Part I
ITEM 1. BUSINESS
General
We are a Cayman Islands exempted company that acquires
mortgage servicing assets consisting of servicing advances, mortgage servicing rights, rights to mortgage servicing rights and other related assets. We launched our operations on March 5, 2012 using the proceeds from our initial public offering
(“IPO”) and a concurrent private placement with our founder and Chairman of our Board of Directors to acquire mortgage servicing assets related to a portfolio with $15.2 billion unpaid principal balance from Ocwen (“Initial
Acquisition”). Prior to March 5, 2012, we were a development stage enterprise. We do not originate or purchase mortgage loans, and as a result we are not subject to the risk of loss related to the origination or ownership of mortgage
loans. We engaged Ocwen, a high quality residential mortgage loan servicer, to service the mortgage loans underlying our mortgage servicing assets and therefore have not and do not intend to develop our own mortgage servicing platform. We believe
that in the first year of operations we accomplished our primary objective of delivering attractive and consistent risk-adjusted returns to our shareholders. Our target is to distribute at least 90% of our net income over time to our shareholders in
the form of a monthly cash dividend. The results for the fiscal year ended December 31, 2012, reflect earnings that exceeded our expectations and the dividends declared by approximately $1.8 million.
Our business strategy is focused on acquiring servicing advances and mortgage servicing rights. In many cases, however, the transfer of
legal ownership of mortgage servicing rights requires the prior approval or consent of various third parties, including rating agencies. If the seller from whom we have agreed to purchase mortgage servicing rights has not obtained the necessary
approvals and consents to transfer legal ownership of the mortgage servicing rights to us (“Required Third Party Consents”), we will instead seek to acquire the rights to receive the servicing fees that the current servicer is entitled to
receive (“Rights to MSRs”) and associated servicing advances, and the current servicer will continue to service the mortgage loans and receive compensation from us for its servicing activities. Upon receipt of the Required Third Party
Consents for transfer of all or a portion of the mortgage servicing rights, the seller is obligated to transfer legal ownership of the respective mortgage servicing rights to us without any additional payment. We do not believe that our business
strategy or economic performance has been or will be materially affected by whether we directly own mortgage servicing rights or the related Rights to MSRs, and all of our acquisitions of mortgage servicing assets to date have been structured as
acquisitions of Rights to MSRs.
Our primary source of income prior to receiving the Required Third Party Consents is interest
income on the Notes Receivable—Rights to MSRs (as defined below). This interest income represents the amount of the servicing and other related fees collected by Ocwen on the underlying Acquired Mortgage Servicing Rights less any amounts due to
Ocwen for its services under the Purchase Agreement and the amount of amortization of the Notes Receivable—Rights to MSRs. Upon receipt of each Required Third Party Consent related to an Acquired Mortgage Servicing Right, we will account for
the Notes Receivable—Rights to MSRs balance related to such Acquired Mortgage Servicing Right as a mortgage servicing right and will begin recording servicing fee revenue related to the mortgage servicing right rather than interest income on
the Notes Receivable-Rights to MSRs.
We have not and do not intend to develop our own mortgage servicing platform but instead
will rely on high quality third-party residential mortgage loan servicers. Ocwen is a leader in the residential subprime and Alt-A mortgage servicing industry based on its historical servicing performance through a variety of real estate and
economic cycles. With respect to any mortgage servicing rights that we have acquired from Ocwen, prior to the transfer of legal ownership of such mortgage servicing rights to us, Ocwen remains obligated to service the underlying mortgage loans and
remits to us the servicing fees (Ocwen retains ancillary income such as late charges, modification fees, float income, etc.) it collects in each month related to the Rights to MSRs. Following the transfer of legal ownership of any mortgage servicing
rights to us, Ocwen will service the underlying mortgage loans on our behalf as subservicer, and we will receive the servicing fees (excluding any ancillary
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income). As compensation for its servicing and subservicing activities, Ocwen receives from us a monthly base fee equal to 12% of such servicing fees collected each month. Ocwen also earns a
monthly performance-based incentive fee that fluctuates based on collections and servicing advance reduction criteria with respect to the underlying mortgage loans. We believe this arrangement aligns the interests of both companies. The method used
to calculate the fees that we pay to Ocwen under the Purchase Agreement with respect to the Rights to MSRs is the same as the method used to calculate the fees that we will pay to Ocwen under a subservicing agreement with respect to any mortgage
servicing rights (“Subservicing Agreement”) that we subsequently acquire. As a result, the compensation to be paid to Ocwen will not vary based on whether Ocwen or we hold legal title to the underlying mortgage servicing rights.
As of the date of this filing, all of the Rights to MSRs that we have acquired (“Acquired Mortgage Servicing
Rights”) are serviced by Ocwen. The assets we have purchased from Ocwen to date under the “Purchase Agreement” and related sale supplements have pertained solely to subprime and Alt-A loans and reflect the fact that the majority of
the assets Ocwen owns pertain to servicing subprime and Alt-A loans. Additionally, the prepayment rate on subprime and Alt-A loans has demonstrated little correlation to interest rates in recent years which is a characteristic that we find
attractive and which fits within our business strategy. We intend to continue to acquire assets pertaining to subprime and Alt-A mortgage loans that were originated prior to 2008. Given the low volume of originations of subprime and Alt-A loans
since 2007, at some point in the future we may be unable to acquire sufficient similar assets which would likely cause us to return cash to shareholders in the form of increased dividends, a special dividend or share repurchases unless we are able
to acquire sufficient other assets that meet our investing criteria. The effect of returning cash to our shareholders may be to reduce or eliminate our dividend which could cause us to reevaluate our long-term business strategy.
We anticipate future growth through subsequent acquisitions of mortgage servicing rights and the related servicing advances
(‘Mortgage Servicing Assets”). As part of our strategy to acquire additional Mortgage Servicing Assets, we intend to purchase substantially all of the remaining mortgage servicing rights pertaining to subprime and Alt-A mortgage loans
currently owned by Ocwen. As of December 31, 2012, Ocwen has rights to approximately $78.8 billion of unpaid principal balance of subprime and Alt-A mortgage loans, including those acquired in connection with Ocwen’s acquisition of
Homeward Residential Servicing (“Homeward”) on December 27, 2012. We believe that Ocwen perceives that it has benefited from the transfer of Rights to MSRs to us in connection with our previous acquisition transactions. Although we
cannot guarantee that future acquisition transactions will occur, we also believe that Ocwen will benefit from such transactions and therefore will continue to sell Mortgage Servicing Assets to us in this manner which will allow us to maintain or
grow the unpaid principal balance of our servicing portfolio.
We intend to continue to finance the acquisitions of additional
similar Mortgage Servicing Assets from Ocwen in the near term in two ways:
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In order to remain fully invested and to offset the impact of prepayments in our serving portfolio, we expect to continue to utilize cash flow from
operations in excess of our dividend to purchase mortgage servicing assets that are similar to our initial portfolio from Ocwen under substantially similar terms. We refer to such transactions as “flow transactions.” We expect flow
transactions to take place at regular intervals. Certain terms of such flow transactions, including the servicing incentive fee and advance ratio targets, will vary over time through these transactions.
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In order to increase the scale of our business we will look for opportunities to issue additional equity in the form of ordinary shares to allow us to
execute larger purchases of mortgage servicing assets substantially similar to Mortgage Servicing Assets previously purchased from Ocwen under substantially similar terms. These follow-on purchases will be subject to equity market conditions and
will likely require that additional advance financing capacity be arranged in advance or concurrent with each transaction in order to maintain leverage similar to our current level.
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As of the date of this filing, we have made purchases of Rights to MSRs from Ocwen related
to approximately $83 billion of unpaid principal balance of mortgage loans. On March 5, 2012, we used the proceeds from the IPO and the concurrent private placement with our founder to acquire from Ocwen Rights to MSRs with approximately $15.2
billion in unpaid principal balance. On May 1, 2012, we used $25.6 million in cash generated from our operations and borrowed $77.9 million under the servicing advance facility to acquire from Ocwen Rights to MSRs with approximately $2.9
billion in unpaid principal balance. On August 1, 2012, we used $20.1 million in cash generated from our operations and borrowed $56.1 million under the servicing advance facility to acquire from Ocwen Rights to MSRs with approximately $2.1
billion in unpaid principal balance. On September 13, 2012, we used $197.8 million in proceeds from our offering of 16,387,500 newly issued ordinary shares at a price to the public of $15.25 per share (the “Follow On Offering”) and
borrowed $590.4 million in under the servicing advance facility to acquire from Ocwen Rights to MSRs with approximately $21.2 billion in unpaid principal balance. On September 28, 2012, we used $34.9 million of the remaining net proceeds from
the Follow On Offering and borrowed $207.5 million under the servicing advance facility to acquire from Ocwen Rights to MSRs with approximately $6.7 billion in unpaid principal balance. On December 26, 2012, we used $407.2 million in proceeds
from our offering of 25,300,000 newly issued ordinary shares at a price to the public of $19.00 per share and borrowed $1.462 billion under our servicing advance facility to acquire from Ocwen Rights to MSRs with approximately $34.6 billion in
unpaid principal balance.
We were incorporated as an exempted company in the Cayman Islands which currently does not levy
income taxes on individuals or companies. We expect to be treated as a Passive Foreign Investment Company (“PFIC”) under U.S. federal income tax laws with respect to our investing activities. Except for our subsidiaries that are engaged in
management activities including the management of servicing advance receivables and are taxed as corporations for U.S. federal income tax purposes, we do not expect to be treated as engaged in a trade or business in the United States and thus do not
expect to be subject to U.S. federal income taxation.
Our Business Model
Our business model is predicated on purchasing mortgage servicing rights, rights to fees and other income from servicing mortgage loans
and associated servicing advances and engaging one or more high-quality residential mortgage loan servicers to service the pools of mortgage loans underlying our mortgage servicing rights. Acquiring Rights to MSRs results in the Company recording
Notes Receivable—Rights to MSRs, Match funded advances and Match funded liabilities. We are entitled to collect the contractual servicing fees related to such Rights to MSRs which are typically 50 basis points annually of the unpaid principal
balance of the related mortgage loans. Servicing fees collected are reduced by the portion of fees paid to Ocwen, and the retained fees are further reduced by the amortization of the Notes Receivable—Rights to MSRs to arrive at revenue or
interest income from the Notes Receivable—Rights to MSRs. This source of revenue allows us to pay operating expenses and other expenses such as interest expense on the match funded liabilities, and the income that remains is expected to
compensate our investors for their investment. These balances are expected to grow in the future in periods where we are acquiring additional Mortgage Servicing Assets. In periods when we are not acquiring additional Mortgage Servicing Assets, these
balances would likely decrease as the underlying mortgage loans are repaid. We believe this unique strategy will result in attractive risk-adjusted returns for our shareholders that are not dependent on future asset appreciation. The key attributes
of our business model are as follows:
Stable Income Stream.
We expect that our interest income from the Notes
Receivable—Rights to MSRs will remain stable during the period before we receive the Required Third Party Consents related to the Acquired Mortgage Servicing Rights. Interest income from the Notes Receivable—Rights to MSRs is driven
primarily by the gross servicing margin percentage, or retained fee, we have negotiated with Ocwen and will be offset by periodic amortization of the Notes Receivable—Rights to MSRs which we do not believe will experience significant valuation
volatility. After we receive the Required Third Party Consents and become the legal owner of any of the Acquired Mortgage Servicing Rights, we expect the servicing fees we receive and the fee expenses we incur will result in a gross servicing margin
percentage which will range from 32.5 to 16.5 basis points in accordance with a pre-determined schedule set forth in the applicable subservicing supplement related to the
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Acquired Mortgage Servicing Rights. Our primary costs other than fee expenses include interest expense and the amortization component of our Notes Receivable—Rights to MSRs. We hedge our
liabilities against increases in interest rates and do not expect our mortgage servicing rights amortization will experience significant valuation volatility.
Stable Balance Sheet
. Servicing advances are our largest asset class and comprise 86.4% of our total assets as of December 31, 2012. Servicing advances are relatively low risk assets because
they represent a first priority lien against the proceeds from the underlying mortgage loans and are recoverable from loan and pool level proceeds over a relatively short period of time. Advances relating to the Acquired Mortgage Servicing Rights
were 3.9% of the unpaid principal balance of the mortgage loans serviced as of December 31, 2012 resulting in significant over collateralization and low credit risk. We expect the advance ratio on the mortgage loans to which we currently hold
the Rights to MSRs to continue to decline over time.
Notes Receivable—Rights to MSRs relating to subprime and Alt-A
mortgage loans are our second largest asset class and comprise 8.5% of our total assets as of December 31, 2012. Notes Receivable—Rights to MSRs are valued, in part, based on the expected life of the pool of mortgage loans underlying such
Mortgage Servicing Assets. Prepayment speeds relating to subprime and Alt-A mortgage loans which comprise all of our Acquired Mortgage Servicing Rights, are relatively insensitive to interest rate fluctuations as the borrowers often do not have the
ability to refinance their loans due to low credit scores or high loan to value ratios.
We recorded the Notes
Receivable—Rights to MSRs at acquisition cost and amortize them using the prospective interest method of accounting. Under the prospective interest method, the principal amount at the end of each reporting period is adjusted to the estimated
value of its future cash flows. We intend to hold the Mortgage Servicing Assets we acquire to maturity, and therefore we do not expect earnings volatility as a result of realized gains or losses that could result from secondary market asset sales.
Cash comprises approximately 2.1% of our total assets at December 31, 2012. At December 31, 2012, $302,679 of our
total maximum borrowing capacity remained unused. We maintain unused borrowing capacity for two reasons:
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as a protection should advances increase due to increased delinquencies; and
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to provide capacity for the acquisition of additional servicing rights.
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We believe that our cash balance and unused advance financing capacity are sufficient to meet foreseeable requirements.
The value of subprime and Alt-A mortgage servicing rights has historically demonstrated a low correlation with changes in interest rates;
although, prime mortgage servicing rights have historically demonstrated a negative correlation to changes in interest rates. We do not own and do not intend to own performing prime mortgage servicing rights. We do not believe that the risk of
increasing prepayments in a falling interest rate environment is as great as the opportunity for decreasing prepayments in a rising interest rate environment. This is because the availability of capital to refinance existing subprime and Alt-A
mortgage loans has been severely constrained. Loan-to-value ratios for existing properties have materially increased, and as a result, many borrowers lack sufficient equity to cost effectively refinance. In addition, certain loan modification
programs have reduced the applicable interest rate on mortgage loans to levels equal to or below the prevailing mortgage rates available to even the most creditworthy borrowers. The result has been that, despite a significant decrease in interest
rates during this time period, relatively few mortgage loans have been refinanced. We believe low prepayment speeds will persist for the foreseeable future absent a severe economic downturn that would render a large number of borrowers unable to pay
their mortgages or action by the Federal government to help borrowers on non-agency mortgages refinance.
While we expect our
interest income and gross servicing margin to vary based on the unpaid principal balance of the mortgage loans underlying the Acquired Mortgage Servicing Rights, we do not expect our interest income or gross servicing margin percentage to vary as a
result of changes in market interest rates due, in part, to
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our strategy of hedging the cost of our floating rate borrowings. Changes in prepayment speeds can, however, affect the unpaid principal balance of the mortgage loans underlying the Acquired
Mortgage Servicing Rights which will impact future servicing fees received. Servicing advances do not earn interest and are self-liquidating over a short period of time.
Our Economic Model
Our primary source of revenue is the servicing
fees we are entitled to receive with respect to the Acquired Mortgage Servicing Assets. Servicing fees are based on the unpaid principal balance of the mortgage loans serviced pursuant to each pooling and servicing agreement and are contractually
set in these agreements. For current loans, the servicing fee is typically received in the same month that the principal and interest payments are paid. Servicing fees for delinquent loans are generally received as the related loan is brought
current, modified, liquidated or charged off. We believe that the risk of a servicer not ultimately receiving the contractual servicing fees for delinquent loans is remote. We also earn other income representing fees for services that we provide to
Ocwen under the Ocwen Professional Services Agreement.
Our expenses consist of fee expenses, interest expense on servicing
advances, mortgage servicing rights amortization expense and administrative expenses. Our fee expenses are based on the amount of principal and interest collections on the mortgage loans underlying our Mortgage Servicing Assets. Amortization expense
relates to reductions in the unpaid principal balance or “UPB” due to portfolio run-off. Interest expense is based on the amount of borrowing necessary to fund servicing advances and the applicable interest rate on those borrowings. We
hedge the risk of increases in interest rates on our floating rate borrowings through fixed for floating interest rate swap agreements. Administrative expenses consist of salaries, wages, payroll taxes, benefits and general administrative costs
related to being a public company.
Since advances are non-interest bearing and the interest expense to finance advances is
one of our largest expenses, the performance based incentive fee in our Purchase Agreement with Ocwen provides for a reduction in the incentive fee payable in any month if the advance ratio exceeds a predetermined level for that month. If the
advance ratio exceeds the predetermined level in any month, the performance based incentive fee payable for such month, if any, is reduced by 4.25% or 6.5% per annum of the amount of any such excess servicing advances. If we do not receive an
amount equal to the retained fee in any given month, as expressed in terms of basis points of the average unpaid principal balance of the mortgage loans serviced, a shortfall in the retained fee is created. Ocwen does not earn a performance based
incentive fee for any month that there is such a shortfall, or in any subsequent month, until we have recovered the shortfall from amounts that would otherwise be available to pay future performance based incentive fees to Ocwen.
