Walker & Dunlop, Inc. (WD) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the historical financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. The following discussion contains, in addition to historical information, forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those expressed or contemplated in those forward-looking statements as a result of certain factors, including those set forth under the headings “Forward-Looking Statements” and “Risk Factors” elsewhere in this Annual Report on Form 10-K.

Business

Walker & Dunlop, Inc. is a holding company, and we conduct the majority of our operations through Walker & Dunlop, LLC, our primary operating company.

We are one of the leading commercial real estate services and finance companies in the United States, with a primary focus on multifamily lending and property sales, commercial real estate debt brokerage, and affordable housing investment management. We originate, sell, and service a range of multifamily and other commercial real estate financing products to owners and developers of commercial real estate across the country, provide multifamily property sales brokerage and appraisal services in various regions throughout the United States, and engage in commercial real estate and affordable housing investment management activities. We are a leader in commercial real estate technology, developing and acquiring technology resources that (i) provide innovative solutions and a better experience for our customers and (ii) allow us to reach a broader customer base.

We originate and sell multifamily loans through the programs of Fannie Mae, Freddie Mac, Ginnie Mae, and HUD, with which we have licenses and long-established relationships. We retain servicing rights and asset management responsibilities on nearly all loans that we originate for the Agencies’ programs. We are approved as a Fannie Mae DUS lender nationally, a Freddie Mac lender nationally for Conventional, Seniors Housing, Targeted Affordable Housing and Small Balance Loans, a HUD MAP lender nationally, a HUD LEAN lender nationally, and a Ginnie Mae issuer. We broker and service loans for many life insurance companies, commercial banks, and other institutional investors, in which cases we do not fund the loan but rather act as a loan broker.

We fund loans for the Agencies’ programs, generally through warehouse facility financings, and sell them to investors in accordance with the related loan sale commitment, which we obtain at rate lock. Proceeds from the sale of the loan are used to pay off the warehouse facility. The sale of the loan is typically completed within 60 days after the loan is closed, and we retain the right to service substantially all of these loans. In cases where we do not fund the loan, we act as a loan broker and service some of the loans. Our mortgage bankers who focus on loan brokerage are engaged by borrowers to work with a variety of institutional lenders to find the most appropriate loan. These loans are then funded directly by the institutional lender, and for those brokered loans we service, we collect ongoing servicing fees while those loans remain in our servicing portfolio. The servicing fees we typically earn on brokered loan transactions are substantially lower than the servicing fees we earn on Agency loans.

We recognize revenue when we make simultaneous commitments to originate a loan to a borrower and sell that loan to an investor. The revenues earned reflect the fair value attributable to loan origination fees, premiums on the sale of loans, net of any co-broker fees, and the fair value of the expected net cash flows associated with servicing the loans, net of any guaranty obligations retained. We also recognize revenue when we receive the origination fee from a brokered loan transaction. Other transaction-related sources of revenue include (i) net warehouse interest income we earn while the loan is held for sale, (ii) net warehouse interest income from loans held for investment while they are outstanding, (iii) sales commissions for brokering the sale of multifamily properties, and (iv) syndication and asset management fees from our investment management activities.

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We retain servicing rights on substantially all the loans we originate and sell and generate revenues from the fees we receive for servicing the loans, from the interest income on escrow deposits held on behalf of borrowers, and from other ancillary fees. Servicing fees set at the time an investor agrees to purchase the loan are generally paid monthly for the duration of the loan and are based on the unpaid principal balance of the loan. Our Fannie Mae and Freddie Mac servicing arrangements generally provide for prepayment to us in the event of a voluntary prepayment. For loans serviced outside of Fannie Mae and Freddie Mac, we typically do not have similar prepayment protections.

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We are currently not exposed to unhedged interest rate risk during the loan commitment, closing, and delivery process. The sale or placement of each loan to an investor is negotiated concurrently with establishing the coupon rate for the loan. We also seek to mitigate the risk of a loan not closing. We have agreements in place with the Agencies that specify the cost of a failed loan delivery in the event we fail to deliver the loan to the investor. To protect us against such fees, we require a deposit from the borrower at rate lock that is typically more than the potential fee. The deposit is returned to the borrower only once the loan is closed. Any potential loss from a catastrophic change in the property condition while the loan is held for sale using warehouse facility financing is mitigated through property insurance equal to replacement cost. We are also protected contractually from an investor’s failure to purchase the loan. We have experienced a de minimis number of failed deliveries in our history and have incurred immaterial losses on such failed deliveries.

We have risk-sharing obligations on substantially all loans we originate under the Fannie Mae DUS program. When a Fannie Mae DUS loan is subject to full risk-sharing, we absorb losses on the first 5% of the unpaid principal balance of a loan at the time of loss settlement, and above 5% we share a percentage of the loss with Fannie Mae, with our maximum loss capped at 20% of the original unpaid principal balance of the loan (subject to doubling or tripling if the loan does not meet specific underwriting criteria or if the loan defaults within 12 months of its sale to Fannie Mae). Our full risk-sharing is currently limited to loans up to $300 million, which equates to a maximum loss per loan of $60 million (such exposure would occur in the event that the underlying collateral is determined to be completely without value at the time of loss). For loans in excess of $300 million, we receive modified risk-sharing. We also may request modified risk-sharing at the time of origination on loans below $300 million, which reduces our potential risk-sharing losses from the levels described above if we do not believe that we are being fully compensated for the risks of the transactions. The full risk-sharing limit in prior years was less than $300 million. Accordingly, loans originated in those prior years were subject to risk-sharing at much lower levels. Our servicing fees for risk-sharing loans include compensation for the risk-sharing obligations and are larger than the servicing fees we receive from Fannie Mae for loans with no risk-sharing obligations.

Our Interim Program offers floating-rate, interest-only loans for terms of generally up to three years to experienced borrowers seeking to acquire or reposition multifamily properties that do not currently qualify for permanent financing. We underwrite, asset-manage, and service all loans executed through the Interim Program. The ultimate goal of the Interim Program is to provide permanent Agency financing on these transitional properties. The Interim Program has two distinct executions: the Interim Program JV and the Interim Loan Program.

The Interim Program JV assumes full risk of loss while the loans it originates are outstanding. We hold a 15% ownership interest in the Interim Program JV and are responsible for sourcing, underwriting, servicing, and asset-managing the loans originated by the joint venture. The joint venture funds its operations using a combination of equity contributions from its owners and third-party credit facilities.

We originate and hold the Interim Loan Program loans for investment, which are included on our balance sheet. During the time that these loans are outstanding, we assume the full risk of loss. As of December 31, 2021, we had 11 loans held for investment under the Interim Loan Program with an aggregate outstanding unpaid principal balance of $235.5 million. One loan with a balance of $14.7 million is currently in default.

During the year ended December 31, 2021, $860.0 million of the $1.4 billion of interim loan originations were executed through the joint venture, with the remainder originated through our Interim Loan Program. During the year ended December 31, 2020, $86.2 million of the $276.0 million of interim loan originations were executed through the joint venture. As of December 31, 2021 and 2020, we asset-managed $848.2 million and $484.8 million, respectively, of interim loans on behalf of the Interim Program JV.

During the third quarter of 2018, we transferred a $70.1 million portfolio of participating interests in loans held for investment to a third party that was paid off in the second quarter of 2021. As of December 31, 2020, the balance of the portfolio was presented as loans held for investment with an offsetting amount for the secured borrowing included in Other Liabilities.

Through WDIS, we offer property sales brokerage services to owners and developers of multifamily properties that are seeking to sell these properties. Through these property sales brokerage services, we seek to maximize proceeds and certainty of closure for our clients using our knowledge of the commercial real estate and capital markets and relying on our experienced transaction professionals. Our property sales services are offered in various regions throughout the United States. We have added several property sales brokerage teams over the past few years and continue to seek to add other property sales brokers, with the goal of expanding these services to cover all major regions throughout the United States.

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WDIP, a wholly owned subsidiary of the Company, is part of our strategy to grow and diversify the Company by growing our investment management platform. WDIP is a registered investment adviser and general partner of private commercial real estate investment funds focused on the management of debt, preferred equity, and mezzanine equity investments in private middle-market commercial real estate funds and separately managed accounts. WDIP’s current AUM of $1.3 billion primarily consist of five sources: Fund III, Fund IV, Fund V, Fund VI (collectively, the “Funds”), and separate accounts managed for life insurance companies. AUM for the Funds and for the separate accounts consists of both unfunded commitments and funded investments. Unfunded commitments are highest during the fund raising and investment phases. AUM disclosed in this Annual Report on Form 10-K may differ from regulatory assets under management disclosed on WDIP’s Form ADV.

WDIP typically receives management fees based on limited partner capital commitments, unfunded investment commitments, and funded investments. Additionally, with respect to Fund III, Fund IV, Fund V and Fund VI, WDIP receives a percentage of the profits above the fund expenses and preferred return specified in the fund offering agreements.

During December 2021, the Company acquired Alliant, one of the largest tax credit syndicators and an affordable housing developer in the U.S. The acquisition of Alliant is part of our strategy to grow our investment management platforms and to strengthen our position in the affordable housing space. Alliant brings $14.3 billion of affordable AUM and an established tax syndication and affordable housing development platform from which we expect to earn substantial syndication and asset management fees.

