10-K 1 dhcpfy201710k.htm 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
 ¨

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
Ditech Holding Corporation
(Exact name of registrant as specified in its charter)
(Successor Registrant to Walter Investment Management Corp.)

 
Maryland
 
13-3950486
State or other jurisdiction of incorporation or organization
 
(I.R.S. Employer Identification No.)
 
 
1100 Virginia Drive, Suite 100
Fort Washington, PA
 
19034
(Address of principal executive offices)
 
(Zip Code)
Registrant's telephone number, including area code (844) 714-8603
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
 
Name of Exchange on Which Registered
Common Stock, $0.01 Par Value per Share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨        No  þ 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨        No  þ
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  þ        No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ        No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer   ¨ 
 
Accelerated filer    ¨ 
Non-accelerated filer    ¨ (Do not check if a smaller reporting company)
 
Smaller reporting company    þ
 
 
 
Emerging growth company    ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨        No  þ
The aggregate market value of the predecessor registrant's stock held by non-affiliates as of June 30, 2017 was approximately $18.9 million, based on the closing sale price of the registrant’s common stock on June 30, 2017. For purposes of this calculation the registrant has considered all Schedule 13G filers as of such date to be non-affiliates.
Indicate by check mark whether the registrant has filed all document and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes  þ         No  ¨
On February 9, 2018, the predecessor registrant's common stock, par value $0.01 per share, was canceled and the successor registrant issued 4,252,500 shares of Ditech Holding Corporation common stock, par value $0.01 per share. The registrant had 4,252,500 shares of common stock outstanding as of March 23, 2018.
Documents Incorporated by Reference
Portions of the registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of registrant's fiscal year covered by this Annual Report are incorporated by reference into Part III.



DITECH HOLDING CORPORATION AND SUBSIDIARIES
FORM 10-K
ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017
INDEX
 
 
 
 
 
 
 
 
PART I
 
 
Item 1.
 
 
Item 1A.
 
 
Item 1B.
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
 
 
 
 
 
 
 
PART II
 
 
Item 5.
 
 
Item 6.
 
 
Item 7.
 
 
Item 7A.
 
 
Item 8.
 
 
Item 9.
 
 
Item 9A.
 
 
Item 9B.
 
 
 
 
 
 
 
 
 
PART III
 
 
Item 10.
 
 
Item 11.
 
 
Item 12.
 
 
Item 13.
 
 
Item 14.
 
 
 
 
 
 
 
 
 
PART IV
 
 
Item 15.
 
 
Item 16.
 
 
 
 
 
 
 
 




Certain acronyms and terms used throughout this Form 10-K are defined in the Glossary of Terms located at the end of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Explanatory Note:
On November 30, 2017, Walter Investment Management Corp. filed a Bankruptcy Petition under the Bankruptcy Code to pursue the Prepackaged Plan announced on November 6, 2017. On January 17, 2018, the Bankruptcy Court approved the amended Prepackaged Plan and on January 18, 2018, entered a confirmation order approving the Prepackaged Plan. On February 9, 2018, the Prepackaged Plan became effective pursuant to its terms and Walter Investment Management Corp. emerged from the Chapter 11 Case. The Company continued to operate throughout the Chapter 11 Case and upon emergence changed its name to Ditech Holding Corporation. From and after effectiveness of the Prepackaged Plan, the Company has continued, in its previous organizational form, to carry out its business.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Certain statements in this report, including matters discussed under Item 1. Business, Item 3. Legal Proceedings and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and including matters discussed elsewhere in this report, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Statements that are not historical fact are forward-looking statements. Certain of these forward-looking statements can be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “assumes,” “may,” “should,” “will,” “seeks,” “targets,” or other similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, and our actual results, performance or achievements could differ materially from future results, performance or achievements expressed in these forward-looking statements. These forward-looking statements are based on our current beliefs, intentions and expectations. These statements are not guarantees or indicative of future performance, nor should any conclusions be drawn or assumptions be made as to any potential outcome of any strategic review we conduct, including any changes in strategy. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those factors, risks and uncertainties described below and in more detail in Item 1A. Risk Factors and in our other filings with the SEC.
In particular (but not by way of limitation), the following important factors, risks and uncertainties could affect our future results, performance and achievements and could cause actual results, performance and achievements to differ materially from those expressed in the forward-looking statements:
our ability to operate our business in compliance with existing and future laws, rules, regulations and contractual commitments affecting our business, including those relating to the origination and servicing of residential loans, default servicing and foreclosure practices, the management of third-party assets and the insurance industry, and changes to, and/or more stringent enforcement of, such laws, rules, regulations and contracts;
scrutiny of our industry by, and potential enforcement actions by, federal and state authorities;
the substantial resources (including senior management time and attention) we devote to, and the significant compliance costs we incur in connection with, regulatory compliance and regulatory examinations and inquiries, and any consumer redress, fines, penalties or similar payments we make in connection with resolving such matters;
uncertainties relating to interest curtailment obligations and any related financial and litigation exposure (including exposure relating to false claims);
potential costs and uncertainties, including the effect on future revenues, associated with and arising from litigation, regulatory investigations and other legal proceedings, and uncertainties relating to the reaction of our key counterparties to the announcement of any such matters;
our dependence on U.S. GSEs and agencies (especially Fannie Mae, Freddie Mac and Ginnie Mae) and their residential loan programs and our ability to maintain relationships with, and remain qualified to participate in programs sponsored by, such entities, our ability to satisfy various existing or future GSE, agency and other capital, net worth, liquidity and other financial requirements applicable to our business, and our ability to remain qualified as a GSE and agency approved seller, servicer or component servicer, including the ability to continue to comply with the GSEs’ and agencies' respective residential loan selling and servicing guides;
uncertainties relating to the status and future role of GSEs and agencies, and the effects of any changes to the origination and/or servicing requirements of the GSEs, agencies or various regulatory authorities or the servicing compensation structure for mortgage servicers pursuant to programs of GSEs, agencies or various regulatory authorities;

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our ability to maintain our loan servicing, loan origination or collection agency licenses, or any other licenses necessary to operate our businesses, or changes to, or our ability to comply with, our licensing requirements;
our ability to comply with the terms of the stipulated orders resolving allegations arising from an FTC and CFPB investigation of Ditech Financial and a CFPB investigation of RMS;
operational risks inherent in the mortgage servicing and mortgage originations businesses, including our ability to comply with the various contracts to which we are a party, and reputational risks;
risks related to the significant amount of senior management turnover and employee reductions recently experienced by us;
risks related to our substantial levels of indebtedness, including our ability to comply with covenants contained in our debt agreements or obtain any necessary waivers or amendments, generate sufficient cash to service such indebtedness and refinance such indebtedness on favorable terms, or at all, as well as our ability to incur substantially more debt;
our ability to renew advance financing facilities or warehouse facilities on favorable terms, or at all, and maintain adequate borrowing capacity under such facilities;
our ability to maintain or grow our residential loan servicing or subservicing business and our mortgage loan originations business;
risks related to the concentration of our subservicing portfolio and the ability of our subservicing clients to terminate us as subservicer;
our ability to achieve our strategic initiatives, particularly our ability to: increase the mix of our fee-for-service business, including by entering into new subservicing arrangements; improve servicing performance; successfully develop our originations capabilities; and execute and realize planned operational improvements and efficiencies;
the success of our business strategy in returning us to sustained profitability;
changes in prepayment rates and delinquency rates on the loans we service or subservice;
the ability of Fannie Mae, Freddie Mac and Ginnie Mae, as well as our other clients and credit owners, to transfer or otherwise terminate our servicing or subservicing rights, with or without cause;
a downgrade of, or other adverse change relating to, or our ability to improve, our servicer ratings or credit ratings;
our ability to collect reimbursements for servicing advances and earn and timely receive incentive payments and ancillary fees on our servicing portfolio;
our ability to collect indemnification payments and enforce repurchase obligations relating to mortgage loans we purchase from our correspondent clients and our ability to collect in a timely manner indemnification payments relating to servicing rights we purchase from prior servicers;
local, regional, national and global economic trends and developments in general, and local, regional and national real estate and residential mortgage market trends in particular, including the volume and pricing of home sales and uncertainty regarding the levels of mortgage originations and prepayments;
uncertainty as to the volume of originations activity we can achieve and the effects of the expiration of HARP, which is scheduled to occur on December 31, 2018, including uncertainty as to the number of "in-the-money" accounts we may be able to refinance and uncertainty as to what type of product or government program will be introduced, if any, to replace HARP;
risks associated with the reverse mortgage business, including changes to reverse mortgage programs operated by FHA, HUD or Ginnie Mae, our ability to accurately estimate interest curtailment liabilities, our ability to fund HECM repurchase obligations, our ability to assign repurchased HECM loans to HUD, our ability to fund principal additions on our HECM loans, and our ability to securitize our HECM tails;
our ability to realize all anticipated benefits of past, pending or potential future acquisitions or joint venture investments;
the effects of competition on our existing and potential future business, including the impact of competitors with greater financial resources and broader scopes of operation;
changes in interest rates and the effectiveness of any hedge we may employ against such changes;
risks and potential costs associated with technology and cybersecurity, including: the risks of technology failures and of cyber-attacks against us or our vendors; our ability to adequately respond to actual or alleged cyber-attacks; and our ability to implement adequate internal security measures and protect confidential borrower information;

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risks and potential costs associated with the implementation of new or more current technology, such as MSP, the use of vendors (including offshore vendors) or the transfer of our servers or other infrastructure to new data center facilities;
our ability to comply with evolving and complex accounting rules, many of which involve significant judgment and assumptions;
risks related to our deferred tax assets, including the risk of an "ownership change" under Section 382 of the Code;
our ability to maintain compliance with the continued listing requirements of the NYSE;
our ability to continue as a going concern;
uncertainties regarding impairment charges relating to our goodwill or other intangible assets;
risks associated with one or more material weaknesses identified in our internal controls over financial reporting, including the timing, expense and effectiveness of our remediation plans;
our ability to implement and maintain effective internal controls over financial reporting and disclosure controls and procedures;
our ability to manage potential conflicts of interest relating to our relationship with WCO; and
risks related to our relationship with Walter Energy and uncertainties arising from or relating to its bankruptcy filings and liquidation proceedings, including potential liability for any taxes, interest and/or penalties owed by the Walter Energy consolidated group for the full or partial tax years during which certain of our former subsidiaries were a part of such consolidated group and certain other tax risks allocated to us in connection with our spin-off from Walter Energy.
All of the above factors, risks and uncertainties are difficult to predict, contain uncertainties that may materially affect actual results and may be beyond our control. New factors, risks and uncertainties emerge from time to time, and it is not possible for our management to predict all such factors, risks and uncertainties.
Although we believe that the assumptions underlying the forward-looking statements (including those relating to our outlook) contained herein are reasonable, any of the assumptions could be inaccurate, and therefore any of these statements included herein may prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made, except as otherwise required under the federal securities laws. If we were in any particular instance to update or correct a forward-looking statement, investors and others should not conclude that we would make additional updates or corrections thereafter except as otherwise required under the federal securities laws.
In addition, this report may contain statements of opinion or belief concerning market conditions and similar matters. In certain instances, those opinions and beliefs could be based upon general observations by members of our management, anecdotal evidence and/or our experience in the conduct of our business, without specific investigation or statistical analyses. Therefore, while such statements reflect our view of the industries and markets in which we are involved, they should not be viewed as reflecting verifiable views and such views may not be shared by all who are involved in those industries or markets.

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PART I
ITEM 1. BUSINESS
The Company
We are an independent servicer and originator of mortgage loans and servicer of reverse mortgage loans. We service a wide array of loans across the credit spectrum for our own portfolio and for GSEs, government agencies, third-party securitization trusts and other credit owners. Through our consumer, correspondent and wholesale lending channels, we originate and purchase residential mortgage loans that we predominantly sell to GSEs and government agencies. We also operate two complementary businesses: asset receivables management and real estate owned property management and disposition. Our goal is to become a partner with our customers; assisting them with the originations process and through the life of their loan, with a highly regarded originations and servicing platform and quality customer service in an open, honest and straightforward manner.
We are a Maryland corporation incorporated in 1997 and operate throughout the U.S. In April 2009, we were spun off from Walter Energy. Since then, we have grown our servicing and originations businesses both organically and through a number of acquisitions. On February 9, 2018 we changed our name to Ditech Holding Corporation.
The terms “Ditech Holding,” the “Company,” “we,” “us” and “our” as used throughout this report refer to Ditech Holding Corporation (successor) and its consolidated subsidiaries after the Effective Date, and/or Walter Investment Management Corp. (predecessor) and its consolidated subsidiaries prior to the Effective Date.
Emergence from Reorganization Proceedings
On November 30, 2017, Walter Investment Management Corp. filed a Bankruptcy Petition under the Bankruptcy Code to pursue the Prepackaged Plan announced on November 6, 2017. On January 17, 2018, the Bankruptcy Court approved the amended Prepackaged Plan and on January 18, 2018, entered a confirmation order approving the Prepackaged Plan. On February 9, 2018, the Prepackaged Plan became effective pursuant to its terms and Walter Investment Management Corp. emerged from the Chapter 11 Case. The Company continued to operate throughout the Chapter 11 Case and upon emergence changed its name to Ditech Holding Corporation. From and after effectiveness of the Prepackaged Plan, the Company has continued, in its previous organizational form, to carry out its business.
On the Effective Date, all of our previously existing equity interests, including our predecessor common stock, were canceled. Our obligations under our previously outstanding Convertible Notes and Senior Notes, except to the limited extent set forth in the Prepackaged Plan, were also extinguished. Previously outstanding equity and debt interests were exchanged as follows:
Senior Notes were exchanged at a rate of 464.11293167 Second Lien Notes and 0.18564517 shares of Convertible Preferred Stock per $1,000 principal amount of Senior Notes;
Convertible Notes were exchanged at a rate of 8.76919841 shares of successor common stock, 14.94011581 Series A Warrants and 11.85465711 Series B Warrants per $1,000 principal amount of Convertible Notes; and
shares of common stock were exchanged at a rate of 0.05689208 shares of successor common stock, 0.09692659 Series A Warrants and 0.07690920 Series B Warrants per share of predecessor common stock.
Accordingly, we issued:
to the holders of predecessor shares of common stock, an aggregate of 2,126,250 shares of successor common stock, 3,622,500 Series A Warrants and 2,874,375 Series B Warrants;
to the holders of Senior Notes claims (as defined in the Prepackaged Plan), $250.0 million aggregate principal amount of our Second Lien Notes and $100 million aggregate initial liquidation preference of Convertible Preferred Stock, convertible into common stock at a ratio of 114.9750 per share of preferred stock; and
to the holders of Convertible Notes claims (as defined in the Prepackaged Plan), an aggregate of 2,126,250 shares of successor common stock, 3,622,500 Series A Warrants and 2,874,375 Series B Warrants.
In addition, we authorized and reserved for future issuance:
3,193,750 shares of successor common stock for issuance under an equity incentive plan;
7,245,000 shares of successor common stock issuable upon the exercise of the Series A Warrants;
5,748,750 shares of successor common stock issuable upon the exercise of the Series B Warrants; and
11,497,500 shares of successor common stock issuable upon conversion of the preferred stock.

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As of February 12, 2018, our newly issued common stock commenced trading on the NYSE under the symbol “DHCP.”
Pursuant to the terms of the Prepackaged Plan, we entered into the 2018 Credit Agreement, providing for the 2018 Term Loan in the amount of $1.2 billion. For a period of approximately one year following the Effective Date, we will continue to receive financing through a master repurchase agreement for a maximum committed purchase price of $1.0 billion used principally to fund Ditech Financial’s mortgage loan origination business, and a master repurchase agreement providing for a maximum committed purchase price of $800.0 million used principally to fund RMS’s purchase of home equity conversion mortgage loans and foreclosed real estate from certain securitization pools. We also issued variable funding notes under the DAAT Facility and the DPATII Facility for advances made in connection with certain mortgage loan servicing operations. These facilities have aggregate capacities of $475.0 million and $75.0 million, respectively. In addition to the foregoing facility sub-limits, the DAAT Facility, the DPATII Facility, Ditech Financial’s master repurchase agreement and RMS’s master repurchase agreement are subject, collectively, to a combined maximum outstanding amount of $1.9 billion.
For a more detailed discussion of our emergence, refer to the Emergence from Reorganization Proceedings section under Part II, Item 7. Management’s Discussion and Analysis of Financial Conditions and Analysis.
We believe that we will meet the conditions to qualify under GAAP for fresh start accounting, and accordingly expect to adopt fresh start accounting effective February 10, 2018. The financial statements for the periods prior to such date do not include the effect of any changes in our capital structure or changes in the fair value of assets and liabilities as a result of fresh start accounting. The actual impact at emergence from reorganization and anticipated fresh start accounting will be reported in our Quarterly Report on Form 10-Q for the first quarter of 2018. See Note 3 to the Consolidated Financial Statements for additional information on fresh start accounting.
Beginning in 2016, we have been pursuing various strategies intended to improve our financial and operating performance. These strategies include shifting our servicing business towards subservicing, reducing our investment in mortgage servicing rights, exiting the reverse mortgage originations business, and implementing various measures designed to result in operating improvements. Further detail on our efforts to improve our financial performance and ensure our compliance with regulatory and contractual obligations can be found under the Strategy section of Part II, Item 7. Management’s Discussion and Analysis of Financial Conditions and Analysis.
Business Segments
We manage our Company in three reportable segments: Servicing; Originations; and Reverse Mortgage. At December 31, 2017, we serviced 1.7 million residential loans with an unpaid principal balance of $207.9 billion. We originated $15.6 billion in unpaid principal balance of mortgage loan volume in 2017. A description of the business conducted by each of these segments is provided below.
Servicing
Our Servicing segment performs servicing for our own mortgage loan portfolio, on behalf of third-party credit owners of mortgage loans for a fee and on behalf of third-party owners of MSR for a fee, which we refer to as subservicing. The Servicing segment also operates complementary businesses including asset receivables management that performs collections of post charge-off deficiency balances for third parties and us. In addition, the Servicing segment holds the assets and mortgage-backed debt of the Residual Trusts.
Our servicing and subservicing activities relating to our mortgage loan portfolio involve the management (e.g., calculation, collection and remittance) of mortgage payments, escrow accounts, insurance claims and customer service. For certain accounts, we perform specialty servicing activities utilizing a “high-touch” model to establish and maintain borrower contact and facilitate loss-mitigation strategies in an attempt to keep defaulted borrowers in their homes. Borrower interactions rely on loss mitigation strategies that apply predictive analytics to identify risk factors and severity grades to determine appropriate loss mitigation options and strategies. We assign a single point of contact to accounts experiencing difficulties in order to make collection calls and coordinate loss mitigation efforts. The single point of contact allows us to build one-on-one relationships with our consumers. We generally follow GSE and agency servicing guidelines (as well as other credit-owner guidelines) to implement a standardized loss mitigation process, which may include loan modification programs for borrowers experiencing temporary hardships. Our loan modification offerings include short-term interest rate reductions and/or payment deferrals and, until recently, also included loan modifications through HAMP, a federally sponsored loan modification program established to assist eligible home owners with loan modifications on their home mortgage debt. When loan modification and other efforts are unable to cure a default, we pursue alternative property resolutions prior to pursuing foreclosure, including short sales (in which the borrower agrees to sell the property for less than the loan balance and the difference is forgiven) and deeds-in-lieu of foreclosure (in which the borrower agrees to convey the property deed outside of foreclosure proceedings).

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With respect to mortgage loans for which we own the MSR, we perform mortgage servicing primarily in accordance with Fannie Mae, Freddie Mac and Ginnie Mae servicing guidelines, as applicable. In 2017, we earned approximately 37%, 8% and 12% of our total revenues from servicing Fannie Mae, Freddie Mac and Ginnie Mae residential loans, respectively. Under our numerous master servicing agreements and subservicing contracts, we agree to service loans in accordance with servicing standards that the credit owners and/or subservicing clients may change from time to time. These agreements and contracts can typically be terminated by the counterparties thereto, with or without cause. Refer to Item 1A. Risk Factors for a discussion of certain risks relating to our master servicing agreements and subservicing contracts.
We have acquired servicing rights in bulk transactions, pursuant to co-issue arrangements and in connection with business acquisitions, and by retaining servicing rights relating to mortgage loans we originate. As the owner of servicing rights, we act on behalf of loan owners and have the contractual right to receive a stream of cash flows (expressed as a percentage of unpaid principal balance) in exchange for performing specified servicing functions and temporarily advancing funds to meet contractual payment requirements for loan owners and to pay taxes, insurance and foreclosure costs on delinquent or defaulted mortgages. As a subservicer, we earn a contractual fee on a per-loan basis and we are reimbursed for servicing advances we make on delinquent or defaulted mortgages, generally in the following month. We can earn incentive fees based on the performance of certain loan pools serviced by us and also have the ability, under certain circumstances, to earn modification fees and other program-specific incentives, and ancillary fees, such as late fees. Our specialty servicing fees typically include a base servicing fee and activity-based fees for the successful completion of default-related services.
The value of a servicing right asset is based on the present value of the stream of expected servicing-related cash flows from a loan and is largely dependent on market interest rates, prepayment speeds and delinquency performance. Generally, a rising interest rate environment drives a decline in prepayment speeds and thus increases the value of servicing rights, while a declining interest rate environment drives increases in prepayment speeds and thus reduces the value of servicing rights.
Our Servicing segment procured voluntary insurance for residential loan borrowers, lender-placed hazard insurance for residential loan borrowers and credit owners and other ancillary products through our principal insurance agency until the sale of such agency and substantially all of our insurance agency business on February 1, 2017. This agency earned commissions on insurance sales, and commissions were earned on lender-placed insurance in certain circumstances and if permitted under applicable laws and regulations. Mortgage loans require borrowers to maintain insurance coverage to protect the collateral securing the loan. To the extent a borrower fails to maintain the necessary coverage, we are generally contractually required to add the borrower’s property to our own hazard insurance policy and charge the borrower his/her allocated premium amount. Though we are licensed nationwide to sell insurance products on behalf of third-party insurance carriers, we neither underwrote insurance policies nor adjudicated claims.
Insurance revenues were historically aligned with the size of our servicing portfolio. However, due to Fannie Mae and Freddie Mac restrictions that became effective on June 1, 2014, as well as other regulatory and litigation developments with respect to lender-placed insurance, our insurance commissions related to lender-placed insurance policies began to decrease materially beginning in 2014. On February 1, 2017, we completed the sale of our principal insurance agency and substantially all of our insurance agency business. As a result of this sale, we no longer receive any insurance commissions on lender-placed insurance policies. Commencing February 1, 2017, another insurance agency owned by us (and retained by us following the aforementioned sale) began to provide insurance marketing services to third-party insurance agencies and carriers with respect to voluntary insurance policies, including hazard insurance. This insurance agency receives premium-based commissions for its insurance marketing services.
Our Servicing segment performs collections of post charge-off or foreclosure deficiency balances for itself and on behalf of third-party securitization trusts and other asset owners. The third-party fee we earn is based on a percentage of our collections or a percentage of the unpaid principal balance. We recognize revenues associated with our on-balance sheet charged-off loan portfolio through its change in fair value.
Subservicing
As of December 31, 2017, we were the subservicer for approximately 0.7 million accounts with an unpaid principal loan balance of approximately $102.7 billion. These subserviced accounts represented approximately 49% of our total servicing portfolio based on unpaid principal loan balance at that date. Our largest subservicing customer, NRM, represented approximately 69% of our total subservicing portfolio based on unpaid principal loan balance on December 31, 2017. Our next largest subservicing customer represented approximately 21% of our total subservicing portfolio based on unpaid principal loan balance on December 31, 2017.

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The subservicing contracts pursuant to which we are retained to subservice mortgage loans generally provide that our customer, the owner of the MSR that we subservice on behalf of, can terminate us as subservicer with or without cause, and each such contract has unique terms establishing the fees we will be paid for our work under the contract or upon the termination of the contract, if any, and the standards of performance we are required to meet in servicing the relevant mortgage loans, such that the profitability of our subservicing activity may vary among different contracts. We believe that our subservicing customers consider various factors from time to time in determining whether to retain or change subservicers, including the financial strength and servicer ratings of the subservicer, the subservicer's record of compliance with regulatory and contractual obligations (including any enhanced, "high touch" processes required by the contract) and the success of the subservicer in limiting the delinquency rate of the relevant portfolio. The termination of one or more of our subservicing contracts could have a material adverse effect on us, including on our business, financial condition, liquidity and results of operations. Refer to Item 1A. Risk Factors for a discussion of certain additional risks and uncertainties relating to our subservicing contracts.
In April 2017, during discussions with a subservicing counterparty regarding our business relationship and our review of our portfolios, this counterparty indicated it was exploring alternatives for certain portfolios we subserviced for such counterparty. At this counterparty's request, we transferred subservicing on mortgage loans with an unpaid principal balance of approximately $7.1 billion to other subservicers or counterparties during 2017.
Originations
Our Originations segment originates and purchases mortgage loans through the following channels:
consumer originations, which is comprised of:
consumer retention - originates mortgage loans primarily through the use of a centralized call center that utilizes leads generated through solicitations of consumers in our existing servicing portfolio and through referrals from our servicing call centers; and
consumer direct - originates mortgage loans primarily through the use of a centralized call center that utilizes origination leads generated through direct mail, internet, telephone and general advertising campaign solicitations of consumers, some of whom who are not currently in our existing servicing portfolio;
correspondent lending - purchases closed mortgage loans from a network of lenders in the marketplace; and
wholesale lending - originates mortgage loans through a network of approved brokers.
Beginning in 2016, we combined our consumer retention and consumer direct call centers to pursue a more streamlined consumer lending process. In January 2016, we exited activities associated with our consumer retail channel, which originated mortgage loans through loan officers. Our consumer retail channel originated $14.9 million in mortgage loans during the year ended December 31, 2016. During the third quarter of 2016, we re-entered the wholesale channel in an effort to expand our customer base, after we had initially exited the wholesale channel in the first quarter of 2014.
Our consumer originations operations offer a range of home purchase and refinance mortgage loan options, including fixed and adjustable rate conventional conforming, Ginnie Mae, FHA, VA, USDA and jumbo products. A conventional conforming loan is a mortgage loan that conforms to GSE guidelines, which include, but are not limited to, limits on loan amount, loan-to-value ratios, debt-to-income ratios, and minimum credit scores. Our product offerings include special financing programs such as HARP, which has expanded loan-to-value limits for qualified applicants as compared to conventional conforming loans. The mortgage loans we fund are generally eligible for sale to GSEs or insured by government agencies.
We underwrite the mortgage loans we originate generally to secondary market standards, including the standards set by Fannie Mae, Freddie Mac, Ginnie Mae, the FHA, the USDA, the VA, and jumbo loan investor programs. Loans are reviewed by our underwriters in an attempt to ensure each mortgage loan is documented according to, and its terms comply with, the applicable secondary market standard. Our underwriters determine loan eligibility based on specific loan product requirements, such as loan-to-value, FICO, or maximum loan amount. Third-party diligence tools are utilized by our underwriters to validate data supplied by the potential borrower and to uncover potential discrepancies. We conduct audits on our underwriters to confirm proper adherence to our internal guidelines and polices, which audits are in addition to our standard quality control review. These audits are designed to provide an additional layer of internal review in an attempt to further mitigate quality defects and repurchase risk in the originations process.

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Within our correspondent lending channel, we generally purchase the same types of loans that we originate in our consumer originations channel, although the mix varies among these channels. Correspondent lenders with which we do business agree to comply with our client guide, which sets forth the terms and conditions for selling loans to us and generally governs the business relationship. We monitor and attempt to mitigate counterparty risk related to loans that we acquire through our correspondent lending channel by conducting quality control reviews of correspondent lenders, reviewing compliance by correspondent lenders with applicable underwriting standards and our client guide, and evaluating the credit worthiness of correspondent lenders on a periodic basis. In 2017, our correspondent lending channel purchased loans from 488 lenders in the marketplace, of which 39 were associated with approximately half of our purchases.
Within our wholesale lending channel, we originate loans through mortgage brokers. Loans sourced by mortgage brokers are underwritten and funded by us and generally close in our name. Through the wholesale channel, we generally originate the same types of loans that we originate in our consumer originations channel, although the mix varies among these channels. We underwrite and process all loan applications submitted by the mortgage brokers in a manner consistent with that described above for the consumer originations channel. Mortgage brokers with whom we do business agree to comply with our client guide, which sets forth the terms and conditions for brokering loans to us and generally governs the business relationship. We monitor and attempt to mitigate counterparty risk related to loans that we originate through our wholesale lending channel by conducting quality control reviews of mortgage brokers, reviewing compliance by brokers with applicable underwriting standards and our client guide, and evaluating the credit worthiness of brokers on a periodic basis.
Our capital markets group is responsible for pricing loans and managing the interest rate risk through the time a loan is sold to third parties and managing the risk (which we call the “pull-through risk”) that loans we have locked will not be closed and funded in an attempt to maximize loan sale profitability through our various originations channels. The capital markets group uses models and hedging analysis in an attempt to maximize profitability while minimizing the risks inherent in the originations business.
In 2017, the mix of mortgage loans originated by our Originations segment, based on unpaid principal balance, consisted of (i) 50% Fannie Mae conventional conforming loans, (ii) 41% Ginnie Mae loans and (iii) 9% Freddie Mac conventional conforming loans.
Our Originations segment revenue, which is primarily net gains on sales of loans, is impacted by interest rates and the volume of loans locked. The margins earned by our Originations segment are impacted by our cost to originate the loans including underwriting, fulfillment and lead costs. We have historically sold our originated and purchased mortgage loans to third parties while retaining the servicing rights. During 2017, our strategy shifted from retaining servicing rights to subservicing as part of our initiative to generate liquidity and reduce our debt. Going forward, we expect to sell servicing rights to third parties on a more selective basis while continuing to grow our subservicing business with third-party servicing rights owners.
Reverse Mortgage
Our Reverse Mortgage segment primarily focuses on the servicing of reverse loans. Effective January 2017, we exited the reverse mortgage originations business. As of December 31, 2017, we did not have any reverse loans remaining in the originations pipeline and have finalized the shutdown of the reverse mortgage originations business. We will continue to fund undrawn amounts available to borrowers under their loans and, from time to time, securitize these amounts.
As a prior originator of reverse mortgages, this segment received cash proceeds at the time reverse loans were securitized and continues to receive cash proceeds at the time tails are securitized. We securitized substantially all our reverse loans and continue to securitize tails through the Ginnie Mae II MBS program into HMBS. Based upon the structure of the Ginnie Mae II MBS program, we determined that these securitizations do not meet all of the requirements for sale accounting, and as such, we account for these transfers as secured borrowings. Under this accounting treatment, the reverse loans remain on our consolidated balance sheets as residential loans. The segment earns net revenue on the net fair value gains on reverse loans and the related HMBS obligations.
This segment also performs subservicing for third-party credit owners of reverse loans, similar to our Servicing segment, and provides other complementary services for the reverse mortgage market, such as real estate owned property management and disposition, for a fee.
We have been evaluating options for our reverse mortgage business, including the possibility of selling some or all of its assets or pursuing alternative solutions for the business in collaboration with other parties. We cannot be certain whether or on what terms we will be able to consummate any transaction involving our reverse mortgage business or whether any such transaction would reduce our expected reverse mortgage losses. As of December 31, 2017, the net carrying value of our Reverse Mortgage segment securitized loan book was a net liability of approximately $84.2 million.

