As filed with the
Securities and Exchange Commission on July 6,
2011
Registration
No. 333-174246
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
NATIONSTAR
MORTGAGE HOLDINGS INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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6162
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45-2156869
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(State or Other Jurisdiction of Incorporation or Organization)
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(Primary Standard Industrial Classification Code Number)
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(I.R.S. Employer
Identification No.)
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350 Highland Drive
Lewisville, Texas
75067
(469) 549-2000
(Address, Including Zip Code, and
Telephone Number, Including Area Code, of Registrants
Principal Executive Offices)
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Anne Sutherland, Esq.
Executive Vice President and General Counsel
Nationstar Mortgage Holdings Inc.
350 Highland Drive
Lewisville, Texas, 75067
(469) 549-2000
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
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Duane McLaughlin, Esq.
Cleary Gottlieb Steen & Hamilton LLP
One Liberty Plaza
New York, New York 10006
(212) 225-2000
(Copies of all communications, including
communications sent
to agent for service)
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after this registration
statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933 check the
following
box: o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
CALCULATION OF
REGISTRATION FEE
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Amount
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Proposed Maximum
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Proposed Maximum
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Amount of
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Title of Each Class of
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to be
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Offering
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Aggregate
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Registration
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Securities to be Registered
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Registered
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Price Per Unit
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Offering
Price(1)
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Fee(2)
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Common stock, $0.01 par value per share
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$
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$
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400,000,000.00
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$
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46,440.00
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(1)
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Estimated solely for the purpose of
calculating the registration fee pursuant to Rule 457(o)
under the Securities Act of 1933, as amended (the
Securities Act).
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(2)
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Calculated pursuant to
Rule 457 under the Securities Act.
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The registrant hereby amends this registration statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act or until the registration statement shall
become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
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SUBJECT TO COMPLETION, DATED
JULY 6, 2011
PROSPECTUS
Shares
Nationstar Mortgage
Holdings Inc.
Common Stock
This is an initial public offering of common stock of Nationstar
Mortgage Holdings Inc. We are
selling shares
of our common stock and the Initial Stockholder identified in
this prospectus is selling an
additional shares
of our common stock. We will not receive any proceeds from the
sale of our common stock by the Initial Stockholder. After this
offering, the Initial Stockholder, an entity owned primarily by
certain private equity funds managed by an affiliate of Fortress
Investment Group LLC, will own
approximately % of our common stock.
The estimated initial public offering price is between
$ and
$ per share. Our common stock has
been authorized for listing on the New York Stock Exchange under
the symbol
,
subject to official notice of issuance.
Investing in our common stock involves risks. See Risk
Factors beginning on page 15.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds to us (before expenses)
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$
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$
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Proceeds to the Initial Stockholder (before expenses)
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$
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$
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We have granted the underwriters the right to purchase up
to
additional shares of common stock, and the Initial Stockholder
has granted the underwriters an option to purchase up
to
additional shares of common stock, in each case at the public
offering price less underwriting discounts and commissions, for
the purpose of covering over-allotments.
Delivery of the shares of common stock will be made on or
about ,
2011.
The date of this prospectus
is ,
2011.
You should rely only on the information contained in this
prospectus or in any free writing prospectus we may authorize to
be delivered to you. We have not, and the Initial Stockholder
and underwriters have not, authorized anyone to provide you with
different information. If anyone provides you with different
information, you should not rely on it. We are not, and the
Initial Stockholder and underwriters are not, making an offer of
these securities in any jurisdiction where the offer is not
permitted. You should not assume that the information contained
in this prospectus is accurate as of any date other than the
date on the front of this prospectus.
TABLE OF
CONTENTS
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1
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15
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36
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38
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39
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40
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41
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43
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46
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87
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90
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93
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100
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121
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125
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138
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141
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143
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148
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150
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152
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157
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157
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158
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159
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F-1
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EX-4.1 |
EX-23.1 |
Until ,
2011 (25 days after the date of this prospectus), all
dealers that buy, sell or trade our common stock, whether or not
participating in this offering, may be required to deliver a
prospectus. This is in addition to each dealers obligation
to deliver a prospectus when acting as underwriter and with
respect to its unsold allotments or subscriptions.
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus. You should read the entire prospectus
carefully, including the section entitled Risk
Factors and our financial statements and the related notes
included elsewhere in this prospectus, before making an
investment decision to purchase shares of our common stock.
Nationstar Mortgage Holdings Inc. is a newly formed Delaware
corporation that has not, to date, conducted any activities
other than those incident to its formation and the preparation
of this registration statement. Unless the context suggests
otherwise, references in this prospectus to
Nationstar, the Company, we,
us, and our refer to Nationstar Mortgage
LLC and its consolidated subsidiaries prior to the consummation
of the Restructuring (as defined below), and to Nationstar
Mortgage Holdings Inc. and its consolidated subsidiaries after
the consummation of the Restructuring. References in this
prospectus to Fortress refer to Fortress Investment
Group LLC. All amounts in this prospectus are expressed in
U.S. dollars and the financial statements have been
prepared in accordance with generally accepted accounting
principles in the Unites States (GAAP).
COMPANY
OVERVIEW
We are a leading residential mortgage loan servicer and one of
the top five non-bank servicers in the United States as measured
by aggregate unpaid principal balance of loans serviced. Our
servicing portfolio consists of over 404,000 loans with an
aggregate unpaid principal balance of $67.0 billion as of
March 31, 2011. We service mortgage loans in all
50 states, and we are licensed as a residential mortgage
loan servicer
and/or a
third-party default specialist in all states that require such
licensing. In addition to our core Servicing business, we
currently originate primarily conventional agency (Fannie Mae
and Freddie Mac, collectively the government sponsored
enterprises or the GSEs) and government
(Federal Housing Administration and Department of Veterans
Affairs) residential mortgage loans, and we are licensed to
originate residential mortgage loans in 49 states.
Our headquarters and operations are based in Lewisville, Texas.
As of April 30, 2011, we had a total of
2,176 employees. Our business primarily consists of our
core Servicing platform and adjacent businesses, and is
complemented by our Originations segment that helps replace a
portion of our servicing portfolio run-off.
Loan
Servicing
Servicing: We are currently ranked in the top
five among non-bank servicers (based on total aggregate unpaid
principal balance), and we have established significant
relationships with leading mortgage investors. These investors
include the GSEs, regulatory agencies, major banks, private
investment funds and other financial institutions and investors
that expect to benefit from lower delinquencies and losses on
portfolios that we service on their behalf. We believe our
demonstrated performance in servicing loans has enabled us to
grow our servicing portfolio from $12.7 billion as of
December 31, 2007, to $67.0 billion as of
March 31, 2011, representing a compound annual growth rate
of 67%. We have added portfolios from 10 new servicing clients
in the last 30 months. Additionally, our growth is the
result of multiple transfers from our client base, which
evidences our ability to exceed client performance expectations.
We expect to continue to grow our Servicing portfolio and are
currently pursuing opportunities to acquire mortgage servicing
rights or enter into subservicing agreements.
Loan servicing primarily involves the calculation, collection
and remittance of principal and interest payments, the
administration of mortgage escrow accounts, the collection of
insurance claims, the administration of foreclosure procedures,
the management of real estate owned and the disbursement of
required advances. We utilize a flexible, customer-centric
mortgage servicing model that focuses on asset performance
through increased personal contact with borrowers and loss
mitigation tools designed to decrease borrower delinquencies and
defaults and to increase borrower repayment performance with a
goal of home ownership preservation. Our operating culture
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emphasizes individual default specialist accountability (what
we refer to as credit loss ownership) for improved asset
performance and cash flow and reduced credit losses. Our
servicing model and operating culture have proven even more
valuable in the current distressed residential mortgage market,
and we have established an excellent track record servicing
credit-sensitive loans.
Our Servicing segment produces recurring, fee-based revenues
based upon contractually established servicing fees. Servicing
fees consist of an amount based on either the unpaid principal
balance of the loans serviced or a per-loan fee amount and also
include ancillary fees such as late fees. In addition, we earn
interest income on amounts deposited in collection accounts and
amounts held in escrow to pay property taxes and insurance,
which we refer to as float income. We also generate incentive
fees from owners of the loans that we service for meeting
certain delinquency and loss goals and for arranging successful
loss mitigation programs. Moreover, we earn incentive fees from
the U.S. Treasury for loans that we successfully modify
within the parameters of the Home Affordable Modification
Program (HAMP) and other assistance programs it
sponsors.
Adjacent Businesses: In addition to our
Servicing business, we have successfully launched and recently
expanded our complementary businesses that provide significant
opportunity for incremental earnings and require minimal capital
investment. We provide these services by leveraging our
servicing expertise for our current clients for either a base
and/or
incentive fee. A summary of these adjacent businesses is
provided below:
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REO management involves comprehensive management of foreclosed
properties from property inspection and listing to property
preservation and sale. Our proven ability to shorten the REO
disposition timeline lowers costs for our REO clients and leads
to increased REO assets being awarded to us over time.
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Recovery services involve collecting charged-off mortgage
deficiencies and other losses incurred by the investor. Our
ability to successfully increase borrower contact rates and
obtain payment in full, negotiate discounted payoffs or arrange
repayment plans enables us to collect more money in less time
for our clients.
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National Real Estate Information Services (NREIS),
an ancillary real estate services and vendor management company
in which we purchased a non-controlling interest on
March 31, 2011, offers comprehensive settlement and
property valuation services for both origination and default
management channels. Direct or indirect product offerings
include title insurance agency, tax searches, flood
certifications, default valuations, full appraisals and broker
price opinions.
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Loan
Originations
We are one of the few non-bank servicers in the United States
with an established in-house loan origination platform. Our
origination business provides (i) an organic source of new
loans to service in order to replace portfolio run-off;
(ii) a servicing portfolio retention source by providing
refinancing services to our existing servicing customers; and
(iii) a loss mitigation solution for our Servicing clients
and customers by offering refinancing options to borrowers
allowing them to lower monthly payments and therefore lowering
the risk of their defaulting.
We currently originate primarily conventional agency and
government mortgage loans, and we are licensed to originate
residential mortgage loans in 49 states. We offer both
purchase and refinance loans through a
direct-to-consumer
retail channel and a third-party wholesale channel. In 2010 and
in the first quarter of 2011, we originated $2.8 billion
and $0.7 billion, respectively, in aggregate principal
balance consisting primarily of conventional residential
mortgage loans.
Our origination strategy is predicated on creating loans that
are readily sold into a liquid market either through
securitizations backed by the GSEs on a servicing retained
basis, or through servicing released whole loans sales to major
conduit investors. Loans are typically securitized or sold
within 30 days of origination and not intended to be held
on our balance sheet on a long-term basis. The
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interest rate risk inherent in the originations process is
mitigated through a disciplined hedging program intended to
minimize exposure to changes in underlying interest rates.
MARKET
OPPORTUNITY
Loan
Servicing
According to Inside Mortgage Finance, there are approximately
$10.5 trillion of residential mortgages outstanding in the
United States with the majority of servicing performed by the
nations four largest money center banks: Bank of America,
Wells Fargo, Chase and Citi. Together, these four institutions
service approximately 54% of all outstanding mortgage loans for
one to four-family residences as of March 31, 2011.
We believe the residential loan servicing market consists of
traditional (bank-owned) servicers and more specialized
servicers with an enhanced asset performance and loss mitigation
focus (high touch servicers). The traditional servicer model
consists of processing mortgage payments and minimizing expense.
Traditional servicers function well in environments
characterized by low delinquencies and defaults. These servicers
mainly service conventional, performing mortgages and are most
effective at routine account management of portfolios with low
delinquencies that require limited interaction with borrowers
(front-end activities). In contrast, the more specialized, high
touch servicer model places more emphasis on borrower contact
and interaction, improving asset performance and foreclosure
avoidance (back-end activities), and functions well in
environments characterized by elevated delinquencies,
foreclosures and real estate owned activity, in addition to more
normalized environments.
We believe the current dynamics of the residential mortgage
market represent an exceptional opportunity for leading,
non-bank servicers to grow their servicing portfolios by
acquiring mortgage servicing rights, entering into subservicing
contracts and by assuming responsibility for mortgage operations
from regulated entities. We anticipate the following factors
will continue to result in a market supply and demand imbalance:
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Elevated delinquencies and foreclosures favoring servicers with
strong capabilities in asset performance and loss mitigation;
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Regulatory and legislative actions such as Basel III and
other factors leading bank-owned servicers to divest mortgage
servicing rights or outsource significant segments of their
mortgage operations;
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Numerous industry reforms including the Qualified Residential
Mortgage (QRM) provision in the Dodd-Frank Wall
Street Reform and Consumer Protection Act; the negotiations
involving the 50 State Attorneys General, certain federal
regulators and servicers; the enforcement consent orders entered
into by 14 of the largest mortgage servicers and four federal
agencies; and the initiative of the Federal Housing Finance
Agency to align the servicing requirements related to delinquent
mortgages and to modify the servicing compensation related to
Fannie Mae and Freddie Mac loans; and
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Anticipated reduced participation of the GSEs and other
regulated entities in the residential mortgage market, which we
believe is incentivizing these entities to accelerate the
facilitation of servicing transfers to existing strong servicers.
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We believe there are a very limited number of servicers such as
us who are able to perform both front- and back-end functions
effectively in a variety of market environments. We believe we
are attractively positioned to capitalize on the current and
future state of the residential servicing sector due to our
proficiency in servicing both higher risk accounts and newly
originated loans with attractive financial returns.
We believe that our demonstrated performance in servicing loans
for the GSEs and other governmental entities, several major
money center banks, and other entities has facilitated our
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acquisitions of over 30 servicing portfolios totaling
approximately $60 billion since November 2008 from 10
different counterparties. These acquisitions helped us grow our
servicing portfolio from $12.7 billion as of
December 31, 2007, to $67.0 billion as of
March 31, 2011, and have demonstrated both our ability to
source and grow our business as well as our scalable capacity to
meet our clients needs. Over 75% of the $60 billion
increase in our portfolio represents loans in a current state
evidencing our clients confidence in our ability to
execute both front- and back-end servicing requirements.
Adjacent
Businesses
Historic high levels of delinquencies, foreclosures and real
estate owned have presented increased opportunities for
providers of residential mortgage services. According to
Dominion Bond Rating Service (DBRS), a globally recognized
credit rating agency, foreclosure filings and completed
foreclosures are expected to reach record levels in 2011.
Additionally, the American Society of REO Specialists expects
real estate owned inventory to exceed four million properties
over the next year, a substantial increase from the current
inventory of two million properties. The demand for adjacent
mortgage services REO management, loan recovery and
title and valuation activities is dependent upon the
number of delinquent and foreclosure loans and the amount of
real estate owned, all of which are projected to remain
elevated. Mortgage origination activities also drive demand for
title and valuation products as both are required by new
purchase and refinance originations. We believe our position as
a captive provider of REO management and loan recovery services,
and our non-controlling interest in NREIS, will further enable
us to capitalize upon industry opportunities.
Loan
Originations
According to Inside Mortgage Finance, total residential mortgage
originations in the United States were $1.6 trillion in
2010, a decrease of 13% compared to 2009. Of the 2010
originations, approximately 87% were conforming mortgages
guaranteed by government sponsored enterprises, including Fannie
Mae and Freddie Mac, or government agencies such as the Federal
Housing Administration and the Department of Veterans Affairs.
From 2006 to 2010, the annual aggregate principal balance of
newly originated mortgage loans that were either insured or
guaranteed by government agencies or sold to government
sponsored enterprises or into government securitizations
increased from $0.9 trillion to $1.4 trillion, representing a
compound annual growth rate of 11%. In 2010, major money center
banks decreased their aggregate originations as compared to
2009 Wells Fargo, Bank of America and Citi decreased
volumes 8%, 22% and 18%, respectively whereas our
origination volume increased 85% over the same period.
Servicers such as us with captive origination platforms are able
to utilize their loan origination capabilities to supplement
loss mitigation strategies for delinquent loans they service, as
well as help create an organic source of new servicing, at an
attractive Mortgage Servicing Right (MSR) price, to
help replace portfolio run-off. As Fannie Mae, Freddie Mac, the
Mortgage Bankers Association and a number of economists project
interest rates to increase over the next several years, we
believe our ability to re-direct resources from pure refinance
activities to focus on purchase origination strategies will
position us to gain share in the residential mortgage
origination market.
OUR COMPETITIVE
STRENGTHS
We believe our servicing platform combined with our originations
and adjacent businesses positions us well for a variety of
market environments. We believe the following competitive
strengths contribute to our leading market position and
differentiate us from our competition.
Market Leading
Residential Mortgage Loan Servicer
We believe we are uniquely positioned to benefit from the
current stressed environment and future state of the residential
servicing sector due to our proficiency servicing both higher
risk
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accounts and newly originated loans. Since November 2008, we
have boarded over $60 billion in new loans, which we
believe is among the highest in the industry and demonstrates
our ability to successfully transfer loans to our servicing
platform, improve asset performance and provide an exceptional
customer experience.
Our servicing model focuses on asset performance with the goal
of increasing personal contact with borrowers, reducing credit
losses and maximizing cash collections in order to provide
superior results. This highly flexible model allows for
customization to meet individual borrower requirements, and is
further differentiated by providing personal contact at critical
borrower touch points, including via telephone, mail, electronic
communications and other personal contact methods. Our approach
facilitates strong relationships with borrowers and greater
employee accountability for desired performance. We believe our
proprietary loss mitigation system gives our employees the tools
necessary to help customers evaluate options to drive the best
possible outcome. We believe that our servicing expertise and
focus on optimal outcomes reduces credit impairments and losses
to loan investors and our clients.
Attractive
Business Model with Strong Cash Flow
Our Servicing platform produces recurring, fee-based revenues
based upon contractually established (predictable) servicing
fees, and we are exposed to minimal credit risk with respect to
the mortgage loans that we service. We believe that we continue
to demonstrate our ability to produce lower delinquency rates on
the loans we service, including credit-sensitive loans, compared
to our competitors. By reducing credit losses, we have earned
repeat business from our most valued strategic relationships. We
believe that we will continue to acquire mortgage servicing
rights at attractive prices from mortgage investors or provide
subservicing for third parties that value our servicing
capabilities.
Our business model generates strong, predictable cash flow. As a
non-bank servicer, we are not bound by the same regulatory
capital requirements as bank-owned servicers. We own mortgage
servicing rights that typically require a capital investment to
purchase and we provide subservicing of loans owned by others,
which typically does not require a significant capital
investment. We expect to acquire additional mortgage servicing
rights and enter into additional subservicing agreements in the
future.
We believe that our in-house originations business
differentiates us from other non-bank servicers without an
origination platform by: (i) providing us with a more
cost-effective alternative to purchasing new mortgage servicing
rights as the unpaid principal balance of our existing servicing
portfolio decreases over time; (ii) diversifying our
revenue in a variety of interest rate environments; and
(iii) providing us an additional tool for loss mitigation
through refinancing efforts. Additionally, we have successfully
launched and recently expanded our adjacent businesses that we
believe provide significant opportunity for incremental earnings
and require minimal capital investment.
Scalable,
Proven Platform Coupled with Asset Evaluation and Acquisition
Expertise
Establishing a servicing platform requires significant initial
capital investments, infrastructure, licensing and expertise to
effectively service loans, which creates substantial barriers to
entry. We operate a highly scalable platform as evidenced by the
growth in our unpaid principal balance from $12.7 billion
at December 31, 2007 to $67.0 billion as of
March 31, 2011. We can service additional accounts with our
existing infrastructure, real estate and technology platform
with minimal incremental fixed costs. Our platform gives us the
ability to add highly profitable and accretive business. As
such, we have invested in our loan administration and customer
service servicing divisions to accommodate the increased scale
and size of our portfolio, which allows us to service newly
originated conventional mortgage loans with attractive financial
returns in a variety of operating and economic environments.
We believe we have demonstrated our ability to grow servicing
through acquiring mortgage servicing rights and entering into
subservicing contracts. By executing over 30 deals in the last
30 months comprising more than 250 separate transfers of
more than 350,000 total accounts with approximately
$60 billion in unpaid principal balance, we believe we have
demonstrated a proven
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process and methodology of integrating additional loans onto our
platform and improving their performance. We believe these
acquisitions and agreements can be attributed to our established
track record in servicing residential mortgage loans, and we
believe that our track record, together with our scalable
platform, positions us well relative to our competitors to
acquire additional servicing rights and enter into additional
subservicing contracts in the future.
Culture of
Credit Loss Ownership and Accountability
Since our inception, our operating culture has emphasized credit
loss ownership (our term for individual default specialist
accountability for asset performance). We establish financial
and operational goals across all levels of the organization, and
compensation for all of our employees is based upon achieving
desired results. As a result, we have a streamlined
organizational structure that allows us to react to business
needs and changes in an expeditious manner. We strongly endorse
a promote from within culture and facilitate this process
through our Manager In Training program. We believe that our
culture of credit loss ownership and accountability has enabled
us to outperform the industry. As an example, a portion of our
servicing portfolio is comprised of non-prime collateral held by
third party investors in asset-backed securities
(ABS). As of February 2011, our 60 or more day
delinquency rate for our ABS portfolio (as a percentage of
current balance) was approximately 23%, while according to
LoanPerformance.com, the average delinquency rate of the ABX
06-1 through
07-2
Mortgage Indices was approximately 42%. The ABX.HE is a series
of indices based on representative bonds issued from 2005 to
2007 that consist of non-prime mortgages. The ABX indices are
commonly used by investors to benchmark collateral performance
for ABS.
We promote both HAMP and non-HAMP loan modifications as an
effective alternative to foreclosure that presents a
win-win situation for both investors and borrowers.
In 2010, we completed over 41,000 total loan modifications, of
which approximately 12,500 were HAMP modifications.
Strong and
Seasoned Management Team
Our senior management team is comprised of experienced mortgage
industry executives with an average of approximately
26 years in the industry and a track record of generating
financial and operational improvements. Our CEO and CFO have
been with us for more than a decade and have managed the company
through the most recent economic downturn and through multiple
economic cycles. Several members of our management team have
held senior positions at other residential mortgage companies.
Our senior management team has demonstrated its ability to adapt
to changing market conditions and has developed a proven ability
to identify, evaluate and execute successful portfolio and
platform acquisitions. We believe that the experience of our
senior management team and its management philosophy are
significant contributors to our operating performance.
OUR GROWTH
STRATEGY
Our primary goal is to grow our servicing portfolio by
(i) employing a high touch approach on the back-end to
increase the value of our clients loans by reducing
delinquencies and credit losses, and (ii) operating the
front-end with maximum efficiency through scale and technology.
This goal is achieved through our culture, processes and
expertise. We plan to grow our revenue, operating cash flow and
net income by employing the following business strategies:
Capitalize on
Industry Opportunities
We believe we are well positioned to benefit from the current
trends in the residential mortgage industry. The disruption in
the mortgage industry has resulted in limited access to funding
and capital, lower than anticipated performance of residential
portfolios and a strong demand for high touch servicing with a
track record of improving asset performance. We believe that
many competitors with significant residential exposure or
limited access to capital do not have sufficient internal
capacity to perform this type of servicing and are selling
mortgage servicing rights or outsourcing their servicing
6
to strong counterparties. Additionally, due to a variety of
economic factors, residential loan delinquencies and related
losses are at historical highs, prompting the GSEs and other
owners of residential mortgage loans to focus on home ownership
preservation and servicing for superior credit performance.
These dynamics allow existing strong servicers the opportunity
to acquire or subservice additional portfolios with attractive
financial returns.
Additionally, we believe pending changes in the regulatory
environment regarding servicing compensation, limitations of MSR
on Tier 1 capital (Basel III), the negotiations involving
the 50 State Attorneys General, certain federal regulators and
servicers, and the enforcement consent orders entered into by 14
of the largest mortgage servicers and four federal agencies will
significantly impact large bank-owned servicers and may lead
many to divest a portion of their MSR holdings
and/or
outsource significant segments of their mortgage operations.
Furthermore, through our business development efforts, we have
seen instances where some of the largest holders of mortgage
servicing are seeking to transform their mortgage business into
a product offering. Rather than having an investment in mortgage
servicing operations, they are partnering with companies who can
provide this service to their customers. We believe we are well
positioned to take advantage of this emerging industry trend.
Maintain and
Grow Our Fee-Based Servicing Portfolio
Our servicing business produces recurring, fee-based revenues
based upon contractually established servicing fees. We intend
to continue to utilize our established and scalable servicing
platform to grow our servicing operations organically through
our existing client base. We believe that we will continue to
benefit from our strong relationships with the GSEs and other
third party investors, which we believe will enable us to
acquire additional servicing rights and enter into additional
subservicing contracts in order to grow our business.
Our origination business also provides the opportunity to
replace portfolio run-off by creating a mortgage servicing right
at an attractive price and provides an alternative loss
mitigation strategy through refinancing. Much of the refinancing
is through special programs (e.g., HAMP, Hope for Homeowners,
and FHA Negative Equity Program) where we excel at helping a
borrower find a program that matches his or her unique
situation.
Engage in
Opportunistic Acquisitions and New Business
Opportunities
There are numerous banks, insurance companies and other
financial entities that have significant exposure to the
residential mortgage sector. Our management, together with our
dedicated operations and business development teams, have
extensive business and corporate expertise, receive numerous
requests to review potential acquisition opportunities and
continually conduct due diligence to identify potential
opportunistic acquisitions.
In 2010, we expanded our business development team and hired a
dedicated senior manager whose primary role is to identify,
evaluate, and enhance both new and existing
acquisition/partnership opportunities. As of April 30,
2011, we had a team of eight individuals who are dedicated to
business development and focused on select areas of the mortgage
industry (e.g. national banks, REO finance, community banks,
etc.). Our business development success is evidenced by the
identification and retention of 10 new clients over the past
30 months. We are currently seeking additional
opportunities and believe there will continue to be significant
opportunities to take advantage of the dislocation in the
residential mortgage sector and to acquire assets at attractive
valuations. We intend to opportunistically grow our business
through executing subservicing contracts and acquiring mortgage
servicing rights, servicing platforms, originations platforms
and complementary adjacent businesses. We may purchase assets
and/or
platforms of significant size. We believe there are several
assets and platforms currently for sale in our industry and we
are currently in the process of pursuing a number of such
opportunities.
7
Continue To
Expand Our Adjacent Businesses and Originations
Platform
Our adjacent businesses complement our core Servicing
operations. REO Management includes both disposal and financing
opportunities through our origination platform. The Recovery
unit leverages the existing servicing portfolio and provides
recovery services to third parties to collect on charge-off
deficiency judgments and collateral representations. NREIS
provides title, settlement, valuation, and foreclosure related
services to Nationstar and other third parties. As our own
servicing portfolio and origination volume grows, these
businesses will benefit. In addition, our business development
team is active in sourcing third parties to extend our REO
Management and Recovery Services. Also, NREIS has its own sales
group to expand its client base to other banks and mortgage
companies.
Our Originations business diversifies our offering of mortgage
services and further stabilizes our revenue and expected
earnings stream by providing us with a natural hedge against
fluctuations in prevailing interest rates. We have a
diversified, multi-channel strategy to continue to build our
conventional product originations platform in order to
organically replace servicing run-off. Through our origination
platform, we are also able to create loan servicing assets at
prices below where our servicing competitors can purchase
comparable mortgage servicing rights. Also, we can recapture
loan payoffs in our existing servicing portfolio by providing
origination services to our existing borrowers and offer special
loss mitigation alternatives through refinancings.
We believe that there are significant opportunities to originate
loans for servicers and other financial institutions lacking
origination capacity, and we intend to capitalize on these
opportunities by expanding our retail channels. Our expansion
efforts will focus primarily on purchase money lending, which is
a stable origination source through various interest rate
cycles. Unlike certain competitors who are required to utilize
third-party intermediaries in transactions with the GSEs and
Ginnie Mae, we are a direct lender with the capability to sell
loans directly to the GSEs and to securitize loans directly with
Ginnie Mae. We believe that this capability allows us to control
the credit quality of the loans we originate, thereby reducing
our repurchase risk.
Corporate and
Other Information
Nationstar Mortgage Holdings Inc. was recently incorporated for
the purpose of effecting this offering and currently holds no
material assets and does not engage in any operations. Prior to
the completion of this offering, all of the equity interests in
Nationstar Mortgage LLC will be transferred from FIF HE Holdings
LLC (our Initial Stockholder) to two direct,
wholly-owned subsidiaries of Nationstar Mortgage Holdings Inc.
(the Restructuring). Additionally, as part of the
Restructuring, certain parent entities of our Initial
Stockholder that do not have any material assets or material
liabilities other than their direct or indirect ownership of our
Initial Stockholder, or any operations, will be merged with and
into Nationstar Mortgage Holdings Inc., and the former
shareholders of those parent entities will receive equity
interests in our Initial Stockholder. Upon the completion of the
Restructuring, we will conduct our business through Nationstar
Mortgage LLC and its consolidated subsidiaries.
Our executive offices are located at 350 Highland Drive,
Lewisville, Texas 75067 and our telephone number is
(469) 549-2000.
Our Internet website address is www.nationstarmtg.com.
Information on, or accessible through, our website is not part
of this prospectus.
Nationstar Mortgage LLC was formed in 1994 in Denver, Colorado
as Nova Credit Corporation, a Nevada corporation. In 1997, it
moved its executive offices and primary operations to Dallas,
Texas and changed its name to Centex Credit Corporation. In
2001, Centex Credit Corporation was merged into Centex Home
Equity Company, LLC, a Delaware limited liability company
(CHEC). In 2006, FIF HE Holdings LLC, acquired all
of its outstanding membership interests (the
Acquisition), and it changed its name to Nationstar
Mortgage LLC.
8
Our Principal
Stockholders
Following the completion of this offering, FIF HE Holdings LLC,
an entity owned primarily by certain private equity funds
managed by an affiliate of Fortress, a leading global investment
manager that offers alternative and traditional investment
products, will own approximately %
of our outstanding common stock,
or % if the underwriters
over-allotment option is fully exercised. FIF HE Holdings LLC is
referred to in this prospectus as our Initial
Stockholder. After this offering, the Initial Stockholder
will own shares sufficient for the majority vote over
fundamental and significant corporate matters and transactions.
See Risk Factors Risks Related to Our
Organization and Structure.
Ownership
Structure
Set forth below is the ownership structure of Nationstar
Mortgage Holdings Inc. and its subsidiaries upon consummation of
the Restructuring and this offering.
9
The
Offering
|
|
|
Common stock we are offering |
|
shares |
|
Common stock offered by the Initial Stockholder |
|
shares |
|
Common stock to be issued and outstanding after this offering |
|
shares |
|
|
|
|
|
Use of proceeds by us |
|
We estimate that the net proceeds to us from the sale of shares
in this offering, after deducting offering expenses, will be
approximately $ million,
assuming the shares are offered at
$ per share, which is the midpoint
of the estimated initial public offering price range set forth
on the cover page of this prospectus. We intend to use the net
proceeds from this offering for working capital and other
general corporate purposes. See Use of Proceeds. We
will not receive any proceeds from the sale of our common stock
by the Initial Stockholder, including any proceeds the Initial
Stockholder may receive from the exercise by the underwriters of
their over-allotment option. |
|
Dividend policy |
|
We do not expect to pay dividends on our common stock for the
foreseeable future. Instead, we anticipate that all of our
earnings in the foreseeable future will be used for the
operation and growth of our business. |
|
|
|
Any future determination to pay dividends on our common stock
will be at the discretion of our board of directors and will
depend upon many factors, including our financial position,
results of operations, liquidity, legal requirements and
restrictions that may be imposed by the indenture for our
10.875% senior notes due 2015. See Dividend
Policy. |
|
Risk factors |
|
Please read the section entitled Risk Factors
beginning on page 15 for a discussion of some of the
factors you should carefully consider before deciding to invest
in our common stock. |
|
Proposed New York Stock Exchange symbol |
|
|
The number of shares of common stock to be issued and
outstanding after the completion of this offering is based
on shares
of common stock issued and outstanding as of , 2011, and
excludes an
additional shares
reserved for issuance under our equity incentive plan, all of
which remain available for grant.
Except as otherwise indicated, all information in this
prospectus:
|
|
|
|
|
assumes an initial public offering price of
$ per share, the midpoint of the
price range set forth on the cover page of this prospectus;
|
|
|
|
assumes no exercise by the underwriters of their option to
purchase an
additional shares
of common stock from the Initial Stockholder to cover
over-allotments; and
|
|
|
|
assumes shares
will be issued to certain of our directors
after ,
2011 but prior to completion of this offering.
|
10
SUMMARY
CONSOLIDATED FINANCIAL DATA
The following tables summarize consolidated financial
information of Nationstar Mortgage LLC, our predecessor company,
as well as pro forma information that reflects the impact of our
conversion to a taxable entity from a disregarded entity for tax
purposes. We were formed on May 9, 2011 and have not, to
date, conducted any activities other than those incident to our
formation and the preparation of this registration statement. We
were formed solely for the purpose of reorganizing the
organizational structure of FIF HE Holdings LLC and Nationstar
Mortgage LLC, so that the issuer is a corporation rather than a
limited liability company and our existing investors will own
common stock rather than equity interests in a limited liability
company. You should read these tables along with
Managements Discussion and Analysis of Financial
Condition and Results of Operations, Business
and our consolidated financial statements and the related notes
included elsewhere in this prospectus.
The summary consolidated statement of operations data for the
years ended December 31, 2008, 2009 and 2010 and the
summary consolidated balance sheet data as of December 31,
2009 and 2010 have been derived from our audited financial
statements included elsewhere in this prospectus. The summary
consolidated balance sheet data as of December 31, 2008 has
been derived from our audited financial statements, which is not
included in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
(dollars in thousands, except for per share amounts)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
$
|
74,007
|
|
|
$
|
100,218
|
|
|
$
|
184,084
|
|
|
$
|
38,750
|
|
|
$
|
64,686
|
|
Gain (loss) on mortgage loans held for sale
|
|
|
(86,663
|
)
|
|
|
(21,349
|
)
|
|
|
77,344
|
|
|
|
12,429
|
|
|
|
20,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
(12,656
|
)
|
|
|
78,869
|
|
|
|
261,428
|
|
|
|
51,179
|
|
|
|
85,192
|
|
Total expenses and impairments
|
|
|
147,777
|
|
|
|
142,367
|
|
|
|
220,976
|
|
|
|
40,089
|
|
|
|
68,121
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
92,060
|
|
|
|
52,518
|
|
|
|
98,895
|
|
|
|
31,333
|
|
|
|
18,318
|
|
Interest expense
|
|
|
(65,548
|
)
|
|
|
(69,883
|
)
|
|
|
(116,163
|
)
|
|
|
(29,135
|
)
|
|
|
(25,368
|
)
|
Loss on interest rate swaps and caps
|
|
|
(23,689
|
)
|
|
|
(14
|
)
|
|
|
(9,801
|
)
|
|
|
(2,779
|
)
|
|
|
|
|
Fair value changes in ABS securitizations
|
|
|
|
|
|
|
|
|
|
|
(23,297
|
)
|
|
|
(9,777
|
)
|
|
|
(2,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
2,823
|
|
|
|
(17,379
|
)
|
|
|
(50,366
|
)
|
|
|
(10,358
|
)
|
|
|
(9,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(157,610
|
)
|
|
$
|
(80,877
|
)
|
|
$
|
(9,914
|
)
|
|
$
|
732
|
|
|
$
|
7,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Information (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical net (loss) income before taxes
|
|
|
|
|
|
|
|
|
|
$
|
(9,914
|
)
|
|
|
|
|
|
$
|
7,369
|
|
Pro forma adjustment for
taxes(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net (loss) income
|
|
|
|
|
|
|
|
|
|
$
|
(9,914
|
)
|
|
|
|
|
|
$
|
7,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
outstanding(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of December 31,
|
|
March 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
|
(in thousands)
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents(3)
|
|
$
|
9,357
|
|
|
$
|
41,645
|
|
|
$
|
21,223
|
|
|
$
|
48,420
|
|
Mortgage servicing rights
|
|
|
110,808
|
|
|
|
114,605
|
|
|
|
145,062
|
|
|
|
151,159
|
|
Total assets
|
|
|
1,122,001
|
|
|
|
1,280,185
|
|
|
|
1,947,181
|
|
|
|
1,868,255
|
|
Unsecured senior notes
|
|
|
|
|
|
|
|
|
|
|
244,061
|
|
|
|
244,410
|
|
Notes payable
|
|
|
810,041
|
|
|
|
771,857
|
|
|
|
709,758
|
|
|
|
608,451
|
|
Nonrecourse debtLegacy Assets
|
|
|
|
|
|
|
177,675
|
|
|
|
138,662
|
|
|
|
133,592
|
|
ABS nonrecourse debt
|
|
|
|
|
|
|
|
|
|
|
496,692
|
|
|
|
489,321
|
|
Total liabilities
|
|
|
866,079
|
|
|
|
1,016,362
|
|
|
|
1,690,809
|
|
|
|
1,603,012
|
|
Total members equity
|
|
|
255,922
|
|
|
|
263,823
|
|
|
|
256,372
|
|
|
|
265,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Year Ended December 31,
|
|
March 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
2010
|
|
2011
|
|
|
(in thousands)
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
40,212
|
|
|
$
|
(83,641
|
)
|
|
$
|
(101,653
|
)
|
|
$
|
(82,639
|
)
|
|
$
|
131,586
|
|
Investing activities
|
|
|
(34,643
|
)
|
|
|
29,983
|
|
|
|
101,197
|
|
|
|
30,741
|
|
|
|
5,278
|
|
Financing activities
|
|
|
(37,463
|
)
|
|
|
85,946
|
|
|
|
(19,966
|
)
|
|
|
33,804
|
|
|
|
(109,667
|
)
|
Adjusted
EBITDA(4)
(non-GAAP measure)
|
|
|
23,141
|
|
|
|
48,644
|
|
|
|
65,306
|
|
|
|
11,159
|
|
|
|
27,953
|
|
Operating Segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense from unsecured senior notes
|
|
|
|
|
|
|
|
|
|
|
24,628
|
|
|
|
1,719
|
|
|
|
7,548
|
|
Change in fair value of mortgage servicing rights
|
|
|
11,701
|
|
|
|
27,915
|
|
|
|
6,043
|
|
|
|
4,600
|
|
|
|
3,784
|
|
Depreciation and amortization
|
|
|
1,172
|
|
|
|
1,542
|
|
|
|
1,873
|
|
|
|
355
|
|
|
|
641
|
|
Share-based compensation
|
|
|
1,633
|
|
|
|
579
|
|
|
|
8,999
|
|
|
|
147
|
|
|
|
5,238
|
|
Notes
|
|
|
(1) |
|
Our pro forma effective tax rate for 2010 is 0%. The pro forma
tax provision (benefit), before valuation allowance, is ($3,612)
on pre-tax loss of ($9,914). We have determined that recognizing
a tax benefit and corresponding deferred tax asset is not
appropriate as management believes it is more likely the
deferred tax asset will not be realized. We will also assume
certain tax attributes of certain parent entities of FIF HE
Holdings LLC as a result of the Restructuring, including
approximately $200 million of net operating loss carry
forwards as of December 31, 2010. We expect that the
utilization of these tax attributes will be limited pursuant to
Sections 382 and 383 of the Internal Revenue Code. |
|
|
|
|
|
Our pro forma effective tax rate for the quarter ended March 31,
2011 is 0%. The pro forma tax provision, before any valuation
adjustments, is $2,782 on pre-tax income of $7,369. Nationstar
assumes for pro forma purposes that the previously recorded
valuation allowance will be released to the extent necessary to
eliminate any tax provision. |
|
|
|
(2) |
|
Represents number of shares issued and outstanding after giving
effect to our sale of common stock in this offering and does not
include common stock that may be issued and sold upon exercise
of the underwriters overallotment option. |
12
|
|
|
(3) |
|
Cash and cash equivalents is one component of our overall
liquidity position. Our liquidity position is a combination of
cash and cash equivalents and unencumbered assets. We follow a
disciplined cash management approach that uses our excess
liquidity or cash available to deploy for investments to
temporarily paydown existing borrowings on mortgage loans held
for sale and accounts receivables. At the time we identify
investment opportunities, we will leverage these unencumbered
assets to fulfill the purchase price. |
|
(4) |
|
Adjusted EBITDA is a key performance measure used by management
in evaluating the performance of our segments. Adjusted EBITDA
represents our Operating Segments income (loss), and
excludes income and expenses that relate to the financing of the
unsecured senior notes, depreciable (or amortizable) asset base
of the business, income taxes (if any), exit costs from our 2007
restructuring and certain non-cash items. Adjusted EBITDA
excludes results from our legacy asset portfolio and certain
securitization trusts that were consolidated upon adoption of
the new accounting guidance eliminating the concept of QSPE. |
|
|
|
Adjusted EBITDA provides us with a key measure of our Operating
Segments performance as it assists us in comparing our
Operating Segments performance on a consistent basis.
Management believes Adjusted EBITDA is useful in assessing the
profitability of our core business and uses Adjusted EBITDA in
evaluating our operating performance as follows: |
|
|
|
|
|
Financing arrangements for our Operating
Segments are secured by assets that are allocated to these
segments. Interest expense that relate to the financing of the
unsecured senior notes is not considered in evaluating our
operating performance because this obligation is serviced by the
excess earnings from our Operating Segments after the debt
obligations that are secured by their assets.
|
|
|
|
To monitor operating costs of each Operating
Segment excluding the impact from depreciation, amortization and
fair value change of the asset base, exit costs from our 2007
restructuring and non-cash operating expense, such as
share-based compensation. Operating costs are analyzed to manage
costs per our operating plan and to assess staffing level,
implementation of technology based solutions, rent and other
general and administrative costs.
|
|
|
|
|
|
Management does not assess the growth prospect and profitability
of our legacy asset portfolio and certain securitization trusts
that were consolidated upon adoption of the new accounting
guidance, except to the extent to assess cash flows from the
assets in the legacy asset portfolio are sufficient to service
its debt obligations. |
|
|
|
We also use Adjusted EBITDA (with additional adjustments) to
measure our compliance with covenants such as leverage coverage
ratios for our unsecured senior notes. |
|
|
|
Adjusted EBITDA has limitations as an analytical tool, and
should not be considered in isolation, or as a substitute for
analysis of our results as reported under generally accepted
accounting principles in the United States (GAAP).
Some of these limitations are: |
|
|
|
|
|
Adjusted EBITDA does not reflect our cash
expenditures, or future requirements for capital expenditures or
contractual commitments;
|
|
|
|
Adjusted EBITDA does not reflect changes in,
or cash requirements for, our working capital needs;
|
|
|
|
Adjusted EBITDA does not reflect the cash
requirements necessary to service principal payments related to
the financing of the business;
|
|
|
|
Adjusted EBITDA does not reflect the interest
expense, or the cash requirements necessary to service interest
or principal payments, on our corporate debt;
|
|
|
|
although depreciation and amortization and
changes in fair value of mortgage servicing rights are non-cash
charges, the assets being depreciated and amortized will often
have to
|
13
|
|
|
|
|
be replaced in the future, and Adjusted EBITDA does not reflect
any cash requirements for such replacements; and |
|
|
|
other companies in our industry may calculate
Adjusted EBITDA differently than we do, limiting their
usefulness as comparative measures.
|
|
|
|
|
|
Because of these and other limitations, Adjusted EBITDA should
not be considered as measures of discretionary cash available to
us to invest in the growth of our business. Adjusted EBITDA is
presented to provide additional information about our
operations. Adjusted EBITDA is a non-GAAP measure and should be
considered in addition to, but not as a substitute for or
superior to, operating income, net income, operating cash flow
and other measures of financial performance prepared in
accordance with GAAP. We compensate for these limitations by
relying primarily on our GAAP results and using Adjusted EBITDA
only supplementally. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands)
|
|
|
Net Income (Loss) to Adjusted EBITDA Reconciliation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(157,610
|
)
|
|
$
|
(80,877
|
)
|
|
$
|
(9,914
|
)
|
|
$
|
732
|
|
|
$
|
7,369
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (income) loss from Legacy Portfolio and Other
|
|
|
164,738
|
|
|
|
97,263
|
|
|
|
24,806
|
|
|
|
827
|
|
|
|
4,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from Operating Segments
|
|
|
7,128
|
|
|
|
16,386
|
|
|
|
14,892
|
|
|
|
1,559
|
|
|
|
11,644
|
|
Adjust for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense from unsecured senior notes
|
|
|
|
|
|
|
|
|
|
|
24,628
|
|
|
|
1,719
|
|
|
|
7,548
|
|
Depreciation and amortization
|
|
|
1,172
|
|
|
|
1,542
|
|
|
|
1,873
|
|
|
|
355
|
|
|
|
641
|
|
Change in fair value of mortgage servicing rights
|
|
|
11,701
|
|
|
|
27,915
|
|
|
|
6,043
|
|
|
|
4,600
|
|
|
|
3,784
|
|
Exit
costs(a)
|
|
|
1,507
|
|
|
|
2,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
1,633
|
|
|
|
579
|
|
|
|
8,999
|
|
|
|
147
|
|
|
|
5,238
|
|
Fair value changes on interest rate
swap(b)
|
|
|
|
|
|
|
|
|
|
|
9,801
|
|
|
|
2,779
|
|
|
|
|
|
Ineffective portion of cash flow hedge
|
|
|
|
|
|
|
|
|
|
|
(930
|
)
|
|
|
|
|
|
|
(902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
23,141
|
|
|
$
|
48,644
|
|
|
$
|
65,306
|
|
|
$
|
11,159
|
|
|
$
|
27,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Relates to restructuring program initiated in 2007, which
included closing several offices and the termination of a
portion of our workforce. Restructuring charges for the years
ended December 31, 2008 and 2009, are primarily due to
reserves on future lease payments. |
|
(b) |
|
Relates to an interest rate swap agreement which was treated as
an economic hedge under ASC 815 since inception to
September 30, 2010. |
14
RISK
FACTORS
Investing in our common stock involves a high degree of risk.
You should carefully consider the following risk factors, as
well as other information contained in this prospectus, before
deciding to invest in our common stock. The occurrence of any of
the following risks could materially and adversely affect our
business, prospects, financial condition, results of operations
and cash flow, in which case, the trading price of our common
stock could decline and you could lose all or part of your
investment.
Risks Related to
Our Business and Industry
Our
foreclosure proceedings in certain states have been delayed due
to inquiries by certain state Attorneys General, court
administrators and state and federal governmental agencies, the
outcome of which could have a negative effect on our operations
or liquidity.
Certain state Attorneys General, court administrators and
governmental agencies, as well as representatives of the federal
government, have issued letters of inquiry to mortgage servicing
companies, including us, requesting written responses to
questions regarding policies and procedures, especially with
respect to notarization and affidavit procedures. These requests
or any subsequent administrative, judicial or legislative
actions taken by these regulators, court administrators or other
governmental entities may subject us to fines and other
sanctions, including a foreclosure moratorium or suspension.
Additionally, because we do business in all fifty states, we may
be affected by regulatory actions or court decisions that are
taken on the individual state level.
In addition to these inquiries, several state Attorneys General
have requested that certain mortgage servicers, including us,
suspend foreclosure proceedings pending internal review to
ensure compliance with applicable law, and we have received
requests from four such state Attorneys General. Pursuant to
these requests and in light of industry-wide press coverage
regarding mortgage foreclosure documentation practices, we, as a
precaution, previously delayed foreclosure proceedings in
23 states, so that we may evaluate our foreclosure
practices and underlying documentation. Upon completion of our
internal review and responding to such inquiries, we resumed
these previously delayed proceedings. Such inquiries, however,
as well as continued court backlog and emerging court processes,
may cause an extended delay in the foreclosure process in
certain states.
Even in states where we have not suspended foreclosure
proceedings or where we have lifted or will soon lift any such
delayed foreclosures, we have faced, and may continue to face,
increased delays and costs in the foreclosure process. For
example, we have incurred, and may continue to incur, additional
costs related to the re-execution and re-filing of certain
documents. We may also be required to take other action in our
capacity as a servicer in connection with pending foreclosures.
In addition, the current legislative and regulatory climate
could lead borrowers to contest foreclosures who would not have
contested such foreclosures under ordinary circumstances, and we
may incur increased litigation costs if the validity of a
foreclosure action is challenged by a borrower. Delays in
foreclosure proceedings could also require us to make additional
servicing advances and draw on our servicing advance facilities,
or delay the recovery of advances, which could materially affect
our earnings and liquidity and increase our need for capital.
The Dodd-Frank
Act could increase our regulatory compliance burden and
associated costs, limit our future capital raising strategies,
and place restrictions on certain origination and servicing
operations.
On July 21, 2010, President Obama signed the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010
(the Dodd-Frank Act) into law. The Dodd-Frank Act
represents a comprehensive overhaul of the financial services
industry in the United States. The Dodd-Frank Act includes,
among other things: (i) the creation of a Financial
Stability Oversight Council to identify emerging systemic risks
posed by financial firms, activities and practices, and to
improve cooperation between federal agencies; (ii) the
creation of a Bureau of Consumer Financial Protection authorized
to promulgate and enforce consumer protection regulations
relating to financial products; (iii) the
15
establishment of strengthened capital and prudential standards
for banks and bank holding companies; (iv) enhanced
regulation of financial markets, including derivatives and
securitization markets; and (v) amendments to the Truth in
Lending Act aimed at improving consumer protections with respect
to mortgage originations, including originator compensation,
minimum repayment standards, and prepayment considerations. The
exact scope of and applicability of many of these requirements
to us are currently unknown, as the regulations to implement the
Dodd-Frank Act generally have not yet been finalized. These
provisions of Dodd-Frank could increase our regulatory
compliance burden and associated costs and place restrictions on
certain origination and servicing operations, all of which could
in turn adversely affect our business, financial condition or
results of operations.
The
enforcement consent orders by certain federal agencies against
the largest servicers related to foreclosure practices could
impose additional compliance costs on our servicing
business.
On April 13, 2011, the four federal agencies overseeing
certain aspects of the mortgage market: the Federal Reserve, the
Office of the Comptroller of the Currency (OCC), the
Office of Thrift Supervision (OTS), and the Federal
Deposit Insurance Corporation (FDIC), entered into
enforcement consent orders with 14 of the largest mortgage
servicers in the United States regarding foreclosure practices.
The enforcement actions require the servicers, among other
things: (i) to promptly correct deficiencies in residential
mortgage loan servicing and foreclosure practices; (ii) to
make significant modifications in practices for residential
mortgage loan servicing and foreclosure processing, including
communications with borrowers and limitations on dual-tracking,
which occurs when servicers continue to pursue foreclosure
during the loan modification process; (iii) to ensure that
foreclosures are not pursued once a mortgage has been approved
for modification and to establish a single point of contact for
borrowers throughout the loan modification and foreclosure
processes; and (iv) to establish robust oversight and
controls pertaining to their third-party vendors, including
outside legal counsel, that provide default management or
foreclosure services. While these enforcement consent orders are
considered as not preemptive to the state actions, it remains to
be seen how state actions and proceedings will be affected by
the federal consents.
Although we are not a party to the above enforcement consent
orders, we might become subject to the terms of the consent
orders if (i) we subservice loans for the servicers that
are parties to the enforcement consent orders; (ii) the
agencies begin to enforce the consent orders by looking
downstream to our arrangement with certain mortgage servicers;
(iii) our investors request that we comply with certain
aspects of the consent orders; or (iv) we otherwise find it
prudent to comply with certain aspects of the consent orders. In
addition, the practices set forth in such enforcement consent
orders may be adopted by the industry as a whole, forcing us to
comply with them in order to follow standard industry practices
as required by our servicing agreements. While we have not made
changes to our operating policies and procedures, potential
changes to our servicing practices would increase compliance
costs for our servicing business, which could materially and
adversely affect our financial condition or results of
operations.
The continued
deterioration of the residential mortgage market may adversely
affect our business, financial condition or results of
operations.
Since mid-2007, adverse economic conditions, including high
unemployment, have impacted the residential mortgage market,
resulting in unprecedented delinquency, default and foreclosure
rates, leading to increased loss severities on all types of
residential mortgage loans due to sharp declines in residential
real estate values. Falling home prices have resulted in higher
loan-to-value
ratios and combined
loan-to-value
ratios, which yield lower recoveries in foreclosure, and result
in an increase in loss severities above those that would have
been realized had property values remained the same or continued
to increase. As
loan-to-value
ratios increase, borrowers are left with equity in their homes
that is not sufficient to permit them to refinance their
existing loans. This may also give borrowers an incentive to
default on their mortgage loan even if they have the ability to
make principal and interest payments, which we refer to as
strategic defaults.
16
Adverse economic conditions may also impact our Originations
Segment. Declining home prices and increasing
loan-to-value
ratios may preclude many potential borrowers, including
borrowers whose existing loans we service, from refinancing
their existing loans. An increase in prevailing interest rates
could decrease our origination volume through our Consumer
Direct Retail originations channel, our largest originations
channel by volume from December 31, 2006 to March 31,
2011, because this channel focuses predominantly on refinancing
existing mortgage loans.
A continued deterioration or a delay in any recovery in the
residential mortgage market may reduce the number of mortgages
we service or new mortgages that we originate, reduce the
profitability of mortgages currently serviced by us or adversely
affect our ability to sell mortgage loans originated by us or
increase delinquency rates. Any of the foregoing could adversely
affect our business, financial condition or results of
operations.
We may
experience serious financial difficulties as some servicers and
originators have experienced.
Since late 2006, a number of servicers and originators of
residential mortgage loans have experienced serious financial
difficulties and, in some cases, have gone out of business.
These difficulties have resulted, in part, from declining
markets for their mortgage loans as well as from claims for
repurchases of mortgage loans previously sold under provisions
that require repurchase in the event of early payment defaults
or for breaches of representations and warranties regarding loan
quality and certain other loan characteristics. Higher
delinquencies and defaults may contribute to these difficulties
by reducing the value of mortgage loan portfolios and requiring
originators to sell their portfolios at greater discounts to
par. In addition, the cost of servicing an increasingly
delinquent mortgage loan portfolio may rise without a
corresponding increase in servicing compensation. The value of
many residual interests retained by sellers of mortgage loans in
the securitization market has also been declining. Overall
origination volumes are down significantly in the current
economic environment. According to Inside Mortgage Finance,
total U.S. residential mortgage origination volume
decreased from $3.0 trillion in 2006 to $1.6 trillion in 2010.
Any of the foregoing could adversely affect our business,
financial condition or results of operations.
Borrowers with
adjustable rate mortgage loans are especially exposed to
increases in monthly payments and they may not be able to
refinance, which could cause delinquency, default and
foreclosure and therefore adversely affect our
business.
As of March 31, 2011, adjustable rate mortgage loans by
count made up approximately 13% of our servicing portfolio.
Borrowers with adjustable rate mortgage loans are being exposed
to increased monthly payments when the related mortgage
loans interest rate adjusts upward from an initial fixed
rate or a low introductory rate, as applicable, to the rate
computed in accordance with the applicable index and margin.
Borrowers with adjustable rate mortgage loans seeking to
refinance their mortgage loans to avoid increased monthly
payments as a result of an upwards adjustment of the mortgage
loans interest rate may no longer be able to find
available replacement loans at comparably low interest rates.
This increase in borrowers monthly payments, together with
any increase in prevailing market interest rates, may result in
significantly increased monthly payments for borrowers with
adjustable rate mortgage loans, which may cause delinquency,
default and foreclosure.
We principally
service higher risk loans, which exposes us to a number of
different risks.
A significant percentage of the mortgage loans we service are
higher risk loans, meaning that the loans are to less
creditworthy borrowers or for properties the value of which has
decreased. These loans are more expensive to service because
they require more frequent interactions with customers and
greater monitoring and oversight. As a result, these loans tend
to have higher delinquency and default rates, which can have a
significant impact on our revenues, expenses and the valuation
of our mortgage servicing rights. It may also be more difficult
for us to recover advances we are required to make with respect
to higher risk loans. In connection with the ongoing mortgage
market reform and regulatory developments, servicers of higher
risk loans may be subject to increased scrutiny by state
17
and federal regulators or may experience higher compliance
costs, which could result in higher servicing costs. We may not
be able to pass along to our servicing clients any incremental
costs we incur. All of the foregoing factors could therefore
adversely affect our business, financial condition or results of
operations.
A significant
change in delinquencies for the loans we service could adversely
affect our financial results.
Delinquency rates have a significant impact on our revenues, our
expenses and on the valuation of our mortgage servicing rights
as follows:
|
|
|
|
|
Revenue. An increase in delinquencies will
result in lower revenue for loans that we service for GSEs
because we only collect servicing fees from GSEs for performing
loans. Additionally, while increased delinquencies generate
higher ancillary fees, including late fees, these fees are not
likely to be recoverable in the event that the related loan is
liquidated. In addition, an increase in delinquencies lowers the
interest income we receive on cash held in collection and other
accounts.
|
|
|
|
Expenses. An increase in delinquencies will
result in a higher cost of service due to the increased time and
effort required to collect payments from delinquent borrowers.
It may also result in an increase in interest expense as a
result of an increase in our advancing obligations.
|
|
|
|
Liquidity. An increase in delinquencies also
could negatively impact our liquidity because of an increase in
borrowing under our advance facilities.
|
|
|
|
Valuation of mortgage servicing rights. We
base the price we pay for mortgage servicing rights on, among
other things, our projections of the cash flows from the related
pool of mortgage loans. Our expectation of delinquencies is a
significant assumption underlying those cash flow projections.
If delinquencies were significantly greater than expected, the
estimated fair value of our mortgage servicing rights could be
diminished. When the estimated fair value of mortgage servicing
rights is reduced, we would suffer a loss, which has a negative
impact on our financial results.
|
A further increase in delinquency rates could therefore
adversely affect our business, financial condition or results of
operations.
Decreasing
property values have caused an increase in
loan-to-value
ratios, resulting in borrowers having little or negative equity
in their property, which may reduce new loan originations and
provide incentive to borrowers to strategically default on their
loans.
According to CoreLogic, from December 2006 to December 2010, the
number of borrowers who owe more on a related mortgage loan than
the property is worth, or have negative equity in their
property, has increased from 7% to 23%. We believe that
borrowers with negative equity in their properties are more
likely to strategically default on mortgage loans and that a
significant increase in strategic defaults could materially
affect our business. Also, with the exception of loans modified
under the MHA, we are unable to refinance loans with high
loan-to-value
ratios. Increased
loan-to-value
ratios could reduce our ability to originate loans for borrowers
with low or negative equity and could adversely affect our
business, financial condition or results of operations.
The industry
in which we operate is highly competitive.
We operate in a highly competitive industry that could become
even more competitive as a result of economic, legislative,
regulatory and technological changes. In the servicing industry,
we face competition in areas such as fees and performance in
reducing delinquencies and entering successful modifications.
Competition to service mortgage loans comes primarily from large
commercial banks and savings institutions. These financial
institutions generally have significantly greater resources and
access to capital than we do, which gives them the benefit of a
lower cost of funds. Additionally, our servicing competitors may
decide to modify their servicing model to compete more directly
with our servicing model, or our servicing model may generate
lower margins as a result of competition or as overall economic
conditions improve.
18
In the mortgage loan originations industry, we face competition
in such areas as mortgage loan offerings, rates, fees and
customer service. Competition to originate mortgage loans comes
primarily from large commercial banks and savings institutions.
These financial institutions generally have significantly
greater resources and access to capital than we do, which gives
them the benefit of a lower cost of funds.
In addition, technological advances and heightened
e-commerce
activities have increased consumers accessibility to
products and services generally. This has intensified
competition among banking as well as non-banking companies in
offering mortgage loans and loan servicing. We may be unable to
compete successfully in our industries and this could adversely
affect our business, financial condition and results of
operations.
We might not
be able to maintain or grow our business if we cannot identify
and acquire mortgage servicing rights or enter into additional
subservicing agreements on favorable terms.
From December 31, 2007 to March 31, 2011, we have
grown the unpaid principal balance of the loans we service from
$12.7 billion to $67.0 billion, primarily through
acquiring mortgage servicing rights and entering into
subservicing agreements. Our servicing portfolio is subject to
run-off,
meaning that mortgage loans serviced by us may be repaid at
maturity, prepaid prior to maturity, refinanced with a mortgage
not serviced by us or liquidated through foreclosure,
deed-in-lieu
of foreclosure or other liquidation process or repaid through
standard amortization of principal. As a result, our ability to
maintain the size of our servicing portfolio depends on our
ability to originate additional mortgages and to acquire the
right to service additional pools of residential mortgages. We
may not be able to acquire servicing rights or enter into
additional subservicing agreements on terms favorable to us or
at all. In determining the purchase price for servicing rights,
management makes certain assumptions, many of which are beyond
our control, including, among other things:
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the rates of prepayment and repayment within the underlying
pools of mortgage loans;
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projected rates of delinquencies, defaults and liquidations;
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future interest rates;
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our cost to service the loans;
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ancillary fee income; and
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amounts of future servicing advances.
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We may not be
able to realize our significant investments in personnel and our
technology platform if we cannot identify and acquire mortgage
servicing rights or enter into additional subservicing
agreements on favorable terms.
We have made, and expect to continue to make, significant
investments in personnel and our technology platform to allow us
to service additional loans. In particular, prior to acquiring a
large portfolio of mortgage servicing rights or entering into a
large subservicing agreement, we invest significant resources in
recruiting, training, technology and systems. We may not realize
the expected benefits of these investments to the extent we are
unable to increase the pool of residential mortgages serviced,
or we do not appropriately value the mortgage servicing rights
that we do purchase. Any of the foregoing could adversely affect
our business, financial condition and results of operations.
We may not
realize all of the anticipated benefits of potential future
acquisitions.
Our ability to realize the anticipated benefits of potential
future acquisitions of servicing portfolios, originations
platforms
and/or
companies will depend, in part, on our ability to
scale-up to
appropriately service any such assets,
and/or
integrate the businesses of such acquired companies with our
business.
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The process of acquiring assets
and/or
companies may disrupt our business, and may not result in the
full benefits expected. The risks associated with acquisitions
include, among others:
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coordinating market functions;
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unanticipated issues in integrating information, communications
and other systems;
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unanticipated incompatibility of purchasing, logistics,
marketing and administration methods;
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retaining key employees; and
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the diversion of managements attention from ongoing
business concerns.
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Moreover, the success of any acquisition will depend upon our
ability to effectively integrate the acquired servicing
portfolios, origination platforms or businesses. The acquired
servicing portfolios, originations platforms or businesses may
not contribute to our revenues or earnings to any material
extent, and cost savings and synergies we expect at the time of
an acquisition may not be realized once the acquisition has been
completed. If we inappropriately value the assets we acquire or
the value of the assets we acquire declines after we acquire
them, the resulting charges may negatively affect the carrying
value of the assets on our balance sheet and our earnings.
Furthermore, if we incur additional indebtedness to finance an
acquisition, the acquired business may not be able to generate
sufficient cash flow to service that additional indebtedness.
Unsuitable or unsuccessful acquisitions could adversely affect
our business, financial condition and results of operations.
We may be
unable to obtain sufficient capital to meet the financing
requirements of our business.
Our financing strategy includes the use of significant leverage.
Accordingly, our ability to finance our operations and repay
maturing obligations rests in large part on our ability to
borrow money. We are generally required to renew our financing
arrangements each year, which exposes us to refinancing and
interest rate risks. Our ability to refinance existing debt and
borrow additional funds is affected by a variety of factors
including:
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limitations imposed on us under the indenture for our
10.875% senior notes due 2015 and other financing
agreements that contain restrictive covenants and borrowing
conditions that may limit our ability to raise additional debt;
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the decline in liquidity in the credit markets;
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prevailing interest rates;
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the strength of the lenders from whom we borrow;
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borrowing on advance facilities is limited by the amount of
eligible collateral pledged and may be less than the borrowing
capacity of the facility; and
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accounting changes that may impact calculations of covenants in
our debt agreements.
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In the ordinary course of our business, we periodically borrow
money or sell newly-originated loans to fund our servicing and
origination operations. See Managements Discussion
and Analysis of Financial Condition and Results of
OperationsLiquidity and Capital Resources. Our
ability to fund current operations and meet our service advance
obligations depends on our ability to secure these types of
financings on acceptable terms and to renew or replace existing
financings as they expire. Such financings may not be available
with the GSEs or other counterparties on acceptable terms or at
all.
An event of default, a negative ratings action by a rating
agency, an adverse action by a regulatory authority or a general
deterioration in the economy that constricts the availability of
credit similar to the market conditions that we have
experienced during the last two to three yearsmay increase
our cost of funds and make it difficult for us to renew existing
credit facilities and obtain new lines of credit. We intend to
continue to pursue opportunities to acquire loan servicing
portfolios, originations platforms
and/or
businesses that engage in loan servicing
and/or loan
originations. Our liquidity and capital resources may be
diminished by any such transactions. Additionally, we believe
20
that a significant acquisition may require us to raise
additional capital to facilitate such a transaction, which may
not be available on acceptable terms or at all.
The Basel Committee recently announced the final framework for
strengthening capital requirements, known as Basel III, which if
implemented by U.S. bank regulatory agencies, will increase
the cost of funding on banking institutions that we rely on for
financing. Such Basel III requirements could reduce our
sources of funding and increase the costs of originating and
servicing mortgage loans. If we are unable to obtain sufficient
capital on acceptable terms for any of the foregoing reasons,
this could adversely affect our business, financial condition or
results of operations.
We may not be
able to continue to grow our loan origination
volume.
Our loan origination business consists of refinancing existing
loans and, increasingly, providing purchase money loans to
homebuyers. The origination of purchase money mortgage loans is
greatly influenced by traditional business clients in the home
buying process such as realtors and builders. As a result, our
ability to secure relationships with such traditional business
clients will influence our ability to grow our purchase money
mortgage loan volume and, thus, our loan origination business.
As we grow our retail origination business, we may not be able
to receive the necessary volume of referrals or compete
successfully with other retail branches in the communities. In
addition, we may not recover investments made in acquiring or
establishing branches or achieve margins acceptable to us. Our
wholesale origination business operates largely through third
party mortgage brokers who are not contractually obligated to do
business with us. Further, our competitors also have
relationships with our brokers and actively compete with us in
our efforts to expand our broker networks. Accordingly, we may
not be successful in maintaining our existing relationships or
expanding our broker networks.
While we intend to use sales lead aggregators and Internet
marketing to reach new borrowers, our Consumer Direct Retail
origination platform may not succeed because of the
referral-driven nature of our industry. Further, our largest
customer base consists of the borrowers whose existing loans we
service. Because we primarily service credit-sensitive loans,
many of our existing servicing customers may not be able to
qualify for conventional mortgage loans with us
and/or may
pose a higher credit risk than other consumers. Furthermore, our
Consumer Direct Retail origination platform focuses
predominantly on refinancing existing mortgage loans. This type
of origination activity is sensitive to increases in interest
rates. If we are unable to continue to grow our loan origination
business, this could adversely affect our business, financial
condition or results of operations.
Our
counterparties may terminate our servicing rights and
subservicing contracts.
The owners of the loans we service and the primary servicers for
the loans we subservice, may, under certain circumstances,
terminate our mortgage servicing rights or subservicing
contracts, respectively.
As is standard in the industry, under the terms of our master
servicing agreement with GSEs, they have the right to terminate
us as servicer of the loans we service on their behalf at any
time and also have the right to cause us to sell the mortgage
servicing rights to a third party. In addition, some may also
have the right to require us to assign the mortgage servicing
rights to a subsidiary and to sell our equity interest in the
subsidiary to a third party. Under our subservicing contracts,
the primary servicers for whom we conduct subservicing
activities have the right to terminate our subservicing rights
with or without cause, with little notice and little to no
compensation. In November and December 2010, through our
relationship with the same GSE, we boarded subservicing rights
totaling approximately $25 billion in unpaid principal
balance. We expect to continue to acquire subservicing rights,
which could exacerbate these risks.
If we were to have our servicing or subservicing rights
terminated on a material portion of our servicing portfolio,
this could adversely affect our business, financial condition
and results of operations.
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Federal, state
and local laws and regulations may materially adversely affect
our business.
Federal, state and local governments have recently proposed or
enacted numerous laws, regulations and rules related to mortgage
loans generally, and foreclosure actions in particular. These
laws, regulations and rules may result in delays in the
foreclosure process, reduced payments by borrowers, modification
of the original terms of mortgage loans, permanent forgiveness
of debt
and/or
increased servicing advances. In some cases, local governments
have ordered moratoriums on foreclosure activity, which prevent
a servicer or trustee, as applicable, from exercising any
remedies they might have in respect of liquidating a severely
delinquent mortgage loan. Several courts also have taken
unprecedented steps to slow the foreclosure process or prevent
foreclosure altogether.
Due to the highly regulated nature of the residential mortgage
industry, we are required to comply with a wide array of
federal, state and local laws and regulations that regulate,
among other things, the manner in which we conduct our servicing
and originations business and the fees we may charge. These
regulations directly impact our business and require constant
compliance, monitoring and internal and external audits. A
material failure to comply with any of these laws or regulations
could subject us to lawsuits or governmental action, and this
could adversely affect our business, financial condition and
results of operations.
In addition, there continue to be changes in legislation and
licensing in an effort to simplify the consumer mortgage
experience, which require technology changes and additional
implementation costs for loan originators. We expect legislative
changes will continue in the foreseeable future, which may
increase our operating expenses.
Any of these changes in the law could adversely affect our
business, financial condition or results of operations. See
BusinessRegulation.
Unlike
competitors that are banks, we are subject to state licensing
requirements and substantial compliance costs.
Because we are not a depository institution, we do not benefit
from a federal exemption to state mortgage banking, loan
servicing or debt collection licensing and regulatory
requirements. We must comply with state licensing requirements
in all fifty states and the District of Columbia, and we are
sensitive to regulatory changes that may increase our costs
through stricter licensing laws, disclosure laws or increased
fees or that may impose conditions to licensing that we or our
personnel are unable to meet. Future state legislation and
changes in regulation may significantly increase the compliance
costs on our operations or reduce the amount of ancillary fees,
including late fees that we may charge to borrowers. This could
make our business cost-prohibitive in the affected state or
states and could materially affect our business.
Federal and
state legislative and agency initiatives in mortgage-backed
securities and securitization may adversely affect our
business.
There are federal and state legislative and agency initiatives
that could, once fully implemented, adversely affect our
business. For instance, the risk retention requirement under the
Dodd-Frank Act requires securitizers to retain a minimum
beneficial interest in mortgage-backed securities that they sell
through a securitization, absent certain qualified residential
mortgage exemptions. Once implemented, the risk retention
requirement may result in higher costs of certain origination
operations and impose on us additional compliance requirements
to meet servicing and origination criteria for qualified
residential mortgages. Additionally, the amendments to
Regulation AB relating to the registration statement
required to be filed by an issuer of asset-backed securities,
recently adopted by the SEC pursuant to the Dodd-Frank Act,
would increase compliance costs for ABS issuers, which could in
turn increase our cost of funding and operations. Lastly,
certain proposed federal legislation would permit borrowers in
bankruptcy to restructure mortgage loans secured by primary
residences. Bankruptcy courts could, if this legislation is
enacted, reduce the principal balance of a mortgage loan that is
secured by a lien on mortgaged property, reduce the mortgage
interest rate, extend the term to
22
maturity or otherwise modify the terms of a bankrupt
borrowers mortgage loan. Any of the foregoing could
materially affect our financial condition and results of
operations.
Our business
would be adversely affected if we lost our
licenses.
Our operations are subject to regulation, supervision and
licensing under various federal, state and local statutes,
ordinances and regulations. In most states in which we operate,
a regulatory agency regulates and enforces laws relating to
mortgage servicing companies and mortgage origination companies
such as us. These rules and regulations generally provide for
licensing as a mortgage servicing company, mortgage origination
company or third party default specialist, as applicable,
requirements as to the form and content of contracts and other
documentation, licensing of our employees and employee hiring
background checks, licensing of independent contractors with
whom we contract, restrictions on collection practices,
disclosure and record-keeping requirements and enforcement of
borrowers rights. In certain states, we are subject to
periodic examination by state regulatory authorities. Some
states in which we operate require special licensing or provide
extensive regulation of our business.
We believe that we maintain all material licenses and permits
required for our current operations and are in substantial
compliance with all applicable federal, state and local
regulations. We may not be able to maintain all requisite
licenses and permits, and the failure to satisfy those and other
regulatory requirements could result in a default under our
servicing agreements and have a material adverse effect on our
operations. Those states that currently do not provide extensive
regulation of our business may later choose to do so, and if
such states so act, we may not be able to obtain or maintain all
requisite licenses and permits. The failure to satisfy those and
other regulatory requirements could result in a default under
our servicing agreements and have a material adverse effect on
our operations. Furthermore, the adoption of additional, or the
revision of existing, rules and regulations could adversely
affect our business, financial condition or results of
operations.
We may be
required to indemnify or repurchase loans we originated, or will
originate, if our loans fail to meet certain criteria or
characteristics or under other circumstances.
The indentures governing our securitized pools of loans and our
contracts with purchasers of our whole loans contain provisions
that require us to indemnify or repurchase the related loans
under certain circumstances. While our contracts vary, they
contain provisions that require us to repurchase loans if:
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our representations and warranties concerning loan quality and
loan circumstances are inaccurate, including representations
concerning the licensing of a mortgage broker;
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we fail to secure adequate mortgage insurance within a certain
period after closing;
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a mortgage insurance provider denies coverage; and
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we fail to comply, at the individual loan level or otherwise,
with regulatory requirements in the current dynamic regulatory
environment.
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We believe that, as a result of the current market environment,
many purchasers of residential mortgage loans are particularly
aware of the conditions under which originators must indemnify
or repurchase loans and would benefit from enforcing any
repurchase remedies that they may have. We believe that our
exposure to repurchases under our representations and warranties
includes the current unpaid balance of all loans that we have
sold. In the period of three months ended March 31, 2011
and three years ended December 31, 2008, 2009, and 2010, we
have sold loans totaling an amount of $4.9 billion. To
recognize the potential loan repurchase or indemnification
losses, we have recorded a reserve amounting to
$8.0 million as of March 31, 2011. Such reserve,
however, may not be adequate to cover actual losses. See
Managements Discussion and Analysis of Financial
Condition and Results of OperationsComparison of
Consolidated Balance Sheet ItemsMarch 31, 2011 to
December 31, 2010Liabilities and Members
Equity. If we are required to indemnify or repurchase
loans that we originate and sell or securitize that result in
losses that exceed our reserve, this could adversely affect our
business, financial condition or results of operations.
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We may incur
litigation costs and related losses if the validity of a
foreclosure action is challenged by a borrower or if a court
overturns a foreclosure.
We may incur costs if we are required to, or if we elect to,
execute or re-file documents or take other action in our
capacity as a servicer in connection with pending or completed
foreclosures. We may incur litigation costs if the validity of a
foreclosure action is challenged by a borrower. If a court were
to overturn a foreclosure because of errors or deficiencies in
the foreclosure process, we may have liability to a title
insurer of the property sold in foreclosure. These costs and
liabilities may not be legally or otherwise reimbursable to us,
particularly to the extent they relate to securitized mortgage
loans. In addition, if certain documents required for a
foreclosure action are missing or defective, we could be
obligated to cure the defect or repurchase the loan. A
significant increase in litigation costs could adversely affect
our liquidity, and our inability to be reimbursed for an advance
could adversely affect our business, financial condition or
results of operations.
We are
required to follow the guidelines of the GSEs with which we do
business, and we are not able to negotiate our fees with these
entities for the purchase of our loans. Our competitors may be
able to sell their loans to these entities on more favorable
terms.
Even though we currently originate conventional agency and
government conforming loans, because we previously originated
non-prime mortgage loans, we believe that we are required to pay
a higher fee to access the secondary market for selling our
loans to GSEs. We believe that because many of our competitors
have always originated conventional loans, they are able to sell
newly originated loans on more favorable terms than us. As a
result, these competitors are able to earn higher margins than
we earn on originated loans, which could materially impact our
business.
In our transactions with the GSEs, we are required to follow
specific guidelines that impact the way we service and originate
mortgage loans including:
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our staffing levels and other servicing practices;
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the servicing and ancillary fees that we may charge;
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our modification standards and procedures; and
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the amount of advances reimbursable.
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We cannot negotiate these terms with the GSEs and they are
subject to change at any time. A significant change in these
guidelines that has the effect of decreasing our fees or
requires us to expend additional resources in providing mortgage
services could decrease our revenues or increase our costs,
which could adversely affect our business, financial condition
or results of operations.
We are
required to make servicing advances that can be subject to
delays in recovery or may not be recoverable in certain
circumstances.
During any period in which a borrower is not making payments, we
are required under most of our servicing agreements to advance
our own funds to meet contractual principal and interest
remittance requirements for investors, pay property taxes and
insurance premiums, legal expenses and other protective
advances. We also advance funds to maintain, repair and market
real estate properties on behalf of investors. As home values
change, we may have to reconsider certain of the assumptions
underlying our decisions to make advances and, in certain
situations, our contractual obligations may require us to make
certain advances for which we may not be reimbursed. In
addition, in the event a mortgage loan serviced by us defaults
or becomes delinquent, the repayment to us of the advance may be
delayed until the mortgage loan is repaid or refinanced or a
liquidation occurs. A delay in our ability to collect an advance
may adversely affect our liquidity, and our inability to be
reimbursed for an advance could adversely affect our business,
financial condition or results of operations.
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Changes to
government mortgage modification programs may adversely affect
future incremental revenues.
Under HAMP and similar government programs, a participating
servicer may be entitled to receive financial incentives in
connection with any modification plans it enters into with
eligible borrowers and subsequent pay for success
fees to the extent that a borrower remains current in any agreed
upon loan modification. While we participate in and dedicate
numerous resources to HAMP, we may not continue to participate
in or realize future revenues from HAMP or any other government
mortgage modification program. Changes in legislation regarding
HAMP that result in the modification of outstanding mortgage
loans, and changes in the requirements necessary to qualify for
refinancing mortgage loans may impact the extent to which we
participate in and receive financial benefits from such
programs, or may increase the expense of participating in such
programs. Changes in governmental loan modification programs
could also result in an increase to our costs.
Under the MHA, a participating servicer may receive a financial
incentive to modify qualifying loans, in accordance with the
plans guidelines and requirements. The MHA also allows us
to refinance loans with a high
loan-to-value
ratio of up to 125%. This allows us to refinance loans to
existing borrowers who have little or negative equity in their
homes. Changes in legislation or regulations regarding the MHA
could reduce our volume of refinancing originations to borrowers
with little or negative equity in their homes. Changes to HAMP,
the MHA and other similar programs could adversely affect our
business, financial condition or results of operations.
We are highly
dependent upon programs administered by GSEs such as Fannie Mae
and Freddie Mac to generate revenues through mortgage loan sales
to institutional investors. Any changes in existing U.S.
government-sponsored mortgage programs could materially and
adversely affect our business, financial position, results of
operations or cash flows.
Our ability to generate revenues through mortgage loan sales to
institutional investors depends to a significant degree on
programs administered by GSEs, such as Fannie Mae and Freddie
Mac, a government agency, Ginnie Mae, and others that facilitate
the issuance of mortgage-backed securities in the secondary
market. These GSEs play a critical role in the residential
mortgage industry, and we have significant business
relationships with many of them. Almost all of the conforming
loans that we originate qualify under existing standards for
inclusion in guaranteed mortgage securities backed by GSEs. We
also derive other material financial benefits from these
relationships, including the assumption of credit risk by these
GSEs on loans included in such mortgage securities in exchange
for our payment of guarantee fees and the ability to avoid
certain loan inventory finance costs through streamlined loan
funding and sale procedures.
Any discontinuation of, or significant reduction in, the
operation of these GSEs or any significant adverse change in the
level of activity in the secondary mortgage market or the
underwriting criteria of these GSEs could adversely affect our
business, financial condition or results of operations.
The
conservatorship of Fannie Mae and Freddie Mac and related
efforts, along with any changes in laws and regulations
affecting the relationship between Fannie Mae and Freddie Mac
and the U.S. federal government, may adversely affect our
business and prospects.
Due to increased market concerns about the ability of Fannie Mae
and Freddie Mac to withstand future credit losses associated
with securities held in their investment portfolios, and on
which they provide guarantees, without the direct support of the
U.S. federal government, on July 30, 2008, the
government passed the Housing and Economic Recovery Act of 2008.
On September 7, 2008, the Federal Housing Finance Agency,
(the FHFA), placed Fannie Mae and Freddie Mac into
conservatorship and, together with the U.S. Treasury,
established a program designed to boost investor confidence in
their respective debt and mortgage-backed securities. As the
conservator of Fannie Mae and Freddie Mac, the FHFA controls and
directs the operations of Fannie Mae and Freddie Mac and may
(i) take over the assets of and operate Fannie Mae and
Freddie Mac with all the powers of the
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shareholders, the directors and the officers of Fannie Mae and
Freddie Mac and conduct all business of Fannie Mae and Freddie
Mac; (ii) collect all obligations and money due to Fannie
Mae and Freddie Mac; (iii) perform all functions of Fannie
Mae and Freddie Mac which are consistent with the
conservators appointment; (iv) preserve and conserve
the assets and property of Fannie Mae and Freddie Mac; and
(v) contract for assistance in fulfilling any function,
activity, action or duty of the conservator.
In addition to the FHFA becoming the conservator of Fannie Mae
and Freddie Mac, the U.S. Treasury and the FHFA have
entered into preferred stock purchase agreements between the
U.S. Treasury and Fannie Mae and Freddie Mac pursuant to
which the U.S. Treasury will ensure that each of Fannie Mae
and Freddie Mac maintains a positive net worth.
Although the U.S. Treasury has committed capital to Fannie
Mae and Freddie Mac, these actions may not be adequate for their
needs. If these actions are inadequate, Fannie Mae and Freddie
Mac could continue to suffer losses and could fail to honor
their guarantees and other obligations. The future roles of
Fannie Mae and Freddie Mac could be significantly reduced and
the nature of their guarantees could be considerably limited
relative to historical measurements. Any changes to the nature
of the guarantees provided by Fannie Mae and Freddie Mac could
redefine what constitute agency and government conforming
mortgage-backed securities and could have broad adverse market
implications. Such market implications could adversely affect
our business, financial condition or results of operations.
The geographic
concentration of our servicing portfolio may result in a higher
rate of delinquencies and may affect our financial
condition.
As of March 31, 2011, approximately 18%, 15% and 5% of the
aggregate outstanding loan balance in our servicing portfolio is
secured by properties located in California, Florida and Texas,
respectively. Some of these states have experienced severe
declines in property values and are experiencing a
disproportionately high rate of delinquencies and foreclosures
relative to other states. To the extent that these states
continue to experience weaker economic conditions or greater
rates of decline in real estate values than the United States
generally, a concentration of the loans we service in those
regions may be expected to increase the effect of the risks
listed in this Risk Factors section. The impact of
property value declines may increase in magnitude and it may
continue for a long period of time. Additionally, if states in
which we have greater concentrations of business were to change
their licensing or other regulatory requirements to make our
business cost prohibitive, this could require us to stop doing
business in those states or increase the cost of doing business
in those states and could adversely affect our business,
financial condition or results of operations.
We use
financial models and estimates in determining the fair value of
certain assets, such as mortgage servicing rights and
investments in debt securities. If our estimates or assumptions
prove to be incorrect, we may be required to record impairment
charges, which could adversely affect our
earnings.
We use internal financial models that utilize, wherever
possible, market participant data to value certain of our
assets, including our mortgage servicing rights, newly
originated loans held for sale and investments in debt
securities for purposes of financial reporting. These models are
complex and use asset-specific collateral data and market inputs
for interest and discount rates. In addition, the modeling
requirements of mortgage servicing rights are complex because of
the high number of variables that drive cash flows associated
with mortgage servicing rights. Even if the general accuracy of
our valuation models is validated, valuations are highly
dependent upon the reasonableness of our assumptions and the
predictability of the relationships that drive the results of
the models. If loan loss levels are higher than anticipated, due
to an increase in delinquencies or prepayment speeds, or
financial market illiquidity continues beyond our estimate, the
value of certain of our assets may decrease. We may be required
to record impairment charges, which could impact our ability to
satisfy minimum net worth covenants of $175.0 million and
borrowing conditions in our debt agreements and
26
adversely affect our business, financial condition or results of
operations. Errors in our financial models or changes in
assumptions could adversely affect our business, financial
condition or results of operations.
Our earnings
may decrease because of changes in prevailing interest
rates.
Our profitability is directly affected by changes in prevailing
interest rates. The following are the material risks we face
related to changes in prevailing interest rates:
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an increase in prevailing interest rates could generate an
increase in delinquency, default and foreclosure rates resulting
in an increase in both operating expenses and interest expense
and could cause a reduction in the value of our assets;
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a substantial and sustained increase in prevailing interest
rates could adversely affect our loan origination volume because
refinancing an existing loan would be less attractive for
homeowners and qualifying for a loan may be more difficult for
consumers;
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an increase in prevailing interest rates would increase the cost
of servicing our outstanding debt, including our ability to
finance servicing advances and loan originations;
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a decrease in prevailing interest rates may require us to record
a decrease in the value of our mortgage servicing
rights; and
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a change in prevailing interest rates could impact our earnings
from our custodial deposit accounts.
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Any such change in prevailing interest rates could adversely
affect our business, financial condition or results of
operations.
Our hedging
strategies may not be successful in mitigating our risks
associated with interest rates.
From time to time, we have used various derivative financial
instruments to provide a level of protection against interest
rate risks, but no hedging strategy can protect us completely.
The derivative financial instruments that we select may not have
the effect of reducing our interest rate risks. In addition, the
nature and timing of hedging transactions may influence the
effectiveness of these strategies. Poorly designed strategies,
improperly executed and documented transactions or inaccurate
assumptions could actually increase our risks and losses. In
addition, hedging strategies involve transaction and other
costs. Our hedging strategies and the derivatives that we use
may not be able to adequately offset the risks of interest rate
volatility and our hedging transactions may result in or magnify
losses. Furthermore, interest rate derivatives may not be
available at all, or at favorable terms, particularly during
economic downturns. Any of the foregoing risks could adversely
affect our business, financial condition or results of
operations.
A downgrade in
our servicer ratings could have an adverse effect on our
business, financial condition or results of
operations.
Standard & Poors and Fitch rate us as a
residential loan servicer. Our current favorable ratings from
the rating agencies are important to the conduct of our loan
servicing business. These ratings may be downgraded in the
future. Any such downgrade could adversely affect our business,
financial condition or results of operations.
We depend on
the accuracy and completeness of information about borrowers and
counterparties.
In deciding whether to extend credit or to enter into other
transactions with borrowers and counterparties, we may rely on
information furnished to us by or on behalf of borrowers and
counterparties, including financial statements and other
financial information. We also may rely on
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representations of borrowers and counterparties as to the
accuracy and completeness of that information and, with respect
to financial statements, on reports of independent auditors. We
additionally rely on representations from public officials
concerning the licensing and good standing of the third party
mortgage brokers through whom we do business. While we have a
practice of independently verifying the borrower information
that we use in deciding whether to extend credit or to agree to
a loan modification, including employment, assets, income and
credit score, if any of this information is intentionally or
negligently misrepresented and such misrepresentation is not
detected prior to loan funding, the value of the loan may be
significantly lower than expected. Whether a misrepresentation
is made by the loan applicant, the mortgage broker, another
third party or one of our employees, we generally bear the risk
of loss associated with the misrepresentation. We have controls
and processes designed to help us identify misrepresented
information in our loan origination operations. We, however, may
not have detected or may not detect all misrepresented
information in our loan originations
and/or our
business clients. Any such misrepresented information could
adversely affect our business, financial condition or results of
operations.
Technology
failures could damage our business operations and increase our
costs.
The financial services industry as a whole is characterized by
rapidly changing technologies, and system disruptions and
failures caused by fire, power loss, telecommunications
failures, unauthorized intrusion, computer viruses and disabling
devices, natural disasters and other similar events, may
interrupt or delay our ability to provide services to our
borrowers. Security breaches, acts of vandalism and developments
in computer capabilities could result in a compromise or breach
of the technology that we use to protect our borrowers
personal information and transaction data. Systems failures
could cause us to incur significant costs and this could
adversely affect our business, financial condition or results of
operations.
The success
and growth of our business will depend upon our ability to adapt
to and implement technological changes.
Our mortgage loan origination business is currently dependent
upon our ability to effectively interface with our brokers,
borrowers and other third parties and to efficiently process
loan applications and closings. The origination process is
becoming more dependent upon technological advancement, such as
our continued ability to process applications over the Internet,
accept electronic signatures, provide process status updates
instantly and other borrower-expected conveniences. Maintaining
and improving this new technology and becoming proficient with
it may also require significant capital expenditures. As these
requirements increase in the future, we will have to fully
develop these technological capabilities to remain competitive
and any failure to do so could adversely affect our business,
financial condition or results of operations.
Any failure of
our internal security measures or breach of our privacy
protections could cause harm to our reputation and subject us to
liability.
In the ordinary course of our business, we receive and store
certain confidential information concerning borrowers.
Additionally, we enter into third party relationships to assist
with various aspects of our business, some of which require the
exchange of confidential borrower information. If a third party
were to compromise or breach our security measures or those of
the vendors, through electronic, physical or other means, and
misappropriate such information, it could cause interruptions in
our operations, expose us to significant liabilities, reporting
obligations, remediation costs and damage to our reputation. Any
of the foregoing risks could adversely affect our business,
financial condition or results of operations.
Our vendor
relationships subject us to a variety of risks.
We have significant vendors that, among other things, provide us
with financial, technology and other services to support our
servicing and originations businesses. With respect to vendors
engaged to perform activities required by servicing criteria, we
have elected to take responsibility for assessing
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compliance with the applicable servicing criteria for the
applicable vendor and are required to have procedures in place
to provide reasonable assurance that the vendors
activities comply in all material respects with servicing
criteria applicable to the vendor. In the event that a
vendors activities do not comply with the servicing
criteria, it could negatively impact our servicing agreements.
In addition, if our current vendors were to stop providing
services to us on acceptable terms, including as a result of one
or more vendor bankruptcies due to poor economic conditions, we
may be unable to procure alternatives from other vendors in a
timely and efficient manner and on acceptable terms, or at all.
Further, we may incur significant costs to resolve any such
disruptions in service and this could adversely affect our
business, financial condition or results of operations.
The loss of
the services of our senior managers could have an adverse effect
on our business.
The experience of our senior managers is a valuable asset to us.
Our management team has an average of approximately
26 years of experience in the residential mortgage
origination and servicing industry and has been with us for an
average of approximately 10 years. We do not maintain key
life insurance policies relating to our senior managers. The
loss of the services of our senior managers could adversely
affect our business, financial condition or results of
operations.
Our business
could suffer if we fail to attract and retain a highly skilled
workforce.
Our future success will depend on our ability to identify, hire,
develop, motivate and retain highly qualified personnel for all
areas of our organization, in particular skilled managers, loan
servicers, default specialists, loan officers and underwriters.
Trained and experienced personnel are in high demand, and may be
in short supply in some areas. Many of the companies with which
we compete for experienced employees have greater resources than
we have and may be able to offer more attractive terms of
employment. In addition, we invest significant time and expense
in training our employees, which increases their value to
competitors who may seek to recruit them. We may not be able to
attract, develop and maintain an adequate skilled workforce
necessary to operate our businesses, and labor expenses may
increase as a result of a shortage in the supply of qualified
personnel. If we are unable to attract and retain such
personnel, we may not be able to take advantage of acquisitions
and other growth opportunities that may be presented to us and
this could materially affect our business, financial condition
or results of operations.
Legal
proceedings and related costs could adversely affect our
financial results.
