MR. COOPER GROUP INC.
Management's discussion and analysis of financial condition and results of
operations ("MD&A") should be read in conjunction with the accompanying
unaudited consolidated financial statements and in conjunction with our Annual
Report on Form 10-K for the year ended December 31, 2019 . The following
discussion contains, in addition to the historical information, forward-looking
statements that include risks, assumptions and uncertainties that could cause
actual results to differ materially from those anticipated by such statements.
Dollar amounts are reported in millions, except per share data and other key metrics, unless otherwise noted.
We have provided a glossary of terms, which defines certain industry-specific and other terms that are used herein, at the end of the MD&A section.
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 2006 to $588 billion as of
September 30, 2020 . 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. More information on the Company is
available at investors.mrcoopergroup.com. Information contained on our website
is not, and should not be deemed to be, a part of this report.
Our strategy is to position the Company for sustainable long-term growth, drive
improved efficiency and profitability, and generate a return on tangible equity
of 12% or higher. Key strategic priorities include the following:
•Strengthen our balance sheet by reducing leverage, building liquidity, and
managing interest rate and credit risk;
•Improve efficiency by driving continuous improvement in unit costs for
Servicing, Originations, and Xome, as well as by taking corporate actions to
eliminate costs throughout the organization;
•Grow and strengthen our customer base in each of our segments;
•Reinvent the customer experience by acting as the customer's advocate and by
harnessing technology to deliver user-friendly digital solutions;
•Sustain the talent of our people and the culture of our organization; and
•Maintain strong relationships with agencies, investors, regulators, and other
counterparties and a strong reputation for compliance and customer service.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic introduces unprecedented uncertainty in the economy, including the risk of a significant employment shock and recessionary conditions, with implications for the health and safety of our employees, borrower delinquency rates, servicing advances, origination volumes, the availability of financing, and our overall profitability and liquidity. We have taken aggressive steps to address these risks, including moving in excess of 95% of our staff to work-from-home status as well as implementing other practices for mitigating the risk of the pandemic, including restrictions on non-essential travel and face-to-face meetings and enhanced sanitization of our facilities. We have also implemented the provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which makes available forbearance plans for up to one year for borrowers under government and government agency mortgage programs, which we have extended to borrowers in our private label mortgage servicing portfolio. As ofOctober 25, 2020 , approximately 6.1% of our customers were on a forbearance plan, down from a peak of 7.2%. More customers are now exiting forbearance than are entering. We include loans in forbearance related to the CARES Act, whereby no payments have been received from borrowers for greater than 90 days, in loans subject to repurchase right fromGinnie Mae in other assets and payables and other liabilities on a gross basis. The balance was$5,095 as ofSeptember 30, 2020 and may increase during the fourth quarter. See liquidity discussion related to the COVID-19 pandemic in Liquidity and Capital Resources section in MD&A. 36 --------------------------------------------------------------------------------
Anticipated Trends
Our Servicing segment continued to experience portfolio run-off from elevated prepayment speeds in the low interest rate environment, most of which was replenished by strong correspondent volume. We expect to see servicing portfolio growth in the fourth quarter of 2020, primarily from correspondent and flow originations as well as UPB growth from a major new subservicing relationship. During the third quarter of 2020, the servicing margin benefited from a$46 loss recovery related to settlement with a government agency. We don't expect any additional settlements in the fourth quarter. Looking ahead into 2021, we would expect prepayment speeds to decline from current level and also expect to see some contribution from incentive fees and early-buyout gains as we help customers exit forbearance. Our Originations segment has experienced volume growth and higher margins as a result of the lower interest rate environment, which more than offset the decline in our Servicing segment. As the pandemic began to impact the mortgage capital markets, our Originations segment took several steps to rapidly de-risk the pipeline. During the second quarter of 2020, we slowed down correspondent productions as we evaluated the environment. However, since then, we ramped up our correspondent production and had record correspondent volumes during the third quarter of 2020. We expect to continue growing the correspondent channel. Our Xome segment's revenue from the Exchange division has been, and is expected to continue to be, negatively impacted, as the foreclosure process is currently on hold, with moratoriums in place at the national level and in some local markets. However, Xome's revenue from the Services division has benefited from the lower interest rate environment and increase in origination volume and has helped balance out the decrease in Exchange's revenues. Once the moratoriums are lifted, we expect a surge in activity and Xome to contribute meaningfully to our consolidated results. Results of Operations Table 1. Consolidated Operations Three Months Ended September 30, 2020 2019 $ Change % Change Revenues - operational(1) $ 901$ 701 $ 200 29 % Revenues - Mark-to-market (29) (83) 54 (65) % Total revenues 872 618 254 41 % Total expenses 431 478 (47) (10) % Total other expenses, net (160) (33) (127) 385 % Income before income tax expense 281 107 174 163 % Less: Income tax expense 67 24 43 179 % Net income 214 83 131 158 % Less: Net income (loss) attributable to non-controlling interests 5 (1) 6 (600) % Net income attributable to Mr. Cooper $ 209$ 84 $ 125 149 %
(1)Revenues - operational consists of total revenues, excluding mark-to-market.
Net income increased during the three months endedSeptember 30, 2020 to$214 compared to net income of$83 during the same period in 2019. The net income in 2020 was higher primarily due to an increase in total revenues and a decrease in total expenses, partially offset by an increase in total other expenses, net. Operational revenues increased primarily due to increased revenue in our Originations segment, driven by higher originations volume predominately in the direct-to-consumer ("DTC") channel, partially offset by a decrease in negative mark-to-market ("MTM") adjustments during the three months endedSeptember 30, 2020 compared to the same period in 2019. Refer to Table 8. Servicing - Revenues and Table 19. Originations - Revenues for further discussion. 37 -------------------------------------------------------------------------------- Total expenses during the three months endedSeptember 30, 2020 decreased compared to the same period in 2019 primarily due to lower foreclosure and other liquidation related expenses and recoveries in our Servicing segment, primarily driven by loss recoveries from settlement with a government agency and operational improvements of the reverse portfolio with respect to assignments and adherence to HUD curtailment guidelines. The decrease in total expenses was partially offset by higher total expense in our Originations segment, primarily attributable to higher originations volume in the lower interest rate environment. Refer to Table 9. Servicing - Expenses and Table 20. Originations - Expenses for further discussion. Total other expenses, net, increased during the three months endedSeptember 30, 2020 compared to the same period in 2019 primarily due to a decrease in interest income and increase in other expenses, net, partially offset by a decrease in interest expense. Interest income decreased primarily due to a decrease in other interest income in our Servicing segment due to lower income earned on custodial balances driven by lower LIBOR rates and a decrease in income earned on reverse mortgage interest, as a result of the decline in the reverse mortgage interests balance. Other expenses, net increased primarily due to an increase in other expense, net in our Corporate/Other segment primarily driven by a loss on redemption of the 2023 unsecured senior notes. Refer to Table 10. Servicing - Other (Expenses) Income, Net and Table 23. Corporate/Other Selected Financial Results for further discussion. During the three months endedSeptember 30, 2020 and 2019, we had an income tax expense. The effective tax rate during the three months endedSeptember 30, 2020 was 24.0% as compared to the effective tax rate of 22.3% during the three months endedSeptember 30, 2019 . The change in effective tax rate is primarily attributable to the relative unfavorable tax impacts of permanent differences such as nondeductible executive compensation and nondeductible meals and entertainment expenses on the annual effective rate, and discrete tax items during the three months endedSeptember 30, 2020 as compared to the three months endedSeptember 30, 2019 .
Table 1.1 Consolidated Operations
Nine Months Ended September 30,
2020 2019 $ Change % Change
Revenues - operational(1) $ 2,453 $ 1,874 $ 579 31 %
Revenues - Mark-to-market (673) (607) (66) 11 %
Total revenues 1,780 1,267 513 40 %
Total expenses 1,294 1,413 (119) (8) %
Total other expenses, net (334) (97) (237) 244 %
Income (loss) before income tax
expense (benefit) 152 (243) 395 (163) %
Less: Income tax expense (benefit) 36 (52) 88 (169) %
Net income (loss) 116 (191) 307 (161) %
Less: Net income (loss) attributable
to non-controlling interests 2 (2) 4 (200) %
Net income (loss) attributable to
Mr. Cooper $ 114 $ (189) $ 303 (160) %
(1)Revenues - operational consists of total revenues, excluding mark-to-market.
