Note 8 — Real Estate Owned, Net
As of March 31, 2026, the carrying value of real estate owned was $131.8 million, of which $115.3 million were pledged as collateral for the Company's securitized debt. As of December 31, 2025, the carrying value of real estate owned was $118.3 million, of which $114.5 million were pledged as collateral for the Company's securitized debt.
Note 9 — Mortgage Servicing Rights
Mortgage loans sold with servicing retained are not included in the Consolidated Balance Sheets. The Company has elected to record its mortgage servicing rights using the fair value measurement method. Fair value adjustments recorded at the end of the current period reflect valuation changes from the prior period-end.
The following table presents the Company's mortgage servicing rights, unpaid principal balance of GNMA loans serviced for GNMA by Century and loans serviced for BPC MC Trust, a related party (see Note 16 — Related Party Transactions), and significant assumptions used in determining the fair value of servicing rights as of March 31, 2026, December 31, 2025, and March 31, 2025:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
Servicing
Rights |
|
|
UPB
Serviced |
|
|
Weighted
Average
Discount
Rate |
|
|
Weighted
Average
Conditional
Prepayment
Rate |
|
|
|
($ in thousands) |
|
March 31, 2026 |
|
|
|
|
|
|
|
|
|
|
|
|
GNMA loans |
|
$ |
12,485 |
|
|
$ |
795,352 |
|
|
|
8.0 |
% |
|
|
5.6 |
% |
BPC MC Trust loans |
|
|
160 |
|
|
|
118,221 |
|
|
|
15.0 |
|
|
|
38.1 |
|
Total |
|
$ |
12,645 |
|
|
$ |
913,573 |
|
|
|
8.9 |
|
|
|
9.8 |
|
December 31, 2025 |
|
|
|
|
|
|
|
|
|
|
|
|
GNMA loans |
|
$ |
12,748 |
|
|
$ |
820,070 |
|
|
|
8.0 |
|
|
|
5.6 |
|
BPC MC Trust loans |
|
|
215 |
|
|
|
128,047 |
|
|
|
15.0 |
|
|
|
36.5 |
|
Total |
|
$ |
12,963 |
|
|
$ |
948,117 |
|
|
|
8.9 |
|
|
|
9.7 |
|
March 31, 2025 |
|
|
|
|
|
|
|
|
|
|
|
|
GNMA loans |
|
$ |
12,631 |
|
|
$ |
798,729 |
|
|
|
8.0 |
|
|
|
5.2 |
|
The following table presents the Company's mortgage servicing rights activity for the three months ended March 31, 2026 and 2025:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2026 |
|
|
2025 |
|
|
|
(In thousands) |
|
Balance at the beginning of period |
|
$ |
12,963 |
|
|
$ |
13,712 |
|
Additions |
|
|
19 |
|
|
|
— |
|
Fair value adjustments |
|
|
(337 |
) |
|
|
(1,081 |
) |
Balance at the end of period |
|
$ |
12,645 |
|
|
$ |
12,631 |
|
Note 10 — Goodwill
The following table presents the activity for goodwill as of March 31, 2026 and December 31, 2025:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2026 |
|
|
December 31, 2025 |
|
|
|
(In thousands) |
|
Balance at the beginning of period |
|
$ |
6,775 |
|
|
$ |
6,775 |
|
Balance at the end of period |
|
$ |
6,775 |
|
|
$ |
6,775 |
|
Note 11 — Securitized Debt at Amortized Cost and Securitized Debt at Fair Value
As of March 31, 2026, the Company is the sole beneficial interest holder of 37 Trusts, which are variable interest entities included in the consolidated financial statements. The securitization transactions are accounted for as secured borrowings under U.S. GAAP. The securities are subject to redemption by the Company when the stated principal balance is less than a certain percentage, ranging from 10% to 30% of the original stated principal balance of loans at issuance. As a result, the actual maturity dates of the securities issued could be earlier than their respective stated maturity dates, ranging from March 2030 through March 2056.
The total balance of the 2022 Term Loan and the 2024 Term Loan in the Consolidated Balance Sheets is net of debt issuance costs and discount of $1.7 million and $3.3 million as of March 31, 2026 and December 31, 2025, respectively. The secured financing is secured by substantially all assets of the Company not otherwise pledged under a securitized debt or warehouse facility and contains certain reporting and financial covenants. Should the Company fail to adhere to those covenants, the lenders have the right to demand immediate repayment that may require the Company to sell the collateral at less than the carrying amounts. As of March 31, 2026, the Company was in compliance with all covenants.
(b)Unsecured Senior Notes, Net (Corporate Debt)
On January 30, 2026, Velocity Commercial Capital, LLC (“VCC”) completed the issuance and sale of $500.0 million aggregate principal amount of 9.375% Unsecured Senior Notes due 2031 (the “2026 Term Notes”). The 2026 Term Notes were sold at an offering price equal to 100% of the principal thereof and bear interest at a rate of 9.375% per annum. Interest on the 2026 Term Notes is payable semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2026 and will mature on February 15, 2031. The 2026 Term Notes are guaranteed by the Company on a senior unsecured basis, with no conditions to the guarantee and no additional risks on a consolidated basis as VCC is the Company's primary operating company. After deducting fees and expenses, the net proceeds from the issuance and sale of the 2026 Term Notes were approximately $484.9 million. The 2026 Term Notes were sold in an offering exempt from the registration requirements of the Securities Act of 1933. The balance of the 2026 Term Notes in the Consolidated Balance Sheets is net of debt issuance costs of $14.6 million as of March 31, 2026.
(c) Warehouse Repurchase and Revolving Loan Facilities, Net
On January 4, 2011, Century entered into a Master Participation and Facility Agreement with a bank (“the September 2022 Term Repurchase Agreement”). The Facility Agreement has a current extended maturity date of July 31, 2026, and is a short-term borrowing facility, collateralized by performing loans, with a maximum capacity of $60.0 million, and bears interest at one-month SOFR plus 1.60% with a 0.25% floor.