As of December 31, 2021, our servicing portfolio was $115.7 billion, up 8% from December 31, 2020, which was the 8th largest commercial/multifamily primary and master servicing portfolio in the nation according to the Mortgage Bankers’ Association’s (“MBA”) 2021 year-end survey (the “Survey”). Our servicing portfolio includes $53.4 billion of loans serviced for Fannie Mae and $37.1 billion for Freddie Mac, making us the 1st and 4th largest servicer of Fannie Mae and Freddie Mac multifamily loans in the nation, respectively, according to the Survey. Also included in our servicing portfolio is $9.9 billion of multifamily HUD loans, the 3rd largest HUD primary and master servicing portfolio in the nation according to the Survey.

The average number of our mortgage bankers increased from 161 during 2020 to 163 during 2021 due to organic growth, recruiting and acquisition, contributing to an increase of 40% in our loan origination volume, from a total of $35.0 billion during 2020 to a total of $48.9 billion during 2021. Fannie Mae recently announced that we ranked as its largest DUS lender in 2021, by loan deliveries, and Freddie Mac recently announced that we ranked as its 4th largest Freddie Mac lender in 2021, by loan deliveries. Additionally, we were the 5th largest multifamily lender for HUD in 2021 based on MAP initial endorsements.

Basis of Presentation

The accompanying consolidated financial statements include all of the accounts of the Company and its wholly owned subsidiaries, and all intercompany transactions have been eliminated.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with GAAP, which requires management to make estimates based on certain judgments and assumptions that are inherently uncertain and affect reported amounts. The estimates and assumptions are based on historical experience and other factors management believes to be reasonable. Actual results may differ from those estimates and assumptions and the use of different judgments and assumptions may have a material impact on our results. The following critical accounting estimates involve significant estimation uncertainty that may have or are reasonably likely to have a material impact on our financial condition or results of operations. Additional information about our critical accounting estimates and other significant accounting policies are discussed in NOTE 2 of the consolidated financial statements.

Mortgage Servicing Rights (“MSRs”). MSRs are recorded at fair value at loan sale or upon purchase. The fair value at loan sale (“OMSR”) is based on estimates of expected net cash flows associated with the servicing rights and takes into consideration an estimate of loan prepayment. Initially, the fair value amount is included as a component of the derivative asset fair value at the loan commitment date. The estimated net cash flows from servicing, which includes assumptions for discount rate, escrow earnings, prepayment speed, and servicing costs, are discounted at a rate that reflects the credit and liquidity risk of the OMSR over the estimated life of the underlying loan. The discount rates used throughout the periods presented for all OMSRs were between 8-14% during 2021 and between 10-15% during 2020 and varied based on the loan type. The life of the underlying loan is estimated giving consideration to the prepayment provisions in the loan and assumptions about loan behaviors around those provisions. Our model for OMSRs assumes no prepayment prior to the expiration of the prepayment provisions and full prepayment of the loan at or near the point when the prepayment provisions have expired. The estimated net cash flows also include cash flows related to the future earnings on the escrow accounts associated with servicing the loans that are based on an escrow earnings rate assumption. We include a servicing cost assumption to account for our expected costs to service a loan. The servicing cost assumption has not had a material impact on the estimate. We record an individual OMSR asset (or liability) for each loan at loan sale. The fair value of MSRs

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acquired through a stand-alone servicing portfolio purchase (“PMSR”) is equal to the purchase price paid. For PMSRs, we record and amortize a portfolio-level MSR asset based on the estimated remaining life of the portfolio using the prepayment characteristics of the portfolio.

The assumptions used to estimate the fair value of capitalized OMSRs are developed internally and are periodically compared to assumptions used by other market participants. Due to the relatively few transactions in the multifamily MSR market and the lack of significant changes in assumptions by market participants, we have experienced limited volatility in the assumptions historically, including the assumption that most significantly impacts the estimate: the discount rate. We do not expect to see significant volatility in the assumptions for the foreseeable future. We actively monitor the assumptions used and make adjustments to those assumptions when market conditions change, or other factors indicate such adjustments are warranted. During the first quarter of 2021, we reduced the discount rate and escrow earnings rate assumptions for our OMSRs. We engage a third party to assist in determining an estimated fair value of our existing and outstanding MSRs on at least a semi-annual basis. Changes in our discount rate assumptions may materially impact the fair value of the MSRs (NOTE 3 of the consolidated financial statements details the portfolio-level impact of a change in the discount rate).

For PMSRs, a constant rate of prepayments and defaults is included in the determination of the portfolio’s estimated life at purchase (and thus included as a component of the portfolio’s amortization). Accordingly, prepayments and defaults of individual loans do not change the level of amortization expense recorded for the portfolio unless the pattern of actual prepayments and defaults varies significantly from the estimated pattern. When such a significant difference in the pattern of estimated and actual prepayments and defaults occurs, we prospectively adjust the estimated life of the portfolio (and thus future amortization) to approximate the actual pattern observed. We have made adjustments to the estimated life of our PMSRs in the past when the actual experience of prepayments differed materially from the estimated prepayments.

Allowance for Risk-Sharing Obligations. This reserve liability (referred to as “allowance”) for risk-sharing obligations relates to our Fannie Mae at-risk servicing portfolio and is presented as a separate liability on our balance sheets. We record an estimate of the loss reserve for the current expected credit losses (“CECL”) for all loans in our Fannie Mae at-risk servicing portfolio using the weighted-average remaining maturity method (“WARM”). WARM uses an average annual loss rate that contains loss content over multiple vintages and loan terms and is used as a foundation for estimating the CECL reserve. The average annual loss rate is applied to the estimated unpaid principal balance over the contractual term, adjusted for estimated prepayments and amortization to arrive at the CECL reserve for the entire current portfolio as described further below. We currently use one year for our reasonable and supportable forecast period (“forecast period”) as we believe forecasts beyond one year are inherently less reliable. During the forecast period we apply an adjusted loss factor based on loss rates from a historical period that we believe is similar. We revert to the historical loss rate over a one-year period.

One of the key components of a WARM calculation is the runoff rate, which is the expected rate at which loans in the current portfolio will amortize and prepay in the future based on our historical prepayment and amortization experience. We group loans by similar origination dates (vintage) and contractual maturity terms for purposes of calculating the runoff rate. We originate loans under the DUS program with various terms generally ranging from several years to 15 years; each of these various loan terms has a different runoff rate. The runoff rates applied to each vintage and contractual maturity term is determined using historical data; however, changes in prepayment and amortization behavior may significantly impact the estimate.

The weighted-average annual loss rate is calculated using a 10-year look-back period, utilizing the average portfolio balance and settled losses for each year. A 10-year period is used as we believe that this period of time includes sufficiently different economic conditions to generate a reasonable estimate of expected results in the future, given the relatively long-term nature of the current portfolio. Changes in our expectations and forecasts may materially impact the estimate.

As of December 31, 2020, our forecast-period loss rate was six basis points due to the significant economic uncertainty and high unemployment rate that existed at the time of our forecast. As economic conditions and unemployment rates improved substantially in 2021, we adjusted our forecast-period loss rate down to three basis points as of December 31, 2021. The decrease in the loss rate resulted in a benefit for risk-sharing obligations compared to a provision for risk-sharing obligations for the years ended December 31, 2021 and 2020, respectively.

We evaluate our risk-sharing loans on a quarterly basis to determine whether there are loans that are probable of default. Specifically, we assess a loan’s qualitative and quantitative risk factors, such as payment status, property financial performance, local real estate market conditions, loan-to-value ratio, debt-service-coverage ratio, and property condition. When a loan is determined to be probable of default based on these factors, we remove the loan from the WARM calculation and individually assess the loan for potential credit loss. This assessment requires certain judgments and assumptions to be made regarding the property values and other factors, that may differ significantly from actual results. Loss settlement with Fannie Mae has historically concluded within 18 to 36 months after foreclosure. Historically, the initial collateral-based reserves have not varied significantly from the final settlement.

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We actively monitor the judgments and assumptions used in our Allowance for Risk-Sharing Obligation estimate and make adjustments to those assumptions when market conditions change, or when other factors indicate such adjustments are warranted. We believe the level of Allowance for Risk-Sharing Obligation is appropriate based on our expectations of future market conditions; however, changes in one or more of the judgments or assumptions used above could have a significant impact on the estimate.

Overview of Current Business Environment

Entering 2021, the pandemic continued to impact macroeconomic conditions with U.S. unemployment rates at elevated levels but significantly improved compared to the middle of 2020. Since the start of the COVID-19 pandemic, Congress passed three pandemic stimulus packages to provide funding for government programs directly supporting households and businesses, which included a total of $47 billion in renter assistance. By the middle of 2021, vaccines became widely available to the public and vaccination rates allowed most jurisdictions to remove most economic restrictions, resulting in macroeconomic conditions rapidly recovering with the reported unemployment rate falling to 3.9% as of December 2021 from 6.7% as of December 2020.

