10-Q 1 wacfy2017q3.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________________
Form 10-Q
_______________________________________________________________________________________

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
or
o
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 
_______________________________________________________________________________________
Walter Investment Management Corp.
(Exact name of registrant as specified in its charter) 
_______________________________________________________________________________________ 
 
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)
(844) 714-8603
(Registrant's telephone number, including area code)

 
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  x    No  o
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  x    No  o
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
 
o
 
Accelerated filer
 
x
 
 
 
 
 
 
 
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
o
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
o
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 Exchange Act).    Yes  o    No  x
The registrant had 37,373,551 shares of common stock outstanding as of November 6, 2017.
_______________________________________________________________________________________ 


WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
FORM 10-Q
INDEX
 
 
 
 
 
 
Page
No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
 
September 30, 
 2017
 
December 31, 
 2016
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Cash and cash equivalents
 
$
276,802

 
$
224,598

Restricted cash and cash equivalents
 
359,420

 
204,463

Residential loans at amortized cost, net (includes $6,371 and $5,167 in allowance for loan losses at September 30, 2017 and December 31, 2016, respectively)
 
742,904

 
665,209

Residential loans at fair value
 
11,377,492

 
12,416,542

Receivables, net (includes $7,498 and $15,033 at fair value at September 30, 2017 and December 31, 2016, respectively)
 
151,398

 
267,962

Servicer and protective advances, net (includes $156,561 and $146,781 in allowance for uncollectible advances at September 30, 2017 and December 31, 2016, respectively)
 
850,867

 
1,195,380

Servicing rights, net (includes $808,830 and $949,593 at fair value at September 30, 2017 and December 31, 2016, respectively)
 
869,981

 
1,029,719

Goodwill
 
47,747

 
47,747

Intangible assets, net
 
9,213

 
11,347

Premises and equipment, net
 
58,210

 
82,628

Assets held for sale
 
—

 
71,085

Other assets (includes $36,215 and $87,937 at fair value at September 30, 2017 and December 31, 2016, respectively)
 
235,601

 
242,290

Total assets
 
$
14,979,635

 
$
16,458,970

LIABILITIES AND STOCKHOLDERS' DEFICIT
 
 
 
 
Payables and accrued liabilities (includes $2,783 and $11,804 at fair value at September 30, 2017 and December 31, 2016, respectively)
 
$
721,191

 
$
759,011

Servicer payables
 
346,753

 
146,332

Servicing advance liabilities
 
509,363

 
783,229

Warehouse borrowings
 
1,178,320

 
1,203,355

Servicing rights related liabilities at fair value
 
1,565

 
1,902

Corporate debt
 
2,022,639

 
2,129,000

Mortgage-backed debt (includes $436,921 and $514,025 at fair value at September 30, 2017 and December 31, 2016, respectively)
 
832,897

 
943,956

HMBS related obligations at fair value
 
9,598,234

 
10,509,449

Deferred tax liabilities, net
 
4,907

 
4,774

Liabilities held for sale
 
—

 
2,402

Total liabilities
 
15,215,869

 
16,483,410

Commitments and contingencies (Note 14)
 

 

Stockholders' deficit:
 
 
 
 
Preferred stock, $0.01 par value per share:
 
 
 
 
Authorized - 10,000,000 shares
 
 
 
 
Issued and outstanding - 0 shares at September 30, 2017 and December 31, 2016
 
—

 
—

Common stock, $0.01 par value per share:
 
 
 
 
Authorized - 90,000,000 shares
 
 
 
 
Issued and outstanding - 37,373,551 and 36,391,129 shares at September 30, 2017 and December 31, 2016, respectively
 
366

 
364

Additional paid-in capital
 
598,129

 
596,067

Accumulated deficit
 
(835,738
)
 
(621,804
)
Accumulated other comprehensive income
 
1,009

 
933

Total stockholders' deficit
 
(236,234
)
 
(24,440
)
Total liabilities and stockholders' deficit
 
$
14,979,635

 
$
16,458,970


3


The following table presents the assets and liabilities of the Company’s consolidated variable interest entities, which are included on the consolidated balance sheets above. The assets in the table below include those assets that can only be used to settle obligations of the consolidated variable interest entities. The liabilities in the table below include third-party liabilities of the consolidated variable interest entities only, and for which creditors or beneficial interest holders do not have recourse to the Company, and exclude intercompany balances that eliminate in consolidation.

 
 
September 30, 
 2017
 
December 31, 
 2016
ASSETS OF CONSOLIDATED VARIABLE INTEREST ENTITIES THAT CAN ONLY BE USED TO SETTLE THE OBLIGATIONS OF CONSOLIDATED VARIABLE INTEREST ENTITIES:
 
(unaudited)
 
 
Restricted cash and cash equivalents
 
$
33,813

 
$
45,843

Residential loans at amortized cost, net
 
431,459

 
462,877

Residential loans at fair value
 
381,125

 
492,499

Receivables, net
 
8,392

 
15,798

Servicer and protective advances, net
 
478,834

 
734,707

Other assets
 
31,982

 
19,831

Total assets
 
$
1,365,605

 
$
1,771,555

 
 
 
 
 
LIABILITIES OF THE CONSOLIDATED VARIABLE INTEREST ENTITIES FOR WHICH CREDITORS OR BENEFICIAL INTEREST HOLDERS DO NOT HAVE RECOURSE TO THE COMPANY:
 
 
 
 
Payables and accrued liabilities
 
$
2,497

 
$
2,985

Servicing advance liabilities
 
425,468

 
650,565

Mortgage-backed debt (includes $436,921 and $514,025 at fair value at September 30, 2017 and December 31, 2016, respectively)
 
832,897

 
943,956

Total liabilities
 
$
1,260,862

 
$
1,597,506

The accompanying notes are an integral part of the consolidated financial statements.


4


WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in thousands, except per share data)

 
 
For the Three Months 
 Ended September 30,
 
For the Nine Months 
 Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
REVENUES
 
 
 
 
 
 
 
 
Net servicing revenue and fees
 
$
65,029

 
$
111,629

 
$
269,537

 
$
37,803

Net gains on sales of loans
 
73,013

 
122,014

 
217,914

 
306,667

Net fair value gains on reverse loans and related HMBS obligations
 
1,810

 
18,627

 
24,384

 
61,485

Interest income on loans
 
9,802

 
11,332

 
31,271

 
35,352

Insurance revenue
 
2,236

 
10,000

 
9,826

 
31,644

Other revenues
 
24,754

 
23,728

 
77,784

 
78,623

Total revenues
 
176,644

 
297,330

 
630,716

 
551,574

 
 
 
 
 
 
 
 
 
EXPENSES
 
 
 
 
 
 
 
 
General and administrative
 
137,614

 
151,792

 
386,785

 
417,174

Salaries and benefits
 
91,544

 
133,199

 
300,572

 
399,519

Interest expense
 
61,671

 
65,302

 
182,965

 
193,950

Depreciation and amortization
 
9,741

 
16,580

 
30,715

 
45,543

Goodwill and intangible assets impairment
 
—

 
97,716

 
—

 
313,128

Other expenses, net
 
2,576

 
1,206

 
8,413

 
5,609

Total expenses
 
303,146

 
465,795

 
909,450

 
1,374,923

 
 
