Nationstar Mortgage Holdings Inc. - FORM 10-Q - November 3, 2016

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EX-32.2 - CFO - 906 CERTIFICATION - Nationstar Mortgage Holdings Inc.a2016-q3xexhibit322.htm
EX-32.1 - CEO - 906 CERTIFICATION - Nationstar Mortgage Holdings Inc.a2016-q3xexhibit321.htm
EX-31.2 - CFO - 302 CERTIFICATION - Nationstar Mortgage Holdings Inc.a2016-q3xexhibit312.htm
EX-31.1 - CEO - 302 CERTIFICATION - Nationstar Mortgage Holdings Inc.a2016-q3xexhibit311.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
 
 FORM 10-Q
 
 
 
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from      to                     
Commission file number: 001-35449
 
 
 
 
 
Nationstar Mortgage Holdings Inc.
(Exact name of registrant as specified in its charter)
 
 
 
 
 
Delaware
 
45-2156869
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
8950 Cypress Waters Blvd
Coppell, TX
 
75019
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(469) 549-2000
 
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, "accelerated filer" and "smaller reporting company" in Rule  12(b)-2 of the Exchange Act
Large Accelerated Filer
¨
Accelerated Filer
x
 
 
 
 
Non-Accelerated Filer
¨ (Do not check if a smaller reporting company.)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Number of shares of common stock, $0.01 par value, outstanding as of October 25, 2016: 97,498,242



1

NATIONSTAR MORTGAGE HOLDINGS INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 
 
 
Page
PART I
FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015
 
 
 
 
Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2016 and 2015
 
 
 
 
Consolidated Statements of Stockholders’ Equity (unaudited) for the Nine Months Ended September 30, 2016 and 2015
 
 
 
 
Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2016 and 2015
 
 
 
 
Notes to Consolidated Financial Statements (unaudited)
 
 
 
Item 2.
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
Item 4.
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 


2

PART I. Financial Information

Item 1. Financial Statements
NATIONSTAR MORTGAGE HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(millions of dollars)
 
September 30,
2016
 
December 31,
2015
 
(unaudited)
 
 
Assets
 
 
 
Cash and cash equivalents
$
695

 
$
613

Restricted cash
336

 
332

Mortgage servicing rights, $2,725 and $3,358 at fair value, respectively
2,732

 
3,367

Advances and other receivables, net of reserves of $180 and $130, respectively
1,824

 
2,412

Reverse mortgage interests, net of reserves of $94 and $53, respectively
7,334

 
7,514

Mortgage loans held for sale at fair value
1,839

 
1,430

Mortgage loans held for investment, net of allowance for loan losses of $3 and $4, respectively
156

 
174

Property and equipment, net of accumulated depreciation of $123 and $93, respectively
149

 
143

Derivative financial instruments at fair value
127

 
100

Other assets
654

 
532

Total assets
$
15,846

 
$
16,617

 
 
 
 
Liabilities and stockholders' equity
 
 
 
Unsecured senior notes, net of unamortized debt issuance costs $19 and $23, respectively
$
2,000

 
$
2,026

Advance facilities, net of unamortized debt issuance costs $1 and $6, respectively
1,188

 
1,640

Warehouse facilities, net of unamortized debt issuance costs $1 and $3, respectively
2,610

 
1,890

Payables and accrued liabilities
1,164

 
1,296

MSR related liabilities - nonrecourse at fair value
1,079

 
1,301

Mortgage servicing liabilities
11

 
25

Derivative financial instruments at fair value
14

 
6

Other nonrecourse debt, net of unamortized debt issuance costs $7 and $4, respectively
6,298

 
6,666

Total liabilities
14,364

 
14,850

Commitments and contingencies (Note 15)


 


Preferred stock at $0.01 par value - 300,000 thousand shares authorized, no shares issued and outstanding
—

 
—

Common stock at $0.01 par value - 1,000,000 thousand shares authorized, 109,915 thousand and 109,826 thousand shares issued, respectively
1

 
1

Additional paid-in-capital
1,119

 
1,105

Retained earnings
503

 
682

Treasury shares at cost, 12,417 thousand and 1,826 thousand shares, respectively
(147
)
 
(30
)
Total Nationstar stockholders' equity
1,476

 
1,758

Noncontrolling interest
6

 
9

Total stockholders' equity
1,482

 
1,767

Total liabilities and stockholders' equity
$
15,846

 
$
16,617

See accompanying notes to the consolidated financial statements.

3

NATIONSTAR MORTGAGE HOLDINGS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(millions of dollars, except for earnings per share data)

 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Service related, net
$
305

 
$
211

 
$
502

 
$
884

Net gain on mortgage loans held for sale
237

 
186

 
624

 
517

Total revenues
542

 
397

 
1,126

 
1,401

Expenses:
 
 
 
 
 
 
 
Salaries, wages and benefits
211

 
201

 
613

 
578

General and administrative
196

 
245

 
619

 
693

Total expenses
407

 
446

 
1,232

 
1,271

Other income (expenses):
 
 
 
 
 
 
 
Interest income
103

 
113

 
313

 
243

Interest expense
(165
)
 
(176
)
 
(493
)
 
(439
)
Other expense
(2
)
 
—

 
(2
)
 
(1
)
Total other income (expenses), net
(64
)
 
(63
)
 
(182
)
 
(197
)
Income (loss) before income tax expense (benefit)
71

 
(112
)
 
(288
)
 
(67
)
Less: income tax expense (benefit)
29

 
(47
)
 
(106
)
 
(31
)
Net income (loss)
42

 
(65
)
 
(182
)
 
(36
)
Less: net income (loss) attributable to non-controlling interests
(3
)
 
1

 
(3
)
 
4

Net income (loss) attributable to Nationstar
$
45

 
$
(66
)
 
$
(179
)
 
$
(40
)
 
 
 
 
 
 
 
 
Net income (loss) per common share attributable to common stockholders:
 
 
 
 
 
 
 
Basic and diluted
$
0.46

 
$
(0.62
)
 
$
(1.78
)
 
$
(0.39
)
Weighted average shares of common stock outstanding (in thousands):
 
 
 
 
 
 
 
       Basic
97,461

 
107,568

 
100,524

 
101,797

       Dilutive effect of stock awards
893

 
—

 
—

 
—

       Diluted
98,354

 
107,568

 
100,524

 
101,797

See accompanying notes to the consolidated financial statements.

4

NATIONSTAR MORTGAGE HOLDINGS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 
Number of Shares Outstanding (in thousands)
 
Amount
(millions of dollars)
 
Common Stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Treasury Share Amount
 
Total Nationstar Stockholders'
Equity
 
Non-controlling Interests
 
Total
Equity
Balance at December 31, 2014
90,357

 
$
1

 
$
587

 
$
643

 
$
(12
)
 
$
1,219

 
$
5

 
$
1,224

Net income (loss)
—

 
—

 
—

 
(40
)
 
—

 
(40
)
 
4

 
(36
)
Shares issued (surrendered) under incentive plan, net
1,042

 
—

 
—

 
—

 
(6
)
 
(6
)
 
—

 
(6
)
Share-based compensation
—

 
—

 
15

 
—

 
—

 
15

 
—

 
15

Issuance of common stock
17,500

 
—

 
498

 
—

 
—

 
498

 
—

 
498

Excess tax benefit from share based compensation
—

 
—

 
1

 
—

 
—

 
1

 
—

 
1

Balance at September 30, 2015
108,899

 
$
1

 
$
1,101

 
$
603

 
$
(18
)
 
$
1,687

 
$
9

 
$
1,696

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
108,000

 
$
1

 
$
1,105

 
$
682

 
$
(30
)
 
$
1,758

 
$
9

 
$
1,767

Net income (loss)
—

 
—

 
—

 
(179
)
 
—

 
(179
)
 
(3
)
 
(182
)
Shares issued (surrendered) under incentive plan, net
87

 
—

 
—

 
—

 
(3
)
 
(3
)
 
—

 
(3
)
Share-based compensation
—

 
—

 
18

 
—

 
—

 
18

 
—

 
18

Excess tax deficiency from share based compensation
—

 
—

 
(4
)
 
—

 
—

 
(4
)
 
—

 
(4
)
Repurchase of common stock
(10,589
)
 
—

 
—

 
—

 
(114
)
 
(114
)
 
—

 
(114
)
Balance at September 30, 2016
97,498

 
$
1

 
$
1,119

 
$
503

 
$
(147
)
 
$
1,476

 
$
6

 
$
1,482


See accompanying notes to the consolidated financial statements.

5

NATIONSTAR MORTGAGE HOLDINGS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions of dollars)

 
Nine months ended September 30,
 
2016
 
2015
Operating Activities
 
 
 
Net loss attributable to Nationstar
$
(179
)
 
$
(40
)
Reconciliation of net loss to net cash attributable to operating activities:
 
 
 
Noncontrolling interest
(3
)
 
4

Net gain on mortgage loans held for sale
(624
)
 
(517
)
Provision for reserves on advances and other receivables
85

 
39

Fair value changes and amortization of mortgage servicing rights
784

 
500

Fair value changes in excess spread financing
(75
)
 
(23
)
Fair value changes in mortgage servicing rights financing liability
(2
)
 
7

Amortization (accretion) of premiums (discounts)
27

 
(20
)
Depreciation and amortization
66

 
52

Share based compensation
18

 
15

Other loss
2

 
1

Repurchases of forward loan assets out of Ginnie Mae securitizations
(1,138
)
 
(1,393
)
Mortgage loans originated and purchased, net of fees
(15,845
)
 
(13,970
)
Sales proceeds and loan payment proceeds for mortgage loans held for sale and held for investment
17,043

 
15,049

Excess tax benefit (deficiency) from share-based compensation
4

 
(1
)
Changes in assets and liabilities:
 
 
 
Advances and other receivables, net
519

 
479

Reverse mortgage interests, net
179

 
(165
)
Other assets
(137
)
 
47

Payables and accrued liabilities
(139
)
 
(127
)
Net cash attributable to operating activities
585

 
(63
)
 
 
 
 
Investing Activities
 
 
 
Property and equipment additions, net of disposals
(47
)
 
(44
)
Purchase of forward mortgage servicing rights, net of liabilities incurred
(46
)
 
(615
)
Purchase of reverse mortgage interests
—

 
(4,815
)
Sale of forward mortgage servicing rights
27

 
41

Proceeds on sale of reverse mortgage servicing rights
1

 
—

Business acquisitions, net
—

 
(45
)
Net cash attributable to investing activities
(65
)
 
(5,478
)
Continued on following page.
See accompanying notes to the consolidated financial statements. 









6

NATIONSTAR MORTGAGE HOLDINGS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(millions of dollars)
 
Nine months ended September 30,
 
2016
 
2015
Financing Activities
 
 
 
Increase in warehouse facilities
718

 
730

Proceeds from HECM securitizations
724

 
342

Repayment of HECM securitizations
(624
)
 
(103
)
Increase (decrease) in participating interest financing in reverse mortgage interests
(480
)
 
4,629

Decrease in advance facilities
(458
)
 
(148
)
Repayment of excess spread financing
(146
)
 
(155
)
Issuance of excess spread financing
—

 
263

Repayment of nonrecourse debt – legacy assets
(12
)
 
(10
)
Repurchase of unsecured senior notes
(29
)
 
—

Repurchase of common stock
(114
)
 
—

Issuance of common stock, net of issuance costs
—

 
498

Transfers to restricted cash, net
—

 
(192
)
Excess tax (deficiency) benefit from share based compensation
(4
)
 
1

Surrender of shares relating to stock vesting
(3
)
 
(6
)
Debt financing costs
(10
)
 
(10
)
Net cash attributable to financing activities
(438
)
 
5,839

Net increase in cash and cash equivalents
82

 
298

Cash and cash equivalents at beginning of period
613

 
299

Cash and cash equivalents at end of period
$
695

 
$
597

 
 
 
 
Supplemental disclosures of cash activities
 
 
 
Cash paid for interest expense
$
510

 
$
319

Net cash paid for income taxes
$
29

 
$
31

See accompanying notes to the consolidated financial statements. 

7


NATIONSTAR MORTGAGE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(millions of dollars, unless otherwise stated)

1. Nature of Business and Basis of Presentation

Nature of Business
Nationstar Mortgage Holdings Inc., a Delaware corporation, including its consolidated subsidiaries (collectively, "Nationstar" or the "Company"), earns fees through the delivery of servicing, origination and transaction based services related primarily to single-family residences throughout the United States.

Basis of Presentation
The consolidated interim financial statements of Nationstar have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") for interim information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission ("SEC"). Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in Nationstar's Annual Report on Form 10-K for the year ended December 31, 2015. The Company describes its significant accounting policies in Note 2 of the notes to consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2015. During the nine months ended September 30, 2016, there were no significant changes to those accounting policies. Dollar amounts are reported in millions, except per share data and other key metrics, unless otherwise noted.

The interim consolidated financial statements are unaudited; however, in the opinion of management, all adjustments considered necessary for a fair presentation of the results of the interim periods have been included. Certain prior period amounts have been reclassified to conform to the current period presentation. Nationstar evaluated subsequent events through the date these interim consolidated financial statements were issued.

Basis of Consolidation
The consolidated financial statements include the accounts of Nationstar, its wholly-owned subsidiaries, and other entities in which the Company has a controlling financial interest, and those variable interest entities ("VIE") where Nationstar's wholly-owned subsidiaries are the primary beneficiaries. Nationstar applies the equity method of accounting to investments where it is able to exercise significant influence, but not control, over the policies and procedures of the entity and owns less than 50% of the voting interests. Intercompany balances and transactions on consolidated entities have been eliminated. Business combinations are included in the consolidated financial statements from their respective dates of acquisition. Assets and liabilities of VIEs and their respective results of operations are consolidated from the date that Nationstar became the primary beneficiary through the date Nationstar ceases to be the primary beneficiary.

Reclassifications
In the second quarter of 2016, the Company reclassified certain assets to more closely align assets related to amounts from agencies and investors from other assets to advances and other receivables in its previously reported consolidated balance sheet as of December 31, 2015. The revised balances of those accounts as of December 31, 2015 are shown in the table below.


8

In addition, certain prior-period amounts have been reclassified to conform to the current-period presentation. As shown in the table below, pursuant to the adoption of Accounting Standards Update ("ASU") No. 2015-03, Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, during the first quarter of 2016 the Company has reclassified unamortized debt issuance costs associated with its unsecured senior notes, advance facilities, warehouse facilities and other nonrecourse debt in its previously reported Consolidated Balance Sheet as of December 31, 2015. The revised balances of those accounts as of December 31, 2015 are shown in the table below.
 
As presented
 
Reclassification
 
As adjusted
 
December 31, 2015
 
ASU 2015-03
Other
 
December 31, 2015
Advances and other receivables, net
$
2,223

 
$
—

$
189

 
$
2,412

Other assets
759

 
(38
)
(189
)
 
532

Unsecured senior notes
2,049

 
(23
)
—

 
2,026

Advance facilities
1,646

 
(6
)
—

 
1,640

Warehouse facilities
1,894

 
(4
)
—

 
1,890

Other nonrecourse debt
6,671

 
(5
)
—

 
6,666


Recent Accounting Guidance Adopted
Effective January 1, 2016, the Company adopted Accounting Standards Update No. 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (ASU 2014-12), which requires that a performance target that affects vesting that could be achieved after the requisite service period be treated as a performance condition. The adoption of ASU 2014-12 did not have a material impact on our financial condition, liquidity or results of operations.

Effective January 1, 2016, the Company retrospectively adopted Accounting Standards Update No. 2015-03, Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), which requires debt issuance costs be included in the carrying value of the related debt liability, when recognized, on the face of the balance sheet. The adoption of ASU 2015-03 was limited to balance sheet reclassification of unamortized debt issuance costs, and did not impact the Company's financial condition, liquidity or results of operations. See Reclassifications section in Note 1 for further details. Also, ASU 2015-15, Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements further expands ASU 2015-03 for presentation and disclosure in the financial statements. ASU 2015-15 amends Subtopic 835-30 to include that the SEC would not object to the deferral and presentation of debt issuance costs as an asset and subsequent amortization of the deferred costs over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The adoption of ASU 2015-15 did not have a material impact on our financial condition, liquidity or results of operations.
 
Effective January 1, 2016, the Company prospectively adopted Accounting Standards Update No. 2015-05, Intangibles — Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (ASU 2015-05), which was created to eliminate diversity in the reporting of fees paid by a customer in a cloud computing arrangement caused by lack of guidance. This update provides that if a cloud computing arrangement includes a software license, the license element should be accounted for as other acquired software licenses. Otherwise, the fees should be accounted for as a service contract. The adoption of ASU 2015-05 did not have a material impact on our financial condition, liquidity or results of operations.

Recent Accounting Guidance Not Yet Adopted
Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), provides guidance for revenue recognition. This ASU’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects consideration to which the company expects to be entitled in exchange for those goods or services. The ASU 2014-09 was postponed resulting in effective commencement with Nationstar's quarter ending March 31, 2018. The Company is currently assessing the potential impact of ASU 2014-09 on the consolidated financial statements.


9

Accounting Standards Update No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15), creates consistency in the disclosures made by an entity when there is doubt that the entity will continue as a going concern. ASU 2014-15 is effective for annual periods ending after December 15, 2016. The adoption of ASU 2014-15 is not expected to have a material impact on our financial condition, liquidity or results of operations.

Accounting Standards Update No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), primarily impacts accounting for equity investments and financial liabilities under the fair value option, as well as the presentation and disclosure requirements for financial instruments. Under the new guidance, equity investments will generally be measured at fair value, with subsequent changes in fair value recognized in net income. ASU 2016-01 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company does not expect the adoption of this guidance to have a material impact on the Company’s financial position or results of operations.
Accounting Standards Update No. 2016-02, Leases (ASU 2016-02), primarily impacts lessee accounting by requiring the recognition of a right-of-use asset and a corresponding lease liability on the balance sheet for long-term lease agreements. The lease liability will be equal to the present value of all reasonably certain lease payments. The right-of-use asset will be based on the liability, subject to adjustment for initial direct costs. Lease agreements that are 12 months or less are permitted to be excluded from the balance sheet. In general, leases will be amortized on a straight-line basis with the exception of finance lease agreements. ASU 2016-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the impact the adoption of this guidance will have on the Company’s financial position or results of operations.
Accounting Standards Updates No. 2016-08 and 2016-12, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), clarify that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer, provides guidance regarding how to apply the control principle when services are provided and when goods or services are combined with other goods or services, and clarifies the definition of a completed contract. Additional clarification is provided that if Topic 606 is applied retrospectively to the financial statements, it does not have to be treated as an accounting change. The effective date of the standard for the Company will coincide with ASU 2014-09 during the first quarter 2018. The Company is currently assessing the impact the adoption of this guidance will have on the Company’s financial position or results of operations.

Accounting Standards Update No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, calculation of earnings per share, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods with early adoption permitted. The Company is currently assessing the impact the adoption of this guidance will have on the Company’s financial position or results of operations.

Accounting Standards Update No. 2016-10, Identifying Performance Obligations and Licensing (ASU 2016-10), amends the revenue guidance in ASU 2014-09 on identifying performance obligations and accounting for licenses of intellectual property. ASU 2016-10 changed the Financial Accounting Standards Board's previous proposals on renewals of right-to-use licenses and contractual restrictions. The effective date of the standard for the Company will coincide with ASU 2014-09 during the first quarter 2018. The Company is currently assessing the impact the adoption of this guidance will have on the Company’s financial position or results of operations.

Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326) (ASU 2016-13), requires organization to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The update eliminates the probable initial recognition threshold in current GAAP and, instead, reflects an entity’s current estimate of all expected credit losses. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 14, 2019. The Company is currently assessing the impact the adoption of this guidance will have on the Company's financial position or results of operations.


10

Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, and will require adoption on a retrospective basis. The Company is currently evaluating the impact the application of ASU 2016-15 will have on the Company’s financial position or results of operations. 

2. Mortgage Servicing Rights ("MSR") and Related Liabilities

The following table sets forth the carrying value of Nationstar's MSR and the related liabilities as of September 30, 2016 and December 31, 2015.
MSRs and Related Liabilities
September 30, 2016
 
December 31, 2015
Forward MSRs - fair value
$
2,725

 
$
3,358

Reverse MSRs - LOCOM
7

 
9

Mortgage servicing rights
$
2,732

 
$
3,367

 
 
 
 
Mortgage servicing liabilities - LOCOM
$
11

 
$
25

 
 
 
 
Excess spread financing - fair value
$
1,012

 
$
1,232

Mortgage servicing rights financing liability - fair value
67

 
69

MSR related liabilities (nonrecourse)
$
1,079

 
$
1,301


Forward Mortgage Servicing Rights - Fair Value
The Company owns and records at fair value the rights to service traditional residential mortgage loans ("forward" loans) for others either as a result of purchase transactions or from the sales and securitizations of loans originated. Forward MSRs are comprised of rights related to both agency and non-agency loans.

Servicing resulting from transfers of financial assets comprises the fair value of the newly originated MSRs at the time the loan is sold or securitized.


11

The activity of MSRs carried at fair value is as follows for the dates indicated.

 
Nine months ended September 30,
Forward MSRs - Fair Value
2016
 
2015
Fair value at the beginning of the period
$
3,358

 
$
2,950

Additions:
 
 
 
Servicing resulting from transfers of financial assets
140

 
169

Purchases of servicing assets
50

 
695

Dispositions:
 
 
 
Sales of servicing assets
(27
)
 
(46
)
Changes in fair value:
 
 
 
Due to changes in valuation inputs or assumptions used in the valuation model
(494
)
 
(197
)
Other changes in fair value
(302
)
 
(338
)
Fair value at the end of the period
$
2,725

 
$
3,233


During the nine months ended September 30, 2016, the Company sold MSRs and was retained as the subservicer for an unpaid principal balance of $3,507, out of a total $4,560 unpaid principal balance sold. From time to time, the Company sells its ownership interest in certain MSRs and is retained as the subservicer for the sold assets. The Company has evaluated the sale accounting requirements related to these transactions given the continued involvement as the subservicer and concluded that these transactions qualify for sale accounting treatment.

MSRs measured at fair value are segregated between credit sensitive and interest sensitive pools. Interest sensitive pools are primarily impacted by changes in forecasted interest rates, which in turn impact voluntary prepayment speeds. Credit sensitive pools are primarily impacted by borrower performance under specified repayment terms, which most directly impacts involuntary prepayments and delinquency rates. The Company assesses whether acquired portfolios are more credit sensitive or interest sensitive in nature on the date of acquisition. Numerous factors are considered in making this assessment, including loan-to-value ratios, FICO scores, percentage of portfolio previously modified, portfolio seasoning and similar criteria. Once the determination for a pool is made, subsequent changes are not made.

Interest sensitive portfolios generally consist of lower delinquency, single-family conforming residential forward mortgage loans for investors. Credit sensitive portfolios generally consist of higher delinquency, single-family non-conforming residential forward mortgage loans serviced for agency and non-agency investors.

The following table provides a breakdown of the total credit and interest sensitive unpaid principal balances ("UPBs") for Nationstar's forward owned MSRs that are carried at fair value.
 
September 30, 2016
 
December 31, 2015
 
UPB
 
Fair Value
 
UPB
 
Fair Value
Credit sensitive
$
192,728

 
$
1,665

 
$
224,334

 
$
2,017

Interest sensitive
120,379

 
1,060

 
121,342

 
1,341

Total
$
313,107

 
$
2,725

 
$
345,676

 
$
3,358



12

Nationstar used the following weighted average assumptions in estimating the fair value of MSRs for the dates indicated.
Credit Sensitive
September 30, 2016
 
December 31, 2015
Discount rate
11.6
%
 
11.6
%
Weighted-average prepayment speeds
17.4
%
 
16.5
%
Expected weighted-average life
5.5 years

 
5.9 years

 
 
 
 
Interest Sensitive
 
 
 
Discount rate
9.2
%
 
9.1
%
Weighted-average prepayment speeds
16.1
%
 
12.4
%
Expected weighted-average life
5.0 years

 
6.1 years


The following table shows the hypothetical effect on the fair value of the MSRs using certain unfavorable variations of the expected levels of key assumptions used in valuing these assets at September 30, 2016 and December 31, 2015.
 
Discount Rate
 
Total Prepayment
Speeds
 
100 bps
Adverse
Change
 
200 bps
Adverse
Change
 
10%
Adverse
Change
 
20%
Adverse
Change
September 30, 2016
 
 
 
 
 
 
 
Mortgage servicing rights
$
(88
)
 
$
(171
)
 
$
(126
)
 
$
(240
)
December 31, 2015
 
 
 
 
 
 
 
Mortgage servicing rights
$
(123
)
 
$
(238
)
 
$
(132
)
 
$
(253
)

These sensitivities are hypothetical and should be evaluated with care. The effect on fair value of a 10% variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects. Also, the changes in the fair value of Nationstar's excess spread financing liability partially offsets the change in the fair value of Nationstar's mortgage servicing rights.

Reverse Mortgage Servicing Rights and Liabilities - LOCOM
Nationstar owns the right to service certain Home Equity Conversion Mortgage ("HECM") reverse mortgage loans with an unpaid principal balance of $26,855 and $29,855 as of September 30, 2016 and December 31, 2015, respectively. An MSR asset or Mortgage Servicing Liability ("MSL") is established upon the acquisition at fair value, as applicable, based on the proceeds paid or received to service the reverse portfolio. Each quarter, the Company amortizes or accretes the MSR or MSL, respectively, to service related revenue, net as the respective portfolios run-off, and the MSR or MSL is assessed for impairment or increased obligation based on its fair value, using a variety of assumptions. The primary assumptions of MSR consists of discount rates, prepayment speeds and the borrower life expectancy, whereas the primary assumptions of MSL consist of loss severity and expectancy rates, foreclosure timelines, and expected changes in interest rates. The MSRs are stratified based on predominant risk characteristics of the underlying serviced loans. Impairment, if any, represents the excess of amortized cost of an individual stratum over its estimated fair value and is recognized through an increase in the valuation expense. At September 30, 2016 and December 31, 2015, no impairment was identified.


13

The following table sets forth the amortized carrying value and activity of reverse MSRs for the nine months ended September 30, 2016 and 2015.
 
Nine months ended September 30,
 
2016
 
2015
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Reverse MSRs and Liabilities - LOCOM
 
 
 
 
 
 
 
Balance at the beginning of the period
$
9

 
$
25

 
$
12

 
$
65

Amortization/accretion
(2
)
 
(14
)
 
(2
)
 
(37
)
Balance at end of the period
$
7

 
$
11

 
$
10

 
$
28

Fair value at end of period
$
25

 
$
2

 
$
30

 
$
11


For the nine months ended September 30, 2016 and 2015, the Company accreted $14 and $37, respectively, of the mortgage servicing liability. As part of servicing arrangements, issuers of HECMs are responsible for repurchasing any loans out of the Home Equity Conversion Mortgage Backed Securities ("HMBS") pool when the outstanding principal balance of the related HECM loan is equal to or greater than 98% of the maximum claim amount set at origination. Purchases of such loans, which relinquishes the reverse MSR or MSL, are subsequently recorded as reverse mortgage interests.

Excess Spread Financing at Fair Value
In order to finance the acquisition of certain forward MSRs on various pools of residential mortgage loans (the "Portfolios"), Nationstar entered into multiple sale and assignment agreements with certain entities formed by New Residential Investment Corp. ("New Residential"), a subsidiary of Fortress Investment Group LLC ("Fortress"). Certain funds are managed by Fortress, which owns an interest in the Company. See Note 18. Transactions with Affiliates. Nationstar, in transactions accounted for as financing arrangements, sold to such entities the right to receive a specified percentage of the excess cash flow generated from the Portfolios after receipt of a fixed basic servicing fee per loan. Nationstar has elected fair value accounting for these financing agreements.

