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What changed in Rithm Capital Corp.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Rithm Capital Corp.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+884 added−753 removedSource: 10-K (2024-02-20) vs 10-K (2023-02-17)

Top changes in Rithm Capital Corp.'s 2023 10-K

884 paragraphs added · 753 removed · 534 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

108 edited+43 added−31 removed101 unchanged
Biggest changeIn addition, we typically incur costs to renovate a property acquired through traditional acquisition channels to prepare it for rental. Renovation work varies, but may include paint, flooring, cabinetry, appliances, plumbing hardware and other items required to prepare the property for rental.
Biggest changeRenovation work varies, but may include paint, flooring, cabinetry, appliances, plumbing hardware and other items required to prepare the property for rental. Additionally, we have acquired and are continuing to acquire additional homes through the purchase of communities and portions of communities purpose built for renting from regional and national home builders.
During any period in which a borrower is not making payments, a servicer is generally required under the applicable servicing agreement to advance its own funds to cover the principal and interest remittances due to investors in the loans, pay property taxes and insurance premiums to third parties, and to make payments for legal expenses and other protective advances.
During any period in which a borrower is not making payments, a servicer is generally required under the applicable servicing agreement to advance its own funds to cover the principal and interest remittances due to investors in the loans, to pay property taxes and insurance premiums to third parties and to make payments for legal expenses and other protective advances.
Mortgage pass-through certificates are securities representing interests in “pools” of residential mortgage loans secured by residential real property where payments of both interest and principal, plus pre-paid principal, on the securities are made monthly to holders of the securities, in effect “passing through” monthly payments made by the individual borrowers on the residential mortgage loans that underlie the securities, net of fees paid in connection with the issuance of the securities and the servicing of the underlying residential mortgage loans.
Mortgage pass-through certificates — Mortgage pass-through certificates are securities representing interests in “pools” of residential mortgage loans secured by residential real property where payments of both interest and principal, plus pre-paid principal, on the securities are made monthly to holders of the securities, in effect “passing through” monthly payments made by the individual borrowers on the residential mortgage loans that underlie the securities, net of fees paid in connection with the issuance of the securities and the servicing of the underlying residential mortgage loans.
We source non-performing residential mortgage loans primarily from two sources: call transactions (discussed above) and third-party pool purchases. With respect to our Ginnie Mae securitization and servicing activities, in order to affect a loan modification, we are required to buy the loan out of the securitization.
We source non-performing residential mortgage loans primarily from two sources: third-party pool purchases and call transactions (discussed above). With respect to our Ginnie Mae securitization and servicing activities, in order to affect a loan modification, we are required to buy the loan out of the securitization.
The Section 3(c)(5)(C) exclusion is available for entities “primarily engaged” in the business of “purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” The Section 3(c)(5)(C) exclusion generally requires that at least 55% of these subsidiaries’ assets comprise qualifying real estate assets and at least 80% of each of their portfolios must comprise qualifying real estate assets and real 13 estate-related assets under the 1940 Act.
The Section 3(c)(5)(C) exclusion is available for entities “primarily engaged” in the business of “purchasing or otherwise acquiring mortgages and other liens on and interests in 13 real estate.” The Section 3(c)(5)(C) exclusion generally requires that at least 55% of these subsidiaries’ assets comprise qualifying real estate assets and at least 80% of each of their portfolios must comprise qualifying real estate assets and real estate-related assets under the 1940 Act.
Our executive management team oversees our human capital resources and employment practices to ensure that an asset as important as our employees are strategically integrated with our goals and business plans as a manager of assets and investments focused on the real estate and financial services industries.
Employees and Human Capital Resources Our executive management team oversees our human capital resources and employment practices to ensure that an asset as important as our employees are strategically integrated with our goals and business plans as a manager of assets and investments focused on the real estate and financial services industries.
The amount of leverage we deploy for a particular investment depends upon an assessment of a variety of factors, which may include the anticipated liquidity and price volatility of our assets; the gap between the duration of assets and liabilities, including hedges; the availability and cost of financing the assets; our opinion of the creditworthiness of financing counterparties; the health of the U.S. economy and the residential mortgage and housing markets; our outlook on interest rates; 10 the credit quality of the loans underlying our investments; and our outlook for asset spreads relative to financing costs.
The amount of leverage we deploy for a particular investment depends upon an assessment of a variety of factors, which may include the anticipated liquidity and price volatility of our assets; the gap between the duration of assets and liabilities, including hedges; the availability and cost of financing the assets; our opinion of the creditworthiness of financing counterparties; the health of the U.S. economy and the residential mortgage and housing markets; our outlook on interest rates; the credit quality of the loans underlying our investments; and our outlook for asset spreads relative to financing costs.
Servicer advances typically fall into one of three categories: • Principal and Interest Advances : Payments made by the servicer to cover scheduled payments of principal of, and interest on, a residential mortgage loan that have not been paid on a timely basis by the borrower. 6 • Escrow Advances (Taxes and Insurance Advances) : Cash payments made by the servicer to third parties on behalf of the borrower for real estate taxes and insurance premiums on the property that have not been paid on a timely basis by the borrower. • Foreclosure Advances : Payments made by the servicer to third parties for the costs and expenses incurred in connection with the foreclosure, property preservation and sale of the mortgaged property, including attorneys’ and other professional fees.
Servicer advances typically fall into one of three categories: • Principal and Interest Advances : Payments made by the servicer to cover scheduled payments of principal of, and interest on, a residential mortgage loan that have not been paid on a timely basis by the borrower. • Escrow Advances (Taxes and Insurance Advances) : Cash payments made by the servicer to third parties on behalf of the borrower for real estate taxes and insurance premiums on the property that have not been paid on a timely basis by the borrower. • Foreclosure Advances : Payments made by the servicer to third parties for the costs and expenses incurred in connection with the foreclosure, property preservation and sale of the mortgaged property, including attorneys’ and other professional fees.
Loan prepayments made by the borrowers on the residential mortgage loans underlying the securitizations can only be used to fund principal and interest advances. The servicing agreements with Fannie Mae, Ginnie Mae and certain private label securitizations generally have a “waterfall” payment structure that allows servicers to apply balances received from prepayments to cover principal and interest advance requirements.
Loan prepayments made by the borrowers on the residential mortgage loans underlying the securitizations can only be used to fund principal and interest advances. The servicing agreements with Fannie Mae, Ginnie Mae and certain private label securitizations (“PLS”) generally have a “waterfall” payment structure that allows servicers to apply balances received from prepayments to cover principal and interest advance requirements.
These and other laws and regulations directly affect our business and require constant compliance monitoring and internal and external audits and examinations by federal and state regulators. We work diligently to assess and understand the implications of the complex regulatory environment in which we operate and strive to meet the requirements of this constantly changing environment.
These and other laws and regulations directly affect our business and require constant compliance monitoring and internal and external audits and examinations by federal and state regulators. We work diligently to assess and understand the implications 12 of the complex regulatory environment in which we operate and strive to meet the requirements of this constantly changing environment.
The legal and regulatory environment in which we operate is also constantly evolving as statutes, regulations and practices, and interpretations thereof, that are in place may be amended or otherwise change, and new statutes, regulations and practices may be enacted, adopted or implemented.
The legal and regulatory environment in which we operate is also constantly evolving as statutes, regulations and practices, and interpretations thereof, that are in place 11 may be amended or otherwise change, and new statutes, regulations and practices may be enacted, adopted or implemented.
Re-performing loans were formally non-performing but became 2 performing again, often as a result of a loan modification where the lender agrees to modified terms with the borrower rather than foreclosing on the underlying property.
Re-performing loans were formally non-performing but became performing again, often as a result of a loan modification where the lender agrees to modified terms with the borrower rather than foreclosing on the underlying property.
Specialty servicers have proven more willing and well equipped to perform the operationally intensive activities (e.g., collections, foreclosure avoidance and loan workouts) required to service credit-sensitive loans. Single-Family Rental Properties The single-family rental properties (“SFR”) industry was previously primarily composed of private and individual investors in local markets and was managed individually or by small, non-institutional owners and property managers.
Specialty servicers have proven more willing and more well-equipped to perform the operationally intensive activities (e.g., collections, foreclosure avoidance and loan workouts) required to service credit-sensitive loans. Single-Family Rental (SFR) Properties The SFR industry was previously primarily composed of private and individual investors in local markets and was managed individually or by small, non-institutional owners and property managers.
Servicing Servicing consists of collecting loan payments, remitting principal and interest payments to investors, managing escrow funds for the payment of mortgage-related expenses, such as taxes and insurance, performing loss mitigation activities, negotiating workouts and modifications, conducting or managing foreclosures on behalf of investors or other servicers and otherwise 5 administering our residential mortgage loan servicing portfolio.
Our servicing business consists of collecting loan payments, remitting principal and interest payments to investors, managing escrow funds for the payment of mortgage-related expenses, such as taxes and insurance, performing loss mitigation activities, negotiating workouts and modifications, conducting or managing foreclosures on behalf of investors or other servicers and otherwise administering our residential mortgage loan servicing portfolio.
If a borrower defaults on a loan and the lender takes ownership of the underlying property through foreclosure, that property is referred to as real estate owned (“REO”). The volume of mortgage loan originations associated with home purchases is generally affected by the overall strength of the economy, unemployment rates, housing prices and interest rates.
If a borrower defaults on a loan and the lender takes ownership of the underlying property through foreclosure, that property is referred to as real estate owned (“REO”). The volume of mortgage loan originations associated with home purchases is generally affected by the overall strength of the economy, interest rates, housing pricing and unemployment rates.
See “Risk Factors—Risks Related to Our Business—Our ability to exercise our cleanup call rights may be limited or delayed if a third party contests our ability to exercise our cleanup call rights, if the related securitization trustee refuses to permit the exercise of such rights, or if a related party is subject to bankruptcy proceedings.” Single-Family Rental Properties Our strategy with respect to the SFR business involves purchasing, renovating, maintaining and managing a large number of geographically diversified high-quality residential properties and leasing them to qualified residents.
See “Risk Factors—Risks Related to Our Business—Our ability to exercise our cleanup call rights may be limited or delayed if a third party contests our ability to 8 exercise our cleanup call rights, if the related securitization trustee refuses to permit the exercise of such rights, or if a related party is subject to bankruptcy proceedings.” Single-Family Rental (SFR) Properties Our strategy with respect to the SFR business involves purchasing, renovating, maintaining and managing a large number of geographically diversified high-quality residential properties and leasing them to qualified tenants.
We seek to attract and retain the most relevant and skilled employees by offering competitive compensation and benefits, including both fixed and variable pay, consisting of base salary, cash bonuses, equity-based compensation consistent with employee position and seniority, and opportunities for merit-based increases.
We seek to attract and retain the most relevant and skilled employees by offering competitive compensation and benefits, including both fixed and variable pay, consisting of base salary, cash bonuses and equity-based compensation consistent with employee position and seniority, as well as opportunities for merit-based increases.
Our ability to originate residential mortgage loans, to own MSRs and to service loans positions us to support, connect with and provide solutions to homeowners throughout the lifetime of their residential mortgage loan. Over the last few decades, the complexity and composition of the market for residential mortgage loans in the U.S. have dramatically evolved.
Our ability to originate and service residential mortgage loans positions us to support, connect with and provide solutions to homeowners throughout the lifetime of their residential mortgage loan. Over the last few decades, the complexity and composition of the market for residential mortgage loans in the U.S. have dramatically evolved.
An MSR is made up of two components: a basic fee and an excess MSR (“Excess MSR”). The basic fee is the amount of compensation for the performance of servicing duties (including advance obligations), and the Excess MSR is the amount that exceeds the basic fee. Ownership of an MSR requires the owner to be a licensed mortgage servicer.
An MSR is made up of two components: a basic fee and an Excess MSR. The basic fee is the amount of compensation for the performance of servicing duties (including advance obligations), and the Excess MSR is the amount that exceeds the basic fee. Ownership of an MSR requires the owner to be a licensed mortgage servicer.
Our operating results are also impacted by the amount of time it takes to market and lease a property, which can vary greatly among properties, and is impacted by local demand, our marketing techniques and the size of our available inventory.
Our operating results are also impacted by the amount of time it takes to market and lease a property, which can vary greatly among properties, and is impacted by local demand, our marketing techniques, size of our available inventory and our acquisition channel.
These securitization trusts fund the acquisition of residential mortgage loans by issuing securities, known as residential mortgage backed securities (“RMBS”), which entitle the owner of such securities to receive a portion of the interest and/or principal collected on the residential mortgage loans in the pool.
These securitization trusts fund the acquisition of residential mortgage loans by issuing securities, known as residential mortgage-backed securities or RMBS, which entitle the owner of such securities to receive a portion of the interest and/or principal collected on the residential mortgage loans in the pool.
Also posted on our website in the “Investors—Governance” section are charters for our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee, as well as our Corporate Governance Guidelines and our Code of Business Conduct and Ethics governing our directors, officers and employees.
Also posted on our website in the “Investors—Governance” section are charters for our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee, as well as our Corporate Governance Guidelines and policies, including our Code of Business Conduct and Ethics governing our directors, officers and employees.
Reverse residential mortgage loans are a special type of loan under which the borrower is typically paid a monthly amount, increasing the balance of the loan and are typically collected when the property is sold or the borrower no longer resides at the property.
Reverse residential mortgage loans are a special type of loan under which the borrower is typically paid a monthly amount, increasing the balance of the loan, and balances are then typically collected when the property is sold or the borrower no longer resides at the property.
This category of residential mortgage loans includes “conforming loans,” which are first lien residential mortgage loans that are secured by single-family residences that meet or “conform” to the underwriting standards established by the GSEs.
This category of residential mortgage loans includes “conforming loans,” which are first lien residential mortgage loans that are secured by single-family residences that meet or “conform” to the underwriting guidelines established by the GSEs.
Our ability to purchase Agency RMBS through TBAs may be limited by the 75% income and asset tests applicable to REITs. Specified RMBS (“Specified Pools”). Specified Pools are pools created with loans that have similar characteristics such as loan balance, FICO, coupon and prepayment protection.
Our ability to purchase Agency RMBS through TBAs may be limited by the income and asset tests applicable to REITs. Specified RMBS — Specified RMBS are pools created with loans that have similar characteristics, such as loan balance, FICO, coupon and prepayment protection.
The trustee or a separate securities administrator for the trust receives the payments collected by the servicer on the residential mortgage loans and distributes them to the investors in the RMBS pursuant to the terms of the pooling and servicing agreement. A servicer generally takes actions, such as foreclosure, in the name and on behalf of the trustee.
The trustee or a separate securities administrator for the trust receives the payments collected by the servicer on the residential mortgage loans and distributes payments pursuant to the terms of the pooling and servicing agreement. A servicer generally takes actions, such as foreclosure, in the name and on behalf of the trustee.
These institutions would generally have held a majority of their originated residential mortgage loans as interest-earning assets on their balance sheets and would have 1 performed all activities associated with servicing the loans, including accepting principal and interest payments, making advances for real estate taxes and property and casualty insurance premiums, initiating collection actions for delinquent payments and conducting foreclosures.
These institutions would generally have held a majority of their originated residential mortgage loans as interest-earning assets on their balance sheets and would have performed all activities associated with servicing the loans, including accepting principal and interest payments, making advances for real estate taxes and homeowners’ insurance premiums, initiating collection actions for delinquent payments and conducting foreclosures.
Treasury securities and options on U.S. Treasury securities; • TBAs; and • other similar transactions. Subject to maintaining our qualification as a REIT and exclusion from registration under the 1940 Act, we may, from time to time, utilize derivative financial instruments to hedge the interest rate risk associated with our borrowings and utilize other techniques that we deem appropriate.
Treasury securities and U.S. Treasury short sales; • TBAs; and • other similar transactions. Subject to maintaining our qualification as a REIT and exclusion from registration under the 1940 Act, we may, from time to time, utilize derivative financial instruments to hedge the interest rate risk associated with our borrowings and utilize other techniques that we deem appropriate.
With respect to our Excess MSRs, Servicer Advance Investments, consumer loans and business purpose loans, we engage third-party servicers to service the loans, or loans underlying the investments, as applicable. With respect to our MSRs and residential mortgage loan investments, we service the loans both in-house and with third-party servicers to service the loans underlying the investments.
Servicing Partners With respect to our Excess MSRs, servicer advance investments, consumer loans and business purpose loans, we engage third-party servicers to service the loans, or loans underlying the investments, as applicable. With respect to our MSRs and residential mortgage loan investments, we service the loans both in-house and through third-party servicers to service the loans underlying the investments.
The Residential Real Estate Market Mortgage Originations and Servicing We believe we are one of only a select number of non-bank market participants that have the combination of capital, infrastructure, industry expertise and key business relationships necessary to take advantage of opportunities existing in today’s complex and dynamic mortgage market.
The Residential Real Estate Market Mortgage Originations and Servicing We believe we are one of only a select number of non-bank market participants that have the combination of capital, infrastructure, industry expertise and business relationships necessary to leverage opportunities existing in today’s complex and dynamic mortgage market.
This category also includes residential mortgage loans issued to borrowers that do not meet conforming loan standards, but who qualify for a loan that is insured or guaranteed by the government through Ginnie Mae (collectively with the GSEs, the “Agencies” and each of Fannie Mae, Freddie Mac and Ginnie Mae, an “Agency”), primarily through federal programs operated by the Federal Housing Administration (“FHA”) and the Department of Veterans Affairs. • Non-GSE or Government Guaranteed Loans.
This category also includes residential mortgage loans issued to borrowers that do not meet conforming loan standards, but who qualify for a loan that is insured or guaranteed by the government through Ginnie Mae (Ginnie Mae, collectively with the GSEs, the “Agencies” and each of Fannie Mae, Freddie Mac and Ginnie Mae, an “Agency”), primarily through federal programs 2 operated by the Federal Housing Administration (“FHA”), the United States Department of Agriculture (“USDA”) and the Department of Veterans Affairs (“VA”). • Non-GSE or Government Guaranteed Loans.
Furthermore, we generally service all of the loans that we originate, which provides us with connectivity with our borrowers throughout the lifecycle of their loan. We combine operational excellence, modern proprietary technology, capital markets expertise, prudent risk management and a relentless focus on client service to deliver consistent high-quality service to our customers.
Furthermore, we generally service all of the loans that we originate, which provides us with connectivity with our borrowers throughout the lifecycle of their loan. We combine operational excellence, modern proprietary technology, capital markets expertise, prudent risk management and a relentless focus on client service to deliver consistent high-quality service to our customers in both our origination and servicing businesses.
Our SMART Loan Series is a Non-QM residential loan product that provides a variety of options for highly qualified borrowers who fall outside the specific requirements of Agency residential mortgage loans.
Our SMART Loan Series is a non-qualified residential mortgage (“Non-QM”) product that provides a variety of options for highly qualified borrowers who fall outside the specific requirements of Agency residential mortgage loans.
Servicer Advances Receivable and Servicer Advance Investments Servicer advances are a customary feature of residential mortgage securitization transactions and represent one of the duties for which a servicer is compensated since the advances are non-interest bearing.
(“Valon”) and SLS. 6 Servicer Advances Receivable and Servicer Advance Investments Servicer advances are a customary feature of residential mortgage securitization transactions and represent one of the duties for which a servicer is compensated since the advances are non-interest-bearing.
In satisfying the 55% requirement under the Section 3(c)(5)(C) exclusion, based on guidance from the Securities and Exchange Commission (“SEC”) and its staff, we treat Agency RMBS issued with respect to an underlying pool of mortgage loans in which we hold all of the certificates issued by the pool as qualifying real estate assets.
In satisfying the 55% requirement under the Section 3(c)(5)(C) exclusion, based on guidance from the SEC and its staff, we treat Agency RMBS issued with respect to an underlying pool of mortgage loans in which we hold all of the certificates issued by the pool as qualifying real estate assets.
