The following discussion should be read in conjunction with the information contained in our consolidated financial statements, including the notes thereto. The following discussion contains, in addition to the historical information, forward-looking statements that include risks and uncertainties (see discussion of "Forward-Looking Statements" included elsewhere in this Annual Report on Form 10-K). Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those factors set forth under Item 1A. Risk Factors and elsewhere in this Annual Report on Form 10-K. All dollar amounts presented herein are in millions, except per share data and other key metrics, unless otherwise noted.
Basis of Presentation
"Predecessor" financial information in the MD&A relates to Nationstar, and
"Successor" relates to
The below presentation discusses the results of the operations for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 . The financial results for the year endedDecember 31, 2019 and five months endedDecember 31, 2018 reflect the results of the Successor. With respect to the year endedDecember 31, 2018 , we have separately provided the financial results of the Predecessor for the seven months endedJuly 31, 2018 , and the financial results of the Successor for the five months endedDecember 31, 2018 , which, in each case, are presented under GAAP. The below presentation also includes a "Combined" column that combines the Predecessor and Successor results referenced above with respect to the year endedDecember 31, 2018 . Although the separate financial results of the Predecessor and Successor for the seven months endedJuly 31, 2018 and the five months endedDecember 31, 2018 are presented under GAAP, the results reported in the "Combined" column reflect non-GAAP financial measures, as a different basis of accounting was used with respect to the financial results for the Predecessor as compared to the financial results of the Successor. We have not provided a reconciliation of the financial metrics reflected under the "Combined" column as such reconciliation cannot be provided without unreasonable effort as a result of this accounting variance. We believe that non-GAAP financial measures should be considered in addition to, and not a substitute for, financial information prepared in accordance with GAAP. We present non-GAAP financial measures in reporting its financial results to provide additional and supplemental disclosure to evaluate operating results. In particular, we believe that providing this "Combined" information is useful as a supplement to our standard GAAP financial presentation as it significantly enhances the period-over-period comparability of our financial results. In addition, our management uses this "Combined" presentation to evaluate our ongoing operations and for internal planning and forecasting purposes. For a discussion of results of operations for the year endedDecember 31, 2018 , on a combined basis, compared to the year endedDecember 31, 2017 (the Predecessor), please refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year endedDecember 31, 2018 .
Overview
We are a leading servicer and originator of residential mortgage loans, and a provider of real estate services through our Xome subsidiary. Our purpose is to keep the dream of homeownership alive, and we do this as a servicer by helping mortgage borrowers manage what is typically their largest financial asset, and by helping our investors maximize the returns from their portfolios of residential mortgages. We have a track record of significant growth, having expanded our servicing portfolio from$10 billion in 2009 to$643 billion as ofDecember 31, 2019 . We believe this track record reflects our strong operating capabilities, which include a proprietary low-cost servicing platform, strong loss mitigation skills, a commitment to compliance, a customer-centric culture, a demonstrated ability to retain customers, growing origination capabilities, and significant investment in technology.
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Our strategy to position the Company for continued, sustainable long-term growth includes initiatives to improve profitability and strengthen the balance sheet. Key strategic initiatives include the following:
• Strengthen our balance sheet by building capital and liquidity, reducing
leverage, taking advantage of market conditions to refinance existing
senior notes, and implementing derivative hedging strategies;
• Drive stronger profitability through a variety of efficiency initiatives,
including ongoing improvement in unit cost economics in Servicing,
Originations, and Xome, as well as finalizing our Project Titan servicing
transformation initiative and identifying and realizing other opportunities for cost savings throughout the organization;
• Improve results at Xome by winning new third-party customers and gaining
wallet share with existing customers by cross-selling multiple services
and by delivering strong performance and excellent customer service; • Continue to focus on improving the customer experience in all of our
segments, as well as sustaining the culture and talent of our workforce;
and
• Maintain strong relationships with agencies, investors, regulators, and
other constituencies and a strong reputation for compliance and customer
service. Results of Operations
Table 1. Consolidated Operations
Successor Predecessor Year Ended Five Months Ended Seven Months Ended December 31, 2019 December 31, 2018 July
31, 2018 Combined(1) $ Change % Change Revenues - operational$ 2,512 $ 758 $ 1,000$ 1,758 $ 754 43 % Revenues - Mark-to-market (505 ) (164 ) 196 32 (537 ) (1,678 )% Total revenues 2,007 594 1,196 1,790 217 12 % Total expenses 1,851 707 945 1,652 199 12 % Total other income (expenses), net (159 ) (24 ) (49 ) (73 ) (86 ) 118 % (Loss) income before income tax (benefit) expense (3 ) (137 ) 202 65 (68 ) (105 )% Less: Income tax (benefit) expense (273 ) (1,021 ) 48 (973 ) 700 (72 )% Net income 270 884 154 1,038 (768 ) (74 )% Less: Net loss attributable to non-controlling interests (4 ) - - - (4 ) (100 )% Net income attributable to Successor/Predecessor $ 274 $ 884 $ 154$ 1,038 $ (764 ) (74 )%
(1) Refer to Basis of Presentation section for discussion on presentation of
combined results. Net income decreased for the year endedDecember 31, 2019 compared to the same period in 2018, on a combined basis. Net income was higher in 2018, on a combined basis, primarily due to$973 income tax benefit recognized compared to$273 income tax benefit recognized in 2019. In addition, mark-to-market ("MTM") revenues decreased due to a negative MTM of$505 in 2019, primarily driven by declining interest rates, compared to a positive MTM of$32 in 2018, on a combined basis. Operational revenues and total expenses increased for the year endedDecember 31, 2019 compared to the same period in 2018, on a combined basis, largely due to growth in originations volume driven by declining interest rates and incremental volumes made available with the acquisition ofPacific Union and related origination channels. In addition, inFebruary 2019 , we acquired Seterus mortgage servicing platform and assumed certain assets related thereto from IBM ("Seterus acquisition") for a total purchase price of$8 , which also contributed to the increase in operational revenue and total expenses. Total other income (expenses), net, increased for the year endedDecember 31, 2019 compared to the same period in 2018, on a combined basis. The increase was primarily due to an increase in interest expense in our Corporate/Other segment in 2019 as a result of a higher debt balance and higher interest rates under the new unsecured senior notes that were issued inJuly 2018 to fund the Merger with Nationstar.Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 34
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Table 2. Provision for Income Taxes
Successor
Predecessor
Year Ended December Five Months Ended Seven
Months Ended July
31, 2019 December 31, 2018 31, 2018 Combined(1) $ Change % Change Income tax (benefit) expense $ (273 )$ (1,021 ) $ 48$ (973 ) $ 700 (72 )% Effective tax rate(2) 7718.8 % 742.4 % 23.8 % (1) Refer to Basis of Presentation section for discussion on presentation of combined results. (2) Effective tax rate is calculated using whole numbers. Income tax benefit decreased for the year endedDecember 31, 2019 as compared to the same period in 2018, on a combined basis, primarily driven by a decrease in the release of the valuation allowance associated with the pre-Merger net operating loss ("NOL") carryforwards, as well as state adjustments and permanent differences. The release of the valuation allowance decreased from$990 for the five months endedDecember 31, 2018 to$285 for the year endedDecember 31, 2019 . The effective tax rate for the year endedDecember 31, 2019 was 7718.8% as compared to the effective tax rate of 742.4% and 23.8% for the five months endedDecember 31, 2018 and the seven months endedJuly 31, 2018 , respectively. The increase in the effective tax rate in 2019 as compared to the five months endedDecember 31, 2018 resulted from adjustments having a relatively higher impact on the effective tax rate due to a significantly lower loss before income tax benefit of$3 in 2019 as compared to loss before income tax benefit of$137 in the five months endedDecember 31, 2018 . The relative impact of adjustments to the effective tax rate will significantly increase as the income (loss) before income tax expense (benefit) approaches zero. Segment Results
We have four reportable segments: Servicing, Originations, Xome, and Corporate/Other.
• The Servicing segment performs operational activities on behalf of
investors or owners of the underlying mortgages, including collecting and
disbursing borrower payments, investor reporting, customer service,
modifying loans where appropriate to help borrowers stay current, and,
when necessary, performing collections, foreclosures, and the sale of REO.
• The Originations segment originates residential mortgage loans through our
direct-to-consumer channel, which provides refinance options for our
existing customers, and through our correspondent and wholesale channels,
which purchase or originate loans from mortgage bankers and brokers.
• The Xome segment provides a variety of real estate services to mortgage
originators, mortgage and real estate investors, and mortgage servicers,
including valuation, title, and field services, and operates an exchange
which facilitates the sale of foreclosed properties.
• The Corporate/Other segment represents unallocated overhead expenses,
including the costs of executive management and other corporate functions
that are not directly attributable to our operating segments, our senior
unsecured notes, and the results of a legacy mortgage investment
portfolio, which consists of non-prime and non-conforming residential
mortgage loans that were transferred to a securitization trust ("Trust
2009-A") in 2009. We collapsed Trust 2009-A and executed the sale of the loans held in the trust inSeptember 2019 .
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Table 3. Segment Results Successor Year Ended December 31, 2019 Total Operating Servicing Originations Xome Elimination Segments Corporate/ Other Consolidated Revenues Service related, net$ 408 $ 80$ 422 $ (3 ) $ 907 $ 2$ 909 Net gain on mortgage loans held for sale 124 963 - - 1,087 11 1,098 Total revenues 532 1,043 422 (3 ) 1,994 13 2,007 Total expenses 690 568 398 (3 ) 1,653 198 1,851 Other income (expenses), net: Interest income 500 98 - - 598 7 605 Interest expense (469 ) (98 ) - - (567 ) (212 ) (779 ) Other income (expenses), net 4 4 14 - 22 (7 ) 15 Total other income (expenses), net 35 4 14 - 53 (212 ) (159 ) Income (loss) before income tax expense (benefit)$ (123 ) $ 479 $ 38 $ - $ 394 $ (397 ) $ (3 ) Successor Five Months Ended December 31, 2018 Total Operating Servicing Originations Xome Elimination Segments Corporate/ Other Consolidated Revenues Service related, net$ 217 $ 24 $ 177 $ - $ 418 $ -$ 418 Net gain on mortgage loans held for sale 19 157 - - 176 - 176 Total revenues 236 181 177 - 594 - 594 Total expenses 303 155 178 - 636 71 707 Other income (expenses), net: Interest income 222 27 - - 249 7 256 Interest expense (173 ) (26 ) (1 ) - (200 ) (93 ) (293 ) Other income, net 6 5 1 - 12 1 13 Total other income (expenses), net 55 6 - - 61 (85 ) (24 ) Income (loss) before income tax expense (benefit)$ (12 ) $ 32 $ (1 ) $ - $ 19 $ (156 )$ (137 ) Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 36
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Predecessor
Seven Months Ended
Elimination/ Total Operating Servicing(1) Originations Xome Reclassification(1) Segments Corporate/ Other Consolidated Revenues Service related, net$ 740 $ 36 $ 149 $ (25 ) $ 900 $ 1$ 901 Net gain on mortgage loans held for sale - 270 - 25 295 - 295 Total revenues 740 306 149 - 1,195 1 1,196 Total expenses 474 245 123 - 842 103 945 Other income (expenses), net: Interest income 288 38 - - 326 7 333 Interest expense (268 ) (37 ) - - (305 ) (83 ) (388 ) Other (expenses) income, net (1 ) - 9 - 8 (2 ) 6 Total other income (expenses), net 19 1 9 - 29 (78 ) (49 ) Income (loss) before income tax expense (benefit)$ 285 $ 62 $ 35 $ - $ 382 $ (180 )$ 202 (1) For the Predecessor's Servicing segment results purposes, all revenues are attributable to servicing the portfolio. Therefore,$25 of net gain on
mortgage loans was moved to revenues - service related, net during the seven
months ended
were reclassed to net gain on mortgage loans held for sale. Servicing Segment The Servicing segment's strategy is to generate income by growing the portfolio and maximizing the servicing margin. We believe several competitive strengths have been critical to our long-term growth as a servicer, including our low-cost platform, our expertise in mitigating losses for investors, our commitment to strong customer service and regulatory compliance, our history of successfully boarding new loans, and the ability to retain existing customers by offering attractive refinance options. We believe that our operational capabilities are reflected in strong servicer ratings.
Table 4. Servicer Ratings
Successor Fitch(1) Moody's(2) S&P(3) Rating date January 2020 May 2019 May 2019
Residential RPS2- Not Rated Above Average Master Servicer RMS2+ SQ2 Above Average Special Servicer RSS2- Not Rated Above Average Subprime Servicer RPS2- Not Rated Above Average
(1) Fitch Rating Scale of 1 (Highest Performance) to 5 (Low/No Proficiency)
(2) Moody's Rating Scale of SQ1 (Strong Ability/Stability) to SQ5 (Weak Ability/Stability) (3) S&P's Rating Scale of Strong to Weak
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Servicing Portfolio Composition
As ofDecember 31, 2019 , the unpaid principal balance in our servicing portfolio consisted of approximately$621 billion in forward loans, of which$324 billion was subservicing, and$23 billion in reverse mortgage loans.
