UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2019March 31, 2020
or
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
Commission file number: 001-14667
Mr. Cooper Group Inc.
(Exact name of registrant as specified in its charter)
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| | |
| Delaware | | 91-1653725 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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| 8950 Cypress Waters Blvd, Coppell, TX | | 75019 |
| (Address of principal executive offices) | | (Zip Code) |
| | | |
| (469) 549-2000 |
| Registrant’s telephone number, including area code |
| |
Securities registered pursuant to Section 12(b) of the Act:
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| | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common stock, $0.01 par value per share | COOP | The Nasdaq Stock Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12(b)-2 of the Exchange Act.
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| | | |
| Large Accelerated Filer | ¨ | Accelerated Filer | x |
| Non-Accelerated Filer | ¨ | Smaller reporting company | ¨ |
| | | Emerging growth company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Number of shares of common stock, $0.01 par value, outstanding as of July 28, 2019April 24, 2020 was 91,075,575.91,970,033.
MR. COOPER GROUP INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
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| PART I | | |
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| Item 1. | | |
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| Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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| PART II | | |
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| Item 1. | | |
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| Item 1A. | | |
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| Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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| Item 5. | | |
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| Item 6. | | |
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GLOSSARY OF TERMS
This Glossary of Terms defines some of the terms that are used throughout this report and does not represent a complete list of all defined terms used.
Advance Facility. A secured financing facility to fund advance receivables which is backed by a pool of mortgage servicing advance receivables made by a servicer to a certain pool of mortgage loans.
Agency and Government Conforming Loan. A mortgage loan that meets all requirements (loan type, maximum amount, LTV ratio and credit quality) for purchase by Fannie Mae, Freddie Mac, or insured by the FHA, USDA or guaranteed by the VA.
Asset-Backed Securities (ABS). A financial security whose income payments and value is derived from and collateralized (or “backed”) by a specified pool of underlying receivables or other financial assets.
Base Servicing Fee. The servicing fee retained by the servicer, expressed in basis points, in an excess MSR arrangement in exchange for the provision of servicing functions on a portfolio of mortgage loans, after which the servicer and the co-investment partner share the excess fees on a pro rata basis.
Direct-to-consumer Originations. A type of mortgage loan origination pursuant to which a lender markets refinancing and purchase money mortgage loans directly to selected consumers through telephone call centers, the Internet or other means.
Conventional Mortgage Loans. A mortgage loan that is not guaranteed or insured by the FHA, the VA or any other government agency. Although a conventional loan is not insured or guaranteed by the government, it can still follow the guidelines of GSEs and be sold to the GSEs.
Correspondent Originations. A type of mortgage loan origination pursuant to which a company purchases closed mortgage loans from correspondent lenders, such as community banks, credit unions, mortgage brokers and independent mortgage bankers.
Credit-Sensitive Loan. A mortgage loan with certain characteristics such as low borrower credit quality, relaxed original underwriting standards and high LTV, which we believe indicates that the mortgage loan presents an elevated risk of borrower default versus payoff.
Delinquent Loan. A mortgage loan that is 30 or more days past due from its contractual due date.
Department of Veterans Affairs (VA). The VA is a cabinet-level department of the U.S. federal government, which guarantees certain home loans for qualified borrowers eligible for securitization with GNMA.
Excess Servicing Fees. In an excess MSR arrangement, the servicing fee cash flows on a portfolio of mortgage loans after payment of the base servicing fee.
Excess Spread. MSRs with a co-investment partner where the servicer receives a base servicing fee and the servicer and co-investment partner share the excess servicing fees. This co-investment strategy reduces the required upfront capital from the servicer when purchasing or investing in MSRs.
Federal National Mortgage Association (Fannie Mae or FNMA). FNMA was federally chartered by Congress in 1938 to support liquidity, stability, and affordability in the secondary mortgage market, where existing mortgage-related assets are purchased and sold. Fannie Mae buys mortgage loans from lenders and resells them as mortgage backed securities in the secondary mortgage market.
Federal Housing Administration (FHA). The FHA is a U.S. federal government agency within the Department of Housing and Urban Development (HUD). It provides mortgage insurance on loans made by FHA-approved lenders in compliance with FHA guidelines throughout the United States.
Federal Housing Finance Agency (FHFA). A U.S. federal government agency that is the regulator and conservator of Fannie Mae and Freddie Mac and the regulator of the 12 Federal Home Loan Banks.
Federal Home Loan Mortgage Corporation (Freddie Mac or FHLMC). Freddie Mac was chartered by Congress in 1970 to stabilize the nation’s residential mortgage markets and expand opportunities for homeownership and affordable rental housing. Freddie Mac participates in the secondary mortgage market by purchasing mortgage loans and mortgage-related securities for investment and by issuing guaranteed mortgage-related securities.
Government National Mortgage Association (Ginnie Mae or GNMA). GNMA is a self financing, wholly-owned U.S. Government corporation within HUD. Ginnie Mae guarantees the timely payment of principal and interest on MBS backed by federally insured or guaranteed loans - mainly loans insured by the FHA or guaranteed by the VA. Ginnie Mae securities are the only MBS to carry the full faith and credit guarantee of the U.S. federal government.
Government-Sponsored Enterprise (GSE). Certain entities established by the U.S. Congress to provide liquidity, stability and affordability in residential housing. These agencies are Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks.
Home Affordable Modification Program (HAMP). A U.S. federal government program designed to help eligible homeowners avoid foreclosure through mortgage loan modifications. Participating servicers may be entitled to receive financial incentives in connection with loan modifications they enter into with eligible borrowers and subsequent success fees to the extent that a borrower remains current in any agreed upon loan modification.
Home Affordable Refinance Program (HARP). A U.S. federal government program designed to help eligible homeowners refinance their existing mortgage loans. The mortgage must be owned or guaranteed by a GSE, originated during a defined time period, and applicants must be up-to-date on their mortgage payments but unable to obtain refinancing because the value of their homes has declined.
Home Equity Conversion Mortgage (HECM). A type of reverse mortgage loan insured by the FHA.
Interest Rate Lock Commitments (IRLC). Agreements under which the interest rate and the maximum amount of the mortgage loan are set prior to funding the mortgage loan.
Interest-Sensitive Loan. A mortgage loan which is primarily impacted by changes in forecasted interest rates, which in turn impacts voluntary prepayment speed. Interest-sensitive loans typically consist of single-family conforming residential forward mortgage loans serviced for GSEs or other third-party investors.
Loan Modification. Temporary or permanent modifications to loan terms with the borrower, including the interest rate, amortization period and term of the borrower’s original mortgage loan. Loan modifications are usually made to loans that are in default, or in imminent danger of defaulting.
Loan-to-Value Ratio (LTV). The unpaid principal balance of a mortgage loan as a percentage of the total appraised or market value of the property that secures the loan. An LTV over 100% indicates that the UPB of the mortgage loan exceeds the value of the property.
Loss Mitigation. The range of servicing activities provided by a servicer in an attempt to minimize the losses suffered by the owner of a defaulted mortgage loan. Loss mitigation techniques include short-sales, deed-in-lieu of foreclosures and loan modifications, among other options.
Mortgage-Backed Securities (MBS). A type of asset-backed security that is secured by a group of mortgage loans.
Mortgage Servicing Right (MSR). The right and obligation to service a loan or pool of loans and to receive a servicing fee as well as certain ancillary income. MSRs may be bought and sold, resulting in the transfer of loan servicing obligations. MSRs are designated as such when the benefits of servicing the loans are expected to adequately compensate the servicer for performing the servicing.
MSR Facility. A type of line of credit backed by mortgage servicing rights that is used for financing purposes. In certain cases these lines may be a sub-limit of another warehouse facility or alternatively exist on a stand-alone basis. These facilities allow for same or next-day draws at the request of the borrower.
Mortgage Servicing Liability (MSL).The right and obligation to service a loan or pool of loans and to receive a servicing fee as well as certain ancillary income. MSLs may be bought and sold, resulting in the transfer of loan servicing obligations. MSLs are designated as such when the benefits of servicing the loans are not expected to adequately compensate the servicer for performing the servicing.
Non-Conforming Loan. A mortgage loan that does not meet the standards of eligibility for purchase or securitization by Fannie Mae, Freddie Mac or Ginnie Mae.
Originations. The process through which a lender provides a mortgage loan to a borrower.
Prepayment Speed. The rate at which voluntary and involuntary mortgage prepayments occur or are projected to occur. The statistic is calculated on an annualized basis and expressed as a percentage of the outstanding principal balance.
Primary Servicer. The servicer that owns the right to service a mortgage loan or pool of mortgage loans. This differs from a subservicer, which has a contractual agreement with the primary servicer to service a mortgage loan or pool of mortgage loans in exchange for a subservicing fee based upon portfolio volume and characteristics.
Prime Mortgage Loan. Generally, a high-quality mortgage loan that meets the underwriting standards set by Fannie Mae or Freddie Mac and is eligible for purchase or securitization in the secondary mortgage market. Prime Mortgage loans generally have lower default risk and are made to borrowers with excellent credit records and a monthly income at least three to four times greater than their monthly housing expenses (mortgage payments plus taxes and other debt payments) as well as significant other assets. Mortgages not classified as prime mortgage loans are generally called either sub-prime or Alt-A.
Private Label Securitizations. Securitizations that do not meet the criteria set by Fannie Mae, Freddie Mac or Ginnie Mae.
Real Estate Owned (REO). Property acquired by the servicer on behalf of the owner of a mortgage loan or pool of mortgage loans, usually through foreclosure or a deed-in-lieu of foreclosure on a defaulted loan. The servicer or a third party real estate management firm is responsible for selling the REO. Net proceeds of the sale are returned to the owner of the related loan or loans. In most cases, the sale of REO does not generate enough to pay off the balance of the loan underlying the REO, causing a loss to the owner of the related mortgage loan.
Recapture. The prepayment of all or part of a federal mortgage subsidy if the home is sold or otherwise disposed of within nine years of receiving a federally-subsidized loan.
Refinancing. The process of working with existing borrowers to re-originate their mortgage loans. By refinancing loans for borrowers we currently service, we retain the servicing rights, thereby extending the longevity of the servicing cash flows.
Reverse Mortgage. A reverse mortgage, also referred to as a Home Equity Conversion Mortgage, enables seniors to borrow against the value of their home, and no payment of principal or interest is required until the death of the borrower or the sale of the home. These loans are designed to go through the foreclosure and claim process to recover loan balance.
Servicing. The performance of contractually specified administrative functions with respect to a mortgage loan or pool of mortgage loans. Duties of a servicer typically include, among other things, collecting monthly payments, maintaining escrow accounts, providing periodic monthly statements to the borrower and monthly reports to the loan owners or their agents, managing insurance, monitoring delinquencies, executing foreclosures (as necessary), and remitting fees to guarantors, trustees and service providers. A servicer is generally compensated with a specific fee outlined in the contract established prior to the commencement of the servicing activities.
Servicing Advances. In the course of servicing loans, servicers are required to make advances that are reimbursable from collections on the related mortgage loan or pool of loans. There are typically three types of servicing advances: P&I advances, T&I Advances and Corporate Advances.
(i) P&I advances cover scheduled payments of principal and interest that have not been timely paid by borrowers. P&I Advances serve to facilitate the cash flows paid to holders of securities issued by the residential MBS trust. The servicer is not the insurer or guarantor of the MBS and thus has the right to cease the advancing of P&I, when the servicer deems the next advance nonrecoverable.
(ii) T&I advances pay specified expenses associated with the preservation of a mortgaged property or the liquidation of defaulted mortgage loans, including but not limited to property taxes, insurance premiums or other property-related expenses that have not been timely paid by borrowers in order for the lien holder to maintain its interest in the property.
(iii) Corporate advances pay costs, fees and expenses incurred in foreclosing upon, preserving defaulted loans and selling REO, including attorneys’ and other professional fees and expenses incurred in connection with foreclosure and liquidation or other legal proceedings arising in the course of servicing the defaulted mortgage loans.
Servicing advances are reimbursed to the servicer if and when the borrower makes a payment on the underlying mortgage loan at the time the loan is modified or upon liquidation of the underlying mortgage loan but are primarily the responsibility of the investor/owner of the loan. The types of servicing advances that a servicer must make are set forth in its servicing agreement with the owner of the mortgage loan or pool of mortgage loans. In some instances, a servicer is allowed to cease Servicing Advances, if those advances will not be recoverable from the property securing the loan.
Subservicing. Subservicing is the process of outsourcing the duties of the primary servicer to a third party servicer. The third party servicer performs the servicing responsibilities for a fee and makes servicing advances, which are subsequently reimbursed by the primary servicer. The Servicer is contractually liable to the owner of the loans for the activities of the subservicer.
Unpaid Principal Balance (UPB). The amount of principal outstanding on a mortgage loan or a pool of mortgage loans.
Warehouse Facility. A type of line of credit facility used to temporarily finance mortgage loan originations to be sold in the secondary market. Pursuant to a warehouse facility, a loan originator typically agrees to transfer to a counterparty certain mortgage loans against the transfer of funds by the counterparty, with a simultaneous agreement by the counterpart to transfer the loans back to the originator at a date certain, or on demand, against the transfer of funds from the originator.
PART I. Financial Information
Item 1. Financial Statements
MR. COOPER GROUP INC.
CONSOLIDATED BALANCE SHEETS
(millions of dollars, except share data)
| | | | Successor | | | | | |
| | June 30, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
| | (unaudited) | | | (unaudited) | | |
| Assets | | | | | | |
| Cash and cash equivalents | $ | 245 |
| | $ | 242 |
| $ | 579 |
| | $ | 329 |
|
| Restricted cash | 304 |
| | 319 |
| 266 |
| | 283 |
|
| Mortgage servicing rights, $3,505 and $3,665 at fair value, respectively | 3,511 |
| | 3,676 |
| |
| Advances and other receivables, net of reserves of $98 and $47, respectively | 1,000 |
| | 1,194 |
| |
| Reverse mortgage interests, net of reserves of $8 and $13, respectively | 7,110 |
| | 7,934 |
| |
| Mortgage servicing rights, $3,109 and $3,496 at fair value, respectively | | 3,115 |
| | 3,502 |
|
| Advances and other receivables, net of reserves of $193 and $175, respectively | | 685 |
| | 988 |
|
| Reverse mortgage interests, net of reserves of $3 and $3, respectively | | 5,955 |
| | 6,279 |
|
| Mortgage loans held for sale at fair value | 3,422 |
| | 1,631 |
| 3,922 |
| | 4,077 |
|
| Mortgage loans held for investment at fair value | 114 |
| | 119 |
| |
| Property and equipment, net of accumulated depreciation of $35 and $16, respectively | 115 |
| | 96 |
| |
| Deferred tax asset, net | 1,055 |
| | 967 |
| |
| Property and equipment, net of accumulated depreciation of $65 and $55, respectively | | 111 |
| | 112 |
|
| Deferred tax assets, net | | 1,411 |
| | 1,345 |
|
| Other assets | 1,529 |
| | 795 |
| 1,569 |
| | 1,390 |
|
| Total assets | $ | 18,405 |
| | $ | 16,973 |
| $ | 17,613 |
| | $ | 18,305 |
|
| | | | | | | |
| Liabilities and Stockholders’ Equity | | | | | | |
| Unsecured senior notes, net | $ | 2,462 |
| | $ | 2,459 |
| $ | 2,259 |
| | $ | 2,366 |
|
| Advance facilities, net | 567 |
| | 595 |
| 489 |
| | 422 |
|
| Warehouse facilities, net | 4,045 |
| | 2,349 |
| 4,551 |
| | 4,575 |
|
| Payables and other liabilities | 2,116 |
| | 1,543 |
| 1,965 |
| | 2,016 |
|
| MSR related liabilities - nonrecourse at fair value | 1,472 |
| | 1,216 |
| 1,285 |
| | 1,348 |
|
| Mortgage servicing liabilities | 80 |
| | 71 |
| 53 |
| | 61 |
|
| Other nonrecourse debt, net | 5,985 |
| | 6,795 |
| 4,945 |
| | 5,286 |
|
| Total liabilities | 16,727 |
| | 15,028 |
| 15,547 |
| | 16,074 |
|
| Commitments and contingencies (Note 18) |
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| Preferred stock at $0.00001 - 10 million shares authorized, 1 million shares issued and outstanding, respectively; aggregate liquidation preference of ten dollars, respectively | — |
| | — |
| — |
| | — |
|
Common stock at $0.01 par value - 300 million shares authorized, 91.1 million and 90.8 million shares issued, respectively | 1 |
| | 1 |
| |
| Common stock at $0.01 par value - 300 million shares authorized, 92.0 million and 91.1 million shares issued, respectively | | 1 |
| | 1 |
|
| Additional paid-in-capital | 1,100 |
| | 1,093 |
| 1,108 |
| | 1,109 |
|
| Retained earnings | 575 |
| | 848 |
| 961 |
| | 1,122 |
|
| Total Mr. Cooper stockholders’ equity | 1,676 |
| | 1,942 |
| 2,070 |
| | 2,232 |
|
| Non-controlling interests | 2 |
| | 3 |
| (4 | ) | | (1 | ) |
| Total stockholders’ equity | 1,678 |
| | 1,945 |
| 2,066 |
| | 2,231 |
|
| Total liabilities and stockholders’ equity | $ | 18,405 |
| | $ | 16,973 |
| $ | 17,613 |
| | $ | 18,305 |
|
See accompanying notes to the consolidated financial statements (unaudited).
MR. COOPER GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(millions of dollars, except for earnings per share data)
| | | | Successor | | | Predecessor | | | | | |
| | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Revenues: | | | | | | | | | | | |
| Service related, net | $ | 137 |
| | $ | 221 |
| | | $ | 317 |
| | $ | 781 |
| $ | (53 | ) | | $ | 84 |
|
| Net gain on mortgage loans held for sale | 262 |
| | 428 |
| | | 127 |
| | 251 |
| 331 |
| | 166 |
|
| Total revenues | 399 |
| | 649 |
| | | 444 |
| | 1,032 |
| 278 |
| | 250 |
|
| Expenses: | | | | | | | | | | | |
| Salaries, wages and benefits | 238 |
| | 453 |
| | | 177 |
| | 357 |
| 246 |
| | 215 |
|
| General and administrative | 254 |
| | 482 |
| | | 162 |
| | 346 |
| 198 |
| | 228 |
|
| Total expenses | 492 |
| | 935 |
| | | 339 |
| | 703 |
| 444 |
| | 443 |
|
| Other income (expenses): | | | | | | | | | |
| Other income (expenses), net: | | | | |
| Interest income | 162 |
| | 296 |
| | | 140 |
| | 285 |
| 118 |
| | 134 |
|
| Interest expense | (187 | ) | | (376 | ) | | | (164 | ) | | (335 | ) | (192 | ) | | (189 | ) |
| Other income (expenses) | 1 |
| | 16 |
| | | (2 | ) | | 6 |
| |
| Other income, net | | 1 |
| | 15 |
|
| Total other income (expenses), net | (24 | ) | | (64 | ) | | | (26 | ) | | (44 | ) | (73 | ) | | (40 | ) |
| (Loss) income before income tax (benefit) expense | (117 | ) | | (350 | ) | | | 79 |
| | 285 |
| |
| Less: Income tax (benefit) expense | (29 | ) | | (76 | ) | | | 21 |
| | 67 |
| |
| Net (loss) income | (88 | ) | | (274 | ) | | | 58 |
| | 218 |
| |
| Less: Net (loss) income attributable to non-controlling interests | (1 | ) | | (1 | ) | | | — |
| | — |
| |
| Net (loss) income attributable to Successor/Predecessor | (87 | ) | | (273 | ) | | | 58 |
| | 218 |
| |
| Loss before income tax benefit | | (239 | ) | | (233 | ) |
| Less: Income tax benefit | | (68 | ) | | (47 | ) |
| Net loss | | (171 | ) | | (186 | ) |
| Less: Net loss attributable to non-controlling interests | | (3 | ) | | — |
|
| Net loss attributable to Mr. Cooper | | (168 | ) | | (186 | ) |
| Less: Undistributed earnings attributable to participating stockholders | — |
| | — |
| | | — |
| | — |
| — |
| | — |
|
| Net (loss) income attributable to common stockholders | $ | (87 | ) | | $ | (273 | ) | | | $ | 58 |
| | $ | 218 |
| |
| Net loss attributable to common stockholders | | $ | (168 | ) | | $ | (186 | ) |
| | | | | | | | | | | | |
| Net (loss) income per common share attributable to Successor/Predecessor: | | | | | | | | | |
| Net loss per common share attributable to Mr. Cooper: | | | | |
| Basic | $ | (0.96 | ) | | $ | (3.00 | ) | | | $ | 0.59 |
| | $ | 2.22 |
| $ | (1.84 | ) | | $ | (2.05 | ) |
| Diluted | $ | (0.96 | ) | | $ | (3.00 | ) | | | $ | 0.59 |
| | $ | 2.20 |
| $ | (1.84 | ) | | $ | (2.05 | ) |
See accompanying notes to the consolidated financial statements (unaudited).
MR. COOPER GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(millions of dollars, except share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, |
| | | Preferred Stock | | Common Stock | | | | | | | | | | | | |
| | | Shares
(in thousands) | | Amount | | Shares (in thousands) | | Amount | | Additional Paid-in Capital | | Retained Earnings | | Treasury Share Amount | | Total Nationstar Stockholders’ Equity and Mr. Cooper Stockholders’ Equity, respectively | | Non-controlling Interests | | Total Equity |
| Predecessor | | | | | | | | | | | | | | | | | | | | |
| Balance at January 1, 2018 | | — |
| | $ | — |
| | 97,728 |
| | $ | 1 |
| | $ | 1,131 |
| | $ | 731 |
| | $ | (148 | ) | | $ | 1,715 |
| | $ | 7 |
| | $ | 1,722 |
|
| Shares issued / (surrendered) under incentive compensation plan | | — |
| | — |
| | 435 |
| | — |
| | (4 | ) | | — |
| | (2 | ) | | (6 | ) | | — |
| | (6 | ) |
| Share-based compensation | | — |
| | — |
| | — |
| | — |
| | 8 |
| | — |
| | — |
| | 8 |
| | — |
| | 8 |
|
| Dividends to non-controlling interests | | — |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| | — |
| | 5 |
| | (6 | ) | | (1 | ) |
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 218 |
| | — |
| | 218 |
| | — |
| | 218 |
|
| Balance at June 30, 2018 | | — |
| | $ | — |
| | 98,163 |
| | $ | 1 |
| | $ | 1,140 |
| | $ | 949 |
| | $ | (150 | ) | | $ | 1,940 |
| | $ | 1 |
| | $ | 1,941 |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Successor | | | | | | | | | | | | | | | | | | | | |
| Balance at January 1, 2019 | | 1,000 |
| | $ | — |
| | 90,821 |
| | $ | 1 |
| | $ | 1,093 |
| | $ | 848 |
| | $ | — |
| | $ | 1,942 |
| | $ | 3 |
| | $ | 1,945 |
|
| Shares issued / (surrendered) under incentive compensation plan | | — |
| | — |
| | 240 |
| | — |
| | (2 | ) | | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
| Share-based compensation | | — |
| | — |
| | — |
| | — |
| | 9 |
| | — |
| | — |
| | 9 |
| | — |
| | 9 |
|
| Net loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (273 | ) | | — |
| | (273 | ) | | (1 | ) | | (274 | ) |
| Balance at June 30, 2019 | | 1,000 |
| | $ | — |
| | 91,061 |
| | $ | 1 |
| | $ | 1,100 |
| | $ | 575 |
| | $ | — |
| | $ | 1,676 |
| | $ | 2 |
| | $ | 1,678 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Preferred Stock | | Common Stock | | | | | | | | | | |
| | | Shares
(in thousands) | | Amount | | Shares (in thousands) | | Amount | | Additional Paid-in Capital | | Retained Earnings | | Total Mr. Cooper Stockholders’ Equity | | Non-controlling Interests | | Total Equity |
| Balance at January 1, 2019 | | 1,000 |
| | $ | — |
| | 90,821 |
| | $ | 1 |
| | $ | 1,093 |
| | $ | 848 |
| | $ | 1,942 |
| | $ | 3 |
| | $ | 1,945 |
|
| Shares issued / (surrendered) under incentive compensation plan | | — |
| | — |
| | 221 |
| | — |
| | (2 | ) | | — |
| | (2 | ) | | — |
| | (2 | ) |
| Share-based compensation | | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 4 |
| | — |
| | 4 |
|
| Net loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (186 | ) | | (186 | ) | | — |
| | (186 | ) |
| Balance at March 31, 2019 | | 1,000 |
| | $ | — |
| | 91,042 |
| | $ | 1 |
| | $ | 1,095 |
| | $ | 662 |
| | $ | 1,758 |
| | $ | 3 |
| | $ | 1,761 |
|
| | | | | | | | | | | | | | | | | | | |
| Balance at January 1, 2020 | | 1,000 |
| | $ | — |
| | 91,118 |
| | $ | 1 |
| | $ | 1,109 |
| | $ | 1,122 |
| | $ | 2,232 |
| | $ | (1 | ) | | $ | 2,231 |
|
| Shares issued / (surrendered) under incentive compensation plan | | — |
| | — |
| | 852 |
| | — |
| | (5 | ) | | — |
| | (5 | ) | | — |
| | (5 | ) |
| Share-based compensation | | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 4 |
| | — |
| | 4 |
|
| Cumulative effect adjustments pursuant to the adoption of ASU 2016-13 | | — |
| | — |
| | — |
| | — |
| | — |
| | 7 |
| | 7 |
| | — |
| | 7 |
|
| Net loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (168 | ) | | (168 | ) | | (3 | ) | | (171 | ) |
| Balance at March 31, 2020 | | 1,000 |
| | $ | — |
| | 91,970 |
| | $ | 1 |
| | $ | 1,108 |
| | $ | 961 |
| | $ | 2,070 |
| | $ | (4 | ) | | $ | 2,066 |
|
See accompanying notes to the consolidated financial statements (unaudited).
MR. COOPER GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(millions of dollars, except share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, |
| | | Preferred Stock | | Common Stock | | | | | | | | | | | | |
| | | Shares
(in thousands) | | Amount | | Shares (in thousands) | | Amount | | Additional Paid-in Capital | | Retained Earnings | | Treasury Share Amount | | Total Nationstar Stockholders’ Equity and Mr. Cooper Stockholders’ Equity, respectively | | Non-controlling Interests | | Total Equity |
| Predecessor | | | | | | | | | | | | | | | | | | | | |
| Balance at March 31, 2018 | | — |
| | $ | — |
| | 98,193 |
| | $ | 1 |
| | $ | 1,131 |
| | $ | 891 |
| | $ | (148 | ) | | $ | 1,875 |
| | $ | 7 |
| | $ | 1,882 |
|
| Shares surrendered under incentive compensation plan | | — |
| | — |
| | (30 | ) | | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) | | — |
| | (2 | ) |
| Share-based compensation | | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | — |
| | 4 |
| | — |
| | 4 |
|
| Dividends to non-controlling interests | | — |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| | — |
| | 5 |
| | (6 | ) | | (1 | ) |
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 58 |
| | — |
| | 58 |
| | — |
| | 58 |
|
| Balance at June 30, 2018 | | — |
| | $ | — |
| | 98,163 |
| | $ | 1 |
| | $ | 1,140 |
| | $ | 949 |
| | $ | (150 | ) | | $ | 1,940 |
| | $ | 1 |
| | $ | 1,941 |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Successor | | | | | | | | | | | | | | | | | | | | |
| Balance at March 31, 2019 | | 1,000 |
| | $ | — |
| | 91,042 |
| | $ | 1 |
| | $ | 1,095 |
| | $ | 662 |
| | $ | — |
| | $ | 1,758 |
| | $ | 3 |
| | $ | 1,761 |
|
| Shares issued / (surrendered) under incentive compensation plan | | — |
| | — |
| | 19 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Share-based compensation | | — |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| | — |
| | 5 |
| | — |
| | 5 |
|
| Net loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (87 | ) | | — |
| | (87 | ) | | (1 | ) | | (88 | ) |
| Balance at June 30, 2019 | | 1,000 |
| | $ | — |
| | 91,061 |
| | $ | 1 |
| | $ | 1,100 |
| | $ | 575 |
| | $ | — |
| | $ | 1,676 |
| | $ | 2 |
| | $ | 1,678 |
|
See accompanying notes to the consolidated financial statements (unaudited).
MR. COOPER GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions of dollars)
| | | | Successor | | | Predecessor | | | | | |
| | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Operating Activities | | | | | | | |
| Net (loss) income attributable to Successor/Predecessor | $ | (273 | ) | | | $ | 218 |
| |
| Adjustments to reconcile net (loss) income to net cash attributable to operating activities: | | | | | |
| Deferred tax (benefit) expense | (76 | ) | | | 40 |
| |
| Net loss attributable to non-controlling interests | (1 | ) | | | — |
| |
| Net loss | | $ | (171 | ) | | $ | (186 | ) |
| Adjustments to reconcile net loss to net cash attributable to operating activities: | | | | |
| Deferred tax benefit | | (68 | ) | | (47 | ) |
| Net gain on mortgage loans held for sale | (428 | ) | | | (251 | ) | (331 | ) | | (166 | ) |
| Interest income on reverse mortgage loan | (167 | ) | | | (237 | ) | |
| Gain on sale of assets | — |
| | | (9 | ) | |
| Provision for servicing reserves | 30 |
| | | 54 |
| |
| Interest income on reverse mortgage loans | | (62 | ) | | (82 | ) |
| Provision for reserves | | 8 |
| | 11 |
|
| Fair value changes and amortization/accretion of mortgage servicing rights/liabilities | 695 |
| | | (155 | ) | 526 |
| | 379 |
|
| Fair value changes in excess spread financing | (74 | ) | | | 74 |
| (35 | ) | | (69 | ) |
| Fair value changes in mortgage servicing rights financing liability | 11 |
| | | 6 |
| 6 |
| | 2 |
|
| Fair value changes in mortgage loan held for investment | (3 | ) | | | — |
| |
| Fair value changes in mortgage loans held for investment | | — |
| | (1 | ) |
| Amortization of premiums, net of discount accretion | (25 | ) | | | 6 |
| 23 |
| | 2 |
|
| Depreciation and amortization for property and equipment and intangible assets | 45 |
| | | 29 |
| 19 |
| | 21 |
|
| Share-based compensation | 9 |
| | | 8 |
| 4 |
| | 4 |
|
| Other loss | | 7 |
| | — |
|
| Repurchases of forward loan assets out of Ginnie Mae securitizations | (715 | ) | | | (475 | ) | (919 | ) | | (364 | ) |
| Mortgage loans originated and purchased for sale, net of fees | (15,727 | ) | | | (10,639 | ) | (12,375 | ) | | (5,717 | ) |
| Sales proceeds and loan payment proceeds for mortgage loans held for sale and held for investment | 15,429 |
| | | 11,500 |
| 13,724 |
| | 6,197 |
|
| Changes in assets and liabilities: | | | | | | | |
| Advances and other receivables | 249 |
| | | 355 |
| 300 |
| | 120 |
|
| Reverse mortgage interests | 1,056 |
| | | 1,326 |
| 400 |
| | 614 |
|
| Other assets | (118 | ) | | | 10 |
| (91 | ) | | (216 | ) |
| Payables and other liabilities | 31 |
| | | 9 |
| (255 | ) | | (217 | ) |
| Net cash attributable to operating activities | (52 | ) | | | 1,869 |
| 710 |
| | 285 |
|
| | | | | | | | |
| Investing Activities | | | | | | | |
| Acquisitions, net of cash acquired | (85 | ) | | | — |
| — |
| | (85 | ) |
| Property and equipment additions, net of disposals | (27 | ) | | | (31 | ) | (12 | ) | | (10 | ) |
| Purchase of forward mortgage servicing rights, net of liabilities incurred | (409 | ) | | | (123 | ) | (27 | ) | | (130 | ) |
| Net payment related to acquisition of HECM related receivables | — |
| | | (1 | ) | |
| Proceeds on sale of forward and reverse mortgage servicing rights | 279 |
| | | — |
| 43 |
| | 243 |
|
| Proceeds on sale of assets | — |
| | | 13 |
| |
| Net cash attributable to investing activities | (242 | ) | | | (142 | ) | 4 |
| | 18 |
|
Continued on following page. See accompanying notes to the consolidated financial statements (unaudited).
MR. COOPER GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(millions of dollars)
| | | | Successor | | | Predecessor | | | | | |
| | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Financing Activities | | | | | | | |
| Increase (decrease) in warehouse facilities | 1,173 |
| | | (199 | ) | |
| Decrease in advance facilities | (40 | ) | | | (339 | ) | |
| (Decrease) increase in warehouse facilities | | (25 | ) | | 307 |
|
| Increase (decrease) in advance facilities | | 68 |
| | (30 | ) |
| Repayment of notes payable | (294 | ) | | | — |
| — |
| | (294 | ) |
| Proceeds from issuance of HECM securitizations | 398 |
| | | 443 |
| |
| Proceeds from sale of HECM securitizations | 20 |
| | | — |
| — |
| | 20 |
|
| Repayment of HECM securitizations | (434 | ) | | | (423 | ) | (99 | ) | | (127 | ) |
| Proceeds from issuance of participating interest financing in reverse mortgage interests | 156 |
| | | 184 |
| 55 |
| | 86 |
|
| Repayment of participating interest financing in reverse mortgage interests | (1,004 | ) | | | (1,368 | ) | (330 | ) | | (494 | ) |
| Proceeds from the issuance of excess spread financing | 437 |
| | | 70 |
| 24 |
| | 245 |
|
| Repayment of excess spread financing | (12 | ) | | | (2 | ) | |
| Settlement of excess spread financing | (107 | ) | | | (91 | ) | |
| Settlements and repayments of excess spread financing | | (58 | ) | | (50 | ) |
| Issuance of unsecured senior debt | | 600 |
| | — |
|
| Repayment of nonrecourse debt – legacy assets | (6 | ) | | | (6 | ) | — |
| | (3 | ) |
| Repurchase of unsecured senior notes | — |
| | | (62 | ) | |
| Redemption and repayment of unsecured senior notes | | (698 | ) | | — |
|
| Repayment of finance lease liability | (2 | ) | | | — |
| (1 | ) | | (1 | ) |
| Surrender of shares relating to stock vesting | (2 | ) | | | (6 | ) | (5 | ) | | (2 | ) |
| Debt financing costs | (1 | ) | | | (7 | ) | (12 | ) | | (1 | ) |
| Dividends to non-controlling interests | — |
| | | (1 | ) | |
| Net cash attributable to financing activities | 282 |
| | | (1,807 | ) | (481 | ) | | (344 | ) |
| Net decrease in cash, cash equivalents, and restricted cash | (12 | ) | | | (80 | ) | |
| Net increase (decrease) in cash, cash equivalents, and restricted cash | | 233 |
| | (41 | ) |
| Cash, cash equivalents, and restricted cash - beginning of period | 561 |
| | | 575 |
| 612 |
| | 561 |
|
Cash, cash equivalents, and restricted cash - end of period(1) | $ | 549 |
| | | $ | 495 |
| $ | 845 |
| | $ | 520 |
|
| | | | | | | | |
| Supplemental Disclosures of Cash Activities | | | | | | | |
| Cash paid for interest expense | $ | 74 |
| | | $ | 373 |
| $ | 89 |
| | $ | 74 |
|
| Net cash (refunded) paid for income taxes | $ | (1 | ) | | | $ | 36 |
| |
| |
(1) | The following table provides a reconciliation of cash, cash equivalents and restricted cash to amount reported within the consolidated balance sheets. |
| | | | Successor | | | Predecessor | | | | | |
| | June 30, 2019 | | | June 30, 2018 | March 31, 2020 | | March 31, 2019 |
| Cash and cash equivalents | $ | 245 |
| | | $ | 185 |
| $ | 579 |
| | $ | 181 |
|
| Restricted cash | 304 |
| | | 310 |
| 266 |
| | 339 |
|
| Total cash, cash equivalents, and restricted cash | $ | 549 |
| | | $ | 495 |
| $ | 845 |
| | $ | 520 |
|
See accompanying notes to the consolidated financial statements (unaudited).
MR COOPER GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(millions of dollars, unless otherwise stated)
1. Nature of Business and Basis of Presentation
Nature of Business
Mr. Cooper Group Inc., collectively with its consolidated subsidiaries, (“Mr. Cooper”, the “Company”, “we”, “us” or “our”) provides servicing, origination and transaction-based services related to single family residences throughout the United States with operations under its primary brands: Mr. Cooper® and Xome®. Mr. Cooper is one of the largest home loan originators and servicers in the country focused on delivering a variety of servicing and lending products, services and technologies. Xome provides real estate data as well as a range of services including real estate brokerage, title, closing, valuation and field services to lenders, investors and consumer.consumers. The Company’s corporate website is located at www.mrcoopergroup.com. The Company has provided a glossary of terms, which defines certain industry-specific and other terms that are used herein, in the MD&A section of this Form 10-Q.
Mr. Cooper, which was previously known as WMIH Corp. (“WMIH”), is a corporation duly organized and existing under the laws of the State of Delaware since May 11, 2015. On July 31, 2018, Wand Merger Corporation (“Merger Sub”), a wholly-owned subsidiary of WMIH merged with and into Nationstar Mortgage Holdings Inc. (“Nationstar”), with Nationstar continuing as a wholly-owned subsidiary of WMIH (the “Merger”). Prior to the Merger, WMIH had limited operations other than its reinsurance business that operated in runoff mode. As a result of the Merger, shares of Nationstar common stock were delisted from the New York Stock Exchange. Following the Merger closing, the combined company traded on NASDAQ under the ticker symbol “WMIH” until October 10, 2018, when WMIH changed its name to “Mr. Cooper Group Inc.” and its ticker symbol to “COOP”.
Basis of Presentation
For the purpose of financial statement presentation, Mr. Cooper was determined to be the accounting acquirer in the Merger, and Nationstar’s assets and liabilities were recorded at estimated fair value as of the acquisition date. Mr. Cooper’s interim consolidated financial statements for periods following the Merger closing are labeled “Successor” and reflect the acquired assets and liabilities from Nationstar.
Under Securities and Exchange Commission (“SEC”) rules, when a registrant succeeds to substantially all of the business of another entity and the registrant’s own operations before the succession appear insignificant relative to the operations assumed or acquired, the registrant is required to present financial information for the acquired entity (the “Predecessor”) for all comparable periods being presented before the acquisition. Due to the acquisition, the Predecessor and Successor financial statements have been prepared on different basis of accounting and are therefore not comparable.
Pursuant to the Merger, Nationstar is considered the predecessor company. Therefore, the Company is providing additional information in the accompanying unaudited condensed consolidated financial statements regarding Nationstar’s business for periods prior to July 31, 2018. The predecessor company financial information in this report is labeled “Predecessor” in these consolidated interim financial statements.
The consolidated interim financial statements of the Company and Predecessor have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the SEC. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Reports on Form 10-K for the year ended December 31, 2018.
Upon the consummation of the Merger, the Company adopted the significant accounting policies that were implemented by Nationstar and applied to the Predecessor’s financial statements, as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.
The interim consolidated financial statements are unaudited; however, in the opinion of management, all adjustments, consisting of normal recurring items, considered necessary for a fair presentation of the results of the interim periods have been included. Dollar amounts are reported in millions, except per share data and other key metrics, unless otherwise noted.
The Company evaluated subsequent events through the date these interim consolidated financial statements were issued.
Basis of Consolidation
The basis of consolidation described below was adopted by Nationstar and applied to the Predecessor financial statements for the periods impacted by the adoption. The Successor’s financial statements reflect the adoption of such standards.
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, other entities in which the Company has a controlling financial interest and those variable interest entities (“VIE”) where the Company’s wholly-owned subsidiaries are the primary beneficiaries. Assets and liabilities of VIEs and their respective results of operations are consolidated from the date that the Company became the primary beneficiary through the date the Company ceases to be the primary beneficiary. The Company applies the equity method of accounting to investments where it is able to exercise significant influence, but not control, over the policies and procedures of the entity and owns less than 50% of the voting interests. Investments in certain companies over which the Company does not exert significant influence are accounted for as cost method investments. Intercompany balances and transactions on consolidated entities have been eliminated. Business combinations are included in the consolidated financial statements from their respective dates of acquisition.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates due to factors such as adverse changes in the economy, changes in interest rates, secondary market pricing for loans held for sale and derivatives, strength of underwriting and servicing practices, changes in prepayment assumptions, declines in home prices or discrete events adversely affecting specific borrowers, and such differences could be material.
Recent Accounting Guidance Adopted
Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), No.2018-10, Codification Improvements to Topic 842, Leases (“ASU 2018-10”), and No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”), primarily impact lessee accounting by requiring the recognition of a right-of-use asset and a corresponding lease liability on the balance sheet for long-term lease agreements. ASU 2016-02 was effective for the Company on January 1, 2019. ASU 2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption with the option to elect certain practical expedients. The Company has elected to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) and has not restated comparative periods. The Company elected the package of practical expedients, which, among other items, permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected the short-term lease recognition exemption for all leases that qualify. Under this practical expedient, for those leases that qualify, the Company does not recognize right-of-use (“ROU”) assets or lease liabilities, which includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company also elected the practical expedient to not separate lease and non-lease components for all of our leases. The Company did not elect the use-of-hindsight practical expedient. As a result of implementing ASU 2016-02, the Company recognized an operating lease ROU asset of $114 and an operating lease liability of $124 on January 1, 2019, with no impact on its consolidated statement of operations. The ROU asset and operating lease liability are recorded in other assets, and payables and other liabilities, respectively, in the consolidated balance sheets. See Note 7, Leases for additional information.
Accounting Standards Update No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40 - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract" (“ASU 2018-15”) aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 will be effective for the Company on January 1, 2020. Early adoption is permitted, including adoption in any interim period. In the first quarter of 2019, the Company early adopted ASU 2018-15. The standard did not have a material impact to the Company’s consolidated financial statements.
Recent Accounting Guidance Not Yet Adopted
Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326), (“ASU 2016-13”), requires expected credit losses for financial instruments held at the reporting date to be measured based on historical experience, current conditions and reasonable and supportable forecasts.forecasts, which is referred to as the current expected credit loss (“CECL”) methodology. The update eliminates the probable initial recognition thresholdof credit losses on an incurred basis in current GAAP and instead reflects an entity’s current estimate of all expected credit losses over the life of the asset. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss. ASU 2016-13The new standard will reflect management’s best estimate of all expected credit losses for the Company’s financial assets that are recognized at amortized cost. The guidance is effective for interim periods beginning after December 15, 2019. Thethe Company is currently evaluatingas of January 1, 2020, with a cumulative-effect adjustment to retained earnings as of that date.
Based upon management’s scoping analysis, the potential impactCompany determined that reverse mortgage interests, net of reserves, advances and other receivables, net of reserves, and certain financial instruments included in other assets are within the scope of ASU 2016-13. Certain financial instruments within these respective line items have been determined to have limited expected credit-related losses due to the contractual servicing agreements with agencies and loan product guarantees. For advances and other receivables, net, the Company determined that the majority of estimated losses are due to servicing operational errors and credit-related losses are not significant because of the contractual relationships with the agencies. For reverse mortgage interests the Company determined that the guarantee from Federal Housing Administration (“FHA”) on Home Equity Conversion Mortgage (“HECM“) loan products limits credit-related losses to an immaterial amount with substantially all losses related to servicing operational errors. For other assets, primarily trade receivables, the Company determined that these are short-term in nature (less than one year), and the estimated credit-related losses over the life of these receivables are similar to those resulting from the Company’s existing loss reserve process. For each of the aforementioned financial instruments carried at amortized cost, the Company enhanced its processes to consider and include the requirements of ASU 2016-13, onas applicable, into the determination of credit-related losses.
On January 1, 2020, the Company adopted ASU 2016-13 using the modified retrospective method for the above-mentioned financial assets. Results for reporting periods after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded transition adjustments aggregating to a net increase of $9, or $7 after tax, to retained earnings and a reduction of $7 to the advances and other receivables reserve and a $2 reduction in the other assets reserves, as of January 1, 2020 for the cumulative effect of adopting ASU 2016-13.
In connection with adoption of ASU 2016-13, the Company updated its consolidatedaccounting policies as follows:
For certain financial statements. As partinstruments included in advances and other receivables, net and certain trade receivables and accrued revenues included in other assets that within the scope of ASU 2016-13, the reserve methodology was revised to consider CECL losses. The revised CECL methodology considers expected lifetime loss rates calculated from historical data using a weighted average life to determine the current expected credit loss required. Due to the nature of the evaluation process,financial instrument, reverse mortgage interests, net of reserves, had limited impact from the Company has performed a scoping analysis, developed a detailed project plan,adoption of CECL to the reserve methodology. See Note 4, Advances and is currently in process of completing documentation. The Company has also formed an internal committee from various internal departments to assist in the documentationOther Receivables, Net, Note 5, Reverse Mortgage Interests, Net, and review of such documentation regarding the implementation of the new standard.Note 8, Other Assets, for additional information.
Factors that influenced management’s current estimate of expected credit losses for certain advances and other receivables and certain trade receivables and accrued revenues included the following: historical collection and loss rates, passage of time, weighted average life of receivables, various qualitative factors including current economic conditions.
Factors that influenced management’s current estimate of expected credit related losses for certain reverse mortgage interests included the following: historical collection and loss rates, foreclosure timelines, and values of underlying collateral.
Accounting Standards Update No. 2018-13, Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement, (“ASU 2018-13”) removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 fair value measurement methodologies, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 measurements. For certain unobservable inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The Company adopted ASU 2018-13 will be effective for the Company on January 1, 2020. The Company isguidance does not have a material impact to the disclosures currently evaluatingprovided by the potential impact of ASU 2018-13 on its consolidated financial statements.Company.
2. Acquisitions
Acquisition of Pacific Union Financial, LLC
On February 1, 2019, the Company completed the acquisition of all the limited liability units of Pacific Union Financial, LLC (“Pacific Union”), a California limited liability company. Pacific Union was a privately-heldprivately held company that was engaged in the origination, as well as servicing of residential mortgage loans, and operated throughout the United States. The acquisition allows the Company to expand its servicing portfolio and increase its mortgage lending volume and capabilities.
The acquisition has been accounted for in accordance with Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, (“ASC 805”), Business Combinations, using the acquisition method of accounting. Under the acquisition method of accounting, the Company allocated the purchase price of the acquisition to identifiable assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The determination of fair value estimates requires management to make certain estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and may require adjustments. The final purchase price was estimated to be $116, as of the closing date and such amount was paid by the Company as required by the Unit Purchase Agreement (UPA). In accordance with the terms of the UPA, the seller has formally disputed the estimated purchase price. As a result of the dispute, the final purchase price is subject to adjustment until the end of the measurement period (up to one year from the acquisition date) which would result in an increase to cash consideration paid and goodwill. Solely for this purpose, the Company estimates that it is reasonably possible that the adjustment to the final purchase price would range between $0 and $16. During the second quarter of 2019, the Company finalized its purchase price allocation subject to resolution of the above dispute.cash. Based on the allocation of fair value, goodwill of $40 has beenwas recorded, which represents the excess of the purchase price over the estimated fair value of tangible and intangible assets acquired, net of the liabilities assumed. The goodwill is primarily attributable to the assembled workforce and synergies with the Company’s current operations. $28 and $12 of the goodwill is assigned to the OriginationOriginations and Servicing segments, respectively, based on expected cash flows, and is expected to be deductible for tax purposes.
| | Estimated Fair Value of Net Assets Acquired (1): | | |
| Final Estimated Fair Value of Net Assets Acquired: | | |
| Cash and cash equivalents | $ | 37 |
| $ | 37 |
|
| Restricted cash | 2 |
| 2 |
|
| Mortgage servicing rights | 271 |
| 271 |
|
| Advances and other receivables | 84 |
| 84 |
|
| Mortgage loans held for sale | 536 |
| 536 |
|
| Mortgage loans held for investment | 1 |
| 1 |
|
| Property and equipment | 8 |
| 8 |
|
| Other assets | 483 |
| 483 |
|
| Fair value of assets acquired | 1,422 |
| 1,422 |
|
Notes payable(2)(1) | 294 |
| 294 |
|
| Advance facilities | 13 |
| 13 |
|
| Warehouse facilities | 393 |
| 393 |
|
| Payables and other liabilities | 530 |
| 530 |
|
| Other nonrecourse debt | 129 |
| 129 |
|
| Fair value of liabilities assumed | 1,359 |
| 1,359 |
|
| Total fair value of net tangible assets acquired | 63 |
| 63 |
|
| Intangible assets: | | |
Customer relationships(3)(2) | 13 |
| 13 |
|
| Goodwill | 40 |
| 40 |
|
| Preliminary purchase price | $ | 116 |
| |
| Final purchase price | | $ | 116 |
|
| |
(1) | Estimated Fair Value of Net Assets Acquired is subject to change due to dispute of purchase price. |
| |
(2)
| Notes payable was subsequently paid off in February 2019 after the consummation of the acquisition. |
| |
(3)(2)
| The estimated fair values for customer relationships were measured using the excess earnings method and were determined to have a remaining useful life of 10 years. |
During the second quarter of 2019, the Company obtained additional information that existed as of the acquisition date and updated its estimated accrued liabilities, which resulted in $11 increase to payables and other liabilities. In addition, the third-party valuation specialists finalized their valuation of intangible assets acquired by the Company, which resulted in $2 increase to the fair value of the intangible assets acquired. The Company also wrote off $2 property and equipment acquired as it finalized its valuation of property and equipment. Total adjustments to goodwill in the second quarter of 2019 were $11. Goodwill totaled $40 as of June 30, 2019 after taking into account these measurement period adjustments.
The Company incurred total acquisition costs of $2 during the three months ended June 30,March 31, 2019, of which $1 areis included in salaries, wages and benefits expense and $1 in general and administrative expense in the Company’s consolidated statements of operations. The Company incurred total acquisition costs of $4 during the six months ended June 30, 2019, of which $2 are included in salaries, wages and benefits expense and $2 in general and administrative expense in the Company’s consolidated statements of operations. The acquisition costs were primarily related to legal, accounting and consulting services. There were no acquisition costs incurred by the Company in the three months ended March 31, 2020.
For the three and six months ended June 30,March 31, 2019, the operations contributed by this acquisition generated consolidated total revenues of $79 and $118$39 and income before income tax of $36 and $50,$14, respectively, which are reported in the Company’s consolidated statements of operations.
The following unaudited pro forma financial information presents the combined results of operations for the three and six months ended June 30,March 31, 2019, as if the acquisition had occurred on January 1, 2019.
2019:
|
| | | | | | | |
| | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
| Pro forma total revenues | $ | 399 |
| | $ | 668 |
|
| | | | |
| Pro forma net loss | $ | (87 | ) | | $ | (271 | ) |
Acquisition of Nationstar Mortgage Holdings Inc.
Upon the Merger with Nationstar on July 31, 2018, each share of Nationstar’s common stock issued and outstanding immediately prior to the Effective Time was converted into the right to receive, at the election of the holder of such share, (i) $18.00 per share in cash, without interest, or (ii) 12.7793 shares (prior to the 1-for-12 reverse stock split) of validly issued, fully paid and nonassessable shares of WMIH common stock (the “Merger Consideration”). The Merger Consideration was subject to automatic proration and adjustment pursuant to the Merger Agreement to ensure that the total amount of cash paid (excluding cash paid in lieu of fractional shares) equaled approximately $1,226.
Pursuant to the Merger Agreement, immediately prior to the Effective Time, subject to certain exceptions, (i) each then-outstanding share of Nationstar restricted stock automatically vested in full and was converted into the right to receive the Merger Consideration, as elected by the holder thereof, and (ii) each then-outstanding Nationstar restricted stock unit, whether vested or unvested, was automatically vested in full, assumed by WMIH and converted into a WMIH restricted stock unit entitling the holder thereof to receive upon settlement the Merger Consideration, as elected by the holder.
Upon closing the Merger, all outstanding WMIH Series B Preferred Stock and all outstanding warrants to purchase shares of WMIH common stock were converted into common stock of WMIH.
Total purchase price was approximately $1,777, consisting of cash paid of $1,226 and transferred stock valued at $551. The purchase price was funded from available cash on hand and borrowings under senior unsecured notes (see discussion below). Prior to the acquisition, Nationstar was a publicly-held company that earned fees through the delivery of servicing, origination and transaction-based services related primarily to single-family residences throughout the United States. This acquisition marks the Company’s initial entry into the mortgage servicing industry that Nationstar operates in and is consistent with the Company’s business strategy.
On July 13, 2018, Merger Sub closed the offering of $950 aggregate principal amount of 8.125% Notes due 2023 (the “2023 Notes”) and $750 aggregate principal amount of 9.125% Notes due 2026 (the “2026 Notes” and, together with the 2023 Notes, the “New Notes”). The proceeds from the New Notes were used, together with the proceeds from the issuance of the Company’s common stock and the Company’s cash and restricted cash on hand, to consummate the Company’s acquisition of Nationstar and the refinancing of certain of Nationstar’s existing debt and to pay related fees and expenses. At the consummation of the acquisition, Merger Sub merged with and into Nationstar, with Nationstar continuing as a wholly-owned subsidiary of the Company. After the Merger, Nationstar assumed all of Merger Sub’s obligations under the New Notes.
The acquisition has been accounted for in accordance with ASC 805, Business Combinations, using the acquisition method of accounting. Under the acquisition method of accounting, the Company allocated the purchase price of the acquisition to identifiable assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The Company recorded final goodwill of $65, which represents the excess of the purchase price over the estimated fair value of tangible and intangible assets acquired, net of the liabilities assumed. The goodwill is primarily attributable to the assembled workforce and synergies from the future growth and strategic advantages in the mortgage industry. The entire goodwill is assigned to the Servicing segment and will not be deductible for tax purposes.
The table below presents the calculation of aggregate purchase price.
|
| | | |
| Purchase Price: | |
| Converted WMIH common shares (prior to reverse stock split) in millions | 394 |
|
| Price per share, based on price of $1.398 for WMIH stock on July 31, 2018 | $ | 1.398 |
|
| Purchase price from common stock issued | 551 |
|
| Purchase price from cash payment | 1,226 |
|
| Total purchase price | $ | 1,777 |
|
|
| | | |
| | Three Months Ended March 31, 2019 |
| Pro forma financial information | (unaudited) |
| Pro forma total revenues | $ | 269 |
|
| | |
| Pro forma net loss | $ | (184 | ) |
The allocation of the fair value of the acquired business was based on final valuations of the estimated net fair value of the assets acquired. The determination of fair value estimates required management to make certain estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and may require adjustments. The Company’s estimates were subject to change as the Company obtained additional information and finalized its review of estimates during the measurement period (up to one year from the acquisition date). The Company recorded any adjustments to the preliminary fair value estimates in the reporting period in which the adjustments were determined. The Company finalized its allocation of fair value of consideration transferred in the three months ended June 30, 2019.
The final allocation of the purchase price to the acquired assets and liabilities is as follows:
|
| | | |
| Final Estimated Fair Value of Net Assets Acquired: | |
| Cash and cash equivalents | $ | 166 |
|
| Restricted cash | 430 |
|
| Mortgage servicing rights | 3,422 |
|
| Advances and other receivables | 1,262 |
|
| Reverse mortgage interests | 9,189 |
|
| Mortgage loans held for sale | 1,514 |
|
| Mortgage loans held for investment | 125 |
|
| Property and equipment | 96 |
|
| Other assets | 610 |
|
| Fair value of assets acquired | 16,814 |
|
| Unsecured senior notes | 1,830 |
|
| Advance facilities | 551 |
|
| Warehouse facilities | 2,701 |
|
| Payables and other liabilities | 1,352 |
|
| MSR related liabilities—nonrecourse | 1,065 |
|
| Mortgage servicing liabilities | 123 |
|
| Other nonrecourse debt | 7,583 |
|
| Fair value of liabilities assumed | 15,205 |
|
| Total fair value of net tangible assets acquired | 1,609 |
|
Intangible assets(1) | 103 |
|
| Goodwill | 65 |
|
| Purchase price | $ | 1,777 |
|
| |
(1)
| The following intangible assets were acquired in the Nationstar acquisition. |
|
| | | | | |
| | Useful Life (Years) | | Fair Value |
Customer relationships(i) | 6 | | $ | 61 |
|
Tradename(ii) | 5 | | 8 |
|
Technology(ii) | 3-5 | | 11 |
|
Internally developed software(iii) | 2 | | 23 |
|
| Total | | | $ | 103 |
|
| |
(i)
| The estimated fair values for customer relationships were measured using the excess earnings method. |
| |
(ii)
| The estimated fair values for tradename and technology were measured using the relief-from-royalty method. This method assumes the tradename and technology have value to the extent the owner is relieved of the obligation to pay royalties for the benefits received from these assets. |
| |
(iii)
| The estimated fair values for internally developed software were measured using the replacement cost method. |
The preliminary allocation of fair value as of December 31, 2018 resulted in goodwill of $10. During the first quarter of 2019, the Company obtained additional information in finalizing its review regarding a market participant view of the cost to service assumption related to the valuation of reverse mortgage assets and liabilities. This additional information was used in finalizing the Company’s review of the fair value of the reverse mortgage assets and liabilities and resulted in a reduction of $24 in reverse mortgage interests, a reduction of $6 in reverse mortgage servicing rights and an increase of $37 in mortgage servicing liabilities. In addition, a reduction of $12 in payables and other liabilities was recorded for the tax impact related to the revised valuation, for a total adjustment to goodwill of $55. As a result of the revised fair value, the Company recorded $7 to service related, net revenue and $1 to interest income, for a total $8 increase to earnings in the consolidated statement of operations for the first quarter of 2019. During the second quarter of 2019, the Company finalized its allocation of purchase price which did not result in any significant additional measurement period adjustments. There was a total goodwill of $65 as of June 30, 2019 after taking into account these measurement period adjustments.
WMIH incurred total acquisition costs of $92 prior to the consummation of the Merger, of which $3 and $7 was incurred in the three and six months ended June 30, 2018, respectively. The acquisition costs were primarily related to legal, accounting and consulting services and were expensed as incurred through July 31, 2018. Included in the total acquisition costs was a transaction fee of $25 to KKR Capital Markets LLC (“KCM”), an affiliate of KKR Wand Investors Corporation, which is WMIH’s largest stockholder, for acting as a non-exclusive financial advisor to WMIH with respect to the Merger and an arrangement fee of $7 to KCM for acting as a placement agent with respect to a bridge financing facility in connection with the Merger that was not executed. In addition, WMIH incurred $38 of costs related to borrowings under the New Notes, which was capitalized in debt costs.
WMIH also paid KCM a deferred fee of $8, which initially reduced the carrying value of the Series B Preferred Stock. This fee was payable in connection with the conversion of Series B Preferred Stock to WMIH common stock upon consummation of the Merger.
The Predecessor incurred total acquisition costs of $27 in connection with the Merger. Included in the Predecessor’s consolidated statements of operations for the three and six months ended June 30, 2018 were $1 and $4, respectively, of acquisition costs incurred by Nationstar. Included in the Company’s consolidated statements of operations for the six months ended June 30, 2019 were $1 of acquisition costs related to the compensation arrangements incurred by the Company related to the Merger. There were no acquisition costs related to the Merger included in the Company’s statements of operations for the three months ended June 30, 2019.
Acquisition of Assurant Mortgage Solutions (“AMS”)
On August 1, 2018, Xome Holdings LLC, a wholly-owned subsidiary of the Company, acquired AMS for $38 in cash with additional consideration dependent on the achievement of certain future performance targets, which was initially estimated at $15 as of December 31, 2018. Total purchase price was estimated at $53. The acquisition expands Xome’s product footprint and grows its third-party client portfolio across its valuation, title and field services businesses. The Company finalized its purchase price allocation and recorded intangible assets of $24 and goodwill of $13 in 2018. The Company expects the entire goodwill balance to be deductible for tax purposes. Under ASC 805, Business Combinations, the contingent consideration was remeasured to fair value of $4 at March 31, 2019 and remained unchanged at June 30, 2019. The $11 change in the fair value was included in other income (expenses) within the consolidated statement of operations for the six months ended June 30, 2019.
3. Mortgage Servicing Rights and Related Liabilities
The following table sets forth the carrying value of the Company’s mortgage servicing rights (“MSRs”) and the related liabilities.liabilities:
| | | | Successor | | | | | |
| MSRs and Related Liabilities | June 30, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
| Forward MSRs - fair value | $ | 3,505 |
| | $ | 3,665 |
| $ | 3,109 |
| | $ | 3,496 |
|
| Reverse MSRs - amortized cost | 6 |
| | 11 |
| 6 |
| | 6 |
|
| Mortgage servicing rights | $ | 3,511 |
| | $ | 3,676 |
| $ | 3,115 |
| | $ | 3,502 |
|
| | | | | | | |
| Mortgage servicing liabilities - amortized cost | $ | 80 |
| | $ | 71 |
| $ | 53 |
| | $ | 61 |
|
| | | | | | | |
| Excess spread financing - fair value | $ | 1,429 |
| | $ | 1,184 |
| $ | 1,242 |
| | $ | 1,311 |
|
| Mortgage servicing rights financing - fair value | 43 |
| | 32 |
| 43 |
| | 37 |
|
| MSR related liabilities - nonrecourse at fair value | $ | 1,472 |
| | $ | 1,216 |
| $ | 1,285 |
| | $ | 1,348 |
|
Mortgage Servicing Rights
The Company owns and records at fair value the rights to service traditional residential mortgage (“forward”) loans for others, either as a result of purchase transactions or from the retained servicing associated with the sales and securitizations of loans originated. MSRs are comprised of servicing rights related toof both agency and non-agency loans.
The following table sets forth the activities of forward MSRs.MSRs:
| | | | Successor | | | Predecessor | |
| MSRs - Fair Value | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | |
| Forward MSRs - Fair Value | | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Fair value - beginning of period | $ | 3,665 |
| | | $ | 2,937 |
| $ | 3,496 |
| | $ | 3,665 |
|
| Additions: | | | | | | | |
| Servicing retained from mortgage loans sold | 169 |
| | | 139 |
| 123 |
| | 66 |
|
Purchases of servicing rights(1) | 689 |
| | | 132 |
| 24 |
| | 409 |
|
| Dispositions: | | | | | | | |
| Sales of servicing assets | (294 | ) | | | 4 |
| — |
| | (260 | ) |
| Changes in fair value: | | | | | | | |
| Changes in valuation inputs or assumptions used in the valuation model | (542 | ) | | | 283 |
| (401 | ) | | (332 | ) |
| Other changes in fair value | (182 | ) | | | (139 | ) | (133 | ) | | (67 | ) |
| Fair value - end of period | $ | 3,505 |
| | | $ | 3,356 |
| $ | 3,109 |
| | $ | 3,481 |
|
| |
(1) | Purchases of servicing rights during the sixthree months ended June 30,March 31, 2019 includes $271 of mortgage servicing rights that were acquired from Pacific Union. See Note 2, Acquisitions, for further discussion. In addition, on January 3, 2019, the Company entered into a subservicing contract for $24 billion in mortgages, which were subsequently purchased on May 1, 2019, resulting in additional $253 servicing rights in the second quarter of 2019. |
From time to time, the Company sells its ownership interest in certain MSRs and is retained as the subservicer for the sold assets. The Company has evaluated the sale accounting requirements related to these transactions, including the Company’s continued involvement as the subservicer, and concluded that these transactions qualify for sale accounting treatment. During the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, the Company sold $40 and the Predecessor sold $22,932 and $1,203$19,409 in unpaid principal balance (“UPB”) of forward MSRs, of which $20,560none and $1 in UPB$19,276 were retained by the Company and the Predecessor as subservicer, respectively.
MSRs measured at fair value are primarily segregated between credit sensitive and interest sensitive pools at acquisition of MSRs.(referred to herein as “acquisition pools”). Credit sensitive pools are primarily impacted by borrower performance under specified repayment terms, which most directly impacts involuntary prepayments and delinquency rates. Interest sensitive pools are primarily impacted by changes in forecasted interest rates, which in turn impact voluntary prepayment speeds. The Company assesses whether acquired portfolios are more credit sensitive or interest sensitive in nature on the date of acquisition. Numerous factors are considered in making this assessment, including loan-to-value ratios, FICO scores, percentage of portfolio previously modified, portfolio seasoning and similar criteria. The determination between credit sensitive and interest sensitive for a pool is made at the date of acquisition, and no subsequent changes are made.
Credit sensitive portfolios generally consist of higher delinquency, single-family non-conforming residential forward mortgage loans serviced for agency and non-agency investors. Due to the Company’s focus on recapture and modifications, significant amounts of the credit sensitive portfolio have been re-underwritten and, therefore, behave more like the interest sensitive portfolio. Interest sensitive portfolios generally consist of lower delinquency, single-family conforming residential forward mortgage loans for agency investors.
MSRs measured at fair value are also segregated between investor type into agency and non-agency pools (referred to herein as “investor pools”) based on upon contractual servicing agreements with investors at the respective balance sheet date to evaluate the MSR portfolio and fair value of the portfolio.
