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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

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

For the quarterly period ended September 30, 2013

or

 

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

For the transition period from:                      to                      

Commission File Number: 1-35431

Home Loan Servicing Solutions, Ltd.

(Exact name of registrant as specified in its charter)

 

Cayman Islands   98-0683664

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

Home Loan Servicing Solutions, Ltd.

c/o Intertrust Corporate Services (Cayman) Limited

190 Elgin Avenue

George Town, Grand Cayman KY1-9005

Cayman Islands

(Address of principal executive offices) (Zip Code)

(345) 943-3100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

x

  Accelerated filer   ¨

Non-accelerated filer

 

¨   (Do not check if a smaller reporting company)

  Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes   ¨     No   x

Number of Ordinary Shares, $0.01 par value, outstanding as of October 17, 2013: 71,016,771 shares.

 

 


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HOME LOAN SERVICING SOLUTIONS, LTD.

FORM 10-Q

INDEX

 

 

     PAGE  

PART I – FINANCIAL INFORMATION

  

Item 1.       Interim Condensed Consolidated Financial Statements (Unaudited)

     2   

Condensed Consolidated Balance Sheets at September 30, 2013 and December 31, 2012

     2   

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September  30, 2013 and 2012

     3   

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012

     4   

Condensed Consolidated Statements of Changes in Equity for the Nine Months Ended September  30, 2013 and 2012

     5   

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012

     6   

Notes to Interim Condensed Consolidated Financial Statements

     7   

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

     22   

Item 3.      Quantitative and Qualitative Disclosures About Market Risk

     32   

Item 4.      Controls and Procedures

     33   

PART II – OTHER INFORMATION

  

Item 1.      Legal Proceedings

     33   

Item 1A.  Risk Factors

     33   

Item 6.      Exhibits

     34   

Signatures

     35   

 

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PART I – FINANCIAL INFORMATION

ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

HOME LOAN SERVICING SOLUTIONS, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

 

         September 30,    
2013
         December 31,    
2012
 

Assets

     

Cash and cash equivalents

   $ 76,832       $ 76,048   

Match funded advances

     5,925,128         3,098,198   

Notes receivable – Rights to MSRs

     643,595         303,705   

Related party receivables

     10,110         28,271   

Other assets

     157,690         79,091   
  

 

 

    

 

 

 

Total assets

   $ 6,813,355       $ 3,585,313   
  

 

 

    

 

 

 

Liabilities and Equity

     

Liabilities

     

Match funded liabilities

   $ 5,187,427       $ 2,690,821   

Other borrowings

     344,072           

Dividends payable

     10,653         6,706   

Income taxes payable

     367         46   

Deferred tax liabilities

     1,019           

Related party payables

     32,607         2,874   

Other liabilities

     12,127         4,233   
  

 

 

    

 

 

 

Total liabilities

     5,588,272         2,704,680   
  

 

 

    

 

 

 

Commitments and Contingencies (See Note 15)

     

Equity

     

Equity – Ordinary shares, $.01 par value; 200,000,000 shares authorized; 71,016,771 and 55,884,718 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively

     710         559   

Additional paid-in capital

     1,210,042         876,657   

Retained earnings

     12,665         4,493   

Accumulated other comprehensive income (loss), net of tax

     1,666         (1,076
  

 

 

    

 

 

 

Total equity

     1,225,083         880,633   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 6,813,355       $ 3,585,313   
  

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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HOME LOAN SERVICING SOLUTIONS, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except share data)

 

     Three Months      Nine Months  

For the periods ended September 30,

           2013                      2012                      2013                      2012          

Revenue

           

Interest income – notes receivable – Rights to MSRs

   $ 74,204       $ 14,017       $ 168,626       $ 27,542   

Interest income – other

     697         146         896         283   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     74,901         14,163         169,522         27,825   

Related party revenue

     491         669         1,458         1,664   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     75,392         14,832         170,980         29,489   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses

           

Compensation and benefits

     2,109         1,152         4,877         2,442   

Related party expenses

     228         227         680         525   

General and administrative expenses

     1,275         557         2,654         1,340   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     3,612         1,936         8,211         4,307   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

     71,780         12,896         162,769         25,182   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other expense

           

Interest expense

     36,080         6,252         74,356         12,507   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other expense

     36,080         6,252         74,356         12,507   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     35,700         6,644         88,413         12,675   

Income tax expense

     777         72         816         149   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 34,923       $ 6,572       $ 87,597       $ 12,526   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share

           

Basic

   $ 0.49       $ 0.37       $ 1.42       $ 1.04   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.49       $ 0.37       $ 1.42       $ 1.04   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding

           

Basic

     71,016,771         17,581,593         61,812,369         12,008,394   

Diluted

     71,016,771         17,581,593         61,812,369         12,008,394   

Dividends declared per share

   $ 0.45       $ 0.30       $ 1.25       $ 0.68   
  

 

 

    

 

 

    

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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HOME LOAN SERVICING SOLUTIONS, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

 

For the periods ended September 30,

   Three Months     Nine Months  
             2013                     2012                     2013                     2012          

Net income

   $ 34,923      $ 6,572      $ 87,597      $ 12,526   

Other comprehensive income (loss), before tax:

        

Change in the value of designated cash flow hedges

     (1,592     (798     3,761        (1,363
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax

     (1,592     (798     3,761        (1,363
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax related to items of other comprehensive income (loss):

        

Tax benefit (expense) on change in the value of designated cash flow hedges

     604               (1,019       
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income tax benefit (expense) related to items of other comprehensive income (loss)

     604               (1,019       
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     (988     (798     2,742        (1,363
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 33,935      $ 5,774      $ 90,339      $ 11,163   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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HOME LOAN SERVICING SOLUTIONS, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Dollars in thousands, except share data)

 

         Ordinary Shares              Additional    
Paid-in Capital
        Retained    
Earnings
         Accumulated
Other
    Comprehensive    
Income, net of  tax
    Total  
     Shares      Amount                           

Balance at December 31, 2012

     55,884,718       $ 559       $ 876,657      $ 4,493      $ (1,076   $ 880,633   

Net income

                            87,597               87,597   

Other comprehensive income, net of tax

                                   2,742        2,742   

Issuance of ordinary shares, net of costs

     15,132,053         151         333,385                      333,536   

Declaration of cash dividends ($1.25 per share)

                            (79,425            (79,425
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

     71,016,771       $ 710       $ 1,210,042      $ 12,665      $ 1,666      $ 1,225,083   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     Ordinary Shares      Additional
Paid-in Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Loss, net of tax
    Total  
     Shares      Amount                           

Balance at December 31, 2011

     20,000       $       $ 300      $ (291   $      $ 9   

Net income

                            12,526               12,526   

Other comprehensive loss, net of tax

                                   (1,363     (1,363

Issuance of ordinary shares, net of costs

     30,564,718         306         417,791                      418,097   

Declaration of cash dividends ($0.68 per share)

                     (2,936     (8,346            (11,282
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

     30,584,718       $ 306       $ 415,155      $ 3,889      $ (1,363   $ 417,987   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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HOME LOAN SERVICING SOLUTIONS, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

 

For the periods ended September 30,

           2013                     2012          

Cash flows from operating activities

    

Net income

   $ 87,597      $ 12,526   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Amortization of debt issuance costs

     11,113        3,980   

Accretion of original issue discount on other borrowings

     197          

Changes in assets and liabilities:

    

Decrease in match funded advances

     662,977        55,788   

Increase in debt service accounts

     (63,586     (13,744

Decrease in related party receivables

     16,989        7,083   

Increase in related party payables

     32,315        24,826   

Decrease (increase) in other assets

     834        (3,307

Increase in other liabilities

     7,729        3,561   
  

 

 

   

 

 

 

Net cash provided by operating activities

     756,165        90,713   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchase of notes receivable – Rights to MSRs

     (387,300     (184,285

Reduction in notes receivable – Rights to MSRs

     48,582        6,555   

Acquisition of advances and other assets (net of liabilities assumed) in connection with the purchase of notes receivable – Rights to MSRs

     (3,492,489     (1,175,156
  

 

 

   

 

 

 

Net cash used in investing activities

     (3,831,207     (1,352,886
  

 

 

   

 

 

 

Cash flows from financing activities

    

Proceeds from match funded liabilities, net

     2,496,606        892,577   

Proceeds from other borrowings

     344,750          

Payment of other borrowings

     (875       

Payment of debt issuance costs

     (23,025     (6,810

Proceeds from issuance of ordinary shares

     334,390        422,783   

Payment of offering costs

     (542     (4,686

Payment of dividends to shareholders

     (75,478     (8,224
  

 

 

   

 

 

 

Net cash provided by financing activities

     3,075,826        1,295,640   
  

 

 

   

 

 

 

Net increase in cash

     784        33,467   

Cash at beginning of period

     76,048        283   
  

 

 

   

 

 

 

Cash at end of period

   $ 76,832      $ 33,750   
  

 

 

   

 

 

 

Supplemental non-cash financing activities

    

Dividends declared but not paid

   $ 10,653      $ 3,058   

Offering costs accrued but not paid

   $ 312      $   

Debt issuance costs accrued but not paid

   $ 810      $   

The accompanying notes are an integral part of these consolidated financial statements.

 

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HOME LOAN SERVICING SOLUTIONS, LTD. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands unless otherwise stated, except share data)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Home Loan Servicing Solutions, Ltd. and its wholly owned subsidiaries (collectively referred to throughout as “HLSS”, “us”, “our”, “we”, the “Company”) focus on acquiring mortgage servicing assets.

Basis of Presentation and Use of Estimates

We prepared the accompanying unaudited Interim Condensed Consolidated Financial Statements in conformity with the instructions of the Securities and Exchange Commission (“SEC”) to Form 10-Q for interim financial statements. In our opinion, the accompanying unaudited financial statements contain all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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. Prior to our Initial Public Offering (“IPO”) on March 5, 2012 we were a developmental stage company. Therefore, our results for the nine months ended September 30, 2012 do not reflect a full nine months of operations and are not fully comparable to the results for the nine months ended September 30, 2013.

