Note 3.—Mortgage Servicing Rights

The Company retains 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 expected 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 underlying mortgage 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 three months ended March 31, 2020 and year ended December 31, 2019:


	March 31,		December 31,
	2020		2019
Balance at beginning of year	$	41,470	$	64,728
Additions from servicing retained loan sales		1,689		2,491
Other		—		22
Changes in fair value (1)		(18,831)		(25,771)
Fair value of MSRs at end of period	$	24,328	$	41,470

(1)

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

At March 31, 2020 and December 31, 2019, the UPB of the mortgage servicing portfolio was comprised of the following:


	March 31,		December 31,
	2020		2019
Government insured	$	155,821	$	105,442
Conventional (1)		4,541,150		4,826,407
Total loans serviced (2)	$	4,696,971	$	4,931,849

(1)

In May 2020, the Company sold all of the conventional mortgage servicing for approximately $20.1 million, receiving approximately 74% of the proceeds upon sale, 6% of the proceeds upon transfer of the servicing and the final 20% upon transfer of all trailing documents. The Company used the proceeds from the MSR sale to pay off the MSR financing. (See Note 5.—Debt– MSR Financings)

(2)

At March 31, 2020, $4.5 billion of Freddie Mac servicing was pledged as collateral as part of the MSR Financing. Pledged collateral was approximately 95% of the fair value of MSRs in the consolidated balance sheets at March 31, 2020. No collateral was pledged as part of the MSR Financing at December 31, 2019. (See Note 5.—Debt– MSR Financings)

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.


	March 31,		December 31,
Mortgage Servicing Rights Sensitivity Analysis	2020		2019
Fair value of MSRs	$	24,328	$	41,470
Prepayment Speed:
Decrease in fair value from 10% adverse change		(1,951)		(1,850)
Decrease in fair value from 20% adverse change		(3,709)		(3,631)
Decrease in fair value from 30% adverse change		(5,305)		(5,325)
Discount Rate:
Decrease in fair value from 10% adverse change		(649)		(1,330)
Decrease in fair value from 20% adverse change		(1,266)		(2,579)
Decrease in fair value from 30% adverse change		(1,853)		(3,753)

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, net is comprised of the following for the three months ended March 31, 2020 and 2019:


	For the Three Months Ended
	March 31,
	2020		2019
Change in fair value of mortgage servicing rights	$	(18,831)	$	(6,488)
Gain on sale of mortgage servicing rights		521		865
Loss on mortgage servicing rights, net	$	(18,310)	$	(5,623)

Servicing fees, net is comprised of the following for the three months ended March 31, 2020 and 2019:


	For the Three Months Ended
	March 31,
	2020		2019
Contractual servicing fees	$	3,049	$	4,189
Late and ancillary fees		39		55
Subservicing and other costs		(581)		(1,275)
Servicing fees, net	$	2,507	$	2,969