Rocket Companies, Inc. (RKT) FY 2021 MD&A

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

The following management’s discussion and analysis of our financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by reference to, our consolidated financial statements and the related notes and other information included elsewhere in this Annual Report on Form 10-K (the “Form 10-K”). This discussion and analysis contains forward-looking statements that involve risks and uncertainties which could cause our actual results to differ materially from those anticipated in these forward-looking statements, including, but not limited to, risks and uncertainties discussed below under the heading “Special Note Regarding Forward-Looking Statements,” and in Part I and elsewhere in this Form 10-K.

Special Note Regarding Forward-Looking Statements

This Form 10-K contains forward-looking statements, which involve risks and uncertainties. These forward-looking statements are generally identified by the use of forward-looking terminology, including the terms “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and, in each case, their negative or other various or comparable terminology. All statements other than statements of historical facts contained in this Form 10-K, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. As you read this Form 10-K, you should understand that these statements are not guarantees of performance or results. They involve known and unknown risks, uncertainties and assumptions, including those described under the heading “Risk Factors” in this Form 10-K. Although we believe that these forward-looking statements are based upon reasonable assumptions, you should be aware that many factors, including those described under the heading “Risk Factors” in this Form 10-K, could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements.

Our forward-looking statements made herein are made only as of the date of this Form 10-K. We expressly disclaim any intent, obligation or undertaking to update or revise any forward-looking statements made herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this Form 10-K.

Objective

The following discussion provides an analysis of the Company's financial condition, cash flows and results of operations from management's perspective and should be read in conjunction with the consolidated financial statements and notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K. Our objective is to provide discussion of events and uncertainties known to management that are reasonably likely to cause reported financial information not to be indicative of future operating results or of future financial condition and to offer information that provides understanding of our financial condition, cash flows and results of operations.

Executive Summary

We are a Detroit-based FinTech holding company consisting of tech-driven real estate, mortgage and eCommerce businesses. We are committed to providing an industry-leading client experience powered by our platform. In addition to Rocket Mortgage, the nation’s largest mortgage lender, we have expanded into complementary industries, such as real estate services, personal lending, auto sales, solar, and personal finance where we seek to deliver innovative client solutions leveraging our Rocket platform.

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Recent Developments

Business Update in Response to COVID-19 Impact

As of December 31, 2021, 20,652 clients, or 0.81% of the total serviced portfolio, have entered into a forbearance plan related to COVID-19. Since year end, we’ve seen positive developments in the number of clients entering into forbearance and as of January 31, 2022, the total number of clients in a forbearance plan related to COVID-19 was 18,909, or 0.73% of the portfolio.

Share Repurchase Program

As of February 18, 2022, Rocket Companies has repurchased 20.7 million shares at a weighted average price of $15.08. Cumulatively, we have returned $312.2 million to shareholders under the $1 billion Share Repurchase Program authorized in November 2020.

Year ended December 31, 2021 summary

For the year ended December 31, 2021, we originated $351.2 billion in residential mortgage loans, which was a $31.0 billion, or 9.7%, increase from the year ended December 31, 2020. Our Net income was $6.1 billion for the year ended December 31, 2021, compared to a Net income of $9.4 billion for the year ended December 31, 2020. We generated $6.2 billion of Adjusted EBITDA for the year ended December 31, 2021, which was a decrease of $5.0 billion, or 44.9%, compared to $11.2 billion for the year ended December 31, 2020. For more information on Adjusted EBITDA, please see “Non-GAAP Financial Measures” below.

The decrease in Net income and Adjusted EBITDA was primarily driven by a decrease of $4.6 billion, or 30.5%, in Gain on sale of loans, net which was driven primarily by a decrease in gain on sale margin in the year ended December 31, 2021. In addition, the year ended December 31, 2021 results included an increase in expenses associated with higher production levels as compared to the year ended December 31, 2020 results. The increase in salaries, commissions and team member benefits of $118.5 million, or 3.7%, was primarily due to hiring in production roles to support the increased volume levels, as well as hiring of key talent such as technology and product strategy teams. General and administrative costs increased by $130.3 million, or 12.4%, in the year ended December 31, 2021 as compared to the year ended December 31, 2020 driven primarily due to increases in third party technology spend to support increased production, partially offset by a decrease in the costs related to the Small Business Administration ("SBA") loan program at Rocket Loans. Marketing and advertising expenses increased by $299.7 million, or 31.5%, in the year ended December 31, 2021 as compared to the year ended December 31, 2020 as a result of higher performance marketing to associated with higher production and an increase in brand marketing spend related to the reintroduction of many sporting and other live events that were cancelled in 2020 due to the COVID-19 pandemic.

As of December 31, 2021, our servicing portfolio, including loans subserviced for others, included approximately $551.9 billion of UPB and 2.6 million client loans. The portfolio primarily consists of high quality performing GSE and government (FHA and VA) loans. As of December 31, 2021, our delinquent loans (defined as 60-plus days past-due) were 1.60% of our total portfolio. Excluding clients in forbearance plans, our delinquent loans were 0.94% as of December 31, 2021. We monitor the MSR portfolio on a regular basis seeking to optimize our portfolio by evaluating the risk and the client lifetime value. As part of these efforts we sold the servicing on approximately 240,000 loans with $93.3 billion in UPB during the year ended December 31, 2021. These sales were more than offset by new loans that were added to the MSR portfolio organically during the period.

Year ended December 31, 2020 summary

For the year ended December 31, 2020, we originated $320.2 billion in residential mortgage loans, which was an $175.0 billion, or 120.6% increase from the year ended December 31, 2019. Our Net income was $9.4 billion for the year ended December 31, 2020, up $8.5 billion, or 947.7%, compared to $897.1 million for the year ended December 31, 2019. We generated $11.2 billion of Adjusted EBITDA for the year ended December 31, 2020, which was an increase of $9.2 billion, or 462.5%, in the year ended December 31, 2020, compared to $2.0 billion in the year ended December 31, 2019. For more information on Adjusted EBITDA, please see "Non-GAAP Financial Measures" below.

