ONITY GROUP INC. (ONIT) FY 2021 MD&A

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in millions, except per share amounts and unless otherwise indicated)

The Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Form 10-K generally discusses 2021 and 2020 items and provides year-to-year comparisons between 2021 and 2020. Discussions of year-to-year comparisons between 2020 and 2019 are not included in this Form 10-K and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 19, 2021.

OVERVIEW

We are a financial services company that services and originates mortgage loans. We are a leading mortgage special servicer, servicing 1.4 million loans with a total UPB of $268.0 billion on behalf of more than 3,900 investors and 125 subservicing clients as of December 31, 2021. We service all mortgage loan classes, including conventional, government-insured and non-Agency loans. Our Originations business is part of our balanced business model to generate gains on loan sales and profitable returns, and to support the replenishment and the growth of our servicing portfolio. Through our retail, correspondent and wholesale channels, we originate and purchase conventional and government-insured forward and reverse mortgage loans that we sell or securitize on a servicing retained basis. In addition, we grow our mortgage servicing volume through MSR flow purchase agreements, Agency Cash Window programs, bulk MSR purchase transactions, and subservicing agreements.

The table below summarizes the volume of Originations by channel during 2021, compared with the volume of the prior years. The volume of Originations is a key driver of the profitability of our Originations segment, together with margins, and a key driver of the replenishment and growth of our Servicing segment. In 2021, we added $152.0 billion of new volume, with $55.1 billion MSR bulk acquisitions, $55.9 billion of new subservicing and $41.0 billion of non-bulk Originations volume, as further detailed in the below table.

(1)Represents the UPB of loans that have been originated or purchased during the respective periods and for which we recognize a new MSR on our consolidated balance sheets upon sale or securitization.

(2)Represents the UPB of loans for which the MSR is purchased.

(3)Represents the UPB of reverse mortgage loans that have been securitized on a servicing retained basis. The loans are recognized on our consolidated balance sheets under GAAP without separate recognition of MSRs.

(4)Includes interim subservicing, including the volume of UPB associated with short-term interim subservicing for certain clients as a support to their originate-to-sell business, with $14.7 billion, $17.8 billion and $12.2 billion in the years 2021, 2020 and 2019, respectively.

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In addition to interim subservicing, subservicing additions for 2021 in the table above include $14.3 billion in UPB of reverse mortgage loan subservicing and $9.4 billion of new subservicing on behalf of MAV. On October 1, 2021, in connection with the transaction with MAM (RMS) and its then parent, PMC became the subservicer for approximately 57,000 reverse mortgages, or approximately $14.3 billion in UPB pursuant to subservicing agreements with various clients, including MAM (RMS). Under the five-year subservicing agreement with MAM (RMS), we expect to add subservicing of approximately 60,000 reverse mortgage loans or approximately $13.1 billion in UPB upon boarding to our servicing platform in the first half of 2022, subject to investor approval. Furthermore, in the second quarter 2021, we launched our joint venture MSR investment with Oaktree with MAV purchasing approximately $9.4 billion GSE MSRs from unrelated third parties that PMC began subservicing in the third quarter of 2021.

The following table summarizes the average volume of our Servicing segment in 2021, compared with prior years. The average volume of Servicing is a key driver of the profitability of our Servicing segment. The relative weight of performing and delinquent loans drives the gross revenue and expenses, and their timing. In 2021, we have increased our total average servicing portfolio by $47.2 billion, net of runoff, with large GSE MSR bulk acquisitions driving the growth of our owned MSR portfolio, and the new subservicing volume generated from our MSR investment joint venture with Oaktree through MAV and our reverse subservicing acquisition from MAM (RMS). In addition to runoff, the NRZ portfolio declined as a result of the termination by NRZ of the PMC servicing agreement resulting in the deboarding of loans with $34.2 billion of UPB in September and October 2020. The year 2021 established the foundation of a transformed servicing portfolio, with the significant addition of a high credit quality GSE MSR portfolio and the continued reduction of our non-Agency servicing through runoff, also reducing our concentration with NRZ servicing agreements.

As of December 31, 2021 and 2020, the total serviced and subserviced UPB amounted to $268.0 billion and $188.8 billion, respectively, a net increase of $79.2 billion or 42%.

Business Initiatives

We had established five key operating objectives to drive improved value for shareholders in 2021. As our near-term priority remains to return to sustainable profitability, we continue to execute our strategy around these objectives:

•Accelerating growth, by expanding our client base and our product offerings, and by leveraging our MSR asset vehicle with Oaktree;

•Strengthening recapture performance, by expanding our operating capacity;

•Improving our cost leadership position, by driving productivity and efficiencies, with our technology and continuous improvement initiatives;

•Maintaining high quality operational execution, through our technology and continuous improvement initiatives, and our commitment to employee engagement and customer satisfaction; and

•Expanding servicing and other revenue opportunities.

MAV and Oaktree Relationship

On May 3, 2021, we formally launched MAV, our MSR asset vehicle and entered into a number of definitive agreements with Oaktree. Oaktree and Ocwen committed 85% and 15%, respectively, to fund GSE MSR investments on a pro rata basis up to a total aggregate commitment of $250.0 million over a term of three years following closing (subject to extension). This joint venture is structured to provide Oaktree with MSR investment opportunities and returns, while providing PMC scale and incremental income through subservicing and recapture services. Additionally, PMC earns direct MSR investment income through its 15% ownership stake and carry interest on investment returns exceeding certain thresholds. Under the arrangement, MAV has a non-compete to purchase certain GSE MSRs through specific channels in cooperation with PMC. In addition, PMC must offer MAV the first opportunity to purchase GSE MSRs sold by PMC or its affiliates that meet certain criteria, which we refer to as the right of first offer. Both the non-compete and the right of first offer are subject to various restrictions and in effect

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until MAV has been fully funded, or, if earlier, in the case of the right of first offer, until May 3, 2024 (subject to extension by mutual consent). In exchange, PMC receives exclusive subservicing and recapture rights, subject generally to ongoing performance and financial standards.

During 2021, PMC recognized $17.1 million of total servicing and subservicing fees, including ancillary income, and remitted $12.2 million servicing fees (as Pledged MSR liability expense) under its agreements with MAV (refer to Note 8 — MSR Transfers Not Qualifying for Sale Accounting to the Consolidated Financial Statements for further description of the accounting for the MAV agreements). In addition, PMC recognized $3.6 million earnings in 2021 from its equity method investment in MAV Canopy.

COVID-19 Pandemic Update

Our financial performance in 2020 was affected by the Coronavirus Disease 2019 (COVID-19) pandemic and the associated historical decline in interest rates, mostly due to large losses on MSRs and lower revenue in our Servicing business, partially offset by the growth and profitability of our Originations business. Furthermore, the CARES Act allowed us to recognize income tax benefits in 2020 mostly due to the carryback of a portion of our prior net operating losses.

In 2021, our Servicing business continued to be impacted by the COVID-19 pandemic, with a large number of loans placed under forbearance and the moratorium on foreclosures and evictions. The collection and recognition of servicing fees and ancillary income related to forbearance loans continued to be delayed or reduced. In addition, our outreach activities with impacted borrowers have intensified to address extensions and exits of plans or to offer loan modifications. The foreclosure moratorium ended on July 31, 2021, and the eviction moratorium was extended through January 1, 2022 for foreclosed borrowers.

As of December 31, 2021, we managed 28,500 loans under forbearance (or 2.1% of our total portfolio), 6,800 of which related to our owned MSRs, or 1.1% of our owned MSR servicing portfolio (excluding NRZ and MAV), a reduction of 65% and 71%, respectively, compared to the prior year end. As of December 31, 2020, we managed 81,900 loans under forbearance, 23,100 of which related to our owned MSRs (excluding NRZ). During 2021, the number of loans under forbearance continued to trend down, as illustrated by the below chart of forbearance plans by investor for our owned MSR portfolio (excluding NRZ).

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The decline in open plans of our owned MSR portfolio during 2021 is mostly driven by performing loans and pay-offs (excluding servicing transfers), as further illustrated below:

We outperformed the industry average as reported by the MBA relating to the percentage of borrowers with an Agency loan who exited forbearance with a reinstatement or loss mitigation solution in place. In addition, we consistently exceeded the industry benchmark for borrowers with a GSE loan who remained current while on forbearance. We undertook significant efforts to contact and educate borrowers in understanding their forbearance plans and resolution options, and believe our high-touch communication strategy resulted in these favorable outcomes. We continue to reach out to all borrowers who have not resumed making payments after exiting their plans with the goal of coming to an appropriate resolution.

We continue to operate through a secure remote workforce model for approximately 95% of our global workforce and continue to adhere to COVID-19 health and safety-related requirements and best practices across all of our locations. We monitor the impact of the pandemic on our workforce and have established business resiliency plans for all our locations. At December 31, 2021, we had approximately 5,700 employees, of which approximately 3,200 were located in India and approximately 500 were based in the Philippines. While we have contingency and continuity plans in place, we cannot guarantee that our operations will not be negatively impacted. To date, our operations have not been significantly affected.

Uncertainties related to the duration and severity of the pandemic and related economic impact remain and make it difficult for us to determine the continued ongoing effect the pandemic may have on us and our business, financial condition, liquidity or results of operations.

