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EX-32 - EXHIBIT 32 - WALTER INVESTMENT MANAGEMENT CORPa32fy2016q1.htm
EX-10.3 - EXHIBIT 10.3 - WALTER INVESTMENT MANAGEMENT CORPa103fy2016q1.htm
EX-31.1 - EXHIBIT 31.1 - WALTER INVESTMENT MANAGEMENT CORPa311fy2016q1.htm
EX-10.1 - EXHIBIT 10.1 - WALTER INVESTMENT MANAGEMENT CORPa101fy2016q1.htm
EX-31.2 - EXHIBIT 31.2 - WALTER INVESTMENT MANAGEMENT CORPa312fy2016q1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 _______________________________________________________________________________________
Form 10-Q
 
 
_______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________          
Commission file number: 001-13417
 
_______________________________________________________________________________________
Walter Investment Management Corp.
(Exact name of registrant as specified in its charter)
 
_______________________________________________________________________________________ 
 
Maryland
 
13-3950486
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
3000 Bayport Drive, Suite 1100
Tampa, FL
 
33607
(Address of principal executive offices)
 
(Zip Code)
(813) 421-7600
(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  o
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  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
 
 
 
 
 
 
Large accelerated filer
 
x
 
Accelerated filer
 
o
 
 
 
 
 
 
 
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
The registrant had 35,741,532 shares of common stock outstanding as of April 28, 2016.
_______________________________________________________________________________________ 
 



WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
FORM 10-Q
INDEX
 
 
 
 
 
 
Page
No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
 
March 31, 
 2016
 
December 31, 
 2015
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Cash and cash equivalents
 
$
194,418

 
$
202,828

Restricted cash and cash equivalents
 
723,280

 
708,099

Residential loans at amortized cost, net (includes $4,554 and $4,457 in allowance for loan losses at March 31, 2016 and December 31, 2015, respectively)
 
549,078

 
541,406

Residential loans at fair value
 
12,543,396

 
12,673,439

Receivables, net (includes $14,118 and $16,542 at fair value at March 31, 2016 and December 31, 2015, respectively)
 
227,146

 
214,398

Servicer and protective advances, net (includes $120,082 and $120,338 in allowance for uncollectible advances at March 31, 2016 and December 31, 2015, respectively)
 
1,586,188

 
1,595,911

Servicing rights, net (includes $1,427,331 and $1,682,016 at fair value at March 31, 2016 and December 31, 2015, respectively)
 
1,528,044

 
1,788,576

Goodwill
 
371,695

 
367,911

Intangible assets, net
 
80,907

 
84,038

Premises and equipment, net
 
104,364

 
106,481

Deferred tax assets, net
 
148,214

 
108,050

Other assets (includes $68,364 and $58,512 at fair value at March 31, 2016 and December 31, 2015, respectively)
 
223,205

 
200,364

Total assets
 
$
18,279,935

 
$
18,591,501

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Payables and accrued liabilities (includes $20,795 and $6,475 at fair value at March 31, 2016 and December 31, 2015, respectively)
 
$
629,753

 
$
639,980

Servicer payables
 
630,267

 
603,692

Servicing advance liabilities
 
1,202,036

 
1,229,280

Warehouse borrowings
 
1,201,788

 
1,340,388

Servicing rights related liabilities at fair value
 
105,559

 
117,000

Corporate debt
 
2,155,356

 
2,157,424

Mortgage-backed debt (includes $564,832 and $582,340 at fair value at March 31, 2016 and December 31, 2015, respectively)
 
1,025,704

 
1,051,679

HMBS related obligations at fair value
 
10,697,435

 
10,647,382

Total liabilities
 
17,647,898

 
17,786,825

Commitments and contingencies (Note 11)
 

 

Stockholders' equity:
 
 
 
 
Preferred stock, $0.01 par value per share:
 
 
 
 
Authorized - 10,000,000 shares
 
 
 
 
Issued and outstanding - 0 shares at March 31, 2016 and December 31, 2015
 

 

Common stock, $0.01 par value per share:
 
 
 
 
Authorized - 90,000,000 shares
 
 
 
 
Issued and outstanding - 35,632,811 and 35,573,405 shares at March 31,2016 and December 31, 2015, respectively
 
356

 
355

Additional paid-in capital
 
591,491

 
591,454

Retained earnings
 
39,352

 
212,054

Accumulated other comprehensive income
 
838

 
813

Total stockholders' equity
 
632,037

 
804,676

Total liabilities and stockholders' equity
 
$
18,279,935

 
$
18,591,501


3



The following table presents the assets and liabilities of the Company’s consolidated variable interest entities, which are included on the consolidated balance sheets above. The assets in the table below include those assets that can only be used to settle obligations of the consolidated variable interest entities. The liabilities in the table below include third-party liabilities of the consolidated variable interest entities only, and for which creditors or beneficial interest holders do not have recourse to the Company, and exclude intercompany balances that eliminate in consolidation.

 
 
March 31, 
 2016
 
December 31, 
 2015
ASSETS OF CONSOLIDATED VARIABLE INTEREST ENTITIES THAT CAN ONLY BE USED TO SETTLE THE OBLIGATIONS OF CONSOLIDATED VARIABLE INTEREST ENTITIES:
 
(unaudited)
 
 
Restricted cash and cash equivalents
 
$
58,678

 
$
59,705

Residential loans at amortized cost, net
 
493,965

 
500,563

Residential loans at fair value
 
578,539

 
526,016

Receivables
 
14,277

 
16,542

Servicer and protective advances, net
 
1,120,276

 
1,136,246

Other assets
 
14,667

 
12,170

Total assets
 
$
2,280,402

 
$
2,251,242

 
 
 
 
 
LIABILITIES OF THE CONSOLIDATED VARIABLE INTEREST ENTITIES FOR WHICH CREDITORS OR BENEFICIAL INTEREST HOLDERS DO NOT HAVE RECOURSE TO THE COMPANY:
 
 
 
 
Payables and accrued liabilities
 
$
3,489

 
$
3,435

Servicing advance liabilities
 
973,514

 
992,769

Mortgage-backed debt (includes $564,832 and $582,340 at fair value at March 31, 2016 and December 31, 2015, respectively)
 
1,025,704

 
1,051,679

Total liabilities
 
$
2,002,707

 
$
2,047,883

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


4



WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in thousands, except per share data)

 
 
For the Three Months 
 Ended March 31,
 
 
2016
 
2015
REVENUES
 
 
 
 
Net servicing revenue and fees
 
$
(105,762
)
 
$
90,887

Net gains on sales of loans
 
84,477

 
125,227

Net fair value gains on reverse loans and related HMBS obligations
 
35,208

 
30,774

Interest income on loans
 
12,171

 
31,941

Insurance revenue
 
10,367

 
14,131

Other revenues
 
30,310

 
17,897

Total revenues
 
66,771

 
310,857

 
 
 
 
 
EXPENSES
 
 
 
 
Salaries and benefits
 
132,639

 
147,228

General and administrative
 
129,606

 
128,647

Interest expense
 
64,248

 
74,871

Depreciation and amortization
 
14,423

 
16,632

Other expenses, net
 
2,506

 
4,047

Total expenses
 
343,422

 
371,425

 
 
 
 
 
OTHER GAINS (LOSSES)
 