The following table provides a breakdown of credit sensitiveUPB and interest sensitive unpaid principal balance (“UPB”)fair value for the Company’s forward MSRs.MSRs:
| | | | Successor | March 31, 2020 | | December 31, 2019 |
| | June 30, 2019 | | December 31, 2018 | |
| MSRs - Sensitivity Pools | UPB | | Fair Value | | UPB | | Fair Value | |
| Forward MSRs - UPB and fair value breakdown | | UPB | | Fair Value | | UPB | | Fair Value |
| Acquisition Pools | | | | | | | | |
| Credit sensitive | $ | 167,381 |
| | $ | 1,797 |
| | $ | 135,752 |
| | $ | 1,495 |
| $ | 138,726 |
| | $ | 1,386 |
| | $ | 147,895 |
| | $ | 1,613 |
|
| Interest sensitive | 148,631 |
| | 1,708 |
| | 159,729 |
| | 2,170 |
| 151,908 |
| | 1,723 |
| | 148,887 |
| | 1,883 |
|
| Total | $ | 316,012 |
| | $ | 3,505 |
| | $ | 295,481 |
| | $ | 3,665 |
| $ | 290,634 |
| | $ | 3,109 |
| | $ | 296,782 |
| | $ | 3,496 |
|
| | | | | | | | | |
| Investors Pools | | | | | | | | |
Agency(1) | | $ | 238,956 |
| | $ | 2,618 |
| | $ | 240,688 |
| | $ | 2,944 |
|
Non-agency(2) | | 51,678 |
| | 491 |
| | 56,094 |
| | 552 |
|
| Total | | $ | 290,634 |
| | $ | 3,109 |
| | $ | 296,782 |
| | $ | 3,496 |
|
| |
(1) | Agency investors primarily consist of government sponsored enterprises (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae” or “FNMA”) and the Federal Home Loan Mortgage Corp (“Freddie Mac” or “FHLMC”), and the Government National Mortgage Association (“Ginnie Mae” or “GNMA”). |
| |
(2) | Non-agency investors consist of investors in private-label securitizations. |
The Company used the following key weighted-average inputs and assumptions in estimating the fair value of MSRs.forward MSRs:
| | | Forward MSRs - Key inputs and assumptions | | March 31, 2020 | | December 31, 2019 |
| Total MSR Portfolio | | | | |
| Discount rate | | 9.7 | % | | 9.7 | % |
| Prepayment speeds | | 13.4 | % | | 13.1 | % |
| Average life | | 5.7 years |
| | 5.8 years |
|
| | Successor | | | |
| | June 30, 2019 | | December 31, 2018 | |
| Acquisition Pools: | | | | |
| Credit Sensitive | | | | | | |
| Discount rate | 10.6 | % | | 11.3 | % | 10.2 | % | | 10.4 | % |
| Prepayment speeds | 13.5 | % | | 11.8 | % | 13.0 | % | | 12.7 | % |
| Average life | 5.9 years |
| | 6.4 years |
| 5.9 years |
| | 6.0 years |
|
| | | | | | | |
| Interest Sensitive | | | | | | |
| Discount rate | 8.9 | % | | 9.3 | % | 9.1 | % | | 9.1 | % |
| Prepayment speeds | 13.9 | % | | 10.0 | % | 13.8 | % | | 13.5 | % |
| Average life | 5.6 years |
| | 7.0 years |
| 5.5 years |
| | 5.7 years |
|
| | | | | | | |
| Total MSR Portfolio | | | | |
| Investor Pools: | | | | |
| Agency | | | | |
| Discount rate | 9.7 | % | | 10.2 | % | 9.0 | % | | 9.0 | % |
| Prepayment speeds | 13.7 | % | | 10.8 | % | 13.2 | % | | 13.0 | % |
| Average life | 5.8 years |
| | 6.7 years |
| 5.6 years |
| | 5.8 years |
|
| | | | | |
| Non-agency | | | | |
| Discount rate | | 12.6 | % | | 12.6 | % |
| Prepayment speeds | | 14.3 | % | | 13.8 | % |
| Average life | | 6.1 years |
| | 6.2 years |
|
The following table shows the hypothetical effect on the fair value of the Successor’sCompany’s forward MSRs when applying certain unfavorable variations of key assumptions to these assets for the dates indicated.indicated:
|
| | | | | | | | | | | | | | | |
| | Successor |
| | Discount Rate | | Total Prepayment Speeds |
| MSRs - Hypothetical Sensitivities | 100 bps Adverse Change | | 200 bps Adverse Change | | 10% Adverse Change | | 20% Adverse Change |
| June 30, 2019 | | | | | | | |
| Mortgage servicing rights | $ | (127 | ) | | $ | (245 | ) | | $ | (169 | ) | | $ | (325 | ) |
| | | | | | | | |
| December 31, 2018 | | | | | | | |
| Mortgage servicing rights | $ | (137 | ) | | $ | (265 | ) | | $ | (129 | ) | | $ | (250 | ) |
|
| | | | | | | | | | | | | | | |
| | Discount Rate | | Total Prepayment Speeds |
| Forward MSRs - Hypothetical Sensitivities | 100 bps Adverse Change | | 200 bps Adverse Change | | 10% Adverse Change | | 20% Adverse Change |
| March 31, 2020 | | | | | | | |
| Mortgage servicing rights | $ | (111 | ) | | $ | (214 | ) | | $ | (158 | ) | | $ | (305 | ) |
| | | | | | | | |
| December 31, 2019 | | | | | | | |
| Mortgage servicing rights | $ | (127 | ) | | $ | (245 | ) | | $ | (165 | ) | | $ | (317 | ) |
These hypothetical sensitivities should be evaluated with care. The effect on fair value of a 10% adverse change in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.
Reverse Mortgage Servicing Rights and Liabilities - Amortized Cost
The Company services certain HECM reverse mortgage loans with an unpaid principal balance of $25,569$21,590 and $28,415$22,725 as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. MortgageThe following table sets forth the activities of reverse MSRs and mortgage servicing liabilities (“MSL”) had an ending balance of $80 and $71 as of June 30, 2019 and December 31, 2018, respectively. For the sixfor three months ended June 30, 2019March 31, 2020 and 2018, the Company and the Predecessor accreted $28 and $11 of the MSL and recorded other MSL adjustments of $37 and $3, respectively. The MSL adjustment recorded by the Company relates to the fair value adjustments for MSL assumed from the Merger resulting from the revised cost to service assumption used in the valuation of MSL during the measurement period. See Note 2, Acquisitions for further information. An accretion recorded by the Predecessor relates to previous portfolio acquisitions.2019:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
| Reverse MSRs and Liabilities - Amortized Cost | Assets | | Liabilities | | Assets | | Liabilities |
| Balance - beginning of period | $ | 6 |
| | $ | 61 |
| | $ | 11 |
| | $ | 71 |
|
| Amortization/accretion | — |
| | (8 | ) | | — |
| | (18 | ) |
Adjustments(1) | — |
| | — |
| | (4 | ) | | 37 |
|
| Balance - end of the period | $ | 6 |
| | $ | 53 |
| | $ | 7 |
| | $ | 90 |
|
| Fair value - end of period | $ | 6 |
| | $ | 27 |
| | $ | 7 |
| | $ | 75 |
|
Reverse MSR had an ending balance of $6 and $11 as of June 30, 2019 and December 31, 2018, respectively. For the six months ended June 30, 2019, the Company amortized $1 and recorded other MSR adjustments of $6. The MSR adjustment recorded by the Company relates to the fair value adjustments for MSR assumed from the Merger resulting from the revised cost to service assumption used in the valuation of MSR during the measurement period. See Note 2, Acquisitions for further information. For the six months ended June 30, 2018, the Predecessor recorded other MSR adjustments of $4. | |
(1) | Reverse MSR and MSL net adjustments recorded by the Company during the three months ended March 31, 2019 primarily relate to the fair value adjustments for reverse MSR and MSL assumed from the Merger resulting from the revised cost to service assumption used in the valuation of reverse MSR and MSL during the measurement period. |
The fair value of the reverse MSR was $7 and $11 as of June 30, 2019 and December 31, 2018, respectively. The fair value of the MSL was $44 and $53 as of June 30, 2019 and December 31, 2018, respectively. Management evaluates reverse MSRs and MSLs each reporting period for impairment. Based on management’s assessment at June 30, 2019,March 31, 2020, no impairment or increased obligation was needed.
Excess Spread Financing - Fair Value
In order to finance the acquisition of certain MSR portfolios,MSRs on various Portfolios, the Company has entered into sale and assignment agreements with a third-party associated with fundsthird parties and accounts under management of BlackRock Financial Management Inc. (“BlackRock”), a third-party associated with funds and accounts under management of Värde Partners, Inc. (“Varde”) and with certain affiliated entities formed and managed by New Residential Investment Corp. (“New Residential”). The Company sold to these entities the right to receive a specified percentage of the excess cash flow generated from the portfolios in excess of a fixed base servicing fee per loan. The Company retains all the base servicing fee, along with ancillary income and interest float earnings on principal andalong with interest payments and escrows, and also incurs costs to service the specified pool. The Company is the legal owner and the servicer of the portfolios and provides all servicing and advancing functions.
In connection with the above transactions, the Company entered into refinanced loanrecapture agreement obligations with New Residential, BlackRock and Vardethird parties that require the Company to transfer the new loan or a replacement loan of similar economic characteristics into the respective portfolio if the Company refinancesrecaptures any loan in the portfolio. The new or replacement loan will be governed by the same terms set forth in the sale and assignment agreement described above.
Accordingly, a recapture assumption is included within excess spread valuation.
The Company used the following weighted-average assumptions in the Company’s valuation of excess spread financing.financing: | | | | Successor | |
| | June 30, 2019 | | December 31, 2018 | |
| Excess Spread Financing | | | | |
| Excess Spread Financing Assumptions | | March 31, 2020 | | December 31, 2019 |
| Discount rate | 9.6 | % | | 10.4 | % | 11.6 | % | | 11.6 | % |
| Prepayment speeds | 13.1 | % | | 11.0 | % | 12.8 | % | | 12.6 | % |
| Recapture rate | 20.2 | % | | 18.6 | % | 18.6 | % | | 20.1 | % |
| Average life | 5.7 years |
| | 6.5 years |
| 5.7 years |
| | 5.8 years |
|
The following table shows the hypothetical effect on the Company’s excess spread financing fair value when applying certain unfavorable variations of key assumptions to these liabilities for the dates indicated.indicated:
| | | | Successor | | | | | | | | | |
| | Discount Rate | | Prepayment Speeds | Discount Rate | | Prepayment Speeds |
| Excess Spread Financing - Hypothetical Sensitivities | 100 bps Adverse Change | | 200 bps Adverse Change | | 10% Adverse Change | | 20% Adverse Change | 100 bps Adverse Change | | 200 bps Adverse Change | | 10% Adverse Change | | 20% Adverse Change |
| June 30, 2019 | | | | | | | | |
| March 31, 2020 | | | | | | | | |
| Excess spread financing | $ | 53 |
| | $ | 111 |
| | $ | 58 |
| | $ | 121 |
| $ | 43 |
| | $ | 89 |
| | $ | 48 |
| | $ | 98 |
|
| | | | | | | | | | | | | | | |
| December 31, 2018 | | | | | | | | |
| December 31, 2019 | | | | | | | | |
| Excess spread financing | $ | 47 |
| | $ | 99 |
| | $ | 38 |
| | $ | 81 |
| $ | 46 |
| | $ | 95 |
| | $ | 46 |
| | $ | 96 |
|
As the cash flow assumptions utilized in determining the fair value amounts in the excess spread financing are based on the related cash flow assumptions utilized in the financed MSRs, any fair value changes recognized in the financed MSRs attributable to a related cash flow assumption would inherently have an inverse impact on the carrying amount of the related excess spread financing. For example, while an increase in discount rates would negatively impact the value of the Company’s financed MSRs, it would reduce the carrying value of the associated excess spread financing liability.
These hypothetical sensitivities should be evaluated with care. The effect on fair value of a 10% variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects. Also, a positive change in the above assumptions would not necessarily correlate with the corresponding decrease in the net carrying amount of the excess spread financing. Excess Spread financing’s cash flow assumptions that are utilized in determining fair value are based on the related cash flow assumptions used in the financed MSRs. Any fair value change recognized in the financed MSRs attributable to related cash flows assumptions would inherently have an inverse impact on the carrying amount of the related excess spread financing.
Mortgage Servicing Rights Financing - Fair Value
From December 2013 through June 2014, the PredecessorCompany entered into agreements to sell a contractually specified base servicing fee component of certain MSRs and servicing advances under specified terms to a joint venture capitalized by New Residential and certain unaffiliated third-party investors. The purpose of this transaction was to facilitate the financing of advances for private label mortgages. The Company continues to be the named servicer, and, for accounting purposes, ownership of the mortgage servicing rights continues to resideMSR resides with the Company. Accordingly, the Company records the MSR and an MSR financing liability associated with this transaction in its consolidated balance sheets. The MSR financing liability reflects the incremental costs of this transaction relative to the market participant assumptions contained in the MSR valuation.
The following table sets forth the weighted averageweighted-average assumptions used in the valuation of the mortgage servicing rights financing liability.liability:
| | | | Successor | | | | |
| Mortgage Servicing Rights Financing Assumptions | June 30, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
| Advance financing rates | 3.7 | % | | 4.2 | % | 1.7 | % | | 3.5 | % |
| Annual advance recovery rates | 19.3 | % | | 19.0 | % | 18.4 | % | | 18.8 | % |
Mortgage Servicing Rights -Segment Revenues
The following table sets forth the items comprising total revenues associated with servicing loan portfolios.for the Servicing segment:
|
| | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| Servicing Revenue | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 |
Contractually specified servicing fees(1) | $ | 307 |
| | $ | 588 |
| | | $ | 245 |
| | $ | 495 |
|
Other service-related income(1)(2) | 32 |
| | 82 |
| | | 28 |
| | 56 |
|
Incentive and modification income(1) | 10 |
| | 17 |
| | | 18 |
| | 33 |
|
Late fees(1) | 27 |
| | 52 |
| | | 22 |
| | 46 |
|
| Reverse servicing fees | 8 |
| | 17 |
| | | 14 |
| | 33 |
|
Mark-to-market adjustments(3) | (231 | ) | | (524 | ) | | | 19 |
| | 171 |
|
Counterparty revenue share(4) | (70 | ) | | (118 | ) | | | (50 | ) | | (95 | ) |
Amortization, net of accretion(5) | (56 | ) | | (79 | ) | | | (48 | ) | | (96 | ) |
| Total servicing revenue | $ | 27 |
| | $ | 35 |
| | | $ | 248 |
| | $ | 643 |
|
|
| | | | | | | |
| Total Revenues - Servicing | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
Contractually specified servicing fees(1) | $ | 297 |
| | $ | 281 |
|
Other service-related income(1) | 49 |
| | 50 |
|
Incentive and modification income(1) | 10 |
| | 7 |
|
Late fees(1) | 27 |
| | 25 |
|
| Reverse servicing fees | 6 |
| | 9 |
|
Mark-to-market adjustments(2) | (383 | ) | | (293 | ) |
Counterparty revenue share(3) | (76 | ) | | (48 | ) |
Amortization, net of accretion(4) | (76 | ) | | (23 | ) |
| Total revenues - Servicing | $ | (146 | ) | | $ | 8 |
|
| |
(1) | The Company recognizes revenue on an earned basis for services performed. Amounts include subservicing related revenues. |
| |
(2) | Amount for the six months ended June 30, 2019 includes a gain of $21 from the execution of a clean-up call option on a reverse mortgage loan trust, as the Company was the master servicer and holder of clean-up call rights. |
| |
(3)
| Mark-to-market (“MTM”) adjustments include fair value adjustments on MSR, excess spread financing and MSR financing liabilities. The amount of MSR MTM includes the impact of negative modeled cash flows which have been transferred to reserves on advances and other receivables. The negative modeled cash flows relate to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio. The impact of negative modeled cash flows for the Company was $10 and Predecessor was $17 and $22$11 for the three months ended June 30,March 31, 2020 and 2019, and 2018, respectively, and $28 and $34 for the six months ended June 30, 2019 and 2018, respectively. |
| |
(4)(3)
| Counterparty revenue share represents the excess servicing fee that the Company pays to the counterparties under the excess spread financing arrangements and the payments made associated with MSRsMSR financing arrangements. |
| |
(5)(4)
| Amortization for the Company is net of excess spread accretion of $59$68 and $36 and MSL accretion of $11$8 and $18 for the three months ended June 30, 2019. Amortization for the Predecessor is net excess spread accretion of $37 for the three months ended June 30, 2018. For the six months ended June 30,March 31, 2020 and 2019, the amortization for the Company is net of excess spread accretion of $95 and MSL accretion of $29. Amortization of the Predecessor is net of excess spread of $67 for the six months ended June 30, 2018. The Predecessor recorded MSL accretion within reverse servicing fees, whereas the Successor has elected to record MSL accretion within Amortization, net of accretion.respectively. |
4. Advances and Other Receivables, Net
Advances and other receivables, net consists of the following.following:
| | | | Successor | |
| | June 30, 2019 | | December 31, 2018 | |
| Servicing advances, net of $156 and $205 discount, respectively | $ | 878 |
| | $ | 1,000 |
| |
| Receivables from agencies, investors and prior servicers, net of $48 and $48 discount, respectively | 220 |
| | 241 |
| |
| Advances and Other Receivables, Net | | March 31, 2020 | | December 31, 2019 |
| Servicing advances, net of $125 and $131 discount, respectively | | $ | 688 |
| | $ | 970 |
|
| Receivables from agencies, investors and prior servicers, net of $21 and $21 discount, respectively | | 190 |
| | 193 |
|
| Reserves | (98 | ) | | (47 | ) | (193 | ) | | (175 | ) |
| Total advances and other receivables, net | $ | 1,000 |
| | $ | 1,194 |
| $ | 685 |
| | $ | 988 |
|
The Company, as loan servicer, is contractually responsible to advance funds on behalf of the borrower and investor primarily for loan principal and interest, property taxes and hazard insurance and foreclosure costs. Advances are primarily recovered through reimbursement from the investor, proceeds from sale of loan collateral or mortgage insurance claims.claims or the borrower. Reserves for advances and other receivables on loans transferredliquidated or purchased out of the MSR portfolio are established within advances and other receivables.
The Company estimates and records an asset for estimated recoveries to be collected from prior servicers for their respective portion of the losses associated with the underlying loans that were not serviced in accordance with established guidelines.
Receivables from prior servicers totaled $96 and $94 for Company’s forward loan portfolio at June 30, 2019 and December 31, 2018, respectively.
The following table sets forth the activities of the servicing reserves for advances and other receivables.receivables:
| | | | Successor | | | Predecessor | | | | | |
| Reserves for Advances and Other Receivables | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Balance - beginning of period | $ | 71 |
| | 47 |
| | | $ | 277 |
| | $ | 284 |
| $ | 168 |
| | $ | 47 |
|
Provision and other additions(1) | 37 |
| | 67 |
| | | 38 |
| | 60 |
| 30 |
| | 30 |
|
| Write-offs | (10 | ) | | (16 | ) | | | (21 | ) | | (50 | ) | (5 | ) | | (6 | ) |
| Balance - end of period | $ | 98 |
| | $ | 98 |
| | | $ | 294 |
| | $ | 294 |
| $ | 193 |
| | $ | 71 |
|
| |
(1) | The Company and the Predecessor recorded a provision of $17$10 and $22$11 through the MTM adjustments in revenues - service related, revenuesnet, in the consolidated statements of operations for the three months ended June 30,March 31, 2020 and 2019, and 2018, respectively, and $28 and $34 for the six months ended June 30, 2019 and 2018, respectively, for inactive and liquidated loans that are no longer part of the MSR portfolio. Other additions represent reclassifications of required reserves provisioned within other balance sheet accounts as associated serviced loans become inactive or liquidate. |
Purchase Discount for Advances and Other Receivables
In connection with the acquisition of Pacific Union in February 2019, the Company recorded the acquired advances and other receivables at estimated fair value as of the acquisition date, which resulted in a purchase discount of $19. Refer to Note 2, Acquisitions, for discussion of the Pacific Union acquisition. In 2018, the Company recorded the acquired advances and other receivables in connection with the Merger at estimated fair value as of the acquisition date, which resulted in a purchase discount of $302.
As of June 30, 2019,March 31, 2020, a total of $117$175 purchase discount has been utilized, with $204$146 purchase discount remaining.
The following table sets forth the activities of the purchase discounts for advances and other receivables.receivables:
| | | | Successor | | | | | | | | | |
| | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Purchase Discounts | Servicing Advances | | Receivables from Agencies, Investors and Prior Servicers | | Servicing Advances | | Receivables from Agencies, Investors and Prior Servicers | Servicing Advances | | Receivables from Agencies, Investors and Prior Servicers | | Servicing Advances | | Receivables from Agencies, Investors and Prior Servicers |
| Balance - beginning of period | $ | 169 |
| | $ | 48 |
| | $ | 205 |
| | $ | 48 |
| $ | 131 |
| | $ | 21 |
| | $ | 205 |
| | $ | 48 |
|
| Addition from acquisition | — |
| | — |
| | 19 |
| | — |
| — |
| | — |
| | 19 |
| | — |
|
| Utilization of purchase discounts | (13 | ) | | — |
| | (68 | ) | | — |
| (6 | ) | | — |
| | (55 | ) | | — |
|
| Balance - end of period | $ | 156 |
| | $ | 48 |
| | $ | 156 |
| | $ | 48 |
| $ | 125 |
| | $ | 21 |
| | $ | 169 |
| | $ | 48 |
|
Credit Loss for Advances and Other Receivables
As described in Note 1, Nature of Business and Basis of Presentation, advances and other receivables are within the scope of ASU 2016-13, and the Company modified its accounting policy regarding its assessment of reserves for credit-related losses in accordance with CECL framework. Upon applying ASU 2016-13, the Company reduced its reserve for credit-related losses by $7 as of January 1, 2020. During the three months ended March 31, 2020, the Company increased the CECL reserve by $6. As of March 31, 2020, the total CECL reserve was $23.
Based upon the Company’s application of ASU 2016-13, the Company determined that the credit-related risk associated with applicable financial instruments typically increase with the passage of time. The CECL reserve methodology considers these financial instruments collectible to a point in time of 39 months. Any projected remaining balance at the end of the collection period is considered a loss and factors into the overall CECL loss rate required.
5. Reverse Mortgage Interests, Net
Reverse mortgage interests, net consists of the following:
| | | | Successor | | | | | |
| Reverse Mortgage Interests, Net | June 30, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
| Participating interests in HECM mortgage-backed securities (“HMBS”), net of $18 and $58 premium, respectively | $ | 4,952 |
| | $ | 5,664 |
| |
| Other interests securitized, net of $84 and $100 discount, respectively | 1,023 |
| | 1,064 |
| |
| Unsecuritized interests, net of $97 and $122 discount, respectively | 1,143 |
| | 1,219 |
| |
| Participating interests in HECM mortgage-backed securities (“HMBS”), net of $16 and $10 purchase discount and premium, respectively | | $ | 4,027 |
| | $ | 4,292 |
|
| Other interests securitized, net of $44 and $56 purchase discount, respectively | | 851 |
| | 938 |
|
| Unsecuritized interests, net of $69 and $68 purchase discount, respectively | | 1,080 |
| | 1,052 |
|
| Reserves | (8 | ) | | (13 | ) | (3 | ) | | (3 | ) |
| Total reverse mortgage interests, net | $ | 7,110 |
| | $ | 7,934 |
| $ | 5,955 |
| | $ | 6,279 |
|
Participating Interests in HMBS
Participating interests in HMBS consist of the Company’s reverse mortgage interests in HECM loans which have been transferred to GNMA and subsequently securitized through the issuance of HMBS. The Company does not own these loans, but due to HMBS program buyout requirements, such interests are consolidated on thein Company’s consolidated balance sheet.sheets. The Company does not originate reverse mortgages, but during the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, a total of $149$52 and $174$82 in UPB associated with new draws on existing loans was transferred to GNMA and securitized by the Company, and Predecessor, respectively.
In March 2019, the Company entered into an agreement with Fannie Mae for the transfer of reverse mortgage loans. As a result, $61 was transferred from Fannie Mae and securitized into GNMA HMBS during the sixthree months ended June 30,March 31, 2019. There was no such activity during the three months ended March 31, 2020.
Other Interests Securitized
Other interests securitized consist of reverse mortgage interests that no longer meet HMBS program eligibility criteria primarily because they have reached 98% of their Max Claim Amount (“MCA”), which is established at origination and in accordance with HMBS program guidelines, which require buyoutrequiring a repurchase of loans from the respective HMBS trust. These reverse mortgage interests have subsequently been transferred to private securitization trusts and are accounted for as a secured borrowing. DuringNo such securitizations occurred during the sixthree months ended June 30, 2019, the Company securitized a total of $398 UPB through Trust 2019-1March 31, 2020 and a total of $249 UPB from Trust 2017-2 was called and the related debt was extinguished. See Note 10, Indebtedness for additional information.2019. The Company sold $20 UPB of Trust 2018-3 retained bonds during the sixthree months ended June 30,March 31, 2019. During the six months ended June 30, 2018, the Predecessor securitized a total of $443 UPB through Trust 2018-1 and a total of $284 UPB from Trust 2016-2 and Trust 2016-3 were called and the related debt was extinguished. Refer to Other Nonrecourse Debt in Note 10, Indebtedness, for additional information.
Unsecuritized Interests
Unsecuritized interests in reverse mortgages consist of the following:
| | | | Successor | |
| | June 30, 2019 | | December 31, 2018 | |
| Unsecuritized interests | | March 31, 2020 | | December 31, 2019 |
| Repurchased HECM loans (exceeds 98% MCA) | $ | 896 |
| | $ | 949 |
| $ | 782 |
| | $ | 789 |
|
| HECM related receivables | 281 |
| | 300 |
| |
HECM related receivables(1) | | 257 |
| | 250 |
|
| Funded borrower draws not yet securitized | 48 |
| | 76 |
| 64 |
| | 67 |
|
| REO-related receivables | 15 |
| | 16 |
| |
| Purchase discount | (97 | ) | | (122 | ) | |
| Real estate owned (“REO”) related receivables | | 46 |
| | 14 |
|
| Purchase discount, net | | (69 | ) | | (68 | ) |
| Total unsecuritized interests | $ | 1,143 |
| | $ | 1,219 |
| $ | 1,080 |
| | $ | 1,052 |
|
| |
(1) | HECM related receivables consist primarily of receivables from FNMA for corporate advances and service fees and claims receivables from the U.S. Department of Housing and Urban Development (“HUD”) on reverse mortgage interests. |
Unsecuritized interests include repurchased HECM loans for which the Company is required to repurchase from the HMBS pool when the outstanding principal balance of the HECM loan is equal to or greater than 98% of the MCA established at origination and in accordance with HMBS program guidelines. These unsecuritized interests are primarily financed through available warehouse lines. The Company and the Predecessor repurchased a total of $1,457$383 and $2,109$740 of HECM loans out of GNMA HMBS securitizations during the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, respectively, of which $371$103 and $444$188 were subsequently assigned to a third party in accordance with applicable servicing agreements, respectively. To the extent a loan is not subject to applicable servicing agreements and assigned to a third party, the loan is either subject to assignment to the U.S. Department of Housing and Urban Development (“HUD”),HUD, per contractual obligations with GNMA, liquidated via a payoff from the borrower or liquidated via a foreclosure according to the terms of the underlying mortgage.
As discussed above, The Company assigned a total of $266 and $514 of HECM loans to HUD during the Company estimatesthree months ended March 31, 2020 and records an asset for probable recoveries from prior servicers for their respective portion of the losses associated with the underlying loans that were not serviced in accordance with established guidelines. Receivables from prior servicers totaled $13 and $18 for the Company’s reverse loan portfolio at June 30, 2019, and December 31, 2018, respectively.
Reserves for Reverse Mortgage Interests
The Company records reserves related to reverse mortgage interests based on potential unrecoverable costs and loss exposures expected to be realized. Recoverability is primarily determined based on the Company’s ability to meet HUD servicing guidelines and is assessed with respect to two different categories of expenses: financial and operational. Financial exposures are defined as the cost of doing business related to servicing the HECM product and include potential unrecoverable costs primarily based on HUD claim guidelines related to recoverable expenses and unfavorable changes in the appraised value of the loan collateral. Operational exposures are defined as unrecoverable debenture interest curtailments imposed for missed HUD-specified servicing timelines and non-claimable UPB that exceeds the MCA upon assignment of the loan collateral to HUD (“MCA Exposure”). Reserves for reverse mortgage interests are related to both financial and operational exposures.
The activityfollowing table sets forth the activities of the servicing reserves for reverse mortgage interests is set forth below.interests:
| | | | Successor | | | Predecessor | | | | | |
| Reserves for reverse mortgage interests | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Balance - beginning of period | $ | 8 |
| | $ | 13 |
| | | $ | 134 |
| | $ | 115 |
| $ | 3 |
| | $ | 13 |
|
| Provision (release), net | 2 |
| | 2 |
| | | (6 | ) | | 20 |
| — |
| | — |
|
| Write-offs | (2 | ) | | (7 | ) | | | (11 | ) | | (18 | ) | — |
| | (5 | ) |
| Balance - end of period | $ | 8 |
| | $ | 8 |
| | | $ | 117 |
| | $ | 117 |
| $ | 3 |
| | $ | 8 |
|
Purchase Discount for Reverse Mortgage Interests
In connection with the Merger, the Company recorded the acquired reverse mortgage interests at estimated fair value as of the acquisition date, which resulted in a purchase premium of $42 for participating interests in HMBS, and a purchase discount of $298 for Other Interest Securitized and Unsecuritized Interests due to the higher exposure to financial and operational losses of servicing the loans through foreclosure and collateral liquidation. The premium and discount are amortized and accreted, respectively, based on the effective yield method, whereby the Company updates its prepayment assumptions for actual prepayments on a quarterly basis.
The following table sets forth the activities of the purchase premiums and discounts for reverse mortgage interests.interests:
| | | | Successor | | | | | | | |
| | Three Months Ended June 30, 2019 | Three Months Ended March 31, 2020 |
| Purchase premiums and discounts for reverse mortgage interests | Net Premium for Participating Interests in HMBS(1) | | Net Discount for Other Interest Securitized(1) | | Net Discount for Unsecuritized Interests(1) | Net Discount for Participating Interests in HMBS(1) | | Net Discount for Other Interest Securitized(1) | | Net Discount for Unsecuritized Interests(1) |
| Balance - beginning of period | $ | 36 |
| | $ | (112 | ) | | $ | (95 | ) | $ | 10 |
| | $ | (56 | ) | | $ | (68 | ) |
| Utilization of purchase discounts | — |
| | 7 |
| | 5 |
| |
Utilization of purchase discounts(2) | | — |
| | 5 |
| | 5 |
|
| (Amortization)/Accretion | (23 | ) | | 28 |
| | (9 | ) | (44 | ) | | 17 |
| | 2 |
|
Transfers(3) | 5 |
| | (7 | ) | | 2 |
| 18 |
| | (10 | ) | | (8 | ) |
| Balance - end of period | $ | 18 |
| | $ | (84 | ) | | $ | (97 | ) | $ | (16 | ) | | $ | (44 | ) | | $ | (69 | ) |
| | | | Successor | | | | | | | |
| | Six Months Ended June 30, 2019 | Three Months Ended March 31, 2019 |
| Purchase premiums and discounts for reverse mortgage interests | Net Premium for Participating Interests in HMBS(1) | | Net Discount for Other Interest Securitized(1) | | Net Discount for Unsecuritized Interests(1) | Net Premium for Participating Interests in HMBS(1) | | Net Discount for Other Interest Securitized(1) | | Net Discount for Unsecuritized Interests(1) |
| Balance - beginning of period | $ | 58 |
| | $ | (100 | ) | | $ | (122 | ) | $ | 58 |
| | $ | (100 | ) | | $ | (122 | ) |
Adjustments(2) | (16 | ) | | (2 | ) | | (6 | ) | |
| Utilization of purchase discounts | — |
| | 13 |
| | 27 |
| |
Adjustments(4) | | (16 | ) | | (2 | ) | | (6 | ) |
Utilization of purchase discounts(2) | | — |
| | 6 |
| | 22 |
|
| (Amortization)/Accretion | (37 | ) | | 13 |
| | 9 |
| (14 | ) | | (15 | ) | | 18 |
|
Transfers(3) | 13 |
| | (8 | ) | | (5 | ) | 8 |
| | (1 | ) | | (7 | ) |
| Balance - end of period | $ | 18 |
| | $ | (84 | ) | | $ | (97 | ) | $ | 36 |
| | $ | (112 | ) | | $ | (95 | ) |
| |
(1) | Net position as certain items are in a premium/(discount) position, based on the characteristics of underlying tranches of loans. |
| |
(2) | Adjustments to premium/(discount) due to revised cost to service assumption utilized inUtilization of purchase discounts on liquidated loans, for which the valuation of reverse mortgage assets and liabilities acquired from the Merger. See Note 2, Acquisitions for additional information.
remaining receivable was written-off. |
| |
(3) | Transfer of premium/(discount) based on the transfer of associated loans between categories consistent with the underlying loan characteristics. |
| |
(4) | Adjustments to premium/(discount) due to revised cost to service assumption utilized in the valuation of reverse mortgage assets and liabilities acquired from the Merger during the measurement period. |
Credit Loss for Reverse Mortgage Interests
As described in Note 1, Nature of Business and Basis of Presentation, reverse mortgage interests are within the scope of ASU 2016-13, requiring an assessment of reserves regarding credit-related losses in accordance with the CECL framework. Upon applying ASU 2016-13, the Company determined that credit-related losses are immaterial given the government insured nature of the HECM loan product. Any expected credit-related losses are contemplated in the Company’s existing reserve methodology due to the nature of this financial instrument. Accordingly, no cumulative effect adjustment was required upon adoption of ASU 2016-13 on January 1, 2020 and no additional CECL reserve was recorded as of March 31, 2020.
In connection with previousThe credit-risk characteristics of reverse mortgage portfolio acquisitions,interests do not vary with time as the Predecessor recorded a purchase discount within Unsecuritized Interests. The following table sets forthfinancial instruments have no contractual life or financial profile as the activities ofprimary counterparty is the purchase discounts for reverse mortgage interests.
|
| | | | | | | |
| | Predecessor |
| Purchase discounts for reverse mortgage interests | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 |
| Balance - beginning of period | $ | (90 | ) | | $ | (89 | ) |
| Additions | — |
| | (7 | ) |
| Accretion | 6 |
| | 12 |
|
| Balance - end of period | $ | (84 | ) | | $ | (84 | ) |
Reverse Mortgage Interest Income
The Company accrues interest income for its participating interest in reverse mortgages based on the stated rates underlying HECM loans, in accordance with FHA guidelines. Total interest earned on the Company’s and the Predecessor’s reverse mortgage interests was $85$62 and $118$82 for the three months ended June 30,March 31, 2020 and 2019, and 2018, respectively, and $167 and $237 for the six months ended June 30, 2019 and 2018, respectively.
6. Mortgage Loans Held for Sale and Investment
Mortgage Loans Held for Sale
The Company maintains a strategy of originating and purchasing residential mortgage loan products primarily for the purpose of selling to GSEs or other third-party investors in the secondary market on a servicing-retained basis. The Company purchases closed loans through its correspondent channel and assists customers currently in the Company’s servicing portfolio with refinancing of loans or new home purchases through its Direct to Consumer channel. Generally, all newly originated mortgage loans held for sale are securitized and transferred to GSEs or delivered to third-party purchasers shortly after origination on a servicing-retained basis.
Mortgage loans held for sale are recorded at fair value as set forth below.below:
| | | | Successor | |
| | June 30, 2019 | | December 31, 2018 | |
| Mortgage Loans Held for Sale | | March 31, 2020 | | December 31, 2019 |
| Mortgage loans held for sale – UPB | $ | 3,268 |
| | $ | 1,568 |
| $ | 3,735 |
| | $ | 3,949 |
|
Mark-to-market adjustment(1) | 154 |
| | 63 |
| 187 |
| | 128 |
|
| Total mortgage loans held for sale | $ | 3,422 |
| | $ | 1,631 |
| $ | 3,922 |
| | $ | 4,077 |
|
| |
(1) | The mark-to-market adjustment is recorded in net gain on mortgage loans held for sale in the consolidated statements of operations. |
The Company accrues interest income as earned and places loans on non-accrual status after any portion of principal or interest has been delinquent for more than 90 days. Accrued interest is recorded as interest income in the consolidated statements of operations.
The total UPB and fair value of mortgage loans held for sale on non-accrual status was as follows:
| | | | Successor | March 31, 2020 | | December 31, 2019 |
| | June 30, 2019 | | December 31, 2018 | |
| Mortgage Loans Held for Sale - UPB | UPB | | Fair Value | | UPB | | Fair Value | |
| Mortgage Loans Held for Sale | | UPB | | Fair Value | | UPB | | Fair Value |
Non-accrual(1) | $ | 26 |
| | $ | 24 |
| | $ | 45 |
| | $ | 42 |
| $ | 33 |
| | $ | 23 |
| | $ | 29 |
| | $ | 22 |
|
| |
(1) | Non-accrual - UPB includes $21$28 and $40$25 of UPB related to Ginnie Mae repurchased loans as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. |
From time to time, the Company exercises its right to repurchase individual delinquent loans in Ginnie Mae securitization pools to minimize interest spread losses, to re-pool into new Ginnie Mae securitizations or to otherwise sell to third-party investors. During the six months ended June 30, 2019, the Company repurchased $72 of delinquent Ginnie Mae loans and securitized or sold to third-party investors $117 of previously repurchased Ginnie Mae loans. During the six months ended June 30, 2018, the Predecessor repurchased $109 of delinquent Ginnie Mae loans and securitized or sold to third-party investors $135 of previously repurchased loans.
For the six months ended June 30, 2019 and 2018, $19 and $92 of the repurchased loans have re-performed and were held in accrual status, respectively, and remaining balances continue to be held under a non-accrual status.
The total UPB of mortgage loans held for sale for which the Company has begun formal foreclosure proceedings was $16$24 and $33$21 as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.
The following table details a roll forward ofsets forth the change in the account balanceactivities of mortgage loans held for sale.sale:
| | | | Successor | | | Predecessor | |
| Mortgage loans held for sale | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | |
| Mortgage Loans Held for Sale | | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Balance - beginning of period | $ | 1,631 |
| | | $ | 1,891 |
| $ | 4,077 |
| | $ | 1,631 |
|
| Loans sold | | (13,510 | ) | | (6,088 | ) |
Mortgage loans originated and purchased, net of fees(1) | 16,257 |
| | | 10,630 |
| 12,375 |
| | 6,253 |
|
| Loans sold | (15,203 | ) | | | (11,377 | ) | |
| Repurchase of loans out of Ginnie Mae securitizations | 715 |
| | | 475 |
| 919 |
| | 364 |
|
Transfer of mortgage loans held for sale to advances/accounts receivable, net related to claims(2) | (7 | ) | | | (6 | ) | |
Net transfer of mortgage loans held for sale from REO in other assets(3) | 7 |
| | | 12 |
| |
| Changes in fair value | 16 |
| | | 1 |
| 61 |
| | 10 |
|
Other purchase-related activities(4) | 6 |
| | | 9 |
| |
Net transfers of mortgage loans held for sale(2) | | — |
| | — |
|
| Balance - end of period | $ | 3,422 |
| | | $ | 1,635 |
| $ | 3,922 |
| | $ | 2,170 |
|
| |
(1) | Mortgage loans originated and purchased during the sixthree months ended June 30,March 31, 2019 includes $536 of loans held for sale that were acquired from Pacific Union. See Note 2, Acquisitions, for further discussion. |
| |
(2) | Amounts are comprised ofAmount reflects transfers to other assets for loans transitioning into REO status and transfers to advances and other receivables, net for claims made on certain government insuredinsurance mortgage loansloans. Transfers out are net of transfers in upon completionreceipt of theproceeds from an REO sale. |
| |
(3)
| Net amounts are comprised of REO in the sales process, which are transferred to other assets, and certain government insured mortgage REO, which are transferred from other assets upon completion of the sale so that the claims process can begin.
|
| |
(4)
| Amounts are comprised primarily of non-Ginnie Mae loan purchases and buyouts.or claim filing. |
For the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, the Company and the Predecessor received proceeds of $15,422$13,724 and $11,491,$6,194, respectively, on the sale of mortgage loans held for sale, resulting in gains of $219$275 and $114,$106, respectively.
The Company has the right to repurchase any individual loan in a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. The majority of Ginnie Mae repurchased loans are repurchased in connection with loan modifications and loan resolution activity, and with the intent to re-pool into new Ginnie Mae securitizations upon re-performance of the loan or to otherwise sell to third-party investors. Therefore, these loans are classified as held for sale.
Mortgage Loans Held for Investment
The following sets forth the composition of mortgage loans held for investment.
|
| | | | | | | |
| | Successor |
| | June 30, 2019 | | December 31, 2018 |
| Mortgage loans held for investment – UPB | $ | 148 |
| | $ | 156 |
|
| Fair value adjustments | (34 | ) | | (37 | ) |
| Total mortgage loans held for investment at fair value | $ | 114 |
| | $ | 119 |
|
The total UPB of mortgage loans held for investment on non-accrual status was as follows.
|
| | | | | | | | | | | | | | | |
| | Successor |
| | June 30, 2019 | | December 31, 2018 |
| Mortgage Loans Held for Investment - UPB | UPB | | Fair Value | | UPB | | Fair Value |
| Non-accrual | $ | 21 |
| | $ | 10 |
| | $ | 27 |
| | $ | 13 |
|
The following table sets forth the activities of mortgage loans held for investment.
|
| | | |
| | Successor |
| Mortgage loans held for investment at fair value | Six Months Ended June 30, 2019 |
| Balance - beginning of period | $ | 119 |
|
| Payments received from borrowers | (8 | ) |
| Changes in fair value | 3 |
|
| Balance - end of period | $ | 114 |
|
The total UPB of mortgage loans held for investment for which the Company has begun formal foreclosure proceedings was $11 and $15 as of June 30, 2019 and December 31, 2018, respectively.
7. Leases
Operating leases in which the Company is the lessee are recorded as operating lease ROUright-of-use (“ROU”) assets and operating lease liabilities, included in other assets and payables and other liabilities, respectively, on itsthe consolidated balance sheets as of June 30, 2019.March 31, 2020. The Company does not currently have any significant finance leases in which it is the lessee. Operating lease ROU assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commencement date. ROU assets are further adjusted for lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in general and administrative expenses in the consolidated statements of operations. The Company’s leases relate primarily to office space and equipment, with remaining lease terms of generally 1 to 9 years. Certain lease arrangements contain extension options, which typically range from 3 to 5 years, at the then fair market rental rates. As these extension options are not generally considered reasonably certain of exercise, they are not included in the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. As of June 30, 2019,March 31, 2020, operating lease ROU assets and liabilities were $139$111 and $148,$125, respectively.
The table below summarizes the Company’s net lease cost:
|
| | | | | | | |
| | Successor |
| | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
| Operating lease cost | $ | 11 |
| | $ | 19 |
|
Short-term lease cost(1) | — |
| | 1 |
|
| Sublease income | (1 | ) | | (1 | ) |
| Net lease cost | $ | 10 |
| | $ | 19 |
|
(1) Amount for three months ended June 30, 2019 is less than $1. |
| | | | | | | |
| Net lease cost | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Operating lease cost | $ | 10 |
| | $ | 8 |
|
| Short-term lease cost | — |
| | 1 |
|
| Sublease income | (1 | ) | | — |
|
| Net lease cost | $ | 9 |
| | $ | 9 |
|
The table below summarizes other information related to the Company’s operating leases:
| | | | Successor | |
| | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 | |
| Operating leases | | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
| Operating cash flows from operating leases | $ | 7 |
| | $ | 13 |
| $ | 10 |
| | $ | 6 |
|
| Leased assets obtained in exchange for new operating lease liabilities | $ | 28 |
| | $ | 155 |
| $ | — |
| | $ | 127 |
|
| Weighted average remaining lease term - operating leases, in years | 5.7 |
| | 6.1 |
| |
| Weighted average discount rate - operating leases | 5.0 | % | | 5.0 | % | |
| Weighted average remaining lease term | | 5.6 years |
| | 5.5 years |
|
| Weighted average discount rate | | 5.0 | % | | 5.0 | % |
Maturities of operating lease liabilities as of June 30, 2019March 31, 2020 are as follows:
| | | Year Ending December 31, | | Operating Leases | | Operating Leases |
2019(1) | | $ | 19 |
| |
| 2020 | | 40 |
| |
2020(1) | | | $ | 37 |
|
| 2021 | | 32 |
| | 29 |
|
| 2022 | | 23 |
| | 20 |
|
| 2023 | | 18 |
| | 16 |
|
| 2024 and thereafter | | 19 |
| |
| Total minimum lease payments | | 151 |
| |
| 2024 | | | 11 |
|
| 2025 and thereafter | | | 30 |
|
| Total future minimum lease payments | | | 143 |
|
| Less: imputed interest | | 3 |
| | 18 |
|
| Total operating lease liabilities | | $ | 148 |
| | $ | 125 |
|
| |
(1) | Excluding the sixthree months ended June 30, 2019.March 31, 2020. |
Finance lease liability was $4 as of June 30, 2019, the majority of which matures within a year.
8. Other Assets
Other assets consist of the following:
| | | | Successor | |
| | June 30, 2019 | | December 31, 2018 | |
| Loans subject to repurchase from Ginnie Mae | $ | 723 |
| | $ | 266 |
| |
| Accrued revenues | 136 |
| | 145 |
| |
| Other assets | | March 31, 2020 | | December 31, 2019 |
| Loans subject to repurchase right from Ginnie Mae | | $ | 468 |
| | $ | 560 |
|
| Derivative financial instruments | | 294 |
| | 153 |
|
| Trade receivables and accrued revenues | | 143 |
| | 126 |
|
| Goodwill | | 120 |
| | 120 |
|
| Right-of-use assets | 139 |
| | — |
| 111 |
| | 121 |
|
| Intangible assets | 105 |
| | 117 |
| 61 |
| | 74 |
|
| Goodwill | 120 |
| | 23 |
| |
| Other | 306 |
| | 244 |
| 372 |
| | 236 |
|
| Total other assets | $ | 1,529 |
| | $ | 795 |
| $ | 1,569 |
| | $ | 1,390 |
|
Loans Subject to Repurchase Right from Ginnie Mae
Forward loans are sold to Ginnie Mae in conjunction with the issuance of mortgage backed securities. The Company, as the issuer of the mortgage backed securities, has the unilateral right to repurchase any individual loan in a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. Once the Company has the unilateral right to repurchase a delinquent loan, it has effectively regained control over the loan and recognizes these rights to the loan on its consolidated balance sheets and establishes a corresponding repurchase liability regardless of the Company’s intention to repurchase the loan. The amount as of June 30, 2019 includes $485 attributable to Pacific Union.
Derivative Financial Instruments
See Note 9, Derivative Financial Instruments, for further details on derivative financial instruments.
Trade Receivables and Accrued Revenues
AccruedTrade receivables and accrued revenues are primarily comprised of trade receivables and service fees earned but not received based upon the terms of the Company’s servicing and subservicing agreements. As described in Note 1, Nature of Business and Basis of Presentation, certain trade receivables and accrued revenues included in other assets are within the scope of ASU 2016-13, requiring an assessment of CECL losses. Upon applying ASU 2016-13, the Company reduced its other assets allowances by $2 as of January 1, 2020. The CECL reserve as of March 31, 2020 was $6.
RightThe credit-risk characteristics of Use Assets
Righttrade receivables included in other assets and within the scope of use assetsASU 2016-13 do not change with time as they are recognized for operating leases as a resultprimarily short-term in nature. However, the Company does monitor the financial status of adoption of ASC 842. See Note 7, Leases for additional information.customers to determine if any specific loss considerations are required.
Goodwill and Intangible Assets
The table below presents changes inIn 2019, the carrying amountCompany recorded goodwill and intangible assets of goodwill for the six months ended June 30, 2019.
|
| | | | |
| | | Successor |
| | | Six Months Ended June 30, 2019 |
| Balance - beginning of period | | $ | 23 |
|
Additions from acquisitions(1) | | 42 |
|
Measurement period adjustment related to Merger(2) | | 55 |
|
| Balance - end of period | | $ | 120 |
|
| |
(1)
| As discussed in Note 2, Acquisitions, the Company recorded goodwill of $40 and $13, respectively, in connection with the acquisition of Pacific Union. In addition, on February 28, 2019, the Company completed the acquisition of the Seterus mortgage servicing platform and assumed certain assets related thereto from IBM (“Seterus acquisition”). In connection with the Seterus acquisition, the Company recorded $2 in goodwill.
|
| |
(2)
| The Company recorded a total measurement period adjustment of $55 to goodwill in 2019 related to the acquisition of Nationstar. See further discussion in Note 2, Acquisitions.
|
In 2018, the Company recorded goodwill of $10 and $13 in connection with the acquisitions of Nationstar and Assurant Mortgage Solutions, respectively. See further discussion in Note 2, Acquisitions. The Company recorded a $4 impairment of technology intangible assets within Corporate/Other segment during the three months ended March 31, 2020 in connection with an ancillary business. The impairment charges were included in the general and administrative expenses in the consolidated statements of operations. There was no impairment expense for intangible assets during the three months ended March 31, 2019.
Right-of-Use Assets
In 2019, the Company recorded intangible assets of $13 in connection with the acquisition of Pacific Union. In 2018, the Company recorded intangible assets of $103 and $24 in connection with the acquisitions of Nationstar and Assurant Mortgage Solutions, respectively. See further discussion in Note 2, Acquisitions7, Leases., for further details on right-of-use assets.
Other
Other primarily includes derivative financial instruments, prepaid expenses, margin call deposits, real estate owned (REO),REO, tax receivables, receivables related to recent loan transfers and non-advance related accounts receivablevarious receivables due from investors. See Note 9, Derivative Financial Instruments, for further details on derivative financial instruments.
REO, net includes $12 and $10$11 of REO-related receivables with government insurance at June 30, 2019as of March 31, 2020 and December 31, 2018,2019, respectively, limiting loss exposure to the Company.
9. Derivative Financial Instruments
Derivative instruments are used as part of the overall strategy to manage exposure to market risks primarily associated with fluctuations in interest rates related to originations. Derivative instruments utilized by the Company primarily include interest rate lock commitments (“IRLCs”), loan purchase commitments (“LPCs”), forward Mortgage Backed Securities (“MBS”) purchase commitments, Eurodollar and Treasury futures and interest rate swap agreements.
Associated with the Company’s derivatives are $25$178 and $12$6 in collateral deposits on derivative instruments recorded in other assets on the Company’s consolidated balance sheets as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. The Company does not offset fair value amounts recognized for derivative instruments with amounts collected or deposited on derivative instruments in the consolidated balance sheets.
The following table providestables provide the outstanding notional balances, fair values of outstanding positions and recorded gains/(losses). for the derivative financial instruments:
| | | | | Successor | | March 31, 2020 | | Three Months Ended March 31, 2020 |
| | | June 30, 2019 | | Six Months Ended June 30, 2019 | |
| | Expiration Dates | | Outstanding Notional | | Fair Value | | Recorded Gains/(Losses) | |
| Derivative Financial Instruments | | Expiration Dates | | Outstanding Notional | | Fair Value | | Recorded Gains/(Losses) |
| Assets | | | | | | | | | | | | |
| Mortgage loans held for sale | | | | | | | | | | | | |
| Loan sale commitments | 2019 | | $ | 1,659 |
| | $ | 47.0 |
| | $ | 21.1 |
| 2020 | | $ | 2,598 |
| | $ | 111 |
| | $ | 79 |
|
| Derivative financial instruments | | | | | | | | | | | | |
| IRLCs | 2019 | | 3,649 |
| | 110.2 |
| | 50.5 |
| 2020 | | 6,923 |
| | 263 |
| | 128 |
|
| Forward sales of MBS | 2019 | | 762 |
| | 1.1 |
| | (0.7 | ) | |
| LPCs | 2019 | | 1,327 |
| | 16.5 |
| | 14.8 |
| 2020 | | 834 |
| | 25 |
| | 13 |
|
Eurodollar futures(1) | 2019-2021 | | 8 |
| | — |
| | — |
| |
| Forward MBS trades | | 2020 | | 886 |
| | 6 |
| | — |
|
| Eurodollar futures | | 2020-2021 | | 6 |
| | — |
| | — |
|
| Total derivative financial instruments - assets | | | $ | 8,649 |
| | $ | 294 |
| | $ | 141 |
|
| Liabilities | | | | | | | | | | | | |
| Derivative financial instruments | | | | | | | | | | | | |
IRLCs(1) | 2019 | | 4 |
| | — |
| | — |
| 2020 | | $ | 22 |
| | $ | — |
| | $ | — |
|
| Forward sales of MBS | 2019 | | 4,932 |
| | 30.3 |
| | 6.4 |
| |
| LPCs | 2019 | | 212 |
| | 1.3 |
| | 0.8 |
| 2020 | | 10 |
| | — |
| | (3 | ) |
| Forward MBS trades | | 2020 | | 10,229 |
| | 223 |
| | 211 |
|
Eurodollar futures(1) | 2019-2021 | | 12 |
| | — |
| | — |
| 2020-2021 | | 6 |
| | — |
| | — |
|
| Total derivative financial instruments - liabilities | | | $ | 10,267 |
| | $ | 223 |
| | $ | 208 |
|
| | | | | Predecessor | | March 31, 2019 | | Three Months Ended March 31, 2019 |
| | | June 30, 2018 | | Six Months Ended June 30, 2018 | |
| | Expiration
Dates | | Outstanding
Notional | | Fair
Value | | Recorded Gains/(Losses) | |
| Derivative Financial Instruments | | Expiration
Dates | | Outstanding
Notional | | Fair
Value | | Recorded Gains/(Losses) |
| Assets | | | | | | | | | | | | |
| Mortgage loans held for sale | | | | | | | | | | | | |
| Loan sale commitments | 2018 | | $ | 368 |
| | $ | 7.2 |
| | $ | 7.1 |
| 2019 | | $ | 365 |
| | $ | 17 |
| | $ | (9 | ) |
| Derivative financial instruments | | | | | | | | | | | | |
| IRLCs | 2018 | | 1,778 |
| | 60.2 |
| | 0.9 |
| 2019 | | 2,557 |
| | 69 |
| | 9 |
|
| Forward sales of MBS | 2018 | | 568 |
| | 0.4 |
| | (2.0 | ) | |
| LPCs | 2018 | | 271 |
| | 1.7 |
| | 0.8 |
| 2019 | | 216 |
| | 2 |
| | 1 |
|
| Treasury futures | 2018 | | 35 |
| | 0.1 |
| | (1.8 | ) | |
Eurodollar futures(1) | 2018-2021 | | 22 |
| | — |
| | — |
| |
| Forward MBS trades | | 2019 | | 410 |
| | 1 |
| | (1 | ) |
| Eurodollar futures | | 2019-2021 | | 7 |
| | — |
| | — |
|
| Total derivative financial instruments - assets | | | $ | 3,190 |
| | $ | 72 |
| | $ | 9 |
|
| Liabilities | | | | | | | | | | | | |
| Derivative financial instruments | | | | | | | | | | | | |
IRLCs(1) | 2018 | | 1 |
| | — |
| | — |
| |
| Forward sales of MBS | 2018 | | 2,710 |
| | 8.0 |
| | 5.2 |
| |
| LPCs | 2018 | | 185 |
| | 0.7 |
| | 0.1 |
| 2019 | | $ | 52 |
| | $ | — |
| | $ | — |
|
Treasury futures(1) | 2018 | | 63 |
| | — |
| | (1.4 | ) | |
Eurodollar futures(1) | 2020-2021 | | 6 |
| | — |
| | — |
| |
| Forward MBS trades | | 2019 | | 3,804 |
| | 22 |
| | (3 | ) |
| Eurodollar futures | | 2019-2021 | | 13 |
| | — |
| | — |
|
| Total derivative financial instruments - liabilities | | | $ | 3,869 |
| | $ | 22 |
| | $ | (3 | ) |
10. Indebtedness
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | March 31, 2020 | | December 31, 2019 |
| Advance Facilities | | Interest Rate | | Maturity Date | | Collateral | | Capacity Amount | | Outstanding | | Collateral Pledged | | Outstanding | | Collateral pledged |
$325 advance facility(1) | | LIBOR+1.5% to 6.5% | | August 2021 | | Servicing advance receivables | | $ | 325 |
| | $ | 223 |
| | $ | 283 |
| | $ | 224 |
| | $ | 285 |
|
$250 advance facility(2) | | LIBOR+1.5% to 2.6% | | December 2020 | | Servicing advance receivables | | 250 |
| | 118 |
| | 138 |
| | 98 |
| | 167 |
|
| $200 advance facility | | LIBOR+2.5% | | January 2021 | | Servicing advance receivables | | 200 |
| | 83 |
| | 117 |
| | 63 |
| | 125 |
|
$125 advance facility(3) | | LIBOR+1.5% to 7.4% | | July 2020 | | Servicing advance receivables | | 125 |
| | 66 |
| | 76 |
| | 37 |
| | 88 |
|
| Advance facilities principal amount | | | | | | 490 |
| | $ | 614 |
| | 422 |
| | $ | 665 |
|
| Unamortized debt issuance costs | | | | | | (1 | ) | | | | — |
| | |
| Advance facilities, net | | | | $ | 489 |
|
|
| | $ | 422 |
| |
|
| |
(1) | Fair values or recorded gains/(losses)The capacity amount was subsequently increased to $425 in April 2020 with a maturity date of derivative instruments are less than $0.1 for the specified dates.October 2021. |
10. Indebtedness | |
(2)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Successor | | | | | | | | | | | | June 30, 2019 | | December 31, 2018 | | Advance Facilities | | Interest Rate | | Maturity Date | | Collateral | | Capacity Amount | | Outstanding | | Collateral Pledged | | Outstanding | | Collateral pledged | | Nationstar mortgage advance receivable trust | | LIBOR + 1.5% to 6.5% | | August 2021 | | Servicing advance receivables | | $ | 325 |
| | $ | 229 |
| | $ | 290 |
| | $ | 209 |
| | $ | 284 |
| | Nationstar agency advance receivable trust | | LIBOR + 1.5% to 2.6% | | December 2020 | | Servicing advance receivables | | 250 |
| | 162 |
| | 194 |
| | 218 |
| | 255 |
| | MBS servicer advance facility (2014) | | LIBOR + 2.5% | | December 2019 | | Servicing advance receivables | | 200 |
| | 90 |
| | 131 |
| | 90 |
| | 149 |
| | Nationstar agency advance financing facility | | LIBOR + 1.5% to 7.4% | | July 2020 | | Servicing advance receivables | | 125 |
| | 87 |
| | 99 |
| | 78 |
| | 89 |
| | Advance facilities principal amount | | | | | | 568 |
| | $ | 714 |
| | 595 |
| | $ | 777 |
| | Unamortized debt issuance costs | | | | | | (1 | ) | | | | — |
| | | | Advance facilities, net | | | | $ | 567 |
|
|
| | $ | 595 |
| |
|
| This advance facility was subsequently terminated and transferred to another advance facility in April 2020. |
| |
(3) | The capacity amount was subsequently increased to $875 in April 2020 with a maturity date of April 2021. |
| | | | | | | Successor | | | | | | | | | | | | | | | | | |
| | | | | June 30, 2019 | | December 31, 2018 | | | | March 31, 2020 | | December 31, 2019 |
| Warehouse Facilities | | Interest Rate | | Maturity Date | | Collateral | | Capacity Amount | | Outstanding | | Collateral pledged | | Outstanding | | Collateral pledged | | Interest Rate | | Maturity Date | | Collateral | | Capacity Amount | | Outstanding | | Collateral pledged | | Outstanding | | Collateral pledged |
| $1,500 warehouse facility | | | LIBOR+1.0% | | June 2020 | | Mortgage loans or MBS | | $ | 1,500 |
| | $ | 1,214 |
| | $ | 1,160 |
| | $ | 759 |
| | $ | 733 |
|
| $1,200 warehouse facility | | LIBOR + 1.7% to 3.5% | | November 2019 | | Mortgage loans or MBS | | $ | 1,200 |
| | $ | 715 |
| | $ | 762 |
| | $ | 560 |
| | $ | 622 |
| | LIBOR+1.5% to 3.0% | | November 2020 | | Mortgage loans or MBS | | 1,200 |
| | 566 |
| | 602 |
| | 683 |
| | 724 |
|
| $1,000 warehouse facility | | LIBOR + 1.6% to 2.5% | | September 2019 | | Mortgage loans or MBS | | 1,000 |
| | 629 |
| | 646 |
| | 137 |
| | 140 |
| | LIBOR+1.4% to 2.3% | | September 2020 | | Mortgage loans or MBS | | 1,000 |
| | 593 |
| | 608 |
| | 762 |
| | 783 |
|
$800 warehouse facility(1) | | | LIBOR+2.1% to 3.8% | | April 2021 | | Mortgage loans or MBS | | 800 |
| | 528 |
| | 639 |
| | 589 |
| | 656 |
|
| $750 warehouse facility | | LIBOR + 1.4% to 2.8% | | August 30, 2019 | | Mortgage loans or MBS | | 750 |
| | 416 |
| | 424 |
| | 119 |
| | 122 |
| | LIBOR+1.4% to 2.8% | | September 2020 | | Mortgage loans or MBS | | 750 |
| | 347 |
| | 355 |
| | 411 |
| | 425 |
|
$800 warehouse facility(1) | | LIBOR + 1.5% to 2.9% | | April 2020 | | Mortgage loans or MBS | | 800 |
| | 531 |
| | 576 |
| | 464 |
| | 514 |
| |
| $700 warehouse facility | | | LIBOR+1.3% to 2.2% | | November 2020 | | Mortgage loans or MBS | | 700 |
| | 628 |
| | 649 |
| | 469 |
| | 488 |
|
| $600 warehouse facility | | LIBOR + 2.3% | | February 2020 | | Mortgage loans or MBS | | 600 |
| | 226 |
| | 258 |
| | 151 |
| | 168 |
| | LIBOR+2.0% | | February 2021 | | Mortgage loans or MBS | | 600 |
| | 169 |
| | 203 |
| | 174 |
| | 202 |
|
| $500 warehouse facility | | LIBOR + 1.5% to 3.0% | | April 2020 | | Mortgage loans or MBS | | 500 |
| | 382 |
| | 395 |
| | 187 |
| | 200 |
| | LIBOR+2.0% to 4.0% | | May 2020 | | Mortgage loans or MBS | | 500 |
| | 22 |
| | 23 |
| | 336 |
| | 349 |
|
| $500 warehouse facility | | LIBOR + 1.5% to 2.8% | | November 2019 | | Mortgage loans or MBS | | 500 |
| | 377 |
| | 410 |
| | 220 |
| | 248 |
| |
| $500 warehouse facility | | LIBOR + 2.0% to 2.3% | | September 2020 | | Mortgage loans or MBS | | 500 |
| | 49 |
| | 51 |
| | 290 |
| | 299 |
| |
| $200 warehouse facility | | LIBOR + 1.0% | | June 2020 | | Mortgage loans or MBS | | 200 |
| | 194 |
| | 187 |
| | — |
| | — |
| |
| $200 warehouse facility | | LIBOR + 1.5% | | December 2019 | | Mortgage loans or MBS | | 200 |
| | 107 |
| | 103 |
| | — |
| | — |
| | LIBOR+1.4% | | January 2021 | | Mortgage loans or MBS | | 200 |
| | 100 |
| | 101 |
| | 136 |
| | 136 |
|
| $200 warehouse facility | | LIBOR + 1.5% | | October 2019 | | Mortgage loans or MBS | | 200 |
| | 104 |
| | 103 |
| | — |
| | — |
| | LIBOR+1.2% | | April 2021 | | Mortgage loans or MBS | | 200 |
| | 21 |
| | 21 |
| | 27 |
| | 27 |
|
| $200 warehouse facility | | LIBOR + 2.0% | | January 2020 | | Mortgage loans or MBS | | 200 |
| | 88 |
| | 116 |
| | 103 |
| | 132 |
| | LIBOR+2.0% | | May 2020 | | Mortgage loans or MBS | | 200 |
| | 59 |
| | 83 |
| | 54 |
| | 78 |
|
| $200 warehouse facility | | LIBOR + 1.2% | | April 2021 | | Mortgage loans or MBS | | 200 |
| | 32 |
| | 33 |
| | 18 |
| | 19 |
| | LIBOR+1.3% | | October 2020 | | Mortgage loans or MBS | | 200 |
| | — |
| | — |
| | — |
| | — |
|
| $50 warehouse facility | | LIBOR + 2.7% to 7.5% | | April 2020 | | Mortgage loans or MBS | | 50 |
| | 5 |
| | 7 |
| | — |
| | — |
| | LIBOR+2.0% to 6.0% | | June 2020 | | Mortgage loans or MBS | | 50 |
| | 4 |
| | 6 |
| | 11 |
| | 15 |
|
| $40 warehouse facility | | LIBOR + 3.0% | | November 2019 | | Mortgage loans or MBS | | 40 |
| | 1 |
| | 2 |
| | 1 |
| | 2 |
| | LIBOR+3.3% | | September 2020 | | Mortgage loans or MBS | | 40 |
| | 6 |
| | 7 |
| | 5 |
| | 6 |
|
| Warehouse facilities principal amount | Warehouse facilities principal amount | | 3,856 |
| | 4,073 |
| | 2,250 |
| | 2,466 |
| Warehouse facilities principal amount | | 4,257 |
| | 4,457 |
| | 4,416 |
| | 4,622 |
|
| MSR Facility | | | | | | | | | | | | | | | | | | | | |
| $400 warehouse facility | | LIBOR + 3.5% to 6.1% | | June 2021 | | MSR | | 400 |
| | 150 |
| | 786 |
| | 100 |
| | 928 |
| | LIBOR+3.5% or 6.1% | | January 2023 | | Mortgage loans or MBS | | 400 |
| | 150 |
| | 836 |
| | 150 |
| | 945 |
|
| $400 warehouse facility | | LIBOR + 2.3% | | December 2020 | | MSR | | 400 |
| | 25 |
| | 215 |
| | — |
| | 226 |
| | LIBOR+2.3% | | December 2020 | | Mortgage loans or MBS | | 400 |
| | 75 |
| | 190 |
| | — |
| | 200 |
|
$150 warehouse facility(1) | | LIBOR + 2.8% | | April 2020 | | MSR | | 150 |
| | — |
| | 121 |
| | — |
| | 430 |
| | LIBOR+2.8% | | April 2021 | | Mortgage loans or MBS | | 150 |
| | 40 |
| | 119 |
| | — |
| | 130 |
|
| $50 warehouse facility | | LIBOR + 2.8% | | August 2020 | | MSR | | 50 |
| | 15 |
| | 92 |
| | — |
| | 102 |
| | LIBOR+2.8% | | August 2020 | | Mortgage loans or MBS | | 50 |
| | 30 |
| | 71 |
| | 10 |
| | 84 |
|
| | | | | 190 |
| | 1,214 |
| | 100 |
| | 1,686 |
| |
| Warehouse facilities principal amount | | 4,046 |
| | $ | 5,287 |
| | 2,350 |
| | $ | 4,152 |
| |
| | | | | | | | | | | | |
| MSR facilities principal amount | | MSR facilities principal amount | | 295 |
| | 1,216 |
| | 160 |
| | 1,359 |
|
| Warehouse and MSR facilities principal amount | | Warehouse and MSR facilities principal amount | | 4,552 |
| | $ | 5,673 |
| | 4,576 |
| | $ | 5,981 |
|
| Unamortized debt issuance costs | Unamortized debt issuance costs | | | | (1 | ) | | | | (1 | ) | | | Unamortized debt issuance costs | | | | (1 | ) | | | | (1 | ) | | |
| Warehouse facilities, net | Warehouse facilities, net | | $ | 4,045 |
| | | | $ | 2,349 |
| | | Warehouse facilities, net | | $ | 4,551 |
| | | | $ | 4,575 |
| | |
| | | | | | | | | | | | | | | | | | | | | |
| Pledged Collateral: | Pledged Collateral: | | | | | | | | | | | Pledged Collateral: | | | | | | | | | | |
| Mortgage loans and mortgage loans held for investment | | | | $ | 3,204 |
| | $ | 3,319 |
| | $ | 1,528 |
| | $ | 1,628 |
| |
| Mortgage loans held for sale | | Mortgage loans held for sale | | | | $ | 3,659 |
| | $ | 3,748 |
| | $ | 3,826 |
| | $ | 3,931 |
|
| Reverse mortgage interests | Reverse mortgage interests | | | | 652 |
| | 754 |
| | 722 |
| | 838 |
| Reverse mortgage interests | | | | 598 |
| | 709 |
| | 590 |
| | 691 |
|
| MSR | MSR | | | | 190 |
| | 1,214 |
| | 100 |
| | 1,686 |
| MSR | | | | 295 |
| | 1,216 |
| | 160 |
| | 1,359 |
|
| |
(1) | Total capacity amount for this facility is $800 of which $150 is a sublimit for MSR financing. |
Unsecured Senior Notes
Unsecured senior notes consist of the following:
| | | | Successor | |
| | June 30, 2019 | | December 31, 2018 | |
| Unsecured senior notes | | March 31, 2020 | | December 31, 2019 |
| $950 face value, 8.125% interest rate payable semi-annually, due July 2023 | $ | 950 |
| | $ | 950 |
| $ | 950 |
| | $ | 950 |
|
| $750 face value, 9.125% interest rate payable semi-annually, due July 2026 | 750 |
| | 750 |
| 750 |
| | 750 |
|
$600 face value, 6.000% interest rate payable semi-annually, due January 2027(1) | | 600 |
| | — |
|
$600 face value, 6.500% interest rate payable semi-annually, due July 2021 | 592 |
| | 592 |
| — |
| | 492 |
|
$300 face value, 6.500% interest rate payable semi-annually, due June 2022 | 206 |
| | 206 |
| — |
| | 206 |
|
| Unsecured senior notes principal amount | 2,498 |
| | 2,498 |
| 2,300 |
| | 2,398 |
|
| Unamortized debt issuance costs, net of premium, and discount | (36 | ) | | (39 | ) | |
| Unamortized debt issuance costs, premium and discount | | (41 | ) | | (32 | ) |
| Unsecured senior notes, net | $ | 2,462 |
| | $ | 2,459 |
| $ | 2,259 |
| | $ | 2,366 |
|
| |
(1) | On January 16, 2020, the Company completed an offering of $600 aggregate principal amount of 6.000% Senior Notes due 2027 (the “2027 notes”). |
| |
(2) | This note was redeemed in full on February 15, 2020 using the net proceeds of the 2027 notes offering, together with cash on hand. |
The ratios included in the indentures for the unsecured senior notes are incurrence-based compared to the customary ratio covenants that are often found in credit agreements that require a company to maintain a certain ratio. The incurrence-based covenants limit the issuer(s) and restricted subsidiaries ability to incur additional indebtedness, pay dividends, make certain investments, create liens, consolidate, merge or sell substantially all of their assets or enter into certain transactions with affiliates. The indentures contain certain events of default, including (subject, in some cases, to customary cure periods and materiality thresholds) defaults based on (i) the failure to make payments under the applicable indenture when due, (ii) breach of covenants, (iii) cross-defaults to certain other indebtedness, (iv) certain bankruptcy or insolvency events, (v) material judgments and (vi) invalidity of material guarantees.
