10-Q 1 wacfy2015q3.htm 10-Q 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 _______________________________________________________________________________________
Form 10-Q
 
 
_______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________          
Commission file number: 001-13417
 
_______________________________________________________________________________________
Walter Investment Management Corp.
(Exact name of registrant as specified in its charter)
 
_______________________________________________________________________________________ 
 
Maryland
 
13-3950486
(State or other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
3000 Bayport Drive, Suite 1100
Tampa, FL
 
33607
(Address of principal executive offices)
 
(Zip Code)
(813) 421-7600
(Registrant's telephone number, including area code)

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
 
 
 
 
 
 
 
Large accelerated filer
 
x
  
Accelerated filer
 
o
 
 
 
 
 
 
 
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
The registrant had 37,802,297 shares of common stock outstanding as of October 30, 2015.
_______________________________________________________________________________________ 
 



WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
FORM 10-Q
INDEX
 
 
 
 
 
 
Page
No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
 
September 30, 
 2015
 
December 31, 
 2014
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Cash and cash equivalents
 
$
268,601

 
$
320,175

Restricted cash and cash equivalents
 
740,459

 
733,015

Residential loans at amortized cost, net (includes $4,116 and $10,033 in allowance for loan losses at September 30, 2015 and December 31, 2014, respectively)
 
538,894

 
1,314,539

Residential loans at fair value
 
12,729,586

 
11,832,630

Receivables, net (includes $19,313 and $25,201 at fair value at September 30, 2015 and December 31, 2014, respectively)
 
246,775

 
215,629

Servicer and protective advances, net (includes $113,294 and $112,427 in allowance for uncollectible advances at September 30, 2015 and December 31, 2014, respectively)
 
1,529,222

 
1,761,082

Servicing rights, net (includes $1,639,624 and $1,599,541 at fair value at September 30, 2015 and December 31, 2014, respectively)
 
1,752,770

 
1,730,216

Goodwill
 
518,929

 
575,468

Intangible assets, net
 
87,513

 
103,503

Premises and equipment, net
 
104,618

 
124,926

Other assets (includes $70,678 and $68,151 at fair value at September 30, 2015 and December 31, 2014, respectively)
 
258,966

 
280,794

Total assets
 
$
18,776,333

 
$
18,991,977

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Payables and accrued liabilities (includes $36,838 and $30,024 at fair value at September 30, 2015 and December 31, 2014, respectively)
 
$
602,454

 
$
663,829

Servicer payables
 
633,949

 
584,567

Servicing advance liabilities
 
1,209,082

 
1,365,885

Warehouse borrowings
 
1,225,437

 
1,176,956

Excess servicing spread liability at fair value
 
59,569

 
66,311

Corporate debt
 
2,216,123

 
2,267,799

Mortgage-backed debt (includes $599,389 and $653,167 at fair value at September 30, 2015 and December 31, 2014, respectively)
 
1,080,606

 
1,751,459

HMBS related obligations at fair value
 
10,745,030

 
9,951,895

Deferred tax liability, net
 
58,981

 
86,617

Total liabilities
 
17,831,231

 
17,915,318

 
 
 
 
 
Commitments and contingencies (Note 20)
 

 

 
 
 
 
 
Stockholders' equity:
 
 
 
 
Preferred stock, $0.01 par value per share:
 
 
 
 
Authorized - 10,000,000 shares
 
 
 
 
Issued and outstanding - 0 shares at September 30, 2015 and December 31, 2014
 

 

Common stock, $0.01 par value per share:
 
 
 
 
Authorized - 90,000,000 shares
 
 
 
 
Issued and outstanding - 37,802,297 and 37,711,623 shares at September 30, 2015 and December 31, 2014, respectively
 
378

 
377

Additional paid-in capital
 
614,889

 
600,643

Retained earnings
 
329,189

 
475,244

Accumulated other comprehensive income
 
646

 
395

Total stockholders' equity
 
945,102

 
1,076,659

Total liabilities and stockholders' equity
 
$
18,776,333

 
$
18,991,977


3



The following table presents the assets and liabilities of the Company’s consolidated variable interest entities, which are included on the consolidated balance sheets above. The assets in the table below include those assets that can only be used to settle obligations of the consolidated variable interest entities. The liabilities in the table below include third-party liabilities of the consolidated variable interest entities only, and for which creditors or beneficial interest holders do not have recourse to the Company, and exclude intercompany balances that eliminate in consolidation.

 
 
September 30, 
 2015
 
December 31, 
 2014
ASSETS OF CONSOLIDATED VARIABLE INTEREST ENTITIES THAT CAN ONLY BE USED TO SETTLE THE OBLIGATIONS OF CONSOLIDATED VARIABLE INTEREST ENTITIES:
 
(unaudited)
 
 
Restricted cash and cash equivalents
 
$
53,715

 
$
105,977

Residential loans at amortized cost, net
 
509,631

 
1,292,781

Residential loans at fair value
 
538,190

 
586,433

Receivables at fair value
 
19,313

 
25,201

Servicer and protective advances, net
 
1,106,985

 
1,273,186

Other assets
 
14,324

 
46,199

Total assets
 
$
2,242,158

 
$
3,329,777

 
 
 
 
 
LIABILITIES OF THE CONSOLIDATED VARIABLE INTEREST ENTITIES FOR WHICH CREDITORS OR BENEFICIAL INTEREST HOLDERS DO NOT HAVE RECOURSE TO THE COMPANY:
 
 
 
 
Payables and accrued liabilities
 
$
3,326

 
$
8,511

Servicing advance liabilities
 
996,498

 
1,160,257

Mortgage-backed debt (includes $599,389 and $653,167 at fair value at September 30, 2015 and December 31, 2014, respectively)
 
1,080,606

 
1,751,459

Total liabilities
 
$
2,080,430

 
$
2,920,227

The accompanying notes are an integral part of the consolidated financial statements.


