Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________________________________________________________________________________________________

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020



¨	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)



Delaware		91-1653725
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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:



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.



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 April 24, 2020 was 91,970,033.

MR. COOPER GROUP INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS



		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Consolidated Balance Sheets as of March 31, 2020 (unaudited) and December 31, 2019	3

	Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2020 and Three Months Ended March 31, 2019	4

	Consolidated Statements of Stockholders’ Equity (unaudited) for the Three Months Ended March 31, 2020 and Three Months Ended March 31, 2019	5

	Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2020 and Three Months Ended March 31, 2019	6

	Notes to Consolidated Financial Statements (unaudited)	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	43

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	80

Item 4.	Controls and Procedures	81



PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	82

Item 1A.	Risk Factors	83

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	83

Item 3.	Defaults Upon Senior Securities	83

Item 4.	Mine Safety Disclosures	83

Item 5.	Other Information	83

Item 6.	Exhibits	84

PART I. Financial Information

Item 1. Financial Statements

MR. COOPER GROUP INC.

CONSOLIDATED BALANCE SHEETS

(millions of dollars, except share data)



	March 31, 2020			December 31, 2019
	(unaudited)
Assets
Cash and cash equivalents	$	579		$	329
Restricted cash	266			283
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	3,922			4,077
Property and equipment, net of accumulated depreciation of $65 and $55, respectively	111			112
Deferred tax assets, net	1,411			1,345
Other assets	1,569			1,390
Total assets	$	17,613		$	18,305

Liabilities and Stockholders’ Equity
Unsecured senior notes, net	$	2,259		$	2,366
Advance facilities, net	489			422
Warehouse facilities, net	4,551			4,575
Payables and other liabilities	1,965			2,016
MSR related liabilities - nonrecourse at fair value	1,285			1,348
Mortgage servicing liabilities	53			61
Other nonrecourse debt, net	4,945			5,286
Total liabilities	15,547			16,074
Commitments and contingencies (Note 18)
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, 92.0 million and 91.1 million shares issued, respectively	1			1
Additional paid-in-capital	1,108			1,109
Retained earnings	961			1,122
Total Mr. Cooper stockholders’ equity	2,070			2,232
Non-controlling interests	(4		)	(1		)
Total stockholders’ equity	2,066			2,231
Total liabilities and stockholders’ equity	$	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)



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Revenues:
Service related, net	$	(53	)	$	84
Net gain on mortgage loans held for sale	331			166
Total revenues	278			250
Expenses:
Salaries, wages and benefits	246			215
General and administrative	198			228
Total expenses	444			443
Other income (expenses), net:
Interest income	118			134
Interest expense	(192		)	(189		)
Other income, net	1			15
Total other income (expenses), net	(73		)	(40		)
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 attributable to common stockholders	$	(168	)	$	(186	)

Net loss per common share attributable to Mr. Cooper:
Basic	$	(1.84	)	$	(2.05	)
Diluted	$	(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)



	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 CASH FLOWS

(millions of dollars)



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Operating Activities
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	(331		)	(166		)
Interest income on reverse mortgage loans	(62		)	(82		)
Provision for reserves	8			11
Fair value changes and amortization/accretion of mortgage servicing rights/liabilities	526			379
Fair value changes in excess spread financing	(35		)	(69		)
Fair value changes in mortgage servicing rights financing liability	6			2
Fair value changes in mortgage loans held for investment	—			(1		)
Amortization of premiums, net of discount accretion	23			2
Depreciation and amortization for property and equipment and intangible assets	19			21
Share-based compensation	4			4
Other loss	7			—
Repurchases of forward loan assets out of Ginnie Mae securitizations	(919		)	(364		)
Mortgage loans originated and purchased for sale, net of fees	(12,375		)	(5,717		)
Sales proceeds and loan payment proceeds for mortgage loans held for sale and held for investment	13,724			6,197
Changes in assets and liabilities:
Advances and other receivables	300			120
Reverse mortgage interests	400			614
Other assets	(91		)	(216		)
Payables and other liabilities	(255		)	(217		)
Net cash attributable to operating activities	710			285

Investing Activities
Acquisitions, net of cash acquired	—			(85		)
Property and equipment additions, net of disposals	(12		)	(10		)
Purchase of forward mortgage servicing rights, net of liabilities incurred	(27		)	(130		)
Proceeds on sale of forward and reverse mortgage servicing rights	43			243
Net cash attributable to investing activities	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)



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Financing Activities
(Decrease) increase in warehouse facilities	(25		)	307
Increase (decrease) in advance facilities	68			(30		)
Repayment of notes payable	—			(294		)
Proceeds from sale of HECM securitizations	—			20
Repayment of HECM securitizations	(99		)	(127		)
Proceeds from issuance of participating interest financing in reverse mortgage interests	55			86
Repayment of participating interest financing in reverse mortgage interests	(330		)	(494		)
Proceeds from the issuance of excess spread financing	24			245
Settlements and repayments of excess spread financing	(58		)	(50		)
Issuance of unsecured senior debt	600			—
Repayment of nonrecourse debt – legacy assets	—			(3		)
Redemption and repayment of unsecured senior notes	(698		)	—
Repayment of finance lease liability	(1		)	(1		)
Surrender of shares relating to stock vesting	(5		)	(2		)
Debt financing costs	(12		)	(1		)
Net cash attributable to financing activities	(481		)	(344		)
Net increase (decrease) in cash, cash equivalents, and restricted cash	233			(41		)
Cash, cash equivalents, and restricted cash - beginning of period	612			561
Cash, cash equivalents, and restricted cash - end of period⁽¹⁾	$	845		$	520

Supplemental Disclosures of Cash Activities
Cash paid for interest expense	$	89		$	74


⁽¹⁾	The following table provides a reconciliation of cash, cash equivalents and restricted cash to amount reported within the consolidated balance sheets.



	March 31, 2020		March 31, 2019
Cash and cash equivalents	$	579	$	181
Restricted cash	266		339
Total cash, cash equivalents, and restricted cash	$	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 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

The consolidated interim financial statements of the Company 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, 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 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. 2016-13, 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, which is referred to as the current expected credit loss (“CECL”) methodology. The update eliminates the initial recognition of 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. The 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 the Company as of January 1, 2020, with a cumulative-effect adjustment to retained earnings as of that date.