We recorded net income of$116 during the nine months endedSeptember 30, 2020 compared to a net loss of$191 during the same period in 2019. The net income in 2020 was primarily due to an increase in total revenues and decrease in total expenses. Operational revenues increased primarily due to increased revenue in our Originations segment, driven by higher originations volume predominately in the DTC channel, partially offset by an increase in negative MTM adjustments during the nine months endedSeptember 30, 2020 compared to the same period in 2019. Refer to Table 8.1 Servicing - Revenues and Table 19.1 Originations - Revenues for further discussion. 38 -------------------------------------------------------------------------------- Total expenses during the nine months endedSeptember 30, 2020 decreased compared with the same period in 2019 primarily due to lower foreclosure and other liquidation related expenses in our Servicing segment primarily driven by loss recoveries from settlement with a government agency and operational improvements of the reverse portfolio with respect to assignments and adherence to HUD curtailment guidelines. In addition, total expenses in our Corporate/Other segment were higher in the nine months endedSeptember 30, 2019 due to acquisition and integration expenses related to thePacific Union acquisition and the acquisition of the Seterus mortgage servicing platform and assumption of assets related thereto from IBM ("Seterus acquisition") inFebruary 2019 . Partially offsetting the decrease in total expenses in our Servicing segment and Corporate/Other segment was an increase in total expenses in our Originations segment primarily driven by higher originations volume in a declining interest rate environment. Refer to Table 9.1 Servicing - Expenses, Table 23.1 Corporate/Other Selected Financial Results and Table 20.1 Originations - Expenses for further discussion. Total other expenses, net, increased during the nine months endedSeptember 30, 2020 compared to the same period in 2019 primarily due to a decrease in interest income and an increase in other expenses, net, partially offset by a decrease in interest expense. Interest income decreased primarily due to a decrease in other interest income in our Servicing segment due to lower income earned on custodial balances driven by lower LIBOR rates and a decrease in income earned on reverse mortgage interest, as a result of the decline in the reverse mortgage interests balance. Other expenses, net, was higher in the nine months endedSeptember 30, 2020 primarily due to a loss on redemption of the 2023 unsecured senior notes in our Corporate/Other segment and due to income related to the change in fair value of the contingent consideration recorded in 2019 for the acquisition of Assurant Mortgage Solutions ("AMS") in our Xome segment. Refer to Table 10.1 Servicing - Other (Expenses) Income, Net, Table 22.1 Xome Segment Results of Operations and Table 23.1 Corporate/Other Selected Financial Results for further discussion During the nine months endedSeptember 30, 2020 and 2019, we had an income tax expense and benefit, respectively. The effective tax rate during the nine months endedSeptember 30, 2020 was 23.9% as compared to the effective tax rate of 21.5% during the nine months endedSeptember 30, 2019 . The change in effective tax rate is primarily attributable to the relative unfavorable tax impacts of permanent differences such as nondeductible executive compensation and nondeductible meals and entertainment expenses on the annual effective rate, and discrete tax items in the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 . Segment Results
Our operations are conducted through four 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 channel, which purchases or originates loans from mortgage bankers. Our wholesale channel was shut down during the three months endedJune 30, 2020 and subsequently ceased originating loans and funded out the remaining pipeline. •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. •Corporate/Other represents unallocated overhead expenses, including the costs of executive management and other corporate functions that are not directly attributable to our operating segments, interest expense on 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 . The Corporate/Other segment also includes inter-segment eliminations.
Refer to Note 16, Business Segment Reporting, for a summary of segment results.
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--------------------------------------------------------------------------------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 skill 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 2. Servicer Ratings
Fitch(1) Moody's(2) S&P(3)
Rating date January 2020 September 2020 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 Rating Scale of Strong to Weak
Servicing Portfolio Composition
As of
•The term "forward" refers to loans we service which are not "reverse mortgages," 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 our 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 transactions and the portfolio is now in run-off mode. For
a significant portion of our reverse mortgages, we record MSRs on our 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.
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The charts below set forth the portfolio mix between forward MSR, subserviced
and other, and reverse mortgage loans, and the composition of our servicing
portfolio ending UPB by investor group ($ in Millions) as of September 30, 2020
and 2019:
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The following tables set forth the results of operations for the Servicing segment: Table 3. Servicing Segment Results of Operations
Three Months Ended September 30,
2020 2019 $ Change % Change
Revenues
Operational $ 273 $ 319 $ (46) (14) %
Amortization, net of accretion (112) (73) (39) 53 %
Mark-to-market (29) (83) 54 (65) %
Total revenues 132 163 (31) (19) %
Total expenses 99 171 (72) (42) %
Total other (expenses) income, net (65) 17 (82) (482) %
(Loss) income before income tax
(benefit) expense $ (32) $ 9 $ (41) (456) %
During the three months ended September 30, 2020 , we incurred a loss before
income tax benefit of $32 compared to income before income tax expense of $9 for
the same period in 2019. The change was primarily due to a change in total other
(expenses) income, net and a decrease in total revenues, partially offset by a
decrease in total expenses. Total other (expenses) income, net, during the three
months ended September 30, 2020 decreased compared to the same period in 2019
primarily due to a decrease in interest income. The decrease in interest income
was primarily due to lower income earned on custodial balances driven by lower
LIBOR rates and a decrease in income earned on reverse mortgage interest,
primarily driven by the decline in the reverse mortgage interests balance.
Total revenues decreased during the three months ended September 30, 2020
compared to the same period in 2019, primarily due to a decrease in operational
revenues driven by lower base servicing fees on lower portfolio UPB.
Additionally, amortization, net of accretion increased primarily due to an
increase in amortization of forward MSRs as a result of elevated prepayments
driven by the declining interest rate environment. The decrease in total
revenues was partially offset by lower negative mark-to-market revenues during
the three months ended September 30, 2020 compared to the same period in 2019
due to decreased impact from changes in interest rates and $46 favorable impact
from additional modification fee income for loans exiting forbearance program
related to the CARES Act. Total expenses decreased during the three months ended
September 30, 2020 compared to the same period in 2019 primarily due to a
decrease in foreclosure and other liquidation (recoveries) expenses, net and a
decrease in salaries, wages and benefits. The decrease in foreclosure and other
liquidation (recoveries) expenses, net was mainly driven by operational
improvements of the reverse portfolio with respect to assignments and adherence
to HUD curtailment guidelines, in addition to $46 on loss recoveries related to
a settlement with a government agency. The decrease in salaries, wages and
benefits was primarily due to improved operational efficiencies.
Refer to Table 8. Servicing - Revenues, Table 9. Servicing - Expenses and Table
10. Servicing - Other (Expenses) Income, Net, for further discussions on the
changes in total revenues, total expenses and total other (expenses) income,
net, respectively.
Table 3.1 Servicing Segment Results of Operations
Nine Months Ended September 30,
2020 2019 $ Change % Change
Revenues
Operational $ 880 $ 957 $ (77) (8) %
Amortization, net of accretion (290) (152) (138) 91 %
Mark-to-market (673) (607) (66) 11 %
Total revenues (83) 198 (281) (142) %
Total expenses 370 555 (185) (33) %
Total other (expenses) income, net (155) 45 (200) (444) %
Loss before income tax benefit $ (608) $ (312) $ (296) 95 %
42-------------------------------------------------------------------------------- During the nine months endedSeptember 30, 2020 , we incurred a loss before income tax benefit of$608 compared to$312 for the same period in 2019. The change in loss before income tax benefit was primarily due to a decrease in total revenues and a change in total other (expenses) income, net, partially offset by a decrease in total expenses. Total revenues decreased primarily due to higher amortization, net of accretion, during the nine months endedSeptember 30, 2020 compared to the same period in 2019, primarily due to an increase in amortization of forward MSRs as a result of elevated prepayments driven by the declining interest rate environment. Additionally, operational revenues decreased driven by lower base servicing fees on lower portfolio UPB. Further, mark-to-market increased primarily as a result of elevated negative mark-to-market revenues during the nine months endedSeptember 30, 2020 compared to the same period in 2019. Total expenses during the nine months endedSeptember 30, 2020 decreased compared to the same period in 2019 primarily due to a decrease in foreclosure and other liquidation (recoveries) expenses, net and a decrease in salaries, wages and benefits. The decrease in foreclosure and other liquidation (recoveries) expenses, net was primarily driven by operational improvements of the reverse portfolio with respect to assignments and adherence to HUD curtailment guidelines, in addition to$46 on loss recoveries related to a settlement with a government agency and improved performance of$15 on loss recoveries related to settlement with a prior servicer. The decrease in salaries, wages and benefits was primarily due to improved operational efficiencies, which included consolidation of one of our servicing centers. Total other (expenses) income, net, during the nine months endedSeptember 30, 2020 decreased compared to the same period in 2019 primarily due to a decrease in interest income. The decrease in interest income was primarily due to a decrease in other interest income due to lower interest income earned on custodial balances driven by lower LIBOR rates and a decrease in income earned on reverse mortgage interest, primarily driven by the decline in the reverse mortgage interests balance. Refer to Table 8.1 Servicing - Revenues, Table 9.1 Servicing - Expenses and Table 10.1 Servicing - Other (Expenses) Income, Net, for further discussions on the changes in total revenues, total expenses and total other (expenses) income, net, respectively. 43 --------------------------------------------------------------------------------
Table 4. Servicing Portfolio - Unpaid Principal Balances
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Average UPB
Forward MSRs $ 277,707 $
315,897
293,014 297,081 301,752 278,158
Reverse loans 20,260 24,301 21,126 25,933
Total average UPB $ 590,981 $ 637,279 $ 613,077 $ 617,496
September 30,
September 30, 2020 2019
Ending UPB
Forward MSRs
Agency $ 220,139 $ 247,821
Non-agency 46,528 58,860
Total forward MSRs 266,667 306,681
Subservicing and other(1)
Agency 285,704 294,783
Non-agency 15,151 15,748
Total subservicing and other 300,855 310,531
Reverse loans
MSR 2,079 2,761
MSL 12,485 14,641
Securitized loans 5,442 6,588
Total reverse portfolio serviced 20,006 23,990
Total ending UPB $ 587,528 $ 641,202 (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 tables provide a rollforward of our forward MSR and subservicing
and other portfolio UPB:
Table 5. Forward Servicing and Subservicing and Other Portfolio UPB Rollforward
Three Months Ended September 30, 2020 Three Months Ended September 30, 2019
Subservicing and Subservicing and
Forward MSR Other Total Forward MSR Other Total
Balance - beginning of
period $ 277,975 $ 296,792 $ 574,767 $ 316,012 $ 302,108 $ 618,120
Additions:
Originations 14,517 1,232 15,749 11,397 410 11,807
Acquisitions / Increase in
subservicing(1) (2,660) 38,082 35,422 333 33,273 33,606
Deductions:
Dispositions (23) (3,046) (3,069) (2,707) (9,399) (12,106)
Principal reductions and
other (2,683) (2,659) (5,342) (3,029) (2,597) (5,626)
Voluntary reductions(2) (20,215) (29,506) (49,721) (14,515) (13,030) (27,545) Involuntary reductions(3) (177) (40) (217) (740) (234) (974) Net changes in loans serviced by others (67) - (67) (70) - (70) Balance - end of period$ 266,667 $ 300,855 $ 567,522 $ 306,681 $ 310,531 $ 617,212
(1)Includes transfers to/from Subservicing and Other. (2)Voluntary reductions are related to loan payoffs by customers. (3)Involuntary reductions refer to loan chargeoffs.