4



WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in thousands, except per share data)

 
 
For the Three Months 
 Ended September 30,
 
For the Nine Months 
 Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
REVENUES
 
 
 
 
 
 
 
 
Net servicing revenue and fees
 
$
(1,771
)
 
$
163,411

 
$
313,031

 
$
477,179

Net gains on sales of loans
 
116,218

 
127,515

 
360,844

 
376,160

Interest income on loans
 
12,410

 
33,451

 
62,537

 
102,091

Net fair value gains on reverse loans and related HMBS obligations
 
52,644

 
25,268

 
90,233

 
69,440

Insurance revenue
 
8,763

 
14,566

 
34,323

 
57,760

Other revenues
 
31,129

 
21,789

 
81,715

 
87,031

Total revenues
 
219,393

 
386,000

 
942,683

 
1,169,661

 
 
 
 
 
 
 
 
 
EXPENSES
 
 
 
 
 
 
 
 
Salaries and benefits
 
142,088

 
147,278

 
432,473

 
428,677

General and administrative
 
132,067

 
143,445

 
402,814

 
394,651

Interest expense
 
66,728

 
76,722

 
210,264

 
226,261

Depreciation and amortization
 
20,646

 
17,918

 
53,371

 
54,953

Goodwill impairment
 



 
56,539

 
82,269

Other expenses, net
 
2,595

 
4,160

 
8,043

 
8,363

Total expenses
 
364,124

 
389,523

 
1,163,504

 
1,195,174

 
 
 
 
 
 
 
 
 
OTHER GAINS (LOSSES)
 
 
 
 
 
 
 
 
Other net fair value gains
 
1,119

 
16,794

 
3,573

 
15,823

Other
 
12,054

 
(590
)
 
21,013

 
(590
)
Total other gains (losses)
 
13,173

 
16,204

 
24,586

 
15,233

 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
(131,558
)
 
12,681

 
(196,235
)
 
(10,280
)
Income tax expense (benefit)
 
(54,630
)
 
83,484

 
(50,180
)
 
56,075

Net loss
 
$
(76,928
)
 
$
(70,803
)
 
$
(146,055
)
 
$
(66,355
)
 
 
 
 
 
 
 
 
 
Comprehensive loss
 
$
(76,793
)
 
$
(71,023
)
 
$
(145,804
)
 
$
(66,566
)
 
 
 
 
 
 
 
 
 
Net loss
 
$
(76,928
)
 
$
(70,803
)
 
$
(146,055
)
 
$
(66,355
)
 
 
 
 
 
 
 
 
 
Basic loss per common and common equivalent share
 
$
(2.04
)
 
$
(1.88
)
 
$
(3.87
)
 
$
(1.76
)
Diluted loss per common and common equivalent share
 
(2.04
)
 
(1.88
)
 
(3.87
)
 
(1.76
)
 
 
 
 
 
 
 
 
 
Weighted-average common and common equivalent shares outstanding — basic
 
37,802

 
37,707

 
37,760

 
37,604

Weighted-average common and common equivalent shares outstanding — diluted
 
37,802

 
37,707

 
37,760

 
37,604

The accompanying notes are an integral part of the consolidated financial statements.

5



WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)
(in thousands, except share data)

 
 
Common Stock
 
Additional Paid-
In Capital
 
Retained
Earnings
 
Accumulated Other
Comprehensive
Income
 
 
 
 
Shares
 
Amount
 
 
 
 
Total
Balance at January 1, 2015
 
37,711,623

 
$
377

 
$
600,643

 
$
475,244

 
$
395

 
$
1,076,659

Net loss
 

 

 

 
(146,055
)
 

 
(146,055
)
Other comprehensive income, net of tax
 

 

 

 

 
251

 
251

Share-based compensation
 

 

 
14,345

 

 

 
14,345

Tax shortfall on share-based compensation
 

 

 
(298
)
 

 

 
(298
)
Issuance of shares under incentive plans
 
90,674

 
1

 
199

 

 

 
200

Balance at September 30, 2015
 
37,802,297

 
$
378

 
$
614,889

 
$
329,189

 
$
646

 
$
945,102

The accompanying notes are an integral part of the consolidated financial statements.



6



WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

 
 
For the Nine Months 
 Ended September 30,
 
 
2015
 
2014
Operating activities
 
 
 
 
Net loss
 
$
(146,055
)
 
$
(66,355
)
 
 
 
 
 
Adjustments to reconcile net loss to net cash provided by operating activities
 
 
 
 
Net fair value gains on reverse loans and related HMBS obligations
 
(90,233
)
 
(69,440
)
Amortization of servicing rights
 
20,634

 
31,527

Change in fair value of servicing rights
 
353,023

 
182,022

Change in fair value of excess servicing spread liability
 
107

 
3

Change in fair value of charged-off loans
 
(16,294
)
 
(3,625
)
Other net fair value (gains) losses
 
3,483

 
(7,549
)
Accretion of discounts on residential loans and advances
 
(6,301
)
 
(11,961
)
Accretion of discounts on debt and amortization of deferred debt issuance costs
 
16,062

 
14,576

Amortization of master repurchase agreements deferred issuance costs
 
4,688

 
5,251

Amortization of servicing advance liabilities deferred issuance costs
 
3,313

 
5,110

Provision for uncollectible advances
 
39,278

 
41,381

Depreciation and amortization of premises and equipment and intangible assets
 
53,371

 
54,953

Losses (gains) on real estate owned, net
 
2,586

 
(1,161
)
Benefit for deferred income taxes
 
(28,118
)
 
(25,771
)
Share-based compensation
 
14,345

 
11,571

Purchases and originations of residential loans held for sale
 
(20,158,426
)
 
(13,728,216
)
Proceeds from sales of and payments on residential loans held for sale
 
20,165,907

 
13,881,782

Proceeds from sale of trading security
 
70,390

 

Net gains on sales of loans
 
(360,844
)
 
(376,160
)
Gain on sale of trading security
 
(10,296
)
 

Gain on sale of investments
 
(8,959
)
 

Goodwill impairment
 
56,539

 
82,269

Other
 
(2,340
)
 
4,268

 
 
 
 
 
Changes in assets and liabilities
 
 
 
 
Decrease (increase) in receivables
 
(36,651
)
 
69,049

Decrease (increase) in servicer and protective advances
 
213,520

 
(161,355
)
Decrease (increase) in other assets
 
9,396

 
(2,584
)
Increase (decrease) in payables and accrued liabilities
 
(53,491
)
 
85,371

Increase (decrease) in servicer payables
 
5,880

 
(8,408
)
Cash flows provided by operating activities
 
114,514

 
6,548

 
 
 
 
 

7



 
 
For the Nine Months 
 Ended September 30,
 
 
2015
 
2014
Investing activities
 
 
 
 
Purchases and originations of reverse loans held for investment
 
(1,259,927
)
 
(1,041,836
)
Principal payments received on reverse loans held for investment
 
618,446

 
382,015

Principal payments received on mortgage loans held for investment
 
93,062

 
122,029

Payments received on charged-off loans held for investment
 
19,859

 
8,623

Payments received on receivables related to Non-Residual Trusts
 
5,547

 
7,676

Cash proceeds from sales of real estate owned, net
 
56,948

 
35,346

Purchases of premises and equipment
 
(16,706
)
 
(17,346
)
Decrease in restricted cash and cash equivalents
 
7,039

 
4,822

Payments for acquisitions of businesses, net of cash acquired
 
(4,737
)
 
(195,307
)
Acquisitions of servicing rights
 
(233,744
)
 
(172,775
)
Proceeds from sale of investment
 
14,376

 

Proceeds from sale of servicing rights
 
778

 
9,499

Proceeds from sale of residual interests in Residual Trusts
 
189,513

 

