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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, 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

400771375_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 October 25, 2019 was 91,087,252.



MR. COOPER GROUP INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 
 
 
Page
PART I
 
 
 
 
Item 1.
 
 
 
 
Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018 (Successor)
 
 
 
 
Consolidated Statements of Operations (unaudited) for the Successor’s Three and Nine Months Ended September 30, 2019 and Two Months ended September 30, 2018, and the Predecessor’s One and Seven Months Ended July 31, 2018
 
 
 
 
Consolidated Statements of Stockholders’ Equity (unaudited) for the Successor’s Three and Nine Months Ended September 30, 2019 and Two Months Ended September 30, 2018, and the Predecessor’s One and Seven Months Ended July 31, 2018
 
 
 
 
Consolidated Statements of Cash Flows (unaudited) for the Successor’s Nine Months Ended September 30, 2019 and Two Months Ended September 30, 2018 and the Predecessor’s Seven Months Ended July 31, 2018
 
 
 
 
 
 
 
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
 
September 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
Assets
 
 
 
Cash and cash equivalents
$
371

 
$
242

Restricted cash
271

 
319

Mortgage servicing rights, $3,339 and $3,665 at fair value, respectively
3,346

 
3,676

Advances and other receivables, net of reserves of $130 and $47, respectively
967

 
1,194

Reverse mortgage interests, net of reserves of $13 and $13, respectively
6,662

 
7,934

Mortgage loans held for sale at fair value
4,267

 
1,631

Mortgage loans held for investment at fair value

 
119

Property and equipment, net of accumulated depreciation of $45 and $16, respectively
113

 
96

Deferred tax asset, net
1,032

 
967

Other assets
1,449

 
795

Total assets
$
18,478

 
$
16,973

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Unsecured senior notes, net
$
2,464

 
$
2,459

Advance facilities, net
513

 
595

Warehouse facilities, net
4,802

 
2,349

Payables and other liabilities
2,002

 
1,543

MSR related liabilities - nonrecourse at fair value
1,328

 
1,216

Mortgage servicing liabilities
69

 
71

Other nonrecourse debt, net
5,533

 
6,795

Total liabilities
16,711

 
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
1,106

 
1,093

Retained earnings
659

 
848

Total Mr. Cooper stockholders’ equity
1,766

 
1,942

Non-controlling interests
1

 
3

Total stockholders’ equity
1,767

 
1,945

Total liabilities and stockholders’ equity
$
18,478

 
$
16,973


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

3


MR. COOPER GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(millions of dollars, except for earnings per share data)
 
Successor
 
 
Predecessor
 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
 
Two Months Ended September 30, 2018
 
 
One Month Ended July 31, 2018
 
Seven Months Ended July 31, 2018
Revenues:
 
 
 
 
 
 
 
 
 
 
Service related, net
$
258

 
$
479

 
$
259

 
 
$
120

 
$
901

Net gain on mortgage loans held for sale
360

 
788

 
83

 
 
44

 
295

Total revenues
618

 
1,267

 
342

 
 
164

 
1,196

Expenses:
 
 
 
 
 
 
 
 
 
 
Salaries, wages and benefits
250

 
703

 
139

 
 
69

 
426

General and administrative
228

 
710

 
136

 
 
173

 
519

Total expenses
478

 
1,413

 
275

 
 
242

 
945

Other income (expenses):
 
 
 
 
 
 
 
 
 
 
Interest income
163

 
459

 
90

 
 
48

 
333

Interest expense
(196
)
 
(572
)
 
(122
)
 
 
(53
)
 
(388
)
Other income (expenses)

 
16

 
6

 
 

 
6

Total other income (expenses), net
(33
)
 
(97
)
 
(26
)
 
 
(5
)
 
(49
)
Income (loss) before income tax expense (benefit)
107

 
(243
)
 
41

 
 
(83
)
 
202

Less: Income tax expense (benefit)
24

 
(52
)
 
(979
)
 
 
(19
)
 
48

Net income (loss)
83

 
(191
)
 
1,020

 
 
(64
)
 
154

Less: Net loss attributable to non-controlling interests
(1
)
 
(2
)
 

 
 

 

Net income (loss) attributable to Successor/Predecessor
84

 
(189
)
 
1,020

 
 
(64
)
 
154

Less: Undistributed earnings attributable to participating stockholders
1

 

 
9

 
 

 

Net income (loss) attributable to common stockholders
$
83

 
$
(189
)
 
$
1,011

 
 
$
(64
)
 
$
154

 
 
 
 
 
 
 
 