 
 
 
 
 
 
 
OTHER GAINS (LOSSES)
 
 
 
 
 
 
 
 
Gain on sale of business
 
—

 
—

 
67,734

 
—

Other net fair value gains (losses)
 
3,783

 
(3,302
)
 
761

 
(6,265
)
Net gains (losses) on extinguishment of debt
 
(959
)
 
13,734

 
(1,668
)
 
14,662

Other
 
—

 
(150
)
 
—

 
(1,706
)
Total other gains
 
2,824

 
10,282

 
66,827

 
6,691

 
 
 
 
 
 
 
 
 
Loss before income taxes
 
(123,678
)
 
(158,183
)
 
(211,907
)
 
(816,658
)
Income tax expense
 
455

 
55,084

 
2,027

 
59,274

Net loss
 
$
(124,133
)
 
$
(213,267
)
 
$
(213,934
)
 
$
(875,932
)
 
 
 
 
 
 
 
 
 
Comprehensive loss
 
$
(124,035
)
 
$
(213,281
)
 
$
(213,858
)
 
$
(875,905
)
 
 
 
 
 
 
 
 
 
Net loss
 
$
(124,133
)
 
$
(213,267
)
 
$
(213,934
)
 
$
(875,932
)
Basic and diluted loss per common and common equivalent share
 
$
(3.38
)
 
$
(5.90
)
 
$
(5.85
)
 
$
(24.45
)
Weighted-average common and common equivalent shares outstanding — basic and diluted
 
36,714

 
36,144

 
36,555

 
35,828

The accompanying notes are an integral part of the consolidated financial statements.

5


WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
(Unaudited)
(in thousands, except share data)

 
 
Common Stock
 
Additional Paid-
In Capital
 
Accumulated Deficit
 
Accumulated Other
Comprehensive
Income
 
 
 
 
Shares
 
Amount
 
 
 
 
Total
Balance at January 1, 2017
 
36,391,129

 
$
364

 
$
596,067

 
$
(621,804
)
 
$
933

 
$
(24,440
)
Net loss
 
—

 
—

 
—

 
(213,934
)
 
—

 
(213,934
)
Other comprehensive income, net of tax
 
—

 
—

 
—

 
—

 
76

 
76

Share-based compensation
 
—

 
—

 
2,139

 
—

 
—

 
2,139

Share-based compensation issuances, net
 
982,422

 
2

 
(77
)
 
—

 
—

 
(75
)
Balance at September 30, 2017
 
37,373,551

 
$
366

 
$
598,129

 
$
(835,738
)
 
$
1,009

 
$
(236,234
)
The accompanying notes are an integral part of the consolidated financial statements.



6


WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

 
 
For the Nine Months 
 Ended September 30,
 
 
2017
 
2016
Operating activities
 
 
 
 
Net loss
 
$
(213,934
)
 
$
(875,932
)
Adjustments to reconcile net loss to net cash provided by operating activities
 
 
 
 
Net fair value gains on reverse loans and related HMBS obligations
 
(24,384
)
 
(61,485
)
Amortization of servicing rights
 
19,969

 
13,058

Change in fair value of servicing rights
 
203,026

 
600,109

Change in fair value of servicing rights related liabilities
 
—

 
(8,486
)
Change in fair value of charged-off loans
 
(12,396
)
 
(17,781
)
Other net fair value losses
 
3,165

 
11,666

Accretion of discounts on residential loans and advances
 
(2,681
)
 
(2,739
)
Accretion of discounts on debt and amortization of deferred debt issuance costs
 
23,962

 
25,615

Provision for uncollectible advances
 
36,798

 
30,775

Depreciation and amortization of premises and equipment and intangible assets
 
30,715

 
45,543

Provision for deferred income taxes
 
1,618

 
49,863

Share-based compensation
 
2,139

 
7,656

Purchases and originations of residential loans held for sale
 
(13,314,135
)
 
(15,553,394
)
Proceeds from sales of and payments on residential loans held for sale
 
13,832,907

 
15,861,355

Net gains on sales of loans
 
(217,914
)
 
(306,667
)
Gain on sale of business
 
(67,734
)
 
—

Goodwill and intangible assets impairment
 
—

 
313,128

Other
 
8,014

 
(5,940
)
Changes in assets and liabilities
 
 
 
 
Decrease (increase) in receivables
 
67,678

 
(7,279
)
Decrease in servicer and protective advances
 
306,980

 
309,093

Increase in other assets
 
(35,585
)
 
(82,724
)
Increase (decrease) in payables and accrued liabilities
 
(145,351
)
 
9,625

Increase in servicer payables, net of change in restricted cash
 
28,560

 
20,113

Cash flows provided by operating activities
 
531,417

 
375,172

 
 
 
 
 
Investing activities
 
 
 
 
Purchases and originations of reverse loans held for investment
 
(302,032
)
 
(653,471
)
Principal payments received on reverse loans held for investment
 
985,989

 
770,636

Principal payments received on mortgage loans held for investment
 
71,024

 
69,238

Payments received on charged-off loans held for investment
 
13,217

 
17,827

Payments received on receivables related to Non-Residual Trusts
 
10,275

 
6,230

Proceeds from sales of real estate owned, net
 
106,014

 
81,591

Purchases of premises and equipment
 
(3,622
)
 
(29,128
)
Decrease in restricted cash and cash equivalents
 
1,841

 
9,778

Payments for acquisitions of businesses, net of cash acquired
 
(1,019
)
 
(1,947
)
Acquisitions of servicing rights, net
 
(171
)
 
(7,701
)
Proceeds from sale of servicing rights, net
 
79,772

 
35,541

Proceeds from sale of business
 
131,074

 
—

Cash outflow from deconsolidation of variable interest entities
 
(28,425
)
 
—

Other
 
8,486

 
(3,665
)
Cash flows provided by investing activities
 
1,072,423

 
294,929

 
 
 
 
 

7


WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
 
 
 
 
 
 
 
For the Nine Months 
 Ended September 30,
 
 
2017
 
2016
Financing activities
 
 
 
 
Payments on corporate debt
 
(121,285
)
 
(480
)
Extinguishments and settlement of debt
 
—

 
(31,037
)
Proceeds from securitizations of reverse loans
 
375,786

 
684,711

Payments on HMBS related obligations
 
(1,420,881
)
 
(958,720
)
Issuances of servicing advance liabilities
 
908,868

 
1,526,733

Payments on servicing advance liabilities
 
(1,184,036
)
 
(1,734,252
)
Net change in warehouse borrowings related to mortgage loans
 
(394,036
)
 
(147,389
)
Net change in warehouse borrowings related to reverse loans
 
369,001

 
169,210

Proceeds from financing of servicing rights
 
—

 
29,742

Payments on servicing rights related liabilities
 
(1,415
)
 
(16,013
)
Payments on mortgage-backed debt
 
(84,814
)
 
(80,335
)
Other debt issuance costs paid
 
(4,855
)
 
(9,260
)
Other
 
6,031

 
(20,157
)
Cash flows used in financing activities
 
(1,551,636
)
 
(587,247
)
 
 
 
 
 
Net increase in cash and cash equivalents
 
52,204

 
82,854

Cash and cash equivalents at beginning of the period
 
224,598

 
202,828

Cash and cash equivalents at end of the period
 
$
276,802

 
$
285,682

 
 
 
 
 
 Supplemental Disclosures of Cash Flow Information
 
 
 
 
Cash paid for interest
 
$
166,126

 
$
190,381

Cash received for taxes
 
(70,469
)
 
(28,155
)
The accompanying notes are an integral part of the consolidated financial statements.

