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” or the “Company”) focus on acquiring residential mortgage 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.
Principles of Consolidation
Our financial statements include the accounts of Home Loan Servicing Solutions, Ltd. and its wholly owned subsidiaries, as well as
three
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 SPEs in exchange for cash. The SPEs issue 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 Match funded 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.
On March 3, 2014, we acquired Government National Mortgage Association (“GNMA”) loans from Ocwen with an unpaid principal balance (“UPB”) of
$549,411
. Ocwen initially acquired these loans through the GNMA early buy-out (“EBO”) program
which
allows servicers of GNMA insured loans to buy delinquent loans from the applicable loan securitization pools. We account for these GNMA EBO loans as “Loans held for investment,” as described more fully later in this footnote. We also financed the GNMA EBO advances related to the GNMA EBO loans, and we account for this arrangement as a financing transaction because Ocwen retained title and all other rights and rewards associated with the GNMA EBO advances. Collectively, the purchase of GNMA EBO loans and financing of the related advances are referred to as the “GNMA EBO Transaction.” Our GNMA EBO loans are in a SPE with a related financing facility ("Mortgage Loan Facility"). The accounts of this SPE are included in our Interim Condensed Consolidated Financial Statements. These transfers to the SPE 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 GNMA EBO loans on our Interim Condensed Consolidated Balance Sheet as Loans held for investment and the related liabilities as Other borrowings. We use collections on the GNMA EBO loans pledged to the SPE to repay principal and to pay interest and the expenses of the entity. The holders of the debt issued by this SPE can look beyond the assets of the SPE for satisfaction of the
debt and therefore have recourse against HLSS. It is our expectation that since our GNMA EBO loans are insured by the
Federal Housing Administration (“FHA”), the cash flows of this SPE will be sufficient to meet all claims of the debt holders. HLSS is responsible for making any principal or interest payments to the debt holders not covered by the cash flows of the SPE.
The following tables summarize the assets and liabilities of our consolidated SPEs, at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2014
|
|
Match Funded Advance SPEs
|
|
Mortgage Loans SPE
|
|
Total
|
|
|
|
|
|
|
|
Match funded advances
|
|
$
|
6,343,397
|
|
|
$
|
—
|
|
|
$
|
6,343,397
|
|
Loans held for investment
|
|
—
|
|
|
552,644
|
|
|
552,644
|
|
Related party receivables (1)
|
|
56,655
|
|
|
—
|
|
|
56,655
|
|
Other assets (2)
|
|
120,980
|
|
|
61,662
|
|
|
182,642
|
|
Total assets
|
|
$
|
6,521,032
|
|
|
$
|
614,306
|
|
|
$
|
7,135,338
|
|
|
|
|
|
|
|
|
Match funded liabilities
|
|
$
|
5,775,180
|
|
|
$
|
—
|
|
|
$
|
5,775,180
|
|
Other borrowings(3)
|
|
—
|
|
|
472,734
|
|
|
472,734
|
|
Other liabilities
|
|
4,525
|
|
|
1,220
|
|
|
5,745
|
|
Total liabilities
|
|
$
|
5,779,705
|
|
|
$
|
473,954
|
|
|
$
|
6,253,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013
|
|
Match Funded Advance SPEs
|
|
Mortgage Loans SPE
|
|
Total
|
|
|
|
|
|
|
|
Match funded advances
|
|
$
|
6,387,781
|
|
|
$
|
—
|
|
|
$
|
6,387,781
|
|
Loans held for investment
|
|
—
|
|
|
—
|
|
|
—
|
|
Related party receivables (1)
|
|
60,239
|
|
|
—
|
|
|
60,239
|
|
Other assets (2)
|
|
119,902
|
|
|
—
|
|
|
119,902
|
|
Total assets
|
|
$
|
6,567,922
|
|
|
$
|
—
|
|
|
$
|
6,567,922
|
|
|
|
|
|
|
|
|
Match funded liabilities
|
|
$
|
5,715,622
|
|
|
$
|
—
|
|
|
$
|
5,715,622
|
|
Other borrowings(3)
|
|
—
|
|
|
—
|
|
|
—
|
|
Other liabilities
|
|
4,673
|
|
|
—
|
|
|
4,673
|
|
Total liabilities
|
|
$
|
5,720,295
|
|
|
$
|
—
|
|
|
$
|
5,720,295
|
|
|
|
(1)
|
Related party receivables principally includes 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, debt issuance costs and advances we financed as part of the GNMA EBO Transaction. See Note 5 for more information about our Other assets.
