BAY EQUITY, LLC
FINANCIAL STATEMENTS
DECEMBER 31, 2021
Table of Contents
INDEPENDENT AUDITOR’S REPORT
To the Members
Bay Equity, LLC
Concord, CA
Report on the Audit of the Financial Statements
Opinion
We have audited the financial statements of Bay Equity, LLC (the “Company”), which comprise the balance sheet as of December 31, 2021, and the related statements of income, changes in members’ equity, and cash flows for the year then ended, and the related notes to the financial statements.
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS) and the standards applicable to financial audits contained in Government Auditing Standards (GAS), issued by the Comptroller General of the United States. Our responsibilities under those standards are further described in the “Auditor’s Responsibilities for the Audit of the Financial Statements” section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued.
800.221.2509 | Flower Mound | 4880 Long Prairie Road, Suite 100 | Flower Mound, TX 75028 | p 972.221.2500 | f 972.436.887
khaaccountants.com | Denton | 2717 Wind River Lane, Suite 130 | Denton, TX 76210 | p 940.591.9300 | f 940.591.9334
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS and Government Auditing Standards will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in aggregate, they would influence the judgement made by a reasonable user based on the financial statements.
In performing an audit in accordance with GAAS and Government Auditing Standards, we:
•Exercise professional judgment and maintain professional skepticism throughout the audit.
•Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
•Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed.
•Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements.
•Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time.
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control–related matters that we identified during the audit.
Supplementary Information
Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The supplementary information, as listed in the table of contents, is presented for purposes of additional analysis as required by the Uniform Financial Reporting Standards issued by the U.S. Department of Housing and Urban Development, Office of the Inspector General, and is not a required part of the financial statements.
Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole.
Other Reporting Required by Government Auditing Standards
In accordance with Government Auditing Standards, we have also issued our report dated March 22, 2022 on our consideration of the Company’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Company’s internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Company’s internal control over financial reporting and compliance.
Flower Mound, Texas
March 22,2022
Bay Equity, LLC
Balance Sheet
December 31, 2021
| | | | | |
| December 31, 2021 |
| Assets | |
| Current assets | |
| Cash and cash equivalents | $ | 42,944,205 | |
| Escrow cash | 830,914 | |
| Accounts receivable | 12,307,399 | |
| Mortgage loans held for sale, at fair value | 321,684,344 | |
| Derivative assets | 3,354,992 | |
| Prepaid expenses | 1,767,869 | |
| Total current assets | 382,889,723 | |
| Property and equipment | |
| Computer software | 1,349,539 | |
| Computer and equipment | 4,586,933 | |
| Furniture and fixtures | 847,780 | |
| Leasehold improvements | 365,884 | |
| Transportation equipment | 187,667 | |
| Less: accumulated depreciation | (6,026,670) | |
| Total property and equipment | 1,311,133 | |
| Other Assets | |
| Restricted cash | 2,310,292 | |
| Mortgage servicing rights, at fair value | 27,658,375 | |
| Deposits | 255,947 | |
| Total other assets | 30,224,614 | |
| Total assets | $ | 414,425,470 | |
| Liabilities and Members’ Equity | |
| Current liabilities | |
| Accounts payable | $ | 5,626,303 | |
| Escrow payable | 798,252 | |
| Accrued payroll expenses | 32,890,121 | |
| Warehouse lines of credit | 304,292,503 | |
| Total current liabilities | 343,607,179 | |
| Long term liabilities | |
| Reserve for loan losses | 8,235,151 | |
| Total long term liabilities | 8,235,151 | |
| Total liabilities | 351,842,330 | |
Members’ equity | 62,583,140 | |
| Total liabilities and members’ equity | $ | 414,425,470 | |
The notes to financial statements are an integral part of this statement.
Bay Equity, LLC
Statement of Income
For the Year Ended December 31, 2021
| | | | | | |
| Year Ended | |
| December 31, 2021 | |
| Revenues | | |
| Loan origination fees, net of direct costs of $18,735,262 | $ | 211,370,532 | | |
| Gain on sale of mortgage loans, net of direct costs of $19,283,357 | 131,951,854 | | |
| Servicing fee income, net of direct costs of $2,369,681 | 6,478,406 | | |
| Interest income | 14,004,610 | | |
| Total revenues | 363,805,402 | | |
| Operating expenses | | |
| Salaries, commissions, and benefits | 238,882,284 | | |
| General and administrative expenses | 15,378,146 | | |
| Occupancy expenses | 14,111,507 | | |
| Interest expense | 13,683,418 | | |
| Advertising | 6,829,755 | | |
| Legal and professional expense | 8,393,589 | | |
| Depreciation | 617,571 | | |
| Total operating expenses | 297,896,270 | | |
| Income before provision for income tax | 65,909,132 | | |
| Provision for income tax | | |
| Income taxes | 780,857 | | |
| Total provision for income tax | 780,857 | | |
| Net income | $ | 65,128,275 | | |
The notes to financial statements are an integral part of this statement.
Bay Equity, LLC
Statement of Changes in Members’ Equity
For the Year Ended December 31, 2021
| | | | | | | | | | | | | | | | | |
| Unit Class | | Total |
| Class A | | Class B | |
| Members’ equity, January 1, 2021 | $ | 28,688,581 | | | $ | 38,448,662 | | | $ | 67,137,243 | |
| Distributions to members | (29,567,333) | | | (40,115,045) | | | (69,682,378) | |
| Net income | 27,577,163 | | | 37,551,112 | | | 65,128,275 | |
| Members’ equity, December 31, 2021 | $ | 26,698,411 | | | $ | 35,884,729 | | | $ | 62,583,140 | |
The notes to financial statements are an integral part of this statement.
Bay Equity, LLC
Statement of Cash Flows
For the Year Ended December 31, 2021
| | | | | | | | |
| | Year Ended |
| | December 31, 2021 |
| Cash flows from operating activities | | |
Net income | | $ | 65,128,275 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| Provision for loan losses | | 1,419,868 | |
| Gain on sale of mortgage loans | | (131,951,854) | |
| Depreciation | | 617,571 | |
| Loss on disposal of property and equipment | | 5,249 | |
| (Increase) decrease in assets: | | |
| Accounts receivable | | (475,840) | |
| Proceeds from sale and principal payments on mortgage loans held for sale | | 8,729,659,597 | |
| Originations and purchases of mortgage loans held for sale | | (8,301,697,632) | |
| Derivative assets | | 398,814 | |
| Prepaid expenses | | (658,955) | |
| Mortgage servicing rights | | (7,273,714) | |
| Deposits | | 10,460 | |
| Increase (decrease) in liabilities: | | |
| Accounts payable | | (10,234,592) | |
| Escrow payable | | (1,129,282) | |
| Accrued payroll expenses | | (5,031,314) | |
| Derivative liabilities | | (3,718,028) | |
| Reserve for loan losses | | (714,838) | |
| Net cash used in operating activities | | 334,353,785 | |
| Cash flows from investing activities | | |
| Purchase of property and equipment | | (718,558) | |
| Net cash used in investing activities | | (718,558) | |
| Cash flows from financing activities | | |
| Distributions to members | | (69,682,378) | |
| Principal payment of note payable | | (72,782) | |
| Net payments on warehouse lines of credit | | (278,263,406) | |
| Net cash provided by financing activities | | (348,018,566) | |
| Net decrease in cash and cash equivalents, restricted cash and escrow cash | | (14,383,339) | |
| Cash and cash equivalents, restricted cash and escrow cash at beginning of year | | 60,468,750 | |
| Cash and cash equivalents, restricted cash and escrow cash at end of year | | $ | 46,085,411 | |
| Supplemental disclosure of cash flow information | | |
| Cash paid for interest | | $ | 14,024,682 | |
| Cash paid for taxes | | 780,857 | |
The notes to financial statements are an integral part of this statement.
