UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________________________________________________________________
  FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______                    
Commission file number: 001-14667

MRCOOPERGROUPLOGOSM.JPG
________________________________________________________________________________________________________

Mr. Cooper Group Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
91-1653725
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
8950 Cypress Waters Blvd, Coppell, TX
 
75019
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(469) 549-2000
Registrant’s telephone number, including area code
________________________________________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12(b)-2 of the Exchange Act.
Large Accelerated Filer
¨
Accelerated Filer
x
Non-Accelerated Filer
¨
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
Number of shares of common stock, $0.01 par value, outstanding as of November 2, 2018 was 90,813,598 .


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


2

PART I. Financial Information

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

 
 
$
215

Restricted cash
332

 
 
360

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

 
 
2,941

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

 
 
1,706

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

 
 
9,984

Mortgage loans held for sale at fair value
1,681

 
 
1,891

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

 
 
139

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

 
 
121

Deferred tax asset
934

 
 
—

Other assets
799

 
 
679

Total assets
$
17,728

 
 
$
18,036

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

 
 
$
1,874

Advance facilities, net
596

 
 
855

Warehouse facilities, net
2,888

 
 
3,285

Payables and accrued liabilities
1,342

 
 
1,239

MSR related liabilities - nonrecourse at fair value
1,123

 
 
1,006

Mortgage servicing liabilities
79

 
 
41

Other nonrecourse debt, net
7,165

 
 
8,014

Total liabilities
15,650

 
 
16,314

Commitments and contingencies (Note 18)


 
 


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

 
 
—

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

 
 
1

Additional paid-in-capital
1,093

 
 
1,131

Retained earnings
984

 
 
731

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

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

 
 
1,715

Non-controlling interests
—

 
 
7

Total stockholders' equity
2,078

 
 
1,722

Total liabilities and stockholders' equity
$
17,728

 
 
$
18,036

See accompanying notes to the consolidated financial statements.

3

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

 
 
$
120

 
$
252

 
$
901

 
$
748

Net gain on mortgage loans held for sale
83

 
 
44

 
154

 
295

 
465

Total revenues
342

 
 
164

 
406

 
1,196

 
1,213

Expenses:
 
 
 
 
 
 
 
 
 
 
Salaries, wages and benefits
139

 
 
69

 
183

 
426

 
557

General and administrative
136

 
 
173

 
185

 
519

 
547

Total expenses
275

 
 
242

 
368

 
945

 
1,104

Other income (expenses):
 
 
 
 
 
 
 
 
 
 
Interest income
90

 
 
48

 
159

 
333

 
437

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

 
 
—

 
(2
)
 
6

 
4

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

 
 
(83
)
 
12

 
202

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

 
48

 
(4
)
Net income (loss)
1,020

 
 
(64
)
 
7

 
154

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

 
 
—

 
—

 
—

 
1

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

 
 
(64
)
 
7

 
154

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

 
 
—

 
—

 
—

 
—

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

 
 
$
(64
)
 
$
7

 
$
154

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

 
 
$
(0.65
)
 
$
0.07

 
$
1.57

 
$
(0.11
)
Diluted
$
10.99

 
 
$
(0.65
)
 
$
0.07

 
$
1.55

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

4

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

 
$
—

 
97,497

 
$
1

 
$
1,122

 
$
701

 
$
(147
)
 
$
1,677

 
$
6

 
$
1,683

Shares issued / (surrendered) under incentive compensation plan
—

 
—

 
226

 
—

 
(3
)
 
—

 
(1
)
 
(4
)
 
—

 
(4
)
Share-based compensation
—

 
—

 
—

 
—

 
13

 
—

 
—

 
13

 
—

 
13

Dividends to non-controlling interests
—

 
—

 
—

 
—

 
(5
)
 
—

 
—

 
(5
)
 
—

 
(5
)
Net income (loss)
—

 
—

 
—

 
—

 
—

 
(11
)
 
—

 
(11
)
 
1

 
(10
)
Balance at September 30, 2017
—

 
$
—

 
97,723

 
$
1

 
$
1,127

 
$
690

 
$
(148
)
 
$
1,670

 
$
7

 
$
1,677

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
—

 
$
—

 
97,728

 
$
1

 
$
1,131

 
$
731

 
$
(148
)
 
$
1,715

 
$
7

 
$
1,722

Shares issued / (surrendered) under incentive compensation plan
—

 
—

 
450

 
—

 
(6
)
 
—

 
(3
)
 
(9
)
 
—

 
(9
)
Share-based compensation
—

 
—

 
—

 
—

 
17

 
—

 
—

 
17

 
—

 
17

Dividends to non-controlling interests
—

 
—

 
—

 
—

 
5

 
—

 
—

 
5

 
(6
)
 
(1
)
Net income
—

 
—

 
—

 
—

 
—

 
154

 
—

 
154

 
—

 
154

Balance at July 31, 2018
—

 
$
—

 
98,178

 
$
1

 
$
1,147

 
$
885

 
$
(151
)
 
$
1,882

 
$
1

 
$
1,883

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Successor
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at August 1, 2018
1,000

 
$
—

 
90,806

 
$
1

 
$
1,091

 
$
(36
)
 
$
—

 
$
1,056

 
$
—

 
$
1,056

Shares issued under incentive compensation plan
—

 
—

 
5

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Share-based compensation
—

 
—

 
—

 
—

 
2

 
—

 
—

 
2

 
—

 
2

Net income
—

 
—

 
—

 
—

 
—

 
1,020

 
—

 
1,020

 
—

 
1,020

Balance at September 30, 2018
1,000

 
$
—

 
90,811

 
$
1

 
$
1,093

 
$
984

 
$
—

 
$
2,078

 
$
—

 
$
2,078


See accompanying notes to the consolidated financial statements.

5

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

 
 
$
154

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

 
—

Net income attributable to non-controlling interests
—

 
 
—

 
1

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

 
 
(9
)
 
(8
)
MSL related increased obligation
—

 
 
59

 
—

Provision for servicing reserves
14

 
 
70

 
97

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

Fair value changes in excess spread financing
26

 
 
81

 
—

Fair value changes in mortgage servicing rights financing liability
—

 
 
16

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

 
 
8

 
63

Depreciation and amortization for property and equipment and intangible assets
15

 
 
33

 
44

Share-based compensation
2

 
 
17

 
13

Other loss
—

 
 
3

 
5

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

 
 
13,392

 
15,472

Excess tax deficiency from share-based compensation
—

 
 
—

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

 
 
377

 
71

Reverse mortgage interests
442

 
 
1,601

 
1,226

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

 
(284
)
Net cash attributable to operating activities
176

 
 
2,294

 
1,246

 
 
 
 
 
 
 
Investing Activities
 
 
 
 
 
 
Acquisition, net of cash acquired
(33
)
 
 
—

 
—

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

 
 
(1
)
 
—

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

 
 
—

 
16

Proceeds on sale of forward and reverse mortgage servicing rights
60

 
 
—

 
25

Proceeds on sale of assets
—

 
 
13

 
16

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

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

6

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

 
 
(585
)
 
351

Increase (decrease) in advance facilities
46

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

 
 
759

 
706

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

 
 
208

 
437

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

 
 
70

 
—

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

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

 
—

Surrender of shares relating to stock vesting
—

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

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

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

 
 
575

 
877

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

 
 
$
596

 
$
580

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

 
 
$
417

 
$
577

Net cash paid for income taxes
$
—

 
 
$
36

 
$
92

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

 
 
$
166

 
$
224

Restricted cash
332

 
 
430

 
356

Total cash, cash equivalents, and restricted cash
$
530

 
 
$
596

 
$
580

See accompanying notes to the consolidated financial statements.  

7


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

1. Nature of Business and Basis of Presentation

Nature of Business

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

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

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

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

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

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

The consolidated interim financial statements of the Company and Predecessor have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the SEC. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's and Predecessor's Annual Reports on Form 10-K for the year ended December 31, 2017 .

8


The interim consolidated financial statements are unaudited; however, in the opinion of management, all adjustments considered necessary for a fair presentation of the results of the interim periods have been included. Dollar amounts are reported in millions, except per share data and other key metrics, unless otherwise noted.

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

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

The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, other entities in which the Company has a controlling financial interest and those variable interest entities ("VIE") where the Company's wholly-owned subsidiaries are the primary beneficiaries. Assets and liabilities of VIEs and their respective results of operations are consolidated from the date that the Company became the primary beneficiary through the date the Company ceases to be the primary beneficiary. The Company applies the equity method of accounting to investments where it is able to exercise significant influence, but not control, over the policies and procedures of the entity and owns less than 50% of the voting interests. Investments in certain companies over which the Company does not exert significant influence are accounted for as cost method investments. Intercompany balances and transactions on consolidated entities have been eliminated.

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

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

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

Recent Accounting Guidance Adopted

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

Accounting Standards Update No. 2014-09, 2016-08, 2016-10, 2016-12 and 2016-20, collectively implemented as Financial Accounting Standard Board ("FASB") Accounting Standards Codification ("ASC") Topic 606 ("ASC 606") Revenue from Contracts with Customers, provides guidance for revenue recognition. This ASC’s core principle requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects consideration to which the company expects to be entitled in exchange for those goods or services. The standard also clarifies the principal versus agent considerations, providing that the evaluation must focus on whether the entity has control of the goods or services before they are transferred to the customer. The new standard permits the use of either the modified retrospective or full retrospective transition method. The Company's revenue is generated from loan servicing, loan originations and services provided by Xome. Servicing revenue is comprised of servicing fees and other ancillary fees in connection with the Company's servicing activities as well as fees earned under subservicing arrangements. Origination revenue is comprised of fee income earned at origination of a loan, interest income earned for the period the loans are held and gain on sale on loans upon disposition of the loan. Xome's revenue is comprised of income earned from real estate exchange, real estate services and real estate software as a service. The Company has performed a review of the new guidance as compared to its current accounting policies and evaluated all services rendered to its customers as well as underlying contracts to determine the impact of this standard to its revenue recognition process. The majority of services rendered by the Company in connection with originations and servicing are not within the scope of ASC 606. However, all revenues from Xome fall within the scope of ASC 606. Xome's operations are comprised of Exchange, Services and Software as a Service ("SaaS"), as discussed below.


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

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

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

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

Accounting Standards Update No. 2016-15, Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"), relates to the Statement of Cash Flows (Topic 230) and is intended to provide specific guidance to reduce diversity in practice. ASU 2016-15 addresses the following eight cash flow classification issues: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of life insurance claims, (5) proceeds from the settlement of corporate owned life insurance policies, including bank-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in securitization transactions and (8) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. Nationstar adopted ASU 2016-15 in the first quarter of 2018 and determined that the implementation of this standard had no impact on its consolidated statement of cash flows of the Predecessor and Successor.

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

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


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Recent Accounting Guidance Not Yet Adopted
Accounting Standards Update No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), No.2018-10, Codification Improvements to Topic 842, Leases ("ASU 2018-10"), and No. 2018-11, Leases (Topic 842): Targeted Improvements ("ASU 2018-11"), primarily impact lessee accounting by requiring the recognition of a right-of-use asset and a corresponding lease liability on the balance sheet for long-term lease agreements. ASU 2016-02 requires the recognition of a lease liability that is equal to the present value of all reasonably certain lease payments. The right-of-use asset will be based on the liability, subject to adjustment for initial direct costs. Lease agreements with terms 12 months or less are permitted to be excluded from the balance sheet. In general, leases will be amortized on a straight-line basis with the exception of finance lease agreements. ASU 2018-10 and ASU 2018-11 affect narrow aspects of the guidance issued in the amendments in ASU 2016-02. ASU 2018-11 specifically relieves companies of the requirement to present prior comparative years' results when they adopt ASU 2016-02 and gives companies the option to recognize the cumulative effect of applying ASU 2016-02 to lease assets and liabilities as an adjustment to the opening balance of retained earnings. ASU 2016-02, ASU 2018-10, and ASU 2018-11 are effective for the Company for its interim periods beginning after December 15, 2018, with early adoption permitted. The Company currently plans to adopt this standard in the first quarter of 2019 using the modified retrospective approach and will recognize a cumulative-effect adjustment to the opening balance of retained earnings in that period. The Company will elect an optional practical expedient to retain its current classification of leases. Based on the current lease portfolio, the Company anticipates recognizing a lease liability and related right-of-use asset on the balance sheet. However, the impact of the adoption of the standard will depend on the Company's lease portfolio as of adoption date and is not expected to have a material impact on the statement of operations. 
Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326) ("ASU 2016-13"), requires expected credit losses for financial instruments held at the reporting date to be measured based on historical experience, current conditions and reasonable and supportable forecasts. The update eliminates the probable initial recognition threshold in current GAAP and instead reflects an entity’s current estimate of all expected credit losses. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss. ASU 2016-13 is effective for interim periods beginning after December 15, 2019. The Company is currently evaluating the potential impact of ASU 2016-13 on its consolidated financial statements.

Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in today’s two-step impairment test under ASC Topic 350, Intangibles - Goodwill and Other . ASU 2017-04 is effective for the Company for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. ASU 2017-04 will be adopted prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the potential impact of ASU 2017-04 on its consolidated financial statements.


2. Significant Accounting Policies

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

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

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


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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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


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

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

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

The Company utilizes internal models to estimate reserves for loan origination activities based upon its expectation of future defaults and the historical defect rate for government insured loans and is based upon judgments and assumptions which can be influenced by many factors and may change over the life of the underlying loans, including: (i) historical loss rate, (ii) secondary market pricing of loans; (iii) home prices and the levels of home equity; (iv) the quality of Company's underwriting procedures; (v) borrower delinquency and default patterns; and (vi) other Company-specific and macro-economic factors. On a quarterly basis, management corroborates these assumptions using third-party data, where applicable.
Reserves for Forward Servicing Activity
In connection with forward loan servicing activities, the Company records reserves primarily for the recoverability of advances, interest claims and mortgage insurance claims. Reserves for advances and other receivables associated with loans in the MSR portfolio are considered within the MSR valuation, and the provision expense for such advances is recorded in the mark-to-market adjustment in service related revenue. Such valuation gives consideration to the expected cash outflows and inflows for advances and other receivables in accordance with the fair value framework. Reserves for advances and other receivables on loans transferred out of the MSR portfolio are established within advances and other receivables, net. As loans serviced transfer out of the MSR portfolio, any negative MSR value associated with the loans transferred is reclassified from the MSR to the reserve within advances and other receivables, net, to the extent such reserves continue to be required for balances remaining on the consolidated balance sheets. Management evaluates reserves for sufficiency each reporting period, and any additional reserve requirements or releases to reserves are recorded as a provision in general and administrative expense, as needed.
The Company records reserves for advances and other receivables and evaluates the sufficiency of such reserves through internal models considering both historical and expected recovery rates on claims filed with government agencies, government sponsored enterprises, vendors, prior servicer and other counterparties. Key assumptions used in the model include but are not limited to expected recovery rates by loan types and aging of the receivable. Recovery of advances and other receivables is subject to significant judgment and estimates based on the Company's assessment of its compliance with servicing guidelines, its ability to produce the necessary documentation to support claims, its ability to support amounts from prior servicers and to effectively negotiate settlements, as needed. Management reviews recorded advances and other receivables, and upon determination that no further recourse for recovery is available from all means known to management, the recorded balances associated with these receivables are written-off against the reserve.

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Reserves for Reverse Mortgage Interests
The Company records an allowance for reserves related to reverse mortgage interests based on unrecoverable costs and estimates of probable loss exposures. The Company estimates reserve requirements upon the realization of a triggering event indicating a probable loss exposure. Internal and external models are utilized to estimate loss exposures at the loan level associated with the Company's ability to meet servicing guidelines set forth by regulatory agencies and GSEs. Key assumptions within the models include but are not limited to expected recovery rates by loan and borrower characteristics, foreclosure timelines, value of underlying collateral, future carrying and foreclosure costs, and other macro-economic factors. If the calculated reserve requirements exceed the recorded allowance for reserves and acquired discounts, a provision is recorded to general and administrative expense, as needed. Releases to reserves are also recorded against provision in general and administrative expenses. Reserve requirements are subject to significant judgment and estimates based on the Company's assessment of its compliance with servicing guidelines, its ability to produce the necessary documentation to support claims, its ability to support amounts from prior servicers and to effectively negotiate settlements, as needed. Each period, management reviews recorded reverse mortgage interests, and upon determination that no further recourse for recovery is available from all means known to management, the recorded balances associated with these receivables are written-off against the reserve at the loan level.

