Note 7 – 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:



Nine months ended September 30,	2017			2016
Beginning balance	$	363,722		$	377,379
Additions recognized in connection with asset acquisitions	1,658			15,968
Additions recognized on the sale of mortgage loans	18,604			26,494
Sales and other transfers	(814		)	(23,521		)
	383,170			396,320
Amortization (1)	(38,560		)	(18,595		)
Decrease (increase) in impairment valuation allowance (2)	1,551			(37,164		)
Ending balance	$	346,161		$	340,561

Estimated fair value at end of period	$	424,208		$	357,817

(1)

During 2016, principally in the third quarter, we participated in HUD’s Aged Delinquent Portfolio Loan Sale (ADPLS) program, which accelerates FHA insurance claims for a population of significantly delinquent FHA loans. The expedited claim filing process allows a servicer to reduce significantly its standard claim losses on accepted loans by shortening the servicing timeline and related expenses, some of which are not reimbursed by FHA insurance. Our participation required that we recognize $23.1 million of life-to-date losses on the claims filed in the third quarter of 2016. This loss is reported in Servicing and origination expense in the unaudited consolidated statements of operations. Because the MSRs related to the loans that were assigned to HUD had negative carrying values, our recognition of the losses on the loans reduced the negative carrying value of the MSRs, thereby generating negative amortization expense for this population of MSRs. In the third quarter of 2016, this ADPLS-related negative amortization expense of $18.1 million exceeded the positive amortization expense on the remaining MSRs, generating net negative amortization for the quarter.


(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:



Nine months ended September 30,	2017									2016
	Agency			Non-Agency			Total			Agency			Non-Agency			Total
Beginning balance	$	13,357		$	665,899		$	679,256		$	15,071		$	746,119		$	761,190
Sales and other transfers	—			(2,672		)	(2,672		)	(3		)	(1,471		)	(1,474		)
Changes in fair value (1):
Changes in valuation inputs or other assumptions	(131		)	2,303			2,172			(4,654		)	—			(4,654		)
Realization of expected future cash flows and other changes	(1,385		)	(79,224		)	(80,609		)	(1,399		)	(57,555		)	(58,954		)
Ending balance	$	11,841		$	586,306		$	598,147		$	9,015		$	687,093		$	696,108


(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 September 30, 2017 given hypothetical shifts in lifetime prepayments and yield assumptions:



	Adverse change in fair value
	10%			20%
Weighted average prepayment speeds	$	(59,993	)	$	(121,587	)
Discount rate (option-adjusted spread)	(10,383		)	(20,807		)

The sensitivity analysis measures the potential impact on fair values based on hypothetical changes, which in the case of our portfolio at September 30, 2017 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 September 30, 2017
Servicing	$	78,254,463	$	—	$	78,254,463
Subservicing	3,656,197		9,750		3,665,947
NRZ (1)	105,557,658		—		105,557,658
	$	187,468,318	$	9,750	$	187,478,068
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 September 30, 2016
Servicing	$	89,018,280	$	—	$	89,018,280
Subservicing	4,692,236		151,432		4,843,668
NRZ (1)	123,181,486		—		123,181,486
	$	216,892,002	$	151,432	$	217,043,434


(1)	UPB of loans serviced for which the Rights to MSRs have been sold to NRZ, including those subserviced for which third-party consents have been received and the MSRs have been transferred to NRZ.

Residential assets serviced includes foreclosed real estate. Residential assets serviced also includes small-balance commercial assets with a UPB of $1.0 billion, $1.4 billion and $1.5 billion at September 30, 2017, December 31, 2016 and September 30, 2016, respectively. Commercial assets consist of large-balance foreclosed real estate.

During the nine months ended September 30, 2017 and 2016, we sold MSRs with a UPB of $210.2 million and $3.6 billion, respectively.

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.

From time to time, rating agencies will assign an outlook (or a ratings watch) to the rating status of a mortgage servicer. A negative outlook is generally used to indicate that a rating “may be lowered,” while a positive outlook is generally used to indicate a rating “may be raised.” S&P’s servicer ratings outlook for Ocwen is stable in general and its outlook for master servicing is positive. Fitch Ratings changed the servicer ratings Outlook to Negative from Stable on April 25, 2017. Moody’s placed the servicer ratings on Watch for Downgrade on April 24, 2017. The Morningstar ratings were withdrawn on August 8, 2017 at the request of Ocwen. None of these three ratings has subsequently changed since these actions.

Certain of our servicing agreements require that we maintain specified servicer ratings from rating agencies such as Moody’s and S&P. Of 3,325 non-Agency servicing agreements, 712 with approximately $30.8 billion of UPB as of September 30, 2017 have minimum servicer ratings criteria. As a result of our current servicer ratings, termination rights have been triggered in 172 of these non-Agency servicing agreements. This represents approximately $9.7 billion in UPB as of September 30, 2017, or approximately 7% 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.

Servicing Revenue

The following table presents the components of servicing and subservicing fees:



Periods ended September 30,	Three Months				Nine Months
Periods ended September 30,	2017		2016		2017		2016
Loan servicing and subservicing fees:
Servicing	$	63,071	$	74,105	$	197,712	$	229,686
Subservicing	1,760		2,989		5,877		11,436
NRZ	129,228		159,919		420,151		482,566
	194,059		237,013		623,740		723,688
Late charges	14,958		15,225		47,352		51,301
Home Affordable Modification Program (HAMP) fees	6,202		32,029		37,692		88,141
Loan collection fees	5,663		6,746		17,918		20,860
Other	12,338		11,222		34,821		23,003
	$	233,220	$	302,235	$	761,523	$	906,993

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 $2.0 billion and $2.6 billion at September 30, 2017 and September 30, 2016, respectively.