Radian Mortgage Capital, our mortgage conduit subsidiary, acquires residential mortgage loans with the intention of then either selling the loans directly to mortgage investors, including the GSEs, or distributing them into the capital markets through private label securitizations, with the option to retain and manage certain components of the underlying credit risk.

During the aggregation period following loan acquisition, we carry these loans as residential mortgage loans held for sale until the loan is either sold or securitized. If the loan is ultimately contributed to a securitization, we perform an analysis of our ongoing participation and rights in the securitization to determine if we need to consolidate the securitization trust. If we conclude that we are required to consolidate the securitization trust and continue to reflect those securitized mortgage loans on our condensed consolidated balance sheets, we then reclassify those loans as securitized residential mortgage loans held for investment, as described further below.

The carrying value of our residential mortgage loans held for sale owned by Radian Mortgage Capital totaled $530 million and $33 million at September 30, 2024, and December 31, 2023, respectively, and is based on fair value. The estimated fair value of our mortgage loans held for sale is subject to, among other things, changes in mortgage interest rates from the date we agree to purchase the mortgage loan through the date we agree to sell the mortgage loan. In an effort to mitigate this interest rate risk, we enter into certain derivative contracts with third parties during the period from the commitment to purchase the mortgage loans until the loans are either securitized or sold directly to mortgage investors.

We elected the fair value option for our residential mortgage loans held for sale to allow for consistent treatment of both mortgage loans and any associated hedges or derivatives. Net gains (losses) associated with our mortgage loans held for sale and any related hedges are included in net gains (losses) on investments and other financial instruments in our condensed consolidated statements of operations.

As of September 30, 2024, our residential mortgage loans held for sale consisted of 569 mortgage loans with a total unpaid principal balance of $517 million, related to properties in 42 states and the District of Columbia. Loans on properties in California accounted for 30% of this balance, with no other state concentration exceeding 10% as of September 30, 2024. The majority of our loans are non-agency loans, with balances in excess of the GSEs’ conforming loan limits and with credit risk characteristics commensurate with the prime jumbo private label securitization market. As of September 30, 2024, none of these mortgage loans were greater than ninety days delinquent or in nonaccrual status. Interest earned on residential mortgage loans held for sale is included in net investment income in our condensed consolidated statements of operations.

Further, as of September 30, 2024, the Company had commitments to purchase and fund additional mortgage loans with a total unpaid principal balance of $268 million. Prior to the settlement and funding of these loan purchases, any unrealized net gains (losses) related to these commitments are recorded as derivative assets or liabilities on our condensed consolidated balance sheets, with the corresponding gain or loss included in net gains (losses) on investments and other financial instruments in our condensed consolidated statements of operations.

The following table reflects the outstanding derivative instruments related to our mortgage loan activity as of the dates indicated.


Derivative instruments


	September 30, 2024						December 31, 2023
			Fair Value						Fair Value
(In thousands)	Notional (1)		Derivative Assets		Derivative Liabilities		Notional (1)		Derivative Assets		Derivative Liabilities


Forward mortgage loan purchase commitments	$	267,644	$	1,286	$	—	$	83,962	$	708	$	—
Hedging instruments (2)
Forward RMBS purchase contracts (3)	$	274,000	$	221	$	94	$	51,100	$	715	$	817
Interest rate swap futures contracts (4)		51,500		1,323		—		7,300		489		—

(1)

Notional amounts provide an indication of the volume of the Company’s derivative capacity. The notional amount is the face amount of our contracts and does not represent our exposure to credit loss and therefore is not reflected on our condensed consolidated balance sheets.

(2)

All of the derivatives used for hedging purposes are interest rate derivatives subject to master netting agreements and are considered economic hedges.

(3)

Derivative assets include cash collateral receivables of $1 million and $715 thousand as of September 30, 2024, and December 31, 2023, respectively.

(4)

Derivative assets include cash collateral receivables of $2 million and $720 thousand as of September 30, 2024, and December 31, 2023, respectively.

The impact to net gains (losses) on investments and other financial instruments from our residential mortgage loans held for sale and related hedging activities was as follows.


