10-K 1 dhcpfy201810k.htm 10-K Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
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: 001-13417
Ditech Holding Corporation
(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)
Registrant's telephone number, including area code (844) 714-8603
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value per Share
Title of Class
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨        No  þ 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨        No  þ
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  þ        No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  þ        No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer   ¨ 
 
Accelerated filer    ¨ 
Non-accelerated filer    þ
 
Smaller reporting company    þ
 
 
Emerging growth company    ¨
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 Act).    Yes  ¨        No  þ
The aggregate market value of the successor registrant's stock held by non-affiliates as of June 30, 2018 was approximately $24.1 million, based on the closing sale price of the registrant’s common stock on June 30, 2018. For purposes of this calculation the registrant has considered all Schedule 13G filers as of such date to be non-affiliates.
Indicate by check mark whether the registrant has filed all document and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes  þ        No  ¨
The Registrant had 5,409,358 shares of common stock outstanding as of April 5, 2019.
Documents Incorporated by Reference
The information required to be included in Part III of this Annual Report on Form 10-K will be provided in accordance with Instruction G(3) to Form 10-K.


DITECH HOLDING CORPORATION AND SUBSIDIARIES
FORM 10-K
ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018
INDEX
 
 
 
 
 
 
 
 
PART I
 
 
Item 1.
 
 
Item 1A.
 
 
Item 1B.
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
 
 
 
 
 
 
 
PART II
 
 
Item 5.
 
 
Item 6.
 
 
Item 7.
 
 
Item 7A.
 
 
Item 8.
 
 
Item 9.
 
 
Item 9A.
 
 
Item 9B.
 
 
 
 
 
 
 
 
 
PART III
 
 
Item 10.
 
 
Item 11.
 
 
Item 12.
 
 
Item 13.
 
 
Item 14.
 
 
 
 
 
 
 
 
 
PART IV
 
 
Item 15.
 
 
Item 16.
 
 
 
 
 
 
 
 



Certain acronyms and terms used throughout this Form 10-K are defined in the Glossary of Terms located at the end of Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Certain statements in this report, including matters discussed under Item 1. Business, Item 3. Legal Proceedings and Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and including matters discussed elsewhere in this report, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Statements that are not historical fact are forward-looking statements. Certain of these forward-looking statements can be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “assumes,” “may,” “should,” “will,” “seeks,” “targets,” or other similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, and our actual results, performance or achievements could differ materially from future results, performance or achievements expressed in these forward-looking statements. These forward-looking statements are based on our current beliefs, intentions and expectations. These statements are not guarantees or indicative of future performance, nor should any conclusions be drawn or assumptions be made as to any potential outcome of our Strategic Review or the DHCP Restructuring, including any changes in strategy. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those factors, risks and uncertainties described below and in more detail in Item 1A. Risk Factors and in our other filings with the SEC.
In particular (but not by way of limitation), the following important factors, risks and uncertainties could affect our future results, performance and achievements and could cause actual results, performance and achievements to differ materially from those expressed in the forward-looking statements:
•
risks and uncertainties relating to our Chapter 11 proceedings, including: our ability to comply with the terms of the DHCP RSA, including completing various stages of the restructuring within the dates specified by the DHCP RSA; the outcome of our review of strategic alternatives; our ability to obtain requisite support for the restructuring; our ability to successfully execute the transactions contemplated by the DHCP RSA, including implementation of the DHCP Plan, without substantial disruption to the business of one or more of our primary operating or other subsidiaries; the effects of disruption from the proposed restructuring making it more difficult to maintain business, financing and operational relationships with GSEs, regulators, government agencies, employees, key vendors, and major customers; and our ability to continue as a going concern;
•
our ability to operate our business in compliance with existing and future laws, rules, regulations and contractual commitments affecting our business, including those relating to the origination and servicing of residential loans, default servicing and foreclosure practices, the management of third-party assets and the insurance industry, and changes to, and/or more stringent enforcement of, such laws, rules, regulations and contracts;
•
scrutiny of our industry by, and potential enforcement actions by, federal and state authorities;
•
the substantial resources (including senior management time and attention) we devote to, and the significant compliance costs we incur in connection with, regulatory compliance and regulatory examinations and inquiries, and any consumer redress, fines, penalties or similar payments we make in connection with resolving such matters;
•
uncertainties relating to interest curtailment obligations and any related financial and litigation exposure (including exposure relating to false claims);
•
potential costs and uncertainties, including the effect on future revenues, associated with and arising from litigation, regulatory investigations and other legal proceedings, and uncertainties relating to the reaction of our key counterparties to the announcement of any such matters;
•
our dependence on U.S. GSEs and agencies (especially Fannie Mae, Freddie Mac and Ginnie Mae) and their residential loan programs and our ability to maintain relationships with, and remain qualified to participate in programs sponsored by, such entities, our ability to satisfy various existing or future GSE, agency and other capital, net worth, liquidity and other financial requirements applicable to our business, and our ability to remain qualified as a GSE and agency approved seller, servicer or component servicer, including the ability to continue to comply with the GSEs’ and agencies' respective residential loan selling and servicing guides;
•
uncertainties relating to the status and future role of GSEs and agencies, and the effects of any changes to the origination and/or servicing requirements of the GSEs, agencies or various regulatory authorities or the servicing compensation structure for mortgage servicers pursuant to programs of GSEs, agencies or various regulatory authorities;
•
our ability to maintain our loan servicing, loan origination or collection agency licenses, or any other licenses necessary to operate our businesses, or changes to, or our ability to comply with, our licensing requirements;

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•
our ability to comply with the terms of the stipulated orders resolving allegations arising from an FTC and CFPB investigation of Ditech Financial and a CFPB investigation of RMS;
•
operational risks inherent in the mortgage servicing and mortgage originations businesses, including our ability to comply with the various contracts to which we are a party, and reputational risks;
•
risks related to the significant amount of senior management turnover and employee reductions recently experienced by us;
•
risks related to our substantial levels of indebtedness, including our ability to comply with covenants contained in our debt agreements or obtain any necessary waivers or amendments, generate sufficient cash to service such indebtedness and refinance such indebtedness on favorable terms, or at all, as well as our ability to incur substantially more debt;
•
our ability to put in place new, or renew, advance financing facilities or warehouse facilities on favorable terms, or at all, and maintain adequate borrowing capacity under such facilities;
•
our ability to maintain or grow our residential loan servicing or subservicing business and our mortgage loan originations business;
•
risks related to the concentration of our subservicing portfolio and the ability of our subservicing clients to terminate us as subservicer;
•
risks relating to operational burdens and stresses we experience in connection with the transfer to a third party of servicing on loans we service or subservice;
•
our ability to achieve our strategic initiatives, particularly our ability to improve servicing performance and execute and realize planned operational improvements and efficiencies;
•
the success of our business strategy in returning us to sustained profitability;
•
changes in prepayment rates and delinquency rates on the loans we service or subservice;
•
the ability of Fannie Mae, Freddie Mac and Ginnie Mae, as well as our other clients and credit owners, to transfer or otherwise terminate our servicing or subservicing rights, with or without cause;
•
a downgrade of, or other adverse change relating to, or our ability to improve, our servicer ratings or credit ratings;
•
our ability to collect reimbursements for servicing advances and earn and timely receive incentive payments and ancillary fees on our servicing portfolio;
•
our ability to collect indemnification payments and enforce repurchase obligations relating to mortgage loans we purchase from our correspondent clients and our ability to collect in a timely manner indemnification payments relating to servicing rights we purchase from prior servicers;
•
local, regional, national and global economic trends and developments in general, and local, regional and national real estate and residential mortgage market trends in particular, including the volume and pricing of home sales and uncertainty regarding the levels of mortgage originations and prepayments;
•
uncertainty as to the volume of originations activity we can achieve and the effects of the expiration of HARP on December 31, 2018, including uncertainty as to the number of "in-the-money" accounts we may be able to refinance and uncertainty as to what type of product or government program will be introduced, if any, to replace HARP;
•
risks associated with the reverse mortgage business, including changes to reverse mortgage programs operated by FHA, HUD or Ginnie Mae, our ability to accurately estimate interest curtailment liabilities, our ability to fund HECM repurchase obligations, our ability to assign repurchased HECM loans to HUD, our ability to fund principal additions on our HECM loans, and our ability to securitize our HECM Tails;
•
our ability to realize all anticipated benefits of past, pending or potential future acquisitions or joint venture investments;
•
the effects of competition on our existing and potential future business, including the impact of competitors with greater financial resources and broader scopes of operation;
•
changes in interest rates and the effectiveness of any hedge we may employ against such changes;
•
risks and potential costs associated with technology and cybersecurity, including: the risks of technology failures and of cyber-attacks against us or our vendors; our ability to adequately respond to actual or alleged cyber-attacks; and our ability to implement adequate internal security measures and protect confidential borrower information;
•
risks and potential costs associated with the implementation of new or more current technology, such as MSP, the use of vendors (including offshore vendors) or the transfer of our servers or other infrastructure to new data center facilities;

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•
our ability to comply with evolving and complex accounting rules, many of which involve significant judgment and assumptions;
•
risks related to our deferred tax assets, including the risk of an "ownership change" under Section 382 of the Code;
•
risks related to our common stock and warrants trading over-the-counter;
•
our ability to continue as a going concern;
•
uncertainties regarding impairment charges relating to our intangible assets;
•
risks associated with one or more material weaknesses identified in our internal controls over financial reporting, including the timing, expense and effectiveness of our remediation plans;
•
our ability to implement and maintain effective internal controls over financial reporting and disclosure controls and procedures; and
•
risks related to our relationship with Walter Energy and uncertainties arising from or relating to its bankruptcy filings and liquidation proceedings, including potential liability for any taxes, interest and/or penalties owed by the Walter Energy consolidated group for the full or partial tax years during which certain of our former subsidiaries were a part of such consolidated group and certain other tax risks allocated to us in connection with our spin-off from Walter Energy.
All of the above factors, risks and uncertainties are difficult to predict, contain uncertainties that may materially affect actual results and may be beyond our control. New factors, risks and uncertainties emerge from time to time, and it is not possible for our management to predict all such factors, risks and uncertainties.
Although we believe that the assumptions underlying the forward-looking statements (including those relating to our outlook) 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. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made, except as otherwise required under the federal securities laws. If we were in any particular instance to update or correct a forward-looking statement, investors and others should not conclude that we would make additional updates or corrections thereafter except as otherwise required under the federal securities laws.
In addition, this report may contain statements of opinion or belief concerning market conditions and similar matters. In certain instances, those opinions and beliefs could be based upon general observations by members of our management, anecdotal evidence and/or our experience in the conduct of our business, without specific investigation or statistical analyses. Therefore, while such statements reflect our view of the industries and markets in which we are involved, they should not be viewed as reflecting verifiable views and such views may not be shared by all who are involved in those industries or markets.

5


PART I
ITEM 1. BUSINESS
The Company
We are an independent servicer and originator of mortgage loans and servicer of reverse mortgage loans. We service a wide array of loans across the credit spectrum for our own portfolio and for GSEs, government agencies, third-party securitization trusts and other credit owners. Through our consumer, correspondent and wholesale lending channels, we originate and purchase residential mortgage loans that we predominantly sell to GSEs and government agencies. We also operate two complementary businesses: asset receivables management and real estate owned property management and disposition.
We are a Maryland corporation incorporated in 1997 and operate throughout the U.S. In April 2009, we were spun off from Walter Energy. From 2009 through 2014, we grew our servicing and originations businesses both organically and through a number of acquisitions and servicing rights acquisitions. Beginning in 2016, we began to sell our servicing rights while retaining subservicing.
On February 11, 2019, Ditech Holding Corporation and certain of its subsidiaries filed the DHCP Bankruptcy Petitions as contemplated by the DHCP RSA entered into on February 8, 2019 as discussed further below. The Company intends to continue to operate its businesses during the pendency of the Chapter 11 proceedings.
The terms “Ditech Holding,” the “Company,” “we,” “us” and “our” as used throughout this report refer to Ditech Holding Corporation (Successor) and its consolidated subsidiaries after the WIMC Effective Date, and/or Walter Investment Management Corp. (Predecessor) and its consolidated subsidiaries prior to the WIMC Effective Date.
Emergence from the WIMC Reorganization Proceedings
On November 30, 2017, Walter Investment Management Corp. (Predecessor) filed the WIMC Bankruptcy Petition under the Bankruptcy Code to pursue the WIMC Prepackaged Plan announced on November 6, 2017. On January 17, 2018, the Bankruptcy Court approved the amended WIMC Prepackaged Plan and on January 18, 2018, entered a confirmation order approving the WIMC Prepackaged Plan. On February 9, 2018, the WIMC Prepackaged Plan became effective pursuant to its terms and Walter Investment Management Corp. emerged from the WIMC Chapter 11 Case and changed its name to Ditech Holding Corporation (Successor) and on February 12, 2018, our newly issued common stock commenced trading on the NYSE under the symbol DHCP. From and after effectiveness of the WIMC Prepackaged Plan, we have continued, in our previous organizational form, to carry out our business.
On the WIMC Effective Date, all of our previously existing equity interests, including our Predecessor common stock, were canceled. Our obligations under our previously outstanding Convertible Notes and Senior Notes, except to the limited extent set forth in the WIMC Prepackaged Plan, were also extinguished. Previously outstanding equity and debt interests were exchanged as follows:
•
Senior Notes were exchanged at a rate of 464.11293167 Second Lien Notes and 0.18564517 shares of Convertible Preferred Stock per $1,000 principal amount of Senior Notes;
•
Convertible Notes were exchanged at a rate of 8.76919841 shares of Successor common stock, 14.94011581 Series A Warrants and 11.85465711 Series B Warrants per $1,000 principal amount of Convertible Notes; and
•
shares of common stock were exchanged at a rate of 0.05689208 shares of Successor common stock, 0.09692659 Series A Warrants and 0.07690920 Series B Warrants per share of Predecessor common stock.
Accordingly, we issued:
•
to the holders of Predecessor shares of common stock, an aggregate of 2,126,250 shares of Successor common stock, 3,622,500 Series A Warrants and 2,874,375 Series B Warrants;
•
to the holders of Senior Notes claims (as defined in the WIMC Prepackaged Plan), $250.0 million aggregate principal amount of our Second Lien Notes and $100.0 million aggregate initial liquidation preference of Mandatorily Convertible Preferred Stock, convertible into common stock at a ratio of 114.9750 per share of preferred stock; and
•
to the holders of Convertible Notes claims (as defined in the WIMC Prepackaged Plan), an aggregate of 2,126,250 shares of Successor common stock, 3,622,500 Series A Warrants and 2,874,375 Series B Warrants.

6


In addition, we authorized and reserved for future issuance:
•
3,193,750 shares of Successor common stock for issuance under an equity incentive plan;
•
7,245,000 shares of Successor common stock issuable upon the exercise of the Series A Warrants;
•
5,748,750 shares of Successor common stock issuable upon the exercise of the Series B Warrants; and
•
11,497,500 shares of Successor common stock issuable upon conversion of the Mandatorily Convertible Preferred Stock.
As discussed below, pursuant to the DHCP RSA on the DHCP Effective Date, it is anticipated that the holders of the Company's existing equity will have their claims extinguished. Our common stock and warrants have been delisted from the NYSE and are trading on the OTC Pink marketplace.
Pursuant to the terms of the WIMC Prepackaged Plan, we entered into the 2018 Credit Agreement, providing for the 2018 Term Loan in the amount of $1.2 billion. For a period of approximately one year following the WIMC Effective Date, we continued to receive financing through a master repurchase agreement for a maximum committed purchase price of $1.0 billion, used principally to fund Ditech Financial’s mortgage loan origination business, and a master repurchase agreement providing for a maximum committed purchase price of $800.0 million used principally to fund RMS' purchase of HECM loans and foreclosed real estate from certain securitization pools. On April 23, 2018, RMS entered into an additional master repurchase agreement which, as of December 31, 2018, provides up to $412.0 million in total capacity, and a minimum of $400.0 million in committed capacity to fund the repurchase of certain HECMs and real estate owned from Ginnie Mae securitization pools. The interest rate on this facility was based on the applicable index rate plus 3.25%. We also issued variable funding notes under the DAAT Facility and the DPAT II Facility for advances made in connection with certain mortgage loan servicing operations. These facilities had aggregate capacities of $465.0 million and $85.0 million, respectively, as of December 31, 2018. In addition to the foregoing facility sub-limits, the DAAT Facility, the DPAT II Facility, Ditech Financial’s master repurchase agreement and RMS’s master repurchase agreement were subject, collectively, to a combined maximum outstanding amount of $1.9 billion.
For a more detailed discussion of our emergence, refer to the Emergence from the WIMC Reorganization Proceedings section under Part II, Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations.
Delisting of our Common Stock
On November 6, 2018, we received notice from the NYSE informing us that the NYSE was commencing proceedings to delist our common stock and warrants from the NYSE and trading of such securities had been suspended as a result of our failure to maintain an average global market capitalization over a consecutive 30-day trading period of at least $15.0 million. Effective November 7, 2018, our common stock and warrants commenced trading in the OTC Pink marketplace. Effective February 12, 2019, our common stock symbol was changed to DHCPQ due to the filing of the DHCP Bankruptcy Petitions. As discussed further below, we anticipate that on the effective date of the DHCP Reorganization Transaction, our common stock and warrants will be extinguished. There may not be a public market for our common stock and warrants.
For a more detailed discussion of our emergence, refer to the Emergence from the WIMC Reorganization Proceedings section under Part II, Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations.
DHCP Reorganization Proceedings
Throughout 2018, we continued to forecast reductions in liquidity due to further deterioration of results, driven by the required repayment terms and restrictive covenants of the 2018 Term Loan, further increases in Ginnie Mae buyout loans, an inability to execute on certain transactions, recurring operating losses and negative cash flows in certain of our segments, including unforeseen increased collateral posting requirements and/or negative impacts from market conditions. To address this situation, we became focused on liquidity and cash generation.
In response to certain inquiries received by our Board of Directors, during the second quarter of 2018, our Board of Directors initiated a process to evaluate strategic alternatives, hereinafter referred to as the Strategic Review. This process was and is being conducted with the assistance of financial and legal advisors. We are considering a range of potential transactions including, among other things, a sale of the Company, a sale of all or a portion of the Company’s assets, and/or a recapitalization of the Company.
Based on analyses we prepared with our financial advisors in connection with the Strategic Review (including analyses of proposals received by us during such review), analyses we prepared from time to time in connection with our internal business planning processes, and the risks and uncertainties that could adversely impact our liquidity plan, during the Strategic Review our management and Board of Directors determined that the actions we had taken and actions that we planned to take to improve our liquidity position may not have been adequate to meet our future obligations.

7


Therefore, in connection with the Strategic Review, during the fourth quarter of 2018, we entered into non-disclosure agreements with, and we along with our financial and legal advisors began to have discussions with, certain of our corporate debt holders and their advisors regarding potential strategic transactions that may involve implementation through an in-court supervised Chapter 11 process.
On January 17, 2019, we received a notice from NRM initiating the process of termination under the NRM Subservicing Agreement. In connection therewith, we have subsequently deboarded certain of the loans we previously subserviced for NRM under the NRM Subservicing Agreement. Any termination of the NRM Subservicing Agreement would not be effective until a servicing transfer has been completed in accordance with applicable requirements. We are reviewing the grounds for termination in consultation with our stakeholders and are considering all of our options with respect thereto including legal rights and remedies. We are proceeding with our strategic alternatives assuming there is not an ongoing subservicing relationship with NRM. The Company’s plans are not contingent on any continuing relationship with NRM.
On February 8, 2019, Ditech Holding Corporation and certain of its direct and indirect subsidiaries (collectively, the Debtors) entered into the DHCP RSA with Consenting Term Lenders holding, as of February 11, 2019, more than 75% of the term loans outstanding under the 2018 Credit Agreement.
Pursuant to the DHCP RSA, the Consenting Term Lenders and the Debtors agreed to the principal terms of a financial restructuring, which, as described further below, will be implemented through a prearranged plan of reorganization under Chapter 11 of the Bankruptcy Code and which provides for the restructuring of our indebtedness through the DHCP Reorganization Transaction that is expected to reduce gross corporate debt by over $800 million and provide us with an appropriately sized working capital facility upon emergence.
The DHCP RSA also provides for the continuation of our prepetition review of strategic alternatives, whereby, as a potential alternative to the implementation of the DHCP Reorganization Transaction, any and all bids for our company or our assets will be evaluated as a precursor to confirmation of any Chapter 11 plan of reorganization.
The review of strategic alternatives provides a public and comprehensive forum in which the Debtors are seeking bids or proposals for three types of potential transactions, as described below. If a bid or proposal is received representing higher or better value than the DHCP Reorganization Transaction, it will either be incorporated into the DHCP Reorganization Transaction or pursued as an alternative to the DHCP Reorganization Transaction in consultation with the Consenting Term Lenders and subject to the DHCP RSA. The date on which a plan of reorganization is consummated is herein and in the DHCP RSA referred to as the DHCP Effective Date.
The three types of transactions for which bids are being solicited are:
•
 a sale transaction meaning, a sale of substantially all of our assets, as provided in the DHCP RSA;
•
an asset sale transaction meaning, the sale of a portion of our assets other than a sale transaction consummated prior to the DHCP Effective Date; provided such sale shall only be conducted with the consent of the Requisite Term Lenders; and
•
a master servicing transaction meaning, as part of the DHCP Reorganization Transaction to the extent the terms thereof are acceptable to the Requisite Term Lenders, entry into an agreement or agreements with an approved subservicer or subservicers whereby, following the DHCP Effective Date, all or substantially all of our mortgage servicing rights are subserviced by such approved subservicers.
The DHCP RSA presently contemplates the following treatment for certain key classes of creditors under the DHCP Reorganization Transaction:
•
DHCP DIP Warehouse Facilities Claims - On the DHCP Effective Date, the holders of DHCP DIP Warehouse Facilities claims will be paid in full in cash;
•
Term Loan Claims - On the DHCP Effective Date, the holders of Term Loan Claims will receive their pro rata share of new term loans under an amended and restated credit facility agreement in the aggregate principal amount of $400 million, and 100% of our New Common Stock, which will be privately held;
•
Second Lien Notes Claims - On the DHCP Effective Date, the holders of the Second Lien Notes will not receive any distribution;
•
Go-Forward Trade Claims - On the DHCP Effective Date, trade creditors identified by us (with the consent of the Requisite Term Lenders) as being integral to and necessary for the ongoing operations of New Ditech will receive a distribution in cash in an amount equaling a certain percentage of their claim, subject to an aggregate cap; and
•
Existing Equity Interests - On the DHCP Effective Date, holders of the Company’s existing preferred stock, common stock, and warrants will have their claims extinguished.

8


If the Debtors proceed to confirmation of a sale transaction, the Debtors will distribute proceeds of such transaction in accordance with the priority scheme under the Bankruptcy Code.
Under the DHCP RSA, on the Election Date, the Electing Term Lenders may deliver an election notice to the Company stating that the Electing Term Lenders wish to consummate an elected transaction as follows: (i) the DHCP Reorganization Transaction, or (ii) master servicing transaction (as part of the DHCP Reorganization Transaction), or (iii) sale transaction, and, if applicable, (iv) in connection and together with an election of (i), (ii), or (iii), any asset sale transaction(s), provided that inclusion of any asset sale transaction(s) is not incompatible with successful consummation of the elected transaction in (i), (ii) or (iii). If the Debtors do not proceed with the elected transaction, the Consenting Term Lenders can terminate the DHCP RSA.
On February 11, 2019, as contemplated by the DHCP RSA, the Debtors filed the DHCP Bankruptcy Petitions and the DHCP Chapter 11 Cases commenced thereby under the Bankruptcy Code in the Bankruptcy Court. Consistent with the DHCP RSA, on March 5, 2019, the Debtors filed the DHCP Plan with the Bankruptcy Court seeking to emerge from Chapter 11 on an expedited timeframe. The Debtors filed an amended DHCP Plan with the Bankruptcy Court on March 28, 2019. The Debtors are continuing to operate their businesses as debtors in possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. The Company intends to continue to operate its businesses during the pendency of the DHCP Chapter 11 Cases, and the Debtors have obtained approval from the Bankruptcy Court for a variety of first day motions seeking various relief, including relief authorizing them to maintain their operations in the ordinary course.
The filing of the DHCP Bankruptcy Petitions described above triggers an event of default or an early amortization event under certain of the Company's debt instruments, as described further in the Liquidity and Capital Resources section under Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The filing of the DHCP Bankruptcy Petitions also triggers the liquidation preference of the Mandatorily Convertible Preferred Stock. Certain of our obligations, including the payment of interest under our debt instruments, are stayed under the Bankruptcy Code during the pendency of the DHCP Chapter 11 Cases.
During the pendency of the DHCP Chapter 11 Cases, the Bankruptcy Court granted relief enabling us to conduct our business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing us to pay employee wages and benefits, to pay taxes and certain governmental fees and charges, to continue to operate our cash management system in the ordinary course, and to pay the prepetition claims of certain of our vendors. For goods and services provided following the DHCP Petition Date, we continue to pay vendors under normal terms.
On March 5, 2019, the Debtors filed the Joint Chapter 11 Plan of Ditech Holding Corporation and its Affiliated Debtors (referred to herein as the DHCP Plan) and the related disclosure statement with the Bankruptcy Court. On March 28, 2019, the Debtors filed amendments to the DHCP Plan and the related disclosure statement with the Bankruptcy Court.
On the DHCP Effective Date, in accordance with the terms of the DHCP Plan, the Board of Directors of the reorganized Company is expected to consist of five directors. Four directors will be selected by the Requisite Term Lenders and one director will be the chief executive officer of the reorganized company, who shall be Thomas F. Marano.
Business Segments
We manage our Company in three reportable segments: Servicing; Originations; and Reverse Mortgage. At December 31, 2018, we serviced 1.5 million residential loans with an unpaid principal balance of $187.2 billion. We originated $12.6 billion in unpaid principal balance of mortgage loan volume in 2018. A description of the business conducted by each of these segments and our Corporate and Other non-reportable segment is provided below.
Servicing Segment
Our Servicing segment performs servicing for our own mortgage loan portfolio, on behalf of third-party credit owners of mortgage loans for a fee and on behalf of third-party owners of MSR for a fee, which we refer to as subservicing. The Servicing segment also operates complementary businesses including asset receivables management that performs collections of post charge-off deficiency balances for third parties and us. Commencing February 1, 2017, an insurance agency owned by the Company began to provide insurance marketing services to a third party with respect to voluntary insurance policies, including hazard insurance. In addition, the Servicing segment held the assets and mortgage-backed debt of the Residual Trusts until their deconsolidation in November 2018.

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Our servicing and subservicing activities relating to our mortgage loan portfolio involve the management (e.g., calculation, collection and remittance) of mortgage payments, escrow accounts, insurance claims and customer service. For certain accounts, we perform specialty servicing activities utilizing a “high-touch” model to establish and maintain borrower contact and facilitate loss-mitigation strategies in an attempt to keep defaulted borrowers in their homes. Borrower interactions rely on loss mitigation strategies that apply predictive analytics to identify risk factors and severity grades to determine appropriate loss mitigation options and strategies. We assign a single point of contact to accounts experiencing difficulties in order to make collection calls and coordinate loss mitigation efforts. The single point of contact allows us to build one-on-one relationships with our consumers. We generally follow GSE and agency servicing guidelines (as well as other credit-owner guidelines) to implement a standardized loss mitigation process, which may include loan modification programs for borrowers experiencing temporary hardships. Our loan modification offerings include short-term interest rate reductions and/or payment deferrals and, until recently, also included loan modifications through HAMP, a federally sponsored loan modification program established to assist eligible home owners with loan modifications on their home mortgage debt. When loan modification and other efforts are unable to cure a default, we pursue alternative property resolutions prior to pursuing foreclosure, including short sales (in which the borrower agrees to sell the property for less than the loan balance and the difference is forgiven) and deeds-in-lieu of foreclosure (in which the borrower agrees to convey the property deed outside of foreclosure proceedings).
With respect to mortgage loans for which we own the MSR, we perform mortgage servicing primarily in accordance with Fannie Mae, Freddie Mac and Ginnie Mae servicing guidelines, as applicable. In 2018, we earned approximately 32%, 12% and 3% of our total revenues from servicing Fannie Mae, Ginnie Mae and Freddie Mac residential loans, respectively. Under our numerous master servicing agreements and subservicing contracts, we agree to service loans in accordance with servicing standards that the credit owners and/or subservicing clients may change from time to time. These agreements and contracts can typically be terminated by the counterparties thereto, with or without cause. Refer to Item 1A. Risk Factors for a discussion of certain risks relating to our master servicing agreements and subservicing contracts.
We have acquired servicing rights in bulk transactions, pursuant to co-issue arrangements and in connection with business acquisitions, and by retaining servicing rights relating to mortgage loans we originate. As the owner of servicing rights, we act on behalf of loan owners and have the contractual right to receive a stream of cash flows (expressed as a percentage of unpaid principal balance) in exchange for performing specified servicing functions and temporarily advancing funds to meet contractual payment requirements for loan owners and to pay taxes, insurance and foreclosure costs on delinquent or defaulted mortgages. As a subservicer, we earn a contractual fee on a per-loan basis and we are reimbursed for servicing advances we make on delinquent or defaulted mortgages, generally in the following month. We can earn incentive fees based on the performance of certain loan pools serviced by us and also have the ability, under certain circumstances, to earn modification fees and other program-specific incentives, and ancillary fees, such as late fees. Our specialty servicing fees typically include a base servicing fee and activity-based fees for the successful completion of default-related services.
The value of a servicing right asset is based on the present value of the stream of expected servicing-related cash flows from a loan and is largely dependent on market interest rates, prepayment speeds and delinquency performance. Generally, a rising interest rate environment drives a decline in prepayment speeds and thus increases the value of servicing rights, while a declining interest rate environment drives increases in prepayment speeds and thus reduces the value of servicing rights.
Our Servicing segment procured voluntary insurance for residential loan borrowers, lender-placed hazard insurance for residential loan borrowers and credit owners and other ancillary products through our principal insurance agency until the sale of such agency and substantially all of our insurance agency business on February 1, 2017. This agency earned commissions on insurance sales, and commissions were earned on lender-placed insurance in certain circumstances and if permitted under applicable laws and regulations. Mortgage loans require borrowers to maintain insurance coverage to protect the collateral securing the loan. To the extent a borrower fails to maintain the necessary coverage, we are generally contractually required to add the borrower’s property to our own hazard insurance policy and charge the borrower his/her allocated premium amount. Though we are licensed nationwide to sell insurance products on behalf of third-party insurance carriers, we neither underwrote insurance policies nor adjudicated claims.
Insurance revenues were historically aligned with the size of our servicing portfolio. However, due to Fannie Mae and Freddie Mac restrictions that became effective on June 1, 2014, as well as other regulatory and litigation developments with respect to lender-placed insurance, our insurance commissions related to lender-placed insurance policies began to decrease materially beginning in 2014. On February 1, 2017, we completed the sale of our principal insurance agency and substantially all of our insurance agency business. As a result of this sale, we no longer receive any insurance commissions on lender-placed insurance policies. Commencing February 1, 2017, another insurance agency owned by us (and retained by us following the aforementioned sale) began to provide insurance marketing services to third-party insurance agencies and carriers with respect to voluntary insurance policies, including hazard insurance. This insurance agency receives premium-based commissions for its insurance marketing services.

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Our Servicing segment performs collections of post charge-off or foreclosure deficiency balances for itself and on behalf of third-party securitization trusts and other asset owners. The third-party fee we earn is based on a percentage of our collections or a percentage of the unpaid principal balance. We recognize revenues associated with our on-balance sheet charged-off loan portfolio through its change in fair value.
Subservicing
As of December 31, 2018, our Servicing segment was the subservicer for approximately 0.7 million accounts with an unpaid principal loan balance of approximately $104.3 billion. These subserviced accounts represented approximately 61% of our total mortgage loan servicing portfolio based on unpaid principal loan balance at that date. Our largest mortgage loan subservicing customer, NRM, represented approximately 78% of our total mortgage loan subservicing portfolio based on unpaid principal loan balance on December 31, 2018. Our next largest mortgage loan subservicing customer, Fannie Mae, represented approximately 17% of our total mortgage loan subservicing portfolio based on unpaid principal loan balance on December 31, 2018.
The subservicing contracts pursuant to which we are retained to subservice mortgage loans generally provide that our customer, the owner of the MSR that we subservice on behalf of, can terminate us as subservicer with or without cause, and each such contract has unique terms establishing the fees we will be paid for our work under the contract or upon the termination of the contract, if any, and the standards of performance we are required to meet in servicing the relevant mortgage loans, such that the profitability of our subservicing activity may vary among different contracts. We believe that our subservicing customers consider various factors from time to time in determining whether to retain or change subservicers, including the financial strength and servicer ratings of the subservicer, the subservicer's record of compliance with regulatory and contractual obligations (including any enhanced, "high touch" processes required by the contract) and the success of the subservicer in limiting the delinquency rate of the relevant portfolio. The termination of one or more of our subservicing contracts could have a material adverse effect on us, including on our business, financial condition, liquidity and results of operations. Refer to Item 1A. Risk Factors for a discussion of certain additional risks and uncertainties relating to our subservicing contracts. Refer also to the Transactions with NRM section below and Note 4 to the Consolidated Financial Statements for information regarding our transactions and relationship with NRM.
Originations Segment
Our Originations segment originates and purchases mortgage loans through the following channels:
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consumer originations, which is comprised of:
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consumer retention - originates mortgage loans primarily through the use of a centralized call center that utilizes leads generated through solicitations of consumers in our existing servicing portfolio and through referrals from our servicing call centers; and
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consumer direct - originates mortgage loans primarily through the use of a centralized call center that utilizes origination leads generated through direct mail, internet, telephone and general advertising campaign solicitations of consumers, some of whom who are not currently in our existing servicing portfolio;
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correspondent lending - purchases closed mortgage loans from a network of lenders in the marketplace; and
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wholesale lending - originates mortgage loans through a network of approved brokers.
Our consumer originations operations offer a range of home purchase and refinance mortgage loan options, including fixed and adjustable rate conventional conforming, Ginnie Mae, FHA, VA, USDA and jumbo products. A conventional conforming loan is a mortgage loan that conforms to GSE guidelines, which include, but are not limited to, limits on loan amount, loan-to-value ratios, debt-to-income ratios, and minimum credit scores. The mortgage loans we fund are generally eligible for sale to GSEs or insured by government agencies.
We underwrite the mortgage loans we originate generally to secondary market standards, including the standards set by Fannie Mae, Freddie Mac, Ginnie Mae, the FHA, the USDA, the VA, and jumbo loan investor programs. Loans are reviewed by our underwriters in an attempt to ensure each mortgage loan is documented according to, and its terms comply with, the applicable secondary market standard. Our underwriters determine loan eligibility based on specific loan product requirements, such as loan-to-value, FICO, or maximum loan amount. Third-party diligence tools are utilized by our underwriters to validate data supplied by the potential borrower and to uncover potential discrepancies. We conduct audits on our underwriters to confirm proper adherence to our internal guidelines and polices, which audits are in addition to our standard quality control review. These audits are designed to provide an additional layer of internal review in an attempt to further mitigate quality defects and repurchase risk in the originations process.

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Within our correspondent lending channel, we generally purchase the same types of loans that we originate in our consumer originations channel, although the mix varies among these channels. Correspondent lenders with which we do business agree to comply with our client guide, which sets forth the terms and conditions for selling loans to us and generally governs the business relationship. We monitor and attempt to mitigate counterparty risk related to loans that we acquire through our correspondent lending channel by conducting quality control reviews of correspondent lenders, reviewing compliance by correspondent lenders with applicable underwriting standards and our client guide, and evaluating the credit worthiness of correspondent lenders on a periodic basis. In 2018, our correspondent lending channel purchased loans from 452 lenders in the marketplace, of which 38 were associated with approximately half of our purchases.
Within our wholesale lending channel, we originate loans through mortgage brokers. Loans sourced by mortgage brokers are underwritten and funded by us and generally close in our name. Through the wholesale channel, we generally originate the same types of loans that we originate in our consumer originations channel, although the mix varies among these channels. We underwrite and process all loan applications submitted by the mortgage brokers in a manner consistent with that described above for the consumer originations channel. Mortgage brokers with whom we do business agree to comply with our client guide, which sets forth the terms and conditions for brokering loans to us and generally governs the business relationship. We monitor and attempt to mitigate counterparty risk related to loans that we originate through our wholesale lending channel by conducting quality control reviews of mortgage brokers, reviewing compliance by brokers with applicable underwriting standards and our client guide, and evaluating the credit worthiness of brokers on a periodic basis.
Our capital markets group is responsible for pricing loans and managing the interest rate risk through the time a loan is sold to third parties and managing the risk (which we call the “pull-through risk”) that loans we have locked will not be closed and funded in an attempt to maximize loan sale profitability through our various originations channels. The capital markets group uses models and hedging analysis in an attempt to maximize profitability while minimizing the risks inherent in the originations business.
In 2018, the mix of mortgage loans sold by our Originations segment, based on unpaid principal balance, consisted of (i) 57% Ginnie Mae loans, (ii) 30% Fannie Mae conventional conforming loans and (iii) 13% Freddie Mac conventional conforming loans.
Our Originations segment revenue, which is primarily net gains on sales of loans, is impacted by interest rates and the volume of loans locked. The margins earned by our Originations segment are impacted by our cost to originate the loans including underwriting, fulfillment and lead costs.
Reverse Mortgage Segment
Our Reverse Mortgage segment primarily focuses on the servicing of reverse loans. Effective January 2017, we exited the reverse mortgage originations business. We no longer have any reverse loans remaining in the originations pipeline and have finalized the shutdown of the reverse mortgage originations business. We continue to fund Tails, and, from time to time, securitize these amounts.
As a prior originator of reverse mortgages, this segment received cash proceeds at the time reverse loans were securitized and continues to receive cash proceeds at the time Tails are securitized. We securitized substantially all our reverse loans and continue to securitize Tails through the Ginnie Mae II MBS program into HMBS. Based upon the structure of the Ginnie Mae II MBS program, we determined that these securitizations do not meet all of the requirements for sale accounting, and as such, we account for these transfers as secured borrowings. Under this accounting treatment, the reverse loans remain on our consolidated balance sheets as residential loans. The segment earns net revenue on the net fair value gains on reverse loans and the related HMBS obligations.
This segment also performs subservicing for third-party credit owners of reverse loans, similar to our Servicing segment, and provides other complementary services for the reverse mortgage market, such as real estate owned property management and disposition, for a fee.
Corporate and Other Non-reportable Segment
Our Corporate and Other non-reportable segment includes our corporate functions and also holds the assets and liabilities of the Non-Residual Trusts and corporate debt. Effective January 1, 2018, we no longer allocate corporate overhead, including depreciation and amortization, to our operating segments. These amounts are now included in the Corporate and Other non-reportable segment. Prior year balances have been restated to conform to current year presentation.

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Competition
We compete with a great number of institutions in the mortgage banking market for both the servicing and originations businesses as well as in our reverse mortgage servicing and complementary businesses. In the servicing area, we compete with other servicers to acquire MSR and for the right to subservice mortgages for others. Competitive factors in the servicing business include: a servicer’s scale of operations and financial strength; a servicer’s access to capital to fund acquisitions of MSR; a servicer’s ability to meet contractual and regulatory obligations and to achieve favorable performance (e.g., in default management activity) relative to other servicers; a servicer’s ability to provide a favorable experience for the borrower; a servicer's ability to recapture borrowers as they refinance; and a servicer’s cost to service or subservice. 
In the mortgage originations area, we compete to refinance or provide new mortgages to borrowers whose mortgages are in our existing servicing portfolio. In this area, the price and variety of our mortgage products are important factors of competition, as is the reputation of our servicing business and the quality of the experience the borrower may have had with our servicing business. Since mid-2015, our loan originations and servicing businesses have operated under a single “Ditech” brand. We also compete, principally on the basis of price and process efficiency, to acquire mortgages from correspondent lenders. In the future, we expect we will also increasingly compete on the basis of brand awareness.
Across our servicing and originations businesses, technology is an important competitive factor. In particular, we believe it will be increasingly important to enable servicing and originations customers to access our services through our website and mobile devices. We face numerous competitors with greater financial resources, human resources and technology resources than ours, and there can be no assurance that we will be able to compete successfully.
Technology
Our businesses employ technology by using third-party systems where standardization and time to market is key and proprietary systems where functionality and flexibility are critical to regulatory compliance, customer experience and credit performance. The majority of our proprietary systems are supported by a team of information technology professionals who seek to protect our systems and ensure they are effective. In-house developed proprietary systems are leveraged for customer service, default management and reverse mortgage servicing.
On October 27, 2014, we signed a long-term Loan Servicing Agreement with Black Knight Financial Services, LLC for the use of MSP, a mortgage and consumer loan servicing platform. We also use our own proprietary systems for collections, customer service and default management. At December 31, 2018, we have approximately 85% of our mortgage loan servicing portfolio based on unpaid principal loan balance on MSP. Our private label loans, manufactured housing loans and second lien mortgage loans continue to be serviced on our proprietary systems.
Subsidiaries
For a listing of our subsidiaries, refer to Exhibit 21 of this Annual Report on Form 10-K.
Employees
We have undergone several changes in our senior leadership during 2018, including the following: effective April 18, 2018, Thomas F. Marano was appointed Chief Executive Officer and President of Ditech Holding, and serves as Chairman of the Board of Directors; and effective February 9, 2018, Jerry Lombardo was appointed Ditech Holding's Chief Financial Officer.
We employed approximately 2,900 full-time equivalent employees at December 31, 2018 as compared to approximately 3,800 at December 31, 2017, all of whom were located in the U.S. The decline in full-time equivalent employees was due primarily to distinct actions we took in 2018 in connection with our continued efforts to enhance efficiencies and streamline processes within the organization, which included various organizational changes to scale our leadership team and support functions to further align with our business needs. We believe we have been successful in our efforts to recruit and retain qualified employees. However, we experience significant turnover with respect to certain roles, and therefore maintain active and continuous new employee recruiting and training programs. None of our employees is a party to any collective bargaining agreements.
We outsource certain support functions that support our loan originations and servicing groups to third-party vendors located in the U.S. and offshore locations in an effort to improve efficiency and reduce cost. These support functions include loan set-up, escrow account set-up, default set-up, foreclosure monitoring, claims filing, post-close audits, indexing and imaging.

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Transactions with NRM
NRM Flow and Bulk Agreement
On August 8, 2016, our subsidiary, Ditech Financial, and NRM executed the NRM Flow and Bulk Agreement whereby we agreed to sell to NRM all of our right, title and interest in mortgage servicing rights with respect to a pool of mortgage loans, with subservicing retained. The NRM Flow and Bulk Agreement provides that, from time to time, we may sell additional MSR to NRM in bulk or as originated or acquired on a flow basis, subject in each case to the parties agreeing on price and certain other terms.
On January 17, 2018, we agreed to sell to NRM MSR relating to mortgage loans having an aggregate unpaid principal balance of approximately $11.3 billion as of such sale date, with subservicing retained, and received approximately $90.4 million in cash proceeds from NRM as partial consideration for this MSR sale. We used 80% of such cash proceeds to repay borrowings under the 2013 Credit Agreement and used the remaining cash proceeds for general corporate purposes. During June 2018, under an agreement similar to the NRM Flow and Bulk Agreement, we agreed to sell to New Penn Financial, which became an affiliate of NRM when acquired by NRM on July 3, 2018, MSR relating to mortgage loans having an aggregate unpaid principal balance of approximately $4.7 billion as of the sale date, with servicing released, and received approximately $56.7 million in cash proceeds from NRM as partial consideration for the MSR sale. Since entering into the NRM Flow and Bulk Agreement and through December 31, 2018, in various bulk transactions under the NRM Flow and Bulk Agreement and a similar agreement, we have sold MSR to NRM relating to mortgage loans having an aggregate unpaid principal balance of $75.8 billion as of the applicable closing dates of such transactions. As of December 31, 2018, we have received $397.1 million in cash proceeds relating to such sales, which proceeds do not include certain holdback amounts relating to such sales that are expected to be paid to us over time. For the year ended December 31, 2018, we received $34.5 million in cash proceeds relating to these holdback amounts and at December 31, 2018 and 2017 had a servicing rights holdback receivable, net from NRM of $10.8 million and $31.3 million, respectively, which is recorded in receivables, net on the consolidated balance sheets.
We also transferred MSR to NRM under flow transactions relating to mortgage loans consisting entirely of co-issue loans with an aggregate unpaid principal balance of $3.6 billion and $469.5 million for the period from February 10, 2018 through December 31, 2018 and the period from January 1, 2018 through February 9, 2018, respectively. For the year ended December 31, 2017, we transferred MSR to NRM under flow transactions relating to mortgage loans with an aggregate unpaid principal balance of $7.6 billion, which included co-issue loans with an aggregate unpaid principal balance of $6.4 billion. These transfers included recapture activities of generally non-NRM portfolio serviced loans with an aggregate unpaid balance of $1.6 billion and $236.9 million for the period from February 10, 2018 through December 31, 2018 and the period from January 1, 2018 through February 9, 2018, respectively. In addition, these transfers generated revenues of $44.1 million, $3.8 million and $61.8 million for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively, which are recorded in net gains on sales of loans on the consolidated statements of comprehensive income (loss).
NRM Subservicing Agreement
On August 8, 2016, we entered into the NRM Subservicing Agreement whereby we act as subservicer for the mortgage loans whose MSR are sold to NRM under the NRM Flow and Bulk Agreement and for other mortgage loans as may be agreed upon by us and NRM from time to time, in exchange for a subservicing fee. Under the NRM Subservicing Agreement and a related agreement, we perform all daily servicing obligations on behalf of NRM, including collecting payments from borrowers and offering refinancing options to borrowers for purposes of minimizing portfolio runoff. On January 17, 2018, Ditech Financial and NRM executed a Side Letter Agreement pursuant to which, among other things, certain provisions of the NRM Subservicing Agreement were amended and/or waived. On June 28, 2018, Ditech Financial and NRM executed an additional Side Letter Agreement, pursuant to which, among other things, NRM agreed to use commercially reasonable efforts to add additional loans to the NRM Subservicing Agreement for us to subservice.
On January 17, 2019, we received a notice from NRM initiating the process of termination under the NRM Subservicing Agreement. Any termination of the NRM Subservicing Agreement would not be effective until a servicing transfer has been completed in accordance with applicable requirements. We are reviewing the grounds for termination in consultation with our stakeholders and are considering all of our options with respect thereto including legal rights and remedies. We are proceeding with our strategic alternative efforts assuming there is not an ongoing subservicing relationship with NRM. Our plans are not contingent on any continuing relationship with NRM.

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We expect that it will take several months to complete the transfer of servicing on loans we subservice for NRM under the NRM Subservicing Agreement. The receipt of the notice of termination, in and of itself, is not an event of default or cross default under our debt documents or warehouse facilities. Subsequent to receiving the aforementioned notice from NRM, and at the direction of and in coordination with NRM, on March 16, 2019 and April 1, 2019, we completed the transfer of servicing on certain NRM subservicing portfolios containing, in aggregate, approximately 208,000 accounts. We are working with NRM to complete additional transfers of servicing on the remaining loans we subservice for NRM under the NRM Subservicing Agreement.
With respect to Ditech Financial, for mortgage loans that were being subserviced by Ditech Financial under the NRM Subservicing Agreement prior to January 17, 2018, and for any additional mortgage loans that Ditech Financial subserviced under the NRM Subservicing Agreement that were added to such agreement after such date (other than (i) mortgage loans relating to MSR sold to NRM by Ditech Financial in a bulk sale agreed to by the parties on January 17, 2018 and (ii) mortgage loans relating to MSR sold to NRM by Ditech Financial on a flow basis under the NRM Flow and Bulk Agreement after such date), the initial term of the NRM Subservicing Agreement expired on August 8, 2017 and was automatically renewed for a successive one-year term, and was further automatically renewed for a successive one-year term thereafter until the aforementioned notice of termination.
With respect to Ditech Financial, for mortgage loans relating to MSR sold to NRM by Ditech Financial in a bulk MSR sale agreed to by the parties on January 17, 2018 and mortgage loans relating to MSR sold to NRM by Ditech Financial on a flow basis under the NRM Flow and Bulk Agreement after such date, the initial term of the NRM Subservicing Agreement was scheduled to expire on January 17, 2019 (with respect to the aforementioned bulk MSR sale) or, with respect to each flow MSR assignment agreement executed by the parties after such date in connection with any flow MSR sales by Ditech Financial to NRM after such date, the first anniversary of the first day of the calendar quarter following the calendar quarter during which such flow MSR assignment agreement was executed; however, such expiration dates were superseded by the aforementioned notice of termination, and the NRM Subservicing Agreement is expected to terminate upon completion of the servicing transfer.
With respect to NRM, for mortgage loans that were being subserviced by Ditech Financial under the NRM Subservicing Agreement prior to January 17, 2018, and for any additional mortgage loans that Ditech Financial subserviced under the NRM Subservicing Agreement that were added to such agreement after such date (other than (i) mortgage loans relating to MSR sold to NRM by Ditech Financial in a bulk sale agreed to by the parties on January 17, 2018 and (ii) mortgage loans relating to MSR sold to NRM by Ditech Financial on a flow basis under the NRM Flow and Bulk Agreement after such date), the initial term of the NRM Subservicing Agreement expired on August 8, 2017 and thereafter the agreement would automatically terminate with respect to such mortgage loans, unless renewed by NRM on a monthly basis. Since the expiration of the initial term, NRM has renewed the NRM Subservicing Agreement each month thereafter until the aforementioned notice of termination received from NRM on January 17, 2019.
In the case of mortgage loans relating to MSR sold to NRM by Ditech Financial in a bulk MSR sale agreed to by the parties on January 17, 2018 and mortgage loans relating to MSR sold to NRM by Ditech Financial on a flow basis under the NRM Flow and Bulk Agreement after such date, the initial term of the NRM Subservicing Agreement was scheduled to expire on January 17, 2019 (with respect to the aforementioned bulk MSR sale) or, with respect to each flow MSR assignment agreement executed by the parties after such date in connection with any of our flow MSR sales to NRM after such date, the first anniversary of the first day of the calendar quarter following the calendar quarter during which such flow MSR assignment agreement was executed; however, such expiration dates were superseded by the aforementioned notice of termination, and the NRM Subservicing Agreement is expected to terminate upon completion of the servicing transfer.
Rights Agreement
We had previously adopted the Rights Agreement, dated as of June 29, 2015, and subsequently amended and restated on November 11, 2016 and further amended on November 9, 2017 and February 9, 2018, which provided that if any person or group of persons, excluding certain exempted persons, acquired 4.99% or more of the outstanding common stock of Walter Investment Management Corp. or any other interest that would be treated as “stock” for the purposes of Section 382, there would be a triggering event potentially resulting in significant dilution in the voting power and economic ownership of such acquiring person or group. The Rights Agreement was intended to help protect our “built-in tax losses” and certain other tax benefits by acting as a deterrent to any person or group of persons acting in concert from becoming or obtaining the right to become the beneficial owner (including through constructive ownership of securities owned by others) of 4.99% or more of the shares of our common stock. The Rights Agreement was scheduled to expire on November 11, 2018 or upon the earlier occurrence of certain events, subject to extension by the Board of Directors or exchange of rights by us.
On the WIMC Effective Date, we entered into Amendment No. 2 to the Rights Agreement with Computershare, which accelerated the scheduled expiration date of the Rights (as defined in the Rights Agreement) to the WIMC Effective Date. The Rights issued pursuant to the Rights Agreement, which were also canceled by operation of the WIMC Prepackaged Plan, have expired and are no longer outstanding, and the Rights Agreement has terminated.

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In connection with the adoption of our Rights Agreement, we filed Articles Supplementary with the State Department of Assessments and Taxation of Maryland, setting forth the rights, powers, and preferences of our junior participating preferred stock issuable upon exercise of the rights. The cancellation of all existing equity interests by operation of the WIMC Prepackaged Plan included the cancellation of any rights issued under the Rights Agreement. In addition, on the WIMC Effective Date, we filed Articles of Amendment with the State Department of Assessments and Taxation of Maryland, which among other things, served to eliminate our junior participating preferred stock.
Transfer Restrictions
Our Articles of Amendment and Restatement, adopted on the WIMC Effective Date, include transfer restriction provisions intended to protect the tax benefits described above. Our Articles of Amendment and Restatement, adopted on the WIMC Effective Date, include certain restrictions on the transfer of our securities intended to preserve the value of our tax attributes, by minimizing the likelihood of an “ownership change” under applicable tax rules. Subject to certain exceptions, the Articles of Amendment and Restatement generally will restrict (i) any transfer that would result in a person or entity accumulating 4.75% or more of our common shares (assuming for the purpose of calculating the 4.75% that all outstanding shares of Convertible Preferred Stock have fully converted) or 4.75% or more of the outstanding shares of our Convertible Preferred Stock (on a separate class basis), (ii) any transfer as to any person or entity that already owns shares at or above such 4.75% threshold, such person or entity acquiring additional stock of our securities and (iii) under limited circumstances described in the Articles of Amendment and Restatement, a transfer by a person or entity that owns shares at or above such 4.75% threshold from disposing of all or part of such stock.
The Articles of Amendment and Restatement exempt from the restrictions (i) any transfer approved in writing (prior to the date of the transfer) by the Board of Directors, (ii) a tender or exchange offer by us to purchase our securities, a purchase program effected by us on the open market or certain other redemptions of our securities, (iii) a conversion, pursuant to its terms, of Convertible Preferred Stock, and (iv) certain transfers by a person or entity that received as part of our WIMC Chapter 11 Case and owns 4.75% or more of our Convertible Preferred Stock.
The procedure for approval of a transfer by the Board of Directors, as well as the other details and elements of these restrictions, are set forth in the Articles of Amendment and Restatement.
Laws and Regulations
Our business is subject to extensive regulation by federal, state and local authorities, including the CFPB, HUD, VA, the SEC and various state agencies that license, audit and conduct examinations of our mortgage servicing and mortgage originations businesses. We are also subject to a variety of regulatory and contractual obligations imposed by credit owners, investors, insurers and guarantors of the mortgages we originate and service, including, but not limited to, Fannie Mae, Freddie Mac, Ginnie Mae, FHFA, USDA and the VA/FHA. Furthermore, our industry has been under scrutiny by federal and state regulators over the past several years, and we expect this scrutiny to continue. Laws, rules, regulations and practices that have been in place for many years may be changed, and new laws, rules, regulations and administrative guidance have been, and may continue to be, introduced in order to address real and perceived problems in our industry. We expect to incur ongoing operational, legal and system costs in order to comply with these rules and regulations.
Federal Law
We are required to comply with numerous federal consumer protection and other laws, including, but not limited to:
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the Gramm-Leach-Bliley Act and Regulation P, which require initial and periodic communications with consumers on privacy matters and the maintenance of privacy matters and the maintenance of privacy regarding certain consumer data in our possession;
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the Fair Debt Collection Practices Act, which regulates the timing and content of communications on debt collections;
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the TILA, including HOEPA, and Regulation Z, which regulate mortgage loan origination activities, require certain disclosures be made to mortgagors regarding terms of mortgage financing, regulate certain high-cost mortgages, mandate home ownership counseling for mortgage applicants and regulate certain mortgage servicing activities;
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the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act and Regulation V, which collectively regulate the use and reporting of information related to the credit history of consumers;
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the Equal Credit Opportunity Act and Regulation B, which prohibit discrimination on the basis of age, race and certain other characteristics in the extension of credit and require certain disclosures to applicants for credit;
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the Homeowners Protection Act, which requires the cancellation of mortgage insurance once certain equity levels are reached;

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the HMDA and Regulation C, which require reporting of certain public loan data;
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the Fair Housing Act and its implementing regulations, which prohibit discrimination in housing on the basis of race, sex, national origin, and certain other characteristics;
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the Service Members Civil Relief Act, as amended, which provides certain legal protections and relief to members of the military;
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the RESPA and Regulation X, which govern certain mortgage loan origination activities and practices and related disclosures and the actions of servicers related to various items, including escrow accounts, servicing transfers, lender-placed insurance, loss mitigation, error resolution, and other customer communications;
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Regulation AB under the Securities Act, which requires registration, reporting and disclosure for mortgage-backed securities;
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certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which among other things, created the CFPB and prohibit unfair, deceptive or abusive acts or practices;
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the Federal Trade Commission Act, the FTC Credit Practices Rules and the FTC Telemarketing Sales Rule, which prohibit unfair and certain related practices;
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the TCPA, which restricts telephone solicitations and automatic telephone equipment;
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Regulation N, which prohibits certain unfair and deceptive acts and practices related to mortgage advertising;
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the Bankruptcy Code and bankruptcy injunctions and stays, which can restrict collection of debts;
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the Secure and Fair Enforcement for Mortgage Licensing Act; and
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various federal flood insurance laws that require the lender and servicer to provide notice and ensure appropriate flood insurance is maintained when required.
The Dodd-Frank Act, enacted in 2010, constituted a sweeping reform of the regulation and supervision of financial institutions, as well as the regulation of derivatives, capital market activities and consumer financial services. Among other things, the Dodd-Frank Act created the CFPB, a new federal entity responsible for regulating consumer financial services. The CFPB has rulemaking authority with respect to many of the federal consumer protection laws applicable to mortgage servicers and originators, including TILA, RESPA and the FDCPA. The CFPB also has supervision, examination and enforcement authority over consumer financial products and services offered by certain non-depository institutions and large insured depository institutions. The CFPB's jurisdiction includes persons (such as us) originating, brokering or servicing residential mortgage loans, those persons performing loan modification or foreclosure relief services in connection with such loans and certain entities involved in the transfer of MSR.
Title XIV of the Dodd-Frank Act imposed a number of requirements on mortgage originators and servicers of residential mortgage loans, significantly increased the penalties for noncompliance with certain consumer protection laws and also established new standards and practices for mortgage originators and servicers. Subsequent to the enactment of the Dodd-Frank Act, the CFPB has issued, and is expected to continue to issue, various rules that impact mortgage servicing and originations, including: periodic billing statements; certain notices and acknowledgments; prompt crediting of borrowers’ accounts for payments received; additional notice, review and timing requirements with respect to delinquent borrowers; prompt investigation of complaints by borrowers; additional requirements before purchasing insurance to protect the lender’s interest in the property; certain customer service benchmarks for servicers; servicers’ obligations to establish reasonable policies and procedures; requirements to provide information about mortgage loss mitigation options to delinquent borrowers; rules governing the scope, timing, content and format of disclosures to consumers regarding the interest rate adjustments of their variable-rate transactions; establishing certain requirements relating to billing statements, payment crediting and the provision of payoff statements; preventing or limiting servicers of residential mortgage loans from taking certain actions (e.g. the charging of certain fees); requirements for determining prospective borrowers’ abilities to repay their mortgages; removing incentives for higher cost mortgages; prohibiting prepayment penalties for non-qualified mortgages; prohibiting mandatory arbitration clauses; requiring additional disclosures to potential borrowers; restricting the fees that mortgage originators may collect; requiring new mortgage loan disclosures that integrate the TILA disclosures with the RESPA disclosures for certain covered transactions; and other new requirements, in each case either increasing costs and risks related to servicing and originations or reducing revenues currently generated.
State Law
We are also subject to extensive state licensing, statutory and regulatory requirements as a mortgage servicer, loan originator and debt collector throughout the U.S. We are subject to ongoing supervision, audits and examinations conducted by state regulators, including periodic requests from state and other agencies for records, documents and information regarding our policies, procedures and business practices.

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State laws affecting our businesses have also been evolving. Some changes have occurred on a nationwide basis at the state level due to the establishment and/or amendment of minimum standards under federal law, such as state licensing requirements. Some states may seek to incorporate federal requirements as a requirement imposed on a state-licensed entity, while other states may seek to impose their own additional requirements to the extent not preempted under federal law. Additionally, there have been growing trends in state lawmaking focusing on the servicing of mortgage loans related to, for example, data privacy, loan modifications and anti-foreclosure measures.
Recent Regulatory Developments
Servicing Segment
There have been various legal and regulatory developments in Nevada regarding liens asserted by HOAs for unpaid assessments. In September 2014, the Nevada Supreme Court held that an HOA non-judicial foreclosure sale can extinguish a mortgage lender’s previously-recorded first deed of trust on a property if that foreclosure is to recover assessments categorized as super-priority amounts. In June 2015, the U.S. District Court for the District of Nevada issued an opinion holding that federal law prohibits an HOA foreclosure proceeding from extinguishing a first deed of trust assigned to Fannie Mae. A Nevada state court subsequently reached the same conclusion. The Nevada Supreme Court also reversed a lower court summary judgment decision invalidating an HOA foreclosure sale on the basis that the HOA refused the lienholder’s tender of the super-priority portion of the lien and that the HOA sale was commercially unreasonable. The Nevada Supreme Court ruled that these were issues of fact and remanded for further proceedings. Additional litigation in both state and federal courts and appellate courts is pending with respect to these issues. Case law is quickly developing, is not harmonious as between federal and state courts and varies by judge within each jurisdiction. Also, legislation in Nevada, which became effective on October 1, 2015, requires HOAs to provide notice to lienholders relating to the default and foreclosure sale and also to provide creditors with a right to redeem the property for up to 60 days following an HOA foreclosure sale. In January 2017, the Nevada Supreme Court ruled that the state’s non-judicial HOA foreclosure statutes in effect prior to the 2015 amendments do not unconstitutionally violate due process and are not a government taking. This opinion conflicts with a 2016 decision of the Ninth Circuit, holding that the statute was unconstitutional. Credit owners may assert claims against servicers for failure to advance sufficient funds to cover unpaid HOA assessments and protect the credit owner’s interest in the subject property. We service numerous loans in Nevada and are involved in litigation and other legal proceedings affected by, or related to, these HOA matters.
Originations Segment

On April 26, 2018, the CFPB finalized an amendment to its “Know Before You Owe” mortgage disclosure rule that addresses when mortgage lenders with a valid justification may pass on increased closing costs to consumers and report them on a closing disclosure. The amendment was designed to provide greater clarity and certainty to the mortgage industry. It took effect June 1, 2018. On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act was signed into law by the President. Among its many provisions were those addressing the following topics:
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Loan Officer Licensing - Amends the SAFE Act to temporarily allow loan originators that meet specified requirements to continue to originate loans after moving (1) from one state to another, or (2) from a depository institution to a non-depository institution. This provision is effective November 24, 2019.
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No Wait for Lower Mortgage Rates - Amends the TILA requirement that a lender provide a borrower with a mortgage disclosure or a revised disclosure at least three business days prior to a mortgage closing. Eliminates the three-day waiting period in situations where a creditor extends to a borrower a second offer of credit that lowers the APR on the mortgage. Also encourages the CFPB to provide clearer guidance on the applicability of TRID to mortgage assumptions. This provision took effect June 23, 2018.
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Restoration of the PTFA - Repeals the sunset provision of the PTFA and restores it as it was in effect prior to its expiration on December 30, 2014. The PTFA provided bona fide tenants residing in properties foreclosed with certain protections, including a 90-day notice before the tenant could be evicted. The PTFA also allowed bona fide tenants the right to remain in the property until the pre-foreclosure lease expired. This provision took effect June 23, 2018.
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Veteran Home Loan Refinancing Reform - Adds protections for veterans who refinance their purchase or construction home loans. Under the Act, the VA will not guarantee or insure the refinancing of a loan to purchase or construct a home unless the insurer provides a certification of the recoupment period for expenses incurred by the borrower in refinancing the loan. Further, all costs and fees must be recouped within 36 months of the loan issuance, and the recoupment must occur through lower monthly payments due to the refinancing. Furthermore, the insurer must provide the veteran with a net tangible benefit test and abide by certain rules regarding the required minimum reduction in the interest rate on the refinanced loan. Per VA Circular 26-18-13, this provision was effective with applications taken on or after May 25, 2018.

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Foreclosure Relief for Service Members - Makes permanent an amendment to the Service Members Civil Relief Act that allowed for a stay of foreclosure, sale or seizure proceedings for a service member for any action filed during or within one year of the Service Member’s period of service. This provision took effect June 23, 2018.
On February 12, 2019, federal regulatory agencies issued a joint final rule to implement provisions of the Biggert-Waters Flood Insurance Reform Act of 2012, requiring regulated institutions to accept certain private flood insurance policies in addition to National Flood Insurance Program policies. The final rule includes a streamlined compliance aid provision to help evaluate whether a flood insurance policy meets the definition of “private flood insurance.” This compliance aid allows a regulated lending institution to conclude that a policy meets the definition of “private flood insurance” without further review of the policy if the policy, or an endorsement to the policy, states: “This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.” It is effective July 1, 2019.
Reverse Mortgage Segment
On January 19, 2017, HUD published the “Final HECM Rule, FHA: Strengthening the Home Equity Conversion Mortgage Program.” The primary purpose of this rule was to codify into regulation prior guidance issued by HUD under mortgagee letters authorized by the Reverse Mortgage Stabilization Act of 2013 and the Housing and Economic Recovery Act of 2008. This rule addresses a wide range of reverse mortgage origination and servicing issues, and in certain areas, amends prior guidance and rules. This rule became effective on September 19, 2017.
HUD Mortgagee Letter 2017-05, effective April 18, 2017, provided consolidated and updated guidance regarding the submission of HECM assignments to HUD. Since the publication of HUD Mortgagee Letter 2017-05, RMS has increasingly experienced delays and rejections with respect to HUD’s acceptance and payment of certain assignment claims, which, in turn, increases the amount of time RMS must carry the applicable loan's balance between the time the loan is bought out of a GNMA pool until the assignment claim is paid. The two predominant reasons for the increase in delays and rejections of HECM assignments relate to HUD Mortgagee Letter 2017-05 being interpreted to require proof that property taxes are "current," as opposed to the prior requirement of proof that such taxes were paid "timely," and the HUD Mortgagee Letter 2017-05 guidance that the only acceptable proof of hazard insurance is a copy of the borrower's current insurance "declarations page." 
HUD Mortgagee Letter 2018-08, effective October 22, 2018, provided revised and amended guidance regarding documentation requirements associated with the submission of HECM assignments to HUD and modified HUD Mortgagee Letter 2017-05 in several ways, including clarifying when property taxes are considered “current” and providing that HUD will now accept alternative written documentation evidencing hazard insurance coverage in lieu of a current hazard insurance declaration page.
Refer to Item 1A. Risk Factors for a discussion of certain risks relating to our HECM repurchase obligations and related matters.
Company Website and Availability of SEC Filings
Our website can be found at www.ditechholding.com. We make available free of charge on our website or provide a link on our website to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after those reports are electronically filed with, or furnished to, the SEC. To access these filings, go to our website, click on “Investor Relations” and then click on "SEC Filings." We also make available through our website other reports filed with or furnished to the SEC under the Exchange Act, including our proxy statements and reports filed by officers and directors under Section 16(a) of the Exchange Act, as well as our Code of Conduct and Ethics, our Corporate Governance Guidelines, and charters for our Audit Committee, Compensation and Human Resources Committee, Nominating and Corporate Governance Committee, Finance Committee, Compliance Committee and Technology and Operations Committee. In addition, our website may include disclosure relating to certain non-GAAP financial measures that we may make public orally, telephonically, by webcast, by broadcast, or by similar means from time to time.
We may use our website as a channel of distribution of material company information. Financial and other material information regarding the Company is routinely posted on and accessible at http://investor.ditechholding.com.
Any information on our website or obtained through our website is not part of this Annual Report on Form 10-K.
Our Investor Relations Department can be contacted at 1100 Virginia Drive, Suite 100A, Fort Washington, Pennsylvania 19034, Attn: Investor Relations, telephone (813) 421-7694.

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ITEM 1A. RISK FACTORS
You should carefully review and consider the risks and uncertainties described below, which are risks and uncertainties that could materially adversely affect our business, prospects, financial condition, cash flows, liquidity and results of operations, our ability to pay dividends to our stockholders and/or our stock price. In addition, to the extent that any of the information contained in this Annual Report on Form 10-K constitutes forward-looking information, the risk factors set forth below are cautionary statements identifying important factors that could cause our actual results for various financial reporting periods to differ materially from those expressed in any forward-looking statements made by or on our behalf.
Risks Related to the DHCP Restructuring
We are subject to risks and uncertainties associated with the DHCP Chapter 11 Cases filed with the Bankruptcy Court on February 11, 2019.
Our operations, our ability to develop and execute our business plan and our continuation as a going concern are subject to the risks and uncertainties associated with bankruptcy proceedings, including, among others: our ability to execute, confirm and consummate the DHCP Plan or another plan of reorganization with respect to the Chapter 11 proceedings; the high costs of bankruptcy proceedings and related fees; our ability to obtain sufficient financing to allow us to emerge from bankruptcy and execute our business plan post-emergence, and our ability to comply with terms and conditions of that financing; our ability to continue our originations and servicing operations in the ordinary course; our ability to maintain our relationships with our lenders, counterparties, employees and other third parties; our ability to maintain contracts that are critical to our operations on reasonably acceptable terms and conditions; our ability to attract, motivate and retain key employees; the ability of third parties to use certain limited safe harbor provisions of the Bankruptcy Code to terminate contracts without first seeking Bankruptcy Court approval; the ability of third parties to seek and obtain court approval to convert the Chapter 11 proceedings to Chapter 7 proceedings; and the actions and decisions of our creditors and other third parties who have interests in our Chapter 11 proceedings that may be inconsistent with our operational and strategic plans.
Delays in our Chapter 11 proceedings increase the risks of our being unable to emerge from bankruptcy and may increase our costs associated with the bankruptcy process. These risks and uncertainties could affect our business and operations in various ways. For example, negative events associated with our Chapter 11 proceedings could adversely affect our relationships with our lenders, counterparties, employees and other third parties, which in turn could adversely affect our operations and financial condition. Also, we need the prior approval of the Bankruptcy Court for transactions outside the ordinary course of business, which may limit our ability to respond timely to certain events or take advantage of certain opportunities. Because of the risks and uncertainties associated with our Chapter 11 proceedings, we cannot accurately predict or quantify the ultimate impact of events that occur during our Chapter 11 proceedings that may be inconsistent with our plans.
The DHCP RSA is subject to significant conditions and milestones that may be beyond our control and may be difficult for us to satisfy. If the DHCP RSA is terminated, our ability to confirm and consummate the DHCP Plan, and our ability to consummate any restructuring of our debt, could be materially and adversely affected.
The DHCP RSA sets forth certain conditions we must satisfy, including the timely satisfaction of conditions and milestones to consummate a Chapter 11 plan. Our ability to timely satisfy such conditions and milestones is subject to risks and uncertainties that, in certain instances, are beyond our control. The DHCP RSA gives the Requisite Term Lenders the ability to terminate the DHCP RSA under certain circumstances, including the failure of certain conditions or milestones being satisfied. Should the DHCP RSA be terminated, all obligations of the parties to the DHCP RSA will terminate (except as expressly provided in the DHCP RSA). A termination of the DHCP RSA may result in the loss of support for the DHCP Plan, which could adversely affect our ability to confirm and consummate the DHCP Plan and our ability to emerge from Chapter 11. In addition, termination of the DHCP RSA is an “Event of Default” under our post-petition debtor-in-possession financing. If the DHCP Plan is not consummated, there can be no assurance that any new plan would be as favorable to holders of claims or interests as the DHCP Plan, and our Chapter 11 proceedings could become protracted, which could significantly and detrimentally impact our relationships with GSEs, regulators, government agencies, vendors, suppliers, employees and major customers.
There can be no assurance that the solicited class of claims will vote to accept the DHCP Plan.
There can be no assurance that the DHCP Plan will receive the necessary level of support to be implemented or will be approved by the Bankruptcy Court. The success of the DHCP Restructuring will depend on the willingness of certain existing creditors to agree to the exchange or modification of their claims and approval by the Bankruptcy Court, and there can be no guarantee of success with respect to those matters. The Term Loan Claims are impaired under the DHCP Plan and entitled to vote to accept or reject the DHCP Plan. Although certain Term Lenders are bound to vote for the DHCP Plan pursuant to the DHCP RSA, if the DHCP RSA is terminated they will not be so bound and any vote or consent given by such Term Lenders prior to such termination will be deemed null and void ab initio.

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We may receive objections to the terms of the transactions contemplated by the DHCP RSA, including official objections to confirmation of the DHCP Plan from the various stakeholders in the DHCP Chapter 11 Cases, including the appointed statutory committee of unsecured creditors. We cannot predict the impact that any objection or third party motion may have on the Bankruptcy Court’s decision to confirm the DHCP Plan or our ability to complete an in-court restructuring as contemplated by the DHCP RSA or otherwise. Any objection may cause us to devote significant resources in response which could materially and adversely affect our business, financial condition and results of operations.
If we do not receive sufficient support for the DHCP Plan, or if the DHCP Plan is not confirmed by the Bankruptcy Court, it is unclear what, if any, distributions holders of claims against us would ultimately receive with respect to their claims and interests. There can be no assurance as to whether or when we will emerge from Chapter 11. If no plan of reorganization can be confirmed, or if the Bankruptcy Court otherwise finds that it would be in the best interest of holders of claims and interests, the DHCP Chapter 11 Cases may be converted to a case under Chapter 7 of the Bankruptcy Code, pursuant to which a trustee would be appointed or elected to liquidate our assets for distribution in accordance with the priorities established by the Bankruptcy Code.
There can be no assurance that our Strategic Review will result in any bids representing higher or better value than the DHCP Reorganization Transaction; and speculation and uncertainty regarding the outcome of the Strategic Review may adversely impact our business.
In response to certain inquiries received by our Board of Directors, during the second quarter of 2018 our Board of Directors initiated a process to evaluate strategic alternatives, hereinafter referred to as the Strategic Review. The DHCP RSA provides for the continuation of the Strategic Review, whereby, as a potential alternative to the implementation of the DHCP Reorganization Transaction, any and all bids for our company or some or all of our assets will be evaluated as a precursor to confirmation of any Chapter 11 plan of reorganization. The Strategic Review provides a public and comprehensive forum in which the Debtors are seeking bids or proposals for three types of potential transactions. If a bid or proposal is received representing higher or better value than the DHCP Reorganization Transaction, it will either be incorporated into the DHCP Reorganization Transaction or pursued as an alternative to the DHCP Reorganization Transaction in consultation with the Consenting Term Lenders and subject to the DHCP RSA. There can be no assurance that any such bids will be received, incorporated or pursued, and speculation and uncertainty regarding the outcome of the Strategic Review may adversely impact our business.
The Consolidated Financial Statements included herein contain disclosures that express substantial doubt about our ability to continue as a going concern due to the significant risks and uncertainties related to the DHCP Chapter 11 Cases.
As set forth in the DHCP RSA, the parties thereto have agreed to, among other things, the principal terms of our proposed financial restructuring, which will be implemented through the DHCP Plan. The significant risks and uncertainties related to the DHCP Chapter 11 Cases raise substantial doubt about our ability to continue as a going concern. Our Consolidated Financial Statements have been prepared assuming we will continue as a going concern.
The pursuit of the DHCP Restructuring will consume a substantial portion of the time and attention of our management, which may have an adverse effect on our business and results of operations.
It is impossible to predict with certainty the amount of time and resources necessary to successfully implement the DHCP Restructuring. Compliance with the terms of the DHCP RSA and the DHCP Plan will involve additional expense and our management will be required to spend a significant amount of time and effort focusing on the proposed transactions. This diversion of attention may materially adversely affect the conduct of our business, and, as a result, our financial condition and results of operations.
Furthermore, loss of key personnel, significant employee attrition or material erosion of employee morale has negatively impacted and could have a material adverse effect on our ability to effectively conduct our business, and could impair our ability to execute our strategy and implement operational initiatives, thereby having a material adverse effect on our business and on our financial condition and results of operations.
Trading in our securities is highly speculative and poses substantial risks.
Trading in our securities is highly speculative and the market price of our common stock has been and may continue to be volatile. Any such volatility may affect the ability to sell our common stock at an advantageous price or at all. Under the DHCP Plan, as currently contemplated, the holders Term Loan Claims will receive their pro rata share of new term loans and 100% of the New Common Stock and holders of Second Lien Notes claims and existing preferred stock, common stock, and warrants will not receive any recovery following effectiveness of the DHCP Plan.

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The DHCP Plan contemplates that we will be a privately held company after emergence from the DHCP Chapter 11 Cases, which would result in less disclosure about us and may negatively affect our ability to raise additional funds, the ability of our stockholders to sell our securities, and the liquidity and trading prices of our preferred stock, common stock and warrants.
We currently have fewer than 300 stockholders of record and, therefore, are eligible to terminate the registration of our preferred stock, common stock and warrants under the Exchange Act. Consistent with the DHCP Plan, we anticipate filing a Form 15 to voluntarily deregister our securities under Section 12(g) of the Exchange Act and suspend our reporting obligations under Section 15(d) of the Exchange Act. We expect that our obligations to file periodic reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, will be suspended immediately upon the filing of the Form 15 with the SEC, and our proxy statement, Section 16 and other Section 12(g) reporting responsibilities will terminate effective 90 days after the filing of the Form 15. Following deregistration, we do not expect to publish periodic financial information or furnish such information to our stockholders except as may be required by applicable laws. These actions will result in less disclosure about us and may negatively affect our ability to raise additional funds, the ability of our stockholders to sell our securities and the liquidity and trading prices of our preferred stock, common stock and warrants.
The inability to effectuate the DHCP Restructuring could have a material adverse effect on the Company.
If a plan of reorganization is not confirmed and we are unable to effectuate the DHCP Restructuring, the adverse pressures we have recently experienced are expected to continue and potentially intensify, and could have a material adverse effect on our business, prospects, results of operations, liquidity and financial condition including with respect to its:
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relationships with counterparties and key stakeholders who are critical to its business;
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ability to access the capital markets;
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ability to execute on its operational and strategic goals;
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ability to recruit and/or retain key personnel; and
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business, prospects, results of operations and liquidity generally.
Even if the DHCP Restructuring is consummated, we may not be able to achieve our strategic goals.
Even if the DHCP Restructuring is consummated, we will continue to face a number of risks, including our ability to reduce expenses, return our servicing and originations businesses to sustained profitability, implement our strategic initiatives, and generally maintain favorable relationships with and secure the confidence of our counterparties. Accordingly, we cannot guarantee that the proposed financial restructuring will achieve our stated goals nor can we give any assurance of our ability to continue as a going concern.
The composition of our Board of Directors changed significantly upon emergence from the WIMC Chapter 11 Case, and is expected to change significantly upon emergence from the DHCP Chapter 11 Cases.
The composition of our Board of Directors changed significantly upon emergence from the WIMC Chapter 11 Case. Our current directors have different backgrounds, experiences and perspectives from those individuals who previously served on the Board of Directors.
The DHCP Plan contemplates that the composition of our Board of Directors will change upon emergence from the DHCP Chapter 11 Cases. The new board will consist of four directors selected by the Requisite Term Lenders and the chief executive officer of the reorganized company, who shall be Thomas F. Marano. Any new directors may have different views on the issues that will determine our future, and, as a result, the future strategy and plans of New Ditech may differ materially from those of the past.
Our businesses could suffer from a long and protracted restructuring.
Our future results are dependent upon the successful confirmation and implementation of the DHCP Plan. Failure to obtain confirmation of a Chapter 11 plan or approval and consummation of an alternative restructuring transaction in a timely manner may harm our ability to obtain financing to fund our operations, and may have a material adverse effect on our business, financial condition, results of operations and liquidity.
For as long as the Chapter 11 proceedings continue, we will be required to incur substantial costs for professional fees and other expenses associated with the administration of the Chapter 11 proceedings. The DHCP DIP Warehouse Facilities are intended to provide liquidity to our operating subsidiaries during the pendency of the Chapter 11 proceedings. If we are unable to obtain the necessary waivers and/or amendments or timely Bankruptcy Court approval for this or alternative financing during the pendency of the Chapter 11 proceedings, our chances of successfully reorganizing our business may be seriously jeopardized, the likelihood that we instead will be required to liquidate our assets may be enhanced, and, as a result, our outstanding securities could become further devalued or become worthless.

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There can be no assurance that we will successfully reorganize and emerge from the Chapter 11 proceedings or, if we do successfully reorganize, as to when we would emerge from the Chapter 11 proceedings.
Even after a Chapter 11 plan is confirmed and implemented, our operating results may be adversely affected by the possible reluctance of prospective lenders, suppliers and other counterparties to do business with a company that recently emerged from bankruptcy proceedings.
In certain instances, a Chapter 11 case may be converted to a case under Chapter 7 of the Bankruptcy Code.
Upon a showing of cause, the Bankruptcy Court may convert our DHCP Chapter 11 Cases to a case under Chapter 7 of the Bankruptcy Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate our assets for distribution in accordance with the priorities established by the Bankruptcy Code. Liquidation under Chapter 7 would result in significantly smaller distributions being made to our creditors than those provided for in the DHCP Plan because of (i) the likelihood that the assets would have to be sold or otherwise disposed of in a distressed fashion over a short period of time rather than in a controlled manner and as a going concern, (ii) additional administrative expenses involved in the appointment of a Chapter 7 trustee, and (iii) additional expenses and claims, some of which would be entitled to priority, that would be generated during the liquidation and from the rejection of leases and other executory contracts in connection with a cessation of operations.
We may be subject to claims that will not be discharged in the Chapter 11 proceedings, which could have a material adverse effect on our financial condition and results of operations.
The Bankruptcy Code provides that the confirmation of a plan of reorganization discharges a debtor from substantially all debts arising prior to confirmation. With certain exceptions, all claims that arose prior to confirmation of the plan of reorganization (i) would be subject to compromise and/or treatment under the plan of reorganization and/or (ii) would be discharged in accordance with the Bankruptcy Code and the terms of the plan of reorganization. Any claims not ultimately discharged through a plan of reorganization could be asserted against the reorganized entities and may have an adverse effect on our financial condition and results of operations on a post-reorganization basis.
The DHCP Plan and any other plan of reorganization that we may implement will be based in large part upon assumptions, projections and analyses developed by us. If these assumptions, projections and analyses prove to be incorrect in any material respect, the DHCP Plan may not be successfully implemented.
The DHCP Plan or any other plan of reorganization that we may implement will have been based in important part on assumptions and analyses based on our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we have considered appropriate under the circumstances. Whether actual future results and developments will be consistent with our expectations and assumptions depends on a number of factors, including but not limited to (i) our ability to change substantially our capital structure; (ii) our ability to maintain customers’ confidence in our viability as a continuing entity and to attract and retain sufficient business from them; (iii) our ability to retain key employees; and (iv) the overall strength and stability of general economic conditions of the mortgage servicing and originations industry. The failure of any of these factors could materially adversely affect the successful reorganization of our businesses.
Information contained in our historical financial statements is not comparable to the information contained in our financial statements after the application of fresh start accounting associated with the WIMC Chapter 11 Case.
Following the consummation of the WIMC Prepackaged Plan, our financial condition and results of operations from and after the WIMC Effective Date are not comparable to the financial condition or results of operations in our historical financial statements. As a result of our restructuring under Chapter 11 of the Bankruptcy Code, our financial statements were subject to the fresh start accounting provisions of GAAP. In the application of fresh start accounting, an allocation of the reorganization value is made to the fair value of assets and liabilities in conformity with the guidance for the acquisition method of accounting for business combinations. Adjustments to the carrying amounts could be material and could affect prospective results of operations as balance sheet items are settled, depreciated, amortized or impaired. This will make it difficult for our stockholders and others to assess our performance in relation to prior periods.
Further, if we emerge from the DHCP Chapter 11 Cases in the form of a recapitalized company, we may apply fresh start accounting to the assets and liabilities on our consolidated balance sheets. This would further diminish the comparability between reported periods.

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Our emergence from the WIMC Reorganization proceedings reduced or eliminated our tax attributes and limited our ability to offset future taxable income with tax losses and credits incurred prior to our emergence from bankruptcy. Our remaining deferred tax assets could be further impaired if we have a subsequent significant change in our stockholder base.
As a result of the discharge of debt pursuant to the WIMC Chapter 11 Case, we incurred substantial cancellation of debt for federal income tax purposes. In general, a debtor in a Chapter 11 proceeding is required to reduce the amount of its tax attributes by such cancellation of debt. The tax attributes, including net operating losses, tax credits and tax basis in assets, provide potential value in the form of reduced future tax liability.
A corporation's ability to recognize the value of its tax attributes can be substantially constrained under the general annual limitation rules of Section 382 if it undergoes an “ownership change” as defined in Section 382 (generally where cumulative stock ownership changes among material shareholders exceed 50% during a rolling three-year period). We experienced an ownership change in connection with our emergence from the WIMC Chapter 11 Case. The general limitation rules for a debtor in a bankruptcy case are liberalized where the ownership change occurs upon emergence from bankruptcy. While we anticipate taking advantage of certain special rules for federal income tax purposes that would allow us to mitigate the limitations imposed under Section 382 with respect to our remaining tax attributes, there can be no assurance that these special rules will apply to the ownership change we experienced upon our emergence from bankruptcy, including that we may ultimately elect not to apply them. If the special rules do not apply, our ability to realize the value of our tax attributes would be subject to limitation.
Notwithstanding the foregoing, an ownership change subsequent to our emergence from the WIMC Chapter 11 Case may severely limit or effectively eliminate our ability to realize the value of our tax attributes. To reduce the risk of a potential adverse effect on our ability to realize the value of our tax attributes, our Articles of Amendment and Restatement contain transfer restrictions applicable to certain substantial common and preferred stockholders. Although the purpose of these transfer restrictions is to prevent an ownership change from occurring, no assurance can be given that such an ownership change will not occur, in which case our ability to realize the value of our tax attributes could be severely limited or effectively eliminated.
Our ability to use our deferred tax assets to offset future taxable income may be subject to certain limitations that could subject our business to higher tax liabilities.
We may be limited in the portion of net operating loss carryforwards and built in losses that we can use in the future to offset taxable income for U.S. federal and state income tax purposes. The Tax Act enacted on December 22, 2017 makes broad and complex changes to the Code. While future interpretative guidance related to the Tax Act and how U.S. states will incorporate these federal law changes may have an impact on our business, the Tax Act’s reduction of the federal corporate income tax rate from 35% to 21%, effective January 1, 2018, has reduced our net deferred tax assets including those associated with NOL Carryforwards. A lack of future taxable income would adversely affect our ability to utilize our NOL Carryforwards.
In addition, under Section 382 of the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOL Carryforwards and built in losses to offset future taxable income. Future changes in our stock ownership as well as other changes that may be outside of our control could result in additional ownership changes under Section 382 of the Code. Our state NOL Carryforwards may also be impaired under similar provisions of state law.
We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize our existing deferred tax assets. On the basis of this evaluation, a full valuation allowance has been recorded to recognize only deferred tax assets that are more likely than not to be realized.
Finally, further changes to the federal or state tax laws or additional technical guidance relating to the Tax Act could operate to effectively reduce or eliminate the value of any deferred tax asset. Our tax attributes as of December 31, 2018 may expire unutilized or underutilized, which could prevent us from offsetting future taxable income.
Risks Related to our Business
If we fail to operate our business in compliance with both existing and future statutory, regulatory and other requirements, our business, financial condition, liquidity and/or results of operations could be materially and adversely affected.
Our business is subject to extensive regulation by federal, state and local governmental and regulatory authorities, including the CFPB, the FTC, HUD, the VA, the SEC and various state agencies that license, audit, investigate and conduct examinations of our mortgage servicing, origination, insurance, collection, reverse mortgage and other activities. Further, due to changes in the federal administration in 2016, the policies, laws, rules and regulations applicable to our business have been rapidly evolving. Federal, state or local governmental authorities may continue to enact laws, rules or regulations that will result in changes in our business practices and increased costs of compliance. However, we are unable to predict whether any such changes will adversely affect our business.

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In addition, the GSEs, Ginnie Mae and other business counterparties also subject us to periodic examinations, reviews and audits, and we routinely conduct our own internal examinations, reviews and audits. These various audits, reviews and examinations of our business and related activities have uncovered, and may in the future uncover, deficiencies in our compliance with our policies and other requirements to which we are subject. While we strive to investigate and remediate such deficiencies, there can be no assurance that any remedial measures we implement, which could involve material expense, will ensure compliance with applicable policies, laws, regulations and other requirements or be deemed sufficient by the GSEs, Ginnie Mae, governmental authorities or other interested parties.
We devote substantial resources (including senior management time and attention) to regulatory compliance and regulatory inquiries, and we incur, and expect to continue to incur, significant costs in connection therewith. Our business, financial condition, liquidity and/or results of operations could be materially and adversely affected by the substantial resources we devote to, and the significant compliance costs we incur in connection with, regulatory compliance and regulatory inquiries, and any fines, penalties, restitution or similar payments we make in connection with resolving such matters.
Furthermore, our actual or alleged failure to comply with applicable federal, state and local laws and regulations and GSE, Ginnie Mae and other business counterparty requirements, or to implement and adhere to adequate remedial measures designed to address any identified compliance deficiencies, could lead to:
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the loss or suspension of licenses and approvals necessary to operate our business;
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limitations, restrictions or complete bans on our business or various segments of our business;
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disqualification from participation in governmental programs, including GSE programs;
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damage to our reputation;
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governmental investigations and enforcement actions;
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administrative fines and financial penalties;
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litigation, including class action lawsuits;
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civil and criminal liability;
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termination of our servicing and subservicing agreements or other contracts;
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demands for us to repurchase loans;
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loss of personnel who are targeted by prosecutions, investigations, enforcement actions or litigation;
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a significant increase in compliance costs;
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a significant increase in the resources (including senior management time and attention) we devote to regulatory compliance and regulatory inquiries;
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an inability to access new, or a default under or other loss of current, liquidity and funding sources necessary to operate our business;
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restrictions on mergers and acquisitions;
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impairment of assets;
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conservatorship or receivership by order of a court or regulator; and
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an inability to execute on our business strategy.
Any of these outcomes could materially and adversely affect our reputation, business, financial condition, prospects, liquidity and/or results of operations.
The mortgage servicing industry has been and remains under a higher degree of scrutiny from state and federal regulators and other authorities, with particular attention directed at larger non-bank servicing organizations such as Ditech Holding. We cannot guarantee that any such scrutiny and investigations will not materially adversely affect us.

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Our failure to comply with existing and future rules and regulations relating to the origination and servicing of residential loans, and/or more stringent enforcement of such rules and regulations by the CFPB, HUD and other federal and state agencies could result in enforcement actions, fines, penalties and reputational damage.
On July 21, 2010, the Dodd-Frank Act was signed into law for the express purpose of further regulating the financial services industry, including mortgage origination, sales, servicing and securitization. The CFPB, a federal agency established pursuant to the Dodd-Frank Act, officially began operation on July 21, 2011. The CFPB is charged, in part, with enforcing laws involving consumer financial products and services, including mortgage finance and servicing and reverse mortgages, and is empowered with examination, enforcement and rulemaking authority.
The Dodd-Frank Act established new standards and practices for mortgage originators and servicers, including determining prospective borrowers’ abilities to repay their mortgages, removing incentives for higher cost mortgages, prohibiting prepayment penalties for non-qualified mortgages, prohibiting mandatory arbitration clauses, requiring additional disclosures to potential borrowers, restricting the fees that mortgage originators may collect, new mortgage loan disclosures that integrate TILA and RESPA disclosures for certain covered transactions and other new requirements.
In recent years, HUD and the DOJ have pursued actions against FHA-approved lenders, including RMS, under the False Claims Act, which imposes liability on any person who knowingly makes a false or fraudulent claim for payment to the U.S. government. Potential penalties are significant as these actions may result in treble damages and several large settlements have been entered into by HUD-approved mortgagees who have allegedly violated the False Claims Act. RMS received a subpoena dated June 16, 2016 from the Office of Inspector General of HUD requiring RMS to produce documents and other materials relating to, among other things, the origination, underwriting and appraisal of reverse mortgages for the time period since January 1, 2005. RMS subsequently received an additional subpoena from the Office of Inspector General of HUD dated January 12, 2017 requesting certain documents and information relating to the origination and underwriting of certain specified loans. This investigation, which is being conducted in coordination with the U.S. Department of Justice, Civil Division, could lead to a demand or claim under the False Claims Act, which allows for penalties and treble damages, or other statutes. See Item 3. Legal Proceedings for additional information.
In addition, the DOJ could take the position that it could initiate actions against Fannie Mae- and Freddie Mac-approved lenders and servicers for alleged violations of the False Claims Act as a result of noncompliance with the GSE’s underwriting and other guidelines, given the FHFA conservatorship.
Regulations under the Dodd-Frank Act, bulletins issued by the CFPB pursuant to its authority, and other actions by the CFPB, HUD, the VA and other federal agencies could materially and adversely affect the manner in which we conduct our businesses, and have and could continue to result in heightened federal regulation and oversight of our business activities and in increased costs and potential litigation associated with our business activities.
We are subject to state licensing requirements and incur related substantial compliance costs, and our business would be adversely affected if we encountered a suspension or termination of our licenses.
Our operations are subject to regulation, supervision and licensing under various federal, state and local statutes, ordinances and regulations. Although we are not a bank or bank holding company, in most states in which we operate, one or more regulatory agencies regulate and enforce laws relating to non-bank mortgage servicing companies and/or mortgage origination companies such as Ditech Financial and RMS. These rules and regulations generally provide for licensing as a mortgage servicing company, mortgage origination company, debt collection agency and/or third-party default specialist, as applicable, requirements as to the documentation, individual licensing of our employees and employee hiring background checks, licensing of independent contractors with whom we contract, restrictions on collection practices, disclosure and record-keeping requirements and enforcement of borrowers' rights. In certain states, we are subject to periodic examination by state regulatory authorities. Some states in which we operate require special licensing or provide extensive regulation of our business, and state regulators may have broad discretion to restrict our activities or to suspend approval or withdraw our licenses for non-compliance with applicable requirements. The failure to respond appropriately to regulatory inquiries and investigations or to satisfy state regulatory requirements could result in our ability to operate in the state being terminated, cause a default under our servicing agreements, impact our ability to originate new loans or service loans and have a material adverse effect on our financial condition and operations.
Regulatory changes could increase our costs through additional or stricter licensing laws, disclosure laws or other regulatory requirements and could impose conditions to licensing that we or our personnel are unable to meet. Future legislation and changes in regulation may significantly increase the compliance costs on our operations or impact overall profitability of our business. This could make our business cost-prohibitive in the affected state or states and could materially affect our business.