 
 
 
Gain on extinguishment
 
928

 

Other net fair value losses
 
(2,144
)
 
(872
)
Other
 
(1,024
)
 
11,762

Total other gains (losses)
 
(2,240
)
 
10,890

 
 
 
 
 
Loss before income taxes
 
(278,891
)
 
(49,678
)
Income tax benefit
 
(106,189
)
 
(18,670
)
Net loss
 
$
(172,702
)
 
$
(31,008
)
 
 
 
 
 
Comprehensive loss
 
$
(172,677
)
 
$
(30,981
)
 
 
 
 
 
Net loss
 
$
(172,702
)
 
$
(31,008
)
 
 
 
 
 
Basic loss per common and common equivalent share
 
$
(4.85
)
 
$
(0.82
)
Diluted loss per common and common equivalent share
 
(4.85
)
 
(0.82
)
 
 
 
 
 
Weighted-average common and common equivalent shares outstanding — basic
 
35,579

 
37,718

Weighted-average common and common equivalent shares outstanding — diluted
 
35,579

 
37,718

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

5



WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(in thousands, except share data)

 
 
Common Stock
 
Additional Paid-
In Capital
 
Retained
Earnings
 
Accumulated Other
Comprehensive
Income
 
 
 
 
Shares
 
Amount
 
 
 
 
Total
Balance at January 1, 2016
 
35,573,405

 
$
355

 
$
591,454

 
$
212,054

 
$
813

 
$
804,676

Net loss
 

 

 

 
(172,702
)
 

 
(172,702
)
Other comprehensive income, net of tax
 

 

 

 

 
25

 
25

Share-based compensation
 

 

 
859

 

 

 
859

Tax shortfall on share-based compensation
 

 

 
(656
)
 

 

 
(656
)
Issuance of shares under incentive plans, net
 
59,406

 
1

 
(166
)
 

 

 
(165
)
Balance at March 31, 2016
 
35,632,811

 
$
356

 
$
591,491

 
$
39,352

 
$
838

 
$
632,037

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



6



WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

 
 
For the Three Months 
 Ended March 31,
 
 
2016
 
2015
Operating activities
 
 
 
 
Net loss
 
$
(172,702
)
 
$
(31,008
)
 
 
 
 
 
Adjustments to reconcile net loss to net cash provided by operating activities
 
 
 
 
Net fair value gains on reverse loans and related HMBS obligations
 
(35,208
)
 
(30,774
)
Amortization of servicing rights
 
4,611

 
7,013

Change in fair value of servicing rights
 
326,580

 
129,235

Change in fair value of servicing rights related liabilities
 
(7,191
)
 
(763
)
Change in fair value of charged-off loans
 
(10,939
)
 

Other net fair value losses
 
4,606

 
3,642

Accretion of discounts on residential loans and advances
 
(928
)
 
(3,608
)
Accretion of discounts on debt and amortization of deferred debt issuance costs
 
7,964

 
7,785

Provision for uncollectible advances
 
8,558

 
11,977

Depreciation and amortization of premises and equipment and intangible assets
 
14,423

 
16,632

Benefit for deferred income taxes
 
(40,819
)
 
(5,595
)
Share-based compensation
 
859

 
3,423

Purchases and originations of residential loans held for sale
 
(5,158,411
)
 
(5,633,936
)
Proceeds from sales of and payments on residential loans held for sale
 
5,422,461

 
5,649,119

Net gains on sales of loans
 
(84,477
)
 
(125,227
)
Gain on sale of investment
 

 
(11,762
)
Other
 
3,622

 
(1,059
)
 
 
 
 
 
Changes in assets and liabilities
 
 
 
 
Increase in receivables
 
(17,600
)
 
(34,348
)
Decrease in servicer and protective advances
 
1,705

 
136,173

Decrease (increase) in other assets
 
(9,201
)
 
2,758

Increase (decrease) in payables and accrued liabilities
 
(55,851
)
 
25,914

Increase in servicer payables, net of change in restricted cash
 
673

 
5,459

Cash flows provided by operating activities
 
202,735

 
121,050

 
 
 
 
 

7



WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
 
 
 
 
 
 
 
For the Three Months 
 Ended March 31,
 
 
2016
 
2015
Investing activities
 
 
 
 
Purchases and originations of reverse loans held for investment
 
(181,167
)
 
(428,350
)
Principal payments received on reverse loans held for investment
 
197,883

 
152,195

Principal payments received on mortgage loans held for investment
 
22,325

 
41,427

Payments received on charged-off loans held for investment
 
7,000

 
6,372

Payments received on receivables related to Non-Residual Trusts
 
1,957

 
2,020

Proceeds from sales of real estate owned, net
 
21,409

 
17,711

Purchases of premises and equipment
 
(11,653
)
 
(3,686
)
Decrease in restricted cash and cash equivalents
 
9,048

 
242

Payments for acquisitions of businesses
 
(1,947
)
 
(2,809
)
Acquisitions of servicing rights, net
 
(6,571
)
 
(53,919
)
Proceeds from sale of investment
 

 
14,376

Other
 
(337
)
 
13,098

Cash flows provided by (used in) investing activities
 
57,947

 
(241,323
)
 
 
 
 
 
Financing activities
 
 
 
 
Payments on corporate debt
 
(210
)
 
(4,272
)
Extinguishments and settlement of debt
 
(6,327
)
 

Proceeds from securitizations of reverse loans
 
202,947

 
457,448

Payments on HMBS related obligations
 
(271,013
)
 
(195,783
)
Issuances of servicing advance liabilities
 
441,924

 
175,725

Payments on servicing advance liabilities
 
(469,835
)
 
(256,806
)
Net change in warehouse borrowings related to mortgage loans
 
(214,510
)
 
29,235

Net change in warehouse borrowings related to reverse loans
 
75,910

 
(18,648
)
Proceeds from sale of servicing rights
 
2,968

 

Payments on servicing rights related liabilities
 
(4,250
)
 
(2,199
)
Payments on mortgage-backed debt
 
(25,203
)
 
(45,050
)
Other debt issuance costs paid
 
(1,031
)
 
(1,618
)
Other
 
(462
)
 
556

Cash flows provided by (used in) financing activities
 
(269,092
)
 
138,588

 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
(8,410
)
 
18,315

Cash and cash equivalents at beginning of the period
 
202,828

 
320,175

Cash and cash equivalents at end of the period
 
$
194,418

 
$
338,490

 
 
 
 
 
 Supplemental Disclosures of Cash Flow Information
 
 
 