Servicing fees associated with a traditional MSR can be segregated into a contractually specified base fee component and an excess servicing fee. The base servicing fee, along with ancillary income, is designed to cover costs incurred to service the specified pool plus a reasonable profit margin. The remaining servicing fee is considered excess.
Nationstar retains all the base servicing fee and ancillary revenues associated with servicing the Portfolios and retains a portion of the excess servicing fee. Nationstar continues to be the servicer of the Portfolios and provides all servicing and advancing functions.

Contemporaneous with the above, Nationstar entered into refinanced loan agreements with New Residential. Should Nationstar refinance any loan in the Portfolios, subject to certain limitations, it will be required to transfer the new loan or a replacement loan of similar economic characteristics into the Portfolios. The new or replacement loan will be governed by the same terms set forth in the sale and assignment agreement described above, which is the primary driver of the recapture rate assumption.

The range of various assumptions used in Nationstar's valuation of excess spread financing are as follows.
Excess Spread Financing
Prepayment Speeds
 
Average
Life (Years)
 
Discount
Rate
 
Recapture Rate
September 30, 2016
 
 
 
 
 
 
 
Low
8.4%
 
3.7
 
8.5%
 
6.7%
High
18.3%
 
6.5
 
14.1%
 
28.3%
Weighted-average
12.5%
 
5.4
 
11.0%
 
18.0%
December 31, 2015
 
 
 
 
 
 
 
Low
7.4%
 
4.2
 
8.5%
 
6.8%
High
17.1%
 
7.8
 
14.1%
 
30.0%
Weighted-average
11.6%
 
5.9
 
11.2%
 
17.7%


14

The following table shows the hypothetical effect on the fair value of excess spread financing using certain unfavorable variations of the expected levels of key assumptions used in valuing these liabilities at the dates indicated.
 
Discount Rate
 
Prepayment
Speeds
 
100 bps
Adverse
Change
 
200 bps
Adverse
Change
 
10%
Adverse
Change
 
20%
Adverse
Change
September 30, 2016
 
 
 
 
 
 
 
Excess spread financing
$
36

 
$
74

 
$
41

 
$
82

December 31, 2015
 
 
 
 
 
 
 
Excess spread financing
$
42

 
$
87

 
$
37

 
$
76


As the cash flow assumptions utilized in determining the fair value amounts in the excess spread financing are based on the related cash flow assumptions utilized in the financed MSRs, any fair value changes recognized in the MSRs would inherently have an inverse impact on the carrying amount in the related excess spread financing. For example, while an increase in discount rates would negatively impact the value of the Company's MSRs, it would reduce the carrying value of the associated excess spread financing liability.

These sensitivities are hypothetical and should be evaluated with care. The effect on fair value of a 10% variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects. Also, a positive change in the above assumptions would not necessarily correlate with the corresponding decrease in the net carrying amount of the excess spread financing.

Mortgage Forward Servicing Rights Financing
From December 2013 through June 2014, Nationstar entered into agreements to sell a contractually specified base fee component of certain forward MSRs and servicing advances under specified terms to New Residential and certain unaffiliated third-parties. Nationstar continues to be the named servicer and, for accounting purposes, ownership of the mortgage servicing rights continues to reside with Nationstar. Nationstar continues to account for the MSRs on its consolidated balance sheets. Consequently, Nationstar records a MSR financing liability associated with this transaction. See Note 18. Transactions with Affiliates for additional information.

Nationstar elected to measure the mortgage servicing rights financings at fair value with all changes in fair value recorded as a charge or credit to servicing related revenue, net in the consolidated statements of operations. The following table sets forth the weighted average assumptions used in the valuation of mortgage servicing rights financing liability.
 
September 30, 2016
 
December 31, 2015
Advance financing rates
3.3
%
 
3.0
%
Annual advance recovery rates
24.2
%
 
20.9
%

15


The following table sets forth the items comprising of revenue associated with servicing loan portfolios.
 
Three months ended September 30,
 
Nine months ended September 30,
Servicing Segment Revenue
2016
 
2015
 
2016
 
2015
Contractually specified servicing fees including subservicing fees
$
254

 
$
285

 
$
786

 
$
827

Reverse servicing fees
11

 
32

 
46

 
75

Incentive and modification income
35

 
21

 
82

 
75

Late fees
19

 
18

 
57

 
52

Other service-related income
66

 
62

 
214

 
173

Revenue sharing related to MSR financing and excess spread
(75
)
 
(77
)
 
(223
)
 
(225
)
Amortization
(92
)
 
(83
)
 
(235
)
 
(247
)
Mark-to-market
(8
)
 
(151
)
 
(502
)
 
(180
)
Total servicing fee income
$
210

 
$
107

 
$
225

 
$
550


3. Advances and Other Receivables, Net

Advances and other receivables, net consists of the following.
 
September 30, 2016
 
December 31, 2015
Servicing advances
$
1,683

 
$
2,254

Receivables from agencies and investors
321

 
288

Reserves
(180
)
 
(130
)
Total advances and other receivables, net
$
1,824

 
$
2,412


Servicing advances on agency securities represent a receivable from the respective agency investor and are recovered from cash reimbursements from the agency. Servicing advances on non-agency securities are typically recovered from proceeds of the sale of mortgage loan collateral for which the advance was made. If loan-level proceeds are determined to be insufficient, recovery is achieved from cash collected at the pool level from the securitization trust as permitted contractually or mortgage insurance claim. In order to more closely align assets related to amounts due from agencies and investors, certain December 31, 2015 balances of other assets were reclassified to advances and other receivables as presented in Note 1. Nature of Business and Basis of Presentation. The reclassified amounts represented amounts due from agencies relating to filed claims and from investors. These amounts, net of reserves, totaled $189 as of December 31, 2015.
Each reporting period, the Company evaluates the appropriateness of its reserves for uncollectible advances and servicing receivables. The reserves are computed based on an analysis that considers the underlying loan, the type of advance or servicing receivable, the investors' servicing reimbursement guidelines, mortgage insurance reimbursement guidelines, reimbursement patterns and past loss experience. The carrying value of active loans within the MSR portfolio are adjusted each period to reflect both the positive and negative projected cash flows associated with serviced loans, and earnings is adjusted accordingly through the mark-to-market adjustment, which is a component of service related revenue. As loans with negative MSR values become inactive and reach a $0 UPB, the related negative values associated with these loans are reclassified from MSR to the reserve account within advances and other receivables, net. The reclassification upon loans becoming inactive is consistent with the Company's accounting policy and allows alignment of reserves with the assets where expected servicing losses for inactive loans will be realized. After a loan becomes inactive, subsequent reserves are established if needed through a charge to general and administrative expense reflecting expected losses incurred during the liquidation process.

16

During the first quarter of 2016, the Company increased reserves by $59 through a reclassification from MSR for negative values associated with inactive loans that were recorded as of December 31, 2015 and decreased reserves by $3 for reclassifications to other accounts to align the needed reserve balance. Reserves also increased by $27 and $85 during the three and nine months ended September 30, 2016, respectively, through a provision for negative MSR values related to inactive loans. The provision was recorded as a reduction to service related revenue. During the three and nine months ended September 30, 2016, the Company wrote off $91 of advances that were previously identified as not recoverable.
4. Reverse Mortgage Interests, Net

Reverse mortgage interests, net consist of the following.
 
September 30, 2016
 
December 31, 2015
Participating interests in HMBS
$
5,412

 
$
5,864

Other interests securitized
836

 
715

Unsecuritized interests
1,180

 
988

Reserves
(94
)
 
(53
)
Total reverse mortgage interests, net
$
7,334

 
$
7,514


Participating interests
Participating interests consist of reverse mortgage interests or HECM loans which have been transferred to Ginnie Mae and subsequently securitized through the issuance of HMBS. The HMBS securitizations are accounted for as secured borrowings with both the reverse mortgage interest and related indebtedness retained on the Company's balance sheet.

Other interests securitized
Other interests securitized consist of reverse mortgage interests which have been transferred to private securitization trusts and are subject to nonrecourse debt. Nationstar evaluated these trusts and concluded that they meet the definition of a VIE and Nationstar is the primary beneficiary. Accordingly, these transactions are treated as secured borrowings and both the reverse mortgage interests and the related indebtedness are retained on the Company's balance sheet.

Unsecuritized interests
Unsecuritized interests in reverse mortgages consist primarily of the following.
 
September 30, 2016
 
December 31, 2015
Repurchased HECM loans
$
803

 
$
591

HECM related receivables
283

 
290

Funded borrower draws not yet securitized
74

 
83

Foreclosed assets
20

 
24

Total unsecuritized interests
$
1,180

 
$
988


Unsecuritized interests include HECM loans for which the Company is required to repurchase from the HMBS pool when the outstanding principal balance of the HECM loan is equal to or greater than 98% of the maximum claim amount established at origination. The Company repurchased a total of $2,270 and $1,572 HECM loans out of Ginnie Mae HMBS securitizations during the nine months ended September 30, 2016 and 2015, respectively, of which, $661 and $608 were subsequently reimbursed by a prior servicer. Nationstar routinely securitizes eligible reverse mortgage interests through Ginnie Mae HMBS pools or private HECM securitization trusts. Reverse mortgage interest securitization transactions are treated as secured borrowings with both the reverse mortgage interests and related indebtedness retained on Nationstar’s balance sheet.


17

Reserves for reverse mortgage interests
Reserves for servicing losses on reverse mortgage interests are reflected through the Company's provision for losses and consist of (1) financial and (2) operational losses related to servicing of other interests securitized and unsecuritized interests in HECM loans. Financial exposures are defined as the cost of doing business related to servicing the HECM product and include potential unrecoverable costs primarily based on FHA claim guidelines related to reimbursable expenses and unfavorable change in the appraised value of the loan collateral. Operational exposures are defined as un-reimbursable debenture interest curtailments imposed for missed HUD servicing time lines. The Company establishes reserves for servicing losses based on historical loss experience, underlying value of collateral, age of claim and management’s knowledge of expected claim recoveries. Losses are established when loans are bought out of the Ginnie Mae HMBS pools. Reserves reflect management’s best estimate of amounts to be realized, which are subject to change as facts and circumstances change. In the nine months ended September 30, 2016, the Company increased reverse mortgage reserves by $42 for changes in actual and estimated losses. The increase in reserves is primarily due to loss estimates resulting from updated economic factors such as prolonged foreclosure timelines and due to changes in negotiations with investors regarding expected recoveries of make-whole claims.

Reverse mortgage sales
During March 2016, Nationstar executed an option to purchase HECM loans related to a reverse mortgage loan trust, of which Nationstar was the master servicer and holder of clean-up call rights. The Company acquired reverse mortgage loans for $55 with an outstanding unpaid principal balance totaling $96. These loans were recorded within reverse mortgage interests as mortgage loans held for sale at LOCOM. In June 2016, Nationstar sold the loans from the transaction for $74 and recorded a gain on the sale of $17, which was recorded to net gain on mortgage loans held for sale.

Reverse interest income
The Company accrues interest income for its participating interest in reverse mortgages based on the stated rate of the HECM loan. Total interest earned on the Company's reverse mortgage interests was $81 and $251 for the three and nine months ended September 31, 2016, respectively, and $90 and $181 for the three and nine months ended September 30, 2015, respectively. 

5. Mortgage Loans Held for Sale and Investment

Mortgage Loans Held for Sale
Nationstar maintains a strategy of originating mortgage loan products primarily for the purpose of selling to government-sponsored enterprises ("GSEs") or other third-party investors in the secondary market. Nationstar focuses on assisting customers currently in the Company's servicing portfolio with refinancings of loans or new home purchases (referred to as "recapture"). Generally, all newly originated mortgage loans held for sale are securitized and transferred to GSEs or delivered to third-party purchasers shortly after origination on a servicing-retained basis.

Mortgage loans held for sale are recorded at fair value as set forth below.
 
September 30, 2016
 
December 31, 2015
Mortgage loans held for sale – unpaid principal balance
$
1,774

 
$
1,374

Mark-to-market adjustment(1)
65

 
56

Total mortgage loans held for sale
$
1,839

 
$
1,430

(1) The mark-to-market adjustment is recorded in net gain on mortgage loans held for sale in the consolidated statements of operations.

Nationstar accrues interest income as earned and places loans on non-accrual status after any portion of principal or interest has been delinquent for more than 90 days. When a loan is placed on non-accrual status, Nationstar reverses the interest that had been accrued but not yet received.

The total UPB of mortgage loans held for sale on nonaccrual status was as follows for the dates indicated.
 
September 30, 2016
 
December 31, 2015
Mortgage Loans Held for Sale - Unpaid Principal Balance
UPB
 
Fair Value
 
UPB
 
Fair Value
Non-accrual
$
109

 
$
105

 
$
31

 
$
29



18

From time to time, Nationstar exercises its right to repurchase individual delinquent loans in Ginnie Mae securitization pools to minimize interest spread losses, to re-pool into new Ginnie Mae securitizations, or to otherwise sell to third-party investors.  During the nine months ended September 30, 2016, Nationstar repurchased $201 of delinquent Ginnie Mae loans, of which $88 of these loans were securitized or sold to third-party investors. As of September 30, 2016, $18 of the repurchased loans have re-performed and were held in accrual status, and remaining balances continue to be held under a nonaccrual status.
The total UPB of mortgage loans held for sale for which the Company has begun formal foreclosure proceedings was $85 and $16 as of September 30, 2016 and December 31, 2015, respectively.
A reconciliation of the changes in mortgage loans held for sale is presented in the following table.
 
 
Nine months ended September 30,
 
2016
 
2015
Mortgage loans held for sale – beginning balance
$
1,430

 
$
1,278

Mortgage loans originated and purchased, net of fees
15,788

 
13,970

Transfer of mortgage loans held for sale to advances/accounts receivable related to claims (1)
(16
)
 
(46
)
Transfer of mortgage loans held for sale to other assets
9

 
—

Repurchase of loans out of Ginnie Mae securitizations
1,138

 
1,369

Loans sold
(16,510
)
 
(14,685
)
Mortgage loans held for sale – ending balance
$
1,839

 
$
1,886


(1) Amounts are comprised of claims made on certain government guaranteed mortgage loans upon foreclosure.

For the nine months ended September 30, 2016 and 2015, the Company received proceeds of $16,957 and $15,034, respectively, on the sale of mortgage loans held for sale, resulting in gains of $447 and $349, respectively.

Nationstar has the right to repurchase any individual loan in a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. The majority of Ginnie Mae repurchased loans are repurchased solely with the intent to re-pool into new Ginnie Mae securitizations upon re-performance of the loan or to otherwise sell to third-party investors. The amounts repurchased out of Ginnie Mae pools, as presented above, are primarily in connection with loan modifications and loan resolution activity as part of Nationstar's contractual obligations as the servicer of the loans.


19

Mortgage Loans Held for Investment, Net
Mortgage loans held for investment, net are comprised of the following. 
 
September 30, 2016
 
December 31, 2015
Mortgage loans held for investment, net – unpaid principal balance
$
225

 
$
250

Transfer discount:
 
 
 
Accretable
(14
)
 
(15
)
Non-accretable
(52
)
 
(57
)
Allowance for loan losses
(3
)
 
(4
)
Total mortgage loans held for investment, net
$
156

 
$
174


The changes in accretable yield on loans transferred to mortgage loans held for investment, net are set forth below. 
 
Nine months ended September 30,
 
2016
 
2015
Accretable Yield
 
 
 
Balance at the beginning of the period
$
(15
)
 
$
(16
)
Accretion
2

 
2

Reclassifications from nonaccretable discount
(1
)
 
(1
)
Balance at the end of the period
$
(14
)
 
$
(15
)
Nationstar may periodically modify the terms of any outstanding mortgage loans held for investment, net for loans that are either in default or in imminent default. Modifications often involve reduced payments by borrowers, modification of the original terms of the mortgage loans, forgiveness of debt and/or modified servicing advances. As a result of the volume of modification agreements entered into, the estimated average outstanding life in this pool of mortgage loans has been extended. Nationstar records interest income on the transferred loans on a level-yield method. To maintain a level-yield on these transferred loans over the estimated extended life, Nationstar reclassified approximately $1.4 and $1.2 of transfer discount from non-accretable yield for the nine months ended September 30, 2016 and 2015, respectively.

Loan delinquency and loan-to-value ratio ("LTV") are common credit quality indicators that Nationstar monitors and utilizes in its evaluation of the adequacy of the allowance for loan losses, of which the primary indicator of credit quality is loan delinquency status. LTV refers to the ratio of the loan’s unpaid principal balance to the property’s collateral value. Loan delinquencies and unpaid principal balances are updated monthly based upon collection activity. Collateral values are updated from third party providers on a periodic basis. The collateral values used to derive LTVs are obtained at various dates, but the majority were within the last twenty-four months. For an event requiring a decision based at least in part on the collateral value, the Company takes its last known value provided by a third party and then adjusts the value based on the applicable home price index.

The total UPB of mortgage loans held for investment for which the Company has begun formal foreclosure proceedings was $31 and $41 as of September 30, 2016 and December 31, 2015, respectively.


20

6. Other Assets

Other assets consist of the following.
 
September 30, 2016
 
December 31, 2015
Accrued revenues
$
172

 
$
180

Loans subject to repurchase right from Ginnie Mae
144

 
117

Taxes receivable
74

 
—

Goodwill
74

 
71

Intangible assets
42

 
50

Deposits
39

 
30

Prepaid expenses
17

 
20

Real estate owned (REO), net
26

 
18

Receivables from affiliates, net
6

 
8

Other
60

 
38

       Total other assets
$
654

 
$
532


Accrued revenue is primarily comprised of service fees earned but not received.
For forward loans that Nationstar sold to Ginnie Mae in conjunction with issuance of mortgage backed securities, Nationstar as the issuer has the unilateral right to repurchase, any individual loan in a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. Once Nationstar has the unilateral right to repurchase a delinquent loan, Nationstar has effectively regained control over the loan and in accordance with GAAP must re-recognize the loan on its consolidated balance sheets and establish a corresponding repurchase liability regardless of Nationstar’s intention to repurchase the loan. Nationstar’s re-recognized loans included in other assets and the corresponding liability in payables and accrued liabilities was $144 at September 30, 2016 and $117 at December 31, 2015.

Tax receivable assets are primarily due to net operating tax losses recorded in 2016 and true-up adjustments associated with federal income tax returns for prior years.

Real estate owned (REO), net includes $21 and $15 of REO loans with a government or GSE guarantee at September 30, 2016 and December 31, 2015, respectively, limiting loss exposure to the Company.

Other primarily includes non-advance related accounts receivables due from investors and various other miscellaneous assets.

7. Derivative Financial Instruments

Derivative instruments utilized by Nationstar primarily include interest rate lock commitments ("IRLCs"), Loan Purchase Commitments ("LPCs"), Forward Mortgage Backed Securities ("MBS") trades, Eurodollar futures, interest rate swap agreements and interest rate caps. Nationstar enters into IRLCs with prospective borrowers. These commitments are carried at fair value, with any changes in fair value recorded in earnings as a component of net gain on mortgage loans held for sale. The estimated fair values of IRLCs are based on the fair value of the related mortgage loans which is based on observable market data and is recorded in derivative financial instruments within the consolidated balance sheets. Nationstar adjusts the outstanding IRLCs with prospective borrowers based on an expectation that it will be exercised and the loan will be funded.

Nationstar actively manages the risk profiles of its IRLCs and mortgage loans held for sale on a daily basis. To manage the price risk associated with IRLCs, Nationstar enters into forward sales of MBS in an amount equal to the portion of the IRLC expected to close, assuming no change in mortgage interest rates. In addition, to manage the interest rate risk associated with mortgage loans held for sale, Nationstar enters into forward sale commitments to deliver mortgage loan inventory to investors. The estimated fair values of forward sales of MBS and forward sale commitments are based on exchange prices or the dealer market price and are recorded as a component of derivative financial instruments in the consolidated balance sheets. The changes in value on forward sales of MBS and forward sale commitments are recorded as a charge or credit to net gain on mortgage loans held for sale.


21

Associated with the Company's derivatives are $10 and $4 in collateral deposits on derivative instruments recorded in other assets and payables and accrued liabilities on the Company's balance sheets as of September 30, 2016 and December 31, 2015, respectively. The Company does not offset fair value amounts recognized for derivative instruments and the amounts collected and/or deposited on derivative instruments in its consolidated balance sheets.

Nationstar enters into contracts with other mortgage lenders to purchase residential mortgage loans at a future date, which are referred to as LPCs. LPCs are accounted for as derivatives and recorded at fair value in derivative financial instruments on Nationstar's consolidated balance sheet. Changes in LPCs are recorded as a charge or credit to net gain on mortgage loans held for sale.

Nationstar enters into Eurodollar futures and Treasury futures contracts to replicate the economic hedging results achieved with interest rate swaps or offset the changes in value of its forward sales of certain agency securities. The Company has not designated its futures contracts as hedges for accounting purposes. Eurodollar futures are accounted for as derivatives and recorded at fair value in derivative financial instruments. Realized and unrealized changes in fair value are recorded as a charge or credit to net gain on mortgage loans held for sale.

Periodically, Nationstar enters into interest rate swap agreements to hedge the interest payment on the warehouse debt and securitization of its mortgage loans held for sale. These interest rate swap agreements generally require Nationstar to pay a fixed interest rate and receive a variable interest rate based on the London Interbank Offered Rate ("LIBOR"). Interest rate swaps are accounted for as derivative financial instruments. Unless designated as an accounting hedge, Nationstar records gains and losses on interest rate swaps as a component of gain/(loss) on interest rate swaps and caps in Nationstar’s consolidated statements of operations. Unrealized losses on designated interest rate derivatives are separately disclosed under operating activities in the consolidated statements of cash flows.

During the second quarter of 2015, Nationstar entered into two interest rate caps with notional values of $800 and $400 to mitigate interest rate risk associated with servicing advance facilities. Expenses associated with interest rate caps are recorded as a gain/(loss) on interest rate swaps and caps in Nationstar's consolidated statements of operations. The Company did not elect hedge accounting related to these agreements and they expired during the first quarter of 2016. The Company did not enter into any new agreements for the three and nine months ended September 30, 2016.

22

The following tables provide the outstanding notional balances, fair values of outstanding positions and recorded gains/(losses).
 
Expiration
Dates
 
Outstanding
Notional
 
Fair
Value
 
Recorded
Gains /
(Losses)
Nine months ended September 30, 2016
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Mortgage loans held for sale, net
 
 
 
 
 
 
 
Loan sale commitments
2016
 
$
82

 
$
(0.4
)
 
$
(0.7
)
Derivative financial instruments
 
 
 
 
 
 
 
IRLCs
2016
 
4,291

 
123.0

 
33.9

Forward MBS trades
2016
 
708

 
0.6

 
(5.5
)
LPCs
2016
 
354

 
2.8

 
(1.1
)
Eurodollar futures(1)
2016-2021
 
7

 
—

 
(0.1
)
Treasury futures
2016
 
63

 
0.5

 
0.5

Interest rate swaps
2017
 
10

 
0.2

 
(0.3
)
Liabilities
 
 
 
 
 
 
 
Derivative financial instruments
 
 
 
 
 
 
 
IRLCs(1)
2016
 
4

 
—

 
—

       Forward MBS trades
2016
 
3,306

 
13.1

 
(9.4
)
LPCs
2016
 
171

 
0.7

 
0.8

Eurodollar futures
2016-2021
 
55

 
0.1

 
—

Treasury futures
2016
 
67

 
0.3

 
(0.3
)
Interest rate swaps
2017
 
10

 
0.2

 
0.3

 
 
 
 
 
 
 
 
Twelve months ended December 31, 2015
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Mortgage loans held for sale
 
 
 
 
 
 
 
Loan sale commitments
2016
 
$
176

 
0.3

 
0.3

Derivative financial instruments
 
 
 
 
 
 
 
IRLCs
2016
 
2,768

 
89.1

 
1.2

Forward MBS trades
2016
 
1,666

 
6.1

 
5.8

LPCs
2016
 
388

 
3.9

 
1.9

Eurodollar futures
2016-2021
 
176

 
0.1

 
0.1

Interest rate swaps and caps
2016-2017
 
846

 
0.5

 
(0.4
)
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Derivative financial instruments
 
 
 
 
 
 
 
IRLCs(1)
2016
 
2

 
—

 
—

Forward MBS trades
2016
 
1,807

 
3.7

 
14.6

LPCs
2016
 
314

 
1.5

 
(1.4
)
Eurodollar futures
2016-2021
 
95

 
0.1

 
(0.1
)
Interest rate swaps and caps
2016-2017
 
13

 
0.5

 
(0.4
)

(1) Fair values of derivative instruments are less than $0.1 for the specified dates.



23

8. Indebtedness

Notes Payable
 
 
 
 
 
 
 
 
 
 
September 30, 2016
 
December 31, 2015
Advance Facilities
 
Interest Rate
 
Maturity Date
 
Collateral
 
Capacity Amount
 
Outstanding
 
Collateral Pledged
 
Outstanding
 
Collateral pledged
MBS advance financing facility
 
LIBOR+2.5%
 
March 31,
2017
 
Servicing advance receivables
 
$
130

 
$
67

 
$
77

 
$
82

 
$
89

Nationstar agency advance financing facility
 
LIBOR+2.0%
 
January 15, 2017
 
Servicing advance receivables
 
400

 
230

 
255

 
310

 
364

MBS advance financing facility (2012)
 
LIBOR+5.0%
 
November 30, 2016
 
Servicing advance receivables
 
50

 
40

 
48

 
50

 
70

Nationstar mortgage advance receivable
trust
 
LIBOR+1.9%
 
December 20, 2017
 
Servicing advance receivables
 
500

 
278

 
319

 
335

 
394

MBS servicer advance facility (2014)
 
LIBOR+3.5%
 
September 12, 2017
 
Servicing advance receivables
 
125

 
103

 
148

 
106

 
185

Nationstar agency advance receivables trust
 
LIBOR+2.0%
 
October 9, 2017
 
Servicing advance receivables
 
1,400

 
471

 
531

 
763

 
823

Advance facilities principal amount
 
 
 
 
 
1,189

 
1,378

 
1,646

 
1,925

Debt issuance costs
 
 
 
 
 
 
 
 
 
(1
)
 
—

 
(6
)
 
—

Advance facilities, net of unamortized debt issuance costs
 
 
 
$
1,188


$
1,378

 
$
1,640

 
$
1,925

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2016
 
December 31, 2015
Warehouse Facilities
 
Interest Rate
 
Maturity Date
 
Collateral
 
Capacity Amount
 
Outstanding
 
Collateral Pledged
 
Outstanding
 
Collateral pledged
$1,300 warehouse facility
 
LIBOR+2.0% to 2.9%
 
October 17, 2017
 
Mortgage loans or MBS
 
$
1,300

 
$
855

 
$
888

 
$
634

 
$
678

$850 warehouse facility
 
LIBOR+1.8% to 3.3%
 
June 30,
2017
 
Mortgage loans or MBS
 
850

 
526

 
568

 
545

 
622

$500 warehouse facility
 
LIBOR+1.8% to 2.8%
 
September 1, 2017
 
Mortgage loans or MBS
 
500

 
215

 
219

 
175

 
179

$500 warehouse facility
 
LIBOR+2.0% to 2.5%
 
November 15, 2016
 
Mortgage loans or MBS
 
500

 
362

 
448

 
257

 
274

$350 warehouse facility
 
LIBOR+2.2% to 4.5%
 
April 7,
2017
 
Mortgage loans or MBS
 
350

 
21

 
22

 
98

 
112

$200 warehouse facility
 
LIBOR+1.5%
 
April 30,
2017
 
Mortgage loans or MBS
 
200

 
56

 
58

 
8

 
9

$300 warehouse facility
 
LIBOR+2.3%
 
December 14, 2016
 
Mortgage loans or MBS
 
300

 
164

 
186

 
23

 
28

$350 warehouse facility
 
LIBOR+2.8% to 3.9%
 
November 17, 2016
 
Mortgage loans or MBS
 
350

 
169

 
185

 
45

 
50

$500 warehouse Facility
 
LIBOR+2.1% to 2.5%
 
September 8, 2017
 
Mortgage loans or MBS
 
500

 
191

 
196

 
—

 
—

$75 warehouse facility (HCM) (1)
 
LIBOR+2.3% to 2.9%
 
October 17, 2016
 
Mortgage loans or MBS
 
75

 
10

 
12

 
53

 
59

$100 warehouse facility (HCM) (1)
 
LIBOR+2.5% to 2.8%
 
November 18, 2016
 
Mortgage loans or MBS
 
100

 
42

 
44

 
55

 
60

Warehouse facilities principal amount
 
 
 

 
2,611

 
2,826

 
1,893

 
2,071

Debt issuance costs
 
 
 
 
 
 
 
 
 
(1
)
 
—

 
(3
)
 
—

Warehouse facilities, net of unamortized debt issuance costs
 
 
 
$
2,610

 
$
2,826

 
$
1,890

 
$
2,071

 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
Mortgage loans, net
 
 
 
 
 
 
 
 
 
$
1,654

 
$
1,725

 
$
1,509

 
$
1,625

Reverse mortgage interests, net
 
 
 
 
 
 
 
642

 
761

 
351

 
390

MSR and other collateral
 
 
 
 
 
 
 
 
 
315


340


33


56


(1) These facilities, specific to Home Community Mortgage ("HCM"), were repaid in October 2016.

