
Note 9 — Mortgage Servicing



Mortgage Servicing Rights – Amortization Method	Years Ended December 31,
Mortgage Servicing Rights – Amortization Method	2018			2017
Beginning balance	$	336,882		$	363,722
Fair value election - transfer to MSRs carried at fair value (1)	(361,670		)	—
Additions recognized in connection with asset acquisitions	—			1,658
Additions recognized on the sale of mortgage loans	—			20,738
Sales	—			(1,066		)
Servicing transfers and adjustments	—			252
	(24,788		)	385,304
Decrease in impairment valuation allowance (1) (2)	24,788			3,366
Amortization (1)	—			(51,788		)
Ending balance	$	—		$	336,882

Estimated fair value at end of year	$	—		$	418,745

(1)

Effective January 1, 2018, we elected fair value accounting for our MSRs previously accounted for using the amortization method, which included Agency MSRs and government-insured MSRs. This irrevocable election applies to all subsequently acquired or originated servicing assets and liabilities that have characteristics consistent with each of these classes. We recorded a cumulative-effect adjustment of $82.0 million to retained earnings as of January 1, 2018 to reflect the excess of the fair value of the Agency MSRs over their carrying amount. We also recognized the tax effect of this adjustment through an increase in retained earnings of $6.8 million and a deferred tax asset for the same amount. However, we established a full valuation allowance on the resulting deferred tax asset through a reduction in retained earnings. The government-insured MSRs were impaired by $24.8 million at December 31, 2017; therefore, these MSRs were already effectively carried at fair value.


(2)	Impairment of MSRs is recognized in MSR valuation adjustments, net in the consolidated statements of operations for 2017. Impairment valuation allowance balance of $24.8 million was reclassified to reduce the carrying value of the related MSRs on January 1, 2018 in connection with our fair value election.



Mortgage Servicing Rights – Fair Value Measurement Method	Years Ended December 31,
Mortgage Servicing Rights – Fair Value Measurement Method	2019									2018									2017
	Agency			Non-Agency			Total			Agency			Non-Agency			Total			Agency			Non-Agency			Total
Beginning balance	$	865,587		$	591,562		$	1,457,149		$	11,960		$	660,002		$	671,962		$	13,357		$	665,899		$	679,256
Fair value election - Transfer from MSRs carried at amortized cost	—			—			—			336,882			—			336,882			—			—			—
Cumulative effect of fair value election	—			—			—			82,043			—			82,043			—			—			—
Sales	(3,578		)	(766		)	(4,344		)	(4,748		)	(1,492		)	(6,240		)	—			(540		)	(540		)
Additions:
Recognized on the sale of residential mortgage loans	8,795			—			8,795			8,279			—			8,279			162			—			162
Recognized in connection with the acquisition of PHH	—			—			—			494,348			23,779			518,127			—			—			—
Purchase of MSRs	153,505			—			153,505			5,433			—			5,433			—			—			—
Servicing transfers and adjustments	—			(7,309		)	(7,309		)	(1,047		)	(4,833		)	(5,880		)	—			(2,376		)	(2,376		)
Changes in fair value (1):
Changes in valuation inputs or other assumptions	(171,050		)	265,003			93,953			11,558			(5,705		)	5,853			243			86,721			86,964
Realization of expected future cash flows and other changes	(139,253		)	(76,101		)	(215,354		)	(79,121		)	(80,189		)	(159,310		)	(1,802		)	(89,702		)	(91,504		)
Ending balance	$	714,006		$	772,389		$	1,486,395		$	865,587		$	591,562		$	1,457,149		$	11,960		$	660,002		$	671,962


(1)	Changes in fair value are recognized in MSR valuation adjustments, net in the consolidated statements of operations.

Portfolio of Assets Serviced

The following table presents the composition of our primary servicing and subservicing portfolios as measured by UPB. The UPB amounts in the table below are not included on our consolidated balance sheets.



	UPB at December 31,
	2019		2018		2017
Servicing (1)	$	76,657,932	$	72,378,693	$	75,469,327
Subservicing (1)	17,120,905		53,104,560		2,063,669
NRZ (1) (2)	118,587,594		130,517,237		101,819,557
	$	212,366,431	$	256,000,490	$	179,352,553


(1)	UPB at December 31, 2018 includes $6.3 billion, $51.3 billion and $42.3 billion UPB of loans serviced, subserviced or subserviced on behalf of NRZ, respectively, added to the portfolio in connection with the PHH acquisition.