Our subsidiaries that perform mortgage lending and servicing activities are subject to extensive regulation by federal, state and local governmental and regulatory authorities, including the CFPB, Federal Trade Commission, the U.S. Department of Housing and Urban Development (“HUD”), the U.S. Department of Veterans Affairs (“VA”), the SEC and various state licensing, supervisory and administrative 11 agencies.
Our subsidiaries that perform mortgage lending and servicing activities are subject to extensive regulation by federal, state and local governmental and regulatory authorities, including the CFPB, Federal Trade Commission, the U.S. Department of Housing and Urban Development (“HUD”), the VA, the SEC and various state licensing, supervisory and administrative agencies.
SMS services delinquent government-insured, Agency and Non-Agency loans on behalf of the owners of the underlying residential mortgage loans. We are highly experienced in loan servicing, including loan modifications and seek to help borrowers avoid foreclosure. SMS special servicing division also includes third-party serviced loans on behalf of unaffiliated investors. As of December 31, 2022, SMS has 59 third-party clients.
SMS services delinquent government-insured, Agency and Non-Agency loans on behalf of the owners of the underlying residential mortgage loans. We are highly experienced in loan servicing, including loan modifications and seek to help borrowers avoid foreclosure. The SMS special servicing division also includes third-party serviced loans on behalf of unaffiliated investors.
Properties added to our portfolio through traditional acquisition channels require expenditures in addition to payment of the purchase price, including property inspections, closing costs, liens, title insurance, transfer taxes, recording fees, broker commissions, property taxes and homeowners’ association (“HOA”) fees, when applicable.
Properties added to our portfolio through traditional acquisition channels require expenditures in addition to payment of the purchase price, including property inspections, closing costs, liens, title insurance, transfer taxes, recording fees, broker commissions, property taxes, renovation work and HOA fees, when applicable.
In this capacity, we play an important role in providing efficient capital markets access to these institutions. Our Correspondent channel is an important component of our strategy to grow our customer base and add to our MSR portfolio. For the year ended December 31, 2022, we originated $29.3 billion in Correspondent originations, representing 44% of our total funded origination volume.
In this capacity, we play an important role in providing efficient capital markets access to these institutions. Our Correspondent channel is an important component of our strategy to grow our customer base and add to our MSR portfolio. For the year ended December 31, 2023, we originated $24.0 billion in Correspondent originations, representing 65% of our total funded origination volume.
If our board of directors changes any of our investment guidelines, we will disclose such changes in our next required periodic report. Financing Strategy Our objective is to generate attractive risk-adjusted returns for our stockholders, which at times incorporates the use of leverage.
These investment guidelines may be changed by our board of directors without the approval of our stockholders. If our board of directors changes any of our investment guidelines, we will disclose such changes in our next required periodic report. Financing Strategy Our objective is to generate attractive risk-adjusted returns for our stockholders, which at times incorporates the use of leverage.
For the year ended December 31, 2022, we originated $11.0 billion in Wholesale originations, representing 16% of our total funded origination volume. Correspondent — Our Correspondent channel purchases closed residential mortgage loans that meet our specific credit and underwriting criteria from community banks, credit unions and independent mortgage banks and funds them in our own name.
For the year ended December 31, 2023, we originated $4.8 billion in Wholesale originations, representing 13% of our total funded origination volume. Correspondent — Our Correspondent channel purchases closed residential mortgage loans that meet our specific credit and underwriting criteria from community banks, credit unions and independent mortgage banks and funds them in our own name.
While sourced through third parties, we underwrite and fund these loans according to our own quality and compliance monitoring standards. Our Mortgage Company provides brokers with differentiated products and pricing as well as superior customer service through our experienced salesforce and our proprietary technologies.
While the loans are sourced through third parties, we underwrite and fund these loans according to our own quality and compliance monitoring standards. We provide brokers with 5 differentiated products and pricing, as well as superior customer service through our experienced salesforce and our proprietary technologies.
Our rental rates and occupancy levels are affected by macroeconomic factors and local and property-level factors, including market conditions, seasonality and tenant defaults, and the amount of time it takes to turn properties when tenants vacate.
Our SFR properties are managed through an external property manager and APM. Our rental rates and occupancy levels are affected by macroeconomic factors and local and property-level factors, including market conditions, seasonality and tenant defaults, and the amount of time it takes to turn properties when tenants vacate.
MSR Related Investments MSRs, MSR Financing Receivables and Excess MSRs Rithm Capital is one of the largest non-bank owners of MSRs in the U.S. with $609 billion UPB of full and excess MSRs, decreasing 3% from $629 billion UPB as of December 31, 2021.
MSRs, MSR Financing Receivables and Excess MSRs Rithm Capital is one of the largest non-bank owners of MSRs in the U.S. with $590 billion UPB of full and excess MSRs as of December 31, 2023, decreasing 3% from $609 billion UPB as of December 31, 2022.
We believe the outlook for Non-QM residential loans remains strong heading into 2023 supported by continued demand for Non-QM products and a growth in population of Non-QM borrowers. In 2022, 58% of our Mortgage Company’s funded production was Agency, 37% was Government, 3% was Non-Agency and 1% was Non-QM residential loans.
We believe the outlook for Non-QM loans remains strong heading into 2024 supported by continued demand for Non-QM products and a growth in population of Non-QM borrowers. In 2023, 55% of our Mortgage Company’s funded production was Agency, 42% was Government, 1% was Non-Agency, and 1% was Non-QM loans.
For the year ended December 31, 2022, we originated $19.0 billion in Retail originations, representing 28% of our total funded origination volume. Wholesale — Our Wholesale channel originates residential mortgage loans through customer loan applications submitted by select mortgage brokers, community banks and credit unions.
For the year ended December 31, 2023, we funded $6.1 billion in Retail originations, representing 17% of our total funded origination volume. Wholesale — Our Wholesale channel originates residential mortgage loans through customer loan applications submitted by select mortgage brokers, community banks and credit unions.
These institutional clients include, but are not limited to, GSEs, money center banks and whole loan investors. Through our servicing platform, we are focused on providing high-quality servicing to our borrowers and maintaining connectivity with our borrowers throughout the lifetime of their loan.
As of December 31, 2023, SMS had 59 third-party clients. These institutional clients include, but are not limited to, GSEs, money center banks and whole loan investors. Through our servicing platform, we are focused on providing high-quality servicing to our clients and maintaining connectivity with our borrowers throughout the lifetime of their loan.
We also retain and own risk retention bonds from our securitizations in conjunction with risk retention regulations under the Dodd-Frank Act. As of December 31, 2022, 57.4% of our Non-Agency RMBS portfolio consisted of bonds retained pursuant to required risk retention regulations.
We also retain and own risk retention bonds from our securitizations in conjunction with risk retention regulations under the Dodd-Frank Act. As of December 31, 2023, 53.9% of our Non-Agency RMBS portfolio consists of bonds retained pursuant to required risk retention regulations.
Now, institutions (including non-bank originators) that originate residential mortgage loans generally hold a smaller portion of originated loans as assets on their balance sheets and instead sell originated loans to third parties. Fannie Mae and Freddie Mac (collectively, Government-sponsored enterprises (“GSEs”)) are currently the largest purchasers of residential mortgage loans.
Now, institutions (including non-bank originators) that originate residential mortgage loans generally hold a smaller portion of originated loans as assets on their balance sheets and instead sell originated loans to third parties. The GSEs are currently the largest purchasers of residential mortgage loans.
Residential mortgage loans are further classified based on certain payment characteristics. Performing loans are residential mortgage loans where the borrower is generally current on required payments; by contrast, non-performing loans are residential mortgage loans where the borrower is delinquent or in default.
Performing loans are residential mortgage loans where the borrower is generally current on required payments. By contrast, non-performing loans are residential mortgage loans where the borrower is delinquent or in default.
Because of this timing difference, servicers can effectively “borrow” against the prepayments received to cover principal and interest advance requirements. As of December 31, 2022, our servicer advance balances were $3.2 billion.
Because of this timing difference, servicers can effectively “borrow” against the prepayments received to cover principal and interest advance requirements. As of December 31, 2023, the carrying value of our servicer advance balances was $2.8 billion.
Furthermore, Genesis provides a complementary business and supports our strategy to create, securitize, sell, or retain high coupon, low duration assets for our balance sheet. Finally, Genesis supports our growing SFR strategy and allows us to capture additional unmet demand from our Retail and Wholesale origination channels. Genesis originated 1,723 loans in 2022.
Furthermore, Genesis provides a complementary business to our other real estate-related businesses and supports our strategy to create, securitize, sell or retain high coupon, low duration assets for our balance sheet. Finally, Genesis supports our growing SFR strategy and allows us to capture additional unmet demand from our Retail and Wholesale origination channels.
Servicing income is affected by the size of the servicing portfolio, both unpaid principal balance (“UPB”) and number of loans, delinquency rates and cost to service per loan. The need for “high-touch” non-bank specialty servicers remains elevated as borrowers continue to seek solutions to their financial hardships.
A portion of the margin is often referred to as the excess servicing fee. Servicing income is affected by the size of the servicing portfolio, both UPB and number of loans, delinquency rates and cost to service per loan. The need for “high-touch” non-bank specialty servicers remains elevated as borrowers continue to seek solutions to their financial hardships.
The conforming loan limit is established by statute and currently is $726,200 for 2023 (an increase from $647,200 in 2022) with certain exceptions for high-priced real estate markets.
The principal underwriting guideline is the conforming loan limit which is established by statute and currently is $766,550 for 2024 (an increase from $726,200 in 2023) with certain exceptions for high-priced real estate markets.
Accordingly, we may, without a stockholder vote, change our target asset classes and acquire a variety of assets that may differ from, and are possibly riskier than, our current portfolio. Our board of directors has adopted a broad set of investment guidelines to evaluate specific investments.
Investment Guidelines We make decisions about our investments in accordance with broad investment guidelines adopted by our board of directors. Accordingly, we may, without a stockholder vote, change our target asset classes and acquire a variety of assets that may differ from, and are possibly riskier than, our current portfolio.
We believe that our multi-channel origination mortgage platform provides us with a competitive advantage and enables us to provide our borrowers within the mortgage community with various products to ultimately originate both purchase and refinance loans across different market backdrops.
During the year ended December 31, 2023, we securitized $670.3 million of Non-QM residential loans. We believe that our multi-channel origination mortgage platform provides us with a competitive advantage and enables us to provide our borrowers within the mortgage community with various products to ultimately originate both purchase and refinance loans across different market backdrops.
As of December 2022, the Mortgage Bankers Association (“MBA”) estimated total U.S. origination volume for 2022 was $2.2 trillion, down from an estimated $4.4 trillion, or 49%, in 2021. Furthermore, 30% of 2022 activity were related to refinance volume, a decline from 58% in 2021.
As of December 2023, the Mortgage Bankers Association (“MBA”) estimated total U.S. origination volume for 2023 was $1.6 trillion, down 25% from an estimated $2.2 trillion in 2022. Furthermore, the MBA estimated that 19% of 2023 activity was related to refinance volume, a decline from 30% in 2022.
Our investment strategy also involves opportunistically pursuing acquisitions and seeking to establish strategic partnerships that we believe enable us to maximize the value of our investments by offering products and services to customers, servicers and other parties through the lifecycle of transactions that affect each mortgage loan and underlying residential property or collateral.
Our strategy involves opportunistically pursuing acquisitions and seeking to establish strategic partnerships that we believe enable us to maximize the value of our investments by offering products and services related to the lifecycle of transactions that affect each mortgage loan and underlying residential property or collateral. We operate our asset management business primarily through our wholly-owned subsidiary, Sculptor.
As a result of transformations in the securitization process, non-bank originators have gained significant market share in the residential mortgage market. The residential mortgage loan market is commonly divided into a number of categories based on certain residential mortgage loan characteristics, including the credit quality of borrowers and the types of institutions that originate or finance such loans.
The residential mortgage loan market is commonly divided into a number of categories based on certain residential mortgage loan characteristics, including the credit quality of borrowers and the types of institutions that originate or finance such loans.
The loans may be non-conforming due to various factors, including mortgage balances in excess of Agency underwriting guidelines, borrower characteristics, loan characteristics and level of documentation. The Non-GSE category also includes “investor loans,” which reflect primarily non-owner occupied investment properties. • Jumbo . Jumbo residential mortgage loans have original principal amounts that exceed the statutory conforming limit for GSE loans.
The loans may be non-conforming due to various factors, including mortgage balances in excess of Agency underwriting guidelines, borrower characteristics, loan characteristics and level of documentation. The Non-GSE category also includes “investor loans,” which reflect primarily non-owner occupied investment properties. Residential mortgage loans are further classified based on certain payment characteristics.
As a third party subservicer, SMS may be obligated to make servicing advances; however, advances and other incurred costs are generally lower compared to those of the MSR owner, and recovery times are substantially faster, often within the following month.
As a third-party subservicer, SMS may be obligated to make servicing advances; however, advances and other incurred costs are generally lower compared to those of the MSR owner and recovery times are substantially faster, often within the following month. We also have several wholly-owned subsidiaries that perform various services in the mortgage and real estate industries.
We regularly re-evaluate our internal policies, including codes of ethics, corporate governance, disclosure controls, anti-discrimination, harassment, retaliation and related complaint procedures, insider trading and related party transaction activity. Additionally, we work to ensure our commitments to diversity, equity and inclusion are reflected throughout our operating companies.
We regularly re-evaluate our internal policies, including codes of ethics, corporate governance, disclosure controls, anti-discrimination, harassment, retaliation and related complaint procedures, insider trading and related party transaction activity.
These referral relationships are integral to our success in the purchase mortgage market. As of December 31, 2022, we employed 678 loan consultants covering 220 of our retail locations in the U.S. We also have joint venture partnerships with realtors, homebuilders and mortgage banks as well as traditional distributed retail business units.
As of December 31, 2023, we employed 485 loan consultants covering 147 of our retail locations in the U.S. We also have joint venture partnerships with realtors, homebuilders and mortgage banks as well as traditional distributed retail business units.
Gain on sale margin for full year 2022 was 1.70% compared to 1.51% for 2021. During 2022, gain on sale margins continued to revert to historical levels largely driven by weakening demand for loans amid excess industry capacity due to an escalating interest rate environment weighing on the residential real estate market.
During 2023, gain on sale margin continued to revert to historical levels largely driven by weakening demand for loans amid excess industry capacity due to a higher interest rate environment weighing on the residential real estate market.
In connection with a securitization, a number of entities perform specific roles with respect to the residential mortgage loans in a pool, including the trustee and the mortgage servicer.
As the securitization market has matured, non-bank originators have gained significant market share in the residential mortgage market. In connection with a securitization, a number of entities perform specific roles with respect to the residential mortgage loans in a pool, including the trustee and the mortgage servicer.
We have adopted corporate governance guidelines, and codes of business conduct and ethics, which delineate our standards for our officers, directors and employees. Rithm Capital files annual, quarterly and current reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with the SEC.
We have adopted corporate governance guidelines and codes of business conduct and ethics, which delineate our standards for our officers, directors and employees. Rithm Capital files annual, quarterly and current reports, proxy statements and other information required by the Exchange Act with the SEC. Our SEC filings are available to the public from the SEC’s internet site at http://www.sec.gov.
In addition, other potential purchasers of our target assets may be more attractive to sellers of such assets if the sellers believe that these potential purchasers could obtain any necessary third-party approvals and consents more easily than us.
In addition, other potential purchasers of our target assets may be more attractive to sellers of such assets if the sellers believe that these potential purchasers could obtain any necessary third-party approvals and consents more easily than us. As it relates to our Mortgage Company (including mortgage-related services businesses), we provide various residential mortgage loan and real estate services products.
We seek to generate long-term value for our investors by using our investment expertise to identify, manage and invest in real estate related assets, including operating companies, that offer attractive risk-adjusted returns.
We seek to generate long-term value for our investors by using our investment expertise to identify, manage and invest in real estate related and other financial assets and more recently, offer broader asset management capabilities, in each case, that provides investors with attractive risk-adjusted returns.
As of December 31, 2022, our SFR portfolio consists of 3,761 units with an aggregate carrying value of $971.3 million, up from 2,551 units with an aggregate carrying value of $579.6 million as of December 31, 2021. During the years ended December 31, 2022 and 2021, we acquired 1,226 and 2,294 SFR units, respectively.
As of December 31, 2023, our SFR portfolio consists of 3,888 units with an aggregate carrying value of $1.0 billion, up from 3,731 units with an aggregate carrying value of $971.3 million as of December 31, 2022. During the years ended December 31, 2023 and 2022, we acquired 182 and 1,196 SFR units, respectively.
For more details on our portfolio, see “—Our Portfolio” below, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Portfolio.” For information concerning current market trends which impact our portfolio, see “—The Residential Real Estate Market,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Considerations” and “—Quantitative and Qualitative Disclosures About Market Risk.” Rithm Capital is a Delaware corporation that was formed as a limited liability company in September 2011 (commenced operations on December 8, 2011).
For more details on our portfolio, see “—Our Portfolio” below, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Portfolio.” For information concerning current market trends which impact our portfolio, see “—The Residential Real Estate Market,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Considerations” and “—Quantitative and Qualitative Disclosures About Market Risk.” Acquisition of Sculptor Capital Management, Inc.
The market’s transition away from a historically low interest rate environment to a rising interest rate environment significantly disrupted the residential mortgage market as it affected the affordability and the ability for potential homebuyers to qualify for a mortgage loan.
The market’s transition away from a historically low interest rate environment to a higher interest rate environment significantly disrupted the residential mortgage market, as it affected the cost savings benefit associated with refinancing residential mortgages, as well as potential homebuyers’ ability to afford and qualify for a mortgage loan.
Our Mortgage Company has a multi-channel residential lending platform, offering mortgage loans across its Direct to Consumer, Retail, Wholesale and Correspondent lending channels. Purchase origination consists of mortgages that are originated to purchase a property. Refinance origination consists of mortgages that are originated to refinance a previous outstanding mortgage.
Our Mortgage Company has a multi-channel residential lending platform, offering mortgage loans across its Direct to Consumer, Retail, Wholesale and Correspondent lending channels.
An owner of an Excess MSR is not required to be licensed, and is not required to assume any servicing duties, advance obligations or liabilities associated with the loan pool underlying the MSR unless otherwise specified through agreement. Our Servicing segment includes both residential mortgage loans underlying our MSR assets as well as those we sub-service for third parties.
An owner of an Excess MSR is not required to be licensed and is not required to assume any servicing duties, advance obligations or liabilities associated with the loan pool underlying the MSR unless otherwise specified through agreement.
Due to a variety of factors, including supply-demand imbalances exacerbated by the geopolitical risks associated with the war in Ukraine and, until recently, adverse developments associated with China’s zero-COVID policy, inflation throughout 2022 remained elevated.
Due to a variety of factors, including supply and demand imbalances exacerbated by the geopolitical risks, including risks associated with the ongoing war and tensions in the Middle East and the war in Ukraine, inflation throughout 2023 remained elevated.
In the face of this competition, we expect to take advantage of the experience of members of our management team and their industry expertise which may provide us with a competitive advantage and help us assess potential risks and determine appropriate pricing for certain potential acquisitions of our target assets.
For additional information regarding the competitive risks that we face, see “Risk Factors—Risks Related to Our Recent Acquisitions—Competitive pressures in the asset management business could materially adversely affect our business, financial condition or results of operations.” In the face of this competition, we expect to take advantage of the experience of members of our management team and their industry expertise which may provide us with a competitive advantage and help us assess potential risks and determine appropriate pricing for certain potential acquisitions of our target assets.
As of December 31, 2022, our servicing divisions served over 2.3 million customers with an aggregate UPB of approximately $503.6 billion, of which $393.3 billion represented performing servicing and $110.3 billion represented special servicing.
As of December 31, 2023, our servicing divisions served over 2.7 million customers with an aggregate UPB of approximately $568.0 billion, of which $445.8 billion represented performing servicing and $122.2 billion represented special servicing.
