
Note 8 — Mortgage Servicing



Mortgage Servicing Rights – Amortization Method	Years Ended December 31,
Mortgage Servicing Rights – Amortization Method	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,
Mortgage Servicing Rights – Fair Value Measurement Method	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.