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Section 1: 10-Q (10-Q)

Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________________________________________________________________
 FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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

399031815_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
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, $0.01 par value per share
COOP
The Nasdaq Stock Market
____________________________________________________________________________________________________
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 July 28, 2019 was 91,075,575.



MR. COOPER GROUP INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 
 
 
Page
PART I
 
 
 
 
Item 1.
 
 
 
 
Consolidated Balance Sheets as of June 30, 2019 (unaudited) and December 31, 2018 (Successor)
 
 
 
 
Consolidated Statements of Operations (unaudited) for the Successor’s Three and Six Months Ended June 30, 2019 and the Predecessor’s Three and Six Months Ended June 30, 2018
 
 
 
 
Consolidated Statements of Stockholders’ Equity (unaudited) for the Successor’s Three and Six Months Ended June 30, 2019 and the Predecessor’s Three and Six Months Ended June 30, 2018
 
 
 
 
Consolidated Statements of Cash Flows (unaudited) for the Successor’s Six Months Ended June 30, 2019 and the Predecessor’s Six Months Ended June 30, 2018
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 


2


GLOSSARY OF TERMS

This Glossary of Terms defines some of the terms that are used throughout this report and does not represent a complete list of all defined terms used.
   
Advance Facility.  A secured financing facility to fund advance receivables which is backed by a pool of mortgage servicing advance receivables made by a servicer to a certain pool of mortgage loans.

Agency and Government Conforming Loan.  A mortgage loan that meets all requirements (loan type, maximum amount, LTV ratio and credit quality) for purchase by Fannie Mae, Freddie Mac, or insured by the FHA, USDA or guaranteed by the VA.

Asset-Backed Securities (ABS).  A financial security whose income payments and value is derived from and collateralized (or “backed”) by a specified pool of underlying receivables or other financial assets.

Base Servicing Fee.  The servicing fee retained by the servicer, expressed in basis points, in an excess MSR arrangement in exchange for the provision of servicing functions on a portfolio of mortgage loans, after which the servicer and the co-investment partner share the excess fees on a pro rata basis.

Direct-to-consumer Originations.  A type of mortgage loan origination pursuant to which a lender markets refinancing and purchase money mortgage loans directly to selected consumers through telephone call centers, the Internet or other means.

Conventional Mortgage Loans.  A mortgage loan that is not guaranteed or insured by the FHA, the VA or any other government agency. Although a conventional loan is not insured or guaranteed by the government, it can still follow the guidelines of GSEs and be sold to the GSEs.

Correspondent Originations.  A type of mortgage loan origination pursuant to which a company purchases closed mortgage loans from correspondent lenders, such as community banks, credit unions, mortgage brokers and independent mortgage bankers.
 
Credit-Sensitive Loan.  A mortgage loan with certain characteristics such as low borrower credit quality, relaxed original underwriting standards and high LTV, which we believe indicates that the mortgage loan presents an elevated risk of borrower default versus payoff.

Delinquent Loan.  A mortgage loan that is 30 or more days past due from its contractual due date.

Department of Veterans Affairs (VA).  The VA is a cabinet-level department of the U.S. federal government, which guarantees certain home loans for qualified borrowers eligible for securitization with GNMA.

Excess Servicing Fees.  In an excess MSR arrangement, the servicing fee cash flows on a portfolio of mortgage loans after payment of the base servicing fee.

Excess Spread.  MSRs with a co-investment partner where the servicer receives a base servicing fee and the servicer and co-investment partner share the excess servicing fees. This co-investment strategy reduces the required upfront capital from the servicer when purchasing or investing in MSRs.

Federal National Mortgage Association (Fannie Mae or FNMA).   FNMA was federally chartered by Congress in 1938 to support liquidity, stability, and affordability in the secondary mortgage market, where existing mortgage-related assets are purchased and sold. Fannie Mae buys mortgage loans from lenders and resells them as mortgage backed securities in the secondary mortgage market.

Federal Housing Administration (FHA).  The FHA is a U.S. federal government agency within the Department of Housing and Urban Development (HUD). It provides mortgage insurance on loans made by FHA-approved lenders in compliance with FHA guidelines throughout the United States.

Federal Housing Finance Agency (FHFA).  A U.S. federal government agency that is the regulator and conservator of Fannie Mae and Freddie Mac and the regulator of the 12 Federal Home Loan Banks.


3


Federal Home Loan Mortgage Corporation (Freddie Mac or FHLMC).  Freddie Mac was chartered by Congress in 1970 to stabilize the nation’s residential mortgage markets and expand opportunities for homeownership and affordable rental housing. Freddie Mac participates in the secondary mortgage market by purchasing mortgage loans and mortgage-related securities for investment and by issuing guaranteed mortgage-related securities.


Government National Mortgage Association (Ginnie Mae or GNMA).  GNMA is a self financing, wholly-owned U.S. Government corporation within HUD. Ginnie Mae guarantees the timely payment of principal and interest on MBS backed by federally insured or guaranteed loans - mainly loans insured by the FHA or guaranteed by the VA. Ginnie Mae securities are the only MBS to carry the full faith and credit guarantee of the U.S. federal government.

Government-Sponsored Enterprise (GSE).  Certain entities established by the U.S. Congress to provide liquidity, stability and affordability in residential housing. These agencies are Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks.

Home Affordable Modification Program (HAMP).  A U.S. federal government program designed to help eligible homeowners avoid foreclosure through mortgage loan modifications. Participating servicers may be entitled to receive financial incentives in connection with loan modifications they enter into with eligible borrowers and subsequent success fees to the extent that a borrower remains current in any agreed upon loan modification.

Home Affordable Refinance Program (HARP).  A U.S. federal government program designed to help eligible homeowners refinance their existing mortgage loans. The mortgage must be owned or guaranteed by a GSE, originated during a defined time period, and applicants must be up-to-date on their mortgage payments but unable to obtain refinancing because the value of their homes has declined.

Home Equity Conversion Mortgage (HECM).  A type of reverse mortgage loan insured by the FHA.

 Interest Rate Lock Commitments (IRLC).  Agreements under which the interest rate and the maximum amount of the mortgage loan are set prior to funding the mortgage loan.

Interest-Sensitive Loan.  A mortgage loan which is primarily impacted by changes in forecasted interest rates, which in turn impacts voluntary prepayment speed. Interest-sensitive loans typically consist of single-family conforming residential forward mortgage loans serviced for GSEs or other third-party investors.

Loan Modification.  Temporary or permanent modifications to loan terms with the borrower, including the interest rate, amortization period and term of the borrower’s original mortgage loan. Loan modifications are usually made to loans that are in default, or in imminent danger of defaulting.

Loan-to-Value Ratio (LTV).  The unpaid principal balance of a mortgage loan as a percentage of the total appraised or market value of the property that secures the loan. An LTV over 100% indicates that the UPB of the mortgage loan exceeds the value of the property.

Loss Mitigation.  The range of servicing activities provided by a servicer in an attempt to minimize the losses suffered by the owner of a defaulted mortgage loan. Loss mitigation techniques include short-sales, deed-in-lieu of foreclosures and loan modifications, among other options.

Mortgage-Backed Securities (MBS).  A type of asset-backed security that is secured by a group of mortgage loans.

Mortgage Servicing Right (MSR).  The right and obligation to service a loan or pool of loans and to receive a servicing fee as well as certain ancillary income. MSRs may be bought and sold, resulting in the transfer of loan servicing obligations. MSRs are designated as such when the benefits of servicing the loans are expected to adequately compensate the servicer for performing the servicing.