 
Cash paid for interest
 
$
53,901

 
$
63,517

Cash received for taxes
 
16

 
1,071

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

8



WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business and Basis of Presentation
Walter Investment Management Corp. and its subsidiaries, or the Company, is a mortgage banking firm focused primarily on servicing and originating residential loans, including reverse loans. The Company services loans for its own portfolio and for GSEs, government agencies, third-party securitization trusts and other credit owners. In addition, the Company operates several other businesses that include managing a portfolio of credit-challenged, non-conforming residential mortgage loans; an insurance agency serving borrowers and credit owners of its servicing portfolio; a post charge-off collection agency; and an asset management business. The Company operates throughout the U.S.
The Company operates through three reportable segments, Servicing, Originations, and Reverse Mortgage. Refer to Note 10 for additional information.
Certain acronyms and terms throughout these notes are defined in the Glossary of Terms in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
RCS Asset Purchase Agreement
On December 8, 2015, the Company entered into an asset purchase agreement with RCS, which closed on January 28, 2016. Pursuant to the terms of the agreement, on or about the closing date, among other things: (i) the Company became obligated to purchase certain assets from, and assume certain liabilities of, RCS; (ii) the Company entered into a residential mortgage loan sub-servicing agreement with RCS pursuant to which the Company will sub-service residential mortgage loans for RCS; and (iii) RCS became obligated to transfer to the Company certain of its existing residential mortgage loan sub-servicing agreements (collectively, the sub-servicing assets). The Company gained control over the purchased assets on March 1, 2016, which is the date that the Company purchased and RCS transferred to the Company certain assets, including servicer and protective advances, and certain liabilities, including employee-related liabilities. In connection with the acquisition, the Company recorded $3.8 million in goodwill, which is included in the Servicing segment.
Interim Financial Reporting
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and related notes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Although management is not currently aware of any factors that would significantly change its estimates and assumptions, actual results may differ from these estimates.
Recent Accounting Guidance
In August 2014, the FASB issued an accounting standards update intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. This update is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the effect that this guidance will have on its consolidated financial statements.

9



In April 2015, the FASB issued an accounting standards update that provides guidance regarding whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the entity should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the entity should account for the arrangement as a service contract. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2015 with early adoption permitted. The adoption of this guidance did not have a significant impact on the Company's consolidated financial statements.
In September 2015, the FASB issued an accounting standards update that provides updated guidance regarding simplifying the accounting for recognizing adjustments to provisional amounts identified during the measurement period in a business combination. To simplify the accounting for these adjustments, the amendments in this update eliminate the requirement to retrospectively account for the adjustments and to recognize them in the period that they are identified. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2015 with early adoption permitted. The adoption of this guidance did not have a significant impact on the Company's consolidated financial statements.
In January 2016, the FASB issued an accounting standards update that amends the guidance on the classification and measurement of financial instruments. The new standard revises an entity's accounting related to (i) the classification and measurement of investments in equity securities and (ii) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company is currently evaluating the effect that this guidance will have on its consolidated financial statements.
In February 2016, the FASB issued an accounting standards update that requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset to not recognize lease assets and lease liabilities. In transition, lessees are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients that entities may elect to apply. This guidance is effective for fiscal years beginning after December 15, 2018, with early application permitted. The Company is currently evaluating the effect that this guidance will have on its consolidated financial statements.
In March 2016, the FASB issued an accounting standards update that provides updated guidance for improvements to employee share-based payment accounting. The new standard revises an entity's accounting for income taxes on share-based-compensation, such that all excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2016. The Company is currently evaluating the effect that this guidance will have on its consolidated financial statements.
In March 2016, the FASB issued an accounting standards update that provides guidance for improvements for equity method investments. It requires that the equity method investor add the cost of acquiring additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. It also requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2016. The Company is currently evaluating the effect that this guidance will have on its consolidated financial statements.
In March 2016, the FASB issued an accounting standards update to clarify the implementation guidance on principal versus agent considerations for revenue from contracts with customers. This update further amends the revenue recognition guidance issued in May 2014, which supersedes most industry specific guidance but does exclude insurance contracts and financial instruments. Under the new revenue recognition guidance, entities are required to identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when the entity satisfies a performance obligation. In April 2015, the FASB voted for a one-year deferral of the effective date of the May 2014 revenue recognition standards update, resulting in this new guidance being effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company is currently evaluating the effect that this guidance will have on its consolidated financial statements.

10



2. Variable Interest Entities
Consolidated Variable Interest Entities
Included in Note 4 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 are descriptions of the Company’s Consolidated VIEs.
Revolving Credit Facilities-Related VIEs
Certain revolving credit facilities utilize subsidiaries and/or trusts, collectively referred to as the entities, which are considered VIEs.  The Company transfers certain assets into the entities created as a mechanism for holding assets as collateral for the revolving credit facilities in order to facilitate the pledging of assets to the revolving credit facilities. The entities have no equity investment at risk, making them variable interest entities. The Company’s continuing involvement with the entities is in the form of servicing the assets and through holding the ownership interests of the entities. Accordingly, the Company concluded that it is the primary beneficiary of the entities and, therefore, the Company consolidated the entities. All of the subsidiaries and/or trusts are separate legal entities and the collateral held by the entities are owned by them and are not available to other creditors. 
During the three months ended March 31, 2016, the Reverse Mortgage VIEs were funded with HECMs and real estate owned that were repurchased from GNMA securitization pools utilizing warehouse facilities. These assets collateralize certain master repurchase agreements. Refer to additional information at Note 8.
Included in the tables below are summaries of the carrying amounts of the assets and liabilities of consolidated VIEs (in thousands):
 
 
March 31, 2016
 
 
Residual
Trusts
 
Non-Residual
Trusts
 
Servicer and Protective Advance Financing VIEs
 
Reverse Mortgage VIEs
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Restricted cash and cash equivalents
 
$
13,539

 
$
11,993

 
$
33,146

 
$

 
$
58,678

Residential loans at amortized cost, net
 
493,965

 

 

 

 
493,965

Residential loans at fair value
 

 
506,337

 

 
72,202

 
578,539

Receivables
 

 
14,118

 

 
159

 
14,277

Servicer and protective advances, net
 

 

 
1,120,276

 

 
1,120,276

Other assets
 
7,839

 
642

 
1,673

 
4,513

 
14,667

Total assets
 
$
515,343

 
$
533,090

 
$
1,155,095

 
$
76,874

 
$
2,280,402

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Payables and accrued liabilities
 
$
2,106

 
$

 
$
1,383

 
$

 
3,489

Servicing advance liabilities
 

 

 
973,514

 

 
973,514

Mortgage-backed debt
 
460,872

 
564,832

 

 

 
1,025,704

Total liabilities
 
$
462,978

 
$
564,832

 
$
974,897

 
$

 
$
2,002,707


11



 
 
December 31, 2015
 
 
Residual
Trusts
 
Non-Residual
Trusts
 
Servicer and Protective Advance Financing VIEs
 
Total
Assets
 
 
 
 
 
 
 
 
Restricted cash and cash equivalents
 
$
13,369

 
$
11,388

 
$
34,948

 
$
59,705

Residential loans at amortized cost, net
 
500,563

 

 

 
500,563

Residential loans at fair value
 

 
526,016

 

 
526,016

Receivables
 

 
16,542

 

 
16,542

Servicer and protective advances, net
 

 

 
1,136,246

 
1,136,246

Other assets
 
9,357

 
558

 
2,255

 
12,170

Total assets
 
$
523,289

 
$
554,504

 
$
1,173,449

 
$
2,251,242

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Payables and accrued liabilities
 
$
2,084

 
$

 
$
1,351

 
$
3,435

Servicing advance liabilities
 

 

 
992,769

 
992,769

Mortgage-backed debt
 
469,339

 
582,340

 

