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Mortgage Servicing Rights ("MSRs") and Related Liabilities | 9 Months Ended
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Sep. 30, 2019
Transfers and Servicing [Abstract] |
Mortgage Servicing Rights (MSRs) and Related Liabilities | 3. Mortgage Servicing Rights and Related Liabilities The following table sets forth the carrying value of the Company’s mortgage servicing rights (“MSRs”) and the related liabilities.
| Successor
MSRs and Related Liabilities | September 30, 2019 |  | December 31, 2018
Forward MSRs - fair value | $ | 3,339 |  |  | $ | 3,665 |
Reverse MSRs - amortized cost | 7 |  |  | 11 |
Mortgage servicing rights | $ | 3,346 |  |  | $ | 3,676 |
Mortgage servicing liabilities - amortized cost | $ | 69 |  |  | $ | 71 |
Excess spread financing - fair value | $ | 1,281 |  |  | $ | 1,184 |
Mortgage servicing rights financing - fair value | 47 |  |  | 32 |
MSR related liabilities - nonrecourse at fair value | $ | 1,328 |  |  | $ | 1,216 |
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
MSRs - Fair Value | Nine Months Ended September 30, 2019 |  | Two Months Ended September 30, 2018 |  |  | Seven Months Ended July 31, 2018
Fair value - beginning of period | $ | 3,665 |  |  | $ | 3,413 |  |  |  | $ | 2,937 |
Additions: |  |  |  |  |  |
Servicing retained from mortgage loans sold | 298 |  |  | 43 |  |  |  | 162 |
Purchases of servicing rights(1) | 732 |  |  | 72 |  |  |  | 144 |
Dispositions: |  |  |  |  |  |
Sales of servicing assets(2) | (317 | ) |  | (63 | ) |  |  | 4 |
Changes in fair value: |  |  |  |  |  |
Changes in valuation inputs or assumptions used in the valuation model | (716 | ) |  | 65 |  |  |  | 330 |
Other changes in fair value | (323 | ) |  | (45 | ) |  |  | (164 | )
Fair value - end of period | $ | 3,339 |  |  | $ | 3,485 |  |  |  | $ | 3,413 |
(1) | Purchases of servicing rights during the nine months ended September 30, 2019 includes $271 of mortgage servicing rights that were acquired from Pacific Union. See Note 2, Acquisitions for further discussion. In addition, on January 3, 2019, the Company entered into a subservicing contract for $24 billion unpaid principal balance in mortgages. The related servicing rights were subsequently purchased on May 1, 2019, resulting in additional $253 servicing rights during the second quarter of 2019.
(2) | Amount for the seven months ended July 31, 2018 is related to the sale of MSRs collateralized by 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. During the nine months ended September 30, 2019 and two months ended September 30, 2018, the Company sold $25,639 and $5,947 in unpaid principal balance (“UPB”) of forward MSRs, of which $20,560 and none were retained by the Company as subservicer, respectively. During the seven months ended July 31, 2018, the Predecessor sold $1,203 in UPB of forward MSRs, of which $1 in UPB was retained by the Predecessor as subservicer. MSRs measured at fair value are segregated between credit sensitive and interest sensitive pools at acquisition of MSRs. 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 or transfer. 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. Due to the Company’s focus on recapture and modifications, significant amounts of the credit sensitive portfolio have been re-underwritten and, therefore, behave more like the interest sensitive portfolio. 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
| September 30, 2019 |  | December 31, 2018
MSRs - Sensitivity Pools | UPB |  | Fair Value |  | UPB |  | Fair Value
Credit sensitive | $ | 157,898 |  |  | $ | 1,661 |  |  | $ | 135,752 |  |  | $ | 1,495 |
Interest sensitive | 148,783 |  |  | 1,678 |  |  | 159,729 |  |  | 2,170 |
Total | $ | 306,681 |  |  | $ | 3,339 |  |  | $ | 295,481 |  |  | $ | 3,665 |
The Company used the following key weighted-average inputs and assumptions in estimating the fair value of MSRs.