Once the modification is completed, the loan can be sold into a new Ginnie Mae securitization. We may also choose to exercise our unilateral right to repurchase loans that are at least three month delinquent out of a Ginnie Mae securitization (as an alternative to continuing to advance principal and interest payments to the holders of the Ginnie Mae securities).
We may also choose to exercise our unilateral right to repurchase loans that are delinquent for at least three months out of a Ginnie Mae securitization (as an alternative to continuing to advance principal and interest payments to the holders of the Ginnie Mae securities). Such repurchases are commonly referred to as Early Buyouts (“EBOs”).
This is what is often referred to as a “general collections backstop.” See “Risk Factors—Risks Related to Our Business—Servicer advances may not be recoverable or may take longer to recover than we expect, which could cause us to fail to achieve our targeted return on our Servicer Advance Investments or MSRs.” We have also invested in rated bonds backed by securitized pools of servicer advances issued through transactions sponsored by mortgage servicers.
This is what is often referred to as a “general collections backstop.” See “Risk Factors—Risks Related to Our Business—Servicer advances may not be recoverable or may take longer to recover than we expect, which could cause us to fail to achieve our targeted return on our servicer advance investments or MSRs.” 7 Residential Securities, Properties and Loans RMBS Residential mortgage loans are often packaged into pools held in securitization entities which issue RMBS collateralized by such loans.
The agreement that governs the packaging of residential mortgage loans into a pool, the servicing of such residential mortgage loans and the terms of the RMBS issued by the securitization trust is often referred to as a pooling and servicing agreement.
The purchasers of the RMBS are typically large institutions, such as pension funds, mutual funds, insurance companies, hedge funds and REITs. The agreement that governs the pooling of residential mortgage loans, the servicing of such residential mortgage loans and the terms of the RMBS issued by the securitization trust is often referred to as a pooling and servicing agreement.
Our general investment guidelines prohibit any investment that would cause us to fail to qualify as a REIT, and any investment that would cause us to be regulated as an investment company. These investment guidelines may be changed by our board of directors without the approval of our stockholders.
Our board of directors has adopted a broad set of investment guidelines to evaluate specific investments. Our general investment guidelines prohibit any investment that would cause us to fail to qualify as a REIT and any investment that would cause us to be regulated as an investment company.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeFurther, significant physical effects of climate change, including extreme weather events such as hurricanes or floods, can also have an adverse impact on the businesses of certain of our operating companies. As the effects of climate change increase, we expect the frequency and impact of weather and climate-related events and conditions to increase as well.
Biggest changeSuch restrictions and requirements could impact our investment strategy or could increase costs for certain of our operating companies, which could adversely affect our results of operations. Further, significant physical effects of climate change, including extreme weather events such as hurricanes or floods, can also have an adverse impact on the businesses of certain of our operating companies.
A continued reduction in our cash flows could impact our ability to continue paying dividends to our stockholders at expected levels or at all. We refer to our MSRs, MSR financing receivables, Excess MSRs and the basic fee portion of the related MSRs included in our Servicer Advance Investments, collectively, as our interests in MSRs.
A continued reduction in our cash flows could impact our ability to continue paying dividends to our stockholders at the expected levels or at all. We refer to our MSRs, MSR financing receivables, Excess MSRs and the basic fee portion of the related MSRs included in our servicer advance investments, collectively, as our interests in MSRs.
Our interests in MSRs relate to loans serviced or subserviced, as applicable, by our Servicing Partners. As disclosed in Notes 5, 6 and 7 of our Consolidated Financial Statements, certain of our Servicing Partners service and/or subservice a substantial portion of our interests in MSRs. In addition, Mr.
Our interests in MSRs relate to loans serviced or subserviced, as applicable, by our Servicing Partners. As disclosed in Notes 5, 6 and 7 to our Consolidated Financial Statements, certain of our Servicing Partners service and/or subservice a substantial portion of our interests in MSRs. In addition, Mr.
Any such default could result in a substantial increase in costs in excess of the original budget and delays in completion of the project. • Concentration Risk : Genesis’s portfolio of active loans is mainly secured by residential real estate located in California and the Los Angeles, California area specifically.
Any such default could result in a substantial increase in costs in excess of the original budget and delays in the completion of the project. • Concentration Risk : Genesis’s portfolio of active loans is mainly secured by residential real estate located in California and the Los Angeles, California area specifically.
If we were required to register us as an investment company but failed to do so, we would be prohibited from engaging in our business and criminal and civil actions could be brought against us.
If we were required to register as an investment company but failed to do so, we would be prohibited from engaging in our business and criminal and civil actions could be brought against us.
If we are not able to obtain adequate financing to purchase servicer advance receivables from our Servicing Partners or fund servicer advances under our MSRs in accordance with the applicable Servicing Guidelines, we or any such Servicing Partner, as applicable, could default on its obligation to fund such advances, which could result in its termination of us or any applicable Servicing Partner, as applicable, as servicer under the applicable Servicing Guidelines, and a partial or total loss of our interests in MSRs and servicer advances, as applicable.
If we are not able to obtain adequate financing to purchase servicer advance receivables from our Servicing Partners or fund servicer advances under our MSRs in accordance with the applicable Servicing Guidelines, we or any such Servicing Partner, as applicable, could default on its obligation to fund such advances, which could result in its termination of us or any applicable Servicing Partner, as servicer under the applicable Servicing Guidelines, and a partial or total loss of our interests in MSRs and servicer advances, as applicable.
Rating agency delays may result in our inability to obtain timely ratings on new notes, or amend or modify other financing facilities which could adversely impact the availability of borrowings or the interest rates, advance rates or other financing terms and adversely affect our results of operations and liquidity.
Rating agency delays may result in our inability to obtain timely ratings on new notes or to amend or modify other financing facilities which could adversely impact the availability of borrowings or the interest rates, advance rates or other financing terms and adversely affect our results of operations and liquidity.
The rate and timing of payments on servicer advances and deferred servicing fees are unpredictable for several reasons, including the following: • payments on the servicer advances and the deferred servicing fees depend on the source of repayment and whether and when the related servicer receives such payment (certain servicer advances are reimbursable only out of late payments and other collections and recoveries on the related residential mortgage loan, while others are also reimbursable out of 18 principal and interest collections with respect to all residential mortgage loans serviced under the related servicing agreement, and as a consequence, the timing of such reimbursement is highly uncertain); • the length of time necessary to obtain liquidation proceeds may be affected by conditions in the real estate market or the financial markets generally, the availability of financing for the acquisition of the real estate and other factors, including, but not limited to, government intervention; • the length of time necessary to effect a foreclosure may be affected by variations in the laws of the particular jurisdiction in which the related mortgaged property is located, including whether or not foreclosure requires judicial action; • the requirements for judicial actions for foreclosure (which can result in substantial delays in reimbursement of servicer advances and payment of deferred servicing fees), which vary from time to time as a result of changes in applicable state law; and • the ability of the related servicer to sell delinquent residential mortgage loans to third parties prior to a sale of the underlying real estate, resulting in the early reimbursement of outstanding unreimbursed servicer advances in respect of such residential mortgage loans.
The rate and timing of payments on servicer advances and deferred servicing fees are unpredictable for several reasons, including the following: • payments on the servicer advances and the deferred servicing fees depend on the source of repayment and whether and when the related servicer receives such payment (certain servicer advances are reimbursable only out of late payments and other collections and recoveries on the related residential mortgage loan, while others are also reimbursable out of principal and interest collections with respect to all residential mortgage loans serviced under the related servicing agreement, and as a consequence, the timing of such reimbursement is highly uncertain); • the length of time necessary to obtain liquidation proceeds may be affected by conditions in the real estate market or the financial markets generally, the availability of financing for the acquisition of the real estate and other factors, including, but not limited to, government intervention; • the length of time necessary to effect a foreclosure may be affected by variations in the laws of the particular jurisdiction in which the related mortgaged property is located, including whether or not foreclosure requires judicial action; • the requirements for judicial actions for foreclosure (which can result in substantial delays in reimbursement of servicer advances and payment of deferred servicing fees), which vary from time to time as a result of changes in applicable state law; and • the ability of the related servicer to sell delinquent residential mortgage loans to third parties prior to a sale of the underlying real estate, resulting in the early reimbursement of outstanding unreimbursed servicer advances in respect of such residential mortgage loans.
The securitization of any loans that we originate and/or service subject us to various risks that may increase our compliance costs and adversely impact our financial results, including: • compliance with the terms of the agreements governing the securitized pools of loans, including any indemnification and repurchase provisions; • reliance on programs administered by the GSEs and Ginnie Mae that facilitate the issuance of mortgage-backed securities in the secondary market and the effect of any changes or modifications thereto (see—“GSE initiatives and other actions, including changes to the minimum servicing amount for GSE loans, could occur at any time and could impact us in significantly negative ways that we are unable to predict or protect against” and — “The federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between these agencies and the U.S. government, may adversely affect our business.”); and 33 • federal and state legislation in securitizations, such as the risk retention requirements under the Dodd-Frank Act, could result in higher costs of certain lending operations and impose on us additional compliance requirements to meet servicing and origination criteria for securitized mortgage loans.
The securitization of any loans that we originate and/or service subject us to various risks that may increase our compliance costs and adversely impact our financial results, including: • compliance with the terms of the agreements governing the securitized pools of loans, including any indemnification and repurchase provisions; • reliance on programs administered by the GSEs and Ginnie Mae that facilitate the issuance of mortgage-backed securities in the secondary market and the effect of any changes or modifications thereto (see—“GSE initiatives and other actions, including changes to the minimum servicing amount for GSE loans, could occur at any time and could impact us in significantly negative ways that we are unable to predict or protect against” and see — “The federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between these agencies and the U.S. government, may adversely affect our business.”); and • federal and state legislation in securitizations, such as the risk retention requirements under the Dodd-Frank Act, could result in higher costs of certain lending operations and impose on us additional compliance requirements to meet servicing and origination criteria for securitized mortgage loans.
See “—We have significant counterparty concentration risk in certain of our 19 Servicing Partners and are subject to other counterparty concentration and default risks.” As a result, we could be materially and adversely affected if one of our Servicing Partners is unable to adequately carry out its duties as a result of: • its failure to comply with applicable laws and regulations; • its failure to comply with contractual and financing obligations and covenants; • a downgrade in, or failure to maintain, any of its servicer ratings; • its failure to maintain sufficient liquidity or access to sources of liquidity; • its failure to perform its loss mitigation obligations; • its failure to perform adequately in its external audits; • a failure in or poor performance of its operational systems or infrastructure; • regulatory or legal scrutiny or regulatory actions regarding any aspect of a servicer’s operations, including, but not limited to, servicing practices and foreclosure processes lengthening foreclosure timelines; • an Agency’s or a whole-loan owner’s transfer of servicing to another party; or • any other reason.
See “—We have significant counterparty concentration risk in certain of our Servicing Partners and are subject to other counterparty concentration and default risks.” As a result, we could be materially and adversely affected if one of our Servicing Partners is unable to adequately carry out its duties as a result of: • its failure to comply with applicable laws and regulations; • its failure to comply with contractual and financing obligations and covenants; • a downgrade in, or failure to maintain, any of its servicer ratings; • its failure to maintain sufficient liquidity or access to sources of liquidity; • its failure to perform its loss mitigation obligations; • its failure to perform adequately in its external audits; • a failure in or poor performance of its operational systems or infrastructure; • regulatory or legal scrutiny or regulatory actions regarding any aspect of a servicer’s operations, including, but not limited to, servicing practices and foreclosure processes lengthening foreclosure timelines; • an Agency’s or a whole-loan owner’s transfer of servicing to another party; or • any other reason.
For a particular taxable year, we would treat such TBAs as qualifying assets for purposes of the REIT asset tests, and income and gains from such TBAs as qualifying income for purposes of the 75% gross income test, to the extent set forth in an opinion from Skadden, Arps, Slate, Meagher & Flom LLP substantially to the effect that (i) for purposes of the REIT asset tests, our ownership of a TBA should be treated as ownership of the underlying Agency RMBS, and (ii) for purposes of the 75% REIT gross income test, any gain recognized by us in connection with the settlement of such TBAs should be treated as gain from the sale or disposition of the underlying Agency RMBS.
For a particular taxable year, we would treat such TBAs as 61 qualifying assets for purposes of the REIT asset tests, and income and gains from such TBAs as qualifying income for purposes of the 75% gross income test, to the extent set forth in an opinion from Skadden, Arps, Slate, Meagher & Flom LLP substantially to the effect that (i) for purposes of the REIT asset tests, our ownership of a TBA should be treated as ownership of the underlying Agency RMBS, and (ii) for purposes of the 75% REIT gross income test, any gain recognized by us in connection with the settlement of such TBAs should be treated as gain from the sale or disposition of the underlying Agency RMBS.
The actual or alleged failure of our mortgage origination and servicing subsidiaries to comply with applicable federal, state and local laws and regulations and GSE, Ginnie Mae and other business counterparty requirements, or to implement and adhere to adequate remedial measures designed to address any identified compliance deficiencies, could lead to: • the loss or suspension of licenses and approvals necessary to operate our or our subsidiaries’ business; • limitations, restrictions or complete bans on our or our subsidiaries’ business or various segments of our business; • our or our subsidiaries’ disqualification from participation in governmental programs, including GSE, Ginnie Mae and VA programs; • breaches of covenants and representations under our servicing, debt, or other agreements; • negative publicity and damage to our reputation; • governmental investigations and enforcement actions; • administrative fines and financial penalties; • litigation, including class action lawsuits; • civil and criminal liability; • termination of our servicing and subservicing agreements or other contracts; 44 • demands for us to repurchase loans; • loss of personnel who are targeted by prosecutions, investigations, enforcement actions or litigation; • a significant increase in compliance costs; • a significant increase in the resources we and our subsidiaries devote to regulatory compliance and regulatory inquiries; • an inability to access new, or a default under or other loss of current, liquidity and funding sources necessary to operate our business; • restrictions on our or our subsidiaries’ business activities; • impairment of assets; and • an inability to execute on our business strategy.
The actual or alleged failure of our mortgage origination and servicing subsidiaries to comply with applicable federal, state and local laws and regulations and GSE, Ginnie Mae and other business counterparty requirements, or to implement and adhere to adequate remedial measures designed to address any identified compliance deficiencies, could lead to: • the loss or suspension of licenses and approvals necessary to operate our or our subsidiaries’ business; • limitations, restrictions or complete bans on our or our subsidiaries’ business or various segments of our business; • our or our subsidiaries’ disqualification from participation in governmental programs, including GSE, Ginnie Mae and VA programs; • breaches of covenants and representations under our servicing, debt, or other agreements; • negative publicity and damage to our reputation; • governmental investigations and enforcement actions; • administrative fines and financial penalties; • litigation, including class action lawsuits; • civil and criminal liability; • termination of our servicing and subservicing agreements or other contracts; 50 • demands for us to repurchase loans; • loss of personnel who are targeted by prosecutions, investigations, enforcement actions or litigation; • a significant increase in compliance costs; • a significant increase in the resources we and our subsidiaries devote to regulatory compliance and regulatory inquiries; • an inability to access new, or a default under or other loss of current, liquidity and funding sources necessary to operate our business; • restrictions on our or our subsidiaries’ business activities; • impairment of assets; and • an inability to execute on our business strategy.
In general, on the date each month that principal prepayments are announced (i.e., factor day), the value of our real estate related security pledged as collateral under our repurchase agreements is reduced by the amount of the prepaid principal and, as a result, our lenders will typically initiate a margin call requiring the pledge of additional collateral or cash, in an amount equal to such prepaid principal, in order to re-establish the required ratio of borrowing to collateral value under such repurchase agreements.
In general, on the date each month that principal prepayments are announced (i.e., factor day), the value of our real estate related security pledged as collateral under our repurchase agreements is reduced by the amount of the prepaid principal and, as a result, our lenders will 35 typically initiate a margin call requiring the pledge of additional collateral or cash, in an amount equal to such prepaid principal, in order to re-establish the required ratio of borrowing to collateral value under such repurchase agreements.
For additional information about the ways in which we may be affected by mortgage servicers, see “—The value of our interests in MSRs, servicer advances, residential mortgage loans, business purpose loans, and RMBS may be adversely affected by deficiencies in servicing and foreclosure practices, as well as related delays in the foreclosure process.” 20 A number of lawsuits, including class-actions, have been filed against mortgage servicers alleging improper servicing in connection with residential Non-Agency mortgage securitizations.
For additional information about the ways in which we may be affected by mortgage servicers, see “—The value of our interests in MSRs, servicer advances, residential mortgage loans, business purpose loans and RMBS may be adversely affected by deficiencies in servicing and foreclosure practices, as well as related delays in the foreclosure process.” A number of lawsuits, including class-actions, have been filed against mortgage servicers alleging improper servicing in connection with residential Non-Agency mortgage securitizations.
As a result, the requirement to distribute a substantial portion of our net taxable income could cause us to: (i) sell assets in adverse market conditions; (ii) borrow on unfavorable terms; (iii) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt; or (iv) make taxable distributions of our capital stock or debt securities in order to comply with REIT requirements.
As a result, the requirement to distribute a substantial portion of our net taxable income could cause us to: (i) sell assets in adverse market conditions; (ii) borrow on 58 unfavorable terms; (iii) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt; or (iv) make taxable distributions of our capital stock or debt securities in order to comply with REIT requirements.
A decision not to, or the inability to, match fund certain investments exposes us to additional risks. 31 Furthermore, we anticipate that, in most cases, for any period during which our floating rate assets are not match funded with respect to maturity, the income from such assets may respond more slowly to interest rate fluctuations than the cost of our borrowings.
A decision not to, or the inability to, match fund certain investments exposes us to additional risks. Furthermore, we anticipate that, in most cases, for any period during which our floating rate assets are not match funded with respect to maturity, the income from such assets may respond more slowly to interest rate fluctuations than the cost of our borrowings.
Many of the expenses associated with our business, such as property taxes, HOA fees, insurance, utilities, acquisition, renovation and maintenance costs and other general corporate expenses are relatively inflexible and will not necessarily decrease with a reduction in revenue from our business. Some components of our fixed assets depreciate more rapidly and require ongoing capital expenditures.
Many of the expenses associated with our SFR business, such as property taxes, HOA fees, insurance, utilities, acquisition, renovation and maintenance costs and other general corporate expenses are relatively inflexible and will not necessarily decrease with a reduction in revenue from our business. Some components of our fixed assets depreciate more rapidly and require ongoing capital expenditures.
If such assertion were successful, all or part of the MSRs or interests in MSRs and servicer advances or any other asset transferred to us pursuant to the related purchase 23 agreement would constitute property of the bankruptcy estate of such servicer and our rights against the servicer could be those of a secured creditor with a lien on such present and future assets.
If such assertion were successful, all or part of the MSRs or interests in MSRs and servicer advances or any other asset transferred to us pursuant to the related purchase agreement would constitute property of the bankruptcy estate of such servicer and our rights against the servicer could be those of a secured creditor with a lien on such present and future assets.
Further, at various points in time, increased default rates in the subprime mortgage market played a role in causing credit spreads to widen, reducing availability of credit on favorable terms, reducing liquidity and price transparency of real estate related assets, resulting in difficulty in obtaining accurate mark-to-market valuations and causing a negative perception of the state of the real estate markets and of REITs generally.
Further, at various points in time, increased default rates in the subprime mortgage market played a role in causing credit spreads to widen, reducing availability of credit on favorable terms, reducing liquidity and price transparency of assets, resulting in difficulty in obtaining accurate mark-to-market valuations and causing a negative perception of the state of the real estate markets and of REITs generally.
Those instruments would be subject to the original issue discount accrual and income computations that are described above with regard to Excess MSRs. Under the Tax Cuts and Jobs Act (“TCJA”) enacted in 2017, we generally are required to take certain amounts into income no later than the time such amounts are reflected on certain financial statements.
Those instruments would be subject to the original issue discount accrual and income computations that are described above with regard to Excess MSRs. Under the Tax Cuts and Jobs Act enacted in 2017, we generally are required to take certain amounts into income no later than the time such amounts are reflected on certain financial statements.
