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Derivative Financial Instruments and Hedging Activities | 6 Months Ended
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Jun. 30, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments and Hedging Activities |
Note 14 – Derivative Financial Instruments and Hedging Activities
The following table summarizes derivative activity, including the derivatives used in each of our identified hedging programs. The notional amount of our contracts does not represent our exposure to credit loss. None of the derivatives were designated as a hedge for accounting purposes as of, or during the six months ended June 30, 2020 and 2019:
| IRLCs |  | Interest Rate Risk
| MSR Hedging |  | IRLCs and Loans Held for Sale |  | Borrowings
| TBA / Forward MBS Trades and Futures (1) |  | Forward Trades |  | Interest Rate Caps
Notional balance at June 30, 2020 (2) | $ | 507,632 |  |  | $ | 395,000 |  |  | $ | 80,000 |  |  | $ | — |
Notional balance at December 31, 2019 | 232,566 |  |  | 1,200,000 |  |  | 60,000 |  |  | 27,083 |
Maturity | July 2020 - Sept. 2020 |  | Sept. 2020 |  | July 2020 - Aug. 2020 |  | N/A
Fair value of derivative assets (liabilities) at: |  |  |  |  |  |  |  |  |  |  |
June 30, 2020 | $ | 17,818 |  |  | $ | 5,019 |  |  | $ | (1,017 | ) |  | $ | — |
December 31, 2019 | 4,878 |  |  | 1,121 |  |  | (92 | ) |  | — |
Gains (losses) on derivatives during the six months ended: | Gain on loans held for sale, net |  | MSR valuation adjustments, net |  | Gain on loans held for sale, net |  | Other, net
June 30, 2020 | $ | 12,048 |  |  | $ | 42,811 |  |  | $ | (10,320 | ) |  | $ | — |
June 30, 2019 | (296 | ) |  | $ | — |  |  | (3,238 | ) |  | (335 | )
(1) | The June 30, 2020 balance is comprised of $395.0 million notional balance and $5.0 million fair value, of interest rate swap futures (zero at December 31, 2019). The related gain on these interest rate futures for the six months ended June 30, 2020 was $5.0 million.
(2) | Includes $30.2 million IRLC and $80.0 million forward trades related to reverse mortgage loans, for which we recorded a $0.7 million hedging gain in Reverse mortgage revenue, net for the six months ended June 30, 2020.
We report derivatives at fair value in Other assets or in Other liabilities on our unaudited consolidated balance sheets. Derivative instruments are generally entered into as economic hedges against changes in the fair value of a recognized asset or liability and are not designated as hedges for accounting purposes. We report the changes in fair value of such derivative instruments in the same line item in the unaudited consolidated statement of operations as the changes in fair value of the related asset or liability. For all other derivative instruments not designated as a hedging instrument, we report changes in fair value in Other, net. Foreign Currency Exchange Rate Risk Our operations in India and the Philippines expose us to foreign currency exchange rate risk to the extent that our foreign exchange positions remain unhedged. We have not entered into any forward exchange contracts during the reported periods to hedge against the effect of changes in the value of the India Rupee or Philippine Peso. Foreign currency remeasurement exchange (losses) gains were $(0.1) million and $(0.9) million, and $(0.1) million and $0.1 million, during the three and six months ended June 30, 2020 and 2019, respectively, and are reported in Other, net in the unaudited consolidated statements of operations. Interest Rate Risk MSR Hedging MSRs are carried at fair value with changes in fair value being recorded in earnings in the period in which the changes occur. The fair value of MSRs is subject to changes in market interest rates and prepayment speeds, among other factors. Beginning in September 2019, management implemented a hedging strategy to partially offset the changes in fair value of our net MSR portfolio to interest rate changes. We define our net MSR portfolio exposure as follows:
• | our more interest rate-sensitive Agency MSR portfolio,
• | less the Agency MSRs subject to our agreements with NRZ (See Note 8 — Rights to MSRs),
• | less the asset value for securitized HECM loans, net of the corresponding HMBS-related borrowings, and
• | less the net value of our held for sale loan portfolio and interest rate lock commitments (pipeline).
We determine and monitor daily a hedge coverage based on the duration and interest rate sensitivity measures of our net MSR portfolio exposure, considering market and liquidity conditions. At June 30, 2020, our hedging strategy provides for a partial coverage of our net MSR portfolio exposure. We use forward trades of MBS or Agency TBAs with different banking counterparties and exchange-traded interest rate swap futures as hedging instruments. These derivative instruments are not designated as accounting hedges. TBAs, or To-Be-Announced securities are actively traded, forward contracts to purchase or sell Agency MBS on a specific future date. Interest rate swap futures are exchange-traded and centrally cleared. We report changes in fair value of these derivative instruments in MSR valuation adjustments, net in our unaudited consolidated statements of operations. The TBAs and interest rate swap futures are subject to margin requirements. Ocwen may be required to post or may be entitled to receive cash collateral with its counterparties, based on daily value changes of the instruments. Changes in market factors, including interest rates, and our credit rating could require us to post additional cash collateral and could have a material adverse impact on our financial condition and liquidity. Interest Rate Lock Commitments A loan commitment binds us (subject to the loan approval process) to fund the loan at the specified rate, regardless of whether interest rates have changed between the commitment date and the loan funding date. As such, outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of the commitment through the loan funding date or expiration date. The borrower is not obligated to obtain the loan; thus, we are subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. Our interest rate exposure on these derivative loan commitments had previously been economically hedged with freestanding derivatives such as forward contracts. Beginning in September 2019, this exposure is not individually hedged, but rather used as an offset to our MSR exposure and managed as part of our MSR hedging strategy described above. Loans Held for Sale, at Fair Value Mortgage loans held for sale that we carry at fair value are subject to interest rate and price risk from the loan funding date until the date the loan is sold into the secondary market. Generally, the fair value of a loan will decline in value when interest rates increase and will rise in value when interest rates decrease. To mitigate this risk, we had previously entered into forward MBS trades to provide an economic hedge against those changes in fair value on mortgage loans held for sale. Forward MBS trades were primarily used to fix the forward sales price that would be realized upon the sale of mortgage loans into the secondary market. Beginning in September 2019, this exposure is not individually hedged, but rather used as an offset to our MSR exposure and managed as part of our MSR hedging strategy described above. Advance Match Funded Liabilities When required by our advance financing arrangements, we purchase interest rate caps to minimize future interest rate exposure from increases in the interest on our variable rate debt as a result of increases in the index, such as 1ML, which is used in determining the interest rate on the debt. We currently do not hedge our fixed-rate debt.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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