Note 3.—Mortgage Servicing Rights

The Company retains mortgage servicing rights (MSRs) from its sales of certain mortgage loans. MSRs are reported at fair value based on the income derived from the net projected cash flows associated with the servicing contracts. The Company receives servicing fees, less subservicing costs, on the UPB of the loans. The servicing fees are collected from the monthly payments made by the mortgagors or when the underlying real estate is foreclosed upon and liquidated. The Company may receive other remuneration from rights to various mortgagor-contracted fees, such as late charges, collateral reconveyance charges and nonsufficient fund fees, and the Company is generally entitled to retain the interest earned on funds held pending remittance (or float) related to its collection of mortgagor principal, interest, tax and insurance payments.

The following table summarizes the activity of MSRs for the three months ended March 31, 2017 and year ended December 31, 2016:


	March 31,		December 31,
	2017		2016
Balance at beginning of period	$	131,537	$	36,425
Additions from servicing retained loan sales		12,066		128,273
Reductions from bulk sales (1)		(895)		(8,773)
Changes in fair value (2)		(1,122)		(24,388)
Fair value of MSRs at end of period	$	141,586	$	131,537

(1)

In the first quarter of 2017, the Company sold all but a small portion of our NonQM MSRs.

(2)

Changes in fair value are included within loss on mortgage servicing rights, net in the accompanying consolidated statements of operations.

At March 31, 2017 and December 31, 2016, the outstanding principal balance of the mortgage servicing portfolio was comprised of the following:


	March 31,		December 31,
	2017		2016
Government insured	$	1,737,753	$	1,359,569
Conventional (1)		11,501,180		10,815,998
NonQM		2,975		175,955
Total loans serviced	$	13,241,908	$	12,351,522

(1)

As of March 31, 2017, $6.5 billion of FNMA Conventional servicing rights have been pledged as collateral and subject to an acknowledgement agreement as part of the MSR Financing. (See Note 4. — Debt – MSR Financing.)

The table below illustrates hypothetical changes in fair values of MSRs, caused by assumed immediate changes to key assumptions that are used to determine fair value. See Note 6.—Fair Value of Financial Instruments for a description of the key assumptions used to determine the fair value of MSRs.


	March 31,		December 31,
Mortgage Servicing Rights Sensitivity Analysis	2017		2016
Fair value of MSRs	$	141,586	$	131,537
Prepayment Speed:
Decrease in fair value from 10% adverse change		(2,278)		(4,956)
Decrease in fair value from 20% adverse change		(4,818)		(9,593)
Decrease in fair value from 30% adverse change		(7,558)		(13,940)
Discount Rate:
Decrease in fair value from 10% adverse change		(5,301)		(4,927)
Decrease in fair value from 20% adverse change		(10,232)		(9,511)
Decrease in fair value from 30% adverse change		(14,829)		(13,786)

Sensitivities are hypothetical changes in fair value and cannot be extrapolated because the relationship of changes in assumptions to changes in fair value may not be linear. Also, the effect of a variation in a particular assumption is calculated without changing any other assumption, whereas a change in one factor may result in changes to another. Accordingly, no assurance can be given that actual results would be consistent with the results of these estimates. As a result, actual future changes in MSR values may differ significantly from those displayed above.

Loss on mortgage servicing rights is comprised of the following for the three months ended March 31, 2017 and 2016:


	For the Three Months Ended
	March 31,
	2017		2016
Change in fair value of mortgage servicing rights	$	(1,122)	$	(10,920)
Loss on sale of mortgage servicing rights		(414)		(620)
Realized and unrealized gains from hedging instruments		559		630
Loss on mortgage servicing rights, net	$	(977)	$	(10,910)

Servicing income, net is comprised of the following for the three months ended March 31, 2017 and 2016:


	For the Three Months Ended
	March 31,
	2017		2016
Contractual servicing fees	$	8,366	$	2,633
Late and ancillary fees		85		34
Subservicing and other costs		(1,131)		(579)
Servicing income, net	$	7,320	$	2,088

Loans Eligible for Repurchase from GNMA

The Company routinely sells loans in GNMA guaranteed mortgage‑backed securities (MBS) by pooling eligible loans through a pool custodian and assigning rights to the loans to GNMA. When these GNMA loans are initially pooled and securitized, the Company meets the criteria for sale treatment and de-recognizes the loans. The terms of the GNMA MBS program allow, but do not require, the Company to repurchase mortgage loans when the borrower has made no payments for three consecutive months. When the Company has the unconditional right, as servicer, to repurchase GNMA pool loans it has previously sold and are more than 90 days past due, the Company then re-recognizes the loans on its consolidated balance sheets in other assets, at their unpaid principal balances and records a corresponding liability in other liabilities in the consolidated balance sheets. At March 31, 2017 and December 31, 2016, loans eligible for repurchase from GNMA total $12.2 million and $9.9 million, respectively.