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Servicing of Residential Loans
 12 Months Ended
Dec. 31, 2018
Transfers and Servicing [Abstract]  
Servicing of Residential Loans Disclosure
Servicing of Residential Loans
The Company services residential loans and real estate owned for itself and on behalf of third-party credit owners. The Company’s total servicing portfolio consists of accounts serviced for others for which servicing rights have been capitalized, accounts subserviced for others, and residential loans and real estate owned carried on the consolidated balance sheets, but excludes charged-off loans managed by the Servicing segment.
Provided below is a summary of the Company’s total servicing portfolio (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
December 31, 2017
 
 
Number
of Accounts
 
Unpaid Principal
Balance
 
 
Number
of Accounts
 
Unpaid Principal
Balance
Third-party credit owners
 
 
 
 
 
 
 
 
 
Capitalized servicing rights
 
648,272

 
$
66,032,203

 
 
854,292

 
$
93,599,077

Capitalized subservicing (1)
 
21,650

 
2,317,501

 
 
29,681

 
3,242,241

Subservicing
 
752,927

 
109,412,032

 
 
712,040

 
99,500,678

Total third-party servicing portfolio
 
1,422,849

 
177,761,736

 
 
1,596,013

 
196,341,996

On-balance sheet residential loans and real estate owned
 
56,318

 
9,476,800

 
 
82,480

 
11,522,817

Total servicing portfolio
 
1,479,167

 
$
187,238,536

 
 
1,678,493

 
$
207,864,813

__________
(1)
Consists of subservicing contracts acquired through business combinations whereby the benefits from the contract are greater than adequate compensation for performing the servicing.
The Company's two largest subservicing customers represented approximately 73% and 16% of the Company's total subservicing portfolio based on unpaid principal balance at December 31, 2018 and approximately 69% and 21% of the Company's total subservicing portfolio based on unpaid principal balance at December 31, 2017.
The Company’s geographic diversification of its third-party servicing portfolio, based on the outstanding unpaid principal balance, is as follows (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
December 31, 2017
 
 
Number
of Accounts
 
Unpaid Principal
Balance
 
Percentage of Total
 
 
Number
of Accounts
 
Unpaid Principal
Balance
 
Percentage of Total
California
 
163,609

 
$
33,363,803

 
18.8
%
 
 
181,126

 
$
35,774,862

 
18.2
%
Florida
 
120,423

 
14,700,373

 
8.3
%
 
 
134,124

 
16,247,905

 
8.3
%
Texas
 
116,621

 
10,754,837

 
6.0
%
 
 
127,442

 
11,378,660

 
5.8
%
Other <5%
 
1,022,196

 
118,942,723

 
66.9
%
 
 
1,153,321

 
132,940,572

 
67.7
%
Total
 
1,422,849

 
$
177,761,736

 
100.0
%
 
 
1,596,013

 
$
196,341,999

 
100.0
%

Net Servicing Revenue and Fees
The Company earns servicing income from its third-party servicing portfolio. The following table presents the components of net servicing revenue and fees, which includes revenues earned by the Servicing and Reverse Mortgage segments and, beginning in March 2018, the Corporate and Other non-reportable segment (in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Servicing fees
 
$
335,718

 
 
$
52,855

 
$
491,531

Incentive and performance fees
 
42,513

 
 
6,019

 
59,660

Ancillary and other fees (1)
 
65,641

 
 
7,335

 
83,753

Servicing revenue and fees
 
443,872

 
 
66,209


634,944

Change in fair value of servicing rights
 
(97,007
)
 
 
64,663

 
(266,246
)
Amortization of servicing rights (2)(3)
 
(7,531
)
 
 
(2,187
)
 
(21,954
)
Change in fair value of servicing rights related liabilities
 
—

 
 
—

 
(62
)
Net servicing revenue and fees
 
$
339,334

 
 