Bay Equity, LLC
Notes to Financial Statements
Note 1. Nature of organization
Bay Equity, LLC (the Company) was formed in the State of California on June 12, 2007, for the purpose of originating real estate mortgages for sale to government-sponsored enterprises (GSE) or third-party investors in the secondary market.
The Company is approved as a Title II, non‐supervised direct endorsement mortgagee with the United States Department of Housing and Urban Development (HUD). In addition, the Company is an approved issuer with the Government National Mortgage Association (GNMA), as well as an approved seller and servicer with the Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC).
The Company is regulated by the Department of Business Oversight under the California Residential Mortgage Lending Act and various respective agencies in states in which it is approved to operate. The Company operates retail branches in Alabama, Arizona, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Kansas, Kentucky, Massachusetts, Minnesota, Missouri, Montana, North Carolina, New Hampshire, Nevada, New Mexico, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee, Texas, Utah, Washington, Wisconsin and Wyoming.
Note 2. Summary of Significant Accounting Policies
Accounting estimates
When preparing financial statements in conformity with U.S. generally accepted accounting principles (GAAP), management must make estimates based on future events that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all demand deposits, money market funds, and cash on hand, as well as highly liquid investments, purchased with a maturity of three months or less to be cash equivalents. The Company maintains its cash balances at various financial institutions where its accounts are insured by the Federal Deposit Insurance Corporation. At December 31, 2021, cash balances exceeded the federally insured limits. However, this at risk amount is subject to fluctuation on a daily basis. The Company has not experienced any losses in such accounts and believes that it is not exposed to any significant risk with respect to such deposits.
Restricted cash
The Company maintains certain cash balances that are restricted for a specific purpose and require third party approval prior to the release of the cash.
Allowance for uncollectible receivables
Revenues are generally received from borrowers and wholesale investors within twenty to thirty days of funding. Realized loan losses are charged to expense as incurred. Based on the timing of loan funding and historical loan losses, management believes no allowance for uncollectible receivables is necessary.
Note 2. Summary of Significant Accounting Policies, continued
Mortgage loans held for sale
Mortgage loans held for sale are carried at fair value under the fair value option with changes in fair value recorded in gain on sale of mortgage loans on the statement of income. The fair value of mortgage loans held for sale committed to investors is calculated using observable market information such as the investor purchase commitment, assignment of trade (AOT) or other mandatory delivery commitment prices. The Company bases loans committed to Agency investors based on the Agency’s quoted Mortgage Backed Security (MBS) prices. The fair value of mortgage loans held for sale not committed to investors is based on quoted best execution secondary market prices. If no such quoted price exists, the fair value is determined using quoted prices for a similar asset or assets, such as MBS prices, adjusted for the specific attributes of that loan, which would be used by other market participants. Mortgage loans held for sale not calculated using observable market information is based on third party broker quotations, the underlying collateral adjusted for a valuation allowance, or market bid pricing.
Mortgage servicing rights
FASB ASC 860‐50, Transfers and Servicing, requires that Mortgage Servicing Rights (MSRs) initially be recorded at fair value at the time the underlying loans are sold. To determine the fair value of the MSR created, the Company uses a valuation model that calculates the net present value of future cash flows. The valuation model incorporates assumptions that market participants would use in estimating future net servicing revenue, including the estimated discount rate, the cost of servicing, objective portfolio characteristics, contractual service fees, ancillary income and late fees, float value, and default rates. MSRs are not actively traded in open markets; accordingly, considerable judgment is required to estimate their fair value, and changes in these estimates could materially change the estimated fair value. The Company receives a base servicing fee monthly on the outstanding principal balances of the loans, which is collected from investors.
After initially recording the MSRs at the discounted present value expected to be realized from performing specified mortgage servicing activities for others as MSRs, the Company has elected to subsequently report its MSRs at fair value, during which time the Company is exposed to fair value risk related to changes in the fair value of the Company’s MSRs. As interest rates decrease, mortgage refinancing activity may increase, resulting in faster prepayment speeds of the loans underlying the MSRs, which results in a reduction of the MSRs’ fair value. Conversely, as mortgage interest rates rise, prepayment speeds are usually slower and the value of the MSR asset generally increases. Changes in fair value are recorded in gain on sale of mortgage loans on the statement of income in the period in which changes in fair value occur. The Company obtains a valuation from an independent third party on a monthly basis to support the reasonableness of the fair value estimate generated by the Company’s internal model. MSRs are also evaluated at the end of each reporting period to determine that capitalized amounts are not in excess of their estimated fair value. Estimates of remaining loan lives and prepayment speeds are incorporated into the model. These inputs can, and generally do, change from period to period as market conditions change. Changes in these estimates could materially change the estimated fair value.
Note 2. Summary of Significant Accounting Policies, continued
Revenue recognition
FASB ASC 606, Revenue from Contracts with Customers (ASC 606), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. The majority of the Company’s revenue generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as the Company’s loans and derivatives, as well as revenue related to the Company’s mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within the Company’s disclosures.
Sale of mortgage loans
Gains and losses from the sale of mortgage loans held for sale are recognized based upon the difference between the sales proceeds and carrying value of the related loans upon sale and are recorded in gain on sale of mortgage loans on the statement of income. Sales proceeds reflect the cash received from investors through the sale of the loan and servicing release premium. If the related mortgage servicing right (MSR) is retained, the MSR addition is recorded in gain on sale of mortgage loans held on the statement of income. Gain on sale of mortgage loans held also includes the unrealized gains and losses associated with the changes in the fair value of mortgage loans and the realized and unrealized gains and losses from derivative instruments.
Mortgage loans held for sale are considered sold when the Company surrenders control over the financial assets. Control is considered to have been surrendered when the transferred assets have been isolated from the Company, beyond the reach of the Company and their creditors; the purchaser obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and the Company does not maintain effective control over the transferred assets through either an agreement that both entitles and obligates the Company to repurchase or redeem the transferred assets before their maturity or the ability to unilaterally cause the holder to return specific assets. The Company typically considers the above criteria to have been met upon acceptance and receipt of sales proceeds from the purchaser.
Loan origination fees and expenses
Loan origination fees represent revenue earned from originating mortgage loans. Loan origination fees generally represent a flat per‐loan fee amount based on a percentage of the original principal loan balance and are recognized as revenue at the time the mortgage loans are funded. Loan origination expenses are charged to operations as incurred.
Interest income
Interest income on mortgage loans held for sale is recognized for the period from loan funding to sale based upon the principal balance outstanding and contractual interest rates. Revenue recognition is discontinued when loans become 90 days delinquent, or when, in management’s opinion, the recovery of principal and interest becomes doubtful and the mortgage loans held for sale are put on nonaccrual status.