|
|
|
(3)
|
Other borrowings include the carrying value of our Mortgage Loan Facility. See Note 7 for more information about our Other borrowings.
|
Loans Held for Investment and Related Accrued Income
We account for our GNMA EBO loans under
ASC 310-20, Receivables – Nonrefundable Fees and Other Costs
. In accordance with
ASC 310-20 30-5
, these loans are recorded at the UPB plus a purchase premium which is the amount we paid to purchase these loans. The purchase premium is amortized into interest income using the interest method of accounting. These loans are FHA insured, making the collectability of the entire Loans held for investment balance reasonably assured. We evaluate whether all contractual payments will be collected as scheduled according to contractual terms. We incorporate the probable recovery of such payments due to FHA insurance in this analysis. Our Loans held for investment related to GNMA EBO loans are our only class of mortgage loans held for investment, and we evaluate these loans on a periodic basis to ensure a carrying value of the lower of cost or fair value. We had
no
loan impairments as of and for the period ended
March 31, 2014
.
We accrue interest income on our GNMA EBO loans at the note rate specific to each individual GNMA EBO loan. We allow for doubtful receivables if we have concerns about the collectability of all or a portion of our accrued income. As of and for the period ended
March 31, 2014
, we did not have an allowance for accrued interest income related to our GNMA EBO loans. We periodically evaluate whether our GNMA EBO loans should be placed on non-accrual status. All of our GNMA EBO loans remained on accrual status for the period ended
March 31, 2014
.
Recent Accounting Pronouncements
Accounting
Standards Update (“ASU”) 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 years ended beginning after December 15, 2013. Our adoption of this standard effective January 1, 2014, did not have a material impact on our Interim Condensed Consolidated Financial Statements.
ASU 2014-06.
This ASU provides
technical corrections and improvements to Accounting Standards Codification glossary terms. Our adoption of this standard, effective March 14, 2014, did not have a material impact on our Interim Condensed Consolidated Financial Statements.
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, 2013
, which was filed with the SEC on February 6, 2014.
2. ASSET ACQUISITIONS
We purchased assets from Ocwen on
March 3, 2014
of GNMA EBO loans with UPB of
$549,411
. Because these loans earn interest at a rate that is higher than current market rates, the loans were purchased at a premium to par, resulting in a total purchase price of
$556,618
. We amortize the purchase price premium using the interest method of accounting. The following table summarizes the transaction and reconciles the cash used to acquire the GNMA EBO loans:
|
|
|
|
|
GNMA EBO loans purchase price(1)
|
$
|
556,618
|
|
Sources:
|
|
Cash on-hand
|
$
|
83,884
|
|
SPE financing
|
$
|
472,734
|
|
|
|
(1)
|
The cash used to purchase these assets is shown within “Purchase of loans held for investment” of the Interim Condensed Consolidated Statement of Cash Flows.
|
During the three months ended
March 31, 2013
, we executed our third flow purchase (“Flow 3”) wherein we used cash on-hand and Match funded liabilities to purchase the following:
|
|
•
|
the contractual right to receive the servicing fees related to mortgage servicing rights with respect to
93
pooling and servicing agreements ("PSA") with UPB of approximately
$15.9 billion
which we account for as Notes receivable - Rights to MSRs; and
|
|
|
•
|
the outstanding servicing advances associated with the related pooling and servicing agreements.
|
The following table summarizes the purchase price of the assets we acquired from Ocwen during the three months ended
March 31, 2013
and reconciles the cash used to acquire such assets:
|
|
|
|
|
Notes receivable – Rights to MSRs
|
$
|
100,707
|
|
Match funded advances (1)
|
$
|
703,206
|
|
Purchase price, as adjusted
|
$
|
803,913
|
|
Post-closing adjustments
|
$
|
10,406
|
|
Total cash used
|
$
|
814,319
|
|
Sources:
|
|
Cash on-hand
|
$
|
153,142
|
|
Match funded liabilities
|
$
|
661,177
|
|
|
|
(1)
|
The
cash
used to purchase these assets is shown within the “Acquisition of advances in connection with the purchase of residential mortgage assets” 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; and
|
|
|
•
|
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 and liabilities 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 plus 3.50%
;
|
|
|
•
|
Mortgage loan prepayment projections ranging from
12%
to
28%
of the related mortgage lifetime projected prepayment rate; and
|
|
|
•
|
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.