Net gains (losses) on residential mortgage loans held for sale


	Three Months Ended September 30,						Nine Months Ended September 30,

(In thousands)	2024			2023			2024			2023

Net realized gains (losses)
Mortgage loans held for sale (1)	$	(2,819	)	$	(89	)	$	(4,008	)	$	(80	)
Mortgage loans held for sale hedging activities		(11,451	)		358			(8,706	)		319
Total realized gains (losses)		(14,270	)		269			(12,714	)		239
Mortgage loan servicing rights resulting from loan sales		758			—			2,256			—
Change in unrealized gains (losses) on mortgage loans held for sale and related derivatives sold or redeemed		2,640			(246	)		(271	)		(23	)
Unrealized gains (losses) on mortgage loans held for sale and related derivatives still held
Mortgage loans held for sale (2)		6,852			(1,728	)		7,043			(1,746	)
Mortgage loans held for sale hedging activities		(591	)		1,989			(591	)		1,989
Total net unrealized gains (losses)		6,261			261			6,452			243
Net gains (losses) on residential mortgage loans held for sale	$	(4,611	)	$	284		$	(4,277	)	$	459

(1)

Includes net gains (losses) on residential mortgage loans held for sale through the date of transfer to a securitization trust, if applicable. See “Securitized Residential Mortgage Loans Held for Investment” below for information on subsequent gains (losses) for those securitized loans.

(2)

Includes net gains (losses) on mortgage loan commitments accounted for as derivatives prior to settlement.

We primarily fund the purchases of our residential mortgage loans held for sale with amounts borrowed under our mortgage loan financing facilities. Expenses related to these facilities are included in interest expense in our condensed consolidated statements of operations. See Note 12 for additional information on these facilities and their related terms and covenants.

Net investment income earned on our residential mortgage loans held for sale and interest expense incurred on our mortgage loan financing facilities consisted of the following.


Net interest on residential mortgage loans held for sale


	Three Months Ended September 30,						Nine Months Ended September 30,

(In thousands)	2024			2023			2024			2023


Interest income	$	7,828		$	1,719		$	15,032		$	2,487
Interest expense		(7,500	)		(1,609	)		(14,045	)		(2,086	)
Net interest on residential mortgage loans held for sale	$	328		$	110		$	987		$	401

In addition to the debt covenants under its financing facilities, Radian Mortgage Capital is also subject to certain requirements established by state and other regulators and loan purchasers, including Freddie Mac, such as certain minimum net worth and capital requirements and ratios. As of September 30, 2024, the most restrictive of these financial conditions required Radian Mortgage Capital to maintain a ratio of tangible net worth to total assets of at least 6%. As of September 30, 2024, Radian Mortgage Capital’s tangible net worth was $103 million, compared to a required minimum tangible net worth of $37 million based on this ratio. Changes in the fair value of residential mortgage loans held for sale and related hedges could materially impact Radian Mortgage Capital’s net worth in future periods. To the extent any capital requirements are not met, regulators and loan purchasers may exercise certain remedies, which may include, as applicable, prohibiting Radian Mortgage Capital from purchasing, selling, or servicing loans. As of September 30, 2024, Radian Mortgage Capital was in compliance with all such requirements.

During the third quarter of 2024, Radian Mortgage Capital closed its inaugural private label prime jumbo securitization transaction. The securitization involved the transfer of a portfolio of residential mortgage loans to a newly created special purpose vehicle, Radian Mortgage Capital Trust 2024-J1, and the private offering and issuance of $349 million of unregistered mortgage pass-through certificates collateralized by the cash flows of the underlying residential mortgage loans. At closing, we retained an interest in certain of the certificates, and Radian Mortgage Capital and its affiliates (excluding its mortgage insurance affiliates) may hold an interest in the certificates from time to time. Because this securitization consists entirely of qualified mortgages as defined in the Dodd-Frank Act, pursuant to applicable federal securities laws and regulations, Radian Mortgage Capital is not obligated to retain these certificates for a minimum length of time as part of any risk retention requirements.

We concluded that the special purpose vehicle created to facilitate this transaction is a VIE, primarily due to the minimal equity that the securitization trust holds to be able to finance its activities without additional support. In addition to being the sponsor and depositor for the trust, our involvement with this VIE is ongoing and includes retaining the subordinate certificates that are in a first loss position and maintaining certain discretionary rights associated with those subordinate investments, including certain rights to direct the loss mitigation activities of the servicer. As a result of our having both: (i) the economic obligation to absorb losses and receive benefits that could be significant to the VIE and (ii) the power to direct the activities that most significantly impact the performance of the VIE, we concluded that we are the primary beneficiary of the VIE. As a result, we consolidate the assets, liabilities, operations and cash flows of the securitization trust on our condensed consolidated financial statements. Since we were already carrying the loans transferred to the trust at fair value prior to the securitization, consistent with our policy election for all residential mortgage loans held for sale, we did not recognize any material gain or loss upon consolidation of the VIE.