Acquisitions of charged-off loans held for investment
 

 
(64,548
)
Other
 
7,950

 
(11,569
)
Cash flows used in investing activities
 
(501,596
)
 
(933,371
)
 
 
 
 
 
Financing activities
 
 
 
 
Payments on corporate debt
 
(62,544
)
 
(13,150
)
Proceeds from securitizations of reverse loans
 
1,382,359

 
1,159,757

Payments on HMBS related obligations
 
(739,447
)
 
(439,526
)
Issuances of servicing advance liabilities
 
712,307

 
929,216

Payments on servicing advance liabilities
 
(869,110
)
 
(851,771
)
Net change in warehouse borrowings related to mortgage loans
 
142,481

 
66,433

Net change in warehouse borrowings related to reverse loans
 
(94,000
)
 
(18,574
)
Proceeds from sale of excess servicing spread
 

 
75,426

Payments on excess servicing spread liability
 
(6,849
)
 
(2,205
)
Other debt issuance costs paid
 
(6,926
)
 
(14,054
)
Payments on mortgage-backed debt
 
(109,808
)
 
(135,697
)
Other
 
(12,955
)
 
4,995

Cash flows provided by financing activities
 
335,508

 
760,850

 
 
 
 
 
Net decrease in cash and cash equivalents
 
(51,574
)
 
(165,973
)
Cash and cash equivalents at beginning of the period
 
320,175

 
491,885

Cash and cash equivalents at end of the period
 
$
268,601

 
$
325,912

The accompanying notes are an integral part of the consolidated financial statements.

8



WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business and Basis of Presentation
Walter Investment Management Corp. and its subsidiaries, or the Company, is a mortgage banking firm focused primarily on servicing and originating residential loans, including reverse loans. The Company services loans for its own portfolio and for GSEs, government agencies, third-party securitization trusts and other credit owners. In addition, the Company operates several other businesses which include managing a portfolio of credit-challenged, non-conforming residential mortgage loans; an insurance agency serving borrowers and credit owners of its servicing portfolio; a post charge-off collection agency; and an asset management business. The Company operates throughout the U.S.
Certain acronyms and terms used throughout these notes are defined in the Glossary of Terms in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Interim Financial Reporting
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and related notes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company’s material estimates and assumptions primarily arise from risks and uncertainties associated with interest rate volatility, prepayment volatility, credit exposure, and borrower mortality rates and include, but are not limited to, the valuation of residential loans, servicing rights, goodwill, derivatives, mortgage-backed debt, and HMBS related obligations and also the allowance for uncollectible advances and contingencies. Although management is not currently aware of any factors that would significantly change its estimates and assumptions, actual results may differ from these estimates.
Changes in Presentation
Certain prior year amounts have been reclassified to conform to current year presentation. During the first quarter of 2015, the Company reorganized its reportable segments, changed the composition of indirect costs and depreciation and amortization allocated to the business segments, and established an intersegment charge between the Servicing and Originations segments for certain loan originations associated with the Company's mortgage loan servicing portfolio. Refer to Note 18 for additional information.
Recent Accounting Guidance
In January 2014, the FASB issued an accounting standards update that clarifies the definition of an in-substance repossession and foreclosure, and requires additional disclosures related to these items. This amendment reduces diversity in practice by clarifying when an in-substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The required disclosures under these new amendments require interim and annual disclosures of both (i) the amount of foreclosed residential real estate property held by the creditor and (ii) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. These additional disclosures are included in Note 5.

9



In April 2014, the FASB issued an accounting standards update which changes the criteria for reporting discontinued operations. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of, or is classified as held for sale, and represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. Major strategic shifts include disposals of a significant geographic area or line of business. The new standard allows an entity to have significant continuing involvement and cash flows with the discontinued operation. The standard requires expanded disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. The amendments in this standard were effective for the Company beginning January 1, 2015. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued guidance that supersedes most revenue recognition requirements regarding contracts with customers to transfer goods or services or for the transfer of nonfinancial assets. The guidance also supersedes most industry specific guidance but does exclude insurance contracts and financial instruments. Under the new guidance, entities are required to recognize revenue in order to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step analysis to be performed on transactions to determine when and how revenue is recognized. In April 2015, the FASB voted for a one-year deferral of the effective date of the new revenue recognition standard, resulting in this new guidance being effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. Entities have the option of using either a full retrospective application or a modified retrospective application to adopt the guidance. Early adoption is not permitted. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements, including the method it will choose for adoption.
In June 2014, the FASB issued an accounting standards update on transfers and servicing, effective prospectively for fiscal years beginning after December 15, 2014 and interim periods within those years. The new guidance requires that repurchase financing arrangements be accounted for as secured borrowings and provides for enhanced disclosures, including the nature of collateral pledged and the time to maturity. Certain interim period disclosures for repurchase agreements are effective for interim periods beginning after March 15, 2015. The adoption of the guidance addressing the accounting for repurchase financing arrangements, which was effective beginning January 1, 2015, did not have an impact on the Company’s consolidated financial statements as the Company already records repurchase agreements as secured borrowings. The new disclosure requirements are included in Note 13.
In August 2014, the FASB issued an accounting standards update regarding an alternative approach on measuring the financial assets and financial liabilities of a consolidated CFE (referred to as the measurement alternative). The accounting standard update provides an entity with an election to measure the financial assets and financial liabilities of a consolidated CFE to be measured on the basis of either the fair value of the CFE’s financial assets or financial liabilities, whichever is more observable. The new guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2015 with early adoption permitted. The adoption of this standard is not expected to have a significant impact on the Company's consolidated financial statements.
In August 2014, the FASB issued an accounting standards update on the classification of certain foreclosed mortgage loans held by creditors that are either fully or partially guaranteed under government programs. The amendments are intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. The amendment requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met, (i) the loan has a government guarantee that is not separable from the loan before foreclosure; (ii) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (iii) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this standard were effective for the Company beginning January 1, 2015. The adoption of this standard did not have a significant impact on the Company’s consolidated financial statements.
In January 2015, the FASB issued an accounting standards update eliminating the concept of extraordinary items. This amendment is intended to reduce complexity in accounting standards. Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Eliminating the extraordinary classification simplifies income statement presentation by altogether removing the concept of extraordinary items from consideration. The new guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2015 with early adoption permitted. The adoption of this standard is not expected to have a significant impact on the Company's consolidated financial statements.