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Other
As of December 31, 2017, our Other non-reportable segment holds the assets and liabilities of the Non-Residual Trusts and corporate debt.
Competition
We compete with a great number of institutions in the mortgage banking market for both the servicing and originations businesses as well as in our reverse mortgage servicing and complementary businesses. In the servicing area, we compete with other servicers to acquire MSR and for the right to subservice mortgages for others. Competitive factors in the servicing business include: a servicer’s scale of operations and financial strength; a servicer’s access to capital to fund acquisitions of MSR; a servicer’s ability to meet contractual and regulatory obligations and to achieve favorable performance (e.g., in default management activity) relative to other servicers; a servicer’s ability to provide a favorable experience for the borrower; a servicer's ability to recapture borrowers as they refinance; and a servicer’s cost to service or subservice. 
In the mortgage originations area, we compete to refinance or provide new mortgages to borrowers whose mortgages are in our existing servicing portfolio. In this area, the price and variety of our mortgage products are important factors of competition, as is the reputation of our servicing business and the quality of the experience the borrower may have had with our servicing business. Since mid-2015, our loan origination and servicing businesses have operated under a single “Ditech” brand. We also compete, principally on the basis of price and process efficiency, to acquire mortgages from correspondent lenders. In the future, as we attempt to grow the amount of purchase money (i.e., non-refinance) mortgages we originate, we expect we will also increasingly compete on the basis of brand awareness.
Across our servicing and originations businesses, technology is an important competitive factor. In particular, we believe it will be increasingly important to enable servicing and originations customers to access our services through our website and mobile devices. We face numerous competitors with greater financial resources, human resources and technology resources than ours, and there can be no assurance that we will be able to compete successfully.
Technology
Our businesses employ technology by using third-party systems where standardization and time to market is key and proprietary systems where functionality and flexibility are critical to regulatory compliance, customer experience and credit performance. The majority of our proprietary systems are supported by a team of information technology professionals who seek to protect our systems and ensure they are effective. In-house developed proprietary systems are leveraged for customer service, default management and reverse mortgage servicing.
On October 27, 2014, we signed a long-term Loan Servicing Agreement with Black Knight Financial Services, LLC for the use of MSP, a mortgage and consumer loan servicing platform. We also use our own proprietary systems for collections, customer service and default management. During the second quarter of 2016, we transitioned approximately 1.4 million loans, or greater than 60% of our mortgage loan servicing portfolio, to MSP, and now have greater than 80% of our mortgage loan servicing portfolio on MSP. Our private label loans, manufactured housing loans and second lien mortgage loans continue to be serviced on our proprietary systems.
Subsidiaries
For a listing of our subsidiaries, refer to Exhibit 21 of this Annual Report on Form 10-K.
Employees
We have recently undergone several changes in our senior leadership. Effective February 20, 2018, Jeffrey P. Baker commenced service as our Interim Chief Executive Officer and President, succeeding Anthony N. Renzi. Mr. Baker also continues to serve as President of RMS, but no longer serves as our Chief Operations Officer. We have engaged an executive search firm to assist us with the process of identifying internal and external candidates to serve as permanent Chief Executive Officer and President. On February 1, 2018, Gerald A. Lombardo joined the Company and, effective February 9, 2018, succeeded Gary Tillett as Chief Financial Officer.
We employed approximately 3,800 full-time equivalent employees at December 31, 2017 as compared to approximately 4,900 at December 31, 2016, all of whom were located in the U.S. The decline in full-time equivalent employees was due primarily to distinct actions we took in 2017 in connection with our continued efforts to enhance efficiencies and streamline processes within the organization, which included various organizational changes to scale our leadership team and support functions to further align with our business needs. We believe we have been successful in our efforts to recruit and retain qualified employees. However, we experience significant turnover with respect to certain of our roles, and therefore maintain active and continuous new employee recruiting and training programs. None of our employees is a party to any collective bargaining agreements.

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We outsource certain support functions that support our loan originations and servicing groups to third-party vendors located in the U.S. and offshore locations in an effort to improve efficiency and reduce cost. These support functions include loan set-up, escrow account set-up, default set-up, foreclosure monitoring, claims filing, post-close audits, indexing and imaging. When we outsource a function, we retain a third-party vendor to perform such function as opposed to having our employees perform such function. We have increased the number of functions we outsource, as well as our use of offshore vendors generally, especially with respect to certain of our technology functions, and we expect to outsource additional back-office and other functions in the future both domestically and abroad.
Transactions with NRM
NRM Flow and Bulk Agreement
On August 8, 2016, our subsidiary, Ditech Financial, and NRM executed the NRM Flow and Bulk Agreement whereby we agreed to sell to NRM all of our right, title and interest in mortgage servicing rights with respect to a pool of mortgage loans, with subservicing retained. The NRM Flow and Bulk Agreement provides that, from time to time, we may sell additional MSR to NRM in bulk or as originated or acquired on a flow basis, subject in each case to the parties agreeing on price and certain other terms.
On January 17, 2018, we agreed to sell to NRM MSR relating to mortgage loans having an aggregate unpaid principal balance of approximately $11.3 billion as of such sale date, with subservicing retained, and we received approximately $90.4 million in cash proceeds from NRM as partial consideration for this MSR sale. We used 80% of such cash proceeds to repay borrowings under the 2013 Credit Agreement and used the remaining cash proceeds for general corporate purposes. Since entering into the NRM Flow and Bulk Agreement and through January 17, 2018, in various bulk transactions under the NRM Flow and Bulk Agreement, we have sold NRM MSR relating to mortgage loans having an aggregate unpaid principal balance of $71.1 billion as of the applicable closing dates of such transactions, in each case with subservicing retained. As of January 17, 2018, we had received $340.4 million in cash proceeds relating to such sales, which proceeds do not include certain holdback amounts relating to such sales that we expect to be paid to us over time. For the year ended December 31, 2017, we received $39.9 million in cash proceeds relating to these holdback amounts and at December 31, 2017 and 2016 had a servicing rights holdback receivable from NRM of $31.3 million and $71.3 million, respectively, which is recorded in receivables, net on the consolidated balance sheets.
In addition, during the fourth quarter of 2016, the Company began to sell to NRM, on a flow basis and with subservicing retained, MSR relating to certain mortgage loans that it originates. During 2017 and 2016, the Company sold MSR relating to mortgage loans with an aggregate unpaid principal balance of $7.6 billion and $1.4 billion, respectively, to NRM, which included co-issue loans sold with an aggregate unpaid principal balance of $6.4 billion and $0.2 billion, respectively. These transfers generated revenues of $61.8 million and $12.9 million for the years ended December 31, 2017 and 2016, respectively, which are recorded in net gains on sales of loans on the consolidated statements of comprehensive loss.
NRM also acquired substantially all of WCO’s MSR portfolio in the fourth quarter of 2016, which consisted of MSR relating to mortgage loans having an aggregate unpaid principal balance of $9.8 billion as of the applicable closing dates, which was serviced by us and included $4.8 billion related to MSR that we previously accounted for as secured borrowings. We subservice these MSR under the NRM Subservicing Agreement.
The initial term of the NRM Flow and Bulk Agreement will expire on August 8, 2019 and shall be renewed for successive one-year terms thereafter unless either party provides written notice to the other party of its election not to renew. Each party to the NRM Flow and Bulk Agreement also has termination rights upon the occurrence of certain events and NRM can terminate this agreement at any time with a notice of 30 days. In connection with our entry into the NRM Flow and Bulk Agreement, we entered into a performance and payment guaranty whereby Ditech Holding guarantees performance of all obligations and all payments required by Ditech Financial under the NRM Flow and Bulk Agreement.

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NRM Subservicing Agreement
On August 8, 2016, we entered into the NRM Subservicing Agreement with NRM whereby we act as subservicer for the mortgage loans whose MSR we sold to NRM under the NRM Flow and Bulk Agreement and for other mortgage loans as may be agreed upon by us and NRM from time to time, in exchange for a subservicing fee. Under the NRM Subservicing Agreement and a related agreement, we perform all daily servicing obligations on behalf of NRM with respect to the MSR that are serviced by us pursuant to the terms of the NRM Subservicing Agreement, including collecting payments from borrowers and offering refinancing options to borrowers for purposes of minimizing portfolio runoff. On January 17, 2018 Ditech Financial and NRM executed a Side Letter Agreement pursuant to which, among other things, certain provisions of the NRM Subservicing Agreement were amended and/or waived.
With respect to Ditech Financial, for mortgage loans that were being subserviced by Ditech Financial under the NRM Subservicing Agreement prior to January 17, 2018, and for any additional mortgage loans that Ditech Financial may subservice under the NRM Subservicing Agreement that are added to such agreement after such date (other than (i) mortgage loans relating to MSR sold to NRM by Ditech Financial in a bulk sale agreed to by the parties on January 17, 2018 and (ii) mortgage loans relating to MSR sold to NRM by Ditech Financial on a flow basis under the NRM Flow and Bulk Agreement after such date), the initial term of the NRM Subservicing Agreement expired on August 8, 2017 and was automatically renewed for a successive one-year term, and will further be automatically renewed for successive one-year terms thereafter, unless we elect to terminate the NRM Subservicing Agreement without cause at the end of any subsequent one-year renewal term by providing notice to NRM at least 120 days prior to the end of the applicable term. With respect to Ditech Financial, for mortgage loans relating to MSR sold to NRM by Ditech Financial in a bulk MSR sale agreed to by the parties on January 17, 2018 and mortgage loans relating to MSR sold to NRM by Ditech Financial on a flow basis under the NRM Flow and Bulk Agreement after such date, the initial term of the NRM Subservicing Agreement shall expire on January 17, 2019 (with respect to the aforementioned bulk MSR sale) or, with respect to each flow MSR assignment agreement executed by the parties after such date in connection with any flow MSR sales by Ditech Financial to NRM after such date, if any, the first anniversary of the first day of the calendar quarter following the calendar quarter during which such flow MSR assignment agreement was executed, and in each case will automatically renew for successive one-year terms thereafter unless we elect to terminate the NRM Subservicing Agreement without cause at the end of any such one-year term by providing notice to NRM at least 120 days prior to the end of the applicable term. If we elect to terminate the NRM Subservicing Agreement without cause, we will not be entitled to receive any deconversion fee, will be responsible for certain servicing transfer costs and will owe NRM a transfer fee if such termination occurs within five years from the effective date of the agreement. We may also terminate the NRM Subservicing Agreement immediately for cause upon the occurrence of certain events, including, without limitation, any failure by NRM to remit payments (subject to a cure period), certain bankruptcy or insolvency events of NRM, NRM ceasing to be an approved servicer in good standing with Fannie Mae or Freddie Mac (unless caused by us) and any failure by NRM to perform, in any material respect, its obligations under the agreement (subject to a cure period). Upon any termination of the NRM Subservicing Agreement by us for cause, NRM will owe us a deconversion fee and be responsible for certain servicing transfer costs.

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With respect to NRM, for mortgage loans that were being subserviced by Ditech Financial under the NRM Subservicing Agreement prior to January 17, 2018, and for any additional mortgage loans that Ditech Financial may subservice under the NRM Subservicing Agreement that are added to such agreement after such date (other than (i) mortgage loans relating to MSR sold to NRM by Ditech Financial in a bulk sale agreed to by the parties on January 17, 2018 and (ii) mortgage loans relating to MSR sold to NRM by Ditech Financial on a flow basis under the NRM Flow and Bulk Agreement after such date), the initial term of the NRM Subservicing Agreement expired on August 8, 2017 and thereafter the agreement automatically terminates with respect to such mortgage loans, unless renewed by NRM on a monthly basis. Since the expiration of the initial term, NRM has renewed the NRM Subservicing Agreement each month thereafter. In the case of mortgage loans relating to MSR sold to NRM by Ditech Financial in a bulk MSR sale agreed to by the parties on January 17, 2018 and mortgage loans relating to MSR sold to NRM by Ditech Financial on a flow basis under the NRM Flow and Bulk Agreement after such date, the initial term of the NRM Subservicing Agreement shall expire on January 17, 2019 (with respect to the aforementioned bulk MSR sale) or, with respect to each flow MSR assignment agreement executed by the parties after such date in connection with any flow MSR sales by Ditech Financial to NRM after such date, if any, the first anniversary of the first day of the calendar quarter following the calendar quarter during which such flow MSR assignment agreement was executed, and following the applicable initial term the agreement automatically terminates with respect to the applicable mortgage loans unless renewed by NRM on a quarterly basis. If NRM fails to renew the agreement, it will owe us a deconversion fee. In addition, if NRM elects to terminate the NRM Subservicing Agreement without cause, it will owe us a deconversion fee and be responsible for certain servicing transfer costs. NRM may also terminate the NRM Subservicing Agreement immediately for cause upon the occurrence of certain events, including, without limitation, our failure to remit payments (subject to a cure period), our failure to provide reports to NRM (subject to a cure period), a change of control of Ditech Financial or Ditech Holding, our failure to satisfy certain portfolio performance measures relating to delinquency rates or advances, our ceasing to be an approved servicer in good standing with Fannie Mae or Freddie Mac, any failure by Ditech Financial or Ditech Holding to satisfy certain financial metrics, certain bankruptcy or insolvency events of Ditech Financial or Ditech Holding and any failure by us to perform, in any material respect, our obligations under the agreement (subject to a cure period). Because certain of these events have already occurred, NRM has the ability to terminate the NRM Subservicing Agreement immediately for cause with respect to mortgage loans that were being subserviced by Ditech Financial under the NRM Subservicing Agreement prior to January 17, 2018, and for any additional mortgage loans that Ditech Financial may subservice under the NRM Subservicing Agreement that are added to such agreement after such date (other than (i) mortgage loans relating to MSR sold to NRM by Ditech Financial in a bulk sale agreed to by the parties on January 17, 2018 and (ii) mortgage loans relating to MSR sold to NRM by Ditech Financial on a flow basis under the NRM Flow and Bulk Agreement after such date), but has not terminated such agreement with respect to any such mortgage loans. Pursuant to the January 17, 2018 Side Letter Agreement Ditech Financial entered into with NRM, NRM agreed to, among other things, waive its right to terminate the Subservicing Agreement for cause due to the occurrence of certain of these events with respect to mortgage loans relating to MSR sold to NRM by Ditech Financial in a bulk sale agreed to by the parties on January 17, 2018 and mortgage loans relating to MSR sold to NRM by Ditech Financial on a flow basis under the NRM Flow and Bulk Agreement after such date. Upon any termination of the NRM Subservicing Agreement by NRM for cause, we will not be entitled to receive any deconversion fee, will be responsible for certain servicing transfer costs and will owe NRM a transfer fee if such termination occurs within five years from the effective date of the agreement.
Walter Capital Opportunity LLC
In 2014, we established WCO, a company formed to invest in mortgage-related assets, including MSR and excess servicing spread related to MSR. We own approximately 10% of WCO; third-party investors own the remainder of WCO. Beginning in 2014 and continuing through 2016, WCO, in various transactions, acquired MSR, excess servicing spread and other mortgage-related assets in transactions with us and other market participants. From 2014 through 2016, we served as investment manager for WCO pursuant to a management agreement.
In November 2016, WCO entered into a series of agreements whereby it agreed to sell substantially all of its assets, which included the sale of substantially all of its MSR portfolio, to NRM. In connection with the December 2016 closing of the transactions relating thereto, WCO commenced liquidation activities and is currently projecting it will wind down its operations in the fourth quarter of 2018. During the third quarter of 2017, we and WCO terminated the management agreement and entered into a services agreement, under which we currently provide non-investment advisory and administrative services to WCO. We received $11.5 million in distributions from our equity investment in WCO during 2017, which are included in other investing activities in the consolidated statements of cash flows.

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Rights Agreement
We had previously adopted the Rights Agreement, dated as of June 29, 2015, and subsequently amended and restated on November 11, 2016 and further amended on November 9, 2017 and February 9, 2018, which provided that if any person or group of persons, excluding certain exempted persons, acquired 4.99% or more of the outstanding common stock of Walter Investment Management Corp. or any other interest that would be treated as “stock” for the purposes of Section 382, there would be a triggering event potentially resulting in significant dilution in the voting power and economic ownership of such acquiring person or group. The Rights Agreement was intended to help protect our “built-in tax losses” and certain other tax benefits by acting as a deterrent to any person or group of persons acting in concert from becoming or obtaining the right to become the beneficial owner (including through constructive ownership of securities owned by others) of 4.99% or more of the shares of our common stock. The Rights Agreement was scheduled to expire on November 11, 2018 or upon the earlier occurrence of certain events, subject to extension by the Board of Directors or exchange of rights by us.
On the Effective Date, we entered into Amendment No. 2 to the Rights Agreement with Computershare that accelerated the scheduled expiration date of the Rights (as defined in the Rights Agreement) to the Effective Date. The Rights issued pursuant to the Rights Agreement, which were also canceled by operation of the Prepackaged Plan, have expired and are no longer outstanding, and the Rights Agreement has terminated.
In connection with the adoption of our Rights Agreement, we filed Articles Supplementary with the State Department of Assessments and Taxation of Maryland, setting forth the rights, powers, and preferences of our junior participating preferred stock issuable upon exercise of the rights. The cancellation of all existing equity interests by operation of the Prepackaged Plan included the cancellation of any rights issued under the Rights Agreement. In addition, on the Effective Date, we filed Articles of Amendment with the State Department of Assessments and Taxation of Maryland, which among other things, served to eliminate our junior participating preferred stock. Our Articles of Amendment and Restatement, adopted on the Effective Date, include transfer restriction provisions intended to protect the tax benefits described above. Our Articles of Amendment and Restatement, adopted on the Effective Date, include certain restrictions on the transfer of our securities intended to preserve the value of our tax attributes, by minimizing the likelihood of an “ownership change” under applicable tax rules. Subject to certain exceptions, the Articles of Amendment and Restatement generally will restrict (i) any transfer that would result in a person or entity accumulating 4.75% or more of our common shares (assuming for the purpose of calculating the 4.75% that all outstanding shares of Convertible Preferred Stock have fully converted) or 4.75% or more of the outstanding shares of our Convertible Preferred Stock (on a separate class basis), (ii) any transfer as to any person or entity that already owns shares at or above such 4.75% threshold, such person or entity acquiring additional stock of our securities and (iii) under limited circumstances described in the Articles of Amendment and Restatement, a transfer by a person or entity that owns shares at or above such 4.75% threshold from disposing of all or part of such stock.
The Articles of Amendment and Restatement exempt from the restrictions (i) any transfer approved in writing (prior to the date of the transfer) by the Board of Directors, (ii) a tender or exchange offer by us to purchase our securities, a purchase program effected by us on the open market or certain other redemptions of our securities, (iii) a conversion, pursuant to its terms, of Convertible Preferred Stock, and (iv) certain transfers by a person or entity that received as part of our Restructuring and owns 4.75% or more of our Convertible Preferred Stock.
The procedure for approval of a transfer by the Board of Directors, as well as the other details and elements of these restrictions, are set forth in the Articles of Amendment and Restatement.
Laws and Regulations
Our business is subject to extensive regulation by federal, state and local authorities, including the CFPB, HUD, VA, the SEC and various state agencies that license, audit and conduct examinations of our mortgage servicing and mortgage originations businesses. We are also subject to a variety of regulatory and contractual obligations imposed by credit owners, investors, insurers and guarantors of the mortgages we originate and service, including, but not limited to, Fannie Mae, Freddie Mac, Ginnie Mae, FHFA, USDA and the VA/FHA. Furthermore, our industry has been under scrutiny by federal and state regulators over the past several years, and we expect this scrutiny to continue. Laws, rules, regulations and practices that have been in place for many years may be changed, and new laws, rules, regulations and administrative guidance have been, and may continue to be, introduced in order to address real and perceived problems in our industry. We expect to incur ongoing operational, legal and system costs in order to comply with these rules and regulations.
Federal Law
We are required to comply with numerous federal consumer protection and other laws, including, but not limited to:
the Gramm-Leach-Bliley Act and Regulation P, which requires initial and periodic communication with consumers on privacy matters and the maintenance of privacy regarding certain consumer data in our possession;

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the Fair Debt Collection Practices Act, which regulates the timing and content of communications on debt collections;
the TILA, including HOEPA, and Regulation Z, which regulate mortgage loan origination activities, require certain disclosures be made to mortgagors regarding terms of mortgage financing, regulate certain high-cost mortgages, mandate home ownership counseling for mortgage applicants and regulate certain mortgage servicing activities;
the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act and Regulation V, which collectively regulate the use and reporting of information related to the credit history of consumers;
the Equal Credit Opportunity Act and Regulation B, which prohibit discrimination on the basis of age, race and certain other characteristics in the extension of credit and requires certain disclosures to applicants for credit;
the Homeowners Protection Act, which requires the cancellation of mortgage insurance once certain equity levels are reached;
the HMDA and Regulation C, which require reporting of certain public loan data;
the Fair Housing Act and its implementing regulations, which prohibit discrimination in housing on the basis of race, sex, national origin, and certain other characteristics;
the Servicemembers Civil Relief Act, as amended, which provides certain legal protections and relief to members of the military;
the RESPA and Regulation X, which governs certain mortgage loan origination activities and practices and related disclosures and the actions of servicers related to various items, including escrow accounts, servicing transfers, lender-placed insurance, loss mitigation, error resolution, and other customer communications;
Regulation AB under the Securities Act, which requires registration, reporting and disclosure for mortgage-backed securities;
certain provisions of the Dodd-Frank Act, including the Consumer Financial Protection Act, which among other things, created the CFPB and prohibits unfair, deceptive or abusive acts or practices;
the Federal Trade Commission Act, the FTC Credit Practices Rules and the FTC Telemarketing Sales Rule, which prohibit unfair and deceptive acts and practices and certain related practices;
the TCPA, which restricts telephone solicitations and automatic telephone equipment;
Regulation N, which prohibits certain unfair and deceptive acts and practices related to mortgage advertising;
the Bankruptcy Code and bankruptcy injunctions and stays, which can restrict collection of debts;
the Secure and Fair Enforcement for Mortgage Licensing Act; and
various federal flood insurance laws that require the lender and servicer to provide notice and ensure appropriate flood insurance is maintained when required.
The Dodd-Frank Act, enacted in 2010, constituted a sweeping reform of the regulation and supervision of financial institutions, as well as the regulation of derivatives, capital market activities and consumer financial services. Among other things, the Dodd-Frank Act created the CFPB, a new federal entity responsible for regulating consumer financial services. The CFPB has rulemaking authority with respect to many of the federal consumer protection laws applicable to mortgage servicers and originators, including TILA, RESPA and the FDCPA. The CFPB also has supervision, examination and enforcement authority over consumer financial products and services offered by certain non-depository institutions and large insured depository institutions. The CFPB's jurisdiction includes persons (such as us) originating, brokering or servicing residential mortgage loans, those persons performing loan modification or foreclosure relief services in connection with such loans and certain entities involved in the transfer of MSR.

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Title XIV of the Dodd-Frank Act imposed a number of requirements on mortgage originators and servicers of residential mortgage loans, significantly increased the penalties for noncompliance with certain consumer protection laws and also established new standards and practices for mortgage originators and servicers. Subsequent to the enactment of the Dodd-Frank Act, the CFPB has issued, and is expected to continue to issue, various rules that impact mortgage servicing and originations, including: periodic billing statements; certain notices and acknowledgments; prompt crediting of borrowers’ accounts for payments received; additional notice, review and timing requirements with respect to delinquent borrowers; prompt investigation of complaints by borrowers; additional requirements before purchasing insurance to protect the lender’s interest in the property; certain customer service benchmarks for servicers; servicers’ obligations to establish reasonable policies and procedures; requirements to provide information about mortgage loss mitigation options to delinquent borrowers; rules governing the scope, timing, content and format of disclosures to consumers regarding the interest rate adjustments of their variable-rate transactions; establishing certain requirements relating to billing statements, payment crediting and the provision of payoff statements; preventing or limiting servicers of residential mortgage loans from taking certain actions (e.g. the charging of certain fees); requirements for determining prospective borrowers’ abilities to repay their mortgages; removing incentives for higher cost mortgages; prohibiting prepayment penalties for non-qualified mortgages; prohibiting mandatory arbitration clauses; requiring additional disclosures to potential borrowers; restricting the fees that mortgage originators may collect; requiring new mortgage loan disclosures that integrate the TILA disclosures with the RESPA disclosures for certain covered transactions; and other new requirements, in each case either increasing costs and risks related to servicing and originations or reducing revenues currently generated.
Recently, the only reverse mortgage loan product we have originated is the HECM, an FHA-insured loan that must comply with FHA and other regulatory requirements. Accordingly, many of the recent federal legal changes affecting our reverse mortgage business relate to the HECM. On September 3, 2013, the FHA announced changes to the HECM program, pursuant to authority under the Reverse Mortgage Stabilization Act, signed into law on August 9, 2013. The changes impact initial mortgage insurance premiums and principal limit factors, impose restrictions on the amount of funds that senior borrowers may draw down at closing and during the first 12 months after closing, and require a financial assessment for all HECM borrowers to ensure they have the capacity and willingness to meet their financial obligations and the terms of the reverse mortgage. Key components of the financial assessment include a credit history and property charge payment history analysis, a cash flow/residual income analysis, and an analysis of compensating factors and extenuating circumstances to determine if the applicant is eligible for a HECM loan. In addition, the changes require borrowers to set aside a portion of the loan proceeds they receive at closing (or withhold a portion of monthly loan disbursements) for the payment of property taxes and homeowners insurance based on the results of the financial assessment. The new HECM requirements generally became effective on September 30, 2013, with the new financial assessment requirements and funding requirements for the payment of property charges taking effect on April 27, 2015.
State Law
We are also subject to extensive state licensing, statutory and regulatory requirements as a mortgage servicer, loan originator and debt collector throughout the U.S. We are subject to ongoing supervision, audits and examinations conducted by state regulators, including periodic requests from state and other agencies for records, documents and information regarding our policies, procedures and business practices.
State laws affecting our businesses have also been evolving. Some changes have occurred on a nationwide basis at the state level due to the establishment and/or amendment of minimum standards under federal law, such as state licensing requirements. Some states may seek to incorporate federal requirements as a requirement imposed on a state licensed entity, while other states may seek to impose their own additional requirements to the extent not preempted under federal law. Additionally, there have been growing trends in state lawmaking focusing on the servicing of mortgage loans related to, for example, data privacy, loan modifications and anti-foreclosure measures.
Recent Regulatory Developments
Servicing Segment
On June 27, 2017, the CFPB announced a final rule addressing technical corrections to existing mortgage servicing rules under Regulation X of RESPA and Regulation Z of TILA, supplementing a final rule issued on August 4, 2016 that clarified, revised and amended provisions regarding, among other things, force-placed insurance, early intervention and loss mitigation requirements under Regulation X and prompt crediting and periodic statement requirements under Regulation Z. The August 4, 2016 final rule also addressed proper compliance regarding certain servicing requirements when a person is a potential or confirmed successor in interest, is a debtor in bankruptcy, or sends a cease communication request under the FDCPA and made technical corrections to several provisions of Regulation X and Regulation Z. The majority of the requirements under the most recent and the August 4, 2016, final rules became effective October 19, 2017.

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On October 4, 2017, the CFPB announced a proposed rule that would amend the 2016 Regulation Z mortgage servicing rule’s requirements relating to the timing for servicers to transition to providing modified or unmodified periodic statements and coupon books in connection with a consumer’s bankruptcy case.
The CFPB also issued an interpretive rule under the FDCPA relating to servicers' compliance with certain mortgage servicing rules. Most of the provisions of the final rule took effect on October 19, 2017, with the provisions relating to successors in interest and the provisions relating to periodic statements for borrowers in bankruptcy expected to take effect April 19, 2018.
There have been various legal and regulatory developments in Nevada regarding liens asserted by HOAs for unpaid assessments. In September 2014, the Nevada Supreme Court held that an HOA non-judicial foreclosure sale can extinguish a mortgage lender’s previously-recorded first deed of trust on a property if that foreclosure is to recover assessments categorized as super-priority amounts. In June 2015, the U.S. District Court for the District of Nevada issued an opinion holding that federal law prohibits an HOA foreclosure proceeding from extinguishing a first deed of trust assigned to Fannie Mae. A Nevada state court subsequently reached the same conclusion. The Nevada Supreme Court also reversed a lower court summary judgment decision invalidating an HOA foreclosure sale on the basis that the HOA refused the lienholder’s tender of the super-priority portion of the lien and that the HOA sale was commercially unreasonable. The Nevada Supreme Court ruled that these were issues of fact and remanded for further proceedings. Additional litigation in both state and federal courts and appellate courts is pending with respect to these issues. Case law is quickly developing, is not harmonious as between federal and state courts and varies by judge within each jurisdiction. Also, legislation in Nevada, which became effective on October 1, 2015, requires HOAs to provide notice to lienholders relating to the default and foreclosure sale and also to provide creditors with a right to redeem the property for up to 60 days following an HOA foreclosure sale. In January 2017, the Nevada Supreme Court ruled that the state’s non-judicial HOA foreclosure statutes in effect prior to the 2015 amendments do not unconstitutionally violate due process and are not a government taking. This opinion conflicts with a 2016 decision of the Ninth Circuit, holding that the statute was unconstitutional. Credit owners may assert claims against servicers for failure to advance sufficient funds to cover unpaid HOA assessments and protect the credit owner’s interest in the subject property. We service numerous loans in Nevada and are involved in litigation and other legal proceedings affected by, or related to, these HOA matters.
Originations Segment
On June 27, 2017, the CFPB announced a final rule amending the TILA-RESPA “Know Before You Owe” mortgage disclosure rule. The final rule formalizes guidance about the rule, provides greater clarity and certainty and helps facilitate compliance within the mortgage industry. In addition to various clarifications, minor changes, and technical corrections, the rule makes four substantive changes to the existing rule. The final rule: (i) creates tolerances for the total of payments disclosure; (ii) provides for an adjustment of the current partial exemption for certain housing assistance loans to clarify that recording fees and transfer taxes are excluded from the exemption's limitation on costs; (iii) includes all cooperatives under the rule regardless of whether the cooperative is classified as real property under state law; and (iv) incorporates and expands upon previous CFPB webinar guidance concerning the sharing of disclosures with sellers and various other parties.
On July 7, 2017, the CFPB announced a proposed rule to further amend the "Know Before You Owe" mortgage disclosure rule. The proposed amendments relate to when a creditor may compare charges paid by or imposed on the consumer to amounts disclosed on a closing disclosure, instead of a loan estimate, to determine if an estimated closing cost was disclosed in good faith. Specifically, the proposed amendments would permit creditors to do so regardless of when the closing disclosure is provided relative to consummation.
On August 24, 2017, the CFPB issued a final rule to make technical corrections and clarifications to certain requirements adopted by the CFPB’s HMDA (Regulation C) final rule issued on October 28, 2015. The final rule also amends Regulation C to increase the threshold for collecting and reporting data about open-end lines of credit for a period of two years so that financial institutions originating fewer than 500 open-end lines of credit in either of the preceding two years would not be required to begin collecting such data until Jan. 1, 2020, and also adopted a new reporting exclusion. The data collection requirements implemented by the 2015 and 2017 final rules became effective on January 1, 2018, while the reporting requirements are expected to begin in 2019.
Reverse Mortgage Segment
On January 19, 2017, HUD published the “Final HECM Rule, FHA: Strengthening the Home Equity Conversion Mortgage Program.” The primary purpose of this rule was to codify into regulation prior guidance issued by HUD under mortgagee letters authorized by the Reverse Mortgage Stabilization Act of 2013 and the Housing and Economic Recovery Act of 2008. This rule addresses a wide range of reverse mortgage origination and servicing issues, and in certain areas, amends prior guidance and rules. This rule became effective on September 19, 2017.

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HUD Mortgagee Letter 2017-05, effective April 18, 2017, provided consolidated and updated guidance regarding the submission of HECM assignments to HUD. Since the publication of HUD Mortgagee Letter 2017-05, RMS has increasingly experienced delays and rejections with respect to HUD’s acceptance and payment of certain assignment claims, which, in turn, increases the amount of time RMS must carry the applicable loan's balance between the time the loan is bought out of a GNMA pool until the assignment claim is paid. The two predominant reasons for the increase in delays and rejections of HECM assignments relate to HUD Mortgagee Letter 2017-05 being interpreted to require proof that property taxes are "current," as opposed to the prior requirement of proof that such taxes were paid "timely," and the HUD Mortgagee Letter 2017-05 guidance that the only acceptable proof of hazard insurance is a copy of the borrower's current insurance "declarations page." Refer to Item 1A. Risk Factors for a discussion of certain risks relating to our HECM repurchase obligations and related matters.
Federal Regulatory Freeze and Uncertainty
Following the November 2016 Presidential and Congressional elections, a level of heightened uncertainty exists with respect to the future of regulation of mortgage lending and servicing, including the future of the Dodd Frank Act and the CFPB. For example, in January 2017, President Trump issued a Presidential Memorandum and an Executive Order designed to decrease the number of federal regulations. The memorandum directed executive departments and agencies to freeze new or pending regulations, and the order directed agencies to eliminate at least two existing regulations for every proposed regulation. The Office of Management and Budget subsequently clarified that the Executive Order does not apply to independent agencies such as the CFPB, and the applicability of the Presidential Memorandum to such independent agencies is less clear. However, on February 12, 2018, the CFPB released its Strategic Plan, in which it communicated its intention to identify and address unduly burdensome regulations. These events create uncertainty with regard to final regulations already published in the Federal Register but not yet in effect, such as the CFPB’s amendments to the mortgage servicing rules requiring servicers to provide modified periodic statements to certain consumers in bankruptcy and transition to and from providing such statements as they enter and come out of bankruptcy, and are expected to take effect in April 2018. Further, the release of the Strategic Plan came on the heels of the CFPB’s announcement on December 21, 2017 that (a) it did not intend to assess penalties with respect to errors for data collected in 2018 and reported in 2019 under HMDA but (b) it did intend to reconsider various aspects of its 2015 HMDA rule. We cannot predict when these rules will take effect, if at all, nor can we predict the specific legislative or executive actions that may follow or what actions federal and state regulators may take in response to potential changes to the Dodd Frank Act or to the regulatory environment generally.
Company Website and Availability of SEC Filings
Our website can be found at www.ditechholding.com. We make available free of charge on our website or provide a link on our website to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after those reports are electronically filed with, or furnished to, the SEC. To access these filings, go to our website, click on “Investor Relations” and then click on "SEC Filings." We also make available through our website other reports filed with or furnished to the SEC under the Exchange Act, including our proxy statements and reports filed by officers and directors under Section 16(a) of the Exchange Act, as well as our Code of Conduct and Ethics, our Corporate Governance Guidelines, and charters for our Audit Committee, Compensation and Human Resources Committee, Nominating and Corporate Governance Committee, Finance Committee, Compliance Committee and Technology and Operations Committee. In addition, our website may include disclosure relating to certain non-GAAP financial measures that we may make public orally, telephonically, by webcast, by broadcast, or by similar means from time to time.
From time to time, we may use our website as a channel of distribution of material company information. Financial and other material information regarding the Company is routinely posted on and accessible at http://investor.ditechholding.com.
Any information on our website or obtained through our website is not part of this Annual Report on Form 10-K.
Our Investor Relations Department can be contacted at 3000 Bayport Drive, Suite 985, Tampa, Florida 33607, Attn: Investor Relations, telephone (813) 421-7694.

