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Section 1: 10-Q (10-Q)

10-Q
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 March 31, 2016
or
¨
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: 001-35449
 
 
 
 
 
Nationstar Mortgage Holdings Inc.
(Exact name of registrant as specified in its charter)
 
 
 
 
 
Delaware
 
45-2156869
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
8950 Cypress Waters Blvd
Coppell, TX
 
75019
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(469) 549-2000
 
 
 
 
 
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  ¨
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  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, "accelerated filer" and "smaller reporting company" in Rule  12(b)-2 of the Exchange Act
Large Accelerated Filer
¨
Accelerated Filer
x
 
 
 
 
Non-Accelerated Filer
¨ (Do not check if a smaller reporting company.)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Number of shares of common stock, $0.01 par value, outstanding as of March 31, 2016: 102,873,112



1


NATIONSTAR MORTGAGE HOLDINGS INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 
 
 
Page
PART I
FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
Consolidated Balance Sheets as of March 31, 2016 (unaudited) and December 31, 2015
 
 
 
 
Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2016 and 2015
 
 
 
 
Consolidated Statements of Stockholders’ Equity (unaudited) for the Three Months Ended March 31, 2016 and 2015
 
 
 
 
Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2016 and 2015
 
 
 
 
Notes to Consolidated Financial Statements (unaudited)
 
 
 
Item 2.
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
Item 4.
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 


2


PART I. Financial Information

Item 1. Financial Statements
NATIONSTAR MORTGAGE HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
 
March 31,
2016
 
December 31,
2015
 
(unaudited)
 
 
Assets
 
 
 
Cash and cash equivalents
$
460,951

 
$
613,241

Restricted cash
307,564

 
332,105

Mortgage servicing rights, $3,088,123 and $3,358,327 at fair value, respectively
3,096,084

 
3,366,973

Advances, net
2,070,599

 
2,223,083

Reverse mortgage interests, net
7,584,086

 
7,514,323

Mortgage loans held for sale
1,880,654

 
1,429,691

Mortgage loans held for investment, net of allowance for loan losses of $3,549 and $3,549, respectively
166,564

 
173,650

Property and equipment, net of accumulated depreciation of $106,797 and $92,834, respectively
142,155

 
142,836

Derivative financial instruments
109,168

 
99,699

Other assets
733,699

 
721,832

Total assets
$
16,551,524

 
$
16,617,433

 
 
 
 
Liabilities and stockholders' equity
 
 
 
Unsecured senior notes, net of unamortized debt issuance costs $21,535 and $22,940, respectively
$
2,025,265

 
$
2,025,754

Advance facilities, net of unamortized debt issuance costs $3,409 and $6,433, respectively
1,563,750

 
1,639,690

Warehouse facilities, net of unamortized debt issuance costs $2,171 and $3,206, respectively
2,414,495

 
1,890,320

Payables and accrued liabilities
1,139,400

 
1,296,387

MSR related liabilities - nonrecourse
1,242,999

 
1,300,782

Mortgage servicing liabilities
18,065

 
25,260

Derivative financial instruments
20,835

 
5,823

Other nonrecourse debt, net of unamortized debt issuance costs $5,758 and $4,558, respectively
6,545,196

 
6,666,040

Total liabilities
14,970,005

 
14,850,056

Commitments and contingencies (Note 15)


 


Preferred stock at $0.01 par value - 300,000 shares authorized, no shares issued and outstanding

 

Common stock at $0.01 par value - 1,000,000 shares authorized, 109,909 shares and 109,826 shares issued, respectively
1,099

 
1,084

Additional paid-in-capital
1,109,005

 
1,104,972

Retained earnings
549,449

 
681,838

Treasury shares at cost; 7,036 and 989 shares, respectively
(86,395
)
 
(29,780
)
Total Nationstar stockholders' equity
1,573,158

 
1,758,114

Noncontrolling interest
8,361

 
9,263

Total stockholders' equity
1,581,519

 
1,767,377

Total liabilities and stockholders' equity
$
16,551,524

 
$
16,617,433

See accompanying notes to the consolidated financial statements.

3


NATIONSTAR MORTGAGE HOLDINGS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except for earnings per share data)

 
Three months ended March 31,
 
2016
 
2015
Revenues:
 
 
 
Service related
$
92,653

 
$
215,123

Net gain on mortgage loans held for sale
171,116

 
166,994

Total revenues
263,769

 
382,117

Expenses:
 
 
 
Salaries, wages and benefits
197,362

 
178,755

General and administrative
224,115

 
205,088

Total expenses
421,477

 
383,843

Other income (expenses):
 
 
 
Interest income
102,843

 
43,774

Interest expense
(160,776
)
 
(115,648
)
Gain on repurchase of unsecured senior notes
77

 

Gain (loss) on interest rate swaps and caps
8

 
(767
)
Total other expenses, net
(57,848
)
 
(72,641
)
Loss before income tax benefit
(215,556
)
 
(74,367
)
Income tax benefit
(82,265
)
 
(27,525
)
Net loss
(133,291
)
 
(46,842
)
Less: net income (loss) attributable to non-controlling interests
(902
)
 
1,473

Net loss attributable to Nationstar
$
(132,389
)
 
$
(48,315
)
 
 
 
 
Net loss per common share attributable to common stockholders:
 
 
 
Basic and diluted
$
(1.28
)
 
$
(0.54
)
Weighted average shares of common stock outstanding:
 
 
 
       Basic and diluted
103,098

 
89,911

Dividends declared per share
$

 
$

See accompanying notes to the consolidated financial statements.

4


NATIONSTAR MORTGAGE HOLDINGS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(amounts in thousands)
 
Number of Shares Outstanding
 
Amount
 
Common Stock
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Treasury Share Amount
 
Total Nationstar Stockholders'
Equity
 
Non-controlling Interests
 
Total
Equity
Balance at December 31, 2014
90,357

 
$
910

 
$
587,446

 
$
643,059

 
$
(12,433
)
 
$
1,218,982

 
$
5,296

 
$
1,224,278

Shares issued under incentive plan
585

 
(1
)
 
1

 

 

 

 

 

Acquisition on noncontrolling interest in subsidiaries

 

 

 

 

 

 
(760
)
 
(760
)
Share-based compensation

 

 
5,524

 

 

 
5,524

 

 
5,524

Stock offering
17,500

 
175

 
497,583

 

 

 
497,758

 

 
497,758

Excess tax benefit from share based compensation

 

 
1,095

 

 

 
1,095

 

 
1,095

Shares acquired by Nationstar related to incentive compensation awards
(188
)
 

 

 

 
(5,442
)
 
(5,442
)
 

 
(5,442
)
Other
(675
)
 

 

 

 

 

 

 

Net income (loss)

 

 

 
(48,315
)
 

 
(48,315
)
 
1,473

 
(46,842
)
Balance at March 31, 2015
107,579

 
$
1,084

 
$
1,091,649

 
$
594,744

 
$
(17,875
)
 
$
1,669,602

 
$
6,009

 
$
1,675,611

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
108,837

 
$
1,084

 
$
1,104,972

 
$
681,838

 
$
(29,780
)
 
$
1,758,114

 
$
9,263

 
$
1,767,377

Shares issued under incentive plan
489

 

 

 

 

 

 

 

Share-based compensation

 

 
6,843

 

 

 
6,843

 

 
6,843

Excess tax deficiency from share-based compensation

 

 
(2,795
)
 

 

 
(2,795
)
 

 
(2,795
)
Shares acquired by Nationstar related to incentive compensation awards
(145
)
 

 

 

 
(1,564
)
 
(1,564
)
 

 
(1,564
)
Repurchase of common stock
(5,522
)
 

 

 

 
(55,051
)
 
(55,051
)
 

 
(55,051
)
Other
(786
)
 
15

 
(15
)
 

 

 

 

 

Net loss

 

 

 
(132,389
)
 

 
(132,389
)
 
(902
)
 
(133,291
)
Balance at March 31, 2016
102,873

 
$
1,099

 
$
1,109,005

 
$
549,449

 
$
(86,395
)
 
$
1,573,158

 
$
8,361

 
$
1,581,519


See accompanying notes to the consolidated financial statements.