MSR Facility.  A type of line of credit backed by mortgage servicing rights that is used for financing purposes.  In certain cases these lines may be a sub-limit of another warehouse facility or alternatively exist on a stand-alone basis.  These facilities allow for same or next-day draws at the request of the borrower.


4


Mortgage Servicing Liability (MSL).  The right and obligation to service a loan or pool of loans and to receive a servicing fee as well as certain ancillary income. MSLs may be bought and sold, resulting in the transfer of loan servicing obligations. MSLs are designated as such when the benefits of servicing the loans are not expected to adequately compensate the servicer for performing the servicing.

Non-Conforming Loan.  A mortgage loan that does not meet the standards of eligibility for purchase or securitization by Fannie Mae, Freddie Mac or Ginnie Mae.

Originations.  The process through which a lender provides a mortgage loan to a borrower.

Prepayment Speed.  The rate at which voluntary and involuntary mortgage prepayments occur or are projected to occur. The statistic is calculated on an annualized basis and expressed as a percentage of the outstanding principal balance.

Primary Servicer.  The servicer that owns the right to service a mortgage loan or pool of mortgage loans. This differs from a subservicer, which has a contractual agreement with the primary servicer to service a mortgage loan or pool of mortgage loans in exchange for a subservicing fee based upon portfolio volume and characteristics.
         
Prime Mortgage Loan.  Generally, a high-quality mortgage loan that meets the underwriting standards set by Fannie Mae or Freddie Mac and is eligible for purchase or securitization in the secondary mortgage market. Prime Mortgage loans generally have lower default risk and are made to borrowers with excellent credit records and a monthly income at least three to four times greater than their monthly housing expenses (mortgage payments plus taxes and other debt payments) as well as significant other assets. Mortgages not classified as prime mortgage loans are generally called either sub-prime or Alt-A.

Private Label Securitizations.  Securitizations that do not meet the criteria set by Fannie Mae, Freddie Mac or Ginnie Mae.

         
Real Estate Owned (REO).  Property acquired by the servicer on behalf of the owner of a mortgage loan or pool of mortgage loans, usually through foreclosure or a deed-in-lieu of foreclosure on a defaulted loan. The servicer or a third party real estate management firm is responsible for selling the REO. Net proceeds of the sale are returned to the owner of the related loan or loans. In most cases, the sale of REO does not generate enough to pay off the balance of the loan underlying the REO, causing a loss to the owner of the related mortgage loan.

Recapture.  The prepayment of all or part of a federal mortgage subsidy if the home is sold or otherwise disposed of within nine years of receiving a federally-subsidized loan.

Refinancing.  The process of working with existing borrowers to re-originate their mortgage loans. By refinancing loans for borrowers we currently service, we retain the servicing rights, thereby extending the longevity of the servicing cash flows.

Reverse Mortgage.  A reverse mortgage, also referred to as a Home Equity Conversion Mortgage, enables seniors to borrow against the value of their home, and no payment of principal or interest is required until the death of the borrower or the sale of the home. These loans are designed to go through the foreclosure and claim process to recover loan balance.

Servicing.  The performance of contractually specified administrative functions with respect to a mortgage loan or pool of mortgage loans. Duties of a servicer typically include, among other things, collecting monthly payments, maintaining escrow accounts, providing periodic monthly statements to the borrower and monthly reports to the loan owners or their agents, managing insurance, monitoring delinquencies, executing foreclosures (as necessary), and remitting fees to guarantors, trustees and service providers. A servicer is generally compensated with a specific fee outlined in the contract established prior to the commencement of the servicing activities.


5


   Servicing Advances.  In the course of servicing loans, servicers are required to make advances that are reimbursable from collections on the related mortgage loan or pool of loans. There are typically three types of servicing advances: P&I advances, T&I Advances and Corporate Advances.
(i) P&I advances cover scheduled payments of principal and interest that have not been timely paid by borrowers. P&I Advances serve to facilitate the cash flows paid to holders of securities issued by the residential MBS trust. The servicer is not the insurer or guarantor of the MBS and thus has the right to cease the advancing of P&I, when the servicer deems the next advance nonrecoverable. 

(ii) T&I advances pay specified expenses associated with the preservation of a mortgaged property or the liquidation of defaulted mortgage loans, including but not limited to property taxes, insurance premiums or other property-related expenses that have not been timely paid by borrowers in order for the lien holder to maintain its interest in the property. 

(iii) Corporate advances pay costs, fees and expenses incurred in foreclosing upon, preserving defaulted loans and selling REO, including attorneys’ and other professional fees and expenses incurred in connection with foreclosure and liquidation or other legal proceedings arising in the course of servicing the defaulted mortgage loans. 

Servicing advances are reimbursed to the servicer if and when the borrower makes a payment on the underlying mortgage loan at the time the loan is modified or upon liquidation of the underlying mortgage loan but are primarily the responsibility of the investor/owner of the loan. The types of servicing advances that a servicer must make are set forth in its servicing agreement with the owner of the mortgage loan or pool of mortgage loans. In some instances, a servicer is allowed to cease Servicing Advances, if those advances will not be recoverable from the property securing the loan.

Subservicing.  Subservicing is the process of outsourcing the duties of the primary servicer to a third party servicer. The third party servicer performs the servicing responsibilities for a fee and makes servicing advances, which are subsequently reimbursed by the primary servicer. The Servicer is contractually liable to the owner of the loans for the activities of the subservicer.

Unpaid Principal Balance (UPB).  The amount of principal outstanding on a mortgage loan or a pool of mortgage loans.

Warehouse Facility.  A type of line of credit facility used to temporarily finance mortgage loan originations to be sold in the secondary market. Pursuant to a warehouse facility, a loan originator typically agrees to transfer to a counterparty certain mortgage loans against the transfer of funds by the counterparty, with a simultaneous agreement by the counterpart to transfer the loans back to the originator at a date certain, or on demand, against the transfer of funds from the originator.



6


PART I. Financial Information

Item 1. Financial Statements
MR. COOPER GROUP INC.
CONSOLIDATED BALANCE SHEETS
(millions of dollars, except share data)
 
Successor
 
June 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
Assets
 
 
 
Cash and cash equivalents
$
245

 
$
242

Restricted cash
304

 
319

Mortgage servicing rights, $3,505 and $3,665 at fair value, respectively
3,511

 
3,676

Advances and other receivables, net of reserves of $98 and $47, respectively
1,000

 
1,194

Reverse mortgage interests, net of reserves of $8 and $13, respectively
7,110

 
7,934

Mortgage loans held for sale at fair value
3,422

 
1,631

Mortgage loans held for investment at fair value
114

 
119

Property and equipment, net of accumulated depreciation of $35 and $16, respectively
115

 
96

Deferred tax asset, net
1,055

 
967

Other assets
1,529

 
795

Total assets
$
18,405

 
$
16,973

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Unsecured senior notes, net
$
2,462

 
$
2,459

Advance facilities, net
567

 
595

Warehouse facilities, net
4,045

 
2,349

Payables and other liabilities
2,116

 
1,543

MSR related liabilities - nonrecourse at fair value
1,472

 
1,216

Mortgage servicing liabilities
80

 
71

Other nonrecourse debt, net
5,985

 
6,795

Total liabilities
16,727

 
15,028

Commitments and contingencies (Note 18)


 


Preferred stock at $0.00001 - 10 million shares authorized, 1 million shares issued and outstanding, respectively; aggregate liquidation preference of ten dollars, respectively

 

Common stock at $0.01 par value - 300 million shares authorized, 91.1 million and 90.8 million shares issued, respectively
1

 
1

Additional paid-in-capital
1,100

 
1,093

Retained earnings
575

 
848

Total Mr. Cooper stockholders’ equity
1,676

 
1,942

Non-controlling interests
2

 
3

Total stockholders’ equity
1,678

 
1,945

Total liabilities and stockholders’ equity
$
18,405

 
$
16,973


See accompanying notes to the consolidated financial statements (unaudited).