Despite being the primary beneficiary of the VIE and consolidating the trust’s activities, the holders of the securitized debt have no recourse to the general credit of Radian and we neither own nor are liable for the assets and liabilities of the VIE. Rather, our exposure to these trusts is primarily through the risk of loss on the interests we have retained, as well as the obligation, under certain circumstances, for Radian Mortgage Capital to repurchase assets from the VIE upon the breach of certain representations and warranties with respect to the residential mortgage loans transferred to the VIE. Furthermore, liquidity available at the consolidated VIE is not available for corporate liquidity needs, other than through distributions on the certificates we have retained.

We have elected the fair value option for the initial and subsequent recognition of the securitized residential mortgage loans and the related liabilities issued by the consolidated VIE. Electing this option allows us to record changes in fair value in

the condensed consolidated statement of operations, which, in management’s view, appropriately reflects the results of operations for a particular reporting period as all activities will be recorded in a comparable manner.

We have concluded that the trust that holds the securitized residential mortgage loans is considered to be a collateralized financing entity (“CFE”). A CFE is a VIE with no more than nominal equity that holds financial assets and issues beneficial interests in those assets, for which the issued beneficial interests have contractual recourse only to the related assets of the CFE. The accounting guidance that addresses VIEs allows us to elect to measure both the financial assets and financial liabilities of a CFE using the more observable of the fair value of the financial assets and the fair value of the financial liabilities of a CFE. The net equity in an entity accounted for under the CFE election effectively represents the fair value of the retained interests that we hold in the entity.

We have determined the inputs to the fair value measurement of the financial liabilities of the VIE to be more observable than those of the financial assets and, as a result, have used the fair value of the financial liabilities of the VIE to measure the fair value of the financial assets of the VIE. For the VIE liabilities, which primarily represent investment grade asset-backed securities issued by the trust, we determine fair value with the assistance of independent third-party valuation service providers, using external market information that includes observable market yields, spreads and projected prepayment speeds on securitizations with similar collateral characteristics. The fair value estimate of the securitized residential mortgage loans is then derived using the fair value of the VIE liabilities. As such, we classify both the securitized residential mortgage loans held by the VIE and the nonrecourse debt issued by the VIE as Level II in the fair value hierarchy, as reflected in Note 5.

On our condensed consolidated balance sheets, we report both the assets and liabilities of the consolidated VIE at fair value, including reporting the VIE’s mortgage loans in securitized residential mortgage loans held for investment and the asset-backed securities issued by the VIE in securitized nonrecourse debt. We eliminate from this debt the value of the certificates that we retained. As of September 30, 2024, the net reported value of the consolidated VIE assets and liabilities was $7 million, which represents the aggregate fair value of our retained interests from the VIE, including accrued interest, as of that date.

We report the net financial results from consolidated VIEs in income (loss) on consolidated VIEs in our condensed consolidated statements of operations, which also equals the income (loss) from our retained interests in any given period, based on the interest income and change in fair value for those interests. As of September 30, 2024, none of the loans in the securitization trust were greater than ninety days delinquent or in nonaccrual status.

The following table details the components of income (loss) on consolidated VIEs for the three and nine months ended September 30, 2024. There was no activity prior to these periods.


Income (loss) on consolidated VIEs


	Three Months Ended September 30,			Nine Months Ended September 30,

(In thousands)	2024			2024


Net change in fair value of VIE assets and liabilities reported under the fair value option	$	265		$	265
Interest income		4,039			4,039
Interest expense		(3,682	)		(3,682	)
Other expenses		(157	)		(157	)
Total income (loss) on consolidated VIEs	$	465		$	465

Radian Mortgage Capital completed its second private label prime jumbo securitization in October 2024. This securitization involved the transfer of a portfolio of residential mortgage loans to a newly created VIE and the private offering and issuance of $423 million of unregistered mortgage pass-through certificates collateralized by the cash flows of the underlying residential mortgage loans. At closing, we retained an interest in certain of the certificates, with an initial fair value of $6 million. Based on our ongoing involvement with the VIE, we expect to consolidate the results of this newly created securitization trust.

As part of our overall business strategy, we expect to continue to expand Radian Mortgage Capital’s use of securitizations in the future. It is possible that we may consolidate additional VIEs in future periods, depending on the facts and circumstances regarding our involvement with each VIE. We continuously analyze entities in which we hold variable interests, including when there is a reconsideration event, to determine whether our consolidation conclusions regarding any VIE should change.