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Servicing of Residential Loans
 3 Months Ended
Mar. 31, 2015
Transfers and Servicing [Abstract]  
Servicing of Residential Loans
Servicing of Residential Loans
The Company provides servicing for third-party credit owners of mortgage loans and reverse loans and for loans and real estate owned recognized on the consolidated balance sheets. The Company’s total servicing portfolio consists of accounts serviced for others for which servicing rights have been capitalized, accounts sub-serviced for others, as well as residential loans and real estate owned recognized on the consolidated balance sheets.
Provided below is a summary of the Company’s total servicing portfolio (dollars in thousands):
 
 
March 31, 2015
 
December 31, 2014
 
 
Number
of Accounts
 
Unpaid Principal
Balance
 
Number
of Accounts
 
Unpaid Principal
Balance
Third-party credit owners (1)
 
 
 
 
 
 
 
 
Capitalized servicing rights
 
1,557,666

 
$
182,404,047

 
1,573,867

 
$
182,207,043

Capitalized sub-servicing (2)
 
181,185

 
10,116,134

 
187,747

 
10,443,480

Sub-servicing
 
417,075

 
49,684,569

 
431,271

 
50,882,152

Total third-party servicing portfolio
 
2,155,926

 
242,204,750

 
2,192,885

 
243,532,675

On-balance sheet residential loans and real estate owned
 
118,126

 
12,877,242

 
116,763

 
12,579,467

Total servicing portfolio (3)
 
2,274,052

 
$
255,081,992

 
2,309,648

 
$
256,112,142

__________
(1)
Includes real estate owned serviced for third parties.
(2)
Consists of sub-servicing contracts acquired through business combinations whereby the benefits from the contract are greater than adequate compensation for performing the servicing.
(3)
Includes accounts serviced by the Servicing and Reverse Mortgage segments and excludes charged-off loans managed by the Servicing segment.
Net Servicing Revenue and Fees
The Company services loans for itself, as well as for third parties, and 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 (in thousands):
 
 
For the Three Months 
 Ended March 31,
 
 
2015
 
2014
Servicing fees
 
$
171,732

 
$
166,033

Incentive and performance fees
 
31,738

 
42,857

Ancillary and other fees (1)
 
25,483

 
22,653

Servicing revenue and fees
 
228,953

 
231,543

Amortization of servicing rights
 
(7,013
)
 
(11,117
)
Change in fair value of servicing rights
 
(129,235
)
 
(47,634
)
Change in fair value of excess servicing spread liability (2)
 
(1,818
)
 
—

Net servicing revenue and fees
 
$
90,887

 
$
172,792

__________
(1)
Includes late fees of $14.5 million and $12.3 million for the three months ended March 31, 2015 and 2014, respectively.
(2)
Includes interest expense on the excess servicing spread liability, which represents the accretion of fair value, of $2.6 million for the three months ended March 31, 2015.
Servicing Rights
Servicing rights are represented by three classes, which consist of a risk-managed loan class, a mortgage loan class, and a reverse loan class. These classes are based on the availability of market inputs used in determining the fair values of servicing rights and risk management strategies available to the Company. Risks inherent in servicing rights include prepayment and interest rate risks. The risk-managed loan class includes portfolios for which the Company may apply a hedging strategy in the future. 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. Subsequent to initial capitalization, servicing rights are accounted for using either the fair value method or the amortization method based on the servicing class. Servicing rights carried at amortized cost consist of the mortgage loan class and the reverse loan class. Servicing rights carried at fair value consist of the risk-managed loan class.
Servicing Rights Carried at Amortized Cost
The following tables summarize the activity in the carrying value of servicing rights accounted for at amortized cost by class (in thousands):
 
 
For the Three Months 
 Ended March 31, 2015
 
For the Three Months 
 Ended March 31, 2014
 
 
Mortgage Loan
 
Reverse Loan
 
Mortgage Loan
 
Reverse Loan
Balance at beginning of the period
 
$
121,364

 
$
9,311

 
$
161,782

 
$
11,994

Amortization of servicing rights
 
(6,458
)
 