24

Unsecured Senior Notes

A summary of the balances of unsecured senior notes is presented below.
 
September 30, 2016
 
December 31, 2015
$475 face value, 6.500% interest rate payable semi-annually, due August 2018
$
471

 
$
475

$375 face value, 9.625% interest rate payable semi-annually, due May 2019
346

 
363

$400 face value, 7.875% interest rate payable semi-annually, due October 2020
400

 
400

$600 face value, 6.500% interest rate payable semi-annually, due July 2021
596

 
597

$300 face value, 6.500% interest rate payable semi-annually, due June 2022
206

 
214

Unsecured senior notes principal amount, subtotal
2,019

 
2,049

Debt issuance costs
(19
)
 
(23
)
Unsecured senior notes, net of unamortized debt issuance costs
$
2,000

 
$
2,026


Nationstar repurchased $29 in principal amount of outstanding notes through the third quarter of 2016 at a discount resulting in a gain of $0.1. The repurchase price included the principal amount of the note, plus accrued and unpaid interest.

The indentures for the unsecured senior notes contain various covenants and restrictions that limit the ability to incur additional indebtedness, pay dividends, make certain investments, create liens, consolidate, merge or sell substantially all of their assets or enter into certain transactions with affiliates. The indentures contain certain events of default, including (subject, in some cases, to customary cure periods and materiality thresholds) defaults based on (i) the failure to make payments under the indenture when due, (ii) breach of covenants, (iii) cross-defaults to certain other indebtedness, (iv) certain bankruptcy or insolvency events, (v) material judgments and (vi) invalidity of material guarantees.

The indentures for the unsecured senior notes allow Nationstar to redeem all or a portion of the notes prior to certain fixed dates by paying a make-whole premium plus accrued and unpaid interest and additional interest, if any, to the redemption dates. On or after certain fixed dates, Nationstar may redeem all or a portion of the unsecured senior notes at the applicable redemption prices set forth in the indentures plus accrued and unpaid interest and additional interest, if any, to the redemption dates.

Additionally, the indentures provide that on or before certain fixed dates, Nationstar may redeem up to 35% of the aggregate principal amount of the unsecured senior notes with the net proceeds of certain equity offerings at fixed redemption prices, plus accrued and unpaid interest and additional interest, if any, to the redemption dates, subject to compliance with certain conditions.
The ratios included in the indentures for the unsecured senior notes are incurrence-based compared to the customary ratio covenants that are often found in credit agreements that require a company to maintain a certain ratio.
As of September 30, 2016, the expected maturities of Nationstar's unsecured senior notes based on contractual maturities as follows.
Year
Amount
2016
$
—

2017
—

2018
471

2019
346

2020
400

Thereafter
802

Unsecured senior notes principal amount
2,019

Unamortized debt issuance costs
(19
)
Unsecured senior notes, net of unamortized debt issuance costs
$
2,000



25

Other Nonrecourse Debt
 
 
 
 
 
 
 
 
 
September 30, 2016
 
December 31, 2015
 
Issue Date
 
Maturity Date
 
Class of Note
 
Securitized Amount
 
Outstanding
 
Outstanding
Participating Interest Financing (1)
_
 
_
 
_
 
$
—

 
$
5,488

 
$
5,947

HECM Securitization (HMBS)
 
 
 
 
 
 
 
 
 
 
 
Trust 2014-1 (2)
December 2014
 
_
 
A, M
 
344

 
—

 
227

Trust 2015-1 (3)
June 2015
 
May 2018
 
A, M
 
269

 
—

 
222

Trust 2015-2
November 2015
 
November 2025
 
A, M1, M2
 
217

 
141

 
209

Trust 2016-1
March 2016
 
February 2026
 
A, M1, M2
 
282

 
216

 
—

Trust 2016-2
June 2016
 
June 2026
 
A, M1, M2
 
209

 
178

 
—

Trust 2016-3
August 2016
 
August 2026
 
A, M1, M2
 
237

 
228

 
—

Nonrecourse Debt - Legacy Assets
November 2009
 
October 2039
 
A
 
222

 
54

 
65

Other nonrecourse debt principal amount
 
 
 
 
 
 
 
 
6,305

 
6,670

Unamortized debt issuance costs
 
 
 
 
 
 
 
 
(7
)
 
(4
)
Other nonrecourse debt, net of unamortized debt issuance cost
 
 
 
 
 
 
 
 
$
6,298

 
$
6,666


(1) Amounts represent the Company's participating interest in various securitized portfolios transferred to the Company.
(2) The Company retained approximately $70 and $36 of the Class A and Class M notes upon issuance, respectively, which were later sold in the first quarter of 2015 for proceeds of $73. In January 2016, the Company executed the optional redemption of the associated notes.
(3) In July 2016, the Company executed the optional redemption of the associated notes.
Participating Interest Financing
Participating interest financing represents the obligation to Ginnie Mae related to the transfer of reverse mortgage interests and subsequent securitization through issuance of HMBS. Nationstar has accounted for these securitizations on its consolidated balance sheets as secured borrowings, retaining the reverse mortgage interests and recording the HMBS obligation as participating interest financing liabilities on the Company’s consolidated balance sheet. Monthly cash flows generated from the HECM loans are used to service the HMBS through securitization of advances on the HECM loans. The interest rate is based on the underlying HMBS rate with a range of 0.8% to 7.0%.

HECM Securitizations
From time to time, the Company securitizes its interests in reverse mortgages that were previously securitized in HMBS pools. These subsequent securitization transactions provide investors with the ability to invest in a pool of first-lien inactive HECMs covered by Federal Housing Administration ("FHA") insurance and a pool of REO properties acquired through foreclosure in connection with HECM loans. The transactions provide the Company with access to liquidity for the non-performing HECM loan portfolio, ongoing servicing fees, and potential residual returns. The transactions are structured as secured borrowings with the reverse mortgage loans included in the consolidated financial statements as reverse mortgage interests and the related financing included in other nonrecourse debt. Interest is accrued at a rate of 2.0% to 7.4% on the outstanding securitized notes. The notes are callable with expected weighted average lives of one to three years. The Company may re-securitize the collateral from called notes to achieve a lower cost of funds.


26

Nonrecourse Debt–Legacy Assets
During November 2009, Nationstar completed the securitization of approximately $222 of asset backed securities ("ABS"), which was accounted for as a secured borrowing. This structure resulted in Nationstar carrying the securitized mortgage loans on its consolidated balance sheets and recognizing the asset-backed certificates acquired by third parties as nonrecourse debt of $54 at September 30, 2016 and $65 at December 31, 2015. The principal and interest on these notes are paid using the cash flows from the underlying mortgage loans, which serve as collateral for the debt. The interest rate paid on the outstanding securities is 7.5%, which is subject to an available funds cap. The total outstanding principal balance on the underlying mortgage loans serving as collateral for the debt was approximately $217 and $242 at September 30, 2016 and December 31, 2015, respectively.

Financial Covenants
The Company's borrowing arrangements and credit facilities contain various financial covenants which primarily relate to required tangible net worth amounts, liquidity reserves, leverage requirements, and profitability requirements. As a result of the change in interest rates during the nine months ended September 30, 2016, Nationstar recorded a charge to service related revenue for changes in fair value associated with the Company's MSRs recorded at fair value. Nationstar was unable to meet the profitability requirements in two facilities as of September 30, 2016. Nationstar received waivers from these financial institutions on the profitability requirements. After giving effect to these waivers, the Company was in compliance with all required financial covenants as of September 30, 2016.

Nationstar is required to maintain a minimum tangible net worth of at least $682 as of each quarter-end related to its outstanding Master Repurchase Agreements on its outstanding repurchase facilities. At September 30, 2016, Nationstar was in compliance with these minimum tangible net worth requirements.

9. Payables and Accrued Liabilities

Payables and accrued liabilities consist of the following.
 
September 30, 2016
 
December 31, 2015
Payables to servicing and subservicing investors
$
429

 
$
484

Loans subject to repurchase from Ginnie Mae
144

 
117

Payables to GSEs and securitized trusts
79

 
113

Payables to insurance carriers and insurance cancellation reserves
72

 
70

Accrued bonus and payroll
94

 
96

Accrued interest
64

 
61

Professional and legal
49

 
43

Accrued liabilities and accounts payables
47

 
73

Repurchase reserves
25

 
26

Lease obligations
28

 
13

MSR purchases payables including advances
11

 
22

Other
122

 
178

Total payables and accrued liabilities
$
1,164

 
$
1,296


Payables to Servicing and Subservicing Investors, Payables to GSEs, and Payables to Securitization Trusts
Payables to servicing and subservicing investors represent amounts due in connection with loans serviced and that are paid from collections of the underlying loans, insurance proceeds or proceeds from property disposal.

Loans Subject to Repurchase from Ginnie Mae
See Note 6, Other Assets for a description of assets and liabilities related to loans subject to repurchase from Ginnie Mae.

Payables to Insurance Carriers and Insurance Cancellation Reserves
Payable to insurance carriers and insurance cancellation reserves consist of insurance premiums received from borrower payments awaiting disbursement to the insurance carrier and/or amounts due to third party investors on liquidated loans.

Lease Obligations
Lease obligations consist of capital leases and deferred rent. During the third quarter of 2016, the Company entered into a capital lease with annual lease payments of $3 million. The lease expires in 2019.

27


Other Payables
Other payables are primarily comprised of tax liabilities, deferred service fees and liabilities related to origination activities.

10. Securitizations and Financings

Variable Interest Entities
In the normal course of business, Nationstar enters into various types of on- and off-balance sheet transactions with special purpose entities ("SPE") determined to be a VIE, which primarily consist of securitization trusts established for a limited purpose. Generally, these SPEs are formed for the purpose of securitization transactions in which Nationstar transfers assets to an SPE, which then issues to investors various forms of debt obligations supported by those assets. In these securitization transactions, Nationstar typically receives cash and/or other interests in the SPE as proceeds for the transferred assets. Nationstar will typically retain the right to service the transferred receivables and to repurchase the transferred receivables from the SPE if the outstanding balance of the receivables falls to a level where the cost exceeds the benefits of servicing the transferred receivables. All debt obligations issued from the VIEs are non-recourse to Nationstar.

Nationstar evaluates its interest in certain entities to determine if these entities meet the definition of a VIE and whether the Company is the primary beneficiary and should consolidate the entity based on the variable interests it held both at inception and when there is a change in circumstances that require a reconsideration.

A summary of the assets and liabilities of Nationstar’s transactions with VIEs included in the Company’s consolidated financial statements is presented below for the periods indicated:
 
September 30, 2016
 
December 31, 2015
 
Transfers
Accounted for as
Secured
Borrowings
 
Reverse Secured Borrowings
 
Transfers
Accounted for as
Secured
Borrowings
 
Reverse Secured Borrowings
Assets
 
 
 
 
 
 
 
Restricted cash
$
129

 
$
34

 
$
94

 
$
36

Reverse mortgage interests, net
—

 
6,208

 
—

 
6,547

Advances and other receivables, net
1,105

 
—

 
1,581

 
—

Mortgage loans held for investment, net
156

 
—

 
173

 
—

Other assets
4

 
—

 
5

 
—

Total assets
$
1,394

 
$
6,242

 
$
1,853

 
$
6,583

Liabilities
 
 
 
 
 
 
 
Advance facilities (1)
$
979

 
$
—

 
$
1,408

 
$
—

Payables and accrued liabilities
2

 
—

 
2

 
1

Participating interest financing (2)
—

 
5,412

 
—

 
5,864

HECM Securitizations (HMBS)
 
 
 
 
 
 
 
Trust 2014-1
—

 
—

 
—

 
227

Trust 2015-1
—

 
—

 
—

 
222

Trust 2015-2
—

 
141

 
—

 
209

Trust 2016-1
—

 
216

 
—

 
—

Trust 2016-2
—

 
178

 
—

 
—

Trust 2016-3
—

 
228

 
—

 
—

Nonrecourse debt–legacy assets
54

 
—

 
65

 
—

Total liabilities
$
1,035

 
$
6,175

 
$
1,475

 
$
6,523


(1) Advance facilities include the Nationstar agency advance financing facility and notes payable recorded by the Nationstar mortgage advance receivable trust, and the Nationstar agency advance receivables trust. Refer to Notes Payable in Note 8. Indebtedness for additional information.
(2) Participating interest financing excludes premiums.


28

11. Stockholders' Equity

On December 17, 2015, Nationstar announced that its Board of Directors authorized the repurchase of up to $150 of the registrant's outstanding common stock through December 16, 2016. On February 9, 2016, Nationstar’s Board of Directors authorized a $100 increase to the original repurchase authorization for an aggregate repurchase authorization of $250 under the Company’s share repurchase program. As of September 30, 2016, a total of 11,426 thousand shares have been repurchased since the inception of the plan, of which 10,589 thousand shares were acquired in 2016 for $114.
During the three and nine months ended September 30, 2016, certain employees of Nationstar were granted 56 thousand and 1,552 thousand restricted stock units ("RSUs"), respectively. The RSUs generally vest in installments of 33.3%, 33.3% and 33.4% respectively on each of the first three anniversaries of the awards, provided that (i) the participant remains continuously employed with us during that time or (ii) the participant's employment has terminated by reason of retirement. In addition, upon death, disability or a change in control of the Company, the unvested shares of an award will vest. The ultimate value of the award, however, depends on the market value of Nationstar common stock on the vesting date. The Company recognized $6 and $18 of expense related to the share-based awards during the three and nine months ended September 30, 2016, respectively, and $4 and $15 for the three and nine months ended September 30, 2015, respectively.

12. Income Taxes

The components of income tax expense (benefit) on continuing operations were as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
2016
 
2015
 
2016
 
2015
Income tax expense (benefit)
$
29

 
$
(47
)
 
$
(106
)
 
$
(31
)
 
 
 
 
 
 
 
 
Effective tax rate
40.6
%
 
42.1
%
 
36.8
%
 
46.0
%

For the three and nine months ended September 30, 2016 and 2015, the effective tax rates differed from the statutory federal rate of 35% primarily due to the elimination of the book loss of a less-than-wholly-owned subsidiary, state taxes and certain other permanent differences. The relative impact of these permanent differences on the effective tax rate is based upon forecasted pre-tax income or loss for the year.

The elimination of the book loss attributable to a less-than-wholly-owned subsidiary is treated as a permanent difference and increases taxable income. The Company is in a net income position for the three months ended September 30, 2016, therefore this permanent difference will increase the effective tax rate and income tax expense. The Company is in a net loss position for the nine months ended September 30, 2016, accordingly, the book loss attributable to a less-than-wholly-owned subsidiary reduces the effective tax rate and the income tax benefit.


29

13. Fair Value Measurements

Fair value is a market-based measurement, not an entity-specific measurement. Accordingly, a fair value measurement should be determined based on the assumptions market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a three-tiered fair value hierarchy has been established based on the level of observable inputs used in the measurement of fair value (e.g., Level 1 representing quoted prices for identical assets or liabilities in an active market; Level 2 representing values using observable inputs other than quoted prices included within Level 1; and Level 3 representing estimated values based on significant unobservable inputs).
The following describes the methods and assumptions used by Nationstar in estimating fair values.
Cash and Cash Equivalents, Restricted Cash (Level 1) – The carrying amount reported in the consolidated balance sheets approximates fair value.
Mortgage Loans Held for Sale (Level 2) – Nationstar originates mortgage loans in the U.S. it intends to sell to Fannie Mae, Freddie Mac and Ginnie Mae. Additionally, Nationstar holds mortgage loans it intends to sell into the secondary markets through whole loan sales or securitizations. Nationstar measures newly originated prime residential mortgage loans held for sale at fair value.
Mortgage loans held for sale are typically pooled together and sold into certain exit markets, depending upon underlying attributes of the loan, such as agency eligibility, product type, interest rate, and credit quality. Mortgage loans held for sale are valued on a recurring basis using a market approach by utilizing either: (i) the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, including the value attributable to mortgage servicing and credit risk, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted for credit risk and other individual loan characteristics. As these prices are derived from market observable inputs, Nationstar classifies these valuations as Level 2 in the fair value disclosures.

The Company may acquire mortgage loans held for sale from various securitization trusts for which it acts as servicer through the exercise of various clean-up call options as permitted through the respective pooling and servicing agreements. The Company has elected to account for these loans at the lower of cost or market. Nationstar classifies these valuations as Level 2 in the fair value disclosures.

Nationstar may also purchase loans out of a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. Nationstar has elected to carry these loans at fair value, which is a Level 2 fair value measurement. See Note 5, Mortgage Loan Held for Sale and Investment for more information.
Mortgage Loans Held for Investment, Net (Level 3) – Nationstar determines the fair value of loans held for investment, net, using internally developed valuation models. These valuation models estimate the exit price Nationstar expects to receive in the loan’s principal market. Although Nationstar utilizes and gives priority to observable market inputs such as interest rates and market spreads within these models, Nationstar typically is required to utilize internal inputs, such as prepayment speeds and discount rates. These internal inputs require the use of judgment by Nationstar and can have a significant impact on the determination of the loan’s fair value. As these prices are derived from internally developed valuation models, Nationstar classifies these valuations as Level 3 in the fair value disclosures. See Note 5, Mortgage Loan Held for Sale and Investment for more information.
Mortgage Servicing Rights – Fair Value (Level 3) – Nationstar estimates the fair value of its forward MSRs on a recurring basis using a process that combines the use of a discounted cash flow model and analysis of current market data to arrive at an estimate of fair value. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, discount rates, ancillary revenues, advance recovery rates and costs to service. These assumptions are generated and applied based on collateral stratifications including product type, remittance type, geography, delinquency and coupon dispersion. These assumptions require the use of judgment by Nationstar and can have a significant impact on the fair value of the MSRs. Quarterly, management obtains third party valuations to assess the reasonableness of the fair value calculations provided by the internal cash flow model. Because of the nature of the valuation inputs, Nationstar classifies these valuations as Level 3 in the fair value disclosures. See Note 2, Mortgage Servicing Rights and Related Liabilities for more information.
Advances and Other Receivables, Net (Level 3) - Advances and other receivables are valued at their net realizable value, which generally approximates fair value because advances have no stated maturity and the effect of interest over their recovery period is not material. See Note 3, Advances and Other Receivables, Net for more information.

30

Reverse Mortgage Interests, Net (Level 3) – The Company’s reverse mortgage interests are primarily comprised of HECM loans that are insured by FHA and guaranteed by Ginnie Mae upon securitization. Fair value for active reverse mortgage loans is estimated based on pricing of recent securitizations with similar attributes and characteristics, such as collateral values and prepayment speeds and adjusted as necessary for differences. The recent timing of these transactions allows the pricing to consider the current interest rate risk exposures. The fair value of inactive reverse mortgage loans is established based upon a discounted par value of the loan derived from the Company’s historical loss factors experienced on foreclosed loans.
Derivative Financial Instruments (Level 2) – Nationstar enters into a variety of derivative financial instruments as part of its hedging strategy and measures these instruments at fair value on a recurring basis in the consolidated balance sheets. The majority of these derivatives are exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, Nationstar utilizes the exchange price or dealer market price for the particular derivative contract, therefore, these contracts are classified as Level 2. In addition, Nationstar enters into IRLCs and LPCs with prospective borrowers and other loan originators. These commitments are recorded at fair value based on the observable market data related to the underlying mortgage loans. Nationstar adjusts the outstanding IRLCs with prospective borrowers based on an expectation that it will be exercised and the loan will be funded. IRLCs and LPCs are recorded in derivative financial instruments in the consolidated balance sheets. These commitments are classified as Level 2 in the fair value disclosures, as the valuations are based on market observable inputs. Nationstar has entered into Eurodollar futures and Treasury futures contracts as part of its hedging strategy. The future contracts are measured at fair value on a recurring basis and classified as Level 2 in the fair value disclosures as the valuation is based on market observable data. See Note 7, Derivative Financial Instruments for more information.
Advance Facilities and Warehouse Facilities (Level 2) – As the underlying warehouse and advance finance facilities bear interest at a rate that is periodically adjusted based on a market index, the carrying amount reported on the consolidated balance sheets approximates fair value. See Note 8, Indebtedness for more information.
Unsecured Senior Notes (Level 1) – The fair value of unsecured senior notes, which are carried at amortized cost, is based on quoted market prices and is considered Level 1 from the market observable inputs used to determine fair value. See Note 8, Indebtedness for more information.
Nonrecourse Debt – Legacy Assets (Level 3) – Nationstar estimates fair value based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. These inputs are derived from a combination of internally developed valuation models and quoted market prices, and are classified as Level 3. See Note 8, Indebtedness for more information.
Excess Spread Financing (Level 3) – Nationstar estimates fair value on a recurring basis based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. The cash flow assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, average life, recapture rates and discount rate. As these prices are derived from a combination of internally developed valuation models and quoted market prices based on the value of the underlying MSRs, Nationstar classifies these valuations as Level 3 in the fair value disclosures. See Note 2, Mortgage Servicing Rights and Related Liabilities for more information.
Mortgage Servicing Rights Financing Liability (Level 3) - Nationstar estimates fair value on a recurring basis based on the present value of future expected discounted cash flows. The cash flow assumptions used in the model are based on various factors, with the key assumptions being advance financing rates, annual advance recovery rates and working capital. As these prices are derived from a combination of internally developed valuation models based on the value of the underlying MSRs, Nationstar classifies these valuations as Level 3 in the fair value disclosures. See Note 2, Mortgage Servicing Rights and Related Liabilities for more information.
Participating Interest Financing (Level 2) – Nationstar estimates the fair value using a market approach by utilizing the fair value of securities backed by similar participating interests in reverse mortgage loans. Nationstar classifies these valuations as Level 2 in the fair value disclosures. See Note 2, Mortgage Servicing Rights and Related Liabilities, and Note 8, Indebtedness for more information.
HECM Securitizations (Level 3) – Nationstar estimates fair value of the nonrecourse debt related to HECM securitization based on the present value of future expected discounted cash flows with the discount rate approximating that of similar financial instruments. As the prices are derived from both internal models and other observable inputs, Nationstar classifies this as Level 3 in the fair value disclosures. See Note 8, Indebtedness for more information.

31

The following table presents the estimated carrying amount and fair value of Nationstar’s financial instruments and other assets and liabilities measured at fair value on a recurring basis.
 
 
 
September 30, 2016
 
 
 
Recurring Fair Value Measurements
 
Total Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Mortgage loans held for sale(1)
$
1,838.6

 
$
—

 
$
1,838.6

 
$
—

Mortgage servicing rights(1)
2,725.6

 
—

 
—

 
2,725.6

Derivative financial instruments:
 
 
 
 
 
 
 
IRLCs
123.0

 
—

 
123.0

 
—

Forward MBS trades
0.6

 
—

 
0.6

 
—

LPCs
2.8

 
—

 
2.8

 
—

Treasury futures
0.5

 
—

 
0.5

 
—

Interest rate swaps and caps
0.2

 
—

 
0.2

 
—

Eurodollar futures(2)
—

 
—

 
—

 
—

Total assets
$
4,691.3

 
$
—

 
$
1,965.7

 
$
2,725.6

Liabilities
 
 
 
 
 
 
 
Derivative financial instruments
 
 
 
 
 
 
 
Forward MBS trades
$
13.1

 
$
—

 
$
13.1

 
$
—

LPCs
0.7

 
—

 
0.7

 
—

Treasury futures
0.3

 
 
 
0.3

 
 
Interest rate swaps and caps
0.2

 
—

 
0.2

 
—

Eurodollar futures
0.1

 
—

 
0.1

 
—

IRLCs(2)
—

 
—

 
—

 
—

Mortgage servicing rights financing
67.1

 
—

 
—

 
67.1

Excess spread financing
1,011.5

 
—

 
—

 
1,011.5

Total liabilities
$
1,093.0

 
$
—

 
$
14.4

 
$
1,078.6

 
 
 
December 31, 2015
 
 
 
Recurring Fair Value Measurements
 
Total Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Mortgage loans held for sale(1)
$
1,429.7

 
$
—

 
$
1,429.7

 
$
—

Mortgage servicing rights(1)
3,358.3

 
—

 
—

 
3,358.3

Derivative financial instruments:
 
 
 
 
 
 
 
IRLCs
89.1

 
—

 
89.1

 
—

Forward MBS trades
6.1

 
—

 
6.1

 
—

LPCs
3.9

 
—

 
3.9

 
—

Interest rate swaps and caps
0.5

 
—

 
0.5

 
—

Eurodollar futures
0.1

 
—

 
0.1

 
—

Total assets
$
4,887.7

 
$
—

 
$
1,529.4

 
$
3,358.3

Liabilities
 
 
 
 
 
 
 
Derivative financial instruments
 
 
 
 
 
 
 
Forward MBS trades
$
3.7

 
$
—

 
$
3.7

 
$
—

LPCs
1.5

 
—

 
1.5

 
—

Interest rate swaps and caps
0.5

 
—

 
0.5

 
—

Eurodollar futures
0.1

 
—

 
0.1

 
—

IRLCs(2)
—

 
—

 
—

 
—

Mortgage servicing rights financing
68.7

 
—

 
—

 
68.7

Excess spread financing
1,232.1

 
—

 
—

 
1,232.1

Total liabilities
$
1,306.6

 
$
—

 
$
5.8

 
$
1,300.8


(1) Based on the nature and risks of the underlying assets and liabilities, the fair value is presented for the aggregate account.
(2) Fair value of derivative instruments are less than $0.1 for the specified dates.