Note 2. Summary of Significant Accounting Policies, continued
Servicing fee income
Loan servicing fees includes contractually specified servicing fees, late charges, prepayment penalties, and other ancillary charges net of amounts paid to the sub-servicer. Servicing encompasses, among other activities, the following processes: billing, collection of payments, movement of cash to the payment clearing accounts, investor reporting, customer service, recovery of delinquent payments, instituting foreclosure, and liquidation of the underlying collateral. The Company recognizes servicing and ancillary fees as they are earned, which is generally upon collection of payments from the borrower.
Sale of mortgage servicing rights
A transfer of servicing rights related to loans previously sold qualifies as a sale at the date on which title passes, if substantially all risks and rewards of ownership have irrevocably passed to the transferee and any protection provisions retained by the transferor are minor and can be reasonably estimated. In addition, if a sale is recognized and only minor protection provisions exist, a liability should be accrued for the estimated obligation associated with those provisions.
Advertising
Advertising is expensed as incurred. Advertising expenses for the year ended December 31, 2021 on the accompanying statement of income is $6,829,755.
Derivative instruments
The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (interest rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with any related fees from potential borrowers, are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in the statement of income in gain on sale of mortgage loans. Fair value is based upon changes in the fair value of the underlying mortgages, estimated to be realizable upon sale into the secondary market. Fair value estimates also take into account loan commitments not expected to be exercised by customers for whatever reason, commonly referred to as fall out.
The Company manages the interest rate risk associated with its outstanding interest rate lock commitments and loans held for sale by entering into derivative loan instruments such as forward loan sales commitments, mandatory delivery commitments, options and futures contracts, whereby the Company maintains the right to deliver residential loans to investors in the future at a specified yield. Fair value is based on the estimated amounts that the Company would receive or pay to terminate the commitment at the reporting date. The Company takes into account various factors and strategies in determining the portion of the mortgage pipeline it wants to economically hedge. Management expects the derivatives will experience changes in fair value opposite to changes in the fair value of the derivative loan commitments and loans held for sale, thereby reducing earnings volatility.
Note 2. Summary of Significant Accounting Policies, continued
Property and equipment
Property and equipment are stated at cost. Depreciation of property and equipment is calculated using a straight-line method over the estimated useful life of each asset, which is generally three to five years.
Long-lived assets
The Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability is evaluated by comparing the carrying value of the asset to the undiscounted future cash flows expected to be generated by the asset. If the carrying value of an asset exceeds its estimated future cash flows, an impairment loss is recognized for the amount by which the carrying value of the asset exceeds the fair value of the asset. The Company did not identify any long-lived assets as being impaired during the year ended December 31, 2021.
Income and other taxes
The Company is a limited liability company that reports income as a partnership for federal income tax purposes. Accordingly, income taxes are the responsibility of the Company’s members. The Company incurs various states and local fees and taxes.
The Company is required to recognize, measure, classify, and disclose in the financial statements uncertain tax positions taken or expected to be taken in the Company’s tax return. Management has determined that the Company does not have any uncertain tax positions and associated unrecognized benefits that materially impact the financial statements or related disclosures. Since tax matters are subject to some degree of uncertainty, there can be no assurance that the Company’s tax returns will not be challenged by the taxing authorities and that the Company or its members will not be subject to additional tax, penalties, and interest as a result of such challenge. Various taxing authorities, including the IRS, may audit the Company. Generally, the Company’s tax returns remain open for Federal income tax examination for 3 years from the date of filing and for state franchise tax examination for 4 years from the date of filing.
Application of new accounting standard
During the year ended December 31, 2020, the Company adopted ASU No. 2016‐18, Statement of Cash Flows (Topic 230) – Restricted Cash (ASU 2016‐18). ASU 2016‐18 requires that a statement of cash flows explain the change during the reporting period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning‐of‐period and end‐of period total amounts shown on the statements of cash flows. Accordingly, the Company retrospectively changed the presentation of its statements of cash flows to conform to the requirements of ASU 2016‐18.
Note 2. Summary of Significant Accounting Policies, continued
Risks and uncertainties
In the normal course of business, companies in the mortgage banking industry encounter certain economic and regulatory risks. Economic risks include interest rate risk and credit risk. The Company is subject to interest rate risk to the extent that in a rising interest rate environment, the Company may experience a decrease in loan production, as well as decreases in the value of mortgage loans held for sale not committed to investors and commitments to originate loans, which may negatively impact the Company’s operations. Credit risk is the risk of default that may result from the borrowers’ inability or unwillingness to make contractually required payments during the period in which loans are being held for sale or serviced by the Company.
The Company sells loans to investors without recourse. As such, the investors have assumed the risk of loss or default by the borrower. However, the Company is usually required by these investors to make certain standard representations and warranties relating to credit information, loan documentation and collateral. To the extent that the Company does not comply with such representations, or there are early payment defaults, the Company may be required to repurchase the loans or indemnify these investors for any losses from borrower defaults. In addition, if loans pay‐off within a specified time frame, the Company may be required to refund a portion of the sales proceeds to the investors.
The Company’s business requires substantial cash to support its operating activities. As a result, the Company is dependent on its warehouse lines of credit, and other financing facilities in order to finance its continued operations. If the Company’s principal lenders decided to terminate or not to renew any of these financing facilities with the Company, the loss of borrowing capacity could have a material adverse impact on the Company’s financial statements unless the Company found a suitable alternative source.
Loan loss reserve
Loans sold to investors by the Company that met investor and agency underwriting guidelines at the time of sale may be subject to repurchase in the event of specific default by the borrower or subsequent discovery that underwriting standards were not met. The Company may, upon mutual agreement, indemnify the investor against future losses on such loans. The Company has established a reserve for potential losses related to these representations and warranties. In assessing the adequacy of the reserve, management evaluates various factors including actual write‐offs during the period, historical loss experience, known delinquent and other problem loans, and economic trends and conditions in the industry. Actual losses incurred are reflected as write offs against the loan loss reserve.
Note 3. Mortgage loans held for sale
Mortgage loans held for sale are as follows at December 31, 2021:
| | | | | |
| Mortgages held for sale | $ | 313,114,499 | |
| Fair value adjustment | 8,569,845 | |
| Total mortgage loans held for sale | $ | 321,684,344 | |
Note 4. Derivative Instruments
The Company enters into interest rate lock commitments (IRLCs) to originate residential mortgage loans held for sale, at specified interest rates and within a specific period of time (generally between 30 and 90 days), with customers who have applied for a loan and meet certain credit and underwriting criteria. These IRLCs meet the definition of a derivative and are reflected on the balance sheets at fair value with changes in fair value recognized in gain on sale of mortgage loans on the statement of income. Unrealized gains and losses on the IRLCs, reflected as derivative assets and derivative liabilities, respectively, are measured based on the fair value of the underlying mortgage loan, quoted agency mortgage backed security (MBS) prices, estimates of the fair value of the MSRs and the probability that the mortgage loan will fund within the terms of the IRLC, net of commission expense and broker fees. The fair value of the forward loan sales commitment and mandatory delivery commitments being used to hedge the IRLCs and mortgage loans held for sale not committed to investors are based on quoted agency MBS prices.