The Market Opportunity
We believe that the current dynamics of the subprime and Alt-A mortgage servicing market have created a unique opportunity where there is the potential for a significant supply of mortgage servicing
rights to be sold over the next several years. These dynamics include:
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higher borrower delinquencies and defaults experienced over the last few years and increased regulatory oversight has led to substantially higher costs
for mortgage servicers and negatively impacted their profitability;
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regulatory changes resulting from the implementation of Basel III which will impose increased regulatory capital costs on depository institutions for
owning mortgage servicing rights; and
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our belief that subprime and Alt-A mortgage servicing has become less attractive to many mortgage servicers due to increasingly negative publicity and
heightened government and regulatory scrutiny.
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We believe that our business model is currently optimized to
allow us to be highly competitive in the acquisition of Mortgage Servicing Assets for subprime and Alt-A mortgage loans from Ocwen due to our ability to access reliable and cost effective sources of advance financing, concentration of ownership of
similar assets
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and cost structure. With the close of the Homeward transaction in December 2012, Ocwen currently has servicing rights related to $78.8 billion of unpaid principal balance for subprime and Alt-A
mortgage loans and will acquire another $62.9 billion of similar assets in connection with its announced acquisition of mortgage servicing rights from ResCap. Should Ocwen’s cost of borrowing decline, we still believe that future
transactions between HLSS and Ocwen will be beneficial to both companies.
We remain open to purchasing assets from third
parties, such as banks, other financial institutions and independent mortgage servicers other than Ocwen, and our ability to capitalize on such opportunities could require us to develop operating capabilities to manage other servicers. We believe
that any such acquisition of mortgage servicing rights from a seller other than Ocwen would also require engaging a high quality servicer which may include the seller, to service the underlying mortgage loans. We may also seek to acquire other
assets with characteristics similar to the Acquired Mortgage Servicing Rights including stable net asset value, low credit risk and attractive yield.
Competitive Strengths
We believe we are well positioned to execute
our business strategy based on the following competitive strengths:
Experienced Management Team with Extensive Knowledge of
the Mortgage Servicing Industry
. We have an executive management team with extensive experience in the mortgage servicing industry. This experience includes evaluating and acquiring mortgage servicing rights, performing asset valuation analysis
and financing mortgage servicing businesses through a variety of economic cycles. Key members of our executive management team also have experience in managing a public company in the mortgage servicing industry.
Focus on subprime and Alt-A mortgage loans.
Since the Mortgage Servicing Assets that we have acquired pertain to subprime and
Alt-A loans, our asset mix is heavily weighted toward mortgage servicing advances which are the first amounts to be repaid from the collection of the underlying mortgage loans and, therefore, have relatively low valuation risk. The mortgage
servicing rights component of our assets has a stable valuation history under our ownership because prepayment speeds for subprime and Alt-A loans do not correlate to interest rates. We believe that our concentration in subprime and Alt-A related
assets could result in a lower cost of capital than for competitors that own a mix of assets that includes mortgage servicing rights for prime loans where prepayment speeds correlate to interest rates.
Asset Acquisition and Evaluation Expertise
. We believe that our asset acquisition evaluation process which includes using
proprietary historical data to project the performance of mortgage loans, and our executive management team’s experience and judgment in identifying, assessing, valuing and acquiring new Mortgage Servicing Assets enables us to accurately price
assets.
Relationship with Ocwen
. We intend to continue to capitalize on the servicing capabilities of Ocwen which we
view as superior relative to other servicers in terms of cost, management experience, market penetration, financial stability, technology infrastructure and platform scalability. Ocwen will continue to service the mortgage loans underlying the
Acquired Purchased Assets during the period of time prior to the transfer of legal ownership to us of the Acquired Mortgage Servicing Rights. Thereafter, we will engage Ocwen to service on our behalf the mortgage loans underlying our Mortgage
Servicing Assets and any additional Mortgage Servicing Assets that we may acquire from them in the future provided that the performance criteria specified in the Subservicing Agreement are met. We may also engage Ocwen to service mortgage loans
underlying any mortgage servicing assets that we acquire from other third parties in the future, or we may retain other servicers to service such mortgage servicing rights.
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Description of Purchase Agreement
We have entered into the Purchase Agreement with Ocwen pursuant to which we may agree to purchase mortgage servicing rights, associated
servicing advances and other related assets from Ocwen from time to time. The specific terms of any acquisition of mortgage servicing rights, associated servicing advances and related assets, are (and may be in the future) documented pursuant to
separate sale supplements to the Purchase Agreement.
While Ocwen retains ownership of any of the Acquired Mortgage Servicing
Rights, we will pay to it an amount equivalent to the monthly base fee and monthly performance based incentive fee that would have been payable to Ocwen under the Subservicing Agreement if the mortgage loans underlying such Acquired Mortgage
Servicing Rights were being serviced by Ocwen pursuant to the Subservicing Agreement and the related subservicing supplements for a six year period after the closing of each acquisition of mortgage servicing rights.
The Purchase Agreement includes various warranties, representations and indemnifications that are triggered should Ocwen fail to perform
its duties as servicer.
Description of Subservicing Agreement
We have entered into the Subservicing Agreement with Ocwen pursuant to which we may engage Ocwen to act as the subservicer of pools of
residential mortgage loans underlying the mortgage servicing rights that we acquire. The specific terms of the subservicing arrangement with respect to each pool of mortgage loans, including the mortgage loans underlying the Acquired Mortgage
Servicing Rights purchased by us pursuant to the Purchase Agreement, are (and may be in the future) documented pursuant to separate subservicing supplements to the Subservicing Agreement having a six year term.
We have entered into separate subservicing supplements to the Subservicing Agreement with Ocwen pursuant to which Ocwen has agreed to act
as subservicer of the mortgage loans underlying the Acquired Mortgage Servicing Rights on the terms described below effective upon the transfer of the Acquired Mortgage Servicing Rights to us.
We pay Ocwen a monthly base fee pursuant to the subservicing supplement relating to the Acquired Mortgage Servicing Rights transferred to
us pursuant to the Purchase Agreement equal to 12% of the servicing fees collected in any given month. The monthly base fee payable to Ocwen is expressed as a percentage of the servicing fees actually collected in any given month which varies from
month to month based on the level of collections of principal and interest for the mortgage loans serviced. In addition to the monthly base fee, the subservicing supplements relating to the Acquired Mortgage Servicing Rights allow Ocwen to retain
any ancillary income (such as investment income earned on any custodial accounts) payable to the servicer pursuant to the related pooling and servicing agreements.
Ocwen may also receive a performance based incentive fee to the extent the servicing fee revenue that the servicer collects for any given month exceeds the sum of the monthly base fee and the retained
fee.
The performance based incentive fee payable in any month is reduced if the advance ratio exceeds a predetermined level
for that month. If the advance ratio is exceeded in any month, any performance based incentive fee payable for such month will be reduced by 4.25% or 6.5% per annum of the amount of any such excess servicing advances.
Description of Servicing Advance Facility Agreements and the Advance Financing Facility
As part of our Initial Acquisition, we entered into Servicing Advance Facility Agreements among us, Barclays Bank PLC and Ocwen, the other
parties to the existing advance financing facility and the holders of the notes issued pursuant to that facility. Pursuant to the Servicing Advance Facility Agreements, we assumed the rights and obligations of Ocwen, as administrator, and as seller
and servicer, relating to the current advance financing facility, and released Ocwen from its respective obligations under such facility.
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Pursuant to a receivables sale agreement, Ocwen sells servicing advances arising under the
pooling and servicing agreements related to the Acquired Mortgage Servicing Rights to HLSS Servicer Advance Facility Transferor, LLC (“Transferor”). The Transferor is our wholly owned subsidiary which owns 100% of HLSS Servicer Advance
Receivables Trust (“Trust”) which is the entity that owns our Match funded advances and assumes related Match funded liabilities. We are required to purchase servicing advances subsequently made by Ocwen in accordance with the terms of the
pooling and servicing agreements related to the Acquired Mortgage Servicing Rights, for which legal ownership has not been transferred to us, and Ocwen’s advance and stop advance policies. These servicing advances are sold and/or contributed by
us to Transferor pursuant to an assumed receivables sale agreement. The Transferor, concurrently with its purchase under the receivables sale agreement, has sold and will continue to sell such servicing advances to the Trust. To finance the
acquisition of servicing advances, the Trust has issued limited recourse notes that are secured by the assets of the Trust, including, among other things, the servicing advances owned by the Trust and a general reserve account.
On September 13, 2012, in connection with the acquisition of additional Mortgage Servicing Assets, we amended and restated the
Servicing Advance Facility Agreements to add Wells Fargo Securities LLC in addition to Barclays Bank Plc and created a master trust that can issue multiple series of notes with varying maturity dates and credit ratings including 2a-7 money
market eligible notes and medium term notes. Additionally, the amended Servicing Advance Facility Agreements allow for deferred servicing fees to be included in the borrowing base for pooling and servicing agreements that meet certain conditions.
On October 17, 2012, we completed the issuance of $250.0 million of one-year and $450.0 million of three-year term notes
secured by servicing advance receivables at a weighted average interest spread over LIBOR of 1.55%. The proceeds were used to repay $600.0 million in Class A through D term notes and to reduce borrowings on our Class A through D variable
funding notes with a weighted average interest spread of 2.93%.
On December 26, 2012, in connection with the acquisition
of additional Mortgage Servicing Assets from the proceeds of our second follow-on equity offering, Wells Fargo Securities, LLC and Credit Suisse AG, New York Branch committed to financing $800.0 million each in the form of variable-funding notes
issued by HLSS Servicer Advance Receivables Trust. We secured this financing in connection with our second follow-on offering purchase.
As of December 31, 2012 the aggregate outstanding principal balance of all our debt was approximately $2.7 billion.
On January 22, 2013, we completed the issuance of $650.0 million of one-year, $350.0 million of three-year and $150.0 million of five-year term notes secured by servicing advance receivables at a
weighted average interest spread over LIBOR of 0.94%. The proceeds were used to reduce borrowings on our variable funding notes with a weighted average interest rate of one-month LIBOR plus 2.32%.
Description of Ocwen Professional Services Agreement
We have entered into the Ocwen Professional Services Agreement with Ocwen with respect to the provision by us of certain services to Ocwen and the provision by Ocwen of certain services to us, in each
case at prices intended to reflect market rates. Services provided by us pursuant to the Ocwen Professional Services Agreement include valuation and analysis of mortgage servicing rights, servicer advance financing management, treasury management,
legal services and other similar services. We may engage third party contractors at reasonable cost to provide any of the services.
Services provided by Ocwen pursuant to the Ocwen Professional Services Agreement include legal, licensing and regulatory compliance support services, risk management services and other similar services.
The Ocwen Professional Services Agreement has an initial term of six years. The agreement is subject to termination by either party upon the occurrence of certain events including failure to make timely payments, meet performance standards outlined
in the agreement or if either party becomes insolvent. The fees we charge Ocwen
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and the fees Ocwen charges us are based on the actual costs incurred by the party providing the service plus an additional markup of 15%. Ocwen may engage third party contractors at reasonable
cost to provide any of the services.
Description of Altisource Administrative Services Agreement
We have entered into the Altisource Administrative Services Agreement with respect to the provision by Altisource Portfolio Solutions,
S.A. “Altisource” of certain administrative services to us at prices intended to reflect market rates. Services provided to us pursuant to the Altisource Administrative Services Agreement include human resources administration
(benefit plan design, recruiting, hiring and training and compliance support), legal and regulatory compliance support services, general business consulting, corporate services (facilities management, security and travel services), finance and
accounting support services (financial analysis, financial reporting and tax services), risk management services, vendor management and other related services. The Altisource Administrative Services Agreement is effective for an initial term of six
years, subject to extension for an additional six years, and is subject to termination by either party upon the occurrence of certain events. We compensate Altisource based on the actual cost to Altisource of providing services plus an
additional markup of 15% including any taxes payable as a result of the performance of services. Altisource may engage third party contractors at reasonable cost to provide any of the services.
Competition
Our
success depends, in large part, on our ability to acquire Mortgage Servicing Assets on terms consistent with our business and economic model. In acquiring these assets, we expect to compete with independent mortgage loan servicers, mortgage REITs,
private equity firms, hedge funds and other large financial services companies. Many of our anticipated competitors are significantly larger than we are, have access to greater capital and other resources and may have other advantages over us. In
addition, some of our competitors may have higher risk tolerances or different risk assessments which could lead them to offer higher prices for assets that we might be interested in acquiring and cause us to lose bids for those assets. In addition,
other potential purchasers of mortgage servicing rights may be more attractive to sellers of mortgage servicing rights if the sellers believe that these potential purchasers could obtain any necessary third party approvals and consents more easily
than us. Thus, we may not be able to achieve our business goals or expectations due to the competitive risks that we face.
Regulation
State and Federal Consumer Protection Regulation
We will become subject to regulation by state agencies in ten states that require the owners of mortgage servicing rights to obtain a
license if and when the Acquired Mortgage Servicing Rights are transferred to us. We will become subject to audits and examinations conducted by these states. From time to time, we may receive requests from state and other agencies for records,
documents and information regarding our policies, procedures and practices.
Because we do not plan to service loans, we
intend to rely on the servicers we engage to comply with extensive regulation by federal, state and local governmental authorities including the Federal Trade Commission (“FTC”) and the SEC. Servicers are also subject to regulation by the
state agencies that license servicing and collection activities in a number of states. Servicers are subject to audits and examinations conducted by these states. Beginning in July 2011, non-bank servicers became subject to supervision, examination
and enforcement by the Consumer Financial Protection Bureau (“CFPB”), a new federal entity responsible for administering and enforcing the laws and regulations for consumer financial products and services, such as residential mortgage
loans. We expect that servicers will incur significant ongoing costs to comply with new and existing laws and governmental regulation of the residential mortgage servicing business.
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A failure to comply with applicable federal, state and local consumer protection laws can
lead to:
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civil and criminal liability;
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loss of our licenses and approvals to own mortgage servicing rights;
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damage to our reputation in the industry;
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inability to raise capital;
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administrative fines and penalties and litigation, including class action lawsuits; and
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governmental investigations and enforcement actions.
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Employees
We have fourteen employees, including four executive
officers.
Section 107 of the JOBS Act
We qualify as an “emerging growth company” as defined in the Jumpstart our Business Startups Act (the “JOBS Act”). Section 107 of the JOBS Act provides that an “emerging
growth company” can take advantage on an extended transaction period for complying with new or revised accounting standards. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply
with new or revised accounting standards on the relevant dates on which adoption of such standards is required for nonemerging growth companies. Our decision to opt out of the extended transition period for complying with new or revised accounting
standards is irrevocable.
Available Information
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are made available free of charge through our website at
www.hlss.com
as soon as such material is electronically filed with or furnished to the SEC. The public may also read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the
SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room.
The SEC maintains an internet
site that contains reports, proxy and information statements and other information regarding issuers, including HLSS that file electronically with the SEC at
www.sec.gov
. We have also posted on our website, and available in print upon
request, the charters for our Audit Committee, Compensation Committee and Governance Committee, our Governance Guidelines and our Code of Ethics and Code of Ethics for Senior Financial Officers. Within the time period required by the SEC and NASDAQ
Global Select Market, we will post on our website any amendment to or waiver of the Code of Ethics for Senior Financial Officers, as well as any amendment to the Code of Ethics or waiver thereto applicable to any executive officer or director. The
information provided on our website is not part of this report and is therefore not incorporated herein by reference.
ITEM 1A RISK FACTORS
An investment in our ordinary shares involves significant risks. We describe below
the principal risks and uncertainties that we believe affect us or could affect us in the future. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are not aware of or focused on
or that we currently deem immaterial may also negatively affect our business operations. You should carefully read and consider the risks and uncertainties described below, together with all of the other information included in this prospectus,
before you decide to invest in our ordinary shares. If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, our ability to pay dividends in
the future may be adversely affected, the value of our ordinary shares could significantly decline and you could lose all or part of your investment.
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Risks Related to Our Business and Industry
Because we are a newly formed company, the historical financial and operating data presented in this filing may not be representative of our future
results.
We are a new company and have limited historical operating results. In preparing our business and economic
model, we made a number of assumptions about future revenues, expenses, assets and liabilities relating to the Acquired Mortgage Servicing Rights. We based these assumptions, in part, on the historical financial and operating data relating to the
Acquired Mortgage Servicing Rights while they were owned by Ocwen which may not be indicative of the results we will be able to achieve in the future. Historical financial performance should not be considered a reliable indicator of future
performance.
We may not be able to obtain the Required Third Party Consents necessary to transfer legal ownership of any acquired
mortgage servicing rights to us.
Generally, most pooling and servicing agreements require the consent of various
parties, including the rating agencies, the trustees of the related securitization trusts, the sponsors of the securitization transactions, any master servicer or any bond insurers or other credit enhancers insuring the mortgage-backed securities
issued by the securitization trusts, prior to the transfer of legal ownership of the related mortgage servicing rights. In connection with our Initial Acquisition some but not all of the rating agencies indicated that they would issue a statement
that the transfer to us of legal ownership of the mortgage servicing rights purchased would not result in a downgrade to the rating of the related mortgage-backed securities. Additionally, we have not received all of the other Required Third Party
Consents in connection with mortgage servicing rights purchased by us. Until we receive the Required Third Party Consents and legal ownership of the mortgage servicing rights is transferred to us, we are subject to increased risks as a result of
Ocwen continuing to own the mortgage servicing rights, including the risks relating to the potential of Ocwen filing for bankruptcy or being terminated as servicer. There is no assurance that we will receive the Required Third Party Consents
required for the Company to become the named servicer in the future.
We may not be able to pay dividends on our ordinary shares.
We intend to declare and pay regular cash dividends on our ordinary shares. We intend to distribute at least 90% of
our net income over time to our shareholders on a monthly basis, although we are not required by law to do so.