5


NATIONSTAR MORTGAGE HOLDINGS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)

 
Three months ended March 31,
 
2016
 
2015
Operating Activities
 
 
 
Net loss attributable to Nationstar
$
(132,389
)
 
$
(48,315
)
Reconciliation of net loss to net cash attributable to operating activities:
 
 
 
Noncontrolling interest
(902
)
 
1,473

Share-based compensation
6,843

 
5,524

Excess tax deficiency (benefit) from share-based compensation
2,795

 
(1,095
)
Net gain on mortgage loans held for sale
(171,116
)
 
(166,994
)
Mortgage loans originated and purchased, net of fees
(4,240,116
)
 
(4,209,078
)
Repurchases of loans and foreclosures out of Ginnie Mae securitizations
(486,124
)
 
(405,893
)
Proceeds on sale of and payments of mortgage loans held for sale and held for investment
4,377,242

 
4,003,126

Gain on repurchase of unsecured senior notes

(77
)
 

(Gain) loss on interest rate swaps and caps
(8
)
 
767

Depreciation and amortization
23,144

 
18,119

Amortization (accretion) of premiums (discounts)
9,878

 
(7,062
)
Fair value changes in excess spread financing
(23,699
)
 
13,114

Fair value changes and amortization/accretion of mortgage servicing rights
286,378

 
204,200

Fair value change in mortgage servicing rights financing liability
13,033

 
(4,386
)
Changes in assets and liabilities:
 
 
 
Advances
152,484

 
95,436

Reverse mortgage interests
(14,998
)
 
(180,793
)
Other assets
26,111

 
18,677

Payables and accrued liabilities
(159,895
)
 
2,873

Net cash attributable to operating activities
(331,416
)
 
(660,307
)
 
 
 
 
Investing Activities
 
 
 
Property and equipment additions, net of disposals
(13,104
)
 
(11,993
)
Purchase of forward mortgage servicing rights, net of liabilities incurred
(1,530
)
 
(196,081
)
Proceeds from sale of forward mortgage servicing rights
18,361

 

Purchase of reverse mortgage interests
(55,215
)
 

Proceeds on sale of reverse mortgage interest
450

 

Acquisitions, net

 
(31,276
)
Net cash attributable to investing activities
(51,038
)
 
(239,350
)
Continued on following page.
See accompanying notes to the consolidated financial statements. 









6


NATIONSTAR MORTGAGE HOLDINGS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(amounts in thousands)
 
Three months ended March 31,
 
2016
 
2015
Financing Activities
 
 
 
Transfers (to) from restricted cash, net
24,541

 
(73,012
)
Issuance of common stock, net of issuance costs

 
497,758

Debt financing costs
(2,497
)
 
(1,549
)
Increase in warehouse facilities
522,893

 
904,850

Decrease in advance facilities
(79,048
)
 
(18,471
)
Proceeds from HECM securitizations
281,680

 
73,082

Repayment of HECM securitizations
(285,985
)
 
(26,829
)
Issuance of excess spread financing

 
52,957

Repayment of excess spread financing
(47,117
)
 
(49,516
)
Increase (decrease) in participating interest financing in reverse mortgage interests
(120,362
)
 
64,781

Repayment of nonrecourse debt – legacy assets
(3,056
)
 
(3,273
)
Repurchase of unsecured senior notes
(1,475
)
 

Excess tax (deficiency) benefit from share-based compensation
(2,795
)
 
1,095

Surrender of shares relating to stock vesting
(1,564
)
 
(5,442
)
Repurchase of common stock
(55,051
)
 

Net cash attributable to financing activities
230,164

 
1,416,431

Net increase (decrease) in cash and cash equivalents
(152,290
)
 
516,774

Cash and cash equivalents at beginning of period
613,241

 
299,002

Cash and cash equivalents at end of period
$
460,951

 
$
815,776

 
 
 
 
Supplemental disclosures of cash activities
 
 
 
Cash paid for interest expense
$
166,898

 
$
110,144

Net cash (received from) paid for income taxes
$
15,365

 
$
(609
)
Supplemental disclosures of non-cash activities
 
 
 
Claims made to third parties
$
13,910

 
$
22,116

See accompanying notes to the consolidated financial statements. 

7

NATIONSTAR MORTGAGE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(amounts in thousands, unless otherwise stated)



1. Nature of Business and Basis of Presentation

Nature of Business
Nationstar Mortgage Holdings Inc., a Delaware corporation, including its consolidated subsidiaries (collectively, Nationstar or the Company), earns fees through the delivery of servicing, origination and transaction based services related principally to single-family residences throughout the United States.

Basis of Presentation
The consolidated interim financial statements of Nationstar have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (SEC). Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in Nationstar's Annual Report on Form 10-K for the year ended December 31, 2015. The Company describes its significant accounting policies in Note 2 of the notes to consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2015. During the three month period ended March 31, 2016, there were no significant changes to those accounting policies.

The interim consolidated financial statements are unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results of the interim periods have been included. The results of operations for the interim periods disclosed are not necessarily indicative of the results that may be expected for the full year or any future period. Certain prior period amounts have been reclassified to conform to the current period presentation. Nationstar evaluated subsequent events through the date these interim consolidated financial statements were issued.

Basis of Consolidation
The consolidated financial statements include the accounts of Nationstar, its wholly-owned subsidiaries, and other entities in which the Company has a controlling financial interest, and those variable interest entities (VIEs) where Nationstar's wholly-owned subsidiaries are the primary beneficiaries. Nationstar applies the equity method of accounting to investments when the entity is a VIE and Nationstar is able to exercise significant influence, but not control, over the policies and procedures of the entity but owns less than 50% of the voting interests. Intercompany balances and transactions on consolidated entities have been eliminated. Business combinations are included in the consolidated financial statements from their respective dates of acquisition. Results of operations, assets and liabilities of VIEs are included from the date that Nationstar became the primary beneficiary through the date Nationstar ceases to be the primary beneficiary.

Reclassifications
Certain prior-period amounts have been reclassified to conform to the current-period presentation. As shown in the table below, pursuant to the adoption of ASU 2015-03, Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, the Company has reclassified unamortized debt issuance costs associated with its unsecured senior notes, advance facilities, warehouse facilities and other nonrecourse debt in its previously reported Consolidated Balance Sheet as of December 31, 2015 as follows:

 
As presented
 
 
 
As adjusted
 
December 31, 2015
 
Reclassification
 
December 31, 2015
Other assets
$
758,969

 
$
(37,137
)
 
$
721,832

Unsecured senior notes
2,048,694

 
(22,940
)
 
2,025,754

Advance facilities
1,646,123

 
(6,433
)
 
1,639,690

Warehouse facilities
1,893,526

 
(3,206
)
 
1,890,320

Other nonrecourse debt
6,670,598

 
(4,558
)
 
6,666,040





8


Recent Accounting Guidance Adopted
Effective January 1, 2016, the Company adopted Accounting Standards Update No. 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (ASU 2014-12), which requires that a performance target that affects vesting that could be achieved after the requisite service period be treated as a performance condition. The adoption of ASU 2014-12 did not have a material impact on our financial condition, liquidity or results of operations.

Effective January 1, 2016, the Company retrospectively adopted Accounting Standards Update 2015-03, Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), which requires that debt issuance costs be included in the carrying value of the related debt liability, when recognized, on the face of the balance sheet. The adoption of ASU 2015-03 was limited to balance sheet reclassification of unamortized debt issuance costs, and did not impact the Company's financial condition, liquidity or results of operations. See Reclassifications section in Note 1 for further details. Also, ASU 2015-15 Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements further expands ASU 2015-03 for presentation and disclosure in the financial statements. ASU 2015-15 amends Subtopic 835-30 to include that the SEC would not object to the deferral and presentation of debt issuance costs as an asset and subsequent amortization of the deferred costs over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The adoption of ASU 2015-15 did not have a material impact on our financial condition, liquidity or results of operations.
 
Effective January 1, 2016, the Company prospectively adopted Accounting Standards Update 2015-05, Intangibles — Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (ASU 2015-05), which was created to eliminate diversity in the reporting of fees paid by a customer in a cloud computing arrangement caused by lack of guidance. This update provides that if a cloud computing arrangement includes a software license, the license element should be accounted for as other acquired software licenses. If the cloud computing arrangement does not include a software license, then the fees should be accounted for as a service contract. The adoption of ASU 2015-05 did not have a material impact on our financial condition, liquidity or results of operations.

Recent Accounting Guidance Not Yet Adopted
Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which provides guidance for revenue recognition. This ASU’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects consideration to which the company expects to be entitled in exchange for those goods or services. The ASU 2014-09 was postponed resulting in effective commencement with Nationstar's quarter ending March 31, 2018. The Company is currently assessing the potential impact of ASU 2014-09 on the consolidated financial statements.

