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Mortgage Servicing Rights ("MSRs") and Related Liabilities | 9 Months Ended
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Sep. 30, 2018
Transfers and Servicing [Abstract] |
Mortgage Servicing Rights (MSRs) and Related Liabilities | The following table sets forth the carrying value of the Company's and Predecessor's MSRs and the related liabilities.
| Successor |  | Predecessor
MSRs and Related Liabilities | September 30, 2018 |  | December 31, 2017
Forward MSRs - fair value | $ | 3,485 |  |  | $ | 2,937 |
Reverse MSRs - amortized cost | 15 |  |  | 4 |
Mortgage servicing rights | $ | 3,500 |  |  | $ | 2,941 |
Mortgage servicing liabilities - amortized cost | $ | 79 |  |  | $ | 41 |
Excess spread financing - fair value | $ | 1,097 |  |  | $ | 996 |
Mortgage servicing rights financing - fair value | 26 |  |  | 10 |
MSR related liabilities - nonrecourse at fair value | $ | 1,123 |  |  | $ | 1,006 |
Mortgage Servicing Rights The Company owns and records at fair value the rights to service traditional residential mortgage ("forward") loans for others either as a result of purchase transactions or from the retained servicing associated with the sales and securitizations of loans originated. MSRs are comprised of servicing rights related to both agency and non-agency loans. The following table sets forth the activities of forward MSRs.
| Successor |  |  | Predecessor
| For the Period August 1 - September 30, 2018 |  |  | For the Period January 1 - July 31, 2018 |  | Nine Months Ended September 30, 2017
MSRs - Fair Value |  |  |
Fair value - beginning of period | $ | 3,413 |  |  |  | $ | 2,937 |  |  | $ | 3,160 |
Additions: |  |  |  |  |  |
Servicing retained from mortgage loans sold | 43 |  |  |  | 162 |  |  | 151 |
Purchases of servicing rights | 72 |  |  |  | 144 |  |  | 30 |
Dispositions: |  |  |  |  |  |
Sales of servicing assets(1) | (63 | ) |  |  | 4 |  |  | (24 | )
Changes in fair value: |  |  |  |  |  |
Changes in valuation inputs or assumptions used in the valuation model | 65 |  |  |  | 330 |  |  | (113 | )
Other changes in fair value | (45 | ) |  |  | (164 | ) |  | (248 | )
Fair value - end of period | $ | 3,485 |  |  |  | $ | 3,413 |  |  | $ | 2,956 |
(1) Amount for the seven months ended July 31, 2018 is related to the sale of nonperforming loans, which have a negative MSR value. From time to time, the Company sells its ownership interest in certain MSRs and is retained as the subservicer for the sold assets. The Company has evaluated the sale accounting requirements related to these transactions, including the Company's continued involvement as the subservicer, and concluded that these transactions qualify for sale accounting treatment. MSRs measured at fair value are segregated between credit sensitive and interest sensitive pools. Credit sensitive pools are primarily impacted by borrower performance under specified repayment terms, which most directly impacts involuntary prepayments and delinquency rates. Interest sensitive pools are primarily impacted by changes in forecasted interest rates, which in turn impact voluntary prepayment speeds. The Company assesses whether acquired portfolios are more credit sensitive or interest sensitive in nature on the date of acquisition. Numerous factors are considered in making this assessment, including loan-to-value ratios, FICO scores, percentage of portfolio previously modified, portfolio seasoning and similar criteria. The determination between credit sensitive and interest sensitive for a pool is made at the date of acquisition, and no subsequent changes are made. Credit sensitive portfolios generally consist of higher delinquency, single-family non-conforming residential forward mortgage loans serviced for agency and non-agency investors. Interest sensitive portfolios generally consist of lower delinquency, single-family conforming residential forward mortgage loans for agency investors. The following table provides a breakdown of credit sensitive and interest sensitive unpaid principal balance ("UPB") for the Company's forward MSRs.