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ITEM 1A. RISK FACTORS
You should carefully review and consider the risks and uncertainties described below, which are risks and uncertainties that could materially adversely affect our business, prospects, financial condition, cash flows, liquidity and results of operations, our ability to pay dividends to our stockholders and/or our stock price. In addition, to the extent that any of the information contained in this Annual Report on Form 10-K constitutes forward-looking information, the risk factors set forth below are cautionary statements identifying important factors that could cause our actual results for various financial reporting periods to differ materially from those expressed in any forward-looking statements made by or on our behalf.
Risks Related to Emergence from Bankruptcy Protection
Information contained in our historical financial statements will not be comparable to the information contained in our financial statements after the expected application of fresh start accounting.
Following the consummation of the Prepackaged Plan, our financial condition and results of operations from and after the Effective Date will not be comparable to the financial condition or results of operations in our historical financial statements. As a result of our restructuring under Chapter 11 of the Bankruptcy Code, our financial statements are expected to be subject to the fresh start accounting provisions of GAAP. In the application of fresh start accounting, an allocation of the reorganization value is made to the fair value of assets and liabilities in conformity with the guidance for the acquisition method of accounting for business combinations. Adjustments to the carrying amounts could be material and could affect prospective results of operations as balance sheet items are settled, depreciated, amortized or impaired. This will make it difficult for our stockholders and others to assess our performance in relation to prior periods. Our Quarterly Report on Form 10-Q for the period ended March 31, 2018 will reflect the consummation of the Prepackaged Plan and the expected adoption of fresh start accounting effective February 10, 2018.
Our emergence from reorganization proceedings will reduce or eliminate our tax attributes and limit our ability to offset future taxable income with tax losses and credits incurred prior to our emergence from bankruptcy. Our remaining deferred tax assets could be further impaired if we have a subsequent significant change in our stockholder base.
As a result of the discharge of debt pursuant to the Chapter 11 Case, we will incur substantial cancellation of debt for federal income tax purposes. In general, a debtor in a Chapter 11 proceeding is required to reduce the amount of its tax attributes by such cancellation of debt. The tax attributes, including net operating losses, tax credits and tax basis in assets, provide potential value in the form of reduced future tax liability.
A corporation's ability to recognize the value of its tax attributes can be substantially constrained under the general annual limitation rules of Section 382 if it undergoes an “ownership change” as defined in Section 382 (generally where cumulative stock ownership changes among material shareholders exceed 50% during a rolling three-year period). We experienced an ownership change in connection with our emergence from the Chapter 11 Case. The general limitation rules for a debtor in a bankruptcy case are liberalized where the ownership change occurs upon emergence from bankruptcy. While we anticipate taking advantage of certain special rules for federal income tax purposes that would allow us to mitigate the limitations imposed under Section 382 with respect to our remaining tax attributes, there can be no assurance that these special rules will apply to the ownership change we experienced upon our emergence from bankruptcy, including that we may ultimately elect not to apply them. If the special rules do not apply, our ability to realize the value of our tax attributes would be subject to limitation.
Notwithstanding the foregoing, an ownership change subsequent to our emergence from the Chapter 11 Case may severely limit or effectively eliminate our ability to realize the value of our tax attributes. To reduce the risk of a potential adverse effect on our ability to realize the value of our tax attributes, our Articles of Amendment and Restatement contain transfer restrictions applicable to certain substantial common and preferred stockholders. Although the purpose of these transfer restrictions is to prevent an ownership change from occurring, no assurance can be given that such an ownership change will not occur, in which case our ability to realize the value of our tax attributes could be severely limited or effectively eliminated.
Our ability to use our deferred tax assets to offset future taxable income may be subject to certain limitations that could subject our business to higher tax liabilities.
We may be limited in the portion of net operating loss carryforwards and built in losses that we can use in the future to offset taxable income for U.S. federal and state income tax purposes. The Tax Act enacted on December 22, 2017 makes broad and complex changes to the Code. While future interpretative guidance related to the Tax Act and how U.S. states will incorporate these federal law changes may have an impact on our business, the Tax Act’s reduction of the federal corporate income tax rate from 35% to 21%, effective January 1, 2018, has reduced our net deferred tax assets including those associated with NOL Carryforwards. A lack of future taxable income would adversely affect our ability to utilize our NOL Carryforwards.

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In addition, under Section 382 of the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOL Carryforwards and built in losses to offset future taxable income. Future changes in our stock ownership as well as other changes that may be outside of our control could result in additional ownership changes under Section 382 of the Code. Our state NOL Carryforwards may also be impaired under similar provisions of state law.
We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize our existing deferred tax assets. On the basis of this evaluation, a full valuation allowance has been recorded to recognize only deferred tax assets that are more likely than not to be realized.
Finally, further changes to the federal or state tax laws or additional technical guidance relating to the Tax Act could operate to effectively reduce or eliminate the value of any deferred tax asset. Our tax attributes as of December 31, 2017 may expire unutilized or underutilized, which could prevent us from offsetting future taxable income.
There is limited history of trading of our post-emergence common stock, and volatility is possible.
Our post-emergence common stock has traded for only a limited period of time. Some of the holders who received common stock upon emergence may not elect to hold their shares on a long-term basis. Sales by these stockholders of a substantial number of shares could significantly reduce the market price of our common stock. Moreover, the perception that these stockholders might sell significant amounts of our common stock could depress the trading price of the stock for a considerable period of time. Such sales of common stock, and the possibility thereof, could make it more difficult for us to sell equity, or equity-related securities, in the future at a time and price that we consider appropriate.
Risks Related to our Business
If we fail to operate our business in compliance with both existing and future statutory, regulatory and other requirements, our business, financial condition, liquidity and/or results of operations could be materially and adversely affected.
Our business is subject to extensive regulation by federal, state and local governmental and regulatory authorities, including the CFPB, the FTC, HUD, the VA, the SEC and various state agencies that license, audit, investigate and conduct examinations of our mortgage servicing, origination, insurance, collection, reverse mortgage and other activities. Further, in recent years the policies, laws, rules and regulations applicable to our business have been rapidly evolving. Federal, state or local governmental authorities may continue to enact laws, rules or regulations that will result in changes in our business practices and increased costs of compliance. However, we are unable to predict whether any such changes will adversely affect our business.
In addition, the GSEs, Ginnie Mae and other business counterparties also subject us to periodic examinations, reviews and audits, and we routinely conduct our own internal examinations, reviews and audits. These various audits, reviews and examinations of our business and related activities have uncovered, and may in the future uncover, deficiencies in our compliance with our policies and other requirements to which we are subject. While we strive to investigate and remediate such deficiencies, there can be no assurance that any remedial measures we implement, which could involve material expense, will ensure compliance with applicable policies, laws, regulations and other requirements or be deemed sufficient by the GSEs, Ginnie Mae, governmental authorities or other interested parties.
We devote substantial resources (including senior management time and attention) to regulatory compliance and regulatory inquiries, and we incur, and expect to continue to incur, significant costs in connection therewith. Our business, financial condition, liquidity and/or results of operations could be materially and adversely affected by the substantial resources (including senior management time and attention) we devote to, and the significant compliance costs we incur in connection with, regulatory compliance and regulatory inquiries, and any fines, penalties, restitution or similar payments we make in connection with resolving such matters.
Furthermore, our actual or alleged failure to comply with applicable federal, state and local laws and regulations and GSE, Ginnie Mae and other business counterparty requirements, or to implement and adhere to adequate remedial measures designed to address any identified compliance deficiencies, could lead to:
the loss or suspension of licenses and approvals necessary to operate our business;
limitations, restrictions or complete bans on our business or various segments of our business;
disqualification from participation in governmental programs, including GSE programs;
damage to our reputation;
governmental investigations and enforcement actions;
administrative fines and financial penalties;

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litigation, including class action lawsuits;
civil and criminal liability;
termination of our servicing and subservicing agreements or other contracts;
demands for us to repurchase loans;
loss of personnel who are targeted by prosecutions, investigations, enforcement actions or litigation;
a significant increase in compliance costs;
a significant increase in the resources (including senior management time and attention) we devote to regulatory compliance and regulatory inquiries;
an inability to access new, or a default under or other loss of current, liquidity and funding sources necessary to operate our business;
restrictions on mergers and acquisitions;
impairment of assets;
conservatorship or receivership by order of a court or regulator; and
an inability to execute on our business strategy.
Any of these outcomes could materially and adversely affect our reputation, business, financial condition, prospects, liquidity and/or results of operations.
The mortgage servicing industry has been and remains under a higher degree of scrutiny from state and federal regulators and other authorities, with particular attention directed at larger non-bank servicing organizations such as Ditech Holding. We cannot guarantee that any such scrutiny and investigations will not materially adversely affect us.
Our failure to comply with existing and future rules and regulations relating to the origination and servicing of residential loans, and/or more stringent enforcement of such rules and regulations by the CFPB, HUD and other federal and state agencies could result in enforcement actions, fines, penalties and reputational damage.
On July 21, 2010, the Dodd-Frank Act was signed into law for the express purpose of further regulating the financial services industry, including mortgage origination, sales, servicing and securitization. The CFPB, a federal agency established pursuant to the Dodd-Frank Act, officially began operation on July 21, 2011. The CFPB is charged, in part, with enforcing laws involving consumer financial products and services, including mortgage finance and servicing and reverse mortgages, and is empowered with examination, enforcement and rulemaking authority.
The Dodd-Frank Act established new standards and practices for mortgage originators and servicers, including determining prospective borrowers’ abilities to repay their mortgages, removing incentives for higher cost mortgages, prohibiting prepayment penalties for non-qualified mortgages, prohibiting mandatory arbitration clauses, requiring additional disclosures to potential borrowers, restricting the fees that mortgage originators may collect, new mortgage loan disclosures that integrate TILA and RESPA disclosures for certain covered transactions and other new requirements.
In recent years, HUD and the DOJ have pursued actions against FHA-approved lenders, including RMS, under the False Claims Act, which imposes liability on any person who knowingly makes a false or fraudulent claim for payment to the U.S. government. Potential penalties are significant as these actions may result in treble damages and several large settlements have been entered into by HUD-approved mortgagees who have allegedly violated the False Claims Act. RMS received a subpoena dated June 16, 2016 from the Office of Inspector General of HUD requiring RMS to produce documents and other materials relating to, among other things, the origination, underwriting and appraisal of reverse mortgages for the time period since January 1, 2005. RMS subsequently received an additional subpoena from the Office of Inspector General of HUD dated January 12, 2017 requesting certain documents and information relating to the origination and underwriting of certain specified loans. This investigation, which is being conducted in coordination with the U.S. Department of Justice, Civil Division, could lead to a demand or claim under the False Claims Act, which allows for penalties and treble damages, or other statutes. See Item 3. Legal Proceedings for additional information.
In addition, the DOJ could take the position that it could initiate actions against Fannie Mae- and Freddie Mac-approved lenders and servicers for alleged violations of the False Claims Act as a result of noncompliance with the GSE’s underwriting and other guidelines, given the FHFA conservatorship.

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Regulations under the Dodd-Frank Act, bulletins issued by the CFPB pursuant to its authority, and other actions by the CFPB, HUD, the VA and other federal agencies could materially and adversely affect the manner in which we conduct our businesses, and have and could continue to result in heightened federal regulation and oversight of our business activities and in increased costs and potential litigation associated with our business activities.
We are subject to state licensing requirements and incur related substantial compliance costs, and our business would be adversely affected if we encountered a suspension or termination of our licenses.
Our operations are subject to regulation, supervision and licensing under various federal, state and local statutes, ordinances and regulations. Although we are not a bank or bank holding company, in most states in which we operate, one or more regulatory agencies regulate and enforce laws relating to non-bank mortgage servicing companies and/or mortgage origination companies such as Ditech Financial and RMS. These rules and regulations generally provide for licensing as a mortgage servicing company, mortgage origination company, debt collection agency and/or third-party default specialist, as applicable, requirements as to the documentation, individual licensing of our employees and employee hiring background checks, licensing of independent contractors with whom we contract, restrictions on collection practices, disclosure and record-keeping requirements and enforcement of borrowers' rights. In certain states, we are subject to periodic examination by state regulatory authorities. Some states in which we operate require special licensing or provide extensive regulation of our business, and state regulators may have broad discretion to restrict our activities or to suspend approval or withdraw our licenses for non-compliance with applicable requirements. The failure to respond appropriately to regulatory inquiries and investigations or to satisfy state regulatory requirements could result in our ability to operate in the state being terminated, cause a default under our servicing agreements, impact our ability to originate new loans or service loans and have a material adverse effect on our financial condition and operations.
Regulatory changes could increase our costs through additional or stricter licensing laws, disclosure laws or other regulatory requirements and could impose conditions to licensing that we or our personnel are unable to meet. Future legislation and changes in regulation may significantly increase the compliance costs on our operations or impact overall profitability of our business. This could make our business cost-prohibitive in the affected state or states and could materially affect our business.
Legal proceedings and related costs may increase and could adversely affect our financial results.
We are involved in various legal proceedings, including numerous litigation matters that arise in the ordinary course of our business (including numerous putative class actions). Like other participants in our industry, we have been and may continue to be the subject of class action and other lawsuits and of regulatory actions by state attorneys general and federal and state regulators and enforcement agencies.
Litigation and other proceedings have required, and may require in the future, that we pay attorneys' fees, settlement costs, damages (including punitive damages), penalties or other charges, which could materially adversely affect our financial results and condition and damage our reputation.
Governmental and regulatory investigations, both state and federal, have increased in all areas of our business over the last several years. The costs of responding to the investigations can be substantial. In addition, government-mandated changes, resulting from investigations or otherwise, to our loan origination and servicing practices have led, and may continue to lead, to higher costs and additional administrative burdens, such as record retention and informational obligations.
From time to time, we have entered into agreements or orders to settle investigations, potential litigations or other enforcement actions against us by governmental and regulatory authorities. Complying with settlements can be costly, and if we fail to comply we could be subject to sanctions, including actions for contempt, actions for additional fines or actions alleging violations of law. The announcement and terms of such settlements could adversely affect our reputation and, if the settlements involve findings that we have breached the law, could cause a breach of or default under our financing agreements, our servicing or subservicing contracts or other contractual obligations. Such settlements, our efforts to comply with settlements and our failure to comply with settlements could have a material adverse effect on our business, business practices, prospects, results of operations, liquidity and financial condition.
We establish reserves for pending or threatened litigation and regulatory matters when it is probable that a loss has been incurred and the amount of such loss can be reasonably estimated. Litigation and regulatory matters involve considerable inherent uncertainties, and our estimates of loss are based on judgments and information available at the time. Our estimates may change from time to time for various reasons, including developments in the matters. There cannot be any assurance that the ultimate resolution of our litigation and regulatory matters will not involve losses, which may be material, in excess of our recorded accruals or estimates of reasonably possible losses. See Note 30 to our Consolidated Financial Statements and Item 3. Legal Proceedings for additional information.

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Our level of indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations.
We have substantial levels of indebtedness. As of the Effective Date, we had approximately $2.8 billion of total indebtedness outstanding, the majority of which was secured, including:
$1.2 billion of indebtedness under our 2018 Term Loan;
$250.0 million aggregate principal amount of Second Lien Notes;
$50.6 million, in the aggregate, of indebtedness under the Early Advance Reimbursement Agreement; and
$1.3 billion, in the aggregate, of indebtedness under the Exit Warehouse Facilities.
All of these amounts of indebtedness exclude (i) intercompany indebtedness, (ii) guarantees of affiliate debt and (iii) certain mortgage-backed debt and HMBS-related obligations (which are non-recourse to us and our subsidiaries).
Our high level of indebtedness could have important consequences, including:
increasing our vulnerability to downturns or adverse changes in general economic, industry or competitive conditions and adverse changes in government regulations;
requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;
exposing us to the risk of increased interest rates as certain of our indebtedness is unhedged and at a variable rate of interest;
limiting our ability to make strategic acquisitions or causing us to make non-strategic divestitures;
limiting our ability to pursue strategic and operational goals;
exposing us to the risk of not being able to refinance our indebtedness on terms that are commercially acceptable to us, or at all;
limiting our ability to obtain additional financing for working capital, capital expenditures, product or service line development, debt service requirements, acquisitions and general corporate or other purposes; and
limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors with lower debt levels.
We may not be able to generate sufficient cash to meet all of our obligations or service all of our indebtedness and may not be able to extend or refinance our indebtedness. If we are unable to do so, we may be forced to take other actions to satisfy our obligations, which may not be successful.
Our ability to make required payments on our debt and other obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control, including the risk factors set forth herein. We have recorded significant losses in 2016 and 2017. We cannot assure you we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness or to meet our other obligations such as our obligations to repurchase HECM loans.
In addition, we conduct a substantial part of our operations through our subsidiaries. Accordingly, our ability to repay our indebtedness depends on the generation of cash flow by our subsidiaries and their ability to make such cash available to us by dividend, debt repayment or otherwise. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness.

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Much of our debt is short-term so we regularly seek to extend or refinance our existing indebtedness. Our ability to extend, renew or refinance our indebtedness on favorable terms, or at all, is uncertain and may be affected by global economic and financial conditions and other factors outside our control. In addition, our ability to incur secured indebtedness (which would generally enable us to achieve better pricing than the incurrence of unsecured indebtedness) depends in part on the value of our assets, which depends, in turn, on the strength of our cash flows and results of operations, and on economic and market conditions and other factors. From time to time in the recent past, we have obtained waivers or amendments of covenants in our pre-Effective Date debt agreements. In addition, in March 2018, we obtained amendments to certain facilities and the 2018 Credit Agreement to, among other things, extend the deadline for providing certain financial statements and increase operational flexibility with respect to certain financial covenants. See the Liquidity and Capital Resources section of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for more information. If we are unable to obtain needed waivers or amendments in the future, we could experience material adverse consequences.
If our cash flows and capital resources are insufficient to fund our debt service and other obligations or we are unable to extend or refinance our indebtedness, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.
Despite our current debt levels, we may still incur substantially more debt or take other actions that would intensify the risks discussed above.
Despite our current consolidated debt levels, we and our subsidiaries are permitted to and may incur substantial additional debt in the future, some of which may be secured, subject to the restrictions contained in our debt instruments. Although the 2018 Credit Agreement and Second Lien Notes indenture contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. Any such indebtedness could increase our leverage and the risks we face from indebtedness. We may also be permitted to take a number of other actions that could have the effect of diminishing our ability to make payments on our indebtedness when due.
Our debt agreements contain covenants that restrict our operations and may inhibit flexibility in operating our business and increasing revenues.
Our 2018 Credit Agreement and Second Lien Notes indenture entered into in February 2018 contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and certain of our subsidiaries' ability to, among other things:
incur additional indebtedness or issue certain preferred shares;
pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;
make certain investments;
sell or transfer assets;
utilize the proceeds from any sale or transfer of assets;
create liens;
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and
enter into certain transactions with our affiliates.
The 2018 Credit Agreement also contains financial covenants requiring compliance with certain asset coverage ratios, and beginning with the four consecutive quarterly "test" periods ending March 31, 2020, an interest expense coverage ratio and a first lien net leverage ratio. Certain of these covenants are subject to varying interpretation, making it possible that we and our creditors disagree as to whether we have complied with our obligations under our debt agreements. A breach, or alleged breach, of any of these covenants could result in a default and our lenders could elect to declare all amounts outstanding to be immediately due and payable and to terminate all commitments to extend further credit. If we were unable to repay those amounts, the secured lenders could proceed against the collateral granted to them to secure such indebtedness. There can be no assurance that we will have sufficient assets to repay amounts due under our indebtedness.

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Our failure to renew or replace one or more of our advance financing facilities or warehouse facilities, or any loss of a material amount of borrowing capacity under such facilities, could have a material adverse effect on our business, financial condition, liquidity or results of operations.
We depend on our Exit Warehouse Facilities to finance, on a short-term basis, our servicer advances (excluding advances made on loans we subservice that are made, on a short-term basis, with available cash) and our residential loan originations and repurchase activities or obligations, including the repurchase of HECMs out of Ginnie Mae securitization pools. The Exit Warehouse Facilities as well as other financing facilities we may enter into are typically subject to renewal every year and contain provisions that could prevent us from utilizing any unused capacity under any such facility and/or that could accelerate our repayment of amounts outstanding under any such facility. Only servicing advances and residential loans (including repurchased residential loans) that meet certain eligibility requirements as defined in the relevant financing facility agreements are eligible to be financed using such facilities. The Exit Warehouse Facilities require us to maintain a good standing relationship with the GSEs and/or Ginnie Mae, and if any contract governing such relationship were terminated, it would limit or eliminate our ability to fund our borrowing needs. In addition, amounts borrowed under our servicing advance facilities are due on a fixed date (unless extended) and, in certain circumstances, we may be required to repay such amounts before we have been reimbursed for the related advances.
Our failure to renew one or more of these financing facilities, including the Exit Warehouse Facilities, on terms acceptable to us, the acceleration of amounts due under such facilities or our loss of a material amount of borrowing capacity under such facilities, could have a material adverse effect on our business, financial condition, liquidity or results of operations.
The Exit Warehouse Facilities contain restrictions, covenants, and representations and warranties that, among other conditions, require us to satisfy specified financial and asset quality tests and may restrict our ability to engage in mergers or consolidations. In the past, including recently, we have obtained waivers or amendments from certain of our lenders in order to maintain compliance with certain covenants and other terms of our financing facilities, and we expect to seek waivers or amendments in the future if necessary. See the Liquidity and Capital Resources section of Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of certain recent amendments and waivers. There is no assurance our lenders would consent to a waiver or amendment in the event of potential noncompliance, and in the past such consent has been, and in the future it may be, conditioned upon the receipt of a cash payment, increased interest rates or other revised terms. If we fail to meet or satisfy any covenants or representations and warranties contained in the Exit Warehouse Facilities or other financing agreements, including the failure to maintain or satisfy requirements imposed by the GSEs or Ginnie Mae, or the failure to comply with applicable law, we could be in default under these agreements and our lenders could elect to declare any and all amounts outstanding under the agreements immediately due and payable, enforce their respective interests against collateral pledged under such agreements, and restrict our ability to make additional borrowings. Many of our financing agreements, including the Exit Warehouse Facilities, contain cross-default provisions, such that if a default occurs under any one agreement, the lenders under our other agreements also could declare a default.
Our business strategy may not be successful in returning us to profitability.
We recorded significant net losses in each of 2016 and 2017. During those years, despite our efforts to reduce our expenses, dispose of certain businesses, eliminate certain activities and improve operations we were not successful in meeting key business goals and generating profits. Our current strategy contemplates further cost reductions, operational enhancements and streamlining of our businesses and reduction of leverage. We cannot control all of the factors that affect our ability to achieve our goals, and some elements of our strategy, such as our goal of improving operational performance, may require expenditures and investments that adversely affect our financial results.
Our business plan also assumes that we will be able to sell the majority of the MSR we originate to third parties who retain us to subservice such MSR. Although we have arrangements pursuant to which we may from time to time sell MSR to NRM, and although we are in discussions with other parties about the possibility of selling MSR to them, we have no firm commitments pursuant to which we can sell MSR and we may be unable to find buyers for MSR in adequate volume or at suitable prices. If we are unable to sell enough MSR in accordance with our plans, we could experience a variety of material adverse consequences, including the failure to achieve our plan goals, liquidity shortages, and a need to reduce origination volumes.
We may be unsuccessful in implementing our strategy and returning us to profitability. Failure to become profitable could result in material adverse consequences for us, including defaults under financing facilities that have minimum profitability covenants, related cross defaults in other financing facilities, a reduction in the number of counterparties that are willing to do business with us (including GSEs, agencies and primary servicers), a loss of key personnel and other significant adverse consequences.

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Our business is highly dependent on U.S. government-sponsored entities or agencies, and any changes in these entities or agencies or their current roles, or any failure by us to maintain our relationships with such entities or agencies, could materially and adversely affect our business, liquidity, financial position and/or results of operations.
The U.S. residential mortgage industry in general and our business in particular are highly dependent on Fannie Mae, Freddie Mac and Ginnie Mae. We receive compensation for servicing loans, most of which are Fannie Mae, Freddie Mac or Ginnie Mae residential loans. In addition, Ditech Financial sells mortgage loans to GSEs, which include mortgage loans in GSE guaranteed securitizations, and is an issuer of MBS guaranteed by Ginnie Mae and collateralized by Ginnie Mae mortgage loans. RMS is an issuer of HMBS, which are guaranteed by Ginnie Mae and collateralized by participation interests in HECMs, which are insured by the FHA.
Ditech Financial is: (i) a Fannie Mae approved seller/servicer pursuant to a Mortgage Selling and Servicing Contract between Ditech Financial and Fannie Mae, dated March 23, 2005, as amended; (ii) a Freddie Mac approved seller/servicer pursuant to a Master Commitment between Ditech Financial and Freddie Mac, dated September 29, 2016, as amended; and (iii) a Ginnie Mae approved issuer/servicer pursuant to (a) an approval letter from Ginnie Mae to Ditech Financial, dated February 26, 2010, as amended, and (b) a Master Servicing Agreement between Ditech Financial and Ginnie Mae, dated October 9, 2015, as amended. Ditech Financial is also a HUD/FHA approved mortgagee, a VA approved non-supervised lender and a USDA approved participant in the USDA Rural Development Single Family Housing Guaranteed Loan Program.
RMS is: (i) a Ginnie Mae approved issuer/servicer pursuant to (a) an approval letter from Ginnie Mae to RMS, dated January 29, 2008, as amended, and (b) a Master Servicing Agreement between Ginnie Mae and RMS, dated May 19, 2008, as amended; (ii) a Fannie Mae approved servicer of reverse mortgages pursuant to a Mortgage Selling and Servicing Contract between RMS and Fannie Mae, dated September 10, 2007, as amended; and (iii) an approved Title I and Title II FHA mortgagee pursuant to Origination Approval Agreements, dated May 8, 2007, as amended.
Our ability to originate and sell mortgage loans under the GSE and Ginnie Mae programs reduces our credit exposure and mortgage inventory financing costs. Our status as a Fannie Mae and Freddie Mac approved seller/servicer is subject to compliance with each GSE’s respective selling and servicing guidelines and failure to adhere to such guidelines could result in the unilateral termination or suspension of our status as an approved seller/servicer. Our status as a Ginnie Mae approved issuer/servicer is subject to compliance with Ginnie Mae’s issuer and servicing guidelines and failure to adhere to such guidelines could result in the unilateral termination or suspension of our status as an approved issuer/servicer. Our failure to maintain each of our various residential loan origination, servicing, issuer and related approvals with the GSEs and Ginnie Mae could materially and adversely affect our business, liquidity, financial position and results of operations.
In 2017, we earned approximately 37%, 8% and 12% of our total revenues from servicing Fannie Mae, Freddie Mac and Ginnie Mae residential loans, respectively. Our ability to generate revenues in our mortgage originations business is highly dependent on programs administered by Fannie Mae, Freddie Mac and Ginnie Mae; during 2017, approximately 50%, 9% and 41% of the mortgage loans our Originations segment sold or securitized based on unpaid principal balance were Fannie Mae, Freddie Mac and Ginnie Mae residential loans, respectively. Our failure to maintain our relationships with Fannie Mae, Freddie Mac or Ginnie Mae could materially and adversely affect our business, liquidity, financial position and results of operations.
There is significant uncertainty regarding the future of Fannie Mae and Freddie Mac, including with respect to how long they will continue to be in existence, the extent of their roles in the market and what forms they will have. On September 7, 2008, the FHFA placed Fannie Mae and Freddie Mac into conservatorship. As the conservator of Fannie Mae and Freddie Mac, the FHFA controls and directs the operations of Fannie Mae and Freddie Mac. The roles of Fannie Mae and Freddie Mac could be significantly reduced or eliminated and the nature of the guarantees provided by such GSEs could be considerably limited relative to historical practice. Any adverse change in the traditional roles of Fannie Mae, Freddie Mac or Ginnie Mae in the U.S. mortgage market, any discontinuation of, or significant reduction in, the operations or level of activity of Fannie Mae, Freddie Mac or Ginnie Mae in the primary or secondary U.S. mortgage market, or any adverse change in the underwriting guidelines utilized by, and mortgage loan programs supported by, Fannie Mae, Freddie Mac or Ginnie Mae could materially adversely affect our business, liquidity, financial position and results of operations. Additionally, the FHFA has in the past increased guarantee fees that the GSEs charge lenders for guaranteeing the timely payment of principal and interest on their mortgage-backed securities and we cannot assure you that they will not increase such fees in the future. If there is any increase in guarantee fees or changes to their structure this may generally raise lending costs, restrict the availability of credit, particularly to higher risk borrowers, and negatively affect our ability to grow, and the performance of, both our servicing and lending businesses.

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Our mortgage servicing business involves significant operational risks.
Our mortgage servicing business involves, among other things, complex record-keeping, the handling of numerous payments each month, a significant amount of consumer contact, reporting to credit agencies, managing servicing advances and participation in foreclosure and bankruptcy proceedings, all of which are subject to detailed, prescriptive, changing and sometimes unclear regulation, contracts and client requirements, including the requirements of the GSEs, Ginnie Mae and our subservicing clients. Performing all of the tasks involved in mortgage servicing in a compliant, timely and profitable manner involves significant operational risk. Operational risks include poor management oversight and decisions, human error by our servicing employees, weak processes and procedures, inadequate resources devoted to key processes, problems with the numerous systems and technologies that comprise our servicing platform and poor records or data inputs by us or prior servicers from whom we have acquired servicing rights or responsibilities. For these and other reasons, we have experienced and may in the future experience significant operational deficiencies and compliance failures across various parts of our servicing operations. We have incurred and expect to continue to incur significant expenses associated with the identification and remediation of operational deficiencies and compliance failures and the reduction of operational risk. These cost increases have not been matched by increases in the compensation structure for owners of, or subservicers of, MSR. Operational deficiencies and compliance failures could materially adversely affect our business in many ways, including by damaging our customer relationships, causing us to breach our contractual servicing or subservicing obligations and our obligations under our warehouse, advance financing and other credit facilities and putting us in breach of law or regulation. Such deficiencies and failures have adversely affected our past results of operations and could, in the future, cause a material adverse effect on our business, prospects, results of operations, liquidity and financial condition.
Operational risks could cause us to fail to meet the performance standards required by counterparties such as the GSEs, Ginnie Mae and our subservicing clients, which could in turn lead to a termination of our servicing rights and subservicing contracts. While we continue to take steps intended to improve our servicing performance, we cannot be certain that our efforts will have sufficient or timely results. If we fail to meet applicable performance standards, we could face various material adverse consequences, including a material increase in compensatory fees we are charged by the GSEs (based on performance against benchmarks for various servicing metrics), competitive disadvantage, the inability to win new subservicing business and the termination (potentially for cause and without payment to us of any termination fee or other compensation) of our servicing rights or subservicing contracts.
When we acquire the rights to service mortgages, particularly GSE mortgages, we have in the past, and may in the future, incur liability that is the result of errors or violations of law attributable to prior originators and servicers of such mortgages to the extent applicable law or our contractual arrangements expose us to such liability, which is normally the case absent additional contractual arrangements that are negotiated on a transaction by transaction basis. In certain circumstances, we have obtained contractual arrangements meant to minimize our exposure to such liabilities. Such contractual arrangements can take the form of, for example, liability bifurcation agreements with the GSEs pursuant to which such liabilities are not assumed by us, or an indemnification pursuant to which we are indemnified for such liabilities by the former owners of the MSR. There is no assurance that any such arrangements, even if obtainable, enforceable and collectible, will be sufficient in amount, scope or duration to fully offset the possible liabilities arising from a particular acquisition. Furthermore, there is no assurance that any such indemnification will cover losses resulting from claims that may be asserted against us by a GSE or others with respect to errors or violations that occurred prior to a particular acquisition by us.
A downgrade in our servicer ratings could have an adverse effect on our business, financial condition or results of operations.
S&P and Moody's rate us as a residential loan servicer. Certain of these ratings have been downgraded in the past, and any of these ratings may be downgraded in the future. Any such downgrade could adversely affect our business, financial condition or results of operations, as well as our ability to finance servicing advances and maintain our status as an approved servicer by Fannie Mae, Freddie Mac and Ginnie Mae. In particular, the Servicing Guide: Fannie Mae Single Family, published February 15, 2017, and the Selling Guide: Fannie Mae Single Family, published January 31, 2017, contain certain requirements with respect to an approved Fannie Mae servicer’s maintenance of minimum servicer ratings. Our failure to maintain favorable or specified ratings may cause our termination as servicer and further impair our ability to consummate future servicing transactions, which could have an adverse effect on our business, financial condition or results of operations. Refer to the Ratings section of Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information relating to our servicer ratings.