 
1,051,679

Total liabilities
 
$
471,423

 
$
582,340

 
$
994,120

 
$
2,047,883

Unconsolidated Variable Interest Entities
Included in Note 4 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 are descriptions of the Company’s variable interests in VIEs relating to servicing arrangements with an LOC reimbursement obligation and other servicing arrangements that it does not consolidate as it has determined that it is not the primary beneficiary of such VIEs. For information on transactions with WCO, refer to Note 13.
3. Transfers of Residential Loans
Sales of Mortgage Loans
As part of its originations activities, the Company sells substantially all of its originated or purchased mortgage loans into the secondary market for securitization or to private investors as whole loans. The Company sells conventional-conforming and government-backed mortgage loans through GSE and agency-sponsored securitizations in which mortgage-backed securities are created and sold to third-party investors. The Company also sells non-conforming mortgage loans to private investors. The Company accounts for these transfers as sales, and in most, but not all, cases, retains the servicing rights associated with the sold loans. If the servicing rights are retained, the Company receives a servicing fee for servicing the sold loans, which represents continuing involvement.
Certain guarantees arise from agreements associated with the sale of the Company's residential loans. Under these agreements, the Company may be obligated to repurchase loans, or otherwise indemnify or reimburse the credit owner or insurer for losses incurred, due to a breach of contractual representations and warranties. Refer to Note 11 for further information.
The following table presents the carrying amounts of the Company’s assets that relate to its continuing involvement with mortgage loans that have been sold with servicing rights retained and the unpaid principal balance of these loans (in thousands):
 
 
Carrying Value of Assets
Recorded on the Consolidated Balance Sheets
 
Unpaid
Principal
Balance of
Sold Loans

 
Servicing
Rights, Net
 
Servicer and
Protective
Advances, Net
 
Total
 
March 31, 2016
 
$
463,964

 
$
25,327

 
$
489,291

 
$
50,438,643

December 31, 2015
 
509,785

 
25,078

 
534,863

 
46,983,388

At March 31, 2016 and December 31, 2015, 0.6% and 0.5%, respectively, of mortgage loans sold and serviced by the Company were 60 days or more past due.

12



The Company has elected to measure mortgage loans held for sale at fair value. The gains and losses on the sale of mortgage loans held for sale are included in net gains on sales of loans on the consolidated statements of comprehensive loss. Also included in net gains on sales of loans is interest income earned during the period the loans were held, the change in fair value of loans, and the gain or loss on the related freestanding derivatives. All activity related to mortgage loans held for sale and the related freestanding derivatives are included in operating activities on the consolidated statements of cash flows.
The following table presents a summary of cash flows related to sales of mortgage loans (in thousands):
 
 
For the Three Months 
 Ended March 31,
 
 
2016
 
2015
Cash proceeds received from sales, net of fees
 
$
5,464,865

 
$
5,659,144

Servicing fees collected (1)
 
34,772

 
22,222

Repurchases of previously sold loans
 
5,932

 
3,130

__________
(1)
Represents servicing fees collected on all loans sold whereby the Company has continuing involvement.
In connection with these sales, the Company recorded servicing rights using a fair value model that utilizes Level 3 unobservable inputs. Refer to Note 6 for information relating to servicing of residential loans.
Transfers of Reverse Loans
The Company, through RMS, is an approved issuer of Ginnie Mae HMBS. The HMBS are guaranteed by Ginnie Mae and collateralized by participation interests in HECMs insured by the FHA. The Company both originates and purchases HECMs that are pooled and securitized into HMBS that the Company sells into the secondary market with servicing rights retained. Based upon the structure of the Ginnie Mae securitization program, the Company has determined that it has not met all of the requirements for sale accounting and accounts for these transfers as secured borrowings. Under this accounting treatment, the reverse loans remain on the consolidated balance sheets as residential loans. The proceeds from the transfer of reverse loans are recorded as HMBS related obligations with no gain or loss recognized on the transfer. Ginnie Mae, as guarantor of the HMBS, is obligated to the holders of the HMBS in an instance of RMS default on its servicing obligations, or when the proceeds realized on HECMs are insufficient to repay all outstanding HMBS related obligations. Ginnie Mae has recourse to RMS to the extent of the participation interests in HECMs serving as collateral to the HMBS, but does not have recourse to the general assets of the Company, except that Ginnie Mae has recourse to RMS in connection with certain claims relating to the performance and obligations of RMS as both an issuer of HMBS and a servicer of HECMs underlying HMBS.
At March 31, 2016, the unpaid principal balance and the carrying value associated with both the reverse loans and the real estate owned pledged as collateral to the securitization pools were $10.0 billion and $10.7 billion, respectively.
4. Fair Value
Basis for Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A three-tier fair value hierarchy is used to prioritize the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:
Level 1 — Valuation is based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 — Valuation is based on quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 — Valuation is based on inputs that are both significant to the fair value measurement and unobservable.
The accounting guidance concerning fair value allows the Company to elect to measure financial instruments at fair value and report the changes in fair value through net income or loss. This election can only be made at certain specified dates and is irrevocable once made. Other than mortgage loans held for sale, which the Company has elected to measure at fair value, the Company does not have a fair value election policy, but rather makes the election on an instrument-by-instrument basis as assets and liabilities are acquired or incurred, other than for those assets and liabilities that are required to be recorded and subsequently measured at fair value.

13



Transfers into and out of the fair value hierarchy levels are assumed to be as of the end of the quarter in which the transfer occurred. There were no transfers between levels during the three months ended March 31, 2016 and 2015.
Items Measured at Fair Value on a Recurring Basis
The following table summarizes the assets and liabilities in each level of the fair value hierarchy (in thousands). There were no assets or liabilities measured at fair value on a recurring basis utilizing Level 1 assumptions.
 
 
March 31, 
 2016
 
December 31, 
 2015
Level 2
 
 
 
 
Assets
 
 
 
 
Mortgage loans held for sale
 
$
1,110,922

 
$
1,334,300

Freestanding derivative instruments
 
3,957

 
6,993

Level 2 assets
 
$
1,114,879

 
$
1,341,293

Liabilities
 
 
 
 
Freestanding derivative instruments
 
$
20,540

 
$
5,405

Level 2 liabilities
 
$
20,540

 
$
5,405

 
 
 
 
 
Level 3
 
 
 
 
Assets
 
 
 
 
Reverse loans
 
$
10,872,891

 
$
10,763,816

Mortgage loans related to Non-Residual Trusts
 
506,337

 
526,016

Charged-off loans
 
53,246

 
49,307

Receivables related to Non-Residual Trusts
 
14,118

 
16,542

Servicing rights carried at fair value
 
1,427,331

 
1,682,016

Freestanding derivative instruments (IRLCs)
 
64,407

 
51,519

Level 3 assets
 
$
12,938,330

 
$
13,089,216

Liabilities
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
255

 
$
1,070

Servicing rights related liabilities
 
105,559

 
117,000

Mortgage-backed debt related to Non-Residual Trusts
 
564,832

 
582,340

HMBS related obligations
 
10,697,435

 
10,647,382

Level 3 liabilities
 
$
11,368,081

 
$
11,347,792


14



The following assets and liabilities are measured on the consolidated balance sheets at fair value on a recurring basis utilizing significant unobservable inputs or Level 3 assumptions in their valuation. The following tables provide a reconciliation of the beginning and ending balances of these assets and liabilities (in thousands):
 