Based upon management’s scoping analysis, the Company 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, as 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 accounting policies as follows:

For certain financial instruments 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 financial instrument, reverse mortgage interests, net of reserves, had limited impact from the adoption of CECL to the reserve methodology. See Note 4, Advances and Other Receivables, Net, Note 5, Reverse Mortgage Interests, Net, and 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 on January 1, 2020. The guidance does not have a material impact to the disclosures currently provided by the 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 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 Accounting Standards Codification 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 $116, paid in cash. Based on the allocation of fair value, goodwill of $40 was 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 Originations and Servicing segments, respectively, based on expected cash flows, and is expected to be deductible for tax purposes.



Final Estimated Fair Value of Net Assets Acquired:
Cash and cash equivalents	$	37
Restricted cash	2
Mortgage servicing rights	271
Advances and other receivables	84
Mortgage loans held for sale	536
Mortgage loans held for investment	1
Property and equipment	8
Other assets	483
Fair value of assets acquired	1,422
Notes payable⁽¹⁾	294
Advance facilities	13
Warehouse facilities	393
Payables and other liabilities	530
Other nonrecourse debt	129
Fair value of liabilities assumed	1,359
Total fair value of net tangible assets acquired	63
Intangible assets:
Customer relationships⁽²⁾	13
Goodwill	40
Final purchase price	$	116


⁽¹⁾	Notes payable was subsequently paid off in February 2019 after the consummation of the acquisition.


⁽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.

The Company incurred total acquisition costs of $2 during the three months ended March 31, 2019, of which $1 is included in salaries, wages and benefits expense and $1 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 months ended March 31, 2019, the operations contributed by this acquisition generated total revenues of $39 and income before income tax of $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 months ended March 31, 2019, as if the acquisition had occurred on January 1, 2019:



	Three Months Ended March 31, 2019
Pro forma financial information	(unaudited)
Pro forma total revenues	$	269

Pro forma net loss	$	(184	)

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:



MSRs and Related Liabilities	March 31, 2020		December 31, 2019
Forward MSRs - fair value	$	3,109	$	3,496
Reverse MSRs - amortized cost	6		6
Mortgage servicing rights	$	3,115	$	3,502

Mortgage servicing liabilities - amortized cost	$	53	$	61

Excess spread financing - fair value	$	1,242	$	1,311
Mortgage servicing rights financing - fair value	43		37
MSR related liabilities - nonrecourse at fair value	$	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 of both agency and non-agency loans.

The following table sets forth the activities of forward MSRs:



Forward MSRs - Fair Value	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⁽¹⁾	24			409
Dispositions:
Sales of servicing assets	—			(260		)
Changes in fair value:
Changes in valuation inputs or assumptions used in the valuation model	(401		)	(332		)
Other changes in fair value	(133		)	(67		)
Fair value - end of period	$	3,109		$	3,481


⁽¹⁾	Purchases of servicing rights during the three months ended March 31, 2019 includes $271 of mortgage servicing rights that were acquired from Pacific Union. See Note 2, Acquisitions, for further discussion.

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 three months ended March 31, 2020 and 2019, the Company sold $40 and $19,409 in unpaid principal balance (“UPB”) of forward MSRs, of which none and $19,276 were retained by the Company as subservicer, respectively.

MSRs measured at fair value are primarily segregated between credit sensitive and interest sensitive pools (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 UPB and fair value for the Company’s forward MSRs:



	March 31, 2020				December 31, 2019
Forward MSRs - UPB and fair value breakdown	UPB		Fair Value		UPB		Fair Value
Acquisition Pools
Credit sensitive	$	138,726	$	1,386	$	147,895	$	1,613
Interest sensitive	151,908		1,723		148,887		1,883
Total	$	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 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

Acquisition Pools:
Credit Sensitive
Discount rate	10.2	%	10.4	%
Prepayment speeds	13.0	%	12.7	%
Average life	5.9 years		6.0 years

Interest Sensitive
Discount rate	9.1	%	9.1	%
Prepayment speeds	13.8	%	13.5	%
Average life	5.5 years		5.7 years

Investor Pools:
Agency
Discount rate	9.0	%	9.0	%
Prepayment speeds	13.2	%	13.0	%
Average life	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 Company’s forward MSRs when applying certain unfavorable variations of key assumptions to these assets for the dates indicated:



	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 $21,590 and $22,725 as of March 31, 2020 and December 31, 2019, respectively. The following table sets forth the activities of reverse MSRs and mortgage servicing liabilities (“MSL”) for three months ended March 31, 2020 and 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


⁽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.

Management evaluates reverse MSRs and MSLs each reporting period for impairment. Based on management’s assessment at March 31, 2020, no impairment or increased obligation was needed.

Excess Spread Financing - Fair Value

In order to finance the acquisition of certain MSRs on various Portfolios, the Company has entered into sale and assignment agreements with third parties and 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, ancillary income and interest float earnings on principal along 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 recapture agreement obligations with third 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 recaptures 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:



Excess Spread Financing Assumptions	March 31, 2020		December 31, 2019
Discount rate	11.6	%	11.6	%
Prepayment speeds	12.8	%	12.6	%
Recapture rate	18.6	%	20.1	%
Average life	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:



	Discount Rate				Prepayment Speeds
Excess Spread Financing - Hypothetical Sensitivities	100 bps Adverse Change		200 bps Adverse Change		10% Adverse Change		20% Adverse Change
March 31, 2020
Excess spread financing	$	43	$	89	$	48	$	98

December 31, 2019
Excess spread financing	$	46	$	95	$	46	$	96

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 Company 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 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 MSR 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-average assumptions used in the valuation of the mortgage servicing rights financing liability:



Mortgage Servicing Rights Financing Assumptions	March 31, 2020		December 31, 2019
Advance financing rates	1.7	%	3.5	%
Annual advance recovery rates	18.4	%	18.8	%

Servicing Segment Revenues

The following table sets forth the items comprising total revenues for the Servicing segment:



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⁾

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 $11 for the three months ended March 31, 2020 and 2019, respectively.


⁽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 MSR financing arrangements.


⁽⁴⁾	Amortization for the Company is net of excess spread accretion of $68 and $36 and MSL accretion of $8 and $18 for the three months ended March 31, 2020 and 2019, respectively.

4. Advances and Other Receivables, Net

Advances and other receivables, net consists of the following:



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	(193		)	(175		)
Total advances and other receivables, net	$	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 or the borrower. Reserves for advances and other receivables on loans liquidated or purchased out of the MSR portfolio are established within advances and other receivables.

