Note 8 — Rights to MSRs

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), an indirect wholly-owned subsidiary of NRZ. We refer to the sale of Rights to MSRs and the related servicing advances as the NRZ/HLSS Transactions, and to the 2012 and 2013 agreements as the 2012 - 2013 Agreements. While certain underlying economics of the MSRs were transferred, legal title was retained by Ocwen, causing the Rights to MSRs transactions to be accounted for as secured financings. We continue to recognize the MSRs and related financing liability on our consolidated balance sheet as well as the full amount of servicing revenue and changes in the fair value of the MSRs and related financing liability in our consolidated statements of operations.

In April 2015, Ocwen agreed, as part of an amendment to the 2012 - 2013 Agreements, to sell all economic beneficial rights to the “clean-up call rights” to which we are entitled pursuant to servicing agreements that underlie the Rights to MSRs to NRZ for a payment upon exercise of 0.50% of the UPB of all performing mortgage loans (mortgage loans that are current or 30 days or less delinquent) associated with such clean-up call. Clean-up call rights generally allow a servicer or master servicer to purchase the remaining mortgage loans and REO out of a securitization, after the stated principal balance of such mortgage loans in the securitization falls below a specified percentage (generally equal to or lower than 10% of the original balance), for a price generally equal to the outstanding balance of such mortgage loans plus interest and certain other amounts. We received $0.8 million and $5.5 million and $1.3 million and $2.4 million during the three and nine months ended September 30, 2017 and 2016, respectively, from NRZ in connection with such clean-up calls.

On July 23, 2017, we entered into a master agreement (Master Agreement), transfer agreement (Transfer Agreement) and subservicing agreement (Subservicing Agreement) (collectively, the 2017 Agreements) pursuant to which the parties agreed to undertake certain actions to facilitate the transfer of the MSRs underlying the Rights to MSRs to NRZ and under which Ocwen will subservice the MSRs for an initial term of five years (Initial Term). Upon obtaining the required third-party consents, and upon transfer of the MSRs, NRZ will pay a lump sum to us, with the amount determined in accordance with the Master Agreement as of each transfer date. In the event third-party consents are not received by July 23, 2018, or earlier if mutually agreed, any non-transferred MSRs may (i) become subject to a new mortgage servicing rights agreement to be negotiated between Ocwen and NRZ, (ii) be acquired by Ocwen or, if Ocwen does not desire or is otherwise unable to purchase, sold to a third party in accordance with the terms of the Master Agreement, or (iii) remain subject to the terms of the 2012 - 2013 Agreements.

The following table provides details of activity related to Rights to MSRs transactions:



Nine months ended September 30, 2017	2017 Agreements						2012 - 2013 Agreements
	MSR						MSR
	UPB			Carrying Value			UPB			Carrying Value			Financing Liability (1) (2)
Beginning balance	$	—		$	—		$	118,712,748		$	477,707		$	(477,707	)
Transfers upon receipt of consents	15,872,374			31,253			(15,872,374		)	(31,253		)	—
Receipt of lump sum payment in connection with transfer of MSRs to NRZ (3)	—			—			—			—			(54,601		)
Calls (4)	(134,705		)	(322		)	(1,132,497		)	(4,156		)	4,478
Sales and other transfers	—			—			(57,793		)	—			—
Changes in fair value (3):
Changes in valuation inputs or other assumptions	—			(2,444		)	—			(1,471		)	27,024
Realization of expected future cash flows and other changes	—			(1,459		)	—			(52,266		)	—
Decrease in impairment valuation allowance	—			—			—			13,769			—
Runoff, settlements and other	(217,048		)	—			(11,613,047		)	1,529			52,963
Ending balance	$	15,520,621		$	27,028		$	90,037,037		$	403,859		$	(447,843	)

Advances				N/A						$	2,727,107


(1)	Carried at fair value in accordance with fair value election.

(2)

Under ASC 470-50, Debt - Modifications and Extinguishments, Ocwen is deemed to have had a significant modification and debt extinguishment in connection with the Rights to MSRs secured financing liability. Because the secured financing liability is accounted for at fair value, there was no gain or loss recognized in connection with this debt extinguishment. As permitted by ASC 825-10-25, Financial Instruments - Recognition - Fair Value Option, a significant modification of debt is an event that creates a fair value option election date.

