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EXCEL - IDEA: XBRL DOCUMENT - HOME LOAN SERVICING SOLUTIONS, LTD.Financial_Report.xls
EX-32.1 - EXHIBIT - HOME LOAN SERVICING SOLUTIONS, LTD.a10_qxaxex321x03312014.htm
EX-31.2 - EXHIBIT - HOME LOAN SERVICING SOLUTIONS, LTD.a10_qxaxex312x03312014.htm
EX-32.2 - EXHIBIT - HOME LOAN SERVICING SOLUTIONS, LTD.a10_qxaxex322x03312014.htm
EX-31.1 - EXHIBIT - HOME LOAN SERVICING SOLUTIONS, LTD.a10_qxaxex311x03312014.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
or
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: _____________________to _____________________
Commission File Number: 1-35431
Home Loan Servicing Solutions, Ltd.
(Exact name of registrant as specified in its charter)

Cayman Islands
98-0683664
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)

Home Loan Servicing Solutions, Ltd.
c/o Intertrust Corporate Services (Cayman) Limited
190 Elgin Avenue
George Town, Grand Cayman KY1-9005
Cayman Islands
(Address of principal executive offices) (Zip Code)
(345) 945-3727
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer 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.
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes ¨ No x

Number of Ordinary Shares, $0.01 par value, outstanding as of April 17, 2014: 71,016,771 shares.




Explanatory Note

Home Loan Servicing Solutions, Ltd. (collectively referred to throughout as “HLSS”, “us”, “our”, “we”, or the “Company”) filed our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014, (the “Original Form 10-Q”) with the Securities and Exchange Commission (the “SEC”) on April 17, 2014. We are filing this Amendment No. 1 to the Form 10-Q (the “Form 10-Q/A”) to properly state the Notes receivable - Rights to MSRs at fair value as of March 31, 2014 and December 31, 2013, and to include the effect of such fair value adjustments in the application of the interest method of accounting in the quarterly periods March 31, 2014 and 2013. Concurrently with the filing of this Form 10-Q/A, we are also filing an amendment to our Annual Report on Form 10-K for the year ended December 31, 2013 (the "Original Form 10-K"), filed with the SEC on February 6, 2014 on our Amendment No. 1 to Form 10-K/A (the “Form 10-K/A”, collectively with the Form 10-Q/A, the "Amendments").

The Amendments reduce net income and cash provided by operating activities by $10.0 million for the year ended December 31, 2013 and increase net income by $20.7 million for the first quarter of 2014. In addition, the Amendments increase cash flows from operating activities by $16.7 million in the first quarter of 2014. When adjusting the Notes receivable - Rights to MSRs to fair value, we also adjusted the allocation of net cash received between interest income and reductions of the Notes receivable - Rights to MSRs. The fair value of our Notes receivable - Rights to MSRs decreased by $17.3 million at December 31, 2013 and increased by $20.7 million as of March 31, 2014. The fair value of the Notes Receivable increased to $637.8 million as of March 31, 2014. Further, the Amendments did not impact the Company’s net cash flows for any period. We updated our disclosure in this Form 10-Q/A to conform to the restated financial statements to the extent necessary.

We have determined that, for each period, the difference between the estimated fair value and the carrying value of the Notes receivable - Rights to MSRs, and the resulting impact on the amortization of Notes receivable - Rights to MSRs, was material and, thus, the recorded amounts were not in accordance with Accounting Principles Generally Accepted in the United States of America (“GAAP”). The Company utilized appraisals prepared by independent valuation firms on a quarterly basis when establishing the fair value of the Notes receivable - Rights to MSRs.

At the time the Company issued the financial statements for the relevant periods, our accounting convention provided for an allowable range of variation to the estimated fair value of the Notes receivable - Rights to MSRs of plus or minus 5% based on the belief that this was an acceptable accounting convention. Variances within that range did not result in an adjustment to the carrying value of the assets to the single point estimate of fair value and were not considered in the application of the interest method when accounting for the Notes receivable - Rights to MSRs. The variance observed for the applicable periods fell within that range and, as a result, the Company did not adjust the recorded amount of the Notes receivable - Rights to MSRs. The Company has subsequently determined that it was required under GAAP to adjust the Notes receivable - Rights to MSRs to the best estimate of fair value and to include the effect of such fair value adjustments in the application of the interest method of accounting. The Company’s valuation process now requires us to record the Notes receivable - Rights to MSRs at the single point estimate of fair value.

We also identified a data input error in relation to the valuation of a small subset of our Notes receivable - Rights to MSRs as of December 31, 2013 and March 31, 2014. The impact of this data error of $5.9 million and $9.3 million as of December 31, 2013 and March 31, 2014, respectively, is reflected in the adjustments to the Notes receivable - Rights to MSRs balance for each of the two periods.







The following table summarizes the effects of the restatement on the consolidated balance sheet as of March 31, 2014 and December 31, 2013 (as restated on the Form 10-K/A filed on August 18, 2014).

 
 
March 31, 2014 (Unaudited)
(In thousands)
 
As Previously Reported
 
Adjustments
 
As Restated
Notes Receivable - Rights to MSRs
 
$
634,399

 
$
3,395

 
$
637,794

All other assets
 
7,233,353

 

 
7,233,353

   Total assets
 
$
7,867,752

 
$
3,395

 
$
7,871,147

 
 
 
 
 
 
 
Total liabilities
 
$
6,622,447

 
$

 
$
6,622,447

 
 
 
 
 
 
 
Retained earnings
 
32,520

 
3,395

 
35,915

All other equity
 
1,212,785

 

 
1,212,785

Total equity
 
1,245,305

 
3,395

 
1,248,700

 
 
 
 
 
 
 
   Total liabilities and equity
 
$
7,867,752

 
$
3,395

 
$
7,871,147


 
 
December 31, 2013
(In thousands)
 
As Previously Reported
 
Adjustments
 
As Restated
Notes Receivable - Rights to MSRs
 
$
651,060

 
$
(17,291
)
 
$
633,769

All other assets
 
6,676,903

 

 
6,676,903

   Total assets
 
$
7,327,963

 
$
(17,291
)
 
$
7,310,672

 
 
 
 
 
 
 
Total liabilities
 
$
6,094,225

 
$

 
$
6,094,225

 
 
 
 
 
 
 
Retained earnings
 
20,804

 
(17,291
)
 
3,513

All other equity
 
1,212,934

 

 
1,212,934

Total equity
 
1,233,738

 
(17,291
)
 
1,216,447

 
 
 
 
 
 
 
   Total liabilities and equity
 
$
7,327,963

 
$
(17,291
)
 
$
7,310,672






The following table summarizes the effects of the restatement on the consolidated statements of operations for the three months ended March 31, 2014 and 2013.

 
 
Three months ended March 31, 2014 (Unaudited)
(In thousands)
 
As Previously Reported
 
Adjustments
 
As Restated
Interest income – notes receivable - Rights to MSRs
 
$
81,852

 
$
20,686

 
$
102,538

Interest income – other
 
2,961

 

 
2,961

   Total interest income
 
84,813

 
20,686

 
105,499

Related party revenue
 
628

 

 
628

   Total revenue
 
85,441

 
20,686

 
106,127

Operating expenses
 
4,256

 

 
4,256

   Income from operations
 
81,185

 
20,686

 
101,871

Other expense
 
 
 
 
 
 
   Interest expense
 
37,511

 

 
37,511

      Total other expense
 
37,511

 

 
37,511

Income before income taxes
 
$
43,674

 
$
20,686

 
$
64,360

Income tax expense
 

 

 

Net income
 
$
43,674

 
$
20,686

 
$
64,360

 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
Earnings per share
 
$
0.61

 
$
0.30

 
$
0.91

 
 
 
 
 
 
 
Diluted earnings per share
 
$
0.61

 
$
0.30

 
$
0.91


 
 
Three months ended March 31, 2013 (Unaudited)
(In thousands)
 
As Previously Reported
 
Adjustments
 
As Restated
Interest income – notes receivable – Rights to MSRs
 
$
44,570

 
$
3,297

 
$
47,867

Interest income – other
 
102

 

 
102

   Total interest income
 
44,672

 
3,297

 
47,969

Related party revenue
 
407

 

 
407

   Total revenue
 
45,079

 
3,297

 
48,376

Operating expenses
 
2,037

 

 
2,037

   Income from operations
 
43,042

 
3,297

 
46,339

Other expense
 
 
 
 
 
 
   Interest expense
 
18,242

 

 
18,242

      Total other expense
 
18,242

 

 
18,242

Income before income taxes
 
24,800

 
3,297

 
28,097

Income tax expense
 
12

 

 
12

Net income
 
$
24,788

 
$
3,297

 
$
28,085

 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
Earnings per share
 
$
0.44

 
$
0.06

 
$
0.50

 
 
 
 
 
 
 
Diluted earnings per share
 
$
0.44

 
$
0.06

 
$
0.50


We have determined that the foregoing errors relating to the valuation of our Notes receivable - Rights to MSRs and the related effect in the application of the interest method in accounting for the Notes receivable - Rights to MSRs giving rise to the restatements constituted a material weakness in our internal control over financial reporting. We intend to fully remediate that weakness during 2014. See “Part I, Item 4 - Controls and Procedures.”





In addition to the above, corresponding changes have been made to the following:

Part I: Item 1. Interim Condensed Consolidated Financial Statements (Unaudited)
Part I: Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Part I: Item 4. Controls and Procedures
Part II: Item 1A. Risk Factors
Part II: Item 6. Exhibits

Except as described above, no other changes have been made to the Original Form 10-Q. This Form 10-Q/A speaks as of the filing date of the Original Form 10-Q and has not been updated to reflect events occurring subsequent to the date of the Original Form 10-Q. This Form 10-Q/A should be read in conjunction with other Company filings with the SEC.






HOME LOAN SERVICING SOLUTIONS, LTD.
FORM 10-Q

INDEX
 
   
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibits   
 
 
 

1


PART I – FINANCIAL INFORMATION

ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

HOME LOAN SERVICING SOLUTIONS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)

 
March 31, 2014
(Restated)
 
December 31, 2013
(Restated)
Assets
 
 
 
   Cash and cash equivalents
$
75,920

 
$
87,896

   Match funded advances
6,343,397

 
6,387,781

   Notes receivable – Rights to MSRs
637,794

 
633,769

   Loans held for investment
552,644

 

   Related party receivables
67,599

 
70,049

   Deferred tax assets
1,024

 
1,024

   Other assets
192,769

 
130,153

      Total assets
$
7,871,147

 
$
7,310,672

Liabilities and Equity
 
 
 
   Liabilities
 
 
 
      Match funded liabilities
$
5,775,180

 
$
5,715,622

      Other borrowings
815,431

 
343,386

      Dividends payable
10,653

 
10,653

      Income taxes payable
600

 
682

      Deferred tax liabilities
1,188

 
1,266

      Related party payables
7,885

 
10,732

      Other liabilities
11,510

 
11,884

         Total liabilities
6,622,447

 
6,094,225

   Commitments and Contingencies (See Note 15)

 

   Equity
 
 
 
Equity – Ordinary shares, $.01 par value; 200,000,000 shares authorized; 71,016,771 and 71,016,771 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively
710

 
710

      Additional paid-in capital
1,210,057

 
1,210,057

      Retained earnings
35,915

 
3,513

      Accumulated other comprehensive income, net of tax
2,018

 
2,167

         Total equity
1,248,700

 
1,216,447

         Total liabilities and equity
$
7,871,147

 
$
7,310,672



The accompanying notes are an integral part of these consolidated financial statements.

2


HOME LOAN SERVICING SOLUTIONS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)

For the three months ended March 31,
 
 
 
 
2014
(Restated)
 
2013
(Restated)
Revenue
 
 
 
 
   Interest income – notes receivable – Rights to MSRs
 
$
102,538

 
$
47,867

   Interest income – other
 
2,961

 
102

      Total interest income
 
105,499

 
47,969

   Related party revenue
 
628

 
407

      Total revenue
 
106,127

 
48,376

Operating expenses
 
 
 
 
   Compensation and benefits
 
1,599

 
1,166

   Related party expenses
 
372

 
226

   General and administrative expenses
 
2,285

 
645

      Total operating expenses
 
4,256

 
2,037

Income from operations
 
101,871

 
46,339

Other expense
 
 
 
 
   Interest expense
 
37,511

 
18,242

      Total other expense
 
37,511

 
18,242

Income before income taxes
 
64,360

 
28,097

Income tax expense
 

 
12

   Net income
 
$
64,360

 
$
28,085

Earnings per share
 
 
 
 
   Basic
 
$
0.91

 
$
0.50

   Diluted
 
$
0.91

 
$
0.50

Weighted average shares outstanding
 
 
 
 
   Basic
 
71,016,771

 
56,628,828

   Diluted
 
71,016,771

 
56,628,828

Dividends declared per share
 
$
0.45

 
$
0.38


The accompanying notes are an integral part of these consolidated financial statements.

3


HOME LOAN SERVICING SOLUTIONS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)

For the three months ended March 31,
 
 
 
 
2014
(Restated)
 
2013
(Restated)
Net income
 
$
64,360

 
$
28,085

Other comprehensive income (loss), before tax:
 
 
 
 
  Change in the value of designated cash flow hedges
 
(227
)
 
13

Total other comprehensive income (loss), before tax
 
(227
)
 
13

Income tax related to items of other comprehensive income (loss):
 
 
 
 
  Tax benefit (expense) on change in the value of designated cash flow hedges
 
78

 

Total income tax benefit (expense) related to items of other comprehensive income (loss)
 
78

 

Total other comprehensive income (loss), net of tax
 
(149
)
 
13

Total comprehensive income
 
$
64,211

 
$
28,098


The accompanying notes are an integral part of these consolidated financial statements.