Our Board of
Directors has the right to rescind any declared, but unpaid dividends at any time prior to the applicable dividend payment date.
While we intend to continue to pay monthly dividends at the current rate, we may not be able to do so in the future. Our dividend policy is subject to the discretion of our Board of Directors and will
depend, among other things, on cash available for distributions, general economic and business conditions, our strategic plans and prospects, our financial results and condition, contractual, legal and regulatory restrictions on the declaration and
payment of dividends by us and such other factors as our Board of Directors considers to be relevant.
We are highly dependent upon our
senior management team.
Our business model and the execution of our business strategy are highly dependent upon the
members of our senior management team. The loss of the services of any of our senior executives or key employees could delay or prevent us from executing our business strategy and could significantly and negatively affect our business.
Our senior management team will also devote a portion of its time to performing certain functions for Ocwen pursuant to the Ocwen
Professional Services Agreement. This will detract from the amount of time these executives have available to focus on our business.
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In the future, we may need to hire additional personnel to meet the demands of our business
and the number of available, qualified personnel in the mortgage servicing industry may be limited, and the lack of qualified personnel may delay our ability to execute our business model as planned.
Future economic slowdowns and/or deterioration of the housing market could increase delinquencies and defaults on the mortgage loans underlying the
mortgage servicing rights we acquire which would negatively affect our operating results.
The residential mortgage
market in the United States has experienced a variety of difficulties as economic conditions have been challenging and housing prices in many parts of the United States have declined. Any new or increased economic challenges or further declines in
home prices could result in increased delinquencies or defaults on the mortgage loans underlying the mortgage servicing rights we acquire.
During any period in which the borrower is not making payments on a mortgage loan, the servicer is generally required to advance its funds to meet contractual principal and interest remittance
requirements for the securitization trust that owns the mortgage loans, pay property taxes and insurance premiums, process foreclosures and maintain, repair and market foreclosed real estate properties.
If the economy slows and/or the housing market deteriorates further, our operating results would be adversely affected in the following
ways:
Interest Income and Servicing fee revenue
. Because we will recognize interest income and, if and when legal title
to any mortgage servicing right is transferred to us, servicing fee revenue as principal and interest payments are collected from the borrowers on the mortgage loans underlying our Mortgage Servicing Assets and as delinquent loans are resolved, an
increase in delinquencies would reduce the interest income and servicing fee revenue that we recognize.
Expenses.
If
the ratio of advances to the unpaid principal balance of our portfolio increases beyond a certain point, the increase in interest expense could exceed the reduction in our incentive fee paid to Ocwen, thus resulting in a reduction to our
profitability.
Valuation of Mortgage Servicing Assets
. Defaults on mortgage loans will decrease the value of the
associated notes receivable and Mortgage Servicing Assets. In addition, future default rates that exceed current estimates may result in higher amortization and a reduction in the value of our Mortgage Servicing Assets such that interest income or
servicing fee revenue may decline and amortization and interest expense may increase.
A significant increase in prepayment speeds would
reduce the unpaid principal balance of the mortgage loans underlying our Mortgage Servicing Assets and could adversely affect our operating results.
Prepayment speeds significantly affect our business. Prepayment speed is the measurement of how quickly borrowers pay down the unpaid principal balance of their loans or how quickly loans are otherwise
brought current, modified, liquidated or charged off. Prepayment speeds which are presently driven primarily by involuntary liquidations of subprime and Alt-A mortgage loans, have a significant impact on our servicing fees, our expenses and the
valuation of our Mortgage Servicing Assets as follows:
Servicing Fees
. If prepayment speeds increase, our servicing
fees will decline more rapidly than estimated because of the greater than expected decrease in the unpaid principal balance of the mortgage loans on which servicing fees are based.
Expenses
. An increase in prepayment speeds will lead to increased UPB runoff and thus increased amortization expense.
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Valuation of Mortgage Servicing Assets
. We base the price we pay for Mortgage
Servicing Assets on, among other things, our projection of the cash flows from the related pool of mortgage loans. Our expectation of prepayment speeds is a significant assumption underlying those cash flow projections. If prepayment speeds are
significantly greater than expected, the fair value of our Mortgage Servicing Assets could decline faster than expected which would have a negative impact on our operating results.
If we are unable to maintain the unpaid principal balance of the mortgage loans underlying our Mortgage Servicing Assets at an adequate
level through the acquisition of additional Mortgage Servicing Assets or acquire other assets with similar characteristics, we would likely reevaluate our long-term business strategy. One possible outcome would be to sell our remaining Mortgage
Servicing Assets and use the proceeds to pay a liquidating distribution to our shareholders. In any such event, our shareholders may not be able to recover the full value of their investment in our ordinary shares.
We may not be able to successfully compete for the acquisition of mortgage servicing rights which could adversely affect our business.
Our success depends, in large part, on our ability to acquire additional mortgage servicing rights on terms consistent
with our business and economic model. We expect to compete with independent mortgage loan servicers, REITs, private equity firms, hedge funds and other large financial services companies in acquiring additional mortgage servicing rights. Many of our
anticipated competitors are significantly larger than we are, have access to greater capital and other resources, are capable of financing servicing advances at a lower interest rate and may have other advantages over us. In addition, some of our
competitors may have higher risk tolerances or different risk assessments which could lead them to offer higher prices to Ocwen and other servicers than we would be willing to pay for these assets. If we are unable to compete for new assets and the
unpaid principal balance of or mortgage portfolio declines over time, this may cause our administrative expense to increase relative to our equity base.
Our assumptions in determining the purchase price for Mortgage Servicing Assets may be inaccurate or the basis for such assumptions may change which could adversely affect our results of
operations
.
To the extent that we purchase Mortgage Servicing Assets in the future, our success
will be highly dependent upon accurate pricing of such Mortgage Servicing Assets. In determining the purchase price for Mortgage Servicing Assets, we will make assumptions regarding the following:
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the rates of prepayment and repayment of the underlying mortgage loans;
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amount of future servicing advances;
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projected rates of delinquencies and defaults;
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future interest rates; and
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the costs associated with engaging subservicers to service the loans.
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If any of our assumptions regarding the Mortgage Servicing Assets that we acquire are inaccurate or the basis for such assumptions
change, the price we pay to acquire Mortgage Servicing Assets may prove to be too high. This could result in lower than expected profitability or a loss. We do not intend to obtain an opinion from an independent valuation firm of the fairness from a
financial point of view of the price of any future acquisitions.
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We do not intend to operate a mortgage servicing platform and will need to engage subservicers to
service the mortgage loans underlying any mortgage servicing rights we ultimately acquire. We may not be able to engage subservicers on terms that are favorable to us or at all.
We do not intend to operate a mortgage servicing platform. Our success will depend on our ability to enter into subservicing agreements
with high-quality mortgage servicers, like Ocwen, to service the mortgage loans underlying any mortgage servicing rights we ultimately acquire.
The terms of any subservicing agreement will be negotiated with the subservicer prior to the acquisition of the related mortgage servicing rights. It is unlikely that the term of any subservicing
agreement we enter into will match the life of any mortgage servicing rights that we ultimately acquire and therefore will need to be renewed. As a result, the terms of any new subservicing agreement or renewal will depend on the economic
environment and the costs of providing subservicing at that time. In addition, the terms of any future subservicing agreements, including those we enter into with Ocwen, may not be similar to the terms of the Subservicing Agreement.
We may be unable to obtain sufficient servicer advance financing necessary to meet the financing requirements of our business which could adversely
affect our liquidity position and results in a loss of servicing rights.
If delinquencies increase with respect to the
mortgage loans underlying our Mortgage Servicing Assets, we will require more funding than we currently expect which may not be available to us on favorable terms or at all. We currently meet our servicing advance financing requirements through the
servicing advance facility. Under normal market conditions, mortgage servicers typically have been able to renew or refinance liquidity facilities for mortgage servicing rights. However, during the economic crisis that began in 2007, there were
periods of time when some mortgage servicers were unable to renew these facilities. Borrowing conditions have improved since that time; however, market conditions at the time of any renewal or refinancing may not enable us to renew or refinance our
advance financing facilities or obtain additional facilities on favorable terms or at all. Ocwen will not have any obligation to us to fund any servicing advances that we are required to purchase or fund. Our inability to obtain adequate financing
to fund servicing advances would result in the termination of our mortgage servicing rights under the applicable pooling and servicing agreements or the loss of our Rights to MSRs pursuant to the Purchase Agreement, as applicable. If, for this
reason, our mortgage servicing rights or Rights to MSRs are terminated or lost, as applicable, we will bear the full economic impact of this termination or loss without the right to seek indemnification from Ocwen.
If our assumptions regarding subprime and Alt-A borrower refinancing options prove incorrect, or if the Federal government implements policies that
help non-agency borrowers refinance, the unpaid principal balance underlying our Mortgage Servicing Assets could decline faster than expected which would adversely affect our operating results
.
In preparing our business and economic model, we made a number of assumptions about future servicing fees, expenses, assets and
liabilities relating to our Mortgage Servicing Assets. These assumptions were based on our view that subprime and Alt-A borrowers would have limited refinancing options. Refinancings, also known as voluntary prepayments, are a small component of
total prepayments with involuntary prepayments and liquidations being the larger component. If subprime and Alt-A borrowers were able to refinance their mortgage loans at a faster rate than expected and had a financial incentive to do so, prepayment
speeds could increase, resulting in a faster amortization of the aggregate unpaid principal balance of the underlying mortgage loans, adversely affecting our operating results.
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Our hedging strategies may not be successful in mitigating the risks associated with changes in
interest rates.
Although we have executed a hedging strategy aimed at neutralizing our net exposure to interest rate
increases on our floating rate match funded liabilities and intend to continue to do so, no hedging strategy can completely protect us. Any significant change in interest rates could result in a significant margin call which would require us to
provide the counterparty with additional cash collateral. Any such margin call, or any decline in interest rates that results in the diminution in value of our hedges, could harm our liquidity, profitability, financial condition and business
prospects.
If Ocwen or we are named in legal proceedings involving mortgage servicers, our financial results could be adversely
affected.
Ocwen has informed us that it has received a Civil Investigative Demand (“CID”) from the Federal
Trade Commission (the “FTC”), requesting documents and information concerning various loan servicing activities. Recently Ocwen was informed that this CID had been referred to the Consumer Financial Protection Bureau, a new federal entity
responsible for administering and enforcing the laws and regulations for consumer financial products and services, such as residential mortgage loans. In addition, a coalition of state attorneys general is conducting an industry-wide investigation
into certain acts and practices concerning the mortgage foreclosure process, and Ocwen has received a request from the Multi-State Mortgage Committee of the Conference of State Bank Supervisors (“MMC”) to provide information and data
relating to its loan servicing portfolio, including loan count and volume data, loan modifications, fees assessed, delinquencies, short sales, loan-to-value data and rating agency reports. The MMC also requested that Ocwen indicate its position on
the servicing standards and consumer relief provisions contained in the National Mortgage Settlement recently executed by five large bank servicers. The FTC, the CFPB and such attorneys general have not taken any action against Ocwen, but it is
possible that Ocwen could receive notifications of alleged wrongdoing or be named as a defendant with respect to these matters or other litigation and regulatory matters.
We could be added as a defendant or investigated in any of these matters. If lawsuits are brought against Ocwen regarding its servicing practices relating to our mortgage servicing rights we also may be
added as a defendant in the future. Defending ourselves against lawsuits or adverse legal judgments against us may require that we pay significant legal fees, settlement costs, damages, penalties or other charges, or undertake remedial actions
pursuant to administrative orders or court-issued injunctions, any of which could adversely affect our financial results.
We are
dependent on Ocwen to act as a servicer with respect to the mortgage loans underlying the Acquired Mortgage Servicing Rights.
We are dependent on Ocwen to service the mortgage loans underlying the Acquired Mortgage Servicing Rights until such time, if at all, as legal ownership of the Acquired Mortgage Servicing Rights are
transferred to us. A failure of Ocwen to perform its servicing obligations under a related pooling and servicing agreement could result in the termination of Ocwen as servicer. If this occurs, we will only have recourse against Ocwen, and if Ocwen
is unable to make any applicable indemnification payments owed to us, we could lose the entire value of the related Rights to MSRs.
Failure by Ocwen to comply with applicable laws and regulations may adversely affect our business
.
The failure of Ocwen to comply with these laws and regulations in connection with servicing mortgage loans underlying our mortgage
servicing rights could possibly lead to civil and criminal liability, loss of licensing, damage to our reputation, fines and penalties, and litigation including class action lawsuits or administrative enforcement actions.
Failure by Ocwen to ensure that servicing advances comply with the terms of the pooling and servicing agreements may have a material adverse effect
on our operating results.
Servicing advances that are improperly made may not be eligible for financing under an
advance financing facility and may not be reimbursable by the related securitization trust or other owner of the mortgage loan which would reduce our liquidity and may cause us to suffer a loss.
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If we have to replace Ocwen, we may not be able to find a suitable replacement at similar terms, and
there could be degradation in servicing results which could adversely affect our financial results.
If for any reason
Ocwen is no longer able to act as subservicer for us with respect to mortgage servicing rights that we have acquired, or if we decide to require Ocwen to transfer their mortgage servicing rights to a successor servicer after the occurrence of an
event of default under the Purchase Agreement, we will need to find a replacement subservicer. Although there are other entities that may be willing to act as subservicer for us, they may not be of the same quality as Ocwen, or they may not be
willing to act on the same economic terms as Ocwen. Even if we retain an entity of equal quality and on the same economic terms, there is typically a temporary degradation in the quality of servicing when the servicing of a mortgage loan is
transitioned from one subservicer to another. As a result, if we have to replace Ocwen, our operating results could be adversely affected.
If Ocwen fails to adequately perform its loss mitigation obligations, we could be required to make additional servicing advances, and the time
period for collecting servicing advances may extend, adversely affecting our liquidity and earnings.
Ocwen and any
future subservicers that we engage will be required to service the mortgage loans in accordance with specified standards and employ loss mitigation techniques to reduce the probability that borrowers will default on their loans and to minimize
losses when defaults occur. These loss mitigation techniques may include the modification of mortgage loan rates, principal balances and maturities. If Ocwen or future subservicers fail to adequately perform their loss mitigation obligations under
these agreements, we could be required to purchase or fund servicing advances in excess of those that we might otherwise have had to purchase or fund, and the time period for collecting servicing advances may extend. Any increase in servicing
advances or material increase in the time to resolution of a defaulted loan could result in increased financing costs to us and adversely affect our liquidity and net income.
A downgrade in Ocwen’s servicer rating could have an adverse effect on our financial condition or results of operations.
Moody’s, Standard & Poor’s and Fitch rate many mortgage servicers, including Ocwen. These ratings are subject to change
in the future without notice. Servicer ratings are important to our ability to finance servicing advances. In addition, some pooling and servicing agreements may also require that the servicer or subservicer maintain specified servicer ratings. The
failure to maintain the specified rating may cause the termination of the servicer under such pooling and servicing agreements. Any such downgrade could have an adverse effect on our business, financing activities, financial condition or results of
operations.
If we are required to register under the Investment Company Act, our ability to conduct our business could be materially
adversely affected, and you could suffer losses.
We are not registered, and do not intend to register, as an
investment company under the Investment Company Act of 1940 (the “Investment Company Act”). We intend to conduct our operations directly and through wholly or majority-owned operating subsidiaries so that we and each of our
subsidiaries is not an investment company under the Investment Company Act. We believe that neither we nor our operating subsidiaries will be considered an investment company under Section 3(a)(1)(A) of the Investment Company Act because
neither we nor our operating subsidiaries will engage primarily, or hold ourselves or our operating subsidiaries out as being engaged primarily, in the business of investing, reinvesting or trading in securities. Rather, we, through our
operating subsidiaries, are primarily engaged in the non-investment company business of these subsidiaries, namely the business of purchasing or otherwise acquiring mortgage servicing rights, Rights to MSRs and associated servicing advances and
engaging and managing one or more high-quality residential mortgage loan servicers to service the pools of mortgage loans underlying the mortgage servicing rights. We have structured the special purpose entities that we establish in connection
with match funded advance financing facilities to rely on the investment company exemption provided to certain structured financing vehicles by Rule 3a-7 promulgated pursuant to the Investment Company Act.
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If, however, we or any of our subsidiaries are deemed to be an investment company under the
Investment Company Act, we may be required to institute burdensome compliance requirements, and our activities may be restricted, among other things which would materially adversely affect our business, financial condition and results of operations
and our ability to pay dividends. For example, because affiliate transactions are generally prohibited under the Investment Company Act, we would not be able to enter into transactions with any of our affiliates if we are required to register
as an investment company, and we may be required to terminate the Purchase Agreement, the Subservicing Agreement, the Ocwen Professional Servicing Agreement, the Altisource Administrative Services Agreement and any other agreements with affiliates
and forgo opportunities to purchase additional Rights to MSRs from Ocwen as currently contemplated. If we or one of our subsidiaries were deemed to be an investment company, we may seek to modify our agreements with Ocwen to achieve relief but
Ocwen may not agree, and this strategy may not be successful. We may also seek exemptive relief from the SEC which could impose significant costs on our business. If we or any of our subsidiaries were required to register as an investment
company but failed to do so, the unregistered entity would be prohibited from engaging in business and criminal and civil actions could be brought against such unregistered entity. In addition, the contracts of such unregistered entity would be
unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of such unregistered entity and liquidate the unregistered entity which could lead to losses to our shareholders.
We could have conflicts of interest with Ocwen, and our officers and directors also could have conflicts of interest due to their relationships
with us and Ocwen that could be resolved in a manner adverse to us.