8


WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business and Basis of Presentation
Walter Investment Management Corp. and its subsidiaries, or the Company, is an independent originator and servicer of mortgage loans and servicer of reverse mortgage loans. Through the consumer, correspondent and wholesale lending channels, the Company originates and purchases residential mortgage loans that are predominantly sold to GSEs and government agencies. The Company services a wide array of loans across the credit spectrum for its own portfolio and for GSEs, government agencies, third-party securitization trusts and other credit owners. The Company also operates two complementary businesses; asset receivables management and real estate owned property management and disposition.
The Company operates throughout the U.S. through three reportable segments, Servicing, Originations, and Reverse Mortgage. Refer to Note 13 for additional information related to segment reporting.
Certain acronyms and terms used throughout these notes are defined in the Glossary of Terms in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Sale of Insurance Business
On December 30, 2016, the Company executed a stock purchase agreement pursuant to which the Company agreed to sell 100% of the stock of its indirect, wholly-owned subsidiary, GTI Holdings Corp., which was the holding company of the Company's primary licensed insurance agency, Green Tree Insurance Agency, Inc., to a wholly-owned subsidiary of Assurant, for a purchase price of $125.0 million in cash, subject to adjustment as specified in the agreement. Under the agreement, an affiliate of Assurant has also agreed to make potential earnout payments to the Company in an aggregate amount of up to $25.0 million in cash, with the amount of such payments to be based upon the gross written premium of certain voluntary homeowners' insurance written by certain affiliates of Assurant over a specified timeframe. As a result of this transaction, the assets and liabilities related to the insurance business, which were included in the Servicing segment, were reclassified to operations held for sale line items on the consolidated balance sheets at December 31, 2016. This transaction closed on February 1, 2017, at which time the Company received $131.1 million in cash, which included a working capital payment.
Restatement of Previously Issued Consolidated Financial Statements
On August 9, 2017, the Company amended its Annual Report on Form 10-K for the year ended December 31, 2016 and separately amended its Quarterly Reports on Form 10-Q for the quarterly periods ended June 30, 2016, September 30, 2016, and March 31, 2017, in each case, to reflect a correction to the net deferred tax assets balance. The restatement of the Company's previously issued consolidated financial statements resulted from an error in the calculation of the valuation allowance on the net deferred tax assets balance. In determining the amount of the valuation allowance in the prior periods, an error was made that resulted in the double-counting of expected future taxable income associated with the projected reversals of taxable temporary differences (i.e., deferred tax liabilities). Accordingly, the Company revised its calculation to reflect the removal of the duplicative amounts, and reevaluated all sources of estimated future taxable income on the recoverability of deferred tax assets under GAAP after taking into account both positive and negative evidence through the issuance date of the restated financial statements to consider the effect of the error. The impact of such correction is reflected in the prior periods presented in these Consolidated Financial Statements.
Interim Financial Reporting
The accompanying unaudited interim Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and related notes required by GAAP for complete Consolidated Financial Statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. These unaudited interim Consolidated Financial Statements should be read in conjunction with the Company’s audited Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2016.

9


Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Although management is not currently aware of any factors that would significantly change its estimates and assumptions, actual results may differ from these estimates.
Recently Adopted Accounting Guidance
In March 2016, the FASB issued an accounting standards update revising certain aspects of share-based accounting guidance, which includes income tax and forfeiture consequences. This guidance was effective for the Company beginning January 1, 2017. Adoption of this update did not have a material impact on the Company's income tax expense. The Company elected to continue with its current methodology of estimating expected forfeitures at the date of grant and adjust throughout the vesting term as needed.
Recent Accounting Guidance Not Yet Adopted
In May 2014, the FASB issued new revenue recognition guidance that supersedes most industry-specific guidance but does exclude insurance contracts and financial instruments. Under the new revenue recognition guidance, entities are required to identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when the entity satisfies a performance obligation. The Company has reviewed the scope of the guidance and monitored the determinations of the FASB Transition Resource Group and concluded that a number of the Company's most significant revenue streams are not within the scope of the standard because the standard does not apply to revenue on contracts accounted for under the transfers and servicing of financial assets or financial instruments standards. Therefore, revenue recognition for these contracts will remain unchanged. While there may be some impact on ancillary revenue streams, the Company does not expect the adoption of this guidance to have a significant impact on the consolidated financial statements. The Company plans to adopt using a modified retrospective method with a cumulative effect adjustment to retained earnings.
In January 2016, the FASB issued an accounting standards update that amends the guidance on the classification and measurement of financial instruments. The new standard revises an entity's accounting related to (i) the classification and measurement of investments in equity securities and (ii) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. At September 30, 2017, the Company did not hold any equity securities measured at fair value, but did have certain financial liabilities measured at fair value. The significance of adoption is dependent upon the nature of those financial liabilities carried at fair value at the time of adoption.
In February 2016, the FASB issued an accounting standards update that requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset to not recognize lease assets and lease liabilities. In transition, lessees are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients that entities may elect to apply. This guidance is effective for fiscal years beginning after December 15, 2018, with early application permitted. While the Company continues to evaluate the full effect that this guidance will have on its consolidated financial statements, it will result in the recognition of certain operating leases as right-of-use assets and lease liabilities on the consolidated balance sheets.
In June 2016, the FASB issued an accounting standards update that amends the guidance for recognizing credit losses on financial instruments measured at amortized cost. This update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2019. Based on the Company's current methodologies for accounting for financial instruments, the adoption of this guidance is not expected to have a material impact on its consolidated financial statements. The significance of the adoption of this guidance may change at the time of adoption based on the nature and composition of the Company's financial instruments at that time and the corresponding conclusions reached.