The increase in net income and Adjusted EBITDA was primarily driven by an increase of $10.2 billion, or 206.9% in gain on sale of loans, net which was driven primarily by the increase in origination volume in the year ended December 31, 2020 noted above. Other income also increased $1.1 billion, or 144.4%, due primarily to revenue generated from Amrock's title insurance services, property valuation and settlement services that was also driven by the increase in origination volume noted above and revenue earned at Rocket Loans from processing 19.9 million unique loan recommendations through the economic injury disaster loans program offered by the Small Business Administration in response to the COVID-19 pandemic. These increases were partially offset by a decrease in collection/realization of cash flows from MSRs of $284.5 million, or 35.3%, which is a reduction in revenue primarily due to an increase in the volume of loans paid in full prior to their scheduled maturity from our servicing portfolio (referred to as ‘prepayment speed’) in the year ended December 31, 2020 as compared to the year ended of December 31, 2019. In addition, the year ended December 31, 2020 results include increased expenses associated with higher production levels as compared to the year ended December 31, 2019 results. The increase in production led to an increase in salaries, commissions and team member benefits of $1.2 billion, or 55.5%, primarily due to variable compensation and an increase in team members in production roles to support our continued growth. General and administrative costs also increased by $368.1 million, or 53.7%, in the year ended December 31, 2020 as compared to the year ended December 31, 2019 driven primarily by higher loan processing expenses due to increased production as well as expenses associated with the increased revenues from Rocket Loans noted above. Other expenses increased by $335.8 million, or 94.6%, in the year ended December 31, 2020 as compared to the year ended December 31, 2019 driven by expenses incurred to support the higher level of title insurance services, property valuation and settlement services due to the increased origination volumes noted above. Other expenses also increased due to an increase in payoff interest expense that resulted from an increase in the volume of loans paid in full prior to their scheduled maturity from our servicing portfolio and due to expenses incurred in connection with the sale of MSRs in the year ended December 31, 2020. When individual loans are paid off, we are required to remit interest for an entire month regardless of the date of payoff; however, clients are only responsible for interest accrued up to the date of payoff. The difference between the interest we are required to remit to investors and the interest we collect from the client as a result of an early payoff is referred to as “payoff interest”.

Non-GAAP Financial Measures

To provide investors with information in addition to our results as determined by GAAP, we disclose Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA as non-GAAP measures which management believes provide useful information to investors. These measures are not financial measures calculated in accordance with GAAP and should not be considered as a substitute for revenue, net income, or any other operating performance measure calculated in accordance with GAAP, and may not be comparable to a similarly titled measure reported by other companies.

We define “Adjusted Revenue” as total revenues net of the change in fair value of mortgage servicing rights (“MSRs”) due to valuation assumptions (net of hedges). We define “Adjusted Net Income” as tax-effected earnings before non-cash share-based compensation expense, the change in fair value of MSRs due to valuation assumptions (net of hedges), loss on extinguishment of Senior Notes, a litigation accrual, Change in Tax receivable agreement liability, and the tax effects of those adjustments. We define “Adjusted Diluted EPS” as Adjusted Net Income divided by the diluted weighted average number of Class A common stock outstanding for the applicable period, which assumes the pro forma exchange and conversion of all outstanding Class D common stock for Class A common stock. We define “Adjusted EBITDA” as earnings before interest and amortization expense on non-funding debt, income tax, and depreciation and amortization, net of the change in fair value of MSRs due to valuation assumptions (net of hedges), share-based compensation expense, and a litigation accrual. We exclude from each of these non-GAAP measures the change in fair value of MSRs due to valuation assumptions (net of hedges) as this represents a non-cash non-realized adjustment to our total revenues, reflecting changes in assumptions including discount rates and prepayment speed assumptions, mostly due to changes in market interest rates, which is not indicative of our performance or results of operation. We also exclude effects of contractual prepayment protection associated with sales of MSRs. Adjusted EBITDA includes interest expense on funding facilities, which are recorded as a component of “Interest income, net”, as these expenses are a direct cost driven by loan origination volume. By contrast, interest and amortization expense on non-funding debt is a function of our capital structure and is therefore excluded from Adjusted EBITDA.

In first quarter of 2021, we revised our definition of Adjusted Net income and Adjusted EBITDA to exclude a litigation accrual that does not directly affect what we consider to be our core operating performance. Excluding this cost did not impact Adjusted Net income or Adjusted EBITDA for the comparative periods presented. In the third quarter of 2021, we revised our definition of Adjusted Revenue, Adjusted Net income and Adjusted EBITDA to exclude the effects of contractual

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prepayment protection associated with sales of MSRs as this does not directly affect what we consider to be our core operating performance. Excluding these costs impacted Adjusted Revenue, Adjusted Net income, Adjusted Diluted EPS and Adjusted EBITDA for the comparative periods presented. In the fourth quarter of 2021, we revised our definition of Adjusted Net income to exclude loss on extinguishment of Senior Notes and change in tax receivable agreement liability as these do not directly affect what we consider to be our core operating performance. Excluding these costs impacted Adjusted Net income for the comparative periods presented. From time to time in the future, we may exclude other items if we believe that doing so is consistent with the goal of providing useful information to investors.

We believe that the presentation of Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA provides useful information to investors regarding our results of operations because each measure assists both investors and management in analyzing and benchmarking the performance and value of our business. Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA provide indicators of performance that are not affected by fluctuations in certain costs or other items. Accordingly, management believes that these measurements are useful for comparing general operating performance from period to period, and management relies on these measures for planning and forecasting of future periods. Additionally, these measures allow management to compare our results with those of other companies that have different financing and capital structures. However, other companies may define Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA differently, and as a result, our measures of Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA may not be directly comparable to those of other companies.

Although we use Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA as financial measures to assess the performance of our business, such use is limited because they do not include certain material costs necessary to operate our business. Additionally, our definitions of each of Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA allows us to add back certain non-cash charges and deduct certain gains that are included in calculating total revenues, net, net income attributable to Rocket Companies or net income (loss). However, these expenses and gains vary greatly, and are difficult to predict. They can represent the effect of long-term strategies as opposed to short-term results. Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA should be considered in addition to, and not as a substitute for, total revenues, net income attributable to Rocket Companies and net income (loss) in accordance with U.S. GAAP as measures of performance. Our presentation of Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA should not be construed as an indication that our future results will be unaffected by unusual or nonrecurring items.

Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

(a)    they do not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments;

(b)    Adjusted EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payment on our debt;

(c)    although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced or require improvements in the future, and Adjusted Revenue, Adjusted Net Income and Adjusted EBITDA do not reflect any cash requirement for such replacements or improvements; and

(d)    they are not adjusted for all non-cash income or expense items that are reflected in our Consolidated Statements of Cash Flows.

Because of these limitations, Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA are not intended as alternatives to total revenue, net income attributable to Rocket Companies or net income (loss) as an indicator of our operating performance and should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as measures of cash that will be available to us to meet our obligations. We compensate for these limitations by using Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA along with other comparative tools, together with U.S. GAAP measurements, to assist in the evaluation of operating performance. See below for reconciliation of these non-GAAP measures to their most comparable U.S. GAAP measures. Additionally, our U.S.

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GAAP-based measures can be found in the consolidated financial statements and related notes included elsewhere in this Form 10-K.

Reconciliation of Adjusted Revenue to Total Revenue, net

(1)    Reflects changes in assumptions including discount rates and prepayment speed assumptions, mostly due to changes in market interest rates, and the effects of contractual prepayment protection associated with sales of MSRs.