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Legal proceedings and related costs may increase and could adversely affect our financial results.
We are involved in various legal proceedings, including numerous litigation matters that arise in the ordinary course of our business (including numerous putative class actions). Like other participants in our industry, we have been and may continue to be the subject of class action and other lawsuits and of regulatory actions by state attorneys general and federal and state regulators and enforcement agencies.
Litigation and other proceedings have required, and may require in the future, that we pay attorneys' fees, settlement costs, damages (including punitive damages), penalties or other charges, which could materially adversely affect our financial results and condition and damage our reputation.
Governmental and regulatory investigations, both state and federal, have increased in all areas of our business over the last several years. The costs of responding to the investigations can be substantial. In addition, government-mandated changes, resulting from investigations or otherwise, to our loan origination and servicing practices have led, and may continue to lead, to higher costs and additional administrative burdens, such as record retention and informational obligations.
From time to time, we have entered into agreements or orders to settle investigations, potential litigations or other enforcement actions against us by governmental and regulatory authorities. Complying with settlements can be costly, and if we fail to comply we could be subject to sanctions, including actions for contempt, actions for additional fines or actions alleging violations of law. The announcement and terms of such settlements could adversely affect our reputation and, if the settlements involve findings that we have breached the law, could cause a breach of or default under our financing agreements, our servicing or subservicing contracts or other contractual obligations. Such settlements, our efforts to comply with settlements and our failure to comply with settlements could have a material adverse effect on our business, business practices, prospects, results of operations, liquidity and financial condition.
We establish reserves for pending or threatened litigation and regulatory matters when it is probable that a loss has been incurred and the amount of such loss can be reasonably estimated. Litigation and regulatory matters involve considerable inherent uncertainties, and our estimates of loss are based on judgments and information available at the time. Our estimates may change from time to time for various reasons, including developments in the matters. There cannot be any assurance that the ultimate resolution of our litigation and regulatory matters will not involve losses, which may be material, in excess of our recorded accruals or estimates of reasonably possible losses. See Note 29 to our Consolidated Financial Statements and Item 3. Legal Proceedings for additional information.
Our level of indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations.
We have substantial levels of indebtedness. As of December 31, 2018, we had approximately $3.0 billion of total indebtedness outstanding, the majority of which was secured, including:
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$933.4 million of indebtedness under our 2018 Term Loan;
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$253.9 million aggregate principal amount of Second Lien Notes;
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$218.3 million, in the aggregate, of servicing advance liabilities under the DAAT Facility and DPAT II Facility; and
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$1.5 billion, in the aggregate, of warehouse borrowings under certain master repurchase agreements and variable funding notes.
On February 14, 2019, the Parent Company, as guarantor, along with its wholly-owned subsidiaries Ditech Financial and RMS, entered into the DHCP DIP Warehouse Facilities, which provide up to $1.9 billion in available financing. Proceeds of the DHCP DIP Warehouse Facilities were used to repay and refinance RMS's and Ditech Financial's existing master repurchase agreements and variable funding notes issued under existing servicer advance facilities. The existing master repurchase agreements and variable funding notes issued under servicer advance facilities were terminated or otherwise replaced under the DHCP DIP Warehouse Facilities. In addition, the lenders under the DHCP DIP Warehouse Facilities have agreed to provide Ditech Financial, through the DIP Maturity Date, up to $1.9 billion in trading capacity for Ditech Financial to hedge its interest rate exposure with respect to the loans in Ditech Financial's loan origination pipeline.
All of these amounts of indebtedness exclude (i) intercompany indebtedness, (ii) guarantees of affiliate debt and (iii) certain mortgage-backed debt and HMBS-related obligations (which are non-recourse to us and our subsidiaries).
Our high level of indebtedness could have important consequences, including:
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increasing our vulnerability to downturns or adverse changes in general economic, industry or competitive conditions and adverse changes in government regulations;

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requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;
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exposing us to the risk of increased interest rates as certain of our indebtedness is unhedged and at a variable rate of interest;
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limiting our ability to make strategic acquisitions or causing us to make non-strategic divestitures;
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limiting our ability to pursue strategic and operational goals;
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exposing us to the risk of not being able to refinance our indebtedness on terms that are commercially acceptable to us, or at all;
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limiting our ability to obtain additional financing for working capital, capital expenditures, product or service line development, debt service requirements, acquisitions and general corporate or other purposes; and
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limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors with lower debt levels.
We may not be able to generate sufficient cash to meet all of our obligations or service all of our indebtedness and may not be able to extend or refinance our indebtedness. If we are unable to do so, we may be forced to take other actions to satisfy our obligations, which may not be successful.
Our ability to make required payments on our debt and other obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control, including the risk factors set forth herein. We have recorded significant losses in the year ended December 31, 2017 and for the period from February 10, 2018 through December 31, 2018. We cannot assure you we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness or to meet our other obligations such as our obligations to repurchase HECM loans.
In addition, we conduct a substantial part of our operations through our subsidiaries. Accordingly, our ability to repay our indebtedness depends on the generation of cash flow by our subsidiaries and their ability to make such cash available to us by dividend, debt repayment or otherwise. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness.
Much of our debt is short-term so we regularly seek to extend or refinance our existing indebtedness. Our ability to extend, renew or refinance our indebtedness on favorable terms, or at all, is uncertain and may be affected by global economic and financial conditions and other factors outside our control. In addition, our ability to incur secured indebtedness (which would generally enable us to achieve better pricing than the incurrence of unsecured indebtedness) depends in part on the value of our assets, which depends, in turn, on the strength of our cash flows and results of operations, and on economic and market conditions and other factors. From time to time in the recent past, we have obtained waivers or amendments of covenants in our pre-WIMC Effective Date debt agreements. In addition, in May 2018, August 2018, and November 2018, we obtained amendments to certain facilities and the 2018 Credit Agreement to, among other things, extend the deadline for providing certain financial statements and increase operational flexibility with respect to certain financial covenants. On February 14, 2019, certain facilities were repaid and refinanced or otherwise replaced with the DHCP DIP Warehouse Facilities. See the Liquidity and Capital Resources section of Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for more information. If we are unable to obtain needed waivers or amendments in the future, we could experience material adverse consequences.
If our cash flows and capital resources are insufficient to fund our debt service and other obligations or we are unable to extend or refinance our indebtedness, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.
Our debt agreements contain covenants that restrict our operations and may inhibit flexibility in operating our business and increasing revenues.
Our 2018 Credit Agreement and Second Lien Notes Indenture entered into in February 2018 contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and certain of our subsidiaries' ability to, among other things:
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incur additional indebtedness or issue certain preferred shares;
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pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;
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make certain investments;

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sell or transfer assets;
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utilize the proceeds from any sale or transfer of assets;
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create liens;
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consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and
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enter into certain transactions with our affiliates.
The 2018 Credit Agreement also contains financial covenants requiring compliance with certain asset coverage ratios, and beginning with the four consecutive quarterly "test" periods ending March 31, 2020, an interest expense coverage ratio and a first lien net leverage ratio. Certain of these covenants are subject to varying interpretation, making it possible that we and our creditors disagree as to whether we have complied with our obligations under our debt agreements. A breach, or alleged breach, of any of these covenants could result in a default and our lenders could elect to declare all amounts outstanding to be immediately due and payable and to terminate all commitments to extend further credit. If we were unable to repay those amounts, the secured lenders could proceed against the collateral granted to them to secure such indebtedness. There can be no assurance that we will have sufficient assets to repay amounts due under our indebtedness.
The filing of the DHCP Bankruptcy Petitions triggers an event of default or an early amortization event under certain of our debt instruments. The filing of the DHCP Bankruptcy Petitions also triggers the liquidation preference of the Mandatory Convertible Preferred Stock. Certain of our obligations, including the payment of interest under our debt instruments, are stayed under the Bankruptcy Code during the pendency of the DHCP Chapter 11 Cases. See the Liquidity and Capital Resources section of Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information.
Our business strategy may not be successful in returning us to profitability.
We recorded significant net losses in the year ended December 31, 2017 and for the period from February 10, 2018 through December 31, 2018. During those periods, despite our efforts to reduce our expenses, dispose of certain businesses, eliminate certain activities and improve operations we were not successful in meeting key business goals and generating profits and on February 11, 2019 filed the DHCP Bankruptcy Petitions. Therefore, our current strategy that contemplates further cost reductions, operational enhancements and streamlining of our businesses and reduction of leverage is on hold. We cannot control all of the factors that affect our ability to achieve our goals, and some elements of our strategy, such as our goal of improving operational performance, may require expenditures and investments that adversely affect our financial results.
Our business is highly dependent on U.S. government-sponsored entities or agencies, and any changes in these entities or agencies or their current roles, or any failure by us to maintain our relationships with such entities or agencies, could materially and adversely affect our business, liquidity, financial position and/or results of operations.
The U.S. residential mortgage industry in general and our business in particular are highly dependent on Fannie Mae, Freddie Mac and Ginnie Mae. We receive compensation for servicing loans, most of which are Fannie Mae, Freddie Mac or Ginnie Mae residential loans. In addition, Ditech Financial sells mortgage loans to GSEs, which include mortgage loans in GSE guaranteed securitizations, and is an issuer of MBS guaranteed by Ginnie Mae and collateralized by Ginnie Mae mortgage loans. RMS is an issuer of HMBS, which are guaranteed by Ginnie Mae and collateralized by participation interests in HECMs, which are insured by the FHA.
Ditech Financial is: (i) a Fannie Mae approved seller/servicer pursuant to a Mortgage Selling and Servicing Contract between Ditech Financial and Fannie Mae, dated March 23, 2005, as amended; (ii) a Freddie Mac approved seller/servicer pursuant to a Master Commitment between Ditech Financial and Freddie Mac, dated September 29, 2016, as amended; and (iii) a Ginnie Mae approved issuer/servicer pursuant to (a) an approval letter from Ginnie Mae to Ditech Financial, dated February 26, 2010, as amended, and (b) a Master Servicing Agreement between Ditech Financial and Ginnie Mae, dated October 9, 2015, as amended. Ditech Financial is also a HUD/FHA approved mortgagee, a VA approved non-supervised lender and a USDA approved participant in the USDA Rural Development Single Family Housing Guaranteed Loan Program.
RMS is: (i) a Ginnie Mae approved issuer/servicer pursuant to (a) an approval letter from Ginnie Mae to RMS, dated January 29, 2008, as amended, and (b) a Master Servicing Agreement between Ginnie Mae and RMS, dated May 19, 2008, as amended; (ii) a Fannie Mae approved servicer of reverse mortgages pursuant to a Mortgage Selling and Servicing Contract between RMS and Fannie Mae, dated September 10, 2007, as amended; and (iii) an approved Title I and Title II FHA mortgagee pursuant to Origination Approval Agreements, dated May 8, 2007, as amended.

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Our ability to originate and sell mortgage loans under the GSE and Ginnie Mae programs reduces our credit exposure and mortgage inventory financing costs. Our status as a Fannie Mae and Freddie Mac approved seller/servicer is subject to compliance with each GSE’s respective selling and servicing guidelines and failure to adhere to such guidelines could result in the unilateral termination or suspension of our status as an approved seller/servicer. Our status as a Ginnie Mae approved issuer/servicer is subject to compliance with Ginnie Mae’s issuer and servicing guidelines and failure to adhere to such guidelines could result in the unilateral termination or suspension of our status as an approved issuer/servicer. Our failure to maintain each of our various residential loan origination, servicing, issuer and related approvals with the GSEs and Ginnie Mae could materially and adversely affect our business, liquidity, financial position and results of operations.
In 2018, we earned approximately 32%, 12% and 3% of our total revenues from servicing Fannie Mae, Ginnie Mae and Freddie Mac residential loans, respectively. Our ability to generate revenues in our mortgage originations business is highly dependent on programs administered by Fannie Mae, Ginnie Mae and Freddie Mac. During 2018, approximately 57%, 30% and 13% of the mortgage loans our Originations segment sold or securitized based on unpaid principal balance were Ginnie Mae, Fannie Mae and Freddie Mac residential loans, respectively. Our failure to maintain our relationships with Fannie Mae, Ginnie Mae or Freddie Mac could materially and adversely affect our business, liquidity, financial position and results of operations.
There is significant uncertainty regarding the future of Fannie Mae and Freddie Mac, including with respect to how long they will continue to be in existence, the extent of their roles in the market and what forms they will have. On September 7, 2008, the FHFA placed Fannie Mae and Freddie Mac into conservatorship. As the conservator of Fannie Mae and Freddie Mac, the FHFA controls and directs the operations of Fannie Mae and Freddie Mac. The roles of Fannie Mae and Freddie Mac could be significantly reduced or eliminated and the nature of the guarantees provided by such GSEs could be considerably limited relative to historical practice. Any adverse change in the traditional roles of Fannie Mae, Freddie Mac or Ginnie Mae in the U.S. mortgage market, any discontinuation of, or significant reduction in, the operations or level of activity of Fannie Mae, Freddie Mac or Ginnie Mae in the primary or secondary U.S. mortgage market, or any adverse change in the underwriting guidelines utilized by, and mortgage loan programs supported by, Fannie Mae, Freddie Mac or Ginnie Mae could materially adversely affect our business, liquidity, financial position and results of operations. Additionally, the FHFA has in the past increased guarantee fees that the GSEs charge lenders for guaranteeing the timely payment of principal and interest on their mortgage-backed securities and we cannot assure you that they will not increase such fees in the future. If there is any increase in guarantee fees or changes to their structure this may generally raise lending costs, restrict the availability of credit, particularly to higher risk borrowers, and negatively affect our ability to grow, and the performance of, both our servicing and lending businesses.
Our mortgage servicing business involves significant operational risks.
Our mortgage servicing business involves, among other things, complex record-keeping, the handling of numerous payments each month, a significant amount of consumer contact, reporting to credit agencies, managing servicing advances and participation in foreclosure and bankruptcy proceedings, all of which are subject to detailed, prescriptive, changing and sometimes unclear regulation, contracts and client requirements, including the requirements of the GSEs, Ginnie Mae and our subservicing clients. Performing all of the tasks involved in mortgage servicing in a compliant, timely and profitable manner involves significant operational risk. Operational risks include poor management oversight and decisions, human error by our servicing employees, weak processes and procedures, inadequate resources devoted to key processes, problems with the numerous systems and technologies that comprise our servicing platform and poor records or data inputs by us or prior servicers from whom we have acquired servicing rights or responsibilities. For these and other reasons, we have experienced and may in the future experience significant operational deficiencies and compliance failures across various parts of our servicing operations. We have incurred and expect to continue to incur significant expenses associated with the identification and remediation of operational deficiencies and compliance failures and the reduction of operational risk. These cost increases have not been matched by increases in the compensation structure for owners of, or subservicers of, MSR. Operational deficiencies and compliance failures could materially adversely affect our business in many ways, including by damaging our customer relationships, causing us to breach our contractual servicing or subservicing obligations and our obligations under our warehouse, advance financing and other credit facilities and putting us in breach of law or regulation. Such deficiencies and failures have adversely affected our past results of operations and could, in the future, cause a material adverse effect on our business, prospects, results of operations, liquidity and financial condition.
Operational risks could cause us to fail to meet the performance standards required by counterparties such as the GSEs, Ginnie Mae and our subservicing clients, which could in turn lead to a termination of our servicing rights and subservicing contracts. While we continue to take steps intended to improve our servicing performance, we cannot be certain that our efforts will have sufficient or timely results. If we fail to meet applicable performance standards, we could face various material adverse consequences, including a material increase in compensatory fees we are charged by the GSEs (based on performance against benchmarks for various servicing metrics), competitive disadvantage, the inability to win new subservicing business and the termination (potentially for cause and without payment to us of any termination fee or other compensation) of our servicing rights or subservicing contracts.

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When we acquire the rights to service mortgages, particularly GSE mortgages, we have in the past, and may in the future, incur liability that is the result of errors or violations of law attributable to prior originators and servicers of such mortgages to the extent applicable law or our contractual arrangements expose us to such liability, which is normally the case absent additional contractual arrangements that are negotiated on a transaction by transaction basis. In certain circumstances, we have obtained contractual arrangements meant to minimize our exposure to such liabilities. Such contractual arrangements can take the form of, for example, liability bifurcation agreements with the GSEs pursuant to which such liabilities are not assumed by us, or an indemnification pursuant to which we are indemnified for such liabilities by the former owners of the MSR. There is no assurance that any such arrangements, even if obtainable, enforceable and collectible, will be sufficient in amount, scope or duration to fully offset the possible liabilities arising from a particular acquisition. Furthermore, there is no assurance that any such indemnification will cover losses resulting from claims that may be asserted against us by a GSE or others with respect to errors or violations that occurred prior to a particular acquisition by us.
A downgrade in our servicer ratings could have an adverse effect on our business, financial condition or results of operations.
S&P and Moody's rate us as a residential loan servicer. Certain of these ratings have been downgraded in the past, and any of these ratings may be downgraded in the future. Any such downgrade could adversely affect our business, financial condition or results of operations, as well as our ability to finance servicing advances and maintain our status as an approved servicer by Fannie Mae, Freddie Mac and Ginnie Mae. In particular, the Servicing Guide: Fannie Mae Single Family, published February 15, 2017, and the Selling Guide: Fannie Mae Single Family, published January 31, 2017, contain certain requirements with respect to an approved Fannie Mae servicer’s maintenance of minimum servicer ratings. Our failure to maintain favorable or specified ratings may cause our termination as servicer and further impair our ability to consummate future servicing transactions, which could have an adverse effect on our business, financial condition or results of operations. Refer to the Ratings section of Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information relating to our servicer ratings.
An increase in delinquency rates could have a material adverse effect on our business, financial position, results of operations and cash flows.
Delinquency rates can have a significant impact on our revenues and expenses and the value of our MSR. For example, an increase in delinquencies may result in lower revenues because, for some GSE and other business, we may only collect servicing fees for performing loans. Additionally, while increased delinquencies may generate higher ancillary fees, including late fees, these fees are not likely to be recoverable in the event that the related loan is liquidated and are generally only recognized as revenue upon collection. In addition, an increase in delinquencies lowers the interest income we receive on cash held in collection and other accounts. Delinquencies can also increase our liability for servicing advances, as we may be required to advance certain payments early in a delinquency, which could impact our liquidity. An increase in delinquencies has in the past resulted, and will result in a higher cost to service due to the increased time and effort required to collect payments from delinquent borrowers. Further, increases in delinquencies could result in lower servicer ratings, the termination of our subservicing contracts or the transfer of servicing away from us, which in turn could have a material adverse effect on our business, prospects, results of operations, liquidity and financial condition.
Fannie Mae, with respect to Fannie Mae loans that we service, and Freddie Mac, with respect to Freddie Mac loans that we service, may terminate Ditech Financial as servicer of such loans, with or without cause, and in connection therewith transfer the related servicing rights to a third party.
Under the terms of Ditech Financial's master servicing agreements (including any amendments and addendums thereto) with each of Fannie Mae and Freddie Mac, Fannie Mae, with respect to Fannie Mae loans that Ditech Financial services, and Freddie Mac, with respect to Freddie Mac loans that Ditech Financial services, may terminate us as servicer of such loans, with or without cause, transfer the servicing rights relating to such loans to a third party and, under certain circumstances, cause such a transfer to occur without payment to us of any consideration in connection therewith. Some provisions of these agreements are open to subjective interpretation or depend upon the judgment or determination of Fannie Mae or Freddie Mac, so we may not be able to determine in advance whether these are grounds for terminating us as servicer or transferring servicing rights away from us.

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For example, if Freddie Mac terminated us as a servicer without cause, we would have a right to a specified termination fee; however, if Freddie Mac terminated us as servicer for cause, we would not have any right to a termination fee or other consideration in connection with such termination and the related transfer of servicing rights to another servicer. Events that could allow Freddie Mac to terminate Ditech Financial for cause as servicer of some or all of the Freddie Mac loans we service include, without limitation, the impending or actual insolvency of Ditech Financial or an affiliate thereof; the filing of a voluntary petition by Ditech Financial or an affiliate thereof under federal bankruptcy or state insolvency laws; Ditech Financial’s failure to maintain qualified staff and/or adequate facilities to assure the adequacy of servicing of Freddie Mac loans; any weakness or notable change in the financial or organizational status or management of Ditech Financial or an affiliate thereof, including any adverse change in profitability or liquidity that, in the opinion of Freddie Mac, could adversely affect Freddie Mac; Ditech Financial’s failure to meet any eligibility requirement, including failure to maintain acceptable net worth; Ditech Financial having delinquency rates or REO rates higher than certain averages; and Freddie Mac’s determination that Ditech Financial’s overall performance is unacceptable (taking into account, among other things, scorecard results that rate absolute and comparative performance with respect to various measures such as loss mitigation, workout effectiveness, default timeline management, data integrity, investor reporting and alternatives to foreclosure).
Similarly, Fannie Mae has the ability to terminate Ditech Financial as servicer for some or all of the Fannie Mae loans it services, with or without cause. In connection with any such termination by Fannie Mae without cause, we would have a right to a specified termination fee; however, in connection with any such termination by Fannie Mae for cause, we would not have any right to a termination fee or other consideration in connection with such termination and the related transfer of servicing rights to another servicer. Events that could allow Fannie Mae to terminate us for cause as servicer of some or all of the Fannie Mae loans we service include, without limitation, a breach of the mortgage selling and servicing contract by Ditech Financial; unacceptable performance as determined by Fannie Mae with regard to Ditech Financial’s compliance with, among other things, servicer performance measurements and any written performance improvement plan; Ditech Financial’s insolvency, the adjudication of Ditech Financial as bankrupt or the execution by Ditech Financial of a general assignment for the benefit of its creditors; any change in Ditech Financial’s financial status that, in Fannie Mae’s opinion, materially and adversely affects Ditech Financial’s ability to provide satisfactory servicing of mortgages; the sale of a majority interest in Ditech Financial without Fannie Mae’s prior written consent; a change in Ditech Financial’s financial or business condition, or in its operations, which, in Fannie Mae’s sole judgment, is material and adverse; Ditech Financial has certain delinquency rates or REO rates more than 50% higher than the average of such rates for certain specified Fannie Mae portfolios; and any judgment, order, finding or regulatory action to which Ditech Financial is subject that would materially and adversely affect Ditech Financial’s ability to comply with the terms or conditions of its Fannie Mae contract.
If Fannie Mae or Freddie Mac were to terminate us as an approved servicer, or transfer or otherwise terminate a material portion of our servicing rights, this could materially and adversely affect our business, financial condition, liquidity and results of operations.
Ginnie Mae, with respect to GMBS for which we are the issuer and the servicer of the underlying mortgage loans, may terminate Ditech Financial as the issuer of such mortgage-backed securities and as servicer of such loans, with cause, and in connection therewith transfer the related servicing rights to a third party.
Under the terms of the Ginnie MBS Guide and the required Ginnie Mae Guaranty Agreement that is executed in connection with each GMBS we issue (together with related documents, the Ginnie Mae Guaranty Agreement), Ginnie Mae may terminate Ditech Financial for cause as the issuer of GMBS and as servicer of the underlying mortgage loans, and transfer all of our rights as issuer and servicer, including the servicing rights relating to the mortgage loans underlying the GMBS issued by us, to a third party without payment to us of any consideration in connection therewith. Events that could allow Ginnie Mae to terminate us as issuer and servicer include, without limitation, the impending or actual insolvency of Ditech Financial; any withdrawal or suspension of Ditech Financial’s status as an approved mortgagee by FHA or an approved seller/servicer by Fannie Mae or Freddie Mac; or any change to Ditech Financial’s business condition that materially and adversely affects its ability to carry out its obligations as an approved Ginnie Mae issuer. A default by Ditech Financial’s affiliate, RMS, under RMS’s Ginnie Mae Guaranty Agreements may also result in an event of default under Ditech Financial’s Ginnie Mae Guaranty Agreement under a cross-default agreement among Ginnie Mae, Ditech Financial and RMS, which could result in our termination as issuer and servicer of all GMBS and HMBS. If we were to have our Ginnie Mae issuer and servicing rights transferred or otherwise terminated, this could materially and adversely affect our business, financial condition, liquidity and results of operations.

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Our subservicing clients can typically terminate our subservicing contracts with or without cause.
As of December 31, 2018, we were the subservicer for 0.8 million accounts with an unpaid principal loan balance of $111.7 billion. These subserviced accounts represented approximately 60% of our total servicing portfolio based on unpaid principal loan balance at that date. Our largest subservicing customer, NRM, represented approximately 73% of our total subservicing portfolio based on unpaid principal loan balance on December 31, 2018. Our next largest subservicing customer, Fannie Mae, represented approximately 16% of our total subservicing portfolio based on unpaid principal loan balance on December 31, 2018. Under our subservicing contracts, the primary servicers for whom we conduct subservicing activities have the right to terminate such contracts, with or without cause, with generally 60 to 90 days’ notice to us. In some instances, our subservicing contracts require payment to us of deboarding, deconversion or other fees in connection with any termination thereof, while in other instances there is little to no consideration owed to us in connection with the termination of a subservicing contract.
On January 17, 2019, we received a notice from NRM initiating the process of termination under the NRM Subservicing Agreement. Any termination of the Subservicing Agreement would not be effective until a servicing transfer has been completed in accordance with applicable requirements. We are reviewing the grounds for termination in consultation with our stakeholders and are considering all of our options with respect thereto including legal rights and remedies. We are proceeding with our strategic alternative efforts assuming there is not an ongoing subservicing relationship with NRM. We expect that it will take several months to complete the transfer of servicing on loans we subservice for NRM under the NRM Subservicing Agreement. In connection with the initial servicing transfers completed with respect to the deboarding of the NRM subservicing portfolio, we have experienced certain operational burdens and stresses. While we have taken remedial measures in an effort to ensure we do not experience such operational burdens or stresses in connection with any future transfer of servicing on a material number of loans from us to a third party, including any future transfer of servicing on the remaining loans we subservice for NRM under the NRM Subservicing Agreement, there can be no assurance that such remedial measures will be successful.
Additionally, from time to time, clients for whom we conduct subservicing activities could sell the mortgage servicing rights relating to some or all of the loans we subservice for such client, which could lead to a termination of our subservicing engagement with respect to such mortgage servicing rights and a decrease in our subservicing revenue.
If subservicing agreements relating to a material portion of our servicing portfolio were to be terminated, this would materially and adversely affect our business, financial condition, liquidity and results of operations. We expect to continue to seek additional subservicing opportunities, which could exacerbate these risks.
We are required to make servicing advances that can be subject to delays in recovery or may not be recoverable in certain circumstances.
During any period in which a mortgage loan borrower is not making payments, we are required under some of our mortgage servicing and subservicing agreements to advance our own funds to meet contractual principal and interest remittance requirements for credit and/or MSR owners. In addition, we must pay property taxes, insurance premiums, legal expenses and make other protective advances on behalf of the borrower. We also advance funds to maintain, repair and market real estate properties on behalf of credit owners. Our obligation to make such advances may increase in connection with any future acquisitions of servicing portfolios and any additional subservicing contracts. In certain situations, our contractual obligations may require us to make certain advances for which we may not be reimbursed.
Servicing advances are generally recovered when a mortgage loan delinquency is resolved, the loan is repaid or refinanced, a liquidation occurs, or through the agency claim process. In addition, recovery of advances we make as subservicer are subject to our compliance with procedures and limitations set forth in the applicable subservicing agreement, and we typically depend upon the MSR owner that has engaged us as subservicer to reimburse us for such advances. Regulatory or other actions that lengthen the foreclosure process may increase the amount of servicing advances we are required to make, lengthen the time it takes for us to be reimbursed for such advances and increase the costs incurred by us in connection with such advances. We have been, and we may in the future be, unable to collect reimbursement for advances because we have failed to meet the applicable requirements for reimbursement, including making timely requests for such reimbursement, providing documentation to support the advance, and seeking required approval before making an advance. We have experienced delays in the collection of reimbursements for advances in the past. Additional or significant delays in our ability to collect advances could adversely affect our liquidity, and our inability to be reimbursed for advances would adversely affect our business, financial condition or results of operations.

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When we purchase MSR from prior servicers, we may also acquire outstanding servicer and protective advances related to those rights. In our agreements under which we have acquired MSR, the prior servicer generally represents that the related advances are eligible for reimbursement by the credit owner and indemnifies us for any breach of this representation. However, the prior servicer’s indemnification obligation with respect to advances generally expires at a specified date, and in order to claim indemnification we may have to satisfy other conditions precedent. Our ability to file indemnity claims with the prior servicer before the expiration date and to meet other conditions precedent may be affected by factors outside our control. For example, if we submit claims for advance reimbursement from the credit owner and such credit owner fails to resolve such claims before the expiration date elapses, we may be unable to seek indemnity for such claims. When we submit a claim for reimbursement from the prior servicer, that servicer may dispute whether and to what extent the indemnity applies, and resolving such disputes or otherwise establishing the validity of our claim could be time consuming and costly, and delays in recovering advances could have a material adverse effect on our liquidity. As a result of the foregoing, despite the indemnification arrangements, we may experience losses relating to advances that we have acquired from prior servicers.
We maintain an allowance for uncollectible advances based on our analysis of the underlying loans, their historical loss experience, and recoverability of the advances pursuant to the terms of the underlying servicing or subservicing agreements. If for any reason we are required to increase our allowance in any period, this could have a material adverse effect on our financial condition and results of operation, and the failure to collect advances could materially adversely affect our cash flows.
Our failure to maintain or grow our servicing business could have a material adverse effect on our business, financial position, results of operations and cash flows.
Our servicing portfolio is subject to runoff, meaning that mortgage loans serviced by us may be repaid at maturity, prepaid prior to maturity, or liquidated through foreclosure, deed-in-lieu of foreclosure or other liquidation process. Our subservicing clients, such as NRM, may also terminate us as a subservicer, which reduces the size of our servicing portfolio. While we seek to replenish our servicing portfolio through the addition of subservicing contracts, through our own MSR originations and from acquisitions of MSR from third parties, we cannot assure you that we will continue to seek to replenish our servicing portfolio utilizing each of these methods or that we will be successful in maintaining the size of our servicing portfolio.
Our ability to maintain or grow our servicing business may depend, in part, on our ability to acquire servicing rights from, and/or enter into subservicing contracts with, third parties. This depends on many factors, including the willingness and ability of the current owners of servicing rights to transfer such servicing rights or enter into subservicing agreements with respect to such servicing rights, and in most cases GSEs and/or government authorities granting consent for such servicing transfers. In considering whether to sell servicing rights to us or to engage us as a subservicer (or to approve such matters), commercial counterparties, GSEs and government authorities may consider various factors, including our financial condition, our ability to meet contractual servicing obligations, the performance of portfolios we service relative to absolute standards or to the performance of portfolios serviced by others, our record of compliance with legal and regulatory requirements, and our reputation.
There is significant competition in the non-bank servicing sector for servicing portfolios made available for purchase or subservicing. This and other factors could increase the price we pay for such portfolios or reduce subservicing margins, which could have a material adverse effect on our business, financial condition and results of operations. In determining the purchase price, we are willing to pay for servicing rights and the fee for which we are willing to accept subservicing engagements, management makes certain assumptions regarding various factors, many of which are beyond our control, including, among other things:
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origination vintage and geography;
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loan-to-value ratio;
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stratification of FICO scores;
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the rates of prepayment and repayment within the underlying pools of mortgage loans;
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projected rates of delinquencies, defaults and liquidations;
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future interest rates;
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our cost to service the loans;
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incentive and ancillary fee income; and
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amounts of future servicing advances.

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The methodology we use to determine the purchase price we are willing to pay for servicing rights and the fee for which we are willing to accept subservicing engagements is complex and management’s assumptions about matters affecting pricing may prove to be inaccurate. As a result, we may not be successful in completing acquisitions or subservicing arrangements on favorable terms or at all or we may overpay or not realize anticipated benefits of acquisitions or subservicing arrangements in our business development pipeline.
Changes in prepayment rates on loans we service due to changes in interest rates, government mortgage programs or other factors could result in reduced earnings or losses.
Changes in prepayment rates on loans we service could result in reduced earnings or losses. Many factors beyond our control affect prepayment rates, including changes in interest rates and government mortgage programs. Many borrowers can prepay their mortgage loans through refinancings when mortgage rates decrease. Any increase in prepayments could reduce our servicing portfolio and have a significant impact on our net servicing revenue and fees. For example:
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If prepayment speeds increase, our net servicing revenue and fees will decline more rapidly than anticipated because of the greater than expected decrease in the number of loans or unpaid principal balance on which those fees are based.
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Amortization of servicing rights carried at amortized cost is a significant reduction to net servicing revenue and fees. Since we amortize servicing rights in proportion to total expected income over the life of a portfolio, an increase in prepayment speeds leads to increased amortization as we revise downward our estimate of total expected income. Faster prepayment speeds will also result in higher compensating interest expense.
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The change in fair value of servicing rights carried at fair value can have a significant impact on net servicing revenue and fees. We base the price we pay for servicing rights and assess the value of our servicing rights on, among other things, our projection of servicing-related cash flows from the related pool of mortgage loans. Our expectation of prepayment speeds is a significant assumption underlying those cash flow projections. If prepayment speeds increase more than expected, we may be required to write down the value of our servicing rights, which would have a negative impact on our net servicing revenue and fees.
We cannot accurately predict the amount of incentive payments and ancillary fees we will earn on our servicing portfolio.
We earn incentive payments and ancillary fees in connection with servicing our residential loan portfolio. The amount of such payments and fees, and the timing of our receipt of such payments and fees, is dependent upon many factors, some of which are not in our control. For example, some of our servicing contracts contain periodic performance payments that are determined by formulas and/or are tied to the performance of our competitors. We also earn certain ancillary fees, such as, for example, late fees, the amount of which can vary significantly from period to period, in most instances due to circumstances over which we have no control. In certain circumstances, incentive payments and ancillary fees can be, and have been, modified or eliminated by a credit owner with little or no notice to us. If certain of our assumptions relating to the amount of incentive payments or ancillary fees we expect to earn and collect in a given period prove to be materially inaccurate, due to the reduction or elimination of any of these fees or otherwise, or if regulators challenge the legitimacy of any of these fees, this could adversely affect our business, financial condition, liquidity and results of operations.
Lender-placed insurance is under increased scrutiny by regulators and, as a result of the sale of substantially all of our insurance agency business, income from sales commissions for lender-placed insurance has been eliminated; however, we remain subject to liability for the period of time during which we received such commissions.
Under certain circumstances, when borrowers fail to maintain hazard insurance on their residences, the owner or servicer of the loan may procure such insurance to protect the loan owner's collateral and pass the premium cost for such insurance on to the borrower. Prior to February 1, 2017, the date we sold our principal insurance agency and substantially all of our insurance agency business, this agency acted as an agent for this purpose, placing the insurance coverage with a third-party carrier for which this agency, in certain circumstances, earned a commission.
Our insurance revenues were historically aligned with the size of our servicing portfolio. However, due to Fannie Mae and Freddie Mac restrictions that became effective on June 1, 2014, as well as other regulatory and litigation developments with respect to lender-placed insurance, our lender-placed insurance commissions began to decrease materially beginning in 2014. On February 1, 2017, we completed the sale of our principal insurance agency and substantially all of our insurance agency business. As a result of this sale, we no longer receive any insurance commissions on lender-placed insurance policies. Commencing February 1, 2017, another insurance agency owned by us (and retained by us following the aforementioned sale) began to provide insurance marketing services to third-party insurance agencies and carriers with respect to voluntary insurance policies, including hazard insurance. This insurance agency receives premium-based commissions for its insurance marketing services.

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Notwithstanding the fact that we no longer receive sales commissions on lender-placed insurance, we remain subject to liability for the period of time during which we received such commissions. Under the agreements we entered into in connection with the sale of our principal insurance agency and substantially all of our insurance agency business, we undertook certain ongoing obligations related to the lender-placed and voluntary hazard business, including obligations relating to the provision of services, the continued conduct of our servicing business and certain referral activities. If we fail to perform these obligations, we could have potentially significant liabilities under these agreements.
We may not be able to grow our loan originations business, which could adversely affect our business, financial condition and results of operations.
We have been seeking to capture market share and increase revenue in our originations business, driven primarily from increased outbound contact efforts and improved retention of our current servicing customers. We have faced and will continue to face many challenges in this regard. For example, during the next several years we expect the overall size of the national mortgage market, as well as our own MSR portfolio, will shrink. Additional risks will include the end of key government refinancing programs (such as HARP) and potentially rising interest rates. To achieve our goals, we will need to reorient our originations group to have a greater focus on non-HARP refinances as well as purchase money mortgages. Historically we have focused on government refinance programs and have originated relatively few purchase money mortgages, except through our correspondent channel. We are still developing our marketing plans, including digital marketing, to build a more targeted retention effort for both refinance and purchase money business. In addition, we will need to attract new customers who are not customers of our servicing operations, and to do that we will need to develop new marketing approaches and outbound calling and contact methods and may need to introduce new technologies, such as mobile-optimized web presence and the ability to go further into the mortgage process online. We will also need to train significant numbers of loan officers and other employees to support these newer efforts. We expect to maintain or expand our correspondent channel, and will continue to face intense competition and margin pressure in that area. Many of the elements of the origination strategy require us to do things we have not done in the past, and our efforts may not be successful or may be more expensive and time consuming than we expect. Our implementation efforts will also be dependent upon third parties, such as technology and marketing vendors. If we are unsuccessful in expanding our originations business, this could have a material adverse effect on our business, financial position, results of operations and cash flows.
We may be subject to liability for potential violations of predatory lending, antidiscrimination and/or other laws applicable to our mortgage loan originations and servicing businesses, which could adversely impact our results of operations, financial condition and business.
Various federal, state and local laws are designed to discourage predatory lending, discrimination based on certain characteristics and other practices. For example, loans that meet HOEPA’s high-cost coverage tests are subject to special disclosure requirements and restrictions on loan terms. Some states have enacted, or may enact, similar laws or regulations, which in some cases impose restrictions and requirements greater than those in HOEPA. Failure of mortgage loan originators such as Ditech Financial to comply with these laws could subject such originators, including us, to monetary penalties and could result in borrowers rescinding the affected loans. Lawsuits have been brought in various states making claims against originators, servicers, assignees and purchasers of “high-cost” loans for violations of state law. Named defendants in these cases have included numerous participants within the mortgage market. If our mortgage loans are found to have been originated in violation of such laws, we could incur losses, which could materially and adversely impact our results of operations, financial condition and business.
Antidiscrimination statutes, such as the Fair Housing Act and the ECOA, prohibit creditors from discriminating against loan applicants and borrowers based on certain characteristics, such as race, religion and national origin. Various federal regulatory agencies and departments, including the DOJ and CFPB, take the position that these laws apply not only to intentional discrimination, but also to neutral practices that have a “disparate impact” on protected classes. These regulatory agencies, as well as consumer advocacy groups and plaintiffs’ attorneys, are becoming more aggressive in asserting claims that the practices of lenders and loan servicers result in a “disparate impact” on protected classes. While the U.S. Supreme Court has held that the “disparate impact” theory applies to cases brought under the Fair Housing Act, the U.S. Supreme Court was not presented with, and did not decide, the question of whether the theory applies under the ECOA. Thus, it remains unclear whether and to what extent the “disparate impact” theory applies under the ECOA and, as a result, we and the residential mortgage industry must attempt to comply with shifting and potentially conflicting interpretations as to such application, and we could be exposed to potential liability for any failure to comply.

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The expiration of, or changes to, government mortgage modification, refinancing or other programs could adversely affect future revenues.
Under HAMP, HARP and similar government programs, a participating servicer may be entitled to receive financial incentives in connection with any mortgage refinancing or modification plans it enters into with eligible borrowers and subsequent success fees to the extent that a borrower remains current in any agreed upon loan modification. We participate in and have dedicated numerous resources to HAMP and HARP, benefiting from fees and from significant loan originations volumes. The HAMP application deadline was December 31, 2016 and the HARP program expired on December 31, 2018. As a result of the termination or expiration of these programs, our refinancing and modification volumes, revenues and margins are expected to decline in 2019. Further changes in the legislation or regulations relating to these or other loan modification programs, including changes to borrower qualification requirements, could have a material adverse effect on our business, financial condition and results of operations. Termination or expiration of the HAMP or HARP programs could have a significant adverse effect on our originations volumes, revenues and margins.
We depend on the accuracy and completeness of information about borrowers and counterparties and any misrepresented information could adversely affect our business, financial condition and results of operations.
In deciding whether to extend credit to borrowers or to enter into other transactions with counterparties, we rely on information furnished to us by or on behalf of borrowers and counterparties, including income and credit history, financial statements and other financial information. We also rely on representations of borrowers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. If any of this information is intentionally or negligently misrepresented and such misrepresentation is not detected prior to loan funding, which has occurred from time to time, the value of the loan has been, and may be, significantly lower than expected. Whether a misrepresentation is made by the loan applicant, the mortgage broker, correspondent lender, another third party or one of our employees, we generally bear the risk of loss associated with the misrepresentation. We, however, may not have detected or may not detect all misrepresented information in our loan originations or from our business clients. Therefore, any such misrepresented information could adversely affect our business, financial condition and results of operations.
Within our correspondent channel, the correspondent lenders with whom we do business underwrite and fund mortgage loans, then sell the closed mortgage loans to us. Within the wholesale channel we originate mortgage loans for borrowers referred to us by mortgage brokers. These loans are underwritten and funded by us and generally close in our name, and we bear the underwriting risk with respect to such loans from a regulatory perspective, but we typically rely upon the mortgage brokers with whom we do business to interact with the borrowers in order to gather the information necessary for us to underwrite and fund such loans. Our correspondent and wholesale counterparties are generally obligated to repurchase any loans we originated through such counterparties for which a misrepresentation has been made, and/or agree to indemnify us for certain losses we may incur in connection with any such misrepresentation. However, such counterparties may not have sufficient resources to repurchase loans from us or make indemnification payments to us, and any failure by such counterparties to satisfy any applicable repurchase or indemnification requirements could adversely affect our business, financial condition and results of operations.
We may be required to make indemnification payments relating to, and/or repurchase, mortgage loans we sold or securitized, or will sell or securitize, if our representations and warranties relating to these mortgage loans are inaccurate at the time the loan is sold or securitized, or under other circumstances.
To finance our future operations, we generally sell or securitize the loans that we originate or purchase through our correspondent and other channels. Our contracts relating to the sale or securitization of such loans contain provisions that require us, under certain circumstances, to make indemnification payments relating to, and/or repurchase, such loans. Our indemnification and repurchase obligations vary contract by contract, but such contracts typically require us to either make an indemnification payment and/or repurchase a loan if, among other things:
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our representations and warranties relating to the loan are materially inaccurate, including but not limited to representations concerning loan underwriting, regulatory compliance or property appraisals;
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we fail to secure adequate mortgage insurance within a certain period after closing; or
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the borrower fails to make certain initial loan payments due to the purchaser.

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We believe that our maximum repurchase exposure under such contracts is the origination UPB of all mortgage loans we have sold or securitized. At December 31, 2018, our maximum exposure to repurchases due to potential breaches of representations and warranties was $67.8 billion and was based on the original UPB of loans sold from the beginning of 2013 through the year ended December 31, 2018, adjusted for voluntary payments made by the borrower on loans for which we perform servicing. To recognize the potential mortgage loan repurchase or indemnification losses, we have recorded a reserve of $12.7 million at December 31, 2018. In 2018, we incurred losses of $2.3 million related to such indemnification and repurchase activity. If our mortgage loan originations increase in the future, our indemnification and repurchase requests may also increase. During periods of elevated mortgage payment delinquency rates and declining housing prices, originators have experienced, and may in the future continue to experience, an increase in loan repurchase and indemnification claims due to actual or alleged breaches of representations and warranties in connection with the sale or servicing of mortgage loans. The estimate of our loan repurchase and indemnification liability is subjective and based upon our projections of the future incidence of loan repurchase and indemnification claims, as well as loss severities. Losses incurred in connection with loan repurchase and indemnification claims may be in excess of our estimates (including our estimate of liabilities we will assume in an acquisition and factor into our purchase price). Our reserve for indemnification and repurchase obligations may increase in the future. If we are required to make indemnification payments with respect to, and/or repurchase, mortgage loans that we originate and sell or securitize in amounts that result in losses that exceed our reserve, this could adversely affect our business, financial condition and results of operations.
From time to time, the FHFA proposes revisions to the GSEs' standard representation and warranty framework, under which the GSEs require lenders to repurchase mortgage loans under certain circumstances. For example, in January 2013, the FHFA sought to relieve lenders of obligations to repurchase loans that had clean payment histories for 36 months. In May 2014, the FHFA and the GSEs announced additional clarifications. We cannot predict how recent or future changes to the GSEs' representation and warranty framework will impact our business, liquidity, financial condition and results of operations.
We service and securitize reverse loans and, until early 2017, originated reverse loans, which subjects us to risks and could have a material adverse effect on our business, liquidity, financial condition and results of operations.
The principal reverse loan product we originated and currently service is the HECM, an FHA-insured loan that must comply with FHA and other regulatory requirements. The reverse loan business is subject to substantial risks, including market, credit, interest rate, liquidity, operational, reputational and legal risks. A reverse loan (e.g., a HECM) is a loan available to seniors aged 62 or older that allows homeowners to borrow money against the value of their home. We depend on our ability to securitize reverse loans, subsequent draws, mortgage insurance premiums and servicing fees, and our liquidity and profitability would be adversely affected if our ability to access the securitization market were to be limited or if the margins we earn in connection with such securitizations were to be reduced. Defaults on reverse loans leading to foreclosures may occur if borrowers fail to meet maintenance obligations, fail to pay taxes or home insurance premiums, fail to meet occupancy requirements or the last remaining borrower passes away. An increase in foreclosure rates may increase our cost of servicing. We may become subject to negative publicity in the event that defaults on reverse mortgages lead to foreclosures or evictions of homeowners.
As a reverse loan servicer, we are responsible for funding any credit drawdowns by borrowers in a timely manner, remitting to credit owners interest accrued, paying for interest shortfalls, and funding advances such as taxes and home insurance premiums. During any period in which a borrower is not making required real estate tax and property insurance premium payments, we may be required under servicing agreements to advance our own funds to pay property taxes, insurance premiums, legal expenses and other protective advances. We also may be required to advance funds to maintain, repair and market real estate properties. In certain situations, our contractual obligations may require us to make certain advances for which we may not be reimbursed. In addition, in the event a reverse loan serviced by us defaults or becomes delinquent, the repayment to us of the advance may be delayed until the reverse loan is repaid or refinanced or liquidation occurs. A delay in our ability to collect advances may adversely affect our liquidity, and our inability to be reimbursed for advances could adversely affect our business, financial condition or results of operations. Advances are typically recovered upon weekly or monthly reimbursement or from securitization in the market. We could receive requests for advances in excess of amounts we are able to fund, which could materially and adversely affect our liquidity. All of the above factors could have a material adverse effect on our business, liquidity, financial condition and results of operations.
Our reverse mortgage business has been unprofitable and we expect losses to continue in this segment.
Our reverse mortgage business generated significant losses before income tax in each of the periods in 2017 and 2018. We expect to continue to generate losses in that segment. We service a substantial portfolio of reverse loans and expect to incur continued losses on that servicing activity. We expect these losses will be driven by the costs of servicing defaulted reverse loans that are a part of our securitized portfolio, including appraisal-based claims, shortfalls between the debenture rate we receive on defaulted loans and the note rate we must continue to pay, property preservation expenses, curtailment costs and other servicing costs. To mitigate the expected losses in the reverse segment, in 2017 we ceased originating new reverse mortgages, having concluded that the cost of expanding the originations business was no longer justified based on probabilities of successfully growing that business to scale. We will continue to fund undrawn amounts available to borrowers of reverse loans we have made. 

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As part of the Strategic Review, we have been evaluating options for our reverse mortgage business, including the possibility of selling some or all of its assets or pursuing alternative solutions for the business in collaboration with other parties. We cannot be certain whether or on what terms we will be able to consummate any transaction involving our reverse mortgage business or whether any such transaction would reduce our expected reverse mortgage losses. As of December 31, 2018, the net carrying value of our Reverse Mortgage segment securitized loan book was a net liability of approximately $60.9 million.
If our estimated liability with respect to interest curtailment obligations arising out of servicing errors is inaccurate, or additional errors are found, and we are required to record additional material amounts, there may be an adverse impact on our results of operations or financial condition.
Subsequent to the completion of our acquisition of RMS, we discovered a failure by RMS to record certain liabilities to HUD, FHA and/or credit owners related to servicing errors by RMS. FHA regulations provide that servicers meet a series of event-specific timeframes during the default, foreclosure, conveyance, and mortgage insurance claim cycles. Failure to timely meet any processing deadline may stop the accrual of debenture interest otherwise payable in satisfaction of a claim under the FHA mortgage insurance contract and the servicer may be responsible to HUD for debenture interest that is not self-curtailed by the servicer, or for making the credit owner whole for any interest curtailed by FHA due to not meeting the required event-specific timeframes.
We had a curtailment obligation liability of $68.7 million at December 31, 2018 related to the foregoing, which reflects management’s best estimate of the probable incurred claim. The curtailment liability is recorded in payables and accrued liabilities on the consolidated balance sheets. We assumed $46.0 million of this liability through the acquisition of RMS, which resulted in a corresponding offset to goodwill and deferred tax assets. During the year ended December 31, 2018, we recorded a provision (benefit), net of expected third-party recoveries, related to the curtailment liability of $(7.0) million. We have potential estimated maximum financial statement exposure for an additional $61.8 million related to similar claims, which are reasonably possible, but which we believe are primarily the responsibility of third parties (e.g., prior servicers and/or credit owners). Our potential exposure to a substantial portion of this additional risk relates to the possibility that such third parties may claim that we are responsible for the servicing liability or that we exacerbated an existing failure by the third party. The actual amount, if any, of this exposure is difficult to estimate and requires significant management judgment as curtailment obligations continue to be an industry issue. While we are pursuing, and will continue to pursue, mitigation efforts to reduce both the direct exposure and the reasonably possible third-party-related exposure, we cannot assure you that any such efforts will be successful.
We had a curtailment obligation liability of $31.1 million at December 31, 2018 related to Ditech Financial's mortgage loan servicing, which we assumed through an acquisition of servicing rights. We are obligated to service the related mortgage loans in accordance with Ginnie Mae requirements, including repayment to credit owners for advances and interest curtailment. The curtailment liability is recorded in payables and accrued liabilities on the consolidated balance sheets.
We cannot assure you that we will not discover additional facts resulting in changes to our estimated liability. To the extent we are required to record additional amounts as liabilities, there may be an adverse impact on our results of operations or financial condition.
See Item 3. Legal Proceedings and Note 29 to our Consolidated Financial Statements for additional information.
We may be unable to fund our HECM repurchase obligations, and/or face delays in our ability to make such repurchases, or we may be unable to convey repurchased HECM loans to the FHA, which could have a material adverse effect on our business, liquidity, financial condition and results of operations.
We issue HMBS collateralized by HECM loans we originated and HECM Tails. Under the Ginnie Mae HMBS program, we are required to repurchase a HECM loan from an HMBS pool we have issued when the outstanding principal balance of the HECM loan is equal to or greater than 98% of the maximum claim amount. There can be no assurance that we will have access to the funding necessary to satisfy our repurchase obligations, particularly if our actual repurchase obligations materially exceed our estimated repurchase obligations. See the Liquidity and Capital Resources section of Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.

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When we repurchase a HECM loan that is not in default from an HMBS pool, we must fund such repurchase until we convey the repurchased HECM loan to and receive reimbursement from the FHA, which generally occurs within 90 days of repurchase (assuming the repurchased loan continues to perform during such time and there are no other factors that cause a delay in conveying the repurchased HECM loan to the FHA). If a repurchased HECM loan goes into default (e.g., if the borrower has failed to pay real estate taxes or property insurance premiums) following our repurchase of such loan from an HMBS pool but prior to our conveyance of such loan to the FHA, or is in default at the time we repurchase such loan from an HMBS pool, the FHA will not accept such loan and we must continue to service such loan until the default is cured or we otherwise satisfy FHA requirements relating to foreclosure of the loan and sell the underlying property. Thus, we are exposed to financing risk when we must repurchase a HECM loan from an HMBS pool, which risk is exacerbated if such loan is in default at the time of repurchase or goes into default prior to our conveyance of such loan to the FHA. In addition, we may be exposed to risk of loss of principal when a HECM loan goes into default, which risk is exacerbated for defaulted loans we seek to foreclose upon. Foreclosure of a HECM loan can be an expensive and lengthy process that could have a substantial negative effect on our anticipated return on the foreclosed HECM loan, especially in circumstances where we make an appraisal-based claim to the FHA with respect to a HECM loan because we have not been able to liquidate the underlying property for an acceptable price within the timeframe established by the FHA. The number of appraisal-based claims we make to the FHA is impacted by a variety of factors, including real estate market conditions and the geographic composition of our HECM loan portfolio. If we make a significant number of appraisal-based claims to the FHA this could have a material adverse effect on our business, liquidity, financial condition and results of operations.
During 2018, our HECM repurchases amounted to approximately $1.8 billion, with a balance of approximately $1.1 billion at the end of 2018, an increase from approximately $808.5 million at the end of 2017. We expect our repurchase obligations to increase in 2019, but the amount of repurchase obligations we will incur in any specific period in the future is uncertain, as it will be affected by, among other things, the rate at which borrowers draw down on amounts available under their HECM loans. In addition, the balance of funds we must commit to repurchases (and the related cost of such funding) will depend in part on how long we must hold and service such loans after repurchasing them, and recent regulatory changes and practices have adversely affected the amount of time we must hold and service such loans following repurchase. As our funding needs increase for repurchased HECMs, we will seek to enter into new, or increase the capacity of existing, lending facilities to provide a portion of such funds; however, we cannot be certain such new facilities will be available or that our existing facilities will be extended or increased.
When we securitize HECM loans into HMBS, we are required to covenant and warrant to Ginnie Mae, among other things, that the HECM loans related to each participation included in the HMBS are eligible under the requirements of the National Housing Act and the Ginnie Mae Mortgage-Backed Securities Guide, and that we will take all actions necessary to continue to ensure the HECM loans continued eligibility. The Ginnie Mae HMBS program requires that we repurchase the participation related to any HECM loan that does not meet the requirements of the Ginnie Mae Mortgage-Backed Securities Guide. Significant repurchase requirements could materially adversely affect our business, financial condition, liquidity and results of operations.
If we are unable to fund our HECM repurchase obligations, for example because new or increased lending facilities are not available or in the event that our repurchase obligations in any period significantly exceed our expectations, face delays in our ability to make such repurchases, or are unable to convey repurchased HECM loans to the FHA, our business, liquidity, financial condition and results of operations could be materially adversely affected.
We may suffer operating losses as a result of not being fully reimbursed for certain costs and interest expenses on our HECM loans, or if we fail to originate or service such loans in conformity with the FHA’s guidelines.
The FHA will reimburse us for most HECM loan losses incurred by us, up to the maximum claim amount, if, upon disposition of the collateral a deficit exists between the value of the collateral and the loan balance. However, there are certain costs and expenses that the FHA will not reimburse. Additionally, the FHA pays the FHA debenture rate instead of the loan interest rate from the date the loan becomes due and payable to the date of disposition of the property or final appraisal. In the event the note rate we are required to pay to an HMBS investor exceeds the FHA debenture rate, we will suffer an interest rate loss.
To obtain such reimbursement from the FHA, we must file a claim under the FHA mortgage insurance contract. Under certain circumstances, if we file a reimbursement claim that is inaccurate, we could be the subject of a claim under the False Claims Act, which imposes liability on any person who knowingly makes a false or fraudulent claim for payment to the U.S. government. Potential penalties are significant, as these actions may result in treble damages.
Additionally, if we fail to service HECM loans in conformity with the FHA’s guidelines, we could lose our right to service the portfolio or be subject to financial penalties that could affect our ability to receive loss claims or result in the curtailment of FHA debenture rate reimbursement. The FHA may also at its discretion request indemnification from a lender on a possible loss on a HECM loan if it determines that the loan was not originated or serviced in conformity with its rules or regulations.

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A loss of RMS' approved status under reverse loan programs operated by the FHA, HUD or Ginnie Mae could adversely affect our business.
In order to service HECM loans, RMS must maintain its status as an approved FHA mortgagee and an approved Ginnie Mae issuer and servicer. RMS must comply with the FHA’s and Ginnie Mae’s respective regulations, guides, handbooks, mortgagee letters and all participants’ memoranda. If RMS defaults under its program obligations to Ginnie Mae, Ginnie Mae has a right to terminate the approved status of RMS, seize the MSR of RMS without compensation (which includes the right to be reimbursed for outstanding advances from the FHA), demand indemnification for its losses, and impose administrative sanctions, which may include civil money penalties. 
Each of our subsidiaries that is a Ginnie Mae issuer (i.e. Ditech Financial and RMS) has also entered into a cross default agreement with Ginnie Mae, which provides that, upon the default by a subsidiary under an applicable Ginnie Mae program agreement, Ginnie Mae will have the right to (i) declare a default on all other pools and loan packages of that subsidiary and all pools and loan packages of any affiliated Ginnie Mae issuer that executed the cross default agreement and (ii) exercise any other remedies available under applicable law against each of the affiliated Ginnie Mae issuers. As a result, a default by RMS under its obligations to Ginnie Mae could lead to Ginnie Mae declaring a default by Ditech Financial in relation to its obligations to Ginnie Mae.
Any discontinuation of, or significant reduction or material change in, the operation of the FHA, HUD or government entities like Ginnie Mae, or the loss of RMS' approved FHA mortgagee or Ginnie Mae issuer or servicer status, could have a material adverse effect on our overall business and our financial position, results of operations and cash flows.
If we are unable to fund our Tail commitments this could have a material adverse effect on our business, financial condition, liquidity and results of operations.
We have originated and continue to service HECM loans under which the borrower has additional undrawn borrowing capacity in the form of undrawn lines of credit. We are obligated to fund future borrowings drawn on that capacity. As of December 31, 2018, our commitment to fund additional borrowing capacity was $1.0 billion. In addition, we are required to make interest payments on HMBS issued in respect of HECM loans and to pay mortgage insurance premiums on behalf of HECM borrowers. We normally fund these obligations on a short-term basis using our cash resources, and from time to time securitize these amounts (along with our servicing fees) through the issuance of Tails. If our cash resources are insufficient to fund these amounts and we are unable to fund them through the securitization of such Tails, this could have a material adverse effect on our business, financial condition, liquidity and results of operations.
A downgrade in our credit ratings could negatively affect our cost of, and ability to access, capital.
Our ability to obtain adequate and cost effective financing depends in part on our credit ratings. Our credit ratings have been downgraded in the past, and are subject to revision, including downgrade, or withdrawal at any time by the assigning rating agency. A negative change in our ratings outlook or any downgrade in our current credit ratings by the rating agencies that provide such ratings could adversely affect our cost of borrowing and/or access to sources of liquidity and capital. Such a downgrade could adversely affect our access to the public and private credit markets and increase the costs of borrowing under available credit lines, which could adversely affect our business, financial condition, results of operations and cash flows. Refer to the Ratings section under Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information relating to our credit ratings.
Changes in interest rates could materially and adversely affect our volume of mortgage loan originations or reduce the value of our MSR, either of which could have a material adverse effect on our business, financial position, results of operations or cash flows.
Historically, rising interest rates have generally been associated with a lower volume of loan originations and lower pricing margins due to a disincentive for borrowers to refinance at a higher interest rate, while falling interest rates have generally been associated with higher loan originations and higher pricing margins, due to an incentive for borrowers to refinance at a lower interest rate. Accordingly, increases in interest rates could materially and adversely affect our mortgage loan origination volume, which could have a material and adverse effect on our overall business, consolidated financial position, results of operations or cash flows. In addition, changes in interest rates may require us to post additional collateral under certain of our financing arrangements and derivative agreements, which could impact our liquidity.
Changes in interest rates are also a key driver of the performance of our Servicing segment as the values of our MSR are highly sensitive to changes in interest rates. Historically, the value of our MSR has increased when interest rates rise, as higher interest rates lead to decreased prepayment rates, and has decreased when interest rates decline, as lower interest rates lead to increased prepayment rates. As a result, substantial volatility in interest rates materially affects our mortgage servicing business, as well as our consolidated financial position, results of operations and cash flows.

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In addition, rising interest rates could (i) require us to post additional collateral under certain of our financing arrangements, which could adversely impact our liquidity, (ii) negatively impact our reverse loan business, (iii) negatively impact our mortgage loan origination volumes, and (iv) have other material and adverse effects on our business, consolidated financial position, results of operations or cash flows, such as, for example, generally making it more expensive for us to fund our various businesses. In a declining interest rate environment, we have been, and could in the future be, required to post additional collateral under certain of our derivative arrangements, which could adversely impact our liquidity.
Failure to hedge effectively against interest rate changes may adversely affect our results of operations.
We currently use derivative financial instruments, primarily forward sales commitments, to manage exposure to interest rate risk and changes in the fair value of IRLCs and mortgage loans held for sale. We may also enter into commitments to purchase MBS as part of our overall hedging strategy. In the future, we may seek to manage our interest rate exposure by using interest rate swaps and options. The nature and timing of hedging transactions may influence the effectiveness of a given hedging strategy, and no hedging strategy is consistently effective. Poorly designed strategies, improperly executed and documented transactions or inaccurate assumptions could increase our risks and losses. In addition, hedging strategies involve transaction and other costs. Our hedging strategies and the derivatives that we use may not completely offset the risks of interest rate volatility and our hedging transactions may result in or magnify losses. Furthermore, interest rate derivatives may not be available at all, or at favorable terms, particularly during economic downturns. Any of the foregoing risks could adversely affect our business, financial condition or results of operations.
Additional risks related to hedging include:
•
interest rate hedging can be expensive, particularly during periods of volatile interest rates;
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available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;
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the duration of the hedge may not match the duration of the related liability;
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the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction;
•
the party owing money in the hedging transaction may default on its obligation to pay; and
•
a court could rule that such an agreement is not legally enforceable.
Technology failures or cyber-attacks against us or our vendors could damage our business operations and reputation, increase our costs, and result in significant third-party liability.
The financial services industry as a whole is characterized by rapidly changing technologies. System disruptions and failures caused by fire, power loss, telecommunications failures, unauthorized intrusion (e.g., cyber-attack), computer viruses and disabling devices, natural disasters and other similar events, may interrupt or delay our ability to provide services to our borrowers. Security breaches (which we have experienced and may in the future experience), acts of vandalism and developments in computer intrusion capabilities could result in a compromise or breach of the technology that we use to protect our borrowers' personal information and transaction data. Systems failures could result in reputational damage to our business and cause us to incur significant costs and third-party liability, and this could adversely affect our business, financial condition or results of operations. See the Cybersecurity section of Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information relating to cybersecurity.
We transitioned a significant portion of our mortgage servicing business to MSP, a mortgage and consumer loan servicing platform, and problems relating to the transition to, and implementation of, MSP have interfered with, and could continue to interfere with, our business and operations.
We have invested significant capital and human resources in connection with the transition to and implementation of MSP, and we expect that we will continue to invest significant capital and human resources in refining our use of MSP with the goal of maximizing efficiencies available to us following such transition. We have experienced decreases in productivity and increased costs as our employees implement and become familiar with the new system, and there can be no assurance that we will not continue to do so in the future. We have also experienced certain disruptions, delays and deficiencies in connection with the transition of servicing onto MSP, and there can be no assurance that we will not continue to do so in the future. Any disruptions, delays or deficiencies in our implementation or refinement efforts, particularly any disruptions, delays or deficiencies that impact our operations could have a material adverse effect on our business and operations. Furthermore, the transition to and implementation of MSP was more costly than we initially anticipated and our current estimates for the remaining cost and time required to refine MSP may be wrong. Our plans to become a more efficient mortgage servicer depend in part upon us achieving significant cost reductions and efficiencies in relation to our servicing platform. If we are unable to achieve these goals, our financial position, results of operations and cash flows could be adversely impacted.

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We may be unable to protect our technology or keep up with the technology of our competitors.
We rely on proprietary and licensed software, and other technology, proprietary information and intellectual property to operate our business and to provide us with a competitive advantage. However, we may be unable to maintain and protect, or prevent others from misappropriating or otherwise violating, our rights in such software, technology, proprietary information and intellectual property. In addition, some competitors may have software and technologies that are as good as or better than our software and technology, which could put us at a disadvantage. Some of our systems are based on old technologies that are no longer in common use, and it may become increasingly difficult and expensive to maintain those systems. Our failure to maintain, protect and continue to develop our software, technology, proprietary information and intellectual property could adversely affect our business, financial condition or results of operations.
Any failure of our internal security measures or those of our vendors, or breach of our privacy protections, could cause harm to our reputation and subject us to liability.
In the ordinary course of our business, we receive and store certain confidential nonpublic information concerning borrowers including names, addresses, social security numbers and other confidential information. Additionally, we enter into third-party relationships to assist with various aspects of our business, some of which require the exchange of confidential borrower information. Breaches of security may occur through intentional or unintentional acts by those having authorized or unauthorized access to our systems or our clients' or counterparties' confidential information, including employees and customers, as well as hackers, and through electronic, physical or other means. If such a compromise or breach of our security measures or those of our vendors occurs, and confidential information is misappropriated, it could cause interruptions in our operations and/or expose us to significant liabilities, reporting obligations, remediation costs and damage to our reputation. Significant damage to our reputation or the reputation of our clients could negatively impact our ability to attract or retain clients. Any of the foregoing risks could adversely affect our business, financial condition or results of operations.
While we have obtained insurance to cover us against certain cybersecurity risks and information theft, there can be no guarantee that all losses will be covered or that the insurance limits will be sufficient to cover such losses.
We have obtained insurance coverage that protects us against losses from unauthorized penetration of company technology systems, employee theft of customer and/or company private information, and company liability for third-party vendors who mishandle company information. This insurance includes coverage for third-party losses as well as costs incidental to a breach of company systems such as notification, credit monitoring and identity theft resolution services. However, there can be no guarantee that every potential loss due to cyber-attack or theft of information has been insured against, nor that the limits of the insurance we have acquired will be sufficient to cover all such losses.
Our vendor relationships subject us to a variety of risks.
We have vendors that, among other things, provide us with financial, technology and other services to support our businesses. With respect to vendors engaged to perform activities required by servicing or originations criteria or regulatory requirements, we are required to take responsibility for assessing compliance with the applicable servicing or originations criteria or regulatory requirements for the applicable vendor and are required to have procedures in place to provide reasonable assurance that the vendor’s activities comply in all material respects with servicing or originations criteria or regulatory requirements applicable to the vendor. We have taken steps to strengthen our vendor oversight program, but there can be no assurance that our program is sufficient. In the event that a vendor’s activities do not comply with the servicing or originations criteria or regulatory requirements, it could materially negatively impact our business.
In addition, we rely on third-party vendors for certain services important or critical to our business, such as Black Knight Financial Services, LLC, with whom we have signed a long-term loan servicing agreement for the use of MSP. If our current vendors, particularly the vendors that provide important or critical services to us, were to stop providing such services to us on acceptable terms, or if there is any other material disruption in the provision of such services, we may be unable to procure such services from other vendors in a timely and efficient manner and on acceptable terms, or at all. Further, we may incur significant costs to resolve any such disruptions in service and this could adversely affect our business, financial condition and results of operations.
We have also increased the use of offshore vendors generally, especially with respect to certain of our technology functions. Our reliance on third-party vendors in other countries exposes us to disruptions in the political and economic environment in those countries and regions. Further, any changes to existing laws or the enactment of new legislation restricting offshore outsourcing by companies based in the U.S. may adversely affect our ability to outsource functions to third-party offshore service providers. Our ability to manage any such difficulties would be largely outside of our control, and our inability to utilize offshore service providers could have a material adverse effect on our business, financial condition, results of operations, cash flows and securities.

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Negative public opinion could damage our reputation and adversely affect our earnings.
Reputational risk, or the risk to our business, earnings and capital from negative public opinion, is inherent in our business. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending, loan servicing, debt collection practices, corporate governance, our WIMC Chapter 11 Case and DHCP Chapter 11 Cases, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can also result from complaints filed with regulators, social media and traditional news media coverage, whether accurate or not. Negative public opinion can adversely affect our ability to attract and retain customers, counterparties and employees and can expose us to litigation and regulatory action. Although we take steps to minimize reputation risk in dealing with our customers and communities, this risk will always be present in our organization.
By combining our servicing and originations businesses under the single "Ditech" brand, we may have increased the risk that adverse publicity in one area of the business could hurt the performance of other parts of the business. In particular, our ability to grow our originations business (which is a key part of our business strategy) could be limited by negative publicity arising from our servicing business, which now operates under the same Ditech brand. Our servicing business has generated a significant number of complaints filed with regulators such as the CFPB and also negative publicity in the press and social media. Further, the reverse mortgage business generally has generated adverse publicity, in part because reverse mortgage borrowers are relatively elderly and are perceived as vulnerable. Although the terms and requirements of the HECM product have been changed from time to time to address perceived origination abuses, we continue to service older HECM loans originated under different requirements. As the servicer of HECM loans, from time to time we are required to foreclose on and evict delinquent borrowers, who are likely to be elderly. This has attracted, and may continue to attract, adverse publicity.
The industry in which we operate is highly competitive, and, to the extent we fail to meet these competitive challenges or otherwise do not achieve our strategic initiatives, it could have a material adverse effect on our business, financial position, results of operations or cash flows.
We operate in a highly competitive industry that could become even more competitive as a result of economic, legislative, regulatory or technological changes. We compete with a great number of competitors in the mortgage banking market for both the servicing and originations businesses as well as in our reverse mortgage and complementary businesses. Key competitors include financial institutions and non-bank servicers and originators. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources, and typically have access to greater financial resources and lower funding costs. All of these factors place us at a competitive disadvantage. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more favorable relationships than we can. Competition to service mortgage loans may result in lower margins. Because of the relatively limited number of servicing customers, our competitive position is impacted by our ability to differentiate ourselves from our competitors through our servicing platform and our failure to meet the performance standards or other expectations of any one of such customers could materially impact our business. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition or results of operations.
From time to time, we embark upon various strategic initiatives for our business, including without limitation initiatives relating to acquisitions and dispositions of MSR and other assets, changes in the mix of our fee-for-service business including by entering into new subservicing arrangements, reducing our debt, improving our servicing performance, developing and growing certain portions of our business such as our mortgage originations capabilities, the use of capital partners, cost savings and operational efficiencies, and other matters. Our ability to achieve such initiatives is dependent upon numerous factors, many of which are not in our control. Our failure to achieve some or all of our strategic initiatives in a timely and efficient manner, or at all, could have a material adverse effect on our business, financial condition, liquidity and results of operations.
We may not realize all of the anticipated benefits of past, pending or potential future acquisitions or joint venture investments, which could adversely affect our business, financial condition and results of operations.
Our ability to realize the anticipated benefits of past, pending or potential future acquisitions will depend, in part, on our ability to integrate these acquisitions into our business and is subject to certain risks, including:
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our ability to successfully combine the acquired businesses with ours;
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whether the combined businesses will perform as expected;
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the possibility that we inaccurately value assets or businesses we acquire, that we pay more than the value we will derive from the acquisitions, or that the value declines after the acquisition;
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the reduction of our cash available for operations and other uses;
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the disruption to our operations inherent in making numerous acquisitions over a relatively short period of time;

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the disruption to the ongoing operations at the acquired businesses;
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the incurrence of significant indebtedness to finance our acquisitions;
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the assumption of certain known and unknown liabilities of the acquired businesses;
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uncoordinated market functions;
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unanticipated issues and delays in integrating the acquired business or any information, communications or other systems;
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unanticipated incompatibility of purchasing, logistics, marketing and administration methods;
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unanticipated liabilities associated with the acquired business, assets or joint venture;
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additional costs or capital requirements beyond forecasted amounts;
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delays in the completion of acquisitions, including due to delays in or the failure to obtain approvals from governmental or regulatory entities;
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lack of expected synergies, failure to realize the anticipated benefits we expect to realize from the acquisition or joint venture, or failure of the assets or businesses we acquire to perform at levels meeting our expectations;
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not retaining key employees; and
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the diversion of management's attention from ongoing business concerns.
Our planned acceleration of our integration and centralization has been delayed as a result of the DHCP Bankruptcy Petitions. We believe that such integration will enable us to achieve considerable cost savings and increases in efficiency and operational oversight. However, there are costs associated with implementing integration changes and there are considerable risks involved in such integration efforts, including the risks of operational breakdowns and unwanted personnel losses during the period of transition. We may be unsuccessful in implementing our integration plan on time or at all, and the integration efforts could be more costly than expected and could yield lower savings and efficiency benefits than planned. If we are not able to successfully combine the acquired businesses and assets with ours within the anticipated time frame, or at all, the anticipated benefits of the acquisitions may not be realized fully, or at all, or may take longer to realize than expected, the combined businesses and assets may not perform as expected, and the value of our business may be adversely affected.
Further, prices at which acquisitions can be made fluctuate with market conditions. We have experienced times during which acquisitions could not be made in specific markets at prices we considered acceptable, and we expect that we will experience this condition in the future. In addition, in order to finance an acquisition we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or raise additional capital, which could dilute the interests of our existing shareholders. Also, it is possible that we will expend considerable resources in the pursuit of an acquisition that, ultimately, either does not close or is terminated. If we incur additional indebtedness to finance an acquisition, the acquired business may not be able to generate sufficient cash flow to service that additional indebtedness.
We cannot assure you that future acquisitions or joint ventures will not adversely affect our results of operations and financial condition, or that we will realize all of the anticipated benefits of any future acquisitions or joint ventures.
We use, and will continue to use, analytical models and data in connection with, among other things, developing our strategy, pricing new business and the valuation of certain investments we make, and any incorrect, misleading or incomplete information used in connection therewith may subject us to potential risks.
Due to the complexity of our business, we rely on, and will continue to rely on, various analytical models, information and data, some of which is supplied by third parties, in connection with, among other things, developing our strategy, pricing new business and the valuation of certain investments we make. Should our models or such data prove to be incorrect or misleading, any decision made in reliance thereon exposes us to potential risks. Some of the analytical models that we use or will be used by us are predictive in nature. The use of predictive models has inherent risks and may incorrectly forecast future behavior, leading to potential losses. We also use and will continue to use valuation models that rely on market data inputs. If incorrect market data is input into a valuation model, even a tested and well-respected valuation model, it may provide incorrect valuations and, as a result, could provide adverse actual results as compared to the predictive results.
We use estimates in determining the fair value of certain assets. If our estimates prove to be incorrect, we may be required to write down the value of these assets, which could adversely affect our earnings.
We estimate the fair value for certain assets (including MSR) and liabilities by calculating the present value of expected future cash flows utilizing assumptions that we believe are used by market participants. The methodology used to estimate these values is complex and uses asset-specific collateral data and market inputs for interest and discount rates and liquidity dates.

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Valuations are highly dependent upon the reasonableness of our assumptions and the predictability of the relationships that drive the results of our valuation methodologies. If prepayment speeds increase more than estimated, delinquency and default levels are higher than anticipated or other events occur, we may be required to write down the value of certain assets, which could adversely affect our earnings.
Accounting rules for our business continue to evolve, are highly complex, and involve significant judgments and assumptions. Changes in accounting interpretations or assumptions could impact our financial statements.
Accounting rules for our business, such as the rules for determining the fair value measurement and disclosure of financial instruments, are highly complex and involve significant judgment and assumptions. These complexities could lead to a delay in the preparation of financial information and the delivery of this information to our stockholders. Changes in accounting interpretations or assumptions related to fair value could impact our financial statements and our ability to timely prepare our financial statements.
Impairment charges relating to our intangible assets could adversely affect our financial performance.
At December 31, 2018, we had $15.8 million of intangible assets. We generally evaluate intangible assets for impairment at the reporting unit or asset group level as of October 1 of each year, or whenever events or circumstances indicate potential impairment. A significant decline in our reporting unit performance, increases in equity capital requirements, increases in the estimated cost of debt or equity, or a significant adverse change in the business climate may necessitate our taking charges in the future related to the impairment of our intangible assets. We incurred impairment charges of $23.7 million during 2018. Unanticipated changes in circumstances, existing as of December 31, 2018 or at other times in the future, or in the numerous estimates made in performing the impairment assessment, may result in impairment of intangible assets and have a related impact on income taxes in the future. If we determine that our intangible assets are impaired, we may be required to record additional significant charges to earnings that could adversely affect our financial condition and operating results.
We identified material weaknesses in our internal controls over financial reporting for the year ended December 31, 2017, one of which has not been remediated as of December 31, 2018. If we do not adequately address this material weakness, if we have other material weaknesses or significant deficiencies in our internal controls over financial reporting in the future, or if we otherwise do not maintain effective internal controls over financial reporting, we could fail to accurately report our financial results, which may materially adversely affect our business and financial condition.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal controls over financial reporting and have our independent auditors issue their own opinion on our internal controls over financial reporting. Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. A material weakness is defined by the standards issued by the Public Company Accounting Oversight Board as a deficiency or a combination of deficiencies in internal controls over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
We concluded at December 31, 2017 that there was a material weakness in internal controls over financial reporting related to operational processes associated with Ditech Financial default servicing activities. We have concluded that the steps taken to remediate the material weakness associated with Ditech Financial default servicing activities were not effective. Accordingly, this material weakness remains as of December 31, 2018.
While we continue to take actions to improve the effectiveness of our internal controls over financial reporting and remediate the material weaknesses, if our remediation efforts are insufficient to address the material weaknesses, or if additional material weaknesses in our internal controls are discovered in the future, they may adversely affect our ability to record, process, summarize and report financial information timely and accurately and, as a result, our financial statements may contain material misstatements or omissions. Refer to Part II, Item 9A. Controls and Procedures for further information regarding these material weaknesses and our related remediation plans.
It is possible that additional material weaknesses and/or significant deficiencies could be identified by our management or by our independent auditing firm in the future, or may occur without being identified. The existence of any material weakness or significant deficiency could require management to devote significant time and incur significant expense to remediate such weakness or deficiency and management may not be able to remediate the same in a timely manner. Any such weakness or deficiency, even if remediated quickly, could result in regulatory scrutiny or lead to a default under our indebtedness. Furthermore, any material weakness requiring disclosure could cause investors to lose confidence in our reported financial condition, materially affect the market price and trading liquidity of our debt instruments, reduce the market value of our common stock and otherwise materially adversely affect our business and financial condition.

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Our business could suffer if we fail to attract, or retain, highly skilled senior managers and other employees and changes in our executive management team have been and may be disruptive to, or cause uncertainty in, our business.
Our future success will depend on our ability to identify, hire, develop, motivate and retain highly qualified personnel for all areas of our organization, in particular skilled managers, loan servicers, debt default specialists, loan officers and underwriters. Trained and experienced personnel are in high demand and may be in short supply in some areas. Many of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment. In addition, we invest significant time and expense in training our employees, which increases their value to competitors who may seek to recruit them. We may not be able to attract, develop and maintain an adequate skilled workforce necessary to operate our businesses and labor expenses may increase as a result of a shortage in the supply of qualified personnel. If we are unable to attract and retain such personnel, we may not be able to take advantage of acquisitions and other growth opportunities that may be presented to us and this could materially affect our business, financial condition and results of operations.
We have been reducing our workforce size and reducing the number of sites at which we operate, and as a result of these changes we have lost experienced personnel, including senior managers, have incurred transition costs and have had impaired efficiency in certain parts of our business during periods of change. We expect to continue to make further changes in our site footprint and to seek further personnel efficiencies, which could adversely affect our operations and results in future periods. As a result of the uncertainty these changes generate, it may be harder for us to retain or attract skilled employees in the future.
The experience of our senior managers is a valuable asset to us. While our senior management team has significant experience in the residential loan originations and servicing industry, we have experienced significant senior management turnover, including with our Chief Executive Officer and Chief Financial Officer. On February 20, 2018, Anthony N. Renzi stepped down from his position as our Chief Executive Officer and President, and the Board appointed Jeffrey P. Baker to serve as Interim Chief Executive Officer and President, while continuing in his role as President of RMS. On April 18, 2018, Thomas F. Marano became our new Chief Executive Officer and President, with Mr. Baker continuing in his role as President of RMS. On February 1, 2018, Gerald A. Lombardo joined us and, effective February 9, 2018, succeeded Gary Tillett as Chief Financial Officer. Effective April 23, 2018, Ritesh Chaturbedi was appointed Ditech Holding's Chief Operating Officer. Mr. Chaturbedi entered into a termination letter agreement with the Company on January 14, 2019, pursuant to which Mr. Chaturbedi's employment was terminated as of such date. Disruptions in management continuity could result in operational or administrative inefficiencies and added costs, which could adversely impact our results of operations and stock price, and may make recruiting for future management positions more difficult or costly. The loss of the services of our senior managers, or our recent, or any future, turnover at the senior management level, as well as risks associated with integrating a significant number of senior level employees into our operations and potential disruptions if one or more of the new employees are not successful, could adversely affect our business.
Risks Related to Our Organization and Structure
Certain provisions of Maryland law and our Articles of Amendment and Restatement could prevent a change of control or limit stockholders' influence on the management of our business.
Certain provisions of the MGCL may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change in our control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then prevailing market price of such shares. We are subject to the "business combination" provisions of the MGCL that, subject to limitations, prohibit certain business combinations between us and an "interested stockholder" (defined generally as any person who beneficially owns, directly or indirectly, 10% or more of our then outstanding voting stock or an affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was the beneficial owner, directly or indirectly, of 10% or more of our then outstanding stock) or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder and, thereafter, imposes special appraisal rights and supermajority stockholder voting requirements on these combinations. These provisions of the MGCL do not apply to business combinations that are approved or exempted by the board of directors of a corporation prior to the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, our Board of Directors has by resolution exempted business combinations between us and any other person, provided that the business combination is first approved by our Board of Directors. This resolution may be altered or repealed in whole or in part at any time. If this resolution is repealed, or our Board of Directors does not otherwise approve a business combination, this statute may discourage others from trying to acquire control of us and may increase the difficulty of consummating any offer.

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The "control share" provisions of the MGCL provide that "control shares" of a Maryland corporation (defined as shares which, when aggregated with all other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in the election of directors) acquired in a "control share acquisition" (defined as the acquisition of issued and outstanding "control shares," subject to certain exceptions) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding votes entitled to be cast by the acquirer of control shares, our officers and our employees who are also our directors. Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of our shares of stock. There can be no assurance that this provision will not be amended or eliminated at any time in the future.
The "unsolicited takeover" provisions of the MGCL permit our Board of Directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain provisions if we have a class of equity securities registered under the Exchange Act and at least three independent directors. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in our control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then current market price.
Our Articles of Amendment and Restatement provide that our Board of Directors is classified. The Preferred Stock Directors, serving in Class I and Class II, were designated by our Senior Noteholders and the Common Stock Directors, serving in Class III, were designated by us. The initial terms of the Class I directors will expire at our annual meeting in 2018, the Class II directors in 2019 and the Class III directors in 2020, with directors being elected thereafter to serve three-year terms. During the period commencing on the WIMC Effective Date and terminating on February 9, 2020, for so long as any preferred stock is outstanding, only the holders of preferred stock, voting separately as a class, will be entitled to elect Preferred Stock Directors, and Preferred Stock Directors will be nominated by, and Preferred Stock Director vacancies will be filled by, the Preferred Stock Directors then in office. During such period, only the holders of our successor common stock, voting separately as a class, will be entitled to elect the Common Stock Directors, and Common Stock Directors will be nominated by, and Common Stock Director vacancies will be filled by, the Common Stock Directors then in office.
From the WIMC Effective Date to and including August 9, 2019, we may not, without the approval of at least seven (7) of the nine (9) members of the Board of Directors then in office, (i) sell all or substantially all of our assets, (ii) enter into any transaction pursuant to which a change in control (as defined in the Articles of Amendment and Restatement) would occur, (iii) increase or decrease the size of the Board of Directors, or (iv) amend, alter or repeal certain provisions of our Articles of Amendment and Restatement.
Our authorized but unissued shares of common and preferred stock may prevent a change in our control.
Our charter authorizes us to issue additional authorized but unissued shares of common or preferred stock. In addition, our Board of Directors may, without stockholder approval, classify or reclassify any unissued shares of common or preferred stock into other classes or series of stock and set the preferences, rights and other terms of the classified or reclassified shares. As a result, our Board of Directors may establish a class or series of shares of common or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for our shares of common stock.
Risks Related to Our Relationship with Walter Energy
We may become liable for U.S. federal income taxes allegedly owed by the Walter Energy consolidated group for 2009 and prior tax years. We cannot predict how Walter Energy’s recent bankruptcy filing in Alabama may affect the outcome of these matters.
We may become liable for U.S. federal income taxes allegedly owed by the Walter Energy consolidated group for 2009 and prior tax years. Under federal law, each member of a consolidated group for U.S. federal income tax purposes is severally liable for the federal income tax liability of each other member of the consolidated group for any year in which it was a member of the consolidated group at any time during such year. Certain of our former subsidiaries (which were subsequently merged or otherwise consolidated with certain of our current subsidiaries) were members of the Walter Energy consolidated tax group prior to our spin-off from Walter Energy on April 17, 2009. As a result, to the extent the Walter Energy consolidated group’s federal income taxes (including penalties and interest) for such tax years are not favorably resolved on the merits or otherwise paid, we could be liable for such amounts.

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Walter Energy Tax Matters. According to Walter Energy’s Form 10-Q, or the Walter Energy Form 10-Q, for the quarter ended September 30, 2015 (filed with the SEC on November 5, 2015) and certain other public filings made by Walter Energy in its bankruptcy proceedings currently pending in Alabama, described below, as of the date of such filing, certain tax matters with respect to certain tax years prior to and including the year of our spin-off from Walter Energy remained unresolved, including certain tax matters relating to: (i) a “proof of claim” for a substantial amount of taxes, interest and penalties with respect to Walter Energy’s fiscal years ended August 31, 1983 through May 31, 1994, which was filed by the IRS in connection with Walter Energy’s bankruptcy filing on December 27, 1989 in the U.S. Bankruptcy Court for the Middle District of Florida, Tampa Division; (ii) an IRS audit of Walter Energy’s federal income tax returns for the years ended May 31, 2000 through December 31, 2008; and (iii) an IRS audit of Walter Energy’s federal income tax returns for the 2009 through 2013 tax years.
Walter Energy 2015 Bankruptcy Filing. On July 15, 2015, Walter Energy filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Northern District of Alabama. On August 18, 2015, Walter Energy filed a motion with the Florida Bankruptcy Court requesting that the court transfer venue of its disputes with the IRS to the Alabama Bankruptcy Court. In that motion, Walter Energy asserted that it believed the liability for the years at issue "will be materially, if not completely, offset by the [r]efunds" asserted by Walter Energy against the IRS. The Florida Bankruptcy Court transferred venue of the matter to the Alabama Bankruptcy Court, where it remains pending.
On November 5, 2015, Walter Energy, together with certain of its subsidiaries, entered into the Walter Energy Asset Purchase Agreement with Coal Acquisition, a Delaware limited liability company formed by members of Walter Energy’s senior lender group, pursuant to which, among other things, Coal Acquisition agreed to acquire substantially all of Walter Energy’s assets and assume certain liabilities, subject to, among other things, a number of closing conditions set forth therein. On January 8, 2016, after conducting a hearing, the Alabama Bankruptcy Court entered an order approving the sale of Walter Energy's assets to Coal Acquisition free and clear of all liens, claims, interests and encumbrances of the debtors. The sale of such assets pursuant to the Walter Energy Asset Purchase Agreement was completed on March 31, 2016 and was conducted under the provisions of Sections 105, 363 and 365 of the Bankruptcy Code. Based on developments in the Alabama bankruptcy proceedings following completion of this asset sale, such asset sale appears to have resulted in (i) limited value remaining in Walter Energy’s bankruptcy estate and (ii) to date, limited recovery for certain of Walter Energy’s unsecured creditors, including the IRS.
On January 9, 2017, Walter Energy filed with the Alabama Bankruptcy Court a motion to convert its Chapter 11 bankruptcy case to a Chapter 7 liquidation. In that motion, Walter Energy stated that, other than with respect to 1% of the equity of the acquirer of Walter Energy's core assets, no prospect of payment of unsecured claims exists. On January 23, 2017, the IRS filed an objection to Walter Energy's motion to convert, in which the IRS requested that a judgment be entered against Walter Energy in connection with the tax matters described above. The IRS further asserted that entry of a final judgment was necessary so that it could pursue collection of tax liabilities from former members of Walter Energy's consolidated group that are not debtors.
On January 30, 2017, the Alabama Bankruptcy Court held a hearing at which it denied the IRS's request for entry of a judgment and announced its intent to grant Walter Energy's motion to convert. The Alabama Bankruptcy Court entered an order on February 2, 2017 converting Walter Energy's Chapter 11 bankruptcy to a Chapter 7 liquidation. During February 2017, Andre Toffel was appointed Chapter 7 trustee of Walter Energy's bankruptcy estate.
We cannot predict whether or to what extent we may become liable for federal income taxes of the Walter Energy consolidated tax group during the tax years in which we were a part of such group, in part because we believe, based on publicly available information, that: (i) the amount of taxes owed by the Walter Energy consolidated tax group for the periods from 1983 through 2009 remains unresolved; and (ii) in light of Walter Energy’s conversion from a Chapter 11 bankruptcy to a Chapter 7 bankruptcy, it is unclear whether the IRS will seek to make a direct claim against us for such taxes. Further, because we cannot currently estimate our liability, if any, relating to the federal income tax liability of Walter Energy’s consolidated tax group during the tax years in which we were a part of such group, we cannot determine whether such liabilities, if any, could have a material adverse effect on our business, financial condition, liquidity and/or results of operations.
Tax Separation Agreement. In connection with our spin-off from Walter Energy, we and Walter Energy entered into a Tax Separation Agreement, dated April 17, 2009. Notwithstanding any several liability we may have under federal tax law described above, under the Tax Separation Agreement, Walter Energy agreed to retain full liability for all U.S. federal income or state combined income taxes of the Walter Energy consolidated group for 2009 and prior tax years (including any interest, additional taxes or penalties applicable thereto), subject to limited exceptions. We therefore filed proofs of claim in the Alabama bankruptcy proceedings asserting claims for any such amounts to the extent we are ultimately held liable for the same. However, we expect to receive little or no recovery from Walter Energy for any filed proofs of claim for indemnification.

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It is unclear whether claims made by us under the Tax Separation Agreement would be enforceable against Walter Energy in connection with, or following the conclusion of, the various Walter Energy bankruptcy proceedings described above, or if such claims would be rejected or disallowed under bankruptcy law. It is also unclear whether we would be able to recover some or all of any such claims given Walter Energy’s limited assets and limited recoveries for unsecured creditors in the Walter Energy bankruptcy proceedings described above.
Furthermore, the Tax Separation Agreement provides that Walter Energy has, in its sole discretion, the exclusive right to represent the interests of the consolidated group in any audit, court proceeding or settlement of a claim with the IRS for the tax years in which certain of our former subsidiaries were members of the Walter Energy consolidated tax group. However, in light of the conversion of Walter Energy’s bankruptcy proceeding from a Chapter 11 proceeding to a Chapter 7 proceeding, we may choose to take a direct role in proceedings involving the IRS’s claim for tax years in which we were a member of the Walter Energy consolidated tax group. Moreover, the Tax Separation Agreement obligates us to take certain tax positions that are consistent with those taken historically by Walter Energy. In the event we do not take such positions, we could be liable to Walter Energy to the extent our failure to do so results in an increased tax liability or the reduction of any tax asset of Walter Energy. These arrangements may result in conflicts of interests between us and Walter Energy, particularly with regard to the Walter Energy bankruptcy proceedings described above.
Lastly, according to its public filings, Walter Energy’s 2009 tax year is currently under audit. Accordingly, if it is determined that certain distribution taxes and other amounts are owed related to our spin-off from Walter Energy in 2009, we may be liable under the Tax Separation Agreement for all or a portion of such amounts.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our executive and principal administrative office and our Originations segment are located in Fort Washington, Pennsylvania in a 192,000 square foot facility, which is leased under a long-term lease. Our Servicing segment has centralized servicing operations located in Saint Paul, Minnesota, Tempe, Arizona, Rapid City, South Dakota and Jacksonville, Florida in leased office space ranging between 22,000 and 171,000 square feet. Our Reverse Mortgage segment operations centers lease office space of 68,000 square feet in Houston, Texas. Certain administrative and corporate operations and other activities included in our Corporate and Other non-reportable segment are conducted at our Tampa, Florida location in approximately 8,000 square feet of leased office space. In addition, our field servicing and regional operations lease approximately 20 smaller offices located throughout the U.S. Our lease agreements have terms that expire through 2026, exclusive of renewal option periods. We believe that our leased facilities are adequate for our current requirements.
On February 11, 2019, we filed with the Bankruptcy Court a motion seeking authority to (i) reject certain unexpired leases of nonresidential real property and related subleases in (a) St. Paul, Minnesota; Houston, Texas; and Maryland Heights, Missouri as of the Commencement Date and (b) Fort Worth, Texas; Irving, Texas; and Palm Beach Gardens, Florida as of February 28, 2019; and (ii) abandon certain property in connection therewith. The Bankruptcy Court granted this motion at the second day hearing held on March 14, 2019. Additionally, on March 28, 2019, we filed with the Bankruptcy Court a motion seeking authority to reject an unexpired lease of nonresidential real property in Rapid City, South Dakota on or before April 5, 2019 and abandon certain property in connection therewith. The Bankruptcy Court granted this motion at a hearing held on April 11, 2019. We are continuing to review our assets and activities and are advancing analysis and developing strategies with respect to any assets and activities we no longer deem to be a core part of our operations. Our remaining sites continue to undergo a review of strategic alternatives, which could result in additional site closings or other outcomes.
ITEM 3. LEGAL PROCEEDINGS
We are, and expect that, from time to time, we will continue to be involved in litigation, arbitration, examinations, inquiries, investigations and claims. These include pending examinations, inquiries and investigations by governmental and regulatory agencies, including but not limited to state attorneys general and other state regulators, Offices of the U.S. Trustees and the CFPB, into whether certain of our residential loan servicing and originations practices, bankruptcy practices and other aspects of our business comply with applicable laws and regulatory requirements.
From time to time, we have received and may in the future receive subpoenas and other information requests from federal and state governmental and regulatory agencies that are examining or investigating us. We cannot provide any assurance as to the outcome of these exams or investigations or that such outcomes will not have a material adverse effect on our reputation, business, prospects, results of operations, liquidity or financial condition.

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DHCP Reorganization Proceedings
On February 11, 2019, Ditech Holding and certain of its direct and indirect subsidiaries filed the DHCP Bankruptcy Petitions under the Bankruptcy Code as contemplated by the DHCP RSA entered into on February 8, 2019.
During the pendency of the DHCP Chapter 11 Case, the Bankruptcy Court granted relief enabling us to conduct our business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing us to pay employee wages and benefits, to pay taxes and certain governmental fees and charges, to continue to operate our cash management system in the ordinary course, and to pay the prepetition claims of certain of our vendors. For goods and services provided following the DHCP Petition Date, we continue to pay vendors under normal terms.
As a result of the DHCP Chapter 11 Cases, attempts to prosecute, collect, secure or enforce remedies with respect to prepetition claims against the Debtors, including litigation relating to the entities involved in the DHCP Chapter 11 Cases, are subject to the automatic stay provisions of section 362(a) of the Bankruptcy Code, as modified or amended by the terms of any order entered in the DHCP Chapter 11 Cases. 
For a more detailed discussion of the DHCP Reorganization Proceedings, refer to the DHCP Chapter 11 Cases section of Liquidity and Capital Resources under Part II, Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations.
Other Legal Matters
RMS received a subpoena dated June 16, 2016 from the Office of Inspector General of HUD requiring RMS to produce documents and other materials relating to, among other things, the origination, underwriting and appraisal of reverse mortgages for the time period since January 1, 2005. RMS subsequently received an additional subpoena from the Office of Inspector General of HUD dated January 12, 2017 requesting certain documents and information relating to the origination and underwriting of certain specified loans. This investigation, which is being conducted in coordination with the U.S. Department of Justice, Civil Division, could lead to a demand or claim under the False Claims Act, which allows for penalties and treble damages, or other statutes.
On July 27, 2016, RMS received a letter from the New York Department of Financial Services requesting information on RMS' reverse mortgage servicing business in New York.
RMS received a subpoena dated March 30, 2017 from the Office of the Attorney General of the State of New York requiring RMS to produce documents and information relating to, among other things, the servicing of HECMs insured by the FHA during the period since January 1, 2012.
We are cooperating with these inquiries relating to RMS.
We have received various subpoenas for testimony and documents, motions for examinations pursuant to Federal Rule of Bankruptcy Procedure 2004, and other information requests from certain Offices of the U.S. Trustees, acting through trial counsel in various federal judicial districts, seeking information regarding an array of our policies, procedures and practices in servicing loans to borrowers who are in bankruptcy and our compliance with bankruptcy laws and rules. We have provided information in response to these subpoenas and requests and have met with representatives of certain Offices of the U.S. Trustees to discuss various issues that have arisen in the course of these inquiries, including our compliance with bankruptcy laws and rules. We cannot predict the outcome of the aforementioned proceedings and inquiries, which could result in requests for damages, fines, sanctions, or other remediation. We could face further legal proceedings in connection with these matters. We may seek to enter into one or more agreements to resolve these matters. Any such agreement may require us to pay fines or other amounts for alleged breaches of law and to change or otherwise remediate our business practices. Legal proceedings relating to these matters and the terms of any settlement agreement could have a material adverse effect on our reputation, business, prospects, results of operations, liquidity and financial condition.
Since mid-2014, we have received subpoenas for documents and other information requests from the offices of various state attorneys general who have, as a group and individually, been investigating our mortgage servicing practices. We have provided information in response to these subpoenas and requests and have had discussions with representatives of the states involved in the investigations to explain our practices. We cannot predict whether litigation or other legal proceedings will be commenced by, or an agreement will be reached with, one or more states in relation to these investigations. Any legal proceedings and any agreement resolving these matters could have a material adverse effect on our reputation, business, prospects, results of operation, liquidity and financial condition.