(2)

UPB of loans for which the Rights to MSRs have been sold to NRZ, including $57.7 billion for which third-party consents have been received and the MSRs have been transferred to NRZ (the MSRs remain on balance sheet as the transactions do not achieve sale accounting treatment). At December 31, 2019, the $118.6 billion NRZ UPB includes $6.6 billion of loans that are subserviced on behalf of NRZ and were added in 2019 by NRZ to the PMC subservicing agreement. This $6.6 billion loan UPB is not included in the MSR loan UPB or associated Rights to MSRs - See Note 10 — Rights to MSRs.

On February 20, 2020, we received a notice of termination from NRZ with respect to the subservicing agreement between NRZ and PMC, which accounted for 20% of our servicing portfolio UPB at December 31, 2019. See Note 28 — Subsequent Events.

We acquired MSRs on portfolios with a UPB of $14.6 billion and $144.1 million during 2019 and 2018, respectively. We also sold MSRs with a UPB of $140.8 million, $901.3 million and $219.4 million during 2019, 2018 and 2017, respectively.

A significant portion of the servicing agreements for our non-Agency servicing portfolio contain provisions where we could be terminated as servicer without compensation upon the failure of the serviced loans to meet certain portfolio delinquency or cumulative loss thresholds. To date, terminations as servicer as a result of a breach of any of these provisions have been minimal.

At December 31, 2019, the S&P Global Ratings, Inc.’s (S&P) and Fitch Ratings, Inc.’s (Fitch) servicer ratings outlook for both PMC is stable. Downgrades in servicer ratings could adversely affect our ability to service loans, sell or finance servicing advances and could impair our ability to consummate future servicing transactions or adversely affect our dealings with lenders, other contractual counterparties, and regulators, including our ability to maintain our status as an approved servicer by Fannie Mae and Freddie Mac. The servicer rating requirements of Fannie Mae do not necessarily require or imply immediate action, as Fannie Mae has discretion with respect to whether we are in compliance with their requirements and what actions it deems appropriate under the circumstances in the event that we fall below their desired servicer ratings.

Certain of our servicing agreements require that we maintain specified servicer ratings from rating agencies such as Moody’s and S&P. As a result of our current servicer ratings, termination rights have been triggered in some non-Agency servicing agreements. To date, terminations as servicer as a result of a breach of any of these provisions have been minimal.

The geographic concentration of the UPB of residential loans and real estate we serviced at December 31, 2019 was as follows:



	Amount		Count
California	$	47,350,699	189,959
New York	19,557,621		90,805
Florida	16,366,372		121,875
New Jersey	10,921,867		57,182
Texas	10,073,637		100,868
Other	108,096,235		859,254
	$	212,366,431	1,419,943



	Years Ended December 31,
Servicing Revenue	2019		2018		2017
Loan servicing and subservicing fees
Servicing	$	227,490	$	227,639	$	259,640
Subservicing	15,459		8,904		7,775
NRZ	577,015		539,039		549,411
	819,964		775,582		816,826
Late charges	57,194		61,453		61,763
Home Affordable Modification Program (HAMP) fees (1)	5,538		14,312		43,310
Custodial accounts (float earnings)	47,562		40,115		25,237
Loan collection fees	15,539		18,392		22,770
Other	29,710		27,229		21,691
	$	975,507	$	937,083	$	991,597


(1)	The HAMP expired on December 31, 2016. Borrowers who had requested assistance or to whom an offer of assistance had been extended as of that date had until September 30, 2017 to finalize their modification. We continue to earn HAMP success fees for HAMP modifications that remain less than 90 days delinquent at the first-, second- and third-year anniversary of the start of the trial modification.

Float balances (balances in custodial accounts, which represent collections of principal and interest that we receive from borrowers) are held in escrow by unaffiliated banks and are excluded from our consolidated balance sheets. Float balances amounted to $1.7 billion, $1.7 billion and $1.5 billion at December 31, 2019, 2018 and 2017, respectively.