We have entered into various agreements with
subsidiaries of Ocwen, and we intend to enter into further agreements with Ocwen or its subsidiaries in the future. Certain of our executive officers and directors may have conflicts of interest with respect to such agreements and other matters due
to their past and/or current relationships with Ocwen.
William C. Erbey, the Chairman of our Board of Directors, is the
Chairman of the Board of Directors of Ocwen and is the beneficial owner of approximately 13.1% of Ocwen’s common stock as of December 31, 2012. Richard Delgado, who is our Treasurer, owns 12,291 shares of Ocwen common stock. In addition,
in connection with their resignation from their positions at Ocwen at the time of the closing of our IPO, the Ocwen Board of Directors extended the post-termination exercise period of options to purchase 625,000 shares of Ocwen common stock held by
Mr. Van Vlack, of which 460,000 shares are unexercised, 30,098 shares of Ocwen common stock held by Mr. Delgado and 20,000 shares of Ocwen common stock held by Michael J. McElroy, who is our General Counsel, so that the options may be
exercised during the original term of the option, subject to any existing vesting schedules of those options. The options would otherwise have expired following the date of such officers’ resignation from Ocwen. This ownership of Ocwen common
stock and options to purchase Ocwen common stock could create or appear to create potential conflicts of interest when our Board of Directors or our executive officers are faced with decisions that involve Ocwen.
We will seek to manage these potential conflicts through oversight by the independent members of our Board of Directors. Such measures
may not be effective, and we may not be able to resolve all conflicts with Ocwen. In addition, the resolution of any such conflicts may be less favorable to us than if we were dealing with an unaffiliated third party.
We could have conflicts with Altisource that could be resolved in a manner adverse to us.
We have entered into an administrative services agreement with Altisource and lease office space in the United States from Altisource.
Certain of our executive officers and directors may be subject to conflicts of interest with respect to such agreements and other matters due to their past and/or current relationships with Altisource.
William C. Erbey, the Chairman of our Board of Directors, is the Chairman of the Board of Directors of Altisource and is the beneficial
owner of approximately 23% of Altisource’s common stock as of December 31, 2012.
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We may not be able to obtain the Required Third Party Consents necessary to transfer legal ownership
of any acquired mortgage servicing rights to us.
Until we receive the Required Third Party Consents and legal
ownership of the mortgage servicing rights is transferred to us, we are subject to increased risks as a result of Ocwen continuing to own the mortgage servicing rights, including the risks relating to the potential of Ocwen filing for bankruptcy or
being terminated as servicer. See below under “—A bankruptcy of Ocwen could adversely affect our business.” Although we are pursuing, and will continue to pursue, the Required Third Party Consents, we may not be able to obtain all the
Required Third Party Consents in a timely manner or at all.
A bankruptcy of Ocwen could adversely affect our business.
If Ocwen becomes subject to a bankruptcy proceeding, our business could be materially adversely affected, and you
could suffer losses.
The validity or priority of our security interest in the Acquired Mortgage Servicing Rights could be
challenged in a bankruptcy proceeding of Ocwen, and the Purchase Agreement could be rejected in such proceeding
. Ocwen’s obligations under the Purchase Agreement with respect to the Rights to MSRs is secured by a security interest in
the related Acquired Mortgage Servicing Rights and the proceeds of the related Acquired Mortgage Servicing Rights. We have undertaken all requirements under applicable law to properly create and perfect such a security interest with respect to the
Rights to MSRs that we have purchased to date, including pledging the collateral in the Purchase Agreement and filing financing statements in appropriate jurisdictions and will undertake to properly create and perfect security interests in any
additional Rights to MSRs that we may purchase from Ocwen in the future. Nonetheless, our security interest may be ruled unenforceable or ineffective by a bankruptcy court. If Ocwen were to file, or to become the subject of, a bankruptcy proceeding
under the United States Bankruptcy Code or similar state insolvency laws, during the period of time prior to the transfer of the Acquired Mortgage Servicing Rights to us, Ocwen (as debtor-in-possession in the bankruptcy proceeding) or the bankruptcy
trustee could reject the Purchase Agreement and attempt to stop payments to us of the servicing or other related fees with respect to the Rights to MSRs and terminate our right to acquire those Acquired Mortgage Servicing Rights that we have not
already acquired. In the event the security interest is declared unenforceable or ineffective, we would be subject to the risk that our claim for any damages from the rejection of the Purchase Agreement or the failure to pay us the servicing or
other related fees with respect to the Rights to MSRs would be treated as a general unsecured claim for purposes of distributions from Ocwen’s bankruptcy estate. In addition, even if the security interest is found to be valid and enforceable,
if a bankruptcy court determines that the value of the collateral exceeds the underlying obligation to us, then Ocwen (as debtor-in-possession in the bankruptcy proceeding) or the bankruptcy trustee would have the power (with the approval of the
bankruptcy court) to modify the terms of the payment obligations to us, to substitute collateral securing the security interest or to reduce the collateral securing the security interest to a lesser amount deemed “adequate” to secure
payment of our claim.
Payments made by Ocwen to us could be avoided by a court under federal or state preference laws
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If Ocwen were to file, or to become the subject of, a bankruptcy proceeding under the United States Bankruptcy Code or similar state insolvency laws, and our security interest is declared unenforceable or ineffective, payments previously made by
Ocwen to us pursuant to the Purchase Agreement may be recoverable on behalf of the bankruptcy estate as preferential transfers. A payment could constitute a preferential transfer if a court were to find that the payment was a transfer of an interest
of property of Ocwen that:
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was made to or for the benefit of a creditor;
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was for or on account of an antecedent debt owed by Ocwen before that transfer was made;
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was made while Ocwen was insolvent (a company is presumed to have been insolvent on and during the 90 days preceding the date the company’s
bankruptcy petition was filed);
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•
|
|
was made on or within 90 days (or if we are determined to be a statutory insider, on or within one year) before Ocwen’s bankruptcy filing; and
|
|
|
•
|
|
permitted us to receive more than we would have received in a Chapter 7 liquidation case under applicable bankruptcy laws.
|
If the court were to determine that any payments were avoidable as preferential transfers, we would be
required to return such payments to Ocwen’s bankruptcy estate.
A sale of Mortgage Servicing Assets or other assets
could be re-characterized as a pledge of such assets in a bankruptcy proceeding.
If Ocwen’s transfer to us of Mortgage Servicing Assets or any other asset transferred pursuant to the Purchase Agreement were considered to be a sale of such
assets, then such assets would not be part of Ocwen’s bankruptcy estate. Ocwen (as debtor-in-possession in the bankruptcy proceeding) or the bankruptcy trustee might assert in a bankruptcy proceeding, however, that mortgage servicing
rights or any other asset transferred to us pursuant to the Purchase Agreement were not sold to us but were merely pledged to us as security for Ocwen’s obligation to repay amounts paid by us to Ocwen pursuant to the Purchase
Agreement. If such assertion were successful, all or part of the Mortgage Servicing Assets or any other asset transferred to us pursuant to the Purchase Agreement would constitute property of the bankruptcy estate of Ocwen, and our rights
against Ocwen would be those of a secured creditor, and not those of an owner, of such assets. Although we will take steps to properly create and perfect a security interest in the assets we have purchased or may purchase in the future pursuant to
the Purchase Agreement in case such purchase is re-characterized as a secured financing, the validity or priority of the security interest could be challenged.
Payments made to us by Ocwen, or obligations incurred by it, could be avoided by a court under federal or state fraudulent conveyance laws.
Ocwen (as debtor-in-possession in the bankruptcy
proceeding) or the bankruptcy trustee could also attempt to claim that a sale of Rights to MSRs or sale of mortgage servicing rights or other assets by Ocwen to us was a fraudulent conveyance. Under the United States Bankruptcy Code and similar
state insolvency laws, payments made, or obligations incurred, could be voided if Ocwen, at the time it made such payment or incurred such obligation: (a) received less than reasonably equivalent value or fair consideration for such transfer or
incurrence; and (b) either (i) was insolvent at the time of, or was rendered insolvent by reason of, such transfer or incurrence; (ii) was engaged in, or was about to engage in, a business or transaction for which the assets remaining
with Ocwen were an unreasonably small capital; or (iii) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature. If any transfer or incurrence is determined to be a fraudulent conveyance,
Ocwen (as debtor-in-possession in the bankruptcy proceeding) or the bankruptcy trustee, would be entitled to recover such transfer or to avoid the obligation previously incurred.
The Subservicing Agreement could be rejected in a bankruptcy proceeding.
If Ocwen were to file, or to become the subject of, a
bankruptcy proceeding under the United States Bankruptcy Code or similar state insolvency laws, Ocwen (as debtor-in-possession in the bankruptcy proceeding) or the bankruptcy trustee could reject the Subservicing Agreement and terminate Ocwen’s
obligation to service the mortgage loans underlying one or more of the mortgage servicing rights that we have acquired and that Ocwen has agreed to service for us pursuant to the Subservicing Agreement. As we will not have and in the future do
not expect to have the employees, servicing platforms or technical resources necessary to service mortgage loans, if the Subservicing Agreement is rejected, we will need to either engage an alternate subservicer which may not be readily available on
acceptable terms or at all, or negotiate a new servicing arrangement with Ocwen which would presumably be on less favorable terms to us. Any claim we have for damages arising from the rejection of the Subservicing Agreement, would be treated as
a general unsecured claim for purposes of distributions from Ocwen’s bankruptcy estate.
Any of the foregoing events
might have a material adverse effect on our financial condition or operating results.
21
Ocwen or we may be terminated as servicer under pooling and servicing agreements. Servicer termination
events or events of default have been triggered in many pooling and servicing agreements underlying the Acquired Mortgage Servicing Rights as of December 31, 2012, and the parties to the related securitization transactions could enforce their
rights against Ocwen or us at any time as a result.
If a servicer termination event or event of default has occurred
under a pooling and servicing agreement, the servicer may be terminated without any right to compensation for its loss from the trustee for the securitization trust, other than the right to be reimbursed for any outstanding servicing advances as the
related loans are brought current, modified, liquidated or charged off. So long as we are in compliance with our obligations under the Subservicing Agreement and the Purchase Agreement, if Ocwen is terminated as servicer, or if we are terminated as
servicer when Ocwen is acting as subservicer, we will have the right to receive an indemnification payment from Ocwen as servicer or subservicer, even if such termination related to servicer termination events or events of default existing at the
time of an Ocwen Transaction, including with respect to those servicer termination events or events of default that have been triggered in pooling and servicing agreements underlying the Acquired Mortgage Servicing Rights as of December 31,
2012. If Ocwen or we are terminated as servicer with respect to a pooling and servicing agreement and Ocwen is unable to make any resulting indemnification payments to us, if any, it may have a material adverse effect on our operating results and
our ability to pay dividends and may make it more difficult for us to acquire additional mortgage servicing rights in the future.
The
expanding body of federal, state and local regulation may increase the cost for Ocwen to service our portfolio which could adversely affect servicing results and our operating results.
The servicing of residential mortgage loans is subject to extensive federal, state and local laws, regulations and administrative
decisions. The volume of new or modified laws and regulations has increased in recent years and is likely to continue to increase. If implemented, these rules or other new laws and regulations affecting the mortgage servicing industry could increase
the cost of servicing loans. This may require us to pay increased fees to Ocwen or other servicers when we renew our agreements with them at the end of their terms or enter into new subservicing agreements. In addition, our ability to purchase
Mortgage Servicing Assets may be limited if we cannot engage mortgage servicers at rates that allow us to achieve the objectives of our business model. Any of these outcomes may adversely affect our results of operations or financial condition.
Regulatory scrutiny regarding foreclosure processes could lengthen foreclosure timelines which could increase advances which would
negatively impact our liquidity and profitability.
Various state banking regulators and attorneys general have
publicly announced that they have initiated inquiries into banks and servicers regarding compliance with legal procedures in connection with mortgage foreclosures, including the preparation, execution, notarization and submission of documents,
principally affidavits, filed in connection with foreclosures. In connection with the recent governmental scrutiny of foreclosure processes and practices in the industry, the attorneys general of certain states and certain members of the U.S.
Congress and state legislatures have called for a temporary moratorium on mortgage foreclosures although no state has implemented a general foreclosure moratorium on mortgage loan servicers to date. In addition, some individual municipalities have
begun to enact laws that may increase the time that it currently takes to complete a foreclosure or prevent foreclosures in such jurisdictions. Such moratoria or other action by federal, state or municipal government bodies, regulators or courts
could increase the length of time needed to complete the foreclosure process.
When a mortgage loan is in foreclosure, we are
generally required to continue to advance delinquent principal and interest to the securitization trust and to also make advances for delinquent taxes and insurance and foreclosure costs and the upkeep of vacant property in foreclosure to the extent
we determine that such amounts are recoverable. These servicing advances are generally recovered when the delinquency is resolved. Foreclosure moratoria or other actions that lengthen the foreclosure process increase the amount of servicing advances
we are required to make, lengthen the time it takes for us to be reimbursed for such advances and increase the costs
22
incurred during the foreclosure process. In addition, advance financing facilities generally contain provisions that limit the eligibility of servicing advances to be financed based on the length
of time that servicing advances are outstanding, and, as a result, an increase in foreclosure timelines could further increase the amount of servicing advances that we need to fund with our own capital. Such increases in foreclosure timelines could
increase our need for capital to fund servicing advances which would increase our interest expense, delay the collection of interest income or servicing fee revenue until the foreclosure has been resolved and, therefore, reduce the cash that we have
available to pay our operating expenses or to pay dividends.
Governmental bodies may also impose regulatory fines or
penalties as a result of our subservicers’ foreclosure processes or impose additional requirements or restrictions on such activities which could increase their operating expenses. For instance, in April 2011 the Office of the Comptroller of
the Currency (“OCC”), the Board of Governors of the Federal Reserve System (“FRB”) and the Federal Deposit Insurance Corporation (“FDIC”) entered into consent orders with the fourteen largest mortgage servicers to
address alleged deficient practices in residential mortgage loan servicing and foreclosure processing. Ocwen is not subject to OCC, FRB or FDIC regulation, and therefore it has not been subject to any consent decree initiated by these federal
regulatory agencies. Nonetheless, Congress or federal or state regulatory agencies could subject Ocwen and other independent servicers to similar consent decrees, enforcement actions or investigations. In general, these regulatory developments with
respect to foreclosure practices could result in increases in the amount of servicing advances and the length of time to recover servicing advances, fines or increases in operating expenses, and decreases in the advance rate and availability of
financing for servicing advances. This would lead to increased borrowings, reduced cash and higher interest expense which could negatively impact our liquidity and profitability, and although the Subservicing Agreement and the Purchase Agreement
relating to the Purchased Assets and the subservicing supplement relating to the Aggregate Purchased Assets contain adjustment mechanisms that would reduce the amount of incentive fees payable to Ocwen if servicing advances exceed pre-determined
amounts, those fee reductions may not be sufficient to cover the expenses resulting from longer foreclosure timelines.
In
February 2012, the Department of Housing and Urban Development and attorneys general representing 49 states and the District of Columbia announced a $25 billion settlement (the “Joint Federal-State Servicing Settlement”) with the five
largest mortgage servicers—Bank of America Corporation, JP Morgan Chase & Co., Wells Fargo & Company, Citigroup Inc. and Ally Financial Inc. (formerly GMAC)—regarding servicing and foreclosure issues. The federal-state
regulators may seek to expand the participation in the Joint Federal-State Servicing Settlement or similar settlements to other servicers and could seek to include Ocwen. Implementation of the servicing practices associated with the Joint
Federal-State Servicing Settlement could result in increased costs for servicing mortgage loans generally which could lead to higher subservicing fees being charged to us for subsequent mortgage servicing assets we acquire. In addition, the
implementation of a refinancing or principal write-down program like that contemplated by the Joint Federal-State Servicing Settlement could result in an increase in prepayment speeds and negatively affect our earnings and operating results.
Risks Related to Taxation
We expect to be treated as a PFIC for U.S. federal income tax purposes which could subject U.S. Holders to adverse U.S. federal income tax consequences.
We expect to be treated as a PFIC for U.S. federal income tax purposes. A PFIC generally is a foreign corporation if either at least
(i) 75% of its gross income is “passive income,” or (ii) 50% of the gross value of its assets is attributable to assets that produce, or are held for the production of, passive income. If you are a U.S. Holder and do not make a
Qualified Electing Fund “QEF” election with respect to us or a mark-to-market election with respect to our ordinary shares, you will be subject to adverse tax consequences, including deferred tax and interest charges with respect to
certain distributions on our ordinary shares, any gain realized on a disposition of our ordinary shares and certain other events. The effect of these adverse tax consequences could be materially adverse to you. If you are a U.S. Holder and make a
valid, timely QEF election for us, you will not be
23
subject to those adverse tax consequences, but could recognize taxable income in a taxable year with respect to our ordinary shares in excess of any distributions that we make to you in that
year, thus giving rise to so-called “phantom income” and to a potential out-of-pocket tax liability. We will provide information to all electing shareholders needed to comply with the QEF election. If you are a U.S. Holder and make a
valid, timely mark-to-market election with respect to our ordinary shares, you will recognize as ordinary income or loss in each year that we are a PFIC an amount equal to the difference between your basis in our ordinary shares and the fair market
value of the ordinary shares, thus also possibly giving rise to phantom income and a potential out-of-pocket tax liability. Ordinary loss generally is recognized only to the extent of net mark-to-market gains previously included in income. U.S.
Holders should be aware that although we currently do not have any subsidiaries that are PFICs, we may form or acquire a subsidiary that is a PFIC in the future. In such event, U.S. Holders will also need to make the QEF election with respect to
each such subsidiary in order to avoid the adverse tax consequences described above. We intend to provide all information necessary for U.S. Holders to make the QEF election with respect to any of our subsidiaries that may be classified as a PFIC.