7


MR. COOPER GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(millions of dollars, except for earnings per share data)
 
Successor
 
 
Predecessor
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Revenues:
 
 
 
 
 
 
 
 
Service related, net
$
137

 
$
221

 
 
$
317

 
$
781

Net gain on mortgage loans held for sale
262

 
428

 
 
127

 
251

Total revenues
399

 
649

 
 
444

 
1,032

Expenses:
 
 
 
 
 
 
 
 
Salaries, wages and benefits
238

 
453

 
 
177

 
357

General and administrative
254

 
482

 
 
162

 
346

Total expenses
492

 
935

 
 
339

 
703

Other income (expenses):
 
 
 
 
 
 
 
 
Interest income
162

 
296

 
 
140

 
285

Interest expense
(187
)
 
(376
)
 
 
(164
)
 
(335
)
Other income (expenses)
1

 
16

 
 
(2
)
 
6

Total other income (expenses), net
(24
)
 
(64
)
 
 
(26
)
 
(44
)
(Loss) income before income tax (benefit) expense
(117
)
 
(350
)
 
 
79

 
285

Less: Income tax (benefit) expense
(29
)
 
(76
)
 
 
21

 
67

Net (loss) income
(88
)
 
(274
)
 
 
58

 
218

Less: Net (loss) income attributable to non-controlling interests
(1
)
 
(1
)
 
 

 

Net (loss) income attributable to Successor/Predecessor
(87
)
 
(273
)
 
 
58

 
218

Less: Undistributed earnings attributable to participating stockholders

 

 
 

 

Net (loss) income attributable to common stockholders
$
(87
)
 
$
(273
)
 
 
$
58

 
$
218

 
 
 
 
 
 
 
 
 
Net (loss) income per common share attributable to Successor/Predecessor:
 
 
 
 
 
 
 
 
Basic
$
(0.96
)
 
$
(3.00
)
 
 
$
0.59

 
$
2.22

Diluted
$
(0.96
)
 
$
(3.00
)
 
 
$
0.59

 
$
2.20


See accompanying notes to the consolidated financial statements (unaudited).

8


MR. COOPER GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(millions of dollars, except share data)
 
 
Six Months Ended June 30,
 
 
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, 2018
 

 
$

 
97,728

 
$
1

 
$
1,131

 
$
731

 
$
(148
)
 
$
1,715

 
$
7

 
$
1,722

Shares issued / (surrendered) under incentive compensation plan
 

 

 
435

 

 
(4
)
 

 
(2
)
 
(6
)
 

 
(6
)
Share-based compensation
 

 

 

 

 
8

 

 

 
8

 

 
8

Dividends to non-controlling interests
 

 

 

 

 
5

 

 

 
5

 
(6
)
 
(1
)
Net income
 

 

 

 

 

 
218

 

 
218

 

 
218

Balance at June 30, 2018
 

 
$

 
98,163

 
$
1

 
$
1,140

 
$
949

 
$
(150
)
 
$
1,940

 
$
1

 
$
1,941

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Successor
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2019
 
1,000

 
$

 
90,821

 
$
1

 
$
1,093

 
$
848

 
$

 
$
1,942

 
$
3

 
$
1,945

Shares issued / (surrendered) under incentive compensation plan
 

 

 
240

 

 
(2
)
 

 

 
(2
)
 

 
(2
)
Share-based compensation
 

 

 

 

 
9

 

 

 
9

 

 
9

Net loss
 

 

 

 

 

 
(273
)
 

 
(273
)
 
(1
)
 
(274
)
Balance at June 30, 2019
 
1,000

 
$

 
91,061

 
$
1

 
$
1,100

 
$
575

 
$

 
$
1,676

 
$
2

 
$
1,678


See accompanying notes to the consolidated financial statements (unaudited).

9


MR. COOPER GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(millions of dollars, except share data)
 
 
Three Months Ended June 30,
 
 
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 March 31, 2018
 

 
$

 
98,193

 
$
1

 
$
1,131

 
$
891

 
$
(148
)
 
$
1,875

 
$
7

 
$
1,882

Shares surrendered under incentive compensation plan
 

 

 
(30
)
 

 

 

 
(2
)
 
(2
)
 

 
(2
)
Share-based compensation
 

 

 

 

 
4

 

 

 
4

 

 
4

Dividends to non-controlling interests
 

 

 

 

 
5

 

 

 
5

 
(6
)
 
(1
)
Net income
 

 

 

 

 

 
58

 

 
58

 

 
58

Balance at June 30, 2018
 

 
$

 
98,163

 
$
1

 
$
1,140

 
$
949

 
$
(150
)
 
$
1,940

 
$
1

 
$
1,941

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Successor
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2019
 
1,000

 
$

 
91,042

 
$
1

 
$
1,095

 
$
662

 
$

 
$
1,758

 
$
3

 
$
1,761

Shares issued / (surrendered) under incentive compensation plan
 

 

 
19

 

 

 

 

 

 

 

Share-based compensation
 

 

 

 

 
5

 

 

 
5

 

 
5

Net loss
 

 

 

 

 

 
(87
)
 

 
(87
)
 
(1
)
 
(88
)
Balance at June 30, 2019
 
1,000

 
$

 
91,061

 
$
1

 
$
1,100

 
$
575

 
$

 
$
1,676

 
$
2

 
$
1,678


See accompanying notes to the consolidated financial statements (unaudited).


10


MR. COOPER GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions of dollars)
 
Successor
 
 
Predecessor
 
Six Months Ended June 30, 2019
 
 
Six Months Ended June 30, 2018
Operating Activities
 
 
 
 
Net (loss) income attributable to Successor/Predecessor
$
(273
)
 
 
$
218

Adjustments to reconcile net (loss) income to net cash attributable to operating activities:
 
 
 
 
Deferred tax (benefit) expense
(76
)
 
 
40

Net loss attributable to non-controlling interests
(1
)
 
 

Net gain on mortgage loans held for sale
(428
)
 
 
(251
)
Interest income on reverse mortgage loan
(167
)
 
 
(237
)
Gain on sale of assets

 
 
(9
)
Provision for servicing reserves
30

 
 
54

Fair value changes and amortization/accretion of mortgage servicing rights/liabilities
695

 
 
(155
)
Fair value changes in excess spread financing
(74
)
 
 
74

Fair value changes in mortgage servicing rights financing liability
11

 
 
6

Fair value changes in mortgage loan held for investment
(3
)
 
 

Amortization of premiums, net of discount accretion
(25
)
 
 
6

Depreciation and amortization for property and equipment and intangible assets
45

 
 
29

Share-based compensation
9

 
 
8

Repurchases of forward loan assets out of Ginnie Mae securitizations
(715
)
 
 
(475
)
Mortgage loans originated and purchased for sale, net of fees
(15,727
)
 
 
(10,639
)
Sales proceeds and loan payment proceeds for mortgage loans held for sale and held for investment
15,429