• The term "forward" refers to loans we service which are not "reverse
mortgage loans," as discussed below. • Our subservicing portfolio consists of loans where we perform the servicing responsibilities for a contractual fee, but do not own the
servicing rights and therefore do not record an MSR on balance sheet.
• Reverse mortgage loans, most commonly HECMs, provide seniors 62 and older
with a loan upon which draws can be made periodically. The draws are
secured by the equity in the borrower's home. We have acquired our reverse
mortgages in prior years through several transitions and it is now in run-off mode. For a significant portion of our reverse mortgages, we record MSRs on balance sheet, similar to the accounting for forward mortgages, except in cases where the costs of servicing are expected to
exceed revenues, in which case a Mortgage Servicing Liability ("MSL") is
created. Additionally, due to program requirements, we consolidate certain
reverse mortgages on our balance sheet and accrue interest income and expense.Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 38
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The charts below set forth the portfolio mix between serviced, subserviced and reverse mortgage loans, and the composition of our servicing portfolio ending UPB by investor group as ofDecember 31, 2019 and 2018. [[Image Removed: chart-e6648e9eb764345dd80.jpg]] [[Image Removed: servicingchartv2.jpg]]
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The following tables set forth the results of operations from the Servicing segment: Table 5. Servicing Segment Results of Operations
Successor Predecessor Seven Months Year Ended Five Months Ended Ended July 31, December 31, 2019 December 31, 2018 2018 Combined(1) $ Change % Change Revenues Operational$ 1,273 $ 464$ 656 $ 1,120 $ 153 14 % Amortization (236 ) (64 ) (112 ) (176 ) (60 ) 34 % Mark-to-market (505 ) (164 ) 196 32 (537 ) (1,678 )% Total revenues 532 236 740 976 (444 ) (45 )% Total expenses 690 303 474 777 (87 ) (11 )% Total other income (expenses), net 35 55 19 74 (39 ) (53 )% (Loss) income before income tax (benefit) expense$ (123 ) $ (12 )$ 285
(1) Refer to Basis of Presentation section for discussion on presentation of
combined results. For the year endedDecember 31, 2019 , we incurred a loss before income tax benefit of$123 compared to an income before income tax expense of$273 for the same period in 2018, on a combined basis. The change in (loss) income before income tax (benefit) expense was primarily due to a decrease in total revenues, partially offset by a decrease in total expenses. Total revenues decreased primarily as a result of negative mark-to-market revenues in 2019 compared to positive mark-to-market revenues in 2018, on a combined basis, partially offset by an increase in operational revenues. In addition, total other income (expenses), net decreased for the year endedDecember 31, 2019 compared to the same period in 2018, on a combined basis. Refer to Table 10. Servicing - Revenues, Table 11. Servicing - Expenses, and Table 12. Servicing - Other Income (Expenses), Net, for further discussions on the changes in total revenues, total expenses and total other income (expenses), net, respectively.Mr. Cooper Group Inc. - 2019 Annual Report on Form
10-K 40
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Table 6. Servicing Portfolio - Unpaid Principal Balances
Successor Predecessor Year Ended Five Months Ended Seven Months Ended December 31, 2019 December 31, 2018 July 31, 2018 Average UPB Forward MSRs - fair value$ 311,601 $ 282,806 $ 279,520 Subservicing and other(1) 283,743 203,341 187,407 Reverse loans - amortized cost 25,270 29,837 33,380 Total average UPB$ 620,614 $ 515,984 $ 500,307 Successor December 31, 2019 December 31, 2018 Ending UPB Forward MSRs - fair value Agency $ 240,688 $ 229,108 Non-agency 56,094 66,373 Total MSRs - fair value 296,782 295,481 Subservicing and other(1) Agency 308,532 208,607 Non-agency 15,451 15,279 Total subservicing and other 323,983 223,886 Reverse loans - amortized cost MSR 2,508 3,940 MSL 13,994 16,538 Securitized loans 6,223 7,937 Total reverse portfolio serviced 22,725 28,415 Total ending UPB $ 643,490 $ 547,782
(1) Subservicing and other includes (i) loans we service for others, (ii)
residential mortgage loans originated but have yet to be sold, and (iii)
agency REO balances for which we own the mortgage servicing rights.
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The following table provides a rollforward of our forward servicing and subservicing portfolio UPB: Table 7. Forward Servicing and Subservicing Portfolio UPB Rollforward
Successor Predecessor Year Ended December Five Months Ended Seven Months Ended 31, 2019 December 31, 2018 July 31, 2018 Balance - beginning of period$ 519,367 $ 465,819 $ 473,256 Additions: Originations 39,355 8,936 12,327 Acquisitions 210,638 82,559 25,987 Deductions: Dispositions (35,004 ) (10,140 ) (1,877 ) Principal reductions and other (21,792 ) (7,837 ) (11,240 ) Voluntary reductions(1) (87,683 ) (18,131 ) (29,172 ) Involuntary reductions(2) (3,816 ) (1,689 ) (3,241 ) Net changes in loans serviced by others (300 ) (150 ) (221 ) Balance - end of period$ 620,765 $ 519,367 $ 465,819 (1) Voluntary reductions are related to loan payoffs by customers. (2) Involuntary reductions refer to loan chargeoffs. During the year endedDecember 31, 2019 , our forward servicing and subservicing portfolio UPB increased when compared to 2018, primarily due to increased boarding of loans generated from the acquisitions ofPacific Union and Seterus, and the portfolio growth from our subservicing clients. The increase in dispositions was primarily due to various MSR sales. The table below summarizes the overall performance of the forward servicing and subservicing portfolio: Table 8. Key Performance Metrics - Forward Servicing and Subservicing Portfolio(1) Successor December 31, 2019 December 31, 2018 Loan count 3,588,162 3,133,784 Average loan amount(2) $ 172,980 $ 165,748 Average coupon - credit sensitive(3) 4.7 % 4.9 % Average coupon - interest sensitive(3) 4.3 % 4.2 % 60+ delinquent (% of loans)(4) 2.0 % 2.2 % 90+ delinquent (% of loans)(4) 1.7 % 1.9 % 120+ delinquent (% of loans)(4) 1.5 % 1.7 % Total prepayment speed (12-month constant prepayment rate) 14.7 % 9.1 %
(1) Characteristics and key performance metrics of our servicing portfolio
exclude UPB and loan counts acquired but not yet boarded and currently
serviced by others.
(2) Average loan amount is presented in whole dollar amounts.
(3) The weighted average coupon amounts for our credit and interest sensitive
pools presented in the table above are only reflective of our owned forward
MSR portfolio that is reported at fair value.
(4) Loan delinquency is based on the current contractual due date of the loan.
In the case of a completed loan modification, delinquency is based on the modified due date of the loan. Delinquency is a significant assumption in determining the mark-to-market adjustment and is a key indicator of MSR portfolio performance. Delinquent loans contribute to lower MSR values due to higher costs to service and increased carrying costs of advances. We continued to experience low delinquency rates during the year endedDecember 31, 2019 , which preserves the value of our MSRs.Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 42
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Table 9. Forward Loan Modifications and Workout Units
Successor Predecessor Five Months Year Ended Ended Seven Months December December Ended July 31, 2019 31, 2018 31, 2018 Combined(1) Amount Change % Change HAMP modifications 11 5 38 43 (32 ) (74 )%
Non-HAMP
modifications 20,683 13,120 16,828 29,948 (9,265 ) (31 )% Workouts 19,669 7,066 22,700 29,766 (10,097 ) (34 )% Total modification and workout units 40,363 20,191 39,566 59,757 (19,394 ) (32 )% (1) Refer to Basis of Presentation section for discussion on presentation of combined results.
Total modifications and workouts during the year ended
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The following table provides the composition of revenues for the Servicing segment: Table 10. Servicing - Revenues
Successor Predecessor Five Months Ended December 31, Seven Months Ended July 31, Year Ended December 31, 2019 2018 2018 Combined(1) $ Change % Change Amt bps(2) Amt bps(2) Amt bps(2) Amt bps(2) Amt bps(2) Amt bps(2) Forward MSR Operational Revenue Base servicing fees $ 999 16$ 367 17$ 501 17$ 868 17$ 131 (1 ) 15 % (6 )% Modification fees(3) 17 - 8 - 21 1 29 1 (12 ) (1 ) (41 )% (100 )% Incentive fees(3) 15 - 5 - 13 - 18 - (3 ) - (17 )% - % Late payment fees(3) 84 2 29 2 45 2 74 2 10 - 14 % - % Other ancillary revenues(3) 172 3 40 2 63 2 103 2 69 1 67 % 50 % Total forward MSR operational revenue 1,287 21 449 21 643 22 1,092 22 195 (1 ) 18 % (5 )% Base subservicing fees and other subservicing revenue(3) 239 4 67 3 87 2 154 3 85 1 55 % 33 % Reverse servicing fees 31 - 16 1 37 1 53 1 (22 ) (1 ) (42 )% (100 )% Total servicing fee revenue 1,557 25 532 25 767 25 1,299 26 258 (1 ) 20 % (4 )% MSR financing liability costs (41 ) - (20 ) (1 ) (33 ) (1 ) (53 ) (1 ) 12 1 (23 )% 100 % Excess spread costs - principal (243 ) (4 ) (48 ) (2 ) (78 ) (3 ) (126 ) (2 ) (117 ) (2 ) 93 % 100 % Total operational revenue 1,273 21 464 22 656 21 1,120 23 153 (2 ) 14 % (9 )% Amortization, net of accretion Forward MSR amortization (527 ) (9 ) (128 ) (6 ) (190 ) (7 ) (318 ) (6 ) (209 ) (3 ) 66 % 50 % Excess spread accretion 243 4 53 2 78 3 131 3 112 1 85 % 33 % Reverse MSL accretion(4) 47 1 15 1 - - 15 - 32 1 213 % 100 % Reverse MSR amortization 1 - (4 ) - - - (4 ) - 5 - (125 )% - % Total amortization, net of accretion (236 ) (4 ) (64 ) (3 ) (112 ) (4 ) (176 ) (3 ) (60 ) (1 ) 34 % 33 % Mark-to-Market Adjustments MSR MTM(5) (669 ) (11 ) (153 ) (7 ) 295 10 142 3 (811 ) (14 ) (571 )% (467 )% Excess spread / financing MTM 164 3 (11 ) (1 ) (99 ) (3 ) (110 ) (2 ) 274 5 (249 )% (250 )% Total MTM adjustments (505 ) (8 ) (164 ) (8 ) 196 7 32 1 (537 ) (9 ) (1,678 )% (900 )%
Total revenues - Servicing $ 532 9$ 236 11$ 740 24$ 976 21$ (444 ) (12 ) (45 )% (57 )% Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 44
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(1) Refer to Basis of Presentation section for discussion on presentation of combined results. (2) Calculated basis points ("bps") are as follows: Annual $ amount/Total Average UPB X 10000.
(3) Certain ancillary and other non-base fees related to subservicing operations
are separately presented as other subservicing revenues. (4) The Predecessor recorded MSL accretion within reverse servicing fees, whereas the Successor has elected to record MSL accretion within Amortization, net of accretion.
(5) The amount of MSR MTM includes the impact of negative modeled cash flows
which have been transferred to reserves on advances and other receivables.
The negative modeled cash flows relate to advances and other receivables
associated with inactive and liquidated loans that are no longer part of the
MSR portfolio. The impact of negative modeled cash flows was
the year ended
respectively. The impact of negative modeled cash flows for the Predecessor
was
Forward - Due to the increase of the forward MSR portfolio's UPB, base servicing fee revenue increased for the year endedDecember 31, 2019 as compared to the same period in 2018, on a combined basis. The improvement in delinquency rates in 2019 contributed to the decrease in modification fees. Other ancillary revenues increased primarily due to the gain on sale from the securitization of reperforming GNMA loans and the collapse of Trust 2009-A. Forward MSR amortization increased for the year endedDecember 31, 2019 as compared to the same period in 2018, on a combined basis, primarily due to the increase in the average forward MSR UPB and higher prepayments driven by the lower interest rate environment.
Total MTM adjustments were negative in the year ended
Subservicing - Subservicing fees increased for the year endedDecember 31, 2019 as compared to the same period in 2018, on a combined basis, due to significant growth in the subservicing portfolio UPB. Reverse - Reverse servicing fees for the year endedDecember 31, 2019 decreased as compared to the same period in 2018, on a combined basis, primarily due to the decline in the reverse mortgage portfolio. In addition, the Predecessor recorded MSL accretion within reverse servicing fees, whereas the Successor has elected to record MSL accretion within Amortization, net of accretion.
