National Semiconductor Earnings 2018-06-30
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________________________________________________________________
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2018
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
Commission file number: 001-35449
________________________________________________________________________________________________________
Nationstar Mortgage Holdings Inc.
(Exact name of registrant as specified in its charter)
Delaware | 45-2156869 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
8950 Cypress Waters Blvd, Coppell, TX | 75019 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (469) 549-2000
________________________________________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12(b)-2 of the Exchange Act.
Large Accelerated Filer | ¨ | Accelerated Filer | x |
Non-Accelerated Filer | ¨ | (Do not check if a smaller reporting company) | |
Smaller reporting company | ¨ | ||
Emerging growth company | ¨ | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Number of shares of common stock, $0.01 par value, outstanding as of July 30, 2018 was 98,178,069.
NATIONSTAR MORTGAGE HOLDINGS INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page | ||
PART I | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
2
PART I. Financial Information
Item 1. Financial Statements
NATIONSTAR MORTGAGE HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(millions of dollars)
June 30, 2018 | December 31, 2017 | ||||||
(unaudited) | |||||||
Assets | |||||||
Cash and cash equivalents | $ | 185 | $ | 215 | |||
Restricted cash | 310 | 360 | |||||
Mortgage servicing rights, $3,356 and $2,937 at fair value, respectively | 3,356 | 2,941 | |||||
Advances and other receivables, net of reserves of $294 and $284, respectively | 1,317 | 1,706 | |||||
Reverse mortgage interests, net of reserves of $117 and $115, respectively | 9,477 | 9,984 | |||||
Mortgage loans held for sale at fair value | 1,635 | 1,891 | |||||
Mortgage loans held for investment, net | 132 | 139 | |||||
Property and equipment, net of accumulated depreciation of $195 and $169, respectively | 123 | 121 | |||||
Derivative financial instruments at fair value | 62 | 65 | |||||
Other assets | 593 | 614 | |||||
Total assets | $ | 17,190 | $ | 18,036 | |||
Liabilities and Stockholders' Equity | |||||||
Unsecured senior notes, net | $ | 1,815 | $ | 1,874 | |||
Advance facilities, net | 516 | 855 | |||||
Warehouse facilities, net | 3,086 | 3,285 | |||||
Payables and accrued liabilities | 1,288 | 1,234 | |||||
MSR related liabilities - nonrecourse at fair value | 1,063 | 1,006 | |||||
Mortgage servicing liabilities | 27 | 41 | |||||
Derivative financial instruments at fair value | 9 | 5 | |||||
Other nonrecourse debt, net | 7,445 | 8,014 | |||||
Total liabilities | 15,249 | 16,314 | |||||
Commitments and contingencies (Note 15) | |||||||
Preferred stock at $0.01 par value - 300,000 thousand shares authorized, no shares issued and outstanding | — | — | |||||
Common stock at $0.01 par value - 1,000,000 thousand shares authorized, 109,915 thousand and 109,915 thousand shares issued, respectively | 1 | 1 | |||||
Additional paid-in-capital | 1,140 | 1,131 | |||||
Retained earnings | 949 | 731 | |||||
Treasury shares at cost, 11,752 thousand and 12,187 thousand shares, respectively | (150 | ) | (148 | ) | |||
Total Nationstar stockholders' equity | 1,940 | 1,715 | |||||
Non-controlling interests | 1 | 7 | |||||
Total stockholders' equity | 1,941 | 1,722 | |||||
Total liabilities and stockholders' equity | $ | 17,190 | $ | 18,036 | |||
See accompanying notes to the consolidated financial statements.
3
NATIONSTAR MORTGAGE HOLDINGS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(millions of dollars, except for earnings per share data)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Revenues: | |||||||||||||||
Service related, net | $ | 317 | $ | 213 | $ | 781 | $ | 496 | |||||||
Net gain on mortgage loans held for sale | 127 | 167 | 251 | 311 | |||||||||||
Total revenues | 444 | 380 | 1,032 | 807 | |||||||||||
Expenses: | |||||||||||||||
Salaries, wages and benefits | 177 | 182 | 357 | 374 | |||||||||||
General and administrative | 162 | 185 | 346 | 362 | |||||||||||
Total expenses | 339 | 367 | 703 | 736 | |||||||||||
Other income (expenses): | |||||||||||||||
Interest income | 140 | 139 | 285 | 278 | |||||||||||
Interest expense | (164 | ) | (188 | ) | (335 | ) | (381 | ) | |||||||
Other income (expenses) | (2 | ) | 7 | 6 | 6 | ||||||||||
Total other income (expenses), net | (26 | ) | (42 | ) | (44 | ) | (97 | ) | |||||||
Income before income tax expense (benefit) | 79 | (29 | ) | 285 | (26 | ) | |||||||||
Less: Income tax expense (benefit) | 21 | (10 | ) | 67 | (9 | ) | |||||||||
Net income (loss) | 58 | (19 | ) | 218 | (17 | ) | |||||||||
Less: Net income attributable to non-controlling interests | — | 1 | — | 1 | |||||||||||
Net income (loss) attributable to Nationstar | $ | 58 | $ | (20 | ) | $ | 218 | $ | (18 | ) | |||||
Net income (loss) per common share attributable to Nationstar: | |||||||||||||||
Basic | $ | 0.59 | $ | (0.20 | ) | $ | 2.22 | $ | (0.18 | ) | |||||
Diluted | $ | 0.59 | $ | (0.20 | ) | $ | 2.20 | $ | (0.18 | ) | |||||
Weighted average shares of common stock outstanding (in thousands): | |||||||||||||||
Basic | 98,203 | 97,752 | 98,037 | 97,672 | |||||||||||
Dilutive effect of stock awards | 927 | — | 1,086 | — | |||||||||||
Diluted | 99,130 | 97,752 | 99,123 | 97,672 | |||||||||||
See accompanying notes to the consolidated financial statements.
4
NATIONSTAR MORTGAGE HOLDINGS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Number of Shares Outstanding (in thousands) | Amount (millions of dollars) | |||||||||||||||||||||||||||||
Common Stock | Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Share Amount | Total Nationstar Stockholders' Equity | Non-controlling Interests | Total Equity | |||||||||||||||||||||||
Balance at January 1, 2017 | 97,497 | $ | 1 | $ | 1,122 | $ | 701 | $ | (147 | ) | $ | 1,677 | $ | 6 | $ | 1,683 | ||||||||||||||
Shares issued / (surrendered) under incentive compensation plan | 214 | — | (4 | ) | — | (1 | ) | (5 | ) | — | (5 | ) | ||||||||||||||||||
Share-based compensation | — | — | 9 | — | — | 9 | — | 9 | ||||||||||||||||||||||
Dividends to non-controlling interests | — | — | (5 | ) | — | — | (5 | ) | — | (5 | ) | |||||||||||||||||||
Net income (loss) | — | — | — | (18 | ) | — | (18 | ) | 1 | (17 | ) | |||||||||||||||||||
Balance at June 30, 2017 | 97,711 | $ | 1 | $ | 1,122 | $ | 683 | $ | (148 | ) | $ | 1,658 | $ | 7 | $ | 1,665 | ||||||||||||||
Balance at January 1, 2018 | 97,728 | $ | 1 | $ | 1,131 | $ | 731 | $ | (148 | ) | $ | 1,715 | $ | 7 | $ | 1,722 | ||||||||||||||
Shares issued / (surrendered) under incentive compensation plan | 435 | — | (4 | ) | — | (2 | ) | (6 | ) | — | (6 | ) | ||||||||||||||||||
Share-based compensation | — | — | 8 | — | — | 8 | — | 8 | ||||||||||||||||||||||
Dividends to non-controlling interests | — | — | 5 | — | — | 5 | (6 | ) | (1 | ) | ||||||||||||||||||||
Net income | — | — | — | 218 | — | 218 | — | 218 | ||||||||||||||||||||||
Balance at June 30, 2018 | 98,163 | $ | 1 | $ | 1,140 | $ | 949 | $ | (150 | ) | $ | 1,940 | $ | 1 | $ | 1,941 | ||||||||||||||
See accompanying notes to the consolidated financial statements.