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We are involved in litigation, including putative class actions, and other legal proceedings concerning, among other things, servicing and serving-transfer practices, lender-placed insurance, private mortgage insurance, bankruptcy practices, property preservation practices, servicing/foreclosure fees and costs and employment practices, and for alleged violations of various federal and state laws and statutes, such as the False Claims Act, FDCPA, TCPA, FCRA, TILA, RESPA, EFTA and ECOA. In addition, there have been various legal and regulatory developments in Nevada regarding liens asserted by HOAs for unpaid HOA assessments. Credit owners may assert claims against servicers such as Ditech Financial for failure to advance sufficient funds to cover unpaid HOA assessments and protect the credit owner’s interest in the subject property. We service numerous loans in Nevada and are involved in litigation and other legal proceedings affected by, or related to, these HOA matters.
In Kamimura, Lee C. v. Green Tree Servicing LLC, filed on April 8, 2016 in the U.S. District Court for the District of Nevada, Ditech Financial is subject to a putative nationwide class action suit alleging FCRA violations by obtaining credit bureau information without a permissible purpose after the discharge of debt owed to Ditech Financial pursuant to Chapter 13 of the Bankruptcy Code. The plaintiff in this suit, on behalf of himself and others similarly situated, seeks actual and punitive damages, statutory penalties, and attorneys’ fees and litigation costs. On February 11, 2019, the action was stayed pursuant to section 362 of the Bankruptcy Code.
Ditech Financial is also subject to several putative class action suits alleging violations of the TCPA for placing phone calls to plaintiffs’ cell phones using an automatic telephone dialing system without their prior consent. The plaintiffs in these suits, on behalf of themselves and others similarly situated, seek statutory damages for both negligent and knowing or willful violations of the TCPA.
A federal securities fraud complaint was filed against the Company, George M. Awad, Denmar J. Dixon, Anthony N. Renzi, and Gary L. Tillett on March 16, 2017. The case, captioned Courtney Elkin, et al. vs. Walter Investment Management Corp., et al., Case No. 2:17-cv-02025-JCJ, is pending in the Eastern District of Pennsylvania. The court has appointed a lead plaintiff in the action who filed an amended complaint on September 15, 2017. The amended complaint seeks monetary damages and asserts claims under Sections 10(b) and 20(a) of the Exchange Act during a class period alleged to begin on August 9, 2016 and conclude on August 1, 2017. The amended complaint alleges that: (i) defendants made material misstatements about the value of the Company's deferred tax assets; (ii) the material misstatement about the value of the Company's deferred tax assets required the Company to restate certain financials in the Quarterly Reports on Form 10-Q for the periods ended June 30, 2016, September 30, 2016 and March 31, 2017 and the Annual Report on Form 10-K for the year ended December 31, 2016, and caused the Company to violate the financial covenants and obligations in agreements with the Company's lenders and GSEs; and (iii) defendants made material misstatements concerning the Company's initiatives to deleverage the Company's capital structure. On November 3, 2017, the lead plaintiff voluntarily dismissed defendant Denmar J. Dixon from the action. On November 14, 2017, the remaining defendants moved to dismiss the amended complaint. From December 1, 2017 to February 9, 2018, the action was stayed pursuant to section 362 of the Bankruptcy Code. On July 13, 2018, the parties entered into a formal settlement agreement to settle the action for $2.95 million subject to notice to the alleged class and court approval. On December 18, 2018, the court approved the settlement, which was paid by the Company's directors’ and officers’ insurance carrier. On January 18, 2019, the time to appeal the court's approval of the settlement expired.
A stockholder derivative complaint purporting to assert claims on behalf of the Company was filed against certain current and former members of the Board of Directors on June 22, 2017. The case, captioned Michael E. Vacek, Jr., et al. vs. George M. Awad, et al., Case No. 2:17-cv-02820-JCJ, is pending in the Eastern District of Pennsylvania. The plaintiff filed an amended complaint in the action on September 13, 2017. The amended complaint seeks monetary damages for the Company and equitable relief and asserts a claim for breach of fiduciary duty arising out of: (i) a material weakness in the Company's internal controls over financial reporting related to operational processes associated with Ditech Financial default servicing activities, including identifying foreclosure tax liens and resolving such liens efficiently, foreclosure related advances, and the processing and oversight of loans in bankruptcy status, which resulted in several adjustments to reserves during the fourth quarter of 2016; (ii) an accounting error that caused an overstatement of the value of the Company's deferred tax assets; and (iii) subpoenas seeking documents relating to RMS’s origination and underwriting of reverse mortgages and loans. The Company and the defendants moved to dismiss the amended complaint on October 5, 2017. From December 1, 2017 to February 9, 2018, the action was stayed pursuant to section 362 of the Bankruptcy Code. On April 26, 2018, the court denied the motion to dismiss. On May 9, 2018, the Company and the defendants moved for reconsideration or certification of the court’s denial of the motion to dismiss. On October 17, 2018, the parties entered into a formal settlement agreement to settle the action based on the Company's adoption of certain corporate governance measures. The Company's directors' and officers' insurance carrier agreed to pay $0.258 million in attorneys’ fees to plaintiff's counsel. On February 1, 2019, the court approved the settlement. On February 11, 2019, the action was stayed pursuant to section 362 of the Bankruptcy Code.

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The outcome of all of our regulatory matters, litigations and other legal proceedings (including putative class actions) is uncertain, and it is possible that adverse results in such proceedings (which could include restitution, penalties, punitive damages and injunctive relief affecting our business practices) and the terms of any settlements of such proceedings could, individually or in the aggregate, have a material adverse effect on our reputation, business, prospects, results of operations, liquidity or financial condition. In addition, governmental and regulatory agency examinations, inquiries and investigations may result in the commencement of lawsuits or other proceedings against us or our personnel. Although we have historically been able to resolve the preponderance of our ordinary course litigations on terms we considered acceptable and individually not material, this pattern may not continue and, in any event, individual cases could have unexpected materially adverse outcomes, requiring payments or other expenses in excess of amounts already accrued. Certain of the litigations against us include claims for substantial compensatory, punitive and/or statutory damages, and in many cases the claims involve indeterminate damages. In some cases, including in some putative class actions, there could be fines or other damages for each separate instance in which a violation occurred. Certification of a class, particularly in such cases, could substantially increase our exposure to damages. We cannot predict whether or how any legal proceeding will affect our business relationship with actual or potential customers, our creditors, rating agencies and others. In addition, cooperating in, defending and resolving these legal proceedings consume significant amounts of management time and attention and could cause us to incur substantial legal, consulting and other expenses and to change our business practices, even in cases where there is no determination that our conduct failed to meet applicable legal or regulatory requirements.
For a description of certain legal proceedings, refer to Note 29 to the Consolidated Financial Statements included in this report, which is incorporated by reference herein.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
On the WIMC Effective Date, all shares of our Predecessor common stock, as well as our Convertible Notes and Senior Notes, were canceled and 4,252,500 shares of common stock, par value $0.01 per share, were issued to the holders of our Predecessor common stock and Convertible Noteholders. In addition, on the WIMC Effective Date, we issued to the holders of our Predecessor common stock and Convertible Noteholders, Series A Warrants to purchase up to an aggregate of 7,245,000 shares of common stock at $20.63 per share and Series B Warrants to purchase up to an aggregate of 5,748,750 shares of common stock at $28.25 per share. Further, we issued Second Lien Notes and Mandatorily Convertible Preferred Stock to the Senior Noteholders, which Mandatorily Convertible Preferred Stock is convertible into 11,497,500 shares of common stock, and we reserved 3,193,750 shares of common stock to be issued under our equity incentive plan. We relied, based on the Confirmation Order we received from the Bankruptcy Court, on Section 1145(a)(1) of the Bankruptcy Code to exempt from the registration requirements of the Securities Act (i) the offer and sale of our outstanding common stock to the holders of our Predecessor common stock and Convertible Notes, (ii) the offer and sale of the Series A and Series B Warrants to the holders of our Predecessor common stock and Convertible Notes, (iii) the offer and sale of the Mandatorily Convertible Preferred Stock and Second Lien Notes to the Senior Noteholders, and (iv) the offer and sale of the common stock issuable upon exercise of the warrants or conversion of the Mandatorily Convertible Preferred Stock. Section 1145(a)(1) of the Bankruptcy Code exempts the offer and sale of securities under a plan of reorganization from registration under Section 5 of the Securities Act and state laws if three principal requirements are satisfied:
•
the securities must be offered and sold under a plan of reorganization and must be securities of the debtor, of an affiliate participating in a joint plan of reorganization with the debtor or of a successor to the debtor under the plan of reorganization;
•
the recipients of the securities must hold claims against or interests in the debtor; and
•
the securities must be issued in exchange, or principally in exchange, for the recipient’s claim against or interest in the debtor.
Price Range of our Common Stock and Warrants
Our Predecessor common stock traded under the symbol WAC until the WIMC Effective Date. Our Successor common stock began trading on the NYSE on February 12, 2018 under the symbol DHCP. No prior established public trading market existed for our Successor common stock prior to this date. On November 6, 2018, the NYSE suspended and commenced proceedings to delist our common stock and warrants from the NYSE due to our failure to maintain an average global market capitalization over a consecutive 30 trading-day period of at least $15.0 million pursuant to Section 802.01B of the NYSE Listed Company Manual. Effective November 7, 2018, our common stock and warrants commenced trading on the OTC Pink marketplace under the symbols DHCP for our common stock and DHCPW and DHCBW for our Series A Warrants and Series B Warrants, respectively. The delisting of our common stock and warrants from the NYSE became effective on December 3, 2018.
Effective February 12, 2019, our common stock symbol was changed to DHCPQ due to the filing of the DHCP Bankruptcy Petitions on February 11, 2019. Any over-the-counter market quotations reflect inter-dealer prices, without retail markup, markdown or commission and may not necessarily represent actual transactions.
We caution that trading in our common stock and warrants during the pendency of the DHCP Chapter 11 Cases is highly speculative and poses substantial risks. Trading prices for our common stock and warrants may bear little or no relationship to the actual recovery, if any, by the holders of our securities in the DHCP Chapter 11 Cases. On the DHCP Effective Date, it is anticipated that the common stock will be canceled. It is not anticipated that the holders of the common stock will receive any distributions.
Number of Holders of Common Stock
As of April 5, 2019, there were 85 record holders of our common stock. Such number of record holders does not reflect the number of individuals or institutional investors holding our stock in nominee name through banks, brokerage firms and others.
Dividends
We did not pay any cash dividends on our common stock during the fiscal years ended December 31, 2018 and 2017. As a result of the DHCP Chapter 11 Cases, we are currently prohibited from paying dividends. Following the potential emergence from the DHCP Chapter 11 Cases, we do not anticipate paying any dividends as we expect to retain any future cash flows for debt reduction and to support operations. These restrictions on dividends are described in greater detail in the Liquidity and Capital Resources section under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Refer to Note 25 to the Consolidated Financial Statements for additional information regarding dividend restrictions.

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Issuer Purchases of Equity Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
Omitted.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our Consolidated Financial Statements and notes thereto included in this report. This discussion contains a number of forward-looking statements, all of which are based on our current expectations and all of which could be affected by uncertainties and risks. Our actual results may differ materially from the results contemplated in these forward-looking statements as a result of many factors including, but not limited to, those described in Part I, Item 1A. Risk Factors. Historical results and trends that might appear should not be taken as indicative of future operations, particularly in light of our emergence from the WIMC Chapter 11 Case in February 2018, our filing the DHCP Bankruptcy Petitions in February 2019, MSR sales, tax reform, and other regulatory developments discussed throughout this report. Refer to the Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 section located in the forepart in this report for a discussion regarding forward-looking statements.
Defined terms used in this Annual Report on Form 10-K are defined in the Glossary of Terms.
Executive Summary
We are an independent servicer and originator of mortgage loans and servicer of reverse mortgage loans. We service a wide array of loans across the credit spectrum for our own portfolio and for GSEs, government agencies, third-party securitization trusts and other credit owners. Through our consumer, correspondent and wholesale lending channels, we originate and purchase residential mortgage loans that we predominantly sell to GSEs and government agencies. We also operate two complementary businesses: asset receivables management and real estate owned property management and disposition.
Recent Developments
On November 30, 2017, Walter Investment Management Corp. (Predecessor) filed the WIMC Bankruptcy Petition under the Bankruptcy Code to pursue the WIMC Prepackaged Plan announced on November 6, 2017. On January 17, 2018, the Bankruptcy Court approved the amended WIMC Prepackaged Plan and on January 18, 2018, entered an order confirming the WIMC Prepackaged Plan. On February 9, 2018, the WIMC Prepackaged Plan became effective pursuant to its terms and Walter Investment Management Corp. emerged from the WIMC Chapter 11 Case as Ditech Holding Corporation (Successor).
We met the conditions to qualify under GAAP for fresh start accounting, and accordingly, adopted fresh start accounting effective February 10, 2018. The actual impact at emergence on February 9, 2018 is shown in Note 2 to the Consolidated Financial Statements. GAAP requires us to report our results separately as the period subsequent to emergence (Successor), which is the period from February 10, 2018 through December 31, 2018, and the period prior to emergence (Predecessor), which is the period from January 1, 2018 through February 9, 2018. Any presentation of the Successor represents the financial position and results of operations of the Successor and is not comparable to prior periods.
Throughout 2018, we continued to forecast reductions in liquidity that became increasingly challenging due to further deterioration of results due to required repayment terms and restrictive covenants of the 2018 Term Loan, further increases in Ginnie Mae buyout loans, an inability to execute on certain transactions, recurring operating losses and negative cash flows in certain of our segments, including unforeseen increased collateral posting requirements and/or negative impacts from market conditions. To address this situation, we became focused on liquidity and cash generation.
Strategy
In response to certain inquiries received by our Board of Directors, during the second quarter of 2018 our Board of Directors initiated a process to evaluate strategic alternatives, hereinafter referred to as the Strategic Review. This process was and is being conducted with the assistance of financial and legal advisors. We are considering a range of potential transactions including, among other things, a sale of the Company, a sale of all or a portion of the Company’s assets, and/or a recapitalization of the Company.

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Based on analyses we prepared with our financial advisors in connection with the Strategic Review (including analyses of proposals received by us during such review), analyses we prepare from time to time in connection with our internal business planning processes, and the risks and uncertainties that could adversely impact our liquidity plan, during the Strategic Review management and our Board of Directors determined that the actions we had taken and actions that we plan to take to improve our liquidity position, may not have been adequate to meet our future obligations.
Therefore, in connection with the Strategic Review, during the fourth quarter of 2018, we entered into non-disclosure agreements with, and we along with our financial and legal advisors began to have discussions with, certain of our corporate debt holders and their advisors regarding potential strategic transactions that may involve implementation through an in-court supervised Chapter 11 process.
On January 17, 2019, we received a notice from NRM initiating the process of termination under the NRM Subservicing Agreement. In connection therewith, we have subsequently deboarded certain of the loans we previously subserviced for NRM under the NRM Subservicing Agreement. Any termination of the NRM Subservicing Agreement would not be effective until a servicing transfer has been completed in accordance with applicable requirements. We are reviewing the grounds for termination in consultation with our stakeholders and are considering all of our options with respect thereto including legal rights and remedies. We are proceeding with our strategic alternatives efforts assuming there is not an ongoing subservicing relationship with NRM. Our plans are not contingent on any continuing relationship with NRM.
On February 8, 2019, Ditech Holding Corporation and certain of its direct and indirect subsidiaries (collectively, the Debtors) entered into the DHCP RSA with the Consenting Term Lenders holding, as of February 11, 2019, more than 75% of the term loans outstanding under the 2018 Credit Agreement. On February 11, 2019, the Debtors filed the DHCP Bankruptcy Petitions under the Bankruptcy Code to pursue the DHCP Plan.
Pursuant to the DHCP RSA, the Debtors have agreed to the principal terms of our financial restructuring with the Consenting Term Lenders, which will be implemented through a prearranged plan of reorganization under the Bankruptcy Code and which provides for the restructuring of our indebtedness through a recapitalization transaction that is expected to reduce gross corporate debt by over $800 million and provide us with an appropriately sized working capital facility or other liquidity enhancing transaction upon emergence.
The DHCP RSA also provides for the continuation of our prepetition review of strategic alternatives, whereby, as a potential alternative to the implementation of the DHCP Reorganization Transaction, any and all bids for our company or some or all of our assets will be evaluated as a precursor to confirmation of any Chapter 11 plan of reorganization.
The review of strategic alternatives provides a public and comprehensive forum in which we are seeking bids or proposals for three types of potential transactions, as described below. If a bid or proposal is received representing higher or better value than the DHCP Reorganization Transaction, it will either be incorporated into the DHCP Reorganization Transaction or pursued as an alternative to the DHCP Reorganization Transaction in consultation with the Consenting Term Lenders and subject to the DHCP RSA.
The three types of transactions for which bids are being solicited are:
•
a sale transaction meaning, a sale of substantially all of our assets, as provided in the DHCP RSA;
•
an asset sale transaction meaning, the sale of a portion of our assets other than a sale transaction consummated prior to DHCP Effective Date; provided such sale shall only be conducted with the consent of the Requisite Term Lenders; and
•
a master servicing transaction meaning, as part of the DHCP Reorganization Transaction to the extent the terms thereof are acceptable to the Requisite Term Lenders, our entry into an agreement or agreements with an approved subservicer or subservicers whereby, following the DHCP Effective Date, all or substantially all of our mortgage servicing rights are subserviced by the new subservicer.
The DHCP RSA presently contemplates the following treatment for certain key classes of creditors under the DHCP Reorganization Transaction:
•
DHCP DIP Warehouse Facilities Claims - On the DHCP Effective Date, the holders of DHCP DIP Warehouse Facilities claims will be paid in full in cash;
•
Term Loan Claims - On the DHCP Effective Date, the holders of Term Loan Claims will receive their pro rata share of new term loans under an amended and restated credit facility agreement in the aggregate principal amount of $400 million, and 100% of our New Common Stock, which will be privately held;
•
Second Lien Notes Claims - On the DHCP Effective Date, the holders of our Second Lien Notes will not receive any distribution;

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•
Go-Forward Trade Claims - On the DHCP Effective Date, trade creditors identified by us (with the consent of the Requisite Term Lenders) as being integral to and necessary for the ongoing operations of New Ditech) will receive a distribution in cash in an amount equaling a certain percentage of their claim, subject to an aggregate cap; and
•
Existing Equity Interests - On the DHCP Effective Date, holders of our existing preferred stock, common stock and warrants will have their claims extinguished.
If we proceed to confirmation of a sale transaction, we will distribute proceeds of such transaction in accordance with the priority scheme under the Bankruptcy Code.
Investments in MSR
Historically, to support our servicing business, we have from time to time bought or sold MSR; however, with a view to using our capital efficiently while increasing free cash-flow, in 2016 we began to limit our investment in MSR.
To date, we executed a number of transactions that helped us reduce our investment in MSR. In particular, we entered into several transactions with NRM pursuant to which we sold MSR to NRM and were retained by NRM to subservice some of these MSR. Refer to Note 4 to the Consolidated Financial Statements for additional information regarding our transactions with NRM.
The Company
At December 31, 2018, we serviced 1.5 million residential loans with a total unpaid principal balance of $187.2 billion. We originated $12.6 billion in mortgage loan volume in 2018.
During 2018, we added to the unpaid principal balance of our third-party mortgage loan servicing portfolio with subservicing contracts of $8.9 billion and mortgage loans sold with servicing retained of $6.5 billion, which was more than offset by $25.6 billion of payoffs and other adjustments, net of recapture activities of $3.5 billion, and $7.5 billion of sales with servicing released. In addition, we added to the unpaid principal balance of our third-party reverse loan servicing portfolio with $2.0 billion in Tail issuances, Ginnie Mae buyout loans sold with subservicing retained and other additions, which was more than offset by $2.8 billion in payoffs and curtailments.
Our mortgage loan originations business diversifies our revenue base and helps us replenish our servicing portfolio. During 2018, we originated $4.6 billion of mortgage loans through our consumer and wholesale channels and purchased $8.0 billion of mortgage loans through our correspondent channel. Substantially all of these purchased and originated mortgage loans were added to our servicing portfolio upon loan sale. The results of our originations business have been negatively impacted by the recent rise in interest rates, which reduces the level of refinancing transactions. Purchase activity has remained relatively consistent with that of 2017 despite the higher rate environment; however, we are not an established purchase money lender and it will take time to develop brand awareness and build market share.
Our profitability for the Reverse segment has been and will continue to be negatively impacted by recent changes to HUD requirements, which have led to additional working capital needs in relation to Ginnie Mae buyouts, and by the level of defaults we are experiencing with HECM loans. When a HECM loan is in default, we earn interest at the debenture rate, which is generally lower than the note rate we must pay. Additionally, if we miss HUD prescribed milestones in the foreclosure and claims filing process, HUD curtails the debenture interest being earned on loans in default. For loans in default, servicing costs generally increase as a result of foreclosure related activities such as legal costs, property preservation expense and other costs, which may include bankruptcy related activities. Further, after a foreclosure sale occurs and we obtain title to the property, we are responsible for the sale of the REO property. If we are unable to sell the property underlying a defaulted reverse loan for an acceptable price within the timeframe established by HUD, we are required to make an appraisal-based claim to HUD. In such cases, HUD reimburses us for the loan balance, eligible expenses and debenture interest, less the appraised value of the underlying property. Thereafter, all the risks and costs associated with maintaining and liquidating the property remains with us. We may incur additional losses on REO properties as they progress through the claims and liquidation processes. The significance of future losses associated with appraisal-based claims is dependent upon the volume of defaulted loans, condition of foreclosed properties and the general real estate market.

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We manage our Company in three reportable segments: Servicing, Originations, and Reverse Mortgage. A description of the business conducted by each of these segments and our Corporate and Other non-reportable segment is provided below:
Servicing - Our Servicing segment performs servicing for our own mortgage loan portfolio, on behalf of third-party credit owners of mortgage loans for a fee and on behalf of third-party owners of MSR for a fee, which we refer to as subservicing. The Servicing segment also operates complementary businesses including asset receivables management that performs collections of post charge-off deficiency balances for third parties and us. Commencing February 1, 2017, an insurance agency owned by the Company began to provide insurance marketing services to a third party with respect to voluntary insurance policies, including hazard insurance. In addition, the Servicing segment held the assets and mortgage-backed debt of the Residual Trusts until their deconsolidation in November 2018.
Originations - Our Originations segment originates and purchases mortgage loans that are intended for sale to third parties. In 2018, the mix of mortgage loans sold by our Originations segment, based on unpaid principal balance, consisted of (i) 57% Ginnie Mae loans, (ii) 30% Fannie Mae conventional conforming loans and (iii) 13% Freddie Mac conventional conforming loans.
Reverse Mortgage - Our Reverse Mortgage segment primarily focuses on the servicing of reverse loans. Effective January 2017, we exited the reverse mortgage originations business. We no longer have any reverse loans remaining in the originations pipeline and have finalized the shutdown of the reverse mortgage originations business. We continue to fund Tails, and, from time to time, securitize these amounts.
Corporate and Other - Our Corporate and Other non-reportable segment includes our corporate functions and also holds the assets and liabilities of the Non-Residual Trusts and corporate debt. Effective January 1, 2018, we no longer allocate corporate overhead, including depreciation and amortization, to our operating segments. These amounts are now included in the Corporate and Other non-reportable segment. Prior year balances have been restated to conform to current year presentation.
Overview
Our Servicing segment revenue is primarily impacted by the size and mix of our capitalized servicing and subservicing portfolios and is generated through servicing of mortgage loans for third-party clients and/or credit owners. Net servicing revenue and fees include the change in fair value of servicing rights carried at fair value and the amortization of all other servicing rights. Our servicing fee income generation is influenced by the volume and timing of entrance into subservicing contracts and purchases and sales of servicing rights. The fair value of our servicing rights is largely dependent on the size of the related portfolio, discount rates, and prepayment and default speeds. Our Originations segment revenue, which is primarily comprised of net gains on sales of loans, is impacted by interest rates and the volume of loans locked as well as the margins earned in our various origination channels. Net gains on sales of loans include the cost of additions to the representations and warranties reserve. Our Reverse Mortgage segment is impacted by subservicing contracts, the fair value of reverse loans and HMBS, draws on existing reverse loans, the repurchase of certain HECMs and real estate owned from Ginnie Mae securitization pools, and historically, the volume of new reverse loan originations.
Our results of operations are also affected by expenses such as salaries and benefits, information technology, occupancy, legal and professional fees, the provision for advances, curtailment, interest expense and other operating expenses. During 2018, our results were also impacted by reorganization items and fresh start accounting adjustments of $461.8 million that were directly attributable to the WIMC Chapter 11 Case and our emergence therefrom, and by non-cash goodwill and intangible assets impairment charges of $23.7 million. Refer to the Financial Highlights, Results of Operations and Business Segment Results sections below for further information.
Our principal sources of liquidity are the cash flows generated from our business segments, funds available from our master repurchase agreements and mortgage loan servicing advance facilities, issuance of GMBS, and issuance of HMBS to fund our Tail commitments. We may generate additional liquidity through sales of MSR, any portion thereof, or other assets. In June 2018, we sold a pool of defaulted reverse Ginnie Mae buyout loans owned by us and financed under our existing financing facilities for a sales price of approximately $241.3 million, which amount includes a negotiated holdback amount. We continue to service these loans on behalf of the purchaser under a subservicing agreement. On April 23, 2018, we entered into a master repurchase agreement which, as of December 31, 2018, provides up to $412.0 million in total capacity, and a minimum of $400.0 million in committed capacity to fund the repurchase of certain HECMs and real estate owned from Ginnie Mae securitization pools. In October 2018, we executed a transaction that provided $230.0 million of additional secured financing for certain HECMs and real estate owned previously repurchased from Ginnie Mae securitization pools. Refer to the Liquidity and Capital Resources section below for additional information.

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Financial Highlights
Our Financial Highlights reflect fresh start accounting effective February 10, 2018. Our financial statements as of February 10, 2018 and for subsequent periods report the results of the Successor with no beginning retained earnings. Any presentation of the Successor represents our financial position and results of operations post-emergence and is not comparable to prior periods.
Total revenues were $658.9 million and $187.3 million for the period from February 10, 2018 through December 31, 2018 and the period from January 1, 2018 through February 9, 2018, respectively, which represented an increase of $15.0 million as compared to the year ended December 31, 2017. The increase in revenue reflects an increase of $121.3 million in net servicing revenue and fees, partially offset by decreases of $94.7 million in net gains on sales of loans and $36.0 million in interest income on loans. The increase in net servicing revenue and fees was driven by an increase of $214.9 million related to changes in valuation inputs and assumptions for servicing rights, partially offset by $103.0 million in lower servicing fees.
The increase in fair value related to changes in valuation inputs and assumptions for servicing rights was driven by a 49 bps increase in mortgage interest rates and adjustments to assumptions for prepayment speeds and delinquencies. This increase in fair value adjustments is consistent with observed increases in MSR values seen in the market during 2018. Additionally, delinquencies continue to decline across market portfolios as sustained job and wage growth has helped borrowers remain current. The decrease in servicing fees was due to the shift of our third-party servicing portfolio from servicing to subservicing and continued runoff of the overall servicing portfolio. The decrease in net gains on sales of loans resulted from a lower day one margin due to a product mix shift towards lower margin correspondent and wholesale channels combined with pricing decreases implemented in 2018, as well as an overall lower volume of locked loans. The decrease in interest income on loans resulted from the adoption of new accounting guidance relating to sales of nonfinancial assets effective January 1, 2018 and the election of fair value accounting for our residential loans held in the Residual Trusts on February 10, 2018 in connection with fresh start accounting.
Total expenses were $879.1 million and $133.7 million for the period from February 10, 2018 through December 31, 2018 and the period from January 1, 2018 through February 9, 2018, respectively, which represented a decrease of $281.9 million as compared to the year ended December 31, 2017. The decrease in expenses was driven by $179.6 million in lower general and administrative expenses, $58.8 million in lower salaries and benefits and $49.3 million in lower other expenses, net, offset in part by goodwill and intangible assets impairment charges of $23.7 million.
General and administrative expenses were lower primarily as a result of decreases in costs related to our debt restructure initiative in 2017, default servicing expense, curtailment-related accruals, legal fees related to litigation and regulatory costs, occupancy costs due primarily to a lease liability accrual recorded in 2017, contractor and consulting fees, professional fees due in part to transitioning work in-house and the sale of substantially all of our insurance business in 2017, loan origination expense due to a lower funded originations volume, and advance loss provision due to a decrease in the servicing advance portfolio and a decline in delinquent portfolios, offset in part by an increase in amortization of the Clean-up Call Agreement inducement fee in 2018. Salaries and benefits decreased primarily as a result of a lower average headcount driven by site closures and various organizational changes. Other expenses, net decreased due primarily to the recognition of a deferred gain on real estate owned in connection with the sale and deconsolidation of the Residual Trusts in November 2018.
In March 2018, we recorded goodwill impairment of $9.0 million related to the Originations segment as a result of lower projected financial performance within this segment subsequent to our emergence from bankruptcy, which was driven by certain market factors including increasing mortgage interest rates driving lower originations volume, a flattening of the interest rate curve resulting in margin compression, aggressive pricing by certain competitors and continued challenges in shifting to a purchase money lender. In March 2018, we recorded intangible assets impairment of $1.0 million related to trade names of the Servicing segment, and in June 2018, we recorded intangible assets impairment of $1.0 million related to trade names of the Originations segment. These assets were tested for recoverability due to changes in facts and circumstances associated with rising mortgage interest rates and lower projected originations business financial performance. In December 2018, we recorded intangible assets impairment of $6.4 million related to trade names of the Servicing segment and $6.3 million related to trade names of the Originations segment as a result of actual and forecasted business declines.
We recorded $464.6 million of reorganization items and fresh start accounting adjustments for the period from January 1, 2018 through February 9, 2018 driven by $556.9 million related to the gain on cancellation of corporate debt and $77.2 million of fresh start accounting adjustments, partially offset by $153.8 million related to the issuance of new equity to Convertible and Senior Noteholders. Refer to the Emergence from the WIMC Reorganization Proceedings section below for additional information.
Cash provided by operating activities decreased $882.6 million to cash used in operating activities for the year ended December 31, 2018 as compared to 2017. The primary driver for the change in cash provided by operating activities was a decrease in cash provided by originations' activities resulting from a lower volume of loans sold in relation to loans originated in 2018 as compared to 2017.

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Emergence from the WIMC Reorganization Proceedings
On November 30, 2017, Walter Investment Management Corp. filed the WIMC Bankruptcy Petition under the Bankruptcy Code to pursue the WIMC Prepackaged Plan announced on November 6, 2017. On January 17, 2018, the Bankruptcy Court approved the amended WIMC Prepackaged Plan and on January 18, 2018, entered a confirmation order approving the WIMC Prepackaged Plan. On February 9, 2018, the WIMC Prepackaged Plan became effective pursuant to its terms and Walter Investment Management Corp. emerged from the WIMC Chapter 11 Case and changed its name to Ditech Holding Corporation. From and after effectiveness of the WIMC Prepackaged Plan, we have continued, in our previous organizational form, to carry out our business.
On February 11, 2019, Ditech Holding Corporation and certain of its subsidiaries filed the DHCP Bankruptcy Petitions as contemplated by the DHCP RSA entered into on February 8, 2019 as discussed further below. The Company intends to continue to operate its businesses during the pendency of the DHCP Chapter 11 Cases.
The below descriptions of our common stock, preferred stock, warrants, term loan, second lien notes, warehouse facilities, and other agreements reflect our emergence from the WIMC Reorganization proceedings. For a discussion of the treatment of key classes of creditors under the DHCP Reorganization Transaction, refer to the Strategy section of the Executive Summary above.
Common Stock
On the WIMC Effective Date, all shares of our Predecessor common stock were canceled and 4,252,500 shares of Successor common stock, par value $0.01 per share, were issued to the Predecessor stockholders and Convertible Noteholders. We reserved 3,193,750 shares of common stock for issuance under our equity incentive plan. The estimated fair value of the common stock on the WIMC Effective Date was $10.25 per share.
Preferred Stock
On the WIMC Effective Date, we issued 100,000 shares of Mandatorily Convertible Preferred Stock to the Senior Noteholders, which are mandatorily convertible into 11,497,500 shares of common stock (a conversion multiple of 114.9750) upon the earliest of (i) February 9, 2023, (ii) at any time following one year after the WIMC Effective Date, the time that the volume weighted-average pricing of the common stock exceeds 150% of the conversion price per share for at least 45 trading days in a 60 consecutive trading day period, including each of the last 20 days in such 60 consecutive trading day period, and (iii) a change of control transaction in which the consideration paid or payable per share of common stock is greater than or equal to the conversion price per share, which, subject to adjustment, is $8.6975. The shares of Mandatorily Convertible Preferred Stock are also convertible at the option of the holder thereof or upon the affirmative vote of at least 66 2/3% of the Mandatorily Convertible Preferred Stock then outstanding. The estimated fair value of the Mandatorily Convertible Preferred Stock on the WIMC Effective Date was $1,231.70 per share.
Warrants
On the WIMC Effective Date, we issued to the Predecessor stockholders of our common stock and the Convertible Noteholders, Series A Warrants to purchase up to an aggregate of 7,245,000 shares of common stock at $20.63 per share and Series B Warrants to purchase up to an aggregate of 5,748,750 shares common stock at $28.25 per share. All unexercised warrants expire and the rights of the warrant holders to purchase shares of common stock terminate on February 9, 2028, at 5:00 p.m., Eastern Standard Time, which is the 10th anniversary of the WIMC Effective Date. The estimated fair values of the Series A Warrants and Series B Warrants on the WIMC Effective Date were $1.68 and $0.94 per share, respectively.
2018 Credit Agreement
On the WIMC Effective Date, pursuant to the terms of the WIMC Prepackaged Plan, we entered into the 2018 Credit Agreement. The 2018 Credit Agreement provides for the 2018 Term Loan maturing on June 30, 2022 in an amount of approximately $1.2 billion. The 2018 Term Loan bears interest at a rate per annum equal to, at our option, (i) LIBOR plus 6.00% (with a LIBOR floor of 1.00%) or (ii) an alternate base rate plus 5.00% (which interest will be payable (a) with respect to any alternate base rate loan, on the last business day of each March, June, September and December, and (b) with respect to any LIBOR loan, on the last day of the interest period applicable to the borrowing of which such loan is a part). The 2018 Term Loan is guaranteed by substantially all of our wholly-owned domestic subsidiaries and secured by a first priority pledge on substantially all of our assets and the assets of the subsidiary guarantors, in each case subject to certain exceptions. Refer to the Liquidity and Capital Resources section for further information.

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Second Lien Notes
On the WIMC Effective Date, pursuant to the terms of the WIMC Prepackaged Plan, we entered into an indenture and issued $250.0 million aggregate principal amount of Second Lien Notes maturing on December 31, 2024. Interest on the Second Lien Notes will accrue at a rate of 9.00% per annum payable semi-annually in arrears on June 15 and December 15 of each year. The Second Lien Notes require payment of interest in cash, except that interest on up to $50.0 million principal amount, at our election, may be paid by increasing the principal amount of the outstanding notes or by issuing additional notes. The terms of the 2018 Credit Agreement require that we exercise such election. The Second Lien Notes are secured on a second-priority basis by substantially all of our assets and our subsidiary guarantors. Refer to the Liquidity and Capital Resources section for further information.
Termination of Rights Agreement
On the WIMC Effective Date, we entered into Amendment No. 2 to the Rights Agreement with Computershare, which accelerated the scheduled expiration date of the Rights (as defined in the Rights Agreement) to the WIMC Effective Date. The rights issued pursuant to the Rights Agreement, which were also canceled by operation of the WIMC Prepackaged Plan, have expired and are no longer outstanding, and the Rights Agreement has terminated. Refer to the Rights Agreement section under Part I, Item 1. Business for a more detailed discussion of the Rights Agreement.
Registration Rights Agreement
On the WIMC Effective Date and pursuant to the WIMC Prepackaged Plan, we entered into a Registration Rights Agreement that provided certain registration rights to certain parties (together with any person or entity that becomes a party to the Registration Rights Agreement pursuant to the terms thereof) that received shares of our common stock, warrants and Mandatorily Convertible Preferred Stock on the WIMC Effective Date as provided in the WIMC Prepackaged Plan. The Registration Rights Agreement provides such persons with registration rights for the holders’ registrable securities (as defined in the Registration Rights Agreement).
Pursuant to the Registration Rights Agreement, we agreed to file an initial shelf registration statement covering resales of the registrable securities held by the holders within 60 days of the receipt of a request by holders of at least 40% of the registrable securities. Subject to limited exceptions, we are required to maintain the effectiveness of any such registration statement until the earlier of (i) three years following the WIMC Effective Date and (ii) the date that all registrable securities covered by the shelf registration statement are no longer registrable securities.
In addition, holders with rights under the Registration Rights Agreement beneficially holding 10% or more of our common stock have the right to a Demand Registration to effect the registration of any or all of the registrable securities and/or effectuate the distribution of any or all of their registrable securities by means of an underwritten shelf takedown offering. We are not obligated to effect more than three Demand Registrations, and we need not comply with such a request if (i) the aggregate gross proceeds from such a sale will not exceed $25 million, unless the Demand Registration includes all of the then-outstanding registrable securities or (ii) a registration statement shall have previously been declared effective by the SEC within 90 days preceding the date of such request.
Holders with rights under the Registration Rights Agreement also have customary piggyback registration rights, subject to the limitations set forth in the Registration Rights Agreement.
These registration rights are subject to certain conditions and limitations, including the right of the underwriters to limit the number of shares to be included in a registration statement and our right to delay or withdraw a registration statement under certain circumstances. We will generally pay the registration expenses in connection with our obligations under the Registration Rights Agreement, regardless of whether a registration statement is filed or becomes effective. The registration rights granted in the Registration Rights Agreement are subject to customary indemnification and contribution provisions, as well as customary restrictions such as blackout periods.
Warehouse Facilities
On the WIMC Effective Date and for a period of one year following the WIMC Effective Date, we continued to receive financing pursuant to a master repurchase agreement providing for a maximum committed capacity sub-limit of $1.0 billion used principally to fund our mortgage loan originations business and a master repurchase agreement providing for a maximum committed capacity sub-limit of $800.0 million used principally to fund the purchase of HECMs and foreclosed real estate from certain securitization pools. In addition to the foregoing master repurchase agreement sub-limits, these facilities, the DAAT Facility and the DPAT II Facility were subject, collectively, to a combined maximum outstanding amount of $1.9 billion. On April 23, 2018, RMS entered into an additional master repurchase agreement which, as of December 31, 2018, provides up to $412.0 million in total capacity, and a minimum of $400.0 million in committed capacity to fund the repurchase of certain HECMs and real estate owned from Ginnie Mae securitization pools. The interest rate on this facility was based on the applicable index rate plus 3.25%. Refer to the Liquidity and Capital Resources section for further information.

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Servicer Advance Financing Facilities
On February 12, 2018, the WIMC Securities Master Repurchase Agreement issued under the WIMC DIP Warehouse Facilities was terminated and repaid with proceeds from the issuance of variable funding notes under two new servicing advance facilities, the DAAT Facility and DPAT II Facility. The DAAT Facility and the DPAT II Facility provided for maximum capacity sub-limits of $465.0 million and $85.0 million, respectively. These variable funding notes issued under the DAAT Facility and DPAT II Facility were then repaid and refinanced on February 14, 2019 with new variable funding notes issued in connection with the DHCP DIP Warehouse Facilities. In connection with the issuances of the variable funding notes, the documents in the DAAT Facility and DPAT II Facility changed the maximum capacity sub-limits to $160.0 million and $90.0 million, respectively.
Fresh Start Accounting
We met the conditions to qualify under GAAP for fresh start accounting, and accordingly adopted fresh start accounting effective February 10, 2018. The actual impact at emergence on February 9, 2018 is shown in Note 2 to the Consolidated Financial Statements. The financial statements as of February 10, 2018 and for subsequent periods report the results of the Successor with no beginning retained earnings. Any presentation of the Successor represents the financial position and results of operations of the Successor is not comparable to prior periods. Refer to Note 2 to the Consolidated Financial Statements for additional information regarding the application of fresh start accounting.
Post-Emergence Board of Directors
On the WIMC Effective Date, in accordance with the terms of the WIMC Prepackaged Plan confirmed by the Bankruptcy Court, the Board of Directors of the reorganized company consists of nine members, with six directors designated by the Senior Noteholders (David Ascher, Seth Bartlett, John Brecker, Thomas Marano, Thomas Miglis and Samuel Ramsey) and three continuing directors designated by us (George M. Awad, Daniel Beltzman and Neal Goldman). During the period commencing on the WIMC Effective Date and terminating on February 9, 2020, for so long as any preferred stock is outstanding, only the holders of preferred stock, voting separately as a class, will be entitled to elect Preferred Stock Directors, and Preferred Stock Directors will be nominated by, and Preferred Stock Director vacancies will be filled by, the Preferred Stock Directors then in office. During such period, only the holders of the common stock, voting separately as a class, will be entitled to elect the Common Stock Directors, and Common Stock Directors will be nominated by, and Common Stock Director vacancies will be filled by, the Common Stock Directors then in office. Following such period, all directors will be elected by holders of common stock and any other class or series of stock (including the preferred stock) entitled to vote thereon, and will be nominated by the Board of Directors or, in accordance with our bylaws, by the stockholders.
Regulatory Developments
For a summary of the regulatory framework under which we operate and recent regulatory developments, refer to the Laws and Regulations section of Part I, Item 1. Business.
Financing Transactions
Refer to the Liquidity and Capital Resources section below for a description of our financing transactions.

62


Results of Operations — Comparison of Consolidated Results of Operations (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
 
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended December 31, 2017
 
Variance
 
 
 
 
 
 
$
 
%
REVENUES
 
 
 
 
 
 
 
 
 
 
 
Net servicing revenue and fees
 
$
339,334

 
 
$
128,685

 
$
346,682

 
$
121,337

 
35
 %
Net gains on sales of loans
 
161,710

 
 
27,963

 
284,391

 
(94,718
)
 
(33
)%
Net fair value gains on reverse loans and related HMBS obligations
 
46,833

 
 
10,576

 
42,419

 
14,990

 
35
 %
Interest income on loans
 
1,832

 
 
3,387

 
41,195

 
(35,976
)
 
(87
)%
Other revenues
 
109,231

 
 
16,662

 
116,573

 
9,320

 
8
 %
Total revenues
 
658,940

 
 
187,273


831,260

 
14,953

 
2
 %
 
 
 
 
 
 
 
 
 
 
 


EXPENSES
 
 
 
 
 
 
 
 
 
 


General and administrative
 
366,710

 
 
50,520

 
596,838

 
(179,608
)
 
(30
)%
Salaries and benefits
 
285,559

 
 
40,408

 
384,814

 
(58,847
)
 
(15
)%
Interest expense
 
209,321

 
 
38,756

 
261,244

 
(13,167
)
 
(5
)%
Depreciation and amortization
 
32,358

 
 
3,810

 
40,764

 
(4,596
)
 
(11
)%
Goodwill and intangible assets impairment
 
23,660

 
 
—

 
—

 
23,660

 
n/m

Other expenses, net
 
(38,505
)
 
 
229

 
11,061

 
(49,337
)
 
n/m

Total expenses
 
879,103

 
 
133,723


1,294,721

 
(281,895
)
 
(22
)%
 
 
 
 
 
 
 
 
 
 
 


OTHER GAINS (LOSSES)
 
 
 
 
 
 
 
 
 
 


Reorganization items and fresh start accounting adjustments
 
(2,726
)
 
 
464,563

 
(37,645
)
 
499,482

 
n/m

Other net fair value gains
 
11,083

 
 
3,740

 
2,008

 
12,815

 
n/m

Net losses on extinguishment of debt
 
(4,454
)
 
 
(864
)
 
(6,111
)
 
793

 
(13
)%
Gain on sale of business
 
—

 
 
—

 
67,734

 
(67,734
)
 
(100
)%
Other
 
8,515

 
 
—

 
7,219

 
1,296

 
18
 %
Total other gains
 
12,418

 
 
467,439


33,205

 
446,652

 
n/m

 
 
 
 
 
 
 
 
 
 
 


Income (loss) before income taxes
 
(207,745
)
 
 
520,989


(430,256
)
 
743,500

 
(173
)%
Income tax benefit
 
(2,651
)
 
 
(18
)
 
(3,357
)
 
688

 
(20
)%
Net income (loss)
 
$
(205,094
)
 
 
$
521,007


$
(426,899
)
 
$
742,812

 
(174
)%

63


Net Servicing Revenue and Fees
A summary of net servicing revenue and fees is provided below (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
 
 
 
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended December 31, 2017
 
Variance
 
 
 
 
 
 
$
 
%
Servicing fees
 
$
335,718

 
 
$
52,855

 
$
491,531

 
$
(102,958
)
 
(21
)%
Incentive and performance fees
 
42,513

 
 
6,019

 
59,660

 
(11,128
)
 
(19
)%
Ancillary and other fees
 
65,641

 
 
7,335

 
83,753

 
(10,777
)
 
(13
)%
Servicing revenue and fees
 
443,872

 
 
66,209


634,944

 
(124,863
)
 
(20
)%
Changes in valuation inputs or other assumptions (1)
 
2,195

 
 
78,132

 
(134,573
)
 
214,900

 
(160
)%
Other changes in fair value (2)
 
(99,202
)
 
 
(13,469
)
 
(131,673
)
 
19,002

 
(14
)%
Change in fair value of servicing rights
 
(97,007
)
 
 
64,663


(266,246
)
 
233,902

 
(88
)%
Amortization of servicing rights
 
(7,531
)
 
 
(2,187
)
 
(21,954
)
 
12,236

 
(56
)%
Change in fair value of servicing rights related liabilities
 
—

 
 
—

 
(62
)
 
62

 
(100
)%
Net servicing revenue and fees
 
$
339,334

 
 
$
128,685


$
346,682

 
$
121,337

 
35
 %
__________
(1)
Represents the net change in servicing rights carried at fair value resulting primarily from market-driven changes in interest rates and prepayment speeds.
(2)
Represents the realization of expected cash flows over time.
We recognize servicing revenue and fees on servicing performed for third parties in which we either own the servicing right or act as subservicer. This revenue includes contractual fees earned on the serviced loans; incentive and performance fees, including those earned based on the performance of certain loans or loan portfolios serviced by us, loan modification fees and asset recovery income; and ancillary fees such as late fees and expedited payment fees. Servicing revenue and fees are adjusted for the amortization and change in fair value of servicing rights and the change in fair value of any servicing rights related liabilities.
Servicing fees decreased $103.0 million in 2018 as compared to 2017 primarily due to the shift of our third-party servicing portfolio from servicing to subservicing and continued runoff of the overall servicing portfolio. Incentive and performance fees decreased $11.1 million in 2018 as compared to 2017 due primarily to reductions in asset recovery income, performance incentives, fees earned under HAMP and REO management fees, offset partially by higher Freddie Mac and Fannie Mae modification incentives. Ancillary and other fees decreased $10.8 million in 2018 as compared to 2017 due to lower late fee income and convenience and expedited payment fees resulting from a smaller overall servicing portfolio.
The change in the fair value of servicing rights improved $233.9 million in 2018 as compared to 2017. Refer to the Servicing segment section under Business Segment Results below for information regarding the change in fair value of our servicing rights.
Net Gains on Sales of Loans
Net gains on sales of loans include realized and unrealized gains and losses on loans held for sale, fair value adjustments on IRLCs and other related freestanding derivatives, values of the initial capitalized servicing rights, a provision for the repurchase of loans, and interest income. Net gains on sales of loans decreased $94.7 million in 2018 as compared to 2017 primarily due to a lower day one margin due to a product mix shift towards lower margin correspondent and wholesale channels combined with pricing decreases implemented in 2018, as well as an overall lower volume of locked loans. This decrease was offset partially by an increase resulting from higher pull-through rates in the consumer channel. In addition, net gains on sales of loans included a decrease in interest income on loans resulting from lower average loan balances, partially offset by higher average interest rates.
Net Fair Value Gains on Reverse Loans and Related HMBS Obligations
Net fair value gains on reverse loans and related HMBS obligations include the contractual interest income earned on reverse loans, including those not yet securitized or bought out of securitization pools, net of interest expense on HMBS related obligations, and the change in fair value of these assets and liabilities. Refer to the Reverse Mortgage segment discussion under our Business Segment Results section below for additional information including a detailed breakout of the components of net fair value gains on reverse loans and related HMBS obligations.

64


Net fair value gains on reverse loans and related HMBS obligations increased $15.0 million in 2018 as compared to 2017 primarily due to an increase of $22.8 million in net interest income on reverse loans and HMBS related obligations, partially offset by a decrease of $8.1 million in cash generated by the origination, purchase and securitization of HECMs. Net interest income increased primarily as a result of a decrease in HMBS related obligations due to an increase in buyouts. Cash generated by the origination, purchase and securitization of HECMs decreased primarily due to our exit from the reverse mortgage originations business and the resulting wind-down of the portfolio, partially offset by a shift in mix from lower margin new originations to higher margin Tails.
Interest Income on Loans
Through February 9, 2018, we recorded interest income on the residential loans held in the Residual Trusts and on our unencumbered mortgage loans, both of which were accounted for at amortized cost. On February 10, 2018, we elected fair value accounting for our residential loans held in the Residual Trusts in connection with fresh start accounting and, subsequently, we only record interest income on our unencumbered mortgage loans.
Interest income on loans decreased $36.0 million in 2018 as compared to 2017 primarily as a result of the adoption of new accounting guidance relating to sales of nonfinancial assets effective January 1, 2018 and the election of fair value accounting for our residential loans held by the Residual Trusts on February 10, 2018 in connection with fresh start accounting. Under the new accounting guidance, a portion of our loans were derecognized and placed back into real estate owned when the loans resulted from prior seller-financed real estate owned sales and we determined collection of substantially all of the sales price is not yet probable. Interest income previously recognized on these loans was reversed and recorded as deferred revenue to be subsequently recognized as gain on sale of real estate owned within other expenses, net when certain criteria are met. Interest income earned on loans carried at fair value is recognized in other net fair value gains (losses) and is discussed below.
Other Revenues
Other revenues consist primarily of other interest income, changes in the fair value of charged-off loans, origination fee income and insurance marketing commissions, and include insurance revenue in 2017. Other revenues increased $9.3 million in 2018 as compared to 2017 due primarily to higher other interest income of $14.4 million and higher fair value gains related to charged-off loans of $2.2 million, partially offset by lower origination fee income of $4.2 million and insurance revenue of $4.0 million in 2017.
General and Administrative
General and administrative expenses decreased $179.6 million in 2018 as compared to 2017 resulting primarily from decreases of $42.0 million in costs related to our debt restructure initiative in 2017, $25.9 million in default servicing expense, $22.6 million in curtailment-related accruals, $19.5 million in legal fees related to litigation and regulatory costs, $11.3 million in occupancy costs due primarily to a lease liability accrual recorded in 2017, $9.3 million in contractor and consulting fees, $8.9 million in professional fees due in part to transitioning work in-house and the sale of substantially all of our insurance business in 2017, $8.9 million in loan origination expense due to a lower funded originations volume, $6.5 million in advance loss provision due to a decrease in the servicing advance portfolio and a decline in delinquent portfolios, $4.4 million due to lower loss accruals for reverse loans and a $3.0 million reimbursement from an insurance carrier related to the settlement of corporate shareholder lawsuits in 2018, offset in part by an increase of $11.0 million in amortization of the Clean-up Call Agreement inducement fee in 2018. In addition, there was a decrease of $18.0 million resulting from accretion recorded during 2018 related to fresh start accounting adjustments for advances, which is not comparable to 2017.
Salaries and Benefits
Salaries and benefits decreased $58.8 million in 2018 as compared to 2017 primarily from a lower average headcount driven by site closures and various organizational changes. Headcount decreased by approximately 900 full-time employees from approximately 3,800 at December 31, 2017 to approximately 2,900 at December 31, 2018.
Interest Expense
Through February 9, 2018, we recorded interest expense on our corporate debt, servicing advance liabilities, master repurchase agreements and mortgage-backed debt issued by the Residual Trusts, all of which were accounted for at amortized cost. On February 10, 2018, we elected fair value accounting for our mortgage-backed debt issued by the Residual Trusts in connection with the adoption of fresh start accounting and, subsequently, we only recognize interest expense on our corporate debt, servicing advance liabilities and master repurchase agreements. Interest expense recorded on mortgage-backed debt carried at fair value is recognized as a component of other net fair value gains (losses) and is discussed below.

65


Interest expense decreased $13.2 million in 2018 as compared to 2017 driven by decreases in interest expense related to mortgage-backed debt of the Residual Trusts and corporate debt, offset in part by an increase in interest expense related to master repurchase agreements. Interest expense related to the mortgage-backed debt of the Residual Trusts decreased as this interest expense is recognized as a component of other net fair value gains (losses) subsequent to the fair value election on February 10, 2018. Interest expense related to corporate debt decreased as a result of the extinguishment of $531.1 million of corporate debt in connection with our emergence from bankruptcy and $268.2 million of corporate debt payments made during 2018, offset in part by higher interest rates on post-bankruptcy debt. Interest expense related to master repurchase agreements increased as a result of higher debt balances related to increased buyout volume and higher interest rates on the post-bankruptcy warehouse facilities. Refer to the Liquidity and Capital Resources section for additional information on our debt.
Provided below is a summary of the average balances of our corporate debt, master repurchase agreements, servicing advance liabilities, and mortgage-backed debt of the Residual Trusts, as well as the related interest expense and average rates (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
 
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended December 31, 2017
 
Variance
Corporate debt (1)
 
 
 
 
 
 
 
 
 
Interest expense
 
$
111,696

 
 
$
7,519

 
$
134,661

 
$
(15,446
)
Average balance (2)
 
1,233,039

 
 
1,187,190

 
2,093,800

 
(852,971
)
Average rate
 
10.17
%
 
 
5.78
%
 
6.43
%
 
3.18
 %
 
 
 
 
 
 
 
 
 
 
Master repurchase agreements (3)
 
 
 
 
 
 
 
 
 
Interest expense (4)
 
$
82,269

 
 
$
21,631

 
$
73,008

 
$
30,892

Average balance (2)
 
1,455,075

 
 
1,117,914

 
1,244,727

 
172,578

Average rate
 
6.35
%
 
 
17.66
%
 
5.87
%
 
1.46
 %
 
 
 
 
 
 
 
 
 
 
Servicing advance liabilities (5)
 
 
 
 
 
 
 
 
 
Interest expense (6)
 
$
15,356

 
 
$
6,963

 
$
27,966

 
$
(5,647
)
Average balance (2)
 
285,926

 
 
436,005

 
607,620

 
(304,882
)
Average rate
 
6.03
%
 
 
14.57
%
 
4.60
%
 
2.77
 %
 
 
 
 
 
 
 
 
 
 
Mortgage-backed debt of the Residual Trusts (5)
 
 
 
 
 
 
 
 
 
Interest expense
 
$
—

 
 
$
2,643

 
$
25,609

 
$
(22,966
)
Average balance (7)
 
—

 
 
386,570

 
411,123

 
(333,809
)
Average rate
 
—

 
 
6.24
%
 
6.23
%
 
(2.81
)%
__________
(1)
Corporate debt includes our 2013 Term Loan, 2018 Term Loan, Senior Notes, Second Lien Notes and Convertible Notes. Corporate debt activities are included in the Corporate and Other non-reportable segment.
(2)
Average balance for corporate debt, master repurchase agreements and servicing advance liabilities is calculated as the average daily carrying value.
(3)
Master repurchase agreements are held by the Originations and Reverse Mortgage segments.
(4)
Includes $13.7 million and $16.5 million in amortization of debt issuance costs related to the WIMC DIP Warehouse Facilities for the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively, which were amortized over the estimated bankruptcy period of two months.
(5)
Servicing advance liabilities and mortgage-backed debt of the Residual Trusts are held by our Servicing segment.
(6)
Includes $4.4 million and $4.3 million in amortization of debt issuance costs related to the WIMC DIP Warehouse Facilities for the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively, which were amortized over the estimated bankruptcy period of two months.
(7)
Average balance for mortgage-backed debt of the Residual Trusts is calculated as the average carrying value at the beginning of each month during the year.

66


Depreciation and Amortization
Depreciation and amortization decreased $4.6 million in 2018 as compared to 2017 driven by a decrease in depreciation expense as a result of revaluing our internally-developed software on February 10, 2018 in connection with fresh start accounting, which resulted in an extension of its useful life. This decrease was offset in part by an increase in amortization expense as a result of recording a new intangible asset for wholesale and correspondent relationships in connection with fresh start accounting.
Goodwill and Intangible Assets Impairment
We recorded goodwill and intangible assets impairment charges totaling $23.7 million in 2018. In March 2018, we recorded goodwill impairment of $9.0 million related to the Originations segment as a result of lower projected financial performance within this segment subsequent to our emergence from bankruptcy, which was driven by certain market factors, including increasing mortgage interest rates driving lower originations volume, a flattening of the interest rate curve resulting in margin compression, aggressive pricing by certain competitors and continued challenges in shifting to a purchase money lender.
In March 2018, we recorded intangible assets impairment of $1.0 million related to the Servicing segment trade names, and in June 2018, we recorded intangible assets impairment of $1.0 million related to the Originations segment trade names. These assets were tested for recoverability due to changes in facts and circumstances associated with rising mortgage interest rates and lower projected originations business financial performance.
In December 2018, we recorded intangible assets impairment of $6.4 million related to trade names of the Servicing segment and $6.3 million related to trade names of the Originations segment as a result of actual and forecasted business declines.
Other Expenses, Net
Effective January 1, 2018, we adopted new accounting guidance relating to sales of nonfinancial assets, under which a portion of our loans were derecognized and placed back into real estate owned when the loans resulted from prior seller-financed real estate owned sales and we determined collection of substantially all of the sales price is not probable. Interest income previously recognized on these loans was reversed and recorded as deferred revenue. Once certain criteria are met, the deferred revenue is recognized as gain on sale of real estate owned within other expenses, net.
Other expenses, net decreased $49.3 million in 2018 as compared to 2017 due primarily to the recognition of a deferred gain on real estate owned of $37.3 million in connection with the sale and deconsolidation of the Residual Trusts in November 2018. In addition, we recognized $7.4 million in gains on sale of real estate owned for other loans that met the required criteria for recognition throughout 2018.
Reorganization Items and Fresh Start Accounting Adjustments
We recorded reorganization items and fresh start accounting adjustments of $461.8 million in 2018 as compared to $(37.6) million in 2017. The gain in 2018 was driven by $556.9 million related to the cancellation of corporate debt and $77.2 million of fresh start accounting adjustments, partially offset by $153.8 million related to the issuance of new equity to the Convertible and Senior Noteholders. The loss in 2017 resulted from the write-off of $34.4 million of costs related to previously issued debt and $3.1 million of legal and professional fees. Refer to the Business Segments Results section below for additional information regarding the fresh start accounting adjustments.
Other Net Fair Value Gains
Historically, other net fair value gains (losses) consisted primarily of fair value gains and losses on the assets and liabilities of the Non-Residual Trusts and fluctuated generally based on changes on prepayment speeds, default rates, loss severity, LIBOR rates and discount rates. On February 10, 2018, we elected fair value accounting for the assets and liabilities of the Residual Trusts in connection with fresh start accounting and, until the sale and deconsolidation of the Residual Trusts in November 2018, fair value gains and losses, interest income earned on loans of the Residual Trusts and interest expense on the mortgage-backed debt of the Residual Trusts were recognized in other net fair value gains (losses).
There were other net fair value gains of $14.8 million in 2018 as compared to $2.0 million in 2017, which represents an increase of $12.8 million. Net fair value gains related to the Non-Residual Trusts increased $7.6 million during 2018 as compared to the same period of 2017 due to an increase in the LIBOR rate for loans and bonds related to the Non-Residual Trusts during 2018. Net fair value gains related to the Residual Trusts were $4.1 million for 2018.

67


Net Losses on Extinguishment of Debt
Net losses on extinguishment of debt of $5.3 million during 2018 resulted from the sale of servicing rights and the sale of the Residual Trusts during the year, which required us to make prepayments on the 2018 Term Loan. These prepayments resulted in prepayment premium fees and the accelerated amortization of discounts related to the 2018 Term Loan, which were recorded as a component of losses on the extinguishment of debt. Net losses on extinguishment of debt of $6.1 million during 2017 resulted from the write-off of deferred debt issuance costs related to the termination of advance facilities and warehouse facilities in exchange for the WIMC DIP Warehouse Facilities, and the write-off of deferred debt issuance costs and debt discount related to payments made on the 2013 Term Loan, each in connection with the WIMC Chapter 11 Case.
Gain on Sale of Business
Gain on sale of business of $67.7 million during 2017 relates to the sale of our principal insurance agency and substantially all of our insurance agency business, which was completed on February 1, 2017.
Other Gains
We recorded other gains of $8.5 million in 2018 as compared to $7.2 million in 2017. Included in these amounts were gains of $18.5 million and $7.2 million in 2018 and 2017, respectively, recognized in connection with our counterparty under the Clean-up Call Agreement having fulfilled its obligation for the mandatory clean-up call of certain of the remaining Non-Residual Trusts, resulting in the subsequent deconsolidation of the trusts. These gains were offset by the amortization of the inducement fee recorded in general and administrative expenses during the period as discussed above. The gains recognized in 2018 were partially offset by a loss of $9.1 million related to the sale and deconsolidation of the Residual Trusts in November 2018. Refer to Note 5 to the Consolidated Financial Statements for additional information on the exercise of the mandatory clean-up call obligation and the sale and deconsolidation of the Residual Trusts.
Income Tax Benefit
We recorded income tax benefit of $2.7 million in 2018 as compared to $3.4 million in 2017. Income tax benefit recognized during 2018 reflects the tax impact from operations, reorganization adjustments and the fresh start accounting adjustments. Refer to Note 24 of the Consolidated Financial Statements for additional information on income taxes in connection with our cancellation of debt and emergence from bankruptcy. The income tax benefit recognized during 2017 resulted primarily from adjustments to reduce the valuation allowance due to tax law changes under the Tax Act, offset in part by tax expense related to goodwill and nominal current state tax. Deferred taxes in 2018 and 2017 have been reduced by a valuation allowance due to a determination that it is more likely than not that some or all of the deferred tax assets will not be realized based on the weight of all available evidence. The effective tax rate and tax expense continue to be low as a result of our not recognizing an income tax benefit associated with net losses.
Financial Condition — Comparison of Consolidated Financial Condition at December 31, 2018 to December 31, 2017
Total assets and total liabilities decreased by $2.9 billion and $3.3 billion, respectively, at December 31, 2018 as compared to December 31, 2017. The most significant changes in assets and liabilities are described below.
Residential loans at amortized cost, net decreased $511.6 million primarily due to the adoption of fresh start accounting and the reclassification of $317.2 million of mortgage loans related to the Residual Trusts from residential loans carried at amortized cost, net to residential loans at fair value. In addition, $118.9 million of the decrease resulted from the adoption of new accounting guidance relating to sales of nonfinancial assets effective January 1, 2018, which resulted in loans being derecognized and placed back into real estate owned when the loans resulted from prior seller-financed real estate owned sales and we determined collection of substantially all of the sales price is not yet probable. Residential loans of the Residual Trusts were subsequently deconsolidated in connection with the sale of our residual interests in the four remaining Residual Trusts in November 2018. Furthermore, loans subject to repurchase from Ginnie Mae decreased $75.9 million resulting from converting disaster forbearances into loan modifications and the sale of certain servicing rights associated with originated Ginnie Mae loans.
Residential loans at fair value decreased $1.6 billion primarily due to a decrease in reverse loans related to increased buyouts of reverse loans from the Ginnie Mae securitization pools and the subsequent conveyance of these loans to HUD. To a lesser extent, reverse loans decreased as a result of the sale of a pool of defaulted reverse Ginnie Mae buyout loans.
Servicer and protective advances, net decreased $372.9 million and servicing advance liabilities, which are utilized to finance servicer and protective advances, decreased $265.2 million, primarily as a result of Fannie Mae reimbursements, Fannie Mae MSR sales related to nonperforming and reperforming loans, and numerous other loan sales throughout 2018 and collections related to these sales. In addition, servicer and protective advances decreased as a result of the adoption of fresh start accounting and adjustments recorded to reflect estimated fair value based on the net present value of expected cash flows and the write-off of aged balances.

68


Servicing rights, net decreased $166.0 million primarily due to the sale of servicing rights with a fair value of $300.0 million and amortization related to the realization of cash flows of $112.7 million, offset partially by servicing rights capitalized upon the sales of loans of $180.7 million and positive fair value adjustments of $80.3 million related to an increase in mortgage interest rates.
Goodwill decreased $47.7 million as a result of the adoption of fresh start accounting, which resulted in a decrease to goodwill of $38.8 million from recording the fair market value of the assets in excess of the reorganization value. In addition, we recorded an impairment charge of $9.0 million in March 2018. As a result, we no longer have goodwill.
Intangible assets, net and premises and equipment, net increased $7.0 million and $16.0 million, respectively, primarily as a result of fresh start accounting adjustments, which resulted in adjustments of $20.2 million for customer and institutional relationships, $15.2 million for trade names and $33.7 million for internally developed technology. These increases were offset in part by impairment charges related to trade names of $14.7 million and depreciation and amortization recorded during 2018.
Payables and accrued liabilities decreased $126.5 million primarily due to a $75.9 million decrease in loans subject to repurchase from Ginnie Mae resulting from converting disaster forbearances into loan modifications and the sale of certain servicing rights associated with originated Ginnie Mae loans and the settlement of $34.0 million of reverse debenture interest curtailment, reserves and other amounts payable to Fannie Mae that were resolved during 2018.
Warehouse borrowings increased $456.5 million as a result of a $287.2 million increase in borrowings for reverse buyout loans resulting from the increased flow of HECMs and real estate owned that are reaching 98% of their maximum claim amount and a $169.3 million increase in borrowings for mortgage loans held for sale resulting from a lower volume of loans sold in relation to loans originated during 2018.
Corporate debt and liabilities subject to compromise in total decreased $888.4 million due to the cancellation of the Senior Notes and Convertible Notes balances of $781.1 million and related accrued interest payable of $25.8 million upon emergence from the WIMC Chapter 11 Case on February 9, 2018 and additional corporate debt payments of $81.3 million made on our term loans during 2018.
Mortgage-backed debt decreased $604.6 million as a result of a $387.2 million decrease related to the sale of our residual interests in the four remaining Residual Trusts in November 2018 and a $182.0 million decrease related to our counterparty under the Clean-up Call Agreement having fulfilled its obligation for the mandatory clean-up call of four of the remaining Non-Residual Trusts. These transactions resulted in the subsequent deconsolidation of these trusts.
HMBS related obligations at fair value decreased $1.9 billion due to an increase in the repurchase of certain HECMs and real estate owned from securitization pools.
Non-GAAP Financial Measures
We manage our company in three reportable segments: Servicing, Originations and Reverse Mortgage. We evaluate the performance of our business segments through the following measures: income (loss) before income taxes and Adjusted EBITDA. Management considers Adjusted EBITDA, a non-GAAP financial measure, to be important in the evaluation of our business segments and of the Company as a whole, as well as for allocating capital resources to our segments. Adjusted EBITDA is a supplemental metric utilized by management to assess the underlying key drivers and operational performance of the continuing operations of the business. In addition, analysts, investors, and creditors may use these measures when analyzing our operating performance. Adjusted EBITDA is not a presentation made in accordance with GAAP and our use of this measure and term may vary from other companies in our industry.
Adjusted EBITDA eliminates the effects of financing, income taxes and depreciation and amortization. Adjusted EBITDA is defined as income (loss) before income taxes, plus amortization of servicing rights and other fair value adjustments; interest expense on corporate debt; depreciation and amortization; goodwill and intangible assets impairment, if any; a portion of the provision for curtailment expense, net of expected third-party recoveries, if applicable; share-based compensation expense or benefit; exit costs; estimated settlements and costs for certain legal and regulatory matters; fair value to cash adjustments for reverse loans; and select other cash and non-cash adjustments primarily including the net provision for the repurchase of loans sold, non-cash interest income, severance, gain or loss on extinguishment of debt, interest income on unrestricted cash and cash equivalents, the net impact of the Residual and Non-Residual Trusts, the provision for loan losses, Residual Trust cash flows prior to the sale and deconsolidation of such Trusts, transaction costs, reorganization items, servicing fee economics, and certain non-recurring costs, as applicable. Adjusted EBITDA includes both cash and non-cash gains from mortgage loan origination activities. Adjusted EBITDA excludes the impact of fair value option accounting on certain assets and liabilities and includes cash generated from reverse mortgage origination activities for the periods during which we were originating reverse mortgages. Adjusted EBITDA may also include other adjustments, as applicable based upon facts and circumstances, consistent with our debt agreements.

69


Adjusted EBITDA should not be considered as an alternative to (i) net income (loss) or any other performance measures determined in accordance with GAAP or (ii) operating cash flows determined in accordance with GAAP. Adjusted EBITDA has important limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of the limitations of these metrics are:
•
Adjusted EBITDA does not reflect cash expenditures for long-term assets and other items that have been and will be incurred, future requirements for capital expenditures or contractual commitments;
•
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•
Adjusted EBITDA does not reflect certain tax payments that represent reductions in cash available to us;
•
Adjusted EBITDA does not reflect non-cash compensation that is and will remain a key element of our overall long-term incentive compensation package;
•
Adjusted EBITDA does not reflect the change in fair value due to changes in valuation inputs and other assumptions;
•
Adjusted EBITDA does not reflect any cash requirements for the assets being depreciated and amortized that may have to be replaced in the future;
•
Adjusted EBITDA does not reflect the change in fair value resulting from the realization of expected cash flows; and
•
Adjusted EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our corporate debt, although it does reflect interest expense associated with our servicing advance liabilities, master repurchase agreements, mortgage-backed debt, and HMBS related obligations.
Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as a supplement. Users of our financial statements are cautioned not to place undue reliance on Adjusted EBITDA.

70


The following table reconciles Adjusted EBITDA to net income (loss), which we consider to be the most directly comparable GAAP financial measure to Adjusted EBITDA (in thousands):
Adjusted EBITDA
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
Net income (loss)
 
$
(205,094
)
 
 
$
521,007

Income tax benefit
 
(2,651
)
 
 
(18
)
Income (loss) before income taxes
 
(207,745
)
 
 
520,989

EBITDA adjustments
 
 
 
 
 
Reorganization items and fresh start accounting adjustments
 
2,726

 
 
(464,563
)
Interest expense
 
112,788

 
 
25,685

Fair value to cash adjustment for reverse loans (1)
 
39,803

 
 
(1,704
)
Depreciation and amortization
 
32,358

 
 
3,810

Gain on deconsolidation of residual interests in the Residual Trusts
 
(29,214
)
 
 
—

Amortization of servicing rights and other fair value adjustments (2)
 
92,977

 
 
(68,222
)
Goodwill and intangible assets impairment
 
23,660

 
 
—

Exit costs (3)
 
13,082

 
 
931

Transaction costs (4)
 
10,729

 
 
(263
)
Share-based compensation expense
 
2,491

 
 
538

Other (5)
 
(16,052
)
 
 
(1,049
)
Subtotal
 
285,348

 
 
(504,837
)
Adjusted EBITDA
 
$
77,603

 
 
$
16,152

__________
(1)
Represents the non-cash fair value adjustment to arrive at cash generated from reverse mortgage origination activities.
(2)
Consists of the change in fair value due to changes in valuation inputs and other assumptions relating to servicing rights and charged-off loans as well as the amortization of servicing rights and the realization of expected cash flows relating to servicing rights carried at fair value.
(3)
Exit costs include expenses related to the closing of offices and the termination and replacement of certain employees as well as other expenses to institute efficiencies. Exit costs incurred for the period from February 10, 2018 through December 31, 2018 and the period from January 1, 2018 through February 9, 2018 include those relating to our exit from the reverse mortgage originations business and actions initiated in 2015, 2016, 2017 and 2018 in connection with our continued efforts to enhance efficiencies and streamline processes in the organization. Refer to Note 17 to the Consolidated Financial Statements for additional information regarding exit costs.
(4)
Transaction costs result primarily from our debt restructuring initiatives.
(5)
Includes the net provision for the repurchase of loans sold, non-cash interest income, accretion related to fresh start accounting adjustments for advances, net losses on extinguishment of debt, interest income on unrestricted cash and cash equivalents, costs associated with transforming the business, the net impact of the Residual and Non-Residual Trusts, the provision for loan losses, and the Residual Trust cash flows.
Business Segment Results
Effective January 1, 2018, we no longer allocate corporate overhead, including depreciation and amortization, to our operating segments. These amounts are now included in the Corporate and Other non-reportable segment. Prior year balances have been restated to conform to current year presentation.
We reconcile our income (loss) before income taxes for our business segments to our GAAP consolidated income (loss) before income taxes and report the financial results of our Non-Residual Trusts, other non-reportable operating segments and certain corporate expenses as Corporate and Other activity. Additional information regarding the results of operations for our Servicing, Originations and Reverse Mortgage segments and the Corporate and Other non-reportable segment is presented below. Refer to Note 27 to the Consolidated Financial Statements for a reconciliation of our income (loss) before income taxes for our business segments to our GAAP consolidated income (loss) before income taxes.

71


Reconciliation of GAAP Consolidated Income (Loss) Before Income Taxes to Adjusted EBITDA (in thousands):
 
 
Successor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
Servicing
 
Originations
 
Reverse
Mortgage
 
Other
 
Total
Consolidated
Income (loss) before income taxes
 
$
70,535

 
$
(34,369
)
 
$
(44,513
)
 
$
(199,398
)
 
$
(207,745
)
 
 
 
 
 
 
 
 
 
 
 
EBITDA adjustments
 
 
 
 
 
 
 
 
 
 
Reorganization items
 
—

 
—

 
—

 
2,726

 
2,726

Interest expense
 
1,092

 
—

 
—

 
111,696

 
112,788

Fair value to cash adjustment for reverse loans
 
—

 
—

 
39,803

 
—

 
39,803

Depreciation and amortization
 
14,062

 
15,691

 
1,632

 
973

 
32,358

Gain on deconsolidation of residual interests in the Residual Trusts
 
(29,214
)
 
—

 
—

 
—

 
(29,214
)
Amortization of servicing rights and other fair value adjustments
 
91,422

 
—

 
1,555

 
—

 
92,977

Goodwill and intangible assets impairment
 
7,400

 
16,260

 
—

 
—

 
23,660

Exit costs
 
5,232

 
5,721

 
422

 
1,707

 
13,082

Transaction costs
 
592

 
—

 
—

 
10,137

 
10,729

Share-based compensation expense
 
45

 
128

 
37

 
2,281

 
2,491

Other
 
(18,420
)
 
(2,904
)
 
748

 
4,524

 
(16,052
)
Total adjustments
 
72,211

 
34,896

 
44,197

 
134,044

 
285,348

Adjusted EBITDA
 
$
142,746

 
$
527

 
$
(316
)
 
$
(65,354
)
 
$
77,603

 
 
 
 
 
 
 
 
 
 
 
 
 
Predecessor
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
 
Servicing
 
Originations
 
Reverse
Mortgage
 
Other
 
Total
Consolidated
Income (loss) before income taxes
 
$
69,614

 
$
7,977

 
$
(1,133
)
 
$
444,531

 
$
520,989

 
 
 
 
 
 
 
 
 
 
 
EBITDA adjustments
 
 
 
 
 
 
 
 
 
 
Reorganization items and fresh start accounting adjustments
 
14,588

 
(9,612
)
 
(7,423
)
 
(462,116
)
 
(464,563
)
Interest expense
 
4,441

 
6,579

 
7,146

 
7,519

 
25,685

Fair value to cash adjustment for reverse loans
 
—

 
—

 
(1,704
)
 
—

 
(1,704
)
Depreciation and amortization
 
3,252

 
265

 
228

 
65

 
3,810

Amortization of servicing rights and other fair value adjustments
 
(68,902
)
 
—

 
680

 
—

 
(68,222
)
Exit costs
 
811

 
46

 
29

 
45

 
931

Transaction costs
 
(208
)
 
—

 
—

 
(55
)
 
(263
)
Share-based compensation expense
 
13

 
14

 
4

 
507

 
538

Other
 
(512
)
 
(71
)
 
117

 
(583
)
 
(1,049
)
Total adjustments
 
(46,517
)
 
(2,779
)
 
(923
)
 
(454,618
)
 
(504,837
)
Adjusted EBITDA
 
$
23,097

 
$
5,198

 
$
(2,056
)
 
$
(10,087
)
 
$
16,152


72


 
 
Predecessor
 
 
For the Year Ended December 31, 2017
 
 
Servicing
 
Originations
 
Reverse
Mortgage
 
Other
 
Total
Consolidated
Income (loss) before income taxes
 
$
(122,326
)
 
$
67,265

 
$
(62,240
)
 
$
(312,955
)
 
$
(430,256
)
 
 
 
 
 
 
 
 
 
 
 
EBITDA adjustments
 
 
 
 
 
 
 
 
 
 
Reorganization items
 
—

 
—

 
—

 
37,645

 
37,645

Interest expense
 
6,796

 
8,638

 
7,826

 
134,661

 
157,921

Fair value to cash adjustment for reverse loans
 
—

 
—

 
38,351

 
—

 
38,351

Depreciation and amortization
 
34,242

 
2,811

 
3,010

 
701

 
40,764

Amortization of servicing rights and other fair value adjustments
 
270,873

 
—

 
1,494

 
—

 
272,367

Exit costs
 
17,507

 
789

 
1,368

 
2,695

 
22,359

Transaction costs
 
6,704

 
—

 
—

 
48,990

 
55,694

Share-based compensation expense (benefit)
 
334

 
(85
)
 
200

 
1,763

 
2,212

Gain on sale of business
 
(67,734
)
 
—

 
—

 
—

 
(67,734
)
Other 
 
8,061

 
(5,031
)
 
1,368

 
7,875

 
12,273

Total adjustments
 
276,783

 
7,122

 
53,617

 
234,330

 
571,852

Adjusted EBITDA
 
$
154,457

 
$
74,387

 
$
(8,623
)
 
$
(78,625
)
 
$
141,596


73


Servicing Segment
Provided below is a summary of results of operations and Adjusted EBITDA for our Servicing segment (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
 
 
 
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended December 31, 2017
 
Variance
 
 
 
 
 
 
$
 
%
Net servicing revenue and fees
 
 
 
 
 
 
 
 
 
 
 
Third parties
 
$
316,918



$
126,656

 
$
319,116

 
$
124,458

 
39
 %
Intercompany
 
4,915

 
 
847

 
9,620

 
(3,858
)
 
(40
)%
Total net servicing revenue and fees
 
321,833

 
 
127,503

 
328,736

 
120,600

 
37
 %
Interest income on loans
 
1,792

 
 
3,381

 
41,147

 
(35,974
)
 
(87
)%
Intersegment retention revenue
 
7,972

 
 
858

 
12,902

 
(4,072
)
 
(32
)%
Net gains on sales of loans
 
564

 
 
216

 
607

 
173

 
29
 %
Other revenues
 
78,509

 
 
13,593

 
81,656

 
10,446

 
13
 %
Total revenues
 
410,670



145,551

 
465,048

 
91,173

 
20
 %
General and administrative expenses (1)
 
220,807

 
 
31,885

 
375,167

 
(122,475
)
 
(33
)%
Salaries and benefits (1)
 
118,156

 
 
17,183

 
182,855

 
(47,516
)
 
(26
)%
Interest expense
 
15,356

 
 
9,606

 
53,593

 
(28,631
)
 
(53
)%
Depreciation and amortization (1)
 
14,062

 
 
3,252

 
34,242

 
(16,928
)
 
(49
)%
Intangible assets impairment
 
7,400

 
 
—

 
—

 
7,400

 
n/m

Other expenses, net
 
(42,524
)
 
 
(419
)
 
5,065

 
(48,008
)
 
n/m

Total expenses
 
333,257



61,507

 
650,922

 
(256,158
)
 
(39
)%
Fresh start accounting adjustments
 
—

 
 
(14,588
)
 
—

 
(14,588
)
 
n/m

Other net fair value gains (losses)
 
3,091

 
 
158

 
(1,937
)
 
5,186

 
(268
)%
Net losses on extinguishment of debt
 
—

 
 
—

 
(2,249
)
 
2,249

 
(100
)%
Gain on sale of business
 
—

 
 
—

 
67,734

 
(67,734
)
 
(100
)%
Other
 
(9,969
)
 
 
—

 
—

 
(9,969
)
 
n/m

Total other gains (losses)
 
(6,878
)
 
 
(14,430
)

63,548


(84,856
)

(134
)%
Income (loss) before income taxes
 
70,535



69,614


(122,326
)
 
262,475

 
(215
)%
 
 
 
 
 
 
 
 
 
 
 


EBITDA Adjustments
 
 
 
 
 
 
 
 
 
 


Amortization of servicing rights and other fair value adjustments
 
91,422

 
 
(68,902
)
 
270,873

 
(248,353
)
 
(92
)%
Gain on deconsolidation of residual interests in the Residual Trusts
 
(29,214
)
 
 
—

 
—

 
(29,214
)
 
n/m

Depreciation and amortization (1)
 
14,062

 
 
3,252

 
34,242

 
(16,928
)
 
(49
)%
Fresh start accounting adjustments
 
—

 
 
14,588

 
—

 
14,588

 
n/m

Intangible assets impairment
 
7,400

 
 
—

 
—

 
7,400

 
n/m

Exit costs (1)
 
5,232

 
 
811

 
17,507

 
(11,464
)
 
(65
)%
Interest expense
 
1,092

 
 
4,441

 
6,796

 
(1,263
)
 
(19
)%
Transaction costs
 
592

 
 
(208
)
 
6,704

 
(6,320
)
 
(94
)%
Share-based compensation expense (1)
 
45

 
 
13

 
334

 
(276
)
 
(83
)%
Gain on sale of business
 
—

 
 
—

 
(67,734
)
 
67,734

 
(100
)%
Other (1)
 
(18,420
)
 
 
(512
)
 
8,061

 
(26,993
)
 
(335
)%
Total adjustments
 
72,211

 
 
(46,517
)
 
276,783

 
(251,089
)
 
(91
)%
Adjusted EBITDA
 
$
142,746

 
 
$
23,097

 
$
154,457

 
$
11,386

 
7
 %
__________
(1)
Effective January 1, 2018, we no longer allocate corporate overhead, including depreciation and amortization, to our operating segments. These amounts are now included in the Corporate and Other non-reportable segment. Prior year balances have been restated to conform to current year presentation.

74


Mortgage Loan Servicing Portfolio
Provided below is a summary of the activity in our mortgage loan servicing portfolio (dollars in thousands):
 
Successor
 
 
Predecessor
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
 
Number
of Accounts
 
Unpaid Principal Balance
 
 
Number
of Accounts
 
Unpaid Principal Balance
 
Number
of Accounts
 
Unpaid Principal Balance
Third-party servicing portfolio (1)
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of the period
1,530,310

 
$
184,717,920

 
 
1,545,831

 
$
186,565,249

 
1,910,605

 
$
223,414,398

Loan sales with servicing retained (2)
25,160

 
5,820,181

 
 
2,952

 
661,414

 
33,414

 
7,080,797

Other new business added (3)
34,919

 
8,639,521

 
 
1,061

 
237,422

 
18,352

 
4,064,478

Sales
(38,015
)
 
(7,545,886
)
 
 
—

 
—

 
(39,695
)
 
(5,138,637
)
Payoffs and other adjustments, net (4)
(172,823
)
 
(22,875,830
)
 
 
(19,534
)
 
(2,746,165
)
 
(376,845
)
 
(42,855,787
)
Balance at end of the period
1,379,551


168,755,906


 
1,530,310


184,717,920

 
1,545,831

 
186,565,249

On-balance sheet residential loans and real estate owned (5)
11,997

 
1,369,181

 
 
26,267

 
1,655,060

 
27,748

 
1,949,013

Total mortgage loan servicing portfolio
1,391,548


$
170,125,087


 
1,556,577


$
186,372,980

 
1,573,579

 
$
188,514,262

__________
(1)
Third-party servicing includes servicing rights capitalized, subservicing rights capitalized and subservicing rights not capitalized. Subservicing rights capitalized consist of contracts acquired through business combinations whereby the benefits from the contract are greater than adequate compensation for performing the servicing. Refer to Note 13 to the Consolidated Financial Statements for additional information regarding servicing rights.
(2)
The year ended December 31, 2017 includes loan sales for which the servicing rights were subsequently transferred to NRM on a flow basis.
(3)
Consists of activities associated with servicing and subservicing contracts and includes co-issue to NRM, excluding recapture and other activities, of $2.1 billion, $233.3 million and $3.9 billion for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively.
(4)
Amounts presented are net of loan sales associated with servicing retained recapture activities of $3.1 billion, $368.3 million and $5.0 billion for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively.
(5)
On-balance sheet residential loans and real estate owned include mortgage loans held for sale, the assets of the Non-Residual Trusts, and loans subject to repurchase from Ginnie Mae, as well as the assets of the Residual Trusts until their sale and deconsolidation in November 2018.
Provided below is a summary of the composition of our mortgage loan servicing portfolio (dollars in thousands):
 
 
Successor
 
 
At December 31, 2018
 
 
Number
of Accounts
 
Unpaid Principal
Balance
 
Weighted- Average
Contractual Servicing Fee (1)
 
30 Days or
More Past Due (2)
Third-party servicing portfolio
 
 
 
 
 
 
 
 
First lien mortgages
 
1,199,911

 
$
163,654,263

 
0.18
%
 
7.53
%
Second lien mortgages
 
24,283

 
810,090

 
0.57
%
 
6.82
%
Manufactured housing and other
 
155,357

 
4,291,553

 
1.10
%
 
13.85
%
Total accounts serviced for third parties (3)
 
1,379,551

 
168,755,906

 
0.20
%
 
7.68
%
On-balance sheet residential loans and real estate owned (4)(5)
 
11,997

 
1,369,181

 
 
 
37.36
%
Total mortgage loan servicing portfolio (6)
 
1,391,548

 
$
170,125,087

 
 
 
7.92
%

75


 
 
 
 
 
 
 
 
 
 
 
Predecessor
 
 
At December 31, 2017
 
 
Number
of Accounts
 
Unpaid Principal
Balance
 
Weighted- Average
Contractual Servicing Fee (1)
 
30 Days or
More Past Due (2)
Third-party servicing portfolio
 
 
 
 
 
 
 
 
First lien mortgages
 
1,335,845

 
$
180,317,101


0.21
%
 
9.59
%
Second lien mortgages
 
31,976

 
1,153,401

 
0.59
%
 
7.86
%
Manufactured housing and other
 
178,010

 
5,094,747

 
1.10
%
 
13.09
%
Total accounts serviced for third parties (3)
 
1,545,831

 
186,565,249


0.23
%
 
9.67
%
On-balance sheet residential loans and real estate owned (4)(5)
 
27,748

 
1,949,013

 
 
 
35.90
%
Total mortgage loan servicing portfolio (6)
 
1,573,579

 
$
188,514,262

 
 
 
9.95
%
__________
(1)
The weighted average contractual servicing fee is calculated as the sum of the product of the contractual servicing fee and the ending unpaid principal balance divided by the total ending unpaid principal balance.
(2)
Past due status is measured based on either the MBA method or the OTS method as specified in the servicing agreement. Under the MBA method, a loan is considered past due if its monthly payment is not received by the end of the day immediately preceding the loan's next due date. Under the OTS method, a loan is considered past due if its monthly payment is not received by the loan's due date in the following month.
(3)
Consists of $64.5 billion and $104.3 billion in unpaid principal balance associated with servicing and subservicing contracts, respectively, at December 31, 2018 and $91.8 billion and $94.8 billion, respectively, at December 31, 2017.
(4)
Includes residential loans and real estate owned held by the Servicing segment for which it does not recognize servicing fees. The Servicing segment receives intercompany servicing fees related to on-balance sheet assets of the Originations segment and the Corporate and Other non-reportable segment.
(5)
Loans subject to repurchase from Ginnie Mae that were 30 days or more past due comprised 34.07% and 27.83% of on-balance sheet residential loans and real estate owned at December 31, 2018 and 2017, respectively. All other loans that were 30 days or more past due comprised 3.29% and 8.07% of on-balance sheet residential loans and real estate owned at December 31, 2018 and 2017, respectively.
(6)
Includes loans that are 30 days or more past due from GSEs, Ginnie Mae, and other of 7.23%, 7.70% and 16.90%, respectively, at December 31, 2018, and 9.62%, 8.28% and 19.01%, respectively, at December 31, 2017.
The unpaid principal balance of our third-party servicing portfolio decreased $17.8 billion at December 31, 2018 as compared to December 31, 2017 primarily due to runoff and sales of the portfolio, partially offset by portfolio additions related to subservicing transferred to us from NRM, loans sold with servicing retained, and the deconsolidation of several of the Non-Residual Trusts and Residual Trusts. The decrease in the unpaid principal balance of our on-balance sheet residential loans and real estate owned of $579.8 million is attributable to the deconsolidation of Residual Trusts and several of the Non-Residual Trusts comprising approximately $430 million and $180 million, respectively, in unpaid principal balance and a decrease in loans subject to repurchase from Ginnie Mae of $75.9 million, offset in part by an increase in mortgage loans held for sale of $178.7 million.
The delinquencies associated with our third-party servicing portfolio decreased 1.99% at December 31, 2018 as compared to December 31, 2017 due primarily to converting disaster forbearances into loan modifications and the sale of certain servicing rights associated with nonperforming loans. The delinquencies associated with our on-balance sheet residential loans and real estate owned increased 1.46% due primarily to a change in the composition of the portfolio. As a result of the significant decrease in the unpaid principal balance of our on-balance sheet portfolio as discussed in the preceding paragraph, the loans subject to repurchase from Ginnie Mae, which are 100% delinquent, now comprise a larger percentage of our on-balance sheet portfolio thereby driving up the delinquency rate of the entire portfolio.

76


Net Servicing Revenue and Fees
A summary of net servicing revenue and fees for our Servicing segment is provided below (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
Variance
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended December 31, 2017
 
$
 
%
Servicing fees
 
$
328,723

 
 
$
52,071

 
$
485,201

 
$
(104,407
)
 
(22
)%
Incentive and performance fees
 
36,779

 
 
5,385

 
51,298

 
(9,134
)
 
(18
)%
Ancillary and other fees
 
59,314

 
 
6,891

 
79,005

 
(12,800
)
 
(16
)%
Servicing revenue and fees
 
424,816



64,347

 
615,504

 
(126,341
)
 
(21
)%
Changes in valuation inputs or other assumptions (1)
 
2,195

 
 
78,132

 
(134,573
)
 
214,900

 
(160
)%
Other changes in fair value (2)
 
(99,202
)
 
 
(13,469
)
 
(131,673
)
 
19,002

 
(14
)%
Change in fair value of servicing rights
 
(97,007
)


64,663


(266,246
)
 
233,902

 
(88
)%
Amortization of servicing rights
 
(5,976
)
 
 
(1,507
)
 
(20,460
)
 
12,977

 
(63
)%
Change in fair value of servicing rights related liabilities
 
—

 
 
—

 
(62
)
 
62

 
(100
)%
Net servicing revenue and fees
 
$
321,833



$
127,503

 
$
328,736

 
$
120,600

 
37
 %
__________
(1)
Represents the net change in servicing rights carried at fair value resulting primarily from market-driven changes in interest rates and prepayment speeds.
(2)
Represents the realization of expected cash flows over time.
Servicing fees decreased $104.4 million in 2018 as compared to 2017 primarily due to the shift of our third-party servicing portfolio from servicing to subservicing and continued runoff of the overall servicing portfolio. Our servicing fees have been negatively affected by the shift in our portfolio towards subservicing as we earn a lower fee for subservicing accounts in relation to servicing accounts.
Incentive and performance fees include modification fees, fees earned under HAMP, asset recovery income, and other incentives. Asset recovery income decreased $4.8 million in 2018 as compared to 2017 due primarily to runoff of the related portfolio. Performance incentives decreased $3.0 million in 2018 as compared to 2017 due primarily to fewer short sales and modifications. Fees earned under HAMP decreased $2.7 million in 2018 as compared to 2017 due primarily to fewer loans having been eligible for these incentives due to the expiration of HAMP and winding down of the program. Other modification fees increased $1.3 million in 2018 as compared to 2017 due to a higher number of Freddie Mac modifications due to efficiencies made in processing these modifications within our MSP system and a higher number of Fannie Mae modifications completed due to converting disaster forbearances from 2017, offset in part by runoff of the related portfolio.
Ancillary and other fees, which primarily include late fees and expedited payment fees, decreased $12.8 million in 2018 as compared to 2017 primarily due to lower late fee income and convenience and expedited payment fees resulting from a smaller overall servicing portfolio.

77


Provided below is a summary of the average unpaid principal balance of loans serviced and the related average servicing fee for our Servicing segment (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Average unpaid principal balance of loans serviced (1)
 
$
178,048,092

 
 
$
187,477,762

 
$
210,507,868

Average servicing fee (2)
 
0.21
%
 
 
0.25
%
 
0.23
%
__________
(1)
Average unpaid principal balance of loans serviced is calculated as the average of the average monthly unpaid principal balances for the year ended December 31, 2017 and the average of the average monthly unpaid principal balance and average of the partial monthly unpaid principal balance for the period from February 10, 2018 through December 31, 2018 and the period from January 1, 2018 through February 9, 2018. The average unpaid principal balance presented above includes on-balance sheet loans owned by the Servicing segment for which it does not earn a servicing fee.
(2)
Average servicing fee is calculated by dividing gross servicing fees by the average unpaid principal balance of loans serviced.
Servicing Rights Carried at Fair Value
Changes in the fair value of servicing rights, which reflect our quarterly valuation process, have a significant effect on net servicing revenue and fees. A summary of key economic inputs and assumptions used in estimating the fair value of servicing rights carried at fair value is presented below (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
 
 
 
December 31, 2018
 
 
February 9, 
 2018
 
December 31,
2017
 
Variance
Servicing rights at fair value
 
$
563,144

 
 
$
688,466

 
$
714,774

 
$
(151,630
)
Unpaid principal balance of accounts
 
57,777,648

 
 
72,238,271

 
84,279,258

 
(26,501,610
)
Inputs and assumptions
 
 
 
 
 
 
 
 


Weighted-average remaining life in years
 
5.4

 
 
5.9

 
5.6

 
(0.2
)
Weighted-average stated borrower interest rate on underlying collateral
 
4.54
%
 
 
4.42
%
 
4.05
%
 
0.49
 %
Weighted-average discount rate
 
10.78
%
 
 
11.70
%
 
11.92
%
 
(1.14
)%
Weighted-average conditional prepayment rate
 
10.79
%
 
 
9.70
%
 
11.10
%
 
(0.31
)%
Weighted-average conditional default rate
 
0.77
%
 
 
0.90
%
 
0.91
%
 
(0.14
)%
The decrease in servicing rights carried at fair value at December 31, 2018 as compared to December 31, 2017 related primarily to $300.0 million in sales and a $32.3 million decrease in fair value, partially offset by $180.7 million in servicing rights capitalized upon sales of loans. The decrease in fair value of servicing rights in 2018 was attributable to a loss of $112.7 million resulting from other changes in fair value, which reflect the impact of the realization of expected cash flows resulting from both regularly scheduled and unscheduled payments and payoffs of loan principal, offset partially by a gain of $80.3 million resulting from changes in valuation inputs or other assumptions.
The change in fair value related to changes in valuation inputs and other assumptions increased $214.9 million in 2018 as compared to 2017 driven by a 49 bps increase in mortgage interest rates and adjustments to assumptions for prepayment speeds and delinquencies. This increase in fair value adjustments is consistent with observed increases in MSR values seen in the market during 2018. Additionally, delinquencies continue to decline across market portfolios as sustained job and wage growth has helped borrowers remain current.
The realization of expected cash flows improved by $19.0 million in 2018 as compared to 2017 due primarily to a smaller capitalized servicing portfolio resulting from sales of servicing rights and portfolio runoff.

