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EX-10.1 - EXHIBIT 10.1 NRM SUBSERVICING AMENDMENT NO 2 - WALTER INVESTMENT MANAGEMENT CORPex101fy2017q1.htm
EX-32 - EXHIBIT 32 RENZI TILLETT 906 CERTIFICATION - WALTER INVESTMENT MANAGEMENT CORPex32fy2017q1.htm
EX-31.2 - EXHIBIT 31.2 TILLETT 302 CERTIFICATION - WALTER INVESTMENT MANAGEMENT CORPex312fy2017q1.htm
EX-31.1 - EXHIBIT 31.1 RENZI 302 CERTIFICATION - WALTER INVESTMENT MANAGEMENT CORPex311fy2017q1.htm
EX-10.2 - EXHIBIT 10.2 JONATHAN PEDERSEN RESIGNATION LETTER - WALTER INVESTMENT MANAGEMENT CORPex102fy2017q1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 March 31, 2017
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________          
Commission File Number: 001-13417 
_______________________________________________________________________________________
Walter Investment Management Corp.
(Exact name of registrant as specified in its charter) 
_______________________________________________________________________________________ 
 
Maryland
 
13-3950486
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
1100 Virginia Drive, Suite 100
Fort Washington, PA
 
19034
(Address of principal executive offices)
 
(Zip Code)
(844) 714-8603
(Registrant's telephone number, including area code)

3000 Bayport Drive, Suite 1100
Tampa, FL 33607
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
 
 
 
 
 
 
Large accelerated filer
 
o
 
Accelerated filer
 
x
 
 
 
 
 
 
 
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
o
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
The registrant had 36,541,688 shares of common stock outstanding as of May 5, 2017.
_______________________________________________________________________________________ 



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




PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
 
March 31, 
 2017
 
December 31, 
 2016
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Cash and cash equivalents
 
$
237,174

 
$
224,598

Restricted cash and cash equivalents
 
174,324

 
204,463

Residential loans at amortized cost, net (includes $5,633 and $5,167 in allowance for loan losses at March 31, 2017 and December 31, 2016, respectively)
 
678,482

 
665,209

Residential loans at fair value
 
12,240,962

 
12,416,542

Receivables, net (includes $13,848 and $15,033 at fair value at March 31, 2017 and December 31, 2016, respectively)
 
224,282

 
267,962

Servicer and protective advances, net (includes $150,305 and $146,781 in allowance for uncollectible advances at March 31, 2017 and December 31, 2016, respectively)
 
1,005,157

 
1,195,380

Servicing rights, net (includes $930,333 and $949,593 at fair value at March 31, 2017 and December 31, 2016, respectively)
 
1,006,428

 
1,029,719

Goodwill
 
47,747

 
47,747

Intangible assets, net
 
10,445

 
11,347

Premises and equipment, net
 
73,999

 
82,628

Deferred tax assets, net
 
299,629

 
299,926

Assets held for sale
 

 
71,085

Other assets (includes $47,173 and $87,937 at fair value at March 31, 2017 and December 31, 2016, respectively)
 
201,346

 
242,290

Total assets
 
$
16,199,975

 
$
16,758,896

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Payables and accrued liabilities (includes $14,271 and $11,804 at fair value at March 31, 2017 and December 31, 2016, respectively)
 
$
699,741

 
$
759,011

Servicer payables
 
138,059

 
146,332

Servicing advance liabilities
 
662,206

 
783,229

Warehouse borrowings
 
1,094,677

 
1,203,355

Servicing rights related liabilities at fair value
 
3,537

 
1,902

Corporate debt
 
2,112,328

 
2,129,000

Mortgage-backed debt (includes $498,768 and $514,025 at fair value at March 31, 2017 and December 31, 2016, respectively)
 
916,952

 
943,956

HMBS related obligations at fair value
 
10,289,505

 
10,509,449

Liabilities held for sale
 

 
2,402

Total liabilities
 
15,917,005

 
16,478,636

Commitments and contingencies (Note 11)
 

 

Stockholders' equity:
 
 
 
 
Preferred stock, $0.01 par value per share:
 
 
 
 
Authorized - 10,000,000 shares
 
 
 
 
Issued and outstanding - 0 shares at March 31, 2017 and December 31, 2016
 

 

Common stock, $0.01 par value per share:
 
 
 
 
Authorized - 90,000,000 shares
 
 
 
 
Issued and outstanding - 36,464,218 and 36,391,129 shares at March 31, 2017 and December 31, 2016, respectively
 
365

 
364

Additional paid-in capital
 
596,905

 
596,067

Accumulated deficit
 
(315,216
)
 
(317,104
)
Accumulated other comprehensive income
 
916

 
933

Total stockholders' equity
 
282,970

 
280,260

Total liabilities and stockholders' equity
 
$
16,199,975

 
$
16,758,896


3



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

 
 
March 31, 
 2017
 
December 31, 
 2016
ASSETS OF CONSOLIDATED VARIABLE INTEREST ENTITIES THAT CAN ONLY BE USED TO SETTLE THE OBLIGATIONS OF CONSOLIDATED VARIABLE INTEREST ENTITIES:
 
(unaudited)
 
 
Restricted cash and cash equivalents
 
$
44,254

 
$
45,843

Residential loans at amortized cost, net
 
453,474

 
462,877

Residential loans at fair value
 
440,219

 
492,499

Receivables, net
 
13,848

 
15,798

Servicer and protective advances, net
 
607,357

 
734,707

Other assets
 
14,001

 
19,831

Total assets
 
$
1,573,153

 
$
1,771,555

 
 
 
 
 
LIABILITIES OF THE CONSOLIDATED VARIABLE INTEREST ENTITIES FOR WHICH CREDITORS OR BENEFICIAL INTEREST HOLDERS DO NOT HAVE RECOURSE TO THE COMPANY:
 
 
 
 
Payables and accrued liabilities
 
$
2,777

 
$
2,985

Servicing advance liabilities
 
542,528

 
650,565

Mortgage-backed debt (includes $498,768 and $514,025 at fair value at March 31, 2017 and December 31, 2016, respectively)
 
916,952

 
943,956

Total liabilities
 
$
1,462,257

 
$
1,597,506

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


4



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

 
 
For the Three Months 
 Ended March 31,
 
 
2017
 
2016
REVENUES
 
 
 
 
Net servicing revenue and fees
 
$
113,187

 
$
(105,762
)
Net gains on sales of loans
 
74,356

 
84,477

Net fair value gains on reverse loans and related HMBS obligations
 
14,702

 
35,208

Interest income on loans
 
10,980

 
12,171

Insurance revenue
 
4,940

 
10,367

Other revenues
 
27,120

 
30,310

Total revenues
 
245,285

 
66,771

 
 
 
 
 
EXPENSES
 
 
 
 
General and administrative
 
131,627

 
129,606

Salaries and benefits
 
107,957

 
132,639

Interest expense
 
60,410

 
64,248

Depreciation and amortization
 
10,932

 
14,423

Other expenses, net
 
2,783

 
2,506

Total expenses
 
313,709

 
343,422

 
 