The following table sets forth the activities of the servicing reserves for advances and other receivables:



Reserves for Advances and Other Receivables	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Balance - beginning of period	$	168		$	47
Provision and other additions⁽¹⁾	30			30
Write-offs	(5		)	(6		)
Balance - end of period	$	193		$	71

⁽¹⁾

The Company recorded a provision of $10 and $11 through the MTM adjustments in revenues - service related, net, in the consolidated statements of operations for the three months ended March 31, 2020 and 2019, 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 March 31, 2020, a total of $175 purchase discount has been utilized, with $146 purchase discount remaining.

The following table sets forth the activities of the purchase discounts for advances and other receivables:



	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
Balance - beginning of period	$	131		$	21	$	205		$	48
Addition from acquisition	—			—		19			—
Utilization of purchase discounts	(6		)	—		(55		)	—
Balance - end of period	$	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:



Reverse Mortgage Interests, Net	March 31, 2020			December 31, 2019
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	(3		)	(3		)
Total reverse mortgage interests, net	$	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 in Company’s consolidated balance sheets. The Company does not originate reverse mortgages, but during the three months ended March 31, 2020 and 2019, a total of $52 and $82 in UPB associated with new draws on existing loans was transferred to GNMA and securitized by the Company, 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 three months ended 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, requiring 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. No such securitizations occurred during the three months ended March 31, 2020 and 2019. The Company sold $20 UPB of Trust 2018-3 during the three months ended March 31, 2019. Refer to Other Nonrecourse Debt in Note 10, Indebtedness, for additional information.

Unsecuritized Interests

Unsecuritized interests in reverse mortgages consist of the following:



Unsecuritized interests	March 31, 2020			December 31, 2019
Repurchased HECM loans (exceeds 98% MCA)	$	782		$	789
HECM related receivables⁽¹⁾	257			250
Funded borrower draws not yet securitized	64			67
Real estate owned (“REO”) related receivables	46			14
Purchase discount, net	(69		)	(68		)
Total unsecuritized interests	$	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 repurchased a total of $383 and $740 of HECM loans out of GNMA HMBS securitizations during the three months ended March 31, 2020 and 2019, respectively, of which $103 and $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 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. The Company assigned a total of $266 and $514 of HECM loans to HUD during the three months ended March 31, 2020 and 2019, 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 both financial and operational exposures.

The following table sets forth the activities of the servicing reserves for reverse mortgage interests:



Reserves for reverse mortgage interests	Three Months Ended March 31, 2020		Three Months Ended March 31, 2019
Balance - beginning of period	$	3	$	13
Provision (release), net	—		—
Write-offs	—		(5		)
Balance - end of period	$	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:



	Three Months Ended March 31, 2020
Purchase premiums and discounts for reverse mortgage interests	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	$	10		$	(56	)	$	(68	)
Utilization of purchase discounts⁽²⁾	—			5			5
(Amortization)/Accretion	(44		)	17			2
Transfers⁽³⁾	18			(10		)	(8		)
Balance - end of period	$	(16	)	$	(44	)	$	(69	)



	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⁾
Balance - beginning of period	$	58		$	(100	)	$	(122	)
Adjustments⁽⁴⁾	(16		)	(2		)	(6		)
Utilization of purchase discounts⁽²⁾	—			6			22
(Amortization)/Accretion	(14		)	(15		)	18
Transfers⁽³⁾	8			(1		)	(7		)
Balance - end of period	$	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⁾	Utilization of purchase discounts on liquidated loans, for which the 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.

The credit-risk characteristics of reverse mortgage interests do not vary with time as the financial instruments have no contractual life or financial profile as the primary counterparty is the government agency insuring the loans.

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 reverse mortgage interests was $62 and $82 for the three months ended March 31, 2020 and 2019, respectively.

6. 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:



Mortgage Loans Held for Sale	March 31, 2020		December 31, 2019
Mortgage loans held for sale – UPB	$	3,735	$	3,949
Mark-to-market adjustment⁽¹⁾	187		128
Total mortgage loans held for sale	$	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:



	March 31, 2020				December 31, 2019
Mortgage Loans Held for Sale	UPB		Fair Value		UPB		Fair Value
Non-accrual⁽¹⁾	$	33	$	23	$	29	$	22


⁽¹⁾	Non-accrual - UPB includes $28 and $25 of UPB related to Ginnie Mae repurchased loans as of March 31, 2020 and December 31, 2019, respectively.

The total UPB of mortgage loans held for sale for which the Company has begun formal foreclosure proceedings was $24 and $21 as of March 31, 2020 and December 31, 2019, respectively.

The following table sets forth the activities of mortgage loans held for sale:



Mortgage Loans Held for Sale	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Balance - beginning of period	$	4,077		$	1,631
Loans sold	(13,510		)	(6,088		)
Mortgage loans originated and purchased, net of fees⁽¹⁾	12,375			6,253
Repurchase of loans out of Ginnie Mae securitizations	919			364
Changes in fair value	61			10
Net transfers of mortgage loans held for sale⁽²⁾	—			—
Balance - end of period	$	3,922		$	2,170


⁽¹⁾	Mortgage loans originated and purchased during the three months ended March 31, 2019 includes $536 of loans held for sale that were acquired from Pacific Union. See Note 2, Acquisitions, for further discussion.


⁽²⁾	Amount 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 insurance mortgage loans. Transfers out are net of transfers in upon receipt of proceeds from an REO sale or claim filing.

For the three months ended March 31, 2020 and 2019, the Company received proceeds of $13,724 and $6,194, respectively, on the sale of mortgage loans held for sale, resulting in gains of $275 and $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, 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.

7. Leases

Operating leases in which the Company is the lessee are recorded as operating lease right-of-use (“ROU”) assets and operating lease liabilities, included in other assets and payables and other liabilities, respectively, on the consolidated balance sheets as of 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 March 31, 2020, operating lease ROU assets and liabilities were $111 and $125, respectively.

The table below summarizes the Company’s net lease cost:



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:



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	$	10		$	6
Leased assets obtained in exchange for new operating lease liabilities	$	—		$	127
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 March 31, 2020 are as follows:



Year Ending December 31,	Operating Leases
2020⁽¹⁾	$	37
2021	29
2022	20
2023	16
2024	11
2025 and thereafter	30
Total future minimum lease payments	143
Less: imputed interest	18
Total operating lease liabilities	$	125


⁽¹⁾	Excluding the three months ended March 31, 2020.

8. Other Assets

Other assets consist of the following:



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	111		121
Intangible assets	61		74
Other	372		236
Total other assets	$	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.

Derivative Financial Instruments

See Note 9, Derivative Financial Instruments, for further details on derivative financial instruments.

Trade Receivables and Accrued Revenues

Trade 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.