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The table below summarizes expenses for the Servicing segment: Table 11. Servicing - Expenses
Successor Predecessor Year Ended December 31, Five Months Ended Seven Months Ended 2019 December 31, 2018 July 31, 2018 Combined(1) Change % Change Amt bps(2) Amt bps(2) Amt bps(2) Amt bps(2) Amt bps(2) Amt bps(2) Salaries, wages and benefits$ 346 5$ 131 6$ 175 6$ 306 6$ 40 (1) 13 % (17 )% General and administrative Servicing support fees 121 2 59 3 71 2 130 3 (9 ) (1) (7 )% (33 )% Corporate and other general and administrative expenses 162 3 66 3 80 3 146 3 16 - 11 % - % Foreclosure and other liquidation related expenses 42 1 38 2 133 4 171 3 (129 ) (2) (75 )% (67 )% Depreciation and amortization 19 - 9 - 15 - 24 - (5 ) - (21 )% - % Total general and administrative expenses 344 6 172 8 299 9 471 9 (127 ) (3) (27 )% (33 )% Total expenses - Servicing$ 690 11$ 303 14$ 474 15$ 777 15$ (87 ) (4) (11 )% (27 )% (1) Refer to Basis of Presentation section for discussion on presentation of combined results. (2) Calculated basis points ("bps") are as follows: Annual $ amount/Total Average UPB X 10000. Total expenses decreased during the year endedDecember 31, 2019 compared to the same period in 2018, on a combined basis, primarily due to a decrease in foreclosure and other liquidation related expenses, partially offset by increased salaries, wages and benefits expense and corporate and other general and administrative expenses. Foreclosure and other liquidation related expenses were higher in 2018, on a combined basis, as a result of a refined modeling method driven by a change in estimate recorded in connection with the Merger and associated with the refinement of loss expectations on theFNMA reverse mortgage portfolio, which led to increased reserves. The increase in salaries, wages and benefits is primarily due to the expansion of the servicing portfolio and an increase in headcount largely driven by thePacific Union and Seterus acquisitions. The increase in corporate and other general and administrative expenses was primarily a result of higher expenses related to our Project Titan, which is expected to increase operational efficiencies and enhance overall customer experience. Mr. Cooper Group Inc. - 2019 Annual Report on Form
10-K 46
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The table below summarizes other income (expenses), net for the Servicing segment: Table 12. Servicing - Other Income (Expenses), Net
Successor Predecessor Five Months Ended December 31, Seven Months Ended July 31, Year Ended December 31, 2019 2018 2018 Combined(1) Change % Change Amt bps(2) Amt bps(2) Amt bps(2) Amt bps(2) Amt bps(2) Amt bps(2) Income earned on reverse mortgage interest$ 313 5$ 206 10$ 274 9$ 480 9$ (167 ) (4 ) (35 )% (44 )% Other interest income 187 3 16 1 14 1 30 1 157 2 523 % 200 % Interest income 500 8 222 11 288 10 510 10 (10 ) (2 ) (2 )% (20 )% Reverse mortgage interest expense (236 ) (4 ) (147 ) (6 ) (221 ) (7 ) (368 ) (7 ) 132 3 (36 )% (43 )% Advance interest expense (29 ) - (13 ) (1 ) (19 ) (1 ) (32 ) (1 ) 3 1 (9 )% (100 )% Other interest expense (204 ) (3 ) (13 ) (1 ) (28 ) (1 ) (41 ) (1 ) (163 ) (2 ) 398 % 200 % Interest expense (469 ) (7 ) (173 ) (8 ) (268 ) (9 ) (441 ) (9 ) (28 ) 2 (6 )% (22 )% Other income (expenses), net 4 - 6 - (1 ) - 5 - (1 ) - (20 )% - % Total other income (expenses), net - Servicing$ 35 1$ 55 3$ 19 1$ 74 1$ (39 ) - (53 )% - % Weighted average cost - advance facilities 3.9 % 4.1 % 3.9 % 4.0 % (0.1 )% (3 )% Weighted average cost - excess spread financing 8.9 % 8.8 % 8.8 % 8.8 % 0.1 % 1 % (1) Refer to Basis of Presentation section for discussion on presentation of combined results. (2) Calculated basis points ("bps") are as follows: Annual $ amount/Total Average UPB X 10000. Total other income (expenses), net decreased during the year endedDecember 31, 2019 as compared to the same period in 2018, on a combined basis, primarily due to an increase in interest expense. The increase in interest expense was primarily due to an increase in other interest expense as a result of an increase of$45 in excess spread costs and$92 of earnings credits and bank fee credits which the Predecessor previously classified as interest expense, and$21 of compensating interest expense driven by higher payoff volume. Partially offsetting the increase in other interest expense was a decrease in reverse mortgage interest expense, primarily due to the decline in the reverse mortgage interest portfolio balance, as well as the accretion of the HMBS bond premium due to a decline in the quarterly revaluation of the original mark-to-market premium on HMBS bonds, which was estimated in connection with the Merger. In addition, interest income decreased due to a decrease in income earned on reverse mortgage interest, partially offset by an increase in other interest income. Income earned on reverse mortgage interest decreased due to the decline in the reverse mortgage interests balance and the amortization of a net asset premium into income. Other interest income increased primarily as a result of aforementioned$92 of earnings credits and bank fee credits which the Predecessor previously classified as interest expense, coupled with higher interest income due to higher yields on custodial balances combined with higher balances driven by portfolio growth.
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Servicing Portfolio and Liabilities
The tables below summarize the servicing portfolio and related liabilities in the Servicing segment: Table 13. Servicing Portfolios and Related Liabilities Successor December 31, 2019 December 31, 2018 Weighted Avg. Weighted Avg. UPB Carrying Amount Coupon UPB Carrying Amount Coupon Forward MSRs - fair value Agency$ 240,688 $ 2,944 4.5 %$ 229,108 $ 3,027 4.5 % Non-agency 56,094 552 4.7 % 66,373 638 4.8 % Total forward MSRs - fair value 296,782 3,496 4.5 % 295,481 3,665 4.5 % Subservicing and other(1) Agency 308,532 N/A N/A 208,607 N/A N/A Non-agency 15,451 N/A N/A 15,279 N/A N/A Total subservicing and other 323,983 N/A N/A 223,886 N/A N/A Reverse portfolio - amortized cost MSR 2,508 6 N/A 3,940 11 N/A MSL 13,994 (61 ) N/A 16,538 (71 ) N/A Securitized loans 6,223 6,279 N/A 7,937 7,934 N/A Total reverse portfolio serviced 22,725 6,224 N/A 28,415 7,874 N/A Total servicing portfolio unpaid principal balance$ 643,490 $ 9,720 N/A$ 547,782 $ 11,539 N/A
(1) Subservicing and other amounts include loans we service for others,
residential mortgage loans originated but have yet to be sold, and agency
REO balances for which we own the mortgage servicing rights.Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 48
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We assess whether acquired portfolios are more credit sensitive or interest sensitive in nature on the date of acquisition. We consider numerous factors in making this assessment, with the primary factors consisting of the overall portfolio delinquency characteristics, portfolio seasoning and residential mortgage loan composition. Interest rate sensitive portfolios typically consist of single-family conforming residential forward mortgage loans serviced for GSEs or other third-party investors. Credit sensitive portfolios primarily consist of higher delinquency single-family non-conforming residential forward mortgage loans in private-label securitizations. Table 14. Fair Value MSR Valuation Successor December 31, 2019 December 31, 2018 UPB Carrying Amount bps UPB Carrying Amount bps Forward MSRs - fair value Credit sensitive$ 147,895 $ 1,613 109$ 135,752 $ 1,495 110 Interest sensitive 148,887 1,883 126 159,729 2,170 136 Total forward MSRs - fair value$ 296,782 $ 3,496 118$ 295,481 $ 3,665 124 As ofDecember 31, 2019 , when measuring the fair value of the portfolio as a basis point of the unpaid principal balance, our credit and interest sensitive pools decreased in value compared toDecember 31, 2018 primarily due to higher forecasted prepayment speeds as a result of the declining interest rate environment in 2019.
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The following table provides information on the fair value of our owned forward MSR portfolio. Table 15. MSRs - Fair Value, Rollforward Successor Predecessor Year Ended December Five Months Ended Seven Months Ended 31, 2019 December 31, 2018 July 31, 2018
Fair value - beginning of period $ 3,665 $ 3,413
$ 2,937
Additions:
Servicing resulting from mortgage loans sold 434 120 162 Purchases of servicing rights 858 479 144 Dispositions: Sales and cancellation of servicing assets(1) (408 ) (111 ) 4 Changes in fair value: Due to changes in valuation inputs or assumptions used in the valuation model: Credit sensitive (205 ) (78 ) 203 Interest sensitive (384 ) (45 ) 127 Other changes in fair value: Scheduled principal payments (94 ) (39 ) (45 ) Disposition of negative MSRs and other(2) 64 14 27 Prepayments Voluntary prepayments Credit sensitive (99 ) (36 ) (71 ) Interest sensitive (309 ) (37 ) (54 ) Involuntary prepayments Credit sensitive (7 ) (7 ) (12 ) Interest sensitive (19 ) (8 ) (9 ) Fair value - end of period $ 3,496 $ 3,665 $ 3,413
(1) Amount for the seven months ended
nonperforming loans, which had a negative MSR value.
(2) Amounts primarily represent negative fair values reclassified from the MSR
asset to reserves as underlying loans are removed from the MSR and other
reclassification adjustments.Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 50
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The following table sets forth the weighted-average assumptions in estimating the fair value of forward MSRs. Table 16. MSRs - Fair Value SuccessorDecember 31, 2019 December 31, 2018
Total MSRs Portfolio Discount rate 9.7 % 10.2 % Prepayment speeds 13.1 % 10.8 % Average life 5.8 years 6.7 years Credit Sensitive Discount rate 10.4 % 11.3 % Prepayment speeds 12.7 % 11.8 % Average life 6.0 years 6.4 years Interest Sensitive Discount rate 9.1 % 9.3 % Prepayment speeds 13.5 % 10.0 % Average life 5.7 years 7.0 years
The discount rate for credit sensitive and interest sensitive MSRs as of
The discount rate, which is used to determine the present value of estimated future net servicing income, is based on the required rate of return market investors would expect for an asset with similar risk characteristics. The discount rate is determined through review of recent market transactions as well as comparing the discount rate to those utilized by third-party valuation specialists. Total prepayment speeds represent the annual rate at which borrowers are forecasted to repay their mortgage loan principal, which includes estimates for both voluntary and involuntary borrower liquidations. The expected weighted-average life represents the total years we expect to service the MSR.
Excess Spread Financing
As further disclosed in Note 4, Mortgage Servicing Rights and Related Liabilities, in the notes to consolidated financial statements, we have entered into sale and assignment agreements treated as financing arrangements whereby the acquirer has the right to receive a specified percentage of the excess cash flow generated from an MSR. The servicing fees associated with an MSR can be segregated into (i) a base servicing fee and (ii) an excess servicing fee. The base servicing fee, along with ancillary income and other revenues, is designed to cover costs incurred to service the specified pool plus a reasonable margin. The remaining servicing fee is considered excess. We sell a percentage of the excess fee, as a method for efficiently financing acquired MSRs and the purchase of loans. Excess spread financings are recorded at fair value, and the impact of fair value adjustments on future revenues and capital resources varies primarily due to (i) prepayment speeds and (ii) our ability to recapture prepayments through the origination platform. See Note 4, Mortgage Servicing Rights and Related Liabilities, in the notes to consolidated financial statements, for additional information regarding the range of assumptions and sensitivities related to the measurement of the excess spread financing liability as ofDecember 31, 2019 and 2018.