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

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

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

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

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


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

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

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

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

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

17


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

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

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

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

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

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

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

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

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

18

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

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

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

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

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

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

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

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

19


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

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

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


3. Acquisitions

Acquisition of Nationstar Mortgage Holdings Inc.

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

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

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

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

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

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

20

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

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

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

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

Purchase price from common stock issued
551

Purchase price from cash payment
1,226

Total purchase price
$
1,777


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


21

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

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

Restricted cash
430

Mortgage servicing rights
3,428

Advances and other receivables
1,262

Reverse mortgage interests
9,225

Mortgage loans held for sale
1,514

Mortgage loans held for investment
125

Property and equipment
96

Derivative financial instruments
64

Other assets
548

Fair value of assets acquired
16,858

Unsecured senior notes
1,830

Advance facilities
551

Warehouse facilities
2,701

Payables and accrued liabilities
1,365

MSR related liabilities—nonrecourse
1,065

Mortgage servicing liabilities
86

Derivative financial instruments
3

Other nonrecourse debt
7,583

Fair value of liabilities assumed
15,184

Total fair value of net tangible assets acquired
1,674

Intangible assets (1)
103

Preliminary goodwill
—

 
$
1,777


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

Tradename (ii)
5
 
8

Technology (ii)
3-5
 
11

Internally developed software (iii)
2
 
23

Total
 
 
$
103


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

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

22


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

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

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

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

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

 
$
1,538

 
 
 
 
Pro forma net income
$
(20
)
 
$
156


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

Acquisition of Assurant Mortgage Solutions Group

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



23

4. Mortgage Servicing Rights and Related Liabilities

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

 
$
2,937

Reverse MSRs - amortized cost
15

 
4

Mortgage servicing rights
$
3,500

 
$
2,941

 
 
 
 
Mortgage servicing liabilities - amortized cost
$
79

 
$
41

 
 
 
 
Excess spread financing - fair value
$
1,097

 
$
996

Mortgage servicing rights financing - fair value
26

 
10

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

 
$
1,006


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

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

 
 
$
2,937

 
$
3,160

Additions:
 
 
 
 
 
 
Servicing retained from mortgage loans sold
43

 
 
162

 
151

Purchases of servicing rights
72

 
 
144

 
30

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

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

 
 
330

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

 
 
$
3,413

 
$
2,956


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

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


24

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

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

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

 
$
1,652

 
$
167,605

 
$
1,572

Interest sensitive
129,789

 
1,833

 
113,775

 
1,365

Total
$
274,486

 
$
3,485

 
$
281,380

 
$
2,937


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

 
5.7 years

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

 
6.7 years


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

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


25

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

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

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

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

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

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


26

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

 
$
92

 
$
33

 
$
68

Predecessor
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Excess spread financing
$
37

 
$
78

 
$
34

 
$
71


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

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

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

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


27

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

 
 
$
79

 
$
251

 
$
574

 
$
759

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

 
 
10

 
40

 
66

 
126

Incentive and modification income (1)
8

 
 
4

 
19

 
37

 
63

Late fees (1)
14

 
 
7

 
22

 
53

 
67

Reverse servicing fees
13

 
 
4

 
16

 
37

 
43

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

 
 
25

 
(44
)
 
196

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

 
 
$
97

 
$
191

 
$
740

 
$
537


(1) Amounts include subservicing related revenues.
(2) In the fourth quarter of 2017, the Predecessor reevaluated presentation of adjustments related to certain Ginnie Mae early buyout activities and reclassified $4 and $16 from other service-related income to mark-to-market adjustments for the three and nine months ended September 30, 2017 , respectively. Total servicing revenue was not affected by this reclassification adjustment.
(3) Mark-to-market ("MTM") adjustments include fair value adjustments on MSR, excess spread financing and MSR financing liabilities. The amount of MSR MTM reflected is net of cumulative incurred losses related to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio, and these incurred losses have been transferred to reserves on advances and other receivables. These cumulative incurred losses for the Company totaled $13 for the two months ended September 30, 2018 . These cumulative incurred losses for the Predecessor totaled $4 and $38 for the one and seven months ended July 31, 2018 , respectively, and $15 and $53 for the three and nine months ended September 30, 2017 , respectively.
(4) Counterparty revenue share represents the excess servicing fee that the Company pays to the counterparties under the excess spread financing arrangements and the payments made associated with MSRs financing arrangements.
(5) Amortization is net of excess spread accretion of $22 for the two months ended September 30, 2018 , $11 and $78 for the one and seven months ended July 31, 2018 , respectively, and $41 and $123 for the three and nine months ended September 30, 2017 , respectively.


5. Advances and Other Receivables, Net

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

 
$
1,599

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

 
391

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

 
$
1,706


The Company and Predecessor, as loan servicer, are contractually responsible to advance funds on behalf of the borrower and investor primarily for loan principal and interest, property taxes and hazard insurance and foreclosure costs. Advances are primarily recovered through reimbursement from the investor, proceeds from sale of loan collateral or mortgage insurance claims. Reserves for advances and other receivables on loans transferred out of the MSR portfolio are established within advances and other receivables.
The Company and Predecessor estimate and record an asset for estimated recoveries to be collected from prior servicers for their respective portion of the losses associated with the underlying loans that were not serviced in accordance with established guidelines.

28

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

 
 
$
294

 
$
236

 
$
284

 
$
184

Provision and other additions (1)
20

 
 
7

 
30

 
69

 
106

Write-offs
—

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

 
 
$
297

 
$
253

 
$
297

 
$
253


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

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

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

 
$
56

Accretion
(19
)
 
—

Balance - end of period
$
227

 
$
56



6. Reverse Mortgage Interests, Net

Reverse mortgage interests, net consists of the following.
 
Successor

 
Predecessor

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

 
$
7,107

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

 
912

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

 
2,080

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

 
$
9,984



29

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

Other Interests Securitized
Other interests securitized consist of reverse mortgage interests that no longer meet HMBS program eligibility criteria and have been repurchased out of HMBS. These reverse mortgage interests have subsequently been transferred to private securitization trusts and are accounted for as a secured borrowing. No such securitizations occurred during the two months ended September 30, 2018 . During the seven months ended July 31, 2018 , a total of $760 UPB was securitized through Trust 2018-1 and Trust 2018-2 and a total of $284 UPB from Trust 2016-2 and Trust 2016-3 were called and debt extinguished. Refer to Other Nonrecourse Debt in Note 10, Indebtedness , for additional information.

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

 
$
1,751

HECM related receivables
353

 
311

Funded borrower draws not yet securitized
68

 
82

REO related receivables
28

 
25

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

 
$
2,080


Unsecuritized interests include repurchased HECM loans for which the Company is required to repurchase from the HMBS pool when the outstanding principal balance of the HECM loan is equal to or greater than 98% of the maximum claim amount established at origination in accordance with HMBS program guidelines. The Company repurchased a total of $608 of HECM loans out of GNMA HMBS securitizations during the two months ended September 30, 2018 , of which $138 were subsequently assigned to a third party in accordance with applicable servicing agreements. The Predecessor repurchased a total of $2,439 and $3,270 of HECM loans out of GNMA HMBS securitizations during the seven months ended July 31, 2018 and nine months ended September 30, 2017 , respectively, of which $512 and $802 were subsequently assigned to a third party in accordance with applicable servicing agreements, respectively. To the extent a loan is not subject to applicable servicing agreements and assigned to a third party, the loan is either subject to assignment to HUD, per contractual obligations with GNMA, liquidated via a payoff from the borrower or liquidated via a foreclosure according to the terms of the underlying mortgage.

The Company also estimates and records an asset for probable recoveries from prior servicers for their respective portion of the losses associated with the underlying loans that were not serviced in accordance with established guidelines. Receivables from prior servicers totaled $25 and $22 for the Company and Predecessor's reverse loan portfolio at September 30, 2018 and December 31, 2017 , respectively.

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


30

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

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

 
 
$
117

 
$
149

 
$
115

 
$
131

Provision, net
1

 
 
12

 
22

 
32

 
44

Write-offs
—

 
 
—

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

 
 
$
129

 
$
88

 
$
129

 
$
88


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

 
$
(117
)
 
$
(161
)
Additions
—

 
—

 
—

Accretion/(Amortization)
(3
)
 
—

 
10

Balance - end of period
$
55

 
$
(117
)
 
$
(151
)


31

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
For the Period July 1 - July 31, 2018
 
Three Months Ended September 30, 2017
 
For the Period January 1 - July 31, 2018
 
Nine Months Ended September 30, 2017
Balance - beginning of period
$
(84
)
 
$
(43
)
 
$
(89
)
 
$
(43
)
Additions
—

 
(75
)
 
(7
)
 
(75
)
Accretion
2

 
22

 
14

 
22

Balance - end of period
$
(82
)
 
$
(96
)
 
$
(82
)
 
$
(96
)

Reverse Mortgage Interest Income
The Company accrues interest income for its participating interest in reverse mortgages based on the stated rates underlying HECM loans and FHA guidelines. Total interest earned on the Company's reverse mortgage interests was $72 for the two months ended September 30, 2018 . Total interest earned on the Predecessor's reverse mortgage interests was $38 and $274 for the one and seven months ended July 31, 2018 , respectively, and $137 and $370 for the three and nine months ended September 30, 2017 , respectively.


7. 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 focuses on assisting customers currently in the Company's servicing portfolio with refinancing of loans or new home purchases. Generally, all newly originated mortgage loans held for sale are securitized and transferred to GSEs or delivered to third-party purchasers shortly after origination on a servicing-retained basis.

Mortgage loans held for sale are recorded at fair value as set forth below.
 
Successor
 
Predecessor
 
September 30, 2018
 
December 31, 2017
Mortgage loans held for sale – UPB
$
1,639

 
$
1,837

Mark-to-market adjustment (1)
42

 
54

Total mortgage loans held for sale
$
1,681

 
$
1,891

(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
 
Predecessor
 
September 30, 2018
 
December 31, 2017
Mortgage Loans Held for Sale - UPB
UPB
 
Fair Value
 
UPB
 
Fair Value
Non-accrual
$
46

 
$
43

 
$
66

 
$
64



32

From time to time, the Company exercises its right to repurchase individual delinquent loans in Ginnie Mae securitization pools to minimize interest spread losses, to re-pool into new Ginnie Mae securitizations or to otherwise sell to third-party investors. During the two months ended September 30, 2018 , the Company repurchased $29 of delinquent Ginnie Mae loans and securitized or sold to third-party investors $32 of previously repurchased loans. During the seven months ended July 31, 2018 and the nine months ended September 30, 2017 , the Predecessor repurchased $118 and $236 of delinquent Ginnie Mae loans, respectively, and securitized or sold to third-party investors $154 and $253 of previously repurchased loans, respectively.
 
As of September 30, 2018 and 2017 , $58 and $59 of the repurchased loans have re-performed and were held in accrual status, respectively, and remaining balances continue to be held under a nonaccrual status.
The total UPB of mortgage loans held for sale for which the Company and the Predecessor have begun formal foreclosure proceedings was $33 and $51 as of September 30, 2018 and December 31, 2017 , respectively.
The following table details a roll forward of the change in the account balance of mortgage loans held for sale.
 
Successor
 
 
Predecessor
Mortgage loans held for sale
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Nine Months Ended September 30, 2017
Balance - beginning of period
$
1,514

 
 
$
1,891

 
$
1,788

Mortgage loans originated and purchased, net of fees
3,459

 
 
12,319

 
13,988

Loans sold
(3,508
)
 
 
(13,255
)
 
(15,107
)
Repurchase of loans out of Ginnie Mae securitizations
223

 
 
544

 
943

Transfer of mortgage loans held for sale to advances/accounts receivable, net related to claims (1)
(2
)
 
 
(7
)
 
(16
)
Net transfer of mortgage loans held for sale from REO in other assets (2)
4

 
 
14

 
20

Changes in fair value
(8
)
 
 
(1
)
 
16

Other purchase-related activities (3)
(1
)
 
 
9

 
14

Balance - end of period
$
1,681

 
 
$
1,514

 
$
1,646


(1) Amounts are comprised of claims made on certain government insured mortgage loans upon completion of the REO sale.
(2) Net amounts are comprised of REO in the sales process, which are transferred to other assets, and certain government insured mortgage REO, which are transferred from other assets upon completion of the sale so that the claims process can begin.
(3) Amounts are comprised primarily of non-Ginnie Mae loan purchases and buyouts.

For the two months ended September 30, 2018 , the Company received proceeds of $3,543 on the sale of mortgage loans held for sale, resulting in gains of $35 . For the one month ended July 31, 2018, the Predecessor received proceeds of $1,891 on the sale of mortgage loans held for sale, resulting in gains of $13 . For the seven months ended July 31, 2018 and the nine months ended September 30, 2017 , the Predecessor received proceeds of $13,382 and $15,470 , respectively, on the sale of mortgage loans held for sale, resulting in gains of $127 and $363 , respectively.

The Company has the right to repurchase any individual loan in a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. The majority of Ginnie Mae repurchased loans are repurchased solely with the intent to re-pool into new Ginnie Mae securitizations upon re-performance of the loan or to otherwise sell to third-party investors. Therefore, these loans are classified as held for sale. The amounts repurchased out of Ginnie Mae pools, as presented above, are primarily in connection with loan modifications and loan resolution activity as part of the Company's contractual obligations as the servicer of the loans.


33

Mortgage Loans Held for Investment
The following sets forth the composition of mortgage loans held for investment, net.
 
Successor
 
September 30, 2018
Mortgage loans held for investment, net – UPB
$
161

Fair value adjustments
(39
)
Total mortgage loans held for investment at fair value
$
122


 
Predecessor
 
December 31, 2017
Mortgage loans held for investment, net – UPB
$
193

Transfer discount:
 
Non-accretable
(41
)
Accretable
(12
)
Allowance for loan losses
(1
)
Total mortgage loans held for investment
$
139


The Predecessor recorded interest income on the transferred loans on a level-yield method. To maintain a level-yield on these transferred loans over the estimated extended life, the Predecessor reclassified to accretable yield discount approximately $1 of transfer discount designated as reserves for future loss for the seven months ended July 31, 2018 and nine months ended September 30, 2017 . No provision for reserves was required for the nine months ended September 30, 2017 , as the fair value of the underlying collateral exceeded the carrying value of the loans, net of the non-accretable discount.

The total UPB of mortgage loans held for investment on non-accrual status was as follows for the dates indicated.
 
Successor
 
September 30, 2018
Mortgage Loans Held for Investment - UPB
UPB
 
Fair Value
Non-accrual
$
32

 
$
15

The following table details a roll forward of the change in the account balance of mortgage loans held for investment.
 
Successor
Mortgage loans held for investment at fair value
For the Period August 1 - September 30, 2018
Balance - beginning of period
$
125

Payments received from borrowers
(2
)
Losses incurred
(1
)
Changes in fair value (1)
—

Balance - end of period
$
122


(1) The changes in fair value during the two months ended September 30, 2018 is less than $1 .

The total UPB of mortgage loans held for investment for which the Company and the Predecessor has begun formal foreclosure proceedings was $15 and $22 as of September 30, 2018 and December 31, 2017 , respectively.



34

8. Other Assets

Other assets consist of the following.
 
Successor
 
Predecessor
 
September 30, 2018
 
December 31, 2017
Loans subject to repurchase right from Ginnie Mae
$
231

 
$
218

Accrued revenues
144

 
148

Intangible assets
117

 
19

Derivative financial instruments at fair value
72

 
65

Prepaid expenses
31

 
27

REO, net
19

 
23

Deposits
15

 
19

Goodwill
3

 
72

Receivables from affiliates, net
—

 
6

Other
167

 
82

Total other assets
$
799

 
$
679

Loans Subject to Repurchase Right from Ginnie Mae
Forward loans are sold to Ginnie Mae in conjunction with the issuance of mortgage backed securities. The Company, as the issuer of the mortgage backed securities, has the unilateral right to repurchase any individual loan in a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. Once the Company has the unilateral right to repurchase a delinquent loan, it has effectively regained control over the loan and recognizes these rights to the loan on its consolidated balance sheets and establishes a corresponding repurchase liability regardless of the Company’s intention to repurchase the loan.