5
NATIONSTAR MORTGAGE HOLDINGS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions of dollars)
Six Months Ended June 30, | |||||||
2018 | 2017 | ||||||
Operating Activities | |||||||
Net income (loss) attributable to Nationstar | $ | 218 | $ | (18 | ) | ||
Adjustments to reconcile net income (loss) to net cash attributable to operating activities: | |||||||
Net income attributable to non-controlling interests | — | 1 | |||||
Net gain on mortgage loans held for sale | (251 | ) | (311 | ) | |||
Reverse mortgage loan interest income | (237 | ) | (233 | ) | |||
Gain on sale of assets | (9 | ) | (8 | ) | |||
Provision for servicing reserves | 54 | 59 | |||||
Fair value changes and amortization/accretion of mortgage servicing rights/liabilities | (155 | ) | 233 | ||||
Fair value changes in excess spread financing | 74 | 15 | |||||
Fair value changes in mortgage servicing rights financing liability | 6 | (14 | ) | ||||
Amortization of premiums, net of discount accretion | 6 | 27 | |||||
Depreciation and amortization for property and equipment and intangible assets | 29 | 29 | |||||
Share-based compensation | 8 | 9 | |||||
Other loss | 2 | 9 | |||||
Repurchases of forward loan assets out of Ginnie Mae securitizations | (475 | ) | (599 | ) | |||
Mortgage loans originated and purchased for sale, net of fees | (10,639 | ) | (8,896 | ) | |||
Sales proceeds and loan payment proceeds for mortgage loans held for sale and held for investment | 11,500 | 10,006 | |||||
Excess tax deficiency from share-based compensation | (1 | ) | (1 | ) | |||
Changes in assets and liabilities: | |||||||
Advances and other receivables | 355 | 118 | |||||
Reverse mortgage interests | 1,326 | 769 | |||||
Other assets | 10 | 24 | |||||
Payables and accrued liabilities | 48 | (348 | ) | ||||
Net cash attributable to operating activities | 1,869 | 871 | |||||
Investing Activities | |||||||
Property and equipment additions, net of disposals | (31 | ) | (25 | ) | |||
Purchase of forward mortgage servicing rights, net of liabilities incurred | (123 | ) | (13 | ) | |||
Net payment related to acquisition of HECM related receivables | (1 | ) | — | ||||
Proceeds on sale of forward and reverse mortgage servicing rights | — | (2 | ) | ||||
Proceeds on sale of assets | 13 | 16 | |||||
Net cash attributable to investing activities | (142 | ) | (24 | ) | |||
Continued on following page.
See accompanying notes to the consolidated financial statements.
6
NATIONSTAR MORTGAGE HOLDINGS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(millions of dollars)
Six Months Ended June 30, | |||||||
2018 | 2017 | ||||||
Financing Activities | |||||||
(Decrease) increase in warehouse facilities | (199 | ) | 100 | ||||
Decrease in advance facilities | (339 | ) | (214 | ) | |||
Proceeds from issuance of HECM securitizations | 443 | 308 | |||||
Repayment of HECM securitizations | (423 | ) | (176 | ) | |||
Proceeds from issuance of participating interest financing in reverse mortgage interests | 184 | 355 | |||||
Repayment of participating interest financing in reverse mortgage interests | (1,368 | ) | (1,260 | ) | |||
Issuance of excess spread financing | 70 | — | |||||
Repayment of excess spread financing | (93 | ) | (109 | ) | |||
Repayment of nonrecourse debt – legacy assets | (6 | ) | (9 | ) | |||
Repurchase of unsecured senior notes | (62 | ) | (95 | ) | |||
Surrender of shares relating to stock vesting | (6 | ) | (5 | ) | |||
Debt financing costs | (7 | ) | (6 | ) | |||
Dividends to non-controlling interests | (1 | ) | (5 | ) | |||
Net cash attributable to financing activities | (1,807 | ) | (1,116 | ) | |||
Net decrease in cash, cash equivalents, and restricted cash | (80 | ) | (269 | ) | |||
Cash, cash equivalents, and restricted cash - beginning of period | 575 | 877 | |||||
Cash, cash equivalents, and restricted cash - end of period(1) | $ | 495 | $ | 608 | |||
Supplemental Disclosures of Cash Activities | |||||||
Cash paid for interest expense | $ | 373 | $ | 399 | |||
Net cash paid for income taxes | $ | 36 | $ | 70 | |||
(1) The following table provides a reconciliation of cash, cash equivalents and restricted cash to amount reported within the consolidated balance sheet. | |||||||
June 30, | |||||||
2018 | 2017 | ||||||
Cash and cash equivalents | $ | 185 | $ | 184 | |||
Restricted cash | 310 | 424 | |||||
Total cash, cash equivalents, and restricted cash | $ | 495 | $ | 608 | |||
See accompanying notes to the consolidated financial statements.
7
NATIONSTAR MORTGAGE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(millions of dollars, unless otherwise stated)
1. Nature of Business and Basis of Presentation
Nature of Business
Nationstar Mortgage Holdings Inc., a Delaware corporation, including its consolidated subsidiaries (collectively, "Nationstar", the "Company", "we", "us" or "our"), earns fees through the delivery of servicing, origination and transaction-based services related primarily to single-family residences throughout the United States.
Merger With WMIH Corp.
On February 12, 2018, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with WMIH Corp., a Delaware corporation ("WMIH"), and Wand Merger Corporation, a Delaware corporation and a wholly-owned subsidiary of WMIH ("Merger Sub"). On July 31, 2018, pursuant to the Merger Agreement, Merger Sub was merged with and into the Company (the “Merger”), with the Company continuing as a wholly-owned subsidiary of WMIH.
Pursuant to the terms of the Merger Agreement, at the effective time of the Merger (the "Effective Time") and as a result of the Merger, each share of the Company’s common stock issued and outstanding immediately prior to the Effective Time was converted into the right to receive, at the election of the holder of such share, (i) $18.00 per share in cash, without interest, or (ii) 12.7793 shares of validly issued, fully paid and nonassessable shares of WMIH common stock, par value $0.00001 per share ("WMIH Common Stock") (the "Merger Consideration"). The Merger Consideration was subject to automatic proration and adjustment pursuant to the Merger Agreement to ensure that the total amount of cash paid (excluding cash paid in lieu of fractional shares) equaled exactly $1,225,885,248.00. As a result of such automatic proration and adjustment based on the final election results, Company stockholders who made a valid election for cash consideration will receive cash for approximately 94% of their shares and will retain stock for approximately 6% of their shares. More specifically, for each share of Nationstar common stock held, $16.917371 in cash (approximately 94% of $18.00) and 0.7686 shares of common stock of WMIH (approximately 6% of 12.7793) will be distributed and Company stockholders who made a valid election for stock consideration (including those deemed to have made an election to receive stock consideration) will receive 12.7793 shares of common stock of WMIH for each share of Nationstar common stock held.