Any of the foregoing events could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of confidence in our security measures, customer dissatisfaction, additional regulatory scrutiny, significant litigation exposure and harm to our reputation, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Any of the foregoing events could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of confidence in our security measures, customer dissatisfaction, additional regulatory scrutiny, significant litigation exposure and harm to our reputation, any of which could have a material adverse effect on our business, financial 67 condition, liquidity and results of operations.
Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Our primary interest rate exposures relate to our interests in MSRs, RMBS, loans, derivatives, any floating rate debt obligations that we may incur and preferred stock that periodically resets.
Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Our primary interest rate exposures relate to our interests in MSRs, RMBS, loans, derivatives, CLOs, any floating rate debt obligations that we may incur and preferred stock that periodically resets.
The laws and 39 regulations are complex and vary greatly among the states and localities, and in some cases, these laws are in conflict with each other or with U.S. federal law. In connection with the MSR Transactions, there is no assurance that each transfer of MSRs to our selected subservicer will be approved by the requisite regulators.
The laws and regulations are complex and vary greatly among the states and localities, and in some cases, these laws are in conflict with each other or with U.S. federal law. In connection with the MSR Transactions, there is no assurance that each transfer of MSRs to our selected subservicer will be approved by the requisite regulators.
In particular: • part of the income and gain recognized by certain qualified employee pension trusts with respect to our stock may be treated as unrelated business taxable income if shares of our stock are predominantly held by qualified employee pension trusts, and we are required to rely on a special look-through rule for purposes of meeting one of the REIT 53 ownership tests, and we are not operated in a manner to avoid treatment of such income or gain as unrelated business taxable income; • part of the income and gain recognized by a tax-exempt investor with respect to our stock would constitute unrelated business taxable income if the investor incurs debt in order to acquire the stock; and • to the extent that we are (or a part of us, or a disregarded subsidiary of ours, is) a “taxable mortgage pool,” or if we hold residual interests in a real estate mortgage investment conduit (“REMIC”), a portion of the distributions paid to a tax exempt stockholder that is allocable to excess inclusion income may be treated as unrelated business taxable income.
In particular: • part of the income and gain recognized by certain qualified employee pension trusts with respect to our stock may be treated as unrelated business taxable income if shares of our stock are predominantly held by qualified employee pension trusts, and we are required to rely on a special look-through rule for purposes of meeting one of the REIT ownership tests, and we are not operated in a manner to avoid treatment of such income or gain as unrelated business taxable income; • part of the income and gain recognized by a tax-exempt investor with respect to our stock would constitute unrelated business taxable income if the investor incurs debt in order to acquire the stock; and • to the extent that we are (or a part of us, or a disregarded subsidiary of ours, is) a “taxable mortgage pool,” or if we hold residual interests in a real estate mortgage investment conduit, a portion of the distributions paid to a tax exempt stockholder that is allocable to excess inclusion income may be treated as unrelated business taxable income.
Any loss suffered by us as a result of a counterparty defaulting, refusing to conduct business with us or 21 imposing more onerous terms on us would also negatively affect our business, results of operations, cash flows and financial condition. Our interests in MSRs relate to loans serviced or subserviced, as applicable, by our Servicing Partners.
Any loss suffered by us as a result of a counterparty defaulting, refusing to conduct business with us or imposing more onerous terms on us would also negatively affect our business, results of operations, cash flows and financial condition. Our interests in MSRs relate to loans serviced or subserviced, as applicable, by our Servicing Partners.
If the fair value of our investment portfolio decreases, we would generally be required to record a non-cash charge, which would have a negative 17 impact on our financial results. Consequently, the price we pay to acquire our investments may prove to be too high if there is a significant increase in prepayment rates.
If the fair value of our investment portfolio decreases, we would generally be required to record a non-cash charge, which would have a negative impact on our financial results. Consequently, the price we pay to acquire our investments may prove to be too high if there is a significant increase in prepayment rates.
Such increases in foreclosure timelines could increase the need for capital to fund servicer advances, which would increase our interest expense, delay the collection of interest income or servicing revenue until the foreclosure has been resolved and, therefore, reduce the cash that we have available to pay our operating expenses or to pay dividends.
Such increases in foreclosure timelines could increase 47 the need for capital to fund servicer advances, which would increase our interest expense, delay the collection of interest income or servicing revenue until the foreclosure has been resolved and, therefore, reduce the cash that we have available to pay our operating expenses or to pay dividends.
Additional legislation intended to provide relief to borrowers may be enacted and could further harm our business, results of operations and financial condition. In March 2020, the GSEs and HUD announced forbearance policies for GSE loans and government-insured loans for homeowners experiencing financial hardship associated with the COVID-19 pandemic.
Additional legislation intended to provide relief to borrowers may be enacted and could further harm our business, results of operations and financial condition. 52 In March 2020, the GSEs and HUD announced forbearance policies for GSE loans and government-insured loans for homeowners experiencing financial hardship associated with the COVID-19 pandemic.
For example, delays in the foreclosure process that have resulted from investigations into improper servicing practices may adversely affect the values of, and result in losses on, these 28 investments. Foreclosure delays may also increase the administrative expenses of the securitization trusts for the RMBS, thereby reducing the amount of funds available for distribution to investors.
For example, delays in the foreclosure process that have resulted from investigations into improper servicing practices may adversely affect the values of, and result in losses on, these investments. Foreclosure delays may also increase the administrative expenses of the securitization trusts for the RMBS, thereby reducing the amount of funds available for distribution to investors.
If the mortgage loans securing these assets prepay at a more rapid rate than anticipated, we would have to amortize our premiums on an accelerated basis which may adversely affect our 30 profitability. As compensation for a lower coupon rate, we would then pay a discount to par value to acquire these assets.
If the mortgage loans securing these assets prepay at a more rapid rate than anticipated, we would have to amortize our premiums on an accelerated basis which may adversely affect our profitability. As compensation for a lower coupon rate, we would then pay a discount to par value to acquire these assets.
With respect to mortgage loans, in lieu of obtaining such licenses, we may contribute our acquired residential mortgage loans to one or more wholly owned trusts whose trustee is a national bank, which may be exempt from state licensing requirements. We have formed one or more subsidiaries to apply for certain state licenses.
With respect to mortgage loans, in lieu of obtaining such licenses, we may contribute our acquired residential mortgage loans to one or more 45 wholly-owned trusts whose trustee is a national bank, which may be exempt from state licensing requirements. We have formed one or more subsidiaries to apply for certain state licenses.
Any failure by NRM, Newrez or Caliber to comply with such state or federal regulatory requirements may expose us to administrative or enforcement actions, license or approval suspensions or revocations or other penalties that may restrict our business and investment options, any of which could adversely impact our business and financial results and damage our reputation.
Any failure by NRM or Newrez to comply with such state or federal regulatory requirements may expose us to administrative or enforcement actions, license or approval suspensions or revocations or other penalties that may restrict our business and investment options, any of which could adversely impact our business and financial results and damage our reputation.
Our ability to acquire and/or transfer MSRs may be subject to the approval of various third parties and such approvals may not be provided on a timely basis or at all, or may be conditioned upon our satisfaction of significant conditions which could require material expenditures and the provision of significant representations, warranties and indemnities.
Our ability to acquire and/or transfer MSRs may be subject to the approval of various third parties and such approvals may not be provided on a timely basis or at all or may be conditioned upon our satisfaction of significant conditions which could require 21 material expenditures and the provision of significant representations, warranties and indemnities.
See also “—Our failure to qualify as a REIT would cause our stock to be delisted from the NYSE.” Unless entitled to relief under certain provisions of the Internal Revenue Code, we also would be disqualified from taxation as a REIT for the four taxable years following the year during which we initially ceased to qualify as a REIT.
See also “—Our failure to qualify as a REIT would cause our stock to be delisted from the NYSE.” Unless entitled to relief under certain provisions of the Internal Revenue Code, we also would be disqualified from taxation as a REIT for the four taxable years following the year during which we initially ceased to qualify as a REIT. 57 Our failure to qualify as a REIT would cause our stock to be delisted from the NYSE.
While we cannot predict exactly how the servicing and foreclosure matters or the resulting litigation or settlement agreements will affect our business, there can be no assurance that these matters will not have an adverse impact on our results of operations, cash flows and financial condition.
While we cannot predict exactly how the servicing and foreclosure matters or the resulting litigation or settlement agreements will affect our business, 33 there can be no assurance that these matters will not have an adverse impact on our results of operations, cash flows and financial condition.
Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect our net interest income from the assets in our portfolio, which would significantly harm our revenues, results of operations, financial condition, liquidity, business prospects and our ability to make distributions to our stockholders.
Any sustained period of increased payment 44 delinquencies, foreclosures or losses could adversely affect our net interest income from the assets in our portfolio, which would significantly harm our revenues, results of operations, financial condition, liquidity, business prospects and our ability to make distributions to our stockholders.
In connection with formal and informal inquiries, such Servicing Partners may receive numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of their activities, including whether certain of their residential loan servicing and origination practices, bankruptcy practices and other aspects of their business comply with applicable laws and regulatory requirements.
In connection with formal and informal inquiries, such Servicing Partners and subsidiaries may receive numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of their activities, including whether certain of their residential loan servicing and origination practices, bankruptcy practices and other aspects of their business comply with applicable laws and regulatory requirements.
Failure of Rithm Capital’s subsidiaries, NRM, Newrez and Caliber, to obtain or maintain certain licenses and approvals required for NRM, Newrez and Caliber to purchase and own MSRs could prevent us from purchasing or owning MSRs, which could limit our potential business activities. State and federal laws require a business to hold certain state licenses prior to acquiring MSRs.
Failure of Rithm Capital’s subsidiaries, NRM and Newrez, to obtain or maintain certain licenses and approvals required for NRM and Newrez to purchase and own MSRs could prevent us from purchasing or owning MSRs, which could limit our potential business activities. State and federal laws require a business to hold certain state licenses prior to acquiring MSRs.
Such approval may be withheld for any reason or no reason in the discretion of the mortgage owner. Moreover, we have not received and do not expect to receive any assurances from any GSEs that their conditions for the sale by us of any interests in MSRs will not change.
Such approval may be withheld for any reason or no reason in the discretion of the mortgage owner. Moreover, we have not received and do not 31 expect to receive any assurances from any GSEs that their conditions for the sale by us of any interests in MSRs will not change.
In addition, servicer advances that are improperly made may not be eligible for financing under our facilities and may not be reimbursable by the related securitization trust or other owner of the residential mortgage loan, which could cause us to suffer losses.
In addition, servicer advances that are improperly made may not be eligible for financing under our 20 facilities and may not be reimbursable by the related securitization trust or other owner of the residential mortgage loan, which could cause us to suffer losses.
NRM, Newrez and Caliber are currently subject to various, and may become subject to additional information, reporting and other regulatory requirements, and there is no assurance that we will be able to satisfy those requirements or other ongoing requirements applicable to mortgage loan servicers under applicable federal and state laws and regulations.
NRM and Newrez are currently subject to various, and may become subject to additional information, reporting and other regulatory requirements, and there is no assurance that we will be able to satisfy those requirements or other ongoing requirements applicable to mortgage loan servicers under applicable federal and state laws and regulations.
Some of our servicer advance financing arrangements entail the issuance of term notes to capital markets investors with whom we have little or no relationships or the identities of which we may not be aware and, therefore, we have no ability to control or monitor the identity of the holders of such term notes.
Some of our servicer advance financing arrangements entail the issuance of term notes to capital markets investors with whom we have little or no relationships or the identities of which we may not be aware and, therefore, we have 55 no ability to control or monitor the identity of the holders of such term notes.
The issuance of our common stock in connection with property, portfolio or business acquisitions or the exercise of outstanding options or otherwise could also have an adverse effect 55 on the market price of our common stock. We have an effective registration statement on file to sell common stock or convertible securities in public offerings.
The issuance of our common stock in connection with property, portfolio or business acquisitions or the exercise of outstanding options or otherwise could also have an adverse effect on the market price of our common stock. We have an effective registration statement on file to sell common stock or convertible securities in public offerings.
Our interests in MSRs are subject to all of the terms and conditions of the applicable Servicing Guidelines. Servicing Guidelines generally provide for the possibility of termination of the contractual rights of the servicer in the absolute discretion of the owner of the mortgages being serviced (or the required bondholders in the case of Non-Agency RMBS).
Our interests in MSRs are subject to all of the terms and conditions of the applicable Servicing 19 Guidelines. Servicing Guidelines generally provide for the possibility of termination of the contractual rights of the servicer in the absolute discretion of the owner of the mortgages being serviced (or the required bondholders in the case of Non-Agency RMBS).
We are subject to substantial other operational risks associated with our Servicing Partners in connection with the financing of servicer advances. In our current financing facilities for servicer advances, the failure of our Servicing Partner to satisfy various covenants and tests can result in an amortization event and/or an event of default.
We are subject to substantial other operational risks associated with our Servicing Partners in connection with the financing of servicer advances. In our current financing facilities for servicer advances, the failure of our Servicing Partner to satisfy various 22 covenants and tests can result in an amortization event and/or an event of default.
If our employees are unable to access customer information easily, or is unable to produce originals or copies of documents or accurate information about the loans, collections could be affected significantly, and our subservicer may not be able to enforce its right to collect in some cases.
If our employees are unable to access customer information easily or are unable to produce originals or copies of documents or accurate information about the loans, collections could be affected significantly, and our subservicer may not be able to enforce its right to collect in some cases.
We believe that, for purposes of the REIT asset and income tests, we should be treated as the owner of the assets that 50 are the subject of any such sale and repurchase agreement, notwithstanding that those agreements generally transfer record ownership of the assets to the counterparty during the term of the agreement.
We believe that, for purposes of the REIT asset and income tests, we should be treated as the owner of the assets that are the subject of any such sale and repurchase agreement, notwithstanding that those agreements generally transfer record ownership of the assets to the counterparty during the term of the agreement.
In addition, certain market participants propose reducing the amount of paperwork required by a borrower to modify a loan, which could increase the likelihood of fraudulent modifications and materially harm the U.S. mortgage market and investors that have exposure to this 46 market.
In addition, certain market participants propose reducing the amount of paperwork required by a borrower to modify a loan, which could increase the likelihood of fraudulent modifications and materially harm the U.S. mortgage market and investors that have exposure to this market.
No assurance can be given that we will make any distributions on shares of our common stock in the future. 56 We may in the future choose to make distributions in our own stock, in which case you could be required to pay income taxes in excess of any cash distributions you receive.
No assurance can be given that we will make any distributions on shares of our common stock in the future. We may in the future choose to make distributions in our own stock, in which case you could be required to pay income taxes in excess of any cash distributions you receive.
In addition, under applicable accounting standards, we may be required to treat some of our investments as derivatives, which could adversely affect our results of operations. Market conditions could negatively impact our business, results of operations, cash flows and financial condition.
In addition, under applicable accounting standards, we may be required to treat some of our investments as derivatives, which could adversely affect our results of operations. 37 Market conditions could negatively impact our business, results of operations, cash flows and financial condition.
When the term of a repurchase agreement ends, we will be required to repurchase the asset for the specified repurchase price, with the difference between the sale and repurchase prices serving as the equivalent of paying interest to the counterparty in return for extending financing to us.
When the term of a repurchase agreement ends, we will be required to repurchase the asset for the specified repurchase price, with the difference between the sale and repurchase prices serving as the equivalent of paying 54 interest to the counterparty in return for extending financing to us.
The political or regulatory climate in the U.S., or elsewhere, also could change so that it would not be lawful or practical for us to use vendors with international operations in the manner in which we currently use them.
The political or 38 regulatory climate in the U.S., or elsewhere, also could change so that it would not be lawful or practical for us to use vendors with international operations in the manner in which we currently use them.
Proposed updates to further refine these rules have been published and will likely lead to further changes in requirements applicable to servicing mortgage loans. In addition to Newrez and Caliber, we engage third-party servicers to subservice mortgage loans relating to any MSRs we acquire.
Proposed updates to further refine these rules have been published and will likely lead to further changes in requirements applicable to servicing mortgage loans. In addition to Newrez, we engage third-party servicers to subservice mortgage loans relating to any MSRs we acquire.
Certain of our Servicing Partners have disclosed certain matters in their periodic reports filed with the SEC and there can be no assurance that such events will not have a material adverse effect on them.
Certain of our Servicing Partners and subsidiaries have disclosed certain matters in their periodic reports filed with the SEC and there can be no assurance that such events will not have a material adverse effect on them.
If the value of securities issued by our subsidiaries that are excluded from the definition of “investment company” by Section 3(c)(1) or 3(c)(7) of the 1940 Act, together with any other investment securities we own, exceeds the 40% test under Section 3(a)(1)(C) of the 1940 Act (e.g., the value of our interests in the taxable REIT subsidiaries that hold Servicer Advance Investments and are not excluded from the definition of “investment company” by Section 3(c)(5)(A), (B) or (C) of the 1940 Act increases significantly in proportion to the value of our other assets), or if one or more of such subsidiaries fail to maintain an exclusion or exception from the 1940 Act, we could, among other things, be required either to (a) change the manner in which we conduct our operations to avoid being required to register as an investment company, (b) effect sales of our assets in a manner that, or at a time when, we would not otherwise choose to do so, or (c) register as an investment company, any of which could negatively affect the market price of our common stock, the sustainability of our business model and our ability to make distributions.
If the value of securities issued by our subsidiaries that are excluded from the definition of “investment company” by Section 3(c)(1) or 3(c)(7) of the 1940 Act, together with any other investment securities we own, exceeds the 40% test under Section 3(a)(1)(C) of the 1940 Act (e.g., the value of our interests in the TRSs that hold servicer advance investments and are not excluded from the definition of “investment company” by Section 3(c)(5)(A), (B) or (C) of the 1940 Act increases significantly in proportion to the value of our other assets), or if one or more of such subsidiaries fail to maintain an exclusion or exception from the 1940 Act, we could, among other things, be required either to (a) change the manner in which we conduct our operations to avoid being required to register as an investment company, (b) effect sales of our assets in a manner that, or at a time when, we would not otherwise choose to do so, or (c) register as an investment company, any of which could negatively affect the market price of our common stock, the sustainability of our business model and our ability to make distributions.
Accordingly, any of the foregoing could materially and adversely affect our business and our financial condition, liquidity and results of operations. Rithm Capital’s subsidiaries, NRM, Newrez, Caliber and Genesis, are or may become subject to significant state and federal regulations.
Accordingly, any of the foregoing could materially and adversely affect our business and our financial condition, liquidity and results of operations. Rithm Capital’s subsidiaries, NRM, Newrez and Genesis, are or may become subject to significant state and federal regulations.
As approved Fannie Mae Servicers, Freddie Mac Servicers and FHA Lenders, NRM, Newrez and Caliber are required to conduct aspects of their respective operations in accordance with applicable policies and guidelines published by FHA, Fannie Mae and Freddie Mac in order to maintain those approvals.
As approved Fannie Mae Servicers, Freddie Mac Servicers and FHA Lenders, NRM and Newrez are required to conduct aspects of their respective operations in accordance with applicable policies and guidelines published by FHA, Fannie Mae and Freddie Mac in order to maintain those approvals.
If our current counterparties and vendors were to stop providing services to us on acceptable terms, we may be unable to procure alternative services from other counterparties or vendors in a timely and efficient manner and on similarly 58 acceptable terms, or at all.
If our current counterparties and vendors were to stop providing services to us on acceptable terms, we may be unable to procure alternative services from other counterparties or vendors in a timely and efficient manner and on similarly acceptable terms, or at all.
In addition, our hedging strategy may limit our flexibility by causing us to refrain 32 from taking certain actions that would be potentially profitable but would cause adverse consequences under the terms of our hedging arrangements.
In addition, our hedging strategy may limit our flexibility by causing us to refrain from taking certain actions that would be potentially profitable but would cause adverse consequences under the terms of our hedging arrangements.
