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Servicing of Residential Loans
 3 Months Ended
Mar. 31, 2017
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):
 
 
March 31, 2017
 
December 31, 2016
 
 
Number
of Accounts
 
Unpaid Principal
Balance
 
Number
of Accounts
 
Unpaid Principal
Balance
Third-party credit owners
 
 
 
 
 
 
 
 
Capitalized servicing rights
 
1,002,683

 
$
111,044,863

 
1,032,676

 
$
112,936,287

Capitalized subservicing (1)
 
123,977

 
7,082,914

 
130,018

 
7,426,803

Subservicing (2)
 
784,338

 
110,025,797

 
804,461

 
113,392,035

Total third-party servicing portfolio
 
1,910,998

 
228,153,574

 
1,967,155

 
233,755,125

On-balance sheet residential loans and real estate owned
 
95,807

 
12,556,539

 
97,388

 
12,690,018

Total servicing portfolio
 
2,006,805

 
$
240,710,113

 
2,064,543

 
$
246,445,143

__________
(1)
Consists of subservicing contracts acquired through business combinations whereby the benefits from the contract are greater than adequate compensation for performing the servicing.
(2)
Includes $64.6 billion in unpaid principal balance of subservicing at December 31, 2016 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.
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 Three Months 
 Ended March 31,
 
 
2017
 
2016
Servicing fees (1) (2)
 
$
133,393

 
$
177,754

Incentive and performance fees (1)
 
15,154

 
19,772

Ancillary and other fees (1) (3)
 
23,243

 
24,609

Servicing revenue and fees
 
171,790

 
222,135

Amortization of servicing rights (4)
 
(5,025
)
 
(4,611
)
Change in fair value of servicing rights
 
(53,516
)
 
(326,580
)
Change in fair value of servicing rights related liabilities (2) (5)
 
(62
)
 
3,294

Net servicing revenue and fees
 
$
113,187

 
$
(105,762
)
__________
(1)
Includes subservicing fees related to servicing assets held by WCO of $1.0 million and incentive and performance fees, and ancillary and other fees related to servicing assets held by WCO of $0.2 million for the three months ended March 31, 2016.
(2)
Includes a pass-through of $1.2 million relating to servicing rights sold to WCO for the three months ended March 31, 2016.
(3)
Includes late fees of $15.6 million and $15.8 million for the three months ended March 31, 2017 and 2016, respectively.
(4)
Includes amortization of a servicing liability of $0.8 million and $1.2 million for the three months ended March 31, 2017 and 2016, respectively, and an increase to a servicing liability of $1.8 million for the three months ended March 31, 2017.
(5)
Includes interest expense on servicing rights related liabilities, which represents the accretion of fair value, of $3.9 million for the three months ended March 31, 2016.
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):
 
 
For the Three Months 
 Ended March 31, 2017
 
For the Three Months 
 Ended March 31, 2016
 
 
Mortgage Loan
 
Reverse Loan
 
Mortgage Loan
 
Reverse Loan
Balance at beginning of the period
 
$
74,621

 
$
5,505

 
$
99,302

 
$
7,258

Amortization of servicing rights (1)
 
(3,632
)
 
(399
)
 
(5,387
)
 
(460
)
Balance at end of the period
 
$
70,989

 
$
5,106

 
$
93,915

 
$
6,798

__________
(1)
Includes impairment of servicing rights related to the mortgage loan class of $1.4 million for the three months ended March 31, 2017.
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 $75.8 million and $6.8 million, respectively at March 31, 2017, and $79.9 million and $7.3 million, respectively, at December 31, 2016. 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, 2017
 
December 31, 2016
 
 
Mortgage Loan
 
Reverse Loan
 
Mortgage Loan
 
Reverse Loan
Weighted-average remaining life in years (1)
 
4.5

 
2.6

 
5.1

 
2.6

Weighted-average discount rate
 
13.00
%
 
15.00
%
 
13.00
%
 
15.00
%
Conditional prepayment rate (2)
 
6.59
%
 
N/A

 
6.51
%
 
N/A

Conditional default rate (2)
 
2.36
%
 
N/A

 
2.33
%
 
N/A

Conditional repayment rate (3)
 
N/A

 
32.28
%
 
N/A

 
32.28
%
__________
(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 Three Months 
 Ended March 31,
 
 
2017
 
2016
Balance at beginning of the period
 
$
949,593

 
$
1,682,016

Purchases
 
446

 
19,637

Servicing rights capitalized upon sales of loans
 
33,904

 
52,258

Sales
 
(94
)
 
—

Change in fair value due to:
 
 
 
 
Changes in valuation inputs or other assumptions (1)
 
(17,530
)
 
(258,460
)
Other changes in fair value (2)
 
(35,986
)
 
(68,120
)
Total change in fair value
 
(53,516
)
 
(326,580
)
Balance at end of the period (3)
 
$
930,333

 
$
1,427,331

__________
(1)
Represents the change in fair value typically resulting from market-driven changes in interest rates and prepayment speeds.
(2)
Represents the realization of expected cash flows over time.
(3)
Includes servicing rights that were sold to WCO and accounted for as a financing transaction of $13.8 million at March 31, 2016.
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 6. 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):
 
 
March 31, 2017
 
December 31, 2016
 
 
 
 
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
 
11.83
%
 
$
(41,094
)
 
$
(78,859
)
 
11.56
%
 
$
(41,926
)
 
$
(80,512
)
Weighted-average conditional prepayment rate
 
9.24
%
 
(29,882
)
 
(57,866
)
 
9.09
%
 
(30,513
)
 
(59,083
)
Weighted-average conditional default rate
 
0.90
%
 
(28,170
)
 
(57,602
)
 
0.88
%
 
(28,370
)
 
(57,854
)

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,
 
 
2017
 
2016
Weighted-average life in years
 
6.6
 
6.1
Weighted-average discount rate
 
13.62%
 
13.19%
Weighted-average conditional prepayment rate
 
8.00%
 
9.68%
Weighted-average conditional default rate
 
0.38%
 
0.32%