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An increase in delinquency rates could have a material adverse effect on our business, financial position, results of operations and cash flows.
Delinquency rates can have a significant impact on our revenues and expenses and the value of our MSR. For example, an increase in delinquencies may result in lower revenues because, for some GSE and other business, we may only collect servicing fees for performing loans. Additionally, while increased delinquencies may generate higher ancillary fees, including late fees, these fees are not likely to be recoverable in the event that the related loan is liquidated and are generally only recognized as revenue upon collection. In addition, an increase in delinquencies lowers the interest income we receive on cash held in collection and other accounts. Delinquencies can also increase our liability for servicing advances, as we may be required to advance certain payments early in a delinquency, which could impact our liquidity. An increase in delinquencies has in the past resulted, and will result in a higher cost to service due to the increased time and effort required to collect payments from delinquent borrowers. Further, increases in delinquencies could result in lower servicer ratings, the termination of our subservicing contracts or the transfer of servicing away from us, which in turn could have a material adverse effect on our business, prospects, results of operations, liquidity and financial condition.
Fannie Mae, with respect to Fannie Mae loans that we service, and Freddie Mac, with respect to Freddie Mac loans that we service, may terminate Ditech Financial as servicer of such loans, with or without cause, and in connection therewith transfer the related servicing rights to a third party.
Under the terms of Ditech Financial's master servicing agreements (including any amendments and addendums thereto) with each of Fannie Mae and Freddie Mac, Fannie Mae, with respect to Fannie Mae loans that Ditech Financial services, and Freddie Mac, with respect to Freddie Mac loans that Ditech Financial services, may terminate us as servicer of such loans, with or without cause, transfer the servicing rights relating to such loans to a third party and, under certain circumstances, cause such a transfer to occur without payment to us of any consideration in connection therewith. Some provisions of these agreements are open to subjective interpretation or depend upon the judgment or determination of Fannie Mae or Freddie Mac, so we may not be able to determine in advance whether these are grounds for terminating us as servicer or transferring servicing rights away from us.
For example, if Freddie Mac terminated us as a servicer without cause, we would have a right to a specified termination fee; however, if Freddie Mac terminated us as servicer for cause, we would not have any right to a termination fee or other consideration in connection with such termination and the related transfer of servicing rights to another servicer. Events that could allow Freddie Mac to terminate Ditech Financial for cause as servicer of some or all of the Freddie Mac loans we service include, without limitation, the impending or actual insolvency of Ditech Financial or an affiliate thereof; the filing of a voluntary petition by Ditech Financial or an affiliate thereof under federal bankruptcy or state insolvency laws; Ditech Financial’s failure to maintain qualified staff and/or adequate facilities to assure the adequacy of servicing of Freddie Mac loans; any weakness or notable change in the financial or organizational status or management of Ditech Financial or an affiliate thereof, including any adverse change in profitability or liquidity that, in the opinion of Freddie Mac, could adversely affect Freddie Mac; Ditech Financial’s failure to meet any eligibility requirement, including failure to maintain acceptable net worth; Ditech Financial having delinquency rates or REO rates higher than certain averages; and Freddie Mac’s determination that Ditech Financial’s overall performance is unacceptable (taking into account, among other things, scorecard results that rate absolute and comparative performance with respect to various measures such as loss mitigation, workout effectiveness, default timeline management, data integrity, investor reporting and alternatives to foreclosure).
Similarly, Fannie Mae has the ability to terminate Ditech Financial as servicer for some or all of the Fannie Mae loans it services, with or without cause. In connection with any such termination by Fannie Mae without cause, we would have a right to a specified termination fee; however, in connection with any such termination by Fannie Mae for cause, we would not have any right to a termination fee or other consideration in connection with such termination and the related transfer of servicing rights to another servicer. Events that could allow Fannie Mae to terminate us for cause as servicer of some or all of the Fannie Mae loans we service include, without limitation, a breach of the mortgage selling and servicing contract by Ditech Financial; unacceptable performance as determined by Fannie Mae with regard to Ditech Financial’s compliance with, among other things, servicer performance measurements and any written performance improvement plan; Ditech Financial’s insolvency, the adjudication of Ditech Financial as bankrupt or the execution by Ditech Financial of a general assignment for the benefit of its creditors; any change in Ditech Financial’s financial status that, in Fannie Mae’s opinion, materially and adversely affects Ditech Financial’s ability to provide satisfactory servicing of mortgages; the sale of a majority interest in Ditech Financial without Fannie Mae’s prior written consent; a change in Ditech Financial’s financial or business condition, or in its operations, which, in Fannie Mae’s sole judgment, is material and adverse; Ditech Financial has certain delinquency rates or REO rates more than 50% higher than the average of such rates for certain specified Fannie Mae portfolios; and any judgment, order, finding or regulatory action to which Ditech Financial is subject that would materially and adversely affect Ditech Financial’s ability to comply with the terms or conditions of its Fannie Mae contract.
If Fannie Mae or Freddie Mac were to terminate us as an approved servicer, or transfer or otherwise terminate a material portion of our servicing rights, this could materially and adversely affect our business, financial condition, liquidity and results of operations.

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Ginnie Mae, with respect to GMBS for which we are the issuer and the servicer of the underlying mortgage loans, may terminate Ditech Financial as the issuer of such mortgage-backed securities and as servicer of such loans, with cause, and in connection therewith transfer the related servicing rights to a third party.
Under the terms of the Ginnie MBS Guide and the required Ginnie Mae Guaranty Agreement that is executed in connection with each GMBS we issue (together with related documents, the Ginnie Mae Guaranty Agreement), Ginnie Mae may terminate Ditech Financial for cause as the issuer of GMBS and as servicer of the underlying mortgage loans, and transfer all of our rights as issuer and servicer, including the servicing rights relating to the mortgage loans underlying the GMBS issued by us, to a third party without payment to us of any consideration in connection therewith. Events that could allow Ginnie Mae to terminate us as issuer and servicer include, without limitation, the impending or actual insolvency of Ditech Financial; any withdrawal or suspension of Ditech Financial’s status as an approved mortgagee by FHA or an approved seller/servicer by Fannie Mae or Freddie Mac; or any change to Ditech Financial’s business condition that materially and adversely affects its ability to carry out its obligations as an approved Ginnie Mae issuer. A default by Ditech Financial’s affiliate, RMS, under RMS’s Ginnie Mae Guaranty Agreements may also result in an event of default under Ditech Financial’s Ginnie Mae Guaranty Agreement under a cross-default agreement among Ginnie Mae, Ditech Financial and RMS, which could result in our termination as issuer and servicer of all GMBS and HMBS. If we were to have our Ginnie Mae issuer and servicing rights transferred or otherwise terminated, this could materially and adversely affect our business, financial condition, liquidity and results of operations.
Our subservicing clients can typically terminate our subservicing contracts with or without cause.
As of December 31, 2017, we were the subservicer for 0.7 million accounts with an unpaid principal loan balance of $102.7 billion. These subserviced accounts represented approximately 49% of our total servicing portfolio based on unpaid principal loan balance at that date. Our largest subservicing customer, NRM, represented approximately 69% of our total subservicing portfolio based on unpaid principal loan balance on December 31, 2017. Our next largest subservicing customer represented approximately 21% of our total subservicing portfolio based on unpaid principal loan balance on December 31, 2017. Under our subservicing contracts, the primary servicers for whom we conduct subservicing activities have the right to terminate such contracts, with or without cause, with generally 60 to 90 days’ notice to us. In some instances, our subservicing contracts require payment to us of deboarding, deconversion or other fees in connection with any termination thereof, while in other instances there is little to no consideration owed to us in connection with the termination of a subservicing contract.
For example, if NRM fails to renew the NRM Subservicing Agreement, it will owe Ditech Financial a deconversion fee. If NRM elects to terminate the NRM Subservicing Agreement without cause, it will owe Ditech Financial a deconversion fee and be responsible for certain servicing transfer costs. NRM may also terminate the NRM Subservicing Agreement immediately for cause upon the occurrence of certain events, some of which have already occurred with respect to certain mortgage loans being subserviced by us under such agreement as described herein. Upon any termination of the NRM Subservicing Agreement by NRM for cause, Ditech Financial will not be entitled to receive any deconversion fee, will be responsible for certain servicing transfer costs and will owe NRM a transfer fee if such termination occurs within five years from the effective date of the agreement.
Additionally, from time to time, clients for whom we conduct subservicing activities could sell the mortgage servicing rights relating to some or all of the loans we subservice for such client, which could lead to a termination of our subservicing engagement with respect to such mortgage servicing rights and a decrease in our subservicing revenue.
If subservicing agreements relating to a material portion of our servicing portfolio were to be terminated, this would materially and adversely affect our business, financial condition, liquidity and results of operations. We expect to continue to seek additional subservicing opportunities, which could exacerbate these risks.
We are required to make servicing advances that can be subject to delays in recovery or may not be recoverable in certain circumstances.
During any period in which a mortgage loan borrower is not making payments, we are required under some of our mortgage servicing and subservicing agreements to advance our own funds to meet contractual principal and interest remittance requirements for credit and/or MSR owners. In addition, we must pay property taxes, insurance premiums, legal expenses and make other protective advances on behalf of the borrower. We also advance funds to maintain, repair and market real estate properties on behalf of credit owners. Our obligation to make such advances may increase in connection with any future acquisitions of servicing portfolios and any additional subservicing contracts. In certain situations, our contractual obligations may require us to make certain advances for which we may not be reimbursed.

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Servicing advances are generally recovered when a mortgage loan delinquency is resolved, the loan is repaid or refinanced, a liquidation occurs, or through the agency claim process. In addition, recovery of advances we make as subservicer are subject to our compliance with procedures and limitations set forth in the applicable subservicing agreement, and we typically depend upon the MSR owner that has engaged us as subservicer to reimburse us for such advances. Regulatory or other actions that lengthen the foreclosure process may increase the amount of servicing advances we are required to make, lengthen the time it takes for us to be reimbursed for such advances and increase the costs incurred by us in connection with such advances. We have been, and we may in the future be, unable to collect reimbursement for advances because we have failed to meet the applicable requirements for reimbursement, including making timely requests for such reimbursement, providing documentation to support the advance, and seeking required approval before making an advance. We have experienced delays in the collection of reimbursements for advances in the past. Additional or significant delays in our ability to collect advances could adversely affect our liquidity, and our inability to be reimbursed for advances would adversely affect our business, financial condition or results of operations.
When we purchase MSR from prior servicers, we may also acquire outstanding servicer and protective advances related to those rights. In our agreements under which we have acquired MSR, the prior servicer generally represents that the related advances are eligible for reimbursement by the credit owner and indemnifies us for any breach of this representation. However, the prior servicer’s indemnification obligation with respect to advances generally expires at a specified date, and in order to claim indemnification we may have to satisfy other conditions precedent. Our ability to file indemnity claims with the prior servicer before the expiration date and to meet other conditions precedent may be affected by factors outside our control. For example, if we submit claims for advance reimbursement from the credit owner and such credit owner fails to resolve such claims before the expiration date elapses, we may be unable to seek indemnity for such claims. In early 2017, we submitted a significant number and value of claims for advance reimbursement to a prior servicer from which we made a significant MSR acquisition in 2013. When we submit a claim for reimbursement from the prior servicer, that servicer may dispute whether and to what extent the indemnity applies, and resolving such disputes or otherwise establishing the validity of our claim could be time consuming and costly, and delays in recovering advances could have a material adverse effect on our liquidity. As a result of the foregoing, despite the indemnification arrangements, we may experience losses relating to advances that we have acquired from prior servicers.
We maintain an allowance for uncollectible advances based on our analysis of the underlying loans, their historical loss experience, and recoverability of the advances pursuant to the terms of the underlying servicing or subservicing agreements. If for any reason we are required to increase our allowance in any period, this could have a material adverse effect on our financial condition and results of operation, and the failure to collect advances could materially adversely affect our cash flows.
Our failure to maintain or grow our servicing business could have a material adverse effect on our business, financial position, results of operations and cash flows.
Our servicing portfolio is subject to runoff, meaning that mortgage loans serviced by us may be repaid at maturity, prepaid prior to maturity, or liquidated through foreclosure, deed-in-lieu of foreclosure or other liquidation process. While we seek to replenish our servicing portfolio through the addition of subservicing contracts, through our own MSR originations and from acquisitions of MSR from third parties, we cannot assure you that we will continue to seek to replenish our servicing portfolio utilizing each of these methods or that we will be successful in maintaining the size of our servicing portfolio.
Our ability to maintain or grow our servicing business may depend, in part, on our ability to acquire servicing rights from, and/or enter into subservicing contracts with, third parties. This depends on many factors, including the willingness and ability of the current owners of servicing rights to transfer such servicing rights or enter into subservicing agreements with respect to such servicing rights, and in most cases GSEs and/or government authorities granting consent for such servicing transfers. In considering whether to sell servicing rights to us or to engage us as a subservicer (or to approve such matters), commercial counterparties, GSEs and government authorities may consider various factors, including our financial condition, our ability to meet contractual servicing obligations, the performance of portfolios we service relative to absolute standards or to the performance of portfolios serviced by others, our record of compliance with legal and regulatory requirements, and our reputation.
There is significant competition in the non-bank servicing sector for servicing portfolios made available for purchase or subservicing. This and other factors could increase the price we pay for such portfolios or reduce subservicing margins, which could have a material adverse effect on our business, financial condition and results of operations. In determining the purchase price we are willing to pay for servicing rights and the fee for which we are willing to accept subservicing engagements, management makes certain assumptions regarding various factors, many of which are beyond our control, including, among other things:
origination vintage and geography;
loan-to-value ratio;
stratification of FICO scores;
the rates of prepayment and repayment within the underlying pools of mortgage loans;

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projected rates of delinquencies, defaults and liquidations;
future interest rates;
our cost to service the loans;
incentive and ancillary fee income; and
amounts of future servicing advances.
The methodology we use to determine the purchase price we are willing to pay for servicing rights and the fee for which we are willing to accept subservicing engagements is complex and management’s assumptions about matters affecting pricing may prove to be inaccurate. As a result, we may not be successful in completing acquisitions or subservicing arrangements on favorable terms or at all or we may overpay or not realize anticipated benefits of acquisitions or subservicing arrangements in our business development pipeline.
Although we are currently planning to increase the proportion of subservicing in our servicing portfolio, we may not be successful in achieving this goal. If we fail to do so, our servicing portfolio could decline or we may be required to invest more of our capital in servicing rights than anticipated.
Changes in prepayment rates on loans we service due to changes in interest rates, government mortgage programs or other factors could result in reduced earnings or losses.
Changes in prepayment rates on loans we service could result in reduced earnings or losses. Many factors beyond our control affect prepayment rates, including changes in interest rates and government mortgage programs. Many borrowers can prepay their mortgage loans through refinancings when mortgage rates decrease. Any increase in prepayments could reduce our servicing portfolio and have a significant impact on our net servicing revenue and fees. For example:
If prepayment speeds increase, our net servicing revenue and fees will decline more rapidly than anticipated because of the greater than expected decrease in the number of loans or unpaid principal balance on which those fees are based.
Amortization of servicing rights carried at amortized cost is a significant reduction to net servicing revenue and fees. Since we amortize servicing rights in proportion to total expected income over the life of a portfolio, an increase in prepayment speeds leads to increased amortization as we revise downward our estimate of total expected income. Faster prepayment speeds will also result in higher compensating interest expense.
The change in fair value of servicing rights carried at fair value can have a significant impact on net servicing revenue and fees. We base the price we pay for servicing rights and assess the value of our servicing rights on, among other things, our projection of servicing-related cash flows from the related pool of mortgage loans. Our expectation of prepayment speeds is a significant assumption underlying those cash flow projections. If prepayment speeds increase more than expected, we may be required to write down the value of our servicing rights, which would have a negative impact on our net servicing revenue and fees.
We cannot accurately predict the amount of incentive payments and ancillary fees we will earn on our servicing portfolio.
We earn incentive payments and ancillary fees in connection with servicing our residential loan portfolio. The amount of such payments and fees, and the timing of our receipt of such payments and fees, is dependent upon many factors, some of which are not in our control. For example, some of our servicing contracts contain periodic performance payments that are determined by formulas and/or are tied to the performance of our competitors. We also earn certain ancillary fees, such as, for example, late fees, the amount of which can vary significantly from period to period, in most instances due to circumstances over which we have no control. In certain circumstances, incentive payments and ancillary fees can be, and have been, modified or eliminated by a credit owner with little or no notice to us. If certain of our assumptions relating to the amount of incentive payments or ancillary fees we expect to earn and collect in a given period prove to be materially inaccurate, due to the reduction or elimination of any of these fees or otherwise, or if regulators challenge the legitimacy of any of these fees, this could adversely affect our business, financial condition, liquidity and results of operations.

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Lender-placed insurance is under increased scrutiny by regulators and, as a result of the recent sale of substantially all of our insurance agency business, income from sales commissions for lender-placed insurance has been eliminated; however, we remain subject to liability for the period of time during which we received such commissions.
Under certain circumstances, when borrowers fail to maintain hazard insurance on their residences, the owner or servicer of the loan may procure such insurance to protect the loan owner's collateral and pass the premium cost for such insurance on to the borrower. Prior to February 1, 2017, the date we sold our principal insurance agency and substantially all of our insurance agency business, this agency acted as an agent for this purpose, placing the insurance coverage with a third-party carrier for which this agency, in certain circumstances, earned a commission.
Our insurance revenues were historically aligned with the size of our servicing portfolio. However, due to Fannie Mae and Freddie Mac restrictions that became effective on June 1, 2014, as well as other regulatory and litigation developments with respect to lender-placed insurance, our lender-placed insurance commissions began to decrease materially beginning in 2014. On February 1, 2017, we completed the sale of our principal insurance agency and substantially all of our insurance agency business. As a result of this sale, we no longer receive any insurance commissions on lender-placed insurance policies. Commencing February 1, 2017, another insurance agency owned by us (and retained by us following the aforementioned sale) began to provide insurance marketing services to third-party insurance agencies and carriers with respect to voluntary insurance policies, including hazard insurance. This insurance agency receives premium-based commissions for its insurance marketing services.
Notwithstanding the fact that we no longer receive sales commissions on lender-placed insurance, we remain subject to liability for the period of time during which we received such commissions. Under the agreements we entered into in connection with the sale of our principal insurance agency and substantially all of our insurance agency business, we undertook certain ongoing obligations related to the lender-placed and voluntary hazard business, including obligations relating to the provision of services, the continued conduct of our servicing business and certain referral activities. If we fail to perform these obligations, we could have potentially significant liabilities under these agreements.
We may not be able to grow our loan originations business, which could adversely affect our business, financial condition and results of operations.
Our strategy contemplates that, over the next several years, we will capture significant market share and increase revenue in our originations business, driven primarily from increased outbound contact efforts and improved retention. We face many challenges in seeking to implement that strategy. For example, during the next several years we expect the overall size of the national mortgage market will shrink, reflecting the end of key government refinancing programs (such as HARP) and potentially rising interest rates. To achieve our goals, we will need to reorient our originations group to have a greater focus on purchase money mortgages, whereas historically we have emphasized refinancings and have originated relatively few purchase money mortgages, except through our correspondent channel. We are still developing our marketing plans, including digital marketing, to build the purchase money business. In addition, we will need to attract new customers who are not customers of our servicing operations, and to do that we will need to develop new marketing approaches and outbound calling and contact methods and may need to introduce new technologies, such as mobile technologies and the ability to take mortgage applications through our website. We will need to hire and train significant numbers of new loan officers and other employees to support our outbound efforts. We expect to maintain or expand our correspondent channel, and will continue to face intense competition and margin pressure in that area. Many of the elements of the origination strategy require us to do things we have not done in the past, and our efforts may not be successful or may be more expensive and time consuming than we expect. Our implementation efforts will also be dependent upon third parties, such as technology and marketing vendors. If we are unsuccessful in expanding our originations business according to our plans, this could have a material adverse effect on our business, financial position, results of operations and cash flows.
We may be subject to liability for potential violations of predatory lending, antidiscrimination and/or other laws applicable to our mortgage loan originations and servicing businesses, which could adversely impact our results of operations, financial condition and business.
Various federal, state and local laws are designed to discourage predatory lending, discrimination based on certain characteristics and other practices. For example, loans that meet HOEPA’s high-cost coverage tests are subject to special disclosure requirements and restrictions on loan terms. Some states have enacted, or may enact, similar laws or regulations, which in some cases impose restrictions and requirements greater than those in HOEPA. Failure of mortgage loan originators such as Ditech Financial to comply with these laws could subject such originators, including us, to monetary penalties and could result in borrowers rescinding the affected loans. Lawsuits have been brought in various states making claims against originators, servicers, assignees and purchasers of “high-cost” loans for violations of state law. Named defendants in these cases have included numerous participants within the mortgage market. If our mortgage loans are found to have been originated in violation of such laws, we could incur losses, which could materially and adversely impact our results of operations, financial condition and business.

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Antidiscrimination statutes, such as the Fair Housing Act and the ECOA, prohibit creditors from discriminating against loan applicants and borrowers based on certain characteristics, such as race, religion and national origin. Various federal regulatory agencies and departments, including the DOJ and CFPB, take the position that these laws apply not only to intentional discrimination, but also to neutral practices that have a “disparate impact” on protected classes. These regulatory agencies, as well as consumer advocacy groups and plaintiffs’ attorneys, are becoming more aggressive in asserting claims that the practices of lenders and loan servicers result in a “disparate impact” on protected classes. While the U.S. Supreme Court has held that the “disparate impact” theory applies to cases brought under the Fair Housing Act, the U.S. Supreme Court was not presented with, and did not decide, the question of whether the theory applies under the ECOA. Thus, it remains unclear whether and to what extent the “disparate impact” theory applies under the ECOA and, as a result, we and the residential mortgage industry must attempt to comply with shifting and potentially conflicting interpretations as to such application, and we could be exposed to potential liability for any failure to comply.
The expiration of, or changes to, government mortgage modification, refinancing or other programs could adversely affect future revenues.
Under HAMP, HARP and similar government programs, a participating servicer may be entitled to receive financial incentives in connection with any mortgage refinancing or modification plans it enters into with eligible borrowers and subsequent success fees to the extent that a borrower remains current in any agreed upon loan modification. We participate in and have dedicated numerous resources to HAMP and HARP, benefiting from fees and from significant loan originations volumes. The HAMP application deadline was December 31, 2016 and the HARP program is scheduled to expire on December 31, 2018. As a result of the termination or expiration of these programs, our refinancing and modification volumes, revenues and margins are expected to decline in 2018. Further changes in the legislation or regulations relating to these or other loan modification programs, including changes to borrower qualification requirements, could have a material adverse effect on our business, financial condition and results of operations. Termination or expiration of the HAMP or HARP programs could have a significant adverse effect on our originations volumes, revenues and margins.
We depend on the accuracy and completeness of information about borrowers and counterparties and any misrepresented information could adversely affect our business, financial condition and results of operations.
In deciding whether to extend credit to borrowers or to enter into other transactions with counterparties, we rely on information furnished to us by or on behalf of borrowers and counterparties, including income and credit history, financial statements and other financial information. We also rely on representations of borrowers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. If any of this information is intentionally or negligently misrepresented and such misrepresentation is not detected prior to loan funding, which has occurred from time to time, the value of the loan has been, and may be, significantly lower than expected. Whether a misrepresentation is made by the loan applicant, the mortgage broker, correspondent lender, another third party or one of our employees, we generally bear the risk of loss associated with the misrepresentation. We, however, may not have detected or may not detect all misrepresented information in our loan originations or from our business clients. Therefore, any such misrepresented information could adversely affect our business, financial condition and results of operations.
Within our correspondent channel, the correspondent lenders with whom we do business underwrite and fund mortgage loans, then sell the closed mortgage loans to us. During the third quarter of 2016, we re-entered the wholesale originations channel. Within the wholesale channel we originate mortgage loans for borrowers referred to us by mortgage brokers. These loans are underwritten and funded by us and generally close in our name, and we bear the underwriting risk with respect to such loans from a regulatory perspective, but we typically rely upon the mortgage brokers with whom we do business to interact with the borrowers in order to gather the information necessary for us to underwrite and fund such loans. Our correspondent and wholesale counterparties are generally obligated to repurchase any loans we originated through such counterparties for which a misrepresentation has been made, and/or agree to indemnify us for certain losses we may incur in connection with any such misrepresentation. However, such counterparties may not have sufficient resources to repurchase loans from us or make indemnification payments to us, and any failure by such counterparties to satisfy any applicable repurchase or indemnification requirements could adversely affect our business, financial condition and results of operations.

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We may be required to make indemnification payments relating to, and/or repurchase, mortgage loans we sold or securitized, or will sell or securitize, if our representations and warranties relating to these mortgage loans are inaccurate at the time the loan is sold or securitized, or under other circumstances.
To finance our future operations, we generally sell or securitize the loans that we originate or purchase through our correspondent and other channels. Our contracts relating to the sale or securitization of such loans contain provisions that require us, under certain circumstances, to make indemnification payments relating to, and/or repurchase, such loans. Our indemnification and repurchase obligations vary contract by contract, but such contracts typically require us to either make an indemnification payment and/or repurchase a loan if, among other things:
our representations and warranties relating to the loan are materially inaccurate, including but not limited to representations concerning loan underwriting, regulatory compliance or property appraisals;
we fail to secure adequate mortgage insurance within a certain period after closing; or
the borrower fails to make certain initial loan payments due to the purchaser.
We believe that our maximum repurchase exposure under such contracts is the origination UPB of all mortgage loans we have sold or securitized. At December 31, 2017, our maximum exposure to repurchases due to potential breaches of representations and warranties was $69.0 billion and was based on the original UPB of loans sold from the beginning of 2013 through the year ended December 31, 2017, adjusted for voluntary payments made by the borrower on loans for which we perform servicing. To recognize the potential mortgage loan repurchase or indemnification losses, we have recorded a reserve of $16.8 million at December 31, 2017. In 2017, we incurred losses of $1.7 million related to such indemnification and repurchase activity. If our mortgage loan originations increase in the future, our indemnification and repurchase requests may also increase. During periods of elevated mortgage payment delinquency rates and declining housing prices, originators have experienced, and may in the future continue to experience, an increase in loan repurchase and indemnification claims due to actual or alleged breaches of representations and warranties in connection with the sale or servicing of mortgage loans. The estimate of our loan repurchase and indemnification liability is subjective and based upon our projections of the future incidence of loan repurchase and indemnification claims, as well as loss severities. Losses incurred in connection with loan repurchase and indemnification claims may be in excess of our estimates (including our estimate of liabilities we will assume in an acquisition and factor into our purchase price). Our reserve for indemnification and repurchase obligations may increase in the future. If we are required to make indemnification payments with respect to, and/or repurchase, mortgage loans that we originate and sell or securitize in amounts that result in losses that exceed our reserve, this could adversely affect our business, financial condition and results of operations.
From time to time, the FHFA proposes revisions to the GSEs' standard representation and warranty framework, under which the GSEs require lenders to repurchase mortgage loans under certain circumstances. For example, in January 2013, the FHFA sought to relieve lenders of obligations to repurchase loans that had clean payment histories for 36 months. In May 2014, the FHFA and the GSEs announced additional clarifications. We cannot predict how recent or future changes to the GSEs' representation and warranty framework will impact our business, liquidity, financial condition and results of operations.
We service and securitize reverse loans and, until early 2017, originated reverse loans, which subjects us to risks and could have a material adverse effect on our business, liquidity, financial condition and results of operations.
The principal reverse loan product we originated and currently service is the HECM, an FHA-insured loan that must comply with FHA and other regulatory requirements. The reverse loan business is subject to substantial risks, including market, credit, interest rate, liquidity, operational, reputational and legal risks. A reverse loan (e.g., a HECM) is a loan available to seniors aged 62 or older that allows homeowners to borrow money against the value of their home. We depend on our ability to securitize reverse loans, subsequent draws, mortgage insurance premiums and servicing fees, and our liquidity and profitability would be adversely affected if our ability to access the securitization market were to be limited or if the margins we earn in connection with such securitizations were to be reduced. Defaults on reverse loans leading to foreclosures may occur if borrowers fail to meet maintenance obligations, fail to pay taxes or home insurance premiums, fail to meet occupancy requirements or the last remaining borrower passes away. An increase in foreclosure rates may increase our cost of servicing. We may become subject to negative publicity in the event that defaults on reverse mortgages lead to foreclosures or evictions of homeowners.

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As a reverse loan servicer, we are responsible for funding any credit drawdowns by borrowers in a timely manner, remitting to credit owners interest accrued, paying for interest shortfalls, and funding advances such as taxes and home insurance premiums. During any period in which a borrower is not making required real estate tax and property insurance premium payments, we may be required under servicing agreements to advance our own funds to pay property taxes, insurance premiums, legal expenses and other protective advances. We also may be required to advance funds to maintain, repair and market real estate properties. In certain situations, our contractual obligations may require us to make certain advances for which we may not be reimbursed. In addition, in the event a reverse loan serviced by us defaults or becomes delinquent, the repayment to us of the advance may be delayed until the reverse loan is repaid or refinanced or liquidation occurs. A delay in our ability to collect advances may adversely affect our liquidity, and our inability to be reimbursed for advances could adversely affect our business, financial condition or results of operations. Advances are typically recovered upon weekly or monthly reimbursement or from securitization in the market. We could receive requests for advances in excess of amounts we are able to fund, which could materially and adversely affect our liquidity. All of the above factors could have a material adverse effect on our business, liquidity, financial condition and results of operations.
Our reverse mortgage business has been unprofitable and we expect losses to continue in this segment.
Our reverse mortgage business generated significant losses before income tax in each of 2016 and 2017. We expect to continue to generate losses in that segment. We service a substantial portfolio of reverse loans and expect to incur continued losses on that servicing activity. We expect these losses will be driven by the costs of servicing defaulted reverse loans that are a part of our securitized portfolio, including appraisal-based claims, shortfalls between the debenture rate we receive on defaulted loans and the note rate we must continue to pay, property preservation expenses, curtailment costs and other servicing costs. To mitigate the expected losses in the reverse segment, in 2017 we ceased originating new reverse mortgages, having concluded that the cost of expanding the originations business was no longer justified based on probabilities of successfully growing that business to scale. We will continue to fund undrawn amounts available to borrowers of reverse loans we have made. We expect our results to continue to include meaningful revenues from HECM IDL funding activity for the next several years; however, such amounts will be lower in the following years due to our decision to exit the originations business. 
We have been evaluating options for our reverse mortgage business, including the possibility of selling some or all of its assets or pursuing alternative solutions for the business in collaboration with other parties. We cannot be certain whether or on what terms we will be able to consummate any transaction involving our reverse mortgage business or whether any such transaction would reduce our expected reverse mortgage losses. As of December 31, 2017, the net carrying value of our Reverse Mortgage segment securitized loan book was a net liability of approximately $84.2 million.
If our estimated liability with respect to interest curtailment obligations arising out of servicing errors is inaccurate, or additional errors are found, and we are required to record additional material amounts, there may be an adverse impact on our results of operations or financial condition.
Subsequent to the completion of our acquisition of RMS, we discovered a failure by RMS to record certain liabilities to HUD, FHA and/or credit owners related to servicing errors by RMS. FHA regulations provide that servicers meet a series of event-specific timeframes during the default, foreclosure, conveyance, and mortgage insurance claim cycles. Failure to timely meet any processing deadline may stop the accrual of debenture interest otherwise payable in satisfaction of a claim under the FHA mortgage insurance contract and the servicer may be responsible to HUD for debenture interest that is not self-curtailed by the servicer, or for making the credit owner whole for any interest curtailed by FHA due to not meeting the required event-specific timeframes.
We had a curtailment obligation liability of $106.1 million at December 31, 2017 related to the foregoing, which reflects management’s best estimate of the probable incurred claim. The curtailment liability is recorded in payables and accrued liabilities on the consolidated balance sheets. We assumed $46.0 million of this liability through the acquisition of RMS, which resulted in a corresponding offset to goodwill and deferred tax assets. During the year ended December 31, 2017, we recorded a provision, net of expected third-party recoveries, related to the curtailment liability of $14.0 million. We have potential estimated maximum financial statement exposure for an additional $147.7 million related to similar claims, which are reasonably possible, but which we believe are primarily the responsibility of third parties (e.g., prior servicers and/or credit owners). Our potential exposure to a substantial portion of this additional risk relates to the possibility that such third parties may claim that we are responsible for the servicing liability or that we exacerbated an existing failure by the third party. The actual amount, if any, of this exposure is difficult to estimate and requires significant management judgment as curtailment obligations continue to be an industry issue. While we are pursuing, and will continue to pursue, mitigation efforts to reduce both the direct exposure and the reasonably possible third-party-related exposure, we cannot assure you that any such efforts will be successful.
We had a curtailment obligation liability of $34.8 million at December 31, 2017 related to Ditech Financial's mortgage loan servicing, which we assumed through an acquisition of servicing rights. We are obligated to service the related mortgage loans in accordance with Ginnie Mae requirements, including repayment to credit owners for advances and interest curtailment. The curtailment liability is recorded in payables and accrued liabilities on the consolidated balance sheets.