On May 17, 2013, the Company entered into a Repurchase Agreement (“the 2013 Repurchase Agreement”) with a warehouse lender. The 2013 Repurchase Agreement is a modified mark-to-market agreement and has a current maturity date of September 23, 2026, and is a short-term borrowing facility, collateralized by a pool of performing loans, with a maximum capacity of $400.0 million, and bears interest at SOFR plus 2.75%. All borrower payments on loans financed under the warehouse repurchase facility are first used to pay interest on the facility.
On January 29, 2021, the Company entered into a non-mark-to-market Repurchase Agreement (“the 2021 Repurchase Agreement”) with a warehouse lender. The 2021 Repurchase Agreement has a current extended maturity date of May 20, 2026, and is a short-term borrowing facility, collateralized by a pool of loans. On July 25, 2024, the Company entered into a mark-to-market Repurchase Agreement (“the 2024 Repurchase Agreement”) with the same warehouse lender. The 2024 Repurchase Agreement also has a maturity date of May 20, 2026, and is a short-term borrowing facility, collateralized by a pool of loans. The maximum capacity under both agreements is $200.0 million individually and in the aggregate. The 2024 Repurchase Agreement includes a $75.0 million sublimit for nonperforming loans. Borrowings under these two facilities bear interest at SOFR plus 3.00% during the availability period and 4.00% during the amortization period. All borrower payments on loans financed under the warehouse repurchase facilities are first used to pay interest on the facilities.
On April 16, 2021, the Company entered into a non-mark-to-market Term Repurchase Agreement (“the 2021 Term Repurchase Agreement”) with a warehouse lender. The 2021 Term Repurchase Agreement has a maturity date of April 14, 2028, with an extended borrowing period through April 14, 2027. During the borrowing period, the Company can take loan advances from time to time, subject to availability. Each loan advance bears interest at SOFR plus 2.95%. The maximum capacity under this facility is $100.0 million.
On December 27, 2023, the Company entered into a loan facility agreement (“the 2023 Repurchase Agreement”) with a bank. The 2023 Repurchase Agreement has a maturity date of December 27, 2026. During the borrowing period, the Company can take loan advances from time to time subject to availability. Each loan advance bears interest at SOFR plus 3.00%. The maximum loan amount under this facility is $125.0 million.
On November 7, 2024, the Company entered into a non-mark-to-market secured revolving loan facility agreement (“the 2024 Bank Credit Agreement”) with a bank. The 2024 Bank Credit Agreement has a current maturity date of May 7, 2027. Each loan advance bears interest at SOFR plus 3.50%, with a floor of 2.00%. The maximum loan amount under this facility is $50.0 million.
Certain loans are pledged as collateral under the warehouse repurchase facilities and the revolving loan facility, which contain covenants. Should the Company fail to adhere to those covenants or otherwise default under the facilities, the lenders have the right to terminate the facilities and demand immediate repayment that may require the Company to sell the collateral at less than the carrying amounts. As of March 31, 2026 and December 31, 2025, the Company was in compliance with all covenants.
The Company regularly evaluates the adequacy of repurchase reserves based on trends in repurchase, actual loss experience, estimated future loss exposure and other relevant factors including economic conditions. As of March 31, 2026 and December 31, 2025, the balance of repurchase liability was $144 thousand, and is included in “Accounts payable and accrued expenses” on the Consolidated Balance Sheets.
The Company is a party to various legal proceedings in the normal course of business. The Company, after consultation with legal counsel, believes the disposition of all pending litigation will not have a material effect on the Company’s consolidated financial condition or results of operations as of March 31, 2026.
(c)Employee Retention Credit
Under the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law on March 27, 2020 and the subsequent extension of the CARES Act, the Company, with the guidance from a third-party specialist, determined it was eligible for a refundable employee retention credit (“ERC”) subject to certain criteria.
The Company applied for ERC for the first three quarters’ wages paid in calendar year 2021. During the second quarter of 2023, the Company received approximately $4.2 million of ERC. Due to the subjectivity of the credit, the Company elected to account for the ERC as a gain analogizing to ASC 450-30, Gain Contingencies. Accordingly, the $4.2 million ERC, net of the third-party specialist fees of $0.6 million, were deferred until the uncertainty surrounding them is resolved. As of March 31, 2026, the IRS statute of limitations for the ERC refunds received related to the first and second quarters of 2021 have expired, as such, the Company recognized $2.4 million of ERC as other income during the quarter ended March 31, 2026. The Company continues to defer the third quarter 2021 net ERC refund of $1.3 million until the special six-year IRS statute of limitations expires in 2028. The deferred net ERC refunds of $1.3 million and $4.2 million is included in “Accounts payable and accrued expenses” on the Consolidated Balance Sheets as of March 31, 2026 and December 31, 2025, respectively.
Century originated a $25.9 million government-backed construction loan in September 2025. The funded advances (draws) on the construction loan were sold after funding. The unfunded portion of the construction loan totaled $19.8 million as of March 31, 2026.
Note 14 — Stock-Based Compensation
The Company’s Amended and Restated 2020 Omnibus Incentive Plan, or “the 2020 Plan,” authorizes grants of stock‑based compensation instruments including but not limited to non-qualified stock options, restricted stock awards (“RSAs”) and performance stock unit awards (“PSUs”) to certain employees and non-employee directors of the Company, to purchase or issue up to 4,520,000 shares of the Company's common stock.
Expenses related to the stock-based compensation instruments and Employee Stock Purchase Plan (“ESPP”) are included in “Compensation and employee benefits” and “Other operating expenses” on the Consolidated Statements of Income.