| Successor |  | Predecessor
| September 30, 2018 |  | December 31, 2017
MSRs - Sensitivity Pools | UPB |  | Fair Value |  | UPB |  | Fair Value
Credit sensitive | $ | 144,697 |  |  | $ | 1,652 |  |  | $ | 167,605 |  |  | $ | 1,572 |
Interest sensitive | 129,789 |  |  | 1,833 |  |  | 113,775 |  |  | 1,365 |
Total | $ | 274,486 |  |  | $ | 3,485 |  |  | $ | 281,380 |  |  | $ | 2,937 |
The Company used the following key weighted-average inputs and assumptions in estimating the fair value of MSRs.
| Successor |  | Predecessor
Credit Sensitive | September 30, 2018 |  | December 31, 2017
Discount rate | 11.2 | % |  | 11.4 | %
Total prepayment speeds | 11.2 | % |  | 15.2 | %
Expected weighted-average life | 6.7 years |  |  | 5.7 years |
Interest Sensitive |  |  |
Discount rate | 9.2 | % |  | 9.2 | %
Total prepayment speeds | 8.9 | % |  | 10.7 | %
Expected weighted-average life | 7.4 years |  |  | 6.7 years |
The following table shows the hypothetical effect on the fair value of the MSRs when applying certain unfavorable variations of key assumptions to these assets for the dates indicated.
| Discount Rate |  | Total Prepayment Speeds
MSRs - Hypothetical Sensitivities | 100 bps Adverse Change |  | 200 bps Adverse Change |  | 10% Adverse Change |  | 20% Adverse Change
Successor |  |  |  |  |  |  |
September 30, 2018 |  |  |  |  |  |  |
Mortgage servicing rights | $ | (138 | ) |  | $ | (266 | ) |  | $ | (117 | ) |  | $ | (227 | )
Predecessor |  |  |  |  |  |  |
December 31, 2017 |  |  |  |  |  |  |
Mortgage servicing rights | $ | (108 | ) |  | $ | (208 | ) |  | $ | (118 | ) |  | $ | (227 | )
These hypothetical sensitivities should be evaluated with care. The effect on fair value of a 10% adverse change in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects. Reverse Mortgage Servicing Rights and Liabilities - Amortized Cost The Company services and subservices certain HECM reverse mortgage loans with an unpaid principal balance of $30,660 and $35,112 as of September 30, 2018 and December 31, 2017, respectively. Mortgage servicing liabilities had an ending balance of $79 and $41 as of September 30, 2018 and December 31, 2017, respectively. For the two months ended September 30, 2018, the Company accreted $7 of the MSL. For the seven months ended July 31, 2018, the Predecessor accreted $11 of the MSL and recorded other MSL adjustments of $56. For the nine months ended September 30, 2017, the Predecessor accreted $1 of the MSL and recorded an increase to the MSL of $6. Such accretion recorded by the Predecessor relates to previous portfolio acquisitions. Reverse MSR had an ending balance of $15 and $4 as of September 30, 2018 and December 31, 2017, respectively. For the two months ended September 30, 2018, the Company recorded less than $1 of amortization. For the seven months ended July 31, 2018, the Predecessor recorded other MSR adjustments of $4. For the nine months ended September 30, 2017, the Predecessor amortized $1 of the MSR. The fair value of the reverse MSR was $15 and $29 as of September 30, 2018 and December 31, 2017, respectively. The fair value of the MSL was $60 and $34 as of September 30, 2018 and December 31, 2017, respectively. Management evaluates reverse MSRs and MSLs each reporting period for impairment. Based on management's assessment at September 30, 2018, no impairment or increased obligation was needed. Excess Spread Financing - Fair Value In order to finance the acquisition of certain MSRs on various Portfolios, the Company has entered into sale and assignment agreements with a third-party associated with funds and accounts under management of BlackRock Financial Management Inc. ("BlackRock"), a third-party associated with funds and accounts under management of V ä rde Partners, Inc. ("Varde") and with certain affiliated entities formed and managed by New Residential Investment Corp. ("New Residential"). The Company sold to such entities the right to receive a specified percentage of the excess cash flow generated from the Portfolios after receipt of a fixed base servicing fee per loan. Servicing fees associated with traditional MSRs can be segregated into a contractually specified base servicing fee component and an excess servicing fee. The base servicing fee, along with ancillary income, is designed to cover costs incurred to service the specified pool plus a reasonable profit margin. The remaining servicing fee is considered excess. The Company retains all the base servicing fee and ancillary revenues associated with servicing the Portfolios and retains a portion of the excess servicing fee. The Company continues to be the servicer of the Portfolios and provides all servicing and advancing functions. Contemporaneous with the above, the Company entered into refinanced loan obligations with New Residential, BlackRock and Varde. Should the Company refinance any loan in the Portfolios, subject to certain limitations, it will be required to transfer the new loan or a replacement loan of similar economic characteristics into the Portfolios. The new or replacement loan will be governed by the same terms set forth in the sale and assignment agreement described above, which is the primary driver of the recapture rate assumption. The range of key assumptions used in the Company's valuation of excess spread financing are as follows.