 
 
 
OTHER GAINS (LOSSES)
 
 
 
 
Gain on sale of business
 
67,727

 

Other net fair value gains (losses)
 
5,083

 
(2,144
)
Gain on extinguishment
 

 
928

Other
 

 
(1,024
)
Total other gains (losses)
 
72,810

 
(2,240
)
 
 
 
 
 
Income (loss) before income taxes
 
4,386

 
(278,891
)
Income tax expense (benefit)
 
2,498

 
(106,189
)
Net income (loss)
 
$
1,888

 
$
(172,702
)
 
 
 
 
 
Comprehensive income (loss)
 
$
1,871

 
$
(172,677
)
 
 
 
 
 
Net income (loss)
 
$
1,888

 
$
(172,702
)
Basic earnings (loss) per common and common equivalent share
 
$
0.05

 
$
(4.85
)
Diluted earnings (loss) per common and common equivalent share
 
$
0.05

 
$
(4.85
)
Weighted-average common and common equivalent shares outstanding — basic
 
36,412

 
35,579

Weighted-average common and common equivalent shares outstanding — diluted
 
36,812

 
35,579

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

5



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

 
 
Common Stock
 
Additional Paid-
In Capital
 
Accumulated Deficit
 
Accumulated Other
Comprehensive
Income
 
 
 
 
Shares
 
Amount
 
 
 
 
Total
Balance at January 1, 2017
 
36,391,129

 
$
364

 
$
596,067

 
$
(317,104
)
 
$
933

 
$
280,260

Net income
 

 

 

 
1,888

 

 
1,888

Other comprehensive loss, net of tax
 

 

 

 

 
(17
)
 
(17
)
Share-based compensation
 

 

 
865

 

 

 
865

Share-based compensation issuances, net
 
73,089

 
1

 
(27
)
 

 

 
(26
)
Balance at March 31, 2017
 
36,464,218

 
$
365

 
$
596,905

 
$
(315,216
)
 
$
916

 
$
282,970

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



6



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

 
 
For the Three Months 
 Ended March 31,
 
 
2017
 
2016
Operating activities
 
 
 
 
Net income (loss)
 
$
1,888

 
$
(172,702
)
 
 
 
 
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities
 
 
 
 
Net fair value gains on reverse loans and related HMBS obligations
 
(14,702
)
 
(35,208
)
Amortization of servicing rights
 
5,025

 
4,611

Change in fair value of servicing rights
 
53,516

 
326,580

Change in fair value of servicing rights related liabilities
 

 
(7,191
)
Change in fair value of charged-off loans
 
(10,133
)
 
(10,939
)
Other net fair value (gains) losses
 
(3,363
)
 
4,606

Accretion of discounts on residential loans and advances
 
(928
)
 
(928
)
Accretion of discounts on debt and amortization of deferred debt issuance costs
 
7,740

 
7,964

Provision for uncollectible advances
 
9,666

 
8,558

Depreciation and amortization of premises and equipment and intangible assets
 
10,932

 
14,423

Provision (benefit) for deferred income taxes
 
1,840

 
(40,819
)
Share-based compensation
 
865

 
859

Purchases and originations of residential loans held for sale
 
(5,187,091
)
 
(5,158,411
)
Proceeds from sales of and payments on residential loans held for sale
 
5,301,187

 
5,422,461

Net gains on sales of loans
 
(74,356
)
 
(84,477
)
Gain on sale of business
 
(67,727
)
 

Other
 
2,506

 
3,622

 
 
 
 
 
Changes in assets and liabilities
 
 
 
 
Decrease (increase) in receivables
 
9,262

 
(25,051
)
Decrease in servicer and protective advances
 
180,432

 
6,517

Increase in other assets
 
(4,774
)
 
(9,201
)
Decrease in payables and accrued liabilities
 
(82,751
)
 
(53,212
)
Increase in servicer payables, net of change in restricted cash
 
7,698

 
673

Cash flows provided by operating activities
 
146,732

 
202,735

 
 
 
 
 
Investing activities
 
 
 
 
Purchases and originations of reverse loans held for investment
 
(130,269
)
 
(181,167
)
Principal payments received on reverse loans held for investment
 
277,262

 
197,883

Principal payments received on mortgage loans held for investment
 
23,981

 
22,325

Payments received on charged-off loans held for investment
 
5,025

 
7,000

Payments received on receivables related to Non-Residual Trusts
 
3,754

 
1,957

Proceeds from sales of real estate owned, net
 
34,344

 
21,409

Purchases of premises and equipment
 
(469
)
 
(11,653
)
Decrease (increase) in restricted cash and cash equivalents
 
(1,887
)
 
9,048

Payments for acquisitions of businesses, net of cash acquired
 
(804
)
 
(1,947
)
Acquisitions of servicing rights, net
 
(109
)
 
(6,571
)
Proceeds from sales of servicing rights, net
 
29,673

 

Proceeds from sale of business
 
131,067

 

Other
 
9,524

 
(337
)
Cash flows provided by investing activities
 
381,092

 
57,947

 
 
 
 
 

7



WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
 
 
 
 
 
 
 
For the Three Months 
 Ended March 31,
 
 
2017
 
2016
Financing activities
 
 
 
 
Payments on corporate debt
 
(21,285
)
 
(210
)
Extinguishments and settlement of debt
 

 
(6,327
)
Proceeds from securitizations of reverse loans
 
154,316

 
202,947

Payments on HMBS related obligations
 
(400,693
)
 
(271,013
)
Issuances of servicing advance liabilities
 
328,341

 
441,924

Payments on servicing advance liabilities
 
(449,636
)
 
(469,835
)
Net change in warehouse borrowings related to mortgage loans
 
(116,795
)
 
(214,510
)
Net change in warehouse borrowings related to reverse loans
 
8,117

 
75,910

Proceeds from sales of servicing rights
 

 
2,968

Payments on servicing rights related liabilities
 
(1,415
)
 
(4,250
)
Payments on mortgage-backed debt
 
(28,619
)
 
(25,203
)
Other debt issuance costs paid
 
(964
)
 
(1,031
)
Other
 
13,385

 
(462
)
Cash flows used in financing activities
 
(515,248
)
 
(269,092
)
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
12,576

 
(8,410
)
Cash and cash equivalents at beginning of the period
 
224,598

 
202,828

Cash and cash equivalents at end of the period
 
$
237,174

 
$
194,418

 
 
 
 
 
 Supplemental Disclosures of Cash Flow Information
 
 
 
 
Cash paid for interest
 
$
46,903

 
$
53,901

Cash paid (received) for taxes
 
(5,591
)
 