32

The table below presents a reconciliation for all of Nationstar’s Level 3 assets and liabilities measured at fair value on a recurring basis.
 
Assets
 
Liabilities
Nine months ended September 30, 2016
Mortgage
servicing rights
 
Excess spread
financing
 
Mortgage servicing rights financing
Beginning balance
$
3,358

 
$
1,232

 
$
69

Total gains or losses
 
 
 
 
 
Included in earnings
(796
)
 
(74
)
 
(2
)
Purchases, issuances, sales and settlements
 
 
 
 
 
Purchases
50

 
—

 
—

Issuances
140

 
—

 
—

Settlements
—

 
(146
)
 
—

Dispositions
(27
)
 
—

 
—

Ending balance
$
2,725

 
$
1,012

 
$
67

 
Assets
 
Liabilities
Twelve months ended December 31, 2015
Mortgage
servicing rights
 
Excess spread
financing
 
Mortgage servicing rights financing
Beginning balance
$
2,950

 
$
1,031

 
$
49

Total gains or losses
 
 
 
 
 
Included in earnings
(497
)
 
25

 
20

Purchases, issuances, sales and settlements
 
 
 
 
 
Purchases
730

 
—

 
—

Issuances
222

 
386

 
—

Settlements
—

 
(210
)
 
—

Dispositions
(47
)
 
—

 
—

Ending balance
$
3,358

 
$
1,232

 
$
69


No transfers were made into or out of Level 3 fair value assets and liabilities for the nine months ended September 30, 2016 or the twelve months ended December 31, 2015.

33

The table below presents a summary of the estimated carrying amount and fair value of Nationstar’s financial instruments.
 
September 30, 2016
 
Carrying
Amount
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
695

 
$
695

 
$
—

 
$
—

Restricted cash
336

 
336

 
—

 
—

Advances and other receivables, net
1,824

 
—

 
—

 
1,824

Reverse mortgage interests, net
7,334

 
—

 
—

 
7,504

Mortgage loans held for sale
1,839

 
—

 
1,839

 
—

Mortgage loans held for investment, net
156

 
—

 
—

 
159

Derivative financial instruments
127

 
—

 
127

 
—

Financial liabilities
 
 
 
 
 
 
 
Unsecured senior notes
2,000

 
2,014

 
—

 
—

Advance facilities
1,188

 
—

 
1,188

 
—

Warehouse facilities
2,610

 
—

 
2,610

 
—

Mortgage servicing rights financing liability
67

 
—

 
—

 
67

Derivative financial instruments
14

 
—

 
14

 
—

Excess spread financing
1,012

 
—

 
—

 
1,012

Participating interest financing
5,488

 
—

 
5,646

 
—

HECM Securitization (HMBS)
 
 
 
 
 
 
 
Trust 2015-2
141

 
—

 
—

 
147

Trust 2016-1
216

 
—

 
—

 
228

Trust 2016-2
178

 
—

 
—

 
179

Trust 2016-3
228

 
—

 
—

 
227

Nonrecourse debt - legacy assets
54

 
—

 
—

 
53

 
 
 
 
 
 
 
 
 
December 31, 2015
 
Carrying
Amount
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
613

 
$
613

 
$
—

 
$
—

Restricted cash
332

 
332

 
—

 
—

Mortgage loans held for sale
1,430

 
—

 
1,430

 
—

Mortgage loans held for investment, net
174

 
—

 
—

 
174

Advances and other receivables, net
2,412

 
—

 
—

 
2,412

Reverse mortgage interests, net
7,514

 
—

 
—

 
7,705

Derivative financial instruments
100

 
—

 
100

 
—

Financial liabilities:
 
 
 
 
 
 
 
Unsecured senior notes
2,026

 
1,912

 
—

 
—

Advance facilities
1,640

 
—

 
1,646

 
—

Warehouse facilities
1,890

 
—

 
1,893

 
—

Derivative financial instruments
6

 
—

 
6

 
—

Excess spread financing
1,232

 
—

 
—

 
1,232

Mortgage servicing rights financing liability
69

 
—

 
—

 
69

Participating interest financing
5,947

 
—

 
6,091

 
—

HECM Securitization (HMBS)
 
 
 
 
 
 
 
Trust 2014-1
227

 
—

 
—

 
298

Trust 2015-1
222

 
—

 
—

 
275

Trust 2015-2
209

 
—

 
—

 
250

Nonrecourse debt - legacy assets
65

 
—

 
—

 
74


34

14. Capital Requirements

Certain of Nationstar's secondary market investors require minimum net worth ("capital") requirements, as specified in the respective selling and servicing agreements. In addition, these investors may require capital ratios in excess of the stated requirements to approve large servicing transfers. To the extent that these requirements are not met, Nationstar's secondary market investors may utilize a range of remedies ranging from sanctions, suspension or ultimately termination of Nationstar's selling and servicing agreements, which would prohibit Nationstar from further originating or securitizing these specific types of mortgage loans or being an approved servicer.
Among Nationstar's various capital requirements related to its outstanding selling and servicing agreements, the most restrictive of these requires Nationstar to maintain a minimum adjusted net worth balance of $1,136. As of September 30, 2016, Nationstar was in compliance with its selling and servicing capital requirements.

15. Commitments and Contingencies

Litigation and Regulatory Matters
Nationstar and its subsidiaries are routinely and currently involved in a significant number of legal proceedings concerning matters that arise in the ordinary course of business. The legal proceedings are at varying stages of adjudication, arbitration or investigation. These actions and proceedings are generally based on alleged violations of consumer protection, securities, employment, contract, tort, common law fraud and other numerous laws, including, without limitation, the Equal Credit Opportunity Act, Fair Debt Collection Practices Act, Fair Credit Reporting Act, Real Estate Settlement Procedures Act, Service Member’s Civil Relief Act, Telephone Consumer Protection Act, Truth in Lending Act, Financial Institutions Reform, Recovery, and Enforcement Act of 1989, unfair, deceptive or abusive acts or practices in violation of the Dodd-Frank Act, the Securities Act of 1933, the Securities Exchange Act of 1934, the Home Mortgage Disclosure Act, Title 11 of the United States Code (aka the Bankruptcy Code), False Claims Act and Making Home Affordable loan modification programs. Some of the proceedings present novel legal theories.

In addition, along with others in our industry, the Company is subject to repurchase and indemnification claims and may continue to receive claims in the future, regarding alleged breaches of representations and warranties relating to the sale of mortgage loans, the placement of mortgage loans into securitization trusts or the servicing of mortgage loans securitizations. The Company has entered into agreements with a number of entities that are parties to various securitizations or other agreements that toll applicable limitations periods with respect to their claims. The Company is also subject to legal actions or proceedings related to loss sharing and indemnification provisions of our various acquisitions. Certain of the pending or threatened legal proceedings include claims for substantial compensatory, punitive and/or, statutory damages or claims for an indeterminate amount of damages.

Nationstar’s business is also subject to extensive examinations, investigations and reviews by various federal, state and local regulatory and enforcement agencies. Nationstar has historically had a number of open investigations with various regulators or enforcement agencies. We have experienced an increase in regulatory and governmental investigations, subpoenas, examinations and other inquiries. Nationstar is currently the subject of various regulatory or governmental investigations, subpoenas, examinations and inquiries related to its residential loan servicing and origination practices, bankruptcy and collections practices, its financial reporting and other aspects of its businesses. These matters include investigations by the Consumer Financial Protection Bureau, the Securities and Exchange Commission, the Executive Office of the United States Trustees, the Department of Justice, the multistate coalition of mortgage banking regulators, various State Attorneys General, the New York Department of Financial Services, and the California Department of Business Oversight. These specific matters and other pending or potential future investigations, subpoenas, examinations or inquiries may lead to administrative, civil or criminal proceedings, and possibly result in remedies including fines, penalties, restitution, or alterations in our business practices, and in additional expenses and collateral costs. Responding to these matters requires Nationstar to devote substantial legal and regulatory resources, resulting in higher costs and lower net cash flows.

The Company seeks to resolve all litigation and regulatory and governmental matters in the manner management believes is in the best interest of the Company and contests liability, allegations of wrongdoing and, where applicable, the amount of damages or scope of any penalties or other relief sought as appropriate in each pending matter. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with outstanding legal and regulatory and governmental proceedings utilizing the latest information available. Where available information indicates that it is probable a liability has been incurred and the Company can reasonably estimate the amount of the loss, an accrued liability is established. The actual costs of resolving these proceedings may be substantially higher or lower than the amounts accrued.


35

As a litigation or regulatory matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is both probable and estimable. If, at the time of evaluation, the loss contingency is not both probable and reasonably estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and reasonably estimable. Once the matter is deemed to be both probable and reasonably estimable, the Company will establish an accrued liability and record a corresponding amount to litigation related expense. The Company will continue to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established. Litigation related expense, which includes legal settlements and the fees paid to external legal service providers, of $16 and $49 for the three and nine months ended September 30, 2016, and $14 and $37 for the three and nine months ended September 30, 2015, respectively, was included in general and administrative expenses on the consolidated statements of operations.

For a number of matters for which a loss is probable or reasonably possible in future periods, whether in excess of a related accrued liability or where there is no accrued liability, the Company may be able to estimate a range of possible loss. In determining whether it is possible to provide an estimate of loss or range of possible loss, the Company reviews and evaluates its litigation and regulatory and governmental matters on an ongoing basis, in conjunction with any outside counsel handling the matter. For those matters for which an estimate is possible, management currently believes the aggregate range of reasonably possible loss is $19 to $55 in excess of the accrued liability (if any) related to those matters as of September 30, 2016. This estimated range of possible loss is based upon currently available information and is subject to significant judgment, numerous assumptions and known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary substantially from the current estimate. Those matters for which an estimate is not possible are not included within the estimated range. Therefore, this estimated range of possible loss represents what management believes to be an estimate of possible loss only for certain matters meeting these criteria. It does not represent the Company's maximum loss exposure and the Company cannot provide assurance that its litigations reserves will not need to be adjusted in the future. Thus, our exposure and ultimate losses may be higher, and possibly significantly so, than the amounts accrued or this aggregate amount.

In our experience, legal proceedings are inherently unpredictable. One or more of the following factors frequently contribute to this inherent unpredictability: the proceeding is in its early stages; the damages sought are unspecified, unsupported or uncertain; it is unclear whether a case brought as a class action will be allowed to proceed on that basis or, if permitted to proceed as a class action, how the class will be defined; the other party is seeking relief other than or in addition to compensatory damages (including, in the case of regulatory and governmental investigations and inquiries, the possibility of fines and penalties); the matter presents meaningful legal uncertainties, including novel issues of law; we have not engaged in meaningful settlement discussions; discovery has not started or is not complete; there are significant facts in dispute; predicting possible outcomes depends on making assumptions about future decisions of courts or regulatory bodies or the behavior of other parties; and there are a large number of parties named as defendants (including where it is uncertain how damages or liability, if any, will be shared among multiple defendants). Generally, the less progress that has been made in the proceedings or the broader the range of potential results, the harder it is for us to estimate losses or ranges of losses that it is reasonably possible we could incur.

Based on current knowledge, and after consultation with counsel, management believes that the current legal accrued liability is appropriate, and the amount of any incremental liability arising from these matters is not expected to have a material adverse effect on the consolidated financial condition of the Company, although the outcome of such proceedings could be material to the Company’s operating results and cash flows for a particular period depending, on among other things, the level of the Company’s revenues or income for such period. However, in the event of significant developments on existing cases, it is possible that the ultimate resolution, if unfavorable, may be material to the Company’s consolidated financial statements.

Loan and Other Commitments
Nationstar enters into IRLCs with prospective borrowers whereby the Company commits to lend a certain loan amount under specific terms and interest rates to the borrower. Nationstar also enters into LPCs with prospective sellers. These loan commitments are treated as derivatives and are carried at fair value. See Note 7, Derivative Financial Instruments.

Nationstar has certain reverse MSRs and reverse mortgage loans related to approximately $26,855 of UPB in reverse mortgage loans. As servicer for these reverse mortgage loans, among other things, the Company is obligated to fund borrowers' draws to the loan customers as required in accordance with the loan agreement. As of September 30, 2016, the Company’s maximum unfunded advance obligation to fund borrower draws related to these MSRs and loans was approximately $2,738. Upon funding any portion of these draws, the Company expects to securitize and sell the advances in transactions that will be accounted for as a financing arrangement.
 

36

16. Business Segment Reporting

Nationstar’s segments are based upon Nationstar’s organizational structure, which focuses primarily on the services offered. The accounting policies of each reportable segment are consistent with those of Nationstar except for 1) expenses for consolidated back-office operations and general overhead-type expenses such as executive administration and accounting, and 2) revenues generated on inter-segment services performed. Expenses are allocated to individual segments based on the estimated value of services performed, including estimated utilization of square footage and corporate personnel as well as the equity invested in each segment. Revenues generated or inter-segment services performed are valued based on similar services provided to external parties.

The following tables present financial information by segment.
 
 
Three months ended September 30, 2016
 
 
Servicing
 
Originations
 
Xome
 
Eliminations
 
Total Operating Segments
 
Corporate and Other
 
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service related, net
 
$
210

 
$
14

 
$
107

 
$
(26
)
 
$
305

 
$
—

 
$
305

Net gain on mortgage loans held for sale
 
—

 
211

 
—

 
26

 
237

 
—

 
237

Total revenues
 
210

 
225

 
107

 
—

 
542

 
—

 
542

Total expenses
 
154

 
142

 
87

 
—

 
383

 
24

 
407

Other income (expenses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
82

 
17

 
—

 
—

 
99

 
4

 
103

Interest expense
 
(107
)
 
(16
)
 
—

 
—

 
(123
)
 
(42
)
 
(165
)
Other
 
—

 
(1
)
 
—

 
—

 
(1
)
 
(1
)
 
(2
)
Total other income (expenses), net
 
(25
)
 
—

 
—

 
—

 
(25
)
 
(39
)
 
(64
)
Income (loss) before taxes
 
$
31

 
$
83

 
$
20

 
$
—

 
$
134

 
$
(63
)
 
$
71

Depreciation and amortization
 
$
7

 
$
2

 
$
4

 
$
—

 
$
13

 
$
9

 
$
22

Total assets
 
12,250

 
4,523


345

 
—

 
17,118

 
(1,272
)
 
15,846

  

37

 
 
Three months ended September 30, 2015
 
 
Servicing
 
Originations
 
Xome
 
Eliminations
 
Total Operating Segments
 
Corporate and Other
 
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service related, net
 
$
107

 
$
18

 
$
109

 
$
(23
)
 
$
211

 
$
—

 
$
211

Net gain on mortgage loans held for sale
 
—

 
163

 
—

 
23

 
186

 
—

 
186

Total revenues
 
107

 
181

 
109

 
—

 
397

 
—

 
397

Total expenses
 
208

 
132

 
92

 
—

 
432

 
14

 
446

Other income (expenses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
89

 
19

 
—

 
—

 
108

 
5

 
113

Interest expense
 
(115
)
 
(18
)
 
—

 
—

 
(133
)
 
(43
)
 
(176
)
Other
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total other income (expenses), net
 
(26
)
 
1

 
—

 
—

 
(25
)
 
(38
)
 
(63
)
Income (loss) before taxes
 
$
(127
)
 
$
50

 
$
17

 
$
—

 
$
(60
)
 
$
(52
)
 
$
(112
)
Depreciation and amortization
 
$
7

 
$
5

 
$
4

 
$
—

 
$
16

 
$
4

 
$
20

Total assets
 
14,120

 
1,899

 
285

 
—

 
16,304

 
693

 
16,997


 
 
Nine months ended September 30, 2016
 
 
Servicing
 
Originations
 
Xome
 
Eliminations
 
Total Operating Segments
 
Corporate and Other
 
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service related, net
 
$
225

 
$
42

 
$
327

 
$
(93
)
 
$
501

 
$
1

 
$
502

Net gain on mortgage loans held for sale
 
—

 
531

 
—

 
93

 
624

 
—

 
624

Total revenues
 
225

 
573

 
327

 
—

 
1,125

 
1

 
1,126

Total expenses
 
488

 
400

 
274

 
—

 
1,162

 
70

 
1,232

Other income (expenses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
254

 
48

 
—

 
—

 
302

 
11

 
313

Interest expense
 
(325
)
 
(44
)
 
—

 
—

 
(369
)
 
(124
)
 
(493
)
Other
 
—

 
(1
)
 
—

 
—

 
(1
)
 
(1
)
 
(2
)
Total other income (expenses), net
 
(71
)
 
3

 
—

 
—

 
(68
)
 
(114
)
 
(182
)
Income (loss) before taxes
 
$
(334
)
 
$
176

 
$
53

 
$
—

 
$
(105
)
 
$
(183
)
 
$
(288
)
Depreciation and amortization
 
$
17

 
$
7

 
$
16

 
$
—

 
$
40

 
$
26

 
$
66

Total assets
 
12,250

 
4,523

 
345

 
—

 
17,118

 
(1,272
)
 
15,846



38

 
 
Nine months ended September 30, 2015
 
 
Servicing
 
Originations
 
Xome
 
Eliminations
 
Total Operating Segments
 
Corporate and Other
 
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service related, net
 
$
550

 
$
38

 
$
339

 
$
(45
)
 
$
882

 
$
2

 
$
884

Net gain on mortgage loans held for sale
 
—

 
470

 
—

 
45

 
515

 
2

 
517

Total revenues
 
550

 
508

 
339

 
—

 
1,397

 
4

 
1,401

Total expenses
 
600

 
349

 
266

 
—

 
1,215

 
56

 
1,271

Other income (expenses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
181

 
51

 
—

 
—

 
232

 
11

 
243

Interest expense
 
(263
)
 
(47
)
 
—

 
—

 
(310
)
 
(129
)
 
(439
)
Other
 
(1
)
 
—

 
—

 
—

 
(1
)
 
—

 
(1
)
Total other income (expenses), net
 
(83
)
 
4

 
—

 
—

 
(79
)
 
(118
)
 
(197
)
Income (loss) before taxes
 
$
(133
)
 
$
163

 
$
73

 
$
—

 
$
103

 
$
(170
)
 
$
(67
)
Depreciation and amortization
 
$
19

 
$
13

 
$
12

 
$
—

 
$
44

 
$
8

 
$
52

Total assets
 
14,120

 
1,899

 
285

 
—

 
16,304

 
693

 
16,997


17. Guarantor Financial Statement Information

As of September 30, 2016, Nationstar Mortgage LLC and Nationstar Capital Corporation(1) (collectively, the "Issuer"), both wholly-owned subsidiaries of Nationstar, have issued $2,000 aggregate principal amount of unsecured senior notes, net of repayments, which mature on various dates through June 1, 2022. The unsecured senior notes are unconditionally guaranteed, jointly and severally, by all of Nationstar Mortgage LLC’s existing and future domestic subsidiaries other than its securitization and certain finance subsidiaries, certain other restricted subsidiaries, excluded restricted subsidiaries and subsidiaries that in the future Nationstar Mortgage LLC designates as unrestricted subsidiaries. All guarantor subsidiaries are 100% owned by Nationstar Mortgage LLC. Nationstar and its two direct wholly-owned subsidiaries are guarantors of the unsecured senior notes as well. Presented below are the condensed consolidating financial statements of Nationstar, Nationstar Mortgage LLC and the guarantor subsidiaries for the periods indicated.

In the condensed consolidating financial statements presented below, Nationstar allocates income tax expense to Nationstar Mortgage LLC as if it were a separate tax payer entity pursuant to ASC 740, Income Taxes.

(1)Nationstar Capital Corporation has no assets, operations or liabilities other than being a co-obligor of the unsecured senior notes.


39

NATIONSTAR MORTGAGE HOLDINGS INC.
CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2016
 
Nationstar
 
Issuer
 
Guarantor (Subsidiaries)
 
Non-Guarantor (Subsidiaries)
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
664

 
$
1

 
$
30

 
$
—

 
$
695

Restricted cash
—

 
170

 
—

 
166

 
—

 
336

Mortgage servicing rights
—

 
2,732

 
—

 
—

 
—

 
2,732

Advances and other receivables, net
—

 
1,824

 
—

 
—

 
—

 
1,824

Reverse mortgage interests, net
—

 
6,537

 
—

 
797

 
—

 
7,334

Mortgage loans held for sale
—

 
1,782

 
—

 
57

 
—

 
1,839

Mortgage loans held for investment, net
—

 
—

 
—

 
156

 
—

 
156

Property and equipment, net
—

 
121

 
1

 
27

 
—

 
149

Derivative financial instruments
—

 
125

 
—

 
2

 
—

 
127

Other assets
(118
)
 
530

 
315

 
1,104

 
(1,177
)
 
654

Investment in subsidiaries
1,600

 
622

 
—

 
—

 
(2,222
)
 
—

Total assets
$
1,482

 
$
15,107

 
$
317

 
$
2,339

 
$
(3,399
)
 
$
15,846

Liabilities and stockholders' equity
 
 
 
 
 
 
 
 
 
 
 
Unsecured senior notes
$
—

 
$
2,000

 
$
—

 
$
—

 
$
—

 
$
2,000

Advance facilities
—

 
209

 
—

 
979

 
—

 
1,188

Warehouse facilities
—

 
2,558

 
—

 
52

 
—

 
2,610

Payables and accrued liabilities
—

 
1,098

 
1

 
65

 
—

 
1,164

MSR related liabilities - nonrecourse
—

 
1,079

 
—

 
—

 
—

 
1,079

Mortgage servicing liabilities
—

 
11

 
—

 
—

 
—

 
11

Derivative financial instruments
—

 
14

 
—

 
—

 
—

 
14

Other nonrecourse debt
—

 
5,481

 
—

 
817

 
—

 
6,298

Payables to affiliates
—

 
1,057

 
3

 
117

 
(1,177
)
 
—

Total liabilities
—

 
13,507

 
4

 
2,030

 
(1,177
)
 
14,364

Total equity
1,482

 
1,600

 
313

 
309

 
(2,222
)
 
1,482

Total liabilities and equity
$
1,482

 
$
15,107

 
$
317

 
$
2,339

 
$
(3,399
)
 
$
15,846



40

NATIONSTAR MORTGAGE HOLDINGS INC.
CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2016
 
Nationstar
 
Issuer
 
Guarantor
(Subsidiaries)
 
Non-Guarantor
(Subsidiaries)
 
Eliminations
 
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
 
 
Service related
$
—

 
$
191

 
$
5

 
$
109

 
$
—

 
$
305

Net gain on mortgage loans held for sale
—

 
228

 
—

 
9

 
—

 
237

Total revenues
—

 
419

 
5

 
118

 
—

 
542

Expenses
 
 
 
 
 
 
 
 
 
 
 
Salaries wages benefits
—

 
155

 
1

 
55

 
—

 
211

General and administrative
—

 
143

 
2

 
51

 
—

 
196

Total expenses
—

 
298

 
3

 
106

 
—

 
407

Other income (expenses)
 
 
 
 
 
 
 
 
 
 
 
Interest income
—

 
90

 
—

 
13

 
—

 
103

Interest expense
—

 
(147
)
 
—

 
(18
)
 
—

 
(165
)
Other expense
—

 
(2
)
 
—

 
—

 
—

 
(2
)
Gain (loss) from subsidiaries
45

 
9

 
—

 
—

 
(54
)
 
—

Total other income (expenses), net
45

 
(50
)
 
—

 
(5
)
 
(54
)
 
(64
)
Income (loss) before taxes
45

 
71

 
2

 
7

 
(54
)
 
71

Income tax expense (benefit)
—

 
29

 
—

 
—

 
—

 
29

Net income (loss)
45

 
42

 
2

 
7

 
(54
)
 
42

Less: net income (loss) attributable to noncontrolling interests
—

 
(3
)
 
—

 
—

 
—

 
(3
)
Net income (loss) excluding noncontrolling interests
$
45

 
$
45

 
$
2

 
$
7

 
$
(54
)
 
$
45





41

NATIONSTAR MORTGAGE HOLDINGS INC.
CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2016
 
Nationstar
 
Issuer
 
Guarantor
(Subsidiaries)
 
Non-Guarantor
(Subsidiaries)
 
Eliminations
 
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
 
 
Service related
$
—

 
$
151

 
$
19

 
$
332

 
$
—

 
$
502

Net gain on mortgage loans held for sale
—

 
595

 
—

 
29

 
—

 
624

Total revenues
—

 
746

 
19

 
361

 
—

 
1,126

Expenses
 
 
 
 
 
 
 
 
 
 
 
Salaries wages benefits
—

 
448

 
3

 
162

 
—

 
613

General and administrative
—

 
453

 
6

 
160

 
—

 
619

Total expenses
—

 
901

 
9

 
322

 
—

 
1,232

Other income (expenses)
 
 
 
 
 
 
 
 
 
 
 
Interest income
—

 
276

 
—

 
37

 
—

 
313

Interest expense
—

 
(437
)
 
—

 
(56
)
 
—

 
(493
)
Other expense
—

 
(2
)
 
—

 
—

 
—

 
(2
)
Gain (loss) from subsidiaries
(179
)
 
30

 
—

 
—

 
149

 
—

Total other income (expenses), net
(179
)
 
(133
)
 
—

 
(19
)
 
149

 
(182
)
Income (loss) before taxes
(179
)
 
(288
)
 
10

 
20

 
149

 
(288
)
Income tax expense (benefit)
—

 
(106
)
 
—

 
—

 
—

 
(106
)
Net income (loss)
(179
)
 
(182
)
 
10

 
20

 
149

 
(182
)
Less: net income (loss) attributable to noncontrolling interests
—

 
(3
)
 
—

 
—

 
—

 
(3
)
Net income (loss) excluding noncontrolling interests
$
(179
)
 
$
(179
)
 
$
10

 
$
20

 
$
149

 
$
(179
)





42

NATIONSTAR MORTGAGE HOLDINGS INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2016
 
Nationstar
 
Issuer
(Parent)
 
Guarantor
(Subsidiaries)
 
Non-Guarantor
(Subsidiaries)
 
Eliminations
 
Consolidated
Operating Activities
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(179
)
 
$
(179
)
 
$
10

 
$
20

 
$
149

 
$
(179
)
Reconciliation of net income to net cash attributable to operating activities, net of effect of acquisitions:
 
 
 
 
 
 
 
 
 
 
 
Noncontrolling interest
—

 
(3
)
 
—

 
—

 
—

 
(3
)
(Gain) loss from subsidiaries
179

 
(30
)
 
—

 
—

 
(149
)
 
—

Share-based compensation
—

 
13

 
—

 
5

 
—

 
18

Excess tax deficiency from share-based compensation
—

 
4

 
—

 
—

 
—

 
4

Net gain on mortgage loans held for sale
—

 
(595
)
 
—

 
(29
)
 
—

 
(624
)
Provision for reserves on advances and other receivables
—

 
85

 
—

 
—

 
—

 
85

Mortgage loans originated and purchased, net of fees
—

 
(15,078
)
 
—

 
(767
)
 
—

 
(15,845
)
Repurchases of loans and foreclosures out of Ginnie Mae securitizations
—

 
(1,138
)
 
—

 
—

 
—

 
(1,138
)
Sales proceeds and loan payments proceeds for mortgage loans held for sale and held for investment
—

 
23,459

 
—

 
(6,416
)
 
—

 
17,043

Other loss
—

 
2

 
—

 
—

 
—

 
2

Depreciation and amortization
—

 
50

 
—

 
16

 
—

 
66

Amortization (accretion) of premiums (discounts)
—

 
(7,275
)
 