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 is 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 and liabilities which we measure at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2014:
|
|
Fair value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Notes receivable – Rights to MSRs
|
|
$
|
634,399
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
634,399
|
|
Derivative financial instruments
|
|
3,523
|
|
|
—
|
|
|
—
|
|
|
3,523
|
|
Total assets
|
|
$
|
637,922
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
637,922
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
444
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
444
|
|
Total liabilities
|
|
$
|
444
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013:
|
|
Fair value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Notes receivable – Rights to MSRs
|
|
$
|
651,060
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
651,060
|
|
Derivative financial instruments
|
|
3,835
|
|
|
—
|
|
|
—
|
|
|
3,835
|
|
Total assets
|
|
$
|
654,895
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
654,895
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
529
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
529
|
|
Total liabilities
|
|
$
|
529
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
For the three months ended March 31,
|
|
Notes receivable – Rights to MSRs
|
|
Derivative
Financial
Instruments
|
|
Notes receivable – Rights to MSRs
|
|
Derivative
Financial
Instruments
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
651,060
|
|
|
$
|
3,306
|
|
|
$
|
303,705
|
|
|
$
|
(1,076
|
)
|
Purchases and reductions:
|
|
|
|
|
|
|
|
|
Purchases
|
|
—
|
|
|
—
|
|
|
100,707
|
|
|
—
|
|
Reductions
|
|
(16,661
|
)
|
|
—
|
|
|
(10,636
|
)
|
|
—
|
|
|
|
$
|
(16,661
|
)
|
|
$
|
—
|
|
|
$
|
90,071
|
|
|
$
|
—
|
|
Changes in fair value :
|
|
|
|
|
|
|
|
|
Included in net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Included in other comprehensive income (1)
|
|
—
|
|
|
(227
|
)
|
|
—
|
|
|
13
|
|
|
|
—
|
|
|
(227
|
)
|
|
—
|
|
|
13
|
|
Transfers in or out of Level 3
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Ending balance
|
|
$
|
634,399
|
|
|
$
|
3,079
|
|
|
$
|
393,776
|
|
|
$
|
(1,063
|
)
|
|
|
(1)
|
These pre-tax gains (losses) are attributable to derivatives still held at
March 31, 2014
and
March 31, 2013
, 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
March 31, 2014
and
December 31, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
Prepayment Speeds
|
|
Delinquency Rates
|
|
100 bps adverse change
|
|
10% adverse change
|
|
10% adverse change
|
At March 31, 2014:
|
|
|
|
|
|
Notes receivable – Rights to MSRs
|
$
|
(12,868
|
)
|
|
$
|
(21,578
|
)
|
|
$
|
(71,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
|
Prepayment Speeds
|
|
Delinquency Rates
|
|
100 bps adverse change
|
|
10% adverse change
|
|
10% adverse change
|
At December 31, 2013:
|
|
|
|
|
|
Notes receivable – Rights to MSRs
|
$
|
(13,343
|
)
|
|
$
|
(23,152
|
)
|
|
$
|
(74,539
|
)
|
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
March 31, 2014
and
December 31, 2013
, respectively:
At March 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
Unobservable Input
|
|
Low
|
|
High
|
|
Weighted Average
|
Notes receivable – Rights to MSRs
|
Discount Rate
|
|
15
|
%
|
|
22
|
%
|
|
19
|
%
|
|
Prepayment Speeds
|
|
12
|
%
|
|
28
|
%
|
|
18
|
%
|
|
Delinquency Rates
|
|
15
|
%
|
|
35
|
%
|
|
24
|
%
|
At December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
Unobservable Input
|
|
Low
|
|
High
|
|
Weighted Average
|
Notes receivable – Rights to MSRs
|
Discount Rate
|
|
15
|
%
|
|
22
|
%
|
|
20
|
%
|
|
Prepayment Speeds
|
|
12
|
%
|
|
28
|
%
|
|
19
|
%
|
|
Delinquency Rates
|
|
15
|
%
|
|
35
|
%
|
|
25
|
%
|
Presented
below are the carrying values and fair value estimates of financial instruments not carried at fair value at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
March 31, 2014
|
|
December 31, 2013
|
|
December 31, 2013
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
Financial assets:
|
|
|
|
|
|
|
|
Match funded advances
|
$
|
6,343,397
|
|
|
$
|
6,343,397
|
|
|
$
|
6,387,781
|
|
|
$
|
6,387,781
|
|
Loans held for investment
|
552,644
|
|
|
552,644
|
|
|
—
|
|
|
—
|
|
Total financial assets
|
$
|
6,896,041
|
|
|
$
|
6,896,041
|
|
|
$
|
6,387,781
|
|
|
$
|
6,387,781
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
Match funded liabilities
|
$
|
5,775,180
|
|
|
$
|
5,770,270
|
|
|
$
|
5,715,622
|
|
|
$
|
5,700,934
|
|
Other borrowings
|
815,431
|
|
|
817,144
|
|
|
343,386
|
|
|
346,391
|
|
Total financial liabilities
|
$
|
6,590,611
|
|
|
$
|
6,587,414
|
|
|
$
|
6,059,008
|
|
|
$
|
6,047,325
|
|
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.
