Note 23 — Business Segment Reporting

Our business segments reflect the internal reporting that we use to evaluate operating performance of services and to assess the allocation of our resources. A brief description of our current business segments is as follows:

Servicing. This segment is primarily comprised of our core residential mortgage servicing business and currently accounts for most of our total revenues. We provide residential and commercial mortgage loan servicing, special servicing and asset management services. We earn fees for providing these services to owners of the mortgage loans and foreclosed real estate. In most cases, we provide these services either because we purchased the MSRs from the owner of the mortgage, retained the MSRs on the sale or securitization of residential mortgage loans or because we entered into a subservicing or special servicing agreement with the entity that owns the MSR. Our residential servicing portfolio includes conventional, government-insured and non-Agency loans. Non-Agency loans include subprime loans, which represent residential loans that generally did not qualify under GSE guidelines or have subsequently become delinquent.

Lending. The Lending segment purchases and originates conventional and government-insured residential forward and reverse mortgage loans. The loans are typically sold shortly after origination into a liquid market on a servicing retained (securitization) or servicing released (sale to a third party) basis. We originate forward mortgage loans directly with customers (retail channel) as well as through correspondent lending arrangements since the second quarter of 2019. We originate reverse mortgage loans in all three channels through our correspondent lending arrangements, broker relationships (wholesale) and retail channels. In 2017, we closed our forward correspondent lending channel and exited the forward wholesale lending business due to higher liquidity and capital requirements versus the available liquidity at the time. We wrote off the capitalized balance of software developed internally for the forward wholesale lending business and recorded a loss of $6.8 million in Other expenses in 2017.

Corporate Items and Other. Corporate Items and Other includes revenues and expenses of corporate support services, CR Limited (CRL), our wholly-owned captive reinsurance subsidiary, discontinued operations and inactive entities, business activities that are individually insignificant, revenues and expenses that are not directly related to other reportable segments, interest income on short-term investments of cash and interest expense on corporate debt. Corporate Items and Other also includes severance, retention, facility-related and other expenses incurred in 2019 related to our cost re-engineering plan. Our cash balances are included in Corporate Items and Other. CRL provides re-insurance related to coverage on foreclosed real estate properties owned or serviced by us. In January 2018, we decided to exit the ACS business and have liquidated our portfolio of inventory-secured loans to independent used car dealers.

We allocate a portion of interest income to each business segment, including interest earned on cash balances and short-term investments. We also allocate expenses incurred by corporate support services to each business segment. Interest expense on direct asset-backed financings are recorded in the respective Servicing and Lending segments, while interest expense on the SSTL and Senior Notes is recorded in Corporate Items and Other and is not allocated.

Financial information for our segments is as follows:



Results of Operations	Servicing			Lending			Corporate Items and Other			Corporate Eliminations		Business Segments Consolidated
Year Ended December 31, 2019
Revenue	$	985,102		$	125,086		$	13,187		$	—	$	1,123,375

MSR valuation adjustments, net	(120,646		)	(230		)	—			—		(120,876		)

Operating expenses (1) (2)	536,153			84,280			53,506			—		673,939

Other income (expense):
Interest income	8,051			7,277			1,776			—		17,104
Interest expense	(47,347		)	(7,911		)	(58,871		)	—		(114,129		)
Pledged MSR liability expense	(372,172		)	—			83			—		(372,089		)
Gain on repurchase of senior secured notes	—			—			5,099			—		5,099
Bargain purchase gain	—			—			(381		)			(381		)
Gain on sale of MSRs, net	453			—			—			—		453
Other, net	11,942			791			(3,841		)	—		8,892
Other income (expense), net	(399,073		)	157			(56,135		)	—		(455,051		)

Income (loss) before income taxes	$	(70,770	)	$	40,733		$	(96,454	)	$	—	$	(126,491	)



Results of Operations	Servicing			Lending			Corporate Items and Other			Corporate Eliminations		Business Segments Consolidated
Year Ended December 31, 2018
Revenue	$	951,224		$	93,672		$	18,149		$	—	$	1,063,045

MSR valuation adjustments, net	(152,983		)	(474		)	—			—		(153,457		)

Operating expenses (1)	619,484			82,432			77,123			—		779,039

Other income (expense):
Interest income	5,383			6,061			2,582			—		14,026
Interest expense	(41,830		)	(7,311		)	(54,230		)	—		(103,371		)
Pledged MSR liability expense	(172,342		)	672			—			—		(171,670		)
Bargain purchase gain	—			—			64,036			—		64,036
Gain on sale of mortgage servicing rights, net	1,325			—			—			—		1,325
Other, net	(3,241		)	966			(4,096		)	—		(6,371		)
Other income (expense), net	(210,705		)	388			8,292			—		(202,025		)

Income (loss) from continuing operations before income taxes	$	(31,948	)	$	11,154		$	(50,682	)	$	—	$	(71,476	)

Year Ended December 31, 2017
Revenue	$	1,041,290		$	127,475		$	25,811		$	—	$	1,194,576

MSR valuation adjustments, net	(52,689		)	(273		)	—			—		(52,962		)

Operating expenses	663,695			127,785			154,203			—		945,683

Other income (expense):
Interest income	783			10,914			4,268			—		15,965
Interest expense	(57,284		)	(13,893		)	(55,750		)	—		(126,927		)
Pledged MSR liability expense	(236,311		)	—			—			—		(236,311		)
Gain on sale of MSRs	10,537			—			—			—		10,537
Other, net	4,049			(869		)	(6,348		)	—		(3,168		)
Other expense, net	(278,226		)	(3,848		)	(57,830		)	—		(339,904		)

Income (loss) before income taxes	$	46,680		$	(4,431	)	$	(186,222	)	$	—	$	(143,973	)

(1)

Compensation and benefits expense in the Corporate Items and Other segment for 2019 and 2018 includes $20.3 million and $11.9 million, respectively, of severance expense attributable to PHH integration-related headcount reductions of primarily U.S.-based employees in 2019 and severance expense attributable to headcount reductions in connection with our strategic decisions to exit the automotive capital services business and the forward lending correspondent and wholesale channels in late 2017 and early 2018, as well as our overall efforts to reduce costs.


(2)	Included in the Corporate Items and Other segment for 2019, we recorded in Professional services expense a recovery from a service provider of $30.7 million during the first quarter of amounts previously recognized as expense.



Total Assets	Servicing		Lending		Corporate Items and Other		Corporate Eliminations		Business Segments Consolidated
December 31, 2019	$	3,378,515	$	6,459,367	$	568,317	$	—	$	10,406,199

December 31, 2018	3,306,208		5,603,481		484,527		—		9,394,216

December 31, 2017	3,033,243		4,945,456		424,465		—		8,403,164



Depreciation and Amortization Expense	Servicing		Lending		Corporate Items and Other		Business Segments Consolidated
Year Ended December 31, 2019:
Depreciation expense	$	1,925	$	93	$	29,893	$	31,911
Amortization of debt discount	—		—		1,342		1,342
Amortization of debt issuance costs	71		—		3,099		3,170

Year Ended December 31, 2018:
Depreciation expense	$	4,601	$	103	$	22,498	$	27,202
Amortization of debt discount	—		—		1,183		1,183
Amortization of debt issuance costs	—		—		2,921		2,921



Year Ended December 31, 2017:
Depreciation expense	$	5,797	$	194	$	20,895	$	26,886
Amortization of mortgage servicing rights	51,515		273		—		51,788
Amortization of debt discount	—		—		1,114		1,114
Amortization of debt issuance costs	—		—		2,738		2,738