—

 
7,302

 
—

 
27

Fair value changes in excess spread financing
—

 
(75
)
 
—

 
—

 
—

 
(75
)
Fair value changes and amortization/accretion of mortgage servicing rights
—

 
784

 
—

 
—

 
—

 
784

Fair value change in mortgage servicing rights financing liability
—

 
(2
)
 
—

 
—

 
—

 
(2
)
Changes in assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
Advances and other receivables, net
—

 
519

 
—

 
—

 
—

 
519

Reverse mortgage interests, net
—

 
294

 
—

 
(115
)
 
—

 
179

Other assets
117

 
(683
)
 
(10
)
 
439

 
—

 
(137
)
Payables and accrued liabilities
—

 
(135
)
 
—

 
(4
)
 
—

 
(139
)
Net cash attributable to operating activities
117

 
17

 
—

 
451

 
—

 
585


43

NATIONSTAR MORTGAGE HOLDINGS INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2016
(Continued)
 
Nationstar
 
Issuer
(Parent)
 
Guarantor
(Subsidiaries)
 
Non-Guarantor
(Subsidiaries)
 
Eliminations
 
Consolidated
Investing activities
 
 
 
 
 
 
 
 
 
 
 
Property and equipment additions, net of disposals
—

 
(38
)
 
—

 
(9
)
 
—

 
(47
)
Purchase of forward mortgage servicing rights, net of liabilities incurred
—

 
(46
)
 
—

 
—

 
—

 
(46
)
Sale of forward mortgage servicing rights
—

 
27

 
—

 
—

 
—

 
27

Proceeds on sale of reverse mortgage servicing rights
—

 
1

 
—

 
—

 
—

 
1

Net cash attributable to investing activities
—

 
(56
)
 
—

 
(9
)
 
—

 
(65
)
Financing activities
 
 
 
 
 
 
 
 
 
 
 
Transfers (to) from restricted cash, net
—

 
33

 
—

 
(33
)
 
—

 
—

Debt financing costs
—

 
(10
)
 
—

 
—

 
—

 
(10
)
Increase (decrease) warehouse facilities
—

 
774

 
—

 
(56
)
 
—

 
718

Increase (decrease) advance facilities
—

 
(29
)
 
—

 
(429
)
 
—

 
(458
)
Proceeds from HECM securitizations
—

 
(4
)
 
—

 
728

 
—

 
724

Repayment of HECM securitizations
—

 
—

 
—

 
(624
)
 
—

 
(624
)
Repayment of excess spread financing
—

 
(146
)
 
—

 
—

 
—

 
(146
)
Increase (decrease) in participating interest financing in reverse mortgage interests
—

 
(480
)
 
—

 
—

 
—

 
(480
)
Repayment of nonrecourse debt–legacy assets
—

 
1

 
—

 
(13
)
 
—

 
(12
)
Repurchase of unsecured senior notes
—

 
(29
)
 
—

 
—

 
—

 
(29
)
Excess tax deficiency from share-based compensation
—

 
(4
)
 
—

 
—

 
—

 
(4
)
Surrender of shares relating to stock vesting
(3
)
 
—

 
—

 
—

 
—

 
(3
)
Repurchase of common stock
(114
)
 
—

 
—

 
—

 
—

 
(114
)
Net cash attributable to financing activities
(117
)
 
106

 
—

 
(427
)
 
—

 
(438
)
Net increase (decrease) in cash
—

 
67

 
—

 
15

 
—

 
82

Cash and cash equivalents at beginning of period
—

 
597

 
1

 
15

 
—

 
613

Cash and cash equivalents at end of period
$
—

 
$
664

 
$
1

 
$
30

 
$
—

 
$
695



44

NATIONSTAR MORTGAGE HOLDINGS INC.
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2015
 
Nationstar
 
Issuer
 
Guarantor
(Subsidiaries)
 
Non-Guarantor
(Subsidiaries)
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
597

 
$
1

 
$
15

 
$
—

 
$
613

Restricted cash
—

 
199

 
—

 
133

 
—

 
332

Mortgage servicing rights
—

 
3,367

 
—

 
—

 
—

 
3,367

Advances and other receivables, net
—

 
2,412

 
—

 
—

 
—

 
2,412

Reverse mortgage interests, net
—

 
6,832

 
—

 
682

 
—

 
7,514

Mortgage loans held for sale
—

 
1,305

 
—

 
125

 
—

 
1,430

Mortgage loans held for investment, net
—

 
1

 
—

 
173

 
—

 
174

Property and equipment, net
—

 
113

 
1

 
29

 
—

 
143

Derivative financial instruments
—

 
96

 
—

 
4

 
—

 
100

Other assets
3

 
610

 
303

 
1,497

 
(1,881
)
 
532

Investment in subsidiaries
1,768

 
510

 
—

 
—

 
(2,278
)
 
—

Total assets
$
1,771

 
$
16,042

 
$
305

 
$
2,658

 
$
(4,159
)
 
$
16,617

Liabilities and stockholders' equity
 
 
 
 
 
 
 
 
 
 
 
Unsecured senior notes
$
—

 
$
2,026

 
$
—

 
$
—

 
$
—

 
$
2,026

Advance facilities
—

 
232

 
—

 
1,408

 
—

 
1,640

Warehouse facilities
—

 
1,782

 
—

 
108

 
—

 
1,890

Payables and accrued liabilities
4

 
1,222

 
1

 
69

 
—

 
1,296

MSR related liabilities - nonrecourse
—

 
1,301

 
—

 
—

 
—

 
1,301

Mortgage servicing liabilities
—

 
25

 
—

 
—

 
—

 
25

Derivative financial instruments
—

 
6

 
—

 
—

 
—

 
6

Other nonrecourse debt
—

 
5,943

 
—

 
723

 
—

 
6,666

Payables to affiliates
—

 
1,737

 
1

 
143

 
(1,881
)
 
—

Total liabilities
4

 
14,274

 
2

 
2,451

 
(1,881
)
 
14,850

Total equity
1,767

 
1,768

 
303

 
207

 
(2,278
)
 
1,767

Total liabilities and equity
$
1,771

 
$
16,042

 
$
305

 
$
2,658

 
$
(4,159
)
 
$
16,617



45

NATIONSTAR MORTGAGE HOLDINGS INC.
CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2015
 
Nationstar
 
Issuer
 
Guarantor
(Subsidiaries)
 
Non-Guarantor
(Subsidiaries)
 
Eliminations
 
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
 
 
Service related, net
$
—

 
$
96

 
$
16

 
$
99

 
$
—

 
$
211

Net gain on mortgage loans held for sale
—

 
174

 
—

 
12

 
—

 
186

Total revenues
—

 
270

 
16

 
111

 
—

 
397

Expenses
 
 
 
 
 
 
 
 
 
 
 
Salaries wages benefits
—

 
141

 
4

 
56

 
—

 
201

General and administrative
—

 
200

 
1

 
44

 
—

 
245

Total expenses
—

 
341

 
5

 
100

 
—

 
446

Other income (expenses)
 
 
 
 
 
 
 
 
 
 
 
Interest income
—

 
102

 
—

 
11

 
—

 
113

Interest expense
—

 
(157
)
 
—

 
(19
)
 
—

 
(176
)
Gain (loss) from subsidiaries
(66
)
 
15

 
—

 
—

 
51

 
—

Total other income (expenses), net
(66
)
 
(40
)
 
—

 
(8
)
 
51

 
(63
)
Income (loss) before taxes
(66
)
 
(111
)
 
11

 
3

 
51


(112
)
Income tax benefit
—

 
(46
)
 
(1
)
 
—

 
—

 
(47
)
Net income (loss)
(66
)
 
(65
)
 
12

 
3

 
51

 
(65
)
Less: net income (loss) attributable to noncontrolling interests
—

 
1

 
—

 
—

 
—

 
1

Net income (loss) excluding noncontrolling interests
$
(66
)
 
$
(66
)
 
$
12

 
$
3

 
$
51

 
$
(66
)



 

46

NATIONSTAR MORTGAGE HOLDINGS INC.
CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2015
 
Nationstar
 
Issuer
(Parent)
 
Guarantor
(Subsidiaries)
 
Non-Guarantor
(Subsidiaries)
 
Eliminations
 
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
 
 
Service related, net
$
—

 
$
529

 
$
13

 
$
342

 
$
—

 
$
884

Net gain on mortgage loans held for sale
—

 
484

 
—

 
33

 
—

 
517

Total Revenues
—

 
1,013

 
13

 
375

 
—

 
1,401

Expenses
 
 
 
 
 
 
 
 
 
 
 
Salaries, wages and benefits
—

 
411

 
4

 
163

 
—

 
578

General and administrative
—

 
558

 
1

 
134

 
—

 
693

Total expenses
—

 
969

 
5

 
297

 
—

 
1,271

Other income (expenses)
 
 
 
 
 
 
 
 
 
 
 
Interest income
—

 
215

 
—

 
28

 
—

 
243

Interest expense
—

 
(388
)
 
—

 
(51
)
 
—

 
(439
)
Other expense
—

 
—

 
—

 
(1
)
 
—

 
(1
)
Gain (loss) from subsidiaries
(40
)
 
62

 
—

 
—

 
(22
)
 
—

Total other income (expenses), net
(40
)
 
(111
)
 
—

 
(24
)
 
(22
)
 
(197
)
Income (loss) before taxes
(40
)
 
(67
)
 
8

 
54

 
(22
)
 
(67
)
Income tax expense (benefit)
—

 
(31
)
 
—

 
—

 
—

 
(31
)
Net income (loss)
(40
)
 
(36
)
 
8

 
54

 
(22
)
 
(36
)
Less: net income (loss) attributable to noncontrolling interests
—

 
4

 
—

 
—

 
—

 
4

Net income (loss) excluding noncontrolling interests
$
(40
)
 
$
(40
)
 
$
8

 
$
54

 
$
(22
)
 
$
(40
)



47

NATIONSTAR MORTGAGE HOLDINGS INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2015
 
 
Nationstar
 
Issuer
(Parent)
 
Guarantor
(Subsidiaries)
 
Non-Guarantor
(Subsidiaries)
 
Eliminations
 
Consolidated
Operating activities
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(40
)
 
$
(40
)
 
$
8

 
$
54

 
$
(22
)
 
$
(40
)
Reconciliation of net income to net cash attributable to operating activities, net of effect of acquisitions:
 
 
 
 
 
 
 
 
 
 
 
 
Noncontrolling interest
 
—

 
4

 
—

 
—

 
—

 
4

(Gain) loss from subsidiaries
 
40

 
(62
)
 
—

 
—

 
22

 
—

Share-based compensation
 
—

 
8

 
—

 
7

 
—

 
15

Excess tax benefit from share based compensation
 
—

 
(1
)
 
—

 
—

 
—

 
(1
)
Net gain on mortgage loans held for sale
 
—

 
(481
)
 
—

 
(36
)
 
—

 
(517
)
Mortgage loans originated and purchased, net of fees
 
—

 
(13,137
)
 
—

 
(833
)
 
—

 
(13,970
)
Repurchases of loans and foreclosures out of Ginnie Mae securitizations
 
—

 
(1,393
)
 
—

 
—

 
—

 
(1,393
)
Sales proceeds and loan payments proceeds for mortgage loans held for sale and held for investment
 
—

 
14,277

 
—

 
772

 
—

 
15,049

Other loss
 
—

 
—

 
—

 
1

 
—

 
1

Provision for reserves on advances and other receivables
 
—

 
39

 
—

 
—

 
—

 
39

Depreciation and amortization
 
—

 
40

 
—

 
12

 
—

 
52

Amortization (accretion) of premiums (discounts)
 
—

 
(17
)
 
—

 
(3
)
 
—

 
(20
)
Fair value changes in excess spread financing
 
—

 
(23
)
 
—

 
—

 
—

 
(23
)
Fair value changes and amortization of mortgage servicing rights
 
—

 
500

 
—

 
—

 
—

 
500

Fair value change in mortgage servicing rights financing liability
 
—

 
7

 
—

 
—

 
—

 
7

Changes in assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 


Advances and other receivables, net
 
—

 
477

 
—

 
2

 
—

 
479

Reverse mortgage interests, net
 
—

 
8

 
—

 
(173
)
 
—

 
(165
)
Other assets
 
6

 
69

 
(6
)
 
(22
)
 
—

 
47

Payables and accrued liabilities
 
—

 
(125
)
 
1

 
(3
)
 
—

 
(127
)
Net cash attributable to operating activities
 
6

 
150

 
3

 
(222
)
 
—

 
(63
)

48

NATIONSTAR MORTGAGE HOLDINGS INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2015
(Continued)
 
 
Nationstar
 
Issuer
(Parent)
 
Guarantor
(Subsidiaries)
 
Non-Guarantor
(Subsidiaries)
 
Eliminations
 
Consolidated
Investing activities
 
 
 
 
 
 
 
 
 
 
 
 
Property and equipment additions, net of disposals
 
—

 
(23
)
 
—

 
(21
)
 
—

 
(44
)
Purchase of forward mortgage servicing rights, net of liabilities incurred
 
—

 
(615
)
 
—

 
—

 
—

 
(615
)
Purchase of reverse mortgage interests
 
—

 
(4,815
)
 
—

 
—

 
—

 
(4,815
)
Sale of forward service rights
 
—

 
41

 
—

 
—

 
—

 
41

Acquisitions, net of cash acquired
 
—

 
—

 
—

 
(45
)
 
—

 
(45
)
Net cash attributable to investing activities
 
—

 
(5,412
)
 
—

 
(66
)
 
—

 
(5,478
)
Financing activities
 
 
 
 
 
 
 
 
 
 
 
 
Transfers to restricted cash, net
 
—

 
(9
)
 
—

 
(183
)
 
—

 
(192
)
Issuance of common stock, net of issuance cost
 
—

 
498

 
—

 
—

 
—

 
498

Debt financing costs
 
—

 
(10
)
 
—

 
—

 
—

 
(10
)
Increase in warehouse facilities
 
—

 
630

 
—

 
100

 
—

 
730

Increase (decrease) in advance facilities
 
—

 
(291
)
 
—

 
143

 
—

 
(148
)
Proceeds from HECM Securitization
 
—

 
—

 
—

 
342

 
—

 
342

Repayment of HECM Securitization
 
—

 
—

 
—

 
(103
)
 
—

 
(103
)
Issuance of excess spread financing
 
—

 
263

 
—

 
—

 
—

 
263

Repayment of excess spread financing
 
—

 
(155
)
 
—

 
—

 
—

 
(155
)
Increase (decrease) in participating interest financing in reverse mortgage interests
 
—

 
4,629

 
—

 
—

 
—

 
4,629

Repayment of nonrecourse debt – legacy assets
 
—

 
(1
)
 
—

 
(9
)
 
—

 
(10
)
Excess tax benefit from share-based compensation
 
—

 
1

 
—

 
—

 
—

 
1

Surrender of shares relating to stock vesting
 
(6
)
 
—

 
—

 
—

 
—

 
(6
)
Net cash attributable to financing activities
 
(6
)
 
5,555

 
—

 
290

 
—

 
5,839

Net increase in cash and cash equivalents
 
—

 
293

 
3

 
2

 
—

 
298

Cash and cash equivalents at beginning of period
 
—

 
280

 
—

 
19

 
—

 
299

Cash and cash equivalents at end of period
 
$
—

 
$
573

 
$
3

 
$
21

 
$
—

 
$
597



49

18. Transactions with Affiliates

Nationstar enters into arrangements with Fortress, its subsidiaries managed funds, or affiliates for purposes of financing the Company's MSR acquisitions and cash flow requirements. An affiliate of Fortress holds a majority of the outstanding common shares of the Company. The following summarizes the transactions with affiliates of Fortress. During the three and nine months ended September 30, 2016, the Company earned revenues from affiliates of Fortress totaling $3 and $8, respectively, compared to $2 and $7 from the same periods in 2015, respectively, as described below.

Newcastle Investment Corp. ("Newcastle")
Nationstar is the loan servicer for several securitized loan portfolios managed by Newcastle, which is managed by an affiliate of Fortress. Nationstar receives a monthly net servicing fee equal to 0.5% per annum on the unpaid principal balance of the Portfolios, which was $597 and $658, at September 30, 2016 and December 31, 2015 respectively. For the three months ended September 30, 2016 and 2015, Nationstar received servicing fees and other performance incentive fees of $1 and $1, respectively. For the nine months ended September 30, 2016 and 2015, Nationstar received servicing fees and other performance incentive fees of $2 and $3, respectively.

New Residential Investment Corp. ("New Residential")
Excess Spread Financing
Nationstar has entered into several agreements with certain entities formed by New Residential, in which New Residential and/or certain funds managed by Fortress own an interest (each a "New Residential Entity"). Nationstar sold to the related New Residential Entity the right to receive a portion of the excess cash flow generated from certain acquired MSRs after a receipt of a fixed base servicing fee per loan. Nationstar, as the servicer of the loans, retains all ancillary revenues and the remaining portion of the excess cash flow after payment of the fixed base servicing fee and also provides all advancing functions for the portfolio. The related New Residential Entity does not have prior or ongoing obligations associated with these MSR portfolios. Should Nationstar refinance any loan in such portfolios, subject to certain limitations, Nationstar will be required to transfer the new loan or a replacement loan of similar economic characteristics into the portfolios. The new or replacement loan will be governed by the same terms set forth in the agreements described above.

The fair value of the outstanding liability related to these agreements was $1,012 and $1,232 at September 30, 2016 and December 31, 2015, respectively. Fees paid to New Residential Entity totaled $71 and $222 for the three and nine months ended September 30, 2016, respectively and $77 and $216 for the three and nine months ended September 30, 2015, respectively, which are recorded as a reduction to servicing fee revenue, net.

Mortgage Servicing Rights Financing
From December 2013 through June 2014, Nationstar entered into agreements to sell a contractually specified base fee component of certain MSRs and servicing advances under specified terms to New Residential and certain unaffiliated third-parties. Nationstar continues to be the named servicer and, for accounting purposes, ownership of the mortgage servicing rights continues to reside with Nationstar. Accordingly, Nationstar accounts for the MSRs and the related MSRs financing liability on its consolidated balance sheets.

Special purpose subsidiaries of Nationstar previously issued approximately $2,100 of nonrecourse variable funding notes to finance the advances funded or acquired by Nationstar. These notes were issued by two wholly-owned special purpose entities under servicer advance facilities. Pursuant to a sale agreement, New Residential purchased the outstanding equity of the wholly-owned special purpose entities. On the sale date, New Residential and Nationstar amended and restated the transaction documents for each facility. Under these amended and restated transaction documents for each facility, Nationstar will continue to sell future servicing advances to New Residential.

The fair value of the outstanding liability related to the Sale Agreement was $67 and $69 at September 30, 2016 and December 31, 2015, respectively. Nationstar did not enter into any additional supplemental agreements with the Purchaser in 2016 and 2015.


50

Other
In May 2014, Nationstar entered into a servicing arrangement with New Residential whereby Nationstar will service residential mortgage loans acquired by New Residential and/or its various affiliates and trust entities. For the three months ended September 30, 2016 and 2015, Nationstar recognized revenue of $1 and $1 related to these servicing arrangements, respectively. For the nine months ended September 30, 2016 and 2015, Nationstar recognized revenue of $4 and $3 related to these servicing arrangements, respectively. Nationstar acted as servicer or master servicer for New Residential related to for the collapse of certain securitization trusts pursuant to the exercise by New Residential of its clean up call rights. The Company earned revenue of $0.5 for these administration services during the three months ended September 30, 2016. The Company earned revenue of $0.1 for these administration services during the three months ended September 30, 2015. For the nine months ended September 30, 2016 and 2015, Nationstar earned revenue of $0.7 and $0.2 for these administration services, respectively.

In February 2013, Nationstar acquired certain fixed and adjustable rate reverse mortgage loans with an unpaid principal balance totaling $83 for a purchase price of $50. In conjunction with this acquisition, Nationstar entered into an agreement with NIC Reverse Loan LLC ("NIC"), a subsidiary of New Residential, whereby it sold NIC a 70% participating interest of the acquired reverse mortgage loans. Both Nationstar and NIC are entitled to the related percentage interest of all amounts received with respect to the reverse mortgage loans, net of payments of servicing fees and the reimbursement to Nationstar of servicing advances. Nationstar records to servicing fee revenue the fixed payments received per loan for servicing NICs interest in these reverse mortgage loans, which totaled $0.1 and $0.1 for the three months ended September 30, 2016 and 2015, respectively and $0.3 and $0.2 for the nine months ended September 30, 2016 and 2015, respectively. Nationstar records NICs interest as a reduction to reverse mortgage interests on the Company's consolidated balance sheets.

OneMain Financial Holdings, LLC
On November 15, 2015, Springleaf Holdings, Inc. which is primarily owned by certain private equity funds managed by an affiliate of Fortress, completed its acquisition of OneMain Financial Holdings, LLC, and changed its corporate name from Springleaf Holdings, Inc. to OneMain Holdings, Inc. Nationstar receives a monthly per loan subservicing fee and other performance incentive fees subject to agreements with OneMain Financial Holdings, LLC. For the three months ended September 30, 2016 and 2015, Nationstar recognized revenue of $0.3 and $0.3, respectively, in additional servicing and other performance incentive fees related to these portfolios. For the nine months ended September 30, 2016 and 2015, Nationstar recognized revenue of $1 and $1, respectively, in additional servicing and other performance incentive fees related to these portfolios.



51

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management's discussion and analysis of financial condition and results of operations ("MD&A") should be read in conjunction with the accompanying unaudited consolidated financial statements and in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2015. The following discussion contains, in addition to the historical information, forward-looking statements that include risks, assumptions and uncertainties that could cause actual results to differ materially from those anticipated by such statements.

Dollar amounts are reported in millions, except per share data and other key metrics, unless otherwise noted.
OVERVIEW
Nationstar is an integrated servicer, originator and provider of transaction based services for residential mortgages in the United States. Our operations are conducted through three segments: Servicing, Originations and Xome. Our success depends on working with customers, investors and GSEs to deliver quality services and solutions that foster and preserve home ownership. The Company is the largest nonbank servicer and the fourth largest servicer of residential mortgage loans in the nation, growing its portfolio of serviced loans through ownership of mortgage servicing rights and execution of subservicing arrangements. We originate conventional residential mortgage loans under our Greenlight and Nationstar brands and leverage existing relationships with borrowers of our serviced portfolios to modify or originate new loans. Our Xome operations represent a leading industry provider of a residential real estate marketing platform and offerings of real estate sales transaction support services. Through our Xome platform, which offers technology and data enhanced solutions to home buyers, home sellers and real estate professionals, we enhance the home buying and selling experience. Xome provides services to three of the top five money center banks with various services including title and close, appraisal and, increasingly, technology solutions.

The Company continues to demonstrate its emergence as a leader in the residential mortgage marketplace through the expansion of its serviced portfolios. The number of forward loans serviced by the Company has grown by approximately 20% compared to the same period in 2015. In the third quarter of 2016, a total of 509,000 loans were added to the servicing platforms. This increase represents the largest portfolio growth in a quarter since 2013 and was primarily driven by the addition of subserviced portfolios associated with the commencement of the previously announced subservicing contracts executed with USAA Federal Savings Bank ("USAA") and Seneca Mortgage Servicing LLC ("Seneca"). The expansion of our subservicing operations allows the Company to leverage the scale of its IT and labor capital to provide cost effective servicing to our customers while limiting the use of cash resources.

Servicing segment revenues grew 96% in the third quarter 2016 over 2015 due to the favorable impact of higher interest rates on mark-to-market revenue adjustments, partially offset by higher amortization from increased prepayment on loans. Fee revenue associated with the Company's MSRs declined due to lower average UPB balances, which was partially offset by higher revenues associated with subservicing operations. After adding back mark-to-market adjustments, profits for the segment grew to $39 in 2016 compared to $24 in 2015. This growth is primarily attributable to cost containment measures and lower required reserves in the quarter. As the Company anticipates further growth in its subservicing operations, expense prioritization and cost reductions will be required in order to achieve the desired returns.

The Originations segment continues to execute during the low interest rate environment. Third quarter 2016 revenues of $225 increased 24% over 2015 and represent the second consecutive quarter of record growth in the past three years. This strong performance exceeds prior year results by 24% and is driven by our direct-to-consumer business. While economic forecasts anticipate mortgage rates to continue near historic lows, other factors such as job growth will influence the outlook for this segment.

Total revenues for Xome remained flat in 2016 due to lower REO auction sales, offset by higher title and escrow services revenue consistent with the growth in loan refinancings and modifications. Expenses decreased slightly from 2015 due to lower marketing expenses. Xome continues to focus its investment in is sales platforms while strengthening its support to the Company's servicing and originations operations.

52


Third Quarter 2016 Highlights

Major highlights for the third quarter of 2016 include:

•
Achieved 4.0 basis points of Servicing profitability despite $92 in total amortization expense.
•
Boarded over $100,000 UPB including $91,000 subservicing UPB for USAA and Seneca.
•
Earned $83 in Originations, funding 25,393 loans during the quarter.
•
Achieved recapture rate of 27% and refinance recapture rate of 42% for the third quarter of 2016.
•
Our delinquency rate, measured as loans that are 60 or more days behind in payments, declined to 5% from 7% at the start of the year.
•
Provided over 13,506 solutions to our mortgage servicing customers, reflecting our continued commitment to foster and preserve homeownership.
•
Funded $5,533 mortgage loans, including $4,034 related to retaining customers from our servicing portfolio.
•
Refinanced $1,011 in Home Affordable Refinance Program ("HARP") loans, providing relief to 5,840 customers.

Capital and Liquidity

We had cash on hand of $695 as of September 30, 2016 and $613 as of December 31, 2015. In addition, we had total equity of $1,482 as of September 30, 2016 and $1,767 as of December 31, 2015. During the nine months ended September 30, 2016, our operating activities provided cash totaling $585. We believe we have sufficient capital and liquidity to conduct our operations including adequate access to capital to expand our operations consistent with the Company's strategy.
Purchase / Sale of MSRs
During the third quarter of 2016, we completed the sale of MSRs associated with $1,253 in UPB which consisted mostly of loans originated through correspondence and retained subservicing rights. We boarded $101,024 UPB of mortgage loans to our servicing platform during the three months ended September 30, 2016, while using limited capital resources to execute these transactions as they predominantly consist of portfolios where we are acting as the subservicer.

Warehouse Facilities
We finance mortgage originations through secured warehouse credit facilities with various financial institutions. The financing is in place until the mortgage loans are sold to secondary market participants, and in the vast majority of cases the servicing of the loans is retained by us. Certain warehouse facilities provide further liquidity for reverse mortgages and mortgage servicing rights. As a result of the increased activity in our Originations segment, our mortgage loans held for sale increased to $1,839 as of September 30, 2016 compared to $1,430 as of December 31, 2015. As of September 30, 2016, total warehouse capacity was $5,025, of which $2,611 was utilized. We constantly assess facilities to ensure sufficient capacity for growth and adequate diversification of lenders. The excess capacity is considered sufficient to support further growth across the platform and minimize funding risk.