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The following table sets forth the change in the excess spread liability and the related weighted average assumptions. Table 17. Excess Spread Financing Successor Predecessor Year Ended December Five Months Ended Seven Months Ended 31, 2019 December 31, 2018 July 31, 2018 Fair value - beginning of period $ 1,184 $ 1,039 $ 996 Additions: New financings 542 255 70 Deductions: Repayments of debt (27 ) (38 ) (3 ) Settlements of principal balances (219 ) (77 ) (105 ) Changes in fair value: Credit sensitive (61 ) 23 73 Interest sensitive (108 ) (18 ) 8 Fair value - end of period $ 1,311 $ 1,184 $ 1,039 Successor Key Weighted-Average Assumptions: December 31, 2019 December 31, 2018 Total Excess Spread Portfolio Discount rate 11.6 % 10.4 % Prepayment speeds 12.6 % 11.0 % Recapture rate 20.1 % 18.6 % Average life 5.8 years 6.5 years Credit Sensitive Discount rate 12.3 % 11.1 % Prepayment speeds 12.5 % 11.6 % Recapture rate 21.6 % 18.0 % Average life 5.9 years 6.3 years Interest Sensitive Discount rate 10.5 % 9.0 % Prepayment speed 12.8 % 9.9 % Recapture rate 17.6 % 16.0 % Average life 5.8 years 7.0 years Due to market driven events occurring within the year endedDecember 31, 2019 , we updated the discount rate utilized for valuation of excess spread financing liabilities to accurately reflect the fair value. Mr. Cooper Group Inc. - 2019 Annual Report on Form
10-K 52
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The following table sets forth the change in the MSRs financing liability and the related weighted average assumptions. Table 18. MSRs Financing Liability - Rollforward Successor Predecessor Five Months Ended Year EndedDecember 31, 2019
32 $ 26 $ 10 Changes in fair value: Changes in valuation inputs or assumptions used in the valuation model 23 11 22 Other changes in fair value (18 ) (5 ) (6 ) Fair value - end of period $ 37 $ 32 $ 26 Successor Weighted-Average Assumptions December 31, 2019 December 31, 2018 Advance financing rates 3.5 % 4.2 % Annual advance recovery rates 18.8 % 19.0 % We entered into several sale agreements whereby we sold the right to receive repayment of servicing advances on private-label servicing advances and the right to receive a portion of the base fee component on the related MSRs, and also transferred the obligations to make future advances. These transactions are recorded as an MSR Financing Liability in our consolidated balance sheets and represent the incremental costs relative to the market participant assumptions contained in the MSR valuation. Changes in the value of the MSR financing liability are recorded against servicing revenue and interest imputed on the outstanding liability is recorded as interest expense. We estimate fair value of the MSR financing liability based on the present value of future expected discounted cash flows with the discount rate approximating current market rate for similar financial instruments. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions atDecember 31, 2019 and 2018 being advance financing rates and annual advance recovery rates. The liability value increased in 2019 primarily due to the increase in the UPB of the underlying MSR, which resulted in an increase in the amounts owed to the counterparty over 2019. The following table provides an overview of our forward servicing portfolio and amounts that involve excess spread financing with our co-invest partners for the periods indicated. Table 19. Leveraged Portfolio Characteristics Successor December 31, 2019 December 31, 2018 Owned forward servicing portfolio - unencumbered $ 83,557 $ 103,644 Owned forward servicing portfolio - encumbered 213,225 191,837 Subserviced forward servicing portfolio and other 323,983 223,886 Total unpaid principal balance $ 620,765 $ 519,367 The encumbered forward servicing portfolio consists of residential mortgage loans included within our excess spread financing transactions and MSR financing liability. Subserviced and other amounts include (1) loans serviced for others, (2) residential mortgage loans originated but not yet sold, and (3) agency REO balances for which we own the mortgage servicing rights.
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Reverse - MSRs Participating Interests - Amortized Cost
The table below provides detail of the characteristics and key performance metrics of the reverse servicing portfolio, which is included in reverse MSRs, MSLs and participating interests in reverse mortgages. Such assets are recorded at amortized cost. Table 20. Reverse - Mortgage Portfolio Characteristics Successor December 31, 2019 December 31, 2018 Loan count 165,364 192,810 Ending unpaid principal balance $ 22,725 $ 28,415 Average loan amount(1) $ 137,426 $ 147,374 Average coupon 3.6 % 4.5 % Average borrower age 80 79 (1) Average loan amount is presented in whole dollar amounts. Historically, the Predecessor acquired servicing rights and participating interests in reverse mortgage portfolios. Reverse mortgage loans, most commonly HECMs, provide seniors 62 and older with a loan upon which draws can be made periodically. The draws are secured by the equity in the borrower's home. For acquired servicing rights, an MSR or MSL is established on the acquisition date at fair value, as applicable, based on the expected discounted cash flow from servicing the reverse portfolio. Each quarter, we accrete the MSL to revenues - service related, net, of the respective portfolios run-off. The MSL is assessed for increased obligation based on its fair value, using a variety of assumptions, with the key assumption being discount rates, prepayment speeds and the borrower life expectancy. The MSLs are stratified based on predominant risk characteristics of the underlying serviced loans. Impairment, if any, represents the excess of amortized cost of an individual stratum over its estimated fair value and is recognized through an increase in the valuation allowance. Based on our assessment, no impairment or increased obligation was required to be recorded for reverse MSRs and MSLs, respectively, as ofDecember 31, 2019 and 2018. Originations Segment The strategy of our Originations segment is to originate or acquire new loans for the servicing portfolio at a more attractive cost than purchasing MSRs in bulk transactions and to retain our existing customers by providing them with attractive refinance options. The Originations segment plays a strategically important role because its profitability is typically counter cyclical to that of the Servicing segment. Furthermore, by originating or acquiring loans at a more attractive cost than would be the case in bulk MSR acquisitions, the Originations segment improves our overall profitability and cash flow. Growing the Originations segment has been a strategic focus for us for several years.
The Originations segment includes three channels:
• Our direct-to-consumer lending channel relies on our call centers, website
and mobile apps to interact with customers. Our primary focus is to assist
our customers with a refinance or home purchase by providing them with a
needs-based approach to understanding their current mortgage options.
• Our correspondent lending channel acquires newly originated residential
mortgage loans that have been underwritten to investor guidelines. This includes both conventional and government-insured loans that qualify for inclusion in securitizations that are guaranteed by the GSEs. Our
correspondent lending channel enables us to replenish servicing portfolio
run-off typically at better rate of return than traditional bulk or flow acquisitions.
• Our wholesale lending channel works with mortgage brokers to source loans
which are underwritten and funded by us in our name. Counterparty risk is
mitigated through quality and compliance monitoring and all brokers are subject to our eligibility requirements coupled with an annual recertification process.Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 54
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The charts below set forth the pull through adjusted lock volume and funded volume by channel and channel mix.
[[Image Removed: pullthroughv3.jpg]] [[Image Removed: channelmixv2a01.jpg]]
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The following tables set forth the results of operations for the Originations segment: Table 21. Originations Segment Results of Operations Successor Predecessor Year Ended Five Months Ended Seven Months Ended December 31, 2019 December 31, 2018 July 31, 2018 Combined(1) $ Change % Change Total revenues$ 1,043 $ 181 $ 306$ 487 $ 556 114 % Total expenses 568 155 245 400 168 42 % Total other income (expenses), net 4 6 1 7 (3 ) (43 )% Income before income tax $ 479 $ 32 $ 62 $ 94$ 385 410 % expense Originations Margin Revenue$ 1,043 $ 181 $ 306$ 487 $ 556 114 % Pull through adjusted lock volume$ 42,393 $ 8,295 $ 11,907$ 20,202 $ 22,191 110 % Revenue as a percentage of pull through adjusted lock volume(2) 2.46 % 2.18 % 2.57 % 2.41 % 0.05 % 2 % Expenses $ 568 $ 155 $ 245$ 400 $ 168 42 % Funded volume$ 40,182 $ 8,884 $ 12,317$ 21,201 $ 18,981 90 % Expenses as a percentage of funded volume(3) 1.41 % 1.74 % 1.99 % 1.89 % (0.48 )% (25 )% Originations Margin 1.05 % 0.44 % 0.58 % 0.52 % 0.53 % 102 %
(1) Refer to Basis of Presentation section for discussion on presentation of
combined results.
(2) Calculated on pull-through adjusted lock volume as revenue is recognized at
the time of loan lock.
(3) Calculated on funded volume as expenses are incurred based on closing of the
loan. Income before income tax expense increased for the year endedDecember 31, 2019 as compared to the same period in 2018, on a combined basis, primarily due to an increase in total revenues driven by origination volume growth. The growth in originations volume was driven by declining interest rates, and incremental volumes made available with the acquisition ofPacific Union and related origination channels. The Originations Margin for the year endedDecember 31, 2019 increased as compared to the same period in 2018, on a combined basis, primarily due to the lower interest rate environment and growth in the direct-to-consumer channel, along with lower expenses as a percentage of funded volume. Originations Segment Revenues Service related fee, net - Originations refers to fees collected from customers for originated loans and from other lenders for loans purchased through the correspondent channel, and includes loan application, underwriting, and other similar fees. Net gain on loans originated and sold represents the gains and losses from the origination, purchase, and sale of loans and related derivative instruments. Gains from the origination and sale of loans are affected by the volume and margin of our originations activity and is impacted by fluctuations in interest rates. Capitalized servicing rights represents the fair value attributed to mortgage servicing rights at the time in which they are retained in connection with the sale of loans during the period.Mr. Cooper Group Inc. - 2019 Annual Report on Form
10-K 56
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Total revenues, including net gain on mortgage loans held for sale, for our Originations segment are set forth in the tables below: Table 22. Originations - Revenues
Successor Predecessor Year Ended Five Months Ended Seven Months Ended December 31, 2019 December 31, 2018 July 31, 2018 Combined(1) $ Change % Change Service related, net - Originations $ 80 $ 24 $ 36 $ 60$ 20 33 % Net gain on mortgage loans held for sale Net gain on loans originated and sold 562 46 115 161 401 249 %
Capitalized
servicing rights 420 114 156 270 150 56 % Provision for repurchase reserves, net of release (19 ) (3 ) (1 ) (4 ) (15 ) 375 % Total net gain on mortgage loans held for sale 963 157 270 427 536 126 % Total revenues - Originations$ 1,043 $ 181 $ 306$ 487 $ 556 114 % Key Metrics Consumer direct lock pull through adjusted volume(2)$ 18,151 $ 3,588 $ 6,100$ 9,688 $ 8,463 87 % Other locked pull through adjusted volume(2) 24,242 4,707 5,807 10,514 13,728 131 % Total pull through adjusted lock volume$ 42,393 $ 8,295 $ 11,907$ 20,202 $ 22,191 110 % Funded volume$ 40,182 $ 8,884 $ 12,317$ 21,201 $ 18,981 90 % Volume of loans sold$ 40,092 $ 9,183 $ 12,915$ 22,098 $ 17,994 81 % Recapture percentage 26.2 % 24.8 % 23.8 % 24.6 % 1.6 % 7 % Purchase as a percentage of funded volume 41.5 % 55.8 % 46.7 % 64.7 % (23.2 )% (36 )% Value of capitalized servicing on retained settlements 147 bps 144 bps 141 bps 142 bps 5 bps 4 %
(1) Refer to Basis of Presentation section for discussion on presentation of
combined results.
(2) Pull through adjusted volume represents the expected funding from locks
taken during the period. Total revenues increased for the year endedDecember 31, 2019 compared to the same period in 2018, on a combined basis, primarily driven by the higher volumes in a declining interest rate environment and the incremental volumes made available with the acquisition ofPacific Union and related origination channels, which occurred inFebruary 2019 . Total revenues increased 114% or$556 period over period as pull through adjusted lock volume increased 110% during the same period.
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The table below summarizes expenses for the Originations segment: Table 23. Originations - Expenses
Successor Predecessor Five Months Ended Year Ended December 31, Seven Months Ended December 31, 2019 2018 July 31, 2018
Combined(1) $ Change % Change Salaries, wages and benefits $ 375$ 95 $ 148 $ 243$ 132 54 % General and administrative Loan origination expenses 58 19 32 51 7 14 % Corporate and other general and administrative expenses 61 18 26 44 17 39 % Marketing and professional service fees 53 18 32 50 3 6 % Depreciation and amortization 18 5 7 12 6 50 % Loss on impairment of assets 3 - - - 3 100 % Total general and administrative 193 60 97 157 36 23 % Total expenses - Originations $ 568$ 155 $ 245 $ 400$ 168 42 %
(1) Refer to Basis of Presentation section for discussion on presentation of
combined results. Total expenses for the year endedDecember 31, 2019 increased when compared to the same period in 2018, on a combined basis, primarily due to growth in volumes, which was driven by the low interest rate environment, and the incremental volumes made available with thePacific Union acquisition and related origination channels. The volume growth contributed to the increase in salaries, wages and benefits, due to increased compensation and headcount related costs, and loan origination expenses. The increase in loan origination expenses attributable to higher volume was partially offset by expense reduction initiatives. In addition, corporate and other general and administrative expenses increased during the year endedDecember 31, 2019 primarily driven by thePacific Union acquisition. The table below summarizes other income (expenses), net for the Originations segment: Table 24. Originations - Other Income (Expenses), Net Successor Predecessor Five Months Year Ended December 31, Ended December Seven
Months Ended July 2019 31, 2018 31, 2018 Combined(1) $ Change % Change Interest income $ 98$ 27 $ 38 $ 65$ 33 51 % Interest expense (98 ) (26 ) (37 ) (63 ) (35 ) 56 % Other income, net 4 5 - 5 (1 ) (20 )% Total other income (expenses), net - Originations $ 4 $ 6 $ 1 $ 7$ (3 ) (43 )% Weighted average note rate - mortgage loans held for sale 4.3 % 4.9 % 4.5 % 4.7 % (0.4 )% (9 )% Weighted average cost of funds (excluding facility fees) 4.1 % 4.5 % 4.2 % 4.4 % (0.3 )% (7 )%
(1) Refer to Basis of Presentation section for discussion on presentation of
combined results.Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 58
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Interest income relates primarily to mortgage loans held for sale. Interest expense is associated with the warehouse facilities utilized to finance newly originated loans.
