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
or
¨
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
MRCOOPERGROUPLOGOR1.JPG
________________________________________________________________________________________________________
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
 
 
 
 
Item 1.
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
 
 
 
 
8
 
 
 
Item 2.
43
 
 
 
Item 3.
80
 
 
 
Item 4.
81
 
 
 
 
 
 
 
 
 
PART II
 
 
 
 
Item 1.
82
 
 
 
Item 1A.
83
 
 
 
Item 2.
83
 
 
 
Item 3.
83
 
 
 
Item 4.
83
 
 
 
Item 5.
83
 
 
 
Item 6.
84
 
 
 
 


2


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).

3


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).

4


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).

5


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). 

6


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). 

7



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.



8



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.



9


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.


10


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.

11



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.


12


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.


13


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



14


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.



15


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




16


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.


17


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



18


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.



19


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.


20


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
%


21


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.

22


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



23


 
 
 
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.

24



 
 
 
 
 
 
 
 
 
 
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