Note 9 — Mortgage Servicing

Mortgage Servicing Rights – Amortization Method

Servicing Assets. The following table summarizes 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.



	2015			2014			2013
Beginning balance	$	1,820,091		$	1,953,352		$	678,937
Fair value election - transfer of MSRs carried at fair value (1)	(787,142		)	—			—
Additions recognized in connection with business acquisitions :
OSI	—			9,008			—
ResCap acquisition	—			11,370			389,944
Liberty acquisition	—			—			2,840
Additions recognized in connection with asset acquisitions:
Ally MSR transaction	—			—			683,787
OneWest MSR transaction	—			14,408			398,804
Greenpoint MSR transaction	—			3,690			33,647
Other	12,356			17,228			8,764
Additions recognized on the sale of mortgage loans	34,961			63,310			74,784
Sales (2)	(586,352		)	(137		)	(28,403		)
Servicing transfers and adjustments	—			(1,763		)	(8,883		)
	493,914			2,070,466			2,234,221
(Increase) decrease in impairment valuation allowance (3)	(17,341		)	—			2,375
Amortization	(99,194		)	(250,375		)	(283,244		)
Ending balance	$	377,379		$	1,820,091		$	1,953,352

Estimated fair value at end of year	$	461,555		$	2,237,703		$	2,441,719

(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, based on a different strategy for managing the risks of the underlying portfolio compared to our other MSR classes. 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 $9.4 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.


(2)	We retained the subservicing on MSRs that we sold in 2013. The gain on the sale of $5.1 million was deferred and is recognized in earnings over the life of the subservicing contract.


(3)	Impairment of MSRs is recognized in Servicing and origination expense in the Consolidated Statements of Operations.

The estimated amortization expense for MSRs, calculated based on assumptions used at December 31, 2015, is projected as follows over the next five years:



2016	$	46,723
2017	36,427
2018	38,564
2019	38,773
2020	34,425

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 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 years ended December 31:



	2015									2014			2013
	Agency			Non-Agency			Total			Agency			Agency
Beginning balance	$	93,901		$	—		$	93,901		$	116,029		$	85,213
Fair value election - transfer of MSRs carried at amortized cost	—			787,142			787,142			—			—
Cumulative effect of fair value election	—			52,015			52,015			—			—
Sales	(70,930		)	(1,344		)	(72,274		)	—			—
Additions recognized on the sale of residential mortgage loans	—			1,007			1,007			—			—
Servicing transfers and adjustments	—			(2,428		)	(2,428		)	—			—
Changes in fair value (1):
Changes in valuation inputs or other assumptions	(639		)	10,684			10,045			(15,028		)	44,199
Realization of expected future cash flows and other changes	(7,261		)	(100,957		)	(108,218		)	(7,100		)	(13,383		)
Ending balance	$	15,071		$	746,119		$	761,190		$	93,901		$	116,029


(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 or an improving housing market (as prepayments increase) and increase in periods of rising interest rates or a 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 December 31, 2015 given hypothetical shifts in lifetime prepayments and yield assumptions:



	Adverse change in fair value
	10%			20%
Weighted average prepayment speeds	$	(65,518	)	$	(140,457	)
Discount rate (option-adjusted spread)	$	(17,407	)	$	(34,492	)

The sensitivity analysis measures the potential impact on fair values based on hypothetical changes, which in the case of our portfolio at December 31, 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 servicing rights 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, 2015
Servicing	$	230,132,729	$	—	$	230,132,729
Subservicing	20,833,383		105,268		20,938,651
	$	250,966,112	$	105,268	$	251,071,380
UPB at December 31, 2014
Servicing	$	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 December 31, 2013
Servicing	$	397,546,635	$	—	$	397,546,635
Subservicing	67,104,697		400,502		67,505,199
	$	464,651,332	$	400,502	$	465,051,834

UPB serviced at December 31, 2015, 2014 and 2013 includes $137.1 billion, $160.8 billion and $175.1 billion, 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 $1.8 billion, $2.3 billion and $2.6 billion at December 31, 2015, 2014 and 2013, 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. 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. To date, terminations as servicer as a result of a breach of any of these provisions have been minimal.

Certain of our servicing agreements require that we maintain specified servicer ratings from rating agencies such as Moody’s Investors Service, Inc. (Moody’s) and S&P. Out of approximately 3,979 non-Agency servicing agreements, approximately 745 with approximately $40.1 billion of UPB as of December 31, 2015 have minimum servicer ratings criteria. As a result of downgrades in our servicer ratings, termination rights have been triggered in 664 of these non-Agency servicing agreements. This represents approximately $34.3 billion in UPB as of December 31, 2015, or approximately 18.3% of our total non-Agency servicing portfolio. In early 2015, we received notices terminating us as the servicer under four of our non-Agency servicing agreements due to rating downgrades. Pursuant to our servicing agreements, generally we are entitled to payment of accrued and unpaid servicing fees through termination as well as all advances and certain other previously unreimbursed amounts, although we lose the future servicing fee revenue. While the financial impact of the termination of servicing under these four servicing agreements was immaterial to our overall financial condition, as it represented only 0.17% of our overall servicing portfolio as of the time of transfer of servicing, we could be subject to further terminations either as a result of recent servicer ratings downgrades or future adverse actions by ratings agencies, which could have an adverse effect on our business, financing activities, financial condition and results of operations.

Downgrades in servicer ratings could adversely affect our ability to finance servicing advances and maintain our status as an approved servicer by Fannie Mae and Freddie Mac. The servicer rating requirements of Fannie Mae do not necessarily require or imply immediate action, as Fannie Mae has discretion with respect to whether we are in compliance with their requirements and what actions it deems appropriate under the circumstances in the event that we fall below their desired servicer ratings.

At December 31, 2015, the geographic distribution of the UPB and count of residential loans and real estate we serviced was as follows:



	Amount		Count
California	$	60,567,867	234,371
Florida	21,004,999		147,454
New York	20,735,251		86,951
New Jersey	11,495,328		55,175
Texas	11,393,316		127,397
Other	125,769,351		973,414
	$	250,966,112	1,624,762

Servicing Revenue

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



	2015		2014		2013
Loan servicing and subservicing fees:
Servicing	$	1,148,278	$	1,363,800	$	1,246,882
Subservicing	58,384		128,797		146,605
	1,206,662		1,492,597		1,393,487
Home Affordable Modification Program (HAMP) fees	135,036		141,121		152,812
Late charges	82,690		121,618		115,826
Loan collection fees	31,763		33,983		31,022
Custodial accounts (float earnings)	15,870		6,693		5,332
Other	59,776		98,163		125,080
	$	1,531,797	$	1,894,175	$	1,823,559

Float balances amounted to $2.2 billion, $3.4 billion and $3.2 billion at December 31, 2015, 2014 and 2013, respectively.