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We cannot assure you that we will not discover additional facts resulting in changes to our estimated liability. To the extent we are required to record additional amounts as liabilities, there may be an adverse impact on our results of operations or financial condition.
See Item 3. Legal Proceedings and Note 30 to our Consolidated Financial Statements for additional information.
We may be unable to fund our HECM repurchase obligations, and/or face delays in our ability to make such repurchases, or we may be unable to convey repurchased HECM loans to the FHA, which could have a material adverse effect on our business, liquidity, financial condition and results of operations.
We issue HMBS collateralized by HECM loans we originated and HECM tails. Under the Ginnie Mae HMBS program, we are required to repurchase a HECM loan from an HMBS pool we have issued when the outstanding principal balance of the HECM loan is equal to or greater than 98% of the maximum claim amount. There can be no assurance that we will have access to the funding necessary to satisfy our repurchase obligations, particularly if our actual repurchase obligations materially exceed our estimated repurchase obligations. See the Liquidity and Capital Resources section of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.
When we repurchase a HECM loan that is not in default from an HMBS pool, we must fund such repurchase until we convey the repurchased HECM loan to and receive reimbursement from the FHA, which generally occurs within 90 days of repurchase (assuming the repurchased loan continues to perform during such time and there are no other factors that cause a delay in conveying the repurchased HECM loan to the FHA). If a repurchased HECM loan goes into default (e.g., if the borrower has failed to pay real estate taxes or property insurance premiums) following our repurchase of such loan from an HMBS pool but prior to our conveyance of such loan to the FHA, or is in default at the time we repurchase such loan from an HMBS pool, the FHA will not accept such loan and we must continue to service such loan until the default is cured or we otherwise satisfy FHA requirements relating to foreclosure of the loan and sell the underlying property. Thus, we are exposed to financing risk when we must repurchase a HECM loan from an HMBS pool, which risk is exacerbated if such loan is in default at the time of repurchase or goes into default prior to our conveyance of such loan to the FHA. In addition, we may be exposed to risk of loss of principal when a HECM loan goes into default, which risk is exacerbated for defaulted loans we seek to foreclose upon. Foreclosure of a HECM loan can be an expensive and lengthy process that could have a substantial negative effect on our anticipated return on the foreclosed HECM loan, especially in circumstances where we make an appraisal-based claim to the FHA with respect to a HECM loan because we have not been able to liquidate the underlying property for an acceptable price within the timeframe established by the FHA. The number of appraisal-based claims we make to the FHA is impacted by a variety of factors, including real estate market conditions and the geographic composition of our HECM loan portfolio. If we make a significant number of appraisal-based claims to the FHA this could have a material adverse effect on our business, liquidity, financial condition and results of operations.
During 2017, our HECM repurchases amounted to approximately $1.3 billion, with a balance of approximately $808.5 million at the end of 2017, an increase from approximately $347.0 million at the end of 2016. We expect our repurchase obligations to increase through 2018 and in subsequent years, but the amount of repurchase obligations we will incur in any specific period in the future is uncertain, as it will be affected by, among other things, the rate at which borrowers draw down on amounts available under their HECM loans. In addition, the balance of funds we must commit to repurchases (and the related cost of such funding) will depend in part on how long we must hold and service such loans after repurchasing them, and recent regulatory changes and practices have adversely affected the amount of time we must hold and service such loans following repurchase. As our funding needs increase for repurchased HECMs, we will seek to enter into new, or increase the capacity of existing, lending facilities to provide a portion of such funds; however, we cannot be certain such new facilities will be available or that our existing facilities will be extended or increased.
When we securitize HECM loans into HMBS, we are required to covenant and warrant to Ginnie Mae, among other things, that the HECM loans related to each participation included in the HMBS are eligible under the requirements of the National Housing Act and the Ginnie Mae Mortgage-Backed Securities Guide, and that we will take all actions necessary to continue to ensure the HECM loans continued eligibility. The Ginnie Mae HMBS program requires that we repurchase the participation related to any HECM loan that does not meet the requirements of the Ginnie Mae Mortgage-Backed Securities Guide. Significant repurchase requirements could materially adversely affect our business, financial condition, liquidity and results of operations.
If we are unable to fund our HECM repurchase obligations, for example because new or increased lending facilities are not available or in the event that our repurchase obligations in any period significantly exceed our expectations, face delays in our ability to make such repurchases, or are unable to convey repurchased HECM loans to the FHA, our business, liquidity, financial condition and results of operations could be materially adversely affected.

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We may suffer operating losses as a result of not being fully reimbursed for certain costs and interest expenses on our HECM loans, or if we fail to originate or service such loans in conformity with the FHA’s guidelines.
The FHA will reimburse us for most HECM loan losses incurred by us, up to the maximum claim amount, if, upon disposition of the collateral a deficit exists between the value of the collateral and the loan balance. However, there are certain costs and expenses that the FHA will not reimburse. Additionally, the FHA pays the FHA debenture rate instead of the loan interest rate from the date the loan becomes due and payable to the date of disposition of the property or final appraisal. In the event the note rate we are required to pay to an HMBS investor exceeds the FHA debenture rate, we will suffer an interest rate loss.
To obtain such reimbursement from the FHA, we must file a claim under the FHA mortgage insurance contract. Under certain circumstances, if we file a reimbursement claim that is inaccurate, we could be the subject of a claim under the False Claims Act, which imposes liability on any person who knowingly makes a false or fraudulent claim for payment to the U.S. government. Potential penalties are significant, as these actions may result in treble damages.
Additionally, if we fail to service HECM loans in conformity with the FHA’s guidelines, we could lose our right to service the portfolio or be subject to financial penalties that could affect our ability to receive loss claims or result in the curtailment of FHA debenture rate reimbursement. The FHA may also at its discretion request indemnification from a lender on a possible loss on a HECM loan if it determines that the loan was not originated or serviced in conformity with its rules or regulations.
A loss of RMS' approved status under reverse loan programs operated by FHA, HUD or Ginnie Mae could adversely affect our business.
In order to service HECM loans, RMS must maintain its status as an approved FHA mortgagee and an approved Ginnie Mae issuer and servicer. RMS must comply with FHA’s and Ginnie Mae’s respective regulations, guides, handbooks, mortgagee letters and all participants’ memoranda. If RMS defaults under its program obligations to Ginnie Mae, Ginnie Mae has a right to terminate the approved status of RMS, seize the MSR of RMS without compensation (which includes the right to be reimbursed for outstanding advances from the FHA), demand indemnification for its losses, and impose administrative sanctions, which may include civil money penalties. 
Each of our subsidiaries that is a Ginnie Mae issuer (i.e. Ditech Financial and RMS) has also entered into a cross default agreement with Ginnie Mae, which provides that, upon the default by a subsidiary under an applicable Ginnie Mae program agreement, Ginnie Mae will have the right to (i) declare a default on all other pools and loan packages of that subsidiary and all pools and loan packages of any affiliated Ginnie Mae issuer that executed the cross default agreement and (ii) exercise any other remedies available under applicable law against each of the affiliated Ginnie Mae issuers. As a result, a default by RMS under its obligations to Ginnie Mae could lead to Ginnie Mae declaring a default by Ditech Financial in relation to its obligations to Ginnie Mae.
Any discontinuation of, or significant reduction or material change in, the operation of the FHA, HUD or government entities like Ginnie Mae, or the loss of RMS' approved FHA mortgagee or Ginnie Mae issuer or servicer status, could have a material adverse effect on our overall business and our financial position, results of operations and cash flows.
If we are unable to fund our tail commitments or securitize our HECM loans (including tails), this could have a material adverse effect on our business, financial condition, liquidity and results of operations.
We have originated and continue to service HECM loans under which the borrower has additional undrawn borrowing capacity in the form of undrawn lines of credit. We are obligated to fund future borrowings drawn on that capacity. As of December 31, 2017, our commitment to fund additional borrowing capacity was $1.0 billion. In addition, we are required to make interest payments on HMBS issued in respect of HECM loans and to pay mortgage insurance premiums on behalf of HECM borrowers. We normally fund these obligations on a short-term basis using our cash resources, and from time to time securitize these amounts (along with our servicing fees) through the issuance of tails. If our cash resources are insufficient to fund these amounts and we are unable to fund them through the securitization of such tails, this could have a material adverse effect on our business, financial condition, liquidity and results of operations.

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A downgrade in our credit ratings could negatively affect our cost of, and ability to access, capital.
Our ability to obtain adequate and cost effective financing depends in part on our credit ratings. Our credit ratings have been downgraded in the past, and are subject to revision, including downgrade, or withdrawal at any time by the assigning rating agency. A negative change in our ratings outlook or any downgrade in our current credit ratings by the rating agencies that provide such ratings could adversely affect our cost of borrowing and/or access to sources of liquidity and capital. Such a downgrade could adversely affect our access to the public and private credit markets and increase the costs of borrowing under available credit lines, which could adversely affect our business, financial condition, results of operations and cash flows. Refer to the Ratings section under Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information relating to our credit ratings.
Changes in interest rates could materially and adversely affect our volume of mortgage loan originations or reduce the value of our MSR, either of which could have a material adverse effect on our business, financial position, results of operations or cash flows.
Historically, rising interest rates have generally been associated with a lower volume of loan originations and lower pricing margins due to a disincentive for borrowers to refinance at a higher interest rate, while falling interest rates have generally been associated with higher loan originations and higher pricing margins, due to an incentive for borrowers to refinance at a lower interest rate. Accordingly, increases in interest rates could materially and adversely affect our mortgage loan origination volume, which could have a material and adverse effect on our overall business, consolidated financial position, results of operations or cash flows. In addition, changes in interest rates may require us to post additional collateral under certain of our financing arrangements and derivative agreements, which could impact our liquidity.
Changes in interest rates are also a key driver of the performance of our Servicing segment as the values of our MSR are highly sensitive to changes in interest rates. Historically, the value of our MSR has increased when interest rates rise, as higher interest rates lead to decreased prepayment rates, and has decreased when interest rates decline, as lower interest rates lead to increased prepayment rates. As a result, substantial volatility in interest rates materially affects our mortgage servicing business, as well as our consolidated financial position, results of operations and cash flows.
In addition, rising interest rates could (i) require us to post additional collateral under certain of our financing arrangements, which could adversely impact our liquidity, (ii) negatively impact our reverse loan business, (iii) negatively impact our mortgage loan origination volumes, and (iv) have other material and adverse effects on our business, consolidated financial position, results of operations or cash flows, such as, for example, generally making it more expensive for us to fund our various businesses. In a declining interest rate environment, we have been, and could in the future be, required to post additional collateral under certain of our derivative arrangements, which could adversely impact our liquidity.
Failure to hedge effectively against interest rate changes may adversely affect results of operations.
We currently use derivative financial instruments, primarily forward sales commitments, to manage exposure to interest rate risk and changes in the fair value of IRLCs and mortgage loans held for sale. We may also enter into commitments to purchase MBS as part of our overall hedging strategy. In the future, we may seek to manage our interest rate exposure by using interest rate swaps and options. The nature and timing of hedging transactions may influence the effectiveness of a given hedging strategy, and no hedging strategy is consistently effective. Poorly designed strategies, improperly executed and documented transactions or inaccurate assumptions could increase our risks and losses. In addition, hedging strategies involve transaction and other costs. Our hedging strategies and the derivatives that we use may not completely offset the risks of interest rate volatility and our hedging transactions may result in or magnify losses. Furthermore, interest rate derivatives may not be available at all, or at favorable terms, particularly during economic downturns. Any of the foregoing risks could adversely affect our business, financial condition or results of operations.
Additional risks related to hedging include:
interest rate hedging can be expensive, particularly during periods of volatile interest rates;
available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;
the duration of the hedge may not match the duration of the related liability;
the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction;
the party owing money in the hedging transaction may default on its obligation to pay; and
a court could rule that such an agreement is not legally enforceable.

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Technology failures or cyber-attacks against us or our vendors could damage our business operations and reputation, increase our costs, and result in significant third-party liability.
The financial services industry as a whole is characterized by rapidly changing technologies. System disruptions and failures caused by fire, power loss, telecommunications failures, unauthorized intrusion (e.g., cyber-attack), computer viruses and disabling devices, natural disasters and other similar events, may interrupt or delay our ability to provide services to our borrowers. Security breaches (which we have experienced and may in the future experience), acts of vandalism and developments in computer intrusion capabilities could result in a compromise or breach of the technology that we use to protect our borrowers' personal information and transaction data. Systems failures could result in reputational damage to our business and cause us to incur significant costs and third-party liability, and this could adversely affect our business, financial condition or results of operations. See the Cybersecurity section of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information relating to cybersecurity.
We transitioned a significant portion of our mortgage servicing business to MSP, a mortgage and consumer loan servicing platform, and problems relating to the transition to, and implementation of, MSP have interfered with, and could continue to interfere with, our business and operations.
On April 1, 2016, we transitioned the Fannie Mae loans that we service to MSP, a mortgage and consumer loan servicing platform. We have invested significant capital and human resources in connection with the transition to and implementation of MSP, and we expect that we will continue to invest significant capital and human resources in refining our use of MSP with the goal of maximizing efficiencies available to us following such transition. We have experienced decreases in productivity and increased costs as our employees implement and become familiar with the new system, and there can be no assurance that we will not continue to do so in the future. Any disruptions, delays or deficiencies in our implementation or refinement efforts, particularly any disruptions, delays or deficiencies that impact our operations, including loss of customer data, could have a material adverse effect on our business and operations. Furthermore, the transition to and implementation of MSP was more costly than we initially anticipated and our current estimates for the remaining cost and time required to completely transition to and refine MSP may be wrong. The cost of maintaining other servicing platforms alongside MSP is significant, and our plans to become a more efficient mortgage servicer depend in part upon us achieving significant cost reductions and efficiencies in relation to our servicing platforms. If we are unable to achieve these goals, our financial position, results of operations and cash flows could be adversely impacted.
We may be unable to protect our technology or keep up with the technology of our competitors.
We rely on proprietary and licensed software, and other technology, proprietary information and intellectual property to operate our business and to provide us with a competitive advantage. However, we may be unable to maintain and protect, or prevent others from misappropriating or otherwise violating, our rights in such software, technology, proprietary information and intellectual property. In addition, some competitors may have software and technologies that are as good as or better than our software and technology, which could put us at a disadvantage. Some of our systems are based on old technologies that are no longer in common use, and it may become increasingly difficult and expensive to maintain those systems. Our failure to maintain, protect and continue to develop our software, technology, proprietary information and intellectual property could adversely affect our business, financial condition or results of operations.
Any failure of our internal security measures or those of our vendors, or breach of our privacy protections, could cause harm to our reputation and subject us to liability.
In the ordinary course of our business, we receive and store certain confidential nonpublic information concerning borrowers including names, addresses, social security numbers and other confidential information. Additionally, we enter into third-party relationships to assist with various aspects of our business, some of which require the exchange of confidential borrower information. Breaches of security may occur through intentional or unintentional acts by those having authorized or unauthorized access to our systems or our clients' or counterparties' confidential information, including employees and customers, as well as hackers, and through electronic, physical or other means. If such a compromise or breach of our security measures or those of our vendors occurs, and confidential information is misappropriated, it could cause interruptions in our operations and/or expose us to significant liabilities, reporting obligations, remediation costs and damage to our reputation. Significant damage to our reputation or the reputation of our clients could negatively impact our ability to attract or retain clients. Any of the foregoing risks could adversely affect our business, financial condition or results of operations.

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While we have obtained insurance to cover us against certain cybersecurity risks and information theft, there can be no guarantee that all losses will be covered or that the insurance limits will be sufficient to cover such losses.
We have obtained insurance coverage that protects us against losses from unauthorized penetration of company technology systems, employee theft of customer and/or company private information, and company liability for third-party vendors who mishandle company information. This insurance includes coverage for third-party losses as well as costs incidental to a breach of company systems such as notification, credit monitoring and identity theft resolution services. However, there can be no guarantee that every potential loss due to cyber-attack or theft of information has been insured against, nor that the limits of the insurance we have acquired will be sufficient to cover all such losses.
Our vendor relationships subject us to a variety of risks.
We have vendors that, among other things, provide us with financial, technology and other services to support our businesses. With respect to vendors engaged to perform activities required by servicing or originations criteria or regulatory requirements, we are required to take responsibility for assessing compliance with the applicable servicing or originations criteria or regulatory requirements for the applicable vendor and are required to have procedures in place to provide reasonable assurance that the vendor’s activities comply in all material respects with servicing or originations criteria or regulatory requirements applicable to the vendor. We have taken steps to strengthen our vendor oversight program, but there can be no assurance that our program is sufficient. In the event that a vendor’s activities do not comply with the servicing or originations criteria or regulatory requirements, it could materially negatively impact our business.
In addition, we rely on third-party vendors for certain services important or critical to our business, such as Black Knight Financial Services, LLC, with whom we have signed a long-term loan servicing agreement for the use of MSP. If our current vendors, particularly the vendors that provide important or critical services to us, were to stop providing such services to us on acceptable terms, or if there is any other material disruption in the provision of such services, we may be unable to procure such services from other vendors in a timely and efficient manner and on acceptable terms, or at all. Further, we may incur significant costs to resolve any such disruptions in service and this could adversely affect our business, financial condition and results of operations.
We have also recently increased the use of offshore vendors generally, especially with respect to certain of our technology functions. Our reliance on third-party vendors in other countries exposes us to disruptions in the political and economic environment in those countries and regions. Further, any changes to existing laws or the enactment of new legislation restricting offshore outsourcing by companies based in the U.S. may adversely affect our ability to outsource functions to third-party offshore service providers. Our ability to manage any such difficulties would be largely outside of our control, and our inability to utilize offshore service providers could have a material adverse effect on our business, financial condition, results of operations, cash flows and securities.
Negative public opinion could damage our reputation and adversely affect our earnings.
Reputational risk, or the risk to our business, earnings and capital from negative public opinion, is inherent in our business. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending, loan servicing, debt collection practices, corporate governance, and our Chapter 11 Case, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can also result from complaints filed with regulators, social media and traditional news media coverage, whether accurate or not. Negative public opinion can adversely affect our ability to attract and retain customers, counterparties and employees and can expose us to litigation and regulatory action. Although we take steps to minimize reputation risk in dealing with our customers and communities, this risk will always be present in our organization.
By combining our servicing and originations businesses under the single "Ditech" brand, we may have increased the risk that adverse publicity in one area of the business could hurt the performance of other parts of the business. In particular, our ability to grow our originations business (which is a key part of our business strategy) could be limited by negative publicity arising from our servicing business, which now operates under the same Ditech brand. Our servicing business has generated a significant number of complaints filed with regulators such as the CFPB and also negative publicity in the press and social media. Further, the reverse mortgage business generally has generated adverse publicity, in part because reverse mortgage borrowers are relatively elderly and are perceived as vulnerable. Although the terms and requirements of the HECM product have been changed from time to time to address perceived origination abuses, we continue to service older HECM loans originated under different requirements. As the servicer of HECM loans, from time to time we are required to foreclose on and evict delinquent borrowers, who are likely to be elderly. This has attracted, and may continue to attract, adverse publicity.

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The industry in which we operate is highly competitive, and, to the extent we fail to meet these competitive challenges or otherwise do not achieve our strategic initiatives, it could have a material adverse effect on our business, financial position, results of operations or cash flows.
We operate in a highly competitive industry that could become even more competitive as a result of economic, legislative, regulatory or technological changes. We compete with a great number of competitors in the mortgage banking market for both the servicing and originations businesses as well as in our reverse mortgage and complementary businesses. Key competitors include financial institutions and non-bank servicers and originators. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources, and typically have access to greater financial resources and lower funding costs. All of these factors place us at a competitive disadvantage. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more favorable relationships than we can. Competition to service mortgage loans may result in lower margins. Because of the relatively limited number of servicing customers, our competitive position is impacted by our ability to differentiate ourselves from our competitors through our servicing platform and our failure to meet the performance standards or other expectations of any one of such customers could materially impact our business. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition or results of operations.
From time to time, we embark upon various strategic initiatives for our business, including without limitation initiatives relating to acquisitions and dispositions of MSR and other assets, changes in the mix of our fee-for-service business including by entering into new subservicing arrangements, reducing our debt, improving our servicing performance, developing and growing certain portions of our business such as our mortgage originations capabilities, the use of capital partners, cost savings and operational efficiencies, and other matters. Our ability to achieve such initiatives is dependent upon numerous factors, many of which are not in our control. Our failure to achieve some or all of our strategic initiatives in a timely and efficient manner, or at all, could have a material adverse effect on our business, financial condition, liquidity and results of operations.
We may not realize all of the anticipated benefits of past, pending or potential future acquisitions or joint venture investments, which could adversely affect our business, financial condition and results of operations.
Our ability to realize the anticipated benefits of past, pending or potential future acquisitions will depend, in part, on our ability to integrate these acquisitions into our business and is subject to certain risks, including:
our ability to successfully combine the acquired businesses with ours;
whether the combined businesses will perform as expected;
the possibility that we inaccurately value assets or businesses we acquire, that we pay more than the value we will derive from the acquisitions, or that the value declines after the acquisition;
the reduction of our cash available for operations and other uses;
the disruption to our operations inherent in making numerous acquisitions over a relatively short period of time;
the disruption to the ongoing operations at the acquired businesses;
the incurrence of significant indebtedness to finance our acquisitions;
the assumption of certain known and unknown liabilities of the acquired businesses;
uncoordinated market functions;
unanticipated issues and delays in integrating the acquired business or any information, communications or other systems;
unanticipated incompatibility of purchasing, logistics, marketing and administration methods;
unanticipated liabilities associated with the acquired business, assets or joint venture;
additional costs or capital requirements beyond forecasted amounts;
delays in the completion of acquisitions, including due to delays in or the failure to obtain approvals from governmental or regulatory entities;
lack of expected synergies, failure to realize the anticipated benefits we expect to realize from the acquisition or joint venture, or failure of the assets or businesses we acquire to perform at levels meeting our expectations;
not retaining key employees; and
the diversion of management's attention from ongoing business concerns.

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Our current business plan contemplates that we will accelerate our integration and centralization, many parts of which we acquired in transactions over several years. We believe that such integration will enable us to achieve considerable cost savings and increases in efficiency and operational oversight. However, there are costs associated with implementing integration changes and there are considerable risks involved in such integration efforts, including the risks of operational breakdowns and unwanted personnel losses during the period of transition. We may be unsuccessful in implementing our integration plan on time or at all, and the integration efforts could be more costly than expected and could yield lower savings and efficiency benefits than planned. If we are not able to successfully combine the acquired businesses and assets with ours within the anticipated time frame, or at all, the anticipated benefits of the acquisitions may not be realized fully, or at all, or may take longer to realize than expected, the combined businesses and assets may not perform as expected, and the value of our common stock may be adversely affected.
Further, prices at which acquisitions can be made fluctuate with market conditions. We have experienced times during which acquisitions could not be made in specific markets at prices we considered acceptable, and we expect that we will experience this condition in the future. In addition, in order to finance an acquisition we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or raise additional capital, which could dilute the interests of our existing shareholders. Also, it is possible that we will expend considerable resources in the pursuit of an acquisition that, ultimately, either does not close or is terminated. If we incur additional indebtedness to finance an acquisition, the acquired business may not be able to generate sufficient cash flow to service that additional indebtedness.
We cannot assure you that future acquisitions or joint ventures will not adversely affect our results of operations and financial condition, or that we will realize all of the anticipated benefits of any future acquisitions or joint ventures.
We use, and will continue to use, analytical models and data in connection with, among other things, developing our strategy, pricing new business and the valuation of certain investments we make, and any incorrect, misleading or incomplete information used in connection therewith may subject us to potential risks.
Due to the complexity of our business, we rely on, and will continue to rely on, various analytical models, information and data, some of which is supplied by third parties, in connection with, among other things, developing our strategy, pricing new business and the valuation of certain investments we make. Should our models or such data prove to be incorrect or misleading, any decision made in reliance thereon exposes us to potential risks. Some of the analytical models that we use or will be used by us are predictive in nature. The use of predictive models has inherent risks and may incorrectly forecast future behavior, leading to potential losses. We also use and will continue to use valuation models that rely on market data inputs. If incorrect market data is input into a valuation model, even a tested and well-respected valuation model, it may provide incorrect valuations and, as a result, could provide adverse actual results as compared to the predictive results.
We use estimates in determining the fair value of certain assets. If our estimates prove to be incorrect, we may be required to write down the value of these assets, which could adversely affect our earnings.
We estimate the fair value for certain assets (including MSR) and liabilities by calculating the present value of expected future cash flows utilizing assumptions that we believe are used by market participants. The methodology used to estimate these values is complex and uses asset-specific collateral data and market inputs for interest and discount rates and liquidity dates.
Valuations are highly dependent upon the reasonableness of our assumptions and the predictability of the relationships that drive the results of our valuation methodologies. If prepayment speeds increase more than estimated, delinquency and default levels are higher than anticipated or other events occur, we may be required to write down the value of certain assets, which could adversely affect our earnings.
Accounting rules for our business continue to evolve, are highly complex, and involve significant judgments and assumptions. Changes in accounting interpretations or assumptions could impact our financial statements.
Accounting rules for our business, such as the rules for determining the fair value measurement and disclosure of financial instruments, are highly complex and involve significant judgment and assumptions. These complexities could lead to a delay in the preparation of financial information and the delivery of this information to our stockholders. Changes in accounting interpretations or assumptions related to fair value could impact our financial statements and our ability to timely prepare our financial statements.

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Impairment charges relating to our goodwill or other intangible assets could adversely affect our financial performance.
At December 31, 2017, we had $47.7 million of goodwill and $8.7 million of other intangible assets. We evaluate goodwill for impairment at the reporting unit level as of October 1 of each year, or whenever events or circumstances indicate potential impairment. A significant decline in our reporting unit performance, increases in equity capital requirements, increases in the estimated cost of debt or equity, a significant adverse change in the business climate or a sustained decline in the price of our common stock may necessitate our taking charges in the future related to the impairment of our goodwill. We incurred impairment charges of $326.3 million during 2016. We are likely to continue to be impacted in the near term by certain company-specific matters, overall market performance within the sector, and a continued level of regulatory scrutiny. As a result, market capitalization, overall economic and sector conditions and other events or circumstances, including the ability to execute on our strategic objectives, amongst other factors, will continue to be regularly monitored by management. Unanticipated outcomes in these areas may result in an impairment of goodwill and/or intangible assets and have a related impact on income taxes in the future. If we determine that our goodwill or another intangible asset is impaired, we may be required to record additional significant charges to earnings that could adversely affect our financial condition and operating results.
We identified material weaknesses in our internal controls over financial reporting for the year ended December 31, 2016, one of which has not been remediated as of December 31, 2017. Further, an additional material weakness in internal controls over financial reporting was identified for the year ended December 31, 2017. If we do not adequately address these material weaknesses, if we have other material weaknesses or significant deficiencies in our internal controls over financial reporting in the future, or if we otherwise do not maintain effective internal controls over financial reporting, we could fail to accurately report our financial results, which may materially adversely affect our business and financial condition.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal controls over financial reporting and have our independent auditors issue their own opinion on our internal controls over financial reporting. Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. A material weakness is defined by the standards issued by the Public Company Accounting Oversight Board as a deficiency or a combination of deficiencies in internal controls over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
We concluded at December 31, 2016 that there were material weaknesses in internal controls over financial reporting related to operational processes associated with Ditech Financial default servicing activities and to the technical review of the valuation of deferred tax assets, which caused us to restate our Annual Report on Form 10-K for the year ended December 31, 2016. While we have completed the steps necessary to remediate the material weakness over deferred tax asset valuation, we have concluded that the steps taken to remediate the material weakness associated with Ditech Financial default servicing activities were not effective. Accordingly, this material weakness remains as of December 31, 2017. Further, a new material weakness was identified for the year ended December 31, 2017 related to the accuracy of the data utilized in the valuation calculation of fair value of MSR.
While we continue to take actions to improve the effectiveness of our internal controls over financial reporting and remediate the material weaknesses, if our remediation efforts are insufficient to address the material weaknesses, or if additional material weaknesses in our internal controls are discovered in the future, they may adversely affect our ability to record, process, summarize and report financial information timely and accurately and, as a result, our financial statements may contain material misstatements or omissions. Refer to Part II, Item 9A. Controls and Procedures for further information regarding these material weaknesses and our related remediation plans.
It is possible that additional material weaknesses and/or significant deficiencies could be identified by our management or by our independent auditing firm in the future, or may occur without being identified. The existence of any material weakness or significant deficiency could require management to devote significant time and incur significant expense to remediate such weakness or deficiency and management may not be able to remediate the same in a timely manner. Any such weakness or deficiency, even if remediated quickly, could result in regulatory scrutiny or lead to a default under our indebtedness. Furthermore, any material weakness requiring disclosure could cause investors to lose confidence in our reported financial condition, materially affect the market price and trading liquidity of our debt instruments, reduce the market value of our common stock and otherwise materially adversely affect our business and financial condition.

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If we fail to maintain compliance with the continued listing standards of the NYSE, it may result in the delisting of our common stock from the NYSE and have other negative implications under our material agreements with lenders and counterparties.
Our common stock is currently listed for trading on the NYSE, and the continued listing of our common stock on the NYSE is subject to our compliance with a number of listing standards. On August 11, 2017, we received written notification from the NYSE that we were considered to be out of compliance with a NYSE continued listing standard because our average global market capitalization over a consecutive 30 trading-day period had fallen below $50.0 million at the same time our stockholders' equity was less than $50.0 million.
Pursuant to the Prepackaged Plan, as described herein, on February 9, 2018, our previously existing common stock was canceled and we issued common stock that began trading on the NYSE on February 12, 2018. On February 28, 2018, we received a notice from the NYSE that we remain out of compliance with the market capitalization and stockholders’ equity continued listing requirement.
We are working with the NYSE to maintain the listing of our common stock.
If we are unable to cure any event of noncompliance with any continued listing standard of the NYSE within the applicable timeframe and other parameters set forth by the NYSE, or if we fail to maintain compliance with certain continued listing standards that do not provide for a cure period, it will result in the delisting of our common stock from the NYSE, which could negatively impact the trading price, trading volume and liquidity of, and have other material adverse effects on, our common stock. If our common stock is delisted from the NYSE, this could also have negative implications on our business relationships and under our material agreements with lenders and other counterparties.
Our business could suffer if we fail to attract, or retain, highly skilled senior managers and other employees and changes in our executive management team have been and may be disruptive to, or cause uncertainty in, our business.
Our future success will depend on our ability to identify, hire, develop, motivate and retain highly qualified personnel for all areas of our organization, in particular skilled managers, loan servicers, debt default specialists, loan officers and underwriters. Trained and experienced personnel are in high demand and may be in short supply in some areas. Many of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment. In addition, we invest significant time and expense in training our employees, which increases their value to competitors who may seek to recruit them. We may not be able to attract, develop and maintain an adequate skilled workforce necessary to operate our businesses and labor expenses may increase as a result of a shortage in the supply of qualified personnel. If we are unable to attract and retain such personnel, we may not be able to take advantage of acquisitions and other growth opportunities that may be presented to us and this could materially affect our business, financial condition and results of operations.
We have been reducing our workforce size and reducing the number of sites at which we operate, and as a result of these changes we have lost experienced personnel, including senior managers, have incurred transition costs and have had impaired efficiency in certain parts of our business during periods of change. We expect to continue to make further changes in our site footprint and to seek further personnel efficiencies, which could adversely affect our operations and results in future periods. As a result of the uncertainty these changes generate, it may be harder for us to retain or attract skilled employees in the future.
The experience of our senior managers is a valuable asset to us. While our senior management team has significant experience in the residential loan originations and servicing industry, we have recently experienced significant senior management turnover, including with our Chief Executive Officer and Chief Financial Officer. On February 20, 2018, Anthony N. Renzi stepped down from his position as Chief Executive Officer and President of the Company, and the Board appointed Jeffrey P. Baker to serve as Interim Chief Executive Officer and President of the Company, while continuing in his role as President of RMS. We continue to evaluate internal and external candidates to serve as permanent Chief Executive Officer and President, and have engaged an executive search firm to assist in that process. On February 1, 2018, Gerald A. Lombardo joined the Company and, effective February 9, 2018, succeeded Gary Tillett as Chief Financial Officer. Disruptions in management continuity could result in operational or administrative inefficiencies and added costs, which could adversely impact our results of operations and stock price, and may make recruiting for future management positions more difficult or costly. The loss of the services of our senior managers, or our recent, or any future, turnover at the senior management level, as well as risks associated with integrating a significant number of senior level employees into our operations and potential disruptions if one or more of the new employees are not successful, could adversely affect our business.