Loans Held for Investment
Loans held for investment relate to our GNMA EBO loans. The fair value estimate of these loans was determined by using an internal discounted cash flow model. The fair value measurements for Loans held for investment are categorized as Level 3.
Match Funded Liabilities
Match funded liabilities include various series of term notes, variable funding notes and other fixed rate liabilities. The fair value estimate of the Company’s term notes and other 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 a senior secured term loan facility and Mortgage Loan Facility. The fair value estimate of the 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 this facility. The Mortgage Loan Facility is short term in nature and the carrying value generally approximates the fair value. The fair value measurements for both facilities are categorized as Level 3.
4. MATCH FUNDED ADVANCES
Match funded advances on residential loans we service for others are comprised of the following at the dates indicated:
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
December 31,
2013
|
Principal and interest advances
|
$
|
2,724,333
|
|
|
$
|
2,632,092
|
|
Taxes and insurance advances
|
2,665,270
|
|
|
2,723,390
|
|
Corporate advances
|
953,794
|
|
|
1,032,299
|
|
|
$
|
6,343,397
|
|
|
$
|
6,387,781
|
|
5. OTHER ASSETS
Other assets consisted of the following at the dates indicated:
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
December 31,
2013
|
Debt service accounts (1)
|
$
|
106,987
|
|
|
$
|
103,910
|
|
Debt issuance costs (2)
|
22,669
|
|
|
21,165
|
|
Accrued interest income (3)
|
2,255
|
|
|
—
|
|
Interest-earning collateral deposits (4)
|
1,075
|
|
|
1,075
|
|
Derivative financial instruments (5)
|
3,523
|
|
|
3,835
|
|
Advance financing receivables (6)
|
55,702
|
|
|
—
|
|
Other
|
558
|
|
|
168
|
|
|
$
|
192,769
|
|
|
$
|
130,153
|
|
|
|
(1)
|
Under our advance funding facilities, we are contractually required to remit collections on Match funded advances to the trustee within
two
days of receipt. We do not use the collected funds to reduce the related Match funded liabilities 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. Lastly, this balance includes collections on our Loans held for investment of
$3,526
which will be used to pay down a portion of the Mortgage Loan Facility balance on the first funding date following quarter end.
|
|
|
(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 accrued interest income on our GNMA EBO loans and interest earned on our financing of GNMA EBO advances. The GNMA EBO loans remain on accrual status as collection is reasonably assured. GNMA EBO advance financing interest income is settled on a monthly basis.
|
|
|
(4)
|
Represents cash collateral held by our counterparty as part of our interest rate swap agreements.
|
|
|
(5)
|
See Notes 3 and 9 for more information regarding our use of derivatives.
|
|
|
(6)
|
We provided financing to Ocwen for GNMA EBO advances as part of the GNMA EBO Transaction. We accounted for this transaction as a financing and receive interest income at a rate of
1- Month LIBOR
plus 450 bps.