 
For the Three Months Ended March 31, 2016
 
 
Fair Value
January 1,
2016
 
Total
Gains (Losses)
Included in
Comprehensive Loss
 
Purchases
 
Originations / Issuances
 
Settlements
 
Fair Value March 31, 2016
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Reverse loans
 
$
10,763,816

 
$
154,834

 
$
54,020

 
$
127,151

 
$
(226,930
)
 
$
10,872,891

Mortgage loans related to Non-Residual Trusts
 
526,016

 
5,163

 

 

 
(24,842
)
 
506,337

Charged-off loans (1)
 
49,307

 
14,376

 

 

 
(10,437
)
 
53,246

Receivables related to Non-Residual Trusts
 
16,542

 
(467
)
 

 

 
(1,957
)
 
14,118

Servicing rights carried at fair value
 
1,682,016

 
(326,580
)
 
19,637

 
52,258

 

 
1,427,331

Freestanding derivative instruments (IRLCs)
 
51,519

 
13,102

 

 

 
(214
)
 
64,407

Total assets
 
$
13,089,216

 
$
(139,572
)
 
$
73,657

 
$
179,409

 
$
(264,380
)
 
$
12,938,330

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
(1,070
)
 
$
815

 
$

 
$

 
$

 
$
(255
)
Servicing rights related liabilities
 
(117,000
)
 
3,294

 

 

 
8,147

 
(105,559
)
Mortgage-backed debt related to Non-Residual Trusts
 
(582,340
)
 
(6,932
)
 

 

 
24,440

 
(564,832
)
HMBS related obligations
 
(10,647,382
)
 
(119,626
)
 

 
(202,947
)
 
272,520

 
(10,697,435
)
Total liabilities
 
$
(11,347,792
)
 
$
(122,449
)
 
$

 
$
(202,947
)
 
$
305,107

 
$
(11,368,081
)
__________
(1)
Included in gains on charged-off loans are gains from instrument-specific credit risk of $10.9 million, which primarily result from changes in assumptions related to collection rates and discount rates.



15



 
For the Three Months Ended March 31, 2015
 
Fair Value
January 1,
2015
 
Total
Gains (Losses)
Included in
Comprehensive
Loss
 
Purchases
 
Sales
 
Originations / Issuances
 
Settlements
 
Fair Value
March 31, 2015
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse loans (1)
$
10,064,365

 
$
122,909

 
$
239,375

 
$
(16,592
)
 
$
189,510

 
$
(169,674
)
 
$
10,429,893

Mortgage loans related to Non-Residual Trusts 
586,433

 
8,164

 

 

 

 
(26,685
)
 
567,912

Charged-off loans
57,217

 
5,984

 

 

 

 
(12,356
)
 
50,845

Receivables related to Non-Residual Trusts
25,201

 
(246
)
 

 

 

 
(2,020
)
 
22,935

Servicing rights carried at fair value
1,599,541

 
(129,235
)
 
27,713

 

 
72,301

 

 
1,570,320

Freestanding derivative instruments (IRLCs)
60,400

 
24,724

 

 

 

 
(199
)
 
84,925

Total assets
$
12,393,157

 
$
32,300

 
$
267,088

 
$
(16,592
)
 
$
261,811

 
$
(210,934
)
 
$
12,726,830

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Freestanding derivative instruments (IRLCs)
$
(263
)
 
$
59

 
$

 
$

 
$

 
$

 
$
(204
)
Servicing rights related liabilities
(66,311
)
 
(1,818
)
 

 

 

 
4,780

 
(63,349
)
Mortgage-backed debt related to Non-Residual Trusts
(653,167
)
 
(8,556
)
 

 

 

 
26,484

 
(635,239
)
HMBS related obligations
(9,951,895
)
 
(92,233
)
 

 

 
(457,448
)
 
197,192

 
(10,304,384
)
Total liabilities
$
(10,671,636
)
 
$
(102,548
)
 
$

 
$

 
$
(457,448
)
 
$
228,456

 
$
(11,003,176
)
__________
(1)
During the three months ended March 31, 2015, the Company sold $16.6 million in reverse loans and recognized $0.1 million in net losses on sales of loans.
All gains and losses on assets and liabilities measured at fair value on a recurring basis and classified as Level 3 within the fair value hierarchy, with the exception of gains and losses on charged-off loans, IRLCs, servicing rights carried at fair value, and servicing rights related liabilities, are recognized in either other net fair value losses or net fair value gains on reverse loans and related HMBS obligations on the consolidated statements of comprehensive loss. Gains and losses related to charged-off loans are recorded in other revenues, while gains and losses relating to IRLCs are recorded in net gains on sales of loans on the consolidated statements of comprehensive loss. The change in fair value of servicing rights carried at fair value and servicing rights related liabilities are recorded in net servicing revenue and fees on the consolidated statements of comprehensive loss. Total gains and losses included in the financial statement line items disclosed above include interest income and interest expense at the stated rate for interest-bearing assets and liabilities, respectively, accretion and amortization, and the impact of the changes in valuation inputs and assumptions.
The Company’s Valuation Committee determines and approves valuation policies and unobservable inputs used to estimate the fair value of items measured at fair value on a recurring basis. The Valuation Committee, consisting of certain members of the senior executive management team, meets on a quarterly basis to review the assets and liabilities that require fair value measurement, including how each asset and liability has actually performed in comparison to the unobservable inputs and the projected performance. The Valuation Committee also reviews related available market data.

16



The following is a description of the methods used to estimate the fair values of the Company’s assets and liabilities measured at fair value on a recurring basis, as well as the basis for classifying these assets and liabilities as Level 2 or 3 within the fair value hierarchy. The Company’s valuations consider assumptions that it believes a market participant would consider in valuing the assets and liabilities, the most significant of which are disclosed below. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the valuations for recent historical experience, as well as for current and expected relevant market conditions.
Residential loans
Reverse loans, mortgage loans related to Non-Residual Trusts and charged-off loans — These loans are not traded in an active, open market with readily observable prices. Accordingly, the Company estimates fair value using Level 3 unobservable market inputs. The estimated fair value is based on the net present value of projected cash flows over the estimated life of the loans. The discount rate assumption for these assets considers, as applicable, collateral and credit risk characteristics of the loans, collection rates, current market interest rates, expected duration, and current market yields.

Mortgage loans held for sale — These loans are valued using a market approach by utilizing observable quoted market prices, where available, or prices for other whole loans with similar characteristics. The Company classifies these loans as Level 2 within the fair value hierarchy.
Receivables related to Non-Residual Trusts — The Company estimates the fair value of these receivables using the net present value of expected cash flows from the LOCs to be used to pay bondholders over the remaining life of the securitization trusts and applies Level 3 unobservable market inputs in its valuation. Receivables related to Non-Residual Trusts are recorded in receivables, net on the consolidated balance sheets.
Servicing rights carried at fair value — The Company accounts for servicing rights associated with the risk-managed loan class at fair value. The Company uses a discounted cash flow model to estimate the fair value of these assets. The assumptions vary based on collateral stratifications including product type, remittance type, geography, delinquency, and coupon dispersion of the underlying loan portfolio. The Company classifies servicing rights within Level 3 of the fair value hierarchy.