78


Interest Income on Loans
Interest income on loans decreased $36.0 million in 2018 as compared to 2017 as a result of the adoption of new accounting guidance relating to sales of nonfinancial assets effective January 1, 2018 and the election of fair value accounting for residential loans held by the Residual Trusts on February 10, 2018 in connection with fresh start accounting. Under the new accounting guidance, a portion of our loans were derecognized and placed back into real estate owned when the loans resulted from prior seller-financed real estate owned sales and we determined collection of substantially all of the sales price is not yet probable. Interest income previously recognized on these loans was reversed and recorded as deferred revenue to be subsequently recognized as gain on sale of real estate owned within other expenses, net when certain criteria are met. Interest income earned on loans carried at fair value is recognized in other net fair value gains (losses) and is discussed below.
Intersegment Retention Revenue
Intersegment retention revenue relates to fees the Servicing segment charges to the Originations segment for loan originations completed that resulted from access to the Servicing segment’s servicing portfolio related to capitalized servicing rights. The decrease in intersegment retention revenue of $4.1 million in 2018 as compared to 2017 was due primarily to lower overall consumer retention volume related in part to a smaller capitalized servicing portfolio resulting from sales of servicing rights and originations flow volume sold with servicing rights released.
Net Gains on Sales of Loans
Net gains or losses on sales of loans include realized and unrealized gains and losses on loans as well as the changes in fair value of our IRLCs and other freestanding derivatives. A substantial portion of the gain or loss on sales of loans is recognized at the time we commit to originate or purchase a loan at specified terms as we recognize the value of the IRLC at the time of commitment. The fair value of the IRLC includes an estimate of the fair value of the servicing right we expect to receive upon sale of the loan.
The Servicing segment recognizes the change in fair value of the servicing rights component of the IRLCs and loans held for sale for Ginnie Mae loans that occur subsequent to the date of our commitment through the sale of the loan. Net gains (losses) on sales of loans for the Servicing segment consist of this change in fair value as well as net gains or losses on sales of loans to third parties.
Other Revenues
Other revenues consist primarily of interest income on cash and cash equivalents, changes in the fair value of charged-off loans, and insurance marketing commissions. Other revenues also include insurance revenue in 2017. Other revenues increased $10.4 million in 2018 as compared to 2017 due primarily to $12.1 million higher interest income on cash and cash equivalents and $2.2 million higher fair value gains related to charged-off loans, partially offset by $4.0 million of insurance revenue recognized in 2017.
General and Administrative Expenses
General and administrative expenses decreased $122.5 million in 2018 as compared to 2017 resulting primarily from decreases of $25.9 million in default servicing expense, $19.5 million in legal fees related to litigation and regulatory costs, $11.3 million in occupancy costs due primarily to a lease liability accrual recorded in 2017, $8.9 million in professional fees due in part to transitioning work in-house and the sale of substantially all of our insurance business in 2017,$8.6 million in purchased services related in part to MSR sales and a smaller portfolio, $6.5 million in advance loss provision due to a decrease in the servicing advance portfolio and a decline in delinquent portfolios, $5.0 million in contractor costs due to a corporate initiative to reduce contractor headcount, and $16.8 million in other cost savings related to a smaller portfolio and lower headcount. In addition, there was a decrease of $18.0 million resulting from accretion recorded during 2018 related to fresh start accounting adjustments for advances, which is not comparable to 2017.
Salaries and Benefits
Salaries and benefits expense decreased $47.5 million in 2018 as compared to 2017 due primarily to a $42.0 million decrease in compensation and benefits primarily resulting from a lower average headcount and a $3.9 million decrease in severance related to restructuring initiatives in 2017. Headcount assigned directly to our Servicing segment decreased by approximately 500 full-time employees from 2,100 at December 31, 2017 to 1,600 at December 31, 2018.

79


Interest Expense
Through February 9, 2018, the Servicing segment recorded interest expense on our servicing advance liabilities and mortgage-backed debt issued by the Residual Trusts, which were accounted for at amortized cost. On February 10, 2018, we elected fair value accounting for our mortgage-backed debt issued by the Residual Trusts in connection with the adoption of fresh start accounting and, subsequently, the Servicing segment only recognizes interest expense on our servicing advance liabilities. Interest expense recorded on mortgage-backed debt carried at fair value is recognized as a component of other net fair value gains (losses) and is discussed below.
Interest expense decreased $28.6 million in 2018 as compared to 2017 driven by decreases in interest expense related to mortgage-backed debt of the Residual Trusts and servicing advance liabilities. Interest expense related to mortgage-backed debt issued by the Residual Trusts decreased $23.0 million as a result of the fair value election on February 10, 2018. Interest expense related to servicing advance liabilities decreased $5.6 million due to lower average borrowings, partially offset by a higher average interest rate on the WIMC Exit Warehouse Facilities.
Depreciation and Amortization
Depreciation and amortization decreased $16.9 million in 2018 as compared to 2017 primarily due to a decrease in depreciation expense as a result of revaluing our internally-developed software on February 10, 2018 in connection with fresh start accounting, which resulted in an extension of its useful life.
Intangible Assets Impairment
The Servicing segment recorded intangible assets impairment charges totaling $7.4 million in 2018. In March 2018, we recorded intangible assets impairment of $1.0 million related to trade names of the Servicing segment, which were tested for recoverability due to changes in facts and circumstances associated with rising mortgage interest rates and the resulting decreased revenues as a result of lower projected funded volume from our originations business, which replenishes our servicing portfolio.
In December 2018, we recorded intangible assets impairment of $6.4 million related to trade names of the Servicing segment as a result of actual and forecasted business declines.
Other Expenses, Net
Effective January 1, 2018, we adopted new accounting guidance relating to sales of nonfinancial assets, under which a portion of our loans were derecognized and placed back into real estate owned when the loans resulted from prior seller-financed real estate owned sales and we determined collection of substantially all of the sales price is not probable. Interest income previously recognized on these loans was reversed and recorded as deferred revenue. Once certain criteria are met, the deferred revenue is recognized as gain on sale of real estate owned within other expenses, net.
Other expenses, net decreased $48.0 million in 2018 as compared to 2017 due primarily to the recognition of a deferred gain on real estate owned of $37.3 million in connection with the sale and deconsolidation of the Residual Trusts in November 2018. In addition, we recognized $7.4 million in gains on sale of real estate owned for other loans that met the required criteria for recognition throughout 2018.
Fresh Start Accounting Adjustments
Fresh start accounting adjustments were $(14.6) million in 2018, which were comprised of a $40.8 million write-down to servicer and protective advances and $1.7 million write-down to receivables, partially offset by increases of $11.7 million for internally developed technology, $11.2 million of intangible assets revaluation, including $10.0 million for trade names and $1.2 million of customer relationships, $4.2 million related to write-up of servicing rights carried at amortized cost and $1.1 million related to accrued liabilities.
Other Net Fair Value Gains (Losses)
On February 10, 2018, we elected fair value accounting for our residential loans and mortgage-backed debt held by the Residual Trusts in connection with fresh start accounting and, until the sale and deconsolidation of the Residual Trusts in November 2018, interest income earned on loans of the Residual Trusts, interest expense recognized on the mortgage-backed debt of the Residual Trusts, and the related fair value gains or losses were recognized in other net fair value gains (losses). Net fair value gains related to the Residual Trusts were $4.1 million in 2018.
Gain on Sale of Business
Gain on sale of business of $67.7 million in 2017 relates to the sale of our principal insurance agency and substantially all of our insurance agency business on February 1, 2017.

80


Other Losses
Other losses of $10.0 million in 2018 include a loss of $9.1 million related to the sale and deconsolidation of the Residual Trusts in November 2018.
Adjusted EBITDA
Adjusted EBITDA increased $11.4 million in 2018 as compared to 2017 due to lower general and administrative expenses, salaries and benefits and interest expense, offset in part by lower servicing fees and interest income on loans.

81


Originations Segment
Provided below is a summary of results of operations and Adjusted EBITDA for our Originations segment (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
 
 
 
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended December 31, 2017
 
Variance
 
 
 
 
 
 
$
 
%
Net gains on sales of loans
 
$
159,787

 
 
$
27,490

 
$
280,967

 
$
(93,690
)
 
(33
)%
Other revenues
 
23,774

 
 
2,395

 
31,377

 
(5,208
)
 
(17
)%
Total revenues
 
183,561



29,885

 
312,344

 
(98,898
)
 
(32
)%
Salaries and benefits (1)
 
89,725

 
 
12,425

 
113,111

 
(10,961
)
 
(10
)%
General and administrative expenses (1)
 
58,837

 
 
8,297

 
73,981

 
(6,847
)
 
(9
)%
Interest expense
 
29,445

 
 
9,675

 
41,555

 
(2,435
)
 
(6
)%
Depreciation and amortization (1)
 
15,691

 
 
265

 
2,811

 
13,145

 
n/m

Goodwill and intangible assets impairment
 
16,260

 
 
—

 
—

 
16,260

 
n/m

Intersegment retention expense
 
7,972

 
 
858

 
12,902

 
(4,072
)
 
(32
)%
Total expenses
 
217,930



31,520

 
244,360

 
5,090

 
2
 %
Fresh start accounting adjustments
 
—

 
 
9,612

 
—

 
9,612

 
n/m

Net losses on extinguishment of debt
 
—

 
 
—

 
(719
)
 
719

 
(100
)%
Income (loss) before income taxes
 
(34,369
)


7,977

 
67,265

 
(93,657
)
 
(139
)%
 
 
 
 
 
 
 
 
 
 
 


EBITDA adjustments
 
 
 
 
 
 
 
 
 
 


Goodwill and intangible assets impairment
 
16,260

 
 
—

 
—

 
16,260

 
n/m

Depreciation and amortization (1)
 
15,691

 
 
265

 
2,811

 
13,145

 
n/m

Fresh start accounting adjustments
 
—

 
 
(9,612
)
 
—

 
(9,612
)
 
n/m

Interest expense
 
—

 
 
6,579

 
8,638

 
(2,059
)
 
(24
)%
Exit costs (1)
 
5,721

 
 
46

 
789

 
4,978

 
n/m

Share-based compensation expense (benefit) (1)
 
128

 
 
14

 
(85
)
 
227

 
(267
)%
Other (1)
 
(2,904
)
 
 
(71
)
 
(5,031
)
 
2,056

 
(41
)%
Total adjustments
 
34,896

 
 
(2,779
)
 
7,122

 
24,995

 
351
 %
Adjusted EBITDA
 
$
527

 
 
$
5,198

 
$
74,387

 
$
(68,662
)
 
(92
)%
__________
(1)
Effective January 1, 2018, we no longer allocate corporate overhead, including depreciation and amortization, to our operating segments. These amounts are now included in the Corporate and Other non-reportable segment. Prior year balances have been restated to conform to current year presentation.

82


The volume of our originations activity and changes in market rates primarily govern the fluctuations in revenues and expenses of our Originations segment. Provided below are summaries of our originations volume by channel (in thousands):
 
Successor
 
 
Predecessor
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
Correspondent
 
Consumer
 
Wholesale
 
Total
 
 
Correspondent
 
Consumer
 
Wholesale
 
Total
Locked Volume (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase
$
5,787,661

 
$
146,183

 
$
371,095

 
$
6,304,939

 
 
$
469,586

 
$
10,984

 
$
85,749

 
$
566,319

Refinance
1,792,419

 
2,838,275

 
246,430

 
4,877,124

 
 
214,761

 
516,531

 
69,464

 
800,756

Total
$
7,580,080

 
$
2,984,458

 
$
617,525

 
$
11,182,063

 
 
$
684,347

 
$
527,515

 
$
155,213

 
$
1,367,075

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Funded Volume
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase
$
5,616,658

 
$
161,778

 
$
411,827

 
$
6,190,263

 
 
$
480,025

 
$
12,259

 
$
57,829

 
$
550,113

Refinance
1,706,198

 
3,248,330

 
266,699

 
5,221,227

 
 
190,656

 
377,717

 
45,751

 
614,124

Total
$
7,322,856

 
$
3,410,108

 
$
678,526

 
$
11,411,490

 
 
$
670,681

 
$
389,976

 
$
103,580

 
$
1,164,237

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sold Volume
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase
$
5,334,957

 
$
157,736

 
$
415,276

 
$
5,907,969

 
 
$
533,367

 
$
16,750

 
$
64,966

 
$
615,083

Refinance
1,643,989

 
3,210,833

 
266,111

 
5,120,933

 
 
204,408

 
483,012

 
62,479

 
749,899

Total
$
6,978,946

 
$
3,368,569

 
$
681,387

 
$
11,028,902

 
 
$
737,775

 
$
499,762

 
$
127,445

 
$
1,364,982

 
 
Predecessor
 
 
For the Year Ended December 31, 2017
 
 
Correspondent
 
Consumer
 
Wholesale
 
Total
Locked Volume (1)
 
 
 
 
 
 
 
 
Purchase
 
$
6,562,755

 
$
98,583

 
$
505,610

 
$
7,166,948

Refinance
 
2,690,679

 
4,640,181

 
442,894

 
7,773,754

Total
 
$
9,253,434

 
$
4,738,764

 
$
948,504

 
$
14,940,702

 
 
 
 
 
 
 
 
 
Funded Volume
 
 
 
 
 
 
 
 
Purchase
 
$
6,736,255

 
$
113,406

 
$
444,401

 
$
7,294,062

Refinance
 
2,806,222

 
5,077,224

 
432,170

 
8,315,616

Total
 
$
9,542,477

 
$
5,190,630

 
$
876,571

 
$
15,609,678

 
 
 
 
 
 
 
 
 
Sold Volume
 
 
 
 
 
 
 
 
Purchase
 
$
6,922,893

 
$
112,440

 
$
419,800

 
$
7,455,133

Refinance
 
2,971,297

 
5,336,742

 
418,678

 
8,726,717

Total
 
$
9,894,190

 
$
5,449,182

 
$
838,478

 
$
16,181,850

__________
(1)
Volume has been adjusted by the percentage of mortgage loans not expected to close based on previous historical experience and changes in interest rates.

83


Net Gains on Sales of Loans
Net gains on sales of loans include realized and unrealized gains and losses on loans, the initial fair value of the capitalized servicing rights upon loan sales with servicing retained, as well as the changes in fair value of our IRLCs and other freestanding derivatives. The amount of net gains on sales of loans is a function of the volume and margin of our originations activity and is impacted by fluctuations in interest rates. A substantial portion of our gains on sales of loans is recognized at the time we commit to originate or purchase a loan at specified terms, as we recognize the value of the IRLC at the time of commitment. The fair value of the IRLC includes our estimate of the fair value of the servicing right we expect to retain upon sale of the loan. We recognize loan origination costs as incurred, which typically align with the date of loan funding for consumer originations and the date of loan purchase for correspondent lending. These expenses are primarily included in general and administrative expenses and salaries and benefits on the consolidated statements of comprehensive income (loss). In addition, we record a provision for losses relating to representations and warranties made as part of the loan sale transaction at the time the loan is sold.
The volatility in the gain on sale of loans spread is attributable to market pricing, which changes with demand, channel mix, and the general level of interest rates. While many factors may affect consumer demand for mortgages, generally, pricing competition on mortgage loans is lower in periods of low or declining interest rates, as consumer demand is greater. This provides opportunities for originators to increase volume and earn wider margins. Conversely, pricing competition increases when interest rates rise as consumer demand lessens. This reduces overall originations volume and may lead originators to reduce margins. The level and direction of interest rates are not the sole determinant of consumer demand for mortgages. Other factors such as secondary market conditions, home prices, credit spreads or legislative activity may impact consumer demand more significantly than interest rates in any given period.
Net gains on sales of loans for our Originations segment consist of the following (dollars in thousands):
 
Successor
 
 
Predecessor
 
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended December 31, 2017
 
Variance
 
 
 
 
 
$
 
%
Realized gains (losses) on sales of loans (1)
$
(7,876
)
 
 
$
2,923

 
$
169,285

 
$
(174,238
)
 
(103
)%
Change in unrealized gains (losses) on loans held for sale (1)
8,206

 
 
(8,871
)
 
7,226

 
(7,891
)
 
(109
)%
Losses on interest rate lock commitments (1)(2)
(4,863
)
 
 
(5,002
)
 
(23,046
)
 
13,181

 
(57
)%
Gains (losses) on forward sales commitments (1)(2)
(22,948
)
 
 
24,570

 
(31,662
)
 
33,284

 
(105
)%
Gains (losses) on MBS purchase commitments (1)(2)
13,807

 
 
(872
)
 
(2,749
)
 
15,684

 
n/m

Capitalized servicing rights (3)
155,352

 
 
13,020

 
135,176

 
33,196

 
25
 %
Provision for repurchases
(5,522
)
 
 
(729
)
 
(6,991
)
 
740

 
(11
)%
Interest income
23,772

 
 
2,295

 
33,856

 
(7,789
)
 
(23
)%
Other
(141
)
 
 
156

 
(128
)
 
143

 
(112
)%
Net gains on sales of loans
$
159,787



$
27,490


$
280,967

 
$
(93,690
)
 
(33
)%
__________
(1)
Gains or losses on interest rate lock commitments, forward sales commitments, and MBS purchase commitments are principally offset by gains or losses included in realized gains (losses) on sales of loans or change in unrealized gains (losses) on loans held for sale.
(2)
Realized gains (losses) on freestanding derivatives were $20.4 million, $7.9 million and $(8.8) million for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively.
(3)
Includes revenues generated in connection with transfers of MSR to NRM of $44.1 million, $3.8 million and $62.3 million for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively. Refer to Note 4 to the Consolidated Financial Statements for additional information regarding transactions with NRM.
The decrease in net gains on sales of loans of $93.7 million in 2018 as compared to 2017 was primarily due to a lower day one margin due to a product mix shift towards lower margin correspondent and wholesale channels combined with pricing decreases implemented in 2018, as well as an overall lower volume of locked loans. This decrease was offset partially by an increase resulting from higher pull-through rates in the consumer channel. In addition, net gains on sales of loans included a decrease in interest income on loans resulting from lower average loan balances, partially offset by higher average interest rates.
The years ended December 31, 2018 and 2017 included the benefit of higher margins from HARP, which expired on December 31, 2018. HARP was a federal program of the U.S. that helped homeowners refinance their mortgage.

84


Other Revenues
Other revenues consist primarily of origination fee income and other interest income. Other revenues decreased $5.2 million in 2018 as compared to 2017 due primarily to $4.1 million in lower origination fee income due to lower funded originations volume and $0.8 million in lower other interest income.
Salaries and Benefits
Salaries and benefits expense decreased $11.0 million in 2018 as compared to 2017 due primarily to $8.8 million in lower compensation and benefits resulting from a lower average headcount and $4.8 million in lower commissions and incentives consistent with lower funded originations volume. Headcount assigned directly to our Originations segment decreased by approximately 350 full-time employees from 1,000 at December 31, 2017 to 650 at December 31, 2018.
General and Administrative Expenses
General and administrative expenses decreased $6.8 million in 2018 as compared to 2017 due primarily to decreases of $8.9 million in loan origination expense due to a lower funded originations volume, $1.0 million in office supplies and express delivery expense due in part to a policy change in 2018 and $1.0 million in advertising expense due to a decrease in direct mailing cost, partially offset by a$2.7 million lower reduction to the representations and warranties reserve resulting from quarterly assumption and adequacy updates and $1.8 million in higher occupancy costs due to a lease liability accrual recorded in 2018.
Interest Expense
Interest expense decreased $2.4 million in 2018 as compared to 2017 driven by a decrease in amortization of debt issuance costs incurred in connection with the WIMC DIP Warehouse Facilities. Although average balances on the warehouse facilities decreased year over year, interest expense remained flat as a result of a higher average interest rate on our post-bankruptcy debt. Refer to the Liquidity and Capital Resources section for additional information on our warehouse facilities.
Depreciation and Amortization
Depreciation and amortization increased $13.1 million in 2018 as compared to 2017 primarily due to an increase in amortization expense as a result of recording a new intangible asset for wholesale and correspondent relationships on February 10, 2018 in connection with fresh start accounting.
Goodwill and Intangible Assets Impairment
The Originations segment recorded goodwill and intangible assets impairment charges totaling $16.3 million in 2018. In March 2018, we recorded goodwill impairment related to the Originations segment of $9.0 million as a result of lower projected financial performance within this segment subsequent to our emergence from bankruptcy, which was driven by certain market factors including increasing mortgage interest rates driving lower originations volume, a flattening of the interest rate curve resulting in margin compression, aggressive pricing by certain competitors and continued challenges in shifting to a purchase money lender.
In June 2018, we recorded intangible assets impairment of $1.0 million related to the trade names of the Originations segment. We tested these intangible assets for recoverability due to changes in facts and circumstances associated with rising mortgage interest rates and lower projected originations revenues.
In December 2018, we recorded intangible assets impairment of $6.3 million related to trade names of the Originations segment as a result of actual and forecasted business declines.
Intersegment Retention Expense
Intersegment retention expense relates to fees charged by our Servicing segment to the Originations segment in relation to loan originations completed that resulted from access to the Servicing segment’s servicing portfolio related to capitalized servicing rights. The decrease in intersegment retention expense of $4.1 million in 2018 as compared to 2017 was due primarily to lower overall consumer retention volume related in part to a smaller capitalized servicing portfolio resulting from sales of servicing rights and originations flow volume sold with servicing rights released.
Fresh Start Accounting Adjustments
Fresh start accounting adjustments were $9.6 million in 2018, which were comprised of a $24.2 million increase in intangible assets, including $19.0 million for wholesale and correspondent relationships and $5.2 million for trade names, $22.0 million for internally developed technology and $2.2 million related to accrued liabilities, partially offset by a $38.8 million decrease in goodwill.

85


Adjusted EBITDA
Adjusted EBITDA declined $68.7 million in 2018 as compared to 2017 due primarily to lower net gains on sales of loans, offset in part by lower general and administrative expenses and salaries and benefits.

86


Reverse Mortgage Segment
Provided below is a summary of results of operations and Adjusted EBITDA for our Reverse Mortgage segment (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
 
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended December 31, 2017
 
Variance
 
 
 
 
 
 
$
 
%
Net fair value gains on reverse loans and related HMBS obligations
 
$
46,833

 
 
$
10,576

 
$
42,419

 
$
14,990

 
35
 %
Net servicing revenue and fees
 
22,361

 
 
2,029

 
27,566

 
(3,176
)
 
(12
)%
Other revenues
 
5,581

 
 
602

 
2,750

 
3,433

 
125
 %
Total revenues
 
74,775



13,207

 
72,735

 
15,247

 
21
 %
Interest expense
 
52,824

 
 
11,956

 
31,435

 
33,345

 
106
 %
Salaries and benefits (1)
 
33,408

 
 
4,752

 
47,202

 
(9,042
)
 
(19
)%
General and administrative expenses (1)
 
27,495

 
 
4,186

 
46,837

 
(15,156
)
 
(32
)%
Depreciation and amortization (1)
 
1,632

 
 
228

 
3,010

 
(1,150
)
 
(38
)%
Other expenses, net
 
3,929

 
 
641

 
5,146

 
(576
)
 
(11
)%
Total expenses
 
119,288



21,763

 
133,630

 
7,421

 
6
 %
Fresh start accounting adjustments
 
—

 
 
7,423

 
—

 
7,423

 
n/m

Net losses on extinguishment of debt
 
—

 
 
—

 
(1,345
)
 
1,345

 
(100
)%
Loss before income taxes
 
(44,513
)


(1,133
)
 
(62,240
)
 
16,594

 
(27
)%
 
 
 
 
 
 
 
 
 
 
 


EBITDA adjustments
 
 
 
 
 
 
 
 
 
 


Fair value to cash adjustment for reverse loans
 
39,803

 
 
(1,704
)
 
38,351

 
(252
)
 
(1
)%
Fresh start accounting adjustments
 
—

 
 
(7,423
)
 
—

 
(7,423
)
 
n/m

Interest expense
 
—

 
 
7,146

 
7,826

 
(680
)
 
(9
)%
Amortization of servicing rights and other fair value adjustments
 
1,555

 
 
680

 
1,494

 
741

 
50
 %
Depreciation and amortization (1)
 
1,632

 
 
228

 
3,010

 
(1,150
)
 
(38
)%
Exit costs (1)
 
422

 
 
29

 
1,368

 
(917
)
 
(67
)%
Share-based compensation expense (1)
 
37

 
 
4

 
200

 
(159
)
 
(80
)%
Other (1)
 
748

 
 
117

 
1,368

 
(503
)
 
(37
)%
Total adjustments
 
44,197

 
 
(923
)
 
53,617

 
(10,343
)
 
(19
)%
Adjusted EBITDA
 
$
(316
)
 
 
$
(2,056
)
 
$
(8,623
)
 
$
6,251

 
(72
)%
__________
(1)
Effective January 1, 2018, we no longer allocate corporate overhead, including depreciation and amortization, to our operating segments. These amounts are now included in the Corporate and Other non-reportable segment. Prior year balances have been restated to conform to current year presentation.

87


Reverse Mortgage Servicing Portfolio
Provided below are summaries of the activity in our third-party servicing portfolio for our reverse mortgage business, which included accounts serviced for third parties for which we earn servicing revenue. These summaries exclude servicing performed related to reverse mortgage loans and real estate owned recognized on our consolidated balance sheets, as the securitized loans are accounted for as a secured borrowing (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
 
 
Number
of Accounts
 
Unpaid Principal
Balance
 
 
Number
of Accounts
 
Unpaid Principal
Balance
 
Number
of Accounts
 
Unpaid Principal
Balance
Third-party servicing portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of the period
 
49,668

 
$
9,752,277

 
 
50,182

 
$
9,776,747

 
56,550

 
$
10,340,727

New business added (1)
 
5,426

 
1,103,064

 
 
955

 
171,825

 
6,012

 
1,169,169

Other additions (2)
 
—

 
628,074

 
 
—

 
78,568

 
—

 
772,161

Payoffs and curtailments
 
(11,796
)
 
(2,477,585
)
 
 
(1,469
)
 
(274,863
)
 
(12,380
)
 
(2,505,310
)
Balance at end of the period
 
43,298

 
$
9,005,830

 
 
49,668


$
9,752,277


50,182

 
$
9,776,747

__________
(1)
Includes Ginnie Mae buyout loans sold with subservicing retained consisting of $254.0 million in unpaid principal balance during the period from February 10, 2018 through December 31, 2018.
(2)
Other additions to the principal balance serviced relate to draws on lines-of-credit, interest, servicing fees, mortgage insurance and advances owed by the existing borrower.
Provided below are summaries of our total reverse loan servicing portfolio (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
 
At December 31, 2018
 
 
At December 31, 2017
 
 
Number of
Accounts
 
Unpaid Principal
Balance
 
 
Number of
Accounts
 
Unpaid Principal
Balance
Third-party servicing portfolio (1)
 
43,298

 
$
9,005,830

 
 
50,182

 
$
9,776,747

On-balance sheet residential loans and real estate owned
 
44,321

 
8,107,619

 
 
54,732

 
9,573,804

Total reverse loan servicing portfolio
 
87,619

 
$
17,113,449

 
 
104,914

 
$
19,350,551

__________
(1)
We earn a fixed dollar amount per loan on a majority of our third-party reverse loan servicing portfolio. The weighted-average contractual servicing fee for our third-party servicing portfolio, which is calculated as the annual average servicing fee divided by the ending unpaid principal balance, was 0.13% at December 31, 2018 and 2017.

88


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 (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
Variance
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
 
$
 
%
Interest income on reverse loans
 
$
379,215

 
 
$
47,116

 
$
450,628

 
$
(24,297
)
 
(5
)%
Interest expense on HMBS related obligations (1)
 
(310,721
)
 
 
(40,427
)
 
(398,241
)
 
47,093

 
(12
)%
Net interest income on reverse loans and HMBS related obligations
 
68,494



6,689

 
52,387

 
22,796

 
44
 %
 
 
 
 
 
 
 
 
 


 


Change in fair value of reverse loans
 
(176,371
)
 
 
(15,640
)
 
(208,340
)
 
16,329

 
(8
)%
Change in fair value of HMBS related obligations
 
154,710

 
 
19,527

 
198,372

 
(24,135
)
 
(12
)%
Net change in fair value on reverse loans and HMBS related obligations
 
(21,661
)


3,887

 
(9,968
)
 
(7,806
)
 
78
 %
Net fair value gains on reverse loans and related HMBS obligations
 
$
46,833



$
10,576

 
$
42,419

 
$
14,990

 
35
 %
__________
(1)
Excludes interest expense related to the warehouse facilities used to fund Ginnie Mae buyouts.
Net fair value gains on reverse loans and related HMBS obligations include the contractual interest income earned on reverse loans, including those not yet securitized or no longer in securitization pools, net of interest expense on HMBS related obligations, and the change in fair value of these assets and liabilities. Included in the change in fair value are gains due to loan originations that currently only include Tails since we exited the reverse mortgage originations business during the first quarter of 2017. Tails are participations in previously securitized HECMs and are created by additions to principal for borrower draws on lines-of-credit, interest, servicing fees, and mortgage insurance premiums. Economic gains and losses result from the pricing of an aggregated pool of loans exceeding the cost of the origination or acquisition of the loan as well as the change in fair value resulting from changes to market pricing on HECMs and HMBS. No gain or loss is recognized as a result of the securitization of reverse loans as these transactions are accounted for as secured borrowings. However, HECMs and HMBS related obligations are marked to fair value, which can result in a net gain or loss related to changes in market pricing.
Net interest income on reverse loans and HMBS related obligations increased $22.8 million in 2018 as compared to 2017 primarily as a result of a decrease in HMBS related obligations resulting from an increase in buyouts. If the net interest income were adjusted for interest expense from debt financing on master repurchase agreements, there would have been an $11.2 million decrease in 2018 as compared to 2017. The net change in fair value on reverse loans and HMBS related obligations is comprised of cash generated by the origination, purchase, and securitization of HECMs as well as non-cash fair value gains or losses. Cash generated by the origination, purchase and securitization of HECMs decreased $8.1 million in 2018 as compared to 2017 primarily due to our exit from the reverse mortgage originations business and the resulting wind-down of the portfolio, partially offset by a shift in mix from lower margin new originations to higher margin Tails. Net non-cash fair value losses remained flat in 2018 as compared to 2017 due primarily to changes in market pricing, offset by valuation model assumption adjustments for buyout loans during 2018.
Reverse loans and related HMBS obligations are generally subject to net fair value gains when interest rates decline primarily as a result of a longer duration of reverse loans as compared to HMBS related obligations. Our reverse loans have longer durations primarily as a result of our obligations as issuer of HMBS, which includes the requirement to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM is equal to or greater than 98% of the maximum claim amount. The conditional repayment rate utilized in the valuation of reverse loans and HMBS related obligations have increased from 30.23% and 32.07%, respectively, at December 31, 2017 to 32.25% and 34.60%, respectively, at December 31, 2018 primarily due to the aging and runoff of the portfolio.

89


Provided below are summaries of our funded volume, which represent purchases and originations of reverse loans, and volume of securitizations into HMBS (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
Variance
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended December 31, 2017
 
$
 
%
Funded volume
 
$
227,267

 
 
$
40,282

 
$
399,165

 
$
(131,616
)
 
(33
)%
Securitized volume (1)
 
233,125

 
 
25,638

 
426,531

 
(167,768
)
 
(39
)%
__________
(1)
Securitized volume includes $233.1 million, $25.6 million and $347.5 million of Tails securitized for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively. Tail draws associated with the HECM IDL product were $126.9 million, $15.1 million and $200.0 million for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively.
Funded and securitized volumes decreased in 2018 as compared to 2017 primarily due to our exit from the reverse mortgage originations business in January 2017 and aging of the portfolio. There are no longer any reverse loans in the originations pipeline, and we have finalized the shutdown of the reverse mortgage originations business. We will continue to fund undrawn Tails available to customers. Refer to Note 17 to the Consolidated Financial Statements for additional information regarding exit activities.
Net Servicing Revenue and Fees
A summary of net servicing revenue and fees for our Reverse Mortgage segment is provided below (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
Variance
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended December 31, 2017
 
$
 
%
Servicing fees
 
$
10,496

 
 
$
1,374

 
$
13,133

 
$
(1,263
)
 
(10
)%
Performance fees
 
5,734

 
 
634

 
8,362

 
(1,994
)
 
(24
)%
Ancillary and other fees
 
7,686

 
 
701

 
7,565

 
822

 
11
 %
Servicing revenue and fees
 
23,916



2,709

 
29,060

 
(2,435
)
 
(8
)%
Amortization of servicing rights
 
(1,555
)
 
 
(680
)
 
(1,494
)
 
(741
)
 
50
 %
Net servicing revenue and fees
 
$
22,361



$
2,029

 
$
27,566

 
$
(3,176
)
 
(12
)%
The decline in net servicing revenue and fees of $3.2 million in 2018 as compared to 2017 was due primarily to a decrease in performance fees for the management of real estate owned and a decrease in the servicing fees due to portfolio runoff.
Interest Expense
Interest expense increased $33.3 million in 2018 as compared to 2017 due primarily to higher average borrowings on master repurchase agreements as a result of higher buyout loan levels, a higher average cost of debt related to the interest rate on the WIMC Exit Warehouse Facilities, and $7.1 million in amortization of debt issuance costs incurred in connection with the WIMC DIP Warehouse Facilities, which were amortized over the estimated bankruptcy period of two months. The WIMC DIP Warehouse Facilities are discussed in more detail in the Liquidity and Capital Resources section below.
Salaries and Benefits
Salaries and benefits expense decreased $9.0 million in 2018 as compared to 2017 due primarily to lower compensation and benefits as a result of lower origination volume and lower average headcount resulting from our decision to exit the reverse mortgage originations business in 2017. Headcount assigned directly to our Reverse Mortgage segment decreased by approximately 100 full-time employees from 600 at December 31, 2017 to 500 at December 31, 2018.

90


General and Administrative Expenses
General and administrative expenses decreased $15.2 million in 2018 as compared to 2017 due primarily to decreases of $22.6 million in curtailment-related accruals, $4.4 million in loan portfolio expenses due to lower loss accruals and $1.1 million in rental expense, partially offset by increases of $4.1 million in contractor fees and outsourcing and $3.6 million in bank fees, primarily relating to the sale of defaulted reverse Ginnie Mae buyout loans.
Fresh Start Accounting Adjustments
Fresh start accounting adjustments were $7.4 million in 2018, which were comprised of $5.6 million in real estate owned fair value adjustments, $2.0 million related to accrued liabilities and $1.2 million of MSR fair value adjustments, partially offset by $1.4 million in advances fair value adjustments.
Adjusted EBITDA
Adjusted EBITDA increased $6.3 million in 2018 as compared to 2017 primarily due to an increase in net interest income on reverse loans and related HMBS obligations and a decline in general and administrative expenses and salaries and benefits, partially offset by higher interest expense related to higher average borrowings on master repurchase agreements resulting from higher buyout loan levels.

91


Corporate and Other Non-Reportable Segment
Provided below is a summary of results of operations and Adjusted EBITDA for our Corporate and Other non-reportable segment (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
 
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended December 31, 2017
 
Variance
 
 
 
 
 
 
$
 
%
Net servicing revenue and fees
 
$
55

 
 
$
—

 
$
—

 
$
55

 
n/m

Other revenues
 
1,498

 
 
89

 
933

 
654

 
70
 %
Total revenues
 
1,553

 
 
89

 
933

 
709

 
76
 %
Interest expense
 
111,696

 
 
7,519

 
134,661

 
(15,446
)
 
(11
)%
General and administrative (1)
 
63,218

 
 
6,753

 
107,751

 
(37,780
)
 
(35
)%
Salaries and benefits (1)
 
44,270

 
 
6,048

 
41,646

 
8,672

 
21
 %
Depreciation and amortization (1)
 
973

 
 
65

 
701

 
337

 
48
 %
Other expenses
 
90

 
 
7

 
850

 
(753
)
 
(89
)%
Total expenses
 
220,247

 
 
20,392

 
285,609

 
(44,970
)
 
(16
)%
Reorganization items and fresh start accounting adjustments
 
(2,726
)
 
 
462,116

 
(37,645
)
 
497,035

 
n/m

Other net fair value gains
 
7,992

 
 
3,582

 
3,945

 
7,629

 
193
 %
Net losses on extinguishment of debt
 
(4,454
)
 
 
(864
)
 
(1,798
)
 
(3,520
)
 
196
 %
Other
 
18,484

 
 
—

 
7,219

 
11,265

 
156
 %
Total other gains (losses)
 
19,296

 
 
464,834

 
(28,279
)
 
512,409

 
n/m

Income (loss) before income taxes
 
(199,398
)
 
 
444,531

 
(312,955
)
 
558,088

 
(178
)%
 
 
 
 
 
 
 
 
 
 
 
 
EBITDA adjustments
 
 
 
 
 
 
 
 
 
 
 
Reorganization items and fresh start accounting adjustments
 
2,726

 
 
(462,116
)
 
37,645

 
(497,035
)
 
n/m

Interest expense
 
111,696

 
 
7,519

 
134,661

 
(15,446
)
 
(11
)%
Transaction costs
 
10,137

 
 
(55
)
 
48,990

 
(38,908
)
 
(79
)%
Share-based compensation expense (1)
 
2,281

 
 
507

 
1,763

 
1,025

 
58
 %
Exit costs (1)
 
1,707

 
 
45

 
2,695

 
(943
)
 
(35
)%
Depreciation and amortization (1)
 
973

 
 
65

 
701

 
337

 
48
 %
Other (1)
 
4,524

 
 
(583
)
 
7,875

 
(3,934
)
 
(50
)%
Total adjustments
 
134,044

 
 
(454,618
)
 
234,330

 
(554,904
)
 
(237
)%
Adjusted EBITDA
 
$
(65,354
)
 
 
$
(10,087
)
 
$
(78,625
)
 
$
3,184

 
(4
)%
__________
(1)
Effective January 1, 2018, we no longer allocate corporate overhead, including depreciation and amortization, to our operating segments. These amounts are now included in the Corporate and Other non-reportable segment. Prior year balances have been restated to conform to current year presentation.
Other Revenues
Other revenues related to the Corporate and Other non-reportable segment consist primarily of other interest income, investment income and miscellaneous income.
Interest Expense
Interest expense decreased $15.4 million in 2018 as compared to 2017 primarily as a result of the extinguishment of $531.1 million of corporate debt in connection with our emergence from bankruptcy and $268.2 million of corporate debt payments made during 2018, offset in part by higher interest rates on post-bankruptcy debt.

92


General and Administrative Expenses
General and administrative expenses decreased $37.8 million in 2018 as compared to 2017 primarily due to $42.0 million in lower costs related to our debt restructure initiative in 2017 and a $3.0 million reimbursement from an insurance carrier related to the settlement of corporate shareholder lawsuits in 2018, offset in part by $11.0 million in higher amortization of the Clean-up Call Agreement inducement fee in 2018.
Salaries and Benefits
Salaries and benefits increased $8.7 million in 2018 as compared to 2017 due primarily to increases of $4.7 million in compensation and benefits, $2.6 million related to additional bonuses to senior executives and $1.3 million in recruiting fees related to senior executives during 2018.
Reorganization Items and Fresh Start Accounting Adjustments
We recorded reorganization items and fresh start accounting adjustments of $459.4 million in 2018 as compared to $(37.6) million in 2017. The gain in 2018 was driven by $556.9 million related to the cancellation of corporate debt and $74.8 million of fresh start accounting adjustments, partially offset by $153.8 million related to the issuance of new equity to the Convertible and Senior Noteholders. The loss in 2017 resulted from the write-off of $34.4 million of costs related to previously issued debt and $3.1 million of legal and professional fees.
Other Net Fair Value Gains
Other net fair value gains increased $7.6 million in 2018 as compared to 2017 driven by an increase in the LIBOR rate for loans and bonds related to the Non-Residual Trusts during 2018.
Net Losses on Extinguishment of Debt
Net losses on extinguishment of debt of $5.3 million during 2018 resulted from the sale of servicing rights and the sale of the Residual Trusts during the year, which required us to make prepayments on the 2018 Term Loan. These prepayments resulted in prepayment premium fees and the accelerated amortization of discounts related to the 2018 Term Loan, which were recorded as a component of losses on the extinguishment of debt. Net losses on extinguishment of debt of $1.8 million during 2017 resulted from the write-off of deferred debt issuance costs and debt discount related to payments made on the 2013 Term Loan in connection with the WIMC Chapter 11 Case.
Other Gains
We recorded other gains of $18.5 million and $7.2 million in 2018 and 2017, respectively, in connection with our counterparty under the Clean-up Call Agreement having fulfilled its obligation for the mandatory clean-up call of certain of the remaining Non-Residual Trusts, resulting in the subsequent deconsolidation of the trusts. These gains were offset by the amortization of the inducement fee recorded in general and administrative expenses during the period as discussed above. Refer to Note 5 to the Consolidated Financial Statements for additional information on the exercise of the mandatory clean-up call obligation.
Adjusted EBITDA
Adjusted EBITDA improved $3.2 million in 2018 as compared to 2017 due primarily to lower general and administrative expenses, offset partially by higher salaries and benefits.
Liquidity and Capital Resources
Overview
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay debt and meet the financial obligations of our operations, including funding MSR acquisitions; mortgage loan and reverse loan servicing advances; obligations associated with the repurchase of reverse loans and mortgage loans from securitization pools; funding additional borrowing capacity on reverse loans; origination of mortgage loans; and other general business needs, including the cost of compliance with changing legislation and related rules. Our liquidity is measured as our consolidated cash and cash equivalents excluding subsidiary minimum cash requirement balances, which are typically associated with our servicer licensing or financing agreements. At December 31, 2018, our liquidity was $138.7 million.

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We endeavor to maintain our liquidity at a level sufficient to fund certain known or expected payments and to fund our working capital needs. Our principal sources of liquidity are the cash flows generated from our business segments, funds available from our master repurchase agreements and mortgage loan servicing advance facilities, issuance of GMBS, and issuance of HMBS to fund our Tail commitments. We may generate additional liquidity through sales of MSR, any portion thereof, or other assets. From time to time, we utilize our excess cash to reinvest in the business, including but not limited to investment in MSR and the repurchase of reverse loans from securitization pools.
In the normal course of business, we utilize mortgage loan servicing advance facilities and master repurchase agreements with various counterparties to finance, on a short-term basis, mortgage loan related servicing advances, the repurchase of HECMs out of Ginnie Mae securitization pools, and funding of newly originated mortgage loans. Each of these facilities is typically subject to annual renewal and contain provisions, that in certain circumstances, could prevent us from utilizing any unused capacity under such facility and/or that could accelerate the repayment of amounts under such facility. Additionally, we may utilize other transaction structures to finance the repurchase of HECMs out of Ginnie Mae securitization pools.
Our ability to fund our operating businesses is a significant factor that affects our liquidity and our ability to operate and grow our businesses. Our subsidiaries are dependent on the ability to secure these types of arrangements on acceptable terms and to renew, replace or resize existing financing facilities as they expire. Continued growth in Ginnie Mae buyout loan activity will require us to continue to seek additional Ginnie Mae buyout financing or to otherwise sell or securitize Ginnie Mae buyout assets.
DHCP Chapter 11 Cases
On January 16, 2019, the Parent Company and certain of its subsidiaries entered into forbearance agreements with (i) certain holders of greater than 75% of the aggregate principal amount of the outstanding Second Lien Notes, (ii) certain lenders of greater than 50% of the aggregate principal amount outstanding under the 2018 Credit Agreement and the administrative agent and collateral agent under the 2018 Credit Agreement and (iii) the requisite buyers and variable funding noteholders, as applicable, under certain warehouse facility agreements and advance financing facilities. Pursuant to the forbearance agreements, the parties noted above agreed to temporarily forbear from the exercise of any rights or remedies they may have in respect of the aforementioned anticipated events of default or other defaults or events of default arising out of or in connection therewith.
On February 8, 2019, the Parent Company and certain of its subsidiaries entered into additional forbearance agreements with (i) certain lenders holding greater than 50% of the sum of (a) the loans outstanding, (b) letter of credit exposure and (c) unused commitments under the 2018 Credit Agreement at such time and the administrative agent and collateral agent under the 2018 Credit Agreement, (ii) the requisite buyers and variable funding noteholders, as applicable, under certain warehouse facility agreements and advance financing facilities and (iii) the counterparty under a certain master securities forward transaction agreement.
On February 11, 2019, as contemplated by the DHCP RSA, the Debtors filed the DHCP Bankruptcy Petitions and the DHCP Chapter 11 Cases commenced thereby under the Bankruptcy Code in the Bankruptcy Court. Consistent with the DHCP RSA, on March 5, 2019, the Debtors filed the DHCP Plan with the Bankruptcy Court seeking to emerge from Chapter 11 on an expedited timeframe. The Debtors filed an amended DHCP Plan with the Bankruptcy Court on March 28, 2019. The Debtors are continuing to operate their businesses as debtors in possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. We intend to continue to operate our businesses in the ordinary course during the pendency of the DHCP Chapter 11 Cases. To assure ordinary course operations, the Debtors have obtained approval from the Bankruptcy Court for a variety of first day motions seeking various relief, authorizing them to maintain their operations in the ordinary course.
Restructuring Support Agreement
On February 8, 2019, the Debtors entered into the DHCP RSA with the Consenting Term Lenders holding, as of February 11, 2019, more than 75% of the term loans outstanding under the 2018 Credit Agreement.
Pursuant to the DHCP RSA, the Consenting Term Lenders and the Debtors have agreed to the principal terms of our financial restructuring, which will be implemented through a prearranged plan of reorganization under the Bankruptcy Code and which provides for the restructuring of our indebtedness through a recapitalization transaction that is expected to reduce gross corporate debt by over $800 million and provide the reorganized company with an appropriately sized working capital facility upon emergence from the DHCP Reorganization Transaction.
The DHCP RSA also provides for the continuation of our prepetition review of strategic alternatives, whereby, as a potential alternative to the implementation of a DHCP Reorganization Transaction, any and all bids for our company or our assets will be evaluated as a precursor to confirmation of any Chapter 11 plan of reorganization.

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The review of strategic alternatives provides a public and comprehensive forum in which the Debtors are seeking bids or proposals for three types of potential transactions, as described below. If a bid or proposal is received representing higher or better value than the DHCP Reorganization Transaction, it will either be incorporated into the DHCP Reorganization Transaction or pursued as an alternative to the DHCP Reorganization Transaction in consultation with the Consenting Term Lenders and subject to the DHCP RSA.
The three types of transactions for which bids are being solicited are:
•
a sale transaction meaning, a sale of substantially all of our assets, as provided in the DHCP RSA;
•
an asset sale transaction meaning, the sale of a portion of our assets other than a sale transaction consummated prior to DHCP Effective Date; provided such sale shall only be conducted with the consent of the Requisite Term Lenders; and
•
a master servicing transaction meaning, as part of the DHCP Reorganization Transaction to the extent the terms thereof are acceptable to the Requisite Term Lenders, entry into an agreement or agreements with an approved subservicer or subservicers whereby, following the DHCP Effective Date, all or substantially all of our mortgage servicing rights are subserviced by the new subservicer.
The DHCP RSA presently contemplates the following treatment for certain key classes of creditors under the DHCP Reorganization Transaction:
•
DHCP DIP Warehouse Facilities Claims - On the DHCP Effective Date, the holders of DHCP DIP Warehouse Facilities claims will be paid in full in cash;
•
Term Loan Claims - On the DHCP Effective Date, the holders of Term Loan Claims will receive their pro rata share of new term loans under an amended and restated credit facility agreement in the aggregate principal amount of $400 million, and 100% of our New Common Stock, which will be privately held;
•
Second Lien Notes Claims - On the DHCP Effective Date, the holders of the Second Lien Notes will not receive any distribution;
•
Go-Forward Trade Claims - On the DHCP Effective Date, trade creditors identified by us (with the consent of the Requisite Term Lenders) as being integral to and necessary for the ongoing operations of New Ditech) will receive a distribution in cash in an amount equaling a certain percentage of their claim, subject to an aggregate cap; and
•
Existing Equity Interests - On the DHCP Effective Date, holders of our existing preferred stock, common stock, and warrants will have their claims extinguished.
If the Debtors proceed to confirmation of a sale transaction, the Debtors will distribute proceeds of such transaction in accordance with the priority scheme under the Bankruptcy Code.
Under the DHCP RSA, on the Election Date, the Electing Term Lenders may deliver an election notice to us stating that the Electing Term Lenders wish to consummate an elected transaction as follows: (i) the DHCP Reorganization Transaction, or (ii) master servicing transaction (as part of the DHCP Reorganization Transaction), or (iii) sale transaction, and, if applicable, (iv) in connection and together with an election of (i), (ii), or (iii), any asset sale transaction(s), provided that inclusion of any asset sale transaction(s) is not incompatible with successful consummation of the elected transaction in (i), (ii) or (iii). If the Debtors do not proceed with the elected transaction, the Consenting Term Lenders can terminate the DHCP RSA.
On February 11, 2019, as contemplated by the DHCP RSA, the Debtors filed the DHCP Bankruptcy Petitions and the DHCP Chapter 11 Cases commenced thereby under the Bankruptcy Code in the Bankruptcy Court. Consistent with the DHCP RSA, on March 5, 2019, the Debtors filed the DHCP Plan with the Bankruptcy Court seeking to emerge from Chapter 11 on an expedited timeframe. The Debtors filed an amended DHCP Plan with the Bankruptcy Court on March 28, 2019. The Debtors are continuing to operate their businesses as debtors in possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. We intend to continue to operate our businesses in the ordinary course during the pendency of the DHCP Chapter 11 Cases. To assure ordinary course operations, the Debtors have obtained approval from the Bankruptcy Court for a variety of first day motions seeking various relief, authorizing them to maintain their operations in the ordinary course.
The filing of the DHCP Bankruptcy Petitions described above triggers an event of default or an early amortization event under certain of our debt instruments, as described further in the Corporate Debt section below. The filing of the DHCP Bankruptcy Petitions also triggers the liquidation preference of our Mandatorily Convertible Preferred Stock. Certain of our obligations, including the payment of interest under our debt instruments, are stayed under the Bankruptcy Code during the pendency of the DHCP Chapter 11 Cases.

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During the pendency of the DHCP Chapter 11 Cases, the Bankruptcy Court granted relief enabling us to conduct our business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing us to pay employee wages and benefits, to pay taxes and certain governmental fees and charges, to continue to operate our cash management system in the ordinary course, and to pay the prepetition claims of certain of our vendors. For goods and services provided following the DHCP Petition Date, we continue to pay vendors under normal terms.
DHCP DIP Warehouse Facilities
On February 8, 2019, the Parent Company, as guarantor, along with its wholly-owned subsidiaries Ditech Financial and RMS, entered into the DHCP Commitment Letter with Barclays Bank PLC and Nomura Corporate Funding Americas, LLC regarding the terms of the DHCP DIP Warehouse Facilities, which, upon approval from the Bankruptcy Court on February 14, 2019, provide up to $1.9 billion in available financing. Proceeds of the DHCP DIP Warehouse Facilities were used to repay and refinance RMS’s and Ditech Financial’s existing master repurchase agreements and variable funding notes issued under existing servicer advance facilities. The existing master repurchase agreements and variable funding notes issued under servicer advance facilities were terminated or otherwise replaced under the DHCP DIP Warehouse Facilities. The DHCP DIP Warehouse Facilities will be used to fund Ditech Financial’s and RMS’ continued business operations, providing the necessary liquidity to the Debtors to implement the DHCP Restructuring.
Under the DHCP DIP Warehouse Facilities:
(i) up to $650.0 million will be available to fund Ditech Financial’s origination business and will incur interest based on 3-month LIBOR plus a per annum margin of 2.25%;
(ii) up to $1.0 billion will be available to RMS to fund certain HECMs and real estate owned from Ginnie Mae securitization pools, and will incur interest based on 3-month LIBOR plus a per annum margin of 3.25%; and
(iii) up to $250.0 million will be available to finance the advance receivables related to Ditech Financial’s servicing activities and will incur interest based on 3-month LIBOR plus a per annum margin of 2.25%. Two new series of variable funding notes were issued under the DHCP DIP Warehouse Facilities to replace the existing variable funding notes under the DAAT Facility and DPAT II Facility, which otherwise remain largely intact to finance advances.
In addition, the lenders under the DHCP DIP Warehouse Facilities have agreed to provide Ditech Financial, through the DIP Maturity Date, up to $1.9 billion in trading capacity for Ditech Financial to hedge its interest rate exposure with respect to the loans in Ditech Financial’s loan origination pipeline.
The DHCP DIP Warehouse Facilities contain customary events of default and financial covenants. Financial covenants that are most sensitive to the operating results of the Company's subsidiaries and resulting financial position are minimum tangible net worth requirements, indebtedness to tangible net worth ratio requirements, and minimum liquidity requirements. We were in compliance with all financial covenants under the DHCP DIP Warehouse Facilities as of February 28, 2019.
Mortgage Loan Servicing Business
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 pay property taxes, insurance premiums and foreclosure costs and various other items, referred to as protective advances. Protective advances are required to preserve the collateral underlying the residential loans being serviced. In addition, we advance our own funds to meet contractual principal and interest payment requirements for certain credit owners. In the normal course of business, we borrow money from various counterparties who provide us with financing to fund a portion of our mortgage loan related servicing advances on a short-term basis. Payments on the amounts due under these servicer advance funding agreements are paid from certain proceeds received (i) in connection with the liquidation of mortgaged properties, (ii) from repayments received from mortgagors, (iii) from reimbursements received from the owners of the mortgage loans, such as Fannie Mae, Freddie Mac and private label securitization trusts, or (iv) from the issuance of new notes or other refinancing transactions.
Subservicers are generally reimbursed for advances in the month following the advance, so our advance funding requirements may be reduced if we succeed in transitioning to a greater mix of subservicing in our portfolio. Our ability to fund servicing advances on our owned MSR portfolio is a significant factor that affects our liquidity, and to operate and grow our servicing portfolio we depend upon our ability to secure financing arrangements on acceptable terms and to renew, replace or resize existing financing facilities as they expire. However, there can be no assurance that these facilities will be available to us in the future. The servicing advance financing agreements that support our servicing operations are discussed below.

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Servicing Advance Facilities
On February 12, 2018, as part of the implementation of our WIMC Exit Warehouse Facilities, the WIMC Securities Master Repurchase Agreement was terminated and repaid with proceeds from the issuance of variable funding notes under two new servicing advance facilities, the DAAT Facility and DPAT II Facility. These variable funding notes issued under the DAAT Facility and DPAT II Facility were then repaid and refinanced on February 14, 2019 with new variable funding notes issued in connection with the DHCP DIP Warehouse Facilities.
DAAT Facility / DPAT II Facility
The DAAT Facility and DPAT II Facility acquired the outstanding advances from the GTAAFT Facility and DPAT Facility, respectively. The variable funding notes issued under the GTAAFT Facility and DPAT Facility, which had been pledged as collateral under the WIMC Securities Master Repurchase Agreement, were fully redeemed and the GTAAFT Facility and DPAT Facility were both terminated on February 12, 2018.
In connection with the DAAT Facility and DPAT II Facility, Ditech Financial sells and/or contributes the rights to reimbursement for servicer and protective advances to a depositor entity, which then sells and/or contributes such rights to reimbursement to an issuer entity. Each of the issuer and the depositor entities under these facilities is structured as a bankruptcy remote special purpose entity and is the sole owner of its respective assets. Advances made under the DAAT Facility and DPAT II Facility are held in two separate trusts: DAAT, used to hold GSE advances, and DPAT II, used to hold non-GSE advances. This financing provides funding for servicer and protective advances made in connection with Ditech Financial's servicing of certain Fannie Mae and other mortgage loans and is non-recourse to us.
The collateral securing the borrowings outstanding under the DAAT Facility and DPAT II Facility consists primarily of rights to reimbursement for servicer and protective advances in respect of certain mortgage loans serviced by Ditech Financial on behalf of Fannie Mae and other private-label securitization trusts, as well as cash.
As part of our WIMC Exit Warehouse Facilities, the DAAT Facility and DPAT II Facility had maximum capacity sub-limits of $465.0 million and $85.0 million, respectively. The interest on the variable funding notes issued under the DAAT Facility and DPAT II Facility was based on the lender's applicable index, plus a per annum margin of 2.25%. These facilities, together with the WIMC Ditech Financial Exit Master Repurchase Agreement and the WIMC RMS Exit Master Repurchase Agreement were subject, collectively, to a combined maximum outstanding amount of $1.9 billion under our WIMC Exit Warehouse Facilities agreements. At December 31, 2018, Ditech Financial had $218.3 million outstanding under the DAAT Facility and the DPAT II Facility, collectively, on advances totaling $239.8 million, and the WIMC Exit Warehouse Facilities in total had an outstanding balance of $1.3 billion.
As discussed further above, on February 14, 2019, the existing variable funding notes issued under the DAAT Facility and DPAT II Facility were repaid and refinanced with variable funding notes issued in connection with the DHCP DIP Warehouse Facilities and the maximum capacity sub-limits for the DAAT Facility and the DPAT II Facility were changed to $160.0 million and $90.0 million, respectively. Otherwise, the DAAT Facility and DPAT II Facility remain largely intact to finance advances.
Each of the facility's base indenture and indenture supplements include facility events of default and target amortization events customary for financings of this type. The target amortization events include, among other events, events related to breaches of representations, financial and non-financial covenants, certain tests related to the collection and performance of the receivables securing the variable funding notes, defaults under certain other material indebtedness, material judgments and change of control. Upon the occurrence of a target amortization event, the outstanding principal balance of the variable funding notes becomes payable on the first payment date occurring after the occurrence of such target amortization event. Failure to make requisite payments on the variable funding notes following the occurrence of a target amortization event could lead to an event of default. Upon the occurrence of an event of default, specified percentages of noteholders have the right to terminate all commitments and accelerate the variable funding notes under the base indenture, enforce their rights with respect to the collateral and take certain other actions. The events of default include, among other events, the occurrence of any failure to make payments (subject to certain cure periods and including balances due after the occurrence of a target amortization event), failure of Ditech Financial to satisfy various deposit and remittance obligations as servicer of certain mortgage loans, the requirement of the issuer to be registered as an "investment company" under the Investment Company Act of 1940, as amended, certain tests related to the collection and performance of the receivables securing the notes issued pursuant to the base indenture and applicable indenture supplement, removal of Ditech Financial’s status as an approved seller or servicer by either Fannie Mae or Freddie Mac and bankruptcy events.

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In connection with these facilities, we entered into an acknowledgment agreement with Fannie Mae, dated as of February 9, 2018, with subsequent amendments to the agreement dated April 20, 2018 and February 14, 2019, that waived Fannie Mae's respective rights of set-off against rights to reimbursement for certain servicer advances and delinquency advances subject to the DAAT Facility. The Fannie Mae acknowledgment agreement remains in effect unless Fannie Mae withdraws its consent (i) at each yearly anniversary of the agreement by providing 30 days' advance written notice or (ii) upon certain other specified events. If Fannie Mae were to withdraw such waiver or subordination, as applicable, of its respective rights of set-off, our ability to increase the draws on the variable funding notes or maintain the drawn balances thereunder could be materially limited or eliminated.
The indenture supplements of the original series of variable funding notes under the DAAT Facility and DPAT II Facility were further amended throughout 2018 to, amongst other things, reduce the minimum liquidity and profitability requirements for certain periods in the remaining term of each agreement. Ditech Financial was not in compliance with the quarterly profitability covenant included in the original indenture supplements of the DAAT Facility and the DPAT II Facility for the quarter ended December 31, 2018. On February 14, 2019, the original series of variable funding notes under the DAAT Facility and DPAT II Facility were repaid and refinanced with new series of variable funding notes issued under new indenture supplements in conjunction with the DHCP DIP Warehouse Facilities as discussed further above.
Early Advance Reimbursement Agreement
Ditech Financial's Early Advance Reimbursement Agreement with Fannie Mae was used exclusively to fund certain principal and interest and servicer and protective advances that are the responsibility of Ditech Financial under its Fannie Mae servicing agreements. In April 2018, we entered into an acknowledgment agreement with Fannie Mae, whereupon the Early Advance Reimbursement Agreement was terminated. We fully repaid the outstanding balance on the Early Advance Reimbursement Agreement upon termination, and the advances were pledged as collateral on the DAAT Facility.
Mortgage Loan Originations Business
Master Repurchase Agreements
Ditech Financial utilizes master repurchase agreements with various warehouse lenders to fund the origination and purchase of residential loans. These facilities provide creditors a security interest in the mortgage loans that meet the eligibility requirements under the terms of each particular facility in exchange for cash proceeds used to originate or purchase mortgage loans. We agree to repay borrowings under these facilities within a specified timeframe, and the source of repayment is typically from the sale or securitization of the underlying loans into the secondary mortgage market. We evaluate our needs under these facilities based on forecasted mortgage loan origination volume; however, there can be no assurance that these facilities will be available to us in the future.
On February 9, 2018, in connection with the WIMC Effective Date of the WIMC Prepackaged Plan, the WIMC DIP Warehouse Facilities transitioned into the WIMC Exit Warehouse Facilities, whereupon the WIMC Ditech Financial Exit Master Repurchase Agreement amended under the WIMC DIP Warehouse Facilities would continue to provide financing for Ditech Financial's origination business. Upon the WIMC Effective Date, the WIMC Ditech Financial Exit Master Repurchase Agreement was amended to, among other things, extend the maturity date to February 8, 2019, change the interest rate to the lender's applicable index, plus a per annum margin of 2.25%, and increase the maximum capacity sub-limit available to finance Ditech Financial's origination business to $1.0 billion. The WIMC Ditech Financial Exit Master Repurchase Agreement, together with the WIMC RMS Exit Master Repurchase Agreement and the DAAT and DPAT II Facilities were subject, collectively, to a combined maximum outstanding amount of $1.9 billion under our WIMC Exit Warehouse Facilities. At December 31, 2018, the WIMC Ditech Financial Exit Master Repurchase Agreement had an outstanding balance of $689.7 million, and the WIMC Exit Warehouse Facilities in total had an outstanding balance of $1.3 billion.
As discussed further above, on February 14, 2019, the WIMC Ditech Financial Exit Master Repurchase Agreement was repaid and refinanced with the DHCP DIP Warehouse Facilities.
Our ability to utilize our master repurchase facilities from time to time depends, among other things, upon us being able to make representations and warranties as to our solvency, the accuracy of information we have furnished, no material adverse changes having occurred, maintenance of our approved seller/servicer status with GSEs, no notices of adverse actions having been received from GSEs or agencies, the adequacy of our control program, our ability to service loans in accordance with accepted servicing practices and our compliance with applicable laws. The WIMC Ditech Financial Exit Master Repurchase Agreement contains customary events of default and financial covenants. Financial covenants that are most sensitive to the operating results of our subsidiaries and resulting financial position are minimum tangible net worth requirements, indebtedness to tangible net worth ratio requirements, and minimum liquidity and profitability requirements.

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The WIMC Ditech Financial Exit Master Repurchase Agreement was further amended throughout 2018 to, amongst other things, reduce the minimum liquidity and profitability requirements for the certain periods in the remaining term of the agreement. Ditech Financial was not in compliance with the quarterly profitability covenant included in the WIMC Ditech Financial Exit Master Repurchase Agreement for the quarter ended December 31, 2018. On February 14, 2019, the WIMC Ditech Financial Exit Master Repurchase Agreement was repaid and refinanced with the DHCP DIP Warehouse Facilities as discussed further above.
Representations and Warranties
In conjunction with our originations business, we provide representations and warranties on loan sales. We sell substantially all of our originated or purchased mortgage loans into the secondary market for securitization or to private investors as whole loans. We sell 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. We also sell non-conforming mortgage loans to private investors. In doing so, representations and warranties regarding certain attributes of the loans are made to the third-party investor. Subsequent to the sale, if it is determined that a loan sold is in breach of these representations or warranties, we generally have an obligation to cure such breach. In general, if we are unable to cure such breach, the purchaser of the loan may require us to repurchase such loan for the unpaid principal balance, accrued interest, and related advances, and in any event, we must indemnify such purchaser for certain losses and expenses incurred by such purchaser in connection with such breach. Our credit loss may be reduced by any recourse we have to correspondent lenders that, in turn, have sold such residential loans to us and breached similar or other representations and warranties.
Our representations and warranties are generally not subject to stated limits of exposure with the exception of certain loans originated under HARP, which limits exposure based on payment history of the loan. At December 31, 2018, our maximum exposure to repurchases due to potential breaches of representations and warranties was $67.8 billion, and was based on the original unpaid principal balance of loans sold from the beginning of 2013 through December 31, 2018 adjusted for voluntary payments made by the borrower on loans for which we perform the servicing. A majority of our loan sales were servicing retained.
Rollforwards of the liability associated with representations and warranties are included below (in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Balance at beginning of the period
 
$
16,487

 
 
$
16,792

 
$
22,094

Provision for new sales
 
5,522

 
 
729

 
6,991

Change in estimate of existing reserves (1)(2)
 
(6,919
)
 
 
(1,001
)
 
(10,596
)
Net realized losses on repurchases
 
(2,343
)
 
 
(33
)
 
(1,697
)
Balance at end of the period
 
$
12,747



$
16,487

 
$
16,792

__________
(1)
The change in estimate of existing reserves during the year ended December 31, 2018 primarily relates to portfolio performance, voluntary loan payoffs and paydowns, clean loan reviews, loans meeting certain age triggers, and updates to certain assumptions used to estimate the reserve, all of which reduced estimated loss exposure.
(2)
The change in estimate of existing reserves during the year ended December 31, 2017 primarily relates to portfolio performance, voluntary loan payoffs and paydowns, clean loan reviews, and loans meeting certain age triggers, which reduces estimated loss exposure.
Rollforwards of loan repurchase requests based on the original unpaid principal balance are included below (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
 
 
No. of Loans
 
Unpaid Principal Balance
 
 
No. of Loans
 
Unpaid Principal Balance
 
No. of Loans
 
Unpaid Principal Balance
Balance at beginning of the period
 
23

 
$
4,740

 
 
31

 
$
6,674

 
29

 
$
5,974

Repurchases and indemnifications
 
(35
)
 
(7,160
)
 
 
(5
)
 
(754
)
 
(35
)
 
(7,279
)
Claims initiated
 
157

 
35,036

 
 
15

 
3,295

 
147

 
28,814

Rescinded
 
(103
)
 
(24,048
)
 
 
(18
)
 
(4,475
)
 
(110
)
 
(20,835
)
Balance at end of the period
 
42


$
8,568



23


$
4,740


31

 
$
6,674


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The following table presents our maximum exposure to repurchases due to potential breaches of representations and warranties at December 31, 2018 based on the original unpaid principal balance of loans sold adjusted for voluntary payments made by the borrower on loans for which we perform the servicing by vintage year (in thousands):
 
 
Successor
 
 
Unpaid Principal Balance
2013
 
$
7,097,265

2014
 
8,382,842

2015
 
12,866,654

2016
 
13,731,663

2017
 
13,661,056

2018
 
12,095,774

Total
 
$
67,835,254

Reverse Mortgage Business
Master Repurchase Agreements
RMS utilizes master repurchase agreements to finance the repurchases of certain HECMs and real estate owned from Ginnie Mae securitization pools. These facilities are secured by the underlying assets and provide creditors a security interest in the assets that meet the eligibility requirements under the terms of each particular facility. We agree to repay the borrowings under these facilities within a specified timeframe, and the source of repayment is typically from claim proceeds received from HUD or liquidation proceeds from the sale of real estate owned. RMS also has non-recourse variable funding notes issued by a subsidiary, which provide secured financing for certain HECMs and real estate owned previously repurchased from Ginnie Mae securitization pools. We evaluate our needs under these facilities based on forecasted reverse loan repurchases and timing of reimbursement from HUD; however, there can be no assurance that these facilities will be available to us in the future.
On February 9, 2018, upon the WIMC Effective Date of the WIMC Prepackaged Plan, the WIMC DIP Warehouse Facilities, which were provided during the WIMC Chapter 11 Case, transitioned into the WIMC Exit Warehouse Facilities, whereupon the WIMC RMS Exit Master Repurchase Agreement continued to provide financing for repurchases of certain HECMs and real estate owned from Ginnie Mae securitization pools for a period of one year. Upon the WIMC Effective Date, the WIMC RMS Exit Master Repurchase Agreement was amended to, among other things, extend the maturity date to February 8, 2019 and change the interest rate to the lender's applicable index, plus a per annum margin of 3.25%, and increase the maximum capacity sub-limit available to finance the repurchase of certain HECMs and real estate owned Ginnie Mae securitization pools to $800.0 million. The WIMC RMS Exit Master Repurchase Agreement, together with the Ditech Financial Exit Master Repurchase agreement and the DAAT and DPAT II Facilities were subject, collectively, to a combined maximum outstanding amount of $1.9 billion under our WIMC Exit Warehouse Facilities. At December 31, 2018, the WIMC RMS Exit Master Repurchase Agreement had an outstanding balance of $441.6 million, and the WIMC Exit Warehouse Facilities in total had an outstanding balance of $1.3 billion.
On April 23, 2018, we entered into an additional master repurchase agreement which, as of December 31, 2018, provides up to $412.0 million in total capacity, and no less than $400.0 million in committed capacity to fund the repurchase of certain HECMs and real estate owned from Ginnie Mae securitization pools. The interest rate on this facility is based on the applicable index rate plus 3.25%. At December 31, 2018, this master repurchase agreement had an outstanding balance of $185.0 million. This facility was scheduled to mature in April 2019.
As discussed further above, on February 14, 2019, the RMS Exit Master Repurchase Agreement and the additional RMS master repurchase agreement entered into on April 23, 2018 were repaid and refinanced or otherwise replaced under the DHCP DIP Warehouse Facilities.
On October 1, 2018, we executed a transaction that provided $230.0 million of additional secured financing for certain HECMs and real estate owned. Under the transaction, the participating interests in certain HECMs and real estate owned that we had previously repurchased from Ginnie Mae securitization pools and that were secured by existing warehouse borrowings were pledged as collateral on variable funding notes issued by a wholly-owned subsidiary under the transaction. The variable funding notes are non-recourse, incur interest monthly at a rate of 6.00% per annum, and expire on October 2025. The variable funding notes had outstanding borrowings of $225.4 million at December 31, 2018. The subsidiary issuer of the variable funding notes under this transaction is not a Debtor under the DHCP Chapter 11 Cases.

100


The RMS master repurchase agreements included in the DHCP DIP Warehouse Facilities contain customary events of default and covenants, the most significant of which are financial covenants. Financial covenants that are most sensitive to the operating results of our subsidiaries and resulting financial position are minimum tangible net worth requirements, indebtedness to tangible net worth ratio requirements, and minimum liquidity requirements. In August 2018, the liquidity covenants included in each of RMS' master repurchase agreements then in effect were amended to reduce the liquidity requirements for the remaining term of each agreement. RMS was in compliance with the terms of each of its master repurchase agreements, including financial covenants, at December 31, 2018.
Reverse Loan Securitizations
We transfer reverse loans that we have originated or purchased through the Ginnie Mae HMBS issuance process. The proceeds from the transfer of the HMBS are accounted for as a secured borrowing and are classified on the consolidated balance sheets as HMBS related obligations. The proceeds from the transfer are used to repay borrowings under our master repurchase agreements. At December 31, 2018, we had $7.0 billion in unpaid principal balance outstanding on the HMBS related obligations. At December 31, 2018, $6.8 billion in unpaid principal balance of reverse loans and real estate owned was pledged as collateral to the HMBS beneficial interest holders, and are not available to satisfy the claims of our creditors. 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 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.
Borrower remittances received on the reverse loans, if any, proceeds received from the sale of real estate owned and our funds used to repurchase reverse loans are used to reduce the HMBS related obligations by making payments to Ginnie Mae, who will then remit the payments to the holders of the HMBS. The maturity of the HMBS related obligations is directly affected by the liquidation of the reverse loans or liquidation of real estate owned and events of default as stipulated in the reverse loan agreements with borrowers. Refer to the section below for additional information on repurchases of reverse loans.
HMBS Issuer Obligations
As an HMBS issuer, we assume certain obligations related to each security issued. The most significant obligation is the requirement to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM is equal to or greater than 98% of the maximum claim amount. Performing repurchased loans are conveyed to HUD and payment is received from HUD typically within a short timeframe of repurchase. HUD reimburses us for the outstanding principal balance on the loan up to the maximum claim amount. We bear the risk of exposure if the amount of the outstanding principal balance on a loan exceeds the maximum claim amount. Recent regulatory changes introduced by HUD increased the requirements for completing an assignment to HUD. These new requirements may increase the time interval between when a loan is repurchased and when the assignment claim is filed with HUD, and inability to meet such requirements could preclude assignment. During this period, accruals for interest, HUD-required mortgage insurance payments, and borrower draws may cause the unpaid balance on the loan to increase and ultimately exceed the maximum claim amount. Nonperforming repurchased loans are generally liquidated through foreclosure and subsequent sale of real estate owned. Loans are considered nonperforming upon events such as, but not limited to, the death of the mortgagor, the mortgagor no longer occupying the property as their principal residence, or the property taxes or insurance not being paid.
We currently rely upon certain master repurchase agreements and operating cash flows, to the extent necessary, to repurchase these Ginnie Mae loans. Given continued growth in the number and amount of our reverse loan repurchases, we may continue to seek additional, or expansion of existing, master repurchase or similar agreements to provide financing capacity for future required loan repurchases. The timing and amount of our obligation to repurchase HECMs is uncertain as repurchase is predicated on certain factors such as whether or not a borrower event of default occurs prior to the HECM reaching the mandatory repurchase threshold under which we are obligated to repurchase the loan.

101


Rollforwards of reverse loan and real estate owned repurchase activity (by unpaid principal balance) are included below (in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Balance at beginning of the period
 
$
970,382

 
 
$
808,508

 
$
346,983

Repurchases and other additions (1)
 
1,557,247

 
 
257,078

 
1,320,230

Liquidations
 
(1,424,337
)
 
 
(95,204
)
 
(858,705
)
Balance at end of the period (2)
 
$
1,103,292



$
970,382

 
$
808,508

__________
(1)
Other additions to the principal balance relate to interest, servicing fees, mortgage insurance and advances.
(2)
The balance at December 31, 2018 included $38.3 million of real estate owned.
Our repurchases of reverse loans and real estate owned have increased significantly in 2018 as compared to 2017. We expect these required repurchases to continue to increase as a greater percentage of HECMs and real estate owned are reaching 98% of their maximum claim amount. At December 31, 2018, we had commitments to repurchase reverse loans and real estate owned of $165.1 million, and we had $585.4 million available under our master repurchase agreements for repurchases of reverse loans and real estate owned. Our repurchases of reverse loans and real estate owned are projected to be approximately $2.0 billion, $1.2 billion and $643.7 million during the years ending December 31, 2019, 2020 and 2021, respectively. There can be no assurance that we will be able to maintain or expand our borrowing capacity to fund loan repurchases. Refer to Notes 6 and 29 of the Consolidated Financial Statements for further discussion.
On June 13, 2018, we sold a pool of defaulted reverse Ginnie Mae buyout loans owned by us and financed under an existing master repurchase agreement for a sales price of approximately $241.3 million. The proceeds from the sale were used to repay the related amount financed under the master repurchase agreement and to fund additional Ginnie Mae buyout loans. We continue to service these loans on behalf of the purchaser under a subservicing agreement.
On October 1, 2018, as discussed further above, we executed a transaction that provided $230.0 million of additional secured financing for certain HECMs and real estate owned.
Reverse Loan Servicer Obligations
Similar to our mortgage loan servicing business, our reverse mortgage servicing agreements impose on us obligations to advance our own funds to meet contractual payment requirements for customers and credit owners and to pay protective advances, which are required to preserve the collateral underlying the residential loans being serviced. We rely upon operating cash flows to fund these obligations.
As servicer of reverse loans, we are also obligated to fund additional borrowings by customers in the form of undrawn lines of credit on floating rate and fixed rate reverse loans. We rely upon our operating cash flows to fund these additional borrowings on a short-term basis prior to securitization (when performing services of both the issuer and servicer) or reimbursement by the issuer (when providing third-party servicing). The additional fundings made by us, as issuer and servicer, are generally securitized within 30 days after funding. Similarly, the additional fundings made by us, as third-party servicer, are typically reimbursed by the issuer within 30 days after funding. At December 31, 2018, our commitment to fund additional borrowings by customers, which was available to be drawn by borrowers, was $1.0 billion. There is no termination date for these drawings so long as the loan remains performing. The obligation to fund these additional borrowings could have a significant impact on our liquidity.
Corporate Debt
2018 Credit Agreement
On February 9, 2018, in connection with the WIMC Effective Date of the WIMC Prepackaged Plan, we entered into the 2018 Credit Agreement, which amended and restated our 2013 Credit Agreement. The 2013 Revolver and LOCs issued thereunder were terminated upon the effectiveness of the 2018 Credit Agreement. Our obligations under this agreement continue to be guaranteed by substantially all of our subsidiaries and secured by substantially all of our assets subject to certain exceptions, the most significant of which are the assets of the consolidated Non-Residual Trusts, the residential loans and real estate owned of the Ginnie Mae securitization pools, and advances of the consolidated financing entities that have been recorded on our consolidated balance sheets.

102


The 2018 Credit Agreement provides for the 2018 Term Loan maturing on June 30, 2022 in an original principal amount of approximately $1.2 billion. The 2018 Term Loan bears interest at a rate per annum equal to, at our option, (i) LIBOR plus 6.00% (with a LIBOR floor of 1.00%) or (ii) an alternate base rate plus 5.00% (which interest will be payable (a) with respect to any alternate base rate loan, the last business day of each March, June, September and December, and (b) with respect to any LIBOR loan, the last day of the interest period applicable to the borrowing of which such loan is a part). We made principal payments on the 2013 Term Loan and 2018 Term Loan totaling $157.6 million during the period from February 10, 2018 through December 31, 2018 and $110.6 million during the period from January 1, 2018 through February 9, 2018. The outstanding principal balance on the 2018 Term Loan was $961.4 million at December 31, 2018. We are required to make quarterly payments on the 2018 Term Loan in the amounts listed below (in thousands):
Repayment Date
 
Principal Amount
March 2019 (1)
 
$
10,000

June 2019
 
26,700

September 2019
 
36,700

December 2019
 
36,700

each March, June, September and December thereafter until maturity
 
15,000

__________
(1)
As a result of the DHCP Chapter 11 Cases discussed further above, the Company did not make the quarterly principal payment for March 2019.
In addition to the quarterly installments detailed above, mandatory repayment obligations under the 2018 Credit Agreement include, subject to exceptions, (i) 100% of the net sale proceeds from the sale or other disposition of certain non-core assets of the Company and of certain of the Company’s subsidiaries, (ii) 80% of the net sale proceeds of certain non-ordinary course asset sales and dispositions of certain bulk mortgage servicing rights, (iii) 100% of the net cash proceeds from the issuance of certain indebtedness and (iv) beginning with the fiscal year ending December 31, 2018, 50% of the Company’s excess cash flow as defined in the agreement. The 2018 Credit Agreement allows us to prepay, in whole or in part, our borrowings outstanding thereunder, together with any accrued and unpaid interest, with prior notice and subject to the prepayment premium described below and breakage or redeployment costs.
The 2018 Credit Agreement contains affirmative and negative covenants and representations and warranties customary for financings of this type, including restrictions on liens, dispositions of assets, fundamental changes, dividends, the ability to incur additional indebtedness, investments, transactions with affiliates, modifications of certain agreements, certain restrictions on subsidiaries, issuance of certain equity interests, changes in lines of business, creation of additional subsidiaries and prepayments of other indebtedness, in each case subject to customary exceptions.

103


The 2018 Credit Agreement contains financial covenants requiring compliance with certain asset coverage ratios and, commencing in 2020 as described below, an interest expense coverage ratio and a first lien net leverage ratio. At December 31, 2018, we were required to meet two asset coverage ratios: Asset Coverage Ratio A and Asset Coverage Ratio B. These ratios were calculated in accordance with the terms of the 2018 Credit Agreement, as amended, and are detailed below. Capitalized terms are defined in the 2018 Credit Agreement.
Asset Coverage Ratio A Calculation (dollars in thousands):
 
 
 
 
 
Successor
 
 
 
December 31, 2018
a
the Balance Sheet Value of “Cash and cash equivalents”;
 
$
187,726

b
the Balance Sheet Value of “Servicing rights, net” minus the Balance Sheet Value of “Servicing rights related liabilities”;
 
607,221

c
the Balance Sheet Value of “Servicer and protective advances, net” minus the Balance Sheet Value of “Servicing advance liabilities”;
 
222,206

d
the sum of (i) the sum of (y) the Balance Sheet Value of “Residential loans” and (z) the Balance Sheet Value of GNMA Buyout REO minus (ii) the sum of (w) the aggregate principal amount of Warehouse Indebtedness with respect to which the assets described in clause (d)(i) are subject, (x) the Balance Sheet Value of the residential loans held in Residual Trusts and Non-Residual Trusts, (y) the Balance Sheet Value of reverse loans, which are in reverse GNMA securitization pools and (z) the Balance Sheet Value of residential loans, which are in GNMA securitization pools that are eligible for early buy-out;
 
358,896

e
the Balance Sheet Value of total assets less total liabilities of the Residual Trusts;
 
—

f
the Balance Sheet Value of “Premises and equipment, net”;
 
66,260

g
the Balance Sheet Value of “Receivables, net” minus the Balance Sheet Value of “Receivables, net” related to the Non-Residual Trusts; and
 
114,871

h
the sum of (i) the Balance Sheet Value of “Other assets, net” minus (ii) the sum of (y) the Balance Sheet Value of “Other assets” related to the Residual Trusts and Non-Residual Trusts and (z) the Balance Sheet Value of REO assets, which are in reverse GNMA securitization pools and any GNMA Buyout REOs included in “Net Assets A” pursuant to clause (d) above;
 
98,493

 
Net Assets A
 
$
1,655,673

 
First Lien Indebtedness (2018 Term Loan Balance)
 
$
961,356

 
 
 
 
 
Asset Coverage Ratio A
 
1.72
x
 
 
 
 
 
Minimum Requirement
 
1.45x


104


Asset Coverage Ratio B Calculation (dollars in thousands):
 
 
 
 
 
Successor
 
 
 
December 31, 2018
a
the lesser of (i) the Balance Sheet Value of “Cash and cash equivalents” or (ii) $250,000
 
$
187,726

b
the Balance Sheet Value of “Servicing rights, net” minus the Balance Sheet Value of “Servicing rights related liabilities”;
 
607,221

c
(if positive) (i) the then-applicable Servicer and Protective Advance Percentage multiplied by the Balance Sheet Value of “Servicer and protective advances, net” minus (ii) the Balance Sheet Value of “Servicing advance liabilities”;
 
200,181

d
(if positive) the sum of (i) 90% of (v) the Balance Sheet Value of “Residential loans” minus (w) the Balance Sheet Value of the residential loans held in Residual Trusts and Non-Residual Trusts, minus (x) the Balance Sheet Value of reverse loans, which are in reverse GNMA securitization pools, minus (y) the Balance Sheet Value of residential loans, which are in GNMA securitization pools that are eligible for early buy-out and minus (z) the Balance Sheet Value of GNMA Buyouts and (ii) the then-applicable GNMA Buyout Percentage multiplied by the sum of (x) GNMA Buyouts and (y) the Balance Sheet Value of GNMA Buyout REO, minus (iii) the aggregate principal amount of Warehouse Indebtedness to which the assets described in clause (d)(i)(v) and (d)(ii) are subject;
 
180,180

e
the sum of 75% of (i) the Balance Sheet Value of “total assets” minus (ii) the Balance Sheet Value of “total liabilities”, in each case, of the Residual Trusts;
 
—

f
50% of MSR Holdback Receivables; and
 
7,025

g
75% of Servicing Fee Receivables;
 
18,869

 
Net Assets B
 
$
1,201,202

 
First Lien Indebtedness (2018 Term Loan Balance)
 
$
961,356

 
 
 
 
 
Asset Coverage Ratio B
 
1.25
x
 
 
 
 
 
Minimum Requirement
 
1.00x

On March 29, 2018, we entered into an amendment to 2018 Credit Agreement to (i) waive our compliance with the first lien net leverage ratio covenant and the interest expense coverage ratio covenant until the test period ending March 31, 2020, (ii) require us to make additional principal payments from March 29, 2018 to December 31, 2018 in an aggregate amount equal to $30.0 million, (iii) provide for a one percent prepayment premium in connection with prepayments of the term loans made during the first 18 months after entering into this amendment (for all prepayments of principal other than mandatory amortization payments and the payments described in the foregoing clause (ii)), and (iv) increase certain asset coverage ratios for all test periods ending on March 31, 2018 through December 31, 2018.
On February 8, 2019, the Debtors entered into the DHCP RSA with the Consenting Term Lenders holding, as of February 11, 2019, more than 75% of the Term Loans outstanding under the 2018 Credit Agreement. Refer to the DHCP Chapter 11 Cases section above for further information.
Second Lien Notes
On February 9, 2018, pursuant to the terms of the WIMC Prepackaged Plan, we issued $250.0 million aggregate principal amount of Second Lien Notes to each holder of a Senior Notes claim on a pro rata basis. The Second Lien Notes pay interest semi-annually on June 15 and December 15, commencing on June 15, 2018, at a rate of 9.00% per year, and mature December 31, 2024. The Second Lien Notes require payment of interest in cash, except that interest on up to $50.0 million principal amount (plus previously accrued PIK interest payable), at our election, may be paid by increasing the principal amount of the outstanding notes or by issuing additional notes. The terms of the 2018 Credit Agreement require us to exercise such election. The Second Lien Notes are secured on a second-priority basis by substantially all of our assets and are guaranteed by substantially all of our subsidiaries. The Second Lien Notes and the guarantees thereof are subordinated to the prior payment in full of the 2018 Credit Agreement and certain other senior indebtedness (as defined and to the extent set forth in the Second Lien Notes Indenture).

105


We may redeem all or a portion of the Second Lien Notes prior to December 15, 2020 by paying a specified premium, or at any time on or after December 15, 2020 at applicable redemption prices, in each case, plus accrued and unpaid interest. In addition, on or before December 15, 2020, we may redeem up to 35% of the aggregate principal amount of the Second Lien Notes with the net proceeds of certain equity offerings at the redemption price of 109.000% of the principal amount of Second Lien Notes redeemed, plus accrued and unpaid interest. If we experience specific kinds of changes of control, we must offer to repurchase the Second Lien Notes at 101% of their principal amount, plus accrued and unpaid interest. In addition, if the Second Lien Notes would otherwise constitute “applicable high-yield discount obligations,” at the end of each accrual period ending on or after February 9, 2023, we will be required to redeem a portion of the Second Lien Notes. The Second Lien Notes Indenture limits our ability to, among other things, pay dividends and make distributions or repurchase stock; make certain investments; incur additional debt; sell assets; enter into certain transactions with affiliates; create or incur liens; materially change its lines of business; and merge or consolidate or transfer or sell all or substantially all of its assets. The Second Lien Notes Indenture contains certain customary events of default, including the failure to make timely payments on the Second Lien Notes, failure to satisfy certain covenants and specified events of bankruptcy and insolvency.
Our Board of Directors elected not to make the approximately $9.0 million cash interest payment due and payable on December 17, 2018 with respect to the Second Lien Notes. We had sufficient liquidity on December 17, 2018 to make the interest payment. However, the Board of Directors elected not to make the interest payment as active discussions continue with certain of our creditors and other parties in interest regarding our previously announced evaluation of strategic alternatives. Under the Second Lien Notes Indenture, we had a 30-day grace period to make the interest payment before such non-payment triggered an event of default under the Second Lien Notes Indenture. Our failure to make the interest payment within 30 days after it was due and payable resulted in an event of default under the Second Lien Notes Indenture effective January 16, 2019. An event of default under the Second Lien Notes Indenture also constitutes an event of default under the 2018 Credit Agreement and certain of our warehouse facility agreements.
On January 16, 2019, the Parent Company and certain of its subsidiaries entered into forbearance agreements with (i) certain holders of greater than 75% of the aggregate principal amount of the outstanding Second Lien Notes, (ii) certain lenders of greater than 50% of the aggregate principal amount outstanding under the 2018 Credit Agreement and the administrative agent and collateral agent under the 2018 Credit Agreement and (iii) the requisite buyers and variable funding noteholders, as applicable, under certain warehouse facility agreements. Pursuant to the forbearance agreements, the parties noted above agreed to temporarily forbear from the exercise of any rights or remedies they may have in respect of the aforementioned anticipated events of default or other defaults or events of default arising out of or in connection therewith.
On February 8, 2019, the Parent Company and certain of its subsidiaries entered into additional forbearance agreements with (i) certain lenders holding greater than 50% of the sum of (a) the loans outstanding, (b) letter of credit exposure and (c) unused commitments under the 2018 Credit Agreement at such time and the administrative agent and collateral agent under the 2018 Credit Agreement, (ii) the requisite buyers and variable funding noteholders, as applicable, under certain warehouse facility agreements and (iii) the counterparty under a certain master securities forward transaction agreement.
Refer to the DHCP Chapter 11 Cases section above for further information.
Corporate Debt - Pre-Bankruptcy Emergence (WIMC)
2013 Credit Agreement
At December 31, 2017, we had a 2013 Term Loan in the original principal amount of $1.5 billion and unpaid principal amount of $1.2 billion. We also had a 2013 Revolver with a maximum availability of $20.0 million at December 31, 2017, and with $19.5 million outstanding in issued LOCs reducing the amount available on the 2013 Revolver, we had $0.5 million in available capacity. Our obligations under the 2013 Secured Credit Facilities were guaranteed by substantially all of our subsidiaries and secured by substantially all of our assets subject to certain exceptions, the most significant of which are the assets of the consolidated Residual and Non-Residual Trusts, the residential loans and real estate owned of the Ginnie Mae securitization pools, and advances of the consolidated financing entities that have been recorded on our consolidated balance sheets.
Under the 2013 Credit Agreement, in order to borrow in excess of 20% of the committed amount under the 2013 Revolver, each quarter we had to satisfy both a specified interest coverage ratio and a specified total leverage ratio as defined in the agreement on a pro forma basis after giving effect to the borrowing. As of December 31, 2017, we did not satisfy these ratios, and as a result the maximum amount we would have been able to borrow on the 2013 Revolver, was $20.0 million. As of December 31, 2017, we had $19.5 million outstanding in issued LOCs and $0.5 million remained available on the 2013 Revolver.
During the year ended December 31, 2017, in accordance with 2013 Credit Agreement and related amendments, as well as the Term Loan RSA and related amendments, we made principal payments on the term loan totaling $186.9 million, resulting in a loss on extinguishment of $1.8 million, primarily due to the write-off of deferred financing fees and discount.

106


During the period from January 1, 2018 through February 9, 2018, in accordance with 2013 Credit Agreement and related amendments, as well as the Term Loan RSA and related amendments, we made principal payments on the 2013 Term Loan totaling $73.1 million and in accordance with the 2018 Credit Agreement, upon the WIMC Effective Date, we made an additional principal payment totaling $37.5 million.
Senior Notes
In December 2013, we completed the sale of $575.0 million aggregate principal amount of Senior Notes, which paid interest semi-annually at an interest rate of 7.875% and were scheduled to mature on December 15, 2021. The outstanding principal balance on the Senior Notes was $538.7 million at December 31, 2017. At December 31, 2017, the outstanding balance of Senior Notes as well as accrued interest on the Senior Notes of $19.4 million were included in liabilities subject to compromise on the consolidated balance sheets. On February 9, 2018, upon the WIMC Effective Date of the WIMC Prepackaged Plan, the Senior Notes were canceled and each holder of a Senior Notes claim received its pro rata share of (a) Second Lien Notes and (b) Mandatorily Convertible Preferred Stock.
Convertible Notes
In October 2012, we closed on a registered underwritten public offering of $290 million aggregate principal amount of Convertible Notes. The Convertible Notes paid interest semi-annually on May 1 and November 1, commencing on May 1, 2013, at a rate of 4.50% per annum, and were scheduled to mature on November 1, 2019. The balance outstanding on the Convertible Notes was $242.5 million at December 31, 2017. At December 31, 2017, the outstanding balance of Convertible Notes as well as accrued interest on the Convertible Notes of $6.4 million were included in liabilities subject to compromise on the consolidated balance sheets. On February 9, 2018, upon the WIMC Effective Date of the WIMC Prepackaged Plan, the Convertible Notes were canceled and each holder of a Convertible Notes claim received common stock and warrants.
Mortgage-Backed Debt
We record on our consolidated balance sheets the assets and liabilities, including mortgage-backed debt, of the Non-Residual Trusts. The total unpaid principal balance of mortgage-backed debt was $139.1 million at December 31, 2018. At December 31, 2018, mortgage-backed debt was collateralized by $123.3 million of assets including residential loans, receivables related to the Non-Residual Trusts, real estate owned and restricted cash and cash equivalents. All of the mortgage-backed debt is non-recourse and not cross-collateralized and, therefore, must be satisfied exclusively with the proceeds from the residential loans and real estate owned held in each securitization trust and also from draws on the LOCs of certain Non-Residual Trusts.
Borrower remittances received on the residential loans Non-Residual Trusts collateralizing this debt and draws under LOCs issued by a third party and serving as credit enhancements to certain of the Non-Residual Trusts are used to make principal and interest payments due on the mortgage-backed debt. The maturity of the mortgage-backed debt is directly affected by the rate of principal prepayments on the collateral. As a result, the actual maturity of the mortgage-backed debt is likely to occur earlier than the stated maturity. Under the mortgage-backed debt issued by the Non-Residual Trusts, we had certain obligations to exercise mandatory clean-up calls for each of these trusts at their earliest exercisable date, which is the date the principal amount of each loan pool falls to 10% of the original principal amount. We fulfilled our obligation for our mandatory clean-up call obligations in the second and third quarters of 2017 by making payments of $28.4 million during the year ended December 31, 2017.
On October 10, 2017, we entered into a Clean-up Call Agreement with a counterparty. Pursuant to the Clean-up Call Agreement, we paid an inducement fee in the amount of $36.5 million to the counterparty to assume our mandatory obligation to exercise the clean-up calls for the eight remaining securitization trusts. In addition, we agreed to reimburse the counterparty for certain losses with respect to these trusts to the extent that such losses exceed $17.0 million in the aggregate for the eight remaining trusts from July 1, 2017 through each individual call date. In connection with the exercise of each clean-up call, the counterparty agreed to reimburse us for certain outstanding advances we previously made with respect to the related trusts, up to an aggregate amount of approximately $6.4 million for the eight remaining trusts. Following the counterparty's assumption of our obligations to exercise future clean-up calls, pursuant to the Clean-up Call Agreement, we are no longer obligated to exercise and fund such clean-up calls. Upon exercise of each remaining clean-up call obligation by the counterparty, the counterparty takes control of the remaining collateral in the trust, and the trust is deconsolidated.

107


Contractual Obligations
The following table summarizes, by remaining maturity, our future cash obligations at December 31, 2018 (in thousands):
 
 
Less than
1 year
 
1 - 3 years
 
3 - 5 years
 
More than
5 years
 
Indeterminate
Maturity
 
Total
Corporate debt
 
 
 
 
 
 
 
 
 
 
 
 
Principal
 
$
110,100

 
$
120,000

 
$
731,256

 
$
299,836

 
$
—

 
$
1,261,192

Interest (1)
 
110,936

 
179,525

 
68,139

 
36,000

 
—

 
394,600

Total corporate debt
 
221,036

 
299,525

 
799,395

 
335,836

 
—

 
1,655,792

Warehouse borrowings (2)
 
1,316,326

 
—

 
—

 
—

 
—

 
1,316,326

Leases
 
13,425

 
21,403

 
20,422

 
12,693

 
—

 
67,943

HMBS related obligations (3)
 
—

 
—

 
—

 
—

 
6,987,306

 
6,987,306

Unfunded commitments associated with the Originations segment (4)
 
1,981,001

 
—

 
—

 
—

 
—

 
1,981,001

Unfunded commitments associated with the Reverse Mortgage segment (4)(5)
 
—

 
—

 
—

 
—

 
974,238

 
974,238

Uncertain tax positions
 
—

 
—

 
—

 
—

 
3,660

 
3,660

Total
 
$
3,531,788

 
$
320,928

 
$
819,817

 
$
348,529

 
$
7,965,204

 
$
12,986,266

__________
(1)
Amounts relate to future cash payments for interest expense on our 2018 Term Loan and Second Lien Notes and are calculated by multiplying outstanding principal balances by the respective interest rate and contractual maturities for each commitment at December 31, 2018.
(2)
Warehouse borrowings are repaid primarily with proceeds from sales or securitizations of mortgage loans or from claim proceeds received from HUD or liquidation proceeds from the sale of real estate owned. This amount excludes the non-recourse variable funding notes securing certain HECMs and real estate owned previously repurchased from GNMA securitization pools.
(3)
HMBS related obligations have no stated maturity. The maturity of HMBS related obligations is directly affected by the liquidation of the reverse loans or liquidation of real estate owned, including voluntary liquidation on behalf of the borrower, and events of default as stipulated in the reverse loan agreements with borrowers. Refer to the HMBS Issuer Obligations section above for HECM and real estate owned repurchase activity, which would exclude voluntary liquidations made on behalf of the borrower, during 2018 and 2017. There is no repurchase activity in instances where proceeds from voluntary liquidations are made on behalf of the borrower as such proceeds are used to settle the associated HMBS related obligation. Our repurchases of reverse loans and real estate owned are projected to be approximately $2.0 billion, $1.2 billion and $643.7 million during the years ending December 31, 2019, 2020 and 2021, respectively.
(4)
Refer to Note 29 to the Consolidated Financial Statements for further information regarding unfunded commitments.
(5)
Unfunded commitments presented under indeterminate maturity above represents the aggregate unfunded borrowing capacity of borrowers under our reverse loans at December 31, 2018. This amount includes $951.8 million in capacity that was available to be drawn by borrowers at December 31, 2018. There is no termination date for these drawings so long as the loan remains performing.
Our contractual obligations shown in the table above may change materially as a result of our anticipated emergence from the DHCP Chapter 11 Cases.
We exclude mortgage-backed debt, amounts due under the DAAT Facility and DPAT II Facility, and the amount due under the variable funding notes securing certain HECMs and real estate owned previously repurchased from GNMA securitization pools, from the contractual obligations disclosed in the table above as this debt is non-recourse to us. The mortgage-backed debt is not cross-collateralized and, therefore, must be satisfied exclusively from the proceeds of the residential loans and real estate owned held in the securitization trusts. Payments under the DAAT Facility and DPAT II Facility are required upon collection of the underlying advances that have been reimbursed under the agreement. Payments under the variable funding notes securing certain HECMs and real estate owned previously repurchased from GNMA securitization pools are required upon receipt of claim proceeds from HUD or liquidation proceeds from the sale of real estate owned.
Operating lease obligations include (i) a lease for our executive and principal administrative office as well as our originations operations located in Fort Washington, Pennsylvania; (ii) leases for our centralized servicing operations in Saint Paul, Minnesota; Tempe, Arizona; Rapid City, South Dakota; and Jacksonville, Florida; (iii) a lease related to our reverse mortgage operations located in Houston, Texas; (iv) a lease for our administrative office in Tampa, Florida; and (v) other regional servicing and originations operations.