10


In August 2016, the FASB issued an accounting standards update that amends the guidance on the classification of certain cash receipts and cash payments presented within the statement of cash flows to reduce the existing diversity in practice. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The adoption may impact the presentation of cash flows, but will not otherwise have a material impact on the consolidated results of operations or financial condition.
In October 2016, the FASB issued an accounting standards update that amends the guidance on the classification of income taxes related to the intra-entity transfer of assets other than inventory. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the effect that this guidance will have on its consolidated financial statements. However, the significance of adoption is dependent on the nature of the transactions and corresponding tax laws in effect at the time of adoption.
In November 2016, the FASB issued an accounting standards update that amends the guidance on restricted cash within the statement of cash flows. The update amends the classification of restricted cash and cash equivalents to be included within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and cash equivalents in the statement of cash flows. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The adoption will impact the presentation of the cash flows, but will not otherwise have a material impact on the consolidated results of operations or financial condition.
In January 2017, the FASB issued an accounting standards update that amends the guidance on business combinations. The update clarifies the definition of a business and provides a framework that gives entities a basis for making reasonable judgments about whether a transaction should be accounted for as an acquisition of assets or a business. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company will apply this guidance to its assessment of applicable transactions, such as acquisitions and disposals of assets or business, consummated after the adoption date.
In January 2017, the FASB issued an accounting standards update that amends the guidance on goodwill. Under the update, goodwill impairment is measured as the amount by which a reporting unit’s carrying value exceeds its fair value, while not exceeding the carrying value of goodwill. The update eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. This guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently considering the timing of adoption and will apply this guidance to applicable impairment tests after the adoption date.
In February 2017, the FASB issued an accounting standards update that amends the guidance on derecognition of nonfinancial assets. This guidance clarifies the scope and accounting of a financial asset that meets the definition of an in substance nonfinancial asset and defines the term in substance nonfinancial asset. It also adds guidance for partial sales of nonfinancial assets. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. Based on the Company's current methodologies for accounting for nonfinancial assets, the adoption of this guidance is not expected to have a material impact on its consolidated financial statements. However, upon adoption, the statement of financial position may reflect changes in presentation related to sales of certain real estate owned. The significance of the adoption of this guidance may change at the time of adoption based on the nature of the Company's nonfinancial assets at that time and the corresponding conclusions reached. The Company plans to adopt using a modified retrospective method.
In May 2017, the FASB issued an accounting standards update that amends the guidance on share-based compensation. The update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The new guidance will be applied prospectively on awards modified on or after the adoption date.
In August 2017, the FASB issued an accounting standards update that amends the guidance on derivatives and hedging. The guidance reduces the complexity of and simplifies the application of hedge accounting. The guidance also better aligns disclosures with risk management activities. This guidance is effective for the annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. The Company currently does not designate any derivative financial instruments as formal hedge relationships, and therefore, does not utilize hedge accounting.

11


2. Going Concern
The Company continues to face certain challenges and uncertainties that could have significant adverse effects on its business, liquidity, and financing activities. On October 20, 2017, the Company entered into the RSAs in which the Consenting Senior Noteholders and Consenting Term Lenders and the Company have agreed to the principal terms of a financial restructuring of the Company which will be implemented through the Prepackaged Plan under Chapter 11 of the Bankruptcy Code and will restructure the indebtedness comprising the Company’s Term Loan Claims, Senior Notes Claims and Convertible Notes Claims, as well as the Company’s outstanding common stock. As of November 6, 2017, the holders of approximately 95% of the Term Loans are parties to the Term Loan RSA and approximately 85% of the Senior Notes are parties to the Senior Noteholder RSA. Pursuant to the Prepackaged Plan, it is intended that only the Parent Company will file for reorganization under the Bankruptcy Code. The Company’s operating entities are expected to remain out of Chapter 11 and continue operations in the normal course through the consummation of the Restructuring, which is expected to occur no later than January 31, 2018. The Company commenced solicitation on the Prepackaged Plan on November 6, 2017, and, pursuant to the RSAs, is required to file for reorganization under the Bankruptcy Code by November 30, 2017. The Company intends to complete the reorganization process on an expedited basis, concluding on the Effective Date, which is contemplated to be no later than January 31, 2018.
Refer to Notes 3 and 10 for more information on the Company's Prepackaged Chapter 11 Plan restructuring, including the impact on warehouse borrowings and advance financing facilities.
The Company is not currently in compliance with, and may be unable to regain and/or maintain compliance with, certain continued listing standards of the NYSE. If the Company is 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 the Company fails to maintain compliance with certain continued listing standards that do not provide for a cure period, it will result in the delisting of the Company’s common stock from the NYSE, which could negatively impact the trading price, trading volume and liquidity of, and have other material adverse effects on, the Company’s common stock. If the Company’s common stock is delisted from the NYSE, this could also have negative implications on the Company’s business relationships under the Company’s material agreements with lenders and other counterparties. The Company has been in contact with the NYSE and is working to regain compliance with NYSE continued listing requirements, including, among other things, by restructuring its corporate debt. The Company is also working with the NYSE to avoid delisting due to the Company’s plan to restructure its indebtedness under Chapter 11 of the Bankruptcy Code. The Company continues to monitor other listing standards. No assurance can be given that the Company’s common stock will not be delisted from the NYSE.
The Company’s subsidiaries are parties to seller/servicer agreements with, and/or subject to the guidelines and regulations of (collectively, the seller/servicer obligations), the GSEs and various government agencies, including the CFPB, HUD, FHA, VA and Ginnie Mae. These seller/servicer obligations include financial covenants and other requirements as defined by the applicable agency. To the extent that these seller/servicer obligations are not met, the applicable GSE or government agency may, at its option, take action to implement one or more of a variety of remedies including, without limitation, requiring certain Company subsidiaries to deposit funds as security for one or more of such subsidiaries’ obligations to the GSEs or government agencies, imposing sanctions on one or more of such subsidiaries, which could include monetary fines or penalties, forcing one or more subsidiaries to transfer servicing on all or a portion of the mortgage loans such subsidiary services for the applicable GSE or government agency, and/or suspending or terminating the approved seller/servicer status of one or more subsidiaries, which could prohibit or severely limit the ability of one or more subsidiaries to originate, service and/or securitize mortgage loans for the applicable GSE or agency. To date, none of the GSEs or government agencies with which the Company and its subsidiaries do business has communicated any material sanction, suspension or prohibition that would materially adversely affect the Company’s business; however, the GSEs and certain of such government agencies have required frequent reporting regarding the financial status of the Company, including preliminary financial results and the availability to the Company of financing capacity under its existing borrowing facilities. The GSEs and certain of such government agencies have also requested frequent telephonic updates with senior Company management regarding the status of the Company’s debt restructuring initiative and other matters. The Company’s subservicing agreements also contain requirements regarding servicing practices and other matters, and a failure to comply with these requirements could have an adverse impact on the Company’s business and liquidity. The Company continues to engage in communications with key stakeholders, including the GSEs, Ginnie Mae, HUD, regulators and government agencies in connection with the Restructuring and the uncertainties regarding the Company’s ability to continue as a going concern as identified above.
The significant risks and uncertainties related to the Company’s Prepackaged Plan raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. The consolidated financial statements do not include any adjustments that might result from the outcome of the going concern uncertainty.

