v3.26.1
Derivative Financial Instruments and Hedging Activities
 3 Months Ended
Mar. 31, 2026
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments and Hedging Activities
Note 15 – Derivative Financial Instruments and Hedging Activities
The table below summarizes the fair value, notional and maturity of our derivative instruments. The notional amount of our contracts does not represent our exposure to credit loss. None of the derivatives were designated as a hedge for accounting purposes as of or during the three months ended March 31, 2026 and 2025.
March 31, 2026December 31, 2025
MaturitiesNotionalFair valueMaturitiesNotionalFair value
Derivative Assets (Other assets)
Forward loans IRLCsApril 2026 - August 2026 $2,707.8 $4.2 January - April 2026$2,461.9 $16.5 
Reverse loans IRLCsApril 2026 - July 202614.2 0.8 February - April 202618.6 0.8 
TBA forward MBS tradesApril 2026 - June 2026 3,801.9 28.4 January - March 20261,913.5 8.4 
Interest rate futures
June 2026597.0 5.9 March 2026590.0 1.9 
Interest rate option contractsApril 2026200.0 0.2 January 202650.0 0.5 
Total$7,320.9 $39.5 $5,034.0 $28.1 
Derivative Liabilities (Other liabilities)
Forward sales of Reverse loansN/A— — January 202630.0 (0.2)
TBA forward MBS tradesApril 2026 - June 2026 1,480.9 (8.0)January - March 20262,171.6 (6.6)
Interest rate futures
June 20262,175.0 (18.9)March 20261,935.0 (1.8)
Interest rate option contractsN/A— — January 202650.0 (0.5)
Total$3,655.9 $(27.0)$4,186.6 $(9.1)
The table below summarizes the net gains and losses of our derivative instruments recognized in our unaudited consolidated statements of operations.
Three Months Ended March 31,Financial Statement Line
Gain (Loss)
20262025
Derivative Instruments
Forward loans IRLCs$(12.3)$8.9 Gain on loans held for sale, net
Reverse loans IRLCs— 1.0 Gain on reverse loans and HMBS-related borrowings, net
Forward trades (economically hedging forward pipeline trades and EBO pipeline)— (1.7)Gain on loans held for sale, net (Economic hedge)
TBA trades and Interest rate futures (economically hedging forward pipeline trades and EBO pipeline)
30.4 (19.9)Gain on loans held for sale, net (Economic hedge)
Interest rate futures, TBA trades and interest rate option contracts
(28.1)20.8 MSR valuation adjustments, net
Interest rate futures
2.4 — Gain on reverse loans and HMBS-related borrowings, net
Forward sales of Reverse loans0.2 (0.6)Gain on reverse loans and HMBS-related borrowings, net
Total$(7.4)$8.6 
Interest Rate Risk
MSR Hedging
MSRs are carried at fair value with changes in fair value being recorded in earnings in the period in which the changes occur. The fair value of MSRs is subject to changes in market interest rates among other inputs and assumptions.
The objective of our MSR interest rate risk management and hedging policy is to protect shareholders’ equity and earnings against the fair value volatility of interest-rate sensitive MSR portfolio exposure, considering market, liquidity, cost and other conditions. The interest-rate sensitive MSR portfolio exposure is defined as follows:
•Agency MSR portfolio,
•expected Agency MSR bulk transactions subject to letters of intent (LOI),
•less the Agency MSRs subject to our sale agreements that do not qualify for sale accounting, also referred to as Pledged MSR liabilities (See Note 8 — MSR Related Financing Liabilities, at Fair Value),
•less the asset value for securitized HECM loans, net of the corresponding HMBS-related borrowings (also referred to as HECM or reverse MSR for risk management purposes),
•other interest-rate sensitive exposures, including our ESS financing liabilities, non-Agency MSR and reverse mortgage buyouts, as deemed appropriate by the Market Risk Committee.