4


HOME LOAN SERVICING SOLUTIONS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Dollars in thousands, except share data)

 
Ordinary Shares
 
Additional Paid-in Capital
 
Retained Earnings
(Restated)
 
Accumulated Other Comprehensive Income (Loss), net of tax
 
Total
(Restated)
 
Shares
 
Amount
 
 
 
 
 
 
 
 
Balance at December 31, 2013 (Restated)
71,016,771

 
$
710

 
$
1,210,057

 
$
3,513

 
$
2,167

 
$
1,216,447

Net income (Restated)

 

 

 
64,360

 

 
64,360

Other comprehensive loss, net of tax

 

 

 

 
(149
)
 
(149
)
Issuance of ordinary shares, net of costs

 

 

 

 

 

Declaration of cash dividends ($0.45 per share)

 

 

 
(31,958
)
 

 
(31,958
)
Balance at March 31, 2014 (Restated)
71,016,771

 
$
710

 
$
1,210,057

 
$
35,915

 
$
2,018

 
$
1,248,700

 
Ordinary Shares
 
Additional Paid-in Capital
 
Retained Earnings
(Accumulated Deficit)
(Restated)
 
Accumulated Other Comprehensive Loss, net of tax
 
Total
(Restated)
 
Shares
 
Amount
 
 
 
 
 
 
 
 
Balance at December 31, 2012 (Restated)
55,884,718

 
$
559

 
$
876,657

 
$
(2,761
)
 
$
(1,076
)
 
$
873,379

Net income (Restated)

 

 

 
28,085

 

 
28,085

Other comprehensive income, net of tax

 

 

 

 
13

 
13

Issuance of ordinary shares, net of costs
970,578

 
10

 
17,569

 

 

 
17,579

Declaration of cash dividends ($0.38 per share)

 

 

 
(21,605
)
 

 
(21,605
)
Balance at March 31, 2013 (Restated)
56,855,296

 
$
569

 
$
894,226

 
$
3,719

 
$
(1,063
)
 
$
897,451




The accompanying notes are an integral part of these consolidated financial statements.

5


HOME LOAN SERVICING SOLUTIONS, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

For the three months ended March 31,
 
2014
(Restated)
 
2013
(Restated)
Cash flows from operating activities
 
 
 
 
Net income
 
$
64,360

 
$
28,085

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
    Amortization of debt issuance costs
 
4,962

 
3,106

    Accretion of original issue discount on other borrowings
 
185

 

    Reduction of purchase premium on loans held for investment
 
448

 

    Increase in the fair value of Notes receivable – Rights to MSRs
 
(4,025
)
 

Changes in assets and liabilities:
 
 
 
 
    Decrease in match funded advances
 
44,384

 
277,141

    Decrease (increase) in debt service accounts
 
(3,077
)
 
5,498

    Decrease in related party receivables
 
2,450

 
24,292

    (Decrease) increase in related party payables
 
(2,847
)
 
32,076

    (Increase) in other assets
 
(2,645
)
 
(382
)
    (Decrease) increase in other liabilities
 
(428
)
 
575

Net cash provided by operating activities
 
103,767

 
370,391

Cash flows from investing activities
 
 
 
 
    Purchase of notes receivable – Rights to MSRs
 

 
(100,737
)
    Reduction in notes receivable – Rights to MSRs
 

 
7,339

    Purchase of loans held for investment
 
(556,618
)
 

    Proceeds from loans held for investment
 
3,526

 

    Cash used in advance financing receivables transaction
 
(55,702
)
 

    Acquisition of advances in connection with the purchase of residential mortgage assets
 

 
(713,582
)
Net cash used in investing activities
 
(608,794
)
 
(806,980
)
Cash flows from financing activities
 
 
 
 
    Proceeds from match funded liabilities, net
 
59,558

 
430,043

    Proceeds from other borrowings
 
472,734

 

    Payment of other borrowings
 
(875
)
 

    Payment of debt issuance costs
 
(6,408
)
 
(5,036
)
    Proceeds from issuance of ordinary shares
 

 
17,633

    Payment of offering costs
 

 
(22
)
    Payment of dividends to shareholders
 
(31,958
)
 
(20,920
)
Net cash provided by financing activities
 
493,051

 
421,698

Net (decrease) in cash
 
(11,976
)
 
(14,891
)
Cash at beginning of period
 
87,896

 
76,048

Cash at end of period
 
$
75,920

 
$
61,157

Supplemental non-cash financing activities
 
 
 
 
Dividends declared but not paid
 
$
10,653

 
$
7,391

Offering costs accrued but not paid
 
$

 
$
32

Debt issuance costs accrued but not paid
 
$
58

 
$
309


The accompanying notes are an integral part of these consolidated financial statements.

6


HOME LOAN SERVICING SOLUTIONS, LTD. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands unless otherwise stated, except share data)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Home Loan Servicing Solutions, Ltd. and its wholly owned subsidiaries (collectively referred to throughout as “HLSS”, “us”, “our”, “we” or the “Company”) focus on acquiring residential mortgage assets.

Basis of Presentation and Use of Estimates

We prepared the accompanying unaudited Interim Condensed Consolidated Financial Statements in conformity with the instructions of the Securities and Exchange Commission (“SEC”) to Form 10-Q for interim financial statements. In our opinion, the accompanying unaudited financial statements contain all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates. Material estimates that are particularly significant relate to our fair value measurements of Notes receivable – Rights to MSRs.

Principles of Consolidation

Our financial statements include the accounts of Home Loan Servicing Solutions, Ltd. and its wholly owned subsidiaries, as well as three variable interest entities (“VIE”) of which we are the primary beneficiary. We eliminate intercompany accounts and transactions in consolidation.

We evaluate each special purpose entity (“SPE”) for classification as a VIE. When a SPE meets the definition of a VIE and we determine that HLSS is the primary beneficiary, we include the SPE in our Interim Condensed Consolidated Financial Statements.

Our Match funded advances are in two SPEs along with related Match funded liabilities. We determined that these SPEs are VIEs of which we are the primary beneficiaries. The accounts of these SPEs are included in our Interim Condensed Consolidated Financial Statements.

Match funded advances on loans serviced for others result from our transfers of residential loan servicing advances to SPEs in exchange for cash. The SPEs issue debt supported by collections on the transferred advances. We made these transfers under the terms of our advance facility agreements. These transfers do not qualify for sale accounting because we retain control over the transferred assets. As a result, we account for these transfers as financings and classify the transferred advances on our Interim Condensed Consolidated Balance Sheet as Match funded advances and the related liabilities as Match funded liabilities. We use collections on the Match funded advances pledged to the SPEs to repay principal and to pay interest and the expenses of the entity. Holders of the debt issued by this entity can look only to the assets of the entity itself for satisfaction of the debt and have no recourse against HLSS.

On March 3, 2014, we acquired Government National Mortgage Association (“GNMA”) loans from Ocwen with an unpaid principal balance (“UPB”) of $549,411. Ocwen initially acquired these loans through the GNMA early buy-out (“EBO”) program which allows servicers of GNMA insured loans to buy delinquent loans from the applicable loan securitization pools. We account for these GNMA EBO loans as “Loans held for investment,” as described more fully later in this footnote. We also financed the GNMA EBO advances related to the GNMA EBO loans, and we account for this arrangement as a financing transaction because Ocwen retained title and all other rights and rewards associated with the GNMA EBO advances. Collectively, the purchase of GNMA EBO loans and financing of the related advances are referred to as the “GNMA EBO Transaction.” Our GNMA EBO loans are in a SPE with a related financing facility ("Mortgage Loan Facility"). The accounts of this SPE are included in our Interim Condensed Consolidated Financial Statements. These transfers to the SPE do not qualify for sale accounting because we retain control over the transferred assets. As a result, we account for these transfers as financings and classify the transferred GNMA EBO loans on our Interim Condensed Consolidated Balance Sheet as Loans held for investment and the related liabilities as Other borrowings. We use collections on the GNMA EBO loans pledged to the SPE to repay principal and to pay interest and the expenses of the entity. The holders of the debt issued by this SPE can look beyond the assets of the SPE for satisfaction of the

7


debt and therefore have recourse against HLSS. It is our expectation that since our GNMA EBO loans are insured by the Federal Housing Administration (“FHA”), the cash flows of this SPE will be sufficient to meet all claims of the debt holders. HLSS is responsible for making any principal or interest payments to the debt holders not covered by the cash flows of the SPE.

The following tables summarize the assets and liabilities of our consolidated SPEs, at the dates indicated:
At March 31, 2014
 
Match Funded Advance SPEs
 
Mortgage Loans SPE
 
Total
 
 
 
 
 
 
 
Match funded advances
 
$
6,343,397

 
$

 
$
6,343,397

Loans held for investment
 

 
552,644

 
552,644

Related party receivables (1)
 
56,655

 

 
56,655

Other assets (2)
 
120,980

 
61,662

 
182,642

   Total assets
 
$
6,521,032

 
$
614,306

 
$
7,135,338

 
 
 
 
 
 
 
Match funded liabilities
 
$
5,775,180

 
$

 
$
5,775,180

Other borrowings(3)
 

 
472,734

 
472,734

Other liabilities
 
4,525

 
1,220

 
5,745

   Total liabilities
 
$
5,779,705

 
$
473,954

 
$
6,253,659


At December 31, 2013
 
Match Funded Advance SPEs
 
Mortgage Loans SPE
 
Total
 
 
 
 
 
 
 
Match funded advances
 
$
6,387,781

 
$

 
$
6,387,781

Loans held for investment
 

 

 

Related party receivables (1)
 
60,239

 

 
60,239

Other assets (2)
 
119,902

 

 
119,902

   Total assets
 
$
6,567,922

 
$

 
$
6,567,922

 
 
 
 
 
 
 
Match funded liabilities
 
$
5,715,622

 
$

 
$
5,715,622

Other borrowings(3)
 

 

 

Other liabilities
 
4,673

 

 
4,673

   Total liabilities
 
$
5,720,295

 
$

 
$
5,720,295


(1)
Related party receivables principally includes Match funded advance collections that were in-transit to pay down our Match funded liabilities as of each presented period. See Note 14 for more information about our Related party receivables.
(2)
Other assets principally include debt service accounts, debt issuance costs and advances we financed as part of the GNMA EBO Transaction. See Note 5 for more information about our Other assets.
(3)
Other borrowings include the carrying value of our Mortgage Loan Facility. See Note 7 for more information about our Other borrowings.

Loans Held for Investment and Related Accrued Income

We account for our GNMA EBO loans under ASC 310-20, Receivables – Nonrefundable Fees and Other Costs. In accordance with ASC 310-20 30-5, these loans are recorded at the UPB plus a purchase premium which is the amount we paid to purchase these loans. The purchase premium is amortized into interest income using the interest method of accounting. These loans are FHA insured, making the collectability of the entire Loans held for investment balance reasonably assured. We evaluate whether all contractual payments will be collected as scheduled according to contractual terms. We incorporate the probable recovery of such payments due to FHA insurance in this analysis. Our Loans held for investment related to GNMA EBO loans are our only class of mortgage loans held for investment, and we evaluate these loans on a periodic basis to ensure a carrying value of the lower of cost or fair value. We had no loan impairments as of and for the period ended March 31, 2014.


8


We accrue interest income on our GNMA EBO loans at the note rate specific to each individual GNMA EBO loan. We allow for doubtful receivables if we have concerns about the collectability of all or a portion of our accrued income. As of and for the period ended March 31, 2014, we did not have an allowance for accrued interest income related to our GNMA EBO loans. We periodically evaluate whether our GNMA EBO loans should be placed on non-accrual status. All of our GNMA EBO loans remained on accrual status for the period ended March 31, 2014.

Recent Accounting Pronouncements

Accounting Standards Update (“ASU”) ASU 2013-11. This ASU provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit exists. Previously, there was diversity in practice, and this ASU is expected to eliminate that diversity in practice. The amendments in this update are effective for fiscal years, and interim periods within those years ended beginning after December 15, 2013. Our adoption of this standard effective January 1, 2014, did not have a material impact on our Interim Condensed Consolidated Financial Statements.

ASU 2014-06. This ASU provides technical corrections and improvements to Accounting Standards Codification glossary terms. Our adoption of this standard, effective March 14, 2014, did not have a material impact on our Interim Condensed Consolidated Financial Statements.

Certain disclosures included in the Company’s Annual Report are not required to be included on an interim basis in the Company’s Quarterly Reports on Forms 10-Q. The Company has condensed or omitted these disclosures. Therefore, this Form 10-Q/A should be read in conjunction with the Company’s amended Annual Report on Form 10-K filed with the SEC on August 18, 2014 ("the Form 10-K/A").

2. ASSET ACQUISITIONS

We purchased assets from Ocwen on March 3, 2014 of GNMA EBO loans with UPB of $549,411. Because these loans earn interest at a rate that is higher than current market rates, the loans were purchased at a premium to par, resulting in a total purchase price of $556,618. We amortize the purchase price premium using the interest method of accounting. The following table summarizes the transaction and reconciles the cash used to acquire the GNMA EBO loans:

GNMA EBO loans purchase price(1)
$
556,618

Sources:
 
Cash on-hand
$
83,884

SPE financing
$
472,734


(1)
The cash used to purchase these assets is shown within “Purchase of loans held for investment” of the Interim Condensed Consolidated Statement of Cash Flows.

During the three months ended March 31, 2013, we executed our third flow purchase (“Flow 3”) wherein we used cash on-hand and Match funded liabilities to purchase the following:

the contractual right to receive the servicing fees related to mortgage servicing rights with respect to 93 pooling and servicing agreements ("PSA") with UPB of approximately $15.9 billion which we account for as Notes receivable - Rights to MSRs; and
the outstanding servicing advances associated with the related pooling and servicing agreements.

The following table summarizes the purchase price of the assets we acquired from Ocwen during the three months ended March 31, 2013 and reconciles the cash used to acquire such assets:


9


Notes receivable – Rights to MSRs
$
100,707

Match funded advances (1)
$
703,206

Purchase price, as adjusted
$
803,913

Post-closing adjustments
$
10,406

Total cash used
$
814,319

Sources:
 
Cash on-hand
$
153,142

Match funded liabilities
$
661,177


(1)
The cash used to purchase these assets is shown within the “Acquisition of advances in connection with the purchase of residential mortgage assets” of the Interim Condensed Consolidated Statement of Cash Flows.