Reconciliation of Adjusted Net Income to Net Income Attributable to Rocket Companies

(1)    Reflects net income to Class A common stock from pro forma exchange and conversion of corresponding shares of our Class D common shares held by non-controlling interest holders as of December 31, 2021, 2020 and 2019.

(2)    Rocket Companies will be subject to U.S. Federal income taxes, in addition to state, local and Canadian taxes with respect to its allocable share of any net taxable income of Holdings. The adjustment to the provision for income tax reflects the effective tax rates below, assuming the Issuer owns 100% of the non-voting common interest units of Holdings.

(3)    Reflects changes in assumptions including discount rates and prepayment speed assumptions, mostly due to changes in market interest rates, and the effects of contractual prepayment protection associated with sales of MSRs.

(4)    Reflects legal accrual related to a specific legal matter.

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(5)    Reflects changes in estimates of tax rates and other variables of the Tax receivable agreement liability for which no income tax expense/benefit is recognized.

(6)    Tax impact of adjustments gives effect to the income tax related to non-cash share-based compensation expense, change in fair value of MSRs due to valuation assumptions, loss on extinguishment of Senior Notes, and the litigation accrual at the above described effective tax rates for each period.

(7)    Represents tax benefits due to the amortization of intangible assets and other tax attributes resulting from the purchase of Holdings units, net of payment obligations under Tax Receivable Agreement.

Reconciliation of Adjusted Diluted Weighted Average Shares Outstanding to Diluted Weighted Average Shares Outstanding

(1)    Reflects the pro forma exchange and conversion of non-dilutive all Class D common stock to Class A common stock.

(2)    Represents Adjusted Net Income for 2020 for the full fiscal year as presented.

(3)    This non-GAAP measure is not applicable for this period, as the reorganization transactions had not yet occurred.

Reconciliation of Adjusted EBITDA to Net Income

(1)    Reflects changes in assumptions including discount rates and prepayment speed assumptions, mostly due to changes in market interest rates and the effects of contractual prepayment protection associated with sales of MSR's.

(2)    Reflects legal accrual related to a specific legal matter.

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Key Performance Indicators

We monitor a number of key performance indicators to evaluate the performance of our business operations. Our loan production key performance indicators enable us to monitor our ability to generate gain on sale revenue as well as understand how our performance compares to the total mortgage origination market. Our servicing portfolio key performance indicators enable us to monitor the overall size of our servicing portfolio of business, the related value of our mortgage servicing rights, and the health of the business as measured by the average MSR delinquency rate. Other key performance indicators for other Rocket Companies, besides Rocket Mortgage ("Other Rocket Companies"), allow us to monitor both revenues and unit sales generated by these businesses. We also include Rockethomes.com average unique monthly visits, as we believe traffic on the site is an indicator of consumer interest.

The following summarizes key performance indicators of the business:

(1)    Rocket Mortgage origination volume and gain on sale margins exclude all reverse mortgage activity.

(2)    Market share information is calculated based on one to four family mortgage originations as reported by the Mortgage Bankers Association as of January 2022.

(3)    Gain on sale margin is the gain on sale of loans, net divided by net rate lock volume for the period, excluding all reverse mortgage activity. Gain on sale of loans, net includes the net gain on sale of loans, fair value of originated MSRs, and fair value adjustment on loans held for sale, divided by the UPB of loans subject to IRLC’s during the applicable period.

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(4)    MSR fair market value multiple is a metric used to determine the relative value of the MSR asset in relation to the annualized retained servicing fee, which is the cash that the holder of the MSR asset would receive from the portfolio as of such date. It is calculated as the quotient of (a) the MSR fair market value as of a specified date divided by (b) the weighted average annualized retained servicing fee for our MSR portfolio as of such date. The weighted average annualized retained servicing fee for our MSR portfolio was 0.284%, 0.304%, and 0.307% for the years ended December 31, 2021, 2020, and 2019, respectively. The vast majority of our portfolio consists of originated MSRs and consequently, the impact of purchased MSRs does not have a material impact on our weighted average service fee.

(5)    This metric measures our retention across a greater percentage of our client bases versus our recapture rate. We define "net client retention rate" as the number of clients that were active at the beginning of a period and which remain active at the end of the period, divided by the number of clients that were active at the beginning of the period. This metric excludes clients whose loans were sold during the period as well as clients to whom we did not actively market to due to contractual prohibitions or other business reasons. We define "active" as those clients who do not pay-off their mortgage with us and originate a new mortgage with another lender during the period.

(6)    This revenue is only reported annually.

(7)    Rockethomes.com average unique monthly visits is calculated by a third party service that monitors website activity. This metric does not have a direct correlation to revenues and is used primarily to monitor consumer interest in the Rockethomes.com site.

(8)    In addition to the closed loans Rocket Loans disclosed here, as noted above, during the year ended December 31, 2021 and December 31, 2020, we also processed more than 3.9 million and 19.9 million unique loan recommendations through the economic injury disaster loans program offered by the SBA.

(9)    Rocket Auto gross revenues includes all revenues generated from facilitating auto sales. Rocket Auto's Gross Merchandise Value, which represents the vehicle and other vehicle-related sales during the period, was $1,896 and $799 for the year ended December 31, 2021 and December 31, 2020, respectively.

(10)    Net revenue presented above is calculated as gross revenues less intercompany revenue eliminations, as a portion of the Other Rocket Companies revenues is generated through intercompany transactions.

Description of Certain Components of Financial Data

Components of revenue

Our sources of revenue include gain on sale of loans, loan servicing income, interest income, and other income.

Gain on sale of loans, net

Gain on sale of loans, net includes all components related to the origination and sale of mortgage loans, including (1) net gain on sale of loans, which represents the premium we receive in excess of the loan principal amount and certain fees charged by investors upon sale of loans into the secondary market, (2) loan origination fees, credits, points and certain costs, (3) provision for or benefit from investor reserves, (4) the change in fair value of interest rate locks (“IRLCs” or “rate lock”) and loans held for sale, (5) the gain or loss on forward commitments hedging loans held for sale and IRLCs, and (6) the fair value of originated MSRs.

An estimate of the gain on sale of loans, net is recognized at the time an IRLC is issued, net of an estimated pull-through factor. The pull-through factor is a key assumption and estimates the loan funding probability, as not all loans that reach IRLC status will result in a closed loan. Subsequent changes in the fair value of IRLCs and mortgage loans held for sale are recognized in current period earnings. When the mortgage loan is sold into the secondary market (i.e., funded), any difference between the proceeds received and the current fair value of the loan is recognized in current period earnings in gain on sale of loans.

