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Derivative Financial Instruments and Hedging Activities | 9 Months Ended
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Sep. 30, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments and Hedging Activities |
Note 16 – Derivative Financial Instruments and Hedging Activities
The table below summarizes the fair value, notional and maturity of our 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, 2022 and 2021.
|  | September 30, 2022 |  | December 31, 2021
|  | Maturities | Notional | Fair value |  | Maturities | Notional | Fair value
Derivative Assets (Other assets) |  |  |  |  |  |  |  |
Forward sales of reverse loans |  | Oct. 2022 | $ | 40,000 |  | $ | 173 |  |  | Feb. 2022 | $ | 175,000 |  | $ | 364 |
Forward loans IRLCs |  | N/A | — |  | — |  |  | Jan. - Apr. 2022 | 1,021,978 |  | 16,074 |
Reverse loans IRLCs |  | Oct. 2022 | 19,224 |  | 610 |  |  | Jan. 2022 | 63,327 |  | 2,011 |
TBA forward MBS trades |  | Oct. - Dec. 2022 | 1,448,000 |  | 23,977 |  |  | Jan. - Mar. 2022 | 587,000 |  | 946 |
Interest rate swap futures |  | N/A | — |  | — |  |  | Mar. 2022 | 792,500 |  | 1,734 |
Interest rate option contracts |  | N/A | — |  | — |  |  | Jan. 2022 | 125,000 |  | 547 |
Total |  |  | $ | 1,507,224 |  | $ | 24,760 |  |  |  | $ | 2,764,805 |  | $ | 21,675 |
Derivative Liabilities (Other liabilities) |  |  |  |  |  |  |  |
Forward loans IRLCs |  | Nov. 2022 - Feb. 2023 | $ | 1,289,388 |  | $ | (12,800) |  |  | N/A | $ | — |  | $ | — |
Forward sales of reverse loans |  | Oct. 2022 | 30,000 |  | (85) |  |  | N/A | — |  | — |
TBA forward MBS trades |  | Oct. - Dec. 2022 | 418,000 |  | (2,208) |  |  | Jan. - Mar. 2022 | 1,195,000 |  | (1,185) |
Interest rate swap futures |  | Dec. 2022 | 440,000 |  | (7,274) |  |  | N/A | — |  | — |
Interest rate option contracts |  | Oct. 2022 | 500,000 |  | (1,172) |  |  | Feb. 2022 | 450,000 |  | (824) |
Other |  | N/A | 11,907 |  | (164) |  |  | N/A | — |  | (1,070) |
Total |  |  | $ | 2,689,295 |  | $ | (23,704) |  |  |  | $ | 1,645,000 |  | $ | (3,080) |
The table below summarizes the net gains and losses of our derivative instruments recognized in our consolidated statement of operations.
| Three Months Ended September 30, |  | Nine Months Ended September 30, |  | Financial Statement Line
Gain (loss) | 2022 |  | 2021 |  | 2022 |  | 2021 |
Derivative Instruments |  |  |  |  |  |  |  |  |
Forward loans IRLCs | $ | (17,953) |  |  | $ | (3,743) |  |  | $ | (28,834) |  |  | $ | (8,817) |  |  | Gain on loans held for sale, net
Reverse loans IRLCs | (250) |  |  | 327 |  |  | (1,421) |  |  | 141 |  |  | Reverse mortgage revenue, net
Reverse loans IRLCs (Equity IQ loans) | 266 |  |  | — |  |  | (20) |  |  | — |  |  | Gain on loans held for sale, net
TBA trades (economically hedging forward pipeline trades and EBO pipeline) | 48,389 |  |  | 780 |  |  | 124,613 |  |  | 592 |  |  | Gain on loans held for sale, net (Economic hedge)
TBA trades (economically hedging reverse pipeline trades) | (131) |  |  | — |  |  | (209) |  |  | — |  |  | Reverse mortgage revenue, net
Interest rate swap futures, TBA trades and interest rate option contracts | (23,814) |  |  | (12,607) |  |  | (107,490) |  |  | (3,310) |  |  | MSR valuation adjustments, net
Forward sales of Reverse loans | (478) |  |  | 274 |  |  | (276) |  |  | 471 |  |  | Reverse mortgage revenue, net
Other | — |  |  | (423) |  |  | — |  |  | (439) |  |  | Gain on loans held for sale, net
Other | (31) |  |  | — |  |  | 906 |  |  | — |  |  | Other, net
Total | $ | 5,998 |  |  | $ | (15,392) |  |  | $ | (12,730) |  |  | $ | (11,362) |  |  |
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 among other inputs and assumptions. Through May 2021, management implemented 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 Rithm (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). 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 our sale agreements with Rithm 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. The objective of our MSR policy 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) is subject to lower and upper thresholds, as modeled. As of September 30, 2022, a minimum 25% and 30% hedge coverage ratios were required for interest rate declines less than, and more than 50 basis points, respectively. Prior to September 30, 2022, the hedge coverage ratio was required to remain within a minimum of 40% and maximum of 60%. 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. We periodically evaluate the hedge coverage ratio at the intended shock interval to determine if it is relevant or warrants adjustment based on market conditions, symmetry of interest rate risk exposure, and liquidity impacts of both the hedge and asset profile under shock scenarios. As the market dictates, management may choose to maintain hedge coverage ratio levels at or beyond the above thresholds, with approval of the Market Risk Committee, in order to preserve liquidity and/or optimize asset returns. In addition, while DV01 measures may remain within the range of our hedging strategy’s objective, actual changes in fair value of the derivatives and MSR portfolio may not offset to the same extent, due to non-parallel changes in the interest rate curve and the basis risk inherent in the MSR profile and hedging instruments, among other factors. We continuously evaluate the use of hedging instruments to strive to enhance the effectiveness of our interest rate hedging strategy. 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. From time-to-time, we enter into exchange-traded options contracts with purchased put options financed by written call options. We report changes in fair value of these derivative instruments in MSR valuation adjustments, net in our consolidated statements of operations, within the Servicing segment. We may, from time to time, establish inter-segment derivative instruments between the MSR and pipeline hedging strategies to optimize the use of third party derivatives. Such inter-segment derivatives are eliminated in our consolidated financial statements. The derivative instruments are subject to margin requirements, posted as either initial 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 may 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 lock commitment cancellation or expiration date or (ii) through the date of sale or securitization 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 55 to 75 days and our commitments to correspondent sellers for 7 days. Loans held for sale are generally funded and sold within 3 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 and IRLCs is economically hedged with derivative instruments, including forward sales of Agency TBAs. The objective of our pipeline hedging strategy is to reduce the volatility of the fair value of IRLCs and loans due to market interest rates, thus to preserve the initial gain on sale margin at lock date. We report changes in fair value of these derivative instruments as gain or loss on economic hedge instruments within either Gain on loans held for sale, net and Reverse mortgage revenue, net in our consolidated statements of operations, respectively. EBO and Loan Modification Hedging – Loans Held for Sale, at fair value Effective February 2022, management started hedging certain Ginnie Mae EBO loans as well as loans in process of modification pending redelivery/re-securitization to manage interest rate risk. Such interest rate exposure on these loans held for sale accounted for at fair value is economically hedged using forward trades of TBAs. Changes in fair value of these derivative instruments are reported as gain or loss on economic hedge instruments within Gain on loans held for sale, net in our consolidated statements of operations. 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 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 $(0.2) million for the three and nine months ended September 30, 2022, respectively, and $0.2 million and $0.3 million during the three and nine months ended September 30, 2021, 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 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI http://asc.fasb.org/extlink&oid=123477628&loc=d3e90205-114008 + Details
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