We are routinely involved in legal proceedings concerning
matters that arise in the ordinary course of our business. The
outcome of these proceedings may adversely affect our financial
results. In addition, a number of participants in our industry
have been the subject of class action lawsuits and regulatory
actions by states attorneys general. Litigation and other
proceedings may require that we pay settlement costs, damages,
penalties or other charges, which could adversely affect our
financial results. See BusinessLegal
Proceedings.
Negative
public opinion could damage our reputation and adversely affect
our earnings.
Reputation risk, or the risk to our business, earnings and
capital from negative public opinion, is inherent in our
business. Negative public opinion can result from our actual or
alleged conduct in any number of activities, including lending
and debt collection practices, corporate governance, and from
actions taken by government regulators and community
organizations in response to those activities. Negative public
opinion can also result from media coverage, whether accurate or
not. Negative public opinion can adversely affect our ability to
attract and retain customers, trading counterparties and
employees and can expose us to litigation and regulatory action.
Although we take steps to minimize reputation risk in dealing
with our customers and communities, this risk will always be
present in our organization.
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Risks Related to
Our Organization and Structure
If the
ownership of our common stock continues to be highly
concentrated, it may prevent you and other minority stockholders
from influencing significant corporate decisions and may result
in conflicts of interest.
Following the completion of this offering, FIF HE Holdings LLC,
which is primarily owned by certain private equity funds managed
by an affiliate of Fortress, referred to in this prospectus as
the Initial Stockholder, will own
approximately % of our outstanding
common stock or % if the
underwriters over-allotment option is fully exercised. As
a result, the Initial Stockholder will own shares sufficient for
the majority vote over all matters requiring a stockholder vote,
including: the election of directors; mergers, consolidations or
acquisitions; the sale of all or substantially all of our assets
and other decisions affecting our capital structure; the
amendment of our certificate of incorporation and our bylaws;
and our winding up and dissolution. This concentration of
ownership may delay, deter or prevent acts that would be favored
by our other stockholders. The interests of the Initial
Stockholder may not always coincide with our interests or the
interests of our other stockholders. This concentration of
ownership may also have the effect of delaying, preventing or
deterring a change in control of our Company. Also, the Initial
Stockholder may seek to cause us to take courses of action that,
in its judgment, could enhance its investment in us, but which
might involve risks to our other stockholders or adversely
affect us or our other stockholders, including investors in this
offering. As a result, the market price of our common stock
could decline or stockholders might not receive a premium over
the then-current market price of our common stock upon a change
in control. In addition, this concentration of share ownership
may adversely affect the trading price of our common stock
because investors may perceive disadvantages in owning shares in
a company with significant stockholders. See Principal and
Selling Stockholders and Description of Capital
StockAnti-Takeover Effects of Delaware Law, Our Amended
and Restated Certificate of Incorporation and Bylaws.
We are a
holding company with no operations and rely on our operating
subsidiaries to provide us with funds necessary to meet our
financial obligations and to pay dividends.
We are a holding company with no material direct operations. Our
principal assets are the equity interests we directly or
indirectly hold in our operating subsidiaries, which own our
operating assets. As a result, we are dependent on loans,
dividends and other payments from our subsidiaries to generate
the funds necessary to meet our financial obligations and to pay
dividends on our common stock. Our subsidiaries are legally
distinct from us and may be prohibited or restricted from paying
dividends or otherwise making funds available to us under
certain conditions. If we are unable to obtain funds from our
subsidiaries, we may be unable to, or our board may exercise its
discretion not to, pay dividends.
We do not
anticipate paying any dividends on our common stock in the
foreseeable future.
We do not expect to declare or pay any cash or other dividends
in the foreseeable future on our common stock, as we intend to
use cash flow generated by operations to grow our business. The
indenture for our 10.875% senior notes due 2015 will
restrict our ability to pay cash dividends on our common stock,
and we may also enter into credit agreements or other borrowing
arrangements in the future that restrict or limit our ability to
pay cash dividends on our common stock. See Dividend
Policy.
Certain
provisions of the Stockholders Agreement, our amended and
restated certificate of incorporation and our bylaws could
hinder, delay or prevent a change in control of our company,
which could adversely affect the price of our common
stock.
Certain provisions of the Stockholders Agreement, our amended
and restated certificate of incorporation and our bylaws will
contain provisions that could make it more difficult for a third
party to acquire us without the consent of our board of
directors or the Initial Stockholder. These provisions provide
for:
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a classified board of directors with staggered three-year terms;
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removal of directors only for cause and only with the
affirmative vote of at least 80% of the voting interest of
stockholders entitled to vote (provided, however, that for so
long as the Fortress Stockholders (as defined below) own at
least 40% of our issued and outstanding common stock, directors
may be removed with or without cause with the affirmative vote
of a majority of the voting interest of stockholders entitled to
vote);
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provisions in our amended and restated certificate of
incorporation and bylaws will prevent stockholders from calling
special meetings of our stockholders (provided, however, that
for so long as the Fortress Stockholders beneficially own at
least 25% of our issued and outstanding common stock, any
stockholders that collectively beneficially own at least 25% of
our issued and outstanding common stock may call special
meetings of our stockholders);
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advance notice requirements by stockholders with respect to
director nominations and actions to be taken at annual meetings;
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the Stockholders Agreement will provide certain rights to the
Fortress Stockholders with respect to the designation of
directors for nomination and election to our board of directors,
including the ability to appoint a majority of the members of
our board of directors for so long as the Fortress Stockholders
continue to hold at least 40% of the outstanding shares of our
common stock. See Certain Relationships and Related Party
TransactionsStockholders Agreement;
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no provision in our amended and restated certificate of
incorporation for cumulative voting in the election of
directors, which means that the holders of a majority of the
outstanding shares of our common stock can elect all the
directors standing for election;
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our amended and restated certificate of incorporation and bylaws
will only permit action by our stockholders outside a meeting by
unanimous written consent, provided, however, that for so long
as the Fortress Stockholders beneficially own at least 25% of
our issued and outstanding common stock, our stockholders may
act without a meeting by written consent of a majority of our
stockholders; and
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under our amended and restated certificate of incorporation, our
board of directors has authority to cause the issuance of
preferred stock from time to time in one or more series and to
establish the terms, preferences and rights of any such series
of preferred stock, all without approval of our stockholders.
Nothing in our amended and restated certificate of incorporation
precludes future issuances without stockholder approval of the
authorized but unissued shares of our common stock.
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In addition, these provisions may make it difficult and
expensive for a third party to pursue a tender offer, change in
control or takeover attempt that is opposed by our Initial
Stockholder, our management
and/or our
board of directors. Public stockholders who might desire to
participate in these types of transactions may not have an
opportunity to do so, even if the transaction is favorable to
stockholders. These anti-takeover provisions could substantially
impede the ability of public stockholders to benefit from a
change in control or change our management and board of
directors and, as a result, may adversely affect the market
price of our common stock and your ability to realize any
potential change of control premium. See Description of
Capital StockAnti-Takeover Effects of Delaware Law, Our
Amended and Restated Certificate of Incorporation and
Bylaws.
Certain of our
stockholders have the right to engage or invest in the same or
similar businesses as us.
The Initial Stockholder and certain other affiliates of Fortress
and permitted transferees (referred to in this prospectus,
collectively, as the Fortress Stockholders) have
other investments and business activities in addition to their
ownership of us. Under our amended and restated certificate of
incorporation, the Fortress Stockholders have the right, and
have no duty to abstain from exercising such right, to engage or
invest in the same or similar businesses as us, do business with
any of our clients, customers or vendors or employ or otherwise
engage any of our officers, directors or employees. If the
Fortress Stockholders or any of their officers, directors or
employees acquire knowledge of a potential transaction that
could be a corporate opportunity, they have no duty, to the
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fullest extent permitted by law, to offer such corporate
opportunity to us, our stockholders or our affiliates.
In the event that any of our directors and officers who is also
a director, officer or employee of any of the Fortress
Stockholders acquires knowledge of a corporate opportunity or is
offered a corporate opportunity, provided that this knowledge
was not acquired solely in such persons capacity as our
director or officer and such person acts in good faith, then to
the fullest extent permitted by law such person is deemed to
have fully satisfied such persons fiduciary duties owed to
us and is not liable to us, if the Fortress Stockholder pursues
or acquires the corporate opportunity or if the Fortress
Stockholder does not present the corporate opportunity to us.
See Certain Relationships and Related Party
TransactionsStockholders Agreement.
Risks Related to
this Offering
An active
trading market for our common stock may never develop or be
sustained.
Although we have applied to have our common stock approved for
listing on the New York Stock Exchange, an active trading market
of our common stock may not develop on that exchange or
elsewhere or, if developed, that market may not be sustained.
Accordingly, an active trading market for our common stock may
not develop or be maintained, which will adversely affect the
liquidity and your ability to sell your shares of common stock
when desired, or the prices that you may obtain for your shares.
The market
price and trading volume of our common stock may be volatile,
which could result in rapid and substantial losses for our
stockholders.
Even if an active trading market develops, the market price of
our common stock may be highly volatile and could be subject to
wide fluctuations. In addition, the trading volume in our common
stock may fluctuate and cause significant price variations to
occur. The initial public offering price of our common stock
will be determined by negotiation between us, the Initial
Stockholder and the representatives of the underwriters based on
a number of factors and may not be indicative of prices that
will prevail in the open market following completion of this
offering. If the market price of our common stock declines
significantly, you may be unable to resell your shares at or
above your purchase price, if at all. The market price of our
common stock may fluctuate or decline significantly in the
future. Some of the factors that could negatively affect our
share price or result in fluctuations in the price or trading
volume of our common stock include:
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variations in our quarterly or annual operating results;
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changes in our earnings estimates (if provided) or differences
between our actual financial and operating results and those
expected by investors and analysts;
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the contents of published research reports about us or our
industry or the failure of securities analysts to cover our
common stock after this offering;
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additions or departures of key management personnel;
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any increased indebtedness we may incur in the future;
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announcements by us or others and developments affecting us;
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actions by institutional stockholders;
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litigation and governmental investigations;
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changes in market valuations of similar companies;
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speculation or reports by the press or investment community with
respect to us or our industry in general;
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increases in market interest rates that may lead purchasers of
our shares to demand a higher yield;
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announcements by us or our competitors of significant contracts,
acquisitions, dispositions, strategic relationships, joint
ventures or capital commitments; and
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general market, political and economic conditions, including any
such conditions and local conditions in the markets in which our
customers are located.
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These broad market and industry factors may decrease the market
price of our common stock, regardless of our actual operating
performance. The stock market in general has from time to time
experienced extreme price and volume fluctuations, including in
recent months. In addition, in the past, following periods of
volatility in the overall market and the market price of a
companys securities, securities class action litigation
has often been instituted against these companies. This
litigation, if instituted against us, could result in
substantial costs and a diversion of our managements
attention and resources.
Future
offerings of debt or equity securities by us may adversely
affect the market price of our common stock.
In the future, we may attempt to obtain financing or to further
increase our capital resources by issuing additional shares of
our common stock or offering debt or additional equity
securities, including commercial paper, medium-term notes,
senior or subordinated notes, debt securities convertible into
equity or shares of preferred stock. Issuing additional shares
of our common stock or other additional equity securities or
securities convertible into equity may dilute the economic and
voting rights of our existing stockholders or reduce the market
price of our common stock, or both. Upon liquidation, holders of
such debt securities and preferred shares, if issued, and
lenders with respect to other borrowings, would receive a
distribution of our available assets prior to the holders of our
common stock. Debt securities convertible into equity could be
subject to adjustments in the conversion ratio pursuant to when
certain events may increase the number of equity securities
issuable upon conversion. Preferred shares, if issued, could
have a preference with respect to liquidating distributions or a
preference with respect to dividend payments that could limit
our ability to pay dividends to the holders of our common stock.
Our decision to issue securities in any future offering will
depend on market conditions and other factors beyond our
control, which may adversely affect the amount, timing or nature
of our future offerings. Thus, holders of our common stock bear
the risk of our future offerings reducing the market price of
our common stock and diluting their share holdings in us. See
Description of Capital Stock.
The market
price of our common stock could be negatively affected by sales
of substantial amounts of our common stock in the public
markets.
After this offering, there will
be shares
of common stock outstanding. There will
be shares
issued and outstanding if the underwriters exercise their
over-allotment option in full. Of our issued and outstanding
shares, all the common stock sold in this offering will be
freely transferable, except for any shares held by our
affiliates, as that term is defined in Rule 144
under the Securities Act of 1933, as amended, or the Securities
Act. Following completion of the offering,
approximately % of our outstanding
common stock (or % if the
underwriters overallotment option is exercised in full)
will be held by the Initial Stockholder and members of our
management and employees, and can be resold into the public
markets in the future in accordance with the requirements of
Rule 144. See Shares Eligible For Future
Sale.
We and our executive officers, directors and the Initial
Stockholder (who will hold in the aggregate
approximately % of our issued and
outstanding common stock immediately after the completion of
this offering) have agreed with the underwriters that, subject
to limited exceptions, for a period
of
days after the date of this prospectus, we and they will not
directly or indirectly offer, pledge, sell, contract to sell,
sell any option or contract to purchase or otherwise dispose of
any common stock or any securities convertible into or
exercisable or exchangeable for common stock, or in any manner
transfer all or a portion of the economic consequences
associated with the ownership of common stock, or cause a
registration statement covering any common stock to be filed,
without the prior written consent of the designated
representatives. The designated representatives may waive
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these restrictions at their discretion. Shares of common stock
held by our employees, other than our officers who are subject
to the lockup provisions referred to above, are not subject to
these restrictions and may be sold without restriction at any
time.
Pursuant to our Stockholders Agreement that we will enter into
prior to completion of this offering, the Initial Stockholder
and certain of its affiliates and permitted third-party
transferees will have the right, in certain circumstances, to
require us to register their
approximately shares
of our common stock under the Securities Act for sale into the
public markets. Upon the effectiveness of such a registration
statement, all shares covered by the registration statement will
be freely transferable. See Certain Relationships and
Related Party TransactionsStockholders Agreement.
The market price of our common stock may decline significantly
when the restrictions on resale by our existing stockholders
lapse. A decline in the price of our common stock might impede
our ability to raise capital through the issuance of additional
common stock or other equity securities.
The future
issuance of additional common stock in connection with our
incentive plans, acquisitions or otherwise will dilute all other
shareholdings.
After this offering, assuming the exercise in full by the
underwriters of their over-allotment option, we will have an
aggregate
of shares
of common stock authorized but unissued and not reserved for
issuance under our incentive plans. We may issue all of these
shares of common stock without any action or approval by our
stockholders, subject to certain exceptions. We also intend to
continue to evaluate acquisition opportunities and may issue
common stock in connection with these acquisitions. Any common
stock issued in connection with our incentive plans,
acquisitions, the exercise of outstanding stock options or
otherwise would dilute the percentage ownership held by the
investors who purchase common stock in this offering.
Investors in
this offering will suffer immediate and substantial
dilution.
The initial public offering price of our common stock will be
substantially higher than the as adjusted net tangible book
value per share issued and outstanding immediately after this
offering. Our net tangible book value per share as of
March 31, 2011 was approximately
$ and represents the amount of
book value of our total tangible assets minus the book value of
our total liabilities, excluding deferred gains, divided by the
number of our shares of common stock then issued and
outstanding. Investors who purchase common stock in this
offering will pay a price per share that substantially exceeds
the net tangible book value per share of common stock. If you
purchase shares of our common stock in this offering, you will
experience immediate and substantial dilution of
$ in the net tangible book value
per share, based upon the initial public offering price of
$ per share (the midpoint of the
price range set forth on the cover of this prospectus).
Investors who purchase common stock in this offering will have
purchased % of the shares issued
and outstanding immediately after the offering, but will have
paid % of the total consideration
for those shares.
We will have
broad discretion in the use of a significant part of the net
proceeds from this offering and may not use them
effectively.
Our management currently intends to use the net proceeds from
this offering in the manner described in Use of
Proceeds and will have broad discretion in the application
of a significant part of the net proceeds from this offering.
The failure by our management to apply these funds effectively
could affect our ability to operate and grow our business.
As a public
company, we will incur additional costs and face increased
demands on our management.
As a public company with shares listed on a U.S. exchange,
we will need to comply with an extensive body of regulations
that did not apply to us previously, including provisions of the
Sarbanes Oxley Act, regulations of the SEC and requirements of
the NYSE. We expect these rules and regulations to increase our
legal and financial compliance costs and to make some activities
more time-consuming and costly. For example, as a result of
becoming a public company, we intend to add independent
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directors, create additional board committees and adopt certain
policies regarding internal controls and disclosure controls and
procedures. In addition, we will incur additional costs
associated with our public company reporting requirements and
maintaining directors and officers liability
insurance. We are currently evaluating and monitoring
developments with respect to these rules, which may impose
additional costs on us and materially affect our business,
financial condition or results of operations.
We will be
required by Section 404 of the Sarbanes-Oxley Act to
evaluate the effectiveness of our internal controls by the end
of fiscal 2012, and the outcome of that effort may adversely
affect our business, financial condition or results of
operations.
As a
U.S.-listed
public company, we will be required to comply with
Section 404 of the Sarbanes-Oxley Act by December 31,
2012. Section 404 will require that we evaluate our
internal control over financial reporting to enable management
to report on, and our independent auditors to audit as of the
end of the next fiscal year, the effectiveness of those
controls. While we have begun the lengthy process of evaluating
our internal controls, we are in the early phases of our review
and will not complete our review until well after this offering
is completed. The outcome of our review may adversely affect our
business, financial condition or results of operations. During
the course of our review, we may identify control deficiencies
of varying degrees of severity, and we may incur significant
costs to remediate those deficiencies or otherwise improve our
internal controls. As a public company, we will be required to
report control deficiencies that constitute a material
weakness in our internal control over financial reporting.
We would also be required to obtain an audit report from our
independent auditors regarding the effectiveness of our internal
controls over financial reporting. If we fail to implement the
requirements of Section 404 in a timely manner, we may be
subject to sanctions or investigation by regulatory authorities,
including the SEC or the NYSE. Furthermore, if we discover a
material weakness or our auditor does not provide an unqualified
audit report, our share price could decline and our ability to
raise capital could be impaired.
Risks Related to
Taxation
Our ability to
use net operating loss and tax credit carryovers and certain
built-in losses to reduce future tax payments is limited by
provisions of the Internal Revenue Code, and may be subject to
further limitation as a result of the transactions contemplated
by this offering.
Sections 382 and 383 of the Internal Revenue Code contain
rules that limit the ability of a company that undergoes an
ownership change, which is generally any change in ownership of
more than 50% of its stock over a three-year period, to utilize
its net operating loss and tax credit carryforwards and certain
built-in losses recognized in years after the ownership change.
These rules generally operate by focusing on ownership changes
involving stockholders owning directly or indirectly 5% or more
of the stock of a company and any change in ownership arising
from a new issuance of stock by the company. Generally, if an
ownership change occurs, the yearly taxable income limitation on
the use of net operating loss and tax credit carryforwards and
certain built-in losses is equal to the product of the
applicable long-term tax exempt rate and the value of the
companys stock immediately before the ownership change. As
a result of the Restructuring, we will assume the net operating
losses, tax credit carryovers and built-in losses of certain
parent entities of our Initial Stockholder. However, our use of
the $ million of federal net
operating losses, the
$ million of tax credits and
certain built-in losses that we will assume in the Restructuring
will be subject to annual taxable income limitations. As a
result, we may be unable to offset our taxable income with
losses, or our tax liability with credits, before such losses
and credits expire and therefore would incur larger federal
income tax liability.
In addition, it is possible that the transactions described in
this offering, either on a standalone basis or when combined
with future transactions (including issuances of new shares of
our common stock and sales of shares of our common stock), will
cause us to undergo one or more ownership changes. In that
event, we generally would not be able to use our pre-change loss
or credit carryovers or certain built-in losses prior to such
ownership change to offset future taxable income in excess of
the annual limitations imposed by Sections 382 and 383 and
those attributes already subject to limitations (as a result of
prior ownership changes) may be subject to more stringent
limitations.
35
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under Prospectus Summary,
Risk Factors, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
Industry, Business and elsewhere in this
prospectus may contain forward-looking statements that reflect
our current views with respect to, among other things, future
events and financial performance. You can identify these
forward-looking statements by the use of forward-looking words
such as outlook, believes,
expects, potential,
continues, may, will,
should, could, seeks,
approximately, predicts,
intends, plans, estimates,
anticipates, target,
projects, contemplates or the negative
version of those words or other comparable words. Any
forward-looking statements contained in this prospectus are
based upon our historical performance and on our current plans,
estimates and expectations in light of information currently
available to us. The inclusion of this forward-looking
information should not be regarded as a representation by us,
Fortress, the Initial Stockholder, the underwriters or any other
person that the future plans, estimates or expectations
contemplated by us will be achieved. Such forward-looking
statements are subject to various risks and uncertainties and
assumptions relating to our operations, financial results,
financial condition, business, prospects, growth strategy and
liquidity. Accordingly, there are or will be important factors
that could cause our actual results to differ materially from
those indicated in these statements. We believe that these
factors include, but are not limited to:
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|
the impact of the ongoing implementation of the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 on our
business activities and practices, costs of operations and
overall results of operations;
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|
the impact of enforcement consent orders entered into by 14 of
the largest servicers and four federal agencies on our servicing
practices;
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|
the continued deterioration of the residential mortgage market,
increase in monthly payments on adjustable rate mortgage loans,
adverse economic conditions, decrease in property values or
increase in delinquencies and defaults;
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|
our ability to compete successfully in the mortgage loan
servicing and mortgage loan originations industry;
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|
|
our ability to maintain the size of our servicing portfolio by
successfully identifying attractive acquisition opportunities,
including mortgage servicing rights, subservicing contracts,
servicing platforms and origination platforms;
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|
our ability to
scale-up
appropriately and integrate our acquisitions to realize the
anticipated benefits of any such potential future acquisitions;
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|
our ability to obtain sufficient capital to meet our financing
requirements;
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|
our ability to grow our loan origination volume and develop a
distributed retail sales channel;
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|
the termination of our servicing rights and subservicing
contracts;
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|
|
changes to federal, state and local laws and regulations
concerning loan servicing, loan origination, loan modification
or the licensing of entities that engage in these activities;
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|
changes in accounting standards;
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|
our ability to meet certain criteria or characteristics under
the indentures governing our securitized pools of loans;
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|
|
our ability to follow the specific guidelines of GSEs or a
significant change in such guidelines;
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|
delays in our ability to collect or be reimbursed for servicing
advances;
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|
|
|
changes to HAMP, MHA or other similar government programs;
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36
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loss of our licenses;
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|
changes in our business relationships with Fannie Mae, Freddie
Mac, Ginnie Mae and others that facilitate the issuance of
mortgage-backed securities;
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|
changes to the nature of the guarantees of Fannie Mae and
Freddie Mac and the market implications of such changes;
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|
|
errors in our financial models or changes in assumptions;
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requirement to write down the value of certain assets;
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changes in prevailing interest rates;
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our ability to successfully mitigate our risks through hedging
strategies;
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changes in our servicer ratings;
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|
the accuracy and completeness of information about borrowers and
counterparties;
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|
our ability to maintain our technology systems and our ability
to adapt such systems for future operating environments;
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|
failure of our internal security measures or breach of our
privacy protections;
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failure of our vendors to comply with servicing criteria;
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|
the loss of the services of our senior managers;
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|
expected changes to our income tax status;
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|
failure to attract and retain a highly skilled workforce;
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|
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increase in legal proceedings and related costs;
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|
changes in public opinion concerning mortgage originators or
default specialists;
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|
|
conflicts of interest with Fortress and our Initial
Stockholder; and
|
|
|
|
other risks described in the Risk Factors section of
this prospectus beginning on page 15.
|
These factors should not be construed as exhaustive and should
be read in conjunction with the other cautionary statements that
are included in this prospectus. The forward-looking statements
made in this prospectus relate only to events as of the date on
which the statements are made. We do not undertake any
obligation to publicly update or review any forward-looking
statement except as required by law, whether as a result of new
information, future developments or otherwise.
If one or more of these or other risks or uncertainties
materialize, or if our underlying assumptions prove to be
incorrect, our actual results may vary materially from what we
may have expressed or implied by these forward-looking
statements. We caution that you should not place undue reliance
on any of our forward-looking statements. You should
specifically consider the factors identified in this prospectus
that could cause actual results to differ before making an
investment decision to purchase our common stock. Furthermore,
new risks and uncertainties arise from time to time, and it is
impossible for us to predict those events or how they may affect
us.
37
USE OF
PROCEEDS
The net proceeds to us from the sale of
the shares
of common stock offered hereby are estimated to be approximately
$ , assuming an initial public
offering price of $ per share (the
midpoint of the price range set forth on the cover page of this
prospectus) and after deducting the offering expenses payable by
us. We will not receive any proceeds from the sale of our common
stock by the Initial Stockholder, including any shares sold by
the Initial Stockholder pursuant to the underwriters
over-allotment option. We intend to use the net proceeds from
this offering for general corporate purposes.
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share (the
midpoint of the price range set forth on the cover page of this
prospectus) would increase (decrease) the net proceeds to us
from this offering by
$ million, assuming the
number of shares of common stock offered by us, as set forth on
the cover page of this prospectus, remains the same and after
deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by us.
38
DIVIDEND
POLICY
We do not expect to pay dividends on our common stock for the
foreseeable future. Instead, we anticipate that all of our
earnings in the foreseeable future will be used for the
operation and growth of our business. Our ability to pay
dividends to holders of our common stock is limited as a
practical matter by the terms of some of our debt, including our
10.875% senior notes and other indebtedness. See
Managements Discussion and Analysis of Financial
Condition and Results of OperationsDescription of Certain
Indebtedness.
Any future determination to pay dividends on our common stock
will be at the discretion of our board of directors and will
depend upon many factors, including our financial position,
results of operations, liquidity, legal requirements,
restrictions that may be imposed by the terms in current and
future financing instruments and other factors deemed relevant
by our board of directors.
39
CAPITALIZATION
The following sets forth our capitalization as of March 31,
2011:
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on an actual basis; and
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|
|
on an as adjusted basis to give effect to the Restructuring and
sale
of shares
of common stock by us in this offering, at an assumed initial
public offering price of $ per
share, the midpoint of the price range set forth on the cover
page of this prospectus, after deducting the underwriting
discount and estimated offering expenses payable by us.
|
You should read this table in conjunction with Use of
Proceeds, Selected Consolidated Historical Financial
Data and Managements Discussion and Analysis
of Financial Condition and Results of Operations and our
audited consolidated financial statements and related notes and
other financial information included elsewhere in this
prospectus.
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|
|
|
|
|
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|
|
As of March 31, 2011
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
|
(in thousands)
|
|
|
Cash and cash
equivalents(1)
|
|
$
|
48,420
|
|
|
$
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
10.875% Senior Notes Due 2015
|
|
|
244,410
|
|
|
|
|
|
Notes payable:
|
|
|
|
|
|
|
|
|
Servicing:
|
|
|
|
|
|
|
|
|
MBS Advance Financing Facility
|
|
|
136,795
|
|
|
|
|
|
ABS Advance Financing Facility
|
|
|
219,146
|
|
|
|
|
|
MSR Notes
|
|
|
14,345
|
|
|
|
|
|
Originations:
|
|
|
|
|
|
|
|
|
$300 Million Warehouse Facility
|
|
|
177,648
|
|
|
|
|
|
$100 Million Warehouse Facility
|
|
|
27,942
|
|
|
|
|
|
$75 Million Warehouse Facility
|
|
|
27,063
|
|
|
|
|
|
$50 Million Warehouse Facility
|
|
|
|
|
|
|
|
|
GSE ASAP+ Short-Term Financing Facility
|
|
|
5,512
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
|
608,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-recourse debtLegacy Assets
|
|
|
133,592
|
|
|
|
|
|
ABS non-recourse debt (at fair value)
|
|
|
489,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
1,475,774
|
|
|
|
|
|
Stockholders and members equity:
|
|
|
|
|
|
|
|
|
Members equity
|
|
|
265,243
|
|
|
|
|
|
Common stock, par value $ per
share; shares
authorized
and shares
issued and outstanding on a pro forma basis
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders and members equity
|
|
|
265,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
1,741,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
(1) |
|
We utilize a cash management approach that uses our excess cash
to temporarily pay down existing borrowings. By re-leveraging
our unencumbered assets, our total liquidity position was
$114.9 million as of March 31, 2011. Total liquidity
is a measure that management uses to determine amounts expected
to be available to fund our business and consists of cash and
cash equivalents ($48.4 million as of March 31, 2011)
as well as amounts we believe we would receive in respect of
unencumbered assets ($66.7 million as of March 31,
2011). Unencumbered assets for this purpose consist of servicing
advances that we expect to be converted into cash within a short
period of time and new loans that are eligible to be financed
under available committed warehouse lines. |
40
DILUTION
If you invest in our common shares, your ownership interest will
be diluted to the extent of the difference between the initial
public offering price in this offering per share of our common
stock and the pro forma as adjusted net tangible book value per
share of our common stock upon consummation of this offering.
Net tangible book value per share represents the book value of
our total tangible assets less the book value of our total
liabilities divided by the number of shares of common stock then
issued and outstanding.
Our net tangible book value as of March 31, 2011 was
approximately $265.2 million, or approximately
$ per share based on
the shares
of common stock issued and outstanding as of such date. After
giving effect to our sale of common stock in this offering at
the initial public offering price of
$ per share (the midpoint of the
price range set forth on the cover page of this prospectus), and
after deducting the estimated expenses related to this offering,
our pro forma as adjusted net tangible book value as
of
would have been $ million, or
$ per share (assuming no exercise
of the underwriters over-allotment option). This
represents an immediate and substantial dilution of
$ per share to new investors
purchasing common stock in this offering. Sales of shares by the
Initial Stockholder in this offering do not affect our net
tangible book value. The following table illustrates this
dilution per share:
|
|
|
|
|
Assumed initial public offering price per share
|
|
$
|
|
|
Net tangible book value per share as of March 31, 2011
|
|
|
|
|
Increase in net tangible book value per share attributable to
this offering
|
|
|
|
|
Pro forma as adjusted net tangible book value per share after
giving effect to this offering
|
|
|
|
|
Dilution per share to new investors in this offering
|
|
$
|
|
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share (the
midpoint of the price range set forth on the cover page of this
prospectus) would increase (decrease) our net tangible book
value by $ million, the pro
forma as adjusted net tangible book value per share after this
offering by $ per share and the
dilution to new investors in this offering by
$ per share, assuming the number
of shares of common stock offered by us, as set forth on the
cover page of this prospectus, remains the same and after
deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by us.
The following table summarizes, on a pro forma basis as of
March 31, 2011, the differences between the number of
shares of common stock purchased from us, the total price and
the average price per share paid by existing stockholders and by
the new investors in this offering, before deducting the
underwriting discounts and commissions and estimated offering
expenses payable by us, at an assumed initial public offering
price of $ per share (the midpoint
of the price range set forth on the cover page of this
prospectus).
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|
|
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|
|
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|
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|
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|
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Average
|
|
|
Shares Purchased
|
|
Total Contribution
|
|
price per
|
|
|
Number
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Share
|
|
|
(in thousands)
|
|
(in thousands)
|
|
|
|
Existing Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The sale
of shares
of our common shares to be sold by the Initial Stockholder in
this offering will reduce the number of shares of common stock
held by existing stockholders
to shares,
or % of the total shares
outstanding, and will increase the number of shares of common
stock held by new investors
to shares,
or % of the total common shares
outstanding.
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share (the
midpoint of the price range set forth on the cover page of this
prospectus) would increase (decrease)
41
total consideration paid by new investors in this offering and
the average price per share paid by new investors by
$ million and
$ , respectively, assuming the
number of shares of common stock offered by us, as set forth on
the cover page of this prospectus, remains the same, and after
deducting underwriting discounts and commissions and other
estimated offering and other expenses.
If the underwriters option to purchase additional shares
is exercised in full, the pro forma as adjusted net tangible
book value per share after this offering as of March 31,
2011 would be approximately $ per
share and the dilution to new investors per share after this
offering would be $ per share.
Furthermore, the percentage of our shares held by existing
equity owners after the sale of shares by the Initial
Stockholder would decrease to
approximately % and the percentage
of our shares held by new investors would increase to
approximately %, based
on shares
of common stock outstanding as of March 31, 2011.
42
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables present selected consolidated financial
information of Nationstar Mortgage LLC, our predecessor company,
as well as pro forma information that reflects the impact of our
conversion to a taxable entity from a disregarded entity for tax
purposes. We were formed on May 9, 2011 and have not, to
date, conducted any activities other than those incident to our
formation and the preparation of this registration statement. We
were formed solely for the purpose of reorganizing the
organizational structure of FIF HE Holdings LLC and Nationstar
Mortgage LLC, so that the issuer is a corporation rather than a
limited liability company and our existing investors will own
common stock rather than equity interests in a limited liability
company.
This prospectus does not include financial statements of
Nationstar Mortgage Holdings Inc., as it has only been recently
incorporated for the purpose of effecting this offering and
currently holds no material assets and does not engage in any
operations. Prior to the completion of this offering, all of the
equity interests in Nationstar Mortgage LLC will be transferred
from our Initial Stockholder to two direct, wholly-owned
subsidiaries of Nationstar Mortgage Holdings Inc., pursuant to
the Restructuring. We anticipate this transaction will be
accounted for as a reorganization of entities under common
control; accordingly, there will be no change in the basis of
the underlying assets and liabilities.
You should read these tables along with Managements
Discussion and Analysis of Financial Condition and Results of
Operations, Business and our consolidated
financial statements and the related notes included elsewhere in
this prospectus.
We have not presented selected consolidated statement of
operations and balance sheet data for periods prior to the
Acquisition. The entity that we acquiredCHECwas a
consolidated subsidiary of Centex Financial Services
(CFS), and we did not receive, separate audited or
unaudited financials of CHEC in connection with the Acquisition.
We only received consolidated financials of CFS. In 2009, CFS
was subsequently acquired by a third party. We do not have, nor
do we have the right to obtain, financial statements for CHEC
prior to the date of the Acquisition. Therefore, because the
information is not available to us, it cannot be created without
unreasonable effort and expense. We also believe that financial
information for the period from April 1, 2006 to
July 10, 2006 does not contribute to an investors
understanding of our historical financial performance and
financial condition because, before the Acquisition, CHEC had
historically operated as a subprime mortgage lender. After the
Acquisition, in the third fiscal quarter of 2007, we transformed
the business from a subprime mortgage lender to a mortgage
servicer and conforming loan originator. As a result, financial
information with respect to the business conducted before the
Acquisition would not provide useful information to investors
about trends in our financial condition and results of operation.
The selected consolidated statement of operations data for the
years ended December 31, 2008, 2009 and 2010 and the
selected consolidated balance sheet data as of December 31,
2009 and 2010 have been derived from our audited financial
statements included elsewhere in this prospectus. The selected
consolidated statement of operations data for the year ended
December 31, 2007 and the selected consolidated balance
sheet data as of December 31, 2008 have been derived from
our audited financial statements that are not included in this
prospectus. The selected consolidated statement of operations
data for the period from July 11, 2006 to December 31,
2006 and the selected consolidated balance sheet data as of
December 31, 2006, and 2007 have been derived from our
unaudited financial statements, which are not included in this
prospectus. The selected consolidated statement of operations
data for the three months ended March 31, 2010 and 2011 and
the selected consolidated
43
balance sheet data as of March 31, 2011 have been derived
from our unaudited financial statements included elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 11, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
to December
|
|
|
Year Ended December 31,
|
|
|
March 31,
|
|
|
|
31, 2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
(Dollars in thousands, except for per share amounts)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
$
|
14,161
|
|
|
$
|
46,301
|
|
|
$
|
74,007
|
|
|
$
|
100,218
|
|
|
$
|
184,084
|
|
|
$
|
38,750
|
|
|
$
|
64,686
|
|
Gain (loss) on mortgage loans held for sale
|
|
|
4,476
|
|
|
|
(94,673
|
)
|
|
|
(86,663
|
)
|
|
|
(21,349
|
)
|
|
|
77,344
|
|
|
|
12,429
|
|
|
|
20,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
18,637
|
|
|
|
(48,372
|
)
|
|
|
(12,656
|
)
|
|
|
78,869
|
|
|
|
261,428
|
|
|
|
51,179
|
|
|
|
85,192
|
|
Total expenses and impairments
|
|
|
98,837
|
|
|
|
259,222
|
|
|
|
147,777
|
|
|
|
142,367
|
|
|
|
220,976
|
|
|
|
40,089
|
|
|
|
68,121
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
75,114
|
|
|
|
163,022
|
|
|
|
92,060
|
|
|
|
52,518
|
|
|
|
98,895
|
|
|
|
31,333
|
|
|
|
18,318
|
|
Interest expense
|
|
|
(55,172
|
)
|
|
|
(118,553
|
)
|
|
|
(65,548
|
)
|
|
|
(69,883
|
)
|
|
|
(116,163
|
)
|
|
|
(29,135
|
)
|
|
|
(25,368
|
)
|
Loss on interest rate swaps and caps
|
|
|
|
|
|
|
(21,353
|
)
|
|
|
(23,689
|
)
|
|
|
(14
|
)
|
|
|
(9,801
|
)
|
|
|
(2,779
|
)
|
|
|
|
|
Fair value changes in ABS securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,297
|
)
|
|
|
(9,777
|
)
|
|
|
(2,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
19,942
|
|
|
|
23,116
|
|
|
|
2,823
|
|
|
|
(17,379
|
)
|
|
|
(50,366
|
)
|
|
|
(10,358
|
)
|
|
|
(9,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(60,258
|
)
|
|
$
|
(284,478
|
)
|
|
$
|
(157,610
|
)
|
|
$
|
(80,877
|
)
|
|
$
|
(9,914
|
)
|
|
$
|
732
|
|
|
$
|
7,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Information (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical net (loss) income before taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(9,914
|
)
|
|
|
|
|
|
$
|
7,369
|
|
Pro forma adjustment for
taxes(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(9,914
|
)
|
|
|
|
|
|
|
7,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
outstanding(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
(1) |
|
Our pro forma effective tax rate for 2010 is 0%. The pro forma
tax provision (benefit), before valuation allowance, is ($3,612)
on pre-tax loss of ($9,914). We have determined that recognizing
a tax benefit and corresponding deferred tax asset is not
appropriate as management believes it is more likely than not
the deferred tax asset will not be realized. We will also assume
certain tax attributes of certain parent entities of FIF HE
Holdings LLC as a result of the Restructuring, including
approximately $200 million of net operating loss carry forwards
as of December 31, 2010. We expect to record a full valuation
allowance against any resulting deferred tax asset. The
utilization of these tax attributes will be limited pursuant to
Sections 382 and 383 of the Internal Revenue Code. |
|
|
|
|
|
Our pro forma effective tax rate for the quarter ended
March 31, 2011 is 0%. The pro forma tax provision, before
any valuation adjustments, is $2,782 on pre-tax income of
$7,369. Nationstar assumes for pro forma purposes that the
previously recorded valuation allowance will be released to the
extent necessary to eliminate any tax provision. |
44
|
|
|
(2) |
|
Represents number of shares issued and outstanding after giving
effect to our sale of common stock in this offering and does not
include common stock that may be issued and sold upon exercise
of the underwriters overallotment option. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
As of December 31,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,335
|
|
|
$
|
41,251
|
|
|
$
|
9,357
|
|
|
$
|
41,645
|
|
|
$
|
21,223
|
|
|
$
|
21,223
|
|
|
$
|
48,420
|
|
Mortgage servicing rights
|
|
|
49,783
|
|
|
|
82,634
|
|
|
|
110,808
|
|
|
|
114,605
|
|
|
|
145,062
|
|
|
|
145,062
|
|
|
|
151,159
|
|
Total assets
|
|
|
2,145,007
|
|
|
|
1,303,221
|
|
|
|
1,122,001
|
|
|
|
1,280,185
|
|
|
|
1,947,181
|
|
|
|
1,947,181
|
|
|
|
1,868,255
|
|
Unsecured senior notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244,061
|
|
|
|
244,061
|
|
|
|
244,410
|
|
Notes payable
|
|
|
1,966,368
|
|
|
|
967,307
|
|
|
|
810,041
|
|
|
|
771,857
|
|
|
|
709,758
|
|
|
|
709,758
|
|
|
|
608,451
|
|
Nonrecourse debtLegacy Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
177,675
|
|
|
|
138,662
|
|
|
|
138,662
|
|
|
|
133,592
|
|
ABS nonrecourse debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
496,692
|
|
|
|
496,692
|
|
|
|
489,321
|
|
Total liabilities
|
|
|
2,005,213
|
|
|
|
1,041,525
|
|
|
|
866,079
|
|
|
|
1,016,362
|
|
|
|
1,690,809
|
|
|
|
1,690,809
|
|
|
|
1,603,012
|
|
Total members equity
|
|
|
139,794
|
|
|
|
261,696
|
|
|
|
255,922
|
|
|
|
263,823
|
|
|
|
256,372
|
|
|
|
256,372
|
|
|
|
265,243
|
|
45
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Nationstar Mortgage Holdings Inc. is a newly formed Delaware
corporation that has not, to date, conducted any activities
other than those incident to its formation and the preparation
of this registration statement. Upon the completion of the
Restructuring, we will conduct our business through Nationstar
Mortgage LLC and its consolidated subsidiaries. The following
discussion and analysis of our financial condition and results
of operations should be read together with our financial
statements and related notes and other financial information
appearing elsewhere in this prospectus. This discussion and
analysis contains forward-looking statements that involve risk,
uncertainties and assumptions. See Cautionary Statement
Regarding Forward-Looking Statements. Our actual results
could differ materially from those anticipated in the forward
looking statements as a result of many factors, including those
discussed in Risk Factors and elsewhere in this
prospectus. Except where the context otherwise requires, the
terms we, us, or our refer
to the business of Nationstar Mortgage LLC and its consolidated
subsidiaries.
General
Our
Business
We are a leading residential mortgage loan servicer and one of
the top five non-bank residential mortgage servicers in the
United States as measured by aggregate unpaid principal balance
of loans serviced. Our servicing portfolio consists of over
404,000 loans with an aggregate unpaid principal balance of
$67.0 billion as of December 31, 2010. We service
mortgage loans in all 50 states, and we are licensed as a
residential mortgage loan servicer
and/or a
third-party default specialist in all states that require such
licensing. In addition to our core Servicing business, we
currently originate primarily conventional agency (Fannie Mae
and Freddie Mac) and government (Federal Housing Administration
and Department of Veterans Affairs) residential mortgage loans,
and we are licensed to originate residential mortgage loans in
49 states.
Our headquarters and operations are based in Lewisville, Texas.
As of April 30, 2011, we had a total of 2,176 employees.
Our business primarily consists of our core Servicing platform
and adjacent businesses, and is complemented by our Originations
segment that helps replace a portion of our servicing portfolio
run-off.
We also have a legacy asset portfolio, which consists primarily
of non-prime and nonconforming residential mortgage loans, most
of which we originated from April to July 2007. In November
2009, we engaged in a transaction through which we term-financed
our legacy assets with a non-recourse loan that requires no
additional capital or equity contributions. Additionally, we
consolidated certain securitization trusts where it was
determined that we had both the power to direct the activities
that most significantly impact the variable interest
entities (VIE) economic performance and the
obligation to absorb losses or the right to receive benefits
that could potentially be significant to the VIE, pursuant to
new consolidation accounting guidance related to VIEs adopted on
January 1, 2010.
The analysis of our financial condition and results of
operations as discussed herein is primarily focused on the
combined results of our two Operating Segments: Servicing and
Originations.
Managing
Business Performance
Management is focused on four key initiatives to manage our
Operating Segments: (i) effective management of our
servicing portfolio; (ii) growing our servicing portfolio
through the acquisition of servicing rights or entering into
subservicing contracts; (iii) growing our adjacent
businesses; and (iv) origination and sale or securitization of
prime agency and government conforming residential mortgage
loans and retention of mortgage servicing rights. We also focus
on access to diverse and multiple liquidity sources to
finance (i) our obligations to pay advances as required by
our servicing agreements and (ii) our loan originations.
46
We service loans by purchasing the right to service the loans,
which is referred to as a mortgage servicing right,
from the owner of the mortgage loan or pool of mortgage loans,
or retaining the mortgage servicing right related to the loans
that we originate and sell. Additionally, we enter into
subservicing contracts with primary servicers that own mortgage
servicing rights, pursuant to which we agree to service the loan
on behalf of the primary servicer for a fee. The aggregate
unpaid principal balance of our servicing portfolio as of
March 31, 2011, December 31, 2010, 2009 and 2008 was
$67.0 billion, $64.2 billion, $33.7 billion and
$21.3 billion, respectively.
Servicing fees consist of an amount based on either the unpaid
principal balance of the loans serviced or a per-loan fee amount
and also include ancillary fees such as late fees. In addition,
we earn interest income on amounts deposited in collection
accounts and amounts held in escrow to pay property taxes and
insurance, which we refer to as float income. We also generate
incentive fees from owners of the loans that we service for
meeting certain delinquency and loss goals and for arranging
successful loss mitigation programs. Moreover, we earn incentive
fees from the U.S. Treasury for loans that we successfully
modify within the parameters of the Home Affordable Modification
Program (HAMP) and other assistance programs it
sponsors.
Delinquency rates on the loans we service impact the contractual
servicing and ancillary fees we receive, and the costs to
service. Delinquent loans cost more to service than performing
loans due to the additional resources and servicing advances
required. We monitor our delinquency levels through our staffing
models, our business plans and other macroeconomic factors.
Apart from the cost of financing our advances, the largest cost
in our servicing organization is staffing cost, which is
primarily impacted by delinquency levels and the size of our
portfolio. Other operating costs in our Servicing Segment
include technology, occupancy and general and administrative
costs. Management continually monitors these costs to improve
efficiency by streamlining workflows and implementing technology
based solutions.
We provide services complementary to our servicing business by
leveraging our servicing expertise for our current clients for
either a base and/or incentive fee. We also own a
non-controlling
interest in NREIS, an ancillary real estate services and vendor
management company that directly or indirectly provides title,
settlement and valuation services for loan originations and
default management.
We intend to continue building our conventional originations
platform. Through our originations platform, we are able to
create mortgage servicing assets at a reasonable cost and
partially replenish our servicing portfolio organically.
Prevailing interest rates are one of the key factors that impact
origination volume. Housing market trends also impact
origination volume with a strong housing market leading to
higher loan origination volume, and a weak housing market
leading to lower loan origination volume. Management continually
evaluates interest rate movements and trends to assess the
impact on loan applications and volume, as well as their
corresponding impact on revenue and costs.
In evaluating revenue per loan originated, management focuses on
various revenue sources, including: loan origination points and
fees; and overall gain or loss on the sale or securitization of
the loan. These components are compared to established revenue
targets and operating plans.
In addition to the cost of financing our originations, our
Originations Segment operating costs include staffing costs,
sales commissions, technology, rent and other general and
administrative costs. Management continually monitors costs
through comparisons to operating plans.
Market
Considerations
Revenues from our Operating Segments primarily consist of
(i) servicing fee income based generally on the size of our
servicing portfolio and (ii) gain on mortgage loans held
for sale based generally on the origination volume. Maintaining
and growing our revenues depends on our ability to acquire
additional mortgage servicing rights, enter into additional
subservicing contracts, and expand our originations platform.
47
Servicing
Current trends in the mortgage servicing industry include high
delinquencies, a significant increase in loan modifications and
the need for more loss mitigation and high-touch servicing
expertise.
Overall, all segments of the residential mortgage sector,
including conventional and non-prime, have experienced increased
delinquency levels and higher credit losses due to stress in the
real estate market and economic environment. Residential loan
delinquencies and related losses are at historical highs,
prompting GSEs and other owners of mortgage loans to focus on
home ownership preservation and superior credit performance.
The increase in delinquencies has placed significant pressure on
the operating capacity of servicers that are not staffed at
appropriate levels for delinquent borrowers and also led owners
of mortgage loans to search for servicers with experience in
loss mitigation. This trend has led to increased demand for
experienced high-touch servicers and provides us opportunities
to acquire additional mortgage servicing rights and enter into
additional subservicing contracts.
These trends may also be impacted by the ongoing implementation
of the
Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010; the
negotiations involving the 50 State Attorneys General, certain
federal regulators and servicers; the enforcement consent orders
entered into by 14 of the largest servicers and four federal
agencies; potential changes to federal, state and local laws and
regulations concerning loan servicing, loan origination, loan
modification or the licensing of entities that engage in these
activities; and the initiative of the Federal Housing Finance
Agency to align the servicing requirements related to delinquent
mortgages and to modify the servicing compensation related to
Fannie Mae and Freddie Mac loans.
However, we cannot predict how many, if any, mortgage servicing
rights will be available for sale or subservicing opportunities
will be available in the future; if we will be able to acquire
mortgage servicing rights from third parties or enter into
additional subservicing contracts, including any transactions
facilitated by GSEs; or whether these mortgage servicing rights
will be available at acceptable prices or on acceptable terms.
Originations
Todays U.S. residential loan originations sector
primarily offers conventional agency and government conforming
mortgage loans. Non-prime and alternative lending programs and
products represent only a small fraction of total originations.
This has led to a consolidation in mortgage lenders in both the
retail and wholesale channels and has resulted in less
competition. We believe that the consolidation of the lending
community has led to a market share opportunity for us.
Origination volume is impacted by changes in interest rates and
the housing market. Depressed home prices and increased
loan-to-value
ratios may preclude many potential borrowers, including
borrowers whose existing loans we service, from refinancing
their existing loans. An increase in prevailing interest rates
could decrease our origination volume through our Consumer
Direct Retail originations channel, our largest originations
channel by volume, because this channel focuses predominantly on
refinancing existing mortgage loans.
In addition, there continue to be changes in legislation and
licensing in an effort to simplify the consumer mortgage
experience, which require technology changes and additional
implementation costs for loan originators. We expect legislative
changes will continue in the foreseeable future, which may
increase our operating expenses.
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 two 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: (a) fair value
measurements; and (b) sale of mortgage loans. We believe
that the judgment, estimates and
48
assumptions used in the preparation of our consolidated
financial statements are appropriate given the factual
circumstances at the time. However, given the sensitivity of our
consolidated financial statements to these critical accounting
policies, the use of other judgments, estimates and assumptions
could result in material differences in our results of
operations or financial condition. Management currently views
its fair value measurements, which include the valuation of
mortgage loans held for sale, the valuation of mortgage loans
held for investment, subject to ABS nonrecourse debt, investment
in debt securities-available-for sale, the valuation of mortgage
servicing rights, the valuation of derivative instruments, the
valuation of ABS nonrecourse debt and sale of mortgage loans to
be our critical accounting policies.
Fair Value
Measurements
Mortgage Loans
Held for Sale
Through September 30, 2009, we recorded mortgage loans held
for sale at the lower of amortized cost or fair value on an
aggregate basis grouped by delinquency status. Effective
October 1, 2009, we elected to measure newly originated
conventional residential mortgage loans held for sale at fair
value, as permitted under current accounting guidance. We
estimate fair value by evaluating a variety of market indicators
including recent trades and outstanding commitments, calculated
on an aggregate basis.
Mortgage Loans
Held for Investment, subject to ABS nonrecourse debt
We determine the fair value on loans held for investment,
subject to ABS nonrecourse debt using internally developed
valuation models. These valuation models estimate the exit price
we expect to receive in the loans principal market.
Although we utilize and give priority to observable market
inputs such as interest rates and market spreads within these
models, we typically are required to utilize internal inputs,
such as prepayment speeds, credit losses, and discount rates.
These internal inputs require the use of our judgment and can
have a significant impact on the determination of the
loans fair value.
Investment in
Debt Securities
Investment in debt securities consists of beneficial interests
we retain in securitization transactions accounted for as a sale
under current accounting guidance. These securities are
classified as
available-for-sale
securities, and are therefore carried at their market value with
the net unrealized gains or losses reported in the comprehensive
income (loss) component of members equity. We base our
valuation of debt securities on observable market prices when
available; however, due to illiquidity in the markets,
observable market prices were not available on these debt
securities at December 31, 2010 and 2009. When observable
market prices are not available, we base valuations on
internally developed discounted cash flow models that use a
market-based discount rate. The valuation considers recent
market transactions, experience with similar securities, current
business conditions and analysis of the underlying collateral,
as available. In order to estimate cash flows, we utilize a
variety of assumptions, including assumptions for prepayments,
cumulative losses, and other variables.
We evaluate investment in debt securities for impairment each
quarter, and investment in debt securities is considered to be
impaired when the fair value of the investment is less than its
cost. The impairment is separated into impairments related to
credit losses, which are recorded in current period operations,
and impairments related to all other factors, which are recorded
in other comprehensive income/loss.
Mortgage
Servicing Rights
We recognize mortgage servicing rights related to all existing
residential mortgage loans transferred to a third party in a
transfer that meets the requirements for sale accounting.
Additionally, we may acquire the rights to service residential
mortgage loans through the purchase of these rights
49
from third parties. We apply fair value accounting to these
mortgage servicing rights, with all changes in fair value
recorded as a charge or credit to servicing fee income in the
consolidated statement of operations. We estimate the fair value
of our mortgage servicing rights using a process that combines
the use of a discounted cash flow model and analysis of current
market data to arrive at an estimate of fair value. The cash
flow assumptions and prepayment assumptions used in the model
are based on various factors, with the key assumptions being
mortgage prepayment speeds and discount rates.
We use internal financial models that use, wherever possible,
market participant data to value our mortgage servicing rights.
These models are complex and use asset-specific collateral data
and market inputs for interest and discount rates. In addition,
the modeling requirements of mortgage servicing rights are
complex because of the high number of variables that drive cash
flows associated with mortgage servicing rights. Even if the
general accuracy of our valuation models is validated,
valuations are highly dependent upon the reasonableness of our
assumptions and the predictability of the relationships that
drive the results of the models. On a periodic basis, a portion
of our mortgage servicing rights is reviewed by an outside
valuation expert.
Derivative
Financial Instruments
We utilize certain derivative instruments in the ordinary course
of our business to manage our exposure to changes in interest
rates. These derivative instruments include forward sales of
mortgage-backed securities, forward loan sale commitments and
interest rate swaps and caps. We also issue interest rate lock
commitments to borrowers in connection with single family
mortgage loan originations. We recognize all derivative
instruments on our consolidated statement of financial position
at fair value. The estimated fair values of forward sales of
mortgage-backed securities, forward sale commitments and
interest rate swaps and caps are based on quoted market values
and are recorded as other assets or derivative financial
instruments liabilities in the consolidated balance sheet. The
initial and subsequent changes in value on forward sales of
mortgage-backed securities are a component of gain/(loss) on
mortgage loans held for sale in the consolidated statement of
operations. The estimated fair values of interest rate lock
commitments are based on quoted market values and are recorded
in other assets in the consolidated balance sheet. The initial
and subsequent changes in value of interest rate lock
commitments are a component of gain on mortgage loans held for
sale in the consolidated statement of operations.
ABS Nonrecourse
Debt
Effective January 1, 2010, new accounting guidance related
to VIEs eliminated the concept of a QSPE, and all existing SPEs
are now subject to the new consolidation guidance. Upon adoption
of this new accounting guidance, we identified certain
securitization trusts where we, through our affiliates,
continued to hold beneficial interests in these trusts. These
retained beneficial interests obligate us to absorb losses of
the VIE that could potentially be significant to the VIE or the
right to receive benefits from the VIE that could potentially be
significant. In addition, as Master Servicer on the related
mortgage loans, we retain the power to direct the activities of
the VIE that most significantly impact the economic performance
of the VIE. When it is determined that we have both the power to
direct the activities that most significantly impact the
VIEs economic performance and the obligation to absorb
losses or the right to receive benefits that could potentially
be significant to the VIE, the assets and liabilities of these
VIEs are included in our consolidated financial statements. Upon
consolidation of these VIEs, we derecognized all previously
recognized beneficial interests obtained as part of the
securitization, including any retained investment in debt
securities, mortgage servicing rights, and any remaining
residual interests. In addition, we recognized the securitized
mortgage loans as mortgage loans held for investment, subject to
ABS nonrecourse debt, and the related asset-backed certificates
acquired by third parties as ABS nonrecourse debt on our
consolidated balance sheet.
We estimate the fair value of ABS nonrecourse debt based on the
present value of future expected discounted cash flows with the
discount rate approximating current market value for similar
financial instruments.
50
Sale of Mortgage
Loans
Transfers of financial assets are accounted for as sales when
control over the assets has been surrendered by us. Control over
transferred assets is deemed to be surrendered when (i) the
assets have been isolated from us, (ii) the transferee has
the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred
assets, and (iii) we do not maintain effective control over
the transferred assets through either (a) an agreement that
entitles and obligates us to repurchase or redeem them before
their maturity or (b) the ability to unilaterally cause the
holder to return specific assets. Loan securitizations
structured as sales as well as whole loan sales are accounted
for as sales of mortgage loans and the resulting gains or losses
on such sales, net of any accrual for standard representations
and warranties, are reported in operating results as a component
of gain/(loss) on mortgage loans held for sale in the
consolidated statement of operations during the period in which
the securitization closes or the sale occurs.
Recent
Developments
On June 21, 2011, we entered into a subservicing agreement
with First Tennessee Bank National Association (FT),
whereby certain mortgage loans from time to time owned by FT
will be serviced by us and the mortgage loans in which FT acts
as servicer for certain investors will be subserviced. The
aggregate loans to be serviced and subserviced by us pursuant to
this arrangement have an unpaid principal balance of
$26.2 billion.
The subservicing agreement requires us to service and subservice
loans on behalf of FT consistent with its normal servicing
practices and, as applicable, the terms of the loans and
FTs contractual obligations contained in its servicing and
securitization agreements and arrangements between FT and its
investors.
In connection with the subservicing agreement, we made customary
representations, warranties and covenants concerning, among
other things, that we (i) are an approved servicer with
certain governmental agencies and (ii) will maintain
minimum ratings with certain rating agencies and Freddie Mac.
The subservicing agreement includes, among other things, a loss
incentive and sharing arrangement.
Events of default for us under the subservicing agreement
include, among other things, our failure to make deposits of
certain amounts collected or to provide reports.
FT can terminate the subservicing agreement upon the occurrence
of certain events, including defaults by us or, at FTs
sole discretion, upon 90 days notice (a Company
Convenience Termination), provided that FT may not
terminate the subservicing agreement in its entirety during the
initial two years of the subservicing agreement. FT will be
required to pay a termination fee if it exercises a Company
Convenience Termination. The subservicing agreement can also be
terminated with respect to any loans that are sold or
securitized by FT.
We can terminate the subservicing agreement upon the occurrence
of certain events including defaults by FT, if we determine that
we cannot continue to subservice the loans under applicable law
(after determining in good faith that the incapacity cannot be
cured or curing the incapacity is not commercially reasonable),
or upon 180 days notice to the extent we and FT are
unable to mutually agree on certain fees in the event of future
material changes to servicing requirements (a Nationstar
Convenience Termination). We will be required to pay a
termination fee if we exercise a Nationstar Convenience
Termination.
The subservicing agreement has a three year term and FT has the
right to extend the term for one or more three year periods.
We will receive certain fees for our servicing and subservicing
services, including the right to retain certain income
incidental to servicing and subservicing.
51
We expect to board the approximately 141,000 loans onto our
system during the third quarter 2011 at which time we will begin
our servicing and subservicing responsibilities under the
subservicing agreement.
On July 1, 2011, we purchased MSRs from a financial
institution relating to Fannie Mae loans with an unpaid
principal balance of approximately $3.6 billion. The
purchase price is approximately $33.3 million of which we
paid $10.0 million on July 1, 2011. We expect to board
the loans onto our system during the third quarter 2011. Until
we begin servicing the loans, the financial institution will
continue to service the loans as subservicer for us for a fee.
Results of
Operations
Consolidated
Results
The following table summarizes our consolidated operating
results for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
$
|
64,686
|
|
|
$
|
38,750
|
|
|
$
|
184,084
|
|
|
$
|
100,218
|
|
|
$
|
74,007
|
|
Gain (loss) on mortgage loans held for sale
|
|
|
20,506
|
|
|
|
12,429
|
|
|
|
77,344
|
|
|
|
(21,349
|
)
|
|
|
(86,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
85,192
|
|
|
|
51,179
|
|
|
|
261,428
|
|
|
|
78,869
|
|
|
|
(12,656
|
)
|
Total expenses and impairments
|
|
|
68,121
|
|
|
|
40,089
|
|
|
|
220,976
|
|
|
|
142,367
|
|
|
|
147,777
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
18,318
|
|
|
|
31,333
|
|
|
|
98,895
|
|
|
|
52,518
|
|
|
|
92,060
|
|
Interest expense
|
|
|
(25,368
|
)
|
|
|
(29,135
|
)
|
|
|
(116,163
|
)
|
|
|
(69,883
|
)
|
|
|
(65,548
|
)
|
Loss on interest rate swaps and caps
|
|
|
|
|
|
|
(2,779
|
)
|
|
|
(9,801
|
)
|
|
|
(14
|
)
|
|
|
(23,689
|
)
|
Fair value changes in ABS securitizations
|
|
|
(2,652
|
)
|
|
|
(9,777
|
)
|
|
|
(23,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(9,702
|
)
|
|
|
(10,358
|
)
|
|
|
(50,366
|
)
|
|
|
(17,379
|
)
|
|
|
2,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
7,369
|
|
|
$
|
732
|
|
|
$
|
(9,914
|
)
|
|
$
|
(80,877
|
)
|
|
$
|
(157,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We provide further discussion of our results of operations for
each of our reportable segments in the Segment
Results section below. Certain income and expenses not
allocated to our reportable segments are presented in the Legacy
Portfolio and Other as discussed in
Note 22-
Business Segment Reporting, in the accompanying Notes to
Consolidated Financial Statements included in this prospectus.
Comparison of
Consolidated Results for the Three Months Ended March 31,
2011 and 2010
Revenues increased $34.0 million from $51.2 million
for the three months ended March 31, 2010 to
$85.2 million for the three months ended March 31,
2011, primarily due to the significant increase in our total fee
income and an increase in our gain on mortgage loans held for
sale. The increase in our total fee income was primarily a
result of (1) our higher average servicing portfolio
balance of $65.9 billion for the three months ended
March 31, 2011, compared to $33.3 billion for the
three months ended March 31, 2010, and (2) an increase
in portfolio level performance-based fees and fees earned for
loss mitigation activities. The increase in the gain on loans
held for sale was a result of the $141.5 million, or 27.6%,
increase in the amount of loans originated during the 2011
period compared to the 2010 period.
52
Expenses and impairments increased $28.0 million from
$40.1 million for the three months ended March 31,
2010 to $68.1 million for the three months ended
March 31, 2011, primarily due to the increase in
compensation expenses related to increased staffing levels in
order to accommodate our larger servicing portfolio and
originations as well as other related increases in general and
administrative expenses. Our 2011 operating results include a
$5.2 million increase in share-based compensation expense
from revised compensation arrangements executed with certain
members of our executive team.
Other expense decreased $0.7 million from
$10.4 million for the three months ended March 31,
2010 to $9.7 million for the three months ended
March 31, 2011, primarily due to the effects of the
derecognition of a previously consolidated VIE and the losses on
our outstanding interest rate swap positions during the 2010
period.
Comparison of
Consolidated Results for the Years Ended December 31, 2010
and 2009
Revenues increased $182.5 million from $78.9 million
for the year ended December 31, 2009 to $261.4 million
for the year ended December 31, 2010, primarily due to the
significant increase in our total fee income and an increase in
our gain (loss) on mortgage loans held for sale. The increase in
our total fee income was primarily a result of (i) our
higher average servicing portfolio balance of $38.7 billion
for the year ended December 31, 2010, compared to
$25.8 billion for the year ended December 31, 2009,
and (ii) an increase in portfolio level performance-based
fees and fees earned for loss mitigation activities. The
increase in the gain on loans held for sale was a result of the
$1.3 billion, or 88.7%, increase in the amount of loans
originated during 2010 as well as the elimination of lower of
cost or market adjustments related to our legacy asset portfolio.
Expenses and impairments increased $78.6 million from
$142.4 million for the year ended December 31, 2009 to
$221.0 million for the year ended December 31, 2010,
primarily due to the increase in compensation expenses related
to increased staffing levels in order to accommodate our larger
servicing portfolio and originations as well as other related
increases in general and administrative expenses. Our 2010
operating results include an additional $12.1 million in
share-based compensation expense from revised compensation
arrangements executed with certain members of our executive
team. Additionally, expenses and impairments increased from the
consolidation of certain VIEs from January 1, 2010, and
from expenses associated with the settlement of certain claims.
Other expense increased $33.0 million from
$17.4 million for the year ended December 31, 2009 to
$50.4 million for the year ended December 31, 2010,
primarily due to the effects of the consolidation of certain
VIEs and the losses on our outstanding interest rate swap
positions during 2010.
Comparison of
Consolidated Results for the Years Ended December 31, 2009
and 2008
Revenues increased $91.6 million from $(12.7) million
for the year ended December 31, 2008 to $78.9 million
for the year ended December 31, 2009, primarily due to
(i) the increase in fee income as a result of the 57.7%
increase in our servicing portfolio year over year and
(ii) the reduction in the loss on mortgage loans held for
sale.
The decrease in loss was caused by the increase in our loans
originated during 2009 compared to 2008 and the reduction in the
lower of cost or market adjustments recorded in 2009 compared to
2008.
Expenses and impairments decreased $5.4 million from
$147.8 million for the year ended December 31, 2008 to
$142.4 million for the year ended December 31, 2009,
primarily due to the reduction in the
other-than-temporary
impairments recognized on available for sale securities during
2009, partially offset by the increase in all other expense
categories due to the increases in our loan originations and
loan servicing portfolio.
Other income (expense) increased $20.2 million from
$2.8 million for the year ended December 31, 2008 to
$(17.4) million for the year ended December 31, 2009,
primarily due to a decrease
53
in interest income and an increase in interest expense as a
result of larger advance balances caused by our increased
servicing portfolio, offset by a reduction in loss on interest
rate swaps and caps.
Segment
Results
Our primary business strategy is to generate recurring, stable
income from managing and growing our servicing portfolio and our
originations. We operate through two business segments:
Servicing and Originations, which we refer to collectively as
our Operating Segments. We report the activity not related to
either operating segment in the Legacy Portfolio and Other. The
Legacy Portfolio and Other includes primarily all
sub-prime
mortgage loans (i) originated in the latter portion of 2006
and during 2007 or (ii) acquired from Centex Home Equity
Company, LLC (CHEC), and VIEs which were
consolidated pursuant to the January 1, 2010 adoption of
new consolidation guidance related to VIEs.
The accounting policies of each reportable segment are the same
as those of the consolidated financial statements except for
(i) expenses for consolidated back-office operations and
general overhead expenses such as executive administration and
accounting and (ii) revenues generated on inter-segment
services performed. Expenses are allocated to individual
segments based on the estimated value of the services performed,
including estimated utilization or square footage and corporate
personnel, as well as the equity invested in each segment.
Revenues generated or inter-segment services performed are
valued based on similar services provided to external parties.
Servicing
Segment
The Servicing Segment provides loan servicing on our servicing
portfolio, including the collection of principal and interest
payments and the generation of ancillary fees related to the
servicing of mortgage loans.
The following table summarizes our operating results from our
Servicing Segment for the periods indicated (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
$
|
58,724
|
|
|
$
|
35,766
|
|
|
$
|
175,569
|
|
|
$
|
91,266
|
|
|
$
|
69,235
|
|
Other fee income
|
|
|
2,394
|
|
|
|
1,784
|
|
|
|
7,273
|
|
|
|
8,867
|
|
|
|
5,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
61,118
|
|
|
|
37,550
|
|
|
|
182,842
|
|
|
|
100,133
|
|
|
|
74,601
|
|
Gain (loss) on mortgage loans held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
61,118
|
|
|
|
37,550
|
|
|
|
182,842
|
|
|
|
100,133
|
|
|
|
74,601
|
|
Expenses and impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and benefits
|
|
|
29,410
|
|
|
|
16,673
|
|
|
|
78,269
|
|
|
|
56,726
|
|
|
|
41,755
|
|
General and administrative
|
|
|
9,621
|
|
|
|
3,576
|
|
|
|
24,664
|
|
|
|
10,669
|
|
|
|
9,878
|
|
Occupancy
|
|
|
1,376
|
|
|
|
1,033
|
|
|
|
4,350
|
|
|
|
3,502
|
|
|
|
3,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses and impairments
|
|
|
40,407
|
|
|
|
21,282
|
|
|
|
107,283
|
|
|
|
70,897
|
|
|
|
55,037
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
967
|
|
|
|
220
|
|
|
|
263
|
|
|
|
4,143
|
|
|
|
10,872
|
|
Interest expense
|
|
|
(13,457
|
)
|
|
|
(10,646
|
)
|
|
|
(51,791
|
)
|
|
|
(25,877
|
)
|
|
|
(15,718
|
)
|
Loss on interest rate swaps and caps
|
|
|
|
|
|
|
(2,779
|
)
|
|
|
(9,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(12,490
|
)
|
|
|
(13,205
|
)
|
|
|
(61,329
|
)
|
|
|
(21,734
|
)
|
|
|
(4,846
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from Servicing Segment
|
|
$
|
8,221
|
|
|
$
|
3,063
|
|
|
$
|
14,230
|
|
|
$
|
7,502
|
|
|
$
|
14,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in aggregate unpaid principal balance of our servicing
portfolio primarily governs the increase in revenues, expenses
and other income (expense) of our Servicing Segment.
54
The table below provides detail of the characteristics and key
performance metrics of our servicing portfolio as of or for the
period ended.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(dollars in millions, except for average loan amount)
|
|
|
Unpaid principal balance (by investor):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Servicing
|
|
$
|
8,692
|
|
|
$
|
1,889
|
|
|
$
|
4,893
|
|
|
$
|
1,554
|
|
|
$
|
1,218
|
|
Government-sponsored enterprises
|
|
|
51,425
|
|
|
|
23,737
|
|
|
|
52,194
|
|
|
|
24,235
|
|
|
|
10,709
|
|
ABS
|
|
|
6,927
|
|
|
|
7,656
|
|
|
|
7,089
|
|
|
|
7,875
|
|
|
|
9,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unpaid principal balance
|
|
$
|
67,044
|
|
|
$
|
33,282
|
|
|
$
|
64,176
|
|
|
$
|
33,664
|
|
|
$
|
21,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan countservicing
|
|
|
404,734
|
|
|
|
228,365
|
|
|
|
389,172
|
|
|
|
230,615
|
|
|
|
159,336
|
|
Average Servicing Portfolio
|
|
$
|
65,929
|
|
|
$
|
33,277
|
|
|
$
|
38,653
|
|
|
$
|
25,799
|
|
|
$
|
12,775
|
|
Average loan amount
|
|
$
|
165,648
|
|
|
$
|
145,739
|
|
|
$
|
164,904
|
|
|
$
|
145,977
|
|
|
$
|
133,943
|
|
Average coupon
|
|
|
5.67
|
%
|
|
|
6.53
|
%
|
|
|
5.74
|
%
|
|
|
6.76
|
%
|
|
|
7.49
|
%
|
Average FICO
|
|
|
627
|
|
|
|
627
|
|
|
|
631
|
|
|
|
644
|
|
|
|
588
|
|
60+ delinquent (% of
loans)(1)
|
|
|
16.8
|
%
|
|
|
18.1
|
%
|
|
|
17.0
|
%
|
|
|
19.9
|
%
|
|
|
13.1
|
%
|
Total prepayment speed (12 month CPR)
|
|
|
13.0
|
%
|
|
|
13.2
|
%
|
|
|
13.3
|
%
|
|
|
16.3
|
%
|
|
|
16.2
|
%
|
|
|
|
(1) |
|
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. |
Revenues
For the Three
Months Ended March 31, 2011 and 2010
Total revenues were $61.1 million for the three months
ended March 31, 2011 compared to $37.6 million for the
three months ended March 31, 2010, an increase of
$23.5 million, or 62.5%, primarily due to the net effect of
the following:
|
|
|
|
|
Servicing fee income increased $23.0 million period over
period primarily from:
|
|
|
|
|
(a)
|
Increase of $21.7 million due to higher average unpaid
principal balance of $65.9 billion in the 2011 period
compared to $33.3 billion in the comparable 2010 period.
The increase in our servicing portfolio was primarily driven by
an increase in average unpaid principal balance for loans
serviced for government-sponsored enterprises and other
subservicing contracts for third party investors of
$51.7 billion in the 2011 period compared to
$23.9 billion in the comparable 2010 period. This increase
was offset by a decrease in average unpaid principal balance for
our private asset-backed securitizations portfolio, which
decreased to $7.0 billion in the 2011 period compared to
$7.7 billion in the comparable 2010 period.
|
|
|
|
|
(b)
|
Increase of $1.0 million due to higher modification fees
earned from HAMP and from modification fees earned on non-HAMP
modifications. As a high-touch servicer, we use modifications as
a key loss mitigation tool. Under HAMP, subject to a program
participation cap, we, as a servicer, will receive an initial
incentive payment of up to $1,500 for each loan modified in
accordance with HAMP subject to the condition that the borrower
successfully completes a trial modification period. With this
program, the servicer must forego any late fees and may not
charge any other fees. In addition, provided that a HAMP
modification does not become 90 days or more delinquent, we
will receive an incentive of up to $1,000. Initial redefault
rates have been favorable, averaging 10% to 20%. The HAMP
program has an expiration date of December 31, 2012 and is
only eligible for first lien mortgages that were originated on
or before January 1, 2009. For non-HAMP modifications, we
generally do not waive late fees, and we charge a modification
fee. These amounts are collected at the time of the modification.
|
55
|
|
|
|
(c)
|
Increase of $1.0 million from change in fair value on
mortgage servicing rights which was recognized in servicing fee
income. The fair value of our mortgage servicing rights (MSRs)
is based upon the present value of the expected future cash
flows related to servicing these loans. The revenue components
of the cash flows are servicing fees, interest earned on
custodial accounts, and other ancillary income. The expense
components include operating costs related to servicing the
loans (including delinquency and foreclosure cost) and interest
expenses on servicing advances. The expected future cash flows
are primarily impacted by prepayment estimates, delinquencies,
and market discount rates. Generally, the value of MSRs
increases when interest rates increase and decreases when
interest rates decline due to the effect those changes in
interest rates have on prepayment estimates. Other factors
affecting the MSR value includes the estimated effects of loan
modifications on expected cash flows. Such modifications tend to
positively impact cash flows by extending the expected life of
the affected MSR and potentially producing additional revenue
opportunities depending on the type of modification. In valuing
the MSRs, we believe our assumptions are consistent with the
assumptions other major market participants use. These
assumptions include a level of future modification activity that
we believe major market participants would use in their
valuation of MSRs. Internally, we have modification goals that
exceed the assumptions utilized in our valuation model.
Nevertheless, were we to utilize an assumption of a level of
future modifications consistent with our internal goals to our
MSR valuation, we do not believe the resulting increase in value
would be material. Additionally, as disclosed under
BusinessLegal Proceedings on page 120, we
delayed certain foreclosure activities temporarily. Although we
have resumed those previously delayed proceedings, changes in
the foreclosure process that may be required by governments or
regulatory bodies could increase the cost of servicing and
diminish the value of our MSRs. We utilize assumptions of
servicing costs that include delinquency and foreclosure costs
that we believe major market participants would use to value
their MSRs. We periodically compare our internal MSR valuation
to third party valuation of our MSRs to help substantiate our
market assumptions. We have considered the costs related to the
delayed proceedings into our assumptions and we do not believe
that any resulting decrease in the MSR was material given the
expected short-term nature of the issue.
|
|
|
|
|
(d)
|
Decrease of $0.8 million due to decreased loss mitigation
and performance-based incentive fees earned from a
government-sponsored enterprise.
|
|
|
|
|
|
Other fee income was $2.4 million for the three months
ended March 31, 2011 compared to $1.8 million for the
three months ended March 31, 2010, a decrease of
$0.6 million, or 33.3%, due to lower REO sales commissions
resulting from a decline in REO sales managed by our internal
REO sales group.
|
For the Years
Ended December 31, 2010 and 2009
Total revenues were $182.8 million for the year ended
December 31, 2010 compared to $100.1 million for the
year ended December 31, 2009, an increase of
$82.7 million, or 82.6%, primarily due to the net effect of
the following:
|
|
|
|
|
Servicing fee income increased $84.3 million period over
period primarily from:
|
|
|
|
|
(a)
|
Increase of $34.8 million due to higher average unpaid
principal balance of $38.7 billion in 2010 compared to
$25.8 billion in 2009. The increase in our servicing
portfolio was primarily driven by an increase in average unpaid
principal balance for loans serviced for GSEs and other
subservicing contracts for third party investors of
$31.2 billion in 2010 compared to $17.2 billion in
2009. This increase was partially offset by a decrease in
average unpaid principal balance for our asset-backed
securitizations portfolio, which decreased to $7.4 billion
in 2010 compared to $8.6 billion in 2009.
|
56
|
|
|
|
(b)
|
Increase of $8.9 million due to increased loss mitigation
and performance-based incentive fees earned from a GSE.
|
|
|
(c)
|
Increase of $17.9 million due to higher fees earned from
HAMP and from modification fees earned on non-HAMP
modifications. As a high-touch servicer, we use modifications as
a key loss mitigation tool. Under HAMP, subject to a program
participation cap, we, as a servicer, will receive an initial
incentive payment of up to $1,500 for each loan modified in
accordance with HAMP subject to the condition that the borrower
successfully completes a trial modification period. With this
program, the servicer must forego any late fees and may not
charge any other fees. In addition, provided that a HAMP
modification does not become 90 days or more delinquent, we
will receive an additional incentive fee of up to $1,000.
Initial redefault rates have been favorable, averaging 10% to
20%. The HAMP program has an expiration date of
December 31, 2012 and is only applicable to first lien
mortgages that were originated on or before January 1,
2009. For non-HAMP modifications, we generally do not waive late
fees, and we charge a modification fee. These amounts are
collected at the time of the modification.
|
|
|
|
|
(d)
|
Increase of $21.9 million from change in fair value on
mortgage servicing rights which was recognized in servicing fee
income. The fair value of our mortgage servicing rights (MSRs)
is based upon the present value of the expected future cash
flows related to servicing these loans. The revenue components
of the cash flows are servicing fees, interest earned on
custodial accounts, and other ancillary income. The expense
components include operating costs related to servicing the
loans (including delinquency and foreclosure costs) and interest
expenses on servicing advances. The expected future cash flows
are primarily impacted by prepayment estimates, delinquencies,
and market discount rates. Generally, the value of MSRs
increases when interest rates increase and decreases when
interest rates decline due to the effect those changes in
interest rates have on prepayment estimates. Other factors
affecting the MSR value includes the estimated effects of loan
modifications on expected cash flows. Such modifications tend to
positively impact cash flows by extending the expected life of
the affected MSR and potentially producing additional revenue
opportunities depending on the type of modification.
|
In valuing the MSRs, we believe our assumptions are consistent
with the assumptions other major market participants use. These
assumptions include a level of future modification activity that
we believe major market participants would use in their
valuation of MSRs. Internally, we have modification goals that
exceed the assumptions utilized in our valuation model.
Nevertheless, were we to utilize an assumption of a level of
future modifications consistent with our internal goals to our
MSR valuation, we do not believe the resulting increase in value
would be material.
|
|
|
|
(e)
|
Increase of $1.0 million due to an increase in ancillary
and late fees arising from growth in the servicing portfolio.
Late fees are recognized as revenue at collection.
|
|
|
|
|
|
Other fee income decreased $1.6 million for the year ended
December 31, 2010 due to lower lender-placed insurance
commissions and lower REO sales commissions resulting from a
decline in REO sales managed by our internal REO sales group.
|
For the Years
Ended December 31, 2009 and 2008
Total revenues were $100.1 million for the year ended
December 31, 2009 compared to $74.6 million for the
year ended December 31, 2008, an increase of
$25.5 million, or 34.2%, primarily due to the net effect of
the following:
|
|
|
|
|
Servicing fee income increased $22.1 million year over year
primarily from:
|
|
|
|
|
(a)
|
Increase of $20.8 million due to higher average unpaid
principal balance of $25.8 billion in 2009 compared to
$12.8 billion in 2008. The increase in our servicing
portfolio was primarily driven by an increase in average unpaid
principal balance for loans serviced for
|
57
|
|
|
|
|
GSEs and other subservicing contracts for third party investors
in 2009 compared to 2008. This increase was partially offset by
a decrease in average unpaid principal balance for our
asset-backed securitizations portfolio, which decreased in 2009
compared to 2008.
|
|
|
|
|
(b)
|
Increase of $7.7 million due to increased loss mitigation
and performance-based incentive fees earned from a GSE.
|
|
|
(c)
|
Increase of $3.3 million due to higher modification fees
earned from HAMP and from modification fees earned on non-HAMP
modifications.
|
|
|
(d)
|
Increase of $7.0 million due to increased collection of
late fees, primarily due to higher average unpaid principal
balance of our servicing portfolio. Late fees are recognized as
revenue at collection.
|
|
|
(e)
|
Decrease of $16.2 million from change in fair value on
mortgage servicing rights which was recognized in servicing fee
income.
|
|
|
|
|
|
Other fee income increased $3.5 million for the year ended
December 31, 2009 from higher lender-placed insurance
commissions, which is primarily due to higher delinquency rates
in 2009 compared to 2008.
|
Expenses and
Impairments
For the Three
Months Ended March 31, 2011 and 2010
Expenses and impairments were $40.4 million for the three
months ended March 31, 2011 compared to $21.3 million
for the three months ended March 31, 2010, an increase of
$19.1 million, or 89.7%, primarily due to the increase of
$12.7 million in salaries, wages and benefits expense
resulting from an increase in headcount from 1,007 in 2010 to
1,243 in 2011 and $4.7 million in additional share-based
compensation from revised compensation arrangements with certain
of our executives. Additionally, we recognized an increase of
$6.4 million in general and administrative and
occupancy-related expenses associated with increased headcount
and growth in the servicing portfolio.
For the Years
Ended December 31, 2010 and 2009
Expenses and impairments were $107.3 million for the year
ended December 31, 2010 compared to $70.9 million for
the year ended December 31, 2009, an increase of
$36.4 million, or 51.3%, primarily due to an increase of
$21.6 million in salaries, wages and benefits expense
resulting from an increase in headcount from 910 in 2009 to
1,178 in 2010 and $4.9 million in additional share-based
compensation from revised compensation arrangements with certain
of our executives. Additionally, we recognized an increase of
$14.8 million in general and administrative and occupancy
expenses associated with increased headcount, growth in the
servicing portfolio and increases in reserves for
non-recoverable advances.
For the Years
Ended December 31, 2009 and 2008
Expenses and impairments were $70.9 million for the year
ended December 31, 2009 compared to $55.0 million for
the year ended December 31, 2008, an increase of
$15.9 million, or 28.9%, primarily due to the increase of
$14.9 million in salaries, wages and benefits expense
resulting from an increase in headcount from 570 in 2008 to 910
in 2009.
58
Other Income
(Expense)
For the Three
Months Ended March 31, 2011 and 2010
Total other income (expense) was $(12.5) million for the
three months ended March 31, 2011 compared to
$(13.2) million for the three months ended March 31,
2010, a decrease in expense, net of income, of
$0.7 million, or 5.3%, primarily due to the net effect of
the following:
|
|
|
|
|
Interest income increased $0.7 million due to higher
average outstanding custodial cash deposit balances as a result
of our increased servicing portfolio.
|
|
|
|
|
|
Interest expense was $13.5 million for the three months
ended March 31, 2011 compared to $10.6 million for the
three months ended March 31, 2010, an increase of
$2.9 million, or 27.4%, primarily due to the senior
unsecured notes, paying 10.875% interest expense. This increase
was partially offset by lower interest expense on the remaining
debt. Excluding the senior unsecured notes, the average
outstanding debt was $373.8 million in 2011 compared to
$630.1 million for the same period in 2010.
|
|
|
|
|
|
Loss on interest rate swaps and caps was $0.0 million for
the three months ended March 31, 2011 compared to
$2.8 million for the three months ended March 31,
2010. Effective October 1, 2010, we designated an existing
interest rate swap as a cash flow hedge against outstanding
floating rate financing associated with one of our outstanding
servicer advance facilities. This interest rate swap is recorded
at fair value, with any changes in fair value being recorded as
an adjustment to other comprehensive income. Prior to this
designation, any changes in fair value were being recorded as a
loss on interest rate swaps and caps on our statement of
operations.
|
For the Years
Ended December 31, 2010 and 2009
Total other income (expense) was $(61.3) million for the
year ended December 31, 2010 compared to
$(21.7) million for the year ended December 31, 2009,
an increase in expense, net of income, of $39.6 million, or
182.5%, primarily due to the net effect of the following:
|
|
|
|
|
Interest income decreased $3.8 million due to lower average
index rates received on custodial cash deposits associated with
mortgage loans serviced combined with lower average outstanding
custodial cash deposit balances.
|
|
|
|
Interest expense increased $25.9 million primarily due to
higher average outstanding debt of $638.6 million in 2010
compared to $313.3 million in 2009, offset by lower
interest rates due to declines in the base LIBOR and decreases
in the overall index margin on outstanding servicer advance
facilities. Additionally, in 2010, we have included the balances
related to our outstanding corporate note and senior unsecured
debt balances, and the related interest expense thereon, as a
component of our Servicing Segment. As a result of the weakening
housing market, we continued to carry approximately
$530.9 million in residential mortgage loans that we were
unable to securitize as mortgage loans held for sale on our
balance sheet throughout most of 2009. During this time period,
we allocated a portion of our outstanding corporate note balance
to Legacy Portfolio and Other to account for the increased
capacity and financing costs we incurred while these loans were
retained on our balance sheet. For the year ended
December 31, 2010, we recorded $21.7 million in
interest expense related to our outstanding corporate and
10.875% senior notes.
|
|
|
|
Loss on interest rate swaps and caps was $9.8 million for
the year ended December 31, 2010, with no corresponding
gain or loss recognized for the year ended December 31,
2009. The loss for the period was a result of a decline in fair
value recognized during the period on outstanding interest rate
swaps designed to economically hedge the interest rate risk
associated with our
2009-ADV1
Servicer Advance Facility. This facility was not executed until
the end of the fourth quarter of 2009, so we did not recognize
any corresponding fair value adjustments during the year ended
December 31, 2009.
|
59
For the Years
Ended December 31, 2009 and 2008
Total other income (expense), which for the most part consisted
of interest expense, was $(21.7) million for the year ended
December 31, 2009 compared to $(4.8) million for the
year ended December 31, 2008, an increase in expense, net
of income, of $16.9 million, or 352.1%, primarily due to
the net effect of the following:
|
|
|
|
|
Increase of $7.7 million from additional amortization of
deferred financing costs resulting from refinancing or renewal
of our advance financing facilities.
|
|
|
|
Increase of $6.7 million from decline in interest income
earned on custodial cash deposits associated with mortgage loans
serviced primarily due to lower average deposits and index rates.
|
|
|
|
Increase of $1.4 million from compensating interest due to
increased average unpaid principal balance.
|
|
|
|
Increase of $1.1 million from higher average outstanding
debt of $313.3 million in 2009 compared to
$259.1 million in 2008, offset by lower interest rates due
to declines in the base LIBOR.
|
Originations
Segment
The Originations Segment involves the origination, packaging,
and sale of GSE mortgage loans into the secondary markets via
whole loan sales or securitizations.
The following table summarizes our operating results from our
Originations Segment for the periods indicated (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Other fee income
|
|
|
4,044
|
|
|
|
1,666
|
|
|
|
7,042
|
|
|
|
1,156
|
|
|
|
589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
4,044
|
|
|
|
1,666
|
|
|
|
7,042
|
|
|
|
1,156
|
|
|
|
589
|
|
Gain on mortgage loans held for sale
|
|
|
20,569
|
|
|
|
12,446
|
|
|
|
77,498
|
|
|
|
54,437
|
|
|
|
21,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
24,613
|
|
|
|
14,112
|
|
|
|
84,540
|
|
|
|
55,593
|
|
|
|
22,574
|
|
Expenses and impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and benefits
|
|
|
16,293
|
|
|
|
10,732
|
|
|
|
57,852
|
|
|
|
31,497
|
|
|
|
18,357
|
|
General and administrative
|
|
|
4,893
|
|
|
|
4,801
|
|
|
|
26,761
|
|
|
|
14,586
|
|
|
|
10,864
|
|
Occupancy
|
|
|
626
|
|
|
|
404
|
|
|
|
2,307
|
|
|
|
1,449
|
|
|
|
1,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses and impairments
|
|
|
21,812
|
|
|
|
15,937
|
|
|
|
86,920
|
|
|
|
47,532
|
|
|
|
30,795
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,603
|
|
|
|
1,629
|
|
|
|
11,848
|
|
|
|
4,261
|
|
|
|
1,920
|
|
Interest expense
|
|
|
(1,981
|
)
|
|
|
(1,308
|
)
|
|
|
(8,806
|
)
|
|
|
(3,438
|
)
|
|
|
(1,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
622
|
|
|
|
321
|
|
|
|
3,042
|
|
|
|
823
|
|
|
|
631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from Originations Segment
|
|
$
|
3,423
|
|
|
$
|
(1,504
|
)
|
|
$
|
662
|
|
|
$
|
8,884
|
|
|
$
|
(7,590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in origination volume primarily governs the increase in
revenues, expenses and other income (expense) of our
Originations Segment. The table below provides detail of the
loan characteristics of loans originated for the periods
presented.