Accounting Standards Update No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15), creates consistency in the disclosures made by an entity when there is doubt that the entity will continue as a going concern. ASU 2014-15 is effective for annual periods ending after December 15, 2016. The adoption of ASU 2014-15 is not expected to have a material impact on our financial condition, liquidity or results of operations.

Accounting Standards Update No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), primarily impacts accounting for equity investments and financial liabilities under the fair value option, as well as the presentation and disclosure requirements for financial instruments. Under the new guidance, equity investments will generally be measured at fair value, with subsequent changes in fair value recognized in net income. ASU 2016-01 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company does not expect the adoption of this guidance to have a material impact on the Company’s financial position or results of operations.
Accounting Standards Update No. 2016-02, Leases (ASU 2016-02), primarily impacts lessee accounting by requiring the recognition of a right-of-use asset and a corresponding lease liability on the balance sheet for long-term lease agreements. The lease liability will be equal to the present value of all reasonably certain lease payments. The right-of-use asset will be based on the liability, subject to adjustment for initial direct costs. Lease agreements that are 12 months or less are permitted to be excluded from the balance sheet. In general, leases will be amortized on a straight-line basis with the exception of finance lease agreements. ASU 2016-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the impact the adoption of this guidance will have on the Company’s financial position or results of operations.

9


Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (ASU 2016-08), clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer. ASU 2016-08 also provides additional guidance about how to apply the control principle when services are provided and when goods or services are combined with other goods or services. The effective date of the standard for the Company will coincide with ASU 2014-09 during the first quarter 2018. The Company is currently assessing the impact the adoption of this guidance will have on the Company’s financial position or results of operations.

Accounting Standards Update No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). The new guidance simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, calculation of earnings per share, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods with early adoption permitted. The Company is currently assessing the impact the adoption of this guidance will have on the Company’s financial position or results of operations.

Accounting Standards Update No. 2016-10, Identifying Performance Obligations and Licensing (ASU 2016-10) amends the revenue guidance in ASU 2014-09 on identifying performance obligations and accounting for licenses of intellectual property. ASU 2016-10 changed the Financial Accounting Standards Board's previous proposals on renewals of right-to-use licenses and contractual restrictions. The effective date of the standard for the Company will coincide with ASU 2014-09 during the first quarter 2018. The Company is currently assessing the impact the adoption of this guidance will have on the Company’s financial position or results of operations.

2. Mortgage Servicing Rights (MSR) and Related Liabilities
MSRs and Related Liabilities
March 31, 2016
 
December 31, 2015
MSRs - fair value
$
3,088,123

 
$
3,358,327

MSRs - LOCOM
7,961

 
8,646

Mortgage servicing rights
$
3,096,084

 
$
3,366,973

 
 
 
 
Mortgage servicing liabilities - LOCOM
$
18,065

 
$
25,260

 
 
 
 
Excess spread financing - fair value
$
1,161,270

 
$
1,232,086

Mortgage servicing rights financing liability - fair value
81,729

 
68,696

MSR related liabilities (nonrecourse)
$
1,242,999

 
$
1,300,782


Mortgage Servicing Rights - Fair Value
MSRs - fair value consists of rights the Company owns and records as assets to service traditional residential mortgage loans for others either as a result of a purchase transaction or from the sale and securitization of loans originated. MSRs - fair value comprise rights related to both agency and non-agency loans. The Company segregates MSRs - fair value between credit sensitive and interest sensitive pools. Interest sensitive pools are primarily impacted by changes in forecasted interest rates, which in turn impact voluntary prepayment speeds. Credit sensitive pools are primarily impacted by borrower performance under specified repayment terms, which most directly impacts involuntary prepayments and delinquency rates.

10



The Company assesses whether acquired portfolios are more credit sensitive or interest sensitive in nature on the date of acquisition. The Company considers numerous factors in making this assessment, including loan-to-value ratios, FICO scores, percentage of portfolio previously modified, portfolio seasoning and similar criteria. Once the determination for a pool is made, it is not changed over time.

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

The following table provides a breakdown of the total credit and interest sensitive unpaid principal balances (UPBs) for Nationstar's forward owned MSRs that are carried at fair value.
 
March 31, 2016
 
December 31, 2015

UPB
 
Fair Value
 
UPB
 
Fair Value
Credit sensitive
$
214,623,983

 
$
1,918,310

 
$
224,334,415

 
$
2,016,617

Interest sensitive
118,036,249

 
1,169,813

 
121,341,842

 
1,341,710

             Total
$
332,660,232

 
$
3,088,123

 
$
345,676,257

 
$
3,358,327


The activity of MSRs carried at fair value is as follows for the dates indicated:
 
Three months ended March 31,
MSRs - Fair Value
2016
 
2015
Fair value at the beginning of the period
$
3,358,327

 
$
2,949,739

Additions:
 
 
 
Servicing resulting from transfers of financial assets
39,663

 
44,232

Purchases of servicing assets
1,643

 
238,413

Dispositions:
 
 
 
Dispositions
(18,621
)
 

Changes in fair value:
 
 
 
Due to changes in valuation inputs or assumptions used in the valuation model
(235,581
)
 
(109,684
)
Other changes in fair value
(57,308
)
 
(100,502
)
Fair value at the end of the period
$
3,088,123

 
$
3,022,198

Servicing resulting from transfers of financial assets comprises the fair value of the newly originated MSRs at the time the loan is funded and securitized.
During the first quarter of 2016, Nationstar sold MSRs with an unpaid principal balance of $1.9 billion and was retained as the subservicer for the sold assets. The Company evaluated the sale accounting requirements related to this transaction given the continued involvement as the subservicer and concluded that the transaction qualifies for sales accounting.

Nationstar used the following weighted average assumptions in estimating the fair value of MSRs for the dates indicated:
Credit Sensitive
March 31, 2016
 
December 31, 2015
Discount rate
11.6
%
 
11.6
%
Total prepayment speeds
16.4
%
 
16.5
%
Expected weighted-average life
5.8 years

 
5.9 years

 
 
 
 
Interest Sensitive
March 31, 2016
 
December 31, 2015
Discount rate
9.2
%
 
9.1
%
Total prepayment speeds
14.1
%
 
12.4
%
Expected weighted-average life
5.6 years

 
6.1 years


11


The following table shows the hypothetical effect on the fair value of the MSRs using certain unfavorable variations of the expected levels of key assumptions used in valuing these assets at March 31, 2016 and December 31, 2015:
 
Discount Rate
 
Total Prepayment
Speeds
 
100 bps
Adverse
Change
 
200 bps
Adverse
Change
 
10%
Adverse
Change
 
20%
Adverse
Change
March 31, 2016
 
 
 
 
 
 
 
Mortgage servicing rights
$
(105,221
)
 
$
(206,145
)
 
$
(132,489
)
 
$
(253,694
)
December 31, 2015
 
 
 
 
 
 
 
Mortgage servicing rights
$
(123,115
)
 
$
(237,779
)
 
$
(132,277
)
 
$
(253,028
)

These sensitivities are hypothetical and 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, the changes in the fair value of Nationstar's excess spread financing liability partially offsets the change in the fair value of Nationstar's mortgage servicing rights.

MSRs - Lower of Cost or Market (LOCOM)
Nationstar owns the right to service certain reverse mortgages with an unpaid principal balance of $29.0 billion and $29.9 billion as of March 31, 2016 and December 31, 2015, respectively. Nationstar carries these mortgage servicing rights at the lower of cost or market and performs an impairment analysis at the end of each reporting period. In determining fair value for the purpose of impairment, Nationstar utilizes a variety of assumptions, with the primary assumptions being discount rates, prepayment speeds, home price index, collateral values and the expected weighted average life. At March 31, 2016 and December 31, 2015, no impairment was identified.