The key unobservable inputs used in determining the fair value of IRLCs are as follows for the year ended December 31, 2021:
| | | | | | | | |
| | Percentage |
| Pull through rate | | 93.00 | % |
| Average cost to originate | | 2.55 | % |
The following summarizes derivative instruments at December 31, 2021:
| | | | | | | | | | | | | | | | | | | | |
| | Fair Value | | Notional Amount | | |
| Interest rate lock commitment - gain | | $ | 3,236,109 | | | $ | 357,193,080 | | | (a) |
| Forward delivery contract - gain | | 118,883 | | | 377,931,369 | | | |
| Total | | $ | 3,354,992 | | | | | |
(a) Net of pull through
The Company has exposure to credit loss in the event of contractual non-performance by its trading counterparties in derivative instruments that the Company uses in its rate risk management activities. The Company manages this credit risk by selecting only counterparties that the Company believes to be financially strong, spreading the risk among multiple counterparties, by placing contractual limits on the amount of unsecured credit extended to any single counterparty and by entering into netting agreements with counterparties, as appropriate.
Note 5. Accounts Receivable
The following summarizes accounts receivable at December 31, 2021:
| | | | | |
| Receivables from investors | $ | 8,312,498 | |
| Receivable from borrowers | 478,085 | |
| Receivable from broker dealers | 29,708 | |
| Receivable from sub-servicer | 3,355,172 | |
| Other receivables | 131,936 | |
| Total accounts receivable | $ | 12,307,399 | |
The receivable from investors represents amounts due on the sale of loans and advanced on behalf of borrowers on housing finance agency and GSE loans. The receivable from borrowers represents interest due from borrowers and amounts advanced on behalf of the borrowers for the payment of taxes and insurance. The receivable from broker dealers represents either monies advanced or monies due from the settlement of hedging securities. The receivable from sub-servicer represents amounts advanced on behalf of borrowers for the payment of taxes and insurance and amounts due for mortgage servicing income. Other receivables include amounts due from employee advances and revenue on brokered loans. The Company reports these receivables at fair value. Receivables are short term in nature and generally settled shortly after the sale of loans, and therefore the carrying amount approximates fair value. No allowance for uncollectible receivables has been established at December 31, 2021, as management has determined that all amounts are fully collectible.
Note 6. Mortgage servicing rights
The following summarizes the activity of MSRs for the year ended December 31, 2021:
| | | | | | | | | | | |
| Loan Count | | UPB |
| Servicing Portfolio UPB at beginning of year | 8,108 | | $ | 2,608,645,432 | |
| Additions obtained from sale of financial assets | 3,526 | | 1,209,707,219 | |
| Decrease, including sales and loan payoffs | (3,139) | | (1,031,466,511) | |
| Other Changes (Principal reductions) | — | | (98,135,578) | |
| Servicing Portfolio UPB at end of year | 8,495 | | $ | 2,688,750,561 | |
| | | |
| Balance at beginning of year | | | $ | 20,384,661 | |
| Additions obtained from sale of financial assets | | | 11,945,340 | |
| Decrease, including sales and loan payoffs | | | (9,501,252) | |
| Unrealized gain/loss | | | 4,829,626 | |
| Balance at end of year | | | $ | 27,658,375 | |
At December 31, 2021, the unpaid principal balance of mortgage loans serviced approximated $2,688,750,561. Conforming conventional loans serviced by the Company are sold to FNMA and FHLMC on a non‐recourse basis, whereby foreclosure losses are generally the responsibility of FNMA and FHLMC, and not the Company. The government loans serviced by the Company are secured through GNMA, whereby the Company is insured against loss by FHA or partially guaranteed against loss by the Veterans Administration.
The fair value of capitalized MSRs at December 31, 2021 was approximately $27,658,375.
Note 7. Warehouse lines of credit
Mortgage loans held for sale are pledged as collateral for bank warehouse credit lines and purchase participation facilities. At December 31, 2021, the Company had $760,000,000 of these facility line borrowings available that are payable subject to terms customary under mortgage warehousing line of credit agreements.
| | | | | | | | | | | | | | |
| | Facility Limit | | Outstanding |
| Warehouse credit facilities | | $ | 535,000,000 | | | $ | 204,844,200 | |
| Purchase participation facility | | 225,000,000 | | | 99,448,303 | |
Under the terms of these credit lines, the Company is required to maintain various financial and other covenants. These financial covenants include, but are not limited to, maintaining (i) a minimum tangible net worth, (ii) a minimum liquidity, (iii) a minimum current ratio, (iv) a maximum ratio of total liabilities to net worth, (v) a maximum leverage ratio and (vi) pre-tax net income requirements.
Interest rates and fees charged are based on the LIBOR cost of funds index plus margins ranging from 2.10% to 3.00% and various per file charges ranging from $65 to $250.
Note 8. Members’ equity
The Company has authorized and issued two classes of ownership units as of December 31, 2021 as follows:
| | | | | | | | | | | | | | |
| | Units Authorized | | Units Issued & Outstanding |
| Class A Units | | 3,250,000 | | 2,958,335 |
| Class B Units | | 8,300,000 | | 4,046,523 |
| Class D Units | | 4,000,000 | | — | |
| | 15,550,000 | | 7,004,858 |
Holders of Class A and B units are entitled to one vote for each unit held. Class A , B and D holders have pro-rata distribution rights in proportion to each holder’s positive capital account balance.
The Company is authorized to issue 1,868,867 compensatory class B units for future performance incentives for officers, managers, agents, or consultants. As of December 31, 2021, the Company had issued 1,865,708 compensatory units. Total distributions paid to class A unit holders in 2021 was $29,567,333. Total distributions paid to class B unit holders in 2021 was $40,115,045.
Class D unit members receive a preferred return of 8% per annum and are not entitled to voting privileges. After the class D unit preferred return, Class A, B, and D holders have pro-rata distribution rights in proportion to each holder’s positive capital account balance until the class D capital is returned in full. Class D units may be redeemed by the holders after one month subject to the Board of Managers approval. If the redemption is not approved by the Company and the unit holding period is 1 year or more, the units may be converted to Class B units, at the option of the holder, at a fixed conversion ratio of 2 for 1. Class D units may be redeemed by the Company at any time, with a 10-day notice provided to the holders, at the issue price of $1.50 per unit. There were no outstanding class D units at December 31, 2021.
Note 8. Members’ equity, continued
On December 31, 2021, the members of the Company contributed all of their membership interest to BE Holdco, LLC in exchange for all of membership interests of BE Holdco, LLC.
Note 9. Escrow Accounts
Cash assets held in escrow on behalf of borrowers and investors (escrow liability) are maintained in custodial accounts by a federally insured bank. At December 31, 2021, the escrow liability and cash held in demand deposit accounts was $798,252 and $830,914, respectively.
Note 10. Employee benefit plan
The Company has a qualified 401(k) Plan (the "Plan"), effective January 1, 2010, to provide retirement and incidental benefits for its employees. Full-time employees and part-time employees of the Company are eligible to participate in the Plan after 90 days of employment following their date of hire. The Company may make contributions to the Plan in an amount which is determined annually by the Board of Managers of the Company at the end of each Plan year. The Company has the right under the Plan to amend or terminate the Plan. Company contributions were $0 in 2021.
Note 11. Commitments and contingencies
Loan loss reserve
The Company's revenues are derived primarily from the origination and sale of mortgage loans secured by residential real estate throughout the United States. The Company utilizes a combination of warehouse lines of credit, other liabilities and equity to fund the mortgage loans it originates. The Company records the mortgage loans it funds at fair value.