If we or such Servicing Partner is terminated as servicer with respect to a PSA and we are unable to enforce our contractual rights against such Servicing Partner, or if such Servicing Partner is unable to make any resulting indemnification payments to us, if any such payment is due and payable, it may have a material adverse effect on our financial condition, results of operations, ability to 35 make distributions, liquidity and financing arrangements, including our servicer advance financing facilities, and may make it more difficult for us to acquire additional interests in MSRs in the future.
If we or such Servicing Partner is terminated as servicer with respect to a PSA and we are unable to enforce our contractual rights against such Servicing Partner, or if such Servicing Partner is unable to make any resulting indemnification payments to us, if any such 40 payment is due and payable, it may have a material adverse effect on our financial condition, results of operations, ability to make distributions, liquidity and financing arrangements, including our servicer advance financing facilities, and may make it more difficult for us to acquire additional interests in MSRs in the future.
Should NRM, Newrez or Caliber fail to maintain FHA, Fannie Mae or Freddie Mac approval, NRM, Newrez or Caliber may be unable to purchase or hold MSRs associated with FHA-insured, Fannie Mae and/or Freddie Mac loans, which could limit our potential business activities.
Should NRM or Newrez fail to maintain FHA, Fannie Mae or Freddie Mac approval, NRM or Newrez may be unable to purchase or hold MSRs associated with FHA-insured, Fannie Mae and/or Freddie Mac loans, which could limit our potential business activities.
Additionally, there may be substantial increases in the interest rates under a financing arrangement if the related notes are not repaid, extended or refinanced prior to the expected repayment dated, which may be before the related maturity date.
Additionally, there may be substantial increases in the interest rates under a financing arrangement if the related notes are not repaid, extended or refinanced prior to the expected repayment date, which may be before the related maturity date.
Our business, results of operations, financial condition and reputation could be adversely impacted if we are not able to successfully manage these or other risks related to investing and managing MSR investments.
Our business, results of operations, financial condition and reputation could be adversely impacted if we are not able to successfully manage these or other risks related to investing in and managing MSR investments.
Furthermore, it is possible that, over the life of the investment in an Excess MSR, the total amount we pay for, and accrue with respect to, the 51 Excess MSR may exceed the total amount we collect on such Excess MSR.
Furthermore, it is possible that, over the life of the investment in an Excess MSR, the total amount we pay for, and accrue with respect to, the Excess MSR may exceed the total amount we collect on such Excess MSR.
Failure to successfully modify, resell or refinance our repurchased Ginnie Mae loans or if a significant portion of the repurchased Ginnie Mae loans default may adversely affect our business, financial condition, liquidity and results of operations.
Failure to successfully modify, resell or refinance our repurchased Ginnie Mae loans or default of a significant portion of the repurchased Ginnie Mae loans may adversely affect our business, financial condition, liquidity and results of operations.
As a result of NRM, Newrez, Caliber and Genesis’s current and expected approvals, NRM, Newrez, Caliber and Genesis are subject to extensive and comprehensive regulation under federal, state and local laws in the U.S.
As a result of NRM, Newrez and Genesis’s current and expected approvals, NRM, Newrez and Genesis are subject to extensive and comprehensive regulation under federal, state and local laws in the U.S.
An adverse result in governmental investigations or examinations or private lawsuits, including purported class action lawsuits, may adversely affect NRM, Newrez, Caliber, Genesis and our financial results or result in serious reputational harm.
An adverse result in governmental investigations or examinations or private lawsuits, including purported class action lawsuits, may adversely affect NRM, Newrez, Genesis and our financial results or result in serious reputational harm.
In addition, the CCPA, effective in 2020, requires businesses that maintain personal information of California residents, including certain mortgage lenders and servicers, to notify certain consumers when collecting their data, respond to consumer requests relating to the uses of their data, verify the identities of consumers who make requests, disclose details regarding transactions involving their data, and maintain records of consumer’ requests relating to their data, among various other obligations and to create procedures designed to comply with CCPA requirements.
In addition, the CCPA, effective in 2020, requires businesses that maintain personal information of California residents, including certain mortgage lenders and servicers, to notify certain consumers when collecting their data, respond to consumer requests relating to the uses of their data, verify the identities of consumers who make requests, disclose details regarding transactions involving their data, and maintain records of consumers’ requests relating to their data, among various other obligations and to create procedures designed to comply with CCPA requirements.
These lower standards include mortgage loans made to borrowers having imperfect or impaired credit histories (including outstanding judgments or prior bankruptcies), mortgage loans where the amount of the loan at origination is 80% or more of the value of the mortgage property, mortgage loans made to borrowers with low credit scores, mortgage loans made to borrowers who have other debt that represents a large portion of their income and mortgage loans made to borrowers whose income is not required to be disclosed or verified.
These lower standards include mortgage loans made to borrowers having imperfect or impaired credit histories (including outstanding judgments or prior bankruptcies), mortgage loans where the amount of the loan at origination is 80% or more of the value of the mortgage property, mortgage loans made to borrowers with low credit scores, mortgage loans made to borrowers who have other debt that represent a large portion of their income and mortgage loans made to borrowers whose income is not required to be disclosed or verified.
In addition, certain of our Servicing Partners have been and continue to be subject to regulatory and governmental examinations, information requests and subpoenas, inquiries, investigations and threatened legal actions and proceedings.
In addition, certain of our Servicing Partners and subsidiaries have been and continue to be subject to regulatory and governmental examinations, information requests and subpoenas, inquiries, investigations and threatened legal actions and proceedings.
Subsidiaries of Rithm Capital, NRM, Newrez, Caliber and Genesis, have obtained applicable qualifications, licenses and approvals to own Non-Agency and certain Agency MSRs in the U.S. and certain other jurisdictions.
Subsidiaries of Rithm Capital, NRM, Newrez and Genesis, have obtained applicable qualifications, licenses and approvals to own Non-Agency and certain Agency MSRs in the U.S. and certain other jurisdictions.
Should Newrez or Caliber fail to maintain Ginnie Mae approval, we may be unable to purchase or hold MSRs associated with Ginnie Mae loans, which could limit our potential business activities.
Should Newrez fail to maintain Ginnie Mae approval, we may be unable to purchase or hold MSRs associated with Ginnie Mae loans, which could limit our potential business activities.
As disclosed in Notes 5, 6 and 7 of our Consolidated Financial Statements, certain of our Servicing Partners service and/or subservice a substantial portion of our interests in MSRs.
As disclosed in Notes 5, 6 and 7 to our Consolidated Financial Statements, certain of our Servicing Partners service and/or subservice a substantial portion of our interests in MSRs.
As a licensee in such states, NRM, Newrez or Caliber may become subject to administrative actions in those states for failing to satisfy ongoing license requirements or for other state law violations, the consequences of which could include fines or suspensions or revocations of NRM, Newrez or Caliber licenses by applicable state regulatory authorities, which could in turn result in NRM, Newrez or Caliber becoming ineligible to hold MSRs in the related jurisdictions.
As a licensee in such states, NRM and Newrez may become subject to administrative actions in those states for failing to satisfy ongoing license requirements or for other state law violations, the consequences of which could include fines or suspensions or revocations of NRM and Newrez licenses by applicable state regulatory authorities, which could in turn result in NRM and Newrez becoming ineligible to hold MSRs in the related jurisdictions.
Stockholders are generally restricted from owning more than 9.8% by value or number of 52 shares, whichever is more restrictive, of our outstanding shares of common stock, or 9.8% by value or number of shares, whichever is more restrictive, of our outstanding shares of capital stock.
Stockholders are generally restricted from owning more than 9.8% by value or number of shares, whichever is more restrictive, of our outstanding shares of common stock, or 9.8% by value or number of shares, whichever is more restrictive, of our outstanding shares of capital stock.
A significant portion of our costs and expenses are fixed, and we may not be able to adapt our cost structure to offset declines in our revenue.
A significant portion of our SFR costs and expenses are fixed, and we may not be able to adapt our cost structure to offset declines in our revenue.
Additionally, NRM, Newrez and Caliber have received approval from FHA to hold MSRs associated with FHA-insured mortgage loans, from Fannie Mae to hold MSRs associated with loans owned by Fannie Mae, and from Freddie Mac to hold MSRs associated with loans owned by Freddie Mac.
Additionally, NRM and Newrez have received approval from FHA to hold MSRs associated with FHA-insured mortgage loans, from Fannie Mae to hold MSRs associated with loans owned by Fannie Mae, and from Freddie Mac to hold MSRs associated with loans owned by Freddie Mac.
In general, compliance with the REIT requirements may hinder our ability to make and retain certain attractive investments. Complying with the REIT requirements may limit our ability to hedge effectively.
In general, compliance with the REIT requirements may hinder our ability to make and retain certain attractive investments. 60 Complying with the REIT requirements may limit our ability to hedge effectively.
Such Servicing Partners may be subject to additional federal and state regulatory matters in the future that could materially and adversely affect the value of our investments to the extent we rely on them to achieve our investment objectives because we have no direct ability to influence their performance.
Such Servicing Partners or subsidiaries may be subject to additional federal and state regulatory matters in the future that could materially and adversely affect the value of our investments to the extent we rely on them to achieve our investment objectives because we have no direct ability to influence their performance.
These laws and regulations do, and may in the future, significantly affect the way that NRM, Newrez, Caliber and Genesis do business, and subject NRM, Newrez, Caliber, Genesis and Rithm Capital to additional costs and regulatory obligations, which could impact our financial results. 45 NRM, Newrez, Caliber and Genesis’s business may become subject to increasing regulatory oversight and scrutiny in the future, which may lead to regulatory investigations or enforcement actions, including both formal and informal inquiries, from various state and federal agencies as part of those agencies’ supervision of mortgage servicing and origination business activities.
These laws and regulations do, and may in the future, significantly affect the way that NRM, Newrez and Genesis do business, and subject NRM, Newrez, Genesis and Rithm Capital to additional costs and regulatory obligations, which could impact our financial results. 51 NRM, Newrez and Genesis’s business may become subject to increasing regulatory oversight and scrutiny in the future, which may lead to regulatory investigations or enforcement actions, including both formal and informal inquiries, from various state and federal agencies as part of those agencies’ supervision of mortgage servicing and origination business activities.

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Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeRithm Capital currently does not believe any of these inquiries would result in a material adverse effect on Rithm Capital’s business. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 60 PART II
Biggest changeRithm Capital currently does not believe any of these inquiries would result in a material adverse effect on Rithm Capital’s business.
Added
As previously disclosed, in connection with the Sculptor Acquisition, on September 11, 2023, stockholder Gilles Beauchemin filed a purported class action against Sculptor and each of Sculptor’s directors in the Court of Chancery of the State of Delaware, captioned Gilles Beauchemin v. Engel, et al., C.A. No. 2023-0921-SG (the “Beauchemin Action”).
Added
The Beauchemin Action alleged, among other things, that Sculptor’s board of directors (the “Sculptor Board”) and the special committee of the Sculptor Board (the “Special Committee”) violated their fiduciary duties and sought, among other things, to enjoin the transaction with Rithm Capital. Plaintiff also filed a Motion for Preliminary Injunction. Rithm Capital was not party to the filed complaint.
Added
On October 17, 2023, Sculptor stockholders Daniel S. Och, Harold A.
Added
Kelly, Jr., Richard Lyon, James O’Connor and Zoltan Varga (collectively, the “Specified Stockholders”) filed a putative class action complaint on behalf of themselves and all other similarly situated stockholders of Sculptor against each of Sculptor’s directors, Sculptor and certain of its subsidiaries, and Rithm Capital and certain of its subsidiaries, in the Court of Chancery of the State of Delaware, captioned Och, et al. v.
Added
Engel, et al., C.A. No. 2023-1043-SG (the “Former EMD Group Action”). The complaint in the Former EMD Group Action alleged, among other things, that the Sculptor Board and the Special Committee violated their fiduciary duties and sought, among other things, to enjoin the transaction with Rithm Capital.
Added
On October 23, 2023, the court entered an order consolidating the Former EMD Group Action and the Beauchemin Action as in re Sculptor Capital Management, Inc. Stockholder Litigation, Consol. C.A. No. 2023-0921-SG (the “Sculptor Stockholder Action”).
Added
On October 26, 2023, Rithm Capital and Sculptor entered into Amendment No. 2 to the Agreement and Plan of Merger (the "Merger Agreement"), amending, among other things, the price per share of Class A common stock of Sculptor, which was increased to $12.70.
Added
In connection, Rithm Capital entered into a Transaction Support Agreement (the “Transaction Support Agreement”) with each of the Specified Stockholders and the other signatories party thereto.
Added
Under the terms of the Transaction Support Agreement, each Specified Stockholder agreed, among other things, to vote all shares held by such Specified Stockholder in favor of the adoption of the Merger Agreement and the approval of the Sculptor Acquisition, and to dismiss with prejudice the claims raised in the Former EMD Group Action complaint, solely with respect to the Specified Stockholders.
Added
A stipulated order dismissing these claims was submitted to the Court of Chancery for approval. The Specified Stockholders also agreed to withdraw any demands under Section 220. On October 29, 2023, plaintiff Beauchemin filed a consolidated amended complaint adding additional claims and defendants to the matter.
Added
On November 14, 2023, the parties reached an agreement in principle to settle all claims in the Sculptor Stockholder Action for, among other things, a total payment of $6.5 million to eligible Sculptor common stockholders. On January 22, 2024, the parties executed and filed the Stipulation and Agreement of Settlement, Compromise and Release in connection with the settlement.
Added
A final hearing for the settlement is scheduled for May 20, 2024. 70 ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 71 PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeAll outstanding options granted under the Plan will be subject to the terms and conditions set forth in the agreements evidencing such options and the terms of the Plan. The maximum number of shares available for issuance in the aggregate over the ten-year term of the Plan is 15,000,000 shares.
Biggest changeTo accomplish these purposes, the 2023 Plan provides for the issuance of options, stock appreciation rights, restricted stock, restricted stock units, stock bonuses, other stock-based awards and cash awards. Such awards will be subject to the terms and conditions set forth in the agreements evidencing such awards and the terms of the 2023 Plan.
No assurance, however, can be given that any future distributions will be made or, if made, as to the amounts or timing of any future distributions as such distributions are subject to our earnings, financial condition, liquidity, capital requirements, REIT requirements and such other factors as our board of directors deems 61 relevant.
No assurance, however, can be given that any future distributions will be made or, if made, as to the amounts or timing of any future distributions as such distributions are subject to our earnings, financial condition, liquidity, capital requirements, REIT requirements and such other factors as our board of directors deems 72 relevant.
The graph assumes an investment of $100 in our common stock and in each of the indices on December 31, 2017 through December 31, 2022. The past performance of our common stock is not an indication of future performance.
The graph assumes an investment of $100 in our common stock and in each of the indices on December 31, 2018 through December 31, 2023. The past performance of our common stock is not an indication of future performance.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES We have one class of common stock, which is listed on the New York Stock Exchange (NYSE) under the symbol “RITM”. As of February 10, 2023, there were 27 holders of record of our common stock.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES We have one class of common stock, which is listed on the NYSE under the symbol “RITM”. As of February 9, 2024, there were 26 holders of record of our common stock.
In addition, such distributions may be subject to the receipt of sufficient funds from our servicer subsidiaries, NRM and Newrez, which are subject to regulatory restrictions on their ability to pay distributions.
In addition, such distributions may be subject to the receipt of sufficient funds from our servicer subsidiaries, NRM and Newrez, which are subject to regulatory restrictions on their ability to pay distributions. Omnibus Incentive Plan On May 25, 2023, Rithm Capital’s stockholders adopted the 2023 Plan, which became effective as of May 25, 2023.
Year Ended December 31, Index 2017 2018 2019 2020 2021 2022 Rithm Capital Corp. $ 100.0 $ 91.1 $ 117.1 $ 76.8 $ 89.8 $ 76.8 NAREIT All REIT 100.0 96.4 124.0 117.7 166.3 124.9 Russell 2000 100.0 88.1 110.6 132.6 152.3 121.1 NAREIT Mortgage REIT 100.0 98.4 119.4 97.1 112.3 82.7 S&P 500 100.0 94.8 124.7 147.6 189.9 155.5 See Note 22 to our Consolidated Financial Statements for further information regarding distributions on our common stock.
Year Ended December 31, Index 2018 2019 2020 2021 2022 2023 Rithm Capital Corp. $ 100.0 $ 128.6 $ 84.4 $ 98.7 $ 84.3 $ 122.7 NAREIT All REIT 100.0 128.1 120.7 168.7 126.4 140.9 Russell 2000 100.0 125.5 150.5 172.7 137.4 160.6 NAREIT Mortgage REIT 100.0 121.3 98.7 114.0 84.0 96.8 S&P 500 100.0 131.5 155.6 200.3 164.0 207.0 See Note 22 to our Consolidated Financial Statements for further information regarding distributions on our common stock.
Nonqualified Stock Option and Incentive Award Plan On April 29, 2013, Rithm Capital’s board of directors adopted the Plan, which was amended and restated as of November 4, 2014.
The 2023 Plan replaced Rithm Capital’s Nonqualified Stock Option and Incentive Award Plan, which became effective on May 15, 2013, was amended and restated as of November 4, 2014 and as of February 16, 2023, and expired by its terms on April 29, 2023 (the “2013 Plan”).
Share Repurchase Program For details regarding our share repurchase program, see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Stockholders’ Equity—Common Stock. 62 ITEM 6. [RESERVED]
The maximum number of shares available for issuance in the aggregate over the ten-year term of the 2023 Plan is 34,240,000 shares. Share Repurchase Program For details regarding our share repurchase program, see Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Stockholders’ Equity—Common Stock.” 73 ITEM 6. [RESERVED]
Removed
The Plan is intended to facilitate the use of long-term equity-based awards and incentives for the benefit of the service providers to Rithm Capital and, prior to the Internalization, its Former Manager.
Added
Any stock-based awards issued under the 2013 Plan will continue to be subject to the terms and provisions of the 2013 Plan applicable to such awards.
Added
The 2023 Plan is intended to facilitate our use of equity-based awards and incentives to provide competitive short-term and long-term compensation opportunities for the benefit of our officers, employees, non-employee directors, independent contractors and consultants to strengthen their commitment to the Company, motivate them to faithfully and diligently perform their responsibilities and attract and retain competent and dedicated persons whose contributions are essential to the success of the Company’s business and whose efforts will impact the Company’s long-term growth and profitability.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeOur cash flow provided by operations differs from our net income due to these primary factors (i) the difference between (a) accretion and amortization and unrealized gains and losses recorded with respect to our investments and (b) cash received therefrom, (ii) unrealized gains and losses on our derivatives, and recorded impairments, if any, (iii) deferred taxes, and (iv) principal cash flows related to held-for-sale loans, which are characterized as operating cash flows under GAAP. 96 Debt Obligations The following table summarizes information regarding our debt obligations (dollars in thousands): December 31, 2022 December 31, 2021 Collateral Debt Obligations/Collateral Outstanding Face Amount Carrying Value (A) Final Stated Maturity (B) Weighted Average Funding Cost Weighted Average Life (Years) Outstanding Face Amortized Cost Basis Carrying Value Weighted Average Life (Years) Carrying Value (A) Secured Financing Agreements (C) Repurchase Agreements: Warehouse Credit Facilities-Residential Mortgage Loans (F) $ 2,603,833 $ 2,601,327 Feb-23 to Jan-25 5.9 % 0.8 $ 3,187,716 $ 3,114,791 $ 3,020,575 21.3 $ 10,138,297 Warehouse Credit Facility-Mortgage Loans Receivable (G) 1,220,662 1,220,662 Mar-23 to Dec-23 6.9 % 0.6 1,451,279 1,451,279 1,451,279 0.8 1,252,660 Agency RMBS (D) 6,821,788 6,821,788 Jan-23 to Feb-23 4.1 % 0.1 7,213,920 7,082,133 7,123,127 8.5 8,386,538 Non-Agency RMBS (E) 609,282 609,282 Jan-23 to Oct-27 6.5 % 1.1 14,824,678 946,631 946,197 7.1 656,874 SFR Properties (E) 4,677 4,677 Dec-24 7.1 % 2.0 N/A 7,765 7,765 NA 158,515 Total Secured Financing Agreements 11,260,242 11,257,736 5.0 % 0.4 20,592,884 Secured Notes and Bonds Payable Excess MSRs (H) 227,596 227,596 Aug-25 3.7 % 2.6 67,454,370 260,828 317,146 6.1 237,835 MSRs (I) 4,800,001 4,791,543 Mar-23 to Nov-27 6.1 % 2.4 532,218,484 6,811,636 8,833,825 6.9 4,234,771 Servicer Advance Investments (J) 319,276 318,445 Aug-23 to Mar-24 6.5 % 1.2 341,628 392,749 398,820 8.4 355,722 Servicer Advances (J) 2,364,757 2,361,259 Feb-23 to Nov-26 4.1 % 1.1 2,847,234 2,825,485 2,825,485 0.7 2,355,969 Residential Mortgage Loans (K) 770,897 769,988 May-24 to Jul-43 5.4 % 1.9 775,314 791,534 791,534 28.5 802,526 Consumer Loans (L) 330,772 299,498 Sep-37 2.1 % 3.3 330,397 343,947 363,725 3.5 458,580 SFR Properties 863,029 817,695 Mar-23 to Sep-27 3.6 % 3.8 N/A 963,547 963,547 N/A 199,407 Mortgage Loans Receivable 524,062 512,919 Jul 26 to Dec-26 5.4 % 3.8 569,486 569,486 569,486 0.6 — Total Secured Notes and Bonds Payable 10,200,390 10,098,943 5.2 % 2.2 8,644,810 Total/Weighted Average $ 21,460,632 $ 21,356,679 5.1 % 1.2 $ 29,237,694 (A) Net of deferred financing costs.