U.S. Holders should also be aware that the mark-to-market election generally will not be available with respect to any our subsidiaries that is a PFIC, rendering such election less beneficial to U.S. Holders than the QEF election.
If the IRS determines that we are not a PFIC, and you previously paid taxes pursuant to a QEF election or a mark-to-market election, you may pay
more taxes than you legally owe.
While we expect to be treated as a PFIC for U.S. federal income tax purposes, our tax
counsel has indicated that there is a risk that we will not be treated as such. If the U.S. Internal Revenue Service (“IRS”) makes a determination that we are not a PFIC in the future, then you may have paid more taxes than you legally
owed due to a QEF or mark-to-market election. If you do not, or are not able to, file a refund claim before the expiration of the applicable statute of limitations, you will not be able to claim a refund for those taxes.
Distributions that we pay to individual U.S. Holders will not be eligible for taxation at reduced rates.
Distributions made to a U.S. Holder that is an individual will not be eligible for taxation at reduced tax rates generally applicable (for
tax years beginning before January 1, 2013) to dividends paid by certain U.S. corporations and “qualified foreign corporations.”
If our ownership of servicing rights were treated as engaged in a trade or business in the United States, we would become subject to U.S. federal
income taxation which could adversely affect our business and result in decreased cash available for distribution to our shareholders.
The IRS could assert that we are engaged in a U.S. trade or business pertaining to the ownership of mortgage servicing rights. If, contrary to our expectations, our ownership of mortgage servicing rights
is treated as being engaged in a trade or business in the United States, we would be subject to additional U.S. federal income taxation on a substantial portion of our net income which would adversely affect our business and result in decreased cash
available for distribution to our shareholders. More specifically, if we are treated as engaged in a trade or business in the United States, the portion of our net income, if any, that was “effectively connected” with such trade or
business would be subject to U.S. federal income taxation at a maximum rate of 35% as opposed to our expectation that only income of our subsidiary that is taxed as a corporation for U.S. federal income tax purposes will be subject to U.S. federal
income tax at such rate. In addition, we would be subject to the U.S. federal branch profits tax on our effectively connected earnings and profits at a rate of 30%.
We may become subject to taxation in the Cayman Islands.
The Cayman
Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. Dividend payments are not subject to withholdings tax in the
Cayman Islands. There are no other taxes likely to be material to our company levied by the government of the Cayman Islands except for stamp duties that may be applicable on
24
instruments executed in, or after execution brought within the jurisdiction of, the Cayman Islands. The tax treatment of our business in the Cayman Islands is subject to change. Thus, we may
become subject to Cayman Islands taxation in the future.
The market price and trading volume of our ordinary shares may be volatile
which could result in losses for our shareholders.
The market price of our ordinary shares may be highly volatile and
could be subject to wide fluctuations. In addition, the trading volume of our ordinary shares may fluctuate and cause significant price variations to occur. If the market price of our ordinary shares declines significantly, you may be unable to
resell your shares at or above your purchase price, if at all.
Future sales of ordinary shares by our principal shareholder could cause
our ordinary share price to decline.
In connection with our IPO, William C. Erbey entered into a written
“lock-up” agreement providing, among other things, that he will not sell the ordinary shares he purchased in the private placement for a period of 18 months following the date of the pricing of our IPO without the prior written
consent of Wells Fargo Securities, LLC. However, the lock-up agreement is subject to a number of specified exceptions. Pursuant to a Registration Rights Agreement that we have entered into with Mr. Erbey, we have granted to Mr. Erbey
demand registration rights which he may exercise one time, and unlimited piggyback registration rights which subject to the applicable lock-up restrictions, may require us to register his ordinary shares beginning 18 months from the date of the
pricing of our IPO. Upon expiration of the lock-up agreement, Mr. Erbey will be able to freely sell these ordinary shares subject to volume limitations pursuant to Rule 144 under the Securities Act for so long as Mr. Erbey is an affiliate
of ours. Mr. Erbey also purchased 128,103 shares in the public market subsequent to our IPO which are no longer subject to lock-up restrictions, but are subject to volume limitations pursuant to Rule 144 under the Securities Act for so
long as Mr. Erbey is an affiliate of ours.
We are required by Section 404 of the Sarbanes-Oxley Act to evaluate the
effectiveness of our internal controls by the end of fiscal 2013, and we may identify control deficiencies which may be expensive to remediate and could affect the ability of our auditor to issue an unqualified audit report which could affect our
share price.
As a U.S.-listed public company, we are required to comply with Section 404 of the Sarbanes-Oxley
Act by December 31, 2013. Section 404 requires that a public company evaluate its internal control over financial reporting to enable management to report on, and the company’s independent auditors to audit as of the end of the next
fiscal year, the effectiveness of those controls. During the course of our review, we may identify control deficiencies of varying degrees of severity, and we may incur significant costs to remediate those deficiencies or otherwise improve our
internal controls. As a public company, we are required to report control deficiencies that constitute a “material weakness” in our internal control over financial reporting. Public companies are also required to obtain an audit report
from their independent auditors regarding the effectiveness of their internal controls over financial reporting. If we fail to implement the requirements of Section 404 in a timely manner, we may be subject to sanctions or investigation by
regulatory authorities, including the SEC or FINRA. Furthermore, if we discover a material weakness or our auditor does not provide an unqualified audit report when required, our share price could decline; our reputation could be significantly
harmed and our ability to raise capital could be impaired. Management is not currently aware of any factors that could result in the determination that there is a material weakness in our internal controls.
We are a Cayman Islands exempted company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands
law than under U.S. law, you may have less protection of your shareholder rights than you would under U.S. law.
Our corporate affairs are governed by Cayman Islands law and our Articles of Association. The rights of shareholders to take action against our directors, the rights of minority shareholders to institute
actions and the
25
fiduciary responsibilities of our directors to us are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from
comparatively limited judicial precedent in the Cayman Islands as well as from English common law, the latter of which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary
responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in the United States. In particular, the Cayman Islands has a less developed body of securities law
than the United States. In addition, a Cayman Islands company may not have standing to initiate a shareholder derivative action before the federal courts of the United States. As a result, our shareholders may encounter more difficulty in
protecting their interests against actions taken by our management or Board of Directors than they would as shareholders of a public company incorporated in the United States.
You may have difficulty enforcing judgments obtained against us.
We
are a Cayman Islands exempted company, and it may be difficult for you to enforce judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors. In
addition, the courts of the Cayman Islands may not recognize or enforce judgments of U.S. courts against us or our directors and officers predicated upon the civil liability provisions of the securities laws of the United States or any
state. Furthermore, Cayman Islands courts may not be competent to hear original actions brought in the Cayman Islands against us or our directors and officers predicated upon the securities laws of the United States or any state.
ITEM 1B UNRESOLVED STAFF COMMENTS:
None
ITEM 2: PROPERTIES
Our principal executive offices are located in the Cayman Islands c/o Intertrust Corporate Services (Cayman) Limited (formerly Walkers
Corporate Services Limited), 190 Elgin Avenue, George Town, Grand Cayman KY1-9005, Cayman Islands. Altisource has agreed to provide us with office space at the following locations: 2002 Summit Boulevard, Sixth Floor, Atlanta, Georgia 30319, for
a fee of $2,759 per month; and 1661
Worthington Road, West Palm Beach, Florida 33409, for a fee of $3,953 per month.
ITEM 3: LEGAL PROCEEDINGS
There are no legal proceedings currently pending or, to our knowledge, contemplated against us, our incorporator or
any of our officers or directors in their capacities as such.
ITEM 4: MINE SAFETY DISCLOSURES:
Not applicable
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands unless otherwise stated, except share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Home Loan Servicing Solutions, Ltd. was incorporated on December 1, 2010 as a Cayman Islands exempted company formed for the purpose of acquiring mortgage servicing assets including mortgage
servicing advances and mortgage servicing rights. Home Loan Servicing Solutions, Ltd. conducts these operations through its wholly owned subsidiaries, HLSS Holdings, LLC and HLSS Management, LLC. Unless otherwise stated, all references to
“HLSS,” “us,” “our,” “we,” the “Company” and similar designations refer to Home Loan Servicing Solutions, Ltd. and its consolidated subsidiaries. HLSS is headquartered in the Cayman Islands and has
offices in Atlanta, Georgia and West Palm Beach, Florida.
Our business strategy focuses on acquiring mortgage servicing
assets. We do not originate or purchase mortgage loans, and as a result, we are not subject to the risk of loss related to the origination or ownership of mortgage loans. Because we have not received the Required Third Party Consents to become the
named servicer of the mortgage servicing rights, we instead acquired from Ocwen the Rights to MSRs. Accordingly, Ocwen will continue to service the mortgage loans and will receive compensation from us for its servicing activities. Upon receipt of
the Required Third Party Consents, Ocwen will transfer legal ownership of the mortgage servicing rights to us without any additional payment. We intend to continue to pursue obtaining the Required Third Party Consents for our initial portfolio and
for future acquisitions. Whether we acquire mortgage servicing rights or Rights to MSRs, we also acquire servicing advances and other associated assets. We do not believe that whether we directly own mortgage servicing rights or the related Rights
to MSRs materially affects our business strategy or economic performance.
During 2012, we completed an IPO and two follow-on
offerings and immediately used the proceeds to purchase assets from Ocwen. Refer to Note 2 for more information regarding our asset acquisitions during 2012.
Prior to our IPO, the Company was a development stage enterprise.
Basis of Presentation
We prepared the accompanying audited Consolidated Financial Statements in conformity with the instructions of the SEC
to Form 10-K for annual financial statements. In our opinion, the accompanying audited financial statements contain all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation. The preparation of financial
statements in conformity with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates. Material estimates that are particularly significant relate to our fair value measurements of Notes
receivable—Rights to MSRs.
Principles of Consolidation
Our financial statements include the accounts of Home Loan Servicing Solutions, Ltd. and its wholly owned subsidiaries, as well as a
variable interest entity (“VIE”) of which we are the primary beneficiary. We eliminate intercompany accounts and transactions in consolidation.
Variable Interest Entities
A VIE is an entity that does not have
sufficient equity to finance its operations without additional subordinated financial support, or an entity for which the risks and rewards of ownership are not directly linked to voting interests. Control is deemed to be present when the company
holds a majority voting interest or
F-8
otherwise has the power to govern the financial and operating policies of the VIE so as to obtain the benefits from its activities. If the company is deemed to have a variable interest in, and to
have the majority of rewards/risks of ownership associated with, an entity, then the company is deemed to be their primary beneficiary and is required to consolidate this entity. We evaluate each special purpose entity “SPE” for
classification as a VIE. When an SPE meets the definition of a VIE and we determine that HLSS is the primary beneficiary, we include the SPE in our Consolidated Financial Statements. Our Match funded advances are in an SPE along with related Match
funded liabilities. We determined that this SPE is a VIE of which we are the primary beneficiary. The accounts of this SPE are included in our Consolidated Financial Statements.
Match funded advances on loans serviced for others result from our transfers of residential loan servicing advances to an SPE in exchange
for cash. This SPE issues debt supported by collections on the transferred advances. We made these transfers under the terms of our advance facility agreements. These transfers do not qualify for sale accounting because we retain control over the
transferred assets. As a result, we account for these transfers as financings and classify the transferred advances on our Consolidated Balance Sheet as Match funded advances and the related liabilities as Match funded liabilities. We use
collections on the advances pledged to the SPE to repay principal and to pay interest and the expenses of the entity. Holders of the debt issued by this entity can look only to the assets of the entity itself for satisfaction of the debt and have no
recourse against HLSS. We did not provide financial or other support to the SPE during the current fiscal period, nor are we required to under the terms of our advance facility agreements.
The following table summarizes the assets and liabilities of the SPE formed in connection with our current match funded advance facility,
at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
Match funded advances
|
|
$
|
3,098,198
|
|
|
$
|
—
|
|
|
Related party receivables (1)
|
|
|
21,265
|
|
|
|
—
|
|
|
Other assets (2)
|
|
|
77,110
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,196,573
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Match funded liabilities
|
|
$
|
2,690,821
|
|
|
$
|
—
|
|
|
Other liabilities
|
|
|
2,203
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
2,693,024
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Relates to collections made by Ocwen on outstanding Match funded advances. This receivable represents the portion of Match funded advance collections that were
in-transit to pay down our Match funded liabilities as of December 31, 2012. See Note 13 for more information about our Related party receivables.
|
|
(2)
|
Other assets principally include debt service accounts and debt issuance costs. See Note 5 for more information about our Other assets.
|
Cash and cash equivalents
Cash includes both interest-bearing and non-interest-bearing demand deposits with financial institutions with original maturities of 90 days and less. There were no restrictions on the use of the cash and
cash equivalents balance as of December 31, 2012 and December 31, 2011.
Servicing Activities and Advances
We are obligated to purchase the servicing advances made by Ocwen during the period of time prior to the transfer of legal ownership of
the mortgage servicing rights to us, and when a mortgage servicing right is
F-9
transferred to us, we will become directly obligated to the related trustee to make any servicing advances required pursuant to the related pooling and servicing agreements. Servicing advances
serve as collateral under the terms of the Advance Facility.
Residential mortgage loan servicers manage the billing,
collections and loss mitigation activities associated with mortgage loans that are originated by banks or other lenders. Servicers send borrowers monthly account statements, collect monthly mortgage payments, remit such payments to the owner of the
mortgage loan, answer customer service inquiries and maintain custodial accounts to hold borrower payments of principal and interest and amounts received from borrowers to pay real estate taxes and insurance with respect to the properties securing
the mortgage loans and pay such real estate taxes and insurance premiums from the custodial accounts. A servicer will also remit collections on the mortgage loans from the custodial accounts to the trustee of the applicable securitization trust to
make payments on the related mortgage-backed securities and prepare and deliver monthly and annual reports to the trustee. A servicer may also be required to advance its own funds to cover shortfalls in collections of principal and interest from
borrowers, to pay property and casualty insurance premiums and real estate taxes on a property and to cover the costs associated with protecting or foreclosing on a property. If borrowers become delinquent on loans, the servicer generally may
conduct loss mitigation activities to reduce loan delinquencies and losses by working with borrowers to collect payments and modify loans or enforce the lenders’ remedies, which may include initiating foreclosure procedures and selling the
properties.
Servicing Advances
Servicing advances generally fall into one of three categories:
|
|
•
|
|
“Principal and Interest Advances” are cash payments made by the servicer to the owner of the mortgage loan to cover scheduled payments of
principal and interest on a mortgage loan that have not been paid on a timely basis by the borrower.
|
|
|
•
|
|
“Taxes and Insurance Advances” are cash payments made by the servicer to third parties on behalf of the borrower for real estate taxes and
insurance premiums on the property that have not been paid on a timely basis by the borrower.
|
|
|
•
|
|
“Corporate Advances” are cash payments made by the servicer to third parties for the costs and expenses incurred in connection with the
foreclosure, preservation and sale of the mortgaged property, including attorneys’ and other professional fees.
|
Servicing advances are usually reimbursed from amounts received with respect to the related mortgage loan, including payments from the borrower or amounts received from the liquidation of the property
securing the loan which is referred to as “loan level recovery.” Servicers generally have the right to cease making servicing advances on a loan if they determine that advances are not recoverable at the loan level. With respect to the
Rights to MSRs that we own, Ocwen makes this determination in accordance with its stop advance policy. In the event that loan level recovery is not sufficient to reimburse the servicer in full for servicing advances made with respect to a mortgage
loan, our pooling and servicing agreements provide that the servicer is entitled to be reimbursed from collections received with respect to other loans in the same securitized mortgage pool which is referred to as “pool level recovery.” We
do not receive interest on servicing advances.
We may record a charge to earnings to the extent that we believe advances are
uncollectible under the provisions of each servicing contract taking into consideration the projected collections under the applicable loan or pool relative to the advances outstanding and the projected future advances. However, the servicer is
generally only obligated to advance funds to the extent that it believes the advances are recoverable from expected proceeds from the loan. We assess collectability using proprietary cash flow projection models which incorporate a number of
different factors, depending on the characteristics of the mortgage loan or pool, including, for example, time to a foreclosure sale, estimated costs of foreclosure action, future property tax payments and the value of the underlying property net of
carrying costs, commissions and closing costs.
F-10
Notes Receivable—Rights to MSRs and Interest Income
We structured the purchase of the Rights to MSRs to convey to HLSS all the rights and rewards of ownership of mortgage servicing rights
absent the necessary approvals required to allow us to become the named servicer under the applicable pooling and servicing agreements; however, until we receive the Required Third Party Consents, Ocwen will remain the named servicer of the related
mortgage servicing rights.
Accounting Standards Codification (“ASC”) 860, Transfers and Servicing
, specifically prohibits accounting for a transfer of servicing rights as a sale if legal title to such servicing rights has not passed
to the purchaser. As a result, prior to receiving the Required Third Party Consents related to the mortgage servicing rights, we are required to account for the purchase of the Rights to MSRs as a financing. We initially recorded the Notes
receivable—Rights to MSRs at the purchase price of the Rights to MSRs. We amortize the Notes receivable—Rights to MSRs using the prospective interest method of accounting. At each reporting date, we calculate the present value of the net
cash flows related to the then outstanding UPB of the underlying mortgage servicing rights and adjust the carrying value of the Notes receivable—Rights to MSRs to this amount. The change in the carrying value of the Notes receivable—Rights
to MSRs reduces the net servicing fees received by us with respect to the mortgage servicing rights and the servicing fees paid to Ocwen with respect to the mortgage servicing rights. We record the resulting amount as Interest income. Interest
income is our primary source of income prior to receiving the Required Third Party Consents. See Note 9 for more information about how we calculate Interest income—notes receivable—Rights to MSRs.