Interest income for the year endedDecember 31, 2019 increased when compared to the same period in 2018, on a combined basis, primarily driven by higher funded volume. The increase in interest income was offset by an increase in interest expense due to higher cost of funds from an increase in originations volume. Other income, net remained relatively flat in the year endedDecember 31, 2019 when compared to the same period in 2018, on a combined basis, due to the recognition of incentives we received related to our financing of certain loans satisfying certain consumer relief characteristics. InSeptember 2018 , we entered into a master repurchase agreement that provided us with incentives to finance mortgage loans satisfying certain consumer relief characteristics as provided in the agreement. We recorded$4 and$5 in other income, net related to such incentives in the year endedDecember 31, 2019 and 2018, on a combined basis, respectively. The master repurchase agreement expired during the third quarter of 2019. Xome Segment Xome is a real estate data and services company that provides services for mortgage originators and servicers, includingMr. Cooper , as well as mortgage and real estate investors. Xome is strategically important because it generates fee income that complements our servicing and origination businesses without requiring a significant amount of capital or exposing us to the same level of interest rate or credit risk.
Xome is organized into three divisions: Exchange, Services and Data/Technology.
• The Exchange division consists of the Xome.com auction platform which
utilizes proprietary technology designed to provide efficient execution
for sales of foreclosed properties. • The Services division includes title, escrow, collateral valuation and field services related to real estate investments or transactions
including purchases, sales, refinances and defaults. Services includes the
business of AMS, which we acquired inAugust 2018 .
• The Data/Technology division contains a diversified set of businesses that
provide technology solutions to real estate service providers, aggregators
and a variety of investors. This includes providing aggregation, standardization and licensing for one of the nation's largest set of MLS, public records and neighborhood demographic data.
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The charts below set forth Xome's total revenues, Exchange properties sold, and Services completed orders.
[[Image Removed: xomev6.jpg]]
[[Image Removed: chart-0034a08c5783ff769dda11.jpg]][[Image Removed: chart-6e1de4948111321f0fca11.jpg]]
Mr. Cooper Group Inc. - 2019 Annual Report on Form
10-K 60
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Table 25. Xome Segment Results of Operations
Successor Predecessor Seven Months Year Ended December Five Months Ended Ended July 31, 31, 2019 December 31, 2018 2018 Combined(1) $ Change % Change Xome - Operations Total revenues $ 422 $ 177$ 149 $ 326 $ 96 29 % Total expenses 398 178 123 301 97 32 % Total other income 14 - 9 9 5 (expenses), net 56 % Income (loss) before income tax expense (benefit) $ 38 $ (1 ) $ 35 $ 34 $ 4 12 % Income (loss) before taxes 9.0 % (0.6 )% 23.5 % 10.4 % (1.4 )% (13 )% margin - Xome Xome - Revenues Exchange $ 79 $ 34 $
62 $ 96
323 135 74 209 114 55 % Data/Technology 20 8 13 21 (1 ) (5 )% Total revenues - Xome $ 422 $ 177$ 149 $ 326 $ 96 29 % Key Metrics Exchange properties sold 9,851 3,952 6,920 10,872 (1,021 ) (9 )% Average Exchange properties under management 7,893 5,660 6,567 6,189 1,704 28 %
Services
completed orders 1,630,002 808,503 264,031 1,072,534 557,468 52 % Percentage of revenue earned from third-party customers 52.5 % 56.2 % 28.0 % 43.3 % 9.2 % 21 % Xome - Expenses Salaries, wages and benefits $ 148 $ 73 $ 58$ 131 $ 17 13 % General and administrative Operational expenses 236 100 58 158 78 49 % Depreciation and amortization 14 5 7 12 2 17 % Total general and administrative 250 105 65 170 80 47 % Total expenses - Xome $ 398 $ 178$ 123 $ 301 $ 97 32 %
(1) Refer to Basis of Presentation section for discussion on presentation of
combined results. Income before income tax expense increased for the year endedDecember 31, 2019 as compared to the same period in 2018, on a combined basis, primarily driven by an increase in total revenues and other income (expenses), net, partially offset by an increase in total expenses. Total revenues increased for the year endedDecember 31, 2019 as compared to the same period in 2018, on a combined basis, primarily due to an increase in Services revenues as a result of theAugust 2018 acquisition of AMS, which added higher volumes of units for valuation and field services. Partially offsetting the increase in Services revenues was a decrease in Exchange revenues, primarily as a result of lower foreclosure sales and inventories across the industry and nation. Total expenses increased for the year endedDecember 31, 2019 as compared to the same period in 2018, on a combined basis, primarily due to an increase in operational expenses, primarily related to the acquisition of AMS. Total other income (expenses), net increased primarily due to the$15 change in the contingent consideration for the acquisition of AMS for the year endedDecember 31, 2019 .
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Corporate/Other Segment The following tables set forth the results of operations for the Corporate/Other segment: Table 26. Corporate/Other Segment Results of Operations Successor Predecessor Year Ended December Five Months Ended Seven Months Ended 31, 2019 December 31, 2018 July 31, 2018 Combined(1) $ Change % Change
Corporate/Other - Operations Total revenues $ 13 $ - $ 1 $ 1$ 12 1,200 % Total expenses 198 71 103 174 24 14 % Total other income (expenses), net (212 ) (85 ) (78 ) (163 ) (49 ) 30 % Loss before income tax benefit - Corporate/Other $ (397 ) $ (156 ) $
(180 )
Corporate/Other - Expenses Salaries, wages and benefits $ 88 $ 38 $ 45$ 83 $ 5 6 % General and administrative Operational expenses 62 13 54 67 (5 ) (7 )% Depreciation and amortization 40 20 4 24 16 67 % Loss on impairment of assets 8 - - - 8 100 % Total general and administrative 110 33 58 91 19 21 % Total expenses - Corporate/Other $ 198 $ 71 $ 103$ 174 $ 24 14 % Corporate/Other - Other Income (Expenses), Net Interest income, legacy portfolio $ 6 $ 5 $
7
1 2 - 2 (1 ) (50 )% Total interest income 7 7 7 14 (7 ) (50 )% Interest expense, legacy portfolio (1 ) (1 ) (3 ) (4 ) 3 (75 )% Interest expense on unsecured senior notes (203 ) (90 ) (77 ) (167 ) (36 ) 22 % Other interest expense (8 ) (2 ) (3 ) (5 ) (3 ) 60 % Total interest expense (212 ) (93 ) (83 ) (176 ) (36 ) 20 % Other (expense) income, net (7 ) 1 (2 ) (1 ) (6 ) 600 % Total other income (expenses), net - Corporate/Other $ (212 ) $ (85 ) $
(78 )
Weighted average cost - unsecured senior notes 7.9 % 7.1 % 7.4 % 7.2 % 0.7 % 10 %
(1) Refer to Basis of Presentation section for discussion on presentation of
combined results.Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 62
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Loss before income tax benefit increased in the year endedDecember 31, 2019 as compared to 2018, on a combined basis, primarily due to an increase in total expenses and the change in total other income (expenses), net. Total expenses increased primarily due to amortization of intangible assets related to the Merger with Nationstar. In addition, during the fourth quarter of 2019, we recorded an$8 impairment of assets in connection with an ancillary business. Total other income (expenses), net for the Corporate/Other segment consists of interest expense on our unsecured senior notes, the interest income and expense from our legacy portfolio, and other interest related to a revolving facility used for general corporate purposes. The change in total other income (expenses), net in the year endedDecember 31, 2019 as compared to 2018, on a combined basis, was primarily due to an increase in interest expense on unsecured senior notes, as a result of a higher debt balance and higher borrowing rates under the new unsecured senior notes that were issued inJuly 2018 to fund the Merger with Nationstar. In addition, net interest income related to the legacy portfolio declined due to the collapse of Trust 2009-A and the sale of loans held in the trust. Other income (expenses), net declined in the year endedDecember 31, 2019 as compared to 2018, on a combined basis, primarily due to a$5 impairment on an equity investment. Partially offsetting the increase in total expenses and the change in total other income (expenses), net was an increase in total revenues in the year endedDecember 31, 2019 as compared to 2018, on a combined basis, due to the gain recognized on the collapse of Trust 2009-A, our legacy portfolio, and the sale of the loans held in the trust. As a result of the collapse of Trust 2009-A and the sale of the loans held in the trust inSeptember 2019 , there was no legacy portfolio as ofDecember 31, 2019 .
Table 27. Legacy Portfolio Composition
Successor December 31, 2018 Performing - UPB $ 145 Nonperforming (90+ delinquency) - UPB 27 REO - estimated fair value 4 Total legacy portfolio $ 176
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Changes in Financial Position Table 28. Changes in Assets Successor December 31, 2019 December 31, 2018 $ Change % Change Cash and cash equivalents $ 329 $ 242 $ 87 36.0 % Mortgage servicing rights 3,502 3,676 (174 ) (4.7 )% Advances and other receivables, net 988 1,194 (206 ) (17.3 )% Reverse mortgage interests, net 6,279 7,934 (1,655 ) (20.9 )% Mortgage loans held for sale at fair value 4,077 1,631 2,446 150.0 % Deferred tax asset, net 1,345 967 378 39.1 % Other 1,785 1,329 456 34.3 % Total assets $ 18,305 $ 16,973$ 1,332 7.8 % Total assets as ofDecember 31, 2019 increased by$1,332 or 7.8% compared withDecember 31, 2018 primarily due to the increase in mortgage loans held for sale and other, partially offset by decreases in reverse mortgage interests, mortgage servicing rights, and advances and other receivables. Mortgage loans held for sale increased in 2019 primarily due to higher origination volumes in a declining interest rate environment, and the incremental volumes made available with the acquisition ofPacific Union and related origination channels, which occurred inFebruary 2019 . Other increased primarily due to$483 of other assets related to thePacific Union acquisition, as indicated in Note 3, Acquisitions, in the notes to consolidated financial statements, and$121 of right of use assets recorded in 2019 as a result of adoption of ASU 2016-02. Reverse mortgage interests, net decreased$1,655 primarily due to the collection on participating interests in HMBS. Mortgage servicing rights decreased in 2019 primarily due to a negative mark-to-market adjustment driven by declining interest rates. Advances and other receivables decreased primarily due to recoveries on advances.
Table 29. Changes in Liabilities and Stockholder's Equity
Successor December 31, 2019 December 31, 2018 $ Change % Change Unsecured senior notes, net $ 2,366 $ 2,459 $ (93 ) (3.8 )% Advance facilities, net 422 595 (173 ) (29.1 )% Warehouse facilities, net 4,575 2,349 2,226 94.8 % MSR related liabilities - nonrecourse at fair value 1,348 1,216 132 10.9 % Other nonrecourse debt, net 5,286 6,795 (1,509 ) (22.2 )% Other liabilities 2,077 1,614 463 28.7 % Total liabilities 16,074 15,028 1,046 7.0 % Total stockholders' equity 2,231 1,945 286 14.7 % Total liabilities and stockholders' equity $ 18,305 $ 16,973$ 1,332 7.8 % Total stockholders' equity atDecember 31, 2019 increased by$286 or 14.7% compared with the balance as ofDecember 31, 2018 primarily due to net income of$270 during the year endedDecember 31, 2019 . Total liabilities atDecember 31, 2019 increased by$1,046 or 7.0% compared with the balance as ofDecember 31, 2018 primarily due to an increase in warehouse facilities and other liabilities, which was partially offset by a decrease in other nonrecourse debt. Warehouse facilities increased by$2,226 primarily due to the warehouse facilities acquired as part of thePacific Union acquisition and higher origination volumes. The increase in other liabilities was primarily due to$530 of payables and other liabilities related to thePacific Union acquisition. Other nonrecourse debt decreased by$1,509 primarily due to repayments of reverse mortgage related nonrecourse debt, which was partially offset by proceeds from issuance of HECM securitizations. Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 64
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Liquidity and Capital Resources
We measure liquidity by unrestricted cash and availability of borrowings on our MSR and other facilities. We recorded cash and cash equivalents on hand of$329 and total stockholders' equity of$2,231 as ofDecember 31, 2019 . As ofDecember 31, 2019 , we had$1,359 collateral pledged against the MSR facilities, of which we could borrow up to$840 . During the year endedDecember 31, 2019 , operating activities generated cash totaling$702 . We have sufficient borrowing capacity to support our operations. As ofDecember 31, 2019 , total available borrowing capacity was$9,690 , of which$4,672 was unused. Sources and Uses of Cash Our primary sources of funds for liquidity include: (i) servicing fees and ancillary revenues; (ii) payments received from sale or securitization of loans; (iii) payments from the liquidation or securitization of our outstanding participating interests in reverse mortgage loans; (iv) advance and warehouse facilities, other secured borrowings and the unsecured senior notes; and (v) payments received in connection with the sale of advance receivables and excess spread. Our primary uses of funds for liquidity include: (i) funding of servicing advances; (ii) originations of loans; (iii) payment of interest expenses; (iv) payment of operating expenses; (v) repayment of borrowings and repurchases or redemptions of outstanding indebtedness; (vi) payments for acquisitions of MSRs; (vii) scheduled and unscheduled draws on our serviced reverse residential mortgage loans; and (viii) payment of our technology expenses. We service reverse mortgage loan portfolios with a UPB of$22,725 as ofDecember 31, 2019 , which includes$2,508 of reverse MSRs,$13,994 of reverse MSLs and$6,223 of reverse mortgage interests. Reverse mortgages provide seniors aged 62 and older with the ability to monetize the equity in their homes in a lump sum, line of credit or annualized draws. The unpaid principal balance of the loan is accreted for borrower draws and other costs such as mortgage insurance premiums, property taxes and insurance. Recovery of advances and draws related to reverse MSRs is generally recovered over a two to three-month period from the investor. However, for reverse mortgage portfolio recorded as a loan, the repayment of loan balances and collection of servicing fees occurs upon the payoff or other liquidation of the loan. We securitize our holdings in reverse mortgage loans in order to finance subsequent borrower draws and loan related costs. Draws on reverse mortgage loans totaled$242 in 2019,$316 in 2018, on a combined basis, and$403 in 2017. We believe that our cash flows from operating activities, as well as capacity with existing facilities, provide adequate resources to fund our anticipated ongoing cash requirements. We rely on these facilities to fund operating activities. As the facilities mature, we anticipate renewal of these facilities will be achieved. Future debt maturities will be funded with cash and cash equivalents, cash flow from operating activities and, if necessary, future access to capital markets. We continue to optimize the use of balance sheet cash to avoid unnecessary interest carrying costs. During 2019, we expanded our subservicing portfolios in order to grow our operations without the capital required for acquisition costs and carrying costs of advances that is associated with ownership of mortgage servicing rights. We completed boardings of$258 billion UPB in connection with new and existing subservicing agreements. OnJanuary 16, 2020 , we completed an offering of$600 aggregate principal amount of 6.000% Senior Notes due 2027 (the "Notes"). The Notes will bear interest at 6.000% per annum and will mature onJanuary 15, 2027 . Interest on the Notes will be payable semi-annually onJanuary 15 andJuly 15 of each year, beginning onJuly 15, 2020 . InFebruary 2020 , the net proceeds of the offering, together with cash on hand, were used to redeem in full the outstanding 6.500% Senior Notes due 2021 and 6.500% Senior Notes due 2022.