During the three months endedSeptember 30, 2020 , our ending forward MSR UPB decreased primarily due to increased voluntary reductions driven by the low interest rate environment, partially offset by increased origination volumes. During the three months endedSeptember 30, 2020 , our subservicing and other portfolio ending UPB increased primarily due to portfolio growth from our subservicing clients, partially offset by increased voluntary reductions in the low interest rate environment. Table 5.1 Forward Servicing and Subservicing and Other Portfolio UPB Rollforward Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019 Subservicing and Subservicing and Forward MSR Other Total Forward MSR Other Total Balance - beginning of period$ 296,782 $ 323,983 $ 620,765 $ 295,481 $ 223,886 $ 519,367 Additions: Originations 35,630 2,918 38,548 25,809 1,213 27,022 Acquisitions / Increase in subservicing(1) (4,967) 78,342 73,375 33,810 130,394 164,204 Deductions: Dispositions (94) (23,156) (23,250) (5,079) (11,192) (16,271) Principal reductions and other (8,109) (7,792) (15,901) (8,887) (7,583)
(16,470)
Voluntary reductions(2) (51,514) (73,291) (124,805) (31,925) (25,670)
(57,595)
Involuntary reductions(3) (815) (149) (964) (2,309) (517) (2,826) Net changes in loans serviced by others (246) - (246) (219) - (219) Balance - end of period$ 266,667 $ 300,855 $ 567,522 $ 306,681 $ 310,531 $ 617,212 45
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(1)Includes transfers to/from Subservicing and Other. (2)Voluntary reductions are related to loan payoffs by customers. (3)Involuntary reductions refer to loan chargeoffs.
During the nine months endedSeptember 30, 2020 , our ending forward MSR UPB decreased primarily due to increased voluntary reductions in the low interest rate environment, partially offset by increased origination volumes. During the nine months endedSeptember 30, 2020 , our subservicing and other portfolio ending UPB decreased primarily driven by increased voluntary reductions in the low interest rate environment and increased dispositions due to various MSR sales from our subservicing clients, partially offset by portfolio growth. The table below summarizes the overall performance of the forward servicing and subservicing portfolio: Table 6. Key Performance Metrics - Forward Servicing and Subservicing Portfolio(1) September 30, September 30, 2020 2019 Loan count(2) 3,283,769 3,601,322 Average loan amount(3)$ 172,828 $ 171,389 Average coupon - credit sensitive(4) 4.6 % 4.8 % Average coupon - interest sensitive(4) 4.1 % 4.2 % Average coupon - agency(4) 4.3 % 4.5 % Average coupon - non-agency(4) 4.6 % 4.8 % 60+ delinquent (% of loans)(5) 5.9 % 2.2 % 90+ delinquent (% of loans)(5) 5.1 % 1.9 % 120+ delinquent (% of loans)(5) 4.3 % 1.6 % Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Total prepayment speed (12-month constant prepayment rate) 30.1 % 17.5 % 25.0 % 13.2 % (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)As ofSeptember 30, 2020 , loan count includes 199,118 loans in forbearance related to the CARES Act. (3)Average loan amount is presented in whole dollar amounts. (4)The weighted average coupon amounts presented in the table above are only reflective of our owned forward MSR portfolio that is reported at fair value. (5)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. Loan delinquency includes loans in forbearance. 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. Due to the COVID-19 pandemic and the implementation of the CARES Act, loans greater than 60 days, 90 days and 120 days delinquent have increased as ofSeptember 30, 2020 compared to the same period in 2019.
Table 7. Forward Loan Modifications and Workout Units
Three Months Ended September 30,
2020 2019 Amount Change % Change
Modifications 3,242 5,061 (1,819) (36) %
Workouts(1) 20,483 3,731 16,752 449 %
Total modifications and workout
units 23,725 8,792 14,933 170 %
(1)During the three months ended
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Total modifications and workouts during the three months ended September 30,
2020 increased compared to the same period in 2019 primarily due to an increase
in workouts related to loans impacted by the COVID-19 pandemic which
successfully exited their forbearance plans.
Table 7.1 Forward Loan Modifications and Workout Units
Nine Months Ended September 30, 2020
2020 2019 Amount Change % Change
Modifications 12,286 15,882 (3,596) (23) %
Workouts(1) 25,849 15,132 10,717 71 %
Total modifications and workout
units 38,135 31,014 7,121 23 %
(1)During the nine months ended
Total modifications and workouts during the nine months endedSeptember 30, 2020 increased compared to the same period in 2019 primarily due to an increase in workouts related to loans impacted by the COVID-19 pandemic which successfully exited their forbearance plans. The following tables provide the composition of revenues for the Servicing segment: Table 8. Servicing - Revenues Three Months Ended September 30, 2020 2019 $ Change % Change Amt bps(1) Amt bps(1) Amt bps(1) Amt bps(1) Forward MSR Operational Revenue Base servicing fees$ 231 16$ 252 16$ (21) - (8) % - % Modification fees(2) 3 - 4 - (1) - (25) % - % Incentive fees(2) - - 6 - (6) - (100) % - % Late payment fees(2) 15 1 23 2 (8) (1) (35) % (50) % Other ancillary revenues(2) 51 3 48 3 3 - 6 % - % Total forward MSR operational revenue 300 20 333 21 (33) (1) (10) % (5) % Base subservicing fees and other subservicing revenue(2) 71 5 65 4 6 1 9 % 25 % Reverse servicing fees 6 1 7 - (1) 1 (14) % 100 % Total servicing fee revenue 377 26 405 25 (28) 1 (7) % 4 % MSR financing liability costs (8) (1) (9) - 1 (1) (11) % (100) % Excess spread costs - principal (96) (6) (77) (5) (19) (1) 25 % 20 % Total operational revenue 273 19 319 20 (46) (1) (14) % (5) % Amortization, net of accretion Forward MSR amortization (212) (14) (162) (10) (50) (4) 31 % 40 % Excess spread accretion 96 6 77 5 19 1 25 % 20 % Reverse MSL accretion 4 - 10 - (6) - (60) % - % Reverse MSR amortization - - 2 - (2) - (100) % - % Total amortization, net of accretion (112) (8) (73) (5) (39) (3) 53 % 60 % Mark-to-Market Adjustments MSR MTM(3) (63) (4) (195) (12) 132 8 (68) % (67) % Excess spread / financing MTM 34 2 112 7 (78) (5) (70) % (71) % Total MTM adjustments (29) (2) (83) (5) 54 3 (65) % (60) % Total revenues - Servicing$ 132 9$ 163 10$ (31) (1) (19) % (10) % 47
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(1)Calculated basis points ("bps") are as follows: Annualized dollar
amount/Total average UPB X 10000.
(2)Certain ancillary and other non-base fees related to subservicing operations
are separately presented as other subservicing revenues.
(3)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 $7 and $18 during the
three months ended September 30, 2020 and 2019, respectively.
Forward - Due to the decrease of the forward MSR portfolio's UPB, base servicing
fee revenue decreased during the three months ended
Forward MSR amortization increased during the three months endedSeptember 30, 2020 as compared to the same period in 2019, primarily due to higher prepayments driven by the lower interest rate environment. Total negative MTM adjustments decreased during the three months endedSeptember 30, 2020 as compared to the same period in 2019 primarily due to decreased impact from changes in interest rates and favorable impact from additional modification fee income for loans exiting forbearance program related to the CARES Act.
Subservicing - Subservicing fees increased during the three months ended
Reverse - Servicing fees and reverse MSL accretion on reverse mortgage
portfolios during the three months ended
Table 8.1 Servicing - Revenues
Nine Months Ended September 30,
2020 2019 $ Change % Change
Amt bps(1) Amt bps(1) Amt bps(1) Amt bps(1)
Forward MSR Operational Revenue
Base servicing fees $ 720 16 $ 749 16 $ (29) - (4) % - %
Modification fees(2) 8 - 13 - (5) - (38) % - %
Incentive fees(2) 9 - 8 - 1 - 13 % - %
Late payment fees(2) 54 1 62 2 (8) (1) (13) % (50) %
Other ancillary revenues(2) 133 3 126 3 7 - 6 % - %
Total forward MSR operational
revenue 924 20 958 21 (34) (1) (4) % (5) %
Base subservicing fees and other
subservicing revenue(2) 205 5 179 4 26 1 15 % 25 %
Reverse servicing fees 19 - 24 - (5) - (21) % - %
Total servicing fee revenue 1,148 25 1,161 25 (13) - (1) % - %
MSR financing liability costs (25) (1) (32) (1) 7 - (22) % - %
Excess spread costs - principal (243) (5) (172) (4) (71) (1) 41 % 25 %
Total operational revenue 880 19 957 20 (77) (1) (8) % (5) %
Amortization, net of accretion
Forward MSR amortization (550) (12) (366) (8) (184) (4) 50 % 50 %
Excess spread accretion 243 5 172 4 71 1 41 % 25 %
Reverse MSL accretion 17 1 39 1 (22) - (56) % - %
Reverse MSR amortization - - 3 - (3) - (100) % - %
Total amortization, net of
accretion (290) (6) (152) (3) (138) (3) 91 % 100 %
Mark-to-Market Adjustments
MSR MTM(3) (796) (17) (782) (17) (14) - 2 % - %
Excess spread / financing MTM 123 2 175 4 (52) (2) (30) % (50) %
Total MTM adjustments (673) (15) (607) (13) (66) (2) 11 % 15 %
Total revenues - Servicing $ (83) (2) $ 198 4 $ (281) (6) (142) % (150) %
48
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(1)Calculated basis points ("bps") are as follows: Annualized dollar
amount/Total average UPB X 10000.