3. FAIR VALUE OF FINANCIAL INSTRUMENTS

We estimate fair value based on a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs to valuation techniques into three broad levels and gives the highest priority to Level 1 inputs and the lowest to Level 3 inputs.

The three broad categories are:

Level 1: Quoted prices in active markets for identical assets or liabilities;
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and
Level 3: Unobservable inputs for the asset or liability.

Where available, we utilize quoted market prices or observable inputs rather than unobservable inputs to determine fair value. We classify assets and liabilities in their entirety based on the lowest level of input that is significant to the fair value measurement.

We describe the methodologies that we use and key assumptions that we make to assess the fair value of instruments in more detail below:

Notes Receivable – Rights to MSRs

We established the value of the Notes receivable – Rights to MSRs based on an appraisal prepared with the assistance of an independent valuation firm. This appraisal is prepared on a quarterly basis. Significant inputs into the valuation include the following:

Discount rates reflecting the risk of earning the future income streams from the Notes receivable – Rights to MSRs ranging from 15% to 22%;
Interest rate used for calculating the cost of servicing advances of 1-Month LIBOR plus 3.50%;
Mortgage loan prepayment projections ranging from 12% to 28% of the related mortgage lifetime projected prepayment rate; and
Delinquency rate projections ranging from 15% to 35% of the aggregate unpaid balance of the underlying mortgage loans.

The independent valuation firm reviewed the collateral attributes and the historical payment performance of the underlying mortgage servicing portfolio and compared them with similar mortgage servicing portfolios and with standard industry mortgage performance benchmarks to arrive at the assumptions set forth above. The selected collateral attributes and performance comparisons utilized were the voluntary prepayment performance, delinquency and foreclosure performance, operational cost

10


comparison, average loan balance, weighted average coupon and note rate distribution, loan product type classification, geographic distribution and servicing advance behavior.

The unobservable inputs that have the most significant effect on the fair value of Notes receivable – Rights to MSRs are the mortgage loan prepayment rate projections and delinquency rate projections; however, any significant increase (decrease) in discount rates, interest rates, mortgage loan prepayment projections or delinquency rate projections, each in isolation, would result in a substantially lower (higher) valuation.

Derivative Financial Instruments

Our derivatives are not exchange-traded, and therefore quoted market prices or other observable inputs are not available. The fair value of our interest rate swap agreements is based on certain information provided by third-party pricing sources. Third-party valuations are derived from proprietary models based on inputs that include yield curves and contractual terms such as fixed interest rates and payment dates. We have not adjusted the information obtained from the third-party pricing sources; however, we review this information to ensure that it provides a reasonable basis for estimating fair value. Our review is designed to identify information that appears stale, information that has changed significantly from the prior period, and other indicators that the information may not be accurate. We determined that potential credit and counterparty risks had an immaterial impact on the valuation of our derivatives. See Note 9 for additional information on our derivative financial instruments.

The following tables present reconciliations of the fair value and changes in fair value of our Level 3 assets and liabilities which we measure at fair value on a recurring basis:

At March 31, 2014:
 
Fair value
 
Level 1
 
Level 2
 
Level 3
Measured at fair value on a recurring basis:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
   Notes receivable – Rights to MSRs
 
$
637,794

 
$

 
$

 
$
637,794

   Derivative financial instruments
 
3,523

 

 

 
3,523

Total assets
 
$
641,317

 
$

 
$

 
$
641,317

Liabilities:
 
 
 
 
 
 
 
 
   Derivative financial instruments
 
$
444

 
$

 
$

 
$
444

Total liabilities
 
$
444

 
$

 
$

 
$
444


At December 31, 2013:
 
Fair value
 
Level 1
 
Level 2
 
Level 3
Measured at fair value on a recurring basis:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
   Notes receivable – Rights to MSRs
 
$
633,769

 
$

 
$

 
$
633,769

   Derivative financial instruments
 
3,835

 

 

 
3,835

Total assets
 
$
637,604

 
$

 
$

 
$
637,604

Liabilities:
 
 
 
 
 
 
 
 
   Derivative financial instruments
 
$
529

 
$

 
$

 
$
529

Total liabilities
 
$
529

 
$

 
$

 
$
529


11



 
 
2014
 
2013
For the three months ended March 31,
 
Notes receivable – Rights to MSRs
 
Derivative
Financial
Instruments
 
Notes receivable – Rights to MSRs
 
Derivative
Financial
Instruments
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
633,769

 
$
3,306

 
$
296,451

 
$
(1,076
)
Purchases and reductions:
 
 
 
 
 
 
 
 
   Purchases
 

 

 
100,707

 

   Reductions
 

 

 
(7,339
)
 

 
 
$

 
$

 
$
93,368

 
$

Changes in fair value :
 
 
 
 
 
 
 
 
   Included in net income (1)
 
4,025

 

 

 

   Included in other comprehensive income (2)
 

 
(227
)
 

 
13

 
 
4,025

 
(227
)
 

 
13

Transfers in or out of Level 3
 

 

 

 

Ending balance
 
$
637,794

 
$
3,079

 
$
389,819

 
$
(1,063
)

(1)
Changes in fair value of the Notes receivable – Rights to MSRs are included in Interest income in the Interim Condensed Consolidated Statements of Operations. See Note 10 for additional information regarding our Interest income.
(2)
These pre-tax gains (losses) are attributable to derivatives still held at March 31, 2014 and March 31, 2013, respectively.

The following table shows the effect on the fair value of the Notes receivable – Rights to MSRs assuming adverse changes to certain key assumptions used in valuing these assets at March 31, 2014 and December 31, 2013:

 
Discount Rate
 
Prepayment Speeds
 
Delinquency Rates
 
100 bps adverse change
 
10% adverse change
 
10% adverse change
At March 31, 2014:
 
 
 
 
 
Notes receivable – Rights to MSRs
$
(12,936
)
 
$
(21,693
)
 
$
(71,773
)

 
Discount Rate
 
Prepayment Speeds
 
Delinquency Rates
 
100 bps adverse change
 
10% adverse change
 
10% adverse change
At December 31, 2013:
 
 
 
 
 
Notes receivable – Rights to MSRs
$
(12,988
)
 
$
(22,537
)
 
$
(72,560
)

This sensitivity analysis above assumes a change is made to one key input, while holding all other inputs constant. As many of these inputs are correlated, a change in one input will likely impact other inputs which would ultimately impact the overall valuation.

The following table provides additional quantitative information on our significant inputs used for valuing our Notes receivable – Rights to MSRs as of March 31, 2014 and December 31, 2013, respectively:

At March 31, 2014:
Asset
Unobservable Input
 
Low
 
High
 
Weighted Average
Notes receivable – Rights to MSRs
Discount Rate
 
15
%
 
22
%
 
19
%
 
Prepayment Speeds
 
12
%
 
28
%
 
18
%
 
Delinquency Rates
 
15
%
 
35
%
 
24
%


12


At December 31, 2013:
Asset
Unobservable Input
 
Low
 
High
 
Weighted Average
Notes receivable – Rights to MSRs
Discount Rate
 
15
%
 
22
%
 
20
%
 
Prepayment Speeds
 
12
%
 
28
%
 
19
%
 
Delinquency Rates
 
15
%
 
35
%
 
25
%

Presented below are the carrying values and fair value estimates of financial instruments not carried at fair value at the dates indicated:
 
March 31, 2014
 
March 31, 2014
 
December 31, 2013
 
December 31, 2013
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Financial assets:
 
 
 
 
 
 
 
Match funded advances
$
6,343,397

 
$
6,343,397

 
$
6,387,781

 
$
6,387,781

Loans held for investment
552,644

 
552,644

 

 

Total financial assets
$
6,896,041

 
$
6,896,041

 
$
6,387,781

 
$
6,387,781

Financial liabilities:
 
 
 
 
 
 
 
Match funded liabilities
$
5,775,180

 
$
5,770,270

 
$
5,715,622

 
$
5,700,934

Other borrowings
815,431

 
817,144

 
343,386

 
346,391

Total financial liabilities
$
6,590,611

 
$
6,587,414

 
$
6,059,008

 
$
6,047,325



Match Funded Advances

The carrying value of our Match funded advances approximates fair value. This is because our Match funded advances have no stated maturity, generally are realized within a relatively short period of time and do not bear interest. The fair value measurements for Match funded advances are categorized as Level 3.

Loans Held for Investment

Loans held for investment relate to our GNMA EBO loans. The fair value estimate of these loans was determined by using an internal discounted cash flow model. The fair value measurements for Loans held for investment are categorized as Level 3.

Match Funded Liabilities

Match funded liabilities include various series of term notes, variable funding notes and other fixed rate liabilities. The fair value estimate of the Company’s term notes and other fixed rate liabilities was determined by using broker quotes. We concluded that no adjustments were required to the quoted prices. The level of trading, both in number of trades and amount of term notes traded, is at a level that the Company believes market quotes to be a reasonable representation of the current fair market value of the term notes. All other Match funded liabilities are short term in nature and the carrying value generally approximates the fair value. The fair value measurements for Match funded liabilities are categorized as Level 3.

Other Borrowings

Other borrowings include a senior secured term loan facility and Mortgage Loan Facility. The fair value estimate of the senior secured term loan facility was determined by using broker quotes. We concluded that no adjustments were required to the quoted price. Trading is at a level that the Company believes market quotes to be a reasonable representation of the current fair market value of this facility. The Mortgage Loan Facility is short term in nature and the carrying value generally approximates the fair value. The fair value measurements for both facilities are categorized as Level 3.



13


4. MATCH FUNDED ADVANCES

Match funded advances on residential loans we service for others are comprised of the following at the dates indicated:

 
March 31,
2014
 
December 31,
2013
Principal and interest advances
$
2,724,333

 
$
2,632,092

Taxes and insurance advances
2,665,270

 
2,723,390

Corporate advances
953,794

 
1,032,299

 
$
6,343,397

 
$
6,387,781


5. OTHER ASSETS

Other assets consisted of the following at the dates indicated:

 
March 31,
2014
 
December 31,
2013
Debt service accounts (1)
$
106,987

 
$
103,910

Debt issuance costs (2)
22,669

 
21,165

Accrued interest income (3)
2,255

 

Interest-earning collateral deposits (4)
1,075

 
1,075

Derivative financial instruments (5)
3,523

 
3,835

Advance financing receivables (6)
55,702

 

Other
558

 
168

 
$
192,769

 
$
130,153


(1)
Under our advance funding facilities, we are contractually required to remit collections on Match funded advances to the trustee within two days of receipt. We do not use the collected funds to reduce the related Match funded liabilities until the payment dates specified in the indenture. The balance also includes amounts that we set aside to provide for possible shortfalls in the funds available to pay certain expenses and interest. Lastly, this balance includes collections on our Loans held for investment of $3,526 which will be used to pay down a portion of the Mortgage Loan Facility balance on the first funding date following quarter end.
(2)
Costs relate to Match funded liabilities and Other borrowings. We amortize these costs to the earlier of the scheduled amortization date, contractual maturity date or prepayment date of the debt.
(3)
Represents accrued interest income on our GNMA EBO loans and interest earned on our financing of GNMA EBO advances. The GNMA EBO loans remain on accrual status as collection is reasonably assured. GNMA EBO advance financing interest income is settled on a monthly basis.
(4)
Represents cash collateral held by our counterparty as part of our interest rate swap agreements.
(5)
See Notes 3 and 9 for more information regarding our use of derivatives.
(6)
We provided financing to Ocwen for GNMA EBO advances as part of the GNMA EBO Transaction. We accounted for this as a financing transaction and receive interest income at a rate of 1- Month LIBOR plus 450 bps.



14


6. MATCH FUNDED LIABILITIES

Match funded liabilities are comprised of the following at the dates indicated:

 
 
 
 
 
 
 
 
 
 
Balance Outstanding
Borrowing Type(1)
 
Interest Rate (2)
 
Maturity (3)
 
Amortization Date (3)
 
Unused Borrowing Capacity (4)
 
March 31, 2014 (5)
 
December 31, 2013
Series 2012 T2 Term Notes
 
199 – 494 bps
 
Oct. 2045
 
Oct. 2015
 
$

 
$
450,000

 
$
450,000

Series 2013 T1 Term Notes
 
90 – 249 bps
 
Jan. 2044
 
Jan. 2014
 

 

 
650,000

Series 2013 T1 Term Notes
 
150 – 323 bps
 
Jan. 2046
 
Jan. 2016
 

 
350,000

 
350,000

Series 2013 T1 Term Notes
 
229 – 446 bps
 
Jan. 2048
 
Jan. 2018
 

 
150,000

 
150,000

Series 2013 T2 Term Notes
 
115 – 239 bps
 
May 2044
 
May 2015
 

 
375,000

 
375,000

Series 2013 T3 Term Notes
 
179 – 313 bps
 
May 2046
 
May 2017
 

 
475,000

 
475,000

Series 2013 T4 Term Notes
 
118 – 232 bps
 
Aug. 2044
 
Aug. 2014
 

 
200,000

 
200,000

Series 2013 T5 Term Notes
 
198 – 331 bps
 
Aug. 2046
 
Aug. 2016
 

 
200,000

 
200,000

Series 2013 T6 Term Notes
 
129 – 223 bps
 
Sep. 2044
 
Sep. 2014
 

 
350,000

 
350,000

Series 2013 T7 Term Notes
 
198 – 302 bps
 
Nov. 2046
 
Nov. 2016
 

 
300,000

 
300,000

Series 2014 T1 Term Notes
 
124 – 229 bps
 
Jan. 2045
 
Jan. 2015
 

 
600,000

 

Series 2014 T2 Term Notes
 
222 – 311 bps
 
Jan. 2047
 
Jan. 2017
 

 
200,000

 