 
 
11,500

Changes in assets and liabilities:
 
 
 
 
Advances and other receivables
249

 
 
355

Reverse mortgage interests
1,056

 
 
1,326

Other assets
(118
)
 
 
10

Payables and other liabilities
31

 
 
9

Net cash attributable to operating activities
(52
)
 
 
1,869

 
 
 
 
 
Investing Activities
 
 
 
 
Acquisitions, net of cash acquired
(85
)
 
 

Property and equipment additions, net of disposals
(27
)
 
 
(31
)
Purchase of forward mortgage servicing rights, net of liabilities incurred
(409
)
 
 
(123
)
Net payment related to acquisition of HECM related receivables

 
 
(1
)
Proceeds on sale of forward and reverse mortgage servicing rights
279

 
 

Proceeds on sale of assets

 
 
13

Net cash attributable to investing activities
(242
)
 
 
(142
)

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

11


MR. COOPER GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(millions of dollars)
 
Successor
 
 
Predecessor
 
Six Months Ended June 30, 2019
 
 
Six Months Ended June 30, 2018
Financing Activities
 
 
 
 
Increase (decrease) in warehouse facilities
1,173

 
 
(199
)
Decrease in advance facilities
(40
)
 
 
(339
)
Repayment of notes payable
(294
)
 
 

Proceeds from issuance of HECM securitizations
398

 
 
443

Proceeds from sale of HECM securitizations
20

 
 

Repayment of HECM securitizations
(434
)
 
 
(423
)
Proceeds from issuance of participating interest financing in reverse mortgage interests
156

 
 
184

Repayment of participating interest financing in reverse mortgage interests
(1,004
)
 
 
(1,368
)
Proceeds from the issuance of excess spread financing
437

 
 
70

Repayment of excess spread financing
(12
)
 
 
(2
)
Settlement of excess spread financing
(107
)
 
 
(91
)
Repayment of nonrecourse debt – legacy assets
(6
)
 
 
(6
)
Repurchase of unsecured senior notes

 
 
(62
)
Repayment of finance lease liability
(2
)
 
 

Surrender of shares relating to stock vesting
(2
)
 
 
(6
)
Debt financing costs
(1
)
 
 
(7
)
Dividends to non-controlling interests

 
 
(1
)
Net cash attributable to financing activities
282

 
 
(1,807
)
Net decrease in cash, cash equivalents, and restricted cash
(12
)
 
 
(80
)
Cash, cash equivalents, and restricted cash - beginning of period
561

 
 
575

Cash, cash equivalents, and restricted cash - end of period(1)
$
549

 
 
$
495

 
 
 
 
 
Supplemental Disclosures of Cash Activities
 
 
 
 
Cash paid for interest expense
$
74

 
 
$
373

Net cash (refunded) paid for income taxes
$
(1
)
 
 
$
36


(1) 
The following table provides a reconciliation of cash, cash equivalents and restricted cash to amount reported within the consolidated balance sheets.
 
Successor
 
 
Predecessor
 
June 30, 2019
 
 
June 30, 2018
Cash and cash equivalents
$
245

 
 
$
185

Restricted cash
304

 
 
310

Total cash, cash equivalents, and restricted cash
$
549

 
 
$
495


See accompanying notes to the consolidated financial statements (unaudited). 

12



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., 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 originators and servicers in the country focused on delivering a variety of servicing and lending products, services and technologies. Xome provides real estate data as well as a range of services including real estate brokerage, title, closing, valuation and field services to lenders, investors and consumer. The Company’s corporate website is located at www.mrcoopergroup.com.

Mr. Cooper, which was previously known as WMIH Corp. (“WMIH”), is a corporation duly organized and existing under the laws of the State of Delaware since May 11, 2015. On July 31, 2018, Wand Merger Corporation (“Merger Sub”), a wholly-owned subsidiary of WMIH merged with and into Nationstar Mortgage Holdings Inc. (“Nationstar”), with Nationstar continuing as a wholly-owned subsidiary of WMIH (the “Merger”). Prior to the Merger, WMIH had limited operations other than its reinsurance business that operated in runoff mode. 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”.

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 acquisition date. 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 Annual Reports on Form 10-K for the year ended December 31, 2018.

Upon the consummation of the Merger, the Company adopted the significant accounting policies that were implemented by Nationstar and applied to the Predecessor’s financial statements, as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

The interim consolidated financial statements are unaudited; however, in the opinion of management, all adjustments, consisting of normal recurring items, 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.

13



Basis of Consolidation
The basis of consolidation described below was 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. Business combinations are included in the consolidated financial statements from their respective dates of acquisition.

Use of Estimates
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.

Recent Accounting Guidance 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 was effective for the Company on January 1, 2019. ASU 2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption with the option to elect certain practical expedients. The Company has elected to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) and has not restated comparative periods. The Company elected the package of practical expedients, which, among other items, permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected the short-term lease recognition exemption for all leases that qualify. Under this practical expedient, for those leases that qualify, the Company does not recognize right-of-use (“ROU”) assets or lease liabilities, which includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company also elected the practical expedient to not separate lease and non-lease components for all of our leases. The Company did not elect the use-of-hindsight practical expedient. As a result of implementing ASU 2016-02, the Company recognized an operating lease ROU asset of $114 and an operating lease liability of $124 on January 1, 2019, with no impact on its consolidated statement of operations. The ROU asset and operating lease liability are recorded in other assets, and payables and other liabilities, respectively, in the consolidated balance sheets. See Note 7, Leases for additional information.

Accounting Standards Update No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40 - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract" (“ASU 2018-15”) aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 will be effective for the Company on January 1, 2020. Early adoption is permitted, including adoption in any interim period. In the first quarter of 2019, the Company early adopted ASU 2018-15. The standard did not have a material impact to the Company’s consolidated financial statements.


14


Recent Accounting Guidance Not Yet Adopted
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 over the life of the asset. 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. As part of the evaluation process, the Company has performed a scoping analysis, developed a detailed project plan, and is currently in process of completing documentation. The Company has also formed an internal committee from various internal departments to assist in the documentation and review of such documentation regarding the implementation of the new standard.

Accounting Standards Update No. 2018-13, Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement, (“ASU 2018-13”) removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 fair value measurement methodologies, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 measurements. For certain unobservable inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 will be effective for the Company on January 1, 2020. The Company is currently evaluating the potential impact of ASU 2018-13 on its consolidated financial statements.


2. Acquisitions

Acquisition of Pacific Union Financial, LLC
On February 1, 2019, the Company completed the acquisition of all the limited liability units of Pacific Union Financial, LLC (“Pacific Union”), a California limited liability company. Pacific Union was a privately-held company that was engaged in the origination as well as servicing of residential mortgage loans, and operated throughout the United States. The acquisition allows the Company to expand its servicing portfolio and increase its mortgage lending volume and capabilities.

The acquisition has been accounted for in accordance with Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 805 (“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 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 purchase price was estimated to be $116 as of the closing date and such amount was paid by the Company as required by the Unit Purchase Agreement (UPA). In accordance with the terms of the UPA, the seller has formally disputed the estimated purchase price. As a result of the dispute, the final purchase price is subject to adjustment until the end of the measurement period (up to one year from the acquisition date) which would result in an increase to cash consideration paid and goodwill. Solely for this purpose, the Company estimates that it is reasonably possible that the adjustment to the final purchase price would range between $0 and $16. During the second quarter of 2019, the Company finalized its purchase price allocation subject to resolution of the above dispute. Based on the allocation of fair value, goodwill of $40 has been recorded, which represents the excess of the purchase price over the estimated fair value of tangible and intangible assets acquired, net of the liabilities assumed. The goodwill is primarily attributable to the assembled workforce and synergies with the Company’s current operations. $28 and $12 of the goodwill is assigned to the Origination and Servicing segments, respectively, based on expected cash flows and is expected to be deductible for tax purposes.