The Federal Reserve has indicated in its fourth quarter 2021 meetings that it believes the economy is nearing what it believes is full employment and given the overall improvements of the economy and large increases in the inflation rate, that it would begin reducing its holdings of Treasury securities and Agency mortgage-backed securities (“Agency MBS”). Additionally, the Federal Reserve has indicated that it will begin increasing its Federal Funds Rate from the target it set during the pandemic of 0% to 0.25%. Despite the movements from the Federal Reserve, long-term mortgage interest rates, which form the basis of most of our lending, remain close to historical lows.

Multifamily property fundamentals showed strength throughout 2021, with multifamily occupancy rates, demand for new leases, and retention rates at record highs. According to RealPage, a provider of commercial real estate data and analytics, occupancy rates have increased to 97.5% as of December 2021, compared to 95.8% as of December 2019, prior to the start of the pandemic. Additionally, the continued demand combined with limited supply of multifamily units drove rental rates higher for both new leases and renewals. Higher occupancy rates coupled with limited supply and rent growth indicate a robust and healthy multifamily market.

Our multifamily property sales volumes grew significantly in 2021, as (i) the multifamily acquisitions market was very active during the year, (ii) we have expanded the number of property sales brokers and the geographical reach of our property sales platform, and (iii) our volume in 2020 was lower due to the pandemic. Long term, we believe the market fundamentals will continue to be positive for multifamily property sales. Over the last several years, and in the months leading up to the pandemic, household formation and a dearth of supply of entry-level single-family homes led to strong demand for rental housing in most geographic areas. Consequently, the fundamentals of the multifamily property sales market were strong prior to the pandemic, and, when combined with high occupancy and retention rates and rising real-estate prices, it is our expectation that market demand for multifamily property sales will continue to grow as this asset class remains an attractive investment option.

Our debt brokerage platform had strong growth in 2021, with brokered volume increasing significantly during the year. The increase in volume during 2021 reflects the continued demand from private capital providers, with activity focused not only on multifamily but other commercial real estate assets such as office and retail. We expect non-multifamily debt financing volumes to continue to recover over time as other commercial real estate asset classes stabilize post-pandemic.

Our Agency multifamily debt financing operations have remained very active over the past year. We are a market-leading originator with the Agencies, and we believe our market leadership positions us well to continue gaining market share and remain a significant lender with the Agencies for the foreseeable future. We expect strength in our Agency operations to continue despite the return of other capital sources.

The FHFA establishes loan origination caps for both Fannie Mae and Freddie Mac each year. In October 2021, the FHFA established Fannie Mae’s and Freddie Mac’s 2022 loan origination caps at $78 billion each for all multifamily business, an 11% increase from the 2021 caps. During 2021, Fannie Mae and Freddie Mac had multifamily origination volumes of $69.5 billion and $70.0 billion, respectively, down 8.8% and 15.5%, respectively, from 2020. The decline in the GSEs’ origination volumes was primarily driven by the origination caps in 2021.

Our debt financing operations with HUD remained steady during 2021, with HUD loan volumes accounting for 5% of our total debt financing volumes for the year ended December 31, 2021, compared to 6% for the year ended 2020, despite our overall debt financing volumes increasing 40%. The maintenance of HUD debt financing volumes as a percentage of our total debt financing volumes was driven by continued strong demand for HUD’s multifamily lending product, which provides borrowers with favorable economics on long-term, fully amortizing debt, despite competition from other private capital sources.

Our originations with the Agencies are our most profitable executions as they provide significant non-cash gains from MSRs that turn into significant cash revenue streams from future servicing fees. During the year ended December 31, 2021, servicing fees were up 18% compared to the year ended December 31, 2020, due to the record amount of MSRs we generated in 2020. A decline in our Agency originations

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would negatively impact our financial results as our non-cash revenues would decrease disproportionately with debt financing volume and future servicing fee revenue would be constrained or decline.

We entered into the Interim Program JV to both increase the overall capital available to transitional multifamily properties and to dramatically expand our capacity to originate Interim Program loans. The demand for transitional lending has brought increased competition from lenders, specifically banks, mortgage real estate investment trusts, and life insurance companies. For the year ended December 31, 2021, we originated $860.0 million of Interim Program JV loans, compared to $86.2 million of originations in 2020. In 2020, we had few originations of new Interim Program loans as a result of the pandemic. Except for one loan that defaulted in early 2019, the loans in our portfolio and in the Interim Program JV continue to perform as agreed.

In December 2021, we acquired Alliant, which provides alternative investment management services focused on the affordable housing sector through LIHTC syndication, joint venture development, and community preservation fund management. We expect the combination of Alliant and our existing strong position in the affordable housing space to generate significant financing and property sales opportunities.

In September 2021, the White House announced plans to increase the affordable housing supply across the country. These plans include the relaunching and expansion of programs designed to increase the available capital for the development of affordable housing projects. In conjunction with the announcement, the FHFA raised the GSEs’ combined LIHTC investment cap to $1.7 billion, up 70% from the previous cap of $1.0 billion. Additionally, as part of FHFA’s 2022 loan origination caps of $156 billion announced in October 2021, at least 50% of the GSEs’ multifamily business is required to be targeted towards affordable housing. We expect these initiatives will create additional growth opportunities for both Alliant and our debt financing and property sales teams focused on affordable housing.

Factors That May Impact Our Operating Results

We believe that our results are affected by a number of factors, including the items discussed below.

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Revenues

Loan Origination and Debt Brokerage Fees, net. Loan origination fee revenue is recognized when we record a derivative asset upon the simultaneous commitments to originate a loan with a borrower and sell to an investor or when a loan that we broker closes with the institutional lender. The commitment asset related to the loan origination fee is recognized at fair value, which reflects the fair value of the contractual loan origination related fees and any sale premiums, net of co-broker fees. Also included in revenues from loan origination activities are changes to the fair value of loan commitments, forward sale commitments, and loans held for sale that occur during their respective holding periods. Upon sale of the loans, no gains or losses are recognized as these loans are recorded at fair value during their holding periods.

Brokered loans tend to have lower origination fees because they often require less time to execute, there is more competition for brokerage assignments, and because the borrower will also have to pay an origination fee to the institutional lender.

Premiums received on the sale of a loan result when a loan is sold to an investor for more than its face value. There are various reasons investors may pay a premium when purchasing a loan. For example, the fixed rate on the loan may be higher than the rate of return required by an investor or the characteristics of a particular loan may be desirable to an investor. We do not receive premiums on brokered loans.

Fair Value of Expected Net Cash Flows from Servicing, net. Revenue related to expected net cash flows from servicing is recognized at the loan commitment date, similar to the loan origination fees, as described above. The derivative asset is recognized at fair value, which reflects the estimated fair value of the expected net cash flows associated with the servicing of the loan, reduced by the estimated fair value of any guaranty obligations to be assumed. OMSRs and guaranty obligations are recognized as assets and liabilities, respectively, upon the sale of the loans.

OMSRs are recorded at fair value upon loan sale. The fair value is based on estimates of expected net cash flows associated with the servicing rights. The estimated net cash flows are discounted at a rate that reflects the credit and liquidity risk of the MSR over the estimated life of the loan.

The “Critical Accounting Policies and Estimates” section above and NOTE 2 of the consolidated financial statements provides additional details of the accounting for these revenues.

Servicing Fees.  We service nearly all loans we originate and some loans we broker. We earn servicing fees for performing certain loan servicing functions such as processing loan, tax, and insurance payments and managing escrow balances. Servicing generally also includes asset management functions, such as monitoring the physical condition of the property, analyzing the financial condition and liquidity of the borrower, and performing loss mitigation activities as directed by the Agencies.

Our servicing fees on loans we originate provide a stable revenue stream. They are based on contractual terms, are earned over the life of the loan, and are generally not subject to significant prepayment risk. Our Fannie Mae and Freddie Mac servicing agreements provide for prepayment fees in the event of a voluntary prepayment. Accordingly, we currently do not hedge our servicing portfolio for prepayment risk. Any prepayment fees received are included in Other revenues.

HUD has the right to terminate our current servicing engagements for cause. In addition to termination for cause, Fannie Mae and Freddie Mac may terminate our servicing engagements without cause by paying a termination fee. Institutional investors typically may terminate our servicing engagements for brokered loans at any time with or without cause, without paying a termination fee.

Net Warehouse Interest Income, Loans Held for Sale. We earn net interest income on loans funded through borrowings from our warehouse facilities from the time the loan is closed until the loan is sold pursuant to the loan purchase agreement. Each borrowing on a warehouse line relates to a specific loan for which we have already secured a loan sale commitment with an investor. Related interest expense from the warehouse loan funding is netted in our financial statements against interest income. Net warehouse interest income related to loans held for sale varies based on the period of time between the loan closing and the sale of the loan to the investor, the size of the average balance of the loans held for sale, and the net interest spread between the loan coupon rate and the cost of warehouse financing. Loans may remain in the warehouse facility for up to 60 days, but the average time in the warehouse facility is approximately 30 days. As a short-term cash management tool, we may also use excess corporate cash to fund Agency loans on our balance sheet rather than borrowing against a warehouse line. Loans that we broker for institutional investors and other investors are funded directly by them; therefore, there is no warehouse interest income or expense associated with brokered loan transactions. Additionally, the amortization of deferred debt issuance costs related to our Agency warehouse lines is included in net warehouse interest income, loans held for sale.