Upon transfer of legal title, we believe we meet all the other sales treatment criteria under ASC 860 for the transfer of the mortgage
servicing rights. If we obtain the Required Third Party Consents and become the legal owner of any mortgage servicing right:
|
|
•
|
|
we will be contractually obligated to service the mortgage loans underlying such mortgage servicing right in accordance with the related pooling and
servicing agreement;
|
|
|
•
|
|
Ocwen will be contractually obligated to us pursuant to the subservicing agreement between HLSS and Ocwen to perform substantially all of the servicing
functions it currently performs on our behalf relating to such mortgage servicing right, other than maintaining custodial accounts, remitting amounts from the custodial accounts and funding servicing advances pursuant to the terms of the related
pooling and servicing agreement which are functions for which we will be responsible; and
|
|
|
•
|
|
we will account for the remaining balance of the Notes receivable—Rights to MSRs related to such mortgage servicing right as mortgage servicing
rights to the extent we have received the Required Third Party Consents to transfer legal ownership of such mortgage servicing rights to us and will begin recording Servicing fee revenue related to the mortgage servicing right rather than Interest
income—notes receivable—Rights to MSRs.
|
Servicing Fees, Base Fees, Ancillary Income and Performance Based
Incentive Fees
Since we are not the named servicer for the mortgage loans underlying the Rights to MSRs, Ocwen will
continue to be the named servicer for these loans and will receive the servicing fee associated with the mortgage servicing rights; however, Ocwen pays these servicing fees to us under the terms of the Purchase Agreement and related sale supplements
specific to each asset purchase. We pay Ocwen a monthly base fee equal to 12% of the servicing fees collected each month. The monthly base fee payable to Ocwen varies from month to month based on the level of collections of principal and interest
for the mortgage loans serviced. In addition to the monthly base fee, Ocwen retains any ancillary income (including investment income earned on any custodial accounts) payable to the servicer pursuant to the related pooling and servicing agreements.
Ocwen also receives a performance based incentive fee to the extent the Servicing fee revenue that it collects for any given month exceeds the sum of the monthly base fee and the retained fee.
The amount, as expressed in terms of basis points of the average UPB of the mortgage loans serviced, used to calculate the retained fee
is a contractually agreed upon amount. If we do not receive an amount equal to the retained fee in any given month, as expressed in terms of basis points of the average UPB of the mortgage loans
F-11
serviced, this creates a shortfall in our targeted gross servicing margin percentage. Should this occur, Ocwen will not earn a performance based incentive fee for any month that there is such a
shortfall, or in any subsequent month, until we have recovered such shortfall from amounts that would otherwise be available to pay future performance based incentive fees to Ocwen.
As determined by the terms of the Sale Supplement with respect to each mortgage servicing right, the performance based incentive fee
payable in any month will be reduced by an amount equal to 4.25% or 6.5% per annum of the amount of any such excess servicing advances if the advance ratio exceeds a predetermined level for that month.
Derivative Financial Instruments
We are party to interest rate swap agreements that we recognize on our Consolidated Balance Sheet at fair value within other liabilities. On the date we entered into the interest rate swap agreements, we
designated and documented them as hedges of the variable cash flows payable for floating rate interest expense on our borrowings (cash flow hedge). To qualify for hedge accounting, a derivative must be highly effective at reducing the risk
associated with the hedged exposure. In addition, the documentation must include the risk management objective and strategy. We assess and document quarterly the derivatives’ effectiveness and expected effectiveness in offsetting the changes in
the fair value or the cash flows of the hedged items. To assess effectiveness, we use statistical methods, such as regression analysis, as well as nonstatistical methods including dollar-offset analysis. For a cash flow hedge, to the extent that it
is effective, we record changes in the estimated fair value of the derivative in other comprehensive income. We subsequently reclassify these changes in estimated fair value to net income in the same period, or periods, that the hedged transaction
affects earnings and in the same financial statement category as the hedged item.
If a derivative instrument in a cash flow
hedge is terminated or the hedge designation is removed, we reclassify related amounts in accumulated other comprehensive income(loss) into earnings in the same period or periods during which the cash flows that were hedged affect earnings. In a
period where we determine that it is probable that a hedged forecasted transaction will not occur, such as variable-rate interest payments on debt that has been repaid in advance, any related amounts in accumulated other comprehensive income are
reclassified into earnings in that period.
See Notes 3 and 8 for additional information regarding our interest rate swap
agreements.
Match Funded Liabilities
The Advance Facility currently finances all of the outstanding advances associated with our Notes Receivable—Rights to MSRs. Match funded liabilities are a form of non-recourse debt that are
collateralized by the servicing advances. Our match funded liability balance is driven primarily by the level of servicing advances and the advance borrowing rate which is defined as the collateral value of servicing advances divided by total
servicing advances. The advance borrowing rates which are different for each type of six advance types were set at levels that enabled each class of notes issued pursuant to the advance financing facility to meet ratings criteria as determined by
Standard & Poor’s. In addition, we are able to pledge deferred servicing fees as collateral for our Match funded liabilities.
Under the terms of the related indenture, the SPE created in connection with the Advance Facility are subject to various qualitative and quantitative covenants. We believe that we are currently in
compliance with these covenants:
|
|
•
|
|
Restrictions on future investments and indebtedness;
|
|
|
•
|
|
Restrictions on sale or assignment of Match funded advances; and
|
|
|
•
|
|
Monitoring and reporting of various specified transactions or events, including specific reporting on defined events affecting collateral underlying
the indenture.
|
F-12
See Note 6 for additional information regarding our Match funded liabilities.
Interest Income—Other
Interest income—Other includes interest earned on cash accounts.
Related Party
Revenue
Related party revenue consists of amounts due to us from Ocwen under the terms of the Ocwen Professional
Services Agreement. Under the Ocwen Professional Services Agreement, we receive revenue for providing certain services to Ocwen which include valuation analysis of mortgage servicing rights, treasury management, legal and other similar services. We
recognize revenue under the Ocwen Professional Services Agreement based on actual costs incurred plus an additional markup of 15%. See Note 13 for more information regarding our related party transactions.
Operating Expenses
Our operating expenses consist largely of compensation and benefits for our employees and fees payable to members of our Board of
Directors. In addition, we incur general and administrative expenses for facilities, technology, communication and other expenses typical of public companies, including audit, legal and other professional fees.
Related Party Expenses
Altisource provides administrative services pursuant to the Altisource Administrative Services Agreement. Our operating expenses also include expenses related to the services we provide to Ocwen and the
services provided by Ocwen to us under the Ocwen Professional Services Agreement. See Note 13 for more information regarding our related party transactions.
Organization Costs
Until the closing of the Offerings we were a
development stage enterprise, and we classified our expenses as “Organization costs.” These organization costs include legal and accounting fees, registration fees and other costs incurred during the development stage to establish Home
Loan Servicing Solutions, Ltd. and its subsidiaries. We expensed these costs as incurred. Organization costs were approximately $123; $273; and $18 for the years ended December 31, 2012; 2011 and 2010, respectively, and are included in General
and administrative expenses.
Interest Expense
We primarily finance servicing advances with Match funded liabilities that accrue interest. Interest expense also includes amortization of deferred financing costs, non-use fees and any hedge related
costs.
Interest expense is sensitive to the Match funded advance balance which is driven primarily by the delinquency rates
and amount of UPB serviced. The speed at which delinquent loans are resolved affects our interest expense. For example, slower resolution of delinquencies will result in higher servicing advance balances and higher interest expense. In order to
mitigate the interest expense impact of higher servicing advance balances, we reduce the performance based servicing fee payable to Ocwen in any month in which the advance ratio exceeds a predetermined level for that month. Additionally, we executed
a hedging strategy designed to largely neutralize the impact of changes in interest rates over time. Our objective is to utilize hedges in an amount equal to our net exposure to interest rate increases on our Match funded liabilities which bear
interest at floating interest rates, after taking into account our expected interest earning account balances which partially offset the impact of rising interest rates. If interest rates decline, the value of our hedges would decline. Should our
hedging strategy prove ineffective or if we are not able to hedge all of our interest rate risk, rising interest rates would lead to higher interest expense.
F-13
Income Taxes
We were incorporated as an exempted company in the Cayman Islands which currently does not levy income taxes on individuals or companies. We expect to be treated as a Passive Foreign Investment Company
(“PFIC”) under U.S. federal income tax laws with respect to our investing activities. Except for our subsidiaries that are engaged in management activities, including the management of servicing advance receivables, and are taxed as a
corporations for U.S. federal income tax purposes, we do not expect to be treated as engaged in a trade or business in the United States and thus do not expect to be subject U.S. federal income taxation on the majority of our earnings.
We account for income taxes using the asset and liability method which requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. As of December 31, 2012, we had deferred tax assets with full valuation allowances and no deferred tax
liabilities.
Basic and Diluted Earnings per Share
We calculate basic earnings per share by dividing net income or loss by the weighted average ordinary shares outstanding for the period. For the years ended December 31, 2012 and 2011, there were no
ordinary share equivalents or other securities that could potentially dilute basic earnings per share.
Dividends
When our Board of Directors declares cash dividends, we record a payable and charge retained earnings for the total amount of the
dividends declared. If we lack sufficient retained earnings to pay the full amount of dividends declared we charge the excess amount to additional paid-in capital.
Recent Accounting Pronouncements
Accounting Standards Update
(“ASU”) 2011-04 (ASC 820, Fair Value Measurement): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
. The amendments in this ASU explain how to measure fair value. They do not
require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments clarify the FASB’s intent about the application of existing fair value
measurement and disclosure requirements and prescribe certain additional disclosures about fair value measurements, including: for fair value measurements within Level 3 of the fair value hierarchy, disclosing the valuation process used and the
sensitivity of fair value measurement to changes in unobservable inputs; and for items not carried at fair value but for which fair value must be disclosed, categorization by level of the fair value hierarchy. Our adoption of this standard effective
January 1, 2012 did not have a material impact on our Consolidated Financial Statements. See Note 3 for our fair value disclosures.
ASU 2011-05 (ASC 220, Comprehensive Income): Presentation of Comprehensive Income.
Previously U.S. GAAP allowed reporting entities three alternatives for presenting other comprehensive income and
its components in financial statements. One of those presentation options is to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This ASU eliminates that option. This ASU also
requires consecutive presentation of the statements of net income and comprehensive income and requires that an entity present reclassification adjustments from other comprehensive income to net income by component on the face of both the statement
in which net income is presented and the statement in which other comprehensive income is presented. Issued on December 23, 2011, ASU 2011-12 defers indefinitely the provision regarding the presentation of reclassification adjustments. Our
adoption of this standard effective January 1, 2012 did not have a material impact on our Consolidated Financial Statements.
F-14
2. ASSETS ACQUIRED AND LIABILITIES ASSUMED
On March 5, 2012, we used a portion of the net proceeds from our IPO to purchase the following:
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|
•
|
|
the contractual right to receive the servicing fees and investment earnings on the custodial accounts related to mortgage servicing rights with respect
to 116 pooling and servicing agreements with UPB of approximately $15.2 billion and the right to automatically obtain legal ownership, without any additional payment to Ocwen, of each mortgage servicing right upon the receipt of the Required Third
Party Consents (these rights constitute the Rights to MSRs with respect to the mortgage servicing rights);
|
|
|
•
|
|
the outstanding servicing advances associated with the related pooling and servicing agreements; and
|
|
|
•
|
|
other assets related to the foregoing (collectively, the forgoing represent the Initial Acquisition).
|
We completed the Initial Acquisition pursuant to the Purchase Agreement and a related sale supplement, each dated February 10, 2012.
Pursuant to the Advance Facility, we also assumed a related match funded servicing advance financing facility from Ocwen effective upon the closing of the Initial Acquisition. At closing on March 5, 2012, HLSS paid cash of $149,798 to Ocwen for
the estimated purchase price of the Initial Purchased Assets (net of assumed liabilities), subject to certain closing adjustments. The purchase price for the Rights to MSRs was based on the value of such assets at the time HLSS entered into the
Purchase Agreement and the estimated outstanding UPB of the underlying mortgage loans at closing. The purchase price for the associated servicing advances and other assets was equal to the net consolidated book value which approximated fair value,
as of the purchase date of all assets and liabilities of the special purpose entities established in connection with the advance financing facility that owns these servicing advances. HLSS paid Barclays Bank PLC, an affiliate of Barclays Capital
Inc., a conversion fee of $3,989 related to our assumption of the existing advance financing facility.
On March 31,
2012, HLSS and Ocwen, pursuant to the terms of the Purchase Agreement, agreed to a final purchase price of $138,792 for the Initial Purchased Assets (net of assumed liabilities of $359,176), reflecting post-closing adjustments of $11,006 that
principally resulted from declines in Match funded advances. See Note 13 for more information regarding our related party transactions.
We made five additional asset purchases from Ocwen on
May 1
st
, August 1
st
, September 13
th
, September 28
th
and December 26
th
, 2012 of Rights to MSRs for mortgage loans with approximately $67.5
billion of UPB together with the related servicing advances. These five asset purchases were all completed pursuant to the Purchase Agreement and sale supplement specific to each asset purchase.
The following table summarizes the purchase price of the assets and liabilities we acquired from Ocwen during 2012 and reconciles the
cash used to acquire such assets and liabilities:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial
Purchase
|
|
|
Subsequent
Purchases
|
|
|
Total
|
|
|
Notes receivable—Rights to MSRs
|
|
$
|
62,458
|
|
|
$
|
254,164
|
|
|
$
|
316,622
|
|
|
Match funded advances (1)
|
|
|
|
|
|
|
2,827,227
|
|
|
|
2,827,227
|
|
|
Purchase of Advance SPE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Match funded advances (1)
|
|
|
413,374
|
|
|
|
|
|
|
|
413,374
|
|
|
Other assets (1)
|
|
|
22,136
|
|
|
|
|
|
|
|
22,136
|
|
|
Match funded liabilities (1)
|
|
|
(358,335
|
)
|
|
|
|
|
|
|
(358,335
|
)
|
|
Other liabilities (1)
|
|
|
(841
|
)
|
|
|
|
|
|
|
(841
|
)
|
|
Net assets of Advance SPE
|
|
|
76,334
|
|
|
|
|
|
|
|
76,334
|
|
|
Purchase price, as adjusted
|
|
|
138,792
|
|
|
|
3,081,391
|
|
|
|
3,220,183
|
|
|
Amount due to Ocwen for post-closing adjustments
|
|
|
|
|
|
|
(1,410
|
)
|
|
|
(1,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used
|
|
$
|
138,792
|
|
|
$
|
3,079,981
|
|
|
$
|
3,218,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash on-hand
|
|
$
|
138,792
|
|
|
$
|
685,654
|
|
|
$
|
824,446
|
|
|
Match funded liabilities
|
|
|
|
|
|
|
2,394,327
|
|
|
|
2,394,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Used
|
|
$
|
138,792
|
|
|
$
|
3,079,981
|
|
|
$
|
3,218,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
|
(1)
|
The cash used to purchase these assets and assume these liabilities are shown net within the “Acquisition of advances and other assets (net of liabilities assumed)
in connection with the purchase of notes receivable—Rights to MSRs” of the consolidated statement of cash flows.
|
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
We estimate fair value based on a hierarchy that maximizes the use of observable inputs and minimizes the use of
unobservable inputs. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable
inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value
hierarchy prioritizes the inputs to valuation techniques into three broad levels and gives the highest priority to Level 1 inputs and the lowest to Level 3 inputs.
The three broad categories are:
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•
|
|
Level 1: Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
|
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly, for substantially the full term
of the financial instrument.
|
|
|
•
|
|
Level 3: Unobservable inputs for the asset or liability.
|
Where available, we utilize quoted market prices or observable inputs rather than unobservable inputs to determine fair value. We classify assets in their entirety based on the lowest level of input that
is significant to the fair value measurement.
We describe the methodologies that we use and key assumptions that we make to
assess the fair value of instruments in more detail below:
Notes Receivable—Rights to MSRs
We established the value of the Notes Receivable—Rights to MSRs based on an appraisal prepared with the assistance of an independent
valuation firm. This appraisal is prepared on a quarterly basis. Significant inputs into the valuation include the following:
|
|
•
|
|
Discount rates reflecting the risk of earning the future income streams from the Notes receivable—Rights to MSRs ranging from 15% to 22%.
|
|
|
•
|
|
Interest rate used for calculating the cost of servicing advances of 1-Month LIBOR + 4%.
|
|
|
•
|
|
Mortgage loan prepayment projections ranging from 12% to 27% of the related mortgage lifetime projected prepayment rate.
|
|
|
•
|
|
Delinquency rate projections ranging from 15% to 35% of the aggregate unpaid balance of the underlying mortgage loans.
|
The independent valuation firm reviewed the collateral attributes and the historical payment performance of the underlying mortgage
servicing portfolio and compared them with similar mortgage servicing portfolios and with standard industry mortgage performance benchmarks to arrive at the assumptions set forth above. The selected collateral attributes and performance comparisons
utilized were the voluntary prepayment performance, delinquency and foreclosure performance, operational cost comparison, average loan balance, weighted average coupon and note rate distribution, loan product type classification, geographic
distribution and servicing advance behavior.
F-16
The unobservable inputs that have the most significant effect on the fair value of Notes
receivable—Rights to MSRs are the mortgage loan prepayment rate projections and delinquency rate projections; however, any significant increase (decrease) in discount rates, interest rates, mortgage loan prepayment projections or delinquency
rate projections, each in isolation, would result in a substantially lower (higher) valuation.