16

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

8



WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business and Basis of Presentation
Walter Investment Management Corp. and its subsidiaries, or the Company, is an independent servicer and originator of mortgage loans and servicer of reverse mortgage loans. The Company services a wide array of loans across the credit spectrum for its own portfolio and for GSEs, government agencies, third-party securitization trusts and other credit owners. Through the consumer, correspondent and wholesale lending channels, the Company originates and purchases residential mortgage loans that are predominantly sold to GSEs and government agencies. The Company also operates two supplementary businesses; asset receivables management and real estate owned property management and disposition.
The Company operates throughout the U.S. through three reportable segments, Servicing, Originations, and Reverse Mortgage. Refer to Note 10 for additional information related to segment reporting.
Certain acronyms and terms used throughout these notes are defined in the Glossary of Terms in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Revision of Previously Issued Financial Statements
During the year ended December 31, 2016, the Company made immaterial corrections of errors in its consolidated balance sheet to insurance related receivables and payables. The insurance business was acquired in 2011. The accounting related to insurance premium receivables and carrier payables was maintained consistently with practices prior to the acquisition. As part of the sale transaction that occurred on February 1, 2017, discussed below, certain agreements related to the insurance business were further reviewed and it was determined that the gross up of premiums and related carrier payables was not consistent with the terms of such agreements. Thus, the Company assessed the effect of the overstatement in the aggregate on prior periods’ financial statements in accordance with the SEC’s Staff Accounting Bulletins No. 99 and 108 and, based on an analysis of quantitative and qualitative factors, determined that the overstatement was not material to the Company’s prior interim and annual financial statements. The Company corrected the overstatement in the year ended December 31, 2016 and revised its previously-issued financial statements for the three months ended March 31, 2016. All financial information contained in the accompanying notes to these financial statements has been revised to reflect the correction of the overstatement. The Company revised the Consolidated Statements of Cash Flows for the three months ended March 31, 2016. All of the revisions were made to the changes in assets and liabilities included in cash flows provided by operating activities. For the three months ended March 31, 2016, cash flows from the change in receivables decreased by $7.4 million, while cash flows from the change in servicer and protective advances and change in payables and accrued liabilities increased by $4.8 million and $2.6 million, respectively.
Sale of Insurance Business
On December 30, 2016, the Company executed a stock purchase agreement pursuant to which the Company agreed to sell 100% of the stock of its indirect, wholly-owned subsidiary, GTI Holdings Corp., which was the holding company of the Company's primary licensed insurance agency, Green Tree Insurance Agency, Inc., to a wholly-owned subsidiary of Assurant, for a purchase price of $125.0 million in cash, subject to adjustment as specified in the agreement. Under the agreement, an affiliate of Assurant has also agreed to make potential earnout payments to the Company in an aggregate amount of up to $25.0 million in cash, with the amount of such payments to be based upon the gross written premium of certain voluntary homeowners' insurance written by certain affiliates of Assurant over a specified timeframe. As a result of this transaction, the assets and liabilities related to the insurance business, which were included in the Servicing segment, were reclassified to operations held for sale line items on the consolidated balance sheets at December 31, 2016. This transaction closed on February 1, 2017, at which time the Company received $131.1 million in cash, which included a working capital payment.

9



Interim Financial Reporting
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and related notes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Although management is not currently aware of any factors that would significantly change its estimates and assumptions, actual results may differ from these estimates.
Recently Adopted Accounting Guidance
In March 2016, the FASB issued an accounting standards update revising certain aspects of share-based accounting guidance which includes income tax and forfeiture consequences. This guidance was effective for the Company beginning January 1, 2017. Adoption of this update did not have a material impact on the Company's income tax expense. The Company elected to continue with its current methodology of estimating expected forfeitures at the date of grant and adjust throughout the vesting term as needed.
Recent Accounting Guidance Not Yet Adopted
In May 2014, the FASB issued new revenue recognition guidance that supersedes most industry-specific guidance but does exclude insurance contracts and financial instruments. Under the new revenue recognition guidance, entities are required to identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when the entity satisfies a performance obligation. In April 2015, the FASB voted for a one-year deferral of the effective date, resulting in this new guidance being effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. Subsequent to the initial issuance, the FASB has continued to issue updates to this guidance to provide additional clarification and implementation instructions to issuers regarding (i) principal versus agent considerations, (ii) identifying performance obligations, (iii) licensing, and (iv) narrow-scope improvements and practical expedients relating to assessing collectability, presentation of sales taxes, non-cash consideration, and completed contracts and contract modifications at transition. The Company has reviewed the scope of the guidance and monitored the determinations of the FASB Transition Resource Group and concluded that a number of the Company's most significant revenue streams are not within the scope of the standard because the standard does not apply to revenue on contracts accounted for under the transfers and servicing of financial assets or financial instruments standards. Therefore, revenue recognition for these contracts will remain unchanged. However, the FASB has issued, and may issue in the future, interpretive guidance that may cause the Company’s evaluation to change. The Company continues to evaluate certain select revenue streams, including subservicing fees, for the effect that this guidance will have on its consolidated financial statements. Based on current guidance available, while there may be some impact on revenue recognition, the Company does not expect the adoption of this guidance to have a significant impact on the consolidated financial statements. The Company has not yet selected a transition method.
In January 2016, the FASB issued an accounting standards update that amends the guidance on the classification and measurement of financial instruments. The new standard revises an entity's accounting related to (i) the classification and measurement of investments in equity securities and (ii) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. At March 31, 2017, the Company did not hold any equity securities measured at fair value, but did have certain financial liabilities measured at fair value. The significance of adoption is dependent upon the nature of those financial liabilities carried at fair value at the time of adoption.

10



In February 2016, the FASB issued an accounting standards update that requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset to not recognize lease assets and lease liabilities. In transition, lessees are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients that entities may elect to apply. This guidance is effective for fiscal years beginning after December 15, 2018, with early application permitted. While the Company is currently evaluating the full effect that this guidance will have on its consolidated financial statements, it will result in the recognition of certain operating leases as right-of-use assets and lease liabilities on the consolidated balance sheets.
In June 2016, the FASB issued an accounting standards update that amends the guidance for recognizing credit losses on financial instruments measured at amortized cost. This update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2019. The Company does not expect, based on the Company's current methodologies for accounting for financial instruments, that the adoption of this guidance will have a material impact on its consolidated financial statements. The significance of the adoption of this guidance may change at the time of adoption based on the nature of the Company's financial instruments at that time and the corresponding conclusions reached.
In August 2016, the FASB issued an accounting standards update that amends the guidance on the classification of certain cash receipts and cash payments presented within the statement of cash flows to reduce the existing diversity in practice. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The adoption may impact the presentation of cash flows, but will not otherwise have a material impact on the consolidated results of operations or financial condition.
In October 2016, the FASB issued an accounting standards update that amends the guidance on the classification of income taxes related to the intra-entity transfer of assets other than inventory. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the effect that this guidance will have on its consolidated financial statements. However, the significance of adoption is dependent on the nature of the transactions and corresponding tax laws in effect at the time of adoption.
In November 2016, the FASB issued an accounting standards update that amends the guidance on restricted cash within the statement of cash flows. The update amends the classification of restricted cash and cash equivalents to be included within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The adoption will impact the presentation of the cash flows, but will not otherwise have a material impact on the consolidated results of operations or financial condition.
In January 2017, the FASB issued an accounting standards update that amends the guidance on business combinations. The update clarifies the definition of a business and provides a framework that gives entities a basis for making reasonable judgments about whether a transaction should be accounted for as an acquisition of assets or a business. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company will apply this guidance to its assessment of applicable transactions, such as acquisitions and disposals of assets or business, consummated after the adoption date.
In January 2017, the FASB issued an accounting standards update that amends the guidance on goodwill. Under the update, goodwill impairment is measured as the amount by which a reporting unit’s carrying value exceeds its fair value, while not exceeding the carrying value of goodwill. The update eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. This guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently considering the timing of adoption and will apply this guidance to applicable impairment tests after the adoption date.