Derivative financial instruments at fair value
See Note 9, Derivative Financial Instrument , for further details.

Intangible assets
As discussed in Note 3, Acquisitions , in connection with the acquisitions of Nationstar and Assurant in 2018, the Company recorded intangible assets of $ 103 and $23 , respectively.

Goodwill
As discussed in Note 3, Acquisitions , in connection with the acquisition of Assurant in 2018, the Company recorded goodwill of $3 .

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

REO, Net
REO, net includes $9 and $15 of REO-related receivables with government insurance at September 30, 2018 and December 31, 2017 , respectively, limiting loss exposure to the Company and the Predecessor.

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


9. Derivative Financial Instrument

Derivative instruments utilized by the Company primarily include IRLCs, LPCs, forward MBS trades, Eurodollar and Treasury futures and interest rate swap agreements.


35

Associated with the Company and Predecessor's derivatives are $3 and $1 in collateral deposits on derivative instruments recorded in other assets on the Company and Predecessor's consolidated balance sheets as of September 30, 2018 and December 31, 2017 , respectively. The Company and the Predecessor do not offset fair value amounts recognized for derivative instruments with amounts collected and/or deposited on derivative instruments in its consolidated balance sheets.
The following table provides the outstanding notional balances, fair values of outstanding positions and recorded gains/(losses).
 
 
 
Successor
 
Predecessor
 
 
 
September 30, 2018
 
For the Period August 1 - September 30, 2018
 
For the Period January 1 - July 31, 2018
 
Expiration
Dates
 
Outstanding
Notional
 
Fair
Value
 
Recorded (Losses)/Gains
Assets
 
 
 
 
 
 
 
 
 
Mortgage loans held for sale
 
 
 
 
 
 
 
 
 
Loan sale commitments
2018
 
$
428

 
$
6.9

 
(3.7
)
 
10.5

Derivative financial instruments
 
 
 
 
 
 
 
 
 
IRLCs
2018
 
1,765

 
57.8

 
(1.8
)
 
0.4

Forward sales of MBS
2018
 
3,040

 
12.2

 
9.0

 
0.9

LPCs
2018
 
228

 
1.7

 
0.5

 
0.3

Treasury futures (1)
2018
 
65

 
—

 
—

 
(1.8
)
Eurodollar futures (1)
2018-2021
 
20

 
—

 
—

 
—

Liabilities
 
 
 
 
 
 
 
 
 
Derivative financial instruments
 
 
 
 
 
 
 
 
 
IRLCs (1)
2018
 
3

 
—

 
—

 
—

Forward sales of MBS
2018
 
413

 
0.5

 
(1.4
)
 
(1.0
)
LPCs
2018
 
320

 
1.5

 
0.9

 
0.1

Treasury futures
2018
 
53

 
0.1

 
0.1

 
(1.3
)
Eurodollar futures (1)
2020-2021
 
6

 
—

 
—

 
—



36

 
 
 
Predecessor
 
 
 
September 30, 2017
 
Nine Months Ended September 30, 2017
 
Expiration
Dates
 
Outstanding
Notional
 
Fair
Value
 
Recorded Gains/(Losses)
Assets
 
 
 
 
 
 
 
Mortgage loans held for sale
 
 
 
 
 
 
 
Loan sale commitments (1)
2017
 
$
1

 
$
0.1

 
$
—

Derivative financial instruments
 
 
 
 
 
 
 
IRLCs
2017
 
2,531

 
68.7

 
(23.5
)
Forward sales of MBS
2017
 
2,524

 
4.7

 
(34.5
)
LPCs
2017
 
132

 
1.0

 
(0.9
)
Treasury futures
2017
 
255

 
2.0

 
2.0

Eurodollar futures (1)
2017-2021
 
11

 
—

 
—

Interest rate swaps (1)
2017
 
—

 
—

 
(0.1
)
Liabilities
 
 
 
 
 
 
 
Derivative financial instruments
 
 
 
 
 
 
 
IRLCs (1)
2017
 
7

 
—

 
1.1

Forward sales of MBS
2017
 
1,137

 
3.2

 
6.8

LPCs
2017
 
335

 
1.2

 
0.3

Treasury futures
2017
 
479

 
2.0

 
(2.0
)
Eurodollar futures (1)
2017-2021
 
45

 
—

 
—

Interest rate swaps (1)
2017
 
—

 
—

 
0.1


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


37

10. Indebtedness

Notes Payable
 
 
 
 
 
 
 
 
 
 
Successor
 
Predecessor
 
 
 
 
 
 
 
 
 
 
September 30, 2018
 
December 31, 2017
Advance Facilities
 
Interest Rate
 
Maturity Date
 
Collateral
 
Capacity Amount
 
Outstanding
 
Collateral Pledged
 
Outstanding
 
Collateral pledged
Nationstar agency advance receivables trust
 
LIBOR+1.9% to 2.6%
 
November 2019
 
Servicing advance receivables
 
$
575

 
$
232

 
$
271

 
$
416

 
$
492

Nationstar mortgage advance receivable trust
 
LIBOR+1.5% to 6.5%
 
August 2021
 
Servicing advance receivables
 
325

 
264

 
333

 
230

 
287

Nationstar agency advance financing facility
 
LIBOR+1.9% to 7.4%
 
January 2019
 
Servicing advance receivables
 
150

 
67

 
78

 
102

 
117

MBS servicer advance facility (2014)
 
CPRATE+3.0%
 
January 2019
 
Servicing advance receivables
 
125

 
33

 
145

 
44

 
140

MBS advance financing facility
 
LIBOR + 2.5%
 
March 2019
 
Servicing advance receivables
 
—

 
—

 
—

 
63

 
64

Advance facilities principal amount
 
 
 
 
 
596

 
$
827

 
855

 
$
1,100

Unamortized debt issuance costs
 
 
 
 
 
—

 
 
 
—

 
 
Advance facilities, net
 
 
 
$
596



 
$
855

 

 
 
 
 
 
 
 
 
 
 
 
Successor
 
Predecessor
 
 
 
 
 
 
 
 
 
 
September 30, 2018
 
December 31, 2017
Warehouse Facilities
 
Interest Rate
 
Maturity Date
 
Collateral
 
Capacity Amount
 
Outstanding
 
Collateral Pledged
 
Outstanding
 
Collateral pledged
$1,200 warehouse facility
 
LIBOR+1.9% to 3.8%
 
November 2018
 
Mortgage loans or MBS
 
$
1,200

 
$
664

 
$
730

 
$
889

 
$
960

$1,000 warehouse facility
 
LIBOR+1.6% to 2.5%
 
September 2019
 
Mortgage loans or MBS
 
1,000

 
220

 
225

 
299

 
308

$950 warehouse facility
 
LIBOR+2.0% to 3.5%
 
November 2018
 
Mortgage loans or MBS
 
950

 
661

 
735

 
721

 
785

$600 warehouse facility
 
LIBOR+2.5%
 
February 2019
 
Mortgage loans or MBS
 
600

 
263

 
285

 
333

 
347

$500 warehouse facility
 
LIBOR+1.5% to 2.8%
 
August 2019
 
Mortgage loans or MBS
 
500

 
160

 
164

 
233

 
239

$500 warehouse facility
 
LIBOR+1.8% to 2.8%
 
November 2018
 
Mortgage loans or MBS
 
500

 
291

 
320

 
305

 
337

$500 warehouse facility
 
LIBOR+2.0% to 3.5%
 
April 2019
 
Mortgage loans or MBS
 
500

 
218

 
233

 
246

 
272

$300 warehouse facility
 
LIBOR+2.3%
 
January 2019
 
Mortgage loans or MBS
 
300

 
89

 
111

 
116

 
141

$250 Warehouse Facility
 
LIBOR+2.0% to 2.3%
 
September 2020
 
Mortgage loans or MBS
 
250

 
177

 
182

 
—

 
—

$200 warehouse facility
 
LIBOR+1.6%
 
April 2019
 
Mortgage loans or MBS
 
200

 
43

 
44

 
80

 
81

$200 warehouse facility
 
LIBOR+4.0%
 
June 2020
 
Mortgage loans or MBS
 
200

 
100

 
198

 
50

 
50

$150 warehouse facility
 
LIBOR+4.3%
 
December 2018
 
Mortgage loans or MBS
 
150

 
—

 
98

 
—

 
—

$50 warehouse facility
 
LIBOR+4.5%
 
August 2020
 
Mortgage loans or MBS
 
50

 
—

 
44

 
10

 
10

$40 warehouse facility
 
LIBOR+3.0%
 
November 2018
 
Mortgage loans or MBS
 
40

 
2

 
3

 
4

 
6

Warehouse facilities principal amount
 
 
 
 
 
2,888

 
$
3,372

 
3,286

 
$
3,536

Unamortized debt issuance costs
 
 
 
 
 
—

 
 
 
(1
)
 
 
Warehouse facilities, net
 
 
 
$
2,888

 

 
$
3,285

 

 
Pledged Collateral:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans, net
 
 
 
 
 
 
 
$
1,595

 
$
1,481

 
$
1,852

 
$
1,680

Reverse mortgage interests, net
 
 
 
 
 
 
 
1,193

 
1,342

 
1,434

 
1,575

MSR and other collateral
 
 
 
 
 
 
 
100

 
549

 
—

 
281


38


Unsecured Senior Notes

Unsecured senior notes consist of the following.
 
Successor
 
Predecessor
 
September 30, 2018
 
December 31, 2017
$950 face value, 8.125% interest rate payable semi-annually, due July 2023 (1)
$
950
 
 
$
—
 
$750 face value, 9.125% interest rate payable semi-annually, due July 2026 (1)
750
 
 
—
 
$600 face value, 6.500% interest rate payable semi-annually, due July 2021 (2)
592
 
 
595
 
$300 face value, 6.500% interest rate payable semi-annually, due June 2022 (2)
206
 
 
206
 
$475 face value, 6.500% interest rate payable semi-annually, due August 2018 (3)
—
 
 
364
 
$400 face value, 7.875% interest rate payable semi-annually, due October 2020 (4)
—
 
 
397
 
$375 face value, 9.625% interest rate payable semi-annually, due May 2019 (4)
—
 
 
323
 
Unsecured senior notes principal amount
2,498
 
 
1,885
 
Unamortized debt issuance costs, net of premium, and discount
(41
)
 
(11
)
Unsecured senior notes, net
$
2,457
 
 
$
1,874
 

(1) On July 13, 2018, Merger Sub issued $950 aggregate principal amount of the 8.125% Notes due 2023 and $750 aggregate principal amount of the 9.125% Notes due 2026. The proceeds from the New Notes were used, together with the proceeds from the issuance of WMIH’s common stock and WMIH’s cash and restricted cash on hand, to consummate the Merger with Nationstar and the refinancing of certain 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 assuming the obligations under the New Notes.
(2) In June 2018, the Predecessor entered into a supplemental indenture to, among other things, modify the definition of “Change of Control” to provide that the Merger will not constitute a change of control which would otherwise trigger redemption obligations.
(3) The note of the Predecessor was paid off in August 2018.
(4) The notes of the Predecessor were redeemed in August 2018.

The indentures for the unsecured senior notes contain various covenants and restrictions that limit the issuer(s) and restricted subsidiaries ability to incur additional indebtedness, pay dividends, make certain investments, create liens, consolidate, merge or sell substantially all of their assets or enter into certain transactions with affiliates. The indentures contain certain events of default, including (subject, in some cases, to customary cure periods and materiality thresholds) defaults based on (i) the failure to make payments under the applicable indenture when due, (ii) breach of covenants, (iii) cross-defaults to certain other indebtedness, (iv) certain bankruptcy or insolvency events, (v) material judgments and (vi) invalidity of material guarantees.

The indentures for the unsecured senior notes provide that the Company may redeem all or a portion of the notes prior to certain fixed dates by paying a make-whole premium plus accrued and unpaid interest, to the redemption dates. In addition, the Company may redeem all or a portion of the unsecured senior notes at any time on or after certain fixed dates at the applicable redemption prices set forth in the indentures plus accrued and unpaid interest, to the redemption dates. During the two months ended September 30, 2018 , the Company redeemed $659 in principal of outstanding notes. Additionally, the Company repaid $364 in principal of outstanding notes which matured during the two months ended September 30, 2018 . The Company repurchased $26 , $60 , and $120 in principal of outstanding notes during the three months ended September 30, 2017 , seven months ended July 31, 2018 , and nine months ended September 30, 2017 , respectively, resulting in a loss of $1 , $2 , and $3 , respectively. No notes were repurchased during the two months ended September 30, 2018 and one month ended July 31, 2018 .
 
Additionally, the indentures provide that on or before certain fixed dates, the Company may redeem (x) in the case of the New Notes, up to 40% , or (y) in the case of the other series of unsecured senior notes, up to 35% of the aggregate principal amount of the unsecured senior notes with the net proceeds of certain equity offerings at fixed redemption prices, plus accrued and unpaid interest, to the redemption dates, subject to compliance with certain conditions.
The ratios included in the indentures for the unsecured senior notes are incurrence-based compared to the customary ratio covenants that are often found in credit agreements that require a company to maintain a certain ratio.

39

As of September 30, 2018 , the expected maturities of the Company's unsecured senior notes based on contractual maturities are as follows.
Year Ending December 31,
 
Amount
2018
 
$
—

2019
 
—

2020
 
—

2021
 
592

2022
 
206

Thereafter
 
1,700

Total
 
$
2,498

Other Nonrecourse Debt

Other nonrecourse debt consists of the following.
 
 
 
 
 
 
 
 
 
Successor
 
Predecessor
 
 
 
 
 
 
 
 
 
September 30, 2018
 
December 31, 2017
 
Issue Date
 
Maturity Date
 
Class of Note
 
Securitized Amount
 
Outstanding
 
Outstanding
Participating interest financing (1)
—
 
—
 
—
 
$
—

 
$
6,021

 
$
7,111

Securitization of nonperforming HECM loans
 
 
 
 
 
 
 
 
 
 
 
Trust 2016-2
June 2016
 
June 2026
 
A, M1, M2
 
—

 
—

 
94

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

 
—

 
138

Trust 2017-1
May 2017
 
May 2027
 
A, M1, M2
 
193

 
151

 
213

Trust 2017-2
September 2017
 
September 2027
 
A, M1, M2
 
308

 
258

 
365

Trust 2018-1
March 2018
 
March 2028
 
A, M1, M2, M3, M4, M5
 
348

 
329

 
—

Trust 2018-2
August 2018
 
August 2028
 
A, M1, M2, M3, M4, M5
 
298

 
292

 
—

Nonrecourse debt - legacy assets
November 2009
 
October 2039
 
A
 
112

 
32

 
42

Other nonrecourse debt principal amount
 
 
 
 
 
 
 
 
7,083

 
7,963

Unamortized debt issuance costs, net of premium, and issuance discount (2)
 
 
 
 
 
 
 
 
82

 
51

Other nonrecourse debt, net
 
 
 
 
 
 
 
 
$
7,165

 
$
8,014


(1) Amounts represent the Company's participating interest in GNMA HMBS securitized portfolios.
(2) The Predecessor amount includes a premium of $62 as of December 31, 2017 .

40

Participating Interest Financing
Participating interest financing represents the obligation of HMBS pools to third-party security holders. The Predecessor and Company issue HMBS in connection with the securitization of borrower draws and accrued interest on HECM loans. Proceeds are received in exchange for securitized advances on the HECM loan amounts transferred to GNMA, and the Company retains a beneficial interest (referred to as a "participating interest") in the securitization trust in which the HECM loans and HMBS obligations are held and assume both issuer and servicer responsibilities in accordance with GNMA HMBS program guidelines. Monthly cash flows generated from the HECM loans are used to service the HMBS obligations. The interest rate is based on the underlying HMBS rate with a range of 2.4% to 7.0% .