Derivative Financial Instruments
Our derivatives are not exchange-traded, and therefore quoted market prices or other observable inputs are not
available. The fair value of our interest rate swap agreements are based on certain information provided by third-party pricing sources. Third-party valuations are derived from proprietary models based on inputs that include yield curves and
contractual terms such as fixed interest rates and payment dates. We have not adjusted the information obtained from the third-party pricing sources; however, we review this information to ensure that it provides a reasonable basis for estimating
fair value. Our review is designed to identify information that appears stale, information that has changed significantly from the prior period, and other indicators that the information may not be accurate. We determined that potential credit and
counterparty risks had an immaterial impact on the valuation of our derivatives. See Notes 1 and 8 for additional information on our derivative financial instruments.
The following table presents assets and liabilities measured at fair value on a recurring basis categorized by input level within the fair value hierarchy:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
At December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes receivable—Rights to MSRs
|
|
$
|
303,705
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
303,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
303,705
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
303,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
1,076
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
1,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
1,076
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We held no Level 3 assets or liabilities prior to the Initial Acquisition, on March 5, 2012. The
following tables present reconciliations of the changes in fair value of our Level 3 assets which we measure at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2012:
|
|
Note
receivable
—Rights to
MSRs
|
|
|
Derivative
Financial
Instruments
|
|
|
Beginning balance
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Purchases and reductions:
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
316,622
|
|
|
|
—
|
|
|
Reductions
|
|
|
12,917
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
303,705
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value :
|
|
|
|
|
|
|
|
|
|
Included in net income
|
|
|
—
|
|
|
|
—
|
|
|
Included in other comprehensive income (loss) (1)
|
|
|
—
|
|
|
|
(1,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
(1,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Transfers in or out of Level 3
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
303,705
|
|
|
$
|
(1,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These losses are attributable to derivatives still held at December 31, 2012.
|
F-17
The following table shows the effect on the fair value of the Note receivable—Rights to
MSRs assuming adverse changes to certain key assumptions used in valuing these assets at December 31, 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
|
Prepayment Speeds
|
|
|
Delinquency Rates
|
|
|
|
|
100 bps adverse change
|
|
|
1000 bps adverse change
|
|
|
1000 bps adverse change
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note Receivable—Rights to MSRs
|
|
$
|
(11,786
|
)
|
|
$
|
(15,470
|
)
|
|
$
|
(45,540
|
)
|
This sensitivity analysis above assumes a change is made to one key input, while holding all other inputs
constant. As many of these inputs are correlated, a change in one input will likely impact other inputs which would ultimately impact the overall valuation.
The following table provides more quantitative information on our significant inputs used for valuing our Note Receivable—Rights to MSRs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
Unobservable Input
|
|
Low
|
|
|
High
|
|
|
Weighted Average
|
|
|
Note receivable—Rights to MSRs
|
|
Discount Rate
|
|
|
15
|
%
|
|
|
22
|
%
|
|
|
20
|
%
|
|
|
|
Prepayment Speeds
|
|
|
12
|
%
|
|
|
27
|
%
|
|
|
19
|
%
|
|
|
|
Delinquency Rates
|
|
|
15
|
%
|
|
|
35
|
%
|
|
|
29
|
%
|
Presented below are the December 31, 2012 carrying values and fair value estimates of financial
instruments not carried at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
Match funded advances
|
|
$
|
3,098,198
|
|
|
$
|
3,098,198
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
3,098,198
|
|
|
$
|
3,098,198
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
Match funded liabilities
|
|
$
|
2,690,821
|
|
|
$
|
2,697,840
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
$
|
2,690,821
|
|
|
$
|
2,697,840
|
|
|
|
|
|
|
|
|
|
|
|
Match Funded Advances
The carrying value of our Match funded advances approximates fair value. This is because our Match funded advances have no stated maturity, generally are realized within a relatively short period of time
and do not bear interest. The fair value measurements for Match funded advances are categorized as Level 3.
Match Funded Liabilities
Match funded liabilities include term notes that are publicly traded. The fair value estimate of the company’s
term notes was determined by using market quotes provided by Bloomberg. We concluded that no adjustments are required to the quoted prices of the term notes. The level of trading, both in number of trades and amount of term notes traded, is at a
level that the company believes market quotes to be a reasonable representation of the current fair market value of the term notes. All other Match funded liabilities are short term in nature and the carrying value generally approximates the fair
value. The fair value measurements for Match funded liabilities are categorized as Level 3.
F-18
4. MATCH FUNDED ADVANCES
Match funded advances on residential loans we service for others, as more fully described in
Note 1—Principles of Consolidation—
Variable Interest Entities
, are comprised of the following at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
Principal and interest advances
|
|
$
|
1,231,471
|
|
|
$
|
—
|
|
|
Escrow advances
|
|
|
1,399,813
|
|
|
|
—
|
|
|
Corporate advances
|
|
|
466,914
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,098,198
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
5. OTHER ASSETS
Other assets consisted of the following at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
Debt service accounts (1)
|
|
$
|
67,776
|
|
|
$
|
—
|
|
|
Debt issuance costs (2)
|
|
|
9,278
|
|
|
|
—
|
|
|
Interest-earning collateral deposits (3)
|
|
|
1,904
|
|
|
|
—
|
|
|
Other (4)
|
|
|
133
|
|
|
|
2,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
79,091
|
|
|
$
|
2,860
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Under our advance funding facility, we are contractually required to remit collections on pledged advances to the trustee within two days of receipt. We do not use the
collected funds to reduce the related match funded debt until the payment dates specified in the indenture. The balance also includes amounts that we set aside to provide for possible shortfalls in the funds available to pay certain expenses and
interest.
|
|
(2)
|
Costs at December 31, 2012 relate to Match funded liabilities. We amortize these costs to the earlier of the scheduled amortization date, contractual maturity date
or prepayment date of the debt.
|
|
(3)
|
Represents cash collateral held by the counterparty to our interest rate swap agreement as of December 31, 2012.
|
|
(4)
|
At December 31, 2011, Other primarily includes $2,777 of deferred offering costs. When we completed the IPO in March 2012, and the subsequent over-allotment
exercise, we charged these costs (along with additional deferred offering costs of $1,154 incurred in 2012) to additional paid-in capital reducing the gross proceeds from the IPO to an amount net of offering costs.
|
F-19
6. MATCH FUNDED LIABILITIES
Match funded liabilities, as more fully described in Note 1—Principles of Consolidation—
Variable Interest
Entities
, are comprised of the following at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowing Type
|
|
Interest Rate (1)
|
|
Maturity (2)
|
|
Amortization Date (2)
|
|
Unused
Borrowing
Capacity (3)
|
|
|
Balance Outstanding
|
|
|
|
|
|
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
Class A-1 Term Note
|
|
134 bps
|
|
Oct. 2043
|
|
Oct. 2013
|
|
$
|
—
|
|
|
$
|
215,067
|
|
|
$
|
—
|
|
|
Class B-1 Term Note
|
|
175 bps
|
|
Oct. 2043
|
|
Oct. 2013
|
|
|
—
|
|
|
|
17,807
|
|
|
|
—
|
|
|
Class C-1 Term Note
|
|
322 bps
|
|
Oct. 2043
|
|
Oct. 2013
|
|
|
—
|
|
|
|
8,903
|
|
|
|
—
|
|
|
Class D-1 Term Note
|
|
396 bps
|
|
Oct. 2043
|
|
Oct. 2013
|
|
|
—
|
|
|
|
8,223
|
|
|
|
—
|
|
|
Class A-2 Term Note
|
|
199 bps
|
|
Oct. 2045
|
|
Oct. 2015
|
|
|
—
|
|
|
|
387,121
|
|
|
|
—
|
|
|
Class B-2 Term Note
|
|
248 bps
|
|
Oct. 2045
|
|
Oct. 2015
|
|
|
—
|
|
|
|
32,053
|
|
|
|
—
|
|
|
Class C-2 Term Note
|
|
396 bps
|
|
Oct. 2045
|
|
Oct. 2015
|
|
|
—
|
|
|
|
16,026
|
|
|
|
—
|
|
|
Class D-2 Term Note
|
|
494 bps
|
|
Oct. 2045
|
|
Oct. 2015
|
|
|
—
|
|
|
|
14,800
|
|
|
|
—
|
|
|
Class A Variable Funding Note—1
|
|
1-Month LIBOR +
200 bps
|
|
Aug. 2043
|
|
Aug. 2013
|
|
|
47,975
|
|
|
|
287,025
|
|
|
|
—
|
|
|
Class B Variable Funding Note—1
|
|
1-Month LIBOR +
500 bps
|
|
Aug. 2043
|
|
Aug. 2013
|
|
|
6,506
|
|
|
|
26,494
|
|
|
|
—
|
|
|
Class C Variable Funding Note—1
|
|
1-Month LIBOR +
600 bps
|
|
Aug. 2043
|
|
Aug. 2013
|
|
|
3,089
|
|
|
|
12,911
|
|
|
|
—
|
|
|
Class D Variable Funding Note—1
|
|
1-Month LIBOR +
700 bps
|
|
Aug. 2043
|
|
Aug. 2013
|
|
|
2,965
|
|
|
|
13,035
|
|
|
|
—
|
|
|
Class A Variable Funding Note—2
|
|
1-Month LIBOR +
195 bps
|
|
Aug. 2043
|
|
Aug. 2013
|
|
|
96,951
|
|
|
|
574,049
|
|
|
|
—
|
|
|
Class B Variable Funding Note—2
|
|
1-Month LIBOR +
260 bps
|
|
Aug. 2043
|
|
Aug. 2013
|
|
|
12,012
|
|
|
|
52,988
|
|
|
|
—
|
|
|
Class C Variable Funding Note—2
|
|
1-Month LIBOR +
457 bps
|
|
Aug. 2043
|
|
Aug. 2013
|
|
|
6,179
|
|
|
|
25,821
|
|
|
|
—
|
|
|
Class D Variable Funding Note—2
|
|
1-Month LIBOR +
550 bps
|
|
Aug. 2043
|
|
Aug. 2013
|
|
|
5,930
|
|
|
|
26,070
|
|
|
|
—
|
|
|
Class A Variable Funding Note—3
|
|
1-Month LIBOR +
195 bps
|
|
Aug. 2043
|
|
Aug. 2013
|
|
|
96,951
|
|
|
|
574,049
|
|
|
|
—
|
|
|
Class B Variable Funding Note—3
|
|
1-Month LIBOR +
260 bps
|
|
Aug. 2043
|
|
Aug. 2013
|
|
|
12,012
|
|
|
|
52,988
|
|
|
|
—
|
|
|
Class C Variable Funding Note—3
|
|
1-Month LIBOR +
457 bps
|
|
Aug. 2043
|
|
Aug. 2013
|
|
|
6,179
|
|
|
|
25,821
|
|
|
|
—
|
|
|
Class D Variable Funding Note—3
|
|
1-Month LIBOR +
550 bps
|
|
Aug. 2043
|
|
Aug. 2013
|
|
|
5,930
|
|
|
|
26,070
|
|
|
|
—
|
|
|
Class A Term Money Market Fund Note
|
|
65 bps
|
|
Sep. 2013
|
|
Sep. 2012
|
|
|
—
|
|
|
|
183,462
|
|
|
|
—
|
|
|
Class B Term Money Market Fund Note
|
|
275 bps
|
|
Sep. 2044
|
|
Sep. 2014
|
|
|
—
|
|
|
|
28,500
|
|
|
|
—
|
|
|
Class A Draw Money Market Fund Note
|
|
1-Month LIBOR +
200 bps
|
|
Sep. 2044
|
|
Sep. 2014
|
|
|
—
|
|
|
|
81,538
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
302,679
|
|
|
$
|
2,690,821
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The weighted average interest rate at December 31, 2012 was 2.71%. We pay interest monthly.
|
|
(2)
|
The amortization date is the date on which the revolving period ends under each Advance Facility note and repayment of the outstanding balance must begin if the note is
not renewed or extended. The maturity date is the due date for all outstanding balances. After the amortization date, all collections that represent the repayment of advances pledged to the facility must be applied to reduce the balance of the note
outstanding, and any new advances are ineligible to be financed.
|
F-20
|
(3)
|
Our unused borrowing capacity is available to us if we have additional eligible collateral to pledge and meet other borrowing conditions. We pay a 0.75% fee on the
unused borrowing capacity.
|
On April 26, 2012, we executed an amendment to the Advance Facility providing
us with the ability to add and remove designated servicing agreements from the facility.
On September 13, 2012 we
amended and restated our outstanding servicing advance financing facility with Barclays Bank PLC. We issued a $265,000 Rule 2a-7 money market eligible note with a one-year term and a fixed interest rate per annum of 0.65% and a “Class A”
draw note with an expected two-year term and a variable interest rate of one month LIBOR + 200 bps.
On September 28,
2012, in connection with our second Follow-On purchase, a $28,500 “Class B” note was issued.
On October 17,
2012, we completed the issuance of $250,000 of one-year and $450,000 of three-year term fixed rate notes secured by servicing advance receivables at a weighted average interest spread over LIBOR of 1.55%. The proceeds were used to repay $600,000 in
Class A through D term notes and to reduce borrowings on our Class A through D variable funding notes with a weighted average interest spread of 2.93%.
On December 26, 2012, Wells Fargo Securities, LLC and Credit Suisse AG, New York Branch committed to financing $800,000 each in the form of variable-funding notes issued by HLSS Servicer Advance
Receivables Trust. We secured this financing in connection with our second follow-on offering purchase.
As of
December 31, 2012, we had $302,679 of unused borrowing capacity. Our ability to continue to pledge collateral under our advance facility depends on the performance of the collateral. Currently, the large majority of our collateral qualifies for
financing. The debt covenants for our Advance Facility require that we maintain minimum levels of liquid assets. Failure to comply with these covenants could result in restrictions on new borrowings or the early termination of our Advance Facility.
We were in compliance with all our debt covenants as of December 31, 2012.
Analysis of Borrowing by Expected Maturity
(1)
:
|
|
|
|
|
|
|
$ in thousands
|
|
December 31,
2012
|
|
|
2013
|
|
$
|
2,130,783
|
|
|
2014
|
|
|
110,038
|
|
|
2015
|
|
|
450,000
|
|
|
2016
|
|
|
—
|
|
|
2017
|
|
|
—
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
2,690,821
|
|
|
|
|
|
|
|
|
(1)
|
The expected maturity date is the date on which the revolving period ends under each Advance Facility note and repayment of the outstanding balance must begin if the
note is not renewed or extended.
|
F-21
7. ORDINARY SHARES
Initial Public Offering
On March 5, 2012, we closed the IPO resulting in the issuance of 13,333,333 of our ordinary shares. The public offering price of the shares sold in the offering was $14.00 per share. The total gross
proceeds from the offering to HLSS were $186,667. After deducting underwriting discounts and commissions and offering expenses paid by HLSS, the aggregate net proceeds we received totaled $170,486.
Private Placement
On March 5, 2012, simultaneously with the IPO, William C. Erbey, the founder of our company and the Chairman of the Board of
Directors, purchased 714,285 of our ordinary shares at a price per share equal to the IPO price in a private placement. The total proceeds from the private placement to HLSS were $10,000. We did not incur underwriting discounts or commissions in
respect of these shares.
Issuance of Additional Ordinary Shares under the IPO
On April 2, 2012, we issued 129,600 additional ordinary shares to the underwriters in connection with the exercise of their
over-allotment option under the IPO. The total gross proceeds from the issuance of these additional shares to HLSS were $1,814. After deducting underwriting discounts, commissions and expenses paid by HLSS, the aggregate net proceeds we received
were $1,577.
First Follow on Offering
On September 12, 2012 we issued 16,387,500 of our ordinary shares at an offering price of $15.25 per share, 2,137,500 of which went to the underwriters in connection with the exercise of their
over-allotment option. The total gross proceeds from the issuance of these additional shares to HLSS were $249,909. After deducting underwriting discounts, commissions and expenses paid by HLSS, the aggregate net proceeds we received were $236,034.
Second Follow on Offering
On December 24, 2012 we issued 25,300,000 of our ordinary shares at an offering price of $19.00 per share. In addition, the underwriters had an over-allotment option for the purchase of 3,795,000
shares. As of December 31, 2012, the over-allotment option remained outstanding. The total gross proceeds from the issuance of these shares to HLSS were $480,700. After deducting underwriting discounts, commissions and expenses paid by HLSS,
the aggregate net proceeds we received were $462,261.
8. DERIVATIVE FINANCIAL INSTRUMENTS
Because our current derivative agreements are not exchange-traded, we are exposed to credit loss in the event of
nonperformance by the counterparty to the agreement. We control this risk through credit monitoring procedures including financial analysis, dollar limits and other monitoring procedures. The notional amounts of our contracts do not represent our
exposure to credit loss. See notes 1 and 3 for additional information regarding our use of derivatives.
Interest Rate Management
We executed a hedging strategy aimed to mitigate the impact of changes in variable interest rates on the excess of
interest rate sensitive liabilities over interest rate sensitive assets. We entered into interest rate swaps to hedge against the effects of a change in 1-Month LIBOR.