Net Warehouse Interest Income, Loans Held for Investment. Similar to loans held for sale, we earn net interest income on loans held for investment during the period they are outstanding. We earn interest income on the loan, which is funded partially by an investment of our cash and through one of our interim warehouse credit facilities. The loans originated for investment are typically interest-only, variable-rate loans

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with terms up to three years. The warehouse credit facilities are variable rate. The interest rate reset date is typically the same for the loans and the credit facility. Related interest expense from the warehouse loan funding is netted in our financial statements against interest income. Net warehouse interest income related to loans held for investment varies based on the period of time the loans are outstanding, the size of the average balance of the loans held for investment, and the net interest spread between the loan coupon rate and the cost of warehouse financing. The net spread has historically not varied much. Additionally, the amortization of deferred fees and costs and the amortization of deferred debt issuance costs related to our interim warehouse lines are included in net warehouse interest income, loans held for investment. Net warehouse interest income from loans held for investment will decrease in the coming years if most, or all, of the loans originated through the Interim Program are held by the Interim Program JV.

Escrow Earnings and Other Interest Income.  We earn fee income on property-level escrow deposits in our servicing portfolio, generally based on a fixed or variable placement fee negotiated with the financial institutions that hold the escrow deposits. Escrow earnings reflect interest income net of interest paid to the borrower, if required. Also included with escrow earnings and other interest income are interest earnings from our cash and cash equivalents and interest income earned on our pledged securities.

Other Revenues.  Other revenues are comprised of fees for processing loan assumptions, prepayment fee income, application fees, property sales broker fees, income from equity-method investments, asset management fees, revenues from LIHTC operations, and other miscellaneous revenues related to our operations.

Costs and Expenses

Personnel.  Personnel expense includes the cost of employee compensation and benefits, which include fixed and discretionary amounts tied to company and individual performance, commissions, severance expense, signing and retention bonuses, and share-based compensation.

Amortization and Depreciation.  Amortization and depreciation is principally comprised of amortization of our MSRs, net of amortization of our guaranty obligations. The MSRs are amortized using the interest method over the period that servicing income is expected to be received. We amortize the guaranty obligations evenly over their expected lives. When the loan underlying an OMSR prepays, we write off the remaining unamortized balance, net of any related guaranty obligation, and record the write off to Amortization and depreciation. Similarly, when the loan underlying an OMSR defaults, we write the OMSR off to Amortization and depreciation.  We depreciate property, plant, and equipment ratably over their estimated useful lives.

Amortization and depreciation also includes the amortization of intangible assets, principally related to the amortization of the mortgage pipeline, asset management fee contracts, research subscription contracts acquired, brand, and other intangible assets recognized in connection with acquisitions. We recognize amortization related to the mortgage pipeline intangible asset when a loan included in the mortgage pipeline intangible asset is rate locked or is no longer probable of rate locking. For the years presented in the Consolidated Statements of Income, the amortization of intangible assets relates primarily to intangible assets associated with our acquisition of WDIP in 2018 and our acquisitions in 2020 and 2021.

Provision (Benefit) for Credit Losses.  The provision (benefit) for credit losses consists of two components: the provision associated with our risk-sharing loans and the provision associated with our loans held for investment. The provision (benefit) for credit losses associated with risk-sharing loans is estimated on a collective basis when a loan is sold to Fannie Mae and is based on our current expected credit losses on the current portfolio from loan sale to maturity. The provision (benefit) for credit losses associated with our loans held for investment is estimated similar to our risk-sharing loans at origination and is based on our current expected credit losses. For both our risk-sharing loans and loans held for investment, when a loan is probable of default, the loan is taken out of the collective evaluation and individually evaluated for credit losses. Our estimates of property fair value are based on appraisals, broker opinions of value, or net operating income and market capitalization rates, whichever we believe is the best estimate of the net disposition value.

The “Critical Accounting Policies and Estimates” section above and NOTE 2 of the consolidated financial statements provides additional details of the accounting for this expense.

Interest Expense on Corporate Debt.  Interest expense on corporate debt includes interest expense incurred and amortization of debt discount and deferred debt issuance costs related to our term loan facility.

Other Operating Expenses.  Other operating expenses include sub-servicing costs, facilities costs, travel and entertainment costs, marketing costs, professional fees, losses on debt extinguishment, accretion and revaluation of contingent consideration liabilities, corporate insurance premiums, and other administrative expenses.

Income Tax Expense.  The Company is a C-corporation subject to both federal and state corporate tax. Our estimated combined statutory federal and state tax rate was 25.7%, 25.2%, and 25.0% for the years ended December 31, 2021, 2020, and 2019, respectively. Except for the

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effects of the Tax Cuts and Jobs Act of 2017 (“Tax Reform”), our combined statutory tax rate has historically not varied significantly as the only material difference in the calculation of the combined statutory tax rate from year to year is the apportionment of our taxable income amongst the various states where we are subject to taxation since we do not have foreign operations. For example, from the period since we went public in 2010 through 2017, our combined statutory tax rate varied by only 0.7%, with a low of 38.2% and a high of 38.9%. Absent additional significant legislative changes to statutory tax rates (particularly the federal tax rate), we expect low deviation from the 2021 combined statutory tax rate for future years. However, we do expect some variability in the effective tax rate going forward due to excess tax benefits recognized and limitations on the deductibility of certain book expenses as a result of Tax Reform, primarily related to executive compensation.

Excess tax benefits recognized in 2021 and 2020 reduced income tax expense by $8.6 million and $7.3 million, respectively. The increase in the excess tax benefits from 2020 to 2021 largely reflects the increase in the number of shares vested and the stock price at which the shares vested.

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Results of Operations

The following is a discussion of the comparison of our results of operations for the years ended December 31, 2021 and 2020. The financial results are not necessarily indicative of future results. Our annual results have fluctuated in the past and are expected to fluctuate in the future, reflecting the interest-rate environment, the volume of transactions, business acquisitions, regulatory actions, and general economic conditions. Discussions of our results of operations and comparisons between 2020 and 2019 can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2020.

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SUPPLEMENTAL OPERATING DATA

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SUPPLEMENTAL OPERATING DATA (Continued)

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The following tables present our AUM as of December 31, 2021 and 2020:

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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

The following table presents a period-to-period comparison of our financial results for the years ended December 31, 2021 and 2020.

FINANCIAL RESULTS –2021 COMPARED TO 2020

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Overview

The increase in revenues was mainly driven by increases in loan origination and debt brokerage fees, net (“origination fees”), servicing fees, property sales broker fees, and other revenues, partially offset by decreases in the fair value of expected net cash flows from servicing, net (“MSR Income”), net warehouse interest income for both loans held for sale and held for investment, and escrow earnings and other interest income. The increase in origination fees was primarily related to an overall increase in debt financing volume, particularly in our brokered product. Servicing fees increased largely from an increase in the average servicing portfolio outstanding. The increase in property sales broker fees was a result of the significant increase in property sales volume. The increase in other revenues was driven by increases in prepayment fees, research subscription fees, and fee revenues from our LIHTC operations. MSR Income decreased as a result of a decrease in GSE debt financing volume. Net warehouse interest income decreased due to decreases in the average balances and net spreads for both loans held for sale (“LHFS”) and loans held for investment (“LHFI”). Escrow earnings and other interest income decreased largely due to a substantial decrease in the average earnings rate.

The increase in expenses was mainly driven by increases in personnel expenses, amortization and depreciation, and other operating expenses, partially offset by a reduction in provision (benefit) for credit losses. The increase in personnel expenses was primarily due to increases in commission costs due to the increases in origination fees and property sales broker fees and salaries and benefits costs due primarily to an increase in the average headcount. Amortization and depreciation expense increased due to an increase in the average MSR balance. Other operating expenses increased as a result of the overall growth of the Company over the past year and additional costs related to acquisition activity during the year. The change to a benefit for credit losses in 2021 from a provision for credit losses in 2020 was driven primarily by a decrease in our CECL reserve.

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Revenues

The following tables provide additional information that helps explain changes in origination fees and MSR income over the past two years:

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Loan origination and debt brokerage fees, net. The increase was driven by the 40% increase in overall debt financing volume, particularly in our brokered debt financing, which grew by 170%, in 2021 compared to 2020. The increase due to debt financing volume was partially offset by a decline in the origination fee rate, as our debt financing volume mix shifted towards brokered loans from Agency loans. Brokered loans typically have lower origination fee margins than Agency loans.

Fair value of the expected net cash flows associated with the servicing of the loan, net of any guaranty obligations retained. The decrease was due to a 28% decrease in GSE debt financing volume, particularly our Fannie Mae debt financing volume, which decreased 27%. Partially offsetting the decline due to volume was an increase in the Agency MSR Rate. The decline in Fannie Mae debt financing volume was partially the result of a portfolio of loans originated in 2020 with over $2 billion in volume, with no comparable large portfolio transaction in 2021. The Agency MSR Rate increased year over year due primarily to this large portfolio, which had a lower-than-average servicing fee and to an increase in the weighted-average servicing fee on Fannie Mae non-portfolio debt financing volume in 2021. The overall Fannie Mae weighted-average servicing fee increased from 45 basis points in 2020 to 52 basis points in 2021.