15



Estimated Fair Value of Net Assets Acquired (1):
 
Cash and cash equivalents
$
37

Restricted cash
2

Mortgage servicing rights
271

Advances and other receivables
84

Mortgage loans held for sale
536

Mortgage loans held for investment
1

Property and equipment
8

Other assets
483

Fair value of assets acquired
1,422

Notes payable(2)
294

Advance facilities
13

Warehouse facilities
393

Payables and other liabilities
530

Other nonrecourse debt
129

Fair value of liabilities assumed
1,359

Total fair value of net tangible assets acquired
63

Intangible assets:
 
Customer relationships(3)
13

Goodwill
40

Preliminary purchase price
$
116


(1) 
Estimated Fair Value of Net Assets Acquired is subject to change due to dispute of purchase price.
(2) 
Notes payable was subsequently paid off in February 2019 after the consummation of the acquisition.
(3) 
The estimated fair values for customer relationships were measured using the excess earnings method and were determined to have a remaining useful life of 10 years.

During the second quarter of 2019, the Company obtained additional information that existed as of the acquisition date and updated its estimated accrued liabilities, which resulted in $11 increase to payables and other liabilities. In addition, the third-party valuation specialists finalized their valuation of intangible assets acquired by the Company, which resulted in $2 increase to the fair value of the intangible assets acquired. The Company also wrote off $2 property and equipment acquired as it finalized its valuation of property and equipment. Total adjustments to goodwill in the second quarter of 2019 were $11. Goodwill totaled $40 as of June 30, 2019 after taking into account these measurement period adjustments.

The Company incurred total acquisition costs of $2 during the three months ended June 30, 2019, of which $1 are included in salaries, wages and benefits expense and $1 in general and administrative expense in the Company’s consolidated statements of operations. The Company incurred total acquisition costs of $4 during the six months ended June 30, 2019, of which $2 are included in salaries, wages and benefits expense and $2 in general and administrative expense in the Company’s consolidated statements of operations. The acquisition costs were primarily related to legal, accounting and consulting services.

For the three and six months ended June 30, 2019, the operations contributed by this acquisition generated consolidated total revenues of $79 and $118 and income before income tax of $36 and $50, respectively, which are reported in the Company’s consolidated statements of operations.

The following unaudited pro forma financial information presents the combined results of operations for the three and six months ended June 30, 2019, as if the acquisition had occurred on January 1, 2019.

16


 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Pro forma total revenues
$
399

 
$
668

 
 
 
 
Pro forma net loss
$
(87
)
 
$
(271
)

Acquisition of Nationstar Mortgage Holdings Inc.
Upon the Merger with Nationstar on July 31, 2018, 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 (prior to the 1-for-12 reverse stock split) of validly issued, fully paid and nonassessable shares of 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.

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, Merger Sub merged with and into Nationstar, with Nationstar continuing as a wholly-owned subsidiary of the Company. After the Merger, Nationstar 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 Company recorded final goodwill of $65, which represents the excess of the purchase price over the estimated fair value of tangible and intangible assets acquired, net of the liabilities assumed. The goodwill is primarily attributable to the assembled workforce and synergies from the future growth and strategic advantages in the mortgage industry. The entire goodwill is assigned to the Servicing segment and will not be deductible for tax purposes.

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



17


The allocation of the fair value of the acquired business was based on final valuations of the estimated net fair value of the assets acquired. The determination of fair value estimates required 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 were subject to change as the Company obtained additional information and finalized its review of estimates during the measurement period (up to one year from the acquisition date). The Company recorded any adjustments to the preliminary fair value estimates in the reporting period in which the adjustments were determined. The Company finalized its allocation of fair value of consideration transferred in the three months ended June 30, 2019.

The final allocation of the purchase price to the acquired assets and liabilities is as follows:
Final Estimated Fair Value of Net Assets Acquired:
 
Cash and cash equivalents
$
166

Restricted cash
430

Mortgage servicing rights
3,422

Advances and other receivables
1,262

Reverse mortgage interests
9,189

Mortgage loans held for sale
1,514

Mortgage loans held for investment
125

Property and equipment
96

Other assets
610

Fair value of assets acquired
16,814

Unsecured senior notes
1,830

Advance facilities
551

Warehouse facilities
2,701

Payables and other liabilities
1,352

MSR related liabilities—nonrecourse
1,065

Mortgage servicing liabilities
123

Other nonrecourse debt
7,583

Fair value of liabilities assumed
15,205

Total fair value of net tangible assets acquired
1,609

Intangible assets(1)
103

Goodwill
65

Purchase price
$
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.


18


The preliminary allocation of fair value as of December 31, 2018 resulted in goodwill of $10. During the first quarter of 2019, the Company obtained additional information in finalizing its review regarding a market participant view of the cost to service assumption related to the valuation of reverse mortgage assets and liabilities. This additional information was used in finalizing the Company’s review of the fair value of the reverse mortgage assets and liabilities and resulted in a reduction of $24 in reverse mortgage interests, a reduction of $6 in reverse mortgage servicing rights and an increase of $37 in mortgage servicing liabilities. In addition, a reduction of $12 in payables and other liabilities was recorded for the tax impact related to the revised valuation, for a total adjustment to goodwill of $55. As a result of the revised fair value, the Company recorded $7 to service related, net revenue and $1 to interest income, for a total $8 increase to earnings in the consolidated statement of operations for the first quarter of 2019. During the second quarter of 2019, the Company finalized its allocation of purchase price which did not result in any significant additional measurement period adjustments. There was a total goodwill of $65 as of June 30, 2019 after taking into account these measurement period adjustments.

WMIH incurred total acquisition costs of $92 prior to the consummation of the Merger, of which $3 and $7 was incurred in the three and six months ended June 30, 2018, respectively. 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 New Notes, which was capitalized in debt costs.

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 common stock upon consummation of the Merger.

The Predecessor incurred total acquisition costs of $27 in connection with the Merger. Included in the Predecessor’s consolidated statements of operations for the three and six months ended June 30, 2018 were $1 and $4, respectively, of acquisition costs incurred by Nationstar. Included in the Company’s consolidated statements of operations for the six months ended June 30, 2019 were $1 of acquisition costs related to the compensation arrangements incurred by the Company related to the Merger. There were no acquisition costs related to the Merger included in the Company’s statements of operations for the three months ended June 30, 2019.

Acquisition of Assurant Mortgage Solutions (“AMS”)
On August 1, 2018, Xome Holdings LLC, a wholly-owned subsidiary of the Company, acquired AMS for $38 in cash with additional consideration dependent on the achievement of certain future performance targets, which was initially estimated at $15 as of December 31, 2018. Total purchase price was estimated at $53. The acquisition expands Xome’s product footprint and grows its third-party client portfolio across its valuation, title and field services businesses. The Company finalized its purchase price allocation and recorded intangible assets of $24 and goodwill of $13 in 2018. The Company expects the entire goodwill balance to be deductible for tax purposes. Under ASC 805, Business Combinations, the contingent consideration was remeasured to fair value of $4 at March 31, 2019 and remained unchanged at June 30, 2019. The $11 change in the fair value was included in other income (expenses) within the consolidated statement of operations for the six months ended June 30, 2019.