Below are summaries of the recognized and unrecognized stock-based compensation expense by instrument for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2026 |
|
|
2025 |
|
|
|
(In thousands) |
|
Recognized compensation expense: |
|
|
|
|
|
|
Options |
|
$ |
16 |
|
|
$ |
129 |
|
RSAs |
|
|
1,109 |
|
|
|
747 |
|
PSUs |
|
|
1,292 |
|
|
|
907 |
|
ESPP |
|
|
278 |
|
|
|
187 |
|
Total recognized compensation expense |
|
$ |
2,695 |
|
|
$ |
1,970 |
|
On December 29, 2025, the Company entered into a Master Flow Mortgage Loan Purchase Agreement (“MLPA”) with BPC MC Trust (a Beach Point Capital affiliate) to sell $128.9 million of nonperforming loans. Beach Point Capital is a related party of the Company. The sale was servicing retained whereby the Company sold whole loans, but retained the servicing rights to the loans. The MLPA contained standard loan level and corporate representations and warranties from the Company as the seller under the agreement. The Company entered into a Servicing Agreement to service and special service the loans for a fee. In addition to the servicing fee, the Company is entitled to a disposition fee of the unpaid principal balance of all loans that are paid off or resolved through an REO sale. This fee is not due on loans that are paid current. The Company also entered into a Servicing Fee Incentive Side Letter with the BPC MC Trust that provides further incentives to the Company based on meeting certain future Internal Rate of Return (“IRR”) hurdles.
The Company recognized $19.3 million gain from the sale of nonperforming loans to BPC MC Trust on December 29, 2025. The Company also recognized mortgage servicing rights of $0.2 million as of December 31, 2025. The mortgage servicing right is approximately $0.2 million as of March 31, 2026, which is included in “Mortgage servicing rights, at fair value” on the Consolidated Balance Sheets.” See Note 9— Mortgage Servicing Rights.
The following table presents the related party transactions completed during the three months ended March 31, 2026 and 2025:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2026 |
|
|
2025 |
|
|
|
(In thousands) |
|
Securitized debt issued to related parties (1) |
|
$ |
6,750 |
|
|
$ |
— |
|
(1)The 2026-1 Loan Trust included $6.75 million of securitized debt issued to related parties. The 2026-1 Loan Trust was a broadly marketed securitization through the Company’s normal securitization process.
Note 17 — Derivative Instruments
In September 2023, the Company began utilizing derivative instruments designated as cash flow hedges to manage the exposure to interest rate volatility related to its forecasted issuances of fixed-rate debt through its securitization process. The derivative instruments include forward starting interest rate swaps or interest rate payer and receiver swaptions. The Company’s risk management objective is to hedge the risk of variability in its interest payment cash flows attributable to changes in the benchmark SOFR between the time the fixed rate mortgages are originated and the fixed rate debt is issued. As of March 31, 2026, the maximum length of time over which the Company was hedging its exposure to variability in future cash flows for forecasted transactions did not exceed four years.
The gains or losses on derivative instruments that are designated and qualify as cash flow hedges are reported as a component of AOCI. Beginning in the period in which the forecasted debt is issued and the related derivative instruments are terminated, the accumulated gains or losses associated with the terminated derivatives are then reclassified into interest expense as a yield adjustment over the term of the related debt. For the quarters ended March 31, 2026 and 2025, $206 thousand and $62 thousand, respectively, of after-tax net losses on terminated derivative instruments were reclassified from AOCI to interest expense. As of March 31, 2026 and 2025, the Company had $2.3 million and $1.8 million of after-tax net unrealized loss, respectively, associated with cash flow hedging instruments recorded in AOCI. As of March 31, 2026, the Company expects to reclassify an estimated $0.9 $0.9 million of after-tax net unrealized loss on derivative instruments designated as cash flow hedges from AOCI into earnings over the next 12 months.
The following tables present the fair value of the Company’s derivative financial instruments on a gross basis, as well as its classification on the Company’s Consolidated Balance Sheets as of March 31, 2026 and December 31, 2025:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2026 |
|
Derivatives designated as hedging instruments: |
|
Balance Sheet Location |
|
Notional Amount |
|
|
Fair Value (1) |
|
Cash flow hedges: |
|
|
|
(In thousands) |
|
Interest rate payer and receiver swaptions |
|
Derivative asset |
|
$ |
197,000 |
|
|
$ |
464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2025 |
|
Derivatives designated as hedging instruments: |
|
Balance Sheet Location |
|
Notional Amount |
|
|
Fair Value (1) |
|
Cash flow hedges: |
|
|
|
(In thousands) |
|
Forward starting payer interest rate swaps |
|
Derivative liability |
|
$ |
215,000 |
|
|
$ |
66 |
|
(1)Fair value reported is exclusive of collateral held and pledged, related to derivative exposure between the Company and its derivative counterparty. As of March 31, 2026, no collateral was pledged to its derivative counterparty. As of December 31, 2025, $0.1 million was pledged to its derivative counterparty. These amounts were included in “Other receivables” on the Consolidated Balance Sheets.
The counterparty to the financial derivatives that the Company enters into is a major institution. The Company is exposed to credit-related losses in the event of non-performance by the counterparty. This credit risk is generally limited to the unrealized gains in such contracts, less collateral held, should the counterparty fail to perform as contracted.
Cash, Cash Equivalents and Restricted Cash
Cash and restricted cash are recorded at historical cost. The carrying amount is a reasonable estimate of fair value as these instruments have short-term maturities and interest rates that approximate market, a Level 1 measurement.
Loans Held for Investment, at Amortized Cost and Loans Held for Investment, at Fair Value
The Company uses a third-party loan valuation specialist to estimate the fair value of its nonperforming mortgage loans, a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company’s nonperforming mortgage loans are interest rates, market yield requirements, the probability of default, loss given default, voluntary prepayment speed and loss timing. The Company uses a third-party loan valuation model to estimate the fair value of its performing mortgage loans, a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company’s performing mortgage loans are discount rate, constant prepayment rate, constant default rate, and loss severity rate. Significant changes in any of those inputs in isolation could result in a significant change to the mortgage loans’ fair value measurement.
