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Mortgage Servicing
 9 Months Ended 12 Months Ended
Sep. 30, 2015
Dec. 31, 2014
Transfers and Servicing [Abstract]    
Mortgage Servicing
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.
Note 9 — Mortgage Servicing
Mortgage Servicing Rights – Amortization Method
Servicing Assets. The following tables summarize the activity in the carrying value of amortization method servicing assets for the years ended December 31. 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.
 
 
2014
 
2013
 
2012
Beginning balance
 
$
1,953,352

 
$
678,937

 
$
293,152

Additions recognized in connection with business acquisitions :
 
 

 
 

 
 
OSI
 
9,008

 
—

 
—

ResCap Acquisition
 
11,370

 
389,944

 
—

Liberty Acquisition
 
—

 
2,840

 
—

Homeward Acquisition
 
—

 
—

 
278,069

Additions recognized in connection with asset acquisitions:
 
 
 
 
 
 
Ally MSR Transaction
 
—

 
683,787

 
—

OneWest MSR Transaction (1)
 
14,408

 
398,804

 
—

Greenpoint MSR Transaction (2)
 
3,690

 
33,647

 
—

Saxon
 
—

 
—

 
77,881

JPMorgan
 
—

 
—

 
23,445

Bank of America
 
—

 
—

 
64,569

Other
 
17,228

 
8,764

 
16,084

Additions recognized on the sale of mortgage loans
 
63,310

 
74,784

 
—

Sales (3)
 
(137
)
 
(28,403
)
 
—

Servicing transfers and adjustments
 
(1,763
)
 
(8,883
)
 
(4
)
Change in valuation allowance
 
—

 
2,375

 
(88
)
Amortization
 
(250,375
)
 
(283,244
)
 
(74,171
)
Ending balance
 
$
1,820,091

 
$
1,953,352

 
$
678,937

 
 
 
 
 
 
 
Estimated fair value at end of year
 
$
2,237,703

 
$
2,441,719

 
$
743,830


(1)
The OneWest MSR Transaction closed in stages, and the majority of loans were boarded onto our primary servicing platform as of December 31, 2013. MSRs acquired in the final closing of the OneWest MSR Transaction in 2014 relate to mortgage loans with a UPB of $1.1 billion and related servicing advances of $34.3 million. Total UPB and related servicing advances acquired in the OneWest MSR Transaction were $70.1 billion and $2.1 billion, respectively. No operations or other assets were purchased in the transaction. As part of the OneWest MSR Transaction, both the seller and OLS have agreed to indemnification provisions for the benefit of the other party.
(2)
The MSRs acquired in 2014 relate to mortgage loans with a UPB of $948.9 million and related servicing advances of $47.6 million. Total UPB and related servicing advances acquired were $7.3 billion and $469.7 million, respectively.
(3)
Cash proceeds from the 2013 sale were $34.8 million. These MSRs were sold with subservicing retained. The gain on the sale of $5.1 million has been deferred and will be recognized in earnings over the life of the subservicing contract.
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.
The estimated amortization expense for MSRs is projected as follows over the next five years:
 
Amortization Method MSRs as of December 31, 2014 (1)
 
Less: MSRs to be Measured at Fair Value as of January 1, 2015 (2)
 
Estimated Amortization Expense
2015
$
222,006

 
$
86,112

 
$
135,894

2016
186,018

 
73,297

 
112,721

2017
174,097

 
65,527

 
108,570

2018
158,107

 
58,592

 
99,515

2019
138,495

 
52,402

 
86,093

(1)
Estimated amortization expense for all MSRs accounted for using the amortization method as of December 31, 2014, calculated based on assumptions used at December 31, 2014.
(2)
Estimated amortization expense attributed to non-Agency MSRs accounted for using the amortization method as of December 31, 2014 for which we subsequently elected to account for using the fair value measurement method effective January 1, 2015.
Servicing Liabilities. Servicing liabilities, if any, are included in Other liabilities.
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 years ended December 31:
 
2014
 
2013
 
2012
Beginning balance
$
116,029

 
$
85,213

 
$
—

Amount recognized in connection with the Homeward Acquisition
—

 
—

 
82,275

Additions recognized on the sale of residential mortgage loans
—

 
—

 
2,908

Changes in fair value (1):
 
 
 
 
 
Changes in assumptions
(15,028
)
 
44,199

 
30

Realization of cash flows and other changes
(7,100
)
 
(13,383
)
 
—

Ending balance
$
93,901

 
$
116,029

 
$
85,213

(1)
Changes in fair value are recognized in Servicing and origination expense in the 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 December 31, 2014 given hypothetical instantaneous parallel shifts in the yield curve:
 
Adverse change in fair value
 
10%
 
20%
Weighted average prepayment speeds
$
(8,101
)
 
$
(15,760
)
Discount rate (Option-adjusted spread)
$
(3,553
)
 
$
(6,860
)
 
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 Consolidated Balance Sheets.
 
Residential
 
Commercial
 
Total
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

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 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

(1)
Includes primary servicing UPB of $160.8 billion, $175.1 billion and $79.4 billion at December 31, 2014, 2013 and 2012, respectively, for which the Rights to MSRs have been sold.
Residential assets serviced includes foreclosed real estate. Residential assets serviced also includes small-balance commercial assets with a UPB of $2.3 billion, $2.6 billion and $2.1 billion at December 31, 2014, 2013 and 2012, respectively, that are managed using the REALServicing® platform. 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 to HLSS (now owned by NRZ), we are obligated to compensate NRZ. As a result of the transfer of servicing to another party in 2014 related to Rights to MSRs sold to HLSS, we were required to reimburse HLSS $2.0 million for the loss of servicing revenues.
At December 31, 2014, the geographic distribution of the UPB and count of residential loans and real estate we serviced was as follows:
 
Amount
 
Count
California
$
96,727,239

 
382,859

Florida
31,922,669

 
212,623

New York
28,113,154

 
118,661

New Jersey
18,599,585

 
89,507

Texas
17,149,095

 
175,210

Other
206,215,985

 
1,507,178

 
$
398,727,727

 
2,486,038


Servicing Revenue
The following table presents the components of servicing and subservicing fees for the years ended December 31:
 
2014
 
2013
 
2012
Loan servicing and subservicing fees:
 
 
 
 
 
Servicing
$
1,363,800

 
$
1,246,882

 
$
535,415

Subservicing
128,797

 
146,605

 
45,713

 
1,492,597

 
1,393,487

 
581,128

Home Affordable Modification Program (HAMP) fees
141,121

 
152,812

 
76,764

Late charges
121,618

 
115,826

 
69,281

Loan collection fees
33,983

 
31,022

 
15,960

Custodial accounts (float earnings)
6,693

 
5,332

 
3,749

Other
98,163

 
125,080

 
57,525

 
$
1,894,175

 
$
1,823,559

 
$
804,407


Float balances amounted to $3.4 billion, $3.2 billion and $1.3 billion at December 31, 2014, 2013 and 2012, respectively.