Series 2012 VF 1 Notes
 
1-Month LIBOR + 110 – 340 bps
 
Aug. 2044
 
Aug. 2014
 
255,524

 
444,476

 
469,050

Series 2012 VF 2 Notes
 
1-Month LIBOR + 110 – 340 bps
 
Aug. 2044
 
Aug. 2014
 
255,524

 
444,476

 
469,050

Series 2012 VF 3 Notes
 
1-Month LIBOR + 110 – 340 bps
 
Aug. 2044
 
Aug. 2014
 
255,524

 
444,476

 
469,050

Series 2013 VF 1 Notes (6)
 
1-Month LIBOR + 150 - 245 bps
 
Feb. 2045
 
Feb. 2015
 
51,748

 
498,252

 
514,972

Class A Term Money Market Fund Note (7)
 
1-Month LIBOR + 20 bps
 
Sep. 2014
 
Jan. 2014
 

 
176,667

 
265,000

Class A Draw Money Market Fund Note (7)
 
1-Month LIBOR + 110 bps
 
Sep. 2044
 
Sep. 2014
 

 
88,333

 

Class B Term Money Market Fund Note
 
275 bps
 
Sep. 2044
 
Sep. 2014
 

 
28,500

 
28,500

 
 
 
 
 
 
 
 
$
818,320

 
$
5,775,180

 
$
5,715,622


(1)
Each term note and variable funding note issuance has four classes, an A, B, C, and D class.
(2)
The weighted average interest rate at March 31, 2014 was 1.68%. We pay interest monthly.
(3)
The amortization date is the date on which the revolving period ends under each Advance Facility note and repayment of the outstanding balance must begin if the note is not renewed or extended. The maturity date is the due date for all outstanding balances. After the amortization date, all collections that represent the repayment of Match funded advances pledged to the facilities must be applied to reduce the balance of the note outstanding, and any new advances are ineligible to be financed.
(4)
Our unused borrowing capacity is available to us if we have additional eligible collateral to pledge and meet other borrowing conditions. We pay a 0.50% or 0.625% fee on the unused borrowing capacity which varies by facility.
(5)
On January 17, 2014, we completed the issuance of $600,000 of one-year and $200,000 of three-years term notes.
(6)
These Variable Funding Notes were amended on February 14, 2014, to extend the amortization and maturity dates by a year and to reduce the interest rate spreads compared to December 31, 2013. Variable Funding Note balances fluctuate based on Match funded advance activity and our ability to issue fixed rate term notes.

15


(7)
The Class A Term Money Market Fund Note and Class A Draw Money Market Fund Note have a combined maximum borrowing capacity of $265,000. By design, the Class A Term Money Market Fund Note balance is reduced at scheduled times and there is an equally offsetting increase to the Class A Draw Money Market Fund Note. The combined balance of these notes was equal to $265,000 at March 31, 2014 and December 31, 2013. The amortization date for the Class A Term Money Market Fund Note represents the commencement date for scheduled repayments.


Analysis of Borrowing by Expected Maturity (1):

Year of Expected Maturity Date
As of March 31, 2014
2014
$
2,176,928

2015
1,923,252

2016
850,000

2017
675,000

2018 and thereafter
150,000

Total
$
5,775,180


(1)
The expected maturity date is the date on which the revolving period ends under each Advance Facility note and repayment of the outstanding balance must begin if the note is not renewed or extended.

7. OTHER BORROWINGS

Other borrowings consisted of the following at the dates indicated:

 
March 31, 2014
 
December 31, 2013
Senior secured term loan facility (1)
$
342,697

 
$
343,386

Mortgage Loan Facility (2)
472,734

 

 
$
815,431

 
$
343,386


(1)
On June 27, 2013, we entered into a $350,000 senior secured term loan facility which was issued at a discount to par. The senior secured term loan facility has a maturity date of June 27, 2020 and an interest rate of 1-Month LIBOR plus 350 bps, with a 1.00% LIBOR floor. As of March 31, 2014, the interest rate on our senior secured term loan facility was 4.50%.
(2)
On March 3, 2014, we entered into a Mortgage Loan Facility to finance the purchase of our GNMA EBO loans. The facility has a maturity date of March 2, 2015 and an interest rate of 1- Month LIBOR plus 305 bps. The Mortgage Loan Facility has maximum borrowing capacity of $600,000, $127,266 of which was unused as of March 31, 2014.

The weighted average interest rate for our Other borrowings was 3.75% as of March 31, 2014.

Analysis of Other Borrowing by Expected Repayment Date (1):

Year of Expected Payment Date
As of March 31, 2014
2014
$
2,625

2015
476,234

2016
3,500

2017
3,500

2018 and thereafter
334,250

Total
$
820,109


(1)
The Mortgage Loan Facility expected payment date is based on the current outstanding balance and maturity date of the facility.


16


8. ORDINARY SHARES

Increases in the number of ordinary shares issued during the three months ended March 31, 2014 and March 31, 2013 are represented in the table below:

 
2014
 
2013
Ordinary shares issued - beginning balance
71,016,771

 
55,884,718

Issuance of new ordinary shares

 
970,578

Ordinary shares issued – ending balance
71,016,771

 
56,855,296


On January 22, 2013, the underwriters exercised a portion of their over-allotment option from our December 24, 2012 offering of ordinary shares in the amount of 970,578 ordinary shares. We received net proceeds of $17,633 from the over-allotment exercise.

9. DERIVATIVE FINANCIAL INSTRUMENTS

We are party to interest rate swap agreements that we recognize on our Interim Condensed Consolidated Balance Sheet at fair value within Other assets and Other liabilities. On the date we entered into the interest rate swap agreements, we designated and documented them as hedges of the variable cash flows payable for floating rate interest expense on our borrowings (cash flow hedge). To qualify for hedge accounting, a derivative must be highly effective at reducing the risk associated with the hedged exposure. In addition, the documentation must include the risk management objective and strategy. On a quarterly basis we assess and document the derivatives’ effectiveness and expected effectiveness in offsetting the changes in the fair value or the cash flows of the hedged items. To assess effectiveness, we use statistical methods, such as regression analysis, as well as nonstatistical methods including dollar-offset analysis. For a cash flow hedge, to the extent that it is effective, we record changes in the estimated fair value of the derivative in other comprehensive income. We subsequently reclassify these changes in estimated fair value to net income in the same period that the hedged transaction affects earnings and in the same financial statement category as the hedged item.

If a derivative instrument in a cash flow hedge is terminated or the hedge designation is removed, we reclassify related amounts in AOCI into earnings in the same period during which the cash flows that were hedged affect earnings. In a period where we determine that it is probable that a hedged forecasted transaction will not occur, such as variable-rate interest payments on debt that has been repaid in advance, any related amounts in AOCI are reclassified into earnings in that period.

Because our current derivative agreements are not exchange-traded, we are exposed to credit loss in the event of nonperformance by the counterparty to the agreement. We control this risk through counterparty credit monitoring procedures including financial analysis, dollar limits and other monitoring procedures. The notional amounts of our contracts do not represent our exposure to credit loss. See Note 3 for additional information regarding our use of derivatives.

Interest Rate Management

We executed a hedging strategy designed to mitigate the impact of changes in variable interest rates on the excess of interest rate sensitive liabilities over interest rate sensitive assets. We entered into interest rate swaps to hedge against the effects of a change in 1-Month LIBOR.


17


The following tables provide information about our interest rate swaps at March 31, 2014 and December 31, 2013, respectively:
Purpose
 
Date Opened
 
Effective Date (1)
 
Maturity
 
We Pay
 
We Receive
 
Balance Sheet Location
 
Notional Amount
 
Fair Value
Designated as hedges(2),(3):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hedge the effects of changes in 1-Month LIBOR
 
September 2012
 
September 2012
 
August 2017
 
0.5188
%
 
1-Month LIBOR
 
Other assets
 
$
141,049

 
$
1,079

Hedge the effects of changes in 1-Month LIBOR
 
January 2013
 
January 2016
 
December 2017
 
1.3975
%
 
1-Month LIBOR
 
Other assets
 
338,009

 
2,444

Total asset derivatives designated as hedges as of March 31, 2014
 
$
479,058

 
$
3,523

Total asset derivatives as of March 31, 2014
 
$
479,058

 
$
3,523


Purpose
 
Date Opened
 
Effective Date (1)
 
Maturity
 
We Pay
 
We Receive
 
Balance Sheet Location
 
Notional Amount
 
Fair Value
Designated as hedges(2),(3):
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Hedge the effects of changes in 1-Month LIBOR
 
March 2012
 
March 2012
 
March 2016
 
0.6325
%
 
1-Month LIBOR
 
Other liabilities
 
$
96,927

 
$
343

Hedge the effects of changes in 1-Month LIBOR
 
May 2012
 
May 2012
 
May 2016
 
0.6070
%
 
1-Month LIBOR
 
Other liabilities
 
25,225

 
15

Hedge the effects of changes in 1-Month LIBOR
 
January 2013
 
January 2014
 
July 2014
 
0.3375
%
 
1-Month LIBOR
 
Other liabilities
 
207,048

 
86

Total liability derivatives designated as hedges as of March 31, 2014
 
$
329,200

 
$
444

Total liability derivatives as of March 31, 2014
 
$
329,200

 
$
444


Purpose
 
Date Opened
 
Effective Date (1)
 
Maturity
 
We Pay
 
We Receive
 
Balance Sheet Location
 
Notional Amount
 
Fair Value
Designated as hedges(3):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hedge the effects of changes in 1-Month LIBOR
 
September 2012
 
September 2012
 
August 2017
 
0.5188
%
 
1-Month LIBOR
 
Other assets
 
$
177,056

 
$
1,084

Hedge the effects of changes in 1-Month LIBOR
 
January 2013
 
January 2016
 
December 2017
 
1.3975
%
 
1-Month LIBOR
 
Other assets
 
338,009

 
2,751

Total asset derivatives designated as hedges as of December 31, 2013
 
$
515,065

 
$
3,835

Total asset derivatives as of December 31, 2013
 
$
515,065

 
$
3,835




18


Purpose
 
Date Opened
 
Effective Date (1)
 
Maturity
 
We Pay
 
We Receive
 
Balance Sheet Location
 
Notional Amount
 
Fair Value
Designated as hedges(3):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hedge the effects of changes in 1-Month LIBOR
 
March 2012
 
March 2012
 
March 2016
 
0.6325
%
 
1-Month LIBOR
 
Other liabilities
 
$
102,522

 
$
364

Hedge the effects of changes in 1-Month LIBOR
 
May 2012
 
May 2012
 
May 2016
 
0.6070
%
 
1-Month LIBOR
 
Other liabilities
 
28,565

 
25

Hedge the effects of changes in 1-Month LIBOR
 
January 2013
 
January 2014
 
July 2014
 
0.3375
%
 
1-Month LIBOR
 
Other liabilities
 
307,043

 
140

Total liability derivatives designated as hedges as of December 31, 2013
 
$
438,130

 
$
529

Total liability derivatives as of December 31, 2013
 
$
438,130

 
$
529


(1)
The effective date of the swap is the date from which monthly net settlements begin to be computed.
(2)
Projected net settlements for the next twelve months total approximately $1,033 of payments to the counterparty.
(3)
There was an unrealized pre-tax loss of $227 related to our interest rate swaps included in AOCI for the three months ended March 31, 2014, and an unrealized pre-tax gain of $13 related to our interest rate swaps included in AOCI for the three months ended March 31, 2013. Given the current and expected effectiveness of our hedging arrangements, we do not expect any reclassifications from AOCI into earnings associated with hedging ineffectiveness related to these hedging arrangements during the next twelve months.

The following table summarizes our use of derivatives during the three months ended March 31:

 
2014
 
2013
Notional balance at beginning of period
$
953,195

 
$
414,631

Additions

 
645,052

Maturities

 

Terminations

 

Amortization
144,937

 
33,631

Notional balance at end of period
$
808,258

 
$
1,026,052


We recognize the right to reclaim cash collateral or the obligation to return cash collateral as part of our hedge agreements. At March 31, 2014, we have the right to reclaim cash collateral of $1,075 and are obligated to return cash collateral of $3,510 as part of our hedge agreements. At December 31, 2013, we had the right to reclaim cash collateral of $1,075 and are obligated to return cash collateral of $3,500 as part of our hedge agreements.

10. INTEREST INCOME

Interest Income – Notes Receivable – Rights to MSRs

Our primary source of revenue is the fees we are entitled to receive in connection with the servicing of mortgage loans. We account for these fees as interest income.

19



The following table shows how we calculated Interest income - notes receivable – Rights to MSRs for the three months ended March 31:

 
Three Months
 
2014
 
2013
Servicing fees collected
$
189,157

 
$
102,258

Subservicing fee payable to Ocwen
(90,644
)
 
(47,052
)
   Net servicing fees retained by HLSS
98,513

 
55,206

Reductions in Notes receivable – Rights to MSRs

 
(7,339
)
Increase in fair value of Notes receivable – Rights to MSRs
4,025

 

   
$
102,538

 
$
47,867


Interest Income – Other

Additional sources of revenue for us are the interest we earn on our GNMA EBO loans, financing of GNMA EBO advances, operating bank accounts and the custodial account balances related to the mortgage loans serviced which are not included in our Interim Condensed Consolidated Balance Sheets. The following table shows our Interest income – other in more detail for the three months ended March 31:

 
Three Months
 
2014
 
2013
Loan interest (1)
$
1,784

 
$

Advance financing interest (2)
202

 

Bank account interest
975

 
102

 
$
2,961

 
$
102


(1)
Represents interest earned at the stated note rate on each individual GNMA EBO loan, net of the amortization of the purchase premium on our GNMA EBO loans using the interest method of accounting.
(2)
Represents interest earned on advance financing we provided to Ocwen in connection with their role as a servicer of agency loans.
 