Biggest changeOur cash flow provided by operations differs from our net income due to these primary factors: (i) the difference between (a) accretion and amortization and unrealized gains and losses recorded with respect to our investments and (b) cash received therefrom, (ii) unrealized gains and losses on our derivatives, and recorded impairments, if any, (iii) deferred taxes and (iv) principal cash flows related to held-for-sale loans, which are characterized as operating cash flows under GAAP. 105 Debt Obligations The following table summarizes Secured Financing Agreements, Secured Notes and Bonds Payable and debt obligations related to consolidated funds: December 31, 2023 December 31, 2022 Collateral Debt Obligations/Collateral (C) Outstanding Face Amount Carrying Value (A) Final Stated Maturity (B) Weighted Average Funding Cost Weighted Average Life (Years) Outstanding Face Amortized Cost Basis Carrying Value Weighted Average Life (Years) Carrying Value (A) Secured Financing Agreements Warehouse Credit Facilities-Residential Mortgage Loans (D) $ 1,940,295 $ 1,940,038 Jan-24 to Nov-25 6.8 % 0.6 $ 2,201,857 $ 2,315,385 $ 2,235,311 21.5 $ 2,601,327 Warehouse Credit Facility- Mortgage Loans Receivable (E) 1,337,010 1,337,010 May-24 to Dec-25 8.2 % 1.7 1,610,728 1,609,242 1,609,242 1.2 1,220,662 Agency RMBS or Treasuries (F) 8,152,469 8,152,469 Jan-24 to Jul-24 5.5 % 0.2 8,588,624 8,415,294 8,566,211 8.2 6,821,788 Non-Agency RMBS (E) 610,189 610,189 Jan-24 to Oct-28 7.6 % 0.8 15,285,491 932,248 958,292 6.1 609,282 SFR Properties (E) 20,534 20,534 Dec-24 8.2 % 1.0 N/A 47,433 47,433 N/A 4,677 CLOs (G) 186,378 183,947 Jan-30 to Jul-35 6.4 % 8.9 186,378 184,112 184,112 8.9 — Commercial Notes Receivable 323,452 317,096 Dec-24 6.5 % 0.9 429,240 364,977 364,977 N/A — Total Secured Financing Agreements 12,570,327 12,561,283 6.1 % 0.6 11,257,736 Secured Notes and Bonds Payable Excess MSRs (E) 181,522 181,522 Oct-25 8.7 % 1.8 60,049,904 235,395 272,308 6.1 227,596 MSRs (H) 4,807,776 4,800,728 Dec-24 to Nov-27 7.5 % 1.9 522,025,042 6,367,520 8,340,171 7.5 4,791,543 Servicer Advance Investments (I) 278,845 278,042 Mar-24 to Aug-24 7.5 % 0.2 314,442 353,113 367,803 8.2 318,445 Servicer Advances (I) 2,254,515 2,254,369 Feb-24 to Sep-25 7.7 % 0.4 2,856,680 2,760,250 2,760,250 0.7 2,361,259 Residential Mortgage Loans (J) 650,000 650,000 May-24 6.5 % 0.4 649,978 651,948 652,059 29.2 769,988 Consumer Loans (K) 1,134,666 1,106,974 Jun-28 to Sep 37 7.0 % 4.2 1,308,774 1,269,872 1,274,005 1.7 299,498 SFR Properties (L) 833,386 789,174 Mar-26 to Sep-27 4.1 % 3.3 N/A 952,923 952,923 N/A 817,695 Mortgage Loans Receivable (M) 524,062 518,998 Jul 26 to Dec-26 5.7 % 2.8 578,314 578,314 578,314 1.0 512,919 Secured Facility- Asset Management 75,000 69,121 Nov-25 8.8 % 1.8 N/A N/A N/A N/A — CLOs (G) 30,458 30,258 May-30 to Oct-34 7.1 % 6.7 30,458 30,425 30,425 6.7 — Total Secured Notes and Bonds Payable 10,770,230 10,679,186 7.1 % 1.9 0 10,098,943 Liabilities of Consolidated Funds (N) Consolidated funds (O) 222,250 218,157 May-37 5.0 % 4.8 205,723 N/A 203,794 N/A — Total / Weighted Average $ 23,562,807 $ 23,458,626 6.6 % 1.2 $ 21,356,679 (A) Net of deferred financing costs.
Our investment approach and capital allocation decisions combine a focus on asset selection, relative value, and risk management, taking into consideration available financing, and other relevant macroeconomic factors.
Our investment approach and capital allocation decisions combine a focus on asset selection, relative value, risk management, taking into consideration available financing and other relevant macroeconomic factors.
For loans measured at the lower of cost or fair value, we account for any excess of cost over fair value as a valuation allowance and include changes in the valuation allowance in in the period in which the change occurs. Purchase price discounts or premiums are deferred in a contra loan account until the related loan is sold.
For loans measured at the lower of cost or fair value, we account for any excess of cost over fair value as a valuation allowance and include changes in the valuation allowance in the period in which the change occurs. Purchase price discounts or premiums are deferred in a contra loan account until the related loan is sold.
While the terms and timing of the approval and declaration of cash dividends, if any, on shares of our capital stock is at the sole discretion of our board of directors and we cannot predict how market conditions may evolve, we intend to distribute to our stockholders an amount equal to at least 90% of our REIT taxable income determined before applying the deduction for dividends paid and by excluding net capital gains consistent with our intention to maintain our qualification as a REIT under the Code.
While the terms and timing of the approval and declaration of cash dividends, if any, on shares of our capital stock is at the sole discretion of our board of directors and we cannot predict how market conditions may evolve, we intend to distribute to our stockholders an amount equal to at least 90% of our REIT taxable 110 income determined before applying the deduction for dividends paid and by excluding net capital gains consistent with our intention to maintain our qualification as a REIT under the Code.
With respect to the next 12 months, we expect that our cash on hand combined with our cash flow provided by operations and our ability to roll our secured financing agreements and servicer advance financings will be sufficient to satisfy our anticipated liquidity needs with respect to our current investment portfolio, including related financings, potential margin calls, mortgage loan origination and operating expenses.
With respect to the next 12 months, we expect that our cash on hand, combined with our cash flow provided by operations and our ability to roll our secured financing agreements and servicer advance financings will be sufficient to satisfy our anticipated liquidity needs with respect to our current investment portfolio, including related financings, potential margin calls, loan origination and operating expenses.
The Series A and Series B will not be redeemable before August 15, 2024, the Series C will not be redeemable before February 15, 2025, and the Series D will not be redeemable before November 15, 2026, except under certain limited circumstances intended to preserve our qualification as a REIT for U.S. federal income tax purposes and except upon the occurrence of a Change of Control (as defined in the Certificate of Designations).
The Series A and Series B will not be redeemable before August 15, 2024, the Series C will not be redeemable before February 15, 2025, and the Series D will not be redeemable before November 15, 2026, except under certain limited circumstances intended to preserve our qualification as a REIT for U.S. federal income tax purposes or upon the occurrence of a Change of Control (as defined in the Certificate of Designations).
Any such change (i) is recorded in the Consolidated Statements of Income, as impairment that impacts net income, and (ii) impacts our Total Rithm Capital Stockholders’ Equity (net book value). In the case of Residential Mortgage Loans, Held-for-Sale, at Lower of Cost or Fair Value, any reductions in value are considered impairment.
Any such change (i) is recorded in the Consolidated Statements of Operations, as impairment that impacts net income, and (ii) impacts our Total Rithm Capital Stockholders’ Equity (net book value). In the case of residential mortgage loans, held-for-sale, at lower of cost or fair value, any reductions in value are considered impairment.
For construction and renovation loans, we generally use loan-to-cost (“LTC”) or loan-to-after-repair-value (“LTARV”) ratio. For bridge loans, we use an LTV ratio. LTC and LTARV are measured by the total commitment amount of the loan at origination divided by the total estimated cost of a project or value of a property after renovations and improvements to a property.
For construction and renovation loans, we generally use loan-to-cost (“LTC”) or loan-to-after-repair-value (“LTARV”) ratio. For bridge loans, we use an LTV ratio. LTC and LTARV are measured by the total commitment amount of the loan at origination 90 divided by the total estimated cost of a project or value of a property after renovations and improvements to a property.
Changes in the value of these assets (i) are recorded in the Consolidated Statements of Comprehensive Income as unrealized gains or losses, and therefore do not impact net income on the Consolidated Statement of Income, and (ii) impact our Total Rithm Capital Stockholders’ Equity (net book value). Cost Assets — Assets that are not marked to market.
Changes in the value of these assets (i) are recorded in the Consolidated Statements of Comprehensive Income as unrealized gains or losses, and therefore do not impact net income on the Consolidated Statement of Operations, and (ii) impact our Total Rithm Capital Stockholders’ Equity (net book value). Cost Assets — Assets that are not marked to market.
As disclosed in Note 2, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates.
As disclosed in Note 2 to the Consolidated Financial Statements, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates.
Changes in the value of these assets (i) are recorded in the Consolidated Statement of Income, as unrealized gains or losses that impact net income, and (ii) impact our Total Rithm Capital Stockholders’ Equity (net book value). Other Comprehensive Income Assets (“OCI Assets”) — Assets that are marked to market through the Consolidated Statements of Comprehensive Income.
Changes in the value of these assets (i) are recorded in the Consolidated Statement of Operations, as unrealized gains or losses that impact net income, and (ii) impact our Total Rithm Capital Stockholders’ Equity (net book value). Other Comprehensive Income Assets (“OCI Assets”) — Assets that are marked to market through the Consolidated Statements of Comprehensive Income.
If this value declines by more than a de minimis threshold, the counterparty could require us to post additional collateral (or “margin”) in order to maintain the initial haircut on the collateral. This margin is typically required to be posted in the form of cash and cash equivalents.
If this value declines by more than a de minimis threshold, the counterparty could require us to post additional collateral, or margin, in order to maintain the initial haircut on the collateral. This margin is typically required to be posted in the form of cash and cash equivalents.
Therefore, rather than recording an investment in MSRs, we have recorded an investment in MSR financing receivables. Income from this investment (net of subservicing fees) is recorded as interest income and is grouped and presented as part of Servicing Revenue, Net in the Consolidated Statements of Income.
Therefore, rather than recording an investment in MSRs, we have recorded an investment in MSR financing receivables. Income from this investment (net of subservicing fees) is recorded as interest income and is grouped and presented as part of Servicing Revenue, Net in the Consolidated Statements of Operations.
Currently, our primary sources of financing are secured financing agreements and secured notes and bonds payable, although we have pursued in the past and may also pursue in the future one or more other sources of financing such as securitizations and other secured and unsecured forms of borrowing.
Currently, our primary sources of financing are secured financing agreements and secured notes and bonds payable, although we have in the past and may in the future also pursue one or more other sources of financing such as securitizations and other secured and unsecured forms of borrowing.
Changes in value of these assets do not impact net income in the Consolidated Statement of Income nor do they impact our Total Rithm Capital Stockholders’ Equity (net book value). An exception to these descriptions results from changes in value that represent impairment.
Changes in value of these assets do not impact net income in the Consolidated Statement of Operations nor do they impact our Total Rithm Capital Stockholders’ Equity (net book value). An exception to these descriptions results from changes in value that represent impairment.
In our efforts to identify and invest in target assets, we compete with banks, other REITs, non-bank mortgage lenders and servicers, private equity firms, alternative assets managers, hedge funds and other large financial services companies.
In our efforts to identify and invest in target assets, we compete with banks, other REITs, non-bank mortgage lenders and servicers, private equity firms, alternative asset managers, hedge funds and other large financial services companies.
Under secured financing agreements, we sell a 94 security to a counterparty and concurrently agree to repurchase the same security at a later date for a higher specified price. The sale price represents financing proceeds and the difference between the sale and repurchase prices represents interest on the financing.
Under secured financing agreements, we sell a security to a counterparty and concurrently agree to repurchase the same security at a later date for a higher specified price. The sale price represents financing proceeds and the difference between the sale and repurchase prices represents interest on the financing.
In regards to capital requirements, the updated standards require all loan sellers and servicers to maintain a minimum tangible net worth of $2.5 million plus 25 bps for Fannie Mae, Freddie Mac and private label servicing UPB plus 35 bps for Ginnie Mae servicing. This change aligns the existing Ginnie Mae capital requirement with the FHFA’s.
In regard to capital requirements, the updated standards require all loan sellers and servicers to maintain a minimum tangible net worth of $2.5 million plus 25 bps for Fannie Mae, Freddie Mac and private label servicing UPB plus 35 bps for Ginnie Mae servicing. This change aligns the existing Ginnie Mae capital requirement with the FHFA’s.
We believe that these off-balance sheet structures presented the most efficient and least expensive form of financing for these assets at the time they were entered, and represented the most common market-accepted method for financing such assets. Our exposure to credit losses related to these non-recourse, off-balance sheet financings is limited to $0.9 billion.
We believe that these off-balance sheet structures presented the most efficient and least expensive form of financing for these assets at the time they were entered and represented the most common market-accepted method for financing such assets. Our exposure to credit losses related to these non-recourse, off-balance sheet financings is limited to $1.0 billion.
Actual results may materially differ from those estimates. Market volatility and inflationary pressures and the war in Ukraine and their impact on the current financial, economic and capital markets environment, and future developments in these and other areas present uncertainty and risk with respect to our financial condition, results of operations, liquidity and ability to pay distributions.
Actual results may materially differ from those estimates. Market volatility and inflationary pressures and their impact on the current financial, economic and capital markets environment, and future developments in these and other areas present uncertainty and risk with respect to our financial condition, results of operations, liquidity and ability to pay distributions.
Discussions of 2021 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Discussions of 2022 items and year-to-year comparisons between 2022 and 2021 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES The Company’s accounting policies are more fully described in Note 2 of the Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES The Company’s accounting policies are more fully described in Note 2 to the Consolidated Financial Statements.
(F) Represents the percentage of the total principal balance of the pool that corresponds to loans that are delinquent by 90 or more days. (G) Weighted averages exclude collateral information for which collateral data was not available as of the report date.
(E) Represents the percentage of the total principal balance of the pool that corresponds to loans that are delinquent by 90 or more days. (F) Weighted averages exclude collateral information for which collateral data was not available as of the report date.
Consequently, higher interest rates on dividends paid on our preferred stock that reset to floating rates would adversely affect our cash flows. 101 Common Stock Our certificate of incorporation authorizes 2.0 billion shares of common stock, par value $0.01 per share.
Consequently, higher interest rates on dividends paid on our preferred stock that reset to floating rates would adversely affect our cash flows. 109 Common Stock Our certificate of incorporation authorizes 2.0 billion shares of common stock, par value $0.01 per share.
Our primary sources of funds are cash provided by operating activities (primarily income from loan origination and servicing), sales of and repayments from our investments, potential debt financing sources, including securitizations, and the issuance of equity securities, when feasible and appropriate.
Our primary sources of funds are cash provided by operating activities (primarily income from loan originations and servicing), sales of and repayments from our investments, potential debt financing sources, including securitizations, and the issuance of equity securities, when feasible and appropriate.
Our ability to recognize interest income on nonaccrual loans as cash interest payments are received rather than as a reduction of the carrying value of the loans is based on the recorded loan balance being deemed fully collectible. Business Combinations and Asset Acquisitions When the assets acquired and liabilities assumed constitute a business, then the acquisition is a business combination.
Our ability to recognize interest income on non-accrual loans as cash interest payments are received rather than as a reduction of the carrying value of the loans is based on the recorded loan balance being deemed fully collectible. Business Combinations and Asset Acquisitions When the assets acquired and liabilities assumed constitute a business, then the acquisition is a business combination.
We were in compliance with all of our debt covenants as of December 31, 2022. 100 Stockholders’ Equity Preferred Stock Pursuant to our certificate of incorporation, we are authorized to designate and issue up to 100.0 million shares of preferred stock, par value of $0.01 per share, in one or more classes or series.
We were in compliance with all of our debt covenants as of December 31, 2023. 108 Stockholders’ Equity Preferred Stock Pursuant to our certificate of incorporation, we are authorized to designate and issue up to 100.0 million shares of preferred stock, par value of $0.01 per share, in one or more classes or series.
On March 5, 2021, Intercontinental Exchange Inc. (“ICE”) announced that ICE Benchmark Administration Limited, the administrator of LIBOR, intends to stop publication of the majority of USD-LIBOR tenors (overnight, 1-, 3-, 6-, and 12-month) on June 30, 2023. On January 1, 2022, ICE discontinued the publication of the 1-week and 2-month tenors of USD-LIBOR.
CHANGES TO LIBOR On March 5, 2021, Intercontinental Exchange Inc. (“ICE”) announced that ICE Benchmark Administration Limited, the administrator of LIBOR, intended to stop publication of the majority of USD-LIBOR tenors (overnight, 1-, 3-, 6- and 12-month) on June 30, 2023. On January 1, 2022, ICE discontinued the publication of the 1-week and 2-month tenors of USD-LIBOR.
Additionally, we elected to measure MSR Financing Receivables at fair value, with changes in fair value flowing through Servicing Revenue, Net in the Consolidated Statements of Income. In order to evaluate the reasonableness of our fair value determinations, similar to MSRs, we engage an independent valuation firm to separately measure the fair value of our MSR Financing Receivables.
Additionally, we elected to measure MSR Financing Receivables at fair value, with changes in fair value flowing through Servicing Revenue, Net in the Consolidated Statements of Operations. In order to evaluate the 94 reasonableness of our fair value determinations, similar to MSRs, we engage an independent valuation firm to separately measure the fair value of our MSR Financing Receivables.
Repurchases may be made at any time and from time to time through open market purchases or privately negotiated transactions, pursuant to one or more plans established pursuant to Rule 10b5-1 under the Exchange Act, by means of one or more tender offers, or otherwise, in each case, as permitted by securities laws and other legal and contractual requirements.
Repurchases may be made from time to time through open market purchases or privately negotiated transactions, pursuant to one or more plans established pursuant to Rule 10b5-1 under the Exchange Act or by means of one or more tender offers, in each case, as permitted by securities laws and other legal requirements.
We finance our investments in MSRs and MSR Financing Receivables with short- and medium-term bank and public capital markets notes. These borrowings are primarily recourse debt and bear both fixed and variable interest rates offered by the counterparty for the term of the notes of a specified margin over LIBOR or SOFR.