|
6. MATCH FUNDED LIABILITIES
Match funded liabilities are comprised of the following at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Outstanding
|
Borrowing Type(1)
|
|
Interest Rate (2)
|
|
Maturity (3)
|
|
Amortization Date (3)
|
|
Unused Borrowing Capacity (4)
|
|
March 31, 2014 (5)
|
|
December 31, 2013
|
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
|
|
|
350,000
|
|
Series 2013 T1 Term Notes
|
|
229 – 446 bps
|
|
Jan. 2048
|
|
Jan. 2018
|
|
—
|
|
|
150,000
|
|
|
150,000
|
|
Series 2013 T2 Term Notes
|
|
115 – 239 bps
|
|
May 2044
|
|
May 2015
|
|
—
|
|
|
375,000
|
|
|
375,000
|
|
Series 2013 T3 Term Notes
|
|
179 – 313 bps
|
|
May 2046
|
|
May 2017
|
|
—
|
|
|
475,000
|
|
|
475,000
|
|
Series 2013 T4 Term Notes
|
|
118 – 232 bps
|
|
Aug. 2044
|
|
Aug. 2014
|
|
—
|
|
|
200,000
|
|
|
200,000
|
|
Series 2013 T5 Term Notes
|
|
198 – 331 bps
|
|
Aug. 2046
|
|
Aug. 2016
|
|
—
|
|
|
200,000
|
|
|
200,000
|
|
Series 2013 T6 Term Notes
|
|
129 – 223 bps
|
|
Sep. 2044
|
|
Sep. 2014
|
|
—
|
|
|
350,000
|
|
|
350,000
|
|
Series 2013 T7 Term Notes
|
|
198 – 302 bps
|
|
Nov. 2046
|
|
Nov. 2016
|
|
—
|
|
|
300,000
|
|
|
300,000
|
|
Series 2014 T1 Term Notes
|
|
124 – 229 bps
|
|
Jan. 2045
|
|
Jan. 2015
|
|
—
|
|
|
600,000
|
|
|
—
|
|
Series 2014 T2 Term Notes
|
|
222 – 311 bps
|
|
Jan. 2047
|
|
Jan. 2017
|
|
—
|
|
|
200,000
|
|
|
—
|
|
Series 2012 VF 1 Notes
|
|
1-Month LIBOR + 110 – 340 bps
|
|
Aug. 2044
|
|
Aug. 2014
|
|
255,524
|
|
|
444,476
|
|
|
469,050
|
|
Series 2012 VF 2 Notes
|
|
1-Month LIBOR + 110 – 340 bps
|
|
Aug. 2044
|
|
Aug. 2014
|
|
255,524
|
|
|
444,476
|
|
|
469,050
|
|
Series 2012 VF 3 Notes
|
|
1-Month LIBOR + 110 – 340 bps
|
|
Aug. 2044
|
|
Aug. 2014
|
|
255,524
|
|
|
444,476
|
|
|
469,050
|
|
Series 2013 VF 1 Notes (6)
|
|
1-Month LIBOR + 150 - 245 bps
|
|
Feb. 2045
|
|
Feb. 2015
|
|
51,748
|
|
|
498,252
|
|
|
514,972
|
|
Class A Term Money Market Fund Note (7)
|
|
1-Month LIBOR + 20 bps
|
|
Sep. 2014
|
|
Jan. 2014
|
|
—
|
|
|
176,667
|
|
|
265,000
|
|
Class A Draw Money Market Fund Note (7)
|
|
1-Month LIBOR + 110 bps
|
|
Sep. 2044
|
|
Sep. 2014
|
|
—
|
|
|
88,333
|
|
|
—
|
|
Class B Term Money Market Fund Note
|
|
275 bps
|
|
Sep. 2044
|
|
Sep. 2014
|
|
—
|
|
|
28,500
|
|
|
28,500
|
|
|
|
|
|
|
|
|
|
$
|
818,320
|
|
|
$
|
5,775,180
|
|
|
$
|
5,715,622
|
|
|
|
(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
March 31, 2014
was
1.68%
. 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 Match funded 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
0.625%
fee on the unused borrowing capacity which varies by facility.
|
|
|
(5)
|
On January 17, 2014, we completed the issuance of
$600,000
of
one
-year and
$200,000
of
three
-years term notes.
|
|
|
(6)
|
These Variable Funding Notes were amended on February 14, 2014, to extend the amortization and maturity dates by a year and to reduce the interest rate spreads compared to
December 31, 2013
. Variable Funding Note balances fluctuate based on Match funded advance activity and our ability to issue fixed rate term notes.
|
|
|
(7)
|
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
March 31, 2014
and
December 31, 2013
. 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 March 31, 2014
|
2014
|
$
|
2,176,928
|
|
2015
|
1,923,252
|
|
2016
|
850,000
|
|
2017
|
675,000
|
|
2018 and thereafter
|
150,000
|
|
Total
|
$
|
5,775,180
|
|
|
|
(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.
