4. Mortgage Servicing Rights and Related Liabilities

The following table sets forth the carrying value of the Company’s MSRs and the related liabilities.



	Successor		Predecessor
MSRs and Related Liabilities	December 31, 2018		December 31, 2017
Forward MSRs - fair value	$	3,665	$	2,937
Reverse MSRs - amortized cost	11		4
Mortgage servicing rights	$	3,676	$	2,941

Mortgage servicing liabilities - amortized cost	$	71	$	41

Excess spread financing - fair value	$	1,184	$	996
Mortgage servicing rights financing - fair value	32		10
MSR related liabilities - nonrecourse at fair value	$	1,216	$	1,006

Mortgage Servicing Rights

The Company owns and records at fair value the rights to service traditional residential mortgage (“forward”) loans for others either as a result of purchase transactions or from the retained servicing associated with the sales and securitizations of loans originated. MSRs are comprised of servicing rights of both agency and non-agency loans.

The following table sets forth the activities of forward MSRs.



	Successor			Predecessor
Forward MSRs - Fair Value	For the Period August 1 - December 31, 2018			For the Period January 1 - July 31, 2018			Year ended December 31, 2017
Fair value - beginning of period	$	3,413		$	2,937		$	3,160
Additions:
Servicing retained from mortgage loans sold	120			162			203
Purchases of servicing rights	479			144			66
Dispositions:
Sales of servicing assets⁽¹⁾	(111		)	4			(60		)
Changes in fair value:
Changes in valuation inputs or assumptions used in the valuation model	(123		)	330			(101		)
Other changes in fair value	(113		)	(164		)	(331		)
Fair value - end of period	$	3,665		$	3,413		$	2,937


⁽¹⁾	Amount for the seven months ended July 31, 2018 is related to the sale of MSRs collateralized by nonperforming loans, which have a negative MSR value.

From time to time, the Company sells its ownership interest in certain MSRs and is retained as the subservicer for the sold assets. The Company has evaluated the sale accounting requirements related to these transactions, including the Company’s continued involvement as the subservicer, and concluded that these transactions qualify for sale accounting treatment. During the five months ended December 31, 2018, the Company sold $10,746 in unpaid principal balance (“UPB”) of forward MSRs, of which none was retained by the Company as subservicer. During the seven months ended July 31, 2018 and the year ended December 31, 2017, the Predecessor sold $1,203 and $2,123 in UPB of forward MSRs, respectively, of which $1 and $364 was retained by the Company as subservicer, respectively.

MSRs measured at fair value are segregated between credit sensitive and interest sensitive pools. Credit sensitive pools are primarily impacted by borrower performance under specified repayment terms, which most directly impacts involuntary prepayments and delinquency rates. Interest sensitive pools are primarily impacted by changes in forecasted interest rates, which in turn impact voluntary prepayment speeds. The Company assesses whether acquired portfolios are more credit sensitive or interest sensitive in nature on the date of acquisition. Numerous factors are considered in making this assessment, including loan-to-value ratios, FICO scores, percentage of portfolio previously modified, portfolio seasoning and similar criteria. The determination between credit sensitive and interest sensitive for a pool is made at the date of acquisition, and no subsequent changes are made.

Credit sensitive portfolios generally consist of higher delinquency, single-family non-conforming residential forward mortgage loans serviced for agency and non-agency investors. Interest sensitive portfolios generally consist of lower delinquency, single-family conforming residential forward mortgage loans for agency investors.

The following table provides a breakdown of credit sensitive and interest sensitive UPB for the Company’s forward MSRs.



	Successor				Predecessor
	December 31, 2018				December 31, 2017
MSRs - Sensitivity Pools	UPB		Fair Value		UPB		Fair Value
Credit sensitive	$	135,752	$	1,495	$	167,605	$	1,572
Interest sensitive	159,729		2,170		113,775		1,365
Total	$	295,481	$	3,665	$	281,380	$	2,937

The Company used the following key weighted-average inputs and assumptions in estimating the fair value of forward MSRs.



	Successor		Predecessor
Credit Sensitive	December 31, 2018		December 31, 2017
Discount rate	11.3	%	11.4	%
Total prepayment speeds	11.8	%	15.2	%
Expected weighted-average life	6.4 years		5.7 years

Interest Sensitive
Discount rate	9.3	%	9.2	%
Total prepayment speeds	10.0	%	10.7	%
Expected weighted-average life	7.0 years		6.7 years

The following table shows the hypothetical effect on the fair value of the forward MSRs when applying certain unfavorable variations of key assumptions to these assets for the dates indicated.