 
 
 
Net income (loss) per common share attributable to Successor/Predecessor:
 
 
 
 
 
 
 
 
 
 
Basic
$
0.91

 
$
(2.08
)
 
$
11.13

 
 
$
(0.65
)
 
$
1.57

Diluted
$
0.90

 
$
(2.08
)
 
$
10.99

 
 
$
(0.65
)
 
$
1.55


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

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, 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 

 

 
266

 

 
(1
)
 

 

 
(1
)
 

 
(1
)
Share-based compensation
 

 

 

 

 
14

 

 

 
14

 

 
14

Net loss
 

 

 

 

 

 
(189
)
 

 
(189
)
 
(2
)
 
(191
)
Balance at September 30, 2019
 
1,000

 
$

 
91,087

 
$
1

 
$
1,106

 
$
659

 
$

 
$
1,766

 
$
1

 
$
1,767


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

5


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 June 30, 2018
 

 
$

 
98,163

 
$
1

 
$
1,140

 
$
949

 
$
(150
)
 
$
1,940

 
$
1

 
$
1,941

Shares issued / (surrendered) under incentive compensation plan
 

 

 
15

 

 
(2
)
 

 
(1
)
 
(3
)
 

 
(3
)
Share-based compensation
 

 

 

 

 
9

 

 

 
9

 

 
9

Dividends to non-controlling interests
 

 

 

 

 

 

 

 

 

 

Net loss
 

 

 

 

 

 
(64
)
 

 
(64
)
 

 
(64
)
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2019
 
1,000

 
$

 
91,061

 
$
1

 
$
1,100

 
$
575

 
$

 
$
1,676

 
$
2

 
$
1,678

Shares issued under incentive compensation plan
 

 

 
26

 

 
1

 

 

 
1

 

 
1

Share-based compensation
 

 

 

 

 
5

 

 

 
5

 

 
5

Net income (loss)
 

 

 

 

 

 
84

 

 
84

 
(1
)
 
83

Balance at September 30, 2019
 
1,000

 
$

 
91,087

 
$
1

 
$
1,106

 
$
659

 
$

 
$
1,766

 
$
1

 
$
1,767


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


6


MR. COOPER GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions of dollars)
 
Successor
 
 
Predecessor
 
Nine Months Ended September 30, 2019
 
Two Months Ended September 30, 2018
 
 
Seven Months Ended July 31, 2018
Operating Activities
 
 
 
 
 
 
Net (loss) income attributable to Successor/Predecessor
$
(189
)
 
$
1,020

 
 
$
154

Adjustments to reconcile net (loss) income to net cash attributable to operating activities:
 
 
 
 
 
 
Deferred tax benefit
(53
)
 
(931
)
 
 

Net loss attributable to non-controlling interests
(2
)
 

 
 

Net gain on mortgage loans held for sale
(788
)
 
(83
)
 
 
(295
)
Interest income on reverse mortgage loans
(241
)
 
(72
)
 
 
(274
)
Gain on sale of assets

 

 
 
(9
)
MSL related increased obligation

 

 
 
59

Provision for servicing reserves
53

 
14

 
 
70

Fair value changes and amortization/accretion of mortgage servicing rights/liabilities
998

 
(27
)
 
 
(177
)
Fair value changes in excess spread financing
(190
)
 
26

 
 
81

Fair value changes in mortgage servicing rights financing liability
15

 

 
 
16

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

 
 

Amortization of premiums, net of discount accretion
(38
)
 
3

 
 
8

Depreciation and amortization for property and equipment and intangible assets
67

 
15

 
 
33

Share-based compensation
14

 
2

 
 
17

Other loss
5

 

 
 
3

Repurchases of forward loan assets out of Ginnie Mae securitizations
(1,823
)
 
(223
)
 
 
(544
)
Mortgage loans originated and purchased for sale, net of fees
(27,673
)
 
(3,458
)
 
 
(12,328
)
Sales proceeds and loan payment proceeds for mortgage loans held for sale and held for investment
27,916

 
3,546

 
 
13,392

Changes in assets and liabilities:
 
 
 
 
 
 
Advances and other receivables
265

 
76

 
 
377

Reverse mortgage interests
1,700

 
442

 
 
1,601

Other assets
8

 
(15
)
 
 
(41
)
Payables and other liabilities
(69
)
 
(159
)
 
 
151

Net cash attributable to operating activities
(28
)
 
176

 
 
2,294

 
 
 
 
 
 
 
Investing Activities
 
 
 
 
 
 
Acquisitions, net of cash acquired
(85
)
 