11



In February 2017, the FASB issued an accounting standards update that amends the guidance on derecognition of nonfinancial assets. This guidance clarifies the scope and accounting of a financial asset that meets the definition of an in substance nonfinancial asset and defines the term in substance nonfinancial asset. It also adds guidance for partial sales of nonfinancial assets. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company does not expect that, based on the Company's current methodologies for accounting for nonfinancial assets, the adoption of this guidance will have a material impact on its consolidated financial statements. The significance of the adoption of this guidance may change at the time of adoption based on the nature of the Company's nonfinancial assets at that time and the corresponding conclusions reached.
2. Variable Interest Entities
Consolidated Variable Interest Entities
Included in Note 5 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 are descriptions of the Company’s Consolidated VIEs.
Included in the tables below are summaries of the carrying amounts of the assets and liabilities of consolidated VIEs (in thousands):
 
 
March 31, 2017
 
 
Residual
Trusts
 
Non-Residual
Trusts
 
Servicer and Protective Advance Financing Facilities
 
 Revolving Credit Facilities-Related VIEs
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Restricted cash and cash equivalents
 
$
14,109

 
$
11,606

 
$
18,539

 
$

 
$
44,254

Residential loans at amortized cost, net
 
453,474

 

 

 

 
453,474

Residential loans at fair value
 

 
440,219

 

 

 
440,219

Receivables, net
 

 
13,848

 

 

 
13,848

Servicer and protective advances, net
 

 

 
607,357

 

 
607,357

Other assets
 
8,302

 
726

 
1,018

 
3,955

 
14,001

Total assets
 
$
475,885

 
$
466,399

 
$
626,914

 
$
3,955

 
$
1,573,153

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Payables and accrued liabilities
 
$
2,048

 
$

 
$
729

 
$

 
$
2,777

Servicing advance liabilities
 

 

 
542,528

 

 
542,528

Mortgage-backed debt
 
418,184

 
498,768

 

 

 
916,952

Total liabilities
 
$
420,232

 
$
498,768

 
$
543,257

 
$

 
$
1,462,257


12



 
 
December 31, 2016
 
 
Residual
Trusts
 
Non-Residual
Trusts
 
Servicer and Protective Advance Financing Facilities
 
 Revolving Credit Facilities-Related VIEs
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Restricted cash and cash equivalents
 
$
13,321

 
$
10,257

 
$
22,265

 
$

 
$
45,843

Residential loans at amortized cost, net
 
462,877

 

 

 

 
462,877

Residential loans at fair value
 

 
450,377

 

 
42,122

 
492,499

Receivables, net
 

 
15,033

 

 
765

 
15,798

Servicer and protective advances, net
 

 

 
734,707

 

 
734,707

Other assets
 
10,028

 
1,028

 
1,440

 
7,335

 
19,831

Total assets
 
$
486,226

 
$
476,695

 
$
758,412

 
$
50,222

 
$
1,771,555

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Payables and accrued liabilities
 
$
2,140

 
$

 
$
845

 
$

 
$
2,985

Servicing advance liabilities
 

 

 
650,565

 

 
650,565

Mortgage-backed debt
 
429,931

 
514,025

 

 

 
943,956

Total liabilities
 
$
432,071

 
$
514,025

 
$
651,410

 
$

 
$
1,597,506

Unconsolidated Variable Interest Entities
Included in Note 5 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 are descriptions of the Company's variable interests in VIEs that it does not consolidate as it has determined that it is not the primary beneficiary of the VIEs. Additionally, refer to Note 13 for information on the Company's transactions with WCO.
3. Transfers of Residential Loans
Sales of Mortgage Loans
As part of its originations activities, the Company sells substantially all of its originated or purchased mortgage loans into the secondary market for securitization or to private investors as whole loans. The Company sells conventional-conforming and government-backed mortgage loans through GSE and agency-sponsored securitizations in which mortgage-backed securities are created and sold to third-party investors. The Company also sells non-conforming mortgage loans to private investors. The Company accounts for these transfers as sales. Historically, the Company has generally retained the rights to subservice the MSR on the sold loans. If the servicing rights are retained, the Company receives a servicing fee for servicing the sold loans, which represents continuing involvement.
Certain guarantees arise from agreements associated with the sale of the Company's residential loans. Under these agreements, the Company may be obligated to repurchase loans, or otherwise indemnify or reimburse the credit owner or insurer for losses incurred, due to a breach of contractual representations and warranties. Refer to Note 11 for additional information.

13



The following table presents the carrying amounts of the Company’s net assets that relate to its continuing involvement with mortgage loans that have been sold with servicing rights retained and the unpaid principal balance of these sold loans (in thousands):
 
 
Carrying Value of Net Assets
Recorded on the Consolidated Balance Sheets
 
Unpaid
Principal
Balance of
Sold Loans
 
 
Servicing
Rights,
Net
(1)
 
Servicer and
Protective
Advances, Net
 
Payables and Accrued Liabilities
 
Total
 
March 31, 2017
 
$
451,192

 
$
18,341

 
$
(3,537
)
 
$
465,996

 
$
38,237,665

December 31, 2016
 
439,062

 
21,825

 
(1,983
)
 
458,904

 
36,116,570

__________
(1)
During the three months ended March 31, 2017, the Company revised the December 31, 2016 disclosed amount of net servicing rights for which the Company has continuing involvement. The total net servicing rights balance reported in the consolidated balance sheets as of December 31, 2016 was not impacted by this disclosure revision.
At March 31, 2017 and December 31, 2016, 1.2% and 1.3%, respectively, of mortgage loans sold and serviced by the Company were 60 days or more past due.
The following table presents a summary of cash flows related to sales of mortgage loans (in thousands):
 
 
For the Three Months 
 Ended March 31,
 
 
2017
 
2016
Cash proceeds received from sales, net of fees
 
$
5,252,552

 
$
5,464,865

Servicing fees collected (1)
 
