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 years ended December 31.



	2016			2015			2014
Beginning balance	$	377,379		$	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 (2) (3)	—			—			20,378
Additions recognized in connection with asset acquisitions	17,356			12,356			35,326
Additions recognized on the sale of mortgage loans	37,231			34,961			63,310
Sales	(24,452		)	(586,352		)	(137		)
Servicing transfers and adjustments	—			—			(1,763		)
	407,514			493,914			2,070,466
Increase in impairment valuation allowance (4)	(10,813		)	(17,341		)	—
Amortization	(32,979		)	(99,194		)	(250,375		)
Ending balance	$	363,722		$	377,379		$	1,820,091

Estimated fair value at end of year	$	467,911		$	461,555		$	2,237,703

(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)

As of the February 15, 2013 acquisition date, the purchase of certain MSRs from Residential Capital, LLC (ResCap) was not complete pending the receipt of certain consents and court approvals. Subsequent to the acquisition, we obtained the required consents and approvals for a portion of these MSRs and, in 2014, paid an additional purchase price of $54.2 million, which included $11.4 million to acquire the MSRs and $39.2 million to acquire the related advances. We recorded a contingent asset effective as of the ResCap acquisition date.


(3)	On January 31, 2014, we increased our ownership in Ocwen Structured Investments, LLC (OSI) from 26.00% to 87.35%. The acquired net assets were $20.0 million and consisted primarily of MSRs ($9.0 million), mortgage-backed securities ($7.7 million) and cash ($3.2 million).


(4)	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, 2016, is projected as follows over the next five years:



2017	$	45,960
2018	37,158
2019	35,264
2020	35,832
2021	33,134

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 years ended December 31:



	2016									2015									2014
	Agency			Non-Agency			Total			Agency			Non-Agency			Total			Agency
Beginning balance	$	15,071		$	746,119		$	761,190		$	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	(3		)	(145		)	(148		)	(70,930		)	(1,344		)	(72,274		)	—
Additions recognized on the sale of residential mortgage loans	—			—			—			—			1,007			1,007			—
Servicing transfers and adjustments	—			(1,548		)	(1,548		)	—			(2,428		)	(2,428		)	—
Changes in fair value (1):																—
Changes in valuation inputs or other assumptions	305			—			305			(639		)	10,684			10,045			(15,028		)
Realization of expected future cash flows and other changes	(2,016		)	(78,527		)	(80,543		)	(7,261		)	(100,957		)	(108,218		)	(7,100		)
Ending balance	$	13,357		$	665,899		$	679,256		$	15,071		$	746,119		$	761,190		$	93,901


(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, 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 December 31, 2016 given hypothetical shifts in lifetime prepayments and yield assumptions:



	Adverse change in fair value
	10%			20%
Weighted average prepayment speeds	$	(64,604	)	$	(131,414	)
Discount rate (option-adjusted spread)	$	(19,043	)	$	(34,224	)

The sensitivity analysis measures the potential impact on fair values based on hypothetical changes, which in the case of our portfolio at December 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 consolidated balance sheets.



	Residential		Commercial		Total
UPB at December 31, 2016
Servicing	$	86,049,298	$	—	$	86,049,298
Subservicing	4,330,084		92,933		4,423,017
NRZ (1)	118,712,748		—		118,712,748
	$	209,092,130	$	92,933	$	209,185,063
UPB at December 31, 2015
Servicing	$	100,058,745	$	—	$	100,058,745
Subservicing	13,764,558		105,268		13,869,826
NRZ (1)	137,142,809		—		137,142,809
	$	250,966,112	$	105,268	$	251,071,380
UPB at December 31, 2014
Servicing	$	208,135,523	$	—	$	208,135,523
Subservicing	29,806,924		149,737		29,956,661
NRZ (1)	160,785,280		—		160,785,280
	$	398,727,727	$	149,737	$	398,877,464


(1)	UPB of loans serviced 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 $1.4 billion, $1.8 billion and $2.3 billion at December 31, 2016, 2015 and 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. 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. Of 3,796 non-Agency servicing agreements, 718 with approximately $34.1 billion of UPB as of December 31, 2016 have minimum servicer ratings criteria. As a result of our current servicer ratings, termination rights have been triggered in 174 of these non-Agency servicing agreements. This represents approximately $10.8 billion in UPB as of December 31, 2016, or approximately 6.8% of our total non-Agency servicing portfolio.

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, 2016, the geographic distribution of the UPB and count of residential loans and real estate we serviced was as follows:



	Amount		Count
California	$	48,094,471	191,031
New York	18,741,164		79,197
Florida	17,282,020		126,949
New Jersey	10,254,163		49,857
Texas	9,522,228		109,763
Other	105,198,084		836,969
	$	209,092,130	1,393,766

Servicing Revenue

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



	2016		2015		2014
Loan servicing and subservicing fees:
Servicing	$	293,210	$	453,445	$	627,678
Subservicing	21,427		58,384		128,797
NRZ	633,545		694,833		736,122
	948,182		1,206,662		1,492,597
Home Affordable Modification Program (HAMP) fees	110,367		135,036		141,121
Late charges	66,709		82,690		121,618
Loan collection fees	27,213		31,763		33,983
Custodial accounts (float earnings)	8,969		15,870		6,693
Other	25,180		59,776		98,163
	$	1,186,620	$	1,531,797	$	1,894,175

Float balances amounted to $2.1 billion, $2.2 billion and $4.3 billion at December 31, 2016, 2015 and 2014, respectively.

In addition to mortgage servicing and subservicing fees, in 2016 we executed clean-up calls on five small-balance commercial mortgage securitization trusts, which resulted in our recognizing income of $14.8 million related to the value of the underlying collateral held by the trusts, including amounts on deposit in spread accounts (a form of cash collateral account). We reported this income in Other, net, (a component of Other income (expense)) in the consolidated statements of operations. Simultaneously with the execution of the clean-up calls, we entered into a mortgage loan purchase agreement to sell the acquired commercial loans and foreclosed properties to a third party. The proceeds from the sale were used to fund the required payments to the holders of the debt securities issued by the trusts. The sales price of the loans represented a discount to the repurchase price of $2.8 million, which we reported in Gain on loans held for sale, net.