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Origination Volume (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
425
|
|
|
$
|
306
|
|
|
$
|
1,608
|
|
|
$
|
1,093
|
|
|
$
|
538
|
|
Wholesale
|
|
|
229
|
|
|
|
207
|
|
|
|
1,184
|
|
|
|
386
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Originations
|
|
$
|
654
|
|
|
$
|
513
|
|
|
$
|
2,792
|
|
|
$
|
1,479
|
|
|
$
|
542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
For the Three
Months Ended March 31, 2011 and 2010
Total revenues were $24.6 million for the three months
ended March 31, 2011 compared to $14.1 million for the
three months ended March 31, 2010, an increase of
$10.5 million, or 74.5% primarily due to the net effect of
the following:
|
|
|
|
|
Other fee income was $4.0 million for the three months
ended March 31, 2011 compared to $1.7 million for the
three months ended March 31, 2010, an increase of
$2.3 million, or 135.3%. The increase is primarily due to
higher points and fees collected on originated loans as a result
of higher originations volume.
|
|
|
|
|
|
Gain on mortgage loans held for sale was $20.6 million for
the three months ended March 31, 2011 compared to
$12.4 million for the three months ended March 31,
2010, an increase of $8.2 million, or 66.1%, primarily due
to the net effect of the following:
|
|
|
|
|
(a)
|
Increase of $5.9 million from larger volume of
originations, which increased from $512.6 million in the
2010 period to $654.1 million in the comparable 2011 period.
|
|
|
|
|
(b)
|
Increase of $3.5 million from capitalized mortgage
servicing rights due to the larger volume of originations and
subsequent retention of servicing rights.
|
|
|
|
|
(c)
|
Decrease of $1.3 million from change in unrealized
gains/losses on derivative financial instruments. These include
interest rate lock commitments and forward sales of
mortgage-backed securities.
|
For the Years
Ended December 31, 2010 and 2009
Total revenues were $84.5 million for the year ended
December 31, 2010 compared to $55.6 million for the
year ended December 31, 2009, an increase of
$28.9 million, or 52.0%, primarily due to the net effect of
the following:
|
|
|
|
|
Other fee income increased $5.8 million primarily due to
our election to measure newly originated conventional
residential mortgage loans held for sale at fair value,
effective October 1, 2009. Subsequent to this election, any
collected points and fees related to originated mortgage loans
held for sale are included in other fee income. Prior to this
election, points and fees were recorded as deferred origination
income and recognized over the life of the mortgage loan as an
adjustment to our interest income yield or, when the related
loan was sold to a third-party purchaser, included as a
component of gain on mortgage loans held for sale.
|
|
|
|
Gain on mortgage loans held for sale increased
$23.1 million primarily from:
|
|
|
|
|
(a)
|
Increase of $22.4 million from improved margins and larger
volume of originations, which increased from $1.5 billion
for the year ended December 31, 2009 to $2.8 billion
in originations for the year December 31, 2010.
|
|
|
(b)
|
Increase of $17.9 million from capitalized mortgage
servicing rights due to the larger volume of originations and
subsequent retention of servicing rights.
|
61
|
|
|
|
(c)
|
Decrease of $0.7 million from change in unrealized
gains/(losses) on derivative financial instruments. These
include interest rate lock commitments and forward sales of
mortgage-backed securities.
|
|
|
|
|
(d)
|
Decrease of $20.2 million from recognition of points and
fees earned on mortgage loans held for sale for the year ended
December 31, 2009. Effective October 1, 2009, all
points and fees are recognized at origination upon the election
to apply fair value accounting to newly-originated loans and are
recognized as a component of other fee income.
|
For the Years
Ended December 31, 2009 and 2008
Total revenues were $55.6 million for the year ended
December 31, 2009 compared to $22.6 million for the
year ended December 31, 2008, an increase of
$33.0 million, or 146.0%, primarily due to the net effect
of the following:
|
|
|
|
|
Gain on mortgage loans held for sale increased
$32.4 million primarily from:
|
|
|
|
|
(a)
|
Increase of $24.8 million from larger volume of
originations, which increased from $0.5 billion in 2008 to
$1.5 billion in 2009.
|
|
|
(b)
|
Increase of $3.8 million from capitalized mortgage
servicing rights due to larger volume of origination and
subsequent retention of servicing rights.
|
|
|
|
|
(c)
|
Increase of $3.8 million from change in unrealized
gains/(losses) on derivative financial instruments. These
include interest rate lock commitments and forward sales of
mortgage-backed securities.
|
Expenses and
Impairments
For the Three
Months Ended March 31, 2011 and 2010
Expenses and impairments were $21.8 million for the three
months ended March 31, 2011 compared to $15.9 million
for the three months ended March 31, 2010, an increase of
$5.9 million, or 37.1%, primarily due to the net effect of
the following:
|
|
|
|
|
Increase of $5.6 million in salaries, wages and benefits
expense from increase in headcount of 450 in 2010 to 742 in 2011
and increases in performance-based compensation. Additionally,
we recognized $0.5 million in share-based compensation
expense from revised compensation arrangements with certain of
our executives.
|
|
|
|
|
|
Increase of $0.3 million in general and administrative and
occupancy expense primarily due to increase in overhead expenses
from the larger volume of originations in 2011.
|
For the Years
Ended December 31, 2010 and 2009
Expenses and impairments were $86.9 million for the year
ended December 31, 2010 compared to $47.5 million for
the year ended December 31, 2009, an increase of
$39.4 million, or 82.9%, primarily due to the net effect of
the following:
|
|
|
|
|
Increase of $26.4 million in salaries, wages and benefits
expense from increase in headcount of 452 in 2009 to 688 in 2010
and increases in performance based compensation. Additionally,
we recognized $3.6 million in share-based compensation
expense from revised compensation arrangements with certain of
our executives.
|
|
|
|
|
|
Increase of $13.1 million in general and administrative and
occupancy expense primarily due to increase in overhead expenses
from the larger volume of originations in 2010 and expenses
associated with the settlement of certain claims.
|
62
For the Years
Ended December 31, 2009 and 2008
Expenses and impairments were $47.5 million for the year
ended December 31, 2009 compared to $30.8 million for
the year ended December 31, 2008, an increase of
$16.7 million, or 54.2%, primarily due to the net effect of
the following:
|
|
|
|
|
Increase of $13.1 million in salaries, wages and benefits
expense from increase in headcount of 311 in 2008 to 452 in 2009
and increases in performance based compensation.
|
|
|
|
Increase of $3.7 million in general and administrative
expense primarily due to increase in overhead expenses from
larger volume of origination in 2009.
|
Other Income
(Expense)
For the Three
Months Ended March 31, 2011 and 2010
Total other income (expense) was $0.6 million for the three
months ended March 31, 2011 compared to $0.3 million
for the three months ended March 31, 2010, an increase of
$0.3 million, primarily due to the net effects of the
following:
|
|
|
|
|
Interest income increased $1.0 million, or 62.5%,
representing interest earned from originated loans prior to sale
or securitization. The increase is primarily due to the increase
in the volume of originations. Loans are typically sold within
30 days of origination.
|
|
|
|
|
|
Interest expense increased $0.7 million, or 53.8%,
primarily due to an increase in origination volume in 2011 and
associated financing required to originate these loans.
|
For the Years
Ended December 31, 2010 and 2009
Total other income (expense) was $3.0 million for the year
ended December 31, 2010 compared to $0.8 million for
the year ended December 31, 2009, an increase in income,
net of expense, of $2.2 million, or 275.0%, primarily due
to the net effect of the following:
|
|
|
|
|
Interest income increased $7.5 million from interest earned
from originated loans prior to sale or securitization. The
increase is primarily due to the increase in the volume of
originations. Loans are typically sold within 30 days of
origination.
|
|
|
|
Interest expense increased $5.4 million primarily due to an
increase in origination volume in 2010 and associated financing
required to originate these loans combined with a slight
increase in outstanding average days in warehouse on newly
originated loans.
|
For the Years
Ended December 31, 2009 and 2008
Total other income (expense) was $0.8 million for the year
ended December 31, 2009 compared to $0.6 million for
the year ended December 31, 2008, an increase in income,
net of expense, of $0.2 million, or 33.3%, primarily due to
the net effect of the following:
|
|
|
|
|
Interest income increased $2.4 million primarily due to
interest earned from originated loans prior to sale or
securitization. Loans are typically sold within 30 days of
origination.
|
|
|
|
Interest expense increased $2.1 million primarily due to
interest expense from warehouse facilities that finance the
origination of loans.
|
Legacy Portfolio
and Other
Through December 2009, our legacy asset portfolio consisted
primarily of non-prime and nonconforming residential mortgage
loans that we primarily originated from April to July 2007.
Revenues and expenses are primarily a result of mortgage loans
transferred to securitization trusts that were structured as
secured borrowings, resulting in carrying the securitized loans
as mortgage loans held for investment on our consolidated
balance sheets and recognizing the asset-backed certificates as
nonrecourse debt. Prior to September 2009, these residential
mortgage loans were classified as mortgage loans held for sale
on our consolidated balance sheet and carried at the lower of
cost or fair value and financed through a combination of our
existing warehouse facilities and our corporate note. These
loans were transferred on October 1, 2009, from mortgage
loans held for sale to a
63
held-for-investment
classification at fair value on the transfer date. Subsequent to
the transfer date, we completed the securitization of the
mortgage loans, which was structured as a secured borrowing.
This structure resulted in carrying the securitized loans as
mortgages on our consolidated balance sheet and recognizing the
asset-backed certificates acquired by third parties as
nonrecourse debt.
Effective January 1, 2010, new accounting guidance
eliminated the concept of a QSPE. Consequently, all existing
securitization trusts are considered VIEs and are now subject to
the new consolidation guidance. Upon consolidation of certain of
these VIEs, we recognized the securitized mortgage loans related
to these securitization trusts as mortgage loans held for
investment, subject to ABS nonrecourse debt (see Note 3 to
our consolidated financial statements). Additionally, we elected
the fair value option provided for by
ASC 825-10.
Assets and liabilities related to these VIEs are included in
Legacy Portfolio and Other in our segmented results.
The following table summarizes our operating results from Legacy
Portfolio and Other for the periods indicated (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
$
|
567
|
|
|
$
|
458
|
|
|
$
|
820
|
|
|
$
|
|
|
|
$
|
|
|
Other fee income
|
|
|
781
|
|
|
|
1,210
|
|
|
|
2,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
1,348
|
|
|
|
1,668
|
|
|
|
3,463
|
|
|
|
|
|
|
|
|
|
Gain (loss) on mortgage loans held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75,786
|
)
|
|
|
(108,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,348
|
|
|
|
1,668
|
|
|
|
3,463
|
|
|
|
(75,786
|
)
|
|
|
(108,648
|
)
|
Expenses and impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and benefits
|
|
|
1,283
|
|
|
|
2,101
|
|
|
|
13,148
|
|
|
|
3,537
|
|
|
|
2,854
|
|
General and administrative
|
|
|
1,050
|
|
|
|
343
|
|
|
|
7,488
|
|
|
|
5,239
|
|
|
|
1,452
|
|
Provision for loan losses
|
|
|
1,128
|
|
|
|
|
|
|
|
3,298
|
|
|
|
|
|
|
|
|
|
Loss on foreclosed real estate
|
|
|
2,247
|
|
|
|
(21
|
)
|
|
|
205
|
|
|
|
7,512
|
|
|
|
2,567
|
|
Occupancy
|
|
|
257
|
|
|
|
464
|
|
|
|
2,788
|
|
|
|
1,912
|
|
|
|
1,043
|
|
Loss on
available-for-sale
securities-other-than- temporary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,809
|
|
|
|
55,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses and impairments
|
|
|
5,965
|
|
|
|
2,887
|
|
|
|
26,927
|
|
|
|
25,009
|
|
|
|
63,128
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
12,924
|
|
|
|
27,350
|
|
|
|
77,521
|
|
|
|
44,114
|
|
|
|
79,268
|
|
Interest expense
|
|
|
(9,930
|
)
|
|
|
(17,181
|
)
|
|
|
(55,566
|
)
|
|
|
(40,568
|
)
|
|
|
(48,541
|
)
|
Gain (loss) on interest rate swaps and caps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
(23,689
|
)
|
Fair value changes in ABS securitizations
|
|
|
(2,652
|
)
|
|
|
(9,777
|
)
|
|
|
(23,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
342
|
|
|
|
392
|
|
|
|
(1,342
|
)
|
|
|
3,532
|
|
|
|
7,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from Legacy Portfolio & Other
|
|
$
|
(4,275
|
)
|
|
$
|
(827
|
)
|
|
$
|
(24,806
|
)
|
|
$
|
(97,263
|
)
|
|
$
|
(164,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
The table below provides detail of the characteristics of our
Legacy Portfolio and other for the dates indicated (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Year Ended December 31,
|
|
|
|
2011(1)
|
|
|
2010(1)
|
|
|
2010(1)
|
|
|
2009
|
|
|
2008
|
|
|
Legacy Portfolio and Other Performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PerformingUPB
|
|
$
|
1,050,676
|
|
|
$
|
1,446,085
|
|
|
$
|
1,037,201
|
|
|
$
|
345,516
|
|
|
$
|
627,368
|
|
Nonperforming (90+ Delinquency)UPB
|
|
|
318,881
|
|
|
|
628,576
|
|
|
|
337,779
|
|
|
|
141,602
|
|
|
|
100,452
|
|
Real Estate OwnedEstimated Fair Value
|
|
|
24,417
|
|
|
|
28,917
|
|
|
|
27,337
|
|
|
|
10,262
|
|
|
|
21,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Legacy Portfolio and OtherUPB
|
|
$
|
1,393,974
|
|
|
$
|
2,103,578
|
|
|
$
|
1,402,317
|
|
|
$
|
497,380
|
|
|
$
|
749,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts include one previously off-balance sheet securitization
which was consolidated upon adoption of ASC 810 related to
consolidation of certain VIEs. |
For the Three
Months Ended March 31, 2011 and 2010
Total revenues were $1.3 million for the three months ended
March 31, 2011, compared to $1.7 million for the three
months ended March 31, 2010.
Expenses and impairments were $6.0 million for the three
months ended March 31, 2011 compared to $2.9 million
for the three months ended March 31, 2010, an increase of
$3.1 million, or 106.9%, primarily a result of higher
charge-offs experienced on liquidated real estate properties.
Additionally, we recorded a $1.1 million provision for loan
losses on credit impaired loans during the 2011 period.
Interest income, net of interest expense, decreased to
$3.0 million for the three months ended March 31, 2011
as compared to $10.2 million for the three months ended
March 31, 2010. The decrease in net interest income was
primarily due to the effects of the derecognition of previously
consolidated VIEs.
Fair value changes in ABS securitizations were $2.7 million
for the three months ended March 31, 2011 compared to a
$9.8 million for the three months ended March 31,
2010. Fair value changes in ABS securitizations is the net
result of the reductions in the fair value of the assets
(Mortgage loans held for investment and Real estate owned) and
the reductions in the fair value of the liabilities (ABS
nonrecourse debt.)
For the Years
Ended December 31, 2010 and 2009
Total revenues were $3.5 million for the year ended
December 31, 2010, compared to $(75.8) million for the
year ended December 31, 2009. This increase was primarily a
result of a change in classification on mortgage loans held for
sale discussed above, with no gain on mortgage loans held for
sale recorded for the year ended December 31, 2010,
compared to a loss of $75.8 million recorded for the year
ended December 31, 2009.
Expenses and impairments were $26.9 million for the year
ended December 31, 2010 compared to $25.0 million for
the year ended December 31, 2009, an increase of
$1.9 million, or 7.6%, primarily due to an increase in
headcount and allocated expenses for corporate support functions
and executive oversight. Additionally, we recognized
$3.6 million in additional share-based compensation expense
from revised compensation arrangements with certain of our
executives, as well as a $3.3 million provision for loan
losses. These expense increases were offset by the net impact of
the adoption of new accounting guidance on the consolidation of
certain securitization trusts which resulted in a
$7.3 million reduction in
65
charges from losses realized on foreclosed real estate and a
decrease of $6.8 million in
other-than-temporary
impairments recognized on our investment in debt
securities-available-for-sale.
Total other income (expense) was $(1.3) million for the
year ended December 31, 2010 compared to $3.5 million
for the year ended December 31, 2009, a decrease of
$4.8 million, or 137.1%. The decrease was primarily due to
an increase in our net interest income, offset by fair value
changes in our ABS securitizations. Interest income, net of
interest expense, increased to $21.9 million for the year
ended December 31, 2010 as compared to $3.5 million
for the year ended December 31, 2009. The increase in
interest income, net was due to the consolidation of certain
securitization trusts upon the adoption of new accounting
guidance related to VIEs. Fair value changes in ABS
securitizations included a loss of $23.3 million for the
year ended December 31, 2010, with no corresponding amount
for the year ended December 31, 2009, due to the election
of the fair value option on consolidated VIEs.
For the Years
Ended December 31, 2009 and 2008
Total revenues were $(75.8) million for the year ended
December 31, 2009, compared to $(108.6) million for
the year ended December 31, 2008, an increase of
$32.8 million, or 30.2%. This increase was a result of
lower
mark-to-market
adjustments on our outstanding legacy portfolio. We accounted
for the excess of cost over fair value of these loans as a
valuation allowance with changes in the valuation allowance
included in loss on mortgage loans held for sale. For the year
ended December 31, 2009, the change in the outstanding
valuation allowance resulted in net income of $8.8 million,
compared to a net loss of $42.6 million for the year ended
December 31, 2008. These amounts were partially offset by
higher realized losses on existing portfolio rewrites and
liquidations on our existing legacy portfolio and real estate
owned of $80.3 million for the year ended December 31,
2009, compared to a loss of $56.3 million for the year
ended December 31, 2008.
Expenses and impairments were $25.0 million for the year
ended December 31, 2009, compared to $63.1 million for
the year ended December 31, 2008, a decrease of
$38.1 million, or 60.4%, primarily due to a decrease of
$48.4 million in
other-than-temporary
impairments recognized on our investment in debt
securities-available-for-sale attributable to lower overall
outstanding carrying balances on outstanding debt securities,
offset by an increase in unallocated corporate expenses and an
increase in losses realized on loans held for investment and
foreclosed real estate.
The deterioration of the housing market and related illiquidity
in the capital markets resulted in an overall decrease in the
credit quality of the residential mortgage loans that
collateralize our retained investment in debt securities. As a
result of these weakening conditions, in 2008 we determined that
we would not be able to fully recover all of our recorded
investment in these related debt securities, and recorded an
other-than-temporary
impairment of $55.2 million, compared to $6.8 million
in impairments for the year ended December 31, 2009. The
decrease in our recognized impairments was primarily a result of
our lower overall total outstanding investment in these debt
securities.
During late 2008 and 2009, increased foreclosure activities
resulted in an increase in real estate owned, coupled with the
continuing deterioration of the housing market, our real estate
owned losses increased. Our increased loss severities were also
impacted by management initiatives enacted in 2009 to liquidate
existing foreclosed real estate in advance of continued
deterioration in certain housing markets.
We estimate the fair value of the real estate owned at the time
that a loan is transferred to the real estate owned
classification. Real estate owned is recorded at estimated fair
value less costs to sell at the date of foreclosure. Fair value
is estimated using the most recently obtained appraised value or
broker price opinion, as applicable, adjusted, as necessary, to
reflect expected price concessions based on historical
experience. Upon foreclosure, we obtain a third party appraisal
and a third party broker price opinion. Subsequently, we obtain
updated broker price opinions every 90 days for our real
estate owned. We review recent real estate owned sales activity
on a quarterly basis to ensure that the resulting overall net
sales proceeds received are consistent with our estimated fair
value. Any subsequent declines in fair value are credited to a
valuation allowance and charged to operations as incurred.
66
Total other income was $3.5 million for the year ended
December 31, 2009 compared to $7.0 million for the
year ended December 31, 2008, a decrease of
$3.5 million, or 50.0%. The decrease was primarily due to a
decrease in net interest income year over year of approximately
$27.3 million, offset by a decrease in loss on interest
rate swaps and caps. The decrease in interest income, net was
attributable to an overall decrease in our total outstanding
performing legacy portfolio assets to $345.5 million as of
December 31, 2009, compared to $627.4 million as of
December 31, 2008. In addition, our weighted average
interest rates on our outstanding legacy portfolio assets
decreased to 7.58% for the year ended December 31, 2009
compared to 9.11% for the year ended December 31, 2008.
Loss on interest rate swaps and caps decreased to
$0.0 million for the year ended December 31, 2009 as
compared to $23.7 million for the year ended
December 31, 2008. Prior to 2009, we entered into interest
rate swap agreements to economically hedge the interest payments
on the warehouse debt and securitization of our mortgage loans
held for sale. The $23.7 million decrease in loss on
interest rate swaps and caps was due to our unwinding of
outstanding interest rate swap positions during 2008.
Analysis of Items
on Consolidated Balance Sheet
The following table presents our consolidated balance sheets as
of March 31, 2011, December 31, 2010 and 2009 (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
48,420
|
|
|
$
|
21,223
|
|
|
$
|
41,645
|
|
Restricted cash
|
|
|
73,100
|
|
|
|
91,125
|
|
|
|
52,795
|
|
Accounts receivable
|
|
|
454,235
|
|
|
|
439,071
|
|
|
|
509,974
|
|
Mortgage loans held for sale
|
|
|
268,950
|
|
|
|
371,160
|
|
|
|
203,131
|
|
Mortgage loans held for investment, subject to nonrecourse
debtLegacy Assets
|
|
|
262,268
|
|
|
|
266,840
|
|
|
|
301,910
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt (at fair value)
|
|
|
530,681
|
|
|
|
538,440
|
|
|
|
|
|
Investment in debt
securitiesavailable-for-sale
|
|
|
|
|
|
|
|
|
|
|
2,486
|
|
Receivables from affiliates
|
|
|
7,542
|
|
|
|
8,993
|
|
|
|
12,574
|
|
Mortgage servicing rights
|
|
|
151,159
|
|
|
|
145,062
|
|
|
|
114,605
|
|
Property and equipment, net
|
|
|
11,255
|
|
|
|
8,394
|
|
|
|
6,575
|
|
Real estate owned, net (includes $17,509 and $0, respectively,
of real estate owned, subject to ABS nonrecourse debt)
|
|
|
24,417
|
|
|
|
27,337
|
|
|
|
10,262
|
|
Other assets
|
|
|
36,228
|
|
|
|
29,536
|
|
|
|
24,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,868,255
|
|
|
$
|
1,947,181
|
|
|
$
|
1,280,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and members equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
608,451
|
|
|
$
|
709,758
|
|
|
$
|
771,857
|
|
Unsecured senior notes
|
|
|
244,410
|
|
|
|
244,061
|
|
|
|
|
|
Payables and accrued liabilities
|
|
|
103,899
|
|
|
|
75,054
|
|
|
|
66,830
|
|
Derivative financial instruments
|
|
|
7,724
|
|
|
|
7,801
|
|
|
|
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
15,615
|
|
|
|
18,781
|
|
|
|
|
|
Nonrecourse debtLegacy Assets
|
|
|
133,592
|
|
|
|
138,662
|
|
|
|
177,675
|
|
ABS nonrecourse debt (at fair value)
|
|
|
489,321
|
|
|
|
496,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,603,012
|
|
|
|
1,690,809
|
|
|
|
1,016,362
|
|
Total members equity
|
|
|
265,243
|
|
|
|
256,372
|
|
|
|
263,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$
|
1,868,255
|
|
|
$
|
1,947,181
|
|
|
$
|
1,280,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
Comparison of
Consolidated Balance Sheet ItemsMarch 31, 2011 to
December 31, 2010
Assets
Restricted cash consists of custodial accounts related to
collections on certain mortgage loans and mortgage loan advances
that have been pledged to debt counterparties under various
Master Repurchase Agreements. Restricted cash was
$73.1 million at March 31, 2011, a decrease of
$18.0 million from December 31, 2010, primarily a
result of decreased servicer advance reimbursement amounts.
Accounts receivable consists primarily of accrued interest
receivable on mortgage loans and securitizations, collateral
deposits on surety bonds, and advances made to nonconsolidated
securitization trusts, as required under various servicing
agreements related to delinquent loans, which are ultimately
paid back to us from the securitization trusts. Accounts
receivable increased $15.1 million to $454.2 million
at March 31, 2011, because of our larger outstanding
serving portfolio, which resulted in a $10.2 million
increase in corporate and escrow advances and an
$8.3 million increase in receivables from trusts.
Mortgage loans held for sale are carried at fair value, as
permitted under ASC 825, Financial Instruments. We
estimate fair value by evaluating a variety of market indicators
including recent trades and outstanding commitments. Mortgage
loans held for sale was $269.0 million at March 31,
2011, a decrease of $102.2 million from December 31,
2010, as $765.7 million mortgage loan sales was partially
offset by $654.1 million loan originations.
Mortgage loans held for investment, subject to nonrecourse
debtlegacy assets consist of nonconforming or subprime
mortgage loans securitized which serve as collateral for the
nonrecourse debt. Mortgage loans held for investment, subject to
nonrecourse debtlegacy assets was $262.3 million at
March 31, 2011, a decrease of $4.5 million from
December 31, 2010 as $5.8 million was transferred to
real estate owned.
Mortgage loans held for investment, subject to ABS nonrecourse
debt consist of mortgage loans that were recognized upon the
adoption of new accounting guidance related to VIEs effective
January 1, 2010. To more accurately represent the future
economic performance of the securitization collateral and
related debt balances, we elected the fair value option provided
for by
ASC 825-10
Financial Instruments-Overall. Mortgage loans held for
investment, subject to ABS nonrecourse debt was
$530.7 million at March 31, 2011, a decrease of
$7.7 million from December 31, 2010, as
$16.2 million was transferred to real estate owned, which
was partially offset by improvements in the fair value of the
mortgage loan portfolio.
Receivables from affiliates consist of periodic transactions
with Nationstar Regular Holdings, Ltd., a subsidiary of FIF HE
Holdings LLC. These transactions typically involve the monthly
payment of principal and interest advances that are required to
be remitted to securitization trusts as required under various
Pooling and Servicing Agreements. These amounts are later repaid
to us when principal and interest advances are recovered from
the respective borrowers. Receivables from affiliates were
$7.5 million at March 31, 2011, a decrease of
$1.5 million from December 31, 2010, as a result of
increased recoveries on outstanding principal and interest
advances.
Mortgage servicing rights consist of servicing assets related to
all existing residential mortgage loans transferred to a third
party in a transfer that meets the requirements for sale
accounting, or through the acquisition of the right to service
residential mortgage loans that do not relate to our assets.
Mortgage servicing rights were $151.2 million at
March 31, 2011, an increase of $6.1 million over
December 31, 2010, primarily a result of the capitalization
of $9.9 million newly created mortgage servicing rights,
partially offset by $3.8 million change in the fair value
of the rights.
Property and equipment, net is comprised of land, furniture,
fixtures, leasehold improvements, computer software, and
computer hardware. These assets are stated at cost less
accumulated
68
depreciation. Property and equipment, net increased
$2.9 million as we invested in information technology
systems to support volume growth in the Originations segment.
Real estate owned, net represents property we acquired as a
result of foreclosures on delinquent mortgage loans. Real estate
owned, net is recorded at estimated fair value, less costs to
sell, at the date of foreclosure. Any subsequent operating
activity and declines in value are charged to earnings. Real
estate owned, net was $24.4 million at March 31, 2011,
a decrease of $2.9 million over December 31, 2010.
This decrease was primarily a result of sales of real estate,
partially offset by transfers from mortgage loans held for
investment.
Other assets increased $6.6 million when the company
acquired a 22% interest in ANC Acquisition LLC (see Note 8
of our accompanying Unaudited Notes to Consolidated Financial
Statements.) Other assets also include deferred financing costs,
derivative financial instruments, and prepaid expenses.
Liabilities and
Members Equity
At March 31, 2011, total liabilities were
$1,603.0 million, an $87.8 million decrease from
December 31, 2010. The decrease in total liabilities was
primarily a result of $104.5 million repayment of the
outstanding warehouse facility notes payable, partially offset
by a $27.0 million increase in payables owed to
securitization trusts.
Included in our payables and accrued liabilities caption on our
balance sheet is our reserve for repurchases and
indemnifications amounting to $8.0 million and
$7.3 million at March 31, 2011 and December 31,
2010, respectively. This liability represents our
(i) estimate of losses to be incurred on the repurchase of
certain loans that we previously sold and (ii) an estimate
of losses to be incurred for indemnification of losses incurred
by purchasers or insurers with respect to loans that we sold.
Certain sale contracts include provisions requiring us to
repurchase a loan or indemnify the purchaser or insurer for
losses if a borrower fails to make certain initial loan payments
due to the acquirer or if the accompanying mortgage loan fails
to meet certain customary representations and warranties. These
representations and warranties are made to the loan purchasers
or insurers about various characteristics of the loans, such as
manner of origination, the nature and extent of underwriting
standards applied and the types of documentation being provided
and typically are in place for the life of the loan. Although
the representations and warranties are in place for the life of
the loan, we believe that most repurchase requests occur within
the first five years of the loan. In the event of a breach of
the representations and warranties, we may be required to either
repurchase the loan or indemnify the purchaser for losses it
sustains on the loan. In addition, an investor may request that
we refund a portion of the premium paid on the sale of mortgage
loans if a loan is prepaid within a certain amount of time from
the date of sale. We record a provision for estimated
repurchases, loss indemnification and premium recapture on loans
sold, which is charged to gain (loss) on mortgage loans held for
sale.
The activity of our outstanding repurchase reserves were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
Year ended
|
|
|
ended
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
Repurchase reserves, beginning of period
|
|
$
|
3,648
|
|
|
$
|
7,321
|
|
Additions
|
|
|
4,649
|
|
|
|
929
|
|
Charge-offs
|
|
|
(976
|
)
|
|
|
(271
|
)
|
|
|
|
|
|
|
|
|
|
Repurchase reserves, end of period
|
|
$
|
7,321
|
|
|
$
|
7,979
|
|
|
|
|
|
|
|
|
|
|
69
The following table summarizes the changes in our loan count and
unpaid principal balance related to unresolved repurchase and
indemnification requests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
Years Ended December 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
Count
|
|
|
$
|
|
|
Count
|
|
|
$
|
|
|
Count
|
|
|
$
|
|
|
|
$ amounts in millions
|
|
|
Beginning balance
|
|
|
3
|
|
|
$
|
0.3
|
|
|
|
8
|
|
|
$
|
1.3
|
|
|
|
21
|
|
|
$
|
4.3
|
|
Repurchases & indemnifications
|
|
|
(17
|
)
|
|
|
(2.7
|
)
|
|
|
(8
|
)
|
|
|
(1.9
|
)
|
|
|
(3
|
)
|
|
|
(0.6
|
)
|
Claims initiated
|
|
|
28
|
|
|
|
4.6
|
|
|
|
53
|
|
|
|
10.8
|
|
|
|
37
|
|
|
|
7.9
|
|
Rescinded
|
|
|
(6
|
)
|
|
|
(0.9
|
)
|
|
|
(32
|
)
|
|
|
(5.9
|
)
|
|
|
(17
|
)
|
|
|
(4.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
|
8
|
|
|
$
|
1.3
|
|
|
|
21
|
|
|
$
|
4.3
|
|
|
|
38
|
|
|
$
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table details our loan sales by period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Three Months Ended
|
|
|
|
|
|
|
2008
|
|
2009
|
|
2010
|
|
March 31, 2011
|
|
Total
|
|
|
Count
|
|
$
|
|
Count
|
|
$
|
|
Count
|
|
$
|
|
Count
|
|
$
|
|
Count
|
|
$
|
|
|
$ amounts in billions
|
|
Loan sales
|
|
|
3,412
|
|
|
$
|
0.5
|
|
|
|
5,344
|
|
|
$
|
1.0
|
|
|
|
13,090
|
|
|
$
|
2.6
|
|
|
|
3,832
|
|
|
$
|
0.8
|
|
|
|
25,678
|
|
|
$
|
4.9
|
|
For the three months ended March 31, 2011, the reserve for
repurchases and indemnifications increased by approximately
$0.7 million. This increase was principally due to the
significant increase in loan sales during 2011 over the 2010
period. We increase the reserve by applying an estimated loss
factor to the principal balance of loan sales. Secondarily, the
reserve may be increased based on outstanding claims received.
We have observed an increase in repurchase requests in each of
the last two years and into 2011. We believe that because of the
increase in our originations during 2009, 2010 and the first
quarter of 2011, we expect that repurchase requests are likely
to increase. Should home values continue to decrease, our
realized losses from loan repurchases and indemnifications may
increase as well. As such, our reserve for repurchases may be
required to increase beyond our current expectations. While the
ultimate amount of repurchases and premium recapture is an
estimate, we consider the liability to be adequate at each
balance sheet date.
At March 31, 2011, outstanding members equity was
$265.2 million, a $8.8 million increase from
December 31, 2010, which is primarily attributed to the
Company earning $7.4 million net income in the current
quarter, $5.3 million share-based compensation, partially
offset by $3.9 million distribution to parent.
Comparison of
Consolidated Balance Sheet ItemsDecember 31, 2010 to
December 31, 2009
Assets
Restricted cash consists of custodial accounts related to
collections on certain mortgage loans and mortgage loan advances
that have been pledged to debt counterparties under various
Master Repurchase Agreements. Restricted cash was
$91.1 million at December 31, 2010, an increase of
$38.3 million from December 31, 2009, primarily a
result of the increase in custodial deposits from mortgage loan
advances. These custodial deposits are held in trust until they
are remitted to the bond investors to pay down the asset-backed
certificates.
Accounts receivable consists primarily of accrued interest
receivable on mortgage loans and securitizations, collateral
deposits on surety bonds, and advances made to nonconsolidated
securitization trusts, as required under various servicing
agreements related to delinquent loans, which are ultimately
paid back to us from the securitization trusts. Accounts
receivable was $439.1 million at December 31, 2010, a
decrease of $70.9 million from December 31, 2009. The
decrease in accounts receivable was primarily a result of
decreases in outstanding delinquency and corporate and escrow
advances of $57.6 million and $41.6 million,
respectively. During the period, the GSEs began to
70
repurchase loans from securitization trusts that we service for
them that are 120 days or more past due. In conjunction
with these repurchases, principal and interest advances that we
had made as servicer for these loans were repaid. As such, our
accounts receivable balance decreased significantly during the
period as well as our corresponding borrowings under our MBS
Advance Funding facility that we utilize to fund such advances.
Mortgage loans held for sale are carried at fair value, as
permitted under ASC 825, Financial Instruments. We
estimate fair value by evaluating a variety of market indicators
including recent trades and outstanding commitments. Mortgage
loans held for sale was $371.2 million at December 31,
2010, an increase of $168.1 million over December 31,
2009, a result of higher origination volume during the 2010
period.
Mortgage loans held for investment, subject to nonrecourse
debtlegacy assets consist of nonconforming or subprime
mortgage loans securitized which serve as collateral for the
nonrecourse debt. These loans were transferred on
October 1, 2009, from mortgage loans held for sale at fair
value on the transfer date, as determined by the present value
of expected future cash flows, with no valuation allowance
recorded. Any decreases in expected cash flows subsequent to the
transfer are recognized as a valuation allowance. Mortgage loans
held for investment, subject to nonrecourse debtlegacy
assets was $266.8 million at December 31, 2010, a
decrease of $35.1 million from December 31, 2009, a
result of principal collections and liquidations on the
outstanding mortgage loans.
Mortgage loans held for investment, subject to ABS nonrecourse
debt consist of mortgage loans that were recognized upon the
adoption of new accounting guidance related to VIEs effective
January 1, 2010. To more accurately represent the future
economic performance of the securitization collateral and
related debt balances, we elected the fair value option provided
for by
ASC 825-10
Financial Instruments-Overall. This option was applied to
all eligible items within the VIE, including mortgage loans held
for investment, subject to ABS nonrecourse debt, and the related
ABS nonrecourse debt.
Investment in debt
securitiesavailable-for-sale
consists of beneficial interests we retain in securitization
transactions accounted for as a sale under the guidance of
ASC 860. Effective January 1, 2010, new accounting
guidance for VIEs eliminated the concept of a QSPE and all
existing securitization trusts are considered VIEs and are now
subject to the new consolidation guidance. Upon consolidation of
these VIEs, Nationstar derecognized all previously recognized
beneficial interests, including retained investment in debt
securities, obtained as part of the securitization (see
Note 3 to our consolidated financial statements).
Receivables from affiliates consist of periodic transactions
with Nationstar Regular Holdings, Ltd., a subsidiary of FIF HE
Holdings LLC. These transactions typically involve the monthly
payment of principal and interest advances that are required to
be remitted to securitization trusts as required under various
Pooling and Servicing Agreements. These amounts are later repaid
to us when principal and interest advances are recovered from
the respective borrowers. Receivables from affiliates were
$9.0 million at December 31, 2010, a decrease of
$3.6 million from December 31, 2009, as a result of
increased recoveries on outstanding principal and interest
advances.
Mortgage servicing rights consist of servicing assets related to
all existing residential mortgage loans transferred to a third
party in a transfer that meets the requirements for sale
accounting, or through the acquisition of the right to service
residential mortgage loans that do not relate to our assets.
Mortgage servicing rights were $145.1 million at
December 31, 2010, an increase of $30.5 million over
December 31, 2009. The increase was primarily a result of
the capitalization of newly created mortgage servicing rights of
$26.3 million, combined with the purchase of
$17.8 million in mortgage servicing rights, offset by the
de-recognition of previously recognized mortgage servicing
rights on the consolidation of certain securitization trusts for
the adoption of new accounting guidance related to VIEs of
$7.6 million, and the change in fair value of mortgage
servicing rights.
71
Property and equipment, net increased by approximately
$1.8 million, primarily as a result of expenditures related
to newly opened retail branches and increased hardware
acquisitions to support servicing expansion.
Real estate owned, net represents property we acquired as a
result of foreclosures on delinquent mortgage loans. Real estate
owned, net is recorded at estimated fair value, less costs to
sell, at the date of foreclosure. Any subsequent operating
activity and declines in value are charged to earnings. Real
estate owned, net was $27.3 million at December 31,
2010, an increase of $17.0 million over December 31,
2009. This increase was primarily a result of the adoption of
the new accounting guidance related to VIEs, resulting in the
recognition of $17.5 million in real estate owned
properties from a consolidated VIE.
Other assets consist of principally deferred financing costs,
derivative financial instruments, and prepaid expenses. Other
assets were $29.5 million at December 31, 2010, an
increase of $5.3 million over December 31, 2009. This
increase was primarily a result of an increase in deferred
financing costs from our March 2010 offering and other higher
prepaid expenses.
Liabilities and
Members Equity
At December 31, 2010, total liabilities were
$1.7 billion, a $0.7 billion increase from
December 31, 2009. The increase in total liabilities was
primarily a result of the adoption of new accounting guidance
related to VIEs, resulting in the recognition of
$0.5 billion in asset-backed certificates from a
consolidated VIE combined with a March 2010 offering of Senior
Unsecured Notes of $244 million.
Included in our payables and accrued liabilities caption on our
balance sheet is our reserve for repurchases and
indemnifications amounting to $7.3 million and
$3.6 million at December 31, 2010 and 2009,
respectively. This liability represents our (i) estimate of
losses to be incurred on the repurchase of certain loans that we
previously sold and (ii) an estimate of losses to be
incurred for indemnification of losses incurred by purchasers or
insurers with respect to loans that we sold.
During 2010, the reserve for repurchases and indemnifications
increased by approximately $3.7 million. This increase was
principally due to the significant increase in loan sales during
2010 over the 2009 period. We increase the reserve by applying
an estimated loss factor to the principal balance of loan sales.
Secondarily, the reserve was increased based on outstanding
claims received, and 2010 represented the first year that we
have received make whole requests that we considered to be
probable and estimable. We have observed an increase in
repurchase requests in each of the last two years. We believe
that because of the increase in our originations during 2009 and
2010, we expect that repurchase requests are likely to increase.
Should home values continue to decrease, our realized losses
from loan repurchases and indemnifications may increase as well.
As such, our reserve for repurchases may be required to increase
beyond our current expectations. While the ultimate amount of
repurchases and premium recapture is an estimate, we consider
the liability to be adequate at each balance sheet date.
At December 31, 2010, outstanding members equity was
$256.4 million, a $7.4 million decrease from
December 31, 2009. The decrease in members equity was
primarily driven by an $9.9 million net loss for the year
ended December 31, 2010, a cumulative effect adjustment
from the adoption of new accounting guidance related to VIEs
resulting in a cumulative effect decrease in our beginning
members units of $8.1 million, offset by
$9.5 million in share-based compensation (net of taxes)
during the period and $1.1 million in the change in value
of a cash flow hedge.
Recent Accounting
Developments
On January 1, 2010, we adopted new FASB accounting guidance
on transfers of financial assets and consolidation of VIEs. This
new accounting guidance revises sale accounting criteria for
transfers of financial assets, including elimination of the
concept of and accounting for qualifying special
72
purpose entities (QSPEs), and significantly changes
the criteria for consolidation of a VIE. The adoption of this
new accounting guidance resulted in the consolidation of certain
VIEs that previously were QSPEs that were not recorded on our
Consolidated Balance Sheet prior to January 1, 2010. We
recorded an $8.1 million charge to members equity on
January 1, 2010 for the cumulative effect of the adoption
of this new accounting guidance, which resulted principally from
the derecognition of the retained interests in the
securitizations. Initial recording of these assets and
liabilities on our Consolidated Balance Sheet had no impact at
the date of adoption on consolidated results of operations.
Accounting Standards Update
No. 2010-06,
Fair Value Measurements and Disclosures (Topic 820):
Improving Disclosures about Fair Value Measurements (Update
No. 2010-06).
Update
No. 2010-06
requires additional disclosures about fair value measurements,
including separate disclosures of significant transfers in and
out of Level 1 and Level 2 fair value measurements and
the reasons for the transfers. Additionally, the reconciliation
for fair value measurements using significant unobservable
inputs (Level 3) should present separately information
about purchases, sales, issuances, and settlements. Update
No. 2010-06
also clarifies previous disclosure requirements, including the
requirement that entities provide disclosures about the
valuation techniques and inputs used to measure fair value for
both recurring and nonrecurring fair value measurements for both
Level 2 and Level 3 measurements. The new disclosures
and clarifications of existing disclosures required under Update
No. 2010-06
is effective for interim and annual reporting periods beginning
after December 15, 2009, and was adopted for the interim
reporting period ending March 31, 2010, except for the
disclosures about purchases, sales, issuances, and settlement in
the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods
within those fiscal years.
Accounting Standards Update
No. 2010-18,
Effect of a Loan Modification When the Loan Is Part of a Pool
That Is Accounted for as a Single Asset (Update
No. 2010-18).
Update
No. 2010-18
clarifies the accounting treatment for modifications of loans
that are accounted for within a pool under Subtopic
310-30,
ReceivablesLoans and Debt Securities Acquired with
Deteriorated Credit Quality (Subtopic
310-30),
requiring an entity to continue to include modified loans in the
pool even if the modification of those loans would otherwise be
considered a troubled debt restructuring. Loans accounted for
individually under Subtopic
310-30
continue to be subject to the troubled debt restructuring
accounting provisions within Subtopic
310-40,
ReceivablesTroubled Debt Restructurings by
Creditors. The amendments in this update were effective for
Nationstar for modifications of loans accounted for within pools
under Subtopic
310-30
occurring in the first interim or annual period ending on or
after July 15, 2010. The adoption of Update
No. 2010-18
did not have a material impact on our financial condition,
liquidity or results of operations.
Accounting Standards Update
No. 2010-20,
Disclosures about the Credit Quality of Financing Receivables
and the Allowance for Credit Losses (Update
No. 2010-20).
Update
No. 2010-20
is intended to provide users of financial statements with
greater transparency regarding a companys allowance for
credit losses and the credit quality of its financing
receivables. It is intended to provide additional information to
assist financial statement users in assessing an entitys
credit risk exposures and evaluating the adequacy of its
allowance for credit losses. The additional disclosure
requirements for this amendment are effective for Nationstar for
annual reporting periods ending on or after December 15,
2011. The adoption of Update
No. 2010-20
will not have a material impact on our financial condition,
liquidity or results of operations.
Accounting Standards Update
No. 2011-02,
A Creditors Determination of Whether a Restructuring is
a Troubled Debt Restructuring (Update
No. 2011-02).
Update
No. 2011-02
is intended to reduce the diversity in identifying troubled debt
restructurings (TDRs), primarily by clarifying certain factors
around concessions and financial difficulty. In evaluating
whether a restructuring constitutes a troubled debt
restructuring, a creditor must separately conclude that:
1) the restructuring constitutes a concession; and
2) the debtor is experiencing financial difficulties. The
clarifications will generally result in more restructurings
being considered troubled. The amendments in this update will be
effective for
73
interim and annual periods beginning after June 15, 2011,
with retrospective application to the beginning of the annual
period of adoption. The adoption of Update
No. 2011-02
will not have a material impact on our financial condition,
liquidity or results of operations.
Accounting Standards Update
No. 2011-03,
Reconsideration of Effective Control for Repurchase
Agreements (Update
No. 2011-03).
Update
No. 2011-03
is intended to improve the accounting and reporting of
repurchase agreements and other agreements that both entitle and
obligate a transferor to repurchase or redeem financial assets
before their maturity. This amendment removes the criterion
pertaining to an exchange of collateral should not be a
determining factor in assessing effective control, including
(1) the criterion requiring the transferor to have the
ability to repurchase or redeem the financial assets on
substantially the agreed terms, even in the event of default by
the transferee, and (2) the collateral maintenance
implementation guidance related to that criterion. Other
criteria applicable to the assessment of effective control are
not changed by the amendments in the update. The amendments in
this update will be effective for interim and annual periods
beginning after December 15, 2011. The adoption of Update
No. 2011-03
will not have a material impact on our financial condition,
liquidity or results of operations.
Accounting Standards Update No.
2011-04,
Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in U.S. GAAP and IFRSs (Update
No. 2011-04).
Update
No. 2011-04
is intended to provide common fair value measurement and
disclosure requirements in U.S. GAAP and IFRSs. The changes
required in this update include changing the wording used to
describe many of the requirements in U.S. GAAP for
measuring fair value and for disclosing information about fair
value measurements. The amendments in this update are to be
applied prospectively and are effective for interim and annual
periods beginning after December 15, 2011. The adoption of
Update
No. 2011-04
will not have a material impact on our financial condition,
liquidity or results of operations.
Liquidity and
Capital Resources
Liquidity measures our ability to meet potential cash
requirements, including the funding of servicing advances,
paying operating expenses, origination of loans and repayment of
borrowings. Our cash balance decreased from $41.6 million
as of December 31, 2009 to $21.2 million as of
December 31, 2010, primarily due to greater cash outflows
from our financing activities to repay our outstanding debt
facilities. Our cash balance increased from $21.2 million
as of December 31, 2010 to $48.4 million as of
March 31, 2011, primarily due to greater cash inflows from
operating activities, partially offset by cash outflows from
financing activities.
Cash and cash equivalents is one component of our overall
liquidity position. As of March 31, 2011, our total
liquidity was $114.9 million. Total liquidity is a measure
that management uses to determine amounts expected to be
available to fund our business and consists of cash and cash
equivalents ($48.4 million as of March 31, 2011) as
well as amounts we believe we would receive in respect of
unencumbered assets ($66.7 million as of March 31,
2011). Unencumbered assets for this purpose consist of servicing
advances that we expect to be converted into cash within a short
period of time and new loans that are eligible to be financed
under available committed warehouse lines. We follow a
disciplined cash management approach that uses our excess
liquidity or cash available to deploy for investments to
temporarily paydown existing borrowings on mortgage loans held
for sale and accounts receivables. At the time we identify
investment opportunities, we will leverage these unencumbered
assets to fulfill the purchase price. As of March 31, 2011,
we had $855.9 million in unused capacity under our existing
servicing advance facilities and origination warehouse lines.
We shifted our strategy after 2007 to leverage our
industry-leading servicing capabilities and capitalize on the
opportunities to grow our origination platform, which has led to
the strengthening of our liquidity position. As a part of our
shift in strategy, we ceased originating non-prime loans in
2007, and new originations have been focused on loans that are
eligible to be sold to GSEs. For the years ended
December 31, 2010 and 2009, substantially all originated
loans have either been sold or are
74
pending sale. Additionally, we grew our servicing portfolio
from $33.7 billion as of December 31, 2009 to
$67.0 billion as of March 31, 2011.
As part of the normal course of our business, we borrow money to
fund servicing advances and loan originations. 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 the loans or place them in government
securitizations and repay the borrowings under the warehouse
lines. We rely upon several counterparties to provide us with
financing facilities to fund a portion of our servicing advances
and to fund our loan originations on a short-term basis. 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.
In March 2010, we completed the offering of $250 million of
10.875% senior notes, which were issued with an issue
discount of $7.0 million for net cash proceeds of
$243.0 million, with a maturity date of April 2015. These
unsecured senior notes pay interest biannually at an interest
rate of 10.875%. Cash proceeds from this offering were used to
pay down outstanding balances on our existing debt facilities.
At this time, we see no material negative trends that we believe
would affect our access to long-term borrowings, short-term
borrowings or bank credit lines sufficient to maintain our
current operations, or would likely cause us to cease to be in
compliance with any applicable covenants in our indebtedness or
that would inhibit our ability to fund operations and capital
commitments for the next 12 months.
Our primary sources of funds for liquidity include:
(i) lines of credit and other secured borrowings;
(ii) servicing fees and ancillary fees; (iii) payments
received from sale or securitization of loans; and
(iv) payments received from mortgage loans held for sale.
Our primary uses of funds for liquidity include:
(i) funding of servicing advances; (ii) origination of
loans; (iii) payment of interest expenses;
(iv) payment of operating expenses; and (v) repayment
of borrowings.
Our servicing agreements impose on us various rights and
obligations that affect our liquidity. Among the most
significant of these obligations is the requirement 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 speed affect the size of servicing advance balances.
We intend to continue to seek opportunities to acquire loan
servicing portfolios, originations platforms
and/or
businesses that engage in loan servicing
and/or loan
originations. We cannot predict the extent to which our
liquidity and capital resources will be diminished by any such
transactions. Additionally, we believe that a significant
acquisition may require us to raise additional capital to
facilitate such a transaction. We would likely finance
acquisitions through a combination of corporate debt issuances,
asset-backed acquisition financing
and/or cash
from operations.
Operating
Activities
Our operating activities provided $131.6 million cash flow
for the three months ended March 31, 2011 and used
$82.6 million of cash flow for the same period in the prior
year. The increase of $214.2 million was primarily due to
better management of working capital and growth in loan
originations volume. The improvement was primarily due to the
net effect of the following:
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$80.3 million improvement in working capital, which
provided $12.5 million cash for the three months ended
March 31, 2011 and used $67.8 million during the same
period in the prior year.
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$273.4 million improvement in proceeds received from sale
of originated loans, which provided $765.7 million and
$492.3 million for the three month period ending
March 31, 2011 and 2010, partially offset by
$141.5 million increase in cash used to originate loans.
Mortgage loans
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75
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originated and purchased, net of fees, used $654.1 million
and $512.6 million in the three month period ending
March 31, 2011 and 2010, respectively.
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Our operating activities used ($101.7) million and
($83.6) million of cash flow for the years ended
December 31, 2010 and 2009, respectively. The decrease of
$18.1 million was primarily due to the net effect of the
following:
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Increase of $1,613.9 million attributable to increased
proceeds received from sale of loans, offset by decrease in cash
attributable to $1,311.1 million increase in origination
volume.
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Decrease in principal payments/prepayments received and other
changes in mortgages loans held for sale of $437.7 million.
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Increase of $130.4 million primarily due to decreased
delinquency advances to investors to cover scheduled payments of
principal and interest that are required to be remitted to
securitization trusts.
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Increase of $71.0 million attributable to decrease in net
loss period over period, primarily a result of increased
revenues from our higher servicing portfolio and increased
volume in loan originations.
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Our operating activities provided (used) $(83.6) million
and $40.2 million of cash flow for the years ended
December 31, 2009 and 2008, respectively. The decrease in
operating cash flow from 2008 to 2009 was primarily due to
$934.6 million higher volume of originations in 2009,
offset by $493.5 million increase from proceeds received
from sale of loans and $268.9 million increase in principal
payments received from loans.
Investing
Activities
Our investing activities provided $5.3 million and
$30.7 million of cash flow for the three months ended
March 31, 2011 and 2010, respectively. The
$25.4 million decrease in cash flows from investing
activities from 2010 to 2011 was primarily a result of a
$17.9 million decrease in cash proceeds from sales of real
estate owned. Also, in March 2011, we acquired a 22% interest in
ANC Acquisition LLC (ANC) for $6.6 million. ANC is the
parent company of National Real Estate Information Services,
Inc. (NREIS), a real estate services company.
Our investing activities provided (used) $101.2 million,
$30.0 million and $(34.6) million of cash flow for the
years ended December 31, 2010, 2009 and 2008, respectively.
The increase in cash flows from investing activities from 2009
to 2010 was primarily a result of an increase in cash proceeds
from sales of real estate owned and principal payments received
and other changes on mortgage loans held for investment, subject
to ABS nonrecourse debt. The increase in cash flow from
investing activities from 2008 to 2009 was primarily due to the
absence of interest rate swap settlements in 2009 compared to
$51.6 million of settlements in 2008 and a
$17.8 million decrease in cash used for the purchase of
mortgage servicing rights, net of liabilities, offset by no
principal payments received from debt securities in 2009
compared to $8.4 million in 2008.
Financing
Activities
Our financing activities used $109.7 million cash flow
during the three month period ending March 31, 2010 and
provided $33.8 million of cash flow for the three months
ended March 31, 2010. The primary source of financing cash
flow during the three months ended March 31, 2010 was
$243.0 million proceeds from offering the Senior Unsecured
Notes. During the three months ended March 31, 2010, the
Company used $35.6 million to repay ABS non-recourse debt,
used $11.3 million for debt financing costs, and used
$164.6 million to repay the outstanding notes payable.
During the current quarter, the Company used less cash for debt
financing costs and to repay debt. During the three months ended
March 31, 2011, the Company used $14.3 million to
repay ABS non-recourse debt,
76
used $2.3 million for debt financing costs, and used
$101.3 million to repay the outstanding notes payable.
Our financing activities provided (used) $(20.0) million,
$85.9 million and $(37.5) million of cash flow for the
years ended December 31, 2010, 2009 and 2008, respectively.
The increase in cash outflow from financing activities from 2009
to 2010 was primarily a result of repayment of ABS and Legacy
Asset nonrecourse debt. We also did not receive any capital
contributions from our existing members in 2010, compared to
$20.7 million in capital contributions received in 2009. In
2009, the Company issued non-recourse debt, which provided
$191.3 million in cash. The increase in cash flow from
financing activities from 2008 to 2009 was primarily due to the
non-recourse debt, net issued in 2009 related to the secured
financing of our legacy assets.
Contractual
Obligations
The table below sets forth our contractual obligations,
excluding our Legacy Asset Securitized Debt and ABS nonrecourse
debt, as of December 31, 2010 (in thousands):
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2012
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2014
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After
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2011
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to 2013
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to 2015
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2015
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Total
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Senior Unsecured Notes
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$
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$
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$
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250,000
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$
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$
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250,000
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Interest expense from Senior Unsecured Notes
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27,188
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54,375
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33,985
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115,548
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MBS Advance Financing Facility
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114,562
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114,562
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ABS Advance Financing Facility
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236,808
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236,808
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MSR Notes
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5,552
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10,181
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15,733
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$300 Million Warehouse
Facility(1)
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209,477
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209,477
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$100 Million Warehouse Facility
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39,014
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39,014
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$75 Million Warehouse Facility
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43,059
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43,059
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GSE ASAP+ Short-Term Financing Facility
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51,105
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51,105
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Operating leases
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7,015
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13,299
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7,972
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1,243
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29,529
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$
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733,780
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$
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77,855
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$
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291,957
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$
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1,243
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$
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1,104,835
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Notes
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(1) |
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Amended in February 2011 to expire in February 2012. |
In addition to the above contractual obligations, we have also
been involved with several securitizations of asset-backed
securities, which were structured as secured borrowings. These
structures resulted in us carrying the securitized loans as
mortgages on our consolidated balance sheet and recognizing the
asset-backed certificates acquired by third parties as
nonrecourse debt. The timing of the principal payments on this
nonrecourse debt is dependent on the payments received on the
underlying mortgage loans and liquidation of real estate owned.
The outstanding principal balance on our Nonrecourse
DebtLegacy Assets and ABS nonrecourse debt was
$161.2 million and $1,037.9 million respectively, as
of December 31, 2010.
There were no other significant changes to our outstanding
contractual obligations as of March 31, 2011 from amounts
disclosed above.
Description of
Certain Indebtedness
10.875% Senior
Notes
On March 26, 2010, Nationstar Mortgage LLC and Nationstar
Capital Corporation, as co-issuer, completed a private offering
of $250.0 million aggregate principal amount of
10.875% senior notes due 2015, or the existing senior
notes. By means of a separate prospectus, we intend to offer to
exchange up to $250.0 million aggregate principal amount of
10.875% senior notes due 2015, or the new senior
77
unsecured notes, for an equal principal amount of the existing
senior notes in an offering that will have been registered under
the Securities Act. This prospectus shall not be deemed to be an
offer to exchange such notes. The existing senior notes and the
new senior notes are referred to herein as the senior notes.
Interest is payable on the senior notes semi-annually in arrears
on April 1 and October 1, starting on October 1, 2010,
with interest accruing from March 26, 2010.
We may redeem some or all of the senior unsecured notes at any
time before April 1, 2013 at a price equal to 100% of the
aggregate principal amount thereof plus accrued and unpaid
interest, if any, to the redemption date and a make-whole
premium. The make-whole premium is the greater of (i) 1.0%
of the then outstanding principal amount of the note or
(ii) the sum of (a)(i) the redemption price of the note at
April 1, 2013 (such redemption price being set forth in the
table below) and (ii) all required interest payments due on
the note through April 1, 2013 (excluding accrued but
unpaid interest to such redemption date), computed using a
discount rate equal to the applicable treasury rate plus
50 basis points over (b) the then outstanding
principal amount of the note. On or after April 1, 2013, we
may also redeem the senior unsecured notes, in whole or in part,
at the following redemption prices set forth below (expressed as
percentages of principal amount), plus accrued and unpaid
interest, if any, if redeemed during the
12-month
period commencing on April 1 of the years set forth below:
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Year
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Percentage
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2013
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105.438
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%
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2014 and thereafter
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100.00
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%
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In addition, on or prior to April 1, 2013, we may use the
net cash proceeds of one or more equity offerings to redeem up
to 35.0% of the principal amount of all notes issued at a
redemption price equal to 110.875% of the principal amount of
the notes redeemed plus accrued and unpaid interest.
Upon a change of control (as defined in the
indenture), we (or a third party) must offer to redeem all of
the senior notes for a payment equal to 101% of the senior
notes principal amount plus accrued and unpaid interest
thereon. This offering will not result in a change of control.
The senior notes are guaranteed, jointly and severally, on a
senior basis by all of our current and future wholly-owned
domestic restricted subsidiaries other than securitization
entities and subsidiaries designated as unrestricted
subsidiaries. The senior notes are our and the guarantors
general unsecured obligation and are pari passu in right
of payment with all existing and any future senior indebtedness;
effectively junior in right of payment to all existing and
future senior unsecured indebtedness to the extent of the assets
securing such indebtedness; and senior in right of payment to
all existing and future subordinated indebtedness.
The indenture governing the senior notes contains certain
limitations and restrictions on Nationstar Mortgage LLC and its
restricted subsidiaries ability to, among other things:
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|
|
|
|
incur additional indebtedness;
|
|
|
|
issue preferred and disqualified stock;
|
|
|
|
purchase or redeem capital stock;
|
|
|
|
make certain investments;
|
|
|
|
pay dividends or make other payments or loans or transfer
property;
|
|
|
|
sell assets;
|
|
|
|
enter into certain types of transactions with affiliates
involving consideration in excess of $5.0 million;
|
|
|
|
sell all or substantially all of Nationstar Mortgage LLC or a
guarantors assets or merge with or into another company.
|
The covenants are subject to important exceptions and
qualifications described below.
78
Nationstar Mortgage LLC and its restricted subsidiaries are
prohibited from incurring or issuing additional indebtedness and
disqualified stock and its restricted subsidiaries are
prohibited from issuing preferred stock unless Nationstar
Mortgage LLCs corporate indebtedness to tangible net worth
ratio for the most recently ended four full fiscal quarters
would be less than 1.10 to 1.00 on a pro forma basis and the
consolidated leverage ratio for the most recently ended four
fiscal quarters would be less than 4.50 to 1.00. In addition,
Nationstar Mortgage LLC may, among other things, incur certain
working capital credit facilities debt not to exceed
$35 million; indebtedness of foreign subsidiaries not to
exceed 5% of total assets of foreign subsidiaries; acquired debt
so long as the Company would be permitted to incur at least an
additional $1 of indebtedness under the debt ratios; and a
general debt basket not to exceed $12.5 million.
Furthermore, Nationstar Mortgage LLC and its restricted
subsidiaries are prohibited from purchasing or redeeming capital
stock; making certain investments, paying dividends or making
other payments or loans or transfers property, unless Nationstar
Mortgage LLC could incur an additional dollar of indebtedness
under its debt ratios and such payment is less than 50% of
Nationstar Mortgage LLCs consolidated net income minus
100% of any loss plus certain other items that increase the size
of the payment basket. In addition, Nationstar Mortgage LLC may,
among other things, make any payment from the proceeds of a
capital contribution or concurrent offering of equity interests
of Nationstar Mortgage LLC; make stock buy-backs from current
and former employees/directors in an amount to not exceed
$2.5 million per year, subject to carryover of unused
amounts into subsequent years and subject to increase for cash
proceeds from certain equity issuances to employees/directors
and cash proceeds from key man life insurance; make investments
in joint ventures in an amount not to exceed
(i) $5 million and (ii) 1.00% of total assets;
pay dividends following a public offering up to 6% per annum of
the net proceeds received by Nationstar Mortgage LLC; make any
other restricted payments up to $17.5 million. Moreover,
Nationstar Mortgage LLC may make investments in an amount not to
exceed the greater of (i) $30 million and
(ii) 1.00% of total assets.
The indenture contains certain events of default, including
(subject, in some cases, to customary cure periods and
materiality thresholds) defaults based on (i) the failure
to make payments under the indenture when due, (ii) breach
of covenants, (iii) cross-defaults to certain other
indebtedness, (iv) certain bankruptcy or insolvency events,
(v) material judgments and (vi) invalidity of material
guarantees.
Consolidated EBITDA, as defined in the indenture governing the
unsecured senior notes, is the key financial covenant measure
that monitors our ability to undertake investing and financing
functions, such as making investments/acquisitions, paying
dividends, and incurring additional indebtedness.
The ratios included in the indenture for the unsecured senior
notes are incurrence based compared to the customary ratio
covenants that are often found in credit agreements that require
a company to maintain a certain ratio.
The consolidated leverage ratio as defined in the indenture is
equal to Corporate Indebtedness, as defined in the indenture,
divided by Consolidated EBITDA, and limits the activities of the
Company as discussed above, if the ratio is equal to or greater
than 4.5.
79
Consolidated EBITDA is computed as follows (in thousands):
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
|
March 31, 2010
|
|
|
Net income (loss)
|
|
$
|
(3,277
|
)
|
Adjust for:
|
|
|
|
|
Impact from consolidation of securitization
trusts(1)
|
|
|
(6,499
|
)
|
Interest expense from Corporate
Indebtedness(2)
|
|
|
30,456
|
|
Depreciation and amortization
|
|
|
2,470
|
|
Change in fair value of mortgage servicing
rights(3)
|
|
|
4,977
|
|
Exit costs
|
|
|
2,159
|
|
Share-based compensation
|
|
|
17,909
|
|
Fair value changes on interest rate swap
|
|
|
7,022
|
|
Ineffective portion of cash flow hedge
|
|
|
(1,832
|
)
|
(Gain) loss from asset sales and other than temporary impairment
of assets
|
|
|
8,609
|
|
Amortization/write-off of deferred financing cost for debt
obligations in existence prior to issuance of unsecured senior
notes
|
|
|
12,071
|
|
Servicing resulting from transfers of financial assets
|
|
|
(32,409
|
)
|
Other
|
|
|
46
|
|
|
|
|
|
|
Consolidated EBITDA
|
|
$
|
41,702
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents impact to net income from the consolidation of
certain securitization trusts. Net income, as defined in the
Indenture, is based on generally accepted accounting principles
in effect as of December 31, 2009, and does not include the
impact of the consolidation of identified VIEs where we have
both the power to direct the activities that most significantly
impact the VIEs economic performance and the obligation to
absorb losses or the right to receive benefits that could
potentially be significant to the VIE. |
|
(2) |
|
Includes interest expense from the unsecured senior notes and an
unsecured line of credit that was paid down with the proceeds
from the unsecured senior notes. |
|
(3) |
|
Represents change in fair value of mortgage servicing rights
after deconsolidation of the securitization trusts as discussed
in note (1) above. |
Servicing
Our Servicing Segments debt consists of our
10.875% Senior Notes, our MBS Advance Financing Facility,
our ABS Advance Financing Facility and our MSR Notes. As of
March 31, 2011, the two separate advance financing
facilities had $625.0 million of committed capacity to fund
the Servicing Segment. In addition, we had a $200 million
advance facility that had not been drawn upon, and
$14.3 million of notes outstanding that we had entered into
to purchase a portfolio of mortgage servicing rights.
MBS Advance
Financing Facility
Our MBS Advance Financing Facility is used to finance our
obligations to pay advances as required by our servicing
agreements. These agreements may require us to advance certain
payments to the owners of the mortgage loans we service,
including: principal and interest, or P&I advances, taxes
and insurance, or T&I advances, or legal fees, maintenance
and preservation costs, or corporate advances. See
IndustryServicing Industry Overview.
In September 2009, we entered into our MBS Advance Financing
Facility with a GSE which currently has a total facility size of
$275.0 million. Our MBS Advance Financing Facility is
secured by certain servicing advance receivables and is subject
to margin calls in the event that the value of our collateral
decreases. We draw on the facility periodically throughout the
month, as necessary, to satisfy our advancing obligations under
our servicing agreements, and we repay the facility when
advances are recovered through liquidations, prepayments and
reimbursement of advances from modifications.
80
Our MBS Advance Facility requires us to comply with various
customary operating covenants and performance tests on the
underlying receivables related to payment rates and minimum
balance. The interest rate is based on LIBOR plus a margin of
2.50%. The maturity date of this facility is December 2011. As
of March 31, 2011, we were in compliance with all covenants
and performance tests under our MBS Advance Financing Facility
and had an aggregate principal amount of $136.8 million
outstanding.
ABS Advance
Financing Facility
In November 2007, we entered into our ABS Advance Financing
Facility with a financial services company. In December 2009, we
entered into an amendment to our ABS Advance Financing Facility,
which, as amended, has a total facility size of
$350.0 million. The transaction was a securitization of the
servicing advance receivables that entailed the issuance and
sale of $174.0 million in term notes and
$176.0 million in variable funding notes. Our ABS Advance
Financing Facility is a non-recourse obligation that is secured
by certain servicing advance receivables. We draw on the
facility periodically throughout the month, as necessary, to
satisfy our advancing obligations under our servicing
agreements, and we repay the facility when advances are
recovered through liquidations, prepayments and reimbursement of
advances after modifications. The balance of the
$174.0 million term notes stays constant, while the
variable funding notes fluctuate with our financing needs.
Our ABS Advance Facility requires us to comply with various
customary operating covenants and performance tests on the
underlying receivables related to payment rates and minimum
balance. The interest rate is based on LIBOR, subject to an
interest rate swap, and had a weighted average cost of 4.82%
during the year ended December 31, 2010 and 4.79% during
the three month period ending March 31, 2011. Upon an event
of default, the notes issued by the servicing advance facilities
may be declared immediately due and payable. The stated maturity
date of this facility is December 2013, twenty-four months after
the repayment date of December 2011. As of March 31, 2011,
we were in compliance with all covenants and performance tests
under our ABS Advance Financing Facility and had an aggregate
principal amount of $219.1 million outstanding.
In December 2010, we executed the
2010-ABS
Advance Financing Facility with a financial institution. This
facility has the capacity to purchase up to $200 million of
advance receivables. This facility is a non-recourse obligation
that will be secured by certain servicing advance receivables.
The interest rate is based on LIBOR plus a margin of 3.00%. The
maturity date of this facility with the financial institution is
July 2011, which may be extended if we elect to pledge any
additional advances to this facility. We have yet to draw on
this facility as of March 31, 2011.
MSR
Notes
In October 2009, we entered into our MSR Notes, with an
aggregate principal amount of $22.2 million, to a GSE to
finance our acquisition of certain mortgage servicing rights.
Our MSR Notes are secured by all of our rights, title and
interest in the mortgage servicing rights that we acquired in
the transaction.
Our MSR Notes require us to comply with various customary
operating covenants and specific covenants including maintaining
a disaster recovery plan, maintaining priority of the
lenders lien, and certain covenants related to the
collateral and limitations on the creation of liens on the
collateral or assigned servicing compensation. The interest rate
is based on LIBOR plus a margin of 2.50%. The maturity date of
our MSR Notes is October 2013. As of March 31, 2011, we had
an aggregate principal amount of $14.3 million outstanding.
Originations
As of March 31, 2011 we maintained five separate financing
facilities with $625 million of committed capacity to fund
the Originations Segment: our $300 Million Warehouse Facility,
our $100
81
Million Warehouse Facility, our $75 Million Warehouse Facility,
our $50 Million Warehouse Facility and our GSE ASAP+ Short-Term
Financing Facility.
$300 Million
Warehouse Facility
Our $300 Million Warehouse Facility is used to finance our loan
originations on a short-term basis. In the ordinary course, we
originate mortgage loans on a near-daily basis, and we use a
combination of our four warehouse facilities and cash to fund
the loans. We agree to transfer to our counterparty certain
mortgage loans against the transfer of funds by the
counterparty, with a simultaneous agreement by the counterparty
to transfer the loans back to us at a date certain, or on demand
by us, against the transfer of funds from us. We typically
renegotiate our warehouse facilities on an annual basis. See
IndustryIndustry Overview.
In July 2006, we entered into our $300 Million Warehouse
Facility with a financial services company. In January 2010, we
amended our $300 Million Warehouse Facility. We sell our newly
originated mortgage loans to our counterparty to finance the
origination of our mortgage loans and typically repurchase the
loan within 30 days of origination when we sell the loan to
a GSE or into a government securitization.
Our $300 Million Warehouse Facility requires us to comply with
various customary operating covenants and specific covenants
including maintaining a minimum tangible net worth of
$150.0 million, limitations on transactions with
affiliates, maintenance of liquidity of $20 million and the
maintenance of additional funding through warehouse loans. The
interest rate is based on LIBOR plus a margin of 2.00%, with a
minimum interest rate of 4.00%. The termination date of this
facility is February 2011. As of March 31, 2011, we were in
compliance with all covenants and performance tests under our
$300 Million Warehouse Facility and had an aggregate principal
amount of $177.6 million outstanding.
In February 2011, we amended our $300 Million Warehouse
Facility, which as amended, is set to expire in February 2012,
has an interest rate based on LIBOR plus a margin of 3.25% and
requires us to maintain a minimum tangible net worth of not less
than $175 million.
$100 Million
Warehouse Facility
In October 2009, we entered into our $100 Million Warehouse
Facility with a financial services company with a total facility
size of $50.0 million. In October 2010, this facility was
increased to $100.0 million. We sell our newly originated
mortgage loans to our counterparty to finance the origination of
our mortgage loans and typically repurchase the loan within
30 days of origination when we sell the loan to a GSE or
into a government securitization.
Our $100 Million Warehouse Facility requires us to comply with
various customary operating covenants and specific covenants
including maintaining additional warehouse facilities,
restrictions on the assignment of purchased loans, limits on
transactions with affiliates and certain financial covenants,
including maintaining a minimum tangible net worth of
$150.0 million. The interest rate is based on LIBOR plus a
margin of 3.50%. The termination date of this facility is
December 2011. As of March 31, 2011, we were in compliance
with all covenants and performance tests under our $100 Million
Warehouse Facility and had an aggregate principal amount of
$27.9 million outstanding.
$75 Million
Warehouse Facility
In February 2010, we entered into our $75 Million Warehouse
Facility with a financial services company, with a total
facility size of $50.0 million. In October 2010, this
facility was increased to $75.0 million. We sell our newly
originated mortgage loans to our counterparty to finance the
origination of our mortgage loans and typically repurchase the
mortgage loan within 30 days of origination when we sell
the mortgage loan to a government- sponsored enterprise or into
a government securitization.
82
Our $75 Million Warehouse Facility requires us to comply with
various customary operating covenants and specific covenants
including financial covenants regarding our liquidity ratio of
liabilities and warehouse credit to net worth and operating
income, maintenance of a minimum tangible net worth of
$150.0 million, maintenance of additional warehouse
facilities and limitations on entering into warehouse facilities
with more favorable terms (with respect to the lender) than this
facility without also applying those more favorable terms to
this facility. The interest rate is based on LIBOR plus a margin
of 3.25%. The termination date of this facility is October 2011.
As of March 31, 2011, we were in compliance with all
covenants and performance tests under this facility and had an
aggregate principal amount of $27.1 million outstanding.
$50 Million
Warehouse Facility
In March 2011, we executed a Master Repurchase Agreement with a
financial institution, under which we may enter into
transactions, for an aggregate amount of $50.0 million, in
which we agree to transfer to the same financial institution
certain mortgage loans and certain securities against the
transfer of funds by the same financial institution, with a
simultaneous agreement by the same financial institution to
transfer such mortgage loans and securities to us at a date
certain, or on our demand, against the transfer of funds to us.
The interest rate is based on LIBOR plus a spread of 1.45% to
3.95%, which varies based on the underlying transferred
collateral. The maturity date of this Master Purchase Agreement
is March 2012.
GSE ASAP+
Short-Term Financing Facility
During 2009, we began executing a series of As Soon As Pooled
Plus, or ASAP+, agreements with a GSE with a total commitment of
$100.0 million. Pursuant to these agreements, we agree to
transfer to the GSE certain mortgage loans against the transfer
of funds by the GSE, with a simultaneous agreement by the
counterparty to transfer the loans back to us at a date certain,
or on demand by us, against the transfer of funds from us. The
interest rate is based on LIBOR plus a margin of 1.50%. These
agreements typically have a maturity of up to 45 days. As
of March 31, 2011, we had an aggregate principal amount of
$5.5 million outstanding.
Legacy Assets
and Other
Legacy Asset
Term-Funded Notes
In November 2009, we completed the securitization of mortgage
assets and issued approximately $222.4 million of our
Legacy Asset Term-Funded Notes. The interest rate is 7.50%,
subject to an available funds cap. In conjunction with the
securitization, we reclassified our legacy assets as held
for investment on our consolidated balance sheet and
recognize the Legacy Asset Term-Funded Notes as non-recourse
debt. We pay the principal and interest on these notes using the
cash flows from the underlying legacy assets, which serve as
collateral for the debt. As of March 31, 2011, the
aggregate unpaid principal balance of the legacy assets that
secure our Legacy Asset Term-Funded Notes was
$419.6 million. Monthly cash flows generated from the
legacy assets are used to service the debt, which has a final
legal maturity of October 2039. As of March 31, 2011, our
Legacy Asset Term-Funded Notes had a par amount and carrying
value, net of financing costs and unamortized discount of
$155.3 million and $133.6 million, respectively.
ABS Nonrecourse
Debt
Effective January 1, 2010, new accounting guidance
eliminated the concept of a QSPE, and all existing
securitization trusts are considered VIEs and are now subject to
new consolidation guidance provided in ASC 810. Upon
consolidation of these VIEs, we derecognized all previously
recognized beneficial interests obtained as part of the
securitization. In addition, we recognized the securitized
mortgage loans as mortgage loans held for investment, subject to
ABS nonrecourse debt, and the related asset-backed certificates
acquired by third parties as ABS nonrecourse debt on our
consolidated
83
balance sheet. Additionally, we elected the fair value option
provided for by
ASC 825-10.
The principal and interest on these notes are paid using the
cash flows from the underlying mortgage loans, which serve as
collateral for the debt. The interest rate paid on the
outstanding securities is based on LIBOR plus a spread ranging
from 0.13% to 2.00%, which is subject to an interest rate cap.
The total outstanding principal balance on the underlying
mortgage loans servicing as collateral for the debt was
approximately $1,000.6 million at March 31, 2011. The
timing of the principal payments on this ABS nonrecourse debt is
dependent on the payments received on the underlying mortgage
loans. The outstanding principal balance on the outstanding
notes related to these consolidated securitization trusts was
$1,009.6 million at March 31, 2011.
Variable Interest
Entities
We have been the transferor in connection with a number of
securitizations or asset-backed financing arrangements, from
which we have continuing involvement with the underlying
transferred financial assets. We aggregate these securitizations
or asset-backed financing arrangements into two groups:
(i) securitizations of residential mortgage loans and
(ii) transfers accounted for as secured borrowings.
Effective January 1, 2010, new accounting guidance related
to VIEs eliminated the concept of a QSPE and all existing SPEs
are now subject to the new consolidation guidance. Upon adoption
of this new accounting guidance, we identified certain
securitization trusts where we, through our affiliates,
continued to hold beneficial interests in these trusts. These
retained beneficial interests obligate us to absorb losses of
the VIE that could potentially be significant to the VIE or the
right to receive benefits from the VIE that could potentially be
significant. In addition, as Master Servicer on the related
mortgage loans, we retain the power to direct the activities of
the VIE that most significantly impact the economic performance
of the VIE. When it is determined that we have both the power to
direct the activities that most significantly impact the
VIEs economic performance and the obligation to absorb
losses or the right to receive benefits that could potentially
be significant to the VIE, the assets and liabilities of these
VIEs are included in our consolidated financial statements. Upon
consolidation of these VIEs, we derecognized all previously
recognized beneficial interests obtained as part of the
securitization, including any retained investment in debt
securities, mortgage servicing rights, and any remaining
residual interests. In addition, we recognized the securitized
mortgage loans as mortgage loans held for investment, subject to
ABS nonrecourse debt, and the related asset-backed certificates
acquired by third parties as ABS nonrecourse debt on our
consolidated balance sheet.
We also maintained various agreements with SPEs, under which we
transfer mortgage loans
and/or
advances on residential mortgage loans in exchange for cash.
These SPEs issue debt supported by collections on the
transferred mortgage loans
and/or
advances. These transfers do not qualify for sale treatment
because we continue to retain control over the transferred
assets. As a result, we account for these transfers as
financings and continue to carry the transferred assets and
recognize the related liabilities on our consolidated balance
sheet. Collections on the mortgage loans
and/or
advances pledged to the SPEs are used to repay principal and
interest and to pay the expenses of the entity. The holders of
these beneficial interests issued by these SPEs do not have
recourse to us and can only look to the assets of the SPEs
themselves for satisfaction of the debt.
SPEs created for the purpose of issuing debt supported by
collections on loans that have been transferred to it are
considered VIEs. VIEs for which we are the primary beneficiary
and have the power to direct the activities that directly impact
the economic performance are consolidated into our consolidated
financial statements.
84
A summary of the assets and liabilities of our transactions with
VIEs included in our consolidated financial statements as of
March 31, 2011 is presented in the following table (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers
|
|
|
|
|
|
|
|
|
|
Accounted for
|
|
|
|
|
|
|
|
|
|
as
|
|
|
|
|
|
|
Securitization
|
|
|
Secured
|
|
|
|
|
|
|
Trusts
|
|
|
Borrowings
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
$
|
694
|
|
|
$
|
20,015
|
|
|
$
|
20,709
|
|
Accounts receivable
|
|
|
3,138
|
|
|
|
265,498
|
|
|
|
268,636
|
|
Mortgage loans held for investment, subject to nonrecourse debt
|
|
|
|
|
|
|
256,108
|
|
|
|
256,108
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt
|
|
|
530,681
|
|
|
|
|
|
|
|
530,681
|
|
Real estate owned
|
|
|
16,142
|
|
|
|
7,808
|
|
|
|
23,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
550,655
|
|
|
$
|
549,429
|
|
|
$
|
1,100,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
|
|
|
$
|
219,146
|
|
|
$
|
219,146
|
|
Payables and accrued liabilities
|
|
|
123
|
|
|
|
1,187
|
|
|
|
1,310
|
|
Outstanding servicer
advances(1)
|
|
|
32,810
|
|
|
|
|
|
|
|
32,810
|
|
Derivative financial instruments
|
|
|
|
|
|
|
6,760
|
|
|
|
6,760
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
15,615
|
|
|
|
|
|
|
|
15,615
|
|
Nonrecourse debtLegacy Assets
|
|
|
|
|
|
|
133,592
|
|
|
|
133,592
|
|
ABS nonrecourse debt
|
|
|
490,171
|
|
|
|
|
|
|
|
490,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
538,719
|
|
|
$
|
360,685
|
|
|
$
|
899,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Outstanding servicer advances consists of principal and interest
advances paid by Nationstar to cover scheduled payments and
interest that have not been timely paid by borrowers. These
outstanding servicer advances are eliminated upon the
consolidation of the securitization trusts. |
Off Balance Sheet
Arrangements
A summary of the outstanding collateral and certificate balances
for securitization trusts, including any retained beneficial
interests and mortgage servicing rights, that were not
consolidated by us for the period ending March 31, 2011 and
for the years ending December 31, 2010 and 2009 is
presented in the following table (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2011(1)
|
|
|
2010(1)
|
|
|
2009(2)
|
|
|
Total collateral balance
|
|
$
|
3,950,854
|
|
|
$
|
4,038,978
|
|
|
$
|
3,240,879
|
|
Total certificate balance
|
|
|
3,944,442
|
|
|
|
4,026,844
|
|
|
|
3,262,995
|
|
Total beneficial interests held at fair value
|
|
|
|
|
|
|
|
|
|
|
2,486
|
|
Total mortgage servicing rights at fair value
|
|
|
25,847
|
|
|
|
26,419
|
|
|
|
20,505
|
|
|
|
|
(1) |
|
Unconsolidated securitization trusts as of March 31, 2011
and December 31, 2010 consist of VIEs where we lack
(i) the power to direct the activities that most
significantly impact the VIEs economic performance or
(ii) the obligation to absorb losses or the right to
receive benefits that could potentially be significant to the
VIE. |
|
|
|
(2) |
|
Unconsolidated securitization trusts as of December 31,
2009 consists of those qualifying for sale treatment under
ASC 860. |
85
Derivatives
We record all derivative transactions at fair value on our
consolidated balance sheets. We use these derivatives primarily
to manage our interest rate risk and price risk associated with
interest rate lock commitments, which we refer to as IRLCs. We
actively manage the risk profiles of our IRLCs and mortgage
loans held for sale on a daily basis. To manage the price risk
associated with IRLCs, we enter into forward sales of
mortgage-backed securities in an amount equal to the portion of
the IRLC we expected to close, assuming no change in interest
rates.
In addition, to manage the interest rate risk associated with
mortgage loans held for sale, we enter into forward sales of
mortgage-backed securities to deliver mortgage loan inventory to
investors.
We also entered into interest rate cap agreements to hedge the
interest payments on our ABS Servicing Facility and our MBS
Servicing Facility. These interest rate cap agreements generally
require an upfront payment and receive cash flow only when a
variable rate based on LIBOR exceeds a defined interest rate. As
of March 31, 2011, these interest rate cap agreements were
out of the money and, unless there is a significant change to
LIBOR, we do not anticipate a material effect to our
consolidated financial statements.
To hedge the aggregate risk of interest rate fluctuations with
respect to our outstanding borrowings, we have entered into swap
agreements whereby we receive floating rate payments in exchange
for fixed rate payments, effectively converting our outstanding
borrowings to fixed rate debt.
As part of our January 1, 2010 adoption of new accounting
guidance related to VIEs, we were required to consolidate
certain VIEs related to previous asset-backed securitizations
that were treated as sales under GAAP. Accordingly, we
recognized all assets and liabilities held by these
securitization trusts in our consolidated balance sheet. As a
form of credit enhancement to the senior noteholders, these
securitization trusts contained embedded interest rate swap
agreements to hedge the required interest payments on the
underlying asset-backed certificates. These interest rate swap
agreements generally require the securitization trust to pay a
variable interest rate and receive a fixed interest rate based
on LIBOR.
86
QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of market risks which include
interest rate risk, consumer credit risk and counterparty credit
risk.
Interest Rate
Risk
Changes in interest rates affect our operations primarily as
follows:
Servicing
Segment
|
|
|
|
|
an increase in interest rates would increase our costs of
servicing our outstanding debt, including our ability to finance
servicing advances;
|
|
|
|
a decrease (increase) in interest rates would generally increase
(decrease) prepayment rates and may require us to report a
decrease (increase) in the value of our mortgage servicing
rights;
|
|
|
|
a change in prevailing interest rates could impact our earnings
from our custodial deposit accounts; and
|
|
|
|
an increase in interest rates could generate an increase in
delinquency, default and foreclosure rates resulting in an
increase in both operating expenses and interest expense and
could cause a reduction in the value of our assets.
|
Originations
Segment
|
|
|
|
|
a substantial and sustained increase in prevailing interest
rates could adversely affect our loan origination volume because
refinancing an existing loan would be less attractive and
qualifying for a loan may be more difficult; and
|
|
|
|
an increase in interest rates would increase our costs of
servicing our outstanding debt, including our ability to finance
loan originations;
|
We actively manage the risk profiles of interest rate lock
commitments or IRLCs and mortgage loans held for sale on a daily
basis and enter into forward sales of mortgage backed securities
in an amount equal to the portion of the IRLC expected to close,
assuming no change in mortgage interest rates. In addition, to
manage the interest rate risk associated with mortgage loans
held for sale, we enter into forward sales of mortgage backed
securities to deliver mortgage loan inventory to investors.
Consumer Credit
Risk
We sell our loans on a non-recourse basis. We also provide
representations and warranties to purchasers and insurers of the
loans sold that typically are in place for the life of the loan.
In the event of a breach of these representations and
warranties, we may be required to repurchase a mortgage loan or
indemnify the purchaser, and any subsequent loss on the mortgage
loan may be borne by us. If there is no breach of a
representation and warranty provision, we have no obligation to
repurchase the loan or indemnify the investor against loss. The
outstanding unpaid principal balance of loans sold by us
represents the maximum potential exposure related to
representation and warranty provisions.
We maintain a reserve for losses on loans repurchased or
indemnified as a result of breaches of representations and
warranties on our sold loans. Our estimate is based on our most
recent data regarding loan repurchases and indemnity payments,
actual credit losses on repurchased loans, recovery history,
among other factors. Our assumptions are affected by factors
both internal and external in nature. Internal factors include,
among other things, level of loan sales, as well as to whom the
loans are sold, the expectation of credit loss on repurchases
and indemnifications, our success rate at appealing repurchase
demands and our ability to recover any losses from third
parties. External factors that may affect our estimate includes,
among other things, the overall economic condition in the
housing market, the economic condition of borrowers, the
political environment at investor
87
agencies and the overall U.S. and world economy. Many of
the factors are beyond our control and may lead to judgments
that are susceptible to change.
Counterparty
Credit Risk
We are exposed to counterparty credit risk in the event of
non-performance by counterparties to various agreements. We
monitor the credit ratings of our counterparties and do not
anticipate losses due to counterparty non-performance.
Sensitivity
Analysis
We assess our market risk based on changes in interest rates
utilizing a sensitivity analysis. The sensitivity analysis
measures the potential impact on fair values based on
hypothetical changes (increases and decreases) in interest rates.
We use a duration-based model in determining the impact of
interest rate shifts on our loan portfolio, certain other
interest-bearing liabilities measured at fair value and interest
rate derivatives portfolios. The primary assumption used in
these models is that an increase or decrease in the benchmark
interest rate produces a parallel shift in the yield curve
across all maturities.
We utilize a discounted cash flow analysis to determine the fair
value of mortgage servicing rights and the impact of parallel
interest rate shifts on mortgage servicing rights. The primary
assumptions in this model are prepayment speeds, market discount
rates and cost to service. However, this analysis ignores the
impact of interest rate changes on certain material variables,
such as the benefit or detriment on the value of future loan
originations, non-parallel shifts in the spread relationships
between mortgage-backed securities, swaps and
U.S. Department of the Treasury rates and changes in
primary and secondary mortgage market spreads. For mortgage
loans, interest rate lock commitments and forward delivery
commitments on mortgage-backed securities, we rely on a model in
determining the impact of interest rate shifts. In addition, for
interest rate lock commitments, the borrowers propensity
to close their mortgage loans under the commitment is used as a
primary assumption.
Our total market risk is influenced by a wide variety of factors
including market volatility and the liquidity of the markets.
There are certain limitations inherent in the sensitivity
analysis presented, including the necessity to conduct the
analysis based on a single point in time and the inability to
include the complex market reactions that normally would arise
from the market shifts modeled.
We used March 31, 2011 market rates on our instruments to
perform the sensitivity analysis. The estimates are based on the
market risk sensitive portfolios described in the preceding
paragraphs and assume instantaneous, parallel shifts in interest
rate yield curves. These sensitivities are hypothetical and
presented for illustrative purposes only. Changes in fair value
based on variations in assumptions generally cannot be
extrapolated because the relationship of the change in fair
value may not be linear.
88
The following table summarizes the estimated change in the fair
value of our assets and liabilities sensitive to interest rates
as of March 31, 2011 given hypothetical instantaneous
parallel shifts in the yield curve:
|
|
|
|
|
|
|
|
|
|
|
Change in Fair Value
|
|
|
|
Down
|
|
|
Up
|
|
|
|
25 bps
|
|
|
25 bps
|
|
|
|
(in thousands)
|
|
|
Increase (decrease) in assets
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale
|
|
|
$2,506
|
|
|
|
$(2,736
|
)
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt
|
|
|
(1,281
|
)
|
|
|
1,350
|
|
Mortgage servicing rights
|
|
|
(2,605
|
)
|
|
|
2,775
|
|
Other assets (derivatives)
|
|
|
|
|
|
|
|
|
IRLCs
|
|
|
2,209
|
|
|
|
(3,089
|
)
|
|
|
|
|
|
|
|
|
|
Total change in assets
|
|
|
829
|
|
|
|
(1,700
|
)
|
Increase (decrease) in liabilities
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
Interest rate swaps and caps
|
|
|
1,342
|
|
|
|
(1,162
|
)
|
Forward MBS trades
|
|
|
5,248
|
|
|
|
(5,737
|
)
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
881
|
|
|
|
(883
|
)
|
ABS nonrecourse debt
|
|
|
(2,067
|
)
|
|
|
2,138
|
|
|
|
|
|
|
|
|
|
|
Total change in liabilities
|
|
|
5,404
|
|
|
|
(5,644
|
)
|
|
|
|
|
|
|
|
|
|
Total, net change
|
|
|
$(4,575
|
)
|
|
|
$3,944
|
|
|
|
|
|
|
|
|
|
|
89
GLOSSARY OF
INDUSTRY TERMS
Adjustable Rate Mortgage. A mortgage loan
where the interest rate on the loan adjusts periodically based
on a specified index and margin agreed to at the time the loan
is originated.
Agency and Government Conforming Loan. A
mortgage loan that meets all requirements (loan type, maximum
amount,
loan-to-value
ratio and credit quality) for purchase by Fannie Mae, Freddie
Mac or FHA.
Compensating Interest. Money paid to the owner
of a mortgage loan or pool of mortgage loans on a monthly basis
(typically by the servicer from its own funds) to compensate the
owner of the mortgage loan for interest shortfalls caused by
intra-month prepayments.
Consumer Direct Retail Origination. A type of
mortgage loan origination pursuant to which a lender markets
refinancing and purchase money mortgage loans directly to
selected consumers.
Conventional Mortgage Loans. A mortgage loan
that is not guaranteed or insured by the FHA, the VA 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.
Corporate Advance. A servicing advance to pay
costs and expenses incurred in foreclosing upon, preserving and
selling real estate owned, 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 mortgage loans.
Credit-Sensitive Loan. A mortgage loan with
certain characteristics such as low borrower credit quality,
relaxed original underwriting standards and high
loan-to-value
ratio, which we believe indicates that the mortgage loan
presents an elevated credit risk.
Delinquent Loan. A mortgage loan that is 30 or
more days past due from its scheduled due date.
Department of Veterans Affairs
(VA). The United States Department of
Veterans Affairs is a cabinet-level department of the
U.S. federal government, which guarantees certain home
loans for qualified borrowers.
Distributed Retail Originations. A type of
mortgage loan origination pursuant to which a lender markets
primarily purchase money mortgage loans directly to consumers
from local branches.
Fannie Mae. The Federal National Mortgage
Association, a federally chartered association that buys
mortgage loans from lenders and resells them as securities in
the secondary mortgage market.
Federal Housing Administration
(FHA). The Federal Housing
Administration is a U.S. federal government agency within
the Department of Housing and Urban Development. It provides
mortgage insurance on loans made by FHA-approved lenders in
compliance with FHA guidelines throughout the United States.
Float Income. Interest income earned by a
servicer on (i) funds collected from borrowers during the
period of time between receipt of the funds and the remittance
of the funds to investors and (ii) funds collected from
borrowers for the payment of taxes and insurance, where
applicable.
Freddie Mac. The Federal Home Loan Mortgage
Corporation, a federally chartered corporation that buys
mortgage loans from lenders and resells them as securities in
the secondary mortgage market.
