Note 9 – Mortgage Servicing



MSRs – Amortization Method	Nine Months Ended September 30, 2018
Beginning balance	$	336,882
Fair value election - transfer of MSRs carried at fair value (1)	(361,670		)
Decrease in impairment valuation allowance (1) (2)	24,788
Ending balance	$	—

(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 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.



MSRs – Fair Value Measurement Method	Three Months Ended September 30,
MSRs – Fair Value Measurement Method	2019									2018
	Agency			Non-Agency			Total			Agency			Non-Agency			Total
Beginning balance	$	745,735		$	566,898		$	1,312,633		$	427,597		$	616,398		$	1,043,995
Fair value election - transfer from MSRs carried at amortized cost	—			—			—			—			—			—
Cumulative effect of fair value election	—			—			—			—			—			—
Sales and other transfers	—			(15		)	(15		)	(5,950		)	(20		)	(5,970		)
Additions:
Recognized on the sale of residential mortgage loans	1,235			—			1,235			1,503			—			1,503
Purchase of MSRs	9,298			1,268			10,566			1,421			—			1,421
Servicing transfers and adjustments	—			(3,105		)	(3,105		)	—			(219		)	(219		)
Changes in fair value (1):
Changes in valuation inputs or other assumptions	(63,360		)	252,293			188,933			(1,243		)	(5,413		)	(6,656		)
Realization of expected future cash flows and other changes	(36,898		)	(17,796		)	(54,694		)	(13,912		)	(20,880		)	(34,792		)
Ending balance	$	656,010		$	799,543		$	1,455,553		$	409,416		$	589,866		$	999,282



MSRs – Fair Value Measurement Method	Nine Months Ended September 30,
MSRs – Fair Value Measurement Method	2019									2018
	Agency			Non-Agency			Total			Agency			Non-Agency			Total
Beginning balance	$	865,587		$	591,562		$	1,457,149		$	11,960		$	660,002		$	671,962
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 and other transfers	(29		)	(556		)	(585		)	(5,950		)	(175		)	(6,125		)
Additions:
Recognized on the sale of residential mortgage loans	3,933			—			3,933			6,080			—			6,080
Purchase of MSRs	123,600			1,355			124,955			2,729			—			2,729
Servicing transfers and adjustments	—			(7,872		)	(7,872		)	—			(2,594		)	(2,594		)
Changes in fair value (1):
Changes in valuation inputs or other assumptions	(235,036		)	264,876			29,840			19,217			(424		)	18,793
Realization of expected future cash flows and other changes	(102,045		)	(49,822		)	(151,867		)	(43,545		)	(66,943		)	(110,488		)
Ending balance	$	656,010		$	799,543		$	1,455,553		$	409,416		$	589,866		$	999,282


(1)	Changes in fair value are recognized in MSR valuation adjustments, net in the unaudited consolidated statements of operations.

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 UPB amounts in the table below are not included on our unaudited consolidated balance sheets.



UPB at September 30, 2019
Servicing	$	76,523,660
Subservicing	23,175,607
NRZ	117,055,517
	$	216,754,784
UPB at December 31, 2018
Servicing	$	72,378,693
Subservicing	53,104,560
NRZ	130,517,237
	$	256,000,490
UPB at September 30, 2018
Servicing	$	68,076,254
Subservicing	1,387,641
NRZ	91,532,579
	$	160,996,474

During the nine months ended September 30, 2019, we acquired MSRs on portfolios consisting of 50,421 loans with a UPB of $11.9 billion. During the nine months ended September 30, 2019, we also sold MSRs on portfolios consisting of 435 loans with a UPB of $116.1 million.

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. To date, terminations as servicer as a result of a breach of any of these provisions have been minimal.

At September 30, 2019, the S&P Global Ratings, Inc.’s (S&P) and Fitch Ratings, Inc.’s (Fitch) servicer ratings outlook for PMC is stable. 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. As a result of our current servicer ratings, termination rights have been triggered in certain of our non-Agency servicing agreements. To date, terminations as servicer as a result of a breach of any of these provisions have been minimal.



Servicing Revenue	Three Months Ended September 30,				Nine Months Ended September 30,
Servicing Revenue	2019		2018		2019		2018
Loan servicing and subservicing fees
Servicing	$	60,682	$	52,610	$	167,720	$	167,389
Subservicing	1,365		658		11,775		2,443
NRZ	146,567		120,593		443,505		374,322
	208,614		173,861		623,000		544,154
Late charges	14,105		14,839		42,786		44,743
Custodial accounts (float earnings)	13,464		10,241		38,739		25,965
Loan collection fees	3,862		4,916		11,613		14,700
Home Affordable Modification Program (HAMP) fees (1)	1,216		3,365		4,558		11,622
Other, net	6,453		6,508		22,063		16,911
	$	247,714	$	213,730	$	742,759	$	658,095


(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 unaffiliated banks and are excluded from our unaudited consolidated balance sheets. Float balances amounted to $2.1 billion, $1.7 billion and $1.7 billion at September 30, 2019, December 31, 2018 and September 30, 2018, respectively.