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Certain Capital Requirements and Guarantees
We, including our subsidiaries, are required to comply with requirements under federal and state laws and regulations, including requirements imposed in connection with certain licenses and approvals, as well as requirements of federal, state, GSE, Ginnie Mae and other business partner loan programs, some of which are financial covenants related to minimum levels of net worth and other financial requirements. If these mandatory imposed capital requirements are not met, our selling and servicing agreements could be terminated and lending and servicing licenses could be suspended or revoked. At December 31, 2018, our subsidiaries were in compliance with such financial covenants.
Noncompliance with any requirements for which we do not receive a waiver could have a negative impact on us, which could include suspension or termination of the selling and servicing agreements, which would prohibit future origination or securitization of mortgage loans or being an approved seller or servicer for the applicable GSE.
We also have financial covenant requirements relating to our servicing advance facilities and master repurchase agreements. Refer to additional information at the Mortgage Loan Servicing Business, Mortgage Loan Originations Business and Reverse Mortgage Business sections above for further information.
Dividends
We have no current plans to pay any cash dividends on our common stock. As a result of the DHCP Chapter 11 Cases, we are currently prohibited from paying dividends. Following the potential emergence from the DHCP Chapter 11 Cases, we do not anticipate paying any dividends as we expect to retain any future cash flows for debt reduction and to support operations. Refer to the Corporate Debt section above.
Sources and Uses of Cash
The following table sets forth selected consolidated cash flow information (in thousands):
 
 
Successor
 
 
Predecessor
 
 
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended December 31, 2017 (1)
 
Variance
Cash flows provided by (used in) operating activities:
 
 
 
 
 
 
 
 
 
Net income (loss) adjusted for non-cash operating activities
 
$
(215,869
)
 
 
$
(41,202
)
 
$
(361,899
)
 
$
104,828

Changes in assets and liabilities
 
197,265

 
 
27,236

 
253,693

 
(29,192
)
Net cash provided by (used in) originations activities (2)
 
(359,673
)
 
 
221,798

 
820,407

 
(958,282
)
Cash flows provided by (used in) operating activities
 
(378,277
)


207,832

 
712,201

 
(882,646
)
Cash flows provided by investing activities
 
1,848,036

 
 
227,431

 
1,552,232

 
523,235

Cash flows used in financing activities
 
(1,465,088
)
 
 
(585,594
)
 
(2,294,699
)
 
244,017

Net increase (decrease) in cash and cash equivalents and restricted cash and cash equivalents
 
$
4,671



$
(150,331
)

$
(30,266
)
 
$
(115,394
)
__________
(1)
On January 1, 2018, we adopted accounting guidance related to presentation of restricted cash and cash equivalents in the consolidated statements of cash flows. The prior year amounts in the table above have been reclassified to conform to current year presentation.
(2)
Represents purchases and originations of residential loans held for sale, net of proceeds from sales and payments.
Operating Activities
The primary sources and uses of cash for operating activities are purchases, originations and sales activity of residential loans held for sale, changes in assets and liabilities, or operating working capital, and net income (loss) adjusted for non-cash items. Cash provided by operating activities decreased $882.6 million to cash used in operating activities in 2018 as compared to 2017. The primary driver for the change in cash provided by operating activities was a decrease in cash provided by originations' activities resulting from a lower volume of loans sold in relation to loans originated in 2018 as compared to 2017.

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Investing Activities
The primary sources and uses of cash for investing activities relate to purchases, originations and payment activity on reverse loans, payments received on mortgage loans held for investment, proceeds from the sale of real estate owned, business and servicing rights, and cash outflow from the deconsolidation of variable interest entities. Cash provided by investing activities increased $523.2 million in 2018 as compared to 2017. Cash provided by principal payments and proceeds received on reverse loans held for investment, net of purchases and originations, increased $479.1 million due primarily to higher payments received for loans conveyed to HUD related to increased buyouts of reverse loans from the Ginnie Mae securitization pools and a lower funded volume of reverse loans due to our exit from the reverse mortgage originations business. In addition, we received higher cash proceeds of $165.2 million from the sale of servicing rights in 2018 as compared to 2017. These increases were offset by cash proceeds of $131.1 million received from the sale of our insurance business in 2017.
Financing Activities
The primary sources and uses of cash for financing activities relate to securing cash for our originations, reverse mortgage and servicing businesses, as well as for our corporate investing activities. Cash used in financing activities decreased $244.0 million in 2018 as compared to 2017. Net cash provided by warehouse borrowings used to fund the origination and purchase of residential loans increased by $777.2 million due to additional borrowings required for mortgage loans as a result of a lower volume of loans sold in relation to loans originated and an increase in buyouts of reverse loans. This was offset by an increase in cash payments on HMBS related obligations, net of cash generated from the securitization of reverse loans, of $554.0 million resulting primarily from an increase in the repurchase of certain HECMs and real estate owned from securitization pools and a lower volume of reverse loan securitizations due to our exit from the reverse mortgage originations business. In addition, payments on corporate debt increased $81.3 million driven by payments made during 2018 on the 2013 Term Loan and the 2018 Term Loan.
Credit Risk
Consumer Credit Risk
In conjunction with our originations business, we provide representations and warranties on loan sales. Subsequent to the sale, if it is determined that a loan sold is in breach of these representations or warranties, we generally have an obligation to cure such breach. In general, if we are unable to cure such breach, the purchaser of the loan may require us to repurchase such loan for the unpaid principal balance, accrued interest, and related advances, and in any event, we must indemnify such purchaser for certain losses and expenses incurred by such purchaser in connection with such breach. In the case we repurchase the loan, we bear any subsequent credit loss on the loan. Our credit loss may be reduced by any recourse we have to correspondent lenders that, in turn, have sold such residential loans to us and breached similar or other representations and warranties. We maintain a reserve for losses on our representations and warranties obligations. Refer to Notes 6 and 29 to the Consolidated Financial Statements and to the Liquidity and Capital Resources section for additional information regarding these transactions. At December 31, 2018, we held $3.8 million in repurchased loans.
We are also subject to credit risk associated with mortgage loans that we purchase and originate during the period of time prior to the sale of these loans. We consider the credit risk associated with these loans to be insignificant as we hold the loans, on average, for approximately 20 days from the date of borrowing, and the market for these loans continues to be highly liquid.
Counterparty Credit Risk
We are exposed to counterparty credit risk in the event of non-performance by counterparties to various agreements we enter into from time to time, including but not limited to our subservicing agreements, our agreements with GSEs and government agencies relating to our residential loan servicing and originations businesses, our master repurchase agreements we use to fund our residential loan originations business and our HECM repurchase obligations, certain of our advance financing facility agreements, and other agreements relating to our mortgage loan sales and MBS purchase commitments. We are also exposed to counterparty credit risk with respect to wholesale and correspondent lenders with whom we do business, and counterparties from whom we have purchased MSR. We attempt to minimize our counterparty credit risk through, among other things, conducting quality control reviews of wholesale and correspondent lenders, reviewing compliance by wholesale and correspondent lenders with applicable underwriting standards and our client guide, our use of internal monitoring procedures, including monitoring of our counterparties’ credit ratings, reviewing of our counterparties' financial statements and general credit worthiness, and the establishment of collateral requirements. Counterparty credit risk, as well as our own credit risk, is taken into account when determining fair value, although its impact is diminished by any requisite margin posting and other collateral requirements.

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Real Estate Market Risk
We include on our consolidated balance sheets assets secured by real property and property obtained directly as a result of foreclosures. Residential property values are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as an oversupply of housing); changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our loans, which could also cause us to suffer losses.
The following tables present the activity related to foreclosed property (dollars in thousands):
 
Successor
 
For the Period From February 10, 2018 Through December 31, 2018
 
Reverse Mortgage
 
Servicing
 
Non-Residual Trusts(1)
 
Units
 
Amount
 
Units
 
Amount
 
Units
 
Amount
Balance at beginning of period
729

 
$
106,416

 
2,223

 
$
134,929

 
69

 
$
1,187

Foreclosures and other additions, at fair value
761

 
98,091

 
316

 
12,988

 
91

 
1,148

Cost basis of financed sales
—

 
—

 
(262
)
 
(13,412
)
 
—

 
—

Cost basis of cash sales to third parties and other dispositions
(1,016
)
 
(133,789
)
 
(2,068
)
 
(126,789
)
 
(132
)
 
(1,891
)
Lower of cost or fair value adjustments
—

 
(3,383
)
 
—

 
72

 
—

 
—

Balance at end of period
474

 
$
67,335

 
209

 
$
7,788

 
28

 
$
444

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Predecessor
 
For the Period From January 1, 2018 Through February 9, 2018
 
Reverse Mortgage
 
Servicing
 
Non-Residual Trusts(1)
 
Units
 
Amount
 
Units
 
Amount
 
Units
 
Amount
Balance at beginning of period
726

 
$
101,760

 
276

 
$
13,721

 
55

 
$
1,072

Adoption of ASC 610
—

 
—

 
1,968

 
123,074

 
—

 
—

Fresh start accounting adjustments
—

 
5,622

 
—

 
—

 
—

 
—

Foreclosures and other additions, at fair value
102

 
12,464

 
45

 
1,988

 
26

 
275

Cost basis of financed sales
—

 
—

 
(46
)
 
(2,375
)
 
—

 
—

Cost basis of cash sales to third parties and other dispositions
(99
)
 
(12,800
)
 
(20
)
 
(1,469
)
 
(12
)
 
(160
)
Lower of cost or fair value adjustments
—

 
(630
)
 
—

 
(10
)
 
—

 
—

Balance at end of period
729

 
$
106,416

 
2,223

 
$
134,929

 
69

 
$
1,187


111


 
Predecessor
 
For the Year Ended December 31, 2017
 
Reverse Mortgage
 
Servicing
 
Non-Residual Trusts(1)
 
Units
 
Amount
 
Units
 
Amount
 
Units
 
Amount
Balance at beginning of year
726

 
$
90,667

 
239

 
$
12,859

 
41

 
$
1,028

Foreclosures and other additions, at fair value
1,086

 
143,409

 
321

 
18,076

 
218

 
2,495

Cost basis of financed sales
—

 
—

 
(202
)
 
(10,724
)
 
—

 
—

Cost basis of cash sales to third parties and other dispositions
(1,086
)
 
(127,170
)
 
(82
)
 
(6,535
)
 
(204
)
 
(2,438
)
Lower of cost or fair value adjustments
—

 
(5,146
)
 
—

 
45

 
—

 
(13
)
Balance at end of year
726

 
$
101,760

 
276

 
$
13,721

 
55

 
$
1,072

__________
(1)
Foreclosed property held by the Non-Residual Trusts is included in our Corporate and Other non-reportable segment.
A nonperforming reverse loan for which the maximum claim amount has not been met is generally foreclosed upon on behalf of Ginnie Mae with the real estate owned remaining in the securitization pool until liquidation. Although performing and nonperforming loans are covered by FHA insurance, we may incur expenses and losses in the process of repurchasing and liquidating these loans that are not reimbursable by FHA in accordance with program guidelines. In addition, in certain circumstances, we may be subject to real estate price risk to the extent we are unable to liquidate real estate owned within the FHA program guidelines. We attempt to mitigate this risk by monitoring the aging of real estate owned and managing our marketing and sales program based on this aging.
Impact of Inflation and Changing Prices
Our 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, or are based on, financial assets. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Ratings
We receive various credit and servicer ratings as set forth below. Our ratings may be subject to a revision or withdrawal at any time by the assigning rating agency, and each rating should be evaluated independently of any other rating. Rating agency ratings are not a recommendation to buy, sell or hold any security.
Credit Ratings
Credit ratings are intended to be an indicator of the creditworthiness of a particular company, security or obligation and are considered by lenders in connection with the setting of interest rates and terms for a company's borrowings. Our ability to obtain adequate and cost effective financing depends, in part, on our credit ratings. Further, downgrades in our credit ratings could negatively affect our cost of, and ability to access, capital. The following table summarizes our credit ratings and outlook as of the date of this report.
 
 
Moody's
 
S&P
Corporate / CCR
 
Ca
 
D
Senior Secured Debt
 
Ca
 
D
Second Lien Debt
 
n/a
 
D
Outlook (1)
 
—
 
—
Date of Last Action
 
February 2019
 
February 2019
__________
(1)
As a result of the DHCP Bankruptcy Petitions, both Moody's and S&P did not issue an outlook in their most recent releases.

112


Servicer Ratings
Residential loan and manufactured housing servicer ratings reflect the applicable rating agency's assessment of a servicer’s operational risk and how the quality and experience of the servicer affect loan performance. The following table summarizes the servicer ratings and outlook assigned to certain of our servicer subsidiaries as of the date of this report. Unless otherwise specified, these servicer ratings relate to Ditech Financial as a servicer of mortgage loans.
 
 
Moody's
 
S&P
Residential Subprime Servicer (1)
 
—
 
Above Average
Residential Second/Subordinated Lien Servicer
 
SQ3
 
Above Average
Manufactured Housing Servicer
 
SQ3
 
Above Average
Residential Primary Servicer
 
SQ3
 
Above Average
Residential Reverse Mortgage Servicer
 
—
 
Strong (2)
Outlook
 
Not on review
 
Stable
Date of Last Action
 
February 2019
 
June 2018
__________
(1)
In April 2018, Moody's withdrew its assessment of the Company as a servicer of subprime residential mortgage loans as we are not currently active in RMBS subprime servicing.
(2)
S&P last affirmed its rating for RMS as a residential reverse mortgage servicer in November 2018 with a stable outlook.
Cybersecurity
We devote significant resources to maintain and regularly update our systems and processes that are designed to protect the security of our computer systems, software, networks and other technology assets against attempts by unauthorized parties to obtain access to confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage. From time to time we, our vendors and other companies that store or process confidential borrower personal and transactional data are targeted by unauthorized parties using malicious code and viruses or otherwise attempting to breach the security of our or our vendors’ systems and data. We employ extensive layered security at all levels within our organization to help us detect malicious activity, both from within the organization and from external sources. It is company protocol to investigate the cause and extent of all instances of cyber-attack, potential or confirmed, and take any additional necessary actions including: conducting additional internal investigation; engaging third-party forensic experts; updating our defenses; and involving senior management. We have established, and continue to establish on an ongoing basis, defenses to identify and mitigate these cyber-attacks and, to date, we have not experienced any material disruption to our operations due to a cyber-attack. Cyber-attacks resulting in loss, unauthorized access to, or misuse of confidential or personal information could disrupt our operations, damage our reputation, and expose us to claims from customers, financial institutions, regulators, employees and other persons, any of which could have an adverse effect on our business, financial condition and results of operations.
In addition to our vendors, other third parties with whom we do business or that facilitate our business activities (e.g., GSEs, transaction counterparties and financial intermediaries) could also be sources of cybersecurity risk to us, including with respect to breakdowns or failures of their systems, misconduct by the employees of such parties, or cyber-attacks, which could affect their ability to deliver a product or service to us or result in lost or compromised information of us or our consumers. We work with our vendors and other third parties with whom we do business, to enhance our defenses and improve resiliency to cybersecurity threats. Systems failures could result in reputational damage to our business and cause us to incur significant costs and third-party liability, and this could adversely affect our business, financial condition and results of operations.

113


Off-Balance Sheet Arrangements
We have certain off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, revenues and expenses, results of operations, liquidity, capital expenditures or capital resources.
We have exposure to representations and warranties obligations as a result of our loan sales activities. If it is determined that loans sold are in breach of these representations or warranties and we are unable to cure such breach, we generally have an obligation to repurchase the loan for the unpaid principal balance, accrued interest, and related advances, and in any event, we must indemnify the purchaser of the loans for certain losses and expenses incurred by such purchaser in connection with such breach. Our credit loss may be reduced by any recourse we have to correspondent lenders that, in turn, have sold such residential loans to us and breached similar or other representations and warranties. We record an estimate of the liability associated with our representations and warranties exposure on our consolidated balance sheets. Refer to Notes 6 and 29 to the Consolidated Financial Statements for the financial effect of these arrangements and to the Liquidity and Capital Resources section for additional information.
We have variable interests in other entities that we do not consolidate as we have determined we are not the primary beneficiary of such entities. Included in Note 5 to the Consolidated Financial Statements are descriptions of our variable interests in VIEs that we do not consolidate as we have determined that we are not the primary beneficiary of such VIEs.
Critical Accounting Estimates
Our ability to measure and report our financial position and operating results is influenced by the need to estimate the impact or outcome of future events on the basis of information available at the time of the financial statements. An accounting estimate is considered critical if it requires that management make assumptions about matters that were highly uncertain at the time the accounting estimate was made. If actual results differ from our judgments and assumptions, then it may have an adverse impact on our results of operations and cash flows. Our significant accounting policies are included in Note 3 to the Consolidated Financial Statements.
Fair Value Measurements
We have an established and documented process for determining fair value measurements. 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, or Level 1 inputs, and the lowest priority to unobservable inputs, or Level 3 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. Refer to Note 7 to the Consolidated Financial Statements for a description of valuation methodologies used to measure assets and liabilities at fair value and details on the valuation models, key inputs to those models and significant assumptions utilized.

114


The following table summarizes the assets and liabilities measured at fair value on a recurring basis using Level 3 inputs (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
December 31, 2017
Assets
 
 
 
 
 
Reverse loans
 
$
8,202,775

 
 
$
9,789,444

Mortgage loans related to Non-Residual Trusts
 
117,410

 
 
301,435

Mortgage loans related to Residual Trusts and other loans held for investment (1)
 
1,044

 
 
—

Mortgage loans held for sale
 
61

 
 
68

Charged-off loans
 
48,440

 
 
45,800

Receivables related to Non-Residual Trusts
 
1,945

 
 
5,608

Servicing rights carried at fair value
 
548,579

 
 
714,774

Freestanding derivative instruments (IRLCs)
 
16,617

 
 
26,637

Assets at fair value using Level 3 inputs
 
$
8,936,871

 
 
$
10,883,766

As a percentage of total assets measured at fair value on a recurring basis
 
91.84
%
 
 
94.85
%
 
 
 
 
 
 
Liabilities
 
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
327

 
 
$
269

Mortgage-backed debt related to Non-Residual Trusts
 
131,313

 
 
348,682

HMBS related obligations
 
7,264,821

 
 
9,175,128

Liabilities at fair value using Level 3 inputs
 
$
7,396,461

 
 
$
9,524,079

As a percentage of total liabilities measured at fair value on a recurring basis
 
99.82
%
 
 
99.99
%
__________
(1)
In connection with the adoption of fresh start accounting effective February 10, 2018, we elected to change our method of accounting for mortgage loans related to Residual Trusts and other loans held for investment as well as mortgage-backed debt related to Residual Trusts from amortized cost to fair value.
When available, we generally use quoted market prices to determine fair value. If quoted market prices are not available, fair value is based upon internally-developed valuation models, such as a discounted cash flow model, that where possible, use current market-based or independently sourced market parameters, such as market rates commensurate with an instrument’s credit quality and duration. We consider market liquidity when estimating fair value based on the type of asset or liability measured and the valuation method used. For example, for mortgage loans where the significant inputs have become unobservable due to illiquidity in the markets for non-agency and non-conforming mortgage loans, we use a discounted cash flow technique to estimate fair value. This technique incorporates forecasting of expected cash flows discounted at an appropriate market discount rate that is intended to reflect the lack of liquidity in the market. Level 3 unobservable assumptions reflect our own estimates for assumptions that market participants would use in pricing the asset or liability.
Unobservable inputs used in our internal valuation models require considerable judgment and are inherently difficult to estimate. Changes to these inputs can have a significant effect on fair value measurements. Accordingly, our estimates of fair value are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange. Separate from the possible future impact to our results of operations from changes to inputs, the value of market-sensitive assets and liabilities may change subsequent to the balance sheet date due to the nature and magnitude of future credit and market conditions. Such credit and market conditions may change quickly and in unforeseen ways and the resulting volatility could have a significant, negative effect on future operating results. These fluctuations would not be indicative of deficiencies in our models or inputs.
All of the techniques used and information obtained in the valuation process provide a range of estimated values, which are evaluated in order to establish an estimated value that, based on management's judgment, represents a reasonable estimate of fair value. It is not uncommon for the range of value to vary widely, and in such cases, we select an estimated value that we believe is the best indication of value based on the yield a market participant in the current environment would expect.

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Our 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 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 changes to the fair value of our Level 3 assets and liabilities are discussed in the Results of Operations and Business Segment Results sections.
Reverse Loans and HMBS Related Obligations
Changes in market pricing for HECMs and HMBS and LIBOR can have a material impact on fair value and our results of operations. We utilize and give priority to observable market inputs, such as interest rates and market spreads, in our valuation of reverse loans and HMBS related obligations. However, we also utilize unobservable inputs, such as repayment speeds, mortality assumptions and expected duration, and also consider the value of underlying collateral. These unobservable inputs require the use of our judgment and can also have a significant impact on the determination of fair value.
Non-Residual Trusts and Residual Trusts
We utilize and give priority to observable market inputs, such as interest rates and market spreads, in our valuation of the assets and liabilities of the Non-Residual Trusts and Residual Trusts. However, we also utilize internal inputs, such as prepayment speeds, default rates, loss severity and discount rates, and also consider the value of underlying collateral. These internal inputs require the use of our judgment and can have a significant impact on the determination of fair value. During 2018, our counterparty under the Clean-up Call Agreement for the Non-Residual Trusts fulfilled its obligation for the mandatory clean-up call on four of the remaining trusts and we sold our residual interests in the four remaining Residual Trusts. These transactions resulted in the subsequent deconsolidation of these trusts.
Refer to the Liquidity and Capital Resources section for additional information.
Charged-off Loans
We primarily utilize internal inputs, such as collection rates and discount rates, in the valuation of charged-off loans and also consider borrower specific factors such as FICO scores and bankruptcy status as well as underlying collateral. In addition, we take into account current and expected future economic conditions. Charged-off loans remained relatively consistent at December 31, 2018 as compared to December 31, 2017.
Servicing Rights
We estimate the fair value of our servicing rights by calculating the present value of expected future cash flows utilizing assumptions that we believe a market participant would consider in valuing our servicing rights. The significant components of the estimated future cash flows for servicing rights include estimates and assumptions related to the prepayments of principal, defaults, ancillary fees, and discount rates that we believe approximate yields required by investors for these assets, and the expected cost of servicing. We reassess periodically and adjust the underlying inputs and assumptions in the model to reflect market conditions and assumptions that a market participant would consider in valuing servicing rights.
We use a discounted cash flow model to value our servicing rights. This process allows us to determine inputs that are significant to the valuation and serves as a basis to forecast prepayment and default rates. These rates, which are used in the development of expected future cash flows, are based on historical observations of prepayment behavior in similar periods, comparing current and expected future mortgage rates to the mortgage rates of our servicing portfolio, and incorporates loan characteristics (e.g., loan type and note rate) and the relative sensitivity of our servicing portfolio to refinancing and also considers estimated levels of home equity. The fair value estimates and assumptions are compared to industry surveys, recent market activity, actual portfolio experience, and when available, observable market data, and are adjusted as applicable based on this data. We obtain third-party valuations on a quarterly basis to assess the reasonableness of the fair value calculated by our model.
Changes in these assumptions are generally expected to affect our results of operations as follows:
•
A declining interest rate environment generally drives increases in prepayment speeds. Increases in prepayments of principal reduce the value of our servicing rights as the underlying loans prepay faster, which causes accelerated servicing right amortization or declines in the fair value of servicing rights;
•
Increases in defaults generally reduce the value of our servicing rights as the cost of servicing increases during the delinquency period due primarily to increases in servicing advances and related interest expense, which is partially offset by increases in ancillary fees; and

116


•
Increases in discount rate reduce the value of our servicing rights due to the lower overall net present value of the cash flows.
In contrast, decreases in prepayment speeds, defaults and discount rates generally increase the value of servicing rights.
Refer to Note 13 to the Consolidated Financial Statements for the effect on the fair value of servicing rights carried at fair value for adverse changes to certain significant assumptions. Refer to the Servicing section within Business Segment Results for a discussion of the changes in servicing rights carried at fair value.
Interest Rate Lock Commitments
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 upon sale of the loan and are adjusted for anticipated loan funding probability. 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. The estimation process involved with the fair value of servicing rights is discussed above. Both the fair value of the servicing rights expected to be recorded upon sale of the loan and the loan funding probability ratio are based on management judgment; these inputs can have a material effect on the estimated fair values.
We have derivative instruments that we hold to manage the price risk associated with IRLCs and mortgage loans held for sale. These derivatives and mortgage loans held for sale are classified as Level 2 within the fair value hierarchy. Refer to Notes 7 and 8 to the Consolidated Financial Statements for additional information related to derivative instruments.
Allowance for Uncollectible Advances
We establish an allowance for uncollectible advances that provides for probable losses inherent in funded servicer and protective advances. The allowance is based on a collection risk analysis that considers the underlying loan, the type of advance, our customers’ servicing and advance reimbursement guidelines, reimbursement patterns and past loss experience. Although we examine a variety of available data to determine our allowance, our estimation process is subject to risks and uncertainties, including a reliance on historical loss and trend information that may not be representative of current conditions and indicative of future performance.
Asset Impairment Reviews
Goodwill
Goodwill is not amortized but rather is evaluated for impairment at least annually or more frequently if an event occurs that indicates goodwill may be impaired. We test for goodwill impairment at the reporting unit level, which is an operating segment or one level below an operating segment. The evaluation begins with a qualitative assessment to determine whether a quantitative impairment test is necessary. If, after assessing qualitative factors, we determine it is more likely than not that the fair value of a reporting unit is less than the carrying amount, then the quantitative goodwill impairment test is necessary.
The quantitative goodwill impairment test used to identify both the existence of impairment and the amount of impairment loss, compares the fair value of a reporting unit with its carrying amount, including goodwill. Fair value represents the price a market participant would be willing to pay in a potential sale of the reporting unit and is based on an income approach. If the fair value exceeds carrying value, then no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
The determination of the fair value of a reporting unit requires us to make significant estimates and assumptions, including cash flows, growth rates and selecting appropriate discount rates. During the first quarter of 2018, we determined our Originations reporting unit was impaired and recorded an impairment charge of $9 million, which represents the entire amount of goodwill of the reporting unit.
Indefinite-Lived Intangibles
Similar to goodwill, indefinite-lived intangibles, consisting of trade names, is not amortized and is tested for impairment at least annually or more frequently if an event occurs that indicates the asset may be impaired. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others, a significant decline in expected future results; a significant adverse change in legal factors or in the business climate; unanticipated competition; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of the trade names.

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We conducted interim quantitative and qualitative impairment assessments of the trade names throughout 2018. The fair value of the trade names is estimated using the relief-from-royalty method, which estimates the fair value of the trade name by determining the present value of estimated royalty payments that are avoided as a result of owning the trade name. This method includes judgmental assumptions about projected revenue growth and trends under different scenarios, an appropriate royalty rate, and a discount rate. As further described in Note 14 to the Consolidated Financial Statements, these assessments resulted in the Company recognizing intangible impairment charges during 2018.
Changes in circumstances, existing at the measurement date or at other times in the future, or in the numerous estimates associated with management's judgments, assumptions and estimates made in assessing the fair value of the trade names, could result in further impairment charges in the future. The Company will continue to monitor all significant estimates and impairment indicators, and will perform interim impairment reviews as necessary.
Other Long-Lived Assets
Long-lived assets, other than goodwill and indefinite-lived intangible assets, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. When evaluating such assets for impairment, the carrying value of the asset group is compared to its estimated undiscounted cash flows. An impairment is indicated if the estimated future undiscounted cash flows are less than the carrying value of the asset group. We qualitatively and quantitatively evaluated the Originations and Servicing reporting units' other long-lived assets for impairment quarterly throughout 2018. Based on the tests performed, no impairment was recognized. Impairment of such assets could occur in the future if expected future cash flows decline.
Income Taxes
We record a tax provision for the anticipated tax consequences of the reported results of operations. We compute the provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. We measure deferred tax assets and liabilities using the currently enacted tax rates in each jurisdiction that applies to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
We are required to establish a valuation allowance for deferred tax assets and record a charge to income if it is determined, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred taxes in 2018 and 2017 have been reduced by a valuation allowance due to a determination that it is more likely than not that some or all of the deferred tax assets will not be realized based on the weight of all available evidence.
Our evaluation of the realizability of the deferred tax assets focuses on identifying significant, objective evidence that we will more likely than not be able to realize our deferred tax assets in the future. We consider both positive and negative evidence when evaluating the need for a valuation allowance, which is highly judgmental and requires subjective weighting of such evidence.
Contingencies
We estimate contingent liabilities based on management's evaluation of the probability of outcomes and the ability to estimate the range of exposure. A liability is contingent if the extent of loss is not presently known but may become known in the future through the occurrence of some uncertain future event. Accounting standards require that a liability be recorded if it is determined that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. In deriving an estimate, we are required to make assumptions about matters that are, by their nature, highly uncertain. The assessment of contingent liabilities, including legal contingencies, curtailment obligations and repurchase obligations, involves the use of critical estimates, assumptions and judgments. Through our assessment we consider many factors, including the progress of the matter, prior experience and experience of others in similar matters, available defenses, and the advice of legal counsel and other experts. Our estimates are based on the belief that future events will validate the current assumptions regarding the ultimate outcome of these exposures. Because matters may be resolved over long periods of time, accruals are adjusted as more information becomes available or when an event occurs requiring a change. However, there can be no assurance that future events will not differ from our assessments.

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Fresh Start Accounting
In connection with our emergence from the WIMC Chapter 11 Case, we met the conditions to qualify under GAAP for fresh start accounting, and accordingly, adopted fresh start accounting effective February 10, 2018. The reorganization value represents the fair value of the Successor's assets before considering liabilities and approximates the amount a willing buyer would have paid for our assets immediately after restructuring. The reorganization value was allocated to the respective fair value of assets. The excess reorganization value over the fair value of identified tangible and intangible assets was recorded as goodwill. Liabilities, other than deferred taxes, were stated at present values of amounts expected to be paid.
Fair values of assets and liabilities represent our best estimates based on independent appraisals and valuations. Where the foregoing were not available, industry data and trends or references to relevant market rates and transactions were used. These estimates and assumptions are inherently subject to significant uncertainties and contingencies beyond our reasonable control. Moreover, the market value of our common stock may differ materially from the fresh start equity valuation.
New Accounting Pronouncements
Refer to Note 1 to the Consolidated Financial Statements for a summary of recently adopted and recently issued accounting standards and their related effects or anticipated effects on our consolidated results of operations and financial condition.

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Glossary of Terms
This Glossary of Terms includes acronyms and defined terms that are used throughout this Annual Report on Form 10-K.
2013 Credit Agreement
Credit agreement entered into on December 19, 2013 among the Company, Credit Suisse AG, as administrative agent and collateral agent, the lenders from time to time party thereto and other parties thereto, as amended and restated on July 31, 2017
2013 Revolver
Senior secured revolving credit facility entered into on December 19, 2013, as amended
2013 Secured Credit Facilities
2013 Term Loan and 2013 Revolver, collectively
2013 Term Loan
Senior secured first lien term loan entered into on December 19, 2013, as amended
2017 Plan
2017 Omnibus Incentive Plan established by the Company on May 17, 2017
2018 Credit Agreement
Second Amended and Restated Credit Agreement entered into on February 9, 2018 (and as amended prior to the date hereof) among the Company, Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent, the lenders from time to time party thereto and other parties thereto, filed with the SEC as Exhibit 10.1 to the Registrant's Current Report on Form 8-K/A on February 12, 2018
2018 Plan
2018 Equity Incentive Plan established by the Company on March 23, 2018
2018 Term Loan
Approximately $1.16 billion senior secured first lien term loan borrowed on February 9, 2018 pursuant to the 2018 Credit Agreement
Adjusted EBITDA
Adjusted earnings before interest, taxes, depreciation and amortization, a non-GAAP financial measure; refer to Non-GAAP Financial Measures section under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for a complete description of this metric
APR
Annual percentage rate
Articles of Amendment and
Restatement
Amended and Restated Articles of Incorporation dated February 9, 2018, filed with the SEC as Exhibit 3.1 to Amendment No. 2 to the Registrant's Current Report on Form 8-K/A on February 13, 2018
Articles Supplementary
    Exhibit A to the Company's Articles of Amendment and Restatement, which contains the terms, rights and preferences of the Company's outstanding Mandatorily Convertible Preferred Stock
ASC 610
In February 2017, the FASB issued an accounting standards update that amends the guidance on derecognition of nonfinancial assets. The adoption of this guidance resulted in changes to the statement of financial position, including residential loans at amortized cost, net, other assets, accumulated deficit and accrued liabilities, under the modified retrospective adoption method. Refer to Note 1 for additional information.
Asset Coverage Ratio A
Asset Coverage Ratio A, as defined in the 2018 Credit Agreement, filed with the SEC as Exhibit 10.1 to the Registrant's Current Report on Form 8-K/A on February 12, 2018
Asset Coverage Ratio B
Asset Coverage Ratio B, as defined in the 2018 Credit Agreement, filed with the SEC as Exhibit 10.1 to the Registrant's Current Report on Form 8-K/A on February 12, 2018
Assurant
Assurant, Inc.
Bankruptcy Code
The United States Bankruptcy Code, 11 U.S.C. Section 101, et seq. as amended
Bankruptcy Court
The United States Bankruptcy Court for the Southern District of New York having jurisdiction over the WIMC Chapter 11 Case and the DHCP Chapter 11 Cases, and, to the extent of the withdrawal of any reference under 28 U.S.C. § 157, pursuant to 28 U.S.C. § 151, the United States District Court for the Southern District of New York
Borrowers
Borrowers under residential mortgage loans and installment obligors under residential retail installment agreements
Bps
Basis points
Bulk MSR
Bulk MSR as defined under the 2013 Credit Agreement
CCR
Corporate credit rating
CFPB
Consumer Financial Protection Bureau
Chapter 7
Chapter 7 of Title 11 of the Bankruptcy Code, which permits liquidation under the bankruptcy laws of the U.S.

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Chapter 11
Chapter 11 of Title 11 of the Bankruptcy Code, which permits reorganization under the bankruptcy laws of the U.S.
Charged-off loans
Defaulted consumer and residential loans acquired by the Company at substantial discounts to face value acquired during 2014, which are also referred to as post charge-off deficiency balances
Clean-up Call Agreement
Clean-up Call Agreement, dated as of October 10, 2017, by and among the Company and Capital One, National Association
Coal Acquisition
Warrior Met Coal, LLC (f/k/a Coal Acquisition LLC)
Code
Internal Revenue Code of 1986, as amended
CODI
Cancellation of Debt Income
Common Stock Directors
Three Class III directors elected by the holders of common stock
Computershare
Computershare Trust Company, N.A., as rights agent to the Rights Agreement
Consenting Term Lenders
Lenders under the 2018 Term Loan that executed the DHCP RSA, together with their respective successors and permitted assigns that become party thereto
Consolidated Financial Statements
The consolidated financial statements of Ditech Holding Corporation (Successor), formerly Walter Investment Management Corp. (Predecessor) and its subsidiaries and the notes thereto included in Item 8. Financial Statements and Supplementary Data of this Form 10-K
Convertible Notes
4.50% convertible senior subordinated notes due 2019 sold in a registered underwritten public offering on October 23, 2012
Convertible Noteholders
Holders of the Convertible Notes
COSO
Committee of Sponsoring Organizations of the Treadway Commission
DAAT Facility
Ditech Agency Advance Trust financing facility
Debtors
Ditech Holding Corporation and certain of its direct and indirect subsidiaries, including DF Insurance Agency LLC, Ditech Financial LLC, Green Tree Credit LLC, Green Tree Credit Solutions LLC, Green Tree Insurance Agency of Nevada, Inc., Green Tree Investment Holdings III LLC, Green Tree Servicing Corp., Marix Servicing LLC, Mortgage Asset Systems, LLC, REO Management Solutions, LLC, Reverse Mortgage Solutions, Inc., Walter Management Holding Company LLC and Walter Reverse Acquisition LLC
Demand Registration
Under the Registration Rights Agreement, holders beneficially holding 10% or more of the common stock have the right to demand that the Company effect the registration of any or all of the registrable securities
DHCP Bankruptcy Petitions
Voluntary petitions filed on February 11, 2019 by the Debtors under Chapter 11 of the Bankruptcy Code
DHCP Chapter 11 Cases
The Debtors' cases under Chapter 11 of the Bankruptcy Code
DHCP Commitment Letter
Letter dated February 8, 2019 between Barclays Bank PLC and Nomura Corporate Funding Americas, LLC and Ditech Holding Corporation, Ditech Financial LLC and Reverse Mortgage Solutions, Inc. as it relates to the DHCP DIP Warehouse Facilities
DHCP DIP Warehouse Facilities
Debtor-in-Possession warehouse facilities governed by agreements with Barclays Bank PLC, Nomura Corporate Funding Americas, LLC, Barclays Capital Inc. and Nomura Securities International, Inc. to replace and refinance certain of the master repurchase agreements governing certain warehouse borrowings and certain other financing facilities during the DHCP Chapter 11 Cases
DHCP Effective Date
The Debtors' anticipated date of emergence from the DHCP Reorganization Transaction
DHCP Petition Date
February 11, 2019, the date that the Debtors filed the DHCP Bankruptcy Petitions with the Bankruptcy Court
DHCP Plan
The Debtors' prepackaged plan of reorganization under Chapter 11 of the Bankruptcy Code
DHCP Reorganization Transaction
Means, collectively, (i) the issuance of the New Common Stock; (ii) the entry into new term loans; (iii) the entry into an exit working capital facility; (iv) the execution of any new organizational documents; (v) the vesting of the Company’s assets in New Ditech pursuant to the DHCP Plan; (vi) the consummation of any transactions with respect to the foregoing, as determined by the Requisite Term Lenders in their reasonable discretion in accordance with the DHCP RSA; and (vii) if applicable and only if the terms there of are acceptable to the Requisite Term Lenders, a master servicing transaction

121


DHCP Restructuring
All acts, events, and transactions contemplated by, required for, and taken to implement the Debtors' restructuring including all definitive documents that are contemplated by the term sheet to the DHCP RSA, a plan supplement comprising all applicable documents as discussed in the DHCP RSA, the DHCP RSA, and an elected transaction as discussed in the DHCP RSA, each in the singular and collectively, as applicable
DHCP RSA
Restructuring Support Agreement, dated as of February 8, 2019, by and among Ditech Holding Corporation and its direct and indirect subsidiaries and the lenders party thereto
DIP Maturity Date
The earliest of (a) the effective date of a plan of reorganization in the Chapter 11 Cases, (b) the consummation of a sale under section 363 of the Bankruptcy Code of all or substantially all of the assets of the Debtors, and (c) 180 days after the filing of the Chapter 11 Cases
Distribution taxes
Taxes imposed on Walter Energy or a Walter Energy shareholder as a result of the potential determination that the Company's spin-off from Walter Energy was not tax-free pursuant to Section 355 of the Code
Ditech Financial
Ditech Financial LLC, an indirect wholly-owned subsidiary of the Company
Ditech Holding
Ditech Holding Corporation (Successor) and/or Walter Investment Management Corp. (Predecessor) and its consolidated subsidiaries
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
DOJ
United States Department of Justice
DPAT Facility
Ditech Private Label Securities Advance Trust financing facility
DPAT II Facility
Ditech Private Label Securities Advance Trust II financing facility
Early Advance Reimbursement
Agreement
$100 million financing facility with Fannie Mae, terminated in April 2018
EBITDA
Earnings before interest, taxes, depreciation, and amortization
ECOA
Equal Credit Opportunity Act
EFTA
Electronic Fund Transfer Act
Election Date
Unless extended by the Company, within five (5) business days following the earlier of (i) the conclusion of the marketing and sale process and (ii) 95 days after February 11, 2019
Electing Term Lenders
Holders of at least 66 2/3% in aggregate principal amount outstanding of the 2018 Term Loan
Exchange Act
Securities Exchange Act of 1934, as amended
Fannie Mae
Federal National Mortgage Association
FASB
Financial Accounting Standards Board
FCRA
Fair Credit Reporting Act
FDCPA
Fair Debt Collection Practices Act
FHA
Federal Housing Administration
FHFA
Federal Housing Finance Agency
FICO
Fair Isaac Corporation (borrower credit score)
Forward sales commitments
Forward sales of agency to-be-announced securities and agency whole loans, freestanding derivative financial instruments
Freddie Mac
Federal Home Loan Mortgage Corporation
FTC
Federal Trade Commission
GAAP
Accounting Principles Generally Accepted in the U.S.
Ginnie Mae
Government National Mortgage Association
Ginnie Mae II MBS
Modified pass-through mortgage-backed securities for which holders receive an aggregate principal and interest payment from a central paying agent
Ginnie Mae Guaranty Agreement
Ginnie Mae Guaranty Agreement together with related documents
Ginnie MBS Guide
Ginnie Mae Mortgage Backed-Securities Guide including the annexes thereto
GMBS
Ginnie Mae mortgage-backed securities
Green Tree Servicing
Green Tree Servicing LLC; former name of Ditech Financial. Ditech Mortgage Corp and DT Holdings LLC were merged with and into Green Tree Servicing LLC, with Green Tree Servicing LLC continuing as the surviving entity, which was renamed Ditech Financial LLC

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GSE
Government-sponsored entity
GTAAFT Facility
Green Tree Agency Advance Funding Trust financing facility
HAMP
Home Affordable Modification Program, which had an application deadline of December 31, 2016
HARP
Home Affordable Refinance Program, which expired December 31, 2018
HECM
Home Equity Conversion Mortgage
HECM IDL
Home Equity Conversion Mortgage Initial Disbursement Limit
HMBS
Home Equity Conversion Mortgage-Backed Securities
HMDA
Home Mortgage Disclosure Act
HOA
Homeowner's Association
HOEPA
Home Ownership and Equity Protection Act of 1994
HUD
U.S. Department of Housing and Urban Development
IRLC
Interest rate lock commitment, a freestanding derivative financial instrument
IRS
Internal Revenue Service
KEIP
Key Employee Incentive Program
"Know Before You Owe"
mortgage disclosure rule
Mortgage disclosure rule amending Regulation X of RESPA and Regulation Z of TILA to integrate certain mortgage loan disclosure forms and requirements, which became effective October 3, 2015
Lender-placed
Also referred to as "force-placed" insurance is an insurance policy placed by a bank or mortgage servicer on a home when the homeowners’ own property insurance may have lapsed or where the bank deems the homeowners’ insurance insufficient
LIBOR
London Interbank Offered Rate
Loans subject to repurchase
from Ginnie Mae
Delinquent mortgage loans that the Company is required to record on its consolidated balance sheets, along with a corresponding liability, as a result of its unilateral right to repurchase such loans from Ginnie Mae
LOC
Letter of Credit
Mandatorily Convertible
Preferred Stock
Mandatorily convertible preferred stock issued by the Company on the WIMC Effective Date that is convertible into shares of Successor common stock at a conversion multiple of 114.9750 upon the earliest of (i) February 9, 2023, (ii) at any time following one year after the WIMC Effective Date, the time that the volume weighted-average pricing of the common stock exceeds 150% of the conversion price per share for at least 45 trading days in a 60 consecutive trading day period, including each of the last 20 days in such 60 consecutive trading day period, and (iii) a change of control transaction in which the consideration paid or payable per share of common stock is greater than or equal to the conversion price per share, which, subject to adjustment, is $8.6975. The shares of mandatorily convertible preferred stock are also convertible at the option of the holder thereof or upon the affirmative vote of at least 66 2/3% of the mandatorily convertible preferred stock then outstanding
MBA
Mortgage Bankers Association
MBS
Mortgage-backed securities
MBS purchase commitments
Commitments to purchase mortgage-backed securities, a freestanding derivative financial instrument
MGCL
Maryland General Corporation Law
Moody's
Moody’s Investors Service Limited, a nationally recognized statistical rating organization designated by the SEC
Mortgage loans
Traditional mortgage loans and residential retail installment agreements, which include manufactured housing loans as well as consumer loans
MSP
A mortgage and consumer loan servicing platform licensed from Black Knight Financial Services, LLC
MSR
Mortgage servicing rights

123


N/A
Not applicable
Net realizable value
Fair value less cost to sell
New Common Stock
On the DHCP Effective Date, New Ditech will issue new common stock which will be in a form and manner acceptable to the Requisite Term Lenders
New Ditech
Means, on or after the DHCP Effective Date, the Parent Company and each of the other Debtors, as reorganized, pursuant to and under the DHCP Plan or any successor thereto, and/or one or more acquiring entities, in each case, after giving effect to the DHCP Reorganization Transaction, whether structured as a debt-for-equity exchange or credit bid and asset sale transaction
n/m
Not meaningful
NOL
Net operating loss
NOL Carryforwards
Net operating losses carried over from prior taxable years
Non-Residual Trusts
Securitization trusts that the Company consolidates and in which the Company does not hold residual interests
NRM
New Residential Mortgage LLC, a wholly owned subsidiary of New Residential Investment Corp., a Delaware Corporation
NRM Flow and Bulk Agreement
Flow and Bulk Agreement for the Purchase and Sale of Mortgage Servicing Rights, dated as of August 8, 2016, and as subsequently amended, by and between Ditech Financial LLC and New Residential Mortgage LLC
NRM Subservicing Agreement
Subservicing Agreement, dated as of August 8, 2016, and as subsequently amended, by and between New Residential Mortgage LLC and Ditech Financial LLC
NYSE
New York Stock Exchange
OTC Pink marketplace
An American financial marketplace maintained by the OTC Markets Group, Inc. for over-the-counter securities
OTS
Office of Thrift Supervision
Parent Company
Ditech Holding Corporation (formerly Walter Investment Management Corp.)
Predecessor
The Company and its activities and results operations prior to the Company's emergence from the WIMC Chapter 11 Case
PIK
Payment-in-kind
Preferred Stock Directors
Six Class I and Class II directors elected by the holders of preferred stock
PSU
Performance Stock Unit
PTFA
Protecting Tenants at Foreclosure Act
Registration Rights Agreement
Registration Rights Agreement entered into with certain parties that received shares of the Company’s common stock, warrants and Mandatorily Convertible Preferred Stock on the WIMC Effective Date as provided in the WIMC Prepackaged Plan and which provides holders with registration rights for the holders’ registrable securities.
REO
Real estate owned
Requisite Term Lenders
As of the date of determination, consenting term lenders holding at least a majority in aggregate principal amount outstanding of the term loans held as of such date
Residential loans
Residential mortgage loans, including traditional mortgage loans, reverse mortgage loans and residential retail installment agreements, which include manufactured housing loans as well as consumer loans
Residual Trusts
Securitization trusts that the Company consolidates and in which it holds a residual interest
RESPA
Real Estate Settlement Procedures Act

Reverse loans
Reverse mortgage loans, including HECMs
Rights Agreement
The Amended and Restated Section 382 Rights Agreement, dated as of November 11, 2016, as amended November 9, 2017 and February 9, 2018
RMBS
Residential mortgage-backed security
RMS
Reverse Mortgage Solutions, Inc., an indirect wholly-owned subsidiary of the Company
RSU
Restricted stock units

124


SAFE Act
The Secure and Fair Enforcement for Mortgage Licensing Act enacted on July 30, 2008, which mandates a nationwide licensing and registration system for residential mortgage loan originators
SEC
U.S. Securities and Exchange Commission
Second Lien Notes
$250 million aggregate principal amount of 9.00% Second Lien Senior Subordinated PIK Toggle Notes due 2024 issued on February 9, 2018
Second Lien Notes Indenture
Indenture for the 9.00% Second Lien Senior Subordinated PIK Toggle Notes due 2024 dated as of February 9, 2018 among the Company, the guarantors and Wilmington Savings Fund Society, FSB, as trustee
Section 382
Section 382 of the Internal Revenue Code
Securities Act
Securities Act of 1933, as amended
Senior Notes
$575 million aggregate principal amount of 7.875% senior notes due 2021 issued on December 17, 2013
Senior Noteholders
Holders of the Senior Notes
Series A Warrants
Warrants to purchase the Company’s common stock, exercisable on a cash or cashless basis at an exercise price of $20.63 per share, expiring February 9, 2028
Series B Warrants
Warrants to purchase the Company’s common stock, exercisable on a cash or cashless basis at an exercise price of $28.25 per share, expiring February 9, 2028
Servicer and Protective Advance
Financing Facilities
The Company's interests in financing entities that acquire servicer and protective advances from certain wholly-owned subsidiaries
Side Letter Agreement
Side Letter Agreement dated as of January 17, 2018 between Ditech Financial and NRM
Strategic Review
A process to evaluate strategic alternatives commenced by the Company's Board of Directors during the second quarter of 2018
Successor
The Company and its activities and results operations subsequent to the Company's emergence from the WIMC Chapter 11 Case
S&P
Standard and Poor's Ratings Services, a nationally recognized statistical rating organization designated by the SEC
Tails
Participations in previously securitized HECMs created by additions to principal for borrower draws on lines of credit, interest, servicing fees, and mortgage insurance premiums
TBAs
To-be-announced securities
Tax Act
Tax Cuts and Jobs Act, signed into law in December 2017
TCPA
Telephone Consumer Protection Act
Term Lenders
Lenders of the 2018 Term Loan
Term Loan Claims
Claims on account of the 2018 Term Loan
Term Loan RSA
Restructuring Support Agreement, dated as of July 31, 2017, by and among Walter Investment Management Corp. and the lenders party thereto
TILA
Truth in Lending Act
TRID
TILA/RESPA Integrated Disclosure rule
UPB
Unpaid principal balance
U.S.
United States of America
U.S. Treasury
U.S. Department of the Treasury
USDA
United States Department of Agriculture
VA
United States Department of Veterans Affairs
VIE
Variable interest entity
Walter Energy
Walter Energy, Inc.
Walter Energy Asset Purchase
Agreement
Stalking horse asset purchase agreement entered into by Walter Energy, together with certain of its subsidiaries, and Coal Acquisition on November 5, 2015 and amended and restated on March 31, 2016

125


Walter Investment Management
Corp.
Former name of Ditech Holding Corporation, also referred to as WIMC
Warehouse borrowings
Borrowings under master repurchase agreements
WIMC Bankruptcy Petition
Voluntary petition filed on November 30, 2017 by Walter Investment Management Corp. under Chapter 11 of the Bankruptcy Code
WIMC Chapter 11 Case
The case under Chapter 11 of the Bankruptcy Code from which Walter Investment Management Corp. emerged on February 9, 2018
WIMC DIP Warehouse Facilities
Debtor-in-Possession warehouse facilities governed by agreements with Credit Suisse First Boston Mortgage Capital LLC, as sole structuring agent, lead arranger, co-lender and administrative agent on behalf of Credit Suisse AG, Cayman Islands Branch and Barclays Bank PLC, as co-lender to replace and refinance certain of the master repurchase agreements governing certain warehouse borrowings and certain other financing facilities during the WIMC Chapter 11 Case
WIMC Ditech Financial Exit
Master Repurchase
Agreement
The Ditech Financial warehouse facility that, together with the DAAT Facility, DPAT II Facility and the WIMC RMS Exit Master Repurchase Agreement, comprises the WIMC Exit Warehouse Facilities
WIMC Effective Date
February 9, 2018, the date of Walter Investment Management Corp.'s emergence from the WIMC Chapter 11 Case
WIMC Exit Warehouse Facilities
Warehouse facilities governed by agreements with Credit Suisse First Boston Mortgage Capital LLC, as sole structuring agent, lead arranger, co-lender and administrative agent on behalf of Credit Suisse AG, Cayman Islands Branch and Barclays Bank PLC, as co-lender to replace and refinance certain of the master repurchase agreements governing certain warehouse borrowings and certain other financing facilities for one year following the WIMC Effective Date
WIMC Petition Date
November 30, 2017, the date that the Company filed the WIMC Bankruptcy Petition with the Bankruptcy Court
WIMC Prepackaged Plan
Prepackaged plan of reorganization of Walter Investment Management Corp. (Predecessor) under Chapter 11 of the Bankruptcy Code
WIMC Reorganization
The reorganization of Walter Investment Management Corp. under Chapter 11 of the Bankruptcy Code, effective February 9, 2018
WIMC RMS Exit Master
Repurchase Agreement
The RMS warehouse facility that, together with the DAAT Facility, DPAT II Facility and the WIMC Ditech Financial Exit Master Repurchase Agreement, comprises the WIMC Exit Warehouse Facilities
WIMC Securities Master
Repurchase Agreement
Master repurchase agreement issued on November 30, 2017 under the WIMC DIP Warehouse Facilities used to fund advances

126


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We seek to manage the risks inherent in our business — including, but not limited to, credit risk, liquidity risk, real estate market risk, and interest rate risk — in a prudent manner designed to enhance our earnings and preserve our capital. In general, we seek to assume risks that can be quantified from historical experience, to actively manage such risks, and to maintain capital levels consistent with these risks. For information regarding our credit risk, real estate market risk and liquidity risk, refer to the Credit Risk, Real Estate Market Risk and Liquidity and Capital Resources sections under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Interest Rate Risk
Interest rate risk is the risk of loss of future earnings or fair value due to changes in interest rates. Our principal market exposure associated with interest rate risk relates to changes in long-term U.S. Treasury and mortgage interest rates, LIBOR and other benchmark rates.
We provide sensitivity analyses regarding changes in interest rates in the Servicing, Originations and Reverse Mortgage Segments and Other Financial Instruments sections below. However, there are certain limitations inherent in any sensitivity analysis, 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.
Servicing, Originations and Reverse Mortgage Segments
Sensitivity Analysis
The following table summarizes the estimated change in the fair value of certain assets and liabilities given hypothetical instantaneous parallel shifts in the interest rate yield curve (in thousands):
 
Successor
 
December 31, 2018
 
Down 50 bps
 
Down 25 bps
 
Up 25 bps
 
Up 50 bps
Servicing segment
 
 
 
 
 
 
 
Servicing rights carried at fair value
$
(78,991
)
 
$
(33,677
)
 
$
29,362

 
$
53,011

Net change in fair value - Servicing segment
$
(78,991
)
 
$
(33,677
)
 
$
29,362

 
$
53,011

 
 
 
 
 
 
 
 
Originations segment
 
 
 
 
 
 
 
Residential loans held for sale
$
9,135

 
$
4,968

 
$
(6,362
)
 
$
(13,470
)
Freestanding derivatives (1)
(12,180
)
 
(6,433
)
 
7,127

 
15,213

Net change in fair value - Originations segment
$
(3,045
)
 
$
(1,465
)
 
$
765

 
$
1,743

 
 
 
 
 
 
 
 
Reverse Mortgage segment
 
 
 
 
 
 
 
Reverse loans
$
86,958

 
$
40,494

 
$
(48,560
)
 
$
(94,262
)
HMBS related obligations
(77,765
)
 
(36,240
)
 
46,157

 
87,135

Net change in fair value - Reverse Mortgage segment
$
9,193

 
$
4,254

 
$
(2,403
)
 
$
(7,127
)

127


 
Predecessor
 
December 31, 2017
 
Down 50 bps
 
Down 25 bps
 
Up 25 bps
 
Up 50 bps
Servicing segment
 
 
 
 
 
 
 
Servicing rights carried at fair value
$
(148,094
)
 
$
(60,902
)
 
$
46,154

 
$
83,445

Net change in fair value - Servicing segment
$
(148,094
)
 
$
(60,902
)
 
$
46,154

 
$
83,445

 
 
 
 
 
 
 
 
Originations segment
 
 
 
 
 
 
 
Residential loans held for sale
$
7,273

 
$
4,038

 
$
(5,224
)
 
$
(11,275
)
Freestanding derivatives (1)
(9,907
)
 
(5,406
)
 
5,308

 
11,236

Net change in fair value - Originations segment
$
(2,634
)
 
$
(1,368
)
 
$
84

 
$
(39
)
 
 
 
 
 
 
 
 
Reverse Mortgage segment
 
 
 
 
 
 
 
Reverse loans
$
103,753

 
$
49,454

 
$
(56,922
)
 
$
(109,026
)
HMBS related obligations
(90,590
)
 
(42,211
)
 
52,801

 
99,451

Net change in fair value - Reverse Mortgage segment
$
13,163

 
$
7,243

 
$
(4,121
)
 
$
(9,575
)
__________
(1)
Consists of IRLCs, forward sales commitments and MBS purchase commitments.
We used December 31, 2018 and 2017 market rates on our instruments to perform the sensitivity analysis. These sensitivities measure the potential impact on fair value, are hypothetical, and presented for illustrative purposes only. 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 complex market reactions that normally would arise from the market shifts modeled. 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.
Servicing Rights Carried at Fair Value
Servicing rights carried at fair value are subject to prepayment risk as the mortgage loans underlying the servicing rights permit the borrowers to prepay the loans. Consequently, the value of these servicing rights generally tend to diminish in periods of declining interest rates (as prepayments increase) and tend to increase in periods of rising interest rates (as prepayments decrease). This analysis ignores the impact of changes on certain material variables, such as non-parallel shifts in interest rates, or changing consumer behavior to incremental changes in interest rates.
Although the level of interest rates is a key driver of prepayment activity, there are other factors that influence prepayments, including home prices, underwriting standards, availability of government-sponsored refinance programs and other product characteristics. Since our Originations segment’s results of operations are positively impacted when interest rates decline, our Originations segment’s results of operations may partially offset the change in fair value of servicing rights over time. The interaction between the results of operations of these activities is a core component of our overall interest rate risk assessment. We take into account the estimated benefit of originations on our Originations segment’s results of operations to determine the impact on net economic value from a decline in interest rates, and we continuously assess our ability to replenish lost value of servicing rights and cash flow due to increased prepayments. We do not currently use derivative instruments to hedge the interest rate risk inherent in the value of servicing rights, but we may choose to use such instruments in the future. The amount and composition of derivatives used to hedge the value of servicing rights, if any, will depend on the exposure to loss of value on the servicing rights, the expected cost of the derivatives, expected liquidity needs, and the expected increase to earnings generated by the origination of new loans resulting from the decline in interest rates. The sensitivity of servicing rights carried at fair value to interest rate changes decreased at December 31, 2018 as compared to December 31, 2017 due primarily to a decrease in the size of the portfolio and, to a lesser extent, the higher interest rate environment.

128


Residential Loans Held for Sale and Related Freestanding Derivatives
We are subject to interest rate risk and price risk on mortgage loans held for sale during the short time from the loan funding date until the date the loan is sold into the secondary market. Interest rate lock commitments represent an agreement to extend credit to a mortgage loan applicant or to purchase loans from a third-party originator, collectively referred to as IRLC, whereby the interest rate of the loan is set prior to funding or purchase. IRLCs, which are considered freestanding derivatives, are subject to interest rate risk and related price risk during the period from the date of the commitment through the loan funding date or expiration date. Loan commitments are generally less than two months from lock to funding of the mortgage loan and our holding period from funding to sale is an average of approximately 20 days.
An integral component of our interest rate risk management strategy is our use of freestanding derivative instruments to minimize significant fluctuations in earnings caused by changes in interest rates that affect the value of our IRLCs and mortgage loans held for sale. The derivatives utilized to hedge the interest rate risk are forward sales commitments, which are forward sales of agency TBAs. These TBAs are primarily used to fix the forward sales price that will be realized upon the sale of the mortgage loans into the secondary market. We also enter into commitments to purchase MBS as part of our overall hedging strategy.
Reverse Loans and HMBS Related Obligations
We are subject to interest rate risk on our reverse loans and HMBS related obligations as a result of different expected cash flows and longer expected durations for loans as compared to HMBS related obligations. Our reverse loans have longer durations primarily as a result of our obligations as issuer of HMBS, which include the requirement to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM is equal to or greater than 98% of the maximum claim amount.
Other Financial Instruments
The following summarizes the estimated changes in annual interest expense at December 31, 2018 and 2017 given a hypothetical and instant parallel shift in the yield curve of 25 and 50 basis points. Our total market risk is influenced by a wide variety of factors including market volatility and the liquidity of the markets.
Servicing Advance Liabilities
Borrowings on our servicing advance agreements were based on the lender's applicable index at December 31, 2018. Based on an increase of 25 and 50 basis points in the lender's applicable index at December 31, 2018 and the advance balances outstanding at such time, our annual interest expense for servicing advance liabilities would have increased by $0.6 million and $1.1 million, respectively.
Our servicing advance agreements were LIBOR-based borrowings at December 31, 2017. Based on an increase of 25 and 50 basis points in LIBOR at December 31, 2017 and the advance balances outstanding at such time, our annual interest expense for servicing advance liabilities would have increased by $1.2 million and $2.4 million, respectively.
Warehouse Borrowings
Borrowings on our master repurchase agreements were based on the lender's applicable index and LIBOR at December 31, 2018. Based on an increase of 25 and 50 basis points in the lender's applicable index and LIBOR at December 31, 2018 and the borrowings outstanding at such time, our annual interest expense for warehouse borrowings would have increased by $3.3 million and $6.6 million, respectively.
Our master repurchase agreements were LIBOR-based at December 31, 2017. Based on an increase of 25 and 50 basis points in LIBOR at December 31, 2017 and the borrowings outstanding at such time, our annual interest expense for warehouse borrowings would have increased by $2.7 million and $5.4 million, respectively.
Corporate Debt
Our 2018 Term Loan was LIBOR-based with a 1.0% floor in place December 31, 2018. Based on an increase of 25 and 50 basis points in LIBOR at December 31, 2018 and the balance outstanding at such time, our annual interest expense for corporate debt would have increased by $2.4 million and $4.8 million, respectively.
Our 2013 Term Loan was LIBOR-based with a 1.0% floor in place at December 31, 2017. Based on an increase of 25 and 50 basis points in LIBOR at December 31, 2017 and the balance outstanding at such time, our annual interest expense for corporate debt would have increased by $3.1 million and $6.1 million, respectively.

129


Mortgage Loans and Related Mortgage-backed Debt
We exclude mortgage loans and mortgage-backed debt of the Non-Residual Trusts from the analysis of rate-sensitive assets and liabilities. These assets and liabilities generally do not represent significant interest rate risk to us as it relates to potential losses in future earnings or fair value. Approximately half of the assets of the Non-Residual Trusts are fixed rate, whereas the mortgage-backed debt is entirely variable rate. Nonetheless, the impact of changes in interest rates are mostly offset. However, we were obligated to exercise mandatory clean-up call obligations related to the Non-Residual Trusts.
We fulfilled our obligation for the mandatory clean-up call obligations for two of the trusts in the second and third quarters of 2017 by making payments of $28.4 million. Upon exercise of the clean-up calls, we were exposed to interest rate risk with regard to the purchased loans. On October 10, 2017, we entered into a Clean-up Call Agreement with a counterparty. With the execution of the Clean-Up Call Agreement, the counterparty assumed the Company’s mandatory obligation to exercise the clean-up calls for the remaining securitization trusts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements and related notes, together with the Report of Independent Registered Certified Public Accounting Firm thereon, are included in Part IV, Item 15. Exhibits and Financial Statement Schedules and begin on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the Company's reports 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 the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of December 31, 2018. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2018, the design and operation of the Company's disclosure controls and procedures were not effective because of the material weakness in its internal control over financial reporting described below.
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). The Company's internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
Management assessed the effectiveness of the Company's internal control over financial reporting at December 31, 2018. In making this assessment, management used the 2013 criteria set forth by COSO in the Internal Control-Integrated Framework. Based on its assessment and those criteria, management has concluded that a previously identified material weakness in its internal control over financial reporting at December 31, 2018 was not sufficiently remediated.

130


The Company had previously identified two material weaknesses in internal control over financial reporting that were described in Management's Report on Internal Control Over Financial Reporting, which was included in the Company's Form 10-K for the year ended December 31, 2017, together with various corrective actions that are being undertaken in order to remediate the material weaknesses. As of December 31, 2018, the Company has concluded that the material weakness related to the data extraction from the servicing system for MSR valuation has been remediated. The material weakness originally identified in 2016 relating to the operational processes within transaction level processing of Ditech Financial default servicing over foreclosure related advances has been remediated. Additionally, management designed and implemented controls over property preservation; however, the controls did not operate as intended and could not be tested, resulting in management concluding that the controls were not operating effectively as of December 31, 2018. Based on this, the material weakness relating to operational processes within the transaction level processing of Ditech Financial default servicing over property preservation has not been remediated. Therefore, the Company’s Chief Executive Officer and its Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) is accumulated and communicated to the Company’s management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
Other than with respect to the matters outlined above, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended December 31, 2018 covered by this Annual Report on Form 10-K that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Remediation of the Material Weakness in Internal Control Over Financial Reporting
Management with the oversight of its Audit Committee, has taken the following actions in the design and operating effectiveness of its internal control over financial reporting in an effort to remediate the material weaknesses over Ditech Financial operational processes:
Ditech Financial operational processes over foreclosure related advances:
•
Management designed and implemented key controls to remediate the material weakness.
•
Management validated the key controls for design effectiveness via walkthrough procedures noting design effectiveness.
•
Tested key controls identified within the process flow narratives for the purpose of validating operating effectiveness noting operating effectiveness.
•
Based on testing of key controls, the material weakness has been remediated.
Ditech Financial operational processes over property preservation:
•
Management documented the process over property preservation identifying the key controls in the process that impact financial reporting.
•
Management designed and implemented key controls to remediate the material weakness.
•
Management could not test the controls as the controls did not operate as intended, concluding that the controls were not operating effectively as of December 31, 2018.
•
Based on the inability to test key controls, the material weakness has not been remediated.
MSR Valuation:
•
Management designed, documented, and implemented control procedures related to the review of the query logic utilized to extract data from the servicing system.
•
Management validated the data extraction for use in MSR fair valuation noting completeness and accuracy at December 31, 2018.
•
Management performed MSR portfolio valuation reconciliations noting completeness and accuracy.
•
Management performed loan level report testing noting completeness and accuracy.
Based on the aforementioned testing performed, the material weakness has been remediated.

131


Management will take the necessary measures to enhance the operating effectiveness of the controls designed and put in place relating to operational processes over the property preservation function within default servicing with an expected completion date of no later than December 31, 2019. Management believes the monitoring and testing of the remediation measures put in place will strengthen the Company's internal control over financial reporting and remediate the material weaknesses identified. If management is unsuccessful in fully implementing the new controls to address the material weaknesses and to strengthen the overall internal control environment, financial condition and results of operations may result in inaccurate and untimely reporting. Management will continue to monitor the effectiveness of these remediation measures and will make any changes and take such other actions that management deems appropriate given the circumstances.
ITEM 9B. OTHER INFORMATION
None.

132


PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 will be provided in accordance with instructions G(3) to Form 10-K.
Code of Conduct and Ethics
We have adopted a Code of Conduct and Ethics that applies to all employees, including executive officers, and to directors. The Code of Conduct and Ethics is available on the Corporate Governance page of our website at www.ditechholding.com. If we ever were to amend or waive any provision of our Code of Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or any person performing similar functions, we intend to satisfy our disclosure obligations with respect to any such amendment or waiver by posting such information on our website set forth above rather than by filing a Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 will be provided in accordance with instructions G(3) to Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 will be provided in accordance with instructions G(3) to Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 will be provided in accordance with instructions G(3) to Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 will be provided in accordance with instructions G(3) to Form 10-K.

133


PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report
(1) Financial Statements.
The Consolidated Financial Statements filed as part of this report are listed on the Table of Contents to Consolidated Financial Statements on page F-1.
(2) Financial Statement Schedules.
Financial statement schedules filed as part of this report are listed on the Table of Contents to Consolidated Financial Statements on page F-1.
(b) Exhibits.
Exhibits required to be attached by Item 601 of Regulation S-K are listed in the Index to Exhibits attached hereto, which is incorporated herein by reference.
ITEM 16. FORM 10-K SUMMARY
Omitted.

134


INDEX TO EXHIBITS
Exhibit No.
 
 
Description
2.1
 
 
 
 
 
 
2.2.1
 
 
 
 
 
 
2.2.2
 
 
 
 
 
 
2.3.1
 
 
 
 
 
 
2.3.2
 
 
 
 
 
 
3.1
 
 
 
 
 
 
3.2
 
 
 
 
 
 
4.1.1
 
 
 
 
 
 
4.1.2
 
 
 
 
 
 
4.2.1
 
 
 
 
 
 
4.2.2
 
 
 
 
 
 
4.2.3
 
 
 
 
 
 
4.3.1
 
 
 
 
 
 

135


Exhibit No.
 
 
Description
4.3.2
 
 
 
 
 
 
10.1
 
 
 
 
 
 
10.2
 
 
 
 
 
 
10.3.1†
 
 
 
 
 
 
10.3.2†
 
 
 
 
 
 
10.4.1†
 
 
 
 
 
 
10.4.2†
 
 
 
 
 
 
10.5.1†
 
 
 
 
 
 
10.5.2†
 
 
 
 
 
 
10.5.3†
 
 
 
 
 
 
10.5.4†
 
 
 
 
 
 
10.5.5†
 
 
 
 
 
 
10.6.1†
 
 
 
 
 
 
10.6.2†
 
 
 
 
 
 

136


Exhibit No.
 
 
Description
10.7.1†
 
 
 
 
 
 
10.7.2†
 
 
 
 
 
 
10.7.3†
 
 
 
 
 
 
10.7.4†
 
 
 
 
 
 
10.8.1†
 
 
 
 
 
 
10.8.2
 
 
 
 
 
 
10.9.1
 
 
 
 
 
 
10.9.2
 
 
 
 
 
 
10.10.1
 
 
 
 
 
 
10.10.2
 
 
 
 
 
 
10.10.3
 
 
 
 
 
 
10.11.1†
 
 
 
 
 
 
10.11.2†
 
 
 
 
 
 
10.12.1†
 
 
 
 
 
 
10.12.2†
 
 
 
 
 
 

137


Exhibit No.
 
 
Description
10.13.1†
 
 
 
 
 
 
10.13.2†
 
 
 
 
 
 
10.13.3
 
 
 
 
 
 
10.13.4
 
 
 
 
 
 
10.14
 
 
 
 
 
 
10.15†
 
 
 
 
 
 
10.16.1
 
 
 
 
 
 
10.16.2
 
 
 
 
 
 
10.16.3+
 
 
 
 
 
 
10.16.4
 
 
 
 
 
 
10.16.5
 
 
 
 
 
 
10.16.6
 
 
 
 
 
 
10.16.7
 
 
 
 
 
 
10.17
 
 
 
 
 
 
10.18.1+
 
 
 
 
 
 

138


Exhibit No.
 
 
Description
10.18.2
 
 
 
 
 
 
10.18.3
 
 
 
 
 
 
10.18.4
 
 
 
 
 
 
10.19.1
 
 
 
 
 
 
10.19.2
 
 
 
 
 
 
10.19.3
 
 
 
 
 
 
10.19.4
 
 
 
 
 
 
10.19.5
 
 
 
 
 
 
10.19.6
 
 
 
 
 
 
10.19.7
 
 
 
 
 
 
10.19.8
 
 
 
 
 
 

139


Exhibit No.
 
 
Description
10.19.9
 
 
 
 
 
 
10.19.10
 
 
 
 
 
 
10.19.11
 
 
 
 
 
 
10.20.1
 
 
 
 
 
 
10.20.2
 
 
 
 
 
 
10.20.3
 
 
 
 
 
 
10.20.4
 
 
 
 
 
 
10.20.5
 
 
 
 
 
 
10.21
 
 
 
 
 
 
10.22
 
 
 
 
 
 
10.23
 
 
 
 
 
 
10.24.1
 
 
 
 
 
 

140


Exhibit No.
 
 
Description
10.24.2
 
 
 
 
 
 
10.24.3
 
 
 
 
 
 
10.24.4
 
 
 
 
 
 
10.25
 
 
 
 
 
 
10.26
 
 
 
 
 
 
10.27.1
 
 
 
 
 
 
10.27.2
 
 
 
 
 
 
10.27.3
 
 
 
 
 
 
10.27.4
 
 
 
 
 
 
10.27.5
 
 
 
 
 
 

141


Exhibit No.
 
 
Description
10.27.6
 
 
 
 
 
 
10.28.1
 
 
 
 
 
 
10.28.2
 
 
 
 
 
 
10.28.3
 
 
 
 
 
 
10.28.4
 
 
 
 
 
 
10.28.5
 
 
 
 
 
 
10.28.6
 
 
Amendment No. 1 to the Series 2018-VF1 Indenture Supplement, dated as of April 20, 2018, by and among Ditech Agency Advance Trust, as issuer, Wells Fargo Bank, N.A., as indenture trustee, as calculation agent, as paying agent and as securities intermediary, Ditech Financial LLC, as administrator and servicer and Credit Suisse First Boston Mortgage Capital LLC, as administrative agent, and consented to by Credit Suisse AG, New York Branch, as noteholder of a Series 2018-VF1 note on behalf of the Credit Suisse purchaser group and Barclays Bank PLC as noteholder of the Series 2018-VF1 note on behalf of the Barclays purchaser group (Incorporated herein by reference to Exhibit 10.9.6 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 as filed with the Securities and Exchange Commission on June 6, 2018).
 
 
 
 
10.28.7
 
 
 
 
 
 
10.28.8
 
 
Amendment No. 2 to the Series 2018-VF1 Indenture Supplement, dated as of May 15, 2018, by and among Ditech Agency Advance Trust, as issuer, Wells Fargo Bank, N.A., as indenture trustee, as calculation agent, as paying agent and as securities intermediary, Ditech Financial LLC, as administrator and servicer and Credit Suisse First Boston Mortgage Capital LLC, as administrative agent, and consented to by Credit Suisse AG, New York Branch, as noteholder of a Series 2018-VF1 note on behalf of the Credit Suisse purchaser group and Barclays Bank PLC as noteholder of a Series 2018-VF1 note on behalf of the Barclays purchaser group (Incorporated herein by reference to Exhibit 10.9.8 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 as filed with the Securities and Exchange Commission on June 6, 2018).
 
 
 
 

142


Exhibit No.
 
 
Description
10.28.9
 
 
Amendment No. 3 to the Series 2018-VF1 Indenture Supplement, dated as of August 6, 2018, by and among Ditech Agency Advance Trust, as issuer, Wells Fargo Bank, N.A., as indenture trustee, as calculation agent, as paying agent and as securities intermediary, Ditech Financial LLC, as administrator and servicer and Credit Suisse First Boston Mortgage Capital LLC, as administrative agent, and consented to by Credit Suisse AG, New York Branch, as noteholder of a Series 2018-VF1 note on behalf of the Credit Suisse purchaser group and Barclays Bank PLC as noteholder of a Series 2018-VF1 note on behalf of the Barclays purchaser group (Incorporated herein by reference to Exhibit 10.7.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 as filed with the Securities and Exchange Commission on August 9, 2018).
 
 
 
 
10.28.10
 
 
Amendment No. 4 to the Series 2018-VF1 Indenture Supplement, dated as of November 13, 2018, by and among Ditech Agency Advance Trust, as issuer, Wells Fargo Bank, N.A., as indenture trustee, as calculation agent, as paying agent and as securities intermediary, Ditech Financial LLC, as administrator and servicer and Credit Suisse First Boston Mortgage Capital LLC, as administrative agent, and consented to by Credit Suisse AG, New York Branch, as noteholder of a Series 2018-VF1 note on behalf of the Credit Suisse purchaser group and Barclays Bank PLC as noteholder of a Series 2018-VF1 note on behalf of the Barclays purchaser group (Incorporated herein by reference to Exhibit 10.4.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 as filed with the Securities and Exchange Commission on November 14, 2018).
 
 
 
 
10.28.11*
 
 
 
 
 
 
10.29.1
 
 
 
 
 
 
10.29.2
 
 
 
 
 
 
10.29.3
 
 
 
 
 
 
10.29.4
 
 
 
 
 
 
10.29.5
 
 
Amendment No. 1 to the Series 2018-VF1 Indenture Supplement, dated as of April 20, 2018, by and among Ditech PLS Advance Trust II, as issuer, Wells Fargo Bank, N.A., as indenture trustee, as calculation agent, as paying agent and as securities intermediary, Ditech Financial LLC, as administrator and servicer and Credit Suisse First Boston Mortgage Capital LLC, as administrative agent, and consented to by Credit Suisse AG, New York Branch, as noteholder of a Series 2018-VF1 note on behalf of the Credit Suisse purchaser group and Barclays Bank PLC as noteholder of a Series 2018-VF1 note on behalf of the Barclays purchaser group (Incorporated herein by reference to Exhibit 10.10.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 as filed with the Securities and Exchange Commission on June 6, 2018).
 
 
 
 

143


Exhibit No.
 
 
Description
10.29.6
 
 
Amendment No. 2 to the Series 2018-VF1 Indenture Supplement, dated as of May 15, 2018, by and among Ditech PLS Advance Trust II, as issuer, Wells Fargo Bank, N.A., as indenture trustee, as calculation agent, as paying agent and as securities intermediary, Ditech Financial LLC, as administrator and servicer and Credit Suisse First Boston Mortgage Capital LLC, as administrative agent, and consented to by Credit Suisse AG, New York Branch, as noteholder of a Series 2018-VF1 note on behalf of the Credit Suisse purchaser group and Barclays Bank PLC as noteholder of a Series 2018-VF1 note on behalf of the Barclays purchaser group (Incorporated herein by reference to Exhibit 10.10.6 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 as filed with the Securities and Exchange Commission on June 6, 2018).
 
 
 
 
10.29.7
 
 
Amendment No. 3 to the Series 2018-VF1 Indenture Supplement, dated as of August 6, 2018, by and among Ditech PLS Advance Trust II, as issuer, Wells Fargo Bank, N.A., as indenture trustee, as calculation agent, as paying agent and as securities intermediary, Ditech Financial LLC, as administrator and servicer and Credit Suisse First Boston Mortgage Capital LLC, as administrative agent, and consented to by Credit Suisse AG, New York Branch, as noteholder of a Series 2018-VF1 note on behalf of the Credit Suisse purchaser group and Barclays Bank PLC as noteholder of a Series 2018-VF1 note on behalf of the Barclays purchaser group (Incorporated herein by reference to Exhibit 10.8.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 as filed with the Securities and Exchange Commission on August 9, 2018).
 
 
 
 
10.29.8
 
 
Amendment No. 4 to the Series 2018-VF1 Indenture Supplement, dated as of November 13, 2018, by and among Ditech PLS Advance Trust II, as issuer, Wells Fargo Bank, N.A., as indenture trustee, as calculation agent, as paying agent and as securities intermediary, Ditech Financial LLC, as administrator and servicer and Credit Suisse First Boston Mortgage Capital LLC, as administrative agent, and consented to by Credit Suisse AG, New York Branch, as noteholder of a Series 2018-VF1 note on behalf of the Credit Suisse purchaser group and Barclays Bank PLC as noteholder of a Series 2018-VF1 note on behalf of the Barclays purchaser group (Incorporated herein by reference to Exhibit 10.5.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 as filed with the Securities and Exchange Commission on November 14, 2018).
 
 
 
 
10.29.9*
 
 
 
 
 
 
10.30.1
 
 
 
 
 
 
10.30.2
 
 
 
 
 
 
10.30.3
 
 
 
 
 
 
10.30.4
 
 
 
 
 
 
10.30.5
 
 
 
 
 
 
10.30.6*
 
 
 
 
 
 

144


Exhibit No.
 
 
Description
10.31.1
 
 
 
 
 
 
10.31.2
 
 
 
 
 
 
10.32
 
 
 
 
 
 
10.33
 
 
 
 
 
 
10.34*
 
 
 
 
 
 
10.35
 
 
 
 
 
 
10.36
 
 
 
 
 
 
10.37
 
 
10.38*
 
 
 
 
 
 
10.39*
 
 
 
 
 
 
10.40*
 
 
 
 
 
 
21*
 
 
 
 
 
 
31.1*
 
 
 
 
 
 

145


Exhibit No.
 
 
Description
31.2*
 
 
 
 
 
 
32*
 
 
 
 
 
 
99.1
 
 
 
 
 
 
99.2.1
 
 
 
 
 
 
99.2.2
 
 
 
 
 
 
101**
 
 
XBRL (Extensible Business Reporting Language) - The following materials from Ditech Holding Corporation's Annual Report on Form 10-K for the year ended December 31, 2018, formatted in XBRL (Extensible Business Reporting Language); (i) Consolidated Balance Sheets as of December 31, 2018 (Successor) and December 31, 2017 (Predecessor), (ii) Consolidated Statements of Comprehensive Income (Loss) for the period from February 10, 2018 through December 31, 2018 (Successor), the period from January 1, 2018 through February 9, 2018 (Predecessor) and the year ended December 31, 2017 (Predecessor), (iii) Consolidated Statements of Stockholders’ Equity (Deficit) for the period from February 10, 2018 through December 31, 2018 (Successor), the period from January 1, 2018 through February 9, 2018 (Predecessor) and the year ended December 31, 2017 (Predecessor); (iv) Consolidated Statements of Cash Flows for the period from February 10, 2018 through December 31, 2018 (Successor), the period from January 1, 2018 through February 9, 2018 (Predecessor) and the year ended December 31, 2017 (Predecessor); and (v) Notes to Consolidated Financial Statements.
* Filed or furnished herewith.
** Filed electronically with this report.
+
Certain information has been omitted from this exhibit and filed separately with the Securities and Exchange Commission. Confidential treatment has been granted with respect to the omitted portions pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Omitted portions are indicated in this exhibit with [***].
†
Constitutes a management contract or compensatory plan or arrangement.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.


146


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.

 
 
DITECH HOLDING CORPORATION
 
 
 
 
 
Dated: April 16, 2019
 
By:
 
/s/ Thomas F. Marano
 
 
 
 
Thomas F. Marano
 
 
 
 
Chairman, Chief Executive Officer and President
(Principal Executive Officer)

147


Pursuant to requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
 
Title
 
Date
 
 
 
 
 
/s/ Thomas F. Marano
 
Chairman, Chief Executive Officer and President
(Principal Executive Officer)
 
April 16, 2019
Thomas F. Marano
 
 
 
 
 
 
 
 
/s/ David S. Ascher
 
Director
 
April 16, 2019
David S. Ascher
 
 
 
 
 
 
 
 
 
/s/ George M. Awad
 
Director
 
April 16, 2019
George M. Awad
 
 
 
 
 
 
 
 
 
/s/ Seth L. Bartlett
 
Director
 
April 16, 2019
Seth L. Bartlett
 
 
 
 
 
 
 
 
 
/s/ Daniel G. Beltzman
 
Director
 
April 16, 2019
Daniel G. Beltzman
 
 
 
 
 
 
 
 
 
/s/ John R. Brecker
 
Director
 
April 16, 2019
John R. Brecker
 
 
 
 
 
 
 
 
 
/s/ Neal P. Goldman
 
Director
 
April 16, 2019
Neal P. Goldman
 
 
 
 
 
 
 
 
 
/s/ Thomas G. Miglis
 
Director
 
April 16, 2019
Thomas G. Miglis
 
 
 
 
 
 
 
 
 
/s/ Samuel T. Ramsey
 
Director
 
April 16, 2019
Samuel T. Ramsey
 
 
 
 
 
 
 
 
 
/s/ Gerald A. Lombardo
 
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
 
April 16, 2019
Gerald A. Lombardo
 
 
 
 
 
 
 
 
 

148


DITECH HOLDING CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Ditech Holding Corporation and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Ditech Holding Corporation and Subsidiaries (the Company) as of December 31, 2018 (Successor) and 2017 (Predecessor), and the related consolidated statements of comprehensive income (loss), shareholders' equity (deficit) and cash flows for the period from February 10, 2018 through December 31, 2018 (Successor), the period from January 1, 2018 through February 9, 2018 (Predecessor) and for the year ended December 31, 2017 (Predecessor), the related notes and Schedule I (Financial Information - Parent Company only) (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2018 (Successor) and 2017 (Predecessor), and the results of its operations and cash flows for the periods of February 10, 2018 through December 31, 2018 (Successor), January 1, 2018 through February 9, 2018 (Predecessor) and for the year ended December 31, 2017 (Predecessor), in conformity with U.S. generally accepted accounting principles.
Company Reorganization
As discussed in Note 1 to the consolidated financial statements, on January 17, 2018, the Bankruptcy Court entered an order confirming the plan of reorganization, which became effective on February 9, 2018. Accordingly, the accompanying consolidated financial statements have been prepared in conformity with Accounting Standards Codification 852-10, Reorganizations, for the Successor Company as a new entity with assets, liabilities and a capital structure having carrying amounts not comparable with prior periods as described in Note 1.
The Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has stated that substantial doubt exists about the Company’s ability to continue as a going concern and on February 11, 2019, the Company and certain of its direct and indirect subsidiaries (collectively, the Debtors) filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. Management's evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1 and Note 31. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2006.
Philadelphia, Pennsylvania
April 16, 2019

F-2


DITECH HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
December 31, 2017
ASSETS
 
 
 
 
 
Cash and cash equivalents
 
$
187,726

 
 
$
285,969

Restricted cash and cash equivalents
 
65,409

 
 
112,826

Residential loans at amortized cost, net (includes $940 and $6,347 in allowance for loan losses at December 31, 2018 and 2017, respectively)
 
473,880

 
 
985,454

Residential loans at fair value
 
9,146,956

 
 
10,725,232

Receivables, net (includes $1,945 and $5,608 at fair value at December 31, 2018 and 2017, respectively)
 
116,816

 
 
124,344

Servicer and protective advances, net (includes $41,688 and $164,225 in allowance for uncollectible advances at December 31, 2018 and 2017, respectively)
 
440,497

 
 
813,433

Servicing rights, net (includes $563,144 and $714,774 at fair value at December 31, 2018 and 2017, respectively)
 
607,221

 
 
773,251

Goodwill
 
—

 
 
47,747

Intangible assets, net
 
15,769

 
 
8,733

Premises and equipment, net
 
66,260

 
 
50,213

Deferred tax assets, net
 
29

 
 
1,400

Other assets (includes $18,387 and $29,394 at fair value at December 31, 2018 and 2017, respectively)
 
163,963

 
 
235,595

Total assets
 
$
11,284,526

 
 
$
14,164,197

LIABILITIES AND STOCKHOLDERS' DEFICIT
 
 
 
 
 
Payables and accrued liabilities (includes $13,737 and $1,282 at fair value at December 31, 2018 and 2017, respectively)
 
$
868,022

 
 
$
994,493

Servicer payables
 
143,357

 
 
116,779

Servicing advance liabilities
 
218,291

 
 
483,462

Warehouse borrowings
 
1,541,726

 
 
1,085,198

Corporate debt
 
1,133,218

 
 
1,214,663

Mortgage-backed debt (includes $131,313 and $348,682 at fair value at December 31, 2018 and 2017, respectively)
 
131,313

 
 
735,882

HMBS related obligations at fair value
 
7,264,821

 
 
9,175,128

Deferred tax liabilities, net
 
1,901

 
 
848

Total liabilities not subject to compromise
 
11,302,649

 
 
13,806,453

Liabilities subject to compromise
 
—

 
 
806,937

Total liabilities
 
11,302,649

 
 
14,613,390

 
 
 
 
 
 
Commitments and contingencies (Note 29)
 

 
 

 
 
 
 
 
 
Stockholders' deficit:
 
 
 
 
 
Preferred stock, $0.01 par value per share (Successor and Predecessor):
 
 
 
 
 
Authorized - 10,000,000 shares, including 100,000 shares of mandatorily convertible preferred stock, at December 31, 2018 (Successor) and 10,000,000 shares at December 31, 2017 (Predecessor)
 
 
 
 
 
Issued and outstanding - 91,408 shares at December 31, 2018 (Successor) and 0 shares at December 31, 2017 (Predecessor) (liquidation preference $97,246)
 
1

 
 
—

Common stock, $0.01 par value per share (Successor and Predecessor):
 
 
 
 
 
Authorized - 90,000,000 shares (Successor and Predecessor)
 
 
 
 
 
Issued and outstanding - 5,328,417 shares at December 31, 2018 (Successor) and 37,373,616 shares at December 31, 2017 (Predecessor)
 
53

 
 
374

Additional paid-in capital
 
186,825

 
 
598,193

Accumulated deficit
 
(205,094
)
 
 
(1,048,817
)
Accumulated other comprehensive income
 
92

 
 
1,057

Total stockholders' deficit
 
(18,123
)
 
 
(449,193
)
Total liabilities and stockholders' deficit
 
$
11,284,526

 
 
$
14,164,197


F-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.
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
December 31, 2017
ASSETS OF CONSOLIDATED VARIABLE INTEREST ENTITIES THAT CAN ONLY BE USED TO SETTLE THE OBLIGATIONS OF CONSOLIDATED VARIABLE INTEREST ENTITIES:
 
 
 
 
 
Restricted cash and cash equivalents
 
$
12,229

 
 
$
44,376

Residential loans at amortized cost, net
 
—

 
 
424,420

Residential loans at fair value
 
324,934

 
 
301,435

Receivables, net
 
3,838

 
 
5,824

Servicer and protective advances, net
 
244,730

 
 
446,799

Other assets
 
23,092

 
 
39,837

Total assets
 
$
608,823

 
 
$
1,262,691

 
 
 
 
 
 
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
 
$
1,911

 
 
$
3,086

Servicing advance liabilities
 
218,291

 
 
444,563

Warehouse borrowings
 
225,399

 
 
—

Mortgage-backed debt (includes $131,313 and $348,682 at fair value at December 31, 2018 and 2017, respectively)
 
131,313

 
 
735,882

Total liabilities
 
$
576,914

 
 
$
1,183,531

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


F-4


DITECH HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
REVENUES
 
 
 
 
 
 
 
Net servicing revenue and fees
 
$
339,334

 
 
$
128,685

 
$
346,682

Net gains on sales of loans
 
161,710

 
 
27,963

 
284,391

Net fair value gains on reverse loans and related HMBS obligations
 
46,833

 
 
10,576

 
42,419

Interest income on loans
 
1,832

 
 
3,387

 
41,195

Other revenues
 
109,231

 
 
16,662

 
116,573

Total revenues
 
658,940

 
 
187,273


831,260

 
 
 
 
 
 
 
 
EXPENSES
 
 
 
 
 
 
 
General and administrative
 
366,710

 
 
50,520

 
596,838

Salaries and benefits
 
285,559

 
 
40,408

 
384,814

Interest expense
 
209,321

 
 
38,756

 
261,244

Depreciation and amortization
 
32,358

 
 
3,810

 
40,764

Goodwill and intangible assets impairment
 
23,660

 
 
—

 
—

Other expenses, net
 
(38,505
)
 
 
229

 
11,061

Total expenses
 
879,103

 
 
133,723


1,294,721

 
 
 
 
 
 
 
 
OTHER GAINS (LOSSES)
 
 
 
 
 
 
 
Reorganization items and fresh start accounting adjustments
 
(2,726
)
 
 
464,563

 
(37,645
)
Other net fair value gains
 
11,083

 
 
3,740

 
2,008

Net losses on extinguishment of debt
 
(4,454
)
 
 
(864
)
 
(6,111
)
Gain on sale of business
 
—

 
 
—

 
67,734

Other
 
8,515

 
 
—

 
7,219

Total other gains
 
12,418

 
 
467,439


33,205

 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
(207,745
)
 
 
520,989


(430,256
)
Income tax benefit
 
(2,651
)
 
 
(18
)
 
(3,357
)
Net income (loss)
 
$
(205,094
)
 
 
$
521,007


$
(426,899
)
 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS) BEFORE TAXES
 
 
 
 
 
 
 
Change in postretirement benefits liability
 
$
54

 
 
$
—

 
$
(89
)
Unrealized gain on available-for-sale security in other assets
 
69

 
 
—

 
104

Other comprehensive income before taxes
 
123

 
 
—

 
15

Income tax expense for other comprehensive income items
 
31

 
 
—

 
5

Other comprehensive income
 
92

 
 
—

 
10

Total comprehensive income (loss)
 
$
(205,002
)
 
 
$
521,007


$
(426,889
)
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(205,094
)
 
 
$
521,007

 
$
(426,899
)
Basic earnings (loss) per common and common equivalent share
 
$
(41.93
)
 
 
$
13.94

 
$
(11.61
)
Diluted earnings (loss) per common and common equivalent share
 
$
(41.93
)
 
 
$
13.92

 
$
(11.61
)
Weighted-average common and common equivalent shares outstanding — basic
 
4,891

 
 
37,374

 
36,761

Weighted-average common and common equivalent shares outstanding — diluted
 
4,891

 
 
37,424

 
36,761

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

F-5


DITECH HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except share data)
 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other
Comprehensive
Income
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Total
Predecessor
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
—

 
$
—

 
36,391,129

 
$
364

 
$
596,067

 
$
(621,804
)
 
$
933


$
(24,440
)
Net loss
—

 
—

 
—

 
—

 
—

 
(426,899
)
 
—

 
(426,899
)
Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
10

 
10

Reclassification adjustment related to adoption of accounting guidance
—

 
—

 
—

 
—

 
—

 
(114
)
 
114

 
—

Share-based compensation
—

 
—

 
—

 
—

 
2,212

 
—

 
—

 
2,212

Share-based compensation issuances, net
—

 
—

 
982,487

 
10

 
(86
)
 
—

 
—

 
(76
)
Balance at December 31, 2017
—


—


37,373,616

 
374

 
598,193

 
(1,048,817
)
 
1,057


(449,193
)
Adoption of ASC 610
—

 
—

 
—

 
—

 
—

 
(40,670
)
 
—

 
(40,670
)
Net income
—

 
—

 
—

 
—

 
—

 
521,007

 
—

 
521,007

Share-based compensation
—

 
—

 
—

 
—

 
538

 
—

 
—

 
538

Fresh start and reorganization adjustments
100,000

 
1

 
(33,121,116
)
 
(331
)
 
(414,387
)
 
568,480

 
(1,057
)
 
152,706

Balance at February 9, 2018
100,000

 
1

 
4,252,500

 
43

 
184,344

 
—

 
—

 
184,388

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Successor
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Net loss
—

 
—

 
—

 
—

 
—

 
(205,094
)
 
—

 
(205,094
)
Other comprehensive income, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
92

 
92

Share-based compensation
—

 
—

 
88,070

 
—

 
2,491

 
—

 
—

 
2,491

Conversion of preferred stock to common stock
(8,592
)
 
—

 
987,847

 
10

 
(10
)
 
—

 
—

 
—

Balance at December 31, 2018
91,408


$
1


5,328,417

 
$
53

 
$
186,825

 
$
(205,094
)
 
$
92

 
$
(18,123
)
The accompanying notes are an integral part of the consolidated financial statements.