(2)Certain ancillary and other non-base fees related to subservicing operations
are separately presented as other subservicing revenues.
(3)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 $20 and $46 during the
nine months ended September 30, 2020 and 2019, respectively.
Forward - Due to the decrease of the forward MSR portfolio's UPB, base servicing
fee revenue decreased for the nine months ended September 30, 2020 as compared
to the same period in 2019. Modification fees decreased primarily due to lower
modification volume. Late payment fees decreased primarily driven by loan
forbearance related to the CARES Act. Other ancillary revenues increased
primarily due to higher sales lead incentives due to increased portfolio
recapture activity.
Forward MSR amortization increased during the nine months ended September 30,
2020 as compared to the same period in 2019, primarily due to higher prepayments
driven by the lower interest rate environment.
Total negative MTM adjustments increased during the nine months ended September
30, 2020 as compared to the same period in 2019 primarily due to the declining
interest rate environment during 2020.
Subservicing - Subservicing fees increased during the nine months ended
September 30, 2020 as compared to the same period in 2019 primarily due to a
higher average subservicing portfolio UPB and higher fees earned on delinquent
loans.
Reverse - Servicing fees and reverse MSL accretion on reverse mortgage
portfolios during the nine months ended September 30, 2020 decreased as compared
to the same period in 2019, primarily due to the decline in the reverse mortgage
portfolio.
The tables below summarize expenses for the Servicing segment: Table 9. Servicing - Expenses
Three Months Ended September 30,
2020 2019 Change % Change
Amt bps(1) Amt bps(1) Amt bps(1) Amt bps(1)
Salaries, wages and benefits $ 77 5 $ 85 5 $ (8) - (9) % - %
General and administrative
Servicing support fees 28 2 30 2 (2) - (7) % - %
Corporate and other general and
administrative expenses 33 2 40 3 (7) (1) (18) % (33) %
Foreclosure and other liquidation
related (recoveries) expenses, net (45) (3) 11 1 (56) (4) (509) % (400) %
Depreciation and amortization 6 1 5 - 1 1 20 % 100 %
Total general and administrative
expenses 22 2 86 6 (64) (4) (74) % (67) %
Total expenses - Servicing $ 99 7 $ 171 11 $ (72) (4) (42) % (36) %
(1)Calculated basis points ("bps") are as follows: Annualized dollar amount/Total average UPB X 10000.
Total expenses decreased during the three months endedSeptember 30, 2020 compared to the same period in 2019, primarily driven by a decrease in foreclosure and other liquidation (recoveries) expenses, net. Foreclosure and other liquidation related (recoveries) expenses, net, decreased primarily due to operational improvements of the reverse portfolio with respect to assignments and adherence to HUD curtailment guidelines, in addition to$46 on loss recoveries related to a settlement with a government agency. Salaries, wages and benefits decreased in 2020 primarily due to operational efficiencies. The decrease in Corporate and other general and administrative expenses was primarily driven by lower repairs and maintenance expenses and temporary labor costs. 49 --------------------------------------------------------------------------------
Table 9.1 Servicing - Expenses
Nine Months Ended September 30,
2020 2019 Change % Change
Amt bps(1) Amt bps(1) Amt bps(1) Amt bps(1)
Salaries, wages and benefits $ 238 5 $ 261 6 $ (23) (1) (9) % (17) %
General and administrative
Servicing support fees 80 2 93 2 (13) - (14) % - %
Corporate and other general and
administrative expenses 100 2 118 3 (18) (1) (15) % (33) %
Foreclosure and other liquidation
related (recoveries) expenses, net (62) (1) 70 1 (132) (2) (189) % (200) %
Depreciation and amortization 14 - 13 - 1 - 8 % - %
Total general and administrative
expenses 132 3 294 6 (162) (3) (55) % (50) %
Total expenses - Servicing $ 370 8 $ 555 12 $ (185) (4) (33) % (33) %
(1)Calculated basis points ("bps") are as follows: Annualized dollar amount/Total average UPB X 10000.
Total expenses decreased during the nine months endedSeptember 30, 2020 compared to the same period in 2019, primarily driven by a decrease in foreclosure and other liquidation (recoveries) expenses, net. Foreclosure and other liquidation related (recoveries) expenses, net decreased primarily due to operational improvements of the reverse portfolio with respect to assignments and adherence to HUD curtailment guidelines, in addition to$46 on loss recoveries related to a settlement with a government agency and improved performance of$15 on loss recoveries related to a settlement with a prior servicer. The decrease in Corporate and other general and administrative expenses in 2020 was primarily driven by lower occupancy expenses and temporary labor costs. Servicing support fees decreased in 2020 compared to the same period in 2019 primarily due to lower legal and tax service expenses. Salaries, wages and benefits decreased in 2020 compared to the same period in 2019 primarily due to improved operational efficiencies which included consolidation of one of our servicing centers.
Table 10. Servicing - Other (Expenses) Income, Net
Three Months Ended September 30,
2020 2019 Change % Change
Amt bps(1) Amt bps(1) Amt bps(1) Amt bps(1)
Income earned on Reverse
mortgage interest $ 40 3 $ 81 5 $ (41) (2) (51) % (40) %
Other interest income - - 56 4 (56) (4) (100) % (100) %
Interest income 40 3 137 9 (97) (6) (71) % (67) %
Reverse mortgage interest
expense (37) (3) (58) (4) 21 1 (36) % (25) %
Advance interest expense (7) - (6) - (1) - 17 % - %
Other interest expense (61) (4) (56) (4) (5) - 9 % - %
Interest expense (105) (7) (120) (8) 15 1 (13) % (13) %
Total other (expenses)
income, net - Servicing $ (65) (4) $ 17 1 $ (82) (5) (482) % (500) %
Weighted average cost - advance facilities 3.0 % 3.8 % (0.8) % (21) % Weighted average cost - excess spread financing 9.0 % 8.9 % 0.1 % 1 %
(1)Calculated basis points ("bps") are as follows: Annualized dollar amount/Total average UPB X 10000.
50
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During the three months ended September 30, 2020 , we had total other expenses,
net, of $65 compared to total other income, net, of $17 for the same period in
2019. The change was primarily due to a decrease in interest income, mainly
driven by lower interest income earned on custodial balances due to lower LIBOR
rates. 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. Interest expense decreased during the three months ended
September 30, 2020 as compared to the same period in 2019, primarily due to a
decrease in reverse mortgage interest expense primarily driven by the decline in
the reverse mortgage interest portfolio.
Table 10.1 Servicing - Other (Expenses) Income, Net
Nine Months Ended September 30,
2020 2019 Change % Change
Amt bps(1) Amt bps(1) Amt bps(1) Amt bps(1)
Income earned on Reverse
mortgage interest $ 137 3 $ 249 5 $ (112) (2) (45) % (40) %
Other interest income 43 1 139 3 (96) (2) (69) % (67) %
Interest income 180 4 388 8 (208) (4) (54) % (50) %
Reverse mortgage interest
expense (140) (3) (175) (4) 35 1 (20) % (25) %
Advance interest expense (20) - (23) - 3 - (13) % - %
Other interest expense (175) (4) (145) (3) (30) (1) 21 % 33 %
Interest expense (335) (7) (343) (7) 8 - (2) % - %
Total other (expenses)
income, net - Servicing $ (155) (3) $ 45 1 $ (200) (4) (444) % (400) %
Weighted average cost - advance facilities 3.0 % 4.0 % (1.0) % (25) % Weighted average cost - excess spread financing 9.0 % 8.9 % 0.1 % 1 %
(1)Calculated basis points ("bps") are as follows: Annualized dollar amount/Total average UPB X 10000.