(33
)
 
 

Property and equipment additions, net of disposals
(38
)
 
(14
)
 
 
(40
)
Purchase of forward mortgage servicing rights, net of liabilities incurred
(454
)
 
(63
)
 
 
(134
)
Net payment related to acquisition of HECM related receivables

 

 
 
(1
)
Proceeds on sale of forward and reverse mortgage servicing rights
298

 
60

 
 

Proceeds on sale of assets

 

 
 
13

Net cash attributable to investing activities
(279
)
 
(50
)
 
 
(162
)

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

7


MR. COOPER GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(millions of dollars)
 
Successor
 
 
Predecessor
 
Nine Months Ended September 30, 2019
 
Two Months Ended September 30, 2018
 
 
Seven Months Ended July 31, 2018
Financing Activities
 
 
 
 
 
 
Increase (decrease) in warehouse facilities
1,930

 
186

 
 
(585
)
(Decrease) increase in advance facilities
(95
)
 
46

 
 
(305
)
Repayment of notes payable
(294
)
 

 
 

Proceeds from issuance of HECM securitizations
398

 

 
 
759

Proceeds from sale of HECM securitizations
20

 

 
 

Repayment of HECM securitizations
(568
)
 
(91
)
 
 
(448
)
Proceeds from issuance of participating interest financing in reverse mortgage interests
220

 
45

 
 
208

Repayment of participating interest financing in reverse mortgage interests
(1,472
)
 
(403
)
 
 
(1,599
)
Proceeds from the issuance of excess spread financing
469

 
84

 
 
70

Repayment of excess spread financing
(19
)
 
(21
)
 
 
(3
)
Settlement of excess spread financing
(163
)
 
(31
)
 
 
(105
)
Repayment of nonrecourse debt – legacy assets
(29
)
 
(3
)
 
 
(7
)
Repurchase of unsecured senior notes

 

 
 
(62
)
Repayment of finance lease liability
(3
)
 

 
 

Redemption and repayment of unsecured senior notes

 
(1,030
)
 
 

Surrender of shares relating to stock vesting
(1
)
 

 
 
(9
)
Debt financing costs
(5
)
 
(1
)
 
 
(24
)
Dividends to non-controlling interests

 

 
 
(1
)
Net cash attributable to financing activities
388

 
(1,219
)
 
 
(2,111
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
81

 
(1,093
)
 
 
21

Cash, cash equivalents, and restricted cash - beginning of period
561

 
1,623

 
 
575

Cash, cash equivalents, and restricted cash - end of period(1)
$
642

 
$
530

 
 
$
596

 
 
 
 
 
 
 
Supplemental Disclosures of Cash Activities
 
 
 
 
 
 
Cash paid for interest expense
$
166

 
$
135

 
 
$
417

Net cash (refunded) paid for income taxes
$
(4
)
 
$

 
 
$
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
 
Nine Months Ended September 30, 2019
 
Two Months Ended September 30, 2018
 
 
Seven Months Ended July 31, 2018
Cash and cash equivalents
$
371

 
$
198

 
 
$
166

Restricted cash
271

 
332

 
 
430

Total cash, cash equivalents, and restricted cash
$
642

 
$
530

 
 
$
596


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

8



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 consumers. The Company’s corporate website is located at www.mrcoopergroup.com. The Company has provided a glossary of terms, which defines certain industry-specific and other terms that are used herein, in the MD&A section of this Form 10-Q.

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 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.

9



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.

Reclassification
Certain reclassifications have been made in the 2018 consolidated financial statements to conform to 2019 presentation. Such reclassifications did not affect total revenues or net income.

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.


10


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. The new standard will reflect management’s best estimate of all expected credit losses for the Company’s financial assets that are recognized at amortized cost. 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 implementation of the new standard. The guidance is effective in first quarter 2020 with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The Company is currently evaluating the potential impact of ASU 2016-13 on its consolidated financial statements.

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 guidance will not have a material impact to the disclosures currently provided by the Company.


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.

11



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

Estimated 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. Preliminary goodwill totaled $40 after taking into account these measurement period adjustments.

The Company incurred total acquisition costs of $4 during the nine months ended September 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. There were no acquisition costs incurred by the Company in the three months ended September 30, 2019.

For the three and nine months ended September 30, 2019, the operations contributed by this acquisition generated total revenues of $95 and $213 and income before income tax of $58 and $108, 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 nine months ended September 30, 2019, as if the acquisition had occurred on January 1, 2019.
 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
Pro forma total revenues
$
618

 
$
1,286

 
 
 
 
Pro forma net income (loss)
$
83

 
$
(188
)

12



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


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.