Freestanding derivative instruments — Fair values of IRLCs are derived using valuation models incorporating market pricing for instruments with similar characteristics and by estimating the fair value of the servicing rights expected to be recorded at sale of the loan. The fair values are then adjusted for anticipated loan funding probability. Both the fair value of servicing rights expected to be recorded at the date of sale of the loan and anticipated loan funding probability are significant unobservable inputs and, as a result, IRLCs are classified as Level 3 within the fair value hierarchy. The loan funding probability ratio represents the aggregate likelihood that loans currently in a lock position will ultimately close, which is largely dependent on the loan processing stage that a loan is currently in and changes in interest rates from the time of the rate lock through the time a loan is closed. IRLCs have positive fair value at inception and change in value as interest rates and loan funding probability change. Rising interest rates have a positive effect on the fair value of the servicing rights component of the IRLC fair value and increase the loan funding probability. An increase in loan funding probability (i.e., higher aggregate likelihood of loans estimated to close) will result in the fair value of the IRLC increasing if in a gain position, or decreasing, to a lower loss, if in a loss position. A significant increase (decrease) to the fair value of servicing rights component in isolation could result in a significantly higher (lower) fair value measurement.
The fair value of forward sales commitments and MBS purchase commitments is determined based on observed market pricing for similar instruments; therefore, these contracts are classified as Level 2 within the fair value hierarchy. Counterparty credit risk is taken into account when determining fair value, although the impact is diminished by daily margin posting on all forward sales and purchase commitments. Refer to Note 5 for additional information on freestanding derivative financial instruments.
Servicing rights related liabilities — The Company uses a discounted cash flow model to estimate the fair value of both its excess servicing spread liabilities and its servicing rights financing. The assumptions utilized are based on collateral stratifications including product type, remittance type, geography, delinquency, and coupon dispersion of the underlying loan portfolio. The Company classifies its servicing rights related liabilities as Level 3 within the fair value hierarchy.
Mortgage-backed debt related to Non-Residual Trusts — This debt is not traded in an active, open market with readily observable prices. Accordingly, the Company estimates fair value using Level 3 unobservable market inputs. The estimated fair value of the debt is based on the net present value of the projected principal and interest payments owed for the estimated remaining life of the securitization trusts. An analysis of the credit assumptions for the underlying collateral in each of the securitization trusts is performed to determine the required payments to bondholders.

17



HMBS related obligations — These obligations are not traded in an active, open market with readily observable prices. Accordingly, the Company estimates fair value using Level 3 unobservable market inputs. The estimated fair value is based on the net present value of projected cash flows over the estimated life of the liabilities. The discount rate assumption for these liabilities is based on an assessment of current market yields for HMBS, expected duration, and current market interest rates. The yield on seasoned HMBS is adjusted based on the duration of each HMBS and assuming a constant spread to LIBOR.
The following tables present the significant unobservable inputs used in the fair value measurement of the assets and liabilities described above. The Company utilizes a discounted cash flow model to estimate the fair value of all Level 3 assets and liabilities included on the consolidated financial statements at fair value on a recurring basis, with the exception of IRLCs for which the Company utilizes a market approach. Significant increases or decreases in any of the inputs disclosed below could result in a significantly lower or higher fair value measurement.
 
 
 
 
March 31, 2016
 
December 31, 2015
 
 
Significant
Unobservable Input
(1) (2)
 
Range of Input (3)
 
Weighted
Average of Input
(3)
 
Range of Input (3)
 
Weighted
Average of Input
(3)
Assets
 
 
 
 
 
 
 
 
 
 
Reverse loans
 
Weighted-average remaining life in years (4)
 
0.9 - 9.8
 
4.0

 
1.1 - 10.0
 
4.1

 
 
Conditional repayment rate
 
13.54% - 55.93%
 
26.32
%
 
13.53% - 52.94%
 
25.59
%
 
 
Discount rate
 
1.34% - 2.92%
 
2.44
%
 
2.08% - 3.56%
 
2.84
%
Mortgage loans related to Non-Residual Trusts
 
Conditional prepayment rate
 
2.84% - 3.90%
 
3.29
%
 
2.67% - 4.66%
 
3.52
%
 
 
Conditional default rate
 
1.67% - 2.47%
 
2.05
%
 
1.47% - 2.74%
 
2.05
%
 
 
Loss severity
 
78.31% - 95.17%
 
90.32
%
 
73.07% - 95.88%
 
88.72
%
 
 
Discount rate
 
8.00%
 
8.00
%
 
8.00%
 
8.00
%
Charged-off loans
 
Collection rate
 
2.56% - 4.10%
 
2.65
%
 
2.15% - 3.54%
 
2.23
%
 
 
Discount rate
 
28.00%
 
28.00
%
 
28.00%
 
28.00
%
Receivables related to Non-Residual Trusts
 
Conditional prepayment rate
 
2.31% - 3.04%
 
2.72
%
 
1.93% - 3.62%
 
2.90
%
 
 
Conditional default rate
 
1.79% - 2.71%
 
2.21
%
 
1.66% - 2.98%
 
2.30
%
 
 
Loss severity
 
74.86% - 92.26%
 
87.24
%
 
70.33% - 93.46%
 
85.63
%
 
 
Discount rate
 
0.50%
 
0.50
%
 
0.50%
 
0.50
%
Servicing rights carried at fair value
 
Weighted-average remaining life in years (4)
 
2.5 - 7.5
 
5.6

 
5.2 - 9.0
 
6.3

 
 
Discount rate
 
10.00% - 13.29%
 
10.96
%
 
10.00% - 14.34%
 
10.88
%
 
 
Conditional prepayment rate
 
5.84% - 23.34%
 
11.31
%
 
6.07% - 13.15%
 
9.94
%
 
 
Conditional default rate
 
0.02% - 3.49%
 
0.92
%
 
0.05% - 2.49%
 
1.06
%
Interest rate lock commitments
 
Loan funding probability
 
12.51% - 100.00%
 
76.10
%
 
2.34% - 100.00%
 
79.42
%
 
 
Fair value of initial servicing rights multiple (5) 
 
0.04 - 6.09
 
3.17

 
0.05 - 7.06
 
3.71

 

18



 
 
 
 
March 31, 2016
 
December 31, 2015
 
 
Significant
Unobservable Input
(1) (2)
 
Range of Input (3)
 
Weighted
Average of Input
(3)
 
Range of Input (3)
 
Weighted
Average of Input
(3)
Liabilities
 
 
 
 
 
 
 
 
 
 
Interest rate lock commitments
 
Loan funding probability
 
20.00% - 100.00%
 
80.87
%
 
38.00% - 100.00%
 
83.28
%
 
 
Fair value of initial servicing rights multiple (5)
 
1.08 - 4.92
 
3.53

 
0.11 - 5.88
 
4.00

Servicing rights related liabilities
 
Weighted-average remaining life in years (4)
 
2.1 - 7.3
 
5.8

 
6.3 - 7.4
 
6.6

 
 