30,803

 
34,772

Repurchases of previously sold loans
 
17,503

 
5,932

__________
(1)
Represents servicing fees collected on all loans sold whereby the Company has continuing involvement with mortgage loans that have been sold with servicing rights retained.
In connection with these sales, the Company recorded servicing rights using either a fair value model that utilizes Level 3 unobservable inputs or using an agreed upon sales price considered level 2. Refer to Note 6 for information relating to servicing of residential loans.
Transfers of Reverse Loans
The Company, through RMS, is an approved issuer of Ginnie Mae HMBS. The HMBS are guaranteed by Ginnie Mae and collateralized by participation interests in HECMs insured by the FHA. The Company both originated and purchased HECMs that are pooled and securitized into HMBS that the Company sells into the secondary market with servicing rights retained. Effective January 2017, the Company exited the reverse mortgage originations business, although the Company intends to fulfill reverse loans in its originations pipeline consistent with its underwriting practices and to fund undrawn amounts available to borrowers.
Based upon the structure of the Ginnie Mae securitization program, the Company has determined that it has not met all of the requirements for sale accounting and accounts for these transfers as secured borrowings. Under this accounting treatment, the reverse loans remain on the consolidated balance sheets as residential loans. The proceeds from the transfer of reverse loans are recorded as HMBS related obligations with no gain or loss recognized on the transfer. Ginnie Mae, as guarantor of the HMBS, is obligated to the holders of the HMBS in an instance of RMS default on its servicing obligations, or when the proceeds realized on HECMs are insufficient to repay all outstanding HMBS related obligations. Ginnie Mae has recourse to RMS to the extent of the participation interests in HECMs serving as collateral to the HMBS, but does not have recourse to the general assets of the Company, except that Ginnie Mae has recourse to RMS in connection with certain claims relating to the performance and obligations of RMS as both an issuer of HMBS and a servicer of HECMs underlying HMBS.
At March 31, 2017, the unpaid principal balance and the carrying value associated with both the reverse loans and the real estate owned pledged as collateral to the securitization pools were $9.7 billion and $10.2 billion, respectively.

14



4. Fair Value
Basis for Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A three-tier fair value hierarchy is used to prioritize the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:
Level 1 — Valuation is based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 — Valuation is based on quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 — Valuation is based on inputs that are both significant to the fair value measurement and unobservable.
The accounting guidance concerning fair value allows the Company to elect to measure financial instruments at fair value and report the changes in fair value through net income or loss. This election can only be made at certain specified dates and is irrevocable once made. Other than mortgage loans held for sale, which the Company has elected to measure at fair value, the Company does not have a fair value election policy, but rather makes the election on an instrument-by-instrument basis as assets and liabilities are acquired or incurred, other than for those assets and liabilities that are required to be recorded and subsequently measured at fair value.
Transfers into and out of the fair value hierarchy levels are assumed to be as of the end of the quarter in which the transfer occurred. There were no transfers between levels during the three months ended March 31, 2017 or 2016.

15



Items Measured at Fair Value on a Recurring Basis
The following table summarizes the assets and liabilities in each level of the fair value hierarchy (in thousands). There was an insignificant amount of assets or liabilities measured at fair value on a recurring basis utilizing Level 1 assumptions.
 
 
March 31, 
 2017
 
December 31, 
 2016
Level 2
 
 
 
 
Assets
 
 
 
 
Mortgage loans held for sale
 
$
1,148,940

 
$
1,176,280

Servicing rights carried at fair value
 
21,063

 
13,170

Freestanding derivative instruments
 
1,826

 
34,543

Level 2 assets
 
$
1,171,829

 
$
1,223,993

Liabilities
 
 
 
 
Freestanding derivative instruments
 
$
13,557

 
$
7,611

Servicing rights related liabilities
 
3,537

 
1,902

Level 2 liabilities
 
$
17,094

 
$
9,513

 
 
 
 
 
Level 3
 
 
 
 
Assets
 
 
 
 
Reverse loans
 
$
10,599,732

 
$
10,742,922

Mortgage loans related to Non-Residual Trusts
 
440,219

 
450,377

Charged-off loans
 
52,071

 
46,963

Receivables related to Non-Residual Trusts
 
13,848

 
15,033

Servicing rights carried at fair value
 
909,270

 
936,423

Freestanding derivative instruments (IRLCs)
 
45,347

 
53,394

Level 3 assets
 
$
12,060,487

 
$
12,245,112

Liabilities
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
714

 
$
4,193

Mortgage-backed debt related to Non-Residual Trusts
 
498,768

 
514,025

HMBS related obligations
 
10,289,505

 
10,509,449

Level 3 liabilities
 
$
10,788,987

 
$
11,027,667


16



The following assets and liabilities are measured on the consolidated balance sheets at fair value on a recurring basis utilizing significant unobservable inputs or Level 3 assumptions in their valuation. The following tables provide a reconciliation of the beginning and ending balances of these assets and liabilities (in thousands):

 
 
For the Three Months Ended March 31, 2017
 
 
Fair Value
January 1, 2017
 
Total
Gains (Losses)
Included in
Comprehensive Income
 
Purchases
 
Sales and Other
 
Originations / Issuances
 
Settlements
 
Fair Value
March 31, 2017
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse loans
 
$
10,742,922

 
$
42,612

 
$
43,134

 
$

 
$
87,062

 
$
(315,998
)
 
$
10,599,732

Mortgage loans related to Non-Residual Trusts
 
450,377

 
12,502

 

 

 

 
(22,660
)
 
440,219

Charged-off loans (1)
 
46,963

 
14,591

 

 

 

 
(9,483
)
 
52,071

Receivables related to Non-Residual Trusts
 
15,033

 
2,569

 

 

 

 
(3,754
)
 
13,848

Servicing rights carried at fair value
 
936,423

 
(52,479
)
 
446

 
76

 
24,804

 

 
909,270

Freestanding derivative instruments (IRLCs)
 
53,394

 
(8,006
)
 

 

 

 
(41
)
 
45,347

Total assets
 
$
12,245,112

 
$
11,789

 
$
43,580

 
$
76

 
$
111,866

 
$
(351,936
)
 
$
12,060,487

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
(4,193
)
 
$
3,479

 
$

 
$

 
$

 
$

 
$
(714
)
Mortgage-backed debt related to Non-Residual Trusts
 
(514,025
)
 
(8,559
)
 

 

 

 
23,816

 
(498,768
)
HMBS related obligations
 
(10,509,449
)
 
(27,910
)
 

 

 
(154,315
)
 
402,169

 
(10,289,505
)
Total liabilities
 
$
(11,027,667
)
 
$
(32,990
)
 
$

 
$

 
$
(154,315
)
 
$
425,985

 
$
(10,788,987
)
__________
(1)
Included in gains on charged-off loans are gains from instrument-specific credit risk, which primarily result from changes in assumptions related to collection rates and discount rates, of $10.1 million during the three months ended March 31, 2017.
 
