Note 8 – Mortgage Servicing

Mortgage Servicing Rights – Amortization Method

The following tables summarize the activity in the carrying value of amortization method servicing assets for the six months ended June 30:



	2014			2013
Beginning balance	$	1,953,352		$	678,937
Additions recognized in connection with business acquisitions:
OSI (1)	9,008			—
ResCap Acquisition (1)	11,370			393,891
Liberty Acquisition (1)	—			2,532
Additions recognized in connection with asset acquisitions:
Ally MSR Transaction	—			679,974
OneWest MSR Transaction (2)	1,516			—
Greenpoint MSR Transaction (3)	3,689			—
Other	4,489			2,422
Additions recognized on the sale of mortgage loans	39,802			46,892
Servicing transfers and adjustments	(434		)	1,970
Amortization (4)	(125,292		)	(118,580		)
Ending balance	$	1,897,500		$	1,688,038

Estimated fair value at end of period	$	2,391,873		$	2,269,985


(1)	See Note 3 – Business Acquisitions for additional information regarding MSRs recognized in connection with business acquisitions.


(2)	The acquired MSRs relate to mortgage loans with a UPB of $1.1 billion and related servicing advances of $34.3 million acquired in the final closing of the OneWest MSR Transaction. The OneWest MSR Transaction closed in stages, and the majority of loans were boarded onto our primary servicing platform as of December 31, 2013.


(3)	The acquired MSRs relate to mortgage loans with a UPB of $948.9 million and related servicing advances of $47.6 million.


(4)	In the unaudited Consolidated Statements 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, if any.

As disclosed in Note 4 – Fair Value, we have sold certain Rights to MSRs as part of the HLSS Transactions which did not qualify as sales for accounting purposes. In addition, on February 26, 2014, we issued $123.6 million of OASIS Series 2014-1 Notes secured by Ocwen-owned MSRs relating to Freddie Mac mortgages of $11.8 billion UPB. We accounted for this transaction as a financing. See Note 11 – Borrowings for additional information.

Mortgage Servicing Rights—Fair Value Measurement Method

This portfolio comprises servicing rights for which we elected the fair value option and includes Agency forward residential mortgage loans for which we previously hedged the related market risks.

The following table summarizes the activity related to fair value servicing assets for the six months ended June 30:



	2014			2013
Beginning balance	$	116,029		$	85,213
Changes in fair value (1):
Changes in assumptions	(9,014		)	20,680
Realization of cash flows and other changes	(2,795		)	(8,730		)
Ending balance	$	104,220		$	97,163


(1)	Changes in fair value are recognized in Servicing and origination expense in the unaudited Consolidated Statements of Operations.

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 value of the MSRs that we carry at fair value as of June 30, 2014 given hypothetical instantaneous parallel shifts in the yield curve:



	Adverse change in fair value
	10%			20%
Weighted average prepayment speeds	$	(8,680	)	$	(16,967	)
Discount rate (Option-adjusted spread)	$	(4,138	)	$	(7,979	)

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 primary 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. The UPB of assets serviced for others are not included on our unaudited Consolidated Balance Sheets.



	Residential		Commercial		Total
UPB at June 30, 2014
Servicing (1)	$	379,570,649	$	—	$	379,570,649
Subservicing	55,549,199		286,546		55,835,745
	$	435,119,848	$	286,546	$	435,406,394
UPB at December 31, 2013
Servicing (1)	$	397,546,635	$	—	$	397,546,635
Subservicing	67,104,697		400,502		67,505,199
	$	464,651,332	$	400,502	$	465,051,834
UPB at June 30, 2013
Servicing (1)	$	344,173,439	$	—	$	344,173,439
Subservicing	92,081,944		452,042		92,533,986
	$	436,255,383	$	452,042	$	436,707,425


(1)	Includes primary servicing UPB of $166.1 billion, $175.1 billion and $99.8 billion at June 30, 2014, December 31, 2013 and June 30, 2013, respectively, for which the Rights to MSRs have been sold to HLSS.

Residential assets serviced includes foreclosed real estate. Residential assets serviced also includes small-balance commercial assets with a UPB of $2.4 billion, $2.6 billion and $1.9 billion at June 30, 2014, December 31, 2013 and June 30, 2013, respectively, that are managed using the REALServicing^® platform. Commercial assets consist of large-balance foreclosed real estate.

Servicing Revenue

The following table presents the components of servicing and subservicing fees for the three and six months ended June 30:



	Three Months				Six Months
	2014		2013		2014		2013
Loan servicing and subservicing fees:
Servicing	$	355,665	$	318,149	$	707,487	$	551,620
Subservicing	30,609		45,590		64,334		80,147
	386,274		363,739		771,821		631,767
Home Affordable Modification Program (HAMP) fees	36,657		38,051		73,356		78,198
Late charges	32,533		29,589		69,368		55,485
Loan collection fees	8,624		7,755		16,918		14,137
Custodial accounts (float earnings)	1,683		2,110		3,404		3,790
Other	25,902		41,388		47,265		66,748
	$	491,673	$	482,632	$	982,132	$	850,125

Float balances (balances in custodial accounts, which represent collections of principal and interest that we receive from borrowers, are held in escrow by an unaffiliated bank and are excluded from our balance sheet) amounted to $4.1 billion and $7.6 billion at June 30, 2014 and June 30, 2013, respectively.