Note 8 – Mortgage Servicing

Mortgage Servicing Rights – Amortization Method

The following table summarizes changes in the net carrying value of servicing assets that we account for using the amortization method for the six months ended June 30:



	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	12,432			6,252
Additions recognized on the sale of mortgage loans	16,668			18,305
Sales	178			(459,201		)
	406,657			598,305
Amortization	(21,153		)	(70,080		)
Increase in impairment valuation allowance (2)	(39,030		)	(1,608		)
Ending balance	$	346,474		$	526,617

Estimated fair value at end of period	$	367,951		$	648,840

(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. See Note 3 – Fair Value for additional information regarding impairment and the valuation allowance.

Mortgage Servicing Rights – Fair Value Measurement Method

The following table summarizes changes in the fair value of servicing assets that we account for at fair value on a recurring basis for the six months ended June 30:



	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	—			(143		)	(143		)	(68,144		)	(845		)	(68,989		)
Servicing transfers and adjustments	—			(1,275		)	(1,275		)	—			(1,139		)	(1,139		)
Changes in fair value (1):
Changes in valuation inputs or other assumptions	(5,033		)	—			(5,033		)	(580		)	—			(580		)
Realization of expected future cash flows and other changes	(855		)	(53,216		)	(54,071		)	(6,256		)	(41,644		)	(47,900		)
Ending balance	$	9,183		$	691,485		$	700,668		$	18,921		$	795,529		$	814,450


(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 June 30, 2016 given hypothetical shifts in lifetime prepayments and yield assumptions:



	Adverse change in fair value
	10%			20%
Weighted average prepayment speeds	$	(68,131	)	$	(138,502	)
Discount rate (option-adjusted spread)	$	(18,605	)	$	(33,629	)

The sensitivity analysis measures the potential impact on fair values based on hypothetical changes, which in the case of our portfolio at June 30, 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 June 30, 2016
Servicing	$	216,555,948	$	—	$	216,555,948
Subservicing	12,720,053		144,639		12,864,692
	$	229,276,001	$	144,639	$	229,420,640
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 June 30, 2015
Servicing	$	267,996,046	$	—	$	267,996,046
Subservicing	53,674,533		181,329		53,855,862
	$	321,670,579	$	181,329	$	321,851,908

UPB serviced at June 30, 2016, December 31, 2015 and June 30, 2015 includes $128.1 billion, $137.1 billion and $151.2 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 $1.6 billion, $1.8 billion and $2.0 billion at June 30, 2016, December 31, 2015 and June 30, 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 beginning in 2007-2008, 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 3,905 non-Agency servicing agreements, approximately 734 with approximately $37.1 billion of UPB as of June 30, 2016 have minimum servicer ratings criteria. As a result of downgrades in our servicer ratings, termination rights have been triggered in 649 of these non-Agency servicing agreements. This represents approximately $31.5 billion in UPB as of June 30, 2016, or approximately 18% of our total non-Agency servicing portfolio.

As described below, with respect to approximately $18.8 billion in UPB as of June 30, 2016, or approximately 59.7% of the UPB of the non-Agency servicing agreements with triggered termination rights relating to servicer rating downgrades, Ocwen has received notices or solicitation results from trustees or master servicers indicating no current intended action or direction to terminate Ocwen as servicer. Specifically, under 272 of the 649 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 49 of the solicitations: 45 resulted in no direction to terminate and four resulted in the termination of Ocwen as servicer in early 2015 due to rating downgrades.

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 periods ended June 30:



	Three Months				Six Months
	2016		2015		2016		2015
Loan servicing and subservicing fees:
Servicing	$	235,542	$	297,773	$	474,180	$	629,973
Subservicing	5,256		15,309		12,495		33,650
	240,798		313,082		486,675		663,623
Home Affordable Modification Program (HAMP) fees	33,493		41,204		56,111		76,380
Late charges	17,474		20,273		36,076		44,395
Loan collection fees	6,985		8,930		14,114		18,494
Other	8,512		13,494		11,782		40,632
	$	307,262	$	396,983	$	604,758	$	843,524

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 $2.7 billion and $3.4 billion at June 30, 2016 and June 30, 2015, respectively.