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Derivative Financial Instruments and Hedging Activities | 9 Months Ended
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Sep. 30, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments and Hedging Activities |
Note 15 – Derivative Financial Instruments and Hedging Activities
The table below summarizes the fair value, notional and maturity of derivative instruments. 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 nine months ended September 30, 2021 and 2020.
|  | September 30, 2021 |  | December 31, 2020
|  | Maturities | Notional | Fair value |  | Maturities | Notional | Fair value
Derivative Assets (Other assets) |  |  |  |  |  |  |  |
Forward sales of Reverse loans |  | Oct. 2021 | $ | 85,000 |  | $ | 762 |  |  | Jan. 2021 | $ | 30,000 |  | $ | 34 |
Forward loans IRLCs |  | Not.2021 - Dec.2021 | 1,222,451 |  | 13,407 |  |  | Apr. 2021 | 619,713 |  | 22,224 |
Reverse loans IRLCs |  | Oct. 2021 | 80,486 |  | 623 |  |  | Jan. 2021 | 11,692 |  | 482 |
TBA forward Pipeline trades |  | Oct.2021 - Dec.2021 | 1,210,000 |  | 5,538 |  |  | N/A | — |  | — |
Interest rate swap futures |  | N/A | — |  | — |  |  | Mar. 2021 | 593,500 |  | 504 |
Other |  | N/A | — |  | — |  |  | N/A | — |  | 2 |
Total |  |  | $ | 2,597,937 |  | $ | 20,329 |  |  |  | $ | 1,254,905 |  | $ | 23,246 |
Derivative Liabilities (Other liabilities) |  |  |  |  |  |  |  |
Forward sales of Reverse loans |  | Oct. 2021 | $ | 55,000 |  | $ | (341) |  |  | Jan. 2021 | $ | 20,000 |  | $ | (84) |
TBA forward Pipeline trades |  | Oct.2021 - Dec.2021 | 245,000 |  | (276) |  |  | N/A | — |  | — |
TBA forward MBS trades |  | Oct.2021 - Nov.2021 | 1,210,000 |  | (11,227) |  |  | Jan. 2021 | 400,000 |  | (4,554) |
Interest rate swap futures |  | Oct.2021 - Dec.2021 | 952,500 |  | (8,236) |  |  | N/A | — |  | — |
Other |  | N/A | — |  | (438) |  |  | N/A | — |  | — |
Total |  |  | $ | 2,462,500 |  | $ | (20,518) |  |  |  | $ | 420,000 |  | $ | (4,638) |
The table below summarizes the net gains and losses of our derivative instruments recognized in our consolidated statement of operations.
| Nine Months Ended September 30, 2021 |  | Nine Months Ended September 30, 2020
| Gain / (Loss) |  | Gain / (Loss)
| Amount | Financial Statement Line |  | Amount | Financial Statement Line
Derivative |  |  |  |  |
Forward loans IRLCs | $ | (8,817) |  | Gain on loans held for sale, net |  | $ | 16,860 |  | Gain on loans held for sale, net
Reverse loans IRLCs | 141 |  | Reverse mortgage revenue, net |  | 940 |  | Reverse mortgage revenue, net
TBA forward pipeline trades | 592 |  | Gain on loans held for sale, net (Economic hedge) |  | — |  | Gain on loans held for sale, net (Economic hedge)
Interest rate swap futures and TBA forward MBS trades | — |  | Gain on loans held for sale, net (Economic hedge) |  | (9,564) |  | Gain on loans held for sale, net (Economic hedge)
Interest rate swap futures and TBA forward MBS trades | (3,310) |  | MSR valuation adjustments, net |  | 39,258 |  | MSR valuation adjustments, net
Forward sales of Reverse loans | 471 |  | Reverse mortgage revenue, net |  | (62) |  | Reverse mortgage revenue, net
Other | (439) |  | Gain on loans held for sale, net |  | (561) |  | Gain on loans held for sale, net
Total | $ | (11,362) |  |  |  | $ | 46,871 |  |
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. Through May 2021, management maintained a macro-hedging strategy to reduce the volatility of the MSR portfolio attributable to interest rate changes. As a general matter, the impact of interest rates on the fair value of our MSR portfolio is naturally offset by other exposures, including our loan pipeline and our economic MSR value embedded in our reverse mortgage loan portfolio. Our hedging strategy was targeted at mitigating the residual exposure, which we referred to as our net MSR portfolio exposure. We defined 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 — MSR Transfers Not Qualifying for Sale Accounting), •less the unsecuritized reverse mortgage loans and tails classified as held for investment, •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 lock commitments (pipeline). In the first and second quarters of 2021, we also included in our MSR portfolio the exposure related to expected future MSR bulk acquisitions subject to letters of intent. Effective May 2021, management started hedging its MSR portfolio and its pipeline separately (see below for further description of pipeline hedging), effectively