12


3. Company Restructuring
As previously disclosed in the Company’s Current Report on Form 8-K dated November 6, 2017, the Company commenced the solicitation of votes to obtain acceptances for a Prepackaged Plan under the Bankruptcy Code, which provides for the restructuring of the Company’s indebtedness consisting of the Company’s 2013 Term Loan, Senior Notes and Convertible Notes, as well as the Company’s outstanding common stock. The Company intends to commence a prepackaged Chapter 11 Case following the conclusion of the solicitation and on or before November 30, 2017. The Company intends to complete the reorganization process on an expedited basis, contemplated to be no later than January 31, 2018. Reference is made to the exhibits to this Quarterly Report on Form 10-Q for further information as to the Prepackaged Plan and the agreements related thereto.
On July 31, 2017, the Company entered into the Term Loan RSA, as amended, with lenders holding, as of July 31, more than 50% of the 2013 Term Loans and/or commitments outstanding under the Company’s 2013 Credit Agreement. Pursuant to the Term Loan RSA, in August 2017, the Company made a principal payment of $100.0 million on the 2013 Term Loan, resulting in a loss on extinguishment of $1.0 million, primarily due to the write-off of deferred financing fees. Additionally, in October 2017, the Company made principal payments on the 2013 Term Loan totaling $65.6 million, which included $37.5 million required under the terms of the Term Loan RSA and related amendments and $28.1 million which represented 80% of the gross proceeds from the sale of certain MSRs as required under the Third Amendment to the Credit Agreement. In addition, the Company will be required to repay $37.5 million upon the Effective Date of the Prepackaged Plan, and $72.7 million by February 15, 2018. On October 20, 2017, the Company entered into (i) the Amended and Restated Term Loan RSA with Consenting Term Lenders, and (ii) the Senior Noteholder RSA with the Consenting Senior Noteholders holding, as of October 20, 2017, more than 50% of the Senior Notes under the Senior Notes Indenture. As of November 6, 2017, the holders of more than 85% of the Senior Notes and more than 95% of the 2013 Term Loans are party to the applicable RSA, which requires them to vote to approve the Prepackaged Plan. It is contemplated that only the Parent Company will file for reorganization under Chapter 11. The Company's operating entities, including Ditech Financial and RMS, are expected to continue their operations in the ordinary course throughout the consummation of the Restructuring, although no assurance can be given that this will be the case.
The claims in the following classes are impaired under the Prepackaged Plan and entitled to vote to accept or reject the Prepackaged Plan: Term Lenders, Senior Noteholders and Convertible Noteholders. The Bankruptcy Code defines “acceptance” of a plan by a class of: (i) claims as acceptance by creditors in that class that hold at least two-thirds in dollar amount and more than one-half in number of the claims that cast ballots for acceptance or rejection of the plan; and (ii) interests as acceptance by interest holders in that class that hold at least two-thirds in dollar amount of the interests that cast ballots for acceptance or rejection of the plan.
In connection with the Restructuring, on November 6, 2017, the Company entered into the Commitment Letter with certain existing warehouse lenders, which, if approved by the Bankruptcy Court, will provide the Company with the DIP Warehouse Facilities of up to $1.9 billion in available warehouse financing during the Chapter 11 Case and one year following the Effective Date of the Prepackaged Plan. Proceeds of the new DIP Warehouse Facilities are intended to refinance RMS’s and Ditech Financial’s existing warehouse and servicer advance facilities and to fund Ditech Financial's and RMS’ continued business operations. The Parent Company will guarantee Ditech Financial’s and RMS’ obligations under the agreement.
The DIP Warehouse Facilities will provide that during the Chapter 11 Case, (i) up to $750.0 million will be available to fund Ditech Financial’s origination business, (ii) up to $800.0 million will be available to RMS, and (iii) up to $550.0 million will be available to finance advances related to Ditech Financial’s servicing activities, provided that this sub-limit may be increased to $600.0 million in the event that certain pre-petition servicing advance facilities are unavailable to Ditech Financial during the Chapter 11 Case. Upon the Effective Date of the Prepackaged Plan, the amount available to fund Ditech Financial's originations business under the exit warehouse facility will increase to up to $1.0 billion.
As previously disclosed, it is anticipated that, among other things, on the Effective Date:
•
the Parent Company will be a guarantor of the DIP Warehouse Facilities;
•
the Company's 2013 Credit Agreement will be amended and restated consistent with the terms of the draft Amended and Restated Credit Agreement as filed on November 6, 2017 with the Form T-3. The Amended and Restated Credit Agreement would among other things:
◦
Extend the maturity thereunder from December 2020 to June 2022
◦
Increase the interest rate margin to LIBOR plus 6.00%
◦
Require quarterly payments beginning in March 2018
◦
Amend and expand financial covenants;
•
the Company’s existing Revolving Credit Facility will be paid in full and terminated;

13


•
The Company will issue to holders of Senior Notes claims:
◦
$250.0 million aggregate principal amount of secured second lien notes with current market terms, covenants and conditions for second lien high yield notes;
◦
$100.0 million face amount of Mandatorily Convertible Preferred Stock, on terms set forth in a term sheet to the RSAs, convertible into 73% of the total number of issued and outstanding shares of New Common Stock as of the Effective Date subject to dilution by shares of New Common Stock issued or issuable pursuant to the Management Incentive Plan and by shares of New Common Stock issued after the Effective Date, including shares of New Common Stock issuable pursuant to the Warrants (if issued); and
◦
if the Convertible Noteholders do not vote to accept the Prepackaged Plan, 100% of the New Common Stock issued, subject to dilution by shares of New Common Stock issuable on conversion of the Mandatorily Convertible Preferred Stock and shares of New Common Stock issued or issuable pursuant to the Management Incentive Plan (described below) and shares of New Common Stock issued after the Effective Date.
•
Solely if the class of Convertible Notes claims votes to accept the Prepackaged Plan:
◦
each holder of a Convertible Note will receive its pro rata share of (i) New Common Stock representing, in the aggregate, 50% of the New Common Stock issued, subject to dilution by shares of New Common Stock issuable upon conversion of the Mandatorily Convertible Preferred Stock, shares of New Common Stock issued or issuable pursuant to the Management Incentive Plan and shares of New Common Stock issued after the Effective Date, including pursuant to the Warrants, and (ii) 50% of two separate classes of 10 year Warrants, on the terms set forth in a term sheet to the RSAs; and
◦
each holder of the Company’s existing common stock will receive its pro rata share of (i) New Common Stock representing, in the aggregate, 50% of the New Common Stock issued, subject to dilution by shares of New Common Stock issuable upon conversion of the Mandatorily Convertible Preferred Stock, shares of New Common Stock issued or issuable pursuant to the Management Incentive Plan and shares of New Common Stock issued after the Effective Date, including pursuant to the Warrants, and (ii) 50% of each class of Warrants.
If the Convertible Noteholders do not vote to accept the Prepackaged Plan, then holders of Convertible Notes and holders of the Company’s existing common stock will not receive or retain any property under the Prepackaged Plan, and 100% of the New Common Stock issued on the Effective Date will be issued to the Senior Noteholders, subject to dilution by shares of New Common Stock issuable upon conversion of the Mandatorily Convertible Preferred Stock, shares of New Common Stock issued or issuable pursuant to the Management Incentive Plan and shares of New Common Stock issued after the Effective Date.
Upon the Effective Date, the Company's existing common stock, Senior Notes and Convertible Notes will be canceled. The board of directors of the Reorganized Company will consist of nine members, with six directors designated by the Senior Noteholders, and three directors designated by the Company. The Reorganized Company will enter into a post-Restructuring Management Incentive Plan, under which 10% of the New Common Stock (after taking into account the shares to be issued under the Management Incentive Plan) will be reserved for issuance as awards under the Management Incentive Plan.
As required by the RSAs, the Company did not make the $5.5 million interest payment due November 1, 2017 on the Company’s Convertible Notes and, as provided for in the indenture governing the Convertible Notes, has entered into the 30-day grace period to make such payment.
Refer to Note 10 for further information on the DIP warehouse facilities and exit warehouse facilities.