53


RESULTS OF OPERATIONS

Consolidated Results
Table 1. Consolidated Operations
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenues - operational
$
550

 
$
548

 
$
1,628

 
$
1,581

Revenues - MTM
(8
)
 
(151
)
 
(502
)
 
(180
)
Total revenues
542

 
397

 
1,126


1,401

Expenses
407

 
446

 
1,232

 
1,271

Other income (expenses), net
(64
)
 
(63
)
 
(182
)
 
(197
)
Income (loss) before income tax
71

 
(112
)
 
(288
)
 
(67
)
Less: income tax expense (benefit)
29

 
(47
)
 
(106
)
 
(31
)
Less: income attributable to noncontrolling interests
(3
)
 
1

 
(3
)
 
4

Net income (loss) attributable to Nationstar
$
45

 
$
(66
)
 
$
(179
)
 
$
(40
)

During the three months ended September 30, 2016, operational revenues remained comparable with the same period in 2015 as the increase in Originations segment revenue was offset by the decrease in Servicing and Xome segment revenue. Net income improved for the three months ended September 30, 2016 primarily due to fair value marks as a result of the impact of declining interest rates in the same period in 2015. Originations earnings were up during the three months ended September 30, 2016 when compared to the same period in 2015 due to the beneficial interest rate environment and higher funded units. Xome earnings were up in the third quarter of 2016 when compared to the same period in 2015 primarily due to decline in marketing expenses.

During the nine months ended September 30, 2016, operational revenues grew approximately 3% compared to the same period in 2015, primarily due to growth in our Originations segment. Gains within our Originations segment were due to higher locked volumes driven by elevated loan recapture rates and the continued low interest rate environment. Net loss from Servicing for nine months ended September 30, 2016 worsened predominantly due to the impact of declining interest rates on fair value marks for the period when compared with same period in 2015. Income from Xome declined during the nine months ended September 30, 2016 when compared to the same period in 2016, primarily due to a decline in volumes.

Table 2. Revenues
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Servicing:
 
 
 
 
 
 
 
Operational
$
310

 
$
341

 
$
962

 
$
977

Amortization
(92
)
 
(83
)
 
(235
)
 
(247
)
Mark-to-market
(8
)
 
(151
)
 
(502
)
 
(180
)
Total Servicing
210

 
107

 
225

 
550

Originations
225

 
181

 
573

 
508

Xome
107

 
109

 
327

 
339

Corporate and other, including eliminations
—

 
—

 
1

 
4

Total revenues
$
542

 
$
397

 
$
1,126

 
$
1,401


Servicing operational revenues decreased in the third quarter and year-to-date in 2016, when compared to the same periods in 2015, primarily driven by a lower average servicing portfolio during the period. Origination revenues increased due to higher locked volumes and continued focus on portfolio recapture rate, which has increased from 26% to 29% year-to-date. Xome revenues decreased as a result of lower sales volumes of its real estate market platform and default valuation orders, partially offset by an increase in title revenue.

54

Table 3. Expenses
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Servicing
$
154

 
$
208

 
$
488

 
$
600

Originations
142

 
132

 
400

 
349

Xome
87

 
92

 
274

 
266

Corporate and other, including eliminations
24

 
14

 
70

 
56

Total expenses
$
407

 
$
446

 
$
1,232

 
$
1,271


Total expenses decreased in the third quarter and year-to-date in 2016, compared to the same periods in 2015. Increased expenses in Originations and Corporate were more than offset by lowered expenses in Servicing for both the three and nine months ended September 30, 2016. Servicing expenses decreased primarily due to lower future expected losses on serviced loans and successful cost containment initiatives throughout 2016. Expenses increased in both the third quarter and year-to-date in 2016 when compared to the same periods in 2015 in our Originations segment primarily due to a higher funded volume and associated incremental headcount. Expenses in the Xome segment decreased in the third quarter due to heightened level of non-recurring marketing expense in support of Xome rebranding in the third quarter of 2015. Xome segment expenses increased year-to-date in 2016, compared to the same periods in 2015, primarily due to growth in title operations and further investment in technology throughout 2016.
Table 4. Other Income (Expenses), Net
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Reverse interest income
$
81

 
$
90

 
$
251

 
$
181

Other interest income
22

 
23

 
62

 
62

Interest income
103

 
113

 
313

 
243

Reverse interest expense
(64
)
 
(65
)
 
(196
)
 
(126
)
Advance interest expense
(12
)
 
(16
)
 
(42
)
 
(41
)
Corporate debt interest expense
(38
)
 
(40
)
 
(114
)
 
(121
)
Other interest expense
(51
)
 
(55
)
 
(141
)
 
(151
)
Interest expense
(165
)
 
(176
)
 
(493
)
 
(439
)
Other expense
(2
)
 
—

 
(2
)
 
(1
)
Total other income (expenses), net
$
(64
)
 
$
(63
)
 
$
(182
)
 
$
(197
)

Total other income (expenses), net was relatively flat for the three months ended September 30, 2016 compared to 2015 and improved for the nine months ended September 30, 2016. Reverse interest income and reverse interest expense declined for the three months ended September 30, 2016 due to lower underlying balances of reverse mortgage loans. For the nine months ended September 30, 2015, higher reverse interest income was recorded associated with the second quarter 2015 Generation Mortgage asset acquisition which added $4,857 UPB of reverse mortgages and related securitized debt. This was partially offset by higher reverse interest expense, also related to the Generation Mortgage asset acquisition.


55

Table 5. Income (Loss) Before Income Taxes
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Servicing:
 
 
 
 
 
 
 
Operational
$
131

 
$
107

 
$
403

 
$
294

Amortization
(92
)
 
(83
)
 
(235
)
 
(247
)
Servicing income before mark-to-market adjustments
39

 
24

 
168

 
47

Mark-to-market
(8
)
 
(151
)
 
(502
)
 
(180
)
Total Servicing
31

 
(127
)
 
(334
)
 
(133
)
Originations
83

 
50

 
176

 
163

Xome
20

 
17

 
53

 
73

Corporate and other, including eliminations
(63
)
 
(52
)
 
(183
)
 
(170
)
Total income (loss) before income taxes
$
71

 
$
(112
)
 
$
(288
)
 
$
(67
)

The Originations segment led income before taxes for all operating segments of the business during the three and nine months ended September 30, 2016 due to the increased loan activity in the current interest rate environment. This segment continued to benefit from the low interest rate environment for year-to-date 2016 and is anticipated to continue with strong pretax earnings while interest rates hold low. Contributions from other segments were mixed as pretax earnings increased in the third quarter of 2016 and declined on a year-to-date basis for both the Servicing and Xome segments. After eliminating amortization and mark-to-market adjustments, pretax earnings from the Servicing segment grew in the third quarter and on a year-to-date basis. Servicing fees continued to decline throughout 2016 as the UPB of the forward serviced portfolio experienced greater amortization due to higher loan prepayment speeds. The decline in servicing fee revenues is partially offset with higher subservicing fees and lower required reserves. Pretax earnings for Xome improved in the third quarter 2016 compared to 2015 primarily due to cost containment measures and declined year-to-date as a result of a decrease in revenues. Corporate expenses grew in third quarter and year-to-date as a result of higher costs associated with rebranding expenses and corporate controls.

Table 6. Income Tax Expense (Benefit)
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Income tax expense (benefit)
$
29

 
$
(47
)
 
$
(106
)
 
$
(31
)
 
 
 
 
 
 
 
 
Effective tax rate
40.6
%
 
42.1
%
 
36.8
%
 
46.0
%
For the three and nine months ended September 30, 2016 and 2015, the effective tax rates differed from the statutory federal rate of 35% primarily due to the elimination of the book loss of a less-than-wholly-owned subsidiary, state taxes and certain other permanent differences. The relative impact of these permanent differences on the effective tax rate is based upon forecasted pre-tax income or loss for the year.

The elimination of the book loss attributable to a less-than-wholly-owned subsidiary is treated as a permanent difference and increases taxable income. The Company is in a net income position for the three months ended September 30, 2016, therefore, this permanent difference will increase the effective tax rate and income tax expense. The Company is in a net loss position for the nine months ended September 30, 2016, accordingly, the book loss attributable to a less-than-wholly-owned subsidiary reduces the effective tax rate and the income tax benefit.


56

Segment Results

Revenues generated on inter-segment services performed are valued based on estimated market value. Expenses are allocated to individual segments based on the estimated value of services performed, total revenue contributions, personnel headcount or the equity invested in each segment based on the type of expense allocated. Expenses for consolidated back-office operations and general overhead expenses such as executive administration and accounting are not allocated to the business segments.

Servicing Segment

Nationstar services both forward and reverse loan portfolios. We service forward loan portfolios for which we own the legal title to the servicing rights on the loans, and we also act as subservicer on forward loan portfolios where title to the servicing rights is owned by third parties. Servicing revenues related to forward MSR portfolios include base, incentive and other servicing fees. Forward MSR portfolios are recorded at fair value, and revenues are adjusted accordingly each period. Servicing revenues for subserviced portfolios are earned and recognized as the services are delivered. Reverse MSRs are recorded at LOCOM and fees related to servicing of reverse MSRs are earned and recognized as the services are delivered and are recorded in service revenue, net.  

We also provide servicing for reverse mortgage portfolios that have been securitized. The total amounts of the securitized loan assets and related financing liabilities are recorded within the consolidated financial statements because the securitization transactions do not qualify for sale accounting treatment. Interests in reverse mortgages are recorded at cost. Interest income is accrued in other income (expense) for our interest in reverse mortgages interests at the stated rate of the underlying HECM loan.  

The following table sets forth the results of operations for the servicing segment.
Table 7. Servicing Operations
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
Operational
$
310

 
$
341

 
$
962

 
$
977

Amortization
(92
)
 
(83
)
 
(235
)
 
(247
)
Other mark-to-market
(8
)
 
(151
)
 
(502
)
 
(180
)
Total revenues
210

 
107

 
225

 
550

Expenses
154

 
208

 
488

 
600

Total other income (expenses), net
(25
)
 
(26
)
 
(71
)
 
(83
)
Income (loss) before income taxes
$
31

 
$
(127
)
 
$
(334
)
 
$
(133
)

For the three and nine months ended September 30, 2016, operational revenues decreased compared to the same periods in 2015. Base servicing fees decreased for both the three and nine months ended September 30, 2016 due to a reduced forward MSR portfolio. Increased ancillary revenues for the nine months ended September 30, 2016 partially offset the decline in base servicing fees and included a second quarter gain of approximately $17 from the sale of reverse mortgage loans. These loans were reacquired in March 2016 in connection with the execution of a clean-up call option to purchase HECM loans related to a reverse mortgage loan trust. Subservicing fees increased for both the three and nine months ended September 30, 2016 due to the boarding of the additional subservicing portfolios. Amortization for the three months ended September 30, 2016 increased due to prepayments resulting from the continued low interest rate environment and decreased for the nine months ended September 30, 2016 primarily because of lower average UPB compared to 2015. Other mark-to-market revenue primarily reflects the effect on our servicing portfolio for the change in interest rates from the previous period. The change in the mark-to-market revenue for the three and nine months ended September 30, 2016 is primarily due to the change in interest rates for these periods.

Expenses for both the three and nine months ended September 30, 2016 decreased from the comparable periods in 2015 primarily due to lower expense required to establish needed reserves. Total other income (expenses), net improved for the three and nine months ended September 30, 2016 as a result of a focus on cost improvement and the expansion of our reverse platform during the year as a result of the Generation Mortgage acquisition which was completed during the second quarter of 2015. In May 2015, we acquired $4,900 of UPB related to securitized reverse mortgages previously owned by Generation Mortgage. In this transaction, we recorded HECM loans and related HMBS notes as reverse mortgage interests and other nonrecourse debt respectively. The

57

Company earns a servicing fee and accrues interest income and interest expense on the loan portfolio and notes. Servicing fees related to this portfolio are recorded as a component of interest income which is a component of other income (expense).

The following table provides a rollforward of our forward servicing portfolio UPB, including loans subserviced for others.

Table 8. Forward Servicing Portfolio UPB Rollforward
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Balance at the beginning of the period
$
341,299

 
$
372,198

 
$
367,800

 
$
353,094

Additions:
 
 
 
 
 
 
 
Originations
5,610

 
3,337

 
15,015

 
12,311

Acquisitions
101,024

 
3,284

 
101,866

 
51,400

Deductions:
 
 
 
 
 
 
 
Dispositions
(81
)
 
(4,647
)
 
(1,517
)
 
(4,647
)
Principal reductions and other
(4,361
)
 
(2,899
)
 
(10,394
)
 
(8,480
)
Voluntary reductions (1)
(14,778
)
 
(13,301
)
 
(38,743
)
 
(36,407
)
Involuntary reductions (2)
(2,153
)
 
(2,598
)
 
(7,470
)
 
(8,456
)
Net changes in loans serviced by others
(45
)
 
21,797

 
(42
)
 
18,356

Balance at the end of period
$
426,515

 
$
377,171

 
$
426,515

 
$
377,171


(1) Voluntary reductions are related to loan payoffs by customers.
(2) Involuntary reductions refer to chargeoff of loans.

During the three and nine months ended September 30, 2016, our forward servicing portfolio's UPB increased primarily as a result of boarding the additional subservicing portfolios. The continued low interest rates environment combined with normal seasonal factors contributed to elevated payoff activity as customers look to refinance their existing mortgage obligations for more favorable terms. Many such payoffs are refinanced through our integrated originations platform. As a result of the low interest rate environment, we boarded $5,610 and $15,015 of servicing rights through Originations during the three and nine months ended September 30, 2016, respectively, compared to $3,337 and $12,311 during the same periods in 2015. As of September 30, 2016, we expect approximately $1,600 of additional subservicing UPB and $17,100 of MSR UPB to board during the fourth quarter of 2016.


58

The following table provides the composition of revenues for the Servicing segment for the periods presented as well as information useful in evaluating revenues.

Table 9. Servicing - Revenues
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
 
Amounts
bps(1)
 
Amounts
bps(1)
 
Amounts
bps(1)
 
Amounts
bps(1)
Forward MSR Operational Revenue
 
 
 
 
 
 
 
 
 
 
 
Base servicing fees
$
244

25
 
$
280

28
 
$
766

27
 
$
808

27
Modification fees
27

3
 
16

2
 
60

2
 
46

2
Incentive fees
8

1
 
5

1
 
22

1
 
29

1
Late payment fees
19

2
 
18

2
 
57

2
 
52

2
Other ancillary revenues (2)
57

6
 
53

5
 
187

6
 
141

5
Other revenues
9

1
 
9

1
 
27

1
 
32

1
Total Forward MSR operational revenue
364

38
 
381

39
 
1,119

39
 
1,108

38
Subservicing fees(3)
10

1
 
5

1
 
20

1
 
19

1
Reverse MSRs (LOCOM) Revenue
 
 
 
 
 
 
 
 
 
 
 
Base servicing fees
10

1
 
12

1
 
32

1
 
37

1
Buyout accretion
1

—
 
20

2
 
14

—
 
38

1
Total Reverse MSRs (LOCOM) revenue
11

1
 
32

3
 
46

1
 
75

2
Total servicing fee revenue
385

40
 
418

43
 
1,185

41
 
1,202

41
Amortization
 
 
 
 
 
 
 
 
 
 
 
MSR scheduled and prepayment amortization
(137
)
(14)
 
(130
)
(13)
 
(383
)
(13)
 
(370
)
(13)
Excess spread accretion
46

5
 
48

5
 
149

5
 
126

4
LOCOM amortization
(1
)
—
 
(1
)
—
 
(1
)
—
 
(3
)
—
Total amortization
(92
)
(9)
 
(83
)
(8)
 
(235
)
(8)
 
(247
)
(9)
Revenue Sharing
 
 
 
 
 
 
 
 
 
 
 
MSR financing liability costs
(24
)
(3)
 
(30
)
(3)
 
(77
)
(3)
 
(96
)
(3)
Excess spread costs - principal
(51
)
(5)
 
(47
)
(5)
 
(146
)
(5)
 
(129
)
(4)
Total revenue sharing
(75
)
(8)
 
(77
)
(8)
 
(223
)
(8)
 
(225
)
(7)
Total operational revenue
218

23
 
258

27
 
727

25
 
730

25
Mark-to-Market Revenue
 
 
 
 
 
 
 
 
 
 
 
MSR MTM(4)
(58
)
(6)
 
(215
)
(22)
 
(579
)
(20)
 
(200
)
(7)
Excess spread / financing MTM
50

5
 
64

6
 
77

3
 
20

1
Total MTM revenue
(8
)
(1)
 
(151
)
(16)
 
(502
)
(17)
 
(180
)
(6)
Total revenues - Servicing
$
210

22
 
$
107

11
 
$
225

8
 
$
550

19

(1) Calculated bps are as follows: Annualized $ amount/Average UPB X 10000.
(2) Other ancillary revenue for the nine months ended September 30, 2016 increased primarily due to $17 gain on HECM loans related to a reverse mortgage loan trust and fees related to higher recapture volumes.
(3) Subservicing fee includes amounts received for loans serviced for other MSR owners, whole loans serviced for other investors and our owned whole loans.
(4) MSR mark-to-market includes value changes related to MSR and whole loan assets. Amounts also include reserves for advances and other receivables of $27 and $85 for the three and nine months ended September 30, 2016, respectively, and $12 and $28 for the three and nine months ended September 30, 2015, respectively.


59

For the three and nine months ended September 30, 2016, base servicing fee revenue decreased when compared to the comparable periods in prior years primarily due to a decline in the UPB of the forward serviced portfolio. Ancillary revenues for 2016 include a gain of approximately $17 from the sale of reverse mortgage loans that were acquired in March 2016 in connection with execution of an option to purchase HECM loans related to a reverse mortgage loan trust, of which we were the master servicer and holder of clean-up call rights. Additionally, the current low interest rate environment increased the gain on sale of early buyout loans and recapture rate of refinanced loans. Modification fees increased due to recognition of annual incentive fees earned for modifications entered into in prior years. Subservicing fees increased for the three and nine months ended September 30, 2016 due to the addition of the new subservicing contracts.

For the three months ended September 30, 2016, total amortization increased primarily due to higher prepayments resulting from the continued low interest rate environment. For the nine months ended September 30, 2016, total amortization decreased primarily due to lower average UPB compared to 2015. Total mark-to-market revenue increased for the three months ended September 30, 2016, primarily due to the impact of higher interest rates in the third quarter of 2016. Total mark-to-market revenue decreased for the nine months ended September 30, 2016, primarily due to the impact of lower interest rates on prepayment speeds in the first half of 2016.

For information regarding fair value adjustments, see the Mortgage Servicing Rights and Related Liabilities section provided below.

Table 10. Servicing Portfolio - Unpaid Principal Balances
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Average UPB:
 
 
 
 
 
 
 
Forward MSRs - fair value
$
317,685

 
$
347,936

 
$
328,084

 
$
342,803

Subservicing and other (1)
44,642

 
20,950

 
30,042

 
20,112

Reverse MSRs - LOCOM
27,338

 
31,019

 
28,426

 
29,374

Total average UPB
$
389,665

 
$
399,905

 
$
386,552

 
$
392,289

 
 
 
 
 
 
 
 
Ending UPB:
 
 
 
 
 
 
 
Forward MSRs - fair value
 
 
 
 
 
 
 
Agency
 
 
 
 
$
225,920

 
$
250,461

Non-agency
 
 
 
 
87,187

 
104,183

Total MSRs - fair value
 
 
 
 
313,107

 
354,644

 
 
 
 
 
 
 
 
Subservicing and other: (1)
 
 
 
 
 
 
 
Agency
 
 
 
 
105,040

 
18,293

Non-agency
 
 
 
 
8,368

 
4,234

Total subservicing and other
 
 
 
 
113,408

 
22,527

 
 
 
 
 
 
 
 
Reverse MSRs - LOCOM
 
 
 
 
26,855

 
30,689

Total ending UPB
 
 
 
 
$
453,370

 
$
407,860


(1) Subservicing and other includes (i) loans we service for others, (ii) residential mortgage loans originated but have yet to be sold, and (iii) agency REO balances for which we own the mortgage servicing rights.


60

Key Metrics

Information about modifications and workout units is presented in the table below.

Table 11. Forward Loan Modifications and Workout Units
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Modifications and workout units:
 
 
 
 
 
 
 
Home Affordable Modification Program ("HAMP") modifications
3,547

 
4,248

 
11,237

 
12,509

Non-HAMP modifications
5,314

 
6,262

 
18,290

 
18,710

Workouts
4,645

 
5,830

 
13,977

 
18,484

Total modification and workout units
13,506

 
16,340

 
43,504

 
49,703


Total modifications and workouts for the three and nine months ended September 30, 2016 decreased from comparable periods in 2015 as a result of the decline in the number of delinquent loans. The current HAMP program expires on December 31, 2016, with borrowers who have requested assistance or to whom an offer of assistance has been extended as of that date having until September 30, 2017 to finalize their modification. The Company continues to monitor the program for any extension. The overall performance of borrowers within the servicing portfolio continues to improve as reflected in the table below.

Table 12. Key Performance Metrics - Forward Servicing Portfolio (1)
September 30,
 
2016
 
2015
Loan count-servicing
2,568,039

 
2,188,332

Average loan amount (2)
$
166,276

 
$
163,928

Average coupon - credit sensitive (3)
4.7
%
 
4.6
%
Average coupon - interest sensitive (3)
4.1
%
 
4.1
%
60+ delinquent (% of loans) (4)
4.7
%
 
7.2
%
90+ delinquent (% of loans) (4)
4.3
%
 
6.6
%
120+ delinquent (% of loans) (4)
4.0
%
 
6.2
%
Total prepayment speed (12 month constant pre-payment rate)
18.4
%
 
16.2
%

(1) Characteristics and key performance metrics of our servicing portfolio excludes UPB and loan counts acquired but not yet boarded and currently serviced by others.
(2) Loan amount is presented in whole dollar amounts.
(3) The weighted average coupon amounts for our credit and interest sensitive pools presented in the table above are only reflective of our owned forward MSR portfolio that is reported at fair value.
(4) Loan delinquency is based on the current contractual due date of the loan. In the case of a completed loan modification, delinquency is based on the modified due date of the loan.


61

Servicer Ratings

The Company participates in ratings reviews with nationally recognized ratings agencies for its mortgage servicing operations. The attainment of favorable ratings is important to maintaining strong relationships with our customers and compliance with provisions in servicing and debt agreements. The table below sets forth Nationstar's most recent ratings for its servicing operations as of September 30, 2016.

Table 13. Servicer Ratings
Fitch
 
Moody's
 
S&P
 
 
 
 
 
 
Rating date
October 2016
 
January 2016
 
September 2015
 
 
 
 
 
 
Residential
RPS3+
 
Not Rated
 
Above Average
Master Servicer
RMS2
 
SQ3+
 
Above Average
Special Servicer
RSS3+
 
Not Rated
 
Above Average
Subprime Servicer
RPS3+
 
Not Rated
 
Above Average
 
 
 
 
 
 
Fitch Rating Scale of 1 (Highest Performance) to 5 (Low/No Proficiency)
Moody's Rating Scale of 1 (Strong Ability/Stability) to 5 (Weak Ability/Stability)

Servicing Expenses

The table below summarizes expenses in the Servicing segment.

Table 14. Servicing - Expenses
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
 
Amounts
bps
 
Amounts
bps
 
Amounts
bps
 
Amounts
bps
Salaries, wages and benefits
$
71

7

 
$
64

6

 
$
214

7

 
$
198

7

General and administrative
77

7

 
137

14

 
257

14

 
387

14

Depreciation and amortization
6

1

 
7

1

 
17

1

 
15

1

Total expenses - Servicing
$
154

15

 
$
208

21

 
$
488

22

 
$
600

22

 
For the three and nine months ended September 30, 2016 compared to the same periods in 2015, expenses declined primarily as a result of lower general administrative expenses as presented in more detail in the table below. Salaries, wages and benefits increased primarily due to the expansion of our subservicing portfolios.

Table 15. Servicing - General and Administrative Expenses
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
 
Amounts
bps
 
Amounts
bps
 
Amounts
bps
 
Amounts
bps
Operational losses (1)
$
11

1
 
$
64

6

 
$
52

6
 
$
164

6

Direct operating costs (2)
32

3
 
38

4

 
100

4
 
113

4

Offshoring costs
12

1
 
13

1

 
38

1
 
36

1

Corporate allocation charges
19

2
 
16

2

 
56

2
 
55

2

Subservicing
3

—
 
6

1

 
11

1
 
19

1

Total general and administrative expenses - Servicing
$
77

7
 
$
137

14

 
$
257

14
 
$
387

14


(1) Operational losses include compensatory fees, claims losses and similar expenses.
(2) Direct operating costs are normal costs of servicing, including filing fees, postage, delivery and similar expenses.


62

General and administrative expenses decreased for the three and nine months ended September 30, 2016 due to higher rates of recoveries on advances and lower reserve requirements, and also due to lower professional and consulting fees resulting from cost containment measures.
Table 16. Servicing - Other Income (Expenses), Net
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
 
Amounts
bps
 
Amounts
bps
 
Amounts
bps
 
Amounts
bps
Reverse interest income
$
81

8

 
$
90

9

 
$
251

9

 
$
181

6

Other interest income
1

—

 
(1
)
—

 
3

—

 
—

—

Interest income
82

8

 
89

9

 
254

9

 
181

6

 
 
 
 
 
 
 
 
 
 
 
 
Reverse interest expense
(64
)
(7
)
 
(65
)
(7
)
 
(196
)
(7
)
 
(126
)
(4
)
Advance interest expense
(12
)
(1
)
 
(16
)
(2
)
 
(42
)
(1
)
 
(41
)
(1
)
Other interest expense
(31
)
(3
)
 
(34
)
(3
)
 
(87
)
(3
)
 
(96
)
(3
)
Interest expense
(107
)
(11
)
 
(115
)
(12
)
 
(325
)
(11
)
 
(263
)
(8
)
Other expense
—

—

 
—

—

 
—

—

 
(1
)
—

Total other income (expenses) - Servicing
$
(25
)
(3
)
 
$
(26
)
(3
)
 
$
(71
)
(2
)
 
$
(83
)
(2
)
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average cost - advance facilities
2.9
%
 
 
2.5
%
 
 
2.8
%
 
 
2.5
%
 
Weighted average cost - excess spread financing
9.0
%
 
 
9.0
%
 
 
9.0
%
 
 
9.2
%
 

Reverse interest income for the three months ended September 30, 2016 declined due to run-off in the reverse portfolio. For the nine months ended September 30, 2016, reverse interest income and expense increased as a result of the addition of the reverse loan portfolio and related HMBS notes acquired from Generation Mortgage in the second quarter of 2015. Reverse interest income includes servicing fees of $7 and $22 earned for the three and nine months ended September 30, 2016, respectively, and $8 and $20, earned for the three and nine months ended September 30, 2015, respectively. See Note 4. Reverse Mortgage Interests, Net for further details related to servicing fees.


63

Mortgage Servicing Rights and Liability
Table 17. MSRs and Related Liabilities
September 30, 2016
 
December 31, 2015
 
UPB
 
Carrying Amount
 
Weighted Avg. Coupon
 
UPB
 
Carrying Amount
 
Weighted Avg. Coupon
Forward MSRs
 
 
 
 
 
 
 
 
 
 
 
Agency
$
225,920

 
$
1,962

 
4.4
%
 
$
246,016

 
$
2,462

 
4.4
%
Non-agency
87,187

 
763

 
4.5
%
 
99,660

 
896

 
4.5
%
Total MSRs - fair value
313,107

 
2,725

 
4.5
%
 
345,676

 
3,358

 
4.5
%
 
 
 
 
 
 
 
 
 
 
 
 
Subservicing and other(1)
 
 
 
 
 
 
 
 
 
 
 
Agency
105,040

 
N/A

 
N/A

 
18,059

 
N/A

 
N/A

Non-agency
8,368

 
N/A

 
N/A

 
4,065

 
N/A

 
N/A

Total subservicing and other
113,408

 
N/A

 
N/A

 
22,124

 
N/A

 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
Reverse MSRs - LOCOM(2)
26,855

 
7

 
N/A

 
29,855

 
9

 
N/A

Total servicing portfolio unpaid principal balance
$
453,370

 
$
2,732

 
N/A

 
$
397,655

 
$
3,367

 
N/A


(1) Subservicing and other amounts include loans we service for others, residential mortgage loans originated but have yet to be sold, and agency REO balances for which we own the mortgage servicing rights.
(2) Reverse MSRs - LOCOM carrying amount is exclusive of $11 and $25 mortgage servicing liabilities as of September 30, 2016 and December 31, 2015, respectively.