Securitizations of Nonperforming HECM Loans
From time to time, the Company securitizes its interests in non-performing reverse mortgages. The transactions provide investors with the ability to invest in a pool of both non-performing HECM loans secured by one-to-four-family residential properties and a pool of REO properties acquired through foreclosure of a deed in lieu of foreclosure in connection with HECM loans that are covered by FHA insurance. The transactions provide the Company with access to liquidity for the non-performing HECM loan portfolio, ongoing servicing fees, and potential residual returns. The transactions are structured as secured borrowings with the reverse mortgage loans included in the consolidated financial statements as reverse mortgage interests and the related financing included in other nonrecourse debt. Interest is accrued at a rate of 2.0% to 6.5% on the outstanding securitized notes and recorded as interest expense in consolidated statements of operations. The HECM securitizations are callable with expected weighted average lives of less than one to three years. The Company may re-securitize the previously called loans from earlier HECM securitizations to achieve a lower cost of funds.

Nonrecourse Debt – Legacy Assets
During November 2009, the Company completed the securitization of approximately $222 of Asset-Backed Securities ("ABS"), which was accounted for as a secured borrowing. This structure resulted in the Company carrying the securitized mortgage loans in its consolidated balance sheets and recognizing the asset-backed certificates acquired by third parties. The principal and interest on these notes are paid using the cash flows from the underlying mortgage loans, which serve as collateral for the debt. The interest rate paid on the outstanding securities is 7.5% , which is subject to an available funds cap. The total outstanding principal balance on the underlying mortgage loans serving as collateral for the debt was approximately $165 and $181 at September 30, 2018 and December 31, 2017 , respectively. The UPB on the outstanding loans was $32 and $42 at September 30, 2018 and December 31, 2017 , respectively, and the carrying value of the nonrecourse debt was $32 and $37 , respectively.

Financial Covenants
The Company and the Predecessor’s borrowing arrangements and credit facilities contain various financial covenants which primarily relate to required tangible net worth amounts, liquidity reserves, leverage requirements, and profitability requirements.  The Predecessor performed an evaluation of its mortgage servicing liabilities and recorded a change in estimate for the month ended July 31, 2018. As a result of this charge, the Predecessor was unable to meet the profitability requirement in one of its outstanding warehouse facilities. The Company asked for, and amended the agreement from this financial institution on this profitability requirement for the period ended September 30, 2018. As a result of this amendment, the Company is in compliance with its required financial covenants.

The Company is required to maintain a minimum tangible net worth of at least $682 as of each quarter-end related to its outstanding Master Repurchase Agreements on its outstanding repurchase facilities. As of September 30, 2018 , the Company is in compliance with these minimum tangible net worth requirements.



41

11. Payables and Accrued Liabilities

Payables and accrued liabilities consist of the following.

 
Successor
 
Predecessor
 
September 30, 2018
 
December 31, 2017
Payables to servicing and subservicing investors
$
530

 
$
516

Loans subject to repurchase from Ginnie Mae
231

 
218

Accounts payable and other accrued liabilities
165

 
99

Payables to GSEs and securitized trusts
95

 
92

Accrued bonus and payroll
89

 
82

Accrued legal expenses
65

 
25

Payable to insurance carriers and insurance cancellation reserves
61

 
61

Accrued interest
61

 
62

MSR purchases payable including advances
21

 
10

Repurchase reserves
9

 
9

Taxes
8

 
36

Lease obligations
5

 
24

Derivative financial instruments at fair value
2

 
5

Total payables and accrued liabilities
$
1,342

 
$
1,239


Payables to Servicing and Subservicing Investors and Payables to GSEs and Securitized Trusts
Payables to servicing and subservicing investors, GSEs and securitized trusts represent amounts due to investors, GSEs and securitized trusts in connection with loans serviced that are paid from collections of the underlying loans, insurance proceeds or proceeds from property disposal.

Loans Subject to Repurchase from Ginnie Mae
See Note 8, Other Assets , for a description of assets and liabilities related to loans subject to repurchase from Ginnie Mae.

Derivative financial instruments at fair value
See Note 9, Derivative Financial Instrument , for further details.

Accounts Payables and Other Accrued Liabilities
Accounts payables and other accrued liabilities are primarily comprised of liabilities related to various vendor and servicing activities.

Payables to Insurance Carriers and Insurance Cancellation Reserves
Payables to insurance carriers and insurance cancellation reserves consist of insurance premiums received from borrower payments awaiting disbursement to the insurance carrier and/or amounts due to third-party investors on liquidated loans.


42

Repurchase Reserves
The activity of the repurchase reserves is set forth below.
 
Successor
 
 
Predecessor
Repurchase Reserves
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Three Months Ended September 30, 2017
 
For the Period January 1 - July 31, 2018
 
Nine Months Ended September 30, 2017
Balance - beginning of period
$
9

 
 
$
9

 
$
14

 
$
9

 
$
18

Provisions
1

 
 
—

 
2

 
3

 
5

Releases
(1
)
 
 
—

 
—

 
(3
)
 
(6
)
Charge-offs
—

 
 
—

 
(1
)
 
—

 
(2
)
Balance - end of period
$
9

 
 
$
9

 
$
15

 
$
9

 
$
15


The provision for repurchases represents an estimate of losses to be incurred on the repurchase of loans or indemnification of purchaser's losses related to forward loans. Certain sale contracts and GSE standards require the Company to repurchase a loan or indemnify the purchaser or insurer for losses if a borrower fails to make initial loan payments or if the accompanying mortgage loan fails to meet certain customary representations and warranties, such as the manner of origination, the nature and extent of underwriting standards.

In the event of a breach of the representations and warranties, the Company may be required to either repurchase the loan or indemnify the purchaser for losses it sustains on the loan. In addition, an investor may request that the Company refund a portion of the premium paid on the sale of mortgage loans if a loan is prepaid within a certain amount of time from the date of sale. The Company records a reserve for estimated losses associated with loan repurchases, purchaser indemnification and premium refunds. The provision for repurchase losses is charged against net gain on mortgage loans held for sale. A release of repurchase reserves is recorded when the Company's assessment reveals that previously recorded reserves are no longer needed.

A selling representation and warranty framework was introduced by the GSEs in 2013 and enhanced in 2014 that helps address concerns of loan sellers with respect to loan repurchase risk. Under the framework, a GSE will not exercise its remedies, including the issuance of repurchase requests, for breaches of certain selling representations and warranties if a mortgage meets certain eligibility requirements. For loans sold to GSEs on or after January 1, 2013, repurchase risk for Home Affordable Refinance Program ("HARP") loans is lowered if the borrower stays current on the loan for 12 months and representation and warranty risks are limited for non-HARP loans that stay current for 36 months.

The Company regularly evaluates the adequacy of repurchase reserves based on trends in repurchase and indemnification requests, actual loss experience, settlement negotiation, estimated future loss exposure and other relevant factors including economic conditions. Current loss rates have significantly declined attributable to stronger underwriting standards and due to the falloff of loans underwritten prior to mortgage loan crisis period prior to 2008. The Company believes its reserve balance as of September 30, 2018 is sufficient to cover loss exposure associated with repurchase contingencies.


12. Securitizations and Financings

Variable Interest Entities (VIE)
In the normal course of business, the Company enters into various types of on- and off-balance sheet transactions with SPEs determined to be VIEs, which primarily consist of securitization trusts established for a limited purpose. Generally, these SPEs are formed for the purpose of securitization transactions in which the Company transfers assets to an SPE, which then issues to investors various forms of debt obligations supported by those assets.

The Company has determined that the SPEs created in connection with the (i) Nationstar Home Equity Loan Trust 2009-A, (ii) Nationstar Mortgage Advance Receivables Trust (NMART), (iii) Nationstar Agency Advance Financing Trust (NAAFT) and (iv) Nationstar Advance Agency Receivables Trust (NAART) should be consolidated as the Company is the primary beneficiary of each of these entities. Also, the Company consolidated four reverse mortgage SPEs as it is the primary beneficiary of each of these entities. These SPEs include the Nationstar HECM Loan Trusts.


43

A summary of the assets and liabilities of the Company's transactions with VIEs included in the Company’s consolidated financial statements is presented below for the dates indicated.
 
Successor
 
Predecessor
 
September 30, 2018
 
December 31, 2017
 
Transfers
Accounted for as
Secured
Borrowings
 
Reverse Secured Borrowings
 
Transfers
Accounted for as
Secured
Borrowings
 
Reverse Secured Borrowings
Assets
 
 
 
 
 
 
 
Restricted cash
$
111

 
$
52

 
$
106

 
$
26

Reverse mortgage interests, net
—

 
7,140

 
—

 
7,981

Advances and other receivables, net
682

 
—

 
896

 
—

Mortgage loans held for investment, net
121

 
—

 
138

 
—

Other assets
—

 
—

 
2

 
—

Total assets
$
914

 
$
7,192

 
$
1,142

 
$
8,007

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Advance facilities (1)
$
563

 
$
—

 
$
749

 
$
—

Payables and accrued liabilities
1

 
1

 
2

 
1

Participating interest financing (2)
—

 
6,021

 
—

 
7,111

HECM Securitizations (HMBS)
 
 
 
 
 
 
 
Trust 2016-2
—

 
—

 
—

 
94

Trust 2016-3
—

 
—

 
—

 
138

Trust 2017-1
—

 
151

 
—

 
213

Trust 2017-2
—

 
258

 
—

 
365

Trust 2018-1
—

 
329

 
—

 
—

Trust 2018-2
—

 
292

 
—

 
—

Nonrecourse debt–legacy assets
32

 
—

 
42

 
—

Total liabilities
$
596

 
$
7,052

 
$
793

 
$
7,922


(1) Advance facilities include the Nationstar agency advance financing facility and notes payable recorded by the Nationstar Mortgage Advance Receivable Trust, and the Nationstar Agency Advance Receivables Trust. Refer to Notes Payable in Note 10, Indebtedness , for additional information.
(2) Participating interest financing excludes premiums.

The following table shows a summary of the outstanding collateral and certificate balances for securitization trusts for which the Company was the transferor, including any retained beneficial interests and MSRs, that were not consolidated by the Company for the dates indicated.
 
Successor
 
Predecessor
 
September 30, 2018
 
December 31, 2017
Total collateral balances
$
1,940

 
$
2,291

Total certificate balances
$
1,884

 
$
2,129


The Company has not retained any variable interests in the unconsolidated securitization trusts that were outstanding as of September 30, 2018 and December 31, 2017 and therefore does not have a significant maximum exposure to loss related to these unconsolidated VIEs.


44

A summary of mortgage loans transferred by the Company to unconsolidated securitization trusts that are 60 days or more past due are presented below.
 
Successor
 
Predecessor
Principal Amount of Loans 60 Days or More Past Due
September 30, 2018
 
December 31, 2017
Unconsolidated securitization trusts
$
317

 
$
448



13. Stockholders' Equity

Upon the consummation of the Merger, the Company assumed and adopted the Nationstar Mortgage Holdings Inc. Second Amended and Restated 2012 Incentive Compensation Plan (“2012 Plan”).

During the seven months ended July 31, 2018 , certain employees of the Predecessor were granted 3,297 thousand restricted stock units ("RSUs"). During the two months ended September 30, 2018 , certain employees of the Company were granted 73 thousand RSUs. The RSUs generally vest in installments of 33.3% , 33.3% and 33.4% respectively on each of the first three anniversaries of the awards, provided that (i) the participant remains continuously employed with the Company during that time or (ii) the participant's employment has terminated by reason of retirement. In addition, upon death, disability or generally a change in control of the Company, the unvested shares of an award will vest. The value of the RSUs is measured based on the market value of common stock of the Company or its Predecessor on the grant date.

The Company recorded $2 of expenses related to share-based awards during the two months ended September 30, 2018 . The Predecessor recorded $9 and $17 of expenses related to share-based awards during the one and seven months ended July 31, 2018 , respectively, including $7 expenses recognized due to a one-time accelerated vesting of equity awards in connection with the Merger. In addition, the Predecessor recorded $4 and $13 during the three and nine months ended September 30, 2017 , respectively.


14. Earnings Per Share

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

On October 10, 2018, the Company completed its previously-announced 1-for-12 reverse stock split. The Successor period presented has been retrospectively revised to reflect this change.


45

The following table sets forth the computation of basic and diluted net income per common share (amounts in millions, except per share amounts).
 
Successor
 
 
Predecessor
 
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Three Months Ended September 30, 2017
 
For the Period January 1 - July 31, 2018
 
Nine Months Ended September 30, 2017
Net income (loss) attributable to Successor/Predecessor
$
1,020

 
 
$
(64
)
 
$
7

 
$
154

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

 
 
—

 
—

 
—

 
—

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

 
 
$
(64
)
 
$
7

 
$
154

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

 
 
$
(0.65
)
 
$
0.07

 
$
1.57

 
$
(0.11
)
Diluted
$
10.99

 
 
$
(0.65
)
 
$
0.07

 
$
1.55

 
$
(0.11
)
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding (in thousands):
 
 
 
 
 
 
 
 
 
 
Basic
90,808

 
 
98,164

 
97,706

 
98,046

 
97,685

Dilutive effect of stock awards
345

 
 
—

 
988

 
1,091

 
—

Dilutive effect of participating securities
839

 
 
—

 
—

 
—

 
—

Diluted
91,992

 
 
98,164

 
98,694

 
99,137

 
97,685



15. Income Taxes

The components of income tax expense (benefit) on continuing operations were as follows:
 
Successor
 
 
Predecessor
 
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Three Months Ended September 30, 2017
 
For the Period January 1 - July 31, 2018
 
Nine Months Ended September 30, 2017
Income tax (benefit) expense
$
(979
)
 
 
$
(19
)
 
$
5

 
$
48

 
$
(4
)
 
 
 
 
 
 
 
 
 
 
 
Effective tax rate
(2,377.1
)%
 
 
23.1
%
 
37.1
%
 
23.8
%
 
29.1
%

In the predecessor period, the effective tax rate differed from the statutory federal rate of 21% primarily due to state tax provision, adjustments in connection with the remediation of the Company’s uncertain tax position and various permanent differences, including nondeductible transaction costs in connection with the Merger.

For the two months ended September 30, 2018 , the effective tax rate differed from the statutory federal rate of 21% primarily due to the reversal of the valuation allowance associated with the net operating loss ("NOL") carryforwards of WMIH, permanent differences including executive compensation disallowed under Internal Revenue Code Section 162(m) and nondeductible meals and entertainment expenses.


46

Prior to the Merger, WMIH had a full valuation allowance established against its federal net operating losses due to cumulative losses in previous years. On the contrary, the Predecessor determined that it would be able to fully realize its federal and state net operating losses, with the exception of a portion of its NOLs that would more-likely-than-not expire unused due to limitations of Internal Revenue Code (“IRC”) Section 382. Other deferred tax assets and liabilities for WMIH and the Predecessor are not significant to the valuation allowance analysis. As a result of the Merger, the Successor re-evaluated its valuation allowance.

In the assessment of whether a valuation allowance was required against WMIH’s NOLs subsequent to the Merger, the Successor considered the four sources of taxable income, as follows, under ASC 740-10-30-18:

1.
Taxable income in prior carryback year(s) if carryback is permitted under the tax law;
2.
Future reversals of existing taxable temporary differences;
3.
Tax-planning strategies; and
4.
Future taxable income exclusive of reversing temporary differences and carryforwards.

The Successor noted that the NOL carryback period in source 1 of taxable income is no longer available to offset taxable income in prior years as modified as part of the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”). Also, the Successor did not identify any tax planning strategies available that would support realization of the WMIH NOL deferred tax asset under ASC 740. Thus, in determining the appropriate deferred tax asset valuation allowance subsequent to the Merger, the Successor relied upon (1) reversals of existing deferred tax liabilities and (2) future taxable income excluding reversing differences, with the latter item accounting for most of the change.

In estimating future taxable income from the fourth source listed above, the Successor considered all available evidence and applied judgment in determining the effect of positive and negative evidence based on its ability to objectively verify it. In that regard, the Successor further noted that under ASC 740-10-30-21, “Forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. Other examples of negative evidence include, but are not limited to, the following:

1.
A history of operating loss or tax credit carryforwards expiring unused
2.
Losses expected in early future years (by a presently profitable entity)
3.
Unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels on a continuing basis in future years
4.
A carryback, carryforward period that is so brief it would limit realization of tax benefits if a significant deductible temporary difference is expected to reverse in a single year or the entity operates in a traditionally cyclical business.”