The activity of MSRs carried at amortized cost is as follows for the dates indicated:
 
Three months ended March 31,
 
2016
 
2015
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Activity of MSRs - LOCOM
 
 
 
 
 
 
 
Balance at the beginning of the period
$
8,646

 
$
25,260

 
$
11,582

 
$
65,382

Additions:
 
 
 
 
 
 
 
Purchase/assumptions of servicing rights/obligations

 

 

 

Deductions:
 
 
 
 
 
 
 
Amortization/accretion
(685
)
 
(7,195
)
 
(798
)
 
(6,783
)
Balance at end of the period
$
7,961

 
$
18,065

 
$
10,784

 
$
58,599

Fair value at end of period
$
28,129

 
$
2,416

 
$
32,618

 
$
55,579


For the three months ended March 31, 2016 and 2015, the Company accreted $7.2 million and $6.8 million, respectively, of the mortgage servicing liability. Issuers of HECMs are responsible for repurchasing any loans out of the HMBS pool when the outstanding principal balance of the related HECM loan is equal to or greater than 98% of the lesser of the appraised value of the underlying property at origination or $625 thousand.

Excess Spread Financing at Fair Value
In order to finance the acquisition of certain MSRs on various pools of residential mortgage loans (the Portfolios), Nationstar entered into multiple sale and assignment agreements with certain entities formed by New Residential Investment Corp. (New Residential) in which New Residential and/or certain funds managed by Fortress Investment Group LLC (Fortress) own an interest. Nationstar, in transactions accounted for as financing arrangements, sold to such entities the right to receive a specified percentage

12


of the excess cash flow generated from the Portfolios after receipt of a fixed basic servicing fee per loan. Nationstar has elected fair value accounting for these financing agreements.

Servicing fees associated with a traditional MSR can be segregated into a base servicing fee and an excess servicing fee. The base servicing fee, along with ancillary income, is meant to cover costs incurred to service the specified pool plus a reasonable profit margin. The remaining servicing fee is considered excess.
Nationstar retains all the base servicing fee and ancillary revenues associated with servicing the Portfolios and retains a portion of the excess servicing fee. Nationstar continues to be the servicer of the Portfolios and provides all servicing and advancing functions.

Contemporaneous with the above, Nationstar entered into refinanced loan agreements with New Residential. Should Nationstar refinance any loan in the Portfolios, subject to certain limitations, Nationstar 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 various assumptions used in Nationstar's valuation of Excess Spread financing were as follows:
Excess Spread Financing
Prepayment Speeds
 
Average
Life (Years)
 
Discount
Rate
 
Recapture Rate
March 31, 2016
 
 
 
 
 
 
 
Low
8.5%
 
4.1
 
8.5%
 
6.7%
High
15.9%
 
7.2
 
14.1%
 
28.9%
Weighted-average
11.9%
 
5.8
 
11.0%
 
18.3%
December 31, 2015
 
 
 
 
 
 
 
Low
7.4%
 
4.2
 
8.5%
 
6.8%
High
17.1%
 
7.8
 
14.1%
 
30.0%
Weighted-average
11.6%
 
5.9
 
11.2%
 
17.7%

The following table shows the hypothetical effect on the fair value of excess spread financing using certain unfavorable variations of the expected levels of key assumptions used in valuing these liabilities at the dates indicated:
 
Discount Rate
 
Total Prepayment
Speeds
 
100 bps
Adverse
Change
 
200 bps
Adverse
Change
 
10%
Adverse
Change
 
20%
Adverse
Change
March 31, 2016
 
 
 
 
 
 
 
Excess spread financing
$
43,552

 
$
90,412

 
$
42,394

 
$
88,488

December 31, 2015
 
 
 
 
 
 
 
Excess spread financing
$
41,806

 
$
86,791

 
$
36,530

 
$
76,373


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 in 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 sensitivities are hypothetical and 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.

13


Mortgage Servicing Rights Financing
From December 2013 through June 2014, Nationstar entered into agreements to sell a contractually specified base fee component of certain MSRs and servicer advances under specified terms to New Residential and certain unaffiliated third-parties. Nationstar continues to be the named servicer and, for accounting purposes, ownership of the mortgage servicing rights continues to reside with Nationstar. Nationstar continues to account for the MSRs on its consolidated balance sheets. Consequently, Nationstar records a MSR financing liability associated with this financing transaction. See Note 18, Disclosures Related to Transactions with Affiliates of Fortress Investment Group LLC for additional information.

Nationstar elected to measure the mortgage servicing rights financings at fair value with all changes in fair value recorded as a charge or credit to servicing related revenue in the consolidated statements of operations. The weighted average assumptions used in the valuation of mortgage servicing rights financing liability were as follows:
 
March 31, 2016
 
December 31, 2015
Advance financing rates
3.1
%
 
3.0
%
Annual advance recovery rates
20.5
%
 
20.9
%

The following table provides a breakout of revenue associated with servicing assets and liabilities.
 
Three months ended March 31,
Service Fee Income (Loss)
2016
 
2015
Contractually specified servicing fees
$
281,088

 
$
276,444

Incentive and modification income
23,801

 
22,865

Late fees
18,523

 
17,583

Other service-related income
30,294

 
33,120

Remittances to counterparties for contractual transfer of servicing assets
(74,387
)
 
(74,657
)
Mark-to-market
(255,008
)
 
(112,443
)
Amortization
(48,662
)
 
(62,915
)
Total service fee income (loss)
$
(24,351
)
 
$
99,997


3. Advances, Net
 
March 31, 2016
 
December 31, 2015
Agency
$
1,280,744

 
$
1,396,176

Non-agency
789,855

 
826,907

Total advances, net
$
2,070,599

 
$
2,223,083


Servicing advances on agency securities represent a receivable from the respective agency and are recovered from cash collections in a securitization trust and/or a requested reimbursement from the agency.
Servicing advances on non-agency securities are typically recovered first at a loan-level from proceeds of the mortgage loans for which the advance was made, and then if loan-level funds are determined to be ultimately insufficient, from cash collected from all borrowers in a securitization trust.
As of March 31, 2016 and December 31, 2015, Nationstar carried an allowance for uncollectible servicer advances of $37.7 million and $29.9 million, respectively. Advance balances are reflected net of these reserves.


14


4. Reverse Mortgage Interests

 
March 31, 2016
 
December 31, 2015
Participating Interests
$
5,752,917

 
$
5,864,329

Other interests securitized, net of reserves of $ 27,626 and $32,780, respectively
682,797

 
682,137

Unsecuritized interests, net of reserves of $33,091 and $20,133, respectively
1,093,157

 
967,857

Reverse mortgage loans held for sale
55,215

 

Total reverse mortgage interests
$
7,584,086

 
$
7,514,323


Participating interests
Participating interests consists of reverse mortgage interests which have been transferred to Ginnie Mae and subsequently securitized through the issuance of Home Equity Conversion Mortgage Backed Securities (HMBS).

Other interests securitized
Other interests securitized consists of reverse mortgage interests which have been transferred to private securitization trusts and are subject to nonrecourse debt. Nationstar evaluated these trusts and concluded that they meet the definition of a VIE and Nationstar is the primary beneficiary. Accordingly, these transactions are treated as secured borrowings and both the reverse mortgage interests and the related indebtedness are retained on Nationstar’s balance sheet. See Note 8, Indebtedness and Note 10, Securitizations and Financing for additional information.

Unsecuritized interests
Unsecuritized interests consist primarily of the following: (1) $747.5 million related to repurchased Ginnie Mae HECMs; (2) $135.0 million related to HECM-related receivables; (3) $99.9 million related to claims accounts receivable; (4) $85.4 million related to funded borrower draws not yet securitized; (5) $21.4 million related to participating interests and advance receivable on an acquired HECM portfolio; (6) $27.3 million related to foreclosed assets; and (7) $9.7 million related to the HECM service fees receivable.

Under the Ginnie Mae HMBS program, the Company is required to repurchase a HECM loan from the HMBS pool when the outstanding principal balance of the HECM loan is equal to or greater than 98% of the maximum claim amount. Nationstar routinely securitizes eligible reverse mortgage interests. These transactions are treated as secured borrowings with both the reverse mortgage interests and related indebtedness retained on Nationstar’s balance sheet. See Note 8, Indebtedness for additional information.

Reverse mortgage loans held for sale
During March 2016, Nationstar executed an option to purchase HECM loans related to a reverse mortgage loan trust, of which Nationstar was the master servicer and holder of clean-up call rights. The Company acquired reverse mortgage loans for $55.2 million with outstanding unpaid principal balance totaling $96.5 million, recorded at lower of cost or fair value. Nationstar plans to sell the loans acquired from the transaction and accordingly has classified as held for sale.

Reserves for servicing losses
Reserves for servicing losses are reflected through the Company's provision for losses and consist of (1) financial and (2) operational losses related to the servicing of HECM loans. Financial exposure is comprised of the cost of doing business related to servicing the HECM product and statutory items specific to investor types. Whereas operational losses are defined as un-reimbursable debenture interest curtailments imposed for missed servicing timelines. The Company assesses the reserve based on expected net realizable value of outstanding claims.