	Discount Rate						Total Prepayment Speeds
Forward MSRs - Hypothetical Sensitivities	100 bps Adverse Change			200 bps Adverse Change			10% Adverse Change			20% Adverse Change
Successor
December 31, 2018
Forward mortgage servicing rights	$	(137	)	$	(265	)	$	(129	)	$	(250	)

Predecessor
December 31, 2017
Forward mortgage servicing rights	$	(108	)	$	(208	)	$	(118	)	$	(227	)

These hypothetical sensitivities should be evaluated with care. The effect on fair value of a 10% adverse change in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.

Reverse Mortgage Servicing Rights and Liabilities - Amortized Cost

The Company services certain HECM reverse mortgage loans with an unpaid principal balance of $28,415 as of December 31, 2018. The Predecessor serviced and subserviced certain HECM reverse mortgage loans with an unpaid principal balance of $35,112 as of December 31, 2017. Reverse mortgage servicing liabilities had an ending balance of $71 and $41 as of December 31, 2018 and 2017 for the Company and Predecessor, respectively. For the five months ended December 31, 2018, the Company accreted $15 of the MSL. For the seven months ended July 31, 2018, the Predecessor accreted $11 of the MSL and recorded impairment of $56 in general and administrative expenses. For the year ended December 31, 2017, the Predecessor accreted $4 of the MSL and recorded an impairment of $3. Such accretion recorded by the Predecessor relates to previous portfolio acquisitions.

Reverse MSR had an ending balance of $11 and $4 as of December 31, 2018 and 2017 for the Company and Predecessor, respectively. For the five months ended December 31, 2018, the Company recorded $4 of amortization. For the seven months ended July 31, 2018, the Predecessor recorded an impairment of $4. For the year ended December 31, 2017, the Predecessor amortized $2 of the MSR.

The fair value of the reverse MSR was $11 and $29 as of December 31, 2018 and 2017 for the Company and Predecessor, respectively. The fair value of the MSL was $53 and $34 as of December 31, 2018 and 2017 for the Company and Predecessor, respectively. Management evaluates reverse MSRs and MSLs each reporting period for impairment. Based on management’s assessment at December 31, 2018 and 2017, no impairment or increased obligation was needed.

Excess Spread Financing - Fair Value

In order to finance the acquisition of certain MSRs on various Portfolios, the Company has entered into sale and assignment agreements with a third-party associated with funds and accounts under management of BlackRock Financial Management Inc. (“BlackRock”), a third-party associated with funds and accounts under management of Värde Partners, Inc. (“Varde”), and with certain affiliated entities formed and managed by New Residential Investment Corp. (“New Residential”). The Company sold to such entities the right to receive a specified percentage of the excess cash flow generated from the Portfolios after receipt of a fixed base servicing fee per loan. Servicing fees associated with traditional MSRs can be segregated into a contractually specified base servicing fee component and an excess servicing fee. The base servicing fee, along with ancillary income, is designed to cover costs incurred to service the specified pool plus a reasonable profit margin. The remaining servicing fee is considered excess. The Company retains all the base servicing fee and ancillary revenues associated with servicing the Portfolios and retains a portion of the excess servicing fee. The Company continues to be the servicer of the Portfolios and provides all servicing and advancing functions.

Contemporaneous with the above, the Company entered into refinanced loan obligations with New Residential, BlackRock and Varde. Should the Company refinance any loan in the Portfolios, subject to certain limitations, it will be required to transfer the new loan or a replacement loan of similar economic characteristics into the Portfolios. The new or replacement loan will be governed by the same terms set forth in the sale and assignment agreement described above, which is the primary driver of the recapture rate assumption.

The range of key assumptions used in the Company’s valuation of excess spread financing are as follows:



Excess Spread Financing	Prepayment Speeds		Average Life (Years)	Discount Rate		Recapture Rate
Successor
December 31, 2018
Low	6.0	%	5.0	8.5	%	8.5	%
High	16.7	%	8.1	13.9	%	30.5	%
Weighted-average	11.0	%	6.5	10.4	%	18.6	%

Predecessor
December 31, 2017
Low	6.2	%	4.4	8.5	%	7.2	%
High	21.2	%	6.9	14.1	%	30.0	%
Weighted-average	13.7	%	5.9	10.8	%	18.7	%

The following table shows the hypothetical effect on the excess spread financing fair value when applying certain unfavorable variations of key assumptions to these liabilities for the dates indicated.