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Loan origination fees generally include underwriting and processing fees. Loan origination costs include lender paid mortgage insurance, recording taxes, investor fees and other related expenses. Net loan origination fees and costs related to the origination of mortgage loans are recognized as a component of the fair value of IRLCs.

We establish reserves for our estimated liabilities associated with the potential repurchase or indemnity of purchasers of loans previously sold due to representation and warranty claims by investors. Additionally, the reserves are established for the estimated liabilities from the need to repay, where applicable, a portion of the premium received from investors on the sale of certain loans if such loans are repaid in their entirety within a specified time period after the sale of the loans. The provision for or benefit from investor reserves is recognized in current period earnings in gain on sale of loans.

We enter into derivative transactions to protect against the risk of adverse interest rate movements that could impact the fair value of certain assets, including IRLCs and loans held for sale. We primarily use forward loan sales commitments to hedge our interest rate risk exposure. Changes in the value of these derivatives, or hedging gains and losses, are included in gain on sale of loans.

Included in gain on sale of loans, net is also the fair value of originated MSRs, which represents the estimated fair value of MSRs related to loans which we have sold and retained the right to service.

Loan servicing income (loss), net

The value of newly originated MSRs is recognized as a component of the gain on sale of loans, net when loans are sold and the associated servicing rights are retained. Loan servicing fee income consists of the contractual fees earned for servicing the loans and includes ancillary revenue such as late fees and modification incentives. Loan servicing fee income is recorded to income as earned, which is upon collection of payments from borrowers. We have elected to subsequently measure the MSRs at fair value on a recurring basis. Changes in fair value of MSRs, net primarily due to the realization of expected cash flows and/or changes in valuation inputs and estimates, are recognized in current period earnings. Furthermore, we also include in loan servicing income (loss), net the gains and losses related to MSRs collateral financing liability and MSRs financing liability.

We regularly perform a comprehensive analysis of the MSR portfolio in order to identify and sell certain MSRs that do not align with our strategy for retaining MSRs. To hedge against interest rate exposure on these assets, we enter into forward loan purchase commitments. Changes in the value of derivatives designed to protect against MSR value fluctuations, or MSR hedging gains and losses, are included as a component of servicing fee loss, net.

Interest income, net

Interest income, net is interest earned on mortgage loans held for sale net of the interest expense paid on our loan funding facilities.

Other income

Other income includes revenues generated from Amrock (title insurance services, property valuation, and settlement services), Rocket Homes (real estate network referral fees), Rocket Auto (auto sales business revenues), Core Digital Media (third party lead generation revenues), Rock Connections (third party sales and support revenues), Truebill (personal finance) and professional service fees. The professional service fees represent amounts paid for services provided by Rocket Mortgage to affiliated companies. For additional information on such fees, see Note 7, Transactions with Related Parties in the notes to the consolidated financial statements included elsewhere in this Form 10-K for additional detail. Services are provided primarily in connection with technology, facilities, human resources, accounting, training, and security functions. Other income also includes revenues from investment interest income.

Components of operating expenses

Our operating expenses as presented in the statement of operations data include salaries, commissions and team member benefits, general and administrative expenses, marketing and advertising expenses, and other expenses.

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Salaries, commissions and team member benefits

Salaries, commissions and team member benefits include all payroll, benefits, and stock compensation expenses for our team members.

General and administrative expenses

General and administrative expenses primarily include occupancy costs, professional services, loan processing expenses on loans that do not close or that are not charged to clients on closed loans, commitment fees, fees on loan funding facilities, license fees, office expenses and other operating expenses.

Marketing and advertising expenses

Marketing and advertising expenses are primarily related to performance and brand marketing.

Other expenses

Other expenses primarily consist of depreciation and amortization on property and equipment, and mortgage servicing related expenses.

Income taxes

Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. We are subject to income taxes predominantly in the United States and Canada. These tax laws are often complex and may be subject to different interpretations. To determine the financial statement impact of accounting for income taxes, the Company must make assumptions and judgements about how to interpret and apply these complex tax laws to numerous transactions and business events, as well as make judgements regarding the timing of when certain items may affect taxable income in the United States and Canada.

Deferred income taxes arise from temporary differences between the financial statement carrying amount and the tax basis of assets and liabilities. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations. If based upon all available positive and negative evidence, it is more likely than not that the deferred tax assets will not be realized, a valuation allowance is established. The valuation allowance may be reversed in a subsequent reporting period if the Company determines that it is more likely than not that all or part of the deferred tax asset will become realizable.

Our interpretations of tax laws are subject to review and examination by various taxing authorities and jurisdictions where the Company operates, and disputes may occur regarding its view on a tax position. These disputes over interpretations with the various tax authorities may be settled by audit, administrative appeals or adjudication in the court systems of the tax jurisdictions in which the Company operates. We regularly review whether we may be assessed additional income taxes as a result of the resolution of these matters, and the Company records additional reserves as appropriate. In addition, the Company may revise its estimate of income taxes due to changes in income tax laws, legal interpretations, and business strategies. We recognize the financial statement effects of uncertain income tax positions when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. We record interest and penalties related to uncertain income tax positions in income tax expense. For additional information regarding our provision for income taxes refer to Note 11, Income Taxes.

Tax Receivable Agreement

In connection with the reorganization, we entered into a Tax Receivable Agreement with RHI and our Chairman that will obligate us to make payments to RHI and our Chairman generally equal to 90% of the applicable cash savings that we actually realize as a result of the tax attributes generated by (i) certain increases in our allocable share of the tax basis in Holdings’ assets resulting from (a) the purchases of Holdings Units (along with the corresponding shares of our Class D common stock or Class C common stock) from RHI and our Chairman (or their transferees of Holdings Units or other assignees) using the net proceeds from our initial public offering or in any future offering, (b) exchanges by RHI and our Chairman (or their transferees of Holdings Units or other assignees) of Holdings Units (along with the corresponding shares

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of our Class D common stock or Class C common stock) for cash or shares of our Class B common stock or Class A common stock, as applicable, or (c) payments under the Tax Receivable Agreement; (ii) tax benefits related to imputed interest deemed arising as a result of payments made under the Tax Receivable Agreement and (iii) disproportionate allocations (if any) of tax benefits to Holdings as a result of section 704(c) of the Code that relate to the reorganization transactions. We will retain the benefit of the remaining 10% of these tax savings.

Share-based compensation

Share-based compensation is comprised of both equity and liability awards and is measured and expensed accordingly under Accounting Standards Codification (“ASC”) 718 Compensation—Stock Compensation. As indicated above, share-based compensation expense is included as part of salaries, commissions and team member benefits.