The credit-risk characteristics of trade receivables included in other assets and within the scope of ASU 2016-13 do not change with time as they are primarily short-term in nature. However, the Company does monitor the financial status of customers to determine if any specific loss considerations are required.

Goodwill and Intangible Assets

In 2019, the Company recorded goodwill and intangible assets of $40 and $13, respectively, in connection with the acquisition of Pacific Union. 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

See Note 7, Leases, for further details on right-of-use assets.

Other

Other primarily includes prepaid expenses, margin call deposits, REO, tax receivables, receivables related to recent loan transfers and various receivables due from investors. REO, net includes $12 and $11 of REO-related receivables with government insurance as of March 31, 2020 and December 31, 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 $178 and $6 in collateral deposits on derivative instruments recorded in other assets on the Company’s consolidated balance sheets as of March 31, 2020 and December 31, 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 tables provide the outstanding notional balances, fair values of outstanding positions and recorded gains/(losses) for the derivative financial instruments:



		March 31, 2020				Three Months Ended March 31, 2020
Derivative Financial Instruments	Expiration Dates	Outstanding Notional		Fair Value		Recorded Gains/(Losses)
Assets
Mortgage loans held for sale
Loan sale commitments	2020	$	2,598	$	111	$	79
Derivative financial instruments
IRLCs	2020	6,923		263		128
LPCs	2020	834		25		13
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	2020	$	22	$	—	$	—
LPCs	2020	10		—		(3		)
Forward MBS trades	2020	10,229		223		211
Eurodollar futures	2020-2021	6		—		—
Total derivative financial instruments - liabilities		$	10,267	$	223	$	208



		March 31, 2019				Three Months Ended March 31, 2019
Derivative Financial Instruments	Expiration Dates	Outstanding Notional		Fair Value		Recorded Gains/(Losses)
Assets
Mortgage loans held for sale
Loan sale commitments	2019	$	365	$	17	$	(9	)
Derivative financial instruments
IRLCs	2019	2,557		69		9
LPCs	2019	216		2		1
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
LPCs	2019	$	52	$	—	$	—
Forward MBS trades	2019	3,804		22		(3		)
Eurodollar futures	2019-2021	13		—		—
Total derivative financial instruments - liabilities		$	3,869	$	22	$	(3	)

10. Indebtedness

Notes Payable



						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⁾	The capacity amount was subsequently increased to $425 in April 2020 with a maturity date of October 2021.


⁽²⁾	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.



						March 31, 2020					December 31, 2019
Warehouse Facilities	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+1.5% to 3.0%	November 2020	Mortgage loans or MBS	1,200		566			602		683			724
$1,000 warehouse facility	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%	September 2020	Mortgage loans or MBS	750		347			355		411			425
$700 warehouse facility	LIBOR+1.3% to 2.2%	November 2020	Mortgage loans or MBS	700		628			649		469			488
$600 warehouse facility	LIBOR+2.0%	February 2021	Mortgage loans or MBS	600		169			203		174			202
$500 warehouse facility	LIBOR+2.0% to 4.0%	May 2020	Mortgage loans or MBS	500		22			23		336			349
$200 warehouse facility	LIBOR+1.4%	January 2021	Mortgage loans or MBS	200		100			101		136			136
$200 warehouse facility	LIBOR+1.2%	April 2021	Mortgage loans or MBS	200		21			21		27			27
$200 warehouse facility	LIBOR+2.0%	May 2020	Mortgage loans or MBS	200		59			83		54			78
$200 warehouse facility	LIBOR+1.3%	October 2020	Mortgage loans or MBS	200		—			—		—			—
$50 warehouse facility	LIBOR+2.0% to 6.0%	June 2020	Mortgage loans or MBS	50		4			6		11			15
$40 warehouse facility	LIBOR+3.3%	September 2020	Mortgage loans or MBS	40		6			7		5			6
Warehouse facilities principal amount						4,257			4,457		4,416			4,622
MSR Facility
$400 warehouse facility	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	Mortgage loans or MBS	400		75			190		—			200
$150 warehouse facility⁽¹⁾	LIBOR+2.8%	April 2021	Mortgage loans or MBS	150		40			119		—			130
$50 warehouse facility	LIBOR+2.8%	August 2020	Mortgage loans or MBS	50		30			71		10			84
MSR facilities principal amount						295			1,216		160			1,359
Warehouse and MSR facilities principal amount						4,552			$	5,673	4,576			$	5,981
Unamortized debt issuance costs						(1		)			(1		)
Warehouse facilities, net						$	4,551				$	4,575

Pledged Collateral:
Mortgage loans held for sale						$	3,659		$	3,748	$	3,826		$	3,931
Reverse mortgage interests						598			709		590			691
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:



Unsecured senior notes	March 31, 2020			December 31, 2019
$950 face value, 8.125% interest rate payable semi-annually, due July 2023	$	950		$	950
$750 face value, 9.125% interest rate payable semi-annually, due July 2026	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⁽²⁾	—			492
$300 face value, 6.500% interest rate payable semi-annually, due June 2022⁽²⁾	—			206
Unsecured senior notes principal amount	2,300			2,398
Unamortized debt issuance costs, premium and discount	(41		)	(32		)
Unsecured senior notes, net	$	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 provide that on or before certain fixed dates, the Company may redeem up to 40% 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. 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. During the three months ended March 31, 2020, the Company repaid $100 in principal of outstanding notes. Additionally, the Company redeemed $598 in principal of outstanding notes during the three months ended March 31, 2020, resulting in a gain of $1. No notes were repurchased or redeemed during the three months ended March 31, 2019.

As of 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
2020	$	—
2021	—
2022	—
2023	950
2024	—
Thereafter	1,350
Total unsecured senior notes principal amount	$	2,300

Other Nonrecourse Debt

Other nonrecourse debt consists of the following:



						March 31, 2020		December 31, 2019
Other nonrecourse debt	Issue Date	Maturity Date	Class of Note	Collateral Amount		Outstanding		Outstanding
Participating interest financing⁽¹⁾	—	—	—	$	—	$	4,045	$	4,284
Securitization of nonperforming HECM loans
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	July 2018	July 2028	A, M1, M2, M3, M4, M5	157		137		148
Other nonrecourse debt principal amount						4,938		5,276
Unamortized debt issuance costs, premium and discount						7		10
Other nonrecourse debt, net						$	4,945	$	5,286


⁽¹⁾	Amounts represent the Company’s participating interest in GNMA HMBS securitized portfolios.

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 1.8% to 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 2.3% 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 three years. The Company may re-securitize the previously called loans from earlier HECM securitizations to achieve a lower cost of funds.

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 March 31, 2020.