14


4. Variable Interest Entities
Consolidated Variable Interest Entities
Included in Note 7 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2016 are descriptions of the Company’s Consolidated VIEs.
Included in the tables below are summaries of the carrying amounts of the assets and liabilities of consolidated VIEs (in thousands):
 
 
September 30, 2017
 
 
Residual
Trusts
 
Non-Residual
Trusts
 
Servicer and Protective Advance Financing Facilities
 
 Revolving Credit Facilities-Related VIEs
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Restricted cash and cash equivalents
 
$
12,100

 
$
10,682

 
$
11,031

 
$
—

 
$
33,813

Residential loans at amortized cost, net
 
431,459

 
—

 
—

 
—

 
431,459

Residential loans at fair value
 
—

 
381,125

 
—

 
—

 
381,125

Receivables, net
 
—

 
7,498

 
—

 
894

 
8,392

Servicer and protective advances, net
 
—

 
—

 
478,834

 
—

 
478,834

Other assets
 
10,631

 
1,116

 
276

 
19,959

 
31,982

Total assets
 
$
454,190

 
$
400,421

 
$
490,141

 
$
20,853

 
$
1,365,605

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Payables and accrued liabilities
 
$
1,961

 
$
—

 
$
536

 
$
—

 
$
2,497

Servicing advance liabilities
 
—

 
—

 
425,468

 
—

 
425,468

Mortgage-backed debt
 
395,976

 
436,921

 
—

 
—

 
832,897

Total liabilities
 
$
397,937

 
$
436,921

 
$
426,004

 
$
—

 
$
1,260,862

 
 
December 31, 2016
 
 
Residual
Trusts
 
Non-Residual
Trusts
 
Servicer and Protective Advance Financing Facilities
 
 Revolving Credit Facilities-Related VIEs
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Restricted cash and cash equivalents
 
$
13,321

 
$
10,257

 
$
22,265

 
$
—

 
$
45,843

Residential loans at amortized cost, net
 
462,877

 
—

 
—

 
—

 
462,877

Residential loans at fair value
 
—

 
450,377

 
—

 
42,122

 
492,499

Receivables, net
 
—

 
15,033

 
—

 
765

 
15,798

Servicer and protective advances, net
 
—

 
—

 
734,707

 
—

 
734,707

Other assets
 
10,028

 
1,028

 
1,440

 
7,335

 
19,831

Total assets
 
$
486,226

 
$
476,695

 
$
758,412

 
$
50,222

 
$
1,771,555

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Payables and accrued liabilities
 
$
2,140

 
$
—

 
$
845

 
$
—

 
$
2,985

Servicing advance liabilities
 
—

 
—

 
650,565

 
—

 
650,565

Mortgage-backed debt
 
429,931

 
514,025

 
—

 
—

 
943,956

Total liabilities
 
$
432,071

 
$
514,025

 
$
651,410

 
$
—

 
$
1,597,506


15


Unconsolidated Variable Interest Entities
Included in Note 7 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2016 are descriptions of the Company's variable interests in VIEs that it does not consolidate as it has determined that it is not the primary beneficiary of the VIEs. Additionally, refer to Note 16 for information on the Company's transactions with WCO.
5. Transfers of Residential Loans
Sales of Mortgage Loans
As part of its originations activities, the Company sells substantially all of its originated or purchased mortgage loans into the secondary market for securitization or to private investors as whole loans. The Company sells conventional-conforming and government-backed mortgage loans through GSE and agency-sponsored securitizations in which mortgage-backed securities are created and sold to third-party investors. The Company also sells non-conforming mortgage loans to private investors. The Company accounts for these transfers as sales. If the servicing rights are retained upon sale, the Company receives a fee for servicing the sold loans, which represents continuing involvement.
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 loans, or otherwise indemnify or reimburse the credit owner or insurer for losses incurred, due to a breach of contractual representations and warranties. Refer to Note 14 for additional information.
The following table presents the carrying amounts of the Company’s net assets that relate to its continuing involvement with mortgage loans that have been sold with servicing rights retained and the unpaid principal balance of these sold loans (in thousands):
 
 
Carrying Value of Net Assets
Recorded on the Consolidated Balance Sheets
 
Unpaid
Principal
Balance of
Sold Loans
 
 
Servicing
Rights,
Net (1)
 
Servicer and
Protective
Advances, Net
 
Payables and Accrued Liabilities
 
Total
 
September 30, 2017
 
$
415,383

 
$
17,168

 
$
(1,565
)
 
$
430,986

 
$
37,840,960

December 31, 2016 (1)
 
439,062

 
21,825

 
(1,983
)
 
458,904

 
36,116,570

__________
(1)
The Company has revised the December 31, 2016 disclosed amount of net servicing rights for which the Company has continuing involvement. The total net servicing rights balance reported in the consolidated balance sheets as of December 31, 2016 was not impacted by this disclosure revision.
At September 30, 2017 and December 31, 2016, 1.7% and 1.3%, respectively, of mortgage loans sold and serviced by the Company were 60 days or more past due.
The following table presents a summary of cash flows related to sales of mortgage loans (in thousands):
 
 
For the Three Months 
 Ended September 30,
 
For the Nine Months 
 Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Cash proceeds received from sales, net of fees
 
$
3,985,471

 
$
5,643,244

 
$
13,789,344

 
$
15,933,300

Servicing fees collected (1)
 
30,668

 
35,125

 
91,034

 
106,304

Repurchases of previously sold loans (2)
 
36,401

 
7,974

 
67,413

 
24,292

__________
(1)
Represents servicing fees collected on all loans sold whereby the Company has continuing involvement with mortgage loans that have been sold with servicing rights retained.
(2)
Includes Ginnie Mae buyout loans of $32.9 million and $1.5 million for the three months ended September 30, 2017 and 2016, respectively, and $58.2 million and $11.2 million for the nine months ended September 30, 2017 and 2016, respectively.
In connection with these sales, the Company recorded servicing rights using either a fair value model that utilizes Level 3 unobservable inputs or using an agreed upon sales price considered to be Level 2. Refer to Note 8 for information relating to servicing of residential loans.