Pursuant to the Merger Agreement, immediately prior to the Effective Time, subject to certain exceptions, (i) each then-outstanding share of Nationstar restricted stock automatically vested in full and was converted into the right to receive the Merger Consideration, as elected by the holder thereof, and (ii) each then-outstanding Nationstar restricted stock unit, whether vested or unvested, was automatically vested in full, assumed by WMIH and converted into a WMIH restricted stock unit entitling the holder thereof to receive upon settlement the Merger Consideration, as elected by the holder, as described above with respect to shares of Nationstar restricted stock.
Basis of Presentation
The consolidated interim financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission ("SEC"). Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
The interim consolidated financial statements are unaudited; however, in the opinion of management, all adjustments considered necessary for a fair presentation of the results of the interim periods have been included. Certain prior period amounts have been reclassified to conform to the current period presentation. Dollar amounts are reported in millions, except per share data and other key metrics, unless otherwise noted.
The Company evaluated subsequent events through the date these interim consolidated financial statements were issued.
The Company describes its significant accounting policies in Note 2 of the notes to the consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2017. During the six months ended June 30, 2018, no significant changes were made to those accounting policies.
8
Basis of Consolidation
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and other entities in which the Company has a controlling financial interest, and those variable interest entities ("VIE") where the Company's wholly-owned subsidiaries are the primary beneficiaries. Assets and liabilities of VIEs and their respective results of operations are consolidated from the date that the Company became the primary beneficiary through the date the Company ceases to be the primary beneficiary. The Company applies the equity method of accounting to investments where it is able to exercise significant influence, but not control, over the policies and procedures of the entity and owns less than 50% of the voting interests. Investments in certain companies over which the Company does not exert significant influence are accounted for as cost method investments. Intercompany balances and transactions on consolidated entities have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates due to factors such as adverse changes in the economy, changes in interest rates, secondary market pricing for loans held for sale and derivatives, strength of underwriting and servicing practices, changes in prepayment assumptions, declines in home prices or discrete events adversely affecting specific borrowers, and such differences could be material.
Reclassification
Certain reclassifications have been made in the 2017 consolidated financial statements to conform to the 2018 presentation. Such reclassifications did not affect total revenues or net income. Refer to the Recent Accounting Guidance Adopted footnote for additional information regarding retrospective reclassifications related to Accounting Standards Update No. 2016-18 adopted in 2018.
Recent Accounting Guidance Adopted
Accounting Standards Update No. 2014-09, 2016-08, 2016-10, 2016-12 and 2016-20, collectively implemented as Financial Accounting Standard Board ("FASB") Accounting Standards Codification ("ASC") Topic 606 ("ASC 606") Revenue from Contracts with Customers, provides guidance for revenue recognition. This ASC’s core principle requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects consideration to which the company expects to be entitled in exchange for those goods or services. The standard also clarifies the principal versus agent considerations, providing the evaluation must focus on whether the entity has control of the goods or services before they are transferred to the customer. The new standard permits the use of either the modified retrospective or full retrospective transition method. The Company's revenue is generated from loan servicing, loan originations, and services provided by Xome. Servicing revenue is comprised of servicing fees and other ancillary fees in connection with the Company's servicing activities as well as fees earned under subservicing arrangements. Origination revenue is comprised of fee income earned at origination of a loan, interest income earned for the period the loans are held, and gain on sale on loans upon disposition of the loan. Xome's revenue is comprised of income earned from real estate exchange, real estate services and real estate software as a service. The Company has performed a review of the new guidance as compared to its current accounting policies, and evaluated all services rendered to its customers as well as underlying contracts to determine the impact of this standard to its revenue recognition process. The majority of services rendered by the Company in connection with originations and servicing are not within the scope of ASC 606. However, all revenues from Xome fall within the scope of ASC 606. Xome's operations are comprised of Exchange, Services and Software as a Service ("SaaS").
• | Exchange is a national technology-enabled platform that manages and sells residential properties through its Xome.com platform. Revenue-generating activities include commission and buyer’s premium of winning bids on auctioned real estate owned ("REO") and short sale properties. Revenue is recognized when performance obligation is completed, which is at the closing of real estate transactions and transfer of ownership to the buyer. |
• | Services connects the major touch points of the real estate transactions process by providing title, escrow and collateral valuation services for purchase, refinance and default transactions. Major revenue-generating activities include title and escrow services, and valuation services. Revenue is recognized when performance obligation is completed, which is when services are rendered to customers. |
• | SaaS includes Company’s software as a service platform providing integrated technology, media and data solutions to mortgage servicers, originators and multiple listing service ("MLS") organizations and associations. Revenue-generating activities include software and platform system access and use, system implementation, software maintenance and support, data services and any additional customized enhancement. Revenue is recognized when performance obligation is completed, which is generally recognized on straight-line basis over the contractual terms. Additionally, any additional fees owed due to usage metrics in excess of the monthly minimum will be recognized each month under the usage-based royalties guidance of ASC 606. |
9
Upon completion of its review of relevant contracts, the Company made a determination that there was no material impact to revenue recognition upon adoption of the new standard. Additionally, the Company identified and implemented changes to its accounting policies and practices, business processes, and controls to support the new revenue recognition standard. The Company adopted the standard on January 1, 2018 and there is no material impact recorded to revenue in 2018.
Accounting Standards Update No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), relates to the Statement of Cash Flows (Topic 230) and is intended to provide specific guidance to reduce diversity in practice. ASU 2016-15 addresses the following eight cash flow classification issues: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of life insurance claims, (5) proceeds from the settlement of corporate owned life insurance policies, including bank-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in securitization transactions and (8) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for annual reporting period beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. The Company adopted ASU 2016-15 in the first quarter of 2018 and determined that the implementation of this standard has no impact on the Company’s consolidated statement of cash flows.
Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash (ASU 2016-18), requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. ASU 2016-18 is effective for annual reporting period beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. The Company adopted ASU 2016-18 in the first quarter of 2018 and retrospectively applied the guidance to all periods presented. As a result, the Company includes restricted cash with cash and cash equivalents when reconciling the beginning and end of period total amounts shown on the consolidated statements of cash flows, and the Company no longer presents changes in restricted cash as a component of financing activities.
Accounting Standards Update No. 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-1), ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Among other things, ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Furthermore, equity investments without readily determinable fair values are to be assessed for impairment using a quantitative approach. ASU 2016-01 is effective for interim period beginning after December 15, 2017, and requires a modified retrospective approach to adoption. The Company adopted ASU 2016-01 in the first quarter of 2018 and determined that the implementation of this standard has no significant impact on the Company’s consolidated financial statements.
