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Servicing of Residential Loans
 12 Months Ended
Dec. 31, 2016
Transfers and Servicing [Abstract]  
Servicing of Residential Loans Disclosure
Servicing of Residential Loans
The Company services residential loans and real estate owned for itself and on behalf of third-party credit owners. The Company’s total servicing portfolio consists of accounts serviced for others for which servicing rights have been capitalized, accounts subserviced for others, and residential loans and real estate owned carried on the consolidated balance sheets, but excludes charged-off loans managed by the Servicing segment.
Provided below is a summary of the Company’s total servicing portfolio (dollars in thousands):
 
 
December 31, 2016
 
December 31, 2015
 
 
Number
of Accounts
 
Unpaid Principal
Balance
 
Number
of Accounts
 
Unpaid Principal
Balance
Third-party credit owners
 
 
 
 
 
 
 
 
Capitalized servicing rights (1)
 
1,032,676

 
$
112,936,287

 
1,637,541

 
$
197,154,579

Capitalized subservicing (2)
 
130,018

 
7,426,803

 
159,368

 
9,053,755

Subservicing (3) (4)
 
804,461

 
113,392,035

 
346,755

 
47,734,378

Total third-party servicing portfolio
 
1,967,155

 
233,755,125

 
2,143,664

 
253,942,712

On-balance sheet residential loans and real estate owned
 
97,388

 
12,690,018

 
102,044

 
12,705,532

Total servicing portfolio
 
2,064,543

 
$
246,445,143

 
2,245,708

 
$
266,648,244

__________
(1)
Includes $1.7 billion in unpaid principal balance associated with servicing rights sold to WCO at December 31, 2015 that did not meet all of the requirements for sale accounting. Refer to Note 21 for additional information relating to the sale of these servicing rights.
(2)
Consists of subservicing contracts acquired through business combinations whereby the benefits from the contract are greater than adequate compensation for performing the servicing.
(3)
Includes $6.6 billion in unpaid principal balance of subservicing performed for WCO at December 31, 2015.
(4)
Includes $64.6 billion in unpaid principal balance of subservicing that relates to transactions with NRM that closed in the fourth quarter of 2016, whereby the Company sold servicing rights with respect to pools of mortgage loans with subservicing retained. Refer to Note 4 for additional information relating to the sale of these servicing rights.
As of December 31, 2016, the Company's two largest subservicing customers represented approximately 56% and 23% of the Company's total subservicing portfolio based on unpaid principal balance.
The Company’s geographic diversification of its third-party servicing portfolio, based on the outstanding unpaid principal balance, is as follows (dollars in thousands):
 
 
December 31, 2016
 
December 31, 2015
 
 
Number
of Accounts
 
Unpaid Principal
Balance
 
Percentage of Total
 
Number
of Accounts
 
Unpaid Principal
Balance
 
Percentage of Total
California
 
224,408

 
$
42,939,204

 
18.4
%
 
244,708

 
$
46,704,146

 
18.4
%
Florida
 
163,186

 
19,530,088

 
8.4
%
 
180,242

 
21,714,653

 
8.6
%
Texas
 
152,485

 
12,935,308

 
5.5
%
 
169,167

 
14,380,328

 
5.7
%
Other <5%
 
1,427,076

 
158,350,525

 
67.7
%
 
1,549,547

 
171,143,585

 
67.3
%
Total
 
1,967,155

 
$
233,755,125

 
100.0
%
 
2,143,664

 
$
253,942,712

 
100.0
%

Net Servicing Revenue and Fees
The Company 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 Years Ended December 31,
 
 
2016
 
2015
 
2014
Servicing fees (1) (2)
 
$
680,002

 
$
708,491

 
$
675,335

Incentive and performance fees (1) 
 
70,197

 
117,586

 
157,148

Ancillary and other fees (1) (3)
 
98,055

 
104,750

 
88,430

Servicing revenue and fees
 
848,254

 
930,827

 
920,913

Change in fair value of servicing rights
 
(480,476
)
 
(401,992
)
 
(273,502
)
Amortization of servicing rights (4)
 
(21,801
)
 
(26,827
)
 
(43,101
)
Change in fair value of servicing rights related liabilities (2) (5)
 
(4,986
)
 
(7,741
)
 
(2,800
)
Net servicing revenue and fees
 
$
340,991

 
$
494,267

 
$
601,510

__________
(1)
Includes subservicing fees related to servicing assets held by WCO of $4.4 million and $1.3 million for the years ended December 31, 2016 and 2015, respectively. Includes incentive and performance fees, and ancillary and other fees related to servicing assets held by WCO of $0.7 million and $0.2 million for the years ended December 31, 2016 and 2015, respectively.
(2)
Includes a pass-through of $9.8 million and $0.6 million relating to servicing rights sold to WCO for the years ended December 31, 2016 and 2015, respectively.
(3)
Includes late fees of $63.3 million, $62.8 million and $48.4 million for the years ended December 31, 2016, 2015 and 2014, respectively.
(4)
Includes amortization of a servicing liability of $7.1 million and $0.4 million for the years ended December 31, 2016 and 2015, respectively.
(5)
Includes interest expense on servicing rights related liabilities, which represents the accretion of fair value, of $16.3 million, $9.3 million and $4.9 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Servicing revenue and fees included $458.9 million, $571.4 million and $615.8 million from servicing Fannie Mae residential loans for the years ended December 31, 2016, 2015 and 2014, respectively. Servicing revenue and fees for the year ended December 31, 2016 also included $92.8 million and $85.2 million from servicing Freddie Mac and Ginnie Mae loans, respectively.
Servicing Rights
Servicing Rights Carried at Amortized Cost
The following table summarizes the activity in the carrying value of servicing rights carried at amortized cost by class (in thousands):
 
