Note 8 – Mortgage Servicing

Mortgage Servicing Rights – Amortization Method

The following table summarizes 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 any servicing liabilities and includes the amount of charges we recognized to increase servicing liability obligations, if any.



	2015			2014
Beginning balance	$	1,820,091		$	1,953,352
Fair value election - transfer to MSRs carried at fair value (1)	(787,142		)	—
Additions recognized in connection with business acquisitions	—			20,378
Additions recognized in connection with asset acquisitions	10,055			19,338
Additions recognized on the sale of mortgage loans	27,791			50,480
Sales	(591,605		)	(137		)
Servicing transfers and adjustments	—			(518		)
	479,190			2,042,893
Amortization	(88,188		)	(186,075		)
Impairment	(25,051		)	—
Ending balance	$	365,951		$	1,856,818

Estimated fair value at end of period	$	404,533		$	2,364,393

(1)

Effective January 1, 2015, we elected fair value accounting for a newly-created class of non-Agency MSRs, which were previously accounted for using the amortization method. This irrevocable election applies to all subsequently acquired or originated servicing assets and liabilities that have characteristics consistent with this class. We recorded a cumulative-effect adjustment of $52.0 million (before deferred income taxes of $9.2 million) to retained earnings as of January 1, 2015 to reflect the excess of the fair value of these MSRs over their carrying amount. At December 31, 2014, the UPB of the loans related to the non-Agency MSRs for which the fair value election was made was $195.3 billion.

Mortgage Servicing Rights—Fair Value Measurement Method

This portfolio comprises servicing rights for which we elected the fair value option and includes Agency residential mortgage loans for which we previously hedged the related market risks and a new class of non-Agency residential mortgage loans for which we elected fair value as of January 1, 2015.

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



	2015									2014
	Agency			Non-Agency			Total			Agency
Beginning balance	$	93,901		$	—		$	93,901		$	116,029
Fair value election - transfer from MSRs carried at amortized cost	—			787,142			787,142			—
Cumulative effect of fair value election	—			52,015			52,015			—
Sales	(70,084		)	(1,234		)	(71,318		)	—
Servicing transfers and adjustments	—			(1,139		)	(1,139		)	(934		)
Changes in fair value (1):
Changes in valuation inputs or other assumptions	(2,592		)	12,031			9,439			(12,217		)
Realization of expected future cash flows and other changes	(6,808		)	(75,888		)	(82,696		)	(930		)
Ending balance	$	14,417		$	772,927		$	787,344		$	101,948


(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 or an improving housing market (as prepayments increase) and increase in periods of rising interest rates or deteriorating housing market (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, 2015 given hypothetical shifts in lifetime prepayments and yield assumptions:



	Adverse change in fair value
	10%			20%
Weighted average prepayment speeds	$	(68,927	)	$	(145,410	)
Discount rate (option-adjusted spread)	$	(21,359	)	$	(39,902	)

The sensitivity analysis measures the potential impact on fair values based on these hypothetical changes, which in the case of our portfolio at September 30, 2015 are increased prepayment speeds and a decrease in the yield assumption.

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, 2015
Servicing (1)	$	238,108,447	$	—	$	238,108,447
Subservicing	49,960,702		180,877		50,141,579
	$	288,069,149	$	180,877	$	288,250,026
UPB at December 31, 2014
Servicing (1)	$	361,288,281	$	—	$	361,288,281
Subservicing	37,439,446		149,737		37,589,183
	$	398,727,727	$	149,737	$	398,877,464
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


(1)	Includes primary servicing UPB of $146.0 billion, $160.8 billion and $160.8 billion at September 30, 2015, December 31, 2014 and September 30, 2014, respectively, for which the Rights to MSRs have been sold to NRZ.

Residential assets serviced includes foreclosed real estate. Residential assets serviced also includes small-balance commercial assets with a UPB of $1.9 billion, $2.3 billion and $2.4 billion at September 30, 2015, December 31, 2014 and September 30, 2014, respectively. Commercial assets consist of large-balance foreclosed real estate.

A significant portion of the servicing agreements for our non-Agency servicing portfolio contain provisions where 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 are terminated as servicer and the Rights to MSRs were sold, we are obligated to compensate NRZ. As a result of the transfer of servicing to another party during 2015 related to Rights to MSRs, we were required to reimburse NRZ $2.2 million in accordance with our agreements.

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
	2015		2014		2015		2014
Loan servicing and subservicing fees:
Servicing	$	274,089	$	331,794	$	879,098	$	1,039,033
Subservicing	14,354		30,926		72,968		95,509
	288,443		362,720		952,066		1,134,542
Home Affordable Modification Program (HAMP) fees	32,318		37,644		108,698		111,000
Late charges	19,162		27,634		63,557		97,002
Loan collection fees	6,682		8,655		25,176		25,573
Custodial accounts (float earnings)	836		1,831		4,633		5,235
Other	12,576		27,480		49,411		74,744
	$	360,017	$	465,964	$	1,203,541	$	1,448,096

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 Unaudited Consolidated Balance Sheets) amounted to $2.0 billion and $3.7 billion at September 30, 2015 and September 30, 2014, respectively.