11. INTEREST EXPENSE

The following table presents the components of Interest expense for the three months ended March 31:

 
Three Months
 
2014
 
2013
   Match funded liabilities
$
26,830

 
$
14,781

   Other borrowings
5,323

 

   Amortization of debt issuance costs
4,962

 
3,106

   Interest rate swaps
396

 
355

 
$
37,511

 
$
18,242


12. INCOME TAXES

Income taxes were provided for based upon the tax laws and rates in countries in which we conduct operations and earn related income. Our effective tax rate for the three months ended March 31, 2014 and 2013 was 0.0% and 0.1%. We are a Cayman Islands exempted company, and the Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation.


20


The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. As of March 31, 2014, the Company did not have any unrecognized tax benefits related to the current period or any previous period. We recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. We did not accrue interest or penalties associated with any unrecognized tax benefits, nor was any interest expense or penalty recognized during the period or in previous periods.

13. BUSINESS SEGMENT REPORTING

Our business strategy focuses on acquiring residential mortgage assets consisting of mortgage servicing rights, rights to fees and mortgage loans. As of March 31, 2014, we operate a single reportable business segment that holds residential mortgage assets.

14. RELATED PARTY TRANSACTIONS

We entered into various agreements with Ocwen and Altisource Portfolio Solutions, S.A. (“Altisource”) in connection with our Initial Public Offering on March 5, 2012. William C. Erbey, our founder and the Chairman of our Board of Directors, is also the Chairman of the Board of Directors of Ocwen and Altisource.

As the named servicer, Ocwen remains obligated to perform as servicer under the related PSAs, and we are required to pay Ocwen a monthly fee for the servicing activities it performs. We are also required to purchase any servicing advances that Ocwen is required to make pursuant to such PSAs.

In addition to the acquisition of residential mortgage assets described in Note 2, the following table summarizes our transactions with Ocwen for the three months ended March 31:

 
Three Months
 
2014
 
2013
Servicing fees collected
$
189,157

 
$
102,258

Subservicing fee payable to Ocwen
(90,644
)
 
(47,052
)
   Net servicing fees retained by HLSS
98,513

 
55,206

Reductions in Notes receivable – Rights to MSRs

 
(7,339
)
Increase in fair value of Notes receivable – Rights to MSRs
4,025

 

 
102,538

 
47,867

 
 
 
 
Servicing advances purchased from Ocwen in the ordinary course of business
$
3,503,375

 
$
695,105


At March 31, 2014, Ocwen owed us $8,087 for servicing fees collected but not remitted to us, and we owed Ocwen $3,738 for the subservicing fee earned by Ocwen in March 2014. Ocwen owed us $2,053 for accrued GNMA EBO loan interest income and $202 for accrued advance financing interest income as of March 31, 2014. During the three months ended March 31, 2014 and 2013, we earned interest income of $1,986 and $0 as a result of the GNMA EBO Transaction with Ocwen. Lastly, our Notes receivable – Rights to MSRs resulted from transactions with Ocwen.

Ocwen Professional Services Agreement

We have a professional services agreement with Ocwen (“Professional Services Agreement”) that requires us to provide certain services to Ocwen and for Ocwen to provide certain services with pricing terms intended to reflect market rates. Services provided by us under this agreement include valuation and analysis of mortgage servicing rights, capital markets activities, advance financing management, treasury management, legal services and other similar services. Services provided by Ocwen under this agreement include business strategy, legal, tax, licensing and regulatory compliance support services, risk management services and other similar services. The services provided by the parties under this agreement are on an as-needed basis, and the fees represent actual costs incurred plus an additional markup of 15%.

At March 31, 2014, Ocwen owed us $1,284 for professional services provided pursuant to the Professional Services Agreement. During the three months ended March 31, 2014 and 2013 we earned fees of $628 and $407, for services provided to

21


Ocwen pursuant to the Professional Services Agreement. Additionally, during the three months ended March 31, 2014 and 2013 we incurred fees of $154 and $30 for services received from Ocwen pursuant to the Professional Services Agreement.

Altisource Administrative Services Agreement

We have an administrative services agreement with Altisource (“Altisource Administrative Services Agreement”) that requires Altisource to provide certain administrative services to us with pricing terms intended to reflect market rates. Services provided to us under this agreement include human resources administration (benefit plan design, recruiting, hiring and training and compliance support), legal and regulatory compliance support services, general business consulting, corporate services (facilities management, security and travel services), finance and accounting support services (financial analysis, financial reporting and tax services), risk management services, vendor management and other related services. The services Altisource provides to us under this agreement are on an as-needed basis, and the fees we pay Altisource are based on the actual costs incurred by them plus an additional markup of 15%. During the three months ended March 31, 2014 and March 31, 2013, we incurred fees of $218 and $196 for services provided to us pursuant to the Altisource Administrative Services Agreement.

Receivables from and Payables to Related Parties

The following table summarizes amounts receivable from and payable to related parties at the dates indicated:

 
March 31, 2014
 
December 31, 2013
Servicing fees collected (1)
$
8,087

 
$
8,482

Professional services (2)
1,284

 
655

Advance collections (3)
56,655

 
60,239

Other
1,573

 
673

Receivables from Ocwen
$
67,599

 
$
70,049

 
 
 
 
Subservicing fees payable (4)
$
3,738

 
$
8,114

Professional services (2)
508

 
354

Other
3,621

 
2,181

Payables to Ocwen
$
7,867

 
$
10,649

 
 
 
 
Payables to Altisource
$
18

 
$
83


(1)
Ocwen is required to remit to us servicing fees it collects on our behalf within two business days. The amount due from Ocwen at March 31, 2014, represents servicing fees collected but not remitted at the end of the month. We record servicing fees we collect less the subservicing fee we pay to Ocwen less the reduction in Notes receivable – Rights to MSRs as Interest income as shown in Note 10.
(2)
The respective amounts are for professional services provided that were receivable as of the dates indicated.
(3)
Upon collection, Ocwen is contractually obligated to remit Match funded advance collections to pay down our Match funded liabilities. This receivable represents the portion of Match funded advance collections that were in-transit to pay down our Match funded liabilities as of the dates indicated.
(4)
The base fee and performance fee, if any, that comprise the subservicing fees payable are calculated and paid to Ocwen within three business days following the end of the month.

15. COMMITMENTS AND CONTINGENCIES

We may be party to various claims, legal actions and complaints arising in the ordinary course of business. We monitor our legal matters, including advice from external legal counsel, and periodically perform assessments of these matters for potential loss accrual and disclosure. There are currently no probable matters outstanding that, in the opinion of management, will have a material effect on our Interim Condensed Consolidated Balance Sheets, Statements of Operations and Statements of Cash Flows. There are also currently no reasonably possible matters outstanding that, in the opinion of management, will have a material effect on our Interim Condensed Consolidated Balance Sheets, Statements of Operations and Statements of Cash Flows.


22


16. SUBSEQUENT EVENTS

Subsequent to our balance sheet date of March 31, 2014:

On April 10, 2014, we paid cash dividends of $10,653 or $0.15 per ordinary share; and
On April 17, 2014, we declared a monthly dividend of $0.16 per ordinary share with respect to April, May and June 2014.

17. RESTATEMENT

Subsequent to the filing of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, (the “Original Form 10-K”), with the SEC on February 6, 2014 and the filing of the Original Form 10-Q for the three months ended March 31, 2014, we determined that the Notes Receivable - Rights to MSRs and related interest income were materially misstated due to the fact that we did not adjust the Notes Receivable - Rights to MSRs to the best estimate of fair value and did not include the effect of such fair value adjustments in the application of the interest method in accounting for the Notes receivable - Rights to MSRs. As a result, the following financial statement amounts have been restated from amounts previously reported.

The following table summarizes the effects of the restatement on the consolidated balance sheet as of March 31, 2014 and December 31, 2013 (as restated on the Form 10-K/A filed on August 18, 2014).

 
 
March 31, 2014 (Unaudited)
(In thousands)
 
As Previously Reported
 
Adjustments
 
As Restated
Notes Receivable - Rights to MSRs
 
$
634,399

 
$
3,395

 
$
637,794

All other assets
 
7,233,353

 

 
7,233,353

   Total assets
 
$
7,867,752

 
$
3,395

 
$
7,871,147

 
 
 
 
 
 
 
Total liabilities
 
$
6,622,447

 
$

 
$
6,622,447

 
 
 
 
 
 
 
Retained earnings
 
32,520

 
3,395

 
35,915

All other equity
 
1,212,785

 

 
1,212,785

Total equity
 
1,245,305

 
3,395

 
1,248,700

 
 
 
 
 
 
 
   Total liabilities and equity
 
$
7,867,752

 
$
3,395

 
$
7,871,147


 
 
December 31, 2013
(In thousands)
 
As Previously Reported
 
Adjustments
 
As Restated
Notes Receivable - Rights to MSRs
 
$
651,060

 
$
(17,291
)
 
$
633,769

All other assets
 
6,676,903

 

 
6,676,903

   Total assets
 
$
7,327,963

 
$
(17,291
)
 
$
7,310,672

 
 
 
 
 
 
 
Total liabilities
 
$
6,094,225

 
$

 
$
6,094,225

 
 
 
 
 
 
 
Retained earnings
 
20,804

 
(17,291
)
 
3,513

All other equity
 
1,212,934

 

 
1,212,934

Total equity
 
1,233,738

 
(17,291
)
 
1,216,447

 
 
 
 
 
 
 
   Total liabilities and equity
 
$
7,327,963

 
$
(17,291
)
 
$
7,310,672



23


The following table summarizes the effects of the restatement on the consolidated statements of operations for the three months ended March 31, 2014 and 2013.

 
 
Three months ended March 31, 2014 (Unaudited)
(In thousands)
 
As Previously Reported
 
Adjustments
 
As Restated
Interest income – notes receivable - Rights to MSRs
 
$
81,852

 
$
20,686

 
$
102,538

Interest income – other
 
2,961

 

 
2,961

   Total interest income
 
84,813

 
20,686

 
105,499

Related party revenue
 
628

 

 
628

   Total revenue
 
85,441

 
20,686

 
106,127

Operating expenses
 
4,256

 

 
4,256

   Income from operations
 
81,185

 
20,686

 
101,871

Other expense
 
 
 
 
 
 
   Interest expense
 
37,511

 

 
37,511

      Total other expense
 
37,511

 

 
37,511

Income before income taxes
 
$
43,674

 
$
20,686

 
$
64,360

Income tax expense
 

 

 

Net income
 
$
43,674

 
$
20,686

 
$
64,360

 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
Earnings per share
 
$
0.61

 
$
0.30

 
$
0.91

 
 
 
 
 
 
 
Diluted earnings per share
 
$
0.61

 
$
0.30

 
$
0.91


 
 
Three months ended March 31, 2013 (Unaudited)
(In thousands)
 
As Previously Reported
 
Adjustments
 
As Restated
Interest income – notes receivable – Rights to MSRs
 
$
44,570

 
$
3,297

 
$
47,867

Interest income – other
 
102

 

 
102

   Total interest income
 
44,672

 
3,297

 
47,969

Related party revenue
 
407

 

 
407

   Total revenue
 
45,079

 
3,297

 
48,376

Operating expenses
 
2,037

 

 
2,037

   Income from operations
 
43,042

 
3,297

 
46,339

Other expense
 
 
 
 
 
 
   Interest expense
 
18,242

 

 
18,242

      Total other expense
 
18,242

 

 
18,242

Income before income taxes
 
24,800

 
3,297

 
28,097

Income tax expense
 
12

 

 
12

Net income
 
$
24,788

 
$
3,297

 
$
28,085

 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
Earnings per share
 
$
0.44

 
$
0.06

 
$
0.50

 
 
 
 
 
 
 
Diluted earnings per share
 
$
0.44

 
$
0.06

 
$
0.50



24


The following table summarizes the effects of the restatement on the consolidated statements of comprehensive income for the three months ended March 31, 2014 and 2013.
 
 
Three months ended March 31, 2014 (Unaudited)
(In thousands)
 
As Previously Reported
 
Adjustments
 
As Restated
Net income
 
$
43,674

 
$
20,686

 
$
64,360

 
 
 
 
 
 
 
Total other comprehensive loss, before tax
 
(227
)
 

 
(227
)
   Tax benefit on other comprehensive loss
 
78

 

 
78

Total other comprehensive loss, net of tax
 
(149
)
 

 
(149
)
 
 
 
 
 
 
 
Total comprehensive income
 
$
43,525

 
$
20,686

 
$
64,211

 
 
Three months ended March 31, 2013 (Unaudited)
(In thousands)
 
As Previously Reported
 
Adjustments
 
As Restated
Net income
 
$
24,788

 
$
3,297

 
$
28,085

 
 
 
 
 
 
 
Total other comprehensive income, before tax
 
13

 

 
13

   Tax expense on other comprehensive income
 

 

 

Total other comprehensive income, net of tax
 
13

 

 
13

 
 
 
 
 
 
 
Total comprehensive income
 
$
24,801

 
$
3,297

 
$
28,098


The following table summarizes the effects of the restatement on the consolidated statements of cash flows for the three months ended March 31, 2014 and 2013.
 
 
March 31, 2014 (Unaudited)
(In thousands)
 
As Previously Reported
 
Adjustments
 
As Restated
Net income
 
$
43,674

 
$
20,686

 
$
64,360

Increase in fair value of Notes receivable – Rights to MSRs
 

 
(4,025
)
 
(4,025
)
All other operating cash flows
 
43,432

 

 
43,432

Net cash provided by operating activities
 
87,106

 
16,661

 
103,767

 
 
 
 
 
 
 
Reduction in Notes receivable – Rights to MSRs
 
16,661

 
(16,661
)
 

All other investing cash flows
 
(608,794
)
 

 
(608,794
)
Net cash used in investing activities
 
(592,133
)
 
(16,661
)
 
(608,794
)
 
 
 
 
 
 
 
Net cash provided by financing activities
 
493,051

 

 
493,051

Net decrease in cash and cash equivalents
 
(11,976
)
 

 
(11,976
)
Cash and cash equivalents at beginning of period
 
87,896

 

 
87,896

Cash and cash equivalents at end of period
 
$
75,920

 
$

 
$
75,920



25


 
 
March 31, 2013 (Unaudited)
(In thousands)
 
As Previously Reported
 
Adjustments
 
As Restated
Net income
 
$
24,788

 
$
3,297

 
$
28,085

All other operating cash flows
 
342,306

 

 
342,306

Net cash provided by operating activities
 
367,094

 
3,297

 
370,391

 
 
 
 
 
 
 
Reduction in Notes receivable – Rights to MSRs
 
10,636

 
(3,297
)
 
7,339

All other investing cash flows
 
(814,319
)
 

 
(814,319
)
Net cash used in investing activities
 
(803,683
)
 
(3,297
)
 
(806,980
)
 
 
 
 
 
 
 
Net cash provided by financing activities
 
421,698

 

 
421,698

Net decrease in cash and cash equivalents
 
(14,891
)
 

 
(14,891
)
Cash and cash equivalents at beginning of period
 
76,048

 

 
76,048

Cash and cash equivalents at end of period
 
$
61,157

 
$

 
$
61,157



26


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands unless otherwise stated, except share data)

FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts included in this report including, without limitation, statements regarding our financial position, business strategy and other plans and objectives for our future operations, are forward-looking statements.