Recent Accounting Guidance Not Yet Adopted
Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), No.2018-10, Codification Improvements to Topic 842, Leases (ASU 2018-10), and No. 2018-11, Leases (Topic 842): Targeted Improvements (ASU 2018-11), primarily impact lessee accounting by requiring the recognition of a right-of-use asset and a corresponding lease liability on the balance sheet for long-term lease agreements. ASU 2016-02 requires the recognition of a lease liability that is equal to the present value of all reasonably certain lease payments. The right-of-use asset will be based on the liability, subject to adjustment for initial direct costs. Lease agreements with terms 12 months or less are permitted to be excluded from the balance sheet. In general, leases will be amortized on a straight-line basis with the exception of finance lease agreements. ASU 2018-10 and ASU 2018-11 affect narrow aspects of the guidance issued in the amendments in ASU 2016-02. ASU 2018-11 specifically relieves companies of the requirement to present prior comparative years' result when they adopt ASU 2016-02 and gives companies the option to recognize the cumulative effect of applying ASU 2016-02 to lease assets and liabilities as an adjustment to the opening balance of retained earnings. ASU 2016-02, ASU 2018-10, and ASU 2018-11 are effective for the Company for its interim periods beginning after December 15, 2018, with early adoption permitted. The Company does not expect adoption of ASU 2016-02, ASU 2018-10, and ASU 2018-11 to have a material impact on its consolidated balance sheets and statements of operations based on the Company's preliminary analysis.
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Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326) (ASU 2016-13), requires expected credit losses for financial instruments held at the reporting date to be measured based on historical experience, current conditions and reasonable and supportable forecasts. The update eliminates the probable initial recognition threshold in current GAAP and instead reflects an entity’s current estimate of all expected credit losses. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss. ASU 2016-13 is effective for interim periods beginning after December 15, 2019. The Company is currently evaluating the potential impact of ASU 2016-13 on its consolidated financial statements.
Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment, simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in today’s two-step impairment test under ASC Topic 350 Intangibles - Goodwill and Other. ASU 2017-04 is effective for the Company for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. ASU 2017-04 will be adopted prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the potential impact of ASU 2017-04 on its consolidated financial statements.
2. Mortgage Servicing Rights ("MSRs") and Related Liabilities
The following table sets forth the carrying value of Company's MSRs and the related liabilities.
MSRs and Related Liabilities | June 30, 2018 | December 31, 2017 | |||||
Mortgage servicing rights - fair value and amortized cost(1) | $ | 3,356 | $ | 2,941 | |||
Mortgage servicing liabilities - amortized cost | $ | 27 | $ | 41 | |||
Excess spread financing - fair value | $ | 1,047 | $ | 996 | |||
Mortgage servicing rights financing - fair value | 16 | 10 | |||||
MSR related liabilities - nonrecourse at fair value | $ | 1,063 | $ | 1,006 | |||
(1) Amount as of December 31, 2017 includes $4 of reverse MSRs at amortized cost. There were no reverse MSRs as of June 30, 2018.
Mortgage Servicing Rights
The Company owns and records at fair value the rights to service traditional residential mortgage ("forward") loans for others either as a result of purchase transactions or from the retained servicing associated with the sales and securitizations of loans originated. MSRs are comprised of servicing rights related to both agency and non-agency loans.
11
The following table sets forth the activities of forward MSRs.
Six Months Ended June 30, | |||||||
MSRs - Fair Value | 2018 | 2017 | |||||
Fair value - beginning of period | $ | 2,937 | $ | 3,160 | |||
Additions: | |||||||
Servicing retained from mortgage loans sold | 139 | 103 | |||||
Purchases of servicing rights | 132 | 13 | |||||
Dispositions: | |||||||
Sales of servicing assets(1) | 4 | 2 | |||||
Changes in fair value: | |||||||
Changes in valuation inputs or assumptions used in the valuation model | 283 | (74 | ) | ||||
Other changes in fair value | (139 | ) | (158 | ) | |||
Fair value - end of period | $ | 3,356 | $ | 3,046 | |||
(1) Amounts are related to the sale of nonperforming loans which have a negative MSR.
From time to time, the Company sells its ownership interest in certain MSRs and is retained as the subservicer for the sold assets. The Company has evaluated the sale accounting requirements related to these transactions, including the Company's continued involvement as the subservicer, and concluded that these transactions qualify for sale accounting treatment.
MSRs measured at fair value are segregated between credit sensitive and interest sensitive pools. Credit sensitive pools are primarily impacted by borrower performance under specified repayment terms, which most directly impacts involuntary prepayments and delinquency rates. Interest sensitive pools are primarily impacted by changes in forecasted interest rates, which in turn impact voluntary prepayment speeds. The Company assesses whether acquired portfolios are more credit sensitive or interest sensitive in nature on the date of acquisition. Numerous factors are considered in making this assessment, including loan-to-value ratios, FICO scores, percentage of portfolio previously modified, portfolio seasoning and similar criteria. The determination between credit sensitive and interest sensitive for a pool is made at the date of acquisition and no subsequent changes are made.
Credit sensitive portfolios generally consist of higher delinquency, single-family non-conforming residential forward mortgage loans serviced for agency and non-agency investors. Interest sensitive portfolios generally consist of lower delinquency, single-family conforming residential forward mortgage loans for agency investors.
The following table provides a breakdown of credit sensitive and interest sensitive unpaid principal balance ("UPB") for the Company's forward MSRs.
MSRs - Sensitivity Pools | June 30, 2018 | December 31, 2017 | |||||||||||||
UPB | Fair Value | UPB | Fair Value | ||||||||||||
Credit sensitive | $ | 153,552 | $ | 1,695 | $ | 167,605 | $ | 1,572 | |||||||
Interest sensitive | 124,553 | 1,661 | 113,775 | 1,365 | |||||||||||
Total | $ | 278,105 | $ | 3,356 | $ | 281,380 | $ | 2,937 | |||||||
The Company used the following key weighted-average inputs and assumptions in estimating the fair value of MSRs.
Credit Sensitive | June 30, 2018 | December 31, 2017 | |||
Discount rate | 11.4 | % | 11.4 | % | |
Total prepayment speeds | 11.7 | % | 15.2 | % | |
Expected weighted-average life | 6.6 years | 5.7 years | |||
Interest Sensitive | |||||
Discount rate | 9.2 | % | 9.2 | % | |
Total prepayment speeds | 9.8 | % | 10.7 | % | |
Expected weighted-average life | 7.0 years | 6.7 years | |||
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The following table shows the hypothetical effect on the fair value of the MSRs when applying certain unfavorable variations of key assumptions to these assets for the dates indicated.
Discount Rate | Total Prepayment Speeds | ||||||||||||||
MSRs - Hypothetical Sensitivities | 100 bps Adverse Change | 200 bps Adverse Change | 10% Adverse Change | 20% Adverse Change | |||||||||||
June 30, 2018 | |||||||||||||||
Mortgage servicing rights | $ | (130 | ) | $ | (251 | ) | $ | (119 | ) | $ | (231 | ) | |||
December 31, 2017 | |||||||||||||||
Mortgage servicing rights | $ | (108 | ) | $ | (208 | ) | $ | (118 | ) | $ | (227 | ) | |||
These hypothetical sensitivities should be evaluated with care. The effect on fair value of a 10% variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.