During the nine months endedSeptember 30, 2020 , we had total other expenses, net, of$155 compared to total other income, net, of$45 for the same period in 2019. The change was primarily due to a decrease in interest income, mainly driven by lower income earned on reverse mortgage interest due to the decline in the reverse mortgage interests balance and the amortization of a net asset premium into income. Other interest income decreased due to lower interest income earned on custodial balances due to lower LIBOR rates. Interest expense remained relatively flat during the nine months endedSeptember 30, 2020 as compared to the same period in 2019. 51 --------------------------------------------------------------------------------
Servicing Portfolio and Related Liabilities
The table below summarizes the servicing portfolio and related liabilities in
the Servicing segment:
Table 11. Servicing Portfolios and Related Liabilities
September 30, 2020 December 31, 2019
Carrying Carrying
UPB Amount bps UPB Amount bps
Forward MSRs - acquisition
pool:
Credit sensitive $ 122,422 $ 1,206 99 $ 147,895 $ 1,613 109
Interest sensitive 144,245 1,457 101 148,887 1,883 126
Total forward MSRs - fair
value $ 266,667 $ 2,663 100 $ 296,782 $ 3,496 118
Forward MSRs - investor
pool:
Agency $ 220,139 $ 2,234 102 $ 240,688 $ 2,944 122
Non-agency 46,528 429 92 56,094 552 98
Total forward MSRs - fair
value $ 266,667 $ 2,663 100 $ 296,782 $ 3,496 118
Total forward MSRs $ 266,667 $ 2,663 $ 296,782 $ 3,496
Subservicing and other(1)
Agency 285,704 N/A 308,532 N/A
Non-agency 15,151 N/A 15,451 N/A
Total subservicing and
other 300,855 N/A 323,983 N/A
Reverse portfolio -
amortized cost
MSR 2,079 6 2,508 6
MSL 12,485 (44) 13,994 (61)
Securitized loans 5,442 5,460 6,223 6,279
Total reverse portfolio
serviced 20,006 5,422 22,725 6,224
Total servicing portfolio
unpaid principal balance $ 587,528 $ 8,085 $ 643,490 $ 9,720 (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.
As ofSeptember 30, 2020 , when measuring the fair value of the portfolio as a basis point of the unpaid principal balance, our total forward MSRs decreased in value by 18 bps compared toDecember 31, 2019 primarily due to higher forecasted prepayment speeds as a result of the declining interest rate environment in 2020. 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. 52 --------------------------------------------------------------------------------
The following table sets forth the activities of forward MSRs: Table 12. Forward MSRs - Fair Value Rollforward
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Fair value - beginning of period $ 2,757 $ 3,505 $ 3,496 $ 3,665 Additions:
Servicing retained from mortgage loans sold 163 129 412 298 Purchases of servicing rights 6 43 30 732 Dispositions: Sales and cancellation of servicing assets - (24) - (317) Changes in fair value: Due to changes in valuation inputs or assumptions used in the valuation model: Credit sensitive (41) (72) (262) (228) Interest sensitive (24) (102) (520) (488) Other changes in fair value: Scheduled principal payments (23) (24) (70) (69) Disposition of negative MSRs and other(1) 12 20 57 43 Prepayments Voluntary prepayments Credit sensitive (31) (27) (81) (72) Interest sensitive (155) (103) (392) (205) Involuntary prepayments Credit sensitive - (1) (1) (6) Interest sensitive (1) (5) (6) (14)
Fair value - end of period $ 2,663$ 3,339 $ 2,663$ 3,339
(1)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.
53
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The following table sets forth the weighted-average key inputs and assumptions
in estimating the fair value of forward MSRs:
Table 13. MSRs - Fair Value
September 30, 2020 September 30, 2019
Total MSRs Portfolio
Discount rate 9.5 % 9.7 %
Prepayment speeds 14.4 % 13.9 %
Average life 5.2 years 5.6 years
Acquisition Pools:
Credit Sensitive
Discount rate 10.0 % 10.4 %
Prepayment speeds 12.6 % 13.2 %
Average life 5.6 years 5.9 years
Interest Sensitive
Discount rate 9.0 % 9.0 %
Prepayment speeds 15.9 % 14.6 %
Average life 4.9 years 5.4 years
Investor Pools:
Agency
Discount rate 8.9 % 9.0 %
Prepayment speeds 14.5 % 13.7 %
Average life 5.1 years 5.5 years
Non-Agency
Discount rate 12.0 % 12.6 %
Prepayment speeds 13.9 % 14.3 %
Average life 5.5 years 6.0 years
The weighted-average discount rate for total MSRs portfolio decreased 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.
The key assumptions were separately applied to the servicing of loans in forbearance to account for differences in the underlying estimate of future servicing revenues related to those loans.
54
--------------------------------------------------------------------------------Excess Spread Financing
As further disclosed in Note 2, Mortgage Servicing Rights and Related Liabilities, 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 mortgage prepayments through the origination platform. See Note 2, Mortgage Servicing Rights and Related Liabilities, for additional information regarding the range of assumptions and sensitivities related to the measurement of the excess spread financing liability as ofSeptember 30, 2020 andDecember 31, 2019 . The following table sets forth the change in the excess spread financing and the related weighted-average key assumptions: Table 14. Excess Spread Financing Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Fair value - beginning of period $ 1,124$ 1,429 $ 1,311 $ 1,184 Additions: New financings - 31 24 469 Deductions: Settlements and repayments (49) (63) (159) (182) Changes in fair value: Credit Sensitive (14) (59) (38) (74) Interest Sensitive (17) (57) (94) (116) Fair value - end of period $ 1,044$ 1,281 $ 1,044 $ 1,281 Weighted-Average Key Assumptions September 30, 2020 September 30, 2019 Total Excess Spread Portfolio Discount rate 11.9 % 11.9 % Prepayment speeds 13.6 % 13.3 % Recapture rate 19.1 % 22.2 % Average life 5.3 years 5.7 years Credit Sensitive Discount rate 12.6 % 12.5 % Prepayment speeds 13.0 % 12.9 % Recapture rate 20.6 % 23.6 % Average life 5.5 years 5.8 years Interest Sensitive Discount rate 10.6 % 10.9 % Prepayment speeds 14.7 % 13.9 % Recapture rate 16.4 % 20.0 % Average life 5.1 years 5.5 years 55
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The following table sets forth the change in the MSRs financing liability and
the related weighted-average key assumptions:
Table 15. MSRs Financing Liability - Rollforward
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Fair value - beginning of period $ 49 $ 43 $ 37 $ 32
Changes in fair value:
Changes in valuation inputs or
assumptions used in the valuation
model 3 9 21 28
Other changes in fair value (5) (5) (11) (13)
Fair value - end of period $ 47 $ 47 $ 47 $ 47
September 30, 2020 September 30, 2019
Weighted-Average Key Assumptions
Advance financing and counterparty fee rates 8.2 % 8.7 %
Annual advance recovery rates 20.2 % 18.7 %
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 being advance financing rates and annual advance recovery
rates.
The following table provides an overview of our forward servicing portfolio and
amounts that involve excess spread financing with our co-investment partners for
the periods indicated:
Table 16. Leveraged Portfolio Characteristics
September 30, September 30,
2020 2019
Owned forward servicing portfolio - unencumbered $ 85,937 $ 89,308
Owned forward servicing portfolio - encumbered 180,730 217,373
Subserviced forward servicing portfolio and other 300,855 310,531
Total unpaid principal balance $ 567,522
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.
56
--------------------------------------------------------------------------------Reverse MSRs, MSLs and Participating Interests in Reverse Mortgages - 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 17. Reverse Mortgage Portfolio Characteristics
September 30, 2020 September 30, 2019
Loan count 151,412 170,903
Ending unpaid principal balance $ 20,006 $ 23,990
Average loan amount(1) $ 132,127 $ 140,374
Average coupon 2.1 % 3.8 %
Average borrower age 80.7 years 80.1 years
(1)Average loan amount is presented in whole dollar amounts.
Historically, we 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 assumptions being discount rates, prepayment speeds and 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 as of
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, our 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 a 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. Our wholesale channel was shut down during the three months endedJune 30, 2020 and subsequently ceased originating loans and funded out the remaining pipeline. 57 --------------------------------------------------------------------------------
The charts below set forth the pull through adjusted lock volume and funded volume by channel and channel mix ($ in Billions):
[[Image Removed: nsm-20200930_g4.jpg]]
[[Image Removed: nsm-20200930_g5.jpg]]
58
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The following tables set forth the results of operations for the Originations
segment:
Table 18. Originations Segment Results of Operations
Three Months Ended September 30,
2020 2019 $ Change % Change
Total revenues $ 632 $ 334 $ 298 89 %
Total expenses 195 155 40 26 %
Total other income (expenses), net 1 (1) 2 (200) %
Income before income tax expense $ 438 $ 178 $ 260 146 %
Originations Margin
Revenue $ 632 $ 334 $ 298 89 %
Pull through adjusted lock volume $ 19,794 $ 12,699 $ 7,095 56 %
Revenue as a percentage of pull
through adjusted lock volume(1) 3.19 % 2.63 % 0.56 % 21 %
Expenses(2) $ 194 $ 156 $ 40 26 %
Funded volume $ 15,598 $ 11,911 $ 3,687 31 %
Expenses as a percentage of funded
volume(3) 1.24 % 1.31 % (0.07) % (5) %
Originations Margin 1.95 % 1.32 % 0.63 % 48 %
(1)Calculated on pull-through adjusted lock volume as revenue is recognized at
the time of loan lock.
(2)Expenses include total expenses and total other income (expenses), net.
(3)Calculated on funded volume as expenses are incurred based on closing of the
loan.
Income before income tax expense increased during the three months ended
September 30, 2020 as compared to the same period in 2019 primarily due to an
increase in revenues driven by origination volume growth from both the DTC and
correspondent channels. The growth in origination volume was primarily due to
declining interest rates. The Originations Margin during the three months ended
September 30, 2020 increased as compared to the same period in 2019 primarily
due to higher revenue as a percentage of pull through adjusted lock volume
driven by an increase in volume from the DTC channel.