F-22
The following table provides information about our interest rate swaps at December 31,
2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purpose
|
|
Date
Opened
|
|
Effective
Date (1)
|
|
Maturity
|
|
We Pay
|
|
|
We
Receive
|
|
Notional
Amount
|
|
|
Fair
Value
|
|
|
Designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge the effects of changes in 1-Month LIBOR (2)
|
|
March
2012
|
|
March
2012
|
|
March
2016
|
|
|
0.6325
|
%
|
|
1-Month
LIBOR
|
|
$
|
147,351
|
|
|
$
|
(759
|
)
|
|
Hedge the effects of changes in 1-Month LIBOR (2)
|
|
May
2012
|
|
May
2012
|
|
May
2016
|
|
|
0.6070
|
%
|
|
1-Month
LIBOR
|
|
|
44,221
|
|
|
|
(174
|
)
|
|
Hedge the effects of changes in 1-Month LIBOR (2)
|
|
September
2012
|
|
September
2012
|
|
August
2017
|
|
|
0.5188
|
%
|
|
1-Month
LIBOR
|
|
|
223,059
|
|
|
|
(143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total designated as hedges
|
|
$
|
414,631
|
|
|
$
|
(1,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
414,631
|
|
|
$
|
(1,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The effective date of the swap is the date from which monthly settlements begin to be computed.
|
|
(2)
|
Projected net settlements for the next twelve months total approximately $1,296 of payments to the counterparty. We designate these swaps as cash flow hedges and report
them at fair value as a component of other liabilities. Unrealized losses of $1,076 related to our interest rate swaps are included in accumulated other comprehensive loss for the year ended December 31, 2012. There were no unrealized gains or
losses attributable to derivatives for the year ended December 31, 2011. Given the current and expected effectiveness of our hedging arrangements, we do not expect any reclassifications from other comprehensive income into earnings associated
with these hedging arrangements during the next twelve months.
|
The following table summarizes the use of
derivatives during the year ended December 31, 2012:
|
|
|
|
|
|
|
|
|
Interest
Rate
Swaps
|
|
|
Notional balance at December 31, 2011
|
|
$
|
—
|
|
|
Additions
|
|
|
534,946
|
|
|
Maturities
|
|
|
—
|
|
|
Terminations
|
|
|
—
|
|
|
Amortization
|
|
|
120,315
|
|
|
|
|
|
|
|
|
Notional balance at December 31, 2012
|
|
$
|
414,631
|
|
|
|
|
|
|
|
9. INTEREST INCOME—NOTES RECEIVABLE—RIGHTS TO MSRS
Our primary source of revenue is the fees we are entitled to receive in connection with the servicing of mortgage
loans. We account for these fees as interest income.
The following table shows how we calculated Interest income—notes
receivable—Rights to MSRs for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
Servicing fees collected
|
|
$
|
117,789
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Subservicing fee payable to Ocwen
|
|
|
50,173
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net servicing fees retained by HLSS
|
|
|
67,616
|
|
|
|
—
|
|
|
|
—
|
|
|
Reduction in notes receivable—Rights to MSRs
|
|
|
12,917
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
54,699
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
10. INTEREST EXPENSE
The following table presents the components of interest expense for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
Match funded liabilities
|
|
$
|
16,158
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Amortization of debt issuance costs
|
|
|
6,960
|
|
|
|
—
|
|
|
|
—
|
|
|
Interest rate swaps
|
|
|
939
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,057
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. INCOME TAXES
Income taxes have been provided for based upon the tax laws and rates in countries in which we conduct operations and
earn related income. Our effective tax rate was 0.2% for the year ended December 31, 2012 (0%, for the years ended December 31, 2011 and 2010). We base income tax provisions / (benefits) on expected annual income taxes calculated
separately from the effect of significant, infrequent or unusual items. We are a Cayman Islands exempted company, and the Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation. Our
subsidiaries are expected to be subject to U.S federal income taxation as corporations. HLSS Management, LLC is the employer of all of our U.S. based employees and earns income from its management activities. HLSS Holdings, LLC earns interest income
as compensation for managing our Match funded advances and related financing activities. We computed income tax expense by applying the Federal and state combined rate of 38% to the earnings of these subsidiaries.
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax laws and rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period that includes the enactment date.
The sources of income from continuing
operations before income taxes for the years ended December 31, 2012, 2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
U.S. operations
|
|
$
|
(3,430
|
)
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
Non-U.S. operations
|
|
|
30,347
|
|
|
|
(272
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,917
|
|
|
$
|
(273
|
)
|
|
$
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
The components of the income tax provision from continuing operations for the year ended
December 31, 2012 consisted of the following (we had no income tax provision or benefit for the year ended December 31, 2011 and 2010):
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
United States
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
State
|
|
|
46
|
|
|
Non-U.S.
|
|
|
—
|
|
|
|
|
|
|
|
|
Current income tax provision (benefit)
|
|
$
|
46
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
United States
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
State
|
|
|
—
|
|
|
Non-U.S.
|
|
|
—
|
|
|
Deferred income tax provision (benefit)
|
|
|
—
|
|
|
|
|
|
|
|
|
Total income tax provision (benefit)
|
|
$
|
46
|
|
|
|
|
|
|
|
The significant components of the Company’s deferred tax assets at December 31, 2012 consisted
of the following (the Company had no deferred tax assets or liabilities at December 31, 2011 or 2010):
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
NOL carryforward
|
|
$
|
1,188
|
|
|
Interest rate derivatives
|
|
|
408
|
|
|
Debt Issuance Costs
|
|
|
84
|
|
|
Accruals
|
|
|
75
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
1,755
|
|
|
Valuation allowance
|
|
|
(1,755
|
)
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
—
|
|
|
|
|
|
|
|
As of December 31, 2012 the Company has net operating carryforwards of $2,827 and $3,776 for both
U.S. federal and state and local tax purposes, respectively (2011 and 2010: $0). These carryforwards are available to offset future taxable income until they begin to expire in 2032 and 2022, respectively. The Company has no tax credit carryforwards
for the years ended December 31, 2012, 2011, and 2010.
The Company conducts periodic evaluations of positive and
negative evidence to determine whether it is more likely than not that some or all of the deferred tax assets will not be realized in future periods. Among the factors considered in this evaluation are estimates of future taxable income, future
reversals of temporary differences, tax character and the impact of tax planning strategies that may be implemented, if warranted. As a result of these evaluations, the Company recorded a valuation allowance for deferred tax assets of $1,755 as of
December 31, 2012.
A reconciliation of the statutory U.S. federal income tax rate to the Company’s effective income
tax rate for the year ended December 31, 2012 is as follows:
|
|
|
|
|
|
|
Statutory rate
|
|
|
34.0
|
%
|
|
State and local income taxes
|
|
|
(0.5
|
%)
|
|
Benefit of Non-U.S. operations (1)
|
|
|
(38.3
|
%)
|
|
Valuation allowance
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
Effective tax rate per Consolidated Statement of Income
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
(1)
|
The majority of our earnings are at Home Loan Servicing Solutions, Ltd., a Cayman Islands entity, that is treated as a PFIC for U.S. federal income tax purposes.
|
F-25
No reconciliation is provided for the years ended December 31, 2011 or 2010 because
prior to its IPO the Company was a developmental stage enterprise and did not have any taxable earnings.
The Company
recognizes the tax benefit from an uncertain tax position only if it is more likely that not that the tax position will be sustained on examination by the taxing authorities. As of December 31, 2012, the Company did not have any unrecognized
tax benefits related to the current year or any previous year. Our policy is that we will recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. We did not accrue interest or penalties
associated with any unrecognized tax benefits, nor was any interest expense or penalty recognized during the year.
HLSS
Holdings, LLC and HLSS Management, LLC file annual income tax returns in the U.S. federal jurisdiction and various U.S. state jurisdictions. The Company and its subsidiaries remain subject to examination for all periods since inception.
12. BUSINESS SEGMENT REPORTING
Our business strategy focuses on acquiring mortgage servicing assets consisting of mortgage servicing rights, rights to
fees and other income from servicing mortgage loans, and associated servicing advances. As of December 31, 2012, we operate a single reportable business segment that holds Rights to MSRs.
13. RELATED PARTY TRANSACTIONS
We entered into various agreements with Ocwen and Altisource in connection with the Initial Acquisition. William C.
Erbey, our founder and the Chairman of our Board of Directors, is also the Chairman of the Board of Directors and largest shareholder of Ocwen and the Chairman of the Board of Directors and largest shareholder of Altisource.
Purchase Agreement
The Purchase Agreement, in conjunction with the initial sale supplement dated February 10, 2012, the Flow One sale supplement dated
May 1, 2012, the Flow Two sale supplement dated August 1, 2012 and the first Follow on Offering purchase sale supplements dated September 13, 2012 and September 28, 2012, and the second Follow On purchase dated December 26,
2012 set forth the terms of our purchase of the assets from Ocwen as described in Notes 1 and 2. So long as the Required Third Party Consents have not been obtained with respect to the transfer of legal ownership of any mortgage servicing right,
Ocwen remains obligated to perform as servicer under the related pooling and servicing agreements, and we are required to pay Ocwen a monthly fee for the servicing activities it performs. We are also required to purchase any servicing advances that
Ocwen is required to make pursuant to such pooling and servicing agreements.
The following table summarizes our transactions,
beginning March 5, 2012, with Ocwen under the Purchase Agreement for the period ended December 31, 2012:
|
|
|
|
|
|
|
Servicing fees collected
|
|
$
|
117,789
|
|
|
Subservicing fee payable to Ocwen
|
|
|
50,173
|
|
|
|
|
|
|
|
|
Net servicing fees retained by HLSS
|
|
|
67,616
|
|
|
Reduction in notes receivable—Rights to MSRs
|
|
|
12,917
|
|
|
|
|
|
|
|
|
|
|
$
|
54,699
|
|
|
|
|
|
|
|
|
Servicing advances purchased from Ocwen in the ordinary course of business
|
|
$
|
1,303,955
|
|
|
|
|
|
|
|
At December 31, 2012, Ocwen owed us $4,966 for servicing fees collected but not remitted to us, and
we owed Ocwen $890 for the subservicing fee earned by Ocwen in December 2012. In addition, we had an
F-26
outstanding receivable from Ocwen of $21,265 that relates to collections made by Ocwen on outstanding Match funded advances. Upon collection, Ocwen is contractually obligated to remit these
collections to pay down our Match funded liabilities. This receivable represents the portion of Match funded advance collections that were in-transit to pay down our Match funded liabilities as of December 31, 2012. The Notes
receivable—Rights to MSRs are due from Ocwen as of December 31, 2012.
Ocwen Professional Services Agreement
This agreement requires HLSS to provide certain services to Ocwen and for Ocwen to provide certain services to us for
an initial term of six years, subject to renewal, with pricing terms intended to reflect market rates. Services provided by us under this agreement include valuation and analysis of mortgage servicing rights, advance financing management, treasury
management, legal services and other similar services. Services provided by Ocwen under this agreement include legal, licensing and regulatory compliance support services, risk management services and other similar services. The services provided by
the parties under this agreement are on an as-needed basis, and the fees represent actual costs incurred plus an additional markup of 15%.
At December 31, 2012, Ocwen owed us $1,322 and we owed Ocwen $40 for professional services provided pursuant to the Ocwen Professional Services Agreement. During the year ended December 31,
2012, we earned fees of $2,316 for services provided to Ocwen pursuant to the Professional Services Agreement. Additionally, during the year ended December 31, 2012, we incurred fees of $100 for services received from Ocwen pursuant to the
Ocwen Professional Services Agreement.
Altisource Administrative Services Agreement
This agreement requires Altisource to provide certain administrative services to us for an initial term of six years, subject to renewal,
with pricing terms intended to reflect market rates. Services provided to us under this agreement include human resources administration (benefit plan design, recruiting, hiring and training and compliance support), legal and regulatory compliance
support services, general business consulting, corporate services (facilities management, security and travel services), finance and accounting support services (financial analysis, financial reporting and tax services), risk management services,
vendor management and other related services. The services Altisource provides to us under this agreement are on an as-needed basis, and the fees we pay Altisource are based on the actual costs incurred by them plus an additional markup of 15%.
During the year ended December 31, 2012, we paid Altisource $655 for services provided to us pursuant to the Altisource Administrative Services Agreement.
Subleases
During the year ended December 31, 2012, we paid
Altisource $69 for the rental of office space under two sublease agreements.
F-27
Receivables from and Payables to Related Parties
The following table summarizes amounts receivable from and payable to related parties at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
Servicing fees collected (1)
|
|
$
|
4,966
|
|
|
$
|
—
|
|
|
Professional services (2)
|
|
|
1,322
|
|
|
|
—
|
|
|
Advance collections (3)
|
|
|
21,265
|
|
|
|
—
|
|
|
Other
|
|
|
718
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables from Ocwen
|
|
$
|
28,271
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Subservicing fees payable (4)
|
|
$
|
890
|
|
|
$
|
—
|
|
|
Professional services (2)
|
|
|
40
|
|
|
|
—
|
|
|
Other (5)
|
|
|
1,815
|
|
|
|
1,478
|
|
|
|
|
|
|
|
|
|
|
|
|
Payables to Ocwen
|
|
$
|
2,745
|
|
|
$
|
1,478
|
|
|
|
|
|
|
|
|
|
|
|
|
Payables to Altisource
|
|
$
|
129
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Ocwen is required to remit to us servicing fees it collects on our behalf within two business days. The amount due from Ocwen at December 31, 2012 represents
servicing fees collected but not remitted at the end of the month. We record servicing fees we collect less the subservicing fee we pay to Ocwen as Interest income as shown in Note 9.
|
|
(2)
|
The respective amounts are for professional services provided during 2012.
|
|
(3)
|
Upon collection, Ocwen is contractually obligated to remit Match funded advance collections to pay down our Match funded liabilities. This receivable represents the
portion of Match funded advance collections that were in-transit to pay down our Match funded liabilities as of December 31, 2012.
|
|
(4)
|
The base fee and performance fee, if any, that comprise the servicing fee expense are calculated and paid to Ocwen within three business days following the end of the
month.
|
|
(5)
|
At December 31, 2012 we owed Ocwen for certain purchase price adjustments pertaining to the second Follow On Offering purchase ($1,410). At December 31, 2011,
we owed Ocwen $1,478 for offering costs associated with our IPO. Ocwen made certain of these payments on our behalf which we reimbursed in March 2012 after the completion of our IPO.
|
14. COMMITMENTS AND CONTINGENCIES
We may be party to various claims, legal actions, and complaints arising in the ordinary course of business. We monitor
our legal matters, including advice from external legal counsel, and periodically perform assessments of these matters for potential loss accrual and disclosure. There are currently no probable matters outstanding that, in the opinion of management,
will have a material effect on our Consolidated Balance Sheets, Statements of Operations and Statements of Cash Flows. There are also currently no reasonably possible matters outstanding that, in the opinion of management, will have a material
effect on our Consolidated Balance Sheets, Statements of Operations and Statements of Cash Flows.
15. SUBSEQUENT EVENTS
On January 10, 2013, we paid cash dividends of $6,706 or $0.12 per ordinary share. On January 15, 2013, we
declared a dividend of $0.12 per ordinary share to holders of record on January 31, 2013 to be paid on February 11, 2013.
On January 22, 2013, the underwriters exercised a portion of their over-allotment option from our December 24, 2012 offering of ordinary shares in the amount of 970,578 shares. We received net
proceeds of $17,633 from the over-allotment exercise.
F-28
On January 22, 2013, we completed the issuance of $650,000 of one-year, $350,000 of
three-year and $150,000 of five-year term notes secured by servicing advance receivables at a weighted average interest spread over LIBOR of 0.94%. The proceeds were used to reduce borrowings on our variable funding notes with a weighted average
interest rate of one-month LIBOR plus 2.32%, and the aggregate outstanding commitments on the variable funding notes were reduced to $1 billion. Below is a schedule of the term notes by class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowing Type
|
|
Amount
|
|
|
Amortization Date
|
|
|
Maturity
|
|
|
Interest Rate
(Yield)
|
|
|
Class A-1 Term Note
|
|
$
|
562,355
|
|
|
|
January 2014
|
|
|
|
January 2044
|
|
|
|
90 bps
|
|
|
Class B-1 Term Note
|
|
|
44,887
|
|
|
|
January 2014
|
|
|
|
January 2044
|
|
|
|
125 bps
|
|
|
Class C-1 Term Note
|
|
|
22,303
|
|
|
|
January 2014
|
|
|
|
January 2044
|
|
|
|
165 bps
|
|
|
Class D-1 Term Note
|
|
|
20,455
|
|
|
|
January 2014
|
|
|
|
January 2044
|
|
|
|
250 bps
|
|
|
Class A-2 Term Note
|
|
|
302,807
|
|
|
|
January 2016
|
|
|
|
January 2046
|
|
|
|
150 bps
|
|
|
Class B-2 Term Note
|
|
|
24,170
|
|
|
|
January 2016
|
|
|
|
January 2046
|
|
|
|
175 bps
|
|
|
Class C-2 Term Note
|
|
|
12,010
|
|
|
|
January 2016
|
|
|
|
January 2046
|
|
|
|
250 bps
|
|
|
Class D-2 Term Note
|
|
|
11,013
|
|
|
|
January 2016
|
|
|
|
January 2046
|
|
|
|
325 bps
|
|
|
Class A-3 Term Note
|
|
|
129,774
|
|
|
|
January 2018
|
|
|
|
January 2048
|
|
|
|
230 bps
|
|
|
Class B-3 Term Note
|
|
|
10,359
|
|
|
|
January 2018
|
|
|
|
January 2048
|
|
|
|
275 bps
|
|
|
Class C-3 Term Note
|
|
|
5,147
|
|
|
|
January 2018
|
|
|
|
January 2048
|
|
|
|
350 bps
|
|
|
Class D-3 Term Note
|
|
|
4,720
|
|
|
|
January 2018
|
|
|
|
January 2048
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450 bps
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|
On February 7, 2013, we declared the following dividends:
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Record Date
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Payment Date
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Amount per Ordinary Share
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February 28, 2013
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March 11, 2013
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$0.13
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March 29, 2013
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April 10, 2013
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$0.13
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F-29