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Note 8 MORTGAGE SERVICING
 12 Months Ended
Dec. 31, 2012
Transfers and Servicing of Financial Assets [Text Block]
NOTE 8 MORTGAGE SERVICING

The following table presents the components of servicing and subservicing fees for the years ended December 31:


    2012     2011     2010  
Loan servicing and subservicing fees   $ 581,067     $ 341,438     $ 226,284  
Home Affordable Modification Program (HAMP) fees     76,764       42,025       32,363  
Late charges     69,281       38,557       32,760  
Loan collection fees     15,960       11,223       8,958  
Float earnings     3,749       2,105       2,843  
Other     57,604       23,527       18,491  
    $ 804,425     $ 458,875     $ 321,699  

Mortgage Servicing Rights – Amortization Method

Servicing Assets. The following table summarizes the activity in the carrying value of residential servicing assets for the years ended December 31:


For the year ended December 31,   2012     2011     2010  
Beginning balance   $ 293,152     $ 193,985     $ 117,802  
Purchases:                        
HomEq Acquisition     —       —       84,324  
Litton Acquisition     —       144,314       —  
Homeward Acquisition (1)     275,844       —       —  
MSR asset acquisitions (2)     181,979       —       23,425  
Servicing transfers and adjustments     (4 )     —       (29 )
Decrease in impairment valuation allowance     (88 )     574       90  
Amortization (3)     (74,171 )     (45,721 )     (31,627 )
Ending balance   $ 676,712     $ 293,152     $ 193,985  
                       
Fair value at end of year   $ 743,830     $ 340,015     $ 237,407  

(1) See Note 2 for additional information regarding the acquisition of MSRs from Homeward.
(2) MSR asset acquisitions for 2012 include:
  • On April 2, 2012, we completed an acquisition from Saxon Mortgage Services, Inc. (Saxon) of an MSR portfolio of approximately $22.2 billion in UPB of residential mortgage loans, approximately $9.9 billion of which Ocwen had previously subserviced, and approximately $1.2 billion of associated servicing advances (the 2012 Saxon MSR Transaction).  To finance the 2012 Saxon MSR Transaction, we utilized a combination of available cash and two new two-year servicing advance facilities.  On April 2, 2012, we also completed an acquisition of MSRs from JPMorgan Chase Bank, N.A. (JPMCB) which includes servicing rights for non-prime loans with a UPB of approximately $8.1 billion (the JPMCB MSR Transaction) and $557,184 of servicing advances.  Ocwen financed the purchase price through available cash and an existing servicing advance facility. 
  • On May 31, 2012, we completed the acquisition of MSRs from Aurora Bank FSB (Aurora) on a portfolio of small-balance commercial mortgage loans with a total UPB of $1.8 billion and $52,911 of servicing advances.
  • On June 11, 2012, we purchased residential MSRs from Bank of America, N.A. (BANA) with respect to mortgage loans with a UPB of approximately $10.1 billion owned by Freddie Mac.  We entered into a new servicing advance facility to finance a portion of the related servicing advances acquired in the transaction.  At December 31, 2012, the acquired MSRs, which had a carrying value of $58,472, were pledged as collateral for the promissory note used to finance the purchase.
  • On July 2 and 16, 2012, we closed on the acquisitions of MSR portfolios totaling approximately $316 million in UPB of residential mortgage loans owned by Fannie Mae and Freddie Mac.
  • On September 4, 2012, we purchased an additional MSR portfolio of approximately $2.2 billion in UPB of residential mortgage loans owned by Fannie Mae.  We boarded these loans on October 1, 2012.
(3) In the Consolidated Statement of Operations, Amortization of mortgage servicing rights is reported net of the amortization of servicing liabilities and includes the amount of charges we recognized to increase servicing liability obligations.

See Note 13 and Note 14 for additional information regarding the advance facilities and promissory note used to finance the advances and MSRs acquired in the transactions described above. As disclosed in Note 3, we sold certain Rights to MSRs during 2012 as part of the HLSS Transactions. The carrying value of the related MSRs which have not been derecognized at December 31, 2012 was $273,028.