Collateral Dependent or Loans Individually Evaluated
Nonaccrual loans held for investment and carried at amortized cost are evaluated individually and are adjusted to the fair value of the collateral when the fair value of the collateral is below the carrying value of the loan. To the extent such a loan is collateral dependent, the Company determines the allowance for credit losses based on the estimated fair value of the underlying collateral. The fair value of each loan’s collateral is generally based on appraisals or broker price opinions obtained, less estimated costs to sell, a Level 3 measurement.
Loans Held for Sale, at Fair Value
The Company elected to account for certain loans originated with the intent to sell at fair value using FASB ASC Topic 825, Financial Instruments (ASC 825). The FVO loans held for sale are measured based on a discounted cash flow model, or on the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value, including the value attributable to mortgage servicing and credit risk, and current commitments to purchase loans, a Level 2 measurement. Management identified all loans to be accounted for at estimated fair value at the instrument level. Changes in fair value are reflected in income as they occur.
Real Estate Owned, Net (“REO”)
Real estate owned, net is initially recorded at the property’s estimated fair value, based on appraisals or broker price opinions obtained, less estimated costs to sell at acquisition date, a Level 3 measurement. From time to time, nonrecurring fair value adjustments are made to real estate owned, net based on the current updated appraised value of the property, or management’s judgment and estimation of value based on recent market trends or negotiated sales prices with potential buyers.
Mortgage Servicing Rights
The Company determined the fair values based on a third-party valuation specialist using a model that calculates the present value of estimated future net servicing income, a Level 3 measurement.
Derivative Instruments
Derivative financial instruments are measured at fair value using readily observable market inputs and the overall fair value measurement is classified as Level 2.
Secured and Unsecured Financing, Net (“Corporate Debt”)
The Company determined the fair values estimate of the secured and unsecured financing using the estimated cash flows discounted at an appropriate market rate, a Level 3 measurement.
Warehouse Repurchase Facilities, Net
Warehouse repurchase facilities are recorded at historical cost. The carrying amount is a reasonable estimate of fair value as these instruments have short-term maturities of one-year or less and interest rates that approximate market plus a spread, a Level 2 measurement.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the information included in our Annual Report on Form 10-K for the year ended December 31, 2025, as well as the unaudited financial statements included elsewhere in this Quarterly Report on Form 10-Q (the “Quarterly Report”).
In addition, the statements and assumptions in this Quarterly Report that are not statements of historical fact are forward-looking statements within the meaning of federal securities laws. In particular, statements about our plans, strategies and prospects as well as estimates of industry growth for the next quarter and beyond are forward-looking statements. For important information regarding these forward-looking statements, please see the discussion below under the caption “Forward-Looking Statements.”
References to “the Company,” “Velocity,” “we,” “us” and “our” refer to Velocity Financial, Inc. and include all of its consolidated subsidiaries, unless otherwise indicated or the context requires otherwise.
Business
We are a vertically integrated real estate finance company founded in 2004. We originate, securitize, and manage a nationwide portfolio of loans secured by real estate to earn attractive risk adjusted spreads for our shareholders. We primarily originate investor loans secured by 1-4 unit residential rental properties, as well as loans for multi-family, mixed use and commercial properties. We originate loans nationwide across our extensive network of independent mortgage brokers and direct borrower relationships, which we have built and refined over the 22 years since our inception. Our objective is to be the preferred and one of the most recognized brands in our core market.
We operate in a large and highly fragmented market with substantial demand for financing and limited supply of institutional financing alternatives. We have developed the highly-specialized skill set required to effectively compete in this market, which we believe has afforded us a durable business model capable of generating attractive risk-adjusted returns for our stockholders throughout various business cycles. We offer competitive pricing to our borrowers by pursuing low-cost financing strategies and by driving front-end process efficiencies through customized technology designed to control the cost of originating a loan. Furthermore, by originating loans through our efficient and scalable network of approved mortgage brokers, we are able to maintain a wide geographical presence and nimble operating infrastructure capable of reacting quickly to changing market environments.
Our primary source of revenue is interest income earned on our loan portfolio. Our typical loan is secured by a first lien on the underlying property with a personal guarantee, and based on all loans in our portfolio as of March 31, 2026, has an average balance of approximately $388 thousand. As of March 31, 2026, our loan portfolio totaled $6.8 billion of UPB on properties in 48 states and the District of Columbia. The total portfolio had a weighted average loan-to-value ratio, or LTV at origination, of 64.9%, of which the 1-4 unit residential rental loans, which we refer to as investor 1-4 loans, represented 46.9% of the UPB. For the three months ended March 31, 2026, the annualized yield on our total portfolio was 9.23%.
We fund our portfolio primarily through a combination of committed and uncommitted secured warehouse facilities, securitized debt, unsecured and secured debt, and equity. The securitized debt market is our primary source of long-term financing. We have successfully executed 48 securitized debt transactions, resulting in a total of over $11.1 billion in gross debt proceeds from May 2011 through March 2026. We may also sell loans from time to time for cash in lieu of holding the loans in our loan portfolio.
One of our core profitably measurements is our portfolio related net interest margin, which measures the difference between interest income earned on loans and interest expense paid on portfolio-related debt, relative to the amount of loans outstanding over the period. Our portfolio-related debt consists of warehouse facilities and securitized debt and excludes corporate debt and unsecured debt. For the three months ended March 31, 2026, our annualized portfolio related net interest margin was 3.56%, compared to 3.35% for the three months ended March 31, 2025. We generate profits to the extent that our portfolio related net interest income exceeds our interest expense on corporate debt and unsecured debt, provision for credit losses and operating expenses. For the three months ended March 31, 2026, including net income attributable to noncontrolling interest, we generated pre-tax income of $30.9 million, and net income of $22.4 million. For the three months ended March 31, 2025, including net income attributable to noncontrolling interest, we generated pre-tax income of $26.9 million, and net income of $18.9 million.