19


3. Mortgage Servicing Rights and Related Liabilities

The following table sets forth the carrying value of the Company’s mortgage servicing rights (“MSRs”) and the related liabilities.
 
Successor
MSRs and Related Liabilities
June 30, 2019
 
December 31, 2018
Forward MSRs - fair value
$
3,505

 
$
3,665

Reverse MSRs - amortized cost
6

 
11

Mortgage servicing rights
$
3,511

 
$
3,676

 
 
 
 
Mortgage servicing liabilities - amortized cost
$
80

 
$
71

 
 
 
 
Excess spread financing - fair value
$
1,429

 
$
1,184

Mortgage servicing rights financing - fair value
43

 
32

MSR related liabilities - nonrecourse at fair value
$
1,472

 
$
1,216


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
MSRs - Fair Value
Six Months Ended June 30, 2019
 
 
Six Months Ended June 30, 2018
Fair value - beginning of period
$
3,665

 
 
$
2,937

Additions:
 
 
 
 
Servicing retained from mortgage loans sold
169

 
 
139

Purchases of servicing rights(1)
689

 
 
132

Dispositions:
 
 
 
 
Sales of servicing assets
(294
)
 
 
4

Changes in fair value:
 
 
 
 
Changes in valuation inputs or assumptions used in the valuation model
(542
)
 
 
283

Other changes in fair value
(182
)
 
 
(139
)
Fair value - end of period
$
3,505

 
 
$
3,356


(1) 
Purchases of servicing rights during the six months ended June 30, 2019 includes $271 of mortgage servicing rights that were acquired from Pacific Union. See Note 2, Acquisitions for further discussion. In addition, on January 3, 2019, the Company entered into a subservicing contract for $24 billion in mortgages, which were subsequently purchased on May 1, 2019, resulting in additional $253 servicing rights in the second quarter of 2019.

From time to time, the Company sells its ownership interest in certain MSRs and is retained as the subservicer for the sold assets. The Company has evaluated the sale accounting requirements related to these transactions, including the Company’s continued involvement as the subservicer, and concluded that these transactions qualify for sale accounting treatment. During the six months ended June 30, 2019 and 2018, the Company and the Predecessor sold $22,932 and $1,203 in unpaid principal balance (“UPB”) of forward MSRs, of which $20,560 and $1 in UPB were retained by the Company and the Predecessor as subservicer, respectively.


20


MSRs measured at fair value are segregated between credit sensitive and interest sensitive pools at acquisition of MSRs. 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. Due to the Company’s focus on recapture and modifications, significant amounts of the credit sensitive portfolio have been re-underwritten and, therefore, behave more like the interest sensitive portfolio. 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
 
June 30, 2019
 
December 31, 2018
MSRs - Sensitivity Pools
UPB
 
Fair Value
 
UPB
 
Fair Value
Credit sensitive
$
167,381

 
$
1,797

 
$
135,752

 
$
1,495

Interest sensitive
148,631

 
1,708

 
159,729

 
2,170

Total
$
316,012

 
$
3,505

 
$
295,481

 
$
3,665


The Company used the following key weighted-average inputs and assumptions in estimating the fair value of MSRs.
 
Successor
 
June 30, 2019
 
December 31, 2018
Credit Sensitive
 
 
 
Discount rate
10.6
%
 
11.3
%
Prepayment speeds
13.5
%
 
11.8
%
Average life
5.9 years

 
6.4 years

 
 
 
 
Interest Sensitive
 
 
 
Discount rate
8.9
%
 
9.3
%
Prepayment speeds
13.9
%
 
10.0
%
Average life
5.6 years

 
7.0 years

 
 
 
 
Total MSR Portfolio
 
 
 
Discount rate
9.7
%
 
10.2
%
Prepayment speeds
13.7
%
 
10.8
%
Average life
5.8 years

 
6.7 years



21


The following table shows the hypothetical effect on the fair value of the Successor’s MSRs when applying certain unfavorable variations of key assumptions to these assets for the dates indicated.
 
Successor
 
Discount Rate
 
Total Prepayment Speeds
MSRs - Hypothetical Sensitivities
100 bps
Adverse
Change
 
200 bps
Adverse
Change
 
10%
Adverse
Change
 
20%
Adverse
Change
June 30, 2019
 
 
 
 
 
 
 
Mortgage servicing rights
$
(127
)
 
$
(245
)
 
$
(169
)
 
$
(325
)
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
Mortgage servicing rights
$
(137
)
 
$
(265
)
 
$
(129
)
 
$
(250
)

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

Reverse Mortgage Servicing Rights and Liabilities - Amortized Cost
The Company services certain HECM reverse mortgage loans with an unpaid principal balance of $25,569 and $28,415 as of June 30, 2019 and December 31, 2018, respectively. Mortgage servicing liabilities (“MSL”) had an ending balance of $80 and $71 as of June 30, 2019 and December 31, 2018, respectively. For the six months ended June 30, 2019 and 2018, the Company and the Predecessor accreted $28 and $11 of the MSL and recorded other MSL adjustments of $37 and $3, respectively. The MSL adjustment recorded by the Company relates to the fair value adjustments for MSL assumed from the Merger resulting from the revised cost to service assumption used in the valuation of MSL during the measurement period. See Note 2, Acquisitions for further information. An accretion recorded by the Predecessor relates to previous portfolio acquisitions.

Reverse MSR had an ending balance of $6 and $11 as of June 30, 2019 and December 31, 2018, respectively. For the six months ended June 30, 2019, the Company amortized $1 and recorded other MSR adjustments of $6. The MSR adjustment recorded by the Company relates to the fair value adjustments for MSR assumed from the Merger resulting from the revised cost to service assumption used in the valuation of MSR during the measurement period. See Note 2, Acquisitions for further information. For the six months ended June 30, 2018, the Predecessor recorded other MSR adjustments of $4.

The fair value of the reverse MSR was $7 and $11 as of June 30, 2019 and December 31, 2018, respectively. The fair value of the MSL was $44 and $53 as of June 30, 2019 and December 31, 2018, respectively. Management evaluates reverse MSRs and MSLs each reporting period for impairment. Based on management’s assessment at June 30, 2019, no impairment or increased obligation was needed.

Excess Spread Financing - Fair Value
In order to finance the acquisition of certain MSR 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 these entities the right to receive a specified percentage of the cash flow generated from the portfolios in excess of a fixed base servicing fee per loan. The Company retains the base servicing fee, along with ancillary income and interest float earnings on principal and interest payments and escrows, and also incurs costs to service the specified pool. The Company is the legal owner and the servicer of the portfolios and provides all servicing and advancing functions.

In connection with the above transactions, the Company entered into refinanced loan obligations with New Residential, BlackRock and Varde that require the Company to transfer the new loan or a replacement loan of similar economic characteristics into the respective portfolio if the Company refinances any loan in the portfolio. The new or replacement loan will be governed by the same terms set forth in the sale and assignment agreement described above.


22


The Company used the following weighted-average assumptions in the Company’s valuation of excess spread financing.
 
Successor
 
June 30, 2019
 
December 31, 2018
Excess Spread Financing
 
 
 
Discount rate
9.6
%
 
10.4
%
Prepayment speeds
13.1
%
 
11.0
%
Recapture rate
20.2
%
 
18.6
%
Average life
5.7 years

 
6.5 years


The following table shows the hypothetical effect on the Company’s excess spread financing fair value when applying certain unfavorable variations of key assumptions to these liabilities for the dates indicated.
 
