Quarterly report pursuant to Section 13 or 15(d)

Servicing Activities

v3.10.0.1
Servicing Activities
 9 Months Ended
Sep. 30, 2018
Disclosures Pertaining to Servicing Assets and Servicing Liabilities [Abstract]  
Servicing Activities Servicing Activities
Mortgage Servicing Rights, at Fair Value
One of the Company’s wholly owned subsidiaries has approvals from Fannie Mae and Freddie Mac to own and manage MSR, which represent the right to control the servicing of mortgage loans. The Company and its subsidiaries do not originate or directly service mortgage loans, and instead contract with appropriately licensed subservicers to handle substantially all servicing functions in the name of the subservicer for the loans underlying the Company’s MSR.
The following table summarizes activity related to MSR for the three and nine months ended September 30, 2018 and 2017.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Balance at beginning of period
$
1,450,261

 
$
898,025

 
$
1,086,717

 
$
693,815

Additions from purchases of mortgage servicing rights
201,197

 
66,280

 
480,462

 
340,156

Additions from sales of residential mortgage loans
—

 
—

 
—

 
20

Subtractions from sales of mortgage servicing rights
—

 
—

 
—

 
(946
)
Changes in fair value due to:
 
 
 
 
 
 
 
Changes in valuation inputs or assumptions used in the valuation model
62,680

 
(154
)
 
209,610

 
(23,083
)
Other changes in fair value (1)
(42,085
)
 
(28,595
)
 
(107,754
)
 
(66,543
)
Other changes (2)
(8,029
)
 
(4,943
)
 
(5,011
)
 
(12,806
)
Balance at end of period
$
1,664,024

 
$
930,613

 
$
1,664,024

 
$
930,613

____________________
(1)
Other changes in fair value primarily represents changes due to the realization of expected cash flows.
(2)
Other changes includes purchase price adjustments, contractual prepayment protection, and changes due to the Company’s purchase of the underlying collateral.

At September 30, 2018 and December 31, 2017, the Company pledged MSR with a carrying value of $1.2 billion and $0.6 billion, respectively, as collateral for repurchase agreements and revolving credit facilities. See Note 14 - Repurchase Agreements and Note 16 - Revolving Credit Facilities.
As of September 30, 2018 and December 31, 2017, the key economic assumptions and sensitivity of the fair value of MSR to immediate 10% and 20% adverse changes in these assumptions were as follows:
(dollars in thousands)
September 30,
2018
 
December 31,
2017
Weighted average prepayment speed:
7.3
%
 
9.8
%
Impact on fair value of 10% adverse change
$
(45,151
)
 
$
(40,100
)
Impact on fair value of 20% adverse change
$
(87,971
)
 
$
(77,483
)
Weighted average delinquency:
1.2
%
 
1.7
%
Impact on fair value of 10% adverse change
$
(5,824
)
 
$
(4,274
)
Impact on fair value of 20% adverse change
$
(11,593
)
 
$
(8,875
)
Weighted average discount rate:
9.7
%
 
9.9
%
Impact on fair value of 10% adverse change
$
(55,024
)
 
$
(35,137
)
Impact on fair value of 20% adverse change
$
(106,220
)
 
$
(68,246
)


These assumptions and sensitivities are hypothetical and should be considered with caution. Changes in fair value based on 10% and 20% variations in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of MSR is calculated without changing any other assumptions. In reality, changes in one factor may result in changes in another (e.g., increased market interest rates may result in lower prepayments and increased credit losses) that could magnify or counteract the sensitivities. Further, these sensitivities show only the change in the asset balances and do not show any expected change in the fair value of the instruments used to manage the interest rates and prepayment risks associated with these assets.
Risk Mitigation Activities
The primary risk associated with the Company’s MSR is interest rate risk and the resulting impact on prepayments. A significant decline in interest rates could lead to higher-than-expected prepayments that could reduce the value of the MSR. The Company economically hedges the impact of these risks with its Agency RMBS portfolio.
Mortgage Servicing Income
The following table presents the components of servicing income recorded on the Company’s condensed consolidated statements of comprehensive (loss) income for the three and nine months ended September 30, 2018 and 2017:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Servicing fee income
$
80,690

 
$
53,989

 
$
218,022

 
$
141,923

Ancillary and other fee income
358

 
310

 
1,004

 
615

Float income
8,570

 
3,088

 
19,447

 
5,930

Total
$
89,618

 
$
57,387

 
$
238,473

 
$
148,468



Mortgage Servicing Advances
In connection with the servicing of loans, the Company’s subservicers make certain payments for property taxes and insurance premiums, default and property maintenance payments, as well as advances of principal and interest payments before collecting them from individual borrowers. Servicing advances, including contractual interest, are priority cash flows in the event of a loan principal reduction or foreclosure and ultimate liquidation of the real estate-owned property, thus making their collection reasonably assured. These servicing advances, which are funded by the Company, totaled $26.1 million and $31.1 million and were included in other assets on the condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017, respectively.
Serviced Mortgage Assets
The Company’s total serviced mortgage assets consist of residential mortgage loans underlying MSR, residential mortgage loans held in previous on-balance sheet securitization trusts for which the Company is the named servicing administrator and loans owned and classified as residential mortgage loans held-for-sale. The following table presents the number of loans and unpaid principal balance of the mortgage assets for which the Company manages the servicing as of September 30, 2018 and December 31, 2017:
 
September 30, 2018
 
December 31, 2017
(dollars in thousands)
Number of Loans
 
Unpaid Principal Balance
 
Number of Loans
 
Unpaid Principal Balance
Mortgage servicing rights
581,677

 
$
131,114,538

 
454,028

 
$
101,344,054

Residential mortgage loans in securitization trusts
3,663

 
2,443,368

 
3,845

 
2,618,016

Residential mortgage loans held-for-sale
206

 
33,448

 
236

 
37,632

Other assets
17

 
1,339

 
24

 
2,590

Total serviced mortgage assets
585,563

 
$
133,592,693

 
458,133

 
$
104,002,292