The indentures forprovide that on or before certain fixed dates, the Company may redeem up to 40% of the aggregate principal amount of the unsecured senior notes provide thatwith the Company may redeem all or a portionnet proceeds of the notes prior to certain equity offerings at fixed dates by paying a make-whole premiumredemption prices, plus accrued and unpaid interest, to the redemption dates.dates, subject to compliance with certain conditions. In addition, the Company may redeem all or a portion of the unsecured senior notes at any time on or after certain fixed dates at the applicable redemption prices set forth in the indentures plus accrued and unpaid interest, to the redemption dates. No notes were repurchased duringDuring the three and six months ended June 30, 2019. The Predecessor repurchased $44 and $60March 31, 2020, the Company repaid $100 in principal of outstanding notes. Additionally, the Company redeemed $598 in principal of outstanding notes during the three and six months ended June 30, 2018March 31, 2020, resulting in a lossgain of $1 and $2, respectively.
Additionally,$1. No notes were repurchased or redeemed during the indentures provide that on or before certain fixed dates, the Company may redeem (x) in the case of the New Notes, up to 40%, or (y) in the case of the other series of unsecured senior notes, up to 35% of the aggregate principal amount of the unsecured senior notes with the net proceeds of certain equity offerings at fixed redemption prices, plus accrued and unpaid interest, to the redemption dates, subject to compliance with certain conditions.three months ended March 31, 2019.
As of June 30, 2019,March 31, 2020, the expected maturities of the Company’s unsecured senior notes based on contractual maturities are as follows:
| | | Year Ending December 31, | | Amount | | Amount |
| 2019 | | $ | — |
| |
| 2020 | | — |
| | $ | — |
|
| 2021 | | 592 |
| | — |
|
| 2022 | | 206 |
| | — |
|
| 2023 | | 950 |
| | 950 |
|
| 2024 | | | — |
|
| Thereafter | | 750 |
| | 1,350 |
|
| Total | | $ | 2,498 |
| |
| Total unsecured senior notes principal amount | | | $ | 2,300 |
|
Other Nonrecourse Debt
Other nonrecourse debt consists of the following:
| | | | | | | Successor | | | | March 31, 2020 | | December 31, 2019 |
| | | | | June 30, 2019 | | December 31, 2018 | |
| | Issue Date | | Maturity Date | | Class of Note | | Securitized Amount | | Outstanding | | Outstanding | |
| Other nonrecourse debt | | Issue Date | | Maturity Date | | Class of Note | | Collateral Amount | | Outstanding | | Outstanding |
Participating interest financing(1) | — | | — | | — | | $ | — |
| | $ | 4,861 |
| | $ | 5,607 |
| — | | — | | — | | $ | — |
| | $ | 4,045 |
| | $ | 4,284 |
|
| Securitization of nonperforming HECM loans | | | | | | | | | | | | |
Trust 2017-2(2) | September 2017 | | September 2027 | | A, M1, M2 | | — |
| | — |
| | 231 |
| |
| Trust 2018-1 | March 2018 | | March 2028 | | A, M1, M2, M3, M4, M5 | | 252 |
| | 224 |
| | 284 |
| |
| Trust 2019-2 | | November 2019 | | November 2029 | | A, M1, M2, M3, M4, M5 | | 306 |
| | 297 |
| | 333 |
|
| Trust 2019-1 | | June 2019 | | June 2029 | | A, M1, M2, M3, M4, M5 | | 286 |
| | 269 |
| | 302 |
|
| Trust 2018-3 | | November 2018 | | November 2028 | | A, M1, M2, M3, M4, M5 | | 209 |
| | 190 |
| | 209 |
|
| Trust 2018-2 | August 2018 | | August 2028 | | A, M1, M2, M3, M4, M5 | | 198 |
| | 182 |
| | 250 |
| July 2018 | | July 2028 | | A, M1, M2, M3, M4, M5 | | 157 |
| | 137 |
| | 148 |
|
| Trust 2018-3 | November 2018 | | November 2028 | | A, M1, M2, M3, M4, M5 | | 284 |
| | 272 |
| | 326 |
| |
| Trust 2019-1 | June 2019 | | June 2029 | | A, M1, M2, M3, M4, M5 | | 398 |
| | 398 |
| | — |
| |
Nonrecourse Debt -
Legacy | November 2009 | | October 2039 | | A | | 97 |
| | 22 |
| | 29 |
| |
| Other nonrecourse debt principal amount | | | | 5,959 |
| | 6,727 |
| | | | 4,938 |
| | 5,276 |
|
| Unamortized debt issuance costs, premium, and issuance discount | | | | 26 |
| | 68 |
| |
| Unamortized debt issuance costs, premium and discount | | | | | 7 |
| | 10 |
|
| Other nonrecourse debt, net | | | | $ | 5,985 |
| | $ | 6,795 |
| | | | $ | 4,945 |
| | $ | 5,286 |
|
| |
(1) | Amounts represent the Company’s participating interest in GNMA HMBS securitized portfolios. |
| |
(2)
| As discussed in Note 5, Reverse Mortgage Interests, Net, Trust 2017-2 was extinguished.
|
Participating Interest Financing
Participating interest financing represents the obligation of HMBS pools to third-party security holders. The Company issues HMBS in connection with the securitization of borrower draws and accrues interest on HECM loans. Proceeds are received in exchange for securitized advances on the HECM loan amounts transferred to GNMA, and the Company retains a beneficial interest (referred to as a “participating interest”) in the securitization trust in which the HECM loans and HMBS obligations are held and assume both issuer and servicer responsibilities in accordance with GNMA HMBS program guidelines. Monthly cash flows generated from the HECM loans are used to service the HMBS obligations. The interest rate is based on the underlying HMBS rate with a range of 2.7%1.8% to 6.0%5.6%.
Securitizations of Nonperforming HECM Loans
From time to time, the Company securitizes its interests in non-performing reverse mortgages. The transactions provide investors with the ability to invest in a pool of both non-performing HECM loans secured by one-to-four-family residential properties and a pool of REO properties acquired through foreclosure of a deed in lieu of foreclosure in connection with HECM loans that are covered by FHA insurance. The transactions provide the Company with access to liquidity for the non-performing HECM loan portfolio, ongoing servicing fees, and potential residual returns. The transactions are structured as secured borrowings with the reverse mortgage loans included in the consolidated financial statements as reverse mortgage interests and the related financing included in other nonrecourse debt. Interest is accrued at a rate of 2.7%2.3% to 6.0% on the outstanding securitized notes and recorded as interest expense in consolidated statements of operations. The HECM securitizations are callable with expected weighted average lives of less than one to fourthree years. The Company may re-securitize the previously called loans from earlier HECM securitizations to achieve a lower cost of funds.
Nonrecourse Debt – Legacy Assets
During November 2009, the Predecessor completed the securitization of approximately $222 of Asset-Backed Securities (“ABS”), which was accounted for as a secured borrowing. This structure resulted in the Predecessor and subsequently the Company carrying the securitized mortgage loans in its consolidated balance sheets and recognizing the asset-backed certificates acquired by third parties. The principal and interest on these notes are paid using the cash flows from the underlying mortgage loans, which serve as collateral for the debt. The interest rate paid on the outstanding securities is 7.5%, which is subject to an available funds cap. The total outstanding principal balance on the underlying mortgage loans serving as collateral for the debt was approximately $151 and $160 at June 30, 2019 and December 31, 2018, respectively. The UPB on the outstanding loans was $22 and $29 at June 30, 2019 and December 31, 2018, respectively, and the carrying value of the nonrecourse debt was $22 and $29, respectively.
Financial Covenants
The Company’s credit facilities contain various financial covenants which primarily relate to required tangible net worth amounts, liquidity reserves, leverage requirements, and profitability requirements, which are measured at the Company’s operating subsidiary, Nationstar Mortgage LLC. The Company was in compliance with its required financial covenants as of June 30, 2019. The most restrictive tangible net worth covenant required the Company to maintain a minimum tangible net worth of at least $682.March 31, 2020.
11. Payables and Other Liabilities
Payables and other liabilities consist of the following:
| | | | Successor | |
| | June 30, 2019 | | December 31, 2018 | |
| Loans subject to repurchase from Ginnie Mae | $ | 723 |
| | $ | 266 |
| |
| Payables and other liabilities | | March 31, 2020 | | December 31, 2019 |
| Loans subject to repurchase right from Ginnie Mae | | $ | 468 |
| | $ | 560 |
|
| Payables to servicing and subservicing investors | 625 |
| | 494 |
| 407 |
| | 423 |
|
| Derivative financial instruments | | 223 |
| | 15 |
|
| Payable to GSEs and securitized trusts | | 148 |
| | 182 |
|
| Operating lease liabilities | 148 |
| | — |
| 125 |
| | 135 |
|
| Payables to GSEs and securitized trusts | 42 |
| | 105 |
| |
| MSR purchases payable including advances | 24 |
| | 182 |
| |
| Other liabilities | 554 |
| | 496 |
| 594 |
| | 701 |
|
| Total payables and other liabilities | $ | 2,116 |
| | $ | 1,543 |
| $ | 1,965 |
| | $ | 2,016 |
|
Loans Subject to Repurchase Right from Ginnie Mae
See Note 8, Other Assets, for a description of assets and liabilities related to loans subject to repurchase right from Ginnie Mae. The amount as of June 30, 2019 includes $485 attributable to Pacific Union.
Payables to Servicing and Subservicing Investors and Payables to GSEs and Securitized Trusts
Payables to servicing and subservicing investors, GSEs and securitized trusts represent amounts due to investors, GSEs and securitized trusts in connection with loans serviced that are paid from collections of the underlying loans, insurance proceeds or proceeds from property disposal.
Derivative Financial Instruments
See Note 9, Derivative Financial Instruments, for further details on derivative financial instruments.
Operating Lease Liabilities
Operating lease liabilities are recognized as a result of adoption of ASC 842 as of January 1, 2019. See Note 7, Leases, for additional information.further details on operating lease liabilities.
MSR Purchases Payable Including Advances
MSR purchases payable including advances representrepresents the amounts owed to the seller in connection with the purchase of MSRs.
Other Liabilities
Other liabilities primarily include accrued bonus and payroll, accrued interest, accrued legal expenses, payablepayables to insurance carriers and insurance cancellation reserves, derivative financial instruments, repurchase reserves, accounts payable and other accrued liabilities. Payables to insurance carriers and insurance cancellation reserves consist of insurance premiums received from borrower payments awaiting disbursement to the insurance carrier and/or amounts due to third-party investors on liquidated loans. See Note 9, Derivative Financial Instruments, for further details on derivative financial instruments.
The following table sets forth the activities of the repurchase reserves:
| | | | Successor | | | Predecessor | | | | | |
| Repurchase Reserves | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Balance - beginning of period | $ | 16 |
| | $ | 8 |
| | | $ | 9 |
| | $ | 9 |
| $ | 25 |
| | $ | 8 |
|
Provisions(1) | 8 |
| | 16 |
| | | 2 |
| | 3 |
| |
| Provisions | | 5 |
| | 8 |
|
| Releases | (1 | ) | | (1 | ) | | | (2 | ) | | (3 | ) | (1 | ) | | — |
|
| Balance - end of period | $ | 23 |
| | $ | 23 |
| | | $ | 9 |
| | $ | 9 |
| $ | 29 |
| | $ | 16 |
|
| |
(1)
| Provision for the six months ended June 30, 2019 is primarily due to repurchase reserve liabilities assumed in connection with the acquisition of Pacific Union. See Note 2, Acquisitions for additional information.
|
The provision for repurchases represents an estimate of losses to be incurred on the repurchase of loans or indemnification of purchaser’s losses related to forward loans. Certain sale contracts and GSE standards require the Predecessor and subsequently the Company to repurchase a loan or indemnify the purchaser or insurer for losses if a borrower fails to make initial loan payments or if the accompanying mortgage loan fails to meet certain customary representations and warranties with respect to underwriting standards.
In the event of a breach of the representations and warranties, the Predecessor and subsequently the Company may be required to either repurchase the loan or indemnify the purchaser for losses it sustains on the loan. In addition, an investor may request that the Predecessor and subsequently the Company refund a portion of the premium paid on the sale of mortgage loans if a loan is prepaid within a certain amount of time from the date of sale. The Predecessor and the Company record a reserve for estimated losses associated with loan repurchases, purchaser indemnification and premium refunds. The provision for repurchase losses is charged against net gain on mortgage loans held for sale. A release of repurchase reserves is recorded when the Predecessor and Company’s assessment reveals that previously recorded reserves are no longer needed.
A selling representation and warranty framework was introduced by the GSEs in 2013 and enhanced in 2014 that helps address concerns of loan sellers with respect to loan repurchase risk. Under the framework, a GSE will not exercise its remedies, including the issuance of repurchase requests, for breaches of certain selling representations and warranties if a mortgage meets certain eligibility requirements. For loans sold to GSEs on or after January 1, 2013, repurchase risk for Home Affordable Refinance Program (“HARP”) loans is lowered if the borrower stays current on the loan for 12 months and representation and warranty risks are limited for non-HARP loans that stay current for 36 months.
The Company regularly evaluates the adequacy of repurchase reserves based on trends in repurchase and indemnification requests, actual loss experience, settlement negotiation, estimated future loss exposure and other relevant factors including economic conditions. Current loss rates have significantly declined attributable to stronger underwriting standards and due to the falloff of loans underwritten prior to the mortgage loan crisis period prior to 2008. The Company believes its reserve balance as of June 30, 2019March 31, 2020 is sufficient to cover loss exposure associated with repurchase contingencies.
12. Securitizations and Financings
Variable Interest Entities (VIE)
In the normal course of business, the Company enters into various types of on- and off-balance sheet transactions with special purpose entities (“SPEs”) determined to be VIEs, which primarily consist of securitization trusts established for a limited purpose. Generally, these SPEs are formed for the purpose of securitization transactions in which the Company transfers assets to an SPE, which then issues to investors various forms of debt obligations supported by those assets.
The Company has determined that the SPEs created in connection with the (i) Nationstar Home Equity Loan Trust 2009-A, (ii) Nationstar Mortgage Advance Receivables Trust (NMART), (iii)(ii) Nationstar Agency Advance Financing Trust (NAAFT) and (iv)(iii) Nationstar Advance Agency Receivables Trust (NAART) should be consolidated as the Company is the primary beneficiary of each of these entities. Also, the Company consolidated four reverse mortgage SPEs as it is the primary beneficiary of each of these entities. These SPEs include the Nationstar HECM Loan Trusts.
A summary of the assets and liabilities of the Company’s transactions with VIEs included in the Company’s consolidated financial statements is presented below.below:
| | | | Successor | March 31, 2020 | | December 31, 2019 |
| | June 30, 2019 | | December 31, 2018 | |
| | Transfers
Accounted for as
Secured
Borrowings | | Reverse Secured Borrowings | | Transfers
Accounted for as
Secured
Borrowings | | Reverse Secured Borrowings | |
| Consolidated transactions with VIEs | | Transfers
Accounted for as
Secured
Borrowings | | Reverse Secured Borrowings | | Transfers
Accounted for as
Secured
Borrowings | | Reverse Secured Borrowings |
| Assets | | | | | | | | | | | | | | |
| Restricted cash | $ | 59 |
| | $ | 40 |
| | $ | 70 |
| | $ | 63 |
| $ | 53 |
| | $ | 43 |
| | $ | 66 |
| | $ | 42 |
|
| Reverse mortgage interests, net | — |
| | 5,975 |
| | — |
| | 6,728 |
| |
Reverse mortgage interests, net(1) | | — |
| | 4,878 |
| | — |
| | 5,230 |
|
| Advances and other receivables, net | 583 |
| | — |
| | 628 |
| | — |
| 498 |
| | — |
| | 540 |
| | — |
|
| Mortgage loans held for investment, net | 113 |
| | — |
| | 118 |
| | — |
| |
| Other assets | — |
| | 9 |
| | — |
| | — |
| |
| Total assets | $ | 755 |
| | $ | 6,024 |
| | $ | 816 |
| | $ | 6,791 |
| $ | 551 |
| | $ | 4,921 |
| | $ | 606 |
| | $ | 5,272 |
|
| | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | |
Advance facilities(1) | $ | 478 |
| | $ | — |
| | $ | 505 |
| | $ | — |
| |
Advance facilities(2) | | $ | 407 |
| | $ | — |
| | $ | 359 |
| | $ | — |
|
| Payables and other liabilities | 1 |
| | — |
| | 1 |
| | 1 |
| — |
| | 1 |
| | 1 |
| | 1 |
|
| Participating interest financing | — |
| | 4,861 |
| | — |
| | 5,607 |
| — |
| | 4,045 |
| | — |
| | 4,284 |
|
| HECM Securitizations (HMBS) | | | | | | | | | | | | | | |
| Trust 2017-2 | — |
| | — |
| | — |
| | 231 |
| |
| Trust 2018-1 | — |
| | 224 |
| | — |
| | 284 |
| |
| Trust 2019-2 | | — |
| | 297 |
| | — |
| | 333 |
|
| Trust 2019-1 | | — |
| | 269 |
| | — |
| | 302 |
|
| Trust 2018-3 | | — |
| | 190 |
| | — |
| | 209 |
|
| Trust 2018-2 | — |
| | 182 |
| | — |
| | 250 |
| — |
| | 137 |
| | — |
| | 148 |
|
| Trust 2018-3 | — |
| | 272 |
| | — |
| | 326 |
| |
| Trust 2019-1 | — |
| | 398 |
| | — |
| | — |
| |
| Nonrecourse debt–legacy assets | 22 |
| | — |
| | 29 |
| | — |
| |
| Total liabilities | $ | 501 |
| | $ | 5,937 |
| | $ | 535 |
| | $ | 6,699 |
| $ | 407 |
| | $ | 4,939 |
| | $ | 360 |
| | $ | 5,277 |
|
| |
(1) | Amounts include net purchase discount of $60 and $46 as of March 31, 2020 and December 31, 2019, respectively. |
| |
Advance facilities(2)
| Amounts include the Nationstar agency advance financing facility and notes payable recorded by the Nationstar Mortgage Advance Receivable Trust, and the Nationstar Agency Advance Receivables Trust. Refer to Notes Payable in Note 10, Indebtedness, for additional information. |
The following table shows a summary of the outstanding collateral and certificate balances for securitization trusts for which the Company was the transferor, including any retained beneficial interests and MSRs, that were not consolidated by the Company.Company:
| | | | Successor | |
| | June 30, 2019 | | December 31, 2018 | |
| Total collateral balances | $ | 1,752 |
| | $ | 1,873 |
| |
| Unconsolidated securitization trusts | | March 31, 2020 | | December 31, 2019 |
| Total collateral balances - UPB | | $ | 1,460 |
| | $ | 1,503 |
|
| Total certificate balances | $ | 1,697 |
| | $ | 1,817 |
| $ | 1,467 |
| | $ | 1,512 |
|
The Company has not retained any variable interests in the unconsolidated securitization trusts that were outstanding as of June 30, 2019March 31, 2020 and December 31, 20182019 and therefore does not have a significant maximum exposure to loss related to these unconsolidated VIEs.
A summary of mortgage loans transferred by the Company to unconsolidated securitization trusts that are 60 days or more past due are presented below.below:
| | | | Successor | |
| Principal Amount of Loans 60 Days or More Past Due | June 30, 2019 | | December 31, 2018 | |
| Principal Amount of Transferred Loans 60 Days or More Past Due | | March 31, 2020 | | December 31, 2019 |
| Unconsolidated securitization trusts | $ | 242 |
| | $ | 285 |
| $ | 184 |
| | $ | 193 |
|
13. Stockholders' Equity
UponEquity-based awards under the consummation of the Merger, the Company assumed and adopted the Nationstar Mortgage Holdings Inc. Second Amended and Restated 2012 Incentive Compensation Plan (“2012 Plan”), as may be amended, that offers equity-based awards to certain key employees of the Company, consultants, and non-employee directors. Additionally, on May 16, 2019, the Company’s stockholders approved the Mr. Cooper Group Inc. 2019 Omnibus Incentive Plan (the “2019 Plan”) which had previously been approved by the Company’s Board of Directors.
The equity-based awards under the 2012 Plan and the 2019 Plan include (i) restricted stock units (“RSUs”) granted to employees of the Company, consultants, and non-employee directors. These awardsdirectors and (ii) performance stock units (“PSUs”) granted to certain executive officers. The RSUs are valued at the fair market value of the Company’s or the Predecessor’s common stock on the grant date as defined in the 20122019 Plan. The PSUs are valued at the fair market value of the Company’s common stock on the grant date as defined in the 2019 Plan and the 2019 Plan.a Monte Carlo simulation model. During the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, certain key employees of the Company, consultants, and non-employee directors of the Company and the Predecessor were granted 2,449 thousand1.1 million and 1,071 thousand1.9 million RSUs, respectively, under the 2012 Plan and the 2019 Plan.respectively. The stock awards for employees generally vest in equal installments of 33.3%, 33.3% and 33.4% respectively on each of the first three anniversaries of the awards, provided that (i) the participant remains continuously employed with the Company during that time or (ii) the participant’s employment has terminated by reason of retirement. The stock awards for non-employee directors generally vest the earlier of (a) the first anniversary of the grant date or (b) the date of the next annual stockholders meeting following the grant date. In addition, upon death or disability, the unvested shares of an award will vest. During the three months ended March 31, 2020, certain executives of the Company were granted 0.5 million PSUs. For the 2020 PSU program, PSUs are eligible to vest and be settled into shares of Common Stock in an amount between 0% and 200% of a target award based on achievement of total shareholder return performance vesting criteria over a period of three years beginning March 1, 2020, with one-third of the units also eligible to vest based on performance through March 1, 2021.
The Company and the Predecessor recorded $5$4 and $4 of expenses related to equity-based awards during the three months ended June 30,March 31, 2020 and 2019, and 2018, respectively, and $9 and $8 for the six months ended June 30, 2019 and 2018, respectively.
14. Earnings Per Share
The Company computes earnings per share using the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. The Series A Preferred Stock is considered participating securities because it has dividend rights determined on an as-converted basis in the event of Company’s declaration of a dividend or distribution for common shares.
The following table sets forth the computation of basic and diluted net (loss) incomeloss per common share (amounts in millions, except per share amounts).:
| | | Computation of earnings per share | | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Net loss attributable to Mr. Cooper | | $ | (168 | ) | | $ | (186 | ) |
| Less: Undistributed earnings attributable to participating stockholders | | — |
| | — |
|
| Net loss attributable to common stockholders | | $ | (168 | ) | | $ | (186 | ) |
| | Successor | | | Predecessor | | | |
| | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 | |
| Net (loss) income attributable to Successor/Predecessor | $ | (87 | ) | | $ | (273 | ) | | | $ | 58 |
| | $ | 218 |
| |
| Less: Undistributed earnings attributable to participating stockholders | — |
| | — |
| | | — |
| | — |
| |
| Net (loss) income attributable to common stockholders | $ | (87 | ) | | $ | (273 | ) | | | $ | 58 |
| | $ | 218 |
| |
| | | | | | | | | | |
| Net (loss) income per common share attributable to Successor/Predecessor: | | | | | | | | | |
| Net loss per common share attributable to Mr. Cooper: | | | | |
| Basic | $ | (0.96 | ) | | $ | (3.00 | ) | | | $ | 0.59 |
| | $ | 2.22 |
| $ | (1.84 | ) | | $ | (2.05 | ) |
| Diluted | $ | (0.96 | ) | | $ | (3.00 | ) | | | $ | 0.59 |
| | $ | 2.20 |
| $ | (1.84 | ) | | $ | (2.05 | ) |
| | | | | | | | | | | | |
| Weighted average shares of common stock outstanding (in thousands): | | | | | | | | | | | |
| Basic | 91,054 |
| | 90,978 |
| | | 98,203 |
| | 98,037 |
| 91,385 |
| | 90,828 |
|
| Dilutive effect of stock awards | — |
| | — |
| | | 927 |
| | 1,086 |
| |
| Dilutive effect of participating securities | — |
| | — |
| | | — |
| | — |
| |
Dilutive effect of stock awards(1) | | — |
| | — |
|
Dilutive effect of participating securities(1) | | — |
| | — |
|
| Diluted | 91,054 |
| | 90,978 |
| | | 99,130 |
| | 99,123 |
| 91,385 |
| | 90,828 |
|
| |
(1) | Due to year-to-date loss, the Company excluded potential common shares from the computation of diluted EPS because inclusion would be antidilutive. |
15. Income Taxes
The components of income tax (benefit) expensebenefit were as follows:
|
| | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 |
| (Loss) income before income tax (benefit) expense | $ | (117 | ) | | $ | (350 | ) | | | $ | 79 |
| | $ | 285 |
|
| | | | | | | | | |
| Income tax (benefit) expense | $ | (29 | ) | | $ | (76 | ) | | | $ | 21 |
| | $ | 67 |
|
| | | | | | | | | |
| Effective tax rate | 24.6 | % | | 21.7 | % | | | 26.5 | % | | 23.6 | % |
|
| | | | | | | |
| Income taxes | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Loss before income tax benefit | $ | (239 | ) | | $ | (233 | ) |
| | | | |
| Income tax benefit | $ | (68 | ) | | $ | (47 | ) |
| | | | |
Effective tax rate(1) | 28.4 | % | | 20.3 | % |
| |
(1) | Effective tax rate is calculated using whole numbers. |
For the three months ended March 31, 2020, the effective tax rate differed from the statutory federal rate of 21% primarily due to state income taxes, as well as unfavorable permanent differences including executive compensation disallowed under Internal Revenue Code Section 162(m). The increase in the effective tax rate as compared to the three months ended March 31, 2019 is primarily attributable to the increased relative unfavorable tax impacts of the permanent differences on the annual effective rate.
For the three and six months ended June 30,March 31, 2019, the effective tax rate differed from the statutory federal rate of 21% primarily due to permanent differences including executive compensation disallowed under Internal Revenue Code Section 162(m) and nondeductible meals and entertainment expenses, as well as other recurring items such as the state tax benefit.
For the three and six months ended June 30, 2018 in the Predecessor period, the effective tax rate differed slightly from the statutory federal rate of 21% primarily due to permanent differences including executive compensation disallowed under Internal Revenue Code Section 162(m), favorable discrete adjustments in connection with the remediation of the Company’s uncertain tax position, and other recurring adjustments, such as state tax expense offset by excess tax deficiency related to restricted share-based compensation.
16. Fair Value Measurements
Fair value is a market-based measurement, not an entity-specific measurement, and should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a three-tiered fair value hierarchy has been established based on the level of observable inputs used in the measurement of fair value (e.g., Level 1 representing quoted prices for identical assets or liabilities in an active market; Level 2 representing values using observable inputs other than quoted prices included within Level 1; and Level 3 representing estimated values based on significant unobservable inputs).
The following describes the methods and assumptions used by the Company in estimating fair values:
Cash and Cash Equivalents, Restricted Cash (Level 1) – The carrying amount reported in the consolidated balance sheets approximates fair value.
Mortgage Loans Held for Sale (Level 2) – The Company originates mortgage loans in the U.S. that it intends to sell into Fannie Mae, Freddie Mac and Ginnie Mae (collectively, the “Agencies”) MBS. Additionally, the Company holds mortgage loans that it intends to sell into the secondary markets via whole loan sales or securitizations. The Company measures newly originated prime residential mortgage loans held for sale at fair value.
Mortgage loans held for sale are typically pooled together and sold into certain exit markets, depending upon underlying attributes of the loan, such as agency eligibility, product type, interest rate and credit quality. Mortgage loans held for sale are valued on a recurring basis using a market approach by utilizing either: (i) the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, including the value attributable to mortgage servicing and credit risk, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted for credit risk and other individual loan characteristics. As these prices are derived from market observable inputs, the Company classifies these valuations as Level 2 in the fair value disclosures.
The Company may acquire mortgage loans held for sale from various securitization trusts for which it acts as servicer through the exercise of various clean-up call options as permitted through the respective pooling and servicing agreements. The Company has elected to account for these loans at the lower of cost or market. The Company classifies these valuations as Level 2 in the fair value disclosures.
The Company may also purchase loans out of a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. The Company has elected to carry these loans at fair value. See Note 6, Mortgage Loans Held for Sale and Investment, for more information.
Mortgage Loans Held for Investment (Level 3) – Mortgage loans held for investment primarily consist of nonconforming or subprime mortgage loans that were transferred in 2009 from mortgage loans held for sale at fair value. The Company intends to hold these loans to their maturities. The Company determines the fair value of loans held for investment, on a recurring basis, based on various underlying attributes such as market participants’ views, loan delinquency, recent observable loan pricing and sales for similar loans, individual loan characteristics and internal market evaluation. These internal market evaluations require the use of judgment by the Company and can have a significant impact on the determination of the loan’s fair value. As these fair values are derived from internally developed valuation models, using observable inputs, the Company classifies these valuations as Level 3 in the fair value disclosures. See Note 6, Mortgage Loans Held for Sale and Investment, for more information.
Mortgage Servicing Rights – Fair Value (Level 3) – The Company estimates the fair value of its forward MSRs on a recurring basis using a process that combines the use of a discounted cash flow model and analysis of current market data to arrive at an estimate of fair value. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, discount rates, ancillary revenues, earnings on escrowsescrow and costs to service. These assumptions are generated and applied based on collateral stratifications including product type, remittance type, geography, delinquency and coupon dispersion. These assumptions require the use of judgment by the Company and can have a significant impact on the fair value of the MSRs. Quarterly, management obtains third-party valuations to assess the reasonableness of the fair value calculations provided by the internal cash flow model. Because of the nature of the valuation inputs, the Company classifies these valuations as Level 3 in the fair value disclosures. See Note 3, Mortgage Servicing Rights and Related Liabilities, for more information.
Advances and Other Receivables, Net (Level 3) - Advances and other receivables, net are valued at their net realizable value after taking into consideration the reserves. Advances have no stated maturity. Their net realizable value approximates fair value as the net present value based on discounted cash flow is not materially different from the net realizable value. See Note 4, Advances and Other Receivables, Net for more information.
Reverse Mortgage Interests, Net (Level 3) – The Company’s reverse mortgage interests are primarily comprised of HECM loans that are insured by FHA and guaranteed by Ginnie Mae upon securitization. Quarterly, the Company estimates fair value using discounted cash flows, obtained from a third-party and supplemented with historical loss experience on the similar assets, with the discount rate approximateapproximating that of similar financial instruments, as observed from recent trades withinwith the HMBS. Key assumptions within the model are based on market participant benchmarks and include discount rates, cost to service, weighted average life of the portfolio, and estimated participating income. Discounted cash flows are applied based on collateral stratifications and include loan rate type, loan status (active vs. inactive), and securitization. Prices are also influenced from both internal models and other observable inputs. The Predecessor determined fair value for active reverse mortgage loans based on pricing of the recent securitizations with similar attributes and characteristics, such as collateral values and prepayment speeds and adjusted as necessary for differences. The related timing of these transactions allowed the pricing to consider the current interest rate risk exposures. The SuccessorCompany determined fair value for all loans based on the applicable tranches established during the Merger valuation. Tranches are segregated based on participation percentages, original loan status as of the Merger date, and interest rate types, and loan status (active vs inactive). Prices are also influenced from both internal models and other observable inputs, including applicable forward interest rate curves. Additionally, historical loss factors are considered within the overall valuation. Because of the unobservable nature of the valuation inputs, the Company classifies these valuations as Level 3 in the fair value disclosures. See Note 5, Reverse Mortgage Interests, Net for more information.
Derivative Financial Instruments (Level 2) – The Company enters into a variety of derivative financial instruments as part of its hedging strategy and measures these instruments at fair value on a recurring basis in the consolidated balance sheets. The majority of theseThese derivatives are exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, the Company utilizes the exchange price or dealer market price for the particular derivative contract; therefore, these contracts are classified as Level 2. In addition, the Company enters into IRLCs and LPCs with prospective borrowers and other loan originators. These commitments are carried at fair value based on the fair value of underlying mortgage loans which are based on observable market data. The Company adjusts the outstanding IRLCs with prospective borrowers based on an expectation that it will be exercised, and the loan will be funded. IRLCs and LPCs are recorded in derivative financial instruments in the consolidated balance sheets. These commitments are classified as Level 2 in the fair value disclosures, as the valuations are based on market observable inputs. The Company has entered into Eurodollar futures contracts as part of its hedging strategy. The futures contracts are measured at fair value on a recurring basis and classified as Level 2 in the fair value disclosures as the valuation is based on market observable data. Derivative financial instruments are recorded in other assets and payables and other liabilities within the consolidated balance sheets. See Note 9, Derivative Financial Instruments, for more information.
Advance Facilities and Warehouse Facilities (Level 2) – As the underlying warehouse and advance finance facilities bear interest at a rate that is periodically adjusted based on a market index, the carrying amount reported at amortized cost on the consolidated balance sheets approximates fair value. See Note 10, Indebtedness, for more information.
Unsecured Senior Notes (Level 1) – The fair value of unsecured senior notes, which are carried at amortized cost, is based on quoted market prices and is considered Level 1 from the market observable inputs used to determine fair value. See Note 10, Indebtedness, for more information.
Nonrecourse Debt – Legacy Assets (Level 3) – The Company estimates fair value based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. These prices are derived from a combination of internally developed valuation models and quoted market prices, and are classified as Level 3. See Note 10, Indebtedness, for more information.
Excess Spread Financing (Level 3) – The Company estimates fair value on a recurring basis based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, average life, recapture rates and discount rate. As these prices are derived from a combination of internally developed valuation models and quoted market prices based on the value of the underlying MSRs, the Company classifies these valuations as Level 3 in the fair value disclosures. Excess spread financing is recorded in MSR related liabilities within the consolidated balance sheets. See Note 3, Mortgage Servicing Rights and Related Liabilities, for more information.
Mortgage Servicing Rights Financing Liability (Level 3) - The Company estimates fair value on a recurring basis based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being advance financing rates and annual advance recovery rates. As these assumptions are derived from internally developed valuation models based on the value of the underlying MSRs, the Company classifies these valuations as Level 3 in the fair value disclosures. Mortgage servicing rights financing liability is recorded in MSR related liabilities within the consolidated balance sheets. See Note 3, Mortgage Servicing Rights and Related Liabilities, for more information.
Participating Interest Financing (Level 2)3) – The Company estimates fair value based on the present value of future expected discounted cash flows with the discount rate approximating that of similar financial instruments. As the prices are derived from both internal models and other observable inputs, the Company classifies these valuations as Level 3 in the fair value disclosures. The Predecessor estimatedParticipating interest financing is recorded in other nonrecourse debt within the fair value using a market approach by utilizing the fair value of securities backed by similar participating interests in reverse mortgage loans. The Predecessor classified these valuations as Level 2 in the fair value disclosures.consolidated balance sheets. See Note 3,5, Reverse Mortgage Servicing Rights and Related LiabilitiesInterests, Net, and Note 10, Indebtedness, for more information.
HECM Securitizations (Level 3) – The Company estimates fair value using a market approach by utilizing the fair value of executed HECM securitizations. Since the executed HECM securitizations are private placements, the Company classifies these valuations as Level 3 in the fair value disclosures. The Predecessor estimated fair value of theHECM securitizations are recorded at amortized cost in other nonrecourse debt related to HECM securitization based onwithin the present value of future expected discounted cash flows with the discount rate approximating that of similar financial instruments. As the prices are derived from both internal models and other observable inputs, the Predecessor classified this as Level 3 in the fair value disclosures.consolidated balance sheets. See Note 10, Indebtedness for more information.
The following table presents the estimated carrying amount and fair value of the Company’s financial instruments and other assets and liabilities measured at fair value on a recurring basis.basis:
|
| | | | | | | | | | | | | | | |
| | Successor |
| | June 30, 2019 |
| | | | Recurring Fair Value Measurements |
| | Total Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | |
Mortgage loans held for sale(1) | $ | 3,421.6 |
| | $ | — |
| | $ | 3,421.6 |
| | $ | — |
|
Mortgage loans held for investment(1) | 114.3 |
| | — |
| | — |
| | 114.3 |
|
Mortgage servicing rights(1) | 3,504.5 |
| | — |
| | — |
| | 3,504.5 |
|
| Derivative financial instruments | | | | | | | |
| IRLCs | 110.2 |
| | — |
| | 110.2 |
| | — |
|
| Forward MBS trades | 1.1 |
| | — |
| | 1.1 |
| | — |
|
| LPCs | 16.5 |
| | — |
| | 16.5 |
| | — |
|
Eurodollar futures(2) | — |
| | — |
| | — |
| | — |
|
| Total assets | $ | 7,168.2 |
| | $ | — |
| | $ | 3,549.4 |
| | $ | 3,618.8 |
|
| Liabilities | | | | | | | |
| Derivative financial instruments | | | | | | | |
IRLCs(2) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Forward MBS trades | 30.3 |
| | — |
| | 30.3 |
| | — |
|
| LPCs | 1.3 |
| | — |
| | 1.3 |
| | — |
|
Eurodollar futures(2) | — |
| | — |
| | — |
| | — |
|
| Mortgage servicing rights financing | 42.6 |
| | — |
| | — |
| | 42.6 |
|
| Excess spread financing | 1,429.4 |
| | — |
| | — |
| | 1,429.4 |
|
| Total liabilities | $ | 1,503.6 |
| | $ | — |
| | $ | 31.6 |
| | $ | 1,472.0 |
|
| |
(1)
| Based on the nature and risks of the underlying assets and liabilities, the fair value is presented for the aggregate account. |
| |
(2)
| Fair values of the underlying assets and liabilities are less than $0.1 for the specified dates. |
|
| | | | | | | | | | | | | | | |
| | March 31, 2020 |
| | | | Recurring Fair Value Measurements |
| Fair value - Recurring basis | Total Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | |
| Mortgage loans held for sale | $ | 3,922 |
| | $ | — |
| | $ | 3,922 |
| | $ | — |
|
| Forward mortgage servicing rights | 3,109 |
| | — |
| | — |
| | 3,109 |
|
| Derivative financial instruments | | | | | | | |
| IRLCs | 263 |
| | — |
| | 263 |
| | — |
|
| Forward MBS trades | 6 |
| | — |
| | 6 |
| | — |
|
| LPCs | 25 |
| | — |
| | 25 |
| | — |
|
| Total assets | $ | 7,325 |
| | $ | — |
| | $ | 4,216 |
| | $ | 3,109 |
|
| Liabilities | | | | | | | |
| Derivative financial instruments | | | | | | | |
| Forward MBS trades | $ | 223 |
| | $ | — |
| | $ | 223 |
| | $ | — |
|
| Mortgage servicing rights financing | 43 |
| | — |
| | — |
| | 43 |
|
| Excess spread financing | 1,242 |
| | — |
| | — |
| | 1,242 |
|
| Total liabilities | $ | 1,508 |
| | $ | — |
| | $ | 223 |
| | $ | 1,285 |
|
| | | | Successor | December 31, 2019 |
| | December 31, 2018 | | | Recurring Fair Value Measurements |
| | | | Recurring Fair Value Measurements | |
| | Total Fair Value | | Level 1 | | Level 2 | | Level 3 | |
| Fair value - Recurring basis | | Total Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | | | | | | | | |
Mortgage loans held for sale(1) | $ | 1,630.8 |
| | $ | — |
| | $ | 1,630.8 |
| | $ | — |
| |
Mortgage loans held for investment(1) | 119.1 |
| | — |
| | — |
| | 119.1 |
| |
Forward mortgage servicing rights(1) | 3,665.4 |
| | — |
| | — |
| | 3,665.4 |
| |
| Mortgage loans held for sale | | $ | 4,077 |
| | $ | — |
| | $ | 4,077 |
| | $ | — |
|
| Forward mortgage servicing rights | | 3,496 |
| | — |
| | — |
| | 3,496 |
|
| Derivative financial instruments | | | | | | | | | | | | | | |
| IRLCs | 47.6 |
| | — |
| | 47.6 |
| | — |
| 135 |
| | — |
| | 135 |
| | — |
|
| Forward MBS trades | 0.1 |
| | — |
| | 0.1 |
| | — |
| 7 |
| | — |
| | 7 |
| | — |
|
| LPCs | 1.7 |
| | — |
| | 1.7 |
| | — |
| 12 |
| | — |
| | 12 |
| | — |
|
Eurodollar futures(2) | — |
| | — |
| | — |
| | — |
| |
| Total assets | $ | 5,464.7 |
| | $ | — |
| | $ | 1,680.2 |
| | $ | 3,784.5 |
| $ | 7,727 |
| | $ | — |
| | $ | 4,231 |
| | $ | 3,496 |
|
| Liabilities | | | | | | | | | | | | | | |
| Derivative financial instruments | | | | | | | | | | | | | | |
| Forward MBS trades | $ | 19.3 |
| | $ | — |
| | $ | 19.3 |
| | $ | — |
| $ | 12 |
| | $ | — |
| | $ | 12 |
| | $ | — |
|
| LPCs | 0.4 |
| | — |
| | 0.4 |
| | — |
| 3 |
| | — |
| | 3 |
| | — |
|
Eurodollar futures(2) | — |
| | — |
| | — |
| | — |
| |
| Mortgage servicing rights financing | 31.7 |
| | — |
| | — |
| | 31.7 |
| 37 |
| | — |
| | — |
| | 37 |
|
| Excess spread financing | 1,184.4 |
| | — |
| | — |
| | 1,184.4 |
| 1,311 |
| | — |
| | — |
| | 1,311 |
|
| Total liabilities | $ | 1,235.8 |
| | $ | — |
| | $ | 19.7 |
| | $ | 1,216.1 |
| $ | 1,363 |
| | $ | — |
| | $ | 15 |
| | $ | 1,348 |
|
| |
(1)
| Based on the nature and risks of the underlying assets and liabilities, the fair value is presented for the aggregate account. |
| |
(2)
| Fair values of the underlying assets and liabilities are less than $0.1 for the specified dates. |
The tabletables below presentspresent a reconciliation for all of the Company and Predecessor’sCompany’s Level 3 assets and liabilities measured at fair value on a recurring basis.basis:
| | | | Successor | Three Months Ended March 31, 2020 |
| | Assets | | Liabilities | Assets | | Liabilities |
| Six Months Ended June 30, 2019 | Mortgage servicing rights | | Mortgage loans held for investment | | Excess spread financing | | Mortgage servicing rights financing | |
| Fair value - Level 3 assets and liabilities | | Mortgage servicing rights | | Excess spread financing | | Mortgage servicing rights financing |
| Balance - beginning of period | $ | 3,665 |
| | $ | 119 |
| | $ | 1,184 |
| | $ | 32 |
| $ | 3,496 |
| | $ | 1,311 |
| | $ | 37 |
|
| Total gains or losses included in earnings | (724 | ) | | 3 |
| | (74 | ) | | 11 |
| (534 | ) | | (35 | ) | | 6 |
|
| Payments received from borrowers | — |
| | (8 | ) | | — |
| | — |
| |
| Purchases, issuances, sales, repayments and settlements | | | | | | | | | | | | |
| Purchases | 689 |
| | — |
| | — |
| | — |
| 24 |
| | — |
| | — |
|
| Issuances | 169 |
| | — |
| | 438 |
| | — |
| 123 |
| | 24 |
| | — |
|
| Sales | (294 | ) | | — |
| | — |
| | — |
| |
| Repayments | — |
| | — |
| | (12 | ) | | — |
| |
| Settlements | — |
| | — |
| | (107 | ) | | — |
| |
| Settlements and repayments | | — |
| | (58 | ) | | — |
|
| Balance - end of period | $ | 3,505 |
| | $ | 114 |
| | $ | 1,429 |
| | $ | 43 |
| $ | 3,109 |
| | $ | 1,242 |
| | $ | 43 |
|
| | | | Predecessor | Three Months Ended March 31, 2019 |
| | Assets | | Liabilities | Assets | | Liabilities |
| Six Months Ended June 30, 2018 | Mortgage servicing rights | | Excess spread financing | | Mortgage servicing rights financing | |
| Fair value - Level 3 assets and liabilities | | Mortgage servicing rights | | Excess spread financing | | Mortgage servicing rights financing |
| Balance - beginning of period | $ | 2,937 |
| | $ | 996 |
| | $ | 10 |
| $ | 3,665 |
| | $ | 1,184 |
| | $ | 32 |
|
| Total gains or losses included in earnings | 144 |
| | 74 |
| | 6 |
| (399 | ) | | (69 | ) | | 2 |
|
| Purchases, issuances, sales, repayments and settlements | | | | | | | | | | |
| Purchases | 132 |
| | — |
| | — |
| 409 |
| | — |
| | — |
|
| Issuances | 139 |
| | 70 |
| | — |
| 66 |
| | 245 |
| | — |
|
| Sales | 4 |
| | — |
| | — |
| (260 | ) | | — |
| | — |
|
| Repayments | — |
| | (2 | ) | | — |
| |
| Settlements | — |
| | (91 | ) | | — |
| |
| Settlements and repayments | | — |
| | (51 | ) | | — |
|
| Balance - end of period | $ | 3,356 |
| | $ | 1,047 |
| | $ | 16 |
| $ | 3,481 |
| | $ | 1,309 |
| | $ | 34 |
|
As of March 31, 2020 and December 31, 2019, the Company had no financial instruments classified as mortgage loans held for investment as the related portfolio was sold in September 2019. During the three months ended March 31, 2019, the Company had an immaterial change in mortgage loans held for investment.
No transfers were made into or out of Level 3 fair value assets and liabilities for the Company and Predecessor for the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, respectively.
The tabletables below presentspresent a summary of the estimated carrying amount and fair value of the Company’s financial instruments.instruments: | | | | Successor | March 31, 2020 |
| | June 30, 2019 | Carrying Amount | | Fair Value |
| | Carrying Amount | | Fair Value | |
| | Level 1 | | Level 2 | | Level 3 | |
| Financial instruments | | Carrying Amount | | Level 1 | | Level 2 | | Level 3 |
| Financial assets | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 245 |
| | $ | 245 |
| | $ | — |
| | $ | — |
| $ | 579 |
| | $ | 579 |
| | $ | — |
| | $ | — |
|
| Restricted cash | 304 |
| | 304 |
| | — |
| | — |
| 266 |
| | 266 |
| | — |
| | — |
|
| Advances and other receivables, net | 1,000 |
| | — |
| | — |
| | 1,000 |
| 685 |
| | — |
| | — |
| | 685 |
|
| Reverse mortgage interests, net | 7,110 |
| | — |
| | — |
| | 7,176 |
| 5,955 |
| | — |
| | — |
| | 6,015 |
|
| Mortgage loans held for sale | 3,422 |
| | — |
| | 3,422 |
| | — |
| 3,922 |
| | — |
| | 3,922 |
| | — |
|
| Mortgage loans held for investment, net | 114 |
| | — |
| | — |
| | 114 |
| |
| Derivative financial instruments | 128 |
| | — |
| | 128 |
| | — |
| 294 |
| | — |
| | 294 |
| | — |
|
| Financial liabilities | | | | | | | | | | | | | | |
| Unsecured senior notes | 2,462 |
| | 2,529 |
| | — |
| | — |
| |
| Advance facilities | 567 |
| | — |
| | 567 |
| | — |
| |
| Warehouse facilities | 4,045 |
| | — |
| | 4,045 |
| | — |
| |
Unsecured senior notes(1) | | 2,259 |
| | 2,055 |
| | — |
| | — |
|
Advance facilities(1) | | 489 |
| | — |
| | 489 |
| | — |
|
Warehouse facilities(1) | | 4,551 |
| | — |
| | 4,551 |
| | — |
|
| Mortgage servicing rights financing liability | 43 |
| | — |
| | — |
| | 43 |
| 43 |
| | — |
| | — |
| | 43 |
|
| Excess spread financing | 1,429 |
| | — |
| | — |
| | 1,429 |
| 1,242 |
| | — |
| | — |
| | 1,242 |
|
| Derivative financial instruments | 32 |
| | — |
| | 32 |
| | — |
| 223 |
| | — |
| | 223 |
| | — |
|
| Participating interest financing | 4,887 |
| | — |
| | — |
| | 4,886 |
| |
| HECM Securitization (HMBS) | | | | | | | | |
| Trust 2018-1 | 224 |
| | — |
| | — |
| | 224 |
| |
Participating interest financing(1) | | 4,056 |
| | — |
| | — |
| | 4,056 |
|
HECM Securitization (HMBS)(1) | | | | | | | | |
| Trust 2019-2 | | 295 |
| | — |
| | — |
| | 295 |
|
| Trust 2019-1 | | 268 |
| | — |
| | — |
| | 268 |
|
| Trust 2018-3 | | 189 |
| | — |
| | — |
| | 189 |
|
| Trust 2018-2 | 182 |
| | — |
| | — |
| | 182 |
| 137 |
| | — |
| | — |
| | 137 |
|
| Trust 2018-3 | 272 |
| | — |
| | — |
| | 272 |
| |
| Trust 2019-1 | 398 |
| | — |
| | — |
| | 398 |
| |
| Nonrecourse debt - legacy assets | 22 |
| | — |
| | — |
| | 22 |
| |
| |
(1) | The amounts are presented net of unamortized debt issuance costs, premium and discount. |
| | | | Successor | December 31, 2019 |
| | December 31, 2018 | Carrying Amount | | Fair Value |
| | Carrying Amount | | Fair Value | |
| | Level 1 | | Level 2 | | Level 3 | |
| Financial instruments | | Carrying Amount | | Level 1 | | Level 2 | | Level 3 |
| Financial assets | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 242 |
| | $ | 242 |
| | $ | — |
| | $ | — |
| $ | 329 |
| | $ | 329 |
| | $ | — |
| | $ | — |
|
| Restricted cash | 319 |
| | 319 |
| | — |
| | — |
| 283 |
| | 283 |
| | — |
| | — |
|
| Advances and other receivables, net | 1,194 |
| | — |
| | — |
| | 1,194 |
| 988 |
| | — |
| | — |
| | 988 |
|
| Reverse mortgage interests, net | 7,934 |
| | — |
| | — |
| | 7,942 |
| 6,279 |
| | — |
| | — |
| | 6,318 |
|
| Mortgage loans held for sale | 1,631 |
| | — |
| | 1,631 |
| | — |
| 4,077 |
| | — |
| | 4,077 |
| | — |
|
| Mortgage loans held for investment, net | 119 |
| | — |
| | — |
| | 119 |
| |
| Derivative financial instruments | 49 |
| | — |
| | 49 |
| | — |
| 153 |
| | — |
| | 153 |
| | — |
|
| Financial liabilities | | | | | | | | | | | | | | |
| Unsecured senior notes | 2,459 |
| | 2,451 |
| | — |
| | — |
| |
Unsecured senior notes(1) | | 2,366 |
| | 2,505 |
| | — |
| | — |
|
| Advance facilities | 595 |
| | — |
| | 595 |
| | — |
| 422 |
| | — |
| | 422 |
| | — |
|
| Warehouse facilities | 2,349 |
| | — |
| | 2,349 |
| | — |
| |
Warehouse facilities(1) | | 4,575 |
| | — |
| | 4,575 |
| | — |
|
| Mortgage servicing rights financing liability | 32 |
| | — |
| | — |
| | 32 |
| 37 |
| | — |
| | — |
| | 37 |
|
| Excess spread financing | 1,184 |
| | — |
| | — |
| | 1,184 |
| 1,311 |
| | — |
| | — |
| | 1,311 |
|
| Derivative financial instruments | 20 |
| | — |
| | 20 |
| | — |
| 15 |
| | — |
| | 15 |
| | — |
|
| Participating interest financing | 5,675 |
| | — |
| | — |
| | 5,672 |
| |
| HECM Securitization (HMBS) | | | | | | | | |
| Trust 2017-2 | 231 |
| | — |
| | — |
| | 230 |
| |
| Trust 2018-1 | 284 |
| | — |
| | — |
| | 284 |
| |
Participating interest financing(1) | | 4,299 |
| | — |
| | — |
| | 4,299 |
|
HECM Securitization (HMBS)(1) | | | | | | | | |
| Trust 2019-2 | | 331 |
| | — |
| | — |
| | 331 |
|
| Trust 2019-1 | | 300 |
| | — |
| | — |
| | 300 |
|
| Trust 2018-3 | | 208 |
| | — |
| | — |
| | 208 |
|
| Trust 2018-2 | 250 |
| | — |
| | — |
| | 249 |
| 148 |
| | — |
| | — |
| | 148 |
|
| Trust 2018-3 | 326 |
| | — |
| | — |
| | 326 |
| |
| Nonrecourse debt - legacy assets | 29 |
| | — |
| | — |
| | 28 |
| |
| |
(1) | The amounts are presented net of unamortized debt issuance costs, premium and discount. |
17. Capital Requirements
Certain of the Company’s secondary market investors require minimum net worth (“capital”) requirements, as specified in the respective selling and servicing agreements. In addition, these investors may require capital ratios in excess of the stated requirements to approve large servicing transfers. To the extent that these requirements are not met, the Company’s secondary market investors may utilize a range of remedies ranging from sanctions, suspension or ultimately termination of the Company’s selling and servicing agreements, which would prohibit the Company from further originating or securitizing these specific types of mortgage loans or being an approved servicer.
Among the The Company’s various capital requirements related to its outstanding selling and servicing agreements which are measured based on the Company’s operating subsidiary, Nationstar Mortgage LLC, the most restrictive of these requires the Company to maintain a minimum adjusted net worth of $856.LLC. As of June 30, 2019,March 31, 2020, the Company was in compliance with its selling and servicing capital requirements.
18. Commitments and Contingencies
Litigation and Regulatory Matters
The Company and its subsidiaries are routinely and currently involved in a significant number of legal proceedings, including, but not limited to, judicial, arbitration, regulatory and governmental proceedings related to matters that arise in connection with the conduct of the Company’s business. The legal proceedings are at varying stages of adjudication, arbitration or investigation and are generally based on alleged violations of consumer protection, securities, employment, contract, tort, common law fraud and other numerous laws, including, without limitation, the Equal Credit Opportunity Act, Fair Debt Collection Practices Act, Fair Credit Reporting Act, Real Estate Settlement Procedures Act, National Housing Act, Homeowners Protection Act, Service Member’s Civil Relief Act, Telephone Consumer Protection Act, Truth in Lending Act, Financial Institutions Reform, Recovery, and Enforcement Act of 1989, unfair, deceptive or abusive acts or practices in violation of the Dodd-Frank Act, the Securities Act of 1933, the Securities Exchange Act of 1934, the Home Mortgage Disclosure Act, Title 11 of the United States Code (aka the “Bankruptcy Code”), False Claims Act and Making Home Affordable loan modification programs.
In addition, along with others in its industry, the Company is subject to repurchase and indemnification claims and may continue to receive claims in the future, regarding alleged breaches of representations and warranties relating to the sale of mortgage loans, the placement of mortgage loans into securitization trusts or the servicing of mortgage loans securitizations. The Company is also subject to legal actions or proceedings related to loss sharing and indemnification provisions of its various acquisitions. Certain of the pending or threatened legal proceedings include claims for substantial compensatory, punitive and/or statutory damages or claims for an indeterminate amount of damages.
The Company’s business is also subject to extensive examinations, investigations and reviews by various federal, state and local governmental, regulatory and enforcement agencies. The Company has historically had a number of open investigations with these agencies and that trend continues. The Company is currently the subject of various governmental or regulatory investigations, subpoenas, examinations and inquiries related to its residential loan servicing and origination practices, bankruptcy and collections practices, its financial reporting and other aspects of its businesses. These matters include investigations by the Consumer Financial Protection Bureau (the “CFPB”), the Securities and Exchange Commission, the Executive Office of the United States Trustees, the Department of Justice, the Office of the Special Inspector General for the Troubled Asset Relief Program, the U.S. Department of Housing and Urban Development, the multi-state committee of mortgage banking regulators and various State Attorneys General. These specific matters and other pending or potential future investigations, subpoenas, examinations or inquiries may lead to administrative, civil or criminal proceedings or settlements, and possibly result in remedies including fines, penalties, restitution, or alterations in the Company’s business practices, and in additional expenses and collateral costs. Responding to these matters requires the Company to devote substantial resources, resulting in higher costs and lower net cash flows.
For example, the Company continues to progress towards resolution of certain legacy regulatory matters involving examination findings for alleged violations of certain laws related to the Company’s business practices. The Company has been in discussions with the multi-state committee of mortgage banking regulators and various State Attorneys General concerning a potential resolution of their investigations. The Company is continuing to cooperate with all parties. Inparties and in connection with these discussions, the Company previously recorded an accrual. These discussions may not result in a settlement of the matter; furthermore, any such settlement may exceed the amount accrued as of June 30, 2019.March 31, 2020. Moreover, if the discussions do not result in a settlement, the regulators and State Attorneys General may seek to exercise their enforcement authority through litigation or other proceedings and seek injunctive relief, damages, restitution and civil monetary penalties, which could have a material adverse effect on the Company’s business, reputation, financial condition and results of operations.
Further, on April 24, 2018, the CFPB notified Nationstar that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (“NORA”) process, the CFPB’s Office of Enforcement is considering whether to recommend that the CFPB take enforcement action against the Company, alleging violations of the Real Estate Settlement Procedures Act, the Consumer Financial Protection Act, and the Homeowners Protection Act, which stems from a 2014 examination. The purpose of a NORA letter is to provide a party being investigated an opportunity to present its position to the CFPB before an enforcement action may be recommended or commenced. The CFPB may seek to exercise its enforcement authority through settlement, administrative proceedings or litigation and seek injunctive relief, damages, restitution and civil monetary penalties, which could have a material adverse effect on the Company’s business, reputation, financial condition and results of operations. The Company has not recorded an accrual related to this matter as of June 30, 2019March 31, 2020 because it does not believe that the possible loss or range of loss arising from any such action is estimable. The Company is continuing to cooperate with the CFPB.
Similarly, the Company is in discussions with the Executive Office of the United States Trustees concerning certain legacy issues with respect to bankruptcy servicing practices. In connection with these discussions, the Company is undertaking certain voluntary remediation activities with respect to loans at issue in these matters. While the Company and the Executive Office of the United States Trustees are engaged in discussions to potentially resolve these issues, there is no guarantee a resolution will occur. Moreover, if the discussions do not result in a resolution, the Executive Office of the United States Trustees may seek redress through litigation or other proceedings and seek injunctive relief, damages and restitution in addition to the remediation activities, which could have a material adverse effect on the Company’s business, reputation, financial condition and results of operations. However, the Company believes it is premature to predict the potential outcome or to estimate the financial impact to the Company in connection with any potential action or settlement arising from this matter, including the voluntary remediation activities undertaken and to be undertaken by the Company.
In addition, the Company was a defendant in a class action proceeding originally filed in state court in March 2012 and then removed to the United States District Court for the Eastern District of Washington under the caption Laura Zamora Jordan v. Nationstar Mortgage LLC. The suit was filed on behalf of a class of Washington borrowers and challenges property preservation measures the Company took, as loan servicer, after the borrowers defaulted and the Company’s vendors determined that the borrowers had vacated or abandoned their properties. The case raises claims for (i) common law trespass, (ii) statutory trespass, and (iii) violation of Washington’s Consumer Protection Act, and seeks recovery of actual, statutory, and treble damages, as well as attorneys’ fees and litigation costs. On July 25, 2018, the Company entered into a settlement agreement to resolve this matter, and on May 2, 2019, the court approved the settlement agreement. The Company is pursuing reimbursement of the settlement payment from the owners of the loans it serviced, but there can be no assurance that the Company would prevail with any claims for reimbursement.
The Company is a defendant in a proceeding filed on January 2, 2018 in the U.S. District Court for the Northern District of California under the caption Collateral Analytics LLC v. Nationstar Mortgage LLC et al. The plaintiff alleges that the Company misappropriated plaintiff’s intellectual property for the purpose of replicating plaintiff’s products. The case raises federal and state law claims for misappropriation of trade secrets and breach of contract and seeks an award of actual damages, unjust enrichment, lost profits and/or a reasonable royalty, exemplary damages and injunctive relief preventing further misuse or disclosure of plaintiff’s intellectual property. The Company believes it has meritorious defenses and will vigorously defend itself in this matter.
The Company is also a defendant in a proceeding filed on October 23, 2015 in the U.S. District Court for the Central District of California under the caption Alfred Zaklit and Jessy Zaklit, individually and on behalf of all others similarly situated v. Nationstar Mortgage LLC et al. The plaintiff alleges that the Company improperly recorded telephone calls without the knowledge or consent of borrowers in violation of the California Penal Code. On July 24, 2017, the court certified a class comprised of California borrowers who, from October 2014 to May 2016, participated in outbound telephone conversations with the Company’s employees who recorded the conversations without first informing the borrowers that the conversations were being recorded. The class seeks statutory damages and attorney’s fees. On September 10, 2018, the Company reached an agreement in principal to settle this matter, and the parties are currently seeking approval of the settlement from the court.