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Our failure to deal appropriately with potential conflicts of interest relating to our relationship with WCO could damage our reputation, expose us to regulatory and other risks, and adversely affect our business.
Certain of our current and former officers, employees and/or Board members have served, or currently serve, as officers and/or Board members of WCO, which could create the perception of conflicts of interest between such persons’ duties to us and their duties to WCO. In addition, potential conflicts of interest could develop regarding various other matters in connection with the recently completed sale of substantially all of WCO’s assets and WCO’s subsequent, ongoing liquidation. We attempt to manage such potential conflicts through our practices, our internal compliance policies and procedures, and the policies and agreements we negotiated with WCO, although no assurance can be given that conflicts have not, and will not in the future, nevertheless arise.
Appropriately dealing with conflicts of interest is complex and difficult and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential or perceived conflicts of interest. It is possible that potential or perceived conflicts could give rise to disagreements with WCO or regulatory enforcement actions as a result of GTIM’s prior obligations as the investment advisor to WCO, or result in a breach of the restrictive covenants contained in our debt agreements. Regulatory scrutiny of, or litigation in connection with, conflicts of interest or other matters relating to our relationship with WCO could have a material adverse effect on our reputation, hamper our ability to raise additional funds or to achieve certain of our strategic objectives, discourage counterparties to do business with us, and damage our investment in WCO, and could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Additionally, WCO’s qualification as a REIT through the time of its liquidation for tax purposes, which occurred in December 2016, involved the application of highly technical and complex Internal Revenue Code provisions for which only limited judicial and administrative authorities exist, and even a technical or inadvertent violation could have jeopardized WCO’s REIT qualification in applicable tax years (thereby causing, among other consequences, WCO to be subject to corporate-level U.S. federal income taxes in such years) and could adversely affect our relationship with WCO and expose us to liability. Although we believe WCO qualified as a REIT through its liquidation for tax purposes, no assurance can be given in that regard.
Risks Related to Our Organization and Structure
Certain provisions of Maryland law and our Articles of Amendment and Restatement could prevent a change of control or limit stockholders' influence on the management of our business.
Certain provisions of the MGCL may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change in our control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then prevailing market price of such shares. We are subject to the "business combination" provisions of the MGCL that, subject to limitations, prohibit certain business combinations between us and an "interested stockholder" (defined generally as any person who beneficially owns, directly or indirectly, 10% or more of our then outstanding voting stock or an affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was the beneficial owner, directly or indirectly, of 10% or more of our then outstanding stock) or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder and, thereafter, imposes special appraisal rights and supermajority stockholder voting requirements on these combinations. These provisions of the MGCL do not apply to business combinations that are approved or exempted by the board of directors of a corporation prior to the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, our Board of Directors has by resolution exempted business combinations between us and any other person, provided that the business combination is first approved by our Board of Directors. This resolution may be altered or repealed in whole or in part at any time. If this resolution is repealed, or our Board of Directors does not otherwise approve a business combination, this statute may discourage others from trying to acquire control of us and may increase the difficulty of consummating any offer.
The "control share" provisions of the MGCL provide that "control shares" of a Maryland corporation (defined as shares which, when aggregated with all other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in the election of directors) acquired in a "control share acquisition" (defined as the acquisition of issued and outstanding "control shares," subject to certain exceptions) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding votes entitled to be cast by the acquirer of control shares, our officers and our employees who are also our directors. Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of our shares of stock. There can be no assurance that this provision will not be amended or eliminated at any time in the future.

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The "unsolicited takeover" provisions of the MGCL permit our Board of Directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain provisions if we have a class of equity securities registered under the Exchange Act and at least three independent directors. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in our control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then current market price.
Our Articles of Amendment and Restatement provide that our Board of Directors is classified. The Preferred Stock Directors, serving in Class I and Class II, were designated by our Senior Noteholders and the Common Stock Directors, serving in Class III, were designated by us. The initial terms of the Class I directors will expire at our annual meeting in 2018, the Class II directors in 2019 and the Class III directors in 2020, with directors being elected thereafter to serve three-year terms. During the period commencing on the Effective Date and terminating on February 9, 2020, for so long as any preferred stock is outstanding, only the holders of preferred stock, voting separately as a class, will be entitled to elect Preferred Stock Directors, and Preferred Stock Directors will be nominated by, and Preferred Stock Director vacancies will be filled by, the Preferred Stock Directors then in office. During such period, only the holders of our successor common stock, voting separately as a class, will be entitled to elect the Common Stock Directors, and Common Stock Directors will be nominated by, and Common Stock Director vacancies will be filled by, the Common Stock Directors then in office.
From the Effective Date to and including August 9, 2019, we may not, without the approval of at least seven (7) of the nine (9) members of the Board of Directors then in office, (i) sell all or substantially all of our assets, (ii) enter into any transaction pursuant to which a change in control (as defined in the Articles of Amendment and Restatement) would occur, (iii) increase or decrease the size of the Board of Directors, or (iv) amend, alter or repeal certain provisions of our Articles of Amendment and Restatement.
Our authorized but unissued shares of common and preferred stock may prevent a change in our control.
Our charter authorizes us to issue additional authorized but unissued shares of common or preferred stock. In addition, our Board of Directors may, without stockholder approval, classify or reclassify any unissued shares of common or preferred stock into other classes or series of stock and set the preferences, rights and other terms of the classified or reclassified shares. As a result, our Board of Directors may establish a class or series of shares of common or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for our shares of common stock.
Our common stock price may experience substantial volatility, which may affect your ability to sell our common stock at an advantageous price.
The market price of our common stock has been and may continue to be volatile. Any such volatility may affect the ability to sell our common stock at an advantageous price. Market price fluctuations in our common stock may be due to a variety of factors, including our emergence from bankruptcy on February 9, 2018 and the transactions executed by us in connection therewith, our available liquidity, public announcements we may make from time to time, and a variety of additional factors including, without limitation, those set forth under these “Risk Factors.”
Our preferred stock and warrants may adversely affect the market price of our common stock.
The market price of our common stock may be influenced by our preferred stock and warrants. The market price of our common stock could become more volatile and could be depressed by investors’ anticipation of the potential resale in the market of a substantial number of additional shares of our common stock received upon conversion of the preferred stock or exercise of warrants; possible sales of our common stock by investors who view our preferred stock or warrants as a more attractive means of equity participation than owning our shares of common stock; and hedging or arbitrage trading activity that may develop involving our preferred stock, warrants and common stock.
Future sales of our common stock in the public market or the issuance of securities senior to our common stock, or the perception that these sales may occur, could adversely affect the trading price of our common stock and our ability to raise funds in stock offerings.
A significant number of our shares of common stock may be held by a relatively small number of investors. Further, we entered into a Registration Rights Agreement with certain investors in our common stock, warrants and preferred stock pursuant to which we have agreed to file a registration statement with the SEC to facilitate potential future sales of securities. Sales by us or our stockholders of a substantial number of shares of our common stock in the public markets, or even the perception that these sales might occur (such as upon the filing of the aforementioned registration statement), could cause the market price of our common stock to decline or could impair our ability to raise capital through a future sale of, or pay for acquisitions using, our equity securities.

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We are currently authorized to issue 100,000,000 shares of stock, consisting of 90,000,000 shares of common stock and 10,000,000 shares of preferred stock, including 100,000 shares of preferred stock, having the preferences, conversion rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption set forth in the Articles Supplementary. As of March 23, 2018, we had outstanding 4,252,500 shares of common stock and warrants to purchase an aggregate of 12,993,750 shares of our common stock. In addition, as of March 23, 2018, we have 11,497,500 shares of common stock reserved for issuance upon conversion of the preferred stock.
We have also reserved an additional 3,193,750 shares for future issuance to our directors, officers and employees pursuant to our equity incentive plan. The potential issuance of such additional shares of common stock may create downward pressure on the trading price of our common stock.
We may issue common stock or other equity securities, including additional preferred stock, senior to our common stock (in terms of dividends, liquidation rights or voting rights) in the future for a number of reasons, including to finance acquisitions and to satisfy our obligations upon the exercise of warrants or conversion of preferred stock, or for other reasons. We cannot predict the effect, if any, that future sales or issuances of shares of our common stock or other equity securities, or the availability of shares of common stock or such other equity securities for future sale or issuance, will have on the trading price of our common stock.
SEC rules for determining beneficial ownership under the Exchange Act, as applied to our capital structure, may increase the likelihood of relatively small holders (on an economic interest basis) of our securities becoming subject to Section 13 and Section 16 of the Exchange Act, which may negatively impact the market for such securities.
Beneficial owners of more than 10% of our outstanding common stock are subject to reporting requirements in respect of their initial ownership of and subsequent transactions in our common stock, pursuant to Section 13 and Section 16 of the Exchange Act. Under our capital structure, the number of shares of common stock issuable upon conversion or exercise of preferred stock or warrants is substantially larger than the number of currently outstanding shares of common stock. SEC rules for calculating beneficial ownership provide that a holder of our preferred stock or warrants would include the common stock issuable to such holder upon the conversion or exercise of such securities in both the ownership (numerator) and total shares outstanding (denominator). For purposes of determining the beneficial ownership under the Exchange Act of any holder of our common stock, preferred stock or warrants, the number of shares outstanding (denominator) does not include the amount of common stock that would be outstanding if all outstanding shares of preferred stock or warrants were converted or exercised, the impact of which would be significantly dilutive. Accordingly, holders of our common stock, preferred stock and warrants may be deemed to have beneficial ownership that significantly exceeds their underlying economic interest, causing them to possibly become subject to Section 16 and/or Section 13 of the Exchange Act.
The composition of our Board of Directors has changed significantly upon emergence from Chapter 11.
The Prepackaged Plan caused the composition of our Board of Directors to change significantly. The new directors have different backgrounds, experiences and perspectives from those individuals who previously served on the Board of Directors and, thus, may have different views on the issues that will determine our future. As a result, our future strategy and plans may differ materially from those of the past.
The Prepackaged Plan was based in part upon assumptions, projections and analyses developed by us. If these assumptions, projections and analyses prove to be incorrect in any material respect, the expected business and financial performance contemplated by the Prepackaged Plan may not be successfully implemented.
The Prepackaged Plan was based in part on assumptions and analyses based on our experience and perception of historical trends, current conditions at the time and expected future developments, as well as other factors that we considered appropriate under the circumstances. Whether actual future results and developments will be consistent with our expectations and assumptions depends on a number of factors, including but not limited to: (i) our ability to maintain customers’ confidence in our viability as a continuing entity and to attract and retain sufficient business from them; (ii) our ability to retain key employees; and (iii) the overall strength and stability of general economic conditions and the mortgage servicing and originations industry. The failure of any of these factors could materially adversely affect the success of our businesses.

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Risks Related to Our Relationship with Walter Energy
We may become liable for U.S. federal income taxes allegedly owed by the Walter Energy consolidated group for 2009 and prior tax years. We cannot predict how Walter Energy’s recent bankruptcy filing in Alabama may affect the outcome of these matters.
We may become liable for U.S. federal income taxes allegedly owed by the Walter Energy consolidated group for 2009 and prior tax years. Under federal law, each member of a consolidated group for U.S. federal income tax purposes is severally liable for the federal income tax liability of each other member of the consolidated group for any year in which it was a member of the consolidated group at any time during such year. Certain of our former subsidiaries (which were subsequently merged or otherwise consolidated with certain of our current subsidiaries) were members of the Walter Energy consolidated tax group prior to our spin-off from Walter Energy on April 17, 2009. As a result, to the extent the Walter Energy consolidated group’s federal income taxes (including penalties and interest) for such tax years are not favorably resolved on the merits or otherwise paid, we could be liable for such amounts.
Walter Energy Tax Matters. According to Walter Energy’s Form 10-Q, or the Walter Energy Form 10-Q, for the quarter ended September 30, 2015 (filed with the SEC on November 5, 2015) and certain other public filings made by Walter Energy in its bankruptcy proceedings currently pending in Alabama, described below, as of the date of such filing, certain tax matters with respect to certain tax years prior to and including the year of our spin-off from Walter Energy remained unresolved, including certain tax matters relating to: (i) a “proof of claim” for a substantial amount of taxes, interest and penalties with respect to Walter Energy’s fiscal years ended August 31, 1983 through May 31, 1994, which was filed by the IRS in connection with Walter Energy’s bankruptcy filing on December 27, 1989 in the U.S. Bankruptcy Court for the Middle District of Florida, Tampa Division; (ii) an IRS audit of Walter Energy’s federal income tax returns for the years ended May 31, 2000 through December 31, 2008; and (iii) an IRS audit of Walter Energy’s federal income tax returns for the 2009 through 2013 tax years.
Walter Energy 2015 Bankruptcy Filing. On July 15, 2015, Walter Energy filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Northern District of Alabama. On August 18, 2015, Walter Energy filed a motion with the Florida bankruptcy court requesting that the court transfer venue of its disputes with the IRS to the Alabama bankruptcy court. In that motion, Walter Energy asserted that it believed the liability for the years at issue "will be materially, if not completely, offset by the [r]efunds" asserted by Walter Energy against the IRS. The Florida Bankruptcy Court transferred venue of the matter to the Alabama Bankruptcy Court, where it remains pending.
On November 5, 2015, Walter Energy, together with certain of its subsidiaries, entered into the Walter Energy Asset Purchase Agreement with Coal Acquisition, a Delaware limited liability company formed by members of Walter Energy’s senior lender group, pursuant to which, among other things, Coal Acquisition agreed to acquire substantially all of Walter Energy’s assets and assume certain liabilities, subject to, among other things, a number of closing conditions set forth therein. On January 8, 2016, after conducting a hearing, the Alabama Bankruptcy Court entered an order approving the sale of Walter Energy's assets to Coal Acquisition free and clear of all liens, claims, interests and encumbrances of the debtors. The sale of such assets pursuant to the Walter Energy Asset Purchase Agreement was completed on March 31, 2016 and was conducted under the provisions of Sections 105, 363 and 365 of the Bankruptcy Code. Based on developments in the Alabama bankruptcy proceedings following completion of this asset sale, such asset sale appears to have resulted in (i) limited value remaining in Walter Energy’s bankruptcy estate and (ii) to date, limited recovery for certain of Walter Energy’s unsecured creditors, including the IRS.
On January 9, 2017, Walter Energy filed with the Alabama Bankruptcy Court a motion to convert its Chapter 11 bankruptcy case to a Chapter 7 liquidation. In that motion, Walter Energy stated that, other than with respect to 1% of the equity of the acquirer of Walter Energy's core assets, no prospect of payment of unsecured claims exists. On January 23, 2017, the IRS filed an objection to Walter Energy's motion to convert, in which the IRS requested that a judgment be entered against Walter Energy in connection with the tax matters described above. The IRS further asserted that entry of a final judgment was necessary so that it could pursue collection of tax liabilities from former members of Walter Energy's consolidated group that are not debtors.
On January 30, 2017, the Alabama Bankruptcy Court held a hearing at which it denied the IRS's request for entry of a judgment and announced its intent to grant Walter Energy's motion to convert. The Alabama Bankruptcy Court entered an order on February 2, 2017 converting Walter Energy's Chapter 11 bankruptcy to a Chapter 7 liquidation. During February 2017, Andre Toffel was appointed Chapter 7 trustee of Walter Energy's bankruptcy estate.

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We cannot predict whether or to what extent we may become liable for federal income taxes of the Walter Energy consolidated tax group during the tax years in which we were a part of such group, in part because we believe, based on publicly available information, that: (i) the amount of taxes owed by the Walter Energy consolidated tax group for the periods from 1983 through 2009 remains unresolved; and (ii) in light of Walter Energy’s conversion from a Chapter 11 bankruptcy to a Chapter 7 bankruptcy, it is unclear whether the IRS will seek to make a direct claim against us for such taxes. Further, because we cannot currently estimate our liability, if any, relating to the federal income tax liability of Walter Energy’s consolidated tax group during the tax years in which we were a part of such group, we cannot determine whether such liabilities, if any, could have a material adverse effect on our business, financial condition, liquidity and/or results of operations.
Tax Separation Agreement. In connection with our spin-off from Walter Energy, we and Walter Energy entered into a Tax Separation Agreement, dated April 17, 2009. Notwithstanding any several liability we may have under federal tax law described above, under the Tax Separation Agreement, Walter Energy agreed to retain full liability for all U.S. federal income or state combined income taxes of the Walter Energy consolidated group for 2009 and prior tax years (including any interest, additional taxes or penalties applicable thereto), subject to limited exceptions. We therefore filed proofs of claim in the Alabama bankruptcy proceedings asserting claims for any such amounts to the extent we are ultimately held liable for the same. However, we expect to receive little or no recovery from Walter Energy for any filed proofs of claim for indemnification.
It is unclear whether claims made by us under the Tax Separation Agreement would be enforceable against Walter Energy in connection with, or following the conclusion of, the various Walter Energy bankruptcy proceedings described above, or if such claims would be rejected or disallowed under bankruptcy law. It is also unclear whether we would be able to recover some or all of any such claims given Walter Energy’s limited assets and limited recoveries for unsecured creditors in the Walter Energy bankruptcy proceedings described above.
Furthermore, the Tax Separation Agreement provides that Walter Energy has, in its sole discretion, the exclusive right to represent the interests of the consolidated group in any audit, court proceeding or settlement of a claim with the IRS for the tax years in which certain of our former subsidiaries were members of the Walter Energy consolidated tax group. However, in light of the conversion of Walter Energy’s bankruptcy proceeding from a Chapter 11 proceeding to a Chapter 7 proceeding, we may choose to take a direct role in proceedings involving the IRS’s claim for tax years in which we were a member of the Walter Energy consolidated tax group. Moreover, the Tax Separation Agreement obligates us to take certain tax positions that are consistent with those taken historically by Walter Energy. In the event we do not take such positions, we could be liable to Walter Energy to the extent our failure to do so results in an increased tax liability or the reduction of any tax asset of Walter Energy. These arrangements may result in conflicts of interests between us and Walter Energy, particularly with regard to the Walter Energy bankruptcy proceedings described above.
Lastly, according to its public filings, Walter Energy’s 2009 tax year is currently under audit. Accordingly, if it is determined that certain distribution taxes and other amounts are owed related to our spin-off from Walter Energy in 2009, we may be liable under the Tax Separation Agreement for all or a portion of such amounts.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our executive and principal administrative office and our Originations segment are located in Fort Washington, Pennsylvania in a 191,000 square foot facility, which is leased under a long-term lease. Our Servicing segment has centralized servicing operations located in Saint Paul, Minnesota, Tempe, Arizona, Rapid City, South Dakota and Jacksonville, Florida in leased office space ranging between 58,000 and 171,000 square feet. Our Reverse Mortgage segment operations centers lease office space of 34,000 and 68,000 square feet in Charlotte, North Carolina and Houston, Texas, respectively. Certain administrative and corporate operations and other activities included in our Other non-reportable segment are conducted at our Tampa, Florida location in approximately 29,000 square feet of leased office space. In addition, our field servicing and regional operations lease approximately 25 smaller offices located throughout the U.S. Our lease agreements have terms that expire through 2026, exclusive of renewal option periods. We believe that our leased facilities are adequate for our current requirements.
We are continuing to review our assets and activities and are advancing analysis and developing strategies with respect to any assets and activities we no longer deem to be a core part of the Company's operations. Our Irving, TX location was closed during 2017, and our remaining sites continue to undergo strategic review, which could result in additional site closings or other outcomes. We are also reevaluating our previously disclosed intention to consolidate, over time, our operations into three Ditech sites - Fort Washington, PA; Jacksonville, FL; and Tempe, AZ; and one RMS site - Houston, TX.

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ITEM 3. LEGAL PROCEEDINGS
We are, and expect that, from time to time, we will continue to be involved in litigation, arbitration, examinations, inquiries, investigations and claims. These include pending examinations, inquiries and investigations by governmental and regulatory agencies, including but not limited to state attorneys general and other state regulators, Offices of the U.S. Trustees and the CFPB, into whether certain of our residential loan servicing and originations practices, bankruptcy practices and other aspects of our business comply with applicable laws and regulatory requirements.
From time to time, we have received and may in the future receive subpoenas and other information requests from federal and state governmental and regulatory agencies that are examining or investigating us. We cannot provide any assurance as to the outcome of these exams or investigations or that such outcomes will not have a material adverse effect on our reputation, business, prospects, results of operations, liquidity or financial condition.
Chapter 11 Case
On November 30, 2017, Walter Investment Management Corp. filed a Bankruptcy Petition under the Bankruptcy Code to pursue the Prepackaged Plan announced on November 6, 2017. On January 17, 2018, the Bankruptcy Court approved the amended Prepackaged Plan and on January 18, 2018, entered a confirmation order approving the Prepackaged Plan. On February 9, 2018, the Prepackaged Plan became effective pursuant to its terms and Walter Investment Management Corp. emerged from the Chapter 11 Case. The Company continued to operate throughout the Chapter 11 Case and upon emergence changed its name to Ditech Holding Corporation. From and after effectiveness of the Prepackaged Plan, the Company has continued, in its previous organizational form, to carry out its business. On the Effective Date, all of our previously existing equity interests, including our predecessor common stock, were canceled. Our obligations under the Convertible Notes and Senior Notes, except to the limited extent set forth in the Prepackaged Plan, were also extinguished. For a more detailed discussion of our emergence, refer to the Emergence from Reorganization Proceedings under Part II, Item 7. Management’s Discussion and Analysis of Financial Conditions and Analysis.
During the pendency of the Chapter 11 Case, the Bankruptcy Court granted relief enabling us to conduct our business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing us to pay employee wages and benefits, to pay taxes and certain governmental fees and charges, to continue to operate our cash management system in the ordinary course, and to pay the pre-petition claims of certain of our vendors. For goods and services provided following the Petition Date, we paid vendors in full under normal terms.
Other Legal Matters
RMS received a subpoena dated June 16, 2016 from the Office of Inspector General of HUD requiring RMS to produce documents and other materials relating to, among other things, the origination, underwriting and appraisal of reverse mortgages for the time period since January 1, 2005. RMS subsequently received an additional subpoena from the Office of Inspector General of HUD dated January 12, 2017 requesting certain documents and information relating to the origination and underwriting of certain specified loans. This investigation, which is being conducted in coordination with the U.S. Department of Justice, Civil Division, could lead to a demand or claim under the False Claims Act, which allows for penalties and treble damages, or other statutes.
On July 27, 2016, RMS received a letter from the New York Department of Financial Services requesting information on RMS's reverse mortgage servicing business in New York.
RMS received a subpoena dated March 30, 2017 from the Office of the Attorney General of the State of New York requiring RMS to produce documents and information relating to, among other things, the servicing of HECMs insured by the FHA during the period since January 1, 2012.
We are cooperating with these inquiries relating to RMS.
We have received various subpoenas for testimony and documents, motions for examinations pursuant to Federal Rule of Bankruptcy Procedure 2004, and other information requests from certain Offices of the U.S. Trustees, acting through trial counsel in various federal judicial districts, seeking information regarding an array of our policies, procedures and practices in servicing loans to borrowers who are in bankruptcy and our compliance with bankruptcy laws and rules. We have provided information in response to these subpoenas and requests and have met with representatives of certain Offices of the U.S. Trustees to discuss various issues that have arisen in the course of these inquiries, including our compliance with bankruptcy laws and rules. We cannot predict the outcome of the aforementioned proceedings and inquiries, which could result in requests for damages, fines, sanctions, or other remediation. We could face further legal proceedings in connection with these matters. We may seek to enter into one or more agreements to resolve these matters. Any such agreement may require us to pay fines or other amounts for alleged breaches of law and to change or otherwise remediate our business practices. Legal proceedings relating to these matters and the terms of any settlement agreement could have a material adverse effect on our reputation, business, prospects, results of operations, liquidity and financial condition.

51



Since mid-2014, we have received subpoenas for documents and other information requests from the offices of various state attorneys general who have, as a group and individually, been investigating our mortgage servicing practices. We have provided information in response to these subpoenas and requests and have had discussions with representatives of the states involved in the investigations to explain our practices. We cannot predict whether litigation or other legal proceedings will be commenced by, or an agreement will be reached with, one or more states in relation to these investigations. Any legal proceedings and any agreement resolving these matters could have a material adverse effect on our reputation, business, prospects, results of operation, liquidity and financial condition.
We are involved in litigation, including putative class actions, and other legal proceedings concerning, among other things, lender-placed insurance, private mortgage insurance, bankruptcy practices, property preservation practices, servicing/foreclosure fees and costs, employment practices, the Consumer Financial Protection Act, the Fair Debt Collection Practices Act, the TCPA, the Fair Credit Reporting Act, TILA, RESPA, EFTA, the ECOA, and other federal and state laws and statutes. In addition, there have been various legal and regulatory developments in Nevada regarding liens asserted by HOAs for unpaid HOA assessments. Credit owners may assert claims against servicers such as Ditech Financial for failure to advance sufficient funds to cover unpaid HOA assessments and protect the credit owner’s interest in the subject property. We service numerous loans in Nevada and are involved in litigation and other legal proceedings affected by, or related to, these HOA matters.
In Kamimura, Lee C. v. Green Tree Servicing LLC, filed on April 8, 2016 in the U.S. District Court for the District of Nevada, Ditech Financial is subject to a putative nationwide class action suit alleging FCRA violations by obtaining credit bureau information without a permissible purpose after the discharge of debt owed to Ditech Financial pursuant to Chapter 13 of the Bankruptcy Code. The plaintiff in this suit, on behalf of himself and others similarly situated, seeks actual and punitive damages, statutory penalties, and attorneys’ fees and litigation costs.
Ditech Financial is also subject to several putative class action suits alleging violations of the TCPA for placing phone calls to plaintiffs’ cell phones using an automatic telephone dialing system without their prior consent. The plaintiffs in these suits, on behalf of themselves and others similarly situated, seek statutory damages for both negligent and knowing or willful violations of the TCPA.
A federal securities fraud complaint was filed against the Company, George M. Awad, Denmar J. Dixon, Anthony N. Renzi, and Gary L. Tillett on March 16, 2017. The case, captioned Courtney Elkin, et al. vs. Walter Investment Management Corp., et al., Case No. 2:17-cv-02025-JCJ, is pending in the Eastern District of Pennsylvania. The court has appointed a lead plaintiff in the action who filed an amended complaint on September 15, 2017. The amended complaint seeks monetary damages and asserts claims under Sections 10(b) and 20(a) of the Exchange Act during a class period alleged to begin on August 9, 2016 and conclude on August 1, 2017. The amended complaint alleges that: (i) defendants made material misstatements about the value of our deferred tax assets; (ii) the material misstatement about the value of our deferred tax assets required us to restate certain financials in our Quarterly Reports on Form 10-Q for the periods ended June 30, 2016, September 30, 2016 and March 30, 2017 and our Annual Report on Form 10-K for the year ended December 31, 2016, and caused us to violate the financial covenants and obligations in agreements with our lenders and GSEs; and (iii) defendants made material misstatements concerning our initiatives to deleverage our capital structure. On November 3, 2017, the lead plaintiff voluntarily dismissed defendant Denmar J. Dixon from the action. On November 14, 2017, the remaining defendants moved to dismiss the amended complaint. From December 1, 2017 to February 9, 2018, the action was stayed pursuant to section 362 of the Bankruptcy Code. On February 15, 2018, the parties reached an agreement in principle to settle the action for $2.95 million subject to the negotiation of a formal settlement agreement, notice to the alleged class, and court approval. The settlement, if completed, is to be paid in part by us and in part by our directors’ and officers’ insurance carrier.
A stockholder derivative complaint purporting to assert claims on behalf of the Company was filed against certain current and former members of our Board of Directors on June 22, 2017. The case, captioned Michael E. Vacek, Jr., et al. vs. George M. Awad, et al., Case No. 2:17-cv-02820-JCJ, is pending in the Eastern District of Pennsylvania. Plaintiff filed an amended complaint in the action on September 13, 2017. The amended complaint seeks monetary damages for the Company and equitable relief and asserts a claim for breach of fiduciary duty arising out of: (i) a material weakness in our internal controls over financial reporting related to operational processes associated with Ditech Financial default servicing activities, including identifying foreclosure tax liens and resolving such liens efficiently, foreclosure related advances, and the processing and oversight of loans in bankruptcy status, which resulted in several adjustments to reserves during the fourth quarter of 2016; (ii) an accounting error that caused us to overstate the value of our deferred tax assets; and (iii) subpoenas seeking documents relating to RMS’s origination and underwriting of reverse mortgages and loans. The Company and the defendants moved to dismiss the amended complaint on October 5, 2017. Briefing on the motion to dismiss is completed. From December 1, 2017 to February 9, 2018, the action was stayed pursuant to section 362 of the Bankruptcy Code.

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The outcome of all of our regulatory matters, litigations and other legal proceedings (including putative class actions) is uncertain, and it is possible that adverse results in such proceedings (which could include restitution, penalties, punitive damages and injunctive relief affecting our business practices) and the terms of any settlements of such proceedings could, individually or in the aggregate, have a material adverse effect on our reputation, business, prospects, results of operations, liquidity or financial condition. In addition, governmental and regulatory agency examinations, inquiries and investigations may result in the commencement of lawsuits or other proceedings against us or our personnel. Although we have historically been able to resolve the preponderance of our ordinary course litigations on terms we considered acceptable and individually not material, this pattern may not continue and, in any event, individual cases could have unexpected materially adverse outcomes, requiring payments or other expenses in excess of amounts already accrued. Certain of the litigations against us include claims for substantial compensatory, punitive and/or statutory damages, and in many cases the claims involve indeterminate damages. In some cases, including in some putative class actions, there could be fines or other damages for each separate instance in which a violation occurred. Certification of a class, particularly in such cases, could substantially increase our exposure to damages. We cannot predict whether or how any legal proceeding will affect our business relationship with actual or potential customers, our creditors, rating agencies and others. In addition, cooperating in, defending and resolving these legal proceedings consume significant amounts of management time and attention and could cause us to incur substantial legal, consulting and other expenses and to change our business practices, even in cases where there is no determination that our conduct failed to meet applicable legal or regulatory requirements.
For a description of certain legal proceedings, refer to Note 30 to the Consolidated Financial Statements included in this report, which is incorporated by reference herein.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
On the Effective Date, all shares of our predecessor common stock, as well as our Convertible Notes and Senior Notes, were canceled and 4,252,500 shares of common stock, par value $0.01 per share, were issued to the holders of our predecessor common stock and Convertible Noteholders. In addition, on the Effective Date, we issued to the holders of our predecessor common stock and Convertible Noteholders Series A Warrants to purchase up to an aggregate of 7,245,000 shares of common stock at $20.63 per share and Series B Warrants to purchase up to an aggregate of 5,748,750 shares of common stock at $28.25 per share. Further, we issued Second Lien Notes and Convertible Preferred Stock to the Senior Note Holders, which Convertible Preferred Stock is convertible into 11,497,500 shares of common stock, and we reserved 3,193,750 shares of common stock to be issued under our equity incentive plan. We relied, based on the Confirmation Order we received from the Bankruptcy Court, on Section 1145(a)(1) of the Bankruptcy Code to exempt from the registration requirements of the Securities Act (i) the offer and sale of our outstanding common stock to the holders of our predecessor common stock and Convertible Notes, (ii) the offer and sale of the Series A and Series B Warrants to the holders of our predecessor common stock and Convertible Notes, (iii) the offer and sale of the Convertible Preferred Stock and Second Lien Notes to the Senior Note Holders, and (iv) the offer and sale of the common stock issuable upon exercise of the warrants or conversion of the Convertible Preferred Stock. Section 1145(a)(1) of the Bankruptcy Code exempts the offer and sale of securities under a plan of reorganization from registration under Section 5 of the Securities Act and state laws if three principal requirements are satisfied:
the securities must be offered and sold under a plan of reorganization and must be securities of the debtor, of an affiliate participating in a joint plan of reorganization with the debtor or of a successor to the debtor under the plan of reorganization;
the recipients of the securities must hold claims against or interests in the debtor; and
the securities must be issued in exchange, or principally in exchange, for the recipient’s claim against or interest in the debtor.
Our predecessor common stock traded under the symbol "WAC" until the Effective Date. Our successor common stock is listed on the NYSE under the symbol “DHCP” and has been trading on such exchange since February 12, 2018. No prior established public trading market existed for our successor common stock prior to this date. As of March 23, 2018, there were 217 record holders of our common stock.
The following table sets forth certain high and low sales prices of our predecessor common stock. There were no cash dividends declared on our common stock for the periods indicated.
 