Certain disclosures included in the Company’s Annual Report are not required to be included on an interim basis in the Company’s Quarterly Reports on Forms 10-Q. The Company has condensed or omitted these disclosures. Therefore, this Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the U.S. Securities and Exchange Commission on February 7, 2013.

Principles of Consolidation

Our financial statements include the accounts of Home Loan Servicing Solutions, Ltd. and its wholly owned subsidiaries, as well as two variable interest entities (“VIE”) of which we are the primary beneficiary. We eliminate intercompany accounts and transactions in consolidation.

We evaluate each special purpose entity (“SPE”) for classification as a VIE. When a SPE meets the definition of a VIE and we determine that HLSS is the primary beneficiary, we include the SPE in our Interim Condensed Consolidated Financial Statements.

Our Match funded advances are in two SPEs along with related Match funded liabilities. We determined that these SPEs are VIEs of which we are the primary beneficiaries. The accounts of these SPEs are included in our Interim Condensed 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. The 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 Interim Condensed Consolidated Balance Sheet as Match funded advances and the related liabilities as Match funded liabilities. We use collections on the advances pledged to the SPEs 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. The following table summarizes the assets and liabilities of the SPEs formed in connection with our current Match funded advance facilities, at the dates indicated:

 

         September 30,    
2013
         December 31,    
2012
 

Match funded advances

   $ 5,925,128       $ 3,098,198   

Related party receivables(1)

             21,265   

Other assets (2)

     148,011         77,110   
  

 

 

    

 

 

 

Total assets

   $ 6,073,139       $ 3,196,573   
  

 

 

    

 

 

 

Match funded liabilities

   $ 5,187,427       $ 2,690,821   

Other liabilities

     4,171         2,203   
  

 

 

    

 

 

 

Total liabilities

   $ 5,191,598       $ 2,693,024   
  

 

 

    

 

 

 

 

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(1) Relates to collections made by Ocwen Financial Corporation and its subsidiaries (collectively “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 each presented period. See Note 14 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.

Recent Accounting Pronouncements

Accounting Standards Update (“ASU”) ASU 2012-04. This ASU makes technical corrections and improvements to a variety of topics in the Codification. The changes include source literature amendments, guidance clarification, reference corrections and relocated guidance. The ASU also includes conforming amendments to the Codification to reflect ASC 820’s fair value measurement and disclosure requirements. Our adoption of this standard effective January 1, 2013, did not have a material impact on our Interim Condensed Consolidated Financial Statements.

ASU 2013-01 . This ASU limits the scope of the new balance sheet offsetting disclosure requirements to derivatives (including bifurcated embedded derivatives), repurchase agreements and reverse repurchase agreements, and securities borrowing and lending transactions. Our adoption of this standard effective January 1, 2013, did not have a material impact on our Interim Condensed Consolidated Financial Statements.

ASU 2013-02. This ASU enhances the reporting of reclassifications out of accumulated other comprehensive income (“AOCI”). The ASU sets requirements for presentation for significant items reclassified to net income in their entirety during the period and for items not reclassified to net income in their entirety during the period. It requires companies to present information about reclassifications out of AOCI in one place. It also requires companies to present reclassifications by component when reporting changes in AOCI balances. Our adoption of this standard effective January 1, 2013, did not have a material impact on our Interim Condensed Consolidated Financial Statements.

ASU 2013-10. This ASU permits the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes, as an alternative to interest rates on direct Treasury obligations of the U.S. government or LIBOR. This standard is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. Our adoption of this standard effective July 17, 2013 did not have a material impact on our Interim Condensed Consolidated Financial Statements.

ASU 2013-11. This ASU provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit exists. Previously, there was diversity in practice, and this ASU is expected to eliminate that diversity in practice. The amendments in this update are effective for fiscal years and interim periods within those periods beginning after December 15, 2013. We do not expect that the adoption of this standard on January 1, 2014 will have a material impact on our Interim Condensed Consolidated Financial Statements.

 

2. ASSETS ACQUIRED AND LIABILITIES ASSUMED

During the nine months ended September 30, 2013, we made asset purchases from Ocwen on March 13, 2013 (“Flow 3”), May 21, 2013 (“Flow 4”) and July 1, 2013 (“Follow On 3”) of Rights to MSRs for mortgage loans with approximately $15.9 billion, $10.6 billion and $83.3 billion respectively, of unpaid principal balance (“UPB”) together with the related servicing advances.

 

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The following table summarizes the purchase price of the assets we acquired from Ocwen during the nine months ended September 30, 2013 and reconciles the cash used to acquire such assets:

 

Notes receivable – Rights to MSRs

   $ 388,472   

Match funded advances (1)

     3,489,907   

Purchase price

     3,878,379   

Cash paid to settle previous post-close adjustments

     1,410   
  

 

 

 

Total cash used

   $ 3,879,789   
  

 

 

 

Sources:

  

Cash on-hand

   $ 739,597   

Match funded liabilities

   $     3,140,192   

 

(1) The cash used to purchase these assets is shown 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 Interim Condensed Consolidated Statement of Cash Flows.

On March 5, 2012, we used a portion of the net proceeds from our IPO (“Initial Acquisition”) to purchase Rights to MSRs from Ocwen with associated UPB of approximately $15.2 billion of UPB, the related servicing advances and other assets related to the foregoing.

On May 1, 2012, we completed an acquisition from Ocwen of Rights to MSRs with associated UPB of approximately $2.9 billion of UPB and the related servicing advances (“Flow One”).

On August 1, 2012, we completed an acquisition from Ocwen of Rights to MSRs with associated UPB of approximately $2.1 billion of UPB and the related servicing advances (“Flow Two”).

On September 13 and September 28, 2012, we completed acquisitions from Ocwen of Rights to MSRs with combined associated UPB of approximately $27.8 billion of UPB and the related servicing advances (“Follow On One”).

The following table summarizes the purchase price of the assets we acquired and liabilities assumed from Ocwen during the nine months ended September 30, 2012 and reconciles the cash used to acquire such assets and assume such liabilities:

 

Notes receivable – Rights to MSRs

   $ 184,285   

Match funded advances (1)

     1,088,503   

Purchase of Advance SPEs:

  

Match funded advances (1)

     413,374   

Other assets (1)

     22,136   

Match funded liabilities (1)

     (358,335

Other liabilities (1)

     (841

Net assets of Advance SPEs

     76,334   

Purchase price, as adjusted

     1,349,122   

Post-closing adjustments

     10,319   
  

 

 

 

Total cash used

   $     1,359,441   
  

 

 

 

Sources:

  

Cash on-hand

   $ 427,533   

Match funded liabilities

   $ 931,908   

 

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(1) The cash used to purchase these assets and assume these liabilities is 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 Interim Condensed 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:

 

   

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 + 3.75%.

 

   

Mortgage loan prepayment projections ranging from 12% to 28% 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.

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.

 

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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 Note 9 for additional information on our derivative financial instruments.

The following tables present reconciliations of the fair value and changes in fair value of our Level 3 assets which we measure at fair value on a recurring basis:

 

         Fair value              Level 1              Level 2              Level 3      

At September 30, 2013:

           

Measured at fair value on a recurring basis:

           

Assets:

           

Notes receivable – Rights to MSRs

   $ 643,595       $       $       $ 643,595   

Derivative financial instruments

     3,125                         3,125   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 646,720       $       $       $ 646,720   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative financial instruments

   $ 440                       $ 440   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 440       $       $       $ 440   
  

 

 

    

 

 

    

 

 

    

 

 

 
         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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

   2013     2012  

For the three months ended September 30,

   Notes
receivable –
Rights to
MSRs
     Derivative
Financial
Instruments
    Notes
receivable –
Rights to
MSRs
     Derivative
Financial
Instruments
 

Beginning balance

   $ 428,339       $ 4,277      $ 70,175       $ (565

Purchases and reductions:

          

Purchases

     239,850                110,594           

Reductions

     24,594                3,039           
  

 

 

    

 

 

   

 

 

    

 

 

 
     643,595       $ 4,277        177,730         (565
  

 

 

    

 

 

   

 

 

    

 

 

 

Changes in fair value :

          

Included in net income

                              

Included in other comprehensive income (1)

             (1,592             (798
  

 

 

    

 

 

   

 

 

    

 

 

 
             (1,592             (798
  

 

 

    

 

 

   

 

 

    

 

 

 

Transfers in or out of Level 3

                              
  

 

 

    

 

 

   

 

 

    

 

 

 

Ending balance

   $ 643,595       $ 2,685      $ 177,730       $ (1,363
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

 

   2013     2012  

For the nine months ended September 30,

   Notes
receivable –
Rights to
MSRs
     Derivative
Financial
Instruments
    Notes
receivable –
Rights to
MSRs
     Derivative
Financial
Instruments
 

Beginning balance

   $ 303,705       $ (1,076   $       $   

Purchases and reductions:

          

Purchases

     388,472                184,285           

Reductions

     48,582                6,555           
  

 

 

    

 

 

   

 

 

    

 

 

 
     643,595       $ (1,076     177,730           
  

 

 

    

 

 

   

 

 

    

 

 

 

Changes in fair value:

          

Included in net income

                              

Included in other comprehensive income (1)

             3,761                (1,363
  

 

 

    

 

 

   

 

 

    

 

 

 
             3,761                (1,363
  

 

 

    

 

 

   

 

 

    

 

 

 

Transfers in or out of Level 3

                              
  

 

 

    

 

 

   

 

 

    

 

 

 

Ending balance

   $ 643,595       $ 2,685      $ 177,730       $ (1,363
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) These pre-tax gains (losses) are attributable to derivatives still held at September 30, 2013 and September 30, 2012, respectively.