 
Mortgage Loan
 
Reverse Loan
Balance at January 1, 2014
 
$
161,782

 
$
11,994

Amortization of servicing rights
 
(40,418
)
 
(2,683
)
Balance at December 31, 2014
 
121,364

 
9,311

Servicing rights capitalized upon deconsolidation of Residual Trusts
 
3,133

 
—

Amortization of servicing rights
 
(25,195
)
 
(2,053
)
Balance at December 31, 2015
 
99,302

 
7,258

Sales
 
(318
)
 
—

Amortization of servicing rights (1)
 
(24,363
)

(1,753
)
Balance at December 31, 2016
 
$
74,621

 
$
5,505

__________
(1)
Includes impairment of servicing rights related to the mortgage loan class of $4.0 million for the year ended December 31, 2016.

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. The fair value of servicing rights for the mortgage loan class and the reverse loan class was $79.9 million and $7.3 million, respectively, at December 31, 2016, and $117.3 million and $11.1 million, respectively, at December 31, 2015. 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:
 
 
December 31, 2016
 
December 31, 2015
 
 
Mortgage Loan
 
Reverse Loan
 
Mortgage Loan
 
Reverse Loan
Weighted-average remaining life in years (1)
 
5.1

 
2.6

 
5.6

 
2.8

Weighted-average discount rate
 
13.00
%
 
15.00
%
 
12.06
%
 
15.00
%
Conditional prepayment rate (2)
 
6.51
%
 
N/A

 
6.49
%
 
N/A

Conditional default rate (2)
 
2.33
%
 
N/A

 
2.16
%
 
N/A

Conditional repayment rate (3)
 
N/A

 
32.28
%
 
N/A

 
29.53
%
__________
(1)
Represents the remaining weighted-average life of the related unpaid principal balance of the underlying collateral adjusted for assumptions for conditional repayment rate, conditional prepayment rate and conditional default rate, as applicable.
(2)
Voluntary and involuntary prepayment rates have been presented as conditional prepayment rate and conditional default rate, respectively.
(3)
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 Years Ended December 31,
 
 
2016
 
2015
 
2014
Balance at beginning of the year (1)
 
$
1,682,016

 
$
1,599,541

 
$
1,131,124

Acquisition of EverBank net assets
 
—

 
—

 
58,680

Purchases
 
24,380

 
237,820

 
479,820

Servicing rights capitalized upon sales of loans
 
198,865

 
306,741

 
214,285

Sales
 
(458,541
)
 
(60,094
)
 
(10,866
)
Other
 
(16,651
)
 
—

 
—

Change in fair value due to:
 
 
 
 
 
 
Changes in valuation inputs or other assumptions (2)
 
(243,645
)
 
(157,262
)
 
(124,471
)
Other changes in fair value (3)
 
(236,831
)
 
(244,730
)
 
(149,031
)
Total change in fair value
 
(480,476
)
 
(401,992
)
 
(273,502
)
Balance at end of the year
 
$
949,593

 
$
1,682,016

 
$
1,599,541

__________
(1)
Includes servicing rights that were sold to WCO and accounted for as a financing of $16.9 million at December 31, 2015.
(2)
Represents the change in fair value resulting primarily from market-driven changes in interest rates and prepayment speeds.
(3)
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 described in Note 7. 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 the significant assumptions used in valuing these assets (dollars in thousands):
 
 
December 31, 2016
 
December 31, 2015
 
 
 
 
Decline in fair value due to
 
 
 
Decline in fair value due to
 
 
Assumption
 
10% adverse change
 
20% adverse change
 
Assumption
 
10% adverse change
 
20% adverse change
Weighted-average discount rate
 
11.56
%
 
$
(41,926
)
 
$
(80,512
)
 
10.88
%
 
$
(68,874
)
 
$
(132,645
)
Weighted-average conditional prepayment rate
 
9.09
%
 
(30,513
)
 
(59,083
)
 
9.94
%
 
(63,884
)
 
(123,173
)
Weighted-average conditional default rate
 
0.88
%
 
(28,370
)
 
(57,854
)
 
1.06
%
 
(21,208
)
 
(43,576
)
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 Years Ended December 31,
 
 
2016
 
2015
 
2014
Weighted-average life in years
 
6.2
 
6.5
 
7.1
Weighted-average discount rate
 
12.47%
 
11.90%
 
9.43%
Weighted-average conditional prepayment rate
 
9.15%
 
8.19%
 
7.67%
Weighted-average conditional default rate
 
0.34%
 
0.39%
 
0.73%