F-6


DITECH HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Operating activities
 
 
 
 
 
 
 
Net income (loss)
 
$
(205,094
)
 
 
$
521,007

 
$
(426,899
)
 
 
 
 
 
 
 
 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
 
 
 
 
 
 
 
Net fair value gains on reverse loans and related HMBS obligations
 
(46,833
)
 
 
(10,576
)
 
(42,419
)
Amortization of servicing rights
 
7,531

 
 
2,187

 
21,954

Change in fair value of servicing rights
 
97,007

 
 
(64,663
)
 
266,246

Change in fair value of charged-off loans
 
(11,562
)
 
 
(5,746
)
 
(15,834
)
Other net fair value (gains) losses
 
(4,654
)
 
 
(3,055
)
 
3,453

Accretion of discounts on residential loans and advances
 
(96
)
 
 
(325
)
 
(3,415
)
Accretion of discounts on debt and amortization of deferred debt issuance costs
 
26,125

 
 
19,831

 
51,779

Provision for uncollectible advances
 
39,819

 
 
2,674

 
51,612

Depreciation and amortization of premises and equipment and intangible assets
 
32,358

 
 
3,810

 
40,764

Provision (benefit) for deferred income taxes
 
2,426

 
 
24

 
(3,799
)
Share-based compensation
 
2,491

 
 
538

 
2,212

Net gains on sales of loans
 
(161,710
)
 
 
(27,963
)
 
(284,391
)
Non-cash reorganization items
 
—

 
 
(403,174
)
 
34,406

Non-cash fresh start accounting adjustments
 
—

 
 
(77,229
)
 
—

Gain on sale of residual interests and deconsolidation of the Residual Trusts, net
 
(29,214
)
 
 
—

 
—

Goodwill and intangible assets impairment
 
23,660

 
 
—

 
—

Gain on sale of business
 
—

 
 
—

 
(67,734
)
Other
 
11,877

 
 
1,458

 
10,166

 
 
 
 
 
 
 
 
Purchases and originations of residential loans held for sale
 
(11,821,103
)
 
 
(1,207,155
)
 
(16,128,212
)
Proceeds from sales of and payments on residential loans held for sale
 
11,461,430

 
 
1,428,953

 
16,948,619

 
 
 
 
 
 
 
 
Changes in assets and liabilities
 
 
 
 
 
 
 
Decrease (increase) in receivables
 
24,715

 
 
(27,855
)
 
80,779

Decrease in servicer and protective advances
 
225,387

 
 
61,642

 
328,658

Decrease (increase) in other assets
 
3,650

 
 
(27,956
)
 
(37,553
)
Increase (decrease) in payables and accrued liabilities
 
(90,441
)
 
 
28,780

 
(88,638
)
Increase (decrease) in servicer payables
 
33,954

 
 
(7,375
)
 
(29,553
)
Cash flows provided by (used in) operating activities
 
(378,277
)
 
 
207,832


712,201

 
 
 
 
 
 
 
 

F-7


DITECH HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in thousands)
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Investing activities
 
 
 
 
 
 
 
Purchases and originations of reverse loans held for investment
 
(218,749
)
 
 
(39,937
)
 
(382,769
)
Principal payments and proceeds received on reverse loans held for investment
 
1,641,552

 
 
144,489

 
1,431,049

Principal payments and proceeds received on mortgage loans held for investment
 
229,748

 
 
8,880

 
161,419

Payments received on charged-off loans held for investment
 
13,421

 
 
1,247

 
16,997

Payments received on receivables related to Non-Residual Trusts
 
2,596

 
 
1,727

 
14,869

Proceeds from sales of real estate owned, net
 
124,430

 
 
17,862

 
144,212

Purchases of premises and equipment
 
(4,210
)
 
 
(268
)
 
(6,141
)
Proceeds from the sale of residual interests in Residual Trusts, net
 
29,924

 
 
—

 
—

Proceeds from sales of servicing rights, net
 
207,478

 
 
94,994

 
137,301

Cash outflow from deconsolidation of variable interest entities
 
(184,182
)
 
 
—

 
(100,951
)
Proceeds from sale of business
 
—

 
 
—

 
131,074

Other
 
6,028

 
 
(1,563
)
 
5,172

Cash flows provided by investing activities
 
1,848,036

 
 
227,431


1,552,232

 
 
 
 
 
 
 
 
Financing activities
 
 
 
 
 
 
 
Payments on corporate debt
 
(157,645
)
 
 
(110,590
)
 
(186,910
)
Proceeds from securitizations of reverse loans
 
251,946

 
 
27,881

 
464,192

Payments on HMBS related obligations
 
(2,052,330
)
 
 
(310,000
)
 
(1,992,729
)
Issuances of servicing advance liabilities
 
456,192

 
 
5,444

 
1,482,960

Payments on servicing advance liabilities
 
(625,715
)
 
 
(101,093
)
 
(1,785,129
)
Net change in warehouse borrowings related to mortgage loans
 
359,419

 
 
(190,104
)
 
(546,556
)
Net change in warehouse borrowings related to reverse loans
 
377,536

 
 
112,216

 
428,399

Payments on mortgage-backed debt
 
(58,398
)
 
 
(8,876
)
 
(108,018
)
Other debt issuance costs paid
 
(16,206
)
 
 
(10,472
)
 
(49,305
)
Other
 
113

 
 
—

 
(1,603
)
Cash flows used in financing activities
 
(1,465,088
)
 
 
(585,594
)

(2,294,699
)
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents and restricted cash and cash equivalents
 
4,671

 
 
(150,331
)

(30,266
)
Cash and cash equivalents and restricted cash and cash equivalents at beginning of the period
 
248,464

 
 
398,795

 
429,061

Cash and cash equivalents and restricted cash and cash equivalents at end of the period
 
$
253,135

 
 
$
248,464


$
398,795

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

F-8


DITECH HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Basis of Presentation
Ditech Holding Corporation and its subsidiaries, or the Company (formerly Walter Investment Management Corp.), is an independent servicer and originator of mortgage loans and servicer of reverse mortgage loans. 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 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. The Company also operates two complementary businesses: asset receivables management and real estate owned property management and disposition.
As a result of Walter Investment Management Corp.'s emergence from bankruptcy under Chapter 11 of the Bankruptcy Code as discussed further below, on February 9, 2018 the Company changed its name to Ditech Holding Corporation. The terms “Ditech Holding” and the “Company,” as used throughout this report refer to Ditech Holding Corporation (Successor) and/or Walter Investment Management Corp. (Predecessor) and its consolidated subsidiaries.
The Company operates throughout the U.S. through three reportable segments, Servicing, Originations, and Reverse Mortgage. Refer to Note 27 for additional information related to segment reporting.
Certain acronyms and terms used throughout these notes are defined in the Glossary of Terms in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Fresh Start Accounting
The Company met the conditions to qualify under GAAP for fresh start accounting, and accordingly, adopted fresh start accounting effective February 10, 2018. The actual impact of fresh start accounting at emergence on February 9, 2018 is shown in Note 2. The financial statements as of February 10, 2018 and for subsequent periods report the results of the Successor with no beginning retained earnings. Any presentation of the Successor represents the financial position and results of operations of the Successor and is not comparable to prior periods.
DHCP Chapter 11 Cases and Going Concern Assessment
On February 11, 2019, Ditech Holding Corporation and certain of its direct and indirect subsidiaries (collectively, the Debtors) filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The DHCP Chapter 11 Cases are being jointly administered under the caption In re Ditech Holding Corporation (Case No. 19-10412). The Bankruptcy Court granted all of the first day motions filed by the Debtors that were designed primarily to minimize the impact of the Chapter 11 proceedings on the Company’s operations, customers and employees. The Company intends to continue to operate its businesses during the pendency of the DHCP Chapter 11 Cases.
For the duration of the Chapter 11 proceedings, the Company’s operations and its ability to develop and execute its business plan are subject to risks and uncertainties associated with the Chapter 11 proceedings described within Part I, Item 1A. Risk Factors. As a result of these risks and uncertainties, the Company’s assets, liabilities, shareholders’ equity, officers and/or directors could be significantly different following the conclusion of the DHCP Chapter 11 Cases, and the description of the Company’s operations, properties and liquidity plans included in this annual report may not accurately reflect the Company’s operations, properties and capital plans following the DHCP Chapter 11 Cases. Refer to Note 31 for further discussion of the Chapter 11 proceedings.
The outcome of the Chapter 11 process is subject to a high degree of uncertainty and is dependent upon factors that are outside of the Company’s control, including actions of the Bankruptcy Court and the Company’s creditors. The significant risks and uncertainties related to the Company’s liquidity and Chapter 11 proceedings described above raise substantial doubt about the Company’s ability to continue as a going concern. These Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and other commitments in the normal course of business. The accompanying Consolidated Financial Statements do not include any adjustments to reflect the possible future effects of this uncertainty on the recoverability or classification of recorded asset amounts or the amounts or classifications of liabilities.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with GAAP. The consolidated financial statements include the accounts of Ditech Holding Corporation, its wholly-owned subsidiaries, and VIEs, of which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated. The results of operations for business combinations are included from their respective dates of acquisition.

F-9


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 revenues 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.
Changes in Presentation
Certain prior year amounts have been reclassified to conform to current year presentation.
Revenue Recognition
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. This guidance was effective for the Company beginning January 1, 2018. The Company adopted the guidance using the modified retrospective method. The Company concluded that its 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 remained unchanged. The Company determined that certain immaterial revenue streams are within the scope of the guidance; however, the guidance did not impact current revenue recognition patterns for these in scope revenue streams and contracts. Accordingly, the adoption of this guidance did not have a significant impact on the Company's consolidated financial statements.
Lease Accounting
In February 2016, the FASB issued an accounting standards update, as amended, which requires recognition of right-of-use assets and lease liabilities by lessees for most leases and to provide enhanced disclosures. The Company will adopt the new standard effective January 1, 2019 on a modified retrospective basis and will not restate comparative periods. The Company will elect the package of practical expedients permitted under the transition guidance, which allows the Company to carryforward historical lease classification, assessments on whether a contract is or contains a lease, and initial direct costs, if any, for any leases that exist prior to the adoption of the new standard. The Company will also elect the short-term lease practical expedient, which allows companies to keep leases with an initial term of 12 months or less off the consolidated balance sheet and recognize the associated lease payments in the consolidated statements of operations on a straight-line basis over the lease term. Based on the lease contracts in effect as of December 31, 2018, the Company expects to recognize lease liabilities of approximately $52.0 million, a reduction of $4.0 million in accumulated deficit, and a corresponding right-of-use assets of approximately $41.0 million, primarily relating to real estate, but will not materially impact operating results or liquidity. However, the Company is seeking to reject or modify leases representing 17% and 71%, respectively, of the lease liability through the DHCP Reorganization Transaction as discussed further in Note 31. As a result of the risks and uncertainties associated with the DHCP Reorganization Transaction, the Company’s leases could be significantly different following the emergence from the DHCP Reorganization Transaction and, therefore, the disclosed impact of adopting this new standard may not accurately reflect the Company’s leases following the DHCP Reorganization Transaction.  
Recent Accounting Guidance
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 was effective for the Company beginning January 1, 2018. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.

F-10


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. In November 2018, the FASB issued an accounting standards update that improves upon the guidance issued in June 2016. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2019. Based on the Company's current methodologies for accounting for financial instruments, the adoption of this guidance is not expected to 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 and composition 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 was effective for the Company beginning January 1, 2018. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.
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 was effective for the Company beginning January 1, 2018. The adoption of this guidance did not have a significant impact on the Company's consolidated financial statements.
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 and ending cash amounts. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and cash equivalents in the statement of cash flows. This guidance was effective for the Company beginning January 1, 2018, and was applied retrospectively. The adoption impacted the presentation of the cash flows, but did not otherwise have a material impact on the consolidated results of operations or financial condition. For the year ended December 31, 2017, cash flows provided by operating activities decreased by $66.9 million, cash flows provided by investing activities decreased by $3.5 million, and cash flows used in financing activities increased by $21.3 million.
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 was effective for the Company beginning January 1, 2018. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.
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 adopted this guidance for impairment tests effective January 1, 2018.
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 was effective for the Company beginning January 1, 2018. The adoption of this guidance resulted in changes to the statement of financial position, including (i) a reduction of $115.0 million in residential loans at amortized cost, net, (ii) an increase of $123.1 million in other assets, (iii) an increase of $40.7 million in accumulated deficit and (iv) an increase of $48.7 million in accrued liabilities under the modified retrospective adoption method. Additionally, the pattern of recognition of certain interest payments will change for properties where the Company finances sales of real estate owned and the Company has determined that collection of substantially all consideration is not yet probable.
In May 2017, the FASB issued an accounting standards update that amends the guidance on share-based compensation. The update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This guidance was effective for the Company beginning January 1, 2018 and is applied prospectively to awards modified on or after the adoption date. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.

F-11


In February 2018, the FASB issued an accounting standards update that provides guidance related to accounting for the income tax effects of the Tax Act. This guidance provides clarification to address situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting under GAAP for certain income tax effects of the Tax Act. To the extent that a registrant's accounting for certain income tax effects of the Tax Act is incomplete, a reasonable estimate may be determined for those effects in the first reporting period in which the registrant was able to determine such reasonable estimate. A measurement period of one year from the enactment date of the Tax Act is provided whereby a registrant may adjust such provisional amounts. If a provisional amount cannot be determined in the initial period of enactment, the registrant may continue to account for taxes in accordance with tax laws that were in effect immediately prior to the Tax Act enactment date until such point in time that a reasonable estimate can be made. The Company's preliminary estimate of the Tax Act and the remeasurement of deferred tax assets and liabilities was subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the Tax Act, changes to certain estimates and the filing of its tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the Tax Act may require further adjustments and changes in the Company's estimates. The final determination of the Tax Act and the remeasurement of the Company's deferred assets and liabilities was completed and there were no material changes needed.
In August 2018, the FASB issued an accounting standards update that modifies the disclosure requirements related to fair value measurement, by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements, such as disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The guidance is effective for annual periods beginning after December 15, 2019, and interim periods within that reporting period, with early adoption permitted. The adoption will impact certain disclosures to the financial statements, but will not otherwise have a material impact on the consolidated results of operations or financial condition.
In October 2018, the FASB issued an accounting standards update that further revises the guidance on consolidation for interests held through related parties that are under common control. The update amends the consolidation guidance on how a reporting entity that is a single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control when determining whether it is the primary beneficiary of that VIE. The guidance is effective for annual periods beginning after December 15, 2019, and interim periods within that reporting period, with early adoption permitted. The amendments in this update are required to be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.
2. Emergence from the WIMC Reorganization Proceedings
On November 30, 2017, Walter Investment Management Corp. (Predecessor) filed the WIMC Bankruptcy Petition under the Bankruptcy Code to pursue the WIMC Prepackaged Plan announced on November 6, 2017. On January 17, 2018, the Bankruptcy Court approved the amended WIMC Prepackaged Plan and on January 18, 2018, entered a confirmation order approving the WIMC Prepackaged Plan. On February 9, 2018, the WIMC Prepackaged Plan became effective pursuant to its terms and Walter Investment Management Corp. emerged from the WIMC Chapter 11 Case and changed its name to Ditech Holding Corporation (Successor) and on February 12, 2018, our newly issued common stock commenced trading on the NYSE under the symbol DHCP. From and after effectiveness of the WIMC Prepackaged Plan, the Company has continued, in its previous organizational form, to carry out its business.

F-12


Reorganization Items and Fresh Start Accounting Adjustments
The Company's reorganization items and fresh start accounting adjustments consist of the following (in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Gain on cancellation of corporate debt
 
$
—

 
 
$
556,937

 
$
—

Less: issuance of new equity to Convertible and Senior Noteholders
 
—

 
 
153,764

 
—

Net gain on cancellation of corporate debt
 
—

 
 
403,173

 
—

Less:
 
 
 
 
 
 
 
Legal and professional fees (1)
 
2,123

 
 
12,461

 
3,098

Write-off deferred debt issuance costs and discounts
 
—

 
 
—

 
34,406

Other expenses
 
603

 
 
3,378

 
141

Total expenses
 
2,726

 
 
15,839

 
37,645

Total reorganization items
 
(2,726
)
 
 
387,334

 
(37,645
)
Fresh start accounting adjustments
 
—

 
 
77,229

 
—

Reorganization items and fresh start accounting adjustments
 
$
(2,726
)
 
 
$
464,563

 
$
(37,645
)
__________
(1)
Professional fees are directly related to the WIMC Reorganization.
The Company made cash payments for reorganization items of $11.8 million and $5.7 million during the period from February 10, 2018 through December 31, 2018 and the period from January 1, 2018 through February 9, 2018, respectively. There were no payments made for the year ended December 31, 2017.
Liabilities Subject to Compromise
Liabilities subject to compromise included unsecured or under-secured liabilities incurred prior to the WIMC Effective Date. These liabilities represented the amounts expected to be allowed on known or potential claims to be resolved through the WIMC Chapter 11 Case and subject to future adjustments based on negotiated settlements with claimants, actions of the Bankruptcy Court, rejection of executory contracts, proofs of claims or other events. Generally, actions to enforce or otherwise effect payment of prepetition liabilities are subject to the automatic stay or an approved motion of the Bankruptcy Court.
Liabilities subject to compromise consist of the following (in thousands):
 
 
Predecessor
 
 
December 31, 2017
Senior Notes
 
$
538,662

Convertible Notes
 
242,468

Accrued interest (1)
 
25,807

Total liabilities subject to compromise
 
$
806,937

__________
(1)
Represents accrued interest on the Senior Notes and Convertible Notes as of November 30, 2017, the date the Company filed the WIMC Bankruptcy Petition. As interest on the Senior Notes and Convertible Notes subsequent to November 30, 2017 was not expected to be an allowed claim, this amount excludes interest that would have been accrued subsequent to November 30, 2017. Interest expense reported on the consolidated statements of comprehensive income (loss) for the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017 excludes $5.9 million and $4.4 million, respectively, of interest on the Senior Notes and Convertible Notes that otherwise would have been accrued for the periods.
On the WIMC Effective Date, all of the Company's obligations under the previously outstanding Convertible Notes and Senior Notes listed above were extinguished. Previously outstanding debt interests were exchanged for Second Lien Notes, common stock, Mandatorily Convertible Preferred Stock, Series A Warrants and/or Series B Warrants, as applicable. Refer to Note 25 for additional information.

F-13


Fresh Start Accounting
The Company met the conditions to qualify under GAAP for fresh start accounting, and accordingly, adopted fresh start accounting effective February 10, 2018. The actual impact at emergence on February 9, 2018 is shown below. The financial statements as of February 10, 2018 and for subsequent periods report the results of the Successor with no beginning retained earnings. Any presentation of the Successor represents the Company's financial position and results of operations post-emergence and is not comparable to prior periods.
Upon the application of fresh start accounting, the Company allocated the reorganization value to its individual assets based on their estimated fair values. Reorganization value represents the fair value of the Successor’s assets before considering liabilities, and the excess of reorganization value over the fair value of identified tangible and intangible assets is reported separately on the consolidated balance sheets in the Successor periods as goodwill.
The Company, with the assistance of external valuation specialists, estimated the enterprise value of the Company upon emergence from the WIMC Chapter 11 Case to be approximately $1.4 billion to $1.5 billion. Enterprise value is defined as the total invested capital, which includes cash and cash equivalents. The estimate is based on the aggregate fair value of total equity of the Company as approved by the Bankruptcy Court and the aggregate fair value of total debt of the Company. The equity of the Company consists of its publicly-traded common stock, Mandatorily Convertible Preferred Stock, Series A Warrants and Series B Warrants. The debt of the Company consists of a 2018 Credit Agreement and Second Lien Notes Indenture.
In determining the value of total equity, the Company relied on the publicly-traded common stock price as of the time of emergence and the following 30 days, which was considered a level one input, and used a Monte-Carlo simulation to solve for the aggregate equity value across all classes of equity. A Monte-Carlo simulation is an analytical method used to estimate value by performing a large number of simulations or trial runs and thereby determining a value based on the possible outcomes from these trial runs. With the Monte-Carlo simulation, the Company was able to consider the rights and features of each of the equity classes and estimate a total equity value, which resulted in a common stock price equivalent to the publicly-traded price as of the time of emergence. The primary assumptions used in the simulation were risk-free rate, volatility, and terms consistent with the rights and features of the various equity classes.
In estimating the fair value of total debt, a synthetic credit rating analysis was performed based on the underlying financial metrics of the Company to estimate the nonperformance risk and determine appropriate market spreads for each debt security. With the resulting credit rating, market yields were observed for various indices with similar credit ratings, as well as consideration of similar rated bonds, with similar maturity dates. The range of implied credit spreads considered in the valuations were 6.0% to 8.0% and the range of implied yields considered in the valuations were 13.5% to 15.5%.
Pursuant to fresh start accounting, the Company allocated the determined reorganization value to the Successor Company’s assets at emergence as follows (in thousands):
 
Successor
 
February 10, 2018
Enterprise value
$
1,464,795

Plus: fair value of liabilities
12,137,344

Reorganization value
13,602,139

Less:
 
Fair value of tangible assets
13,508,179

Fair value of developed technology
41,000

Fair value of identifiable intangible assets
44,000

Goodwill
$
8,960


F-14


Upon the adoption of fresh start accounting, the Successor adopted the majority of the significant accounting policies of the Predecessor. The most significant change in accounting policy relates to the accounting for the Residual Trusts, which were formerly recorded at amortized cost and are now adjusted to fair value on a recurring basis. The adjustments set forth in the following table at February 9, 2018 reflect the effect of the consummation of the transactions contemplated by the WIMC Prepackaged Plan (reflected in the column “Reorganization Adjustments”) as well as fair value adjustments as a result of the adoption of fresh start accounting (reflected in the column “Fresh Start Accounting Adjustments”) (in thousands).
 
 
Predecessor
 
Reorganization Adjustments
 
Fresh Start Accounting Adjustments
 
 
Successor
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
182,462

 
$
(39,039
)
(a)
$
—

 
 
$
143,423

Restricted cash and cash equivalents
 
105,041

 
—

 
—

 
 
105,041

Residential loans at amortized cost, net
 
787,860

 
—

 
(317,189
)
(c)
 
470,671

Residential loans at fair value
 
10,423,633

 
—

 
304,051

(c)
 
10,727,684

Receivables, net
 
151,892

 
—

 
(1,740
)
(d)
 
150,152

Servicer and protective advances, net
 
748,952

 
—

 
(24,367
)
(e)
 
724,585

Servicing rights, net
 
744,724

 
—

 
5,432

(f)
 
750,156

Goodwill
 
47,747

 
—

 
(38,787
)
(g)
 
8,960

Intangible assets, net
 
8,532

 
—

 
35,468

(h)
 
44,000

Premises and equipment, net
 
46,873

 
—

 
33,739

(i)
 
80,612

Deferred tax assets, net
 
1,273

 
44

(b)
—

 
 
1,317

Other assets
 
392,205

 
—

 
3,333

(j)
 
395,538

Total assets
 
$
13,641,194


$
(38,995
)

$
(60
)
 

$
13,602,139

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
 
 
 
 
 
 
 
 
Payables and accrued liabilities
 
$
993,805

 
$
(1,540
)
(a)
$
(7,444
)
(k)
 
$
984,821

Servicer payables
 
109,404

 
—

 
—

 
 
109,404

Servicing advance liabilities
 
387,813

 
—

 
—

 
 
387,813

Warehouse borrowings
 
1,007,310

 
—

 
—

 
 
1,007,310

Corporate debt
 
1,142,941

 
212,500

(a)(b)
(75,034
)
(l)
 
1,280,407

Mortgage-backed debt
 
727,909

 
—

 
6,246

(m)
 
734,155

HMBS related obligations at fair value
 
8,913,052

 
—

 
—

 
 
8,913,052

Deferred tax liabilities, net
 
866

 
(77
)
(b)
—

 
 
789

Total liabilities not subject to compromise
 
13,283,100


210,883


(76,232
)
 

13,417,751

Liabilities subject to compromise
 
806,937

 
(806,937
)
(b)
—

 
 
—

Total liabilities
 
14,090,037


(596,054
)

(76,232
)
 

13,417,751

 
 
 
 
 
 
 
 
 
 
Preferred stock
 
—

 
1

(b)
—

 
 
1

Common stock
 
374

 
(331
)
(b)
—

 
 
43

Additional paid-in capital
 
598,731

 
(414,387
)
(b)
—

 
 
184,344

Accumulated deficit
 
(1,049,005
)
 
971,776

(b)
77,229

(b)
 
—

Accumulated other comprehensive income
 
1,057

 
—

 
(1,057
)
(n)
 
—

Total stockholders' equity (deficit)
 
(448,843
)

557,059


76,172

 

184,388

Total liabilities and stockholders' equity (deficit)
 
$
13,641,194


$
(38,995
)

$
(60
)
 

$
13,602,139


F-15


__________
Reorganization Adjustments:
 
 
 
(a)
 
Represents WIMC Effective Date term loan payment, inclusive of payment of interest accrued.
 
 
 
(b)
 
On the WIMC Effective Date, all of the Company's obligations under the previously outstanding Convertible Notes and Senior Notes listed above were extinguished. Previously outstanding debt interests were exchanged for Second Lien Notes, common stock, Mandatorily Convertible Preferred Stock, Series A Warrants and/or Series B Warrants. Accordingly: (i) new Second Lien Notes and Warrants were recorded, (ii) liabilities subject to compromise was eliminated, (iii) Predecessor common stock, additional paid in capital, accumulated deficit, and accumulated other comprehensive income were set to zero, and (iv) Successor common stock, additional paid in capital, and preferred stock were recorded. The resulting total stockholders' equity balance of the Successor of $184.4 million represents the estimated fair value of total stockholders' equity at the WIMC Effective Date as determined with the assistance of an independent valuation specialist. The estimated fair values on a per share/unit basis on the WIMC Effective Date of the common stock, Mandatorily Convertible Preferred Stock, Series A Warrants and Series B Warrants were $10.25, $1,231.70, $1.68 and $0.94, respectively.
 
 
 
Fresh Start Accounting Adjustments:
 
 
 
(c)
 
A successor emerging entity applying fresh start accounting upon emergence from bankruptcy may select new accounting policies upon emergence from bankruptcy protection. Prior to the WIMC Effective Date, loans of Residual Trusts were carried at amortized cost. In connection with fresh start reporting, the Company made an election to record loans of the Residual Trusts at fair value on a recurring basis. Accordingly, adjustments to residential loans carried at amortized cost, net and residential loans at fair value represent: (i) reclassification of $317.2 million loans of the Residual Trusts from residential loans carried at amortized cost, net to residential loans at fair value and (ii) a $13.1 million reduction of residential loans at fair value to record such Residual Trusts to fair value.
 
 
 
(d)
 
Represents adjustment to decrease the carrying value of holdback receivables carried at amortized cost by $1.7 million to reflect the estimated fair value based on the net present value of expected cash flows. Other remaining receivables, net are short-term in nature and, as a result, carrying value approximates fair value.
 
 
 
(e)
 
Represents adjustment to reflect estimated fair value based on the net present value of expected cash flows.
 
 
 
(f)
 
Represents adjustment to increase the carrying value of servicing rights carried at amortized cost to reflect estimated fair value.
 
 
 
(g)
 
The goodwill of the Predecessor has been eliminated and the fair market value of the assets in excess of the reorganization value has been allocated to assets and liabilities as shown above.
 
 
 
(h)
 
Represents adjustment to record intangible assets. The fair value of intangible assets was estimated under the relief-from-royalty and lost profits methods. Resulting intangible assets at the WIMC Effective Date are comprised of institutional and customer relationships of $24.0 million and trade names of $20.0 million. Refer to Note 14 for additional information.
 
 
 
(i)
 
Represents adjustment to increase the carrying value of premises and equipment, net to estimated fair value, reflecting the implied value of internally developed technology. The fair value of internally developed technology was estimated using the relief-from-royalty approach.
 
 
 
(j)
 
Represents adjustment to (i) increase the carrying value of real estate owned, net carried at the lower of cost or net realizable value by $5.6 million to estimated fair value and to (ii) eliminate previously existing unamortized deferred debt issuance costs of $2.3 million associated with servicing advance liabilities with line-of-credit arrangements and the 2013 Revolver. The Company had previously elected and disclosed that deferred debt issuance costs associated with revolving facilities were recorded in other assets on the consolidated balance sheets.
 
 
 
(k)
 
Represents adjustment to remove liabilities not intended to cash settle, primarily related to liabilities in connection with lease obligations.
 
 
 
(l)
 
Represents adjustment to decrease the carrying value of the 2013 Term Loan from amortized cost, net to estimated fair value. The reduction includes the elimination of previous unamortized issuance discounts and unamortized debt issuance costs prior to recording the 2013 Term Loan at estimated fair value. Additionally, represents adjustment of $60.5 million to decrease the carrying value of the Second Lien Notes issued at par value in connection with the WIMC Prepackaged Plan to estimated fair value.
 
 
 
(m)
 
Represents adjustment to increase the carrying value of mortgage back debt associated with the Residual Trusts, carried at amortized cost, net of discounts and deferred debt issuance costs to estimated fair value.
 
 
 
(n)
 
Represents elimination of other comprehensive income on available for sale investments and other post-retirement benefits at the WIMC Effective Date.

F-16


3. Significant Accounting Policies
Principles of Consolidation
The Company’s Consolidated Financial Statements include the accounts and transactions of Ditech Holding and other entities in which the Company has a controlling financial interest. A controlling financial interest may exist in the form of an ownership of a majority of an entity’s voting interests or through other arrangements with entities, such as with a VIE.
The Company evaluates each securitization trust associated with its residential loan servicing portfolio to determine if the Company has a variable interest in the trust, if the trust meets the definition of a VIE and whether the Company has a controlling financial interest as the primary beneficiary of the VIE. If the Company determines that it does have a variable interest in the trust, that the trust is a VIE, and that it is the primary beneficiary of the VIE, it consolidates the VIE. The evaluation considers all of the Company’s involvement with the VIE, identifying both the implicit and explicit variable interests that either individually or in the aggregate could be significant enough to warrant its designation as the primary beneficiary. This designation is evidenced by both the power to direct the activities of the VIE that most significantly impact its economic performance and the obligation to absorb the losses of, or the right to receive the benefits from, the VIE that could potentially be significant to the VIE.
When the Company’s only involvement with a securitization trust is that of servicer, the Company evaluates whether its servicing fee is deemed a variable interest. When the Company’s servicing fee meets all of the criteria in the accounting guidance for VIEs regarding fees paid to service providers, the Company concludes that it is acting in the capacity of a fiduciary and that it does not have a variable interest in the securitization trust. Accordingly, the Company does not consolidate the trust. However, in the event the servicing fee is deemed a variable interest, the Company evaluates whether it has the power to direct the activities of the VIE that most significantly impact the VIE's economic performance and whether its obligation to absorb the VIE's expected losses or its right to receive the VIE's residual returns could be significant to the VIE. If the Company concludes that it has such power, the Company consolidates the trust. The Company performs a similar evaluation when it is involved with other entities that are not securitization trusts.
The Company re-evaluates whether an entity in which it has a variable interest is a VIE when certain significant events occur. Throughout the duration of its involvement with an entity that is deemed a VIE, the Company reassesses whether it is the primary beneficiary and, accordingly, whether it must consolidate the VIE. Certain events may change the primary beneficiary of a VIE determination including, but not limited to, a change in the Company’s ownership of the residual interests, a change in the Company’s role as servicer, or a change in the Company’s contractual obligations to a VIE.
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 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. This transaction closed on February 1, 2017, at which time the Company received $131.1 million in cash, which included a working capital payment.
Cash and Cash Equivalents
Cash and cash equivalents include short-term deposits and highly-liquid investments that have original maturities of three months or less when purchased and are stated at cost, which approximates fair value. The Company maintains cash and cash equivalents with federally-insured financial institutions and these balances typically exceed insurable amounts. Cash equivalents also include amounts due from third-party financial institutions in process of settlement. These transactions typically settle in three days or less and were $78.0 million and $85.7 million at December 31, 2018 and 2017, respectively.
Restricted Cash and Cash Equivalents
Restricted cash and cash equivalents include cash and cash equivalents that are legally restricted as to use or withdrawal. Restricted cash primarily includes (i) principal and interest payments collected by the Company as servicer on behalf of third-party credit owners and unconsolidated securitization trusts that have not yet been remitted to the credit owners or trusts; (ii) principal and interest payments collected by consolidated securitization trusts that have not yet been remitted to the bondholders; and (iii) amounts pledged as collateral for servicing advance facilities as well as other various obligations. Restricted cash equivalents include investments in money market mutual funds.

F-17


Residential Loans at Amortized Cost, Net
Residential loans carried at amortized cost included mortgage loans associated with the Residual Trusts prior to the adoption of fresh start accounting effective February 10, 2018 and unencumbered mortgage loans. A majority of these loans were originated by the Company, acquired from other originators, principally an affiliate of Walter Energy, or acquired as part of a pool. Originated loans were initially recorded at the discounted value of the future payments using an imputed interest rate net of cost-basis adjustments such as deferred loan origination fees and associated direct costs, premiums and discounts. As a result of fresh start accounting, the fair value accounting election was made for these loans. The imputed interest rate used represented the estimated prevailing market rate of interest for loans of similar terms issued to borrowers with similar credit risk. New originations of mortgage loans held for investment subsequent to May 1, 2008 and through the sale of the Residual Trusts' certificates, relate primarily to the financing of sales of real estate owned. The imputed interest rate on these financings is based on observable market mortgage rates, adjusted for variations in expected credit losses where market data is unavailable.
Ginnie Mae Securitizations
Residential loans at amortized cost also include loans subject to repurchase from Ginnie Mae. For certain mortgage loans that the Company pooled and securitized with Ginnie Mae, the Company as the issuer has the unilateral right to repurchase, without Ginnie Mae’s prior authorization, any individual loan in a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. As a result of this unilateral right, the Company must recognize the delinquent loan on its consolidated balance sheets when the loan becomes 90 days delinquent and establish a corresponding liability regardless of the Company’s intention to repurchase the loan. The corresponding liability is recorded in payables and accrued liabilities on the consolidated balance sheets.
Interest Income and Amortization
Interest income on the Company’s residential loans carried at amortized cost consists of the interest earned on the outstanding principal balance of the underlying loan based on the contractual terms of the residential loan and retail installment agreement and the amortization of cost-basis adjustments, principally premiums and discounts. The retail installment agreements state the maximum amount to be charged to borrowers and ultimately recognized as interest income, based on the contractual number of payments and dollar amount of monthly payments. Cost-basis adjustments are deferred and recognized over the contractual life of the loan as an adjustment to yield using the level yield method. Residential loan pay-offs received in advance of scheduled maturity (voluntary prepayments) affect the amount of interest income due to the recognition at that time of any remaining unamortized premiums, discounts, or other cost-basis adjustments arising from the loan’s inception.
Non-accrual Loans
Residential loans at amortized cost that are not insured are placed on non-accrual status when any portion of the principal or interest is 90 days past due. When placed on non-accrual status, the related interest receivable is reversed against interest income of the current period. Interest income on non-accrual loans, if received, is recorded using the cash basis method of accounting. Residential loans are removed from non-accrual status when there is no longer significant uncertainty regarding collection of the principal and the associated interest. If a non-accrual loan is returned to accruing status, the accrued interest, at the date the residential loan is placed on non-accrual status and interest during the non-accrual period are recorded as interest income as of the date the loan no longer meets the non-accrual criteria. The past due or delinquency status of residential loans is generally determined based on the contractual payment terms. In the case of loans with an approved repayment plan, including plans approved by the Bankruptcy Court, delinquency is based on the modified due date of the loan. Loan balances are charged off when it becomes evident that balances are not collectible.
Allowance for Loan Losses
The allowance for loan losses represents management’s estimate of probable incurred credit losses inherent in the residential loan portfolio carried at amortized cost as of the balance sheet date. This portfolio is made up of one segment and class that consists primarily of less-than prime, credit-challenged residential loans, whose primary risk to the Company is credit exposure. The method for monitoring and assessing credit risk is the same throughout the portfolio.

F-18


Residential loans carried at amortized cost are homogeneous and evaluated collectively for impairment. The determination of the level of the allowance for loan losses and, correspondingly, the provision for loan losses is based on, but not limited to, delinquency levels, default frequency experience, prior loan loss severity experience, and management’s judgment and assumptions regarding various matters, including the composition of the residential loan portfolio, known and inherent risks in the portfolio, the estimated value of the underlying real estate collateral, the level of the allowance in relation to total loans and to historical loss levels, current economic and market conditions within the applicable geographic areas of the underlying real estate, changes in unemployment levels, and the impact that changes in interest rates have on a borrower’s ability to refinance its loan and to meet its repayment obligations. Management evaluates these assumptions and various other relevant factors impacting credit quality and inherent losses when quantifying the Company’s exposure to credit losses and assessing the adequacy of its allowance for loan losses as of each reporting date. The level of the allowance is adjusted based on the results of management’s analysis. Generally, as residential loans age, the credit exposure is reduced, resulting in decreasing provisions.
While the Company considers the allowance for loan losses to be adequate based on information currently available, future adjustments to the allowance may be necessary if circumstances differ from the assumptions used by management in determining the allowance for loan losses.
Loan Modifications
The Company will occasionally modify a loan agreement at the request of the borrower. The Company’s current modification program offered to borrowers is limited and is used to assist borrowers experiencing temporary hardships and is intended to minimize the economic loss to the Company and to avoid foreclosure. Generally, the Company’s modifications are short-term interest rate reductions and/or payment deferrals with forgiveness of principal rarely granted. A modification of a loan constitutes a troubled debt restructuring when a borrower is experiencing financial difficulty and the modification constitutes a concession. Loans modified in a troubled debt restructuring are typically already on non-accrual status and have an allowance recorded. At times, loans reflected on the Company's balance sheet are modified in a troubled debt restructuring and may have the financial effect of increasing the allowance associated with the loan. The allowance for an impaired loan that has been modified in a troubled debt restructuring is measured based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or the estimated fair value of the collateral less any selling costs. Troubled debt restructurings for these loans have historically been, and continue to be, insignificant to the Company.
Residential Loans at Fair Value
Residential Loans Held for Investment
Residential loans held for investment and carried at fair value consist of reverse loans, mortgage loans related to the Non-Residual Trusts, and charged-off loans. The Company has elected to carry these loans at fair value. In connection with the adoption of fresh start accounting effective February 10, 2018, the Company elected fair value accounting for its mortgage loans related to the Residual Trusts. The Company's residual interest in the Residual Trusts were subsequently sold during the fourth quarter of 2018 as discussed in more detail in Note 5. As a result, the mortgage loans related to the Residual Trusts were deconsolidated as of November 2018.
Reverse loans consist of HECMs that were either originated or acquired by the Company. The loans are pooled and securitized into HMBS that are sold into the secondary market with servicing rights retained. Based upon the structure of the Ginnie Mae securitization program, the Company has determined that it has not met all of the requirements for sale accounting and accounts for these transfers as secured borrowings. Under this accounting treatment, the reverse loans remain on the consolidated balance sheets as residential loans. The proceeds from the transfers of reverse loans are recorded as HMBS related obligations with no gain or loss recognized on the transfers.
Reverse loans also include loans that have not yet been transferred to Ginnie Mae securitization pools and loans that have been repurchased from Ginnie Mae securitization pools. The Company, as an issuer of HMBS, is required to repurchase reverse loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM is equal to or greater than 98% of the maximum claim amount, which is defined as the lesser of a home's appraised value at the point in time that the conditional commitment is issued or the maximum loan limit that can be insured by the FHA. Performing repurchased loans are conveyed to HUD and nonperforming repurchased loans are generally liquidated through foreclosure and subsequent sale of the real estate owned. Loans are considered nonperforming upon events such as, but not limited to, the death of the mortgagor, the mortgagor no longer occupying the property as their principal residence, or the property taxes or insurance not being paid. In addition to having to fund these repurchases, the Company also typically earns a lower interest rate and incurs certain non-reimbursable costs during the process of liquidating nonperforming loans.

F-19


The yield on reverse loans and any change in fair value are recorded in net fair value gains on reverse loans and related HMBS obligations on the consolidated statements of comprehensive income (loss). Similarly, the yield on and change in fair value of mortgage loans related to the Non-Residual Trusts, and mortgage loans related to the Residual Trusts subsequent to the adoption of fair value accounting until their deconsolidation, are recorded in other net fair value gains (losses) on the consolidated statements of comprehensive income (loss). The yield on reverse loans, mortgage loans related to the Non-Residual Trusts and mortgage loans related to the Residual Trusts includes recognition of contractual interest income that is expected to be collected based on the stated interest rates of the loans, as well as the accretion of fair value.
Charged-off loans represent a portfolio of defaulted consumer and residential loans that were acquired at substantial discounts to face value. Charged-off loans are consumers' unpaid financial commitments and include residential mortgage loans, auto loans and other unsecured consumer loans. The accretion of fair value associated with charged-off loans and any change in fair value are recorded in other revenues on the consolidated statements of comprehensive income (loss). There is no contractual interest income recognized in relation to charged-off loans.
Purchases and originations of and payments received on residential loans held for investment are included in investing activities on the consolidated statements of cash flows.
Residential Loans Held for Sale
Residential loans held for sale represent mortgage loans originated or acquired by the Company with the intent to sell. These loans are originated or acquired primarily for purposes of selling into the secondary market or to private investors as whole loans with servicing rights either retained or sold. The Company has elected to carry mortgage loans held for sale at fair value. The yield on the loans, any change in fair value, and gains or losses recognized upon sale of the loans are recorded in net gains on sales of loans on the consolidated statements of comprehensive income (loss). The yield on the loans includes recognition of contractual interest income that is expected to be collected based on the stated interest rates of the loans, as well as the accretion of fair value. Loan origination fees are recorded in other revenues within the consolidated statements of comprehensive income (loss) when earned and related costs are recognized in general and administrative expenses when incurred. All activity related to residential loans held for sale are included in operating activities on the consolidated statements of cash flows.
The Company’s agreements with GSEs and other third parties include standard representations and warranties related to the loans the Company sells. The representations and warranties require adherence to origination and underwriting guidelines, including, but not limited to, the validity of the lien securing the loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local laws. Breaches of representations and warranties, with the exception of certain loans originated under HARP, are generally enforceable at any time over the life of the loan. If the Company is unable to cure such breach, the purchaser of the loan may require the Company to repurchase such loan for the unpaid principle balance, accrued interest, and related advances, and in any event, the Company must indemnify such purchaser for certain losses and expenses incurred by such purchaser in connection with such breach. In the case the Company repurchases the loan, the Company bears any subsequent credit loss on the loan. The Company’s credit loss may be reduced by any recourse it has to correspondent lenders that, in turn, have sold such residential loans to the Company and breached similar or other representations and warranties. In such event, the Company has the right to seek a recovery of related repurchase losses from that correspondent lender. The Company actively contests claims to the extent that the Company does not consider the claims to be valid. The Company seeks to manage the risk of repurchase and associated credit exposure through the Company's underwriting and quality assurance practices.
The Company records a provision for losses relating to such representations and warranties as part of its loan sale transactions at the time the loan is sold in accordance with the accounting guidance for guarantees. The provision is a reduction in the net gains on sales of loans on the consolidated statements of comprehensive income (loss). The method used to estimate the liability for representations and warranties is a function of the representations and warranties given and considers a combination of factors, including, but not limited to, historical defect rates, projected repurchase rates, projected resale values, and the probability of reimbursement by the correspondent loan seller. The liability, which is recorded in payables and accrued liabilities on the consolidated balance sheets, is updated based on changes in estimates, with those changes recorded as a component of general and administrative expenses on the consolidated statements of comprehensive income (loss). The level of the liability for representations and warranties requires considerable management judgment. The level of residential loan repurchase losses is dependent on economic factors and external conditions that may change over the lives of the underlying loans.

F-20


Receivables Related to Non-Residual Trusts
Receivables related to Non-Residual Trusts, which are recorded in receivables, net on the consolidated balance sheets, consist of the estimated fair value of expected future draws on LOCs from a third party. The LOCs are credit enhancements to the Non-Residual Trusts. The cash flows received from the LOC draws are paid directly to the underlying securitization trusts and are used to pay bondholders of these securitizations for shortfalls in principal and interest collections on the loans in the securitizations. The Company has elected to carry these receivables at fair value. Changes in fair value are recorded in other net fair value gains (losses) on the consolidated statements of comprehensive income (loss).
Servicing Operations
Servicing Rights, Net
Capitalized servicing rights include rights associated with servicing and subservicing contracts acquired in connection with business combinations and servicing rights acquired through the purchase of such rights from third parties or through the sale of loans with servicing rights retained. At initial recognition, the fair value of the servicing right is established using assumptions consistent with those used to establish the fair value of existing servicing rights.
A servicing or subservicing asset (or liability) is recognized on the consolidated balance sheets when the benefits of servicing are deemed to be greater (or lower) than adequate compensation for the servicing activities performed by the Company. No servicing or subservicing asset or liability is recorded if the amounts earned represent adequate compensation. Generally, no servicing asset or liability is recognized when the Company enters into new subservicing contracts; however, previously existing contracts acquired in a business combination may be deemed to provide greater (or lower) than adequate compensation.
Subsequent to acquisition, servicing rights (or liabilities) are accounted for using the amortization method or the fair value measurement method, based on the Company’s strategy for managing the risks of the underlying portfolios. Risks inherent in servicing rights include prepayment and interest rate risks.
The Company identifies classes of servicing rights based upon the availability of market inputs used in determining fair value and its available risk management strategies associated with the servicing rights. Based upon these criteria, the Company has identified three classes of servicing rights: a risk-managed loan class, a mortgage loan class, and a reverse loan class. The risk-managed loan class includes loan portfolios for which the Company may apply a hedging strategy in the future. For servicing assets associated with the risk-managed loan class, which are accounted for at fair value, the Company measures the fair value at each reporting date and records changes in fair value in net servicing revenue and fees on the consolidated statements of comprehensive income (loss).
Servicing rights associated with the mortgage loan class and the reverse loan class are amortized based on expected cash flows in proportion to and over the life of servicing revenue. Amortization is recorded as an adjustment to net servicing revenue and fees on the consolidated statements of comprehensive income (loss). Servicing assets (or liabilities) are stratified by product type and compared to the estimated fair value on a quarterly basis. Impairment (or an increased obligation) is recognized through a valuation allowance for each stratum. The valuation allowance is adjusted to reflect the amount, if any, by which the carrying value of the servicing rights for a given stratum exceeds (or in the case of servicing liabilities, is lower than) its fair value. Any fair value in excess of (or in the case of servicing liabilities, lower than) the carrying value for a given stratum is not recognized. The Company recognizes a direct impairment to the servicing asset or liability when the valuation allowance is determined to be unrecoverable.
Net Servicing Revenue and Fees
Servicing revenue and fees consist of income from the Company’s third-party servicing portfolio, which includes loans associated with arrangements in which the Company owns the servicing rights or acts as subservicer. Servicing revenue and fees include contractual servicing fees, incentive and performance fees, and ancillary income. Contractual servicing fees related to arrangements in which the Company owns the servicing rights are generally based on a percentage of the unpaid principal balance of the related collateral and are recorded when earned, which is generally upon collection of payments from borrowers. Contractual servicing fees related to arrangements in which the Company acts as subservicer are generally based on a fixed dollar amount per loan and are accrued in the period the services are performed. Incentive and performance fees include fees based on the performance of specific portfolios or loans, asset recovery income, and modification fees. Fees based on the performance of specific portfolios or loans are recognized when earned based on the terms of the various servicing and incentive agreements. Asset recovery income is generally recognized upon collection. Ancillary income includes late fees, prepayment fees, and collection fees and is generally recognized upon collection. Servicing revenue and fees are adjusted for the amortization of servicing rights carried at amortized cost, the change in fair value of servicing rights carried at fair value and the change in fair value of servicing rights related liabilities, if any.

F-21


Servicer and Protective Advances, Net
In the ordinary course of servicing residential loans and pursuant to certain servicing agreements, the Company may advance the principal and interest portion of delinquent mortgage payments to credit owners prior to the collection of such amounts from borrowers, provided that the Company determines these advances are recoverable from either the borrower or the liquidation of collateral. In addition, the Company is required under certain servicing contracts to ensure that property taxes, insurance premiums, foreclosure costs and various other items are paid in order to preserve the collateral underlying the assets being serviced. Generally, the Company recovers such advances from borrowers for reinstated or performing loans, from proceeds of liquidation of collateral or ultimate disposition of the loan, from credit owners or from loan insurers. Certain of the Company’s servicing agreements provide that repayment of servicing advances made under the respective agreements have a priority over all other cash payments to be made from the proceeds of the residential loan, and in certain cases the proceeds of the pool of residential loans, which are the subject of that servicing agreement. As a result, the Company is entitled to repayment from loan proceeds before any interest or principal is paid to the bondholders, and in certain cases, advances in excess of loan proceeds may be recovered from pool-level proceeds. Servicer and protective advances are carried at cost, net of estimated losses. Losses can occur in the normal course of servicing loans when the Company fails to make advances in accordance with investor guidelines including filing claims timely, requesting approvals, or advancing outside of guidelines. The Company establishes an allowance for uncollectible advances based on an analysis of the underlying loans, their historical loss experience, and recoverability pursuant to the terms of the underlying servicing agreements. Historical advance loss experience includes investor curtailment and servicer analytics experience, and also incorporates qualitative management collectability and risk assessments of company operations and investor or counterparty behaviors, including consideration of probable recoveries from prior servicers and status of negotiations on settlements with various counterparties. Generally, estimated losses related to advances are recorded in general and administrative expenses on the consolidated statements of comprehensive income (loss).
Custodial Accounts
In connection with its servicing activities, the Company has a fiduciary responsibility for amounts primarily related to borrower escrow funds and other custodial funds due to credit owners aggregating $3.0 billion and $3.4 billion at December 31, 2018 and 2017, respectively. These funds, which do not represent assets or liabilities of the Company, are maintained in segregated bank accounts, and accordingly, are not reflected on the consolidated balance sheets.
Goodwill
Goodwill represents the excess of the consideration paid in a business combination over the fair value of the identifiable net assets acquired. The Company tests goodwill for impairment at the reporting unit level at least annually or whenever events or circumstances indicate that the carrying value of goodwill may not be recoverable from future cash flows. A reporting unit is a business segment or one level below. The Company has identified three reporting units, which constitute businesses: (i) Servicing; (ii) Originations; and (iii) Reverse Mortgage. Segment management regularly reviews discrete financial information for these reporting units. The Company has the option of performing a qualitative assessment of impairment to determine whether any further quantitative testing for impairment is necessary. If the Company elects to bypass the qualitative assessment or if it determines, based on qualitative factors, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company compares the fair value of the reporting unit with its carrying value, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the Company recognizes an impairment loss in an amount equal to that excess up to the carrying value of goodwill.
The Company's goodwill was fully impaired at December 31, 2018 as discussed in more detail in Note 14.
Intangible Assets, Net
Intangible assets primarily consist of institutional and customer relationships, and trademarks and trade names. Definite-lived intangible assets are amortized using either an economic consumption method or a straight-line method over their related expected useful lives. Definite and indefinite-lived intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable, although indefinite-lived intangible assets are evaluated for impairment at least annually. An asset is considered to be impaired when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition does not exceed its carrying amount. The amount of the impairment loss, if any, is measured as the amount by which the carrying value of the asset exceeds its fair value.

F-22


Premises and Equipment, Net
Premises and equipment, net are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the lesser of the remaining term of the lease or the useful life of the leased asset. Costs to internally develop computer software are capitalized during the application development stage and include external direct costs of materials and services as well as employee costs directly associated with the project during the capitalization period. Premises and equipment are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An asset is considered to be impaired when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition does not exceed its carrying amount. The amount of the impairment loss, if any, is measured as the amount by which the carrying value of the asset exceeds its fair value.
Derivatives
The Company enters into commitments to originate and purchase mortgage loans at interest rates that are determined prior to the funding or purchase of the loan. These commitments are referred to as IRLCs. IRLCs are considered freestanding derivatives and are recorded at fair value at inception. Changes in fair value subsequent to inception are based on changes in the fair value of the underlying loan, and changes in the probability that the loan will fund within the terms of the commitment.
The Company uses derivative financial instruments, primarily forward sales commitments, to manage exposure to interest rate risk and changes in the fair value of IRLCs and mortgage loans held for sale. The Company may also enter into commitments to purchase MBS as part of its overall hedging strategy. The Company has elected not to designate these freestanding derivatives as hedging instruments under GAAP.
The fair value of freestanding derivatives is recorded in other assets or payables and accrued liabilities on the consolidated balance sheets with changes in the fair values included in net gains on sales of loans on the consolidated statements of comprehensive income (loss). Cash flows related to freestanding derivatives are included in operating activities on the consolidated statements of cash flows.
In connection with forward sales commitments and MBS purchase commitments, the Company has margin agreements with its counterparties whereby both parties are required to post cash margin in the event the fair values of the derivative financial instruments meet or exceed established thresholds and minimum transfer amounts. This process substantially mitigates counterparty credit risk. The right to receive cash margin placed by the Company with its counterparties is included in other assets, and the obligation to return cash margin received by the Company from its counterparties is included in payables and accrued liabilities on the consolidated balance sheets. The Company has elected to record derivative assets and liabilities and related cash margin on a gross basis, even when a legally enforceable master netting arrangement exists between the Company and the derivative counterparty.
The derivative transactions described above are measured in terms of the notional amount. With the exception of IRLCs, the notional amount is generally not exchanged and is used only as a basis on which interest and other payments are determined.
Real Estate Owned, Net
Real estate owned, net is included in other assets on the consolidated balance sheets, and represents properties acquired in satisfaction of residential loans. Upon foreclosure, or when the Company otherwise takes possession of the property, real estate owned is recorded at the lower of cost or estimated fair value less estimated costs to sell. The excess of cost over the fair value of the property acquired less estimated costs to sell, or net realizable value, is charged to the allowance for loan losses for residential loans carried at amortized cost, to other net fair value gains (losses) for mortgage loans carried at fair value, and to net fair value gains on reverse loans and related HMBS obligations for reverse loans. The fair value of the property is generally based upon historical resale recovery rates and current market conditions or appraisals. Subsequent declines in the value of real estate owned are recorded as adjustments to the carrying amount through a valuation allowance and are recorded in other expenses, net on the consolidated statements of comprehensive income (loss). Losses from the sale of real estate owned associated with reverse loans are typically covered by FHA insurance, the benefit of which is considered in the net realizable value estimate. To the extent these losses are not covered by the FHA insurance, they are recognized in other expenses, net on the consolidated statements of comprehensive income (loss) when incurred. Costs relating to the improvement of the property are capitalized to the extent the balance does not exceed its fair value, whereas those costs relating to maintaining the property are recorded when incurred to other expenses, net on the consolidated statements of comprehensive income (loss).
Servicer Payables
Servicer payables represent amounts collected that are required to be remitted to third-party trusts, credit owners, or others. These collections are primarily from borrowers or investors whose loans the Company services.

F-23


Debt and Other Obligations
Servicing advance liabilities, warehouse borrowings and corporate debt are carried at amortized cost. Corporate debt is also presented net of related discounts and deferred debt issuance costs. Deferred debt issuance costs associated with servicing advance liabilities with line-of-credit arrangements, warehouse borrowings and the 2013 Revolver are recorded in other assets on the consolidated balance sheets. Deferred debt issuance costs and original issue discounts, if any, are amortized to interest expense over the term of the debt or obligation using either the effective interest method or the straight-line method.
Mortgage-Backed Debt
Prior to February 10, 2018, the Company’s mortgage-backed debt associated with the Residual Trusts was carried at amortized cost, net of discounts and deferred debt issuance costs. For mortgage-backed debt carried at amortized cost, deferred debt issuance costs and original issue discounts, if any, were amortized to interest expense over the term of the debt using the effective interest method.
In connection with the adoption of fresh start accounting effective February 10, 2018, the Company elected fair value accounting for its mortgage-backed debt related to the Residual Trusts. Mortgage-backed debt related to the Non-Residual Trusts is also carried at fair value. For mortgage-backed debt carried at fair value, the yield and any change in fair value are recorded in other net fair value gains (losses) on the consolidated statements of comprehensive income (loss). The yield on mortgage-backed debt includes recognition of interest expense based on the stated interest rates of the debt, as well as the accretion of fair value.
HMBS Related Obligations
The Company recognizes the proceeds from the transfer of HMBS as a secured borrowing. The Company elected to record the secured borrowing, or the HMBS related obligations, at fair value. The yield on HMBS related obligations and any change in fair value are recorded in net fair value gains on reverse loans and related HMBS obligations on the consolidated statements of comprehensive income (loss). The yield on HMBS related obligations includes recognition of contractual interest expense based on the stated interest rates of the obligations, as well as the accretion of fair value. Proceeds from securitizations of reverse loans and payments on HMBS related obligations are included in financing activities on the consolidated statements of cash flows.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates for the periods in which the differences are expected to reverse. The change in deferred tax assets and liabilities due to a change in tax rates is recognized in income in the period of the change.
Periodic reviews of the carrying amount of deferred tax assets are made to determine if the establishment of a valuation allowance is necessary. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. All evidence, both positive and negative, is evaluated when making this determination. Items considered in this analysis include the ability to carry back losses to recoup taxes previously paid, the reversal of temporary differences, tax planning strategies, historical financial performance, expectations of future earnings, and the length of statutory carryforward periods. Significant judgment is required in assessing future earnings trends and the timing of reversals of temporary differences.
The Company assesses its tax positions for all open tax years and determines whether it has any material unrecognized liabilities in accordance with the guidance on accounting for uncertain tax positions. The Company records interest and penalties on uncertain tax positions in income tax expense and general and administrative expenses, respectively, on the consolidated statements of comprehensive income (loss).
Share-Based Compensation
The Company has in effect stock incentive plans under which RSUs, performance shares and non-qualified stock options are granted to employees and non-employee members of the Board of Directors. The Company estimates the fair value of share-based awards on the date of grant. The value of the award is generally recognized as an expense using the graded method over the requisite service period. The fair value of the Company’s RSUs and performance shares with performance conditions only is based on the closing market price of its common stock on the date of the grant. The Company estimates the fair value of performance shares with market conditions and non-qualified stock options as of the date of grant using the Monte-Carlo simulation model and Black-Scholes option pricing model, respectively. These models consider, among other factors, the performance period or expected life of the award, the expected volatility of the Company’s stock price, and expected dividends. The Company records share-based compensation expense in salaries and benefits expense on the consolidated statements of comprehensive income (loss).

F-24


Advertising Costs
Advertising costs are expensed as incurred and are included in general and administrative expenses on the consolidated statements of comprehensive income (loss). The Company recorded advertising expense of $12.5 million, $2.0 million and $16.0 million for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively.
Basic and Diluted Earnings (Loss) Per Share
The Company uses the two-class method to determine earnings per share. Outstanding share-based payment awards that include non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are considered participating securities and are included in the calculation of basic earnings per common share pursuant to the two-class method. The Company’s participating securities were comprised of Mandatorily Convertible Preferred Stock. Under the two-class method, net income is reduced by the amount of dividends declared in the period for common stock and participating securities. The remaining undistributed earnings are then allocated to common stock and participating securities as if all of the net income for the period had been distributed. Basic earnings per share excludes dilution and is calculated by dividing net income allocable to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is calculated by dividing net income allocable to common shares by the weighted-average number of common shares for the period, as adjusted for the potential dilutive effect of non-participating share-based awards and convertible debt, based on the treasury method. During periods of net loss, diluted loss per share is equal to basic loss per share as the antidilutive effect of non-participating share-based awards and convertible debt is disregarded. No effect is given to participating securities in the computation of basic and diluted loss per share as these securities do not share in the losses of the Company.
Contingencies
The Company evaluates contingencies based on information currently available and establishes accruals for those matters when a loss contingency is considered probable and the related amount is reasonably estimable. For matters where a loss is believed to be reasonably possible but not probable, no accrual is established but the nature of the loss contingency and an estimate of the reasonably possible range of loss in excess of amounts accrued, when such estimate can be made, is disclosed. In deriving an estimate, the Company is required to make assumptions about matters that are, by their nature, highly uncertain. The assessment of loss contingencies, including legal contingencies and curtailment obligations, involves the use of critical estimates, assumptions and judgments. Whenever practicable, the Company consults with outside experts, including legal counsel and consultants, to assist with the gathering and evaluation of information related to contingent liabilities. It is not possible to predict or determine the outcome of all loss contingencies. Accruals are periodically reviewed and may be adjusted as circumstances change.
4. Transactions with NRM
NRM Flow and Bulk Agreement
On August 8, 2016, the Company and NRM executed the NRM Flow and Bulk Agreement whereby the Company agreed to sell to NRM all of the Company’s right, title and interest in mortgage servicing rights with respect to a pool of mortgage loans, with subservicing retained. The NRM Flow and Bulk Agreement provides that, from time to time, the Company may sell additional MSR to NRM in bulk or as originated or acquired on a flow basis, subject in each case to the parties agreeing on price and certain other terms.
On January 17, 2018, the Company agreed to sell to NRM MSR relating to mortgage loans having an aggregate unpaid principal balance of approximately $11.3 billion as of such sale date, with subservicing retained, and received approximately $90.4 million in cash proceeds from NRM as partial consideration for this MSR sale. The Company used 80% of such cash proceeds to repay borrowings under the 2013 Credit Agreement and used the remaining cash proceeds for general corporate purposes. During June 2018, under an agreement similar to the NRM Flow and Bulk Agreement, the Company agreed to sell to New Penn Financial, which became an affiliate of NRM when acquired by NRM on July 3, 2018, MSR relating to mortgage loans having an aggregate unpaid principal balance of approximately $4.7 billion as of the sale date, with servicing released, and received approximately $56.7 million in cash proceeds from NRM as partial consideration for the MSR sale. Since entering into the NRM Flow and Bulk Agreement and through December 31, 2018, in various bulk transactions under the NRM Flow and Bulk Agreement and a similar agreement, the Company has sold MSR to NRM relating to mortgage loans having an aggregate unpaid principal balance of $75.8 billion as of the applicable closing dates of such transactions. As of December 31, 2018, the Company has received $397.1 million in cash proceeds relating to such sales, which proceeds do not include certain holdback amounts relating to such sales that are expected to be paid to the Company over time. For the year ended December 31, 2018, the Company received $34.5 million in cash proceeds relating to these holdback amounts and at December 31, 2018 and 2017 had a servicing rights holdback receivable, net from NRM of $10.8 million and $31.3 million, respectively, which is recorded in receivables, net on the consolidated balance sheets.

F-25


The Company also transferred MSR to NRM under flow transactions relating to mortgage loans consisting entirely of co-issue loans with an aggregate unpaid principal balance of $3.6 billion and $469.5 million for the period from February 10, 2018 through December 31, 2018 and the period from January 1, 2018 through February 9, 2018, respectively. For the year ended December 31, 2017, the Company transferred MSR to NRM under flow transactions relating to mortgage loans with an aggregate unpaid principal balance of $7.6 billion, which included co-issue loans with an aggregate unpaid principal balance of $6.4 billion. These transfers included recapture activities of generally non-NRM portfolio serviced loans with an aggregate unpaid balance of $1.6 billion and $236.9 million for the period from February 10, 2018 through December 31, 2018 and the period from January 1, 2018 through February 9, 2018, respectively. In addition, these transfers generated revenues of $44.1 million, $3.8 million and $61.8 million for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively, which are recorded in net gains on sales of loans on the consolidated statements of comprehensive income (loss).
NRM Subservicing Agreement
On August 8, 2016, the Company and NRM entered into the NRM Subservicing Agreement whereby the Company acts as subservicer for the mortgage loans whose MSR are sold by the Company to NRM under the NRM Flow and Bulk Agreement and for other mortgage loans as may be agreed upon by the Company and NRM from time to time, in exchange for a subservicing fee. Under the NRM Subservicing Agreement and a related agreement, the Company performs all daily servicing obligations on behalf of NRM, including collecting payments from borrowers and offering refinancing options to borrowers for purposes of minimizing portfolio runoff. On January 17, 2018, the Company and NRM executed a Side Letter Agreement pursuant to which, among other things, certain provisions of the NRM Subservicing Agreement were amended and/or waived. On June 28, 2018, the Company and NRM executed an additional Side Letter Agreement, pursuant to which, among other things, NRM agreed to use commercially reasonable efforts to add additional loans to the NRM Subservicing Agreement for the Company to subservice.
On January 17, 2019, the Company received a notice from NRM initiating the process of termination under the NRM Subservicing Agreement. Any termination of the NRM Subservicing Agreement would not be effective until a servicing transfer has been completed in accordance with applicable requirements. The Company is reviewing the grounds for termination in consultation with its stakeholders and is considering all of its options with respect thereto including legal rights and remedies. The Company is proceeding with strategic alternatives assuming there is not an ongoing subservicing relationship with NRM. The Company’s plans are not contingent on any continuing relationship with NRM. Refer to Note 31 for additional information regarding the Company's recapitalization efforts.
The Company expects that it will take several months to complete the transfer of servicing on loans that are subserviced for NRM under the NRM Subservicing Agreement. The receipt of the notice of termination, in and of itself, is not an event of default or cross-default under our debt documents or warehouse facilities. Subsequent to receiving the aforementioned notice from NRM, and at the direction of and in coordination with NRM, on March 16, 2019 and April 1, 2019, the Company completed the transfer of servicing on certain NRM subservicing portfolios containing, in aggregate, approximately 208,000 accounts. The Company is working with NRM to complete additional transfers of servicing on the remaining loans it subservices for NRM under the NRM Subservicing Agreement.
With respect to the Company, for mortgage loans that were being subserviced by the Company under the NRM Subservicing Agreement prior to January 17, 2018, and for any additional mortgage loans that the Company subserviced under the NRM Subservicing Agreement that were added to such agreement after such date (other than (i) mortgage loans relating to MSR sold to NRM by the Company in a bulk sale agreed to by the parties on January 17, 2018 and (ii) mortgage loans relating to MSR sold to NRM by the Company on a flow basis under the NRM Flow and Bulk Agreement after such date), the initial term of the NRM Subservicing Agreement expired on August 8, 2017 and was automatically renewed for a successive one-year term, and was further automatically renewed for a successive one-year term thereafter until the aforementioned notice of termination.
With respect to the Company, for mortgage loans relating to MSR sold to NRM by the Company in a bulk MSR sale agreed to by the parties on January 17, 2018 and mortgage loans relating to MSR sold to NRM by the Company on a flow basis under the NRM Flow and Bulk Agreement after such date, the initial term of the NRM Subservicing Agreement was scheduled to expire on January 17, 2019 (with respect to the aforementioned bulk MSR sale) or, with respect to each flow MSR assignment agreement executed by the parties after such date in connection with any flow MSR sales by the Company to NRM after such date, the first anniversary of the first day of the calendar quarter following the calendar quarter during which such flow MSR assignment agreement was executed; however, such expiration dates were superseded by the aforementioned notice of termination, and the NRM Subservicing Agreement is expected to terminate upon completion of the servicing transfer.

F-26


With respect to NRM, for mortgage loans that were being subserviced by the Company under the NRM Subservicing Agreement prior to January 17, 2018, and for any additional mortgage loans that the Company subserviced under the NRM Subservicing Agreement that were added to such agreement after such date (other than (i) mortgage loans relating to MSR sold to NRM by the Company in a bulk sale agreed to by the parties on January 17, 2018 and (ii) mortgage loans relating to MSR sold to NRM by the Company on a flow basis under the NRM Flow and Bulk Agreement after such date), the initial term of the NRM Subservicing Agreement expired on August 8, 2017 and thereafter the agreement would automatically terminate with respect to such mortgage loans, unless renewed by NRM on a monthly basis. Since the expiration of the initial term, NRM has renewed the NRM Subservicing Agreement each month thereafter until the aforementioned notice of termination received by the Company from NRM on January 17, 2019.
In the case of mortgage loans relating to MSR sold to NRM by the Company in a bulk MSR sale agreed to by the parties on January 17, 2018 and mortgage loans relating to MSR sold to NRM by the Company on a flow basis under the NRM Flow and Bulk Agreement after such date, the initial term of the NRM Subservicing Agreement was scheduled to expire on January 17, 2019 (with respect to the aforementioned bulk MSR sale) or, with respect to each flow MSR assignment agreement executed by the parties after such date in connection with any flow MSR sales by the Company to NRM after such date, the first anniversary of the first day of the calendar quarter following the calendar quarter during which such flow MSR assignment agreement was executed; however, such expiration dates were superseded by the aforementioned notice of termination, and the NRM Subservicing Agreement is expected to terminate upon completion of the servicing transfer.
5. Variable Interest Entities
Consolidated Variable Interest Entities
Residual Trusts
The Company evaluates each securitization trust that funded its residential loan portfolio to determine if it meets the definition of a VIE, and whether the Company is required to consolidate the trust. The Company determined that it was the primary beneficiary of four securitization trusts in which it owned residual interests, and as a result, consolidated these trusts. As a holder of the residual securities issued by the trusts, the Company had both the obligation to absorb losses to the extent of its investment and the right to receive benefits from the trusts, both of which could potentially be significant to the trusts. In addition, as the servicer for these trusts, the Company concluded it had the power to direct the activities that most significantly impact the economic performance of the trusts through its ability to manage the delinquent assets of the trusts. Specifically, the Company had discretion, subject to applicable contractual provisions and consistent with prudent mortgage-servicing practices, to decide whether to sell or work out any loans that become troubled.
The Company was not contractually required to provide any financial support to the Residual Trusts. The Company may have, from time to time at its sole discretion, purchased certain assets or cover certain expenses for the trusts to cure delinquency or loss triggers for the sole purpose of releasing excess overcollateralization to the Company.
In November 2018, the Company sold its residual interests in the four remaining Residual Trusts that it previously consolidated for $41.0 million in cash proceeds. Upon the sale of the residual interests, the Company determined that it was no longer required to consolidate the four trusts as it was no longer the primary beneficiary of these trusts since (i) it did not hold the residual securities issued by the trusts and therefore had no obligation to absorb future losses to the extent of its investment and no right to receive future benefits from the trust, both of which could potentially be significant to the trusts, and (ii) it is adequately compensated and its role as servicer is of a fiduciary nature. In conjunction with the transaction, the Company deconsolidated the four Residual Trusts and removed related assets of $414.2 million and liabilities of $402.6 million from its consolidated balance sheet and recorded a servicing rights liability of $0.2 million. As a result of the sale and deconsolidation of the Residual Trusts, the Company recorded a net gain of $29.2 million, which includes a gain of $1.0 million relating to the reversal of deferred interest income recorded in other net fair value gains on the consolidated statements of comprehensive income (loss), a gain of $37.3 million relating to the reversal of deferred income recorded in other expenses, net on the consolidated statements of comprehensive income (loss), and a loss of $9.1 million relating to the sale and deconsolidation of the Residual Trusts recorded in other within other gains (losses) on the consolidated statements of comprehensive income (loss).
Non-Residual Trusts
The Company determined that it is the primary beneficiary of three remaining securitization trusts for which it does not own any residual interests at December 31, 2018. The Company does not receive economic benefit from the residential loans while the loans are held by the Non-Residual Trusts other than the servicing fees paid to the Company to service the loans. There were initially ten securitization trusts included in the Non-Residual Trusts; however, as discussed further below, seven of the trusts were deconsolidated during 2017 and 2018.

F-27


As part of a prior agreement to acquire the rights to service the loans in these securitization trusts, the Company had certain obligations to exercise mandatory clean-up calls for each of these trusts at their earliest exercisable date, which is the date the principal amount of each loan pool falls to 10% of the original principal amount. The Company would take control of the remaining collateral in the trusts when these calls are exercised. The Company fulfilled its obligation for its mandatory clean-up calls for two of the trusts in the second and third quarters of 2017 by making payments totaling $28.4 million. The Company took control of the remaining collateral, including residential loans and REO with a carrying value of $25.1 million and $0.1 million, respectively. Upon exercising these call obligations, the two trusts were deconsolidated and the underlying collateral was recorded on the Company's consolidated balance sheets.
On October 10, 2017, the Company entered into a Clean-up Call Agreement with a counterparty. The Company paid an inducement fee in the amount of $36.5 million to the counterparty, which was recorded within other assets on the consolidated balance sheets. With the execution of the Clean-Up Call Agreement, the counterparty assumed the Company’s mandatory obligation to exercise the clean-up calls for the eight remaining securitization trusts. In connection with the exercise of each clean-up call, the counterparty agreed to reimburse the Company for certain outstanding advances previously made by the Company with respect to the related trusts, up to an aggregate amount of approximately $6.4 million for the eight remaining trusts outstanding at that time. The Company continues to have certain rights and obligations related to the Non-Residual Trusts that are deemed to be variable interests that could potentially be significant to each trust. Additionally, as servicer of these trusts, the Company has concluded that it has the power to direct the activities that most significantly impact the economic performance of the trusts, and as such, the Company continued to consolidate these trusts on its consolidated balance sheets.
During the fourth quarter of 2017, the counterparty fulfilled its obligation for the mandatory clean-up call under the Clean-up Call Agreement on one of the remaining trusts by making a payment to the trust of $71.4 million, at which point the counterparty took control of the remaining collateral in the trust, including loans and REO with a carrying value of $63.8 million and $0.1 million, respectively. The trust was then deconsolidated. As a result of the counterparty exercising its clean-up call obligation and the deconsolidation of the trust, the trust recognized a gain of $7.2 million during the fourth quarter of 2017, which is included in other gains (losses) on the consolidated statements of comprehensive income (loss). Additionally, during the fourth quarter of 2017, the Company expensed $7.2 million of the inducement fee, which is included in general and administrative expenses on the consolidated statements of comprehensive income (loss).
During the period from February 10, 2018 through December 31, 2018, the counterparty under the Clean-up Call Agreement for the Non-Residual Trusts fulfilled its obligation for the mandatory clean-up call on four of the remaining trusts by making payments to the trusts of $181.4 million, at which point the counterparty took control of the remaining collateral in the trusts, including loans and REO with a carrying value of $159.3 million and $0.6 million, respectively. The trusts were then deconsolidated. As a result of the counterparty exercising its clean-up call obligation and the deconsolidation of the trusts, the trusts recognized gains of $18.5 million during the period from February 10, 2018 through December 31, 2018. Additionally, the Company expensed $17.8 million and $0.5 million of the Clean-up Call Agreement inducement fee for the period from February 10, 2018 through December 31, 2018 and the period from January 1, 2018 through February 9, 2018, respectively. The Clean-up Call Agreement inducement fee had a remaining balance of $11.0 million at December 31, 2018, which is included in other assets on the consolidated balance sheets.
For seven of the original ten Non-Residual Trusts and four securitization trusts that had not been consolidated, the Company, as part of an agreement to service the loans in all eleven trusts, also had an obligation to reimburse a third party for the final $165.0 million in LOCs, if drawn, which were issued to the eleven trusts by a third party as credit enhancements to these trusts. As the LOCs were provided as credit enhancements to these securitizations, the trusts would draw on these LOCs if there were insufficient cash flows from the underlying collateral to pay the bondholders. As a result of the Clean-up Call Agreement detailed above, the Company's obligation to reimburse a third party for the final $165.0 million in LOCs, if drawn, was terminated. Under the Clean-up Call Agreement, the Company is obligated to reimburse the counterparty for amounts drawn on the LOCs in excess of $17.0 million in the aggregate related to certain of the remaining securitization trusts from July 1, 2017 through each individual call date.
Servicer and Protective Advance Financing Facilities
The Company has interests in financing entities that acquire servicer and protective advances from certain wholly-owned subsidiaries. The financing subsidiaries are deemed to be VIEs due to the design of the entities, including restrictions on its operating activities. The Company is the primary beneficiary of these financing subsidiaries and, accordingly, consolidates the financing subsidiaries. The subsidiaries issue or enter into notes supported by collections on the transferred advances.
As discussed further in Note 18, during the fourth quarter of 2017, the notes issued under these financing facilities were purchased by a subsidiary with funds from a WIMC Securities Master Repurchase Agreement. The outstanding notes were pledged as collateral under the WIMC Securities Master Repurchase Agreement at December 31, 2017.

F-28


Revolving Credit Facilities-Related VIEs
Certain revolving credit facilities utilize subsidiaries and/or trusts, collectively referred to as the entities, which are considered VIEs. The Company transfers certain assets into the entities created as a mechanism for holding assets as collateral for the revolving credit facilities in order to facilitate the pledging of assets to the revolving credit facilities. The entities have no equity investment at risk, making them variable interest entities. The Company’s continuing involvement with the entities is in the form of servicing the assets and through holding the ownership interests of the entities. Accordingly, the Company concluded that it is the primary beneficiary of the entities and, therefore, the Company consolidated the entities. All of the subsidiaries and/or trusts are separate legal entities and the collateral held by the entities are owned by them and are not available to other creditors. 
The Revolving Credit Facilities-Related VIEs are funded with HECMs and real estate owned that were repurchased from Ginnie Mae securitization pools utilizing warehouse facilities. These assets collateralize certain master repurchase agreements, which are not included in the Revolving Credit Facilities-Related VIEs. Refer to Note 19 for additional information.
Reverse Loan Buyout VIE
In October 2018, the Company closed on a transaction in which 100% of the participating interests in certain existing HECMs and real estate owned that were previously repurchased from Ginnie Mae securitization pools, and financed under existing warehouse facilities, were sold to a wholly-owned subsidiary managed by the Company. The participating interests were then pledged to a third-party lender under a note purchase agreement to secure the issuance of variable funding notes. The Company continues to service the loans under a servicing agreement with the wholly-owned subsidiary. The wholly-owned subsidiary is deemed to be a VIE due to the design of the entity, including restrictions on its operating activities and lack of equity at risk. As servicer of the loans and manager of the wholly-owned subsidiary, the Company determined that it was the primary beneficiary of the VIE and as a result, consolidated this VIE.
Included in the tables below are summaries of the carrying amounts of the assets and liabilities of consolidated VIEs (in thousands):
 
 
Successor
 
 
December 31, 2018
 
 
Non-Residual
Trusts
 
Servicer and
Protective
Advance
Financing
Facilities
 
 Revolving Credit Facilities-Related VIEs
 
Reverse Loan Buyout VIE
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Restricted cash and cash equivalents
 
$
3,467

 
$
8,762

 
$
—

 
$
—

 
$
12,229

Residential loans at fair value
 
117,410

 
—

 
—

 
207,524

 
324,934

Receivables, net
 
1,945

 
—

 
133

 
1,760

 
3,838

Servicer and protective advances, net
 
—

 
239,769

 
—

 
4,961

 
244,730

Other assets
 
444

 
547

 
10,804

 
11,297

 
23,092

Total assets
 
$
123,266

 
$
249,078

 
$
10,937

 
$
225,542

 
$
608,823

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Payables and accrued liabilities
 
$
—

 
$
446

 
$
—

 
$
1,465

 
$
1,911

Servicing advance liabilities
 
—

 
218,291

 
—

 
—

 
218,291

Warehouse borrowings
 
—

 
—

 
—

 
225,399

 
225,399

Mortgage-backed debt 
 
131,313

 
—

 
—

 
—

 
131,313

Total liabilities
 
$
131,313

 
$
218,737

 
$
—

 
$
226,864

 
$
576,914


F-29


 
 
 
 
 
 
 
 
 
 
 
 
 
Predecessor
 
 
December 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
 
$
12,687

 
$
8,020

 
$
23,669

 
$
—

 
$
44,376

Residential loans at amortized cost, net
 
424,420

 
—

 
—

 
—

 
424,420

Residential loans at fair value
 
—

 
301,435

 
—

 
—

 
301,435

Receivables, net
 
—

 
5,608

 
—

 
216

 
5,824

Servicer and protective advances, net
 
—

 
—

 
446,799

 
—

 
446,799

Other assets
 
9,924

 
1,072

 
1,301

 
27,540

 
39,837

Total assets
 
$
447,031

 
$
316,135

 
$
471,769


$
27,756

 
$
1,262,691

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Payables and accrued liabilities
 
$
2,178

 
$
—

 
$
908

 
$
—

 
$
3,086

Servicing advance liabilities (1)
 
—

 
—

 
444,563

 
—

 
444,563

Mortgage-backed debt
 
387,200

 
348,682

 
—

 
—

 
735,882

Total liabilities
 
$
389,378

 
$
348,682

 
$
445,471

 
$
—

 
$
1,183,531

__________
(1)
The notes outstanding under Servicer and Protective Advance Financing Facilities were acquired by a subsidiary during the fourth quarter of 2017, primarily with proceeds from the WIMC Securities Master Repurchase Agreement. These notes are therefore eliminated upon consolidation at December 31, 2017.
The assets of the consolidated VIEs are pledged as collateral to the servicing advance liabilities, mortgage-backed debt, revolving credit facilities and variable funding notes and are not available to satisfy claims of general creditors of the Company. The mortgage-backed debt issued by each consolidated securitization trust is to be satisfied solely from the proceeds of the residential loans and other collateral held in the trusts, while the servicing advance liabilities related to the trusts are to be satisfied from the recoveries or repayments from the underlying advances and the variable funding notes related to the Reverse Loan Buyout VIE, which are included in warehouse borrowings, are to be satisfied from proceeds received on the underlying assets. The consolidated VIEs are not cross-collateralized and the holders of the mortgage-backed debt issued by the trusts and lenders under the Servicer and Protective Advance Financing Facilities and Reverse Loan Buyout VIE do not have recourse to the Company. Refer to Note 21 for additional information regarding the mortgage-backed debt, Note 18 for additional information regarding servicing advance liabilities and Note 19 for additional information regarding warehouse borrowings.
Prior to the adoption of fresh start accounting effective February 10, 2018, the Company accounted for the residential loans and mortgage-backed debt of the Residual Trusts at amortized cost. During the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, the Residual Trusts recognized interest income earned on the residential loans and interest expense incurred on the mortgage-backed debt in interest income on loans and interest expense, respectively, on the consolidated statements of comprehensive income (loss). Additionally, the Company recorded a provision for its estimate of probable incurred credit losses associated with the residential loans as provision for loan losses, which was included in other expenses, net on the consolidated statements of comprehensive income (loss). Interest receipts on residential loans and interest payments on mortgage-backed debt were included in operating activities, while principal payments on residential loans were included in investing activities and payments on mortgage-backed debt are included in financing activities on the consolidated statements of cash flows.
In connection with the adoption of fresh start accounting effective February 10, 2018, the Company changed its method of accounting for the residential loans and mortgage-backed debt of the Residual Trusts from amortized cost to fair value.

F-30


The change in fair value of the assets and liabilities of the Residual Trusts subsequent to February 10, 2018 and the change in fair value of the assets and liabilities of the Non-Residual Trusts are included in other net fair value gains (losses) on the consolidated statements of comprehensive income (loss). Included in other net fair value gains (losses) is the interest income that is expected to be collected on the residential loans, the interest expense that is expected to be paid on the mortgage-backed debt, and the accretion of fair value. The non-cash component of other net fair value gains (losses) is recognized as an adjustment in reconciling net income or loss to net cash provided by or used in operating activities on the consolidated statements of cash flows. Principal payments on residential loans, draws on receivables, proceeds received from the exercise of mandatory call obligations and the cash outflow from the deconsolidation of the Non-Residual Trusts subsequent to the exercise of mandatory call obligations are included in investing activities while payments on mortgage-backed debt are included in financing activities on the consolidated statements of cash flows.
Interest expense associated with the Servicer and Protective Advance Financing Facilities is included in interest expense on the consolidated statements of comprehensive income (loss). Changes in servicer and protective advances are included in operating activities while the issuances of and payments on servicing advance liabilities are included in financing activities on the consolidated statements of cash flows.
The change in fair value of the residential loans of the Revolving Credit Facilities-Related VIEs and of the Reverse Loan Buyout VIE are included in net fair value gains on reverse loans and related HMBS obligations on the consolidated statements of comprehensive income (loss). Declines in the value of real estate owned are recorded as adjustments to the carrying amount through a valuation allowance and are recorded in other expenses, net on the consolidated statements of comprehensive income (loss). Interest expense associated with the variable funding notes relating to the Reverse Loan Buyout VIE is included in interest expense on the consolidated statements of comprehensive income (loss).
Unconsolidated Variable Interest Entities
The Company has variable interests in VIEs that it does not consolidate as it has determined that it is not the primary beneficiary of the VIEs.
Other Servicing Arrangements
The Company is involved with other securitization trusts as servicer of the financial assets of the trusts. The Company’s servicing fees are anticipated to absorb more than an insignificant portion of the returns of the trusts and the Company has considered its contract to service the financial assets of the trusts as a variable interest. Typically, the Company’s involvement as servicer allows it to control the activities of the trusts that most significantly impact the economic performance of the trusts; however, based on the nature of the trusts, the obligations to its beneficial interest holders are guaranteed. Further, the Company’s involvement as servicer is subject to substantive kick-out rights held by a single party, and there are no significant barriers to the exercise of those kick-out rights. As a result, the Company has determined that it is not the primary beneficiary of those trusts and those trusts are not consolidated on the Company’s consolidated balance sheets. The termination of the Company as servicer to the financial assets of the trusts would eliminate any future servicing revenues and related cash flows associated with the underlying financial assets held by the trusts.
The maximum exposure to loss for VIEs, which is equal to the carrying value of assets recognized on the consolidated balance sheets, is immaterial as of December 31, 2018 and 2017.
6. 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. The Company sells conventional-conforming and government-backed mortgage loans through GSE and agency-sponsored programs. The Company also sells non-conforming mortgage loans to private investors. The Company accounts for these transfers as sales. If the servicing rights are retained upon sale, the Company receives a fee for servicing the sold loans, which represents continuing involvement. During the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, 57%, 54% and 41%, respectively, of all mortgage loans sold by the Company were pooled into mortgage-backed securities guaranteed by Ginnie Mae, 28%, 39% and 50%, respectively, were purchased by Fannie Mae, and the remaining 15%, 7% and 9%, respectively, were primarily sold to Freddie Mac.
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 material breach of contractual representations and warranties. Refer to Note 29 for further information.

F-31


The following table presents the carrying amounts of the Company’s net assets that relate to its continued 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
 
Servicer and
Protective
Advances, Net
 
Payables and Accrued Liabilities
 
Total
 
Successor
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
$
323,335

 
$
25,449

 
$
—

 
$
348,784

 
$
28,461,158

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Predecessor
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
$
385,744

 
$
30,762

 
$
(32
)
 
$
416,474

 
$
36,274,449

At December 31, 2018 and 2017, 3.0% and 2.9%, 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):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Cash proceeds received from sales, net of fees
 
$
11,389,421

 
 
$
1,415,435

 
$
16,863,357

Servicing fees collected (1)
 
96,019

 
 
13,884

 
121,064

Repurchases of previously sold loans (2)
 
123,641

 
 
14,948

 
95,950

__________
(1)
Represents servicing fees collected on all loans sold whereby the Company has continued involvement with mortgage loans that have been sold with servicing rights retained.
(2)
Includes Ginnie Mae buyout loans of $113.6 million, $14.2 million and $84.2 million for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively.
In connection with these sales, the Company recorded servicing rights using a fair value model that utilizes Level 3 unobservable inputs or using an agreed upon sales price considered to be Level 2 within the fair value hierarchy. Refer to Note 13 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 were pooled and securitized into HMBS that the Company sold into the secondary market with servicing rights retained. Effective January 2017, the Company exited the reverse mortgage originations business. The Company no longer has any reverse loans remaining in its originations pipeline and has finalized the shutdown of the reverse mortgage originations business. The Company continues to fund undrawn Tails available to borrowers.
Based upon the structure of the Ginnie Mae securitization program, the Company 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 December 31, 2018, 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 $6.8 billion and $7.1 billion, respectively.

F-32


7. 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. The Company transferred $14.6 million and $34.8 million in servicing rights carried at fair value from Level 3 to Level 2 during the period from February 10, 2018 through December 31, 2018 and the year ended December 31, 2017, respectively, as there was direct observable input in a non-active market available to measure these assets.

F-33


Items Measured at Fair Value on a Recurring Basis
The following table summarizes the assets and liabilities in each level of the fair value hierarchy (in thousands). There were an insignificant amount of assets or liabilities measured at fair value on a recurring basis utilizing Level 1 assumptions.
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
December 31, 2017
Level 2
 
 
 
 
 
Assets
 
 
 
 
 
Mortgage loans held for sale
 
$
777,226

 
 
$
588,485

Servicing rights carried at fair value
 
14,565

 
 
—

Freestanding derivative instruments
 
1,770

 
 
2,757

Level 2 assets
 
$
793,561

 
 
$
591,242

Liabilities
 
 
 
 
 
Freestanding derivative instruments
 
$
13,410

 
 
$
981

Servicing rights related liabilities
 
—

 
 
32

Level 2 liabilities
 
$
13,410

 
 
$
1,013

 
 
 
 
 
 
Level 3
 
 
 
 
 
Assets
 
 
 
 
 
Reverse loans
 
$
8,202,775

 
 
$
9,789,444

Mortgage loans related to Non-Residual Trusts
 
117,410

 
 
301,435

Mortgage loans related to Residual Trusts and other loans held for investment (1)
 
1,044

 
 
—

Mortgage loans held for sale
 
61

 
 
68

Charged-off loans
 
48,440

 
 
45,800

Receivables related to Non-Residual Trusts
 
1,945

 
 
5,608

Servicing rights carried at fair value
 
548,579

 
 
714,774

Freestanding derivative instruments (IRLCs)
 
16,617

 
 
26,637

Level 3 assets
 
$
8,936,871

 
 
$
10,883,766

Liabilities
 
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
327

 
 
$
269

Mortgage-backed debt related to Non-Residual Trusts
 
131,313

 
 
348,682

HMBS related obligations
 
7,264,821

 
 
9,175,128

Level 3 liabilities
 
$
7,396,461

 
 
$
9,524,079

__________
(1)
In connection with the adoption of fresh start accounting effective February 10, 2018, the Company elected to change its method of accounting for mortgage loans related to Residual Trusts and other loans held for investment as well as mortgage-backed debt related to Residual Trusts from amortized cost to fair value.

F-34


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):
 
Successor
 
For the Period From February 10, 2018 Through December 31, 2018
 
Fair Value
February 10, 2018
 
Total
Gains (Losses)
Included in
Comprehensive
Loss
 
Purchases and Other
 
Sales and other
 
Originations / Issuances
 
Settlements
 
Transfers Out of Level 3
 
Fair Value December 31, 2018
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse loans
$
9,702,263

 
$
202,844

 
$
—

 
$
(210,172
)
 
$
224,001

 
$
(1,716,161
)
 
$
—

 
$
8,202,775

Mortgage loans related to Non-Residual Trusts (1)
299,790

 
15,728

 
—

 
(159,344
)
 
—

 
(38,764
)
 
—

 
117,410

Mortgage loans related to Residual Trusts and other loans held for investment
304,051

 
(830
)
 
—

 
(287,068
)
 
—

 
(15,109
)
 
—

 
1,044

Mortgage loans held for sale
67

 
24

 
—

 
—

 
—

 
(30
)
 
—

 
61

Charged-off loans (2)
50,299

 
32,411

 
—

 
—

 
—

 
(34,270
)
 
—

 
48,440

Receivables related to Non-Residual Trusts
4,730

 
48

 
—

 
—

 
—

 
(2,833
)
 
—

 
1,945

Servicing rights carried at fair value
688,466

 
(96,873
)
 
55

 
(140,434
)
 
111,930

 
—

 
(14,565
)
 
548,579

Freestanding derivative instruments (IRLCs)
24,460

 
(7,786
)
 
—

 
—

 
—

 
(57
)
 
—

 
16,617

Total assets
$
11,074,126

 
$
145,566

 
$
55

 
$
(797,018
)
 
$
335,931

 
$
(1,807,224
)
 
$
(14,565
)
 
$
8,936,871

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freestanding derivative instruments (IRLCs)
$
(3,023
)
 
$
2,696

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(327
)
Mortgage-backed debt related to Non-Residual Trusts
(344,002
)
 
(7,784
)
 
—

 
—

 
—

 
220,473

 
—

 
(131,313
)
Mortgage-backed debt related to Residual Trusts
(390,152
)
 
1,331

 
—

 
356,621

 
—

 
32,200

 
—

 
—

HMBS related obligations
(8,913,052
)
 
(156,011
)
 
—

 
—

 
(251,946
)
 
2,056,188

 
—

 
(7,264,821
)
Total liabilities
$
(9,650,229
)
 
$
(159,768
)
 
$
—

 
$
356,621

 
$
(251,946
)
 
$
2,308,861

 
$
—

 
$
(7,396,461
)
__________
(1)
Sales and other for mortgage loans related to Non-Residual Trusts represents loans transferred to the counterparty under the Clean-up Call Agreement upon the counterparty's exercise of the mandatory clean-up call on the remaining trusts. Refer to Notes 5 and 29 for further information.
(2)
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, of $11.6 million during the period from February 10, 2018 through December 31, 2018.

F-35


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Predecessor
 
For the Period From January 1, 2018 Through February 9, 2018
 
Fair Value
January 1, 2018
 
Total
Gains (Losses)
Included in
Comprehensive Income
 
Purchases and Other
 
Sales
 
Originations / Issuances
 
Settlements
 
Fresh Start Accounting Adjustment
 
Fair Value
February 9, 2018
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse loans
$
9,789,444

 
$
31,476

 
$
—

 
$
—

 
$
33,300

 
$
(151,957
)
 
$
—

 
$
9,702,263

Mortgage loans related to Non-Residual Trusts
301,435

 
5,690

 
—

 
—

 
—

 
(7,335
)
 
—

 
299,790

Mortgage loans related to Residual Trusts and other loans held for investment
—

 
—

 
—

 
—

 
—

 
—

 
304,051

 
304,051

Mortgage loans held for sale
68

 
—

 
—

 
—

 
—

 
(1
)
 
—

 
67

Charged-off loans (1)
45,800

 
8,843

 
—

 
—

 
—

 
(4,344
)
 
—

 
50,299

Receivables related to Non-Residual Trusts
5,608

 
848

 
—

 
—

 
—

 
(1,726
)
 
—

 
4,730

Servicing rights carried at fair value
714,774

 
64,663

 
(7
)
 
(100,399
)
 
9,435

 
—

 
—

 
688,466

Freestanding derivative instruments (IRLCs)
26,637

 
(2,171
)
 
—

 
—

 
—

 
(6
)
 
—

 
24,460

Total assets
$
10,883,766

 
$
109,349

 
$
(7
)
 
$
(100,399
)
 
$
42,735

 
$
(165,369
)
 
$
304,051

 
$
11,074,126

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freestanding derivative instruments (IRLCs)
$
(269
)
 
$
(2,754
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(3,023
)
Mortgage-backed debt related to Non-Residual Trusts
(348,682
)
 
(2,956
)
 
—

 
—

 
—

 
7,636

 
—

 
(344,002
)
Mortgage-backed debt related to Residual Trusts
—

 
—

 
—

 
—

 
—

 
—

 
(390,152
)
 
(390,152
)
HMBS related obligations
(9,175,128
)
 
(20,900
)
 
—

 
—

 
(27,881
)
 
310,857

 
—

 
(8,913,052
)
Total liabilities
$
(9,524,079
)
 
$
(26,610
)
 
$
—

 
$
—

 
$
(27,881
)
 
$
318,493

 
$
(390,152
)
 
$
(9,650,229
)
__________
(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, of $5.7 million during the period from January 1, 2018 through February 9, 2018.

F-36


 
Predecessor
 
For the Year Ended December 31, 2017
 
Fair Value
January 1,
2017
 
Total
Gains (Losses)
Included in
Comprehensive Loss
 
Purchases and Other
 
Sales and Other
 
Originations / Issuances
 
Settlements
 
Transfers Out of Level 3
 
Fair Value
December 31, 2017
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse loans
$
10,742,922

 
$
242,288

 
$
44,769

 
$
—

 
$
337,378

 
$
(1,577,913
)
 
$
—

 
$
9,789,444

Mortgage loans related to Non-Residual Trusts (1)
450,377

 
25,214

 
—

 
(88,842
)
 
—

 
(85,314
)
 
—

 
301,435

Mortgage loans held for sale (1)
—

 
(131
)
 
—

 
1,671

 
—

 
(1,472
)
 
—

 
68

Charged-off loans (2)
46,963

 
39,072

 
—

 
—

 
—

 
(40,235
)
 
—

 
45,800

Receivables related to Non-Residual Trusts
15,033

 
5,224

 
—

 
—

 
—

 
(14,649
)
 
—

 
5,608

Servicing rights carried at fair value (3)
936,423

 
(263,629
)
 
670

 
5,356

 
70,801

 
—

 
(34,847
)
 
714,774

Freestanding derivative instruments (IRLCs)
53,394

 
(26,556
)
 
—

 
—

 
—

 
(201
)
 
—

 
26,637

Total assets
$
12,245,112

 
$
21,482

 
$
45,439

 
$
(81,815
)
 
$
408,179

 
$
(1,719,784
)
 
$
(34,847
)
 
$
10,883,766

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freestanding derivative instruments (IRLCs)
$
(4,193
)
 
$
3,924

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(269
)
Mortgage-backed debt related to Non-Residual Trusts
(514,025
)
 
(26,519
)
 
—

 
—

 
—

 
191,862

 
—

 
(348,682
)
HMBS related obligations
(10,509,449
)
 
(199,869
)
 
—

 
—

 
(464,192
)
 
1,998,382

 
—

 
(9,175,128
)
Total liabilities
$
(11,027,667
)
 
$
(222,464
)
 
$
—

 
$
—

 
$
(464,192
)
 
$
2,190,244

 
$
—

 
$
(9,524,079
)
__________
(1)
During the year ended December 31, 2017, $25.1 million of loans transferred from mortgage loans related to Non-Residual Trusts to mortgage loans held for sale upon exercising mandatory call obligations reflected within "Sales and Other" in the above table. Refer to Note 29 for additional information on the mandatory call obligations. In December 2017, a majority of these loans were sold to NRM for $23.4 million
(2)
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, of $15.8 million during the year ended December 31, 2017.
(3)
Amounts transferred out of Level 3 consisted of servicing rights that were transferred to Level 2 during the third quarter of 2017. These transfers resulted from an agreement with a third-party to sell such servicing rights, which were subsequently sold during the fourth quarter of 2017. In total, the Company sold $117.5 million of servicing rights during the year ended December 31, 2017. Refer to Note 13 for additional information on servicing rights sold during the year.
Refer to Note 3 for the location within the consolidated statements of comprehensive income (loss) of the gains and losses resulting from changes in fair value of assets and liabilities disclosed above. Total gains and losses included 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. Fair value adjustments relating to the adoption of fresh start accounting are discussed in more detail in Note 2.
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.