Successor
 
Discount Rate
 
Prepayment Speeds
Excess Spread Financing - Hypothetical Sensitivities
100 bps
Adverse
Change
 
200 bps
Adverse
Change
 
10%
Adverse
Change
 
20%
Adverse
Change
June 30, 2019
 
 
 
 
 
 
 
Excess spread financing
$
53

 
$
111

 
$
58

 
$
121

 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
Excess spread financing
$
47

 
$
99

 
$
38

 
$
81


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 financed MSRs attributable to a related cash flow assumption 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 financed MSRs, it would reduce the carrying value of the associated excess spread financing liability.

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

Mortgage Servicing Rights Financing - Fair Value
From December 2013 through June 2014, the Predecessor entered into agreements to sell a contractually specified base servicing fee component of certain MSRs and servicing advances under specified terms to a joint venture capitalized by New Residential and certain unaffiliated third-party investors. The purpose of this transaction was to facilitate the financing of advances for private label mortgages. 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 MSR and an MSR financing liability associated with this transaction in its consolidated balance sheets. The MSR financing liability reflects the incremental costs of this transaction relative to the market participant assumptions contained in the MSR valuation.

The following table sets forth the weighted average assumptions used in the valuation of the mortgage servicing rights financing liability.
 
Successor
Mortgage Servicing Rights Financing Assumptions
June 30, 2019
 
December 31, 2018
Advance financing rates
3.7
%
 
4.2
%
Annual advance recovery rates
19.3
%
 
19.0
%


23


Mortgage Servicing Rights - Revenues

The following table sets forth the items comprising revenues associated with servicing loan portfolios.
 
Successor
 
 
Predecessor
Servicing Revenue
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Contractually specified servicing fees(1)
$
307

 
$
588

 
 
$
245

 
$
495

Other service-related income(1)(2)
32

 
82

 
 
28

 
56

Incentive and modification income(1)
10

 
17

 
 
18

 
33

Late fees(1)
27

 
52

 
 
22

 
46

Reverse servicing fees
8

 
17

 
 
14

 
33

Mark-to-market adjustments(3)
(231
)
 
(524
)
 
 
19

 
171

Counterparty revenue share(4)
(70
)
 
(118
)
 
 
(50
)
 
(95
)
Amortization, net of accretion(5)
(56
)
 
(79
)
 
 
(48
)
 
(96
)
Total servicing revenue
$
27

 
$
35

 
 
$
248

 
$
643


(1) 
Amounts include subservicing related revenues.
(2) 
Amount for the six months ended June 30, 2019 includes a gain of $21 from the execution of a clean-up call option on a reverse mortgage loan trust, as the Company was the master servicer and holder of clean-up call rights.
(3) 
Mark-to-market (“MTM”) adjustments include fair value adjustments on MSR, excess spread financing and MSR financing liabilities. The amount of MSR MTM includes the impact of negative modeled cash flows which have been transferred to reserves on advances and other receivables. The negative modeled cash flows relate to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio. The impact of negative modeled cash flows for the Company and Predecessor was $17 and $22 for the three months ended June 30, 2019 and 2018, respectively, and $28 and $34 for the six months ended June 30, 2019 and 2018, 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 for the Company is net of excess spread accretion of $59 and MSL accretion of $11 for the three months ended June 30, 2019. Amortization for the Predecessor is net excess spread accretion of $37 for the three months ended June 30, 2018. For the six months ended June 30, 2019, the amortization for the Company is net of excess spread accretion of $95 and MSL accretion of $29. Amortization of the Predecessor is net of excess spread of $67 for the six months ended June 30, 2018. The Predecessor recorded MSL accretion within reverse servicing fees, whereas the Successor has elected to record MSL accretion within Amortization, net of accretion.


4. Advances and Other Receivables, Net

Advances and other receivables, net consists of the following.
 
Successor
 
June 30, 2019
 
December 31, 2018
Servicing advances, net of $156 and $205 discount, respectively
$
878

 
$
1,000

Receivables from agencies, investors and prior servicers, net of $48 and $48 discount, respectively
220

 
241

Reserves
(98
)
 
(47
)
Total advances and other receivables, net
$
1,000

 
$
1,194


The Company, as loan servicer, is contractually responsible to advance funds on behalf of the borrower and investor primarily for loan principal and interest, property taxes and hazard insurance and foreclosure costs. Advances are primarily recovered through reimbursement from the investor, proceeds from sale of loan collateral or mortgage insurance claims. Reserves for advances and other receivables on loans transferred out of the MSR portfolio are established within advances and other receivables.

The Company estimates and records an asset for 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.

24


Receivables from prior servicers totaled $96 and $94 for Company’s forward loan portfolio at June 30, 2019 and December 31, 2018, respectively.

The following table sets forth the activities of the reserves for advances and other receivables.
 
Successor
 
 
Predecessor
Reserves for Advances and Other Receivables
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Balance - beginning of period
$
71

 
47

 
 
$
277

 
$
284

Provision and other additions(1)
37

 
67

 
 
38

 
60

Write-offs
(10
)
 
(16
)
 
 
(21
)
 
(50
)
Balance - end of period
$
98

 
$
98

 
 
$
294

 
$
294


(1) 
The Company and the Predecessor recorded a provision of $17 and $22 through the MTM adjustments in service related revenues for the three months ended June 30, 2019 and 2018, respectively, and $28 and $34 for the six months ended June 30, 2019 and 2018, respectively, for inactive and liquidated loans that are no longer part of the MSR portfolio. Other additions represent reclassifications of required reserves provisioned within other balance sheet accounts as associated serviced loans become inactive or liquidate.
 
Purchase Discount for Advances and Other Receivables
In connection with the acquisition of Pacific Union in February 2019, the Company recorded the acquired advances and other receivables at estimated fair value as of the acquisition date, which resulted in a purchase discount of $19. Refer to Note 2, Acquisitions for discussion of the Pacific Union acquisition. In 2018, the Company recorded the acquired advances and other receivables in connection with the Merger at estimated fair value as of the acquisition date, which resulted in a purchase discount of $302.

As of June 30, 2019, a total of $117 purchase discount has been utilized with $204 purchase discount remaining.

The following table sets forth the activities of the purchase discounts for advances and other receivables.
 
Successor
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Purchase Discounts
Servicing Advances
 
Receivables from Agencies, Investors and Prior Servicers
 
Servicing Advances
 
Receivables from Agencies, Investors and Prior Servicers
Balance - beginning of period
$
169

 
$
48

 
$
205

 
$
48

Addition from acquisition

 

 
19

 

Utilization of purchase discounts
(13
)
 

 
(68
)
 

Balance - end of period
$
156

 
$
48

 
$
156

 
$
48



5. Reverse Mortgage Interests, Net

Reverse mortgage interests, net consists of the following:
 
Successor
Reverse Mortgage Interests, Net
June 30, 2019
 
December 31, 2018
Participating interests in HECM mortgage-backed securities (“HMBS”), net of $18 and $58 premium, respectively
$
4,952

 
$
5,664

Other interests securitized, net of $84 and $100 discount, respectively
1,023

 
1,064

Unsecuritized interests, net of $97 and $122 discount, respectively
1,143

 
1,219

Reserves
(8
)
 
(13
)
Total reverse mortgage interests, net
$
7,110

 
$
7,934



25


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. The Company does not own these loans, but due to HMBS program buyout requirements, such interests are consolidated on the Company’s balance sheet. The Company does not originate reverse mortgages, but during the six months ended June 30, 2019 and 2018, a total of $149 and $174 in UPB associated with new draws on existing loans was transferred to GNMA and securitized by the Company and Predecessor, respectively.