Ginnie Mae. The Government National Mortgage
Association, a wholly-owned U.S. federal government
corporation that is an agency of the Department of Housing and
Urban Development. The main focus of Ginnie Mae is to ensure
liquidity for U.S. federal government-insured mortgages
including those insured by the FHA. Ginnie Mae guarantees to
investors who purchase mortgage-backed securities the timely
payment of principal and interest. Ginnie Mae securities are the
only mortgage-backed securities to carry the full faith and
credit guarantee of the U.S. federal government.
GSE. Financing corporations established by the
United States Congress, including Fannie Mae, Freddie Mac and
the Federal Home Loan Banks.
90
High-Touch Servicing. A servicing model that
is designed to increase borrower repayment performance with a
view towards home ownership preservation, and to decrease
borrower delinquencies and defaults on mortgage portfolios. This
model emphasizes a focus on loss mitigation and frequent
interactions with borrowersvia telephone, mail, electronic
communications and other personal contact methods.
Home Affordable Modification Program
(HAMP). A U.S. federal
government program designed to help eligible homeowners avoid
foreclosure through mortgage loan modifications. Participating
servicers may be entitled to receive financial incentives in
connection with loan modifications they enter into with eligible
borrowers and subsequent pay for success fees to the
extent that a borrower remains current in any agreed upon loan
modification.
Independent Loan Servicer. A loan servicer
that is not affiliated with a depository institution.
Loan Modification. Temporary or permanent
modifications, including re-modifications, to the terms and
conditions of a borrowers 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 value of
the property that secures the loan. LTV is one of the key risk
factors that originators assess when qualifying borrowers for a
mortgage loan. A loan with a low LTV is seen as less of a credit
risk than a loan with a high LTV. An LTV over 100% indicates
that the unpaid principal balance of the mortgage loan exceeds
the value of the property.
Loss Mitigation. The range of servicing
activities designed by a servicer to minimize the losses
suffered by the owner of a mortgage loan in connection with a
borrower default. Loss mitigation techniques include
short-sales,
deed-in-lieu
of foreclosures and loan modifications, among other options.
Making Home Affordable Plan
(MHA). Also known as the President of
the United States Homeowner Affordability and Stability
Plan. A U.S. federal government program designed to help
eligible homeowners avoid foreclosure and keep their homes by
refinancing their existing mortgages. MHA loans are available to
eligible homeowners with
loan-to-value
ratios of up to 125%.
Mortgage Servicing Right. The right to service
a loan or pool of loans and to receive a servicing fee. Mortgage
servicing rights may be bought and sold, resulting in the
transfer of loan servicing obligations.
Non-Conforming Mortgage Loan. A mortgage loan
that does not meet the standards of eligibility for purchase or
securitization by Fannie Mae, Freddie Mac or Ginnie Mae.
Non-Recoverable Advance. A servicing advance
made by a servicer, which will not ultimately be recoverable by
the servicer from funds received upon liquidation of the
underlying property of the mortgage loan.
Origination. The process through which a
lender provides a mortgage loan to a borrower.
P&I Advance. A servicing advance to cover
scheduled payments of principal and interest that have not been
timely paid by borrowers. P&I Advances serve to ensure the
cash flows paid to holders of securities issued by the
residential mortgage-backed securities trust.
Prepayment Speed. The rate at which mortgage
prepayments occur or are projected to occur. The statistic is
calculated on an annualized basis and expressed as a percentage
of the outstanding principal balance.
Primary Servicer. The servicer that owns the
right to service a mortgage loan or pool of mortgage loans. This
differs from a subservicer, which has a contractual right with
the primary servicer to service a mortgage loan or pool of
mortgage loans in exchange for a subservicing fee.
Conventional Mortgage Loan. Generally, a
high-quality mortgage loan that meets the underwriting standards
set by Fannie Mae, Freddie Mac and Ginnie Mae and is eligible
for purchase or securitization in the secondary mortgage market.
Conventional mortgage loans generally have lower default risk
and are made to borrowers with good credit records and a monthly
income at least three
91
to four times greater than their monthly housing expenses
(mortgage payments plus taxes and other debt payments).
Mortgages not classified as conventional mortgages are generally
called either non-prime or Alt-A.
Real Estate Owned. 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
real estate owned. Net proceeds of the sale are returned to the
owner of the related loan or loans. In most cases, the sale of
real estate owned does not generate enough to pay off the
balance of the loan underlying the real estate owned, causing a
loss to the owner of the related mortgage loan.
Residential Mortgage-Backed Security. A fixed
income security backed by pools of residential mortgages.
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 reports and
managing insurance. A servicer is generally compensated with a
specific fee outlined in the contract established prior to the
commencement of the servicing activities.
Servicing Advance. In the course of servicing
loans, servicers are required to make servicing advances that
are reimbursable from collections on the related mortgage loan.
There are typically three types of servicing advances: P&I
Advances, T&I Advances and Corporate Advances. Servicing
advances are reimbursed to the servicer if and when the borrower
makes a payment on the underlying mortgage loan or upon
liquidation of the underlying mortgage 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.
Servicing Advance Facility. A secured
financing facility backed by a pool of mortgage servicing
advance receivables made by a servicer to the owner of a
mortgage loan or pool of mortgage loans.
Special Servicers. Special servicers are
responsible for enhancing recoveries on delinquent loans and
real estate owned assets. Loans are transferred to a special
servicer based on predetermined delinquency or other performance
measures.
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.
T&I Advance. A servicing advance to 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 their interest in the property.
Unpaid Principal Balance. The amount of
principal outstanding on a mortgage loan or a pool of mortgage
loans. Unpaid principal balance is used as a means of estimating
future revenue stream for a servicer.
Warehouse Facility. A type of facility used to
finance mortgage loan originations. 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 counterparty, with a simultaneous agreement by the
counterparty to transfer the loans back to the originator at a
date certain, or on demand, against the transfer of funds from
the originator.
Wholesale Origination. A type of mortgage loan
origination pursuant to which a lender acquires refinancing and
purchase money mortgage loans from third party mortgage brokers
or correspondent lenders.
92
INDUSTRY
We conduct our business in the residential mortgage industry in
the United States. We participate in two distinct, but related,
sectors of the mortgage industry: residential mortgage loan
servicing and residential mortgage loan originations.
Servicing
Industry Overview
According to Inside Mortgage Finance, there were $10.5 trillion
in residential mortgage loans outstanding in the United States
as of March 31, 2011, and each mortgage loan must be
serviced by a loan servicer. Loan servicers who own mortgage
servicing rights normally earn a servicing fee of 25 to
50 basis points per annum on the unpaid principal balance
of loans serviced, as well as associated ancillary fees, such as
late fees. Consequently, a loan servicer can create value for
both itself and the owner of the mortgage loan by increasing the
number of borrowers that remain current in their repayment
obligations. Owners may include a lender, investor or
residential mortgage-backed securities trust, in the case of a
securitized pool of mortgages.
Loan servicing primarily involves the calculation, collection
and remittance of principal and interest payments, the
administration of mortgage escrow accounts, the collection of
insurance claims, the administration of foreclosure procedures,
the management of real estate owned and the disbursement of
required advances.
In a weak economic and credit environment with elevated
delinquencies and defaults, servicing becomes operationally more
challenging and more capital intensive as servicers need to add
and train staff to manage the increase in delinquent borrowers.
In addition, servicers are generally required to make advances
on delinquent mortgage loans for principal and interest
payments, taxes, insurance, legal fees and property maintenance
fees, all of which are typically recovered upon foreclosure or
liquidation. According to the Mortgage Bankers Association,
delinquent loans and foreclosures have increased from $0.6
trillion in December 2006 to $1.4 trillion at December 31,
2010. Furthermore, Fannie Mae estimates that as of
December 31, 2010, it had $764 billion of assets
within its own portfolio with characteristics that we believe
make them credit-sensitive.
Mortgage
Servicing Functions
Loan servicers play a key role in the residential mortgage
market by providing loan servicing functions on behalf of the
owners of mortgage loans including collecting the scheduled
principal and interest payments, taxes and insurance, performing
customer service functions and taking active steps to mitigate
any potential losses associated with borrower delinquencies and
defaults. Typically, a servicer is contractually obligated to
service a mortgage loan in accordance with accepted servicing
industry practices as well as applicable regulations and
statutes. A servicers rights and obligations are governed
by the pooling and servicing agreement for the underlying loans.
A subservicers rights and obligations are governed by the
subservicing agreement with the third party that owns the
related mortgage servicing rights.
To the extent a borrower does not make a payment, servicers are
generally required to make advances of principal and interest,
taxes and insurance and legal fees until such time as the
underlying property is liquidated or the servicer determines
that additional advances will not be recoverable from future
payments, proceeds or other collections on the mortgage loan. In
the event of a foreclosure, servicers are entitled to
reimbursement of advances from the sale proceeds of the related
property and, typically, in the event of non-recoverable
advances, from collections on other mortgage loans in the
related mortgage pool.
Collection efforts attempt to maximize early contact with
borrowers who are late or newly delinquent, with more focused
attention on borrowers of lower credit quality. In addition,
servicers are responsible for closely managing their collection
calls and letter campaigns which are tailored to specific loan
products.
93
Loan Servicing
Landscape
The majority of loan servicing in the United States is performed
by the nations money center banks such as Bank of America,
Wells Fargo, Chase and Citi, which together service
approximately 54% of all outstanding mortgage loans on one to
four-family residences as of March 31, 2011. These
bank-owned servicers mainly service conventional, performing
mortgages and are most effective at routine account management
of portfolios with low delinquencies that require limited
interaction with the borrowers (front-end activities). The
traditional (bank-owned) servicer model was constructed to
process simple payments and to minimize costs, and functioned
well in environments characterized by low delinquencies and
defaults. However, in the current environment of rising
delinquencies, extensive foreclosures and elevated real estate
owned activity, traditional servicers are experiencing higher
operating costs, and their performance metrics are declining due
to the elevated level of foreclosures and liquidation processes.
According to the Mortgage Bankers Association, from 2007 through
2010, approximately 3.4 million homes were lost to
foreclosure and as of December 31, 2010, approximately
3.6 million mortgages were in foreclosure or 90 or more
days delinquent. In contrast, the more specialized, high touch
servicer model (non-bank) places more emphasis on borrower
contact and interaction, improving asset performance and
foreclosure avoidance (back-end activities), and functions well
in environments characterized by elevated delinquencies,
foreclosures and real estate owned activity, in addition to more
normalized environments. We believe most bank-owned servicers
are best described as traditional servicers, with a very limited
number of servicers such as us who are able to operate both
front- and back-end functions effectively in a variety of market
environments. Finally, we believe current market opportunities
favor and are greatest for servicers of this nature, as compared
to traditional, bank-owned servicers.
Servicer
Compensation
Loan servicers primarily service loans on which they own the
mortgage servicing right, which is referred to as primary
servicing. Alternatively, loan servicers may enter into a
subservicing agreement with the entity that owns the mortgage
servicing right pursuant to which the servicer agrees to service
the loan on the owners behalf. Loan servicers earn
servicing fees pursuant to these mortgage servicing rights and
subservicing contracts, and these fees represent the largest
source of revenue from loan servicing operations. By purchasing
the mortgage servicing right, the loan servicer is generally
entitled to receive 25 to 50 basis points annually on the
average unpaid principal balance of the loans serviced. Under
subservicing arrangements, where the loan servicer does not pay
for the mortgage servicing right and is only required to make
intra-month advancing obligations, the servicer generally
receives a per-loan fee that generally equates to between 5 and
45 basis points annually on the unpaid principal balance.
The servicing and subservicing fees are typically supplemented
by incentive fees and ancillary fees. Incentive fees include
modification initiation and success fees from the HAMP program
and modification or collateral workout related incentives from
various pool owners and GSEs. Ancillary fees include late fees,
non-sufficient funds fees, convenience fees and interest income
earned on loan payments that have been collected but have not
yet been remitted to the owner of the mortgage loan, or float.
Loan servicers have additional opportunities to provide
value-added services to the owners of the loans they service.
These value-added adjacent services can include obtaining broker
price opinions for valuation of underlying properties, trustee
services, real estate owned preservation services and other
revenues related to real estate owned sales.
94
Advances
In the course of servicing delinquent loans, servicers are
required to make advances that are reimbursable from collections
on the related mortgage loan, or in the event of a
non-recoverable advance, from collections on other mortgage
loans in the related mortgage pool.
There are generally three types of advances: P&I Advances,
T&I Advances and Corporate Advances.
P&I Advances: Advances to cover scheduled
payments of principal and interest that have not been timely
paid by borrowers. P&I Advances serve to smooth the cash
flows paid to holders of securities issued by the residential
mortgage-backed securities trust.
T&I Advances: Advances to 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.
Corporate Advances: Advances to pay costs and
expenses incurred in foreclosing upon, preserving and selling
real estate owned, 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 mortgage loans.
A servicer may decide to stop making P&I Advances prior to
liquidation of the mortgage loan if the servicer deems future
P&I Advances to be non-recoverable. In this circumstance,
T&I Advances and Corporate Advances will likely continue in
order to preserve existing value of the mortgage loan and
complete the foreclosure and real estate owned sale process.
Servicers of GSE securities are reimbursed by the GSE for their
advances upon completion of the foreclosure sale at which point
the mortgage loan is repurchased out of the MBS by the GSE.
Servicers of GSE securities are not responsible for managing
real estate owned. Conversely, servicers of non-agency MBS are
obligated under the servicing agreement to make advances through
liquidation of the related real estate owned.
Subservicing is distinct from MSR servicing as a subservicer
recovers advances in the month following the advance
disbursement, and not upon sale of the related property. As a
result of more timely recovery of advances, subservicing
generally requires much less capital than MSR servicing.
Advances are a non-interest bearing asset. Non-bank servicers
typically utilize securitizations (i.e., match funded
liabilities) to finance their advances. The securitizations are
generally non-recourse to the servicer, and the advances are
financed at a discount to par accounting for the non-interest
bearing nature of the asset. Advance rates for securitizations
generally range between 70% to 85% depending upon the rating and
structure.
Industry
Dynamics
We believe a number of factors associated with the dislocation
in the mortgage industry have led to a supply and demand
imbalance in the residential servicing market, creating an
exceptional market opportunity for non-bank servicers. These
factors include:
Elevated
delinquencies, defaults, foreclosures and real estate
owned:
According to the Mortgage Bankers Association, delinquent loans
and foreclosures have increased from $0.6 trillion at December
2006 to $1.4 trillion at December 31, 2010. The Mortgage
Bankers Association forecasts that delinquent loans and loans in
foreclosure peaked in early 2010 and will stay elevated for
quite some time. Moodys Analytics projects that home
prices will decline further in 2011 and begin to recover in
2012. We believe further home price declines will continue to
drive increased levels of delinquency and foreclosure as more
borrowers owe more on their homes than
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their homes are worth. In a period of elevated mortgage
delinquencies and defaults, servicing becomes operationally more
challenging as servicers need to dedicate more resources to
manage the increase in delinquent borrowers. In the current
environment of rising delinquencies, extensive foreclosures,
expected further home price declines, and elevated real estate
owned activity, we believe traditional bank servicers will
continue to recognize the importance of high touch
servicingstrong emphasis on superior asset performance and
loss mitigation expertiseand seek to partner with
servicers who they believe can be more effective at reducing
credit losses.
Source: Mortgage Bankers Association, HOPE NOW, CoreLogic,
Calculated Risk
Regulatory and
legislative factors:
As a result of the severe dislocation in the U.S. housing
market and the related fallout, regulatory and legislative
attention on the mortgage industry has increased. Numerous
legislative and regulatory actions have been proposed, including
(i) the pending implementation of Basel III that will
result in increased capital requirements for depository
institutions that own mortgage servicing rights; (ii) the
QRM provision and others contained in the Dodd-Frank Wall Street
Reform and Consumer Protection Act; (iii) the negotiations
involving the 50 State Attorneys General, certain federal
regulators and servicers that we believe will increase costs
disproportionately towards the largest traditional bank-owned
servicers; (iv) the enforcement consent orders entered into
by 14 of the largest mortgage servicers and four federal
agencies; (v) the initiative of the Federal Housing Finance
Agency to align the servicing requirements related to delinquent
mortgages and to modify the servicing compensation related to
Fannie Mae and Freddie Mac loans; and (vi) the anticipated
changes to servicer compensation. We believe these factors will
continue to increase compliance costs for the largest servicers
and will cause many to divest servicing rights
and/or
outsource significant segments of their mortgage operations.
Additionally, we believe there are a limited number of non-bank
servicers such as us who are positioned to capitalize upon these
opportunities and provide the expected level of service. We
believe these factors will continue to drive a bifurcation
within the servicing market between front-end and back-end
servicing compensation.
Reform of
government sponsored enterprises:
On September 7, 2008, the Federal Housing Finance Agency,
or the FHFA, placed Fannie Mae and Freddie Mac into
conservatorship and, together with the U.S. Treasury,
established a program designed to boost investor confidence in
their respective debt and mortgage-backed securities. The
U.S. government has expressed interest in reforming and
significantly reducing the participation of the GSEs in the
residential mortgage market. As a result of their
conservatorship and the anticipation of their eventual reduced
participation in the market, we believe the GSEs will continue
to facilitate servicing transfers to strong, proven servicers
with a track record of improving asset performance and
mitigating credit losses. We expect these transfers to
accelerate as market forces continue to erode portfolio
performance. Due to our history of strong asset performance and
our long-standing
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relationships with the GSEs, we believe that we are among a very
limited number of servicers positioned to acquire additional
GSE-controlled servicing.
In addition to the market opportunities that we have identified
and we believe will continue to present themselves, numerous
government programs and initiatives continue to provide
advantages for servicers with loss mitigation expertise. We
expect that servicers that are flexible and adept at
implementing government hardship assistance programs will be
rewarded with higher incentive fees and more servicing transfers
from the GSEs. In contrast, we expect that, as a part of a
recent FHFA initiative, servicers not meeting certain
performance benchmarks will be penalized with compensatory fees
and potential servicing revocations. We believe these trends
favor servicers such as us that have a track record of improving
asset performance on the loans they service.
Opportunities
under HAMP
In response to the rising level of foreclosures, the United
States Department of the Treasury announced the implementation
of HAMP in February 2009, which is designed to keep borrowers in
their homes. HAMP provides financial incentives to loan
servicers and borrowers to successfully modify qualifying
residential mortgages. Under the program, servicers receive an
up-front fee of $1,000 for each completed modification and an
additional $500 if the loan is current, but in risk of imminent
default, at the time the borrower enters the HAMP trial period.
Servicers also receive
Pay-for-Success
payments of as much as $1,000 each year for up to three years.
These fees accrue monthly and are paid annually on the
anniversary of the month in which the trial period plan was
executed. The annual incentives are predicated on the borrower
remaining in good standing (i.e., the borrower must not be more
than 2 months delinquent at any time during the year).
Adjacent
Businesses
Historic high levels of delinquencies, foreclosures and real
estate owned have presented increased opportunities for
providers of residential mortgage services. According to
Dominion Bond Rating Service (DBRS), a globally recognized
credit rating agency, foreclosure filings and completed
foreclosures are expected to reach record levels in 2011.
Additionally, the American Society of REO Specialists expects
real estate owned inventory to exceed four million
properties over the next year, a substantial increase from the
current inventory of two million properties. The demand for
adjacent mortgage servicesREO management, loan recovery
and title and valuation activitiesis dependent upon the
number of delinquent and foreclosure loans and the amount of
real estate owned, all of which are projected to remain
elevated. Mortgage origination activities also drive demand for
title and valuation products as both are required by new
purchase and refinance originations.
Originations
Industry Overview
According to Inside Mortgage Finance, total residential mortgage
originations in the United States were $1.6 trillion in 2010, a
decrease of 13% compared to 2009. Of the 2010 originations,
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approximately 87% were conforming mortgages guaranteed by
government sponsored enterprises, including Fannie Mae and
Freddie Mac, or government agencies such as the Federal Housing
Administration and the Department of Veterans Affairs. From 2006
to 2010, the annual aggregate principal balance of newly
originated mortgage loans that were either insured or guaranteed
by government agencies or sold to GSEs or into government
securitizations increased from $1.1 trillion to
$1.4 trillion, or at a compound annual growth rate, which
we refer to as CAGR, of 6%.
The United States residential mortgage market consists of a
primary mortgage market that links borrowers and lenders and a
secondary mortgage market that links lenders and investors. In
the primary mortgage market, residential mortgage lenders such
as mortgage banking companies, commercial banks, savings
institutions, credit unions and other financial institutions
originate or provide mortgages to borrowers. Lenders obtain
liquidity for originations in a variety of ways, including by
selling mortgages or mortgage-related securities into the
secondary mortgage market. Banks that originate mortgage loans
also have access to customer deposits to fund their originations
business. The secondary mortgage market consists of institutions
engaged in buying and selling mortgages in the form of whole
loans (i.e., mortgages that have not been securitized) and
mortgage-related securities. The GSEs and a government agency,
Ginnie Mae, participate in the secondary mortgage market by
purchasing mortgage loans and mortgage-related securities for
investment and by issuing guaranteed mortgage-related securities.
Loan
Origination Process
Residential mortgage loans are generally originated through
either a direct retail lending network or a mortgage brokerage
network.
A direct retail lending network consists of distributed retail
branches which are individual branch locations
and/or a
centralized retail platform. A centralized retail platform is a
telephone based platform with multiple loan officers in one
location. Typical referral sources for a direct retail lending
network include realtors, homebuilders, credit unions, banks,
the Internet and refinances from existing servicing portfolios.
In a direct lending retail network, the lender controls all loan
origination processes, including: sourcing the borrower, taking
the application and setting the interest rate, ordering the
appraisal, underwriting and processing the loan and closing and
funding the loan.
Loans sourced by mortgage brokers are funded by the lender and
generally closed in the lenders name. When originating
loans through mortgage brokers, the mortgage brokers role
is to identify the applicant, assist in completing the loan
application, gather necessary information and documents and
serve as the liaison to the borrower through the lending
process. The lender reviews and underwrites the application
submitted by the mortgage broker, approves or denies the
application, sets the interest rate and other terms of the loan
and, upon acceptance by the borrower and satisfaction of all
conditions required by the lender, funds the loan. Because
mortgage brokers conduct their own marketing, employ their own
personnel to complete the loan applications and maintain contact
with the borrowers, mortgage brokers represent an efficient loan
origination channel.
The length of time from the origination or purchase of a
mortgage loan to its sale or securitization generally ranges
from 10 to 60 days, depending on a variety of factors
including loan volume, product type, interest rates and capital
market conditions. An important source of capital for the
residential mortgage industry is warehouse lending. These
facilities provide funding to mortgage loan originators until
the loans are sold to investors in the secondary mortgage loan
market.
Types of
Mortgage Loans
Mortgage loans generally fall into one of the following five
categories: prime conforming mortgage loans, prime
non-conforming mortgage loans, government mortgage loans,
non-prime mortgage loans and prime second-lien mortgage loans.
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Prime Conforming Mortgage Loans: These are
prime credit quality first-lien mortgage loans secured by
single-family residences that meet or conform to the
underwriting standards established by Fannie Mae or Freddie Mac
for inclusion in their guaranteed mortgage securities programs.
Prime Non-Conforming Mortgage Loans: These are
prime credit quality first-lien mortgage loans secured by
single-family residences that either (i) do not conform to
the underwriting standards established by Fannie Mae or Freddie
Mac, because they have original principal amounts exceeding
Fannie Mae and Freddie Mac limits, which are commonly referred
to as jumbo mortgage loans, or (ii) have alternative
documentation requirements and property or credit-related
features (e.g., higher
loan-to-value
or
debt-to-income
ratios) but are otherwise considered prime credit quality due to
other compensating factors.
Government Mortgage Loans: These are
first-lien mortgage loans secured by single-family residences
that are insured by the Federal Housing Administration or
guaranteed by the Department of Veterans Affairs and securitized
into Ginnie Mae securities.
Non-prime Mortgage Loans: These are first-lien
and certain junior lien mortgage loans secured by single-family
residences, made to individuals with credit profiles that do not
qualify for a prime loan, have credit-related features that fall
outside the parameters of traditional prime mortgage loans or
have performance characteristics that otherwise expose us to
comparatively higher risk of loss.
Prime Second-Lien Mortgage Loans: These are
open- and closed-end mortgage loans secured by a second or more
junior lien on single-family residences, which include home
equity mortgage loans.
Due to the significant stress in the residential mortgage
industry experienced over the last few years, underwriting
standards have improved. Some of these improvements include the
elimination or significant reduction of mortgage affordability
products such as no income verification loans, limited or no
documentation loans, option adjustable rate mortgage loans, and
non-owner occupied loans. Also, underwriting standards now
include higher minimum credit scores and lower maximum
loan-to-value
ratios than were acceptable under past lending practices. These
improvements in underwriting standards should lead to improved
performance.
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BUSINESS
Overview
We are a leading residential mortgage loan servicer and one of
the top five non-bank servicers in the United States as measured
by aggregate unpaid principal balance of loans serviced. Our
servicing portfolio consists of over 404,000 loans with an
aggregate unpaid principal balance of $67.0 billion as of
March 31, 2011. We service mortgage loans in all
50 states, and we are licensed as a residential mortgage
loan servicer
and/or a
third-party default specialist in all states that require such
licensing. In addition to our core Servicing business, we
currently originate primarily conventional agency (Fannie Mae
and Freddie Mac) and government (Federal Housing Administration,
Department of Veterans Affairs) residential mortgage loans, and
we are licensed to originate residential mortgage loans in
49 states.
Nationstar Mortgage Holdings Inc. was recently incorporated for
the purpose of effecting this offering and currently holds no
material assets and does not engage in any operations. Prior to
the completion of this offering, all of the equity interests in
Nationstar Mortgage LLC will be transferred from FIF HE Holdings
LLC to two direct, wholly-owned subsidiaries of Nationstar
Mortgage Holdings Inc. (the Restructuring). Upon the
completion of the Restructuring, we will conduct our business
through Nationstar Mortgage LLC and its consolidated
subsidiaries.
Nationstar Mortgage LLC was formed in 1994 in Denver, Colorado
as Nova Credit Corporation, a Nevada corporation. In 1997, it
moved its executive offices and primary operations to Dallas,
Texas and changed its name to Centex Credit Corporation. In
2001, Centex Credit Corporation was merged into Centex Home
Equity Company, LLC, a Delaware limited liability company
(CHEC). In 2006, FIF HE Holdings LLC acquired all of
its outstanding membership interests (the
Acquisition), and it changed its name to Nationstar
Mortgage LLC.
Our headquarters and operations are based in Lewisville, Texas.
As of April 30, 2011, we had a total of 2,176 employees.
Our business primarily consists of our core Servicing platform
and adjacent businesses, and is complemented by our Originations
segment that helps replace a portion of our servicing portfolio
run-off.
Loan
Servicing
Servicing: We are currently ranked in
the top five among non-bank servicers (based on total aggregate
unpaid principal balance), and we have established significant
relationships with leading mortgage investors. These investors
include the GSEs, regulatory agencies, major banks, private
investment funds and other financial institutions and investors
that expect to benefit from lower delinquencies and losses on
portfolios that we service on their behalf. We believe our
demonstrated performance in servicing loans has enabled us to
grow our servicing portfolio from $12.7 billion as of
December 31, 2007, to $67.0 billion as of
March 31, 2011, representing a compound annual growth rate
of 72%. We have added portfolios from 10 new servicing clients
in the last 30 months. Additionally, our growth is the
result of multiple transfers from this client base, which
evidences our ability to exceed client performance expectations.
We expect to continue to grow our Servicing portfolio and are
currently pursuing opportunities to acquire mortgage servicing
rights or enter into subservicing agreements.
We utilize a flexible, customer-centric mortgage servicing model
that focuses on asset performance through increased personal
contact with borrowers and loss mitigation tools designed to
decrease borrower delinquencies and defaults and to increase
borrower repayment performance with a goal of home ownership
preservation. Our operating culture emphasizes individual
default specialist accountability (what we refer to as credit
loss ownership) for improved asset performance and cash flow and
reduced credit losses. Our servicing model and operating culture
have proven even more valuable in the current distressed
residential mortgage market, and we have established an
excellent track record servicing credit-sensitive loans.
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Our Servicing segment produces recurring, fee-based revenues
based upon contractually established servicing fees. Servicing
fees consist of an amount based on either the unpaid principal
balance of the loans serviced or a per-loan fee amount, and also
include ancillary fees such as late fees. In addition, we earn
interest income on amounts deposited in collection accounts and
amounts held in escrow to pay property taxes and insurance,
which we refer to as float income. We also generate incentive
fees from owners of the loans that we service for meeting
certain delinquency and loss goals and for arranging successful
loss mitigation programs. Moreover, we earn incentive fees from
the U.S. Treasury for loans that we successfully modify
within the parameters of the Home Affordable Modification
Program (HAMP) and other assistance programs it
sponsors.
Adjacent Businesses: In addition to our
Servicing business, we have successfully launched and recently
expanded our complementary businesses that provide significant
opportunity for incremental earnings and require minimal capital
investment. We provide these services by leveraging our
servicing expertise for our current clients for either a base
and/or
incentive fee. A summary of these adjacent businesses is
provided below:
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REO management involves comprehensive management of foreclosed
properties from property inspection and listing to property
preservation and sale. Our proven ability to shorten the REO
disposition timeline lowers costs for our REO clients and leads
to increased REO assets being awarded to us over time.
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Recovery services involve collecting charged-off mortgage
deficiencies and other losses incurred by the investor. Our
ability to successfully increase borrower contact rates and
obtain payment in full, negotiate discounted payoffs or arrange
repayment plans enables us to collect more money in less time
for our clients.
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National Real Estate Information Services (NREIS),
an ancillary real estate services and vendor management company
in which we purchased a non-controlling interest on
March 31, 2011, offers comprehensive settlement and
property valuation services for both origination and default
management channels. Direct or indirect product offerings
include title insurance agency, tax searches, flood
certifications, default valuations, full appraisals and broker
price opinions.
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Loan
Originations
We are one of the few non-bank servicers in the United States
with an established in-house loan origination platform. Our
origination business provides (i) an organic source of new
loans to service in order to replace portfolio run-off;
(ii) a servicing portfolio retention source by providing
refinancing services to our existing servicing customers; and
(iii) a loss mitigation solution for our Servicing clients
and customers by offering refinancing options to borrowers
allowing them to lower monthly payments and therefore lowering
the risk of their defaulting.
We currently originate primarily conventional agency and
government mortgage loans, and we are licensed to originate
residential mortgage loans in 49 states. We offer both
purchase and refinance loans through a
direct-to-consumer
retail channel and a third-party wholesale channel. In 2010 and
in the first quarter of 2011, we originated $2.8 billion
and $0.7 billion, respectively in aggregate principal
balance consisting primarily of conventional residential
mortgage loans.
Our origination strategy is predicated on creating loans that
are readily sold into a liquid market either through
securitizations backed by the GSEs on a servicing retained
basis, or through servicing released whole loans sales to major
conduit investors. Loans are typically securitized or sold
within 30 days of origination and not intended to be held
on our balance sheet on a long-term basis. The interest rate
risk inherent in the originations process is mitigated through a
disciplined hedging program intended to minimize exposure to
changes in underlying interest rates.
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Market
Opportunity
Loan
Servicing
According to Inside Mortgage Finance, there are approximately
$10.5 trillion of residential mortgages outstanding in the
United States with the majority of servicing performed by the
nations four largest money center banks: Bank of America,
Wells Fargo, Chase and Citi. Together, these four institutions
service approximately 54% of all outstanding mortgage loans for
one to four-family residences as of March 31, 2011.
We believe the residential loan servicing market consists of
traditional (bank-owned) servicers and more specialized
servicers with an enhanced asset performance and loss mitigation
focus (high touch servicers). The traditional servicer model
consists of processing mortgage payments and minimizing expense.
Traditional servicers function well in environments
characterized by low delinquencies and defaults. These servicers
mainly service conventional, performing mortgages and are most
effective at routine account management of portfolios with low
delinquencies that require limited interaction with borrowers
(front-end activities). In contrast, the more specialized, high
touch servicer model places more emphasis on borrower contact
and interaction, improving asset performance and foreclosure
avoidance (back-end activities), and functions well in
environments characterized by elevated delinquencies,
foreclosures and real estate owned activity, in addition to more
normalized environments.
We believe the current dynamics of the residential mortgage
market represent an exceptional opportunity for leading,
non-bank servicers to grow their servicing portfolios by
acquiring mortgage servicing rights, entering into subservicing
contracts and by assuming responsibility for mortgage operations
from regulated entities. We anticipate the following factors
will continue to result in a market supply and demand imbalance:
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Elevated delinquencies and foreclosures favoring servicers with
strong capabilities in asset performance and loss mitigation;
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Regulatory and legislative actions such as Basel III and
other factors leading bank-owned servicers to divest mortgage
servicing rights or outsource significant segments of their
mortgage operations;
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Numerous industry reforms including the Qualified Residential
Mortgage (QRM) provision in the Dodd-Frank Wall
Street Reform and Consumer Protection Act; the negotiations
involving the 50 State Attorneys General, certain federal
regulators and servicers; the enforcement consent orders entered
into by 14 of the largest mortgage servicers and four federal
agencies; and the initiative of the Federal Housing Finance
Agency to align the servicing requirements related to delinquent
mortgages and to modify the servicing compensation related to
Fannie Mae and Freddie Mac loans; and
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Anticipated reduced participation of the GSEs and other
regulated entities in the residential mortgage market, which we
believe is incentivizing these entities to accelerate the
facilitation of servicing transfers to existing strong servicers.
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We believe there are a very limited number of servicers such as
us who are able to perform both front- and back-end functions
effectively in a variety of market environments. We believe we
are attractively positioned to capitalize on the current and
future state of the residential servicing sector due to our
proficiency in servicing both higher risk accounts and newly
originated loans with attractive financial returns.
We believe that our demonstrated performance in servicing loans
for the GSEs and other governmental entities, several major
money center banks, and other entities has facilitated our
acquisitions of over 30 servicing portfolios totaling
approximately $60 billion since November 2008 from 10
different counterparties. These acquisitions helped us grow our
servicing portfolio from $12.7 billion as of
December 31, 2007, to $67.0 billion as of
March 31, 2011, and have demonstrated both our ability
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to source and grow our business as well as our scalable capacity
to meet our clients needs. Over 75% of the
$60 billion increase in our portfolio represents loans in a
current state evidencing our clients confidence in our
ability to execute both front- and back-end servicing
requirements.
Adjacent
Businesses
Historic high levels of delinquencies, foreclosures and real
estate owned have presented increased opportunities for
providers of residential mortgage services. According to
Dominion Bond Rating Service (DBRS), a globally recognized
credit rating agency, foreclosure filings and completed
foreclosures are expected to reach record levels in 2011.
Additionally, the American Society of REO Specialists expects
real estate owned inventory to exceed four million properties
over the next year, a substantial increase from the current
inventory of two million properties. The demand for adjacent
mortgage services REO management, loan recovery and
title and valuation activities is dependent upon the
number of delinquent and foreclosure loans and the amount of
real estate owned, all of which are projected to remain
elevated. Mortgage origination activities also drive demand for
title and valuation products as both are required by new
purchase and refinance originations. We believe our position as
a captive provider of REO management and loan recovery services,
and our
non-controlling
interest in NREIS, will further enable us to capitalize upon
industry opportunities.
Loan
Originations
According to Inside Mortgage Finance, total residential mortgage
originations in the United States were $1.6 trillion in
2010, a decrease of 13% compared to 2009. Of the 2010
originations, approximately 87% were conforming mortgages
guaranteed by government sponsored enterprises, including Fannie
Mae and Freddie Mac, or government agencies such as the Federal
Housing Administration and the Department of Veterans Affairs.
From 2006 to 2010, the annual aggregate principal balance of
newly originated mortgage loans that were either insured or
guaranteed by government agencies or sold to government
sponsored enterprises or into government securitizations
increased from $0.9 trillion to $1.4 trillion, representing a
compound annual growth rate of 11%. In 2010, major money center
banks decreased their aggregate originations as compared to
2009 Wells Fargo, Bank of America and Citi decreased
volumes 8%, 22% and 18%, respectively whereas our
origination volume increased 85% over the same period.
Servicers such as us with captive origination platforms are able
to utilize their loan origination capabilities to supplement
loss mitigation strategies for delinquent loans they service, as
well as help create an organic source of new servicing, at an
attractive MSR price, to help replace portfolio run-off. As
Fannie Mae, Freddie Mac, the Mortgage Bankers Association and a
number of economists project interest rates to increase over the
next several years, we believe our ability to re-direct
resources from pure refinance activities to focus on purchase
origination strategies will position us to gain share in the
residential mortgage origination market.
Our Competitive
Strengths
We believe our servicing platform combined with our originations
and adjacent businesses positions us well for a variety of
market environments. We believe the following competitive
strengths contribute to our leading market position and
differentiate us from our competition.
Market Leading
Residential Mortgage Loan Servicer
We believe we are uniquely positioned to benefit from the
current stressed environment and future state of the residential
servicing sector due to our proficiency servicing both higher
risk accounts and newly originated loans. Since November 2008,
we have boarded over $60 billion in new loans, which we
believe is among the highest in the industry and demonstrates
our ability to successfully transfer loans to our servicing
platform, improve asset performance and provide an exceptional
customer experience.
Our servicing model focuses on asset performance with the goal
of increasing personal contact with borrowers, reducing credit
losses and maximizing cash collections in order to provide
superior results. This highly flexible model allows for
customization to meet individual borrower requirements,
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and is further differentiated by providing personal contact at
critical borrower touch points, including via telephone, mail,
electronic communications and other personal contact methods.
Our approach facilitates strong relationships with borrowers and
greater employee accountability for desired performance. We
believe our proprietary loss mitigation system gives our
employees the tools necessary to help customers evaluate options
to drive the best possible outcome. We believe that our
servicing expertise and focus on optimal outcomes reduces credit
impairments and losses to loan investors and our clients.
Attractive
Business Model with Strong Cash Flow
Our Servicing platform produces recurring, fee-based revenues
based upon contractually established (predictable) servicing
fees, and we are exposed to minimal credit risk with respect to
the mortgage loans that we service. We believe that we continue
to demonstrate our ability to produce lower delinquency rates on
the loans we service, including credit-sensitive loans, compared
to our competitors. By reducing credit losses, we have earned
repeat business from our most valued strategic relationships. We
believe that we will continue to acquire mortgage servicing
rights at attractive prices from mortgage investors or provide
subservicing for third parties that value our servicing
capabilities.
Our business model generates strong, predictable cash flow. As a
non-bank servicer, we are not bound by the same regulatory
capital requirements as bank-owned servicers. We own mortgage
servicing rights that typically require a capital investment to
purchase and we provide subservicing of loans owned by others,
which typically does not require a significant capital
investment. We expect to acquire additional mortgage servicing
rights and enter into additional subservicing agreements in the
future.
We believe that our in-house originations business
differentiates us from other non-bank servicers without an
origination platform by: (i) providing us with a more
cost-effective alternative to purchasing new mortgage servicing
rights as the unpaid principal balance of our existing servicing
portfolio decreases over time; (ii) diversifying our
revenue in a variety of interest rate environments; and
(iii) providing us an additional tool for loss mitigation
through refinancing efforts. Additionally, we have successfully
launched and recently expanded our adjacent businesses that we
believe provide significant opportunity for incremental earnings
and require minimal capital investment.
Scalable,
Proven Platform Coupled with Asset Evaluation and Acquisition
Expertise
Establishing a servicing platform requires significant initial
capital investments, infrastructure, licensing and expertise to
effectively service loans, which creates substantial barriers to
entry. We operate a highly scalable platform as evidenced by the
growth in our unpaid principal balance from $12.7 billion
at December 31, 2007 to $67.0 billion as of
March 31, 2011. We can service additional accounts with our
existing infrastructure, real estate and technology platform
with minimal incremental fixed costs. Our platform gives us the
ability to add highly profitable and accretive business. As
such, we have invested in our loan administration and customer
service servicing divisions to accommodate the increased scale
and size of our portfolio, which allows us to service newly
originated conventional mortgage loans with attractive financial
returns in a variety of operating and economic environments.
We believe we have demonstrated our ability to grow servicing
through acquiring mortgage servicing rights and entering into
subservicing contracts, MSR purchases and subservicing. By
executing over 30 deals in the last 30 months comprising
more than 250 separate transfers of more than 350,000 total
accounts with approximately $60 billion in unpaid principal
balance we believe we have demonstrated a proven process and
methodology of integrating additional loans onto our platform
and improving their performance. We believe these acquisitions
and agreements can be attributed to our established track record
in servicing residential mortgage loans, and we believe that our
track record, together with our scalable platform, positions us
well relative to our competitors to acquire additional servicing
rights and enter into additional subservicing contracts in the
future.
Culture of
Credit Loss Ownership and Accountability
Since our inception, our operating culture has emphasized credit
loss ownership (our term for individual default specialist
accountability for asset performance). We establish financial
and
104
operational goals across all levels of the organization, and
compensation for all of our employees is based upon achieving
the desired results. As a result, we have a streamlined
organizational structure that allows us to react to business
needs and changes in an expeditious manner. We strongly endorse
a promote from within culture and facilitate this process
through our Manager In Training program. We believe that our
culture of credit loss ownership and accountability has enabled
us to outperform the industry. As an example, a portion of our
servicing portfolio is comprised of non-prime collateral held by
third party investors in asset-backed securities
(ABS). As of February 2011, our 60 or more day
delinquency rate for our ABS portfolio (as a percentage of
current balance) was approximately 23%, while according to
LoanPerformance.com, the average delinquency rate of the ABX
06-1 through
07-2
Mortgage Indices was approximately 42%. The ABX.HE is a series
of indices based on representative bonds issued from 2005 to
2007 that consist of non-prime mortgages. The ABX indices are
commonly used by investors to benchmark collateral performance
for ABS.
We strongly promote both HAMP and non-HAMP loan modifications as
an effective alternative to foreclosure that presents a
win-win situation for both investors and borrowers.
In 2010, we completed over 41,000 total loan modifications, of
which approximately 12,500 were HAMP modifications.
Strong and
Seasoned Management Team
Our senior management team is comprised of experienced mortgage
industry executives with an average of approximately
26 years in the industry and a track record of generating
financial and operational improvements. Our CEO and CFO have
been with us for more than a decade and have managed the company
through the most recent economic downturn and through multiple
economic cycles. Several members of our management team have
held senior positions at other residential mortgage companies.
Our senior management team has demonstrated its ability to adapt
to changing market conditions and has developed a proven ability
to identify, evaluate and execute successful portfolio and
platform acquisitions. We believe that the experience of our
senior management team and its management philosophy are
significant contributors our operating performance.
Our Growth
Strategy
Our primary goal is to grow our servicing portfolio by
(i) employing a high touch approach on the back-end to
increase the value of our clients loans by reducing
delinquencies and credit losses, and (ii) operating the
front-end with maximum efficiency through scale and technology.
This goal is achieved through our culture, processes and
expertise. We plan to grow our revenue, operating cash flow and
net income by employing the following business strategies:
Capitalize on
Industry Opportunities
We believe we are well positioned to benefit from the current
trends in the residential mortgage industry. The disruption in
the mortgage industry has resulted in limited access to funding
and capital, lower than anticipated performance of residential
portfolios and a strong demand for high touch servicing with a
track record of improving asset performance. We believe that
many competitors with significant residential exposure or
limited access to capital do not have sufficient internal
capacity to perform this type of servicing and are selling
mortgage servicing rights or outsourcing their servicing to
strong counterparties. Additionally, due to a variety of
economic factors, residential loan delinquencies and related
losses are at historical highs, prompting the GSEs and other
owners of residential mortgage loans to focus on home ownership
preservation and servicing for superior credit performance.
These dynamics allow existing strong servicers the opportunity
to acquire or subservice additional portfolios with attractive
financial returns.
Additionally, we believe pending changes in the regulatory
environment regarding servicing compensation, limitations of MSR
on Tier 1 capital (Basel III), the negotiations involving
the 50 State Attorneys General, certain federal regulators
and servicers, and the enforcement consent orders entered into
by 14 of the largest mortgage servicers and four federal
agencies will significantly impact large bank-owned servicers
and may lead many to divest a portion of their MSR holdings
and/or
outsource significant segments of their mortgage operations.
Furthermore, through our business development
105
efforts, we have seen instances where some of the largest
holders of mortgage servicing are seeking to transform their
mortgage business into a product offering. Rather than having an
investment in mortgage servicing operations, they are partnering
with companies who can provide this service to their customers.
We believe we are well positioned to take advantage of this
emerging industry trend.
Maintain and
Grow Our Fee-Based Servicing Portfolio
Our servicing business produces recurring, fee-based revenues
based upon contractually established servicing fees. We intend
to continue to utilize our established and scalable servicing
platform to grow our servicing operations organically through
our existing client base. We believe that we will continue to
benefit from our strong relationships with the GSEs and other
third party investors, which we believe will enable us to
acquire additional servicing rights and enter into subservicing
contracts in order to grow our business.
Our origination business also provides the opportunity to
replace portfolio run-off by creating a mortgage servicing right
at an attractive price and provides an alternative loss
mitigation strategy through refinancing. Much of the refinancing
is through special programs (e.g., HAMP, Hope for Homeowners,
and FHA Negative Equity Program) where we excel at helping a
borrower find a program that matches his or her unique situation.
Engage in
Opportunistic Acquisitions and New Business
Opportunities
There are numerous banks, insurance companies and other
financial entities that have significant exposure to the
residential mortgage sector. Our management, together with our
dedicated operations and business development teams, have
extensive business and corporate expertise, receive numerous
requests to review potential acquisition opportunities and
continually conduct due diligence to identify potential
opportunistic acquisitions.
In 2010, we expanded our business development team and hired a
dedicated senior manager whose primary role is to identify,
evaluate, and enhance both new and existing
acquisition/partnership opportunities. As of April 30,
2011, we had a team of eight individuals who are dedicated to
business development and focused on select areas of the mortgage
industry (e.g. national banks, REO finance, community banks,
etc.). Our business development success is evidenced by the
identification and retention of 10 new clients over the past
30 months. We are currently seeking additional
opportunities and believe there will continue to be significant
opportunities to take advantage of the dislocation in the
residential mortgage sector and to acquire assets at attractive
valuations. We intend to opportunistically grow our business
through executing subservicing contracts and acquiring mortgage
servicing rights, servicing platforms, originations platforms
and complementary adjacent businesses. We may purchase assets
and/or
platforms of significant size. We believe there are several
assets and platforms currently for sale in our industry and we
are currently in the process of pursuing a number of such
opportunities.
Continue To
Expand Our Adjacent Businesses and Originations
Platform
Our adjacent businesses complement our core Servicing
operations. REO Management includes both disposal and financing
opportunities through our origination platform. The Recovery
unit leverages the existing servicing portfolio and provides
recovery services to third parties to collect on charge-off
deficiency judgments and collateral representations. NREIS
provides title, settlement, valuation, and foreclosure related
services to Nationstar and other third parties. As our own
servicing portfolio and origination volume grows, these
businesses will benefit. In addition, our business development
team is active in sourcing third parties to extend our REO
Management and Recovery Services. Also, NREIS has its own sales
group to expand its client base to other banks and mortgage
companies.
Our Originations business diversifies our offering of mortgage
services and further stabilizes our revenue and expected
earnings stream by providing us with a natural hedge against
fluctuations in prevailing interest rates. We have a
diversified, multi-channel strategy to continue to build our
conventional product originations platform in order to
organically replace servicing run-off. Through our origination
platform, we are also able to create loan servicing assets at
prices below where our servicing competitors can purchase
comparable mortgage servicing rights. Also, we can recapture
loan
106
payoffs in our existing servicing portfolio by providing
origination services to our existing borrowers and offer special
loss mitigation alternatives through refinancings.
We believe that there are significant opportunities to originate
loans for servicers and other financial institutions lacking
origination capacity, and we intend to capitalize on these
opportunities by expanding our retail channels. Our expansion
efforts will focus primarily on purchase money lending, which is
a stable origination source through various interest rate
cycles. Unlike certain competitors who are required to utilize
third-party intermediaries in transactions with the GSEs and
Ginnie Mae, we are a direct lender with the capability to sell
loans directly to the GSEs and to securitize loans directly with
Ginnie Mae. We believe that this capability allows us to control
the credit quality of the loans we originate, thereby reducing
our repurchase risk.
Our
Operations
We are a leading residential mortgage company specializing in
residential mortgage loan servicing and conventional residential
mortgage loan originations. Our business primarily consists of
two Operating Segments: Servicing and Originations.
Servicing
We are one of the largest independent loan servicers in the
United States. As of March 31, 2011, our servicing
portfolio included over 404,000 loans with an aggregate unpaid
principal balance of $67.0 billion. The servicing portfolio
consists of loans originated by our integrated origination
platform as well as mortgage servicing rights either acquired or
subserviced from various third parties. We service these loans
using a high-touch servicing model designed to increase borrower
repayment performance and home ownership preservation and
decrease borrower delinquencies and defaults. The unpaid
principal balance of the loans we serviced increased 428% from
December 31, 2007 to March 31, 2011, primarily through
acquiring mortgage servicing rights and entering into
subservicing agreements. As set forth in the chart below,
revenues from our Servicing Segment were $74.6 million,
$100.1 million and $182.8 million for 2008, 2009 and
2010, respectively, and $61.1 million for the three months ended
March 31, 2011.
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Year Ended December 31,
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Three Months Ended March 31,
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2008
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2009
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2010
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2011
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(unaudited)
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Servicing Portfolio (dollars in millions):
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Unpaid principal balance (by investor):
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Special Servicing
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$
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1,218
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$
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1,554
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$
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4,893
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$
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8,692
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Government-sponsored enterprises
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10,709
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24,235
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52,194
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51,425
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ABS
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9,415
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7,875
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7,089
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6,927
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Total unpaid principal balance
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$
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21,342
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$
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33,664
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$
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64,176
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$
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67,044
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Summary Financial Data (dollars in thousands):
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Total revenue
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$
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74,601
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$
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100,133
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$
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182,842
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$
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61,118
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Net income
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14,718
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7,502
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14,230
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8,221
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Key performance metrics for our servicing portfolio are shown in
the chart below.
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December 31,
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March 31,
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2008
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2009
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2010
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2011
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(dollars in millions, except for average loan amount)
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Loan countservicing
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159,336
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230,615
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389,172
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404,734
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Ending unpaid principal balance
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$
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21,342
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$
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33,664
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$
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64,176
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$
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67,044
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Average unpaid principal balance
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$
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12,775
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$
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25,799
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$
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38,653
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$
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65,929
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Average loan amount
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$
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133,943
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$
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145,977
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$
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164,904
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$
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165,648
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Average coupon
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7.49
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%
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6.76
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%
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5.74
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%
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5.67
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%
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Average FICO
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588
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644
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631
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627
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60+ DQ (% of loans)
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13.1
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%
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19.9
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%
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17.0
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%
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16.8
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%
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Total prepayment speed (12 month CPR)
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16.2
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%
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16.3
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%
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13.3
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%
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13.0
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%
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107
Our Servicing
Model
Our servicing business produces recurring, fee-based revenues
based upon contractually established servicing fees. Servicing
fees are primarily based on the aggregate unpaid principal
balance of the loans serviced and the payment structure varies
by loan source and type. For loans that we do not originate, the
services we provide and the fees we receive vary depending on
our agreement with the owner of the mortgage loan or the primary
servicer, as the case may be. These include differences in rate
of servicing fees as a percentage of unpaid principal balance
and in the structure of advances. For a more detailed
description of advances, see IndustryServicing
Industry Overview.
Our operating culture emphasizes credit loss ownership and loss
mitigation practices to improve asset performance and cash flow
and to reduce credit losses. We seek to ensure that each loan
that we service is paid in accordance with its terms. In
circumstances where the borrower is, or is at risk of becoming,
delinquent or in default, we employ both industry standard and
proprietary strategies to work proactively with borrowers in an
effort to bring borrowers current in their payments, avoiding
foreclosure and keeping borrowers in their homes. We refer to
this frequent interaction with borrowersvia phone,
Internet, mailings, and personal contact methodsas
high-touch loan servicing. Our servicing model and operating
culture have proven especially valuable in the current
high-delinquency environment.
To ensure a customer-centric focus, we have separate account
resolution and foreclosure prevention groups for each type of
owner of mortgage loans for whom we service. We maintain
centralized loan administration and default management groups,
which provide services to all customers.
We are dedicated to a culture of customer service and credit
ownership for our servicing employees. We strongly endorse a
promote from within culture and facilitate this process through
our Manager In Training program. We hire recent college
graduates and train them in the mortgage servicing business by
systematically rotating them through a variety of our business
teams. Our new employees initially work on performing loans and
loans that are less than 30 days past due. After gaining
experience in this environment, we train our employees in the
more challenging 60 and 90 day delinquent categories, where
we particularly emphasize a culture of ownership and
accountability.
To select the best resolution option for a delinquent loan, we
perform a structured analysis of all options using information
provided by the borrower as well as external data. We use recent
broker price opinions, automated valuation models and other
methods to value the property. We then determine the option with
the best expected outcome for the owner of the mortgage loan. In
the current environment, loan modifications often provide a
better outcome for owners of mortgage loans than foreclosure. We
believe that our high-touch servicing model is more effective in
keeping borrowers in their homes and avoiding foreclosure. This
is a win-win situation for both the owners of mortgage loans and
the borrowers that we serve. We conducted over 41,000 loan
modifications in 2010 as compared to over 29,000 in 2009. The
majority of loans modified were delinquent, although we modified
some performing loans proactively under the American
Securitization Forum guidelines.
The most common term modified is the interest rate, while some
modifications also involve the forbearance or rescheduling of
delinquent principal and interest. Of the loans we modified in
2010, we modified over 12,000 mortgage loans pursuant to the
MHA. Under the MHA, we receive an annual financial incentive for
up to four years, provided certain conditions are met. At the
same time, we forego uncollected late fees incurred in the year
of modification for each qualifying loan modification.
In transactions with the GSEs, we are required to follow
specific guidelines that impact the way we service and originate
mortgage loans including:
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our staffing levels and other servicing practices;
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the servicing and ancillary fees that we may charge;
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our modification standards and procedures; and
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the amount of advances reimbursable.
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During December 2009, Nationstar entered into a strategic
relationship with a GSE, which contemplates, among other things,
significant mortgage servicing rights and subservicing transfers
to
108
Nationstar upon terms to be determined. Under this arrangement,
if certain delivery thresholds have been met, the GSE may
require Nationstar to establish an operating division or newly
created subsidiary with separate, dedicated employees within a
specified timeline to service such mortgage servicing rights and
subservicing. After a specified time period, the GSE may
purchase the subsidiary at an agreed upon price.
Our Servicing
Portfolio
Our servicing portfolio consists of mortgage servicing rights
that we retain from loans that we originate; mortgage servicing
rights that we acquire from third party investors, including in
transactions facilitated by GSEs, such as Fannie Mae and Freddie
Mac; and mortgage servicing rights that we manage through
subservicing contracts with third party investors. Our loan
servicing operations are located in Lewisville, Texas.
The charts below illustrate the composition of our servicing
portfolio by investor and product type as of March 31, 2011.
The loans that we service have typically been
securitizedmeaning that the originator of the loan has
pooled the loan together with multiple other loans and then sold
securities to third party investors that are secured by loans in
the securitization pool. We typically service loans that have
been securitized pursuant to one of two arrangements. We
primarily service loans by purchasing the right to service the
loans, which is referred to as a mortgage servicing
right, from the owner of the loan, or retaining the
mortgage servicing right related to the loans that we originate.
Alternatively, we may enter into a subservicing agreement with
the entity that owns the mortgage servicing right pursuant to
which we agree to service the loan on behalf of the primary
servicer. We earn servicing fees pursuant to these servicing and
subservicing contracts, and these fees represent the largest
source of revenue from our loan servicing operations. In the
majority of cases, we purchase the mortgage servicing rights,
which generally entitle us to receive 25 to 50 basis points
annually on the average unpaid principal balance of the loans
serviced, with a weighted average across our servicing portfolio
of approximately 35 basis points. Under subservicing
arrangements, where we do not pay for the mortgage servicing
rights and are only required to make intra-month advancing
obligations, we generally receive a per-loan fee that generally
equates to between 5 and 45 basis points annually on the
unpaid principal balance. The servicing and subservicing fees
are supplemented by related income, including late fees,
non-sufficient funds fees, fees from borrowers who pay by
telephone and interest income earned on funds held in escrow to
pay taxes and insurance and loan payments that we have collected
but have not yet remitted to the owner of the loan.
109
As set forth in the chart below, our servicing portfolio is
diversified with respect to geography. As of March 31,
2011, 65.0% of the aggregate unpaid principal balance of the
loans we service were secured by properties located in the ten
largest states by population. Therefore, we are not as
susceptible to local and regional real estate price fluctuations
as servicers whose portfolios are more concentrated in a single
state or region.
Servicing
Portfolio by Geography
Key Drivers of
Revenue
Three key factors drive the amount of revenue we generate from
our Servicing operations: aggregate unpaid principal balance,
delinquency rates and prepayment speed.
Aggregate Unpaid Principal Balance: Aggregate
unpaid principal balance is a key revenue driver. As noted
earlier, servicing fees are usually earned as a percentage of
unpaid principal balance, and growth in the unpaid principal
balance of a portfolio means growth in servicing fees.
Additionally, a larger servicing portfolio generates increased
ancillary fees and leads to larger custodial balances that
generate greater float income. A larger servicing portfolio also
drives increases in expenses. We will also incur additional
interest expense to finance the servicing advances as the size
of our portfolio increases. Servicers of GSEs collect servicing
fees only on performing loans while servicers of
non-government-sponsored enterprise residential mortgage-backed
securities, are entitled to servicing fees on both performing
loans and delinquent loans. The servicing fee relating to
delinquent loans is accrued and paid from liquidation proceeds
ahead of the reimbursement of advances.
Delinquency Rates: Delinquency rates also have
a significant impact on our results of operations. Delinquent
loans are more expensive to service than performing loans
because our cost of servicing is higher and, although credit
losses are generally not a concern for our financial results,
our advances to investors increase, which results in higher
financing costs. Performing loans include those loans that are
current or have been delinquent for less than 30 days in
accordance with their original terms and those loans on which
borrowers are making scheduled payments under loan
modifications, forbearance plans or bankruptcy plans. We
consider all other loans to be delinquent.
When borrowers are delinquent, the amount of funds that we are
required to advance to the owners of the loans on behalf of the
borrowers increases. While the collectability of advances is
generally not an issue, we do incur significant costs to finance
those advances. We intend to utilize both securitization and
revolving credit facilities to finance our advances. As a
result, increased delinquencies result in increased interest
expense.
110
The cost of servicing delinquent loans is higher than the cost
of servicing performing loans primarily because the loss
mitigation techniques that we employ to keep borrowers in their
homes are more costly than the techniques used in handling a
performing loan. When loans are performing, we have limited
interaction with the borrowers, and relatively low-cost customer
service personnel conduct most of the interaction. Once a loan
becomes delinquent, however, we must employ our loss mitigation
capabilities to work with the borrower to return the loan to
performing status. These procedures involve increased contact
with the borrower and the development of forbearance plans, loan
modifications or other techniques by highly skilled consultants
with higher compensation. On those occasions when loans go into
foreclosure, we incur additional costs related to coordinating
the work of local attorneys to represent us in the foreclosure
process. Finally, when we foreclose on loans, we employ
specialists to service the real estate and manage the sale of
those properties on behalf of our investors. A significant
increase in delinquencies would cause us to increase our
activities in these areas resulting in increased operating
expenses.
Prepayment Speed: A significant driver of our
business is prepayment speed, which is the measurement of how
quickly unpaid principal balance is reduced. Items reducing
unpaid principal balance include normal monthly principal
payments, refinancings, voluntary property sales and involuntary
property sales such as foreclosures or short sales. Prepayment
speed impacts future servicing fees, amortization of servicing
rights, float income, interest expense on advances and
compensating interest expense. When prepayment speed increases,
our servicing fees decrease faster than projected due to the
shortened life of a portfolio. The converse is true when
prepayment speed decreases.
Prepayment speed affects our float income. Decreased prepayment
speed typically leads to our holding lower float balances before
remitting payoff collections to the investor and lower float
income due to a lower invested balance. Lower prepayments have
been associated with higher delinquency rates, higher advance
balances and interest expense.
Servicing
Organization
The servicing organization is comprised of four primary
functional areas as detailed below.
Loan Administration: The loan administration
area includes the customer service, payment processing, loan
accounting, escrow, taxes and insurance and document
administration groups. The customer service group is primarily
responsible for handling borrower inquiries including date of
last payment, date of next payment due, arranging for a payment,
refinance assistance and standard escrow and balance questions.
In December 2010, the customer service group managed over
110,000 calls and service inquiries. The payment processing
group is responsible for posting borrower payments and managing
any payment-related issues. The majority of the borrower
payments are posted electronically via our lock-box operation,
Western Union, ACH or web-based payments. The loan accounting
group manages the payoff of loans. The escrow, taxes and
insurance group manage all escrow balances and the external
vendors we utilize for property insurance and tax tracking. The
document administration group manages the lien release process
upon the payoff of a loan and the tracking of loan documents for
new originations.
Account Resolution: The account resolution
group is responsible for early stage collections (borrowers who
are 1 to 59 days delinquent). For accounts where payments
are past due but not yet delinquent (less than 30 days past
due), we use a behavioral scoring methodology to prioritize our
borrower calling efforts. The key drivers of behavioral score
are payment pattern behavior (i.e., if the borrower historically
has made their payment on the 5th of each month and that
pattern changes more attention will be paid to the borrower) and
updated credit scores. For accounts 31 to 59 days
delinquent, default specialists are assigned individual accounts
and are charged with making contact with the delinquent borrower
to understand the reason for delinquency and attempt to collect
a payment or work on an alternative solution. In the account
resolution group, we use a combination of predictive dialer
technology and account level assignments to contact the
borrowers. The primary objective of this group is to reduce
delinquency levels.
Foreclosure Prevention: The foreclosure
prevention group, commonly referred to in the industry as loss
mitigation, is responsible for late stage collections (borrowers
who are 60 or more days delinquent). The primary focus of this
group is reducing delinquency levels. All accounts in this group
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are assigned to individual default specialists loss mitigators.
The primary role of the default specialist loss mitigator is to
contact the borrower and understand the reasons for the
borrowers delinquency and the borrowers desire and
ability to stay in their house. The foreclosure prevention group
performs most of our government and other loan modifications.
Default Management: The default management
area includes the foreclosure, bankruptcy, real estate owned and
claims processing groups. The foreclosure group manages accounts
involved in the foreclosure process. In the late stage
delinquency status, we will initiate foreclosure proceedings in
accordance with state foreclosure timelines. Accounts in the
foreclosure group are assigned to foreclosure specialists based
on a state-specific assignment. The primary focus of the
foreclosure group is to perform the foreclosure process in
accordance with the state timelines. Any account which has filed
bankruptcy is assigned to a bankruptcy specialist who will
administer the bankruptcy plain proceedings in accordance with
applicable law and in conjunction with an outsourcing firm. The
real estate owned group manages properties within the servicing
portfolio that have completed the foreclosure process. We use
both internal and external resources to manage the disposition
of the real estate owned properties. The primary goal of the
real estate owned team is to dispose of the property within an
acceptable timeframe at the lowest possible loss.
Originations
We are one of the few high-touch servicers in the United States
with a loan origination platform. We are licensed to originate
residential mortgage loans in 49 states and have obtained
all required federal approvals to originate FHA and conventional
loans. We currently originate conventional agency and government
conforming residential mortgage loans, which we either sell
servicing released to other secondary market participants, which
we refer to as conduits, or securitize through the issuance of
Fannie Mae, Freddie Mac or Ginnie Mae bonds. As such, we
minimize any credit or interest rate risk by not retaining loans
on our balance sheet for more than approximately 30 days
beyond funding. As set forth in the chart below, revenues from
our Originations Segment were $22.6 million,
$55.6 million and $84.5 million for the year ended
December 31, 2008, 2009 and 2010, respectively and
$24.6 million for the three months ended March 31,
2011. Origination volumes in 2009 and 2010 increased
significantly as we expanded our conventional market footprint.
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Year Ended December 31,
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Three Months Ended March 31,
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2008
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2009
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2010
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2011
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(unaudited)
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Origination Volume ($ in millions):
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Retail
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$
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538
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$
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1,093
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$
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1,608
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$
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425
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Wholesale
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4
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386
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1,184
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229
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Total Originations
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$
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542
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$
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1,479
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$
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2,792
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$
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654
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Summary Financial Data ($ in thousands):
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Total revenue
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$
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22,574
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$
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55,593
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$
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84,540
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$
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24,613
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Net income (loss)
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(7,590
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)
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8,884
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662
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3,423
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Our Originations
Platform
We originate loans through our three loan origination channels:
Consumer Direct Retail, Distributed Retail and Wholesale. Our
largest channel is our Consumer Direct Retail channel which
operates as a centralized call center. Our second largest
channel, the Wholesale channel, involves brokers sourcing
borrowers for us. Our smallest and newest channel is our
Distributed Retail channel, which includes traditional retail
branches with loan officers who source loans primarily from
realtors and builders. We currently have twelve retail locations
in Texas, Alabama and Tennessee and, while it is our newest
channel, we believe the Distributed Retail channel represents a
significant growth opportunity for us. Our multi-channel
origination strategy enables us to diversify our originations
without becoming overly reliant on any single segment of the
mortgage loan market.
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We originate purchase money loans and refinance existing loans,
including those that we service. Our strategy is to mitigate the
credit, market and interest rate risk from loan originations by
either selling newly originated loans or placing them in GSEs or
government securitizations. We typically sell new loans within
30 days of origination, and we do not expect to hold any of
the loans that we currently originate on our balance sheet on a
long-term basis. At the time of sale, we have the option to
retain the mortgage servicing rights on loans we originate.
Our origination capability differentiates us from other
non-bank, high-touch loan servicers without an integrated
origination platform by:
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providing us with an organic source of new loans to service as
existing loans are repaid or otherwise
liquidatedoriginated loans serviced by us generate higher
returns than comparable mortgage servicing rights that we would
acquire from a third party;
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providing an attractive complement to servicing by allowing us
to modify and refinance mortgage loans, including loans that we
service;
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creating a diversified source of revenue that we believe will
remain stable in a variety of interest rate
environments; and
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building brand recognition.
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Originations
Organization
Each of our loan origination channels has dedicated operations,
support and fulfillment functions (processing, underwriting,
closing and shipping) which are primarily performed at our
offices in Lewisville, Texas. As part of our efforts to manage
credit risk and enhance operating efficiencies, the
underwriting, closing, funding and shipping for all of our
originations channels are managed centrally. Centralizing these
functions is designed to enable us to control loan quality, loan
processing times, cost and, ultimately, borrower satisfaction.
Additionally, to maintain independence from the sales
organization, we have the underwriting function report directly
to the Chief Financial Officer. Our three mortgage loan
originations channels are discussed in more detail below:
Retail
OriginationsConsumer Direct
In the year ended December 31, 2010, our largest
originations channel was our Consumer Direct Retail channel. We
employ a single centralized call center strategy leveraging
multiple potential borrower lead sources. In our Consumer Direct
Retail channel, each sales team typically consists of between 10
and 12 mortgage professionals managed by a sales leader. Three
to four sales leaders report to a senior vice president
responsible for the specific lead source.
Our primary divisions within our Consumer Direct Retail channel
include Renewal, New Customer Acquisition, Centralized Purchase
and Strategic Alliances. Each division specializes in meeting
the needs of their specific target borrowers. This strategy
provides a flexible organizational structure capable of shifting
to new opportunities quickly. The four divisions of our Consumer
Direct Retail channel are as follows:
Renewal: Focuses on retaining current
borrowers in our servicing portfolio and utilizes an integrated
approach with our Servicing Segment to capture borrowers who
either qualify to refinance their current mortgage or who take
action indicating they may be paying off their loan. The Renewal
teams receive leads for borrowers from telemarketing, live
transfers and scheduled callbacks from Customer Service and
website programs.
New Customer Acquisition: Focuses on
generating new mortgage business from prospective borrowers. We
use credit bureau modeling to identify borrowers who are likely
to be in the market for and likely to qualify to refinance their
existing mortgage loan. Marketing channels include
telemarketing, direct marketing, Internet lead aggregators,
credit bureau triggers such as mortgage inquiries and website
programs.
Purchase: Focuses on meeting the purchase
needs of borrowers through a centralized sales force that focus
on real estate owned financing programs, relocation lending and
business to business
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and a decentralized sales force located in real estate offices
in various states. All fulfillment operations are done through a
centralized group. Our marketing channels include both consumer
and business strategies such as
e-mail or
newsletter campaigns, flyers, websites and other direct
marketing programs.
Strategic Alliances (Partner Plus): Focuses on
serving the needs of strategic and joint marketing clients who,
in many cases, do not have the originations capabilities to
provide refinancing for their own portfolios. Currently, we are
providing origination services to several servicers without
origination capability. In many instances, these alliances
involve providing certain incentives for the borrower to
refinance (e.g., payment of closing fees). These programs
typically begin with a direct mail announcement of the
relationship followed by direct marketing campaigns to increase
borrower responses.
Wholesale
Originations
In the year ended December 31, 2010, our Wholesale channel
was our second largest originations channel. The primary
business strategy of the Wholesale channel is to acquire
high-quality servicing at a reduced price through a network of
non-exclusive relationships with various approved mortgage
companies and mortgage brokers. The Wholesale channel is
comprised of seven sales regions throughout the United States,
each staffed with a regional sales manager, and three
centralized sales regions that operate out of our offices in
Lewisville, Texas. Each region generally has 8-12 account
executives whose primary responsibility is to source and service
mortgage brokers. We provide a variety of conforming
conventional mortgage loans to our brokers to allow them to
better service their borrowers.
Mortgage brokers identify applicants, help them complete a loan
application, gather required information and documents, and act
as our liaison with the borrower during the lending process. We
review and underwrite an application submitted by a broker,
accept or reject the application, determine the range of
interest rates and other loan terms, and fund the loan upon
acceptance by the borrower and satisfaction of all conditions to
the loan. By relying on brokers to market our products and
assist the borrower throughout the loan application process, we
can increase loan volume through our Wholesale channel with
proportionately lower increases in overhead costs compared with
the costs of increasing loan volume in loan originations through
our retail channels.
New brokers are sourced through our account executives, industry
trade shows forums and our website. The broker approval process
is critical to maintaining a high quality network of brokers.
Brokers must meet various requirements and must complete the
broker application package, provide evidence of appropriate
state licenses, articles of incorporation, financial statements,
resumes of key personnel and other information as needed. The
Wholesale operations team reviews all submitted materials to
determine whether the broker should be approved. The broker
application is reviewed and investigated by our quality control
and risk management department before final approval is
provided. The process is designed to ensure that borrowers we
acquire through our Wholesale channel are working with reputable
and legitimate mortgage brokers.
Our ongoing investment in technology has allowed us to provide
our broker network with the ability to obtain instantaneous
online loan decisions, product options and corresponding
pricing. We believe that the utility and convenience of online
loan decisions and product options are a value-added service
that has and will continue to solidify our business
relationships. In addition, our website provides our brokers
with loan status reports, product guidelines, loan pricing,
interest rate locks and other added features. We expect to
continue to adapt web-based technologies to enhance our
one-on-one
relationships with our brokers.
Retail
OriginationsDistributed Retail
The Distributed Retail channel is our newest origination
channel. The primary strategy within the Distributed Retail
channel is to expand our purchase money mortgage loan
capability. Purchase money mortgage loans involve the purchase
of a property. We believe that having a purchase mortgage
strategy is an integral part of growing our originations
platform. In order to pursue this
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strategy, we believe it is necessary to establish retail
branches to develop relationships with traditional business
clients such as realtors and builders. Distributed Retail
strategies focused on purchase money mortgage loan volume and
higher overall credit quality volume and are less susceptible to
changing interest rate environments.
The Distributed Retail channel aims to promote sales growth
without compromising credit quality primarily through the use of
centralized underwriting and through the decentralized
processing and closing (maintained at the originating branch).
Mortgage professionals develop relationships with local realtors
and builders in their respective markets. Realtors and builders
then refer their borrowers to us to facilitate the home
purchase. Marketing primarily supports these
business-to-business
relationships with emails, flyers, open houses, trade show
support and other direct marketing efforts.
We currently have twelve retail locations in Texas, Alabama and
Tennessee. We plan to continue to seek attractive opportunities
to open new branches. Each branch is expected to have ten to
twelve mortgage professionals, one to two loan processing
specialists and a branch manager.
Technology
In the vast majority of cases, our key, critical systems are
hosted, managed and maintained by our in-house Information
Technology team. Our key systems consist of a combination of
vendor developed applications as well as internally developed
proprietary systems. On our most critical vendor developed
applications (OPUS, XpressQual, TMO, LSAMS, FORTRACS, and
Equator) we maintain license rights to the source code to enable
in-house customization of these systems to meet our business
needs in a time effective manner.
Servicing
For our Servicing Segment, our system of record is LSAMS, which
we use for all loan accounting functions, claims functions and
supports our Customer Service functions. Our early stage account
collection efforts are focused and prioritized through the use
of ESP, our proprietary early delinquency score model, used to
identify higher risk accounts. Our collections and loss
mitigation efforts are supported by Remedy, a proprietary
default management system which, along with our proprietary Net
Present Value engine and our proprietary Property Valuation
Management system, enables our loan resolution personnel to
guide our borrowers to the optimal economic workout alternative
based on the unique factors of each borrowers situation.
For our foreclosure and bankruptcy processes, we use the
FORTRACS system, which integrates with the Lendstar system to
enable online communications and case tracking with our attorney
network. For properties whereby we complete foreclosure and take
them into real estate owned status, we utilize the web-based
real estate owned management system REOTrans to manage the
marketing and disposition of our owned real estate. To support
our Investor Reporting functions, we use a combination of
systems that include LSAMS and Lewtan ABS, a vendor hosted
system. We also have a website, www.NationstarMtg.com, that is a
fully automated system to apply and process mortgage loan
applications and that our existing borrowers can access to
receive information on their account.
Originations
The critical systems that support our loan origination
activities include:
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MLS (Marketing Lead System), our proprietary
marketing lead system which routes, tracks and delivers leads to
our loan officers, who we refer to as our mortgage professionals;
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OPUS, a web-based
point-of-sale
system that provides product eligibility and pricing to our
retail sales force;
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TMO, our loan origination system used for loan processing,
underwriting and closing;
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XpressQual, a web-based
point-of-sale
system that provides product eligibility and pricing to our
wholesale brokers and allows them to submit loans to us online;
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www.NationstarBroker com, our website for wholesale brokers to
receive information on our products and services;
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CLASS, our proprietary system used to manage our sales
relationships and licensing of our wholesale brokers;
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ODE, a rules-based pricing and eligibility engine that is
integrated with OPUS, XpressQual and TMO;
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High Cost Fee Engine, our proprietary compliance fee engine that
enforces both federal and local high cost and fee limits
throughout the loan originations process; and
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CLT (Compliance License Tracker), our proprietary
system that maintains and tracks all mortgage professionals
locational licensing to ensure that leads and applications are
only processed by properly licensed mortgage professionals.
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For our Retail origination channels, the loan origination
process starts when a lead is imported (or accepted) into our
Marketing Lead System, a propriety system that our mortgage
professionals use to manage the initial borrower contact
process. Once a mortgage professional has made contact with a
potential borrower, the mortgage professional moves the lead
into OPUS, our web-based
point-of-sale
system. Here, our mortgage professionals capture the necessary
loan application information, obtain credit reports to determine
full product eligibility and establish pricing to facilitate the
sales process. Once our mortgage professionals have helped our
borrowers determine the program and pricing that meets their
needs, the loan application is transferred into TMO, our loan
origination system where we complete the loan process,
underwrite the loan, prepare the closing documents and complete
the loan process.
For our Wholesale origination channel, we provide our brokers a
web-based point of sale system, XpressQual, to use to access
product eligibility and pricing and to submit loans online. We
also use TMO in this channel for the processing, underwriting
and closing functions. Through XpressQual, our brokers have
access to a web-based portal where they can upload their loan
applications to determine product eligibility and loan pricing.
Once they select a program and price, the broker is able to
submit the file to us for processing as well as lock the rate
using XpressQual. As in our retail origination channels, once
submitted for processing, the file is transferred into TMO to
verify the application information, clear conditions, underwrite
and close the loan. Supporting OPUS, XpressQual and TMO, we also
utilize a vendor developed rules-based pricing and eligibility
engine called ODE as well as a proprietary compliance fee engine
that enforces high cost and fee limits throughout the entire
originations process. There is also a Compliance License Tracker
system that maintains and tracks all mortgage professional and
location level licensing. All systems are fully integrated and
share information to ensure complete,
up-to-date
and accurate information for reporting purposes.
To protect our business in the event of disaster, we have
implemented a disaster recovery data facility in a co-location
in Irving, Texas where we maintain near real-time replication of
all critical servicing systems and data.
Employees
As of April 30, 2011, we had a total of
2,176 employees, all of which are based in the United
States. None of our employees are members of any labor union or
subject to any collective bargaining agreement and we have never
experienced any business interruption as a result of any labor
dispute. Our employees are allocated among our business
functions as follows:
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55% are in Servicing;
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32% are in Originations;
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13% are in support functions, including Human Resources,
Accounting and other corporate functions.
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In our Servicing Segment, we hire recent college graduates and
teach them our high-touch servicing model. Our loan servicers
and default specialists follow a training program in which they
first service performing loans and slightly delinquent loans. As
they gain experience, they service more delinquent loans and
assume increased personal responsibility for servicing a certain
set of loans and
116
contacting certain borrowers. We strongly endorse a promote from
within culture and facilitate this process through our Manager
in Training program.
In our Originations Segment, we hire experienced conventional
mortgage originators and provide them with training to acclimate
them to Nationstar, as well as compliance and regulatory
training.
Regulation
Our business is subject to extensive federal, state and local
regulation. Our loan origination, loan servicing and debt
collection operations are primarily regulated at the state level
by state licensing authorities and administrative agencies.
Because we do business in all fifty states and the District of
Columbia, we, along with certain of our employees who engage in
regulated activities, must apply for licensing as a mortgage
banker or lender, loan servicer
and/or
default specialist, pursuant to applicable state law. These
state licensing requirements typically require an application
process, processing fees, background checks and administrative
review. Our servicing operations center in Lewisville, Texas is
licensed (or maintains an appropriate statutory exemption) to
service mortgage loans in all fifty states and the District of
Columbia. Our retail loan origination branch is licensed to
originate loans in at least the states in which it operates, and
our direct origination branch is licensed to originate loans in
49 states and the District of Columbia. From time to time,
we receive requests from states and other agencies for records,
documents and information regarding our policies, procedures and
practices regarding our loan origination, loan servicing and
debt collection business activities, and undergo periodic
examinations by state regulatory agencies. We incur significant
ongoing costs to comply with these licensing requirements.
While the U.S. federal government does not primarily
regulate loan originations, the federal Secure and Fair
Enforcement for Mortgage Licensing Act of 2008, or the SAFE Act,
requires all states to enact laws that require all United States
sales representatives to be individually licensed or registered
if they intend to offer mortgage loan products. These licensing
requirements include enrollment in the Nationwide Mortgage
Licensing System, application to state regulators for individual
licenses, a minimum of 20 hours of pre-licensing education,
an annual minimum of eight hours of continuing education and the
successful completion of both national and state exams.
In addition to licensing requirements, we must comply with a
number of federal consumer protection laws, including, among
others:
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the Gramm-Leach-Bliley Act, which requires us to maintain
privacy with respect to certain consumer data in our possession
and to periodically communicate with consumers on privacy
matters;
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the Fair Debt Collection Practices Act, which regulates the
timing and content of debt collection communications;
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the Truth in Lending Act and Regulation Z thereunder, which
require certain disclosures to the mortgagors regarding the
terms of the mortgage loans;
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the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the credit history of
consumers;
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the Equal Credit Opportunity Act and Regulation B
thereunder, which prohibit discrimination on the basis of age,
race and certain other characteristics, in the extension of
credit;
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the Homeowners Protection Act, which requires the cancellation
of mortgage insurance once certain equity levels are reached;
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the Home Mortgage Disclosure Act and Regulation C
thereunder, which require financial institutions to report
certain public loan data;
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the Fair Housing Act, which prohibits discrimination in housing
on the basis of race, sex, national origin, and certain other
characteristics; and
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Regulation AB under the Securities Act, which requires
certain registration, disclosure and reporting for
mortgage-backed securities.
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117
We must also comply with applicable state and local consumer
protection laws, which may impose more comprehensive and costly
restrictions than the regulations listed above. In a response to
the decline in the housing market and the increase in
foreclosures, many local governments have extended the time
period necessary prior to initiating foreclosure proceedings,
which prevent a servicer or trustee, as applicable, from
exercising any remedies they might have in respect of
liquidating a severely delinquent mortgage loan in a timely
manner.
On May 28, 2009, we voluntarily entered into an agreement
to actively participate as a loan servicer in HAMP, which
enables eligible borrowers to avoid foreclosure through a more
affordable and sustainable loan modification made in accordance
with HAMP guidelines, procedures, directives and requirements.
Loan modifications pursuant to HAMP may include a rescheduling
of payments or a reduction in the applicable interest rates and,
in some cases, a reduction in the principal amount due. Under
HAMP, subject to a program participation cap, we, as a servicer,
will receive an initial incentive payment of up to $1,500 for
each loan modified in accordance with HAMP subject to the
condition that the borrower successfully completes a trial
modification period. In addition, provided that a HAMP
modification does not become 90 days or more delinquent, we
will receive an incentive of up to $1,000. As of
December 31, 2010, 14,184 loans with an unpaid principal
balance of $3.1 billion after modification had been
modified through HAMP.
On July 21, 2010, President Obama signed the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010 (the
Dodd-Frank Act) into law. The Dodd-Frank Act
represents a comprehensive overhaul of the financial services
industry in the United States. The Dodd-Frank Act includes,
among other things: (i) the creation of a Financial
Stability Oversight Council to identify emerging systemic risks
posed by financial firms, activities and practices, and to
improve cooperation between federal agencies; (ii) the
creation of a Bureau of Consumer Financial Protection authorized
to promulgate and enforce consumer protection regulations
relating to financial products; (iii) the establishment of
strengthened capital and prudential standards for banks and bank
holding companies; (iv) enhanced regulation of financial
markets, including derivatives and securitization markets;
(v) amendments to the Truth in Lending Act aimed at
improving consumer protections with respect to mortgage
originations, including originator compensation, minimum
repayment standards, and prepayment considerations. The exact
scope of and applicability of many of these requirements to us
are currently unknown, as the regulations to implement the
Dodd-Frank Act generally have not yet been finalized.
On April 13, 2011, the four federal agencies overseeing
certain aspects of the mortgage market: the Federal Reserve, the
Office of the Comptroller of the Currency (OCC), the
Office of Thrift Supervision (OTS), and the Federal
Deposit Insurance Corporation (FDIC), entered into
enforcement consent orders with 14 of the largest mortgage
servicers in the United States regarding foreclosure practices.
The enforcement actions require the servicers, among other
things: (i) to promptly correct deficiencies in residential
mortgage loan servicing and foreclosure practices; (ii) to
make significant modifications in practices for residential
mortgage loan servicing and foreclosure processing, including
communications with borrowers and limitations on dual-tracking,
which occurs when servicers continue to pursue foreclosure
during the loan modification process; (iii) to ensure that
foreclosures are not pursued once a mortgage has been approved
for modification and to establish a single point of contact for
borrowers throughout the loan modification and foreclosure
processes; (iv) to establish robust oversight and controls
pertaining to their third-party vendors, including outside legal
counsel, that provide default management or foreclosure
services. While these enforcement consent orders are considered
as not preemptive to the state actions, it remains to be seen
how state actions and proceedings will be affected by the
federal consents. Although we are not a party to the above
enforcement consent orders, we might become subject to the terms
of the consent orders if (i) we subservice loans for the
servicers that are parties to the enforcement consent orders;
(ii) the agencies begin to enforce the consent orders by
looking downstream to our arrangement with certain mortgage
servicers; (iii) our investors request that we comply with
certain aspects of the consent orders, or (iv) we otherwise
find it prudent to comply with certain aspects of the consent
orders. In addition, the practices set forth in such enforcement
consent orders may be adopted by the industry as a whole,
forcing us to comply with them in order to follow standard
industry practices. While we have not yet
118
made any changes to our operating policies and procedures,
potential changes to our servicing practices would increase
compliance costs for our servicing business, which could
materially and adversely affect our financial condition or
results of operations.
Competition
In our Servicing Segment, we compete with large financial
institutions and with other non-bank servicers. Our ability to
differentiate ourselves from other loan servicers through our
high-touch servicing model and culture of credit largely
determines our competitive position within the mortgage loan
servicing industry.
In our Originations Segment, we compete with large financial
institutions and local and regional mortgage bankers and
lenders. Our ability to differentiate the value of our financial
products primarily through our mortgage loan offerings, rates,
fees and customer service determines our competitive position
within the mortgage loan origination industry. The placement of
mortgage loans is greatly influenced by traditional business
clients such as realtors and builders. As a result, our ability
to secure relationships with traditional business clients will
influence our ability to grow our purchase line.
Seasonality
Our Originations Segment is subject to seasonal fluctuations,
and activity tends to diminish somewhat in the winter months of
December, January and February, when home sales volume and loan
origination volume are at their lowest. This typically causes
seasonal fluctuations in our Originations Segments
revenue. Our Servicing segment is not subject to seasonality.
Intellectual
Property
We use a variety of methods, such as trademarks, patents,
copyrights and trade secrets, to protect our intellectual
property. We also place appropriate restrictions on our
proprietary information to control access and prevent
unauthorized disclosures.
Properties
Our principal executive headquarters is located in Lewisville,
Texas. At our main campus in Lewisville, Texas, we lease two
buildings containing an aggregate of approximately
201,000 square feet of general office space, pursuant to
two leases, both of which are currently due to expire in the
first half of 2014. In addition to serving as our principal
executive headquarters, our main Lewisville campus houses a
portion of our servicing operations and all of our Consumer
Direct Retail origination platform. We also own a parcel of
undeveloped land at our campus location which can be used for
future expansion.
We lease an additional 40,897 square feet of space in
Lewisville, Texas, which is currently due to expire in December,
2011. This building houses our wholesale loan origination
platform and some administrative support functions. We also
lease 83,467 square feet at another location in Lewisville,
Texas, which is currently due to expire in April 2016. We intend
to use this additional space to meet the needs of our growing
servicing operation.
Consistent with our plans to open new branches in our
Distributed Retail channel, we have completed leases on our
regional management office in Montgomery, Alabama as well as
branch office leases in Alabama, Tennessee, Texas, Massachusetts
and Illinois. As of April 29, 2011, we had 13 Distributed
Retail branch leases. Our typical Distributed Retail branch
office is between 2,500 and 4,000 square feet with lease
terms of three years or less.
We maintain leases on 27 small (approximately 150 square
feet) offices throughout the United States.
We also have one lease (80,000 square feet) on property
located in Parsippany, New Jersey which we no longer utilize and
which is being actively marketed for disposal.
119
Legal
Proceedings
We are routinely involved in legal proceedings concerning
matters that arise in the ordinary course of our business. In
addition, we are currently involved in certain inquiries by
certain state Attorneys General and other federal and state
governmental agencies regarding our servicing and foreclosure
policies, procedures and practices. These inquiries or any
subsequent administrative, judicial or legislative actions taken
by these regulators, court administrators or other governmental
entities may subject us to fines and other sanctions, including
a foreclosure moratorium or suspension. In addition to these
inquiries, several state Attorneys General have requested that
certain mortgage servicers, like us, suspend foreclosure
proceedings pending internal review to ensure compliance with
applicable law, and we received requests from four such state
Attorneys General. Pursuant to these requests and in light of
industry-wide press coverage regarding mortgage foreclosure
documentation practices, we, as a precaution, previously delayed
foreclosure proceedings in 23 states, so that we may
evaluate our foreclosure practices and underlying documentation.
Upon completion of our internal review and responding to these
inquiries, we resumed these previously delayed proceedings. Such
inquiries, however, as well as continued court backlog and
emerging court processes, may cause an extended delay in the
foreclosure process in certain states. Although the outcome of
these proceedings cannot be predicted with certainty, management
does not currently expect any of the proceedings pending against
us, individually or in the aggregate, to have a material effect
on our business, financial condition or results of operations.
120
MANAGEMENT
Directors and
Executive Officers
The following table sets forth the name, age and position of
individuals who currently serve as directors and executive
officers of our company. Each of the individuals listed below
served as a director or officer of Nationstar Mortgage LLC and
has been named to the same position at Nationstar Mortgage
Holdings, Inc. in connection with our initial public offering.
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Name
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Age
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Position
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Peter Smith
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43
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Director
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Anthony H. Barone
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53
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Director, President and Chief Executive Officer
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Jay Bray
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44
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Executive Vice President and Chief Financial Officer
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Robert Appel
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49
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Executive Vice President of Servicing
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Amar Patel
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39
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Executive Vice President of Portfolio Investments
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Douglas Krueger
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42
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Executive Vice President of Capital Markets
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Anne E. Sutherland
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50
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Executive Vice President and General Counsel
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Steven L. Hess
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54
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Executive Vice President of Marketing
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Mark OBrien
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59
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Executive Vice President of Organizational Development
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Peter Smith is a managing director in the Private Equity
business at Fortress and is also a member of its Management
Committee. At Fortress, Mr. Smith has been a senior team
member focused on acquisitions and ongoing management of various
finance company investments. Prior to joining Fortress in May
1998, Mr. Smith worked at UBS and, before that, at
BlackRock Financial Management Inc. from 1996 to 1998.
Mr. Smith worked at CRIIMI MAE Inc. from 1991 to 1996.
Mr. Smith received a BBA in Finance from Radford University
and a MBA in Finance from George Washington University.
Anthony H. Barone is the President, Chief Executive
Officer and has served in this capacity since joining Nationstar
in 1997. Mr. Barone was Manager of Nationstar Mortgage LLC
since 2006. Mr. Barone has over 30 years of experience
in the mortgage industry. From 1980 to 1989, Mr. Barone
held management positions in loan servicing, originations,
secondary marketing and credit administration at General
Electric Capital Corporation. From 1990 to 1997, Mr. Barone
served as Executive Vice President of Ford Consumer Finance, a
former mortgage lending and servicing subsidiary of Ford Motor
Credit Corporation. Mr. Barone holds a B.A. in Economics
from the University of Connecticut.
Jay Bray is the Executive Vice President and Chief
Financial Officer and has served in this capacity since joining
Nationstar in 2000. Mr. Bray has over 22 years of
experience in the mortgage servicing and origination industry.
From 1988 to 1994, Mr. Bray served as an Audit Manager with
Arthur Andersen in Atlanta, Georgia. From 1994 to 2000,
Mr. Bray held a variety of leadership roles at Bank of
America and predecessor entities, where he managed the Asset
Backed Securitization process for mortgage related products,
developed and implemented a secondary execution strategy and
profitability plan and managed investment banking relationships,
secondary marketing operations and investor relations.
Additionally, Mr. Bray led the portfolio acquisition,
pricing and modeling group. Mr. Bray holds a B.A.A. in
Accounting from Auburn University and is a Certified Public
Accountant in the State of Georgia.