F-37


Residential loans
•
Reverse loans, mortgage loans related to Non-Residual Trusts, mortgage loans related to Residual Trusts and other loans held for investment, 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 primarily 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. Loans held for sale also includes loans that 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.
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.
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 8 for additional information on freestanding derivative financial instruments.
Mortgage-backed debt related to Non-Residual Trusts and mortgage-backed debt related to 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.

F-38


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.
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
February 9, 2018
 
December 31, 2017
Significant
Unobservable Input
 
Range of Input (1)
 
Weighted
Average of Input (1)
 
 
Range of Input (1)
 
Weighted
Average of Input (1)
 
Range of Input (1)
 
Weighted
Average of Input (1)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average remaining life in years (2)
 
0.0 - 9.4
 
2.8

 
 
0.3 - 10.2
 
3.5
 
0.3 - 10.2
 
3.8

Conditional repayment rate (3)
 
12.71% - 65.89%
 
32.25
%
 
 
12.61% - 71.68%
 
34.43%
 
12.61% - 71.68%
 
30.23
%
Discount rate
 
1.82% - 4.36%
 
3.84
%
 
 
2.79% - 4.17%
 
3.59%
 
3.05% - 4.17%
 
3.60
%
Mortgage loans related to Non-Residual Trusts
 
 
 
 
 
 
 
 
 
 
 
 
 
Conditional prepayment rate (4)
 
2.09% - 2.41%
 
2.23
%
 
 
1.99% - 2.51%
 
2.30%
 
2.08% - 2.53%
 
2.34
%
Conditional default rate (4)
 
1.21% - 4.14%
 
2.06
%
 
 
1.05% - 4.70%
 
2.55%
 
1.01% - 4.97%
 
2.61
%
Loss severity
 
78.97% - 99.96%
 
93.55
%
 
 
96.30% - 100.00%
 
99.79%
 
90.60% - 100.00%
 
99.46
%
Discount rate
 
8.32%
 
8.32
%
 
 
8.32%
 
8.32%
 
8.32%
 
8.32
%
Mortgage loans related to Residual Trusts and other loans held for investment
 
 
 
 
 
 
 
 
 
 
 
 
 
Conditional prepayment rate (4)(5)
 
—
 
—

 
 
2.66% - 3.57%
 
3.06%
 
—
 
—

Conditional default rate (4)(5)
 
—
 
—

 
 
4.13% - 5.32%
 
4.53%
 
—
 
—

Loss severity (5)
 
—
 
—

 
 
27.00% - 30.00%
 
28.25%
 
—
 
—

Discount rate (5)
 
—
 
—

 
 
8.25%
 
8.25%
 
—
 
—

Mortgage loans held for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
Conditional prepayment rate (4)
 
4.81%
 
4.81
%
 
 
4.81%
 
4.81%
 
4.81%
 
4.81
%
Conditional default rate (4)
 
2.46%
 
2.46
%
 
 
2.46%
 
2.46%
 
2.46%
 
2.46
%
Loss severity
 
99.40%
 
99.40
%
 
 
99.40%
 
99.40%
 
99.40%
 
99.40
%
Discount rate
 
9.80%
 
9.80
%
 
 
9.80%
 
9.80%
 
9.80%
 
9.80
%
Charged-off loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Collection rate
 
3.71% - 5.69%
 
3.80
%
 
 
3.42% - 6.05%
 
3.55%
 
2.84% - 4.47%
 
2.92
%
Discount rate
 
28.00%
 
28.00
%
 
 
28.00%
 
28.00%
 
28.00%
 
28.00
%
Receivables related to Non-Residual Trusts
 
 
 
 
 
 
 
 
 
 
 
 
 
Conditional prepayment rate (4)
 
2.42% - 2.57%
 
2.37
%
 
 
2.46% - 3.29%
 
3.02%
 
2.49% - 3.01%
 
2.79
%
Conditional default rate (4)
 
1.41% - 4.14%
 
3.07
%
 
 
1.99% - 5.32%
 
3.50%
 
1.72% - 6.02%
 
3.61
%
Loss severity
 
77.03% - 99.96%
 
94.33
%
 
 
94.86% - 100.00%
 
98.89%
 
88.88% - 100.00%
 
97.71
%
Discount rate
 
0.50%
 
0.50
%
 
 
0.50%
 
0.50%
 
0.50%
 
0.50
%
Servicing rights carried at fair value
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average remaining life in years (2)
 
2.1 - 7.5
 
5.4

 
 
2.4 - 7.5
 
5.9
 
2.4 - 7.1
 
5.6

Discount rate
 
9.63% - 13.11%
 
10.78
%
 
 
9.63% - 14.62%
 
11.70%
 
9.91% - 14.97%
 
11.92
%
Conditional prepayment rate (4)
 
5.12% - 24.87%
 
10.79
%
 
 
6.07% - 27.00%
 
9.70%
 
6.80% - 25.85%
 
11.10
%
Conditional default rate (4)
 
0.03% - 6.42%
 
0.77
%
 
 
0.09% - 10.22%
 
0.90%
 
0.06% - 3.20%
 
0.91
%
Cost to service
 
$62 - $1,260
 
$121
 
 
$62 - $1,260
 
$137
 
$62 - $1,260
 
$136
Interest rate lock commitments
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan funding probability
 
4.20% - 100.00%
 
69.44
%
 
 
1.00% - 100.00%
 
62.49%
 
1.00% - 100.00%
 
62.97
%
Fair value of initial servicing rights multiple (6)
 
0.01 - 6.50
 
3.60

 
 
0.02 - 5.64
 
2.79
 
0.01 - 5.24
 
2.74


F-39


 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
February 9, 2018
 
December 31, 2017
Significant
Unobservable Input
 
Range of Input (1)
 
Weighted
Average of Input (1)
 
 
Range of Input (1)
 
Weighted
Average of Input (1)
 
Range of Input (1)
 
Weighted
Average of Input (1)
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate lock commitments
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan funding probability
 
43.00% - 100.00%
 
88.46
%
 
 
14.19% - 100.00%
 
82.62%
 
33.64% - 100.00%
 
84.76
%
Fair value of initial servicing rights multiple (6)
 
0.50 - 5.90
 
3.60

 
 
0.08 - 5.86
 
3.39
 
0.24 - 4.92
 
3.32

Mortgage-backed debt related to Non-Residual Trusts
 
 
 
 
 
 
 
 
 
 
 
 
 
Conditional prepayment rate (4)
 
2.24% - 2.57%
 
2.37
%
 
 
2.46% - 3.29%
 
3.02%
 
2.49% - 3.01%
 
2.79
%
Conditional default rate (4)
 
1.41% - 4.14%
 
3.07
%
 
 
1.99% - 5.32%
 
3.50%
 
1.72% - 6.02%
 
3.61
%
Loss severity
 
77.03% - 99.96%
 
94.33
%
 
 
94.86% - 100.00%
 
98.89%
 
88.88% - 100.00%
 
97.71
%
Discount rate
 
6.00%
 
6.00
%
 
 
6.00%
 
6.00%
 
6.00%
 
6.00
%
Mortgage-backed debt related to Residual Trusts
 
 
 
 
 
 
 
 
 
 
 
 
 
Conditional prepayment rate (4)(5)
 
—
 
—

 
 
2.66% - 3.57%
 
3.06%
 
—
 
—

Conditional default rate (4)(5)
 
—
 
—

 
 
4.13% - 5.32%
 
4.53%
 
—
 
—

Loss severity (5)
 
—
 
—

 
 
27.00% - 30.00%
 
28.25%
 
—
 
—

Discount rate (5)
 
—
 
—

 
 
6.00%
 
6.00%
 
—
 
—

HMBS related obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average remaining life in years (2)(7)
 
0.0 - 7.0
 
3.0

 
 
0.3 - 7.7
 
3.2
 
0.4 - 7.8
 
3.7

Conditional repayment rate (3)(7)
 
13.00% - 77.52%
 
34.60
%
 
 
12.90% - 79.57%
 
37.32%
 
12.90% - 86.87%
 
32.07
%
Discount rate (7)
 
1.75% - 4.02%
 
3.64
%
 
 
2.81% - 3.91%
 
3.39%
 
3.02% - 3.98%
 
3.45
%
__________
(1)
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.
(2)
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.
(3)
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.
(4)
Voluntary and involuntary prepayment rates have been presented as conditional prepayment rate and conditional default rate, respectively.
(5)
Significant observable inputs used in the fair value measurement of mortgage loans related to Residual Trusts and other loans held for investment and mortgage-backed debt related to Residual Trusts was omitted at December 31, 2018 as the Residual Trusts were deconsolidated in November 2018 and the remaining loans held for investment are insignificant.
(6)
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.
(7)
The Company has revised the February 9, 2018 disclosed inputs for HMBS related obligations. The total HMBS related obligations balance reported in Note 2 was not impacted by this disclosure revision.
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.

F-40


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):
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
December 31, 2017
 
 
Estimated
Fair Value
 
Unpaid Principal
Balance
 
 
Estimated
Fair Value
 
Unpaid Principal
Balance
Loans at fair value under the fair value option
 
 
 
 
 
 
 
 
 
Reverse loans (1)
 
$
8,202,775

 
$
8,030,431

 
 
$
9,789,444

 
$
9,460,616

Mortgage loans held for sale (1)
 
777,287

 
746,229

 
 
588,553

 
567,492

Mortgage loans related to Non-Residual Trusts
 
117,410

 
130,840

 
 
301,435

 
344,421

Mortgage loans related to Residual Trusts and other loans held for investment (2)
 
1,044

 
1,052

 
 
—

 
—

Charged-off loans
 
48,440

 
2,202,491

 
 
45,800

 
2,333,820

Total
 
$
9,146,956

 
$
11,111,043

 
 
$
10,725,232

 
$
12,706,349

 
 
 
 
 
 
 
 
 
 
Debt instruments at fair value under the fair value option
 
 
 
 
 
 
 
 
 
Mortgage-backed debt related to Non-Residual Trusts
 
$
131,313

 
$
139,064

 
 
$
348,682

 
$
353,262

HMBS related obligations (3)
 
7,264,821

 
6,987,306

 
 
9,175,128

 
8,743,700

Total
 
$
7,396,134

 
$
7,126,370

 
 
$
9,523,810

 
$
9,096,962

__________
(1)
Includes loans that collateralize master repurchase agreements. Refer to Note 19 for additional information.
(2)
In connection with the adoption of fresh start accounting effective February 10, 2018, the Company changed its method of accounting for the residential loans and mortgage-backed debt of the Residual Trusts from amortized cost to fair value.
(3)
For HMBS related obligations, the unpaid principal balance represents the balance outstanding.
Included in mortgage loans related to Non-Residual Trusts are loans that are 90 days or more past due that have a fair value of $1.1 million and a loss severity rate of 89% at December 31, 2018, and no fair value at December 31, 2017 as a result of severity rates being greater than 100%. These loans have an unpaid principal balance of $9.9 million and $22.2 million at December 31, 2018 and 2017, respectively. Mortgage loans held for sale that are 90 days or more past due had an unpaid principal balance of $5.6 million and $10.1 million at December 31, 2018 and 2017, respectively. 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 $75.6 million and $116.6 million at December 31, 2018 and 2017, respectively. In addition, the Company had loans that were in the process of foreclosure of $349.0 million and $489.0 million at December 31, 2018 and 2017, 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 within other assets on the consolidated balance sheets and is measured at net realizable value on a non-recurring basis utilizing significant unobservable inputs or Level 3 assumptions in the valuation.
The following table presents the significant unobservable input used in the fair value measurement of real estate owned, net:
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
February 9, 2018
 
December 31, 2017
Significant
Unobservable Input
 
Range of Input
 
Weighted
Average of Input
 
 
Range of Input
 
Weighted
Average of Input
 
Range of Input
 
Weighted
Average of Input
Real estate owned, net
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss severity (1)
 
0.00% - 49.70%
 
4.99
%
 
 
0.00% - 68.66%
 
7.54%
 
0.00% - 78.76%
 
6.16
%
__________
(1)
Loss severity is based on the unpaid principal balance of the related loan at the time of foreclosure.

F-41


The Company held real estate owned, net in the Reverse Mortgage and Servicing segments and the Corporate and Other non-reportable segment of $67.3 million, $7.8 million and $0.5 million, respectively, at December 31, 2018 and $101.8 million, $13.7 million and $1.1 million, respectively, at December 31, 2017. At December 31, 2018, concentrations of properties (represented by 5% or more of real estate owned) were located in Texas, Alabama, Illinois, Maryland, and Pennsylvania. 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.
Real estate owned expenses, net, which are recorded in other expenses, net on the consolidated statements of comprehensive income (loss) were $(38.6) million, less than $0.1 million and $7.4 million for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively. Included in real estate owned expenses, net are lower of cost or fair value adjustments of $3.9 million, $0.7 million and $5.3 million for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively. In addition, real estate owned expenses, net includes a gain of $37.3 million for the period from February 10, 2018 through December 31, 2018, relating to the reversal of deferred income as a result of the sale and deconsolidation of the Residual Trusts which is discussed in further detail in Note 5.
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.
 
 
 
 
Successor
 
 
Predecessor
 
 
 
 
December 31, 2018
 
 
December 31, 2017
 
 
Fair Value
Hierarchy
 
Carrying
Amount
 
Estimated
Fair Value
 
 
Carrying
Amount
 
Estimated
Fair Value
Financial assets
 
 
 
 
 
 
 
 
 
 
 
Residential loans at amortized cost, net (1)(2)
 
Level 3
 
$
7,428

 
$
7,186

 
 
$
443,056

 
$
432,518

Servicer and protective advances, net
 
Level 3
 
440,497

 
438,032

 
 
813,433

 
778,007

 
 
 
 
 
 
 
 
 
 
 
 
Financial liabilities (1)
 
 
 
 
 
 
 
 
 
 
 
Servicing advance liabilities (3)
 
Level 3
 
217,991

 
218,291

 
 
478,838

 
483,462

Corporate debt (4)(5)
 
Level 2
 
1,133,218

 
850,647

 
 
1,994,411

 
1,553,076

Mortgage-backed debt carried at amortized cost (2)
 
Level 3
 
—

 
—

 
 
387,200

 
391,539

__________
(1)
Excludes loans subject to repurchase from Ginnie Mae and the related liability.
(2)
In connection with the adoption of fresh start accounting effective February 10, 2018, the Company changed its method of accounting for the residential loans and mortgage-backed debt of the Residual Trusts from amortized cost to fair value.
(3)
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.
(4)
At December 31, 2017, 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.
(5)
Includes liabilities subject to compromise with a carrying value of $781.1 million and an estimated fair value of $358.8 million at December 31, 2017.
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 and 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.

F-42


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, 2018 Term Loan, Convertible Notes, Senior Notes and Second Lien 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 and 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):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Realized gains (losses) on sales of loans
 
$
(5,602
)
 
 
$
3,582

 
$
171,537

Change in unrealized gains (losses) on loans held for sale
 
7,425

 
 
(9,343
)
 
10,309

Losses on interest rate lock commitments
 
(5,089
)
 
 
(4,926
)
 
(22,632
)
Gains (losses) on forward sales commitments
 
(22,948
)
 
 
24,570

 
(31,662
)
Gains (losses) on MBS purchase commitments
 
13,807

 
 
(872
)
 
(2,749
)
Capitalized servicing rights
 
155,989

 
 
13,227

 
132,581

Provision for repurchases
 
(5,522
)
 
 
(729
)
 
(6,991
)
Interest income
 
23,790

 
 
2,298

 
34,126

Other
 
(140
)
 
 
156

 
(128
)
Net gains on sales of loans
 
$
161,710



$
27,963

 
$
284,391

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):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Interest income on reverse loans
 
$
379,215

 
 
$
47,116

 
$
450,628

Change in fair value of reverse loans
 
(176,371
)
 
 
(15,640
)
 
(208,340
)
Net fair value gains on reverse loans
 
202,844



31,476


242,288

 
 
 
 
 
 
 
 
Interest expense on HMBS related obligations (1)
 
(310,721
)
 
 
(40,427
)
 
(398,241
)
Change in fair value of HMBS related obligations
 
154,710

 
 
19,527

 
198,372

Net fair value losses on HMBS related obligations
 
(156,011
)


(20,900
)

(199,869
)
Net fair value gains on reverse loans and related HMBS obligations
 
$
46,833



$
10,576


$
42,419

__________
(1)
Excludes interest expense related to the warehouse facilities used to fund Ginnie Mae buyouts.

F-43


8. 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):
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
December 31, 2017
 
 
Notional/
Contractual
Amount
 
Fair Value
 
 
Notional/
Contractual
Amount
 
Fair Value
 
 
 
Derivative
Assets
 
Derivative
Liabilities
 
 
 
Derivative
Assets
 
Derivative
Liabilities
Interest rate lock commitments
 
$
1,303,501

 
$
16,617

 
$
327

 
 
$
1,509,712

 
$
26,637

 
$
269

Forward sales commitments
 
2,300,606

 
388

 
13,359

 
 
1,724,500

 
2,224

 
903

MBS purchase commitments
 
677,500

 
1,382

 
51

 
 
298,000

 
533

 
78

Total derivative instruments
 
 
 
$
18,387

 
$
13,737

 
 
 
 
$
29,394

 
$
1,250

Cash margin
 
 
 
$
12,087

 
$
—

 
 
 
 
$
—

 
$
1,533

Derivative positions subject to netting arrangements include all forward sales commitments, MBS purchase commitments and cash margin, as reflected in the table above, and allow the Company to net settle asset and liability positions, as well as associated cash margin, with the same counterparty. After consideration of these netting arrangements and offsetting positions by counterparties, the total net settlement amount as it relates to these positions were asset positions of $1.3 million and $0.9 million, and liability positions of $1.0 million and $0.6 million, at December 31, 2018 and 2017, respectively.
During the fourth quarter of 2017, the Company terminated the previously disclosed master netting arrangements with two counterparties and entered into a new master netting arrangement associated with an existing master repurchase agreement amended under the WIMC DIP Warehouse Facilities. On February 9, 2018 upon the WIMC Effective Date of the WIMC Prepackaged Plan, the WIMC DIP Warehouse Facilities transitioned into the WIMC Exit Warehouse Facilities, whereupon the master repurchase agreement amended under the WIMC DIP Warehouse Facilities continues to provide financing for the Company's originations business. This new master netting arrangement allows for periodic offsetting of derivative positions and margins of two of the Company's counterparties against amounts associated with the WIMC Exit Warehouse Facilities. The Company had aggregate net derivative liability position with the two counterparties of less than $0.1 million at December 31, 2018 and an aggregate net derivative asset position with the two counterparties of $0.4 million at December 31, 2017. Refer to Note 19 for additional information regarding the WIMC Exit Warehouse Facilities. As discussed further in Note 31, in February 2019, the WIMC Exit Warehouse Facilities were repaid and refinanced or otherwise replaced with the DHCP DIP Warehouse Facilities.
Refer to Note 7 for a summary of the gains and losses on freestanding derivatives.
9. Residential Loans at Amortized Cost, Net
Residential loans at amortized cost, net consist of mortgage loans held for investment. The majority of these residential loans consist of loans subject to repurchase from Ginnie Mae and, at December 31, 2017, loans held in securitization trusts that have been consolidated. Refer to Note 5 for further information regarding VIEs.
Residential loans at amortized cost, net are comprised of the following components (in thousands):
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
December 31, 2017
Unpaid principal balance (1)
 
$
481,050

 
 
$
1,021,172

Unamortized discounts and other cost basis adjustments, net (2)
 
(6,230
)
 
 
(29,371
)
Allowance for loan losses
 
(940
)
 
 
(6,347
)
Residential loans at amortized cost, net (3)
 
$
473,880

 
 
$
985,454

__________
(1)
Includes loans subject to repurchase from Ginnie Mae of $466.5 million and $542.4 million at December 31, 2018 and 2017, respectively.
(2)
Includes $0.1 million and $4.5 million of accrued interest receivable at December 31, 2018 and 2017, respectively.
(3)
Includes $561.0 million of mortgage loans that are not related to consolidated VIEs at December 31, 2017. The balance at December 31, 2018 does not include any mortgage loans related to consolidated VIEs.

F-44


In connection with the adoption of fresh start accounting, the Company elected fair value accounting for its mortgage loans related to the Residual Trusts, which resulted in a reduction to residential loans at amortized cost totaling $317.2 million at February 9, 2018 due to the reclassification of these loans from residential loans at amortized cost, net to residential loans at fair value. In addition, the Company adjusted residential loans carried at amortized cost to fair value. The net carrying value of the loans approximated fair value, and accordingly, the allowance for loan losses for each loan classification was netted against the gross asset amount to arrive at the gross asset balances under fresh start accounting. Refer to Note 2 for additional information regarding fresh start accounting adjustments.
Allowance for Loan Losses
The allowance for loan losses relates only to the unpaid principal balance of loans excluding loans subject to repurchase from Ginnie Mae. The following table summarizes the activity in the allowance for loan losses on residential loans at amortized cost, net (in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Balance at beginning of the period
 
$
681

 
 
$
6,347

 
$
5,167

Adoption of ASC 610
 
—

 
 
(1,538
)
 
—

Fresh start accounting adjustments
 
—

 
 
(4,264
)
 
—

Provision for loan losses (1)
 
69

 
 
238

 
3,643

Charge-offs, net of recoveries (2)
 
190

 
 
(102
)
 
(2,463
)
Balance at end of the period
 
$
940

 
 
$
681

 
$
6,347

__________
(1)
Provision for loan losses is included in other expenses, net on the consolidated statements of comprehensive income (loss).
(2)
Includes charge-offs recognized upon foreclosure of real estate in satisfaction of residential loans of $0.1 million and $1.0 million for the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively.
Aging of Past Due Residential Loans and Credit Risk Profile Based on Delinquencies
Residential loans at amortized cost that are not insured are placed on non-accrual status when any portion of the principal or interest is 90 days past due. When placed on non-accrual status, the related interest receivable is reversed against interest income of the current period. Interest income on non-accrual loans, if received, is recorded using the cash-basis method of accounting. Residential loans are removed from non-accrual status when there is no longer significant uncertainty regarding collection of the principal and the associated interest. If a non-accrual loan is returned to accruing status, the accrued interest existing at the date the residential loan is placed on non-accrual status and interest during the non-accrual period are recorded as interest income as of the date the loan no longer meets the non-accrual criteria. The past due or delinquency status of residential loans is generally determined based on the contractual payment terms. In the case of loans with an approved repayment plan, including plans approved by the Bankruptcy Court, delinquency is based on the modified due date of the loan. Loan balances are charged off when it becomes evident that balances are not collectible.
Factors that are important to managing overall credit quality and minimizing loan losses include sound loan underwriting, monitoring of existing loans, early identification of problem loans and timely resolution of problems. The Company primarily utilizes delinquency status to monitor the credit quality of the portfolio. The Company considers all loans 30 days or more past due to be nonperforming and all loans that are current to be performing with regard to its credit quality profile. The Company had a recorded investment in loans that were 30 days or more past due of $3.6 million and $74.4 million at December 31, 2018 and 2017, respectively.
Concentrations of Credit Risk
Concentrations of credit risk associated with the residential loan portfolio carried at amortized cost are limited due to the large number of customers and their dispersion across many geographic areas. At December 31, 2018, the concentrations of homes securing these loans (represented by 5% or more of unpaid principal balance) were located in Florida, California, Texas, Massachusetts, Arizona and Pennsylvania.

F-45


10. Residential Loans at Fair Value
Residential Loans Held for Investment
Residential loans held for investment and carried at fair value include reverse loans, mortgage loans related to Non-Residual Trusts and charged-off loans. In connection with the adoption of fresh start accounting effective February 10, 2018, the Company elected fair value accounting for its mortgage loans related to the Residual Trusts. The Company's residual interests in the Residual Trusts were subsequently sold in November 2018.
Credit Risk
Concentrations of credit risk associated with the residential loan portfolio carried at fair value and held for investment are limited due to the large number of customers and their dispersion across many geographic areas. At December 31, 2018, the concentrations of homes securing reverse loans and mortgage loans related to Non-Residual Trusts (represented by 5% or more of unpaid principal balance) were located in California, Texas, New York and Florida.
The Company does not currently own residual interests in or provide credit support to the Non-Residual Trusts. This credit risk is considered in the fair value of the related mortgage loans.
HECMs are insured by the FHA. Although performing and nonperforming reverse loans are covered by FHA insurance, the Company may incur expenses and losses in the process of foreclosing on and liquidating these loans that are not reimbursable by FHA in accordance with program guidelines, such as a portion of foreclosure related legal fees and closing costs incurred on the sale of REO.
The charged-off loan portfolio was acquired for a substantial discount to face value and, as a result, exposes the Company to minimal credit risk.
Residential Loans Held for Sale
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 may retain the right to service these loans upon sale either through ownership of servicing rights or through subservicing arrangements. Refer to Note 6 for additional information regarding these sales of residential loans that are held for sale.
A reconciliation of the changes in residential loans held for sale to the amounts presented on the consolidated statements of cash flows is presented in the following table (in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Balance at beginning of the period
 
$
371,282

 
 
$
588,553

 
$
1,176,280

Purchases and originations of loans held for sale
 
11,821,103

 
 
1,207,155

 
16,128,212

Proceeds from sales of and payments on loans held for sale (1)
 
(11,441,044
)
 
 
(1,421,102
)
 
(16,957,389
)
Realized gains (losses) on sales of loans (2)
 
(5,602
)
 
 
3,582

 
171,537

Change in unrealized gains (losses) on loans held for sale (2)
 
7,425

 
 
(9,343
)
 
10,309

Interest income (2)
 
23,790

 
 
2,298

 
34,126

Loans acquired from Non-Residual Trusts (3)
 
—

 
 
—

 
25,062

Other
 
333

 
 
139

 
416

Balance at end of the period
 
$
777,287

 
 
$
371,282


$
588,553

__________
(1)
Excludes realized gains and losses on freestanding derivatives.
(2)
Amount is a component of net gains on sales of loans on the consolidated statements of comprehensive income (loss). Refer to Note 7 for additional information related to the components of net gains on sales of loans.
(3)
Loans acquired from Non-Residual Trusts upon exercise of mandatory call obligation.

F-46


Credit Risk
The Company is subject to credit risk associated with mortgage loans that it purchases and originates during the period of time prior to the sale of these loans. The Company considers credit risk associated with these loans to be insignificant as it holds the loans for a short period of time, which is, on average, approximately 20 days from the date of borrowing, and the market for these loans continues to be highly liquid. The Company is also subject to credit risk associated with mortgage loans it has repurchased as a result of breaches of representations and warranties during the period of time between repurchase and resale. At December 31, 2018, the Company held $3.8 million in repurchased loans.
11. Receivables, Net
Receivables, net consist of the following (in thousands):
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
December 31, 2017
Servicing fee receivables
 
$
25,158

 
 
$
24,838

Income tax receivables
 
17,639

 
 
17,477

Servicing rights holdback receivable (1)
 
14,050

 
 
31,336

Receivables related to Non-Residual Trusts
 
1,945

 
 
5,608

Other receivables
 
59,611

 
 
49,829

Total receivables
 
118,403

 
 
129,088

Less: Allowance for uncollectible receivables
 
(1,587
)
 
 
(4,744
)
Receivables, net
 
$
116,816

 
 
$
124,344

__________
(1)
Servicing rights holdback receivable relates primarily to sales of MSR to NRM. Refer to Note 4 for further information regarding transactions with NRM.
In connection with the adoption of fresh start accounting at February 9, 2018, the Company adjusted receivables to fair value, which included an adjustment to decrease the servicing rights holdback receivable by $1.7 million. With the exception of the servicing rights holdback receivable, the net carrying value of the receivables approximated fair value. Accordingly, the allowance for uncollectible accounts for each receivable was netted against the gross receivable amount to arrive at the gross receivable balances under fresh start accounting. Refer to Note 2 for additional information regarding fresh start accounting adjustments.
12. Servicer and Protective Advances, Net
Servicer advances consist of principal and interest advances to certain unconsolidated securitization trusts to meet contractual payment requirements to credit owners. Protective advances consist of advances to protect the collateral being serviced by the Company and primarily include payments made for property taxes, insurance and foreclosure costs. Servicer and protective advances, net consist of the following (in thousands):
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
December 31, 2017
Protective advances
 
$
446,556

 
 
$
928,552

Servicer advances
 
35,629

 
 
49,106

Total servicer and protective advances
 
482,185

 
 
977,658

Less: Allowance for uncollectible advances
 
(41,688
)
 
 
(164,225
)
Servicer and protective advances, net
 
$
440,497

 
 
$
813,433

In connection with the adoption of fresh start accounting, the Company recorded adjustments resulting in a decrease to servicer and protective advances totaling $24.4 million at February 9, 2018, as further described in Note 2.

F-47


The following table shows the activity in the allowance for uncollectible advances (in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Balance at beginning of the period
 
$
—

 
 
$
164,225

 
$
146,781

Fresh start accounting adjustments
 
—

 
 
(166,174
)
 
—

Provision for uncollectible advances
 
39,819

 
 
2,674

 
51,612

Charge-offs, net of recoveries
 
1,869

 
 
(725
)
 
(34,168
)
Balance at end of the period
 
$
41,688

 
 
$
—

 
$
164,225

13. Servicing of Residential Loans
The Company services residential loans and real estate owned for itself and on behalf of third-party credit owners. The Company’s total servicing portfolio consists of accounts serviced for others for which servicing rights have been capitalized, accounts subserviced for others, and residential loans and real estate owned carried on the consolidated balance sheets, but excludes charged-off loans managed by the Servicing segment.
Provided below is a summary of the Company’s total servicing portfolio (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
December 31, 2017
 
 
Number
of Accounts
 
Unpaid Principal
Balance
 
 
Number
of Accounts
 
Unpaid Principal
Balance
Third-party credit owners
 
 
 
 
 
 
 
 
 
Capitalized servicing rights
 
648,272

 
$
66,032,203

 
 
854,292

 
$
93,599,077

Capitalized subservicing (1)
 
21,650

 
2,317,501

 
 
29,681

 
3,242,241

Subservicing
 
752,927

 
109,412,032

 
 
712,040

 
99,500,678

Total third-party servicing portfolio
 
1,422,849

 
177,761,736

 
 
1,596,013

 
196,341,996

On-balance sheet residential loans and real estate owned
 
56,318

 
9,476,800

 
 
82,480

 
11,522,817

Total servicing portfolio
 
1,479,167

 
$
187,238,536

 
 
1,678,493

 
$
207,864,813

__________
(1)
Consists of subservicing contracts acquired through business combinations whereby the benefits from the contract are greater than adequate compensation for performing the servicing.
The Company's two largest subservicing customers represented approximately 73% and 16% of the Company's total subservicing portfolio based on unpaid principal balance at December 31, 2018 and approximately 69% and 21% of the Company's total subservicing portfolio based on unpaid principal balance at December 31, 2017.
The Company’s geographic diversification of its third-party servicing portfolio, based on the outstanding unpaid principal balance, is as follows (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
December 31, 2017
 
 
Number
of Accounts
 
Unpaid Principal
Balance
 
Percentage of Total
 
 
Number
of Accounts
 
Unpaid Principal
Balance
 
Percentage of Total
California
 
163,609

 
$
33,363,803

 
18.8
%
 
 
181,126

 
$
35,774,862

 
18.2
%
Florida
 
120,423

 
14,700,373

 
8.3
%
 
 
134,124

 
16,247,905

 
8.3
%
Texas
 
116,621

 
10,754,837

 
6.0
%
 
 
127,442

 
11,378,660

 
5.8
%
Other <5%
 
1,022,196

 
118,942,723

 
66.9
%
 
 
1,153,321

 
132,940,572

 
67.7
%
Total
 
1,422,849

 
$
177,761,736

 
100.0
%
 
 
1,596,013

 
$
196,341,999

 
100.0
%

F-48


Net Servicing Revenue and Fees
The Company earns servicing income from its third-party servicing portfolio. The following table presents the components of net servicing revenue and fees, which includes revenues earned by the Servicing and Reverse Mortgage segments and, beginning in March 2018, the Corporate and Other non-reportable segment (in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Servicing fees
 
$
335,718

 
 
$
52,855

 
$
491,531

Incentive and performance fees
 
42,513

 
 
6,019

 
59,660

Ancillary and other fees (1)
 
65,641

 
 
7,335

 
83,753

Servicing revenue and fees
 
443,872

 
 
66,209


634,944

Change in fair value of servicing rights
 
(97,007
)
 
 
64,663

 
(266,246
)
Amortization of servicing rights (2)(3)
 
(7,531
)
 
 
(2,187
)
 
(21,954
)
Change in fair value of servicing rights related liabilities
 
—

 
 
—

 
(62
)
Net servicing revenue and fees
 
$
339,334

 
 
$
128,685


$
346,682

__________
(1)
Includes late fees of $45.4 million, $5.1 million and $56.8 million for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively.
(2)
Includes amortization of a servicing liability of $7.6 million, $0.6 million and $4.1 million for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively.
(3)
Includes impairment of servicing rights and a servicing liability of $4.9 million, $1.6 million and $16.1 million for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively.
Servicing revenue and fees for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017 included $239.0 million, $33.8 million and $306.9 million, respectively, from servicing Fannie Mae residential loans and $87.6 million, $14.2 million and $96.9 million, respectively, from servicing Ginnie Mae loans. In addition, servicing revenue and fees for the year ended December 31, 2017 included $67.5 million from servicing Freddie Mac loans.
Servicing Rights
Servicing Rights Carried at Amortized Cost
The following table summarizes the activity in the carrying value of servicing rights carried at amortized cost by class (in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From  
February 10, 2018 Through  
December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
 
 
Mortgage Loan
 
Reverse Loan
 
 
Mortgage Loan
 
Reverse Loan
 
Mortgage Loan
 
Reverse Loan
Balance at beginning of the period
 
$
57,148

 
$
4,542

 
 
$
54,466

 
$
4,011

 
$
74,621


$
5,505

Fresh start accounting adjustments
 
—

 
—

 
 
4,221

 
1,211

 
—

 
—

Amortization
 
(9,022
)
 
(1,201
)
 
 
(944
)
 
(148
)
 
(8,423
)
 
(1,494
)
Impairment
 
(3,167
)
 
(346
)
 
 
(595
)
 
(532
)
 
(11,732
)
 
—

Disposals
 
(3,744
)
 
(133
)
 
 
—

 
—

 
—

 
—

Balance at end of the period
 
$
41,215


$
2,862



$
57,148


$
4,542


$
54,466


$
4,011


F-49


Servicing rights accounted for at amortized cost are evaluated for impairment by strata based on their estimated fair values. The risk characteristics used to stratify servicing rights for purposes of measuring impairment are the type of loan products, which consist of manufactured housing loans, first lien residential mortgages and second lien residential mortgages for the mortgage loan class, and reverse mortgages for the reverse loan class. The fair value of servicing rights for the mortgage loan class and the reverse loan class was $51.7 million and $3.1 million, respectively, at December 31, 2018 and $59.7 million and $4.8 million, respectively, at December 31, 2017. Fair value was estimated using the present value of projected cash flows over the estimated period of net servicing income.
The estimation of fair value requires significant judgment and uses key economic inputs and assumptions, which are provided in the table below:
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
February 9, 2018
 
December 31, 2017
 
 
Mortgage Loan
 
Reverse Loan
 
 
Mortgage Loan
 
Reverse Loan
 
Mortgage Loan
 
Reverse Loan
Weighted-average remaining life in years (1)
 
4.1

 
2.7

 
 
4.5

 
2.7

 
4.5

 
2.8

Weighted-average discount rate
 
13.00
%
 
15.00
%
 
 
13.00
%
 
15.00
%
 
13.00
%
 
15.00
%
Conditional prepayment rate (2)
 
5.67
%
 
N/A

 
 
5.34
%
 
N/A

 
5.91
%
 
N/A

Conditional default rate (2)
 
2.75
%
 
N/A

 
 
2.48
%
 
N/A

 
2.45
%
 
N/A

Conditional repayment rate (3)
 
N/A

 
36.66
%
 
 
N/A

 
36.68
%
 
N/A

 
36.01
%
__________
(1)
Represents the remaining weighted-average life of the related unpaid principal balance of the underlying collateral adjusted for assumptions for conditional repayment rate, conditional prepayment rate and conditional default rate, as applicable.
(2)
Voluntary and involuntary prepayment rates have been presented as conditional prepayment rate and conditional default rate, respectively.
(3)
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.
The valuation of servicing rights is affected by the underlying assumptions above. Should the actual performance and timing differ materially from the Company’s projected assumptions, the estimate of fair value of the servicing rights could be materially different.
Servicing Rights Carried at Fair Value
The following table summarizes the activity in servicing rights carried at fair value (in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Balance at beginning of the period
 
$
688,466

 
 
$
714,774

 
$
949,593

Servicing rights capitalized upon sales of loans
 
166,203

 
 
14,493

 
148,227

Sales
 
(194,573
)
 
 
(105,457
)
 
(117,470
)
Purchases
 
143

 
 
—

 
670

Other
 
(88
)
 
 
(7
)
 
—

Change in fair value due to:
 
 
 
 
 
 
 
Changes in valuation inputs or other assumptions (1)
 
2,195

 
 
78,132

 
(134,573
)
Other changes in fair value (2)
 
(99,202
)
 
 
(13,469
)
 
(131,673
)
Total change in fair value
 
(97,007
)
 
 
64,663


(266,246
)
Balance at end of the period
 
$
563,144

 
 
$
688,466


$
714,774

__________
(1)
Represents the change in fair value typically resulting from market-driven changes in interest rates and prepayment speeds.
(2)
Represents the realization of expected cash flows over time.
The fair value of servicing rights accounted for at fair value was estimated using the present value of projected cash flows over the estimated period of net servicing income. The estimation of fair value requires significant judgment and uses key economic inputs and assumptions, which are described in Note 7. Should the actual performance and timing differ materially from the Company's projected assumptions, the estimate of fair value of the servicing rights could be materially different.

F-50


The following table summarizes the hypothetical effect on the fair value of servicing rights carried at fair value using adverse changes of 10% and 20% to the weighted average of the significant assumptions used in valuing these assets (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
December 31, 2017
 
 
 
 
Decline in fair value due to
 
 
 
 
Decline in fair value due to
 
 
Assumption
 
10% adverse change
 
20% adverse change
 
 
Assumption
 
10% adverse change
 
20% adverse change
Weighted-average discount rate
 
10.78
%
 
$
(20,815
)
 
$
(40,169
)
 
 
11.92
%
 
$
(29,892
)
 
$
(57,517
)
Weighted-average conditional prepayment rate
 
10.79
%
 
(19,192
)
 
(36,967
)
 
 
11.10
%
 
(27,261
)
 
(52,551
)
Weighted-average conditional default rate
 
0.77
%
 
(25,609
)
 
(51,343
)
 
 
0.91
%
 
(31,610
)
 
(63,832
)
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the fair value of the servicing rights is calculated without changing any other assumption, while in reality changes in one factor may result in changes in another, which may either magnify or counteract the effect of the change.
Fair Value of Originated Servicing Rights
For mortgage loans sold with servicing retained, the Company used the following inputs and assumptions to determine the fair value of servicing rights at the dates of sale. These servicing rights are included in servicing rights capitalized upon sales of loans in the table presented above that summarizes the activity in servicing rights carried at fair value. This table excludes inputs and assumptions related to servicing rights capitalized under the Company's co-issue program with NRM, which are classified as Level 2 within the fair value hierarchy.
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Weighted-average life in years
 
5.4
 
 
6.3
 
6.4
Weighted-average discount rate
 
12.25%
 
 
14.75%
 
14.27%
Weighted-average conditional prepayment rate
 
11.94%
 
 
8.74%
 
9.14%
Weighted-average conditional default rate
 
1.11%
 
 
0.92%
 
0.53%

F-51


14. Goodwill and Intangible Assets, Net
Goodwill and intangible assets of the Predecessor were recorded in connection with various business combinations. Goodwill and intangible assets of the Successor were recorded in connection with fresh start accounting. Refer to Note 2 for further information on fresh start accounting.
Goodwill
The table below sets forth the activity in goodwill, which related entirely to the Originations segment (in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Balance at beginning of the period (1)
 
$
8,960

 
 
$
47,747

 
$
47,747

Fresh start accounting adjustment (2)
 
—

 
 
(38,787
)
 
—

Impairment
 
(8,960
)
 
 
—

 
—

Balance at end of the period (3)
 
$
—

 
 
$
8,960

 
$
47,747

__________
(1)
There were accumulated impairment losses of $470.6 million and $138.8 million relating to the Servicing and Reverse Mortgage segments, respectively, at December 31, 2017. These accumulated impairment losses were reset in connection with the adoption of fresh start accounting.
(2)
In connection with the adoption of fresh start accounting, the Company revalued goodwill to its estimated fair value at February 9, 2018. This resulted in a reduction to goodwill totaling $38.8 million at February 9, 2018 as further discussed in Note 2.
(3)
There were accumulated impairment losses of $9.0 million relating to the Originations segment at December 31, 2018.
The Company completes its annual impairment testing effective October 1st, or more often if indicators are present that it is more likely than not that the goodwill of a reporting unit is impaired. As a result of lower projected financial performance within the Originations reporting unit subsequent to the Company's emergence from bankruptcy, which was driven by certain market factors including increasing mortgage interest rates driving lower originations volume, a flattening of the interest rate curve resulting in margin compression, aggressive pricing by certain competitors and continued challenges in shifting to a purchase money lender, the Company determined that there were indicators present that would require an interim impairment analysis as of March 31, 2018. The Company chose to early adopt the accounting guidance that measures the amount of goodwill impairment as the amount by which the reporting unit's carrying value exceeds its fair value. The carrying value of the Originations reporting unit exceeded its estimated fair value. Accordingly, the Company recorded a goodwill impairment charge of $9.0 million relating to the Originations reporting unit. As a result of this charge, there is no longer any goodwill for the Company.
Intangible Assets, Net
Amortization expense associated with intangible assets was $14.2 million, $0.2 million and $3.2 million for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively.

F-52


Intangible assets, net consist of the following (in thousands):
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
December 31, 2017
 
 
Gross Carrying Amount (1)
 
Accumulated Amortization
 
Accumulated Impairment
 
Net Carrying Amount
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Accumulated Impairment
 
Net Carrying Amount
Institutional and customer relationships
 
$
24,000

 
$
(13,640
)
 
$
—

 
$
10,360

 
 
$
41,041

 
$
(30,793
)
 
$
(6,340
)
 
$
3,908

Trademarks and trade names
 
20,000

 
—

 
(14,700
)
 
5,300

 
 
10,000

 
(4,780
)
 
(395
)
 
4,825

Other
 
650

 
(541
)
 
—

 
109

 
 
—

 
—

 
—

 
—

Total intangible assets
 
$
44,650

 
$
(14,181
)
 
$
(14,700
)
 
$
15,769

 
 
$
51,041

 
$
(35,573
)
 
$
(6,735
)
 
$
8,733

__________
(1)
In connection with the adoption of fresh start accounting, the Company revalued its intangible assets to their estimated fair value at February 9, 2018. This resulted in an increase to intangible assets totaling $35.5 million, which included $20.2 million for institutional and customer relationships and $15.2 million for trade names. Refer to Note 2 for additional information regarding fresh start accounting adjustments.
Based on the balance of the definite-lived intangible assets, net at December 31, 2018, the following is an estimate of amortization expense for each of the next five years and thereafter (in thousands):
 
 
Amortization Expense 
2019
 
$
8,076

2020
 
3,121

2021
 
850

2022
 
542

2023
 
530

Thereafter
 
2,650

Total
 
$
15,769

In March 2018, the Company recorded an impairment charge of $1.0 million related to the trade names of the Servicing reporting unit, and in June 2018, the Company recorded an impairment charge of $1.0 million related to the trade names of the Originations reporting unit. The Company tested these intangible assets for recoverability due to changes in facts and circumstances associated with rising mortgage interest rates and lower projected originations business financial performance. Based on the testing results, it was determined that the carrying value of the intangible assets was not fully recoverable and an impairment charge was recorded to the extent that carrying value exceeded estimated fair value.
In December 2018, the Company recorded additional intangible assets impairment of $6.4 million and $6.3 million related to trade names of the Servicing and Originations segments, respectively, as a result of actual and forecasted business declines. The forecasted revenues used in the December 2018 relief-from-royalty method were based on two scenarios, revenue associated with the recapitalization of the Company and revenue associated with the sale of the Company. The recapitalization scenario revenue was calculated by using a probability-weighted average of the revenue associated with the recapitalization of the Company under the proposed terms of the DHCP RSA and revenue extrapolated from the recent actual results as adjusted for known subsequent events, with both scenarios given equal weight. The sale scenario revenue was based on the DHCP RSA revenue reduced in a manner to reflect a sale scenario based on known third-party bids. The trade name fair value was calculated by using a probability-weighted average of the estimated fair value from both the recapitalization and sale scenarios, with equal weight given to each.
Changes in circumstances, existing at the measurement date or at other times in the future, or in the numerous estimates associated with the Company's judgments, assumptions and estimates made in performing the impairment assessments, could result in further impairment charges in the future. The Company will continue to monitor all significant estimates and impairment indicators, and will perform interim impairment reviews as necessary.

F-53


15. Premises and Equipment, Net
Premises and equipment, net consist of the following (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
Useful Life
(in years)
 
 
December 31, 2018
 
 
December 31, 2017
 
Computer software
 
$
74,050

 
 
$
246,271

 
3 - 7
Leasehold improvements and other
 
6,131

 
 
12,699

 
2 - 9
Computer hardware
 
2,154

 
 
33,154

 
3
Furniture and fixtures
 
165

 
 
7,812

 
3
Assets in development
 
1,755

 
 
2,008

 
 
Total premises and equipment
 
84,255

 
 
301,944

 
 
Less: accumulated depreciation and amortization
 
(17,995
)
 
 
(251,731
)
 
 
Premises and equipment, net
 
$
66,260

 
 
$
50,213

 
 
In connection with the adoption of fresh start accounting on February 9, 2018, the Company adjusted premises and equipment to fair value, which included an adjustment to increase computer software by $33.7 million to reflect the fair value of internally developed technology. With the exception of computer software, the net carrying value of the assets approximated fair value. Accordingly, the accumulated depreciation for each asset classification was netted against the gross asset amount to arrive at the gross asset balances under fresh start accounting. Refer to Note 2 for additional information regarding fresh start accounting adjustments.
The Company recorded depreciation and amortization expense for premises and equipment of $18.2 million, $3.6 million and $37.6 million, which includes amortization expense for computer software of $15.2 million, $3.2 million and $31.0 million, for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively. Unamortized computer software costs were $58.8 million and $38.7 million at December 31, 2018 and 2017, respectively.
16. Other Assets
Other assets consist of the following (in thousands):
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
December 31, 2017
Real estate owned, net
 
$
75,567

 
 
$
116,553

Deposits
 
21,191

 
 
2,432

Prepaid expenses
 
20,596

 
 
26,834

Derivative instruments
 
18,387

 
 
29,394

Margin receivable on derivative instruments
 
12,087

 
 
—

Clean-up Call Agreement inducement fee
 
11,022

 
 
29,256

Deferred debt issuance costs
 
3,279

 
 
21,341

Other
 
1,834

 
 
9,785

Total other assets
 
$
163,963

 
 
$
235,595

In connection with the adoption of fresh start accounting, the Company recorded adjustments resulting in an increase to other assets totaling $3.3 million at February 9, 2018, as further described in Note 2.

F-54


17. Payables and Accrued Liabilities
Payables and accrued liabilities consist of the following (in thousands):
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
December 31, 2017
Loans subject to repurchase from Ginnie Mae
 
$
466,452

 
 
$
542,398

Accounts payable and accrued liabilities
 
109,696

 
 
129,731

Curtailment liability
 
99,781

 
 
140,905

Employee-related liabilities
 
45,480

 
 
52,097

Loan repurchase obligation
 
29,360

 
 
31,704

Originations liability
 
28,240

 
 
25,613

Accrued interest payable
 
18,833

 
 
33,322

Derivative instruments
 
13,737

 
 
1,250

Servicing rights and related advance purchases payable
 
12,615

 
 
14,923

Uncertain tax positions
 
3,660

 
 
5,601

Other
 
40,168

 
 
42,756

Subtotal
 
868,022

 
 
1,020,300

Less: Liabilities subject to compromise (1)
 
—

 
 
25,807

Total payables and accrued liabilities
 
$
868,022

 
 
$
994,493

__________
(1)
Liabilities subject to compromise consist of accrued interest related to the Senior Notes and Convertibles Notes. Refer to Note 2 for additional information.
In connection with the adoption of fresh start accounting, the Company recorded adjustments resulting in a reduction to payables and accrued liabilities totaling $7.4 million at February 9, 2018, as further described in Note 2.
Costs Associated with Exit Activities
The Company exited the consumer retail channel of the Originations segment in January 2016 following a decision made during the fourth quarter of 2015. Further, following a decision made in December 2016 and effective January 2017, the Company exited the reverse mortgage originations business, while maintaining its reverse mortgage servicing operations. These actions resulted in costs relating to the termination of certain employees and closing of offices. The actions that were taken in connection with these efforts are collectively referred to as the 2016 and Prior Actions herein.
The Company continued with the transformation of the business during 2017 in an effort to optimize the workforce, processes and functional locations of its businesses as it seeks to achieve sustainable growth. Accordingly, the Company incurred costs, including severance and related costs, office closures, which included the Irving, TX location, and other costs in connection with its transformation efforts during 2017. The actions that were taken in connection with these efforts are collectively referred to as the 2017 Actions herein.
During 2018, the Company continued to optimize its operations, which included consideration of further site consolidations, process improvements and workforce rationalization. Accordingly, the Company incurred costs, including severance and related costs, office closures, and other costs during 2018. The actions that have been taken in connection with these efforts are collectively referred to as the 2018 Actions herein.
In addition, during 2019, as the Company pursues the DHCP Plan and continues with the prepetition review of strategic alternatives as detailed in Note 31, there may be further severance and related costs, office closures and other costs incurred by the Company. The costs associated with such actions will be included in the exit liability as such time that each action is approved by management.
The costs resulting from the 2016 and Prior Actions, 2017 Actions and 2018 Actions are recorded in salaries and benefits and general and administrative expenses on the Company's consolidated statements of comprehensive income (loss).

F-55


The following table presents the current period activity in the accrued exit liability resulting from each of the 2016 and Prior Actions, 2017 Actions and 2018 Actions described above, which is included in payables and accrued liabilities on the consolidated balance sheets, and the related charges and cash payments and other settlements associated with these actions (in thousands):
 
 
Successor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
2016 and Prior Actions
 
2017 Actions
 
2018 Actions
 
Total
Balance at February 10, 2018
 
$
472

 
$
14,837

 
$
616

 
$
15,925

Charges
 
 
 
 
 
 
 
 
Severance and related costs (1)
 
34

 
(118
)
 
6,940

 
6,856

Office closures and other costs (1)
 
(107
)
 
1,536

 
4,797

 
6,226

Total charges
 
(73
)
 
1,418

 
11,737

 
13,082

Cash payments or other settlements
 
 
 
 
 
 
 
 
Severance and related costs
 
(127
)
 
(1,495
)
 
(5,609
)
 
(7,231
)
Office closures and other costs
 
(242
)
 
(3,525
)
 
(272
)
 
(4,039
)
Total cash payments or other settlements
 
(369
)
 
(5,020
)
 
(5,881
)
 
(11,270
)
Balance at December 31, 2018
 
$
30

 
$
11,235

 
$
6,472

 
$
17,737

 
 
 
 
 
 
 
 
 
Cumulative charges incurred
 
 
 
 
 
 
 
 
Severance and related costs
 
$
26,987

 
$
9,013

 
$
7,567

 
$
43,567

Office closures and other costs
 
10,358

 
14,969

 
4,797

 
30,124

Total cumulative charges incurred
 
$
37,345

 
$
23,982

 
$
12,364

 
$
73,691

 
 
 
 
 
 
 
 
 
Total expected costs to be incurred
 
$
37,345

 
$
23,982

 
$
13,998

 
$
75,325

 
 
 
 
 
 
 
 
 
 
 
Predecessor
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
 
2016 and Prior Actions
 
2017 Actions
 
2018 Actions
 
Total
Balance at January 1, 2018
 
$
540

 
$
15,955

 
$
—

 
$
16,495

Charges
 
 
 
 
 
 
 
 
Severance and related costs (1)
 
(21
)
 
72

 
627

 
678

Office closures and other costs (1)
 
19

 
234

 
—

 
253

Total charges, net
 
(2
)
 
306

 
627

 
931

Cash payments or other settlements
 
 
 
 
 
 
 
 
Severance and related costs
 
—

 
(948
)
 
(11
)
 
(959
)
Office closures and other costs
 
(66
)
 
(476
)
 
—

 
(542
)
Total cash payments or other settlements
 
(66
)
 
(1,424
)
 
(11
)
 
(1,501
)
Balance at February 9, 2018
 
$
472

 
$
14,837

 
$
616

 
$
15,925

__________
(1)
Includes adjustments to prior year accruals resulting from changes to previous estimates.

F-56


The following table presents the current period activity for each of the 2016 and Prior Actions, 2017 Actions, and 2018 Actions described above by reportable segment (in thousands):
 
 
Successor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
Servicing
 
Originations
 
Reverse
Mortgage
 
Corporate and Other
 
Total
Consolidated
Balance at February 10, 2018
 
 
 
 
 
 
 
 
 
 
2016 and Prior Actions
 
$
289

 
$
68

 
$
18

 
$
97

 
$
472

2017 Actions
 
13,718

 
44

 
387

 
688

 
14,837

2018 Actions
 
527

 
16

 
27

 
46

 
616

Total balance at February 10, 2018
 
14,534

 
128

 
432

 
831

 
15,925

Charges
 
 
 
 
 
 
 
 
 
 
2016 and Prior Actions (1)
 
(66
)
 
(41
)
 
34

 
—

 
(73
)
2017 Actions (1)
 
1,591

 
(8
)
 
(84
)
 
(81
)
 
1,418

2018 Actions
 
3,707

 
5,770

 
472

 
1,788

 
11,737

Total charges, net
 
5,232

 
5,721

 
422

 
1,707

 
13,082

Cash payments or other settlements
 
 
 
 
 
 
 
 
 
 
2016 and Prior Actions
 
(215
)
 
(27
)
 
(30
)
 
(97
)
 
(369
)
2017 Actions
 
(4,109
)
 
(36
)
 
(303
)
 
(572
)
 
(5,020
)
2018 Actions
 
(2,042
)
 
(1,805
)
 
(499
)
 
(1,535
)
 
(5,881
)
Total cash payments or other settlements
 
(6,366
)
 
(1,868
)
 
(832
)
 
(2,204
)
 
(11,270
)
Balance at December 31, 2018
 
 
 
 
 
 
 
 
 
 
2016 and Prior Actions
 
8

 
—

 
22

 
—

 
30

2017 Actions
 
11,200

 
—

 
—

 
35

 
11,235

2018 Actions
 
2,192

 
3,981

 
—

 
299

 
6,472

Total balance at December 31, 2018
 
$
13,400

 
$
3,981

 
$
22

 
$
334

 
$
17,737

 
 
 
 
 
 
 
 
 
 
 
Total cumulative charges incurred
 
 
 
 
 
 
 
 
 
 
2016 and Prior Actions
 
$
18,001

 
$
5,590

 
$
7,175

 
$
6,579

 
$
37,345

2017 Actions
 
19,398

 
895

 
1,222

 
2,467

 
23,982

2018 Actions
 
4,234

 
5,797

 
499

 
1,834

 
12,364

Total cumulative charges incurred
 
$
41,633

 
$
12,282

 
$
8,896

 
$
10,880

 
$
73,691

 
 
 
 
 
 
 
 
 
 
 
Total expected costs to be incurred
 
 
 
 
 
 
 
 
 
 
2016 and Prior Actions
 
$
18,001

 
$
5,590

 
$
7,175

 
$
6,579

 
$
37,345

2017 Actions
 
19,398

 
895

 
1,222

 
2,467

 
23,982

2018 Actions 
 
5,542

 
5,797

 
499

 
2,160

 
13,998

Total expected costs to be incurred
 
$
42,941

 
$
12,282

 
$
8,896

 
$
11,206

 
$
75,325


F-57


 
 
 
 
 
 
 
 
 
 
 
 
 
Predecessor
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
 
Servicing
 
Originations
 
Reverse
Mortgage
 
Corporate and Other
 
Total
Consolidated
Balance at January 1, 2018
 
 
 
 
 
 
 
 
 
 
2016 and Prior Actions (2)
 
$
348

 
$
77

 
$
18

 
$
97

 
$
540

2017 Actions (2)
 
14,317

 
91

 
483

 
1,064

 
15,955

2018 Actions (2)
 
—

 
—

 
—

 
—

 
—

Total balance at January 1, 2018 (2)
 
14,665

 
168

 
501

 
1,161

 
16,495

Charges
 
 
 
 
 
 
 
 
 
 
2016 and Prior Actions (1)
 
(5
)
 
3

 
—

 
—

 
(2
)
2017 Actions (1)
 
289

 
16

 
2

 
(1
)
 
306

2018 Actions
 
527

 
27

 
27

 
46

 
627

Total charges, net
 
811

 
46

 
29

 
45

 
931

Cash payments or other settlements
 
 
 
 
 
 
 
 
 
 
2016 and Prior Actions
 
(54
)
 
(12
)
 
—

 
—

 
(66
)
2017 Actions
 
(888
)
 
(63
)
 
(98
)
 
(375
)
 
(1,424
)
2018 Actions
 
—

 
(11
)
 
—

 
—

 
(11
)
Total cash payments or other settlements
 
(942
)
 
(86
)
 
(98
)
 
(375
)
 
(1,501
)
Balance at February 9, 2018
 
 
 
 
 
 
 
 
 
 
2016 and Prior Actions
 
289

 
68

 
18

 
97

 
472

2017 Actions
 
13,718

 
44

 
387

 
688

 
14,837

2018 Actions
 
527

 
16

 
27

 
46

 
616

Total balance at February 9, 2018
 
$
14,534

 
$
128

 
$
432

 
$
831

 
$
15,925

__________
(1)
Includes adjustments to prior year accruals resulting from changes to previous estimates.
(2)
Effective January 1, 2018, the Company no longer allocates corporate overhead to its operating segments. These amounts are now included in the Corporate and Other non-reportable segment. Prior year balances have been restated to conform to current year presentation.
18. Servicing Advance Liabilities
Servicing advance liabilities, which are carried at amortized cost, consist of the following (in thousands):
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
December 31, 2017
Servicing Advance Facilities
 
$
218,291

 
 
$
421,165

Early Advance Reimbursement Agreement
 
—

 
 
62,297

Total servicing advance liabilities
 
$
218,291

 
 
$
483,462

The Company's subsidiaries have servicing advance facilities, which are used to fund certain servicer and protective advances that are the responsibility of the Company under certain servicing agreements. Payments on the amounts due under these agreements are paid from certain proceeds received by the subsidiaries (i) in connection with the liquidation of mortgaged properties, (ii) from repayments received from mortgagors, (iii) from reimbursements received from the owners of the mortgage loans, such as Fannie Mae, Freddie Mac and private label securitization trusts, or (iv) issuance of new notes or other refinancing transactions. Accordingly, repayment of the servicing advance liabilities is dependent on the proceeds that are received on the underlying advances associated with the agreements.

F-58


On February 12, 2018, the WIMC Securities Master Repurchase Agreement, which was part of the WIMC DIP Warehouse Facilities and provided financing for advances during the WIMC Chapter 11 Case, was repaid with proceeds from the issuance of variable funding notes under two new servicing advance facilities, the DAAT Facility and DPAT II Facility. The DAAT Facility and DPAT II Facility acquired the outstanding advances from the GTAAFT Facility and DPAT Facility, respectively, and the variable funding notes under the GTAAFT Facility and DPAT Facility, which had been pledged as collateral under the WIMC Securities Master Repurchase Agreement, were fully redeemed. At December 31, 2018, the DAAT Facility and DPAT II Facility have aggregate capacities of $465.0 million and $85.0 million, respectively. The interest on the variable funding notes issued under the DAAT Facility and DPAT II Facility is based on the lender's applicable index, plus a per annum margin of 2.25%. These facilities, together with the WIMC Ditech Financial Exit Master Repurchase Agreement used to fund originations and the WIMC RMS Exit Master Repurchase Agreement used to finance the repurchases of certain HECMs and real estate owned from Ginnie Mae securitization pools, are subject, collectively, to a combined maximum outstanding amount of $1.9 billion under the WIMC Exit Warehouse Facilities. The facilities had a weighted-average stated interest rate of 5.40% and 4.61% at December 31, 2018 and 2017, respectively.
As discussed further in Note 31, in February 2019, the existing variable funding notes issued under the DAAT Facility and DPAT II Facility were repaid and refinanced with variable funding notes issued in connection with the DHCP DIP Warehouse Facilities. Otherwise, the DAAT Facility and DPAT II Facility remain largely intact to finance advances.
In April 2018, the Company entered into an acknowledgment agreement with Fannie Mae, whereupon the Early Advance Reimbursement Agreement was terminated. The Company fully repaid the outstanding balance on the Early Advance Reimbursement Agreement upon termination, and the advances were pledged as collateral on the DAAT Facility.
In connection with the DAAT Facility and DPAT II Facility, Ditech Financial sells and/or contributes the rights to reimbursement for servicer and protective advances to a depositor entity, which then sells and/or contributes such rights to reimbursement to an issuer entity. Each of the issuer and the depositor entities under these facilities is structured as a bankruptcy remote special purpose entity and is the sole owner of its respective assets. Advances made under the DAAT Facility and DPAT II Facility are held in two separate trusts: the existing DAAT, used to hold GSE advances, and DPAT II, used to hold non-GSE advances. These facilities provide funding for servicer and protective advances made in connection with Ditech Financial's servicing of certain Fannie Mae, Freddie Mac and other mortgage loans, and is non-recourse to the Company.
The original series of variable funding notes issued in connection with the DAAT Facility and DPAT II Facility contain customary events of default and covenants, including financial covenants. Financial covenants most sensitive to the Company's operating results and financial position are the requirements that Ditech Financial maintain minimum tangible net worth, indebtedness to tangible net worth, liquidity and profitability. The indenture supplements of the original series of variable funding notes under the DAAT Facility and DPAT II Facility were amended throughout 2018 to, amongst other things, reduce the minimum liquidity and profitability requirements for certain periods in the remaining term of each agreement. Ditech Financial was not in compliance with the quarterly profitability covenant included in the original indenture supplements of the DAAT Facility and the DPAT II Facility for the quarter ended December 31, 2018. However, on February 14, 2019 the original series of variable funding notes were repaid and refinanced with new series of variable funding notes issued under new indenture supplements in connection with the DHCP DIP Warehouse Facilities, and as such it was not necessary to seek any additional amendment or waivers related to the profitability requirement. Refer to Note 31 for further information on the DHCP DIP Warehouse Facilities.
19. Warehouse Borrowings
The Company's subsidiaries enter into master repurchase agreements with lenders providing warehouse facilities. The warehouse facilities are used to fund the origination and purchase of residential loans, as well as the repurchase of certain HECMs and real estate owned from Ginnie Mae securitization pools. Warehouse borrowings also include non-recourse variable funding notes issued by a subsidiary, which provide secured financing for certain HECMs and real estate owned previously repurchased from Ginnie Mae securitization pools.
On February 9, 2018, upon the WIMC Effective Date of the WIMC Prepackaged Plan, the WIMC DIP Warehouse Facilities, which were provided during the WIMC Chapter 11 Case, transitioned into the WIMC Exit Warehouse Facilities whereupon the WIMC Ditech Financial Exit Master Repurchase Agreement and WIMC RMS Exit Master Repurchase Agreement continued to provide financing for Ditech Financial's origination business and the repurchases of certain HECMs and real estate owned from Ginnie Mae securitization pools for a period of one year. At December 31, 2018, the interest rates on the facilities were based on the lender's applicable index, plus a per annum margin of 2.25% on originated and purchased residential loans and 3.25% on repurchased HECMs and real estate owned. The WIMC Exit Warehouse Facilities provided up to $1.0 billion to finance Ditech Financial's origination business and up to $800.0 million to finance the repurchase of certain HECMs and real estate owned from Ginnie Mae securitization pools. These facilities, together with the DAAT Facility and the DPAT II Facility used to fund advances, were subject, collectively, to a combined maximum outstanding amount of $1.9 billion under the WIMC Exit Warehouse Facilities.

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On April 23, 2018, RMS entered into an additional master repurchase agreement which, as of December 31, 2018, provides up to $412.0 million in total capacity, and a minimum of $400.0 million in committed capacity to fund the repurchase of certain HECMs and real estate owned from Ginnie Mae securitization pools. The interest rate on this facility was based on the applicable index rate plus 3.25%.
As discussed further in Note 31, on February 14, 2019, the WIMC Exit Warehouse Facilities and the additional RMS master repurchase agreement entered into on April 23, 2018 were repaid and refinanced or otherwise replaced with the DHCP DIP Warehouse Facilities.
On October 1, 2018, the Company executed a transaction that provided $230.0 million of additional secured financing for certain HECMs and real estate owned previously repurchased from Ginnie Mae securitization pools. Under the transaction, the participating interests in certain HECMs and real estate owned that the Company had previously repurchased from Ginnie Mae securitization pools, and that were secured by existing warehouse borrowings, were pledged as collateral on variable funding notes issued by a wholly-owned subsidiary under the transaction. Refer to Note 5 for additional information. The variable funding notes are non-recourse, incur interest monthly at a rate of 6.00% per annum, and expire on October 2025. The variable funding notes had outstanding borrowings of $225.4 million at December 31, 2018.
At December 31, 2018, $689.7 million of the outstanding borrowings under the master repurchase agreements were secured by $759.3 million in originated and purchased residential loans and $626.6 million of outstanding borrowings under the master repurchase agreements and the variable funding notes were secured by $957.2 million and $24.5 million in repurchased HECMs and real estate owned, respectively. Refer to Note 5 for additional information regarding the collateral securing the variable funding notes. The facilities had a weighted-average stated interest rate of 5.86% and 5.47% at December 31, 2018 and 2017, respectively.
Borrowings utilized to fund the origination and purchase of residential loans are due upon the earlier of sale or securitization of the loan or within 90 days of borrowing. On average, the Company sells or securitizes these loans approximately 20 days from the date of borrowing. Borrowings under master repurchased agreements utilized to repurchase HECMs and real estate owned are due upon the earlier of receipt of claim proceeds from HUD or receipt of proceeds from liquidation of the related real estate owned. In any event, borrowings associated with certain repurchased HECMs and real estate owned are due within 180 days to 365 days. In accordance with the terms of the agreements, the Company may be required to post cash collateral should the fair value of the pledged assets decrease below certain contractual thresholds. The Company is exposed to counterparty credit risk associated with the repurchase agreements in the event of non-performance by the counterparties. The amount at risk during the term of the repurchase agreement is equal to the difference between the amount borrowed by the Company and the fair value of the pledged assets. The Company mitigates this risk through counterparty monitoring procedures, including monitoring of the counterparties' credit ratings and review of their financial statements.
All of the Company’s master repurchase agreements contain customary events of default and financial covenants. Financial covenants that are most sensitive to the operating results of the Company's subsidiaries and resulting financial position are minimum tangible net worth requirements, indebtedness to tangible net worth ratio requirements, and minimum liquidity and profitability requirements. Each of Ditech Financial's and RMS' master repurchase agreements were further amended throughout 2018 to, amongst other things, reduce the minimum liquidity and, an in the case of Ditech Financial, minimum profitability requirements, for certain periods in the remaining term of the agreement. Ditech Financial was not in compliance with the quarterly profitability covenant included in the WIMC Ditech Financial Exit Master Repurchase Agreement for the quarter ended December 31, 2018; however, on February 14, 2019 this facility, as well as the WIMC RMS Exit Master Repurchase Agreement and the additional RMS master repurchase agreement originally entered into on April 23, 2018, were repaid and refinanced or otherwise replaced with the DHCP DIP Warehouse Facilities, and it was not necessary to seek any additional amendment or waivers related to the profitability requirement. Refer to Note 31 for further information on the DHCP DIP Warehouse Facilities.

F-60


20. Corporate Debt
Corporate debt consists of the following (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
December 31, 2017
 
 
Amortized Cost
 
Weighted- Average Stated Interest Rate (1)
 
 
Amortized Cost
 
Weighted- Average Stated Interest Rate (1)
2018 Term Loan (unpaid principal balance of $961,356 at December 31, 2018)
 
$
933,402

 
8.52
%
 
 
$
—

 
—
%
Second Lien Notes (unpaid principal balance of $253,896 at December 31, 2018)
 
199,816

 
9.00
%
 
 
—

 
—
%
2013 Term Loan (unpaid principal balance of $1,229,590 at December 31, 2017)
 
—

 
—
%
 
 
1,214,663

 
5.31
%
Senior Notes (unpaid principal balance of $538,662 at December 31, 2017)
 
—

 
—
%
 
 
538,662

 
7.875
%
Convertible Notes (unpaid principal balance of $242,468 at December 31, 2017)
 
—

 
—
%
 
 
242,468

 
4.50
%
Subtotal
 
1,133,218

 
 
 
 
1,995,793

 
 
Less: Liabilities subject to compromise (2)
 
—

 
 
 
 
781,130

 
 
Total corporate debt
 
$
1,133,218

 
 
 
 
$
1,214,663

 
 
__________
(1)
Represents the weighted-average stated interest rate, which may be different from the effective rate, which considers the amortization of discounts and issuance costs.
(2)
Liabilities subject to compromise consists of the Senior Notes and Convertibles Notes at December 31, 2017. Refer to Note 2 for additional information.
The effective interest rate on corporate debt was 10.17%, 5.78% and 6.43% for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively.
The following table provides the contractual maturities (by unpaid principal balance) of corporate debt at December 31, 2018 (in thousands):
 
 
Successor
 
 
Corporate Debt
2019
 
$
110,100

2020
 
60,000

2021
 
60,000

2022
 
731,256

Thereafter (1)
 
299,836

Total
 
$
1,261,192

__________
(1)
Amount includes projected PIK Interest on the Second Lien Notes of $45.9 million.
2018 Credit Agreement
On February 9, 2018, the Company entered into the 2018 Credit Agreement, which included a $1.2 billion 2018 Term Loan. The 2018 Credit Agreement amended and restated the Company’s 2013 Credit Agreement and was subsequently amended as described below. The 2013 Revolver and issued letters of credit were terminated upon entry into the 2018 Credit Agreement. The Company's obligations under the 2018 Credit Agreement are guaranteed by substantially all of the Company’s subsidiaries and secured by substantially all of the assets of the Company subject to certain exceptions, the most significant of which are the assets of the consolidated Non-Residual Trusts, the residential loans and real estate owned of the Ginnie Mae securitization pools, and advances of the consolidated financing entities that have been recorded on the Company's consolidated balance sheets. Refer to the Consolidated Variable Interest Entities section of Note 5 for additional information.

F-61


The 2018 Term Loan bears interest at a rate equal to, at the Company's option (i) LIBOR plus 6.00%, subject to a LIBOR floor of 1.00% or (ii) an alternate base rate plus 5.00% (which interest will be payable (a) with respect to any alternate base rate loan, on the last business day of each March, June, September and December, and (b) with respect to any LIBOR loan, on the last day of the interest period applicable to the borrowing of which such loan is a part). The 2018 Term Loan matures on June 30, 2022. The Company made principal payments on the 2013 Term Loan and 2018 Term Loan totaling $157.6 million during the period from February 10, 2018 through December 31, 2018 and $110.6 million during the period from January 1, 2018 through February 9, 2018. The outstanding principal balance on the 2018 Term Loan was $961.4 million at December 31, 2018. The Company recorded a loss on extinguishment of debt of $4.5 million during the period from February 10, 2018 through December 31, 2018 and $0.9 million during the period from January 1, 2018 through February 9, 2018, due to the write-off of deferred fees and discount on the term loans. The Company is required to make quarterly payments on the 2018 Term Loan in the amounts listed below (in thousands):
 
 
Successor
Repayment Date
 
Principal Amount 
March 2019 (1)
 
$
10,000

June 2019
 
26,700

September 2019
 
36,700

December 2019
 
36,700

each March, June, September and December thereafter
 
15,000

__________
(1)
As a result of the DHCP Chapter 11 Cases discussed further in Note 31, the Company did not make the quarterly principal payment for March 2019.
In addition to the quarterly installments detailed above, mandatory repayment obligations under the 2018 Credit Agreement include, subject to exceptions, (i) 100% of the net sale proceeds from the sale or other disposition of certain non-core assets of the Company and of certain of the Company’s subsidiaries, (ii) 80% of the net sale proceeds of certain non-ordinary course asset sales and dispositions of certain bulk MSR, (iii) 100% of the net cash proceeds from the issuance of certain indebtedness and (iv) beginning with the fiscal year ending December 31, 2018, 50% of the Company’s excess cash flow as defined in the agreement. The 2018 Credit Agreement allows the Company to prepay, in whole or in part, the Company’s borrowings outstanding thereunder, together with any accrued and unpaid interest, with prior notice and subject to the prepayment premium described below and breakage or redeployment costs.
The 2018 Credit Agreement contains affirmative and negative covenants and representations and warranties customary for financings of this type, including restrictions on liens, dispositions of assets, fundamental changes, dividends, the ability to incur additional indebtedness, investments, transactions with affiliates, modifications of certain agreements, certain restrictions on subsidiaries, issuance of certain equity interests, changes in lines of business, creation of additional subsidiaries and prepayments of other indebtedness, in each case subject to customary exceptions. The 2018 Credit Agreement permits the incurrence of an additional incremental letter of credit facility in an aggregate principal amount at any time outstanding not to exceed $30.0 million. The 2018 Credit Agreement also contains financial covenants requiring compliance with certain asset coverage ratios and, commencing in 2020 as described below, an interest expense coverage ratio and a first lien net leverage ratio.
On March 29, 2018, the Company entered into an amendment to the 2018 Credit Agreement to (i) waive the Company’s compliance with the interest expense coverage ratio covenant and the first lien net leverage ratio covenant until the test period ending March 31, 2020, (ii) require the Company to make additional principal payments from March 29, 2018 to December 31, 2018 in an aggregate amount equal to $30.0 million, which the Company satisfied during the second quarter of 2018, (iii) provide for a one percent prepayment premium in connection with prepayments of the term loans made during the first 18 months after entering into the amendment (for all prepayments of principal other than mandatory amortization payments and the payments described in the foregoing clause (ii)), and (iv) increase the minimum requirement for Asset Coverage Ratio A for all test periods ending on March 31, 2018 through December 31, 2018.
On February 8, 2019, the Company entered into the DHCP RSA with the Consenting Term Lenders holding, as of February 11, 2019, more than 75% of the Term Loans outstanding under the 2018 Credit Agreement. Refer to Note 31 for further information.

F-62


Second Lien Notes
On February 9, 2018, pursuant to the terms of the WIMC Prepackaged Plan, the Company issued $250.0 million aggregate principal amount of Second Lien Notes to each holder of a Senior Notes claim on a pro rata basis. The Second Lien Notes pay interest in arrears semi-annually on June 15 and December 15, commencing on June 15, 2018, at a rate of 9.00% per year, and mature December 31, 2024. The Second Lien Notes require payment of interest in cash, except that interest on up to $50.0 million principal amount, at the election of the Company, may be paid by increasing the principal amount of the outstanding notes or by issuing additional notes. The terms of the 2018 Credit Agreement require that the Company exercise such election. The Second Lien Notes are secured on a second-priority basis by substantially all of the Company's assets and are guaranteed by substantially all of the Company's subsidiaries. The Second Lien Notes and the guarantees thereof are subordinated to the prior payment in full of the 2018 Credit Agreement and certain other senior indebtedness (as defined and to the extent set forth in the Second Lien Notes Indenture).
The Company may redeem all or a portion of the Second Lien Notes prior to December 15, 2020 by paying a specified premium, or at any time on or after December 15, 2020 at applicable redemption prices, in each case, plus accrued and unpaid interest. In addition, on or before December 15, 2020, the Company may redeem up to 35% of the aggregate principal amount of the Second Lien Notes with the net proceeds of certain equity offerings at the redemption price of 109.000% of the principal amount of Second Lien Notes redeemed, plus accrued and unpaid interest. If the Company experiences specific kinds of changes of control, the Company must offer to repurchase the Second Lien Notes at 101% of their principal amount, plus accrued and unpaid interest. In addition, if the Second Lien Notes would otherwise constitute “applicable high-yield discount obligations,” at the end of each accrual period ending on or after February 9, 2023, the Company will be required to redeem a portion of the Second Lien Notes. The Second Lien Notes Indenture limits the Company's ability to, among other things, pay dividends and make distributions or repurchase stock; make certain investments; incur additional debt; sell assets; enter into certain transactions with affiliates; create or incur liens; materially change its lines of business; and merge or consolidate or transfer or sell all or substantially all of its assets. The Second Lien Notes Indenture contains certain customary events of default, including the failure to make timely payments on the Second Lien Notes, failure to satisfy certain covenants and specified events of bankruptcy and insolvency.
The Company's Board of Directors elected not to make the approximately $9.0 million cash interest payment due and payable on December 17, 2018 with respect to the Second Lien Notes. The Company had sufficient liquidity on December 17, 2018 to make the interest payment. However, the Board of Directors elected not to make the interest payment as active discussions continued with certain of the Company’s creditors and other parties in interest regarding the Company’s previously announced evaluation of strategic alternatives. Under the Second Lien Notes Indenture, the Company had a 30-day grace period to make the interest payment before such non-payment triggered an event of default under the Second Lien Notes Indenture. The Company’s failure to make the interest payment within 30 days after it was due and payable resulted in an event of default under the Second Lien Notes Indenture effective January 16, 2019. An event of default under the Second Lien Notes Indenture also constitutes an event of default under the 2018 Credit Agreement and certain of the Company's warehouse facility agreements. Refer to Note 31 for further information.
Pre-Emergence from WIMC Reorganization Proceedings
2013 Credit Agreement
At December 31, 2017, the Company had a 2013 Term Loan in the original principal amount of $1.5 billion and unpaid principal balance amount of $1.2 billion. The Company also had a 2013 Revolver with a maximum availability of $20.0 million at December 31, 2017, and with $19.5 million outstanding in issued LOCs reducing the amount available on the 2013 Revolver, the Company had $0.5 million in available capacity. The Company's obligations under the 2013 Secured Credit Facilities were guaranteed by substantially all of its subsidiaries and secured by substantially all of its assets subject to certain exceptions, the most significant of which were the assets of the consolidated Residual and Non-Residual Trusts, the residential loans and real estate owned of the Ginnie Mae securitization pools, and advances of the consolidated financing entities that were recorded on the consolidated balance sheets.
The 2013 Term Loan paid interest quarterly commencing in the first quarter of 2014, at a rate of 1-month LIBOR plus 3.75% per annum, subject to a LIBOR floor of 1.00%. The 2013 Term Loan was scheduled to mature on December 18, 2020, at which time the remainder of the principal would become due and payable in full. The commitment fee on the unused portion of the 2013 Revolver was 0.50% per year.
During the year ended December 31, 2017, in accordance with 2013 Credit Agreement and related amendments, as well as the Term Loan RSA and related amendments, the Company made principal payments on the 2013 Term Loan totaling $186.9 million, resulting in a loss on extinguishment of debt of $1.8 million, due to the write-off of deferred financing fees and discount.
During the period from January 1, 2018 through February 9, 2018, in accordance with 2013 Credit Agreement and related amendments, as well as the Term Loan RSA and related amendments, the Company made principal payments on the 2013 Term Loan totaling $73.1 million and in accordance with the 2018 Credit Agreement, upon the WIMC Effective Date, the Company made an additional principal payment totaling $37.5 million.

F-63


On February 9, 2018, as a result of the WIMC Prepackaged Plan, the Company entered into the 2018 Credit Agreement, which amended the terms of the 2013 Credit Agreement. Refer to the 2018 Credit Agreement section above for additional information.
Senior Notes
In December 2013, the Company completed the sale of $575.0 million aggregate principal amount of Senior Notes. The Senior Notes paid interest semi-annually on June 15 and December 15, commencing on June 15, 2014, at a rate of 7.875% per annum, and were scheduled to mature on December 15, 2021. The outstanding principal balance of the Senior Notes was $538.7 million at December 31, 2017. At December 31, 2017, the outstanding balance of Senior Notes and related accrued interest of $19.4 million was included in liabilities subject to compromise on the consolidated balance sheets. On February 9, 2018, upon the WIMC Effective Date of the WIMC Prepackaged Plan, the Senior Notes were canceled and each holder of a Senior Notes claim received its pro rata share of (a) Second Lien Notes and (b) Mandatorily Convertible Preferred Stock. Refer to the 2018 Credit Agreement section above and Note 25 for additional information.
During the fourth quarter of 2017, the remaining unamortized deferred financing fees on the Senior Notes of $7.5 million were written off and included as an expense within reorganization items on the consolidated statements of comprehensive income (loss).
Convertible Notes
In October 2012, the Company closed on a registered underwritten public offering of $290 million aggregate principal amount of Convertible Notes. The Convertible Notes pay interest semi-annually on May 1 and November 1, commencing on May 1, 2013, at a rate of 4.50% per annum, and were scheduled to mature on November 1, 2019. The outstanding principal balance of the Convertible Notes was $242.5 million at December 31, 2017.
At December 31, 2017, the outstanding balance of Convertible Notes and related accrued interest of $6.4 million were included in liabilities subject to compromise on the consolidated balance sheets. On February 9, 2018, upon the WIMC Effective Date of the WIMC Prepackaged Plan, the Convertible Notes were canceled and each holder of a Convertible Notes claim received common stock and warrants. Refer to Note 25 for additional information.
During the year ended December 31, 2017, the Company recorded $21.0 million in interest expense related to its Convertible Notes, which included $10.1 million in amortization of discount. The effective interest rate of the liability component of the Convertible Notes, which includes the amortization of discount and debt issuance costs, was 10.0% for the year ended December 31, 2017.
During the fourth quarter of 2017, the remaining unamortized discount on the Convertible Notes of $24.6 million and remaining unamortized deferred financing fees on the Convertible Notes of $2.3 million were written off and included as an expense within reorganization items on the consolidated statements of comprehensive income (loss).
21. Mortgage-Backed Debt
Mortgage-backed debt consists of debt issued by the Residual and Non-Residual Trusts that have been consolidated by the Company. The mortgage-backed debt of the Residual Trusts was carried at amortized cost at December 31, 2017. In connection with the adoption of fresh start accounting effective February 9, 2018, the Company changed its method of accounting for mortgage-backed debt of the Residual Trusts to fair value. In November 2018, the Company sold its residual interests in the four remaining Residual Trusts and these trusts were deconsolidated. The mortgage-backed debt of the Non-Residual Trusts is carried at fair value.

F-64


Provided in the table below is information regarding the mortgage-backed debt (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
December 31, 2017
 
 
Carrying Value
 
Weighted-Average Stated Interest Rate (1)
 
 
Carrying Value
 
Weighted-Average Stated Interest Rate (1)
Mortgage-backed debt at fair value (unpaid principal balance of $139,064 and $353,262 at December 31, 2018 and 2017, respectively)
 
$
131,313

 
6.56
%
 
 
$
348,682

 
6.26
%
Mortgage-backed debt at amortized cost (unpaid principal balance of $391,208 at December 31, 2017) (2)
 
—

 
—
%
 
 
387,200

 
6.07
%
Total mortgage-backed debt
 
$
131,313

 
6.56
%
 
 
$
735,882

 
6.16
%
__________
(1)
Represents the weighted-average stated interest rate, which may be different from the effective rate, which considers the amortization of discounts and issuance costs.
(2)
During the year ended December 31, 2018, the Company sold its residual interests in the four remaining Residual Trusts that it previously consolidated. Refer to Note 5 for additional information.
In connection with the adoption of fresh start accounting, the Company recorded adjustments resulting in an increase to mortgage-backed debt totaling $6.2 million at February 9, 2018, as further described in Note 2.
Borrower remittances received on the residential loans of the Non-Residual Trusts collateralizing this debt and draws under LOCs issued by a third party and serving as credit enhancements to certain of the Non-Residual Trusts are used to make principal and interest payments due on the mortgage-backed debt. The maturity of the Company's mortgage-backed debt is directly affected by the rate of principal prepayments on the collateral. As a result, the actual maturity of the mortgage-backed debt is likely to occur earlier than the stated maturity. At December 31, 2018, mortgage-backed debt was collateralized by $123.3 million of assets including residential loans, receivables related to the Non-Residual Trusts, real estate owned and restricted cash and cash equivalents. Refer to the Consolidated Variable Interest Entities section of Note 5 for further information.
22. HMBS Related Obligations
The weighted-average stated interest rate on HMBS related obligations was 4.61% and 4.25% at December 31, 2018 and 2017, respectively. At December 31, 2018, the weighted-average remaining life was 3.0 years. The unpaid principal balance and the carrying value of residential loans and real estate owned pledged as collateral to the securitization pools was $6.8 billion and $7.1 billion, respectively, at December 31, 2018.
23. Share-Based Compensation
Effective May 17, 2017, the Company established the 2017 Plan, which permitted the grant of stock options, restricted stock, RSUs, performance shares and other awards to the Company’s officers, employees, non-employee directors and consultants and advisors. The 2017 Plan permitted that the number of authorized shares of common stock reserved for issuance under the plan total 3,650,000 shares.
The 2017 Plan was administered by the Compensation and Human Resources Committee, which is comprised of two or more independent members of the Board of Directors. Under the 2017 Plan, the maximum number of shares that could be granted to any participant other than a non-employee director in any calendar year was 1.5 million shares, and the maximum number of shares that could be paid to any non-employee director in any calendar year was 200,000 shares determined as of the date of payout. The aggregate value of all compensation paid to a non-employee director in any calendar year could not exceed $500,000. Each contractual term of an option granted was fixed by the Compensation Committee, and except for limited circumstances, the term could not exceed ten years from the grant date. Restricted stock, RSUs and performance share awards had a vesting period as defined by the applicable award agreement.
At December 31, 2017, there were 3,018,054 shares underlying the 2017 Plan that were authorized, but not yet granted. On the WIMC Effective Date, all outstanding options and non-vested awards were canceled in connection with the Company's emergence from bankruptcy. Accordingly, the Company was required to recognize the entire amount of any previously unrecognized compensation cost, which totaled $0.4 million at February 9, 2018.

F-65


The Company reserved 3,193,750 shares of the Successor common stock issued on the WIMC Effective Date for issuance under the 2018 Plan. At December 31, 2018, there were 2,034,539 shares underlying the 2018 Plan that were authorized, but not yet granted. The Company issues new shares of stock upon the exercise of stock options and the vesting of restricted stock, RSUs and performance shares. Awards of stock options, restricted stock, and RSUs granted in recent years generally vest over a three or four year period and are based on service. Awards of performance shares granted in recent years generally vest over a three year performance period and are based on service and a market-based or company-based performance condition.
Stock Options
The following table summarizes the activity for stock options granted by the Company:
 
 
Shares
 
Weighted-Average Exercise Price Per Share
 
Weighted-Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value (in $000s)
Predecessor
 
 
 
 
 
 
 
 
Outstanding at January 1, 2017
 
3,906,997

 
$
17.34

 
5.74
 
$
1,809

Forfeited or expired
 
(374,196
)
 
13.03

 
 
 
 
Outstanding at December 31, 2017
 
3,532,801

 
17.79

 
4.63
 
—

Canceled (1)
 
(3,532,801
)
 
17.79

 
 
 
 
Outstanding at February 9, 2018
 
—

 
 
 
 
 
 
__________
(1)
On the WIMC Effective Date, all outstanding options were canceled in connection with the Company's emergence from bankruptcy.
There were no options granted during the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017. The total fair value of options that vested during the year ended December 31, 2017 was $0.6 million.
Non-Vested Share Activity
The Company’s non-vested share-based awards consist of RSUs and PSUs. The grant-date fair values of share-based awards granted during the period from February 10, 2018 through December 31, 2018 and the year ended December 31, 2017 were $5.5 million and $1.1 million, respectively. There were no non-vested share-based awards granted during the period from January 1, 2018 through February 9, 2018.

F-66


The following table summarizes the activity for non-vested awards granted by the Company:
 
 
Shares
 
Weighted-Average Grant-Date Fair Value Per Share
 
Weighted-Average Contractual Term (in years)
 
Aggregate Intrinsic Value (in $000s)
Predecessor
 
 
 
 
 
 
 
 
Outstanding at January 1, 2017
 
1,410,210

 
$
16.71

 
4.68
 
$
6,698

Granted 
 
845,422

 
1.28

 
 
 
 
Vested and settled
 
(1,062,068
)
 
4.60

 
 
 
709

Forfeited
 
(198,790
)
 
13.97

 
 
 
 
Canceled (1)
 
(316,175
)
 
34.25

 
 
 
 
Outstanding at December 31, 2017
 
678,599

 
9.07

 
5.42
 
572

Canceled (2)
 
(678,599
)
 
9.07

 
 
 
 
Outstanding at February 9, 2018
 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Successor
 
 
 
 
 
 
 
 
Granted
 
1,184,352

 
4.67

 
 
 
 
Vested and settled
 
(251,632
)
 
5.50

 
 
 
692

Forfeited
 
(130,866
)
 
5.33

 
 
 
 
Outstanding at December 31, 2018
 
801,854

 
4.30

 
9.55
 
80

Non-vested shares expected to vest as of December 31, 2018
 
801,854

 
4.30

 
9.55
 
80

__________
(1)
Consists of the cancellation of performance shares granted in 2014 that vested December 31, 2016; however, no shares were ultimately awarded since the target performance criteria were not met.
(2)
On the WIMC Effective Date, all outstanding non-vested awards were canceled in connection with the Company's emergence from bankruptcy.
The total fair values of shares that vested and settled during the period from February 10, 2018 through December 31, 2018 and the year ended December 31, 2017 were $1.4 million and $4.9 million, respectively. There were no non-vested share-based awards that vested and settled during the period from January 1, 2018 through February 9, 2018.
On May 2, 2018, the Company granted 251,632 immediately vesting RSUs to non-employee directors, which included 37,746 RSUs being accounted for as liability-classified awards in accordance with GAAP and requires them to be marked-to-market each period. The weighted-average grant date fair value of $5.50 for these awards was based on the closing market price of the Company's stock on the grant date. The RSUs granted during the year ended December 31, 2017 include 653,398 immediately vesting RSUs granted to the Company's non-employee directors.
Method and Assumptions Used to Estimate Fair Values of Performance-Share Awards
There were 192,024 performance shares legally granted in 2016 that had not met the grant-date requirements as required by GAAP at December 31, 2016. These performance shares subsequently met the GAAP grant-date requirements during the first quarter of 2017. The fair value of these performance shares was based on the average of the high and low market prices of the Company's common stock on the date of the grant. Subsequently, the Company determined that the performance targets for these performance shares would not be achieved and therefore no related expense was recorded during the year ended December 31, 2017. There were no other performance-share awards granted during the year ended December 31, 2017. There were no shares of common stock issued for the performance shares that vested during the year ended December 31, 2017 as target performance criteria were not met.
During the second quarter of 2018, the Company announced the appointment of Thomas F. Marano as Chief Executive Officer and Ritesh Chaturbedi as Chief Operating Officer. In connection with his appointment as Chief Executive Officer, Mr. Marano received PSUs on July 18, 2018 with the number of shares earned to be determined based upon the average closing price of the Company's stock for the 20 trading days immediately prior to April 18, 2019. The number of shares earned under the applicable award agreement will be determined by the Compensation Committee in accordance with the stock performance ranges detailed within the applicable award agreement up to a maximum number of 500,000 shares. Subject to Mr. Marano's continued service with the Company on each applicable vesting date, fifty percent of the earned shares will vest on April 18, 2019 while the remaining earned shares will vest one year later.

F-67


Mr. Chaturbedi was granted PSUs on July 18, 2018 with the number of shares earned to be determined based upon the average closing price of the Company's stock for the 20 trading days immediately prior to and including December 31, 2020. The number of shares earned under the applicable award agreement will be determined by the Compensation Committee in accordance with the stock performance ranges detailed within the applicable award agreement up to a maximum number of 20,000 shares. Subject to Mr. Chaturbedi's continued service with the Company, fifty percent of the earned shares will vest on December 31, 2020 and the remaining shares will vest one year later.
The Company and Mr. Chaturbedi entered into a termination letter agreement dated January 14, 2019, pursuant to which Mr. Chaturbedi's employment with the Company was terminated on January 11, 2019. In addition, as per the Tier I PSU agreement described above, Mr. Chaturbedi's Tier I PSU awards shall become vested on the termination date and paid out per the performance vesting requirements outlined in the award agreement. Furthermore, the PSUs granted to Mr. Chaturbedi in connection with his employment agreement were canceled per the agreement on his termination date as the awards were out-of-the-money.
Total expected compensation expense for the awards granted to Mr. Marano and Mr. Chaturbedi was calculated using a Monte Carlo valuation technique, which considers the probability of all of the possible outcomes of the performance target.
During July 2018, the Company granted Tier I or Tier II PSUs to certain employees. Tier I awards totaled 315,882 target PSUs and contain a performance condition based on the achievement of liquidity measures in addition to a service component. The Tier II awards totaled 336,636 target PSUs and contain performance conditions based on the achievement of liquidity measures plus individual performance goals in addition to a service component. For the Tier II awards, the liquidity measure accounts for 60% of the target PSUs while the remaining 40% of the target PSUs are attributable to the individual goals metric, subject to the service component. The measurement date for the liquidity and individual performance goals is December 31, 2018, with an ongoing liquidity requirement for the Tier I awards and the liquidity portion of the Tier II awards. The Tier I and Tier II PSUs vest in equal installments on March 15, 2019, March 15, 2020 and March 15, 2021. The number of shares that ultimately vest will be based on the performance percentages, which can range from 0% to 165% of target for the PSUs relating to the liquidity performance metric and 0% to 100% of target for the PSUs relating to the individual performance metric. The weighted-average grant date fair value of both the Tier I and Tier II PSUs of $5.33 was based on the closing market price of the Company's stock on the grant date. Each PSU has one share of Company common stock underlying such PSU.
In connection with the DHCP Bankruptcy Petitions filed by the Company during February 2019, the Company terminated the outstanding Tier 1 and Tier II PSUs prior to the first vesting date of such awards on March 15, 2019. In addition, the Company also anticipates that the remaining outstanding share-based compensation awards will also be terminated in connection the DHCP Bankruptcy Proceedings. Refer to Note 31 for additional information regarding the DHCP Bankruptcy Proceedings.
Share-Based Compensation Expense
Share-based compensation expense recognized by the Company is net of actual forfeitures as well as estimated forfeitures. Share-based compensation expense of $2.5 million, $0.5 million and $2.2 million for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively, is included in salaries and benefits expense on the consolidated statements of comprehensive income (loss). The tax benefit recognized related to share-based compensation expense was $0.5 million, $0.1 million and $0.8 million for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively. For unvested shares, the Company has $2.1 million of total unrecognized compensation cost at December 31, 2018, which is expected to be recognized over a weighted-average period of 1.1 years.
24. Income Taxes
The Company recognized income tax benefit of $2.7 million and $18 thousand for the period from February 10, 2018 through December 31, 2018 and the period from January 1, 2018 through February 9, 2018, respectively, as compared to $3.4 million for the year ended December 31, 2017. Income tax benefit recognized during the period from February 10, 2018 through December 31, 2018 reflects primarily the favorable resolution of certain tax audits during the period. Income tax benefit recognized during the period from January 1, 2018 through February 9, 2018 reflects the tax impact of the Predecessor operations, reorganization adjustments and the fresh start accounting adjustments. The income tax benefit recognized during the year ended December 31, 2017 resulted primarily from adjustments to reduce the valuation allowance due to tax law changes under the Tax Act, offset in part by tax expense related to goodwill and nominal current state tax. Deferred taxes in 2018 and 2017 have been reduced by a valuation allowance due to a determination that it is more likely than not that some or all of the deferred tax assets will not be realized based on the weight of all available evidence. The effective tax rate and tax benefit continue to be low as a result of the Company not recognizing an income tax benefit associated with net losses.