The following table shows the effect on the fair value of the Notes receivable – Rights to MSRs assuming adverse changes to certain key assumptions used in valuing these assets at September 30, 2013 and December 31, 2012:

 

     Discount Rate     Prepayment Speeds     Delinquency Rates  
     100 bps adverse change     10% adverse change     10% adverse change  

At September 30, 2013:

      

Notes Receivable – Rights to MSRs

   $ (12,709   $ (27,600   $ (74,841
     Discount Rate     Prepayment Speeds     Delinquency Rates  
     100 bps adverse change     10% adverse change     10% adverse change  

At December 31, 2012:

      

Notes 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 additional quantitative information on our significant inputs used for valuing our Notes Receivable – Rights to MSRs as of September 30, 2013 and December 31, 2012, respectively:

At September 30, 2013:

Asset

   Unobservable Input    Low     High     Weighted Average  

Notes receivable – Rights to MSRs

   Discount Rate      15     22     20
   Prepayment Speeds      12     28     20
   Delinquency Rates      15     35     27

 

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Table of Contents

At December 31, 2012:

Asset

   Unobservable Input    Low     High     Weighted Average  

Notes receivable – Rights to MSRs

   Discount Rate      15     22     20
   Prepayment Speeds      12     27     19
   Delinquency Rates      15     35     29

Presented below are the carrying values and fair value estimates of financial instruments not carried at fair value at the dates indicated:

 

     September 30,
2013
     September 30,
2013
     December 31,
2012
     December 31,
2012
 
     Carrying Value          Fair Value          Carrying Value      Fair Value  

Financial assets:

           

Match funded advances

   $ 5,925,128       $ 5,925,128       $ 3,098,198       $ 3,098,198   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 5,925,128       $ 5,925,128       $ 3,098,198       $ 3,098,198   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities:

           

Match funded liabilities

   $ 5,187,427       $ 5,170,574       $ 2,690,821       $ 2,697,840   

Other borrowings

     344,072         347,943                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 5,531,499       $ 5,518,517       $ 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 various series of term notes and other fixed rate liabilities. The fair value estimate of the Company’s fixed rate liabilities was determined by using broker quotes. We concluded that no adjustments were required to the quoted prices. 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.

Other Borrowings

Other borrowings include our senior secured term loan facility. The fair value estimate of the Company’s senior secured term loan facility was determined by using broker quotes. We concluded that no adjustments were required to the quoted price. Trading is at a level that the Company believes market quotes to be a reasonable representation of the current fair market value of the senior secured term loan facility. The fair value measurements for Other borrowings are categorized as Level 3.

 

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Table of Contents
4. MATCH FUNDED ADVANCES

Match funded advances on residential loans we service for others are comprised of the following at the dates indicated:

 

     September 30,
       2013      
     December 31,
      2012      
 

Principal and interest advances

   $ 2,520,542       $ 1,231,471   

Escrow advances

     2,432,001         1,399,813   

Corporate advances

     972,585         466,914   
  

 

 

    

 

 

 
   $ 5,925,128       $ 3,098,198   
  

 

 

    

 

 

 

 

5. OTHER ASSETS

Other assets consisted of the following at the dates indicated:

 

     September 30,
       2013      
     December 31,
       2012      
 

Debt service accounts (1)

   $ 131,362       $ 67,776   

Debt issuance costs (2)

     21,999         9,278   

Interest-earning collateral deposits (3)

     1,037         1,904   

Derivative financial instruments (4)

     3,125           

Other

     167         133   
  

 

 

    

 

 

 
   $ 157,690       $ 79,091   
  

 

 

    

 

 

 

 

(1) Under our advance funding facilities, 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 relate to Match funded liabilities and Other borrowings. 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 our counterparty as part of our interest rate swap agreements.
(4) See Notes 3 and 9 for more information regarding our use of derivatives.

 

6. MATCH FUNDED LIABILITIES

Match funded liabilities are comprised of the following at the dates indicated:

 

                        Unused
Borrowing
Capacity (4)
     Balance Outstanding  

Borrowing Type(1)

   Interest Rate (2)    Maturity
(3)
     Amortization
Date (3)
        September 30,
2013 (5,7,8,9)
     December 31,
2012
 

Series 2012 T1 Term Notes

   134 – 396 bps      Oct. 2043         Oct. 2013       $       $ 250,000       $ 250,000   

Series 2012 T2 Term Notes

   199 – 494 bps      Oct. 2045         Oct. 2015                 450,000         450,000   

Series 2013 T1 Term Notes

     90 – 249 bps      Jan. 2044         Jan. 2014                 650,000           

Series 2013 T1 Term Notes

   150 – 323 bps      Jan. 2046         Jan. 2016                 350,000           

Series 2013 T1 Term Notes

   229 – 446 bps      Jan. 2048         Jan. 2018                 150,000           

Series 2013 T2 Term Notes

   115 – 239 bps      May 2044         May 2015                 375,000           

Series 2013 T3 Term Notes

   179 – 313 bps      May 2046         May 2017                 475,000           

Series 2013 T4 Term Notes

   118 – 232 bps      Aug 2044         Aug 2014                 200,000           

Series 2013 T5 Term Notes

   198 – 331 bps      Aug 2046         Aug 2016                 200,000           

Series 2013 T6 Term Notes

   129 – 223 bps      Sep 2044         Sep 2014                 350,000           

Series 2012 VF 1 Notes (6)

   1-Month LIBOR + 110
– 340 bps
     Aug. 2044         Aug. 2014         147,810         402,190         339,465   

Series 2012 VF 2 Notes (6)

   1-Month LIBOR + 110
– 340 bps
     Aug. 2044         Aug. 2014         147,810         402,190         678,928   

Series 2012 VF 3 Notes (6)

   1-Month LIBOR + 110
– 340 bps
     Aug. 2044         Aug. 2014         147,810         402,190         678,928   

Series 2013 VF 1 Notes (10)

   1-Month LIBOR + 288
bps
     Feb. 2044         Feb. 2014         162,643         237,357           

Class A Term Money Market Fund Note (11)

   1-Month LIBOR + 20
bps
     Sep. 2014         Jan. 2014                 265,000         183,462   

Class A Draw Money Market Fund Note (11)

   1-Month LIBOR + 110
bps
     Sep. 2044         Sep. 2014                         81,538   

Class B Term Money Market Fund Note

   275 bps      Sep. 2044         Sep. 2014                 28,500         28,500   
           

 

 

    

 

 

    

 

 

 
            $ 606,073       $ 5,187,427       $ 2,690,821   
           

 

 

    

 

 

    

 

 

 

 

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Table of Contents
(1) Each term note and variable funding note issuance has four classes, an A, B, C, and D class.
(2) The weighted average interest rate at September 30, 2013 was 1.63%. We pay interest monthly.
(3) 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 facilities must be applied to reduce the balance of the note outstanding, and any new advances are ineligible to be financed.
(4) Our unused borrowing capacity is available to us if we have additional eligible collateral to pledge and meet other borrowing conditions. We pay a 0.50% or 0.75% fee on the unused borrowing capacity which varies by facility.
(5) 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.
(6) These Variable Funding Notes were amended during August 2013 to extend the amortization date and maturity date by a year and resulted in new interest rate spreads compared to December 31, 2012. Variable Funding Note balances fluctuate based on Match funded advance activity and our ability to issue fixed rate term notes.
(7) On May 21, 2013, we completed the issuance of $375,000 of two-year and $475,000 of four-year term notes.
(8) On August 8, 2013, we completed the issuance of $200,000 of one-year and $200,000 of three-year term notes.
(9) On September 18, 2013, we completed the issuance of a $350,000 one-year term note.
(10) On July 1, 2013, we issued a new Variable Funding Note series as part of the Follow On 3 acquisition.
(11) The Class A Term Money Market Fund Note and Class A Draw Money Market Fund Note have a combined maximum borrowing capacity of $265,000. By design, the Class A Term Money Market Fund Note balance is reduced at scheduled times and there is an equally offsetting increase to the Class A Draw Money Market Fund Note. The combined balance of these notes was equal to $265,000 at September 30, 2013 and December 31, 2012. On September 26, 2013, we placed a new Money Market Fund Note at a reduced interest rate and amended the related Money Market Fund Draw Note to reduce the interest rate. The amortization date for the Class A Term Money Market Fund Note represents the commencement date for scheduled repayments.

Analysis of Borrowing by Expected Maturity (1):

 

Year of Expected Maturity Date

   As of September 30, 2013  

2013

   $ 250,000   

2014

     2,937,427   

2015

     825,000   

2016

     550,000   

2017 and thereafter

     625,000   
  

 

 

 

Total

   $ 5,187,427   
  

 

 

 

 

(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.

 

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Table of Contents
7. OTHER BORROWINGS

 

       September 30,
2013
     December 31,
2012
 

Senior secured term loan facility (1)

   $ 344,072       $   
  

 

 

    

 

 

 
   $ 344,072       $   
  

 

 

    

 

 

 

 

(1) On June 27, 2013, we entered into a $350,000 senior secured term loan facility. The senior secured term loan facility has an expected maturity date of June 27, 2020 and an interest rate of 3.50% plus one month LIBOR, with a 1.00% LIBOR floor. As of September 30, 2013, the interest rate on our senior secured term loan facility was 4.50%. The senior secured term loan was issued at a discount to par and had a carrying value of $344,072 at September 30, 2013.

Other Borrowings Amortization Schedule:

 

Year of Payment Date

   As of September 30, 2013  

2013

   $ 875   

2014

     3,500   

2015

     3,500   

2016

     3,500   

2017 and thereafter

     337,750   
  

 

 

 

Total

   $ 349,125   
  

 

 

 

 

8. ORDINARY SHARES

Increases in the number of ordinary shares issued during the nine months ended September 30, 2013 and September 30, 2012 are represented in the table below:

 

       2013      2012  

Ordinary shares issued – beginning balance

     55,884,718         20,000   

Issuance of new ordinary shares

     15,132,053         30,564,718   
  

 

 

    

 

 

 

Ordinary shares issued – ending balance

     71,016,771         30,584,718   
  

 

 

    

 

 

 

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 ordinary shares. We received net proceeds of $17,633 from the over-allotment exercise.

On June 26, 2013, we issued 13,000,000 of our ordinary shares, and an additional 1,161,475 of ordinary shares were issued in connection with the exercise of the underwriters’ over-allotment option. The total gross proceeds from the issuance of these additional shares to HLSS were $325,714. After deducting underwriting discounts, commissions and expenses payable by HLSS, the aggregate net proceeds we received were $315,903.