5. Mortgage Loans Held for Sale and Investment

Mortgage Loans Held for Sale
Nationstar maintains a strategy of originating mortgage loan products primarily for the purpose of selling to government-sponsored enterprises (GSEs) or other third-party investors in the secondary market. Nationstar focuses on assisting customers currently in the Company's servicing portfolio with refinances of loans or new home purchases (referred to as recapture). Generally, all newly originated mortgage loans held for sale are securitized and transferred to GSEs or delivered to third-party purchasers shortly after origination on a servicing-retained basis.

15

NATIONSTAR MORTGAGE HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(All amounts in thousands, unless otherwise stated)



Mortgage loans held for sale consist of the following for the dates indicated:
 
March 31, 2016
 
December 31, 2015
Mortgage loans held for sale – unpaid principal balance
$
1,792,620

 
$
1,373,607

Mark-to-market adjustment(1)
88,034

 
56,084

Total mortgage loans held for sale
$
1,880,654

 
$
1,429,691

(1) The mark-to-market adjustment is reflected in net gain on mortgage loans held for sale on our consolidated statements of operations.

Nationstar accrues interest income as earned and places loans on non-accrual status after any portion of principal or interest has been delinquent for more than 90 days. When a loan is placed on non-accrual status, Nationstar reverses the interest that had been accrued but not yet received.
The total UPB of mortgage loans held for sale on nonaccrual status was as follows for the dates indicated:
 
March 31, 2016
 
December 31, 2015
Mortgage Loans Held for Sale - Unpaid Principal Balance
UPB
 
Fair Value
 
UPB
 
Fair Value
Non-accrual
$
31,253

 
$
28,030

 
$
31,390

 
$
28,996

The total UPB of mortgage loans held for sale for which the Company has begun formal foreclosure proceedings was as follows for the dates indicated:
Mortgage Loans Held for Sale - Unpaid Principal Balance
March 31, 2016
 
December 31, 2015
Foreclosure
$
21,809

 
$
16,174

A reconciliation of the changes in mortgage loans held for sale for the dates indicated is presented in the following table:
 
 
Three months ended March 31,
 
2016
 
2015
Mortgage loans held for sale – beginning balance
$
1,429,691

 
$
1,277,931

Mortgage loans originated and purchased, net of fees
4,240,116

 
4,209,078

Repurchase of loans out of Ginnie Mae securitizations
222,712

 
393,550

Claims made to third parties(1)
(13,910
)
 
(22,116
)
Proceeds on sale of and payments of mortgage loans held for sale
(4,134,959
)
 
(3,976,647
)
Gain on sale of mortgage loans(2)
137,004

 
114,202

Mortgage loans held for sale – ending balance
$
1,880,654

 
$
1,995,998


(1) This is comprised of claims made on certain government guaranteed mortgage loans upon foreclosure.
(2) The gain on sale of mortgage loans is reflected in net gain on mortgage loans held for sale on our consolidated statements of operations.

Nationstar has the right to repurchase any individual loan in a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. The majority of Ginnie Mae repurchased loans are repurchased solely with the intent to re-pool into new Ginnie Mae securitizations or to otherwise sell to third-party investors. For the three months ended March 31, 2016 and 2015, the Company repurchased a total of $222.7 million and $393.6 million loans, respectively, out of Ginnie Mae pools primarily in connection with loan modifications and loan resolution activity as part of Nationstar's contractual obligations as the servicer of the loans.


16

NATIONSTAR MORTGAGE HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(All amounts in thousands, unless otherwise stated)


Mortgage Loans Held for Investment, Net
Mortgage loans held for investment, net as of the dates indicated include: 
 
March 31, 2016
 
December 31, 2015
Mortgage loans held for investment, net – unpaid principal balance
$
240,194

 
$
250,033

Transfer discount:
 
 
 
Accretable
(14,398
)
 
(14,631
)
Non-accretable
(55,683
)
 
(58,203
)
Allowance for loan losses
(3,549
)
 
(3,549
)
Total mortgage loans held for investment, net
$
166,564

 
$
173,650


The changes in accretable yield on loans transferred to mortgage loans held for investment, net were as follows: 
 
Three months ended March 31, 2016
 
Twelve months ended December 31, 2015
Accretable Yield
 
 
 
Balance at the beginning of the period
$
14,631

 
$
15,503

Accretion
(668
)
 
(2,727
)
Reclassifications from nonaccretable discount
435

 
1,855

Balance at the end of the period
$
14,398

 
$
14,631

Nationstar may periodically modify the terms of any outstanding mortgage loans held for investment, net for loans that are either in default or in imminent default. Modifications often involve reduced payments by borrowers, modification of the original terms of the mortgage loans, forgiveness of debt and/or modified servicing advances. As a result of the volume of modification agreements entered into, the estimated average outstanding life in this pool of mortgage loans has been extended. Nationstar records interest income on the transferred loans on a level-yield method. To maintain a level-yield on these transferred loans over the estimated extended life, Nationstar reclassified approximately $0.4 million of transfer discount to non-accretable yield during the three months ended March 31, 2016 and $1.9 million of transfer discount from non-accretable yield during the year ended December 31, 2015. Further, Nationstar considers the decrease in principal, interest, and other cash flows expected to be collected arising from the transferred loans as an impairment.

Loan delinquency and Loan-to-Value Ratio (LTV) are common credit quality indicators that Nationstar monitors and utilizes in its evaluation of the adequacy of the allowance for loan losses, of which the primary indicator of credit quality is loan delinquency status. LTV refers to the ratio of the loan’s unpaid principal balance to the property’s collateral value. Loan delinquencies and unpaid principal balances are updated monthly based upon collection activity. Collateral values are updated from third party providers on a periodic basis. The collateral values used to derive LTVs are obtained at various dates, but the majority were within the last twenty-four months. For an event requiring a decision based at least in part on the collateral value, the Company takes its last known value provided by a third party and then adjusts the value based on the applicable home price index. The total UPB of mortgage loans held for investment for which the Company has begun formal foreclosure proceedings was as follows for the dates indicated:
Mortgage Loans Held for Investment - Unpaid Principal Balance
March 31, 2016
 
December 31, 2015
Foreclosure
$
40,532

 
$
41,406



17


6. Other Assets

Other assets consist of the following:
 
March 31, 2016
 
December 31, 2015
Receivables from trusts, agencies and prior servicers, net (1)
$
186,268

 
$
229,452

Accrued revenue
164,417

 
180,036

Loans subject to repurchase right from Ginnie Mae
179,881

 
117,163

Goodwill
71,141

 
71,141

Intangible assets
48,006

 
49,869

Deferred financing costs
5,915

 
5,713

Prepaid expenses
18,213

 
19,800

Receivables from affiliates, net
7,219

 
7,510

Real estate owned (REO), net
3,743

 
3,595

Other
48,896

 
37,553

Total other assets
$
733,699

 
$
721,832


(1) Net of reserves totaling of $167.7 million and $98.8 million as of March 31, 2016 and December 31, 2015, respectively. The increase in the reserves is primarily due to the movement of reserves from mortgage servicing rights attributable to liquidated loans that still have outstanding balances during the first quarter of 2016 in the amount of $64.7 million.

Receivables from trusts, agencies and prior services, net is primarily comprised of prior servicer receivables and custodial receivables acquired in asset acquisitions.

Accrued revenue is primarily comprised of service fees earned but not received.
For certain loans that Nationstar sold to Ginnie Mae, Nationstar as the issuer has the unilateral right to repurchase, without Ginnie Mae’s prior authorization, any individual loan in a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. Once Nationstar has the unilateral right to repurchase a delinquent loan, Nationstar has effectively regained control over the loan and under GAAP, must re-recognize the loan on its consolidated balance sheets and establish a corresponding repurchase liability regardless of Nationstar’s intention to repurchase the loan. Nationstar’s re-recognized loans included in other assets and the corresponding liability in payables and accrued liabilities was $179.9 million at March 31, 2016 and $117.2 million at December 31, 2015.

The increase in other is primarily due to $10.3 million that is expected to be received from counter parties on unsettled trades of securities at March 31, 2016.