 
For the Three Months Ended March 31, 2016
 
 
Fair Value
January 1, 2016
 
Total
Gains (Losses)
Included in
Comprehensive Loss
 
Purchases and Other
 
Originations / Issuances
 
Settlements
 
Fair Value
March 31, 2016
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Reverse loans
 
$
10,763,816

 
$
154,834

 
$
54,020

 
$
127,151

 
$
(226,930
)
 
$
10,872,891

Mortgage loans related to Non-Residual Trusts 
 
526,016

 
5,163

 

 

 
(24,842
)
 
506,337

Charged-off loans (1)
 
49,307

 
14,376

 

 

 
(10,437
)
 
53,246

Receivables related to Non-Residual Trusts
 
16,542

 
(467
)
 

 

 
(1,957
)
 
14,118

Servicing rights carried at fair value
 
1,682,016

 
(326,580
)
 
19,637

 
52,258

 

 
1,427,331

Freestanding derivative instruments (IRLCs)
 
51,519

 
13,102

 

 

 
(214
)
 
64,407

Total assets
 
$
13,089,216

 
$
(139,572
)
 
$
73,657

 
$
179,409

 
$
(264,380
)
 
$
12,938,330

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

 
$

 
$

 
$

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

 

 

 
8,147

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

 

 
24,440

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

 
(202,947
)
 
272,520

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

 
$
(202,947
)
 
$
305,107

 
$
(11,368,081
)
__________
(1)
Included in gains on charged-off loans are gains from instrument-specific credit risk, which primarily result from changes in assumptions related to collection rates and discount rates, of $10.9 million during the three months ended March 31, 2016.

17



All gains and losses on assets and liabilities measured at fair value on a recurring basis and classified as Level 3 within the fair value hierarchy, with the exception of gains and losses on charged-off loans, IRLCs, servicing rights carried at fair value, and servicing rights related liabilities, are recognized in either other net fair value gains (losses) or net fair value gains on reverse loans and related HMBS obligations on the consolidated statements of comprehensive income (loss). Gains and losses related to charged-off loans are recorded in other revenues, while gains and losses relating to IRLCs are recorded in net gains on sales of loans on the consolidated statements of comprehensive income (loss). The change in fair value of servicing rights carried at fair value and servicing rights related liabilities are recorded in net servicing revenue and fees on the consolidated statements of comprehensive income (loss). Total gains and losses included in the financial statement line items disclosed above include interest income and interest expense at the stated rate for interest-bearing assets and liabilities, respectively, accretion and amortization, and the impact of the changes in valuation inputs and assumptions.
The Company’s Valuation Committee determines and approves valuation policies and unobservable inputs used to estimate the fair value of items measured at fair value on a recurring basis. The Valuation Committee, consisting of certain members of the senior executive management team, meets on a quarterly basis to review the assets and liabilities that require fair value measurement, including how each asset and liability has actually performed in comparison to the unobservable inputs and the projected performance. The Valuation Committee also reviews related available market data.
The following is a description of the methods used to estimate the fair values of the Company’s assets and liabilities measured at fair value on a recurring basis, as well as the basis for classifying these assets and liabilities as Level 2 or 3 within the fair value hierarchy. The Company’s valuations consider assumptions that it believes a market participant would consider in valuing the assets and liabilities, the most significant of which are disclosed below. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the valuations for recent historical experience, as well as for current and expected relevant market conditions.
Residential loans
Reverse loans, mortgage loans related to Non-Residual Trusts and charged-off loans — These loans are not traded in an active, open market with readily observable prices. Accordingly, the Company estimates fair value using Level 3 unobservable market inputs. The estimated fair value is based on the net present value of projected cash flows over the estimated life of the loans. The discount rate assumption for these assets considers, as applicable, collateral and credit risk characteristics of the loans, collection rates, current market interest rates, expected duration, and current market yields.
Mortgage loans held for sale — These loans are valued using a market approach by utilizing observable quoted market prices, where available, or prices for other whole loans with similar characteristics. The Company classifies these loans as Level 2 within the fair value hierarchy.
Receivables related to Non-Residual Trusts — The Company estimates the fair value of these receivables using the net present value of expected cash flows from the LOCs to be used to pay bondholders over the remaining life of the securitization trusts and applies Level 3 unobservable market inputs in its valuation. Receivables related to Non-Residual Trusts are recorded in receivables, net on the consolidated balance sheets.
Servicing rights carried at fair value — The Company accounts for servicing rights associated with the risk-managed loan class at fair value. The Company primarily uses a discounted cash flow model to estimate the fair value of these assets, unless there is an agreed upon sales price for a specific portfolio on or prior to the applicable reporting date relating to such reporting period, in which case the assets are valued at the price that the trade will be executed. The assumptions used in the discounted cash flow model vary based on collateral stratifications including product type, remittance type, geography, delinquency, and coupon dispersion of the underlying loan portfolio. The Company classifies servicing rights that are valued at the agreed upon sales price within Level 2 of the fair value hierarchy, and the servicing rights that are valued using a discounted cash flow model are classified within Level 3 of the fair value hierarchy. The Company obtains third-party valuations on a quarterly basis to assess the reasonableness of the fair values calculated by the cash flow model.


18



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

19



The following tables present the significant unobservable inputs used in the fair value measurement of the assets and liabilities described above. The Company utilizes a discounted cash flow model to estimate the fair value of all Level 3 assets and liabilities included on the consolidated financial statements at fair value on a recurring basis, with the exception of IRLCs for which the Company utilizes a market approach. Significant increases or decreases in any of the inputs disclosed below could result in a significantly lower or higher fair value measurement.
 
 
 
 
March 31, 2017
 
December 31, 2016
 
 
Significant
Unobservable Input
(1) (2)
 
Range of Input (3)
 
Weighted
Average of Input
(3)
 
Range of Input (3)
 
Weighted
Average of Input
(3)
Assets
 
 
 
 
 
 
 
 
 
 
Reverse loans
 
Weighted-average remaining life in years (4)
 
0.5 - 9.8
 
3.7

 
0.6 - 10.2
 
3.8

 
 
Conditional repayment rate
 
12.17% - 59.43%
 
29.58
%
 
13.23% - 55.32%
 
28.48
%
 
 
Discount rate
 
2.04% - 3.72%
 
3.00
%
 
1.93% - 3.69%
 
2.93
%
Mortgage loans related to Non-Residual Trusts
 
Conditional prepayment rate
 
1.91% - 2.44%
 
2.19
%
 
1.98% - 2.67%
 
2.27
%
 
 
Conditional default rate
 
0.99% - 5.10%
 
2.50
%
 
1.02% - 4.25%
 
2.61
%
 
 
Loss severity
 
85.33% - 100.00%
 
97.73
%
 
79.98% - 100.00%
 
96.61
%
 
 
Discount rate
 
8.00%
 
8.00
%
 
8.00%
 
8.00
%
Charged-off loans
 
Collection rate
 
3.20% - 5.37%
 
3.31
%
 
2.69% - 3.55%
 
2.74
%
 
 
Discount rate
 
28.00%
 
28.00
%
 
28.00%
 
28.00
%
Receivables related to Non-Residual Trusts
 
Conditional prepayment rate
 
2.27% - 3.07%
 
2.73
%
 
2.22% - 3.17%
 
2.65
%
 
 
Conditional default rate
 
2.56% - 5.84%
 
3.63
%
 
2.32% - 4.66%
 
3.34
%
 
 
Loss severity
 
83.45% - 100.00%
 
95.97
%
 
77.88% - 100.00%
 
94.51
%
 
 
Discount rate
 
0.50%
 
0.50
%
 
0.50%
 
0.50
%
Servicing rights carried at fair value
 
Weighted-average remaining life in years (4)
 