 

9. DERIVATIVE FINANCIAL INSTRUMENTS

We are party to interest rate swap agreements that we recognize on our Interim Condensed Consolidated Balance Sheet at fair value within Other assets and 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. On a quarterly basis we assess and document

 

16


Table of Contents

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 AOCI 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 AOCI are reclassified into earnings in that period.

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 counterparty 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 Note 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.

The following tables provide information about our interest rate swaps at September 30, 2013 and December 31, 2012, respectively:

 

Purpose

   Date
Opened
   Effective
Date (1)
   Maturity        We Pay       We Receive      Balance
Sheet
Location
     Notional  
Amount
     Fair
  Value  
 

Designated as
hedges(2),(3):

                      

Hedge the effects of changes in 1-Month LIBOR

   March
2012
   March

2012

   March
2016
   0.6325%   1-Month
LIBOR
   Other
Liabilities
   $ 108,106       $ 400   

Hedge the effects of changes in 1-Month LIBOR

   May

2012

   May

2012

   May

2016

   0.6070%   1-Month
LIBOR
   Other
Liabilities
     32,583         40   
                   

 

 

    

 

 

 

Total liability derivatives designated as hedges as of September 30, 2013

     140,689         440   
                   

 

 

    

 

 

 

Total liability derivatives as of September 30, 2013

   $ 140,689       $ 440   
                   

 

 

    

 

 

 

Purpose

   Date
Opened
   Effective
Date (1)
   Maturity        We Pay       We Receive      Balance
Sheet
Location
     Notional  
Amount
     Fair
  Value  
 

Designated as
hedges(2),(3):

                      

Hedge the effects of changes in 1-Month LIBOR

   September
2012
   September
2012
   August

2017

   0.5188%   1-Month
LIBOR
   Other
Assets
     206,044         902   

Hedge the effects of changes in 1-Month LIBOR

   January
2013
   January
2014
   July

2014

   0.3375%   1-Month
LIBOR
   Other
Assets
     307,043         (107

Hedge the effects of changes in 1-Month LIBOR

   January
2013
   January
2016
   December

2017

   1.3975%   1-Month
LIBOR
   Other
Assets
     338,009         2,330   
                   

 

 

    

 

 

 

Total asset derivatives designated as hedges as of September 30, 2013

     851,096         3,125   
                   

 

 

    

 

 

 

Total asset derivatives as of September 30, 2013

   $     851,096       $     3,125   
                   

 

 

    

 

 

 

 

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Table of Contents

Purpose

   Date
Opened
   Effective
Date (1)
   Maturity        We Pay       We Receive      Balance
Sheet
Location
     Notional  
Amount
     Fair
  Value  
 

Designated as
hedges(3):

                      

Hedge the effects of changes in 1-Month LIBOR

   March
2012
   March

2012

   March
2016
   0.6325%   1-Month
LIBOR
   Other
Liabilities
   $ 147,351       $ (759

Hedge the effects of changes in 1-Month LIBOR

   May

2012

   May

2012

   May

2016

   0.6070%   1-Month
LIBOR
   Other
Liabilities
     44,221         (174

Hedge the effects of changes in 1-Month LIBOR

   September
2012
   September
2012
   August

2017

   0.5188%   1-Month
LIBOR
   Other
Liabilities
     223,059         (143
                   

 

 

    

 

 

 

Total liability derivatives designated as hedges as of December 31, 2012

     414,631         (1,076
                   

 

 

    

 

 

 

Total liability derivatives as of December 31, 2012

   $      414,631       $      (1,076
                   

 

 

    

 

 

 
(1) The effective date of the swap is the date from which monthly net settlements begin to be computed.
(2) Projected net settlements for the next twelve months total approximately $1,199 of payments to the counterparty.
(3) There was an unrealized pre-tax loss of $1,592 related to our interest rate swaps included in AOCI for the three months ended September 30, 2013, and an unrealized pre-tax gain of $3,761 related to our interest rate swaps included in AOCI for the nine months ended September 30, 2013. There were $798 and $1,363 of unrealized pre-tax losses included in AOCI attributable to derivatives for the three and nine months ended September 30, 2012, respectively. Given the current and expected effectiveness of our hedging arrangements, we do not expect any reclassifications from AOCI into earnings associated with hedging ineffectiveness related to these hedging arrangements during the next twelve months.

The following table summarizes our use of derivatives during the nine months ended September 30:

 

       2013          2012    

Notional balance at beginning of period

   $ 414,631       $   

Additions

     645,052         534,946   

Maturities

               

Terminations

               

Amortization

     67,898         74,952   
  

 

 

    

 

 

 

Notional balance at end of period

   $     991,785       $     459,994   
  

 

 

    

 

 

 

We recognize the right to reclaim cash collateral or the obligation to return cash collateral as part of our hedge agreements. At September 30, 2013, we have the right to reclaim cash collateral of $1,037 and are obligated to return cash collateral of $3,180 as part of our hedge agreements.

 

10. INTEREST INCOME

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 periods ended September 30:

 

     Three Months      Nine Months  
     2013      2012      2013      2012  

Servicing fees collected

   $     200,838       $     27,689       $     431,795       $     57,190   

Subservicing fee payable to Ocwen

     102,040         10,633         214,587         23,093   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net servicing fees retained by HLSS

     98,798         17,056         217,208         34,097   

Reduction in Notes receivable – Rights to MSRs

     24,594         3,039         48,582         6,555   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $     74,204       $     14,017       $     168,626       $     27,542   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Interest income – Other

Another source of revenue for us is the interest we earn on our operating bank accounts and the custodial account balances related to the mortgage loans serviced which are not included in our Interim Condensed Consolidated Balance Sheets. The following table shows our Interest income – other in more detail for the periods ended September 30:

 

     Three Months      Nine Months  
     2013      2012      2013      2012  

Custodial account interest

   $     611       $       $     611       $   

Operating account interest

     86         146         285         283   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $          697       $        146       $          896       $        283   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

11. INTEREST EXPENSE

The following table presents the components of Interest expense for the periods ended September 30:

 

     Three Months      Nine Months  
     2013      2012      2013      2012  

Match funded liabilities

   $     27,108       $     4,090       $     57,793       $ 7,793   

Other borrowings

     4,214                 4,423           

Amortization of debt issuance costs

     4,426         1,901         11,113         4,172   

Interest rate swaps

     332         261         1,027         542   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $     36,080       $     6,252       $     74,356       $   12,507   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

12. INCOME TAXES

Income taxes were provided for based upon the tax laws and rates in countries in which we conduct operations and earn related income. Our effective tax rate for the three and nine months ended September 30, 2013 periods was 2.2% and 0.9%, respectively, compared to 1.1% and 1.2% for the same 2012 periods. 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 subject to U.S federal income taxation as corporations. We computed income tax expense by applying the federal and state combined rate of 38% to the earnings of these subsidiaries.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. As of September 30, 2013, the Company did not have any unrecognized tax benefits related to the current period or any previous period. We 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 period.

Our deferred tax liabilities as of September 30, 2013 relate to the tax effect of the unrecognized gains on our interest rate swaps that are recorded within AOCI. See Notes 3 and 9 for more information regarding our use of derivatives.

 

13. 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 September 30, 2013, we operate a single reportable business segment that holds Rights to MSRs.

 

14. RELATED PARTY TRANSACTIONS

We entered into various agreements with Ocwen and Altisource Portfolio Solutions, S.A. (“Altisource”) in connection with our IPO on March 5, 2012. 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.

 

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We have not obtained the necessary approvals and consents to become the named servicer of our acquired mortgage servicing rights (“Required Third Party Consents”). As a result, 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 with Ocwen for the periods ended September 30:

 

     Three Months      Nine Months  
     2013      2012      2013      2012  

Servicing fees collected

   $     200,838       $ 27,689       $ 431,795       $ 57,190   

Subservicing fee payable to Ocwen

     102,040         10,633         214,587         23,093   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net servicing fees retained by HLSS

     98,798         17,056         217,208         34,097   

Reduction in Notes receivable – Rights to MSRs

     24,594         3,039         48,582         6,555   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 74,204       $ 14,017       $ 168,626       $ 27,542   
  

 

 

    

 

 

    

 

 

    

 

 

 

Servicing advances purchased from Ocwen in the ordinary course of business

   $     3,590,458       $     331,228       $     5,111,443       $     639,966   
  

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2013, Ocwen owed us $9,293 for servicing fees collected but not remitted to us, and we owed Ocwen $4,212 for the subservicing fee earned by Ocwen in September 2013. The Notes receivable – Rights to MSRs are due from Ocwen as of September 30, 2013.

Ocwen Professional Services Agreement

We have a professional services agreement with Ocwen (“Professional Services Agreement”) that requires us to provide certain services to Ocwen and for Ocwen to provide certain services 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, tax, 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 September 30, 2013, Ocwen owed us $303 for professional services provided pursuant to the Professional Services Agreement. During the three and nine months ended September 30, 2013 we earned fees of $491 and $1,458, respectively, for services provided to Ocwen pursuant to the Professional Services Agreement (compared to $669 and $1,664 for the same periods in 2012). Additionally, during the three and nine months ended September 30, 2013 we incurred fees of $30 and $90, respectively, for services received from Ocwen pursuant to the Professional Services Agreement (compared to $30 and $70 for the same periods in 2012).

Altisource Administrative Services Agreement

We have an administrative services agreement with Altisource (“Altisource Administrative Services Agreement”) that requires Altisource to provide certain administrative services to us 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 three and nine months ended September 30, 2013 we incurred expenses of $178 and $530, respectively, for services provided to us pursuant to the Altisource Administrative Services Agreement (compared to $177 and $407 for the same periods in 2012).

 

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Subleases

During the three and nine months ended September 30, 2013 we incurred expenses of $20 and $60, respectively, for the rental of office space under two sublease agreements with Altisource (compared to $20 and $48 for the same periods in 2012).