10



In February 2015, the FASB issued an accounting standards update which requires amendments to both the variable interest entity and voting models. The amendments (i) rescind the indefinite deferral of certain aspects of accounting standards relating to consolidations and provide a permanent scope exception for registered money market funds and similar unregistered money market funds, (ii) modify the identification of variable interests (fees paid to a decision maker or service provider), the VIE characteristics for a limited partnership or similar entity and primary beneficiary determination under the VIE model, and (iii) eliminate the presumption within the current voting model that a general partner controls a limited partnership or similar entity. The new guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2015 with early adoption permitted. The amendments may be applied using either a modified retrospective or full retrospective approach. The Company elected to early adopt these amendments and therefore the amendments in this standard were effective for the Company beginning April 1, 2015. The adoption of this standard did not result in any additional consolidations of variable interest entities.
In April 2015, the FASB issued an accounting standards update regarding the approach for recognizing debt issuance costs. The amendment now requires entities to recognize debt issuance costs as a direct deduction from the carrying amount of the related debt liability and not recorded as a separate asset. The new guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2015 with early adoption permitted. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The adoption of this standard will not have a significant impact on the Company's consolidated financial statements.
In August 2015, as a clarification to the accounting standards update for recognizing debt issuance costs in the paragraph above, the FASB issued an accounting standards update regarding the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. Given the absence of authoritative guidance for debt issuance costs related to line-of-credit arrangements in the aforementioned accounting standards update, the SEC Staff stated that it would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the costs ratably over the term of the arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit. As noted above, the new guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2015 with early adoption permitted. The adoption of this standard will not have a significant impact on the Company's consolidated financial statements.
In April 2015, the FASB issued an accounting standards update which provides guidance regarding whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the entity should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the entity should account for the arrangement as a service contract. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2015 with early adoption permitted. The Company is currently evaluating the effect, if any, the guidance will have on its consolidated financial statements.
In September 2015, the FASB issued an accounting standards update which provides updated guidance regarding simplifying the accounting for recognizing adjustments to provisional amounts identified during the measurement period in a business combination. To simplify the accounting for these adjustments, the amendments in this update eliminate the requirement to retrospectively account for the adjustments and to recognize them in the period that they are identified. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2015 with early adoption permitted. The adoption of this guidance will not have a significant impact on the Company's consolidated financial statements.
2. Significant Accounting Policies
Included in Note 2 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 is a summary of the Company’s significant accounting policies. Provided below is a summary of an additional accounting policy relating to the deconsolidation of a subsidiary during the nine months ended September 30, 2015.
Deconsolidation of Marix
During the second quarter of 2015, the Company completed the contribution of 100% of the equity of Marix to WCO pursuant to the terms of an amended contribution agreement among the Company, WCO and certain other parties. Pursuant to such agreement and as consideration for such contribution, during the quarter ended September 30, 2015, the Company received 300,000 partnership common units in WCO LP, a contingent consideration, following achievement by Marix of various post-contribution milestones, including the purchase of its first MSR. The Company elected to account for the partnership common units as a gain contingency. As a result, during the three months ended September 30, 2015 the Company recorded a $3.1 million gain for the consideration received for the contribution of Marix which is recorded in other gains on the consolidated statements of comprehensive loss.

11



The Company, in exchange for a servicing fee, has entered into agreements to service assets held by WCO, including Marix. Although WCO is not obligated to utilize the Company to service its assets, it is anticipated that the Company will have the opportunity to service some or all of such assets, subject to the Company and WCO agreeing on the terms of any such servicing arrangements.
3. Variable Interest Entities
Consolidated Variable Interest Entities
In April 2015, the Company sold its residual interests in seven of the Residual Trusts that it previously consolidated for $189.5 million in cash proceeds. Upon the sale of the residual interests, the Company determined that it was no longer required to consolidate the seven trusts as it was no longer the primary beneficiary of these trusts since (i) it did not hold the residual securities issued by the trusts and therefore had no obligation to absorb future losses to the extent of its investment and no right to receive future benefits from the trust, both of which could potentially be significant to the trusts, and (ii) it is adequately compensated and its role as servicer is of a fiduciary nature. In conjunction with the transaction, the Company deconsolidated the seven Residual Trusts and removed related assets of $783.9 million and liabilities of $588.5 million from its consolidated balance sheet and recorded servicing rights of $3.1 million. As a result of the sale the Company recorded a loss of $2.8 million which is recorded in other gains on the consolidated statements of comprehensive loss.
With the exception of the aforementioned sale, included in Note 4 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 are descriptions of the Company’s variable interests in VIEs that it continues to consolidate as it has determined that it is the primary beneficiary of such VIEs.
Included in the tables below are summaries of the carrying amounts of the assets and liabilities of consolidated VIEs (in thousands):
 
 
September 30, 2015
 
 
Residual
Trusts
 
Non-Residual
Trusts
 
Servicer and
Protective
Advance
Financing
Facilities
 
Total
Assets
 
 
 
 
 
 
 
 
Restricted cash and cash equivalents
 
$
13,856

 
$
11,607

 
$
28,252

 
$
53,715

Residential loans at amortized cost, net
 
509,631

 

 

 
509,631

Residential loans at fair value
 

 
538,190

 

 
538,190

Receivables at fair value
 

 
19,313

 

 
19,313

Servicer and protective advances, net
 

 

 
1,106,985

 
1,106,985

Other assets
 
12,057

 
733

 
1,534

 
14,324

Total assets
 
$
535,544

 
$
569,843

 
$
1,136,771

 
$
2,242,158

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Payables and accrued liabilities
 
$
2,269

 
$

 
$
1,057

 
$
3,326

Servicing advance liabilities
 

 

 
996,498

 
996,498

Mortgage-backed debt
 
481,217

 
599,389

 

 
1,080,606

Total liabilities
 
$
483,486

 
$
599,389

 
$
997,555

 
$
2,080,430


12



 
 
December 31, 2014
 
 
Residual
Trusts
 
Non-Residual
Trusts
 
Servicer and
Protective
Advance
Financing
Facilities
 
Total
Assets
 
 
 
 
 
 
 
 
Restricted cash and cash equivalents
 
$
41,632

 
$
12,710

 
$
51,635

 
$
105,977

Residential loans at amortized cost, net
 
1,292,781

 

 

 
1,292,781

Residential loans at fair value
 

 
586,433

 

 
586,433

Receivables at fair value
 

 
25,201

 

 
25,201

Servicer and protective advances, net
 

 

 
1,273,186

 
1,273,186

Other assets
 
41,758

 
1,023

 
3,418

 
46,199

Total assets
 
$
1,376,171

 
$
625,367

 
$
1,328,239

 
$
3,329,777

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Payables and accrued liabilities
 
$
7,590

 
$

 
$
921

 
$
8,511

Servicing advance liabilities
 

 

 
1,160,257

 
1,160,257

Mortgage-backed debt
 
1,098,292

 
653,167

 