See the “Overview of Current Business Environment” section above for a detailed discussion of the factors driving the changes in debt financing volumes.

Servicing Fees.  The increase was primarily attributable to increases in the average servicing portfolio period over period as shown below, primarily due to the $4.6 billion net increase in Fannie Mae serviced loans and a $3.6 billion net increase in brokered loans serviced over the past year, coupled with increases in the servicing portfolio’s average servicing fee rates as shown below. The increases in the average servicing fee are the result of the large net increase in Fannie Mae debt financing volume with high servicing fees over the past year.

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Net Warehouse Interest Income, Loans Held for Sale. The decrease was the result of decreases in the average balance outstanding and in the net spread between the rate on the originated loans and the interest costs associated with the warehouse facility as shown below. The decrease in the average balance was related to the overall decrease in our GSE debt financing volume year over year. The decrease in the net spreads shown below was a result of the short-term interest rates upon which we incur interest expense decreasing at a slower rate than the mortgage rates upon which we earn interest income

Net Warehouse Interest Income, Loans Held for Investment.  The decrease was due to a decline in the average balance of loans held for investment outstanding from 2020 to 2021 and the net spread between the rate on the originated loans and the interest costs associated with the warehouse facility. The decrease in the average balance was due to payoffs continuing to outpace loan originations in 2021. Additionally, much of our debt financing volume in 2021 was for loans with short maturities. In 2020, we had a larger balance of loans funded with corporate cash, resulting in a higher net spread.

Escrow Earnings and Other Interest Income. The decrease was primarily due to a significant decrease in average earnings rate on our escrow accounts resulting from a decrease in short-term interest rates in the broader market, slightly offset by an increase in the average balance of escrow accounts due to an increase in the average servicing portfolio. The decrease in the average earnings rate was due to substantial decreases in short-term interest rates, upon which our earnings rates are based, over the past year and a half as discussed above in the “Overview of Current Business Environment” section.

Property Sales Broker Fees. The increase was driven by a significant increase in property sales volume year over year. See the “Overview of Current Business Environment” section above for a detailed discussion of the factors driving the changes in property sales volumes.

Other Revenues. The increase was driven primarily by increases in prepayment fees, research subscription fees, investment management fees, and other revenues. Prepayment fees increased $18.1 million in 2021 compared to 2020 as the volume of the loans that prepaid in 2021 was substantially higher than in 2020 due to changes in the interest rate environment and an increase in property acquisition activity in 2021. In 2021, we acquired Zelman, which resulted in the addition of $7.3 million of research subscription fee revenues, and Alliant, which generated $20.4 million in investment management fees and other revenues.

Expenses

Personnel.  The increase was primarily the result of (i) a $101.9 million increase in commission costs due to higher origination fees and property sales broker fees, (ii) a $28.3 million increase in salaries and benefits due to a 20% increase in average headcount to support our growth efforts, and (iii) an $8.3 million increase in share-based compensation expense due to higher expense associated with a stock grant provided to the vast majority of our non-executive employee base in the fourth quarter of 2020 and share-based compensation expense associated with our performance share plans due to the Company’s financial performance in 2021. Partially offsetting these increases in personnel costs was a decrease of $7.2 million in the accrual for subjective bonuses from 2020.

Amortization and Depreciation.  The increase was primarily attributed to loan origination activity and the resulting growth in the average MSR balance. During the year ended December 31, 2021, we added $91.0 million of MSRs, net of amortization and write offs due to prepayment. Additionally, the write off of MSRs due to prepayment increased $12.3 million due to the aforementioned increase in prepayment activity in 2021.

Provision (benefit) for Credit Losses.  The change in the provision (benefit) for credit losses in 2021 was due to improvements in the forecasted unemployment rate and sustained strength in multifamily operating fundamentals. The forecasted loss rate as of December 31, 2020 was six basis points compared to one basis point upon implementation at January 1, 2020 as a result of the expected negative economic impacts

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of the COVID-19 pandemic, resulting in a significant provision expense for 2020. With the economic improvements noted above, we lowered our forecast-period loss rate to three basis points at December 31, 2021, resulting in a large benefit for 2021. The benefit related to a decrease in the forecast-period loss rate, which was partially offset by an increase in the balance of our at-risk Fannie Mae servicing portfolio during the year.

Other Operating Expenses. The increase was driven primarily by increases in professional fees and other expenses. Professional fees increased $8.6 million primarily due to additional costs related to the acquisitions completed during the year, including Alliant. Other expenses increased primarily due to two non-recurring charges related to (i) a $2.7 million write-off of deferred issuance costs related to our Prior Term Loan (as defined below) that was paid off at the issuance of our new Term Loan and (ii) a $6.9 million accelerated earnout accrual related to the 2020 acquisition of the non-controlling interest in WDIS. The remaining increase was the result of additional costs in travel and entertainment and marketing due to our growth. Partially offsetting these increases was a $6.0 million decrease due to a non-recurring charge in 2020 from the write-off of previously capitalized software implementation costs related to a planned servicing system conversion that was terminated in 2020.

Income Tax Expense.  The increase in income tax expense is related to the 7% increase in income from operations, partially offset by a decrease in the effective tax rate from 25.5% in 2020 to 24.5% in 2021. The decrease in the effective tax rate related primarily to an increase in excess tax benefits of $1.3 million and a reduction to the impact of uncertain tax positions of $3.8 million.

Non-GAAP Financial Measures

To supplement our financial statements presented in accordance with GAAP, we use adjusted EBITDA, a non-GAAP financial measure. The presentation of adjusted EBITDA is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. When analyzing our operating performance, readers should use adjusted EBITDA in addition to, and not as an alternative for, net income. Adjusted EBITDA represents net income before income taxes, interest expense on our term loan facility, and amortization and depreciation, adjusted for provision for credit losses net of write-offs, share-based incentive compensation charges, and the fair value of expected net cash flows from servicing, net. Because not all companies use identical calculations, our presentation of adjusted EBITDA may not be comparable to similarly titled measures of other companies. Furthermore, adjusted EBITDA is not intended to be a measure of free cash flow for our management’s discretionary use, as it does not reflect certain cash requirements such as tax and debt service payments. The amounts shown for adjusted EBITDA may also differ from the amounts calculated under similarly titled definitions in our debt instruments, which are further adjusted to reflect certain other cash and non-cash charges that are used to determine compliance with financial covenants.

We use adjusted EBITDA to evaluate the operating performance of our business, for comparison with forecasts and strategic plans, and for benchmarking performance externally against competitors. We believe that this non-GAAP measure, when read in conjunction with our GAAP financials, provides useful information to investors by offering:

We believe that adjusted EBITDA has limitations in that it does not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP and that adjusted EBITDA should only be used to evaluate our results of operations in conjunction with net income.

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Adjusted EBITDA is reconciled to net income as follows:

ADJUSTED FINANCIAL METRIC RECONCILIATION TO GAAP

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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

The following table presents a period-to-period comparison of the components of our adjusted EBITDA for the years ended December 31, 2021 and 2020:

ADJUSTED EBITDA –2021 COMPARED TO 2020

The increase in origination fees was primarily related to an increase in debt financing volumes year over year. Servicing fees increased due to an increase in the average servicing portfolio period over period as a result of the substantial debt financing volume and relatively few payoffs. Property sales broker fees increased as a result of the increase in property sales volume. Net warehouse interest income decreased primarily due to decreases in the net spreads and average outstanding balances. Escrow earnings and other interest income decreased primarily as a result of a decline in the average earnings rate. Other revenues increased primarily due to increases in prepayment fees and additional revenue from the acquisitions of Zelman and Alliant.

The increase in personnel expense was primarily due to increased commissions expense resulting from the increases in origination fees and property sales broker fees and salaries and benefits expense due to an increase in average headcount. Other operating expenses increased as a result of the overall growth of the Company over the past year, two non-recurring charges mentioned above, and from increased costs associated with due diligence for acquisitions.

Financial Condition

Cash Flows from Operating Activities

Our cash flows from operations are generated from loan sales, servicing fees, escrow earnings, net warehouse interest income, property sales broker fees, investment management fees, and other income, net of loan origination and operating costs. Our cash flows from operations are impacted by the fees generated by our loan originations and property sales, the timing of loan closings, assets under management, escrow

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account balances, the average balance of loans held for investment, and the period of time loans are held for sale in the warehouse loan facility prior to delivery to the investor.

Cash Flows from Investing Activities

We usually lease facilities and equipment for our operations. Our cash flows from investing activities also include the funding and repayment of loans held for investment, contributions to and distributions from joint ventures, and the purchase of available-for-sale (“AFS”) securities pledged to Fannie Mae. We opportunistically invest cash for acquisitions and MSR portfolio purchases.

