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Section 1: 10-Q (10-Q)

Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________________________________________________________________
 FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
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
________________________________________________________________________________________________________
389796049_nationstarlogoa03.jpg
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, "accelerated filer", "smaller reporting company", and "emerging growth 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
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 July 28, 2017 was 97,714,893.





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 June 30, 2017 (unaudited) and December 31, 2016
 
 
 
 
Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2017 and 2016
 
 
 
 
Consolidated Statements of Stockholders’ Equity (unaudited) for the Six Months Ended June 30, 2017 and 2016
 
 
 
 
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2017 and 2016
 
 
 
 
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)
 
June 30,
2017
 
December 31,
2016
 
(unaudited)
 
 
Assets
 
 
 
Cash and cash equivalents
$
184

 
$
489

Restricted cash
424

 
388

Mortgage servicing rights, $3,046, and $3,160 at fair value, respectively
3,051

 
3,166

Advances and other receivables, net of reserves of $236 and $184, respectively
1,594

 
1,749

Reverse mortgage interests, net of reserves of $149 and $131, respectively
10,604

 
11,033

Mortgage loans held for sale at fair value
1,543

 
1,788

Mortgage loans held for investment, net
148

 
151

Property and equipment, net of accumulated depreciation of $142 and $118, respectively
133

 
136

Derivative financial instruments at fair value
81

 
133

Other assets
515

 
560

Total assets
$
18,277

 
$
19,593

 
 
 
 
Liabilities and stockholders' equity
 
 
 
Unsecured senior notes, net
$
1,899

 
$
1,990

Advance facilities, net
881

 
1,096

Warehouse facilities, net
2,523

 
2,421

Payables and accrued liabilities
1,122

 
1,470

MSR related liabilities - nonrecourse at fair value
1,134

 
1,241

Mortgage servicing liabilities
50

 
48

Derivative financial instruments at fair value
6

 
13

Other nonrecourse debt, net
8,997

 
9,631

Total liabilities
16,612

 
17,910

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 109,915 thousand shares issued, respectively
1

 
1

Additional paid-in-capital
1,122

 
1,122

Retained earnings
683

 
701

Treasury shares at cost 12,204 thousand and 12,418 thousand shares, respectively
(148
)
 
(147
)
Total Nationstar stockholders' equity
1,658

 
1,677

Noncontrolling interest
7

 
6

Total stockholders' equity
1,665

 
1,683

Total liabilities and stockholders' equity
$
18,277

 
$
19,593

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 June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Service related, net
$
213

 
$
113

 
$
496

 
$
197

Net gain on mortgage loans held for sale
167

 
216

 
311

 
387

Total revenues
380

 
329

 
807

 
584

Expenses:
 
 
 
 
 
 
 
Salaries, wages and benefits
182

 
205

 
374

 
402

General and administrative
187

 
208

 
367

 
423

Total expenses
369

 
413

 
741

 
825

Other income (expenses):
 
 
 
 
 
 
 
Interest income
139

 
107

 
278

 
210

Interest expense
(186
)
 
(167
)
 
(376
)
 
(328
)
Other income
7

 

 
6

 

Total other income (expenses), net
(40
)
 
(60
)
 
(92
)
 
(118
)
Loss before income tax benefit
(29
)
 
(144
)
 
(26
)
 
(359
)
Less: Income tax benefit
(10
)
 
(53
)
 
(9
)
 
(135
)
Net loss
(19
)
 
(91
)
 
(17
)
 
(224
)
Less: Net income attributable to non-controlling interests
1

 
1

 
1

 

Net loss attributable to Nationstar
$
(20
)
 
$
(92
)
 
$
(18
)
 
$
(224
)
 
 
 
 
 
 
 
 
Net loss per common share attributable to Nationstar:
 
 
 
 
 
 
 
Basic and diluted
$
(0.20
)
 
$
(0.92
)
 
$
(0.18
)
 
$
(2.20
)
 
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding (in thousands):
 
 
 
 
 
 
 
       Basic and diluted
97,752

 
100,055

 
97,672

 
102,016

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, 2015
108,000

 
$
1

 
$
1,105

 
$
682

 
$
(30
)
 
$
1,758

 
$
9

 
$
1,767

Shares issued (surrendered) under incentive plan, net
(7
)
 

 

 

 
(3
)
 
(3
)
 

 
(3
)
Share-based compensation

 

 
12

 

 

 
12

 

 
12

Excess tax deficiency from share based compensation

 

 
(4
)
 

 

 
(4
)
 

 
(4
)
Repurchase of common stock
(9,843
)
 

 

 

 
(106
)
 
(106
)
 

 
(106
)
Net loss

 

 

 
(224
)
 

 
(224
)
 

 
(224
)
Balance at June 30, 2016
98,150

 
$
1

 
$
1,113

 
$
458

 
$
(139
)
 
$
1,433

 
$
9

 
$
1,442

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
97,497

 
$
1

 
$
1,122

 
$
701

 
$
(147
)
 
$
1,677

 
$
6

 
$
1,683

Shares issued (surrendered) under incentive plan, net
214

 

 
(4
)
 

 
(1
)
 
(5
)
 

 
(5
)
Share-based compensation

 

 
9

 

 

 
9

 

 
9

Dividends to noncontrolling interests

 

 
(5
)
 

 

 
(5
)
 

 
(5
)
Net income (loss)

 

 

 
(18
)
 

 
(18
)
 
1

 
(17
)
Balance at June 30, 2017
97,711

 
$
1

 
$
1,122

 
$
683

 
$
(148
)
 
$
1,658

 
$
7

 
$
1,665


See accompanying notes to the consolidated financial statements.

5


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

 
Six months ended June 30,
 
2017
 
2016
Operating Activities
 
 
 
Net loss attributable to Nationstar
$
(18
)
 
$
(224
)
Reconciliation of net loss to net cash attributable to operating activities:
 
 
 
Noncontrolling interest
1

 

Net gain on mortgage loans held for sale
(311
)
 
(387
)
Reverse loan interest income
(233
)
 
(170
)
Gain on sale of assets
(8
)
 

Provision for servicing reserves
73

 
74

Fair value changes and amortization of mortgage servicing rights
233

 
624

Fair value changes in mortgage loans held for sale
(10
)
 
(27
)
Fair value changes in excess spread financing
15

 
(42
)
Fair value changes in mortgage servicing rights financing liability
(14
)
 
11

Amortization of premiums and accretion of discount
27

 
32

Depreciation and amortization
29

 
31

Share-based compensation
9

 
12

Other losses
9

 

Repurchases of forward loan assets out of Ginnie Mae securitizations
(599
)
 
(771
)
Repurchases of reverse loan assets out of Ginnie Mae securitizations, net of assignments to prior servicers
(1,658
)
 
(1,036
)
Mortgage loans originated and purchased, net of fees
(8,896
)
 
(9,524
)
Sales proceeds and loan payment proceeds for mortgage loans held for sale and held for investment
10,008

 
9,872

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

Changes in assets and liabilities:
 
 
 
Advances and other receivables, net
112

 
301

Reverse mortgage interests, net
2,293

 
1,239

Other assets
23

 
(98
)
Payables and accrued liabilities
(348
)
 
(217
)
Net cash attributable to operating activities
736

 
(296
)
 
 
 
 
Investing Activities
 
 
 
Property and equipment additions, net of disposals
(25
)
 
(26
)
Purchase of forward mortgage servicing rights, net of liabilities incurred
(13
)
 
1

Proceeds on sale of forward and reverse mortgage servicing rights
(2
)
 
16

Proceeds on sale of assets
16

 

Net cash attributable to investing activities
(24
)
 
(9
)
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)
 
Six months ended June 30,
 
2017
 
2016
Financing Activities
 
 
 
Increase in warehouse facilities
100

 
1,077

Decrease in advance facilities
(214
)
 
(209
)
Proceeds from issuance of HECM securitizations
308

 
311

Repayment of HECM securitizations
(176
)
 
(362
)
Decrease in participating interest financing in reverse mortgage interests, net
(771
)
 
(286
)
Repayment of excess spread financing
(108
)
 
(95
)
Repayment of nonrecourse debt – legacy assets
(9
)
 
(8
)
Repurchase of unsecured senior notes
(95
)
 
(25
)
Repurchase of common stock

 
(106
)
Transfers to restricted cash, net
(36
)
 
31

Excess tax deficiency from share based compensation

 
(4
)
Surrender of shares relating to stock vesting
(5
)
 
(3
)
Debt financing costs
(6
)
 
(5
)
Dividends to noncontrolling interests
(5
)
 

Net cash attributable to financing activities
(1,017
)
 
316

Net increase (decrease) in cash and cash equivalents
(305
)
 
11

Cash and cash equivalents - beginning of period
489

 
613

Cash and cash equivalents - end of period
$
184

 
$
624

 
 
 
 
Supplemental disclosures of cash activities
 
 
 
Cash paid for interest expense
$
399

 
$
339

Net cash paid for income taxes
$
70

 
$
28

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 U.S. generally accepted accounting principles ("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, 2016.

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. Dollar amounts are reported in millions, except per share data and other key metrics, unless otherwise noted.

Nationstar evaluated subsequent events through the date these interim consolidated financial statements were issued.

The Company describes its significant accounting policies in Note 2 of the notes to the consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2016. During the six months ended June 30, 2017, no significant changes were made to those accounting policies except that the Company updated its policy on advances and other receivables to include more detailed description of its position on write-offs of advance balances. Nationstar records reserves for advances and other receivables and evaluates the sufficiency of such reserves through consideration of both historical and expected recovery rates on claims filed with government agencies, government sponsored enterprises, vendors, prior servicers and other counter parties. Recovery of advances and other receivables is subject to significant judgment and estimates based on the Company’s assessment of its compliance with servicing guidelines, its ability to produce the necessary documentation to support claims, its ability to support amounts from prior servicers and to effectively negotiate settlements, as needed. Each period, management reviews recorded advances and other receivables and upon determination that no further recourse for recovery is available from all means known to management, the recorded balances associated with these receivables are written-off against the reserve.

The Company periodically evaluates corporate allocation methods in order to appropriately align corporate costs with its business. Certain 2016 costs within salaries, wages and benefits and operational expenses were reclassified between segments to conform to current year allocation methods. Such reclassifications had no impact on previously reported net income or shareholders' equity. See Note 17, Business Segment Reporting for information on the changes in the Company's reportable segments.

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 is the primary beneficiary. 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. 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.


8


Recent Accounting Guidance Adopted
Effective January 1, 2017, the Company prospectively adopted Accounting Standards Update No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), which 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 of cash flows. Amendments related to accounting for excess tax benefits or deficiencies have been adopted prospectively, resulting in the recognition of $1 of excess tax deficiencies within income tax expense rather than additional paid in capital for the six months ended June 30, 2017. The impact on diluted earnings per share is $0.01 per share for the period. Excess tax benefits or deficiencies related to share-based payments are now included in operating cash flows rather than financing cash flows. This change has been applied prospectively in accordance with ASU 2016-09 and prior periods have not been adjusted. The Company has previously classified cash paid for tax withholding purposes as a financing activity in the statement of cash flows, therefore no change is requirement. The amendments allow for a one-time accounting policy election to either account for forfeitures as they occur or continue to estimate forfeitures as required by current guidance. The Company has elected to continue estimating forfeitures under the current guidance.

Recent Accounting Guidance Not Yet Adopted
Accounting Standards Update No. 2014-09, 2016-08, 2016-10, 2016-12 and 2016-20, collectively implemented as FASB Accounting Standards Codification Topic 606 ("ASC 606") Revenue from Contracts with Customers, provides guidance for revenue recognition. This ASC’s core principle requires a company to 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 standard also clarifies the principal versus agent considerations, providing the evaluation must focus on whether the entity has control of the goods or services before they are transferred to the customer. The new standard permits the use of either the modified retrospective or full retrospective transition method. The Company's revenue is generated from loan servicing, loan originations, and services provided by Xome. Servicing revenue is comprised of servicing fees and other ancillary fees in connection with our servicing activities as well as fees earned under subservicing arrangements. Origination revenue is comprised of fee income earned at origination of a loan, interest income earned for the period the loans are held, and gain on sale on loans upon disposition of the loan. Xome's revenue is comprised of income earned from real estate exchange, real estate services and real estate technology and support. We have performed a preliminary review of the new guidance as compared to our current accounting policies and are currently evaluating all services rendered to our customers as well as underlying contracts to determine the impact of this standard to our revenue recognition process. The majority of services rendered by the Company in connection with originations and servicing are not within the scope of ASC 606. However, through our review, we have identified one service offering (Services and Software as a Service) under the Xome operating segment that is within the scope of ASC 606. Although revenue recognition may be impacted to some degree for this service offering, we do not anticipate the impact to be materially different from the current revenue recognition processes. The Company expects to adopt the standard in the first quarter of 2018 with a cumulative effect adjustment to opening retained earnings, as necessary.

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 with terms 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 interim periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of this ASU on the consolidated financial statements. If the same lease obligations that are in existence as of June 30, 2017 were also in existence at the time of implementation of this standard, we would expect the additional assets and lease obligations to be added to the consolidated balance sheets upon implementation to approximate $136. The Company is currently evaluating the impact of this new standard to its debt covenants and capitalization requirements.
Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326) (ASU 2016-13), requires expected credit losses for financial instruments held at the reporting date to be measured 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 interim periods beginning after December 15, 2019. The Company is currently evaluating the potential impact of ASU 2016-13 on its consolidated financial statements.


9


Accounting Standards Update No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15) and Accounting Standards Update No 2016-18 Statement of Cash Flows (Topic 230) Restricted Cash (ASU 2016-18) both relate to the Statement of Cash Flows (Topic 230) and are intended to provide specific guidance to reduce diversity in practice. ASU 2016-15 addresses the following eight cash flow classification issues: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of life insurance claims, (5) proceeds from the settlement of corporate owned life insurance policies, including bank-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in securitization transactions and (8) separately identifiable cash flows and application of the predominance principle. 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 of the application of ASU 2016-15 will have on the Company’s classification of cash flows. ASU 2016-18 addresses the classification and presentation of changes in restricted cash on the statement of cash flows. This new standard requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. ASU 2016-18 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the potential impact of ASU 2016-18 on its consolidated financial statements.

Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment, simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in today’s two-step impairment test under Accounting Standards Codification (ASC) 350. The standard has tiered effective dates, starting in 2020 for calendar-year public business entities that meet the definition of an SEC filer. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is currently evaluating the potential impact of ASU 2017-04 on our consolidated financial statements. ASU 2017-04 is effective for the Company for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. ASU 2017-04 will be adopted prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.


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

The following table sets forth the carrying value of Nationstar's MSRs and the related liabilities.
MSRs and Related Liabilities
June 30, 2017
 
December 31, 2016
Forward MSRs - fair value
$
3,046

 
$
3,160

Reverse MSRs - amortized cost
5

 
6

Mortgage servicing rights
$
3,051

 
$
3,166

 
 
 
 
Mortgage servicing liabilities - amortized cost
$
50

 
$
48

 
 
 
 
Excess spread financing - fair value
$
1,121

 
$
1,214

Mortgage servicing rights financing liability - fair value
13

 
27

MSR related liabilities (nonrecourse)
$
1,134

 
$
1,241


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 retained servicing associated with the sales and securitizations of loans originated. Forward MSRs are comprised of servicing rights related to both agency and non-agency loans.

10



The following table sets forth the activities of forward MSRs during the six months ended June 30, 2017 and 2016.
 
Six months ended June 30,
Forward MSRs - Fair Value
2017
 
2016
Fair value - beginning of period
$
3,160

 
$
3,358

Additions:
 
 
 
Servicing retained from mortgage loans sold
103

 
86

Purchases of servicing rights
13

 
2

Dispositions:
 
 
 
Sales of servicing assets (1)
2

 
(16
)
Changes in fair value:
 
 
 
Changes in valuation inputs or assumptions used in the valuation model
(74
)
 
(462
)
Other changes in fair value
(158
)
 
(174
)
Fair value - end of period
$
3,046

 
$
2,794

(1) Amount in 2017 is related to the cost to dispose of negative MSR associated with nonperforming loan portfolios. Amount in 2016 is related to the sale of forward MSRs.

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. During the six months ended June 30, 2017, the Company sold forward MSR with a negative balance of $2 associated with the cost to dispose of nonperforming loan portfolios. During the six months ended June 30, 2016, the Company sold $3,307 in unpaid principal balance ("UPB") of forward MSRs and was retained as the subservicer for $2,254 UPB of the sold MSRs collateralized by assets.

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 on date of acquisition, subsequent changes are not made.

Interest sensitive portfolios generally consist of lower delinquency, single-family conforming residential forward mortgage loans for agency 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 credit and interest sensitive UPBs for Nationstar's forward owned MSRs.
Forward MSRs - Sensitivity Pools
June 30, 2017
 
December 31, 2016
 
UPB
 
Fair Value
 
UPB
 
Fair Value
Credit sensitive
$
181,843

 
$
1,723

 
$
198,935

 
$
1,818

Interest sensitive
114,501

 
1,323

 
113,141

 
1,342

Total
$
296,344

 
$
3,046

 
$
312,076

 
$
3,160



11


Nationstar used the following key weighted-average inputs and assumptions in estimating the fair value of MSRs.
Credit Sensitive
June 30, 2017
 
December 31, 2016
Discount rate
11.4
%
 
11.6
%
Total prepayment speeds
15.8
%
 
15.4
%
Expected weighted-average life
5.9 years

 
6.0 years

 
 
 
 
Interest Sensitive
 
 
 
Discount rate
9.2
%
 
9.3
%
Total prepayment speeds
11.3
%
 
10.7
%
Expected weighted-average life
6.5 years

 
6.8 years


The following table shows the hypothetical effect on the fair value of the forward MSRs fair value when applying certain unfavorable variations of key assumptions to these assets at June 30, 2017 and December 31, 2016.
 
Discount Rate
 
Total Prepayment Speeds
Forward MSRs - Hypothetical Sensitivities
100 bps
Adverse
Change
 
200 bps
Adverse
Change
 
10%
Adverse
Change
 
20%
Adverse
Change
June 30, 2017
 
 
 
 
 
 
 
Mortgage servicing rights
$
(113
)
 
$
(218
)
 
$
(123
)
 
$
(236
)
December 31, 2016
 
 
 
 
 
 
 
Mortgage servicing rights
$
(114
)
 
$
(221
)
 
$
(117
)
 
$
(224
)

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

Reverse Mortgage Servicing Rights and Liabilities - Amortized Cost
Nationstar owns the right to service certain Home Equity Conversion Mortgage ("HECM") reverse mortgage loans with an unpaid principal balance of $36,301 and $38,940 as of June 30, 2017 and December 31, 2016, respectively. The following table sets forth the activities of reverse MSRs and mortgage servicing liabilities ("MSLs") for the six months ended June 30, 2017 and 2016. Management evaluates reverse MSRs and MSLs each reporting period for impairment. Based on management's assessment at June 30, 2017, no impairment was required to be recorded for reverse MSRs. In addition, $2 was recorded for increased MSL obligations due to portfolio performance during the six months ended June 30, 2017.
 
Six months ended June 30,
 
2017
 
2016
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Reverse MSRs and Liabilities - Amortized Cost
 
 
 
 
 
 
 
Balance - beginning of period
$
6

 
$
48

 
$
9

 
$
25

Increased MSL obligation

 
2

 

 

Amortization/accretion
(1
)
 

 
(2
)
 
(13
)
Balance - end of the period
$
5

 
$
50

 
$
7

 
$
12

Fair value - end of period (1)
$
13

 
$
39

 
$
27

 
$


(1) Fair value of the liability is less than $1 for June 30, 2016.

12


Excess Spread Financing - Fair Value
To finance the acquisition of certain forward MSRs on various forward loan pools ("Portfolios"), Nationstar has entered into sale and assignment agreements with a third-party associated with funds and accounts under management of BlackRock Financial Management Inc. ("BlackRock"), and with certain affiliated entities formed and managed by New Residential Investment Corp. ("New Residential"), which is managed by an affiliate of Fortress Investment Group LLC ("Fortress"). Nationstar sold to such entities the right to receive a specified percentage of the excess cash flow generated from the Portfolios after receipt of a fixed base servicing fee per loan. Servicing fees associated with a traditional MSRs 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 has entered into refinanced loan obligations with New Residential and BlackRock. 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 key 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
June 30, 2017
 
 
 
 
 
 
 
Low
6.9%
 
4.4
 
8.5%
 
6.8%
High
22.2%
 
7.2
 
14.0%
 
30.0%
Weighted-average
14.3%
 
6.1
 
10.8%
 
18.9%
December 31, 2016
 
 
 
 
 
 
 
Low
6.1%
 
4.1
 
8.5%
 
6.7%
High
21.2%
 
8.5
 
14.1%
 
29.8%
Weighted-average
13.9%
 
6.3
 
10.8%
 
19.0%

The following table shows the hypothetical effect on the excess spread financing fair value when applying certain unfavorable expected levels variations of key assumptions to these liabilities.
 
Discount Rate
 
Prepayment
Speeds
Excess Spread Financing - Hypothetical Sensitivities
100 bps
Adverse
Change
 
200 bps
Adverse
Change
 
10%
Adverse
Change
 
20%
Adverse
Change
June 30, 2017
 
 
 
 
 
 
 
Excess spread financing
$
43

 
$
89

 
$
39

 
$
81

December 31, 2016
 
 
 
 
 
 
 
Excess spread financing
$
49

 
$
101

 
$
41

 
$
85


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


13


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

Forward Mortgage 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 a joint venture capitalized by New Residential and certain unaffiliated third-party investors. Nationstar continues to be the named servicer and, for accounting purposes, ownership of the mortgage servicing rights continues to reside with Nationstar. Accordingly, Nationstar records the MSRs and a MSR financing liability associated with this transaction in its consolidated balance sheets. See Note 19, Transactions with Affiliates for additional information.

The following table sets forth the weighted average assumptions used in the valuation of the mortgage servicing rights financing liability.
Mortgage Servicing Rights Financing Assumptions
June 30, 2017
 
December 31, 2016
Advance financing rates
3.4
%
 
3.2
%
Annual advance recovery rates
26.0
%
 
23.9
%

The following table sets forth the items comprising of revenue associated with servicing loan portfolios.
 
Three months ended June 30,
 
Six months ended June 30,
Servicing Revenue
2017
 
2016
 
2017
 
2016
Contractually specified servicing fees including subservicing fees
$
253

 
$
261

 
$
508

 
$
532

Other service-related income
52

 
87

 
98

 
147

Incentive and modification income
21

 
23

 
43

 
47

Late fees
22

 
19

 
46

 
37

Reverse servicing fees
13

 
17

 
27

 
35

Mark-to-market (1)
(90
)
 
(231
)
 
(128
)
 
(493
)
Counter party revenue share (2)
(59
)
 
(74
)
 
(121
)
 
(148
)
Amortization, net of accretion (3)
(66
)
 
(78
)
 
(127
)
 
(143
)
Total servicing revenue
$
146

 
$
24

 
$
346

 
$
14


(1) Mark-to-market includes fair value adjustments on MSR, excess spread financing and MSR financing liabilities. The amount of MSR MTM reflected is net of cumulative incurred losses related to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio and these incurred losses have been transferred to reserves on advances and other receivables. These cumulative incurred losses totaled $28 and $29 for the three months ended June 30, 2017 and 2016, respectively, and $49 and $58 for the six months ended June 30, 2017 and 2016, respectively.
(2) Counter party revenue share represents the excess servicing fee that the Company pays to the counterparties under the excess spread financing arrangements and the payments made associated with MSRs financing arrangements.
(3) Accretion was $40 and $56 the three months ended June 30, 2017 and 2016, respectively, and $82 and $103 for the six months ended June 30, 2017 and 2016, respectively.



14


3. Advances and Other Receivables, Net

Advances and other receivables, net consists of the following.
 
June 30, 2017
 
December 31, 2016
Servicing advances
$
1,460

 
$
1,614

Receivables from agencies, investors and prior servicers
370

 
319

Reserves
(236
)
 
(184
)
Total advances and other receivables, net
$
1,594

 
$
1,749


Nationstar as loan servicer is contractually responsible to advance funds on behalf of the borrower and investor primarily for loan principal and interest, property taxes and hazard insurance, and foreclosure costs. Advances are primarily recovered through reimbursement from the investor, proceeds from sale of loan collateral, or mortgage insurance claims. Reserves for advances and other receivables on loans transferred out of the MSR portfolio are established within advances and other receivables.
The Company estimates and records an asset for probable recoveries from prior servicers for their respective portion of the losses associated with the underlying loans that were not serviced in accordance with established guidelines. Receivables from prior servicers totaled $139 and $94 for the Company's forward loan portfolio at June 30, 2017 and December 31, 2016, respectively.
The activity of the reserves for advances and other receivables is set forth below.
 
Three months ended June 30,
 
Six months ended June 30,
Advances and Other Receivables Reserves
2017
 
2016
 
2017
 
2016
Balance - beginning of period (1)
$
208

 
$
205

 
$
184

 
$
163

Provision and other additions (2)
36

 
40

 
76

 
89

Write-offs
(8
)
 
(7
)
 
(24
)
 
(14
)
Balance - end of period
$
236

 
$
238

 
$
236

 
$
238


(1) Beginning reserve balance as of December 31, 2015 was updated to reflect the reclassification of reserves for advances and other receivables from the MSR.
(2) A provision of $28 and $29 was recorded through the MTM adjustment in service related revenues for the three months ended June 30, 2017 and 2016, respectively, and $49 and $58 for the six months ended June 30, 2017 and 2016, respectively, for inactive and liquidated loans that are no longer part of the MSR portfolio. Other additions represent reclassifications of required reserves from other balance sheet accounts.


4. Reverse Mortgage Interests, Net

Reverse mortgage interests, net consist of the following.
 
June 30, 2017
 
December 31, 2016
Participating interests in HMBS
$
8,085

 
$
8,839

Other interests securitized
921

 
753

Unsecuritized interests
1,747

 
1,572

Reserves
(149
)
 
(131
)
Total reverse mortgage interests, net
$
10,604

 
$
11,033


Participating interests in HMBS
Participating interests in HMBS consist of the Company's reverse mortgage interests in HECM loans which have been transferred to Ginnie Mae and subsequently securitized through the issuance of HMBS. During the six months ended June 30, 2017, a total of $338 in UPB was transferred to Ginnie Mae and securitized.


15


Other interests securitized
Other interests securitized consist of reverse mortgage interests that no longer meet HMBS program eligibility criteria and have been repurchased out of HMBS; these reverse mortgage interests have subsequently been transferred to private securitization trusts and are accounted for as a secured borrowing. During the six months ended June 30, 2017, a total of $325 UPB was securitized. Refer to Other Nonrecourse Debt in Note 8, Indebtedness for additional information.

Unsecuritized interests
Unsecuritized interests in reverse mortgages consist of the following.
 
June 30, 2017
 
December 31, 2016
Repurchased HECM loans
$
1,323

 
$
1,000

HECM related receivables
312

 
301

Funded borrower draws not yet securitized
99

 
236

Foreclosed assets
13

 
35

Total unsecuritized interests
$
1,747

 
$
1,572


Unsecuritized interests include repurchased 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 in accordance with HMBS program guidelines. The Company repurchased a total of $2,208 and $1,466 HECM loans out of Ginnie Mae HMBS securitizations during the six months ended June 30, 2017 and 2016, respectively, of which, $550 and $430 were subsequently assigned to a prior servicer in accordance with applicable servicing agreements.

The Company also estimates and records an asset for probable recoveries from prior servicers for their respective portion of the losses associated with the underlying loans that were not serviced in accordance with established guidelines. Receivables from prior servicers totaled $29 and $38 for the Company's reverse loan portfolio at June 30, 2017 and December 31, 2016, respectively.

Reserves for Reverse Mortgage Interests
Nationstar records an allowance for reserves related to reverse mortgage interests based on potential unrecoverable costs and loss exposures expected to be realized. Recoverability is determined based on the Company’s ability to meet HUD servicing guidelines and is viewed as two different categories of expenses: financial and operational. Financial exposures are defined as the cost of doing business related to servicing the HECM product and include potential unrecoverable costs primarily based on HUD claim guidelines related to recoverable expenses and unfavorable changes in the appraised value of the loan collateral. Operational exposures are defined as unrecoverable debenture interest curtailments imposed for missed FHA-specified servicing timelines.

The activity of the reserves for reverse mortgage interests is set forth below.
 
Three months ended June 30,
 
Six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Reserves for reverse mortgage interests - beginning of period
$
137

 
$
61

 
$
131

 
$
53

Provision
14

 
7

 
22

 
15

Write-offs
(2
)
 

 
(4
)
 

Other

 
3

 

 
3

Reserves for reverse mortgage interests - end of period
$
149

 
$
71

 
$
149

 
$
71


Purchase of Reverse Mortgage Servicing Rights and Interests
On December 1, 2016, the Company executed an asset purchase agreement with a large financial institution and acquired $3,748 reverse mortgage interests. Under the purchase agreement, the Company has agreed to acquire remaining components of the reverse portfolio, primarily including whole HECM loans and REO advances owned by third parties, pending the appropriate regulatory approvals which are expected in the second half of 2017.

Reverse Interest Income
The Company accrues interest income for its participating interest in reverse mortgages based on the stated rates underlying HECM loans and FHA guidelines. Total interest earned on the Company's reverse mortgage interests was $115 and $85 for the three months ended June 30, 2017 and 2016, respectively, and $233 and $170 for the six months ended June 30, 2017 and 2016, respectively.

16



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 on a servicing-retained basis. Nationstar focuses on assisting customers currently in the Company's servicing portfolio with refinancings of loans or new home purchases. 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.
 
June 30, 2017
 
December 31, 2016
Mortgage loans held for sale – unpaid principal balance
$
1,494

 
$
1,759

Mark-to-market adjustment (1)
49

 
29

Total mortgage loans held for sale
$
1,543

 
$
1,788

(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. Accrued interest is recorded as interest income in the consolidated statements of operations.

The total UPB of mortgage loans held for sale on nonaccrual status was as follows for the dates indicated.
 
June 30, 2017
 
December 31, 2016
Mortgage Loans Held for Sale - Unpaid Principal Balance
UPB
 
Fair Value
 
UPB
 
Fair Value
Non-accrual
$
89

 
$
85

 
$
106

 
$
103


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 six months ended June 30, 2017 and 2016, Nationstar repurchased $144 and $95 of delinquent Ginnie Mae loans, respectively, and securitized or sold to third-party investors $172 and $20 of previously repurchased loans, respectively. As of June 30, 2017 and 2016, $33 and $13 of the repurchased loans have reperformed and were held in accrual status, respectively, 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 $74 and $84 as of June 30, 2017 and December 31, 2016, respectively.

17


The following table details the changes in mortgage loans held for sale.
 
Six months ended June 30,
Mortgage loans held for sale
2017
 
2016
Balance - beginning of period
$
1,788

 
$
1,430

Mortgage loans originated and purchased, net of fees
8,887

 
9,445

Loans sold
(9,753
)
 
(9,501
)
Repurchase of loans out of Ginnie Mae securitizations
599

 
771

Transfer of mortgage loans held for sale to advances/accounts receivable related to claims (1)
(8
)
 
(13
)
Net transfer of mortgage loans held for sale from REO in other assets (2)
11

 
21

Changes in fair value
10

 
27

Other purchase-related activities
9

 
21

Balance - end of period
$
1,543

 
$
2,201


(1) Amounts are comprised of claims made on certain government insured mortgage loans upon completion of the REO sale.
(2) Net amounts are comprised of REO in the sales process which are transferred to other assets and certain government insured mortgage REO which are transferred from other assets upon completion of the sale so that the claims process can begin.

For the six months ended June 30, 2017 and 2016, the Company received proceeds of $10,007 and $9,788, respectively, on the sale of mortgage loans held for sale, resulting in gains of $254 and $287, 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.

Mortgage Loans Held for Investment, Net
The following sets forth the composition of mortgage loans held for investment, net.
 
June 30, 2017
 
December 31, 2016
Mortgage loans held for investment, net – UPB
$
205

 
$
216

Transfer discount:
 
 
 
Non-accretable
(43
)
 
(52
)
Accretable
(14
)
 
(13
)
Total mortgage loans held for investment, net
$
148

 
$
151



18


The changes in accretable yield discount on loans transferred to mortgage loans held for investment are set forth below. 
 
Six months ended June 30,
Accretable Yield Discount
2017
 
2016
Balance - beginning of the period
$
(13
)
 
$
(15
)
Accretion
1

 
1

Reclassifications from non-accretable discount
(2
)
 

Balance - end of the period
$
(14
)
 
$
(14
)
Nationstar may periodically modify the terms of any outstanding mortgage loans held for investment 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 to accretable yield discount approximately $2 of transfer discount designated as reserves for future loss, for the six months ended June 30, 2017. No provision for reserves was required for the six months ended June 30, 2017 and 2016, respectively, as the fair value of the underlying collateral exceeded the carrying value of the loans, net of the non-accretable discount.

The total UPB of mortgage loans held for investment for which the Company has begun formal foreclosure proceedings was $26 and $29 as of June 30, 2017 and December 31, 2016, respectively.


6. Other Assets

Other assets consist of the following.
 
June 30, 2017
 
December 31, 2016
Accrued revenues
$
149

 
$
165

Loans subject to repurchase right from Ginnie Mae
148

 
152

Goodwill
72

 
74

Real estate owned (REO), net
26

 
30

Deposits
25

 
25

Prepaid expenses
25

 
16

Intangible assets
21

 
28

Receivables from affiliates, net
6

 
6

Other
43

 
64

       Total other assets
$
515

 
$
560


Accrued Revenues
Accrued revenue is primarily comprised of service fees earned but not received based upon the terms of the Company's servicing and subservicing agreements.

Goodwill and Intangible Assets
In connection with the sale of Xome's retail title division, the Company wrote off $2 goodwill and $4 intangible assets in June 2017. See further discussion in Note 16, Dispositions and Exit Costs.
Loans Subject to Repurchase Right from Ginnie Mae
Forward loans are sold to Ginnie Mae in conjunction with the issuance of mortgage backed securities. Nationstar, as the issuer of the mortgage backed securities, 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, it has effectively regained control over the loan and recognizes these rights to the loan on its consolidated balance sheets and establishes a corresponding repurchase liability regardless of Nationstar’s intention to repurchase the loan.


19


Real estate owned
Real estate owned ("REO") includes $20 and $21 of REO loans with government insurance at June 30, 2017 and December 31, 2016, respectively.

Other
Other primarily includes non-advance related accounts receivables due from investors.


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 and Treasury futures, interest rate swap agreements and interest rate caps.

Associated with the Company's derivatives are $6 and $29 in collateral deposits on derivative instruments recorded in other assets and payables and accrued liabilities on the Company's balance sheets as of June 30, 2017 and December 31, 2016, 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.

20


The following table provides the outstanding notional balances, fair values of outstanding positions and recorded gains/(losses).
 
Expiration
Dates
 
Outstanding
Notional
 
Fair
Value
 
Recorded
Gains /
(Losses)
Six months ended June 30, 2017
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Mortgage loans held for sale, net
 
 
 
 
 
 
 
Loan sale commitments (1)
2017
 
$
1

 
$

 
$
(0.1
)
Derivative financial instruments
 
 
 
 
 
 
 
IRLCs
2017
 
2,490

 
71.6

 
(20.6
)
Forward sales of MBS
2017
 
2,613

 
8.5

 
(30.7
)
LPCs
2017
 
77

 
0.9

 
(1.0
)
Treasury futures
2017
 
40

 
0.5

 
0.5

Eurodollar futures (1)
2017-2021
 
10

 

 

Interest rate swaps (1)
2017
 

 

 
(0.1
)
Liabilities
 
 
 
 
 
 
 
Derivative financial instruments
 
 
 
 
 
 
 
IRLCs
2017
 
17

 
0.1

 
1.0

Forward sales of MBS
2017
 
862

 
3.0

 
7.0

LPCs
2017
 
400

 
2.6

 
(1.1
)
Treasury futures
2017
 
68

 
0.6

 
(0.6
)
Eurodollar futures (1)
2017-2021
 
46

 

 

Interest rate swaps (1)
2017
 

 

 
0.1

 
 
 
 
 
 
 
 
Year ended December 31, 2016
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Mortgage loans held for sale
 
 
 
 
 
 
 
Loan sale commitments
2017
 
$
1

 
$
0.1

 
$
(0.2
)
Derivative financial instruments
 
 
 
 
 
 
 
IRLCs
2017
 
3,675

 
92.2

 
3.1

Forward sales of MBS
2017
 
2,580

 
39.2

 
33.1

LPCs
2017
 
203

 
1.9

 
(2.0
)
Eurodollar futures (1)
2017-2021
 
35

 

 
(0.1
)
Interest rate swaps
2017
 
9

 
0.1

 
(0.4
)
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Derivative financial instruments
 
 
 
 
 
 
 
IRLCs
2017
 
176

 
1.1

 
(1.1
)
Forward sales of MBS
2017
 
1,689

 
10.0

 
(6.3
)
LPCs (1)
2017
 
111

 
1.5

 

Eurodollar futures (1)
2017-2021
 
27

 

 
0.1

Interest rate swaps
2017
 
9

 
0.1

 
0.4


(1) Fair values or recorded gains/(losses) of derivative instruments are less than $0.1 for the specified dates.



21


8. Indebtedness

Notes Payable
 
 
 
 
 
 
 
 
 
 
June 30, 2017
 
December 31, 2016
Advance Facilities
 
Interest Rate
 
Maturity Date
 
Collateral
 
Capacity Amount
 
Outstanding
 
Collateral Pledged
 
Outstanding
 
Collateral pledged
Nationstar agency advance receivables trust
 
LIBOR+2.0% to 2.6%
 
October 2017
 
Servicing advance receivables
 
$
650

 
$
425

 
$
556

 
$
485

 
$
578

Nationstar mortgage advance receivable trust
 
LIBOR+1.4% to 6.5%
 
November 2018
 
Servicing advance receivables
 
500

 
228

 
277

 
260

 
301

Nationstar agency advance financing facility
 
LIBOR+1.0% to 7.4%
 
January 2018
 
Servicing advance receivables
 
200

 
117

 
140

 
164

 
186

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

 
60

 
128

 
88

 
142

MBS advance financing facility
 
LIBOR+2.5%
 
March 2018
 
Servicing advance receivables
 
80

 
52

 
57

 
55

 
60

MBS advance financing facility (2012) (1)
 
LIBOR+5.0%
 
January 2017
 
Servicing advance receivables
 

 

 

 
44

 
52

Advance facilities principal amount
 
 
 
 
 
882

 
1,158

 
1,096

 
1,319

Unamortized debt issuance costs
 
 
 
 
 
(1
)
 

 

 

Advance facilities, net
 
 
 
$
881


$
1,158

 
$
1,096

 
$
1,319

 
(1) This MBS Advance Financing facility was paid off in full in February 2017.

 
 
 
 
 
 
 
 
 
 
June 30, 2017
 
December 31, 2016
Warehouse Facilities
 
Interest Rate
 
Maturity Date
 
Collateral
 
Capacity Amount
 
Outstanding
 
Collateral Pledged
 
Outstanding
 
Collateral pledged
$1,200 warehouse facility
 
LIBOR+2.0% to 2.9%
 
October 2017
 
Mortgage loans or MBS
 
$
1,200

 
$
650

 
$
692

 
$
682

 
$
747

$1000 warehouse facility
 
LIBOR+2.1% to 2.4%
 
September 2017
 
Mortgage loans or MBS
 
1,000

 
172

 
176

 
250

 
256

$772 warehouse facility
 
LIBOR+2.0% to 2.8%
 
November 2017
 
Mortgage loans or MBS
 
772

 
544

 
600

 
410

 
415

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

 
254

 
259

 
229

 
237

$500 warehouse facility
 
LIBOR+1.8% to 3.3%
 
June 2018
 
Mortgage loans or MBS
 
500

 
298

 
330

 
496

 
539

$350 warehouse facility
 
LIBOR+2.5% to 2.8%
 
April 2018
 
Mortgage loans or MBS
 
350

 
177

 
192

 
12

 
13

$350 warehouse facility
 
LIBOR+2.5% to 2.6%
 
November 2017
 
Mortgage loans or MBS
 
350

 
235

 
253

 
173

 
189

$300 warehouse facility
 
LIBOR+2.3%
 
January 2018
 
Mortgage loans or MBS
 
300

 
142

 
170

 
153

 
180

$200 warehouse facility
 
LIBOR+1.5%
 
April 2019
 
Mortgage loans or MBS
 
200

 
43

 
44

 
7

 
8

$40 warehouse facility
 
LIBOR+3.0%
 
December 2017
 
Mortgage loans or MBS
 
40

 
9

 
15

 
11

 
18

Warehouse facilities principal amount
 
 
 
 
 
2,524

 
2,731

 
2,423

 
2,602

Unamortized debt issuance costs
 
 
 
 
 
(1
)
 

 
(2
)
 

Warehouse facilities, net
 
 
 
$
2,523

 
$
2,731

 
$
2,421

 
$
2,602

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pledged Collateral:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans, net
 
 
 
 
 
 
 
$
1,498

 
$
1,593

 
$
1,693

 
$
1,427

Reverse mortgage interests, net
 
 
 
 
 
 
 
1,026

 
1,138

 
730

 
834

MSR and other collateral
 
 
 
 
 
 
 

 

 

 
341


22


Unsecured Senior Notes

A summary of the balances of unsecured senior notes is presented below.
 
June 30, 2017
 
December 31, 2016
$600 face value, 6.500% interest rate payable semi-annually, due July 2021
$
595
 
 
$
595
 
$400 face value, 7.875% interest rate payable semi-annually, due October 2020
400
 
 
400
 
$475 face value, 6.500% interest rate payable semi-annually, due August 2018
366
 
 
461
 
$375 face value, 9.625% interest rate payable semi-annually, due May 2019
345
 
 
345
 
$300 face value, 6.500% interest rate payable semi-annually, due June 2022
206
 
 
206
 
Unsecured senior notes principal amount
1,912
 
 
2,007
 
Unamortized debt issuance costs
(13
)
 
(17
)
Unsecured senior notes, net
$
1,899
 
 
$
1,990
 

Nationstar repurchased $47 and $95 in principal amount of outstanding notes during the three and six months ended June 30, 2017 resulting in a loss of $1 and $2, respectively. Nationstar also repurchased $24 and $25 in principal amount of outstanding notes during the three and six months ended June 30, 2016.

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.
As of June 30, 2017, the expected maturities of Nationstar's unsecured senior notes based on contractual maturities are as follows.
Year ending December 31,
 
Amount
2017
 
$

2018
 
366

2019
 
345

2020
 
400

2021
 
595

Thereafter
 
206

Unsecured senior notes principal amount
 
1,912

Unamortized debt issuance costs
 
(13
)
Unsecured senior notes, net
 
$
1,899



23


Other Nonrecourse Debt

A summary of the balances of other nonrecourse debt is presented below.
 
 
 
 
 
 
 
 
 
June 30, 2017
 
December 31, 2016
 
Issue Date
 
Maturity Date
 
Class of Note
 
Securitized Amount
 
Outstanding
 
Outstanding
Participating Interest Financing (1)
_
 
_
 
_
 
$

 
$
8,155

 
$
8,914

Securitization of nonperforming HECM loans
 
 
 
 
 
 
 
 
 
 
 
Trust 2015-2
November 2015
 
November 2025
 
A, M1, M2
 
114

 
86

 
114

Trust 2016-1
March 2016
 
February 2026
 
A, M1, M2
 
200

 
159

 
194

Trust 2016-2
June 2016
 
June 2026
 
A, M1, M2
 
143

 
117

 
158

Trust 2016-3
August 2016
 
August 2026
 
A, M1, M2
 
197

 
170

 
208

Trust 2017-1
May 2017
 
May 2027
 
A, M1, M2
 
298

 
275

 

Nonrecourse debt - legacy assets
November 2009
 
October 2039
 
A
 
139

 
42

 
50

Other nonrecourse debt principal amount
 
 
 
 
 
 
 
 
9,004

 
9,638

Unamortized debt issuance costs
 
 
 
 
 
 
 
 
(7
)
 
(7
)
Other nonrecourse debt, net
 
 
 
 
 
 
 
 
$
8,997

 
$
9,631


(1) Amounts represent the Company's participating interest in GNMA HMBS securitized portfolios.
Participating Interest Financing
Participating interest financing represents the obligation of HMBS pools to third-party security holders. The Company issues HMBS in connection with the securitization of advances and accrued interest on HECM loans. Proceeds are received in exchange for securitized advances on the HECM loan amounts transferred to GNMA, and the Company retains a beneficial interest (referred to as a "participating interest") in the securitization trust in which the HECM loans and HMBS obligations are held and assume both issuer and servicer responsibilities in accordance with GNMA HMBS program guidelines. Monthly cash flows generated from the HECM loans are used to service the HMBS obligations. The interest rate is based on the underlying HMBS rate