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 six months ended June 30, 2020 and year ended December 31, 2019:


	June 30,		December 31,
	2020		2019
Balance at beginning of year	$	41,470	$	64,728
Additions from servicing retained loan sales		1,753		2,491
Reductions from bulk sales		(21,002)		—
Other		—		22
Changes in fair value (1)		(21,942)		(25,771)
Fair value of MSRs at end of period	$	279	$	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) earnings.

At June 30, 2020 and December 31, 2019, the UPB of the mortgage servicing portfolio was comprised of the following:


	June 30,		December 31,
	2020		2019
Government insured	$	146,180	$	105,442
Conventional (1)		—		4,826,407
Total loans serviced (2)	$	146,180	$	4,931,849

(1)

In May 2020, the Company sold all of the conventional mortgage servicing for approximately $20.1 million, receiving $15.0 million in proceeds upon sale, with the remaining due upon transfer of the servicing and transfer of all trailing documents. The Company used the $15.0 million in proceeds from the MSR sale to pay off the MSR financing. (See Note 5.—Debt– MSR Financings)

(2)

At June 30, 2020 and December 31, 2019, no collateral was pledged as part of the MSR Financing. (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.


	June 30,		December 31,
Mortgage Servicing Rights Sensitivity Analysis	2020		2019
Fair value of MSRs	$	279	$	41,470
Prepayment Speed:
Decrease in fair value from 10% adverse change		*		(1,850)
Decrease in fair value from 20% adverse change		*		(3,631)
Decrease in fair value from 30% adverse change		*		(5,325)
Discount Rate:
Decrease in fair value from 10% adverse change		*		(1,330)
Decrease in fair value from 20% adverse change		*		(2,579)
Decrease in fair value from 30% adverse change		*		(3,753)

*At June 30, 2020, the Company was in the process of selling the remaining GNMA servicing portfolio and the indicative bids support the carrying value.

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 and six months ended June 30, 2020 and 2019:


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Change in fair value of mortgage servicing rights	$	(3,111)	$	(9,881)	$	(21,942)	$	(16,374)
(Loss) gain on sale of mortgage servicing rights		(5,332)		(6)		(4,811)		864
Loss on mortgage servicing rights, net	$	(8,443)	$	(9,887)	$	(26,753)	$	(15,510)

Servicing fees, net is comprised of the following for the three and six months ended June 30, 2020 and 2019:


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2020			2019	2020		2019
Contractual servicing fees	$	2,061	$	3,891	$	5,109	$	8,080
Late and ancillary fees		26		38		65		92
Subservicing and other costs		(735)		(393)		(1,315)		(1,667)
Servicing fees, net	$	1,352	$	3,536	$	3,859	$	6,505

Loans Eligible for Repurchase from Government National Mortgage Association (GNMA or Ginnie Mae)

The Company 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 (whether or not in forbearance), and the repurchase will provide the Company with a more than trivial benefit, the Company then re-recognizes the loans on its consolidated balance sheets in other assets, at their UPB, and records a corresponding liability in other liabilities in the consolidated balance sheets. At June 30, 2020 and December 31, 2019, loans eligible for repurchase from GNMA totaled $12.1 million and $1.7 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.