These forward-looking statements include declarations regarding our management’s beliefs and current expectations. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “consider,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict” or “continue” or the negative of such terms or other comparable terminology. Such statements are not guarantees of future performance as they are subject to certain assumptions, inherent risks and uncertainties in predicting future results and conditions that could cause the actual results to differ materially from those projected in these forward-looking statements. Important factors that could cause actual results to differ materially include, but are not limited to, the following:

Estimates regarding prepayment speeds, delinquency rates, servicing advances, amortization of Notes receivable – Rights to MSRs, custodial account balances, interest income, operating costs, interest costs and other drivers of our results;
Assumptions related to sources of liquidity, our ability to fund servicing advances, our ability to pursue new asset classes and the adequacy of our financial resources;
Our status with respect to legal ownership of the rights to mortgage servicing rights we acquired from Ocwen;
Our ability to pay monthly dividends;
The performance of Ocwen as mortgage servicer and our ability to make acquisitions of mortgage servicing rights and the related servicing advances (“Mortgage Servicing Assets”) on terms consistent with our business and economic model;
Assumptions about the availability of additional portfolios of subprime and Alt-A mortgage servicing rights and our ability to acquire additional Mortgage Servicing Assets from Ocwen and others;
Assumptions about the effectiveness of our hedging strategy;
Expectations regarding incentive fees in our servicing contract and the stability of our gross servicing margin;
Our competitive position;
Our dependence on the services of our senior management team;
The susceptibility of our Notes receivable – Rights to MSRs to fluctuations in valuation;
The impact of the change in our accounting convention related to the valuation of our Notes receivable – Rights to MSRs and timing and cost of the remediation of a related material weakness in our internal control over financial reporting as described in the Explanatory Note and in Part II, Item 4, "Controls and Procedures;"
Uncertainty related to future government regulation and housing policies;
Future legal proceedings against us or Ocwen;
Assumptions regarding the availability of refinancing options for subprime and Alt-A borrowers;
Assumptions regarding our tax rate and decisions by taxing authorities;
General economic and market conditions; and
Assumptions regarding amount and timing of additional debt or equity offerings.

All forward-looking statements are subject to certain risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results, performance or achievements could differ materially from those expressed in, or implied by, any such forward-looking statements. Important factors that could cause or contribute to such difference include those risks specific to our business detailed within this report and our other reports and filings with the SEC including our Form 10-K/A dated August 18, 2014. You should not place undue reliance on such forward-looking statements, which speak only as of their dates. We undertake no obligation to update or revise forward-looking statements¸ whether as a result of new information, future events or otherwise. You should carefully consider the risk factors described under the heading “Risk Factors” within our Form 10-K/A dated August 18, 2014 and Part II, Item 1A, “Risk Factors".

INTRODUCTION

The following discussion of our results of operations and changes in financial condition and liquidity should be read in conjunction with our Interim Condensed Consolidated Financial Statements and the related notes, all included elsewhere in this report on Form 10-Q/A and within our Form 10-K/A.


27


The financial information included herein has been restated for the effects of the adjustment described in the Explanatory Note and in Note 17 of Part I, Item I, “Interim Condensed Consolidated Financial Statements”.

OVERVIEW

Strategic Priorities

Now in our third year of operations, we intend to continue to execute upon our chief objective which is to acquire residential mortgage assets. During the past quarter, we expanded our residential mortgage asset portfolio by completing our first acquisition of GNMA EBO loans from Ocwen.

We intend to continue to acquire additional residential mortgage assets in two ways:

In order to remain fully invested and to offset the impact of prepayments in our servicing portfolio, we expect to continue to utilize cash flow from operations in excess of our dividend to purchase residential mortgage assets that have low credit or valuation risk; and
We may issue additional debt or equity to allow us to execute larger purchases of residential mortgage assets. These purchases will be subject to market conditions and will likely require that additional financing capacity be arranged.

We may explore other residential mortgage opportunities with characteristics similar to our current residential mortgage asset portfolio, including stable net asset value, low credit risk and attractive, risk adjusted yield such as the following:

Agency servicing advances;
Mortgage servicing rights on newly originated non-agency loans; and
Warehouse financing on newly originated agency loans.
Ocwen stated that it has servicing assets with approximately $65 billion of UPB that are similar to the assets that HLSS currently holds. Based on our estimates of prepayment speeds, we believe that we can maintain our servicing portfolio for approximately two years by purchasing these assets from Ocwen. Although we cannot guarantee that future transactions will occur, we believe that Ocwen perceives that it has benefited from such transactions and will, therefore, continue to sell mortgage servicing assets to us in this manner.

Our results for the three months ended ended March 31 are discussed in more detail below.

Changes in Results of Operations Summary

The following table summarizes our condensed consolidated operating results for the three months ended March 31:

 
Three Months
 
2014
 
2013
   Revenue
$
106,127

 
$
48,376

   Operating expenses
4,256

 
2,037

   Income from operations
101,871

 
46,339

   Interest expense
37,511

 
18,242

   Income before income taxes
64,360

 
28,097

   Income tax expense

 
12

   Net income
$
64,360

 
$
28,085


Three Months Ended March 2014 versus 2013. Revenue primarily includes interest income recorded on Notes receivable – Rights to MSRs using the interest method. Our 2014 Interest income exceeds 2013 Interest income because our average UPB for the three months ended March 31, 2014 and 2013 was $177.9 billion and $80.4 billion. In addition, lower prepayment speeds for the UPB tied to our Notes receivable – Rights to MSRs contributed to greater Interest income during 2014. Average prepayment speeds were 12.7% for the three months ended March 31, 2013 compared to 9.9% during the three months ended March 31, 2014. We also recognized an increase in our interest income of $20,686 and $3,297, respectively, for the three months ended March 31, 2014 and 2013, as a result of the changes in the fair value of our Notes receivable – Rights to MSRs. Lastly, the

28


interest earned on our GNMA EBO Transaction during the three months ended March 31, 2014, contributed to the increase in interest income as it represents a new residential mortgage asset class for 2014.

Operating expenses increased period over period primarily because the scale of our business significantly increased as a result of various residential mortgage asset purchases. Operating expenses are primarily comprised of salaries and wages, Related party expenses and General and administrative expenses. Our average headcount period over period increased from fifteen to eighteen which primarily contributed to the increase in the Compensation and benefits portion of operating expenses. Related party expenses are related to the Ocwen Professional Services Agreement and the Altisource Administrative Services Agreement. The increase in Related party expenses primarily related to increased use of business strategy, tax and legal services as part of the Ocwen Professional Services Agreement. The increase in General and administrative expenses is primarily related to tax and legal expenses related to our research and pursuit of new investment opportunities and bank fees associated with our custodial accounts.

Our tax expense for both periods was largely impacted by our status as a Cayman Islands exempted company. The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation.

Summary Operating Information

We operate the business as a single reportable segment: residential mortgage assets. For purposes of our internal management reporting, we separately report the components of Interest income – notes receivable – Rights to MSRs which include Servicing fee revenue, Servicing expense, Amortization of Notes receivable - Rights to MSRs and Change in fair value of Notes receivable - Rights to MSRs. We provide a reconciliation of our reported results to our internal management reporting for the three months ended March 31, 2014 and March 31, 2013 in the following tables.

We executed our agreements with Ocwen with the intent that we would receive the total amount of the servicing fees collected and that we would pay Ocwen a subservicing fee that is determined based on its collections and advance ratio performance. We evaluate our operating performance and manage our business considering servicing fees collected and subservicing fees paid and maintain our internal management reporting on this basis. The following table presents our consolidated results of operations in accordance with GAAP reconciled to our internally reported financial results.


29


Our total revenue, total operating expenses and income from operations as presented in our Management Reporting shown below should be considered in addition to, and not as a substitute for total revenue, total operating expenses and income from operations determined in accordance with GAAP.

 
Condensed Consolidated Results (GAAP) (Restated)
 
Adjustments
 
Management Reporting (Non-GAAP)
For the three months ended March 31, 2014:
 
 
 
 
 
Revenue
 
 
 
 
 
Servicing fee revenue (1)
$

 
$
189,157

 
$
189,157

Interest income - notes receivable – Rights to MSRs (2)
102,538

 
(102,538
)
 

Interest income – other
2,961

 

 
2,961

Related party revenue
628

 

 
628

Total revenue
106,127

 
86,619

 
192,746

Operating expenses
 
 
 
 
 
Compensation and benefits
1,599

 

 
1,599

Servicing expense (3)

 
90,644

 
90,644

Amortization of Notes receivable - Rights to MSRs (4)


 
16,661

 
16,661

Change in fair value of Notes receivable - Rights to MSRs (5)

 
(20,686
)
 
(20,686
)
Related party expenses
372

 

 
372

General and administrative expenses
2,285

 

 
2,285

Total operating expenses
4,256

 
86,619

 
90,875

Income from operations
$
101,871

 
$

 
$
101,871

 
Condensed Consolidated Results (GAAP) (Restated)
 
Adjustments
 
Management Reporting (Non-GAAP)
For the three months ended March 31, 2013:
 
 
 
 
 
Revenue
 
 
 
 
 
Servicing fee revenue (1)
$

 
$
102,258

 
$
102,258

Interest income - notes receivable – Rights to MSRs (2)
47,867

 
(47,867
)
 

Interest income – other
102

 

 
102

Related party revenue
407

 

 
407

Total revenue
48,376

 
54,391

 
102,767

Operating expenses
 
 
 
 
 
Compensation and benefits
1,166

 

 
1,166

Servicing expense (3)

 
47,052

 
47,052

Amortization of Notes receivable - Rights to MSRs (4)

 
10,636

 
10,636

Change in fair value of Notes receivable - Rights to MSRs (5)

 
(3,297
)
 
(3,297
)
Related party expenses
226

 

 
226

General and administrative expenses
645

 

 
645

Total operating expenses
2,037

 
54,391

 
56,428

Income from operations
$
46,339

 
$

 
$
46,339


(1)
Servicing fee revenue reflects servicing fees received under our agreements with Ocwen.
(2)
Interest income – notes receivable – Rights to MSRs represents the net amount of servicing fees received less servicing fees paid, amortization of the Notes receivable – Rights to MSRs and changes in the fair value of Notes receivable – Rights to

30


MSRs. We exclude this interest income from our Management Reporting and instead report the individual components, including Servicing fee revenue, Servicing expense, Amortization of Notes receivable – Rights to MSRs and Change in fair value of Notes receivable – Rights to MSRs.
(3)
Servicing expense reflects the fee we paid under the agreements with Ocwen.
(4)
Amortization of MSRs reflects reductions in the value of the Notes receivable – Rights to MSRs due to UPB runoff.
(5)
Our methodology of determining the fair value of Notes receivable - Rights to MSRs is described in Part I, Item I, "Interim Condensed Consolidated Financial Statements – Note 3, Fair Value of Financial Instruments." In our Interim Condensed Consolidated Statements of Operations, we record changes in fair value as a component of Interest income - notes receivable - Rights to MSRs. In our Interim Condensed Consolidated Statements of Cash Flows, we record changes in fair value as Reductions to notes receivable - Rights to MSRs, and we record operating cash flows to the extent that an increase in fair value exceeds amortization.

Three months ended March 2014 versus 2013. Servicing fee revenue increased period over period because we owned the servicing rights for significantly greater average UPB during 2014. Servicing fee revenue is a function of principal and interest collected during the period and the contractual servicing fee rate. Average UPB for the three months ended March 31, 2014 and 2013 was $177.9 billion and $80.4 billion.

The servicing expense paid to Ocwen during the three months ended March 31, 2014 included $22,699 for the base fee and $67,945 in incentive fees. The servicing expense paid to Ocwen during the comparable 2013 period included $12,271 for the base fee and $34,781 in incentive fees. The difference is primarily attributable to increased average UPB period over period. Amortization of Notes receivable – Rights to MSRs relates to reduction in UPB due to portfolio run-off and is greater during 2014 due to larger average UPB. Lastly, in relation to our Notes receivable – Rights to MSRs, we recorded an increase in the fair value of $20,686 for the three months ended March 31, 2014 compared to $3,297 for the three months ended March 31, 2013.

