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 nine months ended September 30. 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.



	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			391,853
Liberty Acquisition (1)	—			2,532
Additions recognized in connection with asset acquisitions:
Ally MSR Transaction	—			683,787
OneWest MSR Transaction (2)	1,516			127,047
Greenpoint MSR Transaction (3)	3,690			—
Other	14,132			3,003
Additions recognized on the sale of mortgage loans	50,480			63,154
Sales	(137		)	(17,523		)
Servicing transfers and adjustments	(518		)	2,052
Amortization	(186,075		)	(197,899		)
Ending balance	$	1,856,818		$	1,736,943

Estimated fair value at end of period	$	2,364,393		$	2,532,239


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

(2)

The acquired MSRs in 2014 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. As of September 30, 2013, we had acquired MSRs of $127.0 million with a UPB of $30.5 billion and related servicing advance receivables of $371.6 million.


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

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 account for these transactions as financings. 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 nine months ended September 30:



	2014			2013
Beginning balance	$	116,029		$	85,213
Servicing transfers	(934		)	—
Changes in fair value (1):
Changes in assumptions	(12,217		)	19,800
Realization of cash flows and other changes	(930		)	(8,075		)
Ending balance	$	101,948		$	96,938


(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 September 30, 2014 given hypothetical instantaneous parallel shifts in the yield curve:



	Adverse change in fair value
	10%			20%
Weighted average prepayment speeds	$	(8,245	)	$	(16,137	)
Discount rate (Option-adjusted spread)	$	(4,100	)	$	(7,905	)

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 September 30, 2014
Servicing (1)	$	360,919,248	$	—	$	360,919,248
Subservicing	50,360,366		216,111		50,576,477
	$	411,279,614	$	216,111	$	411,495,725
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 September 30, 2013
Servicing (1)	$	362,792,312	$	—	$	362,792,312
Subservicing	72,027,114		495,312		72,522,426
	$	434,819,426	$	495,312	$	435,314,738


(1)	Includes primary servicing UPB of $160.8 billion, $175.1 billion and $177.1 billion at September 30, 2014, December 31, 2013 and September 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 $2.5 billion at September 30, 2014, December 31, 2013 and September 30, 2013, respectively, that are managed using the REALServicing^® platform. Commercial assets consist of large-balance foreclosed real estate.

A significant portion of our non-Agency servicing portfolio servicing agreements contain provisions whereby we could be terminated as servicer without compensation upon the failure of the serviced loans to meet certain portfolio delinquency or cumulative loss thresholds or in the event we fail to maintain required servicer ratings, among other provisions. As a result of the economic downturn of recent years, the portfolio delinquency and/or cumulative loss threshold provisions have been breached by many private-label securitizations in our non-Agency servicing portfolio. Terminations as servicer as a result of a breach of any of these provisions have been minimal. In the event we were terminated as servicer and the Rights to MSRs were sold to HLSS, we would be obligated to compensate HLSS.

Servicing Revenue

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



	Three Months				Nine Months
	2014		2013		2014		2013
Loan servicing and subservicing fees:
Servicing	$	331,794	$	335,884	$	1,039,033	$	887,500
Subservicing	30,926		35,286		95,509		115,437
	362,720		371,170		1,134,542		1,002,937
Home Affordable Modification Program (HAMP) fees	37,644		40,213		111,000		118,412
Late charges	27,634		30,445		97,002		85,930
Loan collection fees	8,655		8,387		25,573		22,524
Custodial accounts (float earnings)	1,831		743		5,235		4,533
Other	27,480		32,309		74,744		99,056
	$	465,964	$	483,267	$	1,448,096	$	1,333,392

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 $3.7 billion and $3.5 billion at September 30, 2014 and September 30, 2013, respectively.