F-68


Under the WIMC Prepackaged Plan, a substantial amount of the Company’s debt was discharged. Absent an exception, a debtor recognizes CODI upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. The amount of CODI recognized by a taxpayer is the adjusted issue price of any indebtedness discharged less the sum of (i) the amount of cash paid, (ii) the issue price of any new indebtedness issued and (iii) the fair market value of any other consideration, including equity, issued.
The Code provides that a debtor whose debt is discharged pursuant to a confirmed Chapter 11 plan does not recognize taxable CODI but must reduce certain of its tax attributes by the amount of the CODI excluded from taxable income. The reduction in the Company's tax attributes for excluded CODI has been estimated in connection with the determination of Company's tax liability for the tax year ending December 31, 2018, and will be finalized upon the Company's preparation and filing of the 2018 tax return.
As provided by Section 382 of the Code and similar state law provisions, utilization of certain tax attributes may be subject to substantial annual limitations due to an ownership change in the Company. Under the rules, statutorily defined ownership changes may limit the amount of tax attributes that can be utilized annually to offset future taxable income and tax. In general, an ownership change, as defined by Section 382 for federal income tax purposes, results from transactions that increase the ownership of statutorily defined 5% stockholders in the stock of a corporation by more than 50% in the aggregate over a testing period, generally three years.
The Company experienced an ownership change in connection with the Company's emergence from the WIMC Chapter 11 Case on February 9, 2018. The Company currently expects to apply the rules under Section 382(l)(5) of the Code and the U.S. Treasury regulations thereunder that would allow the Company to mitigate the limitations imposed under Section 382 with respect to the Company's remaining tax attributes and the Company’s deferred tax assets and liabilities have been computed on such basis. However, the application of such provision remains subject to examination by the IRS. Taxpayers who qualify for this provision may, at their option, elect not to apply it. If such provision does not apply, the Company's ability to realize the value of its tax attributes would be subject to limitation and the amount of its deferred tax assets and liabilities may differ. Also, an ownership change subsequent to the Company's emergence from bankruptcy could severely limit or effectively eliminate its ability to realize the value of its tax attributes.
Income tax benefit consists of the following components (in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Current
 
 
 
 
 
 
 
Federal
 
$
(3,430
)
 
 
$
(112
)
 
$
2,757

State and local
 
(1,647
)
 
 
70

 
(2,315
)
Current income tax expense (benefit)
 
(5,077
)
 
 
(42
)
 
442

Deferred
 
 
 
 
 
 
 
Federal
 
3,193

 
 
83

 
(4,215
)
State and local
 
(767
)
 
 
(59
)
 
416

Deferred income tax expense (benefit)
 
2,426

 
 
24

 
(3,799
)
Total income tax benefit
 
$
(2,651
)
 
 
$
(18
)
 
$
(3,357
)

F-69


Income tax benefit at the Company’s effective tax rate differed from the statutory tax rate as follows (in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Income (loss) before income taxes
 
$
(207,745
)
 
 
$
520,989

 
$
(430,256
)
 
 
 
 
 
 
 
 
Tax provision at statutory tax rate (21% and 35% in 2018 and 2017, respectively)
 
(43,627
)
 
 
109,408

 
(150,590
)
Effect of:
 
 
 
 
 
 
 
Valuation allowance exclusive of Tax Act
 
43,565

 
 
(160,644
)
 
162,496

Section 108 attribute reduction
 
—

 
 
92,343

 
—

Cancellation of debt income exclusion
 
(94
)
 
 
(91,859
)
 
—

State and local income tax
 
(4,904
)
 
 
25,127

 
(26,396
)
Section 382 interest adjustment
 
—

 
 
15,750

 
—

Share-based compensation
 
—

 
 
8,044

 
—

Non-deductible restructuring costs
 
149

 
 
1,978

 
13,475

Federal rate change related to Tax Act
 
—

 
 
—

 
173,405

Valuation allowance related to Tax Act
 
—

 
 
—

 
(180,033
)
Other
 
2,260

 
 
(165
)
 
4,286

Total income tax benefit
 
$
(2,651
)
 
 
$
(18
)
 
$
(3,357
)
The following table summarizes the components of deferred tax assets and liabilities (in thousands):
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
December 31, 2017
Deferred tax assets
 
 
 
 
 
Goodwill
 
$
65,426

 
 
$
66,699

Reverse loans
 
60,776

 
 
48,814

Servicer and protective advances
 
40,497

 
 
37,793

Curtailment liability
 
25,228

 
 
33,724

Net operating losses
 
16,644

 
 
113,315

Disallowed interest expense
 
10,997

 
 
—

Intangible assets
 
8,677

 
 
20,978

Accrued expenses
 
6,310

 
 
8,396

Net investment in residential loans
 
4,772

 
 
—

Accrued legal contingencies and settlements
 
3,388

 
 
6,727

Other
 
31,397

 
 
50,638

Total deferred tax assets
 
274,112

 
 
387,084

Valuation allowance
 
(221,913
)
 
 
(328,661
)
Total deferred tax assets, net of valuation allowance
 
52,199

 
 
58,423

Deferred tax liabilities
 
 
 
 
 
Servicing rights
 
(53,617
)
 
 
(52,587
)
Net investment in residential loans
 
—

 
 
(3,972
)
Other
 
(454
)
 
 
(1,312
)
Total deferred tax liabilities
 
(54,071
)
 
 
(57,871
)
Deferred tax assets (liabilities), net
 
$
(1,872
)
 
 
$
552


F-70


The following table summarizes the activity in the valuation allowance on deferred tax assets (in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Balance at beginning of period
 
$
178,303

 
 
$
328,661

 
$
346,199

Fresh start accounting adjustments
 
—

 
 
(148,091
)
 
—

ASC 610 accounting adjustments
 
45

 
 
10,286

 
—

Charges to income tax expense
 
43,565

 
 
—

 
—

Deductions
 
—

 
 
(12,553
)
 
(17,538
)
Balance at end of period
 
$
221,913

 
 
$
178,303

 
$
328,661

The Company is required to establish a valuation allowance for deferred tax assets and record a charge to income if it is determined, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company’s evaluation focuses on identifying significant, objective evidence that it will more likely than not be able to realize its deferred tax assets in the future. The Company considers both positive and negative evidence when evaluating the need for a valuation allowance, which is highly judgmental and requires subjective weighting of such evidence. The Company had a valuation allowance of $221.9 million and $328.7 million at December 31, 2018 and 2017, respectively.
At December 31, 2018, the Company had gross federal operating loss carryforwards of $24.7 million, of which less than $0.1 million will expire between 2036 and 2038, while the remaining balance does not have an expiration date, and gross state operating loss carryforwards of $14.5 million, resulting in net tax carryforwards of $16.6 million. In addition, at December 31, 2018 the Company had tax credit carryforwards of $0.2 million that have no expiration date.
In December 2017, the Tax Act was signed into law. Among other things, the Tax Act lowered the corporate federal income tax rate to 21% from the prior maximum rate of 35%, effective for tax years that included or commenced January 1, 2018. As a result of the reduction of the corporate federal income tax rate to 21%, GAAP required companies to revalue their deferred tax assets and deferred tax liabilities as of the date of enactment, with the resulting tax effects accounted for in the reporting period of enactment. This revaluation resulted in a provision of $173.4 million to income tax expense in continuing operations and a reduction in the valuation allowance of $180.0 million. The Tax Act provided for changes in the carryforward of NOLs and ability to utilize NOLs to offset future taxable income as well as the elimination of the corporate alternative minimum tax for which changes the Company adjusted its valuation allowance.
The final determination of the Tax Act and the remeasurement of the Company's deferred assets and liabilities was completed as of December 31, 2018 and other than the aforementioned impacts of these tax law changes, there were no material changes needed.
Uncertain Tax Positions
The Company recognizes tax benefits in accordance with the accounting guidance concerning uncertainty in income taxes. This guidance establishes a more-likely-than-not recognition threshold that must be met before a tax benefit can be recognized in the Consolidated Financial Statements.
A reconciliation of the beginning and ending balances of the total liability for unrecognized tax benefits is as follows (in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Balance at the beginning of the period
 
$
3,090

 
 
$
3,088

 
$
5,414

Increases (reductions) related to prior year tax positions
 
(1,287
)
 
 
2

 
(2,766
)
Increases related to current year tax positions
 
—

 
 
—

 
440

Balance at the end of the period
 
$
1,803

 
 
$
3,090

 
$
3,088


F-71


The total amount of unrecognized tax benefits that would affect the effective tax rate if recognized was $1.8 million and $3.1 million at December 31, 2018 and 2017, respectively. For the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, income tax expense (benefit) included $(0.7) million, $19 thousand and $(1.5) million, respectively, for interest and penalties accrued on the liability for unrecognized tax benefits. At December 31, 2018 and 2017, accrued interest and penalties were $1.9 million and $2.5 million, respectively, which are included in payables and accrued liabilities on the consolidated balance sheets.
The Company’s tax years that remain subject to examination by the IRS are 2013 through 2018 and by various states are 2012 through 2018.
25. Equity and Earnings (Loss) Per Share
Preferred Stock
The Predecessor Company had no preferred stock issued or outstanding.
Post-WIMC Bankruptcy Emergence
On the WIMC Effective Date, all shares of the Predecessor common stock were canceled and 4,252,500 shares of the Successor common stock, par value $0.01 per share, were issued to the previous shareholders of common stock and the Convertible Noteholders. The Successor common stock was valued based on its initial trading price of $10.25 per share for a total value of $43.6 million. The Company reserved 3,193,750 shares of common stock for issuance under an equity incentive plan.
On the WIMC Effective Date, the Company issued 100,000 shares of Mandatorily Convertible Preferred Stock initially valued at $123.2 million to the Senior Noteholders, which are mandatorily convertible into 11,497,500 shares of common stock (a conversion multiple of 114.9750) upon the earliest of (i) February 9, 2023, (ii) at any time following one year after the WIMC Effective Date, the time that the volume weighted-average pricing of the common stock exceeds 150% of the conversion price per share of $8.6975, subject to adjustment as described in the Articles of Amendment and Restatement, for at least 45 trading days in a 60 consecutive trading day period, including each of the last 20 days in such 60 consecutive trading day period, and (iii) a change of control transaction in which the consideration paid or payable per share of common stock is greater than or equal to the conversion price per share, which, subject to adjustment as described in the Articles of Amendment and Restatement, is $8.6975.
In the event of a voluntary or involuntary liquidation, winding-up or dissolution of the Company, each holder of Mandatorily Convertible Preferred Stock will be entitled to receive the greater of (i) a liquidation preference per share of Mandatorily Convertible Preferred Stock, prior to any distribution with respect to any other equity security of the Company, equal to the Liquidation Preference, and (ii) the amount payable per share, participating on an “as converted” basis, upon liquidation to the holders of the Successor common stock. The “Liquidation Preference” equals (i) the face amount of the Mandatorily Convertible Preferred Stock, increased by (ii) the amount of interest that would have accumulated on the face amount of the Mandatorily Convertible Preferred Stock up to (but excluding) the date of any liquidation, winding-up or dissolution of the Company, compounding quarterly at a rate of 7% per annum. Thereafter, holders of Mandatorily Convertible Preferred Stock will have no right or claim to the remaining assets, if any, of the Company. The filing of the DHCP Bankruptcy Petitions triggers the liquidation preference of the Mandatory Convertible Preferred Stock. Refer to Note 31 for further information.
Further, on the WIMC Effective Date, the Company issued to the holders of its common stock and Convertible Noteholders, Series A Warrants to purchase up to an aggregate of 7,245,000 shares of common stock at $20.63 per share and Series B Warrants to purchase up to an aggregate of 5,748,750 shares of common stock at $28.25 per share. All unexercised warrants expire and the rights of the warrant holders to purchase shares of common stock terminate on February 9, 2028, at 5:00 p.m., Eastern Standard Time, which is the 10th anniversary of the WIMC Effective Date. The estimated fair values of the Series A Warrants and Series B Warrants on the WIMC Effective Date were determined to be $1.68 and $0.94 per warrant, respectively, and are classified within additional paid-in capital on the consolidated balance sheets. The DHCP RSA contemplates that holders of equity securities of the Company will not receive any recovery on account of such securities, and such securities will be canceled. Refer to Note 31 for further information.

F-72


Termination of Rights Agreement
The Company had previously adopted the Rights Agreement, dated as of June 29, 2015, and subsequently amended and restated on November 11, 2016 and further amended on November 9, 2017 and February 9, 2018, which provided registered holders of common stock of the Predecessor with one preferred stock purchase right per share of common stock, entitling the holder to purchase from the Company one one-thousandth of a fully paid non-assessable share of their junior participating preferred stock. The Rights Agreement provided that if any person or group of persons, excluding certain exempted persons, acquired 4.99% or more of the Company's outstanding common stock or any other interest that would be treated as “stock” for the purposes of Section 382, there would be a triggering event potentially resulting in significant dilution in the voting power and economic ownership of such acquiring person or group. The Rights Agreement was intended to help protect the Company's “built-in tax losses” and certain other tax benefits by acting as a deterrent to any person or group of persons acting in concert from becoming or obtaining the right to become the beneficial owner (including through constructive ownership of securities owned by others) of 4.99% or more of the shares of the Company's common stock.
On the WIMC Effective Date, the Company and Computershare entered into Amendment No. 2 to the Rights Agreement, which accelerated the scheduled expiration date of the Rights (as defined in the Rights Agreement) to the WIMC Effective Date. The Rights issued pursuant to the Rights Agreement, which were also canceled by operation of the WIMC Prepackaged Plan, have expired and are no longer outstanding, and the Rights Agreement has terminated.
In connection with the adoption of the Rights Agreement, the Company filed Articles Supplementary with the State Department of Assessments and Taxation of Maryland, setting forth the rights, powers, and preferences of the Company’s junior participating preferred stock issuable upon exercise of the rights. The cancellation of all existing equity interests by operation of the WIMC Prepackaged Plan included the cancellation of any rights issued under the Rights Agreement. In addition, on the WIMC Effective Date, the Company filed Articles of Amendment with the State Department of Assessments and Taxation of Maryland, which among other things, served to eliminate the Company’s junior participating preferred stock. The Company’s Articles of Amendment and Restatement, adopted on the WIMC Effective Date, include transfer restriction provisions intended to protect the tax benefits described above.
Registration Rights Agreement
On the WIMC Effective Date and pursuant to the WIMC Prepackaged Plan, the Company entered into a Registration Rights Agreement that provided certain registration rights to certain parties (together with any person or entity that becomes a party to the Registration Rights Agreement pursuant to the terms thereof) that received shares of the Company’s common stock, warrants and Mandatorily Convertible Preferred stock on the WIMC Effective Date as provided in the WIMC Prepackaged Plan. The Registration Rights Agreement provides such persons with registration rights for the holders’ registrable securities (as defined in the Registration Rights Agreement).
Pursuant to the Registration Rights Agreement, the Company agreed to file, within 60 days of the receipt of a request by holders of at least 40% of the registrable securities, an initial shelf registration statement covering resales of the registrable securities held by the holders. Subject to limited exceptions, the Company is required to maintain the effectiveness of any such registration statement until the earlier of (i) three years following the WIMC Effective Date and (ii) the date that all registrable securities covered by the shelf registration statement are no longer registrable securities.
In addition, holders with rights under the Registration Rights Agreement beneficially holding 10% or more of the common stock have the right to a Demand Registration to effect the registration of any or all of the registrable securities and/or effectuate the distribution of any or all of their registrable securities by means of an underwritten shelf takedown offering. The Company is not obligated to effect more than three Demand Registrations, and it need not comply with such a request if (i) the aggregate gross proceeds from such a sale will not exceed $25 million, unless the Demand Registration includes all of the then-outstanding registrable securities or (ii) a registration statement shall have previously been declared effective by the SEC within 90 days preceding the date of such request.
Holders with rights under the Registration Rights Agreement also have customary piggyback registration rights, subject to the limitations set forth in the Registration Rights Agreement.
These registration rights are subject to certain conditions and limitations, including the right of the underwriters to limit the number of shares to be included in a registration statement and the Company’s right to delay or withdraw a registration statement under certain circumstances. The Company will generally pay the registration expenses in connection with its obligations under the Registration Rights Agreement, regardless of whether a registration statement is filed or becomes effective. The registration rights granted in the Registration Rights Agreement are subject to customary indemnification and contribution provisions, as well as customary restrictions such as blackout periods.

F-73


Dividends on Common Stock
The decision to declare and pay dividends is made at the discretion of the Company’s Board of Directors and will depend on, among other things, results of operations, cash requirements, financial condition, contractual restrictions and other factors that the Company’s Board of Directors may deem relevant.
Many of the Company’s subsidiaries are subject to restrictions on their ability to pay dividends or otherwise transfer funds to other consolidated subsidiaries and, ultimately, to the Parent Company. These restrictions include, but are not limited to, minimum levels of net worth and other financial requirements imposed by GSEs, Ginnie Mae and other licensing requirements. The aggregate restricted net assets of these subsidiaries was $381.8 million at December 31, 2018; however, the restrictions on the net assets of these subsidiaries do not directly limit the ability to pay dividends from consolidated retained earnings.
In addition, the Company’s ability to pay dividends is limited by conditions set forth in the agreements governing the 2018 Credit Agreement entered into by the Company during February 2018.
Earnings (Loss) Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings (loss) per share computations shown on the consolidated statements of comprehensive income (loss) (in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Numerator for basic and diluted earnings (loss) per share
 
 
 
 
 
 
 
Net income (loss) available to common stockholders (numerator)
 
$
(205,094
)
 
 
$
521,007

 
$
(426,899
)
 
 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
 
Weighted-average common shares outstanding (basic denominator)
 
4,891

 
 
37,374

 
36,761

Effect of dilutive securities:
 
 
 
 
 
 
 
RSUs
 
—

 
 
50

 
—

Weighted-average common shares outstanding (dilutive denominator)
 
4,891

 
 
37,424

 
36,761

The Company’s shares of Mandatorily Convertible Preferred Stock are considered to be participating securities. During periods of net income, the calculation of earnings per share for common stock is adjusted to exclude the income attributable to the participating securities from the numerator and exclude the dilutive impact of those shares from the denominator. During periods of net loss, as was the case for the period from February 10, 2018 through December 31, 2018, no effect is given to the participating securities because they do not share in the losses of the Company.

F-74


For periods in which there is income, certain securities would be antidilutive to the diluted earnings per share calculation. The following table summarizes securities that could potentially dilute earnings per share in the future but have been excluded from the computation of dilutive earnings per share in the periods that the Company has earnings (in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Outstanding share-based compensation awards
 
 
 
 
 
 
 
Stock options (1)
 
—

 
 
3,533

 
3,533

RSUs
 
—

 
 
327

 
327

Performance shares
 
151

 
 
—

 
—

Assumed conversion of Convertible Notes
 
—

 
 
4,932

 
4,932

Outstanding Series A and B Warrants
 
12,994

 
 
—

 
—

__________
(1)
All antidilutive stock options were out-of-the-money at February 9, 2018 and December 31, 2017. There were no stock options granted during the period from February 10, 2018 through December 31, 2018.
The outstanding Series A and B Warrants are antidilutive when calculating earnings per share when the Company's average stock price is less than $20.63 and $28.25, respectively. Upon exercise of warrants, the Company shall either deliver, against payment of the exercise price, a number of shares of common stock equal to the number of warrants exercised, or, if a cashless exercise is elected, the net share settlement amount of common stock equal to number of shares of common stock calculated by dividing the product of the number of shares of common stock underlying the warrants multiplied by the fair market value less the exercise price, by the fair market value.
The Convertible Notes were antidilutive when calculating earnings (loss) per share when the Company's average stock price was less than $58.80. Upon conversion of the Convertible Notes, the Company may have paid or delivered, at its option, cash, shares of the Company’s common stock, or a combination of cash and shares of common stock.
26. Supplemental Disclosures of Cash Flow Information
The Company’s supplemental disclosures of cash flow information are summarized as follows (in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Supplemental Disclosure of Cash Flow Information
 
 
 
 
 
 
 
Cash paid for interest
 
$
198,603

 
 
$
17,734

 
$
212,021

Cash received for taxes
 
(910
)
 
 
(244
)
 
(72,882
)
Supplemental Disclosure of Non-Cash Investing and Financing Activities
 
 
 
 
 
 
 
Servicing rights capitalized upon sales of loans
 
166,203

 
 
14,493

 
148,227

Real estate owned acquired through foreclosure
 
111,207

 
 
14,045

 
167,835

Residential loans originated to finance the sale of real estate owned
 
12,885

 
 
1,701

 
10,799

Residential loans acquired from Non-Residual Trusts (1)
 
—

 
 
—

 
25,061

__________
(1)
Represents loans held by the Non-Residual Trusts that were acquired by the Company upon the exercise of the mandatory call obligations. Refer to Notes 5 and 29 for additional information.

F-75


27. Segment Reporting
Management has organized the Company into three reportable segments based primarily on its services as follows:
•
Servicing — performs servicing for the Company's mortgage loan portfolio and on behalf of third-party credit owners of mortgage loans for a fee and also performs subservicing for third-party owners of MSR. The Servicing segment also operates complementary businesses including a collections agency that performs collections of post charge-off deficiency balances for third parties and the Company. Commencing February 1, 2017, an insurance agency owned by the Company began to provide insurance marketing services to a third party with respect to voluntary insurance policies, including hazard insurance. In addition, the Servicing segment held the assets and mortgage-backed debt of the Residual Trusts until their sale and deconsolidation in November 2018.
•
Originations —originates and purchases mortgage loans that are intended for sale to third parties.
•
Reverse Mortgage — primarily focuses on the servicing of reverse loans for the Company's own reverse mortgage portfolio and subservicing on behalf of third-party credit owners of reverse loans. The Reverse Mortgage segment also provides complementary services for the reverse mortgage market, such as real estate owned property management and disposition, for a fee. Effective January 2017, the Company exited the reverse mortgage originations business. The Company no longer has any reverse loans remaining in its originations pipeline and has finalized the shutdown of the reverse mortgage originations business. The Company continues to fund undrawn Tails available to borrowers.
The following tables present select financial information for the reportable segments (in thousands). The Company has presented the revenue and expenses of the Non-Residual Trusts and other non-reportable operating segments, as well as corporate expenses, in the Corporate and Other non-reportable segment. Intersegment revenues and expenses have been eliminated. Effective January 1, 2018, the Company no longer allocates corporate overhead, including depreciation and amortization, to our operating segments. These amounts are now included in the Corporate and Other non-reportable segment. Prior year balances have been restated to conform to current year presentation.
 
 
Successor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
Servicing
 
Originations
 
Reverse
Mortgage
 
Corporate and Other
 
Eliminations
 
Total
Consolidated
Net servicing revenue and fees (1)(2)
 
$
321,833

 
$
—

 
$
22,361

 
$
55

 
$
(4,915
)
 
$
339,334

Net gains on sales of loans (2)
 
564

 
159,787

 
—

 
—

 
1,359

 
161,710

Net fair value gains on reverse loans and related HMBS obligations
 
—

 
—

 
46,833

 
—

 
—

 
46,833

Interest income on loans
 
1,792

 
40

 
—

 
—

 
—

 
1,832

Other revenues (3)
 
86,481

 
23,734

 
5,581

 
1,498

 
(8,063
)
 
109,231

Total revenues
 
410,670

 
183,561

 
74,775

 
1,553

 
(11,619
)
 
658,940

 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
15,356

 
29,445

 
52,824

 
111,696

 
—

 
209,321

Depreciation and amortization
 
14,062

 
15,691

 
1,632

 
973

 
—

 
32,358

Goodwill and intangible assets impairment
 
7,400

 
16,260

 
—

 
—

 
—

 
23,660

Other expenses, net (4)
 
296,439

 
156,534

 
64,832

 
107,578

 
(11,619
)
 
613,764

Total expenses
 
333,257

 
217,930

 
119,288

 
220,247

 
(11,619
)
 
879,103

 
 
 
 
 
 
 
 
 
 
 
 
 
Reorganization items
 
—

 
—

 
—

 
(2,726
)
 
—

 
(2,726
)
Other gains (losses) (6)
 
(6,878
)
 
—

 
—

 
22,022

 
—

 
15,144

 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
$
70,535

 
$
(34,369
)
 
$
(44,513
)
 
$
(199,398
)
 
$
—

 
$
(207,745
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2018
Total assets
 
$
1,900,630

 
$
1,017,847

 
$
8,460,374

 
$
212,761

 
$
(307,086
)
 
$
11,284,526


F-76


 
 
 
Predecessor
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
 
Servicing
 
Originations
 
Reverse
Mortgage
 
Corporate and Other
 
Eliminations
 
Total
Consolidated
Net servicing revenue and fees (1)(2)
 
$
127,503

 
$
—

 
$
2,029

 
$
—

 
$
(847
)
 
$
128,685

Net gains on sales of loans (2)
 
216

 
27,490

 
—

 
—

 
257

 
27,963

Net fair value gains on reverse loans and related HMBS obligations
 
—

 
—

 
10,576

 
—

 
—

 
10,576

Interest income on loans
 
3,381

 
6

 
—

 
—

 
—

 
3,387

Other revenues (3)
 
14,451

 
2,389

 
602

 
89

 
(869
)
 
16,662

Total revenues
 
145,551

 
29,885

 
13,207

 
89

 
(1,459
)
 
187,273

 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
9,606

 
9,675

 
11,956

 
7,519

 
—

 
38,756

Depreciation and amortization
 
3,252

 
265

 
228

 
65

 
—

 
3,810

Other expenses, net (4)
 
48,649

 
21,580

 
9,579

 
12,808

 
(1,459
)
 
91,157

Total expenses
 
61,507

 
31,520

 
21,763

 
20,392

 
(1,459
)
 
133,723

 
 
 
 
 
 
 
 
 
 
 
 
 
Reorganization items and fresh start accounting adjustments
 
(14,588
)
 
9,612

 
7,423

 
462,116

 
—

 
464,563

Other gains (6)
 
158

 
—

 
—

 
2,718

 
—

 
2,876

 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
$
69,614

 
$
7,977

 
$
(1,133
)
 
$
444,531

 
$
—

 
$
520,989


F-77


 
 
Predecessor
 
 
For the Year Ended December 31, 2017
 
 
Servicing
 
Originations
 
Reverse
Mortgage
 
Corporate and Other
 
Eliminations
 
Total
Consolidated
Net servicing revenue and fees (1)(2)
 
$
328,736

 
$
—

 
$
27,566

 
$
—

 
$
(9,620
)
 
$
346,682

Net gains on sales of loans (2)
 
607

 
280,967

 
—

 
—

 
2,817

 
284,391

Net fair value gains on reverse loans and related HMBS obligations
 
—

 
—

 
42,419

 
—

 
—

 
42,419

Interest income on loans
 
41,147

 
48

 
—

 
—

 
—

 
41,195

Other revenues (3)
 
94,558

 
31,329

 
2,750

 
933

 
(12,997
)
 
116,573

Total revenues 
 
465,048

 
312,344

 
72,735

 
933

 
(19,800
)
 
831,260

 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
53,593

 
41,555

 
31,435

 
134,661

 
—

 
261,244

Depreciation and amortization
 
34,242

 
2,811

 
3,010

 
701

 
—

 
40,764

Other expenses, net (4)(5)
 
563,087

 
199,994

 
99,185

 
150,247

 
(19,800
)
 
992,713

Total expenses
 
650,922

 
244,360

 
133,630

 
285,609

 
(19,800
)
 
1,294,721

 
 
 
 
 
 
 
 
 
 
 
 
 
Reorganization items
 
—

 
—

 
—

 
(37,645
)
 
—

 
(37,645
)
Other gains (losses) (6)
 
63,548

 
(719
)
 
(1,345
)
 
9,366

 
—

 
70,850

 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
$
(122,326
)
 
$
67,265

 
$
(62,240
)
 
$
(312,955
)
 
$
—

 
$
(430,256
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2017
Total assets
 
$
2,957,173

 
$
877,193

 
$
10,100,149

 
$
460,193

 
$
(230,511
)
 
$
14,164,197

__________
(1)
The Servicing segment recorded intercompany servicing revenue and fees from activity with the Originations segment and the Corporate and Other non-reportable segment of $4.9 million, $0.8 million and $9.6 million for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively.
(2)
Included in intercompany servicing revenue and fees for the Servicing segment are late fees that were waived as an incentive for borrowers refinancing their loans of $1.4 million, $0.3 million and $2.8 million for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively, which reduced net gains on sales of loans recognized by the Originations segment.
(3)
The Servicing segment recorded intercompany revenues for fees earned related to certain loan originations completed by the Originations segment from leads generated through the Servicing segment's servicing portfolio of $8.0 million, $0.9 million and $12.9 million for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively. The expenses incurred by the Originations segment for these originations are included in other expenses, net in the tables above.
(4)
Other expenses, net in the tables above include salaries and benefits, general and administrative, and other expenses, net on the consolidated statements of comprehensive income (loss).
(5)
Effective January 1, 2018, the Company no longer allocates corporate overhead, including depreciation and amortization, to its operating segments. These amounts are now included in the Corporate and Other non-reportable segment. Prior year balances have been restated to conform to current year presentation.
(6)
Other gains (losses) in the tables above include other net fair value gains, net losses on extinguishment of debt, gain on sale of business and other on the consolidated statements of comprehensive income (loss).
28. Certain Capital Requirements and Guarantees
The Company's subsidiaries are required to comply with requirements under federal and state laws and regulations, including requirements imposed in connection with certain licenses and approvals, requirements of federal, state, GSE, Ginnie Mae and other business partner loan programs, some of which are financial covenants related to minimum levels of net worth and other financial requirements. If these financial covenants are not met, the Company’s selling and servicing agreements could be terminated and lending and servicing licenses could be suspended or revoked.

F-78


Due to the accounting treatment for reverse loans as secured borrowings when transferred, RMS has obtained an indefinite waiver for certain of these requirements from Ginnie Mae and a waiver through December 2019 from Fannie Mae. In addition, the Parent Company has provided a guarantee whereby it guarantees the performance and obligations of RMS under the Ginnie Mae HMBS program. In the event that the Parent Company fails to honor this guarantee, Ginnie Mae could terminate RMS’s status as a qualified issuer of HMBS as well as take other actions permitted by law that could impact the operations of RMS, including the termination or suspension of RMS’s servicing rights associated with reverse loans underlying HMBS guaranteed by Ginnie Mae. Each subsidiary of the Parent Company that is a Ginnie Mae issuer has also entered into a cross default agreement with Ginnie Mae that provides that, upon the default by a subsidiary under an applicable Ginnie Mae program agreement, Ginnie Mae will have the right to (i) declare a default on all other pools and loan packages of that subsidiary and all pools and loan packages of any affiliated Ginnie Mae issuer that executed the cross default agreement and (ii) exercise any other remedies available under applicable law against each of the affiliated Ginnie Mae issuers. Refer to Note 31 for information regarding subsequent events.
The Parent Company has also provided a guarantee to (i) Fannie Mae, dated May 31, 2013, for RMS, (ii) Fannie Mae, dated March 17, 2014, for Ditech Financial, and (iii) Freddie Mac, dated December 19, 2013, for Ditech Financial. Pursuant to the RMS guarantee, the Parent Company agreed to guarantee all of the obligations required to be performed or paid by RMS under RMS' mortgage selling and servicing contract or any other agreement between Fannie Mae and RMS relating to mortgage loans or participation interests that RMS delivers or has delivered to Fannie Mae or services or has serviced for, or on behalf of, Fannie Mae. RMS does not currently sell loans to Fannie Mae. Pursuant to the Ditech Financial Fannie Mae guarantee, the Parent Company agreed to guarantee all of the servicing obligations required to be performed or paid by Ditech Financial under Ditech Financial's mortgage selling and servicing agreement, the Fannie Mae selling and servicing guides, or any other agreement between Fannie Mae and Ditech Financial. The Parent Company also agreed to guarantee all selling representations and warranties Ditech Financial has assumed, or may in the future assume, in connection with Ditech Financial's purchase of MSR related to Fannie Mae loans. The Parent Company does not guarantee Ditech Financial's obligations relating to the selling representations and warranties made or assumed by Ditech Financial in connection with the sale and/or securitization of mortgage loans to and/or by Fannie Mae. Pursuant to the Ditech Financial Freddie Mac guarantee, the Parent Company agreed to guarantee all of the seller and servicer obligations required to be performed or paid by Ditech Financial under any agreement between Freddie Mac and Ditech Financial.
Factors that may significantly affect the adequacy of net worth include, but are not limited to, regulatory mandates, the overall economic condition in the mortgage and real estate markets, as well as the financial markets in general. After taking into account the waivers described above, all of the Company's subsidiaries were in compliance with all of their capital requirements at December 31, 2018 and 2017. The following table presents the required and actual adjusted net worth, as defined by the applicable agreement, for the most restrictive covenant, excluding covenants for which the Company has waivers, applicable to each of the Company's two largest operating subsidiaries (in thousands):
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
December 31, 2017
 
 
Required Adjusted Net Worth
 
Actual Adjusted  
Net Worth
 
 
Required Adjusted Net Worth
 
Actual Adjusted  
Net Worth
Ditech Financial
 
$
306,134

 
$
828,902

 
 
$
357,264

 
$
1,194,815

Reverse Mortgage Solutions
 
75,666

 
161,774

 
 
94,418

 
153,353

The Company also has financial covenant requirements relating to its servicing advance facilities and its master repurchase agreements, as discussed in more detail in Notes 18 and 19.
29. Commitments and Contingencies
Mandatory Clean-Up Call and Letter of Credit Reimbursement Obligation
Historically, the Company was obligated to exercise the mandatory clean-up call obligations assumed as part of a prior agreement to acquire the rights to service the loans in the Non-Residual Trusts. The Company was required to call these securitizations when the principal amount of each loan pool fell to 10% or below of the original principal amount. On October 10, 2017, the Company entered into a Clean-up Call Agreement with a counterparty, pursuant to which the Company paid an inducement fee in the amount of $36.5 million to the counterparty. The Clean-up Call Agreement inducement fee, which was deferred and is being amortized as the counterparty executes the clean-up calls per the agreement, had a balance of $11.0 million at December 31, 2018 and is recorded within other assets on the consolidated balance sheets. With the execution of the Clean-Up Call Agreement, the counterparty assumed the Company’s mandatory obligation to exercise the clean-up calls for the remaining securitization trusts. In connection with the exercise of each clean-up call, the counterparty agreed to reimburse the Company for certain outstanding advances previously made by the Company with respect to the related trusts, up to an aggregate amount of approximately $6.4 million for the eight remaining trusts. At December 31, 2018, the outstanding advances available for the remaining trusts to be called totaled $2.7 million.

F-79


As part of an agreement to service the loans in the original eleven securitization trusts and as a result of the Clean-up Call Agreement, the Company has an obligation to reimburse a third party for amounts drawn on the LOCs in excess of $17.0 million in the aggregate related to the two remaining consolidated securitization trusts from July 1, 2017 through each individual call date. The total draws on the LOCs were $11.9 million at December 31, 2018.
Unfunded Commitments
Reverse Mortgage Loans
At December 31, 2018, the Company had floating-rate reverse loans in which the borrowers have additional borrowing capacity of $894.2 million and similar commitments on fixed-rate reverse loans of $57.6 million primarily in the form of undrawn lines-of-credit. The borrowing capacity of $1.0 billion was available to be drawn by borrowers at December 31, 2018. In addition, the Company has other commitments of $22.4 million to fund taxes and insurance on borrowers’ properties to the extent these amounts were set aside for such purpose upon the origination of the related reverse loan. There is no termination date for these drawings so long as the loan remains performing.
Mortgage Loans
The Company has short-term commitments to lend $1.3 billion and commitments to purchase loans totaling $3.1 million at December 31, 2018. In addition, the Company had commitments to sell $2.3 billion and purchase $677.5 million in mortgage-backed securities at December 31, 2018.
HMBS Issuer Obligations
As an HMBS issuer, the Company assumes certain obligations related to each security issued. The most significant obligation is the requirement to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM is equal to or greater than 98% of the maximum claim amount. Performing repurchased loans are conveyed to HUD and payment is received from HUD typically within a short timeframe of repurchase. HUD reimburses the Company for the outstanding principal balance on the loan up to the maximum claim amount. The Company bears the risk of exposure if the amount of the outstanding principal balance on a loan exceeds the maximum claim amount. Recent regulatory changes introduced by HUD increased the requirements for completing an assignment to HUD. These new requirements have increased the time interval between when a loan is repurchased and when the assignment claim is filed with HUD, and inability to meet such requirements could preclude assignment. During this period, accruals for interest, HUD-required mortgage insurance payments, and borrower draws may cause the unpaid balance on the loan to increase and ultimately exceed the maximum claim amount. Nonperforming repurchased loans are generally liquidated through foreclosure and subsequent sale of real estate owned.
The Company currently relies upon certain master repurchase agreements and operating cash flows, to the extent necessary, to repurchase these Ginnie Mae loans. The timing and amount of the Company's obligation to repurchase HECMs is uncertain as repurchase is predicated on certain factors such as whether a borrower event of default occurs prior to the HECM reaching the mandatory repurchase threshold under which the Company is obligated to repurchase the loan. The Company repurchased $1.6 billion, $257.1 million and $1.3 billion, respectively, in reverse loans and real estate owned from securitization pools during the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively. As of December 31, 2018, the Company had reverse loans and real estate owned that it had repurchased totaling $1.1 billion with a fair value of $1.0 billion, and had unfunded commitments to repurchase reverse loans and real estate owned of $165.1 million. Repurchases of reverse loans and real estate owned have increased significantly as compared to prior periods due to the increased flow of HECMs and real estate owned that are reaching 98% of their maximum claim amount and are expected to peak during 2019. The Company's repurchases of reverse loans and real estate owned are projected to be approximately $2.0 billion, $1.2 billion and $643.7 million during the years ending December 31, 2019, 2020 and 2021, respectively.

F-80


Mortgage Origination Contingencies
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. In doing so, representations and warranties regarding certain attributes of the loans are made to the third-party investor. Subsequent to the sale, if it is determined that a loan sold is in breach of these representations or warranties, the Company generally has an obligation to cure the breach. In general, if the Company is unable to cure such breach, the purchaser of the loan may require the Company to repurchase such loan for the unpaid principal balance, accrued interest, and related advances, and in any event, the Company must indemnify such purchaser for certain losses and expenses incurred by such purchaser in connection with such breach. The Company’s credit loss may be reduced by any recourse it has to correspondent lenders that, in turn, have sold such residential loans to the Company and breached similar or other representations and warranties.
The Company's representations and warranties are generally not subject to stated limits of exposure with the exception of certain loans originated under HARP, which limited exposure based on payment history of the loan. At December 31, 2018, the Company’s maximum exposure to repurchases due to potential breaches of representations and warranties was $67.8 billion and was based on the original unpaid principal balance of loans sold from the beginning of 2013 through December 31, 2018, adjusted for voluntary payments made by the borrower on loans for which the Company performs servicing. A majority of the Company's loan sales were servicing retained.
The Company’s obligations vary based upon the nature of the repurchase demand and the current status of the mortgage loan. The following table summarizes the activity for the Company's liability associated with representations and warranties (in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Balance at beginning of the period
 
$
16,487

 
 
$
16,792

 
$
22,094

Provision for new sales
 
5,522

 
 
729

 
6,991

Change in estimate of existing reserves
 
(6,919
)
 
 
(1,001
)
 
(10,596
)
Net realized losses on repurchases
 
(2,343
)
 
 
(33
)
 
(1,697
)
Balance at end of the period
 
$
12,747

 
 
$
16,487

 
$
16,792

The Company's estimate of the liability associated with the representations and warranties exposure is included in originations liability as part of payables and accrued liabilities on the consolidated balance sheets.
Servicing Contingencies
The Company’s servicing obligations are set forth in industry regulations established by HUD, the FHA, the VA, and other government agencies and in servicing and subservicing agreements with the applicable counterparties, such as Fannie Mae, Freddie Mac and other credit owners. Both the regulations and the servicing agreements provide that the servicer may be liable for failure to perform its servicing obligations and further provide remedies for certain servicer breaches.
Reverse Mortgage Loans
FHA regulations provide that servicers meet a series of event-specific timeframes during the default, foreclosure, conveyance, and mortgage insurance claim cycles. Failure to timely meet any processing deadline may stop the accrual of debenture interest otherwise payable in satisfaction of a claim under the FHA mortgage insurance contract and the servicer may be responsible to HUD for debenture interest that is not self-curtailed by the servicer, or for making the credit owner whole for any interest curtailed by FHA due to not meeting the required event-specific timeframes. The Company had a curtailment obligation liability of $68.7 million at December 31, 2018 related to the foregoing, which reflects management’s best estimate of the probable incurred claim. The curtailment liability is recorded in payables and accrued liabilities on the consolidated balance sheets. The Company recorded a provision (benefit), net of expected third-party recoveries, related to the curtailment liability of $(7.4) million and $0.4 million during the period from February 10, 2018 through December 31, 2018 and the period from January 1, 2018 through February 9, 2018, respectively. The Company has potential estimated maximum financial statement exposure for an additional $61.8 million related to similar claims, which are reasonably possible, but which the Company believes are the responsibility of third parties (e.g., prior servicers and/or credit owners).

F-81


Mortgage Loans
The Company had a curtailment obligation liability of $31.1 million at December 31, 2018 related to sales of servicing rights, advance curtailment exposure and mortgage loan servicing that it primarily assumed through an acquisition of servicing rights. The Company is obligated to service the related mortgage loans in accordance with Ginnie Mae requirements, including repayment to credit owners for corporate advances and interest curtailment. The curtailment liability is recorded in payables and accrued liabilities on the consolidated balance sheets.
Lease Obligations
The Company leases office space and office equipment under various operating lease agreements with terms expiring through 2026, exclusive of renewal option periods. Rent expense was $16.0 million, $1.7 million and $18.6 million for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively. Estimated future minimum rental payments under operating leases at December 31, 2018 are as follows (in thousands):
 
 
Successor
 
 
Amount
2019
 
$
13,425

2020
 
10,801

2021
 
10,602

2022
 
10,887

2023
 
9,535

Thereafter
 
12,693

Total
 
$
67,943

In February 2019, the Company filed the DHCP Bankruptcy Petitions and therefore, the above estimated future minimum rental payments under operating leases will be subject to the outcome of the Company's emergence from the DHCP Chapter 11 Cases, since certain lease obligations may be rejected or disallowed under bankruptcy law. Refer to Note 31 for additional information regarding the DHCP Chapter 11 Cases.
Litigation and Regulatory Matters
In the ordinary course of business, the Company and its subsidiaries are defendants in, or parties to, pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. Many of these actions and proceedings are based on alleged violations of consumer protection laws governing the Company's servicing and origination activities. In some of these actions and proceedings, claims for substantial monetary damages are asserted against the Company.
The Company, in the ordinary course of business, is also subject to regulatory and governmental examinations, information requests and subpoenas, inquiries, investigations and threatened legal actions and proceedings. In connection with formal and informal inquiries, the Company receives numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of the Company’s activities.
In view of the inherent difficulty of predicting outcomes of such litigation, regulatory and governmental matters, particularly where the claimants seek very large or indeterminate restitution, penalties or damages, or where the matters present novel legal theories or involve a large number of parties, the Company generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be.
Reserves are established for pending or threatened litigation, regulatory and governmental matters when it is probable that a loss has been incurred and the amount of such loss can be reasonably estimated. In light of the inherent uncertainties involved in litigation and other legal proceedings, it is not always possible to determine a reasonable estimate of the amount of a probable loss, and the Company may estimate a range of possible loss for consideration in its estimated accruals. The estimates are based upon currently available information, including advice of counsel, and involve significant judgment taking into account the varying stages and inherent uncertainties of such matters. Accordingly, the Company’s estimates may change from time to time and such changes may be material to the consolidated financial results.

F-82


At December 31, 2018, the Company’s recorded reserves associated with legal and regulatory contingencies for which a loss is probable and can be reasonably estimated were approximately $19 million. There can be no assurance that the ultimate resolution of the Company’s pending or threatened litigation, claims or assessments will not result in losses in excess of the Company’s recorded reserves. As a result, the ultimate resolution of any particular legal matter, or matters, could be material to the Company’s results of operations or cash flows for the period in which such matter is resolved.
For matters involving a probable loss where the Company can estimate the range but not a specific loss amount, the aggregate estimated amount of reasonably possible losses in excess of the recorded liability was $0 to approximately $12 million at December 31, 2018. Given the inherent uncertainties and status of the Company’s outstanding legal and regulatory matters, the range of reasonably possible losses cannot be estimated for all matters; therefore, this estimated range does not represent the Company’s maximum loss exposure. As new information becomes available, the matters for which the Company is able to estimate, as well as the estimates themselves, will be adjusted accordingly.
The following is a description of certain litigation and regulatory matters:
The Company has received various subpoenas for testimony and documents, motions for examinations pursuant to Federal Rule of Bankruptcy Procedure 2004, and other information requests from certain Offices of the U.S. Trustees, acting through trial counsel in various federal judicial districts, seeking information regarding an array of the Company's policies, procedures and practices in servicing loans to borrowers who are in bankruptcy and the Company's compliance with bankruptcy laws and rules. The Company has provided information in response to these subpoenas and requests and has met with representatives of certain Offices of the U.S. Trustees to discuss various issues that have arisen in the course of these inquiries, including the Company's compliance with bankruptcy laws and rules. The Company cannot predict the outcome of the aforementioned proceedings and investigations, which could result in requests for damages, fines, sanctions, or other remediation. The Company could face further legal proceedings in connection with these matters. The Company may seek to enter into one or more agreements to resolve these matters. Any such agreement may require the Company to pay fines or other amounts for alleged breaches of law and to change or otherwise remediate the Company's business practices. Legal proceedings relating to these matters and the terms of any settlement agreement could have a material adverse effect on the Company's reputation, business, prospects, results of operations, liquidity and financial condition.
A federal securities fraud complaint was filed against the Company, George M. Awad, Denmar J. Dixon, Anthony N. Renzi, and Gary L. Tillett on March 16, 2017. The case, captioned Courtney Elkin, et al. vs. Walter Investment Management Corp., et al., Case No. 2:17-cv-02025-JCJ, is pending in the Eastern District of Pennsylvania. The court has appointed a lead plaintiff in the action who filed an amended complaint on September 15, 2017. The amended complaint seeks monetary damages and asserts claims under Sections 10(b) and 20(a) of the Exchange Act during a class period alleged to begin on August 9, 2016 and conclude on August 1, 2017. The amended complaint alleges that: (i) defendants made material misstatements about the value of the Company's deferred tax assets; (ii) the material misstatement about the value of the Company's deferred tax assets required the Company to restate certain financials in the Quarterly Reports on Form 10-Q for the periods ended June 30, 2016, September 30, 2016 and March 31, 2017 and the Annual Report on Form 10-K for the year ended December 31, 2016, and caused the Company to violate the financial covenants and obligations in agreements with the Company's lenders and GSEs; and (iii) defendants made material misstatements concerning the Company's initiatives to deleverage the Company's capital structure. On November 3, 2017, the lead plaintiff voluntarily dismissed defendant Denmar J. Dixon from the action. On November 14, 2017, the remaining defendants moved to dismiss the amended complaint. From December 1, 2017 to February 9, 2018, the action was stayed pursuant to section 362 of the Bankruptcy Code. On July 13, 2018, the parties entered into a formal settlement agreement to settle the action for $2.95 million subject to notice to the alleged class and court approval. On December 18, 2018, the court approved the settlement, which was paid by the Company's directors’ and officers’ insurance carrier. On January 18, 2019, the time to appeal the court's approval of the settlement expired.

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A stockholder derivative complaint purporting to assert claims on behalf of the Company was filed against certain current and former members of the Board of Directors on June 22, 2017. The case, captioned Michael E. Vacek, Jr., et al. vs. George M. Awad, et al., Case No. 2:17-cv-02820-JCJ, is pending in the Eastern District of Pennsylvania. The plaintiff filed an amended complaint in the action on September 13, 2017. The amended complaint seeks monetary damages for the Company and equitable relief and asserts a claim for breach of fiduciary duty arising out of: (i) a material weakness in the Company's internal controls over financial reporting related to operational processes associated with Ditech Financial default servicing activities, including identifying foreclosure tax liens and resolving such liens efficiently, foreclosure related advances, and the processing and oversight of loans in bankruptcy status, which resulted in several adjustments to reserves during the fourth quarter of 2016; (ii) an accounting error that caused an overstatement of the value of the Company's deferred tax assets; and (iii) subpoenas seeking documents relating to RMS’s origination and underwriting of reverse mortgages and loans. The Company and the defendants moved to dismiss the amended complaint on October 5, 2017. From December 1, 2017 to February 9, 2018, the action was stayed pursuant to section 362 of the Bankruptcy Code. On April 26, 2018, the court denied the motion to dismiss. On May 9, 2018, the Company and the defendants moved for reconsideration or certification of the court’s denial of the motion to dismiss. On October 17, 2018, the parties entered into a formal settlement agreement to settle the action based on the Company's adoption of certain corporate governance measures. The Company's directors' and officers' insurance carrier agreed to pay $0.258 million in attorneys’ fees to plaintiff's counsel. On February 1, 2019, the court approved the settlement. On February 11, 2019, the action was stayed pursuant to section 362 of the Bankruptcy Code.
From time to time, federal and state authorities investigate or examine aspects of the Company's business activities, such as its mortgage origination, servicing, collection and bankruptcy practices, among other things. It is the Company's general policy to cooperate with such investigations, and the Company has been responding to information requests and otherwise cooperating with various ongoing investigations and examinations by such authorities. The Company cannot predict the outcome of any of the ongoing proceedings and cannot provide assurances that investigations and examinations will not have a material adverse effect on the Company.
Walter Energy Matters
The Company may become liable for U.S. federal income taxes allegedly owed by the Walter Energy consolidated group for the 2009 and prior tax years. Under federal law, each member of a consolidated group for U.S. federal income tax purposes is severally liable for the federal income tax liability of each other member of the consolidated group for any year in which it was a member of the consolidated group at any time during such year. Certain former subsidiaries of the Company (which were subsequently merged or otherwise consolidated with certain current subsidiaries of the Company) were members of the Walter Energy consolidated tax group prior to the Company's spin-off from Walter Energy on April 17, 2009. As a result, to the extent the Walter Energy consolidated group’s federal income taxes (including penalties and interest) for such tax years are not favorably resolved on the merits or otherwise paid, the Company could be liable for such amounts.
Walter Energy Tax Matters. According to Walter Energy’s Form 10-Q, or the Walter Energy Form 10-Q, for the quarter ended September 30, 2015 (filed with the SEC on November 5, 2015) and certain other public filings made by Walter Energy in its bankruptcy proceedings currently pending in Alabama, described below, as of the date of such filing, certain tax matters with respect to certain tax years prior to and including the year of the Company's spin-off from Walter Energy remained unresolved, including certain tax matters relating to: (i) a “proof of claim” for a substantial amount of taxes, interest and penalties with respect to Walter Energy’s fiscal years ended August 31, 1983 through May 31, 1994, which was filed by the IRS in connection with Walter Energy’s bankruptcy filing on December 27, 1989 in the U.S. Bankruptcy Court for the Middle District of Florida, Tampa Division; (ii) an IRS audit of Walter Energy’s federal income tax returns for the years ended May 31, 2000 through December 31, 2008; and (iii) an IRS audit of Walter Energy’s federal income tax returns for the 2009 through 2013 tax years.
Walter Energy 2015 Bankruptcy Filing. On July 15, 2015, Walter Energy filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Northern District of Alabama. On August 18, 2015, Walter Energy filed a motion with the Florida Bankruptcy Court requesting that the court transfer venue of its disputes with the IRS to the Alabama Bankruptcy Court. In that motion, Walter Energy asserted that it believed the liability for the years at issue "will be materially, if not completely, offset by the [r]efunds" asserted by Walter Energy against the IRS. The Florida Bankruptcy Court transferred venue of the matter to the Alabama Bankruptcy Court, where it remains pending.

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On November 5, 2015, Walter Energy, together with certain of its subsidiaries, entered into the Walter Energy Asset Purchase Agreement with Coal Acquisition, a Delaware limited liability company formed by members of Walter Energy’s senior lender group, pursuant to which, among other things, Coal Acquisition agreed to acquire substantially all of Walter Energy’s assets and assume certain liabilities, subject to, among other things, a number of closing conditions set forth therein. On January 8, 2016, after conducting a hearing, the Alabama Bankruptcy Court entered an order approving the sale of Walter Energy's assets to Coal Acquisition free and clear of all liens, claims, interests and encumbrances of the debtors. The sale of such assets pursuant to the Walter Energy Asset Purchase Agreement was completed on March 31, 2016 and was conducted under the provisions of Sections 105, 363 and 365 of the Bankruptcy Code. Based on developments in the Alabama bankruptcy proceedings following completion of this asset sale, such asset sale appears to have resulted in (i) limited value remaining in Walter Energy’s bankruptcy estate and (ii) to date, limited recovery for certain of Walter Energy’s unsecured creditors, including the IRS.
On January 9, 2017, Walter Energy filed with the Alabama Bankruptcy Court a motion to convert its Chapter 11 bankruptcy case to a Chapter 7 liquidation. In that motion, Walter Energy stated that, other than with respect to 1% of the equity of the acquirer of Walter Energy's core assets, no prospect of payment of unsecured claims exists. On January 23, 2017, the IRS filed an objection to Walter Energy's motion to convert, in which the IRS requested that a judgment be entered against Walter Energy in connection with the tax matters described above. The IRS further asserted that entry of a final judgment was necessary so that it could pursue collection of tax liabilities from former members of Walter Energy's consolidated group that are not debtors.
On January 30, 2017, the Alabama Bankruptcy Court held a hearing at which it denied the IRS's request for entry of a judgment and announced its intent to grant Walter Energy's motion to convert. The Alabama Bankruptcy Court entered an order on February 2, 2017 converting Walter Energy's Chapter 11 bankruptcy to a Chapter 7 liquidation. During February 2017, Andre Toffel was appointed Chapter 7 trustee of Walter Energy's bankruptcy estate.
The Company cannot predict whether or to what extent it may become liable for federal income taxes of the Walter Energy consolidated tax group during the tax years in which the Company was a part of such group, in part because the Company believes, based on publicly available information, that: (i) the amount of taxes owed by the Walter Energy consolidated tax group for the periods from 1983 through 2009 remains unresolved; and (ii) in light of Walter Energy’s conversion from a Chapter 11 bankruptcy to a Chapter 7 bankruptcy, it is unclear whether the IRS will seek to make a direct claim against the Company for such taxes. Further, because the Company cannot currently estimate its liability, if any, relating to the federal income tax liability of Walter Energy’s consolidated tax group during the tax years in which it was a part of such group, the Company cannot determine whether such liabilities, if any, could have a material adverse effect on the Company's business, financial condition, liquidity and/or results of operations.
Tax Separation Agreement. In connection with the Company's spin-off from Walter Energy, the Company and Walter Energy entered into a Tax Separation Agreement, dated April 17, 2009. Notwithstanding any several liability the Company may have under federal tax law described above, under the Tax Separation Agreement, Walter Energy agreed to retain full liability for all U.S. federal income or state combined income taxes of the Walter Energy consolidated group for 2009 and prior tax years (including any interest, additional taxes or penalties applicable thereto), subject to limited exceptions. The Company therefore filed proofs of claim in the Alabama bankruptcy proceedings asserting claims for any such amounts to the extent the Company is ultimately held liable for the same. However, the Company expects to receive little or no recovery from Walter Energy for any filed proofs of claim for indemnification.
It is unclear whether claims made by the Company under the Tax Separation Agreement would be enforceable against Walter Energy in connection with, or following the conclusion of, the various Walter Energy bankruptcy proceedings described above, or if such claims would be rejected or disallowed under bankruptcy law. It is also unclear whether the Company would be able to recover some or all of any such claims given Walter Energy's limited assets and limited recoveries for unsecured creditors in the Walter Energy bankruptcy proceedings described above.
Furthermore, the Tax Separation Agreement provides that Walter Energy has, in its sole discretion, the exclusive right to represent the interests of the consolidated group in any audit, court proceeding or settlement of a claim with the IRS for the tax years in which certain of the Company’s former subsidiaries were members of the Walter Energy consolidated tax group. However, in light of the conversion of Walter Energy’s bankruptcy proceeding from a Chapter 11 proceeding to a Chapter 7 proceeding, the Company may choose to take a direct role in proceedings involving the IRS’s claim for tax years in which the Company was a member of the Walter Energy consolidated tax group. Moreover, the Tax Separation Agreement obligates the Company to take certain tax positions that are consistent with those taken historically by Walter Energy. In the event the Company does not take such positions, it could be liable to Walter Energy to the extent the Company's failure to do so results in an increased tax liability or the reduction of any tax asset of Walter Energy. These arrangements may result in conflicts of interests between the Company and Walter Energy, particularly with regard to the Walter Energy bankruptcy proceedings described above.

F-85


Lastly, according to its public filings, Walter Energy’s 2009 tax year is currently under audit. Accordingly, if it is determined that certain distribution taxes and other amounts are owed related to the Company's spin-off from Walter Energy in 2009, the Company may be liable under the Tax Separation Agreement for all or a portion of such amounts.
The Company is unable to estimate reasonably possible losses for the matter described above.
Key Employee Retention Plan and Severance Benefits
In September 2017, the Company entered into retention agreements with certain key officers of the Company. These agreements set forth retention bonuses to be earned by the key officers through dates as defined in each agreement. The total original retention bonuses to be paid for key officers that met the related party definition and met the qualifications of the agreement was $2.8 million, which was earned over the retention period. On February 20, 2018, Anthony N. Renzi resigned from his position as Chief Executive Officer and President of the Company, and therefore forfeited his right to payment of $1.3 million of his original retention bonus, which is included in the total amount above.
In October 2018, the Company entered into retention agreements with certain officers and other employees of the Company. For the Company’s executive officers, terms of the retention agreements include that retention payments would be (i) in lieu of any 2018 annual cash bonus that may have otherwise been payable to such officers under the Company’s 2018 incentive compensation program, and/or under any applicable employment agreement between such officer and the Company, (ii) in lieu of certain other outstanding bonus and/or incentive compensation payments that may be earned by certain officers under existing agreements between such officers and the Company and (iii) subject to repayment under certain circumstances as set forth in such agreements. The total amount paid to the Company’s executive officers in October 2018 under their respective retention agreements was $5.9 million in aggregate.
Ritesh Chaturbedi, the Company's Chief Operating Officer, entered into a termination letter agreement with the Company on January 14, 2019, pursuant to which Mr. Chaturbedi's employment was terminated as of January 11, 2019. Mr. Chaturbedi is entitled to receive a severance benefit equal to one-times Mr. Chaturbedi’s current base salary, payable in installments over a period of 12 months, subject to Mr. Chaturbedi executing and not revoking a release of claims against the Company.
In June 2018, the Company adopted a KEIP, which was designed to provide a transaction incentive bonus to certain key employees, to the extent a successful transaction is executed and ultimately consummated in connection with the Company's previously announced evaluation of strategic alternatives. The KEIP is payable in two equal installments, with the first installment totaling $2.5 million paid during February 2019 upon execution of the DHCP RSA on February 8, 2019. The second installment is payable upon consummation of a transaction, subject to meeting certain performance targets and the Bankruptcy Court’s approval.

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30. Quarterly Results of Operations (Unaudited)
The following tables summarize the Company’s unaudited consolidated results of operations on a quarterly basis for the years ended December 31, 2018 and 2017. The sum of the quarterly earnings (loss) per share amounts do not equal the amount reported for the full year since per share amounts are computed independently for each quarter and for the full year based on respective weighted-average shares outstanding and other dilutive potential shares.
Quarterly results of operations are summarized as follows (in thousands, except per share data):
 
 
Successor
 
 
Predecessor
 
 
For the 2018 Quarters Ended
 
For the Period From February 10, 2018 Through March 31, 2018 (1)(2)
 
 
For the Period From January 1, 2018 Through February 9, 2018 (1)
 
 
December 31 (2)
 
September 30 (1)
 
June 30 (2)
 
 
 
Total revenues
 
$
164,539

 
$
204,658

 
$
198,528

 
$
91,215

 
 
$
187,273

Total expenses
 
229,635

 
252,073

 
251,736

 
145,659

 
 
133,723

Total other gains (losses)
 
(11,516
)
 
10,463

 
12,987

 
484

 
 
467,439

Income (loss) before income taxes (3)
 
(76,612
)
 
(36,952
)
 
(40,221
)
 
(53,960
)

 
520,989

Income tax expense (benefit)
 
(2,774
)
 
(315
)
 
249

 
189

 
 
(18
)
Net income (loss)
 
$
(73,838
)
 
$
(36,637
)
 
$
(40,470
)
 
$
(54,149
)

 
$
521,007

Basic earnings (loss) per common and common equivalent share
 
$
(13.99
)
 
$
(7.28
)
 
$
(8.60
)
 
$
(12.73
)
 
 
$
13.94

Diluted earnings (loss) per common and common equivalent share
 
$
(13.99
)
 
$
(7.28
)
 
$
(8.60
)
 
$
(12.73
)
 
 
$
13.92

__________
(1)
Reorganization items and fresh start accounting adjustments of $(2.6) million, $(0.1) million and $464.6 million are included in total other gains (losses) during the quarter ended September 30, 2018, the period from February 10, 2018 through March 31, 2018 and the period from January 1, 2018 through February 9, 2018, respectively. Refer to Note 2 for further information.
(2)
Goodwill and intangible assets impairment losses of $12.7 million, $1.0 million and$10.0 million are included in total expenses during the quarter ended December 31. 2018, the quarter ended June 30, 2018 and the period from February 10, 2018 through March 31, 2018, respectively. Refer to Note 14 for further information.
(3)
A significant portion of the Company's asset and liabilities are carried at fair value and, as a result, the Company’s net income or loss can be materially impacted quarter over quarter by gains and losses resulting from changes in valuation inputs and other assumptions used in the fair value of the assets and liabilities.

 
 
 
Predecessor
 
 
For the 2017 Quarters Ended
 
 
December 31 (1)
 
September 30
 
June 30
 
March 31
Total revenues
 
$
200,544

 
$
176,644

 
$
208,787

 
$
245,285

Total expenses
 
385,271

 
303,146

 
292,595

 
313,709

Total other gains (losses)
 
(33,622
)
 
2,824

 
(8,807
)
 
72,810

Income (loss) before income taxes (2)
 
(218,349
)
 
(123,678
)
 
(92,615
)
 
4,386

Income tax expense (benefit)
 
(5,384
)
 
455

 
1,694

 
(122
)
Net income (loss)
 
$
(212,965
)
 
$
(124,133
)
 
$
(94,309
)
 
$
4,508

Basic and diluted earnings (loss) per common and common equivalent share
 
$
(5.70
)
 
$
(3.38
)
 
$
(2.58
)
 
$
0.12

__________
(1)
Reorganization items of $(37.6) million are included in total other gains (losses) during the quarter ended December 31, 2017.
(2)
A significant portion of the Company's asset and liabilities are carried at fair value and as a result, the Company’s net income or loss can be materially impacted quarter over quarter by gains and losses resulting from changes in valuation inputs and other assumptions used in the fair value of the assets and liabilities.

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31. Subsequent Events
On January 16, 2019, the Parent Company and certain of its subsidiaries entered into forbearance agreements with (i) certain holders of greater than 75% of the aggregate principal amount of the outstanding Second Lien Notes, (ii) certain lenders of greater than 50% of the aggregate principal amount outstanding under the 2018 Credit Agreement and the administrative agent and collateral agent under the 2018 Credit Agreement and (iii) the requisite buyers and variable funding noteholders, as applicable, under certain warehouse facility agreements. Pursuant to the forbearance agreements, the parties noted above agreed to temporarily forbear from the exercise of any rights or remedies they may have in respect of the aforementioned anticipated events of default or other defaults or events of default arising out of or in connection therewith.
On February 8, 2019, the Parent Company and certain of its subsidiaries entered into additional forbearance agreements with (i) certain lenders holding greater than 50% of the sum of (a) the loans outstanding, (b) letter of credit exposure and (c) unused commitments under the 2018 Credit Agreement at such time and the administrative agent and collateral agent under the 2018 Credit Agreement, (ii) the requisite buyers and variable funding noteholders, as applicable, under certain warehouse facility agreements and (iii) the counterparty under a certain master securities forward transaction agreement.
On February 11, 2019, as contemplated by the DHCP RSA, the Debtors filed the DHCP Bankruptcy Petitions and the DHCP Chapter 11 Cases commenced thereby under the Bankruptcy Code in the Bankruptcy Court. Consistent with the DHCP RSA, on March 5, 2019, the Debtors filed the DHCP Plan with the Bankruptcy Court seeking to emerge from Chapter 11 on an expedited timeframe. The Debtors filed an amended DHCP Plan with the Bankruptcy Court on March 28, 2019. The Debtors are continuing to operate their businesses as debtors in possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. The Company intends to continue to operate its businesses during the pendency of the DHCP Chapter 11 Cases. To assure ordinary course operations, the Debtors have obtained approval from the Bankruptcy Court for a variety of first day motions seeking various relief, authorizing them to maintain their operations in the ordinary course.
Restructuring Support Agreement
On February 8, 2019, the Debtors entered into the DHCP RSA with the Consenting Term Lenders holding, as of February 11, 2019, more than 75% of the term loans outstanding under the 2018 Credit Agreement.
Pursuant to the DHCP RSA, the Consenting Term Lenders and the Debtors have agreed to the principal terms of a financial restructuring of the Company, which will be implemented through a prearranged plan of reorganization under the Bankruptcy Code and which provides for the restructuring of the Company's indebtedness through a recapitalization transaction that is expected to reduce gross corporate debt by over $800 million and provide the reorganized company with an appropriately sized working capital facility upon emergence from the DHCP Reorganization Transaction.
The DHCP RSA also provides for the continuation of the Company’s prepetition review of strategic alternatives, whereby, as a potential alternative to the implementation of a DHCP Reorganization Transaction, any and all bids for the Company or its assets will be evaluated as a precursor to confirmation of any Chapter 11 plan of reorganization.
The review of strategic alternatives provides a public and comprehensive forum in which the Debtors are seeking bids or proposals for three types of potential transactions, as described below. If a bid or proposal is received representing higher or better value than the DHCP Reorganization Transaction, it will either be incorporated into the DHCP Reorganization Transaction or pursued as an alternative to the DHCP Reorganization Transaction in consultation with the Consenting Term Lenders and subject to the DHCP RSA.
The three types of transactions for which bids are being solicited are:
•
a sale transaction meaning, a sale of substantially all of the Company’s assets, as provided in the DHCP RSA;
•
an asset sale transaction meaning, the sale of a portion of the Company’s assets other than a sale transaction consummated prior to DHCP Effective Date; provided such sale shall only be conducted with the consent of the Requisite Term Lenders; and
•
a master servicing transaction meaning, as part of the DHCP Reorganization Transaction to the extent the terms thereof are acceptable to the Requisite Term Lenders, entry by the Company into an agreement or agreements with an approved subservicer or subservicers whereby, following the DHCP Effective Date, all or substantially all of the Company’s mortgage servicing rights are subserviced by the new subservicer.
The DHCP RSA presently contemplates the following treatment for certain key classes of creditors under the DHCP Reorganization Transaction:
•
DHCP DIP Warehouse Facilities Claims - On the DHCP Effective Date, the holders of DHCP DIP Warehouse Facilities claims will be paid in full in cash;

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•
Term Loan Claims - On the DHCP Effective Date, the holders of Term Loan Claims will receive their pro rata share of new term loans under an amended and restated credit facility agreement in the aggregate principal amount of $400 million, and 100% of the New Common Stock, which will be privately held;
•
Second Lien Notes Claims - On the DHCP Effective Date, the holders of the Second Lien Notes will not receive any distribution;
•
Go-Forward Trade Claims - On the DHCP Effective Date, trade creditors identified by the Company (with the consent of the Requisite Term Lenders) as being integral to and necessary for the ongoing operations of New Ditech) will receive a distribution in cash in an amount equaling a certain percentage of their claim, subject to an aggregate cap; and
•
Existing Equity Interests - On the DHCP Effective Date, holders of the Company’s existing preferred stock, common stock and warrants will have their claims extinguished.
If the Debtors proceed to confirmation of a sale transaction, the Debtors will distribute proceeds of such transaction in accordance with the priority scheme under the Bankruptcy Code.
Under the DHCP RSA, on the Election Date, the Electing Term Lenders may deliver an election notice to the Company stating that the Electing Term Lenders wish to consummate an elected transaction as follows: (i) the DHCP Reorganization Transaction, or (ii) master servicing transaction (as part of the DHCP Reorganization Transaction), or (iii) sale transaction, and, if applicable, (iv) in connection and together with an election of (i), (ii), or (iii), any asset sale transaction(s), provided that inclusion of any asset sale transaction(s) is not incompatible with successful consummation of the elected transaction in (i), (ii) or (iii). If the Debtors do not proceed with the elected transaction, the Consenting Term Lenders can terminate the DHCP RSA.
On February 11, 2019, as contemplated by the DHCP RSA, the Debtors filed the DHCP Bankruptcy Petitions and the DHCP Chapter 11 Cases commenced thereby under the Bankruptcy Code in the Bankruptcy Court. Consistent with the DHCP RSA, on March 5, 2019, the Debtors filed the DHCP Plan with the Bankruptcy Court seeking to emerge from Chapter 11 on an expedited timeframe. The Debtors filed an amended DHCP Plan with the Bankruptcy Court on March 28, 2019. The Debtors are continuing to operate their businesses as debtors in possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. The Company intends to continue to operate its businesses during the pendency of the DHCP Chapter 11 Cases. To assure ordinary course operations, the Debtors have obtained approval from the Bankruptcy Court for a variety of first day motions seeking various relief, authorizing them to maintain their operations in the ordinary course.
The filing of the DHCP Bankruptcy Petitions described above triggers an event of default or an early amortization event under certain of the Company's debt instruments. The filing of the DHCP Bankruptcy Petitions also triggers the liquidation preference of the Company’s Mandatorily Convertible Preferred Stock. Certain of the Company's obligations, including the payment of interest under the Company's debt instruments, are stayed under the Bankruptcy Code during the pendency of the DHCP Chapter 11 Cases.
During the pendency of the DHCP Chapter 11 Cases, the Bankruptcy Court granted relief enabling the Company to conduct its business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing the payment of employee wages and benefits, the payment of taxes and certain governmental fees and charges, continued operation of the cash management system in the ordinary course, and payment of the prepetition claims to certain of the Company's vendors. For goods and services provided following the DHCP Petition Date, the Company continues to pay vendors under normal terms.
DHCP DIP Warehouse Facilities
On February 8, 2019, the Parent Company, as guarantor, along with its wholly-owned subsidiaries Ditech Financial and RMS, entered into the DHCP Commitment Letter with Barclays Bank PLC and Nomura Corporate Funding Americas, LLC regarding the terms of the DHCP DIP Warehouse Facilities, which, upon approval from the Bankruptcy Court on February 14, 2019, provide the Company up to $1.9 billion in available financing. Proceeds of the DHCP DIP Warehouse Facilities were used to repay and refinance RMS’ and Ditech Financial’s existing master repurchase agreements and variable funding notes issued under existing servicer advance facilities. The existing master repurchase agreements and variable funding notes issued under servicer advance facilities were terminated or otherwise replaced under the DHCP DIP Warehouse Facilities. The DHCP DIP Warehouse Facilities will be used to fund Ditech Financial’s and RMS’ continued business operations, providing the necessary liquidity to the Debtors to implement the DHCP Restructuring.

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Under the DHCP DIP Warehouse Facilities:
(i) up to $650.0 million will be available to fund Ditech Financial’s origination business and will incur interest based on 3-month LIBOR plus a per annum margin of 2.25%;
(ii) up to $1.0 billion will be available to RMS to fund certain HECMs and real estate owned from Ginnie Mae securitization pools, and will incur interest based on 3-month LIBOR plus a per annum margin of 3.25%; and
(iii) up to $250.0 million will be available to finance the advance receivables related to Ditech Financial’s servicing activities and will incur interest based on 3-month LIBOR plus a per annum margin of 2.25%. Two new series of variable funding notes were issued under the DHCP DIP Warehouse Facilities to replace the existing variable funding notes under the DAAT Facility and DPAT II Facility, which otherwise remain largely intact to finance advances.
In addition, the lenders under the DHCP DIP Warehouse Facilities have agreed to provide Ditech Financial, through the DIP Maturity Date, up to $1.9 billion in trading capacity for Ditech Financial to hedge its interest rate exposure with respect to the loans in Ditech Financial’s loan origination pipeline. The obligations of Ditech Financial and RMS under certain of the DHCP DIP Warehouse Facilities and related hedges are netted and cross-collateralized, pursuant to the terms of a master netting arrangement. Pursuant to such netting arrangement, the lenders under the DHCP DIP Warehouse Facilities are permitted to set-off and net certain margin held by or pledged to them under certain of the DHCP DIP Warehouse Facilities and related hedges against the obligations owed by Ditech Financial and/or RMS thereunder.
The DHCP DIP Warehouse Facilities contain customary events of default and financial covenants. Financial covenants that are most sensitive to the operating results of the Company's subsidiaries and resulting financial position are minimum tangible net worth requirements, indebtedness to tangible net worth ratio requirements, and minimum liquidity requirements. The Company was in compliance with all financial covenants under the DHCP DIP Warehouse Facilities as of February 28, 2019.
Ginnie Mae Notice of Violation
On February 8, 2019, Ginnie Mae sent Ditech Financial and RMS a notice of violation stating that Ginnie Mae learned of certain actions, including the pending filing of the DHCP Chapter 11 Cases, that purportedly constitute a violation of the terms of the Ginnie Mae Guaranty Agreements and Ginnie MBS Guide. The notice of violation outlined certain remedies available to Ginnie Mae as a result of Ditech Financial's and RMS' actions, but advised both Ditech Financial and RMS that Ginnie Mae would forbear from exercising remedies for a period of 125 days provided that Ditech Financial and RMS otherwise complied with the terms set forth in the notice of violation, including complying with additional requests of Ginnie Mae during the forbearance period.

F-90


Ditech Holding Corporation
Schedule I
Financial Information
(Parent Company Only)
(in thousands, except share and per share data)
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
December 31, 2017
ASSETS
 
 
 
 
 
Cash and cash equivalents
 
$
948

 
 
$
506

Restricted cash and cash equivalents
 
1,509

 
 
1,503

Residential loans at amortized cost, net
 
—

 
 
11,602

Residential loans at fair value
 
1,028

 
 
—

Receivables, net
 
19,423

 
 
17,546

Premises and equipment, net
 
104

 
 
600

Deferred tax assets, net
 
—

 
 
2,119

Other assets
 
36,076

 
 
27,639

Due from affiliates, net
 
—

 
 
89,429

Investments in consolidated subsidiaries and VIEs
 
1,317,587

 
 
1,453,385

Total assets
 
$
1,376,675

 
 
$
1,604,329

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' DEFICIT
 
 
 
 
 
Payables and accrued liabilities
 
$
35,701

 
 
$
31,922

Corporate debt
 
1,133,218

 
 
1,214,663

Due to affiliates, net
 
225,879

 
 
—

Total liabilities not subject to compromise
 
1,394,798

 
 
1,246,585

Liabilities subject to compromise
 
—

 
 
806,937

Total liabilities
 
1,394,798

 
 
2,053,522

 
 
 
 
 
 
Stockholders' deficit:
 
 
 
 
 
Preferred stock, $0.01 par value per share (Successor and Predecessor):
 
 
 
 
 
Authorized - 10,000,000 shares, including 100,000 shares of mandatorily convertible preferred stock, at December 31, 2018 (Successor) and 10,000,000 shares at December 31, 2017 (Predecessor)
 
 
 
 
 
Issued and outstanding - 91,408 shares at December 31, 2018 (Successor) and 0 shares at December 31, 2017 (Predecessor) (liquidation preference $97,246)
 
1

 
 
—

Common stock, $0.01 par value per share (Successor and Predecessor):
 
 
 
 
 
Authorized - 90,000,000 shares (Successor and Predecessor)
 
 
 
 
 
Issued and outstanding - 5,328,417 shares at December 31, 2018 (Successor) and 37,373,616 shares at December 31, 2017 (Predecessor)
 
53

 
 
374

Additional paid-in capital
 
186,825

 
 
598,193

Accumulated deficit
 
(205,094
)
 
 
(1,048,817
)
Accumulated other comprehensive income
 
92

 
 
1,057

Total stockholders' deficit
 
(18,123
)
 
 
(449,193
)
Total liabilities and stockholders' deficit
 
$
1,376,675

 
 
$
1,604,329

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

F-91


Ditech Holding Corporation
Schedule I
Financial Information
(Parent Company Only)
(in thousands)
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
REVENUES
 
 
 
 
 
 
 
Interest income on loans
 
$
(48
)
 
 
$
68

 
$
865

Other revenues, net
 
1,086

 
 
47

 
355

Total revenues
 
1,038

 
 
115

 
1,220

 
 
 
 
 
 
 
 
EXPENSES
 
 
 
 
 
 
 
Interest expense
 
111,696

 
 
7,519

 
134,660

Salaries and benefits
 
44,401

 
 
6,071

 
40,763

General and administrative
 
47,782

 
 
821

 
95,660

Depreciation and amortization
 
—

 
 
—

 
700

Corporate allocations
 
(76,537
)
 
 
(11,779
)
 
(86,309
)
Other expenses, net
 
(615
)
 
 
34

 
564

Total expenses
 
126,727

 
 
2,666

 
186,038

 
 
 
 
 
 
 
 
OTHER GAINS (LOSSES)
 
 
 
 
 
 
 
Reorganization items and fresh start accounting adjustments
 
(2,726
)
 
 
458,511

 
(37,645
)
Net losses on extinguishment of debt
 
(4,454
)
 
 
(864
)
 
(1,797
)
Other net fair value gains
 
4,715

 
 
—

 
—

Other
 
(9,066
)
 
 
—

 
—

Total other gains (losses)
 
(11,531
)
 
 
457,647

 
(39,442
)
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
(137,220
)
 
 
455,096

 
(224,260
)
Income tax benefit
 
(613
)
 
 
(3,918
)
 
(24,381
)
Income (loss) before equity in income (losses) of consolidated subsidiaries and VIEs
 
(136,607
)
 
 
459,014

 
(199,879
)
Equity in income (losses) of consolidated subsidiaries and VIEs
 
(68,487
)
 
 
61,993

 
(227,020
)
Net income (loss)
 
$
(205,094
)
 
 
$
521,007

 
$
(426,899
)
 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
$
(205,002
)
 
 
$
521,007

 
$
(426,889
)
The accompanying notes are an integral part of these financial statements.


F-92


Ditech Holding Corporation
Schedule I
Financial Information
(Parent Company Only)
(in thousands)
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Cash flows used in operating activities
 
$
(97,036
)
 
 
$
(30,622
)
 
$
(71,410
)
 
 
 
 
 
 
 
 
Investing activities
 
 
 
 
 
 
 
Principal payments and proceeds received on mortgage loans held for investment
 
776

 
 
26

 
1,443

Purchases of premises and equipment
 
—

 
 
—

 
(1,099
)
Capital contributions to subsidiaries and VIEs
 
(10,564
)
 
 
(741
)
 
(102,897
)
Returns of capital from subsidiaries and VIEs
 
2,446

 
 
2

 
223,999

Change in due from affiliates
 
(65,744
)
 
 
77,262

 
171,805

Proceeds from the sale of residual interests in Residual Trusts, net
 
45,250

 
 
—

 
—

Other
 
8,670

 
 
(5
)
 
11,861

Cash flows provided by (used in) investing activities
 
(19,166
)
 
 
76,544

 
305,112

 
 
 
 
 
 
 
 
Financing activities
 
 
 
 
 
 
 
Payments on corporate debt
 
(157,645
)
 
 
(110,590
)
 
(186,910
)
Other debt issuance costs paid
 
(11,065
)
 
 
—

 
(32,573
)
Change in due to affiliates
 
285,162

 
 
64,866

 
(14,409
)
Other
 
—

 
 
—

 
(76
)
Cash flows provided by (used in) financing activities
 
116,452

 
 
(45,724
)
 
(233,968
)
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents and restricted cash and cash equivalents
 
250

 
 
198

 
(266
)
Cash and cash equivalents and restricted cash and cash equivalents at the beginning of the period
 
2,207

 
 
2,009

 
2,275

Cash and cash equivalents and restricted cash and cash equivalents at the end of the period
 
$
2,457

 
 
$
2,207

 
$
2,009

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


F-93


Ditech Holding Corporation
Schedule I
Notes to the Parent Company Financial Statements

1. Basis of Presentation
The financial information of the Parent Company should be read in conjunction with the Consolidated Financial Statements included in this report. These Parent Company financial statements reflect the results of operations, financial position and cash flows for the Parent Company and its investment in consolidated subsidiaries and VIEs, for which it is the primary beneficiary, using the equity method of accounting.
The accompanying Parent Company financial statements have been prepared in accordance with GAAP. The preparation of these Parent Company financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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.
2. Emergence from the WIMC Reorganization Proceedings
On November 30, 2017, Walter Investment Management Corp. (Predecessor) filed the WIMC Bankruptcy Petition under the Bankruptcy Code to pursue the WIMC Prepackaged Plan announced on November 6, 2017. On January 17, 2018, the Bankruptcy Court approved the amended WIMC Prepackaged Plan and on January 18, 2018, entered a confirmation order approving the WIMC Prepackaged Plan. On February 9, 2018, the WIMC Prepackaged Plan became effective pursuant to its terms and Walter Investment Management Corp. emerged from the WIMC Chapter 11 Case and changed its name to Ditech Holding Corporation (Successor) and on February 12, 2018, our newly issued common stock commenced trading on the NYSE under the symbol DHCP. From and after effectiveness of the WIMC Prepackaged Plan, the Parent Company has continued, in its previous organizational form, to carry out its business.
The impact of the WIMC Reorganization on the Parent Company's debt and equity is discussed in further detail in Notes 20, 23 and 25 to the Consolidated Financial Statements.
Liabilities Subject to Compromise
Liabilities subject to compromise included unsecured or under-secured liabilities incurred prior to the WIMC Petition Date. These liabilities represented the amounts that were expected to be allowed on known or potential claims to be resolved through the WIMC Chapter 11 Case and were subject to future adjustments based on negotiated settlements with claimants, actions of the Bankruptcy Court, rejection of executory contracts, proofs of claims or other events. Generally, actions to enforce or otherwise effect payment of prepetition liabilities are subject to the automatic stay or an approved motion of the Bankruptcy Court.
The Parent Company's liabilities that were subject to compromise consisted of the following (in thousands):
 
 
Predecessor
 
 
December 31, 2017
Senior Notes
 
$
538,662

Convertible Notes
 
242,468

Accrued interest (1)
 
25,807

Total liabilities subject to compromise
 
$
806,937

__________
(1)
Represents accrued interest on the Senior Notes and Convertible Notes as of November 30, 2017, the date the Company filed the WIMC Bankruptcy Petition. As interest on the Senior Notes and Convertible Notes subsequent to November 30, 2017 was not expected to be an allowed claim, this amount excludes interest that would have been accrued subsequent to November 30, 2017. Interest expense reported on the Parent Company statements of comprehensive income (loss) for the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017 excludes $5.9 million and $4.4 million, respectively, of interest on the Senior Notes and Convertible Notes that otherwise would have been accrued for the period.
On the WIMC Effective Date, all of the Parent Company's obligations under the previously outstanding Convertible Notes and Senior Notes listed above were extinguished. Previously outstanding debt interests were exchanged for Second Lien Notes, common stock, Mandatorily Convertible Preferred Stock, Series A Warrants and/or Series B Warrants, as applicable.

F-94


Reorganization Items and Fresh Start Accounting Adjustments
The Parent Company met the conditions to qualify under GAAP for fresh start accounting, and accordingly, adopted fresh start accounting effective February 10, 2018. The Parent Company's reorganization items and fresh start accounting adjustments consist of the following (in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Gain on cancellation of corporate debt
 
$
—

 
 
$
556,937

 
$
—

Less: issuance of new equity to Convertible and Senior Noteholders
 
—

 
 
153,764

 
—

Net gain on cancellation of corporate debt
 
—

 
 
403,173


—

Less:
 
 
 
 
 
 
 
Legal and professional fees (1)
 
2,123

 
 
12,461

 
3,098

Write-off deferred debt issuance costs and discounts
 
—

 
 
—

 
34,406

Other expenses
 
603

 
 
3,378

 
141

Total expenses
 
2,726

 
 
15,839


37,645

Total reorganization items
 
(2,726
)


387,334

 
(37,645
)
Fresh start accounting adjustments
 
—

 
 
71,177

 
—

Reorganization items and fresh start accounting adjustments
 
$
(2,726
)
 
 
$
458,511

 
$
(37,645
)
__________
(1)
Professional fees are directly related to the WIMC Reorganization.
The Parent Company made cash payments for reorganization items of $11.8 million and $5.7 million during the period from February 10, 2018 through December 31, 2018 and the period from January 1, 2018 through February 9, 2018, respectively. There were no payments made for the year ended December 31, 2017.
3. Supplemental Disclosures of Cash Flow Information
The Parent Company’s supplemental disclosures of cash flow information are summarized as follows (in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Supplemental Disclosure of Cash Flow Information
 
 
 
 
 
 
 
Cash paid for interest
 
$
87,389

 
 
$
7,437

 
$
93,327

Cash received for taxes
 
(938
)
 
 
(78
)
 
(72,982
)
Supplemental Disclosure of Non-Cash Investing and Financing Activities
 
 
 
 
 
 
 
Contributions to subsidiaries
 
2,013

 
 
—

 
184,474

Distributions from subsidiaries
 
—

 
 
—

 
4,474

4. Guarantees
Refer to Note 28 to the Consolidated Financial Statements for certain guarantees made by the Parent Company in regards to Ditech Financial and RMS. In addition to these guarantees, all obligations of Ditech Financial and RMS under master repurchase agreements and certain servicing advance facilities are guaranteed by the Parent Company. The Parent Company also guarantees certain subsidiary obligations such as agreements to perform servicing in accordance with contract terms.

F-95


5. Subsequent Events
On January 16, 2019, the Parent Company and certain of its subsidiaries entered into forbearance agreements with (i) certain holders of greater than 75% of the aggregate principal amount of the outstanding Second Lien Notes, (ii) certain lenders of greater than 50% of the aggregate principal amount outstanding under the 2018 Credit Agreement and the administrative agent and collateral agent under the 2018 Credit Agreement and (iii) the requisite buyers and variable funding noteholders, as applicable, under certain warehouse facility agreements. Pursuant to the forbearance agreements, the parties noted above agreed to temporarily forbear from the exercise of any rights or remedies they may have in respect of the aforementioned anticipated events of default or other defaults or events of default arising out of or in connection therewith.
On February 8, 2019, the Parent Company and certain of its subsidiaries entered into additional forbearance agreements with (i) certain lenders holding greater than 50% of the sum of (a) the loans outstanding, (b) letter of credit exposure and (c) unused commitments under the 2018 Credit Agreement at such time and the administrative agent and collateral agent under the 2018 Credit Agreement, (ii) the requisite buyers and variable funding noteholders, as applicable, under certain warehouse facility agreements and (iii) the counterparty under a certain master securities forward transaction agreement.
On February 11, 2019, as contemplated by the DHCP RSA, the Debtors filed the DHCP Bankruptcy Petitions and the DHCP Chapter 11 Cases commenced thereby under the Bankruptcy Code in the Bankruptcy Court. Consistent with the DHCP RSA, on March 5, 2019, the Debtors filed the DHCP Plan with the Bankruptcy Court seeking to emerge from Chapter 11 on an expedited timeframe. The Debtors filed an amended DHCP Plan with the Bankruptcy Court on March 28, 2019. The Debtors are continuing to operate their businesses as debtors in possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. The Parent Company and its consolidated subsidiaries intend to continue to operate their businesses during the pendency of the DHCP Chapter 11 Cases. To assure ordinary course operations, the Debtors have obtained approval from the Bankruptcy Court for a variety of first day motions seeking various relief, authorizing them to maintain their operations in the ordinary course.
Restructuring Support Agreement
On February 8, 2019, the Debtors entered into the DHCP RSA with the Consenting Term Lenders holding, as of February 11, 2019, more than 75% of the term loans outstanding under the 2018 Credit Agreement.
Pursuant to the DHCP RSA, the Consenting Term Lenders and the Debtors have agreed to the principal terms of a financial restructuring of the Parent Company and consolidated subsidiaries, which will be implemented through a prearranged plan of reorganization under the Bankruptcy Code and which provides for the restructuring of the Parent Company's indebtedness through a recapitalization transaction that is expected to reduce gross corporate debt by over $800 million and provide the reorganized company with an appropriately sized working capital facility upon emergence from the DHCP Reorganization Transaction.
The DHCP RSA also provides for the continuation of the Parent Company’s prepetition review of strategic alternatives, whereby, as a potential alternative to the implementation of a DHCP Reorganization Transaction, any and all bids for the Parent Company and its consolidated subsidiaries or its assets will be evaluated as a precursor to confirmation of any Chapter 11 plan of reorganization.
The review of strategic alternatives provides a public and comprehensive forum in which the Debtors are seeking bids or proposals for three types of potential transactions, as described below. If a bid or proposal is received representing higher or better value than the DHCP Reorganization Transaction, it will either be incorporated into the DHCP Reorganization Transaction or pursued as an alternative to the DHCP Reorganization Transaction in consultation with the Consenting Term Lenders and subject to the DHCP RSA.
The three types of transactions for which bids are being solicited are:
•
a sale transaction meaning, a sale of substantially all of the Parent Company's and its consolidated subsidiaries' assets, as provided in the DHCP RSA;
•
an asset sale transaction meaning, the sale of a portion of the Parent Company's and its consolidated subsidiaries' assets other than a sale transaction consummated prior to DHCP Effective Date; provided such sale shall only be conducted with the consent of the Requisite Term Lenders; and
•
a master servicing transaction meaning, as part of the DHCP Reorganization Transaction to the extent the terms thereof are acceptable to the Requisite Term Lenders, entry by the Parent Company and/or its consolidated subsidiaries into an agreement or agreements with an approved subservicer or subservicers whereby, following the DHCP Effective Date, all or substantially all of the Parent Company’s consolidated subsidiaries' mortgage servicing rights are subserviced by the new subservicer.

F-96


The DHCP RSA presently contemplates the following treatment for certain key classes of creditors under the DHCP Reorganization Transaction:
•
DHCP DIP Warehouse Facilities Claims - On the DHCP Effective Date, the holders of DHCP DIP Warehouse Facilities claims will be paid in full in cash;
•
Term Loan Claims - On the DHCP Effective Date, the holders of Term Loan Claims will receive their pro rata share of new term loans under an amended and restated credit facility agreement in the aggregate principal amount of $400 million, and 100% of the New Common Stock, which will be privately held;
•
Second Lien Notes Claims - On the DHCP Effective Date, the holders of the Second Lien Notes will not receive any distribution;
•
Go-Forward Trade Claims - On the DHCP Effective Date, trade creditors identified by the Parent Company and its consolidated subsidiaries (with the consent of the Requisite Term Lenders) as being integral to and necessary for the ongoing operations of New Ditech) will receive a distribution in cash in an amount equaling a certain percentage of their claim, subject to an aggregate cap; and
•
Existing Equity Interests - On the DHCP Effective Date, holders of the Parent Company’s existing preferred stock, common stock and warrants will have their claims extinguished.
If the Debtors proceed to confirmation of a sale transaction, the Debtors will distribute proceeds of such transaction in accordance with the priority scheme under the Bankruptcy Code.
Under the DHCP RSA, on the Election Date, the Electing Term Lenders may deliver an election notice to the Parent Company stating that the Electing Term Lenders wish to consummate an elected transaction as follows: (i) the DHCP Reorganization Transaction, or (ii) master servicing transaction (as part of the DHCP Reorganization Transaction), or (iii) sale transaction, and, if applicable, (iv) in connection and together with an election of (i), (ii), or (iii), any asset sale transaction(s), provided that inclusion of any asset sale transaction(s) is not incompatible with successful consummation of the elected transaction in (i), (ii) or (iii). If the Debtors do not proceed with the elected transaction, the Consenting Term Lenders can terminate the DHCP RSA.
On February 11, 2019, as contemplated by the DHCP RSA, the Debtors filed the DHCP Bankruptcy Petitions and the DHCP Chapter 11 Cases commenced thereby under the Bankruptcy Code in the Bankruptcy Court. Consistent with the DHCP RSA, on March 5, 2019, the Debtors filed the DHCP Plan with the Bankruptcy Court seeking to emerge from Chapter 11 on an expedited timeframe. The Debtors filed an amended DHCP Plan with the Bankruptcy Court on March 28, 2019. The Debtors are continuing to operate their businesses as debtors in possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. The Parent Company and its consolidated subsidiaries intend to continue to operate their businesses during the pendency of the DHCP Chapter 11 Cases. To assure ordinary course operations, the Debtors have obtained approval from the Bankruptcy Court for a variety of first day motions seeking various relief, authorizing them to maintain their operations in the ordinary course.
The filing of the DHCP Bankruptcy Petitions described above triggers an event of default or an early amortization event under certain of the Parent Company's debt instruments. The filing of the DHCP Bankruptcy Petitions also triggers the liquidation preference of the Company’s Mandatorily Convertible Preferred Stock. Certain of the Parent Company's obligations, including the payment of interest under the Parent Company's debt instruments, are stayed under the Bankruptcy Code during the pendency of the DHCP Chapter 11 Cases.
During the pendency of the DHCP Chapter 11 Cases, the Bankruptcy Court granted relief enabling the Parent Company and certain of its subsidiaries to conduct their business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing the payment of employee wages and benefits, the payment of taxes and certain governmental fees and charges, continued operation of the cash management system in the ordinary course, and payment of the prepetition claims to certain of the Parent Company's vendors. For goods and services provided following the DHCP Petition Date, the Parent Company continues to pay vendors under normal terms.

F-97


DHCP DIP Warehouse Facilities
On February 8, 2019, the Parent Company, as guarantor, along with its wholly-owned subsidiaries Ditech Financial and RMS, entered into the DHCP Commitment Letter with Barclays Bank PLC and Nomura Corporate Funding Americas, LLC regarding the terms of the DHCP DIP Warehouse Facilities, which, upon approval from the Bankruptcy Court on February 14, 2019, provide the Parent Company and its consolidated subsidiaries up to $1.9 billion in available financing. Proceeds of the DHCP DIP Warehouse Facilities were used to repay and refinance RMS’ and Ditech Financial’s existing master repurchase agreements and variable funding notes issued under existing servicer advance facilities. The existing master repurchase agreements and variable funding notes issued under servicer advance facilities were terminated or otherwise replaced under the DHCP DIP Warehouse Facilities. The DHCP DIP Warehouse Facilities will be used to fund Ditech Financial’s and RMS’ continued business operations, providing the necessary liquidity to the Debtors to implement the DHCP Restructuring.
Under the DHCP DIP Warehouse Facilities:
(i) up to $650.0 million will be available to fund Ditech Financial’s origination business and will incur interest based on 3-month LIBOR plus a per annum margin of 2.25%;
(ii) up to $1.0 billion will be available to RMS to fund certain HECMs and real estate owned from Ginnie Mae securitization pools, and will incur interest based on 3-month LIBOR plus a per annum margin of 3.25%; and
(iii) up to $250.0 million will be available to finance the advance receivables related to Ditech Financial’s servicing activities and will incur interest based on 3-month LIBOR plus a per annum margin of 2.25%. Two new series of variable funding notes were issued under the DHCP DIP Warehouse Facilities to replace the existing variable funding notes under the DAAT Facility and DPAT II Facility, which otherwise remain largely intact to finance advances.
In addition, the lenders under the DHCP DIP Warehouse Facilities have agreed to provide Ditech Financial, through the DIP Maturity Date, up to $1.9 billion in trading capacity for Ditech Financial to hedge its interest rate exposure with respect to the loans in Ditech Financial’s loan origination pipeline. The obligations of Ditech Financial and RMS under certain of the DHCP DIP Warehouse Facilities and related hedges are netted and cross-collateralized, pursuant to the terms of a master netting arrangement. Pursuant to such netting arrangement, the lenders under the DHCP DIP Warehouse Facilities are permitted to set-off and net certain margin held by or pledged to them under certain of the DHCP DIP Warehouse Facilities and related hedges against the obligations owed by Ditech Financial and/or RMS thereunder.
The DHCP DIP Warehouse Facilities contain customary events of default and financial covenants. Financial covenants that are most sensitive to the operating results of the Parent Company's subsidiaries and resulting financial position are minimum tangible net worth requirements, indebtedness to tangible net worth ratio requirements, and minimum liquidity requirements. The Parent Company and its consolidated subsidiaries were in compliance with all financial covenants under the DHCP DIP Warehouse Facilities as of February 28, 2019.

F-98