Mortgage Servicing Liabilities ("MSL") - Amortized Cost
The Company services and subservices certain Home Equity Conversion Mortgage ("HECM") reverse mortgage loans with an unpaid principal balance of $32,264 and $35,112 as of June 30, 2018 and December 31, 2017, respectively. Mortgage servicing liabilities had an ending balance of $27 and $41 as of June 30, 2018 and December 31, 2017, respectively. For the six months ended June 30, 2018, the Company accreted $11 of the MSL and recorded other MSL adjustments of $3. The fair value of MSL was $(5) and $34 as of June 30, 2018 and December 31, 2017, respectively. The fair value of MSL as of June 30, 2018 was primarily driven by net excess payments made to a government sponsored entity which will be reimbursed in the future. Based on management's assessment at June 30, 2018, no increased obligation was needed.
Excess Spread Financing - Fair Value
In order to finance the acquisition of certain MSRs on various loan pools ("Portfolios"), the Company has entered into sale and assignment agreements with a third-party associated with funds and accounts under management of BlackRock Financial Management Inc. ("BlackRock"), a third-party associated with funds and accounts under management of Värde Partners, Inc. ("Varde") and with certain affiliated entities formed and managed by New Residential Investment Corp. ("New Residential"), which is managed by an affiliate of Fortress Investment Group LLC ("Fortress"). The Company sold to such entities the right to receive a specified percentage of the excess cash flow generated from the Portfolios after receipt of a fixed base servicing fee per loan. Servicing fees associated with traditional MSRs can be segregated into a contractually specified base servicing fee component and an excess servicing fee. The base servicing fee, along with ancillary income, is designed to cover costs incurred to service the specified pool plus a reasonable profit margin. The remaining servicing fee is considered excess. The Company retains all the base servicing fee and ancillary revenues associated with servicing the Portfolios and retains a portion of the excess servicing fee. The Company continues to be the servicer of the Portfolios and provides all servicing and advancing functions.
Contemporaneous with the above, the Company entered into refinanced loan obligations with New Residential, BlackRock and Varde. Should the Company refinance any loan in the Portfolios, subject to certain limitations, it will be required to transfer the new loan or a replacement loan of similar economic characteristics into the Portfolios. The new or replacement loan will be governed by the same terms set forth in the sale and assignment agreement described above, which is the primary driver of the recapture rate assumption.
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The range of key assumptions used in the Company's valuation of excess spread financing are as follows.
Excess Spread Financing | Prepayment Speeds | Average Life (Years) | Discount Rate | Recapture Rate | |||
June 30, 2018 | |||||||
Low | 6.0% | 5.2 | 8.5% | 8.2% | |||
High | 15.1% | 8.1 | 14.0% | 27.3% | |||
Weighted-average | 11.1% | 6.5 | 10.6% | 18.0% | |||
December 31, 2017 | |||||||
Low | 6.2% | 4.4 | 8.5% | 7.2% | |||
High | 21.2% | 6.9 | 14.1% | 30.0% | |||
Weighted-average | 13.7% | 5.9 | 10.8% | 18.7% | |||
The following table shows the hypothetical effect on the excess spread financing fair value when applying certain unfavorable variations of key assumptions to these liabilities for the dates indicated.
Discount Rate | Prepayment Speeds | ||||||||||||||
Excess Spread Financing - Hypothetical Sensitivities | 100 bps Adverse Change | 200 bps Adverse Change | 10% Adverse Change | 20% Adverse Change | |||||||||||
June 30, 2018 | |||||||||||||||
Excess spread financing | $ | 40 | $ | 83 | $ | 31 | $ | 64 | |||||||
December 31, 2017 | |||||||||||||||
Excess spread financing | $ | 37 | $ | 78 | $ | 34 | $ | 71 | |||||||
As the cash flow assumptions utilized in determining the fair value amounts in the excess spread financing are based on the related cash flow assumptions utilized in the financed MSRs, any fair value changes recognized in the MSRs would inherently have an inverse impact on the carrying amount of the related excess spread financing. For example, while an increase in discount rates would negatively impact the value of the Company's MSRs, it would reduce the carrying value of the associated excess spread financing liability.
These hypothetical sensitivities should be evaluated with care. The effect on fair value of a 10% variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects. Also, a positive change in the above assumptions would not necessarily correlate with the corresponding decrease in the net carrying amount of the excess spread financing.
Mortgage Servicing Rights Financing - Fair Value
From December 2013 through June 2014, the Company entered into agreements to sell a contractually specified base servicing fee component of certain MSRs and servicing advances under specified terms to a joint venture capitalized by New Residential and certain unaffiliated third-party investors. The Company continues to be the named servicer and, for accounting purposes, ownership of the mortgage servicing rights continues to reside with the Company. Accordingly, the Company records the MSRs and a MSR financing liability associated with this transaction in its consolidated balance sheets. See Note 18. Transactions with Affiliates for additional information.
The following table sets forth the weighted average assumptions used in the valuation of the mortgage servicing rights financing liability.
Mortgage Servicing Rights Financing Assumptions | June 30, 2018 | December 31, 2017 | |||
Advance financing rates | 4.1 | % | 3.5 | % | |
Annual advance recovery rates | 18.9 | % | 23.2 | % | |
14
The following table sets forth the items comprising revenues associated with servicing loan portfolios.
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
Servicing Revenue | 2018 | 2017 | 2018 | 2017 | |||||||||||
Contractually specified servicing fees(1) | $ | 245 | $ | 253 | $ | 495 | $ | 508 | |||||||
Other service-related income(1)(2) | 28 | 46 | 56 | 86 | |||||||||||
Incentive and modification income(1) | 18 | 21 | 33 | 43 | |||||||||||
Late fees(1) | 22 | 22 | 46 | 46 | |||||||||||
Reverse servicing fees | 14 | 13 | 33 | 27 | |||||||||||
Mark-to-market adjustments(2)(3) | 19 | (84 | ) | 171 | (116 | ) | |||||||||
Counterparty revenue share(4) | (50 | ) | (59 | ) | (95 | ) | (121 | ) | |||||||
Amortization, net of accretion(5) | (48 | ) | (66 | ) | (96 | ) | (127 | ) | |||||||
Total servicing revenue | $ | 248 | $ | 146 | $ | 643 | $ | 346 | |||||||
(1) Amounts include subservicing related revenues.
(2) In the fourth quarter of 2017, the Company reevaluated presentation of adjustments related to certain Ginnie Mae early buyout activities and reclassified $6 and $12 from other service-related income to mark-to-market adjustments for the three and six months ended June 30, 2017, respectively. Total servicing revenue was not affected by this reclassification adjustment.
(3) Mark-to-market ("MTM") includes fair value adjustments on MSR, excess spread financing and MSR financing liabilities. The amount of MSR MTM reflected is net of cumulative incurred losses related to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio and these incurred losses have been transferred to reserves on advances and other receivables. These cumulative incurred losses totaled $22 and $22 for the three months ended June 30, 2018 and 2017, respectively, and $34 and $37 for the six months ended June 30, 2018 and 2017, respectively.
(4) Counterparty revenue share represents the excess servicing fee that the Company pays to the counterparties under the excess spread financing arrangements and the payments made associated with MSRs financing arrangements.
(5) Amortization is net of excess spread accretion of $37 and $40 for the three months ended June 30, 2018 and 2017, respectively and $67 and $82 for the six months ended June 30, 2018 and 2017, respectively.
