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Section 1: 10-Q (10-Q)

Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
 
 FORM 10-Q
 
 
 
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 25, 2016: 97,498,242



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 September 30, 2016 (unaudited) and December 31, 2015
 
 
 
 
Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2016 and 2015
 
 
 
 
Consolidated Statements of Stockholders’ Equity (unaudited) for the Nine Months Ended September 30, 2016 and 2015
 
 
 
 
Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 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
(millions of dollars)
 
September 30,
2016
 
December 31,
2015
 
(unaudited)
 
 
Assets
 
 
 
Cash and cash equivalents
$
695

 
$
613

Restricted cash
336

 
332

Mortgage servicing rights, $2,725 and $3,358 at fair value, respectively
2,732

 
3,367

Advances and other receivables, net of reserves of $180 and $130, respectively
1,824

 
2,412

Reverse mortgage interests, net of reserves of $94 and $53, respectively
7,334

 
7,514

Mortgage loans held for sale at fair value
1,839

 
1,430

Mortgage loans held for investment, net of allowance for loan losses of $3 and $4, respectively
156

 
174

Property and equipment, net of accumulated depreciation of $123 and $93, respectively
149

 
143

Derivative financial instruments at fair value
127

 
100

Other assets
654

 
532

Total assets
$
15,846

 
$
16,617

 
 
 
 
Liabilities and stockholders' equity
 
 
 
Unsecured senior notes, net of unamortized debt issuance costs $19 and $23, respectively
$
2,000

 
$
2,026

Advance facilities, net of unamortized debt issuance costs $1 and $6, respectively
1,188

 
1,640

Warehouse facilities, net of unamortized debt issuance costs $1 and $3, respectively
2,610

 
1,890

Payables and accrued liabilities
1,164

 
1,296

MSR related liabilities - nonrecourse at fair value
1,079

 
1,301

Mortgage servicing liabilities
11

 
25

Derivative financial instruments at fair value
14

 
6

Other nonrecourse debt, net of unamortized debt issuance costs $7 and $4, respectively
6,298

 
6,666

Total liabilities
14,364

 
14,850

Commitments and contingencies (Note 15)


 


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

 

Common stock at $0.01 par value - 1,000,000 thousand shares authorized, 109,915 thousand and 109,826 thousand shares issued, respectively
1

 
1

Additional paid-in-capital
1,119

 
1,105

Retained earnings
503

 
682

Treasury shares at cost, 12,417 thousand and 1,826 thousand shares, respectively
(147
)
 
(30
)
Total Nationstar stockholders' equity
1,476

 
1,758

Noncontrolling interest
6

 
9

Total stockholders' equity
1,482

 
1,767

Total liabilities and stockholders' equity
$
15,846

 
$
16,617

See accompanying notes to the consolidated financial statements.

3


NATIONSTAR MORTGAGE HOLDINGS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(millions of dollars, except for earnings per share data)

 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Service related, net
$
305

 
$
211

 
$
502

 
$
884

Net gain on mortgage loans held for sale
237

 
186

 
624

 
517

Total revenues
542

 
397

 
1,126

 
1,401

Expenses:
 
 
 
 
 
 
 
Salaries, wages and benefits
211

 
201

 
613

 
578

General and administrative
196

 
245

 
619

 
693

Total expenses
407

 
446

 
1,232

 
1,271

Other income (expenses):
 
 
 
 
 
 
 
Interest income
103

 
113

 
313

 
243

Interest expense
(165
)
 
(176
)
 
(493
)
 
(439
)
Other expense
(2
)
 

 
(2
)
 
(1
)
Total other income (expenses), net
(64
)
 
(63
)
 
(182
)
 
(197
)
Income (loss) before income tax expense (benefit)
71

 
(112
)
 
(288
)
 
(67
)
Less: income tax expense (benefit)
29

 
(47
)
 
(106
)
 
(31
)
Net income (loss)
42

 
(65
)
 
(182
)
 
(36
)
Less: net income (loss) attributable to non-controlling interests
(3
)
 
1

 
(3
)
 
4

Net income (loss) attributable to Nationstar
$
45

 
$
(66
)
 
$
(179
)
 
$
(40
)
 
 
 
 
 
 
 
 
Net income (loss) per common share attributable to common stockholders:
 
 
 
 
 
 
 
Basic and diluted
$
0.46

 
$
(0.62
)
 
$
(1.78
)
 
$
(0.39
)
Weighted average shares of common stock outstanding (in thousands):
 
 
 
 
 
 
 
       Basic
97,461

 
107,568

 
100,524

 
101,797

       Dilutive effect of stock awards
893

 

 

 

       Diluted
98,354

 
107,568

 
100,524

 
101,797

See accompanying notes to the consolidated financial statements.

4


NATIONSTAR MORTGAGE HOLDINGS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 
Number of Shares Outstanding (in thousands)
 
Amount
(millions of dollars)
 
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

 
$
1

 
$
587

 
$
643

 
$
(12
)
 
$
1,219

 
$
5

 
$
1,224

Net income (loss)

 

 

 
(40
)
 

 
(40
)
 
4

 
(36
)
Shares issued (surrendered) under incentive plan, net
1,042

 

 

 

 
(6
)
 
(6
)
 

 
(6
)
Share-based compensation

 

 
15

 

 

 
15

 

 
15

Issuance of common stock
17,500

 

 
498

 

 

 
498

 

 
498

Excess tax benefit from share based compensation

 

 
1

 

 

 
1

 

 
1

Balance at September 30, 2015
108,899

 
$
1

 
$
1,101

 
$
603

 
$
(18
)
 
$
1,687

 
$
9

 
$
1,696

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
108,000

 
$
1

 
$
1,105

 
$
682

 
$
(30
)
 
$
1,758

 
$
9

 
$
1,767

Net income (loss)

 

 

 
(179
)
 

 
(179
)
 
(3
)
 
(182
)
Shares issued (surrendered) under incentive plan, net
87

 

 

 

 
(3
)
 
(3
)
 

 
(3
)
Share-based compensation

 

 
18

 

 

 
18

 

 
18

Excess tax deficiency from share based compensation

 

 
(4
)
 

 

 
(4
)
 

 
(4
)
Repurchase of common stock
(10,589
)
 

 

 

 
(114
)
 
(114
)
 

 
(114
)
Balance at September 30, 2016
97,498

 
$
1

 
$
1,119

 
$
503

 
$
(147
)
 
$
1,476

 
$
6

 
$
1,482


See accompanying notes to the consolidated financial statements.

5


NATIONSTAR MORTGAGE HOLDINGS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions of dollars)

 
Nine months ended September 30,
 
2016
 
2015
Operating Activities
 
 
 
Net loss attributable to Nationstar
$
(179
)
 
$
(40
)
Reconciliation of net loss to net cash attributable to operating activities:
 
 
 
Noncontrolling interest
(3
)
 
4

Net gain on mortgage loans held for sale
(624
)
 
(517
)
Provision for reserves on advances and other receivables
85

 
39

Fair value changes and amortization of mortgage servicing rights
784

 
500

Fair value changes in excess spread financing
(75
)
 
(23
)
Fair value changes in mortgage servicing rights financing liability
(2
)
 
7

Amortization (accretion) of premiums (discounts)
27

 
(20
)
Depreciation and amortization
66

 
52

Share based compensation
18

 
15

Other loss
2

 
1

Repurchases of forward loan assets out of Ginnie Mae securitizations
(1,138
)
 
(1,393
)
Mortgage loans originated and purchased, net of fees
(15,845
)
 
(13,970
)
Sales proceeds and loan payment proceeds for mortgage loans held for sale and held for investment
17,043

 
15,049

Excess tax benefit (deficiency) from share-based compensation
4

 
(1
)
Changes in assets and liabilities:
 
 
 
Advances and other receivables, net
519

 
479

Reverse mortgage interests, net
179

 
(165
)
Other assets
(137
)
 
47

Payables and accrued liabilities
(139
)
 
(127
)
Net cash attributable to operating activities
585

 
(63
)
 
 
 
 
Investing Activities
 
 
 
Property and equipment additions, net of disposals
(47
)
 
(44
)
Purchase of forward mortgage servicing rights, net of liabilities incurred
(46
)
 
(615
)
Purchase of reverse mortgage interests

 
(4,815
)
Sale of forward mortgage servicing rights
27

 
41

Proceeds on sale of reverse mortgage servicing rights
1

 

Business acquisitions, net

 
(45
)
Net cash attributable to investing activities
(65
)
 
(5,478
)
Continued on following page.
See accompanying notes to the consolidated financial statements. 









6


NATIONSTAR MORTGAGE HOLDINGS INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(millions of dollars)
 
Nine months ended September 30,
 
2016
 
2015
Financing Activities
 
 
 
Increase in warehouse facilities
718

 
730

Proceeds from HECM securitizations
724

 
342

Repayment of HECM securitizations
(624
)
 
(103
)
Increase (decrease) in participating interest financing in reverse mortgage interests
(480
)
 
4,629

Decrease in advance facilities
(458
)
 
(148
)
Repayment of excess spread financing
(146
)
 
(155
)
Issuance of excess spread financing

 
263

Repayment of nonrecourse debt – legacy assets
(12
)
 
(10
)
Repurchase of unsecured senior notes
(29
)
 

Repurchase of common stock
(114
)
 

Issuance of common stock, net of issuance costs

 
498

Transfers to restricted cash, net

 
(192
)
Excess tax (deficiency) benefit from share based compensation
(4
)
 
1

Surrender of shares relating to stock vesting
(3
)
 
(6
)
Debt financing costs
(10
)
 
(10
)
Net cash attributable to financing activities
(438
)
 
5,839

Net increase in cash and cash equivalents
82

 
298

Cash and cash equivalents at beginning of period
613

 
299

Cash and cash equivalents at end of period
$
695

 
$
597

 
 
 
 
Supplemental disclosures of cash activities
 
 
 
Cash paid for interest expense
$
510

 
$
319

Net cash paid for income taxes
$
29

 
$
31

See accompanying notes to the consolidated financial statements. 

7



NATIONSTAR MORTGAGE HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(millions of dollars, 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 primarily to single-family residences throughout the United States.

Basis of Presentation
The consolidated interim financial statements of Nationstar have been prepared in accordance with generally accepted accounting principles 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 nine months ended September 30, 2016, there were no significant changes to those accounting policies. Dollar amounts are reported in millions, except per share data and other key metrics, unless otherwise noted.

The interim consolidated financial statements are unaudited; however, in the opinion of management, all adjustments considered necessary for a fair presentation of the results of the interim periods have been included. 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 ("VIE") where Nationstar's wholly-owned subsidiaries are the primary beneficiaries. Nationstar applies the equity method of accounting to investments where it is able to exercise significant influence, but not control, over the policies and procedures of the entity and 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. Assets and liabilities of VIEs and their respective results of operations are consolidated from the date that Nationstar became the primary beneficiary through the date Nationstar ceases to be the primary beneficiary.

Reclassifications
In the second quarter of 2016, the Company reclassified certain assets to more closely align assets related to amounts from agencies and investors from other assets to advances and other receivables in its previously reported consolidated balance sheet as of December 31, 2015. The revised balances of those accounts as of December 31, 2015 are shown in the table below.


8


In addition, 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 Accounting Standards Update ("ASU") No. 2015-03, Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, during the first quarter of 2016 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. The revised balances of those accounts as of December 31, 2015 are shown in the table below.
 
As presented
 
Reclassification
 
As adjusted
 
December 31, 2015
 
ASU 2015-03
Other
 
December 31, 2015
Advances and other receivables, net
$
2,223

 
$

$
189

 
$
2,412

Other assets
759

 
(38
)
(189
)
 
532

Unsecured senior notes
2,049

 
(23
)

 
2,026

Advance facilities
1,646

 
(6
)

 
1,640

Warehouse facilities
1,894

 
(4
)

 
1,890

Other nonrecourse debt
6,671

 
(5
)

 
6,666


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 No. 2015-03, Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), which requires 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 No. 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. Otherwise, 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), 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.


9


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.
Accounting Standards Updates No. 2016-08 and 2016-12, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), clarify that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer, provides guidance regarding how to apply the control principle when services are provided and when goods or services are combined with other goods or services, and clarifies the definition of a completed contract. Additional clarification is provided that if Topic 606 is applied retrospectively to the financial statements, it does not have to be treated as an accounting change. 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), 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.

Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326) (ASU 2016-13), requires organization to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The update eliminates the probable initial recognition threshold in current GAAP and, instead, reflects an entity’s current estimate of all expected credit losses. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 14, 2019. The Company is currently assessing the impact the adoption of this guidance will have on the Company's financial position or results of operations.


10


Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, and will require adoption on a retrospective basis. The Company is currently evaluating the impact the application of ASU 2016-15 will have on the Company’s financial position or results of operations. 

2. Mortgage Servicing Rights ("MSR") and Related Liabilities

The following table sets forth the carrying value of Nationstar's MSR and the related liabilities as of September 30, 2016 and December 31, 2015.
MSRs and Related Liabilities
September 30, 2016
 
December 31, 2015
Forward MSRs - fair value
$
2,725

 
$
3,358

Reverse MSRs - LOCOM
7

 
9

Mortgage servicing rights
$
2,732

 
$
3,367

 
 
 
 
Mortgage servicing liabilities - LOCOM
$
11

 
$
25

 
 
 
 
Excess spread financing - fair value
$
1,012

 
$
1,232

Mortgage servicing rights financing liability - fair value
67

 
69

MSR related liabilities (nonrecourse)
$
1,079

 
$
1,301


Forward Mortgage Servicing Rights - Fair Value
The Company owns and records at fair value the rights to service traditional residential mortgage loans ("forward" loans) for others either as a result of purchase transactions or from the sales and securitizations of loans originated. Forward MSRs are comprised of rights related to both agency and non-agency loans.

Servicing resulting from transfers of financial assets comprises the fair value of the newly originated MSRs at the time the loan is sold or securitized.


11


The activity of MSRs carried at fair value is as follows for the dates indicated.

 
Nine months ended September 30,
Forward MSRs - Fair Value
2016
 
2015
Fair value at the beginning of the period
$
3,358

 
$
2,950

Additions:
 
 
 
Servicing resulting from transfers of financial assets
140

 
169

Purchases of servicing assets
50

 
695

Dispositions:
 
 
 
Sales of servicing assets
(27
)
 
(46
)
Changes in fair value:
 
 
 
Due to changes in valuation inputs or assumptions used in the valuation model
(494
)
 
(197
)
Other changes in fair value
(302
)
 
(338
)
Fair value at the end of the period
$
2,725

 
$
3,233


During the nine months ended September 30, 2016, the Company sold MSRs and was retained as the subservicer for an unpaid principal balance of $3,507, out of a total $4,560 unpaid principal balance sold. 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 given the continued involvement as the subservicer and concluded that these transactions qualify for sale accounting treatment.

MSRs measured at fair value are segregated 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. 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. Once the determination for a pool is made, subsequent changes are not made.

Interest sensitive portfolios generally consist of lower delinquency, single-family conforming residential forward mortgage loans for investors. 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.
 
September 30, 2016
 
December 31, 2015
 
UPB
 
Fair Value
 
UPB
 
Fair Value
Credit sensitive
$
192,728

 
$
1,665

 
$
224,334

 
$
2,017

Interest sensitive
120,379

 
1,060

 
121,342

 
1,341

Total
$
313,107

 
$
2,725

 
$
345,676

 
$
3,358



12


Nationstar used the following weighted average assumptions in estimating the fair value of MSRs for the dates indicated.
Credit Sensitive
September 30, 2016
 
December 31, 2015
Discount rate
11.6
%
 
11.6
%
Weighted-average prepayment speeds
17.4
%
 
16.5
%
Expected weighted-average life
5.5 years

 
5.9 years

 
 
 
 
Interest Sensitive
 
 
 
Discount rate
9.2
%
 
9.1
%
Weighted-average prepayment speeds
16.1
%
 
12.4
%
Expected weighted-average life
5.0 years

 
6.1 years


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 September 30, 2016 and December 31, 2015.
 
Discount Rate
 
Total Prepayment
Speeds
 
100 bps
Adverse
Change
 
200 bps
Adverse
Change
 
10%
Adverse
Change
 
20%
Adverse
Change
September 30, 2016
 
 
 
 
 
 
 
Mortgage servicing rights
$
(88
)
 
$
(171
)
 
$
(126
)
 
$
(240
)
December 31, 2015
 
 
 
 
 
 
 
Mortgage servicing rights
$
(123
)
 
$
(238
)
 
$
(132
)
 
$
(253
)

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.

Reverse Mortgage Servicing Rights and Liabilities - LOCOM
Nationstar owns the right to service certain Home Equity Conversion Mortgage ("HECM") reverse mortgage loans with an unpaid principal balance of $26,855 and $29,855 as of September 30, 2016 and December 31, 2015, respectively. An MSR asset or Mortgage Servicing Liability ("MSL") is established upon the acquisition at fair value, as applicable, based on the proceeds paid or received to service the reverse portfolio. Each quarter, the Company amortizes or accretes the MSR or MSL, respectively, to service related revenue, net as the respective portfolios run-off, and the MSR or MSL is assessed for impairment or increased obligation based on its fair value, using a variety of assumptions. The primary assumptions of MSR consists of discount rates, prepayment speeds and the borrower life expectancy, whereas the primary assumptions of MSL consist of loss severity and expectancy rates, foreclosure timelines, and expected changes in interest rates. The MSRs are stratified based on predominant risk characteristics of the underlying serviced loans. Impairment, if any, represents the excess of amortized cost of an individual stratum over its estimated fair value and is recognized through an increase in the valuation expense. At September 30, 2016 and December 31, 2015, no impairment was identified.


13


The following table sets forth the amortized carrying value and activity of reverse MSRs for the nine months ended September 30, 2016 and 2015.
 
Nine months ended September 30,
 
2016
 
2015
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Reverse MSRs and Liabilities - LOCOM
 
 
 
 
 
 
 
Balance at the beginning of the period
$
9

 
$
25

 
$
12

 
$
65

Amortization/accretion
(2
)
 
(14
)
 
(2
)
 
(37
)
Balance at end of the period
$
7

 
$
11

 
$
10

 
$
28

Fair value at end of period
$
25

 
$
2

 
$
30

 
$
11


For the nine months ended September 30, 2016 and 2015, the Company accreted $14 and $37, respectively, of the mortgage servicing liability. As part of servicing arrangements, issuers of HECMs are responsible for repurchasing any loans out of the Home Equity Conversion Mortgage Backed Securities ("HMBS") pool when the outstanding principal balance of the related HECM loan is equal to or greater than 98% of the maximum claim amount set at origination. Purchases of such loans, which relinquishes the reverse MSR or MSL, are subsequently recorded as reverse mortgage interests.

Excess Spread Financing at Fair Value
In order to finance the acquisition of certain forward 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"), a subsidiary of Fortress Investment Group LLC ("Fortress"). Certain funds are managed by Fortress, which owns an interest in the Company. See Note 18. Transactions with Affiliates. Nationstar, in transactions accounted for as financing arrangements, 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 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 contractually specified base 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.
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, 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 various assumptions used in Nationstar's valuation of excess spread financing are as follows.
Excess Spread Financing
Prepayment Speeds
 
Average
Life (Years)
 
Discount
Rate
 
Recapture Rate
September 30, 2016
 
 
 
 
 
 
 
Low
8.4%
 
3.7
 
8.5%
 
6.7%
High
18.3%
 
6.5
 
14.1%
 
28.3%
Weighted-average
12.5%
 
5.4
 
11.0%
 
18.0%
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%


14


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
 
Prepayment
Speeds
 
100 bps
Adverse
Change
 
200 bps
Adverse
Change
 
10%
Adverse
Change
 
20%
Adverse
Change
September 30, 2016
 
 
 
 
 
 
 
Excess spread financing
$
36

 
$
74

 
$
41

 
$
82

December 31, 2015
 
 
 
 
 
 
 
Excess spread financing
$
42

 
$
87

 
$
37

 
$
76


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.

Mortgage Forward Servicing Rights Financing
From December 2013 through June 2014, Nationstar entered into agreements to sell a contractually specified base fee component of certain forward MSRs and servicing 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 transaction. See Note 18. Transactions with Affiliates 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, net in the consolidated statements of operations. The following table sets forth the weighted average assumptions used in the valuation of mortgage servicing rights financing liability.
 
September 30, 2016
 
December 31, 2015
Advance financing rates
3.3
%
 
3.0
%
Annual advance recovery rates
24.2
%
 
20.9
%

15



The following table sets forth the items comprising of revenue associated with servicing loan portfolios.
 
Three months ended September 30,
 
Nine months ended September 30,
Servicing Segment Revenue
2016
 
2015
 
2016
 
2015
Contractually specified servicing fees including subservicing fees
$
254

 
$
285

 
$
786

 
$
827

Reverse servicing fees
11

 
32

 
46

 
75

Incentive and modification income
35

 
21

 
82

 
75

Late fees
19

 
18

 
57

 
52

Other service-related income
66

 
62

 
214

 
173

Revenue sharing related to MSR financing and excess spread
(75
)
 
(77
)
 
(223
)
 
(225
)
Amortization
(92
)
 
(83
)
 
(235
)
 
(247
)
Mark-to-market
(8
)
 
(151
)
 
(502
)
 
(180
)
Total servicing fee income
$
210

 
$
107

 
$
225

 
$
550


3. Advances and Other Receivables, Net

Advances and other receivables, net consists of the following.
 
September 30, 2016
 
December 31, 2015
Servicing advances
$
1,683

 
$
2,254

Receivables from agencies and investors
321

 
288

Reserves
(180
)
 
(130
)
Total advances and other receivables, net
$
1,824

 
$
2,412


Servicing advances on agency securities represent a receivable from the respective agency investor and are recovered from cash reimbursements from the agency. Servicing advances on non-agency securities are typically recovered from proceeds of the sale of mortgage loan collateral for which the advance was made. If loan-level proceeds are determined to be insufficient, recovery is achieved from cash collected at the pool level from the securitization trust as permitted contractually or mortgage insurance claim. In order to more closely align assets related to amounts due from agencies and investors, certain December 31, 2015 balances of other assets were reclassified to advances and other receivables as presented in Note 1. Nature of Business and Basis of Presentation. The reclassified amounts represented amounts due from agencies relating to filed claims and from investors. These amounts, net of reserves, totaled $189 as of December 31, 2015.
Each reporting period, the Company evaluates the appropriateness of its reserves for uncollectible advances and servicing receivables. The reserves are computed based on an analysis that considers the underlying loan, the type of advance or servicing receivable, the investors' servicing reimbursement guidelines, mortgage insurance reimbursement guidelines, reimbursement patterns and past loss experience. The carrying value of active loans within the MSR portfolio are adjusted each period to reflect both the positive and negative projected cash flows associated with serviced loans, and earnings is adjusted accordingly through the mark-to-market adjustment, which is a component of service related revenue. As loans with negative MSR values become inactive and reach a $0 UPB, the related negative values associated with these loans are reclassified from MSR to the reserve account within advances and other receivables, net. The reclassification upon loans becoming inactive is consistent with the Company's accounting policy and allows alignment of reserves with the assets where expected servicing losses for inactive loans will be realized. After a loan becomes inactive, subsequent reserves are established if needed through a charge to general and administrative expense reflecting expected losses incurred during the liquidation process.

16


During the first quarter of 2016, the Company increased reserves by $59 through a reclassification from MSR for negative values associated with inactive loans that were recorded as of December 31, 2015 and decreased reserves by $3 for reclassifications to other accounts to align the needed reserve balance. Reserves also increased by $27 and $85 during the three and nine months ended September 30, 2016, respectively, through a provision for negative MSR values related to inactive loans. The provision was recorded as a reduction to service related revenue. During the three and nine months ended September 30, 2016, the Company wrote off $91 of advances that were previously identified as not recoverable.
4. Reverse Mortgage Interests, Net

Reverse mortgage interests, net consist of the following.
 
September 30, 2016
 
December 31, 2015
Participating interests in HMBS
$
5,412

 
$
5,864

Other interests securitized
836

 
715

Unsecuritized interests
1,180

 
988

Reserves
(94
)
 
(53
)
Total reverse mortgage interests, net
$
7,334

 
$
7,514


Participating interests
Participating interests consist of reverse mortgage interests or HECM loans which have been transferred to Ginnie Mae and subsequently securitized through the issuance of HMBS. The HMBS securitizations are accounted for as secured borrowings with both the reverse mortgage interest and related indebtedness retained on the Company's balance sheet.

Other interests securitized
Other interests securitized consist 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 the Company's balance sheet.

Unsecuritized interests
Unsecuritized interests in reverse mortgages consist primarily of the following.
 
September 30, 2016
 
December 31, 2015
Repurchased HECM loans
$
803

 
$
591

HECM related receivables
283

 
290

Funded borrower draws not yet securitized
74

 
83

Foreclosed assets
20

 
24

Total unsecuritized interests
$
1,180

 
$
988


Unsecuritized interests include HECM loans for which the Company is required to repurchase 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 established at origination. The Company repurchased a total of $2,270 and $1,572 HECM loans out of Ginnie Mae HMBS securitizations during the nine months ended September 30, 2016 and 2015, respectively, of which, $661 and $608 were subsequently reimbursed by a prior servicer. Nationstar routinely securitizes eligible reverse mortgage interests through Ginnie Mae HMBS pools or private HECM securitization trusts. Reverse mortgage interest securitization transactions are treated as secured borrowings with both the reverse mortgage interests and related indebtedness retained on Nationstar’s balance sheet.


17


Reserves for reverse mortgage interests
Reserves for servicing losses on reverse mortgage interests are reflected through the Company's provision for losses and consist of (1) financial and (2) operational losses related to servicing of other interests securitized and unsecuritized interests in HECM loans. Financial exposures are defined as the cost of doing business related to servicing the HECM product and include potential unrecoverable costs primarily based on FHA claim guidelines related to reimbursable expenses and unfavorable change in the appraised value of the loan collateral. Operational exposures are defined as un-reimbursable debenture interest curtailments imposed for missed HUD servicing time lines. The Company establishes reserves for servicing losses based on historical loss experience, underlying value of collateral, age of claim and management’s knowledge of expected claim recoveries. Losses are established when loans are bought out of the Ginnie Mae HMBS pools. Reserves reflect management’s best estimate of amounts to be realized, which are subject to change as facts and circumstances change. In the nine months ended September 30, 2016, the Company increased reverse mortgage reserves by $42 for changes in actual and estimated losses. The increase in reserves is primarily due to loss estimates resulting from updated economic factors such as prolonged foreclosure timelines and due to changes in negotiations with investors regarding expected recoveries of make-whole claims.

Reverse mortgage sales
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 with an outstanding unpaid principal balance totaling $96. These loans were recorded within reverse mortgage interests as mortgage loans held for sale at LOCOM. In June 2016, Nationstar sold the loans from the transaction for $74 and recorded a gain on the sale of $17, which was recorded to net gain on mortgage loans held for sale.

Reverse interest income
The Company accrues interest income for its participating interest in reverse mortgages based on the stated rate of the HECM loan. Total interest earned on the Company's reverse mortgage interests was $81 and $251 for the three and nine months ended September 31, 2016, respectively, and $90 and $181 for the three and nine months ended September 30, 2015, respectively. 

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 refinancings 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.

Mortgage loans held for sale are recorded at fair value as set forth below.
 
September 30, 2016
 
December 31, 2015
Mortgage loans held for sale – unpaid principal balance
$
1,774

 
$
1,374

Mark-to-market adjustment(1)
65

 
56

Total mortgage loans held for sale
$
1,839

 
$
1,430

(1) The mark-to-market adjustment is recorded in net gain on mortgage loans held for sale in the 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.
 
September 30, 2016
 
December 31, 2015
Mortgage Loans Held for Sale - Unpaid Principal Balance
UPB
 
Fair Value
 
UPB
 
Fair Value
Non-accrual
$
109

 
$
105

 
$
31

 
$
29



18


From time to time, Nationstar exercises its right to repurchase individual delinquent loans in Ginnie Mae securitization pools to minimize interest spread losses, to re-pool into new Ginnie Mae securitizations, or to otherwise sell to third-party investors.  During the nine months ended September 30, 2016, Nationstar repurchased $201 of delinquent Ginnie Mae loans, of which $88 of these loans were securitized or sold to third-party investors. As of September 30, 2016, $18 of the repurchased loans have re-performed and were held in accrual status, and remaining balances continue to be held under a nonaccrual status.
The total UPB of mortgage loans held for sale for which the Company has begun formal foreclosure proceedings was $85 and $16 as of September 30, 2016 and December 31, 2015, respectively.
A reconciliation of the changes in mortgage loans held for sale is presented in the following table.
 
 
Nine months ended September 30,
 
2016
 
2015
Mortgage loans held for sale – beginning balance
$
1,430

 
$
1,278

Mortgage loans originated and purchased, net of fees
15,788

 
13,970

Transfer of mortgage loans held for sale to advances/accounts receivable related to claims (1)
(16
)
 
(46
)
Transfer of mortgage loans held for sale to other assets
9

 

Repurchase of loans out of Ginnie Mae securitizations
1,138

 
1,369

Loans sold
(16,510
)
 
(14,685
)
Mortgage loans held for sale – ending balance
$
1,839

 
$
1,886


(1) Amounts are comprised of claims made on certain government guaranteed mortgage loans upon foreclosure.

For the nine months ended September 30, 2016 and 2015, the Company received proceeds of $16,957 and $15,034, respectively, on the sale of mortgage loans held for sale, resulting in gains of $447 and $349, respectively.

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 upon re-performance of the loan or to otherwise sell to third-party investors. The amounts repurchased out of Ginnie Mae pools, as presented above, are primarily in connection with loan modifications and loan resolution activity as part of Nationstar's contractual obligations as the servicer of the loans.


19


Mortgage Loans Held for Investment, Net
Mortgage loans held for investment, net are comprised of the following. 
 
September 30, 2016
 
December 31, 2015
Mortgage loans held for investment, net – unpaid principal balance
$
225

 
$
250

Transfer discount:
 
 
 
Accretable
(14
)
 
(15
)
Non-accretable
(52
)
 
(57
)
Allowance for loan losses
(3
)
 
(4
)
Total mortgage loans held for investment, net
$
156

 
$
174


The changes in accretable yield on loans transferred to mortgage loans held for investment, net are set forth below. 
 
Nine months ended September 30,
 
2016
 
2015
Accretable Yield
 
 
 
Balance at the beginning of the period
$
(15
)
 
$
(16
)
Accretion
2

 
2

Reclassifications from nonaccretable discount
(1
)
 
(1
)
Balance at the end of the period
$
(14
)
 
$
(15
)
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 $1.4 and $1.2 of transfer discount from non-accretable yield for the nine months ended September 30, 2016 and 2015, respectively.

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 $31 and $41 as of September 30, 2016 and December 31, 2015, respectively.


20


6. Other Assets

Other assets consist of the following.
 
September 30, 2016
 
December 31, 2015
Accrued revenues
$
172

 
$
180

Loans subject to repurchase right from Ginnie Mae
144

 
117

Taxes receivable
74

 

Goodwill
74

 
71

Intangible assets
42

 
50

Deposits
39

 
30

Prepaid expenses
17

 
20

Real estate owned (REO), net
26

 
18

Receivables from affiliates, net
6

 
8

Other
60

 
38

       Total other assets
$
654

 
$
532


Accrued revenue is primarily comprised of service fees earned but not received.
For forward loans that Nationstar sold to Ginnie Mae in conjunction with issuance of mortgage backed securities, Nationstar as the issuer has the unilateral 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. Once Nationstar has the unilateral right to repurchase a delinquent loan, Nationstar has effectively regained control over the loan and in accordance with 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 $144 at September 30, 2016 and $117 at December 31, 2015.

Tax receivable assets are primarily due to net operating tax losses recorded in 2016 and true-up adjustments associated with federal income tax returns for prior years.

Real estate owned (REO), net includes $21 and $15 of REO loans with a government or GSE guarantee at September 30, 2016 and December 31, 2015, respectively, limiting loss exposure to the Company.

Other primarily includes non-advance related accounts receivables due from investors and various other miscellaneous assets.

7. Derivative Financial Instruments

Derivative instruments utilized by Nationstar primarily include interest rate lock commitments ("IRLCs"), Loan Purchase Commitments ("LPCs"), Forward Mortgage Backed Securities ("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.


21


Associated with the Company's derivatives are $10 and $4 in collateral deposits on derivative instruments recorded in other assets and payables and accrued liabilities on the Company's balance sheets as of September 30, 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.

Nationstar enters into Eurodollar futures and Treasury 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 enters 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 the London Interbank Offered Rate ("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 and $400 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. The Company did not elect hedge accounting related to these agreements and they expired during the first quarter of 2016. The Company did not enter into any new agreements for the three and nine months ended September 30, 2016.

22


The following tables provide the outstanding notional balances, fair values of outstanding positions and recorded gains/(losses).
 
Expiration
Dates
 
Outstanding
Notional
 
Fair
Value
 
Recorded
Gains /
(Losses)
Nine months ended September 30, 2016
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Mortgage loans held for sale, net
 
 
 
 
 
 
 
Loan sale commitments
2016
 
$
82

 
$
(0.4
)
 
$
(0.7
)
Derivative financial instruments
 
 
 
 
 
 
 
IRLCs
2016
 
4,291

 
123.0

 
33.9

Forward MBS trades
2016
 
708

 
0.6

 
(5.5
)
LPCs
2016
 
354

 
2.8

 
(1.1
)
Eurodollar futures(1)
2016-2021
 
7

 

 
(0.1
)
Treasury futures
2016
 
63

 
0.5

 
0.5

Interest rate swaps
2017
 
10

 
0.2

 
(0.3
)
Liabilities
 
 
 
 
 
 
 
Derivative financial instruments
 
 
 
 
 
 
 
IRLCs(1)
2016
 
4

 

 

       Forward MBS trades
2016
 
3,306

 
13.1

 
(9.4
)
LPCs
2016
 
171

 
0.7

 
0.8

Eurodollar futures
2016-2021
 
55

 
0.1

 

Treasury futures
2016
 
67

 
0.3

 
(0.3
)
Interest rate swaps
2017
 
10

 
0.2

 
0.3

 
 
 
 
 
 
 
 
Twelve months ended December 31, 2015
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Mortgage loans held for sale
 
 
 
 
 
 
 
Loan sale commitments
2016
 
$
176

 
0.3

 
0.3

Derivative financial instruments
 
 
 
 
 
 
 
IRLCs
2016
 
2,768

 
89.1

 
1.2

Forward MBS trades
2016
 
1,666

 
6.1

 
5.8

LPCs
2016
 
388

 
3.9

 
1.9

Eurodollar futures
2016-2021
 
176

 
0.1

 
0.1

Interest rate swaps and caps
2016-2017
 
846

 
0.5

 
(0.4
)
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Derivative financial instruments
 
 
 
 
 
 
 
IRLCs(1)
2016
 
2

 

 

Forward MBS trades
2016
 
1,807

 
3.7

 
14.6

LPCs
2016
 
314

 
1.5

 
(1.4
)
Eurodollar futures
2016-2021
 
95

 
0.1

 
(0.1
)
Interest rate swaps and caps
2016-2017
 
13

 
0.5

 
(0.4
)

(1) Fair values of derivative instruments are less than $0.1 for the specified dates.



23


8. Indebtedness

Notes Payable
 
 
 
 
 
 
 
 
 
 
September 30, 2016
 
December 31, 2015
Advance Facilities
 
Interest Rate
 
Maturity Date
 
Collateral
 
Capacity Amount
 
Outstanding
 
Collateral Pledged
 
Outstanding
 
Collateral pledged
MBS advance financing facility
 
LIBOR+2.5%
 
March 31,
2017
 
Servicing advance receivables
 
$
130

 
$
67

 
$
77

 
$
82

 
$
89

Nationstar agency advance financing facility
 
LIBOR+2.0%
 
January 15, 2017
 
Servicing advance receivables
 
400

 
230

 
255

 
310

 
364

MBS advance financing facility (2012)
 
LIBOR+5.0%
 
November 30, 2016
 
Servicing advance receivables
 
50

 
40

 
48

 
50

 
70

Nationstar mortgage advance receivable
trust
 
LIBOR+1.9%
 
December 20, 2017
 
Servicing advance receivables
 
500

 
278

 
319

 
335

 
394

MBS servicer advance facility (2014)
 
LIBOR+3.5%
 
September 12, 2017
 
Servicing advance receivables
 
125

 
103

 
148

 
106

 
185

Nationstar agency advance receivables trust
 
LIBOR+2.0%
 
October 9, 2017
 
Servicing advance receivables
 
1,400

 
471

 
531

 
763

 
823

Advance facilities principal amount
 
 
 
 
 
1,189

 
1,378

 
1,646

 
1,925

Debt issuance costs
 
 
 
 
 
 
 
 
 
(1
)
 

 
(6
)
 

Advance facilities, net of unamortized debt issuance costs
 
 
 
$
1,188


$
1,378

 
$
1,640

 
$
1,925

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2016
 
December 31, 2015
Warehouse Facilities
 
Interest Rate
 
Maturity Date
 
Collateral
 
Capacity Amount
 
Outstanding
 
Collateral Pledged
 
Outstanding
 
Collateral pledged
$1,300 warehouse facility
 
LIBOR+2.0% to 2.9%
 
October 17, 2017
 
Mortgage loans or MBS
 
$
1,300

 
$
855

 
$
888

 
$
634

 
$
678

$850 warehouse facility
 
LIBOR+1.8% to 3.3%
 
June 30,
2017
 
Mortgage loans or MBS
 
850

 
526

 
568

 
545

 
622

$500 warehouse facility
 
LIBOR+1.8% to 2.8%
 
September 1, 2017
 
Mortgage loans or MBS
 
500

 
215

 
219

 
175

 
179

$500 warehouse facility
 
LIBOR+2.0% to 2.5%
 
November 15, 2016
 
Mortgage loans or MBS
 
500

 
362

 
448

 
257

 
274

$350 warehouse facility
 
LIBOR+2.2% to 4.5%
 
April 7,
2017
 
Mortgage loans or MBS
 
350

 
21

 
22

 
98

 
112

$200 warehouse facility
 
LIBOR+1.5%
 
April 30,
2017
 
Mortgage loans or MBS
 
200

 
56

 
58

 
8

 
9

$300 warehouse facility
 
LIBOR+2.3%
 
December 14, 2016
 
Mortgage loans or MBS
 
300

 
164

 
186

 
23

 
28

$350 warehouse facility
 
LIBOR+2.8% to 3.9%
 
November 17, 2016
 
Mortgage loans or MBS
 
350

 
169

 
185

 
45

 
50

$500 warehouse Facility
 
LIBOR+2.1% to 2.5%
 
September 8, 2017
 
Mortgage loans or MBS
 
500

 
191

 
196

 

 

$75 warehouse facility (HCM) (1)
 
LIBOR+2.3% to 2.9%
 
October 17, 2016
 
Mortgage loans or MBS
 
75

 
10

 
12

 
53

 
59

$100 warehouse facility (HCM) (1)
 
LIBOR+2.5% to 2.8%
 
November 18, 2016
 
Mortgage loans or MBS
 
100

 
42

 
44

 
55

 
60

Warehouse facilities principal amount
 
 
 

 
2,611

 
2,826

 
1,893

 
2,071

Debt issuance costs
 
 
 
 
 
 
 
 
 
(1
)
 

 
(3
)
 

Warehouse facilities, net of unamortized debt issuance costs
 
 
 
$
2,610

 
$
2,826

 
$
1,890

 
$
2,071

 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
Mortgage loans, net
 
 
 
 
 
 
 
 
 
$
1,654

 
$
1,725

 
$
1,509

 
$
1,625

Reverse mortgage interests, net
 
 
 
 
 
 
 
642

 
761

 
351

 
390

MSR and other collateral
 
 
 
 
 
 
 
 
 
315


340


33


56


(1) These facilities, specific to Home Community Mortgage ("HCM"), were repaid in October 2016.

24


Unsecured Senior Notes

A summary of the balances of unsecured senior notes is presented below.
 
September 30, 2016
 
December 31, 2015
$475 face value, 6.500% interest rate payable semi-annually, due August 2018
$
471

 
$
475

$375 face value, 9.625% interest rate payable semi-annually, due May 2019
346

 
363

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

 
400

$600 face value, 6.500% interest rate payable semi-annually, due July 2021
596

 
597

$300 face value, 6.500% interest rate payable semi-annually, due June 2022
206

 
214

Unsecured senior notes principal amount, subtotal
2,019

 
2,049

Debt issuance costs
(19
)
 
(23
)
Unsecured senior notes, net of unamortized debt issuance costs
$
2,000

 
$
2,026


Nationstar repurchased $29 in principal amount of outstanding notes through the third quarter of 2016 at a discount resulting in a gain of $0.1. 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 allow Nationstar to 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. On or after certain fixed dates, Nationstar may redeem all or a portion of the unsecured senior notes 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.
As of September 30, 2016, the expected maturities of Nationstar's unsecured senior notes based on contractual maturities as follows.
Year
Amount
2016
$

2017

2018
471

2019
346

2020
400

Thereafter
802

Unsecured senior notes principal amount
2,019

Unamortized debt issuance costs
(19
)
Unsecured senior notes, net of unamortized debt issuance costs
$
2,000



25


Other Nonrecourse Debt
 
 
 
 
 
 
 
 
 
September 30, 2016
 
December 31, 2015
 
Issue Date
 
Maturity Date
 
Class of Note
 
Securitized Amount
 
Outstanding
 
Outstanding
Participating Interest Financing (1)
_
 
_
 
_
 
$

 
$
5,488

 
$
5,947

HECM Securitization (HMBS)
 
 
 
 
 
 
 
 
 
 
 
Trust 2014-1 (2)
December 2014
 
_
 
A, M
 
344

 

 
227

Trust 2015-1 (3)
June 2015
 
May 2018
 
A, M
 
269

 

 
222

Trust 2015-2
November 2015
 
November 2025
 
A, M1, M2
 
217

 
141

 
209

Trust 2016-1
March 2016
 
February 2026
 
A, M1, M2
 
282

 
216

 

Trust 2016-2
June 2016
 
June 2026
 
A, M1, M2
 
209

 
178

 

Trust 2016-3
August 2016
 
August 2026
 
A, M1, M2
 
237

 
228

 

Nonrecourse Debt - Legacy Assets
November 2009
 
October 2039
 
A
 
222

 
54

 
65

Other nonrecourse debt principal amount
 
 
 
 
 
 
 
 
6,305

 
6,670

Unamortized debt issuance costs