In March 2019, the Company entered into an agreement with Fannie Mae for the transfer of reverse mortgage loans. As a result, $61 was transferred from Fannie Mae and securitized into GNMA HMBS during the six months ended June 30, 2019.

Other Interests Securitized
Other interests securitized consist of reverse mortgage interests that no longer meet HMBS program eligibility criteria primarily because they have reached 98% of their Max Claim Amount (“MCA”) established at origination in accordance with HMBS program guidelines, which require buyout of the respective HMBS trust. These reverse mortgage interests have subsequently been transferred to private securitization trusts and are accounted for as a secured borrowing. During the six months ended June 30, 2019, the Company securitized a total of $398 UPB through Trust 2019-1 and a total of $249 UPB from Trust 2017-2 was called and the related debt was extinguished. See Note 10, Indebtedness for additional information. The Company sold $20 UPB of Trust 2018-3 retained bonds during the six months ended June 30, 2019. During the six months ended June 30, 2018, the Predecessor securitized a total of $443 UPB through Trust 2018-1 and a total of $284 UPB from Trust 2016-2 and Trust 2016-3 were called and the related debt was extinguished. Refer to Other Nonrecourse Debt in Note 10, Indebtedness, for additional information.

Unsecuritized Interests
Unsecuritized interests in reverse mortgages consist of the following:
 
Successor
 
June 30, 2019
 
December 31, 2018
Repurchased HECM loans (exceeds 98% MCA)
$
896

 
$
949

HECM related receivables
281

 
300

Funded borrower draws not yet securitized
48

 
76

REO-related receivables
15

 
16

Purchase discount
(97
)
 
(122
)
Total unsecuritized interests
$
1,143

 
$
1,219


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 MCA established at origination in accordance with HMBS program guidelines. The Company and the Predecessor repurchased a total of $1,457 and $2,109 of HECM loans out of GNMA HMBS securitizations during the six months ended June 30, 2019 and 2018, respectively, of which $371 and $444 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 the U.S. Department of Housing and Urban Development (“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.

As discussed above, the Company estimates and records an asset for probable recoveries from prior servicers for their respective portion of the losses associated with the underlying loans that were not serviced in accordance with established guidelines. Receivables from prior servicers totaled $13 and $18 for the Company’s reverse loan portfolio at June 30, 2019 and December 31, 2018, respectively.

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 HUD servicing guidelines and is assessed with respect to 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 and non-claimable UPB that exceeds the MCA upon assignment of the loan collateral to HUD (“MCA Exposure”). Reserves for reverse mortgage interests are related to both financial and operational exposures.


26


The activity of the reserves for reverse mortgage interests is set forth below.
 
Successor
 
 
Predecessor
Reserves for reverse mortgage interests
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Balance - beginning of period
$
8

 
$
13

 
 
$
134

 
$
115

Provision (release), net
2

 
2

 
 
(6
)
 
20

Write-offs
(2
)
 
(7
)
 
 
(11
)
 
(18
)
Balance - end of period
$
8

 
$
8

 
 
$
117

 
$
117


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 purchase premium of $42 for participating interests in HMBS, and a purchase discount of $298 for Other Interest Securitized and Unsecuritized Interests due to the higher exposure to financial and operational losses of servicing the loans through foreclosure and collateral liquidation.

The following table sets forth the activities of the purchase premiums and discounts for reverse mortgage interests.
 
Successor
 
Three Months Ended June 30, 2019
Purchase premiums and discounts for reverse mortgage interests
Net Premium for Participating Interests in HMBS(1)
 
Net Discount for Other Interest Securitized(1)
 
Net Discount for Unsecuritized Interests(1)
Balance - beginning of period
$
36

 
$
(112
)
 
$
(95
)
Utilization of purchase discounts

 
7

 
5

(Amortization)/Accretion
(23
)
 
28

 
(9
)
Transfers(3)
5

 
(7
)
 
2

Balance - end of period
$
18

 
$
(84
)
 
$
(97
)

 
Successor
 
Six Months Ended June 30, 2019
Purchase premiums and discounts for reverse mortgage interests
Net Premium for Participating Interests in HMBS(1)
 
Net Discount for Other Interest Securitized(1)
 
Net Discount for Unsecuritized Interests(1)
Balance - beginning of period
$
58

 
$
(100
)
 
$
(122
)
Adjustments(2)
(16
)
 
(2
)
 
(6
)
Utilization of purchase discounts

 
13

 
27

(Amortization)/Accretion
(37
)
 
13

 
9

Transfers(3)
13

 
(8
)
 
(5
)
Balance - end of period
$
18

 
$
(84
)
 
$
(97
)

(1) 
Net position as certain items are in a premium/(discount) position, based on the characteristics of underlying tranches of loans.
(2) 
Adjustments to premium/(discount) due to revised cost to service assumption utilized in the valuation of reverse mortgage assets and liabilities acquired from the Merger. See Note 2, Acquisitions for additional information.
(3) 
Transfer of premium/(discount) based on the transfer of associated loans between categories consistent with the underlying loan characteristics.


27


In connection with previous reverse mortgage portfolio acquisitions, the Predecessor recorded a purchase discount within Unsecuritized Interests. The following table sets forth the activities of the purchase discounts for reverse mortgage interests.
 
Predecessor
Purchase discounts for reverse mortgage interests
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Balance - beginning of period
$
(90
)
 
$
(89
)
Additions

 
(7
)
Accretion
6

 
12

Balance - end of period
$
(84
)
 
$
(84
)

Reverse Mortgage Interest Income
The Company accrues interest income for its participating interest in reverse mortgages based on the stated rates underlying HECM loans, in accordance with FHA guidelines. Total interest earned on the Company’s and the Predecessor’s reverse mortgage interests was $85 and $118 for the three months ended June 30, 2019 and 2018, respectively, and $167 and $237 for the six months ended June 30, 2019 and 2018, respectively.


6. Mortgage Loans Held for Sale and Investment

Mortgage Loans Held for Sale
The Company maintains a strategy of originating and purchasing residential mortgage loan products primarily for the purpose of selling to GSEs or other third-party investors in the secondary market on a servicing-retained basis. The Company purchases closed loans through its correspondent channel and assists customers currently in the Company’s servicing portfolio with refinancing of loans or new home purchases through its Direct to Consumer channel. Generally, all newly originated mortgage loans held for sale are securitized and transferred to GSEs or delivered to third-party purchasers shortly after origination on a servicing-retained basis.

Mortgage loans held for sale are recorded at fair value as set forth below.
 
Successor
 
June 30, 2019
 
December 31, 2018
Mortgage loans held for sale – UPB
$
3,268

 
$
1,568

Mark-to-market adjustment(1)
154

 
63

Total mortgage loans held for sale
$
3,422

 
$
1,631


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

The Company accrues interest income as earned and places loans on non-accrual status after any portion of principal or interest has been delinquent for more than 90 days. Accrued interest is recorded as interest income in the consolidated statements of operations.

The total UPB of mortgage loans held for sale on non-accrual status was as follows:
 
Successor
 
June 30, 2019
 
December 31, 2018
Mortgage Loans Held for Sale - UPB