| Successor
| September 30, 2019 |  | December 31, 2018
Credit Sensitive |  |  |
Discount rate | 10.4 | % |  | 11.3 | %
Prepayment speeds | 13.2 | % |  | 11.8 | %
Average life | 5.9 years |  |  | 6.4 years |
Interest Sensitive |  |  |
Discount rate | 9.0 | % |  | 9.3 | %
Prepayment speeds | 14.6 | % |  | 10.0 | %
Average life | 5.4 years |  |  | 7.0 years |
Total MSR Portfolio |  |  |
Discount rate | 9.7 | % |  | 10.2 | %
Prepayment speeds | 13.9 | % |  | 10.8 | %
Average life | 5.6 years |  |  | 6.7 years |
The following table shows the hypothetical effect on the fair value of the Company’s MSRs when applying certain unfavorable variations of key assumptions to these assets for the dates indicated.
| Successor
| Discount Rate |  | Total Prepayment Speeds
MSRs - Hypothetical Sensitivities | 100 bps Adverse Change |  | 200 bps Adverse Change |  | 10% Adverse Change |  | 20% Adverse Change
September 30, 2019 |  |  |  |  |  |  |
Mortgage servicing rights | $ | (117 | ) |  | $ | (226 | ) |  | $ | (164 | ) |  | $ | (316 | )
December 31, 2018 |  |  |  |  |  |  |
Mortgage servicing rights | $ | (137 | ) |  | $ | (265 | ) |  | $ | (129 | ) |  | $ | (250 | )
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 certain HECM reverse mortgage loans with an unpaid principal balance of $23,990 and $28,415 as of September 30, 2019 and December 31, 2018, respectively. Mortgage servicing liabilities (“MSL”) had an ending balance of $69 and $71 as of September 30, 2019 and December 31, 2018, respectively. For the nine months ended September 30, 2019 and two months ended September 30, 2018, the Company accreted $39 and $7 of the MSL, respectively. In addition, the Company recorded an MSL adjustment of $37 during the nine months ended September 30, 2019. The MSL adjustment recorded by the Company relates to the fair value adjustments for MSL assumed from the Merger resulting from the revised cost to service assumption used in the valuation of MSL during the measurement period. See Note 2, Acquisitions for further information. For the seven months ended July 31, 2018, the Predecessor accreted $11 of the MSL and recorded an impairment of $56 in general and administrative expenses. Accretion recorded by the Predecessor relates to previous portfolio acquisitions. Reverse MSR had an ending balance of $7 and $11 as of September 30, 2019 and December 31, 2018, respectively. For the nine months ended September 30, 2019, the Company amortized $2 and recorded other MSR adjustments of $6. The MSR adjustment recorded by the Company relates to the fair value adjustments for MSR assumed from the Merger resulting from the revised cost to service assumption used in the valuation of MSR during the measurement period. See Note 2, Acquisitions for further information. 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 an impairment of $4. The fair value of the reverse MSR was $7 and $11 as of September 30, 2019 and December 31, 2018, respectively. The fair value of the MSL was $41 and $53 as of September 30, 2019 and December 31, 2018, respectively. Management evaluates reverse MSRs and MSLs each reporting period for impairment. Based on management’s assessment at September 30, 2019, no impairment or increased obligation was needed. Excess Spread Financing - Fair Value In order to finance the acquisition of certain MSR portfolios, the Company has entered into sale and assignment agreements with third parties and sold to these entities the right to receive a specified percentage of the cash flow generated from the portfolios in excess of a fixed base servicing fee per loan. The Company retains the base servicing fee, along with ancillary income and interest float earnings on principal and interest payments and escrows, and also incurs costs to service the specified pool. The Company is the legal owner and the servicer of the portfolios and provides all servicing and advancing functions. In connection with the above transactions, the Company entered into refinanced loan obligations with third parties that require the Company to transfer the new loan or a replacement loan of similar economic characteristics into the respective portfolio if the Company refinances any loan in the portfolio. The new or replacement loan will be governed by the same terms set forth in the sale and assignment agreement described above. The Company used the following weighted-average assumptions in the Company’s valuation of excess spread financing.
| Successor
| September 30, 2019 |  | December 31, 2018
Excess Spread Financing Assumptions |  |  |
Discount rate | 11.9 | % |  | 10.4 | %
Prepayment speeds | 13.3 | % |  | 11.0 | %
Recapture rate | 22.3 | % |  | 18.6 | %
Average life | 5.7 years |  |  | 6.5 years |
The following table shows the hypothetical effect on the Company’s excess spread financing fair value when applying certain unfavorable variations of key assumptions to these liabilities for the dates indicated.