Acquisitions
In January 2015, Xome Holdings LLC (Xome), a wholly owned subsidiary of Nationstar, acquired Experience 1, Inc., the holding company for Title365, Xome Signing (previously known as Trusted Signing), and technology subsidiaries Xome Labs (previously known as X1 Labs) and Xome Analytics (previously known as X1 Analytics) (collectively, Title365), a title agency and technology services provider for title insurance and escrow services. The total consideration was $35.9 million in cash. Related to the acquisition, the Company recorded $20.3 million in goodwill and $19.1 million in intangible assets as well as $3.5 million of other net liabilities. The recognized intangible assets primarily relate to customer relationships, trade names and technology.

In May 2015, Xome acquired Quantarium, LLC, a real estate analytics company that has developed industry-leading automated home valuation models utilizing advanced statistical methods and complex proprietary algorithms. Total consideration paid was $12.0 million. In June 2015, Xome acquired substantially all of the assets of GoPaperless Solutions, a leader in digital signature and document management Software-as-a-Service solutions. Total consideration paid was $2.0 million. Related to the acquisitions, the Company tentatively recorded an additional $3.4 million in goodwill and $10.4 million in intangible assets as well as $0.2 million of other net assets.


18


7. Derivative Financial Instruments

Derivatives instruments utilized by Nationstar primarily include interest rate lock commitments (IRLCs), Loan Purchase Commitments (LPCs), Forward MBS trades, Eurodollar futures, interest rate swap agreements and interest rate caps. Nationstar enters into IRLCs with prospective borrowers. These commitments are carried at fair value, with any changes in fair value recorded in earnings as a component of net gain on mortgage loans held for sale. The estimated fair values of IRLCs are based on the fair value of the related mortgage loans which is based on observable market data and is recorded in derivative financial instruments within the consolidated balance sheets. Nationstar adjusts the outstanding IRLCs with prospective borrowers based on an expectation that it will be exercised and the loan will be funded.

Nationstar actively manages the risk profiles of its IRLCs and mortgage loans held for sale on a daily basis. To manage the price risk associated with IRLCs, Nationstar enters into forward sales of MBS in an amount equal to the portion of the IRLC expected to close, assuming no change in mortgage interest rates. In addition, to manage the interest rate risk associated with mortgage loans held for sale, Nationstar enters into forward sale commitments to deliver mortgage loan inventory to investors. The estimated fair values of forward sales of MBS and forward sale commitments are based on exchange prices or the dealer market price and are recorded as a component of derivative financial instruments in the consolidated balance sheets. The changes in value on forward sales of MBS and forward sale commitments are recorded as a charge or credit to net gain on mortgage loans held for sale.

Associated with the Company's derivatives are $10.3 million and $3.9 million in collateral deposits on derivative instruments recorded in other assets and payables and accrued liabilities on the Company's balance sheets as of March 31, 2016 and December 31, 2015, respectively. The Company does not offset fair value amounts recognized for derivative instruments and the amounts collected and/or deposited on derivative instruments in its consolidated balance sheets.

Nationstar enters into contracts with other mortgage lenders to purchase residential mortgage loans at a future date, which are referred to as LPCs. LPCs are accounted for as derivatives and recorded at fair value in derivative financial instruments on Nationstar's consolidated balance sheet. Changes in LPCs are recorded as a charge or credit to net gain on mortgage loans held for sale.

In addition, Nationstar enters into Eurodollar futures contracts to replicate the economic hedging results achieved with interest rate swaps or offset the changes in value of its forward sales of certain agency securities. The Company has not designated its futures contracts as hedges for accounting purposes. Eurodollar futures are accounted for as derivatives and recorded at fair value in derivative financial instruments. Realized and unrealized changes in fair value are recorded as a charge or credit to net gain on mortgage loans held for sale.

Periodically, Nationstar has entered into interest rate swap agreements to hedge the interest payment on the warehouse debt and
securitization of its mortgage loans held for sale. These interest rate swap agreements generally require Nationstar to pay a fixed interest rate and receive a variable interest rate based on LIBOR. Interest rate swaps are accounted for as derivative financial instruments. Unless designated as an accounting hedge, Nationstar records gains and losses on interest rate swaps as a component of gain/(loss) on interest rate swaps and caps in Nationstar’s consolidated statements of operations. Unrealized losses on designated interest rate derivatives are separately disclosed under operating activities in the consolidated statements of cash flows.

During the second quarter of 2015, Nationstar entered into two interest rate caps with notional values of $800 million and $400 million, respectively, to mitigate interest rate risk associated with servicing advance facilities. Expenses associated with interest rate caps are recorded as a gain/(loss) on interest rate swaps and caps in Nationstar's consolidated statements of operations. During the fourth quarter of 2015, the Company entered into a $100 million interest rate cap. The Company did not elect hedge accounting related to these agreements and they expired during the first quarter of 2016.

19


The following tables provide the outstanding notional balances and fair values of outstanding positions for the dates indicated, and recorded gains/(losses) during the periods indicated:
 
Expiration
Dates
 
Outstanding
Notional
 
Fair
Value
 
Recorded
Gains /
(Losses)
Three months ended March 31, 2016
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Mortgage loans held for sale
 
 
 
 
 
 
 
Loan sale commitments
2016
 
$
123,810

 
$
(562
)
 
$
(814
)
Derivative financial instruments
 
 
 
 
 
 
 
IRLCs
2016
 
3,272,423

 
99,462

 
10,324

Forward MBS trades
2016
 
350,830

 
346

 
(5,777
)
LPCs
2016
 
615,172

 
8,944

 
5,072

Eurodollar futures
2016-2021
 
6,000

 
11

 
(49
)
Interest rate swaps
2017
 
11,481

 
405

 
(102
)
Liabilities
 
 
 
 
 
 
 
Derivative financial instruments
 
 
 
 
 
 
 
IRLCs
2016
 
4,289

 
37

 
(32
)
       Forward MBS trades
2016
 
3,313,327

 
19,540

 
(15,794
)
LPCs
2016
 
68,933

 
233

 
1,221

Eurodollar futures
2016-2021
 
381,000

 
594

 
(518
)
Interest rate swaps
2017
 
11,481

 
431

 
110

 
 
 
 
 
 
 
 
Twelve months ended December 31, 2015
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Mortgage loans held for sale
 
 
 
 
 
 
 
Loan sale commitments
2016
 
$
175,570

 
$
252

 
$
256

Derivative financial instruments
 
 
 
 
 
 
 
IRLCs
2016
 
2,767,927

 
89,138

 
1,236

Forward MBS trades
2016
 
1,665,894

 
6,123

 
5,839

LPCs
2016
 
387,891

 
3,872

 
1,873

Eurodollar futures
2016-2021
 
176,000

 
60

 
59

Interest rate swaps and caps
2016-2017
 
845,876

 
506

 
(359
)
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Derivative financial instruments
 
 
 
 
 
 
 
IRLCs
2016
 
2,304

 
5

 
2

Forward MBS trades
2016
 
1,807,418

 
3,746

 
14,614

LPCs
2016
 
314,047

 
1,454

 
(1,406
)
Eurodollar futures
2016-2021
 
95,000

 
76

 
(69
)
Interest rate swaps and caps
2016-2017
 
12,543

 
542

 
(439
)
 
 
 
 
 
 
 
 


20


8. Indebtedness

Notes Payable
 
 
 
 
 
 
 
 
 
March 31, 2016
 
December 31, 2015
 
Interest Rate
 
Maturity Date
 
Collateral
 
Capacity Amount
 
Outstanding
 
Collateral Pledged
 
Outstanding
 
Collateral pledged
Advance Facilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MBS advance financing facility
LIBOR+2.50%
 
March
2017
 
Servicing advance receivables
 
$
130,000

 
$
71,661

 
$
65,022

 
$
82,208

 
$
89,221

Nationstar agency advance financing facility
LIBOR+2.00%
 
January
2017
 
Servicing advance receivables
 
400,000

 
302,386

 
319,398

 
310,316

 
364,352

MBS advance financing facility (2012)
LIBOR+5.00%
 
May 31, 2016
 
Servicing advance receivables
 
50,000

 
44,594

 
53,380

 
50,000

 
69,942

Nationstar mortgage advance receivable
trust
LIBOR+ 2.00%
 
June
2016
 
Servicing advance receivables
 
500,000

 
330,865

 
389,681

 
335,408

 
394,110

MBS servicer advance facility (2014)
LIBOR+3.50%
 
August
2016
 
Servicing advance receivables
 
125,000

 
121,893

 
191,473

 
105,657

 
185,392

Nationstar agency advance receivables trust
LIBOR+2.00%
 
October
2017
 
Servicing advance receivables
 
1,400,000

 
695,760

 
752,588

 
762,534

 
822,504

Advance facilities principal amount
 
 
 