Non-Controlling Interest

We are the sole managing member of Holdings and consolidate the financial results of Holdings. Therefore, we report a non-controlling interest based on the Holdings Units of Holdings held by our Chairman and RHI on our Consolidated Balance Sheets. Income or loss is attributed to the non-controlling interests based on the weighted average Holdings Units outstanding during the period and is presented on the Consolidated Statements of Income and Comprehensive Income. Refer to Note 16, Non-controlling Interests for more information on non-controlling interests.

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Results of Operations for the years ended December 31, 2021, 2020 and 2019

Summary of Operations

Gain on sale of loans, net

The components of gain on sale of loans for the periods presented were as follows:

(1)    Net gain on sale of loans represents the premium received in excess of the UPB, plus net origination fees.

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The table below provides details of the characteristics of our mortgage loan production for each of the periods presented:

(1)    Net rate lock volume includes the UPB of loans subject to IRLCs, net of the pull-through factor as described in the “Description of Certain Components of Financial Data” section above.

(2)    Gain on sale margin is a ratio of gain on sale of loans, net to the net rate lock volume for the period as described above. Gain on sale of loans, net includes the net gain on sale of loans, fair value of originated MSRs, fair value adjustment gain on loans held for sale and IRLC’s, and revaluation loss from forward commitments economically hedging loans held for sale and IRLCs. This metric is a measure of profitability for our on-going mortgage business and therefore excludes revenues from Other Rocket Companies and reverse mortgage activity. See the table above for each of the components of gain on sale of loans, net.

Gain on sale of loans, net was $10.5 billion for the year ended December 31, 2021, a decrease of $4.6 billion, or 30.5%, as compared with $15.1 billion for the year ended December 31, 2020. The decrease in gain on sale of loans, net was primarily driven by a decrease in gain on sale margin to 3.13% from 4.46% for the years ended December 31, 2021 and 2020, respectively. These decreases were partially offset by an increase in mortgage loan origination volume of $31.0 billion, or 9.7%. The decrease in gain on sale margin during the year ended December 31, 2021 is driven by a compression in the primary-secondary spread and an increase in Partner Network as a percentage of our overall production mix. The primary-secondary spread refers to the difference between the primary mortgage rate at which lenders originate loans with borrowers and the rate in the secondary market in which lenders securitize loans into mortgage backed securities.

Gain on sale of loans, net was $15.1 billion for the year ended December 31, 2020, an increase of $10.2 billion, or 206.9%, as compared with $4.9 billion for the year ended December 31, 2019. The increase in gain on sale of loans, net was primarily driven by an increase in mortgage loan origination volume of $175.0 billion, or 120.6%. There was an increase in gain on sale margin to 4.46% in 2020 compared to 3.19% in 2019, respectively. The increase in gain on sale margin was driven by strong consumer demand for mortgages due to historically low mortgage rates and the related increase in the primary-secondary spreads as compared to 2019.

Net gain on sales of loans decreased $5.3 billion, or 41.6%, to $7.5 billion for the year ended December 31, 2021 compared to $12.8 billion for the year ended December 31, 2020. This was driven by a decrease in gain on sale margin noted above partially offset by an increase in mortgage loan origination volume .

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Net gain on sales of loans increased $9.5 billion, or 292.2%, to $12.8 billion in the year ended December 31, 2020 compared to $3.3 billion for the year ended December 31, 2019. This was driven by an increase in mortgage loan origination volume and an increase in gain on sale margin noted above.

The fair value of MSRs originated was $3.9 billion for the year ended December 31, 2021, an increase of $0.7 billion, or 23.7%, as compared with $3.1 billion during the year ended December 31, 2020. The increase was primarily due to an increase in sold loan volume of $46.3 billion, or 15.1%, from $306.4 billion for the year ended December 31, 2020 to $352.7 billion for the year ended December 31, 2021. The increase in sold loan volume was partially offset by a decrease in the weighted average servicing fee during the year ended December 31, 2021 as compared to the year ended December 31, 2020.

The fair value of MSRs originated was $3.1 billion for the year ended December 31, 2020, an increase of $1.4 billion, or 76.4%, as compared with $1.8 billion during the year ended December 31, 2019. The increase was primarily due to an increase in sold loan volume noted above.

Loan servicing income (loss), net

For the periods presented, loan servicing income (loss), net consisted of the following:

Loan servicing income, net was $636.5 million for the year ended December 31, 2021, which compares to Loan servicing loss, net of $1.3 billion for the year ended December 31, 2020. The gain was driven primarily by the change in fair market value of MSRs of $689.4 million in year ended December 31, 2021 as compared to a reduction in fair market value of MSRs of $2.4 billion in year ended December 31, 2020.

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The change in MSR fair value was a net decrease of $689,432 for the year ended December 31, 2021, as compared with a net loss of $2.4 billion for the year ended December 31, 2020. The change in fair value during the year ended December 31, 2021 included $1.2 billion of loss due to collection/realization of cash flows and an increase in fair value due to change in valuation assumptions (net of hedges) of $0.5 billion primarily driven by a decrease in prepayment speeds from 15.8% at December 31, 2020 to 8.7% at December 31, 2021. The prepayment speed valuation assumption represents the annual rate at which serviced clients are estimated to repay their UPB. The decrease in fair value during the year ended December 31, 2020 included $1.1 billion of due to collection/realization of cash flows and a decrease in fair value due to changes in valuation model inputs or assumptions (net of hedges) of $1.3 billion primarily driven by an increase in prepayment speeds from 14.5% at December 31, 2019 to 15.8% at December 31, 2020.

Interest income, net

The components of interest income, net for the periods presented were as follows:

Interest income, net was $168.9 million for the year ended December 31, 2021, an increase of $84.9 million, or 101.0%, as compared to $84.1 million for the year ended December 31, 2020. The increase was driven primarily by an increase in self-funding of loans, as well as an increase in mortgage loan origination volume.

Other income

Other income decreased $0.2 billion, or 8.9%, to $1.6 billion for the year ended December 31, 2021 as compared to $1.8 billion for the year ended December 31, 2020. The change was driven by decreased revenues from Rocket Loans in 2021 when compared to 2020, mainly as a result of a reduction in revenues earned from processing economic injury disaster loans offered by the Small Business Administration in response to the COVID-19 pandemic.

Expenses

Expenses for the periods presented were as follows:

Total expenses were $6.7 billion for the year ended December 31, 2021, an increase of $0.6 billion or 10.0%, as compared with $6.1 billion for the year ended December 31, 2020. This was driven primarily by increases in salaries, commissions and team member benefits, general and administrative expenses, and marketing and advertising expenses as described below.

Salaries, commissions and team member benefits were $3.4 billion for the year ended December 31, 2021, an increase of $0.1 billion, or 3.7%, as compared with $3.2 billion for the year ended December 31, 2020. The increase was primarily due to hiring in production roles to support the increased volume levels, as well as hiring of key talent such as technology and product strategy teams.