	Discount Rate				Prepayment Speeds
Excess Spread Financing - Hypothetical Sensitivities	100 bps Adverse Change		200 bps Adverse Change		10% Adverse Change		20% Adverse Change
Successor
December 31, 2018
Excess spread financing	$	47	$	99	$	38	$	81

Predecessor
December 31, 2017
Excess spread financing	$	37	$	78	$	34	$	71

As the cash flow assumptions utilized in determining the fair value amounts in the excess spread financing are based on the related cash flow assumptions utilized in the financed MSRs, any fair value changes recognized in the MSRs would inherently have an inverse impact on the carrying amount of the related excess spread financing. For example, while an increase in discount rates would negatively impact the value of the Company’s MSRs, it would reduce the carrying value of the associated excess spread financing liability.

These hypothetical sensitivities should be evaluated with care. The effect on fair value of a 10% variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects. Also, a positive change in the above assumptions would not necessarily correlate with the corresponding decrease in the net carrying amount of the excess spread financing.

Mortgage Servicing Rights Financing - Fair Value

From December 2013 through June 2014, the Predecessor entered into agreements to sell a contractually specified base servicing fee component of certain MSRs and servicing advances under specified terms to a joint venture capitalized by New Residential and certain unaffiliated third-party investors. The Predecessor and subsequently the Company continues to be the named servicer and, for accounting purposes, ownership of the mortgage servicing rights continues to reside with the Company. Accordingly, the Predecessor and the Company records the MSRs and a MSR financing liability associated with this transaction in its consolidated balance sheets.

The following table sets forth the weighted average assumptions used in the valuation of the mortgage servicing rights financing.



	Successor		Predecessor
Mortgage Servicing Rights Financing Assumptions	December 31, 2018		December 31, 2017
Advance financing rates	4.2	%	3.5	%
Annual advance recovery rates	19.0	%	23.2	%

The following table sets forth the items comprising revenues associated with servicing loan portfolios.



	Successor			Predecessor
Servicing Revenue	For the Period August 1 - December 31, 2018			For the Period January 1 - July 31, 2018			Year ended December 31, 2017			Year ended December 31, 2016
Contractually specified servicing fees⁽¹⁾	$	421		$	574		$	1,003		$	1,045
Other service-related income⁽¹⁾	44			66			168			245
Incentive and modification income⁽¹⁾	17			37			80			113
Late fees⁽¹⁾	34			53			89			82
Reverse servicing fees	16			37			58			57
Mark-to-market adjustments⁽²⁾	(164		)	196			(160		)	(177		)
Counterparty revenue share⁽³⁾	(68		)	(111		)	(230		)	(298		)
Amortization, net of accretion⁽⁴⁾	(64		)	(112		)	(242		)	(314		)
Total servicing revenue	$	236		$	740		$	766		$	753


⁽¹⁾	Amounts include subservicing related revenues.

⁽²⁾

Mark-to-market (“MTM”) adjustments include fair value adjustments on MSR, excess spread financing and MSR financing liabilities. The amount of MSR MTM includes the impact of negative modeled cash flows which have been transferred to reserves on advances and other receivables. The negative modeled cash flows relate to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio. The impact of negative modeled cash flows was $25 for the five months ended December 31, 2018. The impact of negative modeled cash flows for the Predecessor was $38 for the seven months ended July 31, 2018 and $72 and $81 for the years ended December 31, 2017 and 2016, respectively.


⁽³⁾	Counterparty revenue share represents the excess servicing fee that the Company pays to the counterparties under the excess spread financing arrangements and the payments made associated with MSR financing arrangements.

⁽⁴⁾

Amortization for the Successor is net of excess spread accretion of $53 and MSL accretion of $15 for the five months ended December 31, 2018. Amortization for the Predecessor is net of excess spread accretion of $78 for the seven months ended July 31, 2018, and $161 and $200 for the years ended December 31, 2017 and 2016, respectively. The Predecessor recorded MSL accretion within reverse servicing fees, whereas the Successor has elected to record MSL accretion within Amortization, net of accretion.