
Note 7 — Mortgage Servicing



	Years Ended December 31,
Mortgage Servicing Rights – Amortization Method	2017			2016			2015
Beginning balance	$	363,722		$	377,379		$	1,820,091
Fair value election - transfer to MSRs carried at fair value (1)	—			—			(787,142		)
Additions recognized in connection with asset acquisitions	1,658			17,356			12,355
Additions recognized on the sale of mortgage loans	20,738			37,230			34,962
Sales	(1,066		)	(24,452		)	(586,352		)
Servicing transfers and adjustments	252			—			—
	385,304			407,513			493,914
Decrease (increase) in impairment valuation allowance (2)	3,366			(10,813		)	(17,341		)
Amortization	(51,788		)	(32,978		)	(99,194		)
Ending balance	$	336,882		$	363,722		$	377,379

Estimated fair value at end of year	$	418,745		$	467,911		$	461,555

(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. 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.


(2)	Impairment of MSRs is recognized in Servicing and origination expense in the consolidated statements of operations. See Note 3 — Fair Value for additional information regarding impairment and the valuation allowance.

The estimated amortization expense for MSRs, calculated based on assumptions used at December 31, 2017, is projected as follows over the next five years:



2018	$	46,705
2019	38,141
2020	34,824
2021	33,578
2022	30,552

Mortgage Servicing Rights – Fair Value Measurement Method



	Years Ended December 31,
	2017									2016									2015
	Agency			Non-Agency			Total			Agency			Non-Agency			Total			Agency			Non-Agency			Total
Beginning balance	$	13,357		$	665,899		$	679,256		$	15,071		$	746,119		$	761,190		$	93,901		$	—		$	93,901
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	—			(540		)	(540		)	(3		)	(145		)	(148		)	(70,930		)	(1,344		)	(72,274		)
Additions recognized on the sale of residential mortgage loans	162			—			162			—			—			—			—			1,007			1,007
Servicing transfers and adjustments	—			(2,376		)	(2,376		)	—			(1,548		)	(1,548		)	—			(2,428		)	(2,428		)
Changes in fair value (1):
Changes in valuation inputs or other assumptions	243			86,721			86,964			305			—			305			(639		)	10,684			10,045
Realization of expected future cash flows and other changes	(1,802		)	(89,702		)	(91,504		)	(2,016		)	(78,527		)	(80,543		)	(7,261		)	(100,957		)	(108,218		)
Ending balance	$	11,960		$	660,002		$	671,962		$	13,357		$	665,899		$	679,256		$	15,071		$	746,119		$	761,190


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



	Adverse change in fair value
	10%			20%
Weighted average prepayment speeds	$	(69,646	)	$	(133,017	)
Discount rate (option-adjusted spread)	(14,167		)	(27,901		)

The sensitivity analysis measures the potential impact on fair values based on hypothetical changes, which in the case of our portfolio at December 31, 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 consolidated balance sheets.



	Residential (1)		Commercial (2)		Total
UPB at December 31, 2017
Servicing	$	75,469,327	$	—	$	75,469,327
Subservicing	2,063,669		—		2,063,669
NRZ (3)	101,819,557		—		101,819,557
	$	179,352,553	$	—	$	179,352,553
UPB at December 31, 2016
Servicing	$	86,049,298	$	—	$	86,049,298
Subservicing	4,330,084		92,933		4,423,017
NRZ (3)	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 (3)	137,142,809		—		137,142,809
	$	250,966,112	$	105,268	$	251,071,380


(1)	Includes foreclosed real estate and small-balance commercial assets.


(2)	Consists of large-balance foreclosed real estate. During 2017, we sold or transferred servicing on the remaining managed assets.


(3)	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.

We sold MSRs relating to loans with a UPB of $219.4 million, $3.7 billion and $87.6 billion during 2017, 2016 and 2015, 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 including Moody’s Investors Service, Inc. (Moody’s), Standard & Poor’s Ratings Services (S&P) and Fitch Ratings, Inc. (Fitch) 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.” At December 31, 2017, S&P’s servicer ratings outlook for Ocwen is stable in general and its outlook for master servicing is positive. Fitch’s servicer ratings outlook is Negative and Moody’s servicer ratings are on Watch for Downgrade. 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.

Certain of our servicing agreements require that we maintain specified servicer ratings from rating agencies such as Moody’s and S&P. At December 31, 2017, non-Agency servicing agreements with a UPB of $29.8 billion have minimum servicer ratings criteria. As a result of our current servicer ratings, termination rights have been triggered in non-Agency servicing agreements with a UPB of $9.4 billion, or 7% of our total non-Agency servicing portfolio.

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



	December 31, 2017
	Amount		Count
California	$	40,548,633	164,652
New York	17,132,957		72,500
Florida	15,133,283		114,070
New Jersey	8,843,459		43,819
Texas	8,130,540		95,999
Other	89,563,681		730,655
	$	179,352,553	1,221,695



	Years Ended December 31,
Servicing Revenue	2017		2016		2015
Loan servicing and subservicing fees
Servicing	$	257,419	$	293,210	$	453,445
Subservicing	7,775		21,427		58,384
NRZ	549,411		633,545		694,833
	814,605		948,182		1,206,662
Late charges	61,763		66,709		82,690
Home Affordable Modification Program (HAMP) fees (1)	43,310		110,367		135,036
Custodial accounts (float earnings)	25,237		8,969		15,870
Loan collection fees	22,770		27,213		31,763
Other	21,691		25,180		59,776
	$	989,376	$	1,186,620	$	1,531,797


(1)	The HAMP program expired on December 31, 2016. Borrowers who had requested assistance or to whom an offer of assistance had been extended as of that date had until September 30, 2017 to finalize their modification.

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 consolidated balance sheets. Float balances amounted to $1.5 billion, $2.1 billion and $2.2 billion at December 31, 2017, 2016 and 2015, respectively.

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.