Receivables from and Payables to Related Parties

The following table summarizes amounts receivable from and payable to related parties at the dates indicated:

 

         September 30,    
2013
         December 31,    
2012
 

Servicing fees collected (1)

   $ 9,293       $ 4,966   

Professional services (2)

     303         1,322   

Advance collections (3)

             21,265   

Other

     514         718   
  

 

 

    

 

 

 

Receivables from Ocwen

   $ 10,110       $ 28,271   
  

 

 

    

 

 

 

Subservicing fees payable (4)

   $ 4,212       $ 890   

Advances made (5)

     27,668           

Professional services (2)

     30         40   

Other

     628         1,815   
  

 

 

    

 

 

 

Payables to Ocwen

   $ 32,538       $ 2,745   
  

 

 

    

 

 

 

Payables to Altisource

   $ 69       $ 129   
  

 

 

    

 

 

 

 

(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 September 30, 2013, 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 less the reduction in Notes receivable – Rights to MSRs as Interest income as shown in Note 10.
(2) The respective amounts are for professional services provided during the periods indicated.
(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 the period indicated.
(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 September 30, 2013, we owed Ocwen for advances made on our behalf. Ocwen is still the named servicer for the securitizations where we currently own Rights to MSRs. Thus, any advances Ocwen makes to these securitizations are an obligation for us, and we reimburse Ocwen at agreed upon settlement dates.

 

15. 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 Interim Condensed 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 Interim Condensed Consolidated Balance Sheets, Statements of Operations and Statements of Cash Flows.

 

16. SUBSEQUENT EVENTS

Subsequent to our balance sheet date of September 30, 2013:

 

   

On October 10, 2013, we paid cash dividends of $10,653 or $0.15 per ordinary share; and

   

On October 17, 2013, we declared a monthly dividend of $0.15 per ordinary share with respect to October, November and December 2013.

 

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Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands unless otherwise stated, except share data )

FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts included in this report including, without limitation, statements regarding our financial position, business strategy and other plans and objectives for our future operations, are forward-looking statements.

These forward-looking statements include declarations regarding our management’s beliefs and current expectations. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “intend,” “consider,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict” or “continue” or the negative of such terms or other comparable terminology. Such statements are not guarantees of future performance as they are subject to certain assumptions, inherent risks and uncertainties in predicting future results and conditions that could cause the actual results to differ materially from those projected in these forward-looking statements. Important factors that could cause actual results to differ materially include, but are not limited to, the following:

 

   

Estimates regarding prepayment speeds, delinquency rates, servicing advances, amortization of mortgage servicing assets, custodial account balances, interest income, operating costs, interest costs and other drivers of our results;

   

Assumptions related to sources of liquidity, our ability to fund servicing advances and the adequacy of our financial resources;

   

Our ability to obtain the Required Third Party Consents to become the named servicer of the mortgage servicing rights;

   

Our ability to pay monthly dividends;

   

Assumptions about the availability of additional portfolios of subprime and Alt-A mortgage servicing rights and our ability to acquire additional mortgage servicing assets from Ocwen and others;

   

The performance of Ocwen as mortgage servicer and our ability to add new mortgage servicing assets on terms consistent with our business and economic model;

   

Assumptions about the effectiveness of our hedging strategy;

   

Expectations regarding incentive fees in our servicing contract and the stability of our gross servicing margin;

   

Our competitive position;

   

The susceptibility of our mortgage servicing assets to fluctuations in valuation;

   

Uncertainty related to future government regulation;

   

Assumptions regarding the availability of refinancing options for subprime and Alt-A borrowers;

   

Assumptions regarding our tax rate and decisions by taxing authorities;

   

General economic and market conditions; and

   

Assumptions regarding amount and timing of additional debt or equity offerings.

All forward-looking statements are subject to certain risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results, performance or achievements could differ materially from those expressed in, or implied by, any such forward-looking statements. Important factors that could cause or contribute to such difference include those risks specific to our business detailed within this report and our other reports and filings with the SEC including our Form 10-K dated February 7, 2013 and subsequent reports and filings with the SEC made after the date hereof. You should not place undue reliance on such forward-looking statements, which speak only as of their dates. We undertake no obligation to update or revise forward-looking statements¸ whether as a result of new information, future events or otherwise. You should carefully consider the risk factors described under the heading “Risk Factors” within our Form 10-K dated February 7, 2013.

INTRODUCTION

The following discussion of the results of operations and changes in financial condition and liquidity of Home Loan Servicing Solutions, Ltd. and its wholly owned subsidiaries (collectively referred to throughout as “HLSS”, “us”, “our”, “we”, or the “Company”) should be read in conjunction with our Interim Condensed Consolidated Financial Statements and the related notes, all included elsewhere in this report on Form 10-Q and within our Form 10-K dated February 7, 2013.

 

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Table of Contents

OVERVIEW

Strategic Priorities

Now in our second year of operations, we intend to continue to execute upon our chief objective which is to acquire mortgage servicing assets. During the past quarter, we completed the Follow On 3 purchase from Ocwen which added $83.3 billion of UPB to our servicing portfolio, and we currently hold the rights to service $176.5 billion of UPB as of September 30, 2013.

We intend to continue to acquire additional mortgage servicing rights in two ways:

 

   

In order to remain fully invested and to offset the impact of prepayments in our servicing portfolio, we expect to continue to utilize cash flow from operations in excess of our dividend to purchase servicing assets that are similar to our current portfolio. We will refer to such transactions as flow transactions which we expect to take place periodically. Certain terms of such flow transactions—including the servicing incentive fee and advance ratio targets—will vary from transaction to transaction. We expect to be able to maintain or moderately grow the size of our servicing portfolio over the next several years through these transactions.

 

   

We may issue additional debt or equity to allow us to execute larger purchases of mortgage servicing assets. These follow-on purchases will be subject to market conditions and will likely require that additional advance financing capacity be arranged.

Ocwen stated that after giving effect to its anticipated purchase of servicing assets from One West, it expects to have servicing assets with approximately $58 billion of UPB that are similar to the assets that HLSS currently holds. Based on our estimates of prepayment speeds, we believe that we can maintain our servicing portfolio for approximately two years by purchasing these assets from Ocwen. Although we cannot guarantee that future transactions will occur, we believe that Ocwen perceives that it has benefited from such transactions and will, therefore, continue to sell mortgage servicing assets to us in this manner.

HLSS remains open to purchasing assets from third parties other than Ocwen, but given the amount of servicing assets remaining at Ocwen, initiating purchases from other third parties has not been a near-term priority. Considering this and our ability to meet our financial and business objectives for some time without purchasing assets from other third parties, we will not engage in a discussion of the competitive dynamics driving the current market for the acquisition of servicing assets at this time. Should Ocwen be unwilling or unable to sell mortgage servicing assets to us in the near future, we expect that there will continue to be opportunities to purchase mortgage servicing assets from other parties.

HLSS also remains open to investing in other asset classes such as agency advances or Federal Housing Administration (“FHA”) guaranteed loans. We expect to make significant progress towards investing in either or both of these asset classes within the next year.

A continued strategic priority for HLSS is to receive the consents necessary for us to become the named servicer for the securitizations where we currently own Rights to MSRs and the associated servicing advances. Based on our current dialogue with consent parties, our near term goal in pursuit of such consents is to establish an operating history that demonstrates a continued capability to perform the servicing requirements, specifically our obligation to fund servicing advances and to make principal and interest remittances in conformity with all requirements of the pooling and servicing agreements.

Our results for the periods ended September 30 are discussed in more detail below.

Changes in Results of Operations Summary

The following table summarizes our condensed consolidated operating results for the periods ended September 30:

 

     Three Months      Nine Months  
             2013                      2012                      2013                      2012          

Revenue

   $ 75,392       $ 14,832       $ 170,980       $ 29,489   

Operating expenses

     3,612         1,936         8,211         4,307   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

     71,780         12,896         162,769         25,182   

Interest expense

     36,080         6,252         74,356         12,507   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     35,700         6,644         88,413         12,675   

Income tax expense

     777         72         816         149   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 34,923       $ 6,572       $ 87,597       $ 12,526   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Three and Nine Months Ended September 2013 versus 2012. Revenue primarily includes interest income recorded on Notes receivable – Rights to MSRs using the prospective interest method. Our 2013 Interest income exceeds 2012 Interest income because our average UPB for the three and nine months ended September 30, 2013 was $179.7 billion and $121.7 billion, respectively, compared to average UPB of $22.8 billion and $16.8 billion for the same periods in 2012. An additional $109.8 billion of UPB in Rights to MSRs purchased from Ocwen during 2013 contributed to the increased 2013 average UPB balances.

Operating expenses for the three and nine months ended September 30, 2013 exceeded operating expenses for the comparable 2012 periods in part because average headcount was eighteen for the three months ended and sixteen for the nine months ended 2013 periods compared to twelve for the three months ended and eleven for the nine months ended 2012 periods. In addition, operating expenses for the nine months ended September 30, 2013 exceeded operating expenses for the nine months ended September 30, 2012 primarily because we had nine full months of operations during 2013 compared to seven months of operations during the comparable 2012 period. For the three and nine months ended September 30, larger average Match funded liability balances contributed $59,767 and $131,701, respectively, to the increase in interest expense which was partially offset by a decrease in interest expense attributable to lower effective interest rates of $34,427 and $74,480, respectively.

Income tax expense was $777 and $816 for the three and nine months ended September 30, 2013, respectively, compared to $72 and $149 for the comparable 2012 periods. Our effective tax rate for the three and nine months ended 2013 periods was 2.2% and 0.9%, respectively, compared to 1.1% and 1.2% for the comparable three and nine months ended 2012 periods.

Summary Operating Information

We operate the business as a single reportable segment. For purposes of our internal management reporting, we separately report the components of Interest income – notes receivable – Rights to MSRs which include Servicing fee revenue, Servicing expense and Amortization expense for MSRs. We provide a reconciliation of our reported results to our internal management reporting for the three and nine months ended September 30, 2013 and September 30, 2012 in the following tables.

We executed our agreements with Ocwen with the intent that we would receive the total amount of the servicing fees collected and that we would pay Ocwen a subservicing fee that is determined based on its collections and advance ratio performance. We evaluate our operating performance and manage our business considering servicing fees collected and subservicing fees paid and maintain our internal management reporting on this basis. The following table presents our condensed consolidated results of operations in accordance with GAAP reconciled to our internally reported financial results.