The Successor noted none of the negative items listed above from the perspective of the post-transaction operations. The Predecessor, which accounts for almost all of the post-merger operations, has been profitable over the last several years and expects to grow in profitability in the future. Accordingly, it was deemed appropriate and reasonable to conclude under ASC 740 that a significant portion of the WMIH NOL deferred tax asset, previously subject to a full valuation allowance, would be realizable at a more-likely-than-not (“MLTN”) level subsequent to the Merger.
While WMIH experienced a history of cumulative losses in previous years, the Predecessor has demonstrated a history of strong sustainable pre-tax income and taxable income in previous years. The Successor believes that WMIH and the Predecessor as a combined company will generate enough future pre-tax income to utilize a significant portion of WMIH’s NOL carryforwards.
In determining the amount of the valuation allowance to release, the Successor considered (1) internal forecasts of the Successor’s future pre-tax income exclusive of reversing temporary differences and carryforwards, (2) the nature and timing of future reversals of existing deferred tax assets and liabilities, (3) future originating temporary and permanent differences, and (4) NOL carryforward expiration dates. For purposes of the analysis, the Successor concluded that it should start with using an average of WMIH and the Predecessor’s combined historical pre-tax income to project future taxable income adjusted for non-recurring expenses. The Successor also removed any existing intangible amortization expense and interest expense from the 3-year historical average and incorporated post-Merger costs expected to be incurred, including additional interest expense from new debt assumed and additional amortization expense resulting from the intangibles recorded as part of purchase price accounting. For purposes of analyzing the realization of the deferred tax assets in accordance with ASC 740, the Company assumed a steady state of operations that would generate cash flows and liquidity sufficient to maintain current operations and pay down corporate debt resulting in a reduction in interest expense in future periods. The Successor considered other factors in its determination of future taxable income that was demonstrated by historical performance.


47

As a result of the above considerations and analysis, the Successor released $990 of the valuation allowance related to WMIH's net operating loss carryforwards and other deferred tax assets. In assessing the appropriateness of the federal valuation allowance as of the Merger date, the Successor considered the significant cumulative earnings in recent years of WMIH and the Predecessor as well as consistent historical taxable income of both companies’ federal combined operations. Additionally, the Successor considered its ability to utilize net operating loss carryforwards to offset future taxable income generated by its combined operations. The Successor does not expect any tax loss limitations under IRC §382 that would impact its utilization of WMIH’s pre-Merger federal NOL carryforwards in the future. The Successor projects that it will have sufficient combined pre-tax earnings to realize $990 of the deferred tax asset related to net operating loss carryforwards within the expiration period.

For the three months ended September 30, 2017 , the effective tax rate differed slightly from the statutory federal rate of 35% due to recurring items, such as state tax benefit offset by excess tax deficiency related to restricted share-based compensation recognized within income rather than shareholder’s equity under Accounting Standards Update No. 2016-09.

Impact of Tax Reform
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted which significantly revised the U.S. corporate income tax regime by lowering the U.S. corporate tax rate from 35% to 21% , imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries, creating new taxes on certain foreign sourced earnings, as well as other changes. In the year ended December 31, 2017 , the Company recorded a net tax benefit in connection with the Tax Reform Act and related matters primarily due to the remeasurement of deferred tax balances. During the two months ended September 30, 2018 , no adjustments were made to the amounts recorded in the year ended 2017 related to the Tax Reform Act, including the remeasurement of existing deferred tax balances, the transition tax, uncertain tax positions, valuation allowance, and reassessment of permanently reinvested earnings, among others. The Company has not recorded any adjustments related to the new Global Intangible Low-Taxed Income (“GILTI”) tax and has not adopted an accounting policy regarding whether to record deferred tax on GILTI. However, the Company has included an estimate of the 2018 current GILTI impact on the tax provision for the period ended September 30, 2018 . The Company will continue to refine its calculations as additional analysis is completed. These estimates may be adjusted as the Company continues to gain further clarification and guidance regarding tax accounting methods, state tax conformity to federal tax changes, impact of GILTI provisions, among others.


16. Fair Value Measurements
Fair value is a market-based measurement, not an entity-specific measurement, and should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a three-tiered fair value hierarchy has been established based on the level of observable inputs used in the measurement of fair value (e.g., Level 1 representing quoted prices for identical assets or liabilities in an active market; Level 2 representing values using observable inputs other than quoted prices included within Level 1; and Level 3 representing estimated values based on significant unobservable inputs).
The following describes the methods and assumptions used by the Company in estimating fair values:
Cash and Cash Equivalents, Restricted Cash (Level 1) – The carrying amount reported in the consolidated balance sheets approximates fair value.
Mortgage Loans Held for Sale (Level 2) – The Company originates mortgage loans in the U.S. that it intends to sell into Fannie Mae, Freddie Mac and Ginnie Mae (collectively, the "Agencies") MBS. Additionally, the Company holds mortgage loans that it intends to sell into the secondary markets via whole loan sales or securitizations. The Company measures newly originated prime residential mortgage loans held for sale at fair value.
Mortgage loans held for sale are typically pooled together and sold into certain exit markets, depending upon underlying attributes of the loan, such as agency eligibility, product type, interest rate and credit quality. Mortgage loans held for sale are valued on a recurring basis using a market approach by utilizing either: (i) the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, including the value attributable to mortgage servicing and credit risk, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted for credit risk and other individual loan characteristics. As these prices are derived from market observable inputs, the Company classifies these valuations as Level 2 in the fair value disclosures.

The Company may acquire mortgage loans held for sale from various securitization trusts for which it acts as servicer through the exercise of various clean-up call options as permitted through the respective pooling and servicing agreements. The Company has elected to account for these loans at the lower of cost or market. The Company classifies these valuations as Level 2 in the fair value disclosures.

48


The Company may also purchase loans out of a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. The Company has elected to carry these loans at fair value. See Note 7, Mortgage Loans Held for Sale and Investment , for more information.
Mortgage Loans Held for Investment (Level 3) – Mortgage loans held for investment primarily consist of nonconforming or subprime mortgage loans that were transferred in 2009 from mortgage loans held for sale at fair value and which the Company intends to hold these loans to their maturities. The Company determines the fair value of loans held for investment, on a recurring basis, based on various underlying attributes such as market participants' views, loan delinquency, recent observable loan pricing and sales for similar loans, individual loan characteristics and internal market evaluation. These internal market evaluations require the use of judgment by the Company and can have a significant impact on the determination of the loan’s fair value. As these fair values are derived from internally developed valuation models, using observable inputs, the Company classifies these valuations as Level 3 in the fair value disclosures. See Note 7, Mortgage Loans Held for Sale and Investment , for more information.
Mortgage Servicing Rights – Fair Value (Level 3) – The Company estimates the fair value of its forward MSRs on a recurring basis using a process that combines the use of a discounted cash flow model and analysis of current market data to arrive at an estimate of fair value. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, discount rates, ancillary revenues and costs to service. These assumptions are generated and applied based on collateral stratifications including product type, remittance type, geography, delinquency and coupon dispersion. These assumptions require the use of judgment by the Company and can have a significant impact on the fair value of the MSRs. Quarterly, management obtains third-party valuations to assess the reasonableness of the fair value calculations provided by the internal cash flow model. Because of the nature of the valuation inputs, the Company classifies these valuations as Level 3 in the fair value disclosures. See Note 4, Mortgage Servicing Rights and Related Liabilities , for more information.
Advances and Other Receivables, Net (Level 3) - Advances and other receivables, net are valued at their net realizable value after taking into consideration the reserves. Advances have no stated maturity. Their net realizable value approximates fair value as the net present value based on discounted cash flow is not materially different from the net realizable value.
Reverse Mortgage Interests, Net (Level 3) – The Company’s reverse mortgage interests are primarily comprised of HECM loans that are insured by FHA and guaranteed by Ginnie Mae upon securitization. Fair value for active reverse mortgage loans is estimated based on pricing of the recent securitizations with similar attributes and characteristics, such as collateral values and prepayment speeds and adjusted as necessary for differences. The recent timing of these transactions allows the pricing to consider the current interest rate risk exposures. The fair value of inactive reverse mortgage loans is established based upon a discounted par value of the loan derived from the Company’s historical loss factors experience on foreclosed loans.
Derivative Financial Instruments (Level 2) – The Company enters into a variety of derivative financial instruments as part of its hedging strategy and measures these instruments at fair value on a recurring basis in the consolidated balance sheets. The majority of these derivatives are exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, the Company utilizes the exchange price or dealer market price for the particular derivative contract; therefore, these contracts are classified as Level 2. In addition, the Company enters into IRLCs and LPCs with prospective borrowers and other loan originators. These commitments are carried at fair value based on the fair value of underlying mortgage loans which are based on observable market data. The Company adjusts the outstanding IRLCs with prospective borrowers based on an expectation that it will be exercised and the loan will be funded. IRLCs and LPCs are recorded in derivative financial instruments in the consolidated balance sheets. These commitments are classified as Level 2 in the fair value disclosures, as the valuations are based on market observable inputs. The Company has entered into Eurodollar futures contracts as part of its hedging strategy. The futures contracts are measured at fair value on a recurring basis and classified as Level 2 in the fair value disclosures as the valuation is based on market observable data. See Note 9, Derivative Financial Instrument , for more information.
Advance Facilities and Warehouse Facilities (Level 2) – As the underlying warehouse and advance finance facilities bear interest at a rate that is periodically adjusted based on a market index, the carrying amount reported on the consolidated balance sheets approximates fair value. See Note 10, Indebtedness , for more information.
Unsecured Senior Notes (Level 1) – The fair value of unsecured senior notes, which are carried at amortized cost, is based on quoted market prices and is considered Level 1 from the market observable inputs used to determine fair value. See Note 10, Indebtedness , for more information.
Nonrecourse Debt – Legacy Assets (Level 3) – The Company estimates fair value based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. These prices are derived from a combination of internally developed valuation models and quoted market prices, and are classified as Level 3. See Note 10, Indebtedness , for more information.

49

Excess Spread Financing (Level 3) – The Company estimates fair value on a recurring basis based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, average life, recapture rates and discount rate. As these prices are derived from a combination of internally developed valuation models and quoted market prices based on the value of the underlying MSRs, the Company classifies these valuations as Level 3 in the fair value disclosures. See Note 4, Mortgage Servicing Rights and Related Liabilities , for more information.
Mortgage Servicing Rights Financing Liability (Level 3) - The Company estimates fair value on a recurring basis based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being advance financing rates and annual advance recovery rates. As these assumptions are derived from internally developed valuation models based on the value of the underlying MSRs, the Company classifies these valuations as Level 3 in the fair value disclosures. See Note 4, Mortgage Servicing Rights and Related Liabilities , for more information.
Participating Interest Financing (Level 2) – The Company estimates the fair value using a market approach by utilizing the fair value of securities backed by similar participating interests in reverse mortgage loans. The Company classifies these valuations as Level 2 in the fair value disclosures. See Note 4, Mortgage Servicing Rights and Related Liabilities , and Note 10, Indebtedness , for more information.
HECM Securitizations (Level 3) – The Company estimates fair value of the nonrecourse debt related to HECM securitization based on the present value of future expected discounted cash flows with the discount rate approximating that of similar financial instruments. As the prices are derived from both internal models and other observable inputs, the Company classifies this as Level 3 in the fair value disclosures. See Note 10, Indebtedness for more information.
The following table presents the estimated carrying amount and fair value of the Company's financial instruments and other assets and liabilities measured at fair value on a recurring basis.
 
Successor
 
September 30, 2018
 
 
 
Recurring Fair Value Measurements
 
Total Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Mortgage loans held for sale (1)
$
1,681.1

 
$
—

 
$
1,681.1

 
$
—

Mortgage loans held for investment (1)
121.6

 
 
 
—

 
121.6

Mortgage servicing rights (1)
3,485.4

 
—

 
—

 
3,485.4

Derivative financial instruments
 
 
 
 
 
 
 
IRLCs
57.8

 
—

 
57.8

 
—

Forward MBS trades
12.2

 
—

 
12.2

 
—

LPCs
1.7

 
—

 
1.7

 
—

Eurodollar futures (2)
—

 
—

 
—

 
—

Treasury futures (2)
—

 
—

 
—

 
—

Total assets
$
5,359.8

 
$
—

 
$
1,752.8

 
$
3,607.0

Liabilities
 
 
 
 
 
 
 
Derivative financial instruments
 
 
 
 
 
 
 
IRLCs (2)
$
—

 
$
—

 
$
—

 
$
—

Forward MBS trades
0.5

 
—

 
0.5

 
—

LPCs
1.5

 
—

 
1.5

 
—

Eurodollar futures (2)
—

 
—

 
—

 
—

Treasury futures (2)
0.1

 
—

 
0.1

 
—

Mortgage servicing rights financing
26.3

 
—

 
—

 
26.3

Excess spread financing
1,096.5

 
—

 
—

 
1,096.5

Total liabilities
$
1,124.9

 
$
—

 
$
2.1

 
$
1,122.8


(1) Based on the nature and risks of the underlying assets and liabilities, the fair value is presented for the aggregate account.
(2) Fair values of the underlying assets and liabilities are less than $0.1 for the specified dates.

50

 
Predecessor
 
December 31, 2017
 
 
 
Recurring Fair Value Measurements
 
Total Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Mortgage loans held for sale (1)
$
1,890.8

 
$
—

 
$
1,890.8

 
$
—

Mortgage servicing rights (1)
2,937.4

 
—

 
—

 
2,937.4

Derivative financial instruments
 
 
 
 
 
 
 
IRLCs
59.3

 
—

 
59.3

 
—

Forward MBS trades
2.4

 
—

 
2.4

 
—

LPCs
0.9

 
—

 
0.9

 
—

Eurodollar futures (2)
—

 
—

 
—

 
—

Treasury futures
1.9

 
—

 
1.9

 
—

Total assets
$
4,892.7

 
$
—

 
$
1,955.3

 
$
2,937.4

Liabilities
 
 
 
 
 
 
 
Derivative financial instruments
 
 
 
 
 
 
 
Forward MBS trades
$
2.8

 
$
—

 
$
2.8

 
$
—

LPCs
0.6

 
—

 
0.6

 
—

Eurodollar futures (2)
—

 
—

 
—

 
—

Treasury futures
1.4

 
—

 
1.4

 
—

Mortgage servicing rights financing
9.5

 
—

 
—

 
9.5

Excess spread financing
996.5

 
—

 
—

 
996.5

Total liabilities
$
1,010.8

 
$
—

 
$
4.8

 
$
1,006.0


(1) Based on the nature and risks of the underlying assets and liabilities, the fair value is presented for the aggregate account.
(2) Fair values of the underlying assets and liabilities are less than $0.1 for the specified dates.


51

The table below presents a reconciliation for all of the Company's Level 3 assets and liabilities measured at fair value on a recurring basis.
 
