Note 7 – Mortgage Servicing



Mortgage Servicing Rights – Amortization Method	Three Months Ended March 31,
Mortgage Servicing Rights – Amortization Method	2018			2017
Beginning balance	$	336,882		$	363,722
Fair value election - transfer of MSRs carried at fair value (1)	(361,670		)	—
Additions recognized in connection with asset acquisitions	—			1,229
Additions recognized on the sale of mortgage loans	—			8,126
Sales and other transfers	—			(430		)
	(24,788		)	372,647
Amortization (1)	—			(12,715		)
(Increase) decrease in impairment valuation allowance (1) (2)	24,788			(1,401		)
Ending balance	$	—		$	358,531

Estimated fair value at end of period	$	—		$	462,289

(1)

Effective January 1, 2018, we elected fair value accounting for our MSRs previously accounted for using the amortization method, which included Agency MSRs and government-insured MSRs. This irrevocable election applies to all subsequently acquired or originated servicing assets and liabilities that have characteristics consistent with each of these classes. We recorded a cumulative-effect adjustment of $82.0 million to retained earnings as of January 1, 2018 to reflect the excess of the fair value of the Agency MSRs over their carrying amount. We also recognized the tax effect of this adjustment through an increase in retained earnings of $6.8 million and a deferred tax asset for the same amount. However, we established a full valuation allowance on the resulting deferred tax asset through a reduction in retained earnings. The government-insured MSRs were impaired by $24.8 million at December 31, 2017; therefore, these MSRs were already effectively carried at fair value.

(2)

Impairment of MSRs is recognized in MSR valuation adjustments, net in the unaudited consolidated statements of operations for the three months ended March 31, 2017. Impairment valuation allowance balance of $24.8 million was reclassified to reduce the carrying value of the related MSRs on January 1, 2018 in connection with our fair value election. See Note 3 – Fair Value for additional information regarding impairment and the valuation allowance.



Mortgage Servicing Rights – Fair Value Measurement Method	Three Months Ended March 31,
Mortgage Servicing Rights – Fair Value Measurement Method	2018									2017
	Agency			Non-Agency			Total			Agency			Non-Agency			Total
Beginning balance	$	11,960		$	660,002		$	671,962		$	13,357		$	665,899		$	679,256
Fair value election - transfer of MSRs carried at amortized cost, net of valuation allowance	336,882			—			336,882			—			—			—
Cumulative effect of fair value election	82,043			—			82,043			—			—			—
Sales and other transfers	—			(131		)	(131		)	—			(228		)	(228		)
Additions recognized on the sale of residential mortgage loans	2,378			—			2,378			—			—			—
Servicing transfers and adjustments	(1		)	(1,757		)	(1,758		)	—			(706		)	(706		)
Changes in fair value (1):
Changes in valuation inputs or other assumptions	20,460			—			20,460			494			—			494
Realization of expected future cash flows and other changes	(15,501		)	(22,088		)	(37,589		)	(445		)	(26,384		)	(26,829		)
Ending balance	$	438,221		$	636,026		$	1,074,247		$	13,406		$	638,581		$	651,987


(1)	Changes in fair value are recognized in MSR valuation adjustments, net 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 March 31, 2018 given hypothetical shifts in lifetime prepayments and yield assumptions:



	Adverse change in fair value
	10%			20%
Weighted average prepayment speeds	$	(94,723	)	$	(182,554	)
Discount rate (option-adjusted spread)	(30,858		)	(59,638		)

The sensitivity analysis measures the potential impact on fair values based on hypothetical changes, which in the case of our portfolio at March 31, 2018 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 (1)		Commercial (2)		Total
UPB at March 31, 2018
Servicing	$	73,264,640	$	—	$	73,264,640
Subservicing	1,792,880		—		1,792,880
NRZ (3)	98,331,356		—		98,331,356
	$	173,388,876	$	—	$	173,388,876
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 March 31, 2017
Servicing	$	83,841,793	$	—	$	83,841,793
Subservicing	4,196,729		92,817		4,289,546
NRZ (3)	114,330,492		—		114,330,492
	$	202,369,014	$	92,817	$	202,461,831


(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.

During the three months ended March 31, 2018 and 2017, we sold MSRs with a UPB of $3.3 million and $52.2 million, 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.

At March 31, 2018, S&P Global Ratings (S&P) servicer ratings outlook for Ocwen is stable. Fitch Ratings, Inc. (Fitch) servicer ratings outlook is Negative and Moody’s Investors Service, Inc. (Moody’s) servicer ratings are on Watch for Downgrade. Downgrades in servicer ratings could adversely affect our ability to sell or finance servicing advances and could impair our ability to consummate future servicing transactions or adversely affect our dealings with lenders, other contractual counterparties, and regulators, including our ability to 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 March 31, 2018, non-Agency servicing agreements with a UPB of $28.9 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 $9.1 billion, or approximately 9% of our total non-Agency servicing portfolio. To date, terminations as servicer as a result of a breach of any of these provisions have been minimal.



Servicing Revenue	Three Months Ended March 31,
Servicing Revenue	2018		2017
Loan servicing and subservicing fees
Servicing	$	58,995	$	67,172
Subservicing	914		3,605
NRZ	127,017		147,311
	186,926		218,088
Late charges	14,589		16,784
Custodial accounts (float earnings)	7,263		4,819
Loan collection fees	5,018		6,318
Home Affordable Modification Program (HAMP) fees (1)	4,104		20,983
Other	4,238		5,510
	$	222,138	$	272,502


(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 unaudited consolidated balance sheets. Float balances amounted to $1.6 billion and $2.0 billion at March 31, 2018 and March 31, 2017, respectively.