(555
)
 
(10,367
)
 
(750
)
Balance at end of the period
 
$
114,906

 
$
8,756

 
$
151,415

 
$
11,244

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. At March 31, 2015, the fair value of servicing rights for the mortgage loan class and the reverse loan class was $136.5 million and $14.0 million, respectively. At December 31, 2014, the fair value of servicing rights for the mortgage loan class and the reverse loan class was $142.5 million and $14.1 million, respectively. 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:
 
 
March 31, 2015
 
 
Mortgage Loan
 
Reverse Loan
Weighted-average remaining life in years
 
5.6

 
3.3

Weighted-average stated borrower interest rate on underlying collateral
 
7.87
%
 
3.53
%
Weighted-average discount rate
 
12.10
%
 
15.00
%
Conditional prepayment rate (1)
 
6.54
%
 
N/A

Conditional default rate (1)
 
2.62
%
 
N/A

Conditional repayment rate (2)
 
N/A

 
25.13
%
__________
(1)
For the mortgage loan class, voluntary and involuntary prepayment rates have been presented as conditional prepayment rate and conditional default rate, respectively.
(2)
For the reverse loan class, 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):
 
 
For the Three Months 
 Ended March 31,
 
 
2015
 
2014
Balance at beginning of the period
 
$
1,599,541

 
$
1,131,124

Acquisition of EverBank net assets
 
—

 
58,680

Purchases
 
27,713

 
319,047

Servicing rights capitalized upon sales of loans
 
72,301

 
52,613

Change in fair value due to:
 
 
 
 
Changes in valuation inputs or other assumptions (1)
 
(74,534
)
 
(25,618
)
Other changes in fair value (2)
 
(54,701
)
 
(22,016
)
Total change in fair value
 
(129,235
)
 
(47,634
)
Balance at end of the period
 
$
1,570,320

 
$
1,513,830

__________
(1)
Represents the 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.
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 provided in the table below:
 
 
March 31, 
 2015
 
December 31, 
 2014
Weighted-average remaining life in years
 
6.2

 
6.6

Weighted-average stated borrower interest rate on underlying collateral
 
4.53
%
 
4.65
%
Weighted-average discount rate
 
9.77
%
 
9.55
%
Conditional prepayment rate
 
8.88
%
 
7.87
%
Conditional default rate
 
1.63
%
 
2.36
%

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.
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 certain significant assumptions used in valuing these assets (dollars in thousands):
 
 
March 31, 2015
 
December 31, 2014
 
 
 
 
Decline in fair value due to
 
 
 
Decline in fair value due to
 
 
Actual
 
10% adverse change
 
20% adverse change
 
Actual
 
10% adverse change
 
20% adverse change
Weighted-average discount rate
 
9.77
%
 
$
(61,242
)
 
$
(118,210
)
 
9.55
%
 
$
(62,785
)
 
$
(121,117
)
Conditional prepayment rate
 
8.88
%
 
(72,085
)
 
(135,491
)
 
7.87
%
 
(59,344
)
 
(114,523
)
Conditional default rate
 
1.63
%
 
(12,617
)
 
(20,608
)
 
2.36
%
 
(15,388
)
 
(30,285
)

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 accounted for at fair value.
 
 
For the Three Months 
 Ended March 31,
 
 
2015
 
2014
Weighted-average life in years
 
6.4 - 7.0
 
 7.0 - 7.7
Weighted-average stated borrower interest rate on underlying collateral
 
3.93% - 4.14%
 
4.48% - 4.67%
Discount rates
 
9.30% - 9.55%
 
9.50%
Weighted-average conditional prepayment rates
 
6.92% - 9.62%
 
7.26% - 8.35%
Weighted-average conditional default rates
 
0.73% - 0.81%
 
0.64% - 0.66%