16


Transfers of Reverse Loans
The Company, through RMS, is an approved issuer of Ginnie Mae HMBS. The HMBS are guaranteed by Ginnie Mae and collateralized by participation interests in HECMs insured by the FHA. The Company both originated and purchased HECMs that were pooled and securitized into HMBS that the Company sold into the secondary market with servicing rights retained. Effective January 2017, the Company exited the reverse mortgage originations business. As of September 30, 2017, the Company did not have any reverse loans remaining in its originations pipeline and had finalized the shutdown of the reverse mortgage originations business. The Company will continue to fund undrawn tails available to borrowers.
Based upon the structure of the Ginnie Mae securitization program, the Company has determined that it has not met all of the requirements for sale accounting and 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. Ginnie Mae, as guarantor of the HMBS, is obligated to the holders of the HMBS in an instance of RMS default on its servicing obligations, or when the proceeds realized on HECMs are insufficient to repay all outstanding HMBS related obligations. Ginnie Mae has recourse to RMS to the extent of the participation interests in HECMs serving as collateral to the HMBS, but does not have recourse to the general assets of the Company, except that Ginnie Mae has recourse to RMS in connection with certain claims relating to the performance and obligations of RMS as both an issuer of HMBS and a servicer of HECMs underlying HMBS.
At September 30, 2017, the unpaid principal balance and the carrying value associated with both the reverse loans and the real estate owned pledged as collateral to the securitization pools were $9.1 billion and $9.4 billion, respectively.
6. Fair Value
Basis for Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A three-tier fair value hierarchy is used to prioritize the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:
Level 1 — Valuation is based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 — Valuation is based on quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 — Valuation is based on inputs that are both significant to the fair value measurement and unobservable.
The accounting guidance concerning fair value allows the Company to elect to measure financial instruments at fair value and report the changes in fair value through net income or loss. This election can only be made at certain specified dates and is irrevocable once made. Other than mortgage loans held for sale, which the Company has elected to measure at fair value, the Company does not have a fair value election policy, but rather makes the election on an instrument-by-instrument basis as assets and liabilities are acquired or incurred, other than for those assets and liabilities that are required to be recorded and subsequently measured at fair value.
Transfers into and out of the fair value hierarchy levels are assumed to be as of the end of the quarter in which the transfer occurred. During the three and nine months ended September 30, 2017, the Company transferred $34.8 million in servicing rights carried at fair value from Level 3 to Level 2 as there was direct observable input in a non-active market available to measure these assets. During the three and nine months ended September 30, 2016, the Company transferred $212.6 million in servicing rights carried at fair value from Level 3 to Level 2 as there was direct observable input in a non-active market available to measure these assets.

17


Items Measured at Fair Value on a Recurring Basis
The following table summarizes the assets and liabilities in each level of the fair value hierarchy (in thousands). There was an insignificant amount of assets or liabilities measured at fair value on a recurring basis utilizing Level 1 assumptions.
 
 
September 30, 
 2017
 
December 31, 
 2016
Level 2
 
 
 
 
Assets
 
 
 
 
Mortgage loans held for sale
 
$
816,381

 
$
1,176,280

Servicing rights carried at fair value
 
42,033

 
13,170

Freestanding derivative instruments
 
2,749

 
34,543

Level 2 assets
 
$
861,163

 
$
1,223,993

Liabilities
 
 
 
 
Freestanding derivative instruments
 
$
1,916

 
$
7,611

Servicing rights related liabilities
 
1,565

 
1,902

Level 2 liabilities
 
$
3,481

 
$
9,513

 
 
 
 
 
Level 3
 
 
 
 
Assets
 
 
 
 
Reverse loans
 
$
10,111,725

 
$
10,742,922

Mortgage loans related to Non-Residual Trusts
 
381,125

 
450,377

Mortgage loans held for sale
 
22,119

 
—

Charged-off loans
 
46,142

 
46,963

Receivables related to Non-Residual Trusts
 
7,498

 
15,033

Servicing rights carried at fair value
 
766,797

 
936,423

Freestanding derivative instruments (IRLCs)
 
33,466

 
53,394

Level 3 assets
 
$
11,368,872

 
$
12,245,112

Liabilities
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
867

 
$
4,193

Mortgage-backed debt related to Non-Residual Trusts
 
436,921

 
514,025

HMBS related obligations
 
9,598,234

 
10,509,449

Level 3 liabilities
 
$
10,036,022

 
$
11,027,667



18


The following assets and liabilities are measured on the consolidated balance sheets at fair value on a recurring basis utilizing significant unobservable inputs or Level 3 assumptions in their valuation. The following tables provide a reconciliation of the beginning and ending balances of these assets and liabilities (in thousands):
 
 
For the Three Months Ended September 30, 2017
 
 
Fair Value
July 1, 2017
 
Total
Gains (Losses)
Included in
Comprehensive Loss
 
Purchases
 
Sales and Other
 
Originations / Issuances
 
Settlements
 
Transfers Out of Level 3
 
Fair Value
September 30, 2017
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse loans
 
$
10,440,669

 
$
47,398

 
$
—

 
$
—

 
$
84,862

 
$
(461,204
)
 
$
—

 
$
10,111,725

Mortgage loans related to Non-Residual Trusts (1)
 
406,006

 
13,160

 
—

 
(16,172
)
 
—

 
(21,869
)
 
—

 
381,125

Mortgage loans held for sale (1)
 
8,738

 
(2,201
)
 
—

 
16,172

 
—

 
(590
)
 
—

 
22,119

Charged-off loans (2)
 
49,626

 
6,157

 
—

 
—

 
—

 
(9,641
)
 
—

 
46,142

Receivables related to Non-Residual Trusts
 
11,841

 
(362
)
 
—

 
—

 
—

 
(3,981
)
 
—

 
7,498

Servicing rights carried at fair value
 
864,108

 
(81,881
)
 
36

 
1,465

 
17,916

 
—

 
(34,847
)
 
766,797

Freestanding derivative instruments (IRLCs)
 
31,687

 
1,833

 
—

 
—

 
—

 
(54
)
 
—

 
33,466

Total assets
 
$
11,812,675

 
$
(15,896
)
 
$
36

 
$
1,465

 
$
102,778

 
$
(497,339
)
 
$
(34,847
)
 
$
11,368,872

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
(2,175
)
 
$
1,308

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(867
)
Mortgage-backed debt related to Non-Residual Trusts
 
(470,600
)
 
(8,459
)
 
—

 
—

 
—

 
42,138

 
—

 
(436,921
)
HMBS related obligations
 
(9,986,409
)
 
(45,588
)
 
—

 
—

 
(97,776
)
 
531,539

 
—

 
(9,598,234
)
Total liabilities
 
$
(10,459,184
)
 
$
(52,739
)
 
$
—

 
$
—

 
$
(97,776
)
 
$
573,677

 
$
—

 
$
(10,036,022
)
__________
(1)
During the three months ended September 30, 2017, $16.2 million of loans transferred from mortgage loans related to Non-Residual Trusts to mortgage loans held for sale upon exercising a mandatory call obligation. See Note 14 for additional information on the mandatory call obligations.
(2)
Included in gains on charged-off loans are gains from instrument-specific credit risk, which primarily result from changes in assumptions related to collection rates and discount rates, of $0.5 million during the three months ended September 30, 2017.