Our total revenue, total operating expenses and income from operations as presented in our Management Reporting shown below should be considered in addition to, and not as a substitute for total revenue, total operating expenses and income from operations determined in accordance with GAAP.

 

For the three months ended September 30, 2013:    Condensed
Consolidated

     Results (GAAP)    
         Adjustments         Management
Reporting

    (Non-GAAP)    
 

Servicing fee revenue (1)

   $       $ 200,838      $ 200,838   

Interest income—notes receivable – Rights to MSRs (2)

     74,204         (74,204       

Interest income – other

     697                697   

Related party revenue

     491                491   
  

 

 

    

 

 

   

 

 

 

Total revenue

     75,392         126,634        202,026   
  

 

 

    

 

 

   

 

 

 

Operating expenses

       

Compensation and benefits

     2,109                2,109   

Servicing expense (3)

             102,040        102,040   

Amortization of MSRs (4)

             24,594        24,594   

Related party expenses

     228                228   

General and administrative expenses

     1,275                1,275   
  

 

 

    

 

 

   

 

 

 

Total operating expenses

     3,612         126,634        130,246   
  

 

 

    

 

 

   

 

 

 

Income from operations

   $ 71,780       $      $ 71,780   
  

 

 

    

 

 

   

 

 

 

 

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Table of Contents
For the nine months ended September 30, 2013:    Condensed
Consolidated

     Results (GAAP)    
         Adjustments         Management
Reporting

    (Non-GAAP)    
 

Servicing fee revenue (1)

   $       $ 431,795      $ 431,795   

Interest income—notes receivable – Rights to MSRs (2)

     168,626         (168,626       

Interest income – other

     896                896   

Related party revenue

     1,458                1,458   
  

 

 

    

 

 

   

 

 

 

Total revenue

     170,980         263,169        434,149   
  

 

 

    

 

 

   

 

 

 

Operating expenses

       

Compensation and benefits

     4,877                4,877   

Servicing expense (3)

             214,587        214,587   

Amortization of MSRs (4)

             48,582        48,582   

Related party expenses

     680                680   

General and administrative expenses

     2,654                2,654   
  

 

 

    

 

 

   

 

 

 

Total operating expenses

     8,211         263,169        271,380   
  

 

 

    

 

 

   

 

 

 

Income from operations

   $ 162,769       $      $ 162,769   
  

 

 

    

 

 

   

 

 

 

 

For the three months ended September 30, 2012:    Condensed
Consolidated

     Results (GAAP)    
         Adjustments         Management
Reporting

    (Non-GAAP)    
 

Servicing fee revenue (1)

   $       $ 27,689      $ 27,689   

Interest income—notes receivable – Rights to MSRs (2)

     14,017         (14,017       

Interest income – other

     146                146   

Related party revenue

     669                669   
  

 

 

    

 

 

   

 

 

 

Total revenue

     14,832         13,672        28,504   
  

 

 

    

 

 

   

 

 

 

Operating expenses

       

Compensation and benefits

     1,152                1,152   

Servicing expense (3)

             10,633        10,633   

Amortization of MSRs (4)

             3,039        3,039   

Related party expenses

     227                227   

General and administrative expenses

     557                557   
  

 

 

    

 

 

   

 

 

 

Total operating expenses

     1,936         13,672        15,608   
  

 

 

    

 

 

   

 

 

 

Income from operations

   $ 12,896       $      $ 12,896   
  

 

 

    

 

 

   

 

 

 

 

For the nine months ended September 30, 2012:    Condensed
Consolidated

     Results (GAAP)    
         Adjustments         Management
Reporting

    (Non-GAAP)    
 

Servicing fee revenue (1)

   $       $ 57,190      $ 57,190   

Interest income—notes receivable – Rights to MSRs (2)

     27,542         (27,542       

Interest income – other

     283                283   

Related party revenue

     1,664                1,664   
  

 

 

    

 

 

   

 

 

 

Total revenue

     29,489         29,648        59,137   
  

 

 

    

 

 

   

 

 

 

Operating expenses

       

Compensation and benefits

     2,442                2,442   

Servicing expense (3)

             23,093        23,093   

Amortization of MSRs (4)

             6,555        6,555   

Related party expenses

     525                525   

General and administrative expenses

     1,340                1,340   
  

 

 

    

 

 

   

 

 

 

Total operating expenses

     4,307         29,648        33,955   
  

 

 

    

 

 

   

 

 

 

Income from operations

   $ 25,182       $      $ 25,182   
  

 

 

    

 

 

   

 

 

 

 

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Table of Contents
(1) Servicing fee revenue reflects servicing fees received under the agreements with Ocwen.
(2) Interest income – notes receivable – Rights to MSRs represents the net amount of servicing fees received less servicing fees paid and amortization of the Notes receivable – Rights to MSRs. We exclude this interest income from our Management Reporting and instead report the contractual components including Servicing fee revenue, Servicing expense and Amortization of MSRs.
(3) Servicing expense reflects the fee we paid under the agreements with Ocwen.
(4) Amortization of MSRs reflects reductions in the value of the Notes receivable – Rights to MSRs.

Three and nine months ended September 2013 versus September 2012. Servicing fee revenue increased for the three and nine month periods because we owned the servicing rights for significantly greater average UPB during the current 2013 periods compared to the same prior year periods. Servicing fee revenue is a function of principal and interest collected during the period and the contractual servicing fee rate. Average UPB for the three months and nine months ended September 30, 2013 was $179.7 billion and $121.7 billion, respectively, compared to $22.8 billion and $16.8 billion for the comparable 2012 periods.

Operating expenses increased for the three and nine month periods primarily because the scale of our business has significantly increased from 2012 to 2013 as a result of follow-on and flow Rights to MSRs purchases. Operating expenses are primarily comprised of servicing fees paid to Ocwen for servicing the mortgage loans underlying the Rights to MSRs, salaries and wages and professional services. The servicing fees earned by Ocwen during the three and nine months ended September 30, 2013 periods include $24,101 and $51,781, respectively, for the base fee and $77,939 and $162,806, respectively, in incentive fees. The servicing fees earned by Ocwen during the comparable three and nine months ended September 30, 2012 periods include $3,323 and $6,863, respectively, for the base fee and $7,310 and $16,230, respectively, in incentive fees. The difference is primarily attributable to increased average UPB for the current periods compared to the same prior year periods. Amortization expense relates to reduction in UPB due to portfolio run-off and is greater during 2013 due to larger average UPB. There was no change in the valuation of our assets in either the three months or nine months ended September 30, 2013. Our average headcount for the three and nine months ended September 30, 2013 was eighteen and sixteen, respectively, compared to an average headcount of twelve and eleven for the comparable prior year periods.

The following table provides selected portfolio statistics as of September 30:

 

(in thousands, except for loan count data)

       2013             2012             % Change      

Residential Assets Serviced

      

Unpaid principal balance:

      

Performing loans (1)

   $ 144,026,950      $ 36,257,325        297

Non-performing loans

     29,568,935        9,204,862        221   

Non-performing real estate

     2,952,222        1,061,446        178   
  

 

 

   

 

 

   

Total residential assets serviced

   $ 176,548,107      $ 46,523,633        279   
  

 

 

   

 

 

   

Percent of total UPB:

      

Non-performing residential assets serviced

     18.4     22.1     (17

Number of:

      

Performing loans (1)

     935,349        264,904        253   

Non-performing loans

     146,507        47,283        210   

Non-performing real estate

     15,918        5,546        187   
  

 

 

   

 

 

   

Total number of residential assets serviced

     1,097,774        317,733        246   
  

 

 

   

 

 

   

Percent of total number:

      

Non-performing residential assets serviced

     14.8     16.6     (11

 

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(1) Performing loans include those loans that are current or have been delinquent for less than 90 days in accordance with their original terms and those loans for which borrowers are making scheduled payments under loan modification, forbearance or bankruptcy plans. Performing loans also include loans for which we have master servicing rights which are reported based on scheduled UPB. We consider all other loans to be non-performing.

The following table provides selected portfolio statistics for the three months ended September 30:

 

(in thousands, except for loan count data)

           2013                     2012                     % Change          

Average residential assets serviced

   $ 179,725,089      $ 22,797,355        688

Prepayment speed (average CPR)

     13.7     12.6     9   

Average number of residential assets serviced

     671,664        182,332        268   

The following table provides selected portfolio statistics for the nine months ended September 30:

 

(in thousands, except for loan count data)

           2013                     2012                     % Change          

Average residential assets serviced

   $ 121,744,295      $ 16,806,681        624

Prepayment speed (average CPR)

     13.0     14.2     (8

Average number of residential assets serviced

     641,489        127,907        402   

The following tables provide information regarding changes in our portfolio of residential assets serviced for the three and nine months ended September 30:

 

(in thousands, except for loan count data)

           UPB                     Loan Count           

Servicing portfolio at June 30, 2013

   $ 99,912,023        654,701   

Additions

     83,300,984        498,273   

Runoff

     (6,664,900     (55,200
  

 

 

   

 

 

 

Servicing portfolio at September 30, 2013

   $ 176,548,107        1,097,774   
  

 

 

   

 

 

 

(in thousands, except for loan count data)

           UPB                     Loan Count           

Servicing portfolio at December 31, 2012

   $ 79,360,874        549,949   

Additions

     109,833,116        632,913   

Runoff

     (12,645,883     (85,088
  

 

 

   

 

 

 

Servicing portfolio at September 30, 2013

   $ 176,548,107        1,097,774   
  

 

 

   

 

 

 

(in thousands, except for loan count data)

           UPB                     Loan Count           

Servicing portfolio at June 30, 2012

   $ 17,294,385        109,890   

Additions

     29,860,255        210,175   

Runoff

     (631,007     (2,332
  

 

 

   

 

 

 

Servicing portfolio at September 30, 2012

   $ 46,523,633        317,733   
  

 

 

   

 

 

 

 

(in thousands, except for loan count data)

           UPB                     Loan Count           

Servicing portfolio at December 31, 2011

   $          

Additions

     48,034,827        323,251   

Runoff

     (1,511,194     (5,518
  

 

 

   

 

 

 

Servicing portfolio at September 30, 2012

   $ 46,523,633        317,733   
  

 

 

   

 

 

 

As of September 30, 2013, the balance of deferred servicing fees related to delinquent borrower payments was $493.2 million compared to $233.3 million at December 31, 2012.