2.5 - 7.5
 
6.0

 
2.6 - 7.4
 
6.0

 
 
Discount rate
 
10.71% - 15.27%
 
11.83
%
 
10.68% - 14.61%
 
11.56
%
 
 
Conditional prepayment rate
 
5.89% - 23.00%
 
9.24
%
 
5.76% - 21.67%
 
9.09
%
 
 
Conditional default rate
 
0.04% - 3.02%
 
0.90
%
 
0.04% - 2.97%
 
0.88
%
 
 
Cost to service
 
$62 - $1,181
 
$130
 
$62 - $1,260
 
$128
Interest rate lock commitments
 
Loan funding probability
 
2.28% - 100.00%
 
71.91
%
 
16.00% - 100.00%
 
75.86
%
 
 
Fair value of initial servicing rights multiple (5) 
 
0.01 - 5.82
 
3.01

 
0.01 - 5.98
 
3.06


20



 
 
 
 
March 31, 2017
 
December 31, 2016
 
 
Significant
Unobservable Input
(1) (2)
 
Range of Input (3)
 
Weighted
Average of Input
(3)
 
Range of Input (3)
 
Weighted
Average of Input
(3)
Liabilities
 
 
 
 
 
 
 
 
 
 
Interest rate lock commitments
 
Loan funding probability
 
18.75% - 100.00%
 
81.13
%
 
34.40% - 100.00%
 
83.36
%
 
 
Fair value of initial servicing rights multiple (5)
 
0.02 - 5.16
 
3.52

 
0.04 - 6.04
 
3.69

Mortgage-backed debt related to Non-Residual Trusts
 
Conditional prepayment rate
 
2.27% - 3.07%
 
2.73
%
 
2.22% - 3.17%
 
2.65
%
 
 
Conditional default rate
 
2.56% - 5.84%
 
3.63
%
 
2.32% - 4.66%
 
3.34
%
 
 
Loss severity
 
83.45% - 100.00%
 
95.97
%
 
77.88% - 100.00%
 
94.51
%
 
 
Discount rate
 
6.00%
 
6.00
%
 
6.00%
 
6.00
%
HMBS related obligations
 
Weighted-average remaining life in years (4)
 
0.4 - 7.2
 
3.1

 
0.4 - 7.2
 
3.2

 
 
Conditional repayment rate
 
11.77% - 64.92%
 
28.84
%
 
11.49% - 57.76%
 
27.74
%
 
 
Discount rate
 
1.59% - 3.19%
 
2.63
%
 
1.50% - 3.17%
 
2.56
%
__________
(1)
Conditional repayment rate includes assumptions for both voluntary and involuntary rates as well as assumptions for the assignment of HECMs to HUD, in accordance with obligations as servicer.
(2)
Voluntary and involuntary prepayment rates have been presented as conditional prepayment rate and conditional default rate, respectively.
(3)
With the exception of loss severity, fair value of initial servicing rights embedded in IRLCs and discount rate on charged-off loans, all significant unobservable inputs above are based on the related unpaid principal balance of the underlying collateral, or in the case of HMBS related obligations, the balance outstanding. Loss severity is based on projected liquidations. Fair value of servicing rights embedded in IRLCs represents a multiple of the annual servicing fee. The discount rate on charged-off loans is based on the loan balance at fair value.
(4)
Represents the remaining weighted-average life of the related unpaid principal balance or balance outstanding of the underlying collateral adjusted for assumptions for conditional repayment rate, conditional prepayment rate and conditional default rate, as applicable.
(5)
Fair value of servicing rights embedded in IRLCs, which represents a multiple of the annual servicing fee, excludes the impact of certain IRLCs identified as servicing released for which the Company does not ultimately realize the benefits.
Fair Value Option
With the exception of freestanding derivative instruments, the Company has elected the fair value option for the assets and liabilities described above as measured at fair value on a recurring basis. The fair value option was elected for these assets and liabilities as the Company believes fair value best reflects their expected future economic performance.
Presented in the table below is the estimated fair value and unpaid principal balance of loans and debt instruments that have contractual principal amounts and for which the Company has elected the fair value option (in thousands):
 
 
March 31, 2017
 
December 31, 2016
 
 
Estimated
Fair Value
 
Unpaid Principal
Balance
 
Estimated
Fair Value
 
Unpaid Principal
Balance
Loans at fair value under the fair value option
 
 
 
 
 
 
 
 
Reverse loans (1)
 
$
10,599,732

 
$
10,139,017

 
$
10,742,922

 
$
10,218,007

Mortgage loans held for sale (1)
 
1,148,940

 
1,098,763

 
1,176,280

 
1,148,897

Mortgage loans related to Non-Residual Trusts
 
440,219

 
495,041

 
450,377

 
513,545

Charged-off loans
 
52,071

 
2,417,501

 
46,963

 
2,439,318

Total
 
$
12,240,962

 
$
14,150,322

 
$
12,416,542

 
$
14,319,767


 
 
 
 
 
 
 
 
Debt instruments at fair value under the fair value option
 
 
 
 
 
 
 
 
Mortgage-backed debt related to Non-Residual Trusts
 
$
498,768

 
$
501,603

 
$
514,025

 
$
518,317

HMBS related obligations (2)
 
10,289,505

 
9,757,690

 
10,509,449

 
9,916,383

Total
 
$
10,788,273

 
$
10,259,293

 
$
11,023,474

 
$
10,434,700

__________
(1)
Includes loans that collateralize master repurchase agreements. Refer to Note 8 for additional information.
(2)
For HMBS related obligations, the unpaid principal balance represents the balance outstanding.