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Operations Summary

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Total Revenue

The below table presents total revenue by segment and at the consolidated level:

(1)The fair value change of inter-segment economic hedge derivatives reported within Total revenue (Gain on loans held for sale, net) is eliminated at the consolidated level with an offset in MSR valuation adjustments, net.

As compared to 2020, total segment revenue for 2021 was $131.9 million or 14% higher, due to a $70.6 million increase in Originations revenue and a $61.7 million increase in Servicing revenue. The 39% increase in Originations revenue is primarily due to a 159% increase in total forward and reverse production volume combined, partially offset by lower margins. The increase in Servicing revenue is primarily due to a $42.2 million increase in servicing fees and $27.1 million gain on sale of loans acquired through the exercise of call rights in 2021. The $42.2 million increase in servicing fees is mostly driven by a $123.1 million or 57% increase in servicing fee income on our owned MSRs and $15.7 million new servicing fees collected on behalf of MAV in 2021, partially offset by $79.4 million reduction in fees collected on behalf of NRZ and a $9.3 million reduction in ancillary income. The growth in our owned MSR portfolio is mostly due to bulk MSR acquisitions, MSR acquisitions through the Agency Cash Window programs and the growth in our correspondent lending volumes. The decline in the collection of NRZ servicing fees is mostly due to portfolio runoff and the termination of the PMC servicing agreement in February 2020. The decline in ancillary fees is mostly due to the COVID-19 environment and related decrease in late fees, collection and convenience fees as well as a decrease in float earnings due to lower interest rates, partially offset by the growth in our owned MSR portfolio.

Total revenue (after elimination of inter-segment derivative fair value changes) was $1.05 billion for 2021, $89.2 million or 9% higher than 2020, driven by the segment revenue factors described above and the presentation of macro-hedging derivative gains and losses reported within MSR valuation adjustments, net at the consolidated level, as disclosed in Note 4 — Loans Held for Sale, Note 17 — Derivative Financial Instruments and Hedging Activities and Note 23 — Business Segment Reporting. Effective May 2021, we replaced our macro-hedging strategies with two distinct strategies to separately hedge the pipeline and our MSR exposure with third party derivatives. However, we have and may continue to use inter-segment derivatives between the two strategies. Refer to the MSR Hedging Strategy section of Item 7A.Quantitative and Qualitative Disclosures About Market Risk for further detail.

See the respective Segment Results of Operations for additional information.

MSR Valuation Adjustments, Net

The table below presents the key components of MSR valuation adjustments, net:

(1)The terms “realization of expected cash flows” and “runoff” may be used interchangeably within this discussion.

(2)The fair value change of inter-segment economic hedge derivatives reported within MSR valuation adjustments, net is eliminated at the consolidated level with an offset in Gain on loans held for sale, net (Total Revenue). Also refer to the description of the inter-segment derivative elimination in Note 23 — Business Segment Reporting.

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We reported a $109.9 million loss in MSR valuation adjustments, net in 2021. As detailed in the above table and further discussed below, the loss is due to $250.2 million portfolio runoff and a $124.7 million fair value gain due to interest rate and assumption updates, $34.9 million loss on MSR hedging derivative instruments, $25.2 million revaluation gain on MSR purchases reported in Originations and a $25.3 million gain on derivatives hedging the pipeline within the Originations segment.

•MSR portfolio runoff represents the realization of expected cash flows and yield based on projected borrower behavior, including scheduled and unscheduled amortization of the loan UPB. MSR portfolio runoff increased by $78.8 million mostly due to a higher MSR portfolio driven by MSR acquisitions and continued elevated levels of prepayments in a relatively low interest rate environment.

•The $124.7 million fair value gain due to interest rate and assumption updates is comprised of a $88.5 million gain on the MSRs transferred to NRZ and MAV (that did not achieve sale accounting) and a $36.2 million gain on our owned MSRs. This NRZ and MAV MSR gain is mostly driven by assumption updates implemented in the third quarter of 2021 relating to a PLS model calibration by our third-party valuation expert, and is largely offset by a corresponding loss separately reported with Pledged MSR liability expense.

•Our MSR hedging policy is designed to reduce the volatility of the MSR portfolio fair value due to market interest rates. In 2021, we reported a $36.2 million fair value gain on our owned MSR portfolio attributable to interest rate and assumption updates and a $34.9 million hedging derivative loss. The year-over-year fair value changes are mostly explained by interest rate changes, with a 66 basis point increase in the 10-year swap rate during 2021. The changes in fair value of the MSR and economically hedging derivatives were not offset to the same extent as per their expected hedging sensitivity measures, mainly due to non-parallel changes in the interest rate curve and the basis risk inherent in the MSR profile and the available hedging instruments. Refer to the MSR Hedging Strategy section of Item 7A.Quantitative and Qualitative Disclosures About Market Risk for additional information regarding our hedging programs.

•The $16.5 million decline in 2021 in MSR fair value changes reported in Originations, from $41.7 million to $25.2 million, is due to a decrease in our cash window MSR originations volume and declining margins.

•In connection with our macro-hedge strategy through the second quarter of 2021, we have used our derivative instruments to economically hedge both the fair value changes of the MSR and Originations pipeline exposures. While allocated to the pipeline for risk management purposes and segment reporting, inter-segment derivatives are eliminated in our consolidated financial statements and we reported a $25.3 million gain on inter-segment derivatives in 2021 economically hedging the Originations pipeline. The change from $17.4 million loss in 2020 to $25.3 million gain on Originations inter-segment derivatives in 2021 is mostly due to the change in interest rates and related changes in our Originations pipeline.

Compensation and Benefits

Compensation and benefits expense increased $32.7 million, or 12%, as compared to 2020. Salaries and benefits, commissions, and incentive compensation increased $13.6 million, $9.9 million, and $9.7 million, respectively. Originations segment compensation and benefits increased by $39.4 million, mostly due to additional commissions and salaries driven by additional headcount to support higher loan production levels in 2021. Servicing segment compensation and benefits expense decreased by $5.4 million, mostly driven by a decline in average headcount that was largely due to the scaling down of our platform to the number of loans serviced and the efficiencies resulting from our cost re-engineering initiatives, partially offset by the hiring of employees to support the acquisition of reverse mortgage subservicing from MAM (RMS) on October 1, 2021. Corporate segment compensation and benefits expense decreased $1.3 million primarily as a result of a decrease in average corporate headcount and a decrease in annual incentive compensation, significantly offset by a $7.9 million increase in share-based compensation. Our total average headcount declined by 2%, and overall our offshore-to-total average headcount ratio decreased from 72% to 68%.

Servicing and Origination Expense

Servicing and origination expense increased $36.4 million, or 47%, as compared to 2020, with $29.8 million from Servicing (see below) and $7.8 million from Originations, due to the increase in loan production volume. Servicing expenses increased $29.8 million, or 44%, largely driven by the following:

•$19.0 million provision release recorded in 2020, comprised of $9.9 million recoveries from a settlement in 2020 with a mortgage insurer, and $9.1 million improved advance recoveries in 2020, which decreased loss severity rates used in the computation of advance reserves;

•Additional subservicing expenses primarily due to a $4.5 million increase in interim subservicing expense on MSR bulk acquisitions and a $5.2 million increase largely attributable to the termination and deboarding fees associated with moving our owned reverse portfolio from a subservicer onto our platform;

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•$8.4 million additional satisfaction and other loan expenses attributed to a larger portfolio; and

•$6.6 million reduction in government-insured claim loss provisions in 2021 on reinstated or modified loans that was primarily due to a decline in the volume of government-insured claim receivables due to the foreclosure moratorium in effect for much of 2021.

Other Operating Expenses

Professional services expense decreased $25.0 million, or 23%, as compared to 2020 primarily due to a $17.2 million decline in legal expenses and an $8.5 million decline in other professional services. The decline in legal fees is primarily due to expenses recorded in 2020 related to the CFPB and Florida matters. Cost reduction initiatives and higher utilization of professional services in 2020, including strategic vendor sourcing, cloud migration and consulting, resulted in lower other professional fees in 2021. In addition, professional services for 2021 include $3.2 million of advisory fees related to the launch of our MSR investment joint venture with Oaktree, MAV Canopy. Legal expenses and professional services for 2020 included an $8.0 million recovery of prior expenses from a mortgage insurer and $5.1 million of COVID-19 related expenses, respectively.

Technology and communication expense decreased $3.6 million, or 6%, as compared to 2020. Telephone and telecommunication expense declined $4.4 million as compared to 2020, largely driven by facility closures, our transition to a more cost-effective alternative telephone system, consolidation of telecommunication vendors and other cost savings initiatives. Depreciation expense decreased $2.6 million as compared to 2020. These decreases were partially offset by a $4.0 million increase in software usage and maintenance expenses, mostly in our Originations segment to support its growth.

Occupancy and equipment expense decreased $11.0 million, or 23%, as compared to 2020. Depreciation expense, facility maintenance and utility expenses, and interest on lease liabilities decreased $6.3 million, $2.7 million and $1.6 million, respectively, compared to 2020 largely due to our cost reduction efforts in 2020, which included closing and consolidating certain facilities.

Other expenses increased $4.1 million as compared to 2020 primarily due to a $3.8 million increase in advertising expenses, mostly in our Originations segment as part of our initiative to expand our origination platform and increase volumes.