 

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Change in Financial Condition Summary

The overall increase in total assets of $3,228,042 and total liabilities of $2,883,592 during the nine months ended September 30, 2013 primarily resulted from:

 

   

The completion of three asset purchases from Ocwen totaling $3,878,379;

 

   

Issuance of 15,132,053 ordinary shares which resulted in net proceeds to us of $333,536;

 

   

A new senior secured term loan facility which increased total liabilities by $344,072; and

 

   

Advance facilities activity: we received $662,977 in Match funded advance remittances and had net proceeds of $2,496,606 from Match funded liabilities.

The assets acquired included Notes receivable – Rights to MSRs which had a balance of $643,595 representing 9.4% of total assets at September 30, 2013. Notes receivable – Rights to MSRs are carried at fair value which is determined based on an appraisal prepared with the assistance of an independent valuation firm and requires the use of significant unobservable inputs. The most significant assumptions used in the appraisal are:

 

   

Discount rates reflecting the risk of earning the future income streams ranging from 15% to 22%.

 

   

Interest rate used for calculating the cost of servicing advances of 1-Month LIBOR + 3.75%.

 

   

Mortgage loan prepayment projections ranging from 12% to 28% 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.

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.

Total equity amounted to $1,225,083 at September 30, 2013 as compared to $880,633 at December 31, 2012. This increase of $344,450 is primarily due to the issuance of new ordinary shares (net of expenses) of $333,536 and net income of $87,597, offset by dividends declared of $79,425. In addition, we recorded $2,742 of unrealized gains (net of tax) on interest rate swaps that we designated as cash flow hedges.

LIQUIDITY AND CAPITAL RESOURCES

We define liquidity as unencumbered cash balances plus unused, collateralized advance financing capacity. Our liquidity as of September 30, 2013, as measured by cash and available credit, was $275,653, an increase of $166,415 from December 31, 2012. At September 30, 2013, our cash position was $76,832 compared to $76,048 at December 31, 2012, and we had $198,821 of fully collateralized available credit on our advance financing facilities as of the latter date which we deem to be similar to cash. We did not draw on this available credit to minimize interest expense during the current period. Regarding the investment of cash, our investment policies emphasize principal preservation and availability by limiting the investment to demand deposit accounts.

 

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Investment policy and funding strategy. Our primary sources of funds for near-term liquidity are:

 

   

Interest income – notes receivable – Rights to MSRs; and

   

Proceeds from Match funded liabilities.

Potential long-term sources of liquidity include proceeds from the issuance of debt or equity.

Our primary uses of funds are:

 

   

Payments for advances in excess of collections on our existing servicing portfolio;

   

Payments of interest and operating costs;

   

Purchases of MSRs and related servicing advances; and

   

Repayments of borrowings.

In managing our liquidity position, our primary focus is on maintaining sufficient cash and unused borrowing capacity to meet our advancing obligations, pay expenses and purchase additional assets. We regularly monitor and project our cash position and borrowing capacity and consider this in sizing asset purchases.

At September 30, 2013, $606,073 of our total maximum borrowing capacity on our advance facilities remained unused. We maintain unused borrowing capacity for two reasons:

 

   

As a protection should advances increase due to increased delinquencies; and

   

To provide capacity for the acquisition of additional servicing rights.

Outlook. We believe that our cash balance and unused advance financing capacity are sufficient to meet foreseeable requirements.

Debt and Match funded liability summary. As of September 30, 2013, we had $606,073 of unused borrowing capacity on our advance facilities. Our ability to continue to pledge collateral under our advance facilities depends on the performance of the collateral. Currently, the large majority of our collateral qualifies for financing. The debt covenants for our advance facilities and senior secured term loan facility (“Facilities”) 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 Facilities. We believe we are in compliance with these covenants and do not expect them to restrict our activities. During the current quarter, we issued three term notes with a combined balance of $750,000. In addition, we issued a new variable funding note series, placed a new money market fund note and amended the related money market fund draw note to reduce the interest rate.

Liquidity Risk. We are exposed to liquidity risk should the cash required to make new advances pursuant to servicing contracts and our agreements with Ocwen exceed the amount of advance repayments. In general, we finance our operations through operating cash flows and have advance financing facilities in place with sufficient capacity to cover the majority of cash required to make new advances. However, our Facilities contain borrowing conditions which if not met, could affect our ability to borrow on new advances and affect our liquidity.

Cash flows for the periods ended September 30.

The following table presents a summary of our cash flows for the nine months ended September 30:

 

             2013                     2012          

Net income

   $ 87,597      $ 12,526   

Adjustments for non-cash items

     11,310        3,980   

Changes in working capital accounts

     657,258        74,207   
  

 

 

   

 

 

 

Cash flows from operating activities

     756,165        90,713   

Cash flows from investing activities

     (3,831,207     (1,352,886

Cash flows from financing activities

     3,075,826        1,295,640   
  

 

 

   

 

 

 

Net increase in cash

     784        33,467   

Cash at beginning of period

     76,048        283   
  

 

 

   

 

 

 

Cash at end of period

   $ 76,832      $ 33,750   
  

 

 

   

 

 

 

 

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Nine months ended September 30, 2013. Our operating activities provided $756,165 of cash. Components of operating cash flows included amounts provided by changes in working capital accounts of $657,258 and by our Net income of $87,597, adjusted for amortization of debt issuance costs of $11,113 and accretion of our original issuance discount related to our senior secured term loan facility of $197. The primary contributors to the changes in working capital accounts were reductions in Match funded advances of $662,977 and Related party receivables of $16,989 and increases in debt service accounts of $63,586 and Related party payables of $32,315. The remainder of the working capital activity relates to a net increase in cash flows from operations due to movements in other assets and other liabilities of $8,563.

The primary driver of the reduction in Related party receivables was advance collections due from Ocwen of $21,265. Increases in Related party payables were primarily attributable to subservicing fees payable to Ocwen of $4,212 for September subservicing activity and an amount due to Ocwen of $27,668 for advances made on our behalf at the end of September. The collection of Match funded advances of $662,977 was used to pay down $643,585 of our Match funded liabilities which resulted in net cash provided of $19,392. Refer to the financing activities discussion below for more details regarding Match funded liability cash movements during the current period. Lastly, the increase in debt service accounts relates to payments made to the trustees of our advance financing facilities. The trustees release these funds to pay down our Match funded liabilities on scheduled funding dates.

Our investing activities used $3,831,207 of cash during the nine months ended September 30, 2013 which primarily related to our acquisition of Rights to MSRs and advances associated with our three asset purchases from Ocwen. We paid $387,300 to Ocwen for Notes receivable – Rights to MSRs and $3,492,489 for Match funded advances. Finally, we had a reduction in Notes receivable – Rights to MSRs of $48,582 resulting from runoff in the UPB of the mortgage loans serviced.

Our financing activities provided $3,075,826 of cash. New ordinary share issuances during the period provided $334,390 of cash, offset by offering costs of $542. We borrowed $3,140,192 on our servicing advance financing facilities related to our asset purchases from Ocwen, and overall, we had net proceeds from Match funded liabilities of $2,496,606 during the period. We received $344,750 in proceeds in connection with the issuance of debt under our senior secured term loan facility to help fund our Follow On 3 purchase from Ocwen. These amounts were offset by payments of debt issuance costs of $23,025 and a quarterly principal payment of $875 on our senior secured term loan facility. Additionally, we paid dividends of $75,478.

Nine months ended September 30, 2012. Our operating activities provided $90,713 of cash. Components of operating cash flows included amounts provided by net collections on Match funded advances of $55,788 and by our Net income of $12,526, adjusted for amortization of debt issuance costs of $3,980. Additional sources of cash flows resulted from increases in Related party payables of $24,826, decreases in Related party receivables of $7,083 and increases in Other liabilities of $3,561. These cash sources were offset by uses of cash resulting from an increase in our debt service accounts of $13,744 which was related to higher Match funded liability balances at the end of the period and increases in Other assets of $3,307.

Our investing activities used $1,352,886 of cash during the nine months ended September 30, 2012 to acquire Rights to MSRs, advances and other related assets net of liabilities assumed in connection with our acquisitions during the year. We paid $184,285 to Ocwen for Notes receivable – Rights to MSRs and $1,175,156 for Match funded advances and other assets, net of liabilities assumed. Lastly, we had a reduction in Notes receivable – Rights to MSRs of $6,555 resulting from runoff in the UPB of the mortgage loans serviced.

Our financing activities provided $1,295,640 of cash. New ordinary share issuances during the period provided $418,097 of cash, net of offering expenses. We borrowed $931,908 on our servicing advance financing facility related to the asset purchases from Ocwen during the period. This amount was offset by repayments to the facility of $39,331 and payments of debt issuance costs of $6,810. Additionally, we paid dividends of $8,224.

 

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DIVIDENDS

We intend to distribute at least 90 percent of our earnings over time in the form of monthly cash dividends. During 2013, we declared the following dividends:

 

Record Date

  

Payment Date

  

Amount per Ordinary Share

January 31, 2013

   February 11, 2013    $0.12

February 28, 2013

   March 11, 2013    $0.13

March 29, 2013

   April 10, 2013    $0.13

April 30, 2013

   May 10, 2013    $0.14

May 31, 2013

   June 10, 2013    $0.14

June 28, 2013

   July 10, 2013    $0.14

July 31, 2013

   August 12, 2013    $0.15

August 30, 2013

   September 10, 2013    $0.15

September 30, 2013

   October 10, 2013    $0.15

October 31, 2013

   November 11, 2013    $0.15

November 29, 2013

   December 10, 2013    $0.15

December 31, 2013

   January 10, 2014    $0.15

CONTRACTUAL OBLIGATIONS, OFF-BALANCE SHEET ARRANGEMENTS AND OTHER MATTERS

Contractual Obligations

We believe that we have adequate resources to fund all unfunded commitments to the extent required and meet all contractual obligations as they come due. Such contractual obligations include payments on our senior secured term loan facility and operating leases. The following table sets forth certain information regarding our contractual obligations as of September 30, 2013:

 

          Total             Less than    
1 year
        1 – 3 years             3 – 5 years             More than    
5 years
 

Operating leases (1)

  $ 88      $ 81      $ 7      $      $   

Other borrowings (2)

    349,125        3,500        7,000        7,000        331,625   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual cash obligations

  $ 349,213      $ 3,581      $ 7,007      $ 7,000      $ 331,625   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) We sublease office space from Altisource in Atlanta, Georgia and West Palm Beach, Florida in the aggregate amount of $7 per month. The leases terminate on October 31, 2014.
(2) Our senior secured term loan facility has an expected maturity date of September 27, 2020 and requires scheduled quarterly principal payments of $875. Any remaining principal outstanding on the senior secured term loan facility becomes due at maturity.