Successor
 
Assets
 
Liabilities
 
Mortgage servicing rights
 
Excess spread financing
 
Mortgage servicing rights financing
For the Period August 1 to September 30, 2018
 
 
 
 
 
Balance - beginning of period
$
3,413

 
$
1,039

 
$
26

Total gains or losses included in earnings
20

 
26

 
—

Purchases, issuances, sales, repayments and settlements
 
 
 
 
 
Purchases
72

 
—

 
—

Issuances
43

 
84

 
—

Sales
(63
)
 
—

 
—

Repayments
—

 
(21
)
 
—

Settlements
—

 
(31
)
 
—

Balance - end of period
$
3,485

 
$
1,097

 
$
26

 
Predecessor
 
Assets
 
Liabilities
 
Mortgage servicing rights
 
Excess spread financing
 
Mortgage servicing rights financing
For the Period January 1 to July 31, 2018
 
 
 
 
 
Balance - beginning of period
$
2,937

 
$
996

 
$
10

Total gains or losses included in earnings
166

 
81

 
16

Purchases, issuances, sales, repayments and settlements
 
 
 
 
 
Purchases
144

 
—

 
—

Issuances
162

 
70

 
—

Sales
4

 
—

 
—

Repayments
—

 
(3
)
 
 
Settlements
—

 
(105
)
 
—

Balance - end of period
$
3,413

 
$
1,039

 
$
26

 
Predecessor
 
Assets
 
Liabilities
 
Mortgage servicing rights
 
Excess spread financing
 
Mortgage servicing rights financing
Nine Months Ended September 30, 2017
 
 
 
 
 
Balance - beginning of period
$
3,160

 
$
1,214

 
$
27

Total gains or losses included in earnings
(361
)
 
—

 
(7
)
Purchases, issuances, sales, repayments and settlements
 
 
 
 
 
Purchases
30

 
—

 
—

Issuances
151

 
—

 
—

Sales
(24
)
 
—

 
—

Repayments
—

 
(9
)
 
—

Settlements
—

 
(159
)
 
—

Balance - end of period
$
2,956

 
$
1,046

 
$
20


No transfers were made into or out of Level 3 fair value assets and liabilities for the two months ended September 30, 2018 , seven months ended July 31, 2018 and nine months ended September 30, 2017 .

52

The table below presents a summary of the estimated carrying amount and fair value of the Company's financial instruments.
 
Successor
 
September 30, 2018
 
Carrying
Amount
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
198

 
$
198

 
$
—

 
$
—

Restricted cash
332

 
332

 
—

 
—

Advances and other receivables, net
1,174

 
—

 
—

 
1,174

Reverse mortgage interests, net
8,886

 
—

 
—

 
8,980

Mortgage loans held for sale
1,681

 
—

 
1,681

 
—

Mortgage loans held for investment, net
122

 
—

 
—

 
122

Derivative financial instruments
72

 
—

 
72

 
—

Financial liabilities
 
 
 
 
 
 
 
Unsecured senior notes
2,457

 
2,583

 
—

 
—

Advance facilities
596

 
—

 
596

 
—

Warehouse facilities
2,888

 
—

 
2,888

 
—

Mortgage servicing rights financing liability
26

 
—

 
—

 
26

Excess spread financing
1,097

 
—

 
—

 
1,097

Derivative financial instruments
2

 
—

 
2

 
—

Participating interest financing
6,103

 
—

 
6,101

 
—

HECM Securitization (HMBS)
 
 
 
 
 
 
 
Trust 2017-1
151

 
—

 
—

 
176

Trust 2017-2
258

 
—

 
—

 
283

Trust 2018-1
329

 
—

 
—

 
318

Trust 2018-2
292

 
—

 
—

 
271

Nonrecourse debt - legacy assets
32

 
—

 
—

 
31

 
 
 
 
 
 
 
 
 
Predecessor
 
December 31, 2017
 
Carrying
Amount
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
215

 
$
215

 
$
—

 
$
—

Restricted cash
360

 
360

 
—

 
—

Advances and other receivables, net
1,706

 
—

 
—

 
1,706

Reverse mortgage interests, net
9,984

 
—

 
—

 
10,164

Mortgage loans held for sale
1,891

 
—

 
1,891

 
—

Mortgage loans held for investment, net
139

 
—

 
—

 
139

Derivative financial instruments
65

 
—

 
65

 
—

Financial liabilities
 
 
 
 
 
 
 
Unsecured senior notes
1,874

 
1,912

 
—

 
—

Advance facilities
855

 
—

 
855

 
—

Warehouse facilities
3,285

 
—

 
3,286

 
—

Mortgage servicing rights financing liability
10

 
—

 
—

 
10

Excess spread financing
996

 
—

 
—

 
996

Derivative financial instruments
5

 
—

 
5

 
—

Participating interest financing
7,167

 
—

 
7,353

 
—

HECM Securitization (HMBS)
 
 
 
 
 
 
 
Trust 2016-2
94

 
—

 
—

 
112

Trust 2016-3
138

 
—

 
—

 
155

Trust 2017-1
213

 
—

 
—

 
225

Trust 2017-2
365

 
—

 
—

 
371

Nonrecourse debt - legacy assets
37

 
—

 
—

 
36


53



17. Capital Requirements

Certain of the Company's secondary market investors require minimum net worth ("capital") requirements, as specified in the respective selling and servicing agreements. In addition, these investors may require capital ratios in excess of the stated requirements to approve large servicing transfers. To the extent that these requirements are not met, the Company's secondary market investors may utilize a range of remedies ranging from sanctions, suspension or ultimately termination of the Company's selling and servicing agreements, which would prohibit the Company from further originating or securitizing these specific types of mortgage loans or being an approved servicer.
Among the Company's various capital requirements related to its outstanding selling and servicing agreements, the most restrictive of these requires the Company to maintain a minimum adjusted net worth balance of $766 . As of September 30, 2018 , the Company was in compliance with its selling and servicing capital requirements.


18. Commitments and Contingencies

Litigation and Regulatory Matters
The Company and its subsidiaries are routinely and currently involved in a significant number of legal proceedings, including, but not limited to, judicial, arbitration, regulatory and governmental proceedings relating to matters that arise in connection with the conduct of our business. The legal proceedings are at varying stages of adjudication, arbitration or investigation and are generally based on alleged violations of consumer protection, securities, employment, contract, tort, common law fraud and other numerous laws, including, without limitation, the Equal Credit Opportunity Act, Fair Debt Collection Practices Act, Fair Credit Reporting Act, Real Estate Settlement Procedures Act, National Housing Act, Homeowners Protection Act, Service Member’s Civil Relief Act, Telephone Consumer Protection Act, Truth in Lending Act, Financial Institutions Reform, Recovery, and Enforcement Act of 1989, unfair, deceptive or abusive acts or practices in violation of the Dodd-Frank Act, the Securities Act of 1933, the Securities Exchange Act of 1934, the Home Mortgage Disclosure Act, Title 11 of the United States Code (aka the "Bankruptcy Code"), False Claims Act and Making Home Affordable loan modification programs.

In addition, along with others in its industry, the Company is subject to repurchase and indemnification claims and may continue to receive claims in the future, regarding alleged breaches of representations and warranties relating to the sale of mortgage loans, the placement of mortgage loans into securitization trusts or the servicing of mortgage loans securitizations. The Company is also subject to legal actions or proceedings related to loss sharing and indemnification provisions of its various acquisitions. Certain of the pending or threatened legal proceedings include claims for substantial compensatory, punitive and/or, statutory damages or claims for an indeterminate amount of damages.

The Company's business is also subject to extensive examinations, investigations and reviews by various federal, state and local governmental, regulatory and enforcement agencies. The Company has historically had a number of open investigations with these agencies and that trend continues. The Company is currently the subject of various governmental or regulatory investigations, subpoenas, examinations and inquiries related to its residential loan servicing and origination practices, bankruptcy and collections practices, its financial reporting and other aspects of its businesses. These matters include investigations by the Bureau of Consumer Financial Protection (the "BCFP"), the Securities and Exchange Commission, the Executive Office of the United States Trustees, the Department of Justice, the Office of the Special Inspector General for the Troubled Asset Relief Program, the U.S. Department of Housing and Urban Development, the multistate coalition of mortgage banking regulators and various State Attorneys General. These specific matters and other pending or potential future investigations, subpoenas, examinations or inquiries may lead to administrative, civil or criminal proceedings or settlements, and possibly result in remedies including fines, penalties, restitution, or alterations in the Company's business practices, and in additional expenses and collateral costs. Responding to these matters requires the Company to devote substantial resources, resulting in higher costs and lower net cash flows.

For example, the Company continues to progress towards resolution of certain legacy regulatory matters involving regulatory examination findings for alleged violations of certain laws related to the Company's business practices. The Company has been in discussions with the multi-state coalition of mortgage banking regulators and various State Attorneys General concerning a potential resolution of their investigation. The Company is continuing to cooperate with all parties. In connection with these discussions, the Company previously recorded an accrual. These discussions may not result in a settlement of the matter; furthermore, any such settlement may exceed the amount accrued as of September 30, 2018 . Moreover, if the discussions do not result in a settlement, the regulators and State Attorneys General may seek to exercise their enforcement authority through litigation

54

or other proceedings and seek injunctive relief, damages, restitution and civil monetary penalties, which could have a material adverse effect on our business, reputation, financial condition and results of operations.

Further, on April 24, 2018, the BCFP notified Nationstar that, in accordance with the BCFP’s discretionary Notice and Opportunity to Respond and Advise ("NORA") process, the BCFP’s Office of Enforcement is considering whether to recommend that the BCFP take enforcement action against the Company, alleging violations of the Real Estate Settlement Procedures Act, the Consumer Financial Protection Act, and the Homeowners Protection Act, which stems from a 2014 examination. The purpose of a NORA letter is to provide a party being investigated an opportunity to present its position to the BCFP before an enforcement action may be recommended or commenced. The BCFP may seek to exercise its enforcement authority through settlement, administrative proceedings or litigation and seek injunctive relief, damages, restitution and civil monetary penalties, which could have a material adverse effect on the Company’s business, reputation, financial condition and results of operations. Similarly, while the Company is in discussions with regard to the status and various issues arising in the investigation by the Executive Office of the United States Trustees, it cannot predict the outcome of this investigation or whether they will exercise their enforcement authority through a settlement or other proceeding in which they seek to impose additional remedial measures or other financial sanctions, which could have a material adverse effect on the Company’s business, reputation, financial condition and results of operation. However, the Company believes it is premature to predict the potential outcome or to estimate any potential financial impact in connection with any potential enforcement action or settlement arising from either of the BCFP or United States Trustees matters. The Company has not recorded an accrual related to these matters as of September 30, 2018 as the Company does not believe that the possible loss or range of loss arising from any such action is estimable. The Company is continuing to cooperate with the BCFP and the Executive Office of the United States Trustees.

In addition, the Company is a defendant in a class action proceeding originally filed in state court in March 2012, and then removed to the United States District Court for the Eastern District of Washington under the caption Laura Zamora Jordan v. Nationstar Mortgage LLC. The suit was filed on behalf of a class of Washington borrowers and challenges property preservation measures the Company took, as loan servicer, after the borrowers defaulted and the Company's vendors determined that the borrowers had vacated or abandoned their properties. The case raises claims for (i) common law trespass, (ii) statutory trespass, and (iii) violation of Washington’s Consumer Protection Act, and seeks recovery of actual, statutory, and treble damages, as well as attorneys’ fees and litigation costs. On July 25, 2018, the Company entered into a settlement agreement to resolve this matter. The parties are currently seeking approval of the settlement from the court. The Company is pursuing reimbursement of the settlement payment from the owners of the loans it serviced, but there can be no assurance that the Company would prevail with any claims for reimbursement.

The Company is a defendant in a proceeding filed on January 2, 2018 in the U.S. District Court for the Northern District of California under the caption Collateral Analytics LLC v. Nationstar Mortgage LLC et al. The plaintiff alleges that the Company misappropriated plaintiff’s intellectual property for the purpose of replicating plaintiff’s products. The case raises federal and state law claims for misappropriation of trade secrets and breach of contract and seeks an award of actual damages, unjust enrichment, lost profits and/or a reasonable royalty, exemplary damages and injunctive relief preventing further misuse or disclosure of plaintiff’s intellectual property. The Company believes it has meritorious defenses and will vigorously defend itself in this matter.

The Company is also a defendant in a proceeding filed on October 23, 2015 in the U.S. District Court for the Central District of California under the caption Alfred Zaklit and Jessy Zaklit, individually and on behalf of all others similarly situated v. Nationstar Mortgage LLC et al. The plaintiff alleges that the Company improperly recorded telephone calls without the knowledge or consent of borrowers in violation of the California Penal Code. On July 24, 2017, the court certified a class comprised of California borrowers who, from October 2014 to May 2016, participated in outbound telephone conversations with the Company's employees who recorded the conversations without first informing the borrowers that the conversations were being recorded. The class seeks statutory damages and attorney’s fees. On September 10, 2018, we reached an agreement in principal to settle this matter.

On May 8, 2018, a purported class action lawsuit styled as Franchi v. Nationstar Mortgage Holdings Inc., et al., was filed in the United States District Court for the Northern District of Texas naming Nationstar, WMIH Corp., Wand Merger Corporation and the individual members of the Nationstar board of directors as defendants. The complaint alleged that the defendants violated the Exchange Act by disseminating a false and misleading registration statement. In order to, among other things, eliminate the burden, inconvenience, expense, risk, and disruption of continued litigation, on June 26, 2018, the plaintiff and the defendants (together, the “Parties”) entered into a memorandum of understanding (the “MOU”) to resolve the claims asserted by the plaintiff without the defendants admitting any wrongdoing or conceding the materiality of any supplemental disclosures. Pursuant to the MOU, the Parties agreed that the defendants would cause to be made certain supplemental disclosures set forth in an 8-K filed with the SEC on June 26, 2018. On August 7, 2018, the Parties filed a stipulation of dismissal of the purported class action lawsuit which dismissed plaintiff’s individual claims with prejudice, and dismissed the claims purportedly asserted on behalf of a putative class of Nationstar shareholders without prejudice.  

55


The Company seeks to resolve all legal proceedings and other matters in the manner management believes is in the best interest of the Company and contests liability, allegations of wrongdoing and, where applicable, the amount of damages or scope of any penalties or other relief sought as appropriate in each pending matter. The Company has entered into agreements with a number of entities and regulatory agencies that toll applicable limitations periods with respect to their claims.

On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where available information indicates that it is probable, a liability has been incurred, and the Company can reasonably estimate the amount of the loss, an accrued liability is established. The actual costs of resolving these proceedings may be substantially higher or lower than the amounts accrued.

As a legal matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is both probable and estimable. If, at the time of evaluation, the loss contingency is not both probable and reasonably estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and reasonably estimable. Once the matter is deemed to be both probable and reasonably estimable, the Company will establish an accrued liability and record a corresponding amount to legal-related expense. The Company will continue to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established. Legal-related expense, which includes legal settlements and the fees paid to external legal service providers, of $5 for the two months ended September 30, 2018 , was included in general and administrative expenses on the consolidated statements of operations. Legal-related expense for the Predecessor of $33 and $40 for the one and seven months ended July 31, 2018 , respectively, and $10 and $29 for the three and nine months ended September 30, 2017 , respectively, was included in general and administrative expenses on the consolidated statements of operations.

For a number of matters for which a loss is probable or reasonably possible in future periods, whether in excess of a related accrued liability or where there is no accrued liability, the Company may be able to estimate a range of possible loss. In determining whether it is possible to provide an estimate of loss or range of possible loss, the Company reviews and evaluates its material legal matters on an ongoing basis, in conjunction with any outside counsel handling the matter. For those matters for which an estimate is possible, management currently believes the aggregate range of reasonably possible loss is $15 to $36 in excess of the accrued liability (if any) related to those matters as of September 30, 2018 . This estimated range of possible loss is based upon currently available information and is subject to significant judgment, numerous assumptions and known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary substantially from the current estimate. Those matters for which an estimate is not possible are not included within the estimated range. Therefore, this estimated range of possible loss represents what management believes to be an estimate of possible loss only for certain matters meeting these criteria. It does not represent the Company's maximum loss exposure and the Company cannot provide assurance that its litigations reserves will not need to be adjusted in the future. Thus, the Company's exposure and ultimate losses may be higher, possibly significantly so, than the amounts accrued or this aggregate amount.

In the Company's experience, legal proceedings are inherently unpredictable. One or more of the following factors frequently contribute to this inherent unpredictability: the proceeding is in its early stages; the damages sought are unspecified, unsupported or uncertain; it is unclear whether a case brought as a class action will be allowed to proceed on that basis or, if permitted to proceed as a class action, how the class will be defined; the other party is seeking relief other than or in addition to compensatory damages (including, in the case of regulatory and governmental investigations and inquiries, the possibility of fines and penalties); the matter presents meaningful legal uncertainties, including novel issues of law; the Company has not engaged in meaningful settlement discussions; discovery has not started or is not complete; there are significant facts in dispute; predicting possible outcomes depends on making assumptions about future decisions of courts or governmental or regulatory bodies or the behavior of other parties; and there are a large number of parties named as defendants (including where it is uncertain how damages or liability, if any, will be shared among multiple defendants). Generally, the less progress that has been made in the proceedings or the broader the range of potential results, the harder it is for the Company to estimate losses or ranges of losses that it is reasonably possible the Company could incur.