In February 2020, we announced our intention to implement certain cost re-engineering initiatives in 2020 to generate further cost savings. Our continuous cost improvement efforts were focused on reducing operating and overhead costs through facility rationalization, strategic sourcing and actions, off-shore utilization, lean process design, simplification, automation and other technology-enabled productivity enhancement. We incurred a total of $27.6 million re-engineering costs in 2020, including $6.2 million facility-related expenses reported as Occupancy and equipment, $9.7 million Compensation and benefits costs and $6.7 million Professional services costs.

Other Income (Expense)

The $10.4 million increase in interest income during as compared to 2020 is primarily attributable to the Originations segment and as a result of the increase in loan production volumes.

Interest expense increased $34.6 million, or 32%, as compared to 2020, due to an increased average debt balance to finance our increased loan production volumes and MSR portfolio, partially offset by a lower cost of funds. The $1.2 billion or 59% higher debt balance is driven by a higher MSR portfolio - largely due to bulk acquisitions - and additional warehouse loans, partially offset by lower advance match funded liabilities. The lower cost of funds on asset backed financing facilities (102 basis point lower effective interest rate) is partially offset by the issuance of higher-rate senior secured notes as part of our corporate debt refinancing on March 4, 2021.

Pledged MSR liability expense increased $57.6 million as compared to 2020, primarily due to a $71.1 million unfavorable fair value change, mostly driven by a fair value increase in NRZ PLS MSRs due to model recalibrations performed by our third-party valuation expert to more accurately reflect the favorable delinquency and default performance of PLS collateral across its client base. Fair value adjustments to our NRZ MSR pledged liability are offset by fair value adjustments to the related MSR asset, which are recorded in MSR valuation adjustments, net. In addition, the lump-sum cash payments received from NRZ in 2017 and 2018 were fully amortized as of the end of the second quarter of 2020 ($34.2 million income in 2020). These increases in expense were partially offset by a $50.8 million decline in servicing fee remittance driven by lower volume serviced, with the runoff of the portfolio and the termination of the PMC agreement by NRZ in February 2020.

Loss on debt extinguishment of $15.5 million for 2021 was recognized in the first quarter of 2021 and resulted from our early repayment of the Senior Secured Term Loan (SSTL) due May 2022 and our early redemption of the PHH 6.375% senior unsecured notes due August 2021 and the PMC 8.375% senior secured notes due November 2022.

Earnings of equity method investee represent our 15% share of MAV Canopy from May 3, 2021. See Note 11 — Investment in Equity Method Investee for further detail.

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Income Tax Benefit (Expense)

For 2021 and 2020, we recognized an income tax benefit of $22.4 million and $65.5 million on pre-tax losses of $4.4 million and $105.7 million, respectively. For 2021, the income tax benefit was driven primarily by $12.6 million of additional income tax benefit recognized under the CARES Act and $9.0 million of income tax benefit recognized related to the favorable resolution of various uncertain tax positions during the year. For 2020, the income tax benefit was driven by the $79.0 million of estimated income tax benefit recognized under the CARES Act offset by $15.0 million of income tax expense for related uncertain tax positions. Income tax benefits recognized during 2021 and 2020 related primarily to resolution of prior period uncertain tax positions and utilization of prior period losses that bear no relationship to current operating results. This in turn resulted in the high effective tax rates of 513.6% and 62.0% for 2021 and 2020, respectively.

The $43.1 million reduction in income tax benefit for 2021, compared with 2020, is primarily due to a $45.0 million reduction in estimated income tax benefit recognized under the CARES Act, net of related uncertain tax positions, during 2021 versus 2020 based on modification of the tax rules to allow the carryback of NOLs arising in 2018, 2019 and 2020 tax years to the five prior tax years, and the increase to the business interest expense limitation under IRC Section 163(j). In 2021 and 2020, we collected $24.6 million and $51.4 million, respectively, which represents the tax refund associated with the NOLs generated in 2019 and 2018, respectively, carried back to prior tax years.

Under our transfer pricing agreements, our operations in India and Philippines are compensated on a cost-plus basis for the services they provide, such that even when we have a consolidated pre-tax loss from operations these foreign operations have taxable income, which is subject to statutory tax rates in these jurisdictions that are higher than the U.S. statutory rate of 21%.

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Financial Condition Summary

Total assets increased by $1.5 billion, or 14%, between December 31, 2020 and December 31, 2021 mostly due to a $955.3 million, or 74%, increase in our MSR portfolio - mostly driven by MSR bulk acquisitions and new capitalized MSRs - and a $540.7 million, or 139%, increase in our loans held for sale portfolio - driven by higher production volumes. In addition, loans held for investment increased $200.7 million mostly due to the continued growth of our reverse mortgage business. Servicing advances declined $55.8 million mostly due to heightened payoff activity and lower delinquencies, partially offset by increased escrow advances on acquired MSRs. The $67.5 million decrease in other assets is mostly attributable to the decrease in contingent repurchase rights related to loans that have been repurchased from Ginnie Mae.

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Total liabilities increased $1.4 billion, or 14%, as compared to December 31, 2020 with similar effects as described above. Borrowings under our mortgage warehouse lines and MSR financing facilities increased $633.4 million and $463.1 million, respectively, due to higher loan production volumes and MSR bulk acquisitions, respectively. Our HMBS-related borrowings increased by $112.3 million due to the continued growth of our reverse mortgage business and its securitization. Our senior notes increased $302.9 million due to the refinancing transactions completed on March 4, 2021 and May 3, 2021. We issued $627.1 million of new senior notes, net of discount, redeemed in full $313.1 million of existing senior notes and repaid the $185.0 million SSTL. The $228.2 million increase in Other financing liabilities is due to the transfers of MSRs to MAV in 2021 which did not qualify for sale accounting. Advance match funded liabilities decreased $69.0 million consistent with the decline in servicing advances. Other liabilities declined $56.5 million mostly due to a decrease in the Ginnie Mae contingent repurchase rights of loans under forbearance.

Total equity increased $61.3 million during 2021 mostly due to $32.1 million issuance of common stock and warrants to Oaktree in March and May 2021, $18.1 million net income, a $6.5 million reduction in the unfunded pension plan obligation recognized in accumulated other comprehensive income and $4.4 million of equity-classified awards.

Key Trends

The following discussion provides information regarding certain key drivers of our financial performance. Also refer to the Segment results of operations section for further detail, the description of our business environment, initiatives and risks.

Servicing fee revenue - Our servicing fee revenue is a function of the volume being serviced - UPB for servicing fees and loan count for subservicing fees. We expect we will continue to replenish and grow our servicing portfolio through our multi-channel Originations platform in 2022. In addition, we continuously evaluate the relative mix between servicing and subservicing volume. The expected volume increase is also intended to exceed the portfolio serviced on behalf of NRZ that may end in July 2022. Servicing revenue and ancillary income have been adversely impacted by COVID-19, which may persist throughout 2022, until forbearance plan exits and the end of foreclosure and eviction moratoria or related restrictions.

Gain on sale of loans held for sale - Our gain on sale is driven by both volume and margin and is channel-sensitive, with consumer direct generating relatively higher margins than correspondent. The volume mix is expected to shift to purchase as the volume of refinance activity by borrowers is expected to continue to decline, consistent with expected industry trends. While we continue to increase our recapture rate by expanding our channel operating capacity, we focus on cash-out, debt consolidation and other borrower solutions, in addition to new customer acquisitions. Based on industry origination volume projections for 2022, we expect competition to intensify and origination margins will be under pressure until industry excess capacity can be eliminated. This will impose trade-offs between volumes and margins, and potential shifts among channels.

Reverse mortgage revenue, net - The reverse mortgage origination gain is driven by the same factors as gain on sale of loans held for sale, with smaller volumes in the reverse mortgage market and generally larger margins. With our experience and brand in the marketplace, we expect to continue to grow our volumes and maintain similar margins in each channel, however the channel mix may vary. With the assignment of MAM (RMS) subservicing agreements to PMC on October 1, 2021 and the expected additional loans to transfer on our subservicing platform in the first half of 2022, reverse mortgage servicing revenue is expected to grow.

MSR valuation adjustments, net - Our net MSR fair value changes include multiple components. First, amortization of our investment is function of both UPB, capitalized value of the MSR relative to the UPB, and the level of scheduled payments and prepayments. We expect the MSR realization of cash flows to increase in 2022 as we have recently grown our MSR portfolio. Second, MSR fair value changes are driven by changes in interest rates and assumptions, such as forecasted prepayments, Third, the MSR fair value changes are partially offset by derivative fair value changes that economically hedge the MSR portfolio. We are exposed to increased interest rate volatility due to our now larger MSR portfolio. Refer to the sensitivity analysis in the Market Risk sections of Item 7A.Quantitative and Qualitative Disclosures About Market Risk for further detail.

Operating expenses - Compensation and benefits is a significant component of our cost-to-service and cost-per-loan and is directly correlated to headcount levels. Headcount in Servicing is primarily driven by the number of loans or UPB being serviced and subserviced, and by the relative mix of performing, delinquent and defaulted loans. As servicing volume is expected to increase (see above), we expect an increase in our workforce with partial offset from an increased relative share of performing loans through our MSR acquisitions. We expect to swiftly scale our headcount and operating expenses to servicing volume in 2022, including due to the potential non-renewal or termination of the NRZ agreement. We expect our Originations workforce to remain largely stable or moderately increase in the near term to accompany the growth of the channels. Other operating expenses are expected to favorably correlate with volumes, as productivity and efficiencies are expected with our technology and continuous improvement initiatives.