|
7. OTHER BORROWINGS
Other borrowings consisted of the following at the dates indicated:
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
December 31, 2013
|
Senior secured term loan facility (1)
|
$
|
342,697
|
|
|
$
|
343,386
|
|
Mortgage Loan Facility (2)
|
472,734
|
|
|
—
|
|
|
$
|
815,431
|
|
|
$
|
343,386
|
|
|
|
(1)
|
On June 27, 2013, we entered into a
$350,000
senior secured term loan facility which was issued at a discount to par. The senior secured term loan facility has a maturity date of
June 27, 2020
and
an interest rate of 1-Month LIBOR plus 350 bps, with a 1.00% LIBOR floor
. As of
March 31, 2014
, the interest rate on our senior secured term loan facility was
4.50%
.
|
|
|
(2)
|
On March 3, 2014, we entered into a Mortgage Loan Facility to finance the purchase of our GNMA EBO loans. The facility has a maturity date of March 2, 2015 and an interest rate of
1- Month LIBOR
plus 305 bps. The Mortgage Loan Facility has maximum borrowing capacity of
$600,000
,
$127,266
of which was unused as of
March 31, 2014
.
|
The weighted average interest rate for our Other borrowings was
3.75%
as of
March 31, 2014
.
Analysis of Other Borrowing by Expected Repayment Date (1):
|
|
|
|
|
Year of Expected Payment Date
|
As of March 31, 2014
|
2014
|
$
|
2,625
|
|
2015
|
476,234
|
|
2016
|
3,500
|
|
2017
|
3,500
|
|
2018 and thereafter
|
334,250
|
|
Total
|
$
|
820,109
|
|
|
|
(1)
|
The Mortgage Loan Facility expected payment date is based on the current outstanding balance and maturity date of the facility.
|
8. ORDINARY SHARES
Increases in the number of ordinary shares issued during the three months ended
March 31, 2014
and
March 31, 2013
are represented in the table below:
|
|
|
|
|
|
|
|
2014
|
|
2013
|
Ordinary shares issued - beginning balance
|
71,016,771
|
|
|
55,884,718
|
|
Issuance of new ordinary shares
|
—
|
|
|
970,578
|
|
Ordinary shares issued – ending balance
|
71,016,771
|
|
|
56,855,296
|
|
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.
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 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 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 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 designed 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
March 31, 2014
and
December 31, 2013
, 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
|
|
September 2012
|
|
September 2012
|
|
August 2017
|
|
0.5188
|
%
|
|
1-Month LIBOR
|
|
Other assets
|
|
$
|
141,049
|
|
|
$
|
1,079
|
|
Hedge the effects of changes in 1-Month LIBOR
|
|
January 2013
|
|
January 2016
|
|
December 2017
|
|
1.3975
|
%
|
|
1-Month LIBOR
|
|
Other assets
|
|
338,009
|
|
|
2,444
|
|
Total asset derivatives designated as hedges as of March 31, 2014
|
|
$
|
479,058
|
|
|
$
|
3,523
|
|
Total asset derivatives as of March 31, 2014
|
|
$
|
479,058
|
|
|
$
|
3,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
96,927
|
|
|
$
|
343
|
|
Hedge the effects of changes in 1-Month LIBOR
|
|
May 2012
|
|
May 2012
|
|
May 2016
|
|
0.6070
|
%
|
|
1-Month LIBOR
|
|
Other liabilities
|
|
25,225
|
|
|
15
|
|
Hedge the effects of changes in 1-Month LIBOR
|
|
January 2013
|
|
January 2014
|
|
July 2014
|
|
0.3375
|
%
|
|
1-Month LIBOR
|
|
Other liabilities
|
|
207,048
|
|
|
86
|
|
Total liability derivatives designated as hedges as of March 31, 2014
|
|
$
|
329,200
|
|
|
$
|
444
|
|
Total liability derivatives as of March 31, 2014
|
|
$
|
329,200
|
|
|
$
|
444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
September 2012
|
|
September 2012
|
|
August 2017
|
|
0.5188
|
%
|
|
1-Month LIBOR
|
|
Other assets
|
|
$
|
177,056
|
|
|
$
|
1,084
|
|
Hedge the effects of changes in 1-Month LIBOR
|
|
January 2013
|
|
January 2016
|
|
December 2017
|
|
1.3975
|
%
|
|
1-Month LIBOR
|
|
Other assets
|
|
338,009
|
|
|
2,751
|
|