3. Advances and Other Receivables, Net
Advances and other receivables, net consists of the following.
June 30, 2018 | December 31, 2017 | ||||||
Servicing advances | $ | 1,248 | $ | 1,599 | |||
Receivables from agencies, investors and prior servicers | 363 | 391 | |||||
Reserves | (294 | ) | (284 | ) | |||
Total advances and other receivables, net | $ | 1,317 | $ | 1,706 | |||
The Company, as a loan servicer, is contractually responsible to advance funds on behalf of the borrower and investor primarily for loan principal and interest, property taxes and hazard insurance, and foreclosure costs. Advances are primarily recovered through reimbursement from the investor, proceeds from sale of loan collateral, or mortgage insurance claims. Reserves for advances and other receivables on loans transferred out of the MSR portfolio are established within advances and other receivables.
The Company estimates and records an asset for estimated recoveries to be collected from prior servicers for their respective portion of the losses associated with the underlying loans that were not serviced in accordance with established guidelines. Receivables from prior servicers totaled $136 and $134 for the Company's forward loan portfolio at June 30, 2018 and December 31, 2017, respectively.
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The following table sets forth the activities of the reserves for advances and other receivables.
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
Reserves for Advances and Other Receivables | 2018 | 2017 | 2018 | 2017 | |||||||||||
Balance - beginning of period | $ | 277 | $ | 208 | $ | 284 | $ | 184 | |||||||
Provision and other additions(1) | 38 | 36 | 60 | 76 | |||||||||||
Write-offs | (21 | ) | (8 | ) | (50 | ) | (24 | ) | |||||||
Balance - end of period | $ | 294 | $ | 236 | $ | 294 | $ | 236 | |||||||
(1) A provision of $22 and $22 was recorded through the MTM adjustments in service related revenues for the three months ended June 30, 2018 and 2017, respectively, and $34 and $37 for the six months ended June 30, 2018 and 2017, respectively, for inactive and liquidated loans that are no longer part of the MSR portfolio. Other additions represent reclassifications of required reserves from other balance sheet accounts.
4. Reverse Mortgage Interests, Net
Reverse mortgage interests, net consists of the following.
June 30, 2018 | December 31, 2017 | ||||||
Participating interests in HECM mortgage-backed securities ("HMBS") | $ | 6,518 | $ | 7,107 | |||
Other interests securitized | 908 | 912 | |||||
Unsecuritized interests | 2,168 | 2,080 | |||||
Reserves | (117 | ) | (115 | ) | |||
Total reverse mortgage interests, net | $ | 9,477 | $ | 9,984 | |||
Participating Interests in HMBS
Participating interests in HMBS consist of the Company's reverse mortgage interests in HECM loans which have been transferred to Ginnie Mae ("GNMA") and subsequently securitized through the issuance of HMBS. During the six months ended June 30, 2018 and 2017, a total of $174 and $338 in UPB were transferred to Ginnie Mae and securitized, respectively.
Other Interests Securitized
Other interests securitized consist of reverse mortgage interests that no longer meet HMBS program eligibility criteria and have been repurchased out of HMBS. These reverse mortgage interests have subsequently been transferred to private securitization trusts and are accounted for as a secured borrowing. During the six months ended June 30, 2018, a total of $443 UPB was securitized through Trust 2018-1 and a total of $284 UPB from Trust 2016-2 and Trust 2016-3 were called and debt extinguished. Refer to Other Nonrecourse Debt in Note 8, Indebtedness for additional information.
Unsecuritized Interests
Unsecuritized interests in reverse mortgages consists of the following.
June 30, 2018 | December 31, 2017 | ||||||
Repurchased HECM loans | $ | 1,749 | $ | 1,662 | |||
HECM related receivables | 332 | 311 | |||||
Funded borrower draws not yet securitized | 62 | 82 | |||||
REO related receivables | 25 | 25 | |||||
Total unsecuritized interests | $ | 2,168 | $ | 2,080 | |||
16
Unsecuritized interests include repurchased HECM loans for which the Company is required to repurchase from the HMBS pool when the outstanding principal balance of the HECM loan is equal to or greater than 98% of the maximum claim amount established at origination in accordance with HMBS program guidelines. The Company repurchased a total of $2,109 and $2,208 HECM loans out of Ginnie Mae HMBS securitizations during the six months ended June 30, 2018 and 2017, respectively, of which $444 and $550 were subsequently assigned to a third party in accordance with applicable servicing agreements, respectively. To the extent a loan is not subject to applicable servicing agreements and assigned to a third party, the loan is either subject to assignment to HUD, per contractual obligations with Ginnie Mae, liquidated via a payoff from the borrower, or liquidated via a foreclosure according to the terms of the underlying mortgage.
The Company also estimates and records an asset for probable recoveries from prior servicers for their respective portion of the losses associated with the underlying loans that were not serviced in accordance with established guidelines. Receivables from prior servicers totaled $36 and $22 for the Company's reverse loan portfolio at June 30, 2018 and December 31, 2017, respectively.
Purchase of Reverse Mortgage Servicing Rights and Interests
On December 1, 2016, the Company executed an asset purchase agreement with a large financial institution and acquired servicing rights and reverse mortgage interests. As part of the asset purchase agreement, the Company agreed to acquire remaining components of the reverse portfolio, primarily including servicing of whole HECM loans and REO advances upon receiving regulatory approval. In September 2017, the Company executed a mortgage servicing rights purchase agreement and a subservicing agreement to acquire servicing rights and subservicing contracts on the remaining reverse portfolio. In March 2018, the Company executed an asset purchase agreement to acquire reverse mortgage interests on the subservicing contracts acquired in September 2017 referenced above, acquiring $467 UPB of participating interests in HECM loans and $460 UPB of related HMBS obligations. The Company performed a relative fair value allocation upon the March 2018 acquisition, resulting in the aforementioned assets and liabilities in addition to $2 of HECM related receivables and $7 of purchase discount within unsecuritized interests. In addition, the Company paid net proceeds of $1 for the acquisition of these assets and assumption of related liabilities.
Reserves for Reverse Mortgage Interests
The Company records reserves related to reverse mortgage interests based on potential unrecoverable costs and loss exposures expected to be realized. Recoverability is determined based on the Company’s ability to meet U.S. Department of Housing and Urban Development ("HUD") servicing guidelines and is viewed as two different categories of expenses: financial and operational. Financial exposures are defined as the cost of doing business related to servicing the HECM product and include potential unrecoverable costs primarily based on HUD claim guidelines related to recoverable expenses and unfavorable changes in the appraised value of the loan collateral. Operational exposures are defined as unrecoverable debenture interest curtailments imposed for missed Federal Housing Administration ("FHA") specified servicing timelines.
The activity of the reserves for reverse mortgage interests is set forth below.
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
Reserves for reverse mortgage interests | 2018 | 2017 | 2018 | 2017 | |||||||||||
Balance - beginning of period | $ | 134 | $ | 137 | $ | 115 | $ | 131 | |||||||
Provision (release), net | (6 | ) | 14 | 20 | 22 | ||||||||||
Write-offs | (11 | ) | (2 | ) | (18 | ) | (4 | ) | |||||||
Balance - end of period | $ | 117 | $ | 149 | $ | 117 | $ | 149 | |||||||
Reverse Mortgage Interest Income
The Company accrues interest income for its participating interest in reverse mortgages based on the stated rates underlying HECM loans and FHA guidelines. Total interest earned on the Company's reverse mortgage interests was $118 and $115 for the three months ended June 30, 2018 and 2017, respectively, and $237 and $233 for the six months ended June 30, 2018 and 2017, respectively.