Stockholders’ equity - With the above considerations, we expect our businesses to generate net income and increase our equity in 2022, absent any significant adverse change in interest rates.

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SEGMENT RESULTS OF OPERATIONS

We report our activities in three segments, Servicing, Originations (previously Lending) and Corporate Items and Other that reflect other business activities that are currently individually insignificant. Our business segments reflect the internal reporting that we use to evaluate operating performance and to assess the allocation of our resources.

Servicing

We earn contractual monthly servicing fees pursuant to servicing agreements, which are typically payable as a percentage of UPB, as well as ancillary fees, including late fees, modification incentive fees, REO referral commissions, float earnings and Speedpay/collection fees. We also earn fees under both subservicing and special servicing arrangements with banks and other institutions that own the MSRs. Subservicing and special servicing fees are earned either as a percentage of UPB or on a per-loan basis. Per-loan fees typically vary based on type of investor and on loan delinquency status.

As of December 31, 2021, we serviced 1.4 million mortgage loans with an aggregate UPB of $268.0 billion, an increase of 22% and 42%, respectively, from December 31, 2020. The average UPB of loans serviced during 2021 increased by 11% or $22.1 billion compared to 2020. The increase in our servicing volume is mostly due to MSR acquisitions, subservicing additions and increased MSR originations. We manage the size of our servicing portfolio with our Originations business and by selectively purchasing MSRs based on our capital availability and financial return targets.

In May 2021, PMC entered into a subservicing agreement with MAV for exclusive rights to service the mortgage loans underlying MSRs owned by MAV. In addition, in October 2021, PMC acquired reverse mortgage subservicing contracts from MAM (RMS) and became its exclusive subservicer under a five-year subservicing agreement.

NRZ remains our largest subservicing client, accounting for 21% and 31% of the UPB and loan count, respectively, in our servicing portfolio as of December 31, 2021. NRZ servicing fees retained by Ocwen represented approximately 19% and 30% of the total servicing and subservicing fees earned by Ocwen, net of servicing fees remitted to NRZ and excluding ancillary income, for 2021 and 2020, respectively. NRZ’s portfolio represents approximately 66% of all delinquent loans that Ocwen serviced, for which the cost to service and the associated risks are higher. Consistent with a subservicing relationship, NRZ is responsible for funding the advances we service for NRZ.

In 2017 and early 2018, we renegotiated the Ocwen agreements with NRZ to more closely align with a typical subservicing arrangement whereby we receive a base servicing fee and certain ancillary fees, primarily late fees, loan modification fees and Speedpay fees. We may also receive certain incentive fees or pay penalties tied to various contractual performance metrics. We received upfront cash payments in 2018 and 2017 of $279.6 million and $54.6 million, respectively, from NRZ in connection with the resulting 2017 and New RMSR Agreements. These upfront payments generally represented the net present value of the difference between the future revenue stream Ocwen would have received under the original agreements and the future revenue Ocwen would receive under the renegotiated agreements. These upfront payments received from NRZ were deferred and recorded within Other income (expense) as they amortized through the remaining term of the original agreements (April 30, 2020).

The financial performance of our servicing segment is impacted by the changes in fair value of the MSR portfolio due to changes in market interest rates. Our MSR portfolio is carried at fair value, with changes in fair value recorded in earnings, within MSR valuation adjustments, net. The value of our MSRs is typically correlated to changes in market interest rates; as interest rates decrease, the value of the servicing portfolio typically decreases as a result of higher anticipated prepayment speeds, and the reverse is true. The sensitivity of MSR fair value to interest rates is typically higher for higher credit quality loans, such as our Agency loans. Our Non-Agency portfolio is significantly seasoned, with an average loan age of approximately 16 years, exhibiting little response to movements in market interest rates. Our hedging strategy is designed to reduce the volatility of the MSR portfolio.

For those MSR sale transactions with NRZ and MAV that do not achieve sale accounting treatment, we present on a gross basis the transferred MSR as an asset at fair value and the corresponding liability amount as a pledged MSR liability at fair value on our balance sheet. The changes in fair value of the MSR are reflected as MSR valuation adjustments, net and the corresponding changes in fair value of the pledged MSR liability are reported within Pledged MSR liability expense. Similarly, we present on a gross basis the total servicing fees collected on behalf of NRZ within Servicing and subservicing fees, net and the total servicing fee remittance to NRZ within Pledged MSR liability expense.

Our Servicing business continues to be adversely affected by the COVID-19 pandemic, with the loans placed under forbearance, the moratorium on foreclosures and elevated prepayments of our MSR portfolio due to interest rates. See further discussion within Overview, COVID-19 Pandemic Update.

Loan Resolutions

We have a strong track record of success as a leader in the servicing industry in foreclosure prevention and loss mitigation that helps homeowners stay in their homes and improves financial outcomes for mortgage loan investors. Reducing

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delinquencies also enables us to recover advances and recognize additional ancillary income, such as late fees, which we do not recognize on delinquent loans until they are brought current. Loan resolution activities address the pipeline of delinquent loans and generally lead to (i) modification of the loan terms, (ii) repayment plan alternatives, (iii) a discounted payoff of the loan (e.g., a “short sale”), or (iv) foreclosure or deed-in-lieu-of-foreclosure and sale of the resulting REO. Loan modifications must be made in accordance with the applicable servicing agreement as such agreements may require approvals or impose restrictions upon, or even forbid, loan modifications. To select an appropriate loan modification option for a borrower, we perform a structured analysis, using a proprietary model, of all options using information provided by the borrower as well as external data, including recent broker price opinions to value the mortgaged property. Our proprietary model includes, among other things, an assessment of re-default risk.

Our future financial performance will be less impacted by loan resolutions because, under our NRZ agreements, NRZ receives all deferred servicing fees. Deferred servicing fees related to delinquent borrower payments were $148.4 million at December 31, 2021, of which $117.7 million were attributable to NRZ agreements.

Advance Obligation

As a servicer, we are generally obligated to advance funds in the event borrowers are delinquent on their monthly mortgage related payments. We advance principal and interest (P&I Advances), taxes and insurance (T&I Advances) and legal fees, property valuation fees, property inspection fees, maintenance costs and preservation costs on properties that have been foreclosed (Corporate Advances). For certain loans in non-Agency securitization trusts, we have the ability to cease making P&I advances and immediately recover advances previously made from the general collections of the respective trust if we determine that our P&I advances cannot be recovered from the projected future cash flows. With T&I and Corporate advances, we continue to advance if net future cash flows exceed projected future advances without regard to advances already made.

Most of our advances have the highest reimbursement priority (i.e., they are “top of the waterfall”) so that we are entitled to repayment from respective loan or REO liquidation proceeds before any interest or principal is paid on the bonds that were issued by the trust. In the majority of cases, advances in excess of respective loan or REO liquidation proceeds may be recovered from pool-level proceeds. The costs incurred in meeting these obligations consist principally of the interest expense incurred in financing the servicing advances. Most subservicing agreements, including our agreements with NRZ, provide for prompt reimbursement of any advances from the owner of the servicing rights. Refer to Note 25 — Commitments to the Consolidated Financial Statements for further description of servicer advance obligations.

Significant Variables

Aggregate UPB and Loan Count. Servicing fees are generally expressed as a percentage of UPB and subservicing fees are earned on a per-loan basis or expressed as a percentage of UPB. Aggregate UPB and loan count decline as a result of portfolio run-off and increase to the extent we retain MSRs from new originations or engage in MSR acquisitions, to the extent permitted.

Operating Efficiency. Our operating results are heavily dependent on our ability to scale our operations to cost-effectively and efficiently perform servicing activities in accordance with our servicing agreements.

Delinquencies. Delinquencies impact our results of operations and operating cash flows. Non-performing loans are more expensive to service because the loss mitigation activities that we must undertake to keep borrowers in their homes or to foreclose, if necessary, are costlier than the activities required to service a performing loan. These loss mitigation activities include increased contact with the borrower for collection and the development of forbearance plans or loan modifications by highly skilled associates who command higher compensation as well as the higher compliance costs associated with these, and similar, activities. While the higher cost is somewhat offset by ancillary fees, for severely delinquent loans or loans that enter the foreclosure process the incremental revenue opportunities are generally not sufficient to cover our increased costs.

In addition, when borrowers are delinquent, the amount of funds that we are required to advance to the investors increases. We utilize servicing advance financing facilities, which are asset-backed (i.e., match funded liabilities) securitization facilities, to finance a portion of our advances. As a result, increased delinquencies result in increased interest expense.

Prepayment Speed. The rate at which portfolio UPB declines can have a significant impact on our business. Items reducing UPB include scheduled and unscheduled principal payments (runoff), refinancing, loan modifications involving forgiveness of principal, voluntary property sales and involuntary property sales such as foreclosures. Prepayment speed impacts future servicing fees, amortization and valuation of MSRs, float earnings on float balances and interest expense on advances. Increases in anticipated lifetime prepayment speeds generally cause MSR valuation adjustments to increase because MSRs are valued based on total expected servicing income over the life of a portfolio. The converse is true when expectations for prepayment speeds decrease.