 
Stock Prices
 
 
High
 
Low
2017
 
 
 
 
First quarter ended March 31
 
$
5.25

 
$
0.64

Second quarter ended June 30
 
1.94

 
0.76

Third quarter ended September 30
 
1.13

 
0.30

Fourth quarter ended December 31
 
0.95

 
0.31

 
 
 
 
 
2016
 
 
 
 
First quarter ended March 31
 
$
16.00

 
$
6.31

Second quarter ended June 30
 
8.51

 
2.70

Third quarter ended September 30
 
4.06

 
2.24

Fourth quarter ended December 31
 
8.11

 
3.77


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We did not pay any cash dividends on our common stock during the fiscal years ended December 31, 2017 and 2016, and we have no current plans to pay any cash dividends on our common stock and instead may retain earnings, if any, for future operations, reinvestment in our business, debt repayment or other purposes. Any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our Board of Directors may deem relevant (including restrictions contained in the 2018 Credit Agreement and the Second Lien Notes indenture). These restrictions on dividends are described in greater detail in the Liquidity and Capital Resources section under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Refer to Note 26 to the Consolidated Financial Statements for additional information regarding dividend restrictions.
Issuer Purchases of Equity Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
Omitted.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our Consolidated Financial Statements and notes thereto included in this report. This discussion contains a number of forward-looking statements, all of which are based on our current expectations and all of which could be affected by uncertainties and risks. Our actual results may differ materially from the results contemplated in these forward-looking statements as a result of many factors including, but not limited to, those described in Part I, Item 1A. Risk Factors. Historical results and trends that might appear should not be taken as indicative of future operations, particularly in light of our emergence from bankruptcy in February 2018, MSR sales, tax reform, and other regulatory developments discussed throughout this report. Refer to the Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 section located in the forepart in this report for a discussion regarding forward-looking statements.
Defined terms used in this Annual Report on Form 10-K are defined in the Glossary of Terms.
Executive Summary
The Company
We are an independent servicer and originator of mortgage loans and servicer of reverse mortgage loans. We service a wide array of loans across the credit spectrum for our own portfolio and for GSEs, government agencies, third-party securitization trusts and other credit owners. Through our consumer, correspondent and wholesale lending channels, we originate and purchase residential mortgage loans that we predominantly sell to GSEs and government agencies. We also operate two complementary businesses: asset receivables management and real estate owned property management and disposition. Our goal is to become a partner with our customers; assisting them with the originations process and through the life of their loan, with a highly regarded originations and servicing platform and quality customer service in an open, honest and straightforward manner.
On February 9, 2018, we emerged from our Chapter 11 Case. The Company continued to operate throughout the Chapter 11 Case and upon emergence changed its name to Ditech Holding Corporation. Upon effectiveness of the Prepackaged Plan, the Company has continued, in its previous organizational form, to carry out its business. Refer to the Emergence from Reorganization Proceedings section below for further discussion.
During 2017, we changed our principal executive offices from Tampa, Florida to Fort Washington, Pennsylvania. We have recently undergone several changes in our senior leadership. Effective February 20, 2018, Jeffrey P. Baker commenced service as our Interim Chief Executive Officer and President, succeeding Anthony N. Renzi. Mr. Baker also continues to serve as President of RMS, but no longer serves as our Chief Operations Officer. We have engaged an executive search firm to assist us with the process of identifying internal and external candidates to serve as permanent Chief Executive Officer and President. On February 1, 2018, Gerald A. Lombardo joined the Company and, effective February 9, 2018, succeeded Gary Tillett as Chief Financial Officer.
At December 31, 2017, we serviced 1.7 million residential loans with a total unpaid principal balance of $207.9 billion. We originated $15.6 billion in mortgage loan volume in 2017.

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During 2016 and throughout 2017, our strategy was to move towards a fee-for-service model in our servicing business by increasing the proportion of subservicing activity in our business mix. For example, in 2016, we entered into several transactions with NRM pursuant to which we sold MSR to NRM and were retained by NRM to subservice these and other MSR; and in 2017, we began selling MSR to NRM on both a traditional flow sale basis and a concurrent assignment or co-issue basis, each with subservicing retained. Largely as a result of these transactions, and based on unpaid principal loan balance, the portion of our servicing portfolio represented by subservicing rose from 24% (or $62.5 billion in unpaid principal loan balance) at September 30, 2016 to 49% (or $102.7 billion in unpaid principal loan balance) at December 31, 2017. Our subservicing fees vary considerably from contract to contract, and in general subservicing fees are lower than the servicing fee associated with owning the MSR and servicing the related loans. Therefore, our servicing revenues have been and are expected to continue to be negatively affected by the sale of our MSR, even in situations where we are engaged to subservice the loans relating to such MSR following their sale. However, as the portion of our servicing portfolio represented by subservicing increases, we generally expect to benefit from lower advance funding costs and from the elimination of amortization charges associated with the MSR we have sold. Going forward, we expect to sell servicing rights to third parties on a more selective basis while continuing to grow our subservicing business with third-party servicing rights owners.
During 2017, we added to the unpaid principal balance of our third-party mortgage loan servicing portfolio with $7.1 billion relating to mortgage loans sold with servicing retained and $4.1 billion relating to subservicing contracts, which was more than offset by $48.0 billion of payoffs, sales and other adjustments, net of recapture activities. In addition, we added to the unpaid principal balance of our third-party reverse loan servicing portfolio with $1.9 billion in new business and tails, which was more than offset by $2.5 billion in payoffs and curtailments.
Our mortgage loan originations business diversifies our revenue base and helps us replenish our servicing portfolio. During 2017, we originated $6.1 billion of mortgage loans through our consumer and wholesale channels and purchased $9.5 billion of mortgage loans through our correspondent channel. Substantially all of these purchased and originated mortgage loans were added to our servicing portfolio upon loan sale. In addition, we originated and purchased $399.2 million in reverse mortgage volume and issued $426.5 million in HMBS during 2017, although, as discussed below, we exited the reverse mortgage originations business at the beginning of 2017.
Our profitability for the Reverse segment has been and will continue to be negatively impacted by recent changes to HUD requirements, which have led to additional working capital needs in relation to Ginnie Mae buyouts, and by the level of defaults we are experiencing with HECM loans. When a HECM loan is in default, we earn interest at the debenture rate, which is generally lower than the note rate we must pay. Additionally, if we miss HUD prescribed milestones in the foreclosure and claims filing process, HUD curtails the debenture interest being earned on loans in default. For loans in default, servicing costs generally increase as a result of foreclosure related activities such as legal costs, property preservation expense and other costs, which may include bankruptcy related activities. Further, after a foreclosure sale occurs and we obtain title to the property, we are responsible for the sale of the REO property. If we are unable to sell the property underlying a defaulted reverse loan for an acceptable price within the timeframe established by HUD, we are required to make an appraisal-based claim to HUD. In such cases, HUD reimburses us for the loan balance, eligible expenses and debenture interest, less the appraised value of the underlying property. Thereafter, all the risks and costs associated with maintaining and liquidating the property remains with us. We may incur additional losses on REO properties as they progress through the claims and liquidation processes. The significance of future losses associated with appraisal-based claims is dependent upon the volume of defaulted loans, condition of foreclosed properties and the general real estate market.
We manage our Company in three reportable segments: Servicing, Originations, and Reverse Mortgage. A description of the business conducted by each of these segments is provided below:
Servicing - Our Servicing segment performs servicing for our own mortgage loan portfolio, on behalf of third-party credit owners of mortgage loans for a fee and on behalf of third-party owners of MSR for a fee, which we refer to as subservicing. The Servicing segment also operates complementary businesses including asset receivables management that performs collections of post charge-off deficiency balances for third parties and us. In addition, the Servicing segment holds the assets and mortgage-backed debt of the Residual Trusts.
Originations - Our Originations segment originates and purchases mortgage loans that are intended for sale to third parties. In 2017, the mix of mortgage loans sold by our Originations segment, based on unpaid principal balance, consisted of (i) 50% Fannie Mae conventional conforming loans, (ii) 41% Ginnie Mae loans and (iii) 9% Freddie Mac conventional conforming loans.
Reverse Mortgage - Our Reverse Mortgage segment primarily focuses on the servicing of reverse loans. Effective January 2017, we exited the reverse mortgage originations business. As of December 31, 2017, we did not have any reverse loans remaining in the originations pipeline and have finalized the shutdown of the reverse mortgage originations business. We will continue to fund undrawn amounts available to borrowers under their loans and, from time to time, securitize these amounts.

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Other - As of December 31, 2017, our Other non-reportable segment holds the assets and liabilities of the Non-Residual Trusts and corporate debt.
Overview
Our Servicing segment revenue is primarily impacted by the size and mix of our capitalized servicing and subservicing portfolios and is generated through servicing of mortgage loans for third-party clients and/or credit owners. Net servicing revenue and fees include the change in fair value of servicing rights carried at fair value and the amortization of all other servicing rights. Our servicing fee income generation is influenced by the volume and timing of entrance into subservicing contracts and purchases and sales of servicing rights. The fair value of our servicing rights is largely dependent on the size of the related portfolio, discount rates, and prepayment and default speeds. Our Originations segment revenue, which is primarily comprised of net gains on sales of loans, is impacted by interest rates and the volume of loans locked as well as the margins earned in our various origination channels. Net gains on sales of loans include the cost of additions to the representations and warranties reserve. Our Reverse Mortgage segment is impacted by subservicing contracts, the fair value of reverse loans and HMBS, draws on existing reverse loans, and historically, the volume of new reverse loan originations.
Our results of operations are also affected by expenses such as salaries and benefits, information technology, occupancy, legal and professional fees, the provision for advances, curtailment, interest expense and other operating expenses. Our expenses were also impacted by reorganization items of $37.6 million that were directly attributable to the Chapter 11 Case during 2017, and by non-cash goodwill and intangible assets impairment charges of $326.3 million during 2016. Refer to the Financial Highlights, Results of Operations and Business Segment Results sections below for further information.
Our principal sources of liquidity are the cash flows generated from our business segments and funds available from our master repurchase agreements, mortgage loan servicing advance facilities, issuance of GMBS, issuance of HMBS to fund our tail commitments and sales of MSR, any portion thereof, or other assets. Refer to the Liquidity and Capital Resources section below for additional information.
In connection with the Company’s ongoing evaluation and analysis of various factors and risks that impact its business and operating results, including recent changes to the forward interest rate curve, and the Company’s recent, preliminary 2018 operating performance, including lower originations volumes than expected due in part to an increase in interest rates, the Company now expects that its Adjusted EBITDA for the year ending December 31, 2018 will be materially lower than previously projected. Under its new leadership, the Company continues to develop and execute various strategies to improve the Company’s financial and operating performance. As the outcomes of our efforts are difficult to predict given the complex business and economic environment in which we operate and the risks we face, which are described in Item 1A. Risk Factors and elsewhere herein, we no longer intend to provide guidance relating to financial expectations going forward.
Financial Highlights
2017 Compared to 2016
Total revenues for 2017 were $831.3 million, which represented a decrease of $164.5 million, or 17%, as compared to 2016. The decrease in revenue reflects a $125.1 million decrease in net gains on sales of loans resulting from an overall lower volume of locked loans and a $38.0 million decrease in insurance revenue due to the sale of our principal insurance agency and substantially all of our insurance agency business during the first quarter of 2017.
Total expenses for 2017 were $1.3 billion, which represented a decrease of $459.8 million, or 26%, as compared to 2016. The decrease in expenses was driven by $326.3 million in goodwill and intangible assets impairment recorded during 2016, $135.5 million in lower salaries and benefits, and $22.9 million in lower general and administrative expenses, partially offset by $37.6 million in reorganization items recorded during 2017.
We recorded goodwill and intangible assets impairment charges as a result of evaluations performed during 2016. Salaries and benefits decreased primarily as a result of a lower average headcount driven by site closures and various organizational changes to the scale and proficiency of the leadership team and support functions, as well as our exit from the reverse mortgage originations business in early 2017. General and administrative expenses decreased primarily as a result of lower contractor costs, servicer interest expense and transformation expenses as well as other cost savings, offset in part by higher costs associated with our debt restructuring initiative.
We recorded reorganization items that were directly attributable to the Chapter 11 Case during 2017. These expenses resulted primarily from the write-off of $34.4 million of costs related to previously issued debt and $3.1 million of legal and professional fees. Refer to the Emergence from Reorganization Proceedings section below for additional information.

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We identified a material weakness in internal controls within the operating control environment for property preservation as of December 31, 2017. Specifically, management identified operational control deficiencies related to operational processes within the property preservation function of Ditech Financial default servicing activities, which resulted in an adjustment to reserves during the fourth quarter of 2017 totaling $6.3 million for exposures related to deficient processes within the operating control environment for the property preservation function.
We also identified a material weakness in internal controls related to the valuation of MSR. Specifically, management determined that the Company did not design and maintain effective internal controls to ensure that data is appropriately utilized in its MSR valuation process, including its ability to appropriately query and extract data from its servicing system. The control deficiency did result in a decrease to our MSR fair value during the fourth quarter of 2017 totaling $8.9 million for exposures related to inaccurate data pulls for purposes of MSR valuation.
Our cash flows provided by operating activities were $779.1 million during 2017, which represented an increase of $327.1 million as compared to 2016. The increase in cash provided by operating activities was primarily a result of an increase in cash provided by origination activities resulting from a higher volume of loans sold in relation to loans originated in 2017 as compared to 2016, offset in part by net changes in working capital items as described in more detail in the Financial Condition section.
Natural Disasters
During 2017, there were several significant natural disasters that have impacted the U.S. and its territories, including Hurricanes Harvey, Irma, and Maria, as well as widespread wildfires in California.
Investors and GSEs permit us to grant periods of forbearance to customers impacted by a natural disaster. Additionally, we are permitted to waive assessments of late fees against those homeowners with disaster-damaged homes, as well as suspend reporting forbearance or delinquencies caused by the disaster to the national credit bureau. We are currently granting such forbearance and waiving late fees and penalties on affected properties.
Further, all properties in the affected areas must be inspected for “acceptable” condition prior to any transaction occurring with or on behalf of the GSEs or HUD (including foreclosure sale, property conveyance, sale/funding/transfers of originated loans to third parties, etc.). This required inspection may cause delays in funding the originations pipeline, delays in selling those loans into the secondary market, and may unfavorably impact the fair value of related hedging activities. Additionally, in certain circumstances when there are uninsured losses, we may be responsible for repairs to the properties if not done by the homeowner.
The damage caused by these events to the properties that are either owned by us or underlie the loans serviced by us has not been fully determined and potential losses and assessment of potential insurance recoveries cannot be reasonably estimated at this time. However, we did experience an increase in the delinquencies of the related properties during the fourth quarter of 2017, which negatively impacted the fair value of these assets.
We currently maintain operating locations in Florida, Texas, and California. Certain office closures during the hurricanes impacted collection efforts, and also resulted in increased overtime once the offices re-opened. Further, higher call volume with customers impacted by the natural disasters has occurred, and a dedicated team focused on disaster-related calls and loss mitigation has been formed, which also has impacted compensation costs. These impacts were not significant to the current year results.
Regulatory Developments
For a summary of the regulatory framework under which we operate and recent regulatory developments, refer to the Laws and Regulations section of Part I, Item 1. Business.
Strategy
During 2016 and throughout 2017, our strategy was to move towards a fee-for-service model in our servicing business by increasing the proportion of subservicing activity in our business mix. Going forward, we expect to sell servicing rights to third parties on a more selective basis while continuing to grow our subservicing business with third-party servicing rights owners.

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In Servicing, the shift of our servicing portfolio from servicing to subservicing has resulted in, and is expected to continue to result in, a decline in revenue. Our ability to implement initiatives to reduce costs on pace with or faster than declining revenues is a key factor to us achieving a return to profitability within the servicing business. We have already achieved cost reductions in a number of areas, but there can be no assurance that we will be able to reduce costs so as to enable the servicing business to return to profitability in the near-term or at all. We intend to execute numerous initiatives to become a more customer centric organization aimed at improving our performance as an originator and servicer. We also continue to improve the efficiency of our origination operations, through such measures as better processes, site consolidation and improved use of technology. We are also concentrating on improving the performance of our servicing business by, for example, strengthening our internal control environment, lowering delinquency rates and improving standards and compliance. We plan to prioritize these initiatives over the pursuit of significant new servicing or subservicing opportunities, though over time as we improve operations we aim to be able to compete effectively and profitably for opportunities to subservice for others. Recent operating results have been negatively impacted by costs associated with matters within default servicing operations and costs associated with site consolidation plans, and we expect to continue to incur similar costs as we continue to optimize the platform and right-size the business.
In Originations, our goal is to achieve significant revenue growth over time, primarily from increased outbound contact efforts and improved retention. As we endeavor to expand our originations business, we expect that we will need to increase significantly the amount of purchase money loans we originate, particularly in our consumer direct channel. This will require us to enhance our brand awareness among potential customers, and we are working on plans to develop a digital marketing presence. We have recently brought in new leadership to lead this initiative, and believe our strategy will require us to hire a considerable number of new loan officers and other employees.
Our operating results have been negatively impacted by a number of factors, including a greater than anticipated decline in origination volumes as new leads, pull-through rates and recapture rates within the consumer lending channel have been below expectations. We continue to face challenges in our ability to achieve growth in the originations business as we transition from a principally refinance-focused strategy directed at our captive servicing portfolio to a strategy that also focuses on new customer acquisition and includes purchase money originations. We have been working to develop new lead sources leveraging digital and mobile technologies and investing and advertising in our Ditech brand, achieve deeper integration of our originations business with our servicing business to better identify viable customer opportunities and streamline and shorten processes in an effort to increase pull-through rates. Additionally, volumes and pricing in the correspondent and wholesale channels are being negatively impacted by a challenging business lending environment, our ability to attract talent to the wholesale channel and our ability to enter into flow arrangements to sell MSR acquired in those channels. As a result of these recent developments, management is closely monitoring performance of the originations segment in connection with our evaluation of the recoverability of our remaining goodwill and intangible assets.
In Reverse Mortgage, having exited the originations business, we are working to improve the efficiency of our servicing activities in order to reduce expected future losses. We have also been evaluating options for our reverse mortgage business, including the possibility of selling some or all of its assets or pursuing alternative solutions for the business that include collaboration with other parties.
Improving the effectiveness and efficiency of our information technology group is an important element of our strategy across all of our operations. We use numerous systems and incur considerable expense to support our lending, servicing, reverse and other business activities. We have initiated measures to reduce the complexity and cost of our information technology operations and are continuing our review of this function to identify further areas of opportunity.
Investments in MSR
Historically from time to time, to support our servicing business, we have bought or sold MSR; however, with a view to using our capital efficiently, in 2016 we began to limit our investment in MSR. Going forward, we expect to sell servicing rights to third parties on a more selective basis while continuing to grow our subservicing business with third-party servicing rights owners. However, we expect that from time to time we will sell MSR we now own or those we create in connection with our mortgage originations activities. We expect that normally we will retain the right to subservice such MSR sold by us, but we may also sell MSR with servicing released. We may also engage in other transactions to limit or reduce our investment in MSR, including sales of excess servicing spread.
In 2016 and 2017, we executed a number of transactions that helped us reduce our investment in MSR. In particular, we entered into a several transactions with NRM pursuant to which we sold MSR to NRM and were retained by NRM to subservice these and other MSR. Refer to Note 5 to the Consolidated Financial Statements for additional information on transactions with NRM. We may seek to sell additional MSR to NRM in the future and may also seek to enter into arrangements to sell MSR to other buyers. In 2017, we transferred MSR to NRM under a flow sale agreement related to mortgage loans with an aggregate UPB of $2.4 billion. Additionally, we simultaneously assigned servicing to NRM concurrent with the loan delivery to GSEs with respect to mortgage loans having an aggregate UPB of $6.4 billion for the year ended December 31, 2017.

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Operating Improvements
Since 2016, we have focused our efforts on improving our financial performance through increasing efficiency and cost reductions. During 2016, we initiated actions in connection with our continued efforts to enhance efficiencies and streamline processes, which included various organizational changes to the scale and proficiency of our leadership team and support functions, which continued into 2017. For example, we exited the reverse mortgage originations business effective January 2017 while maintaining our reverse mortgage servicing operations, and in July 2017 we announced certain site consolidation plans, as discussed previously. While our goals for 2018 continue to include expense reductions, there can be no assurance that we will be successful in reducing costs. In 2018, we expect to continue to incur severance and other expenses associated with the improvement of our business, and we may incur unexpected expenses, including expenses arising from unanticipated operational problems, legal and regulatory matters, and other matters that are beyond our control. If we are not successful in reducing our expenses, our results of operations, financial condition and liquidity could be materially adversely affected.
In addition to improving the financial performance of our operations, we are focused on ensuring that our servicing operations meet legal and regulatory requirements and our contractual servicing obligations and that we improve our servicing performance, as measured by the owners of the loans we service (such as GSEs) and by customers for whom we subservice. By some measures, such as delinquency rates for our mortgage loan servicing portfolio, during 2016 our servicing performance deteriorated significantly relative to our past performance and to that of other servicers following the introduction of new servicing technology, changes in servicing practices, site consolidation, and other developments; during 2017, we experienced modest improvement in certain servicing performance measures. The GSEs and other parties for whom we service or subservice regularly monitor our performance and communicate their observations and expectations to us. Several important such counterparties noted our recent performance deterioration and have requested that we improve various aspects of our performance, which we are endeavoring to do. In 2017, at Freddie Mac’s request, we completed the voluntary transfer of $640.6 million in unpaid principal balance of MSR relating to Freddie Mac mortgage loans that were 90 days or more delinquent to another special default servicer. Also in 2017 and at Freddie Mac's request, we completed the voluntary transfer of $4.2 billion in unpaid principal balance of MSR relating to Freddie Mac re-performing mortgage loans to another servicer. With a view to improving our performance, we have been enhancing our processes and have made management changes and introduced new procedures to track key performance metrics. We may need to make further enhancements to our people, processes or technologies to achieve acceptable levels of servicing performance and satisfy evolving legal and regulatory requirements and best practices. In addition, these enhancements could require significant unplanned expenditures that could adversely affect our financial results. We cannot be certain that our efforts to improve our servicing performance will have sufficient or timely results. If we are unable to improve our servicing performance metrics, we could face various material adverse consequences, including competitive disadvantage, the inability to win new subservicing business, the termination of servicing rights or subservicing contracts and GSEs or other counterparties asking us to transfer to other servicers, or otherwise limit or reduce, certain assets in our servicing portfolio.
We plan to continue to take actions across our businesses to improve efficiency, identify revenue opportunities and reduce expenses. However, we also expect to incur certain other costs. For example, we have been making investments and taking other measures to enhance the structure and effectiveness of our compliance and risk processes and associated programs across the Company, with a view to improving our customers’ experience, our compliance results and our performance and ratings under our subservicing contracts and our obligations to GSEs and loan investors. We intend to make additional investments and process improvements. The mortgage industry generally, including our Company, is subject to extensive and evolving regulation and continues to be under scrutiny from federal and state regulators, enforcement agencies and other government entities. This oversight has led, in our case, to ongoing investigations and examinations of several of our business areas, and we have been and will be required to dedicate internal and external resources to providing information to and otherwise cooperating with such government entities. In addition, we have incurred, and expect that in the future we will incur, significant expenses (i) associated with the remediation or other resolution of breaches, findings or concerns raised by regulators, enforcement agencies, other government entities, customers or ourselves, (ii) to enhance the effectiveness of our risk and compliance program and (iii) to address operational issues and other events of noncompliance we have discovered, or may in the future discover, through our compliance program or otherwise. Investments to enhance our operational, compliance and risk processes may also result in an improved customer experience and competitive advantage for our business.
Emergence from Reorganization Proceedings
On November 30, 2017, Walter Investment Management Corp. filed a Bankruptcy Petition under the Bankruptcy Code to pursue the Prepackaged Plan announced on November 6, 2017. On January 17, 2018, the Bankruptcy Court approved the amended Prepackaged Plan and on January 18, 2018, entered a confirmation order approving the Prepackaged Plan. On February 9, 2018, the Prepackaged Plan became effective pursuant to its terms and Walter Investment Management Corp. emerged from the Chapter 11 Case. The Company continued to operate throughout the Chapter 11 Case and upon emergence changed its name to Ditech Holding Corporation. From and after effectiveness of the Prepackaged Plan, the Company has continued, in its previous organizational form, to carry out its business.

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Common Stock
On the Effective Date, all shares of our predecessor common stock were canceled and 4,252,500 shares of successor common stock, par value $0.01 per share, were issued to the predecessor stockholders and Convertible Noteholders. We reserved 3,193,750 shares of common stock for issuance under our equity incentive plan.
Preferred Stock
On the Effective Date, we issued 100,000 shares of Convertible Preferred Stock to the Senior Noteholders, which are mandatorily convertible into 11,497,500 shares of common stock (a conversion multiple of 114.9750) upon the earliest of (i) February 9, 2023, (ii) at any time following one year after the Effective Date, the time that the volume weighted-average pricing of the common stock exceeds 150% of the conversion price per share for at least 45 trading days in a 60 consecutive trading day period, including each of the last 20 days in such 60 consecutive trading day period, and (iii) a change of control transaction in which the consideration paid or payable per share of common stock is greater than or equal to the conversion price per share, which, subject to adjustment, is $8.6975. The shares of Convertible Preferred Stock are also convertible at the option of the holder thereof or upon the affirmative vote of at least 66 2/3% of the Convertible Preferred Stock then outstanding.
In the event of a voluntary or involuntary liquidation, winding-up or dissolution of the Company, each holder of Convertible Preferred Stock will be entitled to receive the greater of (i) a liquidation preference per share of Convertible Preferred Stock, prior to any distribution with respect to any other equity security of the Company, equal to the Liquidation Preference, and (ii) the amount payable per share, participating on an “as converted” basis, upon liquidation to the holders of the successor common stock. The “Liquidation Preference” equals (i) the face amount of the Convertible Preferred Stock, increased by (ii) the amount of interest that would have accumulated on the face amount of the Convertible Preferred Stock up to (but excluding) the date of any liquidation, winding-up or dissolution of the Company, compounding quarterly at a rate of seven percent (7%) per annum. Thereafter, holders of Convertible Preferred Stock will have no right or claim to the remaining assets, if any, of the Company.
During the period commencing on the Effective Date and terminating on February 9, 2020, for so long as any preferred stock is outstanding, only the holders of preferred stock, voting separately as a class, will be entitled to elect Preferred Stock Directors, and Preferred Stock Directors will be nominated by, and Preferred Stock Director vacancies will be filled by, the Preferred Stock Directors then in office. During such period, only the holders of the common stock, voting separately as a class, will be entitled to elect the Common Stock Directors, and Common Stock Directors will be nominated by, and Common Stock Director vacancies will be filled by, the Common Stock Directors then in office. Following such period, all directors will be elected by holders of common stock and any other class or series of stock (including the preferred stock) entitled to vote thereon, and will be nominated by the Board of Directors or, in accordance with the Company's bylaws, by the stockholders.
Warrants
On the Effective Date, we issued to the predecessor stockholders of our common stock, as well as the Convertible Noteholders, Series A Warrants to purchase up to an aggregate of 7,245,000 shares of common stock at $20.63 per share and Series B Warrants to purchase up to an aggregate of 5,748,750 shares common stock at $28.25 per share. All unexercised warrants expire and the rights of the warrant holders to purchase shares of common stock terminate on February 9, 2028, at 5:00 p.m., Eastern Standard Time, which is the 10th anniversary of the Effective Date.
2018 Credit Agreement
On the Effective Date, pursuant to the terms of the Prepackaged Plan, we entered into the 2018 Credit Agreement. The 2018 Credit Agreement provides for the 2018 Term Loan maturing on June 30, 2022 in an amount of approximately $1.2 billion. The 2018 Term Loan bears interest at a rate per annum equal to, at our option, (i) LIBOR plus 6.00% (with a LIBOR “floor” of 1.00%) or (ii) an alternate base rate plus 5.00% (which interest will be payable (a) with respect to any alternate base rate loan, the last business day of each March, June, September and December, and (b) with respect to any LIBOR loan, the last day of the interest period applicable to the borrowing of which such loan is a part). The 2018 Term Loan is guaranteed by substantially all of our wholly-owned domestic subsidiaries and secured by a first priority pledge on substantially all of our assets and the assets of the subsidiary guarantors, in each case subject to certain exceptions. See Liquidity and Capital Resources for further discussion of the impact to our liquidity and the recent amendment to the 2018 Credit Agreement.

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Second Lien Notes
On the Effective Date, pursuant to the terms of the Prepackaged Plan, we entered into an indenture and issued $250.0 million aggregate principal amount of the Company’s 9.00% Second Lien Notes due 2024. The Second Lien Notes will mature on December 31, 2024. Interest on the Second Lien Notes will accrue at a rate of 9.00% per annum payable semi-annually in arrears on June 15 and December 15 of each year. The Second Lien Notes require payment of interest in cash, except that interest on up to $50.0 million principal amount (plus previously accrued PIK interest payable), at our election, may be paid by increasing the principal amount of the outstanding notes or by issuing additional notes. The terms of the 2018 Credit Agreement require that we exercise such election. The Second Lien Notes are secured on a second-priority basis by substantially all of our assets and our subsidiary guarantors. See Liquidity and Capital Resources for further discussion of the impact to our liquidity.
Termination of Rights Agreement
On the Effective Date, we entered into Amendment No. 2 to the Rights Agreement with Computershare, which accelerated the scheduled expiration date of the Rights (as defined in the Rights Agreement) to the Effective Date. The rights issued pursuant to the Rights Agreement, which were also canceled by operation of the Prepackaged Plan, have expired and are no longer outstanding, and the Rights Agreement has terminated. Refer to the Rights Agreement section under Part I, Item 1. Business for a more detailed discussion of the termination of the Rights Agreement.
Registration Rights Agreement
On the Effective Date and pursuant to the Prepackaged Plan, we entered into a Registration Rights Agreement that provided certain registration rights to certain parties (together with any person or entity that becomes a party to the Registration Rights Agreement pursuant to the terms thereof) that received shares of our common stock, warrants and mandatorily convertible preferred stock on the Effective Date as provided in the Prepackaged Plan. The Registration Rights Agreement provides such persons with registration rights for the holders’ registrable securities (as defined in the Registration Rights Agreement).
Pursuant to the Registration Rights Agreement, we agreed to file, within 60 days of the receipt of a request by holders of at least 40% of the registrable securities, an initial shelf registration statement covering resales of the registrable securities held by the holders. Subject to limited exceptions, we are required to maintain the effectiveness of any such registration statement until the earlier of (i) three years following the Effective Date and (ii) the date that all registrable securities covered by the shelf registration statement are no longer registrable securities.
In addition, holders with rights under the Registration Rights Agreement beneficially holding 10% or more of our common stock have the right to a Demand Registration to effect the registration of any or all of the registrable securities and/or effectuate the distribution of any or all of their registrable securities by means of an underwritten shelf takedown offering. We are not obligated to effect more than three Demand Registrations, and we need not comply with such a request if (i) the aggregate gross proceeds from such a sale will not exceed $25 million, unless the Demand Registration includes all of the then-outstanding registrable securities or (ii) a registration statement shall have previously been declared effective by the SEC within 90 days preceding the date of such request.
Holders with rights under the Registration Rights Agreement also have customary piggyback registration rights, subject to the limitations set forth in the Registration Rights Agreement.
These registration rights are subject to certain conditions and limitations, including the right of the underwriters to limit the number of shares to be included in a registration statement and our right to delay or withdraw a registration statement under certain circumstances. We will generally pay the registration expenses in connection with our obligations under the Registration Rights Agreement, regardless of whether a registration statement is filed or becomes effective. The registration rights granted in the Registration Rights Agreement are subject to customary indemnification and contribution provisions, as well as customary restrictions such as blackout periods.
Warehouse Facilities
On the Effective Date and for a period of one year following the Effective Date, we will continue to receive financing pursuant to a master repurchase agreement providing for a maximum committed capacity sub-limit of $1.0 billion used principally to fund our mortgage loan originations business and a master repurchase agreement providing for a maximum committed capacity sub-limit of $800.0 million used principally to fund the purchase of home equity conversion mortgage loans and foreclosed real estate from certain securitization pools. In addition to the foregoing master repurchase agreement sub-limits, these facilities, the DAAT Facility and the DPATII Facility are subject, collectively, to a combined maximum outstanding amount of $1.9 billion. See Liquidity and Capital Resources for further discussion of the impact to our liquidity and recent amendments to these facilities.

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Servicer Advance Financing Facilities
On February 12, 2018, the Securities Master Repurchase Agreement issued under the DIP Warehouse Facilities was terminated and repaid with proceeds from the issuance of variable funding notes under two new servicing advance facilities, the DAAT Facility and DPATII Facility. The DAAT Facility and the DPATII Facility have maximum capacity sub-limits of $475.0 million and $75.0 million, respectively. These facilities, together with our master repurchase agreement used to fund originations and our master repurchase agreement used to finance the repurchases of certain HECMs and real estate owned from Ginnie Mae securitization pools, are subject, collectively, to a combined maximum outstanding amount of $1.9 billion.
Fresh Start Accounting
We believe that we will meet the conditions to qualify under GAAP for fresh start accounting, and accordingly expect to adopt fresh start accounting effective February 10, 2018. The financial statements for the periods prior to this date do not include the effect of any changes in our capital structure or changes in the fair value of assets and liabilities as a result of fresh start accounting. The actual impact at emergence on February 9, 2018 will be reported in our Form 10-Q for the first quarter of 2018. Refer to Note 3 to the Consolidated Financial Statements for additional information regarding the application of fresh start accounting.
Post-Emergence Board of Directors
On the Effective Date, in accordance with the terms of the Prepackaged Plan confirmed by the Bankruptcy Court, the Board of Directors of the reorganized company consists of nine members, with six directors designated by the Senior Noteholders (David Ascher, Seth Bartlett, John Brecker, Thomas Marano, Thomas Miglis and Samuel Ramsey) and three continuing directors designated by us (George M. Awad, Daniel Beltzman and Neal Goldman). During the period commencing on the Effective Date and terminating on February 9, 2020, for so long as any preferred stock is outstanding, only the holders of preferred stock, voting separately as a class, will be entitled to elect Preferred Stock Directors, and Preferred Stock Directors will be nominated by, and Preferred Stock Director vacancies will be filled by, the Preferred Stock Directors then in office. During such period, only the holders of the common stock, voting separately as a class, will be entitled to elect the Common Stock Directors, and Common Stock Directors will be nominated by, and Common Stock Director vacancies will be filled by, the Common Stock Directors then in office.
Following such period, all directors will be elected by holders of common stock and any other class or series of stock (including the preferred stock) entitled to vote thereon, and will be nominated by the Board of Directors or, in accordance with the Company's bylaws, by the stockholders.
Financing Transactions
Refer to the Liquidity and Capital Resources section below for a description of our financing transactions.