 
1,751,459

Total liabilities
 
$
1,105,882

 
$
653,167

 
$
1,161,178

 
$
2,920,227

Unconsolidated Variable Interest Entities
Included in Note 4 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 are descriptions of the Company’s variable interests in VIEs that it does not consolidate as it has determined that it is not the primary beneficiary of such VIEs.
During the nine months ended September 30, 2015, the Company, in exchange for a servicing fee, entered into agreements to service assets held by WCO. Refer to additional information at Note 9.
4. Transfers of Residential Loans
Sales of Mortgage Loans
As part of its originations activities, the Company sells substantially all of its originated or purchased mortgage loans into the secondary market for securitization or to private investors as whole loans. The Company sells conventional conforming and government-backed mortgage loans through GSE and agency-sponsored securitizations in which mortgage-backed securities are created and sold to third-party investors. The Company also sells non-conforming mortgage loans to private investors. The Company accounts for these transfers as sales, and in most, but not all, cases, retains the servicing rights associated with the sold loans. If the servicing rights are retained, the Company receives a servicing fee for servicing the sold loans, which represents continuing involvement.
Certain guarantees arise from agreements associated with the sale of the Company's residential loans. Under these agreements, the Company may be obligated to repurchase loans, or otherwise indemnify or reimburse the credit owner or insurer for losses incurred, due to material breach of contractual representations and warranties. Refer to Note 20 for further information.
The following table presents the carrying amounts of the Company’s assets that relate to its continued involvement with mortgage loans that have been sold with servicing rights retained and the unpaid principal balance of these loans (in thousands):
 
 
Carrying Value of Assets
Recorded on the Consolidated Balance Sheets
 
Unpaid
Principal
Balance of
Sold Loans

 
Servicing
Rights, Net
 
Servicer and
Protective
Advances, Net
 
Total
 
September 30, 2015
 
$
456,798

 
$
14,129

 
$
470,927

 
$
43,075,736

December 31, 2014
 
331,365

 
13,146

 
344,511

 
28,457,216


13



At September 30, 2015 and December 31, 2014, 0.4% and 0.3%, respectively, of mortgage loans sold and serviced by the Company were 60 days or more past due.
The Company has elected to measure mortgage loans held for sale at fair value. The gains and losses on the sale of mortgage loans held for sale are included in net gains on sales of loans on the consolidated statements of comprehensive loss. Also included in net gains on sales of loans is interest income earned during the period the loans were held, the change in fair value of loans, and the gain or loss on the related freestanding derivatives. All activity related to mortgage loans held for sale and the related freestanding derivatives are included in operating activities on the consolidated statements of cash flows.
The following table presents a summary of cash flows related to sales of mortgage loans (in thousands):
 
 
For the Three Months 
 Ended September 30,
 
For the Nine Months 
 Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Proceeds received from sales, net of fees
 
$
7,456,037

 
$
5,848,708

 
$
20,125,035

 
$
13,929,054

Servicing fees collected (1)
 
31,040

 
16,968

 
79,804

 
43,719

Repurchases of previously sold loans
 
4,355

 
1,623

 
12,734

 
6,576

__________
(1)
Represents servicing fees collected on all loans sold with servicing retained.
In connection with these sales, the Company recorded servicing rights using a fair value model that utilizes Level 3 unobservable inputs. Refer to Note 9 for information relating to servicing of residential loans.
Transfers of Reverse Loans
The Company, through RMS, is an approved issuer of Ginnie Mae HMBS. The HMBS are guaranteed by Ginnie Mae and collateralized by participation interests in HECMs insured by the FHA. The Company both originates and purchases HECMs. The loans are then pooled and securitized into HMBS that the Company sells into the secondary market with servicing rights retained. Based upon the structure of the Ginnie Mae securitization program, the Company has determined that it has not met all of the requirements for sale accounting and accounts for these transfers as secured borrowings. Under this accounting treatment, the reverse loans remain on the consolidated balance sheets as residential loans. The proceeds from the transfer of reverse loans are recorded as HMBS related obligations with no gain or loss recognized on the transfer. Ginnie Mae, as guarantor of the HMBS, is obligated to the holders of the HMBS in an instance of RMS default on its servicing obligations, or when the proceeds realized on HECMs are insufficient to repay all outstanding HMBS related obligations. Ginnie Mae has recourse to RMS to the extent of the participation interests in HECMs serving as collateral to the HMBS, but does not have recourse to the general assets of the Company, except that Ginnie Mae has recourse to RMS in connection with certain claims relating to the performance and obligations of RMS as both an issuer of HMBS and a servicer of HECMs underlying HMBS.
The Company elects to measure reverse loans and HMBS related obligations at fair value. The changes in fair value of the reverse loans and HMBS related obligations are included in net fair value gains on reverse loans and related HMBS obligations on the consolidated statements of comprehensive loss. Included in net fair value gains on reverse loans and related HMBS obligations is the contractual interest income earned on the reverse loans and the contractual interest expense incurred on the HMBS related obligations. Net fair value gains on reverse loans and related HMBS obligations are recognized as an adjustment in reconciling net income or loss to the net cash provided by or used in operating activities on the consolidated statements of cash flows. Purchases and originations of and repayment of principal received on reverse loans held for investment are included in investing activities on the consolidated statements of cash flows. Proceeds from securitizations of reverse loans and payments on HMBS related obligations are included in financing activities on the consolidated statements of cash flows.
At September 30, 2015, the unpaid principal balance and the carrying value associated with both the reverse loans and the real estate owned pledged as collateral to the securitization pools were $10.0 billion and $10.7 billion, respectively.
5. Fair Value
Basis for Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A three-tier fair value hierarchy is used to prioritize the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:

14



Level 1 — Valuation is based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 — Valuation is based on quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 — Valuation is based on inputs that are both significant to the fair value measurement and unobservable.
The accounting guidance concerning fair value allows the Company to elect to measure financial instruments at fair value and report the changes in fair value through net income or loss. This election can only be made at certain specified dates and is irrevocable once made. Other than mortgage loans held for sale, which the Company has elected to measure at fair value, the Company does not have a fair value election policy, but rather makes the election on an instrument-by-instrument basis as assets and liabilities are acquired or incurred, other than for those assets and liabilities that are required to be recorded and subsequently measured at fair value.
Transfers into and out of the fair value hierarchy levels are assumed to be as of the end of the quarter in which the transfer occurred. There were no transfers between levels during the three and nine months ended September 30, 2015 and 2014.
Items Measured at Fair Value on a Recurring Basis
The following table summarizes the assets and liabilities in each level of the fair value hierarchy (in thousands). There were no assets or liabilities measured at fair value on a recurring basis utilizing Level 1 assumptions.
 