11. Payables and Other Liabilities

Payables and other liabilities consist of the following:



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	407		423
Derivative financial instruments	223		15
Payable to GSEs and securitized trusts	148		182
Operating lease liabilities	125		135
Other liabilities	594		701
Total payables and other liabilities	$	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.

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

See Note 7, Leases, for further details on operating lease liabilities.

MSR Purchases Payable Including Advances

MSR purchases payable including advances represents 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, payables to insurance carriers and insurance cancellation reserves, 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.

The following table sets forth the activities of the repurchase reserves:



Repurchase Reserves	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Balance - beginning of period	$	25		$	8
Provisions	5			8
Releases	(1		)	—
Balance - end of period	$	29		$	16

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 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.

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 March 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 Mortgage Advance Receivables Trust (NMART), (ii) Nationstar Agency Advance Financing Trust (NAAFT) and (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:



	March 31, 2020				December 31, 2019
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	$	53	$	43	$	66	$	42
Reverse mortgage interests, net⁽¹⁾	—		4,878		—		5,230
Advances and other receivables, net	498		—		540		—
Total assets	$	551	$	4,921	$	606	$	5,272

Liabilities
Advance facilities⁽²⁾	$	407	$	—	$	359	$	—
Payables and other liabilities	—		1		1		1
Participating interest financing	—		4,045		—		4,284
HECM Securitizations (HMBS)
Trust 2019-2	—		297		—		333
Trust 2019-1	—		269		—		302
Trust 2018-3	—		190		—		209
Trust 2018-2	—		137		—		148
Total liabilities	$	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.


⁽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:



Unconsolidated securitization trusts	March 31, 2020		December 31, 2019
Total collateral balances - UPB	$	1,460	$	1,503
Total certificate balances	$	1,467	$	1,512

The Company has not retained any variable interests in the unconsolidated securitization trusts that were outstanding as of March 31, 2020 and December 31, 2019 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:



Principal Amount of Transferred Loans 60 Days or More Past Due	March 31, 2020		December 31, 2019
Unconsolidated securitization trusts	$	184	$	193

13. Stockholders' Equity

Equity-based awards under the 2019 Omnibus Incentive Plan (the “2019 Plan”) include (i) restricted stock units (“RSUs”) granted to employees of the Company, consultants, and non-employee directors and (ii) performance stock units (“PSUs”) granted to certain executive officers. The RSUs are valued at the fair market value of the Company’s common stock on the grant date as defined in the 2019 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 a Monte Carlo simulation model. During the three months ended March 31, 2020 and 2019, certain key employees of the Company, consultants, and non-employee directors of the Company were granted 1.1 million and 1.9 million RSUs, respectively. The stock awards for employees generally vest in equal installments 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 recorded $4 and $4 of expenses related to equity-based awards during the three months ended March 31, 2020 and 2019, 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 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	)

Net loss per common share attributable to Mr. Cooper:
Basic	$	(1.84	)	$	(2.05	)
Diluted	$	(1.84	)	$	(2.05	)

Weighted average shares of common stock outstanding (in thousands):
Basic	91,385			90,828
Dilutive effect of stock awards⁽¹⁾	—			—
Dilutive effect of participating securities⁽¹⁾	—			—
Diluted	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 were as follows:



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 months ended 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.

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 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, 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 escrow 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 similar assets, with the discount rate approximating that of similar financial instruments, as observed from recent trades with 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 Company 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. These 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.

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 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. Participating interest financing is recorded in other nonrecourse debt within the consolidated balance sheets. See Note 5, Reverse Mortgage Interests, 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. HECM securitizations are recorded at amortized cost in other nonrecourse debt within the 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:



	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



	December 31, 2019
			Recurring Fair Value Measurements
Fair value - Recurring basis	Total Fair Value		Level 1		Level 2		Level 3
Assets
Mortgage loans held for sale	$	4,077	$	—	$	4,077	$	—
Forward mortgage servicing rights	3,496		—		—		3,496
Derivative financial instruments
IRLCs	135		—		135		—
Forward MBS trades	7		—		7		—
LPCs	12		—		12		—
Total assets	$	7,727	$	—	$	4,231	$	3,496
Liabilities
Derivative financial instruments
Forward MBS trades	$	12	$	—	$	12	$	—
LPCs	3		—		3		—
Mortgage servicing rights financing	37		—		—		37
Excess spread financing	1,311		—		—		1,311
Total liabilities	$	1,363	$	—	$	15	$	1,348

The tables below present a reconciliation for all of the Company’s Level 3 assets and liabilities measured at fair value on a recurring basis:



	Three Months Ended March 31, 2020
	Assets			Liabilities
Fair value - Level 3 assets and liabilities	Mortgage servicing rights			Excess spread financing			Mortgage servicing rights financing
Balance - beginning of period	$	3,496		$	1,311		$	37
Total gains or losses included in earnings	(534		)	(35		)	6
Purchases, issuances, sales, repayments and settlements
Purchases	24			—			—
Issuances	123			24			—
Settlements and repayments	—			(58		)	—
Balance - end of period	$	3,109		$	1,242		$	43



	Three Months Ended March 31, 2019
	Assets			Liabilities
Fair value - Level 3 assets and liabilities	Mortgage servicing rights			Excess spread financing			Mortgage servicing rights financing
Balance - beginning of period	$	3,665		$	1,184		$	32
Total gains or losses included in earnings	(399		)	(69		)	2
Purchases, issuances, sales, repayments and settlements
Purchases	409			—			—
Issuances	66			245			—
Sales	(260		)	—			—
Settlements and repayments	—			(51		)	—
Balance - end of period	$	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 for the three months ended March 31, 2020 and 2019, respectively.

The tables below present a summary of the estimated carrying amount and fair value of the Company’s financial instruments:



	March 31, 2020
	Carrying Amount		Fair Value
Financial instruments			Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	579	$	579	$	—	$	—
Restricted cash	266		266		—		—
Advances and other receivables, net	685		—		—		685
Reverse mortgage interests, net	5,955		—		—		6,015
Mortgage loans held for sale	3,922		—		3,922		—
Derivative financial instruments	294		—		294		—
Financial liabilities
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
Excess spread financing	1,242		—		—		1,242
Derivative financial instruments	223		—		223		—
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	137		—		—		137


⁽¹⁾	The amounts are presented net of unamortized debt issuance costs, premium and discount.