Robert Appel is the Executive Vice President of Servicing
and has served in this capacity since joining Nationstar in
February 2008. Mr. Appel has over 20 years of
experience in the mortgage industry and 5 years of public
accounting experience. From 1985 to 1990, he served as an audit
manager with Ernst and Young LLP. From 1990 to 1992, he held a
position as Vice President of Control for Tyler Cabot Mortgage
Securities Fund, a NYSE listed bond fund. From 1992 to 1999,
Mr. Appel held a position at Capstead Mortgage where he
started a master servicing organization and later became Senior
Vice President of Default Management for Capsteads primary
servicer. From 1999 to 2003, he was Managing Director of
GMACs Master Servicing operation. From 2003 to 2005,
Mr. Appel was
121
Chief Executive Officer of GMACs United Kingdom mortgage
lending business. From 2005 to 2008, he served as Servicing
Manager of GMACs $100 billion non-prime residential
servicing platform. Mr. Appel holds a B.S., cum
laude, in Business Control Systems from the University of
North Texas and is a Certified Financial Planner and Certified
Public Accountant in the State of Texas and is a former member
of the Freddie Mac Default Advisory Group.
Amar Patel is the Executive Vice President of Portfolio
Investments and has served in this capacity since joining
Nationstar in June 2006. Mr. Patel has over 17 years
of experience in the mortgage industry. From 1993 to 2006,
Mr. Patel held various management roles at Capstead
Mortgage Corporation, last serving as Senior Vice President of
Asset and Liability Management. Mr. Patel holds a B.B.A. in
Finance and Mathematics from Baylor University and an M.B.A.
from Southern Methodist University.
Douglas Krueger is the Executive Vice President of
Capital Markets and has served in this capacity since joining
Nationstar in 2009. Mr. Krueger has over 20 years of
experience in the mortgage industry. For five years,
Mr. Krueger held various senior leadership roles with
CitiMortgage managing the secondary marketing and master
servicing areas. Mr. Krueger also served as Senior Vice
President with Principal Residential Mortgage for thirteen
years. Mr. Krueger holds a B.B.A. from the University of
Iowa and has earned the Chartered Financial Analyst (CFA)
designation.
Anne E. Sutherland is the Executive Vice President and
General Counsel and has served in this capacity since joining
Nationstar in 1997. Ms. Sutherland has over 24 years
of legal experience in the mortgage banking and consumer finance
industry. From 1986 to 1988, Ms. Sutherland served as Staff
Attorney for the Oklahoma Bankers Association. From January 1988
until its dissolution in July 1989, Ms. Sutherland served
as Counsel for Wells Fargo Credit Corporation. From 1989 to
1994, Ms. Sutherland was the Assistant General Counsel for
Ford Consumer Finance Company. From 1994 to 1997,
Ms. Sutherland served as Vice President,
Division Counsel and Secretary of ContiMortgage
Corporation, a subsidiary of ContiFinancial. Ms. Sutherland
holds a B.B.A. in Finance and a J.D. from the University of
Oklahoma.
Steven L. Hess is the Executive Vice President of
Marketing and has served in this capacity since joining
Nationstar in 1997. Mr. Hess has over 30 years
experience in the financial services industry. He assumed his
current role as the Executive Vice President, Marketing for
Nationstar in 2001. From 1980 to 1989, Mr. Hess held
various management roles in marketing, loan servicing and credit
administration. From 1989 to 1997, he served as Senior Vice
President of Corporate Marketing for Ford Consumer Finance
Company, a former subsidiary of Ford Motor Credit that is now
part of Citigroup. He also served in a subsequent assignment as
Senior Vice President and Product Manager of Card Services and
was responsible for managing the P&L and marketing for an
$800 million co-brand Visa portfolio issued in partnership
with Amoco Oil Company and Unocal 76. Mr. Hess holds a B.S.
in Marketing and Advertising from the University of Colorado.
Mark OBrien is the Executive Vice President of
Organizational Development and has served in this capacity since
joining Nationstar in 2002. Mr. OBrien has over
35 years of experience in the financial services industry.
From 1974 to 1983, Mr. OBrien held various management
roles in consumer finance and human resources at GE Capital
Corporation. From 1984 to 1989, he served as Vice President of
Human Resources for PSFS Bank, a subsidiary of Meritor Financial
Group. From 1990 to 1997, Mr. OBrien served as Senior
Vice President of Human Resources for Fleet Mortgage Group,
during which time loan origination volume and the loan servicing
portfolio doubled in size. From 1997 to 2002, he served as
Executive Vice President of Human Resources for North America
Mortgage Company, the mortgage banking subsidiary of Dime
Savings Bank of New York. Mr. OBrien holds a B.B.A.
in Management from Xavier University and is a member of the
Association of Financial Services and recently served as Chair
of the Human Resources Subcommittee of the Mortgage Bankers
Association.
122
Board of
Directors
In connection with the Reorganization, we will adopt a new
certificate of incorporate and new bylaws. Our bylaws will
provide that our board shall consist of not less
than and not more
than directors as the board of
directors may from time to time determine. Our board of
directors is divided into three classes that are, as nearly as
possible, of equal size. Each class of directors is elected for
a three-year term of office, but the terms are staggered so that
the term of only one class of directors expires at each annual
general meeting. The initial terms of the Class I,
Class II and Class III directors will expire in 2012,
2013 and 2014, respectively.
Messrs. ,
and
will each serve as a Class I director,
Messrs.
and
will each serve as a Class II director and
Messrs.
and
will each serve as a Class III director. All officers serve
at the discretion of the board of directors. Under our
Stockholders Agreement, which we and the Initial Stockholder
will execute prior to the completion of this offering, we are
required to take all reasonable actions within our control
(including nominating as directors the individuals designated by
our Initial Stockholder that otherwise meet our reasonable
standards for board nominations), subject to applicable
regulatory and listing requirements (including the director
independence requirements of the NYSE), so that up to a majority
(depending upon the level of ownership of the Fortress
Stockholders) of the members of our board of directors are
individuals designated by our Initial Stockholder. Upon
completion of this offering, and in accordance with our
Stockholders Agreement, our board of directors will
consist
directors,
of whom will be independent, as defined under the
rules of the NYSE. Our board of directors has determined that
Messrs. , ,
and
will be our independent directors.
Our amended and restated certificate of incorporation will not
provide for cumulative voting in the election of directors,
which means that the holders of a majority of the outstanding
shares of common stock can elect all of the directors standing
for election, and the holders of the remaining shares will not
be able to elect any directors, subject to our obligations under
our Stockholders Agreement discussed in the previous paragraph.
Committees of the
Board of Directors
Upon completion of this offering, we will establish the
following committees of our board of directors:
Audit
Committee
The audit committee:
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reviews the audit plans and findings of our independent
registered public accounting firm and our internal audit and
risk review staff, as well as the results of regulatory
examinations, and tracks managements corrective action
plans where necessary;
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reviews our financial statements, including any significant
financial items
and/or
changes in accounting policies, with our senior management and
independent registered public accounting firm;
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reviews our financial risk and control procedures, compliance
programs and significant tax, legal and regulatory
matters; and
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has the sole discretion to appoint annually our independent
registered public accounting firm, evaluate its independence and
performance and set clear hiring policies for employees or
former employees of the independent registered public accounting
firm.
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The members of the committee have not yet been appointed. We
will be required to have one director on our audit committee
beginning on the date of effectiveness of the registration
statement filed with the Commission in connection with this
offering and of which this prospectus is a part. After such
90-day
period and until one year from the date of effectiveness of the
registration statement, we
123
are required to have a majority of independent directors on our
audit committee. Thereafter, our audit committee is required to
be comprised entirely of independent directors. By effectiveness
of the registration statement, we will have appointed at least
one member to this committee who is an independent
director as defined under the rules of the New York Stock
Exchange and
Rule 10A-3
of the Securities Exchange Act of 1934, as amended, or the
Exchange Act. Each director appointed to the audit committee
will be determined to be financially literate by our board, and
one is expected to be our audit committee financial expert.
Nominating,
Corporate Governance and Conflicts Committee
The nominating, corporate governance and conflicts committee:
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reviews the performance of our board of directors and makes
recommendations to the board regarding the selection of
candidates, qualification and competency requirements for
service on the board and the suitability of proposed nominees as
directors;
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advises the board with respect to the corporate governance
principles applicable to us;
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oversees the evaluation of the board and management;
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reviews and approves in advance any related party transaction,
other than those that are pre-approved pursuant to pre-approval
guidelines or rules established by the committee; and
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established guidelines or rules to cover specific categories of
transactions.
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The members of the committee have not yet been appointed. We
expect to have independent
nominating, corporate governance and conflicts committee member,
as defined under the rules of the New York Stock Exchange, upon
the listing of our common stock on the New York Stock Exchange,
a majority of independent directors within 90 days of such
listing and all independent directors within one year of such
listing.
Compensation
Committee
The compensation committee:
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reviews and recommends to the board the salaries, benefits and
equity incentive grants for all employees, consultants,
officers, directors and other individuals we compensate;
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reviews and approves corporate goals and objectives relevant to
Chief Executive Officer compensation, evaluates the Chief
Executive Officers performance in light of those goals and
objectives, and determines the Chief Executive Officers
compensation based on that evaluation; and
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oversees our compensation and employee benefit plans.
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The members of the compensation committee have not yet been
appointed. We expect to have
independent compensation committee member, as defined under the
rules of the New York Stock Exchange, upon the listing of our
common stock on the New York Stock Exchange, a majority of
independent directors within 90 days of such listing and
all independent directors within one year of such listing. Any
independent directors, as defined under the rules of
the New York Stock Exchange, appointed to the compensation
committee will also be non-employee directors as
defined in
Rule 16b-3(b)(3)
under the Exchange Act and outside directors within
the meaning of Section 162(m)(4)(c)(i) of the Code.
124
COMPENSATION
DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis is designed to provide
an understanding of the compensation program for our CEO,
Anthony H. Barone, our CFO, Jay Bray, our Executive Vice
President of Servicing, Robert L. Appel, our Executive Vice
President, Amar Patel, and, our Executive Vice President,
Capital Markets, Douglas Krueger (collectively, our named
executive officers or NEOs), with respect to our
2010 fiscal year. Our executive officers receive no direct
compensation from us. The executives who run our Company are
compensated by Nationstar Mortgage LLC, and, therefore, the
disclosure in this section relates to the compensation
arrangements of Nationstar Mortgage LLC. References to
our compensation policies in this section refer to
the joint policies and practices of us and Nationstar Mortgage
LLC.
Compensation
Philosophy and Objectives
Our primary executive compensation goals are to attract,
motivate and retain the most talented and dedicated executives
and to align annual and long-term incentives while enhancing
unitholder value. To achieve these goals we maintain
compensation plans that:
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Deliver a mix of fixed and at-risk compensation, including
through the grants of restricted units and restricted preferred
units.
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Through dividend equivalents on grants of restricted units and
restricted preferred units, tie a portion of the overall
compensation of executive officers to the dividends we pay to
our unitholders.
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Encourage the achievement of our short- and long-term goals on
both the individual and company levels.
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Process for
Setting Executive Officer Compensation
In 2010, Peter Smith, the designated manager (the
Manager) of our Initial Stockholder and its
unitholders evaluated our performance, including the achievement
of key investment and capital raising goals, and the individual
performance of each named executive officer, with a goal of
setting overall compensation at levels that our Initial
Stockholder and its unitholders believe were appropriate. It is
anticipated that after this offering, the compensation committee
will assist our board of directors in discharging its
responsibilities relating to (i) setting our compensation
program and compensation of our executive officers and
directors, (ii) monitoring our incentive and equity-based
compensation plans, and (iii) preparing the compensation
committee report required to be included in our proxy statement
under the rules and regulations of the SEC.
During 2010, in connection with new grants of restricted units
and restricted preferred units, we amended the employment
agreements with Messrs. Barone, Bray, Appel, and Patel,
further described below. The amendments were minor and were
intended to bring the agreements in line with customary practice
in our industry. We believe that the employment agreements and
these amendments benefit the Company and its unitholders by
providing these individuals with a degree of comfort during the
contract term about their employment so that they may focus on
managing the business.
Participation of Management. Our NEOs are not
directly responsible for determining our CEOs
compensation, although they regularly provide information to our
Initial Stockholder and its unitholders, and it is anticipated
will provide information to the compensation committee, that is
relevant to its evaluation of the NEOs compensation (for
instance, in terms of our performance against established
compensation goals and otherwise). By contrast, the CEO plays a
more active role in determining the compensation of the other
NEOs, who are his subordinates. He regularly advises our Initial
Stockholder and its unitholders, and we anticipate that he will
advise the compensation committee, of his own evaluation of
their job performance and offers for consideration his own
recommendations for their compensation levels.
125
Compensation Consultant. We have not retained a
compensation consultant to review our policies and procedures
with respect to executive compensation, although we may elect in
the future to retain a compensation consultant if we determine
that doing so would assist us in implementing and maintaining
compensation plans.
Risk considerations. In developing and reviewing the
executive incentive programs, we consider the business risks
inherent in program designs to ensure they do not induce
executives to take unacceptable levels of business risk for the
purpose of increasing their incentive plan awards. We believe
that the mix of compensation components used in the
determination of our NEOs compensation reflects the
performance of our Company and the performance of the individual
employee and does not encourage our NEOs to take unreasonable
risks relating to the business. Our NEOs ownership
interest in the Company aligns our NEOs interests with our
long-term performance and discourages excessive risk taking.
Elements of
Compensation
Our executive compensation consists of the elements set forth
below. Determinations regarding any one element of compensation
affect determinations regarding each other element of
compensation; our goal is to set overall compensation at an
appropriate level. We take into account in this regard the
extent to which different compensation elements are at-risk.
Accordingly, for example, the amount of salary paid to a named
executive officer is considered in determining the amount of any
cash bonus or restricted unit or restricted preferred unit
award, but the relationship among the elements is not formulaic
because of the need to balance the likelihood that the at-risk
components of compensation will actually be paid at any
particular level. We further base overall compensation packages
of our executive officers on their experience, current market
conditions, business trends, and overall Company performance. As
a result, the total compensation of our NEOs in 2010 consisted
of the following elements: (1) base salary,
(2) non-equity incentive plan awards, (3) equity
awards, and (4) participation in employee benefit plans.
Base
Salary
We utilize base salary as a building block of our compensation
program. Base salaries for our NEOs are established based upon
the scope of their responsibilities and what is necessary to
recruit and retain skilled executives. We believe that our
executives base salaries are comparable with salaries paid
to executives at companies of a similar size and with a similar
performance to us. Base salaries are reviewed annually in
accordance with the named executive officers annual
performance evaluation and increased from time to time in view
of each named executive officers individual
responsibilities, individual and company performance, and
experience. Base salaries may not be reduced without the
NEOs approval.
Our named executive officers have entered into employment
agreements with the Company that set a minimum salary upon
execution of the agreement; however, Mr. Kruegers
employment agreement expired February 18, 2011 and he is
currently an employee at-will. These base salaries are intended
to complement the at-risk components of the Companys
compensation program by assuring that our NEOs will receive an
appropriate minimum level of compensation.
Annual Bonus
Plans
Annual bonus incentives keyed to short-term objectives form an
important part of our compensation program. The bonus plans are
designed to provide incentives to achieve certain financial
goals of the Company, as well as personal objectives.
The Incentive Plan for Messrs. Barone, Bray, Appel and
Patel. Messrs. Barone, Bray, Appel, and Patel
participate in our Annual Incentive Compensation Plan (the
Incentive Plan). The Incentive Plan provides for
payment of annual cash incentive bonuses from a pool equal to 5%
of the Companys Operating Cash Flow. Operating Cash Flow
is generally equal to Adjusted EBITDA from the Operating
126
segments less Servicing resulting from transfers of financial
assets. In calculating Operating Cash Flow, non-cash components
affecting Adjusted EBITDA both positively and negatively, if
any, are excluded. This measure of Operating Cash Flow is
intended to represent the Companys cash revenues less all
fully allocated cash and accrued expenses. Tying bonus payments
to Operating Cash Flow puts a significant portion of these
executives salary at risk and ties their compensation to
our operational and financial results. We chose the
Companys Operating Cash Flow as an incentive metric
believing that it reflects the efficiency with which our
management team manages the Company on a short- and long-term
basis.
Our Initial Stockholder may not decrease the amount of the bonus
pool. Each fiscal year, the Manager determines each named
executive officers allocable portion of the bonus pool for
that fiscal year, provided, however, that the Manager may not
reduce any executives allocable percentage to less than
75% of the executives percentage for the prior fiscal
year. To receive the actual award, the named executive officer
must be employed by the Company (and not have given notice of
intent to resign) on the last day of the fiscal year to which
the bonus relates.
Annual Incentive Program for
Mr. Krueger. Mr. Krueger participates in our
annual cash incentive program, which includes Company and
individual performance measures. These measures are established
at the beginning of the fiscal year by the Board of Managers of
Nationstar Mortgage LLC. Mr. Kruegers key objectives
for 2010 were Operating Cash Flow (40% weight factor in final
payout), secondary marketing profit/loss (30% weight) and other
deliverables (30% weight). In 2010, Mr. Kruegers
other responsibilities were associated with managing hedging
risks, execution of loan sales, government sponsored enterprise
and investor relations and frequency of repurchase requests. At
year end, the Board of Managers of Nationstar Mortgage LLC rates
the results for each key objective on a scale of one to five.
The rating is multiplied by the weight of each key objective to
result in a weighted score, with five being the highest possible
score. The weighted score is converted into a percentage and
multiplied by Mr. Kruegers bonus opportunity to
result in the annual cash incentive awarded.
Mr. Kruegers maximum bonus opportunity pursuant to
his employment agreement, discussed below, is set at 150% of
annual base salary. In 2010, the Companys and
Mr. Kruegers performance were rated as exceeding
target in all three key objectives resulting in an above target
annual cash incentive. The annual cash incentive is generally
paid in a single installment in the first quarter following
completion of the plan year, the amount of which is determined
by our Board of Managers. Mr. Krueger must be employed by
the Company on December 31 of the award year and not have given
notice of termination by the time that the award is paid to
receive the bonus. As a condition of participation in the annual
incentive plan, Mr. Krueger is subject to a
non-solicitation covenant.
The following are our NEOs target bonus percentages for
2010:
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Allocable
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Target Bonus
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Percentage of the
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As Percent Of
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Name
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Bonus Pool
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Salary
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Anthony H. Barone
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35.6%
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N/A
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Jay Bray
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31.7%
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N/A
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Robert L. Appel
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17.2%
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N/A
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Amar Patel
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15.5%
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N/A
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Douglas Krueger
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N/A
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90.0%
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Long-Term
Incentive Plans
Equity Incentive Plan. Long-term incentives in the
form of grants of units and preferred units in our Initial
Stockholder to our NEOs are intended to promote sustained high
performance. Units are granted pursuant to the limited liability
company agreement of our Initial Stockholder. In 2010,
substantial one-time grants of multi-year vesting units and
preferred units were granted based on a review of our existing
compensation arrangements with our most highly valued executives
and the business environment. Specifically, the grants were
intended to both serve as a long-term incentive
127
device, a retention device and to further align the interests
of Messrs. Barone, Bray, Appel and Patel with the Company
in the future. The amounts of these awards are set forth in the
Grants of Plan Based Awards table on page 134. The units
vest over three years. In determining the amounts of 2010 grants
to each of Messrs. Barone, Bray, Appel, and Patel, to
achieve the desired ownership percentage for each executive,
prior vested awards of Class A units and Class A units
previously purchased by each executive were taken into account.
In addition, Messrs. Barone and Bray forfeited prior
unvested grants of Class A units representing one-third of
their prior granted units (Messrs. Appel and Patel held no
unvested units). The executives are entitled to share in any
dividend distribution with respect to the Class A units
whether or not they have vested.
In 2010, the Company also granted each of Messrs. Barone,
Bray, Appel, and Patel restricted preferred stock units
(RSUs) relating to Series 1 Class C
Preferred units and Series 1 Class D Preferred units.
Each RSU represents the right to receive one Class C unit
or Class D unit, as applicable, upon vesting and settlement
of the RSU. If the Company pays a dividend to Class C or
Class D unitholders (other than with respect to any
pre-2010 preferred yield), then the executive would be entitled
to receive a proportionate payment based on the number of RSUs
he holds, whether or not they have vested.
Following termination of employment, the Company will have
certain repurchase rights. The applicable series, and if the
series elects not to exercise its right, the Fortress Funds,
which own our Initial Stockholder, may repurchase units for
30 days following the executives termination of
employment. The repurchase price per unit is calculated as set
forth in the limited liability company agreement of our Initial
Stockholder and the applicable unit award agreements. The
repurchase price differs based on the units series, as
well as the reason for termination. Class A units granted
to Messrs. Barone, Bray, Appel and Patel, may be
repurchased (a) following a termination for cause at the
lesser of fair market value on the date of (i) termination
or (ii) grant, and (b) following a termination for any
other reason, for fair market value on the date of termination.
Class C and D units may be repurchased for an amount equal
to the sum of (a) the purchase price of the units plus any
additional capital contributions less any distribution paid with
respect to the units and (b) any accrued and preferred
yield less any accrued unpaid pre-2010 preferred yield.
Our equity plan provides for accelerated vesting of a portion of
the unvested awards where the employment of any of our NEOs are
terminated without cause (other than within six
months after a change in control), by the NEO for good
reason or upon death or disability, subject to the named
executive officer executing a general release of claims in favor
of the Company. If the employment of any of our NEOs is
terminated without cause, subject to the named executive officer
executing a general release of claims in favor of the Company,
all unvested units and RSUs will vest. Such a provision benefits
the Company and its unitholders by giving the executives some
protection so they may make decisions about the Company and any
potential transaction free from concerns about the impact to
their unvested equity awards. On any other termination of
employment, all unvested units and RSUs would be forfeited.
Equity Plan Adopted in Connection with our Initial Public
Offering. Prior to the completion of the offering, we
intend to adopt, subject to stockholder approval the 2011 Equity
Incentive Plan (the Plan), which will enable us to
offer certain key employees, consultants and non-employee
directors equity-based awards. The purpose of the Plan is to
enhance our profitability and value for the benefit of
stockholders by enabling us to offer equity-based incentives in
order to attract, retain and reward such individuals, while
strengthening the mutuality of interests between those
individuals and our stockholders. Up
to shares
of our common stock may be issued under the plan with annual
increases
of shares
of common stock per year (subject to adjustment to reflect
certain transactions and events specified in the Plan, as
described below). The maximum aggregate awards that may be
granted during any fiscal year will
be shares.
We intend to file with the SEC a registration statement on
Form S-8
covering the shares issuable under the Plan.
128
The following is a summary of the material terms and provisions
of the Plan and certain tax effects of participation in the
Plan. This summary is qualified in its entirety by reference to
the complete text of the Plan, which is attached hereto as
Exhibit
and incorporated herein. To the extent that there is a conflict
between this summary and the Plan, the terms of the Plan will
govern. Capitalized terms that are used but not defined in this
summary have the meanings given to them in the Plan.
Description of
the Plan
Plan Administration. The Plan will be administered
by the compensation committee (the Committee), which
will have discretion and authority to interpret the Plan,
prescribe, amend and rescind rules and regulations regarding the
Plan, select Participants to receive Awards, determine the form,
terms and conditions of Awards, and take other actions it deems
necessary or advisable for the proper operation or
administration of the Plan.
Stock Options and Stock Appreciation Rights. All
Stock Options granted under the Plan are intended to be
non-qualified share options and are not intended to qualify as
incentive stock options within the meaning of
Section 422 of the Internal Revenue Code. Stock
Appreciation Rights may be awarded either alone or in tandem
with Nonqualified Stock Options. Stock Options and Stock
Appreciation Rights will have maximum terms of ten years. Stock
Options and Stock Appreciation Rights will be subject to the
following terms and conditions:
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The Exercise Price for each Share subject to a Stock Option or
Stock Appreciation Right will be not less than the Fair Market
Value of a Share on the date of grant.
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Restricted Units, Restricted Stock, Deferred Shares and
Performance Shares. Restricted Units, Restricted Stock,
Deferred Shares and Performance Shares are subject to the
following terms and conditions:
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The Committee will determine the purchase price, the vesting
schedule and performance objectives, if any, with respect to the
grant of Restricted Shares, Restricted Units, Deferred Shares
and Performance Shares.
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Other Stock-Based Awards. The Committee may, from
time to time, grant Awards other than those referred to above
that consist of, are denominated in, or are otherwise related to
Shares. These Awards may include, among other things, stock
units or phantom or hypothetical shares. The Committee has broad
discretion to determine any terms and conditions that will apply
to Other Stock-Based Awards under the Plan.
Transfer. Awards may not be transferred by a
Participant other than by will or the laws of descent and
distribution, except that Restricted Stock may be freely
transferred after the restrictions lapse or are satisfied and
the Shares are delivered.
Adjustments. The maximum number of Shares available
for issuance under the Plan, the individual and aggregate limits
described above, the number of Shares underlying outstanding
Awards and the Exercise Price applicable to outstanding Awards
shall be equitably adjusted upon certain events effecting the
capitalization of Nationstar Mortgage Holdings Inc. such as a
recapitalization or stock split. Upon the occurrence of certain
extraordinary corporate transactions, such as a dissolution,
sale, or merger of Nationstar Mortgage Holdings Inc., the
Committee has discretion to cancel each Award in exchange for an
amount in cash or to provide for the exchange of each Award for
an Award with respect to some or all of the property which a
holder of the number of shares of Common Stock subject to such
Award would have received in the transaction.
Change in Control. The Committee has discretion to
provide for acceleration of vesting
and/or
payment of Awards upon a Change in Control, as defined in the
Plan.
Amendment and Termination. The Committee has
authority at any time to amend or terminate the Plan. No
material revision to the Plan may become effective without
stockholder approval. For this
129
purpose, a revision will be deemed to be material based on the
rules adopted by the NYSE from time to time or if it materially
increases the number of Shares that may be issued under the Plan
(other than as a result of an adjustment described above or
automatic increases). NYSE rules currently provide that material
revisions which require stockholder approval include a material
increase in the number of shares available under the Plan, a
material expansion of the types of awards available under the
plan, a material expansion of the class of employees, directors,
or other service providers eligible under the Plan, a material
extension of the term of the Plan, a material change in the
method of determining the strike price of options under the Plan
and an amendment to permit option repricing. The Plan will
terminate, if not sooner as a result of Committee action, on the
10th anniversary of the date the Plan is adopted.
Summary of
Federal Income Tax Consequences of Awards
The following is a brief summary of the principal United States
federal income tax consequences of Awards and transactions under
the Plan. This summary is not intended to be exhaustive and,
among other things, does not describe state, local or foreign
tax consequences.
Nonqualified Stock Options and Stock Appreciation
Rights. A Participant will not recognize any income at
the time a Nonqualified Stock Option or Stock Appreciation Right
is granted, nor will we be entitled to a deduction at that time.
When a Nonqualified Stock Option is exercised, the Participant
will recognize ordinary income in an amount equal to the excess
of the Fair Market Value of the Shares received as of the date
of exercise over the Exercise Price. When a Stock Appreciation
Right is exercised, the Participant will recognize ordinary
income in an amount equal to the cash received or, if the Stock
Appreciation Right is paid in Shares, the Fair Market Value of
the Shares received as of the date of exercise. Payroll taxes
are required to be withheld from the Participant on the amount
of ordinary income recognized by the Participant. We will be
entitled to a tax deduction with respect to a Nonqualified Stock
Option or Stock Appreciation Right in the same amount as the
Participant recognizes income.
Restricted Units, Restricted Stock and Performance
Awards. A Participant will not recognize any income at
the time a Restricted Unit, Share of Restricted Stock or
Performance Award is granted, nor will we be entitled to a
deduction at that time. When a Restricted Unit is redeemed, the
Participant will recognize ordinary income in an amount equal to
the Fair Market Value of the Shares received or, if the
Restricted Unit is paid in cash, the amount payable. In the year
in which Shares of Restricted Stock or the Performance Award are
no longer subject to a substantial risk of forfeiture
(i.e., in the year that the Shares vest), the Participant
will recognize ordinary income in an amount equal to the excess
of the Fair Market Value of the Shares on the date of vesting
over the amount, if any, the Participant paid for the Shares. A
Participant may, however, elect within 30 days after
receiving Restricted Stock to recognize ordinary income in the
year of receipt instead of the year of vesting. If an election
is made, the amount of income recognized by the Participant will
be equal to the excess of the Fair Market Value of the Shares on
the date of receipt over the amount, if any, the Participant
paid for the Shares. Payroll taxes are required to be withheld
from the Participant on the amount of ordinary income recognized
by the Participant. We will be entitled to a tax deduction in
the same amount as the Participant recognizes income.
Deferred Shares. In general, the grant of Deferred
Shares will not result in income for the Participant or in a tax
deduction for us. Upon the settlement of such an award, the
Participant will recognize ordinary income equal to the
aggregate value of the payment received, and we generally will
be entitled to a tax deduction in the same amount.
Cash-Based Awards. A Participant will not recognize
any income at the time of the grant to the Participant of a
Cash-Based Award. The Participant will recognize income at the
time that cash is paid to the Employee pursuant to a Cash-Based
Award, in the amount paid. Payroll taxes will be required to be
withheld at that time. We will be entitled to a tax deduction in
the same amount as the Participant recognizes income.
130
Long-Term
Incentive Plan
Mr. Krueger participates in a long-term incentive plan
which is designed to reward company and individual performance
and serve as a retention device. Awards are determined at the
conclusion of the plan year (calendar) based upon the
Companys overall financial performance and
Mr. Kruegers contribution to those results. Long-term
incentive awards for 2010 are set forth in the Summary
Compensation Table on page 133 and the Grants of Plan-Based
Awards table on page 134. The amount of awards that
Mr. Krueger received in 2009 and 2010 were determined by
his employment agreement. Following our public offering, we
anticipate Mr. Krueger will continue to receive long-term
incentive awards. However, the Compensation has made no
definitive decisions regarding future awards. Awards are
approved by the Board of Managers of Nationstar Mortgage LLC
with an award date of December 31 of the year just concluded.
The award is generally subject to a three year cliff vesting
requirement from the date of the award, which provides an
important retention incentive as the executive must remain
employed by the Company to receive the bonus. The bonus
ordinarily is paid in a single installment in the first quarter
of the third year following grant. Mr. Krueger must be
employed by the Company on the date of payout to receive the
award.
Severance
Benefits
In 2010, we had employment agreements with our NEOs that provide
severance benefits to such officers in the circumstances
described in greater detail below in the section entitled
Employment Agreements. Upon expiration of
Mr. Kruegers employment agreement in early 2011, he
became eligible for severance as per overall Company policy. We
believe that these severance benefits are essential elements of
our executive compensation and assist us in recruiting and
retaining talented executives.
Other
Compensation Components
All of our executive officers are eligible to participate in our
employee benefit plans, including medical, dental, life
insurance and 401(k) plans. These plans are available to all
employees and do not discriminate in favor of our named
executive officers. In addition, we reimburse Mr. Barone
and Mr. Bray the cost of life insurance premiums pursuant
to our Executive Life Program. We do not view perquisites as a
significant element of our comprehensive compensation structure;
however, we believe some perquisites are necessary for the
Company to attract and retain superior management talent for the
benefit of all stockholders. The value of these benefits to the
NEOs is set forth in the Summary Compensation Table under the
column All Other Compensation and detail
about each benefit is set forth in a table following the Summary
Compensation Table.
131
Summary
Compensation Table
The following table summarizes the total compensation earned by
or paid to our NEOs in 2009 and 2010.
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Non-Stock
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Stock
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Incentive Plan
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All Other
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Salary
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Bonus
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Awards
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Compensation
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Compensation
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Total
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Name
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Year
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($)
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($)
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($)(1)
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($)
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($)
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($)
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Anthony H. Barone
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2010
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424,350
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9,584,458
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907,862
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(2)
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16,116
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(3)
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10,932,786
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2009
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424,350
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706,872
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(4)
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16,116
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(3)
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1,147,338
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Jay Bray
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2010
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320,000
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9,918,148
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809,434
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(2)
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11,048
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(5)
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11,058,630
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2009
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289,800
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630,235
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(4)
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11,069
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(6)
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931,104
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Robert L. Appel
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2010
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275,000
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6,467,985
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439,288
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(2)
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5,500
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(7)
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7,187,746
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2009
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274,999
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342,035
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(4)
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5,500
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(7)
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622,534
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Amar Patel
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2010
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255,000
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4,147,863
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395,415
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(2)
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6,231
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(7)
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4,804,509
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2009
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255,000
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307,875
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(4)
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6,231
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(7)
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569,106
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Douglas Krueger
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2010
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250,000
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425,000
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(8)
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3,125
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(7)
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678,125
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2009
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215,064
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50,000
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(9)
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350,000
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(10)
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41,239
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(11)
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706,303
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(1) |
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Represents the aggregate grant date fair value, as computed in
accordance with FASB ASC Topic 718. Assumptions used in the
calculations of these amounts for awards granted in 2009 and
2010 are included in Note 2 to Nationstars audited
financial statements for the fiscal year ended December 31,
2010. Information with respect to vesting of these awards is
disclosed in the Grant of Plan Based Awards table and the
accompanying notes. |
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These amounts were paid in the first quarter of fiscal year
2011, but represent awards with respect to the Companys
and individual performance in fiscal year 2010. |
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(3) |
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Represents payment of a life insurance premium equal to $9,216
and a $6,900 contribution to Mr. Barones 401(k)
account. |
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(4) |
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These amounts were paid in the first quarter of fiscal 2010, but
represent awards with respect to the Companys and
individual performance in fiscal year 2009. |
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(5) |
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Represents payment of a life insurance premium equal to $5,998
and a $5,050 contribution to Mr. Brays 401(k) account. |
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Represents payment of a life insurance premium equal to $5,998
and a $5,071 contribution to Mr. Brays 401(k) account. |
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(7) |
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Represents a contribution to the named executive officers
401(k) account. |
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(8) |
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Of this amount, $300,000 was paid in the first quarter of fiscal
year 2011, although it represents an award with respect to the
Companys and Mr. Kruegers individual
performance in fiscal year 2010, as described in Annual
Incentive Program for Mr. Krueger. The remaining
$125,000 is pursuant to the Long-Term Incentive Plan, described
above, and is subject to three-year time-based cliff vesting;
this amount will become vested on December 31, 2013 as long
as Mr. Krueger remains employed with the Company. |
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(9) |
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Represents a sign-on bonus Mr. Krueger received pursuant to
his employment agreement when he joined the Company. |
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(10) |
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Of this amount, $225,000 was paid in the first quarter of fiscal
year 2010, although it represents an award with respect to the
Companys and Mr. Kruegers individual
performance in fiscal year 2009, as described in Annual
Incentive Program for Mr. Krueger. The remaining
$125,000 is pursuant to the Long-Term Incentive Plan, described
above, and is subject to three-year time-based cliff vesting;
this amount will become vested on December 31, 2012 as long
as Mr. Krueger remains employed with the Company. |
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(11) |
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Represents payment of a relocation expenses equal to $39,469 and
a $1,770 contribution to Mr. Kruegers 401(k) account. |
132
Grants of
Plan-Based Awards
The following table sets forth, for each of the NEOs, the grants
of awards under any plan during the fiscal year ended
December 31, 2010.
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Estimated
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Future
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Payouts
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Under
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Non-Equity
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Incentive Plan
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All Other Stock Awards:
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Grant Date Fair Value of
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Awards
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Number of Units (#)
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Equity Awards ($)
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Name
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Grant Date
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Target ($)
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1A
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2A
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C&D
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1A
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2A
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C&D
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Anthony H. Barone
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9/17/2010
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(1)
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907,862
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136,993
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25,607
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2,494,500
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6,752,295
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22,088
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2,810,075
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Jay Bray
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9/17/2010
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(2)
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809,434
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153,212
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28,637
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2,078,750
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7,551,718
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24,701
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2,341,729
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Robert L. Appel
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9/17/2010
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(3)
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439,288
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102,384
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19,137
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1,247,250
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5,046,440
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16,507
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1,405,038
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Amar Patel
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9/17/2010
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(4)
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395,415
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64,937
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12,137
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831,500
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3,200,702
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10,469
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936,692
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Douglas Krueger
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125,000
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(5)
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(1) |
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This award is subject to vesting. With respect to the
Series 1 Class A, the award vested with respect to 481
Series 1 Class A units on September 17, 2010, and
will vest with respect to 68,256 Series 1 Class A
units on each of June 30, 2011 and 2012. With respect to
the Series 2 Class A, the award vested with respect to
91 Series 2 Class A units on September 17, 2010,
and will vest with respect to 12,758 on each of June 30,
2011 and 2012. With respect to the Series 1 Class C
and D preferred units, the award vests in equal tranches with
respect to 831,500 units on each of September 17,
2010, June 30, 2011 and June 30, 2012. |
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(2) |
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This award is subject to vesting. With respect to the
Series 1 Class A, the award vested with respect to
39,452 Series 1 Class A units on September 17,
2010, and will vest with respect to 56,880 Series 1
Class A units on each of June 30, 2011 and 2012. With
respect to the Series 2 Class A, the award vested with
respect to 7,373 Series 2 Class A units on
September 17, 2010, and will vest with respect to 10,631 on
June 30, 2011 and with respect to 10,633 on June 30,
2012. With respect to the Series 1 Class C and D
preferred units, the award vests in equal tranches with respect
to 692,916 units on September 17, 2010 and
692,917 units on each of June 30, 2011 and
June 30, 2012. |
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(3) |
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This award is subject to vesting. With respect to the
Series 1 Class A, the award vests in equal tranches
with respect to 34,128 units on each of September 17,
2010, June 30, 2011 and June 30, 2012. With respect to
the Series 2 Class A, the award vests in equal
tranches with respect to 6,379 units on each of
September 17, 2010, June 30, 2011 and June 30,
2012. With respect to the Series 1 Class C and D
preferred units, the award vests in equal tranches with respect
to 415,750 units on each of September 17, 2010,
June 30, 2011 and June 30, 2012. |
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(4) |
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This award is subject to vesting. With respect to the
Series 1 Class A, the award vested with respect to
19,433 Series 1 Class A units on September 17,
2010, and will vest with respect to 22,752 Series 1
Class A units on each of June 30, 2011 and 2012. With
respect to the Series 2 Class A, the award vested with
respect to 3,631 Series 2 Class A units on
September 17, 2010, and will vest with respect to 4,252 on
June 30, 2011 and 4,254 on June 30, 2012. With respect
to the Series 1 Class C and D preferred units, the
award vests in equal tranches with respect to 277,166 units
on September 17, 2010 and 277,167 units on each of
June 30, 2011 and June 30, 2012. |
|
(5) |
|
This bonus under the Long-Term Incentive Plan, described above,
is subject to three-year time-based cliff vesting, which will
become vested on December 31, 2013 as long as
Mr. Krueger remains employed with the Company. |
133
Outstanding
Equity Awards at Fiscal Year End
The following table sets forth, for each of the Executive
Officers, the outstanding equity awards as of the end of the
fiscal year ended December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards
|
|
|
Number of Units That Have
|
|
Market Value of Units That Have
|
|
|
Not Vested (#)
|
|
Not Vested ($)
|
Name
|
|
1A
|
|
2A
|
|
C&D
|
|
1A
|
|
2A
|
|
C&D
|
|
Anthony H. Barone(1)
|
|
|
136,512
|
|
|
|
25,516
|
|
|
|
1,663,000
|
|
|
|
6,715,749
|
|
|
|
22,009
|
|
|
|
1,886,089
|
|
Jay Bray(2)
|
|
|
113,760
|
|
|
|
21,264
|
|
|
|
1,385,834
|
|
|
|
5,596,458
|
|
|
|
18,342
|
|
|
|
1,571,741
|
|
Robert L. Appel(3)
|
|
|
68,256
|
|
|
|
12,758
|
|
|
|
831,500
|
|
|
|
3,357,875
|
|
|
|
11,005
|
|
|
|
943,045
|
|
Amar Patel(4)
|
|
|
45,504
|
|
|
|
8,506
|
|
|
|
554,334
|
|
|
|
2,238,583
|
|
|
|
7,337
|
|
|
|
628,696
|
|
Douglas Krueger
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This award is subject to vesting. With respect to the
Series 1 Class A, the award will vest with respect to
68,256 Series 1 Class A units on each of June 30,
2011 and 2012. With respect to the Series 2 Class A,
the award will vest with respect to 12,758 on each of
June 30, 2011 and 2012. With respect to the Series 1
Class C and D preferred units, the award vests in equal
tranches with respect to 831,500 units on each of
June 30, 2011 and 2012. |
|
(2) |
|
This award is subject to vesting. With respect to the
Series 1 Class A, the award will vest with respect to
56,880 Series 1 Class A units on each of June 30,
2011 and 2012. With respect to the Series 2 Class A,
the award will vest with respect to 10,631 on June 30, 2011
and with respect to 10,633 on June 30, 2012. With respect
to the Series 1 Class C and D preferred units, the
award vests in equal tranches with respect to 692,917 units
on each of June 30, 2011 and 2012. |
|
(3) |
|
This award is subject to vesting. With respect to the
Series 1 Class A, the award vests in equal tranches
with respect to 34,128 units on each of June 30, 2011
and 2012. With respect to the Series 2 Class A, the
award vests in equal tranches with respect to 6,379 units
on each of June 30, 2011 and 2012. With respect to the
Series 1 Class C and D preferred units, the award
vests in equal tranches with respect to 415,750 units on
each of June 30, 2011 and 2012. |
|
(4) |
|
This award is subject to vesting. With respect to the
Series 1 Class A, the award will vest with respect to
22,752 Series 1 Class A units on each of June 30,
2011 and 2012. With respect to the Series 2 Class A,
the award will vest with respect to 4,252 on June 30, 2011
and 4,254 on June 30, 2012. With respect to the
Series 1 Class C and D preferred units, the award
vests in equal tranches with respect to 277,167 units on
each of June 30, 2011 and 2012. |
Stock
Vested
The following table sets forth, for each of the NEOs,
information with respect to the exercise of stock options, SARs
and similar instruments and vesting of other equity-based awards
during the fiscal year ended December 31, 2010.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards
|
|
|
Number of Shares
|
|
|
|
|
Acquired on Vesting (#)
|
|
Value Realized on Vesting ($)
|
Name
|
|
1A
|
|
2A
|
|
C&D
|
|
1A
|
|
2A
|
|
C&D
|
|
Anthony H. Barone
|
|
|
19,845
|
|
|
|
3,710
|
|
|
|
831,500
|
|
|
|
1,021,205
|
|
|
|
3,386
|
|
|
|
936,692
|
|
Jay Bray
|
|
|
44,432
|
|
|
|
8,304
|
|
|
|
692,916
|
|
|
|
2,201,098
|
|
|
|
7,210
|
|
|
|
780,576
|
|
Robert L. Appel
|
|
|
34,128
|
|
|
|
6,379
|
|
|
|
415,750
|
|
|
|
1,682,147
|
|
|
|
5,502
|
|
|
|
468,346
|
|
Amar Patel
|
|
|
19,433
|
|
|
|
3,631
|
|
|
|
277,166
|
|
|
|
957,840
|
|
|
|
3,132
|
|
|
|
312,230
|
|
Douglas Krueger
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134
Employment
Agreements
The Company has entered into employment agreements with all of
our named executive officers.
Employment
Agreements of Messrs. Barone and Bray
Mr. Barone and the Company entered into an amended and
restated employment agreement pursuant to which Mr. Barone
agreed to serve as our Chief Executive Officer on
September 17, 2010. Mr. Bray and the Company entered
into an amended and restated employment agreement pursuant to
which Mr. Bray agreed to serve as our Chief Financial
Officer on September 17, 2010. The employment agreements
expire on July 10, 2011. Pursuant to the employment
agreements, upon a termination for any reason or no reason,
Messrs. Barone and Bray are bound by non-competition,
non-solicitation, confidentiality and non-disparagement
covenants. These covenants survive the expiration of
Messrs. Barones and Brays employment agreements.
The employment agreements provide, among other things, for
payments to the executive following certain terminations of
employment. If Mr. Barones employment or
Mr. Brays employment is terminated by the Company
without cause or is terminated by him for good
reason, subject to his execution of a release of claims,
he would be entitled to (1) 18 months of continued
base salary, (2) an amount equal to 150% of the average of
his annual cash bonus for the three most recently completed
fiscal years and (3) continued coverage under the
Companys medical plan until the earlier of (a) the
time he becomes eligible for coverage from a new employer and
(b) 12 months following the date of termination. If
Mr. Barones or Mr. Brays employment
terminates due to his resignation, subject to his execution of a
release of claims, he will be entitled to (1) six months of
continued base salary and (2) 50% of the average of his
annual cash bonus for the three most recently completed fiscal
years. Following July 10, 2011, absent an earlier
termination of their employment agreements, Mr. Barone and
Mr. Bray will continue as employees at-will and will not be
entitled to any severance payments under their respective
employment agreements upon any subsequent termination.
Employment
Agreement of Mr. Appel
Mr. Appel and the Company entered into an amended
employment agreement pursuant to which Mr. Appel agreed to
serve as our Executive Vice President, Servicing on
September 17, 2010. The initial term of the employment
agreement ends on February 3, 2011 and will be
automatically renewed for two additional periods of one year
commencing on each of February 4, 2011 and February 4,
2012 unless either party gives the other notice of intent not to
renew by no later than January 4, 2011 and January 4,
2012, respectively. Failure by the Company to renew
Mr. Appels term of employment on February 4,
2011 and February 4, 2012, would entitle Mr. Appel to
terminate his employment for good reason and receive
the severance payments described below. Pursuant to the
employment agreement, upon a termination for any reason or no
reason, Mr. Appel is bound by non-competition,
non-solicitation, confidentiality and non-disparagement
covenants. These covenants survive the expiration of
Mr. Appels employment agreement.
The employment agreement provides for a one-time cash retention
bonus if Mr. Appel is employed by the Company on
February 4, 2013 (and has not given notice of his intent to
resign). If Mr. Appels employment is terminated by
the Company without cause or is terminated by
Mr. Appel for good reason, subject to his
execution of a release of claims, he would be entitled to
(1) an amount equal to (a) 12 months of base
salary plus (b) a lump sum severance payment, (2) a
prorated portion of the annual cash incentive bonus for the year
of termination, (3) if such termination occurs prior to
February 4, 2013, the retention bonus, and
(4) continued coverage under the Companys medical
plan until the earlier of (a) the time Mr. Appel
becomes eligible for coverage from a new employer and
(b) 12 months following the date of termination.
Following February 3, 2013, absent an earlier termination
of his employment agreement, Mr. Appel will continue as an
employee at-will and
135
will not be entitled to any severance payments under his
employment agreement upon any subsequent termination.
Employment
Agreement of Mr. Patel
Mr. Patel and the Company entered into an amended and
restated employment agreement pursuant to which Mr. Patel
agreed to serve as our Executive Vice President on
September 17, 2010. The employment agreement expires on
June 1, 2011. Pursuant to the employment agreement, upon a
termination for any reason or no reason, Mr. Patel is bound
by non-competition, non-solicitation, confidentiality and
non-disparagement covenants. These covenants survive the
termination of Mr. Patels employment agreement.
If Mr. Patels employment is terminated by the Company
without cause or is terminated by Mr. Patel for
good reason, subject to Mr. Patels
execution of a release of claims, he would be entitled to
(1) six months of continued base salary, (2) an amount
equal to 50% of his annual cash bonus paid to him for the most
recently completed fiscal year and (3) continued coverage
under the Companys medical plan until the earlier of
(a) the time he becomes eligible for coverage from a new
employer and (b) six months following the date of
termination. Following June 1, 2011, absent an earlier
termination of his employment agreement, Mr. Patel will
continue as an employee at-will and will not be entitled to any
severance payments under his employment agreement upon any
subsequent termination.
Employment
Agreement of Mr. Krueger
Mr. Krueger and the Company entered into an employment
agreement pursuant to which Mr. Krueger agreed to serve as
our Executive Vice President, Capital Markets on
February 19, 2009. Pursuant to its terms, the agreement
expired on February 18, 2011. Pursuant to the agreement,
Mr. Krueger was bound by non-competition, non-solicitation,
confidentiality and non-disparagement covenants. These covenants
survive the termination of Mr. Kruegers employment
agreement.
Prior to the expiration of the agreement, if
Mr. Kruegers employment had been terminated by the
Company without cause or had been terminated by
Mr. Krueger for good reason, subject to
Mr. Kruegers execution of a release of claims, he
would have been entitled to (1) accrued benefits,
(2) an amount equal to Mr. Kruegers unpaid base
salary and guaranteed bonus through February 18, 2011 and
(3) continued coverage under the Companys medical
plan until the earlier of (a) the time he becomes eligible
for coverage from a new employer and (b) six months
following the date of termination.
Potential
Payments Upon Termination or Change in Control
The following table sets forth the value of benefits that would
have been payable to the NEOs assuming a termination of
employment or change of control on December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|
|
|
|
|
Termination without
|
|
Change in
|
|
|
|
|
|
|
|
|
Cause Other than
|
|
Control,
|
|
|
|
|
|
|
|
|
After A Change in
|
|
Termination
|
|
|
|
|
|
|
Voluntary
|
|
Control or for Good
|
|
without
|
|
|
Death(1)
|
|
Disability(1)
|
|
Termination
|
|
Reason(1)
|
|
Cause(2)
|
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Anthony H. Barone
|
|
|
4,311,924
|
|
|
|
4,311,924
|
|
|
|
564,630
|
|
|
|
6,015,435
|
|
|
|
10,327,358
|
|
Jay Bray
|
|
|
3,593,269
|
|
|
|
3,593,269
|
|
|
|
483,278
|
|
|
|
5,052,723
|
|
|
|
8,645,995
|
|
Robert L. Appel
|
|
|
2,155,962
|
|
|
|
2,155,962
|
|
|
|
0
|
|
|
|
3,454,870
|
|
|
|
5,610,833
|
|
Amar Patel
|
|
|
1,437,307
|
|
|
|
1,437,307
|
|
|
|
0
|
|
|
|
1,767,324
|
|
|
|
3,204,634
|
|
Douglas Krueger
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
33,656
|
|
|
|
33,656
|
|
136
|
|
|
(1) |
|
Pursuant to the equity grant agreements granting each of
Messrs. Barone, Bray, Appel and Patel Series 1
Class A units, Series 2 Class A units, and RSUs
with respect to Series 1 Class C and D preferred units, in
the event the named executive officers employment
terminates as a result of the named executive officers
death, disability or voluntary resignation for good reason or as
a result of the Company terminating the named executive
officers employment without cause other than in connection
with a change in control, an additional tranche of any
outstanding and unvested equity awards will become vested. |
|
(2) |
|
Pursuant to the equity grant agreements granting each of
Messrs. Barone, Bray, Appel and Patel Series 1
Class A units, Series 2 Class A units, and RSUs
with respect to Series 1 Class C and D preferred units, in
the event the named executive officers employment
terminates as a result the Company terminating the named
executive officers employment without cause within
6 months following a change in control, all of the named
executive officers outstanding and unvested equity awards
will become vested. |
Director
Compensation
Nationstar Mortgage Holdings Inc. has not yet paid any
compensation to our directors. Following completion of this
offering, we will pay an annual fee to each independent director
equal to $ , payable in semi-annual
installments. In addition, an annual fee of
$ will be paid to each member of
the audit committee of the board of directors, and an annual fee
of $ will be paid to each member
of the nominating, corporate governance and conflicts committee
and the compensation committee of the board of directors. Fees
to independent directors may be made by issuance of common
stock, based on the value of such common stock at the date of
issuance, rather than in cash, provided that any such issuance
does not prevent such director from being determined to be
independent and such shares are granted pursuant to a
stockholder approved plan or the issuance is otherwise exempt
from NYSE listing requirements. Affiliated directors, however,
will not be separately compensated by us. All members of the
board of directors will be reimbursed for reasonable costs and
expenses incurred in attending meetings of our board of
directors. Following the completion of this offering, each
independent director will be eligible to receive awards of our
common stock under the Plan described above.
The Nationstar Mortgage LLC Board of Managers is comprised of
managers elected by our unitholders. We currently have two
members on the Board of Managers: Peter Smith and Anthony
Barone. Mr. Barone receives no payments in addition to what
has been described as a result of his service on the Board of
Managers. Mr. Smith is an employee of our sponsor and we
pay him no additional compensation for his service on the
Companys Board of Managers.
137
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Under SEC rules, a related person is an officer, director,
nominee for director or beneficial holder of more than 5% of any
class of our voting securities since the beginning of the last
fiscal year or an immediate family member of any of the
foregoing. Our board of directors is primarily responsible for
developing and implementing processes and controls to obtain
information from our directors, executive officers and
significant stockholders regarding related-person transactions
and then determining, based on the facts and circumstances,
whether we or a related person has a direct or indirect material
interest in these transactions. We currently do not have a
standalone written policy for evaluating related party
transactions. Our officers and directors use an established
process to review, approve and ratify transactions with related
parties. When considering potential transactions involving a
related party that may require board approval, our officers
notify our board of directors of the proposed transaction,
provide a brief background of the transaction and schedule a
meeting with the board of directors to review the matter. At
such meetings, our Chief Executive Officer, Chief Financial
Officer and other members of management, as appropriate, provide
information to the board of directors regarding the proposed
transaction, after which the board of directors and management
discuss the transaction and the implications of engaging a
related party as opposed to an unrelated third party. If the
board of directors (or specified directors as required by
applicable legal requirements) determines that the transaction
is in our best interests, it will vote to approve entering into
the transaction with the applicable related party. Other than
compensation agreements and other arrangements which are
described under Compensation Discussion and Analysis
and the transactions described below, since January 1,
2009, there has not been, and there is not currently proposed,
any transaction or series of similar transactions to which we
were or will be a party in which the amount involved exceeded or
will exceed $120,000 and in which any related person had or will
have a direct or indirect material interest.
We currently serve as the loan servicer for two securitized loan
portfolios managed by Newcastle Investment Corp., which is
managed by an affiliate of Fortress, for which we receive a
monthly net servicing fee equal to 0.5% per annum on the unpaid
principal balance of the portfolios. For the years ended
December 31, 2009, December 31, 2010, and for the
three months ended March 31, 2011, we received servicing
fees of $7.4 million, $6.3 million and
$1.5 million, respectively. The outstanding unpaid
principal balance as of December 31, 2010 and
March 31, 2011, was $1.2 billion and
$1.2 billion, respectively.
We currently serve as the loan
sub-servicer
for three loan portfolios managed by FCDB FF1 LLC, FCDB 8020 REO
LLC, FCDB FF1
2008-1
Trust, FCDB UB 8020 Residential LLC and FCDB GMPL
2008-1
Trust, which is managed by an affiliate of Fortress, for which
we receive a monthly per loan
sub-servicing
fee and other performance incentive fees subject to our
agreement with them. For the years ended December 31, 2009,
December 31, 2010, and for the three months ended
March 31, 2011, we received $1.0 million,
$0.6 million and $0.4 million of
sub-servicing
fees, respectively. The outstanding unpaid principal balance as
of December 31, 2010 and March 31, 2011, was
$121.1 million and $109.7 million, respectively.
In September 2010, we entered into a marketing agreement with
American General Home Equity, Inc. (Amgen), American
General Financial Services of Arkansas, Inc. (Amgen
Arkansas) and MorEquity, Inc. (MorEquity and
together with Amgen and Amgen Arkansas, the Amgen
Entities), each of which are indirectly owned by
investment funds managed by affiliates of Fortress Investment
Group LLC. Pursuant to this agreement, we market our mortgage
origination products to customers of the Amgen Entities, and are
compensated by the origination fees of loans that we refinance.
For the year ended December 31, 2010, and for the three
months ended March 31, 2011 we recognized revenue of
$0.4 million and $0.5 million, respectively. The
marketing agreement has an initial term of six months.
Additionally, in January, 2011, we entered into three agreements
to act as the loan
sub-servicer
for the Amgen Entities for a whole loan portfolio and two
securitized loan portfolios totaling $4.4 billion for which
we receive a monthly per loan
sub-servicing
fee and other performance incentive fees subject to our
agreement with the Amgen Entities. For the three months ended
138
March 31, 2011, we recognized revenue of $2.2 million
in additional servicing and other performance incentive fees
related to these portfolios.
Stockholders
Agreement
General
Prior to the completion of this offering, we will enter into a
stockholders agreement, or the Stockholders Agreement, with FIF
HE Holdings LLC, which we refer to as the Initial
Stockholder.
As discussed further below, the Stockholders Agreement that we
will enter into prior to completion of this offering provides
certain rights to the Initial Stockholder with respect to the
designation of directors for nomination and election to our
board of directors, as well as registration rights for certain
of our securities owned by the Initial Stockholder, certain
other affiliates of Fortress and permitted transferees
(Fortress Stockholders).
Our Stockholders Agreement will provide that the parties thereto
will use their respective reasonable efforts (including voting
or causing to be voted all of our voting shares beneficially
owned by each) so that no amendment is made to our amended and
restated certificate of incorporation or bylaws in effect as of
the date of the Stockholders Agreement that would add
restrictions to the transferability of our shares by the Initial
Stockholder or its permitted transferees which are beyond those
provided for in our amended and restated certificate of
incorporation, bylaws, the Stockholders Agreement or applicable
securities laws, or that nullify the rights set out in the
Stockholders Agreement of the Initial Stockholder or its
permitted transferees unless such amendment is approved by such
the Initial Stockholder.
Designation
and Election of Directors
Our Stockholders Agreement will provide that, for so long as the
Stockholders Agreement is in effect, we and the Fortress
Stockholders shall take all reasonable actions within our
respective control (including voting or causing to be voted all
of the securities entitled to vote generally in the election of
our directors of the Company held of record or beneficially
owned by the Fortress Stockholders, and, with respect to the
Company, including in the slate of nominees recommended by the
board those individuals designated by FIF HE Holdings
LLC) so as to elect to the board, and to cause to continue
in office, not more
than directors (or such other
number as FIF HE Holdings LLC may agree in writing), of whom, at
any given time:
|
|
|
|
|
at least a majority of such directors shall be individuals
designated by FIF HE Holdings LLC, for so long as the Fortress
Stockholders beneficially own at least 40% of the voting power
of the Company;
|
|
|
|
at least directors
( if the board consists of more
than directors) shall be
individuals designated by FIF HE Holdings LLC, for so long as
the Fortress Stockholders beneficially own less than 40% but at
least 20% of the voting power of the Company;
|
|
|
|
at least directors shall be
individuals designated by FIF HE Holdings LLC, for so long as
the Fortress Stockholders beneficially own less than 20% but at
least 10% of the voting power of the Company; and
|
|
|
|
at least director shall be an
individual designated by FIF HE Holdings LLC, for so long as the
Fortress Stockholders has beneficially own less than 10% but at
least 5% of the voting power of the Company.
|
In accordance with the Stockholders Agreement, FIF HE Holdings
LLC will
designate , ,
and
for election to our board of directors prior to the completion
of this offering.
139
Registration
Rights
Demand Rights. Under our Stockholders Agreement, the
Fortress Stockholders will have, for so long as the Fortress
Stockholders beneficially own an amount of our common stock
(whether owned at the time of this offering or subsequently
acquired) equal to or greater than 1% of our shares of common
stock issued and outstanding immediately after the consummation
of this offering (a Registrable Amount),
demand registration rights that allow the Fortress
Stockholders, at any time
after days following the
consummation of this offering, to request that we register under
the Securities Act an amount equal to or greater than a
Registrable Amount. The Fortress Stockholders will be entitled
to unlimited demand registrations so long as such persons,
together, beneficially own a Registrable Amount. We are also not
required to effect any demand registration within three months
of a firm commitment underwritten offering to which
the requestor held piggyback rights, described
below, and which included at least 50% of the shares of common
stock requested by the requestor to be included. We are not
obligated to grant a request for a demand registration within
three months of any other demand registration.
Piggyback Rights. For so long as the Fortress
Stockholders beneficially own an amount of our common stock
equal to or greater than 1% of our common stock issued and
outstanding immediately after the consummation of this offering,
such Fortress Stockholders will also have piggyback
registration rights that allow them to include the common stock
that they own in any public offering of equity securities
initiated by us (other than those public offerings pursuant to
registration statements on
Forms S-4
or S-8) or
by any of our other stockholders that have registration rights.
The piggyback registration rights of the Fortress
Stockholders are subject to proportional cutbacks based on the
manner of the offering and the identity of the party initiating
such offering.
Shelf Registration. Under our Stockholders
Agreement, we will grant to the Initial Stockholder or any of
its respective permitted transferees, for so long as it
beneficially owns a Registrable Amount, the right to request a
shelf registration on
Form S-3
providing for offerings of our common stock to be made on a
continuous basis until all shares covered by such registration
have been sold, subject to our right to suspend the use of the
shelf registration prospectuses for a reasonable period of time
(not exceeding 60 days in succession or 90 days in the
aggregate in any 12 month period) if we determine that
certain disclosures required by the shelf registration
statements would be detrimental to us or our stockholders. In
addition, the Initial Stockholder may elect to participate in
such shelf registrations within ten days after notice of the
registration is given.
Indemnification; Expenses; Lock-ups. Under our
Stockholders Agreement, we will agree to indemnify the
applicable selling stockholder and its officers, directors,
employees, managers, members partners, agents and controlling
persons against any losses or damages resulting from any untrue
statement or omission of material fact in any registration
statement or prospectus pursuant to which it sells shares of our
common stock, unless such liability arose from the applicable
selling stockholders misstatement or omission, and the
applicable selling stockholder has agreed to indemnify us
against all losses caused by its misstatements or omissions. We
will pay all registration expenses incidental to our performance
under the Stockholders Agreement, and the applicable selling
stockholder will pay its portion of all underwriting discounts,
commissions and transfer taxes, if any, relating to the sale of
its shares of common stock under the Stockholders Agreement. We
have agreed to enter into, and to cause our officers and
directors to enter into, lock-up agreements in connection with
any exercise of registration rights by the Fortress Stockholders.
140
PRINCIPAL AND
SELLING STOCKHOLDERS
Prior to this offering, all of the shares of outstanding common
stock of Nationstar Mortgage Holdings Inc. were owned by the
Initial Stockholder, FIF HE Holdings LLC.
The following table sets forth information regarding the
ownership of our common stock. Other than the Initial
Stockholder and its direct and indirect equity holders, we are
not aware of any person, or group of affiliated persons, who
beneficially owns more than five percent of our outstanding
common stock. The percentage of beneficial ownership is based
on shares
of common stock outstanding after giving effect to the
Restructuring,
and shares
of common stock to be outstanding after the completion of this
offering, assuming no exercise of the option to purchase
additional shares,
or shares.
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Number of Shares
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Number of Shares
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Beneficially Owned
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Number
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Beneficially Owned
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Prior to the Offering
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of Shares
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After the Offering
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Number
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Percentage
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Being
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Number
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Percentage
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Name
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of Shares
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of Shares
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Offered
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of Shares
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of Shares
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Initial Stockholder(1)
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100
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%
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(1) |
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FIF HE Holdings LLC. The address of the Initial Stockholder is
c/o Fortress
Investment Group LLC, 1345 Avenue of the Americas, 46th Floor,
New York, New York 10105. The text below contains information
with respect to the beneficial ownership the Initial Stockholder. |
The following table sets forth information as of
December 31, 2010 regarding the beneficial ownership of the
Initial Stockholders issued and outstanding
Series 1 units by:
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each person or group who is known by us to own beneficially more
than 5% of the Initial Stockholders issued and outstanding
Series 1 Class A units;
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each of our directors;
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each of our named executive officers; and
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all of our directors and executive officers as a group.
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Beneficial ownership for the purposes of the following table is
determined in accordance with the rules and regulations of the
SEC. These rules generally provide that a person is the
beneficial owner of securities if such person has or shares the
power to vote or direct the voting of securities, or to dispose
or direct the disposition of securities or has the right to
acquire such powers within 60 days. The information does
not necessarily indicate beneficial ownership for any other
purpose. Except as disclosed in the footnotes to this table and
subject to applicable community property laws, we believe that
each beneficial owner identified in the table possesses sole
voting and investment power over all Series 1 units
shown as beneficially owned by the beneficial owner. For
purposes of the calculations in the table below, the number of
Series 1 units deemed outstanding includes
Series 1 units issuable upon exercise of options held
by the respective person which may be exercised within
60 days after January 31, 2011. For purposes of
calculating each persons percentage ownership,
Series 1 units issuable pursuant to options
exercisable within 60 days after December 31, 2010 are
included as outstanding and beneficially owned for that person
or group, but are not deemed outstanding for the purposes of
computing the percentage ownership of any other person. Unless
otherwise indicated in the table or footnotes below, the address
for each beneficial owner is
c/o Nationstar
Mortgage LLC, 350 Highland Drive, Lewisville, Texas 75067.
The Initial Stockholder has four types of issued and outstanding
Series 1 units. Series 1 Class A units have
voting rights. Series 1 Class B preferred units,
Series 1 Class C preferred units and Series 1
Class D units do not have voting rights. The percentage of
beneficial ownership of our Series 1 units is based on
13,076,679 Series 1 Class A units, 1,000 Series 1
Class B preferred units, 82,214,532 Series 1
Class C preferred units and 83,309,399 Series 1
Class D preferred units issued and outstanding as of
January 31, 2011. The percentage of beneficial ownership of
our Series 1 Class A units is based on
141
13,076,679 Series 1 Class A units issued and
outstanding as of December 31, 2010. The table assumes that
the underwriters will not exercise their over-allotment option.
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Number of Shares Beneficially
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Owned
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Number of
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Percentage of
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Name of Beneficial Owner
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Series 1
Units(2)
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Series 1
Units(2)
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Executive Officers and Directors
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Peter Smith
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0
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*
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Anthony H. Barone
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601,784
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*
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Jay Bray
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491,722
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*
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Robert Appel
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292,420
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*
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Amar Patel
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196,107
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*
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Douglas Krueger
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0
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*
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All executive officers, managers and directors as a group
(6 persons)
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1,582,033
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0.9%
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5% Interest holders
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Fortress Fund III
Funds(1)
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6,434,408
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49.2%
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Fortress Fund IV
Funds(1)
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6,434,411
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49.2%
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(1) |
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Fortress Fund III Funds represent Fortress Investment
Fund III LP, Fortress Investment Fund III
(Fund B) LP, Fortress Investment Fund III
(Fund C) LP, Fortress Investment Fund III (Fund
D) L.P., Fortress Investment Fund III
(Fund E) L.P., FIF III B HE BLKR LLC, and FIF III C HE
BLKR LLC. Fortress Fund IV Funds represent Fortress
Investment Fund IV (Fund A) L.P., Fortress
Investment Fund IV (Fund B) L.P., Fortress
Investment Fund IV (Fund C) L.P., Fortress
Investment Fund IV (Fund D) L.P., Fortress
Investment Fund IV (Fund E) L.P., Fortress
Investment Fund IV (Fund F) L.P. and Fortress
Investment Fund IV (Fund G) L.P., FIF IV B HE
BLKR LLC and FIF IV CFG HE BLKR LLC. Fortress Fund III GP
LLC is the general partner of each of the Fortress Fund III
Funds (excluding FIF III B HE BLKR LLC and FIF III C HE BLKR
LLC, which are wholly owned by Fortress Investment Fund III
(Fund B) L.P. and Fortress Investment Fund III
(Fund C) L.P., respectively). The sole managing member
of Fortress Fund III GP LLC is Fortress Investment
Fund GP (Holdings) LLC. The sole managing member of
Fortress Investment Fund III GP (Holdings) LLC is Fortress
Operating Entity I LP (FOE I). FIG Corp. is the
general partner of FOE I, and FIG Corp. is wholly owned by
Fortress Investment Group LLC. Fortress Fund IV GP L.P. is
the general partner of each of the Fortress Fund IV Funds
(excluding FIF IV HE BLKR LLC and FIF IV CFG HE BLKR LLC, which
are wholly owned by Fortress Investment Fund IV
(Fund B) L.P., and Fortress Investment Fund IV
(Fund C) L.P., Fortress Investment Fund IV
(Fund F) L.P. and Fortress Investment Fund IV
(Fund G) L.P., respectively). Fortress Fund IV GP
Holdings Ltd. is the general partner of Fortress Fund IV GP
L.P. Fortress Fund IV GP Holdings Ltd. is wholly owned by
FOE I. FIG Corp. is the general partner of FOE I. FIG Corp. is
wholly owned by Fortress Investment Group LLC. By virtue of his
ownership interest in Fortress Investment Group LLC and certain
of its affiliates, as well as his role in advising certain
investment funds, Wesley R. Edens may be deemed to be the
natural person that has sole or shared voting and investment
control over the shares listed as beneficially owned by
Holdings. Mr. Edens disclaims beneficial ownership of such
shares. The address of all persons listed above is
c/o Fortress
Investment Group LLC, 1345 Avenue of the Americas, 46th Floor,
New York, New York 10105. |
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(2) |
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The Initial Stockholder issues its equity interests in two
series, each of which relate to certain specified assets of the
LLC: Series 1 units, which relate to all the issued
and outstanding membership interests in Nationstar Mortgage LLC;
and Series 2 units, which relate to equity interests
in a separate entity, which is not a subsidiary of Nationstar
Mortgage LLC. Certain executive compensation arrangements
include equity grants of the Series 2 units of our
Initial Stockholder. See Compensation Discussion and
Analysis. |
142
DESCRIPTION OF
CAPITAL STOCK
The following descriptions are summaries of the material
terms of our amended and restated certificate of incorporation
and bylaws as will be in effect upon the consummation of this
offering. These descriptions contain all information which we
consider to be material, but may not contain all of the
information that is important to you. To understand them fully,
you should read our amended and restated certificate of
incorporation and bylaws, copies of which are filed with the SEC
as exhibits to the registration statement of which this
prospectus is a part.
Please note that, with respect to any of our shares held in
book-entry form through The Depository Trust Company or any
other share depository, the depository or its nominee will be
the sole registered and legal owner of those shares, and
references in this prospectus to any stockholder or
holder of those shares means only the depository or
its nominee. Persons who hold beneficial interests in our shares
through a depository will not be registered or legal owners of
those shares and will not be recognized as such for any purpose.
For example, only the depository or its nominee will be entitled
to vote the shares held through it, and any dividends or other
distributions to be paid, and any notices to be given, in
respect of those shares will be paid or given only to the
depository or its nominee. Owners of beneficial interests in
those shares will have to look solely to the depository with
respect to any benefits of share ownership, and any rights they
may have with respect to those shares will be governed by the
rules of the depository, which are subject to change from time
to time. We have no responsibility for those rules or their
application to any interests held through the depository.
Under our amended and restated certificate of incorporation, our
authorized capital stock will consist of:
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shares
of common stock, par value $0.01 per share; and
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preferred
shares, par value $0.01 per share.
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Upon completion of this offering, there will be
outstanding shares
of common stock (assuming no exercise of the underwriters
over-allotment option and an initial public offering price of
$ , the midpoint of the price range
set forth on the cover of this prospectus) and no outstanding
shares of preferred stock.
The following is a description of the material terms of our
amended and restated certificate of incorporation and bylaws. We
refer you to our amended and restated certificate of
incorporation and bylaws, copies of which have been filed with
the SEC as exhibits to our registration statement of which this
prospectus forms a part.
Common
Stock
Each holder of common stock is entitled to one vote for each
share of common stock held on all matters submitted to a vote of
stockholders. Except as provided with respect to any other class
or series of stock, the holders of our common stock will possess
the exclusive right to vote for the election of directors and
for all other purposes. Our amended and restated certificate of
incorporation does not provide for cumulative voting in the
election of directors, which means that the holders of a
majority of the outstanding shares of common stock can elect all
of the directors standing for election, and the holders of the
remaining shares will not be able to elect any directors;
provided, however, that pursuant to the Stockholders Agreement
that we will enter into with the Initial Stockholder prior to
the completion of this offering, we will be required to take all
reasonable actions within our control (including nominating as
directors the individuals designated by FIF HE Holdings
LLC) so that up to a majority (or other number, depending
upon the level of ownership of the Initial Stockholder) of the
members of our board of directors are individuals designated by
FIF HE Holdings LLC.
Subject to any preference rights of holders of any preferred
stock that we may issue in the future, holders of our common
stock are entitled to receive dividends, if any, declared from
time to time by our board of directors out of legally available
funds. In the event of our liquidation, dissolution
143
or winding up, the holders of our common stock are entitled to
share ratably in all assets remaining after the payment of
liabilities, subject to any rights of holders of our preferred
stock to prior distribution.
Holders of our common stock have no preemptive, subscription,
redemption or conversion rights. Any shares of common stock sold
under this prospectus will be validly issued, fully paid and
nonassessable upon issuance against full payment of the purchase
price for such shares.
Preferred
Stock
Our board of directors has the authority, without action by our
stockholders, to issue preferred stock and to fix voting powers
for each class or series of preferred stock, and to provide that
any class or series may be subject to redemption, entitled to
receive dividends, entitled to rights upon dissolution, or
convertible or exchangeable for shares of any other class or
classes of capital stock. The rights with respect to a series or
class of preferred stock may be greater than the rights attached
to our common stock. It is not possible to state the actual
effect of the issuance of any shares of our preferred stock on
the rights of holders of our common stock until our board of
directors determines the specific rights attached to that
preferred stock. The effect of issuing preferred stock could
include, among other things, one or more of the following:
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restricting dividends in respect of our common stock;
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diluting the voting power of our common stock or providing that
holders of preferred stock have the right to vote on matters as
a class;
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impairing the liquidation rights of our common stock; or
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delaying or preventing a change of control of us.
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Stockholders
Agreement
For a description of the Stockholders Agreement that we will
enter into with the Initial Stockholder prior to the completion
of this offering, see Certain Relationships and Related
Party TransactionsStockholders Agreement.
Anti-Takeover
Effects of Delaware Law, Our Amended and Restated Certificate of
Incorporation and Bylaws
The following is a summary of certain provisions of our amended
and restated certificate of incorporation and bylaws that may be
deemed to have an anti-takeover effect and may delay, deter or
prevent a tender offer or takeover attempt that a stockholder
might consider to be in its best interest, including those
attempts that might result in a premium over the market price
for the shares held by stockholders.
Authorized but
Unissued Shares
The authorized but unissued shares of our common stock and our
preferred stock will be available for future issuance without
obtaining stockholder approval. These additional shares may be
utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate
acquisitions and employee benefit plans. The existence of
authorized but unissued shares of our common stock and preferred
stock could render more difficult or discourage an attempt to
obtain control over us by means of a proxy contest, tender
offer, merger or otherwise.
Delaware
Business Combination Statute
We are organized under Delaware law. Some provisions of Delaware
law may delay or prevent a transaction that would cause a change
in our control.
144
Our amended and restated certificate of incorporation provides
that Section 203 of the Delaware General Corporation Law,
as amended, an anti-takeover law, will not apply to us. In
general, this statute prohibits a publicly held Delaware
corporation from engaging in a business combination with an
interested stockholder for a period of three years after the
date of the transaction by which that person became an
interested stockholder, unless the business combination is
approved in a prescribed manner. For purposes of
Section 203, a business combination includes a merger,
asset sale or other transaction resulting in a financial benefit
to the interested stockholder, and an interested stockholder is
a person who, together with affiliates and associates, owns, or
within three years prior, did own, 15% or more of voting stock.
Other
Provisions of Our Amended and Restated Certificate of
Incorporation and Bylaws
Our amended and restated certificate of incorporation provides
for a staggered board of directors consisting of three classes
of directors. Directors of each class are chosen for three-year
terms upon the expiration of their current terms and each year
one class of our directors will be elected by our stockholders.
The terms of the first, second and third classes will expire in
2012, 2013 and 2014, respectively. We believe that
classification of our board of directors will help to assure the
continuity and stability of our business strategies and policies
as determined by our board of directors. Additionally, there is
no cumulative voting in the election of directors. This
classified board provision could have the effect of making the
replacement of incumbent directors more time consuming and
difficult. At least two annual meetings of stockholders, instead
of one, will generally be required to effect a change in a
majority of our board of directors. Thus, the classified board
provision could increase the likelihood that incumbent directors
will retain their positions. The staggered terms of directors
may delay, defer or prevent a tender offer or an attempt to
change control of us, even though a tender offer or change in
control might be believed by our stockholders to be in their
best interest. In addition, our amended and restated certificate
of incorporation and our bylaws provide that directors may be
removed only for cause and only with the affirmative vote of at
least 80% of the voting interest of stockholders entitled to
vote; provided, however, that for so long as the Fortress
Stockholders beneficially own at least 40% of our issued and
outstanding common stock, directors may be removed with or
without cause with the affirmative vote of a majority of the
voting interest of stockholders entitled to vote.
Pursuant to our amended and restated certificate of
incorporation, shares of our preferred stock may be issued from
time to time, and the board of directors is authorized to
determine and alter all rights, preferences, privileges,
qualifications, limitations and restrictions without limitation.
See Preferred Stock.
Ability of our
Stockholders to Act
Our amended and restated certificate of incorporation and bylaws
do not permit our stockholders to call special stockholders
meetings; provided, however, that for so long as the Fortress
Stockholders beneficially own at least 25% of our issued and
outstanding common stock, any stockholders that collectively
beneficially own at least 25% of our issued and outstanding
common stock may call special meetings of our stockholders.
Written notice of any special meeting so called shall be given
to each stockholder of record entitled to vote at such meeting
not less than 10 or more than 60 days before the date of
such meeting, unless otherwise required by law.
Under our amended and restated certificate of incorporation and
bylaws, any action required or permitted to be taken at a
meeting of our stockholders may be taken without a meeting by
written consent of a majority of our stockholders for so long as
the Fortress Stockholders beneficially own at least 25% of our
issued and outstanding common stock. After the Fortress
Stockholders beneficially own less than 25% of our issued and
outstanding stock, only action by unanimous written consent of
our stockholders can be taken without a meeting.
145
Our bylaws provide that nominations of persons for election to
our board of directors may be made at any annual meeting of our
stockholders, or at any special meeting of our stockholders
called for the purpose of electing directors, (a) by or at
the direction of our board of directors or (b) by any of
our stockholders. In addition to any other applicable
requirements, for a nomination to be properly brought by a
stockholder, such stockholder must have given timely notice
thereof in proper written form to our Secretary of the Company.
To be timely, a stockholders notice must be delivered to
or mailed and received at our principal executive offices
(a) in the case of an annual meeting of stockholders, not
less than 90 days nor more than 120 days prior to the
anniversary date of the immediately preceding annual meeting of
stockholders; provided, however, that in the event that the
annual meeting is called for a date that is not within
25 days before or after such anniversary date, notice by a
stockholder in order to be timely must be so received not later
than the close of business on the tenth day following the day on
which such notice of the date of the annual meeting was mailed
or such public disclosure of the date of the annual meeting was
made, whichever first occurs; and (b) in the case of a
special meeting of our stockholders called for the purpose of
electing directors, not later than the close of business on the
tenth day following the day on which notice of the date of the
special meeting was mailed or public disclosure of the date of
the special meeting was made, whichever first occurs.
Our bylaws provide that no business may be transacted at any
annual meeting of our stockholders, other than business that is
either (a) specified in the notice of meeting given by or
at the direction of our board of directors, (b) otherwise
properly brought before the annual meeting by or at the
direction of our board of directors, or (c) otherwise
properly brought by any of our stockholders. In addition to any
other applicable requirements, for business to be properly
brought before an annual meeting by a stockholder, such
stockholder must have given timely notice thereof in proper
written form to our Secretary of the Company. To be timely, a
stockholders notice must be delivered to or mailed and
received at our principal executive offices not less than
90 days nor more than 120 days prior to the
anniversary date of the immediately preceding annual meeting of
stockholders; provided, however, that in the event that the
annual meeting is called for a date that is not within
25 days before or after such anniversary date, notice by a
stockholder in order to be timely must be so received not later
than the close of business on the tenth day following the day on
which such notice of the date of the annual meeting was mailed
or such public disclosure of the date of the annual meeting was
made, whichever first occurs.
Limitations on
Liability and Indemnification of Directors and
Officers
Our amended and restated certificate of incorporation and bylaws
provide that our directors will not be personally liable to us
or our stockholders for monetary damages for breach of a
fiduciary duty as a director, except for the following (to the
extent such exemption is not permitted under the Delaware
General Corporation Law, as amended from time to time):
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any breach of the directors duty of loyalty to us or our
stockholders;
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intentional misconduct or a knowing violation of law;
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liability under Delaware corporate law for an unlawful payment
of dividends or an unlawful stock purchase or redemption of
stock; or
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any transaction from which the director derives an improper
personal benefit.
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Our amended and restated certificate of incorporation provides
that we must indemnify our directors and officers to the fullest
extent permitted by law. We are also expressly authorized to
advance certain expenses (including attorneys fees and
disbursements and court costs) to our directors and officers and
carry directors and officers insurance providing
indemnification for our directors and officers for some
liabilities. We believe that these indemnification provisions
and insurance are useful to attract and retain qualified
directors and executive officers.
146
Prior to the completion of this offering, we intend to enter
into separate indemnification agreements with each of our
directors and executive officers. Each indemnification agreement
will provide, among other things, for indemnification to the
fullest extent permitted by law and our amended and restated
certificate of incorporation against (i) any and all
expenses and liabilities, including judgments, fines, penalties
and amounts paid in settlement of any claim with our approval
and counsel fees and disbursements, (ii) any liability
pursuant to a loan guarantee, or otherwise, for any of our
indebtedness, and (iii) any liabilities incurred as a
result of acting on our behalf (as a fiduciary or otherwise) in
connection with an employee benefit plan. The indemnification
agreements will provide for the advancement or payment of all
expenses to the indemnitee and for reimbursement to us if it is
found that such indemnitee is not entitled to such
indemnification under applicable law and our amended and
restated certificate of incorporation. These provisions and
agreements may have the practical effect in some cases of
eliminating our stockholders ability to collect monetary
damages from our directors and executive officers.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or
persons controlling the registrant pursuant to the foregoing
provisions, we have been informed that, in the opinion of the
SEC such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
Corporate
Opportunity
Under our amended and restated certificate of incorporation, to
the extent permitted by law:
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the Fortress Stockholders have the right to, and have no duty to
abstain from, exercising such right to, engage or invest in the
same or similar business as us, do business with any of our
clients, customers or vendors or employ or otherwise engage any
of our officers, directors or employees;
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if the Fortress Stockholders or any of their officers, directors
or employees acquire knowledge of a potential transaction that
could be a corporate opportunity, they have no duty to offer
such corporate opportunity to us, our stockholders or affiliates;
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we have renounced any interest or expectancy in, or in being
offered an opportunity to participate in, such corporate
opportunities; and
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in the event that any of our directors and officers who is also
a director, officer or employee of any of the Fortress
Stockholders acquires knowledge of a corporate opportunity or is
offered a corporate opportunity, provided that this knowledge
was not acquired solely in such persons capacity as our
director or officer and such person acted in good faith, then
such person is deemed to have fully satisfied such persons
fiduciary duty and is not liable to us if any of the Fortress
Stockholders pursues or acquires such corporate opportunity or
if such person did not present the corporate opportunity to us.
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Transfer
Agent
The registrar and transfer agent for our common stock is .
Listing
Our common stock has been authorized for listing on the NYSE
under the symbol
,
subject to official notice of issuance.
147
SHARES ELIGIBLE
FOR FUTURE SALE
Prior to this offering, there has been no public market for our
common stock, and we cannot predict the effect, if any, that
sales of shares or availability of any shares for sale will have
on the market price of our common stock prevailing from time to
time. Sales of substantial amounts of common stock (including
shares issued on the exercise of options, warrants or
convertible securities, if any) or the perception that such
sales could occur, could adversely affect the market price of
our common stock and our ability to raise additional capital
through a future sale of securities.
Upon completion of this offering, we will
have shares
of common stock issued and outstanding (or a maximum
of shares
if the underwriters exercise their over-allotment option in
full). All of
the shares
of our common stock sold in this offering
(or shares
if the underwriters exercise their over-allotment option in
full) will be freely tradable without restriction or further
registration under the Securities Act unless such shares are
purchased by affiliates as that term is defined in
Rule 144 under the Securities Act. Upon completion of this
offering, approximately % of our
outstanding common stock will be held by the Initial Stockholder
and members of our management and employees. These shares will
be restricted securities as that phrase is defined
in Rule 144. Subject to certain contractual restrictions,
including the
lock-up
agreements described below, holders of restricted shares will be
entitled to sell those shares in the public market if they
qualify for an exemption from registration under Rule 144
or any other applicable exemption under the Securities Act.
Subject to the
lock-up
agreements described below and the provisions of Rules 144
and 701, additional shares will be available for sale as set
forth below.
Lock-Up
Agreements
We and our executive officers, directors and the Initial
Stockholder have agreed with the underwriters, subject to
certain exceptions, not to dispose of or hedge any of their
shares of common stock or securities convertible into or
exchangeable for shares during the period from the date of this
prospectus continuing through the date days after
the date of this prospectus, except with the prior written
consent of the designated representatives. This agreement does
not apply to any existing incentive programs.
The -day restricted period described in the preceding
paragraph will be automatically extended if (i) during the
last 17 days of the -day restricted period we
issue an earnings release or announce material news or a
material event relating to us occurs or (ii) prior to the
expiration of the -day restricted period, we announce
that we will release earnings results during the
16-day
period following the last day of the -day restricted
period, in which case the restrictions described in the
preceding paragraph will continue to apply until the expiration
of the
18-day
period beginning on the issuance of the earnings release or the
announcement of the material news or material event, unless the
designated representatives provide a written waiver of such
extension. The designated representatives have no present intent
or arrangement to release any of the securities subject to these
lock-up
agreements. The release of any
lock-up is
considered on a case by case basis. Factors in deciding whether
to release shares may include the length of time before the
lock-up
expires, the number of shares involved, the reason for the
requested release, market conditions, the trading price of our
common stock, historical trading volumes of our common stock and
whether the person seeking the release is an officer, director
or affiliate of the Company.
Rule 144
In general, under Rule 144 under the Securities Act, a
person (or persons whose shares are aggregated) who is not
deemed to have been an affiliate of ours at any time during the
three months preceding a sale, and who has beneficially owned
restricted securities within the meaning of Rule 144 for at
least six months (including any period of consecutive ownership
of preceding non-affiliated holders) would be entitled to sell
those shares, subject only to the availability of current public
information about us. A non-affiliated person who has
beneficially owned restricted securities within
148
the meaning of Rule 144 for at least one year would be
entitled to sell those shares without regard to the provisions
of Rule 144.
A person (or persons whose shares are aggregated) who is deemed
to be an affiliate of ours and who has beneficially owned
restricted securities within the meaning of Rule 144 for at
least six months would be entitled to sell within any
three-month period a number of shares that does not exceed the
greater of one percent of the then outstanding shares of our
common stock or the average weekly trading volume of our common
stock reported through the NYSE during the four calendar weeks
preceding such sale. Such sales are also subject to certain
manner of sale provisions, notice requirements and the
availability of current public information about us.
Rule 701
In general, under Rule 701 of the Securities Act, most of
our employees, consultants or advisors who purchased shares from
us in connection with a qualified compensatory stock plan or
other written agreement are eligible to resell those shares
90 days after the date of this prospectus in reliance on
Rule 144, but without compliance with the holding period or
certain other restrictions contained in Rule 144.
Registration
Rights
Pursuant to the Stockholders Agreement that we will enter into
prior to completion of this offering, the Initial Stockholder
and certain of its affiliates and permitted third-party
transferees will have the right, in certain circumstances, to
require us to register their shares of our common stock under
the Securities Act for sale into the public markets at any time
following the expiration of
the -day
lock-up
period described above. The Initial Stockholder and certain of
its affiliates and permitted third-party transferees will also
be entitled to piggyback registration rights with respect to any
future registration statement that we file for an underwritten
public offering of our securities. Upon the effectiveness of
such a registration statement, all shares covered by the
registration statement will be freely transferable. If these
rights are exercised and the Initial Stockholder sells a large
number of shares of common stock, the market price of our common
stock could decline. See Certain Relationships and Related
Party TransactionsStockholders Agreement for a more
detailed description of these registration rights.
149
CERTAIN U.S.
FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS TO
NON-U.S.
HOLDERS
The following discussion is a summary of certain
U.S. federal income and estate tax considerations generally
applicable to the purchase, ownership and disposition of our
common stock by
Non-U.S. Holders.
A
Non-U.S. Holder
means a person (other than a partnership) that is not a citizen
or resident of the United States, a U.S. domestic
corporation, or a person that would otherwise be subject to
U.S. federal income tax on a net income basis in respect of
such common stock. This discussion deals only with our common
stock held as capital assets by holders who purchase common
stock in this offering. This discussion does not cover all
aspects of U.S. federal income taxation that may be
relevant to the purchase, ownership or disposition of our common
stock by prospective investors in light of their particular
circumstances. In particular, this discussion does not address
all of the tax considerations that may be relevant to persons in
special tax situations, including persons that will hold shares
of our common stock in connection with a U.S. trade or
business or a U.S. permanent establishment, hold more than
5% of our common stock, are a controlled foreign
corporation or a passive foreign investment
company, or are otherwise subject to special treatment
under the Code. You should consult your own tax advisors about
the tax consequences of the purchase, ownership, and disposition
of our common stock in light of your own particular
circumstances, including the tax consequences under state,
local, foreign and other tax laws and the possible effects of
any changes in applicable tax laws.
Furthermore, this summary is based upon the provisions of the
Code, the Treasury regulations promulgated thereunder and
administrative and judicial interpretations thereof, all as of
the date hereof. Such authorities may be repealed, revoked,
modified or subject to differing interpretations, possibly on a
retroactive basis, so as to result in U.S. federal income
tax or estate tax consequences different from those discussed
below. This discussion does not address any other
U.S. federal tax considerations (such as gift tax) or any
state, local or
non-U.S. tax
considerations.
Dividends
As discussed under Dividend Policy above, we do not
currently expect to pay dividends. In the event that we do make
a distribution of cash or property with respect to our common
stock, any such distributions generally will constitute
dividends for U.S. federal income tax purposes to the
extent of our current or accumulated earnings and profits, as
determined under U.S. federal income tax principles. If a
distribution exceeds our current and accumulated earnings and
profits, the excess will be treated as a tax-free return of the
Non-U.S. Holders
investment, up to such holders tax basis in the common
stock. Any remaining excess will be treated as capital gain,
subject to the tax treatment described below in Sale,
Exchange or Other Taxable Disposition of Common Stock.
Dividends paid to you generally will be subject to
U.S. federal withholding tax at a 30% rate, or such lower
rate as may be specified by an applicable tax treaty. Even if
you are eligible for a lower treaty rate, we and other payors
will generally be required to withhold at a 30% rate (rather
than the lower treaty rate) on dividend payments to you, unless:
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you have furnished to us or such other payor a valid IRS
Form W-8BEN
or other documentary evidence establishing your entitlement to
the lower treaty rate with respect to such payments, and
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in the case of actual or constructive dividends paid to a
foreign entity after December 31, 2012, you hold the common
stock through a foreign financial institution or entity that has
entered into an agreement with the U.S. government to
collect and provide to the U.S. tax authorities information
about its accountholders (including certain investors in such
institution or entity) and, if required, you have provided the
withholding agent with a certification identifying your direct
and indirect U.S. owners.
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If you are eligible for a reduced rate of U.S. federal
withholding tax pursuant to an applicable income tax treaty or
otherwise, you may obtain a refund of any excess amounts
withheld by timely
150
filing an appropriate claim for refund with the IRS. Investors
are encouraged to consult with their own tax advisors regarding
the possible implications of these withholding requirements on
their investment in the common stock.