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Reverse Mortgage Revenue

The activities and financial performance related to reverse mortgage loans that are securitized and classified as held for investment, at fair value, together with the HMBS-related borrowings, at fair value (internally identified as our Reverse Servicing business) are reflected in the Servicing segment, consistent with how the activities are managed and internally reported. Once a reverse mortgage loan is securitized, our activities are generally consistent with other loan servicing as described above, with the following variations.

Under the terms of ARM-based HECM loan agreements, the borrowers have additional borrowing capacity of $1.5 billion at December 31, 2021. These draws or tails are funded by the servicer and can be subsequently securitized. We do not incur any substantive underwriting, marketing or compensation costs in connection with any future draws, although we must maintain sufficient capital resources and available borrowing capacity to ensure that we are able to fund these future draws.

As an HMBS issuer, we assume certain obligations related to each security issued. In addition to our obligation to fund tails, the most significant obligation is the requirement to purchase loans out of the Ginnie Mae securitization pools once they reach 98% of the maximum claim amount (MCA repurchases or active buyouts). Active repurchased loans are assigned to HUD and payment is received from HUD through a claims process. HUD reimburses us for the outstanding principal balance on the loan up to the maximum claim amount; we bear the risk of exposure if the outstanding balance on a loan exceeds the maximum claim amount. Inactive repurchased loans or buyouts (loans that are in default for one of the following reasons - title conveyances or the borrower is deceased, no longer occupies the property or is delinquent on tax and insurance payments) are generally liquidated through foreclosure and subsequent sale of REO. State specific foreclosure and REO liquidation timelines have a significant impact on the timing and amount of our recovery. If we are unable to sell the property securing the inactive reverse loan for an acceptable price within the timeframe established by HUD (six months), we are required to make an appraisal-based claim to HUD. In such cases, HUD reimburses us for the loan balance, eligible expenses and interest, less the appraised value of the underlying property. Thereafter, all the risks and costs associated with maintaining and liquidating the property remains with us; we may incur additional losses on REO properties as they progress through the liquidation processes related to delayed timelines due to market conditions, sales commissions, property preservation costs or property tax and insurance advances. The significance of future losses associated with appraisal-based claims is dependent upon the volume of inactive loans, condition of foreclosed properties and the general real estate market.

The reverse mortgage revenue reported within the Servicing segment includes the net fair value changes of securitized reverse mortgage loans held for investment and HMBS-related borrowings. We elected the fair value accounting election for both our reverse mortgage loans held for investment and the HMBS-related borrowings. The net fair value changes of the reverse mortgage loans and related borrowings reported within the Servicing segment include the following:

•contractual interest income earned on securitized reverse mortgage loans, net of interest expense on HMBS-related borrowings, that is, the servicing fee we are contractually entitled to and collect on a monthly basis under the Ginnie Mae MBS Guide regarding servicing HMBS;

•cash gains on tail securitization. Tails are participations in previously securitized HECMs and are created by additions to principal for borrower draws on lines-of-credit (scheduled and unscheduled), interest, servicing fees, and mortgage insurance premiums;

•fair value changes due to the realization of expected cash flows of the net asset balance of securitized loans held for investment and HMBS-related borrowings; and

•fair value changes due to the inputs and assumptions of the net balance of securitized loans held for investment and HMBS-related borrowings.

The fair value of our HECM loan portfolio generally decreases as market interest rates rise and increases as market rates fall. As our HECM loan portfolio is predominantly comprised of ARMs, higher interest rates cause the loan balance to accrue and reach a 98% maximum claim amount liquidation event more quickly, with lower interest rates extending the timeline to liquidation. HECM loans have a longer duration than HMBS-related borrowings as a result of the future draw commitments, and our obligations as issuer of HMBS to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM loan is equal to 98% of the maximum claim amount.

The financial performance associated with the subservicing of reverse mortgage loans associated with the MAM (RMS) transaction is primarily reflected within Servicing and subservicing fees, net since Reverse mortgage revenue, net strictly reflects the financial performance of owned loans/servicing. We collect higher subservicing fees for inactive loans relative to the base subservicing fee for performing loans or active repurchased loans, commensurate with the level of servicing efforts, as described above.

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The following table presents selected results of operations of our Servicing segment. The amounts presented are before the elimination of balances and transactions with our other segments:

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The following table provides selected operating statistics for our Servicing segment:

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(1)Performing loans include those loans that are less than 90 days past due and those loans for which borrowers are making scheduled payments under loan modification, forbearance or bankruptcy plans. We consider all other loans to be non-performing.

(2)Conventional loans at December 31, 2021 include 73,340 prime loans with a UPB of $13.7 billion which we service or subservice. This compares to 89,458 prime loans with a UPB of $16.1 billion at December 31, 2020. Prime loans are generally good credit quality loans that meet GSE underwriting standards.

(3)Includes $7.0 billion UPB of reverse mortgage loans that are recognized in our consolidated balance sheet at December 31, 2021.

(4)Includes $8.9 billion UPB subserviced and $24.0 billion UPB of MSRs sold to MAV that does not achieve sale accounting treatment.

(5)Loans serviced or subserviced pursuant to our agreements with NRZ.

(6)Includes $2.1 billion UPB of subserviced loans at December 31, 2021.

(7)Total 12-month % CPR includes voluntary and involuntary prepayments, as shown in the table, plus scheduled principal amortization.

The following table provides selected operating statistics related to our owned reverse mortgage loans held for investment reported within our Servicing segment:

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(1)Securitized loans only; excludes unsecuritized loans as reported within the Originations segment.

(2)Buyouts are reported as Loans held for sale, Accounts Receivable or REO depending on the loan and foreclosure status.

The following table provides selected operating statistics related to advances for our Servicing segment:

The following table provides the rollforward of activity of our portfolio of mortgage loans serviced for the years ended December 31, that includes MSR, whole loans and subserviced loans, both forward and reverse:

(1)2021 additions include purchased MSRs on portfolios consisting of 287 loans with a UPB of $0.1 billion that have not yet transferred to the Black Knight MSP servicing system as of December 31, 2021. Because we have legal title to the MSRs, the UPB and count of the loans are included in our reported servicing portfolio. The seller continues to subservice the loans on an interim basis between the transaction closing date and the servicing transfer date.

(2)Includes the volume UPB associated with short-term interim subservicing for some clients as a support to their originate-to-sell business, where loans are boarded and deboarded within the same quarter.

(3)2020 includes 270,218 deboarded loans with a UPB of $34.2 billion related to the termination of the subservicing agreement between NRZ and PMC on February 20, 2020. Refer to Note 8 — MSR Transfers Not Qualifying for Sale Accounting.

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Year Ended December 31, 2021 versus 2020

Servicing and Subservicing Fees

The $42.2 million, or 6% increase in total servicing and subservicing fees in 2021 as compared to 2020 is primarily driven by servicing volume, with a $123.1 million or 57% increase in servicing fee income on our owned MSR, partially offset by $79.4 million reduction in fees collected on behalf of NRZ. The increase in servicing fee income on our owned MSR as compared to 2020 is due to a 60% increase in our average volume serviced, primarily driven by bulk acquisitions, MSR acquisitions through the Agency Cash Window programs and the growth in our correspondent lending volumes. The decline in the collection of NRZ servicing fees is mostly due to portfolio runoff and the PMC servicing termination in February 2020.

Additional changes between 2020 and 2021 include $15.7 million of servicing fees collected on behalf of MAV, launched in 2021 and $9.2 million subservicing fees related to the MAM (RMS) reverse subservicing portfolio acquired in the fourth quarter of 2021. The average subservicing fee per loan increased, driven by the inclusion of reverse mortgage loans, with relatively higher compensation for inactive loans. These fee increases were offset by a $9.3 million decline in ancillary income and a $15.8 million decrease in NRZ subservicing fees. The $7.8 million decrease in subservicing fees is mostly due to NRZ fees being reported as subservicing fees during 2020 from PMC servicing termination through loan deboarding, partially offset by MAM (RMS) reverse subservicing fees.

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The following table presents the respective drivers of loan servicing and subservicing fees.

(1)Subservicing fees for the year ended December 31, 2020 includes $15.9 million of fees earned on the NRZ PMC MSR Agreements upon receiving the notice of cancellation in February 2020.

(2)Excludes MAV portfolio and includes reverse subservicing in the fourth quarter of 2021.

The following table presents both servicing fees collected and subservicing fees retained by Ocwen under the NRZ agreements, together with the previously recognized amortization gain of the lump-sum payments received in connection with the 2017 Agreements and New RMSR Agreements (through the second quarter of 2020 only). See Note 8 — MSR Transfers Not Qualifying for Sale Accounting for further information.

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(1)Reported within Pledged MSR liability expense. The NRZ servicing fee includes the total servicing fees collected on behalf of NRZ relating to the MSR sold but not derecognized from our balance sheet. Under GAAP, we separately present servicing fees collected and remitted on a gross basis, with the servicing fees remitted to NRZ reported as Pledged MSR liability expense.

(2)Excludes the servicing fees of loans under the PMC Servicing Agreement after February 20, 2020 due to the notice of termination by NRZ, and subservicing fees earned under subservicing agreements. Excludes ancillary income.