Excess Spread Financing | Prepayment Speeds |  | Average Life (Years) |  | Discount Rate |  | Recapture Rate
Successor |  |  |  |  |  |  |
September 30, 2018 |  |  |  |  |  |  |
Low | 5.9% |  | 5.3 |  | 8.5% |  | 7.6%
High | 15.0% |  | 8.5 |  | 14.0% |  | 26.7%
Weighted-average | 10.6% |  | 6.7 |  | 10.6% |  | 17.7%
Predecessor |  |  |  |  |  |  |
December 31, 2017 |  |  |  |  |  |  |
Low | 6.2% |  | 4.4 |  | 8.5% |  | 7.2%
High | 21.2% |  | 6.9 |  | 14.1% |  | 30.0%
Weighted-average | 13.7% |  | 5.9 |  | 10.8% |  | 18.7%
The following table shows the hypothetical effect on the excess spread financing fair value when applying certain unfavorable variations of key assumptions to these liabilities for the dates indicated.
| Discount Rate |  | Prepayment Speeds
Excess Spread Financing - Hypothetical Sensitivities | 100 bps Adverse Change |  | 200 bps Adverse Change |  | 10% Adverse Change |  | 20% Adverse Change
Successor |  |  |  |  |  |  |
September 30, 2018 |  |  |  |  |  |  |
Excess spread financing | $ | 44 |  |  | $ | 92 |  |  | $ | 33 |  |  | $ | 68 |
Predecessor |  |  |  |  |  |  |
December 31, 2017 |  |  |  |  |  |  |
Excess spread financing | $ | 37 |  |  | $ | 78 |  |  | $ | 34 |  |  | $ | 71 |
As the cash flow assumptions utilized in determining the fair value amounts in the excess spread financing are based on the related cash flow assumptions utilized in the financed MSRs, any fair value changes recognized in the MSRs would inherently have an inverse impact on the carrying amount of the related excess spread financing. For example, while an increase in discount rates would negatively impact the value of the Company's MSRs, it would reduce the carrying value of the associated excess spread financing liability. These hypothetical sensitivities should be evaluated with care. The effect on fair value of a 10% variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects. Also, a positive change in the above assumptions would not necessarily correlate with the corresponding decrease in the net carrying amount of the excess spread financing. Mortgage Servicing Rights Financing - Fair Value From December 2013 through June 2014, the Company entered into agreements to sell a contractually specified base servicing fee component of certain MSRs and servicing advances under specified terms to a joint venture capitalized by New Residential and certain unaffiliated third-party investors. The Company continues to be the named servicer, and, for accounting purposes, ownership of the mortgage servicing rights continues to reside with the Company. Accordingly, the Company records the MSRs and a MSR financing liability associated with this transaction in its consolidated balance sheets. The following table sets forth the weighted average assumptions used in the valuation of the mortgage servicing rights financing liability.