We finance our investments in MSRs and MSR financing receivables with short- and medium-term bank and public capital markets notes. These borrowings are primarily recourse debt and bear either fixed or variable interest rates, which are offered by the counterparty for the term of the notes for a specified margin over SOFR.
Our primary uses of funds are the payment of interest, servicing and subservicing expenses, outstanding commitments (including margins and mortgage loan originations), other operating expenses, repayment of borrowings and hedge obligations, dividends and funding of future servicer advances. Total cash and cash equivalents at December 31, 2022 and 2021 was $1.3 billion.
Our primary uses of funds are the payment of interest, servicing and subservicing expenses, outstanding commitments (including margins and loan originations), other operating expenses, repayment of borrowings and hedge obligations, dividends and funding of future servicer advances. Our total cash and cash equivalents at December 31, 2023 was $1.3 billion.
TBA dollar roll transactions may also have a lower implied cost of funds than comparable repo funded transactions offering incremental return potential.
TBA dollar roll transactions may also have a lower implied cost of funds than comparable repurchase funded transactions offering incremental return potential.
(E) Involuntary prepayment rate represents the annualized rate of the involuntary prepayments (defaults) during the quarter as a percentage of the total principal balance of the pool. (F) Represents the percentage of the total principal balance of the pool that corresponds to loans that are delinquent by 90 or more days.
(D) Represents the annualized rate of the involuntary prepayments (defaults) during the quarter as a percentage of the total principal balance of the pool. (E) Represents the percentage of the total principal balance of the pool that corresponds to loans that are delinquent by 90 or more days.
Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our repurchase agreements and other debt payable.
Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our secured financing agreements and other debt payable.
At December 31, 2022 and 2021, the Company pledged residential mortgage loans with a carrying value of approximately $3.0 billion and $11.0 billion, respectively, as collateral for borrowings under repurchase agreements. A portion of collateral for borrowings under repurchase agreements is subject to daily mark-to-market fluctuations and margin calls.
At December 31, 2023 and 2022, the Company pledged residential mortgage loans with a carrying value of approximately $2.2 billion and $3.0 billion, respectively, as collateral for borrowings under repurchase agreements. A portion of collateral for borrowings under repurchase agreements is subject to daily mark-to-market fluctuations and margin calls.
These commitments are generally subject to loan agreements with covenants regarding the financial performance of the customer and other terms regarding advances that must be met before Genesis funds the commitment. INFLATION Virtually all of our assets and liabilities are financial in nature.
These commitments are generally subject to loan agreements with covenants regarding the financial performance of the customer and other terms regarding advances that must be met before Genesis and Rithm Capital fund the commitment. INFLATION Virtually all of our assets and liabilities are financial in nature.
(C) Excludes residual bonds, and certain other Non-Agency bonds, with a carrying value of $16.6 million and $1.1 million, respectively, for which no coupon payment is expected. (D) The ratio of original UPB of loans still outstanding. (E) Three month average constant prepayment rate and default rates.
(C) Excludes residual bonds and certain other Non-Agency bonds, with a carrying value of $17.5 million and $1.0 million, respectively, for which no coupon payment is expected. (D) The ratio of original UPB of loans still outstanding. (E) Three-month average constant prepayment rate and default rates.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and notes thereto, and with Part I, Item 1A, “Risk Factors.” Management’s discussion and analysis of financial condition and results of operations is intended to allow readers to view our business from management’s perspective by (i) providing material information relevant to an assessment of our financial condition and results of operations, including an evaluation of the amount and certainty of cash flows from operations and from outside sources, (ii) focusing the discussion on material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be indicative of future operating results or future financial condition, including descriptions and amounts of matters that are reasonably likely, based on management’s assessment, to have a material impact on future operations and (iii) discussing the financial statements and other statistical data management believes will enhance the reader’s understanding of our financial condition, changes in financial condition, cash flows and results of operations.
“Risk Factors.” Management’s discussion and analysis of financial condition and results of operations is intended to allow readers to view our business from management’s perspective by (i) providing material information relevant to an assessment of our financial condition and results of operations, including an evaluation of the amount and certainty of cash flows from operations and from outside sources, (ii) focusing the discussion on material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be indicative of future operating results or future financial condition, including descriptions and amounts of matters that are reasonably likely, based on management’s assessment, to have a material impact on future operations and (iii) discussing the financial statements and other statistical data management believes will enhance the reader’s understanding of our financial condition, changes in financial condition, cash flows and results of operations.
We originate or purchase residential mortgage loans conforming to the underwriting standards of the Agencies, government-insured residential mortgage loans which are insured by the FHA, VA and USDA, and Non-Agency and non-QM loans, through our SMART Loan Series.
We originate or purchase residential mortgage loans conforming to the underwriting standards of the GSEs and Ginnie Mae, government-insured residential mortgage loans which are insured by the FHA, VA and USDA, and Non-Agency and non-QM loans through our SMART Loan Series.
The Company believes that the following discussion addresses the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective and complex judgments. 81 The mortgage and financial industries are operating in a challenging and uncertain economic environment.
The Company believes that the following discussion addresses the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective and complex judgments. The mortgage and financial sectors operate in a challenging and uncertain economic environment.
Servicer advances are generally reimbursable payments made by a servicer (i) when the borrower fails to make scheduled payments due on a residential mortgage loan or (ii) to support the value of the collateral property.
Servicer advances are generally reimbursable payments made by a servicer (i) when the borrower fails to make scheduled payments due on a residential mortgage loan, including during forbearance periods, or (ii) to support the value of the collateral property.
Real Estate and Other Securities Classification and valuation — Our securities portfolio primarily consists of Agency and Non-Agency RMBS. Agency RMBS are securities issued or guaranteed as to principal and/or interest by a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S. Government, such as Ginnie Mae.
Real Estate and Other Securities Classification and valuation — Our securities portfolio primarily consists of Agency RMBS and Non-Agency residential and other securities. Agency RMBS are securities issued or guaranteed as to principal and/or interest by a federally chartered corporation, such as the GSEs, or an agency of the U.S. Government, such as Ginnie Mae.
Loans, other than PCD loans, are placed on nonaccrual status and considered non-performing when full payment of principal and interest is in doubt, which generally occurs when principal or interest is 90 days or more past due unless the loan is both well secured and in the process of collection. Loans held-for-sale are subject to the nonaccrual policy.
Loans, other than purchase credit deteriorated loans, are placed on non-accrual status and considered non-performing when full payment of principal and interest is in doubt, which generally occurs when principal or interest is 90 days or more past due unless the loan is both well secured and in the process of collection. Loans held-for-sale are subject to the non-accrual policy.
Our operating results may also be affected by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers whose mortgage loans underlie the MSRs, mortgage loans receivable, or the non-Agency RMBS held in our investment portfolio. During the year ended December 31, 2022, interest rates increased and remained elevated.
Our operating results may also be affected by credit losses in excess of initial estimates or unanticipated credit events experienced by borrowers whose mortgage loans underlie the MSRs, mortgage loans receivable, or the non-Agency RMBS held in our investment portfolio. During the year ended December 31, 2023, interest rates remained elevated.
In certain instances, the subservicer is required to reimburse us for any advances that were deemed nonrecoverable or advances that were not made in accordance with the related servicing contract. 71 We finance our servicer advances with short- and medium-term collateralized borrowings.
In certain instances, the subservicer is required to reimburse us for any advances that were deemed non-recoverable or advances that were not made in accordance with the related servicing contract. 81 We finance our servicer advances with short- and medium-term collateralized borrowings.
(D) Voluntary prepayment rate represents the annualized rate of the voluntary prepayments during the quarter as a percentage of the total principal balance of the pool. (E) Involuntary prepayment rate represents the annualized rate of the involuntary prepayments (defaults) during the quarter as a percentage of the total principal balance of the pool.
(C) Represents the annualized rate of the voluntary prepayments during the quarter as a percentage of the total principal balance of the pool. (D) Represents the annualized rate of the involuntary prepayments (defaults) during the quarter as a percentage of the total principal balance of the pool.
At December 31, 2022 and 2021, the Company pledged Non-Agency RMBS with a carrying value of approximately $946.2 million and $924.9 million, respectively, as collateral for borrowings under repurchase agreements. A portion of collateral for borrowings under repurchase agreements is subject to daily mark-to-market fluctuations and margin calls.
At December 31, 2023 and 2022, the Company pledged Non-Agency RMBS with a carrying value of approximately $958.3 million and $946.2 million, respectively, as collateral for borrowings under repurchase agreements. A portion of collateral for borrowings under repurchase agreements is subject to daily mark-to-market fluctuations and margin calls.
Financial and real estate companies continue to be affected by, among other things, market volatility, rapidly rising interest rates and inflationary pressures.
Financial and real estate companies continue to be affected by, among other things, market volatility, heightened interest rates and inflationary pressures.
The following table summarizes our preferred shares: Number of Shares Liquidation Preference (A) Dividends Declared per Share December 31, Year Ended December 31, Series 2022 2021 2022 2021 Issuance Discount Carrying Value (B) 2022 2021 2020 Series A, 7.50% issued July 2019 (C) 6,200 6,210 $ 155,002 $ 155,250 3.15 % $ 149,822 $ 1.88 $ 1.88 $ 1.88 Series B, 7.125% issued August 2019 (C) 11,261 11,300 281,518 282,500 3.15 % 272,654 1.78 1.78 1.78 Series C, 6.375% issued February 2020 (C) 15,903 16,100 397,584 402,500 3.15 % 385,289 1.59 1.59 1.60 Series D, 7.00% issued September 2021 (D) 18,600 18,600 465,000 465,000 3.15 % 449,489 1.75 0.72 — Total 51,964 52,210 $ 1,299,104 $ 1,305,250 $ 1,257,254 $ 7.00 $ 5.97 $ 5.26 (A) Each series has a liquidation preference of $25.00 per share.
The following table summarizes preferred shares: Number of Shares Liquidation Preference (A) Dividends Declared per Share December 31, Year Ended December 31, Series 2023 2022 2023 2022 Issuance Discount Carrying Value (B) 2023 2022 2021 Series A, 7.50% issued July 2019 (C) 6,200 6,200 $ 155,002 $ 155,002 3.15 % $ 149,822 $ 1.88 $ 1.88 $ 1.88 Series B, 7.125% issued August 2019 (C) 11,261 11,261 281,518 $ 281,518 3.15 % 272,654 1.78 1.78 1.78 Series C, 6.375% issued February 2020 (C) 15,903 15,903 397,584 $ 397,584 3.15 % 385,289 1.59 1.59 1.59 Series D, 7.00% issued September 2021 (D) 18,600 18,600 465,000 $ 465,000 3.15 % 449,489 1.75 1.75 0.72 Total 51,964 51,964 $ 1,299,104 $ 1,299,104 $ 1,257,254 $ 7.00 $ 7.00 $ 5.97 (A) Each series has a liquidation preference of $25.00 per share.
Both our portfolio composition (inclusive of long and short duration instruments and various operating businesses) and specific hedging instruments (including Agency MBS TBAs, interest rate swaps and others) are employed to mitigate book value volatility.
Both our portfolio composition (inclusive of long and short duration instruments and various operating businesses) and specific hedging instruments (including Agency mortgage-backed securities (“MBS”) TBAs, interest rate swaps and others) are employed to mitigate book value volatility.
As of December 31, 2022, we had outstanding secured financing agreements with an aggregate face amount of approximately $11.3 billion to finance our investments. The financing of our entire RMBS portfolio, which generally has 30- to 90-day terms, is subject to margin calls.
As of December 31, 2023, we had outstanding secured financing agreements with an aggregate face amount of approximately $12.6 billion to finance our investments. The financing of our entire RMBS portfolio, which generally has 30- to 90-day terms, is subject to margin calls.
Profit margins per loan vary by channel, with 67 correspondent typically being the lowest and DTC being the highest. We sell conforming loans to the GSEs and securitize Non-QM residential loans. We utilize warehouse financing to fund loans at origination through the sale date.
Profit margins per loan vary by channel, with Correspondent typically being the lowest and Direct to Consumer being the highest. We sell conforming loans to the GSEs and Ginnie Mae and securitize Non-QM residential loans. We utilize warehouse financing to fund loans at origination through the sale date.
The following tables summarize our Servicer Advance Investments, including the right to the basic fee component of the related MSRs (dollars in thousands): December 31, 2022 Amortized Cost Basis Carrying Value (A) UPB of Underlying Residential Mortgage Loans Outstanding Servicer Advances Servicer Advances to UPB of Underlying Residential Mortgage Loans Mr.
The following is a summary of our servicer advance investments, including the right to the basic fee component of the related MSRs (dollars in thousands): December 31, 2023 Amortized Cost Basis Carrying Value (A) UPB of Underlying Residential Mortgage Loans Outstanding Servicer Advances Servicer Advances to UPB of Underlying Residential Mortgage Loans Mr.
Department of Labor: December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021 Unemployment rate 3.5 % 3.5 % 3.6 % 3.6 % 3.9 % The following table summarizes the 10-year Treasury rate and the 30-year fixed mortgage rates: December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021 10-year U.S.
Department of Labor: December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 December 31, 2022 Unemployment rate 3.7 % 3.8 % 3.6 % 3.5 % 3.5 % The following table summarizes the 10-year Treasury rate and the 30-year fixed mortgage rates: December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 December 31, 2022 10-year U.S.
This section generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021.
This section generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022.
The results of operations of acquired businesses are included from the date of acquisition. 85 If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, we will recognize a measurement-period adjustment during the period in which we determine the amount of the adjustment, including the effect on earnings of any amounts we would have recorded in previous periods if the accounting had been completed at the acquisition date.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, we will recognize a measurement-period adjustment during the period in which we determine the amount of the adjustment, including the effect on earnings of any amounts we would have recorded in previous periods if the accounting had been completed at the acquisition date.
MSR Component (A) Excess MSRs Through Equity Method Investees Current UPB (billions) Weighted Average MSR (bps) Weighted Average Excess MSR (bps) Rithm Capital Interest in Investee (%) Investee Interest in Excess MSR (%) Rithm Capital Effective Ownership (%) Investee Carrying Value (millions) Agency $ 19.3 33 21 50.0 % 66.7 % 33.3 % $ 135.4 (A) The MSR is a weighted average as of December 31, 2022, and the Excess MSR represents the difference between the weighted average MSR and the basic fee (which fee remains constant).
MSR Component (A) Excess MSRs Through Equity Method Investees Current UPB (billions) Weighted Average MSR (bps) Weighted Average Excess MSR (bps) Rithm Capital Interest in Investee (%) Investee Interest in Excess MSR (%) Rithm Capital Effective Ownership (%) Investee Carrying Value (millions) Agency $ 17.1 33 21 50.0 % 66.7 % 33.3 % $ 114.6 (A) The MSR is a weighted average as of December 31, 2023, and the Excess MSR represents the difference between the weighted average MSR and the basic fee (which fee remains constant).
Acquired performing loans means that at the time of acquisition it is likely the borrower will continue making payments in accordance with contractual terms. Purchased non-performing loans means that at the time of acquisition the borrower will not likely make payments in accordance with contractual terms (i.e., credit-impaired).
Purchased non-performing loans means that at the time of acquisition, the borrower will not likely make payments in accordance with contractual terms (i.e., credit-impaired).
The loan servicer generally updates the FICO score when loans are refinanced or become delinquent. (B) Represents the percentage of the total principal balance of the pool that corresponds to adjustable rate mortgages. (C) Constant prepayment rate represents the annualized rate of the prepayments during the quarter as a percentage of the total principal balance of the pool.
The loan servicer generally updates the FICO score when loans are refinanced or become delinquent. (B) Constant prepayment rate represents the annualized rate of the prepayments during the quarter as a percentage of the total principal balance of the pool.
We account for loans based on the following categories: • Loans held-for-investment, at fair value • Loans held-for-sale, at lower of cost or fair value • Loans held-for-sale, at fair value As of December 31, 2022, we had approximately $4.0 billion outstanding face amount of residential mortgage loans.
We account for loans based on the following categories: • Loans held-for-investment, at fair value • Loans held-for-sale, at lower of cost or fair value • Loans held-for-sale, at fair value As of December 31, 2023, we had approximately $3.0 billion outstanding face amount of residential mortgage loans (see below).
Non-Agency RMBS are not issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae and are therefore subject to credit risk. RMBS investments are classified as either available-for-sale or accounted for under the fair value option.
Non-Agency securities are not issued or guaranteed by the GSEs or Ginnie Mae and are therefore subject to credit risk. Securities investments are classified as either available-for-sale or accounted for under the fair value option.
(C) Constant prepayment rate represents the annualized rate of the prepayments during the quarter as a percentage of the total principal balance of the pool. 73 (D) Voluntary prepayment rate represents the annualized rate of the voluntary prepayments during the quarter as a percentage of the total principal balance of the pool.
(B) constant prepayment rate represents the annualized rate of the prepayments during the quarter as a percentage of the total principal balance of the pool. 83 (C) Represents the annualized rate of the voluntary prepayments during the quarter as a percentage of the total principal balance of the pool.
We finance our Non-Agency RMBS with short-term borrowings under master repurchase agreements. These borrowings generally bear interest rates offered by the counterparty for the term of the proposed repurchase transaction (e.g., 30 days, 60 days, etc.) of a specified margin over one-month LIBOR. The repurchase agreements represent uncommitted financing.
We finance our investments in Non-Agency RMBS with short-term borrowings under master uncommitted repurchase agreements. These borrowings generally bear interest rates offered by the counterparty for the term of the proposed repurchase transaction (e.g., 30 days, 60 days, etc.) of a specified margin over SOFR.
The following table summarizes the annualized GDP growth rate: Three Months Ended December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021 Real GDP 2.9% (A) 3.2 % (0.6) % (1.6) % 6.9 % (A) Annualized rate based on the advance estimate. The following table summarizes the U.S. unemployment rate according to the U.S.
Bureau of Economic Analysis: Three Months Ended December 31, 2023 (A) September 30, 2023 June 30, 2023 March 31, 2023 December 31, 2022 Real GDP 3.3 % 4.9 % 2.1 % 2.0 % 2.6 % (A) Annualized rate based on the advance estimate. The following table summarizes the U.S. unemployment rate according to the U.S.
This excludes interest-only bonds. (B) The current amount of interest received on the underlying loans in excess of the interest paid on the securities, as a percentage of the outstanding collateral balance for the quarter ended December 31, 2022.
(B) The current amount of interest received on the underlying loans in excess of the interest paid on the securities, as a percentage of the outstanding collateral balance for the quarter ended December 31, 2023.
(I) Includes $3.0 billion of MSR notes which bear interest equal to the sum of (i) a floating rate index equal to one-month LIBOR or SOFR, and (ii) a margin ranging from 2.5% to 3.3%; and $1.8 billion of capital market notes with fixed interest rates ranging 3.0% to 5.4%.
(H) Includes $3.8 billion of MSR notes which bear interest equal to the sum of (i) a floating rate index equal to SOFR and (ii) a margin ranging from 2.5% to 3.7%; and $1.0 billion of MSR notes with fixed interest rates ranging 3.0% to 5.4%.
For the year ended December 31, 2022, we recognized deferred tax expense (benefit) of $271.2 million primarily reflecting deferred tax expense generated from changes in the fair value of MSRs, loans, and swaps held within taxable entities as well as income in our servicing and origination business segments.
For the year ended December 31, 2023, we recognized deferred tax expense (benefit) of $116.3 million primarily reflecting deferred tax expense generated from changes in the fair value of MSRs, loans, and swaps held within taxable entities, as well as income in our servicing and origination and asset management segments.
On August 5, 2022, we entered into a Distribution Agreement to sell shares of our common stock, par value $0.01 per share (the “ATM Shares”), having an aggregate offering price of up to $500.0 million, from time to time, through an “at-the-market” equity offering program (the “ATM Program”). No share issuances were made during the year ended December 31, 2022.