(3)

The amount of the lump sum payment is based on a contractual schedule that approximates the net present value of the difference in cash flows under the 2017 Agreements versus the 2012 - 2013 Agreements, and was determined based on the weighted average characteristics, such as contractual servicing fee rates and delinquency, of the MSRs underlying the Rights to MSRs. The difference between the characteristics of the MSRs underlying the Rights to MSRs that are transferred in any period, relative to the weighted average loan characteristics used to determine the lump sum payment, will result in an increase (characteristics of transferred MSRs compare favorably to the weighted average) or decrease (characteristics of transferred MSRs compare unfavorably to the weighted average) in the fair value of the financing liability. The fair value of the portion of the financing liability recognized in connection with the September 1, 2017 transfer declined $37.6 million primarily due to the transferred MSRs having a contractual servicing fee rate of 33.4 bps as compared to the weighted average of 47.1 bps.

(4)

Represents the UPB and carrying value of MSRs in connection with clean-up call rights exercised by NRZ, for MSRs transferred to NRZ under the 2017 Agreements, or by Ocwen at NRZ’s direction, for MSRs underlying the 2012 - 2013 Agreements. Ocwen derecognizes the MSRs and the related financing liability upon collapse of the securitization. Income recognized in connection with clean-up calls is reported in other income in our unaudited consolidated statements of operations.

The 2017 Agreements obligate NRZ to a standstill through January 23, 2019, subject to limited exceptions, on exercising rights it may otherwise have under the 2012 - 2013 Agreements to replace Ocwen as servicer of certain MSRs in the event of a termination event with respect to an affected servicing agreement underlying the MSRs resulting from a servicer rating downgrade.

Under the terms of the Subservicing Agreement, in addition to a base servicing fee, Ocwen will continue to receive ancillary income, which primarily includes late fees, HAMP or other loan modification fees and Speedpay^® fees. NRZ will receive all float earnings and deferred servicing fees related to delinquent borrower payments, as well as be entitled to receive all REO-related income including REO referral commissions.

At any time during the Initial Term, NRZ may terminate the Subservicing Agreement for convenience, subject to Ocwen’s right to receive a termination fee and proper notice. Following the Initial Term, NRZ may extend the term of the Subservicing Agreement for additional three-month periods by providing proper notice. Following the Initial Term, the Subservicing Agreement can be cancelled by Ocwen on an annual basis. NRZ and Ocwen have the ability to terminate the Subservicing Agreement for cause if certain conditions specified in the Subservicing Agreement occur.

Under the 2012 - 2013 Agreements, the servicing fees payable under the servicing agreements underlying the Rights to MSRs are apportioned between NRZ and us. 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 the cost of financing those advances.

Due to the length of the Initial Term of the Subservicing Agreement, this transaction does not qualify as a sale and is accounted for as a secured financing. As consents are received and MSRs transfer to NRZ, a new liability is recognized in an amount equal to the lump sum payment Ocwen receives in connection with such transfer. Due diligence and consent-related costs are recorded in Professional services expense as incurred. Changes in the fair value of the financing liability are recognized in Interest expense.

Interest expense related to financing liabilities recorded in connection with the NRZ Transactions is indicated in the table below.



Periods ended September 30,	Three Months					Nine Months
Periods ended September 30,	2017		2016			2017		2016
Servicing fees collected on behalf of NRZ	$	129,228	$	159,919		$	420,151	$	482,566
Less: Subservicing fee retained by Ocwen	68,536		87,506			226,483		257,408
Net servicing fees remitted to NRZ	60,692		72,413			193,668		225,158
Less: Reduction (increase) in financing liability
Changes in fair value	27,024		(807		)	27,024		(1,555		)
Runoff, settlement and other	19,770		594			52,963		47,172
	$	13,898	$	72,626		$	113,681	$	179,541

Interest expense for the nine months ended September 30, 2016 includes $10.5 million of fees incurred in connection with our agreement to compensate NRZ for certain increased costs associated with its servicing advance financing facilities that were the direct result of a previous downgrade of our S&P servicer rating.