On December 28, 2021, the Company acquired an 80% ownership interest in Century Health & Housing Capital, LLC (“Century”). Century is a licensed Ginnie Mae issuer/servicer that provides government-insured Federal Housing Administration (“FHA”) mortgage financing for multifamily housing, senior housing and long-term care/assisted living facilities. Century originates loans through its borrower-direct origination channel and services the loans through its in-house servicing platform, which enables the formation of long-term relationships with its clients and drives strong portfolio retention. Century earns origination fees and servicing fees from the mortgage servicing rights on its servicing portfolio.
Items Affecting Comparability of Results
Due to a number of factors, our historical financial results may not be comparable, either from period to period, or to our financial results in future periods. We have summarized the key factors affecting the comparability of our financial results below.
Recent Developments
Corporate Debt
In January 2026, we completed the issuance and sale of $500.0 million aggregate principal amount of 9.375% Senior Notes due 2031 (“the 2026 Term Notes”), which will mature on February 15, 2031. The 2026 Term Notes bear interest at 9.375% and are guaranteed by us on an unsecured basis.
In January 2026, we paid off the $215.0 million secured debt, or the "2022 Term Loan" with proceeds from the issuance and sale of $500.0 million Senior Notes.
Securitized Debt
In February 2026, we completed the securitization of $355.2 million of investor real estate loans, as measured by UPB, through a consolidated VIE.
In March 2026, we completed the securitization of $189.9 million of investor real estate loans, as measured by UPB, through a consolidated VIE.
Continued Market Uncertainties
Our operational and financial performance will depend on certain market developments, including the impact of tariffs, the actions of the Federal Reserve, the Russia/Ukraine war, the ongoing conflicts in the Middle East, the prolonged government shutdown, heightened stress in the real estate and corporate debt markets, and macroeconomic conditions and market fundamentals, which can all affect each of these factors and potentially impact our business performance.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires certain judgments and assumptions, based on information available at the time of preparation of the consolidated financial statements, in determining accounting estimates used in preparation of the consolidated financial statements. The following discussion addresses the accounting policies that we believe apply to us based on the nature of our operations. Our most critical accounting policies involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all the decisions and assessments used to prepare our financial statements are based upon reasonable assumptions given the information available at that time.
These policies and estimates relate to the allowance for credit losses and fair value option accounting. Our critical accounting policies and estimates are described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2025, as filed with the SEC.
How We Assess Our Business Performance
Net income is the primary metric by which we assess our business performance. Accordingly, we closely monitor the primary drivers of net income which consist of the following:
Net Interest Income
Net interest income is the largest contributor to our net income and is monitored both on an absolute basis and relative to provision for credit losses and operating expenses. We generate net interest income to the extent that the rate at which we lend in our portfolio exceeds the cost of financing our portfolio, which we primarily achieve through long-term securitized debt. Accordingly, we closely monitor the financing markets and maintain consistent dialogue with investors and financial institutions as we evaluate our financing sources and cost of funds.
To evaluate net interest income, we measure and monitor: (1) the yields on our loans, (2) the costs of our funding sources, (3) our net interest spread and (4) our net interest margin. Net interest spread measures the difference between the rates earned on our loans and the rates paid on our funding sources. Net interest margin measures the difference between our annualized interest income and annualized interest expense, or net interest income, as a percentage of average loans outstanding over the specified time period.
Periodic changes in net interest income are primarily driven by: (1) origination volume and changes in average outstanding loan balances and (2) interest rates and changes in interest earned on our portfolio or paid on our debt. Historically, origination volume and portfolio size have been the largest contributors to the growth in our net interest income. We measure net interest income before and after interest expense related to our secured and unsecured corporate debt, and before and after our provision for credit losses.
Credit Losses
We strive to minimize actual credit losses through our rigorous screening and underwriting process and life of loan portfolio management and special servicing practices. We closely monitor the credit performance of our loan portfolio, including delinquency rates and expected and actual credit losses, as a key factor in assessing our overall business performance.
Operating Expenses
We incur operating expenses from compensation and benefits related to our employee base, rent and other occupancy costs associated with our leased facilities, our third-party primary loan servicing vendors, professional fees to the extent we utilize third-party legal, consulting and advisory firms, and costs associated with the resolution and disposition of real estate owned, and securitization expenses, among other items. We monitor and strive to prudently manage operating expenses and to balance current period profitability with investment in the continued development of our platform. Because volume and portfolio size determine the magnitude of the impact of each of the above factors on our earnings, we also closely monitor origination volume along with all key terms of new loan originations, such as interest rates, loan-to-value ratios, estimated credit losses and expected duration.
Factors Affecting Our Results of Operations
Our results of operations depend on, among other things, the level of our net interest income, the credit performance of our loan portfolio and the efficiency of our operating platform. These measures are affected by various factors, including the demand for investor real estate loans, the competitiveness of the market for originating or acquiring investor real estate loans, the cost of financing our portfolio, operating costs, the availability of funding sources and the underlying performance of the collateral supporting our loans. While we have been successful at managing these elements in the past, there are certain circumstances beyond our control, including the ongoing geopolitical conflicts, the changing economic policies, an expected recession, and macroeconomic conditions and market fundamentals, which can all affect each of these factors and potentially impact our business performance.
Competition
The investor real estate loan market is highly competitive which could affect our profitability and growth. We believe we compete favorably through diversified borrower access driven by our extensive network of mortgage brokers and by emphasizing a high level of real estate and financial expertise, customer service, and flexibility in structuring transactions, as well as by attracting and retaining experienced managerial and marketing personnel. However, some of our competitors may be better positioned to market their services and financing programs because of their ability to offer more favorable rates and terms and other services.