 
 
 
 
 
1,567,159

 
1,771,542

 
1,646,123

 
1,925,521

Debt issuance costs
 
 
 
 
 
 
 
 
(3,409
)
 

 
(6,433
)
 

Advance facilities, net of unamortized debt issuance costs
 
 
 
 
 
 
 
 
$
1,563,750


$
1,771,542

 
$
1,639,690

 
$
1,925,521

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2016
 
December 31, 2015
 
Interest Rate
 
Maturity Date
 
Collateral
 
Capacity Amount
 
Outstanding
 
Collateral Pledged
 
Outstanding
 
Collateral pledged
Warehouse Facilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$1.3 billion warehouse facility
LIBOR+2.0% to 2.875%
 
October
2016
 
Mortgage loans or MBS
 
$
1,300,000

 
$
887,423

 
$
941,098

 
$
633,694

 
$
677,775

$1.0 billion warehouse facility
LIBOR+1.75% to 3.25%
 
June
2016
 
Mortgage loans or MBS
 
1,000,000

 
725,773

 
755,697

 
544,951

 
621,526

$500 million warehouse facility
LIBOR+1.75% to 2.75%
 
September
2016
 
Mortgage loans or MBS
 
500,000

 
271,662

 
277,933

 
174,702

 
178,923

$500 million warehouse facility
LIBOR+ 2.00% to 2.50%
 
November
2016
 
Mortgage loans or MBS
 
500,000

 
204,082

 
224,325

 
257,479

 
274,497

$350 million warehouse facility
LIBOR+2.20% to 4.50%
 
April
2017
 
Mortgage loans or MBS
 
350,000

 
21,485

 
29,359

 
97,790

 
111,541

$200 million warehouse facility
LIBOR+1.50%
 
April
2017
 
Mortgage loans or MBS
 
200,000

 
67,381

 
69,202

 
8,531

 
9,052

$300 million warehouse facility
LIBOR + 2.25%
 
December
2016
 
Mortgage loans or MBS
 
300,000

 
32,723

 
38,536

 
23,014

 
27,769

$200 million warehouse facility
LIBOR + 2.75% to 3.875%
 
November
2016
 
Mortgage loans or MBS
 
200,000

 
152,832

 
191,839

 
45,106

 
50,083

$75 million warehouse facility (HCM) (1)
LIBOR+ 2.25% to 2.875%
 
October
2016
 
Mortgage loans or MBS
 
75,000

 
24,913

 
29,547

 
53,102

 
59,563

$100 million warehouse facility (HCM)
LIBOR + 2.50% to 2.75%
 
November
2016
 
Mortgage loans or MBS
 
100,000

 
28,392

 
29,613

 
55,157

 
60,581

Warehouse facilities principal amount
 
 
 
 
 
 

 
2,416,666

 
2,587,149

 
1,893,526

 
2,071,310

Debt issuance costs
 
 
 
 
 
 
 
 
(2,171
)
 

 
(3,206
)
 

Warehouse facilities, net of unamortized debt issuance costs
 
 
 
 
 
 
 
 
$
2,414,495

 
$
2,587,149

 
$
1,890,320

 
$
2,071,310

 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
Mortgage loans, net
 
 
 
 
 
 
 
 
$
1,782,803

 
$
1,867,637

 
$
1,539,457

 
$
1,681,352

Reverse mortgage interests, net
 
 
 
 
 
 
 
$
631,692

 
$
719,512

 
$
350,863

 
$
389,958



21


(1) This facility is a sublimit of the $1.3 billion facility specific to Home Community Mortgage (HCM).

Unsecured Senior Notes

A summary of the balances of unsecured senior notes is presented below:
 
March 31, 2016
 
December 31, 2015
$475 million face value, 6.500% interest rate payable semi-annually, due August 2018
$
475,000

 
$
475,000

$375 million face value, 9.625% interest rate payable semi-annually, due May 2019
362,074

 
362,750

$400 million face value, 7.875% interest rate payable semi-annually, due October 2020
400,425

 
400,448

$600 million face value, 6.500% interest rate payable semi-annually, due July 2021
595,760

 
596,955

$300 million face value, 6.500% interest rate payable semi-annually, due June 2022
213,541

 
213,541

Unsecured senior notes principal amount, subtotal
2,046,800

 
2,048,694

Debt issuance costs
(21,535
)
 
(22,940
)
Unsecured senior notes, net of unamortized debt issuance costs
$
2,025,265

 
$
2,025,754



Nationstar repurchased $1,475 thousand in principal amount of outstanding notes during the first quarter of 2016 at a discount resulting in a gain of $77 thousand. The repurchase price included the principal amount of the note, plus accrued and unpaid interest.

The indentures for the unsecured senior notes contain various covenants and restrictions that limit the ability to incur additional indebtedness, pay dividends, make certain investments, create liens, consolidate, merge or sell substantially all of their assets or enter into certain transactions with affiliates. The indentures contain certain events of default, including (subject, in some cases, to customary cure periods and materiality thresholds) defaults based on (i) the failure to make payments under the indenture when due, (ii) breach of covenants, (iii) cross-defaults to certain other indebtedness, (iv) certain bankruptcy or insolvency events, (v) material judgments and (vi) invalidity of material guarantees.

The indentures for the unsecured senior notes provide that Nationstar may redeem all or a portion of the notes prior to certain fixed dates by paying a make-whole premium plus accrued and unpaid interest and additional interest, if any, to the redemption dates. In addition, Nationstar may redeem all or a portion of the unsecured senior notes at any time on or after certain fixed dates at the applicable redemption prices set forth in the indentures plus accrued and unpaid interest and additional interest, if any, to the redemption dates.

Additionally, the indentures provide that on or before certain fixed dates, Nationstar may redeem up to 35% of the aggregate principal amount of the unsecured senior notes with the net proceeds of certain equity offerings at fixed redemption prices, plus accrued and unpaid interest and additional interest, if any, to the redemption dates, subject to compliance with certain conditions.
The ratios included in the indentures for the unsecured senior notes are incurrence-based compared to the customary ratio covenants that are often found in credit agreements that require a company to maintain a certain ratio.

22


As of March 31, 2016, the expected maturities of Nationstar's unsecured senior notes based on contractual maturities are as follows:
Year
Amount
2016
$

2017

2018
475,000

2019
362,074

2020
400,425

Thereafter
809,301

Unsecured senior notes principal amount
2,046,800

Unamortized debt issuance costs
(21,535
)
Unsecured senior notes, net of unamortized debt issuance costs
$
2,025,265

Other Nonrecourse Debt
A summary of the balances of other nonrecourse debt is presented below:
 
March 31, 2016
 
December 31, 2015
Participating interest financing
$
5,833,773

 
$
5,947,407

2014-1 HECM securitization

 
226,851

2015-1 HECM securitization
199,309

 
222,495

2015-2 HECM securitization
183,569

 
209,030

2016-1 HECM securitization
272,115

 

Nonrecourse debt - legacy assets
62,188

 
64,815

Other nonrecourse debt principal amount
6,550,954

 
6,670,598

Unamortized debt issuance costs
(5,758
)
 
(4,558
)
Other nonrecourse debt, net of unamortized debt issuance costs
$
6,545,196

 
$
6,666,040

Participating Interest Financing
Participating interest financing represents the obligation to Ginnie Mae related to the transfer of reverse mortgage interests and subsequent securitization through issuance of HMBS. Nationstar has accounted for these securitizations as secured borrowings, retaining the initial reverse mortgage interests on its consolidated balance sheet, and recording the pooled HMBS as participating interest financing liabilities on the Company’s consolidated balance sheet. Monthly cash flows generated from the HECM loans are used to service the HMBS through securitization of advances on the HECM loans. The interest rate is based on the underlying HMBS rate with a range of 0.7% to 7.0%.

HECM Securitizations
From time to time, Nationstar securitizes its interests in reverse mortgages. These transactions provide investors with the ability to invest in a pool of non-performing Federal Housing Administration (FHA) insured HECM loans secured by one to four-family residential properties and a pool of REO properties acquired through foreclosure in connection with HECM loans. The transactions provide Nationstar with access to liquidity for the non-performing HECM loan portfolio, ongoing servicing fees, and potential residual returns. The transactions are structured as secured borrowings with the reverse mortgage loans included in the consolidated financial statements as reverse mortgage interests and the related financing included in other nonrecourse debt.

