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 Companys Annual Report are not required to be included on an interim basis in the
Companys 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 Companys 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
|
|
|
|
|
|
|
|
|
|
|
7
(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 820s 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.
8
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
|
|
9
(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 entitys 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.
10
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
12
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 Companys 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 Companys 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.
13
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
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
(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.
|
15
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
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
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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 incomenotes 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
19
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).
20
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.
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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21