General and administrative expenses were $1.2 billion for the year ended December 31, 2021, an increase of $0.1 billion, or 12.4%, as compared with $1.1 billion for the year ended December 31, 2020. The increase was primarily due to increases in

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third party technology spend to support increased production, partially offset by a decrease in the costs related to the SBA loan program at Rocket Loans.

Marketing and advertising expenses were $1.2 billion for the year ended December 31, 2021, an increase of $299.7 million, or 31.5%, as compared with $0.9 billion for the year ended December 31, 2020. The increased expense was a result of an increase in performance marketing associated with higher production and an increase in brand marketing spend related related to the reintroduction of many sporting and other live events that were cancelled in 2020 due to the COVID-19 pandemic.

Summary results by segment for the years ended December 31, 2021, 2020 and 2019

Our operations are organized by distinct marketing channels which promote client acquisition into our platform and include two reportable segments: Direct to Consumer and Partner Network. In the Direct to Consumer segment, clients have the ability to interact with the Rocket Mortgage app and/or with our Rocket Cloud Force, consisting of sales team members across our platform. We market to potential clients in this segment through various performance marketing channels. The Direct to Consumer segment derives revenue from originating, closing, selling and servicing predominantly agency-conforming loans, which are pooled and sold to the secondary market. This also includes providing title insurance services, appraisals and settlement services to these clients as part of our end-to-end mortgage origination experience. Servicing activities are fully allocated to the Direct to Consumer segment as they are viewed as an extension of the client experience with the primary objective to establish and maintain positive, regular touchpoints with our clients, which positions us to have high retention and recapture the clients’ next refinance, purchase, personal loan, and auto sales transactions. These activities position us to be the natural choice for clients’ next refinance or purchase transaction.

The Rocket Professional platform supports our Partner Network segment, where we leverage our superior client service and widely recognized brand to grow marketing and influencer relationships, and our mortgage broker partnerships through Rocket Pro TPO. Our marketing partnerships consist of well-known consumer-focused companies that find value in our award-winning client experience and want to offer their clients mortgage solutions with our trusted, widely recognized brand. These organizations connect their clients directly to us through marketing channels and a referral process. Our influencer partnerships are typically with companies that employ licensed mortgage professionals that find value in our client experience, technology and efficient mortgage process, where mortgages may not be their primary offering. We also enable clients to start the mortgage process through the Rocket platform in the way that works best for them, including through a local mortgage broker. Rocket Pro TPO works exclusively with mortgage brokers, community banks and credit unions. Rocket Pro TPO’s partners provide the face-to-face service their clients desire, while tapping into the expertise, technology and award-winning process of Rocket Mortgage.

We measure the performance of the segments primarily on a contribution margin basis. Contribution margin is intended to measure the direct profitability of each segment and is calculated as Adjusted Revenue less directly attributable expenses. Adjusted Revenue is a non-GAAP financial measure described above. Directly attributable expenses include salaries, commissions and team member benefits, marketing and advertising expenses, general and administrative expenses and other expenses, such as direct servicing costs and origination costs. For segments, we measure gain on sale margin of sold loans and refer to this metric as ‘sold loan gain on sale margin.’ A loan is considered sold when it is sold to investors on the secondary market. In previous disclosures, "sold loans" were referred to as "funded loans". Sold loan gain on sale margin represents revenues on loans that have been sold divided by the sold UPB amount. Sold loan gain on sale margin is used specifically in the context of measuring the gain on sale margins of our Direct to Consumer and Partner Network segments. Sold loan gain on sale margin is an important metric in evaluating the revenue generating performance of our segments as it allows us to measure this metric at a segment level with a high degree of precision. By contrast, ‘gain on sale margin’, which we use outside of the segment discussion, measures the gain on sale revenue generation of our combined mortgage business. See below for our overview and discussion of segment results for the years ended December 31, 2021, 2020 and 2019. For additional discussion, see Note 15, Segments of the consolidated financial statements of this Form 10-K.

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Direct to Consumer Results

(1)    Direct expenses attributable to operating segments exclude corporate overhead, depreciation and amortization, and interest and amortization expense on non-funding debt.

For the year ended December 31, 2021, Direct to Consumer Adjusted Revenue decreased $2.9 billion, or 22.4% to $10.1 billion from $13.0 billion for the year ended December 31, 2020. The decrease was driven by a decrease in net rate lock gain on sale margin, resulting in decreased gain on sale revenue of $3.2 billion, or 26.8%, in the year ending December 31, 2021. On a sold loan basis, the Direct to Consumer segment generated $213.9 billion in volume in the year ended December 31, 2021, an increase of $14.0 billion, or 7.0%, as compared to year ended December 31, 2020. In addition, sold loan gain on sale margin was 4.75% in the year ended December 31, 2021, as compared to 5.48% in year ended December 31, 2020, driven primarily by compression in primary-secondary spreads.

For the year ended December 31, 2021, Direct to Consumer attributable expenses increased $60.2 million, or 1.7%, to $3.7 billion in 2021 compared to $3.6 billion in 2020. The increase was primarily due to higher marketing spend and more team members in production roles, partially offset by lower variable commissions.

For the year ended December 31, 2021, Direct to Consumer Contribution Margin decreased $3.0 billion, or 31.8%, to $6.4 billion compared to $9.4 billion for the year ended December 31, 2020. The decrease in Contribution Margin was driven primarily due to a decrease in gain on sale revenue, which was driven by a lower net rate lock gain on sale margin.

For the year ended December 31, 2020, Direct to Consumer Adjusted Revenue increased $8.0 billion, or 161.2%, to $13.0 billion from $5.0 billion for the year ended December 31, 2019. The increase was driven by growth in Direct to Consumer sold loan volume and an increase in sold loan gain on sale margin, resulting in increased gain on sale revenue of $7.8 billion, or 179.6%, in 2020. On a sold loan basis, the Direct to Consumer segment generated $199.8 billion in volume in 2020, an increase of $110.9 billion, or 124.7% as compared to 2019. In addition, sold loan gain on sale margin was 5.48% in 2020 as compared to 4.45% in 2019, driven by strong consumer demand for mortgages due to historically low mortgage rates and the related increase in the primary-secondary spreads as compared to 2019. The increased adjusted revenue also reflects increased other income of $457.2 million, or 103.1%, related primarily to revenues generated from title insurance services, property valuation and settlement services from increased origination levels. Revenues from title insurance services, property valuation and settlement services are generated by Amrock.

For the year ended December 31, 2020, Direct to Consumer Attributable Expenses increased $1.1 billion, or 44.2%, to $3.6 billion in 2020 compared to $2.5 billion in 2019. The increase was primarily due to an increase in variable compensation and an increase in team members in production roles needed to support volume growth. The increase also reflects greater loan processing costs due to higher loan production and an increase in expenses incurred to support the higher level of title

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insurance services, valuation and settlement services due to the increased sold loan volumes noted above, as well as an increase in payoff interest expense.

