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Derivative Financial Instruments and Hedging Activities | 9 Months Ended
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Sep. 30, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments and Hedging Activities |
Note 14 – 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, 2023 and 2022.
|  | September 30, 2023 |  | December 31, 2022
|  | Maturities | Notional | Fair value |  | Maturities | Notional | Fair value
Derivative Assets (Other assets) |  |  |  |  |  |  |  |
Forward sales of Reverse loans |  | Oct. 2023 | $ | 15.0 |  | $ | — |  |  | Jan. 2023 | $ | 20.0 |  | $ | 0.1 |
Reverse loans IRLCs |  | Nov. - Dec. 2023 | 20.2 |  | 0.4 |  |  | Jan. 2023 | 13.8 |  | 0.6 |
TBA forward MBS trades |  | Oct. - Dec. 2023 | 1,244.0 |  | 11.0 |  |  | Jan. - Mar. 2023 | 804.0 |  | 6.6 |
Forward sales of Forward loans |  | Oct. - Nov. 2023 | 189.0 |  | 1.4 |  |  | Jan. 2023 | 100.0 |  | 0.4 |
Interest rate swap futures |  | Dec. 2023 | 335.0 |  | 0.8 |  |  | N/A | — |  | — |
Total |  |  | $ | 1,803.2 |  | $ | 13.6 |  |  |  | $ | 937.8 |  | $ | 7.7 |
Derivative Liabilities (Other liabilities) |  |  |  |  |  |  |  |
Forward loans IRLCs |  | Oct. 2023-Feb. 2024 | $ | 916.9 |  | $ | (1.6) |  |  | Jan. - Apr. 2023 | $ | 540.1 |  | $ | (1.3) |
Forward sales of Reverse loans |  | Oct. 2023 | 31.6 |  | (0.1) |  |  | Jan. 2023 | 20.0 |  | (0.1) |
TBA forward MBS trades |  | Oct. -Dec. 2023 | 863.0 |  | (10.0) |  |  | Jan. - Feb. 2023 | 85.0 |  | (0.7) |
Forward sales of Forward loans |  | Oct. - Nov. 2023 | 10.0 |  | — |  |  | N/A | — |  | — |
Interest rate swap futures |  | Dec. 2023 | 915.0 |  | (11.0) |  |  | Jan. 2023 | 670.0 |  | (13.6) |
Interest rate option contracts |  | Oct. -Nov. 2023 | 900.0 |  | (1.4) |  |  | N/A | — |  | — |
Other |  | N/A | 27.2 |  | (0.2) |  |  | N/A | 56.4 |  | (0.1) |
Total |  |  | $ | 3,663.7 |  | $ | (24.3) |  |  |  | $ | 1,371.4 |  | $ | (15.7) |
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) | 2023 |  | 2022 |  | 2023 |  | 2022 |
Derivative Instruments |  |  |  |  |  |  |  |  |
Forward loans IRLCs | $ | (2.7) |  |  | $ | (18.0) |  |  | $ | (0.2) |  |  | $ | (28.8) |  |  | Gain on loans held for sale, net
Reverse loans IRLCs | 0.1 |  |  | (0.3) |  |  | (0.2) |  |  | (1.4) |  |  | Gain on reverse loans held for investment and HMBS-related borrowings, net
Reverse loans IRLCs (Equity IQ loans) | — |  |  | 0.3 |  |  | — |  |  | — |  |  | Gain on loans held for sale, net
Forward trades (economically hedging forward pipeline trades and EBO pipeline) | 1.0 |  |  | — |  |  | 1.0 |  |  | — |  |  | Gain on loans held for sale, net (Economic hedge)
TBA trades (economically hedging forward pipeline trades and EBO pipeline) | 33.1 |  |  | 48.4 |  |  | 37.9 |  |  | 124.6 |  |  | Gain on loans held for sale, net (Economic hedge)
TBA trades (economically hedging reverse pipeline trades) | — |  |  | (0.1) |  |  | — |  |  | (0.2) |  |  | Gain on reverse loans held for investment and HMBS-related borrowings, net
Interest rate swap futures, TBA trades and interest rate option contracts | (68.6) |  |  | (23.8) |  |  | (119.7) |  |  | (107.5) |  |  | MSR valuation adjustments, net
Forward sales of Reverse loans | (0.2) |  |  | (0.5) |  |  | (0.2) |  |  | (0.3) |  |  | Gain on reverse loans held for investment and HMBS-related borrowings, net
Other | (0.1) |  |  | — |  |  | 0.2 |  |  | 0.9 |  |  | Other, net
Total | $ | (37.3) |  |  | $ | 6.0 |  |  | $ | (81.3) |  |  | $ | (12.7) |  |  |
Interest Rate Risk MSR Hedging Under our MSR hedging strategy, the interest-rate sensitive MSR portfolio exposure to be hedged is 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 MAV, Rithm and others (See Note 8 — Other Financing Liabilities, at Fair Value), •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. Since September 2022, our hedge policy establishes a minimum 25% and 30% hedge coverage ratio required for interest rate declines less than, and more than 50 basis points, respectively. 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. During the second quarter of 2023, management raised its minimum hedge coverage ratio to 60%. With a partial hedge coverage ratio, 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. 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 with the objective of enhancing 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 minimize the use of third-party derivatives. The fair value gains and losses of such inter-segment derivatives effectively reclassify certain derivative gains and losses between MSR valuation adjustments, net within the Servicing segment and Gain on loans held for sale, net within the Originations segment to reflect the performance of these economic hedging strategies in the appropriate segments (see Note 17 – Business Segment Reporting for the amount of such reclassification). 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 75 days, with the majority of our commitments to borrowers for 40 to 60 days and our commitments to correspondent sellers for 5 to 15 days. Loans held for sale are generally funded and sold within 5 to 30 days. This 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 or Gain on reverse loans held for investment and HMBS-related borrowings, net in our consolidated statements of operations, respectively. See above description of inter-segment derivatives.

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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 https://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 https://asc.fasb.org/extlink&oid=126731327&loc=d3e90205-114008 + Details
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