The estimated amortization expense for MSRs, calculated based on assumptions used at December 31, 2012, is projected as follows over the next five years:


2013   $ 122,365  
2014     100,316  
2015     82,240  
2016     67,421  
2017     55,273  

Valuation Allowance for Impairment. During 2008, we established a valuation allowance for impairment of $3,624 on the high-loan-to-value stratum of our mortgage servicing rights as the estimated fair value was less than the carrying value. Changes in the valuation allowance for impairment are reflected in Servicing and origination expenses in the Consolidated Statement of Operations. Net of the valuation allowance of $2,378 and $2,290, the carrying value of this stratum was $0 and $214 at December 31, 2012 and 2011, respectively. For all other strata, the fair value exceeded the carrying value.


Servicing Liabilities. Servicing liabilities are included in Other liabilities. See Note 16 for additional information.


Mortgage Servicing Rights—Fair Value Measurement Method


This portfolio comprises servicing rights for prime mortgage loans that were acquired by Homeward through asset or flow purchases or retained on loans originated and subsequently sold. We acquired these loans as part of the Homeward Acquisition at an initial fair value of $82,275. See Note 4


for a reconciliation of changes in the fair value from the acquisition date to $85,213 at December 31, 2012.


Because the mortgages underlying these MSRs permit the borrowers to prepay the loans, the value of the MSRs generally tends to diminish in periods of declining interest rates (as prepayments increase) and increase in periods of rising interest rates (as prepayments decrease). The following table summarizes the estimated change in the fair value of the MSRs and related derivatives as of December 31, 2012 given hypothetical instantaneous parallel shifts in the yield curve:


    Adverse change in fair value  
    10%     20%  
                 
Weighted average prepayment speeds   $ (6,374 )   $ (13,681 )
                 
Discount rate (Option-adjusted spread)   $ (3,533 )   $ (6,448 )

The sensitivity analysis measures the potential impact on fair values based on hypothetical changes (increases and decreases) in interest rates.


Portfolio of Assets Serviced


The following table presents the composition of our servicing and subservicing portfolios by type of property serviced as measured by UPB. The servicing portfolio represents loans for which we own the MSRs while subservicing represents all other loans.


    Residential     Commercial     Total  
UPB at December 31, 2010                        
Servicing   $ 51,252,380     $ —     $ 51,252,380  
Subservicing     22,634,011       434,305       23,068,316  
    $ 73,886,391     $ 434,305     $ 74,320,696  
UPB at December 31, 2011                        
Servicing   $ 78,675,160     $ —     $ 78,675,160  
Subservicing     23,524,062       290,863       23,814,925  
    $ 102,199,222     $ 290,863     $ 102,490,085  
UPB at December 31, 2012                        
Servicing (1)   $ 175,762,161     $ —     $ 175,762,161  
Subservicing     27,903,555       401,031       28,304,586  
    $ 203,665,716     $ 401,031     $ 204,066,747  

(1) Includes UPB of $79,360,874 for which the Rights to MSRs have been sold to HLSS.

Residential assets serviced consist principally of mortgage loans, primarily subprime, but also include foreclosed real estate. Residential assets serviced also include small-balance commercial assets with a UPB of $2.1 billion and $586,080 at December 31, 2012 and 2011, respectively that are managed using the REALServicing™ application. Commercial assets subserviced consist of large-balance foreclosed real estate. Assets serviced for others are not included on our Consolidated Balance Sheet.


At December 31, 2012, the geographic distribution of the UPB and count of residential loans and real estate we serviced was as follows:


    Amount     Count  
California   $ 45,851,476       160,501  
Florida     22,731,227       136,224  
New York     17,276,718       67,725  
Texas     9,151,031       99,935  
Illinois     8,174,504       53,203  
Other     100,480,760       702,368  
    $ 203,665,716       1,219,956  

Float balances amounted to approximately $1.3 billion and $555,500 at December 31, 2012 and 2011, respectively.