(3)In 2017 and early 2018, we renegotiated the Ocwen agreements with NRZ to more closely align with a typical subservicing arrangement whereby we receive a base servicing fee and certain ancillary fees, primarily late fees, loan modification fees and Speedpay fees. We may also receive certain incentive fees or pay penalties tied to various contractual performance metrics. We received upfront cash payments in 2018 and 2017 of $279.6 million and $54.6 million, respectively, from NRZ in connection with the resulting 2017 and New RMSR Agreements. These upfront payments generally represented the net present value of the difference between the future revenue stream Ocwen would have received under the original agreements and the future revenue Ocwen received under the renegotiated agreements. These upfront payments received from NRZ were deferred and recorded within Other income (expense), Pledged MSR liability expense, as they amortized through the term of the original agreements (April 2020). See Note 8 — MSR Transfers Not Qualifying for Sale Accounting for further information.

(4)Excludes the UPB of loans subserviced under the PMC Servicing Agreement after February 20, 2020 due to the notice of termination by NRZ, and excludes the UPB of loans under subservicing agreements.

The net retained fee on our NRZ portfolio declined by $16.4 million, or 16% as compared to 2020. The decline in the NRZ fee collection and remittance is primarily driven by the decline in the average UPB of 18%, partially offset by an increased fee margin due to the nature of remaining collateral, which was non-Agency with higher delinquencies, as compared to the performing Agency portfolio that deboarded in connection with the termination of the PMC agreement by NRZ on February 20, 2020. The decline in serviced volume is explained by the NRZ portfolio runoff and the derecognition of the MSRs in connection with the termination of the PMC agreement. As the NRZ relationship is effectively a subservicing agreement, the COVID-19 environment, loans under forbearance and the fee collection do not impact our financial results to the same extent as for serviced loans with our owned MSRs.

The following table presents the detail of our ancillary income:

Ancillary income declined by $9.3 million as compared to 2020 primarily due to $6.8 million lower late fees, driven by the combined effect of lower servicing volume of delinquent loans, through acquisitions of primarily performing portfolios and sales of delinquent portfolios in 2021, and the COVID-19 environment restricting late fees. Float earnings were $5.2 million lower driven by the decline in interest rates, with average one-month LIBOR declining by approximately 40 basis points in 2021 as compared to 2020, partially offset by larger account balances due to the MSR portfolio growth.

Gain on Loans Held for Sale, Net

Gain on loans held for sale, net of $46.6 million increased $31.9 million as compared to 2020 primarily due to a $27.1 million gain recognized in 2021 on the sale of loans acquired in connection with the exercise of call rights relating to certain Non-Agency trusts, and additional gains on repurchased loans in connection with Ginnie Mae loan modifications and early buyout (EBO) activities.

Reverse Mortgage Revenue, Net

Reverse mortgage revenue, net is the net change in fair value of securitized loans held for investment and HMBS-related borrowings. The following table presents the components of the net fair value change and is comprised of net interest income and other fair value gains or losses. Net interest income is primarily driven by the volume of securitized UPB as it is the interest

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income earned on the securitized loans offset against interest expense incurred on the HMBS-related borrowings, and represents our compensation for servicing the portfolio, that is typically a percentage of the outstanding UPB. Other fair value changes are primarily driven by changes in market-based inputs or assumptions. Lower interest rates generally result in favorable net fair value impacts on our HECM reverse mortgage loans and the related HMBS financing liability and higher interest rates generally result in unfavorable net fair value impacts.

(1)     Includes $21.6 million and $24.4 million of realized gains on tail securitization in 2021 and 2020, respectively. On January 1, 2020, we made an irrevocable election to account for tails at fair value.

The decline in Reverse mortgage revenue, net of $9.9 million, or 131%, as compared to 2020 is primarily due to unrealized losses on the HECM loan portfolio attributable to market rate conditions. Specifically, fair value losses are driven by increasing interest rates and widening yield spread directly impacting the tail value of the HECM reverse mortgage loans. Tails represent the future draws of borrowers, scheduled and unscheduled, as well as capitalized interest and are included in the fair value of the underlying loans. As our HECM loan portfolio is predominantly comprised of ARMs, higher interest rates cause the loan balance to accrue and reach the 98% maximum claim amount liquidation event more quickly. Tails are securitized on a monthly basis and a widening yield spread results in lower cash gain on securitization. Net interest income, that effectively represents our servicing fee increased in 2021 as compared with 2020 mostly due to the growth of the loan portfolio.

MSR Valuation Adjustments, Net

The following table summarizes the MSR valuation adjustments, net reported in our Servicing segment, with the breakdown of the total MSRs recorded on our balance sheet between our owned MSR and the MSRs transferred to NRZ and MAV that did not achieve sale accounting treatment:

(1)Excludes gains of $25.2 million and $41.7 million in 2021 and 2020, respectively (nil in 2019), on the revaluation of MSRs purchased at a discount, that is reported in the Originations segment as MSR valuation adjustments, net.

(2)MSR sale transactions with NRZ and MAV that do not achieve sale accounting treatment. See Note 8 — MSR Transfers Not Qualifying for Sale Accounting for further information.

(3)Effective January 1, 2021, changes in fair value due to actual versus model variances are presented as Changes in valuation inputs or assumptions. Activity for 2020 and 2019 in the table above has been recast to conform to current year disclosure, resulting in a $1.8 million and $18.1 million gain, respectively, reclassified from Runoff to Rate and assumption change.

(4)The terms runoff and realization of expected future cash flows may be used interchangeably within this discussion.

We reported a $160.4 million loss in MSR valuation adjustments, net in 2021, comprised of $158.6 million loss on our owned MSRs and $1.8 million loss on the MSRs transferred to NRZ and MAV. The $158.6 million loss on our owned MSRs is comprised of $159.9 million MSR portfolio runoff, $36.2 million gain on the MSR portfolio attributed to rate and assumption change and a $34.9 million hedging loss. MSR portfolio runoff represents the realization of expected cash flows and yield based on projected borrower behavior, including scheduled amortization of the loan UPB together with projected voluntary prepayments. The gain on rate and assumption change is primarily due to an increase in market interest rates (the 10 year swap rate increased by 66 basis points in 2021), partially offset by a loss on assumption updates driven by unfavorable prepayment model variance and related calibrations.

Our MSR hedging policy is designed to reduce the volatility of the MSR portfolio fair value due to market interest rates. The changes in fair value of the MSR and hedging derivatives were not offset to the same extent as per their expected hedging

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sensitivity measures, mainly due to non-parallel changes in the interest rate curve and the basis risk inherent in the MSR profile and the available hedging instruments. Refer to the Market Risk sections for further detail on our hedging strategy and its effectiveness.

The following table provides information regarding the changes in the fair value and the UPB of our portfolio of Owned MSRs (excluding NRZ and MAV related MSRs) during 2021, with the breakdown by investor type.

(1)Mostly changes in interest rates, except for gains of $25.2 million on the revaluation of purchased MSRs, that are reported in the Originations segment.

(2)Multiple of average servicing fee and UPB.

(3)Includes $274.8 million fair value and $24.9 billion UPB of MSR sales to MAV in 2021 that did not achieve sale accounting treatment.

(4)See Note 7 — Mortgage Servicing and Note 8 — MSR Transfers Not Qualifying for Sale Accounting for further information on the NRZ and MAV portfolios.

The $1.8 million loss on the transferred MSRs not qualifying for sale accounting (transferred to NRZ and MAV) includes $90.3 million runoff and $88.5 million fair value gain attributable to rates and assumptions. The runoff is explained by the same factors underlying our owned MSR, discussed above, and the transfers of MSRs to MAV in 2021 and the decline in the NRZ MSR portfolio, due to runoff and the termination of the PMC servicing agreement by NRZ in February 2020. The $88.5 million fair value gain attributable to rates and assumptions in 2021 is mostly driven by PLS model calibrations by our third-party valuation expert. The model calibrations more accurately reflect the favorable delinquency and default performance of the PLS collateral across the valuation expert’s client base and was supported by our fair value benchmarking and back-testing analysis. This MSR fair value gain is offset by a fair value loss recorded on the associated NRZ MSR pledged liability.

Compensation and Benefits

Compensation and benefits expense declined $5.4 million, or 5%, as compared to 2020 primarily due to a $5.3 million decrease in salaries and benefit expense as a result of the 12% decline in our average servicing headcount, mostly offshore. A $0.8 million decline in commissions also contributed to the decline in Compensation and benefits expense. During 2021, we serviced 7% fewer loans, on average, as compared to 2020. The decline in servicing headcount reflects the scaling down of our

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platform to the number of loans being serviced and the efficiencies resulting from our cost re-engineering initiatives, partially offset by the hiring of employees to support the acquisition of reverse mortgage subservicing from MAM (RMS) on October 1, 2021.

Servicing Expense

Servicing expense primarily includes claim losses and interest curtailments on government-insured loans, provision expense for advances and servicing representation and warranties, and certain loan volume related expenses.

Servicing expense increased $29.8 million, or 44%, as compared to 2020 largely driven by a $4.5 million increase in interim subservicing expense on MSR bulk acquisitions, a $5.2 million increase in our subservicer expenses largely attributable to the termination and deboarding fees associated with moving our owned reverse portfolio from a subservicer onto our platform, and an $8.4 million increase in satisfaction and other loan expenses attributed to a larger portfolio. In addition, Servicing expense for 2020 included a $19.0 million provision release comprised of $9.9 million recoveries from a settlement in 2020 with a mortgage insurer, and $9.1 million improved advance recoveries in 2020, which decreased loss severity rates used in the computation of advance reserves.