The Company seeks to resolve all legal proceedings and other matters in the manner management believes is in the best interest of the Company and contests liability, allegations of wrongdoing and, where applicable, the amount of damages or scope of any penalties or other relief sought as appropriate in each pending matter. The Company has entered into agreements with a number of entities and regulatory agencies that toll applicable limitations periods with respect to their claims.
On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with outstanding legal and regulatory and governmental proceedings utilizing the latest information available. Where available information indicates that it is probable, a liability has been incurred, and the Company can reasonably estimate the amount of the loss, an accrued liability is established. The actual costs of resolving these proceedings may be substantially higher or lower than the amounts accrued.
As a legal matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is both probable and estimable. If, at the time of evaluation, the loss contingency is not both probable and reasonably estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and reasonably estimable. Once the matter is deemed to be both probable and reasonably estimable, the Company will establish an accrued liability and record a corresponding amount to legal-related expense. The Company will continue to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established. Legal-related expense for the Company, which includes legal settlements and the fees paid to external legal service providers, of $21$15 and $32$11 for the three and six months ended June 30,March 31, 2020 and 2019, respectively. Legal-related expense for the Predecessor of $3 and $7 for the three and six months ended June 30, 2018, respectively, was included in general and administrative expenses on the consolidated statements of operations.
For a number of matters for which a loss is probable or reasonably possible in future periods, whether in excess of a related accrued liability or where there is no accrued liability, the Company may be able to estimate a range of possible loss. In determining whether it is possible to provide an estimate of loss or range of possible loss, the Company reviews and evaluates its material legal matters on an ongoing basis, in conjunction with any outside counsel handling the matter. For those matters for which an estimate is possible, management currently believes the aggregate range of reasonably possible loss is $16$17 to $45$47 in excess of the accrued liability (if any) related to those matters as of June 30, 2019.March 31, 2020. This estimated range of possible loss is based upon currently available information and is subject to significant judgment, numerous assumptions and known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary substantially from the current estimate. Those matters for which an estimate is not possible are not included within the estimated range. Therefore, this estimated range of possible loss represents what management believes to be an estimate of possible loss only for certain matters meeting these criteria. It does not represent the Company’s maximum loss exposure and the Company cannot provide assurance that its litigations reserves will not need to be adjusted in the future. Thus, the Company’s exposure and ultimate losses may be higher, possibly significantly so, than the amounts accrued or this aggregate amount.
In the Company’s experience, legal proceedings are inherently unpredictable. One or more of the following factors frequently contribute to this inherent unpredictability: the proceeding is in its early stages; the damages sought are unspecified, unsupported or uncertain; it is unclear whether a case brought as a class action will be allowed to proceed on that basis or, if permitted to proceed as a class action, how the class will be defined; the other party is seeking relief other than or in addition to compensatory damages (including, in the case of regulatory and governmental investigations and inquiries, the possibility of fines and penalties); the matter presents meaningful legal uncertainties, including novel issues of law; the Company has not engaged in meaningful settlement discussions; discovery has not started or is not complete; there are significant facts in dispute; predicting possible outcomes depends on making assumptions about future decisions of courts or governmental or regulatory bodies or the behavior of other parties; and there are a large number of parties named as defendants (including where it is uncertain how damages or liability, if any, will be shared among multiple defendants). Generally, the less progress that has been made in the proceedings or the broader the range of potential results, the harder it is for the Company to estimate losses or ranges of losses that is reasonably possible the Company could incur.
Based on current knowledge, and after consultation with counsel, management believes that the current legal accrued liability within payables and accrued liabilities, is appropriate, and the amount of any incremental liability arising from these matters is not expected to have a material adverse effect on the consolidated financial condition of the Company, although the outcome of such proceedings could be material to the Company’s operating results and cash flows for a particular period depending, on among other things, the level of the Company’s revenues or income for such period. However, in the event of significant developments on existing cases, it is possible that the ultimate resolution, if unfavorable, may be material to the Company’s consolidated financial statements.
Other Loss Contingencies
As part of the Company’s ongoing operations, it acquires servicing rights of forward and reverse mortgage loan portfolios that are subject to indemnification based on the representations and warranties of the seller. From time to time, the Company will seek recovery under these representations and warranties for incurred costs. The Company believes all balances sought from sellers recorded in advances and other receivables and reverse mortgage interests represent valid claims. However, the Company acknowledges that the claims process can be prolonged due to the required time to perfect claims at the loan level. Because of the required time to perfect or remediate these claims, management relies on the sufficiency of documentation supporting the claim, current negotiations with the counterparty and other evidence to evaluate whether a reserve is required for non-recoverable balances. In the absence of successful negotiations with the seller, all amounts claimed may not be recovered. Balances may be written-off and charged against earnings when management identifies amounts where recoverability from the seller is not likely. As of June 30, 2019,March 31, 2020, the Company believes all recorded balances for which recovery is sought from the seller are valid claims, and no evidence suggests additional reserves are warranted.
Loan and Other Commitments
The Company enters into IRLCs with prospective borrowers whereby the Company commits to lend a certain loan amount under specific terms and interest rates to the borrower. The Company also enters into LPCs with prospective sellers. These loan commitments are treated as derivatives and are carried at fair value. See Note 9, Derivative Financial Instruments, for more information.
The Company had certain reverse MSRs, reverse MSLs and reverse mortgage loans related to approximately $25,569$21,590 and $28,415$22,725 of UPB in reverse mortgage loans as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. As a servicer for these reverse mortgage loans, among other things, the Company is obligated to fund borrowers’ draws to the loan customers as required in accordance with the loan agreement. As of June 30, 2019March 31, 2020 and December 31, 2018,2019, the Company’s maximum unfunded advance obligation to fund borrower draws related to these MSRs and loans was approximately $2,869$2,504 and $3,128,$2,617, respectively. Upon funding any portion of these draws, the Company expectexpects to securitize and sell the advances in transactions that will be accounted for as secured borrowings.
19. Business Segment Reporting
Upon consummation of the Merger with Nationstar, the Company has identified four reportable segments: Servicing, Originations, Xome and Corporate/Other. The Company’s segments are based upon the Company’s organizational structure, which focuses primarily on the services offered. Corporate functional expenses are allocated to individual segments based on the actual cost of services performed based on direct resource utilization, estimate of percentage use for shared services or headcount percentage for certain functions. Facility costs are allocated to individual segments based on cost per headcount for specific facilities utilized. Group insurance costs are allocated to individual segments based on global cost per headcount. Non-allocated corporate expenses include the administrative costs of executive management and other corporate functions that are not directly attributable to Company’s operating segments. Revenues generated on inter-segment services performed are valued based on similar services provided to external parties.
The following tables present financial information by segment.segment:
| | | | Successor | Three Months Ended March 31, 2020 |
| | Three Months Ended June 30, 2019 | |
| | Servicing | | Originations | | Xome | | Elimination/ Reclassification(1) | | Total Operating Segments | | Corporate/Other | | Consolidated | |
| Financial information by segment | | Servicing | | Originations | | Xome | | Elimination | | Total Operating Segments | | Corporate/Other | | Consolidated |
| Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Service related, net | $ | 27 |
| | $ | 20 |
| | $ | 108 |
| | $ | (18 | ) | | $ | 137 |
| | $ | — |
| | $ | 137 |
| $ | (180 | ) | | $ | 20 |
| | $ | 106 |
| | $ | (1 | ) | | $ | (55 | ) | | $ | 2 |
| | $ | (53 | ) |
| Net gain on mortgage loans held for sale | — |
| | 244 |
| | — |
| | 18 |
| | 262 |
| | — |
| | 262 |
| 34 |
| | 297 |
| | — |
| | — |
| | 331 |
| | — |
| | 331 |
|
| Total revenues | 27 |
| | 264 |
| | 108 |
| | — |
| | 399 |
| | — |
| | 399 |
| (146 | ) | | 317 |
| | 106 |
| | (1 | ) | | 276 |
| | 2 |
| | 278 |
|
| Total Expenses | 189 |
| | 145 |
| | 101 |
| | — |
| | 435 |
| | 57 |
| | 492 |
| |
| Other income (expenses) |
| |
| |
| |
| | | |
| |
| |
| Total expenses | | 149 |
| | 166 |
| | 96 |
| | (1 | ) | | 410 |
| | 34 |
| | 444 |
|
| Other income (expenses), net: | |
| |
| |
| |
| | | |
| |
|
| Interest income | 136 |
| | 23 |
| | — |
| | — |
| | 159 |
| | 3 |
| | 162 |
| 83 |
| | 34 |
| | — |
| | — |
| | 117 |
| | 1 |
| | 118 |
|
| Interest expense | (109 | ) | | (25 | ) | | — |
| | — |
| | (134 | ) | | (53 | ) | | (187 | ) | (113 | ) | | (27 | ) | | — |
| | — |
| | (140 | ) | | (52 | ) | | (192 | ) |
| Other | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| |
| Total Other Income (Expenses), Net | 27 |
| | (1 | ) | | — |
| | — |
| | 26 |
| | (50 | ) | | (24 | ) | |
| Other income (expenses), net | | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Total other income (expenses), net | | (30 | ) | | 7 |
| | 1 |
| | — |
| | (22 | ) | | (51 | ) | | (73 | ) |
| (Loss) income before income tax (benefit) expense | $ | (135 | ) | | $ | 118 |
| | $ | 7 |
| | $ | — |
| | $ | (10 | ) | | $ | (107 | ) | | $ | (117 | ) | $ | (325 | ) | | $ | 158 |
| | $ | 11 |
| | $ | — |
| | $ | (156 | ) | | $ | (83 | ) | | $ | (239 | ) |
| Depreciation and amortization for property and equipment and intangible assets | $ | 4 |
| | $ | 6 |
| | $ | 3 |
| | $ | — |
| | $ | 13 |
| | $ | 11 |
| | $ | 24 |
| $ | 3 |
| | $ | 3 |
| | $ | 3 |
| | $ | — |
| | $ | 9 |
| | $ | 10 |
| | $ | 19 |
|
| Total assets | $ | 12,806 |
| | $ | 7,478 |
| | $ | 493 |
| | $ | (4,687 | ) | | $ | 16,090 |
| | $ | 2,315 |
| | $ | 18,405 |
| $ | 10,142 |
| | $ | 9,608 |
| | $ | 534 |
| | $ | (5,964 | ) | | $ | 14,320 |
| | $ | 3,293 |
| | $ | 17,613 |
|
| | | | Predecessor | Three Months Ended March 31, 2019 |
| | Three Months Ended June 30, 2018 | |
| | Servicing | | Originations | | Xome | | Elimination/ Reclassification(1) | | Total Operating Segments | | Corporate/Other | | Consolidated | |
| Financial information by segment | | Servicing | | Originations | | Xome | | Elimination | | Total Operating Segments | | Corporate/Other | | Consolidated |
| Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Service related, net | $ | 248 |
| | $ | 17 |
| | $ | 62 |
| | $ | (11 | ) | | $ | 316 |
| | $ | 1 |
| | $ | 317 |
| $ | (27 | ) | | $ | 15 |
| | $ | 96 |
| | $ | — |
| | $ | 84 |
| | $ | — |
| | $ | 84 |
|
| Net gain on mortgage loans held for sale | — |
| | 116 |
| | — |
| | 11 |
| | 127 |
| | — |
| | 127 |
| 35 |
| | 131 |
| | — |
| | — |
| | 166 |
| | — |
| | 166 |
|
| Total revenues | 248 |
| | 133 |
| | 62 |
| | — |
| | 443 |
| | 1 |
| | 444 |
| 8 |
| | 146 |
| | 96 |
| | — |
| | 250 |
| | — |
| | 250 |
|
| Total Expenses | 166 |
| | 102 |
| | 52 |
| | — |
| | 320 |
| | 19 |
| | 339 |
| |
| Other income (expenses) | | | | | | | | | | | | | | |
| Total expenses | | 195 |
| | 104 |
| | 99 |
| | — |
| | 398 |
| | 45 |
| | 443 |
|
| Other income (expenses), net: | | | | | | | | | | | | | | |
| Interest income | 121 |
| | 17 |
| | — |
| | — |
| | 138 |
| | 2 |
| | 140 |
| 115 |
| | 17 |
| | — |
| | — |
| | 132 |
| | 2 |
| | 134 |
|
| Interest expense | (115 | ) | | (16 | ) | | — |
| | — |
| | (131 | ) | | (33 | ) | | (164 | ) | (114 | ) | | (18 | ) | | — |
| | — |
| | (132 | ) | | (57 | ) | | (189 | ) |
| Other | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) | |
| Total Other Income (Expenses), Net | 6 |
| | 1 |
| | — |
| | — |
| | 7 |
| | (33 | ) | | (26 | ) | |
| Income (loss) before income tax expense (benefit) | $ | 88 |
| | $ | 32 |
| | $ | 10 |
| | $ | — |
| | $ | 130 |
| | $ | (51 | ) | | $ | 79 |
| |
| Other income, net | | — |
| | 4 |
| | 11 |
| | — |
| | 15 |
| | — |
| | 15 |
|
| Total other income (expenses), net | | 1 |
| | 3 |
| | 11 |
| | — |
| | 15 |
| | (55 | ) | | (40 | ) |
| (Loss) income before income tax (benefit) expense | | $ | (186 | ) | | $ | 45 |
| | $ | 8 |
| | $ | — |
| | $ | (133 | ) | | $ | (100 | ) | | $ | (233 | ) |
| Depreciation and amortization for property and equipment and intangible assets | $ | 6 |
| | $ | 3 |
| | $ | 3 |
| | $ | — |
| | $ | 12 |
| | $ | 2 |
| | $ | 14 |
| $ | 4 |
| | $ | 3 |
| | $ | 4 |
| | $ | — |
| | $ | 11 |
| | $ | 10 |
| | $ | 21 |
|
| Total assets | $ | 14,640 |
| | $ | 4,794 |
| | $ | 423 |
| | $ | (3,538 | ) | | $ | 16,319 |
| | $ | 871 |
| | $ | 17,190 |
| $ | 13,642 |
| | $ | 4,865 |
| | $ | 502 |
| | $ | (4,100 | ) | | $ | 14,909 |
| | $ | 2,737 |
| | $ | 17,646 |
|
CAUTIONS REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the U.S. federal securities laws. These forward-looking statements include, without limitation, statements concerning plans, objectives, goals, projections, strategies, core initiatives, future events or performance, and underlying assumptions and other statements, which are not statements of historical facts, including the projected impact of COVID-19 on our business, financial performance and operating results. When used in this discussion, the words “anticipate,” “appears,” “believe,” “foresee,” “intend,” “should,” “expect,” “estimate,” “project,” “plan,” “may,” “could,” “will,” “are likely” and similar expressions are intended to identify forward-looking statements. These statements involve predictions of our future financial condition, performance, plans and strategies and are thus dependent on a number of factors including, without limitation, assumptions and data that may be imprecise or incorrect. Specific factors that may impact performance or other predictions of future actions have, in many but not all cases, been identified in connection with specific forward-looking statements. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances, and we are under no obligation to, and express disclaim any obligation, to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.
A number of important factors exist that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to:
the severity and duration of the COVID-19 pandemic; the pandemic’s impact on the U.S. and global economies; and federal, state and local governmental responses to the pandemic
our ability to maintain or grow the size of our servicing portfolio;
our ability to maintain or grow our originations volume and profitability;
our ability to recapture voluntary prepayments related to our existing servicing portfolio;
our shift in the mix of our servicing portfolio to subservicing, which is highly concentrated;
delays in our ability to collect or be reimbursed for servicing advances;
our ability to obtain sufficient liquidity and capital to operate our business;
changes in prevailing interest rates;
our ability to finance and recover costs of our reverse servicing operations;
our ability to successfully implement our strategic initiatives;
our ability to realize anticipated benefits of our previous acquisitions;
our ability to use net operating loss carryforwards and other tax attributes;
changes in our business relationships or changes in servicing guidelines with Fannie Mae, Freddie Mac and Ginnie Mae;
Xome’s ability to compete in highly competitive markets;
our ability to pay down debt;
our ability to manage legal and regulatory examinations and enforcement investigations and proceedings, compliance requirements and related costs;
our ability to prevent cyber intrusions and mitigate cyber risks; and
our ability to maintain our licenses and other regulatory approvals.
All of these factors are difficult to predict, contain uncertainties that may materially affect actual results and may be beyond our control. New factors emerge from time to time, and it is not possible for our management to predict all such factors or to assess the effect of each such new factor on our business. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and any of these statements included herein may prove to be inaccurate. Given the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. Please refer to Risk Factor, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in this report and in our Annual Report on Form 10-K for the year ended December 31, 2019 for further information on these and other risk factors affecting us.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with the accompanying unaudited consolidated financial statements and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019. The following discussion contains, in addition to the historical information, forward-looking statements that include risks, assumptions and uncertainties that could cause actual results to differ materially from those anticipated by such statements.
Dollar amounts are reported in millions, except per share data and other key metrics, unless otherwise noted.
We are a leading servicer and originator of residential mortgage loans, and a provider of real estate services through our Xome subsidiary. Our purpose is to keep the dream of homeownership alive, and we do this as a servicer by helping mortgage borrowers manage what is typically their largest financial asset, and by helping our investors maximize the returns from their portfolios of residential mortgages. We have a track record of significant growth, having expanded our servicing portfolio from $10 billion in 2009 to $629 billion as of March 31, 2020. We believe this track record reflects our strong operating capabilities, which include a proprietary low-cost servicing platform, strong loss mitigation skills, a commitment to compliance, a customer-centric culture, a demonstrated ability to retain customers, growing origination capabilities, and significant investment in technology. More information on the Company is available at investors.mrcoopergroup.com. Information contained on our websites is not, and should not be deemed to be, a part of this report.
Our strategy is to position the Company for sustainable long-term growth, drive improved efficiency and profitability, and generate a return on tangible equity of 12% or higher. Key strategic priorities include the following:
Strengthen our balance sheet, by reducing leverage, building liquidity, and managing interest rate and credit risk;
Improve efficiency by driving continuous improvement in unit costs for Servicing, Originations, and Xome, as well as by taking corporate actions to eliminate costs throughout the organizations
Grow and strengthen our customer base, in each our segments
Reinvent the customer experience, by acting as the customer’s advocate and by harnessing technology to deliver user-friendly digital solutions
Sustain the talent of our people and the culture of our organization
Maintain strong relationships with agencies, investors, regulators, and other counterparties and a strong reputation for compliance and customer service.
Impact of COVID-19 Pandemic
The COVID-19 pandemic introduces unprecedented uncertainty in the economy, including the risk of a significant employment shock and recessionary conditions, with implications for the health and safety of our employees, borrower delinquency rates, servicing advances, origination volumes, the availability of financing, and our overall profitability and liquidity. We have taken aggressive steps to address these risks, including moving in excess of 95% of our staff to work-from-home status as well as implementing other practices for mitigating the risk of the pandemic, including restrictions on non-essential travel and face-to-face meetings and enhanced sanitization of our facilities. We have also implemented the provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which makes available forbearance plans for up to one year for borrowers under government and government agency mortgage programs, which we have extended to borrowers in our private label mortgage servicing portfolio. As of April 27, 2020, approximately 194,000 or 5.6% of our customers were on a forbearance plan.
Depending on how long the pandemic continues to disrupt the economy and employment, our Servicing segment could experience our cost-to-service increase as we deal with higher delinquencies and foreclosures. However, we have not seen a deterioration in 30-day or 60-day delinquencies at this time. We expect servicing costs to be moderately elevated for loans on forbearance, offset by servicing fees earned during the period. As the pandemic began to impact the mortgage capital markets, our Originations segment took several steps to rapidly de-risk the pipeline. We slowed correspondent production, and closed our wholesale lending channel, which had only been marginally profitable and reallocated those resources to the direct-to-consumer channel. As the foreclosure process is currently on hold, with moratoriums in place at the national level and in some local markets, Xome’s revenues, particularly revenues of Exchange division, are expected to be negatively impacted. In the short term, however once the moratoriums are lifted, we expect Xome to return to profitability. See liquidity discussion related to COVID-19 pandemic in Liquidity and Capital Resources section in MD&A.
Results of Operations
|
|
| Table 1. Consolidated Operations |
|
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Revenues - operational | $ | 661 |
| | $ | 543 |
| | $ | 118 |
| | 22 | % |
| Revenues - Mark-to-market | (383 | ) | | (293 | ) | | (90 | ) | | 31 | % |
| Total revenues | 278 |
| | 250 |
| | 28 |
| | 11 | % |
| Total expenses | 444 |
| | 443 |
| | 1 |
| | — | % |
| Total other income (expenses), net | (73 | ) | | (40 | ) | | (33 | ) | | 83 | % |
| Loss before income tax expense benefit | (239 | ) | | (233 | ) | | (6 | ) | | 3 | % |
| Less: Income tax benefit | (68 | ) | | (47 | ) | | (21 | ) | | 45 | % |
| Net loss | (171 | ) | | (186 | ) | | 15 |
| | (8 | )% |
| Less: Net loss attributable to non-controlling interests | (3 | ) | | — |
| | (3 | ) | | (100 | )% |
| Net loss attributable to Mr. Cooper | $ | (168 | ) | | $ | (186 | ) | | $ | 18 |
| | (10 | )% |
We recorded a net loss of $171 during the three months ended March 31, 2020 compared to a net loss of $186 during the same period in 2019. The net loss in 2020 was lower primarily due to the income tax benefit. Consolidated operational revenues increased primarily due to increased revenue in our Originations segment, driven by higher originations volume in a declining interest rate environment and incremental volumes associated with the acquisition of Pacific Union, which was completed in February 2019. Partially offsetting the increase in operational revenues was an increase in negative mark-to-market (“MTM”) adjustments for the three months ended March 31, 2020 compared to the same period in 2019. Total expenses for the three months ended March 31, 2020 were consistent with the same period in 2019.
Total other income (expenses), net increased for the three months ended March 31, 2020 compared to the same period in 2019 primarily due to a decrease in interest income and other income (expenses), net. Interest income decreased primarily due to a decrease in income earned on reverse mortgage interest, as a result of the decline in the reverse mortgage interests balance. Other income (expenses), net was higher in three months ended March 31, 2019 primarily due to income related to the change in fair value of the contingent consideration for the acquisition of Assurant Mortgage Solutions (“AMS”).
|
| | | | |
| Table 2. Provision for Income Taxes |
|
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Income tax benefit | $ | (68 | ) | | $ | (47 | ) | | $ | (21 | ) | | 45 | % |
| | | | | | | | |
Effective tax rate(1) | 28.4 | % | | 20.3 | % | | | | |
| |
(1) | For Servicing segment results purposes, all revenueEffective tax rate is attributable to servicing portfolio. Therefore, $18 and $11 of net gain on mortgage loans is moved to service related, net during the three months ended June 30, 2019 and 2018, respectively. For consolidated results purposes, these amounts were reclassed back to net gain on mortgage loans held for sale.calculated using whole numbers. |
For the three months ended March 31, 2020 and 2019, we had an income tax benefit. The effective tax rate for the three months ended March 31, 2020 was 28.4% as compared to the effective tax rate of 20.3% for the three months ended March 31, 2019. The change in effective tax rate is primarily attributable to the increased relative unfavorable tax impacts of permanent differences such as nondeductible executive compensation and nondeductible meals and entertainment expenses on the annual effective rate, and discrete tax items in the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor |
| | Six Months Ended June 30, 2019 |
| | Servicing | | Originations | | Xome | | Elimination/ Reclassification(1) | | Total Operating Segments | | Corporate/Other | | Consolidated |
| Revenues | | | | | | | | | | | | | |
| Service related, net | $ | 35 |
| | $ | 35 |
| | $ | 204 |
| | $ | (53 | ) | | $ | 221 |
| | $ | — |
| | $ | 221 |
|
| Net gain on mortgage loans held for sale | — |
| | 375 |
| | — |
| | 53 |
| | 428 |
| | — |
| | 428 |
|
| Total revenues | 35 |
| | 410 |
| | 204 |
| | — |
| | 649 |
| | — |
| | 649 |
|
| Total Expenses | 384 |
| | 249 |
| | 200 |
| | — |
| | 833 |
| | 102 |
| | 935 |
|
| Other income (expenses) | | | | | | | | | | | | | |
| Interest income | 251 |
| | 40 |
| | — |
| | — |
| | 291 |
| | 5 |
| | 296 |
|
| Interest expense | (223 | ) | | (43 | ) | | — |
| | — |
| | (266 | ) | | (110 | ) | | (376 | ) |
| Other | — |
| | 5 |
| | 11 |
| | — |
| | 16 |
| | — |
| | 16 |
|
| Total Other Income (Expenses), Net | 28 |
| | 2 |
| | 11 |
| | — |
| | 41 |
| | (105 | ) | | (64 | ) |
| (Loss) income before income tax (benefit) expense | $ | (321 | ) | | $ | 163 |
| | $ | 15 |
| | $ | — |
| | $ | (143 | ) | | $ | (207 | ) | | $ | (350 | ) |
| Depreciation and amortization for property and equipment and intangible assets | $ | 8 |
| | $ | 9 |
| | $ | 7 |
| | $ | — |
| | $ | 24 |
| | $ | 21 |
| | $ | 45 |
|
| Total assets | $ | 12,806 |
| | $ | 7,478 |
| | $ | 493 |
| | $ | (4,687 | ) | | $ | 16,090 |
| | $ | 2,315 |
| | $ | 18,405 |
|
Our operations are conducted through four segments: Servicing, Originations, Xome, and Corporate/Other.
The Servicing segment performs operational activities on behalf of investors or owners of the underlying mortgages, including collecting and disbursing borrower payments, investor reporting, customer service, modifying loans where appropriate to help borrowers stay current, and when necessary performing collections, foreclosures, and the sale of REO.
The Originations segment originates residential mortgage loans through our direct-to-consumer channel, which provides refinance options for our existing customers, and through our correspondent and wholesale channels which purchase or originate loans from mortgage bankers and brokers.
The Xome segment provides a variety of real estate services to mortgage originators, mortgage and real estate investors, and mortgage servicers, including valuation, title, and field services, and operates an exchange which facilitates the sale of foreclosed properties.
The Corporate/Other segment represents unallocated overhead expenses, including the costs of executive management and other corporate functions that are not directly attributable to our operating segments, our senior unsecured notes, and the results of a legacy mortgage investment portfolio, which consists of non-prime and non-conforming residential mortgage loans that were transferred to a securitization trust (“Trust 2009-A”) in 2009. We collapsed Trust 2009-A and executed the sale of the loans held in the trust in September 2019.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 |
| | Servicing | | Originations | | Xome | | Elimination | | Total Operating Segments | | Corporate/Other | | Consolidated |
| Revenues | | | | | | | | | | | | | |
| Service related, net | $ | (180 | ) | | $ | 20 |
| | $ | 106 |
| | $ | (1 | ) | | $ | (55 | ) | | $ | 2 |
| | $ | (53 | ) |
| Net gain on mortgage loans held for sale | 34 |
| | 297 |
| | — |
| | — |
| | 331 |
| | — |
| | 331 |
|
| Total revenues | (146 | ) | | 317 |
| | 106 |
| | (1 | ) | | 276 |
| | 2 |
| | 278 |
|
| Total expenses | 149 |
| | 166 |
| | 96 |
| | (1 | ) | | 410 |
| | 34 |
| | 444 |
|
| Other income (expenses), net: | | | | | | |
| | | |
| | |
| Interest income | 83 |
| | 34 |
| | — |
| | — |
| | 117 |
| | 1 |
| | 118 |
|
| Interest expense | (113 | ) | | (27 | ) | | — |
| | — |
| | (140 | ) | | (52 | ) | | (192 | ) |
| Other income (expenses), net | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Total other income (expenses), net | (30 | ) | | 7 |
| | 1 |
| | — |
| | (22 | ) | | (51 | ) | | (73 | ) |
| (Loss) income before income tax (benefit) expense | $ | (325 | ) | | $ | 158 |
| | $ | 11 |
| | $ | — |
| | $ | (156 | ) | | $ | (83 | ) | | $ | (239 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Predecessor |
| | Six Months Ended June 30, 2018 |
| | Servicing | | Originations | | Xome | | Elimination/ Reclassification(1) | | Total Operating Segments | | Corporate/Other | | Consolidated |
| Revenues | | | | | | | | | | | | | |
| Service related, net | $ | 643 |
| | $ | 32 |
| | $ | 127 |
| | $ | (22 | ) | | $ | 780 |
| | $ | 1 |
| | $ | 781 |
|
| Net gain on mortgage loans held for sale | — |
| | 229 |
| | — |
| | 22 |
| | 251 |
| | — |
| | 251 |
|
| Total revenues | 643 |
| | 261 |
| | 127 |
| | — |
| | 1,031 |
| | 1 |
| | 1,032 |
|
| Total Expenses | 348 |
| | 211 |
| | 104 |
| | — |
| | 663 |
| | 40 |
| | 703 |
|
| Other income (expenses) | | | | | | | | | | | | | |
| Interest income | 247 |
| | 32 |
| | — |
| | — |
| | 279 |
| | 6 |
| | 285 |
|
| Interest expense | (233 | ) | | (31 | ) | | — |
| | — |
| | (264 | ) | | (71 | ) | | (335 | ) |
| Other | (1 | ) | | — |
| | 9 |
| | — |
| | 8 |
| | (2 | ) | | 6 |
|
| Total Other Income (Expenses), Net | 13 |
| | 1 |
| | 9 |
| | — |
| | 23 |
| | (67 | ) | | (44 | ) |
| Income (loss) before income tax expense (benefit) | $ | 308 |
| | $ | 51 |
| | $ | 32 |
| | $ | — |
| | $ | 391 |
| | $ | (106 | ) | | $ | 285 |
|
| Depreciation and amortization for property and equipment and intangible assets | $ | 13 |
| | $ | 6 |
| | $ | 6 |
| | $ | — |
| | $ | 25 |
| | $ | 4 |
| | $ | 29 |
|
| Total assets | $ | 14,640 |
| | $ | 4,794 |
| | $ | 423 |
| | $ | (3,538 | ) | | $ | 16,319 |
| | $ | 871 |
| | $ | 17,190 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2019 |
| | Servicing | | Originations | | Xome | | Elimination | | Total Operating Segments | | Corporate/Other | | Consolidated |
| Revenues | | | | | | | | | | | | | |
| Service related, net | $ | (27 | ) | | $ | 15 |
| | $ | 96 |
| | $ | — |
| | $ | 84 |
| | $ | — |
| | $ | 84 |
|
| Net gain on mortgage loans held for sale | 35 |
| | 131 |
| | — |
| | — |
| | 166 |
| | — |
| | 166 |
|
| Total revenues | 8 |
| | 146 |
| | 96 |
| | — |
| | 250 |
| | — |
| | 250 |
|
| Total expenses | 195 |
| | 104 |
| | 99 |
| | — |
| | 398 |
| | 45 |
| | 443 |
|
| Other income (expenses), net: | | | | | | | | | | | | | |
| Interest income | 115 |
| | 17 |
| | — |
| | — |
| | 132 |
| | 2 |
| | 134 |
|
| Interest expense | (114 | ) | | (18 | ) | | — |
| | — |
| | (132 | ) | | (57 | ) | | (189 | ) |
| Other income, net | — |
| | 4 |
| | 11 |
| | — |
| | 15 |
| | — |
| | 15 |
|
| Total other income (expenses), net | 1 |
| | 3 |
| | 11 |
| | — |
| | 15 |
| | (55 | ) | | (40 | ) |
| (Loss) income before income tax (benefit) expense | $ | (186 | ) | | $ | 45 |
| | $ | 8 |
| | $ | — |
| | $ | (133 | ) | | $ | (100 | ) | | $ | (233 | ) |
The Servicing segment’s strategy is to generate income by growing the portfolio and maximizing the servicing margin. We believe several competitive strengths have been critical to our long-term growth as a servicer, including our low-cost platform, our skill in mitigating losses for investors, our commitment to strong customer service and regulatory compliance, our history of successfully boarding new loans, and the ability to retain existing customers by offering attractive refinance options. We believe that our operational capabilities are reflected in strong servicer ratings.
|
| | | | |
| Table 4. Servicer Ratings |
|
| | | | | |
| Fitch(1) | | Moody’s(2) | | S&P(3) |
| Rating date | January 2020 | | May 2019 | | May 2019 |
| | | | | |
| Residential | RPS2- | | Not Rated | | Above Average |
| Master Servicer | RMS2+ | | SQ2 | | Above Average |
| Special Servicer | RSS2- | | Not Rated | | Above Average |
| Subprime Servicer | RPS2- | | Not Rated | | Above Average |
| |
(1) | For Servicing segment results purposes, all revenue is attributableFitch Rating Scale of 1 (Highest Performance) to servicing portfolio. Therefore, $53 and $225 (Low/No Proficiency) |
| |
(2) | Moody’s Rating Scale of net gain on mortgage loans is movedSQ1 (Strong Ability/Stability) to service related, net during the six months ended June 30, 2019 and 2018, respectively. For consolidated results purposes, these amounts were reclassed backSQ5 (Weak Ability/Stability) |
| |
(3) | S&P’s Rating Scale of Strong to net gain on mortgage loans held for sale.Weak |
Servicing Portfolio Composition
As of March 31, 2020, the unpaid principal balance in our servicing portfolio consisted of approximately $290.6 billion in forward loans, $316.9 billion in subservicing and other, and $21.6 billion in reverse mortgage loans.
The term “forward” refers to loans we service which are not “reverse mortgages,” as discussed below.
Our subservicing portfolio consists of loans where we perform the servicing responsibilities for a contractual fee, but do not own the servicing rights and therefore do not record an MSR on our balance sheet.
Reverse mortgage loans, most commonly HECMs, provide seniors 62 and older with a loan upon which draws can be made periodically. The draws are secured by the equity in the borrower’s home. We have acquired our reverse mortgages in prior years through several transactions and it is now in run-off mode. For a significant portion of our reverse mortgages, we record MSRs on our balance sheet, similar to the accounting for forward mortgages, except in cases where the costs of servicing are expected to exceed revenues, in which case a Mortgage Servicing Liability (“MSL”) is created. Additionally, due to program requirements, we consolidate certain reverse mortgages on our balance sheet and accrue interest income and expense.
The charts below set forth the portfolio mix between serviced, subserviced and reverse mortgage loans, and the composition of our servicing portfolio ending UPB by investor group as of March 31, 2020 and 2019:
The following tables set forth the results of operations for the Servicing segment:
|
| | | | |
| Table 5. Servicing Segment Results of Operations |
|
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Revenues | | | | | | | |
| Operational | $ | 313 |
| | $ | 324 |
| | $ | (11 | ) | | (3 | )% |
| Amortization, net of accretion | (76 | ) | | (23 | ) | | (53 | ) | | 230 | % |
| Mark-to-market | (383 | ) | | (293 | ) | | (90 | ) | | 31 | % |
| Total revenues | (146 | ) | | 8 |
| | (154 | ) | | (1,925 | )% |
| Total expenses | 149 |
| | 195 |
| | (46 | ) | | (24 | )% |
| Total other income (expenses), net | (30 | ) | | 1 |
| | (31 | ) | | (3,100 | )% |
| Loss before income tax benefit | $ | (325 | ) | | $ | (186 | ) | | $ | (139 | ) | | 75 | % |
20. Guarantor Financial Statement InformationFor the three months ended March 31, 2020, we incurred a loss before income tax benefit of $325 compared to a loss before income tax benefit of $186 for the same period in 2019. The change in loss before income tax benefit was primarily due to a decrease in total revenues, partially offset by a decrease in total expenses. Total revenues decreased primarily as a result of elevated negative mark-to-market revenues during the three months ended March 31, 2020 compared to the same period in 2019. Amortization, net of accretion, for the three months ended March 31, 2020 increased compared to the same period in 2019, primarily due to an increase in amortization of forward MSRs as a result of growth in the forward MSR portfolio and elevated prepayments driven by the declining interest rate environment. Total expenses for the three months ended March 31, 2020 decreased compared to the same period in 2019 primarily due to a decrease in foreclosure and other liquidation expenses. The decrease in foreclosure and other liquidation expenses was primarily driven by operational improvements of the reverse portfolio with respect to assignments and adherence to HUD curtailment guidelines. Total other income (expense), net for the three months ended March 31, 2020 decreased compared to the same period in 2019 primarily due to a decrease in interest income. The decrease in interest income was primarily due to a decrease in income earned on reverse mortgage interest, primarily driven by the decline in the reverse mortgage interests balance and the amortization of a net premium into income. Refer to Table 10. Servicing - Revenues, Table 11. Servicing - Expenses and Table 12. Servicing - Other Income (Expenses), Net, for further discussions on the changes in total revenues, total expenses and total other income (expenses), net, respectively.
As of June 30, 2019, Nationstar Mortgage LLC and Nationstar Capital Corporation(1) (collectively, the “Issuer”), both wholly-owned subsidiaries of the Company, have issued a 6.500% unsecured senior notes due July 2021 with an outstanding aggregate principal amount of $592 and a 6.500% unsecured senior notes due June 2022 with an outstanding aggregate principal amount of $206 (collectively, the “unsecured senior notes”). The unsecured senior notes are unconditionally guaranteed, jointly and severally, by all of Nationstar Mortgage LLC’s existing and future domestic subsidiaries other than its securitization and certain finance subsidiaries, certain other restricted subsidiaries, excluded restricted subsidiaries and subsidiaries that in the future Nationstar Mortgage LLC designates as unrestricted subsidiaries. All guarantor subsidiaries 100% are owned by Nationstar Mortgage LLC. The Company and its three wholly-owned subsidiaries are guarantors of the unsecured senior notes as well. Presented below are the condensed consolidating financial statements of the Company, Nationstar Mortgage LLC and the guarantor subsidiaries for the periods indicated.
In the condensed consolidating financial statements presented below, the Company allocates income tax expense to Nationstar Mortgage LLC as if it were a separate tax payer entity pursuant to ASC 740, Income Taxes. |
| | | | |
| Table 6. Servicing Portfolio - Unpaid Principal Balances |
|
| | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Average UPB | | | |
| Forward MSRs | $ | 303,578 |
| | $ | 308,984 |
|
Subservicing and other(1) | 310,160 |
| | 239,468 |
|
| Reverse loans | 22,059 |
| | 27,472 |
|
| Total average UPB | $ | 635,797 |
| | $ | 575,924 |
|
| | | | |
| | March 31, 2020 | | March 31, 2019 |
| Ending UPB | | | |
| Forward MSRs | | | |
| Agency | $ | 238,956 |
| | $ | 238,937 |
|
| Non-agency | 51,678 |
| | 64,755 |
|
| Total forward MSRs | 290,634 |
| | 303,692 |
|
| | | | |
Subservicing and other(1) | | | |
| Agency | 302,060 |
| | 273,786 |
|
| Non-agency | 14,873 |
| | 27,405 |
|
| Total subservicing and other | 316,933 |
| | 301,191 |
|
| |
| | |
| Reverse loans | | | |
| MSR | 2,332 |
| | 3,559 |
|
| MSL | 13,360 |
| | 15,928 |
|
| Securitized loans | 5,898 |
| | 7,527 |
|
| Total reverse portfolio serviced | 21,590 |
| | 27,014 |
|
| Total ending UPB | $ | 629,157 |
| | $ | 631,897 |
|
| |
(1) | Nationstar Capital Corporation has no assets, operations or liabilitiesSubservicing and other than being a co-obligor ofincludes (i) loans we service for others, (ii) residential mortgage loans originated but have yet to be sold, and (iii) agency REO balances for which we own the unsecured senior notes.mortgage servicing rights. |
The following table provides a rollforward of our forward servicing and subservicing and other portfolio UPB:
MR. COOPER GROUP INC. CONSOLIDATING BALANCE SHEET JUNE 30, 2019 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Successor |
| | Mr. Cooper | | Issuer(1) | | Guarantor
(Subsidiaries of Issuer) | | Non-Guarantor
(Subsidiaries of Issuer) | | Eliminations | | Consolidated |
| Assets | | | | | | | | | | | |
| Cash and cash equivalents | $ | — |
| | $ | 215 |
| | $ | 1 |
| | $ | 29 |
| | $ | — |
| | $ | 245 |
|
| Restricted cash | — |
| | 204 |
| | — |
| | 100 |
| | — |
| | 304 |
|
| Mortgage servicing rights | — |
| | 3,484 |
| | — |
| | 27 |
| | — |
| | 3,511 |
|
| Advances and other receivables, net | — |
| | 1,000 |
| | — |
| | — |
| | — |
| | 1,000 |
|
| Reverse mortgage interests, net | — |
| | 6,003 |
| | — |
| | 1,107 |
| | — |
| | 7,110 |
|
| Mortgage loans held for sale at fair value | — |
| | 3,422 |
| | — |
| | — |
| | — |
| | 3,422 |
|
| Mortgage loans held for investment at fair value | — |
| | 2 |
| | — |
| | 112 |
| | — |
| | 114 |
|
| Property and equipment, net | — |
| | 99 |
| | — |
| | 16 |
| | — |
| | 115 |
|
| Deferred tax asset, net | 984 |
| | 69 |
| | — |
| | 2 |
| | — |
| | 1,055 |
|
| Other assets | — |
| | 1,399 |
| | 208 |
| | 661 |
| | (739 | ) | | 1,529 |
|
| Investment in subsidiaries | 2,557 |
| | 612 |
| | — |
| | — |
| | (3,169 | ) | | — |
|
| Total assets | $ | 3,541 |
| | $ | 16,509 |
| | $ | 209 |
| | $ | 2,054 |
| | $ | (3,908 | ) | | $ | 18,405 |
|
| | | | | | | | | | | | |
| Liabilities and Stockholders’ Equity | | | | | | | | | | | |
| Unsecured senior notes, net | $ | 1,663 |
| | $ | 799 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2,462 |
|
| Advance facilities, net | — |
| | 89 |
| | — |
| | 478 |
| | — |
| | 567 |
|
| Warehouse facilities, net | — |
| | 4,045 |
| | — |
| | — |
| | — |
| | 4,045 |
|
| Payables and other liabilities | 59 |
| | 1,999 |
| | 2 |
| | 56 |
| | — |
| | 2,116 |
|
| MSR related liabilities - nonrecourse at fair value | — |
| | 1,456 |
| | — |
| | 16 |
| | — |
| | 1,472 |
|
| Mortgage servicing liabilities | — |
| | 80 |
| | — |
| | — |
| | — |
| | 80 |
|
| Other nonrecourse debt, net | — |
| | 4,890 |
| | — |
| | 1,095 |
| | — |
| | 5,985 |
|
| Payables to affiliates | 141 |
| | 594 |
| | — |
| | 4 |
| | (739 | ) | | — |
|
| Total liabilities | 1,863 |
| | 13,952 |
| | 2 |
| | 1,649 |
| | (739 | ) | | 16,727 |
|
| Total stockholders’ equity | 1,678 |
| | 2,557 |
| | 207 |
| | 405 |
| | (3,169 | ) | | 1,678 |
|
| Total liabilities and stockholders’ equity | $ | 3,541 |
| | $ | 16,509 |
| | $ | 209 |
| | $ | 2,054 |
| | $ | (3,908 | ) | | $ | 18,405 |
|
|
| | | | |
| Table 7. Forward Servicing and Subservicing and Other Portfolio UPB Rollforward |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| | Forward MSR | | Subservicing and Other | | Total | | Forward MSR | | Subservicing and Other | | Total |
| Balance - beginning of period | $ | 296,782 |
| | $ | 323,983 |
| | $ | 620,765 |
| | $ | 295,481 |
| | $ | 223,886 |
| | $ | 519,367 |
|
| Additions: | | | | | | | | | | | |
| Originations | 11,635 |
| | 662 |
| | 12,297 |
| | 4,891 |
| | 404 |
| | 5,295 |
|
| Acquisitions / Increase in subservicing | (673 | ) | | 23,352 |
| | 22,679 |
| | 13,404 |
| | 84,406 |
| | 97,810 |
|
| Deductions: | | | | | | | | | | | |
| Dispositions | (40 | ) | | (10,359 | ) | | (10,399 | ) | | (133 | ) | | (1,118 | ) | | (1,251 | ) |
| Principal reductions and other | (2,748 | ) | | (2,965 | ) | | (5,713 | ) | | (2,827 | ) | | (2,317 | ) | | (5,144 | ) |
Voluntary reductions(1) | (13,864 | ) | | (17,672 | ) | | (31,536 | ) | | (6,297 | ) | | (3,975 | ) | | (10,272 | ) |
Involuntary reductions(2) | (387 | ) | | (68 | ) | | (455 | ) | | (762 | ) | | (95 | ) | | (857 | ) |
| Net changes in loans serviced by others | (71 | ) | | — |
| | (71 | ) | | (65 | ) | | — |
| | (65 | ) |
| Balance - end of period | $ | 290,634 |
| | $ | 316,933 |
| | $ | 607,567 |
| | $ | 303,692 |
| | $ | 301,191 |
| | $ | 604,883 |
|
| |
(1) | Issuer balances exclude the balances of its guarantor and non-guarantor subsidiaries, as previously described.Voluntary reductions are related to loan payoffs by customers. |
| |
(2) | Involuntary reductions refer to loan chargeoffs. |
As of March 31, 2020, our forward servicing UPB decreased when compared to 2019, primarily due to increased voluntary reductions in a low interest rate environment, partially offset by increased origination volumes. As of March 31, 2020, our subservicing and other portfolio ending UPB increased when compared to 2019, primarily driven by portfolio growth from our subservicing clients, partially offset by increased dispositions primarily due to various MSR sales.
The table below summarizes the overall performance of the forward servicing and subservicing portfolio:
MR. COOPER GROUP INC. CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2019 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Successor |
| | Mr. Cooper | | Issuer(1) | | Guarantor
(Subsidiaries of Issuer) | | Non-Guarantor
(Subsidiaries of Issuer) | | Eliminations | | Consolidated |
| Revenues: | | | | | | | | | | | |
| Service related, net | $ | — |
| | $ | 21 |
| | $ | 5 |
| | $ | 111 |
| | $ | — |
| | $ | 137 |
|
| Net gain on mortgage loans held for sale | — |
| | 262 |
| | — |
| | — |
| | — |
| | 262 |
|
| Total revenues | — |
| | 283 |
| | 5 |
| | 111 |
| | — |
| | 399 |
|
| Expenses: | | | | | | | | | | | |
| Salaries, wages benefits | — |
| | 198 |
| | 1 |
| | 39 |
| | — |
| | 238 |
|
| General and administrative | — |
| | 179 |
| | 1 |
| | 74 |
| | — |
| | 254 |
|
| Total expenses | — |
| | 377 |
| | 2 |
| | 113 |
| | — |
| | 492 |
|
| Other income (expenses): | | | | | | | | | | | |
| Interest income | — |
| | 147 |
| | — |
| | 15 |
| | — |
| | 162 |
|
| Interest expense | (39 | ) | | (134 | ) | | — |
| | (14 | ) | | — |
| | (187 | ) |
| Other income (expenses) | — |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
| (Loss) gain from subsidiaries | (48 | ) | | 2 |
| | — |
| | — |
| | 46 |
| | — |
|
| Total other income (expenses), net | (87 | ) | | 16 |
| | — |
| | 1 |
| | 46 |
| | (24 | ) |
| (Loss) income before income tax benefit | (87 | ) | | (78 | ) | | 3 |
| | (1 | ) | | 46 |
| | (117 | ) |
| Less: Income tax benefit | — |
| | (29 | ) | | — |
| | — |
| | — |
| | (29 | ) |
| Net (loss) income | (87 | ) | | (49 | ) | | 3 |
| | (1 | ) | | 46 |
| | (88 | ) |
| Less: Net loss attributable to non-controlling interests | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) |
| Net (loss) income attributable to Mr. Cooper | $ | (87 | ) | | $ | (48 | ) | | $ | 3 |
| | $ | (1 | ) | | $ | 46 |
| | $ | (87 | ) |
|
| | | | |
Table 8. Key Performance Metrics - Forward Servicing and Subservicing Portfolio(1) |
|
| | | | | | | |
| | March 31, 2020 | | March 31, 2019 |
| Loan count | 3,506,998 |
| | 3,616,323 |
|
Average loan amount(2) | $ | 173,231 |
| | $ | 167,266 |
|
Average coupon - credit sensitive(3) | 4.7 | % | | 4.9 | % |
Average coupon - interest sensitive(3) | 4.3 | % | | 4.3 | % |
Average coupon - agency(3) | 4.4 | % | | 4.4 | % |
Average coupon - non-agency(3) | 4.7 | % | | 4.8 | % |
60+ delinquent (% of loans)(4) | 1.9 | % | | 2.4 | % |
90+ delinquent (% of loans)(4) | 1.6 | % | | 2.1 | % |
120+ delinquent (% of loans)(4) | 1.4 | % | | 1.9 | % |
| Total prepayment speed (12-month constant prepayment rate) | 19.2 | % | | 8.2 | % |
| |
(1) | Issuer activitiesCharacteristics and key performance metrics of our servicing portfolio exclude UPB and loan counts acquired but not yet boarded and currently serviced by others. |
| |
(2) | Average loan amount is presented in whole dollar amounts. |
| |
(3) | The weighted average coupon amounts presented in the activitiestable above are only reflective of its guarantor and non-guarantor subsidiaries, as previously described.our owned forward MSR portfolio that is reported at fair value. |
| |
(4) | Loan delinquency is based on the current contractual due date of the loan. In the case of a completed loan modification, delinquency is based on the modified due date of the loan. |
Delinquency is a significant assumption in determining the mark-to-market adjustment and is a key indicator of MSR portfolio performance. Delinquent loans contribute to lower MSR values due to higher costs to service and increased carrying costs of advances. We continue to experience low delinquency rates during the three months ended March 31, 2020 which preserves the value of our MSRs. At this time, it is too early to estimate the potential impact the COVID-19 pandemic will have on future delinquencies.
MR. COOPER GROUP INC. CONSOLIDATING STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2019 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Successor |
| | Mr. Cooper | | Issuer(1) | | Guarantor
(Subsidiaries of Issuer) | | Non-Guarantor
(Subsidiaries of Issuer) | | Eliminations | | Consolidated |
| Revenues: | | | | | | | | | | | |
| Service related, net | $ | — |
| | $ | 2 |
| | $ | 11 |
| | $ | 208 |
| | $ | — |
| | $ | 221 |
|
| Net gain on mortgage loans held for sale | — |
| | 428 |
| | — |
| | — |
| | — |
| | 428 |
|
| Total revenues | — |
| | 430 |
| | 11 |
| | 208 |
| | — |
| | 649 |
|
| Expenses: | | | | | | | | | | | |
| Salaries, wages benefits | — |
| | 372 |
| | 2 |
| | 79 |
| | — |
| | 453 |
|
| General and administrative | — |
| | 344 |
| | 2 |
| | 136 |
| | — |
| | 482 |
|
| Total expenses | — |
| | 716 |
| | 4 |
| | 215 |
| | — |
| | 935 |
|
| Other income (expenses): | | | | | | | | | | | |
| Interest income | — |
| | 265 |
| | — |
| | 31 |
| | — |
| | 296 |
|
| Interest expense | (77 | ) | | (268 | ) | | — |
| | (31 | ) | | — |
| | (376 | ) |
| Other income (expenses) | — |
| | 5 |
| | — |
| | 11 |
| | — |
| | 16 |
|
| (Loss) gain from subsidiaries | (196 | ) | | 11 |
| | — |
| | — |
| | 185 |
| | — |
|
| Total other income (expenses), net | (273 | ) | | 13 |
| | — |
| | 11 |
| | 185 |
| | (64 | ) |
| (Loss) income before income tax benefit | (273 | ) | | (273 | ) | | 7 |
| | 4 |
| | 185 |
| | (350 | ) |
| Less: Income tax benefit | — |
| | (76 | ) | | — |
| | — |
| | — |
| | (76 | ) |
| Net (loss) income | (273 | ) | | (197 | ) | | 7 |
| | 4 |
| | 185 |
| | (274 | ) |
| Less: Net loss attributable to non-controlling interests | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) |
| Net (loss) income attributable to Mr. Cooper | $ | (273 | ) | | $ | (196 | ) | | $ | 7 |
| | $ | 4 |
| | $ | 185 |
| | $ | (273 | ) |
|
| | | | |
| Table 9. Forward Loan Modifications and Workout Units |
|
| | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | Amount Change | | % Change |
| Modifications | 4,715 |
| | 5,189 |
| | (474 | ) | | (9 | )% |
| Workouts | 3,994 |
| | 4,401 |
| | (407 | ) | | (9 | )% |
| Total modifications and workout units | 8,709 |
| | 9,590 |
| | (881 | ) | | (9 | )% |
Total modifications and workouts during the three months ended March 31, 2020 decreased compared to the same period in 2019 primarily due to lower delinquency rates. At this time, it is too early to estimate the potential impact the COVID-19 pandemic will have on future delinquencies and corresponding modification activity.
The following table provides the composition of revenues for the Servicing segment:
|
| | | | |
| Table 10. Servicing - Revenues |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) |
| Forward MSR Operational Revenue | | | | | | | | | | | | | | | |
| Base servicing fees | $ | 250 |
| | 16 | | $ | 240 |
| | 17 | | $ | 10 |
| | (1) | | 4 | % | | (6 | )% |
Modification fees(2) | 3 |
| | — | | 3 |
| | — | | — |
| | — | | — | % | | — | % |
Incentive fees(2) | 4 |
| | — | | 1 |
| | — | | 3 |
| | — | | 300 | % | | — | % |
Late payment fees(2) | 23 |
| | 2 | | 19 |
| | 2 | | 4 |
| | — | | 21 | % | | — | % |
Other ancillary revenues(2) | 38 |
| | 2 | | 48 |
| | 3 | | (10 | ) | | (1) | | (21 | )% | | (33 | )% |
| Total forward MSR operational revenue | 318 |
| | 20 | | 311 |
| | 22 | | 7 |
| | (2) | | 2 | % | | (9 | )% |
Base subservicing fees and other subservicing revenue(3) | 65 |
| | 4 | | 52 |
| | 4 | | 13 |
| | — | | 25 | % | | — | % |
| Reverse servicing fees | 6 |
| | — | | 9 |
| | — | | (3 | ) | | — | | (33 | )% | | — | % |
| Total servicing fee revenue | 389 |
| | 24 | | 372 |
| | 26 | | 17 |
| | (2) | | 5 | % | | (8 | )% |
| MSR financing liability costs | (8 | ) | | — | | (12 | ) | | (1) | | 4 |
| | 1 | | (33 | )% | | 100 | % |
| Excess spread costs - principal | (68 | ) | | (4) | | (36 | ) | | (2) | | (32 | ) | | (2) | | 89 | % | | 100 | % |
| Total operational revenue | 313 |
| | 20 | | 324 |
| | 23 | | (11 | ) | | (3) | | (3 | )% | | (13 | )% |
| Amortization, net of accretion | | | | | | | | | | | | | | | |
| Forward MSR amortization | (152 | ) | | (10) | | (79 | ) | | (6) | | (73 | ) | | (4) | | 92 | % | | 67 | % |
| Excess spread accretion | 68 |
| | 4 | | 36 |
| | 3 | | 32 |
| | 1 | | 89 | % | | 33 | % |
| Reverse MSL accretion | 8 |
| | 1 | | 18 |
| | 1 | | (10 | ) | | — | | (56 | )% | | — | % |
| Reverse MSR amortization | — |
| | — | | 2 |
| | — | | (2 | ) | | — | | (100 | )% | | — | % |
| Total amortization, net of accretion | (76 | ) | | (5) | | (23 | ) | | (2) | | (53 | ) | | (3) | | 230 | % | | 150 | % |
| Mark-to-Market Adjustments | | | | | | | | | | | | | | | |
MSR MTM(3) | (412 | ) | | (26) | | (360 | ) | | (25) | | (52 | ) | | (1) | | 14 | % | | 4 | % |
| Excess spread / financing MTM | 29 |
| | 2 | | 67 |
| | 5 | | (38 | ) | | (3) | | (57 | )% | | (60 | )% |
| Total MTM adjustments | (383 | ) | | (24) | | (293 | ) | | (20) | | (90 | ) | | (4) | | 31 | % | | 20 | % |
| Total revenues - Servicing | $ | (146 | ) | | (9) | | $ | 8 |
| | 1 | | $ | (154 | ) | | (10) | | (1,925 | )% | | (1,000 | )% |
| |
(1) | Issuer activities excludeCalculated basis points (“bps”) are as follows: Annualized dollar amount/Total average UPB X 10000. |
| |
(2) | Certain ancillary and other non-base fees related to subservicing operations are separately presented as other subservicing revenues. |
| |
(3) | The amount of MSR MTM includes the activitiesimpact of its guarantornegative modeled cash flows which have been transferred to reserves on advances and non-guarantor subsidiaries, as previously described.other receivables. The negative modeled cash flows relate to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio. The impact of negative modeled cash flows was $10 and $11 for the three months ended March 31, 2020 and 2019, respectively. |
Forward - Due to the shift in the forward MSR portfolio mix, base servicing fee revenue increased for the three months ended March 31, 2020 as compared to the same period in 2019. The decrease in BPS is primarily driven by an increase in the average loan size due to a shift in portfolio mix.
MSR prepayment and forward MSR amortization increased for the three months ended March 31, 2020 as compared to the same period in 2019, primarily due to higher prepayments driven by the lower interest rate environment.
Total negative MTM adjustments increased for the three months ended March 31, 2020 as compared to the same period in 2019 primarily due to the declining interest rate environment during 2020.
Subservicing - Subservicing fees increased for the three months ended March 31, 2020 as compared to the same period in 2019, due to significant growth in the subservicing portfolio UPB.
Reverse - Servicing fees and reverse MSL accretion on reverse mortgage portfolios for the three months ended March 31, 2020 decreased as compared to the same period in 2019, primarily due to the decline in the reverse mortgage portfolio. Reverse MSL accretion was further impacted by $6 pertaining to accumulated accretion recorded during the three months ended March 31, 2019 related to fair value adjustments for MSL assumed from the Merger. The fair value adjustment resulted from the revised cost to service assumption used in the valuation of MSL during the measurement period.
The tables below summarize expenses for the Servicing segment:
MR. COOPER GROUP INC. CONSOLIDATING STATEMENT OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2019 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Successor |
| | Mr. Cooper | | Issuer(1) | | Guarantor
(Subsidiaries of Issuer) | | Non-Guarantor
(Subsidiaries of Issuer) | | Eliminations | | Consolidated |
| Operating Activities | | | | | | | | | | | |
| Net (loss) income attributable to Mr. Cooper | $ | (273 | ) | | $ | (196 | ) | | $ | 7 |
| | $ | 4 |
| | $ | 185 |
| | $ | (273 | ) |
| Adjustments to reconcile net (loss) income to net cash attributable to operating activities: | | | | | | | | | | | |
| Deferred tax benefit | — |
| | (76 | ) | | — |
| | — |
| | — |
| | (76 | ) |
| Net income attributable to non-controlling interests | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) |
| Loss (gain) from subsidiaries | 196 |
| | (11 | ) | | — |
| | — |
| | (185 | ) | | — |
|
| Net gain on mortgage loans held for sale | — |
| | (428 | ) | | — |
| | — |
| | — |
| | (428 | ) |
| Interest income on reverse mortgage loan | — |
| | (167 | ) | | — |
| | — |
| | — |
| | (167 | ) |
| Provision for servicing reserves | — |
| | 30 |
| | — |
| | — |
| | — |
| | 30 |
|
| Fair value changes and amortization/accretion of mortgage servicing rights/liabilities | — |
| | 690 |
| | — |
| | 5 |
| | — |
| | 695 |
|
| Fair value changes in excess spread financing | — |
| | (71 | ) | | — |
| | (3 | ) | | — |
| | (74 | ) |
| Fair value changes in mortgage servicing rights financing liability | — |
| | 11 |
| | — |
| | — |
| | — |
| | 11 |
|
| Fair value changes in mortgage loans held for investment | — |
| | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
| Amortization of premiums, net of discount accretion | 3 |
| | (28 | ) | | — |
| | — |
| | — |
| | (25 | ) |
| Depreciation and amortization for property and equipment and intangible assets | — |
| | 37 |
| | — |
| | 8 |
| | — |
| | 45 |
|
| Share-based compensation | — |
| | 7 |
| | — |
| | 2 |
| | — |
| | 9 |
|
| Repurchases of forward loans assets out of Ginnie Mae securitizations | — |
| | (715 | ) | | — |
| | — |
| | — |
| | (715 | ) |
| Mortgage loans originated and purchased for sale, net of fees | — |
| | (15,727 | ) | | — |
| | — |
| | — |
| | (15,727 | ) |
| Sales proceeds and loan payment proceeds for mortgage loans held for sale and held for investment | — |
| | 15,420 |
| | — |
| | 9 |
| | — |
| | 15,429 |
|
| Changes in assets and liabilities: | | | | | | | | | | | |
| Advances and other receivables | — |
| | 249 |
| | — |
| | — |
| | — |
| | 249 |
|
| Reverse mortgage interests | — |
| | 1,001 |
| | — |
| | 55 |
| | — |
| | 1,056 |
|
| Other assets | — |
| | (65 | ) | | (8 | ) | | (45 | ) | | — |
| | (118 | ) |
| Payables and other liabilities | 74 |
| | (16 | ) | | 1 |
| | (28 | ) | | — |
| | 31 |
|
| Net cash attributable to operating activities | — |
| | (56 | ) | | — |
| | 4 |
| | — |
| | (52 | ) |
|
| | | | |
| Table 11. Servicing - Expenses |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | Change | | % Change |
| | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) |
| Salaries, wages and benefits | $ | 86 |
| | 5 | | $ | 86 |
| | 6 | | $ | — |
| | (1) | | — | % | | (17 | )% |
| General and administrative | | | | | | | | | | | | | | | |
| Servicing support fees | 25 |
| | 2 | | 39 |
| | 3 | | (14 | ) | | (1) | | (36 | )% | | (33 | )% |
| Corporate and other general and administrative expenses | 35 |
| | 2 | | 39 |
| | 3 | | (4 | ) | | (1) | | (10 | )% | | (33 | )% |
| Foreclosure and other liquidation related expenses | — |
| | — | | 27 |
| | 2 | | (27 | ) | | (2) | | (100 | )% | | (100 | )% |
| Depreciation and amortization | 3 |
| | — | | 4 |
| | — | | (1 | ) | | — | | (25 | )% | | — | % |
| Total general and administrative expenses | 63 |
| | 4 | | 109 |
| | 8 | | (46 | ) | | (4) | | (42 | )% | | (50 | )% |
| Total expenses - Servicing | $ | 149 |
| | 9 | | $ | 195 |
| | 14 | | $ | (46 | ) | | (5) | | (24 | )% | | (36 | )% |
| |
(1) | Issuer activities exclude the activities of its guarantor and non-guarantor subsidiaries,Calculated basis points (“bps”) are as previously described.follows: Annualized dollar amount/Total average UPB X 10000. |
Total expenses decreased during the three months ended March 31, 2020 compared to the same period in 2019, primarily driven by a decrease in foreclosure and other liquidation expenses. Foreclosure and other liquidation related expenses were lower during the three months ended March 31, 2020 as compared to the same period in 2019, primarily due to operational improvements of the reverse portfolio with respect to assignments and adherence to HUD curtailment guidelines, in addition to recovery of $5 prior period operating losses from a previous sub-servicer during the three months ended March 31, 2020. Servicing support fees decreased in 2020 compared to the same period in 2019 primarily due to lower legal and tax service expenses.