Based on current knowledge, and after consultation with counsel, management believes that the current legal accrued liability, within payables and accrued liabilities, is appropriate, and the amount of any incremental liability arising from these matters is not expected to have a material adverse effect on the consolidated financial condition of the Company, although the outcome of such proceedings could be material to the Company’s operating results and cash flows for a particular period depending, on among other things, the level of the Company’s revenues or income for such period. However, in the event of significant developments on existing cases, it is possible that the ultimate resolution, if unfavorable, may be material to the Company’s consolidated financial statements.


56

Other Loss Contingencies
As part of the Company's ongoing operations, it acquires servicing rights of forward and reverse mortgage loan portfolios that are subject to indemnification based on the representations and warranties of the seller. From time to time, the Company will seek recovery under these representations and warranties for incurred costs. The Company believes all balances sought from sellers recorded in advances and other receivables and reverse mortgage interests represent valid claims. However, the Company acknowledges that the claims process can be prolonged due to the required time to perfect claims at the loan level. Because of the required time to perfect or remediate these claims, management relies on the sufficiency of documentation supporting the claim, current negotiations with the counterparty and other evidence to evaluate whether a reserve is required for non-recoverable balances. In the absence of successful negotiations with the seller, all amounts claimed may not be recovered. Balances may be written-off and charged against earnings when management identifies amounts where recoverability from the seller is not likely. As of September 30, 2018 , the Company believes all recorded balances for which recovery is sought from the seller are valid claims, and no evidence suggests additional reserves are warranted at this time.

Loan and Other Commitments
The Company enters into IRLCs with prospective borrowers whereby the Company commits to lend a certain loan amount under specific terms and interest rates to the borrower. The Company also enters into LPCs with prospective sellers. These loan commitments are treated as derivatives and are carried at fair value. See Note 9, Derivative Financial Instrument , for more information.

The Company and the Predecessor had certain reverse MSRs and reverse mortgage loans related to approximately $30,660 and $34,635 of UPB in reverse mortgage loans as of September 30, 2018 and December 31, 2017 , respectively. As servicer for these reverse mortgage loans, among other things, the Company and the Predecessor is obligated to fund borrowers' draws to the loan customers as required in accordance with the loan agreement. As of September 30, 2018 and December 31, 2017 , the Company and the Predecessor’s maximum unfunded advance obligation to fund borrower draws related to these MSRs and loans was approximately $3,274 and $3,713 , respectively. Upon funding any portion of these draws, the Company and the Predecessor expect to securitize and sell the advances in transactions that will be accounted for as secured borrowings.


19. Business Segment Reporting

Upon consummation of the Merger with Nationstar, the Company has identified four  reportable segments: Servicing, Originations, Xome and Corporate and other. The Company's segments are based upon the Company's organizational structure, which focuses primarily on the services offered. Corporate functional expenses are allocated to individual segments based on the actual cost of services performed based on direct resource utilization, estimate of percentage use for shared services or headcount percentage for certain functions. Facility costs are allocated to individual segments based on cost per headcount for specific facilities utilized. Group insurance costs are allocated to individual segments based on global cost per headcount. Non-Allocated corporate expenses include the administrative costs of executive management and other corporate functions that are not directly attributable to our operating segments. Revenues generated on inter-segment services performed are valued based on similar services provided to external parties.


57

The following tables present financial information by segment.
 
 
Successor
 
 
For the Period August 1 - September 30, 2018
 
 
Servicing
 
Originations
 
Xome
 
Eliminations
 
Total Operating Segments
 
Corporate and Other
 
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service related, net
 
$
183

 
$
10

 
$
73

 
$
(7
)
 
$
259

 
$
—

 
$
259

Net gain on mortgage loans held for sale
 
—

 
76

 
—

 
7

 
83

 
—

 
83

Total revenues
 
183

 
86

 
73

 
—

 
342

 
—

 
342

Total Expenses
 
104

 
66

 
71

 
—

 
241

 
34

 
275

Other income (expenses)
 

 

 

 

 
 
 

 

Interest income
 
78

 
10

 
—

 
—

 
88

 
2

 
90

Interest expense
 
(74
)
 
(10
)
 
(1
)
 
—

 
(85
)
 
(37
)
 
(122
)
Other
 
5

 
1

 
—

 
—

 
6

 
—

 
6

Total Other Income (expenses), net
 
9

 
1

 
(1
)
 
—

 
9

 
(35
)
 
(26
)
Income (loss) before income tax expense (benefit)
 
$
88

 
$
21

 
$
1

 
$
—

 
$
110

 
$
(69
)
 
$
41

Depreciation and amortization for property and equipment and intangible assets
 
$
4

 
$
2

 
$
2

 
$
—

 
$
8

 
$
7

 
$
15

Total assets
 
$
14,166

 
$
4,892

 
$
457

 
$
(3,532
)
 
$
15,983

 
$
1,745

 
$
17,728


 
 
Predecessor
 
 
For the Period July 1 - July 31, 2018
 
 
Servicing
 
Originations
 
Xome
 
Eliminations
 
Total Operating Segments
 
Corporate and Other
 
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service related, net
 
$
97

 
$
4

 
$
22

 
$
(3
)
 
$
120

 
$
—

 
$
120

Net gain on mortgage loans held for sale
 
—

 
41

 
—

 
3

 
44

 
—

 
44

Total revenues
 
97

 
45

 
22

 
—

 
164

 
—

 
164

Total Expenses
 
126

 
34

 
19

 
—

 
179

 
63

 
242

Other income (expenses)
 

 

 

 

 

 

 

Interest income
 
41

 
6

 
—

 
—

 
47

 
1

 
48

Interest expense
 
(35
)
 
(6
)
 
—

 
—

 
(41
)
 
(12
)
 
(53
)
Other
 
—

 
—

 
—

 
—

 
—

 
—


—

Total Other Income (expenses), net
 
6

 
—

 
—

 
—

 
6

 
(11
)
 
(5
)
Income (loss) before income tax expense (benefit)
 
$
(23
)
 
$
11

 
$
3

 
$
—

 
$
(9
)
 
$
(74
)
 
$
(83
)
Depreciation and amortization for property and equipment and intangible assets
 
$
2

 
$
1

 
$
1

 
$
—

 
$
4

 
$
—

 
$
4

Total assets
 
$
14,578

 
$
4,701

 
$
425

 
$
(3,591
)
 
$
16,113

 
$
913

 
$
17,026


58

 
 
Predecessor
 
 
Three Months Ended September 30, 2017
 
 
Servicing
 
Originations
 
Xome
 
Eliminations
 
Total Operating Segments
 
Corporate and Other
 
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service related, net
 
$
191

 
$
16

 
$
65

 
$
(20
)
 
$
252

 
$
—

 
$
252

Net gain on mortgage loans held for sale
 
—

 
134

 
—

 
20

 
154

 
—

 
154

Total revenues
 
191

 
150

 
65

 
—

 
406

 
—

 
406

Total Expenses
 
185

 
106

 
54

 
—

 
345

 
23

 
368

Other income (expenses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
143

 
14

 
—

 
—

 
157

 
2

 
159

Interest expense
 
(132
)
 
(13
)
 
—

 
—

 
(145
)
 
(38
)
 
(183
)
Other
 
(2
)
 
—

 
—

 
—

 
(2
)
 
—

 
(2
)
Total Other Income (expenses), net
 
9

 
1

 
—

 
—

 
10

 
(36
)
 
(26
)
Income (loss) before income tax expense (benefit)
 
$
15

 
$
45

 
$
11

 
$
—

 
$
71

 
$
(59
)
 
$
12

Depreciation and amortization for property and equipment and intangible assets
 
$
6

 
$
3

 
$
3

 
$
—

 
$
12

 
$
3

 
$
15

Total assets
 
$
15,147

 
$
4,644

 
$
382

 
$
(2,948
)
 
$
17,225

 
$
779

 
$
18,004

 
 
Predecessor
 
 
For the Period January 1 - July 31, 2018
 
 
Servicing
 
Originations
 
Xome
 
Eliminations
 
Total Operating Segments
 
Corporate and Other
 
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service related, net
 
$
740

 
$
36

 
$
149

 
$
(25
)
 
$
900

 
$
1

 
$
901

Net gain on mortgage loans held for sale
 
—

 
270

 
—

 
25

 
295

 
—

 
295

Total revenues
 
740

 
306

 
149

 
—

 
1,195

 
1

 
1,196

Total expenses
 
474

 
245

 
123

 
—

 
842

 
103

 
945

Other income (expenses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
288

 
38

 
—

 
—

 
326

 
7

 
333

Interest expense
 
(268
)
 
(37
)
 
—

 
—

 
(305
)
 
(83
)
 
(388
)
Other
 
(1
)
 
—

 
9

 
—

 
8

 
(2
)
 
6

Total other income (expenses), net
 
19

 
1

 
9

 
—

 
29

 
(78
)
 
(49
)
Income (loss) before income tax expense (benefit)
 
$
285

 
$
62

 
$
35

 
$
—

 
$
382

 
$
(180
)
 
$
202

Depreciation and amortization for property and equipment and intangible assets
 
$
15

 
$
7

 
$
7

 
$
—

 
$
29

 
$
4

 
$
33

Total assets
 
$
14,578

 
$
4,701

 
$
425

 
$
(3,591
)
 
$
16,113

 
$
913

 
$
17,026


59

 
 
Predecessor
 
 
Nine Months Ended September 30, 2017
 
 
Servicing
 
Originations
 
Xome
 
Eliminations
 
Total Operating Segments
 
Corporate and Other
 
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service related, net
 
$
537

 
$
47

 
$
226

 
$
(63
)
 
$
747

 
$
1

 
$
748

Net gain on mortgage loans held for sale
 
—

 
402

 
—

 
63

 
465

 
—

 
465

Total revenues
 
537

 
449

 
226

 
—

 
1,212

 
1

 
1,213

Total expenses
 
513

 
326

 
193

 
—

 
1,032

 
72

 
1,104

Other income (expenses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
386

 
39

 
—

 
—

 
425

 
12

 
437

Interest expense
 
(409
)
 
(39
)
 
—

 
—

 
(448
)
 
(116
)
 
(564
)
Other
 
(2
)
 
—

 
8

 
—

 
6

 
(2
)
 
4

Total other income (expenses), net
 
(25
)
 
—

 
8

 
—

 
(17
)
 
(106
)
 
(123
)
Income (loss) before income tax expense (benefit)
 
$
(1
)
 
$
123

 
$
41

 
$
—

 
$
163

 
$
(177
)
 
$
(14
)
Depreciation and amortization for property and equipment and intangible assets
 
$
16

 
$
8

 
$
10

 
$
—

 
$
34

 
$
10

 
$
44

Total assets
 
$
15,147

 
$
4,644

 
$
382

 
$
(2,948
)
 
$
17,225

 
$
779

 
$
18,004



20. Guarantor Financial Statement Information

As of September 30, 2018 , Nationstar Mortgage LLC and Nationstar Capital Corporation (1) (collectively, the "Issuer"), both indirect wholly-owned subsidiaries of the Company, have issued a 6.500% senior notes due July 2021 with an outstanding aggregate principal amount of $592 and a 6.500% senior notes due June 2022 with an outstanding aggregate principal amount of $206 , (collectively, the "unsecured senior notes"). The unsecured senior notes are unconditionally guaranteed, jointly and severally, by all of Nationstar Mortgage LLC’s existing and future domestic subsidiaries other than its securitization and certain finance subsidiaries excluded restricted subsidiaries and subsidiaries that in the future Nationstar Mortgage LLC designates as unrestricted subsidiaries. All guarantor subsidiaries are 100% owned by Nationstar Mortgage LLC. The Company and its three wholly-owned subsidiaries (which are holding companies above Nationstar Mortgage LLC) are guarantors of the unsecured senior notes as well. Presented below are the condensed consolidating financial statements of the Company, Nationstar Mortgage LLC and the guarantor and non-guarantor subsidiaries for the periods indicated.

In the condensed consolidating financial statements presented below, the Company allocates income tax expense to Nationstar Mortgage LLC as if it were a separate tax payer entity pursuant to ASC 740, Income Taxes .

(1) Nationstar Capital Corporation has no assets, operations or liabilities other than being a co-obligor of the unsecured senior notes.

60

MR. COOPER GROUP INC.
CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2018
 
Successor
 
Mr. Cooper
 
Issuer (1)
 
Guarantor
(Subsidiaries of Issuer)
 
Non-Guarantor
(Subsidiaries of Issuer)
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5

 
$
164

 
$
1

 
$
28

 
$
—

 
$
198

Restricted cash
—

 
168

 
—

 
164

 
—

 
332

Mortgage servicing rights
—

 
3,462

 
—

 
38

 
—

 
3,500

Advances and other receivables, net
—

 
1,174

 
—

 
—

 
—

 
1,174

Reverse mortgage interests, net
—

 
7,764

 
—

 
1,122

 
—

 
8,886

Mortgage loans held for sale at fair value
—

 
1,681

 
—

 
—

 
—

 
1,681

Mortgage loans held for investment, net
—

 
1

 
—

 
121

 
—

 
122

Property and equipment, net
—

 
85

 
—

 
17

 
—

 
102

Deferred tax asset
990

 
(49
)
 
—

 
(7
)
 
—

 
934

Other assets
1

 
671

 
197

 
616

 
(686
)
 
799

Investment in subsidiaries
2,916

 
586

 
—

 
—

 
(3,502
)
 
—

Total assets
$
3,912

 
$
15,707

 
$
198

 
$
2,099

 
$
(4,188
)
 
$
17,728

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Unsecured senior notes, net
$
1,658

 
$
799

 
$
—

 
$
—

 
$
—

 
$
2,457

Advance facilities, net
—

 
33

 
—

 
563

 
—

 
596

Warehouse facilities, net
—

 
2,888

 
—

 
—

 
—

 
2,888

Payables and accrued liabilities
32

 
1,244

 
2

 
64

 
—

 
1,342

MSR related liabilities - nonrecourse at fair value
—

 
1,103

 
—

 
20

 
—

 
1,123

Mortgage servicing liabilities
—

 
79

 
—

 
—

 
—

 
79

Other nonrecourse debt, net
—

 
6,103

 
—

 
1,062

 
—

 
7,165

Payables to affiliates
144

 
542

 
—

 
—

 
(686
)
 
—

Total liabilities
1,834

 
12,791

 
2

 
1,709

 
(686
)
 
15,650

Total stockholders' equity
2,078

 
2,916

 
196

 
390

 
(3,502
)
 
2,078

Total liabilities and stockholders' equity
$
3,912

 
$
15,707

 
$
198

 
$
2,099

 
$
(4,188
)
 
$
17,728


(1) Issuer balances exclude the balances of its guarantor and non-guarantor subsidiaries, as previously described.

61

MR. COOPER GROUP INC.
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE PERIOD AUGUST 1 TO SEPTEMBER 30, 2018
 
Successor
 
Mr. Cooper
 
Issuer (1)
 
Guarantor
(Subsidiaries of Issuer)
 
Non-Guarantor
(Subsidiaries of Issuer)
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Service related, net
$
—

 
$
183

 
$
4

 
$
72

 
$
—

 
$
259

Net gain on mortgage loans held for sale
—

 
83

 
—

 
—

 
—

 
83

Total revenues
—

 
266

 
4

 
72

 
—

 
342

Expenses:
 
 
 
 
 
 
 
 
 
 
 
Salaries, wages benefits
—

 
107

 
1

 
31

 
—

 
139

General and administrative
1

 
91

 
1

 
43

 
—

 
136

Total expenses
1

 
198

 
2

 
74

 
—

 
275

Other income (expenses):
 
 
 
 
 
 
 
 
 
 
 
Interest income
—

 
80

 
—

 
10

 
—

 
90

Interest expense
(26
)
 
(87
)
 
—

 
(9
)
 
—

 
(122
)
Other income (expenses)
1

 
5

 
—

 
—

 
—

 
6

Gain (loss) from subsidiaries
56

 
1

 
—

 
—

 
(57
)
 
—

Total other income (expenses), net
31

 
(1
)
 
—

 
1

 
(57
)
 
(26
)
Income (loss) before income tax expense (benefit)
30

 
67

 
2

 
(1
)
 
(57
)
 
41

Less: Income tax expense (benefit)
(990
)
 
11

 
—

 
—

 
—

 
(979
)
Net income (loss)
1,020

 
56

 
2

 
(1
)
 
(57
)
 
1,020

Less: Net income attributable to non-controlling interests
—

 
—

 
—

 
—

 
—

 
—

Net income (loss) attributable to Nationstar
$
1,020

 
$
56

 
$
2

 
$
(1
)
 
$
(57
)
 
$
1,020


(1) Issuer activities exclude the activities of its guarantor and non-guarantor subsidiaries, as previously described.