In connection with previous reverse mortgage portfolio acquisitions, the Company recorded a purchase discount within unsecuritized interests. During the three and six months ended June 30, 2018, the Company accreted $6 and $12, respectively, of the purchase discount to interest income related to the above referenced transactions. There was $84 purchase discount remaining related to the above referenced transactions as of June 30, 2018.
17
5. Mortgage Loans Held for Sale and Investment
Mortgage Loans Held for Sale
The Company maintains a strategy of originating and purchasing residential mortgage loan products primarily for the purpose of selling to government-sponsored enterprises ("GSEs") or other third-party investors in the secondary market on a servicing-retained basis. The Company focuses on assisting customers currently in the Company's servicing portfolio with refinancing of loans or new home purchases. Generally, all newly originated mortgage loans held for sale are securitized and transferred to GSEs or delivered to third-party purchasers shortly after origination on a servicing-retained basis.
Mortgage loans held for sale are recorded at fair value as set forth below.
June 30, 2018 | December 31, 2017 | ||||||
Mortgage loans held for sale – UPB | $ | 1,586 | $ | 1,837 | |||
Mark-to-market adjustment(1) | 49 | 54 | |||||
Total mortgage loans held for sale | $ | 1,635 | $ | 1,891 | |||
(1) The mark-to-market adjustment is recorded in net gain on mortgage loans held for sale in the consolidated statements of operations.
The Company accrues interest income as earned and places loans on non-accrual status after any portion of principal or interest has been delinquent for more than 90 days. Accrued interest is recorded as interest income in the consolidated statements of operations.
The total UPB of mortgage loans held for sale on non-accrual status was as follows for the dates indicated.
June 30, 2018 | December 31, 2017 | ||||||||||||||
Mortgage Loans Held for Sale - UPB | UPB | Fair Value | UPB | Fair Value | |||||||||||
Non-accrual | $ | 57 | $ | 53 | $ | 66 | $ | 64 | |||||||
From time to time, the Company exercises its right to repurchase individual delinquent loans in Ginnie Mae securitization pools to minimize interest spread losses, to re-pool into new Ginnie Mae securitizations, or to otherwise sell to third-party investors. During the six months ended June 30, 2018 and 2017, the Company repurchased $109 and $144 of delinquent Ginnie Mae loans, respectively, and securitized or sold to third-party investors $135 and $172 of previously repurchased loans, respectively. As of June 30, 2018 and 2017, $92 and $33 of the repurchased loans have re-performed and were held in accrual status, respectively, and remaining balances continue to be held under a nonaccrual status.
The total UPB of mortgage loans held for sale for which the Company has begun formal foreclosure proceedings was $40 and $51 as of June 30, 2018 and December 31, 2017, respectively.
18
The following table details a roll forward of the change in the account balance of mortgage loans held for sale.
Six Months Ended June 30, | |||||||
Mortgage loans held for sale | 2018 | 2017 | |||||
Balance - beginning of period | $ | 1,891 | $ | 1,788 | |||
Mortgage loans originated and purchased, net of fees | 10,630 | 8,887 | |||||
Loans sold | (11,377 | ) | (9,753 | ) | |||
Repurchase of loans out of Ginnie Mae securitizations | 475 | 599 | |||||
Transfer of mortgage loans held for sale to advances/accounts receivable, net related to claims(1) | (6 | ) | (8 | ) | |||
Net transfer of mortgage loans held for sale from REO in other assets(2) | 12 | 11 | |||||
Changes in fair value | 1 | 10 | |||||
Other purchase-related activities(3) | 9 | 9 | |||||
Balance - end of period | $ | 1,635 | $ | 1,543 | |||
(1) Amounts are comprised of claims made on certain government insured mortgage loans upon completion of the REO sale.
(2) Net amounts are comprised of REO in the sales process, which are transferred to other assets, and certain government insured mortgage REO, which are transferred from other assets upon completion of the sale so that the claims process can begin.
(3) Amounts are comprised primarily of non-Ginnie Mae loan purchases and buyouts.
For the six months ended June 30, 2018 and 2017, the Company received proceeds of $11,491 and $10,007, respectively, on the sale of mortgage loans held for sale, resulting in gains of $114 and $254, respectively.
The Company has the right to repurchase any individual loan in a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. The majority of Ginnie Mae repurchased loans are repurchased solely with the intent to re-pool into new Ginnie Mae securitizations upon re-performance of the loan or to otherwise sell to third-party investors. Therefore, these loans are classified as held for sale. The amounts repurchased out of Ginnie Mae pools, as presented above, are primarily in connection with loan modifications and loan resolution activity as part of the Company's contractual obligations as the servicer of the loans.
Mortgage Loans Held for Investment, Net
The following sets forth the composition of mortgage loans held for investment, net.
June 30, 2018 | December 31, 2017 | ||||||
Mortgage loans held for investment, net – UPB | $ | 183 | $ | 193 | |||
Transfer discount: | |||||||
Non-accretable | (37 | ) | (41 | ) | |||
Accretable | (13 | ) | (12 | ) | |||
Allowance for loan losses | (1 | ) | (1 | ) | |||
Total mortgage loans held for investment, net | $ | 132 | $ | 139 | |||
19
The changes in accretable yield discount on loans transferred to mortgage loans held for investment, net are set forth below.
Six Months Ended June 30, | |||||||
Accretable Yield Discount | 2018 | 2017 | |||||
Balance - beginning of the period | $ | (12 | ) | $ | (13 | ) | |
Accretion | 1 | 1 | |||||
Reclassifications from non-accretable discount | (2 | ) | (2 | ) | |||
Balance - end of the period | $ | (13 | ) | $ | (14 | ) | |
The Company may periodically modify the terms of any outstanding mortgage loans held for investment for loans that are either in default or in imminent default. Modifications often involve reduced payments by borrowers, modification of the original terms of the mortgage loans, forgiveness of debt and/or modified servicing advances. As a result of the volume of modification agreements entered into, the estimated average outstanding life in this pool of mortgage loans has been extended. The Company records interest income on the transferred loans on a level-yield method. To maintain a level-yield on these transferred loans over the estimated extended life, the Company reclassified to accretable yield discount approximately $2 and $2 of transfer discount designated as reserves for future loss, for the six months ended June 30, 2018 and 2017, respectively. No provision for reserves was required for the six months ended June 30, 2018 and 2017, respectively, as the fair value of the underlying collateral exceeded the carrying value of the loans, net of the non-accretable discount.
The total UPB of mortgage loans held for investment for which the Company has begun formal foreclosure proceedings was $19 and $22 as of June 30, 2018 and December 31, 2017, respectively.
6. Other Assets
Other assets consist of the following.