Sale, Exchange or
Other Taxable Disposition of Common Stock
You generally will not be subject to U.S. federal income
tax with respect to gain recognized on a sale, exchange or other
taxable disposition of shares of our common stock unless you are
an individual present in the United States for 183 or more days
in the taxable year of the sale, exchange or other taxable
disposition, and certain other requirements are met. If you are
such an individual, you will generally be subject to a flat 30%
tax on any gain derived from the sale, exchange or other taxable
disposition that may be offset by U.S. source capital
losses (even though you are not considered a resident of the
United States).
In the case of the sale or disposition of common stock after
December 31, 2012, you may be subject to a 30% withholding
tax on the gross proceeds of the sale or disposition unless the
requirements described in the last bullet point above under
Dividends are satisfied. Investors are
encouraged to consult with their own tax advisors regarding the
possible implications of these withholding requirements on their
investment in the common stock and the potential for a refund or
credit in the case of any withholding tax.
Information
Reporting and Backup Withholding
We must report annually to the IRS and to each
Non-U.S. holder
the amount of dividends paid to such holder and the tax withheld
with respect to such dividends, regardless of whether
withholding was required. Copies of the information returns
reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the
Non-U.S. holder
resides under the provisions of an applicable income tax treaty.
A
Non-U.S. holder
may be subject to backup withholding for dividends paid to such
holder unless such holder certifies under penalty of perjury
that it is a
Non-U.S. holder
or such holder otherwise establishes an exemption. Any amounts
withheld under the backup withholding rules may be allowed as a
refund or a credit against a
Non-U.S. holders
U.S. federal income tax liability provided the required
information is timely furnished to the IRS.
U.S. Federal
Estate Tax
Shares of our common stock held (or deemed held) by an
individual
Non-U.S. Holder
at the time of his or her death will be included in such
Non-U.S. Holders
gross estate for U.S. federal estate tax purposes, unless
an applicable estate tax treaty provides otherwise.
151
UNDERWRITING
are acting as global coordinators and representatives of the
underwriters and, together
with ,
are acting as joint book-running managers of this offering and
as representatives of the underwriters named below. Subject to
the terms and conditions stated in the underwriting agreement
dated the date of this prospectus, each underwriter named below
has severally agreed to purchase, and we and the Initial
Stockholder have agreed to sell to that underwriter, the number
of shares set forth opposite the underwriters name.
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Underwriters
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Number of Shares
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Total
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The underwriting agreement provides that the obligations of the
underwriters to purchase the shares included in this offering
are subject to approval of legal matters by counsel and to other
conditions. The underwriters are obligated to purchase all the
shares (other than those covered by the over-allotment option
described below) if they purchase any of the shares.
Shares sold by the underwriters to the public will initially be
offered at the initial public offering price set forth on the
cover of this prospectus. Any shares sold by the underwriters to
securities dealers may be sold at a discount from the initial
public offering price not to exceed
$ per share. If all the shares are
not sold at the initial offering price, the underwriters may
change the offering price and the other selling terms after the
completion of the initial public distribution. The
representatives have advised us and the Initial Stockholder that
the underwriters do not intend to make sales to discretionary
accounts.
If the underwriters sell more shares than the total number set
forth in the table above, we have granted to the underwriters an
option to purchase up
to
additional shares of common stock, and the Initial Stockholder
has granted to the underwriters an option to purchase up
to additional
shares of common stock, exercisable for 30 days from the
date of this prospectus, at the public offering price less the
underwriting discount. The underwriters may exercise the option
solely for the purpose of covering over-allotments, if any, in
connection with this offering. To the extent the option is
exercised, each underwriter must purchase a number of additional
shares approximately proportionate to that underwriters
initial purchase commitment. Any shares issued or sold under the
option will be issued and sold on the same terms and conditions
as the other shares that are the subject of this offering.
We and our executive officers, directors and the Initial
Stockholder (who will hold in the aggregate
approximately % of our issued and
outstanding common stock immediately after the completion of
this offering) have agreed that, subject to limited exceptions,
for a period of days from the date of this
prospectus, we and they will not, without the prior written
consent of the designated representatives, dispose of or hedge
any shares or any securities convertible into or exchangeable
for our common stock. The designated representatives in their
sole discretion may release any of the securities subject to
these
lock-up
agreements at any time without notice. Notwithstanding the
foregoing, if (i) during the last 17 days of
the -day restricted period, we issue an earnings
release or material news or a material event relating to our
company occurs; or (ii) prior to the expiration of
the -day restricted period, we announce that we will
release earnings results during the
16-day
period beginning on the last day of the -day
restricted period, the restrictions described above shall
continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event.
At our request, the underwriters have reserved up
to % of the shares for sale at the
initial public offering price to persons who are directors,
officers or employees, or who are otherwise associated with us
through a directed share program. The number of shares available
for sale to the general public will be reduced by the number of
directed shares purchased by participants in the
152
program. Except for certain of our officers, directors and
employees who have entered into
lock-up
agreements as contemplated in the immediately preceding
paragraph, each person buying shares through the directed share
program has agreed that, for a period of days from
the date of this prospectus, he or she will not, without the
prior written consent of the designated representatives, dispose
of or hedge any shares or any securities convertible into or
exchangeable for our common stock with respect to shares
purchased in the program. For certain officers, directors and
employees purchasing shares through the directed share program,
the lock-up
agreements contemplated in the immediately preceding paragraph
shall govern with respect to their purchases. The designated
representatives in their sole discretion may release any of the
securities subject to these
lock-up
agreements at any time without notice. Any directed shares not
purchased will be offered by the underwriters to the general
public on the same basis as all other shares offered. We have
agreed to indemnify the underwriters against certain liabilities
and expenses, including liabilities under the Securities Act, in
connection with the sales of the directed shares.
Prior to this offering, there has been no public market for our
shares. Consequently, the initial public offering price for the
shares was determined by negotiations among us, the Initial
Stockholder and the representatives. Among the factors
considered in determining the initial public offering price were
our results of operations, our current financial condition, our
future prospects, our markets, the economic conditions in and
future prospects for the industry in which we compete, our
management, and currently prevailing general conditions in the
equity securities markets, including current market valuations
of publicly traded companies considered comparable to our
company. We cannot assure you, however, that the price at which
the shares will sell in the public market after this offering
will not be lower than the initial public offering price or that
an active trading market in our shares will develop and continue
after this offering.
Our common stock has been authorized for listing on the NYSE
under the symbol , subject to official
notice of issuance. The underwriters have undertaken to sell
shares to a minimum of 400 beneficial owners in lots of 100 or
more shares to meet the NYSE distribution requirements for
trading.
The following table shows the underwriting discounts and
commissions that we and the Initial Stockholder are to pay to
the underwriters in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the
underwriters over-allotment option.
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Paid by Us
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Paid by Initial Stockholder
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No Exercise
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Full Exercise
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No Exercise
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Full Exercise
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Per share
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Total
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In addition, we estimate that the total expenses of this
offering payable by us will be approximately
$ million.
In connection with the offering, the underwriters may purchase
and sell shares in the open market. Purchases and sales in the
open market may include short sales, purchases to cover short
positions, which may include purchases pursuant to the
over-allotment option, and stabilizing purchases.
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Short sales involve secondary market sales by the underwriters
of a greater number of shares than they are required to purchase
in the offering.
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Covered short sales are sales of shares in an amount
up to the number of shares represented by the underwriters
over-allotment option.
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Naked short sales are sales of shares in an amount
in excess of the number of shares represented by the
underwriters over-allotment option.
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Covering transactions involve purchases of shares either
pursuant to the over-allotment option or in the open market
after the distribution has been completed in order to cover
short positions.
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To close a naked short position, the underwriters must purchase
shares in the open market after the distribution has been
completed. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward
pressure on the price of the shares in the open market after
pricing that could adversely affect investors who purchase in
the offering.
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To close a covered short position, the underwriters must
purchase shares in the open market after the distribution has
been completed or must exercise the over-allotment option. In
determining the source of shares to close the covered short
position, the underwriters will consider, among other things,
the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through
the over-allotment option.
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Stabilizing transactions involve bids to purchase shares so long
as the stabilizing bids do not exceed a specified maximum.
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The underwriters also may impose a penalty bid. Penalty bids
permit the underwriters to reclaim a selling concession from a
syndicate member when the underwriters, in covering short
positions or making stabilizing purchases, repurchase shares
originally sold by that syndicate member.
Purchases to cover short positions and stabilizing purchases, as
well as other purchases by the underwriters for their own
accounts, may have the effect of preventing or retarding a
decline in the market price of the shares. They may also cause
the price of the shares to be higher than the price that would
otherwise exist in the open market in the absence of these
transactions. The underwriters may conduct these transactions on
the NYSE, in the
over-the-counter
market or otherwise. If the underwriters commence any of these
transactions, they may discontinue them at any time.
The underwriters and their respective affiliates have, from time
to time, performed, and may in the future perform, investment
banking, commercial banking and financial advisory services for
us and our affiliates, for which they received or will receive
customary fees and expenses.
We and the Initial Stockholder have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act, or to contribute to payments the
underwriters may be required to make because of any of those
liabilities.
The Initial Stockholder may be deemed to be an
underwriter within the meaning of the Securities Act.
Notice to
Prospective Investors in the European Economic Area
In relation to each member state of the European Economic Area
that has implemented the Prospectus Directive (each, a relevant
member state), with effect from and including the date on which
the Prospectus Directive is implemented in that relevant member
state (the relevant implementation date), an offer of shares
described in this prospectus may not be made to the public in
that relevant member state prior to the publication of a
prospectus in relation to the shares that has been approved by
the competent authority in that relevant member state or, where
appropriate, approved in another relevant member state and
notified to the competent authority in that relevant member
state, all in accordance with the Prospectus Directive, except
that, with effect from and including the relevant implementation
date, an offer of securities may be offered to the public in
that relevant member state at any time:
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(1)
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to legal entities which are authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities;
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(2)
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to any legal entity which has two or more of (i) an average
of at least 250 employees during the last financial year,
(ii) a total balance sheet of more than 43,000,000
and (iii) an annual net turnover of more than
50,000,000, as shown in its last annual or consolidated
accounts;
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(3)
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to fewer than 100 natural or legal persons (other than qualified
investors as defined in the Prospectus Directive) subject to
obtaining the prior consent of the representatives for any such
offer; or
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(4)
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in any other circumstances which do not require the publication
by the company of a prospectus pursuant to Article 3
of the Prospectus Directive.
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Each purchaser of shares described in this prospectus located
within a relevant member state will be deemed to have
represented, acknowledged and agreed that it is a
qualified investor within the meaning of
Article 2(1)(e) of the Prospectus Directive.
For purposes of this provision, the expression an offer to
the public in any relevant member state means the
communication in any form and by any means of sufficient
information on the terms of the offer and the securities to be
offered so as to enable an investor to decide to purchase or
subscribe the securities, as the expression may be varied in
that member state by any measure implementing the Prospectus
Directive in that member state, and the expression
Prospectus Directive means Directive 2003/71/EC and
includes any relevant implementing measure in each relevant
member state.
The sellers of the shares have not authorized and do not
authorize the making of any offer of shares through any
financial intermediary on their behalf, other than offers made
by the underwriters with a view to the final placement of the
shares as contemplated in this prospectus. Accordingly, no
purchaser of the shares, other than the underwriters, is
authorized to make any further offer of the shares on behalf of
the sellers or the underwriters.
Notice to
Prospective Investors in the United Kingdom
This prospectus is only being distributed to, and is only
directed at, persons in the United Kingdom that are
qualified investors within the meaning of Article 2(1)(e)
of the Prospectus Directive that are also (i) investment
professionals falling within Article 19(5) of the Financial
Services and Markets Act 2000 (Financial Promotion) Order 2005
(the Order) or (ii) high net worth entities,
and other persons to whom it may lawfully be communicated,
falling within Article 49(2)(a) to (d) of the Order
(each such person being referred to as a relevant
person). This prospectus and its contents are confidential
and should not be distributed, published or reproduced (in whole
or in part) or disclosed by recipients to any other persons in
the United Kingdom. Any person in the United Kingdom that is not
a relevant person should not act or rely on this document or any
of its contents.
Notice to
Prospective Investors in France
Neither this prospectus nor any other offering material relating
to the shares described in this prospectus has been submitted to
the clearance procedures of the Autorité des
Marchés Financiers or of the competent authority of
another member state of the European Economic Area and notified
to the Autorité des Marchés Financiers. The
shares have not been offered or sold and will not be offered or
sold, directly or indirectly, to the public in France. Neither
this prospectus nor any other offering material relating to the
shares has been or will be:
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released, issued, distributed or caused to be released, issued
or distributed to the public in France; or
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used in connection with any offer for subscription or sale of
the shares to the public in France.
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155
Such offers, sales and distributions will be made in France only:
to qualified investors (investisseurs
qualifiés)
and/or to a
restricted circle of investors (cercle restreint
dinvestisseurs), in each case investing for their own
account, all as defined in, and in accordance with
articles L.411-2,
D.411-1, D.411-2, D.734-1, D.744-1, D.754-1 and D.764-1 of the
French Code monétaire et financier;
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to investment services providers authorized to engage in
portfolio management on behalf of third parties; or
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in a transaction that, in accordance with
article L.411-2-II-1°-or-2°-or
3° of the French Code monétaire et financier
and
article 211-2
of the General Regulations (Règlement
Général) of the Autorité des Marchés
Financiers, does not constitute a public offer (appel
public à lépargne).
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The shares may be resold directly or indirectly, only in
compliance with
articles L.411-1,
L.411-2, L.412-1 and L.621-8 through L.621-8-3 of the French
Code monétaire et financier.
Notice to
Prospective Investors in Switzerland
Neither this prospectus nor any other material relating to the
common stock which is the subject of the offering contemplated
by this prospectus constitute an issue prospectus pursuant to
Article 652a of the Swiss Code of Obligations. The common
stock will not be listed on the SWX Swiss Exchange and,
therefore, the documents relating to the common stock,
including, but not limited to, this document, do not claim to
comply with the disclosure standards of the listing rules of SWX
Swiss Exchange and corresponding prospectus schemes annexed to
the listing rules of the SWX Swiss Exchange. The common stock is
being offered in Switzerland by way of a private placement, i.e.
to a small number of selected investors only, without any public
offer and only to investors who do not purchase the shares with
the intention to distribute them to the public. The investors
will be individually approached by us from time to time. This
prospectus or any other material relating to the common stock
are personal and confidential and do not constitute an offer to
any other person. This prospectus or any other material relating
to the common stock may only be used by those investors to whom
it has been handed out in connection with the offering described
herein and may neither directly nor indirectly be distributed or
made available to other persons without our express consent.
Such materials may not be used in connection with any other
offer and shall in particular not be copied
and/or
distributed to the public in (or from) Switzerland.
Notice to
Prospective Investors in Hong Kong
The shares may not be offered or sold in Hong Kong by means of
any document other than (i) in circumstances which do not
constitute an offer to the public within the meaning of the
Companies Ordinance (Cap. 32, Laws of Hong Kong), or
(ii) to professional investors within the
meaning of the Securities and Futures Ordinance (Cap. 571, Laws
of Hong Kong) and any rules made thereunder, or (iii) in
other circumstances which do not result in the document being a
prospectus within the meaning of the Companies
Ordinance (Cap. 32, Laws of Hong Kong) and no advertisement,
invitation or document relating to the shares may be issued or
may be in the possession of any person for the purpose of issue
(in each case whether in Hong Kong or elsewhere), which is
directed at, or the contents of which are likely to be accessed
or read by, the public in Hong Kong (except if permitted to do
so under the laws of Hong Kong) other than with respect to
shares which are or are intended to be disposed of only to
persons outside Hong Kong or only to professional
investors within the meaning of the Securities and Futures
Ordinance (Cap. 571, Laws of Hong Kong) and any rules made
thereunder.
Notice to
Prospective Investors in Japan
The shares offered in this prospectus have not been registered
under the Securities and Exchange Law of Japan. The shares have
not been offered or sold and will not be offered or sold,
156
directly or indirectly, in Japan or to or for the account of any
resident of Japan, except (i) pursuant to an exemption from
the registration requirements of the Securities and Exchange Law
and (ii) in compliance with any other applicable
requirements of Japanese law.
Notice to
Prospective Investors in Singapore
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase, of the
shares may not be circulated or distributed, nor may the shares
be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to
persons in Singapore other than (i) to an institutional
investor under Section 274 of the Securities and Futures
Act, Chapter 289 of Singapore (the SFA),
(ii) to a relevant person pursuant to Section 275(1),
or any person pursuant to Section 275(1A), and in
accordance with the conditions specified in Section 275 of
the SFA or (iii) otherwise pursuant to, and in accordance
with the conditions of, any other applicable provision of the
SFA, in each case subject to compliance with conditions set
forth in the SFA.
Where the shares are subscribed or purchased under
Section 275 of the SFA by a relevant person which is:
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a corporation (which is not an accredited investor (as defined
in Section 4A of the SFA)) the sole business of which is to
hold investments and the entire share capital of which is owned
by one or more individuals, each of whom is an accredited
investor; or
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a trust (where the trustee is not an accredited investor) whose
sole purpose is to hold investments and each beneficiary of the
trust is an individual who is an accredited investor,
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shares, debentures and units of shares and debentures of that
corporation or the beneficiaries rights and interest
(howsoever described) in that trust shall not be transferred
within six months after that corporation or that trust has
acquired the shares pursuant to an offer made under
Section 275 of the SFA except:
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to an institutional investor (for corporations, under
Section 274 of the SFA) or to a relevant person defined in
Section 275(2) of the SFA, or to any person pursuant to an
offer that is made on terms that such shares, debentures and
units of shares and debentures of that corporation or such
rights and interest in that trust are acquired at a
consideration of not less than S$200,000 (or its equivalent in a
foreign currency) for each transaction, whether such amount is
to be paid for in cash or by exchange of securities or other
assets, and further for corporations, in accordance with the
conditions specified in Section 275 of the SFA;
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where no consideration is or will be given for the
transfer; or
|
where the transfer is by operation of law.
LEGAL
MATTERS
Certain legal matters relating to this offering will be passed
upon for us and the Initial Stockholder by Cleary Gottlieb
Steen & Hamilton LLP, New York, New York.
EXPERTS
The consolidated financial statements of Nationstar Mortgage LLC
at December 31, 2010 and 2009, and for each of the three
years in the period ended December 31, 2010, appearing in
this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent registered public
accounting firm, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report
given on the authority of such firm as experts in accounting and
auditing.
157
MARKET AND
INDUSTRY DATA AND FORECASTS
Certain market and industry data included in this prospectus has
been obtained from third party sources that we believe to be
reliable. Market estimates are calculated by using independent
industry publications, government publications and third party
forecasts in conjunction with our assumptions about our markets.
We have not independently verified such third party information.
While we are not aware of any misstatements regarding any
market, industry or similar data presented herein, such data
involves risks and uncertainties and is subject to change based
on various factors, including those discussed under the headings
Special Note Regarding Forward-Looking Statements
and Risk Factors in this prospectus.
158
WHERE YOU CAN
FIND MORE INFORMATION
We have filed a registration statement, of which this prospectus
is a part, on
Form S-1
with the SEC relating to this offering. This prospectus does not
contain all of the information in the registration statement and
the exhibits included with the registration statement.
References in this prospectus to any of our contracts,
agreements or other documents are not necessarily complete, and
you should refer to the exhibits attached to the registration
statement for copies of the actual contracts, agreements or
documents. You may read and copy the registration statement, the
related exhibits and other material we file with the SEC at the
SECs public reference room in Washington, D.C. at
100 F Street, Room 1580, N.E.,
Washington, D.C. 20549. You can also request copies of
those documents, upon payment of a duplicating fee, by writing
to the SEC. Please call the Commission at
1-800-SEC-0330
for further information on the operation of the public reference
rooms. The SEC also maintains an internet site that contains
reports, proxy and information statements and other information
regarding issuers that file with the SEC. The website address is
http://www.sec.gov.
Upon the effectiveness of the registration statement, we will be
subject to the informational requirements of the Exchange Act,
and, in accordance with the Exchange Act, will file reports,
proxy and information statements and other information with the
SEC. Such annual, quarterly and special reports, proxy and
information statements and other information can be inspected
and copied at the locations set forth above. We intend to make
this information available on the investors relations section of
our website, www.nationstarmtg.com. Information on, or
accessible through, our website is not part of this prospectus.
159
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Audited Financial Statements
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F-2
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F-3
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F-4
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F-5
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F-6
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F-8
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Unaudited Consolidated Financial Statements
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F-57
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F-58
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F-59
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F-60
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F-62
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F-1
REPORT OF
INDEPENDENT AUDITORS
The Members
Nationstar Mortgage LLC
We have audited the accompanying consolidated balance sheets of
Nationstar Mortgage LLC and subsidiaries (the Company) as of
December 31, 2010 and 2009, and the related consolidated
statements of operations, members equity, and cash flows
for each of the three years in the period ended
December 31, 2010. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Nationstar Mortgage LLC and
subsidiaries at December 31, 2010 and 2009, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2010, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 3 to the consolidated financial
statements, the Company changed its method of accounting for
transfers of financial assets and consolidation of variable
interest entities, effective January 1, 2010.
Dallas, Texas
March 28, 2011
F-2
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
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December 31,
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2010
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2009
|
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(in thousands)
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Assets
|
|
|
|
|
|
|
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Cash and cash equivalents
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$
|
21,223
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$
|
41,645
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Restricted cash (includes $1,472 and $0, respectively, of
restricted cash, subject to ABS nonrecourse debt)
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91,125
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|
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52,795
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Accounts receivable, net (includes $2,392 and $0, respectively,
of accrued interest, subject to ABS nonrecourse debt)
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439,071
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|
|
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509,974
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Mortgage loans held for sale
|
|
|
371,160
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|
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|
203,131
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Mortgage loans held for investment, subject to nonrecourse
debtLegacy Assets, net of allowance for loan losses of
$3,298 and $0, respectively
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266,840
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301,910
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Mortgage loans held for investment, subject to ABS nonrecourse
debt (at fair value)
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538,440
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Investment in debt
securitiesavailable-for-sale
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|
|
|
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|
2,486
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Receivables from affiliates
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|
8,993
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12,574
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Mortgage servicing rights
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|
145,062
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114,605
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Property and equipment, net
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8,394
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6,575
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Real estate owned, net (includes $17,509 and $0, respectively,
of real estate owned, subject to ABS nonrecourse debt)
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27,337
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10,262
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Other assets
|
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|
29,536
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|
24,228
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|
|
|
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|
|
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|
Total assets
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$
|
1,947,181
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$
|
1,280,185
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|
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Liabilities and members equity
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Notes payable
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$
|
709,758
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$
|
771,857
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Unsecured senior notes
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244,061
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|
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|
Payables and accrued liabilities (includes $95 and $0,
respectively, of accrued interest payable, subject to ABS
nonrecourse debt)
|
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|
75,054
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|
|
|
66,830
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|
Derivative financial instruments
|
|
|
7,801
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|
|
|
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
18,781
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|
|
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|
Nonrecourse debtLegacy Assets
|
|
|
138,662
|
|
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|
177,675
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|
ABS nonrecourse debt (at fair value)
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|
496,692
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,690,809
|
|
|
|
1,016,362
|
|
Commitments and contingencies (Note 14)
|
|
|
|
|
|
|
|
|
Total members equity
|
|
|
256,372
|
|
|
|
263,823
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$
|
1,947,181
|
|
|
$
|
1,280,185
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-3
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
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Year Ended December 31
|
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2010
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2009
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2008
|
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(in thousands)
|
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Revenues:
|
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|
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|
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|
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Servicing fee income
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$
|
167,126
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|
|
$
|
90,195
|
|
|
$
|
68,052
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|
Other fee income
|
|
|
16,958
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|
|
|
10,023
|
|
|
|
5,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
184,084
|
|
|
|
100,218
|
|
|
|
74,007
|
|
Gain/(loss) on mortgage loans held for sale
|
|
|
77,344
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|
|
|
(21,349
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)
|
|
|
(86,663
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
261,428
|
|
|
|
78,869
|
|
|
|
(12,656
|
)
|
Expenses and impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and benefits
|
|
|
149,115
|
|
|
|
90,689
|
|
|
|
61,783
|
|
General and administrative
|
|
|
58,913
|
|
|
|
30,494
|
|
|
|
22,194
|
|
Provision for loan losses
|
|
|
3,298
|
|
|
|
|
|
|
|
|
|
Loss on foreclosed real estate
|
|
|
205
|
|
|
|
7,512
|
|
|
|
2,567
|
|
Occupancy
|
|
|
9,445
|
|
|
|
6,863
|
|
|
|
6,021
|
|
Loss on
available-for-sale
securitiesother-than-temporary
|
|
|
|
|
|
|
6,809
|
|
|
|
55,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses and impairments
|
|
|
220,976
|
|
|
|
142,367
|
|
|
|
147,777
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
98,895
|
|
|
|
52,518
|
|
|
|
92,060
|
|
Interest expense
|
|
|
(116,163
|
)
|
|
|
(69,883
|
)
|
|
|
(65,548
|
)
|
Loss on interest rate swaps and caps
|
|
|
(9,801
|
)
|
|
|
(14
|
)
|
|
|
(23,689
|
)
|
Fair value changes in ABS securitizations
|
|
|
(23,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(50,366
|
)
|
|
|
(17,379
|
)
|
|
|
2,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,914
|
)
|
|
$
|
(80,877
|
)
|
|
$
|
(157,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma information (Note 25):
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical net loss before taxes
|
|
$
|
(9,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma adjustment for taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(9,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-4
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
Years
Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Member
|
|
|
Comprehensive
|
|
|
Members
|
|
|
|
Units
|
|
|
Loss
|
|
|
Equity
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Balance at January 1, 2008
|
|
$
|
265,599
|
|
|
$
|
(3,903
|
)
|
|
$
|
261,696
|
|
Capital contributions
|
|
|
145,600
|
|
|
|
|
|
|
|
145,600
|
|
Share-based compensation
|
|
|
2,333
|
|
|
|
|
|
|
|
2,333
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(157,610
|
)
|
|
|
|
|
|
|
(157,610
|
)
|
Reclassification of loss on investment in debt securities due to
other-than-temporary
impairments
|
|
|
|
|
|
|
3,903
|
|
|
|
3,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(153,707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
255,922
|
|
|
|
|
|
|
|
255,922
|
|
Capital contributions
|
|
|
87,951
|
|
|
|
|
|
|
|
87,951
|
|
Share-based compensation
|
|
|
827
|
|
|
|
|
|
|
|
827
|
|
Net loss and comprehensive loss
|
|
|
(80,877
|
)
|
|
|
|
|
|
|
(80,877
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
263,823
|
|
|
|
|
|
|
|
263,823
|
|
Cumulative effect of change in accounting principles as of
January 1, 2010 related to adoption of new accounting
guidance on consolidation of variable interest entities
|
|
|
(8,068
|
)
|
|
|
|
|
|
|
(8,068
|
)
|
Share-based compensation
|
|
|
12,856
|
|
|
|
|
|
|
|
12,856
|
|
Tax related share-based settlement of units by members
|
|
|
(3,396
|
)
|
|
|
|
|
|
|
(3,396
|
)
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(9,914
|
)
|
|
|
|
|
|
|
(9,914
|
)
|
Change in value of cash flow hedge
|
|
|
|
|
|
|
1,071
|
|
|
|
1,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(8,843
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
255,301
|
|
|
$
|
1,071
|
|
|
$
|
256,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,914
|
)
|
|
$
|
(80,877
|
)
|
|
|
(157,610
|
)
|
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
12,856
|
|
|
|
827
|
|
|
|
2,333
|
|
Loss/(gain) on mortgage loans held for sale
|
|
|
(77,344
|
)
|
|
|
21,349
|
|
|
|
86,663
|
|
Provision for loan losses
|
|
|
3,298
|
|
|
|
|
|
|
|
|
|
Loss on foreclosed real estate
|
|
|
205
|
|
|
|
7,512
|
|
|
|
2,567
|
|
Depreciation and amortization
|
|
|
2,117
|
|
|
|
1,767
|
|
|
|
1,309
|
|
Accretion of discount on securities
|
|
|
|
|
|
|
|
|
|
|
(4,422
|
)
|
Impairment of investments in debt securities
|
|
|
|
|
|
|
6,809
|
|
|
|
55,212
|
|
Fair value changes in ABS securitizations
|
|
|
23,297
|
|
|
|
|
|
|
|
|
|
Loss on interest rate swaps and caps
|
|
|
8,872
|
|
|
|
14
|
|
|
|
23,689
|
|
Unrealized gains/losses on derivative financial instruments
|
|
|
|
|
|
|
(2,436
|
)
|
|
|
2,077
|
|
Change in fair value of mortgage servicing rights
|
|
|
6,043
|
|
|
|
27,915
|
|
|
|
11,701
|
|
Amortization of debt discount
|
|
|
18,731
|
|
|
|
21,287
|
|
|
|
8,879
|
|
Amortization of premiums/discounts
|
|
|
(4,526
|
)
|
|
|
(1,394
|
)
|
|
|
(85
|
)
|
Mortgage loans originated and purchased, net of fees
|
|
|
(2,791,639
|
)
|
|
|
(1,480,549
|
)
|
|
|
(545,860
|
)
|
Cost of loans sold, net of fees
|
|
|
2,621,275
|
|
|
|
1,007,369
|
|
|
|
513,924
|
|
Principal payments/prepayments received and other changes in
mortgage loans originated as held for sale
|
|
|
32,415
|
|
|
|
470,072
|
|
|
|
201,184
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
39,388
|
|
|
|
(154,000
|
)
|
|
|
(165,566
|
)
|
Receivables from affiliates
|
|
|
3,958
|
|
|
|
66,940
|
|
|
|
2,452
|
|
Other assets
|
|
|
1,152
|
|
|
|
(9,115
|
)
|
|
|
38,363
|
|
Payables and accrued liabilities
|
|
|
8,163
|
|
|
|
12,869
|
|
|
|
(36,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(101,653
|
)
|
|
|
(83,641
|
)
|
|
|
40,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued on following page
F-6
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments received and other changes on mortgage loans
held for investment, subject to ABS nonrecourse debt
|
|
$
|
48,838
|
|
|
$
|
|
|
|
$
|
|
|
Proceeds from sales of real estate owned
|
|
|
74,107
|
|
|
|
34,181
|
|
|
|
29,276
|
|
Purchase of mortgage servicing rights, net of liabilities
incurred
|
|
|
(17,812
|
)
|
|
|
(1,169
|
)
|
|
|
(19,013
|
)
|
Interest rate swap settlements
|
|
|
|
|
|
|
|
|
|
|
(51,570
|
)
|
Property and equipment additions, net of disposals
|
|
|
(3,936
|
)
|
|
|
(3,029
|
)
|
|
|
(1,772
|
)
|
Principal payments received on debt securities
|
|
|
|
|
|
|
|
|
|
|
8,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
101,197
|
|
|
|
29,983
|
|
|
|
(34,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers to restricted cash, net
|
|
|
(33,731
|
)
|
|
|
(31,763
|
)
|
|
|
(9,871
|
)
|
Issuance of non-recourse debt, net
|
|
|
|
|
|
|
191,272
|
|
|
|
|
|
Issuance of unsecured notes, net of issue discount
|
|
|
243,013
|
|
|
|
|
|
|
|
|
|
Repayment of nonrecourse debtLegacy assets
|
|
|
(45,364
|
)
|
|
|
(15,809
|
)
|
|
|
|
|
Repayment of ABS nonrecourse debt
|
|
|
(103,466
|
)
|
|
|
|
|
|
|
|
|
Decrease in notes payable, net
|
|
|
(62,099
|
)
|
|
|
(60,395
|
)
|
|
|
(157,266
|
)
|
Debt financing costs
|
|
|
(14,923
|
)
|
|
|
(18,059
|
)
|
|
|
(15,926
|
)
|
Tax related share-based settlement of units by members
|
|
|
(3,396
|
)
|
|
|
|
|
|
|
|
|
Capital contributions from members
|
|
|
|
|
|
|
20,700
|
|
|
|
145,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(19,966
|
)
|
|
|
85,946
|
|
|
|
(37,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(20,422
|
)
|
|
|
32,288
|
|
|
|
(31,894
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
41,645
|
|
|
|
9,357
|
|
|
|
41,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
21,223
|
|
|
$
|
41,645
|
|
|
$
|
9,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of noncash activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of mortgage loans held for sale to real estate owned
|
|
$
|
827
|
|
|
$
|
73,264
|
|
|
$
|
65,304
|
|
Mortgage servicing rights resulting from sale or securitization
of mortgage loans
|
|
|
26,253
|
|
|
|
8,332
|
|
|
|
4,522
|
|
Transfer of mortgage loans held for investment to real estate
owned
|
|
|
53,408
|
|
|
|
12,990
|
|
|
|
|
|
Transfer of mortgage loans held for investment, subject to ABS
nonrecourse debt, to real estate owned
|
|
|
111,865
|
|
|
|
|
|
|
|
|
|
Transfer of mortgage loans held for sale to mortgage loans held
for investment
|
|
|
|
|
|
|
319,183
|
|
|
|
|
|
Contribution of intercompany payable from parent
|
|
|
|
|
|
|
67,251
|
|
|
|
|
|
Financing of acquisition of mortgage servicing rights
|
|
|
|
|
|
|
22,211
|
|
|
|
|
|
Change in value of cash flow hedgeaccumulated other
comprehensive income
|
|
|
1,071
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
F-7
Nationstar
Mortgage LLC and Subsidiaries
|
|
1.
|
Description of
the Companies and Basis of Presentation
|
General
The consolidated financial statements include the accounts of
Nationstar Mortgage LLC (Nationstar), formerly Centex Home
Equity Company, LLC (CHEC), a Delaware limited liability
company, and its wholly owned subsidiaries, after the
elimination of intercompany balances and transactions.
Nationstar is a subsidiary of FIF HE Holdings LLC (FIF), a
subsidiary of Fortress Private Equity Funds III and IV
(Fortress).
Nature of
Business
Nationstars principal business is the origination and
selling or securitization of single-family conforming mortgage
loans to government-sponsored entities and the servicing of
residential mortgage loans for others.
The sale or securitization of mortgage loans typically involves
Nationstar retaining the right to service the mortgage loans
that it sells. The servicing of mortgage loans includes the
collection of principal and interest payments and the assessment
of ancillary fees related to the servicing of mortgage loans.
Additionally, Nationstar may occasionally obtain additional
servicing rights through the acquisition of servicing portfolios
from third parties.
|
|
2.
|
Significant
Accounting Policies
|
Use of
Estimates in Preparation of Consolidated Financial
Statements
The accompanying consolidated financial statements were prepared
in conformity with accounting principles generally accepted in
the United States (GAAP). The preparation of the financial
statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from these estimates due to factors such as adverse
changes in the economy, increases in interest rates, declines in
home prices or discrete events adversely affecting specific
borrowers, and such differences could be material.
Nationstar evaluated subsequent events through the date these
consolidated financial statements were issued.
Reclassification
Adjustments
Certain prior-period amounts have been reclassified to conform
to the current-period presentation.
Cash and Cash
Equivalents
Cash and cash equivalents include unrestricted cash on hand and
other highly liquid investments having an original maturity of
less than three months.
Restricted
Cash
Restricted cash consists of custodial accounts related to
Nationstars portfolio securitizations or to collections on
certain mortgage loans and mortgage loan advances that have been
pledged to a financial services company under a Master
Repurchase Agreement. Restricted cash also includes certain fees
collected on mortgage loan payments that are required to be
remitted to a government-sponsored entity (GSE) to settle
outstanding guarantee fee requirements.
F-8
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
2.
|
Significant
Accounting Policies (continued)
|
Mortgage Loans
Held for Sale
Nationstar maintains a strategy of originating mortgage loan
products primarily for the purpose of selling to
government-sponsored entities or other third-party investors in
the secondary market. Generally, all newly originated mortgage
loans held for sale are delivered to third-party purchasers or
securitized within three months after origination.
Through September 30, 2009, mortgage loans held for sale
were carried at the lower of amortized cost or fair value on an
aggregate basis grouped by delinquency status. Nationstar
estimates fair value by evaluating a variety of market
indicators including recent trades and outstanding commitments,
calculated on an aggregate basis (see Note 16).
Effective October 1, 2009, Nationstar elected to measure
newly originated prime residential mortgage loans held for sale
at fair value, as permitted under Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC) 825,
Financial Instruments.
In connection with Nationstars election to measure
mortgage loans held for sale at fair value, Nationstar is no
longer permitted to defer the loan origination fees, net of
direct loan origination costs associated with these loans. Prior
to October 1, 2009, Nationstar deferred all nonrefundable
fees and costs as required under ASC 310,
Receivables. In accordance with this guidance, loan
origination fees, net of direct loan origination costs were
capitalized and added as an adjustment to the basis of the
individual loans originated. These fees are accreted into income
as an adjustment to the loan yield over the life of the loan or
recognized when the loan is sold to a third party purchaser.
Mortgage Loans
Held for Investment, Net
Mortgage loans held for investment principally consist of
nonconforming or subprime mortgage loans securitized which serve
as collateral for the issued debt. These loans were transferred
on October 1, 2009, from mortgage loans held for sale at
fair value on the transfer date, as determined by the present
value of expected future cash flows, with no valuation allowance
recorded. The difference between the undiscounted cash flows
expected and the investment in the loan is recognized as
interest income on a level-yield method over the life of the
loan. Contractually required payments for interest and principal
that exceed the undiscounted cash flows expected at transfer are
not recognized as a yield adjustment or as a loss accrual or a
valuation allowance. Increases in expected cash flows subsequent
to the transfer are recognized prospectively through adjustment
of the yield on the loans over the remaining life. Decreases in
expected cash flows subsequent to transfer are recognized as a
valuation allowance.
Allowance for
Loan Losses on Mortgage Loans Held for Investment
An allowance for loan losses is established by recording a
provision for loan losses in the consolidated statement of
operations when management believes a loss has occurred on a
loan held for investment. When management determines that a loan
held for investment is partially or fully uncollectible, the
estimated loss is charged against the allowance for loan losses.
Recoveries on losses previously charged to the allowance are
credited to the allowance at the time the recovery is collected.
Nationstar accounts for the loans that were transferred to held
for investment from held for sale during October 2009 in a
manner similar to
ASC 310-30,
Loans and Debt Securities Acquired with Deteriorated Credit
Quality. At the date of transfer, management evaluated such
loans to determine whether there was evidence of deterioration
of credit quality since acquisition and if it was probable that
Nationstar would be unable to collect all amounts due according
to the loans contractual terms.
F-9
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
2.
|
Significant
Accounting Policies (continued)
|
The transferred loans were aggregated into separate pools of
loans based on common risk characteristics (loan delinquency).
Nationstar considers expected prepayments, and estimates the
amount and timing of undiscounted expected principal, interest,
and other cash flows for each aggregated pool of loans.
Nationstar determines the excess of the pools scheduled
contractual principal and contractual interest payments over all
cash flows expected as of the transfer date as an amount that
should not be accreted (nonaccretable difference). The remaining
amount is accreted into interest income over the remaining life
of the pool of loans (accretable yield).
Over the life of the transferred loans, management continues to
estimate cash flows expected to be collected. Nationstar
evaluates at the balance sheet date whether the present value of
the loans determined using the effective interest rates has
decreased, and if so, records an allowance for loan loss. The
present value of any subsequent increase in the transferred
loans cash flows expected to be collected is used first to
reverse any existing allowance for loan loss related to such
loans. Any remaining increase in cash flows expected to be
collected are used to adjust the amount of accretable yield
recognized on a prospective basis over the remaining life of the
loans.
Nationstar accounts for its allowance for loan losses for all
other mortgage loans held for investment in accordance with
ASC 450-20,
Loss Contingencies. The allowance for loan losses represents
managements best estimate of probable losses inherent in
the loans held for investment portfolio. Mortgage loans held for
investment portfolio is comprised primarily of large groups of
homogeneous residential mortgage loans. These loans are
evaluated based on the loans present delinquency status.
The estimate of probable losses on these loans considers the
rate of default of the loans and the amount of loss in the event
of default. The rate of default is based on historical
experience related to the migration of these from each
delinquency category to default over a twelve-month period. The
entire allowance is available to absorb probable credit losses
from the entire held for investment portfolio.
Substantially, all mortgage loans held for investment were
transferred from mortgage loans held for sale at fair value in
October 2009.
Investment in
Debt Securities
Investment in debt securities consists of beneficial interests
Nationstar retains in securitization transactions accounted for
as a sale under the guidance of ASC 860, Transfers and
Servicing. These securities are classified as
available-for-sale
securities, and are therefore carried at their market value with
the net unrealized gains or losses reported in the comprehensive
income (loss) component of members equity. Nationstar
accounts for debt securities based on ASC 320,
InvestmentsDebt and Equity Securities. Nationstar
evaluates investment in debt securities for impairment each
quarter, and investment in debt securities is considered to be
impaired when the fair value of the investment is less than its
cost. The impairment is separated into impairments related to
credit losses, which are recorded in current-period operations,
and impairments related to all other factors, which are recorded
in other comprehensive income/(loss). Substantially all
impairments related to Nationstars investment in debt
securities were credit related.
Receivables
from Affiliates
Nationstar engages in periodic transactions with Nationstar
Regular Holdings, Ltd., a subsidiary of FIF. These transactions
typically involve the monthly payment of principal and interest
advances that are required to be remitted to the securitization
trusts as required under various Pooling and Servicing
F-10
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
2.
|
Significant
Accounting Policies (continued)
|
Agreements. These amounts are later repaid to Nationstar when
principal and interest advances are recovered from the
respective borrowers.
Mortgage
Servicing Rights (MSRs)
Nationstar recognizes MSRs related to all existing residential
mortgage loans transferred to a third party in a transfer that
meets the requirements for sale accounting and for which the
servicing rights are retained. Additionally, Nationstar may
acquire the rights to service residential mortgage loans that do
not relate to assets transferred by Nationstar through the
purchase of these rights from third parties. Nationstar applies
fair value accounting to these MSRs, with all changes in fair
value recorded as charges or credits to servicing fee income.
Property and
Equipment, Net
Property and equipment, net is comprised of land, furniture,
fixtures, leasehold improvements, computer software, and
computer hardware. These assets are stated at cost less
accumulated depreciation. Repairs and maintenance are expensed
as incurred. Depreciation is recorded using the straight-line
method over the estimated useful lives of the related assets,
usually three to ten years. Cost and accumulated depreciation
applicable to assets retired or sold are eliminated from the
accounts, and any resulting gains or losses are recognized at
such time through a charge or credit to general and
administrative expenses.
Real Estate
Owned, Net
Nationstar holds real estate owned as a result of foreclosures
on delinquent mortgage loans. Real estate owned is recorded at
estimated fair value less costs to sell at the date of
foreclosure. Any subsequent declines in fair value are credited
to a valuation allowance and charged to operations as incurred.
Variable
Interest Entities
Nationstar has been the transferor in connection with a number
of securitizations or asset-backed financing arrangements, from
which Nationstar has continuing involvement with the underlying
transferred financial assets. Nationstar aggregates these
securitizations or asset-backed financing arrangements into two
groups: 1) securitizations of residential mortgage loans
that were accounted for as sales and 2) financings
accounted for as secured borrowings.
On securitizations of residential mortgage loans,
Nationstars continuing involvement typically includes
acting as servicer for the mortgage loans held by the trust and
holding beneficial interests in the trust. Nationstars
responsibilities as servicer include, among other things,
collecting monthly payments, maintaining escrow accounts,
providing periodic reports and managing insurance in exchange
for a contractually specified servicing fee. The beneficial
interests held consist of both subordinate and residual
securities that were retained at the time of the securitization.
Prior to January 1, 2010, each of these securitization
trusts were considered QSPEs, and these trusts were excluded
from Nationstars consolidated financial statements.
Nationstar also maintains various agreements with special
purpose entities (SPEs), under which Nationstar transfers
mortgage loans
and/or
advances on residential mortgage loans in exchange for cash.
These SPEs issue debt supported by collections on the
transferred mortgage loans
and/or
advances. These transfers do not qualify for sale treatment
because Nationstar continues to retain control over the
transferred assets. As a result, Nationstar accounts for these
transfers as financings
F-11
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
2.
|
Significant
Accounting Policies (continued)
|
and continues to carry the transferred assets and recognizes the
related liabilities on Nationstars consolidated balance
sheets. Collections on the mortgage loans
and/or
advances pledged to the SPEs are used to repay principal and
interest and to pay the expenses of the entity. The holders of
these beneficial interests issued by these SPEs do not have
recourse to Nationstar and can only look to the assets of the
SPEs themselves for satisfaction of the debt.
Prior to January 1, 2010, Nationstar evaluated each special
purpose entity (SPE) for classification as a QSPE. QSPEs were
not consolidated in Nationstars consolidated financial
statements. When an SPE was determined to not be a QSPE,
Nationstar further evaluated it for classification as a VIE.
When an SPE met the definition of a VIE, and when it was
determined that Nationstar was the primary beneficiary,
Nationstar included the SPE in its consolidated financial
statements.
Nationstar considers the SPEs created for the purpose of issuing
debt supported by collections on loans
and/or
advances that have been transferred to it as VIEs, and
Nationstar is the primary beneficiary of these VIEs. Nationstar
consolidates the assets and liabilities of the VIEs into its
consolidated financial statements.
Effective January 1, 2010, new accounting guidance
eliminated the concept of a QSPE and all existing SPEs are now
subject to new consolidation guidance. Upon adoption of this new
accounting guidance, Nationstar identified certain
securitization trusts where Nationstar, or through its
affiliates, continued to hold beneficial interests in these
trusts. These retained beneficial interests obligate Nationstar
to absorb losses of the VIE that could potentially be
significant to the VIE or the right to receive benefits from the
VIE that could potentially be significant. In addition,
Nationstar as Master Servicer on the related mortgage loans,
retains the power to direct the activities of the VIE that most
significantly impact the economic performance of the VIE. When
it is determined that Nationstar has both the power to direct
the activities that most significantly impact the VIEs
economic performance and the obligation to absorb losses or the
right to receive benefits that could potentially be significant
to the VIE, the assets and liabilities of these VIEs are
included in Nationstars consolidated financial statements.
Upon consolidation of these VIEs, Nationstar derecognized all
previously recognized beneficial interests obtained as part of
the securitization, including any retained investment in debt
securities, mortgage servicing rights, and any remaining
residual interests. In addition, Nationstar recognized the
securitized mortgage loans as mortgage loans held for
investment, subject to ABS nonrecourse debt, and the related
asset-backed certificates (ABS nonrecourse debt) acquired by
third parties as ABS nonrecourse debt on Nationstars
consolidated balance sheet.
Derivative
Financial Instruments
Nationstar enters into interest rate lock commitments (IRLCs)
with prospective borrowers. These commitments are carried at
fair value in accordance with ASC 815, Derivatives and
Hedging. ASC 815 clarifies that the expected net future cash
flows related to the associated servicing of a loan should be
included in the measurement of all written loan commitments that
are accounted for at fair value through earnings. The estimated
fair values of IRLCs are based on quoted market values and are
recorded in other assets in the consolidated balance sheets. The
initial and subsequent changes in the value of IRLCs are a
component of gain (loss) on mortgage loans held for sale.
Nationstar actively manages the risk profiles of its IRLCs and
mortgage loans held for sale on a daily basis. To manage the
price risk associated with IRLCs, Nationstar enters into forward
sales of mortgage backed securities (MBS) in an amount equal to
the portion of the IRLC expected to close, assuming no change in
mortgage interest rates. In addition, to manage the interest
rate risk associated with mortgage loans held for sale,
Nationstar enters into forward sales of MBS to deliver mortgage
F-12
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
2.
|
Significant
Accounting Policies (continued)
|
loan inventory to investors. The estimated fair values of
forward sales of MBS and forward sale commitments are based on
quoted market values and are recorded as a component of mortgage
loans held for sale in the consolidated balance sheets. The
initial and subsequent changes in value on forward sales of MBS
are a component of gain (loss) on mortgage loans held for sale.
Periodically, Nationstar has entered into interest rate swap
agreements to hedge the interest payment on the warehouse debt
and securitization of its mortgage loans held for sale. These
interest rate swap agreements generally require Nationstar to
pay a fixed interest rate and receive a variable interest rate
based on LIBOR. Unless designated as an accounting hedge,
Nationstar records losses on interest rate swaps as a component
of loss on interest rate swaps and caps in Nationstars
consolidated statements of operations. Unrealized losses on
undesignated interest rate derivatives are separately disclosed
under operating activities in the consolidated statements of
cash flows. At December 31, 2009, Nationstar had no
interest rate swap agreements designated as accounting hedges.
On October 1, 2010, the Company designated an existing
interest rate swap as a cash flow hedge against outstanding
floating rate financing associated with the Nationstar Mortgage
Advance Receivables
Trust 2009-ADV1
financing. Under the swap agreement, the Company receives
interest equivalent to one month LIBOR and pays a fixed rate of
2.0425% based on an amortizing notional of $268M as of
December 31, 2010, with settlements occurring monthly until
November 2013. This interest rate swap is a cash flow hedge
under ASC 815, Derivatives and Hedging, and is recorded at
fair value on the Companys consolidated balance sheet,
with any changes in fair value being recorded as an adjustment
to other comprehensive income. To qualify as a cash flow hedge,
the hedge must be highly effective at reducing the risk
associated with the exposure being hedged and must be formally
designated at hedge inception. Nationstar considers a hedge to
be highly effective if the change in fair value of the
derivative hedging instrument is within 80% to 125% of the
opposite change in the fair value of the hedged item
attributable to the hedged risk. Ineffective portions of the
cash flow hedge are reflected in earnings as they occur as a
component of interest expense.
During 2008, Nationstar entered into interest rate cap
agreements to hedge the interest payment on the servicing
advance facility. These interest rate cap agreements generally
require an upfront payment and receive cash flow only when a
variable rate based on LIBOR exceeds a defined interest rate.
These interest rate cap agreements are not designated as hedging
instruments, and unrealized gains and losses are recorded in
loss on interest rate swaps and caps in Nationstars
consolidated statements of operations.
Interest
Income
Interest income is recognized using the interest method. Revenue
accruals for individual loans are suspended and accrued amounts
reversed when the mortgage loan becomes contractually delinquent
for 90 days or more. Delinquency payment status is based on
the most recently received payment from the borrower. The
accrual is resumed when the individual mortgage loan becomes
less than 90 days contractually delinquent. For individual
loans that have been modified, a period of six timely payments
is required before the loan is returned to an accrual basis.
Interest income also includes (1) interest earned on
custodial cash deposits associated with the mortgage loans
serviced and (2) deferred origination income, net of
deferred origination costs and other revenues derived from the
origination of mortgage loans, which is deferred and recognized
over the life of a mortgage loan or recognized when the related
loan is sold to a third-party purchaser. Effective
October 1, 2009, in connection with Nationstars
election to measure mortgage loans held for sale at fair value,
Nationstar
F-13
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
2.
|
Significant
Accounting Policies (continued)
|
is no longer permitted to defer the loan origination fees, net
of direct loan origination costs for such loans originated
subsequent to the election date.
Servicing Fee
Income
Servicing fees include contractually specified servicing fees,
late charges, prepayment penalties and other ancillary charges.
Servicing encompasses, among other activities, the following
processes: billing, collection of payments, movement of cash to
the payment clearing bank accounts, investor reporting, customer
service, recovery of delinquent payments, instituting
foreclosure, and liquidation of the underlying collateral.
Nationstar recognizes servicing and ancillary fees as they are
earned, which is generally upon collection of the payments from
the borrower. In addition, Nationstar also receives various fees
in the course of providing servicing on its various portfolios.
These fees include modification fees for modifications performed
outside of government programs, modification fees for
modifications pursuant to various government programs, and
incentive fees for servicing performance on specific GSE
portfolios.
Fees recorded on modifications of mortgage loans held for
investment performed outside of government programs are deferred
and recognized as an adjustment to the loans held for
investment. These fees are accreted into interest income as an
adjustment to the loan yield over the life of the loan. Fees
recorded on modifications of mortgage loans serviced by
Nationstar for others are recognized on collection and are
recorded as a component of service fee income. Fees recorded on
modifications pursuant to various government programs are
recognized when Nationstar has completed all necessary steps and
the loans have performed for the minimum required time frame to
establish eligibility for the fee. Revenue earned on
modifications pursuant to various government programs are
included as a component of service fee income. Incentive fees
for servicing performance on specific GSE portfolios are
recognized as various incentive standards are achieved and are
recorded as a component of service fee income.
Sale of
Mortgage Loans
Transfers of financial assets are accounted for as sales when
control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the
assets have been isolated from Nationstar, (2) the
transferee has the right (free of conditions that constrain it
from taking advantage of that right) to pledge or exchange the
transferred assets, and (3) Nationstar does not maintain
effective control over the transferred assets through either
(a) an agreement that entitles and obligates Nationstar to
repurchase or redeem them before their maturity or (b) the
ability to unilaterally cause the holder to return specific
assets.
Loan securitizations structured as sales, as well as whole loan
sales, are accounted for in accordance with ASC 860 and the
resulting gains on such sales, net of any accrual for recourse
obligations, are reported in operating results during the period
in which the securitization closes or the sale occurs.
Share-Based
Compensation Expense
Share-based compensation is recognized in accordance with
ASC 718, CompensationStock Compensation. This
guidance requires all share-based payments to employees,
including grants of employee stock options, to be recognized as
an expense in the consolidated statements of operations, based
on their fair values. The amount of compensation is measured at
the fair value of the awards
F-14
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
2.
|
Significant
Accounting Policies (continued)
|
when granted and this cost is expensed over the required service
period, which is normally the vesting period of the award.
Advertising
Costs
Advertising costs are expensed as incurred and are included as
part of general and administrative expenses.
Income
Taxes
For federal income tax purposes, Nationstar has elected to be a
disregarded entity and is treated as a branch of its parent, FIF
HE Holdings LLC. FIF HE Holdings LLC is taxed as a partnership,
whereby all income is taxed at the member level. Certain states
impose income taxes on LLCs. However, Nationstar does not
believe it is subject to material state or local income tax in
any of the jurisdictions in which it does business.
Consolidated
Statement of Cash FlowsSupplemental
Disclosure
Total interest paid for the years ended December 31, 2010,
2009, and 2008, was approximately $91.8 million,
$47.6 million, and $58.8 million, respectively.
New Accounting
Standards
On January 1, 2010, the Company adopted new FASB accounting
guidance on transfers of financial assets and consolidation of
VIEs. This new accounting guidance revises sale accounting
criteria for transfers of financial assets, including
elimination of the concept of and accounting for qualifying
special purpose entities (QSPEs), and significantly changes the
criteria for consolidation of a VIE. The adoption of this new
accounting guidance resulted in the consolidation of certain
VIEs that previously were QSPEs that were not recorded on the
Companys Consolidated Balance Sheet prior to
January 1, 2010. The adoption of this new accounting
guidance resulted in a net incremental increase in assets of
$905.5 million and a net increase in liabilities of
$913.6 million. These amounts are net of retained interests
in securitizations held on the Consolidated Balance Sheet at
December 31, 2009. The Company recorded an
$8.1 million charge to members equity on
January 1, 2010 for the cumulative effect of the adoption
of this new accounting guidance, which resulted principally from
the derecognition of the retained interests in the
securitizations. Initial recording of these assets and
liabilities on the Companys Consolidated Balance Sheet had
no impact at the date of adoption on consolidated results of
operations. See Note 3.
Accounting Standards Update
No. 2010-06,
Fair Value Measurements and Disclosures (Topic 820):
Improving Disclosures about Fair Value Measurements (Update
No. 2010-06).
Update
No. 2010-06
requires additional disclosures about fair value measurements,
including separate disclosures of significant transfers in and
out of Level 1 and Level 2 fair value measurements and
the reasons for the transfers. Additionally, the reconciliation
for fair value measurements using significant unobservable
inputs (Level 3) should present separately information
about purchases, sales, issuances, and settlements. Update
No. 2010-06
also clarifies previous disclosure requirements, including the
requirement that entities provide disclosures about the
valuation techniques and inputs used to measure fair value for
both recurring and nonrecurring fair value measurements for both
Level 2 and Level 3 measurements. The new disclosures
and clarifications of existing disclosures required under Update
No. 2010-06
is effective for interim and annual reporting periods beginning
after December 15, 2009, and was adopted for the interim
reporting period ending March 31, 2010, except for the
disclosures about purchases, sales, issuances, and settlement in
the roll forward of activity in Level 3
F-15
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
2.
|
Significant
Accounting Policies (continued)
|
fair value measurements. Those disclosures are effective for
fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years.
Accounting Standards Update
No. 2010-18,
Effect of a Loan Modification When the Loan Is Part of a Pool
That Is Accounted for as a Single Asset (Update
No. 2010-18).
Update
No. 2010-18
clarifies the accounting treatment for modifications of loans
that are accounted for within a pool under Subtopic
310-30,
ReceivablesLoans and Debt Securities Acquired with
Deteriorated Credit Quality (Subtopic
310-30),
requiring an entity to continue to include modified loans in the
pool even if the modification of those loans would otherwise be
considered a troubled debt restructuring. Loans accounted for
individually under Subtopic
310-30
continue to be subject to the troubled debt restructuring
accounting provisions within Subtopic
310-40,
ReceivablesTroubled Debt Restructurings by
Creditors. The amendments in this update were effective for
Nationstar for modifications of loans accounted for within pools
under Subtopic
310-30
occurring in the first interim or annual period ending on or
after July 15, 2010. The adoption of Update
No. 2010-18
did not have a material impact on Nationstars financial
condition, liquidity or results of operations.
Accounting Standards Update
No. 2010-20,
Disclosures about the Credit Quality of Financing Receivables
and the Allowance for Credit Losses (Update
No. 2010-20).
Update
No. 2010-20
is intended to provide users of financial statements with
greater transparency regarding a companys allowance for
credit losses and the credit quality of its financing
receivables. It is intended to provide additional information to
assist financial statement users in assessing an entitys
credit risk exposures and evaluating the adequacy of its
allowance for credit losses. The additional disclosure
requirements for this amendment were initially to be effective
for Nationstar for annual reporting periods ending on or after
December 15, 2011, but was subsequently deferred by
Accounting Standards Update
No. 2011-01,
Deferral of the Effective Date of Disclosures about Troubled
Debt Restructurings in Update
No. 2010-20.
In the proposed Update for determining what constitutes a
troubled debt restructuring, the clarifications would be
effective for interim and annual periods ending after
June 15, 2011. The adoption of Update
No. 2010-20
will not have a material impact on Nationstars financial
condition, liquidity or results of operations.
|
|
3.
|
Variable Interest
Entities and Securitizations
|
A VIE is an entity that has either a total equity investment
that is insufficient to permit the entity to finance its
activities without additional subordinated financial support or
whose equity investors lack the characteristics of a controlling
financial interest. A VIE is consolidated by its primary
beneficiary, which is the entity that, through its variable
interests has both the power to direct the activities of a VIE
that most significantly impact the VIEs economic performance and
the obligation to absorb losses of the VIE that could
potentially be significant to the VIE or the right to receive
benefits from the VIE that could potentially be significant to
the VIE.
Effective January 1, 2010, new accounting guidance
eliminated the concept of a QSPE and all existing SPEs are now
subject to new consolidation guidance. Upon adoption of this new
accounting guidance, Nationstar identified certain
securitization trusts where Nationstar had both the power to
direct the activities that most significantly impacted the
VIEs economic performance and the obligation to absorb
losses or the right to receive benefits that could potentially
be significant to the VIE, the assets and liabilities of these
VIEs are included in Nationstars consolidated financial
statements. The net incremental impact of this accounting change
on the Companys Consolidated
F-16
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
3.
|
Variable Interest
Entities and Securitizations (continued)
|
Balance Sheet is set forth in the following table. The net
effect of the accounting change on January 1, 2010
members equity was an $8.1 million charge to
members equity (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
|
|
|
|
Beginning Balance
|
|
|
|
Sheet
|
|
|
Net Increase/
|
|
|
Sheet
|
|
|
|
December 31, 2009
|
|
|
(Decrease)
|
|
|
January 1, 2010
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
41,645
|
|
|
$
|
|
|
|
$
|
41,645
|
|
Restricted cash
|
|
|
52,795
|
|
|
|
6,183
|
|
|
|
58,978
|
|
Accounts receivable
|
|
|
509,974
|
|
|
|
(39,612
|
)
|
|
|
470,362
|
|
Mortgage loans held for sale
|
|
|
203,131
|
|
|
|
|
|
|
|
203,131
|
|
Mortgage loans held for investment, subject to nonrecourse
debtLegacy Assets
|
|
|
301,910
|
|
|
|
|
|
|
|
301,910
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt
|
|
|
|
|
|
|
928,891
|
|
|
|
928,891
|
|
Investment in debt
securitiesavailable-for-sale
|
|
|
2,486
|
|
|
|
(2,486
|
)
|
|
|
|
|
Receivables from affiliates
|
|
|
12,574
|
|
|
|
|
|
|
|
12,574
|
|
Mortgage servicing rights
|
|
|
114,605
|
|
|
|
(10,431
|
)
|
|
|
104,174
|
|
Property and equipment, net
|
|
|
6,575
|
|
|
|
|
|
|
|
6,575
|
|
Real estate owned, net
|
|
|
10,262
|
|
|
|
22,970
|
|
|
|
33,232
|
|
Other assets
|
|
|
24,228
|
|
|
|
|
|
|
|
24,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,280,185
|
|
|
$
|
905,515
|
|
|
$
|
2,185,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and members equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
771,857
|
|
|
$
|
|
|
|
$
|
771,857
|
|
Payables and accrued liabilities
|
|
|
66,830
|
|
|
|
123
|
|
|
|
66,953
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
|
|
|
|
28,614
|
|
|
|
28,614
|
|
Nonrecourse debtLegacy Assets
|
|
|
177,675
|
|
|
|
|
|
|
|
177,675
|
|
ABS nonrecourse debt
|
|
|
|
|
|
|
884,846
|
|
|
|
884,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,016,362
|
|
|
|
913,583
|
|
|
|
1,929,945
|
|
Total members equity
|
|
|
263,823
|
|
|
|
(8,068
|
)
|
|
|
255,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$
|
1,280,185
|
|
|
$
|
905,515
|
|
|
$
|
2,185,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of market conditions and deteriorating credit
performance on these consolidated VIEs, Nationstar expects
minimal to no future cash flows on the economic residual. Under
existing GAAP, Nationstar would be required to provide for
additional allowances for loan losses on the securitization
collateral as credit performance deteriorated, with no
offsetting reduction in the securitizations debt balances,
even though any nonperformance of the assets will ultimately
pass through as a reduction of amounts owed to the debt holders,
once the economic residuals are extinguished. Therefore,
Nationstar would be required to record accounting losses beyond
its economic exposure.
To more accurately represent the future economic performance of
the securitization collateral and related debt balances,
Nationstar elected the fair value option provided for by
ASC 825-10,
F-17
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
3.
|
Variable Interest
Entities and Securitizations (continued)
|
Financial Instruments-Overall. This option was applied to
all eligible items within the VIE, including mortgage loans held
for investment, subject to ABS nonrecourse debt, and the related
ABS nonrecourse debt.
Subsequent to this fair value election, Nationstar no longer
records an allowance for loan loss on mortgage loans held for
investment, subject to ABS nonrecourse debt. Nationstar
continues to record interest income in Nationstars
consolidated statement of operations on these fair value elected
loans until they are placed on a nonaccrual status when they are
90 days or more past due. The fair value adjustment
recorded for the mortgage loans held for investment is
classified within fair value changes of ABS securitizations in
Nationstars consolidated statement of operations.
Subsequent to the fair value election for ABS nonrecourse debt,
Nationstar continues to record interest expense in
Nationstars consolidated statement of operations on the
fair value elected ABS nonrecourse debt. The fair value
adjustment recorded for the ABS nonrecourse debt is classified
within fair value changes of ABS securitizations in
Nationstars consolidated statement of operations.
Under the existing pooling and servicing agreements of these
securitization trusts, the principal and interest cash flows on
the underlying securitized loans are used to service the
asset-backed certificates. Accordingly, the timing of the
principal payments on this nonrecourse debt is dependent on the
payments received on the underlying mortgage loans and
liquidation of real estate owned.
Nationstar consolidates the SPEs created for the purpose of
issuing debt supported by collections on loans and advances that
have been transferred to it as VIEs, and Nationstar is the
primary beneficiary of these VIEs. Nationstar consolidates the
assets and liabilities of the VIEs into its consolidated
financial statements.
F-18
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
3.
|
Variable Interest
Entities and Securitizations (continued)
|
A summary of the assets and liabilities of Nationstars
transactions with VIEs included in Nationstars
consolidated financial statements as of December 31, 2010
is presented in the following table (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers
|
|
|
|
|
|
|
|
|
|
Accounted for as
|
|
|
|
|
|
|
Securitization
|
|
|
Secured
|
|
|
|
|
|
|
Trusts
|
|
|
Borrowings
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
$
|
1,472
|
|
|
$
|
32,075
|
|
|
$
|
33,547
|
|
Accounts receivable
|
|
|
2,392
|
|
|
|
286,808
|
|
|
|
289,200
|
|
Mortgage loans held for investment, subject to nonrecourse debt
|
|
|
|
|
|
|
261,305
|
|
|
|
261,305
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt
|
|
|
538,440
|
|
|
|
|
|
|
|
538,440
|
|
Real estate owned
|
|
|
17,509
|
|
|
|
9,505
|
|
|
|
27,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
559,813
|
|
|
$
|
589,693
|
|
|
$
|
1,149,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
|
|
|
$
|
236,808
|
|
|
$
|
236,808
|
|
Payables and accrued liabilities
|
|
|
95
|
|
|
|
1,173
|
|
|
|
1,268
|
|
Outstanding servicer
advances(1)
|
|
|
32,284
|
|
|
|
|
|
|
|
32,284
|
|
Derivative financial instruments
|
|
|
|
|
|
|
7,801
|
|
|
|
7,801
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
18,781
|
|
|
|
|
|
|
|
18,781
|
|
Nonrecourse debtLegacy Assets
|
|
|
|
|
|
|
138,662
|
|
|
|
138,662
|
|
ABS nonrecourse debt
|
|
|
497,289
|
|
|
|
|
|
|
|
497,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
548,449
|
|
|
$
|
384,444
|
|
|
$
|
932,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Outstanding servicer advances consists of principal and interest
advances paid by Nationstar to cover scheduled payments and
interest that have not been timely paid by borrowers. These
outstanding servicer advances are eliminated upon the
consolidation of the securitization trusts. |
F-19
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
3.
|
Variable Interest
Entities and Securitizations (continued)
|
A summary of the assets and liabilities of Nationstars
transactions with VIEs included in Nationstars
consolidated financial statements as of December 31, 2009
is presented in the following table (in thousands).
|
|
|
|
|
|
|
Transfers
|
|
|
|
Accounted for as
|
|
|
|
Secured
|
|
|
|
Borrowings
|
|
|
Assets
|
|
|
|
|
Restricted cash
|
|
$
|
11,318
|
|
Accounts receivable
|
|
|
294,973
|
|
Mortgage loans held for investment, subject to nonrecourse debt
|
|
|
297,737
|
|
Real estate owned
|
|
|
10,262
|
|
|
|
|
|
|
Total Assets
|
|
$
|
614,290
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Notes payable
|
|
$
|
240,935
|
|
Payables and accrued liabilities
|
|
|
1,393
|
|
Nonrecourse debtLegacy Assets
|
|
|
177,675
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
420,003
|
|
|
|
|
|
|
As of July 1, 2010, cumulative realized losses related to a
consolidated securitization trust were in excess of
Nationstars retained beneficial interests. In accordance
with ASC 810, Consolidation, Nationstar has evaluated this
securitization trust and determined that Nationstar no longer
has both the power to direct the activities that most
significantly impact the VIEs economic performance and the
obligation to absorb losses or the right to receive benefits
that could potentially be significant to the VIE, and this
securitization trust was derecognized on July 1, 2010. Upon
derecognition of this VIE, Nationstar derecognized the
securitized mortgage loans held for investment, subject to ABS
nonrecourse debt, and the related ABS nonrecourse debt, and
recognized any mortgage servicing rights on Nationstars
consolidated balance sheet. The impact of this derecognition on
Nationstars consolidated statement of operations was a
decrease in net income of approximately $0.7 million during
2010.
A summary of the outstanding collateral and certificate balances
for securitization trusts, including any retained beneficial
interests and mortgage servicing rights, that were not
consolidated by Nationstar for the years ended December 31,
2010 and 2009 are presented in the following table (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2010(1)
|
|
|
2009
|
|
|
Total collateral balance
|
|
$
|
4,038,978
|
|
|
$
|
3,240,879
|
|
Total certificate balance
|
|
|
4,026,844
|
|
|
|
3,262,995
|
|
Total beneficial interests held at fair value
|
|
|
|
|
|
|
2,486
|
|
Total mortgage servicing rights at fair value
|
|
|
26,419
|
|
|
|
20,505
|
|
|
|
|
(1) |
|
Unconsolidated securitization trusts as of December 31,
2010 consist of VIEs where Nationstar does not have both
the power to direct the activities that most significantly
impact the VIEs economic performance and the obligation to
absorb losses or the right to receive benefits that could
potentially be significant to the VIE. |
F-20
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
3.
|
Variable Interest
Entities and Securitizations (continued)
|
Nationstar has no recorded variable interests in the
unconsolidated securitization trusts that were outstanding as of
December 31, 2010, and does not have any exposure to loss
related to these unconsolidated VIEs.
A summary of mortgage loans transferred to unconsolidated
securitization trusts that are 60 days or more past due and
the credit losses incurred in the unconsolidated securitization
trusts are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
|
December 31, 2010
|
|
December 31, 2009
|
|
December 31, 2008
|
|
|
Principal Amount of
|
|
|
|
Principal Amount of
|
|
|
|
Principal Amount of
|
|
|
|
|
Loans 60 Days or
|
|
Credit
|
|
Loans 60 Days or
|
|
Credit
|
|
Loans 60 Days or
|
|
Credit
|
|
|
More Past Due
|
|
Losses
|
|
More Past Due
|
|
Losses
|
|
More Past Due
|
|
Losses
|
|
Total securitization Trusts
|
|
$
|
830,953
|
|
|
$
|
18,341
|
|
|
$
|
1,172,822
|
|
|
$
|
27,734
|
|
|
$
|
979,556
|
|
|
$
|
16,708
|
|
Certain cash flows received from securitization trusts accounted
for as sales for the dates indicated were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Servicing
|
|
|
|
|
|
Servicing
|
|
|
|
|
|
Servicing
|
|
|
|
|
|
|
Fees
|
|
|
Loan
|
|
|
Fees
|
|
|
Loan
|
|
|
Fees
|
|
|
Loan
|
|
|
|
Received
|
|
|
Repurchases
|
|
|
Received
|
|
|
Repurchases
|
|
|
Received
|
|
|
Repurchases
|
|
|
Total securitization trusts
|
|
$
|
29,129
|
|
|
$
|
|
|
|
$
|
32,593
|
|
|
$
|
|
|
|
$
|
25,535
|
|
|
$
|
|
|
Accounts receivable consist primarily of accrued interest
receivable on mortgage loans and securitizations, collateral
deposits on surety bonds, and advances made to securitization
trusts, as required under various servicing agreements related
to delinquent loans, which are ultimately paid back to
Nationstar from such trusts.
Accounts receivable consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
Delinquency advances
|
|
$
|
148,752
|
|
|
$
|
206,446
|
|
Corporate and escrow advances
|
|
|
233,432
|
|
|
|
275,001
|
|
Insurance deposits
|
|
|
6,390
|
|
|
|
6,025
|
|
Accrued interest (includes $2,392 and $0, respectively, subject
to ABS nonrecourse debt)
|
|
|
4,302
|
|
|
|
3,353
|
|
Receivable from trusts
|
|
|
30,095
|
|
|
|
1,779
|
|
Other
|
|
|
16,100
|
|
|
|
17,370
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable
|
|
$
|
439,071
|
|
|
$
|
509,974
|
|
|
|
|
|
|
|
|
|
|
F-21
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
5.
|
Mortgage Loans
Held for Sale and Investment
|
Mortgage loans
held for sale
Mortgage loans held for sale consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
Mortgage loans held for saleunpaid principal balance
|
|
$
|
366,880
|
|
|
$
|
201,121
|
|
Mark-to-market
adjustment
|
|
|
4,280
|
|
|
|
2,010
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans held for sale
|
|
$
|
371,160
|
|
|
$
|
203,131
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale on a nonaccrual status are
presented in the following table for the years indicated (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Mortgage loans held for sale
|
|
$
|
2,016
|
|
|
$
|
920
|
|
|
$
|
101,418
|
|
A reconciliation of the changes in mortgage loans held for sale
to the amounts presented in the consolidated statements of cash
flows for the dates indicated is presented in the following
table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
Mortgage loans held for salebeginning balance
|
|
$
|
203,131
|
|
|
$
|
560,354
|
|
Mortgage loans originated and purchased, net of fees
|
|
|
2,791,639
|
|
|
|
1,480,549
|
|
Cost of loans sold, net of fees
|
|
|
(2,621,275
|
)
|
|
|
(1,007,369
|
)
|
Principal payments/prepayments received on mortgage loans held
for sale and other changes (including fair value
mark-to-market
adjustments from adoption of ASC 825 and other lower of
cost or market valuation adjustments)
|
|
|
(1,508
|
)
|
|
|
(437,956
|
)
|
Transfer of mortgage loans held for sale to mortgage loans held
for investment
|
|
|
|
|
|
|
(319,183
|
)
|
Transfer of mortgage loans held for sale to real estate owned
|
|
|
(827
|
)
|
|
|
(73,264
|
)
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for saleending balance
|
|
$
|
371,160
|
|
|
$
|
203,131
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
held for investment, subject to nonrecourse debtLegacy
Assets, net
In November 2009, Nationstar completed the securitization of
approximately $222 million of asset-backed securities,
which was structured as a secured borrowing, resulting in
carrying the securitized loans as mortgage loans on
Nationstars consolidated balance sheets and recognizing
the asset-backed certificates as nonrecourse debt. Prior to this
securitization, Nationstar transferred $530.9 million in
mortgage loans held for sale to mortgage loans held for
investment. These mortgage loans were transferred to the held
for investment classification at their fair value of
$319.2 million with no associated allowance for loan
losses, in accordance with ASC 310, Receivables. Subsequent
to the transfer date, mortgage loans held for sale consisted
principally of single-family conforming loans originated for
sale to GSEs or the other third-party investors in the secondary
market.
F-22
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
5.
|
Mortgage Loans
Held for Sale and Investment (continued)
|
Mortgage loans held for investment, subject to nonrecourse
debtLegacy Assets, net consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
Mortgage loans held for investment, subject to nonrecourse
debtLegacy Assets, netunpaid principal balance
|
|
$
|
412,398
|
|
|
$
|
490,610
|
|
Transfer discount
|
|
|
|
|
|
|
|
|
Accretable
|
|
|
(25,219
|
)
|
|
|
(22,040
|
)
|
Non-accretable
|
|
|
(117,041
|
)
|
|
|
(166,660
|
)
|
Allowance for loan losses
|
|
|
(3,298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans held for investment, subject to nonrecourse
debtLegacy Assets, net
|
|
$
|
266,840
|
|
|
$
|
301,910
|
|
|
|
|
|
|
|
|
|
|
Over the life of the loan pools, Nationstar continues to
estimate cash flows expected to be collected. Nationstar
considers expected prepayments and estimates the amount and
timing of undiscounted expected principal, interest, and other
cash flows (expected as of the transfer date) for each aggregate
pool of loans. Nationstar evaluates at the balance sheet date
whether the present value of its loans determined using the
effective interest rates, has decreased and if so, recognizes a
valuation allowance subsequent to the transfer date. The present
value of any subsequent increase in the loan pools actual
cash flows expected to be collected is used first to reverse any
existing valuation allowance for that loan pool. Any remaining
increase in cash flows expected to be collected adjusts the
amount of accretable yield recognized on a prospective basis
over the loan pools remaining life.
The changes in accretable yield on loans transferred to mortgage
loans held for investment, subject to nonrecourse
debtLegacy Assets, net were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance at the beginning of the period
|
|
$
|
22,040
|
|
|
$
|
|
|
Additions
|
|
|
|
|
|
|
23,331
|
|
Accretion
|
|
|
(4,082
|
)
|
|
|
(1,291
|
)
|
Reclassifications from (to) nonaccretable discount
|
|
|
7,261
|
|
|
|
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
25,219
|
|
|
$
|
22,040
|
|
|
|
|
|
|
|
|
|
|
Nationstar will occasionally modify the terms of any outstanding
mortgage loans held for investment, subject to nonrecourse
debtLegacy Assets, net 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
increased 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. Nationstar 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,
Nationstar reclassified approximately $7.3 million from
nonaccretable difference. Furthermore, the Company considers the
decrease in principal, interest, and other cash flows expected
to be collected arising from the transferred loans as an
impairment, and Nationstar recorded a $3.3 million
provision for loan losses on the transferred loans to reflect
this impairment.
F-23
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
5.
|
Mortgage Loans
Held for Sale and Investment (continued)
|
The changes in the allowance for loan losses on mortgage loans
held for investment, subject to nonrecourse debtLegacy
Assets, net were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
Performing
|
|
|
Performing
|
|
|
Total
|
|
|
Balance at the beginning of the period
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Provision for loan losses
|
|
|
829
|
|
|
|
2,469
|
|
|
|
3,298
|
|
Recoveries on loans previously charged-off
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
829
|
|
|
$
|
2,469
|
|
|
$
|
3,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: Collectively evaluated for impairment
|
|
$
|
311,122
|
|
|
$
|
101,276
|
|
|
$
|
412,398
|
|
Loan delinquency, and Loan-to-Value Ratio (LTV) are common
credit quality indicators that Nationstar monitors and utilizes
in its evaluation of the adequacy of the allowance for
loan losses, of which the primary indicator of credit quality
being loan delinquency. LTV refers to the ratio of comparing the
loans unpaid principal balance to the propertys
collateral value. Loan delinquencies and unpaid principal
balances are updated monthly based upon collection activity.
Collateral values are updated on an as needed basis, which is
generally described as an event requiring a decision based at
least in part on the collateral value. The collateral values
used to derive the LTVs shown below were obtained at
various points during the prior eighteen months.
The following tables provide the outstanding unpaid principal
balance of Nationstars mortgage loans held for investment,
subject to nonrecourse debtLegacy Assets, net by credit
quality indicators as of December 31, 2010.
|
|
|
|
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Credit Quality by Delinquency Status
|
|
|
|
|
Performing
|
|
$
|
311,122
|
|
Non-Performing
|
|
|
101,276
|
|
|
|
|
|
|
Total
|
|
$
|
412,398
|
|
|
|
|
|
|
Credit Quality by
Loan-to-Value
Ratio
|
|
|
|
|
Less than 60
|
|
$
|
47,627
|
|
Less than 70 and more than 60
|
|
|
17,498
|
|
Less than 80 and more than 70
|
|
|
26,805
|
|
Less than 90 and more than 80
|
|
|
36,125
|
|
Less than 100 and more than 90
|
|
|
37,599
|
|
Greater than 100
|
|
|
246,744
|
|
|
|
|
|
|
Total
|
|
$
|
412,398
|
|
|
|
|
|
|
Mortgage loans
held for investment, subject to ABS nonrecourse debt
Effective January 1, 2010, new accounting guidance
eliminated the concept of a QSPE, and all existing
securitization trusts are considered VIEs and are now subject to
new consolidation guidance provided in ASC 810. Upon
consolidation of these VIEs, Nationstar recognized the
securitized mortgage
F-24
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
5.
|
Mortgage Loans
Held for Sale and Investment (continued)
|
loans related to these securitization trusts as mortgage loans
held for investment, subject to ABS nonrecourse debt (see
Note 3). Additionally, Nationstar elected the fair value
option provided for by
ASC 825-10.
Mortgage loans held for investment, subject to ABS nonrecourse
debt as of December 31, 2010 includes (in thousands):
|
|
|
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debtunpaid principal balance
|
|
$
|
983,106
|
|
Fair value adjustment
|
|
|
(444,666
|
)
|
|
|
|
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt, net
|
|
$
|
538,440
|
|
|
|
|
|
|
As of December 31, 2010, approximately $223.5 million
of the unpaid principal balance of mortgage loans held for
investment, subject to ABS nonrecourse debt were over
90 days past due. The fair value of such loans was
approximately $117.6 million.
|
|
6.
|
Investment in
Debt Securities
|
Effective January 1, 2010, new accounting guidance
eliminated the concept of a QSPE, and all existing
securitization trusts are considered VIEs and are now subject to
new accounting guidance provided in ASC 810. Upon
consolidation of these VIEs, Nationstar derecognized all
previously recognized beneficial interests, including retained
investment in debt securities, obtained as part of the
securitization (see Note 3).
The following table presents a summary of Nationstars
bonds retained from securitization trusts as of
December 31, 2009, which are classified as
available-for-sale
securities, and are therefore carried at fair value (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Outstanding
|
|
|
Accreted
|
|
|
Fair
|
|
|
|
Face
|
|
|
Cost
|
|
|
Value
|
|
|
Retained bonds security rating
|
|
|
|
|
|
|
|
|
|
|
|
|
BBs
|
|
$
|
68,432
|
|
|
$
|
2,486
|
|
|
$
|
2,486
|
|
Bs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total retained bonds
|
|
|
68,432
|
|
|
|
2,486
|
|
|
|
2,486
|
|
Retained net interest margin securities
|
|
|
11,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment in debt securities
|
|
$
|
80,382
|
|
|
$
|
2,486
|
|
|
$
|
2,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
6.
|
Investment in
Debt Securities (continued)
|
The following table presents a summary of unrealized gains
(losses), both temporary and
other-than-temporary,
recognized on outstanding debt securities for the periods
indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Other-than-
|
|
|
Gains
|
|
|
Other-than-
|
|
|
Gains
|
|
|
|
Temporary
|
|
|
(Losses)(1)
|
|
|
Temporary(2)
|
|
|
(Losses)(1)
|
|
|
Retained bonds security rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BBs
|
|
$
|
(5,505
|
)
|
|
$
|
|
|
|
$
|
(40,901
|
)
|
|
$
|
|
|
Bs
|
|
|
(1,214
|
)
|
|
|
|
|
|
|
(3,670
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total retained bonds
|
|
|
(6,719
|
)
|
|
|
|
|
|
|
(44,571
|
)
|
|
|
|
|
Retained net interest margin securities
|
|
|
(90
|
)
|
|
|
|
|
|
|
(10,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment in debt securities
|
|
$
|
(6,809
|
)
|
|
$
|
|
|
|
$
|
(55,212
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Unrealized gains (losses) are recorded as a component of other
comprehensive income (loss). |
|
(2) |
|
As part of the 2008 impairment charges, Nationstar reclassified
approximately $3.9 million in unrealized losses from other
comprehensive income (loss). |
|
|
7.
|
Mortgage
Servicing Rights
|
MSRs arise from contractual agreements between Nationstar and
investors in mortgage securities and mortgage loans. Nationstar
records MSR assets when it sells loans on a servicing-retained
basis, at the time of securitization or through the acquisition
or assumption of the right to service a financial asset. Under
these contracts, Nationstar performs loan servicing functions in
exchange for fees and other remuneration.
The fair value of the MSRs is based upon the present value of
the expected future cash flows related to servicing these loans.
Nationstar receives a base servicing fee ranging from 0.25% to
0.50% annually on the remaining outstanding principal balances
of the loans. The servicing fees are collected from investors.
Nationstar determines the fair value of the MSRs by the use of a
cash flow model that incorporates prepayment speeds, discount
rate, and other assumptions (including servicing costs)
management believes are consistent with the assumptions other
major market participants use in valuing the MSRs. During 2010,
Nationstar obtained third-party valuations of a portion of its
MSRs to assess the reasonableness of the fair value calculated
by the cash flow model.
Nationstar used the following assumptions in estimating the fair
value of MSRs for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2010
|
|
2009
|
|
Discount rate
|
|
|
9.7% to 30.0%
|
|
|
|
15.0%
|
|
Total prepayment speeds
|
|
|
10.57% to 28.71%
|
|
|
|
12.89% to 25.40%
|
|
Expected weighted-average life
|
|
|
3.49 to 6.75 years
|
|
|
|
3.50 to 6.37 years
|
|
Credit losses
|
|
|
5.82% to 60.19%
|
|
|
|
12.50% to 64.62%
|
|
F-26
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
7.
|
Mortgage
Servicing Rights (continued)
|
The activity of MSRs carried at fair value is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
Fair value at the beginning of the period
|
|
$
|
114,605
|
|
|
$
|
110,808
|
|
Additions:
|
|
|
|
|
|
|
|
|
Servicing resulting from transfers of financial assets
|
|
|
26,253
|
|
|
|
8,332
|
|
Recognition of MSRs from derecognition of variable interest
entities
|
|
|
2,866
|
|
|
|
|
|
Purchases of servicing assets
|
|
|
17,812
|
|
|
|
23,380
|
|
Deductions:
|
|
|
|
|
|
|
|
|
Derecognition of servicing assets due to new accounting guidance
on consolidation of variable interest entities
|
|
|
(10,431
|
)
|
|
|
|
|
Changes in fair value:
|
|
|
|
|
|
|
|
|
Due to changes in valuation inputs or assumptions used in the
valuation model
|
|
|
9,455
|
|
|
|
(9,355
|
)
|
Other changes in fair value
|
|
|
(15,498
|
)
|
|
|
(18,560
|
)
|
|
|
|
|
|
|
|
|
|
Fair value at the end of the period
|
|
$
|
145,062
|
|
|
$
|
114,605
|
|
|
|
|
|
|
|
|
|
|
Unpaid principal balance of loans serviced for others
|
|
|
|
|
|
|
|
|
Originated or purchased mortgage loans
|
|
$
|
31,686,641
|
|
|
$
|
32,109,547
|
|
Subserviced for others
|
|
|
30,649,472
|
|
|
|
793,428
|
|
|
|
|
|
|
|
|
|
|
Total unpaid principal balance of loans serviced for others
|
|
$
|
62,336,113
|
|
|
$
|
32,902,975
|
|
|
|
|
|
|
|
|
|
|
The following table shows the hypothetical effect on the fair
value of the MSRs using various unfavorable variations of the
expected levels of certain key assumptions used in valuing these
assets at December 31, 2010 and 2009 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Prepayment
|
|
|
|
|
Discount Rate
|
|
Speeds
|
|
Credit Losses
|
|
|
100 bps
|
|
200 bps
|
|
10%
|
|
20%
|
|
10%
|
|
20%
|
|
|
Adverse
|
|
Adverse
|
|
Adverse
|
|
Adverse
|
|
Adverse
|
|
Adverse
|
|
|
Change
|
|
Change
|
|
Change
|
|
Change
|
|
Change
|
|
Change
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights
|
|
$
|
(3,828
|
)
|
|
$
|
(7,458
|
)
|
|
$
|
(8,175
|
)
|
|
$
|
(16,042
|
)
|
|
$
|
(4,310
|
)
|
|
$
|
(9,326
|
)
|
These sensitivities are hypothetical and 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 (e.g., a decrease in
total prepayment speeds may result in an increase in credit
losses), which could impact the above hypothetical effects.
In November 2008, Nationstar acquired MSRs on a portfolio of
residential mortgage loans with an aggregate unpaid principal
balance of $12.7 billion from a third-party servicer.
Nationstars share of the acquisition price was
$35.4 million. An additional amount was paid by a
third-party investor in the underlying loans to the previous
servicer. Contemporaneously, Nationstar and the third-party
investor entered into a supplemental servicing agreement, which,
among other matters, established that any sale by Nationstar of
these servicing rights had to be approved by the investor and
that if Nationstar were to sell the MSRs in the five-year period
following the acquisition transaction, Nationstar would be
F-27
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
7.
|
Mortgage
Servicing Rights (continued)
|
entitled to the proceeds from the sale of up to a specified
amount of the then existing aggregate unpaid principal balance
of the underlying mortgage loans, the investor would be entitled
to a specified amount, and the remaining excess proceeds, if
any, over and above these allocations would be retained by
Nationstar. In October 2009, Nationstar acquired MSRs on a
portfolio of residential mortgage loans with an aggregate unpaid
principal balance of $12.3 billion from another third party
servicer. Nationstars share of the acquisition price of
these servicing rights was $23.4 million. An additional
amount was paid by a third-party investor in the underlying
loans to the previous servicer. Contemporaneously, Nationstar
and the third-party investor entered into a supplemental
servicing agreement, which, among other matters, established
that any sale by Nationstar of these servicing rights had to be
approved by the investor and that if Nationstar were to sell the
MSRs following the acquisition transaction, Nationstar would be
entitled to the proceeds from the sale of up to a specified
amount of the then existing aggregate unpaid principal balance
of the underlying mortgage loans, the investor would be entitled
to a specified amount, and the remaining excess proceeds, if
any, over and above these allocations would be retained by
Nationstar. Nationstar carries these mortgage servicing rights
at their estimated fair value, which includes consideration of
the effect of the restriction on any sale by Nationstar due to
the investors right to approve such sale. Under the
supplemental servicing agreement, Nationstar is entitled to all
of the contractually specified servicing fees, ancillary fees
and also certain incentive fees, if certain performance
conditions are met, and does not share these servicing revenues
with the investor.
Total servicing and ancillary fees from Nationstars
portfolio of residential mortgage loans are presented in the
following table for the years indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Servicing fees
|
|
$
|
103,690
|
|
|
$
|
89,893
|
|
|
$
|
60,021
|
|
Ancillary fees
|
|
|
70,130
|
|
|
|
28,642
|
|
|
|
19,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total servicing and ancillary fees
|
|
$
|
173,820
|
|
|
$
|
118,535
|
|
|
$
|
79,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred financing costs
|
|
$
|
14,396
|
|
|
$
|
11,786
|
|
Derivative financial instruments
|
|
|
8,666
|
|
|
|
7,236
|
|
Prepaid expenses
|
|
|
3,379
|
|
|
|
2,791
|
|
Other
|
|
|
3,095
|
|
|
|
2,415
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
$
|
29,536
|
|
|
$
|
24,228
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
Derivative
Financial Instruments
|
On October 1, 2010, the Company designated an existing
interest rate swap as a cash flow hedge against outstanding
floating rate financing associated with the Nationstar Mortgage
Advance Receivables
Trust 2009-ADV1
financing. Under the swap agreement, the Company receives
interest equivalent to one month LIBOR and pays a fixed rate of
2.0425% based on an amortizing notional of
F-28
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
9.
|
Derivative
Financial Instruments (continued)
|
$268.0 million as of December 31, 2010, with
settlements occurring monthly until November 2013. Unrealized
gains associated with the effective portion of this cash flow
hedge of approximately $1.1 million were recorded in
accumulated other comprehensive income for the year ended
December 31, 2010. Realized gains associated with the
ineffective portion of this cash flow hedge of approximately
$0.9 million were recorded as a component of interest
expense for the year ended December 31, 2010.
As of December 31, 2010, there are no credit risk related
contingent features in any of the Companys derivative
agreements. The amount of OCI expected to be reclassified to the
consolidated statement of operations in the next 12 months
is $0.8 million.
