Note 18 – Business Segment Reporting

Our business segments reflect the internal reporting that we use to evaluate operating performance of services and to assess the allocation of our resources. A brief description of our current business segments is as follows:

Servicing. This segment is primarily comprised of our core residential mortgage servicing business and currently accounts for most of our total revenues. We provide residential and commercial mortgage loan servicing, special servicing and asset management services. We earn fees for providing these services to owners of the mortgage loans and foreclosed real estate. In most cases, we provide these services either because we purchased the MSRs from the owner of the mortgage, retained the MSRs on the sale or securitization of residential mortgage loans or because we entered into a subservicing or special servicing agreement with the entity that owns the MSR. Our residential servicing portfolio includes conventional, government-insured and non-Agency loans. Non-Agency loans include subprime loans, which represent residential loans that generally did not qualify under GSE guidelines or have subsequently become delinquent.

Originations. The Originations segment (previously labeled as Lending) purchases and originates conventional and government-insured residential forward and reverse mortgage loans. The loans are typically sold shortly after origination into a liquid market on a servicing retained (securitization) or servicing released (sale to a third party) basis. We originate forward mortgage loans directly with customers (recapture channel) as well as through correspondent lending arrangements since the second quarter of 2019. We originate reverse mortgage loans in all three channels, through our correspondent lending arrangements, broker relationships (wholesale) and retail channels. In addition to our originated MSRs, we acquire MSRs through multiple channels, including flow purchase agreements, the GSE Cash Window program and bulk MSR purchases. The pricing and acquisition decisions are made relative to other originated MSR channels. Accordingly, as part of our internal management reporting we renamed the Lending segment as Originations effective in the first quarter 2020, without any other changes to our operating and reporting segments.

Corporate Items and Other. Corporate Items and Other includes revenues and expenses of corporate support services, CR Limited (CRL), our wholly-owned captive reinsurance subsidiary, discontinued operations and inactive entities, business activities that are individually insignificant, revenues and expenses that are not directly related to other reportable segments, interest income on short-term investments of cash and interest expense on corporate debt. Corporate Items and Other also includes severance, retention, facility-related and other expenses incurred in 2019 related to cost our re-engineering plan. Our cash balances are included in Corporate Items and Other. CRL provides re-insurance related to coverage on foreclosed real estate properties owned or serviced by us.

We allocate a portion of interest income to each business segment, including interest earned on cash balances. We also allocate certain expenses incurred by corporate support services that are not directly attributable to a segment to each business segment. Beginning in 2020, we updated our methodology to allocate overhead costs incurred by corporate support services to the Servicing and Originations segments which now incorporates the utilization of various measurements primarily based on time studies, personnel volumes and service consumption levels. In 2019, corporate support services costs were primarily allocated based on relative segment size. Support services costs not allocated to the Servicing and Originations segments are retained in the Corporate Items and Other segment along with certain other costs including certain litigation and settlement related expenses or recoveries, costs related to our re-engineering plan, and other costs related to operating as a public company.

Interest expense on direct asset-backed financings are recorded in the respective Servicing and Originations segments, while interest expense on the SSTL and Senior Notes is recorded in Corporate Items and Other and is not allocated.

Financial information for our segments is as follows:



	Three Months Ended March 31, 2020
Results of Operations	Servicing			Originations			Corporate Items and Other			Business Segments Consolidated
Revenue	$	213,555		$	37,647		$	2,640		$	253,842

MSR valuation adjustments, net	(174,436		)	316			—			(174,120		)

Operating expenses (1) (2)	80,473			26,958			29,783			137,214

Other (expense) income:
Interest income	1,886			2,266			1,243			5,395
Interest expense	(13,667		)	(2,861		)	(13,454		)	(29,982		)
Pledged MSR liability expense	(6,623		)	—			29			(6,594		)
Other	3,662			(29		)	(2,305		)	1,328
Other expense, net	(14,742		)	(624		)	(14,487		)	(29,853		)

(Loss) income before income taxes	$	(56,096	)	$	10,381		$	(41,630	)	$	(87,345	)



	Three Months Ended March 31, 2019
Results of Operations	Servicing			Originations			Corporate Items and Other			Business Segments Consolidated
Revenue	$	259,274		$	41,091		$	3,523		$	303,888

MSR valuation adjustments, net	(108,914		)	(84		)	—			(108,998		)

Operating expenses (1) (2)	156,984			21,247			(7,124		)	171,107

Other (expense) income:
Interest income	2,294			1,549			715			4,558
Interest expense	(10,742		)	(1,668		)	(14,079		)	(26,489		)
Pledged MSR liability expense	(43,956		)	—			—			(43,956		)
Other	1,525			219			(724		)	1,020
Other (expense) income, net	(50,879		)	100			(14,088		)	(64,867		)

(Loss) income before income taxes	$	(57,503	)	$	19,860		$	(3,441	)	$	(41,084	)


(1)	Compensation and benefits expense in the Corporate Items and Other segment for the three months ended March 31, 2020 and 2019 includes $0.2 million and $18.5 million, respectively, of severance expense attributable to PHH integration-related headcount reductions of primarily U.S.-based employees in 2019, as well as our overall efforts to reduce costs.


(2)	Included in the Corporate Items and Other segment for the three months ended March 31, 2019, we recorded in Professional services expense a recovery from a service provider of $30.7 million of amounts previously recognized as expense.



Total Assets	Servicing		Originations		Corporate Items and Other		Business Segments Consolidated
March 31, 2020	$	2,787,250	$	6,739,576	$	459,198	$	9,986,024

December 31, 2019	$	3,378,515	$	6,459,367	$	568,317	$	10,406,199

March 31, 2019	$	3,221,779	$	5,848,830	$	466,601	$	9,537,210



Depreciation and Amortization Expense	Servicing		Originations		Corporate Items and Other		Business Segments Consolidated
Three months ended March 31, 2020
Depreciation expense	$	215	$	37	$	3,745	$	3,997
Amortization of debt discount	—		—		929		929
Amortization of debt issuance costs	112		—		1,621		1,733

Three months ended March 31, 2019
Depreciation expense	$	806	$	36	$	7,709	$	8,551
Amortization of debt discount	—		—		351		351
Amortization of debt issuance costs	—		—		700		700