The Company sells loans it originates both servicing retained and servicing released. Under a servicing released sale, the Company sells the rights to future principal and interest from the loan as well as the rights to future loan servicing income. Further, on a servicing release sale, the risk of loss or default by the borrower is generally transferred to the investor. However, the Company is required by these investors to make certain representations relating to credit information, loan documentation and collateral. These representations and warranties may extend through the contractual life of the mortgage loan.
Subsequent to the sale, if deficiencies in the loan are discovered, the Company may be obligated to repurchase the respective mortgage loan or indemnify the investors for any losses from borrower defaults, if such deficiency or defect cannot be cured within the specified period following discovery. In the case of early payoffs and early defaults on certain loans, the Company may be required to repay all, or a portion of, the premium initially paid by the investor. The estimated obligation associated with early payoffs and early defaults is calculated based on historical loss experience by type of loan.
Note 11. Commitments and contingencies, continued
Loan loss reserve, continued
The obligation for losses related to the representations and warranties and other provisions discussed above is initially recorded at its estimated fair value, which includes a projection of expected future losses as well as a market based premium. On servicing release loans, the Company does not maintain nor have access to the current balances and loan performance data with respect to the individual loans previously sold to investors. Accordingly, the Company is unable to determine, with precision, its maximum exposure under its representations and warranties. However, the Company utilizes the original loan balance (before it was sold to an investor), historical and projected loss frequency and loss severity ratios by loan segment, claims history (adjusted for recent trends in claims experience) as well as analyses of loss claims in process to estimate its exposure to losses on loans previously sold.
Accordingly, subsequent adjustments to the obligation, if any, are not made based on changes in the fair value of the obligation, which might include an estimated change in losses that may be expected in the future, but are made once further losses are estimated to be both probable and estimable.
As of December 31, 2021, the Company estimated the future losses due to representation and warranty issues to be $8,235,151 based on the methodology described above. Given current general industry trends in mortgage loans, the impact of the health pandemic and housing prices, market expectations around losses related to the Company's obligations could vary significantly from the estimated obligation recorded as of the balance sheet date above.
The activity in the loan loss reserve for mortgage loans held for sale is as follows for the year ended December 31, 2021:
| | | | | |
| Balance at the beginning of the year | $ | 7,530,121 | |
| Provision for loan losses | 1,419,868 | |
| Charges to Reserve | (714,838) | |
| Balance at the end of the year | $ | 8,235,151 | |
Because of the uncertainty in the various estimates underlying the loan loss reserve, there is a range of losses in excess of the recorded loan loss reserve that is reasonably possible. The estimate of the range of possible loss for representations and warranties does not represent a probable loss and is based on current available information, significant judgment, and a number of assumptions that are subject to change.
Regulatory contingencies
The Company is subject to periodic audits and examinations, both formal and informal in nature, from various federal and state agencies, including those made as part of regulatory oversight of mortgage origination, servicing and financing activities. Such audits and examinations could result in additional actions, penalties or fines by state or federal governmental bodies, regulators or the courts.
Note 11. Commitments and contingencies, continued
Commitments to extend credit
The Company enters into IRLCs with borrowers who have applied for residential mortgage loans and have met certain credit and underwriting criteria. These commitments expose the Company to market risk if interest rates change and the underlying loan is not economically hedged or committed to an investor. The Company is also exposed to credit loss if the loan is originated and not sold to an investor and the mortgagor does not perform. The collateral upon extension of credit typically consists of a first deed of trust in the mortgagor’s residential property. Commitments to originate loans do not necessarily reflect future cash requirements as some commitments are expected to expire without being drawn upon.
Operating leases
The Company leases office space and equipment under various operating lease arrangements expiring through February 2026. The Company subleased certain office spaces to third parties during the year ended December 31, 2021. Total sublease income, included in occupancy expense was approximately $540,000.
Total rent expense under all operating leases amounted to $5,341,779 for the year ended December 31, 2021, and is included in occupancy expense on the accompanying statement of income.
Future minimum rental payments under long‐term operating leases are as follows:
| | | | | |
| Years ending December 31, | |
| 2022 | $ | 5,717,718 | |
| 2023 | 1,666,027 | |
| 2024 | 315,955 | |
| 2025 | 140,296 | |
| Thereafter | 64,624 | |
| $ | 7,904,620 | |
Litigation and regulatory
From time to time, the Company is routinely and currently involved in a number of legal proceedings, including, but not limited to, judicial, arbitration, regulatory and governmental proceedings related to matters that arise in connection with the conduct of the Company’s business. The Company seeks to resolve all legal proceedings and other matters in the manner management believes is in the best interest of the Company and contests liability, allegations of wrongdoing and, where applicable, the amount of damages or scope of any penalties or other relief sought as appropriate in each pending matter.
Based on current knowledge, and after consultation with counsel, management believes that the current legal accrued liability within accounts payable and accrued expenses, is appropriate, and the amount of any incremental liability arising from these matters is not expected to have a material adverse effect on the financial condition of the Company.
Note 11. Commitments and contingencies, continued
In accordance with the regulatory requirements of HUD, governing non‐supervised, direct endorsement mortgagees, the Company is required to maintain a minimum net worth (as defined by HUD Title II requirements). As of December 31, 2021, the Company had adjusted net worth of $60,692,394 and liquid assets of $42,944,205.
In accordance with the regulatory and enhanced requirements of GNMA, governing issuers of GNMA securities, the Company is required to maintain a net worth (as defined by GNMA) of $2,620,378. At December 31, 2021, the Company exceeded the regulatory net worth requirement by $58,072,016.
Note 12. Fair value measurements
FASB ASC 820, Fair Value Measurements and Disclosures, (ASC 820) defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not assumptions specific to the entity.
ASC 820 specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon the market data obtained from independent sources (observable inputs). In accordance with ASC 820, the following summarizes the fair value hierarchy:
Level 1 Inputs – Unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has the ability to access.
Level 2 Inputs – Inputs other than the quoted market prices in active markets that are observable either directly or indirectly.
Level 3 Inputs – Inputs based on prices or valuation techniques that are unobservable and significant to the overall fair value measurements.
ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurements. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
While the Company believes its valuation methods are appropriate and consistent with those used by other market participants, the use of different methods or assumptions to estimate the fair value of certain financial statement items could result in a different estimate of fair value at the reporting date. The significant unobservable inputs used in the fair value measurement may result in significantly different fair value measurements if any of those inputs were to change in isolation. Generally, a change in the assumptions used in the fair value measurement would be accompanied by a directionally opposite change in other assumptions. Those estimated values may differ significantly from the values that would have been used had a readily available market for such items existed, or had such items been liquidated, and those differences could be material to the financial statements.
Note 12. Fair value measurements, continued
The following is a description of the valuation methodologies used for assets and liabilities measured at fair value. There have been no changes in the methodologies used at December 31, 2021.
Mortgage loans held for sale – The fair value of mortgage loans held for sale based on Level 2 inputs is determined, when possible, using either quoted secondary‐market prices or investor purchase commitments. If no such quoted price exists, the fair value of a loan is determined using quoted prices for a similar asset or assets, adjusted for the specific attributes of that loan, which would be used by other market participants.