The following table provides selected portfolio statistics as of March 31 (1):

(in thousands, except for loan count data)
 
2014
 
2013
 
% Change
Residential Assets Serviced
 
 
 
 
 
 
Unpaid principal balance:
 
 
 
 
 
 
Performing loans (2)
 
$
141,325,033

 
$
71,068,116

 
99
 %
Non-performing loans
 
31,075,264

 
19,548,192

 
59
 %
Non-performing real estate
 
3,366,449

 
1,904,520

 
77
 %
Total residential assets serviced
 
175,766,746

 
92,520,828

 
90
 %
 
 
 
 
 
 
 
Percent of total UPB:
 
 
 
 
 
 
Non-performing residential assets serviced
 
19.6
%
 
23.2
%
 
-16
 %
 
 
 
 
 
 
 
Number of:
 
 
 
 
 
 
Performing loans (1)
 
946,997

 
514,891

 
84
 %
Non-performing loans
 
156,963

 
98,408

 
60
 %
Non-performing real estate
 
18,445

 
10,560

 
75
 %
Total number of residential assets serviced
 
1,122,405

 
623,859

 
80
 %
 
 
 
 
 
 
 
Percent of total number:
 
 
 
 
 
 
Non-performing residential assets serviced
 
15.6
%
 
17.5
%
 
-11
 %
 

31


(1)
This table only includes the UPB related to our Notes receivable - Rights to MSRs.
(2)
Performing loans include those loans that are current or have been delinquent for less than 90 days in accordance with their original terms and those loans for which borrowers are making scheduled payments under loan modification, forbearance or bankruptcy plans. Performing loans also include loans for which we have master servicing rights which are reported based on scheduled UPB. We consider all other loans to be non-performing.
    
The following table provides selected portfolio statistics for the three months ended March 31:

(in thousands, except for loan count data)
 
2014
 
2013
 
% Change
Average residential assets serviced
 

$177,977,591

 

$80,444,886

 
121
 %
Prepayment speed (average CPR)
 
9.9
%
 
12.7
%
 
-22
 %
Average number of residential assets serviced
 
1,133,082

 
556,937

 
103
 %

The following tables provide information regarding changes in our portfolio of residential assets serviced for the three months ended March 31:

(in thousands, except for loan count data)
 
UPB
 
Loan Count
Servicing portfolio at December 31, 2013
 
$
180,403,208

 
1,148,193

Additions
 

 

Runoff
 
(4,636,462
)
 
(25,788
)
Servicing portfolio at March 31, 2014
 
$
175,766,746

 
1,122,405


(in thousands, except for loan count data)
 
UPB
 
Loan Count
Servicing portfolio at December 31, 2012
 
$
79,360,874

 
549,949

Additions
 
15,922,650

 
87,442

Runoff
 
(2,762,696
)
 
(13,532
)
Servicing portfolio at March 31, 2013
 
$
92,520,828

 
623,859


As of March 31, 2014, the balance of deferred servicing fees related to delinquent borrower payments was $455.4 million compared to $470.3 million at December 31, 2013.

Change in Financial Condition Summary

The overall increase in total assets of $560,475 and total liabilities of $528,222 during the three months ended March 31, 2014 primarily resulted from:

The completion of a GNMA EBO loan purchase from Ocwen totaling $556,618;
The creation of a new Mortgage Loan Facility which increased total liabilities by $472,734;
An advance financing receivable related to the GNMA EBO Transaction of $55,702; and
Advance facilities activity: we received $44,384 in Match funded advance remittances and had net proceeds of $59,558 from Match funded liabilities.

Our assets at March 31, 2014, include Notes receivable – Rights to MSRs which had a balance of $637,794 representing 8.1% of total assets at March 31, 2014. Notes receivable – Rights to MSRs are carried at fair value which is determined based on an appraisal prepared with the assistance of an independent valuation firm and requires the use of significant unobservable inputs. The most significant assumptions used in the appraisal are:

Discount rates reflecting the risk of earning the future income streams ranging from 15% to 22%;
Interest rate used for calculating the cost of servicing advances of 1-Month LIBOR plus 3.50%;
Mortgage loan prepayment projections ranging from 12% to 28% of the related mortgage lifetime projected prepayment rate; and

32


Delinquency rate projections ranging from 15% to 35% of the aggregate unpaid balance of the underlying mortgage loans.

The independent valuation firm reviewed the collateral attributes and the historical payment performance of the underlying mortgage servicing portfolio and compared them with similar mortgage servicing portfolios and with standard industry mortgage performance benchmarks to arrive at the assumptions set forth above. The selected collateral attributes and performance comparisons utilized were the voluntary prepayment performance, delinquency and foreclosure performance, operational cost comparison, average loan balance, weighted average coupon and note rate distribution, loan product type classification, geographic distribution and servicing advance behavior.

The unobservable inputs that have the most significant effect on the fair value of Notes receivable – Rights to MSRs are the mortgage loan prepayment rate projections and delinquency rate projections; however, any significant increase (decrease) in discount rates, interest rates, mortgage loan prepayment projections or delinquency rate projections, each in isolation, would result in a substantially lower (higher) valuation.

Total equity amounted to $1,248,700 at March 31, 2014 as compared to $1,216,447 at December 31, 2013. This increase of $32,253 is primarily due to net income of $64,360, offset by dividends declared of $31,958. In addition, we recorded $149 of unrealized losses (net of tax) on interest rate swaps that we designated as cash flow hedges.

LIQUIDITY AND CAPITAL RESOURCES

We define liquidity as unencumbered cash balances plus unused, collateralized advance financing capacity. Our liquidity as of March 31, 2014, as measured by cash and available credit, was $101,742, a decrease of $59,231 from December 31, 2013. At March 31, 2014, our cash position was $75,920 compared to $87,896 at December 31, 2013, and we had $25,822 of fully collateralized available credit on our advance financing facilities which we deem to be similar to cash. We did not draw on this available credit to minimize interest expense during the current period. Regarding the investment of cash, our investment policies emphasize principal preservation and availability by limiting the investment to demand deposit accounts.

Investment policy and funding strategy. Our primary sources of funds for near-term liquidity are:

Interest income - notes receivable - Rights to MSRs;
Proceeds from liquidation of GNMA EBO loans; and
Proceeds from Match funded liabilities.

Potential long-term sources of liquidity include proceeds from the issuance of debt or equity.

Our primary uses of funds are:

Payments for advances in excess of collections on our existing servicing portfolio;
Payments of interest and operating costs;
Purchases of residential mortgage assets; and
Repayments of borrowings.

In managing our liquidity position, our primary focus is on maintaining sufficient cash and unused borrowing capacity to meet our advancing obligations, pay expenses and purchase additional residential mortgage assets. We regularly monitor and project our cash position and borrowing capacity and consider this in sizing asset purchases.

At March 31, 2014, $818,320 of our total maximum borrowing capacity on our advance facilities remained unused. We maintain unused borrowing capacity for three reasons:

As a protection should advances increase due to increased delinquencies;
As a way to retire our term notes as they mature; and
To provide capacity for the acquisition of additional residential mortgage assets.

Outlook. We believe that our cash balance and unused advance financing capacity are sufficient to meet foreseeable requirements.


33


Debt and Match funded liability summary. As of March 31, 2014, we had $818,320 of unused borrowing capacity on our advance facilities. Our ability to continue to pledge collateral under our advance facilities depends on the performance of the collateral. Currently, the large majority of our collateral qualifies for financing. The debt covenants for our advance facilities, senior secured term loan facility and Mortgage Loan Facility (“Facilities”) require that we maintain minimum levels of liquid assets. Failure to comply with these covenants could result in restrictions on new borrowings or the early termination of our Facilities. We believe we are in compliance with these covenants and do not expect them to restrict our activities.

During the current quarter, we issued two term notes with a combined balance of $800,000. In addition, we renewed our Series 2013 VF 1 Notes to reduce the cost of borrowing and extend the term by one year. We also retired term notes of $650,000. Lastly, we entered into a Mortgage Loan Facility to partially finance our purchase of GNMA EBO loans. This facility had an outstanding balance of $472,734 at March 31, 2014.

Liquidity Risk. We are exposed to liquidity risk should the cash required to make new advances pursuant to servicing contracts and our agreements with Ocwen exceed the amount of advance repayments. In general, we finance our operations through operating cash flows and have advance financing facilities in place with sufficient capacity to cover the majority of cash required to make new advances. However, our Facilities contain borrowing conditions which if not met, could affect our ability to borrow on new advances and affect our liquidity.

Cash flows for the three months ended March 31.

The following table presents a summary of our cash flows for the three months ended March 31:

 
2014
 
2013
Net income
$
64,360

 
$
28,085

Adjustments for non-cash items
1,570

 
3,106

Changes in working capital amounts
37,837

 
339,200

Cash flows from operating activities
103,767

 
370,391

Cash flows from investing activities
(608,794
)
 
(806,980
)
Cash flows from financing activities
493,051

 
421,698

Net decrease in cash
(11,976
)
 
(14,891
)
Cash at beginning of period
87,896

 
76,048

Cash at end of period
$
75,920

 
$
61,157


Three months ended March 31, 2014. Our operating activities provided $103,767 of cash. Components of operating cash flows included amounts provided by a decrease in working capital accounts of $37,837 and by our Net income of $64,360, adjusted for amortization of debt issuance costs of $4,962, accretion of our original issuance discount related to our senior secured term loan facility of $185 and amortization of our GNMA EBO loan purchase premium of $448 and an increase in the fair value of our Notes receivable – Rights to MSRs in excess of Reductions in Notes receivable – Rights to MSRs of $4,025. The primary contributors to the changes in working capital accounts were reductions in Match funded advances of $44,384 and Related party receivables of $2,450, offset by increases in debt service accounts of $3,077 and a decrease in Related party payables of $2,847. The remainder of the working capital activity relates to a net decrease in cash flows from operations due to movements in other assets and other liabilities of $3,073, primarily attributable to an increase in accrued interest income related to the GNMA EBO Transaction.

The primary driver of the decrease in Related party receivables was attributable to the change in Match funded advance collections due from Ocwen of $3,584. The decrease in Related party payables was primarily attributable to the decrease in subservicing fees payable to Ocwen of $4,376, offset by an increase in custodial fees payable to Ocwen of $1,354. The majority of our Match funded advance collections of $44,384 were immediately used to pay down our outstanding Match funded liabilities. Refer to the financing activities discussion below for more details regarding Match funded liability cash movements during the current period. Lastly, the increase in debt service accounts primarily relates to payments made to the trustees of our advance financing facilities. The trustees release these funds to pay down our Match funded liabilities on scheduled funding dates.

Our investing activities used $608,794 of cash during the three months ended March 31, 2014 which primarily related to our acquisition of GNMA EBO loans from Ocwen. We paid $556,618 to Ocwen for the GNMA EBO loans. This purchase was offset

34


by reductions of $3,526 from the payoff of certain loans in our GNMA EBO loan portfolio. In addition, we used $55,702 of cash to finance GNMA EBO advances.

Our financing activities provided $493,051 of cash. We had net proceeds from Match funded liabilities of $59,558 during the period. We received $472,734 in proceeds from our Mortgage Loan Facility to help fund our GNMA EBO loan purchase from Ocwen. These amounts were offset by payments of debt issuance costs of $6,408 and a quarterly principal payment of $875 on our senior secured term loan facility. Additionally, we paid dividends of $31,958.

Three months ended March 31, 2013. Our operating activities provided $370,391 of cash. Components of operating cash flows included amounts provided by changes in working capital accounts of $339,200 and by our Net income of $28,085, adjusted for amortization of debt issuance costs of $3,106. The primary contributors to the change in working capital accounts were reductions in Match funded advances of $277,141, decreases in Related party receivables of $24,292 and debt service accounts of $5,498, and increases in related party payables of $32,076. The remainder of the working capital activity relates to a net increase in cash flows from operations due to movements in other assets and other liabilities of $193.

The primary driver of the change in Related party receivables was Match funded advance collections due from Ocwen of $21,265. Increases in related party payables were primarily attributable to subservicing fees payable to Ocwen of $17,056 for March 2013 subservicing activity and an amount due to Ocwen of $17,758 for advances made on our behalf at the end of March 2013. The collection of Match funded advances of $277,141 was used to pay down $231,134 of our Match funded liabilities which resulted in net cash provided of $46,007. Refer to the financing activities discussion below for more details regarding Match funded liability cash movements during the current period.

Our investing activities used $806,980 of cash during the period which primarily related to our acquisition of Rights to MSRs and related Match funded advances associated with our Flow 3 purchase from Ocwen. We paid $100,737 to Ocwen for Notes receivable – Rights to MSRs and $713,582 for Match funded advances. Finally, we had a reduction in Notes receivable – Rights to MSRs of $7,339 due to UPB runoff and the application of the interest method.

Our financing activities provided $421,698 of cash. The underwriters’ exercise of their over-allotment option provided $17,633 of cash, net of offering expenses. We borrowed $661,177 on our Match funded advance financing facility related to the Flow 3 purchase from Ocwen, and overall, we had net proceeds from Match funded liabilities of $430,043 during the period. This amount was offset by payments of debt issue costs totaling $5,036. Additionally, we paid dividends equal to $20,920. Finally, we paid offering costs of $22 associated with the over-allotment exercise during the period.

DIVIDENDS

We intend to distribute approximately 90 percent of our earnings over time in the form of monthly cash dividends. During 2014, we declared the following dividends:

Record Date
Payment Date
Amount per Ordinary Share
January 31, 2014
February 10, 2014
$0.15
February 28, 2014
March 10, 2014
$0.15
March 31, 2014
April 10, 2014
$0.15
April 30, 2014
May 12, 2014
$0.16
May 30, 2014
June 10, 2014
$0.16
June 30, 2014
July 10, 2014
$0.16


35


CONTRACTUAL OBLIGATIONS, OFF-BALANCE SHEET ARRANGEMENTS AND OTHER MATTERS

Contractual Obligations

We believe that we have adequate resources to fund all unfunded commitments to the extent required and meet all contractual obligations as they come due. Such contractual obligations include payments on our senior secured term loan facility and operating leases. The following table sets forth certain information regarding our contractual obligations as of March 31, 2014:

 
Total
 
Less than 1 year
 
1 – 3 years
 
3 -5 years
 
More than 5 years
Operating leases (1)
$
47

 
$
47

 
$

 
$

 
$

Senior secured term loan facility (2)
347,375

 
3,500

 
7,000

 
7,000

 
329,875

Total contractual cash obligations
$
347,422

 
$
3,547

 
$
7,000

 
$
7,000

 
$
329,875


(1)
We sublease office space from Altisource in Atlanta, Georgia and West Palm Beach, Florida in the aggregate amount of $7 per month. The leases terminate on October 31, 2014.
(2)
Our senior secured term loan facility has an expected maturity date of June 27, 2020 and requires scheduled quarterly principal payments of $875. Any remaining principal outstanding on the senior secured term loan facility becomes due at maturity.