On August 5, 2022, we entered into a Distribution Agreement to sell shares of our common stock, par value $0.01 per share, having an aggregate offering price of up to $500.0 million, from time to time, through an “at-the-market” equity offering program (the “ATM Program”).
We will also advance funds to maintain and report foreclosed real estate properties on behalf of investors. Advances are recovered through claims to the related investor and subservicers. Per the servicing agreements, we are obligated to make certain advances on mortgages to be in compliance with applicable requirements.
We will also advance funds to maintain and to report to regulators foreclosed real estate properties on behalf of investors. Advances are recovered through claims to the related investor. Pursuant to our servicing agreements, we are obligated to make certain advances on residential mortgage loans to be in compliance with applicable requirements.
Our Series A, Series B, Series C and Series D rank senior to all classes or series of our common stock and to all other equity securities issued by us that expressly indicate are subordinated to the Series A, Series B, Series C and Series D with respect to rights to the payment of dividends and the distribution of assets upon our liquidation, dissolution or winding up.
Our Series A, Series B, Series C and 7.00% Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (“Series D”) rank senior to all classes or series of our common stock and to all other equity securities issued by us that expressly indicate are subordinated to the Series A, Series B, Series C and Series D with respect to rights to the payment of dividends and the distribution of assets upon our liquidation, dissolution or winding up.
Single-Family Rental (“SFR”) Portfolio We continue to invest in and grow our SFR portfolio and strive to become a leader in the SFR industry by acquiring and maintaining a geographically diversified portfolio of high-quality single-family homes.
Single-Family Rental (SFR) Portfolio We continue to invest in our SFR portfolio and strive to become a leader in the SFR sector by acquiring and maintaining a geographically diversified portfolio of high-quality single-family homes and leasing them to high quality residents.
We conduct our business through the following segments: Origination, Servicing, MSR Related Investments, Residential Securities, Properties and Loans, Consumer Loans and Mortgage Loans Receivable. Within our portfolio, we target complementary assets that generate stable long-term cash flows and employ conservative capital structures in an effort to generate returns across different interest rate environments.
We conduct our business through the following segments: Origination and Servicing, Investment Portfolio, Mortgage Loans Receivable, Asset Management and Corporate. Within our portfolio, we target complementary assets that generate stable long-term cash flows and employ conservative capital structures in an effort to generate returns across different interest rate environments.
Operating cash inflows for the year ended December 31, 2022 primarily consisted of proceeds from sales and principal repayments of purchased residential mortgage loans, held-for-sale, servicing fees received and net interest income received.
Operating cash inflows for the year ended December 31, 2023 primarily consist of proceeds from sales and principal repayments of purchased residential mortgage loans, held-for-sale, servicing fees received, net interest income received and net recoveries of servicer advances receivable.
In addition, a portion of collateral for borrowings under repurchase agreements is not subject to daily margin calls unless the collateral coverage percentage, a quotient expressed as a percentage equal to the current carrying value of outstanding debt divided by the market value of the underlying collateral, becomes greater than or equal to a collateral trigger.
The remaining collateral is not subject to daily margin calls unless the collateral coverage percentage, a quotient expressed as a percentage equal to the current carrying value of outstanding debt divided by the market value of the underlying collateral, becomes greater than or equal to a collateral trigger.
The difference between the collateral coverage percentage and the collateral trigger is referred to as a “margin holiday.” See Note 19 to our Consolidated Financial Statements for further information regarding financing of our residential mortgage loans.
The difference between the collateral coverage percentage and the collateral trigger is referred to as a “margin holiday.” See Note 19 to our Consolidated Financial Statements for further information regarding financing of our residential mortgage loans, including a summary of activity related to financing from December 31, 2022 to December 31, 2023.
We are generally obligated to fund all future servicer advances related to the underlying pools of mortgages on our MSRs and MSR Financing Receivables, as well as Servicer Advance Investments. Generally, we will advance funds when the borrower fails to meet contractual payments (e.g., principal, interest, property taxes, insurance).
We are generally obligated to fund all future servicer advances related to the underlying pools of residential mortgage loans on our MSRs and MSR financing receivables. Generally, we will advance funds when the borrower fails to meet, including during forbearance periods, contractual payments (e.g., principal, interest, property taxes and insurance).
We estimate the fair value of the majority of our RMBS based upon broker quotations, counterparty quotations or pricing service quotations. Pricing services generally develop their pricing of RMBS based on transaction prices of recent trades for similar financial instruments, when available.
We estimate the fair value of the majority of our securities based upon broker quotations, counterparty quotations or pricing service quotations. Pricing services generally develop their pricing based on transaction prices of recent trades for similar financial instruments, when available. When recent trades for similar financial instruments are not available, cash flow models or other pricing models are used.
The following table summarizes the net interest spread of our Agency RMBS portfolio for the year ended December 31, 2022: Net Interest Spread (A) Weighted Average Asset Yield 4.98 % Weighted Average Funding Cost 4.14 % Net Interest Spread 0.84 % (A) The Agency RMBS portfolio consists of 100.0% fixed rate securities (based on amortized cost basis).
The following table summarizes the net interest spread of our Agency RMBS portfolio for the year ended December 31, 2023: Net Interest Spread (A) Weighted Average Asset Yield 5.15 % Weighted Average Funding Cost 5.53 % Net Interest Spread (0.38) % (A) The Agency RMBS portfolio consists of 100.0% fixed-rate securities (based on amortized cost basis).
Loans are also eligible to be accounted for under the fair value option which are recorded on the Consolidated Balance Sheets at fair value and the periodic changes in fair value is recorded as a component of Change in Fair Value of Investments in the Consolidated Statements of Income.
Loans are also eligible to be accounted for under the fair value option which are recorded on the Consolidated Balance Sheets at fair value and the periodic changes in fair value is recorded as a component of realized and unrealized gains (losses), net in the Consolidated Statements of Operations.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeInterest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. 106 The interest rates on our secured financing agreements, as well as adjustable-rate mortgage loans in our securitizations, are generally based on LIBOR, which is subject to national, international, and other regulatory guidance for reform.
Biggest changeThe interest rates on our secured financing agreements, as well as adjustable-rate mortgage loans in our securitizations, are generally based on SOFR, which is subject to national, international and other regulatory guidance for reform. The interest rates on the CLO Investments Loans are variable based on SOFR or EURIBOR (subject to a floor of zero percent).
Credit risk refers to the ability of each individual borrower underlying our MSRs and MSR Financing Receivables, Excess MSRs, Servicer Advance Investments, securities and loans to make required interest and principal payments on the scheduled due dates. If delinquencies increase, then the amount of servicer advances we are required to make will also increase, as would our financing cost thereof.
Credit risk refers to the ability of each individual borrower underlying our MSRs, MSR financing receivables, Excess MSRs, servicer advance investments, securities and loans to make required interest and principal payments on the scheduled due dates. If delinquencies increase, then the amount of servicer advances we are required to make will also increase, as would our financing cost thereof.
Our pre-acquisition due diligence and processes for monitoring performance include the evaluation of, among other things, credit and risk ratings, principal subordination, prepayment rates, delinquency and default rates, and vintage of collateral. For our MSRs and MSR Financing Receivables, and Excess MSRs on Agency collateral and our Agency RMBS, delinquency and default rates have an effect similar to prepayment rates.
Our pre-acquisition due diligence and processes for monitoring performance include the evaluation of, among other things, credit and risk ratings, principal subordination, prepayment rates, delinquency and default rates, and vintage of collateral. For our MSRs, MSR financing receivables and Excess MSRs on Agency collateral and our Agency RMBS, delinquency and default rates have an effect similar to prepayment rates.
Our 107 expectation of prepayment rates is a significant assumption underlying those cash flow projections. If the fair value of MSRs and MSR Financing Receivables, Excess MSRs or the basic fee component of MSRs decreases, we would be required to record a non-cash charge, which would have a negative impact on our financial results.
Our expectation of prepayment rates is a significant assumption underlying those cash flow projections. If the fair value of MSRs and MSR financing receivables, Excess MSRs or the basic fee component of MSRs decreases, we would be required to record a non-cash charge, which would have a negative impact on our financial results.
To the extent we do not hedge against changes in interest rates, our balance sheet, results of operations and cash flows would be susceptible to significant volatility due to changes in the fair value of, or cash flows from, our investments as interest rates change.
To the extent we do not hedge against changes in interest rates, our balance sheet, results of operations and cash flows would be 113 susceptible to significant volatility due to changes in the fair value of, or cash flows from, our investments as interest rates change.
These risks are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. All of our market risk sensitive assets, liabilities and derivative positions (other than TBAs) are for non-trading purposes only.
These risks are highly sensitive to many factors, including, but not limited to, governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. All of our market risk sensitive assets, liabilities and derivative positions (other than TBAs) are for non-trading purposes only.
With respect to a significant portion of our MSRs, we have recapture agreements, as described in Note 6 to our Consolidated Financial Statements. These recapture agreements help to protect these investments from the impact of increasing prepayment rates.
With respect to a significant portion of our MSRs and Excess MSRs, we have recapture agreements, as described in Note 5 and Note 6 to our Consolidated Financial Statements. These recapture agreements help to protect these investments from the impact of increasing prepayment rates.
For a further discussion of how market risk may affect our financial position or results of operations, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Use of Estimates.” Interest Rate Risk Changes in interest rates, including changes in expected interest rates or “yield curves,” affect our investments in various ways, the most significant of which are discussed below. 105 Fair Value Impact Changes in the level of interest rates also affect the yields required by the marketplace on interest rate instruments.
For a further discussion of how market risk may affect our financial position or results of operations, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Use of Estimates.” Interest Rate Risk Changes in interest rates, including changes in expected interest rates or “yield curves,” affect our investments in various ways, the most significant of which are discussed below.
Market factors that could influence the degree of the impact of credit risk on our investments include (i) unemployment and the general economy, which impact borrowers’ ability to make payments on their loans, (ii) home prices, which impact the value of collateral underlying residential mortgage loans, (iii) the availability of credit, which impacts borrowers’ ability to refinance, and (iv) other factors, all of which are beyond our control.
For our call rights, higher delinquencies and defaults could reduce the value of the underlying loans, therefore reducing or eliminating the related potential profit. 115 Market factors that could influence the degree of the impact of credit risk on our investments include (i) unemployment levels and the general economy, which impact borrowers’ ability to make payments on their loans, (ii) home prices, which impact the value of collateral underlying residential mortgage loans, (iii) the availability of credit, which impacts borrowers’ ability to refinance and (iv) other factors, all of which are beyond our control.
Estimated Change in Book Value (in millions) Interest rate change (bps) December 31, 2022 December 31, 2021 +50bps +403.4 +488.5 +25bps +203.3 +253.6 -25bps -203.3 -253.6 -50bps -411.5 -519.8 Mortgage Basis Spread Risk Mortgage basis measures the spread between the yield on current coupon mortgage backed securities and benchmark rates including treasuries and swaps.
Estimated Change in Book Value (in millions) (A) Interest rate change (bps) December 31, 2023 December 31, 2022 +50bps +339.3 +403.4 +25bps +171.2 +203.3 -25bps -171.2 -203.3 -50bps -347.4 -411.5 (A) Amounts shown are pre-tax. Mortgage Basis Spread Risk Mortgage basis measures the spread between the yield on current coupon mortgage-backed securities and benchmark rates, including treasuries and swaps.
A lower mortgage basis would imply a lower mortgage rate which would increase prepayment speeds due to higher refinance activity and, therefore, lower fair value of our mortgage portfolio.
A lower mortgage basis would imply a lower mortgage rate which would 114 increase prepayment speeds due to higher refinance activity and, therefore, lower fair value of our mortgage portfolio. The mortgage basis is also correlated with other spread products such as corporate credit.
Estimated Change in Book Value (in millions) Mortgage basis change (bps) December 31, 2022 December 31, 2021 +20bps +0.9 +145.4 +10bps +0.6 +76.5 -10bps -0.6 -76.5 -20bps -1.8 -157.9 Prepayment Rate Exposure Prepayment rates significantly affect the value of MSRs and MSR Financing Receivables, Excess MSRs, the basic fee component of MSRs (which we own as part of our Servicer Advance Investments), Non-Agency RMBS and loans, including consumer loans.
Prepayment Rate Exposure Prepayment rates significantly affect the value of MSRs and MSR financing receivables, Excess MSRs, the basic fee component of MSRs (which we own as part of our servicer advance investments), Non-Agency RMBS and loans, including consumer loans.
For our Non-Agency RMBS and loans, higher default rates can lead to greater loss of principal. For our call rights, higher delinquencies and defaults could reduce the value of the underlying loans, therefore reducing or eliminating the related potential profit.
For our Non-Agency RMBS and loans, higher default rates can lead to greater loss of principal.
See “Risk Factors—Risks Related to Our Business—Changes in banks’ inter-bank lending rate reporting practices or how the method pursuant to which LIBOR is determined may adversely affect the value of the financial obligations to be held or issued by us that are linked to LIBOR.” The table below provides comparative estimated changes in our book value based on a parallel shift in the yield curve (assuming an unchanged mortgage basis) including changes in our book value resulting from potential related changes in discount rates.
The table below provides comparative estimated changes in our book value based on a parallel shift in the yield curve (assuming an unchanged mortgage basis), including changes in our book value resulting from potential related changes in discount rates.
We and other market participants have less experience understanding and modeling SOFR-based assets and liabilities than LIBOR-based assets and liabilities, increasing the difficulty of investing, hedging, and risk management. The process of transition involves operational risks. It is also possible that no transition will occur for many financial instruments.
The recent transition from LIBOR to SOFR involves operational risks, including but not limited to, reduced experience understanding and modeling SOFR-based assets and liabilities, which in turn increases the difficulty of investing, hedging and risk management.
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We believe our business purpose loan investments generally have limited interest rate sensitivity given that our portfolio is mostly composed of short duration mortgage loans.
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Fair Value Impact Changes in the level of interest rates also affect the yields required by the marketplace on interest rate instruments.
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Some of these reforms are already effective while others are still to be implemented. These reforms may cause such benchmarks to perform differently than in the past or have other consequences which cannot be predicted with precision.
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Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control.
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Uncertainty as to the nature of such potential changes, alternative reference rates or other reforms may adversely affect the rates on our secured financing facilities, securitizations or residential loans held for longer-term investment. If LIBOR is discontinued or is no longer quoted, the applicable base rate used to calculate interest on our repurchase agreements will be determined using alternative methods.
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The table below provides comparative estimated changes in our book value based on changes in mortgage basis. Estimated Change in Book Value (in millions) (A) Mortgage basis change (bps) December 31, 2023 December 31, 2022 +20bps +31.2 +0.9 +10bps +15.7 +0.6 -10bps -15.7 -0.6 -20bps -32 -1.8 (A) Amounts shown are pre-tax.
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The U.S. Federal Reserve, in conjunction with the ARRC, a steering committee comprised of large U.S. financial institutions, started replacing U.S. dollar LIBOR with SOFR.
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The illiquidity of our assets may make it difficult for us to sell such assets if the need or desire arises, including in response to changes in economic and other conditions. See Note 20 to our Consolidated Financial Statements for a sensitivity analysis for MSRs and MSR financing receivables. 116
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It is possible that not all of our assets and liabilities will transition away from LIBOR at the same time, and it is possible that not all of our assets and liabilities will transition to the same alternative reference rate, in each case increasing the difficulty of hedging.
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Any additional changes announced by the regulators or any other successor governance or oversight body, or future changes adopted by such body, in the method pursuant to which reference rates are determined may result in a sudden or prolonged increase or decrease in the reported reference rates.
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If that were to occur, the level of interest payments we incur may change.
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The mortgage basis is also correlated with other spread products such as corporate credit, and in the crisis of the last decade it was at a generational wide not seen before or since. The table below provides comparative estimated changes in our book value based on changes in mortgage basis.
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The illiquidity of our assets may make it difficult for us to sell such assets if the need or desire arises, including in response to changes in economic and other conditions. 108 Investment Specific Sensitivity Analyses MSRs and MSR Financing Receivables The following table summarizes the estimated change in fair value of our interests in the Agency MSRs, owned as of December 31, 2022 given several parallel shifts in the discount rate, prepayment rate and delinquency rate (dollars in thousands): Fair value at December 31, 2022 $ 6,022,266 Discount rate shift in % -20% -10% 10% 20% Estimated fair value $ 6,465,226 $ 6,236,108 $ 5,822,299 $ 5,634,990 Change in estimated fair value: Amount $ 442,960 $ 213,842 $ (199,967) $ (387,276) Percentage 7.4 % 3.6 % (3.3) % (6.4) % Prepayment rate shift in % -20% -10% 10% 20% Estimated fair value $ 6,315,071 $ 6,162,026 $ 5,902,317 $ 5,788,848 Change in estimated fair value: Amount $ 292,805 $ 139,760 $ (119,949) $ (233,418) Percentage 4.9 % 2.3 % (2.0) % (3.9) % Delinquency rate shift in % -20% -10% 10% 20% Estimated fair value $ 6,114,811 $ 6,072,475 $ 5,964,450 $ 5,899,718 Change in estimated fair value: Amount $ 92,545 $ 50,209 $ (57,816) $ (122,548) Percentage 1.5 % 0.8 % (1.0) % (2.0) % The following table summarizes the estimated change in fair value of our interests in the Non-Agency MSRs, including MSR Financing Receivables, owned as of December 31, 2022 given several parallel shifts in the discount rate, prepayment rate and delinquency rate (dollars in thousands): Fair value at December 31, 2022 $ 794,459 Discount rate shift in % -20% -10% 10% 20% Estimated fair value $ 848,320 $ 820,578 $ 769,838 $ 746,602 Change in estimated fair value: Amount $ 53,861 $ 26,119 $ (24,621) $ (47,857) Percentage 6.8 % 3.3 % (3.1) % (6.0) % Prepayment rate shift in % -20% -10% 10% 20% Estimated fair value $ 821,546 $ 806,823 $ 784,780 $ 774,700 Change in estimated fair value: Amount $ 27,087 $ 12,364 $ (9,679) $ (19,759) Percentage 3.4 % 1.6 % (1.2) % (2.5) % Delinquency rate shift in % -20% -10% 10% 20% Estimated fair value $ 819,091 $ 807,392 $ 780,436 $ 765,497 Change in estimated fair value: Amount $ 24,632 $ 12,933 $ (14,023) $ (28,962) Percentage 3.1 % 1.6 % (1.8) % (3.6) % 109 The following table summarizes the estimated change in fair value of our interests in the Ginnie Mae MSRs, owned as of December 31, 2022 given several parallel shifts in the discount rate, prepayment rate and delinquency rate (dollars in thousands): Fair value at December 31, 2022 $ 2,072,678 Discount rate shift in % -20% -10% 10% 20% Estimated fair value $ 2,235,342 $ 2,150,948 $ 1,999,920 $ 1,932,140 Change in estimated fair value: Amount $ 162,664 $ 78,270 $ (72,758) $ (140,538) Percentage 7.8 % 3.8 % (3.5) % (6.8) % Prepayment rate shift in % -20% -10% 10% 20% Estimated fair value $ 2,186,119 $ 2,126,528 $ 2,022,729 $ 1,976,292 Change in estimated fair value: Amount $ 113,441 $ 53,850 $ (49,949) $ (96,386) Percentage 5.5 % 2.6 % (2.4) % (4.7) % Delinquency rate shift in % -20% -10% 10% 20% Estimated fair value $ 2,249,518 $ 2,165,307 $ 1,972,937 $ 1,867,606 Change in estimated fair value: Amount $ 176,840 $ 92,629 $ (99,741) $ (205,072) Percentage 8.5 % 4.5 % (4.8) % (9.9) % Each of the preceding sensitivity analyses is hypothetical and should be used with caution.
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In particular, the results are calculated by stressing a particular economic assumption independent of changes in any other assumption; in practice, changes in one factor may result in changes in another, which might counteract or amplify the sensitivities.
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Also, changes in the fair value based on a 10% variation in an assumption generally may not be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. 110

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