Derivative instruments – The fair value of IRLCs is derived by valuation models incorporating market pricing for instruments with similar characteristics, commonly referred to as best execution pricing, or investor commitment prices for best effort IRLCs. The valuation models used to value the IRLCs have unobservable inputs, such as an estimate of the fair value of the servicing rights expected to be recorded upon sale of the loans, estimated costs to originate the loans, and the pull through rate, and are therefore classified as Level 3 within the fair value hierarchy.
The fair value of forward sale commitments is based on unobservable market pricing for similar instruments and are therefore classified as Level 3 within the fair value hierarchy.
Mortgage servicing rights – The fair value of MSRs is difficult to determine because MSRs are not actively traded in observable stand‐alone markets. Management uses a discounted cash flow approach to estimate the fair value of MSRs. This approach consists of projecting servicing cash flows discounted at a rate that management believes market participants would use in their determinations of fair value. The key assumptions used in the estimation of the fair value of MSRs include prepayment speeds, discount rates, default rates, cost to service, contractual servicing fees, escrow earnings and ancillary income. The fair value of MSRs is based on unobservable market pricing for similar instruments and are therefore classified as Level 3 within the fair value hierarchy.
Assets and liabilities measured at fair value
The following are the major categories of assets and liabilities measured at fair value on a recurring basis as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Level 1 | | Level 2 | | Level 3 | | Total |
| Mortgage loans held for sale | | $ | — | | | $ | 321,684,344 | | | $ | — | | | $ | 321,684,344 | |
| Derivative assets | | — | | | — | | | 3,354,992 | | | 3,354,992 | |
| Mortgage servicing rights | | — | | | — | | | 27,658,375 | | | 27,658,375 | |
| | $ | — | | | $ | 321,684,344 | | | $ | 31,013,367 | | | $ | 352,697,711 | |
Note 13. Concentrations
The Company sold approximately 45% of its originated loans to two investors during the year. Management believes no risk is present under these arrangements due to an active market of investors available to purchase mortgage loans.
Note 14. Report on compliance with servicing standards for mortgage bankers
The Company utilizes a third-party servicing entity to perform all servicing functions (sub-servicing) on its portfolio of loans for which it retains servicing rights. Accordingly, the Company obtained the servicing· entity's Report on Compliance with Servicing Standards for Mortgage Bankers certifying that the Servicing Entity complied with the minimum servicing standards identified in the Mortgage Bankers Association of America's "Uniform Single Attestation Program for Mortgage Bankers (USAP)" as of and for the year ended December 31, 2021.
Note 15. Subsequent events
On January 11, 2022, Redfin, a public entity, entered into a merger agreement with BE Holdco, LLC. Under the terms of the merger agreement, the purchase price is estimated to be $135 million, which represents a $72.50 million premium over the Company’s estimated tangible book value as of December 31, 2021. The final purchase price will be determined by the same premium over the tangible book value as of the closing date, subject to certain transaction related adjustments. Two-thirds of the purchase price will be paid in cash and one-third will be paid in Redfin stock. The transaction is scheduled to close in April 2022.
The Company has evaluated subsequent events through March 22, 2022, the date which the financial statements were available to be issued.
Bay Equity, LLC
Supplementary Information
Computation of Adjusted Net Worth to Determine Compliance with HUD Net Worth Requirements
December 31, 2021
| | | | | |
| FHA servicing portfolio at end of fiscal year under audit | $ | 34,393,736 | |
| FHA originations - FHA-insured Title II loan originations during the fiscal year | 938,462,597 | |
| FHA purchases - FHA-insured Title II third-party originator purchases during the fiscal year | — | |
| Total FHA loan activity | 972,856,333 | |
| FHA-insured Title II loan originations retained at the fiscal year end | 34,566,863 | |
| FHA-insured Title II third-party originator purchases retained at the end of fiscal year | — | |
| Adjustments | 34,566,863 | |
| Total adjusted FHA loan activity | 938,289,470 | |
| Minimum net worth required | 1,000,000 | |
| Additional net worth required (If adjusted FHA loan activity is greater than $25 million, then subtract $25 million from adjusted FHA loan activity and multiply the results by 1%) | 9,132,895 | |
| Total net worth required | $ | 2,500,000 | |
| Members’ equity per balance sheet | 62,583,140 | |
| Less: unacceptable assets | (1,890,746) | |
| Adjusted net worth for HUD purposes | 60,692,394 | |
| Less: minimum net worth required | 2,500,000 | |
| Adjusted net worth above minimum net worth required | $ | 58,192,394 | |
Computation of Capital Requirements Pursuant to GNMA Requirements
December 31, 2021
A.Capital requirement for depository institutions:
| | | | | | | | | | | |
| Tier 1 capital | $ | — | | | |
| Total capital | $ | — | | | |
| | | |
| Risk-based assets | $ | — | | | |
| Total assets | $ | — | | | |
| | | |
| Tier 1 capital-total assets | | | |
| Tier 1 capital-risk-based assets | | | |
| Total capital-risk-based assets | | | |
| | | |
| | | Meets requirement? |
| | | (yes-no) |
| | | |
| 5% of tier 1 capital-total assets | $ | — | | | |
| 6% of tier 1 capital-risk-based assets | $ | — | | | |
| 10% of total capital-risk-based assets | $ | — | | | |
B.Capital requirement for nondepository institutions:
| | | | | | | | | | | |
| Total adjusted net worth | $ | 60,692,394 | | | |
| Total assets | $ | 414,425,470 | | | |
| | | Meets requirement? |
| | | (yes-no) |
| | | |
| Total assets | 15 | % | | Yes |
Computation of Adjusted Net Worth Pursuant to GNMA Requirements
December 31, 2021
| | | | | | | | | | | | | | | | | |
A. Adjusted net worth calculation: | | | | | |
| Members’ equity per statement of financial condition at end of reporting period | | | | | $ | 62,583,140 | |
| Less: | | | | | |
| Itemized unacceptable assets | | | | | |
| 1. Transportation equipment | | | $ | 122,877 | | | |
| 2. Prepaid expenses | | | $ | 1,767,869 | | | |
| 3. | | | $ | — | | | |
| Total unacceptable assets | | | | | $ | 1,890,746 | |
| | | | | |
| Adjusted net worth | | | | | $ | 60,692,394 | |
| | | | | |
B. Required net worth calculation: | | | | | |
| Unpaid principal balance (UPB) of securities outstanding | | | | | |
| UPB in $ | | # of pools | | |
| Single family | $ | 34,393,736 | | | 26 | | | |
| Multifamily | $ | — | | | | | |
| HMBS | $ | — | | | | | |
| MH | $ | — | | | | | |
| | | | | |
| | | Total UPB | | $ | 34,393,736 | |
| | | | | |
| Plus: | | | | | |
| | | | | |
| Outstanding balance of available commitment authority and pools funded | | | | | |
| | | | | |
| Single family | $ | 122,981,776 | | | | | |
| Multifamily | $ | — | | | | | |
| HMBS | $ | — | | | | | |
| MH | $ | — | | | | | |
| | | Total | | $ | 122,981,776 | |
| | | | | |
| Total outstanding portfolio, commitment authority, and pools funded | | | | | $ | 157,375,512 | |
| Required net worth | | | | | $ | 3,050,814 | |
