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Mortgage Servicing Rights ("MSRs") and Related Liabilities | 6 Months Ended
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Jun. 30, 2020
Transfers and Servicing [Abstract] |
Mortgage servicing rights 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. In estimating the fair value of all servicing rights and related liabilities, the impact of the COVID-19 pandemic was considered in the determination of key assumptions.
MSRs and Related Liabilities | June 30, 2020 |  | December 31, 2019
Forward MSRs - fair value | $ | 2,757 |  |  | $ | 3,496 |
Reverse MSRs - amortized cost | 6 |  |  | 6 |
Mortgage servicing rights | $ | 2,763 |  |  | $ | 3,502 |
Mortgage servicing liabilities - amortized cost | $ | 48 |  |  | $ | 61 |
Excess spread financing - fair value | $ | 1,124 |  |  | $ | 1,311 |
Mortgage servicing rights financing - fair value | 49 |  |  | 37 |
MSR related liabilities - nonrecourse at fair value | $ | 1,173 |  |  | $ | 1,348 |
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 of both agency and non-agency loans. The following table sets forth the activities of forward MSRs:
| Six Months Ended June 30, |  |  |  |  |
Forward MSRs - Fair Value | 2020 |  | 2019 |  |  |
Fair value - beginning of period | $ | 3,496 |  |  | $ | 3,665 |  |  |  |
Additions: |  |  |  |  |  |
Servicing retained from mortgage loans sold | 249 |  |  | 169 |  |  |  |
Purchases of servicing rights(1) | 24 |  |  | 689 |  |  |  |
Dispositions: |  |  |  |  |  |
Sales of servicing assets | — |  |  | (294) |  |  |  |
Changes in fair value: |  |  |  |  |  |
Changes in valuation inputs or assumptions used in the valuation model | (717) |  |  | (542) |  |  |  |
Other changes in fair value | (295) |  |  | (182) |  |  |  |
Fair value - end of period | $ | 2,757 |  |  | $ | 3,505 |  |  |  |
(1)Purchases of servicing rights during the six months ended June 30, 2019 includes $271 of mortgage servicing rights that were acquired from Pacific Union. See Note 2, Acquisitions, for further discussion. In addition, in January 2019, the Company entered into a subservicing contract for $24 billion in mortgages, which were subsequently purchased in May 2019, resulting in additional $253 servicing rights in the second quarter of 2019. 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 six months ended June 30, 2020 and 2019, the Company sold $71 and $22,932 in unpaid principal balance (“UPB”) of forward MSRs, of which none and $20,560 were retained by the Company as subservicer, respectively. MSRs measured at fair value are primarily segregated between credit sensitive and interest sensitive pools (referred to herein as “acquisition 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, and no subsequent changes are made. 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. 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. MSRs measured at fair value are also segregated between investor type into agency and non-agency pools (referred to herein as “investor pools”) based upon contractual servicing agreements with investors at the respective balance sheet date to evaluate the MSR portfolio and fair value of the portfolio. The following table provides a breakdown of UPB and fair value for the Company’s forward MSRs:
| June 30, 2020 |  |  |  | December 31, 2019 |  |
Forward MSRs - UPB and fair value breakdown | UPB |  | Fair Value |  | UPB |  | Fair Value
Acquisition Pools |  |  |  |  |  |  |
Credit sensitive | $ | 131,105 |  |  | $ | 1,307 |  |  | $ | 147,895 |  |  | $ | 1,613 |
Interest sensitive | 146,870 |  |  | 1,450 |  |  | 148,887 |  |  | 1,883 |
Total | $ | 277,975 |  |  | $ | 2,757 |  |  | $ | 296,782 |  |  | $ | 3,496 |
Investor Pools |  |  |  |  |  |  |
Agency(1) | $ | 228,680 |  |  | $ | 2,308 |  |  | $ | 240,688 |  |  | $ | 2,944 |
Non-agency(2) | 49,295 |  |  | 449 |  |  | 56,094 |  |  | 552 |