Off-Balance Sheet Arrangements

In the normal course of business, we may engage in transactions with a variety of financial institutions and other companies that we do not reflect on our Interim Condensed Consolidated Balance Sheet. We are subject to potential financial loss if the counterparties to our off-balance sheet transactions are unable to complete an agreed upon transaction. We seek to limit counterparty risk through financial analysis, dollar limits and other monitoring procedures. We also entered into non-cancelable operating leases principally for our office facilities.

Derivatives . We record all derivative transactions at fair value on our Interim Condensed Consolidated Balance Sheet. We use these derivatives primarily to manage our interest rate risk. The notional amounts of our derivative contracts do not reflect our exposure to credit loss.

Involvement with SPEs . We use SPEs in the financing of our servicing advances. We use match funded securitization facilities to finance our servicing advances. The SPEs to which the advances are transferred in these securitization transactions are included in our Interim Condensed Consolidated Financial Statements because we are the primary beneficiary of the SPEs which are also VIEs. The holders of the debt of the SPEs can look only to the assets of the SPEs for satisfaction of the debt and have no recourse against HLSS.

VIEs . If we determine that we are the primary beneficiary of a VIE, we report the VIE in our Interim Condensed Consolidated Financial Statements. As of September 30, 2013, we have no VIEs other than our advance financing SPEs.

Related Parties

We have entered into various agreements at market rates with Ocwen and Altisource. 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. We use actual costs incurred plus a 15% mark-up as a proxy for market rates.

 

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At September 30, 2013, Ocwen owed us $303 for professional services provided pursuant to the Professional Services Agreement. During the three and nine months ended September 30, 2013 we earned fees of $491 and $1,458, respectively, for services provided to Ocwen pursuant to the Professional Services Agreement (compared to $669 and $1,664 for the same periods in 2012). Additionally, during the three and nine months ended September 30, 2013 we incurred fees of $30 and $90, respectively, for services received from Ocwen pursuant to the Professional Services Agreement (compared to $30 and $70 for the same periods in 2012). Revenue and expenses from the Professional Services Agreement are included within Related party revenue and Related party expenses, respectively.

During the three and nine months ended September 30, 2013 we incurred expenses of $178 and $530, respectively, for services provided to us pursuant to the Altisource Administrative Services Agreement (compared to $177 and $407 for the same periods in 2012). Additionally, during the three and nine months ended September 30, 2013 we incurred expenses of $20 and $60, respectively, for the rental of office space under two sublease agreements with Altisource (compared to $20 and $48 for the same periods in 2012). We reported these amounts within Related party expenses for each period then ended.

CRITICAL ACCOUNTING POLICIES

There were no significant changes to the accounting policies that we believe are the most critical to an understanding of our results of operations and financial condition which are disclosed in our most recent Form 10-K for the year ended December 31, 2012.

RECENT ACCOUNTING DEVELOPMENTS

See Part I, Item 1, “Interim Condensed Consolidated Financial Statements — Note 1, Summary of Significant Accounting Policies — Recent Accounting Pronouncements.”

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (DOLLARS IN THOUSANDS)

Market risk includes liquidity risk and interest rate risk. Market risk also reflects the risk of decline in the valuation of financial instruments and the collateral underlying loans. Our Investment Committee reviews significant transactions that may impact market risk and is authorized to utilize a wide variety of techniques and strategies to manage market risk including, in particular, interest rate risk.

Liquidity Risk

See the “Liquidity and Capital Resources” section for additional discussion of liquidity and related risks.

Interest Rate Risk

Interest rate risk is a function of (i) the timing and (ii) the dollar amount of assets and liabilities that re-price at various points in time. We are exposed to interest rate risk to the extent that our interest rate sensitive liabilities mature or re-price at different speeds, or different bases, than our interest-earning assets.

Our primary strategy to manage the impact of changes in interest rates is to primarily borrow at fixed rates on the term notes in our Match funded liability structure. We also receive the floating rate interest earned on custodial account balances related to the mortgage loans serviced under our subservicing agreement with Ocwen. Further, we executed a hedging strategy aimed at mitigating the impact of changes in variable interest rates within a certain period based on the projected excess of interest rate sensitive liabilities over interest rate sensitive assets. Future variances between the projected excess of interest rate sensitive liabilities over interest rate sensitive assets and actual results could cause us to become over-hedged or under-hedged.

 

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If interest rates increase by 1% on our variable-rate borrowing and interest earning account balances, we estimate a net negative impact of approximately $706 resulting from an increase of $13,543 in annual interest income compared to an increase of $14,249 in annual interest expense based on September 30, 2013 balances.

 

         September 30,    
2013
 

Variable-rate borrowings outstanding (1)

   $ 2,052,999   

Fixed-rate borrowings outstanding

     3,478,500   

Custodial account balances (excluded from our Interim Condensed Consolidated Balance Sheet)

     1,276,406   

Notional balance of interest rate swaps (2)

     346,733   

 

(1) A portion of this balance is attributable to our senior secured term loan facility which has an interest rate of 3.50% plus one month LIBOR, with a 1.00% LIBOR floor.
(2) Relates to the non-forward starting interest rate swaps entered into to hedge our exposure to rising interest rates on a portion of our variable-rate borrowings with an outstanding balance of $2,052,999 at September 30, 2013.

Our Interim Condensed Consolidated Balance Sheet at September 30, 2013 includes $76,832 of interest-earning cash accounts and $1,037 of interest-earning collateral accounts.

 

ITEM 4. CONTROLS AND PROCEDURES

Our management, under the supervision of and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of September 30, 2013. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2013 our disclosure controls and procedures (1) were designed and functioning effectively to ensure that material information relating to HLSS, including its consolidated subsidiaries, is made known to our Chief Executive Officer and Chief Financial Officer by others within those entities particularly during the period in which this report was being prepared and (2) were operating effectively in that they provided reasonable assurance that information required to be disclosed by HLSS in the reports that it files or submits under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to management, including the Chief Executive Officer or Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) occurred during the fiscal quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

See Part I, Item 1, “Interim Condensed Consolidated Financial Statements — Note 15, “Commitments and Contingencies,” for more information regarding legal proceedings.

 

ITEM 1A. RISK FACTORS

We include a discussion of the principal risks and uncertainties that affect or could affect our business operations within our latest Form 10-K dated February 7, 2013.

 

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ITEM 6. EXHIBITS

Exhibit Index

 

3.1    Amended and Restated Memorandum and Articles of Association of Home Loan Servicing Solutions, Ltd. Incorporated by reference to the registrant’s registration statement on Form S-1/A filed on February 6, 2012.
10.1    Sale Supplement, dated July 1, 2013. Incorporated by reference to the registrant’s Current Report on Form 8-K filed July 8, 2013.
10.2    Subservicing Supplement, dated July 1, 2013. Incorporated by reference to the registrant’s Current Report on Form 8-K filed July 8, 2013.
10.3    Base Indenture, dated July 1, 2013. Incorporated by reference to the registrant’s Current Report on Form 8-K filed July 8, 2013.
10.4    Series 2013-VF1 Indenture Supplement, dated July 1, 2013. Incorporated by reference to the registrant’s Current Report on Form 8-K filed July 8, 2013.
10.5    Receivables Pooling Agreement, dated July 1, 2013. Incorporated by reference to the registrant’s Current Report on Form 8-K filed July 8, 2013.
10.6    Receivables Sale Agreement, dated July 1, 2013. Incorporated by reference to the registrant’s Current Report on Form 8-K filed July 8, 2013.
10.7    Series 2013-T4 Indenture Supplement, dated August 8, 2013. Incorporated by reference to the registrant’s Current Report on Form 8-K filed August 13, 2013.
10.8    Series 2013-T5 Indenture Supplement, dated August 8, 2013. Incorporated by reference to the registrant’s Current Report on Form 8-K filed August 13, 2013.
10.9    Series 2012-VF1 Second Amended and Restated Indenture Supplement, dated as of August 30, 2013 (filed herewith).
10.10    Series 2012-VF2 Second Amended and Restated Indenture Supplement, dated as of August 30, 2013 (filed herewith).
10.11    Series 2012-VF3 Second Amended and Restated Indenture Supplement, dated as of August 30, 2013 (filed herewith).
10.12    Series 2013-T6 Indenture Supplement, dated September 18, 2013. Incorporated by reference to the registrant’s Current Report on Form 8-K filed September 19, 2013.
10.13    Series 2013-MM1 Third Amended and Restated Indenture Supplement, dated as of September 26, 2013 (filed herewith).
10.14    Amendment to Sale Supplement, dated as of September 30, 2013 (filed herewith).
10.15    Amendment to Subservicing Supplement, dated as of September 30, 2013 (filed herewith).
11.1    Computation of earnings per share. Incorporated by reference from “PART I – FINANCIAL INFORMATION; ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)” on page 3 herein.
31.1    Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1    Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2    Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

* Furnished (and not filed) herewith pursuant to Item 601(b)(32)(ii) of Regulation S-K under the Exchange Act.

 

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Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    HOME LOAN SERVICING SOLUTIONS, LTD.

Date: October 17, 2013

   

By: /s/ James E. Lauter

   

James E. Lauter

   

Chief Financial Officer and Chief Accounting Officer

(On behalf of the Registrant and as its principal financial officer)

 

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