13



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.


14


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 September 30, 2019 after taking into account these measurement period adjustments.

WMIH incurred total acquisition costs of $92 prior to the consummation of the Merger. 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.

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 Company’s consolidated statements of operations were $7 of acquisition costs related to the compensation arrangements incurred by the Company related to the Merger for the 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 acquisition 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 (loss) income
$
(20
)
 
$
156


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 contingent consideration dependent on the achievement of certain future performance targets, which was 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 contingent consideration was remeasured at September 30, 2019 and was determined to have zero fair value. The changes in the fair value of $4 and $15 were included in other income (expenses) within the consolidated statements of operations for the three and nine months ended September 30, 2019, respectively.



15


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
September 30, 2019
 
December 31, 2018
Forward MSRs - fair value
$
3,339

 
$
3,665

Reverse MSRs - amortized cost
7

 
11

Mortgage servicing rights
$
3,346

 
$
3,676

 
 
 
 
Mortgage servicing liabilities - amortized cost
$
69

 
$
71

 
 
 
 
Excess spread financing - fair value
$
1,281

 
$
1,184

Mortgage servicing rights financing - fair value
47

 
32

MSR related liabilities - nonrecourse at fair value
$
1,328

 
$
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
Nine Months Ended September 30, 2019
 
Two Months Ended September 30, 2018
 
 
Seven Months Ended July 31, 2018
Fair value - beginning of period
$
3,665

 
$
3,413

 
 
$
2,937

Additions:
 
 
 
 
 
 
Servicing retained from mortgage loans sold
298

 
43

 
 
162

Purchases of servicing rights(1)
732

 
72

 
 
144

Dispositions:
 
 
 
 
 
 
Sales of servicing assets(2)
(317
)
 
(63
)
 
 
4

Changes in fair value:
 
 
 
 
 
 
Changes in valuation inputs or assumptions used in the valuation model
(716
)
 
65

 
 
330

Other changes in fair value
(323
)
 
(45
)
 
 
(164
)
Fair value - end of period
$
3,339

 
$
3,485

 
 
$
3,413


(1) 
Purchases of servicing rights during the nine months ended September 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 unpaid principal balance in mortgages. The related servicing rights were subsequently purchased on May 1, 2019, resulting in additional $253 servicing rights during the second quarter of 2019.
(2) 
Amount for the seven months ended July 31, 2018 is related to the sale of MSRs collateralized by 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. During the nine months ended September 30, 2019 and two months ended September 30, 2018, the Company sold $25,639 and $5,947 in unpaid principal balance (“UPB”) of forward MSRs, of which $20,560 and none were retained by the Company as subservicer, respectively. During the seven months ended July 31, 2018, the Predecessor sold $1,203 in UPB of forward MSRs, of which $1 in UPB was retained by the Predecessor as subservicer.


16


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 or transfer. 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
 
September 30, 2019
 
December 31, 2018
MSRs - Sensitivity Pools
UPB
 
Fair Value
 
UPB
 
Fair Value
Credit sensitive
$
157,898

 
$
1,661

 
$
135,752

 
$
1,495

Interest sensitive
148,783

 
1,678

 
159,729

 
2,170

Total
$
306,681

 
$
3,339

 
$
295,481

 
$
3,665


The Company used the following key weighted-average inputs and assumptions in estimating the fair value of MSRs.
 
Successor
 
September 30, 2019
 
December 31, 2018
Credit Sensitive
 
 
 
Discount rate
10.4
%
 
11.3
%
Prepayment speeds
13.2
%
 
11.8
%
Average life
5.9 years

 
6.4 years

 
 
 
 
Interest Sensitive
 
 
 
Discount rate
9.0
%
 
9.3
%
Prepayment speeds
14.6
%
 
10.0
%
Average life
5.4 years

 
7.0 years

 
 
 
 
Total MSR Portfolio
 
 
 
Discount rate
9.7
%
 
10.2
%
Prepayment speeds
13.9
%
 
10.8
%
Average life
5.6 years

 
6.7 years



17


The following table shows the hypothetical effect on the fair value of the Company’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
September 30, 2019
 
 
 
 
 
 
 
Mortgage servicing rights
$
(117
)
 
$
(226
)
 
$
(164
)
 
$
(316
)
 
 
 
 
 
 
 
 
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 $23,990 and $28,415 as of September 30, 2019 and December 31, 2018, respectively. Mortgage servicing liabilities (“MSL”) had an ending balance of $69 and $71 as of September 30, 2019 and December 31, 2018, respectively. For the nine months ended September 30, 2019 and two months ended September 30, 2018, the Company accreted $39 and $7 of the MSL, respectively. In addition, the Company recorded an MSL adjustment of $37 during the nine months ended September 30, 2019. 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. For the seven months ended July 31, 2018, the Predecessor accreted $11 of the MSL and recorded an impairment of $56 in general and administrative expenses. Accretion recorded by the Predecessor relates to previous portfolio acquisitions.