Our servicing portfolio consists of credit sensitive MSRs, primarily acquired through bulk acquisitions and interest rate sensitive MSRs principally consisting of MSRs acquired via flow transactions or transferred from our origination activities. For MSRs marked at fair value that are interest rate sensitive, servicing values are typically correlated to interest rates such that when interest rates rise, the value of the servicing portfolio increases principally as a result of lower expected prepayments. Credit sensitive MSRs are less influenced by movement in interest rates and more influenced by changes in loan performance factors which impact involuntary prepayment speeds.

We assess whether acquired portfolios are more credit sensitive or interest sensitive in nature on the date of acquisition. As part of the assessment, we consider numerous factors in making this assessment, with the primary factors consisting of the overall portfolio delinquency characteristics, portfolio seasoning and residential mortgage loan composition. Interest sensitive portfolios typically consist of single-family conforming residential forward mortgage loans serviced for GSEs or other third-party investors.
Credit sensitive portfolio primarily consists of higher delinquency single-family non-conforming residential forward mortgage loans in private label securitizations.

Table 18. Fair Value MSR Valuation
September 30, 2016
 
December 31, 2015
 
UPB
 
Carrying Amount
 
bps
 
UPB
 
Carrying Amount
 
bps
MSRs - Fair Value
 
 
 
 
 
 
 
 
 
 
 
Credit sensitive
$
192,728

 
$
1,665

 
86

 
$
224,334

 
$
2,017

 
90

Interest sensitive - agency
120,379

 
1,060

 
88

 
121,342

 
1,341

 
111

Total MSRs - fair value
$
313,107

 
$
2,725

 
87

 
$
345,676

 
$
3,358

 
97


The fair value of our credit sensitive and interest sensitive portfolios declined in dollars primarily due to mark-to-market related increased prepayments as a result of the declining interest rates throughout 2016. When measuring the fair value of the portfolio, as a basis point ("bps") of the unpaid principal balance, our credit sensitive pool decreased slightly in value compared to December 31, 2015 due to run-off of portfolio and offset partially by increased portfolio performance as evidenced by lower delinquency rates. The fair value of our interest sensitive portfolio decreased compared to December 31, 2015 measured in bps primarily due to increase in prepayment speeds in current low interest rate environment.


64

The following table provides information on the fair value of our owned forward MSR portfolio.

Table 19. MSRs - Fair Value, Roll Forward
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Fair value at the beginning of the period
$
2,794

 
$
3,350

 
$
3,358

 
$
2,950

Additions:
 
 
 
 
 
 
 
Servicing resulting from transfers of financial assets
55

 
64

 
140

 
170

Purchases of servicing assets
48

 
201

 
50

 
695

Dispositions:
 
 
 
 
 
 
 
Sales of servicing assets (1)
(11
)
 
(46
)
 
(27
)
 
(46
)
Changes in fair value:
 
 
 
 
 
 
 
Due to changes in valuation inputs or assumptions used in the valuation model:
 
 
 
 
 
 
 
        Credit sensitive
(33
)
 
(113
)
 
(191
)
 
(35
)
        Interest sensitive
1

 
(102
)
 
(303
)
 
(162
)
Other changes in fair value:
 
 
 
 
 
 
 
Scheduled principal payments
(20
)
 
(20
)
 
(61
)
 
(55
)
Disposition of negative MSRs(2)
7

 
—

 
60

 
—

Prepayments
 
 
 
 
 
 
 
 Voluntary prepayments
 
 
 
 
 
 
 
      Credit sensitive
(56
)
 
(64
)
 
(151
)
 
(162
)
      Interest sensitive
(60
)
 
(33
)
 
(138
)
 
(103
)
   Involuntary prepayments
 
 
 
 
 
 
 
      Credit sensitive
(1
)
 
(4
)
 
(11
)
 
(18
)
      Interest sensitive
1

 
—

 
(1
)
 
(1
)
Fair value at the end of the period
$
2,725

 
$
3,233

 
$
2,725

 
$
3,233


(1) Reported sales for the nine months ended September 30, 2016 included $7 of MSRs with a negative fair value associated with nonperforming loans.
(2) Amounts represent the disposition of negative MSR fair values related to liabilities for loans deemed to be inactive during the period. Typically a loan is inactive upon reaching a $0 UPB.

The following table sets forth the weighted average assumptions in estimating the fair value of MSRs.

Table 20. MSRs - Fair Value, Weighted Average Assumptions
September 30,
 
2016
 
2015
Credit Sensitive MSRs
 
 
 
Discount rate
11.6
%
 
11.6
%
Weighted-average prepayment speeds
17.4
%
 
17.2
%
Expected weighted-average life
5.5 years

 
5.7 years

 
 
 
 
Interest Sensitive MSRs
 
 
 
Discount rate
9.2
%
 
9.1
%
Weighted-average prepayment speeds
16.1
%
 
13.6
%
Expected weighted-average life
5.0 years

 
5.7 years


The discount rate increased for interest sensitive MSRs during 2016 primarily due to higher yields on new acquisitions, driving up the weighted average rate. The prepayment speed increase and weighted-average life decline for both credit sensitive and interest sensitive MSRs are attributable to net market interest rate reductions period over period.


65

The discount rate is used to determine the present value of estimated future net servicing income, which is based on the required rate of return market investors would expect for an asset with similar risk characteristics. The discount rate is determined through review of recent market transactions as well as comparing the discount rate to those utilized by third party valuation specialists.

Total prepayment speeds represent the annual rate at which borrowers are forecasted to repay their mortgage loan principal, which includes estimates for both voluntary and involuntary borrower liquidations. The expected weighted-average life represents the total years we expect to service the MSR.

Excess Spread Financing

As disclosed in Note 2. Mortgage Servicing Rights ("MSR") and Related Liabilities and Note 18. Transactions with Affiliates, we entered into sale and assignment agreements treated as financing arrangements whereby the acquirer has the right to receive a specified percentage of the excess cash flow generated from an MSR.

The servicing fees associated with an MSR for both book and tax purposes can be segregated into (i) a base servicing fee and (ii) an excess servicing fee. The base servicing fee, along with ancillary income and other revenues, is designed to cover costs incurred to service the specified pool plus a reasonable margin. The remaining servicing fee is considered excess. The Company sells a percentage of the excess fee, as a method for efficiently financing acquired MSRs. Excess spread financings are presently applicable only to acquired MSRs, however, they can be entered into at any time for both acquired and originated MSRs. These financings have been provided by New Residential and certain funds managed by Fortress Investment Group, all of which are affiliated companies.

Excess spread financings are recorded at fair value, and the impact of fair value adjustments on future revenues and capital resources varies primarily due to (i) prepayment speeds and (ii) our ability to recapture prepayments through the origination platform. In Note 2. Mortgage Servicing Rights ("MSR") and Related Liabilities, the range of assumptions and sensitivities related to the measurement of the excess spread financing liability as of September 30, 2016 and December 31, 2015 is disclosed.


66

The following table sets forth the change in the excess spread liability and the related weighted average assumptions for the three and nine months ended September 30, 2016 and 2015.

Table 21. Excess Spread Financing
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Fair value at the beginning of the period
$
1,095

 
$
1,228

 
$
1,232

 
$
1,031

Additions:
 
 
 
 
 
 
 
New financings
—

 
5

 
—

 
262

Deductions:
 
 
 
 
 
 
 
  Settlements
(51
)
 
(55
)
 
(146
)
 
(154
)
Fair value changes:
 
 
 
 
 
 
 
  Credit Sensitive
(30
)
 
(53
)
 
(44
)
 
(5
)
  Interest Sensitive
(2
)
 
(9
)
 
(30
)
 
(18
)
Fair value at the end of the period
$
1,012

 
$
1,116

 
$
1,012

 
$
1,116

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
 
 
 
 
 
2016
 
2015
Weighted-Average Assumptions:
 
 
 
 
 
 
 
Mortgage prepayment speeds
 
 
 
 
12.5
%
 
12.3
%
Average life of mortgage loans
 
 
 
 
5.4 years

 
5.7 years

Discount rate
 
 
 
 
11.0
%
 
11.2
%
 
 
 
 
 
 
 
 
Credit Sensitive:
 
 
 
 
 
 
 
Mortgage prepayment speeds
 
 
 
 
12.0
%
 
12.3
%
Average life of mortgage loans
 
 
 
 
5.5 years

 
5.8 years

Discount rate
 
 
 
 
11.4
%
 
11.5
%
 
 
 
 
 
 
 
 
Interest Sensitive:
 
 
 
 
 
 
 
Mortgage prepayment speeds
 
 
 
 
15.0
%
 
11.7
%
Average life of mortgage loans
 
 
 
 
5.1 years

 
5.4 years

Discount rate
 
 
 
 
8.9
%
 
8.8
%

In conjunction with the excess spread financing servicing acquisition structure, the Company entered into several sale agreements whereby we sold the right to repayment on outstanding private label servicing advances and also sold the right to receive the base fee component on the related MSRs. The Company continues to service the loans in exchange for a portion of the base fee. These financings are recorded at fair value and the change in fair value is recorded against servicing revenue.

67

Table 22. MSRs Financing Liability - Rollforward
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Fair value at the beginning of the period
$
80

 
$
59

 
$
69

 
$
49

Mark-to-Market Adjustments: (1)
 
 
 
 
 
 
 
        Due to changes in valuation inputs or
        assumptions used in the valuation model
(8
)
 
—

 
10

 
—

        Other changes in fair value
(5
)
 
(3
)
 
(12
)
 
7

Fair value at the end of the period
$
67

 
$
56

 
$
67

 
$
56

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
 
 
 
 
 
2016
 
2015
Weighted-Average Assumptions:
 
 
 
 
 
 
 
Advance financing rates
 
 
 
 
3.3
%
 
2.9
%
Annual advance recovery rates
 
 
 
 
24.2
%
 
24.7
%

(1) The changes in fair value related to our MSRs financing liability primarily relate to both scheduled and unscheduled principal payments reflected in the underlying MSRs and changes in the fair value model assumptions.

The fair value of MSR liability decreased for the three months ended September 30, 2016 due to higher prepayments and higher advance recoveries. The fair value of MSR liability for the nine months ended September 30, 2016 remained relatively flat.
The following table provides an overview of the Company's forward servicing portfolio and amounts that have been previously transferred to our co-invest partners.

Table 23. Leveraged Portfolio Characteristics
September 30,
 
2016
 
2015
Owned forward servicing portfolio - unencumbered
$
100,418

 
$
106,286

Owned forward servicing portfolio - transferred to New Residential
212,688

 
248,358

Subserviced forward servicing portfolio and other
119,829

 
22,527

Total unpaid principal balance
$
432,935

 
$
377,171


The encumbered forward servicing portfolio consists of residential mortgage loans included within the Company's excess spread financing transactions and MSR financing liability. Subserviced and other amounts include (1) loans serviced for others, (2) residential mortgage loans originated but not yet sold, and (3) agency REO balances for which the Company owns the mortgage servicing rights. The increase in subserviced forward servicing portfolio and other was primarily due to the addition of subserviced portfolios previously announced.

Reverse MSRs - LOCOM

The table below provides the characteristics and key performance metrics of the reverse servicing portfolio, which is included in Reverse MSRs - LOCOM.

Table 24. Reverse MSR Portfolio Characteristics
September 30, 2016
 
December 31, 2015
Loan count
165,825

 
176,272

Ending unpaid principal balance
$
26,855

 
$
29,855

Average loan amount (1)
$
161,949

 
$
169,371

Average coupon
3.4
%
 
3.2
%
Average borrower age
78

 
77


(1) Average loan amount is presented in whole dollar amounts.

68


We acquire reverse MSRs and funded unsecuritized advances from third parties. Reverse mortgages, known as HECMs, provide seniors 62 and older with a loan secured by their home.

An MSR or MSL is established on the acquisition date at fair value, as applicable, based on the proceeds paid or received to service the reverse portfolio. Each quarter, the Company amortizes or accretes the MSR or MSL to service related revenue, net as the respective portfolios run-off. The MSR or MSL is assessed for impairment or increased obligation based on its fair value, using a variety of assumptions, with the primary assumption being discount rates, prepayment speeds and the borrower life expectancy. The MSRs are stratified based on predominant risk characteristics of the underlying serviced loans. Impairment, if any, represents the excess of amortized cost of an individual stratum over its estimated fair value and is recognized through an increase in the valuation allowance. Based on our assessment, no impairment on this asset was required as of September 30, 2016 or December 31, 2015.

Originations Segment

Our Originations segment comprises both the Greenlight Loans and Nationstar brands. We originate primarily conventional agency ("GSE") and government-insured residential mortgage loans and, to mitigate interest rate and credit risk, these loans are typically sold within approximately 30 to 60 days while retaining the associated servicing rights. Our primary focus is assisting customers currently in our servicing portfolio with refinances or loans for new home purchases (or recapture). This increases our origination margins by reducing marketing and other costs to retain customers as well as replenishment of our servicing portfolio.

Table 25. Originations - Operations
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenues
$
225

 
$
181

 
$
573

 
$
508

Expenses
142

 
132

 
400

 
349

Other income (expenses), net
—

 
1

 
3

 
4

Income before income tax expense
$
83

 
$
50

 
$
176

 
$
163

Income before taxes margin
36.9
%
 
27.6
%
 
30.7
%
 
32.1
%

Operating results for the three months ended September 30, 2016 increased by $33 compared to the same period in 2015. Origination revenues increased due to higher locked volumes, a 21% increase period over period driven by the low interest rate environment and continued focus on recapture of portfolio runoff. Portfolio recapture for the current period was 27%, down slightly from 2015 results of 28% for the third quarter while refinance recapture increase slightly to 42% from 41% period over period. Overall revenue increased $44 compared to the same period in 2015 primarily due to beneficial interest rate environment. Expenses were $10 higher compared to the same period in 2015, driven by higher funded volumes, associated headcount, and strategic marketing efforts to take advantage of the low interest rate environment.

Operating results for the nine months ended September 30, 2016 increased by $13 compared to the same period in 2015. Revenue increased $65 due to higher locked loan volumes, margins and secondary gains along with portfolio recapture growth. Expenses increased 15% or $51 primarily due to an increase in funded units, associated headcount, and marketing efforts in the low interest rate environment.


69

Table 26. Originations - Revenues
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Service related, net - Originations
$
14

 
$
18

 
$
42

 
$
38

 
 
 
 
 
 
 
 
Gain on loans originated and sold
273

 
209

 
726

 
579

Fair value adjustment on loans held for sale
(101
)
 
(49
)
 
(239
)
 
(204
)
Mark-to-market on locks and commitments(1)
(9
)
 
(52
)
 
(80
)
 
(51
)
Provision for repurchases
(3
)
 
(5
)
 
(9
)
 
(13
)
Capitalized servicing rights
51

 
60

 
133

 
159

Net gain on mortgage loans held for sale
211

 
163

 
531

 
470

 
 
 
 
 
 
 
 
Total revenues - Originations
$
225

 
$
181

 
$
573

 
$
508

 
 
 
 
 
 
 
 
Key Metrics
 
 
 
 
 
 
 
Consumer direct lock pull through adjusted volume ($) (2)
$
4,034

 
$
2,888

 
$
10,293

 
$
8,922

Other locked pull through adjusted volume ($)
1,847

 
1,924

 
5,390

 
5,446

Funded volume, total ($)
5,533

 
4,948

 
14,977

 
13,969

Funded HARP volume, total ($)
1,011

 
1,438

 
3,381

 
3,977

Recapture percentage
27.2
%
 
28.1
%
 
28.6
%
 
26.4
%
Purchase percentage of funded volume
23.7
%
 
27.3
%
 
24.9
%
 
26.2
%
Value of capitalized servicing
89 bps

 
121 bps

 
91 bps

 
114 bps


(1) Amounts include the fair value mark-to-market adjustments on IRLCs, forward loan commitments, and any associated pair-off amounts.
(2) Actual versus expected funding from locks taken during the period.

The Company evaluates performance by combining net gain on mortgage loans held for sale and service related revenue. For the three and nine months ended September 30, 2016, the increase in revenues of $44 and $65 respectively, in 2016 was primarily driven by higher locked loan volumes and margins. Our volumes in 2016 continue to benefit from the low interest rate environment and an ongoing focus on the recapture of our portfolio customers. Our direct-to-consumer business represents more than 60% of total volume year-over-year, and we consistently improve revenue and profitability margins in this channel.

Table 27. Originations - Expenses
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Salaries, wages and benefits
$
86

 
$
79

 
$
239

 
$
212

General and administrative
53

 
49

 
152

 
128

Depreciation and amortization
3

 
4

 
9

 
9

Total expenses - Originations
$
142

 
$
132

 
$
400

 
$
349


For the three months ended September 30, 2016, salaries, wages and benefits increased compared to the same period in 2015 primarily due to higher headcount associated with higher funded volumes. Salary costs were higher due to incremental headcount, partially offset by higher fulfillment productivity levels which increased 9% during the current quarter. General and administrative expense was higher due to operating costs associated with increased volumes, headcount growth, strategic marketing efforts to take advantage of the low interest rate environment and regulatory and compliance costs.


70

For the nine months ended September 30, 2016, expenses increased 15% from the same period in 2015. Unit volume increased 8% due to an increase in government mix volumes from 19% to 34% compared to 2015, partially offset by a decrease in HARP volumes from 36% to 27%. Salary costs were higher due to incremental headcount driven by higher non-HARP funded units, partially offset by continued improvements in fulfillment productivity levels. General and administrative expense was higher due to operating costs associated with strategic marketing efforts to take advantage of the low interest rate environment.

Table 28. Originations - Other Income (Expenses), Net
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Interest income
$
17

 
$
19

 
$
48

 
$
51

Interest expense
(16
)
 
(18
)
 
(44
)
 
(47
)
Other expense
(1
)
 
—

 
(1
)
 
—

Other income, net - Originations
$
—

 
$
1

 
$
3

 
$
4

 
 
 
 
 
 
 
 
Weighted average coupon - mortgage loans held for sale
4
%
 
4
%
 
4
%
 
4
%
Weighted average cost of funds (excluding facility fees)
3
%
 
3
%
 
3
%
 
2
%

Interest income primarily relates to mortgage loans held for sale. Interest expense is associated with the warehouse facilities utilized to originate new loans. For the three and nine months ended September 30, 2016, interest income declined primarily as a result of lower coupon rates on originated loans when compared to the same periods in 2015. For the three and nine months ended September 30, 2016, interest expense declined primarily as a result of lower costs of borrowing when compared to the same periods in 2015.

Indemnification Reserves

The activity of the outstanding repurchase reserves were as follows:

Table 29. Repurchase Reserves
Nine months ended September 30,
 
2016
 
2015
Repurchase reserves, beginning of period
$
26

 
$
29

Provisions
10

 
7

Charge-offs and releases
(11
)
 
(9
)
Repurchase reserves, end of period
$
25

 
$
27


Certain sale contracts and GSE standards require us to repurchase a loan or indemnify the purchaser or insurer for losses if a borrower fails to make initial loan payments or if the accompanying mortgage loan fails to meet certain customary representations and warranties, such as the manner of origination, the nature and extent of underwriting standards.

The Company provides certain representations and warranties on the sale of its mortgage loans. In the event of a breach of the representations and warranties, we may be required to either repurchase the loan or indemnify the purchaser for losses it sustains on the loan. In addition, an investor may request that we refund a portion of the premium paid on the sale of mortgage loans if a loan is prepaid within a certain amount of time from the date of sale. A reserve is recorded on the consolidated balance sheet for estimated repurchases, loss indemnification and premium recapture on loans sold. The provision for repurchase losses is charged against gain on mortgage loans held for sale.

Xome Segment

The Xome segment is a leading provider of technology and data-enhanced solutions to home buyers, home sellers, real estate professionals and companies engaged in the origination and/or servicing of mortgage loans. Xome seeks to transform the real estate experience by making the challenge of buying or selling less complex and increase transparency through the partnering of both online and offline components of the transaction cycle. The result provides customers a more streamlined and cohesive real estate environment. Xome is comprised of three types of revenues categorized as Exchange, Services and Technology and Support.


71

Exchange revenue is comprised of real estate disposition services. During the third quarter of 2016, we completed the migration of sales from Homesearch.com, our legacy residential real estate platform, to our Xome.com platform which leverages our new proprietary auction technology. The Xome.com platform was designed to increase transparency, reduce fraud risk and provide better execution for property sales as evidenced by generally higher sales price and lower average days to sell compared to traditional sales.

Services revenue is comprised of title, escrow, and collateral valuation services for purchase, refinance and default transactions. We continue to serve existing third-party customers and capture refinance and default transactions generated by our Servicing and Originations segments. Today, significant opportunities still exist with respect to penetration of current and new customers. Our 2015 acquisition of Experience 1, holding company of Title365 and related entities, continues to prove itself as a positive investment as it has allowed us to expand our footprint in the purchase and refinance title related services market, particularly in California, Texas and Arizona. The acquisition has allowed us to expand our third-party revenue.

Technology and Support revenue includes sales of our software as a service (“SaaS”) platform providing integrated technology, media and data solutions to real estate franchisors, brokerages, agents and MLS organizations and associations. Through our Xome platform, we intend to enhance the home buying and selling experience via smart investments in innovative technology and a sharp focus on customer service to make the home transaction experience simpler, more transparent and more accessible for all market participants. The Xome platform is accessible through a combination of a web-based platform and easy to use mobile apps, giving customers instant access to over 90% of all active MLS listings in the United States. The platform allows users to search among distressed and non-distressed real estate listings on a single website, which we believe is a significant advantage over competitor platforms which generally support either distressed or non-distressed listings, but not both.

Table 30. Xome - Operations
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenues
$
107

 
$
109

 
$
327

 
$
339

Expenses
87

 
92

 
274

 
266

Other income (expenses), net
—

 
—

 
—

 
—

Income before income tax expense
$
20

 
$
17

 
$
53

 
$
73

Income before taxes margin
18.7
%
 
15.6
%
 
16.2
%
 
21.5
%

For the three months ended September 30, 2016, pretax earnings increased compared to the prior period primarily due to a decline in marketing expenses compared to 2015 in support of our Xome rebranding from Solutionstar and launch of Xome.com and related apps in June 2015. Further, technology expenses in the third quarter 2016 are approximately 20% below total expenses for the prior period.

For the nine months ended September 30, 2016, pretax earnings decreased compared to prior year primarily due to a decline in Exchange revenues coupled with the costs of defending and settling a contingent obligation (partially offset by release of related reserves) that we inherited in connection with our acquisition of the title and close business. In addition, higher personnel costs in our title and escrow services business driven by growth in order volumes and further investment in technology contributed to the decrease in net income. Our investment in technology began in 2015 with an expansion in personnel, tools and facilities in Seattle and Chennai, India. As of September 2016, our technology expenses have stabilized. These aforementioned expense increases were partially offset by a decline in marketing expenses.



72

Table 31. Xome - Revenues
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Exchange
$
37

 
$
45

 
$
120

 
$
143

Services
62

 
55

 
182

 
170

Technology and Support
8

 
9

 
25

 
26

Total Revenues
$
107

 
$
109

 
$
327

 
$
339

 
 
 
 
 
 
 
 
Key Metrics
 
 
 
 
 
 
 
Properties sold
4,061

 
4,914

 
13,632

 
16,554

REO listings at period end
5,284

 
8,008

 
5,284

 
8,008

Xome services completed orders
146,257

 
167,174

 
454,932

 
508,251

Percentage of revenue earned from third party customers
43.9
%
 
34.3
%
 
39.0
%
 
31.9
%

For the three and nine months ended September 30, 2016, exchange revenues were lower compared to the same periods in 2015 due to a decline in property sales. The reduction in sales volume was primarily due to a decrease in REO listings as our sales outflow outpaced our referral inflow. Despite the decrease in listings, our average monthly sales turnover rate (current month unit sales divided by current month beginning listing) for the nine months ended September 30, 2016 remains consistent with the comparable periods in 2015.

For the three and nine months ended September 30, 2016, services revenues increased compared to the same periods in 2015 driven primarily by continued growth in our national and retail title and escrow services. Revenues from our national services, which provides refinance and default title and escrow services to mortgage servicers and mortgage originators, grew approximately 35% due to the addition of new customers and volume growth in existing customer relationships. Retail services revenue increased approximately 10% due to a growth in transaction volume and to a lesser extent an increase in the average fee earned per transaction. Both our national and retail services operations have been positively impacted by a low interest rate environment which has led to strong retail sales and refinance transaction volumes in a number of the geographies we service. The increase in title and escrow services was partially offset by lower revenues generated by valuations services due to a decline in volumes.

Table 32. Xome - Expenses
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Salaries, wages and benefits
$
44

 
$
44

 
$
132

 
$
126

General and administrative
39

 
43

 
126

 
128

Depreciation and amortization
4

 
5

 
16

 
12

Total Expenses
$
87

 
$
92

 
$
274

 
$
266

During the three months ended September 30, 2016, expenses were lower compared to the same period in 2015. During the three months ended September 30, 2015, we incurred a heightened level of marketing expenses in support of our Xome rebranding and launch of Xome.com and related apps in June 2015.

During the nine months ended September 30, 2016, salaries, wages and benefits expenses were higher compared to the same period in 2015 driven by higher personnel costs due to continued growth in our title and escrow services and significant investment in technology personnel to support our technology initiatives. The focus of our technology initiatives continues to be Xome.com platform and related mobile apps, as well as the development of proprietary auction technology, order management and workflow systems. These aforementioned increases in compensation were partially offset by a decline in acquisition related compensation. The decrease in general and administrative expenses was driven by an $8 decline in marketing expenses, partially offset by costs associated with defending and settling a contingent obligation (partially offset by related reserves) that we inherited in connection with our acquisition of a title and close business in January 2015. The increase in depreciation and amortization was primarily due to accelerated migration from our Homesearch.com platform to our Xome.com auction platform. The migration to the new auction platform has reduced external vendor costs and depreciation expenses by approximately $1 per quarter beginning with the three months ended September 30, 2016.



73

Corporate and Other
Table 33. Corporate and Other - Operations
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenues
$
—

 
$
—

 
$
1

 
$
4

Expenses
24

 
14

 
70

 
56

Other income (expenses), net
(39
)
 
(38
)
 
(114
)
 
(118
)
Total loss before income tax benefit - Corporate and Other
$
(63
)
 
$
(52
)
 
$
(183
)
 
$
(170
)

Table 34. Income Before Income Tax Expense Components
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Interest expense on unsecured senior notes
$
(38
)
 
$
(40
)
 
$
(114
)
 
$
(121
)
Legacy
(1
)
 
2

 
(3
)
 
1

Other corporate
(24
)
 
(14
)
 
(66
)
 
(50
)
Total loss before income tax benefit - Corporate and Other
$
(63
)
 
$
(52
)
 
$
(183
)
 
$
(170
)

Our Corporate and Other segment consists of interest expense on our unsecured senior notes and other corporate debt, income or loss from our legacy portfolio consisting of non-prime and nonconforming residential mortgage loans and corporate expenses that are not directly attributable to our operating segments. The legacy portfolio consists of loans that were transferred to a securitization trust in 2009 that was structured as a secured borrowing. The securitized loans are recorded as mortgage loans on our consolidated balance sheets and the asset backed certificates acquired by third parties are recorded as nonrecourse debt.