MR. COOPER GROUP INC. CONSOLIDATING STATEMENT OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2019 (Continued) |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Successor |
| | Mr. Cooper | | Issuer(1) | | Guarantor
(Subsidiaries of Issuer) | | Non-Guarantor
(Subsidiaries of Issuer) | | Eliminations | | Consolidated |
| Investing Activities | | | | | | | | | | | |
| Acquisition, net of cash acquired | — |
| | (85 | ) | | — |
| | — |
| | — |
| | (85 | ) |
| Property and equipment additions, net of disposals | — |
| | (20 | ) | | — |
| | (7 | ) | | — |
| | (27 | ) |
| Purchase of forward mortgage servicing rights, net of liabilities incurred | — |
| | (409 | ) | | — |
| | — |
| | — |
| | (409 | ) |
| Proceeds on sale of forward and reverse mortgage servicing rights | — |
| | 279 |
| | — |
| | — |
| | — |
| | 279 |
|
| Net cash attributable to investing activities | — |
| | (235 | ) | | — |
| | (7 | ) | | — |
| | (242 | ) |
| Financing Activities | | | | | | | | | | | |
| Increase in warehouse facilities | — |
| | 1,173 |
| | — |
| | — |
| | — |
| | 1,173 |
|
| Decrease in advance facilities | — |
| | (13 | ) | | — |
| | (27 | ) | | — |
| | (40 | ) |
| Repayment of notes payable | — |
| | (294 | ) | | — |
| | — |
| | — |
| | (294 | ) |
| Proceeds from issuance of HECM securitizations | — |
| | — |
| | — |
| | 398 |
| | — |
| | 398 |
|
| Proceeds from sale of HECM securitizations | — |
| | — |
| | — |
| | 20 |
| | — |
| | 20 |
|
| Repayment of HECM securitizations | — |
| | — |
| | — |
| | (434 | ) | | — |
| | (434 | ) |
| Proceeds from issuance of participating interest financing in reverse mortgage interests | — |
| | 156 |
| | — |
| | — |
| | — |
| | 156 |
|
| Repayment of participating interest financing in reverse mortgage interests | — |
| | (1,004 | ) | | — |
| | — |
| | — |
| | (1,004 | ) |
| Proceeds from issuance of excess spread financing | — |
| | 437 |
| | — |
| | — |
| | — |
| | 437 |
|
| Repayment of excess spread financing | — |
| | (12 | ) | | — |
| | — |
| | — |
| | (12 | ) |
| Settlement of excess spread financing | — |
| | (107 | ) | | — |
| | — |
| | — |
| | (107 | ) |
| Repayment of nonrecourse debt - legacy assets | — |
| | — |
| | — |
| | (6 | ) | | — |
| | (6 | ) |
| Repayment of finance lease liability | — |
| | (2 | ) | | — |
| | — |
| | — |
| | (2 | ) |
| Surrender of shares relating to stock vesting | — |
| | (2 | ) | | — |
| | — |
| | — |
| | (2 | ) |
| Debt financing costs | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) |
| Net cash attributable to financing activities | — |
| | 331 |
| | — |
| | (49 | ) | | — |
| | 282 |
|
| Net increase (decrease) in cash, cash equivalents, and restricted cash | — |
| | 40 |
| | — |
| | (52 | ) | | — |
| | (12 | ) |
| Cash, cash equivalents, and restricted cash - beginning of period | — |
| | 379 |
| | 1 |
| | 181 |
| | — |
| | 561 |
|
| Cash, cash equivalents, and restricted cash - end of period | $ | — |
| | $ | 419 |
| | $ | 1 |
| | $ | 129 |
| | $ | — |
| | $ | 549 |
|
|
| | | | |
| Table 12. Servicing - Other Income (Expenses), Net |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | Change | | % Change |
| | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) |
| Income earned on Reverse mortgage interest | $ | 43 |
| | 3 | | $ | 82 |
| | 6 | | $ | (39 | ) | | (3) | | (48 | )% | | (50 | )% |
| Other interest income | 40 |
| | 2 | | 33 |
| | 2 | | 7 |
| | — | | 21 | % | | — | % |
| Interest income | 83 |
| | 5 | | 115 |
| | 8 | | (32 | ) | | (3) | | (28 | )% | | (38 | )% |
| | | | | | | | | | | | | | | | |
| Reverse mortgage interest expense | (52 | ) | | (3) | | (71 | ) | | (5) | | 19 |
| | 2 | | (27 | )% | | (40 | )% |
| Advance interest expense | (5 | ) | | — | | (9 | ) | | (1) | | 4 |
| | 1 | | (44 | )% | | 100 | % |
| Other interest expense | (56 | ) | | (4) | | (34 | ) | | (2) | | (22 | ) | | (2) | | 65 | % | | 100 | % |
| Interest expense | (113 | ) | | (7) | | (114 | ) | | (8) | | 1 |
| | 1 | | (1 | )% | | (13 | )% |
| Total other income (expenses), net - Servicing | $ | (30 | ) | | (2) | | $ | 1 |
| | — | | $ | (31 | ) | | (2) | | (3,100 | )% | | (100 | )% |
| | | | | | | | | | | | | | | | |
| Weighted average cost - advance facilities | 3.0 | % | | | | 4.7 | % | | | | (1.7 | )% | |
| | (36 | )% | |
|
|
| Weighted average cost - excess spread financing | 9.0 | % | | | | 9.0 | % | | | | — | % | |
| | — | % | |
|
|
| |
(1) | Issuer activities exclude the activities of its guarantor and non-guarantor subsidiaries,Calculated basis points (“bps”) are as previously described.follows: Annualized dollar amount/Total average UPB X 10000. |
Total other income (expenses), net decreased during the three months ended March 31, 2020 as compared to the same period in 2019 primarily due to a decrease in interest income. The decrease in interest income was primarily due to a decrease in income earned on reverse mortgage interest, partially offset by an increase in other interest income. Income earned on reverse mortgage interest decreased due to the decline in the reverse mortgage interests balance and the amortization of a net asset premium into income. Other interest income increased primarily driven by an increase in earnings credits and bank fee credits. Interest expense remained relatively flat during the three months ended March 31, 2020 as compared to the same period in 2019, primarily due to an increase in other interest expense primarily driven by higher compensating interest expense and bank fees, partially offset by a decrease in reverse mortgage interest expense due to the decline in the reverse mortgage interest portfolio.
Servicing Portfolio and Related Liabilities
The tables below summarize the servicing portfolio and related liabilities in the Servicing segment:
MR. COOPER GROUP INC. CONSOLIDATING BALANCE SHEET DECEMBER 31, 2018 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Successor |
| | Mr. Cooper | | Issuer(1) | | Guarantor (Subsidiaries of Issuer) | | Non-Guarantor (Subsidiaries of Issuer) | | Eliminations | | Consolidated |
| Assets | | | | | | | | | | | |
| Cash and cash equivalents | $ | — |
| | $ | 193 |
| | $ | 1 |
| | $ | 48 |
| | $ | — |
| | $ | 242 |
|
| Restricted cash | — |
| | 186 |
| | — |
| | 133 |
| | — |
| | 319 |
|
| Mortgage servicing rights | — |
| | 3,644 |
| | — |
| | 32 |
| | — |
| | 3,676 |
|
| Advances and other receivables, net | — |
| | 1,194 |
| | — |
| | — |
| | — |
| | 1,194 |
|
| Reverse mortgage interests, net | — |
| | 6,770 |
| | — |
| | 1,164 |
| | — |
| | 7,934 |
|
| Mortgage loans held for sale at fair value | — |
| | 1,631 |
| | — |
| | — |
| | — |
| | 1,631 |
|
| Mortgage loans held for investment at fair value | — |
| | 1 |
| | — |
| | 118 |
| | — |
| | 119 |
|
| Property and equipment, net | — |
| | 84 |
| | — |
| | 12 |
| | — |
| | 96 |
|
| Deferred tax asset, net | 973 |
| | — |
| | — |
| | (6 | ) | | — |
| | 967 |
|
| Other assets | — |
| | 660 |
| | 202 |
| | 621 |
| | (688 | ) | | 795 |
|
| Investment in subsidiaries | 2,820 |
| | 601 |
| | — |
| | — |
| | (3,421 | ) | | — |
|
| Total assets | $ | 3,793 |
| | $ | 14,964 |
| | $ | 203 |
| | $ | 2,122 |
| | $ | (4,109 | ) | | $ | 16,973 |
|
| | | | | | | | | | | | |
| Liabilities and Stockholders’ Equity | | | | | | | | | | | |
| Unsecured senior notes, net | $ | 1,660 |
| | $ | 799 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2,459 |
|
| Advance facilities, net | — |
| | 90 |
| | — |
| | 505 |
| | — |
| | 595 |
|
| Warehouse facilities, net | — |
| | 2,349 |
| | — |
| | — |
| | — |
| | 2,349 |
|
| Payables and other liabilities | 49 |
| | 1,413 |
| | 1 |
| | 80 |
| | — |
| | 1,543 |
|
| MSR related liabilities - nonrecourse at fair value | — |
| | 1,197 |
| | — |
| | 19 |
| | — |
| | 1,216 |
|
| Mortgage servicing liabilities | — |
| | 71 |
| | — |
| | — |
| | — |
| | 71 |
|
| Other nonrecourse debt, net | — |
| | 5,676 |
| | — |
| | 1,119 |
| | — |
| | 6,795 |
|
| Payables to affiliates | 139 |
| | 549 |
| | — |
| | — |
| | (688 | ) | | — |
|
| Total liabilities | 1,848 |
| | 12,144 |
| | 1 |
| | 1,723 |
| | (688 | ) | | 15,028 |
|
| Total stockholders’ equity | 1,945 |
| | 2,820 |
| | 202 |
| | 399 |
| | (3,421 | ) | | 1,945 |
|
| Total liabilities and stockholders’ equity | $ | 3,793 |
| | $ | 14,964 |
| | $ | 203 |
| | $ | 2,122 |
| | $ | (4,109 | ) | | $ | 16,973 |
|
|
| | | | |
| Table 13. Servicing Portfolios and Related Liabilities |
|
| | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
| UPB | | Carrying Amount | | bps | | UPB | | Carrying Amount | | bps |
| Forward MSRs - acquisition pool: | | | | | | | | | | | |
| Credit sensitive | $ | 138,726 |
| | $ | 1,386 |
| | 100 | | $ | 147,895 |
| | $ | 1,613 |
| | 109 |
| Interest sensitive | 151,908 |
| | 1,723 |
| | 113 | | 148,887 |
| | 1,883 |
| | 126 |
| Total forward MSRs - fair value | $ | 290,634 |
| | $ | 3,109 |
| | 107 | | $ | 296,782 |
| | $ | 3,496 |
| | 118 |
| | | | | | | | | | | | |
| Forward MSRs - investor pool: | | | | | | | | | | | |
| Agency | $ | 238,956 |
| | $ | 2,618 |
| | 110 | | $ | 240,688 |
| | $ | 2,944 |
| | 122 |
| Non-agency | 51,678 |
| | 491 |
| | 95 | | 56,094 |
| | 552 |
| | 98 |
| Total forward MSRs - fair value | $ | 290,634 |
| | $ | 3,109 |
| | 107 | | $ | 296,782 |
| | $ | 3,496 |
| | 118 |
| | | | | | | | | | | | |
| Total forward MSRs | $ | 290,634 |
| | $ | 3,109 |
| | | | $ | 296,782 |
| | $ | 3,496 |
| | |
| | | | | | | | | | | | |
Subservicing and other(1) | | | | | | | | | | | |
| Agency | 302,060 |
| | N/A |
| | | | 308,532 |
| | N/A |
| | |
| Non-agency | 14,873 |
| | N/A |
| | | | 15,451 |
| | N/A |
| | |
| Total subservicing and other | 316,933 |
| | N/A |
| | | | 323,983 |
| | N/A |
| | |
| | | | | | | | | | | | |
| Reverse portfolio - amortized cost | | | | | | | | | | | |
| MSR | 2,332 |
| | 6 |
| | | | 2,508 |
| | 6 |
| | |
| MSL | 13,360 |
| | (53 | ) | | | | 13,994 |
| | (61 | ) | | |
| Securitized loans | 5,898 |
| | 5,955 |
| | | | 6,223 |
| | 6,279 |
| | |
| Total reverse portfolio serviced | 21,590 |
| | 5,908 |
| | | | 22,725 |
| | 6,224 |
| | |
| Total servicing portfolio unpaid principal balance | $ | 629,157 |
| | $ | 9,017 |
| | | | $ | 643,490 |
| | $ | 9,720 |
| | |
| |
(1) | IssuerSubservicing and other amounts include loans we service for others, residential mortgage loans originated but have yet to be sold and agency REO balances excludefor which we own the balances of its guarantor and non-guarantor subsidiaries, as previously described.mortgage servicing rights. |
As of March 31, 2020, when measuring the fair value of the portfolio as a basis point of the unpaid principal balance, our credit sensitive pool decreased in value by 9 bps and interest sensitive pool decreased in value 13 bps, compared to December 31, 2019 due to higher forecasted prepayment speeds as a result of the declining interest rate environment in 2020.
We assess whether acquired portfolios are more credit sensitive or interest sensitive in nature on the date of acquisition. We consider numerous factors in making this assessment, with the primary factors consisting of the overall portfolio delinquency characteristics, portfolio seasoning and residential mortgage loan composition. Interest rate sensitive portfolios typically consist of single-family conforming residential forward mortgage loans serviced for GSEs or other third-party investors. Credit sensitive portfolios primarily consist of higher delinquency single-family non-conforming residential forward mortgage loans in private-label securitizations.
The following table provides information on the fair value of our owned forward MSR portfolio:
MR. COOPER GROUP INC. CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2018 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Predecessor |
| | Nationstar | | Issuer(1) | | Guarantor
(Subsidiaries of Issuer) | | Non-Guarantor
(Subsidiaries of Issuer) | | Eliminations | | Consolidated |
| Revenues: | | | | | | | | | | | |
| Service related, net | $ | — |
| | $ | 247 |
| | $ | 7 |
| | $ | 63 |
| | $ | — |
| | $ | 317 |
|
| Net gain on mortgage loans held for sale | — |
| | 127 |
| | — |
| | — |
| | — |
| | 127 |
|
| Total Revenues | — |
| | 374 |
| | 7 |
| | 63 |
| | — |
| | 444 |
|
| Expenses: | | | | | | | | | | | |
| Salaries, wages and benefits | — |
| | 149 |
| | 1 |
| | 27 |
| | — |
| | 177 |
|
| General and administrative | — |
| | 134 |
| | — |
| | 28 |
| | — |
| | 162 |
|
| Total expenses | — |
| | 283 |
| | 1 |
| | 55 |
| | — |
| | 339 |
|
| Other income (expenses): | | | | | | | | | | | |
| Interest income | — |
| | 127 |
| | — |
| | 13 |
| | — |
| | 140 |
|
| Interest expense | — |
| | (153 | ) | | — |
| | (11 | ) | | — |
| | (164 | ) |
| Other expense | — |
| | (3 | ) | | — |
| | 1 |
| | — |
| | (2 | ) |
| Gain (loss) from subsidiaries | 58 |
| | 18 |
| | — |
| | — |
| | (76 | ) | | — |
|
| Total other income (expenses), net | 58 |
| | (11 | ) | | — |
| | 3 |
| | (76 | ) | | (26 | ) |
| Income (loss) before income tax expense (benefit) | 58 |
| | 80 |
| | 6 |
| | 11 |
| | (76 | ) | | 79 |
|
| Less: Income tax expense (benefit) | — |
| | 22 |
| | — |
| | (1 | ) | | — |
| | 21 |
|
| Net income (loss) | 58 |
| | 58 |
| | 6 |
| | 12 |
| | (76 | ) | | 58 |
|
| Less: Net income (loss) attributable to non-controlling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Net income (loss) attributable to Nationstar | $ | 58 |
| | $ | 58 |
| | $ | 6 |
| | $ | 12 |
| | $ | (76 | ) | | $ | 58 |
|
|
| | | | |
| Table 14. MSRs - Fair Value, Rollforward |
|
| | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Fair value - beginning of period | $ | 3,496 |
| | $ | 3,665 |
|
| Additions: | | | |
| Servicing retained from mortgage loans sold | 123 |
| | 66 |
|
| Purchases of servicing rights | 24 |
| | 409 |
|
| Dispositions: | | | |
| Sales and cancellation of servicing assets | — |
| | (260 | ) |
| Changes in fair value: | | | |
| Due to changes in valuation inputs or assumptions used in the valuation model: | | | |
| Credit sensitive | (181 | ) | | (121 | ) |
| Interest sensitive | (220 | ) | | (211 | ) |
| Other changes in fair value: | | | |
| Scheduled principal payments | (23 | ) | | (22 | ) |
Disposition of negative MSRs and other(1) | 20 |
| | 12 |
|
| Prepayments | | | |
| Voluntary prepayments | | | |
| Credit sensitive | (24 | ) | | (19 | ) |
| Interest sensitive | (102 | ) | | (32 | ) |
| Involuntary prepayments | | | |
| Credit sensitive | (1 | ) | | (2 | ) |
| Interest sensitive | (3 | ) | | (4 | ) |
| Fair value - end of period | $ | 3,109 |
| | $ | 3,481 |
|
| |
(1) | Issuer activities excludeAmounts primarily represent negative fair values reclassified from the activities of its guarantorMSR asset to reserves as underlying loans are removed from the MSR and non-guarantor subsidiaries, as previously described. |
MR. COOPER GROUP INC. CONSOLIDATING STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2018 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Predecessor |
| | Nationstar | | Issuer(1) | | Guarantor
(Subsidiaries of Issuer) | | Non-Guarantor
(Subsidiaries of Issuer) | | Eliminations | | Consolidated |
| Revenues: | | | | | | | | | | | |
| Service related, net | $ | — |
| | $ | 637 |
| | $ | 13 |
| | $ | 131 |
| | $ | — |
| | $ | 781 |
|
| Net gain on mortgage loans held for sale | — |
| | 251 |
| | — |
| | — |
| | — |
| | 251 |
|
| Total Revenues | — |
| | 888 |
| | 13 |
| | 131 |
| | — |
| | 1,032 |
|
| Expenses: | | | | | | | | | | | |
| Salaries, wages and benefits | — |
| | 301 |
| | 2 |
| | 54 |
| | — |
| | 357 |
|
| General and administrative | — |
| | 290 |
| | 1 |
| | 55 |
| | — |
| | 346 |
|
| Total expenses | — |
| | 591 |
| | 3 |
| | 109 |
| | — |
| | 703 |
|
| Other income (expenses): | | | | | | | | | | | |
| Interest income | — |
| | 258 |
| | — |
| | 27 |
| | — |
| | 285 |
|
| Interest expense | — |
| | (315 | ) | | — |
| | (20 | ) | | — |
| | (335 | ) |
| Other expense | — |
| | (4 | ) | | — |
| | 10 |
| | — |
| | 6 |
|
| Gain (loss) from subsidiaries | 218 |
| | 50 |
| | — |
| | — |
| | (268 | ) | | — |
|
| Total other income (expenses), net | 218 |
| | (11 | ) | | — |
| | 17 |
| | (268 | ) | | (44 | ) |
| Income (loss) before income tax expense (benefit) | 218 |
| | 286 |
| | 10 |
| | 39 |
| | (268 | ) | | 285 |
|
| Less: Income tax expense (benefit) | — |
| | 68 |
| | — |
| | (1 | ) | | — |
| | 67 |
|
| Net income (loss) | 218 |
| | 218 |
| | 10 |
| | 40 |
| | (268 | ) | | 218 |
|
| Less: Net income (loss) attributable to non-controlling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Net income (loss) attributable to Nationstar | $ | 218 |
| | $ | 218 |
| | $ | 10 |
| | $ | 40 |
| | $ | (268 | ) | | $ | 218 |
|
| |
(1)
| Issuer activities exclude the activities of its guarantor and non-guarantor subsidiaries, as previously described.other reclassification adjustments. |
The following table sets forth the weighted-average key assumptions in estimating the fair value of forward MSRs:
MR. COOPER GROUP INC. CONSOLIDATING STATEMENT OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2018 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Predecessor |
| | Nationstar | | Issuer(1) | | Guarantor
(Subsidiaries of Issuer) | | Non-Guarantor
(Subsidiaries of Issuer) | | Eliminations | | Consolidated |
| Operating Activities | | | | | | | | | | | |
| Net income (loss) attributable to Nationstar | $ | 218 |
| | $ | 218 |
| | $ | 10 |
| | $ | 40 |
| | $ | (268 | ) | | $ | 218 |
|
| Adjustments to reconcile net income (loss) to net cash attributable to operating activities: | | | | | | | | | | | |
| Deferred income tax expense (benefit) | — |
| | 41 |
| | — |
| | (1 | ) | | — |
| | 40 |
|
| (Gain) loss from subsidiaries | (218 | ) | | (50 | ) | | — |
| | — |
| | 268 |
| | — |
|
| Net gain on mortgage loans held for sale | — |
| | (251 | ) | | — |
| | — |
| | — |
| | (251 | ) |
| Interest income on reverse mortgage loan | — |
| | (237 | ) | | — |
| | — |
| | — |
| | (237 | ) |
| Gain on sale of assets | — |
| | — |
| | — |
| | (9 | ) | | — |
| | (9 | ) |
| Provision for servicing reserves | — |
| | 54 |
| | — |
| | — |
| | — |
| | 54 |
|
| Fair value changes and amortization/accretion of mortgage servicing rights/liabilities | — |
| | (155 | ) | | — |
| | — |
| | — |
| | (155 | ) |
| Fair value changes in excess spread financing | — |
| | 73 |
| | — |
| | 1 |
| | — |
| | 74 |
|
| Fair value changes in mortgage servicing rights financing liability | — |
| | 6 |
| | — |
| | — |
| | — |
| | 6 |
|
| Amortization of premiums, net of discount accretion | — |
| | 9 |
| | — |
| | (3 | ) | | — |
| | 6 |
|
| Depreciation and amortization for property and equipment and intangible assets | — |
| | 23 |
| | — |
| | 6 |
| | — |
| | 29 |
|
| Share-based compensation | — |
| | 7 |
| | — |
| | 1 |
| | — |
| | 8 |
|
| Repurchases of forward loans assets out of Ginnie Mae securitizations | — |
| | (475 | ) | | — |
| | — |
| | — |
| | (475 | ) |
| Mortgage loans originated and purchased for sale, net of fees | — |
| | (10,639 | ) | | — |
| | — |
| | — |
| | (10,639 | ) |
| Sale proceeds and loan payment proceeds for mortgage loans held for sale and held for investment | — |
| | 11,490 |
| | — |
| | 10 |
| | — |
| | 11,500 |
|
| Changes in assets and liabilities: | | | | | | | | | | |
|
|
| Advances and other receivables | — |
| | 355 |
| | — |
| | — |
| | — |
| | 355 |
|
| Reverse mortgage interests | — |
| | 1,314 |
| | — |
| | 12 |
| | — |
| | 1,326 |
|
| Other assets | 6 |
| | (188 | ) | | (10 | ) | | 202 |
| | — |
| | 10 |
|
| Payables and other liabilities | — |
| | 13 |
| | — |
| | (4 | ) | | — |
| | 9 |
|
| Net cash attributable to operating activities | 6 |
| | 1,608 |
| | — |
| | 255 |
| | — |
| | 1,869 |
|
|
| | | | |
(1)
| Issuer activities exclude the activities of its guarantor and non-guarantor subsidiaries, as previously described.Table 15. MSRs - Fair Value |
MR. COOPER GROUP INC. CONSOLIDATING STATEMENT OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2018 (Continued) |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Predecessor |
| | Nationstar | | Issuer(1) | | Guarantor
(Subsidiaries of Issuer) | | Non-Guarantor
(Subsidiaries of Issuer) | | Eliminations | | Consolidated |
| Investing Activities | | | | | | | | | | | |
| Property and equipment additions, net of disposals | — |
| | (27 | ) | | — |
| | (4 | ) | | — |
| | (31 | ) |
| Purchase of forward mortgage servicing rights, net of liabilities incurred | — |
| | (117 | ) | | — |
| | (6 | ) | | — |
| | (123 | ) |
| Net payment related to acquisition of HECM related receivables | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) |
| Proceeds on sale of assets | — |
| | — |
| | — |
| | 13 |
| | — |
| | 13 |
|
| Net cash attributable to investing activities | — |
| | (145 | ) | | — |
| | 3 |
| | — |
| | (142 | ) |
| Financing Activities | | | | | | | | | | | |
| Increase in warehouse facilities | — |
| | (199 | ) | | — |
| | — |
| | — |
| | (199 | ) |
| Decrease in advance facilities | — |
| | (57 | ) | | — |
| | (282 | ) | | — |
| | (339 | ) |
| Proceeds from issuance of HECM securitizations | — |
| | — |
| | — |
| | 443 |
| | — |
| | 443 |
|
| Repayment of HECM securitizations | — |
| | — |
| | — |
| | (423 | ) | | — |
| | (423 | ) |
| Proceeds from issuance of participating interest financing in reverse mortgage interests | — |
| | 184 |
| | — |
| | — |
| | — |
| | 184 |
|
| Repayment of participating interest financing in reverse mortgage interests | — |
| | (1,368 | ) | | — |
| | — |
| | — |
| | (1,368 | ) |
| Repayment of excess spread financing | — |
| | (2 | ) | | — |
| | — |
| | — |
| | (2 | ) |
| Settlement of excess spread financing | — |
| | (91 | ) | | — |
| | — |
| | — |
| | (91 | ) |
| Proceeds from issuance of excess spread financing | — |
| | 70 |
| | — |
| | — |
| | — |
| | 70 |
|
| Repayment of nonrecourse debt - legacy assets | — |
| | — |
| | — |
| | (6 | ) | | — |
| | (6 | ) |
| Repurchase of unsecured senior notes | — |
| | (62 | ) | | — |
| | — |
| | — |
| | (62 | ) |
| Surrender of shares relating to stock vesting | (6 | ) | | — |
| | — |
| | — |
| | — |
| | (6 | ) |
| Debt financing costs | — |
| | (7 | ) | | — |
| | — |
| | — |
| | (7 | ) |
| Dividends to non-controlling interests | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) |
| Net cash attributable to financing activities | (6 | ) | | (1,533 | ) | | — |
| | (268 | ) | | — |
| | (1,807 | ) |
| Net decrease in cash, cash equivalents, and restricted cash | — |
| | (70 | ) | | — |
| | (10 | ) | | — |
| | (80 | ) |
| Cash, cash equivalents, and restricted cash - beginning of period | — |
| | 423 |
| | 1 |
| | 151 |
| | — |
| | 575 |
|
| Cash, cash equivalents, and restricted cash - end of period | $ | — |
| | $ | 353 |
| | $ | 1 |
| | $ | 141 |
| | $ | — |
| | $ | 495 |
|
|
| | | | | |
| | March 31, 2020 | | March 31, 2019 |
| Total MSRs Portfolio | | | |
| Discount rate | 9.7 | % | | 10.3 | % |
| Prepayment speeds | 13.4 | % | | 13.0 | % |
| Average life | 5.7 years |
| | 6.0 years |
|
| | | | |
| Acquisition Pools: | | | |
| Credit Sensitive | | | |
| Discount rate | 10.2 | % | | 11.3 | % |
| Prepayment speeds | 13.0 | % | | 13.5 | % |
| Average life | 5.9 years |
| | 6.0 years |
|
| | | | |
| Interest Sensitive | | | |
| Discount rate | 9.1 | % | | 9.4 | % |
| Prepayment speeds | 13.8 | % | | 12.5 | % |
| Average life | 5.5 years |
| | 6.1 years |
|
| | | | |
| Investor Pools: | | | |
| Agency | | | |
| Discount rate | 9.0 | % | | 9.4 | % |
| Prepayment speeds | 13.2 | % | | 12.4 | % |
| Average life | 5.6 years |
| | 6.1 years |
|
| | | | |
| Non-Agency | | | |
| Discount rate | 12.6 | % | | 13.6 | % |
| Prepayment speeds | 14.3 | % | | 15.4 | % |
| Average life | 6.1 years |
| | 5.9 years |
|
| |
(1)The weighted-average discount rate for total MSRs portfolio decreased as of March 31, 2020 compared to the same period in 2019 due to the declining interest rate environment in 2020. Weighted-average life for total MSRs portfolio decreased due to the increase in prepayment speeds, which was attributable to the interest rate decline period over period.
The discount rate, which is used to determine the present value of estimated future net servicing income, is based on the required rate of return market investors would expect for an asset with similar risk characteristics. The discount rate is determined through review of recent market transactions as well as comparing the discount rate to those utilized by third-party valuation specialists.
Total prepayment speeds represent the annual rate at which borrowers are forecasted to repay their mortgage loan principal, which includes estimates for both voluntary and involuntary borrower liquidations. The expected weighted-average life represents the total years we expect to service the MSR.
In determining key assumptions in estimating fair value of forward MSRs, we took into account the situations created by COVID-19 pandemic. | Issuer activities exclude the activities of its guarantor and non-guarantor subsidiaries, as previously described. |
21. Transactions with Affiliates
Nationstar previously entered into arrangements with Fortress Investment Group (“Fortress”), its subsidiaries managed funds, or affiliates for purposes of financing the Company’s MSR acquisitions and performing services as a subservicer. Prior to the Merger with Nationstar on July 31, 2018, an affiliate of Fortress held a majority of the outstanding common shares of the Predecessor. Subsequent to the Merger, Fortress is no longer an affiliate of the Company. Refer to Note 2, Acquisitions, for additional information. The following summarizes the Predecessor’s transactions with affiliates of Fortress prior to the Merger on July, 31 2018.
New Residential
Excess Spread Financing
The Predecessor has entered into several agreements with certain entities managed by New Residential, in which New Residential and/or certain funds managed by Fortress own an interest (each a “New Residential Entity”). The Predecessor sold to the related New Residential Entity the right to receive a portion of the excess cash flow generated from certain acquired MSRs after a receipt of a fixed base servicing fee per loan. The Predecessor, as the servicer of the loans, retains all ancillary revenues and the remaining portion of the excess cash flow after payment of the fixed base servicing fee and also provides all advancing functions for the portfolio. The related New Residential Entity does not have prior or ongoing obligations associated with these MSR portfolios. Should the Company refinance any loan in such portfolios, subject to certain limitations, the Company will be required to transfer the new loan or a replacement loan of similar economic characteristics into the portfolios. The new or replacement loan will be governed by the same terms set forth in the agreements described above.
The fees paid to New Residential Entity by the Predecessor totaled $52 and $105 during the three and six months ended June 30, 2018, respectively, which were recorded as a reduction to servicing fee revenue, net.
Mortgage Servicing Rights Financing
From December 2013 through June 2014, the Predecessor entered into agreements to sell a contractually specified base fee component of certain MSRs and servicing advances under specified terms to a joint venture capitalized by New Residential and certain unaffiliated third-parties. The Company continues to be the named servicer, and, for accounting purposes, ownership of the mortgage servicing rights continues to reside with the Company. Accordingly, the Company accounts for the MSRs and the related MSRs financing liability on its consolidated balance sheets. The Company will continue to sell future servicing advances to New Residential.
The Predecessor did not enter into any additional supplemental agreements with these affiliates in 2018.
Subservicing and Servicing
In January 2017, the Predecessor entered into a subservicing agreement with a subsidiary of New Residential. The Predecessor earned $18 and $37 of subservicing fees and other subservicing revenues during the three and six months ended June 30, 2018, respectively.
In May 2014, the Predecessor entered into a servicing arrangement with New Residential whereby the Predecessor services residential mortgage loans acquired by New Residential and/or its various affiliates and trust entities. For the three and six months ended June 30, 2018, the Predecessor recognized approximately $2 and $3 related to these service arrangements, respectively.
CAUTIONS REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the U.S. federal securities laws. These forward-looking statements include, without limitation, statements concerning plans, objectives, goals, projections, strategies, core initiatives, future events or performance, and underlying assumptions and other statements, which are not statements of historical facts. When used in this discussion, the words “anticipate,” “appears,” “believe,” “foresee,” “intend,” “should,” “expect,” “estimate,” “project,” “plan,” “may,” “could,” “will,” “are likely” and similar expressions are intended to identify forward-looking statements. These statements involve predictions of our future financial condition, performance, plans and strategies and are thus dependent on a number of factors including, without limitation, assumptions and data that may be imprecise or incorrect. Specific factors that may impact performance or other predictions of future actions have, in many but not all cases, been identified in connection with specific forward-looking statements. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances, and we are under no obligation to, and express disclaim any obligation, to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.
A number of important factors exist that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to:
our ability to maintain or grow the size of our servicing portfolio;
our ability to maintain or grow our originations volume and profitability;
our ability to recapture voluntary prepayments related to our existing servicing portfolio;
our shift in the mix of our servicing portfolio to subservicing, which is highly concentrated;
delays in our ability to collect or be reimbursed for servicing advances;
our ability to obtain sufficient liquidity and capital to operate our business;
changes in prevailing interest rates;
our ability to finance and recover costs of our reverse servicing operations;
our ability to successfully implement our strategic initiatives;
our ability to realize anticipated benefits of the Merger and other acquisitions, including Pacific Union, AMS, and Seterus;
our ability to use net operating loss carryforwards and other tax attributes;
changes in our business relationships or changes in servicing guidelines with Fannie Mae, Freddie Mac and Ginnie Mae;
Xome’s ability to compete in highly competitive markets;
our ability to pay down debt;
our ability to manage legal and regulatory examinations and enforcement investigations and proceedings, compliance requirements and related costs;
our ability to prevent cyber intrusions and mitigate cyber risks; and
our ability to maintain our licenses and other regulatory approvals.
All of these factors are difficult to predict, contain uncertainties that may materially affect actual results and may be beyond our control. New factors emerge from time to time, and it is not possible for our management to predict all such factors or to assess the effect of each such new factor on our business. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and any of these statements included herein may prove to be inaccurate. Given the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. Please refer to Item 1A, Risk Factors, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operationsincluded in this report and in our Annual Report on Form 10-K for the year ended December 31, 2018 for further information on these and other risk factors affecting us.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with the accompanying unaudited consolidated financial statements and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018. The following discussion contains, in addition to the historical information, forward-looking statements that include risks, assumptions and uncertainties that could cause actual results to differ materially from those anticipated by such statements.
“Predecessor” and “Successor” in the MD&A relates to Nationstar and Mr. Cooper, respectively. The financial results for the three and six months ended June 30, 2018 reflect the results of the Predecessor. The financial results for the three and six months ended June 30, 2019 reflect the results of the Successor. The financial results in each case are presented under GAAP.
Dollar amounts are reported in millions, except per share data and other key metrics, unless otherwise noted.
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|
OverviewTable 1. Consolidated Operations |
|
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Revenues - operational | $ | 661 |
| | $ | 543 |
| | $ | 118 |
| | 22 | % |
| Revenues - Mark-to-market | (383 | ) | | (293 | ) | | (90 | ) | | 31 | % |
| Total revenues | 278 |
| | 250 |
| | 28 |
| | 11 | % |
| Total expenses | 444 |
| | 443 |
| | 1 |
| | — | % |
| Total other income (expenses), net | (73 | ) | | (40 | ) | | (33 | ) | | 83 | % |
| Loss before income tax expense benefit | (239 | ) | | (233 | ) | | (6 | ) | | 3 | % |
| Less: Income tax benefit | (68 | ) | | (47 | ) | | (21 | ) | | 45 | % |
| Net loss | (171 | ) | | (186 | ) | | 15 |
| | (8 | )% |
| Less: Net loss attributable to non-controlling interests | (3 | ) | | — |
| | (3 | ) | | (100 | )% |
| Net loss attributable to Mr. Cooper | $ | (168 | ) | | $ | (186 | ) | | $ | 18 |
| | (10 | )% |
We arerecorded a leading servicernet loss of $171 during the three months ended March 31, 2020 compared to a net loss of $186 during the same period in 2019. The net loss in 2020 was lower primarily due to the income tax benefit. Consolidated operational revenues increased primarily due to increased revenue in our Originations segment, driven by higher originations volume in a declining interest rate environment and originatorincremental volumes associated with the acquisition of residentialPacific Union, which was completed in February 2019. Partially offsetting the increase in operational revenues was an increase in negative mark-to-market (“MTM”) adjustments for the three months ended March 31, 2020 compared to the same period in 2019. Total expenses for the three months ended March 31, 2020 were consistent with the same period in 2019.
Total other income (expenses), net increased for the three months ended March 31, 2020 compared to the same period in 2019 primarily due to a decrease in interest income and other income (expenses), net. Interest income decreased primarily due to a decrease in income earned on reverse mortgage loans, and a provider of real estate services through our Xome subsidiary. Our purpose is to keep the dream of homeownership alive, and we do thisinterest, as a servicer by helpingresult of the decline in the reverse mortgage borrowers manage what is typically their largest financial asset, and by helping our investors maximizeinterests balance. Other income (expenses), net was higher in three months ended March 31, 2019 primarily due to income related to the returns from their portfolioschange in fair value of residential mortgages. We have a track recordthe contingent consideration for the acquisition of significant growth, having expanded our servicing portfolio from $10 billion in 2009 to $644 billion as of June 30, 2019. We believe this track record reflects our strong operating capabilities, which include a proprietary low-cost servicing platform, strong loss mitigation skills, a commitment to compliance, a customer-centric culture, a demonstrated ability to retain customers, growing origination capabilities, and significant investment in technology. More information on the company is available at investors.mrcoopergroup.com. Information contained on our websites is not, and should not be deemed to be, a part of this report.
Our strategy to position the company for continued, sustainable long-term growth includes initiatives to improve profitability and strengthen the balance sheet. Key strategic initiatives include the following:
Integrate our recent acquisitions, which include Assurant Mortgage Solutions Pacific Union, and Seterus;
Complete Project Titan, our servicing transformation initiative, which consists of a series of interrelated technology initiatives designed to streamline processes, improve customer and team member experiences, and drive efficiency;
Identify additional opportunities throughout the organization to drive greater efficiency;
Strengthen our balance sheet and reduce leverage;
Manage the interest rate risk associated with holding MSRs on balance sheet by providing existing customers with attractive refinance options, growing the size and improving the profitability of our Origination segment (whose results are typically counter-cyclical to those of the Servicing segment), expanding the size of our subservicing portfolio through value-added partnerships with MSR owners, and by utilizing excess spread facilities to pass through a portion of the interest rate risk to capital partners; and
Maintain strong relationships with agencies, investors, regulators, and other counterparties and a strong reputation for compliance and customer service.(“AMS”).
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| | | | |
| Table 2. Provision for Income Taxes |
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| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Income tax benefit | $ | (68 | ) | | $ | (47 | ) | | $ | (21 | ) | | 45 | % |
| | | | | | | | |
Effective tax rate(1) | 28.4 | % | | 20.3 | % | | | | |
| |
(1) | Effective tax rate is calculated using whole numbers. |
For the three months ended March 31, 2020 and 2019, we had an income tax benefit. The effective tax rate for the three months ended March 31, 2020 was 28.4% as compared to the effective tax rate of 20.3% for the three months ended March 31, 2019. The change in effective tax rate is primarily attributable to the increased relative unfavorable tax impacts of permanent differences such as nondeductible executive compensation and nondeductible meals and entertainment expenses on the annual effective rate, and discrete tax items in the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.
Our operations are conducted through four segments: Servicing, Originations, Xome, and Corporate/Other.
The Servicing segment performs operational activities on behalf of investors or owners of the underlying mortgages, including collecting and disbursing borrower payments, investor reporting, customer service, modifying loans where appropriate to help borrowers stay current, and when necessary performing collections, foreclosures, and the sale of REO.
The Originations segment originates residential mortgage loans through our direct-to-consumer channel, which provides refinance options for our existing customers, and through our correspondent and wholesale channels which purchase or originate loans from mortgage bankers and brokers.
The Xome segment provides a variety of real estate services to mortgage originators, mortgage and real estate investors, and mortgage servicers, including valuation, title, and field services, and operates an exchange which facilitates the sale of foreclosed properties.
The Corporate/Other segment represents unallocated overhead expenses, including the costs of executive management and other corporate functions that are not directly attributable to our operating segments, our senior unsecured notes, and the results of a legacy mortgage investment portfolio, which consists of non-prime and non-conforming residential mortgage loans that were transferred to a securitization trust (“Trust 2009-A”) in 2009. We collapsed Trust 2009-A and executed the sale of the loans held in the trust in September 2019.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 |
| | Servicing | | Originations | | Xome | | Elimination | | Total Operating Segments | | Corporate/Other | | Consolidated |
| Revenues | | | | | | | | | | | | | |
| Service related, net | $ | (180 | ) | | $ | 20 |
| | $ | 106 |
| | $ | (1 | ) | | $ | (55 | ) | | $ | 2 |
| | $ | (53 | ) |
| Net gain on mortgage loans held for sale | 34 |
| | 297 |
| | — |
| | — |
| | 331 |
| | — |
| | 331 |
|
| Total revenues | (146 | ) | | 317 |
| | 106 |
| | (1 | ) | | 276 |
| | 2 |
| | 278 |
|
| Total expenses | 149 |
| | 166 |
| | 96 |
| | (1 | ) | | 410 |
| | 34 |
| | 444 |
|
| Other income (expenses), net: | | | | | | |
| | | |
| | |
| Interest income | 83 |
| | 34 |
| | — |
| | — |
| | 117 |
| | 1 |
| | 118 |
|
| Interest expense | (113 | ) | | (27 | ) | | — |
| | — |
| | (140 | ) | | (52 | ) | | (192 | ) |
| Other income (expenses), net | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Total other income (expenses), net | (30 | ) | | 7 |
| | 1 |
| | — |
| | (22 | ) | | (51 | ) | | (73 | ) |
| (Loss) income before income tax (benefit) expense | $ | (325 | ) | | $ | 158 |
| | $ | 11 |
| | $ | — |
| | $ | (156 | ) | | $ | (83 | ) | | $ | (239 | ) |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2019 |
| | Servicing | | Originations | | Xome | | Elimination | | Total Operating Segments | | Corporate/Other | | Consolidated |
| Revenues | | | | | | | | | | | | | |
| Service related, net | $ | (27 | ) | | $ | 15 |
| | $ | 96 |
| | $ | — |
| | $ | 84 |
| | $ | — |
| | $ | 84 |
|
| Net gain on mortgage loans held for sale | 35 |
| | 131 |
| | — |
| | — |
| | 166 |
| | — |
| | 166 |
|
| Total revenues | 8 |
| | 146 |
| | 96 |
| | — |
| | 250 |
| | — |
| | 250 |
|
| Total expenses | 195 |
| | 104 |
| | 99 |
| | — |
| | 398 |
| | 45 |
| | 443 |
|
| Other income (expenses), net: | | | | | | | | | | | | | |
| Interest income | 115 |
| | 17 |
| | — |
| | — |
| | 132 |
| | 2 |
| | 134 |
|
| Interest expense | (114 | ) | | (18 | ) | | — |
| | — |
| | (132 | ) | | (57 | ) | | (189 | ) |
| Other income, net | — |
| | 4 |
| | 11 |
| | — |
| | 15 |
| | — |
| | 15 |
|
| Total other income (expenses), net | 1 |
| | 3 |
| | 11 |
| | — |
| | 15 |
| | (55 | ) | | (40 | ) |
| (Loss) income before income tax (benefit) expense | $ | (186 | ) | | $ | 45 |
| | $ | 8 |
| | $ | — |
| | $ | (133 | ) | | $ | (100 | ) | | $ | (233 | ) |
The Servicing segment’s strategy is to generate income by growing the portfolio and maximizing the servicing margin. We believe several competitive strengths have been critical to our long-term growth as a servicer, including our low-cost platform, our skill in mitigating losses for investors, our commitment to strong customer service and regulatory compliance, our history of successfully boarding new loans, and the ability to retain existing customers by offering attractive refinance options. We believe that our operational capabilities are reflected in strong servicer ratings.
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| | | | |
| Table 4. Servicer Ratings |
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| | | | | |
| Fitch(1) | | Moody’s(2) | | S&P(3) |
| Rating date | January 2020 | | May 2019 | | May 2019 |
| | | | | |
| Residential | RPS2- | | Not Rated | | Above Average |
| Master Servicer | RMS2+ | | SQ2 | | Above Average |
| Special Servicer | RSS2- | | Not Rated | | Above Average |
| Subprime Servicer | RPS2- | | Not Rated | | Above Average |
| |
(1) | Fitch Rating Scale of 1 (Highest Performance) to 5 (Low/No Proficiency) |
| |
(2) | Moody’s Rating Scale of SQ1 (Strong Ability/Stability) to SQ5 (Weak Ability/Stability) |
| |
(3) | S&P’s Rating Scale of Strong to Weak |
Servicing Portfolio Composition
As of March 31, 2020, the unpaid principal balance in our servicing portfolio consisted of approximately $290.6 billion in forward loans, $316.9 billion in subservicing and other, and $21.6 billion in reverse mortgage loans.
The term “forward” refers to loans we service which are not “reverse mortgages,” as discussed below.
Our subservicing portfolio consists of loans where we perform the servicing responsibilities for a contractual fee, but do not own the servicing rights and therefore do not record an MSR on our balance sheet.
Reverse mortgage loans, most commonly HECMs, provide seniors 62 and older with a loan upon which draws can be made periodically. The draws are secured by the equity in the borrower’s home. We have acquired our reverse mortgages in prior years through several transactions and it is now in run-off mode. For a significant portion of our reverse mortgages, we record MSRs on our balance sheet, similar to the accounting for forward mortgages, except in cases where the costs of servicing are expected to exceed revenues, in which case a Mortgage Servicing Liability (“MSL”) is created. Additionally, due to program requirements, we consolidate certain reverse mortgages on our balance sheet and accrue interest income and expense.
The charts below set forth the portfolio mix between serviced, subserviced and reverse mortgage loans, and the composition of our servicing portfolio ending UPB by investor group as of March 31, 2020 and 2019:
The following tables set forth the results of operations for the Servicing segment:
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| | | | |
| Table 5. Servicing Segment Results of Operations |
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| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Revenues | | | | | | | |
| Operational | $ | 313 |
| | $ | 324 |
| | $ | (11 | ) | | (3 | )% |
| Amortization, net of accretion | (76 | ) | | (23 | ) | | (53 | ) | | 230 | % |
| Mark-to-market | (383 | ) | | (293 | ) | | (90 | ) | | 31 | % |
| Total revenues | (146 | ) | | 8 |
| | (154 | ) | | (1,925 | )% |
| Total expenses | 149 |
| | 195 |
| | (46 | ) | | (24 | )% |
| Total other income (expenses), net | (30 | ) | | 1 |
| | (31 | ) | | (3,100 | )% |
| Loss before income tax benefit | $ | (325 | ) | | $ | (186 | ) | | $ | (139 | ) | | 75 | % |
For the three months ended March 31, 2020, we incurred a loss before income tax benefit of $325 compared to a loss before income tax benefit of $186 for the same period in 2019. The change in loss before income tax benefit was primarily due to a decrease in total revenues, partially offset by a decrease in total expenses. Total revenues decreased primarily as a result of elevated negative mark-to-market revenues during the three months ended March 31, 2020 compared to the same period in 2019. Amortization, net of accretion, for the three months ended March 31, 2020 increased compared to the same period in 2019, primarily due to an increase in amortization of forward MSRs as a result of growth in the forward MSR portfolio and elevated prepayments driven by the declining interest rate environment. Total expenses for the three months ended March 31, 2020 decreased compared to the same period in 2019 primarily due to a decrease in foreclosure and other liquidation expenses. The decrease in foreclosure and other liquidation expenses was primarily driven by operational improvements of the reverse portfolio with respect to assignments and adherence to HUD curtailment guidelines. Total other income (expense), net for the three months ended March 31, 2020 decreased compared to the same period in 2019 primarily due to a decrease in interest income. The decrease in interest income was primarily due to a decrease in income earned on reverse mortgage interest, primarily driven by the decline in the reverse mortgage interests balance and the amortization of a net premium into income. Refer to Table 10. Servicing - Revenues, Table 11. Servicing - Expenses and Table 12. Servicing - Other Income (Expenses), Net, for further discussions on the changes in total revenues, total expenses and total other income (expenses), net, respectively.
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| | | | |
| Table 6. Servicing Portfolio - Unpaid Principal Balances |
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| | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Average UPB | | | |
| Forward MSRs | $ | 303,578 |
| | $ | 308,984 |
|
Subservicing and other(1) | 310,160 |
| | 239,468 |
|
| Reverse loans | 22,059 |
| | 27,472 |
|
| Total average UPB | $ | 635,797 |
| | $ | 575,924 |
|
| | | | |
| | March 31, 2020 | | March 31, 2019 |
| Ending UPB | | | |
| Forward MSRs | | | |
| Agency | $ | 238,956 |
| | $ | 238,937 |
|
| Non-agency | 51,678 |
| | 64,755 |
|
| Total forward MSRs | 290,634 |
| | 303,692 |
|
| | | | |
Subservicing and other(1) | | | |
| Agency | 302,060 |
| | 273,786 |
|
| Non-agency | 14,873 |
| | 27,405 |
|
| Total subservicing and other | 316,933 |
| | 301,191 |
|
| |
| | |
| Reverse loans | | | |
| MSR | 2,332 |
| | 3,559 |
|
| MSL | 13,360 |
| | 15,928 |
|
| Securitized loans | 5,898 |
| | 7,527 |
|
| Total reverse portfolio serviced | 21,590 |
| | 27,014 |
|
| Total ending UPB | $ | 629,157 |
| | $ | 631,897 |
|
| |
(1) | Subservicing and other includes (i) loans we service for others, (ii) residential mortgage loans originated but have yet to be sold, and (iii) agency REO balances for which we own the mortgage servicing rights. |
The following table provides a rollforward of our forward servicing and subservicing and other portfolio UPB:
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| | | | |
| Table 7. Forward Servicing and Subservicing and Other Portfolio UPB Rollforward |
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| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| | Forward MSR | | Subservicing and Other | | Total | | Forward MSR | | Subservicing and Other | | Total |
| Balance - beginning of period | $ | 296,782 |
| | $ | 323,983 |
| | $ | 620,765 |
| | $ | 295,481 |
| | $ | 223,886 |
| | $ | 519,367 |
|
| Additions: | | | | | | | | | | | |
| Originations | 11,635 |
| | 662 |
| | 12,297 |
| | 4,891 |
| | 404 |
| | 5,295 |
|
| Acquisitions / Increase in subservicing | (673 | ) | | 23,352 |
| | 22,679 |
| | 13,404 |
| | 84,406 |
| | 97,810 |
|
| Deductions: | | | | | | | | | | | |
| Dispositions | (40 | ) | | (10,359 | ) | | (10,399 | ) | | (133 | ) | | (1,118 | ) | | (1,251 | ) |
| Principal reductions and other | (2,748 | ) | | (2,965 | ) | | (5,713 | ) | | (2,827 | ) | | (2,317 | ) | | (5,144 | ) |
Voluntary reductions(1) | (13,864 | ) | | (17,672 | ) | | (31,536 | ) | | (6,297 | ) | | (3,975 | ) | | (10,272 | ) |
Involuntary reductions(2) | (387 | ) | | (68 | ) | | (455 | ) | | (762 | ) | | (95 | ) | | (857 | ) |
| Net changes in loans serviced by others | (71 | ) | | — |
| | (71 | ) | | (65 | ) | | — |
| | (65 | ) |
| Balance - end of period | $ | 290,634 |
| | $ | 316,933 |
| | $ | 607,567 |
| | $ | 303,692 |
| | $ | 301,191 |
| | $ | 604,883 |
|
| |
(1) | Voluntary reductions are related to loan payoffs by customers. |
| |
(2) | Involuntary reductions refer to loan chargeoffs. |
As of March 31, 2020, our forward servicing UPB decreased when compared to 2019, primarily due to increased voluntary reductions in a low interest rate environment, partially offset by increased origination volumes. As of March 31, 2020, our subservicing and other portfolio ending UPB increased when compared to 2019, primarily driven by portfolio growth from our subservicing clients, partially offset by increased dispositions primarily due to various MSR sales.
The table below summarizes the overall performance of the forward servicing and subservicing portfolio:
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| | | | |
Table 8. Key Performance Metrics - Forward Servicing and Subservicing Portfolio(1) |
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| | | | | | | |
| | March 31, 2020 | | March 31, 2019 |
| Loan count | 3,506,998 |
| | 3,616,323 |
|
Average loan amount(2) | $ | 173,231 |
| | $ | 167,266 |
|
Average coupon - credit sensitive(3) | 4.7 | % | | 4.9 | % |
Average coupon - interest sensitive(3) | 4.3 | % | | 4.3 | % |
Average coupon - agency(3) | 4.4 | % | | 4.4 | % |
Average coupon - non-agency(3) | 4.7 | % | | 4.8 | % |
60+ delinquent (% of loans)(4) | 1.9 | % | | 2.4 | % |
90+ delinquent (% of loans)(4) | 1.6 | % | | 2.1 | % |
120+ delinquent (% of loans)(4) | 1.4 | % | | 1.9 | % |
| Total prepayment speed (12-month constant prepayment rate) | 19.2 | % | | 8.2 | % |
| |
(1) | Characteristics and key performance metrics of our servicing portfolio exclude UPB and loan counts acquired but not yet boarded and currently serviced by others. |
| |
(2) | Average loan amount is presented in whole dollar amounts. |
| |
(3) | The weighted average coupon amounts presented in the table above are only reflective of our owned forward MSR portfolio that is reported at fair value. |
| |
(4) | Loan delinquency is based on the current contractual due date of the loan. In the case of a completed loan modification, delinquency is based on the modified due date of the loan. |
Delinquency is a significant assumption in determining the mark-to-market adjustment and is a key indicator of MSR portfolio performance. Delinquent loans contribute to lower MSR values due to higher costs to service and increased carrying costs of advances. We continue to experience low delinquency rates during the three months ended March 31, 2020 which preserves the value of our MSRs. At this time, it is too early to estimate the potential impact the COVID-19 pandemic will have on future delinquencies.
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| | | | |
| Table 9. Forward Loan Modifications and Workout Units |
|
| | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | Amount Change | | % Change |
| Modifications | 4,715 |
| | 5,189 |
| | (474 | ) | | (9 | )% |
| Workouts | 3,994 |
| | 4,401 |
| | (407 | ) | | (9 | )% |
| Total modifications and workout units | 8,709 |
| | 9,590 |
| | (881 | ) | | (9 | )% |
Total modifications and workouts during the three months ended March 31, 2020 decreased compared to the same period in 2019 primarily due to lower delinquency rates. At this time, it is too early to estimate the potential impact the COVID-19 pandemic will have on future delinquencies and corresponding modification activity.
The following table provides the composition of revenues for the Servicing segment:
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| | | | |
| Table 10. Servicing - Revenues |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) |
| Forward MSR Operational Revenue | | | | | | | | | | | | | | | |
| Base servicing fees | $ | 250 |
| | 16 | | $ | 240 |
| | 17 | | $ | 10 |
| | (1) | | 4 | % | | (6 | )% |
Modification fees(2) | 3 |
| | — | | 3 |
| | — | | — |
| | — | | — | % | | — | % |
Incentive fees(2) | 4 |
| | — | | 1 |
| | — | | 3 |
| | — | | 300 | % | | — | % |
Late payment fees(2) | 23 |
| | 2 | | 19 |
| | 2 | | 4 |
| | — | | 21 | % | | — | % |
Other ancillary revenues(2) | 38 |
| | 2 | | 48 |
| | 3 | | (10 | ) | | (1) | | (21 | )% | | (33 | )% |
| Total forward MSR operational revenue | 318 |
| | 20 | | 311 |
| | 22 | | 7 |
| | (2) | | 2 | % | | (9 | )% |
Base subservicing fees and other subservicing revenue(3) | 65 |
| | 4 | | 52 |
| | 4 | | 13 |
| | — | | 25 | % | | — | % |
| Reverse servicing fees | 6 |
| | — | | 9 |
| | — | | (3 | ) | | — | | (33 | )% | | — | % |
| Total servicing fee revenue | 389 |
| | 24 | | 372 |
| | 26 | | 17 |
| | (2) | | 5 | % | | (8 | )% |
| MSR financing liability costs | (8 | ) | | — | | (12 | ) | | (1) | | 4 |
| | 1 | | (33 | )% | | 100 | % |
| Excess spread costs - principal | (68 | ) | | (4) | | (36 | ) | | (2) | | (32 | ) | | (2) | | 89 | % | | 100 | % |
| Total operational revenue | 313 |
| | 20 | | 324 |
| | 23 | | (11 | ) | | (3) | | (3 | )% | | (13 | )% |
| Amortization, net of accretion | | | | | | | | | | | | | | | |
| Forward MSR amortization | (152 | ) | | (10) | | (79 | ) | | (6) | | (73 | ) | | (4) | | 92 | % | | 67 | % |
| Excess spread accretion | 68 |
| | 4 | | 36 |
| | 3 | | 32 |
| | 1 | | 89 | % | | 33 | % |
| Reverse MSL accretion | 8 |
| | 1 | | 18 |
| | 1 | | (10 | ) | | — | | (56 | )% | | — | % |
| Reverse MSR amortization | — |
| | — | | 2 |
| | — | | (2 | ) | | — | | (100 | )% | | — | % |
| Total amortization, net of accretion | (76 | ) | | (5) | | (23 | ) | | (2) | | (53 | ) | | (3) | | 230 | % | | 150 | % |
| Mark-to-Market Adjustments | | | | | | | | | | | | | | | |
MSR MTM(3) | (412 | ) | | (26) | | (360 | ) | | (25) | | (52 | ) | | (1) | | 14 | % | | 4 | % |
| Excess spread / financing MTM | 29 |
| | 2 | | 67 |
| | 5 | | (38 | ) | | (3) | | (57 | )% | | (60 | )% |
| Total MTM adjustments | (383 | ) | | (24) | | (293 | ) | | (20) | | (90 | ) | | (4) | | 31 | % | | 20 | % |
| Total revenues - Servicing | $ | (146 | ) | | (9) | | $ | 8 |
| | 1 | | $ | (154 | ) | | (10) | | (1,925 | )% | | (1,000 | )% |
| |
(1) | Calculated basis points (“bps”) are as follows: Annualized dollar amount/Total average UPB X 10000. |
| |
(2) | Certain ancillary and other non-base fees related to subservicing operations are separately presented as other subservicing revenues. |
| |
(3) | The amount of MSR MTM includes the impact of negative modeled cash flows which have been transferred to reserves on advances and other receivables. The negative modeled cash flows relate to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio. The impact of negative modeled cash flows was $10 and $11 for the three months ended March 31, 2020 and 2019, respectively. |
Forward - Due to the shift in the forward MSR portfolio mix, base servicing fee revenue increased for the three months ended March 31, 2020 as compared to the same period in 2019. The decrease in BPS is primarily driven by an increase in the average loan size due to a shift in portfolio mix.
MSR prepayment and forward MSR amortization increased for the three months ended March 31, 2020 as compared to the same period in 2019, primarily due to higher prepayments driven by the lower interest rate environment.
Total negative MTM adjustments increased for the three months ended March 31, 2020 as compared to the same period in 2019 primarily due to the declining interest rate environment during 2020.
Subservicing - Subservicing fees increased for the three months ended March 31, 2020 as compared to the same period in 2019, due to significant growth in the subservicing portfolio UPB.
Reverse - Servicing fees and reverse MSL accretion on reverse mortgage portfolios for the three months ended March 31, 2020 decreased as compared to the same period in 2019, primarily due to the decline in the reverse mortgage portfolio. Reverse MSL accretion was further impacted by $6 pertaining to accumulated accretion recorded during the three months ended March 31, 2019 related to fair value adjustments for MSL assumed from the Merger. The fair value adjustment resulted from the revised cost to service assumption used in the valuation of MSL during the measurement period.
The tables below summarize expenses for the Servicing segment:
|
| | | | |
| Table 11. Servicing - Expenses |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | Change | | % Change |
| | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) |
| Salaries, wages and benefits | $ | 86 |
| | 5 | | $ | 86 |
| | 6 | | $ | — |
| | (1) | | — | % | | (17 | )% |
| General and administrative | | | | | | | | | | | | | | | |
| Servicing support fees | 25 |
| | 2 | | 39 |
| | 3 | | (14 | ) | | (1) | | (36 | )% | | (33 | )% |
| Corporate and other general and administrative expenses | 35 |
| | 2 | | 39 |
| | 3 | | (4 | ) | | (1) | | (10 | )% | | (33 | )% |
| Foreclosure and other liquidation related expenses | — |
| | — | | 27 |
| | 2 | | (27 | ) | | (2) | | (100 | )% | | (100 | )% |
| Depreciation and amortization | 3 |
| | — | | 4 |
| | — | | (1 | ) | | — | | (25 | )% | | — | % |
| Total general and administrative expenses | 63 |
| | 4 | | 109 |
| | 8 | | (46 | ) | | (4) | | (42 | )% | | (50 | )% |
| Total expenses - Servicing | $ | 149 |
| | 9 | | $ | 195 |
| | 14 | | $ | (46 | ) | | (5) | | (24 | )% | | (36 | )% |
| |
(1) | Calculated basis points (“bps”) are as follows: Annualized dollar amount/Total average UPB X 10000. |
Total expenses decreased during the three months ended March 31, 2020 compared to the same period in 2019, primarily driven by a decrease in foreclosure and other liquidation expenses. Foreclosure and other liquidation related expenses were lower during the three months ended March 31, 2020 as compared to the same period in 2019, primarily due to operational improvements of the reverse portfolio with respect to assignments and adherence to HUD curtailment guidelines, in addition to recovery of $5 prior period operating losses from a previous sub-servicer during the three months ended March 31, 2020. Servicing support fees decreased in 2020 compared to the same period in 2019 primarily due to lower legal and tax service expenses.
|
| | | | |
| Table 12. Servicing - Other Income (Expenses), Net |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | Change | | % Change |
| | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) |
| Income earned on Reverse mortgage interest | $ | 43 |
| | 3 | | $ | 82 |
| | 6 | | $ | (39 | ) | | (3) | | (48 | )% | | (50 | )% |
| Other interest income | 40 |
| | 2 | | 33 |
| | 2 | | 7 |
| | — | | 21 | % | | — | % |
| Interest income | 83 |
| | 5 | | 115 |
| | 8 | | (32 | ) | | (3) | | (28 | )% | | (38 | )% |
| | | | | | | | | | | | | | | | |
| Reverse mortgage interest expense | (52 | ) | | (3) | | (71 | ) | | (5) | | 19 |
| | 2 | | (27 | )% | | (40 | )% |
| Advance interest expense | (5 | ) | | — | | (9 | ) | | (1) | | 4 |
| | 1 | | (44 | )% | | 100 | % |
| Other interest expense | (56 | ) | | (4) | | (34 | ) | | (2) | | (22 | ) | | (2) | | 65 | % | | 100 | % |
| Interest expense | (113 | ) | | (7) | | (114 | ) | | (8) | | 1 |
| | 1 | | (1 | )% | | (13 | )% |
| Total other income (expenses), net - Servicing | $ | (30 | ) | | (2) | | $ | 1 |
| | — | | $ | (31 | ) | | (2) | | (3,100 | )% | | (100 | )% |
| | | | | | | | | | | | | | | | |
| Weighted average cost - advance facilities | 3.0 | % | | | | 4.7 | % | | | | (1.7 | )% | |
| | (36 | )% | |
|
|
| Weighted average cost - excess spread financing | 9.0 | % | | | | 9.0 | % | | | | — | % | |
| | — | % | |
|
|
| |
(1) | Calculated basis points (“bps”) are as follows: Annualized dollar amount/Total average UPB X 10000. |
Total other income (expenses), net decreased during the three months ended March 31, 2020 as compared to the same period in 2019 primarily due to a decrease in interest income. The decrease in interest income was primarily due to a decrease in income earned on reverse mortgage interest, partially offset by an increase in other interest income. Income earned on reverse mortgage interest decreased due to the decline in the reverse mortgage interests balance and the amortization of a net asset premium into income. Other interest income increased primarily driven by an increase in earnings credits and bank fee credits. Interest expense remained relatively flat during the three months ended March 31, 2020 as compared to the same period in 2019, primarily due to an increase in other interest expense primarily driven by higher compensating interest expense and bank fees, partially offset by a decrease in reverse mortgage interest expense due to the decline in the reverse mortgage interest portfolio.
Servicing Portfolio and Related Liabilities
The tables below summarize the servicing portfolio and related liabilities in the Servicing segment:
|
| | | | |
| Table 13. Servicing Portfolios and Related Liabilities |
|
| | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
| UPB | | Carrying Amount | | bps | | UPB | | Carrying Amount | | bps |
| Forward MSRs - acquisition pool: | | | | | | | | | | | |
| Credit sensitive | $ | 138,726 |
| | $ | 1,386 |
| | 100 | | $ | 147,895 |
| | $ | 1,613 |
| | 109 |
| Interest sensitive | 151,908 |
| | 1,723 |
| | 113 | | 148,887 |
| | 1,883 |
| | 126 |
| Total forward MSRs - fair value | $ | 290,634 |
| | $ | 3,109 |
| | 107 | | $ | 296,782 |
| | $ | 3,496 |
| | 118 |
| | | | | | | | | | | | |
| Forward MSRs - investor pool: | | | | | | | | | | | |
| Agency | $ | 238,956 |
| | $ | 2,618 |
| | 110 | | $ | 240,688 |
| | $ | 2,944 |
| | 122 |
| Non-agency | 51,678 |
| | 491 |
| | 95 | | 56,094 |
| | 552 |
| | 98 |
| Total forward MSRs - fair value | $ | 290,634 |
| | $ | 3,109 |
| | 107 | | $ | 296,782 |
| | $ | 3,496 |
| | 118 |
| | | | | | | | | | | | |
| Total forward MSRs | $ | 290,634 |
| | $ | 3,109 |
| | | | $ | 296,782 |
| | $ | 3,496 |
| | |
| | | | | | | | | | | | |
Subservicing and other(1) | | | | | | | | | | | |
| Agency | 302,060 |
| | N/A |
| | | | 308,532 |
| | N/A |
| | |
| Non-agency | 14,873 |
| | N/A |
| | | | 15,451 |
| | N/A |
| | |
| Total subservicing and other | 316,933 |
| | N/A |
| | | | 323,983 |
| | N/A |
| | |
| | | | | | | | | | | | |
| Reverse portfolio - amortized cost | | | | | | | | | | | |
| MSR | 2,332 |
| | 6 |
| | | | 2,508 |
| | 6 |
| | |
| MSL | 13,360 |
| | (53 | ) | | | | 13,994 |
| | (61 | ) | | |
| Securitized loans | 5,898 |
| | 5,955 |
| | | | 6,223 |
| | 6,279 |
| | |
| Total reverse portfolio serviced | 21,590 |
| | 5,908 |
| | | | 22,725 |
| | 6,224 |
| | |
| Total servicing portfolio unpaid principal balance | $ | 629,157 |
| | $ | 9,017 |
| | | | $ | 643,490 |
| | $ | 9,720 |
| | |
| |
(1) | Subservicing and other amounts include loans we service for others, residential mortgage loans originated but have yet to be sold and agency REO balances for which we own the mortgage servicing rights. |
As of March 31, 2020, when measuring the fair value of the portfolio as a basis point of the unpaid principal balance, our credit sensitive pool decreased in value by 9 bps and interest sensitive pool decreased in value 13 bps, compared to December 31, 2019 due to higher forecasted prepayment speeds as a result of the declining interest rate environment in 2020.