The following tables provide the outstanding notional balances
and fair values of outstanding positions for the dates
indicated, and recorded gains (losses) during the years
indicated (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
|
Expiration
|
|
Outstanding
|
|
|
Fair
|
|
|
Gains /
|
|
|
|
Dates
|
|
Notional
|
|
|
Value
|
|
|
Losses
|
|
|
Year-ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MORTGAGE LOANS HELD FOR SALE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan sale commitments
|
|
2011
|
|
$
|
28,641
|
|
|
$
|
42
|
|
|
$
|
(1,397
|
)
|
Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
|
2011
|
|
|
391,990
|
|
|
|
4,703
|
|
|
|
2,289
|
|
Forward MBS trades
|
|
2011
|
|
|
546,500
|
|
|
|
3,963
|
|
|
|
580
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps and caps
|
|
2011-2013
|
|
|
429,000
|
|
|
|
7,801
|
|
|
|
8,872
|
|
Interest rate swap,subject to ABS nonrecourse debt
|
|
2013
|
|
|
245,119
|
|
|
|
18,781
|
|
|
|
2,049
|
|
Year-ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
|
2010
|
|
$
|
278,181
|
|
|
$
|
2,414
|
|
|
$
|
1,207
|
|
Forward MBS trades
|
|
2010
|
|
|
292,553
|
|
|
|
3,383
|
|
|
|
(210
|
)
|
Loan sale commitments
|
|
2010
|
|
|
56,131
|
|
|
|
1,439
|
|
|
|
1,439
|
|
Interest rate cap agreements
|
|
2011
|
|
|
344,075
|
|
|
|
|
|
|
|
(14
|
)
|
Interest rate swap
|
|
2013
|
|
|
220,000
|
|
|
|
|
|
|
|
|
|
F-29
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
Notes
Payable
A summary of the balances of notes payable for the dates
indicated is presented below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Collateral
|
|
|
|
|
|
Collateral
|
|
|
|
Outstanding
|
|
|
Pledged
|
|
|
Outstanding
|
|
|
Pledged
|
|
|
Financial institutions repurchase facility (2010)
|
|
$
|
43,059
|
|
|
$
|
45,429
|
|
|
$
|
|
|
|
$
|
|
|
Financial services company repurchase facility
|
|
|
209,477
|
|
|
|
223,119
|
|
|
|
149,449
|
|
|
|
159,281
|
|
Financial services company unsecured line of credit
|
|
|
|
|
|
|
N/A
|
|
|
|
88,915
|
|
|
|
N/A
|
|
Financial institutions repurchase facility (2009)
|
|
|
39,014
|
|
|
|
40,640
|
|
|
|
31,582
|
|
|
|
33,245
|
|
Financial services company
2009-ADV1
advance facility
|
|
|
236,808
|
|
|
|
285,226
|
|
|
|
240,935
|
|
|
|
291,462
|
|
Financial institutions
2010-ADV1
advance facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GSE MSR facility
|
|
|
15,733
|
|
|
|
18,951
|
|
|
|
21,286
|
|
|
|
23,185
|
|
GSE ASAP+ facility
|
|
|
51,105
|
|
|
|
53,230
|
|
|
|
7,755
|
|
|
|
7,803
|
|
GSE EAF facility
|
|
|
114,562
|
|
|
|
142,327
|
|
|
|
231,935
|
|
|
|
252,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
$
|
709,758
|
|
|
$
|
808,922
|
|
|
$
|
771,857
|
|
|
$
|
767,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In February 2010, Nationstar executed a Master Repurchase
Agreement (MRA) with a financial institution, under which
Nationstar may currently enter into transactions, for an
aggregate amount of $75 million, in which Nationstar agrees
to transfer to the same financial institution certain mortgage
loans against the transfer of funds by the same financial
institution, with a simultaneous agreement by the same financial
institution to transfer such mortgage loans to Nationstar at a
date certain, or on demand by Nationstar, against the transfer
of funds from Nationstar. The interest rate is based on LIBOR
plus a spread ranging from 2.75% to 3.50%, with a minimum
interest rate of 4.75%. The maturity date of this MRA is October
2011.
Nationstar has a second MRA with a financial services company,
which expires in February 2011. The MRA states that from time to
time Nationstar may enter into transactions, for an aggregate
amount of $300 million, in which Nationstar agrees to
transfer to the financial services company certain mortgage
loans or mortgage-backed securities against the transfer of
funds by the financial services company, with a simultaneous
agreement by the financial services company to transfer such
mortgage loans or mortgage-backed securities to Nationstar at a
certain date, or on demand by Nationstar, against the transfer
of funds from Nationstar. The interest rate is based on LIBOR
plus a margin of 2.00%, with a minimum interest rate of 4.00%.
In October 2009, Nationstar executed a third MRA with a
financial institution. This MRA states that from time to time
Nationstar may currently enter into transactions, for an
aggregate amount of $100 million, in which Nationstar
agrees to transfer to the financial institution certain mortgage
loans against the transfer of funds by the financial
institution, with a simultaneous agreement by the financial
institution to transfer such mortgage loans to Nationstar at a
certain date, or on demand by Nationstar, against the transfer
of funds from Nationstar. The interest rate is based on LIBOR
plus a spread of 3.50%. The maturity date of this MRA with the
financial institution is December 2011.
Nationstar maintains a facility with a financial services
company, the
2009-ADV1
Advance Facility. This facility has the capacity to purchase up
to $350 million of advance receivables. The
F-30
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
10.
|
Indebtedness
(continued)
|
interest rate is based on LIBOR plus a spread ranging from 3.00%
to 12.00%. The maturity date of this facility with the financial
services company is December 2011. This debt is nonrecourse to
Nationstar.
In December 2010, Nationstar executed the
2010-ADV1
Advance Facility with a financial institution. This facility has
the capacity to purchase up to $200 million of advance
receivables. The interest rate is based on LIBOR plus a spread
of 3.00%. The maturity date of this facility with the financial
institution is July 2011, which may be extended if Nationstar
elects to pledge any additional advances to this facility. This
debt is nonrecourse to Nationstar.
In connection with the October 2009 mortgage servicing rights
acquisition, Nationstar executed a four-year note agreement with
a government-sponsored enterprise (GSE). As collateral for this
note, Nationstar has pledged Nationstars rights, title,
and interest in the acquired servicing portfolio. The interest
rate is based on LIBOR plus 2.50%. The maturity date of this
facility is October 2013.
During 2009, Nationstar began executing As Soon As Pooled Plus
agreements with a GSE, under which Nationstar transfers to the
GSE eligible mortgage loans that are to be pooled into the GSE
MBS against the transfer of funds by the GSE. The interest rate
is based on LIBOR plus a spread of 1.50%. These agreements
typically have a maturity of up to 45 days.
In September 2009, Nationstar executed a committed facility
agreement with a GSE, under which Nationstar agrees to transfer
to the GSE certain servicing advance receivables against the
transfer of funds by the GSE. This facility currently has the
capacity to purchase up to $275 million in eligible
servicing advance receivables. The interest rate is based on
LIBOR plus a spread of 2.50%. The maturity date of this facility
is December 2011.
Senior
Unsecured Notes
In March 2010, Nationstar completed the offering of
$250 million of unsecured senior notes, which were issued
with an issue discount of $7.0 million for net cash
proceeds of $243.0 million, with a maturity date of April
2015. These unsecured senior notes pay interest biannually at an
interest rate of 10.875%.
The indenture for the unsecured senior notes contains various
covenants and restrictions that limit Nationstar, or certain of
its subsidiaries, ability to incur additional
indebtedness, pay dividends, make certain investments, create
liens, consolidate, merge or sell substantially all the assets,
or enter into certain transactions with affiliates.
Nonrecourse
DebtLegacy Assets
In November 2009, Nationstar completed the securitization of
approximately $222 million of asset-backed securities,
which was structured as a secured borrowing. This structure
resulted in Nationstar carrying the securitized loans as
mortgages on Nationstars consolidated balance sheet and
recognizing the asset-backed certificates acquired by third
parties as nonrecourse debt, totaling approximately
$138.7 million and $177.7 million at December 31,
2010 and 2009, respectively. The principal and interest on these
notes are paid using the cash flows from the underlying mortgage
loans, which serve as collateral for the debt. The interest rate
paid on the outstanding securities is 7.50%, which is subject to
an available funds cap. The total outstanding principal balance
on the underlying mortgage loans serving as collateral for the
debt was approximately $430.0 million and
$515.5 million at December 31, 2010 and
December 31, 2009, respectively. Accordingly, the timing of
the principal payments on this nonrecourse debt is dependent on
the payments received on the
F-31
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
10.
|
Indebtedness
(continued)
|
underlying mortgage loans. The unpaid principal balance on the
outstanding notes was $161.2 million and
$206.6 million at December 31, 2010 and
December 31, 2009, respectively.
ABS
Nonrecourse Debt
Effective January 1, 2010, new accounting guidance
eliminated the concept of a QSPE, and all existing
securitization trusts are considered VIEs and are now subject to
new consolidation guidance provided in ASC 810. Upon
consolidation of these VIEs, Nationstar derecognized all
previously recognized beneficial interests obtained as part of
the securitization. In addition, Nationstar recognized the
securitized mortgage loans as mortgage loans held for
investment, subject to ABS nonrecourse debt, and the related
asset-backed certificates acquired by third parties as ABS
nonrecourse debt on Nationstars consolidated balance sheet
(see Note 3). Additionally, Nationstar elected the fair
value option provided for by
ASC 825-10.
The principal and interest on these notes are paid using the
cash flows from the underlying mortgage loans, which serve as
collateral for the debt. The interest rate paid on the
outstanding securities is based on LIBOR plus a spread ranging
from 0.13% to 2.00%, which is subject to an interest rate cap.
The total outstanding principal balance on the underlying
mortgage loans serving as collateral for the debt was
approximately $1,025.3 million at December 31, 2010.
The timing of the principal payments on this ABS nonrecourse
debt is dependent on the payments received on the underlying
mortgage loans. The outstanding principal balance on the
outstanding notes related to these consolidated securitization
trusts was $1,037.9 million at December 31, 2010.
Financial
Covenants
As of December 31, 2010, Nationstar was in compliance with
its covenants on Nationstars borrowing arrangements and
credit facilities. These covenants generally relate to
Nationstars tangible net worth, liquidity reserves, and
leverage requirements.
Certain whole loan sale contracts include provisions requiring
Nationstar to repurchase a loan if a borrower fails to make
certain initial loan payments due to the acquirer or if the
accompanying mortgage loan fails to meet customary
representations and warranties. These representations and
warranties are made to the loan purchasers about various
characteristics of the loans, such as manner of origination, the
nature and extent of underwriting standards applied and the
types of documentation being provided and typically are in place
for the life of the loan. In the event of a breach of the
representations and warranties, the Company may be required to
either repurchase the loan or indemnify the purchaser for losses
it sustains on the loan. In addition, an investor may request
that Nationstar refund a portion of the premium paid on the sale
of mortgage loans if a loan is prepaid within a certain amount
of time from the date of sale. Nationstar records a provision
for estimated repurchases and premium recapture on loans sold,
which is charged to gain (loss) on mortgage loans held for sale.
The reserve for repurchases is included as a component of
payables and accrued liabilities. The current unpaid principal
balance of loans sold by Nationstar represents the maximum
potential exposure to repurchases related to representations and
warranties. Reserve levels are a function of expected losses
based on actual pending and expected claims, repurchase
requests, historical experience, and loan volume. While the
amount of repurchases and premium recapture is uncertain,
Nationstar considers the liability to be adequate.
F-32
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
11.
|
Repurchase
Reserves (continued)
|
The activity of the outstanding repurchase reserves were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Repurchase reserves, beginning of period
|
|
$
|
3,648
|
|
|
$
|
3,965
|
|
|
$
|
4,196
|
|
Additions
|
|
|
4,649
|
|
|
|
820
|
|
|
|
1,164
|
|
Charge-offs
|
|
|
(976
|
)
|
|
|
(1,137
|
)
|
|
|
(1,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase reserves, end of period
|
|
$
|
7,321
|
|
|
$
|
3,648
|
|
|
$
|
3,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
General and
Administrative
|
General and administrative expense consists of the following for
the dates indicated (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Depreciation and amortization
|
|
$
|
2,117
|
|
|
$
|
1,767
|
|
|
$
|
1,309
|
|
Advertising
|
|
|
4,559
|
|
|
|
3,882
|
|
|
|
3,318
|
|
Equipment
|
|
|
3,862
|
|
|
|
3,300
|
|
|
|
3,359
|
|
Servicing
|
|
|
14,122
|
|
|
|
1,951
|
|
|
|
1,739
|
|
Telecommunications
|
|
|
2,347
|
|
|
|
1,590
|
|
|
|
1,479
|
|
Legal and professional fees
|
|
|
14,736
|
|
|
|
9,610
|
|
|
|
6,184
|
|
Postage
|
|
|
4,220
|
|
|
|
2,315
|
|
|
|
1,057
|
|
Stationary and supplies
|
|
|
2,594
|
|
|
|
1,500
|
|
|
|
903
|
|
Travel
|
|
|
2,231
|
|
|
|
827
|
|
|
|
740
|
|
Dues and fees
|
|
|
4,114
|
|
|
|
2,264
|
|
|
|
1,383
|
|
Insurance and taxes
|
|
|
2,798
|
|
|
|
1,218
|
|
|
|
1,680
|
|
Other
|
|
|
1,213
|
|
|
|
270
|
|
|
|
(957
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expense
|
|
$
|
58,913
|
|
|
$
|
30,494
|
|
|
$
|
22,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The limited liability company interests in FIF HE Holdings LLC
are represented by four separate classes of units, Class A
Units, Class B Units, Class C Preferred Units, and
Class D Preferred Units, as defined in the FIF HE Holdings
LLC Amended and Restated Limited Liability Company Agreement
dated December 31, 2008 (the Agreement). Class A Units
have voting rights and Class B Units, Class C
Preferred Units, and Class D Preferred Units have no voting
rights. Distributions and allocations of profits and losses to
members are made in accordance with the Agreement. Class C
Preferred Units and Class D Preferred Units represent
preferred priority return units, accruing distribution
preference on any contributions at an annual rate of 15% and
20%, respectively.
A total of 100,887 Company Match Class A Units were granted
to certain management members on the date of the acquisition of
CHEC. Subsequently, the Company Match Class A Units were
increased to 141,707, net of forfeitures. No consideration was
paid for the Company Match Class A Units, and these units
vest in accordance with the Vesting Schedule per the Agreement,
generally in years three through five after grant date.
F-33
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
13.
|
Members
Equity (continued)
|
Effective September 17, 2010, FIF HE Holdings LLC executed
the FIF HE Holdings LLC Fifth Amended and Restated Limited
Liability Company Agreement (the Fifth Agreement). This Fifth
Agreement provided for a total of 457,526 Class A Units to
be granted to certain management members. No consideration was
paid for the granted units, and the units vest in accordance
with the Vesting Schedule per the Fifth Agreement.
Simultaneously to the execution of the Fifth Agreement, FIF HE
Holdings LLC executed several Restricted Series I Preferred
Stock Unit Award Agreements (PRSU Agreements). These Agreements
provided for a total of 3,304,000 Class C Units and
3,348,000 Class D Units to be granted to certain management
members. No consideration was paid for the granted units, and
the units vest in accordance with the Vesting Schedule per the
PRSU Agreements.
These awards were valued using a sum of the parts analysis in
computing the fair value of the companys equity. The
analysis adds the value of the servicing and originations
businesses to the value of the assets and securities that
Nationstar owns. The value of the servicing and originations
businesses is derived using both a market approach and an income
approach. The market approach considers market multiples from
public company examples in the industry. The income approach
employs a discounted cash flow analysis that utilizes several
factors to capture the ongoing cash flows of the business and
then is discounted with an assumed equity cost of capital. The
valuation of the assets applies a net asset value method
utilizing a variety of assumptions, including assumptions for
prepayments, cumulative losses, and other variables. Recent
market transactions, experience with similar assets and
securities, current business combinations, and analysis of the
underlying collateral, as available, are considered in the
valuation.
The Class A, Class C and Class D Units vest over
1.8 years, vesting schedule of these Units are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 17, 2010
|
|
June 30, 2011
|
|
June 30, 2012
|
|
Total
|
|
Class A Units
|
|
93,494
|
|
182,016
|
|
182,016
|
|
457,526
|
Class C Units
|
|
1,101,332
|
|
1,101,334
|
|
1,101,334
|
|
3,304,000
|
Class D Units
|
|
1,116,000
|
|
1,116,000
|
|
1,116,000
|
|
3,348,000
|
The weighted average grant date fair value of the Units was
$4.23. Subsequent to December 31, 2010, Nationstar expects
to recognize $16.9 million of compensation expense over the
next 1.6 years.
In 2010, certain management members elected to settle a portion
of the units which vested during the year to offset tax
liabilities of $3.4 million that these members have
incurred related to these awarded units.
Total share-based compensation expense, net of forfeitures, is
provided in the table below for the years indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Share-based compensation
|
|
$
|
12,856
|
|
|
$
|
827
|
|
|
$
|
2,333
|
|
|
|
14.
|
Commitments and
Contingencies
|
Nationstar leases various office facilities under noncancelable
lease agreements with primary terms extending through fiscal
2016. These lease agreements generally provide for market-rate
renewal options, and may provide for escalations in minimum
rentals over the lease term (see Note 19).
F-34
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
14.
|
Commitments and
Contingencies (continued)
|
Minimum annual rental commitments for office leases with
unrelated parties and with initial or remaining terms of one
year or more, net of sublease payments, are presented below (in
thousands).
|
|
|
|
|
2011
|
|
$
|
7,015
|
|
2012
|
|
|
6,756
|
|
2013
|
|
|
6,543
|
|
2014
|
|
|
4,591
|
|
Thereafter
|
|
|
4,624
|
|
|
|
|
|
|
Total
|
|
$
|
29,529
|
|
|
|
|
|
|
Nationstar enters into IRLCs with prospective borrowers whereby
the Company commits to lend a certain loan amount under specific
terms and interest rates to the borrower. These IRLCs are
treated as derivatives and are carried at fair value (See
Note 9).
Nationstar is engaged in legal actions arising from the normal
course of business. In managements opinion, Nationstar has
adequate legal defenses with respect to these actions, and the
resolution of these matters is not expected to have a material
adverse effect upon the consolidated results of operations or
financial condition of Nationstar.
During December 2009, Nationstar entered into a strategic
relationship with a major mortgage market participant, which
contemplates, among other things, significant mortgage servicing
rights and subservicing transfers to Nationstar upon terms to be
determined. Under this arrangement, if certain delivery
thresholds have been met, the market participant may require
Nationstar to establish an operating division or newly created
subsidiary with separate, dedicated employees within a specified
timeline to service such mortgage servicing rights and
subservicing. After a specified time period, this market
participant may purchase the subsidiary at an agreed upon price.
As of December 2010, all of the required delivery thresholds
with this market participant have been met, but the market
participant has not required the Company to establish an
operating division or newly created subsidiary with separate,
dedicated employees.
Nationstar holds a contributory defined contribution plan
(401(k) plan) that covers substantially all full-time employees.
Nationstar matches 50% of participant contributions, up to 6% of
each participants total annual base compensation. Matching
contributions totaled approximately $1.5 million,
$1.0 million, and $0.8 million for the years ended
December 31, 2010, 2009, and 2008, respectively.
|
|
16.
|
Fair Value
Measurements
|
ASC 820 provides a definition of fair value, establishes a
framework for measuring fair value, and requires expanded
disclosures about fair value measurements. The standard applies
when GAAP requires or allows assets or liabilities to be
measured at fair value and, therefore, does not expand the use
of fair value in any new circumstance.
ASC 820 emphasizes that fair value is a market-based
measurement, not an entity-specific measurement. Therefore, a
fair value measurement should be determined based on the
assumptions that market participants would use in pricing the
asset or liability. As a basis for considering market
participant assumptions in fair value measurements, ASC 820
establishes a three-tiered fair value hierarchy based on the
level of observable inputs used in the measurement of fair value
(e.g., Level 1
F-35
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
16.
|
Fair Value
Measurements (continued)
|
representing quoted prices for identical assets or liabilities
in an active market; Level 2 representing values using
observable inputs other than quoted prices included within
Level 1; and Level 3 representing estimated values
based on significant unobservable inputs). In addition, ASC 820
requires an entity to consider all aspects of nonperformance
risk, including its own credit standing, when measuring the fair
value of a liability. Under ASC 820, related disclosures
are segregated for assets and liabilities measured at fair value
based on the level used within the hierarchy to determine their
fair values.
The following describes the methods and assumptions used by
Nationstar in estimating fair values:
Cash and Cash Equivalents, Restricted Cash, Notes
PayableThe carrying amount reported in the
consolidated balance sheets approximates fair value.
Mortgage Loans Held for SaleNationstar originates
mortgage loans in the U.S. that it intends to sell to
Fannie Mae, Freddie Mac, and GNMA (collectively, the Agencies).
Additionally, Nationstar holds mortgage loans that it intends to
sell into the secondary markets via whole loan sales or
securitizations. Effective October 2009, in conjunction with
Nationstars election under ASC 825, Nationstar began
measuring newly originated prime residential mortgage loans held
for sale at fair value.
Mortgage loans held for sale are typically pooled together and
sold into certain exit markets, depending upon underlying
attributes of the loan, such as agency eligibility, product
type, interest rate, and credit quality.
Mortgage loans held for sale are valued using a market approach
by utilizing either: (i) the fair value of securities
backed by similar mortgage loans, adjusted for certain factors
to approximate the fair value of a whole mortgage loan,
including the value attributable to mortgage servicing and
credit risk, (ii) current commitments to purchase loans or
(iii) recent observable market trades for similar loans,
adjusted for credit risk and other individual loan
characteristics. As these prices are derived from quoted market
prices, Nationstar classifies these valuations as Level 2
in the fair value disclosures.
Mortgage Loans Held for Investment, subject to nonrecourse
debtNationstar determines the fair value on loans held
for investment using internally developed valuation models.
These valuation models estimate the exit price Nationstar
expects to receive in the loans principal market. Although
Nationstar utilizes and gives priority to observable market
inputs such as interest rates and market spreads within these
models, Nationstar typically is required to utilize internal
inputs, such as prepayment speeds, credit losses, and discount
rates. These internal inputs require the use of judgment by
Nationstar and can have a significant impact on the
determination of the loans fair value. As these prices are
derived from a combination of internally developed valuation
models and quoted market prices, Nationstar classifies these
valuations as Level 3 in the fair value disclosures.
Mortgage Loans Held for Investment, subject to ABS
nonrecourse debtNationstar determines the fair value
on loans held for investment, subject to ABS nonrecourse debt
using internally developed valuation models. These valuation
models estimate the exit price Nationstar expects to receive in
the loans principal market. Although Nationstar utilizes
and gives priority to observable market inputs such as interest
rates and market spreads within these models, Nationstar
typically is required to utilize internal inputs, such as
prepayment speeds, credit losses, and discount rates. These
internal inputs require the use of judgment by Nationstar and
can have a significant impact on the determination of the
loans fair value. As these prices are derived from a
combination of
F-36
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
16.
|
Fair Value
Measurements (continued)
|
internally developed valuation models and quoted market prices,
Nationstar classifies these valuations as Level 3 in the
fair value disclosures.
Investment in Debt SecuritiesNationstar bases its
valuation of debt securities on observable market prices when
available; however, due to illiquidity in the markets,
observable market prices were not available on these debt
securities at December 31, 2009. When observable market
prices are not available, Nationstar bases valuations on
internally developed discounted cash flow models that use a
market-based discount rate. The valuation considers recent
market transactions, experience with similar securities, current
business conditions, and analysis of the underlying collateral,
as available. In order to estimate cash flows, Nationstar
utilizes a variety of assumptions, including assumptions for
prepayments, cumulative losses, and other variables. These
assumptions require the use of judgment by Nationstar and can
have a significant impact on the determination of the
securities fair values. Accordingly, Nationstar classifies
these valuations as Level 3 in the fair value disclosures.
Mortgage Servicing RightsNationstar will typically
retain the servicing rights when it sells loans into the
secondary market. Nationstar estimates the fair value of its
MSRs using a process that combines the use of a discounted cash
flow model and analysis of current market data to arrive at an
estimate of fair value. The cash flow assumptions and prepayment
assumptions used in the model are based on various factors, with
the key assumptions being mortgage prepayment speeds, discount
rates and credit losses. These assumptions are generated and
applied based on collateral stratifications including product
type, remittance type, geography, delinquency and coupon
dispersion. These assumptions require the use of judgment by
Nationstar and can have a significant impact on the
determination of the MSRs fair value. During 2010,
management obtained third-party valuations that covered portions
of the portfolio to assess the reasonableness of the fair value
calculations provided by the cash flow model. Because of the
nature of the valuation inputs, Nationstar classifies these
valuations as Level 3 in the fair value disclosures.
Real Estate OwnedNationstar determines the fair
value of real estate owned properties through the use of
third-party appraisals and broker price opinions, adjusted for
estimated selling costs. Such estimated selling costs include
realtor fees and other anticipated closing costs. These values
are adjusted to take into account factors that could cause the
actual liquidation value of foreclosed properties to be
different than the appraised values. This valuation adjustment
is based upon Nationstars historical experience with real
estate owned. Nationstar regularly reviews recent sales activity
of its real estate owned properties in order to ensure that the
estimated realizable value is consistent with the recorded
amount. Real estate owned is classified as Level 3 in the
fair value disclosures.
Derivative InstrumentsNationstar enters into a
variety of derivative financial instruments as part of its
hedging strategy. The majority of these derivatives are
exchange-traded or traded within highly active dealer markets.
In order to determine the fair value of these instruments,
Nationstar utilizes the exchange price or dealer market price
for the particular derivative contract; therefore, these
contracts are classified as Level 2.
Unsecured Senior NotesThe fair value of unsecured
senior notes are based on quoted market prices, and Nationstar
classifies these valuations as Level 1 in the fair value
disclosures.
Nonrecourse Debt Legacy
AssetsNationstar estimates fair value based on the
present value of future expected discounted cash flows with the
discount rate approximating current market value for similar
financial instruments. As these prices are derived from a
combination of internally developed valuation models and quoted
market prices, Nationstar classifies these valuations as
Level 3 in the fair value disclosures.
F-37
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
16.
|
Fair Value
Measurements (continued)
|
ABS Nonrecourse DebtNationstar estimates fair value
based on the present value of future expected discounted cash
flows with the discount rate approximating current market value
for similar financial instruments. As these prices are derived
from a combination of internally developed valuation models and
quoted market prices, Nationstar classifies these valuations as
Level 3 in the fair value disclosures.
The estimated carrying amount and fair value of
Nationstars financial instruments and other assets and
liabilities measured at fair value on a recurring basis is as
follows for the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Total
|
|
|
Recurring Fair Value Measurements
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for
sale(1)
|
|
$
|
371,160
|
|
|
$
|
|
|
|
$
|
371,160
|
|
|
$
|
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt(1)
|
|
|
538,440
|
|
|
|
|
|
|
|
|
|
|
|
538,440
|
|
Mortgage servicing
rights(1)
|
|
|
145,062
|
|
|
|
|
|
|
|
|
|
|
|
145,062
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
|
|
4,703
|
|
|
|
|
|
|
|
4,703
|
|
|
|
|
|
Forward MBS trades
|
|
|
3,963
|
|
|
|
|
|
|
|
3,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,063,328
|
|
|
$
|
|
|
|
$
|
379,826
|
|
|
$
|
683,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
7,801
|
|
|
$
|
|
|
|
$
|
7,801
|
|
|
$
|
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
18,781
|
|
|
|
|
|
|
|
18,781
|
|
|
|
|
|
ABS nonrecourse
debt(1)
|
|
|
496,692
|
|
|
|
|
|
|
|
|
|
|
|
496,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
523,274
|
|
|
$
|
|
|
|
$
|
26,582
|
|
|
$
|
496,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on the nature and risks of these assets and liabilities,
the Company has determined that presenting them as a single
class is appropriate. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Total
|
|
|
Recurring Fair Value Measurements
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for
sale(1)
|
|
$
|
203,131
|
|
|
$
|
|
|
|
$
|
203,131
|
|
|
$
|
|
|
Investment in debt
securities(1)
|
|
|
2,486
|
|
|
|
|
|
|
|
|
|
|
|
2,486
|
|
Mortgage servicing
rights(1)
|
|
|
114,605
|
|
|
|
|
|
|
|
|
|
|
|
114,605
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
|
|
2,414
|
|
|
|
|
|
|
|
2,414
|
|
|
|
|
|
Forward MBS trades
|
|
|
3,383
|
|
|
|
|
|
|
|
3,383
|
|
|
|
|
|
Loan sale commitments
|
|
|
1,439
|
|
|
|
|
|
|
|
1,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
327,458
|
|
|
$
|
|
|
|
$
|
210,367
|
|
|
$
|
117,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on the nature and risks of these assets and liabilities,
the Company has determined that presenting them as a single
class is appropriate. |
F-38
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
16.
|
Fair Value
Measurements (continued)
|
The table below presents a reconciliation for all of
Nationstars Level 3 assets measured at fair value on
a recurring basis (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Recurring Fair Value Measurements
|
|
|
|
|
|
|
Total Gains (Losses) Included in
|
|
|
Purchases,
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
Other
|
|
|
Sale,
|
|
|
Transfers
|
|
|
|
|
|
|
Beginning of
|
|
|
Net Income
|
|
|
Comprehensive
|
|
|
Issuances, and
|
|
|
In/Out of
|
|
|
Fair Value
|
|
|
|
Period(1)
|
|
|
(Loss)
|
|
|
Income
|
|
|
Settlements
|
|
|
Level 3
|
|
|
End of Period
|
|
|
Year-ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt
|
|
$
|
928,891
|
|
|
$
|
71,239
|
|
|
$
|
|
|
|
$
|
(461,690
|
)
|
|
$
|
|
|
|
$
|
538,440
|
|
Mortgage servicing rights
|
|
|
104,174
|
|
|
|
20,210
|
|
|
|
|
|
|
|
20,678
|
|
|
|
|
|
|
|
145,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,033,065
|
|
|
$
|
91,449
|
|
|
$
|
|
|
|
$
|
(441,012
|
)
|
|
$
|
|
|
|
$
|
683,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABS nonrecourse debt
|
|
$
|
884,846
|
|
|
$
|
(16,937
|
)
|
|
$
|
|
|
|
$
|
(371,217
|
)
|
|
$
|
|
|
|
$
|
496,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in debt securities
|
|
$
|
9,294
|
|
|
$
|
(6,808
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,486
|
|
Mortgage servicing rights
|
|
|
110,808
|
|
|
|
(19,583
|
)
|
|
|
|
|
|
|
23,380
|
|
|
|
|
|
|
|
114,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
120,102
|
|
|
$
|
(26,391
|
)
|
|
$
|
|
|
|
$
|
23,380
|
|
|
$
|
|
|
|
$
|
117,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts include derecognition of previously retained beneficial
interests and mortgage servicing rights upon adoption of
ASC 810 related to consolidation of certain VIEs. |
The table below presents the items which Nationstar measures at
fair value on a nonrecurring basis (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains
|
|
|
|
Nonrecurring Fair Value
|
|
|
Total
|
|
|
(Losses)
|
|
|
|
Measurements
|
|
|
Estimated
|
|
|
Included in
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
Earnings
|
|
|
Year-ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
owned(1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
27,337
|
|
|
$
|
27,337
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
27,337
|
|
|
$
|
27,337
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
owned(1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,262
|
|
|
$
|
10,262
|
|
|
$
|
(7,512
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,262
|
|
|
$
|
10,262
|
|
|
$
|
(7,512
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on the nature and risks of these assets and liabilities,
the Company has determined that presenting them as a single
class is appropriate. |
For the year ended December 31, 2009, Nationstar
transferred approximately $530.9 million in mortgage loans
held for sale to the held for investment classification in
connection with the securitization of approximately
$222 million of asset-backed securities, which was
structured as a
F-39
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
16.
|
Fair Value
Measurements (continued)
|
secured borrowing. These loans were classified as Level 3
assets that were measured on a nonrecurring basis for the year
ended December 31, 2008, but were not measured at fair
value for the year ended December 31, 2009. In addition,
Nationstar elected under ASC
825-10,
Financial Instruments-Overall to measure newly originated
prime residential mortgage loans held for sale at fair value at
origination. These newly originated prime residential mortgage
loans were classified as Level 2 assets that were measured
on a nonrecurring basis for the year ended December 31,
2008, but are measured on a recurring basis for the year ended
December 31, 2009.
The table below presents a summary of the estimated carrying
amount and fair value of Nationstars financial instruments
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21,223
|
|
|
$
|
21,223
|
|
|
$
|
41,645
|
|
|
$
|
41,645
|
|
Restricted cash
|
|
|
91,125
|
|
|
|
91,125
|
|
|
|
52,795
|
|
|
|
52,795
|
|
Mortgage loans held for sale
|
|
|
371,160
|
|
|
|
371,160
|
|
|
|
203,131
|
|
|
|
203,131
|
|
Mortgage loans held for investment, subject to nonrecourse
debtLegacy assets
|
|
|
266,840
|
|
|
|
239,035
|
|
|
|
301,910
|
|
|
|
284,774
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt
|
|
|
538,440
|
|
|
|
538,440
|
|
|
|
|
|
|
|
|
|
Investment in debt securities
|
|
|
|
|
|
|
|
|
|
|
2,486
|
|
|
|
2,486
|
|
Derivative instruments
|
|
|
8,666
|
|
|
|
8,666
|
|
|
|
7,236
|
|
|
|
7,236
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
709,758
|
|
|
|
709,758
|
|
|
|
771,857
|
|
|
|
771,857
|
|
Unsecured senior notes
|
|
|
244,061
|
|
|
|
244,375
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
7,801
|
|
|
|
7,801
|
|
|
|
|
|
|
|
|
|
Derivative instruments, subject to ABS nonrecourse debt
|
|
|
18,781
|
|
|
|
18,781
|
|
|
|
|
|
|
|
|
|
Nonrecourse debt
|
|
|
138,662
|
|
|
|
140,197
|
|
|
|
177,675
|
|
|
|
178,161
|
|
ABS nonrecourse debt
|
|
|
496,692
|
|
|
|
496,692
|
|
|
|
|
|
|
|
|
|
|
|
17.
|
Termination of
the Company
|
The duration of Nationstars existence is indefinite per
the Agreement and shall continue until dissolved in accordance
with the terms of the Agreement and the Delaware Limited
Liability Company Act (DLLCA).
|
|
18.
|
Limited Liability
of Members
|
The members of a Delaware limited liability company are
generally not liable for the acts and omissions of the company,
much in the same manner as the shareholders, officers, and
directors of a corporation are generally limited by the
provisions of the DLLCA and by applicable case law.
|
|
19.
|
Restructuring
Charges
|
To respond to the decreased demand in the home equity mortgage
market and other market conditions, Nationstar initiated a
program to reduce costs and improve operating effectiveness in
2007. This program included the closing of several offices and
the termination of a large portion of
F-40
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
19.
|
Restructuring
Charges (continued)
|
Nationstars workforce. As part of this plan, Nationstar
expected to incur lease and other contract termination costs.
Nationstar recorded restructuring charges totaling
$2.3 million, $2.2 million, and $1.2 million for
the years ended December 31, 2010, 2009, and 2008,
respectively, related to cancelled lease expenses that are
reflected in general and administrative expenses. In addition,
Nationstar recorded severance and other employee termination
benefits totaling $0.3 million for the year ended
December 31, 2008. No severance or other employee
termination benefits were incurred for the years ended
December 31, 2010 and 2009.
The following table summarizes, by category, the Companys
restructuring charge activity for the dates indicated (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Balance
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
Liability Balance
|
|
|
|
at January 1
|
|
|
Adjustments
|
|
|
Settlements
|
|
|
at December 31
|
|
|
Year-ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance and other
|
|
$
|
1,048
|
|
|
$
|
270
|
|
|
$
|
(1,318
|
)
|
|
$
|
|
|
Lease terminations
|
|
|
18,310
|
|
|
|
1,237
|
|
|
|
(8,644
|
)
|
|
|
10,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,358
|
|
|
$
|
1,507
|
|
|
$
|
(9,962
|
)
|
|
$
|
10,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease terminations
|
|
$
|
10,903
|
|
|
$
|
2,222
|
|
|
$
|
(3,660
|
)
|
|
$
|
9,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,903
|
|
|
$
|
2,222
|
|
|
$
|
(3,660
|
)
|
|
$
|
9,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease terminations
|
|
$
|
9,465
|
|
|
$
|
2,287
|
|
|
$
|
(2,569
|
)
|
|
$
|
9,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,465
|
|
|
$
|
2,287
|
|
|
$
|
(2,569
|
)
|
|
$
|
9,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.
|
Concentrations of
Credit Risk
|
Properties collateralizing mortgage loans held for investment
and real estate owned were geographically disbursed throughout
the United States (measured by principal balance and expressed
as a percent of the total outstanding mortgage loans held for
investment and real estate owned).
The following table details the geographical concentration of
mortgage loans held for investment and real estate owned by
state for the dates indicated (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Unpaid
|
|
|
% of
|
|
|
Unpaid
|
|
|
% of
|
|
|
|
Principal
|
|
|
Total
|
|
|
Principal
|
|
|
Total
|
|
State
|
|
Balance
|
|
|
Outstanding
|
|
|
Balance
|
|
|
Outstanding
|
|
|
Florida
|
|
$
|
62,775
|
|
|
|
14.4
|
%
|
|
$
|
78,331
|
|
|
|
15.1
|
%
|
Texas
|
|
|
58,815
|
|
|
|
13.4
|
%
|
|
|
65,519
|
|
|
|
12.6
|
%
|
California
|
|
|
41,019
|
|
|
|
9.4
|
%
|
|
|
55,785
|
|
|
|
10.7
|
%
|
All other
states(1)
|
|
|
274,235
|
|
|
|
62.8
|
%
|
|
|
320,010
|
|
|
|
61.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
436,844
|
|
|
|
100.0
|
%
|
|
$
|
519,645
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
No other state contains more than 5.0% of the total outstanding. |
F-41
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
20.
|
Concentrations of
Credit Risk (continued)
|
Additionally, certain loan products contractual terms may
give rise to a concentration of credit risk and increase
Nationstars exposure to risk of nonpayment or realization.
The following table details the unpaid principal balance of ARM
loans included in mortgage loans held for investment that are
subject to future payment increases for the dates indicated (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Interest only ARMs
|
|
$
|
43,687
|
|
|
$
|
57,745
|
|
Amortizing ARMs:
|
|
|
|
|
|
|
|
|
2/28
|
|
|
71,614
|
|
|
|
108,052
|
|
3/27
|
|
|
5,608
|
|
|
|
9,900
|
|
All other ARMs
|
|
|
11,173
|
|
|
|
5,617
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
132,082
|
|
|
$
|
181,314
|
|
|
|
|
|
|
|
|
|
|
Certain of Nationstars secondary market investors require
various capital adequacy requirements, as specified in the
respective selling and servicing agreements. To the extent that
these mandatory, imposed capital requirements are not met,
Nationstars secondary market investors may ultimately
terminate Nationstars selling and servicing agreements,
which would prohibit Nationstar from further originating or
securitizing these specific types of mortgage loans. In
addition, these secondary market investors may impose additional
net worth or financial condition requirements based on an
assessment of market conditions or other relevant factors.
Among Nationstars various capital requirements related to
its outstanding selling and servicing agreements, the most
restrictive of these requires Nationstar to maintain a minimum
adjusted net worth balance of $83.2 million.
As of December 31, 2010, Nationstar was in compliance with
all of its selling and servicing capital requirements.
Additionally, Nationstar is required to maintain a minimum
tangible net worth of at least $150 million as of each
quarter-end related to its outstanding Master Repurchase
Agreements on our outstanding repurchase facilities. As of
December 31, 2010, Nationstar was in compliance with these
minimum tangible net worth requirements.
|
|
22.
|
Business Segment
Reporting
|
Nationstar currently conducts business in two separate operating
segments: Servicing and Originations. The Servicing segment
provides loan servicing on Nationstars total servicing
portfolio, including the collection of principal and interest
payments and the assessment of ancillary fees related to the
servicing of mortgage loans. The Originations segment involves
the origination, packaging, and sale of agency mortgage loans
into the secondary markets via whole loan sales or
securitizations. Nationstar reports the activity not related to
either operating segment in the Legacy Portfolio and Other
column. The Legacy Portfolio and Other column primarily includes
all
sub-prime
mortgage loans originated in the latter portion of 2006 and
during 2007 or acquired from CHEC and consolidated VIEs which
were consolidated pursuant to the adoption of new accounting
guidance related to VIEs adopted on January 1, 2010.
F-42
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
22.
|
Business Segment
Reporting (continued)
|
Nationstars segments are based upon Nationstars
organizational structure which focuses primarily on the services
offered. The accounting policies of each reportable segment are
the same as those of Nationstar except for 1) expenses for
consolidated back-office operations and general overhead-type
expenses such as executive administration and accounting and
2) revenues generated on inter-segment services performed.
Expenses are allocated to individual segments based on the
estimated value of services performed, including estimated
utilization of square footage and corporate personnel as well as
the equity invested in each segment. Revenues generated or
inter-segment services performed are valued based on similar
services provided to external parties.
To reconcile to Nationstars consolidated results, certain
inter-segment revenues and expenses costs are eliminated in the
Elimination column in the following tables.
The following tables are a presentation of financial information
by segment for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Legacy Portfolio
|
|
|
|
|
|
|
|
|
|
Servicing
|
|
|
Originations
|
|
|
Segments
|
|
|
and Other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
$
|
175,569
|
|
|
$
|
|
|
|
$
|
175,569
|
|
|
$
|
820
|
|
|
$
|
(9,263
|
)
|
|
$
|
167,126
|
|
Other fee income
|
|
|
7,273
|
|
|
|
7,042
|
|
|
|
14,315
|
|
|
|
2,643
|
|
|
|
|
|
|
|
16,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
182,842
|
|
|
|
7,042
|
|
|
|
189,884
|
|
|
|
3,463
|
|
|
|
(9,263
|
)
|
|
|
184,084
|
|
Gain (loss) on mortgage loans held for sale
|
|
|
|
|
|
|
77,498
|
|
|
|
77,498
|
|
|
|
|
|
|
|
(154
|
)
|
|
|
77,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
182,842
|
|
|
|
84,540
|
|
|
|
267,382
|
|
|
|
3,463
|
|
|
|
(9,417
|
)
|
|
|
261,428
|
|
Total expenses and impairments
|
|
|
107,283
|
|
|
|
86,920
|
|
|
|
194,203
|
|
|
|
26,927
|
|
|
|
(154
|
)
|
|
|
220,976
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
263
|
|
|
|
11,848
|
|
|
|
12,111
|
|
|
|
77,521
|
|
|
|
9,263
|
|
|
|
98,895
|
|
Interest expense
|
|
|
(51,791
|
)
|
|
|
(8,806
|
)
|
|
|
(60,597
|
)
|
|
|
(55,566
|
)
|
|
|
|
|
|
|
(116,163
|
)
|
Loss on interest rate swaps and caps
|
|
|
(9,801
|
)
|
|
|
|
|
|
|
(9,801
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,801
|
)
|
Change in fair value on ABS nonrecourse debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,297
|
)
|
|
|
|
|
|
|
(23,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(61,329
|
)
|
|
|
3,042
|
|
|
|
(58,287
|
)
|
|
|
(1,342
|
)
|
|
|
9,263
|
|
|
|
(50,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
14,230
|
|
|
$
|
662
|
|
|
$
|
14,892
|
|
|
$
|
(24,806
|
)
|
|
$
|
|
|
|
$
|
(9,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
1,092
|
|
|
$
|
781
|
|
|
$
|
1,873
|
|
|
$
|
244
|
|
|
$
|
|
|
|
$
|
2,117
|
|
Total assets
|
|
|
689,923
|
|
|
|
402,627
|
|
|
|
1,092,550
|
|
|
|
854,631
|
|
|
|
|
|
|
|
1,947,181
|
|
F-43
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
22.
|
Business Segment
Reporting (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Legacy Portfolio
|
|
|
|
|
|
|
|
|
|
Servicing
|
|
|
Originations
|
|
|
Segments
|
|
|
and Other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
$
|
91,266
|
|
|
$
|
|
|
|
$
|
91,266
|
|
|
$
|
|
|
|
$
|
(1,071
|
)
|
|
$
|
90,195
|
|
Other fee income
|
|
|
8,867
|
|
|
|
1,156
|
|
|
|
10,023
|
|
|
|
|
|
|
|
|
|
|
|
10,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
100,133
|
|
|
|
1,156
|
|
|
|
101,289
|
|
|
|
|
|
|
|
(1,071
|
)
|
|
|
100,218
|
|
Gain (loss) on mortgage loans held for sale
|
|
|
|
|
|
|
54,437
|
|
|
|
54,437
|
|
|
|
(75,786
|
)
|
|
|
|
|
|
|
(21,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100,133
|
|
|
|
55,593
|
|
|
|
155,726
|
|
|
|
(75,786
|
)
|
|
|
(1,071
|
)
|
|
|
78,869
|
|
Total expenses and impairments
|
|
|
70,897
|
|
|
|
47,532
|
|
|
|
118,429
|
|
|
|
25,009
|
|
|
|
(1,071
|
)
|
|
|
142,367
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
4,143
|
|
|
|
4,261
|
|
|
|
8,404
|
|
|
|
44,114
|
|
|
|
|
|
|
|
52,518
|
|
Interest expense
|
|
|
(25,877
|
)
|
|
|
(3,438
|
)
|
|
|
(29,315
|
)
|
|
|
(40,568
|
)
|
|
|
|
|
|
|
(69,883
|
)
|
Loss on interest rate swaps and caps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(21,734
|
)
|
|
|
823
|
|
|
|
(20,911
|
)
|
|
|
3,532
|
|
|
|
|
|
|
|
(17,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
7,502
|
|
|
$
|
8,884
|
|
|
$
|
16,386
|
|
|
$
|
(97,263
|
)
|
|
$
|
|
|
|
$
|
(80,877
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
1,004
|
|
|
$
|
538
|
|
|
$
|
1,542
|
|
|
$
|
225
|
|
|
$
|
|
|
|
$
|
1,767
|
|
Total assets
|
|
|
681,543
|
|
|
|
239,202
|
|
|
|
920,745
|
|
|
|
359,440
|
|
|
|
|
|
|
|
1,280,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Legacy Portfolio
|
|
|
|
|
|
|
|
|
|
Servicing
|
|
|
Originations
|
|
|
Segments
|
|
|
and Other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
$
|
69,235
|
|
|
$
|
|
|
|
$
|
69,235
|
|
|
$
|
|
|
|
$
|
(1,183
|
)
|
|
$
|
68,052
|
|
Other fee income
|
|
|
5,366
|
|
|
|
589
|
|
|
|
5,955
|
|
|
|
|
|
|
|
|
|
|
|
5,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
74,601
|
|
|
|
589
|
|
|
|
75,190
|
|
|
|
|
|
|
|
(1,183
|
)
|
|
|
74,007
|
|
Gain (loss) on mortgage loans held for sale
|
|
|
|
|
|
|
21,985
|
|
|
|
21,985
|
|
|
|
(108,648
|
)
|
|
|
|
|
|
|
(86,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
74,601
|
|
|
|
22,574
|
|
|
|
97,175
|
|
|
|
(108,648
|
)
|
|
|
(1,183
|
)
|
|
|
(12,656
|
)
|
Total expenses and impairments
|
|
|
55,037
|
|
|
|
30,795
|
|
|
|
85,832
|
|
|
|
63,128
|
|
|
|
(1,183
|
)
|
|
|
147,777
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
10,872
|
|
|
|
1,920
|
|
|
|
12,792
|
|
|
|
79,268
|
|
|
|
|
|
|
|
92,060
|
|
Interest expense
|
|
|
(15,718
|
)
|
|
|
(1,289
|
)
|
|
|
(17,007
|
)
|
|
|
(48,541
|
)
|
|
|
|
|
|
|
(65,548
|
)
|
Loss on interest rate swaps and caps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,689
|
)
|
|
|
|
|
|
|
(23,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(4,846
|
)
|
|
|
631
|
|
|
|
(4,215
|
)
|
|
|
7,038
|
|
|
|
|
|
|
|
2,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
14,718
|
|
|
$
|
(7,590
|
)
|
|
$
|
7,128
|
|
|
$
|
(164,738
|
)
|
|
|
|
|
|
$
|
(157,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
789
|
|
|
$
|
383
|
|
|
$
|
1,172
|
|
|
$
|
137
|
|
|
|
|
|
|
$
|
1,309
|
|
Total assets
|
|
|
479,819
|
|
|
|
72,888
|
|
|
|
552,707
|
|
|
|
569,294
|
|
|
|
|
|
|
|
1,122,001
|
|
F-44
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
23.
|
Guarantor
Financial Statement Information
|
In March 2010, Nationstar Mortgage LLC and Nationstar Capital
Corporation (the Issuers), sold in a private
offering $250.0 million aggregate principal amount of
10.875% senior unsecured notes which mature on
April 1, 2015. In December 2010, the Company filed with the
Securities and Exchange Commission a
Form S-4
registration statement to exchange the privately placed notes
with registered notes. The terms of the registered notes are
substantially identical to those of the privately placed notes.
The notes are jointly and severally guaranteed on a senior
unsecured basis by all of the Issuers existing and future
wholly-owned domestic restricted subsidiaries, with certain
exceptions. All guarantor subsidiaries are 100% owned by the
Issuer. All amounts in the following tables are in thousands.
F-45
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
23.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING
BALANCE SHEET
DECEMBER 31,
2010
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Assets
|
Cash and cash equivalents
|
|
$
|
20,904
|
|
|
$
|
319
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
21,223
|
|
Restricted cash
|
|
|
57,579
|
|
|
|
|
|
|
|
33,546
|
|
|
|
|
|
|
|
91,125
|
|
Accounts receivable, net
|
|
|
435,096
|
|
|
|
|
|
|
|
3,975
|
|
|
|
|
|
|
|
439,071
|
|
Mortgage loans held for sale
|
|
|
371,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
371,160
|
|
Mortgage loans held for investment, subject to nonrecourse
debt-Legacy Assets, net
|
|
|
5,536
|
|
|
|
|
|
|
|
261,304
|
|
|
|
|
|
|
|
266,840
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt (at fair value)
|
|
|
|
|
|
|
|
|
|
|
538,440
|
|
|
|
|
|
|
|
538,440
|
|
Investment in debt
securitiesavailable-for-sale
|
|
|
597
|
|
|
|
|
|
|
|
|
|
|
|
(597
|
)
|
|
|
|
|
Investment in subsidiaries
|
|
|
158,276
|
|
|
|
|
|
|
|
|
|
|
|
(158,276
|
)
|
|
|
|
|
Receivables from affiliates
|
|
|
|
|
|
|
62,171
|
|
|
|
132,353
|
|
|
|
(185,531
|
)
|
|
|
8,993
|
|
Mortgage servicing rights
|
|
|
145,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,062
|
|
Property and equipment, net
|
|
|
7,559
|
|
|
|
835
|
|
|
|
|
|
|
|
|
|
|
|
8,394
|
|
Real estate owned, net
|
|
|
323
|
|
|
|
|
|
|
|
27,014
|
|
|
|
|
|
|
|
27,337
|
|
Other assets
|
|
|
29,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,231,628
|
|
|
$
|
63,325
|
|
|
$
|
996,632
|
|
|
$
|
(344,404
|
)
|
|
$
|
1,947,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and members equity
|
Notes payable
|
|
$
|
472,950
|
|
|
$
|
|
|
|
$
|
236,808
|
|
|
$
|
|
|
|
$
|
709,758
|
|
Unsecured senior notes
|
|
|
244,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244,061
|
|
Payables and accrued liabilities
|
|
|
73,785
|
|
|
|
|
|
|
|
1,269
|
|
|
|
|
|
|
|
75,054
|
|
Payables to affiliates
|
|
|
185,531
|
|
|
|
|
|
|
|
|
|
|
|
(185,531
|
)
|
|
|
|
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
7,801
|
|
|
|
|
|
|
|
7,801
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
|
|
|
|
|
|
|
|
18,781
|
|
|
|
|
|
|
|
18,781
|
|
Nonrecourse debtLegacy Assets
|
|
|
|
|
|
|
|
|
|
|
138,662
|
|
|
|
|
|
|
|
138,662
|
|
ABS nonrecourse debt (at fair value)
|
|
|
|
|
|
|
|
|
|
|
497,289
|
|
|
|
(597
|
)
|
|
|
496,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
976,327
|
|
|
|
|
|
|
|
900,610
|
|
|
|
(186,128
|
)
|
|
|
1,690,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total members equity
|
|
|
255,301
|
|
|
|
63,325
|
|
|
|
96,022
|
|
|
|
(158,276
|
)
|
|
|
256,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$
|
1,231,628
|
|
|
$
|
63,325
|
|
|
$
|
996,632
|
|
|
$
|
(344,404
|
)
|
|
$
|
1,947,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-46
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
23.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING
STATEMENT OF OPERATIONS
FOR THE YEAR
ENDED DECEMBER 31, 2010
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
$
|
174,660
|
|
|
$
|
1,730
|
|
|
$
|
|
|
|
$
|
(9,264
|
)
|
|
$
|
167,126
|
|
Other fee income
|
|
|
8,259
|
|
|
|
7,551
|
|
|
|
1,148
|
|
|
|
|
|
|
|
16,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
182,919
|
|
|
|
9,281
|
|
|
|
1,148
|
|
|
|
(9,264
|
)
|
|
|
184,084
|
|
Gain on mortgage loans held for sale
|
|
|
77,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
260,263
|
|
|
|
9,281
|
|
|
|
1,148
|
|
|
|
(9,264
|
)
|
|
|
261,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses and impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and benefits
|
|
|
146,746
|
|
|
|
2,369
|
|
|
|
|
|
|
|
|
|
|
|
149,115
|
|
General and administrative
|
|
|
57,329
|
|
|
|
1,642
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
58,913
|
|
Provision for loan losses
|
|
|
1,558
|
|
|
|
|
|
|
|
1,740
|
|
|
|
|
|
|
|
3,298
|
|
Loss on foreclosed real estate
|
|
|
|
|
|
|
|
|
|
|
205
|
|
|
|
|
|
|
|
205
|
|
Occupancy
|
|
|
9,289
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
9,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses and impairments
|
|
|
214,922
|
|
|
|
4,167
|
|
|
|
1,887
|
|
|
|
|
|
|
|
220,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
17,019
|
|
|
|
6
|
|
|
|
72,606
|
|
|
|
9,264
|
|
|
|
98,895
|
|
Interest expense
|
|
|
(54,075
|
)
|
|
|
|
|
|
|
(62,088
|
)
|
|
|
|
|
|
|
(116,163
|
)
|
Loss on interest rate swaps and caps
|
|
|
|
|
|
|
|
|
|
|
(9,801
|
)
|
|
|
|
|
|
|
(9,801
|
)
|
Fair value changes in ABS securitizations
|
|
|
|
|
|
|
|
|
|
|
(23,748
|
)
|
|
|
451
|
|
|
|
(23,297
|
)
|
Gain (loss) from subsidiaries
|
|
|
(18,650
|
)
|
|
|
|
|
|
|
|
|
|
|
18,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(55,706
|
)
|
|
|
6
|
|
|
|
(23,031
|
)
|
|
|
28,365
|
|
|
|
(50,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(10,365
|
)
|
|
$
|
5,120
|
|
|
$
|
(23,770
|
)
|
|
$
|
19,101
|
|
|
$
|
(9,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-47
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
23.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING
STATEMENT OF CASH FLOWS
FOR THE YEAR
ENDED DECEMBER 31, 2010
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(10,365
|
)
|
|
$
|
5,120
|
|
|
$
|
(23,770
|
)
|
|
$
|
19,101
|
|
|
$
|
(9,914
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from subsidiaries
|
|
|
18,650
|
|
|
|
|
|
|
|
|
|
|
|
(18,650
|
)
|
|
|
|
|
Share-based compensation
|
|
|
12,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,856
|
|
Gain on mortgage loans held for sale
|
|
|
(77,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77,344
|
)
|
Provision for loan losses
|
|
|
1,558
|
|
|
|
|
|
|
|
1,740
|
|
|
|
|
|
|
|
3,298
|
|
Loss on foreclosed real estate
|
|
|
|
|
|
|
|
|
|
|
205
|
|
|
|
|
|
|
|
205
|
|
Depreciation and amortization
|
|
|
2,104
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
2,117
|
|
Fair value changes in ABS securitization
|
|
|
|
|
|
|
|
|
|
|
23,297
|
|
|
|
|
|
|
|
23,297
|
|
Loss on interest rate swaps and caps
|
|
|
|
|
|
|
|
|
|
|
8,872
|
|
|
|
|
|
|
|
8,872
|
|
Change in fair value of mortgage servicing rights
|
|
|
6,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,043
|
|
Amortization of debt discount
|
|
|
12,380
|
|
|
|
|
|
|
|
6,351
|
|
|
|
|
|
|
|
18,731
|
|
Amortization of premiums/discounts
|
|
|
|
|
|
|
|
|
|
|
(4,526
|
)
|
|
|
|
|
|
|
(4,526
|
)
|
Mortgage loans originated and purchased, net of fees
|
|
|
(2,791,639
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,791,639
|
)
|
Cost of loans sold, net of fees
|
|
|
2,621,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,621,275
|
|
Principal payments/prepayments received and other changes in
mortgage loans originated as held for sale
|
|
|
49,049
|
|
|
|
|
|
|
|
(16,634
|
)
|
|
|
|
|
|
|
32,415
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
71,364
|
|
|
|
3
|
|
|
|
(31,979
|
)
|
|
|
|
|
|
|
39,388
|
|
Payables to affiliates
|
|
|
(52,594
|
)
|
|
|
(5,110
|
)
|
|
|
61,662
|
|
|
|
|
|
|
|
3,958
|
|
Other assets
|
|
|
1,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,152
|
|
Payables and accrued liabilities
|
|
|
8,444
|
|
|
|
(96
|
)
|
|
|
(185
|
)
|
|
|
|
|
|
|
8,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used) in operating activities
|
|
|
(127,067
|
)
|
|
|
(70
|
)
|
|
|
25,033
|
|
|
|
451
|
|
|
|
(101,653
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments received and other changes on mortgage loans
held for investment, subject to ABS nonrecourse debt
|
|
|
|
|
|
|
|
|
|
|
48,838
|
|
|
|
|
|
|
|
48,838
|
|
Proceeds from sales of real estate owned
|
|
|
504
|
|
|
|
|
|
|
|
73,603
|
|
|
|
|
|
|
|
74,107
|
|
Purchase of mortgage servicing rights, net of liabilities
incurred
|
|
|
(17,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,812
|
)
|
Property and equipment additions, net of disposals
|
|
|
(3,923
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used) in investing activities
|
|
|
(21,231
|
)
|
|
|
(13
|
)
|
|
|
122,441
|
|
|
|
|
|
|
|
101,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers to/from restricted cash, net
|
|
|
(38,617
|
)
|
|
|
|
|
|
|
4,886
|
|
|
|
|
|
|
|
(33,731
|
)
|
Issuance of unsecured notes, net of issue discount
|
|
|
243,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
243,013
|
|
F-48
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
23.
|
Guarantor
Financial Statement Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Repayment of non-recourse debtLegacy assets
|
|
|
|
|
|
|
|
|
|
|
(45,364
|
)
|
|
|
|
|
|
|
(45,364
|
)
|
Repayment of ABS nonrecourse debt
|
|
|
(146
|
)
|
|
|
|
|
|
|
(102,869
|
)
|
|
|
(451
|
)
|
|
|
(103,466
|
)
|
Decrease in notes payable, net
|
|
|
(57,972
|
)
|
|
|
|
|
|
|
(4,127
|
)
|
|
|
|
|
|
|
(62,099
|
)
|
Debt financing costs
|
|
|
(14,923
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,923
|
)
|
Tax related share-based settlement of units by members
|
|
|
(3,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
127,959
|
|
|
|
|
|
|
|
(147,474
|
)
|
|
|
(451
|
)
|
|
|
(19,966
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(20,339
|
)
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
(20,422
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
41,243
|
|
|
|
402
|
|
|
|
|
|
|
|
|
|
|
|
41,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
20,904
|
|
|
$
|
319
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
21,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-49
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
23.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING
BALANCE SHEET
DECEMBER 31,
2009
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
41,243
|
|
|
$
|
402
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
41,645
|
|
Restricted cash
|
|
|
18,962
|
|
|
|
|
|
|
|
33,833
|
|
|
|
|
|
|
|
52,795
|
|
Accounts receivable, net
|
|
|
506,460
|
|
|
|
3
|
|
|
|
3,511
|
|
|
|
|
|
|
|
509,974
|
|
Mortgage loans held for sale
|
|
|
203,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203,131
|
|
Mortgage loans held for investment, subject to nonrecourse
debtLegacy Assets, net
|
|
|
6,413
|
|
|
|
|
|
|
|
295,497
|
|
|
|
|
|
|
|
301,910
|
|
Investment in debt
securitiesavailable-for-sale
|
|
|
2,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,486
|
|
Investment in subsidiaries
|
|
|
275,661
|
|
|
|
|
|
|
|
|
|
|
|
(275,661
|
)
|
|
|
|
|
Receivables from affiliates
|
|
|
|
|
|
|
160,645
|
|
|
|
190,772
|
|
|
|
(338,843
|
)
|
|
|
12,574
|
|
Mortgage servicing rights
|
|
|
114,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114,605
|
|
Property and equipment, net
|
|
|
5,740
|
|
|
|
835
|
|
|
|
|
|
|
|
|
|
|
|
6,575
|
|
Real estate owned, net
|
|
|
|
|
|
|
|
|
|
|
10,262
|
|
|
|
|
|
|
|
10,262
|
|
Other assets
|
|
|
24,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,198,929
|
|
|
$
|
161,885
|
|
|
$
|
533,875
|
|
|
$
|
(614,504
|
)
|
|
$
|
1,280,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and members equity
|
Notes payable
|
|
$
|
530,922
|
|
|
$
|
|
|
|
$
|
240,935
|
|
|
$
|
|
|
|
$
|
771,857
|
|
Payables and accrued liabilities
|
|
|
65,341
|
|
|
|
96
|
|
|
|
1,393
|
|
|
|
|
|
|
|
66,830
|
|
Payables to affiliates
|
|
|
338,843
|
|
|
|
|
|
|
|
|
|
|
|
(338,843
|
)
|
|
|
|
|
Nonrecourse debtLegacy Assets
|
|
|
|
|
|
|
|
|
|
|
177,675
|
|
|
|
|
|
|
|
177,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
935,106
|
|
|
|
96
|
|
|
|
420,003
|
|
|
|
(338,843
|
)
|
|
|
1,016,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total members equity
|
|
|
263,823
|
|
|
|
161,789
|
|
|
|
113,872
|
|
|
|
(275,661
|
)
|
|
|
263,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$
|
1,198,929
|
|
|
$
|
161,885
|
|
|
$
|
533,875
|
|
|
$
|
(614,504
|
)
|
|
$
|
1,280,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-50
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
23.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING
STATEMENT OF OPERATIONS
FOR THE YEAR
ENDED DECEMBER 31, 2009
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
$
|
89,151
|
|
|
$
|
1,044
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
90,195
|
|
Other fee income
|
|
|
4,823
|
|
|
|
5,200
|
|
|
|
|
|
|
|
|
|
|
|
10,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
93,974
|
|
|
|
6,244
|
|
|
|
|
|
|
|
|
|
|
|
100,218
|
|
Loss on mortgage loans held for sale
|
|
|
(21,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
72,625
|
|
|
|
6,244
|
|
|
|
|
|
|
|
|
|
|
|
78,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses and impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and benefits
|
|
|
88,075
|
|
|
|
2,614
|
|
|
|
|
|
|
|
|
|
|
|
90,689
|
|
General and administrative
|
|
|
30,111
|
|
|
|
379
|
|
|
|
4
|
|
|
|
|
|
|
|
30,494
|
|
Loss on foreclosed real estate
|
|
|
(1,352
|
)
|
|
|
(10,925
|
)
|
|
|
19,789
|
|
|
|
|
|
|
|
7,512
|
|
Occupancy
|
|
|
6,621
|
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
|
6,863
|
|
Loss on
available-for-sale
securities-other-than-temporary
|
|
|
6,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses and impairments
|
|
|
130,264
|
|
|
|
(7,690
|
)
|
|
|
19,793
|
|
|
|
|
|
|
|
142,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
42,160
|
|
|
|
233
|
|
|
|
10,125
|
|
|
|
|
|
|
|
52,518
|
|
Interest expense
|
|
|
(52,810
|
)
|
|
|
(2,694
|
)
|
|
|
(14,379
|
)
|
|
|
|
|
|
|
(69,883
|
)
|
Loss on interest rate swaps and caps
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
Gain (loss) from subsidiaries
|
|
|
(12,574
|
)
|
|
|
|
|
|
|
|
|
|
|
12,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(23,238
|
)
|
|
|
(2,461
|
)
|
|
|
(4,254
|
)
|
|
|
12,574
|
|
|
|
(17,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
(80,877
|
)
|
|
$
|
11,473
|
|
|
$
|
(24,047
|
)
|
|
$
|
12,574
|
|
|
$
|
(80,877
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-51
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
23.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2009
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(80,877
|
)
|
|
$
|
11,473
|
|
|
$
|
(24,047
|
)
|
|
$
|
12,574
|
|
|
$
|
(80,877
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from subsidiaries
|
|
|
12,574
|
|
|
|
|
|
|
|
|
|
|
|
(12,574
|
)
|
|
|
|
|
Share-based compensation
|
|
|
827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
827
|
|
Loss on mortgage loans held for sale
|
|
|
21,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,349
|
|
Loss on foreclosed real estate
|
|
|
(1,352
|
)
|
|
|
(10,925
|
)
|
|
|
19,789
|
|
|
|
|
|
|
|
7,512
|
|
Loss on interest rate swaps and caps
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
Unrealized gain on derivative financial instruments
|
|
|
(2,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,436
|
)
|
Depreciation and amortization
|
|
|
1,728
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
1,767
|
|
Impairment of investments in debt securities
|
|
|
6,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,809
|
|
Change in fair value of mortgage servicing rights
|
|
|
27,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,915
|
|
Amortization of debt discount
|
|
|
19,075
|
|
|
|
|
|
|
|
2,212
|
|
|
|
|
|
|
|
21,287
|
|
Amortization of premiums/discounts
|
|
|
(1,394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,394
|
)
|
Mortgage Loans originated and purchased, net of fees
|
|
|
(1,480,549
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,480,549
|
)
|
Cost of loans sold, net of fees
|
|
|
1,007,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,007,369
|
|
Principal payments/prepayments received and other changes in
mortgage loans originated as held for sale
|
|
|
403,256
|
|
|
|
|
|
|
|
66,816
|
|
|
|
|
|
|
|
470,072
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(151,602
|
)
|
|
|
1,113
|
|
|
|
(3,511
|
)
|
|
|
|
|
|
|
(154,000
|
)
|
Payables to affiliates
|
|
|
247,676
|
|
|
|
(47,397
|
)
|
|
|
(133,339
|
)
|
|
|
|
|
|
|
66,940
|
|
Other assets
|
|
|
(9,115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,115
|
)
|
Payables and accrued liabilities
|
|
|
11,550
|
|
|
|
(12
|
)
|
|
|
1,331
|
|
|
|
|
|
|
|
12,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used) in operating activities
|
|
|
32,817
|
|
|
|
(45,709
|
)
|
|
|
(70,749
|
)
|
|
|
|
|
|
|
(83,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of real estate owned
|
|
|
1,896
|
|
|
|
32,202
|
|
|
|
83
|
|
|
|
|
|
|
|
34,181
|
|
Purchase of mortgage servicing rights, net of liabilities
incurred
|
|
|
(1,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,169
|
)
|
Property and equipment additions, net of disposals
|
|
|
(2,990
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,029
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used) in investing activities
|
|
|
(2,263
|
)
|
|
|
32,163
|
|
|
|
83
|
|
|
|
|
|
|
|
29,983
|
|
F-52
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
23.
|
Guarantor
Financial Statement Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers to/from restricted cash, net
|
|
|
(18,444
|
)
|
|
|
13,737
|
|
|
|
(27,056
|
)
|
|
|
|
|
|
|
(31,763
|
)
|
Issuance of non-recourse debt, net
|
|
|
|
|
|
|
|
|
|
|
191,272
|
|
|
|
|
|
|
|
191,272
|
|
(Decrease) increase in notes payable, net
|
|
|
17,346
|
|
|
|
|
|
|
|
(77,741
|
)
|
|
|
|
|
|
|
(60,395
|
)
|
Repayment of non-recourse debtLegacy assets
|
|
|
|
|
|
|
|
|
|
|
(15,809
|
)
|
|
|
|
|
|
|
(15,809
|
)
|
Debt financing costs
|
|
|
(18,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,059
|
)
|
Capital contributions from members
|
|
|
20,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,543
|
|
|
|
13,737
|
|
|
|
70,666
|
|
|
|
|
|
|
|
85,946
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
32,097
|
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
|
32,288
|
|
Cash and cash equivalents at beginning of year
|
|
|
9,146
|
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
9,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
41,243
|
|
|
$
|
402
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
41,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-53
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
23.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2008
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
$
|
67,876
|
|
|
$
|
74
|
|
|
$
|
102
|
|
|
$
|
|
|
|
$
|
68,052
|
|
Other fee income
|
|
|
1,304
|
|
|
|
4,651
|
|
|
|
|
|
|
|
|
|
|
|
5,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
69,180
|
|
|
|
4,725
|
|
|
|
102
|
|
|
|
|
|
|
|
74,007
|
|
Loss on mortgage loans held for sale
|
|
|
(86,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(86,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
(17,483
|
)
|
|
|
4,725
|
|
|
|
102
|
|
|
|
|
|
|
|
(12,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses and impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and benefits
|
|
|
60,808
|
|
|
|
975
|
|
|
|
|
|
|
|
|
|
|
|
61,783
|
|
General and administrative
|
|
|
22,059
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
22,194
|
|
Loss on foreclosed real estate
|
|
|
(1,011
|
)
|
|
|
3,578
|
|
|
|
|
|
|
|
|
|
|
|
2,567
|
|
Occupancy
|
|
|
5,989
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
6,021
|
|
Loss on
available-for-sale
securities- other-than-temporary
|
|
|
55,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses and impairments
|
|
|
143,057
|
|
|
|
4,720
|
|
|
|
|
|
|
|
|
|
|
|
147,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
92,030
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
92,060
|
|
Interest expense
|
|
|
(52,931
|
)
|
|
|
(45
|
)
|
|
|
(12,572
|
)
|
|
|
|
|
|
|
(65,548
|
)
|
Loss on interest rate swaps and caps
|
|
|
(23,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,689
|
)
|
Gain (loss) from subsidiaries
|
|
|
(12,480
|
)
|
|
|
|
|
|
|
|
|
|
|
12,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
2,930
|
|
|
|
(15
|
)
|
|
|
(12,572
|
)
|
|
|
12,480
|
|
|
|
2,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(157,610
|
)
|
|
$
|
(10
|
)
|
|
$
|
(12,470
|
)
|
|
$
|
12,480
|
|
|
$
|
(157,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-54
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
23.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING
STATEMENT OF CASH FLOWS
FOR THE YEAR
ENDED DECEMBER 31, 2008
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(157,610
|
)
|
|
$
|
(10
|
)
|
|
$
|
(12,470
|
)
|
|
$
|
12,480
|
|
|
$
|
(157,610
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from subsidiaries
|
|
|
12,480
|
|
|
|
|
|
|
|
|
|
|
|
(12,480
|
)
|
|
|
|
|
Share-based compensation
|
|
|
2,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,333
|
|
Loss on mortgage loans held for sale
|
|
|
86,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,663
|
|
Loss on foreclosed real estate
|
|
|
(1,011
|
)
|
|
|
3,578
|
|
|
|
|
|
|
|
|
|
|
|
2,567
|
|
Loss on interest rate swaps and caps
|
|
|
23,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,689
|
|
Unrealized loss on derivative financial instruments
|
|
|
2,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,077
|
|
Depreciation and amortization
|
|
|
1,301
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
1,309
|
|
Accretion of discount on securities
|
|
|
(4,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,422
|
)
|
Impairment of investments in debt securities
|
|
|
55,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,212
|
|
Change in fair value of mortgage servicing rights
|
|
|
11,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,701
|
|
Amortization of debt discount
|
|
|
8,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,879
|
|
Amortization of premiums/discounts
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(85
|
)
|
Mortgage loans originated and purchased, net of fees
|
|
|
(545,860
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(545,860
|
)
|
Cost of loans sold, net of fees
|
|
|
513,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
513,924
|
|
Principal payments/prepayments received and other changes in
mortgage loans originated as held for sale
|
|
|
201,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201,184
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(164,961
|
)
|
|
|
(605
|
)
|
|
|
|
|
|
|
|
|
|
|
(165,566
|
)
|
Payables to affiliates
|
|
|
129,110
|
|
|
|
128,659
|
|
|
|
(255,317
|
)
|
|
|
|
|
|
|
2,452
|
|
Other assets
|
|
|
38,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,363
|
|
Payables and accrued liabilities
|
|
|
(36,363
|
)
|
|
|
(297
|
)
|
|
|
62
|
|
|
|
|
|
|
|
(36,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used) in operating activities
|
|
|
176,604
|
|
|
|
131,333
|
|
|
|
(267,725
|
)
|
|
|
|
|
|
|
40,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of real estate owned
|
|
|
52,764
|
|
|
|
(23,488
|
)
|
|
|
|
|
|
|
|
|
|
|
29,276
|
|
Purchase of mortgage servicing rights, net of liabilities
incurred
|
|
|
(19,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,013
|
)
|
Interest rate swap settlements
|
|
|
(51,570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51,570
|
)
|
Property and equipment additions, net of disposals
|
|
|
(1,764
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,772
|
)
|
Principal payments received on debt securities
|
|
|
8,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(11,147
|
)
|
|
|
(23,496
|
)
|
|
|
|
|
|
|
|
|
|
|
(34,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers to/from restricted cash, net
|
|
|
(517
|
)
|
|
|
(8,402
|
)
|
|
|
(952
|
)
|
|
|
|
|
|
|
(9,871
|
)
|
(Decrease)/increase in notes payable, net
|
|
|
(325,943
|
)
|
|
|
(100,000
|
)
|
|
|
268,677
|
|
|
|
|
|
|
|
(157,266
|
)
|
Debt financing costs
|
|
|
(15,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,926
|
)
|
F-55
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
|
|
23.
|
Guarantor
Financial Statement Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Capital contributions from members
|
|
|
145,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(196,786
|
)
|
|
|
(108,402
|
)
|
|
|
267,725
|
|
|
|
|
|
|
|
(37,463
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(31,329
|
)
|
|
|
(565
|
)
|
|
|
|
|
|
|
|
|
|
|
(31,894
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
40,475
|
|
|
|
776
|
|
|
|
|
|
|
|
|
|
|
|
41,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
9,146
|
|
|
$
|
211
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In February 2011, Nationstar amended one of its outstanding
Master Repurchase Agreements with a financial services company.
Under the terms of this new agreement, Nationstar is now
required to maintain a minimum tangible net worth of not less
than $175 million and is now set to expire in February
2012. In addition, the interest rate paid on any transfer loans
has been amended to LIBOR plus a margin of 3.25%.
In March 2011, Nationstar executed a MRA with a financial
institution, under which Nationstar may enter into transactions,
for an aggregate amount of $50.0 million, in which
Nationstar agrees to transfer to the same financial institution
certain mortgage loans and certain securities against the
transfer of funds by the same financial institution, with a
simultaneous agreement by the same financial institution to
transfer such mortgage loans and securities to Nationstar at a
date certain, or on demand by Nationstar, against the transfer
of funds Nationstar. The interest rate is based on LIBOR plus a
spread of 1.45% to 3.95%, which varies based on the underlying
transferred collateral. The maturity date of this MRA is March
2012.
|
|
25.
|
Unaudited Pro
Forma Tax Information
|
Nationstar has elected to be a disregarded entity for federal
tax purposes and is treated as a branch of its parent, FIF. FIF
is taxed as a partnership, whereby all income is taxed at the
member (partner) level. Historically Nationstar has generated
net operating losses for federal and state income tax purposes
but has incurred de minimis amounts of state capital, franchise
and minimum tax. It is expected that Nationstar will become a
wholly owned indirect subsidiary of Nationstar Mortgage Holdings
Inc. a new C corporation upon the Restructuring, see
Note 1. It is anticipated that Nationstar Mortgage Holdings
Inc., Nationstar and all affiliates will join in a consolidated
income tax return for US purposes.
Nationstars pro forma effective tax rate for 2010 is 0%.
The pro forma tax provision (benefit), before valuation
allowance, is ($3,612) on pre-tax loss of ($9,914). Nationstar
has determined that recognizing a tax benefit and corresponding
deferred tax asset is not appropriate as management believes it
is more likely than not the deferred tax asset will not be
realized. Nationstar will also assume certain tax attributes of
certain parent entities of FIF HE Holdings LLC as a result of
the Restructuring, including approximately $200 million of
net operating loss carry forwards as of December 31, 2010.
Nationstar expects to record a full valuation allowance against
any resulting deferred tax asset. The utilization of these tax
attributes will be limited pursuant to Sections 382 and 383
of the Internal Revenue Code.
F-56
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
48,420
|
|
|
$
|
21,223
|
|
Restricted cash (includes $694 and $1,472, respectively, of
restricted cash, subject to ABS nonrecourse debt)
|
|
|
73,100
|
|
|
|
91,125
|
|
Accounts receivable, net (includes $3,138 and $2,392,
respectively, of accrued interest, subject to ABS nonrecourse
debt)
|
|
|
454,235
|
|
|
|
439,071
|
|
Mortgage loans held for sale
|
|
|
268,950
|
|
|
|
371,160
|
|
Mortgage loans held for investment, subject to nonrecourse debt
- Legacy Assets, net of allowance for loan losses of $4,426 and
$3,298, respectively
|
|
|
262,268
|
|
|
|
266,840
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt (at fair value)
|
|
|
530,681
|
|
|
|
538,440
|
|
Receivables from affiliates
|
|
|
7,542
|
|
|
|
8,993
|
|
Mortgage servicing rights
|
|
|
151,159
|
|
|
|
145,062
|
|
Property and equipment, net
|
|
|
11,255
|
|
|
|
8,394
|
|
Real estate owned, net (includes $16,142 and $17,509,
respectively, of real estate owned, subject to ABS nonrecourse
debt)
|
|
|
24,417
|
|
|
|
27,337
|
|
Other assets
|
|
|
36,228
|
|
|
|
29,536
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,868,255
|
|
|
$
|
1,947,181
|
|
|
|
|
|
|
|
|
|
|
Liabilities and members equity
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
608,451
|
|
|
$
|
709,758
|
|
Unsecured senior notes
|
|
|
244,410
|
|
|
|
244,061
|
|
Payables and accrued liabilities (includes $123 and $95,
respectively, of accrued interest payable, subject to ABS
nonrecourse debt)
|
|
|
103,899
|
|
|
|
75,054
|
|
Derivative financial instruments
|
|
|
7,724
|
|
|
|
7,801
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
15,615
|
|
|
|
18,781
|
|
Nonrecourse debt Legacy Assets
|
|
|
133,592
|
|
|
|
138,662
|
|
ABS nonrecourse debt (at fair value)
|
|
|
489,321
|
|
|
|
496,692
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,603,012
|
|
|
|
1,690,809
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Total members equity
|
|
|
265,243
|
|
|
|
256,372
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$
|
1,868,255
|
|
|
$
|
1,947,181
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-57
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
$
|
57,467
|
|
|
$
|
34,090
|
|
Other fee income
|
|
|
7,219
|
|
|
|
4,660
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
64,686
|
|
|
|
38,750
|
|
Gain on mortgage loans held for sale
|
|
|
20,506
|
|
|
|
12,429
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
85,192
|
|
|
|
51,179
|
|
Expenses and impairments:
|
|
|
|
|
|
|
|
|
Salaries, wages, and benefits
|
|
|
46,923
|
|
|
|
29,489
|
|
General and administrative
|
|
|
15,564
|
|
|
|
8,720
|
|
Provisions for loan losses
|
|
|
1,128
|
|
|
|
|
|
(Gain)/Loss on foreclosed real estate
|
|
|
2,247
|
|
|
|
(21
|
)
|
Occupancy
|
|
|
2,259
|
|
|
|
1,901
|
|
|
|
|
|
|
|
|
|
|
Total expenses and impairments
|
|
|
68,121
|
|
|
|
40,089
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
18,318
|
|
|
|
31,333
|
|
Interest expense
|
|
|
(25,368
|
)
|
|
|
(29,135
|
)
|
Loss on interest rate swaps and caps
|
|
|
|
|
|
|
(2,779
|
)
|
Fair value changes in ABS securitizations
|
|
|
(2,652
|
)
|
|
|
(9,777
|
)
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(9,702
|
)
|
|
|
(10,358
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,369
|
|
|
$
|
732
|
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma information (Note 18):
|
|
|
|
|
|
|
|
|
Historical net income before taxes
|
|
$
|
7,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma adjustment for taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
7,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
Total
|
|
|
|
Member
|
|
|
Comprehensive
|
|
|
Members
|
|
|
|
Units
|
|
|
Income
|
|
|
Equity
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at January 1, 2010
|
|
$
|
263,823
|
|
|
$
|
|
|
|
$
|
263,823
|
|
Cumulative effect of change in accounting principles as of
January 1, 2010 related to adoption of new accounting
guidance on consolidation of variable interest entities
|
|
|
(8,068
|
)
|
|
|
|
|
|
|
(8,068
|
)
|
Share-based compensation
|
|
|
12,856
|
|
|
|
|
|
|
|
12,856
|
|
Tax related share-based settlement of units by members
|
|
|
(3,396
|
)
|
|
|
|
|
|
|
(3,396
|
)
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(9,914
|
)
|
|
|
|
|
|
|
(9,914
|
)
|
Change in value of cash flow hedge
|
|
|
|
|
|
|
1,071
|
|
|
|
1,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(8,843
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
255,301
|
|
|
|
1,071
|
|
|
|
256,372
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
5,263
|
|
|
|
|
|
|
|
5,263
|
|
Distribution to parent
|
|
|
(3,900
|
)
|
|
|
|
|
|
|
(3,900
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
7,369
|
|
|
|
|
|
|
|
7,369
|
|
Change in value of cash flow hedge
|
|
|
|
|
|
|
139
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
7,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2011
|
|
$
|
264,033
|
|
|
$
|
1,210
|
|
|
$
|
265,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-59
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,369
|
|
|
$
|
732
|
|
Adjustments to reconcile net income to net cash provided
by/(used in) operating activities:
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
5,263
|
|
|
|
210
|
|
Gain on mortgage loans held for sale
|
|
|
(20,506
|
)
|
|
|
(12,429
|
)
|
Provisions for loan losses
|
|
|
1,128
|
|
|
|
|
|
(Gain)/Loss on foreclosed real estate
|
|
|
2,247
|
|
|
|
(21
|
)
|
Fair value changes in ABS securitizations
|
|
|
2,652
|
|
|
|
9,777
|
|
Depreciation and amortization
|
|
|
751
|
|
|
|
398
|
|
(Gain)/loss or ineffectiveness on interest rate swaps and caps
|
|
|
(902
|
)
|
|
|
2,779
|
|
Change in fair value on mortgage servicing rights
|
|
|
3,784
|
|
|
|
4,600
|
|
Amortization of debt discount
|
|
|
3,066
|
|
|
|
5,564
|
|
Amortization of premiums/discounts
|
|
|
(1,260
|
)
|
|
|
(1,466
|
)
|
Mortgage loans originated and purchased, net of fees
|
|
|
(654,127
|
)
|
|
|
(512,615
|
)
|
Cost of loans sold, net of fees
|
|
|
765,695
|
|
|
|
492,333
|
|
Principal payments/prepayments received and other changes in
mortgage loans originated as held for sale
|
|
|
2,943
|
|
|
|
(4,708
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(15,164
|
)
|
|
|
(68,510
|
)
|
Receivables from affiliates
|
|
|
1,451
|
|
|
|
2,278
|
|
Other assets
|
|
|
(1,649
|
)
|
|
|
(2,211
|
)
|
Payables and accrued liabilities
|
|
|
28,845
|
|
|
|
650
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) operating activities
|
|
|
131,586
|
|
|
|
(82,639
|
)
|
Continued on following page
F-60
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands)
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Principal payments received and other changes on mortgage loans
held for investment, subject to ABS nonrecourse debt
|
|
$
|
2,987
|
|
|
$
|
713
|
|
Property and equipment additions, net of disposals
|
|
|
(3,612
|
)
|
|
|
(367
|
)
|
Acquisition of equity method investee
|
|
|
(6,600
|
)
|
|
|
|
|
Proceeds from sales of real estate owned
|
|
|
12,503
|
|
|
|
30,395
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
5,278
|
|
|
|
30,741
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Transfers from/(to) restricted cash, net
|
|
|
18,025
|
|
|
|
13,608
|
|
Issuance of unsecured notes, net of issue discount
|
|
|
|
|
|
|
243,012
|
|
Decrease in notes payable
|
|
|
(101,307
|
)
|
|
|
(164,639
|
)
|
Repayment of non-recourse debt Legacy assets
|
|
|
(5,895
|
)
|
|
|
(11,348
|
)
|
Repayment of ABS nonrecourse debt
|
|
|
(14,288
|
)
|
|
|
(35,559
|
)
|
Distribution to parent
|
|
|
(3,900
|
)
|
|
|
|
|
Debt financing costs
|
|
|
(2,302
|
)
|
|
|
(11,270
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) financing activities
|
|
|
(109,667
|
)
|
|
|
33,804
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
27,197
|
|
|
|
(18,094
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
21,223
|
|
|
|
41,645
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
48,420
|
|
|
$
|
23,551
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of noncash activities
|
|
|
|
|
|
|
|
|
Transfer of mortgage loans held for investment to real estate
owned
|
|
$
|
5,830
|
|
|
$
|
16,252
|
|
Transfer of mortgage loans held for investment, subject to ABS
nonrecourse debt to real estate owned
|
|
|
16,244
|
|
|
|
33,740
|
|
Transfer of mortgage loans held for sale to real estate owned
|
|
|
288
|
|
|
|
|
|
Mortgage servicing rights resulting from sale or securitization
of mortgage loans
|
|
|
9,881
|
|
|
|
3,725
|
|
See accompanying notes.
|
|
|
|
|
|
|
|
|
F-61
The accompanying unaudited interim consolidated financial
statements include the accounts of Nationstar, and its wholly
owned subsidiaries and those variable interest entities (VIEs)
where Nationstar is the primary beneficiary. Nationstar applies
the equity method of accounting to investments when the entity
is not a VIE and Nationstar is able to exercise significant
influence, but not control, over the policies and procedures of
the entity but owns less than 50% of the voting interests.
Intercompany balances and transactions have been eliminated.
Results of operations, assets and liabilities of VIEs are
included from the date that the Company became the primary
beneficiary. In addition, certain prior period amounts have been
reclassified to conform to the current period presentation.
The unaudited consolidated financial statements of Nationstar
have been prepared in accordance with generally accepted
accounting principles (GAAP) for interim 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 (the
SEC). The accompanying interim financial statements
are unaudited; however, in the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The
results of operations for the three month period ended
March 31, 2011, are not necessarily indicative of the
results that may be expected for the year ended
December 31, 2011.
|
|
2.
|
Recent Accounting
Developments
|
Accounting Standards Update
No. 2011-02,
A Creditors Determination of Whether a Restructuring is
a Troubled Debt Restructuring (Update
No. 2011-02).
Update
No. 2011-02
is intended to reduce the diversity in identifying troubled debt
restructurings (TDRs), primarily by clarifying certain factors
around concessions and financial difficulty. In evaluating
whether a restructuring constitutes a troubled debt
restructuring, a creditor must separately conclude that:
1) the restructuring constitutes a concession; and
2) the debtor is experiencing financial difficulties. The
clarifications will generally result in more restructurings
being considered troubled. The amendments in this update will be
effective for interim and annual periods beginning after
June 15, 2011, with retrospective application to the
beginning of the annual period of adoption. The adoption of
Update
No. 2011-02
is not expected to have a material impact on Nationstars
financial condition, liquidity or results of operations.
Accounting Standards Update
No. 2011-03,
Reconsideration of Effective Control for Repurchase
Agreements (Update
No. 2011-03).
Update
No. 2011-03
is intended to improve the accounting and reporting of
repurchase agreements and other agreements that both entitle and
obligate a transferor to repurchase or redeem financial assets
before their maturity. This amendment removes the criterion
pertaining to an exchange of collateral such that it should not
be a determining factor in assessing effective control,
including (1) the criterion requiring the transferor to
have the ability to repurchase or redeem the financial assets on
substantially the agreed terms, even in the event of default by
the transferee, and (2) the collateral maintenance
implementation guidance related to that criterion. Other
criteria applicable to the assessment of effective control are
not changed by the amendments in the update. The amendments in
this update will be effective for interim and annual periods
beginning after December 15, 2011. The adoption of Update
No. 2011-03
is not expected to have a material impact on Nationstars
financial condition, liquidity or results of operations.
Accounting Standards Update
No. 2011-04,
Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in U.S. GAAP and IFRSs (Update
No. 2011-04).
Update
No. 2011-04
is intended to provide common fair value measurement and
disclosure requirements in
F-62
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
2.
|
Recent Accounting
Developments (continued)
|
U.S. GAAP and IFRSs. The changes required in this update
include changing the wording used to describe many of the
requirements in U.S. GAAP for measuring fair value and for
disclosing information about fair value measurements. The
amendments in this update are to be applied prospectively and
are effective for interim and annual periods beginning after
December 15, 2011. The adoption of Update
No. 2011-04
is not expected to have a material impact on Nationstars
financial condition, liquidity or results of operations.
|
|
3.
|
Variable Interest
Entities and Securitizations
|
A summary of the assets and liabilities of Nationstars
transactions with VIEs included in Nationstars
consolidated financial statements as of March 31, 2011 and
December 31, 2010 is presented in the following table (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers
|
|
|
|
|
|
|
|
|
|
Accounted for as
|
|
|
|
|
|
|
Securitization
|
|
|
Secured
|
|
|
|
|
March 31, 2011
|
|
Trusts
|
|
|
Borrowings
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
$
|
694
|
|
|
$
|
20,015
|
|
|
$
|
20,709
|
|
Accounts receivable
|
|
|
3,138
|
|
|
|
265,498
|
|
|
|
268,636
|
|
Mortgage loans held for investment, subject to nonrecourse debt
|
|
|
|
|
|
|
256,108
|
|
|
|
256,108
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt
|
|
|
530,681
|
|
|
|
|
|
|
|
530,681
|
|
Real estate owned
|
|
|
16,142
|
|
|
|
7,808
|
|
|
|
23,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
550,655
|
|
|
$
|
549,429
|
|
|
$
|
1,100,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
Notes payable
|
|
$
|
|
|
|
$
|
219,146
|
|
|
$
|
219,146
|
|
Payables and accrued liabilities
|
|
|
123
|
|
|
|
1,187
|
|
|
|
1,310
|
|
Outstanding servicer
advances(1)
|
|
|
32,810
|
|
|
|
|
|
|
|
32,810
|
|
Derivative financial instruments
|
|
|
|
|
|
|
6,760
|
|
|
|
6,760
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
15,615
|
|
|
|
|
|
|
|
15,615
|
|
Nonrecourse debtLegacy Assets
|
|
|
|
|
|
|
133,592
|
|
|
|
133,592
|
|
ABS nonrecourse debt
|
|
|
490,171
|
|
|
|
|
|
|
|
490,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
538,719
|
|
|
$
|
360,685
|
|
|
$
|
899,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-63
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
3.
|
Variable Interest
Entities and Securitizations (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers
|
|
|
|
|
|
|
|
|
|
Accounted for as
|
|
|
|
|
|
|
Securitization
|
|
|
Secured
|
|
|
|
|
December 31, 2010
|
|
Trusts
|
|
|
Borrowings
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
$
|
1,472
|
|
|
$
|
32,075
|
|
|
$
|
33,547
|
|
Accounts receivable
|
|
|
2,392
|
|
|
|
286,808
|
|
|
|
289,200
|
|
Mortgage loans held for investment, subject to nonrecourse debt
|
|
|
|
|
|
|
261,305
|
|
|
|
261,305
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt
|
|
|
538,440
|
|
|
|
|
|
|
|
538,440
|
|
Real estate owned
|
|
|
17,509
|
|
|
|
9,505
|
|
|
|
27,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
559,813
|
|
|
$
|
589,693
|
|
|
$
|
1,149,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
Notes payable
|
|
$
|
|
|
|
$
|
236,808
|
|
|
$
|
236,808
|
|
Payables and accrued liabilities
|
|
|
95
|
|
|
|
1,173
|
|
|
|
1,268
|
|
Outstanding servicer
advances(1)
|
|
|
32,284
|
|
|
|
|
|
|
|
32,284
|
|
Derivative financial instruments
|
|
|
|
|
|
|
7,801
|
|
|
|
7,801
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
18,781
|
|
|
|
|
|
|
|
18,781
|
|
Nonrecourse debtLegacy Assets
|
|
|
|
|
|
|
138,662
|
|
|
|
138,662
|
|
ABS nonrecourse debt
|
|
|
497,289
|
|
|
|
|
|
|
|
497,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
548,449
|
|
|
$
|
384,444
|
|
|
$
|
932,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Outstanding servicer advances consists of principal and interest
advances paid by Nationstar to cover scheduled payments and
interest that have not been timely paid by borrowers. These
outstanding servicer advances are eliminated upon the
consolidation of the securitization trusts. |
A summary of the outstanding collateral and certificate balances
for securitization trusts, including any retained beneficial
interests and mortgage servicing rights, that were not
consolidated by Nationstar for the periods ending March 31,
2011 and December 31, 2010 is presented in the following
table (in thousands).