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Cash Flows The table below presents the major sources and uses of cash flow for operating activities: Table 30. Operating Cash Flow Successor Predecessor Year Ended December Five Months Ended Seven Months Ended 31, 2019 December 31, 2018 July 31, 2018 Combined(1) $ Change % Change Net income $ 270 $ 884 $ 154$ 1,038 $ (768 ) (74 )% Fair value changes in MSRs, MSR related liabilities and mortgage loans held for investment 838 234 (80 ) 154 684 444 % Deferred tax (benefit) expense (366 ) (1,021 ) 63 (958 ) 592 (62 )% Other non-cash adjustments to net income (1,249 ) (294 ) (388 ) (682 ) (567 ) 83 % Originations net sales activities (1,204 ) (10 ) 520 510 (1,714 ) (336 )% Changes in working capital 2,413 1,458 2,025 3,483 (1,070 ) (31 )% Net cash attributable to operating activities $ 702$ 1,251 $ 2,294$ 3,545 $ (2,843 ) (80 )%
(1) Refer to Basis of Presentation section for discussion on presentation of
combined results. Our operating activities generated cash of$702 during the year endedDecember 31, 2019 compared to$3,545 in 2018, on a combined basis. The decrease in cash generated from operating activities was primarily due to the cash used in originations net sales activities and the changes in working capital. Cash used in originations net sales activities was$1,204 during the year endedDecember 31, 2019 compared to$510 cash generated in 2018, on a combined basis. The change was primarily due to a higher funding of$19,041 for loan origination activities driven by the declining interest rate environment, and an increase in funds used of$1,824 to repurchase forward loan assets out ofGinnie Mae securitizations. The increase in funding was partially offset by an increase in proceeds of$19,151 on the sales of previously originated loans and the sale of loans related to the collapse of Trust 2009-A, our legacy portfolio. Cash generated from the changes in working capital was$2,413 during the year endedDecember 31, 2019 compared to$3,483 cash generated in 2018, on a combined basis. The change was primarily due to less collections on reverse mortgage interests driven by normal portfolio run-off. Cash generated from fair value changes in MSRs, MSR related liabilities and mortgage loans held for investment during the year endedDecember 31, 2019 increased by$684 when compared to 2018, on a combined basis. The change was primarily due to an increase in fair value changes and amortization/accretion of mortgage servicing rights/liabilities of$957 , primarily due to the negative mark-to-market adjustment for the year endedDecember 31, 2019 . Cash used from the deferred tax benefit during the year endedDecember 31, 2019 decreased by$592 when compared to 2018, on a combined basis, primarily due to the reversal of the valuation allowance associated with the NOL carryforwards of WMIH in the five months endedDecember 31, 2018 .Mr. Cooper Group Inc. - 2019 Annual Report on Form
10-K 66
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The table below presents the major sources and uses of cash flow for investing activities: Table 31. Investing Cash Flows Successor Predecessor Year Ended December Five Months Ended Seven Months Ended 31, 2019 December 31, 2018 July
31, 2018 Combined(1) $ Change % Change Acquisitions, net $ (85 ) $
(33 ) $ -$ (33 ) $ (52 ) 158 % Purchase of forward mortgage servicing rights, net of liabilities incurred (547 ) (307 )
(134 ) (441 ) (106 ) 24 % Proceeds on sale of assets - - 13 13 (13 ) (100 )% Proceeds on sale of forward and reverse mortgage servicing rights 343 105 - 105 238 227 % Other (49 ) (15 ) (41 ) (56 ) 7 (13 )% Net cash attributable to investing activities $ (338 ) $ (250 ) $
(162 )
(1) Refer to Basis of Presentation section for discussion on presentation of
combined results. Our investing activities used$338 during the year endedDecember 31, 2019 , which decreased from$412 of cash used in 2018, on a combined basis. The decrease in cash attributable to investing activities was primarily due to an increase in proceeds on sale of forward mortgage servicing rights of$238 . Although we continue to seek to acquire servicing portfolios at advantageous pricing, the amounts and timing of these opportunities is not of a consistent frequency and can result in cash flow variability between periods. Partially offsetting the increase in proceeds was an increase in cash used of$106 in the purchase of forward mortgage servicing rights, net of liabilities incurred, and net cash of$85 used in connection with the acquisitions ofPacific Union and Seterus.
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The table below presents the major sources and uses of cash flow for financing activities: Table 32. Financing Cash Flow Successor Predecessor Year Ended Five Months Ended Seven Months Ended December 31, 2019 December 31, 2018 July 31, 2018 Combined(1) $ Change % Change Increase (decrease) in warehouse facilities$ 1,704 $ (351 ) $ (585 )$ (936 ) $ 2,640 (282 )% (Decrease) increase in advance facilities (186 ) 45 (305 ) (260 ) 74 (28 )% Repayment of notes payable (294 ) - - - (294 ) (100 )% Payment of unsecured senior notes and nonrecourse debt (129 ) (1,036 ) (69 ) (1,105 ) 976 (88 )% Issuance of excess spread financing 542 255 70 325 217 67 % Repayment of excess spread financing (27 ) (38 ) (3 ) (41 ) 14 (34 )% Settlement of excess spread financing (219 ) (77 ) (105 ) (182 ) (37 ) 20 % Decrease of participating interest financing (1,591 ) (831 ) (1,391 ) (2,222 ) 631 (28 )% Changes in HECM securitizations (99 ) (31 ) 311 280 (379 ) (135 )% Other (14 ) 1 (34 ) (33 ) 19 (58 )% Net cash attributable to financing activities$ (313 ) $ (2,063 ) $ (2,111 )$ (4,174 ) $ 3,861 (93 )%
(1) Refer to Basis of Presentation section for discussion on presentation of
combined results. Our financing activities used$313 cash during the year endedDecember 31, 2019 , which decreased from$4,174 of cash used in 2018, on a combined basis. The decrease in cash attributable to financing activities was primarily due to an increase of$1,704 in warehouse facilities during the year endedDecember 31, 2019 compared to a pay down on warehouse facilities of$936 in 2018, on a combined basis. Payment of warehouse facilities was higher in 2018, on a combined basis, due to proceeds from HECM securitizations being used to pay down the facilities, which did not occur in the same period in 2019. In addition, the cash used for payment of unsecured senior notes and nonrecourse debt decreased by$976 primarily due to the redemption and repayment of unsecured senior notes in 2018, on a combined basis. Cash used for participating interest financing decreased in 2019 primarily due to a lower repayment of participating interest financing in 2019 compared to the same period in 2018, on a combined basis. Partially offsetting these decreases in cash used is an increase in cash used for repayment of notes payable and HECM securitizations when compared to the same period in 2018, on a combined basis. During the year endedDecember 31, 2019 , cash of$294 was used to pay off the notes payable assumed from thePacific Union acquisition. The cash used in the change in HECM securitizations during the year endedDecember 31, 2019 increased due to scheduled pay downs and amounts incurred to settle the collapsed trusts exceeding proceeds from the securitization of new trusts, resulting in a net cash outflow of$99 . In addition, during 2018, on a combined basis, proceeds from securitizations of new trusts exceeded scheduled pay downs and amounts incurred to settle the collapsed trusts, resulting in a net cash inflow of$280 .
Capital Resources
Capital Structure and Debt We require access to external financing resources from time to time depending on our cash requirements, assessments of current and anticipated market conditions and after-tax cost of capital. If needed, we believe additional capital could be raised through a combination of issuances of equity, corporate indebtedness, asset-backed acquisition financing and/or cash from operations. Our access to capital markets can be impacted by factors outside our control, including economic conditions.Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 68
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Financial Covenants Our credit facilities contain various financial covenants which primarily relate to required tangible net worth amounts, liquidity reserves, leverage requirements, and profitability requirements, which are measured at our operating subsidiary,Nationstar Mortgage LLC . As ofDecember 31, 2019 , we were in compliance with our required financial covenants. Seller/Servicer Financial Requirements We are also subject to net worth, capital ratio and liquidity requirements established by theFederal Housing Finance Agency ("FHFA") for Fannie Mae and Freddie Mac Seller/Servicers, andGinnie Mae for single family issuers. In both cases, these requirements apply to our operating subsidiary,Nationstar Mortgage LLC . MinimumNet Worth
The minimum net worth requirement for Fannie Mae and Freddie Mac is defined as follows:
? Base of
? Tangible
assets, affiliate receivables and certain pledged assets.
The minimum net worth requirement for
? The sum of (i) base of$2.5 plus 35 basis points of the issuer's total single-family effective outstanding obligations, and (ii) base of$5 plus 1% of the total effective HMBS outstanding obligations.
? Tangible
assets, affiliate receivables and certain pledged assets. Effective for fiscal year 2020, under the Ginnie Mae MBS Guide, the issuers will no longer be permitted to include deferred tax assets when computing the minimum net worth requirement.
Minimum Capital Ratio
? In addition to the minimum net worth requirement, we are also required to
hold a ratio of TangibleNet Worth to Total Assets (excluding HMBS securitizations) greater than 6%.
Minimum Liquidity
The minimum liquidity requirement for Fannie Mae and Freddie Mac is defined as follows:
? 3.5 basis points of total Agency servicing.
? Incremental 200 basis points of total nonperforming Agency, measured as
90+ delinquencies, servicing in excess of 6% of the total Agency servicing
UPB.
? Allowable assets for liquidity may include: cash and cash equivalents
(unrestricted), available for sale or held for trading investment grade
securities (e.g., Agency MBS, Obligations of GSEs,
Obligations); and unused/available portion of committed servicing advance
lines.
The minimum liquidity requirement for
? Maintain liquid assets equal to the greater of$1 or 10 basis points of our outstanding single-family MBS.
? Maintain liquid assets equal to at least 20% of our net worth requirement
for HECM MBS.
Secured Debt to Gross Tangible Asset Ratio
UnderGinnie Mae guide, effectiveSeptember 1, 2019 , we are also required to maintain a secured debt to gross tangible asset ratios greater than 60%. EffectiveSeptember 1, 2019 , since we have aGinnie Mae single-family servicing portfolio that exceeds$75 billion in UPB, we are also required to obtain an external primary servicer rating and issuer credit ratings from two different rating agencies and receive a minimum rating of a B or its equivalent. Effective for fiscal year 2020, we are permitted to satisfy minimum liquidity requirements using a combination of AAA rated government securities that are marked to market in addition to cash and certain cash equivalents.