59
--------------------------------------------------------------------------------Table 18.1 Originations Segment Results of Operations
Nine Months Ended September 30,
2020 2019 $ Change % Change
Total revenues $ 1,543 $ 744 $ 799 107 %
Total expenses 528 404 124 31 %
Total other income, net 14 1 13 1,300 %
Income before income tax expense $ 1,029 $ 341 $ 688 202 %
Originations Margin
Revenue $ 1,543 $ 744 $ 799 107 %
Pull through adjusted lock volume $ 44,865 $ 29,856 $ 15,009 50 %
Revenue as a percentage of pull
through adjusted lock volume(1) 3.44 % 2.49 % 0.95 % 38 %
Expenses(2) $ 514 $ 403 $ 124 31 %
Funded volume $ 38,686 $ 27,623 $ 11,063 40 %
Expenses as a percentage of funded
volume(3) 1.33 % 1.46 % (0.13) % (9) %
Originations Margin 2.11 % 1.03 % 1.08 % 105 %
(1)Calculated on pull-through adjusted lock volume as revenue is recognized at
the time of loan lock.
(2)Expenses include total expenses and total other income, net.
(3)Calculated on funded volume as expenses are incurred based on closing of the
loan.
Income before tax expense increased during the nine months ended September 30,
2020 as compared to the same period in 2019 primarily due to an increase in
revenues driven by origination volume growth predominately in the DTC channel.
In response to the COVID-19 pandemic, we temporarily slowed operations in the
correspondent channel in order to prioritize cash build and de-risk the
pipeline. As the market stabilized post pandemic, we returned to normal
correspondent activity in the third quarter 2020. The growth in origination
volume was due to declining interest rates. The Originations Margin during the
nine months ended September 30, 2020 increased as compared to the same period in
2019 due to higher revenue as a percentage of pull through adjusted lock volume
driven by an increase in volume from the DTC channel.
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 fluctuation 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.
60
--------------------------------------------------------------------------------Total revenues for the Originations segment are set forth in the tables below: Table 19. Originations - Revenues
Three Months Ended September 30,
2020 2019 $ Change % Change
Service related, net - Originations $ 27 $ 22 $ 5 23 %
Net gain on mortgage loans held for
sale
Net gain on loans originated and
sold 449 191 258 135 %
Capitalized servicing rights 162 126 36 29 %
Provision for repurchase reserves,
net of release (6) (5) (1) 20 %
Total net gain on mortgage loans
held for sale 605 312 293 94 %
Total revenues - Originations $ 632 $ 334 $ 298 89 %
Key Metrics
Consumer direct lock pull through
adjusted volume(1) $ 10,414 $ 5,488 $ 4,926 90 %
Other locked pull through adjusted
volume(1) 9,380 7,211 2,169 30 %
Total pull through adjusted volume $ 19,794 $ 12,699 $ 7,095 56 %
Funded volume $ 15,598 $ 11,911 $ 3,687 31 %
Volume of loans sold $ 15,206 $ 12,150 $ 3,056 25 %
Recapture percentage(2) 24.9 % 24.6 % 0.3 % 1 %
Refinance recapture percentage(3) 31.2 % 36.9 % (5.7) % (15) %
Purchase as a percentage of funded
volume 16.4 % 39.1 % (22.7) % (58) %
Value of capitalized servicing on
retained settlements 133 bps 154 bps (21) bps (14) %
(1)Pull through adjusted volume represents the expected funding from locks taken
during the period.
(2)Recapture percentage includes both purchase and refinance origination and
payoff activity.
(3)Refinance recapture percentage excludes purchase originations and purchase
payoff activity.
Total revenues increased during the three months ended September 30, 2020
compared to the same period in 2019 primarily driven by the higher origination
volumes in a declining interest rate environment, primarily from the DTC
channel. Total revenue increased $298 or 89% period over period as consumer
direct lock pull through adjusted volume increased 90% during the same period.
There were no material changes for repurchase reserves.
61
--------------------------------------------------------------------------------Table 19.1 Originations - Revenues
Nine Months Ended September 30,
2020 2019 $ Change % Change
Service related, net - Originations $ 68 $ 57 $ 11 19 %
Net gain on mortgage loans held for
sale
Net gain on loans originated and
sold 1,085 415 670 161 %
Capitalized servicing rights 404 287 117 41 %
Provision for repurchase reserves,
net of release (14) (15) 1 (7) %
Total net gain on mortgage loans
held for sale 1,475 687 788 115 %
Total revenues - Originations $ 1,543 $ 744 $ 799 107 %
Key Metrics
Consumer direct lock pull through
adjusted volume(1) $ 27,432 $ 12,211 $ 15,221 125 %
Other locked pull through adjusted
volume(1) 17,433 17,645 (212) (1) %
Total pull through adjusted volume $ 44,865 $ 29,856 $ 15,009 50 %
Funded volume $ 38,686 $ 27,623 $ 11,063 40 %
Volume of loans sold $ 39,633 $ 27,474 $ 12,159 44 %
Recapture percentage(2) 26.5 % 24.8 % 1.7 % 7 %
Refinance recapture percentage(3) 32.4 % 41.2 % (8.8) % (21) %
Purchase as a percentage of funded
volume 17.8 % 46.7 % (28.9) % (62) %
Value of capitalized servicing on
retained settlements 134 bps 149 bps (15) bps (10) %
(1)Pull through adjusted volume represents the expected funding from locks taken
during the period.
(2)Recapture percentage includes both purchase and refinance origination and
payoff activity.
(3)Refinance recapture percentage excludes purchase originations and purchase
payoff activity.
Total revenues increased during the nine months ended September 30, 2020
compared to the same period in 2019 primarily driven by the higher origination
volumes in a declining interest rate environment, primarily from the DTC
channel. Total revenue increased $799 or 107% period over period as consumer
direct lock pull through adjusted volume increased 125% during the same period.
There were no material changes for repurchase reserves.
The tables below summarize expenses for the Originations segment: Table 20. Originations - Expenses
Three Months Ended September 30,
2020 2019 $ Change % Change
Salaries, wages and benefits $ 140 $ 104 $ 36 35 %
General and administrative
Loan origination expenses 20 16 4 25 %
Corporate and other general and
administrative expenses 16 16 - - %
Marketing and professional service
fees 14 12 2 17 %
Depreciation and amortization 5 4 1 25 %
Loss on impairment of assets - 3 (3) (100) %
Total general and administrative 55 51 4 8 %
Total expenses - Originations $ 195 $ 155 $ 40 26 %
62-------------------------------------------------------------------------------- Total expenses during the three months endedSeptember 30, 2020 increased when compared to the same period in 2019 primarily due to growth in origination volumes, which was driven by the low interest rate environment. The origination volume growth contributed to the increase in salaries, wages and benefits, due to increased compensation and headcount related costs.
Table 20.1 Originations - Expenses
Nine Months Ended September 30,
2020 2019 $ Change % Change
Salaries, wages and benefits $ 377 $ 261 $ 116 44 %
General and administrative
Loan origination expenses 52 43 9 21 %
Corporate and other general and
administrative expenses 50 43 7 16 %
Marketing and professional service
fees 37 41 (4) (10) %
Depreciation and amortization 12 13 (1) (8) %
Loss on impairment of assets - 3 (3) (100) %
Total general and administrative 151 143 8 6 %
Total expenses - Originations $ 528 $ 404 $ 124 31 %
Total expenses during the nine months ended September 30, 2020 increased when
compared to the same period in 2019 primarily due to growth in origination
volumes, which was driven by the low interest rate environment. The origination
volume growth contributed to the increase in salaries, wages and benefits, due
to increased compensation and headcount related costs, and loan origination
expenses. In addition, corporate and other general and administrative expenses
increased during the nine months ended September 30, 2020 primarily driven by
higher outsourcing costs.
The tables below summarize other income (expenses), net, for the Originations
segment:
Table 21. Originations - Other Income (Expenses), Net
Three Months Ended September 30,
2020 2019 $ Change % Change
Interest income $ 16 $ 24 $ (8) (33) %
Interest expense (15) (24) 9 (38) %
Other expense, net - (1) 1 100 %
Total other income (expenses), net
- Originations $ 1 $ (1) $ 2 (200) %
Weighted average note rate -
mortgage loans held for sale 3.1 % 4.1 % (1.0) % (24) %
Weighted average cost of funds
(excluding facility fees) 2.5 % 3.8 % (1.3) % (34) %
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 during the three months endedSeptember 30, 2020 decreased when compared to the same period in 2019 primarily driven by a lower average note rate on mortgage loans held for sale, partially offset by higher funded volume. The decrease in interest income was offset by a decrease in interest expense due to a lower cost of funds. 63 --------------------------------------------------------------------------------
Table 21.1 Originations - Other Income, Net
Nine Months Ended September 30,
2020 2019 $ Change % Change
Interest income $ 69 $ 64 $ 5 8 %
Interest expense (55) (67) 12 (18) %
Other income, net - 4 (4) (100) %
Total other income, net -
Originations $ 14 $ 1 $ 13 1,300 %
Weighted average note rate -
mortgage loans held for sale 3.4 % 4.4 % (1.0) % (23) %
Weighted average cost of funds
(excluding facility fees) 2.7 % 4.3 % (1.6) % (37) %
Interest expense during the nine months ended September 30, 2020 decreased when
compared to the same period in 2019 primarily driven by a lower cost of funds.
The decrease in interest expense was partially offset by a decrease in other
income, net. Other income, net, was higher in 2019 due to recognition of
incentives we received related to our financing of certain loans satisfying
certain customer relief characteristics. In September 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 $4 in other income, net, related to such incentives
during the nine months ended September 30, 2019 . The master repurchase agreement
expired during the third quarter of 2019.