| Successor |  | Predecessor
Mortgage Servicing Rights Financing Assumptions | September 30, 2018 |  | December 31, 2017
Advance financing rates | 4.9 | % |  | 3.5 | %
Annual advance recovery rates | 18.2 | % |  | 23.2 | %
The following table sets forth the items comprising revenues associated with servicing loan portfolios.
| Successor |  |  | Predecessor
| For the Period August 1 - September 30, 2018 |  |  | For the Period July 1 - July 31, 2018 |  | Three Months Ended September 30, 2017 |  | For the Period January 1 - July 31, 2018 |  | Nine Months Ended September 30, 2017
Servicing Revenue |  |  |  |  |
Contractually specified servicing fees(1) | $ | 163 |  |  |  | $ | 79 |  |  | $ | 251 |  |  | $ | 574 |  |  | $ | 759 |
Other service-related income(1)(2) | 18 |  |  |  | 10 |  |  | 40 |  |  | 66 |  |  | 126 |
Incentive and modification income(1) | 8 |  |  |  | 4 |  |  | 19 |  |  | 37 |  |  | 63 |
Late fees(1) | 14 |  |  |  | 7 |  |  | 22 |  |  | 53 |  |  | 67 |
Reverse servicing fees | 13 |  |  |  | 4 |  |  | 16 |  |  | 37 |  |  | 43 |
Mark-to-market adjustments(2)(3) | 24 |  |  |  | 25 |  |  | (44 | ) |  | 196 |  |  | (160 | )
Counterparty revenue share(4) | (26 | ) |  |  | (16 | ) |  | (53 | ) |  | (111 | ) |  | (174 | )
Amortization, net of accretion(5) | (31 | ) |  |  | (16 | ) |  | (60 | ) |  | (112 | ) |  | (187 | )
Total servicing revenue | $ | 183 |  |  |  | $ | 97 |  |  | $ | 191 |  |  | $ | 740 |  |  | $ | 537 |
(1) Amounts include subservicing related revenues. (2) In the fourth quarter of 2017, the Predecessor reevaluated presentation of adjustments related to certain Ginnie Mae early buyout activities and reclassified $4 and $16 from other service-related income to mark-to-market adjustments for the three and nine months ended September 30, 2017, respectively. Total servicing revenue was not affected by this reclassification adjustment. (3) Mark-to-market ("MTM") adjustments include fair value adjustments on MSR, excess spread financing and MSR financing liabilities. The amount of MSR MTM reflected is net of cumulative incurred losses related to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio, and these incurred losses have been transferred to reserves on advances and other receivables. These cumulative incurred losses for the Company totaled $13 for the two months ended September 30, 2018. These cumulative incurred losses for the Predecessor totaled $4 and $38 for the one and seven months ended July 31, 2018, respectively, and $15 and $53 for the three and nine months ended September 30, 2017, respectively. (4) Counterparty revenue share represents the excess servicing fee that the Company pays to the counterparties under the excess spread financing arrangements and the payments made associated with MSRs financing arrangements. (5) Amortization is net of excess spread accretion of $22 for the two months ended September 30, 2018, $11 and $78 for the one and seven months ended July 31, 2018, respectively, and $41 and $123 for the three and nine months ended September 30, 2017, respectively.

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- Definition The entire disclosure for a transferor's continuing involvement in financial assets that it has transferred in a securitization or asset-backed financing arrangement, the nature of any restrictions on assets reported by an entity in its statement of financial position that relate to a transferred financial asset (including the carrying amounts of such assets), how servicing assets and servicing liabilities are reported, and (for securitization or asset-backed financing arrangements accounted for as sales) when a transferor has continuing involvement with the transferred financial assets and transfers of financial assets accounted for as secured borrowings, how the transfer of financial assets affects an entity's financial position, financial performance, and cash flows. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 860 -URI http://asc.fasb.org/topic&trid=2197590 + Details
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