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Mortgage Servicing | 12 Months Ended
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Dec. 31, 2018
Transfers and Servicing [Abstract] |
Mortgage Servicing |
Note 8 — Mortgage Servicing |
Mortgage Servicing Rights – Amortization Method | Years Ended December 31,
2018 |  | 2017 |  | 2016
Beginning balance | $ | 336,882 |  |  | $ | 363,722 |  |  | $ | 377,379 |
Fair value election - transfer to MSRs carried at fair value (1) | (361,670 | ) |  | — |  |  | — |
Additions recognized in connection with asset acquisitions | — |  |  | 1,658 |  |  | 17,356 |
Additions recognized on the sale of mortgage loans | — |  |  | 20,738 |  |  | 37,230 |
Sales | — |  |  | (1,066 | ) |  | (24,452 | )
Servicing transfers and adjustments | — |  |  | 252 |  |  | — |
| (24,788 | ) |  | 385,304 |  |  | 407,513 |
Decrease (increase) in impairment valuation allowance (1) (2) | 24,788 |  |  | 3,366 |  |  | (10,813 | )
Amortization (1) | — |  |  | (51,788 | ) |  | (32,978 | )
Ending balance | $ | — |  |  | $ | 336,882 |  |  | $ | 363,722 |
Estimated fair value at end of year | $ | — |  |  | $ | 418,745 |  |  | $ | 467,911 |
(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 consolidated statements of operations for 2017 and 2016. 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 4 — Fair Value for additional information regarding impairment and the valuation allowance.
Mortgage Servicing Rights – Fair Value Measurement Method | Years Ended December 31,
2018 |  | 2017 |  | 2016
| Agency |  | Non-Agency |  | Total |  | Agency |  | Non-Agency |  | Total |  | Agency |  | Non-Agency |  | Total
Beginning balance | $ | 11,960 |  |  | $ | 660,002 |  |  | $ | 671,962 |  |  | $ | 13,357 |  |  | $ | 665,899 |  |  | $ | 679,256 |  |  | $ | 15,071 |  |  | $ | 746,119 |  |  | $ | 761,190 |
Fair value election - transfer from MSRs carried at amortized cost | 336,882 |  |  | — |  |  | 336,882 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Cumulative effect of fair value election | 82,043 |  |  | — |  |  | 82,043 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Sales | (4,748 | ) |  | (1,492 | ) |  | (6,240 | ) |  | — |  |  | (540 | ) |  | (540 | ) |  | (3 | ) |  | (145 | ) |  | (148 | )
Additions: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Recognized on the sale of residential mortgage loans | 8,279 |  |  | — |  |  | 8,279 |  |  | 162 |  |  | — |  |  | 162 |  |  | — |  |  | — |  |  | — |
Recognized in connection with the acquisition of PHH | 494,348 |  |  | 23,779 |  |  | 518,127 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Purchase of MSRs | 5,433 |  |  | — |  |  | 5,433 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Servicing transfers and adjustments | (1,047 | ) |  | (4,833 | ) |  | (5,880 | ) |  | — |  |  | (2,376 | ) |  | (2,376 | ) |  | — |  |  | (1,548 | ) |  | (1,548 | )
Changes in fair value (1): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Changes in valuation inputs or other assumptions | 11,558 |  |  | (5,705 | ) |  | 5,853 |  |  | 243 |  |  | 86,721 |  |  | 86,964 |  |  | 305 |  |  | — |  |  | 305 |
Realization of expected future cash flows and other changes | (79,121 | ) |  | (80,189 | ) |  | (159,310 | ) |  | (1,802 | ) |  | (89,702 | ) |  | (91,504 | ) |  | (2,016 | ) |  | (78,527 | ) |  | (80,543 | )
Ending balance | $ | 865,587 |  |  | $ | 591,562 |  |  | $ | 1,457,149 |  |  | $ | 11,960 |  |  | $ | 660,002 |  |  | $ | 671,962 |  |  | $ | 13,357 |  |  | $ | 665,899 |  |  | $ | 679,256 |
(1) | Changes in fair value are recognized in MSR valuation adjustments, net 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, 2018 given hypothetical shifts in lifetime prepayments and yield assumptions:
| Adverse change in fair value
| 10% |  | 20%
Weighted average prepayment speeds | $ | (122,911 | ) |  | $ | (237,916 | )
Discount rate (option-adjusted spread) | (43,410 | ) |  | (84,631 | )
The sensitivity analysis measures the potential impact on fair values based on hypothetical changes, which in the case of our portfolio at December 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 residential primary servicing and subservicing portfolios as measured by UPB, including foreclosed real estate and small-balance commercial loans. 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.