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Cash Flows from Financing Activities

We use our warehouse loan facilities and, when necessary, our corporate cash to fund loan closings. We believe that our current warehouse loan facilities are adequate to meet our increasing loan origination needs. Historically, we have used a combination of long-term debt and cash flows from operations to fund acquisitions, repurchase shares, pay cash dividends, and fund a portion of loans held for investment.

Years Ended December 31, 2021 Compared to Years Ended December 31, 2020

The following table presents a period-to-period comparison of the significant components of cash flows for the year ended December 31, 2021 and 2020.

SIGNIFICANT COMPONENTS OF CASH FLOWS – 2021 COMPARED TO 2020

The change in cash flows from operating activities was driven primarily by loans originated and sold. Such loans are held for short periods of time, generally less than 60 days, and impact cash flows presented as of a point in time. The decrease in cash flows used in loan origination activities is primarily attributable to sales of loans held for sale outpacing originations by $620.8 million in 2021 compared to originations outpacing sales of loans held for sale by $1.6 billion in 2020. Our GSE debt financing activity decreased year over year, which resulted in less cash used in originations during 2021. Excluding cash used for the origination and sale of loans, cash flows provided by operations were $249.7 million in 2021, up from $200.3 million in 2020. The increase is primarily the result of a $19.7 million increase in net income before noncontrolling interests, a lower adjustment for gains attributable to the fair value of future servicing rights, net of guaranty obligation of $70.9 million, and a lower adjustment for change in the fair value of premiums and origination fees of $52.4 million, partially

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offset by a lower adjustment for the provision (benefit) for credit losses of $50.8 million, a greater increase in receivables of $23.6 million, and a smaller decrease in other liabilities of $24.7 million.

The change from cash provided by investing activities in 2020 to cash used by investing activities in 2021 was primarily attributable to the changes shown in the table above. The increase in cash paid for acquisitions was primarily the result of the increase in the size of the acquisitions in 2021 compared to 2020, particularly the acquisition of Alliant in 2021, the largest acquisition in our history. The decrease in net payoff of loans held for investment was due to an increase in originations in 2021 compared to 2020 as we paused the originations of loans held for investment for several months in 2020 due to the COVID-19 pandemic. We increased our investments in equity-method investments as we increased our investments in small strategic opportunities. Net proceeds from prepayment/sale of pledged AFS securities increased as prepayments of AFS securities were greater than our purchases of AFS securities in 2021. The increase in purchases of AFS investments was due to the increase in the aforementioned prepayments of AFS. The increase in investment in joint ventures related primarily to the increase in originations for our Interim Program JV.

The change to cash used from cash provided by financing activity was primarily attributable to the changes shown in the table above. The change in net borrowings of warehouse notes payable during 2021 was largely due to the decrease in cash used for loan origination activity, as noted above. The repayment of secured borrowings was the result of the maturity of the loan in the second quarter of 2021, a unique transaction. Cash dividends paid increased as a result of the increase in our dividend to $2.00 per share in 2021 compared to $1.44 per share in 2020. Net borrowings of notes payable changed due to the refinancing and increase of our Term Loan in December 2021 to fund our acquisition of Alliant. Net borrowings of interim warehouse notes payable increased due to the increase in originations of loans held for investments noted above. The decrease in cash paid for repurchases of common stock was related to repurchases under approved stock repurchase programs. In 2021, we did not repurchase any shares under approved repurchase programs, while in 2020 we repurchased $26.1 million of shares under such programs.

Liquidity and Capital Resources

Uses of Liquidity, Cash and Cash Equivalents

Our significant recurring cash flow requirements consist of liquidity to (i) fund loans held for sale; (ii) fund loans held for investment under the Interim Loan Program; (iii) pay cash dividends; (iv) fund our portion of the equity necessary for the operations of the Interim Program JV, our appraisal JV, and other equity-method investments; (v) fund investments in properties to be syndicated to LIHTC investment funds that we will asset-manage; (vi) make payments related to earnouts from acquisitions, (vii) meet working capital needs to support our day-to-day operations, including debt service payments, joint venture development partnerships contributions, servicing advances and payments for salaries, commissions, and income taxes,; and (viii) meet working capital to satisfy collateral requirements for our Fannie Mae DUS risk-sharing obligations and to meet the operational liquidity requirements of Fannie Mae, Freddie Mac, HUD, Ginnie Mae, and our warehouse facility lenders.

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Fannie Mae has established benchmark standards for capital adequacy and reserves the right to terminate our servicing authority for all or some of the portfolio if, at any time, it determines that our financial condition is not adequate to support our obligations under the DUS agreement. We are required to maintain acceptable net worth as defined in the standards, and we satisfied the requirements as of December 31, 2021. The net worth requirement is derived primarily from unpaid balances on Fannie Mae loans and the level of risk-sharing. As of December 31, 2021, the net worth requirement was $258.2 million, and our net worth was $722.4 million, as measured at our wholly owned operating subsidiary, Walker & Dunlop, LLC. As of December 31, 2021, we were required to maintain at least $51.1 million of liquid assets to meet our operational liquidity requirements for Fannie Mae, Freddie Mac, HUD, Ginnie Mae and our warehouse facility lenders. As of December 31, 2021, we had operational liquidity of $251.7 million, as measured at our wholly owned operating subsidiary, Walker & Dunlop, LLC.

We paid a cash dividend of $0.50 per share each quarter of 2021, which is 39% higher than the quarterly dividend paid in each quarter of 2020. In February 2022, the Company’s Board of Directors declared a dividend of $0.60 per share for the first quarter of 2022, an increase of 20%. The dividend will be paid on March 10, 2022 to all holders of record of our restricted and unrestricted common stock as of February 22, 2022. We expect to continue to make regular quarterly dividend payments for the foreseeable future.

Over the past three years, we have returned $177.5 million to investors in the form of the repurchase of 594 thousand shares of our common stock under share repurchase programs for a cost of $30.5 million and cash dividend payments of $147.0 million. Additionally, we have invested $619.4 million in acquisitions. On occasion, we may use cash to fully fund loans held for investment or loans held for sale instead of using our warehouse lines. We continually seek opportunities to complete additional acquisitions if we believe the economics are favorable.

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In February 2021, our Board of Directors approved a stock repurchase program; we did not repurchase any shares under this program. In February 2022, our Board approved a new stock repurchase program that permits the repurchase of up to $75.0 million of shares of our common stock over a 12-month period beginning February 13, 2022.

We have contractual obligations to make future cash payments on lease agreements on our various offices of $29.5 million as of December 31, 2021. NOTE 15 in the consolidated financial statements contains additional details related to future lease payments. We have contractual obligations to repay short-term and long-term debt. The total principal balance for such debt is $2.7 billion as of December 31, 2021. Most of this balance will be repaid with the proceeds from the sale of loans held for sale and the repayments of loans held for investment. NOTE 6 in the consolidated financial statements contains additional details related to these future debt payments. The expected interest associated with these debt payments is $31.2 million in 2022, $25.0 million in 2023, $22.2 million in 2024, $20.4 million in 2025, and $19.4 million in 2026. The interest for long-term debt is based on a variable rate. Such interest is calculated based on the effective interest rate as of December 31, 2021.

Historically, our cash flows from operations and warehouse facilities have been sufficient to enable us to meet our short-term liquidity needs and other funding requirements. We believe that cash flows from operations will continue to be sufficient for us to meet our current obligations for the foreseeable future.

Restricted Cash and Pledged Securities

Restricted cash consists primarily of good faith deposits held on behalf of borrowers between the time we enter into a loan commitment with the borrower and the investor purchases the loan and cash held in collection accounts to be used to fund the repayment of the Alliant note payable. We are generally required to share the risk of any losses associated with loans sold under the Fannie Mae DUS program, our only off-balance sheet arrangement. We are required to secure this obligation by assigning collateral to Fannie Mae. We meet this obligation by assigning pledged securities to Fannie Mae. The amount of collateral required by Fannie Mae is a formulaic calculation at the loan level and considers the balance of the loan, the risk level of the loan, the age of the loan, and the level of risk-sharing. Fannie Mae requires collateral for Tier 2 loans of 75 basis points, which is funded over a 48-month period that begins upon delivery of the loan to Fannie Mae. Collateral held in the form of money market funds holding U.S. Treasuries is discounted 5%, and Agency MBS are discounted 4% for purposes of calculating compliance with the collateral requirements. As of December 31, 2021, we held substantially all of our restricted liquidity in Agency MBS in the aggregate amount of $104.3 million. Additionally, the majority of the loans for which we have risk-sharing are Tier 2 loans. We fund any growth in our Fannie Mae required operational liquidity and collateral requirements from our working capital.

We are in compliance with the December 31, 2021 collateral requirements as outlined above. As of December 31, 2021, reserve requirements for the December 31, 2021 DUS loan portfolio will require us to fund $65.3 million in additional restricted liquidity over the next 48 months, assuming no further principal paydowns, prepayments, or defaults within our at-risk portfolio. Fannie Mae has assessed the DUS Capital Standards in the past and may make changes to these standards in the future. We generate sufficient cash flows from our operations to meet these capital standards and do not expect any future changes to have a material impact on our future operations; however, any future changes to collateral requirements may adversely impact our available cash.