For the year ended December 31, 2020, Direct to Consumer Contribution Margin increased $6.9 billion, or 281.4%, to $9.4 billion compared to $2.5 billion for the year ended December 31, 2019. The increase in Contribution Margin was driven primarily by the increase in Direct to Consumer sold loan volume and sold loan gain on sale margin as noted above.

Partner Network Results

For the year ended December 31, 2021, Partner Network Adjusted Revenue decreased $1.4 billion, or 44.5% to $1.8 billion from $3.2 billion for the year ended December 31, 2020. The decrease was driven by a decrease in net rate lock gain on sale margin. On a sold loan basis, the Partner Network segment generated $138.8 billion in volume in the year ended December 31, 2021, an increase of $32.3 billion, or 30.3%, as compared to the year ended December 31, 2020. In addition, sold loan gain on sale margin was 1.20% in the year ended December 31, 2021, as compared to 2.19% in the year ended December 31, 2020, driven primarily by compression in primary-secondary spreads.

For the year ended December 31, 2021, Partner Network Directly Attributable Expenses increased $148.8 million, or 27.7%, to $686.3 million in 2021 compared to $537.5 million in 2020. The increase was driven by higher loan processing costs and more team members in production roles to support the increase in sold loan volume.

For the year ended December 31, 2021, Partner Network Contribution Margin decreased $1.6 billion, or 59.2%, to $1.1 billion in 2021 compared to $2.6 billion in 2020. The decrease in Contribution Margin was driven by the decrease in net rate lock gain on sale margin noted above and an increase in directly attributable expenses.

For the year ended December 31, 2020, Partner Network Adjusted Revenue increased $2.6 billion, or 433.3% to $3.2 billion from $596.3 million for the year ended December 31, 2019. The increase was driven by growth in sold loan volume and gain on sale margin, resulting in an increase in gain on sale revenue of $2.4 billion, or 454.7%, in 2020. On a sold loan basis, the Partner Network segment generated $106.5 billion in volume in 2020, an increase of $59.8 billion, or 127.9% as compared to 2019. In addition, sold loan gain on sale margin was 2.19% in 2020 as compared to 0.77% in 2019, driven primarily by high consumer demand for mortgages, due to historically low mortgage rates and the related increase in the primary-secondary spreads as compared to 2019.

For the year ended December 31, 2020, Partner Network Directly attributable expenses increased $292.3 million, or 119.2%, to $537.5 million in 2020 compared to $245.3 million in 2019. The increase was primarily due to an increase in variable compensation and an increase in team members in production roles needed to support growth.

For the year ended December 31, 2020, Partner Network Contribution Margin increased $2.3 billion, or 652.9%, to $2.6 billion in 2020 compared to $351.0 million in 2019. The increase in Contribution Margin was driven primarily by the increase in sold loan volume and gain on sale margin noted above.

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Liquidity and Capital Resources

Historically, our primary sources of liquidity have included:

•    borrowings, including under our loan funding facilities and other secured and unsecured financing facilities;

•    cash flow from our operations, including:

•    sale of whole loans into the secondary market;

•    sale of mortgage servicing rights into the secondary market;

•    loan origination fees;

•    servicing fee income; and

•    interest income on loans held for sale; and

•    cash and marketable securities on hand.

Historically, our primary uses of funds have included:

•    origination of loans;

•    payment of interest expense;

•    prepayment of debt;

•    payment of operating expenses; and

•    distributions to RHI including those to fund distributions for payment of taxes by its ultimate shareholders.

We are also subject to contingencies which may have a significant impact on the use of our cash.

In order to originate and aggregate loans for sale into the secondary market, we use our own working capital and borrow or obtain money on a short-term basis primarily through committed and uncommitted loan funding facilities that the Company has established with large global banks.

Our loan funding facilities are primarily in the form of master repurchase agreements. We also have loan funding facilities directly with the GSEs. Loans financed under these facilities are generally financed at approximately 97% to 99% of the principal balance of the loan (although certain types of loans are financed at lower percentages of the principal balance of the loan), which requires us to fund the balance from cash generated from the Company's operations. Once closed, the underlying residential mortgage loan that is held for sale is pledged as collateral for the borrowing or advance that was made under these loan funding facilities. In most cases, the loans will remain in one of the loan funding facilities for only a short time, generally less than one month, until the loans are pooled and sold. During the time the loans are held for sale, we earn interest income from the borrower on the underlying mortgage loan. This income is partially offset by the interest and fees we have to pay under the loan funding facilities.

When we sell a pool of loans in the secondary market, the proceeds received from the sale of the loans are used to pay back the amounts we owe on the loan funding facilities. We rely on the cash generated from the sale of loans to fund future loans and repay borrowings under our loan funding facilities. Delays or failures to sell loans in the secondary market could have an adverse effect on our liquidity position.

As discussed in Note 6, Borrowings, of the consolidated financial statements included in this Form 10-K, as of December 31, 2021, we had 19 different funding facilities in different amounts and with various maturities together with the 2.875% Senior Notes due 2026, 5.250% Senior Notes due 2028, 3.625% Senior Notes due 2029, 3.875% Senior Notes due 2031 and 4.000% Senior Notes due 2033. Also referenced in Note 6, Borrowings, is the interest rate charged by lenders on funding facilities. At

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December 31, 2021, the aggregate available amount under our facilities was $31.0 billion with combined outstanding balances of $14.7 billion and unutilized capacity of $16.3 billion.

During the fourth quarter of 2021, we purchased $948.0 million of the outstanding principal amount of the 2028 Senior Notes and received consent from the holders of such notes to remove substantially all of the restrictive covenants applicable to the 2028 Senior Notes in a Tender Offer and Consent Solicitation.

The amount of financing actually advanced on each individual loan under our loan funding facilities, as determined by agreed upon advance rates, may be less than the stated advance rate depending, in part, on the market value of the mortgage loans securing the financings. Each of our loan funding facilities allows the bank providing the funds to evaluate the market value of the loans that are serving as collateral for the borrowings or advances being made. If the bank determines that the value of the collateral has decreased, the bank can require us to provide additional collateral or reduce the amount outstanding with respect to those loans (e.g., initiate a margin call). Our inability or unwillingness to satisfy the request could result in the termination of the facilities and possible default under our other loan funding facilities. In addition, a large unanticipated margin call could have a material adverse effect on our liquidity.

