Note 8 – 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 three months ended March 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.



	2016			2015
Beginning balance	$	377,379		$	1,820,091
Fair value election - transfer of MSRs carried at fair value (1)	—			(787,142		)
Additions recognized in connection with asset acquisitions	4,263			3,267
Additions recognized on the sale of mortgage loans	7,156			8,528
Sales	—			(65,627		)
	388,798			979,117
Amortization	(12,806		)	(38,494		)
Increase in impairment valuation allowance (2)	(29,953		)	(17,769		)
Ending balance	$	346,039		$	922,854

Estimated fair value at end of period	$	390,970		$	1,064,134

(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 $9.2 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.


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

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 three months ended March 31:



	2016									2015
	Agency			Non-Agency			Total			Agency			Non-Agency			Total
Beginning balance	$	15,071		$	746,119		$	761,190		$	93,901		$	—		$	93,901
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	—			(142		)	(142		)	—			(947		)	(947		)
Servicing transfers and adjustments	—			419			419			—			(1,139		)	(1,139		)
Changes in fair value (1):
Changes in valuation inputs or other assumptions	(2,709		)	(3,671		)	(6,380		)	(6,110		)	—			(6,110		)
Realization of expected future cash flows and other changes	(351		)	(22,562		)	(22,913		)	(3,276		)	(23,789		)	(27,065		)
Ending balance	$	12,011		$	720,163		$	732,174		$	84,515		$	813,282		$	897,797


(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, an improving housing market or expanded product availability (as prepayments increase) and increase in periods of rising interest rates, a deteriorating housing market or reduced product availability (as prepayments decrease). The following table summarizes the estimated change in the value of the MSRs that we carry at fair value as of March 31, 2016 given hypothetical shifts in lifetime prepayments and yield assumptions:



	Adverse change in fair value
	10%			20%
Weighted average prepayment speeds	$	(77,665	)	$	(150,075	)
Discount rate (option-adjusted spread)	$	(17,894	)	$	(34,728	)

The sensitivity analysis measures the potential impact on fair values based on hypothetical changes, which in the case of our portfolio at March 31, 2016 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 Unaudited Consolidated Balance Sheets.



	Residential		Commercial		Total
UPB at March 31, 2016
Servicing	$	223,731,371	$	—	$	223,731,371
Subservicing	13,349,665		136,473		13,486,138
	$	237,081,036	$	136,473	$	237,217,509
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 March 31, 2015
Servicing	$	337,125,187	$	—	$	337,125,187
Subservicing	45,088,815		161,887		45,250,702
	$	382,214,002	$	161,887	$	382,375,889

UPB serviced at March 31, 2016, December 31, 2015 and March 31, 2015 includes $132.7 billion, $137.1 billion and $156.3 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 $1.7 billion, $1.8 billion and $2.1 billion at March 31, 2016, December 31, 2015 and March 31, 2015, 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 3,908 non-Agency servicing agreements, approximately 735 with approximately $38.1 billion of UPB as of March 31, 2016 have minimum servicer ratings criteria. As a result of downgrades in our servicer ratings, termination rights have been triggered in 651 of these non-Agency servicing agreements. This represents approximately $32.4 billion in UPB as of March 31, 2016, or approximately 18% of our total non-Agency servicing portfolio. Under 272 of the 651 triggered agreements, trustees and master servicers have sent notices to investors indicating that they did not currently intend to take action relating to the termination rights. In addition, in connection with 69 of the triggered agreements, the trustee or master servicer sent solicitation notices to investors asking whether or not the investor wanted to direct the trustee or master servicer to terminate Ocwen as servicer. The trustee or master servicer has announced results for 47 of the solicitations: 43 resulted in no direction to terminate and four resulted in the termination of Ocwen as servicer in early 2015 due to rating downgrades. The 272 notices regarding no action at this time and the 43 solicitations resulting in no direction to terminate Ocwen as servicer represent approximately $19.3 billion in UPB as of March 31, 2016, or approximately 59.6% of the UPB of the non-Agency servicing agreements with triggered termination rights. As noted above, 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.

Servicing Revenue

The following table presents the components of servicing and subservicing fees for the three months ended March 31:



	2016		2015
Loan servicing and subservicing fees:
Servicing	$	238,638	$	332,201
Subservicing	7,239		18,341
	245,877		350,542
Home Affordable Modification Program (HAMP) fees	22,618		35,176
Late charges	18,603		24,122
Loan collection fees	7,129		9,563
Other	3,269		27,138
	$	297,496	$	446,541

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. Float balances amounted to $2.3 billion and $4.0 billion at March 31, 2016 and March 31, 2015, respectively.