Under the provisions of the DUS agreement, we must also maintain a certain level of liquid assets referred to as the operational and unrestricted portions of the required reserves each year. We satisfied these requirements as of December 31, 2021.

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Sources of Liquidity: Warehouse Facilities

The following table provides information related to our warehouse facilities as of December 31, 2021.

Agency Warehouse Facilities

As of December 31, 2021, we had seven warehouse lines of credit in the aggregate amount of $4.1 billion with certain national banks and a $1.5 billion uncommitted facility with Fannie Mae (collectively, the “Agency Warehouse Facilities”) that we use to fund substantially all of our loan originations. The seven warehouse facilities are revolving commitments we expect to renew annually (consistent with industry practice), and the Fannie Mae facility is provided on an uncommitted basis without a specific maturity date. Our ability to originate mortgage loans depends upon our ability to secure and maintain these types of short-term financing on acceptable terms. An outline of the affirmative and negative covenants contained within the warehouse agreements and a summary of the amendments we executed during 2021 are detailed in NOTE 6 in the consolidated financial statements.

Agency Warehouse Facility #1:

We have a warehousing credit and security agreement with a national bank for a $425.0 million committed warehouse line that is scheduled to mature on October 24, 2022. The agreement provides us with the ability to fund Fannie Mae, Freddie Mac, HUD, and FHA loans. Advances are made at 100% of the loan balance and borrowings under this line bear interest at the Adjusted Term Secured Overnight Financing Rate (“SOFR”) plus 130 basis points.

Agency Warehouse Facility #2:

We have a warehousing credit and security agreement with a national bank for a $700.0 million committed warehouse line that is scheduled to mature on April 14, 2022. The committed warehouse facility provides the Company with the ability to fund Fannie Mae, Freddie Mac, HUD, and FHA loans. Advances are made at 100% of the loan balance, and borrowings under this line bear interest at 30-day LIBOR plus 130 basis points. In addition to the committed borrowing capacity, the agreement provides $300.0 million of uncommitted borrowing capacity that bears interest at the same rate as the committed facility.

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Agency Warehouse Facility #3:

We have a $600.0 million committed warehouse credit and security agreement with a national bank that is scheduled to mature on May 14, 2022. The committed warehouse facility provides us with the ability to fund Fannie Mae, Freddie Mac, HUD and FHA loans. Advances are made at 100% of the loan balance, and the borrowings under the warehouse agreement bear interest at a rate of 30-day LIBOR plus 130 basis points, with a 30-day LIBOR floor of zero basis points. In addition to the committed borrowing capacity, the agreement provides $265.0 million of uncommitted borrowing capacity that bears interest at the same rate as the committed facility.

Agency Warehouse Facility #4:

We have a $350.0 million committed warehouse credit and security agreement with a national bank that is scheduled to mature on June 22, 2022. The warehouse facility provides us with the ability to fund Fannie Mae, Freddie Mac, HUD, FHA, and defaulted HUD and FHA loans and has a sublimit of $75.0 million to fund defaulted HUD and FHA loans. Advances are made at 100% of the loan balance, and the borrowings under the warehouse agreement bear interest at a rate of 30-day LIBOR plus 130 basis points, with a 30-day LIBOR floor of five basis points.

Agency Warehouse Facility #5:

We have a master repurchase agreement with a national bank for a $1.0 billion uncommitted advance credit facility that is scheduled to mature on September 15, 2022. The facility provides us with the ability to fund Fannie Mae, Freddie Mac, HUD, and FHA loans. Advances are made at 100% of the loan balance, and the borrowings under the repurchase agreement bear interest at a rate of Adjusted Term SOFR plus 145 basis points.

Agency Warehouse Facility #6:

During 2021, we entered into an agreement with a national bank to establish Agency Warehouse Facility #6. The facility has a $150.0 million committed borrowing capacity and provides us with the ability to fund Fannie Mae, Freddie Mac, HUD, and FHA loans under the facility. The facility is scheduled to mature on March 5, 2022. Advances are made at 100% of the loan balance, and the borrowings under the warehouse agreement bear interest at a rate of 30-day LIBOR plus 140 basis points with a 30-day LIBOR floor of 25 basis points. The agreement also provides $100.0 million of uncommitted borrowing capacity that bears interest at the same rate as the committed facility.

Agency Warehouse Facility #7:

During 2021, we entered into an agreement to establish Agency Warehouse Facility #7. The warehouse facility has a $150.0 million maximum committed borrowing capacity, provides us with the ability to fund Fannie Mae, Freddie Mac, HUD, and FHA loans, and matures on August 24, 2022. Advances are made at 100% of the loan balance, and the borrowings under the warehouse agreement bear interest at a rate of 30-day LIBOR plus 130 basis points. In addition to the committed borrowing capacity, the agreement provides $50.0 million of uncommitted borrowing capacity that bears interest at the same rate as the committed facility.

Uncommitted Agency Warehouse Facility:

We have a $1.5 billion uncommitted facility with Fannie Mae under its ASAP funding program. After approval of certain loan documents, Fannie Mae will fund loans after closing and the advances are used to repay the primary warehouse line. Fannie Mae will advance 99% of the loan balance. There is no expiration date for this facility.

Interim Warehouse Facilities

To assist in funding loans held for investment under the Interim Loan Program, we have four warehouse facilities with certain national banks in the aggregate amount of $0.5 billion as of December 31, 2021 (“Interim Warehouse Facilities”). Consistent with industry practice, three of these facilities are revolving commitments we expect to renew annually or bi-annually, and one is a commitment that matures according to the maturity date of the underlying loan it finances. Our ability to originate loans held for investment depends upon our ability to secure and maintain these types of short-term financings on acceptable terms. An outline of the affirmative and negative covenants contained within the warehouse agreements and a summary of the amendments we executed during 2021 are detailed in NOTE 6 in the consolidated financial statements.

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Interim Warehouse Facility #1:

We have a $135.0 million committed warehouse line agreement that is scheduled to mature on May 14, 2022. The facility provides us with the ability to fund first mortgage loans on multifamily real estate properties for periods of up to three years, using available cash in combination with advances under the facility. Borrowings under the facility are full recourse to the Company and bear interest at 30-day LIBOR plus 190 basis points, with a 30-day LIBOR floor of zero basis points.  Repayments under the credit agreement are interest-only, with principal repayments made upon the earlier of the refinancing of an underlying mortgage or the maturity of an advance under the credit agreement.

Interim Warehouse Facility #2:

We have a $100.0 million committed warehouse line agreement that is scheduled to mature on December 13, 2023. The agreement provides us with the ability to fund first mortgage loans on multifamily real estate properties for periods of up to three years, using available cash in combination with advances under the facility. Borrowings under the facility are full recourse to the Company. All borrowings originally bear interest at 30-day LIBOR plus 165 to 200 basis points (“the spread”) as of December 31, 2021. The spread varies according to the type of asset the borrowing finances. The lender retains a first priority security interest in all mortgages funded by such advances on a cross-collateralized basis. Repayments under the credit agreement are interest-only, with principal repayments made upon the earlier of the refinancing of an underlying mortgage or the maturity of an advance under the credit agreement.

Interim Warehouse Facility #3:

We have a $200.0 million repurchase agreement with a national bank that is scheduled to mature on September 29, 2022. The agreement provides us with the ability to fund first mortgage loans on multifamily real estate properties for periods of up to three years, using available cash in combination with advances under the facility. Borrowings under the facility are full recourse to the Company. The borrowings under the agreement bear interest at a rate of 30-day LIBOR plus 175 to 325 basis points (“the spread”). The spread varies according to the type of asset the borrowing finances. Repayments under the credit agreement are interest-only, with principal repayments made upon the earlier of the refinancing of an underlying mortgage or the maturity of an advance under the credit agreement.

Interim Warehouse Facility #4:

We have a $19.8 million committed warehouse loan and security agreement with a national bank that funds one specific loan. The agreement provides for a maturity date to coincide with the earlier of the maturity date for the underlying loan or the stated maturity date of October 1, 2022. Borrowings under the facility are full recourse and bear interest at 30-day LIBOR plus 300 basis points, with a floor of 450 basis points. Repayments under the credit agreement are interest-only, with principal repayments made upon the earlier of the refinancing of an underlying mortgage or the maturity of an advance under the credit agreement. The committed warehouse loan and security agreement has only two financial covenants, both of which are similar to the other Interim Warehouse Facilities. We may request additional capacity under the agreement to fund specific loans.

The warehouse agreements above contain cross-default provisions, such that if a default occurs under any of our warehouse agreements, generally the lenders under our other warehouse agreements could also declare a default. As of December 31, 2021, we were in compliance with all of our warehouse line covenants.

We believe that the combination of our capital and warehouse facilities is adequate to meet our loan origination needs.

Alliant Warehouse Facility

During December 2021, we acquired Alliant and assumed the liabilities of Alliant and its subsidiaries, including a warehouse line of credit with a national bank that is used to fund our Committed investments in tax credit equity before transferring them to a tax credit fund that we asset-manage. The warehouse facility is a revolving commitment that we expect to renew annually.

