Note 4 — Sales of Advances and MSRs

In order to efficiently finance our assets, streamline our operations and generate liquidity, we sell MSRs, Rights to MSRs and servicing advances to market participants. We may retain the right to subservice loans when we sell MSRs. In connection with sales of Rights to MSRs, we retain legal ownership of the MSRs and continue to service the related mortgage loans until such time as all necessary consents to a transfer of the MSRs are received.

During the three months ended March 31, 2017 and 2016, we sold MSRs relating to loans with a UPB of $52.2 million (Agency and non-Agency) and $34.5 million (non-Agency), respectively.

In 2012 and 2013, we sold Rights to MSRs with respect to certain non-Agency MSRs and the related servicing advances to Home Loan Servicing Solutions, Ltd. (HLSS). On April 6, 2015, HLSS closed on the sale of substantially all of its assets to NRZ. NRZ, through its subsidiaries, is the owner of the Rights to MSRs and has assumed HLSS’ rights and obligations under the associated agreements. We refer to the sale of Rights to MSRs and the related servicing advances as the NRZ/HLSS Transactions. As of March 31, 2017, these Rights to MSRs relate to approximately $114.3 billion in UPB of our non-Agency MSRs.

Pursuant to our agreements with NRZ, NRZ has assumed the obligation to fund new servicing advances with respect to the Rights to MSRs. We continue to service the loans for which the Rights to MSRs have been sold to NRZ. Accordingly, in the event NRZ was unable to fulfill its advance funding obligations, as the servicer under our servicing agreements with the residential mortgage backed securitization trusts, we would be contractually obligated to fund such advances under those servicing agreements. At March 31, 2017, NRZ had outstanding advances of approximately $3.7 billion in connection with the Rights to MSRs.

Under our agreements with NRZ, NRZ has certain rights to direct us to transfer the legal ownership of the MSRs and certain other rights under the servicing agreements underlying the Rights to MSRs as follows:


•	To HLSS Holdings, LLC (Holdings), a subsidiary of NRZ, if or when Holdings obtains all required third-party consents and licenses. If and when such transfer of legal ownership occurs, OLS would subservice the loans pursuant to the existing subservicing agreement(s), as amended, with Holdings. The subservicing agreement would have a subservicing fee reset date described below.


•	To a third party, other than Holdings, who can obtain all required third-party consents and licenses, provided that the transfer is subject to our continued right to be paid the servicing fees and other amounts payable under our agreements with NRZ as described below. To the extent Ocwen remained subservicer, new subservicing agreements would need to be executed.


•	If a termination event occurs with respect to an affected servicing agreement, to a replacement servicer that obtains all required third-party consents and licenses. Upon any such transfer, we would no longer be entitled to receive future servicing fee revenue with respect to the transferred servicing agreement.

We are working toward an agreement with NRZ that would transfer legal ownership of MSRs underlying the Rights to MSRs to NRZ. The new agreement would extend our relationship with NRZ out to at least 2022, removing a level of uncertainty concerning NRZ’s future intentions and ability to move servicing without us retaining our rights to be paid the servicing fees and other amounts payable under our existing agreements. During our negotiations with NRZ, NRZ has informed us that its position is that a termination event has occurred under our agreements because our current Moody’s servicer rating (SQ3-) is allegedly below the contractual threshold. NRZ has also informed us that it does not intend to take any action to transfer servicing without us retaining our economics, although it has reserved its rights. As Ocwen has previously publicly stated, Ocwen does not consider any termination event to have occurred based on Ocwen’s current servicer ratings.

Under our existing agreements, the servicing fees payable under the servicing agreements underlying the Rights to MSRs are apportioned between NRZ and us as provided in our agreements with NRZ. NRZ retains a fee based on the UPB of the loans serviced, and OLS receives certain fees, including a performance fee based on servicing fees actually paid less an amount calculated based on the amount of servicing advances and cost of financing those advances. The apportionment of these fees with respect to each tranche of Rights to MSRs sold to NRZ is subject to negotiations required to be commenced by NRZ no later than six months prior to the servicing fee reset date. The servicing fee reset date is the earlier of April 30, 2020 or eight years after the closing date of the sale of each tranche of Rights to MSRs to NRZ, unless there is an uncured “termination event” with respect to an affected servicing agreement due to a servicer rating downgrade of OLS’s S&P or Moody’s residential primary servicer rating for subprime loans to Below Average (or lower) or SQ4 (or lower), respectively, on the sixth anniversary of the closing date of the particular tranche, in which case such six year anniversary shall be the fee reset date. If the parties are not able to agree on servicing fees prior to the fee reset date, NRZ is required to continue paying under the existing fee structure and the agreements between the parties will continue in effect with respect to each underlying servicing agreement unless and until NRZ directs the transfer of servicing under such servicing agreement to a third-party servicer with respect to which all required third-party consents and licenses have been obtained.

To the extent servicing agreements with residential mortgage backed securities (RMBS) trustees underlying Rights to MSRs are terminated as a result of a termination event, NRZ is entitled to payment of an amount equal to an amortized percentage of NRZ’s purchase price for the related Rights to MSRs.

Under our agreements with NRZ, we were required to compensate NRZ for certain increased costs associated with its servicing advance financing facilities. This compensation requirement ran for a period of 12 months and ended in the second quarter of 2016.

The Rights to MSRs transactions are accounted for as financings. If and when transfer of legal ownership of the underlying MSRs occurs (which would follow receipt of the necessary consents), we would derecognize the related MSRs and the related financing liability. Upon derecognition, any resulting gain or loss would be deferred and amortized over the life of the related subservicing agreement. Until derecognition, we will continue to recognize the full amount of servicing revenue and changes in the fair value of the MSRs.

The sales of advances in connection with MSR sales, including the NRZ/HLSS Transactions, meet the requirements for sale accounting, and the advances are derecognized from our consolidated financial statements at the servicing transfer date, or, in the case of advances sold in connection with the sale of Rights to MSRs, at the time of the sale.