Total | $ | 277,975 |  |  | $ | 2,757 |  |  | $ | 296,782 |  |  | $ | 3,496 |
(1)Agency investors primarily consist of government sponsored enterprises (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae” or “FNMA”) and the Federal Home Loan Mortgage Corp (“Freddie Mac” or “FHLMC”), and the Government National Mortgage Association (“Ginnie Mae” or “GNMA”). (2)Non-agency investors consist of investors in private-label securitizations. The Company used the following key weighted-average inputs and assumptions in estimating the fair value of forward MSRs:
Forward MSRs - Key inputs and assumptions | June 30, 2020 |  | December 31, 2019
Total MSR Portfolio |  |  |
Discount rate | 9.5 | % |  | 9.7 | %
Prepayment speeds | 14.2 | % |  | 13.1 | %
Average life | 5.3 years |  | 5.8 years
Acquisition Pools: |  |  |
Credit Sensitive |  |  |
Discount rate | 9.9 | % |  | 10.4 | %
Prepayment speeds | 12.6 | % |  | 12.7 | %
Average life | 5.6 years |  | 6.0 years
Interest Sensitive |  |  |
Discount rate | 9.0 | % |  | 9.1 | %
Prepayment speeds | 15.8 | % |  | 13.5 | %
Average life | 4.9 years |  | 5.7 years
Investor Pools: |  |  |
Agency |  |  |
Discount rate | 8.9 | % |  | 9.0 | %
Prepayment speeds | 14.4 | % |  | 13.0 | %
Average life | 5.2 years |  | 5.8 years
Non-agency |  |  |
Discount rate | 12.0 | % |  | 12.6 | %
Prepayment speeds | 13.4 | % |  | 13.8 | %
Average life | 5.6 years |  | 6.2 years
The following table shows the hypothetical effect on the fair value of the Company’s forward MSRs when applying certain unfavorable variations of key assumptions to these assets for the dates indicated:
| Discount Rate |  |  |  | Total Prepayment Speeds |  |
Forward MSRs - Hypothetical Sensitivities | 100 bps Adverse Change |  | 200 bps Adverse Change |  | 10% Adverse Change |  | 20% Adverse Change
June 30, 2020 |  |  |  |  |  |  |
Mortgage servicing rights | $ | (104) |  |  | $ | (201) |  |  | $ | (175) |  |  | $ | (335) |
December 31, 2019 |  |  |  |  |  |  |
Mortgage servicing rights | $ | (127) |  |  | $ | (245) |  |  | $ | (165) |  |  | $ | (317) |
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 $20,758 and $22,725 as of June 30, 2020 and December 31, 2019, respectively. The following table sets forth the activities of reverse MSRs and mortgage servicing liabilities (“MSL”):
| Six Months Ended June 30, |  |  |  |  |  |
| 2020 |  |  |  | 2019 |  |
Reverse MSRs and Liabilities - Amortized Cost | Assets |  | Liabilities |  | Assets |  | Liabilities
Balance - beginning of period | $ | 6 |  |  | $ | 61 |  |  | $ | 11 |  |  | $ | 71 |
Amortization/accretion | — |  |  | (13) |  |  | (1) |  |  | (28) |
Adjustments(1) | — |  |  | — |  |  | (4) |  |  | 37 |
Balance - end of the period | $ | 6 |  |  | $ | 48 |  |  | $ | 6 |  |  | $ | 80 |
Fair value - end of period | $ | 6 |  |  | $ | 12 |  |  | $ | 7 |  |  | $ | 44 |
(1)Reverse MSR and MSL net adjustments recorded by the Company during the six months ended June 30, 2019 primarily relate to the fair value adjustments for reverse MSR and MSL assumed from the Merger resulting from the revised cost to service assumption used in the valuation of reverse MSR and MSL during the measurement period. Management evaluates reverse MSRs and MSLs each reporting period for impairment. Based on management’s assessment at June 30, 2020, 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 third parties and sold to these entities the right to receive a specified percentage of the excess cash flow generated from the portfolios in excess of a fixed base servicing fee per loan. The Company retains all the base servicing fee, ancillary income and interest float earnings on principal along with 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 recapture agreement 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 recaptures 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. Accordingly, a recapture assumption is included within excess spread valuation. The Company used the following weighted-average assumptions in the Company’s valuation of excess spread financing:
Excess Spread Financing Assumptions | June 30, 2020 |  | December 31, 2019
Discount rate | 12.0 | % |  | 11.6 | %
Prepayment speeds | 13.4 | % |  | 12.6 | %
Recapture rate | 18.7 | % |  | 20.1 | %
Average life | 5.4 years |  | 5.8 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:
| Discount Rate |  |  |  | Prepayment Speeds |  |
Excess Spread Financing - Hypothetical Sensitivities | 100 bps Adverse Change |  | 200 bps Adverse Change |  | 10% Adverse Change |  | 20% Adverse Change
June 30, 2020 |  |  |  |  |  |  |
Excess spread financing | $ | 38 |  |  | $ | 78 |  |  | $ | 47 |  |  | $ | 97 |
December 31, 2019 |  |  |  |  |  |  |
Excess spread financing | $ | 46 |  |  | $ | 95 |  |  | $ | 46 |  |  | $ | 96 |
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. Excess spread financing’s cash flow assumptions that are utilized in determining fair value are based on the related cash flow assumptions used in the financed MSRs. Any fair value change recognized in the financed MSRs attributable to related cash flows assumptions would inherently have an inverse impact on the carrying amount of the related 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 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 MSR resides with the Company. Accordingly, the Company records the MSR and an MSR financing liability associated with this transaction in the 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 Company had MSR financing liability of $49 and $37 as of June 30, 2020 and December 31, 2019, respectively. The following table sets forth the weighted-average assumptions used in the valuation of the mortgage servicing rights financing liability:
Mortgage Servicing Rights Financing Assumptions | June 30, 2020 |  | December 31, 2019
Advance financing rates | 4.3 | % |  | 3.5 | %
Annual advance recovery rates | 18.6 | % |  | 18.8 | %
Servicing Segment Revenues The following table sets forth the items comprising total revenues for the Servicing segment:
| Three Months Ended June 30, |  |  |  | Six Months Ended June 30, |  |
Total Revenues - Servicing | 2020 |  | 2019 |  | 2020 |  | 2019
Contractually specified servicing fees(1) | $ | 285 |  |  | $ | 307 |  |  | $ | 582 |  |  | $ | 588 |
Other service-related income(1) | 62 |  |  | 32 |  |  | 111 |  |  | 82 |
Incentive and modification income(1) | 8 |  |  | 10 |  |  | 18 |  |  | 17 |
Late fees(1) | 20 |  |  | 27 |  |  | 47 |  |  | 52 |
Reverse servicing fees | 7 |  |  | 8 |  |  | 13 |  |  | 17 |
Mark-to-market adjustments(2) | (261) |  |  | (231) |  |  | (644) |  |  | (524) |
Counterparty revenue share(3) | (88) |  |  | (70) |  |  | (164) |  |  | (118) |
Amortization, net of accretion(4) | (102) |  |  | (56) |  |  | (178) |  |  | (79) |
Total revenues - Servicing | $ | (69) |  |  | $ | 27 |  |  | $ | (215) |  |  | $ | 35 |
(1)The Company recognizes revenue on an earned basis for services performed. Amounts include subservicing related revenues. (2)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 was $3 and $17 for the three months ended June 30, 2020 and 2019 and $13 and $28 for the six months ended June 30, 2020 and 2019, respectively. (3)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 MSR financing arrangements. (4)Amortization is net of excess spread accretion of $79 and $59 and MSL accretion of $5 and $11 for the three months ended June 30, 2020 and 2019, respectively. For the six months ended June 30, 2020 and 2019, amortization is net of excess spread accretion of $147 and $95 and MSL accretion of $13 and $29, 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://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 860 -SubTopic 30 -Section 50 -Paragraph 1A -Subparagraph (c)(3) -URI 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