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Business Segment Reporting
 9 Months Ended
Sep. 30, 2020
Segment Reporting [Abstract]  
Business Segment Reporting
Note 19 – 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 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 through multiple channels. The loans are typically sold shortly after origination 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 Co-issue and Cash Window programs and bulk MSR purchases, and we acquire new subservicing through our enterprise sales. 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 and 2020 related to our cost re-engineering plan and initiatives. 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. Beginning in the third quarter of 2020, we began allocating interest expense on corporate debt, including the SSTL and Senior Notes, used to fund servicing advances and other servicing assets from Corporate Items and Other to Servicing. Amortization of debt issuance costs and discount are excluded from the interest expense allocation. The interest expense related to the corporate debt has been allocated to the Servicing segment for prior periods to conform to the current period presentation. The interest expense allocation for the nine months ended September 30, 2020 is $28.8 million, including $10.5 million, $9.5 million and $8.8 million for the three months ended March 31, 2020, June 30, 2020 and September 30, 2020, respectively. The interest expense allocation for the nine months ended September 30, 2019 is $43.3 million, including $13.8 million, $15.5 million and $14.0 million for the three months ended March 31, 2019, June 30, 2019 and September 30, 2019, respectively.
Financial information for our segments is as follows:
Three Months Ended September 30, 2020
Results of Operations ServicingOriginationsCorporate Items and OtherBusiness Segments Consolidated
Revenue (1)$185,892 $53,755 $9,388 $249,035 
MSR valuation adjustments, net (1)(38,356)12,375 (7,833)(33,814)
Operating expenses (2) 79,522 35,421 34,579 149,522 
Other (expense) income:
Interest income872 2,717 212 3,801 
Interest expense (21,421)(3,163)(2,231)(26,815)
Pledged MSR liability expense(57,434)— 30 (57,404)
Other 2,211 197 937 3,345 
Other expense, net(75,772)(249)(1,052)(77,073)
Income (loss) before income taxes
$(7,758)$30,460 $(34,076)$(11,374)
Three Months Ended September 30, 2019
Results of Operations ServicingOriginationsCorporate Items and OtherBusiness Segments Consolidated
Revenue $250,224 $29,502 $3,789 $283,515 
MSR valuation adjustments, net134,617 (56)— 134,561 
Operating expenses (2)135,507 20,609 23,169 179,285 
Other (expense) income:
Interest income2,105 1,688 336 4,129 
Interest expense (26,087)(2,133)(1,286)(29,506)
Pledged MSR liability expense(256,499)— 83 (256,416)
Gain on repurchase of senior secured notes— — 5,099 5,099 
Other 3,917 498 (4,829)(414)
Other (expense) income, net(276,564)53 (597)(277,108)
Income (loss) before income taxes
$(27,230)$8,890 $(19,977)$(38,317)
Nine Months Ended September 30, 2020
Results of Operations ServicingOriginationsCorporate Items and OtherBusiness Segments Consolidated
Revenue (1)$579,883 $136,947 $13,071 $729,901 
MSR valuation adjustments, net (1)(249,396)25,861 (7,833)(231,368)
Operating expenses (2) 242,735 91,129 97,681 431,545 
Other (expense) income:
Interest income4,196 6,857 1,709 12,762 
Interest expense (67,923)(8,423)(7,211)(83,557)
Pledged MSR liability expense(105,771)— 87 (105,684)
Other 8,332 167 (3,883)4,616 
Other expense, net
(161,166)(1,399)(9,298)(171,863)
Income (loss) before income taxes$(73,414)$70,280 $(101,741)$(104,875)
Nine Months Ended September 30, 2019
Results of Operations ServicingOriginationsCorporate Items and OtherBusiness Segments Consolidated
Revenue$752,010 $99,386 $10,345 $861,741 
MSR valuation adjustments, net(121,497)(208)— (121,705)
Operating expenses (2) (3)435,377 62,813 36,428 534,618 
Other (expense) income:
Interest income6,270 4,783 1,471 12,524 
Interest expense (77,328)(5,200)(2,108)(84,636)
Pledged MSR liability expense(303,385)— 83 (303,302)
Gain on repurchase of senior secured notes— — 5,099 5,099 
Other6,332 1,161 (6,330)1,163 
Other (expense) income, net(368,111)744 (1,785)(369,152)
Income (loss) before income taxes$(172,975)$37,109 $(27,868)$(163,734)
(1)Revenue in the Corporate Items and Other segment for the three and nine months ended September 30, 2020 includes an inter-segment derivatives elimination of $7.8 million with a corresponding offset in MSR valuation adjustments, net.
(2)Compensation and benefits expense in the Corporate Items and Other segment for the three and nine months ended September 30, 2020 and 2019 includes $1.0 million and $2.6 million, and $(0.1) million and $19.1 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.
(3)Included in the Corporate Items and Other segment for the nine months ended September 30, 2019, we recorded in Professional services expense a recovery from a service provider of $30.7 million during the first quarter of 2019 of amounts previously recognized as expense.
Total AssetsServicingOriginationsCorporate Items and OtherBusiness Segments Consolidated
September 30, 2020$2,694,561 $7,259,257 $470,033 $10,423,851 
December 31, 2019$3,378,515 $6,459,367 $568,317 $10,406,199 
September 30, 2019$3,227,245 $6,225,394 $504,014 $9,956,653 
Depreciation and Amortization ExpenseServicingOriginationsCorporate Items and OtherBusiness Segments Consolidated
Three months ended September 30, 2020
Depreciation expense$219 $31 $4,055 $4,305 
Amortization of debt issuance costs and discount115 — 1,039 1,154 
Three months ended September 30, 2019
Depreciation expense$105 $(32)$6,386 $6,459 
Amortization of debt issuance costs and discount— — 1,146 1,146 
Nine Months Ended September 30, 2020
Depreciation expense$652 $102 $14,644 $15,398 
Amortization of debt issuance costs and discount343 — 4,992 5,335 
Nine months ended September 30, 2019
Depreciation expense$1,674 $49 $24,297 $26,020 
Amortization of debt issuance costs and discount— — 3,299 3,299