	December 31, 2019
	Carrying Amount		Fair Value
Financial instruments			Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	329	$	329	$	—	$	—
Restricted cash	283		283		—		—
Advances and other receivables, net	988		—		—		988
Reverse mortgage interests, net	6,279		—		—		6,318
Mortgage loans held for sale	4,077		—		4,077		—
Derivative financial instruments	153		—		153		—
Financial liabilities
Unsecured senior notes⁽¹⁾	2,366		2,505		—		—
Advance facilities	422		—		422		—
Warehouse facilities⁽¹⁾	4,575		—		4,575		—
Mortgage servicing rights financing liability	37		—		—		37
Excess spread financing	1,311		—		—		1,311
Derivative financial instruments	15		—		15		—
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	148		—		—		148


⁽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. The Company’s various capital requirements related to its outstanding selling and servicing agreements are measured based on the Company’s operating subsidiary, Nationstar Mortgage LLC. As of March 31, 2020, the Company was in compliance with its selling and servicing capital requirements.

18. Commitments and Contingencies

Litigation and Regulatory

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 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 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 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 March 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.

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 $15 and $11 for the three months ended March 31, 2020 and 2019, 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 $17 to $47 in excess of the accrued liability (if any) related to those matters as of 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 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 $21,590 and $22,725 of UPB in reverse mortgage loans as of March 31, 2020 and December 31, 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 March 31, 2020 and December 31, 2019, the Company’s maximum unfunded advance obligation to fund borrower draws related to these MSRs and loans was approximately $2,504 and $2,617, respectively. Upon funding any portion of these draws, the Company expects to securitize and sell the advances in transactions that will be accounted for as secured borrowings.

19. Business Segment Reporting

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:



	Three Months Ended March 31, 2020
Financial information by segment	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	)
Depreciation and amortization for property and equipment and intangible assets	$	3		$	3		$	3	$	—		$	9		$	10		$	19
Total assets	$	10,142		$	9,608		$	534	$	(5,964	)	$	14,320		$	3,293		$	17,613



	Three Months Ended March 31, 2019
Financial information by segment	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	)
Depreciation and amortization for property and equipment and intangible assets	$	4		$	3		$	4	$	—		$	11		$	10		$	21
Total assets	$	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.

Overview

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⁾	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.



Segment Results

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.

Table 3. Segment Results



	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	)



	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	)



Servicing Segment

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⁾	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:



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	%

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.



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



	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:



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 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⁾	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.

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 and the purchase of 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 (i) prepayment speeds and (ii) our ability to recapture mortgage prepayments through the origination platform. See Note 3, Mortgage Servicing Rights and Related Liabilities, for additional information regarding the range of assumptions and sensitivities related to the measurement of the excess spread financing liability as of March 31, 2020 and December 31, 2019.

The following table sets forth the change in the excess spread liability and the related weighted-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. MSRs Financing Liability - Rollforward



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Fair value - beginning of period	$	37		$	32
Changes in fair value:
Changes in valuation inputs or assumptions used in the valuation model	9			6
Other changes in fair value	(3		)	(4		)
Fair value - end of period	$	43		$	34

	March 31, 2020			March 31, 2019
Weighted-Average Assumptions
Advance financing rates	1.7		%	3.9		%
Annual advance recovery rates	18.4		%	19.3		%

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 recorded as an MSR Financing Liability in our consolidated balance sheets and represent the incremental costs relative to the market participant assumptions contained in the MSR valuation. Changes in the value of the MSR financing 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 rate 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 involve excess spread financing with our co-invest partners for the periods indicated.



Table 18. Leveraged Portfolio Characteristics



	March 31, 2020		March 31, 2019
Owned forward servicing portfolio - unencumbered	$	85,124	$	88,995
Owned forward servicing portfolio - encumbered	205,510		214,697
Subserviced forward servicing portfolio and other	316,933		301,191
Total unpaid principal balance	$	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 - MSRs 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 19. Reverse - Mortgage Portfolio Characteristics



	March 31, 2020			March 31, 2019
Loan count	158,838			184,807
Ending unpaid principal balance	$	21,590		$	27,014
Average loan amount⁽¹⁾	$	135,924		$	146,173
Average coupon	3.3		%	4.4		%
Average borrower age	81			80


⁽¹⁾	Average loan amount is presented in whole dollar amounts.

Historically, the Company acquired servicing rights and participating interests in reverse mortgage portfolios. 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. For acquired servicing rights, 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, 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 March 31, 2020.



Originations Segment

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 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 Originations 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 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:

The following tables set forth the results of operations for the Originations segment:



Table 20. Originations Segment Results of Operations



	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	%

Originations Margin
Revenue	$	317		$	146		$	171		117	%
Pull through adjusted lock volume	$	12,677		$	5,960		$	6,717		113	%
Revenue as a percentage of pull through adjusted lock volume⁽¹⁾	2.50		%	2.45		%	0.05		%	2	%

Expenses	$	166		$	104		$	62		60	%
Funded volume	$	12,359		$	5,716		$	6,643		116	%
Expenses as a percentage of funded volume⁽²⁾	1.34		%	1.82		%	(0.48		)%	(26	)%

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 March 31, 2020 as compared to the same period in 2019 primarily due to an increase in revenues driven by origination volume growth. The growth in origination volume was primarily due to declining interest rates and incremental volumes associated with the acquisition of Pacific Union. The Originations Margin for the three months ended March 31, 2020 increased as compared to the same period in 2019 primarily due to lower expenses as a percentage of funded volume as the increase in total expenses was partially offset by expense 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 purchased through the correspondent channel, and includes loan application, underwriting, and other similar fees.

Net gain on loans originated and sold represents the gains and losses from the origination, purchase, and sale of loans and related derivative instruments. Gains from the origination and sale of loans are affected by the volume and margin of our originations activity and is impacted by fluctuation in interest rates.

Capitalized servicing rights represents the fair value attributed to mortgage servicing rights at the time in which they are retained in connection with the sale of loans during the period.

Total revenues, including net gain on mortgage loans held for sale, for our Originations segment are set forth in the tables below:



Table 21. Originations - Revenues



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019			$ Change			% Change
Service related, net - Originations	$	20		$	15		$	5		33	%
Net gain on mortgage loans held for sale
Net gain on loans originated and sold	183			72			111			154	%
Capitalized servicing rights	119			61			58			95	%
Provision for repurchase reserves, net of release	(5		)	(2		)	(3		)	150	%
Total net gain on mortgage loans held for sale	297			131			166			127	%
Total revenues - Originations	$	317		$	146		$	171		117	%

Key Metrics
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	$	12,677		$	5,960		$	6,717		113	%
Funded volume	$	12,359		$	5,716		$	6,643		116	%
Volume of loans sold	$	13,255		$	6,235		$	7,020		113	%
Recapture percentage	29.8		%	27.5		%	2.3		%	7	%
Purchase as a percentage of funded volume	26.0		%	51.7		%	(25.7		)%	(50	)%
Value of capitalized servicing on retained settlements	137		bps	141		bps	(4) bps			(3	)%


⁽¹⁾	Pull through adjusted volume represents the expected funding from locks taken during the period.