| Successor
| Discount Rate |  | Prepayment Speeds
Excess Spread Financing - Hypothetical Sensitivities | 100 bps Adverse Change |  | 200 bps Adverse Change |  | 10% Adverse Change |  | 20% Adverse Change
September 30, 2019 |  |  |  |  |  |  |
Excess spread financing | $ | 42 |  |  | $ | 87 |  |  | $ | 44 |  |  | $ | 93 |
December 31, 2018 |  |  |  |  |  |  |
Excess spread financing | $ | 47 |  |  | $ | 99 |  |  | $ | 38 |  |  | $ | 81 |
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 financed MSRs attributable to a related cash flow assumption 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 financed 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 Predecessor 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 purpose of this transaction was to facilitate the financing of advances for private label mortgages. 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 MSR and an MSR financing liability associated with this transaction in its consolidated balance sheets. The MSR financing liability reflects the incremental costs of this transaction relative to the market participant assumptions contained in the MSR valuation. The following table sets forth the weighted average assumptions used in the valuation of the mortgage servicing rights financing liability.
| Successor
Mortgage Servicing Rights Financing Assumptions | September 30, 2019 |  | December 31, 2018
Advance financing rates | 3.7 | % |  | 4.2 | %
Annual advance recovery rates | 18.7 | % |  | 19.0 | %
Mortgage Servicing Rights - Revenues The following table sets forth the items comprising revenues associated with servicing loan portfolios.
| Successor |  |  | Predecessor
Servicing Revenue | Three Months Ended September 30, 2019 |  | Nine Months Ended September 30, 2019 |  | Two Months Ended September 30, 2018 |  |  | One Month Ended July 31, 2018 |  | Seven Months Ended July 31, 2018
Contractually specified servicing fees(1) | $ | 305 |  |  | $ | 893 |  |  | $ | 163 |  |  |  | $ | 79 |  |  | $ | 574 |
Other service-related income(1)(2) | 51 |  |  | 133 |  |  | 18 |  |  |  | 10 |  |  | 66 |
Incentive and modification income(1) | 12 |  |  | 29 |  |  | 8 |  |  |  | 4 |  |  | 37 |
Late fees(1) | 30 |  |  | 82 |  |  | 14 |  |  |  | 7 |  |  | 53 |
Reverse servicing fees | 7 |  |  | 24 |  |  | 13 |  |  |  | 4 |  |  | 37 |
Mark-to-market adjustments(3) | (83 | ) |  | (607 | ) |  | 24 |  |  |  | 25 |  |  | 196 |
Counterparty revenue share(4) | (86 | ) |  | (204 | ) |  | (26 | ) |  |  | (16 | ) |  | (111 | )
Amortization, net of accretion(5) | (73 | ) |  | (152 | ) |  | (31 | ) |  |  | (16 | ) |  | (112 | )
Total servicing revenue | $ | 163 |  |  | $ | 198 |  |  | $ | 183 |  |  |  | $ | 97 |  |  | $ | 740 |
(1) | Amounts include subservicing related revenues.
(2) | Amount for the nine months ended September 30, 2019 includes a gain of $21 from the execution of a clean-up call option on a reverse mortgage loan trust, as the Company was the master servicer and holder of clean-up call rights.
(3) | Mark-to-market (“MTM”) adjustments include fair value adjustments on MSR, excess spread financing and MSR financing liabilities. The amount of MSR MTM includes the impact of negative modeled cash flows which have been transferred to reserves on advances and other receivables. The negative modeled cash flows relate to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio. The impact of negative modeled cash flows for the Company was $18, $46, and $13 for the three and nine months ended September 30, 2019 and two months ended September 30, 2018, respectively. The impact of negative modeled cash flows for the Predecessor totaled $4 and $38 for the one and seven months ended July 31, 2018, 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 for the Company is net of excess spread accretion of $77 and $172 and MSL accretion of $10 and $39 for the three and nine months ended September 30, 2019, respectively. Amortization for the Company is net of excess spread accretion of $22 for the two months ended September 30, 2018. Amortization of the Predecessor is net of excess spread of $11 and $78 for the one and seven months ended July 31, 2018, respectively. The Predecessor recorded MSL accretion within reverse servicing fees, whereas the Successor has elected to record MSL accretion within amortization, net of accretion.

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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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