We assess whether acquired portfolios are more credit sensitive or interest sensitive in nature on the date of acquisition. We consider numerous factors in making this assessment, with the primary factors consisting of the overall portfolio delinquency characteristics, portfolio seasoning and residential mortgage loan composition. Interest rate sensitive portfolios typically consist of single-family conforming residential forward mortgage loans serviced for GSEs or other third-party investors. Credit sensitive portfolios primarily consist of higher delinquency single-family non-conforming residential forward mortgage loans in private-label securitizations.
The following table provides information on the fair value of our owned forward MSR portfolio:
|
| | | | |
| Table 14. MSRs - Fair Value, Rollforward |
|
| | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Fair value - beginning of period | $ | 3,496 |
| | $ | 3,665 |
|
| Additions: | | | |
| Servicing retained from mortgage loans sold | 123 |
| | 66 |
|
| Purchases of servicing rights | 24 |
| | 409 |
|
| Dispositions: | | | |
| Sales and cancellation of servicing assets | — |
| | (260 | ) |
| Changes in fair value: | | | |
| Due to changes in valuation inputs or assumptions used in the valuation model: | | | |
| Credit sensitive | (181 | ) | | (121 | ) |
| Interest sensitive | (220 | ) | | (211 | ) |
| Other changes in fair value: | | | |
| Scheduled principal payments | (23 | ) | | (22 | ) |
Disposition of negative MSRs and other(1) | 20 |
| | 12 |
|
| Prepayments | | | |
| Voluntary prepayments | | | |
| Credit sensitive | (24 | ) | | (19 | ) |
| Interest sensitive | (102 | ) | | (32 | ) |
| Involuntary prepayments | | | |
| Credit sensitive | (1 | ) | | (2 | ) |
| Interest sensitive | (3 | ) | | (4 | ) |
| Fair value - end of period | $ | 3,109 |
| | $ | 3,481 |
|
| |
(1) | Amounts primarily represent negative fair values reclassified from the MSR asset to reserves as underlying loans are removed from the MSR and other reclassification adjustments. |
The following table sets forth the weighted-average key assumptions in estimating the fair value of forward MSRs:
|
| | | | |
| Table 15. MSRs - Fair Value |
|
| | | | | |
| | March 31, 2020 | | March 31, 2019 |
| Total MSRs Portfolio | | | |
| Discount rate | 9.7 | % | | 10.3 | % |
| Prepayment speeds | 13.4 | % | | 13.0 | % |
| Average life | 5.7 years |
| | 6.0 years |
|
| | | | |
| Acquisition Pools: | | | |
| Credit Sensitive | | | |
| Discount rate | 10.2 | % | | 11.3 | % |
| Prepayment speeds | 13.0 | % | | 13.5 | % |
| Average life | 5.9 years |
| | 6.0 years |
|
| | | | |
| Interest Sensitive | | | |
| Discount rate | 9.1 | % | | 9.4 | % |
| Prepayment speeds | 13.8 | % | | 12.5 | % |
| Average life | 5.5 years |
| | 6.1 years |
|
| | | | |
| Investor Pools: | | | |
| Agency | | | |
| Discount rate | 9.0 | % | | 9.4 | % |
| Prepayment speeds | 13.2 | % | | 12.4 | % |
| Average life | 5.6 years |
| | 6.1 years |
|
| | | | |
| Non-Agency | | | |
| Discount rate | 12.6 | % | | 13.6 | % |
| Prepayment speeds | 14.3 | % | | 15.4 | % |
| Average life | 6.1 years |
| | 5.9 years |
|
The weighted-average discount rate for total MSRs portfolio decreased as of March 31, 2020 compared to the same period in 2019 due to the declining interest rate environment in 2020. Weighted-average life for total MSRs portfolio decreased due to the increase in prepayment speeds, which was attributable to the interest rate decline period over period.
The discount rate, which is used to determine the present value of estimated future net servicing income, is based on the required rate of return market investors would expect for an asset with similar risk characteristics. The discount rate is determined through review of recent market transactions as well as comparing the discount rate to those utilized by third-party valuation specialists.
Total prepayment speeds represent the annual rate at which borrowers are forecasted to repay their mortgage loan principal, which includes estimates for both voluntary and involuntary borrower liquidations. The expected weighted-average life represents the total years we expect to service the MSR.
In determining key assumptions in estimating fair value of forward MSRs, we took into account the situations created by COVID-19 pandemic.
Results of Operations
|
|
| Table 1. Consolidated Operations |
|
| | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | Three Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | $ Change | | % Change |
| Revenues - operational | $ | 630 |
| | | $ | 425 |
| | $ | 205 |
| | 48 | % |
| Revenues - Mark-to-market | (231 | ) | | | 19 |
| | (250 | ) | | (1,316 | )% |
| Total revenues | 399 |
| | | 444 |
| | (45 | ) | | (10 | )% |
| Expenses | 492 |
| | | 339 |
| | 153 |
| | 45 | % |
| Other income (expenses), net | (24 | ) | | | (26 | ) | | 2 |
| | (8 | )% |
| (Loss) income before income tax (benefit) expense | (117 | ) | | | 79 |
| | (196 | ) | | (248 | )% |
| Less: Income tax (benefit) expense | (29 | ) | | | 21 |
| | (50 | ) | | (238 | )% |
| Net (loss) income | (88 | ) | | | 58 |
| | (146 | ) | | (252 | )% |
| Less: Net (loss) income attributable to non-controlling interests | (1 | ) | | | — |
| | (1 | ) | | (100 | )% |
| Net (loss) income attributable to Successor/Predecessor | $ | (87 | ) | | | $ | 58 |
| | $ | (145 | ) | | (250 | )% |
|
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Revenues - operational | $ | 661 |
| | $ | 543 |
| | $ | 118 |
| | 22 | % |
| Revenues - Mark-to-market | (383 | ) | | (293 | ) | | (90 | ) | | 31 | % |
| Total revenues | 278 |
| | 250 |
| | 28 |
| | 11 | % |
| Total expenses | 444 |
| | 443 |
| | 1 |
| | — | % |
| Total other income (expenses), net | (73 | ) | | (40 | ) | | (33 | ) | | 83 | % |
| Loss before income tax expense benefit | (239 | ) | | (233 | ) | | (6 | ) | | 3 | % |
| Less: Income tax benefit | (68 | ) | | (47 | ) | | (21 | ) | | 45 | % |
| Net loss | (171 | ) | | (186 | ) | | 15 |
| | (8 | )% |
| Less: Net loss attributable to non-controlling interests | (3 | ) | | — |
| | (3 | ) | | (100 | )% |
| Net loss attributable to Mr. Cooper | $ | (168 | ) | | $ | (186 | ) | | $ | 18 |
| | (10 | )% |
We incurredrecorded a totalnet loss before income tax of $117$171 during the three months ended June 30, 2019 whereas the Predecessor generated total income before income taxMarch 31, 2020 compared to a net loss of $79$186 during the same period in 2018.2019. The net loss in 20192020 was lower primarily due to unfavorablethe income tax benefit. Consolidated operational revenues increased primarily due to increased revenue in our Originations segment, driven by higher originations volume in a declining interest rate environment and incremental volumes associated with the acquisition of Pacific Union, which was completed in February 2019. Partially offsetting the increase in operational revenues was an increase in negative mark-to-market (“MTM”) of $231 driven by declining interest rates when compared with a favorable MTM of $19 in 2018. Both operational revenue and expenses increased in 2019 as a result ofadjustments for the acquisitions of Pacific Union and Seterus in February 2019 and Xome’s acquisition of AMS in August 2018.
|
|
Table 1.1 Consolidated Operations |
|
| | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | | $ Change | | % Change |
| Revenues - operational | $ | 1,173 |
| | | $ | 861 |
| | $ | 312 |
| | 36 | % |
| Revenues - Mark-to-market | (524 | ) | | | 171 |
| | (695 | ) | | (406 | )% |
| Total revenues | 649 |
| | | 1,032 |
| | (383 | ) | | (37 | )% |
| Expenses | 935 |
| | | 703 |
| | 232 |
| | 33 | % |
| Other income (expenses), net | (64 | ) | | | (44 | ) | | (20 | ) | | 45 | % |
| (Loss) income before income tax (benefit) expense | (350 | ) | | | 285 |
| | (635 | ) | | (223 | )% |
| Less: Income tax (benefit) expense | (76 | ) | | | 67 |
| | (143 | ) | | (213 | )% |
| Net (loss) income | (274 | ) | | | 218 |
| | (492 | ) | | (226 | )% |
| Less: Net (loss) income attributable to non-controlling interests | (1 | ) | | | — |
| | (1 | ) | | (100 | )% |
| Net (loss) income attributable to Successor/Predecessor | $ | (273 | ) | | | $ | 218 |
| | $ | (491 | ) | | (225 | )% |
We incurred a total loss before income tax of $350 during the sixthree months ended June 30, 2019 whereas the Predecessor generated total income before income tax expense of $285 during the same period in 2018. The net loss in 2019 was primarily due to unfavorable MTM of $524 driven by declining interest rates when compared with a favorable MTM of $171 in 2018. Consolidated operational revenue and expenses increased during the six months ended June 30, 2019March 31, 2020 compared to the same period in 2018 largely driven by2019. Total expenses for the acquisitions of Pacific Union and Seterusthree months ended March 31, 2020 were consistent with the same period in February 2019, as well as Xome’s acquisition of AMS in August 2018.
2019.
Total other income (expenses), net declined duringincreased for the sixthree months ended June 30, 2019March 31, 2020 compared to the same period in 2018. The decline was2019 primarily due to an increasea decrease in interest expenseincome and other income (expenses), net. Interest income decreased primarily due to a decrease in our Corporate segment in 2019income earned on reverse mortgage interest, as a result of athe decline in the reverse mortgage interests balance. Other income (expenses), net was higher debt balance and higher interest ratesin three months ended March 31, 2019 primarily due to income related to unsecured senior notes.the change in fair value of the contingent consideration for the acquisition of Assurant Mortgage Solutions (“AMS”).
|
| | | | |
| Table 2. Provision for Income Taxes |
| | | | Successor | | | Predecessor | | | | | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| | Three Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | $ Change | | % Change | |
| Income tax (benefit) expense | $ | (29 | ) | | | $ | 21 |
| | $ | (50 | ) | | (238 | )% | |
| Income tax benefit | | $ | (68 | ) | | $ | (47 | ) | | $ | (21 | ) | | 45 | % |
| | | | | | | | | | | | | | | | |
Effective tax rate(1) | 24.6 | % | | | 26.5 | % | | | | | 28.4 | % | | 20.3 | % | | | | |
| |
(1) | Effective tax rate is calculated using whole numbers. |
WeFor the three months ended March 31, 2020 and 2019, we had an income tax benefit for the three months ended June 30, 2019. For the same period ended in 2018, the Predecessor had an income tax expense.benefit. The effective tax rate for the three months ended June 30, 2019March 31, 2020 was 24.6%28.4% as compared to the effective tax rate of 26.5%20.3% for the three months ended June 30, 2018.March 31, 2019. The decreasedchange in effective tax rate is primarily attributable to the increased relative unfavorable tax effectimpacts of permanent differences.
|
| | | | |
Table 2.1. Provision for Income Taxes |
|
| | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | | $ Change | | % Change |
| Income tax (benefit) expense | $ | (76 | ) | | | $ | 67 |
| | $ | (143 | ) | | (213 | )% |
| | | | | | | | | |
Effective tax rate(1) | 21.7 | % | | | 23.6 | % | | | | |
| |
(1)
| Effective tax rate is calculated using whole numbers. |
We had an incomedifferences such as nondeductible executive compensation and nondeductible meals and entertainment expenses on the annual effective rate, and discrete tax benefit foritems in the sixthree months ended June 30, 2019. For the same period ended in 2018, the Predecessor had an income tax expense. The effective tax rate for the six months ended June 30, 2019 was 21.7%March 31, 2020 as compared to the effective tax rate of 23.6% for the sixthree months ended June 30, 2018. The decreased rate is primarily attributable to the tax effect of permanent differences.March 31, 2019.
Our operations are conducted through four segments: Servicing, Originations, Xome, and Corporate/Other.
The Servicing segment performs operational activities on behalf of investors or owners of the underlying mortgages, including collecting and disbursing borrower payments, investor reporting, customer service, modifying loans where appropriate to help borrowers stay current, and when necessary performing collections, foreclosures, and the sale of REO.
The Originations segment originates residential mortgage loans through our direct-to-consumer channel, which provides refinance options for our existing customers, and through our correspondent and wholesale channels which purchase or originate loans from mortgage bankers and brokers.
The Xome segment provides a variety of real estate services to mortgage originators, mortgage and real estate investors, and mortgage servicers, including valuation, title, and field services, and operates an exchange which facilitates the sale of foreclosed properties, and contains a subsidiary which sells data and technology solutions.properties.
The Corporate/Other segment represents unallocated overhead expenses, including the costs of executive management and other corporate functions that are not directly attributable to our operating segments, our senior unsecured notes, and the results of a legacy mortgage investment portfolio.portfolio, which consists of non-prime and non-conforming residential mortgage loans that were transferred to a securitization trust (“Trust 2009-A”) in 2009. We collapsed Trust 2009-A and executed the sale of the loans held in the trust in September 2019.
| | | | Successor | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 | Three Months Ended March 31, 2020 |
| | Servicing | | Originations | | Xome | | Elimination/ Reclassification(1) | | Total Operating Segments | | Corporate/Other | | Consolidated | Servicing | | Originations | | Xome | | Elimination | | Total Operating Segments | | Corporate/Other | | Consolidated |
| Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Service related, net | $ | 27 |
| | $ | 20 |
| | $ | 108 |
| | $ | (18 | ) | | $ | 137 |
| | $ | — |
| | $ | 137 |
| $ | (180 | ) | | $ | 20 |
| | $ | 106 |
| | $ | (1 | ) | | $ | (55 | ) | | $ | 2 |
| | $ | (53 | ) |
| Net gain on mortgage loans held for sale | — |
| | 244 |
| | — |
| | 18 |
| | 262 |
| | — |
| | 262 |
| 34 |
| | 297 |
| | — |
| | — |
| | 331 |
| | — |
| | 331 |
|
| Total revenues | 27 |
| | 264 |
| | 108 |
| | — |
| | 399 |
| | — |
| | 399 |
| (146 | ) | | 317 |
| | 106 |
| | (1 | ) | | 276 |
| | 2 |
| | 278 |
|
| Total Expenses | 189 |
| | 145 |
| | 101 |
| | — |
| | 435 |
| | 57 |
| | 492 |
| |
| Other income (expenses) | | | | | | | | | | | | | | |
| Total expenses | | 149 |
| | 166 |
| | 96 |
| | (1 | ) | | 410 |
| | 34 |
| | 444 |
|
| Other income (expenses), net: | | | | | | | |
| | | |
| | |
| Interest income | 136 |
| | 23 |
| | — |
| | — |
| | 159 |
| | 3 |
| | 162 |
| 83 |
| | 34 |
| | — |
| | — |
| | 117 |
| | 1 |
| | 118 |
|
| Interest expense | (109 | ) | | (25 | ) | | — |
| | — |
| | (134 | ) | | (53 | ) | | (187 | ) | (113 | ) | | (27 | ) | | — |
| | — |
| | (140 | ) | | (52 | ) | | (192 | ) |
| Other | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| |
| Total Other Income (Expenses), Net | 27 |
| | (1 | ) | | — |
| | — |
| | 26 |
| | (50 | ) | | (24 | ) | |
| Other income (expenses), net | | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Total other income (expenses), net | | (30 | ) | | 7 |
| | 1 |
| | — |
| | (22 | ) | | (51 | ) | | (73 | ) |
| (Loss) income before income tax (benefit) expense | $ | (135 | ) | | $ | 118 |
| | $ | 7 |
| | $ | — |
| | $ | (10 | ) | | $ | (107 | ) | | $ | (117 | ) | $ | (325 | ) | | $ | 158 |
| | $ | 11 |
| | $ | — |
| | $ | (156 | ) | | $ | (83 | ) | | $ | (239 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Predecessor |
| | Three Months Ended June 30, 2018 |
| | Servicing | | Originations | | Xome | | Elimination/ Reclassification(1) | | Total Operating Segments | | Corporate/Other | | Consolidated |
| Revenues | | | | | | | | | | | | | |
| Service related, net | $ | 248 |
| | $ | 17 |
| | $ | 62 |
| | $ | (11 | ) | | $ | 316 |
| | $ | 1 |
| | $ | 317 |
|
| Net gain on mortgage loans held for sale | — |
| | 116 |
| | — |
| | 11 |
| | 127 |
| | — |
| | 127 |
|
| Total revenues | 248 |
| | 133 |
| | 62 |
| | — |
| | 443 |
| | 1 |
| | 444 |
|
| Total Expenses | 166 |
| | 102 |
| | 52 |
| | — |
| | 320 |
| | 19 |
| | 339 |
|
| Other income (expenses) | | | | | | | | | | | | | |
| Interest income | 121 |
| | 17 |
| | — |
| | — |
| | 138 |
| | 2 |
| | 140 |
|
| Interest expense | (115 | ) | | (16 | ) | | — |
| | — |
| | (131 | ) | | (33 | ) | | (164 | ) |
| Other | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) |
| Total Other Income (Expenses), Net | 6 |
| | 1 |
| | — |
| | — |
| | 7 |
| | (33 | ) | | (26 | ) |
| Income (loss) before income tax expense (benefit) | $ | 88 |
| | $ | 32 |
| | $ | 10 |
| | $ | — |
| | $ | 130 |
| | $ | (51 | ) | | $ | 79 |
|
| |
(1)
| For Servicing segment results purposes, all revenue is attributable to servicing the portfolio. Therefore, $18 and $11 of net gain on mortgage loans is moved to service related, net for the three months ended June 30, 2019 and 2018, respectively. For consolidated results purposes, these amounts were reclassed to net gain on mortgage loans held for sale. |
|
|
Table 3.1 Segment Results |
| | | | Successor | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2019 | Three Months Ended March 31, 2019 |
| | Servicing | | Originations | | Xome | | Elimination/ Reclassification(1) | | Total Operating Segments | | Corporate/Other | | Consolidated | Servicing | | Originations | | Xome | | Elimination | | Total Operating Segments | | Corporate/Other | | Consolidated |
| Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Service related, net | $ | 35 |
| | $ | 35 |
| | $ | 204 |
| | $ | (53 | ) | | $ | 221 |
| | $ | — |
| | $ | 221 |
| $ | (27 | ) | | $ | 15 |
| | $ | 96 |
| | $ | — |
| | $ | 84 |
| | $ | — |
| | $ | 84 |
|
| Net gain on mortgage loans held for sale | — |
| | 375 |
| | — |
| | 53 |
| | 428 |
| | — |
| | 428 |
| 35 |
| | 131 |
| | — |
| | — |
| | 166 |
| | — |
| | 166 |
|
| Total revenues | 35 |
| | 410 |
| | 204 |
| | — |
| | 649 |
| | — |
| | 649 |
| 8 |
| | 146 |
| | 96 |
| | — |
| | 250 |
| | — |
| | 250 |
|
| Total Expenses | 384 |
| | 249 |
| | 200 |
| | — |
| | 833 |
| | 102 |
| | 935 |
| |
| Other income (expenses) | | | | | | | | | | | | | | |
| Total expenses | | 195 |
| | 104 |
| | 99 |
| | — |
| | 398 |
| | 45 |
| | 443 |
|
| Other income (expenses), net: | | | | | | | | | | | | | | |
| Interest income | 251 |
| | 40 |
| | — |
| | — |
| | 291 |
| | 5 |
| | 296 |
| 115 |
| | 17 |
| | — |
| | — |
| | 132 |
| | 2 |
| | 134 |
|
| Interest expense | (223 | ) | | (43 | ) | | — |
| | — |
| | (266 | ) | | (110 | ) | | (376 | ) | (114 | ) | | (18 | ) | | — |
| | — |
| | (132 | ) | | (57 | ) | | (189 | ) |
| Other | — |
| | 5 |
| | 11 |
| | — |
| | 16 |
| | — |
| | 16 |
| |
| Total Other Income (Expenses), Net | 28 |
| | 2 |
| | 11 |
| | — |
| | 41 |
| | (105 | ) | | (64 | ) | |
| Other income, net | | — |
| | 4 |
| | 11 |
| | — |
| | 15 |
| | — |
| | 15 |
|
| Total other income (expenses), net | | 1 |
| | 3 |
| | 11 |
| | — |
| | 15 |
| | (55 | ) | | (40 | ) |
| (Loss) income before income tax (benefit) expense | $ | (321 | ) | | $ | 163 |
| | $ | 15 |
| | $ | — |
| | $ | (143 | ) | | $ | (207 | ) | | $ | (350 | ) | $ | (186 | ) | | $ | 45 |
| | $ | 8 |
| | $ | — |
| | $ | (133 | ) | | $ | (100 | ) | | $ | (233 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Predecessor |
| | Six Months Ended June 30, 2018 |
| | Servicing | | Originations | | Xome | | Elimination/ Reclassification(1) | | Total Operating Segments | | Corporate/Other | | Consolidated |
| Revenues | | | | | | | | | | | | | |
| Service related, net | $ | 643 |
| | $ | 32 |
| | $ | 127 |
| | $ | (22 | ) | | $ | 780 |
| | $ | 1 |
| | $ | 781 |
|
| Net gain on mortgage loans held for sale | — |
| | 229 |
| | — |
| | 22 |
| | 251 |
| | — |
| | 251 |
|
| Total revenues | 643 |
| | 261 |
| | 127 |
| | — |
| | 1,031 |
| | 1 |
| | 1,032 |
|
| Total Expenses | 348 |
| | 211 |
| | 104 |
| | — |
| | 663 |
| | 40 |
| | 703 |
|
| Other income (expenses) | | | | | | | | | | | | | |
| Interest income | 247 |
| | 32 |
| | — |
| | — |
| | 279 |
| | 6 |
| | 285 |
|
| Interest expense | (233 | ) | | (31 | ) | | — |
| | — |
| | (264 | ) | | (71 | ) | | (335 | ) |
| Other | (1 | ) | | — |
| | 9 |
| | — |
| | 8 |
| | (2 | ) | | 6 |
|
| Total Other Income (Expenses), Net | 13 |
| | 1 |
| | 9 |
| | — |
| | 23 |
| | (67 | ) | | (44 | ) |
| (Loss) income before income tax (benefit) expense | $ | 308 |
| | $ | 51 |
| | $ | 32 |
| | $ | — |
| | $ | 391 |
| | $ | (106 | ) | | $ | 285 |
|
| |
(1)
| For Servicing segment results purposes, all revenue is attributable to servicing the portfolio. Therefore, $53 and $22 of net gain on mortgage loans is moved to service related, net for the six months ended June 30, 2019 and 2018, respectively. For consolidated results purposes, these amounts were reclassed to net gain on mortgage loans held for sale. |
The Servicing segment’s strategy is to generate income by growing the portfolio and maximizing the servicing margin. We believe several competitive strengths have been critical to our long-term growth as a servicer, including our low-cost platform, our skill in mitigating losses for investors, our commitment to strong customer service and regulatory compliance, our history of successfully boarding new loans, and the ability to retain existing customers by offering attractive refinance options. We believe that our operational capabilities are reflected in strong servicer ratings.
|
| | | | |
| Table 4. Servicer Ratings |
|
| | | | | |
| | Successor |
| Fitch(1) | | Moody’s(2) | | S&P(3) |
| Rating date | November 2018January 2020 | | May 2019 | | May 2019 |
| | | | | | |
| Residential | RPS2- | | Not Rated | | Above Average |
| Master Servicer | RMS2+ | | SQ2 | | Above Average |
| Special Servicer | RSS2- | | Not Rated | | Above Average |
| Subprime Servicer | RPS2- | | Not Rated | | Above Average |
| |
(1) | Fitch Rating Scale of 1 (Highest Performance) to 5 (Low/No Proficiency) |
| |
(2) | Moody’s Rating Scale of SQ1 (Strong Ability/Stability) to SQ5 (Weak Ability/Stability) |
| |
(3) | S&P’s Rating Scale of Strong to Weak |
Servicing Portfolio Composition
As of June 30, 2019,March 31, 2020, the outstandingunpaid principal balance in our servicing portfolio consisted of approximately $618$290.6 billion in forward loans, of which $302$316.9 billion wasin subservicing and $26other, and $21.6 billion in reverse servicing.mortgage loans.
The term “forward” refers to loans we service which are not “reverse mortgages,” as discussed below.
Our subservicing portfolio consists of loans where we perform the servicing responsibilities for a contractual fee, but do not own the servicing rights and therefore do not holdrecord an MSR on our balance sheet.
Reverse mortgage loans, known asmost commonly HECMs, provide seniors 62 and older with a loan upon which draws can be made periodically. The draws are secured by the equity in the borrower’s home. We have acquired portfolios ofour reverse mortgages in prior years through several transactions and our portfolio of reverse mortgagesit is now in run-off mode. For a significant portion of our reverse mortgages, we holdrecord MSRs on our balance sheet, similar to the accounting for forward mortgages, except in cases where the costs of servicing are expected to exceed revenues, in which case a Mortgage Servicing Liability (“MSL”) is created. Additionally, due to program requirements, we consolidate certain reverse mortgages on our balance sheet and accrue interest income and expense.
The charts below set forth the portfolio mix between serviced, subserviced and reverse mortgage loans, and the composition of our servicing portfolio ending UPB by investor group as of March 31, 2020 and 2019:
The following tables set forth the results of operations for the Servicing segment.segment:
|
| | | | |
Table 5. Servicing -Segment Results of Operations |
| | | | Successor | | | Predecessor | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | $ Change | | % Change | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Revenues | | | | | | | | | | | | | | | |
| Operational | $ | 314 |
| | | $ | 277 |
| | $ | 37 |
| | 13 | % | $ | 313 |
| | $ | 324 |
| | $ | (11 | ) | | (3 | )% |
| Amortization, net of accretion | (56 | ) | | | (48 | ) | | (8 | ) | | 17 | % | (76 | ) | | (23 | ) | | (53 | ) | | 230 | % |
| Mark-to-market | (231 | ) | | | 19 |
| | (250 | ) | | (1,316 | )% | (383 | ) | | (293 | ) | | (90 | ) | | 31 | % |
| Total revenues | 27 |
| | | 248 |
| | (221 | ) | | (89 | )% | (146 | ) | | 8 |
| | (154 | ) | | (1,925 | )% |
| Expenses | 189 |
| | | 166 |
| | 23 |
| | 14 | % | |
| Total expenses | | 149 |
| | 195 |
| | (46 | ) | | (24 | )% |
| Total other income (expenses), net | 27 |
| | | 6 |
| | 21 |
| | 350 | % | (30 | ) | | 1 |
| | (31 | ) | | (3,100 | )% |
| Income (loss) before income tax expense | $ | (135 | ) | | | $ | 88 |
| | $ | (223 | ) | | (253 | )% | |
| Loss before income tax benefit | | $ | (325 | ) | | $ | (186 | ) | | $ | (139 | ) | | 75 | % |
For the three months ended June 30, 2019,March 31, 2020, we incurred a loss before income tax benefit of $325 compared to a loss before income tax benefit of $186 for the same period in 2019. The change in loss before income tax benefit was primarily due to a decrease in total revenues, partially offset by a decrease in total expenses. Total revenues decreased primarily as a result of elevated negative mark-to-market revenues during the three months ended March 31, 2020 compared to the same period in 2018 primarily due to unfavorable mark-to-market revenues, partially offset by an increase in operational revenues. The change in the mark-to-market revenue was primarily due to the lower interest rate environment in 2019. The increase in the operational revenues was primarily due to an increase in base servicing and subservicing fees. Base servicing and subservicing fees increased in 2019 primarily due to the increase in the forward and subservicing portfolios largely driven by the acquisition of Pacific Union, along with continued growth in subservicing clients’ portfolios. The increase in servicing and subservicing fees was partially offset by an increase in excess spread principal payments, a decrease in modification fees and reverse servicing fees revenues. Amortization, net of accretion, for the three months ended June 30,March 31, 2020 increased compared to the same period in 2019, increased primarily due to an increase in amortization of forward MSRMSRs as a result of growth in the forward MSR portfolio and elevated prepayments driven by the lowerdeclining interest rate environment. Partially offsetting the increase in amortization of the forward MSR was the accretion of excess spread, as well as the accretion of the premium that was recorded in connection with the Merger on our reverse MSL.
ExpensesTotal expenses for the three months ended June 30, 2019 increased compared to the same period in 2018 primarily due to an increase in salaries, wages and benefits from an increase in headcount to service the growth in the servicing portfolio primarily driven by the Pacific Union and Seterus acquisitions. Other income (expense), net, increased primarily due to an increase in interest income driven by earnings credits and bank fee credits the Predecessor previously classified as interest expense and a decrease in interest expense due to lower reverse mortgage interest expense.
|
| | | | |
Table 5.1. Servicing - Operations |
|
| | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | | $ Change | | % Change |
| Revenues | | | | | | | | |
| Operational | $ | 638 |
| | | $ | 568 |
| | $ | 70 |
| | 12 | % |
| Amortization, net of accretion | (79 | ) | | | (96 | ) | | 17 |
| | (18 | )% |
| Mark-to-market | (524 | ) | | | 171 |
| | (695 | ) | | (406 | )% |
| Total revenues | 35 |
| | | 643 |
| | (608 | ) | | (95 | )% |
| Expenses | 384 |
| | | 348 |
| | 36 |
| | 10 | % |
| Total other income (expenses), net | 28 |
| | | 13 |
| | 15 |
| | 115 | % |
| Income before income tax expense | $ | (321 | ) | | | $ | 308 |
| | $ | (629 | ) | | (204 | )% |
For the six months ended June 30, 2019, total revenuesMarch 31, 2020 decreased compared to the same period in 2018 primarily due to unfavorable mark-to-market revenues, partially offset by an increase in operational revenues and lower amortization. The change in the mark-to-market revenue was primarily due to the lower interest rate environment in 2019. The increase in the operational revenues was primarily due to an increase in base servicing and subservicing fees and other ancillary revenues. Base servicing and subservicing fees increased in 2019 primarily due to the increase in the forward and subservicing portfolios largely driven by the acquisition of Pacific Union, along with continued growth in subservicing clients’ portfolios. The increase in other ancillary revenues was primarily due to a gain from the execution of a clean-up call option on a reverse mortgage loan trust during the first quarter of 2019. Partially offsetting the increase in servicing and subservicing fees and other ancillary revenues was a decrease in incentive fees, modification feesforeclosure and other liquidation expenses. The decrease in foreclosure and other liquidation expenses was primarily driven by operational improvements of the reverse servicing fees revenues, as well as an increase in excess spread principal payments. Amortization, net of accretion for the six months ended June 30, 2019 decreased primarily dueportfolio with respect to the accretion of our reverse MSL that was recorded in connection with the Merger. The remaining change in amortization was a result of an increase in excess spread accretion. Otherassignments and adherence to HUD curtailment guidelines. Total other income (expense), net increasedfor the three months ended March 31, 2020 decreased compared to the same period in 2019 primarily due to a decrease in interest expense as a result of the accretion of the HMBS bond premium as well asincome. The decrease in interest income was primarily due to a decrease in income earned on reverse mortgage interest, expenseprimarily driven by the decline in the reverse mortgage interests balance and the amortization of a net premium into income. Refer to Table 10. Servicing - Revenues, Table 11. Servicing - Expenses and Table 12. Servicing - Other Income (Expenses), Net, for further discussions on financing vehicles.the changes in total revenues, total expenses and total other income (expenses), net, respectively.
Expenses for the six months ended June 30, 2019 increased compared to the same period in 2018 primarily due to an increase in salaries, wages and benefits from an increase in headcount in connection with the Pacific Union and Seterus acquisitions.
The following table provides a rollforward of our forward servicing portfolio UPB, including loans subserviced for others.
|
| | | | |
| Table 6. Servicing Portfolio - Unpaid Principal Balances |
|
| | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Average UPB | | | |
| Forward MSRs | $ | 303,578 |
| | $ | 308,984 |
|
Subservicing and other(1) | 310,160 |
| | 239,468 |
|
| Reverse loans | 22,059 |
| | 27,472 |
|
| Total average UPB | $ | 635,797 |
| | $ | 575,924 |
|
| | | | |
| | March 31, 2020 | | March 31, 2019 |
| Ending UPB | | | |
| Forward MSRs | | | |
| Agency | $ | 238,956 |
| | $ | 238,937 |
|
| Non-agency | 51,678 |
| | 64,755 |
|
| Total forward MSRs | 290,634 |
| | 303,692 |
|
| | | | |
Subservicing and other(1) | | | |
| Agency | 302,060 |
| | 273,786 |
|
| Non-agency | 14,873 |
| | 27,405 |
|
| Total subservicing and other | 316,933 |
| | 301,191 |
|
| |
| | |
| Reverse loans | | | |
| MSR | 2,332 |
| | 3,559 |
|
| MSL | 13,360 |
| | 15,928 |
|
| Securitized loans | 5,898 |
| | 7,527 |
|
| Total reverse portfolio serviced | 21,590 |
| | 27,014 |
|
| Total ending UPB | $ | 629,157 |
| | $ | 631,897 |
|
| |
(1) | Subservicing and other includes (i) loans we service for others, (ii) residential mortgage loans originated but have yet to be sold, and (iii) agency REO balances for which we own the mortgage servicing rights. |
The following table provides a rollforward of our forward servicing and subservicing and other portfolio UPB:
|
| | | | |
| Table 7. Forward Servicing and Subservicing and Other Portfolio UPB Rollforward |
| | | | Successor | | | Predecessor | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 | Forward MSR | | Subservicing and Other | | Total | | Forward MSR | | Subservicing and Other | | Total |
| Balance - beginning of period | $ | 604,883 |
| | $ | 519,367 |
| | | $ | 466,401 |
| | $ | 473,256 |
| $ | 296,782 |
| | $ | 323,983 |
| | $ | 620,765 |
| | $ | 295,481 |
| | $ | 223,886 |
| | $ | 519,367 |
|
| Additions: |
|
| | | | | | | | | | | | | | | | | | |
| Originations | 9,920 |
| | 15,215 |
| | | 5,545 |
| | 10,633 |
| 11,635 |
| | 662 |
| | 12,297 |
| | 4,891 |
| | 404 |
| | 5,295 |
|
| Acquisitions | 32,787 |
| | 130,598 |
| | | 14,655 |
| | 20,804 |
| |
| Acquisitions / Increase in subservicing | | (673 | ) | | 23,352 |
| | 22,679 |
| | 13,404 |
| | 84,406 |
| | 97,810 |
|
| Deductions: |
|
| | | | | | | | | | | | | | | | | | |
| Dispositions | (2,914 | ) | | (4,165 | ) | | | (1,739 | ) | | (1,793 | ) | (40 | ) | | (10,359 | ) | | (10,399 | ) | | (133 | ) | | (1,118 | ) | | (1,251 | ) |
| Principal reductions and other | (5,700 | ) | | (10,845 | ) | | | (4,724 | ) | | (9,659 | ) | (2,748 | ) | | (2,965 | ) | | (5,713 | ) | | (2,827 | ) | | (2,317 | ) | | (5,144 | ) |
Voluntary reductions(1) | (19,778 | ) | | (30,050 | ) | | | (13,166 | ) | | (24,829 | ) | (13,864 | ) | | (17,672 | ) | | (31,536 | ) | | (6,297 | ) | | (3,975 | ) | | (10,272 | ) |
Involuntary reductions(2) | (994 | ) | | (1,851 | ) | | | (1,478 | ) | | (2,823 | ) | (387 | ) | | (68 | ) | | (455 | ) | | (762 | ) | | (95 | ) | | (857 | ) |
| Net changes in loans serviced by others | (84 | ) | | (149 | ) | | | (96 | ) | | (191 | ) | (71 | ) | | — |
| | (71 | ) | | (65 | ) | | — |
| | (65 | ) |
| Balance - end of period | $ | 618,120 |
| | $ | 618,120 |
| | | $ | 465,398 |
| | $ | 465,398 |
| $ | 290,634 |
| | $ | 316,933 |
| | $ | 607,567 |
| | $ | 303,692 |
| | $ | 301,191 |
| | $ | 604,883 |
|
| |
(1) | Voluntary reductions are related to loan payoffs by customers. |
| |
(2) | Involuntary reductions refer to loans liquidated through default.loan chargeoffs. |
During the three and six months ended June 30, 2019,As of March 31, 2020, our forward servicing UPB decreased when compared to 2019, primarily due to increased voluntary reductions in a low interest rate environment, partially offset by increased origination volumes. As of March 31, 2020, our subservicing and subservicingother portfolio ending UPB increased when compared to the same periods in 2018,2019, primarily due to increased boarding of loans generated from the acquisitions anddriven by portfolio growth from our subservicing clients. The increase in dispositions was a result of an increase in our loan sales drivenclients, partially offset by increased sales volume in our origination channel.
dispositions primarily due to various MSR sales.
The following tables providetable below summarizes the compositionoverall performance of revenues for the Servicing segment.forward servicing and subservicing portfolio:
|
| | | | |
Table 8. Key Performance Metrics - Forward Servicing and Subservicing Portfolio(1) |
|
| | | | | | | |
| | March 31, 2020 | | March 31, 2019 |
| Loan count | 3,506,998 |
| | 3,616,323 |
|
Average loan amount(2) | $ | 173,231 |
| | $ | 167,266 |
|
Average coupon - credit sensitive(3) | 4.7 | % | | 4.9 | % |
Average coupon - interest sensitive(3) | 4.3 | % | | 4.3 | % |
Average coupon - agency(3) | 4.4 | % | | 4.4 | % |
Average coupon - non-agency(3) | 4.7 | % | | 4.8 | % |
60+ delinquent (% of loans)(4) | 1.9 | % | | 2.4 | % |
90+ delinquent (% of loans)(4) | 1.6 | % | | 2.1 | % |
120+ delinquent (% of loans)(4) | 1.4 | % | | 1.9 | % |
| Total prepayment speed (12-month constant prepayment rate) | 19.2 | % | | 8.2 | % |
| |
(1) | Characteristics and key performance metrics of our servicing portfolio exclude UPB and loan counts acquired but not yet boarded and currently serviced by others. |
| |
(2) | Average loan amount is presented in whole dollar amounts. |
| |
(3) | The weighted average coupon amounts presented in the table above are only reflective of our owned forward MSR portfolio that is reported at fair value. |
| |
(4) | Loan delinquency is based on the current contractual due date of the loan. In the case of a completed loan modification, delinquency is based on the modified due date of the loan. |
Delinquency is a significant assumption in determining the mark-to-market adjustment and is a key indicator of MSR portfolio performance. Delinquent loans contribute to lower MSR values due to higher costs to service and increased carrying costs of advances. We continue to experience low delinquency rates during the three months ended March 31, 2020 which preserves the value of our MSRs. At this time, it is too early to estimate the potential impact the COVID-19 pandemic will have on future delinquencies.
|
| | | | |
Table 7.9. Forward Loan Modifications and Workout Units |
|
| | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | Amount Change | | % Change |
| Modifications | 4,715 |
| | 5,189 |
| | (474 | ) | | (9 | )% |
| Workouts | 3,994 |
| | 4,401 |
| | (407 | ) | | (9 | )% |
| Total modifications and workout units | 8,709 |
| | 9,590 |
| | (881 | ) | | (9 | )% |
Total modifications and workouts during the three months ended March 31, 2020 decreased compared to the same period in 2019 primarily due to lower delinquency rates. At this time, it is too early to estimate the potential impact the COVID-19 pandemic will have on future delinquencies and corresponding modification activity.
The following table provides the composition of revenues for the Servicing segment:
|
| | | | |
| Table 10. Servicing - Revenues |
| | | | Successor | | | Predecessor | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | $ Change | | % Change | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| | Amt | | bps(1) | | | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) |
| Forward MSR Operational Revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Base servicing fees | $ | 257 |
| | 16 |
| | | $ | 214 |
| | 17 |
| | $ | 43 |
| | (1 | ) | | 20 | % | | (6 | )% | $ | 250 |
| | 16 | | $ | 240 |
| | 17 | | $ | 10 |
| | (1) | | 4 | % | | (6 | )% |
Modification fees(2) | 6 |
| | — |
| | | 13 |
| | 1 |
| | (7 | ) | | (1 | ) | | (54 | )% | | (100 | )% | 3 |
| | — | | 3 |
| | — | | — |
| | — | | — | % | | — | % |
Incentive fees(2) | 1 |
| | — |
| | | 4 |
| | — |
| | (3 | ) | | — |
| | (75 | )% | | — | % | 4 |
| | — | | 1 |
| | — | | 3 |
| | — | | 300 | % | | — | % |
Late payment fees(2) | 20 |
| | 2 |
| | | 19 |
| | 2 |
| | 1 |
| | — |
| | 5 | % | | — | % | 23 |
| | 2 | | 19 |
| | 2 | | 4 |
| | — | | 21 | % | | — | % |
Other ancillary revenues(2) | 30 |
| | 2 |
| | | 26 |
| | 2 |
| | 4 |
| | — |
| | 15 | % | | — | % | 38 |
| | 2 | | 48 |
| | 3 | | (10 | ) | | (1) | | (21 | )% | | (33 | )% |
| Total forward MSR operational revenue | 314 |
| | 20 |
| | | 276 |
| | 22 |
| | 38 |
| | (2 | ) | | 14 | % | | (9 | )% | 318 |
| | 20 | | 311 |
| | 22 | | 7 |
| | (2) | | 2 | % | | (9 | )% |
Base subservicing fees and other subservicing revenue(2) | 62 |
| | 4 |
| | | 37 |
| | 3 |
| | 25 |
| | 1 |
| | 68 | % | | 33 | % | |
Base subservicing fees and other subservicing revenue(3) | | 65 |
| | 4 | | 52 |
| | 4 | | 13 |
| | — | | 25 | % | | — | % |
| Reverse servicing fees | 8 |
| | — |
| | | 14 |
| | 1 |
| | (6 | ) | | (1 | ) | | (43 | )% | | (100 | )% | 6 |
| | — | | 9 |
| | — | | (3 | ) | | — | | (33 | )% | | — | % |
| Total servicing fee revenue | 384 |
| | 24 |
| | | 327 |
| | 26 |
| | 57 |
| | (2 | ) | | 17 | % | | (8 | )% | 389 |
| | 24 | | 372 |
| | 26 | | 17 |
| | (2) | | 5 | % | | (8 | )% |
| MSR financing liability costs | (11 | ) | | (1 | ) | | | (14 | ) | | (1 | ) | | 3 |
| | — |
| | (21 | )% | | — | % | (8 | ) | | — | | (12 | ) | | (1) | | 4 |
| | 1 | | (33 | )% | | 100 | % |
| Excess spread costs - principal | (59 | ) | | (3 | ) | | | (36 | ) | | (2 | ) | | (23 | ) | | (1 | ) | | 64 | % | | 50 | % | (68 | ) | | (4) | | (36 | ) | | (2) | | (32 | ) | | (2) | | 89 | % | | 100 | % |
| Total operational revenue | 314 |
| | 20 |
| | | 277 |
| | 23 |
| | 37 |
| | (3 | ) | | 13 | % | | (13 | )% | 313 |
| | 20 | | 324 |
| | 23 | | (11 | ) | | (3) | | (3 | )% | | (13 | )% |
| Amortization, net of accretion | | | | | | | | | | | | | | | | | | | | | | | | | |
| Forward MSR amortization | (125 | ) | | (8 | ) | | | (84 | ) | | (7 | ) | | (41 | ) | | (1 | ) | | 49 | % | | 14 | % | (152 | ) | | (10) | | (79 | ) | | (6) | | (73 | ) | | (4) | | 92 | % | | 67 | % |
| Excess spread accretion | 59 |
| | 3 |
| | | 36 |
| | 3 |
| | 23 |
| | — |
| | 64 | % | | — | % | 68 |
| | 4 | | 36 |
| | 3 | | 32 |
| | 1 | | 89 | % | | 33 | % |
| Reverse MSL accretion | 11 |
| | 1 |
| | | — |
| | — |
| | 11 |
| | 1 |
| | 100 | % | | 100 | % | 8 |
| | 1 | | 18 |
| | 1 | | (10 | ) | | — | | (56 | )% | | — | % |
| Reverse MSR amortization | (1 | ) | | — |
| | | — |
| | — |
| | (1 | ) | | — |
| | (100 | )% | | — | % | — |
| | — | | 2 |
| | — | | (2 | ) | | — | | (100 | )% | | — | % |
| Total amortization, net of accretion | (56 | ) | | (4 | ) | | | (48 | ) | | (4 | ) | | (8 | ) | | — |
| | 17 | % | | — | % | (76 | ) | | (5) | | (23 | ) | | (2) | | (53 | ) | | (3) | | 230 | % | | 150 | % |
| Mark-to-Market Adjustments | | | | | | | | | | | | | | | | | | | | | | | | | |
MSR MTM(3) | (227 | ) | | (14 | ) | | | 25 |
| | 2 |
| | (252 | ) | | (16 | ) | | (1,008 | )% | | (800 | )% | (412 | ) | | (26) | | (360 | ) | | (25) | | (52 | ) | | (1) | | 14 | % | | 4 | % |
| Excess spread / financing MTM | (4 | ) | | — |
| | | (6 | ) | | — |
| | 2 |
| | — |
| | (33 | )% | | — | % | 29 |
| | 2 | | 67 |
| | 5 | | (38 | ) | | (3) | | (57 | )% | | (60 | )% |
| Total MTM adjustments | (231 | ) | | (14 | ) | | | 19 |
| | 2 |
| | (250 | ) | | (16 | ) | | (1,316 | )% | | (800 | )% | (383 | ) | | (24) | | (293 | ) | | (20) | | (90 | ) | | (4) | | 31 | % | | 20 | % |
| Total revenues - Servicing | $ | 27 |
| | 2 |
| | | $ | 248 |
| | 21 |
| | $ | (221 | ) | | (19 | ) | | (89 | )% | | (90 | )% | $ | (146 | ) | | (9) | | $ | 8 |
| | 1 | | $ | (154 | ) | | (10) | | (1,925 | )% | | (1,000 | )% |
| |
(1) | Calculated basis points (“bps”) are as follows: Annualized dollar amount/Total average UPB X 10000. |
| |
(2) | Certain ancillary and other non-base fees related to subservicing operations are separately presented as other subservicing revenues. |
| |
(3) | The amount of MSR MTM includes the impact of negative modeled cash flows which have been transferred to reserves on advances and other receivables. The negative modeled cash flows relate to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio. The impact of negative modeled cash flows was $17$10 and $11 for the three months ended June 30, 2019. The impact of negative modeled cash flows for the Predecessor was $22 for the three months ended June 30, 2018.March 31, 2020 and 2019, respectively. |
Forward - Due to the increase ofshift in the forward MSR portfolio’s UPB,portfolio mix, base servicing fee revenue and servicing fees per total average UPB increased for the three months ended June 30, 2019March 31, 2020 as compared to the same period in 2018. 2019. The improvement in delinquency rates as of June 30, 2019 contributed to the decrease in modification fees. Other ancillary revenues increasedBPS is primarily driven by an increase in the average loan size due to a gain from the execution of a clean-up call option on a reverse mortgage loan trust, as we were the master servicer and holder of clean-up call rights.shift in portfolio mix.
MSR prepayment and scheduledforward MSR amortization increased for the three months ended June 30, 2019March 31, 2020 as compared to the same period in 2018,2019, primarily due to higher average MSR UPB, and elevated prepayments driven by the lower interest rate environment.
Total negative MTM adjustments declined inincreased for the three months ended June 30, 2019March 31, 2020 as compared to the same period in 20182019 primarily due to the lowerdeclining interest rate environment during 2019.2020.
Subservicing - Subservicing fees increased for the three months ended June 30, 2019March 31, 2020 as compared to the same period in 2018,2019, due to significant growth in the subservicing portfolio UPB.
Reverse - Servicing fees and reverse MSL accretion on reverse mortgage portfolios for the three months ended June 30, 2019March 31, 2020 decreased as compared to the same period in 20182019, primarily due to the decline in the reverse mortgage portfolio.
|
| | | | |
Table 7.1. Servicing - Revenues |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | | | | | |
| | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | | $ Change | | % Change |
| | Amt | | bps(1) | | | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) |
| Forward MSR Operational Revenue | | | | | | | | | | | | | | | | |
| Base servicing fees | $ | 497 |
| | 17 |
| | | $ | 433 |
| | 17 |
| | $ | 64 |
| | — |
| | 15 | % | | — | % |
Modification fees(2) | 9 |
| | — |
| | | 20 |
| | 1 |
| | (11 | ) | | (1 | ) | | (55 | )% | | (100 | )% |
Incentive fees(2) | 2 |
| | — |
| | | 11 |
| | — |
| | (9 | ) | | — |
| | (82 | )% | | — | % |
Late payment fees(2) | 39 |
| | 1 |
| | | 39 |
| | 2 |
| | — |
| | (1 | ) | | — | % | | (50 | )% |
Other ancillary revenues(2) | 78 |
| | 3 |
| | | 53 |
| | 2 |
| | 25 |
| | 1 |
| | 47 | % | | 50 | % |
| Total forward MSR operational revenue | 625 |
| | 21 |
| | | 556 |
| | 22 |
| | 69 |
| | (1 | ) | | 12 | % | | (5 | )% |
Base subservicing fees and other subservicing revenue(2) | 114 |
| | 4 |
| | | 74 |
| | 3 |
| | 40 |
| | 1 |
| | 54 | % | | 33 | % |
| Reverse servicing fees | 17 |
| | — |
| | | 33 |
| | 1 |
| | (16 | ) | | (1 | ) | | (48 | )% | | (100 | )% |
| Total servicing fee revenue | 756 |
| | 25 |
| | | 663 |
| | 26 |
| | 93 |
| | (1 | ) | | 14 | % | | (4 | )% |
| MSR financing liability costs | (23 | ) | | (1 | ) | | | (29 | ) | | (1 | ) | | 6 |
| | — |
| | (21 | )% | | — | % |
| Excess spread costs - principal | (95 | ) | | (3 | ) | | | (66 | ) | | (2 | ) | | (29 | ) | | (1 | ) | | 44 | % | | 50 | % |
| Total operational revenue | 638 |
| | 21 |
| | | 568 |
| | 23 |
| | 70 |
| | (2 | ) | | 12 | % | | (9 | )% |
| Amortization, net of accretion | | | | | | | | | | | | | | | | |
| Forward MSR amortization | (204 | ) | | (7 | ) | | | (162 | ) | | (7 | ) | | (42 | ) | | — |
| | 26 | % | | — | % |
| Excess spread accretion | 95 |
| | 3 |
| | | 66 |
| | 3 |
| | 29 |
| | — |
| | 44 | % | | — | % |
| Reverse MSL accretion | 29 |
| | 1 |
| | | — |
| | — |
| | 29 |
| | 1 |
| | 100 | % | | 100 | % |
| Reverse MSR amortization | 1 |
| | — |
| | | — |
| | — |
| | 1 |
| | — |
| | 100 | % | | — | % |
| Total amortization, net of accretion | (79 | ) | | (3 | ) | | | (96 | ) | | (4 | ) | | 17 |
| | 1 |
| | (18 | )% | | (25 | )% |
| Mark-to-Market Adjustments | | | | | | | | | | | | | | | | |
MSR MTM(3) | (587 | ) | | (19 | ) | | | 251 |
| | 10 |
| | (838 | ) | | (29 | ) | | (334 | )% | | (290 | )% |
| Excess spread / financing MTM | 63 |
| | 2 |
| | | (80 | ) | | (3 | ) | | 143 |
| | 5 |
| | (179 | )% | | (167 | )% |
| Total MTM adjustments | (524 | ) | | (17 | ) | | | 171 |
| | 7 |
| | (695 | ) | | (24 | ) | | (406 | )% | | (343 | )% |
| Total revenues - Servicing | $ | 35 |
| | 1 |
| | | $ | 643 |
| | 26 |
| | $ | (608 | ) | | (25 | ) | | (95 | )% | | (96 | )% |
| |
(1)
| Calculated basis points (“bps”) are as follows: Annualized dollar amount/Total average UPB X 10000. |
| |
(2)
| Certain ancillary and other non-base fees related to subservicing operations are separately presented as other subservicing revenues. |
| |
(3)
| The amount of MSR MTM includes the impact of negative modeled cash flows which have been transferred to reserves on advances and other receivables. The negative modeled cash flows relate to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio. The impact of negative modeled cash flows was $28 for the six months ended June 30, 2019. The impact of negative modeled cash flows for the Predecessor was $34 for the six months ended June 30, 2018. |
Forward - Due Reverse MSL accretion was further impacted by $6 pertaining to the increase of the forward MSR portfolio’s UPB, base servicing fee revenue and servicing fees per total average UPB increased for the six months ended June 30, 2019 as compared to the same period in 2018. The improvement in delinquency rates as of June 30, 2019 contributed to the decrease in modification fees. Other ancillary revenues increased primarily due to the gain on sale from the securitization of reperforming GNMA loans.
MSR prepayment and scheduled amortization increased for the six months ended June 30, 2019 as compared to the same period in 2018, primarily due to higher average MSR UPB, and elevated prepayments driven by the lower rate environment.
Total MTM adjustments declined in the six months ended June 30, 2019 as compared to the same period in 2018 primarily due to the lower interest rate environment during 2019.
Subservicing - Subservicing fees increased for the six months ended June 30, 2019 as compared to the same period in 2018, due to significant growth in the subservicing portfolio UPB.
Reverse - Servicing fees on reverse mortgage portfolios for the six months ended June 30, 2019 decreased as compared to the same period in 2018 primarily due to the decline in the reverse mortgage portfolio.
|
| | | | |
Table 8. Servicing Portfolio - Unpaid Principal Balances |
|
| | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | | Six Months Ended June 30, 2018 |
| Average UPB: | | | | | | | | | |
| Forward MSRs | $ | 315,333 |
| | $ | 312,158 |
| | | $ | 277,297 |
| | | $ | 279,504 |
|
Subservicing and other(1) | 297,924 |
| | 268,696 |
| | | 187,068 |
| | | 187,663 |
|
| Reverse portfolio | 26,028 |
| | 26,750 |
| | | 32,873 |
| | | 33,651 |
|
| Total average UPB | $ | 639,285 |
| | $ | 607,604 |
| | | $ | 497,238 |
| | | $ | 500,818 |
|
| | | | | | | | | | |
| | | | | | | Successor | | | Predecessor |
| | | | | | | June 30, 2019 | | | June 30, 2018 |
| Ending UPB: | | | | | | | | | |
| Forward MSRs | | | | | | | | | |
| Agency | | | | | | $ | 254,543 |
| | | $ | 206,017 |
|
| Non-agency | | | | | | 61,469 |
| | | 72,088 |
|
| Total Forward MSRs | | | | | | 316,012 |
| | | 278,105 |
|
| | | | | | | | | | |
Subservicing and other(1) | | | | | | | | | |
| Agency | | | | | | 253,846 |
| | | 178,236 |
|
| Non-agency | | | | | | 48,262 |
| | | 9,057 |
|
| Total subservicing and other | | | | | | 302,108 |
| | | 187,293 |
|
| | | | | | | | | | |
| Reverse loans | | | | | | | | | |
| MSR | | | | | | 3,127 |
| | | — |
|
| MSL | | | | | | 15,374 |
| | | 22,777 |
|
| Securitized loans | | | | | | 7,068 |
| | | 9,487 |
|
| Total reverse portfolio serviced | | | | | | 25,569 |
| | | 32,264 |
|
| Total ending UPB | | | | | | $ | 643,689 |
| | | $ | 497,662 |
|
| |
(1)
| Subservicing and other includes (i) loans we service for others, (ii) residential mortgage loans originated but have yet to be sold and (iii) agency REO balances for which we own the mortgage servicing rights. |
Key Metrics
The tables below present the number of modifications and workout units with our serviced portfolios.
|
| | | | |
Table 9. Forward Loan Modifications and Workout Units |
|
| | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | Three Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | Amount Change | | % Change |
| HAMP modifications | 3 |
| | | 9 |
| | (6 | ) | | (67 | )% |
| Non-HAMP modifications | 5,629 |
| | | 7,547 |
| | (1,918 | ) | | (25 | )% |
| Workouts | 6,476 |
| | | 7,159 |
| | (683 | ) | | (10 | )% |
| Total modification and workout units | 12,108 |
| | | 14,715 |
| | (2,607 | ) | | (18 | )% |
Total modifications and workoutsaccumulated accretion recorded during the three months ended June 30,March 31, 2019 decreased comparedrelated to fair value adjustments for MSL assumed from the same periodMerger. The fair value adjustment resulted from the revised cost to service assumption used in 2018 primarily due to lower delinquency rates.the valuation of MSL during the measurement period.
|
| | | | |
Table 9.1. Forward Loan Modifications and Workout Units |
|
| | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | | Amount Change | | % Change |
| HAMP modifications | 9 |
| | | 31 |
| | (22 | ) | | (71 | )% |
| Non-HAMP modifications | 10,812 |
| | | 13,382 |
| | (2,570 | ) | | (19 | )% |
| Workouts | 10,877 |
| | | 21,252 |
| | (10,375 | ) | | (49 | )% |
| Total modification and workout units | 21,698 |
| | | 34,665 |
| | (12,967 | ) | | (37 | )% |
Total modifications and workouts during the six months ended June 30, 2019 decreased compared to the same period in 2018 primarily due to lower delinquency rates and lower disaster (hurricanes and wildfires) related loss mitigation activity.
The table below summarizes the overall performance of the forward servicing and subservicing portfolio.
|
| | | | |
Table 10. Key Performance Metrics - Forward Servicing and Subservicing Portfolio (1)
|
|
| | | | | | | | |
| Successor | | | Predecessor |
| | June 30, 2019 | | | June 30, 2018 |
| Loan count | 3,637,538 |
| | | 2,970,692 |
|
Average loan amount(2) | $ | 169,935 |
| | | $ | 156,688 |
|
Average coupon - credit sensitive(3) | 4.8 | % | | | 4.8 | % |
Average coupon - interest sensitive(3) | 4.4 | % | | | 4.2 | % |
60+ delinquent (% of loans)(4) | 2.3 | % | | | 2.8 | % |
90+ delinquent (% of loans)(4) | 2.0 | % | | | 2.5 | % |
120+ delinquent (% of loans)(4) | 1.8 | % | | | 2.3 | % |
| Total prepayment speed (12-month constant prepayment rate) | 13.0 | % | | | 12.1 | % |
| |
(1)
| Characteristics and key performance metrics of our servicing portfolio exclude UPB and loan counts acquired but not yet boarded and currently serviced by others. |
| |
(2)
| Average loan amount is presented in whole dollar amounts. |
| |
(3)
| The weighted average coupon amounts for our credit and interest sensitive pools presented in the table above are only reflective of our owned forward MSR portfolio that is reported at fair value. |
| |
(4)
| Loan delinquency is based on the current contractual due date of the loan. In the case of a completed loan modification, delinquency is based on the modified due date of the loan. |
Delinquency is a significant assumption in determining the mark-to-market adjustment and is a key indicator of MSR portfolio performance. Delinquent loans contribute to lower MSR values due to higher costs to service and increased carrying costs of advances. We continued to experience low delinquency rates during the six months ended June 30, 2019, which preserves the value of our MSRs.
Servicing Expenses
The tables below summarize expenses infor the Servicing segment.segment:
|
| | | | |
| Table 11. Servicing - Expenses |
| | | | Successor | | | Predecessor | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | Change | | % Change | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | Change | | % Change |
| Amt | | bps | | | Amt | | bps | | Amt | | bps | | Amt | | bps | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) |
| Salaries, wages and benefits | $ | 90 |
| | 6 | | | $ | 74 |
| | 6 | | $ | 16 |
| | — | | 22 | % | | — | % | $ | 86 |
| | 5 | | $ | 86 |
| | 6 | | $ | — |
| | (1) | | — | % | | (17 | )% |
| General and administrative | | | | | | | | | | | | | | | | | | | | |
| Servicing support fees | 24 |
| | 2 | | | 35 |
| | 3 | | (11 | ) | | (1) | | (31 | )% | | (33 | )% | 25 |
| | 2 | | 39 |
| | 3 | | (14 | ) | | (1) | | (36 | )% | | (33 | )% |
| Corporate and other general and administrative expenses | 39 |
| | 2 | | | 32 |
| | 2 | | 7 |
| | — | | 22 | % | | — | % | 35 |
| | 2 | | 39 |
| | 3 | | (4 | ) | | (1) | | (10 | )% | | (33 | )% |
| Foreclosure and other liquidation related expenses | 32 |
| | 2 | | | 19 |
| | 2 | | 13 |
| | — | | 68 | % | | — | % | — |
| | — | | 27 |
| | 2 | | (27 | ) | | (2) | | (100 | )% | | (100 | )% |
| Depreciation and amortization | 4 |
| | — | | | 6 |
| | — | | (2 | ) | | — | | (33 | )% | | — | % | 3 |
| | — | | 4 |
| | — | | (1 | ) | | — | | (25 | )% | | — | % |
| Total general and administrative expenses | 99 |
| | 6 | | | 92 |
| | 7 | | 7 |
| | (1) | | 8 | % | | (14 | )% | 63 |
| | 4 | | 109 |
| | 8 | | (46 | ) | | (4) | | (42 | )% | | (50 | )% |
| Total expenses - Servicing | $ | 189 |
| | 12 | | | $ | 166 |
| | 13 | | $ | 23 |
| | (1) | | 14 | % | | (8 | )% | $ | 149 |
| | 9 | | $ | 195 |
| | 14 | | $ | (46 | ) | | (5) | | (24 | )% | | (36 | )% |
| |
(1) | Calculated basis points (“bps”) are as follows: Annualized dollar amount/Total average UPB X 10000. |
Total expenses increaseddecreased during the three months ended June 30, 2019March 31, 2020 compared to the same period in 20182019, primarily driven by increased salaries, wagesa decrease in foreclosure and benefits. Salaries, wagesother liquidation expenses. Foreclosure and benefits increasedother liquidation related expenses were lower during the three months ended March 31, 2020 as a resultcompared to the same period in 2019, primarily due to operational improvements of the expansionreverse portfolio with respect to assignments and adherence to HUD curtailment guidelines, in addition to recovery of $5 prior period operating losses from a previous sub-servicer during the servicing portfolio and an increase in headcount largely driven by the Pacific Union and Seterus acquisitions.three months ended March 31, 2020. Servicing support fees decreased in 2020 compared to the same period in 2019 primarily due to lower legal and tax service expenses. Furthermore, corporate and other general and administrative expenses increased in 2019 driven by costs related to drive operational efficiencies and enhance overall customer experience. In addition, foreclosure and other liquidation related expenses increased in 2019, primarily due to incremental reserves related to the Reverse portfolio.
|
| | | | |
Table 11.1. Servicing - Expenses |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | | | | | |
| | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | | Change | | % Change |
| Amt | | bps | | | Amt | | bps | | Amt | | bps | | Amt | | bps |
| Salaries, wages and benefits | $ | 176 |
| | 6 | | | $ | 150 |
| | 6 | | $ | 26 |
| | — | | 17 | % | | — | % |
| General and administrative | | | | | | | | | | | | | | | | |
| Servicing support fees | 63 |
| | 2 | | | 62 |
| | 2 | | 1 |
| | — | | 2 | % | | — | % |
| Corporate and other general and administrative expenses | 78 |
| | 3 | | | 63 |
| | 3 | | 15 |
| | — | | 24 | % | | — | % |
| Foreclosure and other liquidation related expenses | 59 |
| | 2 | | | 60 |
| | 2 | | (1 | ) | | — | | (2 | )% | | — | % |
| Depreciation and amortization | 8 |
| | — | | | 13 |
| | 1 | | (5 | ) | | (1) | | (38 | )% | | (100 | )% |
| Total general and administrative expenses | 208 |
| | 7 | | | 198 |
| | 8 | | 10 |
| | (1) | | 5 | % | | (13 | )% |
| Total expenses - Servicing | $ | 384 |
| | 13 | | | $ | 348 |
| | 14 | | $ | 36 |
| | (1) | | 10 | % | | (7 | )% |
Total expenses increased during the six months ended June 30, 2019 compared to the same period in 2018 primarily due to increased salaries, wages and benefits. The increase in salaries, wages and benefits is primarily due to the expansion of the servicing portfolio and an increase in headcount largely driven by the Pacific Union and Seterus acquisitions. In addition, corporate and other general and administrative expenses increased as compared to the same period in 2018 as a result of expenses related to our initiative to increase operational efficiencies and enhance overall customer experience.
|
| | | | |
| Table 12. Servicing - Other Income (Expenses), Net |
| | | | Successor | | | Predecessor | | | | | | | | | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | Change | | % Change |
| | Three Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | Change | | % Change | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) | | Amt | | bps(1) |
| Amt | | bps | | | Amt | | bps | | Amt | | bps | | Amt | | bps | |
| Reverse mortgage interest income | $ | 86 |
| | 6 |
| | | $ | 118 |
| | 10 |
| | $ | (32 | ) | | (4 | ) | | (27 | )% | | (40 | )% | |
| Income earned on Reverse mortgage interest | | $ | 43 |
| | 3 | | $ | 82 |
| | 6 | | $ | (39 | ) | | (3) | | (48 | )% | | (50 | )% |
| Other interest income | 50 |
| | 3 |
| | | 3 |
| | — |
| | 47 |
| | 3 |
| | 1,567 | % | | 100 | % | 40 |
| | 2 | | 33 |
| | 2 | | 7 |
| | — | | 21 | % | | — | % |
| Interest income | 136 |
| | 9 |
| | | 121 |
| | 10 |
| | 15 |
| | (1 | ) | | 12 | % | | (10 | )% | 83 |
| | 5 | | 115 |
| | 8 | | (32 | ) | | (3) | | (28 | )% | | (38 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reverse mortgage interest expense | (46 | ) | | (3 | ) | | | (95 | ) | | (8 | ) | | (49 | ) | | (5 | ) | | (52 | )% | | (63 | )% | (52 | ) | | (3) | | (71 | ) | | (5) | | 19 |
| | 2 | | (27 | )% | | (40 | )% |
| Advance interest expense | (8 | ) | | (1 | ) | | | (12 | ) | | (1 | ) | | (4 | ) | | — |
| | (33 | )% | | — | % | (5 | ) | | — | | (9 | ) | | (1) | | 4 |
| | 1 | | (44 | )% | | 100 | % |
| Other interest expense | (55 | ) | | (3 | ) | | | (8 | ) | | (1 | ) | | 47 |
| | 2 |
| | 588 | % | | 200 | % | (56 | ) | | (4) | | (34 | ) | | (2) | | (22 | ) | | (2) | | 65 | % | | 100 | % |
| Interest expense | (109 | ) | | (7 | ) | | | (115 | ) | | (10 | ) | | (6 | ) | | (3 | ) | | (5 | )% | | (30 | )% | (113 | ) | | (7) | | (114 | ) | | (8) | | 1 |
| | 1 | | (1 | )% | | (13 | )% |
| Other income (expense) | — |
| | — |
| | | — |
| | — |
| | — |
| | — |
| | — | % | | — | % | |
| Total other income (expenses), net - Servicing | $ | 27 |
| | 2 |
| | | $ | 6 |
| | — |
| | $ | 21 |
| | 2 |
| | 350 | % | | 100 | % | $ | (30 | ) | | (2) | | $ | 1 |
| | — | | $ | (31 | ) | | (2) | | (3,100 | )% | | (100 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average cost - advance facilities | 5.5 | % | | | | | 4.0 | % | | | | 1.5 | % | |
|
| | 38 | % | |
|
| 3.0 | % | | 4.7 | % | | (1.7 | )% | |
| | (36 | )% | |
|
|
| Weighted average cost - excess spread financing | 8.9 | % | | | | | 8.8 | % | | | | 0.1 | % | |
|
| | 1 | % | |
|
| 9.0 | % | | 9.0 | % | | — | % | |
| | — | % | |
|
|
| |
(1) | Calculated basis points (“bps”) are as follows: Annualized dollar amount/Total average UPB X 10000. |
Total other income (expenses), net increaseddecreased during the three months ended June 30, 2019March 31, 2020 as compared to the same period in 20182019 primarily due to a decrease in interest income. The decrease in interest income was primarily due to a decrease in income earned on reverse mortgage interest, partially offset by an increase in other interest income. Other interest income increased due to $48 of earnings credits and bank fee credits the Predecessor previously classified as interest expense. ReverseIncome earned on reverse mortgage interest income decreased due to the decline in the reverse mortgage interests balance.balance and the amortization of a net asset premium into income. Other interest income increased primarily driven by an increase in earnings credits and bank fee credits. Interest expense decreasedremained relatively flat during the three months ended June 30, 2019March 31, 2020 as compared to the same period in 2018 as a result of lower reverse mortgage interest expense driven by the decline in the reverse mortgage interest portfolio balance as well as the accretion of the HMBS bond premium, offset by an increase in other interest expense. The increase in other interest expense was primarily due to an increase of $16 in excess spread costs and $26 of earnings credits and bank fee credits the Predecessor previously classified as interest expense and $5 of compensating interest expense driven by higher payoff volume.
|
| | | | |
Table 12.1. Servicing - Other Income (Expenses), Net |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | | | | | |
| | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | | Change | | % Change |
| Amt | | bps | | | Amt | | bps | | Amt | | bps | | Amt | | bps |
| Reverse mortgage interest income | $ | 168 |
| | 5 |
| | | $ | 237 |
| | 10 |
| | $ | (69 | ) | | (5 | ) | | (29 | )% | | (50 | )% |
| Other interest income | 83 |
| | 3 |
| | | 10 |
| | — |
| | 73 |
| | 3 |
| | 730 | % | | 100 | % |
| Interest income | 251 |
| | 8 |
| | | 247 |
| | 10 |
| | 4 |
| | (2 | ) | | 2 | % | | (20 | )% |
| | | | | | | | | | | | | | | | | |
| Reverse mortgage interest expense | (117 | ) | | (4 | ) | | | (191 | ) | | (7 | ) | | (74 | ) | | (3 | ) | | (39 | )% | | (43 | )% |
| Advance interest expense | (17 | ) | | — |
| | | (17 | ) | | (1 | ) | | — |
| | (1 | ) | | — | % | | 100 | % |
| Other interest expense | (89 | ) | | (3 | ) | | | (25 | ) | | (1 | ) | | 64 |
| | 2 |
| | 256 | % | | 200 | % |
| Interest expense | (223 | ) | | (7 | ) | | | (233 | ) | | (9 | ) | | (10 | ) | | (2 | ) | | (4 | )% | | (22 | )% |
| Other income (expense) | — |
| | — |
| | | (1 | ) | | — |
| | 1 |
| | — |
| | 100 | % | | — | % |
| Total other income (expenses), net - Servicing | $ | 28 |
| | 1 |
| | | $ | 13 |
| | 1 |
| | $ | 15 |
| | — |
| | 115 | % | | — | % |
| | | | | | | | | | | | | | | | | |
| Weighted average cost - advance facilities | 5.1 | % | | | | | 3.9 | % | | | | 1.2 | % | | | | 31 | % | | |
| Weighted average cost - excess spread financing | 8.9 | % | | | | | 8.9 | % | | | | — | % | | | | — | % | | |
Total other income (expenses), net increased during the six months ended June 30, 2019, as compared to the same period in 2018 primarily due to a decrease in interest expense. Interest expense decreased during the six months ended June 30, 2019 as compared to the same period in 2018 due to lower reverse mortgage interest expense driven by the decline in the reverse mortgage interest portfolio balance as well as the accretion of the HMBS bond premium, offset by an increase in other interest expense. Other interest expense increased primarily due to an increase of $23 in excess spread costs and $34 of earnings credits and bank fee credits the Predecessor previously classified as interest expense. In addition, interest income increased primarily due to an increase in other interest income as a result of $34 of earnings creditsexpense primarily driven by higher compensating interest expense and bank fee credits the Predecessor previously classified as interest expense. Offsetting the increase in other interest income wasfees, partially offset by a decrease in reverse mortgage interest income which was relatedexpense due to the decline in the reverse mortgage interests balance.interest portfolio.