19


 
 
For the Three Months Ended September 30, 2016
 
 
Fair Value
July 1, 2016
 
Total
Gains (Losses)
Included in
Comprehensive Loss
 
Purchases and Other
 
Sales
 
Originations / Issuances
 
Settlements
 
Transfers Out of Level 3
 
Fair Value
September 30, 2016
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse loans
 
$
10,910,237

 
$
96,139

 
$
157,138

 
$
—

 
$
111,645

 
$
(330,090
)
 
$
—

 
$
10,945,069

Mortgage loans related to Non-Residual Trusts 
 
488,179

 
(1,025
)
 
—

 
—

 
—

 
(23,534
)
 
—

 
463,620

Charged-off loans (1)
 
51,062

 
8,880

 
—

 
—

 
—

 
(10,681
)
 
—

 
49,261

Receivables related to Non-Residual Trusts
 
12,681

 
4,547

 
—

 
—

 
—

 
(2,218
)
 
—

 
15,010

Servicing rights carried at fair value (2)
 
1,255,351

 
(86,036
)
 
(11,421
)
 
(12,792
)
 
49,912

 
—

 
(212,630
)
 
982,384

Freestanding derivative instruments (IRLCs)
 
75,477

 
3,070

 
—

 
—

 
—

 
(126
)
 
—

 
78,421

Total assets
 
$
12,792,987

 
$
25,575

 
$
145,717

 
$
(12,792
)
 
$
161,557

 
$
(366,649
)
 
$
(212,630
)
 
$
12,533,765

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
(163
)
 
$
(352
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(515
)
Servicing rights related liabilities (3)
 
(120,825
)
 
(9,885
)
 
—

 
—

 
—

 
11,443

 
—

 
(119,267
)
Mortgage-backed debt related to Non-Residual Trusts
 
(548,067
)
 
(6,182
)
 
—

 
—

 
—

 
24,876

 
—

 
(529,373
)
HMBS related obligations
 
(10,717,148
)
 
(77,512
)
 
—

 
—

 
(274,604
)
 
369,544

 
—

 
(10,699,720
)
Total liabilities
 
$
(11,386,203
)
 
$
(93,931
)
 
$
—

 
$
—

 
$
(274,604
)
 
$
405,863

 
$
—

 
$
(11,348,875
)
__________
(1)
Included in gains on charged-off loans are gains from instrument-specific credit risk, which primarily result from changes in assumptions related to collection rates and discount rates, of $3.5 million during the three months ended September 30, 2016.
(2)
During the three months ended September 30, 2016, the Company sold mortgage servicing rights with a fair value of $12.8 million and recognized a total net loss on sale of $0.1 million.
(3)
Included in losses on servicing rights related liabilities are losses from instrument-specific credit risk, which primarily result from changes in assumptions related to discount rates, conditional prepayment rates and conditional default rates, of $4.2 million during the three months ended September 30, 2016.

20


 
 
For the Nine Months Ended September 30, 2017
 
 
Fair Value
January 1, 2017
 
Total
Gains (Losses)
Included in
Comprehensive Loss
 
Purchases
 
Sales and Other
 
Originations / Issuances
 
Settlements
 
Transfers Out of Level 3
 
Fair Value
September 30, 2017
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse loans
 
$
10,742,922

 
$
162,579

 
$
44,769

 
$
—

 
$
256,896

 
$
(1,095,441
)
 
$
—

 
$
10,111,725

Mortgage loans related to Non-Residual Trusts (1)
 
450,377

 
22,319

 
—

 
(25,062
)
 
—

 
(66,509
)
 
—

 
381,125

Mortgage loans held for sale (1)
 
—

 
(2,195
)
 
—

 
25,062

 
—

 
(748
)
 
—

 
22,119

Charged-off loans (2)
 
46,963

 
28,909

 
—

 
—

 
—

 
(29,730
)
 
—

 
46,142

Receivables related to Non-Residual Trusts
 
15,033

 
2,740

 
—

 
—

 
—

 
(10,275
)
 
—

 
7,498

Servicing rights carried at fair value
 
936,423

 
(200,993
)
 
555

 
5,672

 
59,987

 
—

 
(34,847
)
 
766,797

Freestanding derivative instruments (IRLCs)
 
53,394

 
(19,763
)
 
—

 
—

 
—

 
(165
)
 
—

 
33,466

Total assets
 
$
12,245,112

 
$
(6,404
)
 
$
45,324

 
$
5,672

 
$
316,883

 
$
(1,202,868
)
 
$
(34,847
)
 
$
11,368,872

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
(4,193
)
 
$
3,326

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(867
)
Mortgage-backed debt related to Non-Residual Trusts
 
(514,025
)
 
(22,424
)
 
—

 
—

 
—

 
99,528

 
—

 
(436,921
)
HMBS related obligations
 
(10,509,449
)
 
(138,195
)
 
—

 
—

 
(375,786
)
 
1,425,196

 
—

 
(9,598,234
)
Total liabilities
 
$
(11,027,667
)
 
$
(157,293
)
 
$
—

 
$
—

 
$
(375,786
)
 
$
1,524,724

 
$
—

 
$
(10,036,022
)
__________
(1)
During the nine months ended September 30, 2017, $25.1 million of loans transferred from mortgage loans related to Non-Residual Trusts to mortgage loans held for sale upon exercising a mandatory call obligation. See Note 14 for additional information on the mandatory call obligations.
(2)
Included in gains on charged-off loans are gains from instrument-specific credit risk, which primarily result from changes in assumptions related to collection rates and discount rates, of $12.4 million during the nine months ended September 30, 2017.

21


 
 
For the Nine Months Ended September 30, 2016
 
 
Fair Value
January 1, 2016
 
Total
Gains (Losses)
Included in
Comprehensive Loss
 
Purchases and Other
 
Sales
 
Originations / Issuances
 
Settlements
 
Transfers Out of Level 3
 
Fair Value
September 30, 2016
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse loans
 
$
10,763,816

 
$
392,348

 
$
296,093

 
$
—

 
$
357,603

 
$
(864,791
)
 
$
—

 
$
10,945,069

Mortgage loans related to Non-Residual Trusts 
 
526,016

 
10,556

 
—

 
—

 
—

 
(72,952
)
 
—

 
463,620

Charged-off loans (1)
 
49,307

 
32,924

 
—

 
—

 
—

 
(32,970
)
 
—

 
49,261

Receivables related to Non-Residual Trusts
 
16,542

 
4,698

 
—

 
—

 
—

 
(6,230
)
 
—

 
15,010

Servicing rights carried at fair value (2)
 
1,682,016

 
(600,109
)
 
5,685

 
(41,027
)
 
148,449

 
—

 
(212,630
)
 
982,384

Freestanding derivative instruments (IRLCs)
 
51,519

 
27,476

 
—

 
—

 
—

 
(574
)
 
—

 
78,421

Total assets
 
$
13,089,216

 
$
(132,107
)
 
$
301,778

 
$
(41,027
)
 
$
506,052

 
$
(977,517
)
 
$
(212,630
)
 
$
12,533,765

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
(1,070
)
 
$
555

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(515
)
Servicing rights related liabilities (3)
 
(117,000
)
 
(4,688
)
 
—

 
—

 
(27,886
)
 
30,307

 
—

 
(119,267
)
Mortgage-backed debt related to Non-Residual Trusts
 
(582,340
)
 
(21,101
)
 
—

 
—

 
—

 
74,068

 
—

 
(529,373
)
HMBS related obligations
 
(10,647,382
)
 
(330,863
)
 
—

 
—

 
(684,711
)
 
963,236

 
—

 
(10,699,720
)
Total liabilities
 
$
(11,347,792
)
 
$
(356,097
)
 
$
—

 
$
—

 
$
(712,597
)
 
$
1,067,611

 
$
—

 
$
(11,348,875
)
__________
(1)
Included in gains on charged-off loans are gains from instrument-specific credit risk, which primarily result from changes in assumptions related to collection rates and discount rates, of $17.8 million during the nine mont