Discount rate
 
11.67% - 13.85%
 
13.23
%
 
11.67% - 13.85%
 
13.24
%
 
 
Conditional prepayment rate
 
6.60% - 16.38%
 
10.64
%
 
8.32% - 11.28%
 
9.98
%
 
 
Conditional default rate
 
0.01% - 3.41%
 
0.56
%
 
0.11% - 1.06%
 
0.58
%
Mortgage-backed debt related to Non-Residual Trusts
 
Conditional prepayment rate
 
2.31% - 3.04%
 
2.72
%
 
1.93% - 3.62%
 
2.90
%
 
 
Conditional default rate
 
1.79% - 2.71%
 
2.21
%
 
1.66% - 2.98%
 
2.30
%
 
 
Loss severity
 
74.86% - 92.26%
 
87.24
%
 
70.33% - 93.46%
 
85.63
%
 
 
Discount rate
 
6.00%
 
6.00
%
 
6.00%
 
6.00
%
HMBS related obligations
 
Weighted-average remaining life in years (4)
 
0.7 - 6.6
 
3.4

 
0.9 - 6.6
 
3.5

 
 
Conditional repayment rate
 
12.37% - 59.92%
 
25.72
%
 
12.06% - 55.49%
 
24.70
%
 
 
Discount rate
 
1.68% - 2.56%
 
2.15
%
 
1.73% - 3.08%
 
2.39
%
__________
(1)
Conditional repayment rate includes assumptions for both voluntary and involuntary rates as well as assumptions for the assignment of HECMs to HUD, in accordance with obligations as servicer.
(2)
Voluntary and involuntary prepayment rates have been presented as conditional prepayment rate and conditional default rate, respectively.
(3)
With the exception of loss severity, fair value of initial servicing rights embedded in IRLCs and discount rate on charged-off loans, all significant unobservable inputs above are based on the related unpaid principal balance of the underlying collateral, or in the case of HMBS related obligations, the balance outstanding. Loss severity is based on projected liquidations. Fair value of servicing rights embedded in IRLCs represents a multiple of the annual servicing fee. The discount rate on charged-off loans is based on the loan balance at fair value.
(4)
Represents the remaining weighted-average life of the related unpaid principal balance or balance outstanding of the underlying collateral adjusted for assumptions for conditional repayment rate, conditional prepayment rate and conditional default rate, as applicable.
(5)
Fair value of servicing rights embedded in IRLCs, which represents a multiple of the annual servicing fee, excludes the impact of IRLCs identified as servicing released.
Fair Value Option
With the exception of freestanding derivative instruments, the Company has elected the fair value option for the assets and liabilities described above as measured at fair value on a recurring basis. The fair value option was elected for these assets and liabilities as the Company believes fair value best reflects their expected future economic performance.

19



Presented in the table below is the estimated fair value and unpaid principal balance of loans and debt instruments that have contractual principal amounts and for which the Company has elected the fair value option (in thousands):
 
 
March 31, 2016
 
December 31, 2015
 
 
Estimated
Fair Value
 
Unpaid Principal
Balance
 
Estimated
Fair Value
 
Unpaid Principal
Balance
Loans at fair value under the fair value option
 
 
 
 
 
 
 
 
Reverse loans (1)
 
$
10,872,891

 
$
10,246,001

 
$
10,763,816

 
$
10,187,521

Mortgage loans held for sale (1)
 
1,110,922

 
1,057,804

 
1,334,300

 
1,285,582

Mortgage loans related to Non-Residual Trusts
 
506,337

 
563,061

 
526,016

 
580,695

Charged-off loans
 
53,246

 
2,833,960

 
49,307

 
2,887,367

Total
 
$
12,543,396

 
$
14,700,826

 
$
12,673,439

 
$
14,941,165


 
 
 
 
 
 
 
 
Debt instruments at fair value under the fair value option
 
 
 
 
 
 
 
 
Mortgage-backed debt related to Non-Residual Trusts
 
$
564,832

 
$
569,200

 
$
582,340

 
$
585,939

HMBS related obligations (2)
 
10,697,435

 
10,031,182

 
10,647,382

 
10,012,283

Total
 
$
11,262,267

 
$
10,600,382

 
$
11,229,722

 
$
10,598,222

__________
(1)
Includes loans that collateralize master repurchase agreements. Refer to Note 8 for additional information.
(2)
For HMBS related obligations, the unpaid principal balance represents the balance outstanding.
Included in mortgage loans related to Non-Residual Trusts are loans that are 90 days or more past due that had a fair value of $2.3 million and $2.6 million at March 31, 2016 and December 31, 2015, respectively, and an unpaid principal balance of $16.2 million at March 31, 2016 and December 31, 2015. Mortgage loans held for sale that are 90 days or more past due are insignificant at March 31, 2016 and December 31, 2015. Charged-off loans are predominantly 90 days or more past due.
Items Measured at Fair Value on a Non-Recurring Basis
The Company held real estate owned, net of $82.4 million and $77.4 million at March 31, 2016 and December 31, 2015, respectively. In addition, the Company had loans that were in the process of foreclosure of $409.6 million and $244.9 million at March 31, 2016 and December 31, 2015, respectively, which are included in residential loans at amortized cost, net and residential loans at fair value on the consolidated balance sheets. Real estate owned, net is included on the consolidated balance sheets within other assets and is measured at net realizable value on a non-recurring basis utilizing significant unobservable inputs or Level 3 assumptions in their valuation.
The following table presents the significant unobservable input used in the fair value measurement of real estate owned, net:
 
 
 
 
March 31, 2016
 
December 31, 2015
 
 
Significant
Unobservable Input
 
Range of Input
 
Weighted
Average of Input
 
Range of Input
 
Weighted
Average of Input
Real estate owned, net
 
Loss severity (1)
 
0.00% - 87.36%
 
8.26
%
 
0.00% - 72.58%
 
8.25
%
__________
(1)
Loss severity is based on the unpaid principal balance of the related loan at time of foreclosure.
The Company held real estate owned, net in the Reverse Mortgage and Servicing segments and Other non-reportable segment of $72.9 million, $8.9 million and $0.6 million at March 31, 2016, respectively and $66.4 million, $10.4 million and $0.6 million at December 31, 2015, respectively. In determining fair value, the Company either obtains appraisals or performs a review of historical severity rates of real estate owned previously sold by the Company. When utilizing historical severity rates, the properties are stratified by collateral type and/or geographical concentration and length of time held by the Company. The severity rates are reviewed for reasonableness by comparison to third-party market trends and fair value is determined by applying severity rates to the stratified population. In the determination of fair value of real estate owned associated with reverse mortgages, the Company considers amounts typically covered by FHA insurance. Management approves valuations that have been determined using the historical severity rate method.

20



Fair Value of Other Financial Instruments
The following table presents the carrying amounts and estimated fair values of financial assets and liabilities that are not recorded at fair value on a recurring or non-recurring basis and their respective levels within the fair value hierarchy (in thousands). This table excludes cash and cash equivalents, restricted cash and cash equivalents, servicer payables and warehouse borrowings as these financial instruments are highly liquid or short-term in nature and as a result, their carrying amounts approximate fair value.
 