 
September 30, 
 2015
 
December 31, 
 2014
Level 2
 
 
 
 
Assets
 
 
 
 
Mortgage loans held for sale
 
$
1,266,247

 
$
1,124,615

Freestanding derivative instruments
 
4,384

 
7,751

Level 2 assets
 
$
1,270,631

 
$
1,132,366

Liabilities
 
 
 
 
Freestanding derivative instruments
 
$
36,681

 
$
29,761

Level 2 liabilities
 
$
36,681

 
$
29,761

 
 
 
 
 
Level 3
 
 
 
 
Assets
 
 
 
 
Reverse loans
 
$
10,871,497

 
$
10,064,365

Mortgage loans related to Non-Residual Trusts
 
538,190

 
586,433

Charged-off loans
 
53,652

 
57,217

Receivables related to Non-Residual Trusts
 
19,313

 
25,201

Servicing rights carried at fair value
 
1,639,624

 
1,599,541

Freestanding derivative instruments (IRLCs)
 
66,294

 
60,400

Level 3 assets
 
$
13,188,570

 
$
12,393,157

Liabilities
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
157

 
$
263

Excess servicing spread liability
 
59,569

 
66,311

Mortgage-backed debt related to Non-Residual Trusts
 
599,389

 
653,167

HMBS related obligations
 
10,745,030

 
9,951,895

Level 3 liabilities
 
$
11,404,145

 
$
10,671,636


15



The following assets and liabilities are measured on the consolidated balance sheets at fair value on a recurring basis utilizing significant unobservable inputs or Level 3 assumptions in their valuation. The following tables provide a reconciliation of the beginning and ending balances of these assets and liabilities (in thousands):
 
 
For the Three Months Ended September 30, 2015
 
 
Fair Value
July 1, 2015
 
Total
Gains (Losses)
Included in
Comprehensive Loss
 
Purchases
 
Sales
 
Originations / Issuances
 
Settlements
 
Fair Value September 30, 2015
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse loans
 
$
10,736,098

 
$
52,625

 
$
178,021

 
$

 
$
158,971

 
$
(254,218
)
 
$
10,871,497

Mortgage loans related to Non-Residual Trusts
 
553,410

 
9,793

 

 

 

 
(25,013
)
 
538,190

Charged-off loans (1)
 
53,624

 
12,745

 

 

 

 
(12,717
)
 
53,652

Receivables related to Non-Residual Trusts
 
20,800

 
207

 

 

 

 
(1,694
)
 
19,313

Servicing rights carried at fair value
 
1,797,721

 
(224,929
)
 
42,551

 
(60,094
)
 
84,375

 

 
1,639,624

Freestanding derivative instruments (IRLCs)
 
50,750

 
15,638

 

 

 

 
(94
)
 
66,294

Total assets
 
$
13,212,403

 
$
(133,921
)
 
$
220,572

 
$
(60,094
)
 
$
243,346

 
$
(293,736
)
 
$
13,188,570

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
(4,791
)
 
$
4,634

 
$

 
$

 
$

 
$

 
$
(157
)
Excess servicing spread liability
 
(64,556
)
 
450

 

 

 

 
4,537

 
(59,569
)
Mortgage-backed debt related to Non-Residual Trusts
 
(616,794
)
 
(8,668
)
 

 

 

 
26,073

 
(599,389
)
HMBS related obligations
 
(10,588,671
)
 
19

 

 

 
(431,126
)
 
274,748

 
(10,745,030
)
Total liabilities
 
$
(11,274,812
)
 
$
(3,565
)
 
$

 
$

 
$
(431,126
)
 
$
305,358

 
$
(11,404,145
)
__________
(1)
Included in gains on charged-off loans are gains from instrument-specific credit risk which primarily result from changes in assumptions related to collection rates and discount rates of $7.6 million .

16




 
 
For the Nine Months Ended September 30, 2015
 
 
Fair Value
January 1,
2015
 
Total
Gains (Losses)
Included in
Comprehensive Loss
 
Purchases
 
Sales
 
Originations / Issuances
 
Settlements
 
Fair Value September 30, 2015
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse loans (1)
 
$
10,064,365

 
$
244,712

 
$
687,880

 
$
(16,592
)
 
$
572,306

 
$
(681,174
)
 
$
10,871,497

Mortgage loans related to Non-Residual Trusts
 
586,433

 
29,957

 

 

 

 
(78,200
)
 
538,190

Charged-off loans (2)
 
57,217

 
34,436

 

 

 

 
(38,001
)
 
53,652

Receivables related to Non-Residual Trusts
 
25,201

 
(341
)
 

 

 

 
(5,547
)
 
19,313

Servicing rights carried at fair value
 
1,599,541

 
(353,023
)
 
209,713

 
(60,094
)
 
243,487

 

 
1,639,624

Freestanding derivative instruments (IRLCs)
 
60,400

 
6,308

 

 

 

 
(414
)
 
66,294

Total assets
 
$
12,393,157

 
$
(37,951
)
 
$
897,593

 
$
(76,686
)
 
$
815,793

 
$
(803,336
)
 
$
13,188,570

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
(263
)
 
$
106

 
$

 
$

 
$

 
$

 
$
(157
)
Excess servicing spread liability
 
(66,311
)
 
(7,062
)
 

 

 

 
13,804

 
(59,569
)
Mortgage-backed debt related to Non-Residual Trusts
 
(653,167
)
 
(25,498
)
 

 

 

 
79,276

 
(599,389
)
HMBS related obligations
 
(9,951,895
)
 
(154,577
)
 


 

 
(1,382,359
)
 
743,801

 
(10,745,030
)
Total liabilities
 
$
(10,671,636
)
 
$
(187,031
)
 
$

 
$

 
$
(1,382,359
)
 
$
836,881

 
$
(11,404,145
)
__________
(1)
During the nine months ended September 30, 2015, the Company sold $16.6 million in reverse loans and recognized $0.1 million in net losses on sales of loans.
(2)
Included in gains on charged-off loans are gains from instrument-specific credit risk, which primarily result from changes in assumptions related to collection rates and discount rates of $16.3 million.


17



 
 
For the Three Months Ended September 30, 2014
 
 
Fair Value
July 1, 2014
 
Total
Gains (Losses)
Included in
Comprehensive
Loss
 
Purchases
 
Sales
 
Originations / Issuances
 
Settlements
 
Fair Value
September 30, 2014
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse loans
 
$
9,482,030

 
$
23,721

 
$
172,298

 
$

 
$
154,212

 
$
(165,660
)
 
$
9,666,601

Mortgage loans related to Non-Residual Trusts (1)
 
557,786

 
69,368

 

 

 

 
(28,038
)
 
599,116

Charged-off loans (2)
 
54,997

 
9,449

 
7,496

 

 

 
(12,392
)
 
59,550

Receivables related to Non-Residual Trusts (1)
 
36,181

 
(4,268
)
 

 

 

 
(1,980
)
 
29,933

Servicing rights carried at fair value
 
1,496,073

 
(50,836
)
 

 
(10,866
)
 
57,441

 

 
1,491,812

Freestanding derivative instruments (IRLCs)
 
75,526

 
(26,719
)
 

 

 

 