Total asset derivatives designated as hedges as of December 31, 2013
|
|
$
|
515,065
|
|
|
$
|
3,835
|
|
Total asset derivatives as of December 31, 2013
|
|
$
|
515,065
|
|
|
$
|
3,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
102,522
|
|
|
$
|
364
|
|
Hedge the effects of changes in 1-Month LIBOR
|
|
May 2012
|
|
May 2012
|
|
May 2016
|
|
0.6070
|
%
|
|
1-Month LIBOR
|
|
Other liabilities
|
|
28,565
|
|
|
25
|
|
Hedge the effects of changes in 1-Month LIBOR
|
|
January 2013
|
|
January 2014
|
|
July 2014
|
|
0.3375
|
%
|
|
1-Month LIBOR
|
|
Other liabilities
|
|
307,043
|
|
|
140
|
|
Total liability derivatives designated as hedges as of December 31, 2013
|
|
$
|
438,130
|
|
|
$
|
529
|
|
Total liability derivatives as of December 31, 2013
|
|
$
|
438,130
|
|
|
$
|
529
|
|
|
|
(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
$1,033
of payments to the counterparty.
|
|
|
(3)
|
There was an unrealized pre-tax loss of
$227
related to our interest rate swaps included in AOCI for the three months ended
March 31, 2014
, and an unrealized pre-tax gain of
$13
related to our interest rate swaps included in AOCI for the three months ended
March 31, 2013
. 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 three months ended March 31:
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
Notional balance at beginning of period
|
$
|
953,195
|
|
|
$
|
414,631
|
|
Additions
|
—
|
|
|
645,052
|
|
Maturities
|
—
|
|
|
—
|
|
Terminations
|
—
|
|
|
—
|
|
Amortization
|
144,937
|
|
|
33,631
|
|
Notional balance at end of period
|
$
|
808,258
|
|
|
$
|
1,026,052
|
|
We recognize the right to reclaim cash collateral or the obligation to return cash collateral as part of our hedge agreements. At
March 31, 2014
, we have the right to reclaim cash collateral of
$1,075
and are obligated to return cash collateral of
$3,510
as part of our hedge agreements. At
December 31, 2013
, we had the right to reclaim cash collateral of
$1,075
and are obligated to return cash collateral of
$3,500
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 three months ended March 31:
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
2014
|
|
2013
|
Servicing fees collected
|
$
|
189,157
|
|
|
$
|
102,258
|
|
Subservicing fee payable to Ocwen
|
90,644
|
|
|
47,052
|
|
Net servicing fees retained by HLSS
|
98,513
|
|
|
55,206
|
|
Reduction in Notes receivable – Rights to MSRs
|
16,661
|
|
|
10,636
|
|
|
$
|
81,852
|
|
|
$
|
44,570
|
|
Interest Income – Other
Additional sources of revenue for us are the interest we earn on our GNMA EBO loans, financing of GNMA EBO advances, 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 three months ended March 31:
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
2014
|
|
2013
|
Loan interest(1)
|
$
|
1,784
|
|
|
$
|
—
|
|
Advance financing interest(2)
|
202
|
|
|
—
|
|
Bank account interest
|
975
|
|
|
102
|
|
|
$
|
2,961
|
|
|
$
|
102
|
|
|
|
(1)
|
Represents interest earned at the stated note rate on each individual GNMA EBO loan, net of the amortization of the purchase premium on our GNMA EBO loans using the interest method of accounting.
|
|
|
(2)
|
Represents interest earned on advance financing we provided to Ocwen in connection with their role as a servicer of agency loans.
|
11. INTEREST EXPENSE
The following table presents the components of Interest expense for the three months ended March 31:
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
2014
|
|
2013
|
Match funded liabilities
|
$
|
26,830
|
|
|
$
|
14,781
|
|
Other borrowings
|
5,323
|
|
|
—
|
|
Amortization of debt issuance costs
|
4,962
|
|
|
3,106
|
|
Interest rate swaps
|
396
|
|
|
355
|
|
|
$
|
37,511
|
|
|
$
|
18,242
|
|
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 months ended
March 31, 2014
and
2013
was
0.0%
and
0.1%
. 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.