Xome Segment
Xome is a real estate services company that provides services for mortgage
originators and servicers, including Mr. Cooper , as well as mortgage and real
estate investors. Xome is strategically important because it generates fee
income that complements our servicing and origination businesses without
requiring a significant amount of capital or exposing us to the same level of
interest rate or credit risk.
Xome is organized into three divisions: Exchange, Services and Data/Technology.
•The Exchange division consists of the Xome.com auction platform which utilizes proprietary technology designed to provide efficient execution for sales of foreclosed properties.
•The Services division includes title, escrow, collateral valuation and field
services related to real estate investments or transactions including purchases,
sales, refinances and defaults.
•The Data/Technology division contains a diversified set of businesses that
provide technology solutions to real estate service providers, aggregators, and
a variety of investors. This includes providing aggregation, standardization and
licensing for one of the nation's largest set of MLS, public records and
neighborhood demographic data.
64
--------------------------------------------------------------------------------The charts below set forth Xome's total revenues ($ in Millions), Exchange properties sold, and Services completed orders:
[[Image Removed: nsm-20200930_g6.jpg]][[Image Removed: nsm-20200930_g7.jpg]][[Image Removed: nsm-20200930_g8.jpg]]
65
--------------------------------------------------------------------------------The following tables set forth the results of operations for the Xome segment: Table 22. Xome Segment Results of Operations
Three Months Ended September 30,
2020 2019 $ Change % Change
Xome - Operations
Total revenues $ 108 $ 112 $ (4) (4) %
Total expenses 94 101 (7) (7) %
Total other income, net 1 3 (2) (67) %
Income before income tax expense $ 15 $ 14 $ 1 7 %
Pre-tax margin 13.9 % 12.5 % 1.4 % 11 %
Xome - Revenues
Exchange $ 6 $ 19 $ (13) (68) %
Services 99 87 12 14 %
Data/Technology 3 6 (3) (50) %
Total revenues - Xome $ 108 $ 112 $ (4) (4) %
Key Metrics
Exchange properties sold 860 2,453 (1,593) (65) %
Average Exchange properties under
management 15,067 6,688 8,379 125 %
Services completed orders 422,935 429,128 (6,193) (1) %
Percentage of revenue earned from
third-party customers 50.1 % 53.4 % (3.3) % (6) %
Xome - Expenses
Salaries, wages and benefits $ 32 $ 37 $ (5) (14) %
General and administrative
Operational expenses 57 60 (3) (5) %
Depreciation and amortization 5 4 1 25 %
Total general and administrative 62 64 (2) (3) %
Total expenses - Xome $ 94 $ 101 $ (7) (7) %
Income before income tax expense increased during the three months ended
September 30, 2020 as compared to the same period in 2019 primarily due to a
decrease in total expenses, partially offset by lower total revenues. The
decrease in total expenses was due to a decrease in both salaries, wages and
benefits and operational expenses primarily driven by operational efficiencies.
Total revenues decreased during the three months ended September 30, 2020 as
compared to the same period in 2019 primarily due to a decrease in Exchange
revenues attributable to a decrease in defaults and foreclosures nationwide
related to the CARES Act, offset by an increase in Services revenues primarily
driven by originations volume from title services.
66
--------------------------------------------------------------------------------
Table 22.1 Xome Segment Results of Operations
Nine Months Ended September 30,
2020 2019 $ Change % Change
Xome - Operations
Total revenues $ 320 $ 316 $ 4 1 %
Total expenses 285 301 (16) (5) %
Total other income, net 3 14 (11) (79) %
Income before income tax expense $ 38 $ 29 $ 9 31 %
Pre-tax margin 11.9 % 9.2 % 2.7 % 29 %
Xome - Revenues
Exchange $ 31 $ 59 $ (28) (47) %
Services 278 240 38 16 %
Data/Technology 11 17 (6) (35) %
Total revenues - Xome $ 320 $ 316 $ 4 1 %
Key Metrics
Exchange properties sold 4,165 7,519 (3,354) (45) %
Average Exchange properties under
management 16,761 6,552 10,209 156 %
Services completed orders 1,255,643 1,226,223 29,420 2 %
Percentage of revenue earned from
third-party customers 52.7 % 53.1 % (0.4) % (1) %
Xome - Expenses
Salaries, wages and benefits $ 100 $ 111 $ (11) (10) %
General and administrative
Operational expenses 174 179 (5) (3) %
Depreciation and amortization 11 11 - - %
Total general and administrative 185 190 (5) (3) %
Total expenses - Xome $ 285 $ 301 $ (16) (5) %
Income before income tax expense increased during the nine months ended
September 30, 2020 as compared to the same period in 2019 due to a decrease in
total expenses, partially offset by a decrease in total other income, net. The
decrease in total expenses was primarily due to a decrease in salaries, wages
and benefits driven by operational efficiencies. The decrease in total other
income, net, was due to the change in fair value of the contingent consideration
of $15 recorded in 2019 in connection with the acquisition of AMS. Total
revenues remained relatively flat during the nine months ended September 30,
2020 as compared to the same period in 2019 primarily due to an increase in
Services revenues from higher volumes of units for title and close, and field
services, partially offset by a decrease in Exchange revenues due to the
decrease in defaults and foreclosures nationwide related to the CARES Act.
67
--------------------------------------------------------------------------------Corporate/Other
The following tables set forth the selected financial results for Corporate/Other: Table 23. Corporate/Other Selected Financial Results
Three Months Ended September 30,
2020 2019 $ Change % Change
Corporate/Other - Operations
Total expenses 43 51 (8) (16) %
Interest expense 45 52 (7) (13) %
Other expense, net (52) - (52) (100) %
Total expenses decreased in the three months ended September 30, 2020 as
compared to the same period in 2019 primarily due to a decrease in general and
administrative expense. General and administrative expense was higher in the
three months ended September 30, 2019 due to higher legal reserves.
Additionally, depreciation and amortization decreased in the three months ended
September 30, 2020 as compared to the same period in 2019 primarily due to a
decrease in amortization of intangible assets. Partially offsetting the decrease
in total expenses was a $7 loss on impairment of assets in connection with
technology write-offs.
Interest expense decreased in the three months ended September 30, 2020 as
compared to the same period in 2019 primarily due to a decrease in interest
expense on unsecured senior notes as result of the repayment and redemption of
the 2021 and 2022 unsecured senior notes in February 2020 and the 2023 unsecured
senior notes in August 2020 . The decrease in total interest expense was
partially offset by the issuance of the 2027 unsecured senior notes in January
2020 and issuance of the 2028 unsecured senior notes in August 2020 .
The change in other expense, net, in the three months ended September 30, 2020
as compared to the same period in 2019 was primarily due to the $53 loss on
redemption of the 2023 unsecured senior notes.
Table 23.1 Corporate/Other Selected Financial Results
Nine Months Ended September 30,
2020 2019 $ Change % Change
Corporate/Other - Operations
Total expenses 111 153 (42) (27) %
Interest expense 144 162 (18) (11) %
Other (expense) income, net (53) 5 (58) (1,160) %
Total expenses decreased in the nine months ended September 30, 2020 as compared
to the same period in 2019 primarily due to a decrease in salaries, wages and
benefits, and general and administrative expense. Both salaries, wages and
benefits and general and administrative expense were higher in the nine months
ended September 30, 2019 due to acquisition and integration expenses related to
the Pacific Union acquisition and the Seterus acquisition in February 2019 . The
decrease in salaries, wage and benefits and operational expenses were partially
offset by a $7 and $8 loss on impairment of assets in connection with technology
write-offs and an ancillary business in 2020, respectively.
Interest expense decreased in the nine months ended September 30, 2020 as
compared to the same period in 2019 primarily due to a decrease in interest
expense on unsecured senior notes as result of the repayment and redemption of
the 2021 and 2022 unsecured senior notes in February 2020 and the 2023 unsecured
senior notes in August 2020 . The decrease in total interest expense was
partially offset by the issuance of the 2027 unsecured senior notes in January
2020 and issuance of the 2028 unsecured senior notes in August 2020 .
The change in other (expense) income, net, in the nine months ended September
30, 2020 as compared to the same period in 2019 was primarily due to the $53
loss on redemption of the 2023 unsecured senior notes.
68
--------------------------------------------------------------------------------Liquidity and Capital Resources
We measure liquidity by unrestricted cash and availability of borrowings on our MSR facilities. Our cash and cash equivalents on hand increased to$946 as ofSeptember 30, 2020 from$329 as ofDecember 31, 2019 . We benefited from strong operating cash flow and repaid$179 of incremental draws from our MSR facilities that were incurred at the start of the COVID-19 pandemic. During the three months endedSeptember 30, 2020 , we bought back 1.2 million shares of our outstanding common stocks as part of the$100 stock repurchase program. During the nine months endedSeptember 30, 2020 , operating activities generated cash totaling$1,878 . As ofSeptember 30, 2020 , total available borrowing capacity was$11,540 , of which$6,677 was unused. As ofSeptember 30, 2020 , we had$1,075 collateral pledged against the MSR facilities, of which we could borrow an additional$394 . The economic impact of the COVID-19 pandemic could result in an increase in servicing advances and liquidity demands related to the utilization of forbearance programs offered by the CARES Act. We did see an increase in forbearance plans during the second quarter of 2020, but the forbearance rate has subsequently declined. Based on current modeling of expected forbearance rates within our portfolio, we believe that we are well-positioned to manage an increase in advances. InApril 2020 , we expanded our committed advance facility capacity by$850 , including an expansion of capacity for private label advances for$200 . In addition, inAugust 2020 , we entered into a new financing facility for GNMA MSRs and advances with a capacity of$900 , of which$640 was allocated to advances as ofSeptember 30, 2020 . With this addition, we expanded our total advance facility capacity to$2,040 and total unused advance capacity to$1,471 as ofSeptember 30, 2020 . We believe our facilities will be adequate for our needs, as we expect increases in advances in the coming quarter due to typical seasonal trends. We have begun financing GNMA advances with this new financing facility. For more information on our MSR and advance facilities, see Note 9, Indebtedness. For non-agency servicing, we are reimbursed for advances relatively quickly, which should limit growth in balances with even higher forbearance rates.