Availability and Cost of Funding
Our primary funding sources have historically included cash from operations, warehouse facilities, term securitized debt, corporate debt, and equity. We believe we have an established brand in the term securitized debt market and that this market will continue to support our portfolio growth with long-term financing. Changes in macroeconomic conditions can adversely impact our ability to issue securitized debt and, thereby, limit our options for long-term financing. In consideration of this potential risk, we have entered into a credit facility for longer-term financing that will provide us with capital resources to fund loan growth in the event we are not able to issue securitized debt.
All our warehouse repurchase and revolving loan facilities have interest payment obligations tied to the Secured Overnight Offering Rate (“SOFR”).
Loan Performance
We underwrite and structure our loans to minimize potential losses. We believe our fully amortizing loan structures and avoidance of large balloon payments, coupled with meaningful borrower equity in properties, limit the probability of losses and that our proven in-house asset management capability allows us to minimize potential losses in situations where there is insufficient equity in the property. Our income is highly dependent upon borrowers making their payments and resolving delinquent loans as favorably as possible. Macroeconomic conditions can, however, impact credit trends in our core market and adversely affect financial results.
Macroeconomic Conditions
The investor real estate loan market may be impacted by a wide range of macroeconomic factors such as interest rates, residential and commercial real estate prices, home ownership and unemployment rates, and availability of credit, among others. We believe our prudent underwriting, conservative loan structures and interest rate protections, and proven in-house asset management capability leave us well positioned to manage changing macroeconomic conditions.
Portfolio and Asset Quality
Key Portfolio Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2026 |
|
|
December 31, 2025 |
|
|
March 31, 2025 |
|
|
|
($ in thousands) |
|
Total loans (UPB) |
|
$ |
6,836,544 |
|
|
$ |
6,491,338 |
|
|
$ |
5,449,901 |
|
Loan count |
|
|
17,639 |
|
|
|
16,652 |
|
|
|
13,858 |
|
Average loan balance |
|
$ |
388 |
|
|
$ |
390 |
|
|
$ |
393 |
|
Weighted average loan-to-value |
|
|
64.9 |
% |
|
|
65.2 |
% |
|
|
66.1 |
% |
Weighted average coupon |
|
|
9.75 |
% |
|
|
9.74 |
% |
|
|
9.6 |
% |
Nonperforming loans (UPB) (A) |
|
$ |
692,073 |
|
|
$ |
554,540 |
|
|
$ |
587,811 |
|
Nonperforming loans (% of total) (A) |
|
|
10.1 |
% |
|
|
8.5 |
% |
|
|
10.8 |
% |
(A) Reflects the UPB of loans 90 days or more past due or placed on nonaccrual status. Includes $27.3 million, $29.6 million and $36.7 million of COVID-19 forbearance-granted loans 90 days or more past due or placed on nonaccrual status as of March 31, 2026, December 31, 2025, and March 31, 2025, respectively.
Total Loans. Total loans reflects the aggregate UPB at the end of the period. It excludes deferred origination costs, acquisition discounts, fair value adjustments and allowance for credit losses.
Loan Count. Loan count reflects the number of loans at the end of the period. It includes all loans with an outstanding principal balance.
Average Loan Balance. Average loan balance reflects the average UPB at the end of the period (i.e., total loans divided by loan count).
Weighted Average Loan-to-Value. Loan-to-value, or LTV, reflects the ratio of the original loan amount to the appraised value of the underlying property at the time of origination. In instances where the LTV at origination is not available for an acquired loan, the LTV reflects our best estimate of value at the time of acquisition. Weighted average LTV is calculated for the population of loans outstanding at the end of each specified period using the original loan amounts and appraised LTVs at the time of origination of each loan. LTV is a key statistic because requiring the borrower to invest more equity in the collateral minimizes our exposure for future credit losses.
Weighted Average Coupon. Weighted average coupon reflects the weighted average loan rate at the end of the period.
Nonperforming Loans. Loans that are 90 or more days past due, in bankruptcy, in foreclosure, or not accruing interest, are considered nonperforming loans. The dollar amount of nonperforming loans presented in the table above reflects the UPB of all loans that meet this definition.
Originations and Acquisitions
The following table presents new loan originations including unfunded commitments and acquisitions and includes average loan size, weighted average coupon and weighted average loan-to-value for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Count |
|
|
Loan Balance |
|
|
Average
Loan Size |
|
|
Weighted
Average
Coupon |
|
|
Weighted
Average
LTV |
|
|
|
($ in thousands) |
|
Three Months Ended March 31, 2026: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan originations — held for investment |
|
|
1,682 |
|
|
$ |
637,146 |
|
|
$ |
379 |
|
|
|
10.15 |
% |
|
|
62.5 |
% |
Construction loan advances — held for sale |
|
|
— |
|
|
|
2,226 |
|
|
|
— |
|
|
|
5.90 |
% |
|
|
85.0 |
% |
Total loan originations |
|
|
1,682 |
|
|
$ |
639,372 |
|
|
$ |
380 |
|
|
|
10.15 |
% |
|
|
62.5 |
% |
Three Months Ended December 31, 2025: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan originations — held for investment |
|
|
1,714 |
|
|
$ |
632,796 |
|
|
$ |
369 |
|
|
|
10.14 |
% |
|
|
62.8 |
% |
Construction loan advances — held for sale |
|
|
— |
|
|
|
1,818 |
|
|
|
— |
|
|
|
5.90 |
% |
|
|
85.0 |
% |
Total loan originations |
|
|
1,714 |
|
|
$ |
634,614 |
|
|
$ |
370 |
|
|
|
10.13 |
% |
|
|
62.9 |
% |
Three Months Ended March 31, 2025: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan originations — held for investment |
|
|
1,513 |
|
|
$ |
635,537 |
|
|
$ |
420 |
|
|
|
10.51 |
% |
|
|
62.6 |
% |
Loan originations — held for sale |
|
|
1 |
|
|
|
4,886 |
|
|
|
4,886 |
|
|
|
5.70 |
% |
|
|
19.9 |
% |
Total loan originations |
|
|
1,514 |
|
|
$ |
640,423 |
|
|
$ |
423 |
|
|
|
10.47 |
% |
|
|
62.3 |
% |
During the first quarter of 2026, loan originations increased $4.8 million and decreased $1.1 million from the quarters ended December 31, 2025 and March 31, 2025, respectively.