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In addition, Fannie Mae or Freddie Mac may require capital ratios in excess of stated requirements. Refer to Note 20, Capital Requirements, in the notes to consolidated financial statements for additional information. As ofDecember 31, 2019 , we were in compliance with our seller/servicer financial requirements for FHFA andGinnie Mae . Table 33. Debt Successor December 31, 2019 December 31, 2018 Advance facilities, net $ 422 $ 595 Warehouse facilities, net 4,575 2,349 Unsecured senior notes, net 2,366 2,459 Advance Facilities As part of our normal course of business, we borrow money to fund servicing advances. Our servicing agreements require that we advance our own funds to meet contractual principal and interest payments for certain investors, and to pay taxes, insurance, foreclosure costs and various other items that are required to preserve the assets being serviced. Delinquency rates and prepayment speeds affect the size of servicing advance balances along with our stop advance policies. These servicing requirements affect our liquidity. We rely upon several counterparties to provide us with financing facilities to fund a portion of our servicing advances. Warehouse Facilities Loan origination activities generally require short-term liquidity in excess of amounts generated by our operations. The loans we originate are financed through several warehouse lines on a short-term basis. We typically hold the loans for approximately 30 days and then sell or place the loans in government securitizations in order to repay the borrowings under the warehouse lines. Our ability to fund current operations depends upon our ability to secure these types of short-term financings on acceptable terms and to renew or replace the financings as they expire. As servicer for reverse mortgage loans, among other things, we are required to fund borrower draws on the loans. We typically pool borrower draws for approximately 30 days before including them in a HMBS securitization. As ofDecember 31, 2019 , unsecuritized borrower draws totaled$67 , and our maximum unfunded advance obligation related to these reverse mortgage loans was$2,617 . Unsecured Senior Notes In 2013 and 2018, we completed offerings of unsecured senior notes, which mature on various dated throughJuly 2026 . We pay interest semi-annually to the holders of these notes at interest rates ranging from 6.500% to 9.125%.
As of
Table 34. Contractual Maturities - Unsecured Senior Notes
Year Ending December 31, Amount 2020 $ - 2021(1) 492 2022(1) 206 2023 950 2024 - Thereafter 750 Unsecured senior notes principal amount 2,398
Unamortized debt issuance costs, premium and discount (32 ) Unsecured senior notes, net
$ 2,366
(1) This note was subsequently redeemed in full in
Subsequent Events, in the notes to consolidated financial statements for
further information.Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 70
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The table below sets forth our contractual obligations, excluding our excess
spread financing, MSR financing and participating interest financing at
Table 35. Contractual Obligations
Less than 1 Year 1 - 3 Years 3-5 Years More than 5 Years Total Unsecured senior notes(1) $ - $ 698$ 950 $ 750$ 2,398 Interest payment from unsecured senior notes(2) 191 343 214 137 885 Advance facilities 135 287 - - 422 Warehouse facilities 4,263 313 - - 4,576 Finance lease obligations 2 - - - 2 Operating lease obligations 40 55 29 32 156 Total$ 4,631 $ 1,696 $ 1,193 $ 919$ 8,439
(1) On
amount of 6.000% Senior Notes due 2027. In
of the offering, together with cash on hand, were used to redeem in full the
outstanding 6.500% Senior Notes due 2021 and 6.500% Senior notes due 2022.
See Note 26, Subsequent Events, in the notes to consolidated financial statements for additional information. (2) Interest expense on advance and warehouse facilities is not presented in this table due to the short-term nature of these facilities. In addition to the above contractual obligations, we have also been involved with several securitizations, which were structured as secured borrowings. These structures resulted in us carrying the securitized loans as mortgages on our consolidated balance sheets and recognizing the asset-backed certificates acquired by third parties as nonrecourse debt. The timing of the principal payments on this nonrecourse debt is dependent on the payments received on the underlying mortgage loans and liquidation of REO. For more information regarding our indebtedness, see Note 12, Indebtedness, in the notes to consolidated financial statements.
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Critical Accounting Policies Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, we have identified the following policies that, due to the judgment, estimates and assumptions inherent in those policies, are critical to an understanding of our consolidated financial statements. These policies relate to fair value measurements, particularly those determined to be Level 3 as discussed in Note 18, Fair Value Measurements, in notes to consolidated financial statements, business combinations and goodwill, and valuation and realization of deferred tax assets. We believe that the judgment, estimates and assumptions used in the preparation of our consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of our consolidated financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition. Fair value measurements considered to be Level 3 representing estimated values based on significant unobservable inputs include (i) the valuation of MSRs, (ii) the valuation of excess spread financing and (iii) the valuation of mortgage servicing rights financing liability. MSRs at Fair Value We generally retain the servicing rights for existing forward residential mortgage loans transferred to a third party. We recognize MSRs in such transfers that meet the requirements for sale accounting. Additionally, we may acquire the rights to service forward residential mortgage loans from third parties. We apply fair value accounting to this class of MSRs, with all changes in fair value recorded within revenues - service related, net in the consolidated statements of operations. We estimate the fair value of these MSRs using a process that combines the use of a discounted cash flow model and analysis of current market data. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, discount rates and average life of loan. We use internal financial models that use market participant data to value MSRs. These models are complex and use asset specific collateral data and market inputs for interest and discount rates. In addition, the modeling requirements of MSRs are complex because of the high number of variables that drive cash flows associated with MSRs. Although the general accuracy of our valuation models is validated, valuations are highly dependent upon the reasonableness of our assumptions and the predictability of the relationships that drive the results of the models. On a quarterly basis, we obtain external market valuations from independent third-party MSR valuation experts in order to validate the reasonableness of our internal valuation. Excess Spread Financing In conjunction with the acquisition of certain MSRs, we have entered into sale and assignment agreements, which we account for as financings with third parties associated with funds and accounts under management of New Residential,BlackRock Financial Management, Inc. and VärdePartners, Inc. , whereby we sell the right to receive a portion of the excess cash flow generated from certain underlying MSR portfolios after receipt of a fixed base servicing fee per loan. We retain all ancillary revenues associated with servicing the portfolio and the remaining portion of the excess cash flow after receipt of the fixed base servicing fee. We measure these financing arrangements at fair value to more accurately represent the future economic performance of the acquired MSRs and related excess servicing financing, with all changes in fair value recorded as a charge or credit to servicing related revenue, net in the consolidated statements of operations. We estimate the fair value of these financings using a process that combines the use of a discounted cash flow model and analysis of current market data based on the value of the underlying MSRs. In addition, should we refinance any loan in the portfolios, subject to certain limitations, we are required to transfer the new loan or a replacement loan of similar economic characteristics into the portfolios. The new or replacement loan will be governed by the same terms set forth in the sale and assignment agreement described above. This is referred to collectively as recapture component of excess spread financing liability. The cash flow assumptions and prepayment assumptions used in the model are based on various factors with the key assumptions being mortgage prepayment speeds, discount rates, average life and recapture rate. Mortgage Servicing Rights Financing Liability From time to time, we will enter into certain transactions with third parties to sell certain mortgage servicer rights and servicer advances under specified terms. When these transfers qualify for sale treatment, we derecognize the transferred assets on our consolidated balance sheets. We have determined that for a portion of these transactions, the related mortgage servicing rights sales are contingent upon the receipt of consents from various third parties. Until these required consents are obtained, legal ownership of the mortgage servicing rights continues to reside with us. We continue to account for the mortgage servicing rights on our consolidated balance sheets. Consequently, we record a mortgage servicing rights financing liability associated with this financing transaction.Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 72
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We have elected to measure MSR financing agreements at fair value, with all changes in fair value recorded within revenues - service related, net in the consolidated statements of operations. The fair value of MSR financing is based on the present value of future expected discounted cash flows with the discount rate approximating current market rate for similar financial instruments. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being advance financing rates and advance recovery rates. Business Combinations andGoodwill Acquisitions that qualify as a business combination are accounted for using the acquisition method of accounting. The fair value of consideration transferred for an acquisition is allocated to the assets acquired and liabilities assumed based on their fair value as of the acquisition date.Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and identified intangible assets acquired under a business combination. Under the acquisition method of accounting, we complete valuation procedures for an acquisition to determine the fair value of the assets acquired and liabilities assumed. These valuation procedures require management to make assumptions and apply significant judgment to estimate the fair value of the assets acquired and liabilities assumed. If the estimates or assumptions used should significantly change, the resulting differences could materially affect the fair value of net assets. We estimate the fair value of the intangible assets acquired generally through a combination of a discounted cash flow analysis (the income approach) and an analysis of comparable market transactions (the market approach). For the income approach, we base the inputs and assumptions used to develop these estimates on a market participant perspective which include estimates of projected revenues, discount rates, economic lives and income tax rates, among others, all of which require significant management judgment. For the market approach, we apply judgment to identify the most comparable market transactions to the transaction. Finite lived intangible assets, which are primarily comprised of customer relationships and technology, are amortized over their estimated useful lives using the straight-line method, or on a basis more representative of the time pattern over which the benefit is derived, and are assessed for impairment whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable.Goodwill is not amortized, but is reviewed for impairment annually as ofOctober 1 and monitored for interim triggering events on an ongoing basis.Goodwill is reviewed for impairment utilizing either a qualitative assessment or a quantitative goodwill impairment test. If we choose to perform a qualitative assessment and determines the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. For reporting units where we perform the quantitative goodwill impairment test, we compare the fair value of each reporting unit, which we primarily determine using an income approach based on the present value of discounted cash flows, to the respective carrying value, which includes goodwill. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, the difference would be recognized as an impairment loss. Realization of Deferred Tax Assets Our provision for income taxes is calculated using the balance sheet method, which requires the recognition of deferred income taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and certain changes in the valuation allowance. We provide a valuation allowance against deferred tax assets if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining the adequacy of the valuation allowance, we consider all forms of evidence, including: (1) historic earnings or losses; (2) anticipated taxable income resulting from the reversal of taxable temporary differences; (3) tax planning strategies; and (4) anticipated future earnings exclusive of the reversal of taxable temporary differences. Of all of the sources of taxable income, we generally rely upon reversals of existing deferred tax liabilities, tax planning strategies, and future taxable income excluding reversing differences. In determining the appropriate amount of valuation allowance required, we consider (1) internal forecasts of our future pre-tax income exclusive of reversing temporary differences and carryforwards, (2) the nature and timing of future reversals of existing deferred tax assets and liabilities, (3) future originating temporary and permanent differences, and (4) NOL carryforward expiration dates, among others.
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Other Matters
Recent Accounting Developments
Below provides recently issued accounting pronouncements applicable to us but not yet effective.
Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326) ("ASU 2016-13") requires expected credit losses for financial instruments held at the reporting date to be measured based on historical experience, current conditions and reasonable and supportable forecasts. The update eliminates the probable initial recognition threshold in current GAAP and instead reflects an entity's current estimate of all expected credit losses over the life of the asset. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss. The new standard requires the estimated loss amount to reflect management's best estimate of all expected credit losses for the Company's financial assets that are measured at amortized cost. The guidance became effective onJanuary 1, 2020 for the Company. The standard requires a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. To implement and adopt this standard, management developed a detailed project plan, formed an internal committee from various internal departments, and performed a scoping analysis. As a result, the Company determined that Reverse Mortgage Interests, net of reserves, Advances and Other Receivables, net of reserves, and certain financial assets included in Other Assets are within the scope of ASU 2016-13. For each of these financial instruments carried at amortized cost, the Company enhanced its processes to consider and include the requirements of ASU 2016-13, as applicable, into the determination of credit-related losses. Specifically, the Company considered that the guarantee from HUD on Reverse Mortgage Interests limits the credit losses on this product primarily to those caused by operational errors from servicing; credit losses from adopting ASU 2016-13 are not material. For Advances and Other Receivables, the Company considered that the majority of estimated losses are due to servicing operational errors, while credit-related losses have historically been minimal and accordingly are estimated to not be material over the life of the receivable. For Other Assets, certain financial assets (i.e. trade receivables and other receivables) the Company considered that these are short-term in nature (less than one year), and the estimated credit-related losses over the life of these receivables are similar to those resulting from the Company's existing loss reserve process. After considering and implementing the requirements of ASU 2016-13 as applicable, the Company does not expect a material impact of adopting ASU 2016-13 to the consolidated financial statements. Accounting Standards Update No. 2018-13, Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement, ("ASU 2018-13") removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 fair value measurement methodologies, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 measurements. For certain unobservable inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 will be effective for the Company onJanuary 1, 2020 . The guidance will not have a material impact to the disclosures currently provided by the Company.
Impact of Inflation and Changing Prices
Our consolidated financial statements and notes thereto presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike most industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Further, interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Variable Interest Entities and Off Balance Sheet Arrangements
See Note 14, Securitizations and Financings, in the notes to consolidated financial statements in Item 8, Financial Statements and Supplementary Data, which is incorporated herein for a summary of our transactions with VIEs and unconsolidated balances, and details of their impact on our consolidated financial statements.Mr. Cooper Group Inc. - 2019 Annual Report on Form
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Derivatives
See Note 11, Derivative Financial Instruments, in the notes to consolidated financial statements in Item 8, Financial Statements and Supplementary Data, which is incorporated herein for a summary of our derivative transactions.
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GLOSSARY OF TERMS
This Glossary of Terms defines some of the terms that are used throughout this report and does not represent a complete list of all defined terms used.
Advance Facility. A secured financing facility to fund advance receivables which is backed by a pool of mortgage servicing advance receivables made by a servicer to a certain pool of mortgage loans. Agency. Government entities guaranteeing the mortgage investors that the principal amount of the loan will be repaid; theFederal Housing Administration , theDepartment of Veterans Affairs , theUS Department of Agriculture andGinnie Mae (and collectively, the "Agencies") Agency Conforming Loan. A mortgage loan that meets all requirements (loan type, maximum amount, LTV ratio and credit quality) for purchase by Fannie Mae, Freddie Mac, or insured by the FHA,USDA or guaranteed by theVA or sold into Ginnie Mae. Asset-Backed Securities ("ABS"). A financial security whose income payments and value is derived from and collateralized (or "backed") by a specified pool of underlying receivables or other financial assets.