In
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, which continue to increase due to the COVID-19 pandemic; (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 believe that our cash flows from operating activities, as well as capacity
through 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.
69
--------------------------------------------------------------------------------
Cash Flows
The table below presents the major sources and uses of cash flows:
Table 24. Cash Flows
Nine Months Ended September 30,
2020 2019 $ Change % Change
Net cash attributable to:
Operating activities $ 1,878 $ (28) $ 1,906 (6,807) %
Investing activities (38) (279) 241 (86) %
Financing activities (1,277) 388 (1,665) (429) %
Net increase in cash, cash
equivalents, and restricted cash $ 563 $ 81 $ 482 595 %
Operating activities
Our operating activities generated cash of $1,878 during the nine months ended
September 30, 2020 compared to cash used of $28 in the same period in 2019. The
change was primarily due to the cash generated from originations activities
primarily driven by higher origination volumes in a low interest rate
environment.
Investing activities
Our investing activities used cash of $38 during the nine months ended September
30, 2020 compared to $279 during the same period in 2019. The decrease in cash
used in investing activities was primarily due to a decrease of $415 in cash
used for the purchase of forward mortgage servicing rights, net of liabilities
incurred. In addition, during the nine months ended September 30, 2019 , we used
$85 cash in connection with the Pacific Union and Seterus acquisitions. The
decrease in cash used was partially offset by a decrease in cash generated of
$254 from proceeds on sale of forward mortgage servicing rights.
Financing activities
Our financing activities used cash of $1,277 during the nine months ended
September 30, 2020 compared to cash generated of $388 in the same period in
2019. Contributing to the cash used was the $1,970 change in advance and
warehouse facilities due to a net pay down of $135 in advance and warehouse
facilities during the nine months ended September 30, 2020 compared to a net
increased borrowing of $1,835 in the same period in 2019. Additionally, cash
used in the redemption and repayment of unsecured senior debt and nonrecourse
debt during the nine months ended September 30, 2020 increased $1,657 compared
to the same period in 2019 due to the repayment and redemption of the 2021 and
2022 unsecured senior notes in February 2020 and the 2023 unsecured senior notes
in August 2020 . The change in cash used was partially offset by an increase in
cash generated of $1,450 due to the issuance of the 2027 unsecured senior notes
in January 2020 and issuance of the 2028 unsecured senior notes in August 2020 .
The cash generated from the issuance of excess spread financing decreased $445
during the nine months ended September 30, 2020 compared to the same period in
2019, as we did not enter into any new excess spread financing deals during
2020. In addition, cash used in participating interest financing decreased $546
in 2020 primarily due to a lower repayment of participating interest financing
in 2020 compared to the same period in 2019. Further, during the nine months
ended September 30, 2019 , cash of $294 was used to pay off the notes payable
assumed from the Pacific Union acquisition.
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. 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. These covenants are measured at our operating subsidiary,Nationstar Mortgage LLC . As ofSeptember 30, 2020 , we were in compliance with our required financial covenants. 70 -------------------------------------------------------------------------------- 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 . As ofSeptember 30, 2020 , we were in compliance with our seller/servicer financial requirements for FHFA andGinnie Mae .
Minimum
The minimum net worth requirement for Fannie Mae and Freddie Mac is defined as follows:
?Base of$2.5 plus 25 basis points of outstanding UPB for total loans serviced. ?TangibleNet Worth comprises of total equity less goodwill, intangible 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. ?TangibleNet Worth is defined as total equity less deferred tax assets, goodwill, intangible assets, affiliate receivables and certain pledged assets.
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 Mortgage Servicing, plus ?Incremental 200 basis points times the sum of the following: •The total UPB of nonperforming (90 or more days delinquent) Agency Mortgage Servicing that is not in forbearance, plus •The total UPB of nonperforming (90 or more days delinquent) Agency Mortgage Servicing that is in forbearance and which were delinquent at the time it entered forbearance, plus •30% of the UPB of nonperforming (90 or more days delinquent) Agency Mortgage Servicing that is in forbearance and which were current at the time it entered forbearance ?This liquidity must only be maintained to the extent this sum exceeds 6% of the total Agency Mortgage 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, US Treasury 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
Under the Ginnie Mae guide, we are also required to maintain a secured debt to gross tangible asset ratios no greater than 60%.
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. 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. 71 --------------------------------------------------------------------------------
In addition, Fannie Mae or Freddie Mac may require capital ratios in excess of stated requirements. Refer to Note 14, Capital Requirements, for additional information.
Table 25. Debt
September 30, 2020 December 31, 2019
Advance facilities principal amount $ 569 $ 422
Warehouse facilities principal amount 4,028
4,416
MSR facilities principal amount 266
160
Unsecured senior principal amount 2,200 2,398 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, and we exercise our ability to stop advancing principal and interest where the pooling and servicing agreements permit, where the advance is deemed to be non-recoverable from future proceeds. 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 and MSR 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 a 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 ofSeptember 30, 2020 , unsecuritized borrower draws totaled$56 , and our maximum unfunded advance obligation related to these reverse mortgage loans was$2,304 . Unsecured Senior Notes In 2018 and 2020, we completed offerings of unsecured senior notes, which mature on various dates throughAugust 2028 . We pay interest semi-annually to the holders of these notes at interest rates ranging from 5.500% to 9.125%. Refer to Note 9, Indebtedness, for the contractual maturities of unsecured senior notes.
Contractual Obligations
As ofSeptember 30, 2020 , no material changes to our outstanding contractual obligations were made from the amounts previously disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 except for the following, in connection with the issuance of the 2027 and 2028 Notes and redemption of the 2021, 2022 and 2023 Notes during the nine months endedSeptember 30, 2020 :
Table 26. Contractual Obligations
Less than 1 More than 5
Year 1-3 Years 3-5 Years Years Total
Unsecured senior notes $ - $ - $ - $ 2,200 $ 2,200
Interest payment from unsecured
senior notes 151 304 304 267 1,026
Total $ 151 $ 304 $ 304 $ 2,467 $ 3,226
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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 13, 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 these critical accounting policies on our consolidated financial statements, 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, (iii) the valuation of the mortgage servicing rights financing liability and (iv) the valuation of IRLCs and LPCs. For further information on our critical accounting policies, please refer to the Company's Annual Reports on Form 10-K for the year endedDecember 31, 2019 . There have been no material changes to our critical accounting policies sinceDecember 31, 2019 . During the three months endedMarch 31, 2020 , we updated the policies for reserves related to certain financial assets that are subject to CECL accounting in connection with adoption of ASU 2016-13. The update did not have material impact on the consolidated financial statements. See Note 1, Nature of Business and Basis of Presentation, in the consolidated financial statements which is incorporated herein for details.
Recent Accounting Developments
Below lists recently issued accounting pronouncements applicable to us but not yet effective.
Accounting Standards Update 2019-12, Income Taxes (Topic 740) - Simplifying the
Accounting for Income Taxes ("ASU 2019-12") simplifies accounting for income
taxes by removing certain exceptions from the general principles in Topic 740
including elimination of the exception to the incremental approach for
intraperiod tax allocation when there is a loss from continuing operations and
income or a gain from other items such as other comprehensive
income. ASU 2019-12 also clarifies and amends certain guidance in Topic
740. ASU 2019-12 is effective for public companies for fiscal years beginning
after December 15, 2020 , including interim periods, with early adoption of all
amendments in the same period permitted. We are currently assessing the impact
of ASU 2019-12, but do not believe it will have a material impact on our
consolidated financial statements.
Accounting Standards Update 2020-04, Reference Rate Reform (Topic 848):
Facilitation of the Effects of Reference Rate Reform on Financial Reporting
("ASU 2020-04") provides temporary optional expedients and exceptions for
applying generally accepted accounting principles to contract modifications,
hedge accounting and other transactions affected by the transitioning away from
reference rates that are expected to be discontinued, such as interbank offered
rates and LIBOR. If LIBOR ceases to exist or if the methods of calculating LIBOR
change from current methods for any reasons, interest rates on our floating rate
loans, obligation derivatives, and other financial instruments tied to LIBOR
rates, may be affected and need renegotiation with its lenders. ASU 2020-04 is
effective March 12, 2020 through December 31, 2022 . We are currently assessing
the impact of ASU 2020-04 on our consolidated financial statements.
GLOSSARY OF TERMSThis 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. 73 -------------------------------------------------------------------------------- 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 Loan. 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 ("DTC"). 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 the U.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 a U.S. federal government
agency within the Department of Housing and Urban Development (HUD). It provides
mortgage insurance on loans made by FHA-approved lenders in compliance with FHA
guidelines throughout the United States .
Federal Housing Finance Agency ("FHFA"). A U.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 by Congress 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 owned U.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 the VA . Ginnie Mae securities are the only MBS to carry the full
faith and credit guarantee of the U.S. federal government.
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Government-Sponsored Enterprise ("GSE"). Certain entities established by the
U.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 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.
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 ("MSLs"). 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.
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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.
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.
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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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