Quarterly report pursuant to Section 13 or 15(d)

Servicing Activities (Notes)

v3.5.0.2
Servicing Activities (Notes)
 9 Months Ended
Sep. 30, 2016
Disclosures Pertaining to Servicing Assets and Servicing Liabilities [Abstract]  
Transfers and Servicing of Financial Assets [Text Block]
Servicing Activities
Mortgage Servicing Rights, at Fair Value
One of the Company’s wholly owned subsidiaries has approvals from Fannie Mae, Freddie Mac, and Ginnie Mae 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 fully licensed subservicers to handle substantially all servicing functions 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, 2016 and 2015.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands)
2016
 
2015
 
2016
 
2015
Balance at beginning of period
$
427,813

 
$
437,576

 
$
493,688

 
$
452,006

Additions from purchases of servicing rights
98,224

 
67,175

 
204,435

 
75,709

Additions from sales of residential mortgage loans
242

 
752

 
764

 
1,568

Subtractions from sales of servicing rights
(60,910
)
 
—

 
(60,910
)
 
—

Changes in fair value due to:
 
 
 
 
 
 
 
Changes in valuation inputs or assumptions used in the valuation model
3,846

 
(49,449
)
 
(139,587
)
 
(63,573
)
Other changes in fair value (1)
(18,231
)
 
(12,100
)
 
(52,773
)
 
(32,744
)
Other changes (2)
4,645

 
3,391

 
10,012

 
14,379

Balance at end of period
$
455,629

 
$
447,345

 
$
455,629

 
$
447,345

____________________
(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, 2016, the Company pledged MSR with a carrying value of $73.5 million as collateral for revolving credit facilities. See Note 18 - Revolving Credit Facilities. The Company did not have any revolving credit facilities in place, and, thus, had not pledged any MSR as collateral, at December 31, 2015.
As of September 30, 2016 and December 31, 2015, 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:
(in thousands)
September 30,
2016
 
December 31,
2015
Weighted average prepayment speed:
15.8
%
 
11.8
%
Impact on fair value of 10% adverse change
$
(25,310
)
 
$
(20,093
)
Impact on fair value of 20% adverse change
$
(48,388
)
 
$
(38,656
)
Weighted average delinquency:
2.1
%
 
4.0
%
Impact on fair value of 10% adverse change
$
(1,549
)
 
$
(3,826
)
Impact on fair value of 20% adverse change
$
(4,237
)
 
$
(6,640
)
Weighted average discount rate:
9.0
%
 
10.1
%
Impact on fair value of 10% adverse change
$
(11,937
)
 
$
(16,316
)
Impact on fair value of 20% adverse change
$
(23,100
)
 
$
(31,522
)


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 AFS securities and derivative financial instruments. Refer to Note 11 - Derivative Instruments and Hedging Activities for additional information regarding the derivative financial instruments used to economically hedge MSR.
Mortgage Servicing Income
The following table presents the components of servicing income recorded on the Company’s condensed consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2016 and 2015:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands)
2016
 
2015
 
2016
 
2015
Servicing fee income
$
37,226

 
$
31,073

 
$
104,765

 
$
91,896

Ancillary fee income
449

 
535

 
1,423

 
1,650

Float income
1,033

 
402

 
2,469

 
1,067

Total
$
38,708

 
$
32,010

 
$
108,657

 
$
94,613



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 $46.5 million and $37.5 million and were included in other assets on the condensed consolidated balance sheets as of September 30, 2016 and December 31, 2015, respectively.
Serviced Mortgage Assets
The Company’s total serviced mortgage assets consist of loans owned and classified as residential mortgage loans held-for-sale, loans held in consolidated VIEs classified as residential mortgage loans held-for-investment in securitization trusts, and loans underlying MSR. 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, 2016 and December 31, 2015:
 
September 30, 2016
 
December 31, 2015
(dollars in thousands)
Number of Loans
 
Unpaid Principal Balance
 
Number of Loans
 
Unpaid Principal Balance
Residential mortgage loans held-for-sale
1,439

 
$
720,609

 
1,415

 
$
812,661

Residential mortgage loans held-for-investment in securitization trusts
4,938

 
3,499,285

 
4,329

 
3,117,219

Mortgage servicing rights
249,032

 
55,080,859

 
241,228

 
48,566,301

Total serviced mortgage assets
255,409

 
$
59,300,753

 
246,972

 
$
52,496,181