The credit agreement is scheduled to mature on April 30, 2022. The facility provides us with up to $30.0 million in committed borrowing capacity to fund investments in tax credit equity that also secure the borrowings. Borrowings under this facility bear interest at Daily LIBOR plus 300 basis points with a Daily LIBOR floor of 150 basis points. The warehouse agreement contains certain affirmative and negative covenants which are outlined in NOTE 6 in the consolidated financial statements.

As of December 31, 2021, the outstanding balance was $8.3 million.

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Notes Payable

Term Loan

On December 16, 2021, we entered into a senior secured term loan credit agreement (the “Credit Agreement”) that provided for a $600.0 million term loan (the “Term Loan”). The Credit Agreement replaces our $300.0 million term loan agreement (the “Prior Term Loan”), which was governed by that certain amended and restated credit agreement, dated as November 7, 2018. The Term Loan was issued at a 0.25% discount, has a stated maturity date of December 16, 2028 (or, if earlier, the date of acceleration of the Term Loan pursuant to the term of the Credit Agreement), and bears interest at Adjusted Term SOFR plus 225 basis points with a floor of 50 basis points. At any time, we may also elect to request one or more incremental term loan commitments not to exceed the lesser of $230.0 million and 100% of trailing four-quarter Consolidated Adjusted EBITDA, provided that total indebtedness would not cause the leverage ratio to exceed 3.00 to 1.00.

We are obligated to repay the aggregate outstanding principal amount of the Term Loan in consecutive quarterly installments equal to 0.25% of the original principal amount of the Term Loan on the last business day of each of March, June, September, and December commencing on March 31, 2022. The Term Loan also requires certain other prepayments in certain circumstances pursuant to the terms of the Credit Agreement.

Our obligations under the Credit Agreement are guaranteed by Walker & Dunlop Multifamily, Inc., Walker & Dunlop, LLC, Walker & Dunlop Capital, LLC, W&D BE, Inc., and Walker & Dunlop Investment Sales, LLC, each of which is a direct or indirect wholly owned subsidiary of the Company (together with the Company, the “Loan Parties”), pursuant to the Amended and Restated Guarantee and Collateral Agreement entered into on December 16, 2021 among the Loan Parties and JPMorgan Chase Bank, N.A., as administrative agent (the “Guarantee and Collateral Agreement”). Subject to certain exceptions and qualifications contained in the Credit Agreement, the Company is required to cause any newly created or acquired subsidiary, unless such subsidiary has been designated as an Excluded Subsidiary (as defined in the Credit Agreement) by the Company in accordance with the terms of the Credit Agreement, to guarantee the obligations of the Company under the Credit Agreement and become a party to the Guarantee and Collateral Agreement. The Company may designate a newly created or acquired subsidiary as an Excluded Subsidiary, so long as certain conditions and requirements provided for in the Credit Agreement are met.

The Credit Agreement contains certain affirmative and negative covenants that are binding on the Loan Parties, including, but not limited to, restrictions (subject to specified exceptions and qualifications) on the ability of the Loan Parties to incur indebtedness, to create liens on their property, to make investments, to merge, consolidate, or enter into any similar combination, or enter into any asset disposition of all or substantially all assets, or liquidate, wind-up or dissolve, to make asset dispositions, to declare or pay dividends or make related distributions, to enter into certain transactions with affiliates, to enter into any negative pledges or other restrictive agreements, and to engage in any business other than the business of the Loan Parties as of the date of the Credit Agreement and business activities reasonably related or ancillary thereto, or to amend certain material contracts. The Credit Agreement contains only one financial covenant, which requires the Company not to permit its asset coverage ratio (as defined in the Credit Agreement) to be less than 1.50 to 1.00.

The Credit Agreement contains customary events of default (which are, in some cases, subject to certain exceptions, thresholds, notice requirements and grace periods), including, but not limited to, non-payment of principal or interest or other amounts, misrepresentations, failure to perform or observe covenants, cross-defaults with certain other indebtedness or material agreements, certain change in control events, voluntary or involuntary bankruptcy proceedings, failure of the Credit Agreements or other loan documents to be valid and binding, or certain ERISA events and judgments.

As of December 31, 2021, the outstanding principal balance of the note payable was $600.0 million. The note payable and the warehouse facilities are senior obligations of the Company. As of December 31, 2021, we were in compliance with all covenants related to the Credit Agreement.

Alliant Note Payable

Through our acquisition of Alliant, we assumed Alliant’s note payable, which has an outstanding balance of $145.2 million as of December 31, 2021 and bears interest at a fixed rate of 4.75%. The note has a stated maturity of January 15, 2035. The note requires quarterly payments of principal, interest, and other required priority items shortly after the beginning of each quarter. The note is collateralized by specific legal rights to receive a formulaic portion of future cash flows from Alliant’s LIHTC operations. These cash flows are deposited into a collection account and used to make a minimum principal payment that is based on a defined amortization schedule. If funds remain after making the minimum principal payment, an amount based on a defined percentage of the remaining funds may be used to make an additional principal payment. If the funds in the collection account are insufficient to cover the minimum principal payment, the entire balance of the collection account is used to pay down the principal balance. We may elect to make principal payments in addition to the amount required by the note agreement. The balance of the collection account is included in Restricted cash on our Consolidated Balance Sheets.

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Credit Quality and Allowance for Risk-Sharing Obligations

The following table sets forth certain information useful in evaluating our credit performance.

​

For example, a $15 million loan with 50% risk-sharing has the same potential risk exposure as a $7.5 million loan with full DUS risk sharing. Accordingly, if the $15 million loan with 50% risk-sharing were to default, we would view the overall loss as a percentage of the at-risk balance, or $7.5 million, to ensure comparability between all risk-sharing obligations. To date, substantially all of the risk-sharing obligations that we have settled have been from full risk-sharing loans.

Fannie Mae DUS risk-sharing obligations are based on a tiered formula and represent substantially all of our risk-sharing activities. The risk-sharing tiers and the amount of the risk-sharing obligations we absorb under full risk-sharing are provided below. Except as described in the following paragraph, the maximum amount of risk-sharing obligations we absorb at the time of default is generally 20% of the origination unpaid principal balance (“UPB”) of the loan.

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Fannie Mae can double or triple our risk-sharing obligation if the loan does not meet specific underwriting criteria or if a loan defaults within 12 months of its sale to Fannie Mae. We may request modified risk-sharing at the time of origination, which reduces our potential risk-sharing obligation from the levels described above.

We use several techniques to manage our risk exposure under the Fannie Mae DUS risk-sharing program. These techniques include maintaining a strong underwriting and approval process, evaluating and modifying our underwriting criteria given the underlying multifamily housing market fundamentals, limiting our geographic market and borrower exposures, and electing the modified risk-sharing option under the Fannie Mae DUS program.

The “Business” section of “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains a discussion of the risk-sharing caps we have with Fannie Mae.

We regularly monitor the credit quality of all loans for which we have a risk-sharing obligation. Loans with indicators of underperforming credit are placed on a watch list, assigned a numerical risk rating based on our assessment of the relative credit weakness, and subjected to additional evaluation or loss mitigation. Indicators of underperforming credit include poor financial performance, poor physical condition, poor management, and delinquency. A specific reserve is recorded when it is probable that a risk-sharing loan will foreclose or has foreclosed, and a reserve for estimated credit losses and a guaranty obligation are recorded for all other risk-sharing loans.

As of December 31, 2021 and 2020, our allowance for risk-sharing obligations was $62.6 million and $75.3 million, respectively, or 13 basis points and 17 basis points of the at risk balance, respectively. The allowance for risk-sharing obligations as of December 31, 2021 was substantially comprised of the aforementioned CECL reserve.

The calculated CECL reserve for our at-risk Fannie Mae servicing portfolio as of December 31, 2021, which excludes collateral-based reserves, was $52.3 million compared to $67.0 million as of December 31, 2020. The significant decrease in the CECL reserve was principally related to a reduction in our loss forecast due to the improvements in the unemployment statistics and overall health of the multifamily market.

As of December 31, 2021, three at-risk loans with an aggregate UPB of $78.7 million were in default compared to two loans with an aggregated UPB of $48.5 million as of December 31, 2020. The collateral-based reserve on defaulted loans were $10.3 million and $8.3 million as of December 31, 2021 and 2020, respectively. We had a benefit for risk-sharing obligations of $12.7 million and a provision for risk-sharing obligations of $33.7 million for the years ended December 31, 2021 and 2020, respectively.

For the year ended December 31, 2021, we had a benefit for risk-sharing obligations of $12.7 million and a provision for risk-sharing obligations of $33.7 million for the year ended December 31, 2020.

For the ten-year period from January 1, 2012 through December 31, 2021, we recognized net write-offs of risk-sharing obligations of $23.4 million, or an average of less than two basis points annually of the average at risk Fannie Mae portfolio balance.

We have never been required to repurchase a loan.

New/Recent Accounting Pronouncements

NOTE 2 in the consolidated financial statements in Item 15 of Part IV in this Annual Report on Form 10-K contains a description of the accounting pronouncements that the Financial Accounting Standards Board has issued and that have the potential to impact us but have not yet been adopted by us. There were no other accounting pronouncements issued during 2021 that have the potential to impact our consolidated financial statements.