During December 2014, Nationstar Mortgage LLC completed the securitization of approximately $343.6 million in Nationstar HECM Loan Trust 2014-1 Mortgage Backed Securities. The notes were issued under two separate classes, comprised of Class A Notes and Class M Notes. As part of the securitization, Nationstar retained a portion of the offered Class A notes of approximately $70.4 million as well as the Class M Notes with an outstanding note balance of $36.2 million. A portion of the notes retained by Nationstar represent subordinated beneficial interests. During the first quarter 2015, the Company sold the remaining retained portions of the Class A and the Class M notes for total proceeds of $73.1 million. During January 2016, Nationstar executed an optional redemption of the notes within HECM Loan Trust 2014-1.  The Company re-securitized the collateral from the transaction and achieved a lower cost of funds within HECM Loan Trust 2016-1.

23



During June 2015, Nationstar Mortgage LLC completed the securitization of approximately $269.4 million in Nationstar HECM Loan Trust 2015-1 Mortgage Backed Securities. The notes were issued under two separate classes, comprised of Class A Notes and Class M Notes. This transaction was accounted for as a secured borrowing. The notes have a final maturity date of May 2018. No portion of the notes were retained by the Company as of March 31, 2016.

During November 2015, Nationstar Mortgage LLC completed the securitization of approximately $217.3 million in Nationstar HECM Loan Trust 2015-2 Mortgage Backed Securities. The notes were issued under three separate classes, comprised of Class A Notes, Class M1 Notes and Class M2 Notes. This transaction was accounted for as a secured borrowing. The notes have a final maturity date of November 2025. No portion of the notes were retained by the Company as of March 31, 2016.

During March 2016, Nationstar Mortgage LLC completed the securitization of approximately $281.7 million in Nationstar HECM Loan Trust 2016-1 Mortgage Backed Securities. The notes were issued as three separate classes, comprised of Class A Notes, Class M1 Notes and Class M2 Notes. This transaction was accounted for as a secured borrowing. The notes have a final maturity date of February 2026. No portion of the notes were retained by the Company as of March 31, 2016.

Nonrecourse Debt–Legacy Assets
During November 2009, Nationstar completed the securitization of approximately $222.0 million of Asset Backed Securities (ABS), which was accounted for as a secured borrowing. This structure resulted in Nationstar carrying the securitized mortgage loans on its consolidated balance sheet and recognizing the asset-backed certificates acquired by third parties as nonrecourse debt of $62.2 million at March 31, 2016 and $64.8 million at December 31, 2015. The principal and interest on these notes are paid using the cash flows from the underlying mortgage loans, which serve as collateral for the debt. The interest rate paid on the outstanding securities is 7.50%, which is subject to an available funds cap. The total outstanding principal balance on the underlying mortgage loans serving as collateral for the debt was approximately $236.0 million and $242.4 million at March 31, 2016 and December 31, 2015, respectively. The timing of the principal payments on this nonrecourse debt is dependent on the payments received on the underlying mortgage loans. The unpaid principal balance on the outstanding notes was $72.3 million and $75.4 million at March 31, 2016 and December 31, 2015, respectively.

Financial Covenants
The Company's borrowing arrangements and credit facilities contain various financial covenants which primarily relate to required tangible net worth amounts, liquidity reserves, leverage requirements, and profitability requirements. As a result of the decrease in interest rates during the three month period ended March 31, 2016, Nationstar recorded a charge to service related revenue for changes in fair value associated with the Company's MSRs recorded at fair value. As a result of the change, Nationstar was unable to meet the profitability requirement in one outstanding warehouse facility and one MBS facility. Nationstar received a waiver from these financial institutions on these profitability requirements for the period ended March 31, 2016. After giving effect to these waivers, the Company was in compliance with all required financial covenants as of March 31, 2016.

Nationstar is required to maintain a minimum tangible net worth of at least $681.7 million as of each quarter-end related to its outstanding Master Repurchase Agreements on its outstanding repurchase facilities. At March 31, 2016, Nationstar was in compliance with these minimum tangible net worth requirements.


24


9. Payables and Accrued Liabilities

Payables and accrued liabilities consist of the following:
 
March 31, 2016
 
December 31, 2015
Payables to servicing and subservicing investors
$
447,996

 
$
483,535

Loans subject to repurchase from Ginnie Mae
179,881

 
117,163

Accrued bonus and payroll
68,700

 
96,381

Payables to GSEs
81,132

 
87,748

Payable to insurance carriers and insurance cancellation reserves
71,174

 
69,936

Accrued interest
63,675

 
61,071

Repurchase reserves
26,015

 
26,404

Payables to securitization trusts
20,450

 
24,910

MSR purchases payable including advances
9,702

 
21,851

Other
170,675

 
307,388

Total payables and accrued liabilities
$
1,139,400

 
$
1,296,387


Payables to Servicing and Subservicing Investors, Payables to GSEs, and Payables to Securitization Trusts
Payables to servicing and subservicing investors represent amounts due to investors in connection with loans serviced and that are paid from collections of the underlying loans, insurance proceeds or at time of property disposal.

Loans Subject to Repurchase from Ginnie Mae
See Note 6, Other Assets for a description of assets and liabilities related to Loans subject to repurchase from Ginnie Mae.

Payable to Insurance Carriers and Insurance Cancellation Reserves
Payable to insurance carriers and insurance cancellation reserves consist of insurance premiums received from borrower payments awaiting disbursement to the insurance carrier and/or amounts due to third party investors on liquidated loans.

10. Securitizations and Financings

Variable Interest Entities (VIEs)
In the normal course of business, Nationstar enters into various types of on- and off-balance sheet transactions with special purpose entities (SPEs) determined to be a VIE, which primarily consists of securitization trusts established for a limited purpose. Generally, these SPEs are formed for the purpose of securitization transactions in which Nationstar transfers assets to an SPE, which then issues to investors various forms of debt obligations supported by those assets. In these securitization transactions, Nationstar typically receives cash and/or other interests in the SPE as proceeds for the transferred assets. Nationstar will typically retain the right to service the transferred receivables and to repurchase the transferred receivables from the SPE if the outstanding balance of the receivables falls to a level where the cost exceeds the benefits of servicing the transferred receivables. All debt obligations issued from the VIEs is non-recourse to Nationstar.

Nationstar evaluates its interest in certain entities to determine if these entities meet the definition of a VIE and whether the Company is the primary beneficiary and should consolidate the entity based on the variable interests it held both at inception and when there is a change in circumstances that require a reconsideration.

Nationstar has determined that the SPEs created in connection with the (i) Nationstar Home Equity Loan Trust 2009-A, (ii) Nationstar Mortgage Advance Receivables Trust (NMART), (iii) Nationstar Agency Advance Financing Trust (NAAFT), (iv) Nationstar Advance Agency Receivables Trust (NAART) should be consolidated as Nationstar is the primary beneficiary. Also, Nationstar consolidated three reverse mortgage SPEs which are (v) Nationstar HECM Loan Trust 2015-1, (vi) Nationstar HECM Loan Trust 2015-2, (vii) Nationstar HECM Loan Trust 2016-1 and it is the primary beneficiary.


25


A summary of the assets and liabilities of Nationstar’s transactions with VIEs included in the Company’s consolidated financial statements is presented below for the periods indicated:
 
 
March 31, 2016
 
December 31, 2015
 
Transfers
Accounted for as
Secured
Borrowings
 
Reverse Secured Borrowings
 
Transfers
Accounted for as
Secured
Borrowings
 
Reverse Secured Borrowings
Assets
 
 
 
 
 
 
 
Restricted cash
$
107,176

 
$
24,962

 
$
94,361

 
$
36,089

Reverse mortgage interests, net

 
6,435,794

 

 
6,546,466

Advances
1,461,733

 

 
1,580,966

 

Mortgage loans held for investment, net
167,222

 

 
172,810

 

Derivative financial instruments

 

 
7

 

Other assets
4,639

 

 
4,538

 

Total assets
$
1,740,770

 
$
6,460,756

 
$
1,852,682

 
$
6,582,555

Liabilities
 
 
 
 
 
 
 
Advance facilities
$
1,329,011

 
$

 
$
1,408,258

 
$

Payables and accrued liabilities
2,173