The hedge coverage ratio, defined as the ratio of hedge (including reverse MSR) to asset rate sensitivity (referred to as DV01) is subject to lower and upper target thresholds under our policy. We regularly evaluate the hedge coverage ratio at the intended shock interval to determine if it is relevant or warrants adjustment based on market conditions, symmetry of interest rate risk exposure, liquidity impacts under shock scenarios and other factors. As the market dictates, management may choose to maintain the hedge coverage ratio at different thresholds, with approval of the Market Risk Committee, in order to preserve liquidity, improve hedge effectiveness and/or optimize asset returns. Effective December 2023, we established a targeted hedge coverage ratio range between 95% and 105%. In April 2024, we changed the risk measure to a dollar DV01 that resulted in an equivalent range of approximately 90% to 110%. In May 2025, we established a new targeted hedge coverage ratio of 85% with a range between 80% and 100%. The targeted ratio was increased to a range of 95% to 100%, effective end of October 2025, which was revised to a range of 95% to 105% effective beginning of February 2026.
With a partial hedge coverage ratio, the changes in fair value of our hedging instruments may not fully offset the changes in fair value of our net MSR portfolio exposure attributable to interest rate changes. In addition, while DV01 measures may remain within the range of our hedging strategy’s objective, actual changes in fair value of the derivatives and MSR portfolio may not offset to the same extent, due to many factors. These factors include non-parallel changes in the interest rate curve, the convexity of the MSR, the basis risk inherent in the MSR profile and hedging instruments, model risk observed between actual vs. expected fair value changes, and hedge costs. We continuously evaluate the use of hedging instruments with the objective of enhancing the effectiveness of our interest rate hedging strategy.
Our derivative instruments include forward trades of MBS or Agency TBAs with different banking counterparties, exchange-traded interest rate futures and options. These derivative instruments are not designated as accounting hedges. TBAs, or To-Be-Announced securities, are actively traded, forward contracts to purchase or sell Agency MBS on a specific future date. From time to time, we enter into exchange-traded options contracts with purchased put options financed by written call options. We report changes in fair value of these derivative instruments in MSR valuation adjustments, net in our consolidated statements of operations, within the Servicing segment.
Effective October 2025, without changing our interest rate risk management objective and procedures, our HECM MSR is now hedged with dedicated third-party derivative instruments, whose fair value changes are presented within Gain on reverse loans and HMBS-related borrowings, net in our consolidated statements of operations, within the Servicing segment.
The derivative instruments are subject to margin requirements, posted as either initial or variation margin. Onity may be required to post or may be entitled to receive cash collateral with its counterparties through margin calls, based on daily value changes of the instruments. Changes in market factors, including interest rates, and our credit rating may require us to post additional cash collateral and could have a material adverse impact on our financial condition and liquidity.
Pipeline Hedging - Interest Rate Lock Commitments and Loans Held for Sale, at Fair Value
In our Originations business, we are exposed to interest rate risk and related price risk during the period from the date of the interest rate lock commitment through (i) the lock commitment cancellation or expiration date or (ii) through the date of sale or securitization of the resulting loan into the secondary mortgage market. Loan commitments for forward loans generally range from 5 to 75 days, with the majority of our commitments to borrowers for 40 to 60 days and our commitments to correspondent sellers for 5 to 30 days. Loans held for sale are generally funded and sold within 5 to 30 days. This interest rate exposure of loans and IRLCs is economically hedged with derivative instruments, including forward sales of Agency TBAs. We have elected the fair value option for pipeline loans held for sale for risk management purposes. The objective of our pipeline hedging strategy is to reduce the volatility of the fair value of IRLCs and loans due to market interest rates, thus to preserve the initial gain on sale margin at lock date. Actual fair value changes of derivatives may not fully offset fair value changes of the IRLCs and loans due to many factors including basis risk or market volatility. We report changes in fair value of these derivative instruments as gain or loss on economic hedge instruments within either Gain on loans held for sale, net or Gain on reverse loans and HMBS-related borrowings, net in our consolidated statements of operations.