$
128,685


$
346,682

__________
(1)
Includes late fees of $45.4 million, $5.1 million and $56.8 million for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively.
(2)
Includes amortization of a servicing liability of $7.6 million, $0.6 million and $4.1 million for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively.
(3)
Includes impairment of servicing rights and a servicing liability of $4.9 million, $1.6 million and $16.1 million for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017, respectively.
Servicing revenue and fees for the period from February 10, 2018 through December 31, 2018, the period from January 1, 2018 through February 9, 2018 and the year ended December 31, 2017 included $239.0 million, $33.8 million and $306.9 million, respectively, from servicing Fannie Mae residential loans and $87.6 million, $14.2 million and $96.9 million, respectively, from servicing Ginnie Mae loans. In addition, servicing revenue and fees for the year ended December 31, 2017 included $67.5 million from servicing Freddie Mac loans.
Servicing Rights
Servicing Rights Carried at Amortized Cost
The following table summarizes the activity in the carrying value of servicing rights carried at amortized cost by class (in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From  
February 10, 2018 Through  
December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
 
 
Mortgage Loan
 
Reverse Loan
 
 
Mortgage Loan
 
Reverse Loan
 
Mortgage Loan
 
Reverse Loan
Balance at beginning of the period
 
$
57,148

 
$
4,542

 
 
$
54,466

 
$
4,011

 
$
74,621


$
5,505

Fresh start accounting adjustments
 
—

 
—

 
 
4,221

 
1,211

 
—

 
—

Amortization
 
(9,022
)
 
(1,201
)
 
 
(944
)
 
(148
)
 
(8,423
)
 
(1,494
)
Impairment
 
(3,167
)
 
(346
)
 
 
(595
)
 
(532
)
 
(11,732
)
 
—

Disposals
 
(3,744
)
 
(133
)
 
 
—

 
—

 
—

 
—

Balance at end of the period
 
$
41,215


$
2,862



$
57,148


$
4,542


$
54,466


$
4,011


Servicing rights accounted for at amortized cost are evaluated for impairment by strata based on their estimated fair values. The risk characteristics used to stratify servicing rights for purposes of measuring impairment are the type of loan products, which consist of manufactured housing loans, first lien residential mortgages and second lien residential mortgages for the mortgage loan class, and reverse mortgages for the reverse loan class. The fair value of servicing rights for the mortgage loan class and the reverse loan class was $51.7 million and $3.1 million, respectively, at December 31, 2018 and $59.7 million and $4.8 million, respectively, at December 31, 2017. Fair value was estimated using the present value of projected cash flows over the estimated period of net servicing income.
The estimation of fair value requires significant judgment and uses key economic inputs and assumptions, which are provided in the table below:
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
February 9, 2018
 
December 31, 2017
 
 
Mortgage Loan
 
Reverse Loan
 
 
Mortgage Loan
 
Reverse Loan
 
Mortgage Loan
 
Reverse Loan
Weighted-average remaining life in years (1)
 
4.1

 
2.7

 
 
4.5

 
2.7

 
4.5

 
2.8

Weighted-average discount rate
 
13.00
%
 
15.00
%
 
 
13.00
%
 
15.00
%
 
13.00
%
 
15.00
%
Conditional prepayment rate (2)
 
5.67
%
 
N/A

 
 
5.34
%
 
N/A

 
5.91
%
 
N/A

Conditional default rate (2)
 
2.75
%
 
N/A

 
 
2.48
%
 
N/A

 
2.45
%
 
N/A

Conditional repayment rate (3)
 
N/A

 
36.66
%
 
 
N/A

 
36.68
%
 
N/A

 
36.01
%
__________
(1)
Represents the remaining weighted-average life of the related unpaid principal balance of the underlying collateral adjusted for assumptions for conditional repayment rate, conditional prepayment rate and conditional default rate, as applicable.
(2)
Voluntary and involuntary prepayment rates have been presented as conditional prepayment rate and conditional default rate, respectively.
(3)
Conditional repayment rate includes assumptions for both voluntary and involuntary rates as well as assumptions for the assignment of HECMs to HUD, in accordance with obligations as servicer.
The valuation of servicing rights is affected by the underlying assumptions above. Should the actual performance and timing differ materially from the Company’s projected assumptions, the estimate of fair value of the servicing rights could be materially different.
Servicing Rights Carried at Fair Value
The following table summarizes the activity in servicing rights carried at fair value (in thousands):
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Balance at beginning of the period
 