ServicedServicing Portfolio and Related Liabilities
The tables below summarize the servicedservicing portfolio and related liabilities in the Servicing segment.segment:
|
| | | | |
Table 13. ServicedServicing Portfolios and Related Liabilities |
| | | | Successor | March 31, 2020 | | December 31, 2019 |
| | June 30, 2019 | | December 31, 2018 | UPB | | Carrying Amount | | bps | | UPB | | Carrying Amount | | bps |
| | | | | | | | |
| Credit sensitive | | $ | 138,726 |
| | $ | 1,386 |
| | 100 | | $ | 147,895 |
| | $ | 1,613 |
| | 109 |
| Interest sensitive | | 151,908 |
| | 1,723 |
| | 113 | | 148,887 |
| | 1,883 |
| | 126 |
| Total forward MSRs - fair value | | $ | 290,634 |
| | $ | 3,109 |
| | 107 | | $ | 296,782 |
| | $ | 3,496 |
| | 118 |
| | UPB | | Carrying Amount | | Weighted Avg. Coupon | | UPB | | Carrying Amount | | Weighted Avg. Coupon | | | | | | | | |
| | | | | | | | | | | | |
| Forward MSRs - investor pool: | | | | | | | | | |
| Agency | $ | 254,543 |
| | $ | 2,904 |
| | 4.5 | % | | $ | 229,108 |
| | $ | 3,027 |
| | 4.5 | % | $ | 238,956 |
| | $ | 2,618 |
| | 110 | | $ | 240,688 |
| | $ | 2,944 |
| | 122 |
| Non-agency | 61,469 |
| | 601 |
| | 4.8 | % | | 66,373 |
| | 638 |
| | 4.8 | % | 51,678 |
| | 491 |
| | 95 | | 56,094 |
| | 552 |
| | 98 |
| Total Forward MSRs - fair value | 316,012 |
| | 3,505 |
| | 4.6 | % | | 295,481 |
| | 3,665 |
| | 4.5 | % | |
| Total forward MSRs - fair value | | $ | 290,634 |
| | $ | 3,109 |
| | 107 | | $ | 296,782 |
| | $ | 3,496 |
| | 118 |
| | | | | | | | | | |
| Total forward MSRs | | $ | 290,634 |
| | $ | 3,109 |
| | $ | 296,782 |
| | $ | 3,496 |
| |
| | | | | | | | | | | | | | | | | | | | |
Subservicing and other(1) | | | | | | | | | | | | | | | | | | | |
| Agency | 253,846 |
| | N/A |
| | N/A |
| | 208,607 |
| | N/A |
| | N/A |
| 302,060 |
| | N/A |
| | 308,532 |
| | N/A |
| |
| Non-agency | 48,262 |
| | N/A |
| | N/A |
| | 15,279 |
| | N/A |
| | N/A |
| 14,873 |
| | N/A |
| | 15,451 |
| | N/A |
| |
| Total subservicing and other | 302,108 |
| | N/A |
| | N/A |
| | 223,886 |
| | N/A |
| | N/A |
| 316,933 |
| | N/A |
| | 323,983 |
| | N/A |
| |
| | | | | | | | | | | | | | | | | | | | |
| Reverse portfolio - amortized cost | | | | | | | | | | | | | | | | | | | |
| MSR | 3,127 |
| | 6 |
| | N/A |
| | 3,940 |
| | 11 |
| | N/A |
| 2,332 |
| | 6 |
| | 2,508 |
| | 6 |
| |
| MSL | 15,374 |
| | (80 | ) | | N/A |
| | 16,538 |
| | (71 | ) | | N/A |
| 13,360 |
| | (53 | ) | | 13,994 |
| | (61 | ) | |
| Securitized loans | 7,068 |
| | 7,110 |
| | N/A |
| | 7,937 |
| | 7,934 |
| | N/A |
| 5,898 |
| | 5,955 |
| | 6,223 |
| | 6,279 |
| |
| Total reverse portfolio serviced | 25,569 |
| | 7,036 |
| | N/A |
| | 28,415 |
| | 7,874 |
| | N/A |
| 21,590 |
| | 5,908 |
| | 22,725 |
| | 6,224 |
| |
| Total servicing portfolio unpaid principal balance | $ | 643,689 |
| | $ | 10,541 |
| | N/A |
| | $ | 547,782 |
| | $ | 11,539 |
| | N/A |
| $ | 629,157 |
| | $ | 9,017 |
| | $ | 643,490 |
| | $ | 9,720 |
| |
| |
(1) | Subservicing and other amounts include loans we service for others, residential mortgage loans originated but have yet to be sold and agency REO balances for which we own the mortgage servicing rights. |
As of March 31, 2020, when measuring the fair value of the portfolio as a basis point of the unpaid principal balance, our credit sensitive pool decreased in value by 9 bps and interest sensitive pool decreased in value 13 bps, compared to December 31, 2019 due to higher forecasted prepayment speeds as a result of the declining interest rate environment in 2020.
We assess whether acquired portfolios are more credit sensitive or interest sensitive in nature on the date of the acquisition. We consider numerous factors in making this assessment, with the primary factors consisting of the overall portfolio delinquency characteristics, portfolio seasoning and residential mortgage loan composition. Interest rate sensitive portfolios typically consist of single-family conforming residential forward mortgage loans serviced for GSEs or other third-party investors. Credit sensitive portfolioportfolios primarily consistsconsist of higher delinquency single-family non-conforming residential forward mortgage loans in private-label securitizations.
|
| | | | |
Table 14. Fair Value MSR Valuation |
|
| | | | | | | | | | | | | | | | | | | |
| | Successor |
| | June 30, 2019 | | December 31, 2018 |
| UPB | | Carrying Amount | | bps | | UPB | | Carrying Amount | | bps |
| MSRs - fair value | | | | | | | | | | | |
| Credit sensitive | $ | 167,381 |
| | $ | 1,797 |
| | 107 | | $ | 135,752 |
| | $ | 1,495 |
| | 110 |
| Interest sensitive | 148,631 |
| | 1,708 |
| | 115 | | 159,729 |
| | 2,170 |
| | 136 |
| Total MSRs - fair value | $ | 316,012 |
| | $ | 3,505 |
| | 111 | | $ | 295,481 |
| | $ | 3,665 |
| | 124 |
As of June 30, 2019, when measuring the fair value of the portfolio as a basis point of the unpaid principal balance, our credit sensitive pool increased in value by 3 bps and interest sensitive pool decreased in value 21 bps, compared to December 31, 2018 due to higher forecasted prepayment speeds as a result of the declining interest rate environment in 2019.
The following table provides information on the fair value of our owned forward MSR portfolio.portfolio:
|
| | | | |
Table 15.14. MSRs - Fair Value, Roll ForwardRollforward |
| | | | Successor | | | Predecessor | | | | | |
| | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Fair value - beginning of period | $ | 3,481 |
| | $ | 3,665 |
| | | $ | 3,194 |
| | $ | 2,937 |
| $ | 3,496 |
| | $ | 3,665 |
|
| Additions: | | | | | | | | | | | |
| Servicing retained from mortgage loans sold | 103 |
| | 169 |
| | | 71 |
| | 139 |
| 123 |
| | 66 |
|
| Purchases of servicing rights | 280 |
| | 689 |
| | | 113 |
| | 132 |
| 24 |
| | 409 |
|
| Dispositions: | | | | | | | | | | | |
| Sales of servicing rights | (34 | ) | | (294 | ) | | | 4 |
| | 4 |
| |
| Sales and cancellation of servicing assets | | — |
| | (260 | ) |
| Changes in fair value: | | | | | | | | | | | |
| Due to changes in valuation inputs or assumptions used in the valuation model: | | | | | | | | | | | |
| Credit sensitive | (35 | ) | | (156 | ) | | | 11 |
| | 192 |
| (181 | ) | | (121 | ) |
| Interest sensitive | (175 | ) | | (386 | ) | | | 33 |
| | 91 |
| (220 | ) | | (211 | ) |
| Other changes in fair value: | | | | | | | | | | | |
| Scheduled principal payments | (23 | ) | | (45 | ) | | | (19 | ) | | (38 | ) | (23 | ) | | (22 | ) |
Disposition of negative MSRs and other(1) | 11 |
| | 23 |
| | | 14 |
| | 23 |
| 20 |
| | 12 |
|
| Prepayments | | | | | | | | | | | |
| Voluntary prepayments | | | | | | | | | | | |
| Credit sensitive | (26 | ) | | (45 | ) | | | (31 | ) | | (61 | ) | (24 | ) | | (19 | ) |
| Interest sensitive | (70 | ) | | (102 | ) | | | (25 | ) | | (46 | ) | (102 | ) | | (32 | ) |
| Involuntary prepayments | | | | | | | | | | | |
| Credit sensitive | (2 | ) | | (4 | ) | | | (5 | ) | | (10 | ) | (1 | ) | | (2 | ) |
| Interest sensitive | (5 | ) | | (9 | ) | | | (4 | ) | | (7 | ) | (3 | ) | | (4 | ) |
| Fair value - end of period | $ | 3,505 |
| | $ | 3,505 |
| | | $ | 3,356 |
| | $ | 3,356 |
| $ | 3,109 |
| | $ | 3,481 |
|
| |
(1) | Amounts primarily represent negative fair values reclassified from the MSR asset to reserves of advances and other receivables as underlying loans are removed from the MSR and other reclassification adjustments. |
The following table sets forth the weighted averageweighted-average key assumptions in estimating the fair value of MSRs.forward MSRs:
|
| | | | |
Table 16.15. MSRs - Fair Value |
|
| | | | | | |
| | Successor | | | Predecessor |
| | June 30, 2019 | | | June 30, 2018 |
| Credit Sensitive MSRs | | | | |
| Discount rate | 10.6 | % | | | 11.4 | % |
| Weighted average prepayment speeds | 13.5 | % | | | 11.7 | % |
| Weighted average life of loans | 5.9 years |
| | | 6.6 years |
|
| | | | | |
| Interest Sensitive MSRs | | | | |
| Discount rate | 8.9 | % | | | 9.2 | % |
| Weighted average prepayment speeds | 13.9 | % | | | 9.8 | % |
| Weighted average life of loans | 5.6 years |
| | | 7.0 years |
|
| | | | | |
| Total MSRs Portfolio | | | | |
| Discount rate | 9.7 | % | | | 10.4 | % |
| Weighted average prepayment speeds | 13.7 | % | | | 10.8 | % |
| Weighted average life of loans | 5.8 years |
| | | 6.8 years |
|
| | | | | |
|
| | | | | |
| | March 31, 2020 | | March 31, 2019 |
| Total MSRs Portfolio | | | |
| Discount rate | 9.7 | % | | 10.3 | % |
| Prepayment speeds | 13.4 | % | | 13.0 | % |
| Average life | 5.7 years |
| | 6.0 years |
|
| | | | |
| Acquisition Pools: | | | |
| Credit Sensitive | | | |
| Discount rate | 10.2 | % | | 11.3 | % |
| Prepayment speeds | 13.0 | % | | 13.5 | % |
| Average life | 5.9 years |
| | 6.0 years |
|
| | | | |
| Interest Sensitive | | | |
| Discount rate | 9.1 | % | | 9.4 | % |
| Prepayment speeds | 13.8 | % | | 12.5 | % |
| Average life | 5.5 years |
| | 6.1 years |
|
| | | | |
| Investor Pools: | | | |
| Agency | | | |
| Discount rate | 9.0 | % | | 9.4 | % |
| Prepayment speeds | 13.2 | % | | 12.4 | % |
| Average life | 5.6 years |
| | 6.1 years |
|
| | | | |
| Non-Agency | | | |
| Discount rate | 12.6 | % | | 13.6 | % |
| Prepayment speeds | 14.3 | % | | 15.4 | % |
| Average life | 6.1 years |
| | 5.9 years |
|
DiscountThe weighted-average discount rate for credit sensitive and interest sensitivetotal MSRs portfolio decreased as of June 30, 2019March 31, 2020 compared to the same period in 20182019 due to the declining interest rate environment in 2019. Weighted average lives2020. Weighted-average life for total MSRs portfolio decreased for both credit sensitive and interest sensitive MSRs due to the increase in prepayment speeds, which was attributable to the interest rate decline period over period.
The discount rate, which is used to determine the present value of estimated future net servicing income, is based on the required rate of return market investors would expect for an asset with similar risk characteristics. The discount rate is determined through review of recent market transactions as well as comparing the discount rate to those utilized by third-party valuation specialists and market surveys.specialists.
Total prepayment speeds represent the annual rate at which borrowers are forecasted to repay their mortgage loan principal, which includes estimates for both voluntary and involuntary borrower liquidations. The expected weighted averageweighted-average life represents the total years we expect to service the MSR.
In determining key assumptions in estimating fair value of forward MSRs, we took into account the situations created by COVID-19 pandemic.
Excess Spread Financing
As further disclosed in Note 3, Mortgage Servicing Rights and Related Liabilities, we have entered into sale and assignment agreements treated as financing arrangements whereby the acquirer has the right to receive a specified percentage of the excess cash flow generated from an MSR.
The servicing fees associated with an MSR can be segregated into (i) a base servicing fee and (ii) an excess servicing fee. The base servicing fee, along with ancillary income and other revenues, is designed to cover costs incurred to service the specified pool plus a reasonable margin. The remaining servicing fee is considered excess. We sell a percentage of the excess fee as a method for efficiently financing acquired MSRs. Excess spread financings are presently applicable only to acquired MSRs and originated poolsthe purchase of loans; however, they can be entered into at any time for both acquired and originated MSRs. These financings have been provided by companies including New Residential, certain funds managed by Fortress Investment Group, and third-parties associated with funds and accounts under management of BlackRock Financial Management, Inc and Värde Partners, Inc.loans.
Excess spread financings are recorded at fair value, and the impact of fair value adjustments on future revenues and capital resources varies primarily due to changes in (i) prepayment speeds and (ii) our ability to recapture mortgage loan payoffsprepayments through the origination platform. InSee Note 3, Mortgage Servicing Rights and Related Liabilities, we discussfor additional information regarding the range of assumptions and sensitivities related to the measurement of the excess spread financing liability as of June 30, 2019March 31, 2020 and December 31, 2018.2019.
The following table sets forth the change in the excess spread liability and the related key weighted averageweighted-average assumptions:
|
| | | | |
| Table 16. Excess Spread Financing |
|
| | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Fair value - beginning of period | $ | 1,311 |
| | $ | 1,184 |
|
| Additions: | | | |
| New financings | 24 |
| | 245 |
|
| Deductions: | | | |
| Settlements and repayments | (58 | ) | | (51 | ) |
| Changes in fair value: | | | |
| Credit Sensitive | (2 | ) | | (32 | ) |
| Interest Sensitive | (33 | ) | | (37 | ) |
| Fair value - end of period | $ | 1,242 |
| | $ | 1,309 |
|
| | | | |
| Key Weighted-Average Assumptions: | March 31, 2020 | | March 31, 2019 |
| Total Excess Spread Portfolio | | | |
| Discount rate | 11.6 | % | | 10.4 | % |
| Prepayment speeds | 12.8 | % | | 12.9 | % |
| Recapture rate | 18.6 | % | | 20.4 | % |
| Average life | 5.7 years |
| | 5.9 years |
|
| | | | |
| Credit Sensitive | | | |
| Discount rate | 12.3 | % | | 10.9 | % |
| Prepayment speeds | 12.3 | % | | 13.2 | % |
| Recapture rate | 18.4 | % | | 21.7 | % |
| Average life | 5.9 years |
| | 5.9 years |
|
| | | | |
| Interest Sensitive | | | |
| Discount rate | 10.3 | % | | 9.1 | % |
| Prepayment speeds | 13.5 | % | | 12.4 | % |
| Recapture rate | 19.8 | % | | 17.3 | % |
| Average life | 5.5 years |
| | 6.1 years |
|
The following table sets forth the change in the MSRs financing liability and the related weighted-average assumptions.
|
| | | | |
Table 17. Excess Spread Financing |
|
| | | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | | Six Months Ended June 30, 2018 |
| Fair value - beginning of period | $ | 1,309 |
| | $ | 1,184 |
| | | $ | 1,001 |
| | | $ | 996 |
|
| Additions: | | | | | | | | | |
| New financings | 193 |
| | 438 |
| | | 70 |
| | | 70 |
|
| Deductions: | | | | | | | | | |
| Repayments of debt | (11 | ) | | (12 | ) | | | (2 | ) | | | (2 | ) |
| Settlements of principal balances | (57 | ) | | (107 | ) | | | (46 | ) | | | (91 | ) |
| Fair value changes: | | | | | | | | | |
| Credit Sensitive | 17 |
| | (15 | ) | | | 20 |
| | | 66 |
|
| Interest Sensitive | (22 | ) | | (59 | ) | | | 4 |
| | | 8 |
|
| Fair value - end of period | $ | 1,429 |
| | $ | 1,429 |
| | | $ | 1,047 |
| | | $ | 1,047 |
|
| | | | | | | | | | |
| | | | | | | Successor | | | Predecessor |
| Total Key Weighted Average Assumptions: | | | | | June 30, 2019 | | | June 30, 2018 |
| Credit Sensitive | | | | | | | | | |
| Discount rate | | | | | | 10.3 | % | | | 11.1 | % |
| Prepayment speeds | | | | | | 13.1 | % | | | 11.4 | % |
| Recapture rate | | | | | | 22.3 | % | | | 16.8 | % |
| Average life | | | | | | 5.8 years |
| | | 6.5 years |
|
| | | | | | | | | | |
| Interest Sensitive | | | | | | | | | |
| Discount rate | | | | | | 8.4 | % | | | 9.0 | % |
| Prepayment speeds | | | | | | 12.9 | % | | | 9.9 | % |
| Recapture rate | | | | | | 17.4 | % | | | 19.8 | % |
| Average life | | | | | | 5.4 years |
| | | 6.8 years |
|
| | | | | | | | | | |
| Total Excess Spread Financing Portfolio | | | | | | | | |
| Discount rate | | | | | | 9.6 | % | | | 10.6 | % |
| Prepayment speeds | | | | | | 13.1 | % | | | 11.1 | % |
| Recapture rate | | | | | | 20.2 | % | | | 18.0 | % |
| Average life | | | | | | 5.7 years |
| | | 6.5 years |
|
|
| | | | |
Table 18. MSRs Financing Liability - Rollforward |
| | | | Successor | | | Predecessor | | | | | |
| | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Fair value - beginning of period | $ | 34 |
| | $ | 32 |
| | | $ | 34 |
| | $ | 10 |
| $ | 37 |
| | $ | 32 |
|
Changes in fair value(1): | | | | | | | | | |
| Changes in fair value: | | | | |
| Changes in valuation inputs or assumptions used in the valuation model | 13 |
| | 19 |
| | | (14 | ) | | 11 |
| 9 |
| | 6 |
|
| Other changes in fair value | (4 | ) | | (8 | ) | | | (4 | ) | | (5 | ) | (3 | ) | | (4 | ) |
| Fair value - end of period | $ | 43 |
| | $ | 43 |
| | | $ | 16 |
| | $ | 16 |
| $ | 43 |
| | $ | 34 |
|
| | | | | | | | | | | |
| | | | | | Successor | | | Predecessor | March 31, 2020 | | March 31, 2019 |
| | | | | | June 30, 2019 | | | June 30, 2018 | |
| Weighted Average Assumptions | | | | | | | | | |
| Weighted-Average Assumptions | | | | |
| Advance financing rates | | | | | 3.7 | % | | | 4.1 | % | 1.7 | % | | 3.9 | % |
| Annual advance recovery rates | | | | | 19.3 | % | | | 18.9 | % | 18.4 | % | | 19.3 | % |
| |
(1)
| The changes in fair value related to our MSRs financing liability primarily relate to both scheduled and unscheduled principal payments reflected in the underlying MSRs and changes in the fair value model assumptions. |
We entered into several sale agreements whereby we sold the right to receive repayment of servicing advances on private-label servicing advances and the right to receive a portion of the base fee component on the related MSRs, and also transferred the obligations to make future advances. These transactions are treatedrecorded as aan MSR Financing Liability. TheLiability in our consolidated balance sheet entry for these financings represents that component of fair value that reflectssheets and represent the excess cost of these transactionsincremental costs relative to the cost of financing advances assumedmarket participant assumptions contained in the MSR valuation. Changes in the value of the corresponding MSR and the change in fair value isfinancing liability are recorded against servicing revenue and interest imputed on the outstanding liability is recorded as interest expense.
We estimate fair value of the MSR financing liability based on the present value of future expected discounted cash flows with the discount rate approximating current market valuerate for similar financial instruments. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being advance financing rates and annual advance recovery rates.
The following table provides an overview of our forward servicing portfolio and amounts that have been transferred toinvolve excess spread financing with our co-invest partners for the periods indicated.
|
| | | | |
Table 19.18. Leveraged Portfolio Characteristics |
| | | | Successor | | | Predecessor | | | | | |
| | June 30, 2019 | | | June 30, 2018 | March 31, 2020 | | March 31, 2019 |
| Owned forward servicing portfolio - unencumbered | $ | 87,007 |
| | | $ | 91,619 |
| $ | 85,124 |
| | $ | 88,995 |
|
| Owned forward servicing portfolio - encumbered | 229,005 |
| | | 186,486 |
| 205,510 |
| | 214,697 |
|
| Subserviced forward servicing portfolio and other | 302,108 |
| | | 187,293 |
| 316,933 |
| | 301,191 |
|
| Total unpaid principal balance | $ | 618,120 |
| | | $ | 465,398 |
| $ | 607,567 |
| | $ | 604,883 |
|
The encumbered forward servicing portfolio consists of residential mortgage loans included within our excess spread financing transactions and MSR financing liability. Subserviced and other amounts include (1) loans serviced for others, (2) residential mortgage loans originated but not yet sold and (3) agency REO balances for which we own the mortgage servicing rights.
Reverse - MSLs andMSRs Participating Interests - Amortized Cost
The table below provides detail of the characteristics and key performance metrics of the reverse servicing portfolio, which is included in reverse MSRs, MSLs and participating interests in reverse mortgages. Such assets are recorded at amortized cost.
|
| | | | |
Table 20. Reserve19. Reverse - Mortgage Portfolio Characteristics |
| | | | Successor | | | Predecessor | | | | | |
| | June 30, 2019 | | | June 30, 2018 | March 31, 2020 | | March 31, 2019 |
| Loan count | 180,899 |
| | | 205,438 |
| 158,838 |
| | 184,807 |
|
| Ending unpaid principal balance | $ | 25,569 |
| | | $ | 32,264 |
| $ | 21,590 |
| | $ | 27,014 |
|
Average loan amount(1) | $ | 141,342 |
| | | $ | 157,050 |
| $ | 135,924 |
| | $ | 146,173 |
|
| Average coupon | 4.3 | % | | | 4.2 | % | 3.3 | % | | 4.4 | % |
| Average borrower age | 80 |
| | | 79 |
| 81 |
| | 80 |
|
| |
(1) | Average loan amount is presented in whole dollar amounts. |
Historically, the PredecessorCompany acquired servicing rights and participating interests in reverse mortgage portfolios. Reverse mortgage loans, known asmost commonly HECMs, provide seniors 62 and older with a loan upon which draws can be made periodically. The draws are secured by the equity in the borrower’s home. For acquired servicing rights, on reverse mortgages, an MSR or MSL is established on the acquisition date at fair value, as applicable, based on the expected discounted cash flow from servicing the reverse portfolio.
Each quarter, we accrete the MSL to revenues - service related, revenue, net of the respective portfolios run-off. The MSL is assessed for increased obligation based on its fair value, using a variety of assumptions, with the key assumptions being discount rates, prepayment speeds and borrower life expectancy. The MSLs are stratified based on predominant risk characteristics of the underlying serviced loans. Impairment, if any, represents the excess of amortized cost of an individual stratum over its estimated fair value and is recognized through an increase in the valuation allowance.
Based on our assessment, no impairment or increased obligation was required to be recorded for reverse MSRs and MSLs as of June 30, 2019.March 31, 2020.
The strategy of our Originations segment is to originate or acquire new loans for the servicing portfolio at a more attractive cost than purchasing MSRs in bulk transactions and to retain our existing customers by providing them with attractive refinance options. The Originations segment plays a strategically important role because its profitability is typically counter-cyclicalcounter cyclical to that of the Servicing segment. Furthermore, by originating or acquiring loans at a more attractive cost than would be the case in bulk MSR acquisitions, the OriginationOriginations segment improves our overall profitability and cash flow. Growing the Originations segment has been a strategic focus for us for several years.
The Originations segment includes three channels:
Our direct-to-consumer lending channel relies on our call centers, our website and mobile apps to interact with customers. Our primary focus is to assist our customers with a refinance or home purchase by providing them with a needs-based approach to understanding their current mortgage options.
Our correspondent lending channel acquires newly originated residential mortgage loans that have been underwritten to investor guidelines. This includes both conventional and government-insured loans that qualify for inclusion in securitizations that are guaranteed by the GSEs. Our correspondent lending channel enables us to replenish servicing portfolio run-off typically at better rate of return than traditional bulk or flow acquisitions.
Our wholesale lending channel works with mortgage brokers to source loans which are underwritten and funded by us and also in our name. Counterparty risk is mitigated through quality and compliance monitoring and all brokers are subject to our eligibility requirements coupled with an annual recertification process. Subsequent to March 31, 2020, we closed our wholesale lending channel.
The charts below set forth the pull through adjusted lock volume and funded volume by channel and channel mix.mix:
The following tables set forth the results of operations for the Originations segment.segment:
|
| | | | |
Table 21.20. Originations -Segment Results of Operations |
| | | | Successor | | | Predecessor | | | | | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Total revenues | | $ | 317 |
| | $ | 146 |
| | $ | 171 |
| | 117 | % |
| Total expenses | | 166 |
| | 104 |
| | 62 |
| | 60 | % |
| Total other income (expenses), net | | 7 |
| | 3 |
| | 4 |
| | 133 | % |
| Income before income tax expense | | $ | 158 |
| | $ | 45 |
| | $ | 113 |
| | 251 | % |
| | Three Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | $ Change | | % Change | | | | | | | |
| Revenues | $ | 264 |
| | | $ | 133 |
| | $ | 131 |
| | 98 | % | |
| Expenses | 145 |
| | | 102 |
| | 43 |
| | 42 | % | |
| Other income (expenses), net | (1 | ) | | | 1 |
| | (2 | ) | | (200 | )% | |
| Income before income tax expense | $ | 118 |
| | | $ | 32 |
| | $ | 86 |
| | 269 | % | |
| Income before taxes margin | 44.7 | % | | | 24.1 | % | | 20.6 | % | | 85 | % | |
| | | | | | | | | |
| | Successor | | | Predecessor | | | | | |
| | Three Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | $ Change | | % Change | |
| Originations Margin | | | | | | | | |
| Revenue | $ | 264 |
| | | $ | 133 |
| | $ | 131 |
| | 98 | % | $ | 317 |
| | $ | 146 |
| | $ | 171 |
| | 117 | % |
| Pull through adjusted lock volume | $ | 11,197 |
| | | $ | 5,440 |
| | $ | 5,757 |
| | 106 | % | $ | 12,677 |
| | $ | 5,960 |
| | $ | 6,717 |
| | 113 | % |
Revenue basis points(1) | 2.36 | % | | | 2.44 | % | | (0.08 | )% | | (3 | )% | |
Revenue as a percentage of pull through adjusted lock volume(1) | | 2.50 | % | | 2.45 | % | | 0.05 | % | | 2 | % |
| | | | | | | | | | | | | | | | |
| Expenses | $ | 145 |
| | | $ | 102 |
| | $ | 43 |
| | 42 | % | $ | 166 |
| | $ | 104 |
| | $ | 62 |
| | 60 | % |
| Funded volume | $ | 9,996 |
| | | $ | 5,543 |
| | $ | 4,453 |
| | 80 | % | $ | 12,359 |
| | $ | 5,716 |
| | $ | 6,643 |
| | 116 | % |
Expenses basis points(2) | 1.45 | % | | | 1.84 | % | | (0.39 | )% | | (21 | )% | |
Expenses as a percentage of funded volume(2) | | 1.34 | % | | 1.82 | % | | (0.48 | )% | | (26 | )% |
| | | | | | | | | | | | | | | | |
| Margin | 0.91 | % | | | 0.60 | % | | 0.31 | % | | 52 | % | |
| Originations Margin | | 1.16 | % | | 0.63 | % | | 0.53 | % | | 84 | % |
| |
(1) | Calculated on pull-through adjusted lock volume as revenue is recognized at the time of loan lock. |
| |
(2) | Calculated on funded volume as expenses are incurred based on closing of the loan. |
Income before income tax expense increased for the three months ended June 30, 2019March 31, 2020 as compared to the same period in 20182019 primarily due to an increase in revenues driven by origination volume growth. The growth as a result of lowerin origination volume was primarily due to declining interest rates and loans originated as a result ofincremental volumes associated with the acquisition of Pacific Union. Expense basis points duringThe Originations Margin for the three months ended June 30, 2019 decreased as compared the same period in 2018 due to cost saving initiatives and a higher percentage of volume from the correspondent channel. Net margin in 2019March 31, 2020 increased because of a combination of higher revenue and lower expenses.
|
| | | | |
Table 21.1 Originations - Operations |
|
| | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | | $ Change | | % Change |
| Revenues | $ | 410 |
| | | $ | 261 |
| | $ | 149 |
| | 57 | % |
| Expenses | 249 |
| | | 211 |
| | 38 |
| | 18 | % |
| Other income (expenses), net | 2 |
| | | 1 |
| | 1 |
| | 100 | % |
| Income before income tax expense | $ | 163 |
| | | $ | 51 |
| | $ | 112 |
| | 220 | % |
| Income before taxes margin | 39.8 | % | | | 19.5 | % | | 20.3 | % | | 104 | % |
| | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | | $ Change | | % Change |
| Revenue | $ | 410 |
| | | $ | 261 |
| | $ | 149 |
| | 57 | % |
| Pull through adjusted lock volume | $ | 17,157 |
| | | $ | 10,302 |
| | $ | 6,855 |
| | 67 | % |
Revenue basis points(1) | 2.39 | % | | | 2.53 | % | | (0.14 | )% | | (6 | )% |
| | | | | | | | | |
| Expenses | $ | 249 |
| | | $ | 211 |
| | $ | 38 |
| | 18 | % |
| Funded volume | $ | 15,712 |
| | | $ | 10,630 |
| | $ | 5,082 |
| | 48 | % |
Expenses basis points(2) | 1.58 | % | | | 1.98 | % | | (0.40 | )% | | (20 | )% |
| | | | | | | | | |
| Margin | 0.81 | % | | | 0.55 | % | | 0.26 | % | | 47 | % |
| |
(1)
| Calculated on pull-through adjusted lock volume as revenue is recognized at the time of loan lock. |
| |
(2)
| Calculated on funded volume as expenses are incurred based on closing of the loan. |
Income before income tax expense increased for the six months ended June 30, 2019 as compared to the same period in 20182019 primarily due to anlower expenses as a percentage of funded volume as the increase in revenues driventotal expenses was partially offset by origination volume growth as a result of lower interest ratesexpense reduction initiatives relative to the significant increase in funded volume.
Originations Segment Revenues
Service related fee, net - Originations refers to fees collected from customers for originated loans and from other lenders for loans originated as a result of the acquisition of Pacific Union. Expense basis points during the six months ended June 30, 2019 decreased as compared the same period in 2018 due to cost saving initiatives and a higher percentage of volume comingpurchased through the correspondent channel. Net margin in 2019 increased in combination of higher revenuechannel, and lower expenses.includes loan application, underwriting, and other similar fees.
Gain on Loans Originated and Sold
GainNet gain on loans originated and sold represents the realized gains and losses on loan salesfrom the origination, purchase, and settled derivatives. The gainsale of loans originated and sold is a functionrelated derivative instruments. Gains from the origination and sale of loans are affected by the volume margin and channel mixmargin of our originations activity and is impacted by fluctuationsfluctuation in interest rates.
Net Gain on Mortgage Loans Held for Sale
The net gain on mortgage loans held for sale includes gain on mortgage loans held for sale as well as capitalizedCapitalized servicing rights and mark-to-market adjustments on mortgage loans held for sale and related derivative financial instruments. We recognize represents the fair value of the interest rate lock commitments (“IRLC”), including the fair value of the relatedattributed to mortgage servicing rights at the time we commit to originate or purchase a loan at specified terms. Loan origination costsin which they are recognized as the obligations are incurred, which typically alignsretained in connection with the datesale of loan funding for direct-to-consumer originations andloans during the date of loan purchase for correspondent lending originations.period.
Revenues,Total revenues, including net gain on mortgage loans held for sale, for our Originations segment are set forth in the tables below.below:
|
| | | | |
Table 22.21. Originations - Revenues |
| | | | Successor | | | Predecessor | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | $ Change | | % Change | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Service related, net - Originations | $ | 20 |
| | | $ | 17 |
| | $ | 3 |
| | 18 | % | $ | 20 |
| | $ | 15 |
| | $ | 5 |
| | 33 | % |
| Net gain on mortgage loans held for sale | | | | | | | | | | | | | | | |
| Gain on loans originated and sold | 84 |
| | | 45 |
| | 39 |
| | 87 | % | |
| Fair value adjustment on loans held for sale | 6 |
| | | 6 |
| | — |
| | — | % | |
Mark-to-market on locks and commitments(1) | 65 |
| | | 3 |
| | 62 |
| | 2,067 | % | |
| Mark-to-market on derivative/hedges | (3 | ) | | | (6 | ) | | 3 |
| | (50 | )% | |
| Net gain on loans originated and sold | | 183 |
| | 72 |
| | 111 |
| | 154 | % |
| Capitalized servicing rights | 100 |
| | | 69 |
| | 31 |
| | 45 | % | 119 |
| | 61 |
| | 58 |
| | 95 | % |
| Provision for repurchase reserves, net of release | (8 | ) | | | (1 | ) | | (7 | ) | | 700 | % | (5 | ) | | (2 | ) | | (3 | ) | | 150 | % |
| Total net gain on mortgage loans held for sale | 244 |
| | | 116 |
| | 128 |
| | 110 | % | 297 |
| | 131 |
| | 166 |
| | 127 | % |
| Total revenues - Originations | $ | 264 |
| | | $ | 133 |
| | $ | 131 |
| | 98 | % | $ | 317 |
| | $ | 146 |
| | $ | 171 |
| | 117 | % |
| | | | | | | | | | | | | | | | |
| Key Metrics | | | | | | | | | | | | | | | |
Consumer direct lock pull through adjusted volume(2) | $ | 4,390 |
| | | $ | 2,552 |
| | $ | 1,838 |
| | 72 | % | |
Other locked pull through adjusted volume(2) | 6,807 |
| | | 2,888 |
| | 3,919 |
| | 136 | % | |
Consumer direct lock pull through adjusted volume(1) | | $ | 7,423 |
| | $ | 2,333 |
| | $ | 5,090 |
| | 218 | % |
Other locked pull through adjusted volume(1) | | 5,254 |
| | 3,627 |
| | 1,627 |
| | 45 | % |
| Total pull through adjusted volume | $ | 11,197 |
| | | $ | 5,440 |
| | $ | 5,757 |
| | 106 | % | $ | 12,677 |
| | $ | 5,960 |
| | $ | 6,717 |
| | 113 | % |
| Funded volume | $ | 9,996 |
| | | $ | 5,543 |
| | $ | 4,453 |
| | 80 | % | $ | 12,359 |
| | $ | 5,716 |
| | $ | 6,643 |
| | 116 | % |
| Funded HARP volume | $ | 1 |
| | | $ | 324 |
| | $ | (323 | ) | | (100 | )% | |
| Volume of loans sold | | $ | 13,255 |
| | $ | 6,235 |
| | $ | 7,020 |
| | 113 | % |
| Recapture percentage | 23.1 | % | | | 21.8 | % | | 1.3 | % | | 6 | % | 29.8 | % | | 27.5 | % | | 2.3 | % | | 7 | % |
| Purchase percentage of funded volume | 52.8 | % | | | 51.3 | % | | 1.5 | % | | 3 | % | |
| Purchase as a percentage of funded volume | | 26.0 | % | | 51.7 | % | | (25.7 | )% | | (50 | )% |
| Value of capitalized servicing on retained settlements | 149 bps |
| | | 142 bps |
| | 7 |
| | 5 | % | 137 | bps | | 141 | bps | | (4) bps |
| | (3 | )% |
| |
(1) | Mark-to-market on locks and commitments includes our fair value mark-to-market adjustments on IRLCs. |
| |
(2)
| Pull through adjusted volume represents the expected funding from locks taken during the period. |
DuringTotal revenues increased for the three months ended June 30, 2019, total revenues increasedMarch 31, 2020 compared to the same period in 20182019 primarily driven by the higher volumevolumes in a lowerdeclining interest rate environment and the integration ofincremental volumes made available with the Pacific Union acquisition and related origination channels, which occurred in February 2019. Total revenue increased 98%$171 or $131117% period over period as pull through adjusted lock volume increased 106%113% during the same period.
The table below summarizes expenses for the Originations segment:
|
| | | | |
Table 22.1. Originations - Revenues |
|
| | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | | $ Change | | % Change |
| Service related, net - Originations | $ | 35 |
| | | $ | 32 |
| | $ | 3 |
| | 9 | % |
| Net gain on mortgage loans held for sale | | | | | | | | |
| Gain on loans originated and sold | 130 |
| | | 101 |
| | 29 |
| | 29 | % |
| Fair value adjustment on loans held for sale | 16 |
| | | 1 |
| | 15 |
| | 1,500 | % |
Mark-to-market on locks and commitments(1) | 71 |
| | | 2 |
| | 69 |
| | 3,450 | % |
| Mark-to-market on derivative/hedges | 7 |
| | | (8 | ) | | 15 |
| | (188 | )% |
| Capitalized servicing rights | 161 |
| | | 134 |
| | 27 |
| | 20 | % |
| Provision for repurchase reserves, net of release | (10 | ) | | | (1 | ) | | (9 | ) | | 900 | % |
| Total net gain on mortgage loans held for sale | 375 |
| | | 229 |
| | 146 |
| | 64 | % |
| Total revenues - Originations | $ | 410 |
| | | $ | 261 |
| | $ | 149 |
| | 57 | % |
| | | | | | | | | |
| Key Metrics | | | | | | | | |
Consumer direct lock pull through adjusted volume(2) | $ | 6,723 |
| | | $ | 5,294 |
| | $ | 1,429 |
| | 27 | % |
Other locked pull through adjusted volume(2) | 10,434 |
| | | 5,008 |
| | 5,426 |
| | 108 | % |
| Total pull through adjusted volume | $ | 17,157 |
| | | $ | 10,302 |
| | $ | 6,855 |
| | 67 | % |
| Funded volume | $ | 15,712 |
| | | $ | 10,630 |
| | $ | 5,082 |
| | 48 | % |
| Funded HARP volume | $ | 82 |
| | | $ | 760 |
| | $ | (678 | ) | | (89 | )% |
| Recapture percentage | 24.9 | % | | | 24.3 | % | | 0.6 | % | | 2 | % |
| Purchase percentage of funded volume | 52.4 | % | | | 45.8 | % | | 6.6 | % | | 14 | % |
| Value of capitalized servicing retained | 146 bps |
| | | 142 bps |
| | 4 |
| | 3 | % |
| |
(1)
| Mark-to-market on locks and commitments includes our fair value mark-to-market adjustments on IRLCs. |
| |
(2)
| Pull through adjusted volume represents the expected funding from locks taken during the period. |
During the six months ended June 30, 2019, total revenues increased compared to the same period in 2018 driven by higher volume in a lower interest rate environment and the integration of the Pacific Union acquisition which occurred in February 2019. Total revenue increased 57% or $149 period over period as pull through adjusted lock volume increased 67% during the same period.
|
| | | | |
Table 23.22. Originations - Expenses |
| | | | Successor | | | Predecessor | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | $ Change | | % Change | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Salaries, wages and benefits | $ | 88 |
| | | $ | 61 |
| | $ | 27 |
| | 44 | % | $ | 117 |
| | $ | 69 |
| | $ | 48 |
| | 70 | % |
| General and administrative | | | | | | | | | | | | | | | |
| Loan origination expenses | 17 |
| | | 13 |
| | 4 |
| | 31 | % | 16 |
| | 10 |
| | 6 |
| | 60 | % |
| Corporate and other general and administrative expenses | 13 |
| | | 12 |
| | 1 |
| | 8 | % | 18 |
| | 14 |
| | 4 |
| | 29 | % |
| Marketing and professional service fee | 21 |
| | | 13 |
| | 8 |
| | 62 | % | |
| Marketing and professional service fees | | 12 |
| | 8 |
| | 4 |
| | 50 | % |
| Depreciation and amortization | 6 |
| | | 3 |
| | 3 |
| | 100 | % | 3 |
| | 3 |
| | — |
| | — | % |
| Total general and administrative | 57 |
| | | 41 |
| | 16 |
| | 39 | % | 49 |
| | 35 |
| | 14 |
| | 40 | % |
| Total expenses - Originations | $ | 145 |
| | | $ | 102 |
| | $ | 43 |
| | 42 | % | $ | 166 |
| | $ | 104 |
| | $ | 62 |
| | 60 | % |
Total expenses duringfor the three months ended June 30, 2019March 31, 2020 increased when compared to the same period in 20182019 primarily due to growth in volumes, which was driven by the low interest rate environment and the incremental volumes made available with the Pacific Union acquisition.acquisition and related origination channels. The volume growth impacted increasescontributed to the increase in salaries, wages and benefits, in connection withdue to increased compensation and headcount related costs, and loan origination expense which isexpenses. The increase in loan origination expenses attributable to higher volume driven. Marketing and professional service fee expense increased in second quarter 2019 due to a $10 legal reservewas partially offset by lower marketing expense period over period.reduction initiatives. In addition, corporate and other general and administrative expenses increased during the three months ended March 31, 2020 primarily driven by higher outsourcing costs.
The table below summarizes other income (expenses), net for the Originations segment:
|
| | | | |
Table 23.1. Originations - Expenses |
|
| | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | | $ Change | | % Change |
| Salaries, wages and benefits | $ | 157 |
| | | $ | 127 |
| | $ | 30 |
| | 24 | % |
| General and administrative | | | | | | | | |
| Loan origination expenses | 27 |
| | | 27 |
| | — |
| | — | % |
| Corporate and other general and administrative expenses | 27 |
| | | 23 |
| | 4 |
| | 17 | % |
| Marketing and professional service fee | 29 |
| | | 28 |
| | 1 |
| | 4 | % |
| Depreciation and amortization | 9 |
| | | 6 |
| | 3 |
| | 50 | % |
| Total general and administrative | 92 |
| | | 84 |
| | 8 |
| | 10 | % |
| Total expenses - Originations | $ | 249 |
| | | $ | 211 |
| | $ | 38 |
| | 18 | % |
Total expenses during the six months ended June 30, 2019 increased when compared to the same period in 2018 primarily due to growth in volumes, which was driven by the low interest rate environment and the Pacific Union acquisition. The volume growth impacted increases in salaries, wages and benefits in connection with compensation and headcount related costs. Loan origination expense was flat period over period as the costs due to higher volume were offset by expense reduction initiatives. Marketing and professional service fee expense increased slightly due to a $10 legal reserve in the second quarter of 2019 offset by lower marketing expense period over period. Corporate costs increased period over period driven primarily by the Pacific Union acquisition.
|
| | | | |
Table 24.23. Originations - Other Income (Expenses), Net |
| | | | Successor | | | Predecessor | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | $ Change | | % Change | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Interest income | $ | 23 |
| | | $ | 17 |
| | $ | 6 |
| | 35 | % | $ | 34 |
| | $ | 17 |
| | $ | 17 |
| | 100 | % |
| Interest expense | (25 | ) | | | (16 | ) | | 9 |
| | 56 | % | (27 | ) | | (18 | ) | | (9 | ) | | 50 | % |
| Other income | 1 |
| | | — |
| | 1 |
| | 100 | % | |
| Total other income, net - Originations | $ | (1 | ) | | | $ | 1 |
| | $ | (2 | ) | | (200 | )% | |
| Other income, net | | — |
| | 4 |
| | (4 | ) | | (100 | )% |
| Total other income (expenses), net - Originations | | $ | 7 |
| | $ | 3 |
| | $ | 4 |
| | 133 | % |
| | | | | | | | | | | | | | | | |
| Weighted average note rate - mortgage loans held for sale | 4.4 | % | | | 4.7 | % | | (0.3 | )% | | (6 | )% | 3.8 | % | | 4.9 | % | | (1.1 | )% | | (22 | )% |
| Weighted average cost of funds (excluding facility fees) | 4.3 | % | | | 4.4 | % | | (0.1 | )% | | (2 | )% | 3.2 | % | | 4.7 | % | | (1.5 | )% | | (32 | )% |
Interest income relates primarily to mortgage loans held for sale. Interest expense is associated with the warehouse facilities utilized to finance newly originated loans.
Interest income for the three months ended March 31, 2020 increased in 2019 primarily duewhen compared to higher funded volume offset by an increase in interest expense driven by higher cost of funds from an increase in the origination volume.
|
| | | | |
Table 24.1. Originations - Other Income (Expenses), Net |
|
| | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | | $ Change | | % Change |
| Interest income | $ | 40 |
| | | $ | 32 |
| | $ | 8 |
| | 25 | % |
| Interest expense | (43 | ) | | | (31 | ) | | 12 |
| | 39 | % |
| Other income | 5 |
| | | — |
| | 5 |
| | 100 | % |
| Total other income, net - Originations | $ | 2 |
| | | $ | 1 |
| | $ | 1 |
| | 100 | % |
| | | | | | | | | |
| Weighted average note rate - mortgage loans held for sale | 4.6 | % | | | 4.5 | % | | 0.1 | % | | 2 | % |
| Weighted average cost of funds (excluding facility fees) | 4.5 | % | | | 4.2 | % | | 0.3 | % | | 7 | % |
Interest income increasedsame period in 2019 primarily driven by higher funded volume, whichvolume. The increase in interest income was offset by an increase in interest expense due to higher cost of funds from an increase in the origination volume.originations volume, partially offset by a lower cost of funds. Other income, increasednet was higher in the six months ended June 30, 2019 due to the recognition of incentives we received related to our financing of certain loans satisfying certain consumercustomer relief characteristics. In September 2018, we entered into a master repurchase agreement that provided us with incentives to finance mortgage loans satisfying certain consumer relief characteristics as provided in the agreement. In the six months ended June 30, 2019, weWe recorded $5$4 in other income, net related to such incentives.incentives for the three months ended March 31, 2019. The master repurchase agreement expired during the third quarter of 2019.
Xome is a real estate data and services company that provides services for mortgage originators and servicers, including Mr. Cooper, as well as mortgage and real estate investors. Xome is strategically important because it generates fee income that complements our servicing and origination businesses without requiring a significant amount of capital or exposing us to the same level of interest rate or credit risk.
Xome is organized into three divisions: Exchange, Services and Data/Technology.
The Exchange division consists of the Xome.com auction platform which utilizes proprietary technology designed to provide efficient execution for sales of foreclosed properties.
The Services division includes title, escrow, collateral valuation and field services related to real estate investments or transactions including purchases, sales, refinances and defaults. Services includes the business of AMS, which we acquired in August 2018.
The Data/Technology division sells data or softwarecontains a diversified set of businesses that provide technology solutions to real estate service providers, MLS organizations, data aggregators, real estate or mortgage investors and mortgage lenders or servicers. Data/Technology contains Affinity Solutions, which providesa variety of investors. This includes providing aggregation, standardization and licensing for one of the nation’s largest set of MLS, organizations, public records and neighborhood demographic data, Quantarium, which provides artificial intelligence-powered valuation and other real estate data and analytics, and Xome Signings, which provides technology-enabled notary services.data.
The following tablescharts below set forth the results of operations for the Xome segment.Xome’s total revenues, Exchange properties sold, and Services completed orders:
|
| | | | |
Table 25.24. Xome -Segment Results of Operations |
|
| | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | Three Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | $ Change | | % Change |
| Revenues | $ | 108 |
| | | $ | 62 |
| | $ | 46 |
| | 74 | % |
| Expenses | 101 |
| | | 52 |
| | 49 |
| | 94 | % |
| Other income (expenses), net | — |
| | | — |
| | — |
| | — | % |
| Income before income tax expense | $ | 7 |
| | | $ | 10 |
| | $ | (3 | ) | | (30 | )% |
| Income before taxes margin - Xome | 6.5 | % | | | 16.1 | % | | (9.6 | )% | | (60 | )% |
|
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Xome - Operations | | | | | | | |
| Total revenues | $ | 106 |
| | $ | 96 |
| | $ | 10 |
| | 10 | % |
| Total expenses | 96 |
| | 99 |
| | (3 | ) | | (3 | )% |
| Total other income (expenses), net | 1 |
| | 11 |
| | (10 | ) | | (91 | )% |
| Income before income tax expense | $ | 11 |
| | $ | 8 |
| | $ | 3 |
| | 38 | % |
| Income before taxes margin - Xome | 10.4 | % | | 8.3 | % | | 2.1 | % | | 25 | % |
| | | | | | | | |
| Xome - Revenues | | | | | | | |
| Exchange | $ | 16 |
| | $ | 20 |
| | $ | (4 | ) | | (20 | )% |
| Services | 85 |
| | 71 |
| | 14 |
| | 20 | % |
| Data/Technology | 5 |
| | 5 |
| | — |
| | — | % |
| Total revenues - Xome | $ | 106 |
| | $ | 96 |
| | $ | 10 |
| | 10 | % |
| | | | | | | | |
| Key Metrics | | | | | | | |
| Exchange properties sold | 2,114 |
| | 2,421 |
| | (307 | ) | | (13 | )% |
| Average Exchange properties under management | 17,777 |
| | 6,634 |
| | 11,143 |
| | 168 | % |
| Services completed orders | 408,734 |
| | 379,585 |
| | 29,149 |
| | 8 | % |
| Percentage of revenue earned from third-party customers | 54.6 | % | | 53.0 | % | | 1.6 | % | | 3 | % |
| | | | | | | | |
| Xome - Expenses | | | | | | | |
| Salaries, wages and benefits | $ | 35 |
| | $ | 38 |
| | $ | (3 | ) | | (8 | )% |
| General and administrative | | | | | | | |
| Operational expenses | 58 |
| | 57 |
| | 1 |
| | 2 | % |
| Depreciation and amortization | 3 |
| | 4 |
| | (1 | ) | | (25 | )% |
| Total general and administrative | 61 |
| | 61 |
| | — |
| | — | % |
| Total expenses - Xome | $ | 96 |
| | $ | 99 |
| | $ | (3 | ) | | (3 | )% |
Income before income tax expense decreasedincreased for the three months ended June 30, 2019March 31, 2020 as compared to the same period in 20182019 primarily due to an increase in expenses driventotal revenues, offset by operational expenses related to the acquisition of AMS, which was completeda decrease in August 2018. Thisother income (expense), net. The increase in expensestotal revenues was partially offset by increased Services revenues related to the AMS acquisition, which contributed to higher volumes of units for valuation and field services.
|
| | | | |
Table 25.1. Xome - Operations |
|
| | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | | $ Change | | % Change |
| Revenues | $ | 204 |
| | | $ | 127 |
| | $ | 77 |
| | 61 | % |
| Expenses | 200 |
| | | 104 |
| | 96 |
| | 92 | % |
| Other income (expenses), net | 11 |
| | | 9 |
| | 2 |
| | 22 | % |
| Income before income tax expense | $ | 15 |
| | | $ | 32 |
| | $ | (17 | ) | | (53 | )% |
| Income before taxes margin - Xome | 7.4 | % | | | 25.2 | % | | (17.8 | )% | | (71 | )% |
Income before income tax expense decreased for the six months ended June 30, 2019 as compared to the same period in 2018 primarily driven by an increase in expenses, partially offset by an increase in revenues. The increase in expenses is primarily related to the acquisition of AMS. The increase inServices revenues is due to the AMS acquisition, which added tofrom higher volumes of units for valuation and field services, partially offset by a decrease in Exchange revenues due to the decrease in defaults and foreclosures nationwide. The decrease in other income of(expense), net was due to $11 for the change in fair value of the contingent consideration in 2019 for the acquisition of AMS.
|
| | | | |
Table 26. Xome - Revenues |
|
| | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | Three Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | $ Change | | % Change |
| Exchange | $ | 20 |
| | | $ | 27 |
| | $ | (7 | ) | | (26 | )% |
| Services | 82 |
| | | 30 |
| | 52 |
| | 173 | % |
| Data/Technology | 6 |
| | | 5 |
| | 1 |
| | 20 | % |
| Total revenues - Xome | $ | 108 |
| | | $ | 62 |
| | $ | 46 |
| | 74 | % |
| | | | | | | | | |
| Key Metrics | | | | | | | | |
| Exchange property listings sold | 2,645 |
| | | 3,112 |
| | (467 | ) | | (15 | )% |
| Average Exchange property listings | 6,693 |
| | | 6,621 |
| | 72 |
| | 1 | % |
| Services completed orders | 417,510 |
| | | 117,093 |
| | 300,417 |
| | 257 | % |
| Percentage of revenue earned from third-party customers | 52.9 | % | | | 28.0 | % | | 24.9 | % | | 89 | % |
Exchange revenues for the three months ended June 30, 2019 decreased as compared to the same period in 2018, primarily due to the decrease in defaults and foreclosures nationwide. Despite the decline in total property listings sold, revenues from third-party customers for the three months ended June 30, 2019 increased significantly to 26% from 17% in 2018 for the Exchange division.
Services revenues increased for the three months ended June 30, 2019 as compared to the same period in 2018, primarily due to the August 2018 acquisition of AMS.
|
| | | | |
Table 26.1. Xome - Revenues |
|
| | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | | $ Change | | % Change |
| Exchange | $ | 40 |
| | | $ | 53 |
| | $ | (13 | ) | | (25 | )% |
| Services | 153 |
| | | 63 |
| | 90 |
| | 143 | % |
| Data/Technology | 11 |
| | | 11 |
| | — |
| | — | % |
| Total revenues - Xome | $ | 204 |
| | | $ | 127 |
| | $ | 77 |
| | 61 | % |
| | | | | | | | | |
| Key Metrics | | | | | | | | |
| Exchange property listings sold | 5,066 |
| | | 5,992 |
| | (926 | ) | | (15 | )% |
| Average Exchange property listings | 6,484 |
| | | 6,714 |
| | (230 | ) | | (3 | )% |
| Services completed orders | 797,095 |
| | | 228,432 |
| | 568,663 |
| | 249 | % |
| Percentage of revenue earned from third-party customers | 53.0 | % | | | 27.5 | % | | 25.5 | % | | 93 | % |
Exchange revenues for the six months ended June 30, 2019 decreased as compared to the same period in 2018, primarily as a result of lower foreclosure sales and inventories across the industry and nation. Lower average number of real estate property listings contributed to a decrease in revenues earned from default property listings. Though total property listings sold declined in 2019, revenues from third-party customers for the six months ended June 30, 2019 increased significantly to 23% from 14% in 2018 for the Exchange division.
Services revenues increased for the six months ended June 30, 2019 as compared to the same period in 2018, primarily as a result of the August 2018 acquisition of AMS.
|
| | | | |
Table 27. Xome - Expenses |
|
| | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | Three Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | $ Change | | % Change |
| Salaries, wages and benefits | $ | 36 |
| | | $ | 25 |
| | $ | 11 |
| | 44 | % |
| General and administrative | | | | | | | | |
| Operational expenses | 62 |
| | | 24 |
| | 38 |
| | 158 | % |
| Depreciation and amortization | 3 |
| | | 3 |
| | — |
| | — | % |
| Total general and administrative | 65 |
| | | 27 |
| | 38 |
| | 141 | % |
| Total expenses - Xome | $ | 101 |
| | | $ | 52 |
| | $ | 49 |
| | 94 | % |
Both salaries, wages and benefits expenses, and operational expenses increased for the three months ended June 30, 2019 as compared to the same period in2018, primarily driven by the acquisition of AMS in August 2018.
|
| | | | |
Table 27.1. Xome - Expenses |
|
| | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | | $ Change | | % Change |
| Salaries, wages and benefits | $ | 74 |
| | | $ | 49 |
| | $ | 25 |
| | 51 | % |
| General and administrative | | | | | | | | |
| Operational expenses | 119 |
| | | 49 |
| | 70 |
| | 143 | % |
| Depreciation and amortization | 7 |
| | | 6 |
| | 1 |
| | 17 | % |
| Total general and administrative | 126 |
| | | 55 |
| | 71 |
| | 129 | % |
| Total expenses - Xome | $ | 200 |
| | | $ | 104 |
| | $ | 96 |
| | 92 | % |
Both salaries, wages and benefits expenses, and operational expenses increased for the six months ended June 30, 2019 as compared to the same period in2018, primarily due to the acquisition of AMS in August 2018.
Our Corporate and Other segment records corporate expenses that are not directly attributable to our operating segments, interest expense on our unsecured senior notes, and income or loss from our legacy portfolio of non-prime and non-conforming residential mortgage loans that were transferred to a securitization trust in 2009.