| | | | | |
C. Excess (deficit) net worth: | | | | | $ | 57,641,580 | |
Computation of Liquid Assets Requirement Pursuant to GNMA Requirements
December 31, 2021
| | | | | | | | | | | | | | | | | |
A. Liquid asset calculation: | | | | | |
| Required net worth | | | $ | 2,620,378 | | | |
| | | | | |
| Acceptable liquid assets | | | | | |
1.Cash in banks | $ | 42,944,205 | | | | | |
| 2. | $ | — | | | | | |
| 3. | $ | — | | | | | |
| 4. | $ | — | | | | | |
| 5. | $ | — | | | | | |
| 6. | $ | — | | | | | |
| | | | | |
| Total liquid assets | | | $ | 42,944,205 | | | |
| | | | | |
B. Required liquid asset: | | | | | |
| | | Meets requirement? | | |
| Single-family issuer liquidity requirement | | | (yes-no) | | |
| (Greater of $1,000,000 or .10% of outstanding single-family securities) | $ | 1,000,000 | | | Yes | | |
| | | | | |
| | | Meets requirement? | | |
| All other issuer types liquidity requirement | | | (yes-no) | | |
| (Total liquid assets-required net worth) | | | | | |
| | | | | |
| Multiple program participation | | | | | |
| Liquid assets | Required | | Actual | | |
| Single family | $ | — | | | $ | — | | | |
| Multifamily | $ | — | | | $ | — | | | |
| HMBS | $ | — | | | $ | — | | | Meets requirement? |
| MH | $ | — | | | $ | — | | | (yes-no) |
| Total | $ | — | | | $ | — | | | |
Computation of Insurance Requirement Pursuant to GNMA Requirements
December 31, 2021
| | | | | | | | | | | | | | | | | |
A. Identification of affiliated Ginnie Mae Issuers: | | | | | |
| Affiliated Ginnie Mae issuers: | None |
| (Issuer name and Ginnie Mae issuer identification number) |
| | | | | |
| Affiliated issuers on same insurance policies: | None |
| (Issuer name and Ginnie Mae issuer identification number) |
| | | | | | | | |
| B. Required insurance calculation: | | |
| | |
| Servicing Portfolio: | | |
| Ginnie Mae | | $ | 63,757,760 | |
| Fannie Mae | | $ | 1,237,550,541 | |
| Freddie Mac | | $ | 1,387,442,260 | |
| Conventional (other) | | $ | — | |
| Remaining principal balance of total servicing portfolio | | $ | 2,688,750,561 | |
| Required fidelity bond coverage | | $ | 3,635,938 | |
| Required mortgage servicing errors and omissions coverage | | $ | 3,635,938 | |
| | |
| C. Verification of insurance coverage: | | |
| | |
| Fidelity bond coverage at end of reporting period | | $ | 10,000,000 | |
| Mortgage servicing errors and omissions coverage at the end of reporting period | | $ | 10,000,000 | |
| | |
| D. Excess (deficit) insurance coverage: | | |
| Fidelity bond coverage | | $ | 6,364,062 | |
| Required mortgage servicing errors and omissions coverage | | $ | 6,364,062 | |
| | |
| E. Policies contain the required elements | | |
| Fidelity bond coverage | | Yes |
| Mortgage servicing errors and omissions coverage | | Yes |
FHA Lender Recertification - Financial Data Template
As of and For the Year Ended December 31, 2021
Balance Sheet - Assets
| | | | | | | | |
| Line Item # | Title | Value |
| 100 | Cash and Cash Equivalents | $ | 42,944,205 | |
| 101 | Escrow Deposit Cash | $ | 830,914 | |
| 102 | Restricted Cash / Compensating Balances | $ | 2,310,292 | |
| 103 | Trading Account Securities | $ | — | |
| 104 | Net Mortgage Servicing Rights | $ | 27,658,375 | |
| 105 | Other Real Estate Owned at Net Realizable Value | $ | — | |
| 106 | Loans Held for Investment | $ | — | |
Balance Sheet - Unacceptable Assets
| | | | | | | | |
| Line Item # | Title | Value |
| 200 | Pledged Assets | $ | — | |
| 201 | Assets Due from an Officer, Stockholder, or Related Entity | $ | — | |
| 202 | Personal Interest Investment | $ | — | |
| 203 | Investment in Related Entity, Greater than Equity as Adjusted | $ | — | |
| 204 | Intangible Assets, Net of Amortization | $ | — | |
| 205 | Value of Servicing Contract in Accordance with ASC 948 and ASC 860 | $ | — | |
| 206 | Assets not Readily Marketable | $ | — | |
| 207 | Marketable Security in Excess of Cost or Market | $ | — | |
| 208 | Amount in Excess of Foreclosure Value | $ | — | |
| 209 | Assets used for Personal Enjoyment | $ | — | |
| 210 | Other Unacceptable Assets | $ | 122,877 | |
| 211 | Contributed Property in Excess of Appraised Value | $ | — | |
| 212 | Real Property | $ | — | |
| 213 | Prepaid Expenses | $ | 1,767,869 | |
| 214 | Deferred Tax Asset | $ | — | |
| 215 | Total Unacceptable Assets | $ | 1,890,746 | |
Balance Sheet - Liability
| | | | | | | | |
| Line Item # | Title | Value |
| 300 | Escrows Payable | $ | 798,252 | |
Statement of Operations and Equity - Revenue
| | | | | | | | |
| Line Item # | Title | Value |
| 400 | Gross Interest Income | $ | 14,004,610 | |
| 401 | Net Marketing Gain (Loss) on Loans and MBS sold with servicing retained | $ | 24,719,344 | |
| 402 | Net Marketing Gain (Loss) on Loans and MBS sold with servicing released including the Servicing Release Premium | $ | 103,063,188 | |
| 403 | Net Gain (Loss) on Sales of Servicing Rights | $ | 57,783 | |
| 404 | Net Gain (Loss) from Servicing Valuations | $ | 4,111,539 | |
| 405 | Net Gain (Loss) on Sale of Securities | $ | — | |
| 406 | Net Gain (Loss) on Sale of OREO | $ | — | |
| 407 | Retail Origination Fees | $ | 171,521,937 | |
| 408 | Net Loan Administration Income | $ | 6,478,406 | |
| 409 | Correspondent and Broker Fee Income | $ | 4,734,765 | |
| 410 | Other Retail Origination Income | $ | 35,113,830 | |
| 411 | Other Income (Loss) Related to Mortgage Lending Activities | $ | — | |
| 412 | Other Income (Loss) Not Related to Mortgage Lending Activities | $ | — | |
| 413 | Total Revenue | $ | 363,805,402 | |
Statement of Equity
| | | | | | | | |
| Line Item # | Title | Value |
| 500 | Balance at Beginning of the Year, as Reported | $ | 67,137,243 | |
| 501 | Prior Period Adjustments | $ | — | |
| 502 | Balance at Beginning of the Year, Restated | $ | 67,137,243 | |
| 503 | Net Income | $ | 65,128,275 | |
| 504 | Dividend / Distribution | $ | (69,682,378) | |
| 505 | Contributions - from Cash Flow Statement | $ | — | |
| 506 | Contributions - non-cash | $ | — | |
| 507 | Other Equity | $ | — | |
| 508 | Ending Balance | $ | 62,583,140 | |
Net Worth
| | | | | | | | |
| Line Item # | Title | Value |
| 600 | FHA Servicing Portfolio | $ | 34,393,736 | |
| 601 | FHA Originations | $ | 938,462,597 | |
| 602 | FHA Purchases | $ | — | |
| 603 | Subtotal - FHA Loan Activity | $ | 972,856,333 | |
| 604 | FHA Origination Servicing Retained | $ | 34,566,863 | |
| 605 | FHA Purchase Servicing Retained | $ | — | |
| 606 | Subtotal - Servicing Retained Adjustments | $ | 34,566,863 | |
| 607 | Total Adjusted FHA Loan Activity | $ | 938,289,470 | |
| 608 | Net Worth Required Baseline | $ | 1,000,000 | |
| 609 | Additional Net Worth Required | $ | 9,132,895 | |
| 610 | Total Minimum Net Worth Required | $ | 2,500,000 | |
| 611 | Stockholder Equity - Ending Balance | $ | 62,583,140 | |
| 612 | Total Unacceptable Assets | $ | 1,890,746 | |
| 613 | Adjusted Net Worth | $ | 60,692,394 | |
| 614 | Adjusted Net Worth Above/Below Required Minimum Amount | $ | 58,192,394 | |
Liquidity
| | | | | | | | |
| Line Item # | Title | Value |
| 700 | Cash and Cash Equivalents | $ | 42,944,205 | |
| 701 | Trading Account Securities | $ | — | |
| 702 | Total of Liquid Assets per HUD Guidelines | $ | 42,944,205 | |
| 703 | Liquid Assets Required | $ | 500,000 | |
| 704 | Liquid Assets Above/Below Required Amount | $ | 42,444,205 | |
INDEPENDENT AUDITOR’S REPORT ON COMPLIANCE FOR EACH MAJOR HUD PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE CONSOLIDATED AUDIT GUIDE FOR AUDITS OF HUD PROGRAMS