$
688,466

 
 
$
714,774

 
$
949,593

Servicing rights capitalized upon sales of loans
 
166,203

 
 
14,493

 
148,227

Sales
 
(194,573
)
 
 
(105,457
)
 
(117,470
)
Purchases
 
143

 
 
—

 
670

Other
 
(88
)
 
 
(7
)
 
—

Change in fair value due to:
 
 
 
 
 
 
 
Changes in valuation inputs or other assumptions (1)
 
2,195

 
 
78,132

 
(134,573
)
Other changes in fair value (2)
 
(99,202
)
 
 
(13,469
)
 
(131,673
)
Total change in fair value
 
(97,007
)
 
 
64,663


(266,246
)
Balance at end of the period
 
$
563,144

 
 
$
688,466


$
714,774

__________
(1)
Represents the change in fair value typically resulting from market-driven changes in interest rates and prepayment speeds.
(2)
Represents the realization of expected cash flows over time.
The fair value of servicing rights accounted for at fair value was estimated using the present value of projected cash flows over the estimated period of net servicing income. The estimation of fair value requires significant judgment and uses key economic inputs and assumptions, which are described in Note 7. Should the actual performance and timing differ materially from the Company's projected assumptions, the estimate of fair value of the servicing rights could be materially different.
The following table summarizes the hypothetical effect on the fair value of servicing rights carried at fair value using adverse changes of 10% and 20% to the weighted average of the significant assumptions used in valuing these assets (dollars in thousands):
 
 
Successor
 
 
Predecessor
 
 
December 31, 2018
 
 
December 31, 2017
 
 
 
 
Decline in fair value due to
 
 
 
 
Decline in fair value due to
 
 
Assumption
 
10% adverse change
 
20% adverse change
 
 
Assumption
 
10% adverse change
 
20% adverse change
Weighted-average discount rate
 
10.78
%
 
$
(20,815
)
 
$
(40,169
)
 
 
11.92
%
 
$
(29,892
)
 
$
(57,517
)
Weighted-average conditional prepayment rate
 
10.79
%
 
(19,192
)
 
(36,967
)
 
 
11.10
%
 
(27,261
)
 
(52,551
)
Weighted-average conditional default rate
 
0.77
%
 
(25,609
)
 
(51,343
)
 
 
0.91
%
 
(31,610
)
 
(63,832
)
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the fair value of the servicing rights is calculated without changing any other assumption, while in reality changes in one factor may result in changes in another, which may either magnify or counteract the effect of the change.
Fair Value of Originated Servicing Rights
For mortgage loans sold with servicing retained, the Company used the following inputs and assumptions to determine the fair value of servicing rights at the dates of sale. These servicing rights are included in servicing rights capitalized upon sales of loans in the table presented above that summarizes the activity in servicing rights carried at fair value. This table excludes inputs and assumptions related to servicing rights capitalized under the Company's co-issue program with NRM, which are classified as Level 2 within the fair value hierarchy.
 
 
Successor
 
 
Predecessor
 
 
For the Period From February 10, 2018 Through December 31, 2018
 
 
For the Period From January 1, 2018 Through February 9, 2018
 
For the Year Ended 
 December 31, 2017
Weighted-average life in years
 
5.4
 
 
6.3
 
6.4
Weighted-average discount rate
 
12.25%
 
 
14.75%
 
14.27%
Weighted-average conditional prepayment rate
 
11.94%
 
 
8.74%
 
9.14%
Weighted-average conditional default rate
 
1.11%
 
 
0.92%
 
0.53%