ending the macro-hedge strategy previously in place. Under the new MSR hedging strategy, the interest-rate sensitive MSR portfolio exposure is now defined as follows: •Agency MSR portfolio, •expected Agency MSR bulk transactions subject to letters of intent (LOI), •less the Agency MSRs subject to sale agreements with NRZ and MAV (See Note 8 — MSR Transfers Not Qualifying for Sale Accounting), •less the asset value for securitized HECM loans, net of the corresponding HMBS-related borrowings. Our MSR policy’s objective is to provide partial hedge coverage of interest-rate sensitive MSR portfolio exposure, considering market and liquidity conditions. The hedge coverage ratio defined as the ratio of hedge and asset rate sensitivity (referred to as DV01) at the time of measurement is subject to lower and upper thresholds of 40% and 60%, respectively. Accordingly, the changes in fair value of our hedging instruments may not fully offset the changes in fair value of our net MSR portfolio exposure attributable to interest rate changes. Effective October 2021, we refined the scope of the hedge policy to allow for MSRs subject to LOI to be covered under a separate hedge coverage ratio requirement sufficient to preserve the economics of the intended transactions. Our derivative instruments include forward trades of MBS or Agency TBAs with different banking counterparties, exchange-traded interest rate swap futures and interest rate options. 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. We report changes in fair value of these derivative instruments in MSR valuation adjustments, net in our consolidated statements of operations. The derivative instruments are subject to margin requirements, posted as either initial margin or variation margin. Ocwen may be required to post or may be entitled to receive cash collateral with its counterparties through margin calls, 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. Pipeline Hedging - Interest Rate Lock Commitments and Loans Held for Sale, at Fair Value In our Originations business, we are exposed to interest rate risk and related price risk during the period from the date of the interest rate lock commitment through (i) the commitment cancellation or expiration date or (ii) through the date of sale of the resulting loan into the secondary mortgage market. Loan commitments for forward loans generally range from 5 to 90 days, with the majority of our commitments to borrowers for 75 days and our commitments to correspondent sellers for 7 days. Loans held for sale are generally funded and sold within 5 to 20 days. This interest rate exposure was not individually hedged until May 2021, but rather used as an offset to our MSR exposure and managed as part of our MSR macro-hedging strategy described above. Effective May 2021, we implemented a new pipeline hedging strategy, whereby the interest rate exposure of loans held for sale and interest rate lock commitments is economically hedged with derivative instruments, including forward sales of Agency “to be announced” securities (TBAs). We report changes in fair value of these derivative instruments as gain or loss on economic hedge instruments within gain on loans held-for-sale in our consolidated statements of operations. Advance Match Funded Liabilities We monitor the effect of increases in interest rates on the interest paid on our variable-rate advance financing debt. Earnings on cash and float balances are a partial offset to our exposure to changes in interest expense. We purchase interest rate caps as economic hedges (not designated as a hedge for accounting purposes) when required by our advance financing arrangements. 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. Depending on the magnitude and risk of our positions we may enter into any forward exchange contracts to hedge against the effect of changes in the value of the India Rupee or Philippine Peso. We currently do not hedge our foreign currency exposure with derivative instruments. Foreign currency remeasurement exchange gains (losses) were $0.2 million and $0.3 million for the three and nine months ended September 30, 2021, respectively, and $(0.2) million and $(1.1) million during the three and nine months ended September 30, 2020, respectively, and are reported in Other, net in the consolidated statements of operations.

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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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