5. Transfers of Residential Loans

Transfers of Reverse Mortgage Loans

In connection with the acquisition of RMS, the Company became an approved issuer of the Government National Mortgage Association, or GNMA, HMBS. The HMBS are guaranteed by GNMA and collateralized by participation interests in Home Equity Conversion Mortgages, or HECMs, insured by the Federal Housing Administration, or FHA. The Company both originates and acquires HECM reverse mortgage loans, or reverse loans. The loans are then pooled into HMBS that are sold into the secondary market with servicing rights retained. Based upon the structure of the GNMA securitization program, the Company has determined that it has not met all of the requirements for sale accounting and therefore accounts for these transfers as secured borrowings. Under this accounting treatment, the reverse loans remain on the consolidated balance sheets as residential loans. The proceeds from the transfer of reverse loans are recorded as HMBS related obligations with no gain or loss recognized on the transfer. The holders of the beneficial interests in HMBS have recourse to the extent of their participation in the reverse loans, but do not have recourse to the general assets of the Company, except for obligations as servicer.

The Company elected to measure reverse loans and HMBS related obligations at fair value. The change in fair value of the reverse loans and HMBS related obligations are included in net fair value gains on reverse loans and related HMBS obligations in the consolidated statements of comprehensive income. Also included in net fair value gains on reverse loans and related HMBS obligations is the contractual interest income earned on the reverse loans and the contractual interest expense incurred on the HMBS related obligations as well as fair value adjustments, including fair value gains on reverse loans originated and additional participations issued. Net fair value gains on reverse loans and related HMBS obligations is recognized as an adjustment in reconciling net income to the net cash provided by or used in operating activities in the consolidated statements of cash flows. Purchases and originations of and principal payments received on reverse loans held for investment are included in investing activities in the consolidated statements of cash flows. Proceeds from securitizations of reverse loans and payments on HMBS related obligations are included in financing activities in the consolidated statements of cash flows.

At September 30, 2013, the unpaid principal balance associated with the reverse loans and real estate owned pledged as collateral to the pools was $7.5 billion.

Transfers of Forward Mortgage Loans

Through the acquisition of the ResCap net assets, the Company has grown its originations business. As part of its origination activities, the Company sells or securitizes forward loans it originates or purchases from third parties, generally in the form of mortgage-backed securities guaranteed by Fannie Mae. Securitization usually occurs within 20 days of loan closing or purchase. The Company accounts for these transfers as sales and generally retains the servicing rights associated with the transferred loans for which it receives a servicing fee for services provided.

The Company elected to measure residential loans held for sale at fair value. The gains and losses on the transfer of residential loans held for sale are included in net gains on sales of loans in the consolidated statements of comprehensive income. Also included in net gains on sales of loans is interest income earned during the period the loans were held, changes in fair value of loans and the gain or loss on the related derivatives. Refer to Note 7 for information on these derivative financial instruments. All residential loans held for sale and related derivative activities are included in operating activities in the consolidated statements of cash flows.

The following table presents a summary of cash flows related to transfers of forward loans accounted for as sales (in thousands):


	For the Three Months		For the Nine Months
	Ended September 30, 2013		Ended September 30, 2013
Proceeds received from transfers	$	6,490,299	$	10,122,117
Servicing fees collected		3,349		3,796

In connection with these transfers, the Company recorded servicing rights of $80.6 million and $118.1 million for the three and nine months ended September 30, 2013, respectively. All servicing rights are initially recorded at fair value using a Level 3 measurement technique based on the present value of projected cash flows over the estimated period of net servicing income. Refer to Note 11 for information relating to servicing of residential loans.

Certain guarantees arise from agreements associated with the sale of the Company’s residential loans. Under these agreements, the Company may be obligated to repurchase, or otherwise indemnify or reimburse the investor or insurer for losses incurred, due to material breach of contractual representations and warranties. Refer to Note 22 for further information.

The following table presents the carrying amounts of the Company’s assets that relate to its continued involvement with forward loans that have been transferred with servicing rights retained and the unpaid principal balance of these transferred loans (in thousands):


	Carrying Value of Assets Recorded on the Consolidated Balance Sheet								Unpaid Principal Balance of Transferred Loans
Type of Involvement	Servicing Rights, Net		Servicer and Protective Advances, Net		Receivables, Net		Total		Unpaid Principal Balance of Transferred Loans
Servicing arrangements associated with transfers of forward loans
September 30, 2013	$	124,977	$	1,555	$	251	$	126,783	$	9,746,851

At September 30, 2013, there were $2.5 million in transferred residential loans serviced by the Company that were 60 days or more past due. There were no charge-offs associated with these transferred loans during the three and nine months ended September 30, 2013.