Reverse MSR had an ending balance of $7 and $11 as of September 30, 2019 and December 31, 2018, respectively. For the nine months ended September 30, 2019, the Company amortized $2 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 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 an impairment of $4.

The fair value of the reverse MSR was $7 and $11 as of September 30, 2019 and December 31, 2018, respectively. The fair value of the MSL was $41 and $53 as of September 30, 2019 and December 31, 2018, respectively. Management evaluates reverse MSRs and MSLs each reporting period for impairment. Based on management’s assessment at September 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 third parties and 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 third parties 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.


18


The Company used the following weighted-average assumptions in the Company’s valuation of excess spread financing.
 
Successor
 
September 30, 2019
 
December 31, 2018
Excess Spread Financing Assumptions
 
 
 
Discount rate
11.9
%
 
10.4
%
Prepayment speeds
13.3
%
 
11.0
%
Recapture rate
22.3
%
 
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
September 30, 2019
 
 
 
 
 
 
 
Excess spread financing
$
42

 
$
87

 
$
44

 
$
93

 
 
 
 
 
 
 
 
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
September 30, 2019
 
December 31, 2018
Advance financing rates
3.7
%
 
4.2
%
Annual advance recovery rates
18.7
%
 
19.0
%


19


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 September 30, 2019
 
Nine Months Ended September 30, 2019
 
Two Months Ended September 30, 2018
 
 
One Month Ended July 31, 2018
 
Seven Months Ended July 31, 2018
Contractually specified servicing fees(1)
$
305

 
$
893

 
$
163

 
 
$
79

 
$
574

Other service-related income(1)(2)
51

 
133

 
18

 
 
10

 
66

Incentive and modification income(1)
12

 
29

 
8

 
 
4

 
37

Late fees(1)
30

 
82

 
14

 
 
7

 
53

Reverse servicing fees
7

 
24

 
13

 
 
4

 
37

Mark-to-market adjustments(3)
(83
)
 
(607
)
 
24

 
 
25

 
196

Counterparty revenue share(4)
(86
)
 
(204
)
 
(26
)
 
 
(16
)
 
(111
)
Amortization, net of accretion(5)
(73
)
 
(152
)
 
(31
)
 
 
(16
)
 
(112
)
Total servicing revenue
$
163

 
$
198

 
$
183

 
 
$
97

 
$
740


(1) 
Amounts include subservicing related revenues.
(2) 
Amount for the nine months ended September 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 was $18, $46, and $13 for the three and nine months ended September 30, 2019 and two months ended September 30, 2018, respectively. The impact of negative modeled cash flows for the Predecessor totaled $4 and $38 for the one and seven months ended July 31, 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 $77 and $172 and MSL accretion of $10 and $39 for the three and nine months ended September 30, 2019, respectively. Amortization for the Company is net of excess spread accretion of $22 for the two months ended September 30, 2018. Amortization of the Predecessor is net of excess spread of $11 and $78 for the one and seven months ended July 31, 2018, respectively. 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
 
September 30, 2019
 
December 31, 2018
Servicing advances, net of $148 and $205 discount, respectively
$
865

 
$
1,000

Receivables from agencies, investors and prior servicers, net of $48 and $48 discount, respectively
232

 
241

Reserves
(130
)
 
(47
)
Total advances and other receivables, net
$
967

 
$
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.


20


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. Receivables from prior servicers totaled $101 and $94 for the Company’s forward loan portfolio at September 30, 2019 and December 31, 2018, respectively.

The following table sets forth the activities of the servicing reserves for advances and other receivables.
 
Successor
 
 
Predecessor
Reserves for Advances and Other Receivables
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
 
Two Months Ended September 30, 2018
 
 
One Month Ended July 31, 2018
 
Seven Months Ended July 31, 2018
Balance - beginning of period
$
98

 
$
47

 
$

 
 
$
294

 
$
284

Provision and other additions(1)
35

 
102

 
20

 
 
7

 
69

Write-offs
(3
)
 
(19
)
 

 
 
(4
)
 
(56