Total revenues increased for the three months ended March 31, 2020 compared to the same period in 2019 primarily driven by the higher volumes in a declining interest rate environment and the incremental volumes made available with the Pacific Union acquisition and related origination channels, which occurred in February 2019. Total revenue increased $171 or 117% period over period as pull through adjusted lock volume increased 113% during the same period.

The table below summarizes expenses for the Originations segment:



Table 22. Originations - Expenses



	Three Months Ended March 31, 2020		Three Months Ended March 31, 2019		$ Change		% Change
Salaries, wages and benefits	$	117	$	69	$	48	70	%
General and administrative
Loan origination expenses	16		10		6		60	%
Corporate and other general and administrative expenses	18		14		4		29	%
Marketing and professional service fees	12		8		4		50	%
Depreciation and amortization	3		3		—		—	%
Total general and administrative	49		35		14		40	%
Total expenses - Originations	$	166	$	104	$	62	60	%

Total expenses for the three months ended March 31, 2020 increased when compared to the same period in 2019 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 and related origination channels. The volume growth contributed to the increase in salaries, wages and benefits, due to increased compensation and headcount related costs, and loan origination expenses. The increase in loan origination expenses attributable to higher volume was partially offset by expense 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. Originations - Other Income (Expenses), Net



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019			$ Change			% Change
Interest income	$	34		$	17		$	17		100	%
Interest expense	(27		)	(18		)	(9		)	50	%
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	3.8		%	4.9		%	(1.1		)%	(22	)%
Weighted average cost of funds (excluding facility fees)	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 when compared to the same period in 2019 primarily driven by higher funded volume. The increase in interest income was offset by an increase in interest expense due to an increase in originations volume, partially offset by a lower cost of funds. Other income, net was higher in 2019 due to recognition of incentives we received related to our financing of certain loans satisfying certain customer 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. We recorded $4 in other income, net related to such incentives for the three months ended March 31, 2019. The master repurchase agreement expired during the third quarter of 2019.



Xome Segment

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.


•	The Data/Technology division contains a diversified set of businesses that provide technology solutions to real estate service providers, aggregators, and a variety of investors. This includes providing aggregation, standardization and licensing for one of the nation’s largest set of MLS, public records and neighborhood demographic data.

The charts below set forth the Xome’s total revenues, Exchange properties sold, and Services completed orders:



Table 24. Xome Segment Results of Operations



	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 increased for the three months ended March 31, 2020 as compared to the same period in 2019 primarily due to an increase in total revenues, offset by a decrease in other income (expense), net. The increase in total revenues was driven by an increase in Services revenues from 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 (expense), net was due to $11 for the change in fair value of the contingent consideration in 2019 for the acquisition of AMS.



Corporate/Other Segment

The following table sets forth the results of operations for the Corporate/Other segment:



Table 25. Corporate/Other Segment Results of Operations



	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 tax benefit decreased in the three months ended March 31, 2020 as compared to the same period in 2019 primarily due to a decrease in total expenses. Total expenses decreased primarily due to lower salaries, wages and benefits, which were higher in the three months ended March 31, 2019 due to the Pacific Union acquisition and the acquisition of the Seterus mortgage servicing platform and assumption of certain assets related thereto 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 an ancillary business.

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.

The change in total other income (expenses), net in the three months ended March 31, 2020 as compared to the same period in 2019 was primarily due to a decrease in other interest expense as a result of lower commitment and facility fees, which were higher in 2019 due to the Pacific Union acquisition.



Changes in Financial Position



Table 26. Changes in Assets



	March 31, 2020		December 31, 2019		$ Change			% Change
Cash and cash equivalents	$	579	$	329	$	250		76	%
Mortgage servicing rights	3,115		3,502		(387		)	(11	)%
Advances and other receivables, net	685		988		(303		)	(31	)%
Reverse mortgage interests, net	5,955		6,279		(324		)	(5	)%
Mortgage loans held for sale at fair value	3,922		4,077		(155		)	(4	)%
Deferred tax assets, net	1,411		1,345		66			5	%
Other	1,946		1,785		161			9	%
Total assets	$	17,613	$	18,305	$	(692	)	(4	)%

Total assets as of March 31, 2020 decreased by $692 or 4% compared with December 31, 2019 primarily due to the decrease in mortgage servicing rights, reverse mortgage interests, net and advances and other receivables, net, partially offset by an increase in cash and cash equivalents. Mortgage servicing rights decreased in 2019 primarily due to a negative mark-to-market adjustment of $383 driven by declining interest rates. Reverse mortgage interests, net decreased $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 27. Changes in Liabilities and Stockholders’ Equity



	March 31, 2020		December 31, 2019		$ Change			% Change
Unsecured senior notes, net	$	2,259	$	2,366	$	(107	)	(5	)%
Advance facilities, net	489		422		67			16	%
Warehouse facilities, net	4,551		4,575		(24		)	(1	)%
MSR related liabilities - nonrecourse at fair value	1,285		1,348		(63		)	(5	)%
Other nonrecourse debt, net	4,945		5,286		(341		)	(6	)%
Other liabilities	2,018		2,077		(59		)	(3	)%
Total liabilities	15,547		16,074		(527		)	(3	)%
Total stockholders’ equity	2,066		2,231		(165		)	(7	)%
Total liabilities and stockholders’ equity	$	17,613	$	18,305	$	(692	)	(4	)%

Total stockholders’ equity at March 31, 2020 decreased by $165 or 7% compared with the balance as of December 31, 2019 primarily due to net loss of $171 during the three months ended March 31, 2020. Total liabilities at March 31, 2020 decreased by $527 or 3% compared with the balance as of December 31, 2019 primarily due to a decrease in other nonrecourse debt and unsecured senior notes, net. Other nonrecourse debt decreased by $341 primarily due to repayments of reverse mortgage related nonrecourse debt. 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 the issuance of the 2027 unsecured senior notes.



Liquidity and Capital Resources

We measure liquidity by unrestricted cash and availability of borrowings on our MSR facilities. Our cash and cash equivalents on hand increased to $579 as of March 31, 2020 from $329 as of December 31, 2019. As of March 31, 2020, we had $1,216 collateral pledged against the MSR facilities, of which we could borrow an additional $705. During the three months ended March 31, 2020, operating activities used cash totaling $710. As of March 31, 2020, total available borrowing capacity is $9,690, of which $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, 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.