The effects of the above factors were partially offset by a $6.6 million reduction in government-insured claim loss provisions in 2021 on reinstated or modified loans and receivables primarily due to a decline in the volume of government-insured claim receivables and claim losses due to the foreclosure moratorium in effect for much of 2021.

Other Operating Expenses

Other operating expenses (total operating expenses less compensation and benefit expense and servicer expense) decreased by $13.8 million in 2021 as compared to 2020, in large part due to a $13.3 million decline in Corporate overhead allocations and other cost savings attributed to our re-engineering initiatives.

Professional services increased by $3.2 million primarily due to $1.6 million increase in other professional services fee expense driven by additional expense related to reverse sub-servicing business. Professional services expenses in 2020 included $1.1 million reimbursement credits for the NRM consent deal-related shared expenses.

Occupancy and equipment expense decreased $4.5 million primarily due to a $3.8 million decrease in office space occupancy allocations resulting from a reduction in Servicing headcount and the cost savings of prior year office space rationalization initiatives.

Technology and communications expense declined $1.4 million primarily due to cost savings associated with the implementation of data solutions as well as consolidation of telecommunication vendors in the second quarter of 2020.

The $13.3 million decline in Corporate overhead allocations is attributable to the decline in support group operating expenses, including technology savings, and the lower relative weight of Servicing headcount to the consolidated organization.

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Other Income (Expense)

Other income (expense) primarily includes net interest expense and the Pledged MSR liability expense.

Interest expense increased by $13.9 million, or 15%, compared to 2020, due to an overall increase in the average debt balances to finance the growth of the business, partially offset by a lower funding cost. The $10.2 million increase in interest expense on MSR financing facilities, $10.6 million increase in the corporate debt interest expense allocation and $3.5 million increase in interest expense on mortgage loan warehouse facilities, are mostly the result of larger MSR and Loans held for sale portfolios, partially offset by lower funding costs. The $9.9 million decline in interest expense on advance match funded facilities is due to lower average balances of advances and borrowings and a lower cost of funds.

Pledged MSR liability expense relates to the MSR transfers that do not qualify for sale accounting and are presented on a gross basis in our financial statements. See Note 8 — MSR Transfers Not Qualifying for Sale Accounting to the Consolidated Financial Statements. Pledged MSR liability expense includes the servicing fee remittance for these transfers and the fair value changes of the pledged MSR liability.

The following table provides information regarding the Pledged MSR liability expense:

(1)See Note 8 — MSR Transfers Not Qualifying for Sale Accounting

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Pledged MSR liability expense increased $56.7 million as compared to 2020, primarily due to a $71.1 million unfavorable fair value change on the Pledged MSR liability, mostly driven by a fair value increase in NRZ PLS MSRs due to model recalibrations performed by our third-party valuation expert to more accurately reflect the favorable delinquency and default performance of PLS collateral across its client base. Fair value adjustments to our NRZ MSR pledged liability are offset by fair value adjustments to the related MSR asset, which are recorded in MSR valuation adjustments, net. In addition, we recognized a $34.2 million amortization gain recorded in 2020 (through the end of the second quarter of 2020, nil in 2021), related to the lump-sum cash payments received from NRZ in 2017 and 2018. These increases in the expense were partially offset by a $50.8 million decline in servicing fee remittance, driven by lower volume serviced, with the runoff of the portfolio and the termination of the PMC agreement by NRZ in February 2020. Refer to the above discussions of MSR valuation adjustments, net (Pledged MSR to NRZ and MAV) and Servicing and subservicing fees (NRZ).

Originations

We originate and purchase loans and MSRs through multiple channels, including retail, wholesale, correspondent, flow MSR purchase agreements, the Agency Cash Window and Co-issue programs and bulk MSR purchases.

We originate and purchase conventional loans (conforming to the underwriting standards of Fannie Mae or Freddie Mac; collectively referred to as Agency loans) and government-insured (FHA or VA) forward mortgage loans. The GSEs and Ginnie Mae guarantee these mortgage securitizations. We originate HECM loans, or reverse mortgages, that are mostly insured by the FHA and we are an approved issuer of HECM mortgage-backed securities (HMBS) that are guaranteed by Ginnie Mae.

Within retail, our Consumer Direct channel for forward mortgage loans (previously called Recapture) focuses on targeting existing servicing customers by offering them competitive mortgage refinance opportunities, where permitted by the governing servicing and pooling agreement. In doing so, we generate revenues for our forward lending business and protect the servicing portfolio by retaining these customers. A portion of our servicing portfolio is susceptible to refinance activity during periods of declining interest rates. Origination recapture volume and related gains are a natural economic hedge, to a certain degree, to the impact of declining MSR values as interest rates decline. To the extent we refinance a loan underlying the MSRs subject to the MAV subservicing agreement, we are obligated to transfer such recaptured MSR to MAV under the terms of the joint-marketing agreement. In addition to refinance activities, our Consumer Direct channel targets cash-out, debt consolidation, mortgage insurance premium reduction, and new customer acquisition.

Our forward lending correspondent channel drives higher servicing portfolio replenishment. We purchase closed loans that have been underwritten to investor guidelines from our network of correspondent sellers and sell and securitize them. As of December 31, 2021, we have relationships with 438 approved correspondent sellers, or 307 new sellers since December 31, 2020. On June 1, 2021, we expanded our network through the assignment by Texas Capital Bank (TCB) to us, of all its correspondent loan purchase agreements with its correspondent sellers (approximately 220 sellers).

We originate and purchase reverse mortgage loans through our retail, wholesale and correspondent lending channels, under the guidelines of the HECM reverse mortgage insurance program of the FHA. Loans originated under this program are generally insured by the FHA, which provides protection against risk of borrower default.

After origination, we package and sell the loans in the secondary mortgage market, through GSE and Ginnie Mae securitizations on a servicing retained basis. Origination revenues mostly include interest income earned for the period the loans are held by us, gain on sale revenue, which represents the difference between the origination or purchase value and the sale value of the loan including its MSR value, and fee income earned at origination. As the securitizations of reverse mortgage loans do not achieve sale accounting treatment and the loans are classified as loans held for investment, at fair value, reverse mortgage revenues include the fair value changes of the loan from lock date to securitization date.

We provide customary origination representations and warranties to investors in connection with our GSE loan sales and securitization activities. We receive customary origination representations and warranties from our network of approved correspondent lenders. We recognize the fair value of the liability for our representations and warranties at the time of sale. In the event we cannot remedy a breach of a representation or warranty, we may be required to repurchase the loan or provide an indemnification payment to the mortgage loan investor. To the extent that we have recourse against a third-party originator, we may recover part or all of any loss we incur. We actively monitor our counterparty risk associated with our network of correspondent lenders-sellers.

We purchase MSRs through flow purchase agreements, the Agency Cash Window programs and bulk MSR purchases. The Agency Cash Window programs we participate in, and purchase MSR from, allow mortgage companies and financial institutions to sell whole loans to the respective agency and sell the MSR to the winning bidder servicing released. In addition, we partner with other originators to replenish our MSRs through flow purchase agreements. We do not provide any origination representations and warranties in connection with our MSR purchases through MSR flow purchase agreements or Agency Cash Window programs. As of December 31, 2021, we have relationships with 154 approved sellers through the Agency Cash Window co-issue programs, or 121 new sellers since December 31, 2020.

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We recognize our MSR origination with the associated economics in our Originations business, and transfer the MSR to our Servicing segment at fair value once the MSR is recognized on our balance sheet. Our Servicing segment reflects all subsequent performance associated with the MSR, including funding cost, run-off and other fair value changes.

We source additional servicing volume through our subservicing and interim servicing agreements, through our existing relationships and our enterprise sales initiatives. We do not report any revenue or gain associated with subservicing within the Originations segment as the impact is captured in the Servicing segment. However, sales efforts and certain costs - marginal compensation and benefits - are managed and reported within the Originations segment.

For 2021, our Originations business originated or purchased forward and reverse mortgage loans with a UPB of $19.0 billion and $1.5 billion, respectively. In addition, we purchased $20.4 billion UPB MSR through the Agency Cash Window / Flow MSR during 2021.

Significant Variables

Economic Conditions. General economic conditions impact the capacity for consumer credit and the supply of capital. More specifically, employment and home prices are variables that can each have a material impact on mortgage volume. Employment levels, the level of wages and the stability of employment are underlying factors that impact credit qualification. The effect of home prices on lending volumes is significant and complex. As home prices go up, home equity increases and this improves the position of existing homeowners either to refinance or to sell their home, which often leads to a new home purchase and a new forward mortgage loan, or in the case of a reverse mortgage, increase the size of the mortgage loan available and the number of potential borrowers. However, if home prices increase rapidly, the effect on affordability for first-time and move-up buyers can dampen the demand for mortgage loans. The more restrictive standards for loan to value (LTV) ratios, debt to income (DTI) ratios and employment that characterize the current market amplify the significance and sensitivity of the housing market and related mortgage lending volumes to employment levels and home prices.