 
 
 
March 31, 2016
 
December 31, 2015
 
 
Fair Value
Hierarchy
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
Financial assets
 
 
 
 
 
 
 
 
 
 
Residential loans at amortized cost, net
 
Level 3
 
$
549,078

 
$
563,851

 
$
541,406

 
$
554,664

Insurance premium receivables
 
Level 3
 
82,697

 
80,358

 
90,053

 
87,152

Servicer and protective advances, net
 
Level 3
 
1,586,188

 
1,498,002

 
1,595,911

 
1,513,076

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
 
Payables to insurance carriers
 
Level 3
 
58,441

 
56,592

 
63,410

 
62,694

Servicing advance liabilities (1)
 
Level 3
 
1,200,141

 
1,203,983

 
1,226,898

 
1,232,147

Corporate debt (2)
 
Level 2
 
2,150,233

 
1,772,098

 
2,152,031

 
1,904,467

Mortgage-backed debt carried at amortized cost
 
Level 3
 
460,872

 
467,140

 
469,339

 
475,347

__________
(1)
The carrying amounts of servicing advance liabilities are net of deferred issuance costs, including those relating to line-of-credit arrangements, which are recorded in other assets.
(2)
The carrying amounts of corporate debt in the table above are net of the 2013 Revolver deferred issuance costs, which are recorded in other assets on the consolidated balance sheets.
The following is a description of the methods and significant assumptions used in estimating the fair value of the Company’s financial instruments that are not measured at fair value on a recurring or non-recurring basis.
Residential loans at amortized cost, net — The methods and assumptions used to estimate the fair value of residential loans carried at amortized cost are the same as those described above for mortgage loans related to Non-Residual Trusts.
Insurance premium receivables — The estimated fair value of these receivables is based on the net present value of the expected cash flows. The determination of fair value includes assumptions related to the underlying collateral serviced by the Company, such as delinquency and default rates, as the insurance premiums are collected as part of the borrowers’ loan payments or from the related trusts.
Servicer and protective advances, net — The estimated fair value of these advances is based on the net present value of expected cash flows. The determination of expected cash flows includes consideration of recoverability clauses in the Company’s servicing agreements, as well as assumptions related to the underlying collateral and when proceeds may be used to recover these receivables.
Payables to insurance carriers — The estimated fair value of these liabilities is based on the net present value of the expected carrier payments over the life of the payables.
Servicing advance liabilities — The estimated fair value of the majority of these liabilities approximates carrying value as these liabilities bear interest at a rate that is adjusted regularly based on a market index.
Corporate debt — The Company’s 2013 Term Loan, Convertible Notes, and Senior Notes are not traded in an active, open market with readily observable prices. The estimated fair value of corporate debt is primarily based on an average of broker quotes.
Mortgage-backed debt carried at amortized cost — The methods and assumptions used to estimate the fair value of mortgage-backed debt carried at amortized cost are the same as those described above for mortgage-backed debt related to Non-Residual Trusts.


21



Net Gains on Sales of Loans
Provided in the table below is a summary of the components of net gains on sales of loans (in thousands):
 
 
For the Three Months 
 Ended March 31,
 
 
2016
 
2015
Realized gains on sales of loans
 
$
80,080

 
$
61,379

Change in unrealized gains on loans held for sale
 
10,291

 
1,389

Gains on interest rate lock commitments
 
13,917

 
24,782

Losses on forward sales commitments
 
(66,953
)
 
(38,648
)
Losses on MBS purchase commitments
 
(10,796
)
 
(5,679
)
Capitalized servicing rights
 
52,258

 
72,301

Provision for repurchases
 
(4,713
)
 
(2,025
)
Interest income
 
10,393

 
11,728

Net gains on sales of loans
 
$
84,477

 
$
125,227

Net Fair Value Gains on Reverse Loans and Related HMBS Obligations
Provided in the table below is a summary of the components of net fair value gains on reverse loans and related HMBS obligations (in thousands):
 
 
For the Three Months 
 Ended March 31,
 
 
2016
 
2015
Interest income on reverse loans
 
$
110,594

 
$
106,280

Change in fair value of reverse loans
 
44,240

 
16,727

Net fair value gains on reverse loans
 
154,834

 
123,007

 
 
 
 
 
Interest expense on HMBS related obligations
 
(103,254
)
 
(98,536
)
Change in fair value of HMBS related obligations
 
(16,372
)
 
6,303

Net fair value losses on HMBS related obligations
 
(119,626
)
 
(92,233
)
Net fair value gains on reverse loans and related HMBS obligations
 
$
35,208

 
$
30,774

5. Freestanding Derivative Financial Instruments
The following table provides the total notional or contractual amounts and related fair values of derivative assets and liabilities as well as cash margin (in thousands):
 
 
March 31, 2016
 
December 31, 2015
 
 
Notional/
Contractual
Amount
 
Fair Value
 
Notional/
Contractual
Amount
 
Fair Value
 
 
 
Derivative
Assets
 
Derivative
Liabilities
 
 
Derivative
Assets
 
Derivative
Liabilities
Interest rate lock commitments
 
$
2,828,407

 
$
64,407

 
$
255

 
$
3,398,892

 
$
51,519

 
$
1,070

Forward sales commitments
 
4,220,920

 
168

 
20,540

 
4,650,000

 
6,427

 
4,871

MBS purchase commitments
 
957,000

 
3,789

 

 
703,000

 
566

 
534

Total derivative instruments
 
 
 
$
68,364

 
$
20,795

 
 
 
$
58,512

 
$
6,475

Cash margin
 
 
 
$
11,414

 
$
3,958

 
 
 
$
209

 
$
10,101


22



Derivative positions subject to netting arrangements include all forward sale commitments, MBS purchase commitments, and cash margin, as reflected in the table above, and allow the Company to net settle asset and liability positions, as well as cash margin, with the same counterparty. After consideration of these netting arrangements and offsetting positions by counterparty, the total net settlement amount as it relates to these positions were asset positions of $0.2 million and $0.3 million, and liability positions of $9.4 million and $8.6 million, at March 31, 2016 and December 31, 2015, respectively. A master netting arrangement with one of the Company’s counterparties also allows for offsetting derivative positions and margin against amounts associated with the master repurchase agreement with that same counterparty. At March 31, 2016, the Company’s net derivative liability position with that counterparty of $0.1 million was comprised of a net derivative liability position of $1.2 million and cash margin received of $4.0 million, partially offset by $5.1 million of over-collateralized positions associated with the master repurchase agreement.
During the first quarter of 2016 the Company entered into a master netting arrangement with another of the Company’s counterparties, which also allows for offsetting derivative positions and margin against amounts associated with the master repurchase agreement with the same counterparty. At March 31, 2016, the Company’s net derivative liability position with that counterparty was $0.3 million. Under the master netting arrangement, the Company is able to utilize certain over-collateralized positions and excess cash deposited with the counterparty associated with the master repurchase agreement to reduce potential cash margin posting requirements on derivative transactions. At March 31, 2016 there were $17.7 million of over-collateralized positions and $55.6 million in excess cash deposited with the counterparty related to the master repurchase agreement. The master netting agreement does not obligate the counterparty to transfer cash margin to the Company related to the master repurchase agreement over-collateralization and excess cash positions.
Over collateralized positions on master repurchase agreements are not reflected as margin in the table above. Refer to Note 4 for a summary of the gains and losses on freestanding derivatives.
6. Servicing of Residential Loans
The Company provides servicing of residential loans and real estate owned for itself and third-party credit owners. The Company’s total servicing portfolio consists of accounts serviced for others for which servicing rights have been capitalized, accounts sub-serviced for others, as well as residential loans and real estate owned recognized on the consolidated balance sheets.
Provided below is a summary of the Company’s t