We exclude our Match funded liabilities from the contractual obligation table above because they represent non-recourse debt that has been collateralized by Match funded advances which are not available to satisfy general claims against HLSS. Holders of the notes issued by the SPE have no recourse against any assets other than the Match funded advances that serve as collateral for the securitized debt. In addition, we exclude the Mortgage Loan Facility from the contractual obligation table above because this facility is in a SPE, with our GNMA EBO loans serving as collateral. It is expected that the cash flows of the GNMA EBO loan collateral will satisfy the outstanding balance on the Mortgage Loan Facility, and therefore, we do not consider this outstanding balance to be a contractual obligation of HLSS.


Off-Balance Sheet Arrangements

In the normal course of business, we may engage in transactions with a variety of financial institutions and other companies that we do not reflect on our Interim Condensed Consolidated Balance Sheet. We are subject to potential financial loss if the counterparties to our off-balance sheet transactions are unable to complete an agreed upon transaction. We seek to limit counterparty risk through financial analysis, dollar limits and other monitoring procedures. We also entered into non-cancelable operating leases principally for our office facilities.

Derivatives. We record all derivative transactions at fair value on our Interim Condensed Consolidated Balance Sheet. We use these derivatives primarily to manage our interest rate risk. The notional amounts of our derivative contracts do not reflect our exposure to credit loss.

Involvement with SPEs. We use SPEs in the financing of our Match funded advances and whole mortgage loans. We use securitization facilities to finance these assets. The SPEs to which these assets are transferred in these securitization transactions are included in our Interim Condensed Consolidated Financial Statements because we are the primary beneficiary of the SPEs which are also VIEs. The holders of the debt of the Match funded advance financing SPEs can look only to the assets of the SPEs for satisfaction of the debt and have no recourse against HLSS. The holders of the debt of the mortgage loans SPE have recourse against HLSS if the assets of the SPE are not able to satisfy the debt of the SPE.

VIEs. If we determine that we are the primary beneficiary of a VIE, we report the VIE in our Interim Condensed Consolidated Financial Statements. As of March 31, 2014, all of our VIEs are fully consolidated.


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Related Parties

We have entered into various agreements with Ocwen and Altisource. William C. Erbey, our founder and the Chairman of our Board of Directors, is also the Chairman of the Board of Directors of Ocwen and Altisource. We use actual costs incurred plus a 15% mark-up as a proxy for market rates.

At March 31, 2014, Ocwen owed us $1,284 for professional services provided pursuant to the Professional Services Agreement. During the three months ended March 31, 2014 and 2013 we earned fees of $628 and $407 for services provided to Ocwen pursuant to the Professional Services Agreement. Additionally, during the three months ended March 31, 2014 and 2013 we incurred expenses of $154 and $30 for services received from Ocwen pursuant to the Professional Services Agreement. Revenue and expenses from the Professional Services Agreement are included within Related party revenue and Related party expenses, respectively.

During the three months ended March 31, 2014 and 2013 we incurred expenses of $218 and $196 for services provided to us pursuant to the Altisource Administrative Services Agreement. We reported these amounts within Related party expenses for each period then ended.

CRITICAL ACCOUNTING POLICIES

There were no significant changes to the accounting policies that we believe are the most critical to an understanding of our results of operations and financial condition which are disclosed in our most recent Form 10-K/A for the year ended December 31, 2013.

RECENT ACCOUNTING DEVELOPMENTS

See Part I, Item 1, “Interim Condensed Consolidated Financial Statements — Note 1, Summary of Significant Accounting Policies — Recent Accounting Pronouncements.”

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (DOLLARS IN THOUSANDS)

Market risk includes liquidity risk and interest rate risk. Market risk also reflects the risk of decline in the valuation of financial instruments and the collateral underlying loans. Our Investment Committee reviews significant transactions that may impact market risk and is authorized to utilize a wide variety of techniques and strategies to manage market risk including, in particular, interest rate risk.

Liquidity Risk

See the “Liquidity and Capital Resources” section for additional discussion of liquidity and related risks.

Interest Rate Risk

Interest rate risk is a function of (i) the timing and (ii) the dollar amount of assets and liabilities that re-price at various points in time. We are exposed to interest rate risk to the extent that our interest rate sensitive liabilities mature or re-price at different speeds, or different bases, than our interest-earning assets.

Our primary strategy to manage the impact of changes in interest rates is to primarily borrow at fixed rates on the term notes in our Match funded liability structure. We also receive the floating rate interest earned on custodial account balances related to the mortgage loans serviced under our subservicing agreement with Ocwen. Further, we executed a hedging strategy aimed at mitigating the impact of changes in variable interest rates within a certain period based on the projected excess of interest rate sensitive liabilities over interest rate sensitive assets. Future variances between the projected excess of interest rate sensitive liabilities over interest rate sensitive assets and actual results could cause us to become over-hedged or under-hedged. Lastly, we are partially compensated for the cost of excess advances because the performance based incentive fee payable to Ocwen in any month will be reduced by an amount equal to 1 - Month LIBOR plus 275 bps per annum of the amount of any such excess servicing advances if the advance ratio exceeds a predetermined level for that month.


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If interest rates increase by 1% on our variable-rate borrowing and interest earning account balances, we estimate a net positive impact of approximately $1,607 resulting from an increase of $10,498 in annual interest income compared to an increase of $8,891 in annual interest expense based on March 31, 2014 balances.

 
March 31,
2014
Variable-rate borrowings outstanding (1)
$
1,648,926

Fixed-rate borrowings outstanding
3,678,500

Custodial account balances (excluded from our Interim Condensed Consolidated Balance Sheet)
973,481

Notional balance of interest rate swaps (2)
470,249


(1)
A portion of this balance is attributable to our senior secured term loan facility which has an interest rate of 1- Month LIBOR plus 3.50%, with a 1.00% LIBOR floor. We also include the outstanding balance of our Mortgage Loan Facility which has an interest rate of 1- Month LIBOR plus 3.05%. We use the Mortgage Loan Facility to finance a portion of our fixed rate Loans held for investment. Because we finance our fixed rate Loans held for investment using variable rate borrowings, we face interest rate risk related to our Loans held for investment in a rising interest rate environment. Lastly, we adjusted this balance to exclude financing of advances over the predetermined advance ratio for the month of March 2014.
(2)
Relates to the non-forward starting interest rate swaps entered into to hedge our exposure to rising interest rates on a portion of our outstanding variable-rate borrowings.

Our Interim Condensed Consolidated Balance Sheet at March 31, 2014 includes $75,920 of interest-earning cash accounts and $1,075 of interest-earning collateral accounts.
ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's filings under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and to ensure that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act) as of March 31, 2014. Based upon that evaluation, and in connection with the restatements described in Note 17 to the accompanying condensed consolidated financial statements, management has determined that the Company's disclosure controls and procedures were not effective as of March 31, 2014 solely as a result of this material weakness which had not been remediated as of March 31, 2014.

We are committed to a strong internal control environment and are currently taking steps to remediate this material weakness. Specifically, management will establish an internal cash flow model to evaluate changes in fair value of our Notes receivable - Rights to MSRs, and this model will be reconciled to valuations provided by independent third parties. We will also include the effect of fair value adjustments in the application of the interest method in accounting for our Notes receivable - Rights to MSRs. Additionally, we will perform reconciliations of data underlying the valuation models provided to independent valuation firms to ensure the data is accurate. We intend to implement this process immediately and to complete remediation during 2014. We believe that this remediation action will represent significant improvement in our internal control environment.

There have been no changes in our internal control over financial reporting that have occurred during the fiscal quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Part I, Item 1, “Interim Condensed Consolidated Financial Statements — Note 15, “Commitments and Contingencies,” for more information regarding legal proceedings.

ITEM 1A. RISK FACTORS
The only change to our risk factors since our filing of our Form 10-K/A is set forth below.

Governmental bodies may restrict our transactions with related parties or institute policies that adversely affect Ocwen’s business which could increase our operating expenses, reduce our revenues or otherwise adversely affect our business, financial condition, results of operations and ability to grow.

Our business strategy, including our asset purchase strategy, may be affected by regulatory considerations. The recent trend among federal, state and local lawmakers and regulators has been toward increasing laws, regulations and investigative proceedings with regard to residential mortgage servicing. Our success in part depends on our ability to purchase additional residential mortgage assets from parties like Ocwen and engage high quality mortgage servicers, like Ocwen, to service these assets. If regulators restrict any aspect of our or Ocwen’s business strategy, including Ocwen’s ability to transact business with us, we may be required to alter our strategy, which could include revisions to our residential mortgage asset purchase plans or changes with respect to our mortgage servicing arrangements. Any restrictions imposed on Ocwen’s ability to transact business with us could have a material adverse impact on our business. Ocwen has disclosed that it is subject to a number of federal and state regulatory investigations, examinations, inquiries and requests for information which have resulted or could, in the future, result in adverse regulatory action against Ocwen. One or more of such regulatory actions or Ocwen’s failure to comply with any commitments it makes with respect to such regulatory actions could adversely affect Ocwen’s business or impose additional requirements or restrictions on its activities. Regulatory action against Ocwen could increase our operating expenses, reduce our revenues or otherwise adversely affect our business, financial condition, results of operations and ability to grow.    

We include a discussion of all other principal risks and uncertainties that affect or could affect our business operations within our latest Form 10-K/A.

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ITEM 6. EXHIBITS
Exhibit Index
10.1
Amendment No.1 to the Master Repurchase Agreement among HLSS Mortgage Master Trust, Barclays Bank PLC and Home Loan Servicing Solutions, Ltd. dated as of April 15, 2014. Incorporated by reference to the registrant’s Current Report on Form 8-K filed on April 17, 2014.
 
 
10.2
Employment contract, dated as of January 1, 2014, between HLSS SEZ LP and John P. Van Vlack. Incorporated by reference to the registrant’s Current Report on Form 8-K filed on April 17, 2014.
 
 
10.3
Employment contract, dated as of January 1, 2014, between HLSS SEZ LP and Richard Delgado. Incorporated by reference to the registrant’s Current Report on Form 8-K filed on April 17, 2014.
 
 
10.4
Employment contract, dated as of January 1, 2014, between HLSS SEZ LP and James E. Lauter. Incorporated by reference to the registrant’s Current Report on Form 8-K filed on April 17, 2014.
 
 
10.5
Mortgage Loan Purchase and Servicing Agreement, dated as of March 3, 2014, between Ocwen Loan Servicing, LLC and HLSS Mortgage Master Trust. Incorporated by reference to the registrant’s Current Report on Form 8-K filed on March 6, 2014.
 
 
10.6
Receivables Sale Agreement, dated as of March 3, 2014, between Ocwen Loan Servicing, LLC and HLSS Mortgage Master Trust. Incorporated by reference to the registrant’s Current Report on Form 8-K filed on March 6, 2014.
 
 
10.7
Master Repurchase Agreement, dated as of March 3, 2014, by and among Barclays Bank PLC, HLSS Mortgage Master Trust and Home Loan Servicing Solutions, Ltd. Incorporated by reference to the registrant’s Current Report on Form 8-K filed on March 6, 2014.
 
 
10.8
Second Amended and Restated Indenture, dated as of February 14, 2014, by and among HLSS Servicer Advance Receivables Trust II, Deutsche Bank National Trust Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC and Barclays Bank PLC. Incorporated by reference to the registrant’s Current Report on Form 8-K filed on February 19, 2014.
 
 
10.9
Second Amended and Restated Indenture Supplement, dated as of February 14, 2014, by and among HLSS Servicer Advance Receivables Trust II, Deutsche Bank National Trust Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC and Barclays Bank PLC. Incorporated by reference to the registrant’s Current Report on Form 8-K filed on February 19, 2014.
 
 
10.10
Sixth Amended and Restated Indenture, dated as of January 17, 2014, by and among HLSS Servicer Advance Receivables Trust, Deutsche Bank National Trust Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC, Barclays Bank PLC, Wells Fargo Securities, LLC and Credit Suisse AG, New York Branch. Incorporated by reference to the registrant’s Current Report on Form 8-K filed on January 23, 2014.
 
 
10.11
Series 2014-T1 Indenture Supplement, dated as of January 17, 2014, by and among HLSS Servicer Advance Receivables Trust, Deutsche Bank National Trust Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC and Barclays Bank PLC. Incorporated by reference to the registrant’s Current Report on Form 8-K filed on January 23, 2014.
 
 
10.12
Series 2014-T2 Indenture Supplement, dated as of January 17, 2014, by and among HLSS Servicer Advance Receivables Trust, Deutsche Bank National Trust Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC and Barclays Bank PLC. Incorporated by reference to the registrant’s Current Report on Form 8-K filed on January 23, 2014.
 
 
11.1
Computation of earnings per share. Incorporated by reference from “PART I – FINANCIAL INFORMATION; ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)” on page 3 herein.
 
 
31.1
Certification of the Chief Executive Officer pursuant to Section 312 of the Sarbanes-Oxley Act of 2002 (filed herewith)
 
 
31.2
Certification of the Chief Financial Officer pursuant to Section 312 of the Sarbanes-Oxley Act of 2002 (filed herewith)
 
 
32.1
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
 
 
32.2
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
 
 
101.INS
XBRL Instance Document (filed herewith)

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101.SCH
XBRL Taxonomy Extension Schema Document (filed herewith)
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
* Furnished (and not filed) herewith pursuant to Item 601(b)(32)(ii) of Regulation S-K under the Exchange Act.


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Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
 
 
HOME LOAN SERVICING SOLUTIONS, LTD.
 
 
 
 
 
Date:
 
August 18, 2014
 
By:/s/ James E. Lauter
 
 
 
 
James E. Lauter
 
 
 
 
Chief Financial Officer and Chief Accounting Officer
 
 
 
 
(On behalf of the Registrant and as its principal financial officer)


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