Loans Held for Investment
Our total portfolio of loans held for investment consists of both loans held for investment carried at amortized cost and loans held for investment at fair value, which are presented in the Consolidated Balance Sheets as “Loans held for investment, at amortized cost” and “Loans held for investment, at fair value,” respectively. The following tables show the various components of loans held for investment as of the dates indicated:
|
|
|
|
|
|
|
|
|
Loans held for investment, at amortized cost |
|
March 31, 2026 |
|
|
December 31, 2025 |
|
|
|
(In thousands) |
|
Unpaid principal balance |
|
$ |
1,937,474 |
|
|
$ |
2,013,514 |
|
Deferred loan origination costs |
|
|
18,416 |
|
|
|
19,269 |
|
Allowance for credit losses |
|
|
(4,860 |
) |
|
|
(4,521 |
) |
Loans held for investment, at amortized cost |
|
$ |
1,951,030 |
|
|
$ |
2,028,262 |
|
|
|
|
|
|
|
|
|
|
Loans held for investment, at fair value |
|
March 31, 2026 |
|
|
December 31, 2025 |
|
|
|
(In thousands) |
|
Unpaid principal balance |
|
$ |
4,899,070 |
|
|
$ |
4,477,824 |
|
Valuation adjustments on performing FVO loans |
|
|
307,626 |
|
|
|
300,344 |
|
Valuation adjustments on nonperforming FVO loans |
|
|
(52,188 |
) |
|
|
(48,299 |
) |
Loans held for investment, at fair value |
|
$ |
5,154,508 |
|
|
$ |
4,729,869 |
|
The following table illustrates the contractual maturities of our loans held for investment in aggregate UPB and as a percentage of total held for investment loan portfolio as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2026 |
|
|
December 31, 2025 |
|
|
|
UPB |
|
|
% |
|
|
UPB |
|
|
% |
|
|
|
($ in thousands) |
|
Loans due in less than one year |
|
$ |
162,465 |
|
|
|
2.4 |
% |
|
$ |
159,623 |
|
|
|
2.5 |
% |
Loans due in one to five years |
|
|
73,042 |
|
|
|
1.1 |
|
|
|
78,875 |
|
|
|
1.2 |
|
Loans due in more than five years |
|
|
6,601,037 |
|
|
|
96.5 |
|
|
|
6,252,840 |
|
|
|
96.3 |
|
Total loans held for investment |
|
$ |
6,836,544 |
|
|
|
100.0 |
% |
|
$ |
6,491,338 |
|
|
|
100.0 |
% |
Allowance for Credit Losses
For the March 31, 2026 CECL estimate, we considered a severe stress scenario with a seven-quarter reasonable and supportable forecast period followed by a three-quarter straight-line reversion period. Management concluded that applying the severe stress scenario was appropriate and reflected the economic uncertainties due to the recent Iran War and unstable labor market conditions.
For the December 31, 2025 CECL estimate, we considered a severe stress scenario with a seven-quarter reasonable and supportable forecast period followed by a three-quarter straight-line reversion period. The severe stress scenario was applied to reflect the uncertainties in the market with the tariffs, change in immigration policy, and unstable inflation rates.
Our allowance for credit losses as of March 31, 2026 was $4.9 million compared to $5.0 million as of March 31, 2025. The decrease in allowance for credit losses from March 31, 2025 was primarily due to a decrease in the amortized cost loan portfolio subject to CECL, and the removal of COVID pandemic era data from the macroeconomic forecasts in the latest CECL model update. Additionally, we believe borrower equity of 25% to 40% provides significant protection against credit losses. The various scenarios, the weighting of scenarios, as well as the forecast period and reversion to historical loss are subject to change as conditions in the market change and our ability to forecast as economic events evolve.
To estimate the allowance for credit losses in our portfolio of loans held for investment carried at amortized cost, we follow a detailed internal review process, considering a number of different factors including, but not limited to, our ongoing analyses of loans, historical loss rates, relevant environmental factors, relevant market research, trends in delinquencies, effects and changes in credit concentrations, and ongoing evaluation of fair values.
The following table illustrates the activity in our allowance for credit losses of loans held for investment, excluding loans held for investment, at fair value over the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
March 31, 2026 |
|
|
December 31, 2025 |
|
|
March 31, 2025 |
|
|
Allowance for credit losses: |
|
($ in thousands) |
Beginning balance |
|
$ |
4,521 |
|
|
$ |
4,586 |
|
|
$ |
4,174 |
|
|
Provision for credit losses |
|
|
1,661 |
|
|
|
1,954 |
|
|
|
1,872 |
|
|
Charge-offs |
|
|
(1,322 |
) |
|
|
(2,019 |
) |
|
|
(1,029 |
) |
|
Ending balance |
|
$ |
4,860 |
|
|
$ |
4,521 |
|
|
$ |
5,017 |
|
|
Total UPB(1) |
|
$ |
1,937,474 |
|
|
$ |
2,013,514 |
|
|
$ |
2,304,587 |
|
|
Nonperforming loans UPB |
|
$ |
238,407 |
|
|
$ |
234,490 |
|
|
$ |
292,811 |
|
|
Nonperforming loans UPB / Total UPB(1) |
|
|
12.3 |
% |
|
|
11.6 |
% |
|
|
12.7 |
% |
|
Allowance for credit losses / Total UPB(1) |
|
|
0.25 |
% |
|
|
0.22 |
% |
|
|
0.22 |
% |
|
Charge-offs / Total UPB(1) |
|
|
0.27 |
% |
(2) |
|
0.40 |
% |
(2) |
|
0.18 |
% |
(2) |
(1)Reflects the UPB of loans held for investment at amortized cost.