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
Total collateral balance
|
|
$
|
3,950,854
|
|
|
$
|
4,038,978
|
|
Total certificate balance
|
|
|
3,944,442
|
|
|
|
4,026,844
|
|
Total mortgage servicing rights at fair value
|
|
|
25,847
|
|
|
|
26,419
|
|
Nationstar has not retained any variable interests in the
unconsolidated securitization trusts that were outstanding as of
March 31, 2011 or 2010, and therefore does not have a
significant maximum exposure to loss related to these
unconsolidated VIEs.
F-64
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
3.
|
Variable Interest
Entities and Securitizations (continued)
|
A summary of mortgage loans transferred to unconsolidated
securitization trusts that are 60 days or more past due and
the credit losses incurred in the unconsolidated securitization
trusts are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
March 31, 2011
|
|
March 31, 2010
|
|
|
Principal Amount of
|
|
|
|
Principal Amount of
|
|
|
|
|
Loans 60 Days or
|
|
Credit
|
|
Loans 60 Days or
|
|
Credit
|
|
|
More Past Due
|
|
Losses
|
|
More Past Due
|
|
Losses
|
|
Total securitization Trusts
|
|
$
|
756,024
|
|
|
$
|
51,422
|
|
|
$
|
934,905
|
|
|
$
|
48,524
|
|
Certain cash flows received from securitization trusts accounted
for as sales for the dates indicated were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
March 31, 2011
|
|
March 31, 2010
|
|
|
Servicing
|
|
Loan
|
|
Servicing
|
|
Loan
|
|
|
Fees Received
|
|
Repurchases
|
|
Fees Received
|
|
Repurchases
|
|
Total securitization trusts
|
|
$
|
7,738
|
|
|
$
|
|
|
|
$
|
7,027
|
|
|
$
|
|
|
|
|
4.
|
Consolidated
Statement of Cash Flows-Supplemental Disclosure
|
Total interest paid for the three months ended March 31,
2011 and 2010, was approximately $16.5 million and
$23.5 million, respectively.
Accounts receivable consist primarily of accrued interest
receivable on mortgage loans and securitizations, collateral
deposits on surety bonds, and advances made to securitization
trusts, as required under various servicing agreements related
to delinquent loans, which are ultimately paid back to
Nationstar from such trusts.
Accounts receivable consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Delinquency advances
|
|
$
|
147,262
|
|
|
$
|
148,752
|
|
Corporate and escrow advances
|
|
|
243,642
|
|
|
|
233,432
|
|
Insurance deposits
|
|
|
3,390
|
|
|
|
6,390
|
|
Accrued interest (includes $3,138 and $2,392, respectively,
subject to ABS nonrecourse debt)
|
|
|
5,047
|
|
|
|
4,302
|
|
Receivable from trusts
|
|
|
38,401
|
|
|
|
30,095
|
|
Other
|
|
|
16,493
|
|
|
|
16,100
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable
|
|
$
|
454,235
|
|
|
$
|
439,071
|
|
|
|
|
|
|
|
|
|
|
F-65
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
6.
|
Mortgage Loans
Held for Sale and Investment
|
Mortgage loans held for sale consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Mortgage loans held for saleunpaid principal balance
|
|
$
|
261,562
|
|
|
$
|
366,880
|
|
Mark-to-market
adjustment
|
|
|
7,388
|
|
|
|
4,280
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans held for sale
|
|
$
|
268,950
|
|
|
$
|
371,160
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale on a nonaccrual status are
presented in the following table for the periods indicated (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Mortgage loans held for saleNon-performing
|
|
$
|
1,971
|
|
|
$
|
2,016
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the changes in mortgage loans held for sale
to the amounts presented in the consolidated statements of cash
flows for the dates indicated is presented in the following
table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Mortgage loans held for salebeginning balance
|
|
$
|
371,160
|
|
|
$
|
203,131
|
|
Mortgage loans originated and purchased, net of fees
|
|
|
654,127
|
|
|
|
512,615
|
|
Cost of loans sold, net of fees
|
|
|
(765,695
|
)
|
|
|
(492,333
|
)
|
Principal payments received on mortgage loans held for sale and
other changes
|
|
|
9,646
|
|
|
|
4,172
|
|
Transfer of mortgage loans held for sale to real estate owned
|
|
|
(288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for saleending balance
|
|
$
|
268,950
|
|
|
$
|
227,585
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for investment as of the dates indicated
include (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Mortgage loans held for investmentunpaid principal balance
|
|
$
|
405,682
|
|
|
$
|
412,398
|
|
Transfer discount
|
|
|
|
|
|
|
|
|
Accretable
|
|
|
(25,659
|
)
|
|
|
(25,219
|
)
|
Non-accretable
|
|
|
(113,329
|
)
|
|
|
(117,041
|
)
|
Allowance for loan losses
|
|
|
(4,426
|
)
|
|
|
(3,298
|
)
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for investment, net
|
|
$
|
262,268
|
|
|
$
|
266,840
|
|
|
|
|
|
|
|
|
|
|
Over the life of the loan pools, Nationstar continues to
estimate cash flows expected to be collected. Nationstar
considers expected prepayments and estimates the amount and
timing of undiscounted expected principal, interest, and other
cash flows (expected as of the transfer date) for each aggregate
pool of loans. Nationstar evaluates at the balance sheet date
whether the present value of its loans determined using the
effective interest rates has decreased and, if so, recognizes a
valuation allowance subsequent to the transfer date. The present
value of any subsequent increase in the loan pools actual
cash flows expected to be collected is used first to reverse any
existing valuation
F-66
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
6.
|
Mortgage Loans
Held for Sale and Investment (continued)
|
allowance for that loan pool. Any remaining increase in cash
flows expected to be collected adjusts the amount of accretable
yield recognized on a prospective basis over the loan
pools remaining life.
The changes in accretable yield on loans transferred to mortgage
loans held for investment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Balance at the beginning of the period
|
|
$
|
25,219
|
|
|
$
|
22,040
|
|
Additions
|
|
|
|
|
|
|
|
|
Accretion
|
|
|
(1,103
|
)
|
|
|
(4,082
|
)
|
Reclassifications from (to) nonaccretable discount
|
|
|
1,543
|
|
|
|
7,261
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
25,659
|
|
|
$
|
25,219
|
|
|
|
|
|
|
|
|
|
|
Nationstar may periodically modify the terms of any outstanding
mortgage loans held for investment, subject to nonrecourse
debt-Legacy Assets, net 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
increased 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. Nationstar 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,
Nationstar reclassified approximately $1.5 million for the
three months ended March 31, 2011 and $7.3 million
from the twelve months ended December 31, 2010 from
nonaccretable difference. Furthermore, the Company considers the
decrease in principal, interest, and other cash flows expected
to be collected arising from the transferred loans as an
impairment, and Nationstar recorded a $1.1 million
provision for loan losses for the three months ended
March 31, 2010 and a $3.3 million provision for loan
losses for the twelve months ended December 31, 2010 on the
transferred loans to reflect this impairment.
The changes in the allowance for loan losses on mortgage loans
held for investment, subject to nonrecourse debt-Legacy Assets,
net were as follows (in thousands) for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
Performing
|
|
|
Performing
|
|
|
Total
|
|
|
Balance at the beginning of the period
|
|
$
|
829
|
|
|
$
|
2,469
|
|
|
$
|
3,298
|
|
Provision for loan losses
|
|
|
86
|
|
|
|
1,042
|
|
|
|
1,128
|
|
Recoveries on loans previously charged-off
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
915
|
|
|
$
|
3,511
|
|
|
$
|
4,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balanceCollectively evaluated for impairment
|
|
$
|
304,421
|
|
|
$
|
101,261
|
|
|
$
|
405,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-67
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
6.
|
Mortgage Loans
Held for Sale and Investment (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
Performing
|
|
|
Performing
|
|
|
Total
|
|
|
Balance at the beginning of the period
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Provision for loan losses
|
|
|
829
|
|
|
|
2,469
|
|
|
|
3,298
|
|
Recoveries on loans previously charged-off
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
829
|
|
|
$
|
2,469
|
|
|
$
|
3,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance Collectively evaluated for impairment
|
|
$
|
311,122
|
|
|
$
|
101,276
|
|
|
$
|
412,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan delinquency and
Loan-to-Value
Ratio (LTV) are common credit quality indicators that Nationstar
monitors and utilizes in its evaluation of the adequacy of
the allowance for loan losses, of which the primary indicator of
credit quality is loan delinquency. LTV refers to the ratio of
comparing the loans unpaid principal balance to the
propertys collateral value. Loan delinquencies and unpaid
principal balances are updated monthly based upon collection
activity. Collateral values are updated on an as needed basis,
which is generally described as an event requiring a decision
based at least in part on the collateral value. The collateral
values used to derive the LTVs shown below were obtained
at various points during the prior eighteen months.
The following tables provide the outstanding unpaid principal
balance of Nationstars mortgage loans held for investment
by credit quality indicators as of March 31, 2011 and
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Credit Quality by Delinquency Status
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
304,421
|
|
|
$
|
311,122
|
|
Non-Performing
|
|
|
101,261
|
|
|
|
101,276
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
405,682
|
|
|
$
|
412,398
|
|
|
|
|
|
|
|
|
|
|
Credit Quality by
Loan-to-Value
Ratio
|
|
|
|
|
|
|
|
|
Less than 60
|
|
$
|
45,688
|
|
|
$
|
47,627
|
|
Less than 70 and more than 60
|
|
|
18,018
|
|
|
|
17,498
|
|
Less than 80 and more than 70
|
|
|
26,770
|
|
|
|
26,805
|
|
Less than 90 and more than 80
|
|
|
35,567
|
|
|
|
36,125
|
|
Less than 100 and more than 90
|
|
|
38,402
|
|
|
|
37,599
|
|
Greater than 100
|
|
|
241,237
|
|
|
|
246,744
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
405,682
|
|
|
$
|
412,398
|
|
|
|
|
|
|
|
|
|
|
Performing loans refer to loans that are less than 90 days
delinquent. Non-performing loans refer to loans that are greater
than 90 days delinquent.
Effective January 1, 2010, new accounting guidance
eliminated the concept of a QSPE and all existing securitization
trusts are considered VIEs and are now subject to new
consolidation guidance provided in ASC 810. Upon
consolidation of these VIEs, Nationstar recognized the
securitized mortgage
F-68
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
6.
|
Mortgage Loans
Held for Sale and Investment (continued)
|
loans related to these securitization trusts as mortgage loans
held for investment, subject to ABS nonrecourse debt.
Additionally, Nationstar elected the fair value option provided
for by
ASC 825-10.
Mortgage loans held for investment, subject to ABS nonrecourse
debt as of March 31, 2011 and December 31, 2010
includes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt unpaid principal balance
|
|
$
|
963,875
|
|
|
$
|
983,106
|
|
Fair value adjustment
|
|
|
(433,194
|
)
|
|
|
(444,666
|
)
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt, net
|
|
$
|
530,681
|
|
|
$
|
538,440
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2011 and December 31, 2010,
respectively, approximately $213.8 million and
$223.5 million of the unpaid principal balance of mortgage
loans held for investment, subject to ABS nonrecourse debt were
over 90 days past due. The fair value of such loans was
approximately $114.1 million and $117.6 million,
respectively.
|
|
7.
|
Mortgage
Servicing Rights
|
MSRs arise from contractual agreements between Nationstar and
investors in mortgage securities and mortgage loans. Nationstar
records MSR assets when it sells loans on a servicing-retained
basis, at the time of securitization or through the acquisition
or assumption of the right to service a financial asset. Under
these contracts, Nationstar performs loan servicing functions in
exchange for fees and other remuneration.
The fair value of the MSRs is based upon the present value of
the expected future cash flows related to servicing these loans.
Nationstar receives a base servicing fee ranging from 0.25% to
0.50% annually on the remaining outstanding principal balances
of the loans. The servicing fees are collected from investors.
Nationstar determines the fair value of the MSRs by the use of a
cash flow model that incorporates prepayment speeds, discount
rate, and other assumptions (including servicing costs)
management believes are consistent with the assumptions other
major market participants use in valuing the MSRs. The Company
periodically obtains third-party valuations of a portion of its
MSRs to assess the reasonableness of the fair value calculated
by the cash flow model.
Nationstar used the following assumptions in estimating the fair
value of MSRs for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
Discount rate
|
|
|
9.7% to 30.0%
|
|
|
|
9.7% to 30.0%
|
|
Total prepayment speeds
|
|
|
10.57% to 28.71%
|
|
|
|
10.57% to 28.71%
|
|
Expected weighted-average life
|
|
|
3.49 to 6.75 years
|
|
|
|
3.49 to 6.75 years
|
|
Credit losses
|
|
|
5.82% to 60.19%
|
|
|
|
5.82% to 60.19%
|
|
F-69
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
7.
|
Mortgage
Servicing Rights (continued)
|
The activity of MSRs carried at fair value is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Fair value at the beginning of the period
|
|
$
|
145,062
|
|
|
$
|
114,605
|
|
Additions:
|
|
|
|
|
|
|
|
|
Servicing resulting from transfers of financial assets
|
|
|
9,881
|
|
|
|
26,253
|
|
Recognition of MSRs from derecognition of variable interest
entities
|
|
|
|
|
|
|
2,866
|
|
Purchases of servicing assets
|
|
|
|
|
|
|
17,812
|
|
Deductions:
|
|
|
|
|
|
|
|
|
Derecognition of servicing assets due to new accounting guidance
on consolidation of variable interest entities
|
|
|
|
|
|
|
(10,431
|
)
|
Changes in fair value:
|
|
|
|
|
|
|
|
|
Due to changes in valuation inputs or assumptions used in the
valuation model
|
|
|
|
|
|
|
9,455
|
|
Other changes in fair value
|
|
|
(3,784
|
)
|
|
|
(15,498
|
)
|
|
|
|
|
|
|
|
|
|
Fair value at the end of the period
|
|
$
|
151,159
|
|
|
$
|
145,062
|
|
|
|
|
|
|
|
|
|
|
Unpaid principal balance of loans serviced for others
|
|
|
|
|
|
|
|
|
Originated or purchased mortgage loans
|
|
$
|
31,297,199
|
|
|
$
|
31,686,641
|
|
Subserviced for others
|
|
|
33,971,672
|
|
|
|
30,649,472
|
|
|
|
|
|
|
|
|
|
|
Total unpaid principal balance of loans serviced for others
|
|
$
|
65,268,871
|
|
|
$
|
62,336,113
|
|
|
|
|
|
|
|
|
|
|
Total servicing and ancillary fees from Nationstars
portfolio of residential mortgage loans are presented in the
following table for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31, 2011
|
|
|
March 31, 2010
|
|
|
Servicing fees
|
|
$
|
43,138
|
|
|
$
|
22,498
|
|
Ancillary fees
|
|
|
18,357
|
|
|
|
13,193
|
|
|
|
|
|
|
|
|
|
|
Total servicing and ancillary fees
|
|
$
|
61,495
|
|
|
$
|
35,691
|
|
|
|
|
|
|
|
|
|
|
Other assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Deferred financing costs
|
|
$
|
14,639
|
|
|
$
|
14,396
|
|
Derivative financial instruments
|
|
|
6,699
|
|
|
|
8,666
|
|
Prepaid expenses
|
|
|
3,003
|
|
|
|
3,379
|
|
Equity method investment
|
|
|
6,600
|
|
|
|
|
|
Other
|
|
|
5,287
|
|
|
|
3,095
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
$
|
36,228
|
|
|
$
|
29,536
|
|
|
|
|
|
|
|
|
|
|
F-70
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
8.
|
Other Assets
(continued)
|
In March 2011, the Company acquired a 22% interest in ANC
Acquisition LLC (ANC) for $6.6 million. ANC is the parent
company of National Real Estate Information Services, Inc.
(NREIS), a real estate services company. As the Company is able
to exercise significant influence, but not control, over the
policies and procedures of the entity, and Nationstar owns less
than 50% of the voting interests, Nationstar applies the equity
method of accounting.
|
|
9.
|
Derivative
Financial Instruments
|
On October 1, 2010, the Company designated an existing
interest rate swap as a cash flow hedge against outstanding
floating rate financing associated with the Nationstar Mortgage
Advance Receivables
Trust 2009-ADV1
financing. Under the swap agreement, the Company receives
interest equivalent to one month LIBOR and pays a fixed rate of
2.0425% based on an amortizing notional of $280.0 million
as of March 31, 2011, with settlements occurring monthly
until November 2013.
The Effect of
Derivative Instruments on the Statement of Operations
for the three months ended March 31, 2011
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
Recognized
|
|
|
|
|
|
|
Location of
|
|
Amount of
|
|
in Income on
|
|
|
|
|
|
|
Gain (Loss)
|
|
Gain (Loss)
|
|
Derivative
|
|
|
|
|
Amount of
|
|
Reclassified
|
|
Reclassified
|
|
(Ineffective
|
|
Amount of
|
Derivatives
|
|
Gain (Loss)
|
|
from
|
|
from
|
|
Portion and
|
|
Gain (Loss)
|
in ASC815
|
|
Recognized
|
|
Accumulated
|
|
Accumulated
|
|
Amount
|
|
Recognized
|
Cash Flow
|
|
in OCI on
|
|
OCI into
|
|
OCI into
|
|
Excluded from
|
|
in Income on
|
Hedging
|
|
Derivative
|
|
Income
|
|
Income
|
|
Effectiveness
|
|
Derivative
|
Relationships
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
Testing)
|
|
(Ineffective Portion)
|
|
Interest Rate Swap
|
|
$
|
139
|
|
|
|
Interest Expense
|
|
|
$
|
278
|
|
|
|
Interest
Expense
|
|
|
$
|
902
|
|
As of March 31, 2011, there are no credit risk related
contingent features in any of the Companys derivative
agreements. The amount of OCI expected to be reclassified to the
consolidated statement of operations in the next 12 months
is $0.7 million.
F-71
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
9.
|
Derivative
Financial Instruments (continued)
|
The following tables provide the outstanding notional balances
and fair values of outstanding positions for the dates
indicated, and recorded gains (losses) during the periods
indicated (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
|
Expiration
|
|
|
Outstanding
|
|
|
|
|
|
Gains /
|
|
|
|
Dates
|
|
|
Notional
|
|
|
Fair Value
|
|
|
(Losses)
|
|
|
THREE MONTHS ENDED MARCH 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MORTGAGE LOANS HELD FOR SALE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan sale commitments
|
|
|
2011
|
|
|
$
|
30,931
|
|
|
$
|
861
|
|
|
$
|
819
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
|
|
2011
|
|
|
|
509,882
|
|
|
|
6,699
|
|
|
|
1,997
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps and caps
|
|
|
2011-2013
|
|
|
|
395,500
|
|
|
|
6,760
|
|
|
|
902
|
|
Forward MBS trades
|
|
|
2011
|
|
|
|
531,701
|
|
|
|
964
|
|
|
|
(4,928
|
)
|
Interest rate swap, subject to ABS nonrecourse debt
|
|
|
2013
|
|
|
|
234,921
|
|
|
|
15,615
|
|
|
|
3,166
|
|
YEAR ENDED DECEMBER 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MORTGAGE LOANS HELD FOR SALE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan sale commitments
|
|
|
2011
|
|
|
$
|
28,641
|
|
|
$
|
42
|
|
|
$
|
(1,397
|
)
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
|
|
2011
|
|
|
|
391,990
|
|
|
|
4,703
|
|
|
|
2,289
|
|
Forward MBS trades
|
|
|
2011
|
|
|
|
546,500
|
|
|
|
3,963
|
|
|
|
580
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps and caps
|
|
|
2011-2013
|
|
|
|
429,000
|
|
|
|
7,801
|
|
|
|
8,872
|
|
Interest rate swap, subject to ABS nonrecourse debt
|
|
|
2013
|
|
|
|
245,119
|
|
|
|
18,781
|
|
|
|
2,049
|
|
F-72
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
Notes
Payable
A summary of the balances of notes payable for the dates
indicated is presented below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
Collateral
|
|
|
|
|
|
Collateral
|
|
|
|
Outstanding
|
|
|
Pledged
|
|
|
Outstanding
|
|
|
Pledged
|
|
|
Financial institutions repurchase facility (2011)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Financial institutions repurchase facility (2010)
|
|
|
27,063
|
|
|
|
29,225
|
|
|
|
43,059
|
|
|
|
45,429
|
|
Financial services company repurchase facility
|
|
|
177,648
|
|
|
|
185,184
|
|
|
|
209,477
|
|
|
|
223,119
|
|
Financial institutions repurchase facility (2009)
|
|
|
27,942
|
|
|
|
29,106
|
|
|
|
39,014
|
|
|
|
40,640
|
|
Financial services company
2009-ADV1
advance facility
|
|
|
219,146
|
|
|
|
263,898
|
|
|
|
236,808
|
|
|
|
285,226
|
|
Financial institutions
2010-ADV1
advance facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GSE MSR facility
|
|
|
14,345
|
|
|
|
18,272
|
|
|
|
15,733
|
|
|
|
18,951
|
|
GSE ASAP+ facility
|
|
|
5,512
|
|
|
|
5,594
|
|
|
|
51,105
|
|
|
|
53,230
|
|
GSE EAF facility
|
|
|
136,795
|
|
|
|
171,860
|
|
|
|
114,562
|
|
|
|
142,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
$
|
608,451
|
|
|
$
|
703,139
|
|
|
$
|
709,758
|
|
|
$
|
808,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In March 2011, Nationstar executed a Master Repurchase Agreement
(MRA) with a financial institution, under which Nationstar may
enter into transactions, for an aggregate amount of
$50.0 million, in which Nationstar agrees to transfer to
the same financial institution certain mortgage loans and
certain securities against the transfer of funds by the same
financial institution, with a simultaneous agreement by the same
financial institution to transfer such mortgage loans and
securities to Nationstar at a date certain, or on demand by
Nationstar, against the transfer of funds Nationstar. The
interest rate is based on LIBOR plus a spread of 1.45% to 3.95%,
which varies based on the underlying transferred collateral. The
maturity date of this MRA is March 2012.
In February 2010, Nationstar executed a second MRA with a
financial institution, which expires in October 2011. The MRA
states that from time to time Nationstar may enter into
transactions, for an aggregate amount of $75 million, in
which Nationstar agrees to transfer to the same financial
institution certain mortgage loans against the transfer of funds
by the same financial institution, with a simultaneous agreement
by the same financial institution to transfer such mortgage
loans to Nationstar at a date certain, or on demand by
Nationstar, against the transfer of funds from Nationstar. The
interest rate is based on LIBOR plus a spread ranging from 2.75%
to 3.50%, with a minimum interest rate of 4.75%.
Nationstar has a third MRA with a financial services company,
which expires in February 2012. The MRA states that from time to
time Nationstar may enter into transactions, for an aggregate
amount of $300 million, in which Nationstar agrees to
transfer to the financial services company certain mortgage
loans or mortgage-backed securities against the transfer of
funds by the financial services company, with a simultaneous
agreement by the financial services company to transfer such
mortgage loans or mortgage-backed securities to Nationstar at a
certain date, or on demand by Nationstar, against the transfer
of funds from Nationstar. The interest rate is based on LIBOR
plus a margin of 3.25%.
F-73
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
10.
|
Indebtedness
(continued)
|
In October 2009, Nationstar executed a fourth MRA with a
financial institution. This MRA states that from time to time
Nationstar may enter into transactions, for an aggregate amount
of $100 million, in which Nationstar agrees to transfer to
the financial institution certain mortgage loans against the
transfer of funds by the financial institution, with a
simultaneous agreement by the financial institution to transfer
such mortgage loans to Nationstar at a certain date, or on
demand by Nationstar, against the transfer of funds from
Nationstar. The interest rate is based on LIBOR plus a spread of
3.50%. The maturity date of this MRA with the financial
institution is December 2011.
Nationstar maintains a facility with a financial services
company, the
2009-ADV1
Advance Facility. This facility has the capacity to purchase up
to $350 million of advance receivables. The interest rate
is based on LIBOR plus a spread ranging from 3.00% to 12.00%.
The maturity date of this facility with the financial services
company is December 2011. This debt is nonrecourse to Nationstar.
In December 2010, Nationstar executed the
2010-ADV1
Advance Facility with a financial institution. This facility has
the capacity to purchase up to $200 million of advance
receivables. The interest rate is based on LIBOR plus a spread
of 3.00%. The maturity date of this facility with the financial
institution is July 2011, which may be extended if Nationstar
elects to pledge any additional advances to this facility. This
debt is nonrecourse to Nationstar.
In connection with the October 2009 mortgage servicing rights
acquisition, Nationstar executed a four-year note agreement with
a government-sponsored enterprise (GSE). As collateral for this
note, Nationstar has pledged Nationstars rights, title,
and interest in the acquired servicing portfolio. The interest
rate is based on LIBOR plus 2.50%. The maturity date of this
facility is October 2013.
During 2009, Nationstar began executing As Soon As Pooled Plus
agreements with a GSE, under which Nationstar transfers to the
GSE eligible mortgage loans that are to be pooled into the GSE
MBS against the transfer of funds by the GSE. The interest rate
is based on LIBOR plus a spread of 1.50%. These agreements
typically have a maturity of up to 45 days.
In September 2009, Nationstar executed a one-year committed
facility agreement with a GSE, under which Nationstar agrees to
transfer to the GSE certain servicing advance receivables
against the transfer of funds by the GSE. This facility has the
capacity to purchase up to $275 million in eligible
servicing advance receivables. The interest rate is based on
LIBOR plus a spread of 2.50%. The maturity date of this facility
is December 2011.
Senior
Unsecured Notes
In March 2010, Nationstar completed the offering of
$250 million of unsecured senior notes, which were issued
with an issue discount of $7.0 million for net cash
proceeds of $243.0 million, with a maturity date of April
2015. These unsecured senior notes pay interest biannually at an
interest rate of 10.875%.
The indenture for the unsecured senior notes contains various
covenants and restrictions that limit Nationstar, or certain of
its subsidiaries, ability to incur additional
indebtedness, pay dividends, make certain investments, create
liens, consolidate, merge or sell substantially all the assets,
or enter into certain transactions with affiliates.
Nonrecourse
DebtLegacy Assets
In November 2009, Nationstar completed the securitization of
approximately $222 million of asset-backed securities,
which was structured as a secured borrowing. This structure
resulted in
F-74
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
10.
|
Indebtedness
(continued)
|
Nationstar carrying the securitized loans as mortgages on
Nationstars consolidated balance sheet and recognizing the
asset-backed certificates acquired by third parties as
nonrecourse debt, totaling approximately $133.6 million and
$138.7 million at March 31, 2011 and December 31,
2010, respectively. The principal and interest on these notes
are paid using the cash flows from the underlying mortgage
loans, which serve as collateral for the debt. The interest rate
paid on the outstanding securities is 7.50%, which is subject to
an available funds cap. The total outstanding principal balance
on the underlying mortgage loans serving as collateral for the
debt was approximately $419.6 million and
$430.0 million at March 31, 2011 and December 31,
2010, respectively. Accordingly, the timing of the principal
payments on this nonrecourse debt is dependent on the payments
received on the underlying mortgage loans. The unpaid principal
balance on the outstanding notes was $155.3 million and
$161.2 million at March 31, 2011 and December 31,
2010, respectively.
ABS
Nonrecourse Debt
Effective January 1, 2010, new accounting guidance
eliminated the concept of a QSPE, and all existing
securitization trusts are considered VIEs and are now subject to
new consolidation guidance provided in ASC 810. Upon
consolidation of these VIEs, Nationstar derecognized all
previously recognized beneficial interests obtained as part of
the securitization. In addition, Nationstar recognized the
securitized mortgage loans as mortgage loans held for
investment, subject to ABS nonrecourse debt, and the related
asset-backed certificates acquired by third parties as ABS
nonrecourse debt on Nationstars consolidated balance
sheet. (see Note 3). Additionally, Nationstar elected the
fair value option provided for by
ASC 825-10.
The principal and interest on these notes are paid using the
cash flows from the underlying mortgage loans, which serve as
collateral for the debt. The interest rate paid on the
outstanding securities is based on LIBOR plus a spread ranging
from 0.13% to 2.00%, which is subject to an interest rate cap.
The total outstanding principal balance on the underlying
mortgage loans and real estate owned serving as collateral for
the debt was approximately $1,000.6 million and
$1,025.3 million at March 31, 2011 and
December 31, 2010, respectively. The timing of the
principal payments on this ABS nonrecourse debt is dependent on
the payments received on the underlying mortgage loans. The
outstanding principal balance on the outstanding notes related
to these consolidated securitization trusts was
$1,009.6 million and $1,037.9 million at
March 31, 2011 and December 31, 2010, respectively.
Financial
Covenants
As of March 31, 2011, Nationstar was in compliance with its
covenants on Nationstars borrowing arrangements and credit
facilities. These covenants generally relate to
Nationstars tangible net worth, liquidity reserves, and
leverage requirements.
F-75
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
11.
|
General and
Administrative
|
General and administrative expense consists of the following for
the dates indicated (in thousands).
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31, 2011
|
|
|
March 31, 2010
|
|
|
Depreciation and amortization
|
|
$
|
751
|
|
|
$
|
398
|
|
Advertising
|
|
|
850
|
|
|
|
1,435
|
|
Equipment
|
|
|
909
|
|
|
|
708
|
|
Servicing
|
|
|
4,646
|
|
|
|
1,327
|
|
Telecommunications
|
|
|
819
|
|
|
|
500
|
|
Legal and professional fees
|
|
|
3,095
|
|
|
|
967
|
|
Postage
|
|
|
1,517
|
|
|
|
1,031
|
|
Stationary and supplies
|
|
|
1,002
|
|
|
|
483
|
|
Travel
|
|
|
693
|
|
|
|
479
|
|
Insurance and Other
|
|
|
1,282
|
|
|
|
1,392
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expense
|
|
$
|
15,564
|
|
|
$
|
8,720
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
Fair Value
Measurements
|
ASC 820 provides a definition of fair value, establishes a
framework for measuring fair value, and requires expanded
disclosures about fair value measurements. The standard applies
when GAAP requires or allows assets or liabilities to be
measured at fair value and, therefore, does not expand the use
of fair value in any new circumstance.
ASC 820 emphasizes that fair value is a market-based
measurement, not an entity-specific measurement. Therefore, a
fair value measurement should be determined based on the
assumptions that market participants would use in pricing the
asset or liability. As a basis for considering market
participant assumptions in fair value measurements, ASC 820
establishes a three-tiered fair value hierarchy based on the
level of observable inputs used in the measurement of fair value
(e.g., Level 1 representing quoted prices for identical
assets or liabilities in an active market; Level 2
representing values using observable inputs other than quoted
prices included within Level 1; and Level 3
representing estimated values based on significant unobservable
inputs). In addition, ASC 820 requires an entity to
consider all aspects of nonperformance risk, including its own
credit standing, when measuring the fair value of a liability.
Under ASC 820, related disclosures are segregated for
assets and liabilities measured at fair value based on the level
used within the hierarchy to determine their fair values.
The following describes the methods and assumptions used by
Nationstar in estimating fair values:
Cash and Cash Equivalents, Restricted Cash, Notes
PayableThe carrying amount reported in the
consolidated balance sheets approximates fair value.
Mortgage Loans Held for SaleNationstar originates
mortgage loans in the U.S. that it intends to sell to
Fannie Mae, Freddie Mac, and GNMA (collectively, the Agencies).
Additionally, Nationstar holds mortgage loans that it intends to
sell into the secondary markets via whole loan sales or
securitizations. Nationstar measures newly originated prime
residential mortgage loans held for sale at fair value.
F-76
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
12.
|
Fair Value
Measurements (continued)
|
Mortgage loans held for sale are typically pooled together and
sold into certain exit markets, depending upon underlying
attributes of the loan, such as agency eligibility, product
type, interest rate, and credit quality.
Mortgage loans held for sale are valued using a market approach
by utilizing either: (i) the fair value of securities
backed by similar mortgage loans, adjusted for certain factors
to approximate the fair value of a whole mortgage loan,
including the value attributable to mortgage servicing and
credit risk, (ii) current commitments to purchase loans or
(iii) recent observable market trades for similar loans,
adjusted for credit risk and other individual loan
characteristics. As these prices are derived from quoted market
prices, Nationstar classifies these valuations as Level 2
in the fair value disclosures.
Mortgage Loans Held for Investment, subject to nonrecourse
debtNationstar determines the fair value on loans held
for investment using internally developed valuation models.
These valuation models estimate the exit price Nationstar
expects to receive in the loans principal market. Although
Nationstar utilizes and gives priority to observable market
inputs such as interest rates and market spreads within these
models, Nationstar typically is required to utilize internal
inputs, such as prepayment speeds, credit losses, and discount
rates. These internal inputs require the use of judgment by
Nationstar and can have a significant impact on the
determination of the loans fair value.
Mortgage Loans Held for Investment, subject to ABS
nonrecourse debtNationstar determines the fair value
on loans held for investment, subject to ABS nonrecourse debt
using internally developed valuation models. These valuation
models estimate the exit price Nationstar expects to receive in
the loans principal market. Although Nationstar utilizes
and gives priority to observable market inputs such as interest
rates and market spreads within these models, Nationstar
typically is required to utilize internal inputs, such as
prepayment speeds, credit losses, and discount rates. These
internal inputs require the use of judgment by Nationstar and
can have a significant impact on the determination of the
loans fair value. As these prices are derived from a
combination of internally developed valuation models and quoted
market prices, Nationstar classifies these valuations as
Level 3 in the fair value disclosures.
Mortgage Servicing RightsNationstar will typically
retain the servicing rights when it sells loans into the
secondary market. Nationstar estimates the fair value of its
MSRs using a process that combines the use of a discounted cash
flow model and analysis of current market data to arrive at an
estimate of fair value. The cash flow assumptions and prepayment
assumptions used in the model are based on various factors, with
the key assumptions being mortgage prepayment speeds and
discount rates. These assumptions are generated and applied
based on collateral stratifications including product type,
remittance type, geography, delinquency and coupon dispersion.
These assumptions require the use of judgment by Nationstar and
can have a significant impact on the determination of the
MSRs fair value. Periodically, management obtains
third-party valuations of a portion of the portfolio to assess
the reasonableness of the fair value calculations provided by
the cash flow model. Because of the nature of the valuation
inputs, Nationstar classifies these valuations as Level 3
in the fair value disclosures.
Real Estate OwnedNationstar determines the fair
value of real estate owned properties through the use of
third-party appraisals and broker price opinions, adjusted for
estimated selling costs. Such estimated selling costs include
realtor fees and other anticipated closing costs. These values
are adjusted to take into account factors that could cause the
actual liquidation value of foreclosed properties to be
different than the appraised values. This valuation adjustment
is based
F-77
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
12.
|
Fair Value
Measurements (continued)
|
upon Nationstars historical experience with real estate
owned. Real estate owned is classified as Level 3 in the
fair value disclosures.
Derivative InstrumentsNationstar enters into a
variety of derivative financial instruments as part of its
hedging strategy. The majority of these derivatives are
exchange-traded or traded within highly active dealer markets.
In order to determine the fair value of these instruments,
Nationstar utilizes the exchange price or dealer market price
for the particular derivative contract; therefore, these
contracts are classified as Level 2.
Unsecured Senior NotesThe fair value of unsecured
senior notes are based on quoted market prices, and Nationstar
classifies these valuations as Level 1 in the fair value
disclosures.
Nonrecourse DebtLegacy AssetsNationstar
estimates fair value based on the present value of future
expected discounted cash flows with the discount rate
approximating current market value for similar financial
instruments. As these prices are derived from a combination of
internally developed valuation models and quoted market prices,
Nationstar classifies these valuations as Level 3 in the
fair value disclosures.
ABS Nonrecourse DebtNationstar estimates fair value
based on the present value of future expected discounted cash
flows with the discount rate approximating current market value
for similar financial instruments. As these prices are derived
from a combination of internally developed valuation models and
quoted market prices, Nationstar classifies these valuations as
Level 3 in the fair value disclosures.
The estimated carrying amount and fair value of
Nationstars financial instruments and other assets and
liabilities measured at fair value on a recurring basis is as
follows for the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
|
|
|
|
Recurring Fair Value Measurements
|
|
|
|
Total Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for
sale(1)
|
|
$
|
268,950
|
|
|
$
|
|
|
|
$
|
268,950
|
|
|
$
|
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt(1)
|
|
|
530,681
|
|
|
|
|
|
|
|
|
|
|
|
530,681
|
|
Mortgage servicing
rights(1)
|
|
|
151,159
|
|
|
|
|
|
|
|
|
|
|
|
151,159
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
|
|
6,699
|
|
|
|
|
|
|
|
6,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
957,489
|
|
|
$
|
|
|
|
$
|
275,649
|
|
|
$
|
681,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
6,760
|
|
|
$
|
|
|
|
$
|
6,760
|
|
|
$
|
|
|
Forward MBS trades
|
|
|
964
|
|
|
|
|
|
|
|
964
|
|
|
|
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
15,615
|
|
|
|
|
|
|
|
15,615
|
|
|
|
|
|
ABS nonrecourse
debt(1)
|
|
|
489,321
|
|
|
|
|
|
|
|
|
|
|
|
489,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
512,660
|
|
|
$
|
|
|
|
$
|
23,339
|
|
|
$
|
489,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on the nature and risks of these assets and liabilities,
the Company has determined that presenting them as a single
class is appropriate. |
F-78
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
12.
|
Fair Value
Measurements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Total Fair
|
|
|
Recurring Fair Value Measurements
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for
sale(1)
|
|
$
|
371,160
|
|
|
$
|
|
|
|
$
|
371,160
|
|
|
$
|
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt(1)
|
|
|
538,440
|
|
|
|
|
|
|
|
|
|
|
|
538,440
|
|
Mortgage servicing
rights(1)
|
|
|
145,062
|
|
|
|
|
|
|
|
|
|
|
|
145,062
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
|
|
4,703
|
|
|
|
|
|
|
|
4,703
|
|
|
|
|
|
Forward MBS trades
|
|
|
3,963
|
|
|
|
|
|
|
|
3,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,063,328
|
|
|
$
|
|
|
|
$
|
379,826
|
|
|
$
|
683,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
7,801
|
|
|
$
|
|
|
|
$
|
7,801
|
|
|
$
|
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
18,781
|
|
|
|
|
|
|
|
18,781
|
|
|
|
|
|
ABS nonrecourse
debt(1)
|
|
|
496,692
|
|
|
|
|
|
|
|
|
|
|
|
496,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
523,274
|
|
|
$
|
|
|
|
$
|
26,582
|
|
|
$
|
496,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on the nature and risks of these assets and liabilities,
the Company has determined that presenting them as a single
class is appropriate. |
F-79
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
12.
|
Fair Value
Measurements (continued)
|
The table below presents a reconciliation for all of
Nationstars Level 3 assets measured at fair value on
a recurring basis (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
held for investment,
|
|
|
|
|
|
|
|
|
|
|
|
|
subject to ABS
|
|
|
Mortgage
|
|
|
|
|
|
ABS non-
|
|
|
|
nonrecourse debt
|
|
|
servicing rights
|
|
|
Total assets
|
|
|
recourse debt
|
|
|
THREE MONTHS ENDED MARCH 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
538,440
|
|
|
$
|
145,062
|
|
|
$
|
683,502
|
|
|
$
|
496,692
|
|
Transfers into Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers out of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings (or changes in net assets)
|
|
|
11,472
|
|
|
|
(3,784
|
)
|
|
|
7,688
|
|
|
|
9,617
|
|
Included in earnings (or changes in net assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances, sales and settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances
|
|
|
|
|
|
|
9,881
|
|
|
|
9,881
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlements
|
|
|
(19,231
|
)
|
|
|
|
|
|
|
(19,231
|
)
|
|
|
(16,988
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
530,681
|
|
|
$
|
151,159
|
|
|
$
|
681,840
|
|
|
$
|
489,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED DECEMBER 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance(1)
|
|
$
|
928,891
|
|
|
$
|
104,174
|
|
|
$
|
1,033,065
|
|
|
$
|
884,846
|
|
Transfers into Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers out of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings (or changes in net assets)
|
|
|
71,239
|
|
|
|
(6,043
|
)
|
|
|
65,196
|
|
|
|
16,938
|
|
Included in earnings (or changes in net assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances, sales and settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
|
|
|
|
17,812
|
|
|
|
17,812
|
|
|
|
|
|
Issuances
|
|
|
|
|
|
|
26,253
|
|
|
|
26,253
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlements
|
|
|
(461,690
|
)
|
|
|
2,866
|
|
|
|
(458,824
|
)
|
|
|
(405,092
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
538,440
|
|
|
$
|
145,062
|
|
|
$
|
683,502
|
|
|
$
|
496,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts include derecognition of previously retained beneficial
interests and mortgage servicing rights upon adoption of
ASC 810 related to consolidation of certain VIEs. |
F-80
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
12.
|
Fair Value
Measurements (continued)
|
The table below presents the items which Nationstar measures at
fair value on a nonrecurring basis (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Nonrecurring Fair Value Measurements
|
|
|
Estimated
|
|
|
Total Gains (Losses)
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
Included in Earnings
|
|
|
Three months ended March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
owned(1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
24,417
|
|
|
$
|
24,417
|
|
|
$
|
(2,651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
24,417
|
|
|
$
|
24,417
|
|
|
$
|
(2,651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
owned(1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
27,337
|
|
|
$
|
27,337
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
27,337
|
|
|
$
|
27,337
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on the nature and risks of these assets and liabilities,
the Company has determined that presenting them as a single
class is appropriate. |
The table below presents a summary of the estimated carrying
amount and fair value of Nationstars financial instruments
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
December 31 2010
|
|
|
Carrying
|
|
|
|
Carrying
|
|
|
|
|
Amount
|
|
Fair Value
|
|
Amount
|
|
Fair Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
48,420
|
|
|
$
|
48,420
|
|
|
$
|
21,223
|
|
|
$
|
21,223
|
|
Restricted cash
|
|
|
73,100
|
|
|
|
73,100
|
|
|
|
91,125
|
|
|
|
91,125
|
|
Mortgage loans held for sale
|
|
|
268,950
|
|
|
|
268,950
|
|
|
|
371,160
|
|
|
|
371,160
|
|
Mortgage loans held for investment, subject to nonrecourse
debtLegacy assets
|
|
|
262,268
|
|
|
|
242,416
|
|
|
|
266,840
|
|
|
|
239,035
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt
|
|
|
530,681
|
|
|
|
530,681
|
|
|
|
538,440
|
|
|
|
538,440
|
|
Derivative instruments
|
|
|
6,699
|
|
|
|
6,699
|
|
|
|
8,666
|
|
|
|
8,666
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
608,451
|
|
|
|
608,451
|
|
|
|
709,758
|
|
|
|
709,758
|
|
Unsecured senior notes
|
|
|
244,410
|
|
|
|
255,158
|
|
|
|
244,061
|
|
|
|
244,375
|
|
Derivative financial instruments
|
|
|
7,724
|
|
|
|
7,724
|
|
|
|
7,801
|
|
|
|
7,801
|
|
Derivative instruments, subject to ABS nonrecourse debt
|
|
|
15,615
|
|
|
|
15,615
|
|
|
|
18,781
|
|
|
|
18,781
|
|
Nonrecourse debt
|
|
|
133,592
|
|
|
|
134,696
|
|
|
|
138,662
|
|
|
|
140,197
|
|
ABS nonrecourse debt
|
|
|
489,321
|
|
|
|
489,321
|
|
|
|
496,692
|
|
|
|
496,692
|
|
Certain of Nationstars secondary market investors require
various capital adequacy requirements, as specified in the
respective selling and servicing agreements. To the extent that
these mandatory, imposed capital requirements are not met,
Nationstars secondary market investors may
F-81
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
13.
|
Capital
Requirements (continued)
|
ultimately terminate Nationstars selling and servicing
agreements, which would prohibit Nationstar from further
originating or securitizing these specific types of mortgage
loans. In addition, these secondary market investors may impose
additional net worth or financial condition requirements based
on an assessment of market conditions or other relevant factors.
Among Nationstars various capital requirements related to
its outstanding selling and servicing agreements, the most
restrictive of these requires Nationstar to maintain a minimum
adjusted net worth balance of $122.3 million.
As of March 31, 2011, Nationstar was in compliance with all
of its selling and servicing capital requirements. Additionally,
Nationstar is required to maintain a minimum tangible net worth
of at least $175 million as of each quarter-end related to
its outstanding Master Repurchase Agreements on our outstanding
repurchase facilities. As of March 31, 2011, Nationstar was
in compliance with these minimum tangible net worth requirements.
|
|
14.
|
Business Segment
Reporting
|
To reconcile to Nationstars consolidated results, certain
inter-segment revenues and expenses are eliminated in the
Elimination column in the following tables.
The following tables are a presentation of financial information
by segment for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2011
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Legacy Portfolio
|
|
|
|
|
|
|
|
|
|
Servicing
|
|
|
Originations
|
|
|
Segments
|
|
|
and Other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
$
|
58,724
|
|
|
$
|
|
|
|
$
|
58,724
|
|
|
$
|
567
|
|
|
$
|
(1,824
|
)
|
|
$
|
57,467
|
|
Other fee income
|
|
|
2,394
|
|
|
|
4,044
|
|
|
|
6,438
|
|
|
|
781
|
|
|
|
|
|
|
|
7,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
61,118
|
|
|
|
4,044
|
|
|
|
65,162
|
|
|
|
1,348
|
|
|
|
(1,824
|
)
|
|
|
64,686
|
|
Gain on mortgage loans held for sale
|
|
|
|
|
|
|
20,569
|
|
|
|
20,569
|
|
|
|
|
|
|
|
(63
|
)
|
|
|
20,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
61,118
|
|
|
|
24,613
|
|
|
|
85,731
|
|
|
|
1,348
|
|
|
|
(1,887
|
)
|
|
|
85,192
|
|
Total expenses and impairments
|
|
|
40,407
|
|
|
|
21,812
|
|
|
|
62,219
|
|
|
|
5,965
|
|
|
|
(63
|
)
|
|
|
68,121
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
967
|
|
|
|
2,603
|
|
|
|
3,570
|
|
|
|
12,924
|
|
|
|
1,824
|
|
|
|
18,318
|
|
Interest expense
|
|
|
(13,457
|
)
|
|
|
(1,981
|
)
|
|
|
(15,438
|
)
|
|
|
(9,930
|
)
|
|
|
|
|
|
|
(25,368
|
)
|
Fair value changes in ABS securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,652
|
)
|
|
|
|
|
|
|
(2,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(12,490
|
)
|
|
|
622
|
|
|
|
(11,868
|
)
|
|
|
342
|
|
|
|
1,824
|
|
|
|
(9,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
8,221
|
|
|
$
|
3,423
|
|
|
$
|
11,644
|
|
|
$
|
(4,275
|
)
|
|
$
|
|
|
|
$
|
7,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
372
|
|
|
$
|
269
|
|
|
$
|
641
|
|
|
$
|
110
|
|
|
$
|
|
|
|
$
|
751
|
|
Total assets
|
|
|
720,762
|
|
|
|
306,170
|
|
|
|
1,026,932
|
|
|
|
841,323
|
|
|
|
|
|
|
|
1,868,255
|
|
F-82
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
14.
|
Business Segment
Reporting (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Legacy Portfolio
|
|
|
|
|
|
|
|
|
|
Servicing
|
|
|
Originations
|
|
|
Segments
|
|
|
and Other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
$
|
35,766
|
|
|
$
|
|
|
|
$
|
35,766
|
|
|
$
|
458
|
|
|
$
|
(2,134
|
)
|
|
$
|
34,090
|
|
Other fee income
|
|
|
1,784
|
|
|
|
1,666
|
|
|
|
3,450
|
|
|
|
1,210
|
|
|
|
|
|
|
|
4,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
37,550
|
|
|
|
1,666
|
|
|
|
39,216
|
|
|
|
1,668
|
|
|
|
(2,134
|
)
|
|
|
38,750
|
|
Gain on mortgage loans held for sale
|
|
|
|
|
|
|
12,446
|
|
|
|
12,446
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
12,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
37,550
|
|
|
|
14,112
|
|
|
|
51,662
|
|
|
|
1,668
|
|
|
|
(2,151
|
)
|
|
|
51,179
|
|
Total expenses and impairments
|
|
|
21,282
|
|
|
|
15,937
|
|
|
|
37,219
|
|
|
|
2,887
|
|
|
|
(17
|
)
|
|
|
40,089
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
220
|
|
|
|
1,629
|
|
|
|
1,849
|
|
|
|
27,350
|
|
|
|
2,134
|
|
|
|
31,333
|
|
Interest expense
|
|
|
(10,646
|
)
|
|
|
(1,308
|
)
|
|
|
(11,954
|
)
|
|
|
(17,181
|
)
|
|
|
|
|
|
|
(29,135
|
)
|
Loss on interest rate swaps and caps
|
|
|
(2,779
|
)
|
|
|
|
|
|
|
(2,779
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,779
|
)
|
Fair value changes in ABS securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,777
|
)
|
|
|
|
|
|
|
(9,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(13,205
|
)
|
|
|
321
|
|
|
|
(12,884
|
)
|
|
|
392
|
|
|
|
2,134
|
|
|
|
(10,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
3,063
|
|
|
$
|
(1,504
|
)
|
|
$
|
1,559
|
|
|
$
|
(827
|
)
|
|
$
|
|
|
|
$
|
732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
214
|
|
|
$
|
141
|
|
|
$
|
355
|
|
|
$
|
43
|
|
|
$
|
|
|
|
$
|
398
|
|
|
|
15.
|
Guarantor
Financial Statement Information
|
In March 2010, Nationstar Mortgage LLC and Nationstar Capital
Corporation (the Issuers), sold in a private
offering $250.0 million aggregate principal amount of
10.875% senior unsecured notes which mature on
April 1, 2015. In June 2011, the Company filed with
the Securities and Exchange Commission an Amendment No. 6
to
Form S-4
registration statement to exchange the privately placed notes
with registered notes. The terms of the registered notes are
substantially identical to those of the privately placed notes.
The notes are jointly and severally guaranteed on a senior
unsecured basis by all of the Issuers existing and future
wholly-owned domestic restricted subsidiaries, with certain
exceptions. All guarantor subsidiaries are 100% owned by the
Issuer. All amounts in the following tables are in thousands.
F-83
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
15.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING
BALANCE SHEET
MARCH 31, 2011
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
47,843
|
|
|
$
|
577
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
48,420
|
|
Restricted cash
|
|
|
52,391
|
|
|
|
|
|
|
|
20,709
|
|
|
|
|
|
|
|
73,100
|
|
Accounts receivable, net
|
|
|
449,498
|
|
|
|
|
|
|
|
4,737
|
|
|
|
|
|
|
|
454,235
|
|
Mortgage loans held for sale
|
|
|
268,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
268,950
|
|
Mortgage loans held for investment, subject to nonrecourse
debtLegacy Asset, net
|
|
|
6,160
|
|
|
|
|
|
|
|
256,108
|
|
|
|
|
|
|
|
262,268
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt (at fair value)
|
|
|
|
|
|
|
|
|
|
|
530,681
|
|
|
|
|
|
|
|
530,681
|
|
Investment in debt
securitiesavailable-for-sale
|
|
|
850
|
|
|
|
|
|
|
|
|
|
|
|
(850
|
)
|
|
|
|
|
Investment in subsidiaries
|
|
|
161,172
|
|
|
|
|
|
|
|
|
|
|
|
(161,172
|
)
|
|
|
|
|
Receivables from affiliates
|
|
|
|
|
|
|
63,634
|
|
|
|
122,834
|
|
|
|
(178,926
|
)
|
|
|
7,542
|
|
Mortgage servicing rights
|
|
|
151,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151,159
|
|
Property and equipment, net
|
|
|
10,420
|
|
|
|
835
|
|
|
|
|
|
|
|
|
|
|
|
11,255
|
|
Real estate owned, net
|
|
|
466
|
|
|
|
|
|
|
|
23,951
|
|
|
|
|
|
|
|
24,417
|
|
Other assets
|
|
|
36,227
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
36,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,185,136
|
|
|
$
|
65,046
|
|
|
$
|
959,021
|
|
|
$
|
(340,948
|
)
|
|
$
|
1,868,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and members equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
389,305
|
|
|
$
|
|
|
|
$
|
219,146
|
|
|
$
|
|
|
|
$
|
608,451
|
|
Unsecured senior notes
|
|
|
244,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244,410
|
|
Payables and accrued liabilities
|
|
|
102,589
|
|
|
|
|
|
|
|
1,310
|
|
|
|
|
|
|
|
103,899
|
|
Payables to affiliates
|
|
|
178,926
|
|
|
|
|
|
|
|
|
|
|
|
(178,926
|
)
|
|
|
|
|
Derivative financial instruments
|
|
|
964
|
|
|
|
|
|
|
|
6,760
|
|
|
|
|
|
|
|
7,724
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
|
|
|
|
|
|
|
|
15,615
|
|
|
|
|
|
|
|
15,615
|
|
Nonrecourse debt Legacy Assets
|
|
|
|
|
|
|
|
|
|
|
133,592
|
|
|
|
|
|
|
|
133,592
|
|
ABS nonrecourse debt (at fair value)
|
|
|
|
|
|
|
|
|
|
|
490,171
|
|
|
|
(850
|
)
|
|
|
489,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
916,194
|
|
|
|
|
|
|
|
866,594
|
|
|
|
(179,776
|
)
|
|
|
1,603,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total members equity
|
|
|
268,942
|
|
|
|
65,046
|
|
|
|
92,427
|
|
|
|
(161,172
|
)
|
|
|
265,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$
|
1,185,136
|
|
|
$
|
65,046
|
|
|
$
|
959,021
|
|
|
$
|
(340,948
|
)
|
|
$
|
1,868,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-84
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
15.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING
STATEMENT OF OPERATIONS
FOR THE THREE
MONTHS ENDED MARCH 31, 2011
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
$
|
58,747
|
|
|
$
|
544
|
|
|
$
|
|
|
|
$
|
(1,824
|
)
|
|
$
|
57,467
|
|
Other fee income
|
|
|
4,061
|
|
|
|
2,687
|
|
|
|
471
|
|
|
|
|
|
|
|
7,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
62,808
|
|
|
|
3,231
|
|
|
|
471
|
|
|
|
(1,824
|
)
|
|
|
64,686
|
|
Gain on mortgage loans held for sale
|
|
|
20,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
83,314
|
|
|
|
3,231
|
|
|
|
471
|
|
|
|
(1,824
|
)
|
|
|
85,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses and impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and benefits
|
|
|
46,130
|
|
|
|
793
|
|
|
|
|
|
|
|
|
|
|
|
46,923
|
|
General and administrative
|
|
|
14,940
|
|
|
|
621
|
|
|
|
3
|
|
|
|
|
|
|
|
15,564
|
|
Provision for loan losses
|
|
|
724
|
|
|
|
|
|
|
|
404
|
|
|
|
|
|
|
|
1,128
|
|
Loss on foreclosed real estate
|
|
|
245
|
|
|
|
|
|
|
|
2,002
|
|
|
|
|
|
|
|
2,247
|
|
Occupancy
|
|
|
2,204
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
2,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses and impairments
|
|
|
64,243
|
|
|
|
1,469
|
|
|
|
2,409
|
|
|
|
|
|
|
|
68,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
3,619
|
|
|
|
(5
|
)
|
|
|
12,880
|
|
|
|
1,824
|
|
|
|
18,318
|
|
Interest expense
|
|
|
(13,595
|
)
|
|
|
|
|
|
|
(11,773
|
)
|
|
|
|
|
|
|
(25,368
|
)
|
Loss on interest rate swaps and caps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value changes in ABS securitizations
|
|
|
|
|
|
|
|
|
|
|
(2,905
|
)
|
|
|
253
|
|
|
|
(2,652
|
)
|
Gain/(loss) from subsidiaries
|
|
|
2,930
|
|
|
|
|
|
|
|
|
|
|
|
(2,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(7,046
|
)
|
|
|
(5
|
)
|
|
|
(1,798
|
)
|
|
|
(853
|
)
|
|
|
(9,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
12,025
|
|
|
$
|
1,757
|
|
|
$
|
(3,736
|
)
|
|
$
|
(2,677
|
)
|
|
$
|
7,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-85
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
15.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING
STATEMENT OF CASH FLOWS
FOR THE THREE
MONTHS ENDED MARCH 31, 2011
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
12,025
|
|
|
$
|
1,757
|
|
|
$
|
(3,736
|
)
|
|
$
|
(2,677
|
)
|
|
$
|
7,369
|
|
Adjustments to reconcile net income/(loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from subsidiaries
|
|
|
(2,930
|
)
|
|
|
|
|
|
|
|
|
|
|
2,930
|
|
|
|
|
|
Share-based compensation
|
|
|
5,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,263
|
|
Gain on mortgage loans held for sale
|
|
|
(20,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,506
|
)
|
Fair value changes in ABS securitizations
|
|
|
|
|
|
|
|
|
|
|
2,905
|
|
|
|
(253
|
)
|
|
|
2,652
|
|
Provision for loan losses
|
|
|
724
|
|
|
|
|
|
|
|
404
|
|
|
|
|
|
|
|
1,128
|
|
Loss on foreclosed real estate
|
|
|
245
|
|
|
|
|
|
|
|
2,002
|
|
|
|
|
|
|
|
2,247
|
|
Loss/(gain) on derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
(902
|
)
|
|
|
|
|
|
|
(902
|
)
|
Depreciation and amortization
|
|
|
751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
751
|
|
Change in fair value of mortgage servicing rights
|
|
|
3,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,784
|
|
Amortization of debt discount
|
|
|
2,241
|
|
|
|
|
|
|
|
825
|
|
|
|
|
|
|
|
3,066
|
|
Amortization of premiums/discounts
|
|
|
(62
|
)
|
|
|
|
|
|
|
(1,198
|
)
|
|
|
|
|
|
|
(1,260
|
)
|
Mortgage Loans originated and purchased, net of fees
|
|
|
(654,127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(654,127
|
)
|
Cost of loans sold, net of fees
|
|
|
765,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
765,695
|
|
Principal Payments/Prepayments Received and other changes in
mortgage loans originated as held for sale
|
|
|
2,379
|
|
|
|
|
|
|
|
564
|
|
|
|
|
|
|
|
2,943
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(14,402
|
)
|
|
|
|
|
|
|
(762
|
)
|
|
|
|
|
|
|
(15,164
|
)
|
Payables to affiliates
|
|
|
(6,569
|
)
|
|
|
(1,499
|
)
|
|
|
9,519
|
|
|
|
|
|
|
|
1,451
|
|
Other assets
|
|
|
(1,649
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,649
|
)
|
Accounts payable and accrued liabilities
|
|
|
28,804
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
28,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used) in operating activities
|
|
|
121,666
|
|
|
|
258
|
|
|
|
9,662
|
|
|
|
|
|
|
|
131,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments received and other changes on mortgage loans
held for investment, subject to ABS nonrecourse debt
|
|
|
|
|
|
|
|
|
|
|
2,987
|
|
|
|
|
|
|
|
2,987
|
|
Proceeds from sales of real estate owned
|
|
|
144
|
|
|
|
|
|
|
|
12,359
|
|
|
|
|
|
|
|
12,503
|
|
Acquisition of equity method investment
|
|
|
(6,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,600
|
)
|
Property and equipment additions, net of disposals
|
|
|
(3,612
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,612
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used) in investing activities
|
|
|
(10,068
|
)
|
|
|
|
|
|
|
15,346
|
|
|
|
|
|
|
|
5,278
|
|
F-86
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
15.
|
Guarantor
Financial Statement Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers to/from restricted cash
|
|
|
5,188
|
|
|
|
|
|
|
|
12,837
|
|
|
|
|
|
|
|
18,025
|
|
Decrease in notes payable, net
|
|
|
(83,645
|
)
|
|
|
|
|
|
|
(17,662
|
)
|
|
|
|
|
|
|
(101,307
|
)
|
Repayment of non-recourse debtLegacy assets
|
|
|
|
|
|
|
|
|
|
|
(5,895
|
)
|
|
|
|
|
|
|
(5,895
|
)
|
Repayment of ABS non-recourse debt
|
|
|
|
|
|
|
|
|
|
|
(14,288
|
)
|
|
|
|
|
|
|
(14,288
|
)
|
Debt financing costs
|
|
|
(2,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,302
|
)
|
Distribution to parent
|
|
|
(3,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
(84,659
|
)
|
|
|
|
|
|
|
(25,008
|
)
|
|
|
|
|
|
|
(109,667
|
)
|
Net increase (decrease) in cash
|
|
|
26,939
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
27,197
|
|
Cash and cash equivalents at beginning of period
|
|
|
20,904
|
|
|
|
319
|
|
|
|
|
|
|
|
|
|
|
|
21,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
47,843
|
|
|
$
|
577
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
48,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-87
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
15.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING BALANCE SHEET
DECEMBER 31,
2010
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
20,904
|
|
|
$
|
319
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
21,223
|
|
Restricted cash
|
|
|
57,579
|
|
|
|
|
|
|
|
33,546
|
|
|
|
|
|
|
|
91,125
|
|
Accounts receivable, net
|
|
|
435,096
|
|
|
|
|
|
|
|
3,975
|
|
|
|
|
|
|
|
439,071
|
|
Mortgage loans held for sale
|
|
|
371,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
371,160
|
|
Mortgage loans held for investment, subject to nonrecourse debt,
Legacy Assets, net
|
|
|
5,536
|
|
|
|
|
|
|
|
261,304
|
|
|
|
|
|
|
|
266,840
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt (at fair value)
|
|
|
|
|
|
|
|
|
|
|
538,440
|
|
|
|
|
|
|
|
538,440
|
|
Investment in debt
securitiesavailable-for-sale
|
|
|
597
|
|
|
|
|
|
|
|
|
|
|
|
(597
|
)
|
|
|
|
|
Investment in subsidiaries
|
|
|
158,276
|
|
|
|
|
|
|
|
|
|
|
|
(158,276
|
)
|
|
|
|
|
Receivables from affiliates
|
|
|
|
|
|
|
62,171
|
|
|
|
132,353
|
|
|
|
(185,531
|
)
|
|
|
8,993
|
|
Mortgage servicing rights
|
|
|
145,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,062
|
|
Property and equipment, net
|
|
|
7,559
|
|
|
|
835
|
|
|
|
|
|
|
|
|
|
|
|
8,394
|
|
Real estate owned, net
|
|
|
323
|
|
|
|
|
|
|
|
27,014
|
|
|
|
|
|
|
|
27,337
|
|
Other assets
|
|
|
29,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,231,628
|
|
|
$
|
63,325
|
|
|
$
|
996,632
|
|
|
$
|
(344,404
|
)
|
|
$
|
1,947,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY
|
Notes payable
|
|
$
|
472,950
|
|
|
$
|
|
|
|
$
|
236,808
|
|
|
$
|
|
|
|
$
|
709,758
|
|
Unsecured senior notes
|
|
|
244,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244,061
|
|
Payables and accrued liabilities
|
|
|
73,785
|
|
|
|
|
|
|
|
1,269
|
|
|
|
|
|
|
|
75,054
|
|
Payables to affiliates
|
|
|
185,531
|
|
|
|
|
|
|
|
|
|
|
|
(185,531
|
)
|
|
|
|
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
7,801
|
|
|
|
|
|
|
|
7,801
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
|
|
|
|
|
|
|
|
18,781
|
|
|
|
|
|
|
|
18,781
|
|
Nonrecourse debtLegacy Assets
|
|
|
|
|
|
|
|
|
|
|
138,662
|
|
|
|
|
|
|
|
138,662
|
|
ABS nonrecourse debt (at fair value)
|
|
|
|
|
|
|
|
|
|
|
497,289
|
|
|
|
(597
|
)
|
|
|
496,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
976,327
|
|
|
|
|
|
|
|
900,610
|
|
|
|
(186,128
|
)
|
|
|
1,690,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total members equity
|
|
|
255,301
|
|
|
|
63,325
|
|
|
|
96,022
|
|
|
|
(158,276
|
)
|
|
|
256,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$
|
1,231,628
|
|
|
$
|
63,325
|
|
|
$
|
996,632
|
|
|
$
|
(344,404
|
)
|
|
$
|
1,947,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-88
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
15.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE
MONTHS ENDED MARCH 31, 2010
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
$
|
35,687
|
|
|
$
|
536
|
|
|
$
|
|
|
|
$
|
(2,133
|
)
|
|
$
|
34,090
|
|
Other fee income
|
|
|
2,850
|
|
|
|
1,810
|
|
|
|
|
|
|
|
|
|
|
|
4,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
38,537
|
|
|
|
2,346
|
|
|
|
|
|
|
|
(2,133
|
)
|
|
|
38,750
|
|
Gain on mortgage loans held for sale
|
|
|
12,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
50,966
|
|
|
|
2,346
|
|
|
|
|
|
|
|
(2,133
|
)
|
|
|
51,179
|
|
Expenses and impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and benefits
|
|
|
28,955
|
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
29,489
|
|
General and administrative
|
|
|
8,541
|
|
|
|
174
|
|
|
|
5
|
|
|
|
|
|
|
|
8,720
|
|
Loss on foreclosed real estate
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
Occupancy
|
|
|
1,866
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
1,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses and impairments
|
|
|
39,341
|
|
|
|
743
|
|
|
|
5
|
|
|
|
|
|
|
|
40,089
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
3,899
|
|
|
|
|
|
|
|
25,301
|
|
|
|
2,133
|
|
|
|
31,333
|
|
Interest expense
|
|
|
(11,233
|
)
|
|
|
|
|
|
|
(17,902
|
)
|
|
|
|
|
|
|
(29,135
|
)
|
Loss on interest rate swaps and caps
|
|
|
|
|
|
|
|
|
|
|
(2,779
|
)
|
|
|
|
|
|
|
(2,779
|
)
|
Fair value changes in ABS securitizations
|
|
|
|
|
|
|
|
|
|
|
(9,777
|
)
|
|
|
|
|
|
|
(9,777
|
)
|
Gain/(loss) from subsidiaries
|
|
|
(3,559
|
)
|
|
|
|
|
|
|
|
|
|
|
3,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(10,893
|
)
|
|
|
|
|
|
|
(5,157
|
)
|
|
|
5,692
|
|
|
|
(10,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
732
|
|
|
$
|
1,603
|
|
|
$
|
(5,162
|
)
|
|
$
|
3,559
|
|
|
$
|
732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-89
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
15.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING
STATEMENT OF CASH FLOWS
FOR THE THREE
MONTHS ENDED MARCH 31, 2010
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
732
|
|
|
$
|
1,603
|
|
|
$
|
(5,162
|
)
|
|
$
|
3,559
|
|
|
$
|
732
|
|
Adjustments to reconcile net income/(loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from subsidiaries
|
|
|
3,559
|
|
|
|
|
|
|
|
|
|
|
|
(3,559
|
)
|
|
|
|
|
Share-based compensation
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
210
|
|
Gain on mortgage loans held for sale
|
|
|
(12,429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,429
|
)
|
Fair value changes in ABS securitizations
|
|
|
|
|
|
|
|
|
|
|
9,777
|
|
|
|
|
|
|
|
9,777
|
|
Loss on foreclosed real estate
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
Loss on interest rate swaps and caps
|
|
|
|
|
|
|
|
|
|
|
2,779
|
|
|
|
|
|
|
|
2,779
|
|
Depreciation and amortization
|
|
|
398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
398
|
|
Change in fair value of mortgage servicing rights
|
|
|
4,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,600
|
|
Amortization of debt discount
|
|
|
3,975
|
|
|
|
|
|
|
|
1,589
|
|
|
|
|
|
|
|
5,564
|
|
Amortization of premiums/discounts
|
|
|
(1,466
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,466
|
)
|
Mortgage Loans originated and purchased, net of fees
|
|
|
(512,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(512,615
|
)
|
Cost of loans sold, net of fees
|
|
|
492,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
492,333
|
|
Principal Payments/Prepayments Received and other changes in
mortgage loans originated as held for sale
|
|
|
5,319
|
|
|
|
|
|
|
|
(10,027
|
)
|
|
|
|
|
|
|
(4,708
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(22,267
|
)
|
|
|
5
|
|
|
|
(46,248
|
)
|
|
|
|
|
|
|
(68,510
|
)
|
Payables to affiliates
|
|
|
(42,141
|
)
|
|
|
(1,563
|
)
|
|
|
45,982
|
|
|
|
|
|
|
|
2,278
|
|
Other assets
|
|
|
(2,211
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,211
|
)
|
Accounts payable and accrued liabilities
|
|
|
659
|
|
|
|
15
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used) in operating activities
|
|
|
(81,365
|
)
|
|
|
60
|
|
|
|
(1,334
|
)
|
|
|
|
|
|
|
(82,639
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments received and other changes on mortgage loans
held for investment, subject to ABS nonrecourse debt
|
|
|
|
|
|
|
|
|
|
|
713
|
|
|
|
|
|
|
|
713
|
|
Proceeds from sales of real estate owned
|
|
|
762
|
|
|
|
|
|
|
|
29,633
|
|
|
|
|
|
|
|
30,395
|
|
Property and equipment additions, net of disposals
|
|
|
(367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used) in investing activities
|
|
|
395
|
|
|
|
|
|
|
|
30,346
|
|
|
|
|
|
|
|
30,741
|
|
F-90
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
|
|
15.
|
Guarantor
Financial Statement Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers to/from restricted cash
|
|
|
899
|
|
|
|
|
|
|
|
12,709
|
|
|
|
|
|
|
|
13,608
|
|
Issuance of unsecured senior notes, net of issue discount
|
|
|
243,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
243,012
|
|
Decrease in notes payable, net
|
|
|
(169,679
|
)
|
|
|
|
|
|
|
5,040
|
|
|
|
|
|
|
|
(164,639
|
)
|
Repayment of non-recourse debt Legacy assets
|
|
|
|
|
|
|
|
|
|
|
(11,348
|
)
|
|
|
|
|
|
|
(11,348
|
)
|
Repayment of ABS non-recourse debt
|
|
|
(146
|
)
|
|
|
|
|
|
|
(35,413
|
)
|
|
|
|
|
|
|
(35,559
|
)
|
Debt financing costs
|
|
|
(11,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
62,816
|
|
|
|
|
|
|
|
(29,012
|
)
|
|
|
|
|
|
|
33,804
|
|
Net increase (decrease) in cash
|
|
|
(18,154
|
)
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
(18,094
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
41,243
|
|
|
|
402
|
|
|
|
|
|
|
|
|
|
|
|
41,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
23,089
|
|
|
$
|
462
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
23,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.
|
Related Party
Disclosures
|
In September 2010, the Company entered into a marketing
agreement with Springleaf Home Equity, Inc., formerly known as
American General Home Equity, Inc., Springleaf General Financial
Services of Arkansas, Inc., formerly known as American General
Financial Services of Arkansas, Inc. and MorEquity, Inc.
(collectively Springleaf), each of which are
indirectly owned by investment funds managed by affiliates of
Fortress Investment Group LLC. Pursuant to this agreement,
Nationstar markets mortgage origination products to customers of
Springleaf, and is compensated by the origination fees of loans
that the Company refinances. The marketing agreement has an
initial term of six months. Additionally, in January, 2011, the
Company entered into three agreements to act as the loan
sub-servicer
for Springleaf for a whole loan portfolio and two securitized
loan portfolios totaling $4.4 billion for which the Company
receives a monthly per loan
sub-servicing
fee and other performance incentive fees subject to the
agreement with Springleaf. For the three months ended
March 31, 2011, Nationstar recognized revenue of
$2.2 million in additional servicing and other performance
incentive fees related to this portfolio. At March 31,
2011, the Company had an outstanding receivable from Springleaf
of $1.0 which was included as a component of accounts receivable.
Nationstar is the loan servicer for two securitized loan
portfolios managed by Newcastle Investment Corp., which is
managed by an affiliate of Fortress, for which the Company
receives a monthly net servicing fee equal to 0.5% per annum on
the unpaid principal balance of the portfolios. For the
three months ended March 31, 2011 and 2010, the
Company received servicing fees and other performance incentive
fees of $2.6 million and $0.1 million, respectively.
F-91
Nationstar
Mortgage LLC and Subsidiaries
Notes to
Consolidated Financial Statements (continued)
(Unaudited)
On June 21, 2011, the Company entered into an agreement to
subservice approximately $26.2 billion unpaid principal
balance of loans for a financial services company. Management of
the Company expects to board the approximately 141,000 loans
onto its system during the third quarter 2011 at which time the
Company will begin its servicing responsibilities.
On July 1, 2011, the Company purchased MSRs from a
financial institution relating to Fannie Mae loans with an
unpaid principal balance of approximately $3.6 billion. The
purchase price is approximately $33.3 million of which the
Company paid $10.0 million on July 1, 2011. The
Company expects to board the loans onto its system during the
third quarter 2011. Until the Company begins servicing the
loans, the financial institution will continue to service the
loans as subservicer for a fee.
|
|
18.
|
Unaudited Pro
Forma Tax Information
|
Nationstars pro forma effective tax rate for the quarter
ended March 31, 2011 is 0%. The pro forma tax provision,
before any valuation adjustments, is $2,782 on pre-tax income of
$7,369. Nationstar assumes for pro forma purposes that the
previously recorded valuation allowance will be released to the
extent necessary to eliminate any tax provision.
F-92
PART II
INFORMATION NOT
REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other Expenses
of Issuance and Distribution.
|
The following table sets forth the estimated fees and expenses
(except for the SEC registration fee, the Financial Industry
Regulatory Authority, Inc., or FINRA, filing fee and the NYSE
listing fee) payable by the registrant in connection with the
distribution of our common stock::
|
|
|
|
|
SEC registration fee
|
|
$
|
|
|
FINRA filing fee
|
|
|
|
|
NYSE listing fee
|
|
|
|
|
Printing and engraving expenses
|
|
|
|
|
Legal fees and expenses
|
|
|
|
|
Accounting fees and expenses
|
|
|
|
|
Transfer agent and registrar fees and expenses
|
|
|
|
|
Blue Sky fees and expenses
|
|
|
|
|
Miscellaneous
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
|
|
|
|
We will bear all of the expenses shown above.
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
Section 102 of the Delaware General Corporation Law, as
amended, or the DGCL, allows a corporation to eliminate the
personal liability of directors to a corporation or its
stockholders for monetary damages for a breach of a fiduciary
duty as a director, except where the director breached his duty
of loyalty, failed to act in good faith, engaged in intentional
misconduct or knowingly violated a law, authorized the payment
of a dividend or approved a stock repurchase or redemption in
violation of Delaware corporate law or obtained an improper
personal benefit.
Section 145 of the DGCL provides, among other things, that
a corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (other than an action by or
in the right of the corporation) by reason of the fact that the
person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the corporations
request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise, against expenses, including attorneys fees,
judgments, fines and amounts paid in settlement actually and
reasonably incurred by the person in connection with the action,
suit or proceeding. The power to indemnify applies if
(i) such person is successful on the merits or otherwise in
defense of any action, suit or proceeding or (ii) such
person acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful. The power to indemnify applies to actions brought by
or in the right of the corporation as well, but only to the
extent of defense expenses (including attorneys fees but
excluding amounts paid in settlement) actually and reasonably
incurred and not to any satisfaction of judgment or settlement
of the claim itself, and with the further limitation that in
such actions no indemnification shall be made in the event of
any adjudication of negligence or misconduct in the performance
of his duties to the corporation, unless a court believes that
in light of all the circumstances indemnification should apply.
Section 174 of the DGCL provides, among other things, that
a director who willfully and negligently approves of an unlawful
payment of dividends or an unlawful stock purchase or redemption
may be held liable for such actions. A director who was either
absent when the unlawful
II-1
actions were approved or dissented at the time, may avoid
liability by causing his or her dissent to such actions to be
entered in the books containing the minutes of the meetings of
the board of directors at the time the action occurred or
immediately after the absent director receives notice of the
unlawful acts.
The Companys amended and restated certificate of
incorporation states that no director shall be personally liable
to us or any of our stockholders for monetary damages for breach
of fiduciary duty as a director, except to the extent such
exemption from liability or limitation thereof is not permitted
under the DGCL as it exists or may be amended. A director is
also not exempt from liability for any transaction from which he
or she derived an improper personal benefit, or for violations
of Section 174 of the DGCL. To the maximum extent permitted
under Section 145 of the DGCL, our amended and restated
certificate of incorporation authorizes us to indemnify any and
all persons whom we have the power to indemnify under the law.
Our bylaws provide that the Company will indemnify, to the
fullest extent permitted by the DGCL, each person who was or is
made a party or is threatened to be made a party in any legal
proceeding by reason of the fact that he or she is or was a
director or officer of the Company or is or was a director or
officer of the Company serving at the request of the Company as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise. However,
such indemnification is permitted only if such person acted in
good faith and in a manner such person reasonably believed to be
in or not opposed to the best interests of the Company, and,
with respect to any criminal action or proceeding, had no
reasonable cause to believe such persons conduct was
unlawful. Indemnification is authorized on a
case-by-case
basis by (1) our board of directors by a majority vote of
disinterested directors, (2) a committee of the
disinterested directors, (3) independent legal counsel in a
written opinion if (1) and (2) are not available, or
if disinterested directors so direct, or (4) the
stockholders. Indemnification of former directors or officers
shall be determined by any person authorized to act on the
matter on our behalf. Expenses incurred by a director or officer
in defending against such legal proceedings are payable before
the final disposition of the action, provided that the director
or officer undertakes to repay us if it is later determined that
he or she is not entitled to indemnification.
Prior to completion of this offering, the Company intends to
enter into separate indemnification agreements with its
directors and officers. Each indemnification agreement will
provide, among other things, for indemnification to the fullest
extent permitted by law and our amended and restated certificate
of incorporation and bylaws against any and all expenses,
judgments, fines, penalties and amounts paid in settlement of
any claim. The indemnification agreements will provide for the
advancement or payment of all expenses to the indemnitee and for
reimbursement to us if it is found that such indemnitee is not
entitled to such indemnification under applicable law and our
amended and restated certificate of incorporation and bylaws.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or
persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that, in the opinion
of the SEC such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
We maintain directors and officers liability
insurance for our officers and directors.
The Registrant maintains standard policies of insurance under
which coverage is provided (a) to its directors and
officers against loss rising from claims made by reason of
breach of duty or other wrongful act, and (b) to the
Registrant with respect to payments which may be made by the
Registrant to such officers and directors pursuant to the above
indemnification provision or otherwise as a matter of law.
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Item 15.
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Recent Sales
of Unregistered Securities.
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In the last three years, we have not issued or sold any
unregistered securities.
II-2
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Item 16.
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Exhibits and
Financial Statement Schedules.
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(a) Exhibits: The list of exhibits is set forth in
beginning on page II-5 of this Registration Statement and
is incorporated herein by reference.
(b) Financial Statement Schedules: No financial statement
schedules are provided because the information called for is not
applicable or is shown in the financial statements or notes
thereto.
* (f) The undersigned registrant hereby undertakes to
provide to the underwriters at the closing specified in the
underwriting agreement, certificates in such denominations and
registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
* (h) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to
directors, officers, and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer, or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
* (i) The undersigned registrant hereby undertakes that:
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For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by us
pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
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For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
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* |
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Paragraph references correspond to those of
Regulation S-K,
Item 512. |
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Lewisville, State of Texas on
July 6, 2011.
Nationstar Mortgage Holdings Inc.
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By:
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Anthony H. Barone
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Title:
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Chief Executive Officer
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Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed below by
the following persons in the capacities and on the dates
indicated.
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Name
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Title
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Date
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/s/ Anthony
H. Barone
Anthony
H. Barone
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Chief Executive Officer, President and Director
(principal executive officer)
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July 6, 2011
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/s/ Jay
Bray
Jay
Bray
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Chief Financial Officer
(principal financial and accounting officer)
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July 6, 2011
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/s/ Peter
Smith
Peter
Smith
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Director
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July 6, 2011
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II-4
EXHIBIT INDEX
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Exhibit
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Number
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Description
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1
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.1*
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Form of Underwriting Agreement
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3
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.1*
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Form of Amended and Restated Certificate of Incorporation of
Nationstar Mortgage Holdings Inc.
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3
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.2*
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Form of Amended and Restated Bylaws of Nationstar Mortgage
Holdings Inc.
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4
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.1
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Form of Stockholders Agreement by and among Nationstar Mortgage
Holdings Inc and FIF HE Holdings LLC.
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5
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.1*
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Opinion of Cleary Gottlieb Steen & Hamilton LLP.
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10
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.1
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Amended and Restated Servicer Advance Early Reimbursement
Addendum, dated as of August 16, 2010, between Nationstar
Mortgage LLC and Fannie Mae (incorporated by reference to
Exhibit 10.1 to Nationstar Mortgage LLCs Registration
Statement on Form S-4 filed with the SEC on December 23, 2010).
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10
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.2
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Fifth Amended and Restated Master Repurchase Agreement, dated as
of January 27, 2010, between The Royal Bank of Scotland plc, as
buyer, and Nationstar Mortgage LLC, as seller (incorporated by
reference to Exhibit 10.2 to Nationstar Mortgage LLCs
Registration Statement on Form S-4 filed with the SEC on
December 23, 2010).
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10
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.3
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Amendment Number One to Fifth Amended and Restated Master
Repurchase Agreement, and Amendment Number One to Fifth Amended
and Restated Pricing Side Letter, both dated as of April 6,
2010, between The Royal Bank of Scotland Plc and Nationstar
Mortgage LLC. (incorporated by reference to Exhibit 10.3 to
Amendment No. 3 to Nationstar Mortgage LLCs Registration
Statement on Form S-4 filed with the SEC on April 27, 2011).
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10
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.4
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Amendment Number Two to Fifth Amended and Restated Master
Repurchase Agreement, and Amendment Number One to Fifth Amended
and Restated Pricing Side Letter, both dated as of February 25,
2011, between The Royal Bank of Scotland Plc and Nationstar
Mortgage LLC. (incorporated by reference to Exhibit 10.4 to
Amendment No. 3 to Nationstar Mortgage LLCs Registration
Statement on Form S-4 filed with the SEC on April 27, 2011).
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10
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.5
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Subservicing Agreement, dated as of October 29, 2010, between
Fannie Mae and Nationstar Mortgage LLC (incorporated by
reference to Exhibit 10.3 to Amendment No. 1 to Nationstar
Mortgage LLCs Registration Statement on Form S-4 filed
with the SEC on February 9, 2011).
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10
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.6
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Strategic Relationship Agreement, dated as of December 16, 2009,
between Fannie Mae and Nationstar Mortgage LLC (incorporated by
reference to Exhibit 10.4 to Nationstar Mortgage LLCs
Registration Statement on Form S-4 filed with the SEC on
December 23, 2010).
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10
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.7
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Subservicing Agreement, dated as of February 1, 2011, among
MorEquity, Inc., American General Financial Services of
Arkansas, Inc. and American General Home Equity, Inc. as owners
and as servicers, and Nationstar Mortgage LLC, as subservicer.
(incorporated by reference to Exhibit 10.5 to Amendment No. 2 to
Nationstar Mortgage LLCs Registration Statement on Form
S-4 filed with the SEC on March 28, 2011).
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10
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.8
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Subservicing Agreement (American General Mortgage Loan Trust
2006-1), dated as of February 1, 2011, between MorEquity, Inc.,
as servicer, and Nationstar Mortgage LLC, as subservicer
(incorporated by reference to Exhibit 10.6 to Amendment No. 2 to
Nationstar Mortgage LLCs Registration Statement on Form
S-4 filed with the SEC on March 28, 2011).
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10
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.9
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Subservicing Agreement (American General Mortgage Loan Trust
2010-1), dated as of February 1, 2011, between MorEquity, Inc.,
as servicer, and Nationstar Mortgage LLC, as subservicer.
(incorporated by reference to Exhibit 10.7 to Amendment No. 2 to
Nationstar Mortgage LLCs Registration Statement on Form
S-4 filed with the SEC on March 28, 2011).
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10
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.10
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Sale and Servicing Agreement, dated as of April 6, 2010, between
The Financial Asset Securities Corp., as Depositor, Centex Home
Equity Company, LLC, as Originator and Servicer, Newcastle
Mortgage Securities Trust 2006-1, as Issuer, and JPMorgan Chase
Bank, N.A. (incorporated by reference to Exhibit 10.10 to
Amendment No. 5 to Nationstar Mortgage LLCs Registration
Statement on Form S-4 filed with the SEC on June 6, 2011).
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II-5
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Exhibit
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Number
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Description
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10
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.11
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Sale and Servicing Agreement, dated as of July 12, 2007, between
Bear Stearns Asset-Backed Securities I LLC, as Depositor,
Nationstar Mortgage LLC, as Servicer, Newcastle Mortgage
Securities Trust 2007-1, as Issuing Entity, Wells Fargo Bank,
N.A., as Master Servicer, Securities Administrator and
Custodian, and The Bank of New York, as Indenture Trustee.
(incorporated by reference to Exhibit 10.11 to Amendment No. 5
to Nationstar Mortgage LLCs Registration Statement on Form
S-4 filed with the SEC on June 6, 2011).
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10
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.12
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Subservicing Agreement, effective as of June 21, 2011, between
First Tennessee Bank National Association, as Owner and Master
Servicer, and Nationstar Mortgage LLC, as Servicer and
Subservicer (incorporated by reference to Exhibit 10.12 to
Amendment No. 6 to Nationstar Mortgage LLCs Registration
Statement on Form S-4 filed with the SEC on June 30, 2011).
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10
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.13
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Employment Agreement, dated as of January 29, 2008, by and
between Nationstar Mortgage LLC and Robert L. Appel
(incorporated by reference to Exhibit 10.5 to Nationstar
Mortgage LLCs Registration Statement on Form S-4 filed
with the SEC on December 23, 2010).
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10
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.14
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Amendment, dated as of September 17, 2010, to Employment
Agreement dated January 29, 2008 by and between Nationstar
Mortgage LLC and Robert L. Appel (incorporated by reference to
Exhibit 10.6 to Nationstar Mortgage LLCs Registration
Statement on Form S-4 filed with the SEC on December 23, 2010).
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10
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.15
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Employment Agreement, dated as of February 19, 2009, by and
between Nationstar Mortgage LLC and Douglas Krueger
(incorporated by reference to Exhibit 10.7 to Nationstar
Mortgage LLCs Registration Statement on Form S-4 filed
with the SEC on December 23, 2010).
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10
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.16
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Employment Agreement, dated as of September 17, 2010, by and
between Nationstar Mortgage LLC and Anthony H. Barone
(incorporated by reference to Exhibit 10.8 to Nationstar
Mortgage LLCs Registration Statement on Form S-4 filed
with the SEC on December 23, 2010).
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10
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.17
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Employment Agreement, dated as of September 17, 2010, by and
between the Company and Jesse K. Bray (incorporated by reference
to Exhibit 10.9 to Nationstar Mortgage LLCs Registration
Statement on Form S-4 filed with the SEC on December 23, 2010).
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10
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.18
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Employment Agreement, dated as of September 17, 2010, by and
between Nationstar Mortgage LLC and Amar Patel (incorporated by
reference to Exhibit 10.10 to Nationstar Mortgage LLCs
Registration Statement on Form S-4 filed with the SEC on
December 23, 2010).
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10
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.19
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Form of Restricted Series 1 Preferred Unit Award Agreement under
FIF HE Holdings LLC Fifth Amended and Restated Limited Liability
Company Agreement (incorporated by reference to Exhibit 10.11 to
Nationstar Mortgage LLCs Registration Statement on Form
S-4 filed with the SEC on December 23, 2010).
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10
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.20
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Form of Series 1 Class A Unit Award Agreement under FIF HE
Holdings LLC Fifth Amended and Restated Limited Liability
Company (incorporated by reference to Exhibit 10.12 to
Nationstar Mortgage LLCs Registration Statement on Form
S-4 filed with the SEC on December 23, 2010).
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10
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.21
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Form of Series 2 Class A Unit Award Agreement under FIF HE
Holdings LLC Fifth Amended and Restated Limited Liability
Company (incorporated by reference to Exhibit 10.13 to
Nationstar Mortgage LLCs Registration Statement on Form
S-4 filed with the SEC on December 23, 2010).
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10
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.22
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Nationstar Mortgage LLC Annual Incentive Compensation Plan
(incorporated by reference to Exhibit 10.14 to Nationstar
Mortgage LLCs Registration Statement on Form S-4 filed
with the SEC on December 23, 2010).
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10
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.23
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Nationstar Mortgage LLC Incentive Program Summary (incorporated
by reference to Exhibit 10.15 to Nationstar Mortgage
LLCs Registration Statement on Form S-4 filed with the SEC
on December 23, 2010).
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10
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.24
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Nationstar Mortgage LLC Long-Term Incentive Plan for Mr.
Krueger. (incorporated by reference to Exhibit 10.16 to
Nationstar Mortgage LLCs Registration Statement on Form
S-4 filed with the SEC on December 23, 2010).
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II-6
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|
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Exhibit
|
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Number
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|
Description
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10
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.25
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Fifth Amended and Restated Limited Liability Company Agreement
of FIF HE HOLDINGS LLC (incorporated by reference to Exhibit
10.25 to Amendment No. 6 to Nationstar Mortgage LLCs
Registration Statement on Form S-4 filed with the SEC on June
30, 2011).
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21
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.1*
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Subsidiaries of the Registrants.
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23
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.1
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Consent of Ernst & Young LLP, Independent Registered Public
Accounting Firm.
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23
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.2*
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Consent of Cleary Gottlieb Steen & Hamilton LLP (included
in Exhibit 5.1).
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* |
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To be filed by amendment |
II-7