June 30, 2018 | December 31, 2017 | ||||||
Loans subject to repurchase right from Ginnie Mae | $ | 206 | $ | 218 | |||
Accrued revenues | 128 | 148 | |||||
Goodwill | 71 | 72 | |||||
Prepaid expenses | 31 | 27 | |||||
Deposits | 21 | 19 | |||||
Real estate owned (REO), net | 18 | 23 | |||||
Intangible assets | 14 | 19 | |||||
Receivables from affiliates, net | 6 | 6 | |||||
Other | 98 | 82 | |||||
Total other assets | $ | 593 | $ | 614 | |||
Loans Subject to Repurchase Right from Ginnie Mae
Forward loans are sold to Ginnie Mae in conjunction with the issuance of mortgage backed securities. The Company, as the issuer of the mortgage backed securities, has the unilateral right to repurchase any individual loan in a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. Once the Company has the unilateral right to repurchase a delinquent loan, it has effectively regained control over the loan and recognizes these rights to the loan on its consolidated balance sheets and establishes a corresponding repurchase liability regardless of the Company’s intention to repurchase the loan.
Goodwill
In February 2018, the Company sold the software-based business of Xome's Real Estate Digital ("RED") business. In connection with the sale, the Company wrote off $1 goodwill.
Accrued Revenues
Accrued revenues are primarily comprised of service fees earned but not received based upon the terms of the Company's servicing and subservicing agreements.
20
REO, Net
REO, net includes $11 and $15 of REO-related receivables with government insurance at June 30, 2018 and December 31, 2017, respectively, limiting loss exposure to the Company.
Other
Other primarily includes tax receivables and non-advance related accounts receivable due from investors.
7. Derivative Financial Instruments
Derivative instruments utilized by the Company primarily include interest rate lock commitments ("IRLCs"), Loan Purchase Commitments ("LPCs"), forward Mortgage Backed Securities ("MBS") trades, Eurodollar and Treasury futures and interest rate swap agreements.
Associated with the Company's derivatives are $6 and $1 in collateral deposits on derivative instruments recorded in other assets on the Company's consolidated balance sheets as of June 30, 2018 and December 31, 2017, respectively. The Company does not offset fair value amounts recognized for derivative instruments with amounts collected and/or deposited on derivative instruments in its consolidated balance sheets.
21
The following table provides the outstanding notional balances, fair values of outstanding positions and recorded gains/(losses).
Expiration Dates | Outstanding Notional | Fair Value | Recorded Gains / (Losses) | ||||||||||
Six Months Ended June 30, 2018 | |||||||||||||
Assets | |||||||||||||
Mortgage loans held for sale | |||||||||||||
Loan sale commitments | 2018 | $ | 368 | $ | 7.2 | $ | 7.1 | ||||||
Derivative financial instruments | |||||||||||||
IRLCs | 2018 | 1,778 | 60.2 | 0.9 | |||||||||
Forward sales of MBS | 2018 | 568 | 0.4 | (2.0 | ) | ||||||||
LPCs | 2018 | 271 | 1.7 | 0.8 | |||||||||
Treasury futures | 2018 | 35 | 0.1 | (1.8 | ) | ||||||||
Eurodollar futures(1) | 2018-2021 | 22 | — | — | |||||||||
Liabilities | |||||||||||||
Derivative financial instruments | |||||||||||||
IRLCs(1) | 2018 | 1 | — | — | |||||||||
Forward sales of MBS | 2018 | 2,710 | 8.0 | 5.2 | |||||||||
LPCs | 2018 | 185 | 0.7 | 0.1 | |||||||||
Treasury futures(1) | 2018 | 63 | — | (1.4 | ) | ||||||||
Eurodollar futures(1) | 2020-2021 | 6 | — | — | |||||||||
Year Ended December 31, 2017 | |||||||||||||
Assets | |||||||||||||
Mortgage loans held for sale | |||||||||||||
Loan sale commitments(1) | 2018 | $ | 13 | $ | 0.1 | $ | — | ||||||
Derivative financial instruments | |||||||||||||
IRLCs | 2018 | 2,065 | 59.3 | (32.9 | ) | ||||||||
Forward sales of MBS | 2018 | 1,802 | 2.4 | (36.9 | ) | ||||||||
LPCs | 2018 | 171 | 0.9 | (1.0 | ) | ||||||||
Treasury futures | 2018 | 81 | 1.9 | 1.9 | |||||||||
Eurodollar futures(1) | 2018-2021 | 26 | — | — | |||||||||
Interest rate swaps(1) | 2018 | — | — | (0.1 | ) | ||||||||
Liabilities | |||||||||||||
Derivative financial instruments | |||||||||||||
IRLCs(1) | 2018 | 7 | — | 1.1 | |||||||||
Forward sales of MBS | 2018 | 1,579 | 2.8 | 7.2 | |||||||||
LPCs | 2018 | 213 | 0.6 | 0.9 | |||||||||
Treasury futures | 2018 | 128 | 1.4 | (1.4 | ) | ||||||||
Eurodollar futures(1) | 2018-2021 | 17 | — | — | |||||||||
Interest rate swaps(1) | 2018 | — | — | 0.1 | |||||||||
(1) Fair values or recorded gains/(losses) of derivative instruments are less than $0.1 for the specified dates.
22
8. Indebtedness
Notes Payable
June 30, 2018 | December 31, 2017 | |||||||||||||||||||||||||
Advance Facilities | Interest Rate | Maturity Date | Collateral | Capacity Amount | Outstanding | Collateral Pledged | Outstanding | Collateral pledged | ||||||||||||||||||
Nationstar agency advance receivables trust | LIBOR+2.0% to 2.6% | November 2019 | Servicing advance receivables | $ | 575 | $ | 248 | $ | 292 | $ | 416 | $ | 492 | |||||||||||||
Nationstar mortgage advance receivable trust | LIBOR+1.4% to 6.5% | November 2018 | Servicing advance receivables | 500 | 142 | 243 | 230 | 287 | ||||||||||||||||||
Nationstar agency advance financing facility | LIBOR+1.0% to 7.4% | January 2019 | Servicing advance receivables | 150 | 77 | 92 | 102 | 117 | ||||||||||||||||||
MBS advance financing facility | LIBOR+2.5% | March 2019 | Servicing advance receivables | 130 | — | — | 63 | 64 | ||||||||||||||||||
MBS servicer advance facility (2014) | LIBOR+3.0% | October 2018 | Servicing advance receivables | 125 | 49 | 139 | 44 | 140 | ||||||||||||||||||
Advance facilities principal amount | 516 | $ | 766 | 855 | $ | 1,100 | ||||||||||||||||||||
Unamortized debt issuance costs | — | — | ||||||||||||||||||||||||
Advance facilities, net | $ | 516 | $ | 855 | ||||||||||||||||||||||
June 30, 2018 | December 31, 2017 | |||||||||||||||||||||||||
Warehouse Facilities | Interest Rate | Maturity Date | Collateral | Capacity Amount | Outstanding | Collateral Pledged | Outstanding | Collateral pledged | ||||||||||||||||||
$1,200 warehouse facility | LIBOR+1.9% to 3.8% | October 2018 | Mortgage loans or MBS | $ | 1,200 | $ | 768 | $ | 836 | $ | 889 | $ | 960 | |||||||||||||
$1,000 warehouse facility | LIBOR+2.0% to 2.5% | September 2018 | Mortgage loans or MBS | 1,000 | 289 | 297 | 299 | 308 | ||||||||||||||||||
$950 warehouse facility | LIBOR+2.0% to 3.5%< | |||||||||||||||||||||||||