21



Included in mortgage loans related to Non-Residual Trusts are loans that are 90 days or more past due that had a fair value of $0.4 million and $1.6 million at March 31, 2017 and December 31, 2016, respectively, and an unpaid principal balance of $31.0 million and $29.5 million at March 31, 2017 and December 31, 2016, respectively. Mortgage loans held for sale that are 90 days or more past due are insignificant at March 31, 2017 and December 31, 2016. Charged-off loans are predominantly 90 days or more past due.
Items Measured at Fair Value on a Non-Recurring Basis
The Company held real estate owned, net of $110.1 million and $104.6 million at March 31, 2017 and December 31, 2016, respectively. In addition, the Company had loans that were in the process of foreclosure of $198.8 million and $418.4 million at March 31, 2017 and December 31, 2016, respectively, which are included in residential loans at amortized cost, net and residential loans at fair value on the consolidated balance sheets. Real estate owned, net is included on the consolidated balance sheets within other assets and is measured at net realizable value on a non-recurring basis utilizing significant unobservable inputs or Level 3 assumptions in their valuation.
The following table presents the significant unobservable input used in the fair value measurement of real estate owned, net:
 
 
 
 
March 31, 2017
 
December 31, 2016
 
 
Significant
Unobservable Input
 
Range of Input
 
Weighted
Average of Input
 
Range of Input
 
Weighted
Average of Input
Real estate owned, net
 
Loss severity (1)
 
0.00% - 60.98%
 
6.89
%
 
0.00% - 61.61%
 
7.30
%
__________
(1)
Loss severity is based on the unpaid principal balance of the related loan at the time of foreclosure.
The Company held real estate owned, net in the Reverse Mortgage and Servicing segments and Other non-reportable segment of $97.4 million, $12.0 million and $0.7 million at March 31, 2017, respectively, and $90.7 million, $12.9 million and $1.0 million at December 31, 2016, respectively. In determining fair value, the Company either obtains appraisals or performs a review of historical severity rates of real estate owned previously sold by the Company. When utilizing historical severity rates, the properties are stratified by collateral type and/or geographical concentration and length of time held by the Company. The severity rates are reviewed for reasonableness by comparison to third-party market trends and fair value is determined by applying severity rates to the stratified population. In the determination of fair value of real estate owned associated with reverse mortgages, the Company considers amounts typically covered by FHA insurance. Management approves valuations that have been determined using the historical severity rate method.
Fair Value of Other Financial Instruments
The following table presents the carrying amounts and estimated fair values of financial assets and liabilities that are not recorded at fair value on a recurring or non-recurring basis and their respective levels within the fair value hierarchy (in thousands). This table excludes cash and cash equivalents, restricted cash and cash equivalents, servicer payables and warehouse borrowings as these financial instruments are highly liquid or short-term in nature and as a result, their carrying amounts approximate fair value.
 
 
 
 
March 31, 2017
 
December 31, 2016
 
 
Fair Value
Hierarchy
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
Financial assets
 
 
 
 
 
 
 
 
 
 
Residential loans at amortized cost, net (1)
 
Level 3
 
$
678,482

 
$
693,028

 
$
665,209

 
$
674,851

Servicer and protective advances, net
 
Level 3
 
1,005,157

 
948,453

 
1,195,380

 
1,147,155

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
 
Servicing advance liabilities (2)
 
Level 3
 
661,057

 
661,646

 
781,734

 
782,570

Corporate debt (3)
 
Level 2
 
2,109,865

 
1,612,373

 
2,126,176

 
1,967,518

Mortgage-backed debt carried at amortized cost
 
Level 3
 
418,184

 
428,272

 
429,931

 
435,679

__________
(1)
Includes loans subject to repurchase from Ginnie Mae.
(2)
The carrying amounts of servicing advance liabilities are net of deferred issuance costs, including those relating to line-of-credit arrangements, which are recorded in other assets.
(3)
The carrying amounts of corporate debt are net of the 2013 Revolver deferred issuance costs, which are recorded in other assets on the consolidated balance sheets.

22



The following is a description of the methods and significant assumptions used in estimating the fair value of the Company’s financial instruments that are not measured at fair value on a recurring or non-recurring basis.
Residential loans at amortized cost, net — The methods and assumptions used to estimate the fair value of residential loans carried at amortized cost are the same as those described above for mortgage loans related to Non-Residual Trusts.
Servicer and protective advances, net — The estimated fair value of these advances is based on the net present value of expected cash flows. The determination of expected cash flows includes consideration of recoverability clauses in the Company’s servicing agreements, as well as assumptions related to the underlying collateral and when proceeds may be used to recover these receivables.
Servicing advance liabilities — The estimated fair value of the majority of these liabilities approximates carrying value as these liabilities bear interest at a rate that is adjusted regularly based on a market index.
Corporate debt — The Company’s 2013 Term Loan, Convertible Notes, and Senior Notes are not traded in an active, open market with readily observable prices. The estimated fair value of corporate debt is primarily based on an average of broker quotes.
Mortgage-backed debt carried at amortized cost — The methods and assumptions used to estimate the fair value of mortgage-backed debt carried at amortized cost are the same as those described above for mortgage-backed debt related to Non-Residual Trusts.
Net Gains on Sales of Loans
Provided in the table below is a summary of the components of net gains on sales of loans (in thousands):
 
 
For the Three Months 
 Ended March 31,
 
 
2017
 
2016
Realized gains on sales of loans
 
$
26,085

 
$
80,080

Change in unrealized gains on loans held for sale
 
19,658

 
10,291

Gains (losses) on interest rate lock commitments
 
(4,526
)
 
13,917

Losses on forward sales commitments
 
(20,548
)
 
(66,953
)
Gains (losses) on MBS purchase commitments
 
11,884

 
(10,796
)
Capitalized servicing rights
 
32,384

 
52,258

Provision for repurchases
 
(1,795
)
 
(4,713
)
Interest income
 
11,203

 
10,393

Other
 
11

 

Net gains on sales of loans
 
$
74,356

 
$
84,477

Net Fair Value Gains on Reverse Loans and Related HMBS Obligations
Provided in the table below is a summary of the components of net fair value gains on reverse loans and related HMBS obligations (in thousands):
 
 
For the Three Months 
 Ended March 31,
 
 
2017
 
2016
Interest income on reverse loans
 
$
113,302

 
$
110,594

Change in fair value of reverse loans
 
(70,690
)
 
44,240

Net fair value gains on reverse loans
 
42,612

 
154,834

 
 
 
 
 
Interest expense on HMBS related obligations
 
(102,436
)
 
(103,254
)
Change in fair value of HMBS related obligations
 
74,526

 
(16,372
)
Net fair value losses on HMBS related obligations
 
(27,910
)
 
(119,626
)
Net fair value gains on reverse loans and related HMBS obligations
 
$
14,702

 
$
35,208


23



5. Freestanding Derivative Financial Instruments
The following table provides the total notional or contractual amounts and related fair values of derivative assets and liabilities as well as cash margin (in thousands):
 
 
March 31, 2017
 
December 31, 2016
 
 
Notional/
Contractual
Amount
 
Fair Value
 
Notional/
Contractual
Amount
 
Fair Value
 
 
 
Derivative
Assets
 
Derivative
Liabilities
 
 
Derivative
Assets
 
Derivative
Liabilities
Interest rate lock commitments
 
$
2,429,149

 
$
45,347

 
$
714

 
$
3,046,549

 
$
53,394

 
$
4,193

Forward sales commitments
 
3,190,680

 
475

 
13,557

 
3,978,000

 
29,471

 
7,609

MBS purchase commitments
 
357,500

 
1,351

 

 
623,500

 
5,072

 
2

Total derivative instruments
 
 
 
$
47,173

 
$
14,271

 
 
 
$
87,937

 
$
11,804

Cash margin
 
 
 
$
6,832

 
$
2,239

 
 
 
$