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. Reverse mortgage loans provide seniors with the ability to monetize the equity in their homes in a lump sum, line of credit or monthly draws. 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:



Table 28. Operating Cash Flow



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019			$ 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	430			116			314			271	%
Changes in working capital	354			301			53			18	%
Net cash attributable to operating activities	$	710		$	285		$	425		149	%

Our operating activities generated cash of $710 during the three months ended March 31, 2020 compared to $285 cash generated in the same period in 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 an increase in proceeds of $7,527 on the sales of previously originated loans, partially offset by higher funding of $6,658 for loan origination activities driven by the declining interest rate environment and an increase in funds used of $555 to repurchase forward loan assets out of Ginnie Mae securitizations.

Cash generated from fair value changes in MSRs, MSR related liabilities and mortgage loans held for investment during the three months ended March 31, 2020 increased by $186 when compared to the same period in 2019. The change was primarily due to an increase in fair value changes and amortization/accretion of mortgage servicing rights/liabilities of $147, primarily due to the negative mark-to-market adjustment for the three months ended 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 29. Investing Cash Flows



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019			$ Change			% Change
Acquisitions, net	$	—		$	(85	)	$	85		(100	)%
Purchase of forward mortgage servicing rights, net of liabilities incurred	(27		)	(130		)	103			(79	)%
Proceeds on sale of forward and reverse mortgage servicing rights	43			243			(200		)	(82	)%
Other	(12		)	(10		)	(2		)	20	%
Net cash attributable to investing activities	$	4		$	18		$	(14	)	(78	)%

Our investing activities generated $4 during the three months ended March 31, 2020 compared to $18 during the same period in 2019. The decrease in cash generated from investing activities was primarily due to a decrease of $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 an $85 decrease in cash used in connection with the Pacific Union and 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 30. Financing Cash Flow



	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 used $481 cash during the three months ended March 31, 2020 compared to $344 cash used in the same period in 2019. 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 $25 in warehouse facilities during the three months ended March 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 $221 due to a decline in excess spread financing deals in the three months ended March 31, 2020 compared to the same period in 2019.

Offsetting these increases in cash used was a decrease in cash used for the repayment of notes payable. During the three months ended March 31, 2019, cash of $294 was used to pay off the notes payable assumed from the Pacific Union acquisition. In addition, there was an increase in cash generated of $600 due to the issuance of the 2027 unsecured senior notes in 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. These covenants are measured at our operating subsidiary, Nationstar Mortgage LLC. As of March 31, 2020, we were in compliance with our required financial covenants.

Seller/Servicer Financial Requirements

We are also subject to net worth, capital ratio and liquidity requirements established by the Federal Housing Finance Agency (“FHFA”) for Fannie Mae and Freddie Mac Seller/Servicers, 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.

The 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 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.


▪	Incremental 200 basis points of total nonperforming Agency, measured as 90+ delinquencies, servicing in excess of 6% of the total Agency servicing 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 Note 17, Capital Requirements, in the notes to consolidated financial statements for additional information.



Table 31. Debt



	March 31, 2020		December 31, 2019
Advance facilities, net	$	489	$	422
Warehouse facilities, net	4,551		4,575
Unsecured senior notes, net	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, and we exercise our ability to stop advancing principal and interest where the pooling and servicing agreements permit, where the advance 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.

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. As of March 31, 2020, unsecuritized borrower draws totaled $64, and our maximum unfunded advance obligation related to these reverse mortgage loans was $2,504.

Unsecured Senior Notes

In 2018 and 2020, we completed offerings of unsecured senior notes, which mature on various dated through January 2027. We pay interest semi-annually to the holders of these notes at interest rates ranging from 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 32. Contractual Maturities - Unsecured Senior Notes



Year Ending December 31,	Amount
2020	$	—
2021	—
2022	—
2023	950
2024	—
Thereafter	1,350
Unsecured senior notes principal amount	2,300
Unamortized debt issuance costs, premium and discount	(41		)
Unsecured senior notes, net	$	2,259

As of 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, 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 realization 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 Annual Reports on Form 10-K for the year ended December 31, 2019. There have been no material changes to our critical accounting policies since December 31, 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

Below 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 same period permitted. The Company is currently assessing the impact of ASU 2019-12, but does not believe it will have a material impact on its 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.

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. Government 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 Ginnie Mae (and collectively, the “Agencies”)

Agency 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.

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.

Bulk acquisitions or purchases. MSR portfolio acquired on non-retained basis through an open market bidding process.

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.

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 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 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 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.

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 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 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, 2019. There have been no material changes in the types of market risks faced by us since December 31, 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 March 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 March 31, 2020 given hypothetical instantaneous parallel shifts in the yield curve. Results could differ materially.



Table 34. Change in Fair Value



	March 31, 2020
	Down 25 bps			Up 25 bps
Increase (decrease) in assets
Mortgage servicing rights at fair value	$	(229	)	$	235
Mortgage loans held for sale at fair value	10			(12		)
Derivative financial instruments:
Interest rate lock commitments	31			(37		)
Total change in assets	(188		)	186
Increase (decrease) in liabilities
Mortgage servicing rights liabilities at fair value	(5		)	4
Excess spread financing at fair value	(46		)	51
Derivative financial instruments:
Forward MBS trades	36			(44		)
Total change in liabilities	(15		)	11
Total, net change	$	(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 March 31, 2020.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of 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 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 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 March 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.

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, 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 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 March 31, 2020.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits



		Incorporated by Reference
Exhibit Number	Description	Form	File No.	Exhibit	Filing Date	Filed or Furnished Herewith

10.1**	Form of Performance Stock Unit Agreement - Employee					X
10.2**	Form of Performance Stock Unit Agreement - Special Retirement Provisions					X
10.3	Amendment Number Thirteen to the Second Amended and Restated Master Repurchase Agreement Dated as of January 29, 2016 between Barclays Bank PLC, as Agent and Nationstar Mortgage LLC, as Seller, dated March 30, 2020					X
31.1	Certification by Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
31.2	Certification by Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
32.1	Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002					X
32.2	Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002					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.

April 30, 2020		/s/ Jay Bray
Date		Jay Bray Chief Executive Officer (Principal Executive Officer)

April 30, 2020		/s/ Christopher G. Marshall
Date		Christopher G. Marshall Vice Chairman & Chief Financial Officer (Principal Financial and Accounting Officer)