The following tables settable sets forth the results of operations for the Corporate/Other segment.segment:
|
| | | | |
Table 28.25. Corporate/Other -Segment Results of Operations |
|
| | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | Three Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | $ Change | | % Change |
| Revenues | $ | — |
| | | $ | 1 |
| | $ | (1 | ) | | (100 | )% |
| Expenses | 57 |
| | | 19 |
| | 38 |
| | 200 | % |
| Other income (expenses), net | (50 | ) | | | (33 | ) | | (17 | ) | | 52 | % |
| Loss before income tax benefit | $ | (107 | ) | | | $ | (51 | ) | | $ | (56 | ) | | 110 | % |
|
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Corporate/Other - Operations | | | | | | | |
| Total revenues | $ | 2 |
| | $ | — |
| | $ | 2 |
| | 100 | % |
| Total expenses | 34 |
| | 45 |
| | (11 | ) | | (24 | )% |
| Total other income (expenses), net | (51 | ) | | (55 | ) | | 4 |
| | (7 | )% |
| Loss before income tax benefit - Corporate/Other | $ | (83 | ) | | $ | (100 | ) | | $ | 17 |
| | (17 | )% |
| | | | | | | | |
| Corporate/Other - Expenses | | | | | | | |
| Salaries, wages and benefits | $ | 8 |
| | $ | 22 |
| | $ | (14 | ) | | (64 | )% |
| General and administrative | | | | | | | |
| Operational expenses | 8 |
| | 13 |
| | (5 | ) | | (38 | )% |
| Depreciation and amortization | 10 |
| | 10 |
| | — |
| | — | % |
| Loss on impairment of assets | 8 |
| | — |
| | 8 |
| | 100 | % |
| Total general and administrative | 26 |
| | 23 |
| | 3 |
| | 13 | % |
| Total expenses - Corporate/Other | $ | 34 |
| | $ | 45 |
| | $ | (11 | ) | | (24 | )% |
| | | | | | | | |
| Corporate/Other - Other Income (Expenses), Net | | | | | | | |
| Total interest income | $ | 1 |
| | $ | 2 |
| | $ | (1 | ) | | (50 | )% |
| Interest expense on unsecured senior notes | (51 | ) | | (51 | ) | | — |
| | — | % |
| Other interest expense | (1 | ) | | (6 | ) | | 5 |
| | (83 | )% |
| Total interest expense | (52 | ) | | (57 | ) | | 5 |
| | (9 | )% |
| Total other income (expenses), net - Corporate/Other | $ | (51 | ) | | $ | (55 | ) | | $ | 4 |
| | (7 | )% |
| | | | | | | | |
| Weighted average cost - unsecured senior notes | 7.8 | % | | 7.9 | % | | (0.1 | )% | | (1 | )% |
Loss before income taxes increasedtax benefit decreased in the three months ended June 30, 2019March 31, 2020 as compared to the same period in 20182019 primarily due to an increasea decrease in total expenses. Total expenses decreased primarily driven by acquisitiondue to lower salaries, wages and integration expenses related to the acquisition of Pacific Union and Seterusbenefits, which were higher in February 2019, and amortization of intangible assets related to the Nationstar transaction. Other income (expense), net declined during the three months ended June 30,March 31, 2019 primarily due to an increase in interest expense on higher debt balance and higher interest rates related to unsecured senior notes.
|
| | | | |
Table 28.1. Corporate/Other - Operations |
|
| | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | | $ Change | | % Change |
| Revenues | $ | — |
| | | $ | 1 |
| | $ | (1 | ) | | (100 | )% |
| Expenses | 102 |
| | | 40 |
| | 62 |
| | 155 | % |
| Other income (expenses), net | (105 | ) | | | (67 | ) | | (38 | ) | | 57 | % |
| Loss before income tax benefit | $ | (207 | ) | | | $ | (106 | ) | | $ | (101 | ) | | 95 | % |
For the six months ended June 30, 2019, loss before income taxes increased as compared to the same period in 2018 due to an increase in expenses, primarily driven by acquisition and integration expenses related to the acquisition of Pacific Union and Seterus in February 2019, and amortization of intangible assets related to the Nationstar transaction. Other income (expense), net declined during the six months ended June 30, 2019 primarily driven by an increase in interest expense on a higher debt balance and higher interest rates related to unsecured senior notes.
|
| | | | |
Table 29. Legacy Portfolio Composition |
|
| | | | | | | |
| | Successor |
| | June 30, 2019 | | December 31, 2018 |
| Performing - UPB | $ | 141 |
| | $ | 145 |
|
| Nonperforming (90+ delinquency) - UPB | 21 |
| | 27 |
|
| REO - estimated fair value | 4 |
| | 4 |
|
| Total legacy portfolio | $ | 166 |
| | $ | 176 |
|
|
| | | | |
Table 30. Corporate/Other - Expenses |
|
| | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | Three Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | $ Change | | % Change |
| Salaries, wages and benefits | $ | 24 |
| | | $ | 17 |
| | $ | 7 |
| | 41 | % |
| General and administrative | | | | | | | | |
| Operational expenses | 22 |
| | | — |
| | 22 |
| | 100 | % |
| Depreciation and amortization | 11 |
| | | 2 |
| | 9 |
| | 450 | % |
| Total general and administrative | 33 |
| | | 2 |
| | 31 |
| | 1,550 | % |
| Total expenses - Corporate/Other | $ | 57 |
| | | $ | 19 |
| | $ | 38 |
| | 200 | % |
Total expenses increased during the three months ended June 30, 2019 as compared to the same period in 2018, primarily due to increased expenses related to the Pacific Union acquisition and the acquisition of the Seterus acquisitionsmortgage servicing platform and amortizationassumption of intangiblecertain assets related to the Mergerthereto from IBM (“Seterus acquisition”). The decrease in salaries, wages and benefits was partially offset by an $8 loss on impairment of assets in connection with Nationstar.an ancillary business.
|
| | | | |
Table 30.1. Corporate/Other - Expenses |
|
| | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | | $ Change | | % Change |
| Salaries, wages and benefits | $ | 46 |
| | | $ | 31 |
| | $ | 15 |
| | 48 | % |
| General and administrative | | | | | | | | |
| Operational expenses | 35 |
| | | 5 |
| | 30 |
| | 600 | % |
| Depreciation and amortization | 21 |
| | | 4 |
| | 17 |
| | 425 | % |
| Total general and administrative | 56 |
| | | 9 |
| | 47 |
| | 522 | % |
| Total expenses - Corporate/Other | $ | 102 |
| | | $ | 40 |
| | $ | 62 |
| | 155 | % |
For the six months ended June 30, 2019, total expenses increased as compared to the same period in 2018, primarily due to increased expenses related to the Pacific Union and Seterus acquisitions and amortization of intangible assets related to the the Merger with Nationstar.
|
| | | | |
Table 31. Corporate/Other - Other Income (Expenses), Net |
|
| | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | Three Months Ended June 30, 2019 | | | Three Months Ended June 30, 2018 | | $ Change | | % Change |
| Interest income, legacy portfolio | $ | 3 |
| | | $ | 3 |
| | $ | — |
| | — | % |
| Other interest income | — |
| | | — |
| | — |
| | — | % |
| Total interest income | 3 |
| | | 3 |
| | — |
| | — | % |
| | | | | | | | | |
| Interest expense, legacy portfolio | (1 | ) | | | (1 | ) | | — |
| | — | % |
| Interest expense on unsecured senior notes | (51 | ) | | | (31 | ) | | 20 |
| | 65 | % |
| Other interest expense | (1 | ) | | | (2 | ) | | (1 | ) | | (50 | )% |
| Total interest expense | (53 | ) | | | (34 | ) | | 19 |
| | 56 | % |
| Other income (expense) | — |
| | | (2 | ) | | 2 |
| | (100 | )% |
| Other income (expenses), net - Corporate/Other | $ | (50 | ) | | | $ | (33 | ) | | $ | (17 | ) | | 52 | % |
| | | | | | | | | |
| Weighted average cost - unsecured senior notes | 7.9 | % | | | 7.3 | % | | 0.6 | % | | 8 | % |
Other income (expenses), net for the Corporate/Other segment consists of interest expense on our unsecured senior notes, the interest income and expense from our legacy portfolio, and other interest related to a revolving facility used for general corporate purposes.
TotalThe change in total other income (expenses), net declined duringin the three months ended June 30, 2019March 31, 2020 as compared to the same period in 2018. Interest2019 was primarily due to a decrease in other interest expense on unsecured senior notes increasedas a result of lower commitment and facility fees, which were higher in 2019 due to a higher debt balance and higher borrowing rates under the new unsecured senior notes that were executed in July 2018 to fund the Merger with Nationstar.
|
| | | | |
Table 31.1. Corporate/Other - Other Income (Expenses), Net |
|
| | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | | $ Change | | % Change |
| Interest income, legacy portfolio | $ | 5 |
| | | $ | 6 |
| | $ | (1 | ) | | (17 | )% |
| Other interest income | — |
| | | — |
| | — |
| | — | % |
| Total interest income | 5 |
| | | 6 |
| | (1 | ) | | (17 | )% |
| | | | | | | | | |
| Interest expense, legacy portfolio | (1 | ) | | | (2 | ) | | (1 | ) | | (50 | )% |
| Interest expense on unsecured senior notes | (102 | ) | | | (66 | ) | | 36 |
| | 55 | % |
| Other interest expense | (7 | ) | | | (3 | ) | | 4 |
| | 133 | % |
| Total interest expense | (110 | ) | | | (71 | ) | | 39 |
| | 55 | % |
| Other income (expense) | — |
| | | (2 | ) | | 2 |
| | (100 | )% |
| Other income (expenses), net - Corporate/Other | $ | (105 | ) | | | $ | (67 | ) | | $ | (38 | ) | | 57 | % |
| | | | | | | | | |
| Weighted average cost - unsecured senior notes | 7.9 | % | | | 7.3 | % | | 0.6 | % | | 8 | % |
For six months ended June 30, 2019, total other income (expenses), net declined as compared to the same period in 2018. Interest expense on unsecured senior notes increased during the six months ended June 30, 2019 compared to the same period in 2018 due to a higher debt balance and higher borrowing rates under the new unsecured senior notes that were executed in July 2018 to fund the Merger with Nationstar.
|
| | | | |
| Changes in Financial Position |
|
| | | | |
Table 32.26. Changes in Assets |
| | | | Successor | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 | | $ Change | | % Change | March 31, 2020 | | December 31, 2019 | | $ Change | | % Change |
| Cash and cash equivalents | $ | 245 |
| | $ | 242 |
| | $ | 3 |
| | 1 | % | $ | 579 |
| | $ | 329 |
| | $ | 250 |
| | 76 | % |
| Mortgage servicing rights | 3,511 |
| | 3,676 |
| | (165 | ) | | (4 | )% | 3,115 |
| | 3,502 |
| | (387 | ) | | (11 | )% |
| Advances and other receivables, net | 1,000 |
| | 1,194 |
| | (194 | ) | | (16 | )% | 685 |
| | 988 |
| | (303 | ) | | (31 | )% |
| Reverse mortgage interests, net | 7,110 |
| | 7,934 |
| | (824 | ) | | (10 | )% | 5,955 |
| | 6,279 |
| | (324 | ) | | (5 | )% |
| Mortgage loans held for sale at fair value | 3,422 |
| | 1,631 |
| | 1,791 |
| | 110 | % | 3,922 |
| | 4,077 |
| | (155 | ) | | (4 | )% |
| Deferred tax asset, net | 1,055 |
| | 967 |
| | 88 |
| | 9 | % | |
| Deferred tax assets, net | | 1,411 |
| | 1,345 |
| | 66 |
| | 5 | % |
| Other | 2,062 |
| | 1,329 |
| | 733 |
| | 55 | % | 1,946 |
| | 1,785 |
| | 161 |
| | 9 | % |
| Total assets | $ | 18,405 |
| | $ | 16,973 |
| | $ | 1,432 |
| | 8 | % | $ | 17,613 |
| | $ | 18,305 |
| | $ | (692 | ) | | (4 | )% |
Total assets as of June 30, 2019 increasedMarch 31, 2020 decreased by $1,432$692 or 8%4% compared with December 31, 20182019 primarily due to the increasedecrease in mortgage loans held for sale and other, partially offset by decreases inservicing rights, reverse mortgage interests, net and advances and other receivables, net, partially offset by an increase in cash and mortgage servicing rights. Mortgage loans held for sale increased in 2019 primarily attributable to loans originated as a result of the acquisition of Pacific Union and increased origination volume driven by a lower interest rate environment. Other increased primarily due to $483 of other assets related to the Pacific Union acquisition, as indicated in Note 2, Acquisitions, and $139 of right of use assets recorded in 2019 as a result of adoption of ASU 2016-02.cash equivalents. Mortgage servicing rights decreased in 2019 primarily due to unfavorablea negative mark-to-market adjustment of $383 driven by declining interest rates. Reverse mortgage interests, net decreased $824$324 primarily due to the collection on participating interests in HMBS.
Advances and other receivables decreased primarily due to recoveries on advances through claim proceeds, customer payments and servicing transfers. Cash and cash equivalents was higher as of March 31, 2020 compared with December 31, 2019 primarily due to additional funds drawn on our MSR facilities given the market risk at the end of the quarter in relation to COVID-19 pandemic.
|
| | | | |
Table 33.27. Changes in Liabilities and Stockholder’sStockholders’ Equity |
| | | | Successor | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 | | $ Change | | % Change | March 31, 2020 | | December 31, 2019 | | $ Change | | % Change |
| Unsecured senior notes, net | $ | 2,462 |
| | $ | 2,459 |
| | $ | 3 |
| | — | % | $ | 2,259 |
| | $ | 2,366 |
| | $ | (107 | ) | | (5 | )% |
| Advance facilities, net | 567 |
| | 595 |
| | (28 | ) | | (5 | )% | 489 |
| | 422 |
| | 67 |
| | 16 | % |
| Warehouse facilities, net | 4,045 |
| | 2,349 |
| | 1,696 |
| | 72 | % | 4,551 |
| | 4,575 |
| | (24 | ) | | (1 | )% |
| MSR related liabilities - nonrecourse at fair value | 1,472 |
| | 1,216 |
| | 256 |
| | 21 | % | 1,285 |
| | 1,348 |
| | (63 | ) | | (5 | )% |
| Other nonrecourse debt, net | 5,985 |
| | 6,795 |
| | (810 | ) | | (12 | )% | 4,945 |
| | 5,286 |
| | (341 | ) | | (6 | )% |
| Other liabilities | 2,196 |
| | 1,614 |
| | 582 |
| | 36 | % | 2,018 |
| | 2,077 |
| | (59 | ) | | (3 | )% |
| Total liabilities | 16,727 |
| | 15,028 |
| | 1,699 |
| | 11 | % | 15,547 |
| | 16,074 |
| | (527 | ) | | (3 | )% |
| Total stockholders’ equity | 1,678 |
| | 1,945 |
| | (267 | ) | | (14 | )% | 2,066 |
| | 2,231 |
| | (165 | ) | | (7 | )% |
| Total liabilities and stockholders’ equity | $ | 18,405 |
| | $ | 16,973 |
| | $ | 1,432 |
| | 8 | % | $ | 17,613 |
| | $ | 18,305 |
| | $ | (692 | ) | | (4 | )% |
Total stockholders’ equity at June 30, 2019March 31, 2020 decreased by $267$165 or 14%7% compared with the balance as of December 31, 20182019 primarily due to net loss of $274$171 during the sixthree months ended June 30, 2019.March 31, 2020. Total liabilities at June 30, 2019 increasedMarch 31, 2020 decreased by $1,699$527 or 11%3% compared with the balance as of December 31, 20182019 primarily due to an increase in warehouse facilities, MSR related liabilities and other liabilities, which was partially offset by a decrease in other nonrecourse debt. Warehouse facilities increased by $1,696 primarily due to the warehouse facilities acquired as part of the Pacific Union acquisitiondebt and higher origination volumes. MSR related liabilities increased by $256 primarily due to increase in excess spread financing related to new excess spread financing deals. The increase in other liabilities was primarily due to $530 of payables and other liabilities related to the Pacific Union acquisition.unsecured senior notes, net. Other nonrecourse debt decreased by $810$341 primarily due to repayments of reverse mortgage related nonrecourse debt, which wasdebt. Unsecured senior notes, net, decreased by $107 primarily due to the repayment and redemption of the 2021 and 2022 unsecured senior notes, partially offset by proceeds fromthe issuance of HECM securitizations.the 2027 unsecured senior notes.
|
| | | | |
| Liquidity and Capital Resources |
We measure liquidity by unrestricted cash and availability of borrowings on our MSR facilities. We recordedOur cash and cash equivalents on hand of $245 and total stockholders’ equity of $1,678increased to $579 as of June 30,March 31, 2020 from $329 as of December 31, 2019. As of June 30, 2019,March 31, 2020, we had $1,214$1,216 collateral pledged against the MSR facilities, of which we could borrow up to $810.an additional $705. During the sixthree months ended June 30, 2019,March 31, 2020, operating activities used cash totaling $52.
Our operating cash flow is primarily impacted by the receipt of servicing fees, changes in our servicing advance balances, the level of new loan production, the timing of sales and securitizations of forward and reverse mortgage loans, and revenues from our Xome segment.
We have sufficient borrowing capacity to support our operations.$710. As of June 30, 2019,March 31, 2020, total available borrowing capacity is $8,690,$9,690, of which $4,076$4,648 is unused.
We expect the economic impact of the COVID-19 pandemic to result in a significant increase in servicing advances and liquidity demands related to the utilization of forbearance programs offered by the CARES Act. Based on current modeling of expected forbearance rates within our portfolio, we believe that we are well-positioned to manage a significant increase in advances. In April 2020, we expanded our committed advance facility capacity by $850, including an expansion of capacity for private label advances for $200, which we believe will be adequate for our needs. We plan to finance GNMA advances with existing MSR lines and corporate cash flow, along with GNMA’s Pass-Through Assistance Program as a backup. For non-agency servicing, we are reimbursed for advances relatively quickly, which should limit growth in balances even with higher forbearance rates.
Sources and Uses of Cash
Our primary sources of funds for liquidity include: (i) servicing fees and ancillary revenues; (ii) payments received from sale or securitization of loans; (iii) payments from the liquidation or securitization of our outstanding participating interests in reverse mortgage loans; (iv) advance and warehouse facilities, other secured borrowings and the unsecured senior notes; and (v) payments received in connection with the sale of advance receivables and excess spread.
Our primary uses of funds for liquidity include: (i) funding of servicing advances;advances, which are expected to increase in the near future due to COVID-19 pandemic; (ii) originations of loans; (iii) payment of interest expenses; (iv) payment of operating expenses; (v) repayment of borrowings and repurchases or redemptions of outstanding indebtedness; (vi) payments for acquisitions of MSRs; (vii) scheduled and unscheduled draws on our serviced reverse residential mortgage loans; and (viii) payment of our technology expenses.
Our business is subject to extensive regulation, investigations and reviews by various federal, state and local regulatory and enforcement agencies. We are also subject to various legal proceedings in the ordinary course of our business. Addressing these regulations, reviews and legal proceedings and implementing any resulting remedial measures may require us to devote substantial resources to legal and regulatory compliance or to make other changes to our business practices, resulting in higher costs which may adversely affect our cash flows.
We believe that our cash flows from operating activities, as well as capacity through existing facilities, provide adequate resources to fund our anticipated ongoing cash requirements. We rely on these facilities to fund operating activities. As the facilities mature, we anticipate renewal of these facilities will be achieved. Future debt maturities will be funded with cash and cash equivalents, cash flow from operating activities and, if necessary, future access to capital markets. We continue to optimize the use of balance sheet cash to avoid unnecessary interest carrying costs.
We service reverse Reverse mortgage loan portfolios with a UPB of $25,569 as of June 30, 2019, which includes $3,127 of reverse MSR, $15,374 of reverse MSLs and $7,068 of reverse mortgage interests. Reverse mortgagesloans provide seniors with the ability to monetize the equity in their homes in a lump sum, line of credit or monthly draws. The unpaid principal balance of the loan is accreted for borrower draws and other costs such as mortgage insurance premiums, property taxes and insurance, as wells as applicable servicing fees earned and the interest applicable to the underlying principal. Recovery of advances and draws related to reverse MSLs is generally recovered over a two to three month period from the investor. However, for reverse assets recorded as a loan, the repayment of loan balances and collection of servicing fees occurs upon the payoff or other liquidation of the loan. We securitize our holdings in reverse mortgage loans in order to finance subsequent borrower draws and loan related costs.
Cash Flows
The table below presents the major sources and uses of cash flow for operating activities.
activities:
|
| | | | |
Table 34.28. Operating Cash Flow |
| | | | Successor | | | Predecessor | | | | | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | | $ Change | | % Change | |
| Net loss | | $ | (171 | ) | | $ | (186 | ) | | $ | 15 |
| | (8 | )% |
| Fair value changes in MSRs, MSR related liabilities and mortgage loans held for investment | | 497 |
| | 311 |
| | 186 |
| | 60 | % |
| Deferred tax benefit | | (68 | ) | | (47 | ) | | (21 | ) | | 45 | % |
| Other non-cash adjustments to net loss | | (332 | ) | | (210 | ) | | (122 | ) | | 58 | % |
| Originations net sales activities | $ | (1,013 | ) | | | $ | 386 |
| | $ | (1,399 | ) | | (362 | )% | 430 |
| | 116 |
| | 314 |
| | 271 | % |
| Cash provided by operating profits and changes in working capital and other assets | 961 |
| | | 1,483 |
| | (522 | ) | | (35 | )% | |
| Changes in working capital | | 354 |
| | 301 |
| | 53 |
| | 18 | % |
| Net cash attributable to operating activities | $ | (52 | ) | | | $ | 1,869 |
| | $ | (1,921 | ) | | (103 | )% | $ | 710 |
| | $ | 285 |
| | $ | 425 |
| | 149 | % |
Cash used in originations net salesOur operating activities was $1,013generated cash of $710 during the sixthree months ended June 30, 2019March 31, 2020 compared to $386$285 cash generated in the same period in 2018.2019. The increase was primarily due to the cash generated in originations net sales activities.
Cash generated in originations net sales activities was $430 during the three months ended March 31, 2020 compared to $116 in the same period in 2019. The change was primarily due to aan increase in proceeds of $7,527 on the sales of previously originated loans, partially offset by higher funding of $5,088$6,658 for loan origination activities driven by lowerthe declining interest rate environment and an increase in funds used of $240$555 to repurchase forward loan assets out of Ginnie Mae securitizations. The increase in funding was partially offset by an increase in proceeds of $3,929 on the sales of previously originated loans.
Cash generated from other operating activities and fromfair value changes in working capitalMSRs, MSR related liabilities and other assetsmortgage loans held for investment during the sixthree months ended June 30, 2019 decreasedMarch 31, 2020 increased by $522$186 when compared to the same period in 2018.2019. The decreasechange was primarily due to a net loss of $273 during the six months ended June 30, 2019 compared to a net income of $218 in the same period in 2018. Changes in advances, other assets and payables and other liabilities increased cash outflow by $212 during the six months ended June 30, 2019. Partially offsetting these changes was an increase in fair value changes and amortization/accretion of mortgage servicing rights/liabilities of $850$147, primarily due to the unfavorablenegative mark-to-market adjustment for the sixthree months ended June 30, 2019.March 31, 2020.
Cash used from the other non-cash adjustments to net loss during the three months ended March 31, 2020 increased by $122 when compared to the same period in 2019 primarily due to the $165 increase in net gain on mortgage loans held for sale primarily driven by the higher volumes in a declining interest rate environment and the incremental volumes made available with the February 2019 Pacific Union acquisition and related origination channels.
The table below presents the major sources and uses of cash flow for investing activities:
|
| | | | |
Table 35.29. Investing Cash Flows |
| | | | Successor | | | Predecessor | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | | $ Change | | % Change | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| Acquisitions, net | $ | (85 | ) | | | $ | — |
| | $ | (85 | ) | | (100 | )% | $ | — |
| | $ | (85 | ) | | $ | 85 |
| | (100 | )% |
| Purchase of forward mortgage servicing rights, net of liabilities incurred | (409 | ) | | | (123 | ) | | (286 | ) | | 233 | % | (27 | ) | | (130 | ) | | 103 |
| | (79 | )% |
| Proceeds on sale of assets | — |
| | | 13 |
| | (13 | ) | | (100 | )% | |
| Proceeds on sale of forward and reverse mortgage servicing rights | 279 |
| | | — |
| | 279 |
| | 100 | % | 43 |
| | 243 |
| | (200 | ) | | (82 | )% |
| Other | (27 | ) | | | (32 | ) | | 5 |
| | (16 | )% | (12 | ) | | (10 | ) | | (2 | ) | | 20 | % |
| Net cash attributable to investing activities | $ | (242 | ) | | | $ | (142 | ) | | $ | (100 | ) | | 70 | % | $ | 4 |
| | $ | 18 |
| | $ | (14 | ) | | (78 | )% |
Our investing activities used $242generated $4 during the sixthree months ended June 30, 2019, which increased from $142 of cash used inMarch 31, 2020 compared to $18 during the same period in 2018.2019. The changedecrease in cash generated from investing activities was primarily due to an increasea decrease of $286$200 in proceeds on sale of forward mortgage servicing rights. Partially offsetting the decrease in cash generated was a $103 decrease in cash used in the purchase of forward mortgage servicing rights, net of liabilities incurred, and netan $85 decrease in cash of $85 used in connection with the acquisitions of Pacific Union and Seterus. Partially offsetting these uses of cash was an increase in proceeds on sale of forward mortgage servicing rights of $279.Seterus acquisitions, which were acquired during the three months ended March 31, 2019. Although we continue to seek to acquire servicing portfolios at advantageous pricing, the amounts and timing of these opportunities is not of a consistent frequency and can result in cash flow variability between periods.
The table below presents the major sources and uses of cash flow for financing activities:
|
| | | | |
Table 36.30. Financing Cash Flow |
|
| | | | | | | | | | | | | | | |
| | Successor | | | Predecessor | | | | |
| | Six Months Ended June 30, 2019 | | | Six Months Ended June 30, 2018 | | $ Change | | % Change |
| Decrease in advance facilities | $ | (40 | ) | | | $ | (339 | ) | | $ | 299 |
| | (88 | )% |
| Increase (decrease) in warehouse facilities | 1,173 |
| | | (199 | ) | | 1,372 |
| | (689 | )% |
| Repayment of notes payable | (294 | ) | | | — |
| | (294 | ) | | 100 | % |
| Payment of unsecured senior notes and nonrecourse debt | (9 | ) | | | (75 | ) | | 66 |
| | (88 | )% |
| Issuance of excess spread financing | 437 |
| | | 70 |
| | 367 |
| | 524 | % |
| Repayment of excess spread financing | (12 | ) | | | (2 | ) | | (10 | ) | | 500 | % |
| Settlements of excess spread financing | (107 | ) | | | (91 | ) | | (16 | ) | | 18 | % |
| Decrease in participating interest financing in reverse mortgage interests | (848 | ) | | | (1,184 | ) | | 336 |
| | (28 | )% |
| Changes in HECM securitizations | (36 | ) | | | 20 |
| | (56 | ) | | (280 | )% |
| Other | 18 |
| | | (7 | ) | | 25 |
| | (357 | )% |
| Net cash attributable to financing activities | $ | 282 |
| | | $ | (1,807 | ) | | $ | 2,089 |
| | (116 | )% |
|
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 | | $ Change | | % Change |
| (Decrease) increase in warehouse facilities | $ | (25 | ) | | $ | 307 |
| | $ | (332 | ) | | (108 | )% |
| Increase (decrease) in advance facilities | 68 |
| | (30 | ) | | 98 |
| | (327 | )% |
| Repayment of notes payable | — |
| | (294 | ) | | 294 |
| | (100 | )% |
| Redemption and repayment of unsecured senior notes and nonrecourse debt | (698 | ) | | (3 | ) | | (695 | ) | | 23,167 | % |
| Issuance of unsecured senior debt | 600 |
| | — |
| | 600 |
| | 100 | % |
| Issuance of excess spread financing | 24 |
| | 245 |
| | (221 | ) | | (90 | )% |
| Settlements and repayments of excess spread financing | (58 | ) | | (50 | ) | | (8 | ) | | 16 | % |
| Decrease of participating interest financing | (275 | ) | | (408 | ) | | 133 |
| | (33 | )% |
| Changes in HECM securitizations | (99 | ) | | (107 | ) | | 8 |
| | (7 | )% |
| Other | (18 | ) | | (4 | ) | | (14 | ) | | 350 | % |
| Net cash attributable to financing activities | $ | (481 | ) | | $ | (344 | ) | | $ | (137 | ) | | 40 | % |
Our financing activities generated $282used $481 cash during the sixthree months ended June 30, 2019, whereas the Predecessor used cash of $1,807 cash in the same period in 2018. The change in cash flows from financing activities was primarily due to an increase of $1,173 in warehouse facilities during the six months ended June 30, 2019March 31, 2020 compared to a pay down on warehouse facilities of $199 during the same period in 2018. Payment of warehouse facilities decreased in 2019 due to proceeds from HECM securitizations being$344 cash used to pay down the facilities in 2018, which did not occur in the same period in 2019. In addition,Contributing to the increase in cash used was the repayment of unsecured senior debt and nonrecourse debt of $698 during the three months ended March 31, 2020 compared to $3 in the same period in 2019. The $695 increase in cash used for the payment of unsecured senior debt and nonrecourse debt is primarily due to the repayment and redemption of the 2021 and 2022 unsecured senior notes in February 2020. Cash used also increased due to a net pay down of advance$25 in warehouse facilities during the sixthree months ended June 30, 2019March 31, 2020 compared to a net increase of $307 in the same period in 2019. The cash generated from the issuance of excess spread financing decreased by $299 when$221 due to a decline in excess spread financing deals in the three months ended March 31, 2020 compared to the same period in 2018. The issuance of excess spread financing increased by $367 due to new excess spread financing deals. 2019.
Offsetting these decreasesincreases in cash used is an increasewas a decrease in cash used for the repayment of notes payable and HECM securitizations when compared to the same period in 2018.payable. During the sixthree months ended June 30,March 31, 2019, cash of $294 was used to pay off the notes payable assumed from the Pacific Union acquisition. TheIn addition, there was an increase in cash used in the change in HECM securitizations during the six months ended June 30, 2019 increasedgenerated of $600 due to scheduled pay downs and amounts incurred to settle the collapsed trusts exceeding proceeds fromissuance of the securitization, resulting2027 unsecured senior notes in a net cash outflow of $36. In the six months ended June 30, 2018, proceeds from the securitization exceeded scheduled pay downs and amounts incurred to settle the collapsed trusts, resulting in a net cash inflow of $20.January 2020.
Capital Resources
Capital Structure and Debt
We require access to external financing resources from time to time depending on our cash requirements, assessments of current and anticipated market conditions and after-tax cost of capital. If needed, we believe additional capital could be raised through a combination of issuances of equity, corporate indebtedness, asset-backed acquisition financing and/or cash from operations. Our access to capital markets can be impacted by factors outside our control, including economic conditions. In April 2020, we expanded our committed advance capacity by $850.
Financial Covenants
Our credit facilities contain various financial covenants, which primarily relate to required tangible net worth amounts, liquidity reserves, leverage requirements, and profitability requirements, whichrequirements. These covenants are measured at our operating subsidiary, Nationstar Mortgage LLC. WeAs of March 31, 2020, we were in compliance with itsour required financial covenants as of June 30, 2019. The most restrictive tangible net worth covenant required us to maintain a minimum tangible net worth of at least $682.covenants.
Seller/Servicer Financial Requirements
Seller/Servicer financialWe are also subject to net worth, capital ratio and liquidity requirements for our operating subsidiary, Nationstar Mortgage LLC, as definedestablished by the Federal Housing Finance Agency minimum financial requirements(“FHFA”) for Fannie Mae and Freddie Mac Seller/Servicers, are set forth below.and Ginnie Mae for single family issuers. In both cases, these requirements apply to our operating subsidiary, Nationstar Mortgage LLC. As of March 31, 2020, we were in compliance with our seller/servicer financial requirements for FHFA and Ginnie Mae.
Minimum Net Worth
The minimum net worth requirement for Fannie Mae and Freddie Mac is defined as follows:
| |
| ▪ | Base of $2.5 plus 25 basis points of outstanding UPB for total loans serviced. |
| |
| ▪ | Tangible Net Worth comprises of total equity less goodwill, intangible assets, affiliate receivables and certain pledged assets. |
Minimum Capital RatioThe minimum net worth requirement for Ginnie Mae is defined as follows:
| |
| ▪ | The sum of (i) base of $2.5 plus 35 basis points of the issuer’s total single-family effective outstanding obligations, and (ii) base of $5 plus 1% of the total effective HMBS outstanding obligations. |
| |
| ▪ | Tangible Net Worth/Worth is defined as total equity less goodwill, intangible assets, affiliate receivables and certain pledged assets. Effective for fiscal year 2020, under the Ginnie Mae MBS Guide, the issuers will no longer be permitted to include deferred tax assets when computing the minimum net worth requirement. |
Minimum Capital Ratio
| |
| ▪ | In addition to the minimum net worth requirement, we are also required to hold a ratio of Tangible Net Worth to Total Assets (excluding HMBS securitizations) greater than 6%. |
Minimum Liquidity
The minimum liquidity requirement for Fannie Mae and Freddie Mac is defined as follows:
| |
| ▪ | 3.5 basis points of total Agency servicing (Fannie Mae, Freddie Mac, Ginnie Mae) plus,servicing. |
| |
| ▪ | Incremental 200 basis points of total nonperforming Agency, measured as 90+ delinquencies, servicing in excess of 6% of the total Agency servicing UPB,UPB. |
| |
| ▪ | Allowable assets for liquidity may include: cash and cash equivalents (unrestricted), available for sale or held for trading investment grade securities (e.g., Agency MBS, Obligations of GSEs, US Treasury Obligations); and unused/available portion of committed servicing advance lines. |
The minimum liquidity requirement for Ginnie Mae is defined as follows:
| |
| ▪ | Maintain liquid assets equal to the greater of $1 or 10 basis points of our outstanding single-family MBS. |
| |
| ▪ | Maintain liquid assets equal to at least 20% of our net worth requirement for HECM MBS. |
Secured Debt to Gross Tangible Asset Ratio
Under the Ginnie Mae guide, we are also required to maintain a secured debt to gross tangible asset ratios no greater than 60%.
Since we have a Ginnie Mae single-family servicing portfolio that exceeds $75 billion in UPB, we are also required to obtain an external primary servicer rating and issuer credit ratings from two different rating agencies and receive a minimum rating of a B or its equivalent. Effective for fiscal year 2020, we are permitted to satisfy minimum liquidity requirements using a combination of AAA rated government securities that are marked to market in addition to cash and certain cash equivalents.
In addition, Fannie Mae or Freddie Mac may require capital ratios in excess of stated requirements. Refer to Financial Covenants in Note 10, Indebtedness, and Note 17, Capital Requirements, in the notes to consolidated financial statements for additional information. As of June 30, 2019, we were in compliance with our seller/servicer financial requirements.
| | | | Successor | | | | | |
| | June 30, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
| Advance facilities, net | $ | 567 |
| | $ | 595 |
| $ | 489 |
| | $ | 422 |
|
| Warehouse facilities, net | 4,045 |
| | 2,349 |
| 4,551 |
| | 4,575 |
|
| Unsecured senior notes, net | 2,462 |
| | 2,459 |
| 2,259 |
| | 2,366 |
|
Advance Facilities
As part of our normal course of business, we borrow money to fund servicing advances. Our servicing agreements require that we advance our own funds to meet contractual principal and interest payments for certain investors, and to pay taxes, insurance, foreclosure costs and various other items that are required to preserve the assets being serviced. Delinquency rates and prepayment speeds affect the size of servicing advance balances, along withand we exercise our ability to stop advancing principal and interest where the pooling and servicing agreements permit, where the advance policies.is deemed to be non-recoverable from future proceeds. These servicing requirements affect our liquidity. We rely upon several counterparties to provide us with financing facilities to fund a portion of our servicing advances. Pursuant to the terms of our agreements, New Residential has the obligation to fund future advances on the private-label securitized loans subject to the agreements.
Warehouse Facilities
Loan origination activities generally require short-term liquidity in excess of amounts generated by our operations. The loans we originate are financed through several warehouse lines on a short-term basis. We typically hold the loans for approximately 30 days and then sell or place the loans in government securitizations in order to repay the borrowings under the warehouse lines. Our ability to fund current operations depends upon our ability to secure these types of short-term financings on acceptable terms and to renew or replace the financings as they expire.
As a servicer for reverse mortgage loans, among other things, we are required to fund borrower draws on the loans. We typically pool borrower draws for approximately 30 days before including them in a HMBS securitization. At June 30, 2019,As of March 31, 2020, unsecuritized borrower draws totaled $295,$64, and our maximum unfunded advance obligation related to these reverse mortgage loans was $2,869.$2,504.
Unsecured Senior Notes
In 20132018 and 2018,2020, we completed offerings of unsecured senior notes, which mature on various dated through July 2026.January 2027. We pay interest semi-annually to the holders of these notes at interest rates ranging from 6.500%6.000% to 9.125%.
As of March 31, 2020, the expected maturities of our unsecured senior notes based on contractual maturities are presented below:
|
| | | | |
Table 38.32. Contractual Maturities - Unsecured Senior Notes |
| | | Year Ending December 31, | | Amount | | Amount |
| 2019 | | $ | — |
| |
| 2020 | | — |
| | $ | — |
|
| 2021 | | 592 |
| | — |
|
| 2022 | | 206 |
| | — |
|
| 2023 | | 950 |
| | 950 |
|
| 2024 | | | — |
|
| Thereafter | | 750 |
| | 1,350 |
|
| Unsecured senior notes | | 2,498 |
| |
| Unamortized debt issuance costs | | (36 | ) | |
| Unsecured senior notes, net of unamortized debt issuance costs | | $ | 2,462 |
| |
| Unsecured senior notes principal amount | | | 2,300 |
|
| Unamortized debt issuance costs, premium and discount | | | (41 | ) |
| Unsecured senior notes, net | | | $ | 2,259 |
|
Contractual Obligations
As of June 30, 2019,March 31, 2020, no material changes to our outstanding contractual obligations were made from the amounts previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.2019 except for the following, in connection with the issuance of the 2027 notes and redemption of the 2021 and 2022 notes during the three months ended March 31, 2020:
|
| | | | |
| Table 33. Contractual Obligations |
|
| | | | | | | | | | | | | | | | | | | |
| | Less than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 Years | | Total |
| Unsecured senior notes | $ | — |
| | $ | — |
| | $ | 950 |
| | $ | 1,350 |
| | $ | 2,300 |
|
| Interest payment from unsecured senior notes | 182 |
| | 363 |
| | 248 |
| | 175 |
| | 968 |
|
| Total | $ | 182 |
| | $ | 363 |
| | $ | 1,198 |
| | $ | 1,525 |
| | $ | 3,268 |
|
|
| | | | |
| Critical Accounting Policies |
Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, we have identified the following policies that, due to the judgment, estimates and assumptions inherent in those policies, are critical to an understanding of our consolidated financial statements. These policies relate to fair value measurements, particularly those determined to be Level 3 as discussed in Note 16, Fair Value Measurements, in notes to consolidated financial statements, business combinations and goodwill, and valuation and reserves forrealization of deferred tax assets. We believe that the judgment, estimates and assumptions used in the preparation of our consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of these critical accounting policies on our consolidated financial statements, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition. Fair value measurements considered to be Level 3 representing estimated values based on significant unobservable inputs include (i) the valuation of MSRs, (ii) the valuation of excess spread financing and (iii) the valuation of the mortgage servicing rights financing liability. For further information on our critical accounting policies, please refer to the Company’s and Predecessor’s Annual Reports on Form 10-K for the year ended December 31, 2018.2019. There have been no material changes to our critical accounting policies since December 31, 2018.2019. During the three months ended March 31, 2020, we updated the policies for reserves related to certain financial assets that are subject to CECL accounting in connection with adoption of ASU 2016-13. The update did not have material impact on the consolidated financial statements. See Note 1, Nature of Business and Basis of Presentation, in the consolidated financial statements which is incorporated herein for details.
Recent Accounting Developments
See Note 1, Nature of Business and Basis of Presentation, in the consolidated financial statements which is incorporated herein for details ofBelow lists recently issued accounting pronouncements applicable to us but not yet effective.
Accounting Standards Update 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes (“ASU 2019-12”) simplifies accounting for income taxes by removing certain exceptions from the general principles in Topic 740 including elimination of the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items such as other comprehensive income. ASU 2019-12 also clarifies and amends certain guidance in Topic 740. ASU 2019-12 is effective for public companies for fiscal years beginning after December 15, 2020, including interim periods, with early adoption of all amendments in the expectedsame period permitted. The Company is currently assessing the impact of ASU 2019-12, but does not believe it will have a material impact on ourits consolidated financial statements.
Impact of Inflation and Changing Prices
Our consolidated financial statements and notes thereto presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike most industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Further, interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Variable Interest EntitiesGLOSSARY OF TERMS
This Glossary of Terms defines some of the terms that are used throughout this report and Off-Balance Sheet Arrangementsdoes not represent a complete list of all defined terms used.
Advance Facility. A secured financing facility to fund advance receivables which is backed by a pool of mortgage servicing advance receivables made by a servicer to a certain pool of mortgage loans.
SeeAgency. Note 12, SecuritizationsGovernment entities guaranteeing the mortgage investors that the principal amount of the loan will be repaid; the Federal Housing Administration, the Department of Veterans Affairs, the US Department of Agriculture and FinancingsGinnie Mae (and collectively, the “, in the consolidated financial statements in Item 1, AgenciesFinancial Statements, which is incorporated herein for a summary of our transactions with VIEs and unconsolidated balances details of their impact on our consolidated financial statements.”)
DerivativesAgency Conforming Loan. A mortgage loan that meets all requirements (loan type, maximum amount, LTV ratio and credit quality) for purchase by Fannie Mae, Freddie Mac, or insured by the FHA, USDA or guaranteed by the VA or sold into Ginnie Mae.
See Note 9, Derivative Financial Instruments, in the consolidated financial statements in Item 1, Financial Statements,Asset-Backed Securities (“ABS”). whichA financial security whose income payments and value is incorporated herein forderived from and collateralized (or “backed”) by a summaryspecified pool of our derivative transactions.underlying receivables or other financial assets.
Income TaxesBulk acquisitions or purchases. MSR portfolio acquired on non-retained basis through an open market bidding process.
See Base Servicing Fee.Note 15, Income Taxes The servicing fee retained by the servicer, expressed in basis points, in an excess MSR arrangement in exchange for the provision of servicing functions on a portfolio of mortgage loans, after which the servicer and the co-investment partner share the excess fees on a pro rata basis.
Conventional Mortgage Loans., A mortgage loan that is not guaranteed or insured by the FHA, the VA or any other government agency. Although a conventional loan is not insured or guaranteed by the government, it can still follow the guidelines of GSEs and be sold to the GSEs.
Correspondent lender, lending channel or relationship. A correspondent lender is a lender that funds loans in their own name and then sells them off to larger mortgage lenders. A correspondent lender underwrites the loans to the standards of an investor and provides the funds at close.
Credit-Sensitive Loan. A mortgage loan with certain characteristics such as low borrower credit quality, relaxed original underwriting standards and high LTV, which we believe indicates that the mortgage loan presents an elevated credit risk of borrower default versus payoff.
Delinquent Loan. A mortgage loan that is 30 or more days past due from its contractual due date.
Department of Veterans Affairs (“VA”). The VA is a cabinet-level department of the U.S. federal government, which guarantees certain home loans for qualified borrowers eligible for securitization with GNMA.
Direct-to-consumer originations. A type of mortgage loan origination pursuant to which a lender markets refinancing and purchase money mortgage loans directly to selected consumers through telephone call centers, the Internet or other means.
Excess Servicing Fees. In an excess MSR arrangement, the servicing fee cash flows on a portfolio of mortgage loans after payment of the base servicing fee.
Excess Spread. MSRs with a co-investment partner where the servicer receives a base servicing fee and the servicer and co-investment partner share the excess servicing fees. This co-investment strategy reduces the required upfront capital from the servicer when purchasing or investing in MSRs.
Federal National Mortgage Association (“Fannie Mae” or “FNMA”). FNMA was federally chartered by the U.S. Congress in 1938 to support liquidity, stability, and affordability in the consolidated financial statementssecondary mortgage market, where existing mortgage-related assets are purchased and sold. Fannie Mae buys mortgage loans from lenders and resells them as mortgage-backed securities in Item 1,the secondary mortgage market.
Federal Housing Administration (“FHA”). Financial Statements,The FHA is a U.S. federal government agency within the Department of Housing and Urban Development (HUD). It provides mortgage insurance on loans made by FHA-approved lenders in compliance with FHA guidelines throughout the United States.
Federal Housing Finance Agency (“FHFA”). A U.S. federal government agency that is the regulator and conservator of Fannie Mae and Freddie Mac and the regulator of the 12 Federal Home Loan Banks.
Federal Home Loan Mortgage Corporation (“Freddie Mac” or “FHLMC”). Freddie Mac was chartered by Congress in 1970 to stabilize the nation’s residential mortgage markets and expand opportunities for homeownership and affordable rental housing. Freddie Mac participates in the secondary mortgage market by purchasing mortgage loans and mortgage-related securities for investment and by issuing guaranteed mortgage-related securities.
Government National Mortgage Association (“Ginnie Mae” or “GNMA”). GNMA is a self-financing, wholly owned U.S. Government corporation within HUD. Ginnie Mae guarantees the timely payment of principal and interest on MBS backed by federally insured or guaranteed loans - mainly loans insured by the FHA or guaranteed by the VA. Ginnie Mae securities are the only MBS to carry the full faith and credit guarantee of the U.S. federal government.
Government-Sponsored Enterprise (“GSE”). Certain entities established by the U.S. Congress to provide liquidity, stability and affordability in residential housing. These agencies are Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks.
Home Equity Conversion Mortgage (“HECM”). Reverse mortgage loans issued by FHA. HECMs provide seniors aged 62 and older with a loan secured by their home which can be taken as a lump sum, line of credit, or scheduled payments. HECM loan balances grow over the loan term through borrower draws of scheduled payments or line of credit draws as well as through the accrual of interest and FHA mortgage insurance premiums. In accordance with FHA guidelines, HECMs are designed to repay through foreclosure and subsequent liquidation of loan collateral after the loan becomes due and payable. Shortfalls experienced by the servicer of the HECM through the foreclosure and liquidation process can be claimed to FHA in accordance with applicable guidelines.
HECM mortgage-backed securities (“HMBS”). A type of asset-backed security that is secured by a group of HECM loans.
Interest Rate Lock Commitments (“IRLC”). Agreements under which the interest rate and the maximum amount of the mortgage loan are set prior to funding the mortgage loan.
Interest-Sensitive Loan. A mortgage loan which is incorporated hereinprimarily impacted by changes in forecasted interest rates, which in turn impacts voluntary prepayment speed. Interest-sensitive loans typically consist of single-family conforming residential forward mortgage loans serviced for GSEs or other third-party investors.
Loan Modification. Temporary or permanent modifications to loan terms with the borrower, including the interest rate, amortization period and term of the borrower’s original mortgage loan. Loan modifications are usually made to loans that are in default, or in imminent danger of defaulting.
Loan-to-Value Ratio (“LTV”). The unpaid principal balance of a mortgage loan as a percentage of the total appraised or market value of the property that secures the loan. An LTV over 100% indicates that the UPB of the mortgage loan exceeds the value of the property.
Lock period. A set of periods of time that a lender will guarantee a specific rate is set prior to funding the mortgage loan.
Loss Mitigation. The range of servicing activities provided by a servicer in an attempt to minimize the losses suffered by the owner of a defaulted mortgage loan. Loss mitigation techniques include short-sales, deed-in-lieu of foreclosures and loan modifications, among other options.
Mortgage-Backed Securities (“MBS”). A type of asset-backed security that is secured by a group of mortgage loans.
Mortgage Servicing Right (“MSRs”). The right and obligation to service a loan or pool of loans and to receive a servicing fee as well as certain ancillary income. MSRs may be bought and sold, resulting in the transfer of loan servicing obligations. MSRs are designated as such when the benefits of servicing the loans are expected to adequately compensate the servicer for performing the servicing.
MSR Facility. A line of credit backed by mortgage servicing rights that is used for financing purposes. In certain cases, these lines may be a sub-limit of another warehouse facility or alternatively exist on a stand-alone basis. These facilities allow for same or next day draws at the request of the borrower.
Mortgage Servicing Liability (“MSL”).The right and obligation to service a loan or pool of loans and to receive a servicing fee as well as certain ancillary income. MSLs may be bought and sold, resulting in the transfer of loan servicing obligations. MSLs are designated as such when the benefits of servicing the loans are not expected to adequately compensate the servicer for performing the servicing.
Non-Conforming Loan. A mortgage loan that does not meet the standards of eligibility for purchase or securitization by Fannie Mae, Freddie Mac or Ginnie Mae.
Originations. The process through which a lender provides a mortgage loan to a borrower.
Pull through adjusted lock volume. Represents the expected funding from locks taken during the period.
Prepayment Speed. The rate at which voluntary mortgage prepayments occur or are projected to occur. The statistic is calculated on an annualized basis and expressed as a percentage of the outstanding principal balance.
Primary Servicer. The servicer that owns the right to service a mortgage loan or pool of mortgage loans. This differs from a subservicer, which has a contractual agreement with the primary servicer to service a mortgage loan or pool of mortgage loans in exchange for a summary of oursubservicing fee based upon portfolio volume and characteristics.
Prime Mortgage Loan. Generally, a high-quality mortgage loan that meets the underwriting standards set by Fannie Mae or Freddie Mac and is eligible for purchase or securitization in the secondary mortgage market. Prime Mortgage loans generally have lower default risk and are made to borrowers with excellent credit records and a monthly income tax considerations.at least three to four times greater than their monthly housing expenses (mortgage payments plus taxes and other debt payments) as well as significant other assets. Mortgages not classified as prime mortgage loans are generally called either sub-prime or Alt-A.
Private Label Securitizations. Securitizations that do not meet the criteria set by Fannie Mae, Freddie Mac or Ginnie Mae.
Real Estate Owned (”REO”). Property acquired by the servicer on behalf of the owner of a mortgage loan or pool of mortgage loans, usually through foreclosure or a deed-in-lieu of foreclosure on a defaulted loan. The servicer or a third-party real estate management firm is responsible for selling the REO. Net proceeds of the sale are returned to the owner of the related loan or loans. In most cases, the sale of REO does not generate enough to pay off the balance of the loan underlying the REO, causing a loss to the owner of the related mortgage loan.
Recapture. The refinancing of a loan currently in the portfolio, or the financing of a customer’s new purchase which resulted in the payoff of an existing loan.
Refinancing. The process of working with existing borrowers to refinance their mortgage loans. By refinancing loans for borrowers we currently service, we retain the servicing rights, thereby extending the longevity of the servicing cash flows.
Reverse Mortgage Loan. A reverse mortgage loan, most commonly a Home Equity Conversion Mortgage, enables seniors to borrow against the value of their home, and no payment of principal or interest is required until the death of the borrower or the sale of the home. These loans are designed to go through the foreclosure and claim process to recover loan balance.
Servicing. The performance of contractually specified administrative functions with respect to a mortgage loan or pool of mortgage loans. Duties of a servicer typically include, among other things, collecting monthly payments, maintaining escrow accounts, providing periodic monthly statements to the borrower and monthly reports to the loan owners or their agents, managing insurance, monitoring delinquencies, executing foreclosures (as necessary), and remitting fees to guarantors, trustees and service providers. A servicer is generally compensated with a specific fee outlined in the contract established prior to the commencement of the servicing activities.
Servicing Advances. In the course of servicing loans, servicers are required to make advances that are reimbursable from collections on the related mortgage loan or pool of loans. There are typically three types of servicing advances: P&I advances, T&I Advances and Corporate Advances.
(i) P&I advances cover scheduled payments of principal and interest that have not been timely paid by borrowers. P&I Advances serve to facilitate the cash flows paid to holders of securities issued by the residential MBS trust. The servicer is not the insurer or guarantor of the MBS and thus has the right to cease the advancing of P&I, when the servicer deems the next advance nonrecoverable.
(ii) T&I advances pay specified expenses associated with the preservation of a mortgaged property or the liquidation of defaulted mortgage loans, including but not limited to property taxes, insurance premiums or other property-related expenses that have not been timely paid by borrowers in order for the lien holder to maintain its interest in the property.
(iii) Corporate advances pay costs, fees and expenses incurred in foreclosing upon, preserving defaulted loans and selling REO, including attorneys’ and other professional fees and expenses incurred in connection with foreclosure and liquidation or other legal proceedings arising in the course of servicing the defaulted mortgage loans.
Servicing advances are reimbursed to the servicer if and when the borrower makes a payment on the underlying mortgage loan at the time the loan is modified or upon liquidation of the underlying mortgage loan but are primarily the responsibility of the investor/owner of the loan. The types of servicing advances that a servicer must make are set forth in its servicing agreement with the owner of the mortgage loan or pool of mortgage loans. In some instances, a servicer is allowed to cease Servicing Advances, if those advances will not be recoverable from the property securing the loan.
Subservicing. Subservicing is the process of outsourcing the duties of the primary servicer to a third-party servicer. The third-party servicer performs the servicing responsibilities for a fee and is typically not responsible for making servicing advances, which are subsequently reimbursed by the primary servicer. The primary servicer is contractually liable to the owner of the loans for the activities of the subservicer.
Unpaid Principal Balance (“UPB”). The amount of principal outstanding on a mortgage loan or a pool of mortgage loans. UPB is used together with the servicing fees and ancillary incomes as a means of estimating the future revenue stream for a servicer.
U.S. Department of Agriculture (“USDA”). The USDA is a cabinet-level department of the U.S. federal government, which guarantees certain home loans for qualified borrowers.
Warehouse Facility. A type of line of credit facility used to temporarily finance mortgage loan originations to be sold in the secondary market. Pursuant to a warehouse facility, a loan originator typically agrees to transfer to a counterparty certain mortgage loans against the transfer of funds by the counterpart, with a simultaneous agreement by the counterpart to transfer the loans back to the originator at a date certain, or on demand, against the transfer of funds from the originator.
Wholesale Originations. A type of mortgage loan origination pursuant to which a lender acquires refinancing and purchase money mortgage loans from third party correspondent lenders where the lender funds the loan.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Refer to the discussion included in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2018.2019. There have been no material changes in the types of market risks faced by us since December 31, 2018.2019 except for the broad effects of the COVID-19 pandemic. As we cannot predict the duration or scope of the COVID-19 pandemic, the negative financial impact to our results cannot be reasonably estimated at this time.
Sensitivity Analysis
We assess our market risk based on changes in interest rates utilizing a sensitivity analysis. The sensitivity analysis measures the potential impact on fair values based on hypothetical changes (increases and decreases) in interest rates.
We use a duration-based model in determining the impact of interest rate shifts on our loan portfolio, certain other interest-bearing liabilities measured at fair value and interest rate derivatives portfolios. The primary assumption used in these models is that an increase or decrease in the benchmark interest rate produces a parallel shift in the yield curve across all maturities.
We utilize a discounted cash flow analysis to determine the fair value of MSRs and the impact of parallel interest rate shifts on MSRs. The primary assumptions in this model are prepayment speeds, earnings related to float and market discount rates. However, this analysis ignores the impact of interest rate changes on certain material variables, such as the benefit or detriment on the value of future loan originations, non-parallel shifts in the spread relationships between MBS, swaps and U.S. Treasury rates and changes in primary and secondary mortgage market spreads. For mortgage loans, IRLCs and forward delivery commitments on MBS, we rely on a model in determining the impact of interest rate shifts. In addition, the primary assumption used for IRLCs, is the borrower’s propensity to close their mortgage loans under the commitment.
Our total market risk is influenced by a wide variety of factors including market volatility and the liquidity of the markets. There are certain limitations inherent in the sensitivity analysis presented, including the necessity to conduct the analysis based on a single point in time and the inability to include the complex market reactions that normally would arise from the market shifts modeled.
We used June 30, 2019March 31, 2020 market rates on our instruments to perform the sensitivity analysis. The estimates are based on the market risk sensitive portfolios described in the preceding paragraphs and assume instantaneous, parallel shifts in interest rate yield curves. These sensitivities are hypothetical and presented for illustrative purposes only. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in fair value may not be linear.
The following table summarizes the estimated change in the fair value of our assets and liabilities sensitive to interest rates as of June 30, 2019March 31, 2020 given hypothetical instantaneous parallel shifts in the yield curve. Results could differ materially.
|
| | | | |
Table 39.34. Change in Fair Value |
| | | | June 30, 2019 | March 31, 2020 |
| Down 25 bps | | Up 25 bps | Down 25 bps | | Up 25 bps |
| Increase (decrease) in assets | | | | | | |
| Mortgage servicing rights at fair value | $ | (248 | ) | | $ | 251 |
| $ | (229 | ) | | $ | 235 |
|
| Mortgage loans held for sale at fair value | 10 |
| | (12 | ) | 10 |
| | (12 | ) |
| Derivative financial instruments: | | | | | | |
| Interest rate lock commitments | 13 |
| | (17 | ) | 31 |
| | (37 | ) |
| Total change in assets | (225 | ) | | 222 |
| (188 | ) | | 186 |
|
| Increase (decrease) in liabilities | | | | | | |
| Mortgage servicing rights liabilities at fair value | (5 | ) | | 5 |
| (5 | ) | | 4 |
|
| Excess spread financing at fair value | (61 | ) | | 65 |
| (46 | ) | | 51 |
|
| Derivative financial instruments: | | | | | | |
| Forward MBS trades | 21 |
| | (26 | ) | 36 |
| | (44 | ) |
| Total change in liabilities | (45 | ) | | 44 |
| (15 | ) | | 11 |
|
| Total, net change | $ | (180 | ) | | $ | 178 |
| $ | (173 | ) | | $ | 175 |
|
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of June 30, 2019.March 31, 2020.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2019,March 31, 2020, our disclosure controls and procedures are effective. Disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the three months ended June 30, 2019,March 31, 2020, no changes in our internal control over financial reporting occurred that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are a state licensed, non-bank mortgage lender, servicer and ancillary services provider. From time to time, we and our subsidiaries are involved in a number of legal proceedings, including, but not limited to, judicial, arbitration, regulatory and governmental proceedings relating to matters that arise in connection with the conduct of our business. These legal proceedings are generally based on alleged violations of federal, state and local laws and regulations governing our mortgage servicing and lending activities including, without limitation, consumer protection laws, but may also include alleged violations of securities, employment, contract, tort, common law fraud and other laws. Legal proceedings include open and pending examinations, information gathering requests and investigations by governmental, regulatory and enforcement agencies as well as litigation in judicial forums and arbitration proceedings.
Our business is subject to extensive examinations, investigations and reviews by various federal, state and local governmental, regulatory and enforcement agencies. We have historically had and continue to have a number of open investigations with these agencies. We continue to receive governmental and regulatory requests for information, subpoenas, examinations and other inquiries. We are currently the subject of various governmental or regulatory investigations, subpoenas, examinations and inquiries related to our residential loan servicing and origination practices, bankruptcy and collections practices, financial reporting and other aspects of our businesses. These matters include investigations by the Consumer Financial Protection Bureau (the “CFPB”), the Securities and Exchange Commission, the Executive Office of the United States Trustees, the Department of Justice, the Office of the Special Inspector General for the Troubled Asset Relief Program, the U.S. Department of Housing and Urban Development, the multi-state coalition of mortgage banking regulators and various State Attorneys General. These specific matters and other pending or potential future investigations, subpoenas, examinations or inquiries may lead to administrative, civil or criminal proceedings or settlements and possibly result in remedies including fines, penalties, restitution, or alterations in our business practices and in additional expenses and collateral costs. We are cooperating fully in these matters.
For example, we continue to progress towards resolution of certain legacy regulatory matters involving examination findings in prior years for alleged violations of certain laws related to our business practices. We have been in discussions with the multi-state committee of mortgage banking regulators and various State Attorneys General concerning a potential resolution of their investigations. We are continuing to cooperate with all parties. In connection with these discussions, we previously recorded an accrual. These discussions may not result in a settlement of the matter; furthermore, any such settlement may exceed the amount accrued as of June 30, 2019.March 31, 2020. Moreover, if the discussions do not result in a settlement, the regulators and State Attorneys General may seek to exercise their enforcement authority through litigation or other proceedings and seek injunctive relief, damages, restitution and civil monetary penalties, which could have a material adverse effect on our business, reputation, financial condition and results of operations.
Further, on April 24, 2018, the CFPB notified us that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (NORA) process, the CFPB’s Office of Enforcement is considering whether to recommend that the CFPB take enforcement action against us, alleging violations of the Real Estate Settlement Procedures Act, the Consumer Financial Protection Act, and the Homeowners Protection Act, which stems from a 2014 examination. The purpose of a NORA letter is to provide a party being investigated an opportunity to present its position to the CFPB before an enforcement action may be recommended or commenced. The CFPB may seek to exercise its enforcement authority through settlement, administrative proceedings or litigation and seek injunctive relief, damages, restitution and civil monetary penalties, which could have a material adverse effect on our business, reputation, financial condition and results of operations. We have not recorded an accrual related to this matter as of June 30, 2019March 31, 2020 as we do not believe that the possible loss or range of loss arising from any such action is estimable. We are continuing to cooperate with the CFPB.
Similarly, we are in discussions with the Executive Office of the United States Trustees concerning certain legacy issues with respect to bankruptcy servicing practices. In connection with these discussions, we are undertaking certain voluntary remediation activities with respect to loans at issue in these matters. While we and the Executive Office of the United States Trustees are engaged in discussions to potentially resolve these issues, there is no guarantee a resolution will occur. Moreover, if the discussions do not result in a resolution, the Executive Office of the United States Trustees may seek redress through litigation or other proceedings and seek injunctive relief, damages and restitution in addition to the remediation activities, which could have a material adverse effect on our business, reputation, financial condition and results of operations. However, we believe it is premature to predict the potential outcome or to estimate the financial impact to us in connection with any potential action or settlement arising from this matter, including the voluntary remediation activities undertaken and to be undertaken by us.
In addition, we were a defendant in a class action proceeding originally filed in state court in March 2012, and then removed to the United States District Court for the Eastern District of Washington under the caption Laura Zamora Jordan v. Nationstar Mortgage LLC. The suit was filed on behalf of a class of Washington borrowers and challenges property preservation measures we took, as loan servicer, after the borrowers defaulted and our vendors determined that the borrowers had vacated or abandoned their properties. The case raises claims for (i) common law trespass, (ii) statutory trespass, and (iii) violation of Washington’s Consumer Protection Act, and seeks recovery of actual, statutory, and treble damages, as well as attorneys’ fees and litigation costs. On July 25, 2018, we entered into a settlement agreement to resolve this matter, and on May 2, 2019, the court approved the settlement agreement. We are pursuing reimbursement of the settlement payment from the owners of the loans we serviced, but there can be no assurance that we will prevail with any claims for reimbursement.
We are a defendant in a proceeding filed on January 2, 2018 in the U.S. District Court for the Northern District of California under the caption Collateral Analytics LLC v. Nationstar Mortgage LLC et al. The plaintiff alleges that we and certain affiliated entities misappropriated plaintiff’s intellectual property for the purpose of replicating plaintiff’s products. The case raises federal and state law claims for misappropriation of trade secrets and breach of contract and seeks an award of actual damages, unjust enrichment, lost profits and/or a reasonable royalty, exemplary damages and injunctive relief preventing further misuse or disclosure of plaintiff’s intellectual property. We believe we have meritorious defenses and will vigorously defend ourselves in this matter, and the parties are currently seeking approval of the settlement from the court.
We are also a defendant in a proceeding filed on October 23, 2015 in the U.S. District Court for the Central District of California under the caption Alfred Zaklit and Jessy Zaklit, individually and on behalf of all others similarly situated v. Nationstar Mortgage LLC et al. The plaintiff alleges that we improperly recorded telephone calls without the knowledge or consent of borrowers in violation of the California Penal Code. On July 24, 2017, the court certified a class comprised of California borrowers who, from October 2014 to May 2016, participated in outbound telephone conversations with our employees who recorded the conversations without first informing the borrowers that the conversations were being recorded. The class seeks statutory damages and attorney’s fees. On September 10, 2018, we reached an agreement in principal to settle this matter.
Responding to these matters requires us to devote substantial resources, resulting in higher costs and lower net cash flows. Adverse results in any of these matters could further increase our operating expenses and reduce our revenues, require us to change business practices and limit our ability to grow and otherwise materially and adversely affect our business, reputation, financial condition or results of operation.
Item 1A. Risk Factors
There have been no material changes or additions to the risk factors previously disclosed under “Risk Factors” included in our Annual Report on Form 10-K filed for the year ended December 31, 2018.2019, except for the following:
The COVID-19 pandemic may adversely impact our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
The COVID-19 pandemic introduces unprecedented uncertainty in the economy, including the risk of a significant employment shock and recessionary conditions, with implications for the health and safety of our employees, borrower delinquency rates, forbearance take-up rates under the forbearance program included in the CARES Act and the related funding for the P&I and T&I servicing advances, the sources, adequacy and availability of financing to fund advances, origination volumes and our overall profitability and liquidity.
The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We did not make any repurchases of our shares during the three months ended June 30, 2019.March 31, 2020.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
The Company previously announced that on June 28, 2019, Anthony Villani, Executive Vice President & General Counsel, informed the Company of his intent to retire effective October 4, 2019. In connection with his resignation, on August 2, 2019, the Company and Mr. Villani entered into a Transition Agreement (the “Transition Agreement”) to provide services to the Company to ensure a smooth transition. The transition payments and benefits are substantially consistent with Mr. Villani’s previously disclosed Severance Agreement that was entered into on February 12, 2018, in connection with the merger with WMIH Corp. Additionally, upon his retirement, Mr. Villani’s unvested restricted stock units will continue to vest pursuant to the vesting schedule in the applicable Restricted Stock Unit Agreement. The Transition Agreement includes certain confidentiality, non-competition and non-solicitation provisions. The transition payments described above are conditioned on Mr. Villani executing and not revoking a release, which releases and waives any and all claims against the Company. This description of the Transition Agreement is not complete and is qualified in its entirety by reference to the full text of the Transition Agreement, which is filed as Exhibit 10.3 to this report and is incorporated by reference herein.
None.
Item 6. Exhibits
|
| | | | | | |
| | | Incorporated by Reference | |
| Exhibit Number | Description | Form | File No. | Exhibit | Filing Date | Filed or Furnished Herewith |
| | | | | | | |
10.110.1** | | | | | | X |
10.210.2** | | | | | | X |
10.3**10.3 | | | | | | X |
10.4** | | S-8 | 333-231552 | 99.1 | 05/16/2019 | |
10.5** | | 8-K | 001-14667 | 10.2 | 05/17/2019 | |
10.6** | | 8-K | 001-14667 | 10.3 | 05/17/2019 | |
| 31.1 | |
|
|
|
| X |
| 31.2 | | | | | | X |
| 32.1 | |
|
|
|
| X |
| 32.2 | | | | | | X |
| 101.INS | XBRL Instance Document |
|
|
|
| X |
| 101.SCH | XBRL Taxonomy Extension Schema Document | | | | | X |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
| X |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | | | | | X |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
| X |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | X |
** Management contract, compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | |
| | | MR. COOPER GROUP INC. |
| | | |
August 2, 2019April 30, 2020 | | /s/ Jay Bray |
| Date | | Jay Bray
Chief Executive Officer
(Principal Executive Officer) |
| | | |
August 2, 2019April 30, 2020 | | /s/ Christopher G. Marshall |
| Date | | Christopher G. Marshall Vice Chairman & Chief Financial Officer (Principal Financial and Accounting Officer) |