Market Size and Composition. Changes in mortgage rates directly impact the demand for both purchase and refinance forward mortgages. Small changes in mortgage rates directly impact housing affordability for both first-time and move-up home buyers and affect their ability to purchase a home. For refinance loans, current market mortgage rates must be considered relative to the rates on the current mortgage debt outstanding. As the time and cost to refinance has decreased, relatively small reductions in mortgage rates can trigger higher refinancing activity. Given the large size of U.S. residential forward mortgage debt outstanding, the impact of mortgage rate changes can drive significant swings in mortgage refinance volume.

Market size is likewise impacted by changes to existing, or development of new, GSE or other government sponsored programs. Changes in GSE or HUD guidelines and costs and the availability of alternative financing sources, such as non-Agency proprietary loans and traditional home equity loans, impact borrower demand for forward and reverse mortgages.

Investor Demand. The liquidity of the secondary market impacts the size of the market by defining loan attributes and credit guidelines for loans that investors are willing to buy and at what price. In recent years, the GSEs have been the dominant providers of secondary market liquidity for forward mortgages, keeping the product and credit spectrum relatively homogeneous and risk averse (higher credit standards).

Margins. Changes in pricing margin are closely correlated with changes in market size. As loan demand and market capacity move out of alignment, pricing adjusts. In a growing market, margins expand and in a contracting market, margins tighten as lenders seek to keep their production at or close to full capacity. Managing capacity and cost is critical as volumes change. Among our channels, our margins per loan are highest in the retail channel and lowest in the correspondent channel. We work directly with the borrower to process, underwrite and close loans in our retail and reverse wholesale channels. In our retail channel, we also identify the customer and take loan applications. As a result, our retail channel is the most people- and cost-intensive and experiences the greatest volume volatility.

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The following table presents the results of operations of our Originations segment. The amounts presented are before the elimination of balances and transactions with our other segments:

(1)Includes $8.5 million, $6.0 million, and $1.3 million ancillary fee income related to MSR acquisitions reported as Servicing and subservicing fees at the consolidated level for 2021, 2020 and 2019, respectively.

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The following table provides selected operating statistics for our Origination segment:

(1)Loan production excludes reverse mortgage loan draws by borrowers disbursed subsequent to origination that are reported within the Servicing segment.

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Gain on Loans Held for Sale

The following table provides information regarding Gain on loans held for sale by channel and the related forward loan origination volume and margins (excluding fees that are presented in Other revenue, net):

(1)Includes realized gains on loan sales and related new MSR capitalization, changes in fair value of IRLCs, changes in fair value of loans held for sale and economic hedging gains and losses.

(2)Ratio of gain on Loans held for sale to Origination UPB - see (3) below. Note that the ratio differs from the day-one gain on sale margin upon lock.

(3)Defined as the UPB of loans funded in the period plus the change in the period in the pull-through adjusted UPB of IRLCs.

Gain on loans held for sale, net, increased $19.3 million, or 18%, as compared to 2020, all attributed to our consumer direct channel, with a 56% increase in our loan production volume, partially offset by a lower margin. The effect of nearly three times higher production volume in our correspondent channel was more than offset by lower margin and resulted in a 11% lower gain on sale as compared to 2020. The combined $12.0 billion, or 162% new production volume increase in our correspondent and consumer direct channels is due to favorable market conditions for borrower refinancing, the successful integration of the TCB correspondent lending resources and network of correspondent sellers, and the demonstrated capability of our Originations platform. We have expanded our correspondent seller network from 131 to 438, a 234% increase in twelve months. In addition, the increase in the new production volume of our consumer direct channel is the result of investments in staffing we made to develop the production capabilities of our platform. Overall, the average gain on sale margin for forward loans declined from 142 basis points in 2020 to 64 basis points in 2021, mostly due to the continued shift in the channel mix, with higher volume in correspondent, a lower-margin channel.

Reverse Mortgage Revenue, Net

The following table provides information regarding Reverse mortgage revenue, net of the Originations segment that comprises fair value changes of the pipeline and unsecuritized reverse mortgage loans held for investment, at fair value, together with volume and margin:

(1)Defined as the UPB of loans funded in the period plus the change in the period in the pull-through adjusted UPB of IRLCs.

(2)Ratio of origination gain and fees - see (3) below - to origination UPB - see (1) above.

(3)Includes gain on new origination, and loan fees and other. Includes $34.1 million, $26.9 million and $16.6 million non-cash gain on securitization of newly originated loans in 2021, 2020 and 2019, respectively.

We reported $82.0 million Reverse mortgage revenue, net in 2021, a $28.9 million or 54% increase as compared to 2020. The increase is primarily driven by an increase in volume of our higher-margin retail channel that generated an additional $26.8

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million revenue. The historical record increase in the volume of our reverse correspondent and retail channels were partially offset by a lower average margin in those channels mostly due to unfavorable yield spread widening observed in the market.

Other revenue, net

Other revenue, net increased $22.4 million as compared to 2020 primarily due to higher fees earned on increased loan origination volume and setup fees earned for loans boarded on our servicing platform, mostly driven by our forward correspondent and consumer direct channels.

MSR Valuation Adjustments, Net

MSR valuation adjustments, net includes gains of $25.2 million and $41.7 million in 2021 and 2020, respectively, due to the revaluation gains on certain MSRs purchased through the Agency Cash Window programs, and flow purchases. As an aggregator of MSRs, we may purchase MSRs from smaller originators with a purchase price at a discount to fair value and we recognize valuation adjustments for differences in exit markets in accordance with the accounting fair value guidance. We record such valuation adjustments as MSR valuation adjustments, net, within the Originations segment because the segment’s business objective is the sourcing of new MSRs at targeted returns. We transfer the MSR from the Originations segment to the Servicing segment at fair value.

MSR valuation adjustments, net decreased $16.5 million as compared to 2020. Opportunities for fair value discount or margins were larger in the early period of the pandemic and have reduced as markets normalized.

Operating Expenses

Operating expenses increased $58.4 million, or 51%, as compared to 2020, due to our increased production volumes. Compensation and benefits increased by $39.4 million, or 63%, with a $23.1 million increase in salary and benefits and $10.9 million higher commissions. Originations average headcount increased 65% as compared to 2020, reflecting an increase in loan production levels, and reflecting the integration of the TCB correspondent lending resources in the second half of 2021. The offshore-to-total average headcount ratio for Originations increased from 28% for 2020 to 38% for 2021.

Other operating expenses increased primarily due to a $7.8 million increase in Origination expense driven by increased origination volumes, a $4.2 million increase in Technology and communications mostly due to higher software usage and maintenance expenses to support the growth in originations volumes, a $3.5 million increase in advertising expense as part of Origination business expansion, and a $2.0 million increase in postage and mailing expenses in support of increased volumes. Certain other operating expenses are variable, and as a result, as origination volume increased so did the related expenses. Examples include credit reports, appraisals, settlement fees, and tax service fees recorded in origination expenses or certain outsourced services including surge resources recorded in Professional services.

Other Income (Expense)

Interest income consists primarily of interest earned on newly-originated and purchased loans prior to sale to investors. Interest expense is incurred to finance the mortgage loans. We finance originated and purchased forward and reverse mortgage loans with repurchase and participation agreements, commonly referred to as warehouse lines. The increases in interest income and interest expense as compared to 2020 is primarily the result of the increase in the average held-for-sale loan and warehouse debt balances, due to increased loan production volumes.

Corporate Items and Other

Corporate Items and Other includes revenues and expenses of corporate support services, our reinsurance business CRL, inactive entities, and our other business activities that are currently individually insignificant, revenues and expenses that are not directly related to other reportable segments, interest income on short-term investments of cash, gain or loss on repurchases of debt, interest expense on unallocated corporate debt and foreign currency exchange gains or losses. Interest expense on direct asset-backed financings are recorded in the respective Servicing and Originations segments. Interest expense on corporate debt is allocated to the Servicing segment and the Originations segment (starting in the fourth quarter of 2021) based on relative financing requirements.

Corporate support services include finance, facilities, human resources, internal audit, legal, risk and compliance and technology functions. Certain expenses incurred by corporate support services are allocated to the Servicing and Originations segments using various methodologies intended to approximate the utilization of such services. Various measurements of utilization of corporate support services are maintained, primarily time studies, personnel volumes and service consumption levels. In 2019, corporate support services costs were primarily allocated based on relative segment size. Support service costs not allocated to the Servicing and Originations segments are retained in the Corporate Items and Other segment along with certain other costs including certain litigation and settlement related expenses or recoveries, and other costs related to operating as a public company. Corporate Items and Other also includes severance, retention, facility-related and other expenses incurred in 2020 and 2019 related to our re-engineering initiatives and have not been allocated to other segments.

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CRL, our wholly-owned captive reinsurance subsidiary, provides re-insurance related to coverage on REO properties owned or serviced by us. CRL assumes a quota share of REO insurance coverage written by a third-party insurer under a blanket policy issued to PMC. The underlying REO policy provides coverage for direct physical loss on commercial and residential properties, subject to certain limitations. Under the terms of the reinsurance agreement, CRL assumes a 60% quota share of premiums and all related losses incurred by the third-party insurer, effective March 2021, with a 50% and 40% quota share through February 2021 and May 2020, respectively. The reinsurance agreement expires December 31, 2023, but may be terminated by either party at any time with six months advance written notice. The agreement will automatically renew for additional one-year terms unless either party provides 60 days advance written notice prior to renewal.

The following table presents selected results of operations of Corporate Items and Other. The amounts presented are before the elimination of balances and transactions with our other segments: