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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 September 30, 2018
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: 001-14667

395711440_mrcoopergrouplogosm.jpg
________________________________________________________________________________________________________

Mr. Cooper Group Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
91-1653725
(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)
 
 
 
(469) 549-2000
Registrant’s telephone number, including area code
________________________________________________________________________________________________________
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 every Interactive Data File required to be submitted 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 such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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
¨
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 November 2, 2018 was 90,813,598.



MR. COOPER GROUP INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 
 
 
Page
PART I
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
Consolidated Statements of Operations (unaudited) for the Successor’s Two Months Ended September 30, 2018 and the Predecessor’s One and Seven Months Ended July 31, 2018 and Nine Months Ended September 30, 2017
 
 
 
 
Consolidated Statements of Stockholders’ Equity (unaudited) for the Successor’s Two Months Ended September 30, 2018 and the Predecessor’s Seven Months Ended July 31, 2018 and Nine Months Ended September 30, 2017
 
 
 
 
Consolidated Statements of Cash Flows (unaudited) for the Successor’s Two Months Ended September 30, 2018 and the Predecessor’s Seven Months Ended July 31, 2018 and Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 


2


PART I. Financial Information

Item 1. Financial Statements
MR. COOPER GROUP INC.
CONSOLIDATED BALANCE SHEETS
(millions of dollars, except share data)
 
Successor
 
 
Predecessor
 
September 30,
2018
 
 
December 31,
2017
 
(unaudited)
 
 
 
Assets
 
 
 
 
Cash and cash equivalents
$
198

 
 
$
215

Restricted cash
332

 
 
360

Mortgage servicing rights, $3,485 and $2,937 at fair value, respectively
3,500

 
 
2,941

Advances and other receivables, net of reserves of $20 and $284, respectively
1,174

 
 
1,706

Reverse mortgage interests, net of reserves of $1 and $115, respectively
8,886

 
 
9,984

Mortgage loans held for sale at fair value
1,681

 
 
1,891

Mortgage loans held for investment, $122 and $0 at fair value, respectively
122

 
 
139

Property and equipment, net of accumulated depreciation of $9 and $169, respectively
102

 
 
121

Deferred tax asset
934

 
 

Other assets
799

 
 
679

Total assets
$
17,728

 
 
$
18,036

 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
Unsecured senior notes, net
$
2,457

 
 
$
1,874

Advance facilities, net
596

 
 
855

Warehouse facilities, net
2,888

 
 
3,285

Payables and accrued liabilities
1,342

 
 
1,239

MSR related liabilities - nonrecourse at fair value
1,123

 
 
1,006

Mortgage servicing liabilities
79

 
 
41

Other nonrecourse debt, net
7,165

 
 
8,014

Total liabilities
15,650

 
 
16,314

Commitments and contingencies (Note 18)


 
 


Preferred stock at $0.00001 and $0.01 par value - 10 million and 300 million shares authorized, 1 million and zero shares issued and outstanding for Successor and Predecessor, respectively; aggregate liquidation preference of ten and zero dollars for Successor and Predecessor, respectively

 
 

Common stock at $0.01 and $0.01 par value - 300 million and 1 billion shares authorized, 90.8 million and 109.9 million shares issued for Successor and Predecessor, respectively
1

 
 
1

Additional paid-in-capital
1,093

 
 
1,131

Retained earnings
984

 
 
731

Treasury shares at cost, zero and 12,187 thousand shares for Successor and Predecessor, respectively

 
 
(148
)
Total Mr. Cooper stockholders' equity and Nationstar stockholders' equity, respectively
2,078

 
 
1,715

Non-controlling interests

 
 
7

Total stockholders' equity
2,078

 
 
1,722

Total liabilities and stockholders' equity
$
17,728

 
 
$
18,036

See accompanying notes to the consolidated financial statements.

3


MR. COOPER GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(millions of dollars, except for earnings per share data)
 
Successor
 
 
Predecessor
 
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Three Months Ended September 30, 2017
 
For the Period January 1 - July 31, 2018
 
Nine Months Ended September 30, 2017
Revenues:
 
 
 
 
 
 
 
 
 
 
Service related, net
$
259

 
 
$
120

 
$
252

 
$
901

 
$
748

Net gain on mortgage loans held for sale
83

 
 
44

 
154

 
295

 
465

Total revenues
342

 
 
164

 
406

 
1,196

 
1,213

Expenses:
 
 
 
 
 
 
 
 
 
 
Salaries, wages and benefits
139

 
 
69

 
183

 
426

 
557

General and administrative
136

 
 
173

 
185

 
519

 
547

Total expenses
275

 
 
242

 
368

 
945

 
1,104

Other income (expenses):
 
 
 
 
 
 
 
 
 
 
Interest income
90

 
 
48

 
159

 
333

 
437

Interest expense
(122
)
 
 
(53
)
 
(183
)
 
(388
)
 
(564
)
Other income (expenses)
6

 
 

 
(2
)
 
6

 
4

Total other income (expenses), net
(26
)
 
 
(5
)
 
(26
)
 
(49
)
 
(123
)
Income before income tax expense (benefit)
41

 
 
(83
)
 
12

 
202

 
(14
)
Less: Income tax expense (benefit)
(979
)
 
 
(19
)
 
5

 
48

 
(4
)
Net income (loss)
1,020

 
 
(64
)
 
7

 
154

 
(10
)
Less: Net income attributable to non-controlling interests

 
 

 

 

 
1

Net income (loss) attributable to Successor/Predecessor
1,020

 
 
(64
)
 
7

 
154

 
(11
)
Less: Undistributed earnings attributable to participating stockholders
9

 
 

 

 

 

Net income (loss) attributable to common stockholders
$
1,011

 
 
$
(64
)
 
$
7

 
$
154

 
$
(11
)
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) per common share attributable to Successor/Predecessor:
 
 
 
 
 
 
 
 
 
 
Basic
$
11.13

 
 
$
(0.65
)
 
$
0.07

 
$
1.57

 
$
(0.11
)
Diluted
$
10.99

 
 
$
(0.65
)
 
$
0.07

 
$
1.55

 
$
(0.11
)
See accompanying notes to the consolidated financial statements.

4


MR. COOPER GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(millions of dollars, except share data)
 
Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
(in thousands)
 
Amount
 
Shares
(in thousands)
 
Amount
 
Additional Paid-in Capital
 
Retained Earnings
 
Treasury Share Amount
 
Total Nationstar Stockholders'
Equity and
Mr. Cooper Stockholders' Equity, respectively
 
Non-controlling Interests
 
Total
Equity
Predecessor
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017

 
$

 
97,497

 
$
1

 
$
1,122

 
$
701

 
$
(147
)
 
$
1,677

 
$
6

 
$
1,683

Shares issued / (surrendered) under incentive compensation plan

 

 
226

 

 
(3
)
 

 
(1
)
 
(4
)
 

 
(4
)
Share-based compensation

 

 

 

 
13

 

 

 
13

 

 
13

Dividends to non-controlling interests

 

 

 

 
(5
)
 

 

 
(5
)
 

 
(5
)
Net income (loss)

 

 

 

 

 
(11
)
 

 
(11
)
 
1

 
(10
)
Balance at September 30, 2017

 
$

 
97,723

 
$
1

 
$
1,127

 
$
690

 
$
(148
)
 
$
1,670

 
$
7

 
$
1,677

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018

 
$

 
97,728

 
$
1

 
$
1,131

 
$
731

 
$
(148
)
 
$
1,715

 
$
7

 
$
1,722

Shares issued / (surrendered) under incentive compensation plan

 

 
450

 

 
(6
)
 

 
(3
)
 
(9
)
 

 
(9
)
Share-based compensation

 

 

 

 
17

 

 

 
17

 

 
17

Dividends to non-controlling interests

 

 

 

 
5

 

 

 
5

 
(6
)
 
(1
)
Net income

 

 

 

 

 
154

 

 
154

 

 
154

Balance at July 31, 2018

 
$

 
98,178

 
$
1

 
$
1,147

 
$
885

 
$
(151
)
 
$
1,882

 
$
1

 
$
1,883

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Successor
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at August 1, 2018
1,000

 
$

 
90,806

 
$
1

 
$
1,091

 
$
(36
)
 
$

 
$
1,056

 
$

 
$
1,056

Shares issued under incentive compensation plan

 

 
5

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 
2

 

 

 
2

 

 
2

Net income

 

 

 

 

 
1,020

 

 
1,020

 

 
1,020

Balance at September 30, 2018
1,000

 
$

 
90,811

 
$
1

 
$
1,093

 
$
984

 
$

 
$
2,078

 
$

 
$
2,078


See accompanying notes to the consolidated financial statements.

5


MR. COOPER GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions of dollars)
 
Successor
 
 
Predecessor
 
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Nine Months Ended September 30, 2017
Operating Activities
 
 
 
 
 
 
Net income (loss) attributable to Successor/Predecessor
$
1,020

 
 
$
154

 
$
(11
)
Adjustments to reconcile net income (loss) to net cash attributable to operating activities:
 
 
 
 
 
 
Deferred tax benefit
(931
)
 
 

 

Net income attributable to non-controlling interests

 
 

 
1

Net gain on mortgage loans held for sale
(83
)
 
 
(295
)
 
(465
)
Reverse mortgage loan interest income
(72
)
 
 
(274
)
 
(370
)
Gain on sale of assets

 
 
(9
)
 
(8
)
MSL related increased obligation

 
 
59

 

Provision for servicing reserves
14

 
 
70

 
97

Fair value changes and amortization/accretion of mortgage servicing rights/liabilities
(27
)
 
 
(177
)
 
362

Fair value changes in excess spread financing
26

 
 
81

 

Fair value changes in mortgage servicing rights financing liability

 
 
16

 
(7
)
Amortization of premiums, net of discount accretion
3

 
 
8

 
63

Depreciation and amortization for property and equipment and intangible assets
15

 
 
33

 
44

Share-based compensation
2

 
 
17

 
13

Other loss

 
 
3

 
5

Repurchases of forward loan assets out of Ginnie Mae securitizations
(223
)
 
 
(544
)
 
(943
)
Mortgage loans originated and purchased for sale, net of fees
(3,458
)
 
 
(12,328
)
 
(14,002
)
Sales proceeds and loan payment proceeds for mortgage loans held for sale and held for investment
3,546

 
 
13,392

 
15,472

Excess tax deficiency from share-based compensation

 
 

 
(1
)
Changes in assets and liabilities:
 
 
 
 
 
 
Advances and other receivables
76

 
 
377

 
71

Reverse mortgage interests
442

 
 
1,601

 
1,226

Other assets
(15
)
 
 
(41
)
 
(17
)
Payables and accrued liabilities
(159
)
 
 
151

 
(284
)
Net cash attributable to operating activities
176

 
 
2,294

 
1,246

 
 
 
 
 
 
 
Investing Activities
 
 
 
 
 
 
Acquisition, net of cash acquired
(33
)
 
 

 

Property and equipment additions, net of disposals
(14
)
 
 
(40
)
 
(34
)
Purchase of forward mortgage servicing rights, net of liabilities incurred
(63
)
 
 
(134
)
 
(28
)
Net payment related to acquisition of HECM related receivables

 
 
(1
)
 

Net proceeds from acquisition of reverse mortgage servicing portfolio and HECM related receivables

 
 

 
16

Proceeds on sale of forward and reverse mortgage servicing rights
60

 
 

 
25

Proceeds on sale of assets

 
 
13

 
16

Net cash attributable to investing activities
(50
)
 
 
(162
)
 
(5
)

Continued on following page. See accompanying notes to the consolidated financial statements. 

6


MR. COOPER GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(millions of dollars)
 
Successor
 
 
Predecessor
 
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Nine Months Ended September 30, 2017
Financing Activities
 
 
 
 
 
 
Increase (decrease) in warehouse facilities
186

 
 
(585
)
 
351

Increase (decrease) in advance facilities
46

 
 
(305
)
 
(298
)
Proceeds from issuance of HECM securitizations

 
 
759

 
706

Repayment of HECM securitizations
(91
)
 
 
(448
)
 
(484
)
Proceeds from issuance of participating interest financing in reverse mortgage interests
45

 
 
208

 
437

Repayment of participating interest financing in reverse mortgage interests
(403
)
 
 
(1,599
)
 
(1,928
)
Proceeds from the issuance of excess spread financing
84

 
 
70

 

Repayment of excess spread financing
(21
)
 
 
(3
)
 
(9
)
Settlement of excess spread financing
(31
)
 
 
(105
)
 
(159
)
Repayment of nonrecourse debt – legacy assets
(3
)
 
 
(7
)
 
(12
)
Repurchase of unsecured senior notes

 
 
(62
)
 
(122
)
Redemption and repayment of unsecured senior notes
(1,030
)
 
 

 

Surrender of shares relating to stock vesting

 
 
(9
)
 
(4
)
Debt financing costs
(1
)
 
 
(24
)
 
(11
)
Dividends to non-controlling interests

 
 
(1
)
 
(5
)
Net cash attributable to financing activities
(1,219
)
 
 
(2,111
)
 
(1,538
)
Net (decrease) increase in cash, cash equivalents, and restricted cash
(1,093
)
 
 
21

 
(297
)
Cash, cash equivalents, and restricted cash - beginning of period
1,623

 
 
575

 
877

Cash, cash equivalents, and restricted cash - end of period(1)
$
530

 
 
$
596

 
$
580

 
 
 
 
 
 
 
Supplemental Disclosures of Cash Activities
 
 
 
 
 
 
Cash paid for interest expense
$
135

 
 
$
417

 
$
577

Net cash paid for income taxes
$

 
 
$
36

 
$
92

 
 
 
 
 
 
 
(1) The following table provides a reconciliation of cash, cash equivalents and restricted cash to amount reported within the consolidated balance sheets.
 
Successor
 
 
Predecessor
 
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Nine Months Ended September 30, 2017
Cash and cash equivalents
$
198

 
 
$
166

 
$
224

Restricted cash
332

 
 
430

 
356

Total cash, cash equivalents, and restricted cash
$
530

 
 
$
596

 
$
580

See accompanying notes to the consolidated financial statements. 

7



MR COOPER GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(millions of dollars, unless otherwise stated)

1. Nature of Business and Basis of Presentation

Nature of Business

Mr. Cooper Group Inc. (formerly WMIH Corp. ("WMIH") and, collectively with its consolidated subsidiaries, "Mr. Cooper", the "Company", "we", "us" or "our") provides servicing, origination and transaction-based services related to single family residences throughout the United States with operations under its primary brands: Mr. Cooper® and Xome®. Mr. Cooper is one of the largest home loan servicers in the country focused on delivering a variety of servicing and lending products, services and technologies. Xome provides technology and data enhanced solutions to homebuyers, home sellers, real estate agents and mortgage companies. The Company's corporate website is located at www.mrcoopergroup.com.

Mr. Cooper, which was previously known as WMIH, is a corporation duly organized and existing under the laws of the State of Delaware since May 11, 2015. On February 12, 2018, WMIH and Wand Merger Corporation, a Delaware corporation and a wholly-owned subsidiary of WMIH ("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement") with Nationstar Mortgage Holdings Inc. ("Nationstar"). On July 31, 2018 at 11:59 pm ET ("Effective Time"), pursuant to the Merger Agreement, Merger Sub merged with and into Nationstar (the “Merger”), with Nationstar continuing as a wholly-owned subsidiary of WMIH. Prior to the Merger, WMIH had limited operations other than its reinsurance business that operated in runoff mode and focused on identifying and consummating an accretive acquisition transaction across a broad array of industries, with a primary focus on the financial institutions sector. As a result of the Merger, shares of Nationstar common stock were delisted from the New York Stock Exchange. Following the Merger closing, the combined company traded on NASDAQ under the ticker symbol “WMIH” until October 10, 2018, when WMIH changed its name to “Mr. Cooper Group Inc.” and its ticker symbol to “COOP”.

Reverse Stock Split
On October 10, 2018, the Company completed its previously announced 1-for-12 reverse stock split. The reverse stock split reduced the number of WMIH common shares outstanding from approximately 1,089,738,735 shares as of October 9, 2018, to approximately 90,811,562 shares outstanding after giving effect to the reverse stock split. In addition, the reverse stock split reduced the total authorized shares of the Company’s common stock from 3,500,000,000 to 300,000,000 and increased the par value of each share from $0.00001 per share to $0.01 per share. All issued and outstanding share and per share amounts for Mr. Cooper included in the accompanying consolidated financial statements have been adjusted to reflect this reverse stock split for the successor period presented.

Basis of Presentation
For the purpose of financial statement presentation, Mr. Cooper was determined to be the accounting acquirer in the Merger, and Nationstar's assets and liabilities were recorded at estimated fair value as of the Merger Effective Time. Mr. Cooper's interim consolidated financial statements for periods following the Merger closing are labeled "Successor” and reflect the acquired assets and liabilities from Nationstar.

Under Securities and Exchange Commission ("SEC") rules, when a registrant succeeds to substantially all of the business of another entity and the registrant’s own operations before the succession appear insignificant relative to the operations assumed or acquired, the registrant is required to present financial information for the acquired entity (the “Predecessor”) for all comparable periods being presented before the acquisition. Due to the acquisition, the Predecessor and Successor financial statements have been prepared on different basis of accounting and are therefore not comparable.

Pursuant to the Merger, Nationstar is considered the predecessor company. Therefore, the Company is providing additional information in the accompanying unaudited condensed consolidated financial statements regarding Nationstar's business for periods prior to July 31, 2018. The predecessor company financial information in this report is labeled “Predecessor” in these consolidated interim financial statements.

The consolidated interim financial statements of the Company and Predecessor have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the 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 the Company's and Predecessor's Annual Reports on Form 10-K for the year ended December 31, 2017.

8



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

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

Basis of Consolidation
The basis of consolidation described below were adopted by Nationstar and applied to the Predecessor financial statements for the periods impacted by the adoption. The Successor's financial statements reflect the adoption of such standards.

The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, other entities in which the Company has a controlling financial interest and those variable interest entities ("VIE") where the Company's wholly-owned subsidiaries are the primary beneficiaries. Assets and liabilities of VIEs and their respective results of operations are consolidated from the date that the Company became the primary beneficiary through the date the Company ceases to be the primary beneficiary. The Company 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. Investments in certain companies over which the Company does not exert significant influence are accounted for as cost method investments. Intercompany balances and transactions on consolidated entities have been eliminated.

Use of Estimates
The use of estimates described below were adopted by Nationstar and applied to the Predecessor financial statements for the periods impacted by the adoption. The adoption of such standards are also considered in the Successor's financial statements.

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates due to factors such as adverse changes in the economy, changes in interest rates, secondary market pricing for loans held for sale and derivatives, strength of underwriting and servicing practices, changes in prepayment assumptions, declines in home prices or discrete events adversely affecting specific borrowers, and such differences could be material.

Reclassification
Certain reclassifications have been made in the Predecessor's consolidated financial statements to conform to the Successor's 2018 presentation. Such reclassifications did not affect total revenues or net income.

Recent Accounting Guidance Adopted

The accounting standards described below were adopted by Nationstar and applied to the Predecessor financial statements for the periods impacted by the adoption. The adoption of such standards are also considered in the Successor's financial statements.

Accounting Standards Update No. 2014-09, 2016-08, 2016-10, 2016-12 and 2016-20, collectively implemented as Financial Accounting Standard Board ("FASB") Accounting Standards Codification ("ASC") 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 that 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 the Company's 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 software as a service. The Company has performed a review of the new guidance as compared to its current accounting policies and evaluated all services rendered to its customers as well as underlying contracts to determine the impact of this standard to its 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, all revenues from Xome fall within the scope of ASC 606. Xome's operations are comprised of Exchange, Services and Software as a Service ("SaaS"), as discussed below.


9


Exchange is a national technology-enabled platform that manages and sells residential properties through its Xome.com platform. Revenue-generating activities include commission and buyer’s premium of winning bids on auctioned real estate owned ("REO") and short sale properties. Revenue is recognized when the performance obligation is completed, which is at the closing of real estate transactions and there is transfer of ownership to the buyer.

Services connects the major touch points of the real estate transactions process by providing title, escrow and collateral valuation services for purchase, refinance and default transactions. Major revenue-generating activities include title and escrow services and valuation services. Revenue is recognized when the performance obligation is completed, which is when services are rendered to customers.

SaaS includes the Company’s software as a service platform which provides integrated technology, media and data solutions to mortgage servicers, originators and multiple listing service ("MLS") organizations and associations. Revenue-generating activities include software and platform system access and use, system implementation, software maintenance and support, data services and any additional customized enhancement. Revenue is recognized when the performance obligation is completed, which is generally recognized on a straight-line basis over the contractual terms. Additionally, any additional fees owed due to usage metrics in excess of the monthly minimum will be recognized each month under the usage-based royalties guidance of ASC 606.

Nationstar adopted ASC 606 on January 1, 2018, and there was no material impact recorded to the 2018 consolidated statements of operations of either the Successor or Predecessor. In connection with the adoption of ASC 606, Nationstar identified and implemented changes to its accounting policies and practices, business processes, and controls to support the new revenue recognition standard.

Accounting Standards Update No. 2016-15, Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"), relates to the Statement of Cash Flows (Topic 230) and is 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. ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. Nationstar adopted ASU 2016-15 in the first quarter of 2018 and determined that the implementation of this standard had no impact on its consolidated statement of cash flows of the Predecessor and Successor.

Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash ("ASU 2016-18"), requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. ASU 2016-18 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. Nationstar adopted ASU 2016-18 in the first quarter of 2018 and retrospectively applied the guidance to all periods presented. As a result, the consolidated financial statements of the Predecessor and Successor includes restricted cash with cash and cash equivalents when reconciling the beginning and end of period total amounts shown on the consolidated statements of cash flows, and changes in restricted cash are no longer presented as a component of financing activities.

Accounting Standards Update No. 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-1), ASU 2016-01 addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Among other things, ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Furthermore, equity investments without readily determinable fair values are to be assessed for impairment using a quantitative approach. ASU 2016-01 is effective for interim periods beginning after December 15, 2017, and requires a modified retrospective approach to adoption. Nationstar adopted ASU 2016-01 in the first quarter of 2018, and the implementation of this standard did not have a significant impact on the consolidated financial statements of the Predecessor and Successor.


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Recent Accounting Guidance Not Yet Adopted
Accounting Standards Update No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), No.2018-10, Codification Improvements to Topic 842, Leases ("ASU 2018-10"), and No. 2018-11, Leases (Topic 842): Targeted Improvements ("ASU 2018-11"), primarily impact 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. ASU 2016-02 requires the recognition of a lease liability that is 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 2018-10 and ASU 2018-11 affect narrow aspects of the guidance issued in the amendments in ASU 2016-02. ASU 2018-11 specifically relieves companies of the requirement to present prior comparative years' results when they adopt ASU 2016-02 and gives companies the option to recognize the cumulative effect of applying ASU 2016-02 to lease assets and liabilities as an adjustment to the opening balance of retained earnings. ASU 2016-02, ASU 2018-10, and ASU 2018-11 are effective for the Company for its interim periods beginning after December 15, 2018, with early adoption permitted. The Company currently plans to adopt this standard in the first quarter of 2019 using the modified retrospective approach and will recognize a cumulative-effect adjustment to the opening balance of retained earnings in that period. The Company will elect an optional practical expedient to retain its current classification of leases. Based on the current lease portfolio, the Company anticipates recognizing a lease liability and related right-of-use asset on the balance sheet. However, the impact of the adoption of the standard will depend on the Company's lease portfolio as of adoption date and is not expected to have a material impact on the statement of operations. 
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.

Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), 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 ASC Topic 350, Intangibles - Goodwill and Other. 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. The Company is currently evaluating the potential impact of ASU 2017-04 on its consolidated financial statements.


2. Significant Accounting Policies

The significant accounting policies described below were implemented by Nationstar and applied to the Predecessor's financial statements, unless otherwise noted. Upon the consummation of the Merger, the Company adopted these significant accounting policies, which are applicable to the Successor's financial statements.

Restricted Cash
With respect to the Servicing segment, restricted cash includes recoveries received from borrowers or investors on advances pledged to advance facilities and to advance facilities structured as special purposes entities that require certain level of restricted cash. With respect to the Originations segment, restricted cash includes (i) principal received from borrowers on originated loans pledged to a warehouse facility and (ii) guarantee fees collected on behalf and payable to either Fannie Mae or Freddie Mac on a monthly basis.
Advances and Other Receivables, Net
The Company advances funds to or on behalf of the investors when the borrower fails to meet contractual payments (e.g., principal, interest, property taxes, insurance) in accordance with terms of its servicing agreements. Other receivables consist of advances funded to maintain and market underlying loan collateral through foreclosure and ultimate liquidation on behalf of the investors. Advances are recovered from borrowers for performing loans and from the investors and loan proceeds for non-performing loans.

The Company may also acquire servicer advances in connection with the acquisition of mortgage servicing rights ("MSR"). These advances are recorded at their relative fair value amounts upon acquisition. The Company records receivables upon determining that collection of amounts due from loan proceeds, investors, mortgage insurers or prior servicers is probable. Reserves related to recoverability of advances and other receivables are discussed below in Reserves for Forward Servicing Activity.


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As a result of the WMIH merger, the Advances and Other Receivables assets were recorded at their estimated fair value as of the acquisition date. Recording the estimated fair value resulted in a discount within Advances and Other Receivables. Subsequently, this discount will be utilized as the advance balances associated with the discount are released through recoveries or write-offs.

Mortgage Loans Held for Sale
The Company originates prime residential mortgage loans with the intention of selling such loans on a servicing-retained basis in the secondary market. As these loans are originated with intent to sell, the loans are classified as held for sale, and the Company has elected to measure these loans held for sale at fair value. The Company estimates fair value of mortgage loans held for sale by evaluating a variety of market indicators, including recent trades and outstanding commitments, calculated on an aggregate basis. In connection with the Company’s election to measure originated mortgage loans held for sale at fair value, the Company records the loan originations fees when earned, net of direct loan originations costs associated with these loans. Loan origination fees, gains or losses recognized upon sale of loans and fair value adjustments are recorded in net gain on sale of mortgage loans held for sale in the consolidated statements of operations.

The Company may repurchase loans that were previously transferred to Ginnie Mae if those loans meet certain criteria, including being delinquent greater than 90 days. It is the Company's intention to sell such loans; therefore, the Company classifies such loans as loans held for sale and has elected to measure these repurchased loans at fair value.
Mortgage Loans Held for Investment
Mortgage loans held for investment primarily consist of nonconforming or subprime mortgage loans that were transferred in 2009 from mortgage loans held for sale at fair value. In connection with the Merger, the Company elected the fair value option for mortgage loans held for investment effective August 1, 2018. The Company determines the fair value of loans held for investment, on a recurring basis, based on various underlying attributes such as market participants' views, loan delinquency, recent observable loan pricing and sales for similar loans, individual loan characteristics and internal market evaluation. These internal market evaluations require the use of judgment by the Company and can have a significant impact on the determination of the loan’s fair value. The Predecessor recorded mortgage loans held for investment at amortized cost.
Reverse Mortgage Interests, Net
Reverse mortgage interests are comprised of the Company’s interest in reverse mortgage loans (participating interests in Home Equity Conversion Mortgages ("HECMs") mortgage-backed security (“HMBS”) loans, unsecuritized interests and other interests securitized) as well as related claims receivables and real estate owned ("REO") related receivables. The Company primarily acquires and services interests in reverse mortgage loans insured by the Federal Housing Administration ("FHA") known as HECMs. HECMs provide seniors aged 62 and older with a loan secured by their home which can be taken as a lump sum, line of credit, or scheduled payments. HECM loan balances grow over the loan term through borrower draws of scheduled payments or line of credit draws as well as through the accrual of interest, servicing fees and FHA mortgage insurance premiums. In accordance with FHA guidelines, HECMs are designed to repay through foreclosure and subsequent liquidation of loan collateral after the loan becomes due and payable. Shortfalls experienced by the servicer of the HECM through the foreclosure and liquidation process can be claimed to FHA in accordance with applicable guidelines.

The Company records financial and non-financial assets acquired and liabilities assumed at relative fair value. Any premium or discount associated with the recording of the assets is amortized or accreted, respectively, ratably over the expected life of the portfolio and recognized into amortization expense and interest income, respectively. As the HECM loan moves through the foreclosure and claims process, the Company classifies reverse mortgage interests as REO related receivables and HECM related receivables, respectively. Borrower draws, mortgage insurance premiums funded by the Company, and the accrual of interest and servicing fees are capitalized and recorded as reverse mortgage interests within the Company's consolidated balance sheets. Interest income is accrued monthly within the consolidated statements of operations based upon the borrower interest rates. The Company includes the cash outflow from funding these amounts as operating activities in the consolidated statements of cash flow as a component of reverse mortgage interests.

The Company is an authorized Ginnie Mae ("GNMA") HMBS program issuer and servicer. In accordance with GNMA HMBS program guidelines, borrower draws of scheduled payments or line of credit draws, servicing fee and interest accruals and mortgage insurance premium accruals are eligible for HMBS participation securitizations as each of these items increases underlying HECM loan balances. The Company pools and securitizes such eligible items into GNMA HMBS as issuer and servicer. In accordance with the HMBS program, issuers are responsible for purchasing HECM loans out of the HMBS pool when the outstanding principal balance of the related HECM loan is equal or greater than 98% of the maximum claim amount at which point the HECM loans are no longer eligible to remain in the HMBS pool. Upon purchase from the HMBS pool, the Company will assign active HECM loans to FHA or a prior servicer (as applicable and permitted by acquisition agreements) or service inactive HECM loans through foreclosure and liquidation. Based upon the structure of the GNMA HMBS program, the Company has determined that the securitizations of the HECM loans into HMBS pools do not meet all requirements for sale accounting. Accordingly, these

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transactions are accounted for as secured borrowings. If the Company has repurchased an inactive HECM loan that cannot be assigned to FHA, the Company may pool and securitize these loans into a private HECM securitization. These securitizations are also recorded as secured borrowings in the consolidated balance sheets. Interest expense on the participating interest financing is accrued monthly based upon the underlying HMBS rates and is recorded to interest expense in the consolidated statements of operations. Both the acquisition and assumption of HECM loans and related GNMA HMBS debt are presented as investing and financing activities, respectively, in the consolidated statements of cash flows. Subsequent proceeds received from securitizations, and subsequent repayments on the securitized debt are presented as financing activities in the consolidated statements of cash flows. Reserves related to recoverability of reverse mortgage interests are discussed below in Reserves for Reverse Mortgage Interests.

As a result of the Merger, the reverse mortgage interest assets were recorded at their estimated fair value as of the acquisition date. Recording the estimated fair value resulted in a premium on the participating interests in HMBS loans and a discount on the unsecuritized interests and other interests securitized within reverse mortgage interests. Subsequently, the premium and the discount will be amortized and accreted, respectively, to other income, based on discounted cash flows that will be updated on a quarterly basis.

Mortgage Servicing Rights
The Company recognizes the rights to service mortgage loans for others, or MSRs, whether acquired or as a result of the sale of loans the Company originates with servicing retained, as assets. The Company initially records all MSRs at fair value. MSRs related to reverse mortgages are subsequently recorded at amortized cost. The Company has elected to subsequently measure forward MSRs at fair value.

For MSRs initially recorded and subsequently measured at fair value, the fair value of the MSRs is based upon the present value of the expected future net cash flows related to servicing the underlying loans. The Company determines the fair value of the MSRs by the use of a discounted cash flow model which incorporates prepayment speeds, delinquencies, discount rate, ancillary revenues and other assumptions (including costs to service) that management believes are consistent with the assumptions that other similar market participants use in valuing the MSRs. The credit quality and stated interest rates of the forward loans underlying the MSRs affects the assumptions used in the cash flow models. The Company obtains third-party valuations quarterly to assess the reasonableness of the fair value calculated by the cash flow model. The Company receives a base servicing fee annually on the outstanding principal balances of the loans, which is collected from investors.

Additionally, the Company owns servicing rights for certain reverse mortgage loans. For this separate class of servicing rights, the Company initially records a MSR or mortgage servicing liability ("MSL") on the acquisition date based on the fair value of the future cash flows associated with the pool and whether adequate compensation is to be received for servicing. The Company applies the amortized cost method for subsequent measurement of the loan pools with the capitalized cost of the MSRs amortized in proportion and over the period of the estimated net future servicing income and the MSL accreted ratably over the expected life of the portfolio. The expected period of the estimated net servicing income is based, in part, on the expected prepayment period of the underlying mortgages. The Company adjusts MSR amortization and MSL accretion prospectively in response to changes in estimated projections of future cash flows. Reverse MSRs and MSLs are stratified and evaluated each reporting period for impairment or increased obligation, as applicable, based on predominant risk characteristics of the underlying serviced loans. These stratification characteristics include investor, loan type (fixed or adjustable rate), term and interest rate. Impairment of the MSR or additional obligation associated with the MSL are recorded through a valuation allowance, unless considered other-than-temporary, and are recognized as a charge to general and administrative expense. Amounts amortized or accreted are recognized as an adjustment to service related revenue, net, along with monthly servicing fees received, generally stated at a fixed rate per loan.

MSR Related Liabilities - Nonrecourse
Excess Spread Financing
In conjunction with the Company's acquisition of certain MSRs on various pools of residential mortgage loans (the "Portfolios"), the Company has entered into sale and assignment agreements related to its right to servicing fees, under which the Company sells to third parties the right to receive a portion of the excess cash flow generated from the Portfolios after receipt of a fixed base servicing fee per loan. The sale of these rights is accounted for as secured borrowings, with the total proceeds received being recorded as a component of MSR related liabilities - nonrecourse at fair value in the consolidated balance sheets. The Company determines the effective interest rate on these liabilities and allocates total repayments between interest expense and the outstanding liability.


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The Company has elected to measure the outstanding financings related to the excess spread financing agreements at fair value with all changes in fair value recorded as a charge or credit to service related revenue, net in the consolidated statements of operations. The fair value on excess spread financing is based on the present value of future expected discounted cash flows with the discount rate approximating current market value.

Mortgage Servicing Rights Financing
From time to time, the Company enters into certain transactions with third parties to sell a contractually specified base fee component of certain MSRs and servicer advances under specified terms. The Company evaluates these transactions to determine if they are sales or secured borrowings. When these transfers qualify for sale treatment, the Company derecognizes the transferred assets in its consolidated balance sheets. The Company has determined that, for a portion of these transactions, the related MSR's sales are contingent on the receipt of consents from various third parties. Until these required consents are obtained, for accounting purposes, legal ownership of the MSRs continues to reside with the Company. The Company continues to account for the MSRs in its consolidated balance sheets. In addition, the Company records a mortgage servicing rights financing liability associated with this financing transaction. Counterparty payments related to this financing arrangement are recorded as an adjustment to the Company's service related revenues.

The Company has elected to measure the mortgage servicing rights financing liabilities at fair value with all changes in fair value recorded as a charge or credit to service related revenue, net, in the consolidated statements of operations. The fair value on mortgage servicing right financings is based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments.

Participating Interest Financing
The Company periodically securitizes participating interests in HECM loans (mainly borrower draws, mortgage insurance premium and interest) into HMBS which are sold to third-party security holders and guaranteed by GNMA. The securitization transactions are accounted for as secured borrowings with the obligations to the HMBS presented as participating interest financing included within other nonrecourse debt in the Company's consolidated balance sheets. Issuance or acquisition of HMBS is presented as a financing activity in the consolidated statements of cash flow. Interest is accrued monthly based upon the stated HMBS rates to interest expense in the consolidated statements of operations. HMBS issuance premiums or discounts are deferred as a component of the participating interest financing and amortized or accreted, respectively, to interest expense over the life of the HMBS on an effective interest method.
Revenues
The Company recognizes revenue from the services provided when the revenue is realized or realizable and earned, which is generally when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been performed; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectability is reasonably assured.

Revenues from Forward Servicing Activities
Service related revenues primarily include contractually specified servicing fees, late charges and other ancillary revenues. The servicing fees are based on a contractual percentage of the outstanding principal balance and recognized as revenue as earned, which is generally upon collection of the payments from the borrower. Corresponding loan servicing costs are charged to expense as incurred. The Company recognizes ancillary revenues as they are earned, which is generally upon collection of the payments from the borrower.

In addition, the Company receives various fees in the course of providing servicing on its various portfolios. These fees include modification fees for modifications performed outside of government programs, modification fees for modifications pursuant to various government programs, and incentive fees for servicing performance on specific government-sponsored entities ("GSE") portfolios. Fees recorded on modifications of mortgage loans serviced by the Company for others are recognized on collection and are recorded as a component of service related revenues. Fees recorded on modifications pursuant to various government programs are recognized based upon completion of all necessary steps by the Company and the minimum loan performance time frame to establish eligibility for the fee. Revenue earned on modifications pursuant to various government programs is included as a component of service related revenues. Incentive fees for servicing performance on specific GSE portfolios are recognized as various incentive standards are achieved and are recorded as a component of service related revenues.

The Company also acts as a subservicer for certain parties that own the underlying servicing rights and receives subservicing fees, which are typically a stated monthly fee per loan that varies based on types of loans. Fees related to the subserviced portfolio are accrued in the period the services are performed.


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Revenues from Origination Activities
Loan origination and other loan fees generally represent flat, per-loan fee amounts and are recognized as revenue, net of loan origination costs, at the time the loans are funded.

Revenues from Reverse Mortgage Servicing and Reverse Mortgage Interests
The Company performs servicing of reverse mortgage loans, similar to its forward servicing business, and receives servicing fees from investors, which is recorded in service related revenues. For reverse mortgage interests, where the Company records entire participating interest in HECM loans, the Company accrues interest in accordance with FHA guidelines and records interest income on the consolidated statements of operations.
Net Gain on Mortgage Loans Held for Sale
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (i) the assets have been legally isolated from the Company, (ii) the transferee has the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (iii) the Company does not maintain effective control over the transferred assets through either (a) an agreement that entitles and obligates the Company to repurchase or redeem them before their maturity or (b) the ability to unilaterally cause the holder to return specific assets.

Loan securitizations structured as sales, as well as whole loan sales and the resulting gains on such sales, net of any accrual for recourse obligations, are reported in operating results during the period in which the securitization closes or the sale occurs.
Reserves for Origination Activity
The Company provides for reserves, included within payables and accrued liabilities, in connection with loan origination activities. Reserves on loan origination activities primarily include reserves for the repurchase of loans from GSEs, GNMA and third-party investors primarily due to delinquency or foreclosure and are initially recorded upon sale of the loan to a third party with subsequent reserves recorded based on repurchase demands. The provision for reserves associated with loan origination activities is a component of net gain on mortgage loans held for sale.

The Company utilizes internal models to estimate reserves for loan origination activities based upon its expectation of future defaults and the historical defect rate for government insured loans and is based upon judgments and assumptions which can be influenced by many factors and may change over the life of the underlying loans, including: (i) historical loss rate, (ii) secondary market pricing of loans; (iii) home prices and the levels of home equity; (iv) the quality of Company's underwriting procedures; (v) borrower delinquency and default patterns; and (vi) other Company-specific and macro-economic factors. On a quarterly basis, management corroborates these assumptions using third-party data, where applicable.
Reserves for Forward Servicing Activity
In connection with forward loan servicing activities, the Company records reserves primarily for the recoverability of advances, interest claims and mortgage insurance claims. Reserves for advances and other receivables associated with loans in the MSR portfolio are considered within the MSR valuation, and the provision expense for such advances is recorded in the mark-to-market adjustment in service related revenue. Such valuation gives consideration to the expected cash outflows and inflows for advances and other receivables in accordance with the fair value framework. Reserves for advances and other receivables on loans transferred out of the MSR portfolio are established within advances and other receivables, net. As loans serviced transfer out of the MSR portfolio, any negative MSR value associated with the loans transferred is reclassified from the MSR to the reserve within advances and other receivables, net, to the extent such reserves continue to be required for balances remaining on the consolidated balance sheets. Management evaluates reserves for sufficiency each reporting period, and any additional reserve requirements or releases to reserves are recorded as a provision in general and administrative expense, as needed.
The Company records reserves for advances and other receivables and evaluates the sufficiency of such reserves through internal models considering both historical and expected recovery rates on claims filed with government agencies, government sponsored enterprises, vendors, prior servicer and other counterparties. Key assumptions used in the model include but are not limited to expected recovery rates by loan types and aging of the receivable. 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. 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.

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Reserves for Reverse Mortgage Interests
The Company records an allowance for reserves related to reverse mortgage interests based on unrecoverable costs and estimates of probable loss exposures. The Company estimates reserve requirements upon the realization of a triggering event indicating a probable loss exposure. Internal and external models are utilized to estimate loss exposures at the loan level associated with the Company's ability to meet servicing guidelines set forth by regulatory agencies and GSEs. Key assumptions within the models include but are not limited to expected recovery rates by loan and borrower characteristics, foreclosure timelines, value of underlying collateral, future carrying and foreclosure costs, and other macro-economic factors. If the calculated reserve requirements exceed the recorded allowance for reserves and acquired discounts, a provision is recorded to general and administrative expense, as needed. Releases to reserves are also recorded against provision in general and administrative expenses. Reserve requirements are 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 reverse mortgage interests, 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 at the loan level.

Amounts Due from Prior Servicers
The Company services its loan portfolios under guidelines set forth by regulatory agencies and investor guidelines. Losses can be incurred if the underlying loans are not serviced in accordance with established guidelines, resulting in the assessment of fines and the inability to recover interest and costs incurred. Prior servicers associated with the underlying loans may have contributed to the losses if their prior servicing practices did not allow for timely compliance with servicing guidelines set forth. To mitigate the risk of loss to the Company, indemnification provisions are incorporated into the executed acquisition and servicing agreements that allow for the recovery of realized losses which can be attributed to prior servicers. As part of its servicing operations, the Company estimates and records an asset for probable recoveries from prior servicers for their respective portion of these losses. Estimated recoveries from prior servicers are based on management's best estimate of allocated losses among servicing parties, terms of the indemnification provisions, prior recovery experience, current negotiations and the servicer's ability to pay requested amounts. The Company updates its estimate of recovery each reporting period based on the facts and circumstances known at the time. Recovery of amounts due from prior servicers is subject to significant judgment based on the Company's assessment of the prior servicer's responsibility for losses incurred, its ability to provide related support for such amounts and its ability to effectively negotiate settlement of amounts due from prior servicers if needed.

Property and Equipment, Net
Property and equipment, net is comprised of land, building, furniture, fixtures, leasehold improvements, computer software and computer hardware. These assets are stated at cost less accumulated depreciation. Repairs and maintenance are expensed as incurred which is included in general and administrative expenses in the consolidated statements of operations. Depreciation, which includes depreciation and amortization on capital leases, is recorded using the straight-line method over the estimated useful lives of the related assets. Cost and accumulated depreciation applicable to assets retired or sold are eliminated from the accounts, and any resulting gains or losses are recognized at such time through a charge or credit to general and administrative expenses. Costs to internally develop computer software are capitalized during the development stage and include external direct costs of materials and services as well as employee costs related to time spent on the project.

The Company periodically reviews its property and equipment when events or changes in circumstances indicate that the carrying amount of its property and equipment might not be recoverable under the recoverability test, whereby the expected future undiscounted cash flows from the assets are estimated and compared with the carrying amount of the assets. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the assets, an impairment loss is recorded to general and administrative expense, as needed. The impairment loss is measured by comparing the fair value of the assets with their carrying amounts. Fair value is determined based on discounted cash flow.

The Company evaluates all leases at inception to determine if they meet the criteria for a capital lease. A capital lease is recorded as an acquisition of property or equipment at an amount equal to the present value of minimum lease payments at the date of inception. Assets acquired under a capital lease are depreciated on a straight-line basis in accordance with the Company's normal depreciation policy over the lease term and are included in property and equipment, net, on the consolidated balance sheets. A corresponding liability is recorded representing an obligation to make lease payments which is included in payables and accrued liabilities on the consolidated balance sheets. Lease payments are allocated between interest expense and reduction of obligation.

Leases that do not meet the capital lease criteria are accounted for as operating leases. Rental expense on operating leases is recognized on a straight-line basis over the lease term which is included in general and administrative expenses in the consolidated statements of operations. Leasehold improvements are amortized over the shorter of the lease terms of the respective leases or the estimated useful lives of the related assets.


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

The Company evaluates its interests in each SPE for classification as a Variable Interest Entity ("VIE"). When an SPE meets the definition of a VIE and the Company determines that the Company is the primary beneficiary, the Company includes the SPE in its consolidated financial statements.
 
The Company consolidates SPEs connected with both forward and reverse mortgage activities. See Note 12, Securitizations and Financings, for more information on Company SPEs and Note 10, Indebtedness, for certain debt activity connected with SPEs.

Securitizations and Asset-Backed Financing Arrangements
The Company and its subsidiaries have been a transferor in connection with a number of securitizations and asset-backed financing arrangements. The Company has continuing involvement with the financial assets of the securitizations and the asset-backed financing arrangements. The Company has aggregated these transactions into two groups: (1) securitizations of residential mortgage loans accounted for as sales and (2) financings of advances on loans serviced for others accounted for as secured borrowings.
 
Securitizations Treated as Sales
The Company’s continuing involvement typically includes acting as servicer for the mortgage loans held by the trust and holding beneficial interests in the trust. The Company’s responsibilities as servicer include, among other things, collecting monthly payments, maintaining escrow accounts, providing periodic reports and managing insurance in exchange for a contractually specified servicing fee. The beneficial interests held consist of both subordinate and residual securities that were retained at the time of securitization. These securitizations generally do not result in consolidation of the VIE as the beneficial interests that are held in the unconsolidated securitization trusts have no value and no potential for significant cash flows in the future. In addition, at December 31, 2017, the Company had no other significant assets in its consolidated financial statements related to these trusts. The Company has no obligation to provide financial support to unconsolidated securitization trusts and has provided no such support. The creditors of the trusts can look only to the assets of the trusts themselves for satisfaction of the debt issued by the trusts and have no recourse against the assets of the Company. The general creditors of the Company have no claim on the assets of the trusts. The Company’s exposure to loss as a result of its continuing involvement with the trusts is limited to the carrying values, if any, of its investments in the residual and subordinate securities of the trusts, the MSRs that are related to the trusts and the advances to the trusts. The Company considers the probability of loss arising from its advances to be remote because of their position ahead of most of the other liabilities of the trusts. See Note 5, Advances and Other Receivables, Net, and Note 4, Mortgage Servicing Rights and Related Liabilities, for additional information regarding advances and MSRs.
 
Financings
The Company transfers advances on loans serviced for others to SPEs in exchange for cash. The Company consolidates these SPEs because the Company is the primary beneficiary of the VIE.
 
These VIEs issue debt supported by collections on the transferred advances. The Company made these transfers under the terms of its advance facility agreements. The Company classifies the transferred advances on its consolidated balance sheets as advances and classifies the related liabilities as advance facilities and other nonrecourse debt. The SPEs use collections of the pledged advances to repay principal and interest and to pay the expenses of the entity. Holders of the debt issued by these entities can look only to the assets of the entities themselves for satisfaction of the debt and have no recourse against the Company.

Upon securitization of a HECM loan under the GNMA mortgage-backed securities program, ownership and legal title to the HECM loan is transferred to GNMA. The Company accounts for these transactions as secured borrowings because these transactions do not qualify for sale accounting treatment. An asset is recorded within reverse mortgage interests related to the transferred HECM loan, and the financing related to the HMBS note is included in other nonrecourse debt in Company's consolidated financial statements.

Occasionally, the Company will transfer reverse mortgage interests into private securitization trusts ("Reverse Trusts"). The Company evaluates the Reverse Trusts to determine whether they meet the definition of a VIE, and when the Reverse Trust meets the definition of a VIE and the Company determines that it is the primary beneficiary, the Company will retain the securitized reverse mortgage interests on its consolidated balance sheets and recognize the issued securities in other nonrecourse debt.

17



Derivative Financial Instruments
Derivative instruments are used as part of the overall strategy to manage exposure to market risks primarily associated with fluctuations in interest rates related to originations. The Company recognizes all derivatives on its consolidated balance sheets at fair value on a recurring basis. The Company treats all of its derivative instruments as economic hedges; therefore none of its derivative instruments are designated as accounting hedges.

Derivative instruments utilized by the Company primarily include interest rate lock commitments ("IRLCs"), loan purchase commitments ("LPCs"), forward Mortgage Backed Securities ("MBS") purchase commitments, Eurodollar futures, Treasury futures, interest rate swap agreements and interest rate caps.

IRLCs represent an agreement to extend credit to a mortgage loan applicant, or an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to funding. The fair values of mortgage loans held for sale, which are held in inventory awaiting sale into the secondary market, and interest rate lock commitments are subject to changes in mortgage interest rates from the date of the commitment through the sale of the loan into the secondary market. As a result, the Company is exposed to interest rate risk during the period from the date of the lock commitment through (i) the lock commitment cancellation or expiration date; or (ii) the date of sale into the secondary mortgage market. IRLCs are considered freestanding derivatives and are recorded at fair value at inception. Loan commitments generally range between 30 and 90 days, and the Company typically sells mortgage loans within 30 days of origination. Changes in fair value subsequent to inception are based on changes in the fair value of the underlying loan and changes in the probability that the loan will fund within the terms of the commitment. Any changes in fair value are recorded in earnings as a component of net gain on mortgage loans held for sale.

The Company uses other derivative financial instruments, primarily forward sales commitments, to manage exposure to interest rate risk and changes in the fair value of IRLCs and mortgage loans held for sale. These commitments are recorded at fair value based on the dealer's market. The forward sales commitments fix the forward sales price that will be realized in the secondary market and thereby reduce the interest rate and price risk to the Company. The Company's expectation of the amount of its interest rate lock commitments that will ultimately close is a key factor in determining the notional amount of derivatives used in economically hedging the position. The Company may also enter into commitments to purchase MBS as part of its overall hedging strategy. The estimated fair values of forward MBS are based on the exchange prices. The changes in value on the forward sales commitments and forward sales of MBS are recorded as a charge or credit to net gain on mortgage loans held for sale.

The Company also purchases interest rate swaps, Eurodollar futures and Treasury futures to mitigate exposure to interest rate risk related to cash flows on securitized mortgage borrowings.

Intangible Assets
Intangible assets primarily consist of trade name, subservicing contracts and technology acquired through the acquisition of Nationstar and the acquisition of Assurant Mortgage Solutions Group ("Assurant"). Those intangible assets are deemed to have finite useful lives and are amortized either on a straight-line basis over their estimated useful lives (trade name, technology and internally developed software), or on a basis more representative of the time pattern over which the benefit is derived (customer relationships).

Intangible assets with finite useful lives are tested for impairment on an annual basis or whenever events or circumstances indicate that their carrying amount may not be recoverable. If the carrying value of the asset cannot be recovered from estimated future undiscounted cash flows, the fair value of the asset is calculated using the present value of net future cash flows. If the carrying amount of the asset exceeds its fair value, an impairment is recorded.

Goodwill
Goodwill is initially recorded as the excess of the purchase price over the fair value of net assets acquired in a business combination and is subsequently evaluated for impairment at least annually or when events or circumstances make it more likely than not that an impairment may have occurred. Goodwill impairment testing is performed at the reporting unit level, equivalent to a business segment or one level below. The Company has determined that each of its operating segments (the Servicing, Originations and Xome segments) represents a reporting unit, resulting in three total reporting units.

The Company performs its annual goodwill impairment test as of October 1 and monitors for interim triggering events on an ongoing basis.  Goodwill is reviewed for impairment utilizing either a qualitative assessment or a quantitative goodwill impairment test.  If the Company chooses to perform a qualitative assessment and determines the fair value more likely than not exceeds the carrying value, no further evaluation is necessary.  For reporting units where the Company performs the quantitative goodwill impairment test, the Company compares the fair value of each reporting unit, which the Company primarily determines using an income approach based on the present value of discounted cash flows, to the respective carrying value, which

18


includes goodwill.  If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired.  If the carrying value is higher than the fair value, the difference would be recognized as an impairment loss.

Loans Subject to Repurchase Rights from Ginnie Mae
For certain forward loans sold to GNMA, the Company as the issuer has the unilateral right to repurchase, without GNMA’s prior authorization, any individual loan in a GNMA securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. Once the Company has the unilateral right to repurchase a delinquent loan, the Company has effectively regained control over the loan, and under GAAP, must recognize the right to the loan in its consolidated balance sheets and establish a corresponding repurchase liability regardless of the Company’s intention to repurchase the loan. The Company recognizes the right to purchase these mortgage loans in other assets at their unpaid principal balances and records a corresponding liability in payables and accrued liability for mortgage loans eligible for repurchase in its consolidated balance sheets.
Interest Income
Interest income is recognized on loans held for sale for the period from loan funding to sale, which is typically within 30 days. Loans are placed on non-accrual status when any portion of the principal or interest is 90 days past due. Interest received from loans on non-accrual status is recorded as income when collected. Loans return to accrual status when the principal and interest become current and it is probable that the amounts are fully collectible. For individual loans that have been modified, a period of six timely payments is required before the loan is returned to an accrual basis.

Interest income also includes interest earned on custodial cash deposits associated with the mortgage loans serviced and interest earned on reverse mortgage interests. Reverse mortgage interests accrue as interest income in accordance with FHA guidelines.

Share-Based Compensation
Share-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant) in salaries, wages and benefits within the consolidated statements of operations.

Advertising Costs
Advertising costs are expensed as incurred and are included as part of general and administrative expenses. The Company incurred advertising costs of $8 for the two months ended September 30, 2018. The Predecessor incurred advertising costs of $4 and $33 for the one and seven months ended July 31, 2018, respectively, and $14 and $42 for the three and nine months ended September 30, 2017, respectively.

Income Taxes
The Company is subject to the income tax laws of the U.S., its states and municipalities. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities.

Deferred income taxes are determined using the balance sheet method. Deferred taxes are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.
The Company regularly reviews the carrying amount of its deferred tax assets to determine if the establishment of a valuation allowance is necessary. If, based on the available evidence, it is more likely than not that all or a portion of the Company's deferred tax assets will not be realized in future periods, a deferred tax valuation allowance is established. Consideration is given to various positive and negative factors that could affect the realization of the deferred tax assets. In evaluating this available evidence, management considers, among other things, historical financial performance, expectation of future earnings, length of statutory carryforward periods, experience with operating tax loss and tax credit carryforwards which may expire unused, tax planning strategies and timing of reversals of temporary differences. The Company's evaluation is based on current tax laws as well as management's expectations of future performance.

The Company initially recognizes tax positions in the consolidated financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. In establishing a provision for income tax expense, the Company makes judgments and interpretations about the application of these inherently complex tax laws within the framework of existing GAAP. The Company recognizes interest and penalties related to uncertain tax positions as a component of provision for income taxes.

19



On December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. GAAP related to the enactment of the Tax Reform Act. SAB 118 provides guidance in those situations where the accounting for certain income tax effects of the Tax Reform Act will be incomplete by the time financial statements are issued for the reporting period that includes the enactment date. The Company has recorded provisional amounts where the impact of the Tax Reform Act could be reasonably estimated. Any subsequent adjustment to these amounts will be made within one year from the enactment date.
Earnings Per Share

The Company computes earnings per share using the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. The Series A Preferred Stock is considered participating securities because it has dividend rights determined on an as-converted basis in the event of Company's declaration of a dividend or distribution for common shares.

Basic net income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income per common share is computed by dividing net income available to common stockholders by the sum of the weighted average number of common shares outstanding and any dilutive securities for the period.


3. Acquisitions

Acquisition of Nationstar Mortgage Holdings Inc.

On February 12, 2018, WMIH and Merger Sub entered into the Merger Agreement with Nationstar. At the effective time of the Merger ("Effective Time"), pursuant to the Merger Agreement, Merger Sub was merged with and into Nationstar, with Nationstar continuing as a wholly-owned subsidiary of WMIH.

Pursuant to the terms of the Merger Agreement, at the Effective Time, and as a result of the Merger, each share of Nationstar's common stock issued and outstanding immediately prior to the Effective Time was converted into the right to receive, at the election of the holder of such share, (i) $18.00 per share in cash, without interest, or (ii) 12.7793 shares of validly issued, fully paid and nonassessable shares of WMIH common stock, par value $0.00001 per share ("WMIH Common Stock") (the "Merger Consideration"). The Merger Consideration was subject to automatic proration and adjustment pursuant to the Merger Agreement to ensure that the total amount of cash paid (excluding cash paid in lieu of fractional shares) equaled approximately $1,226

Pursuant to the Merger Agreement, immediately prior to the Effective Time, subject to certain exceptions, (i) each then-outstanding share of Nationstar restricted stock automatically vested in full and was converted into the right to receive the Merger Consideration, as elected by the holder thereof, and (ii) each then-outstanding Nationstar restricted stock unit, whether vested or unvested, was automatically vested in full, assumed by WMIH and converted into a WMIH restricted stock unit entitling the holder thereof to receive upon settlement the Merger Consideration, as elected by the holder, with respect to shares of Nationstar restricted stock.

Upon closing the Merger, all outstanding WMIH Series B Preferred Stock and all outstanding warrants to purchase shares of WMIH common stock were converted into common stock of WMIH. 

Total purchase price was approximately $1,777, consisting of cash paid of $1,226 and transferred stock valued at $551. The purchase price was funded from available cash on hand and borrowings under senior unsecured notes (see discussion below). Prior to the acquisition, Nationstar was a publicly-held company that earned fees through the delivery of servicing, origination and transaction-based services related primarily to single-family residences throughout the United States. This acquisition marks the Company's initial entry into the mortgage servicing industry that Nationstar operates in and is consistent with the Company's business strategy.

On July 13, 2018, Merger Sub closed the offering of $950 aggregate principal amount of 8.125% Notes due 2023 (the “2023 Notes”) and $750 aggregate principal amount of 9.125% Notes due 2026 (the “2026 Notes” and, together with the 2023 Notes, the “New Notes”). The proceeds from the New Notes were used, together with the proceeds from the issuance of the Company’s common stock and the Company’s cash and restricted cash on hand, to consummate the Company’s acquisition of Nationstar and the refinancing of certain of Nationstar’s existing debt and to pay related fees and expenses. At the consummation of the acquisition,

20


Merger Sub merged with and into Nationstar, with Nationstar continuing as a wholly-owned subsidiary of the Company. After the Merger, the surviving subsidiary assumed all of Merger Sub’s obligations under the New Notes.

The acquisition has been accounted for in accordance with ASC 805, Business Combinations, using the acquisition method of accounting. Under the acquisition method of accounting, the Company allocated the purchase price of the acquisition to identifiable assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The excess of the purchase price over the aggregate fair values will be recorded as goodwill within the consolidated balance sheet. The excess of the aggregate fair value over the purchase price will be recorded as bargain purchase gain within the consolidated statement of operations.

The table below presents the calculation of aggregate purchase price.
Purchase Price:
 
Converted WMIH common shares (prior to reverse stock split) in millions
394

Price per share, based on price of $1.398 for WMIH stock on July 31, 2018
$
1.398

Purchase price from common stock issued
551

Purchase price from cash payment
1,226

Total purchase price
$
1,777


The allocation of the fair value of the acquired business was based on preliminary valuations of the estimated net fair value of the assets acquired. The determination of fair value estimates requires management to make certain estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and may require adjustments. The Company's estimates are subject to change as the Company obtains additional information and finalizes its review of estimates during the measurement period (up to one year from the acquisition date). The primary areas of the preliminary allocation of fair value of consideration transferred that are not yet finalized relate to the fair value of reverse mortgage interests and related other nonrecourse debt, advances and other receivables and payables and accrued liabilities. Based on the preliminary allocation of fair value, no goodwill has been recorded as the preliminary fair value of the net assets acquired exceeds the purchase price by approximately $2. The Company has not recorded the bargain purchase gain because it has not completed its assessment of the re-consideration criteria as specified in ASC 805, Business Combinations, which is required to be performed prior to recording a bargain purchase gain. The Company expects to complete its assessment of the re-consideration criteria in the fourth quarter of 2018. In addition, the bargain purchase gain or any goodwill may be adjusted pending the completion of the valuation of the assets acquired and liabilities assumed as described above. The Company will record any adjustments to the preliminary fair value estimates in the reporting period in which the adjustments are determined. Fair value adjustments based on updated estimates could materially affect the goodwill recorded on the acquisition.


21


The preliminary allocation of the purchase price to the acquired assets and liabilities is as follows:

Preliminary Estimated Fair Value of Net Assets Acquired:
 
Cash and cash equivalent
$
166

Restricted cash
430

Mortgage servicing rights
3,428

Advances and other receivables
1,262

Reverse mortgage interests
9,225

Mortgage loans held for sale
1,514

Mortgage loans held for investment
125

Property and equipment
96

Derivative financial instruments
64

Other assets
548

Fair value of assets acquired
16,858

Unsecured senior notes
1,830

Advance facilities
551

Warehouse facilities
2,701

Payables and accrued liabilities
1,365

MSR related liabilities—nonrecourse
1,065

Mortgage servicing liabilities
86

Derivative financial instruments
3

Other nonrecourse debt
7,583

Fair value of liabilities assumed
15,184

Total fair value of net tangible assets acquired
1,674

Intangible assets(1)
103

Preliminary goodwill

 
$
1,777


(1) The following intangible assets were acquired in the Nationstar acquisition.
 
Useful Life (Years)
 
Fair Value
Customer relationships (i)
6
 
$
61

Tradename (ii)
5
 
8

Technology (ii)
3-5
 
11

Internally developed software(iii)
2
 
23

Total
 
 
$
103


(i) The estimated fair values for customer relationships were measured using the excess earnings method.
(ii) The estimated fair values for tradename and technology were measured using the relief-from-royalty method. This method assumes the tradename and technology have value to the extent the owner is relieved of the obligation to pay royalties for the benefits received from these assets.
(iii) The estimated fair values for internally developed software were measured using the replacement cost method.

WMIH incurred total acquisition costs of $92 prior to the consummation of the Merger. Additional acquisition costs are not expected to be significant during the remainder of fiscal 2018. The acquisition costs were primarily related to legal, accounting and consulting services and were expensed as incurred through July 31, 2018. Included in the total acquisition costs was a transaction fee of $25 to KKR Capital Markets LLC ("KCM"), an affiliate of KKR Wand Investors Corporation, which is WMIH's largest stockholder, for acting as a non-exclusive financial advisor to WMIH with respect to the Merger and an arrangement fee of $7 to KCM for acting as a placement agent with respect to a bridge financing facility in connection with the Merger that was not executed. In addition, WMIH incurred $38 of costs related to borrowings under the Notes, which was capitalized in debt costs.

22



WMIH also paid KCM a deferred fee of $8, which initially reduced the carrying value of the Series B Preferred Stock. This fee was payable in connection with the conversion of Series B Preferred Stock to WMIH's common stock upon consummation of the Merger.

Included in the Predecessor's consolidated statements of operations were $27 of acquisition costs incurred by Nationstar for the seven months ended July 31, 2018.

Included in the Successor's consolidated statements of operations were $7 of acquisition costs related to the compensation arrangements incurred by the Company related to the merger for two months ended September 30, 2018.

The following unaudited pro forma financial information presents the combined results of operations for the three and nine months ended September 30, 2018 as if the transaction had occurred on January 1, 2018.

 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
Pro forma total revenues
$
506

 
$
1,538

 
 
 
 
Pro forma net income
$
(20
)
 
$
156


The unaudited pro forma financial information above does not include the pro forma effects of the Company's acquisition of Assurant as presented below. The above unaudited pro forma financial information is presented for illustrative purposes only and is not indicative of the results of operations that would have actually occurred had the Merger occurred on January 1, 2018. In addition, the unaudited pro forma financial information is not indicative of, nor does it purport to project, the future operating results of the Company. Further, the unaudited financial information excludes acquisition and integration costs and does not give effect to any estimated and potential cost savings or other operating efficiencies, if any, that might result from the acquisition.

Acquisition of Assurant Mortgage Solutions Group

On August 1, 2018, Xome Holdings LLC, a wholly-owned subsidiary of the Company, acquired Assurant Mortgage Solutions Group for $35 in cash with additional consideration dependent on the achievement of certain future performance targets. The acquisition expands Xome's footprint and grows its third-party client portfolio across its valuation, title and field services businesses. Based on the preliminary valuations of the estimated net fair value of the assets acquired and preliminary purchase price allocation, the acquisition resulted in $23 of intangible assets and $3 of goodwill.



23


4. Mortgage Servicing Rights and Related Liabilities

The following table sets forth the carrying value of the Company's and Predecessor's MSRs and the related liabilities.
 
Successor
 
Predecessor
MSRs and Related Liabilities
September 30, 2018
 
December 31, 2017
Forward MSRs - fair value
$
3,485

 
$
2,937

Reverse MSRs - amortized cost
15

 
4

Mortgage servicing rights
$
3,500

 
$
2,941

 
 
 
 
Mortgage servicing liabilities - amortized cost
$
79

 
$
41

 
 
 
 
Excess spread financing - fair value
$
1,097

 
$
996

Mortgage servicing rights financing - fair value
26

 
10

MSR related liabilities - nonrecourse at fair value
$
1,123

 
$
1,006


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

The following table sets forth the activities of forward MSRs.
 
Successor
 
 
Predecessor
 
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Nine Months Ended September 30, 2017
MSRs - Fair Value
 
 
 
Fair value - beginning of period
$
3,413

 
 
$
2,937

 
$
3,160

Additions:
 
 
 
 
 
 
Servicing retained from mortgage loans sold
43

 
 
162

 
151

Purchases of servicing rights
72

 
 
144

 
30

Dispositions:
 
 
 
 
 
 
Sales of servicing assets(1)
(63
)
 
 
4

 
(24
)
Changes in fair value:
 
 
 
 
 
 
Changes in valuation inputs or assumptions used in the valuation model
65

 
 
330

 
(113
)
Other changes in fair value
(45
)
 
 
(164
)
 
(248
)
Fair value - end of period
$
3,485

 
 
$
3,413

 
$
2,956


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

From time to time, the Company sells its ownership interest in certain MSRs and is retained as the subservicer for the sold assets. The Company has evaluated the sale accounting requirements related to these transactions, including the Company's continued involvement as the subservicer, and concluded that these transactions qualify for sale accounting treatment.


24


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

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

The following table provides a breakdown of credit sensitive and interest sensitive unpaid principal balance ("UPB") for the Company's forward MSRs.
 
Successor
 
Predecessor
 
September 30, 2018
 
December 31, 2017
MSRs - Sensitivity Pools
UPB
 
Fair Value
 
UPB
 
Fair Value
Credit sensitive
$
144,697

 
$
1,652

 
$
167,605

 
$
1,572

Interest sensitive
129,789

 
1,833

 
113,775

 
1,365

Total
$
274,486

 
$
3,485

 
$
281,380

 
$
2,937


The Company used the following key weighted-average inputs and assumptions in estimating the fair value of MSRs.
 
Successor
 
Predecessor
Credit Sensitive
September 30, 2018
 
December 31, 2017
Discount rate
11.2
%
 
11.4
%
Total prepayment speeds
11.2
%
 
15.2
%
Expected weighted-average life
6.7 years

 
5.7 years

 
 
 
 
Interest Sensitive
 
 
 
Discount rate
9.2
%
 
9.2
%
Total prepayment speeds
8.9
%
 
10.7
%
Expected weighted-average life
7.4 years

 
6.7 years


The following table shows the hypothetical effect on the fair value of the MSRs when applying certain unfavorable variations of key assumptions to these assets for the dates indicated.
 
Discount Rate
 
Total Prepayment Speeds
MSRs - Hypothetical Sensitivities
100 bps
Adverse
Change
 
200 bps
Adverse
Change
 
10%
Adverse
Change
 
20%
Adverse
Change
Successor
 
 
 
 
 
 
 
September 30, 2018
 
 
 
 
 
 
 
Mortgage servicing rights
$
(138
)
 
$
(266
)
 
$
(117
)
 
$
(227
)
Predecessor
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Mortgage servicing rights
$
(108
)
 
$
(208
)
 
$
(118
)
 
$
(227
)

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


25


Reverse Mortgage Servicing Rights and Liabilities - Amortized Cost
The Company services and subservices certain HECM reverse mortgage loans with an unpaid principal balance of $30,660 and $35,112 as of September 30, 2018 and December 31, 2017, respectively. Mortgage servicing liabilities had an ending balance of $79 and $41 as of September 30, 2018 and December 31, 2017, respectively. For the two months ended September 30, 2018, the Company accreted $7 of the MSL. For the seven months ended July 31, 2018, the Predecessor accreted $11 of the MSL and recorded other MSL adjustments of $56. For the nine months ended September 30, 2017, the Predecessor accreted $1 of the MSL and recorded an increase to the MSL of $6. Such accretion recorded by the Predecessor relates to previous portfolio acquisitions.

Reverse MSR had an ending balance of $15 and $4 as of September 30, 2018 and December 31, 2017, respectively. For the two months ended September 30, 2018, the Company recorded less than $1 of amortization. For the seven months ended July 31, 2018, the Predecessor recorded other MSR adjustments of $4. For the nine months ended September 30, 2017, the Predecessor amortized $1 of the MSR.

The fair value of the reverse MSR was $15 and $29 as of September 30, 2018 and December 31, 2017, respectively. The fair value of the MSL was $60 and $34 as of September 30, 2018 and December 31, 2017, respectively. Management evaluates reverse MSRs and MSLs each reporting period for impairment. Based on management's assessment at September 30, 2018, no impairment or increased obligation was needed.

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

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

The range of key assumptions used in the Company's valuation of excess spread financing are as follows.
Excess Spread Financing
Prepayment Speeds
 
Average
Life (Years)
 
Discount Rate
 
Recapture Rate
Successor
 
 
 
 
 
 
 
September 30, 2018
 
 
 
 
 
 
 
Low
5.9%
 
5.3
 
8.5%
 
7.6%
High
15.0%
 
8.5
 
14.0%
 
26.7%
Weighted-average
10.6%
 
6.7
 
10.6%
 
17.7%
Predecessor
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Low
6.2%
 
4.4
 
8.5%
 
7.2%
High
21.2%
 
6.9
 
14.1%
 
30.0%
Weighted-average
13.7%
 
5.9
 
10.8%
 
18.7%


26


The following table shows the hypothetical effect on the excess spread financing fair value when applying certain unfavorable variations of key assumptions to these liabilities for the dates indicated.
 
Discount Rate
 
Prepayment Speeds
Excess Spread Financing - Hypothetical Sensitivities
100 bps
Adverse
Change
 
200 bps
Adverse
Change
 
10%
Adverse
Change
 
20%
Adverse
Change
Successor
 
 
 
 
 
 
 
September 30, 2018
 
 
 
 
 
 
 
Excess spread financing
$
44

 
$
92

 
$
33

 
$
68

Predecessor
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Excess spread financing
$
37

 
$
78

 
$
34

 
$
71


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

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

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

The following table sets forth the weighted average assumptions used in the valuation of the mortgage servicing rights financing liability.
 
Successor
 
Predecessor
Mortgage Servicing Rights Financing Assumptions
September 30, 2018
 
December 31, 2017
Advance financing rates
4.9
%
 
3.5
%
Annual advance recovery rates
18.2
%
 
23.2
%


27


The following table sets forth the items comprising revenues associated with servicing loan portfolios.
 
Successor
 
 
Predecessor
 
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Three Months Ended September 30, 2017
 
For the Period January 1 - July 31, 2018
 
Nine Months Ended September 30, 2017
Servicing Revenue
 
 
 
 
 
Contractually specified servicing fees(1)
$
163

 
 
$
79

 
$
251

 
$
574

 
$
759

Other service-related income(1)(2)
18

 
 
10

 
40

 
66

 
126

Incentive and modification income(1)
8

 
 
4

 
19

 
37

 
63

Late fees(1)
14

 
 
7

 
22

 
53

 
67

Reverse servicing fees
13

 
 
4

 
16

 
37

 
43

Mark-to-market adjustments(2)(3)
24

 
 
25

 
(44
)
 
196

 
(160
)
Counterparty revenue share(4)
(26
)
 
 
(16
)
 
(53
)
 
(111
)
 
(174
)
Amortization, net of accretion(5)
(31
)
 
 
(16
)
 
(60
)
 
(112
)
 
(187
)
Total servicing revenue
$
183

 
 
$
97

 
$
191

 
$
740

 
$
537


(1) Amounts include subservicing related revenues.
(2) In the fourth quarter of 2017, the Predecessor reevaluated presentation of adjustments related to certain Ginnie Mae early buyout activities and reclassified $4 and $16 from other service-related income to mark-to-market adjustments for the three and nine months ended September 30, 2017, respectively. Total servicing revenue was not affected by this reclassification adjustment.
(3) Mark-to-market ("MTM") adjustments include 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 for the Company totaled $13 for the two months ended September 30, 2018. These cumulative incurred losses for the Predecessor totaled $4 and $38 for the one and seven months ended July 31, 2018, respectively, and $15 and $53 for the three and nine months ended September 30, 2017, respectively.
(4) Counterparty revenue share represents the excess servicing fee that the Company pays to the counterparties under the excess spread financing arrangements and the payments made associated with MSRs financing arrangements.
(5) Amortization is net of excess spread accretion of $22 for the two months ended September 30, 2018, $11 and $78 for the one and seven months ended July 31, 2018, respectively, and $41 and $123 for the three and nine months ended September 30, 2017, respectively.


5. Advances and Other Receivables, Net

Advances and other receivables, net consists of the following.
 
Successor
 
Predecessor
 
September 30, 2018
 
December 31, 2017
Servicing advances, net of $227 and $0 discount, respectively
$
889

 
$
1,599

Receivables from agencies, investors and prior servicers, net of $56 and $0 discount, respectively
305

 
391

Reserves
(20
)
 
(284
)
Total advances and other receivables, net
$
1,174

 
$
1,706


The Company and Predecessor, as loan servicer, are 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 and Predecessor estimate and record an asset for estimated recoveries to be collected from prior servicers for their respective portion of the losses associated with the underlying loans that were not serviced in accordance with established guidelines.

28


Receivables from prior servicers totaled $84 and $134 for the Company and Predecessor's forward loan portfolio at September 30, 2018 and December 31, 2017, respectively.
The following table sets forth the activities of the reserves for advances and other receivables.
 
Successor
 
 
Predecessor
Reserves for Advances and Other Receivables
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Three Months Ended September 30, 2017
 
For the Period January 1 - July 31, 2018
 
Nine Months Ended September 30, 2017
Balance - beginning of period
$

 
 
$
294

 
$
236

 
$
284

 
$
184

Provision and other additions(1)
20

 
 
7

 
30

 
69

 
106

Write-offs

 
 
(4
)
 
(13
)
 
(56
)
 
(37
)
Balance - end of period
$
20

 
 
$
297

 
$
253

 
$
297

 
$
253


(1) The Company recorded a provision of $13 through the MTM adjustments in service related revenues for the two months ended September 30, 2018 for inactive and liquidated loans that are no longer part of the MSR portfolio. The Predecessor recorded a provision through the MTM adjustments in service related revenues of $4 and $38 for the one and seven months ended July 31, 2018, respectively, and $15 and $53 for the three and nine months ended September 30, 2017, 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.

Purchase Discount for Advances and Other Receivables
In connection with the Merger, the Company recorded the acquired advances and other receivables at estimated fair value as of the acquisition date, which resulted in a preliminary purchase discount of $302. The following table sets forth the activities of the purchase discount for advances and other receivables.

 
Successor
 
For the Period August 1 - September 30, 2018
Purchase Discounts
Servicing Advances
 
Receivables from Agencies, Investors and Prior Servicers
Balance - beginning of period
$
246

 
$
56

Accretion
(19
)
 

Balance - end of period
$
227

 
$
56



6. Reverse Mortgage Interests, Net

Reverse mortgage interests, net consists of the following.
 
Successor

 
Predecessor

Reverse Mortgage Interests, Net
September 30, 2018
 
December 31, 2017
Participating interests in HECM mortgage-backed securities, net of $55 and $0 premium, respectively
$
6,074

 
$
7,107

Other interests securitized, net of $117 and $0 discount, respectively
1,003

 
912

Unsecuritized interests, net of $151 and $89 discount, respectively
1,810

 
2,080

Reserves
(1
)
 
(115
)
Total reverse mortgage interests, net
$
8,886

 
$
9,984



29


Participating Interests in HMBS
Participating interests in HMBS consist of the Company's reverse mortgage interests in HECM loans which have been transferred to GNMA and subsequently securitized through the issuance of HMBS. During the two months ended September 30, 2018, a total of $44 in UPB was transferred to GNMA and securitized by the Company. During the seven months ended July 31, 2018 and nine months ended September 30, 2017, a total of $198 and $416 in UPB were transferred to GNMA and securitized by the Predecessor, respectively.

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. No such securitizations occurred during the two months ended September 30, 2018. During the seven months ended July 31, 2018, a total of $760 UPB was securitized through Trust 2018-1 and Trust 2018-2 and a total of $284 UPB from Trust 2016-2 and Trust 2016-3 were called and debt extinguished. Refer to Other Nonrecourse Debt in Note 10, Indebtedness, for additional information.

Unsecuritized Interests
Unsecuritized interests in reverse mortgages consists of the following.
 
Successor
 
Predecessor
Unsecuritized Interests
September 30, 2018
 
December 31, 2017
Repurchased HECM loans
$
1,512

 
$
1,751

HECM related receivables
353

 
311

Funded borrower draws not yet securitized
68

 
82

REO related receivables
28

 
25

Purchase discount
(151
)
 
(89
)
Total unsecuritized interests
$
1,810

 
$
2,080


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 $608 of HECM loans out of GNMA HMBS securitizations during the two months ended September 30, 2018, of which $138 were subsequently assigned to a third party in accordance with applicable servicing agreements. The Predecessor repurchased a total of $2,439 and $3,270 of HECM loans out of GNMA HMBS securitizations during the seven months ended July 31, 2018 and nine months ended September 30, 2017, respectively, of which $512 and $802 were subsequently assigned to a third party in accordance with applicable servicing agreements, respectively. To the extent a loan is not subject to applicable servicing agreements and assigned to a third party, the loan is either subject to assignment to HUD, per contractual obligations with GNMA, liquidated via a payoff from the borrower or liquidated via a foreclosure according to the terms of the underlying mortgage.

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 $25 and $22 for the Company and Predecessor's reverse loan portfolio at September 30, 2018 and December 31, 2017, respectively.

Purchase of Reverse Mortgage Servicing Rights and Interests
On December 1, 2016, the Predecessor executed an asset purchase agreement with a large financial institution and acquired servicing rights and reverse mortgage interests. As part of the asset purchase agreement, the Predecessor agreed to acquire remaining components of the reverse portfolio, primarily including servicing of whole HECM loans and REO advances upon receiving regulatory approval. In September 2017, the Predecessor executed a mortgage servicing rights purchase agreement and a subservicing agreement to acquire servicing rights and subservicing contracts on the remaining reverse portfolio. In March 2018, the Predecessor executed an asset purchase agreement to acquire reverse mortgage interests on the subservicing contracts acquired in September 2017 referenced above, acquiring $467 UPB of participating interests in HECM loans and $460 UPB of related HMBS obligations. The Predecessor performed a relative fair value allocation upon the March 2018 acquisition, resulting in the aforementioned assets and liabilities in addition to $2 of HECM related receivables and $7 of purchase discount within unsecuritized interests. In addition, the Predecessor paid net proceeds of $1 for the acquisition of these assets and assumption of related liabilities.


30


Reserves for Reverse Mortgage Interests
The Company records 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 U.S. Department of Housing and Urban Development ("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 HUD specified servicing timelines.

The activity of the reserves for reverse mortgage interests is set forth below.
 
Successor
 
 
Predecessor
 
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Three Months Ended September 30, 2017
 
For the Period January 1 - July 31, 2018
 
Nine Months Ended September 30, 2017
Reserves for reverse mortgage interests
 
 
 
 
 
Balance - beginning of period
$

 
 
$
117

 
$
149

 
$
115

 
$
131

Provision, net
1

 
 
12

 
22

 
32

 
44

Write-offs

 
 

 
(83
)
 
(18
)
 
(87
)
Balance - end of period
$
1

 
 
$
129

 
$
88

 
$
129

 
$
88


Purchase Discount for Reverse Mortgage Interests
In connection with the Merger, the Company recorded the acquired reverse mortgage interests at estimated fair value as of the acquisition date, which resulted in a preliminary purchase premium of $58 for participating interests in HMBS and a preliminary purchase discount of $278 for other interest securitized and unsecuritized interests. The following table sets forth the activities of the purchase premiums and discounts for reverse mortgage interests.
 
Successor
 
For the Period August 1 - September 30, 2018
Purchase premiums and discounts for reverse mortgage interests
Premium for Participating Interests in HMBS
 
Discount for Other Interest Securitized
 
Discount for Unsecuritized Interests
Balance - beginning of period
$
58

 
$
(117
)
 
$
(161
)
Additions

 

 

Accretion/(Amortization)
(3
)
 

 
10

Balance - end of period
$
55

 
$
(117
)
 
$