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
March 31, 2014
, 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 or in previous periods.
13. BUSINESS SEGMENT REPORTING
Our business strategy focuses on acquiring residential mortgage assets consisting of mortgage servicing rights, rights to fees and mortgage loans. As of
March 31, 2014
, we operate a single reportable business segment that holds residential mortgage assets.
14. RELATED PARTY TRANSACTIONS
We entered into various agreements with Ocwen and Altisource Portfolio Solutions, S.A. (“Altisource”) in connection with our Initial Public Offering 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 of Ocwen and Altisource.
As the named servicer, Ocwen remains obligated to perform as servicer under the related PSAs, 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 PSAs.
In addition to the acquisition of residential mortgage assets described in Note 2, the following table summarizes our transactions with Ocwen for the three months ended March 31:
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
2014
|
|
2013
|
Servicing fees collected
|
$
|
189,157
|
|
|
$
|
102,258
|
|
Subservicing fee payable to Ocwen
|
90,644
|
|
|
47,052
|
|
Net servicing fees retained by HLSS
|
98,513
|
|
|
55,206
|
|
Reduction in Notes receivable – Rights to MSRs
|
16,661
|
|
|
10,636
|
|
|
$
|
81,852
|
|
|
$
|
44,570
|
|
|
|
|
|
Servicing advances purchased from Ocwen in the ordinary course of business
|
$
|
3,503,375
|
|
|
$
|
695,105
|
|
At
March 31, 2014
, Ocwen owed us
$8,087
for servicing fees collected but not remitted to us, and we owed Ocwen
$3,738
for the subservicing fee earned by Ocwen in March 2014. Ocwen owed us
$2,053
for accrued GNMA EBO loan interest income and
$202
for accrued advance financing interest income as of
March 31, 2014
. During the three months ended
March 31, 2014
and
2013
, we earned interest income of
$1,986
and
$0
as a result of the GNMA EBO Transaction with Ocwen. Lastly, our Notes receivable – Rights to MSRs resulted from transactions with Ocwen.
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, capital markets activities, advance financing management, treasury management, legal services and other similar services. Services provided by Ocwen under this agreement include business strategy, 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
March 31, 2014
, Ocwen owed us
$1,284
for professional services provided pursuant to the Professional Services Agreement. During the three months ended
March 31, 2014
and
2013
we earned fees of
$628
and
$407
, for services provided to Ocwen pursuant to the Professional Services Agreement. Additionally, during the three months ended
March 31, 2014
and
2013
we incurred fees of
$154
and
$30
for services received from Ocwen pursuant to the Professional Services Agreement.
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 months ended
March 31, 2014
and
March 31, 2013
, we incurred fees of
$218
and
$196
for services provided to us pursuant to the Altisource Administrative Services Agreement.
Receivables from and Payables to Related Parties
The following table summarizes amounts receivable from and payable to related parties at the dates indicated:
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
December 31, 2013
|
Servicing fees collected (1)
|
$
|
8,087
|
|
|
$
|
8,482
|
|
Professional services (2)
|
1,284
|
|
|
655
|
|
Advance collections (3)
|
56,655
|
|
|
60,239
|
|
Other
|
1,573
|
|
|
673
|
|
Receivables from Ocwen
|
$
|
67,599
|
|
|
$
|
70,049
|
|
|
|
|
|
Subservicing fees payable (4)
|
$
|
3,738
|
|
|
$
|
8,114
|
|
Professional services (2)
|
508
|
|
|
354
|
|
Other
|
3,621
|
|
|
2,181
|
|
Payables to Ocwen
|
$
|
7,867
|
|
|
$
|
10,649
|
|
|
|
|
|
Payables to Altisource
|
$
|
18
|
|
|
$
|
83
|
|
|
|
(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
March 31, 2014
, 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 that were receivable as of the dates 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 dates indicated.
|
|
|
(4)
|
The
base
fee and performance fee, if any, that comprise the subservicing fees payable are calculated and paid to Ocwen within
three
business days following the end of the month.
|
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
March 31, 2014
:
|
|
•
|
On April 10, 2014, we paid cash dividends of
$10,653
or
$0.15
per ordinary share; and
|
|
|
•
|
On April 17, 2014, we declared a monthly dividend of
$0.16
per ordinary share with respect to April, May and June 2014.
|