UPB at December 31, 2018 |  |
Servicing (3) | $ | 72,378,693 |
Subservicing (3) | 53,104,560 |
NRZ (1) (3) | 130,517,237 |
| $ | 256,000,490 |
UPB at December 31, 2017 |  |
Servicing | $ | 75,469,327 |
Subservicing | 2,063,669 |
NRZ (1) | 101,819,557 |
| $ | 179,352,553 |
UPB at December 31, 2016 |  |
Servicing | $ | 86,049,298 |
Subservicing (2) | 4,330,084 |
NRZ (1) | 118,712,748 |
| $ | 209,092,130 |
(1) | UPB of loans for which the Rights to MSRs have been sold to NRZ, including those for which third-party consents have been received and the MSRs have been transferred to NRZ.
(2) | Excludes $92.9 million of large-balance commercial foreclosed real estate. During 2017, we sold or transferred servicing on the remaining managed assets.
(3) | Includes $6.3 billion, $51.3 billion and $42.3 billion UPB of loans serviced, subserviced or subserviced on behalf of NRZ, respectively, added to the portfolio in connection with the PHH acquisition.
We sold MSRs relating to loans with a UPB of $901.3 million, $219.4 million and $3.7 billion during 2018, 2017 and 2016, 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 in 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 December 31, 2018, the S&P Global Ratings, Inc.’s (S&P) and Fitch Ratings, Inc.’s (Fitch) servicer ratings outlook for both OLS and PHH is stable. Moody’s Investors Service, Inc.’s (Moody’s) servicer ratings for OLS 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 December 31, 2018, non-Agency servicing agreements with a UPB of $25.9 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 $8.2 billion, or 7% 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. The geographic distribution of the UPB and count of residential loans and real estate we serviced at December 31, 2018 was as follows:
| Amount |  | Count
California | $ | 56,455,157 |  |  | 201,058 |
New York | 25,411,051 |  |  | 101,444 |
Florida | 20,345,407 |  |  | 134,335 |
New Jersey | 13,711,894 |  |  | 65,263 |
Texas | 11,858,287 |  |  | 111,512 |
Other | 128,218,694 |  |  | 948,626 |
| $ | 256,000,490 |  |  | 1,562,238 |
| Years Ended December 31,
Servicing Revenue | 2018 |  | 2017 |  | 2016
Loan servicing and subservicing fees |  |  |  |  |
Servicing | $ | 224,892 |  |  | $ | 257,419 |  |  | $ | 293,210 |
Subservicing | 8,904 |  |  | 7,775 |  |  | 21,427 |
NRZ | 539,039 |  |  | 549,411 |  |  | 633,545 |
| 772,835 |  |  | 814,605 |  |  | 948,182 |
Late charges | 61,453 |  |  | 61,763 |  |  | 66,709 |
Home Affordable Modification Program (HAMP) fees (1) | 14,312 |  |  | 43,310 |  |  | 110,367 |
Custodial accounts (float earnings) | 40,115 |  |  | 25,237 |  |  | 8,969 |
Loan collection fees | 18,392 |  |  | 22,770 |  |  | 27,213 |
Other | 27,229 |  |  | 21,691 |  |  | 25,180 |
| $ | 934,336 |  |  | $ | 989,376 |  |  | $ | 1,186,620 |
(1) | The HAMP 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. We continue to earn HAMP success fees for HAMP modifications that remain less than 90 days delinquent at the first-, second- and third-year anniversary of the start of the trial 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 $1.7 billion, $1.5 billion and $2.1 billion at December 31, 2018, 2017 and 2016, 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, which we reported in Other, net, in the consolidated statements of operations. Simultaneously with the execution of the clean-up calls, we sold the acquired commercial loans and foreclosed properties to a third party, repaid the holders of the debt securities issued by the trusts and recognized a gain of $2.8 million equal to the discount on the repurchase price of the loans which we reported in Gain on loans held for sale, net.

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- Definition The entire disclosure for a transferor's continuing involvement in financial assets that it has transferred in a securitization or asset-backed financing arrangement, the nature of any restrictions on assets reported by an entity in its statement of financial position that relate to a transferred financial asset (including the carrying amounts of such assets), how servicing assets and servicing liabilities are reported, and (for securitization or asset-backed financing arrangements accounted for as sales) when a transferor has continuing involvement with the transferred financial assets and transfers of financial assets accounted for as secured borrowings, how the transfer of financial assets affects an entity's financial position, financial performance, and cash flows. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 860 -URI http://asc.fasb.org/topic&trid=2197590 + Details
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