 
48,807

Total assets
 
$
11,702,593

 
$
20,715

 
$
179,794

 
$
(10,866
)
 
$
211,653

 
$
(208,070
)
 
$
11,895,819

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
(87
)
 
$
(628
)
 
$

 
$

 
$

 
$

 
$
(715
)
Excess servicing spread liability
 

 
(2,656
)
 

 

 
(75,426
)
 
5,036

 
(73,046
)
Mortgage-backed debt related to Non-Residual Trusts (1)
 
(651,784
)
 
(48,032
)
 

 

 

 
28,196

 
(671,620
)
HMBS related obligations
 
(9,472,666
)
 
1,547

 

 

 
(320,326
)
 
173,047

 
(9,618,398
)
Total liabilities
 
$
(10,124,537
)
 
$
(49,769
)
 
$

 
$

 
$
(395,752
)
 
$
206,279

 
$
(10,363,779
)
__________
(1)
Included in gains (losses) on mortgage loans, receivables and mortgage-backed debt related to Non-Residual Trusts are gains (losses) from instrument-specific credit risk of $56.4 million, $(3.6) million and $(36.0) million, respectively, due primarily from changes in assumptions related to the reduction of discount rates resulting from tightening of yields in the market.
(2)
Included in gains on charged-off loans are gains from instrument-specific credit risk, which primarily result from changes in assumptions related to collection rates and discount rates of $3.6 million.



18



 
 
For the Nine Months Ended September 30, 2014
 
 
Fair Value
January 1,
2014
 
Acquisition
of EverBank
Net Assets
 
Total
Gains (Losses)
Included in
Comprehensive
Loss
 
Purchases
 
Sales
 
Originations / Issuances
 
Settlements
 
Fair Value
September 30, 2014
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse loans
 
$
8,738,503

 
$

 
$
318,701

 
$
610,418

 
$

 
$
432,244

 
$
(433,265
)
 
$
9,666,601

Mortgage loans related to Non-Residual Trusts (1)
 
587,265

 

 
97,022

 

 

 

 
(85,171
)
 
599,116

Charged-off loans (2)
 

 

 
10,910

 
64,548

 

 

 
(15,908
)
 
59,550

Receivables related to Non-Residual Trusts (1)
 
43,545

 

 
(5,936
)
 

 

 

 
(7,676
)
 
29,933

Servicing rights carried at fair value
 
1,131,124

 
58,680

 
(182,022
)
 
339,288

 
(10,866
)
 
155,608

 

 
1,491,812

Freestanding derivative instruments (IRLCs)
 
42,831

 

 
5,976

 

 

 

 

 
48,807

Total assets
 
$
10,543,268

 
$
58,680

 
$
244,651

 
$
1,014,254

 
$
(10,866
)
 
$
587,852

 
$
(542,020
)
 
$
11,895,819

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
(3,755
)
 
$

 
$
3,040

 
$

 
$

 
$

 
$

 
$
(715
)
Excess servicing spread liability
 

 

 
(2,656
)
 

 

 
(75,426
)
 
5,036

 
(73,046
)
Mortgage-backed debt related to Non-Residual Trusts (1)
 
(684,778
)
 

 
(73,446
)
 

 

 

 
86,604

 
(671,620
)
HMBS related obligations
 
(8,652,746
)
 

 
(249,261
)
 

 

 
(1,159,757
)
 
443,366

 
(9,618,398
)
Total liabilities
 
$
(9,341,279
)
 
$

 
$
(322,323
)
 
$

 
$

 
$
(1,235,183
)
 
$
535,006

 
$
(10,363,779
)
__________
(1)
Included in gains (losses) on mortgage loans, receivables and mortgage-backed debt related to Non-Residual Trusts are gains (losses) from instrument-specific credit risk of $57.6 million, $(5.3) million and $(35.1) million, respectively, due primarily from changes in assumptions related to the reduction of discount rates resulting from tightening of yields in the market.
(2)
Included in gains on charged-off loans are gains from instrument-specific credit risk, which primarily result from changes in assumptions related to collection rates and discount rates of $3.6 million.
All gains and losses on assets and liabilities measured at fair value on a recurring basis and classified as Level 3 within the fair value hierarchy, with the exception of gains and losses on charged-off loans, IRLCs, servicing rights carried at fair value, and the excess servicing spread liability, are recognized in either other net fair value gains (losses) or net fair value gains on reverse loans and related HMBS obligations on the consolidated statements of comprehensive loss. Gains and losses related to charged-off loans are recorded in other revenues while gains and losses relating to IRLCs are recorded in net gains on sales of loans on the consolidated statements of comprehensive loss. The change in fair value of servicing rights carried at fair value and the excess servicing spread liability are recorded in net servicing revenue and fees on the consolidated statements of comprehensive loss. Total gains and losses included in the financial statement line items disclosed above include interest income and interest expense at the stated rate for interest-bearing assets and liabilities, respectively, accretion and amortization, and the impact of the changes in valuation inputs and assumptions.
The Company’s valuation committee determines and approves valuation policies and unobservable inputs used to estimate the fair value of items measured at fair value on a recurring basis. The valuation committee, consisting of certain members of the senior executive management team, meets on a quarterly basis to review the assets and liabilities that require fair value measurement, including how each asset and liability has actually performed in comparison to the unobservable inputs and the projected performance provided by the Company’s credit risk group. The valuation committee also reviews related available market data.

19



The following is a description of the methods used to estimate the fair values of the Company’s assets and liabilities measured at fair value on a recurring basis, as well as the basis for classifying these assets and liabilities as Level 2 or 3 within the fair value hierarchy. The Company’s valuations consider assumptions that it believes a market participant would consider in valuing the assets and liabilities, the most significant of which are disclosed below. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the valuations for recent historical experience, as well as for current and expected relevant market conditions.
Residential loans
Reverse loans, mortgage loans related to Non-Residual Trusts and charged-off loans — These loans are not traded in an active, open market with readily observable prices. Accordingly, the Company estimates fair value using Level 3 unobservable market inputs. The estimated fair value is based on the net present value of projected cash flows over the estimated life of the loans. The discount rate assumption for these assets considers, as applicable, collateral and credit risk characteristics of the loans, collection rates, current market interest rates, expected duration, and current market yields.

Mortgage loans held for sale — These loans are valued using a market approach by utilizing observable quoted market prices, where available, or prices for other whole loans with similar characteristics. The Company classifies these loans as Level 2 within the fair value hierarchy.
Receivables related to Non-Residual Trusts — The Company estimates the fair value of these receivables using the net present value of expected cash flows from the LOCs to be used to pay debt holders over the remaining life of the securitization trusts and applies Level 3 unobservable market inputs in its valuation. Receivables related to Non-Residual Trusts are recorded in receivables, net, on the consolidated balance sheets.
Servicing rights carried at fair value — The Company accounts for servicing rights associated with the risk-managed loan class at fair value. The Company uses a discounted cash flow model to estimate the fair value of these assets. The assumptions utilized are based on collateral stratifications including product type, remittance type, geography, delinquency, and coupon dispersion of the underlying loan portfolio. The Company classifies servicing rights within Level 3 of the fair value hierarchy.