INDEPENDENT AUDITOR’S REPORT
To the Board of Members of
Bay Equity, LLC
Concord, CA
Report on Compliance for Each Major Program
Opinion on Each Major Program
We have audited Bay Equity, LLC’s (the Company) compliance with the compliance requirements described in the Consolidated Audit Guide for Audits of HUD Programs (Audit Guide) that could have a direct and material effect on each of the Company’s major U.S. Department of Housing and Urban Development (HUD) programs for the year ended December 31, 2021. The Company’s major HUD programs and the related direct and material compliance requirements are as follows:
| | | | | |
| NAME of MAJOR PROGRAM | Direct and Material Compliance Requirements |
| All Lenders Title II | Quality Control Plan, Branch Office Requirements, Loan Origination, Loan Servicing, Federal Financial and Activity Reports, Lender Annual Recertification, Adjusted Net Worth, Liquidity and Licensing, Loan Settlement, Escrow Accounts, Kickbacks |
| GNMA | Federal financial reports, eligibility to issue mortgage-back securities, review of custodial documents, issuer’s administration of pooled mortgages, review of monthly accounting reports and quarterly submissions, securities marketing and trading practices, adjusted net worth, institution-wide capital requirements and liquid assets requirements |
In our opinion, the Company complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on each of its major HUD programs for the year ended December 31, 2021.
800.221.2509 | Flower Mound | 4880 Long Prairie Road, Suite 100 | Flower Mound, TX 75028 | p 972.221.2500 | f 972.436.887
khaaccountants.com | Denton | 2717 Wind River Lane, Suite 130 | Denton, TX 76210 | p 940.591.9300 | f 940.591.9334
Basis for Opinion on Each Major Program
We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America (GAAS); the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the Audit Guide. Our responsibilities under those standards and the Audit Guide are further described in the Auditor’s Responsibilities for the Audit of Compliance section of our report.
We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with relevant ethical requirements relating to our audit. We believe that our audit evidence provides a reasonable basis for our opinion on compliance for each major HUD program. Our audit does not provide a legal determination of the Company’s compliance with the compliance requirements referred to above.
Responsibilities of Management for Compliance
Management is responsible for compliance with the requirements referred to above and for the design, implementation, and maintenance of effective internal control over compliance with the requirements of laws, regulations, rules, and provisions of contracts or grant agreements applicable to the Company’s HUD programs.
Auditor’s Responsibilities for the Audit of Compliance
Our objectives are to obtain reasonable assurance about whether material noncompliance with the compliance requirements referred to above occurred, whether due to fraud or error, and express an opinion on the Company’s compliance based on our audit. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS, Government Auditing Standards, and the Audit Guide will always detect material noncompliance when it exists. The risk of not detecting material noncompliance resulting from
fraud is higher than for that resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Noncompliance with the compliance requirements referred to above is considered material if there is a substantial likelihood that, individually or in the aggregate, it would influence the judgment made by a reasonable user of the report on compliance about the Company’s compliance with the requirements of each major HUD program as a whole.
In performing an audit in accordance with GAAS, Government Auditing Standards, and the Audit Guide, we:
•Exercise professional judgment and maintain professional skepticism throughout the audit.
•Identify and assess the risks of material noncompliance, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the Company’s compliance with the compliance requirements referred to above and performing such other procedures as we considered necessary in the circumstances.
•Obtain an understanding of the Company’s internal control over compliance relevant to the audit in order to design audit procedures that are appropriate in the circumstances and to test and report on internal control over compliance in accordance with the Audit Guide, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over compliance. Accordingly, no such opinion is expressed.
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and any significant deficiencies and material weaknesses in internal control over compliance that we identified during the audit.
Report on Internal Control Over Compliance
A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with the compliance requirements of a HUD program on a timely basis. A material weakness in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a compliance requirement of a HUD program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a compliance requirement of a HUD program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance.
Our consideration of internal control over compliance was for the limited purpose described in the Auditor’s Responsibilities for the Audit of Compliance section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses, as defined above. However, material weaknesses or significant deficiencies in internal control over compliance may exist that were not identified.
Our audit was not designed for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, no such opinion is expressed.
The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Audit Guide. Accordingly, this report is not suitable for any other purpose.
Flower Mound, Texas
March 22, 2022
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS
INDEPENDENT AUDITOR’S REPORT
To the Board of Members
Bay Equity, LLC
Concord, California
We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, the financial statements of Bay Equity, LLC (the Company), which comprise the balance sheet as of December 31, 2021, and the related statements of income, changes in members’ equity, and cash flows for the year then ended and the related notes to the financial statements, and have issued our report thereon dated March 22, 2022.
Report on Internal Control over Financial Reporting
In planning and performing our audit of the financial statements, we considered the Company’s internal control over financial reporting (internal control) as a basis for designing audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we do not express an opinion on the effectiveness of the Company’s internal control.
A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.
800.221.2509 | Flower Mound | 4880 Long Prairie Road, Suite 100 | Flower Mound, TX 75028 | p 972.221.2500 | f 972.436.887
khaaccountants.com | Denton | 2717 Wind River Lane, Suite 130 | Denton, TX 76210 | p 940.591.9300 | f 940.591.9334
Report on Compliance and Other Matters
As part of obtaining reasonable assurance about whether the Company's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.
Purpose of This Report
The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose.
Flower Mound, Texas
March 22, 2022