Interest expense on unsecured senior notes and other corporate debt declined during the three and nine months ended September 30, 2016 compared to the same periods in 2015 primarily due to the repurchase of $109 in unsecured senior notes during the fourth quarter of 2015 and an additional $29 in the first nine months of 2016. Legacy income for the three and nine months ended September 30, 2016 declined relative to the comparable periods in 2015 due primarily to higher losses on REO sales from the legacy portfolio. The size of the highly delinquent portfolio continues to decline as nonperforming loans go through disposition. Other corporate expense for the three and nine months ended September 30, 2016 was higher than the same periods in 2015 primarily due to an increase in marketing expenses and an increase in investment in corporate controls and risk management.

Table 35. Legacy Portfolio
September 30, 2016
 
December 31, 2015
Performing - UPB
$
172

 
$
178

Nonperforming (90+ delinquency) - UPB
52

 
71

REO - estimated fair value
3

 
4

Total legacy portfolio
$
227

 
$
253

 
Table 36. Corporate and Other - Expenses
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Salaries, wages and benefits
$
11

 
$
8

 
$
28

 
$
28

General and administrative
11

 
6

 
38

 
24

Depreciation and amortization
2

 
—

 
4

 
4

Total expenses - Corporate and Other
$
24

 
$
14

 
$
70

 
$
56


Expenses increased for the three and nine months ended September 30, 2016 compared to 2015. General and administrative expenses increased due to higher losses in the legacy portfolio, an increase in marketing expenses related to the Company’s potential rebranding efforts, and an increase in investment in corporate controls and risk management.


74

Table 37. Corporate and Other - Other Income (Expenses), Net
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Interest income, legacy portfolio
$
4

 
$
5

 
$
11

 
$
11

Interest expense, legacy portfolio
(2
)
 
(2
)
 
(6
)
 
(6
)
Interest expense on unsecured senior notes
(38
)
 
(40
)
 
(114
)
 
(121
)
Other interest
(2
)
 
(1
)
 
(4
)
 
(2
)
Total interest expense
(38
)
 
(38
)
 
(113
)
 
(118
)
Other expense
(1
)
 
—

 
(1
)
 
—

Other income (expenses), net - Corporate and Other
$
(39
)
 
$
(38
)
 
$
(114
)
 
$
(118
)
 
 
 
 
 
 
 
 
Weighted average cost - unsecured senior notes
7.3
%
 
7.3
%
 
7.3
%
 
7.3
%

Other income (expenses), net includes interest expense associated with our unsecured senior notes and other corporate debt and the interest income and expense from our legacy portfolio. The favorable decline in other expense for the nine months ended September 30, 2016 compared to the same periods in 2015 is primarily due to the repurchase of $109 of unsecured senior notes during the fourth quarter of 2015 and an additional $29 in repurchases in the first nine months of 2016.

Changes in Financial Position

Table 38. Assets
September 30, 2016
 
December 31, 2015
 
% Change
Cash and cash equivalents
$
695

 
$
613

 
13.4
 %
Mortgage servicing rights
2,732

 
3,367

 
(18.9
)%
Advances and other receivables, net
1,824

 
2,412

 
(24.4
)%
Reverse mortgage interests, net
7,334

 
7,514

 
(2.4
)%
Mortgage loans held for sale
1,839

 
1,430

 
28.6
 %
Other
1,422

 
1,281

 
11.0
 %
Total assets
$
15,846

 
$
16,617

 
(4.6
)%

Total assets as of September 30, 2016 decreased $771 compared with December 31, 2015. Mortgage servicing rights, which are recorded at fair value, declined primarily due to negative fair value adjustments resulting from lower interest rates. Advances and other receivables, net decreased primarily due to lower escrow advances on smaller serviced portfolio. These declines were partially offset by an increase in mortgage loans held for sale of $409, or 29%, due to continued growth in the Originations segment as we originated approximately $14,977 in mortgage loans during the nine months ended September 30, 2016 consistent with the continued low interest rate environment and increase of portfolio recapture rate from 26% to 29%.


75

Table 39. Liabilities and Stockholders' Equity
September 30, 2016
 
December 31, 2015
 
% Change
Unsecured senior notes, net of unamortized debt issuance cost
$
2,000

 
$
2,026

 
(1.3
)%
Advance facilities, net of unamortized debt issuance cost
1,188

 
1,640

 
(27.6
)%
Warehouse facilities, net of unamortized debt issuance cost
2,610

 
1,890

 
38.1
 %
MSR related liabilities - nonrecourse
1,079

 
1,301

 
(17.1
)%
Other nonrecourse debt, net of unamortized debt issuance cost
6,298

 
6,666

 
(5.5
)%
Other liabilities
1,189

 
1,327

 
(10.4
)%
Total liabilities
14,364

 
14,850

 
(3.3
)%
Total stockholders' equity attributable to Nationstar
1,476

 
1,758

 
(16.0
)%
Noncontrolling interest
6

 
9

 
(33.3
)%
Total liabilities and stockholders' equity
$
15,846

 
$
16,617

 
(4.6
)%

The stockholder's equity declined as a combination of the year-to-date losses sustained and the repurchasing of common stock under the stock repurchase program. Within the liabilities, the advance facilities declined as the portfolio balance continues to decline due to the improvement in the delinquency rates. The decrease in advance facilities was partially offset by the increase in warehouse facilities of $720 or 38% over the nine months ended September 30, 2016 primarily due to borrowings to fund the increased origination activities.


76

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Sources and Uses of Cash

Our primary sources of funds for liquidity include: (i) servicing fees and ancillary revenues; (ii) payments received from sale or securitization of loans; (iii) proceeds received from the sale of mortgage loans held for sale; (iv) payments from the liquidation or securitization of our outstanding participating interests in reverse mortgage loans; (v) lines of credit, other secured borrowings and the unsecured senior notes; and (vi) payments received in connection with the sale of advance receivables and excess spread.

Our primary uses of funds for liquidity include: (i) funding of servicing advances; (ii) originations of loans; (iii) payment of interest expenses; (iv) payment of operating expenses; (v) repayment of borrowings; (vi) payments for acquisitions of MSRs; and (vii) scheduled and unscheduled draws on our serviced reverse residential mortgage loans.

The Company owns and services reverse mortgage loans and in 2015, significantly expanded its reverse mortgage servicing operations through the acquisition of $4,971 in reverse mortgage loans. Reverse mortgages provide seniors with the ability to monetize the equity in their homes in a lump sum, line of credit or annuitized draws. The unpaid principal balance of the loan is accreted for borrower draws and other costs such as mortgage insurance premiums, property taxes and insurance. Repayment of loan balances and collection of servicing fees occurs upon the payoff or other liquidation of the loan. The Company securitizes its holdings in reverse mortgage loans in order to finance subsequent borrower draws and loan related costs which totaled $212 and $211 for the nine months ended September 30, 2016 and 2015, respectively.

We believe that our cash flows from operating activities, as well as capacity with existing facilities, provide adequate resources to fund our anticipated ongoing cash requirements. The Company anticipates that future debt maturities will be funded with cash and cash equivalents, cash flow from operating activities and, if necessary, future access to capital markets. We continue to optimize the use of balance sheet cash to avoid unnecessary interest carrying costs.

During the third quarter, the Company expanded its subservicing portfolios in order to grow its operations without the capital required for acquisition costs and carrying costs of advances that is associated with ownership of mortgage servicing rights. The Company boarded approximately $100,000 UPB of loans associated with two large subservicing contracts and anticipates expansion of new and existing subservicing arrangements in future periods with minimal use of capital.

Cash Flows

The table below presents the major sources and uses of cash flow for operating activities.

Table 40. Operating Cash Flow
Nine months ended September 30,
 
2016
 
2015
Cash provided by operating profits and changes in working capital and other assets
$
525

 
$
251

Originations net sales activity
1,198

 
1,079

Ginnie Mae forward loan buy-backs
(1,138
)
 
(1,393
)
Net cash attributable to operating activities
$
585

 
$
(63
)

During the nine months ended September 30, 2016, cash generated from operating profits and from changes in working capital and other assets grew by $274. Operating profits improved in 2016 primarily due to stronger loan recapture rates, gains on sales of reverse mortgages and improved servicing fees associated with lower loan delinquencies. Cash from changes in working capital and other asset accounts totaled $422 and $234 in 2016 and 2015, respectively. The increase in proceeds of $188 was primarily due to higher cash flows related to the net proceeds on the settlement of HECM loans and improved carrying costs associated with advances.

Cash activity related to the origination and sales of loans totaled $1,198 in 2016 compared to $1,079 in 2015. Higher cash proceeds in 2016 were attributable to higher volume of loans sold during 2016. Cash generated from origination activities will vary based upon the timing of loan fundings and the mix between direct-to-consumer or correspondent lending.


77

Spending on Ginnie Mae forward loan buy-backs decreased by $255 in 2016. The buy-back of Ginnie Mae loans is primarily recovered through the through the sale of the loans to third parties. Accordingly, substantial portions of these acquisitions are generally recovered in the near term and are reflected as financing activities or proceeds on loans held for sale in operations.

Our business is subject to extensive regulation, investigations and reviews by various federal, state and local regulatory and enforcement agencies. We are also subject to various legal proceedings in the ordinary course of our business. Addressing these regulations, reviews and legal proceedings and implementing any resulting remedial measures may require us to devote substantial resources to legal and regulatory compliance or to make other changes to our business practices, resulting in higher costs which may adversely affect our cash flows.

Table 41. Investing Cash Flows
Nine months ended September 30,
 
2016
 
2015
Purchase of reverse mortgage loans
$
—

 
$
(4,815
)
Purchase of forward mortgage servicing rights, net of liabilities incurred
(46
)
 
(615
)
Sale of forward mortgage service rights
27

 
—

All other
(46
)
 
(48
)
Net cash attributable to investing activities
$
(65
)
 
$
(5,478
)

Our investing activities used $65 and $5,478 during the nine months ended September 30, 2016 and 2015, respectively. Cash increased for investing activities due to significant purchases of reverse mortgage interests during 2015, which did not recur in 2016. The timing of transactions to purchase forward mortgage servicing rights can vary depending upon the volume and type of offerings, availability of investments meeting our return requirements and timing of regulatory approvals. Purchases of forward mortgage servicing rights declined in 2016 compared to 2015 because of these factors and our focus on boarding new subservicing portfolios.

Table 42. Financing Cash Flow
Nine months ended September 30,
 
2016
 
2015
Advance, warehouse and senior unsecured notes
$
209

 
$
562

Excess spread and MSR liability financing
(146
)
 
108

Increase (decrease) in participating interest financing in reverse mortgage interests
(480
)
 
4,629

HECM securitizations
100

 
239

Repurchase of common stock
(114
)
 
—

Proceeds from issuance of common stock
—

 
498

Restricted cash activity
—

 
(192
)
All other
(7
)
 
(5
)
Net cash attributable to financing activities
$
(438
)
 
$
5,839


Our financing activities used $438 and provided $5,839 of cash flow during the nine months ended September 30, 2016 and 2015, respectively. Borrowings under advance facilities declined by $458 in 2016 consistent with the recoveries in advance balances. These amounts were offset by higher borrowings of $894 in warehouse facilities due to the growth in mortgage loans held for sale from our Originations segment.
Excess spread financings reflected a net repayment of debt primarily due to higher repayment rates of underlying financed mortgage loans resulting from declining interest rates.
In 2016, the Company collapsed two HECM trusts and issued HMBS under three new trusts. Proceeds from the securitizations less scheduled pay downs and amounts incurred to settle the collapsed trusts totaled $100. Warehouse facilities financing the Company's interests in reverse mortgages declined by $480 in 2016 as certain assets previously financed through the facilities were included in the HECM securitizations. The facilities also decreased due to the proceeds received from borrower repayments exceeding the borrower draws on HECM loans. In 2015, financing activities reflected the $4,622 of HMBS debt acquired from Generation Mortgage.

78

Financings from equity transactions resulted in the 2016 repurchase of common shares of approximately $114 under previously authorized share repurchase programs of $250. In 2015, net proceeds of $498 were received from the issuance of 17,500 thousand common shares during the second quarter of 2015, which did not recur in 2016.
Capital Resources

Capital Structure and Debt

The Company requires access to external financing resources from time to time depending on our cash requirements, assessments of current and anticipated market conditions and after-tax cost of capital. If needed, the Company believes additional capital could be raised through a combination of issuances of equity, corporate indebtedness, asset backed acquisition financing and/or cash from operations. Our access to capital markets can be impacted by factors outside our control, including economic conditions.

Financial Covenants
Our advance and warehouse facilities contain various financial covenants which primarily relate to required tangible net worth amounts, liquidity reserves, leverage requirements, and profitability requirements. As a result of the change in interest rates during the nine months ended September 30, 2016, Nationstar recorded a charge to service related revenue for changes in fair value associated with the Company's MSRs recorded at fair value. Upon recording this charge, Nationstar was unable to meet the profitability requirements in two facilities as of September 30, 2016. Nationstar received waivers from these financial institutions on the profitability requirements. After giving effect to these waivers, the Company was in compliance with all required financial covenants as of September 30, 2016.

Seller/Servicer Financial Requirements
Effective December 31, 2015, the Federal Housing Finance Agency ("FHFA") finalized minimum financial requirements for Fannie Mae and Freddie Mac Seller/Servicers as set forth below.

Minimum Net Worth
▪
Base of $2.5 plus 25 basis points of UPB for total loans serviced.

Minimum Capital Ratio
▪
Tangible Net Worth/Total Asset greater than 6%. Tangible Net Worth comprises total equity less goodwill, intangible assets, affiliate receivables and certain pledged assets.

Minimum Liquidity
▪
3.5 basis points of total Agency servicing (Fannie Mae, Freddie Mac, Ginnie Mae) plus,
▪
Incremental 200 basis points of total nonperforming Agency, measured as 90+ delinquencies, servicing in excess of 6% of the total Agency servicing UPB.
▪
Allowable assets for liquidity may including: cash and cash equivalents (unrestricted), available for sale or held for trading investment grade securities (e.g., Agency MBS, Obligations of GSEs, US Treasury Obligations); and unused/available portion of committed servicing advance lines.

In addition, Fannie Mae or Freddie Mac may require capital ratios in excess of stated requirements. Refer to Financial Covenants in Note 8. Indebtedness and Note 14. Capital Requirements for additional information. As of September 30, 2016, Nationstar was in compliance with its seller/servicer financial requirements.


79

Table 43. Debt
September 30, 2016
 
December 31, 2015
Advance facilities, net of unamortized debt issuance costs
$
1,188

 
$
1,640

Warehouse facilities, net of unamortized debt issuance costs
2,610

 
1,890

Unsecured senior notes, net of unamortized debt issuance costs
2,000

 
2,026


Advance Facilities
Our servicing agreements impose on us various rights and obligations that affect our liquidity. Among the most significant of these obligations is the requirement that we advance our own funds to meet contractual principal and interest payments for certain investors and to pay taxes, insurance, foreclosure costs and various other items that are required to preserve the assets being serviced. Delinquency rates and prepayment speeds affect the size of servicing advance balances along with stop advance policies. As part of our normal course of business, we borrow money to fund servicing advances. We rely upon several counterparties to provide us with financing facilities to fund a portion of our servicing advances. Pursuant to the terms of our agreements, New Residential now has the obligation to fund future advances on the private label securitized loans.

As servicer for reverse mortgage loans, among other things, we are required to fund borrower draws on the loans. We typically hold the participation interests, which are made up of the borrower draws for approximately 30 days while we pool the participation interests into a government securitization. At September 30, 2016, unsecuritized borrow draws totaled $80 and our maximum unfunded advance obligation related to these reverse mortgage loans was $2,738.

Warehouse Facilities
Loan origination activities generally require short-term liquidity in excess of amounts generated by our operations. The loans we originate are financed through several warehouse lines on a short-term basis. We typically hold the loans for approximately 30 days and then sell the loans or place them in government securitizations and repay the borrowings under the warehouse lines. Our ability to fund current operations depends upon our ability to secure these types of short-term financings on acceptable terms and to renew or replace the financings as they expire.

Unsecured Senior Notes
From 2010 through 2013, we completed offerings of unsecured senior notes, with maturity dates ranging from August 2015 to June 2022. We pay interest semi-annually to the holders of these notes at interest rates ranging from 6.5% to 9.6%.

As of September 30, 2016, the expected maturities of Nationstar's Unsecured Senior Notes based on contractual maturities are as follows:
Table 44. Contractual Maturities - Unsecured Senior Notes
 
Year
Amount
2016
$
—

2017
—

2018
471

2019
346

2020
400

Thereafter
802

 
2,019

Unamortized debt issuance costs
(19
)
Total
$
2,000


Contractual Obligations
There were no material changes to our outstanding contractual obligations as of September 30, 2016, from amounts previously disclosed in Nationstar's Annual Report on Form 10-K for the year ended December 31, 2015.


80

CRITICAL ACCOUNTING POLICIES
Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, we have identified five policies that, due to the judgment, estimates and assumptions inherent in those policies, are critical to an understanding of our consolidated financial statements. These policies relate to fair value measurements, particularly those valued using significant unobservable inputs including (i) the valuation of MSRs, (ii) the valuation of excess spread financing, and (iii) the valuation of mortgage servicing rights financing liability, (iv) reserves for loan origination and servicing activity and (v) valuation of deferred tax assets. We believe the judgment, estimates and assumptions used in the preparation of the consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of the consolidated financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition. For further information on our critical accounting policies, please refer to Nationstar's Annual Report on Form 10-K for the year ended December 31, 2015. There have been no material changes to our critical accounting policies since December 31, 2015.

Recent Accounting Developments
See Note 1, Nature of Business and Basis of Presentation, of the notes to the consolidated financial statements for details of recently issued accounting pronouncements and their expected impact on the consolidated financial statements, which is incorporated herein.

Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike most industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflations. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Variable Interest Entities and Off Balance Sheet Arrangements
See Note 10. Securitizations and Financings, in Item 1. Financial Statements, which is incorporated by reference herein, for a summary of Nationstar's transactions with VIEs and details of their impact on the consolidated financial statements.

Derivatives
See Note 7. Derivative Financial Instruments, of Item 1. Financial Statements, which is incorporated by reference herein, for a summary of Nationstar's derivative transactions.


81

CAUTIONS REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the U.S. federal securities laws. These forward-looking statements include, without limitation, statements concerning plans, objectives, goals, projections, strategies, future events or performance, and underlying assumptions and other statements, which are not statements of historical facts. When used in this discussion, the words "anticipate," "appears," "believe," "foresee," "intend," "should," "expect," "estimate," "project," "plan," "may," "could," "will," "are likely" and similar expressions are intended to identify forward-looking statements. These statements involve predictions of our future financial condition, performance, plans and strategies, and are thus dependent on a number of factors including, without limitation, assumptions and data that may be imprecise or incorrect. Specific factors that may impact performance or other predictions of future actions have, in many but not all cases, been identified in connection with specific forward-looking statements.

There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to:

•
our ability to refinance existing loans and maintain our loan originations volume;
•
our ability to increase recapture of voluntary prepayments related to our existing servicing portfolio;
•
our ability to maintain or grow the size of our servicing portfolio;
•
our ability to successfully enhance the home buying experience;
•
the success of our customer-for-life and customer service initiatives;
•
delays in our ability to collect or be reimbursed for servicing advances;
•
risks related to servicing reverse mortgages;
•
our ability to obtain sufficient capital to meet our financing requirements;
•
changes in prevailing interest rates;
•
changes in our business relationships or changes in guidelines with Fannie Mae, Freddie Mac and Ginnie Mae;
•
our ability to effectively develop, market, sell and implement new technology;
•
our ability to realize all of the anticipated benefits of previous and potential future acquisitions;
•
increased legal, regulatory and governmental investigations and proceedings, compliance requirements and related costs; and
•
loss of our licenses.

These factors should not be construed as exhaustive and should be read with the other cautionary statements that are included or incorporated by reference. All of the factors are difficult to predict, contain uncertainties that may materially affect actual results, and may be beyond our control. New factors emerge from time to time, and it is not possible for our management to predict all such factors or to assess the effect of each such new factor on our business. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore any of these statements included herein may prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. Please refer to Item 1A. Risk Factors included in Nationstar's Annual Report on Form 10-K for the year ended December 31, 2015 for further information on these and other risk factors affecting us.


82

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Refer to the discussion of market risks included in Part II, Item 7A of Nationstar's Annual Report on Form 10-K for the year ended December 31, 2015, which is herein incorporated by reference. There has been no material change in the types of market risks faced by us since December 31, 2015.

We assess our market risk based on changes in interest rates utilizing a sensitivity analysis. The sensitivity analysis measures the potential impact on fair values based on hypothetical changes (increases and decreases) in interest rates.
We use a duration-based model in determining the impact of interest rate shifts on our loan portfolio, certain other interest-bearing liabilities measured at fair value and interest rate derivatives portfolios. The primary assumption used in these models is that an increase or decrease in the benchmark interest rate produces a parallel shift in the yield curve across all maturities.

We utilize discounted cash flows and analysis to determine the fair value of MSRs and the impact of parallel interest rate shifts on MSRs. The primary assumptions in this model are prepayment speeds, market discount rates and cost to service. However, this analysis ignores the impact of interest rate changes on certain material variables, such as the benefit or detriment on the value of future loan originations, non-parallel shifts in the spread relationships between MBS, swaps and U.S. Treasury rates and changes in primary and secondary mortgage market spreads. For mortgage loans, IRLCs and forward delivery commitments on MBS, we rely on a model in determining the impact of interest rate shifts. In addition, for IRLCs, the borrower’s propensity to close their mortgage loans under the commitment is used as a primary assumption.

Our total market risk is influenced by a wide variety of factors including market volatility and the liquidity of the markets. There are certain limitations inherent in the sensitivity analysis presented, including the necessity to conduct the analysis based on a single point in time and the inability to include the complex market reactions that normally would arise from the market shifts modeled.

We use market rates on our instruments to perform the sensitivity analysis. The estimates are based on the market risk sensitive portfolios described in the preceding paragraphs and assume instantaneous, parallel shifts in interest rate yield curves. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in fair value may not be linear. We believe that on the whole our estimated net changes to the fair value of our assets and liabilities at September 30, 2016 are within acceptable ranges based on the materiality of the Company's financial statements.

Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (Exchange Act), as of September 30, 2016.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2016, our disclosure controls and procedures are effective. Disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2016, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

83

PART II – OTHER INFORMATION
Item 1. Legal Proceedings

From time to time, we are party to numerous legal proceedings that have arisen in the normal course of conducting business. In addition, in the ordinary course of business Nationstar and its subsidiaries can be and are involved in governmental and regulatory examinations, information gathering requests, investigations and proceedings.
We are a state licensed, non-bank mortgage lender and servicer. Our business is subject to extensive examinations, investigations and reviews by various federal, state and local regulatory and enforcement agencies. We have historically had a number of open investigations with various regulators or enforcement agencies.
We have experienced an increase in regulatory and governmental investigations, subpoenas, examinations and other inquiries. We are currently the subject of various regulatory or governmental investigations, subpoenas, examinations and inquiries related to our residential loan servicing and origination practices, bankruptcy and collections practices, financial reporting and other aspects of our businesses. These matters include investigations by the Consumer Financial Protection Bureau, the Securities and Exchange Commission, the Executive Office of the United States Trustees, the Department of Justice, the multistate coalition of mortgage banking regulators, various State Attorneys General, the New York Department of Financial Services, and the California Department of Business Oversight. These specific matters and other pending or potential future investigations, subpoenas, examinations or inquiries may lead to administrative, civil or criminal proceedings and possibly result in remedies including fines, penalties, restitution, or alterations in our business practices and in additional expenses and collateral costs. We are cooperating fully in these matters.

Responding to these matters requires us to devote substantial legal and regulatory resources, resulting in higher costs and lower net cash flows. Adverse results in any of these matters could further increase our operating expenses and reduce our revenues, require us to change business practices and limit our ability to grow and otherwise materially and adversely affect our business, reputation, financial condition or results of operation.


Item 1A. Risk Factors
There have been no material changes or additions to the risk factors previously disclosed under “Risk Factors” included in Nationstar's Annual Report on Form 10-K filed for the year ended December 31, 2015.



84

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the nine months ended September 30, 2016, we have repurchased shares of our common stock at a cost of $114 under our share repurchase program. The number and average price of shares purchased are set forth in the table below.
(in thousands except Average Price Paid per Share)
Period
(a) Total Number of Shares (or Units) Purchased 
(in thousands)
 
(b) Average Price Paid per Share (or Unit)
 
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (1)
(in thousands)
 
(d) Maximum Number (or Appropriate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Program
(in millions)
July 1, 2016-
July 31, 2016
747

(2) 
$
11.06

 
746

 
$
125

August 1, 2016-
August 31, 2016
12

(2) 
$
12.92

 
—

 
$
125

September 1, 2016-
September 30, 2016
—

(2) 
$
—

 
—

 
$
125

Total
759

 
 
 
746

 
 

(1) On December 17, 2015, we announced that our Board of Directors had authorized the repurchase of up to $150 of our outstanding common stock through December 16, 2016. On February 9, 2016, our Board of Directors authorized a $100 increase to the original repurchase authorization for an aggregate repurchase authorization of $250 under our share repurchase program.
(2) Amounts for July and August include 1 thousand and 12 thousand shares of common stock, respectively, surrendered to us by certain employees in an amount equal to the amount of tax withheld to satisfy minimum statutory tax requirements in connection with the vesting of equity awards.

Item 3. Defaults Upon Senior Securities
None.

Item 4. Mine Safety Disclosures
Not applicable.

Item 5. Other Information
None.


85

Item 6. Exhibits
 
 
 
Incorporated by Reference
 
Exhibit Number
Description
Form
File No.
Exhibit
Filing Date
Filed or Furnished Herewith
 
 
 
 
 
 
 
31.1
Certification by Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002




X
31.2
Certification by Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
X
32.1
Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002




X
32.2
Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
X
101.INS
XBRL Instance Document




X
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
 
 
X
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document




X
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
X
101.LAB
XBRL Taxonomy Extension Label Linkbase Document




X
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
X


86

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
NATIONSTAR MORTGAGE HOLDINGS INC.
 
 
 
November 3, 2016
 
/s/ Jay Bray
Date
 
Jay Bray
Chief Executive Officer
(Principal Executive Officer)
 
 
 
November 3, 2016
 
/s/ Robert D. Stiles
Date
 
Robert D. Stiles
Chief Financial Officer
(Principal Finance and Accounting Officer)


87

Exhibit Index
 
 
Incorporated by Reference
 
Exhibit Number
Description
Form
File No.
Exhibit
Filing Date
Filed or Furnished Herewith
 
 
 
 
 
 
 
31.1
Certification by Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
X
31.2
Certification by Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
X
32.1
Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
X
32.2
Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
X
101.INS
XBRL Instance Document
 
 
 
 
X
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
 
 
X
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
X
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
X
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
X
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
X




88

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