Freestanding derivative instruments — Fair values of IRLCs are derived using valuation models incorporating market pricing for instruments with similar characteristics and by estimating the fair value of the servicing rights expected to be recorded at sale of the loan and are adjusted for anticipated loan funding probability. Both the fair value of servicing rights expected to be recorded at the date of sale of the loan and anticipated loan funding probability are significant unobservable inputs and, as a result, IRLCs are classified as Level 3 within the fair value hierarchy. The loan funding probability ratio represents the aggregate likelihood that loans currently in a lock position will ultimately close, which is largely dependent on the loan processing stage that a loan is currently in and changes in interest rates from the time of the rate lock through the time a loan is closed. IRLCs have positive fair value at inception and change in value as interest rates and loan funding probability change. Rising interest rates have a positive effect on the fair value of the servicing rights component of the IRLC fair value and increase the loan funding probability. An increase in loan funding probability (i.e., higher aggregate likelihood of loans estimated to close) will result in the fair value of the IRLC increasing if in a gain position, or decreasing, to a lower loss, if in a loss position. A significant increase (decrease) to the fair value of servicing rights component in isolation could result in a significantly higher (lower) fair value measurement.
The fair value of forward sales commitments and MBS purchase commitments is determined based on observed market pricing for similar instruments; therefore, these contracts are classified as Level 2 within the fair value hierarchy. Counterparty credit risk is taken into account when determining fair value, although the impact is diminished by daily margin posting on all forward sales and purchase commitments. Refer to Note 6 for additional information on freestanding derivative financial instruments.
Excess servicing spread liability — The Company uses a discounted cash flow model to estimate the fair value of this liability. The assumptions utilized are based on collateral stratifications including product type, remittance type, geography, delinquency, and coupon dispersion of the underlying loan portfolio. The Company classifies its excess servicing spread liability as Level 3 within the fair value hierarchy.
Mortgage-backed debt related to Non-Residual Trusts — This debt is not traded in an active, open market with readily observable prices. Accordingly, the Company estimates fair value using Level 3 unobservable market inputs. The estimated fair value of the debt is based on the net present value of the projected principal and interest payments owed for the remaining life of the securitization trusts. An analysis of the credit assumptions for the underlying collateral in each of the securitization trusts is performed to determine the required payments to debt holders.

20



HMBS related obligations — These obligations are not traded in an active, open market with readily observable prices. Accordingly, the Company estimates fair value using Level 3 unobservable market inputs. The estimated fair value is based on the net present value of projected cash flows over the estimated life of the liability. The discount rate assumption for these liabilities is based on an assessment of current market yields for HMBS, expected duration, and current market interest rates. The yield on seasoned HMBS is adjusted based on the duration of each HMBS and assuming a constant spread to LIBOR.
The following tables present the significant unobservable inputs used in the fair value measurement of the assets and liabilities described above. The Company utilizes a discounted cash flow model to estimate the fair value of all Level 3 assets and liabilities included on the consolidated financial statements at fair value on a recurring basis, with the exception of IRLCs for which the Company utilizes a market approach.
With the exception of IRLCs and collection rates associated with charged-off loans, significant increases (decreases) in any of the inputs related to assets disclosed below, in isolation, could result in a significantly lower (higher) fair value measurement. Significant increases (decreases) in any of the inputs related to liabilities, other than IRLCs, and collection rates on charged-off loans, as disclosed below, in isolation, could result in a significantly higher (lower) fair value measurement. The impact on fair value for increases and decreases to significant unobservable inputs related to IRLCs is discussed above.
 
 
 
 
September 30, 2015
 
December 31, 2014
 
 
Significant
Unobservable Input
(1) (2)
 
Range of Input (3)
 
Weighted
Average of Input
(3)
 
Range of Input (3)
 
Weighted
Average of Input
(3)
Assets
 
 
 
 
 
 
 
 
 
 
Reverse loans
 
Weighted-average remaining life in years
 
1.2 - 10.9
 
4.2

 
1.8 - 12.3
 
4.7

 
 
Conditional repayment rate
 
12.40% - 50.64%
 
24.57
%
 
13.40% - 42.20%
 
21.68
%
 
 
Discount rate
 
1.66% - 3.61%
 
2.52
%
 
2.00% - 3.65%
 
2.76
%
Mortgage loans related to Non-Residual Trusts
 
Conditional prepayment rate
 
2.58% - 4.07%
 
3.36
%
 
2.24% - 3.76%
 
3.17
%
 
 
Conditional default rate
 
1.48% - 2.88%
 
2.25
%
 
1.68% - 3.51%
 
2.34
%
 
 
Loss severity
 
70.37% - 94.36%
 
87.52
%
 
76.12% - 92.53%
 
85.88
%
 
 
Discount rate
 
8.00%
 
8.00
%
 
8.00%
 
8.00
%
Charged-off loans
 
Collection rate
 
2.38% - 3.66%
 
2.45
%
 
2.34% - 4.53%
 
2.46
%
 
 
Discount rate
 
30.00% - 32.25%
 
30.18
%
 
30.00% - 32.25%
 
30.19
%
Receivables related to Non-Residual Trusts
 
Conditional prepayment rate
 
1.90% - 3.59%
 
2.79
%
 
1.89% - 3.33%
 
2.72
%
 
 
Conditional default rate
 
1.66% - 3.21%
 
2.48
%
 
1.92% - 3.81%
 
2.55
%
 
 
Loss severity
 
67.58% - 91.33%
 
84.32
%
 
73.26% - 89.78%
 
82.87
%
 
 
Discount rate
 
0.50%
 
0.50
%
 
0.50%
 
0.50
%
Servicing rights carried at fair value
 
Weighted-average remaining life in years
 
5.1 - 9.1
 
6.1

 
5.6 - 9.3
 
6.6

 
 
Discount rate
 
10.00% - 14.34%
 
10.72
%
 
8.24% - 29.16%
 
9.55
%
 
 
Conditional prepayment rate
 
6.05% - 14.24%
 
10.39
%
 
5.04% - 11.15%
 
7.87
%
 
 
Conditional default rate
 
0.04% - 2.37%
 
1.02
%
 
0.28% - 3.53%
 
2.36
%
Interest rate lock commitments
 
Loan funding probability
 
2.34% - 100.00%
 
75.39
%
 
3.44% - 100.00%
 
77.45
%
 
 
Fair value of initial servicing rights multiple (4) 
 
0.05 - 7.43
 
3.76

 
0.20 - 5.47
 
3.83

 

21