The allowance for credit losses was 0.25% of total UPB of loans held for investment carried at amortized cost as of March 31, 2026. Nonperforming loans were 12.3% of total UPB of loans held for investment carried at amortized cost as of March 31, 2026. Management believes the allowance for credit losses is adequate to absorb expected lifetime credit losses because historically, most loans that become nonperforming either paid off or paid current, resulting in an overall gain. This is due to low LTVs at origination and active management of our portfolio. Historically, our actual annual charge-offs rate was 0.11% over the last four years.
Credit Quality – Loans Held for Investment
The following table provides delinquency information on our loans held for investment by UPB as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2026 (A) |
|
|
COVID-19
Forbearance |
|
|
December 31, 2025 (A) |
|
|
COVID-19
Forbearance |
|
|
March 31, 2025 (A) |
|
|
COVID-19
Forbearance |
|
|
|
($ in thousands) |
|
Performing/Accruing: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
5,648,159 |
|
|
|
82.6 |
|
% |
$ |
87,769 |
|
|
$ |
5,432,204 |
|
|
|
83.7 |
|
% |
$ |
90,159 |
|
|
$ |
4,504,854 |
|
|
|
82.7 |
|
% |
$ |
88,462 |
|
30-59 days past due |
|
|
293,479 |
|
|
|
4.3 |
|
|
|
4,201 |
|
|
|
296,100 |
|
|
|
4.6 |
|
|
|
3,377 |
|
|
|
239,547 |
|
|
|
4.4 |
|
|
|
9,186 |
|
60-89 days past due |
|
|
202,833 |
|
|
|
3.0 |
|
|
|
1,661 |
|
|
|
208,494 |
|
|
|
3.2 |
|
|
|
3,040 |
|
|
|
112,803 |
|
|
|
2.1 |
|
|
|
1,800 |
|
Total Performing Loans |
|
|
6,144,471 |
|
|
|
89.9 |
|
|
|
93,631 |
|
|
|
5,936,798 |
|
|
|
91.5 |
|
|
|
96,576 |
|
|
|
4,857,204 |
|
|
|
89.2 |
|
|
|
99,448 |
|
Nonperforming/Nonaccrual: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
<90 days past due |
|
|
57,685 |
|
|
|
0.8 |
|
|
|
1,030 |
|
|
|
41,296 |
|
|
|
0.6 |
|
|
|
3,242 |
|
|
|
33,488 |
|
|
|
0.6 |
|
|
|
3,189 |
|
90+ days past due |
|
|
108,963 |
|
|
|
1.6 |
|
|
|
487 |
|
|
|
71,985 |
|
|
|
1.1 |
|
|
|
— |
|
|
|
46,545 |
|
|
|
0.9 |
|
|
|
205 |
|
Bankruptcy |
|
|
50,669 |
|
|
|
0.7 |
|
|
|
10,128 |
|
|
|
57,919 |
|
|
|
0.9 |
|
|
|
5,945 |
|
|
|
76,606 |
|
|
|
1.4 |
|
|
|
3,688 |
|
In foreclosure |
|
|
474,756 |
|
|
|
7.0 |
|
|
|
15,648 |
|
|
|
383,340 |
|
|
|
5.9 |
|
|
|
20,379 |
|
|
|
431,172 |
|
|
|
7.9 |
|
|
|
29,612 |
|
Total nonperforming loans |
|
|
692,073 |
|
|
|
10.1 |
|
|
|
27,293 |
|
|
|
554,540 |
|
|
|
8.5 |
|
|
|
29,566 |
|
|
|
587,811 |
|
|
|
10.8 |
|
|
|
36,694 |
|
Total loans held for investment |
|
$ |
6,836,544 |
|
|
|
100.0 |
|
% |
$ |
120,924 |
|
|
$ |
6,491,338 |
|
|
|
100.0 |
|
% |
$ |
126,142 |
|
|
$ |
5,445,015 |
|
|
|
100.0 |
|
% |
$ |
136,142 |
|
(A)Balance includes $120.9 million UPB of loans held for investment at amortized cost as of March 31, 2026, $126.1 million as of December 31, 2025, and $136.1 million as of March 31, 2025 in our COVID-19 forbearance program.
Loans that are 90+ days past due, in bankruptcy, in foreclosure, or not accruing interest are considered nonperforming loans. Nonperforming loans were $692.1 million, or 10.1% of our held for investment loan portfolio as of March 31, 2026, compared to $554.5 million, or 8.5% as of December 31, 2025, and $587.8 million, or 10.8% as of March 31, 2025. The increase in total nonperforming loans as of March 31, 2026 compared to December 31, 2025 and March 31, 2025 was primarily due to an increase in the size and aging of our portfolio.
Resolution of Nonperforming Loans
Historically, most loans that become nonperforming resolve prior to converting to REO. The following tables summarize the resolution activities of loans that became nonperforming prior to the beginning of the periods indicated or became nonperforming and subsequently resolved during the periods indicated. We resolved $70.1 million of long-term and short-term nonperforming loans for the quarter ended March 31, 2026, compared to $78.1 million for the quarter ended December 31, 2025, and $68.3 million for the quarter ended March 31, 2025. We recovered total revenue of $4.6 million, $5.2 million and $7.6 million for the quarters ended March 31, 2026, December 31, 2025, and March 31, 2025, respectively. This is largely the result of collecting all regular accrued interest, default interest, and prepayment penalties in excess of the principal on loans.
The tables below include resolutions of our long-term nonperforming loans during the periods indicated. Historically, we have resolved our nonperforming loans at a gain over and above contractual interest due. Below is a breakout of the net gains, regular accrued interest income and expense recognized with the resolution of these nonperforming loans. Total nonperforming loans
recovered include default interest, prepayment penalty, and contractual regular interest received, and any servicing advance recovered or written off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Three Months Ended March 31, 2026 |
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Long-Term Nonperforming Loans |