63



Results of Operations — Comparison of Consolidated Results of Operations (dollars in thousands):
 
 
For the Years Ended 
 December 31,
 
Variance
 
 
2017
 
2016
 
$
 
%
REVENUES
 
 
 
 
 
 
 
 
Net servicing revenue and fees
 
$
346,682

 
$
340,991

 
$
5,691

 
2
 %
Net gains on sales of loans
 
284,391

 
409,448

 
(125,057
)
 
(31
)%
Net fair value gains on reverse loans and related HMBS obligations
 
42,419

 
59,022

 
(16,603
)
 
(28
)%
Interest income on loans
 
41,195

 
45,700

 
(4,505
)
 
(10
)%
Insurance revenue
 
3,963

 
41,968

 
(38,005
)
 
(91
)%
Other revenues
 
112,610

 
98,588

 
14,022

 
14
 %
Total revenues
 
831,260

 
995,717

 
(164,457
)
 
(17
)%
 
 
 
 
 
 
 
 


EXPENSES
 
 
 
 
 
 
 


General and administrative
 
596,838

 
619,772

 
(22,934
)
 
(4
)%
Salaries and benefits
 
384,814

 
520,357

 
(135,543
)
 
(26
)%
Interest expense
 
261,244

 
255,781

 
5,463

 
2
 %
Depreciation and amortization
 
40,764

 
59,426

 
(18,662
)
 
(31
)%
Reorganization items
 
37,645

 

 
37,645

 
n/m

Goodwill and intangible assets impairment
 

 
326,286

 
(326,286
)
 
(100
)%
Other expenses, net
 
11,061

 
10,530

 
531

 
5
 %
Total expenses
 
1,332,366

 
1,792,152

 
(459,786
)
 
(26
)%
 
 
 
 
 
 
 
 


OTHER GAINS (LOSSES)
 
 
 
 
 
 
 


Gain on sale of business
 
67,734

 

 
67,734

 
n/m

Net gains (losses) on extinguishment of debt
 
(6,111
)
 
14,662

 
(20,773
)
 
(142
)%
Other net fair value gains (losses)
 
2,008

 
(4,234
)
 
6,242

 
(147
)%
Other
 
7,219

 
(3,811
)
 
11,030

 
(289
)%
Total other gains
 
70,850

 
6,617

 
64,233

 
n/m

 
 
 
 
 
 
 
 


Loss before income taxes
 
(430,256
)
 
(789,818
)
 
359,562

 
(46
)%
Income tax expense (benefit)
 
(3,357
)
 
44,040

 
(47,397
)
 
(108
)%
Net loss
 
$
(426,899
)
 
$
(833,858
)
 
$
406,959

 
(49
)%

64



Net Servicing Revenue and Fees
A summary of net servicing revenue and fees is provided below (dollars in thousands):
 
 
For the Years Ended 
 December 31,
 
Variance
 
 
2017
 
2016
 
$
 
%
Servicing fees
 
$
491,531

 
$
680,002

 
$
(188,471
)
 
(28
)%
Incentive and performance fees
 
59,660

 
70,197

 
(10,537
)
 
(15
)%
Ancillary and other fees
 
83,753

 
98,055

 
(14,302
)
 
(15
)%
Servicing revenue and fees
 
634,944

 
848,254

 
(213,310
)
 
(25
)%
Changes in valuation inputs or other assumptions (1)
 
(134,573
)
 
(243,645
)
 
109,072

 
(45
)%
Other changes in fair value (2)
 
(131,673
)
 
(236,831
)
 
105,158

 
(44
)%
Change in fair value of servicing rights
 
(266,246
)
 
(480,476
)
 
214,230

 
(45
)%
Amortization of servicing rights
 
(21,954
)
 
(21,801
)
 
(153
)
 
1
 %
Change in fair value of servicing rights related liabilities
 
(62
)
 
(4,986
)
 
4,924

 
(99
)%
Net servicing revenue and fees
 
$
346,682

 
$
340,991

 
$
5,691

 
2
 %
__________
(1)
Represents the net 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.
We recognize servicing revenue and fees for servicing performed on behalf of third parties in which we either own the servicing right or act as subservicer. This revenue includes contractual fees earned on the serviced loans, incentive and performance fees, including those earned based on the performance of certain loans or loan portfolios serviced by us, loan modification fees and asset recovery income, and ancillary fees such as late fees and expedited payment fees. Servicing revenue and fees are adjusted for amortization, the change in fair value of servicing rights and the change in fair value of servicing rights related liabilities.
Servicing fees decreased $188.5 million in 2017 as compared to 2016 primarily due to the reduction in our owned MSR portfolio driven by MSR sales in 2017 and the fourth quarter of 2016 combined with runoff of the portfolio. Incentive and performance fees decreased $10.5 million in 2017 as compared to 2016 due primarily to lower fees earned under HAMP and lower asset recovery income. Ancillary and other fees decreased $14.3 million in 2017 as compared to 2016 due to lower late fee income and convenience and expedited payment fees resulting from a smaller MSR portfolio and our having waived late fees for customers located within disaster areas during the end of 2017. In addition, there was a decrease in insurance premium service fees as a result of the sale of substantially all of our insurance agency business on February 1, 2017.
Net Gains on Sales of Loans
Net gains on sales of loans include realized and unrealized gains and losses on loans held for sale, fair value adjustments on IRLCs and other related freestanding derivatives, values of the initial capitalized servicing rights, and a provision for the repurchase of loans. Net gains on sales of loans decreased $125.1 million in 2017 as compared to 2016 primarily due to an overall lower volume of locked loans.
Net Fair Value Gains on Reverse Loans and Related HMBS Obligations
Net fair value gains on reverse loans and related HMBS obligations include the contractual interest income earned on reverse loans, including those not yet securitized or bought out of securitization pools, net of interest expense on HMBS related obligations, and the change in fair value of these assets and liabilities. Refer to the Reverse Mortgage segment discussion under our Business Segment Results section below for additional information including a detailed breakout of the components of net fair value gains on reverse loans and related HMBS obligations.

65



Net fair value gains on reverse loans and related HMBS obligations decreased $16.6 million in 2017 as compared to 2016 primarily due to an increase in net non-cash fair value losses and a decrease in cash generated by the origination, purchase and securitization of HECMs, partially offset by an increase in net interest income. Net non-cash fair value losses increased resulting from valuation model assumption adjustments related to buyout loans as well as the impact of an increased level of buyout loans and changes in market pricing in 2017. Cash generated by the origination, purchase and securitization of HECMs decreased due to our exit from the reverse mortgage originations business in early 2017, partially offset by a shift in mix from lower margin new originations to higher margin tails. Net interest income increased primarily as a result of a decrease in HMBS related obligations due to an increase in buyouts, partially offset by an increase in nonperforming reverse loans.
Interest Income on Loans
We earn interest income on the residential loans held in the Residual Trusts and on our unencumbered mortgage loans, both of which are accounted for at amortized cost. Interest income on loans decreased $4.5 million in 2017 as compared to 2016 primarily due to runoff of the overall mortgage loan portfolio and a lower average yield on loans due to an increase in delinquencies that are 90 days or more past due.
Provided below is a summary of the average balances of residential loans carried at amortized cost and the related interest income and average yields (dollars in thousands):
 
 
For the Years Ended 
 December 31,
 

 
 
2017
 
2016
 
Variance
Residential loans at amortized cost
 
 
 
 
 
 
Interest income
 
$
41,195

 
$
45,700

 
$
(4,505
)
Average balance (1)(2)
 
468,721

 
507,712

 
(38,991
)
Average yield
 
8.79
%
 
9.00
%
 
(0.21
)%
__________
(1)
Average balance is calculated as the average recorded investment in the loans at the beginning of each month during the year.
(2)
Average balance excludes loans subject to repurchase from Ginnie Mae as we do not own these mortgage loans and, therefore, are not entitled to any interest income they generate.
Insurance Revenue
Insurance revenue consists of commission income and fees earned on voluntary and lender-placed insurance policies issued and other products sold to borrowers, net of estimated future policy cancellations. Commission income is based on a percentage of the premium of the insurance policy issued, which varies based on the type of policy. Insurance revenue decreased $38.0 million in 2017 as compared to 2016 due primarily to the sale of our principal insurance agency and substantially all of our insurance agency business on February 1, 2017. As a result of this sale, we no longer receive any insurance commissions on lender-placed insurance policies. Commencing February 1, 2017, another insurance agency owned by us began to provide insurance marketing services to a third party with respect to voluntary insurance policies, including hazard insurance. This insurance agency receives premium-based commissions for its insurance marketing services, which are recognized in other revenues. Refer to Note 4 to the Consolidated Financial Statements for additional information on the sale of our insurance business.
Other Revenues
Other revenues consist primarily of origination fee income, interest income on cash and cash equivalents, changes in the fair value of charged-off loans and, beginning in 2017, insurance marketing commissions. Other revenues increased $14.0 million in 2017 as compared to 2016 due primarily to $15.3 million in higher other interest income and $7.8 million in insurance marketing commissions recognized in 2017, partially offset by $7.4 million in lower origination fee income due to an overall lower volume of funded loans during 2017.

66



General and Administrative
General and administrative expenses decreased $22.9 million in 2017 as compared to 2016 resulting primarily from decreases of $26.1 million in contractor costs related to our servicing platform conversion that occurred in 2016 as well as efforts to reduce contractor costs throughout our operations, $24.6 million in servicer interest expense primarily due to the reduction in our owned MSR portfolio, $14.6 million in transformation expenses incurred in 2016, $13.0 million in legal fees due to lower litigation and settlement costs, $11.5 million in advance loss provision due to additional reserves established in 2016, $10.1 million in postage and printing costs, $8.9 million in advertising expenses resulting from a decrease in mail solicitations and a strategy shift in lead acquisition for our Originations segment and our exit from the reverse mortgage originations business in early 2017 and $15.0 million in other cost savings; partially offset by increases of $50.0 million related to our debt restructuring initiative in 2017, $22.7 million in charges associated with default servicing, $10.0 million in accruals for lease cancellation costs related to site closures, $5.0 million in lower reduction to the representations and warranty reserve resulting from assumption updates and $4.3 million in loan origination expense due to an increase in loan processing and underwriting expenses and higher net appraisal expense in 2017.
Salaries and Benefits
Salaries and benefits decreased $135.5 million in 2017 as compared to 2016 primarily due to decreases of $68.7 million in compensation and benefits resulting primarily from a lower average headcount driven by site closures and various organizational changes to the scale and proficiency of the leadership team and support functions as well as our exit from the reverse mortgage originations business in early 2017, $22.3 million in severance due to the departure of certain senior executives and workforce optimization accruals in 2016, $19.9 million primarily related to a change in the commissions structure, $14.3 million in bonus accruals, $8.8 million in overtime driven by cost reduction measures and $4.4 million in stock compensation expense related to increased forfeitures and fewer grants in 2017. Headcount decreased by approximately 1,100 full-time employees from approximately 4,900 at December 31, 2016 to approximately 3,800 at December 31, 2017.
Interest Expense
We incur interest expense on our corporate debt, servicing advance liabilities, master repurchase agreements, and mortgage-backed debt issued by the Residual Trusts, all of which are accounted for at amortized cost. Interest expense increased $5.5 million in 2017 as compared to 2016 driven by an increase in interest expense related to master repurchase agreements, offset in part by decreases in interest expense related to servicing advance liabilities and corporate debt. Interest expense related to master repurchase agreements increased primarily as a result of the amortization of debt issuance costs incurred in connection with the DIP Warehouse Facilities, which are being amortized over the estimated bankruptcy period of two months, and a higher average cost of debt related to higher LIBOR rates and interest rate increases on our warehouse facilities during 2017. Interest expense related to servicing advance liabilities decreased due primarily to the net pay down of our advance facilities resulting from advance reimbursements received in connection with the sale of loans and servicing rights during 2017 and the fourth quarter of 2016 and the retirement and termination of certain advance facilities in exchange for the DIP Warehouse Facilities, partially offset by the amortization of debt issuance costs related to the DIP Warehouse Facilities. Interest expense related to corporate debt decreased as a result of payments made on our 2013 Term Loan during 2017. Refer to the Liquidity and Capital Resources section below for additional information on our debt.

67



Provided below is a summary of the average balances of our corporate debt, servicing advance liabilities, master repurchase agreements, and mortgage-backed debt of the Residual Trusts, as well as the related interest expense and average rates (dollars in thousands):
 
 
For the Years Ended 
 December 31,
 
 
 
 
2017
 
2016
 
Variance
Corporate debt (1)
 
 
 
 
 
 
Interest expense
 
$
134,661

 
$
144,171

 
$
(9,510
)
Average balance (2)
 
2,093,800

 
2,170,296

 
(76,496
)
Average rate
 
6.43
%
 
6.64
%
 
(0.21
)%
 
 
 
 
 
 
 
Servicing advance liabilities (3)
 
 
 
 
 
 
Interest expense
 
$
27,966

 
$
40,038

 
$
(12,072
)
Average balance (2)
 
607,620

 
1,084,171

 
(476,551
)
Average rate
 
4.60
%
 
3.69
%
 
0.91
 %
 
 
 
 
 
 
 
Master repurchase agreements (4)
 
 
 
 
 
 
Interest expense
 
$
73,008

 
$
43,263

 
$
29,745

Average balance (2)
 
1,244,727

 
1,243,547

 
1,180

Average rate
 
5.87
%
 
3.48
%
 
2.39
 %
 
 
 
 
 
 
 
Mortgage-backed debt of the Residual Trusts (3)
 
 
 
 
 
 
Interest expense
 
$
25,609

 
$
28,309

 
$
(2,700
)
Average balance (5)
 
411,123

 
454,467

 
(43,344
)
Average rate
 
6.23
%
 
6.23
%
 
0.00
 %
__________
(1)
Corporate debt includes our 2013 Term Loan, Senior Notes and Convertible Notes. Corporate debt activities are included in the Other non-reportable segment.
(2)
Average balance for corporate debt, servicing advance liabilities and master repurchase agreements is calculated as the average daily carrying value.
(3)
Servicing advance liabilities and mortgage-backed debt of the Residual Trusts are held by our Servicing segment.
(4)
Master repurchase agreements are held by the Originations and Reverse Mortgage segments.
(5)
Average balance for mortgage-backed debt of the Residual Trusts is calculated as the average carrying value at the beginning of each month during the year.
Depreciation and Amortization
Depreciation and amortization decreased $18.7 million in 2017 as compared to 2016 primarily due to the sale of assets related to our insurance business in the first quarter of 2017 and as a result of certain assets having reached the end of their estimated useful lives at the end of 2016.
Reorganization Items
We recorded reorganization items of $37.6 million that were directly attributable to the Chapter 11 Case during 2017. These expenses resulted primarily from the write-off of $34.4 million of costs related to previously issued debt and $3.1 million of legal and professional fees.
Goodwill and Intangible Assets Impairment
We recorded $326.3 million in goodwill and intangible assets impairment charges during 2016. The impairment charges were the result of certain market, industry and company-specific matters as discussed in more detail in Note 15 to the Consolidated Financial Statements.
Gain on Sale of Business
Gain on sale of business of $67.7 million during 2017 relates to the sale of our principal insurance agency and substantially all of our insurance agency business on February 1, 2017.

68



Net Gains (Losses) on Extinguishment of Debt
Net losses on extinguishment of debt of $6.1 million during 2017 resulted from the write-off of deferred debt issuance costs related to the termination of advance facilities and warehouse facilities in exchange for the DIP Warehouse Facilities, and the write-off of deferred debt issuance costs and debt discount related to payments made on the 2013 Term Loan, each in connection with the Restructuring.
Net gains on extinguishment of debt of $14.7 million during 2016 were primarily attributable to the repurchase of a portion of our Convertible Notes with a carrying value of $39.3 million.
Other Net Fair Value Gains (Losses)
Other net fair value gains (losses) consist primarily of fair value gains and losses on the assets and liabilities of the Non-Residual Trusts and fluctuates generally based on changes in prepayment speeds, default rates, loss severity, LIBOR rates and discount rates. Other net fair value gains (losses) increased $6.2 million to a gain in 2017 as compared to a loss in 2016 driven by improved default rate assumptions and an increase in the LIBOR rate for loans and bonds related to the Non-Residual Trusts, partially offset by a 32 bps increase in the discount rate of mortgage loans related to Non-Residual Trusts during 2017.
Other Gains (Losses)
We recorded other gains of $7.2 million in 2017 in connection with our counterparty under the Clean-up Call Agreement having fulfilled its obligation for the mandatory clean-up call of one of the remaining Non-Residual Trusts, resulting in the subsequent deconsolidation of the trust. Refer to Note 6 to the Consolidated Financial Statements for additional information on the deconsolidation of the Non-Residual Trusts.
Income Tax Expense (Benefit)
We recorded income tax benefit of $3.4 million in 2017 as compared to income tax expense of $44.0 million in 2016. The income tax expense incurred during 2016 resulted from our having recorded a $343.2 million valuation allowance against our deferred tax assets, which was offset in part by an income tax benefit related to the net loss. The income tax benefit recognized during 2017 resulted primarily from adjustments to reduce the valuation allowance due to tax law changes under the Tax Act, offset in part by tax expense related to goodwill and nominal current state tax. The tax benefit related to the net book loss was fully offset by a valuation allowance for the year ended December 31, 2017.
Financial Condition — Comparison of Consolidated Financial Condition at December 31, 2017 to December 31, 2016
Our total assets and total liabilities decreased by $2.3 billion and $1.9 billion, respectively, at December 31, 2017 as compared to December 31, 2016. The most significant changes in assets and liabilities are described below.
Residential loans at amortized cost increased $320.2 million primarily as a result of a $358.1 million increase in loans subject to repurchase from Ginnie Mae, offset in part by portfolio runoff of mortgage loans held by the Residual Trusts. As the amount of loans securitized with Ginnie Mae increases and the portfolio continues to season, the amount of loans subject to repurchase from Ginnie Mae recorded on the consolidated balance sheets will continue to increase, offset by actual repurchases of, or payments received on, these loans.
Residential loans at fair value decreased $1.7 billion and warehouse borrowings, mortgage-backed debt and HMBS related obligations decreased $1.7 billion in the aggregate primarily as a result of runoff of the reverse loan portfolio due to our exit from the reverse mortgage originations business in January 2017, runoff of mortgage loans held for sale due to lower mortgage loan originations volume, and runoff of the mortgage loans related to Non-Residual Trusts.
Servicer and protective advances decreased $381.9 million and servicing advance liabilities, which are utilized to finance servicer and protective advances, decreased $299.8 million primarily as a result of advance reimbursements received in connection with Freddie Mac loan sales and owned MSR sales as well as continued investor reimbursements on advance claims. Advances collected are used to settle servicing advance liabilities balances outstanding.
Servicing rights decreased $256.5 million primarily as a result of fair value losses, sales and runoff of the portfolio.
Payables and accrued liabilities increased $235.5 million primarily as a result of a $358.1 million increase in the liability for loans subject to repurchase from Ginnie Mae, offset in part by a decrease in employee-related liabilities from a reduction in headcount, in addition to decreases in certain liabilities related to our originations business due to a lower volume of sold loans and a change in Fannie Mae's invoicing process such that fees are paid in the month of sale as opposed to in the subsequent month.

69



Corporate debt decreased $914.3 million primarily due to the reclassification of the balances of our Senior Notes and Convertible Notes to liabilities subject to compromise on the consolidated balance sheets at December 31, 2017 as a result of the Chapter 11 Case. Refer to Note 3 to the Consolidated Financial Statements for detail of the liabilities subject to compromise. In addition, we made principal payments on the 2013 Term Loan of $186.9 million during 2017.
At December 31, 2016, the assets and liabilities related to the insurance business were reclassified to assets held for sale of $71.1 million and liabilities held for sale of $2.4 million as a result of our having executed a stock purchase agreement for the sale of substantially all of our insurance agency business. The sale was completed on February 1, 2017 and the related assets and liabilities were removed from our balance sheet.
Non-GAAP Financial Measures
We manage our company in three reportable segments: Servicing, Originations and Reverse Mortgage. We evaluate the performance of our business segments through the following measures: income (loss) before income taxes, Adjusted Earnings (Loss), and Adjusted EBITDA. Management considers Adjusted Earnings (Loss) and Adjusted EBITDA, both non-GAAP financial measures, to be important in the evaluation of our business segments and of the Company as a whole, as well as for allocating capital resources to our segments. Adjusted Earnings (Loss) and Adjusted EBITDA are supplemental metrics utilized by management to assess the underlying key drivers and operational performance of the continuing operations of the business. In addition, analysts, investors, and creditors may use these measures when analyzing our operating performance. Adjusted Earnings (Loss) and Adjusted EBITDA are not presentations made in accordance with GAAP and our use of these measures and terms may vary from other companies in our industry.
Adjusted Earnings (Loss) is defined as income (loss) before income taxes, plus changes in fair value due to changes in valuation inputs and other assumptions; goodwill and intangible assets impairment, if any; a portion of the provision for curtailment expense, net of expected third-party recoveries, if applicable; share-based compensation expense or benefit; non-cash interest expense; exit costs; estimated settlements and costs for certain legal and regulatory matters; fair value to cash adjustments for reverse loans; and select other cash and non-cash adjustments primarily including severance, gain or loss on extinguishment of debt, the net impact of the Non-Residual Trusts, transaction costs, reorganization items and certain non-recurring costs, as applicable. Adjusted Earnings (Loss) excludes unrealized changes in fair value of MSR that are based on projections of expected future cash flows and prepayments. Adjusted Earnings (Loss) includes both cash and non-cash gains from mortgage loan origination activities. Non-cash gains are net of non-cash charges or reserves provided. Adjusted Earnings (Loss) includes cash generated from reverse mortgage origination activities for the periods during which we were originating reverse mortgages. Adjusted Earnings (Loss) may from time to time also include other adjustments, as applicable based upon facts and circumstances, consistent with the intent of providing investors with a supplemental means of evaluating our operating performance.
Adjusted EBITDA eliminates the effects of financing, income taxes and depreciation and amortization. Adjusted EBITDA is defined as income (loss) before income taxes, plus amortization of servicing rights and other fair value adjustments; interest expense on corporate debt; depreciation and amortization; goodwill and intangible assets impairment, if any; a portion of the provision for curtailment expense, net of expected third-party recoveries, if applicable; share-based compensation expense or benefit; exit costs; estimated settlements and costs for certain legal and regulatory matters; fair value to cash adjustments for reverse loans; and select other cash and non-cash adjustments primarily including the net provision for the repurchase of loans sold, non-cash interest income, severance, gain or loss on extinguishment of debt, interest income on unrestricted cash and cash equivalents, the net impact of the Non-Residual Trusts, the provision for loan losses, Residual Trust cash flows, transaction costs, reorganization items, servicing fee economics, and certain non-recurring costs, as applicable. Adjusted EBITDA includes both cash and non-cash gains from mortgage loan origination activities. Adjusted EBITDA excludes the impact of fair value option accounting on certain assets and liabilities and includes cash generated from reverse mortgage origination activities for the periods during which we were originating reverse mortgages. Adjusted EBITDA may also include other adjustments, as applicable based upon facts and circumstances, consistent with the intent of providing investors a supplemental means of evaluating our operating performance.
Adjusted Earnings (Loss) and Adjusted EBITDA should not be considered as alternatives to (i) net income (loss) or any other performance measures determined in accordance with GAAP or (ii) operating cash flows determined in accordance with GAAP. Adjusted Earnings (Loss) and Adjusted EBITDA have important limitations as analytical tools, and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP. Some of the limitations of these metrics are:
Adjusted Earnings (Loss) and Adjusted EBITDA do not reflect cash expenditures for long-term assets and other items that have been and will be incurred, future requirements for capital expenditures or contractual commitments;
Adjusted Earnings (Loss) and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

70



Adjusted Earnings (Loss) and Adjusted EBITDA do not reflect certain tax payments that represent reductions in cash available to us;
Adjusted Earnings (Loss) and Adjusted EBITDA do not reflect any cash requirements for the assets being depreciated and amortized that may have to be replaced in the future;
Adjusted Earnings (Loss) and Adjusted EBITDA do not reflect non-cash compensation that is and will remain a key element of our overall long-term incentive compensation package;
Adjusted Earnings (Loss) and Adjusted EBITDA do not reflect the change in fair value due to changes in valuation inputs and other assumptions;
Adjusted EBITDA does not reflect the change in fair value resulting from the realization of expected cash flows; and
Adjusted EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our corporate debt, although it does reflect interest expense associated with our servicing advance liabilities, master repurchase agreements, mortgage-backed debt, and HMBS related obligations.
Because of these limitations, Adjusted Earnings (Loss) and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted Earnings (Loss) and Adjusted EBITDA only as supplements. Users of our financial statements are cautioned not to place undue reliance on Adjusted Earnings (Loss) and Adjusted EBITDA.
The following tables reconcile Adjusted Loss and Adjusted EBITDA to net loss, which we consider to be the most directly comparable GAAP financial measure to Adjusted Loss and Adjusted EBITDA (in thousands):
Adjusted Loss
 
 
For the Year Ended 
 December 31, 2017
Net loss
 
$
(426,899
)
Adjust for income tax benefit
 
(3,357
)
Loss before income taxes
 
(430,256
)
Adjustments to loss before income taxes
 
 
Changes in fair value due to changes in valuation inputs and other assumptions (1)
 
118,740

Gain on sale of business
 
(67,734
)
Transaction costs (2)
 
55,694

Fair value to cash adjustment for reverse loans (3)
 
38,351

Reorganization items
 
37,645

Non-cash interest expense
 
33,401

Exit costs (4) 
 
22,359

Share-based compensation expense
 
2,212

Other (5)
 
20,866

Subtotal
 
261,534

Adjusted Loss
 
$
(168,722
)
__________
(1)
Consists of the change in fair value due to changes in valuation inputs and other assumptions relating to servicing rights and charged-off loans.
(2)
Transaction costs result primarily from our debt restructuring initiative.
(3)
Represents the non-cash fair value adjustment to arrive at cash generated from reverse mortgage origination activities.
(4)
Exit costs include expenses related to the closing of offices and the termination and replacement of certain employees as well as other expenses to institute efficiencies. Exit costs incurred for the year ended December 31, 2017 include those relating to our exit from the consumer retail channel of the Originations segment, our exit from the reverse mortgage originations business, and actions initiated in 2015, 2016 and 2017 in connection with our continued efforts to enhance efficiencies and streamline processes in the organization. Refer to Note 18 to the Consolidated Financial Statements for additional information regarding exit costs.
(5)
Includes severance, costs associated with transforming the business, the net impact of the Non-Residual Trusts, and net loss on extinguishment of debt.

71



Adjusted EBITDA
 
 
For the Year Ended 
 December 31, 2017
Net loss
 
$
(426,899
)
Adjust for income tax benefit
 
(3,357
)
Loss before income taxes
 
(430,256
)
EBITDA adjustments
 
 
Amortization of servicing rights and other fair value adjustments (1)
 
272,367

Interest expense
 
157,921

Gain on sale of business
 
(67,734
)
Transaction costs (2)
 
55,694

Depreciation and amortization
 
40,764

Fair value to cash adjustment for reverse loans (3)
 
38,351

Reorganization items
 
37,645

Exit costs (4)
 
22,359

Share-based compensation expense
 
2,212

Other (5)
 
12,273

Subtotal
 
571,852

Adjusted EBITDA
 
$
141,596

__________
(1)
Consists of the change in fair value due to changes in valuation inputs and other assumptions relating to servicing rights and charged-off loans as well as the amortization of servicing rights and the realization of expected cash flows relating to servicing rights carried at fair value.
(2)
Transaction costs result primarily from our debt restructuring initiative.
(3)
Represents the non-cash fair value adjustment to arrive at cash generated from reverse mortgage origination activities.
(4)
Exit costs include expenses related to the closing of offices and the termination and replacement of certain employees as well as other expenses to institute efficiencies. Exit costs incurred for the year ended December 31, 2017 include those relating to our exit from the consumer retail channel of the Originations segment, our exit from the reverse mortgage originations business, and actions initiated in 2015, 2016 and 2017 in connection with our continued efforts to enhance efficiencies and streamline processes in the organization. Refer to Note 18 to the Consolidated Financial Statements for additional information regarding exit costs.
(5)
Includes the net provision for the repurchase of loans sold, non-cash interest income, severance, net loss on extinguishment of debt, interest income on unrestricted cash and cash equivalents, costs associated with transforming the business, the net impact of the Non-Residual Trusts, the provision for loan losses, and the Residual Trust cash flows.
Business Segment Results
In calculating income (loss) before income taxes for our segments, we allocate indirect expenses to our business segments. Indirect expenses are allocated to our Servicing, Originations, Reverse Mortgage and certain non-reportable segments based on headcount.
We reconcile our income (loss) before income taxes for our business segments to our GAAP consolidated loss before income taxes and report the financial results of our Non-Residual Trusts, other non-reportable operating segments and certain corporate expenses as other activity. Additional information regarding the results of operations for our Servicing, Originations and Reverse Mortgage segments is presented below. Refer to Note 28 to the Consolidated Financial Statements for a reconciliation of our income (loss) before income taxes for our business segments to our GAAP consolidated loss before income taxes.

72



Reconciliation of GAAP Consolidated Income (Loss) Before Income Taxes to Adjusted Earnings (Loss) and Adjusted EBITDA (in thousands):
 
 
For the Year Ended December 31, 2017
 
 
Servicing
 
Originations
 
Reverse
Mortgage
 
Other
 
Total
Consolidated
Income (loss) before income taxes
 
$
(174,218
)
 
$
46,539

 
$
(75,531
)
 
$
(227,046
)
 
$
(430,256
)
 
 
 
 
 
 
 
 
 
 
 
Adjustments to income (loss) before income taxes
 
 
 
 
 
 
 
 
 
 
Changes in fair value due to changes in valuation inputs and other assumptions
 
118,740

 

 

 

 
118,740

Gain on sale of business
 
(67,734
)
 

 

 

 
(67,734
)
Transaction costs
 
6,704

 

 

 
48,990

 
55,694

Fair value to cash adjustment for reverse loans
 

 

 
38,351

 

 
38,351

Reorganization items
 

 

 

 
37,645

 
37,645

Non-cash interest expense
 
6,796

 
8,638

 
7,826

 
10,141

 
33,401

Exit costs
 
19,149

 
1,436

 
1,628

 
146

 
22,359

Share-based compensation expense
 
938

 
154

 
348

 
772

 
2,212

Other 
 
13,274

 
1,683

 
2,098

 
3,811

 
20,866

Total adjustments
 
97,867

 
11,911

 
50,251

 
101,505

 
261,534

Adjusted Earnings (Loss)
 
(76,351
)
 
58,450

 
(25,280
)
 
(125,541
)
 
(168,722
)
 
 
 
 
 
 
 
 
 
 
 
EBITDA adjustments
 
 
 
 
 
 
 
 
 
 
Amortization of servicing rights and other fair value adjustments
 
152,133

 

 
1,494

 

 
153,627

Interest expense on debt
 

 

 

 
124,520

 
124,520

Depreciation and amortization
 
34,666

 
2,979

 
3,119

 

 
40,764

Other
 
(2,887
)
 
(5,780
)
 
82

 
(8
)
 
(8,593
)
Total adjustments
 
183,912

 
(2,801
)
 
4,695

 
124,512

 
310,318

Adjusted EBITDA
 
$
107,561

 
$
55,649

 
$
(20,585
)
 
$
(1,029
)
 
$
141,596


73



 
 
For the Year Ended December 31, 2016
 
 
Servicing
 
Originations
 
Reverse
Mortgage
 
Other
 
Total
Consolidated
Income (loss) before income taxes
 
$
(690,402
)
 
$
135,117

 
$
(84,545
)
 
$
(149,988
)
 
$
(789,818
)
 
 
 
 
 
 
 
 
 
 
 
Adjustments to income (loss) before income taxes
 
 
 
 
 
 
 
 
 
 
Changes in fair value due to changes in valuation inputs and other assumptions
 
209,412

 

 

 

 
209,412

Transaction costs
 
10,955

 

 

 
6,563

 
17,518

Fair value to cash adjustment for reverse loans
 

 

 
17,501

 

 
17,501

Non-cash interest expense
 
1,518

 

 

 
11,245

 
12,763

Exit costs
 
11,621

 
3,118

 
5,437

 
5,582

 
25,758

Share-based compensation expense (benefit)
 
5,007

 
1,019

 
1,032

 
(490
)
 
6,568

Goodwill and intangible assets impairment
 
319,551

 

 
6,735

 

 
326,286

Other 
 
37,095

 
14,531

 
3,971

 
(12,902
)
 
42,695

Total adjustments
 
595,159

 
18,668

 
34,676

 
9,998

 
658,501

Adjusted Earnings (Loss)
 
(95,243
)
 
153,785

 
(49,869
)
 
(139,990
)
 
(131,317
)
 
 
 
 
 
 
 
 
 
 
 
EBITDA adjustments
 
 
 
 
 
 
 
 
 
 
Amortization of servicing rights and other fair value adjustments
 
256,880

 

 
1,753