Note 3.—Mortgage Servicing Rights

The Company retains mortgage servicing rights (MSRs) from its sales and securitization of certain mortgage loans or as a result of purchase transactions. 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 if delinquent, 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 nine months ended September 30, 2018 and year ended December 31, 2017:


	September 30,		December 31,
	2018		2017
Balance at beginning of period	$	154,405	$	131,537
Additions from servicing retained loan sales		22,473		56,049
Addition from purchases		—		5,618
Reductions from bulk sales (1)		—		(895)
Changes in fair value (2)		4,127		(37,904)
Fair value of MSRs at end of period	$	181,005	$	154,405

(1)

In the first quarter of 2017, the Company sold substantially all of its NonQM MSRs.

(2)

Changes in fair value are included within gain (loss) on MSRs, net in the accompanying consolidated statements of operations and comprehensive (loss) earnings.

At September 30, 2018 and December 31, 2017, the outstanding principal balance of the mortgage servicing portfolio was comprised of the following:


	September 30,		December 31,
	2018		2017
Government insured (1)	$	3,820,752	$	2,834,680
Conventional (2)		12,966,922		13,493,463
NonQM		1,860		1,957
Total loans serviced	$	16,789,534	$	16,330,100

(1)

In October 2018, the Company sold approximately $3.4 billion in UPB of Ginne Mae (GNMA) servicing.

(2)

At September 30, 2018 and December 31, 2017, $13.0 billion and $13.5 billion, respectively, of Fannie Mae and Freddie Mac servicing was pledged as collateral as part of the MSR Financing (See Note 5.—Debt– MSR Financings). Pledged collateral was approximately 77% and 81% of the fair value of MSRs in the consolidated balance sheets at September 30, 2018 and December 31, 2017, respectively.

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 7.—Fair Value of Financial Instruments for a description of the key assumptions used to determine the fair value of MSRs.


	September 30,		December 31,
Mortgage Servicing Rights Sensitivity Analysis	2018		2017
Fair value of MSRs	$	181,005	$	154,405
Prepayment Speed:
Decrease in fair value from 10% adverse change		(1,846)		(5,643)
Decrease in fair value from 20% adverse change		(3,914)		(11,275)
Decrease in fair value from 30% adverse change		(6,216)		(16,807)
Discount Rate:
Decrease in fair value from 10% adverse change		(5,357)		(5,461)
Decrease in fair value from 20% adverse change		(10,346)		(10,555)
Decrease in fair value from 30% adverse change		(15,001)		(15,316)

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) gain on mortgage servicing rights, net is comprised of the following for the three and nine months ended September 30, 2018 and 2017:


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Change in fair value of mortgage servicing rights	$	(5,445)	$	(11,177)	$	4,127	$	(20,038)
Loss on sale of mortgage servicing rights		—		(8)		—		(90)
Realized and unrealized (losses) gains from hedging instruments		253		672		(1,445)		1,969
(Loss) gain on mortgage servicing rights, net	$	(5,192)	$	(10,513)	$	2,682	$	(18,159)

Servicing fees, net is comprised of the following for the three and nine months ended September 30, 2018 and 2017:


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2018			2017	2018		2017
Contractual servicing fees	$	11,458	$	9,978	$	34,322	$	27,356
Late and ancillary fees		182		117		500		275
Subservicing and other costs		(1,516)		(1,603)		(5,377)		(4,056)
Servicing fees, net	$	10,124	$	8,492	$	29,445	$	23,575

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 derecognizes 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 Loans eligible for repurchase from Ginnie Mae, at their UPB, and records a corresponding liability in other liabilities in the consolidated balance sheets. At September 30, 2018 and December 31, 2017, loans eligible for repurchase from GNMA totaled $78.7 million and $47.7 million in UPB, respectively. As part of the Company’s repurchase reserve, the Company records a repurchase provision to provide for estimated losses from the sale or securitization of all mortgage loans, including these loans.

The loans eligible for repurchase from GNMA are in the Company’s servicing portfolio. The Company monitors the delinquency of the servicing portfolio and directs the subservicer to mitigate losses on delinquent loans. In October 2018, the Company sold $3.4 billion in UPB of GNMA MSRs substantially reducing the loans eligible for repurchase from GNMA.