The amount owed and outstanding on our loan funding facilities fluctuates significantly based on our origination volume, the amount of time it takes us to sell the loans the Company originates, and the amount of loans being self-funded with cash. We may from time to time use surplus cash to “buy-down” the effective interest rate of certain loan funding facilities or to self-fund a portion of our loan originations. As of December 31, 2021, $3.8 billion of our cash was used to buy-down our funding facilities and self-fund, $275.0 million of which are buy-down funds that are included in cash on the balance sheet and $3.5 billion of which is discretionary self-funding that reduces cash on the balance sheet. We have the ability to withdraw the $275.0 million at any time, unless a margin call has been made or a default has occurred under the relevant facilities. The Company has $3.5 billion of discretionary self-funded loans, of which a portion can be transferred to a warehouse line or the early buy out line, provided that such loans meet the eligibility criteria to be placed on such lines. The remaining portion will be funded in normal course over a short period of time, generally less than one month.

We remain in a strong position to meet our liquidity needs. As of December 31, 2021 our total liquidity was $9.1 billion, which includes $2.1 billion of cash on the balance sheet, $3.5 billion of discretionary self-funded loans, a portion of which could be transferred to funding facilities at our discretion, $3.1 billion of undrawn lines of credit from non-funding facilities, and $0.3 billion of undrawn MSR lines. Our available cash position was $5.6 billion, which includes cash on the balance sheet and cash used to self-fund loans.

Our loan funding facilities, early buy out facilities, MSR facility and unsecured lines of credit also generally require us to comply with certain operating and financial covenants and the availability of funds under these facilities is subject to, among other conditions, our continued compliance with these covenants. These financial covenants include, but are not limited to, maintaining (1) a certain minimum tangible net worth, (2) minimum liquidity, (3) a maximum ratio of total liabilities or total debt to tangible net worth and (4) pre-tax net income requirements. A breach of these covenants can result in an event of default under these facilities and as such allows the lenders to pursue certain remedies. In addition, each of these facilities, as well as our unsecured lines of credit, includes cross default or cross acceleration provisions that could result in all facilities terminating if an event of default or acceleration of maturity occurs under any facility. We were in compliance with all covenants as of December 31, 2021 and 2020.

December 31, 2021 compared to December 31, 2020

Cash and cash equivalents

Our cash and cash equivalents and restricted cash were $2.2 billion at December 31, 2021, an increase of 0.2 billion, or 7.7%, compared to $2.1 billion at December 31, 2020. The increase in the cash and cash equivalents balance was impacted by a net increase from the issuance of Senior Notes and a net increase from earnings, partially offset by distributions made to Class A shareholders of the Company and to unit holders (members) of Holdings.

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Equity

Equity was $9.8 billion as of December 31, 2021, an increase of $1.9 billion, or 23.8%, as compared to $7.9 billion as of December 31, 2020. The change was primarily the result of net income of $6 billion and share-based compensation of $163.7 million. The increase was partially offset by distributions made to the unit holders, the repurchase of Class A common stock and the 2021 Special Dividend to Class A common shareholders.

December 31, 2020 compared to December 31, 2019

Cash and cash equivalents

Our cash and cash equivalents and restricted cash were $2.1 billion at December 31, 2020, an increase of $598.4 million or 41.1%, compared to $1.5 billion at December 31, 2019. The increase was impacted by a net increase from the issuance of Senior Notes, earnings for the period adjusted for non-cash items, the increase in net borrowings on funding facilities to fund the increase in mortgage loans held for sale, and proceeds from MSR sales. The increase was partially offset by transfers and distributions made to the parent company.

Equity

Equity was $7.9 billion as of December 31, 2020, an increase of $4.4 billion, or 124.2%, as compared to $3.5 billion as of December 31, 2019. The change was primarily the result of net income of $9.4 billion and was partially offset by net transfers and distributions made to the parent company.

Contractual Obligations, Commercial Commitments, and Other Contingencies

Our material expected cash requirements also include the following contractual commitments:

Repurchase and indemnification obligations

In the ordinary course of business, we are exposed to liability under representations and warranties made to purchasers of mortgage loans. Under certain circumstances, we may be required to repurchase mortgage loans, or indemnify the purchaser of such loans for losses incurred, if there has been a breach of representations or warranties, or if the borrower defaults on the loan payments within a contractually defined period (early payment default). Additionally, in certain instances we are contractually obligated to refund to the purchaser certain premiums paid to us on the sale if the mortgagor prepays the loan within a specified period of time, specified in our loan sale agreements. See Note 13, Commitments, Contingencies, and Guarantees of the notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Interest rate lock commitments, loan sale and forward commitments

In the normal course of business, we are party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit to borrowers at either fixed or floating interest rates. IRLCs are commitment agreements to lend to a client at a specified interest rate within a specified period of time as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses which may require payment of a fee. As many of the commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. In addition, we have contracts to sell mortgage loans into the secondary market at specified future dates (commitments to sell loans), and forward commitments to sell MBS at specified future dates and interest rates.

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Following is a summary of the notional amounts of commitments:

Distributions

Year Ended December 31, 2021

On February 25, 2021, our board of directors authorized and declared a cash dividend (the "2021 Special Dividend") of $1.11 per share to the holders of our Class A common stock. The 2021 Special Dividend was paid on March 23, 2021 to holders of the Class A common stock of record as of the close of business on March 9, 2021. The Company funded the 2021 Special Dividend from cash distributions of approximately $2.2 billion by RKT Holdings, LLC to all of its members, including the Company.

In addition to the $2.2 billion 2021 Special Dividend, we had $1.8 billion in tax distributions, for a total of $4.0 billion of distributions during the year ended December 31, 2021. During the year ended December 31, 2020, we had net transfers to the parent company of $3.8 billion. Except for tax distributions, these distributions are at the discretion of our board of directors.

Special Dividend

On February 24, 2022, our board of directors declared a cash dividend (the "2022 Special Dividend") of $1.01 per share to the holders of our Class A common stock. The 2022 Special Dividend is to be paid on March 22, 2022 to holders of the Class A common stock of record as of the close of business on March 8, 2022. The Company will fund the 2022 Special Dividend from cash distributions of approximately $2.0 billion by RKT Holdings, LLC to all of its members, including the Company.

Year Ended December 31, 2020

During the year ended December 31, 2020, we had net transfers and distributions to the parent company of $3.8 billion, inclusive of both tax and discretionary equity distributions, as well as cash distributions to other unit holders (members) of RKT Holdings, LLC of $1.4 billion for taxes. During the year ended December 31, 2019, we had net transfers to RHI of $210.9 million. Except for tax distributions, these distributions are at the discretion of our board of directors.

New Accounting Pronouncements Not Yet Effective

See Note 1, Business, Basis of Presentation and Accounting Policies of the notes to the consolidated financial statements for details of recently issued accounting pronouncements and their expected impact on our consolidated financial statements.