Bulk acquisitions or purchases. MSR portfolio acquired on non-retained basis through an open market bidding process.
Base Servicing Fee. The servicing fee retained by the servicer, expressed in basis points, in an excess MSR arrangement in exchange for the provision of servicing functions on a portfolio of mortgage loans, after which the servicer and the co-investment partner share the excess fees on a pro rata basis. Conventional Mortgage Loans. A mortgage loan that is not guaranteed or insured by the FHA, theVA or any other government agency. Although a conventional loan is not insured or guaranteed by the government, it can still follow the guidelines of GSEs and be sold to the GSEs. Correspondent lender, lending channel or relationship. A correspondent lender is a lender that funds loans in their own name and then sells them off to larger mortgage lenders. A correspondent lender underwrites the loans to the standards of an investor and provides the funds at close. Credit-Sensitive Loan. A mortgage loan with certain characteristics such as low borrower credit quality, relaxed original underwriting standards and high LTV, which we believe indicates that the mortgage loan presents an elevated credit risk of borrower default versus payoff.
Delinquent Loan. A mortgage loan that is 30 or more days past due from its contractual due date.
Department of Veterans Affairs ("VA"). TheVA is a cabinet-level department of theU.S. federal government, which guarantees certain home loans for qualified borrowers eligible for securitization with GNMA. Direct-to-consumer originations. A type of mortgage loan origination pursuant to which a lender markets refinancing and purchase money mortgage loans directly to selected consumers through telephone call centers, the Internet or other means.
Excess Servicing Fees. In an excess MSR arrangement, the servicing fee cash flows on a portfolio of mortgage loans after payment of the base servicing fee.
Excess Spread. MSRs with a co-investment partner where the servicer receives a base servicing fee and the servicer and co-investment partner share the excess servicing fees. This co-investment strategy reduces the required upfront capital from the servicer when purchasing or investing in MSRs. Federal National Mortgage Association ("Fannie Mae" or "FNMA").FNMA was federally chartered by theU.S. Congress in 1938 to support liquidity, stability, and affordability in the secondary mortgage market, where existing mortgage-related assets are purchased and sold. Fannie Mae buys mortgage loans from lenders and resells them as mortgage-backed securities in the secondary mortgage market.Federal Housing Administration ("FHA"). The FHA is aU.S. federal government agency within theDepartment of Housing and Urban Development (HUD). It provides mortgage insurance on loans made by FHA-approved lenders in compliance with FHA guidelines throughoutthe United States .Mr. Cooper Group Inc. - 2019 Annual Report on Form
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Federal Housing Finance Agency ("FHFA"). AU.S. federal government agency that is the regulator and conservator of Fannie Mae and Freddie Mac and the regulator of the 12 Federal Home Loan Banks. Federal Home Loan Mortgage Corporation ("Freddie Mac" or "FHLMC"). Freddie Mac was chartered byCongress in 1970 to stabilize the nation's residential mortgage markets and expand opportunities for homeownership and affordable rental housing. Freddie Mac participates in the secondary mortgage market by purchasing mortgage loans and mortgage-related securities for investment and by issuing guaranteed mortgage-related securities.Government National Mortgage Association ("Ginnie Mae" or "GNMA"). GNMA is a self-financing, wholly ownedU.S. Government corporation within HUD. Ginnie Mae guarantees the timely payment of principal and interest on MBS backed by federally insured or guaranteed loans - mainly loans insured by the FHA or guaranteed by theVA . Ginnie Mae securities are the only MBS to carry the full faith and credit guarantee of theU.S. federal government. Government-Sponsored Enterprise ("GSE"). Certain entities established by theU.S. Congress to provide liquidity, stability and affordability in residential housing. These agencies are Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks. Home Affordable Modification Program ("HAMP"). AU.S. federal government program designed to help eligible homeowners avoid foreclosure through mortgage loan modifications. Participating servicers may be entitled to receive financial incentives in connection with loan modifications they enter into with eligible borrowers and subsequent success fees to the extent that a borrower remains current in any agreed upon loan modification. Home Affordable Refinance Program ("HARP"). AU.S. federal government program designed to help eligible homeowners refinance their existing mortgage loans. The mortgage must be owned or guaranteed by a GSE, originated during a defined time period, and applicants must be up-to-date on their mortgage payments but unable to obtain refinancing because the value of their homes has declined. Home Equity Conversion Mortgage ("HECM"). Reverse mortgage loans issued by FHA. HECMs provide seniors aged 62 and older with a loan secured by their home which can be taken as a lump sum, line of credit, or scheduled payments. HECM loan balances grow over the loan term through borrower draws of scheduled payments or line of credit draws as well as through the accrual of interest and FHA mortgage insurance premiums. In accordance with FHA guidelines, HECMs are designed to repay through foreclosure and subsequent liquidation of loan collateral after the loan becomes due and payable. Shortfalls experienced by the servicer of the HECM through the foreclosure and liquidation process can be claimed to FHA in accordance with applicable guidelines.
HECM mortgage-backed securities ("HMBS"). A type of asset-backed security that is secured by a group of HECM loans.
Interest Rate Lock Commitments ("IRLC"). Agreements under which the interest rate and the maximum amount of the mortgage loan are set prior to funding the mortgage loan. Interest-Sensitive Loan. A mortgage loan which is primarily impacted by changes in forecasted interest rates, which in turn impacts voluntary prepayment speed. Interest-sensitive loans typically consist of single-family conforming residential forward mortgage loans serviced for GSEs or other third-party investors. Loan Modification. Temporary or permanent modifications to loan terms with the borrower, including the interest rate, amortization period and term of the borrower's original mortgage loan. Loan modifications are usually made to loans that are in default, or in imminent danger of defaulting. Loan-to-Value Ratio ("LTV"). The unpaid principal balance of a mortgage loan as a percentage of the total appraised or market value of the property that secures the loan. An LTV over 100% indicates that the UPB of the mortgage loan exceeds the value of the property.
Lock period. A set of periods of time that a lender will guarantee a specific rate is set prior to funding the mortgage loan.
Loss Mitigation. The range of servicing activities provided by a servicer in an attempt to minimize the losses suffered by the owner of a defaulted mortgage loan. Loss mitigation techniques include short-sales, deed-in-lieu of foreclosures and loan modifications, among other options.
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Mortgage Servicing Right ("MSRs"). The right and obligation to service a loan or pool of loans and to receive a servicing fee as well as certain ancillary income. MSRs may be bought and sold, resulting in the transfer of loan servicing obligations. MSRs are designated as such when the benefits of servicing the loans are expected to adequately compensate the servicer for performing the servicing. MSR Facility. A line of credit backed by mortgage servicing rights that is used for financing purposes. In certain cases, these lines may be a sub-limit of another warehouse facility or alternatively exist on a stand-alone basis. These facilities allow for same or next day draws at the request of the borrower. Mortgage Servicing Liability ("MSL"). The right and obligation to service a loan or pool of loans and to receive a servicing fee as well as certain ancillary income. MSLs may be bought and sold, resulting in the transfer of loan servicing obligations. MSLs are designated as such when the benefits of servicing the loans are not expected to adequately compensate the servicer for performing the servicing.
Non-Conforming Loan. A mortgage loan that does not meet the standards of eligibility for purchase or securitization by Fannie Mae, Freddie Mac or Ginnie Mae.
Originations. The process through which a lender provides a mortgage loan to a borrower.
Pull through adjusted lock volume. Represents the expected funding from locks taken during the period.
Prepayment Speed. The rate at which voluntary mortgage prepayments occur or are projected to occur. The statistic is calculated on an annualized basis and expressed as a percentage of the outstanding principal balance.
Primary Servicer. The servicer that owns the right to service a mortgage loan or pool of mortgage loans. This differs from a subservicer, which has a contractual agreement with the primary servicer to service a mortgage loan or pool of mortgage loans in exchange for a subservicing fee based upon portfolio volume and characteristics. Prime Mortgage Loan. Generally, a high-quality mortgage loan that meets the underwriting standards set by Fannie Mae or Freddie Mac and is eligible for purchase or securitization in the secondary mortgage market. Prime Mortgage loans generally have lower default risk and are made to borrowers with excellent credit records and a monthly income at least three to four times greater than their monthly housing expenses (mortgage payments plus taxes and other debt payments) as well as significant other assets. Mortgages not classified as prime mortgage loans are generally called either sub-prime or Alt-A.
Private Label Securitizations. Securitizations that do not meet the criteria set by Fannie Mae, Freddie Mac or Ginnie Mae.
Real Estate Owned ("REO"). Property acquired by the servicer on behalf of the owner of a mortgage loan or pool of mortgage loans, usually through foreclosure or a deed-in-lieu of foreclosure on a defaulted loan. The servicer or a third-party real estate management firm is responsible for selling the REO. Net proceeds of the sale are returned to the owner of the related loan or loans. In most cases, the sale of REO does not generate enough to pay off the balance of the loan underlying the REO, causing a loss to the owner of the related mortgage loan.
Recapture. The refinancing of a loan currently in the portfolio, or the financing of a customer's new purchase which resulted in the payoff of an existing loan.
Refinancing. The process of working with existing borrowers to refinance their mortgage loans. By refinancing loans for borrowers we currently service, we retain the servicing rights, thereby extending the longevity of the servicing cash flows. Reverse Mortgage Loan. A reverse mortgage loan, most commonly a Home Equity Conversion Mortgage, enables seniors to borrow against the value of their home, and no payment of principal or interest is required until the death of the borrower or the sale of the home. These loans are designed to go through the foreclosure and claim process to recover loan balance.Mr. Cooper Group Inc. - 2019 Annual Report on Form
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Servicing. The performance of contractually specified administrative functions with respect to a mortgage loan or pool of mortgage loans. Duties of a servicer typically include, among other things, collecting monthly payments, maintaining escrow accounts, providing periodic monthly statements to the borrower and monthly reports to the loan owners or their agents, managing insurance, monitoring delinquencies, executing foreclosures (as necessary), and remitting fees to guarantors, trustees and service providers. A servicer is generally compensated with a specific fee outlined in the contract established prior to the commencement of the servicing activities. Servicing Advances. In the course of servicing loans, servicers are required to make advances that are reimbursable from collections on the related mortgage loan or pool of loans. There are typically three types of servicing advances: P&I advances, T&I Advances and Corporate Advances. (i) P&I advances cover scheduled payments of principal and interest that have not been timely paid by borrowers. P&I Advances serve to facilitate the cash flows paid to holders of securities issued by the residential MBS trust. The servicer is not the insurer or guarantor of the MBS and thus has the right to cease the advancing of P&I, when the servicer deems the next advance nonrecoverable. (ii) T&I advances pay specified expenses associated with the preservation of a mortgaged property or the liquidation of defaulted mortgage loans, including but not limited to property taxes, insurance premiums or other property-related expenses that have not been timely paid by borrowers in order for the lien holder to maintain its interest in the property. (iii) Corporate advances pay costs, fees and expenses incurred in foreclosing upon, preserving defaulted loans and selling REO, including attorneys' and other professional fees and expenses incurred in connection with foreclosure and liquidation or other legal proceedings arising in the course of servicing the defaulted mortgage loans. Servicing advances are reimbursed to the servicer if and when the borrower makes a payment on the underlying mortgage loan at the time the loan is modified or upon liquidation of the underlying mortgage loan but are primarily the responsibility of the investor/owner of the loan. The types of servicing advances that a servicer must make are set forth in its servicing agreement with the owner of the mortgage loan or pool of mortgage loans. In some instances, a servicer is allowed to cease Servicing Advances, if those advances will not be recoverable from the property securing the loan. Subservicing. Subservicing is the process of outsourcing the duties of the primary servicer to a third-party servicer. The third-party servicer performs the servicing responsibilities for a fee and is typically not responsible for making servicing advances, which are subsequently reimbursed by the primary servicer. The primary servicer is contractually liable to the owner of the loans for the activities of the subservicer.
Unpaid Principal Balance ("UPB"). The amount of principal outstanding on a mortgage loan or a pool of mortgage loans. UPB is used together with the servicing fees and ancillary incomes as a means of estimating the future revenue stream for a servicer.
Warehouse Facility. A type of line of credit facility used to temporarily finance mortgage loan originations to be sold in the secondary market. Pursuant to a warehouse facility, a loan originator typically agrees to transfer to a counterparty certain mortgage loans against the transfer of funds by the counterpart, with a simultaneous agreement by the counterpart to transfer the loans back to the originator at a date certain, or on demand, against the transfer of funds from the originator. Wholesale Originations. A type of mortgage loan origination pursuant to which a lender acquires refinancing and purchase money mortgage loans from third party correspondent lenders where the lender funds the loan.
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