62

MR. COOPER GROUP INC.
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE PERIOD JULY 1 TO JULY 31, 2018
 
Predecessor
 
Nationstar
 
Issuer (1)
 
Guarantor
(Subsidiaries of Issuer)
 
Non-Guarantor
(Subsidiaries of Issuer)
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Service related, net
$
—

 
$
95

 
$
3

 
$
22

 
$
—

 
$
120

Net gain on mortgage loans held for sale
—

 
44

 
—

 
—

 
—

 
44

Total revenues
—

 
139

 
3

 
22

 
—

 
164

Expenses:
 
 
 
 
 
 
 
 
 
 
 
Salaries, wages benefits
—

 
59

 
—

 
10

 
—

 
69

General and administrative
27

 
136

 
—

 
10

 
—

 
173

Total expenses
27

 
195

 
—

 
20

 
—

 
242

Other income (expenses):
 
 
 
 
 
 
 
 
 
 
 
Interest income
—

 
41

 
—

 
7

 
—

 
48

Interest expense
—

 
(49
)
 
—

 
(4
)
 
—

 
(53
)
Other income (expenses)
—

 
—

 
—

 
—

 
—

 
—

Gain (loss) from subsidiaries
(37
)
 
7

 
—

 
—

 
30

 
—

Total other income (expenses), net
(37
)
 
(1
)
 
—

 
3

 
30

 
(5
)
Income (loss) before income tax expense (benefit)
(64
)
 
(57
)
 
3

 
5

 
30

 
(83
)
Less: Income tax expense (benefit)
—

 
(20
)
 
—

 
1

 
—

 
(19
)
Net income (loss)
(64
)
 
(37
)
 
3

 
4

 
30

 
(64
)
Less: Net income attributable to non-controlling interests
—

 
—

 
—

 
—

 
—

 
—

Net income (loss) attributable to Nationstar
$
(64
)
 
$
(37
)
 
$
3

 
$
4

 
$
30

 
$
(64
)

(1) Issuer activities exclude the activities of its guarantor and non-guarantor subsidiaries, as previously described.

63

MR. COOPER GROUP INC.
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE PERIOD JANUARY 1 TO JULY 31, 2018
 
Predecessor
 
Nationstar
 
Issuer (1)
 
Guarantor
(Subsidiaries of Issuer)
 
Non-Guarantor
(Subsidiaries of Issuer)
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Service related, net
$
—

 
$
732

 
$
16

 
$
153

 
$
—

 
$
901

Net gain on mortgage loans held for sale
—

 
295

 
—

 
—

 
—

 
295

Total revenues
—

 
1,027

 
16

 
153

 
—

 
1,196

Expenses:
 
 
 
 
 
 
 
 
 
 
 
Salaries, wages benefits
—

 
359

 
3

 
64

 
—

 
426

General and administrative
27

 
427

 
1

 
64

 
—

 
519

Total expenses
27

 
786

 
4

 
128

 
—

 
945

Other income (expenses):
 
 
 
 
 
 
 
 
 
 
 
Interest income
—

 
299

 
—

 
34

 
—

 
333

Interest expense
—

 
(364
)
 
—

 
(24
)
 
—

 
(388
)
Other income (expense)
—

 
(3
)
 
—

 
9

 
—

 
6

Gain (loss) from subsidiaries
181

 
56

 
—

 
—

 
(237
)
 
—

Total other income (expenses), net
181

 
(12
)
 
—

 
19

 
(237
)
 
(49
)
Income (loss) before income tax expense (benefit)
154

 
229

 
12

 
44

 
(237
)
 
202

Less: income tax expense (benefit)
—

 
48

 
—

 
—

 
—

 
48

Net income (loss)
154

 
181

 
12

 
44

 
(237
)
 
154

Less: net loss attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

Net income (loss) attributable to Nationstar
$
154

 
$
181

 
$
12

 
$
44

 
$
(237
)
 
$
154


(1) Issuer activities exclude the activities of its guarantor and non-guarantor subsidiaries, as previously described.

64

MR. COOPER GROUP INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD AUGUST 1 TO SEPTEMBER 30, 2018
 
Successor
 
Mr. Cooper
 
Issuer (1)
 
Guarantor
(Subsidiaries of Issuer)
 
Non-Guarantor
(Subsidiaries of Issuer)
 
Eliminations
 
Consolidated
Operating Activities
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to Nationstar
$
1,020

 
$
56

 
$
2

 
$
(1
)
 
$
(57
)
 
$
1,020

Adjustments to reconcile net income (loss) to net cash attributable to operating activities:
 
 
 
 
 
 
 
 
 
 
 
Deferred tax
(990
)
 
52

 
—

 
7

 
—

 
(931
)
(Gain) loss from subsidiaries
(56
)
 
(1
)
 
—

 
—

 
57

 
—

Net gain on mortgage loans held for sale
—

 
(83
)
 
—

 
—

 
—

 
(83
)
Reverse mortgage loan interest income
—

 
(72
)
 
—

 
—

 
—

 
(72
)
Provision for servicing reserves
—

 
14

 
—

 
—

 
—

 
14

Fair value changes and amortization of mortgage servicing rights
—

 
(27
)
 
—

 
—

 
—

 
(27
)
Fair value changes in excess spread financing
—

 
26

 
—

 
—

 
—

 
26

Amortization of premiums, net of discount accretion
1

 
2

 
—

 
—

 
—

 
3

Depreciation and amortization for property and equipment and intangible assets
—

 
13

 
—

 
2

 
—

 
15

Share-based compensation
—

 
2

 
—

 
—

 
—

 
2

Repurchases of forward loans assets out of Ginnie Mae securitizations
—

 
(223
)
 
—

 
—

 
—

 
(223
)
Mortgage loans originated and purchased for sale, net of fees
—

 
(3,458
)
 
—

 
—

 
—

 
(3,458
)
Sales proceeds and loan payment proceeds for mortgage loans held for sale and held for investment
—

 
3,537

 
—

 
9

 
—

 
3,546

Changes in assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
Advances and other receivables
—

 
76

 
—

 
—

 
—

 
76

Reverse mortgage interests
—

 
425

 
—

 
17

 
—

 
442

Other assets
—

 
25

 
(3
)
 
(37
)
 
—

 
(15
)
Payables and accrued liabilities
19

 
(179
)
 
1

 
—

 
—

 
(159
)
Net cash attributable to operating activities
(6
)
 
185

 
—

 
(3
)
 
—

 
176


(1) Issuer activities exclude the activities of its guarantor and non-guarantor subsidiaries, as previously described.




65

MR. COOPER GROUP INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD AUGUST 1 TO SEPTEMBER 30, 2018
(Continued)
 
Successor
 
Mr. Cooper
 
Issuer (1)
 
Guarantor
(Subsidiaries of Issuer)
 
Non-Guarantor
(Subsidiaries of Issuer)
 
Eliminations
 
Consolidated
Investing Activities
 
 
 
 
 
 
 
 
 
 
 
Acquisition, net of cash acquired
—

 
—

 
—

 
(33
)
 
—

 
(33
)
Property and equipment additions, net of disposals
—

 
(20
)
 
—

 
6

 
—

 
(14
)
Purchase of forward mortgage servicing rights, net of liabilities incurred
—

 
(63
)
 
—

 
—

 
—

 
(63
)
Proceeds on sale of forward and reverse mortgage servicing rights
—

 
60

 
—

 
—

 
—

 
60

Net cash attributable to investing activities
—

 
(23
)
 
—

 
(27
)
 
—

 
(50
)
Financing Activities
 
 
 
 
 
 
 
 
 
 
 
Increase in warehouse facilities
—

 
186

 
—

 
—

 
—

 
186

(Decrease) increase in advance facilities
—

 
(17
)
 
—

 
63

 
—

 
46

Repayment of HECM securitizations
—

 
—

 
—

 
(91
)
 
—

 
(91
)
Proceeds from issuance of participating interest financing in reverse mortgage interests
—

 
45

 
—

 
—

 
—

 
45

Repayment of participating interest financing in reverse mortgage interests
—

 
(403
)
 
—

 
—

 
—

 
(403
)
Proceeds from issuance of excess spread financing
—

 
84

 
—

 
—

 
—

 
84

Repayment of excess spread financing
—

 
(21
)
 
—

 
—

 
—

 
(21
)
Settlement of excess spread financing
—

 
(31
)
 
—

 
—

 
—

 
(31
)
Repayment of nonrecourse debt - legacy assets
—

 
—

 
—

 
(3
)
 
—

 
(3
)
Redemption and repayment of unsecured senior notes
—

 
(1,030
)
 
—

 
—

 
—

 
(1,030
)
Debt financing costs
—

 
(1
)
 
—

 
—

 
—

 
(1
)
Net cash attributable to financing activities
—

 
(1,188
)
 
—

 
(31
)
 
—

 
(1,219
)
Net decrease in cash, cash equivalents, and restricted cash
(6
)
 
(1,026
)
 
—

 
(61
)
 
—

 
(1,093
)
Cash, cash equivalents, and restricted cash - beginning of period
11

 
1,358

 
1

 
253

 
—

 
1,623

Cash, cash equivalents, and restricted cash - end of period
$
5

 
$
332

 
$
1

 
$
192

 
$
—

 
$
530


(1) Issuer activities exclude the activities of its guarantor and non-guarantor subsidiaries, as previously described.


66

MR. COOPER GROUP INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 1 TO JULY 31, 2018
 
Predecessor
 
Nationstar
 
Issuer (1)
 
Guarantor
(Subsidiaries of Issuer)
 
Non-Guarantor
(Subsidiaries of Issuer)
 
Eliminations
 
Consolidated
Operating Activities
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to Nationstar
$
154

 
$
181

 
$
12

 
$
44

 
$
(237
)
 
$
154

Adjustments to reconcile net income (loss) to net cash attributable to operating activities:
 
 
 
 
 
 
 
 
 
 
 
(Gain) loss from subsidiaries
(181
)
 
(56
)
 
—

 
—

 
237

 
—

Net gain on mortgage loans held for sale
—

 
(295
)
 
—

 
—

 
—

 
(295
)
Reverse mortgage loan interest income
—

 
(274
)
 
—

 
—

 
—

 
(274
)
Gain on sale of assets
—

 
—

 
—

 
(9
)
 
—

 
(9
)
MSL related increased obligation
—

 
59

 
—

 
—

 
—

 
59

Provision for servicing reserves
—

 
70

 
—

 
—

 
—

 
70

Fair value changes and amortization of mortgage servicing rights
—

 
(178
)
 
—

 
1

 
—

 
(177
)
Fair value changes in excess spread financing
—

 
81

 
—

 
—

 
—

 
81

Fair value changes in mortgage servicing rights financing liability
—

 
16

 
—

 
—

 
—

 
16

Amortization of premiums, net of discount accretion
—

 
11

 
—

 
(3
)
 
—

 
8

Depreciation and amortization for property and equipment and intangible assets
—

 
26

 
—

 
7

 
—

 
33

Share-based compensation
—

 
16

 
—

 
1

 
—

 
17

Other (gain) loss
—

 
3

 
—

 
—

 
—

 
3

Repurchases of forward loans assets out of Ginnie Mae securitizations
—

 
(544
)
 
—

 
—

 
—

 
(544
)
Mortgage loans originated and purchased for sale, net of fees
—

 
(12,328
)
 
—

 
—

 
—

 
(12,328
)
Sales proceeds and loan payment proceeds for mortgage loans held for sale and held for investment
—

 
13,381

 
—

 
11

 
—

 
13,392

Changes in assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
Advances and other receivables
—

 
377

 
—

 
—

 
—

 
377

Reverse mortgage interests
—

 
1,866

 
—

 
(265
)
 
—

 
1,601

Other assets
9

 
(293
)
 
(12
)
 
255

 
—

 
(41
)
Payables and accrued liabilities
27

 
128

 
—

 
(4
)
 
—

 
151

Net cash attributable to operating activities
9

 
2,247

 
—

 
38

 
—

 
2,294


(1) Issuer activities exclude the activities of its guarantor and non-guarantor subsidiaries, as previously described.


67

MR. COOPER GROUP INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 1 TO JULY 31, 2018
(Continued)
 
Predecessor
 
Nationstar
 
Issuer (1)
 
Guarantor
(Subsidiaries of Issuer)
 
Non-Guarantor
(Subsidiaries of Issuer)
 
Eliminations
 
Consolidated
Investing Activities
 
 
 
 
 
 
 
 
 
 
 
Property and equipment additions, net of disposals
—

 
(35
)
 
—

 
(5
)
 
—

 
(40
)
Purchase of forward mortgage servicing rights, net of liabilities incurred
—

 
(127
)
 
—

 
(7
)
 
—

 
(134
)
Net payment related to acquisition of HECM related receivables
—

 
(1
)
 
—

 
—

 
—

 
(1
)
Proceeds on sale of assets
—

 
—

 
—

 
13

 
—

 
13

Net cash attributable to investing activities
—

 
(163
)
 
—

 
1

 
—

 
(162
)
Financing Activities
 
 
 
 
 
 
 
 
 
 
 
Decrease in warehouse facilities
—

 
(585
)
 
—

 
—

 
—

 
(585
)
Decrease in advance facilities
—

 
(55
)
 
—

 
(250
)
 
—

 
(305
)
Proceeds from issuance of HECM securitizations
—

 
—

 
—

 
759

 
—

 
759

Repayment of HECM securitizations
—

 
—

 
—

 
(448
)
 
—

 
(448
)
Proceeds from issuance of participating interest financing in reverse mortgage interests
—

 
208

 
—

 
—

 
—

 
208

Repayment of participating interest financing in reverse mortgage interests
—

 
(1,599
)
 
—

 
—

 
—

 
(1,599
)
Proceeds from issuance of excess spread financing
—

 
70

 
—

 
—

 
—

 
70

Repayment of excess spread financing
—

 
(3
)
 
—

 
—

 
—

 
(3
)
Settlement of excess spread financing
—

 
(105
)
 
—

 
—

 
—

 
(105
)
Repayment of nonrecourse debt - legacy assets
—

 
—

 
—

 
(7
)
 
—

 
(7
)
Repurchase of unsecured senior notes
—

 
(62
)
 
—

 
—

 
—

 
(62
)
Surrender of shares relating to stock vesting
(9
)
 
—

 
—

 
—

 
—

 
(9
)
Debt financing costs
—

 
(24
)
 
—

 
—

 
—

 
(24
)
Dividends to non-controlling interests
—

 
(1
)
 
—

 
—

 
—

 
(1
)
Net cash attributable to financing activities
(9
)
 
(2,156
)
 
—

 
54

 
—

 
(2,111
)
Net (decrease) increase in cash, cash equivalents, and restricted cash
—

 
(72
)
 
—

 
93

 
—

 
21

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

 
423

 
1

 
151

 
—

 
575

Cash, cash equivalents, and restricted cash - end of period
$
—

 
$
351

 
$
1

 
$
244

 
$
—

 
$
596


(1) Issuer activities exclude the activities of its guarantor and non-guarantor subsidiaries, as previously described.

68



MR. COOPER GROUP INC.
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2017
 
Predecessor
 
Nationstar
 
Issuer (1)
 
Guarantor
(Subsidiaries of Issuer)
 
Non-Guarantor
(Subsidiaries of Issuer)
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
195

 
$
1

 
$
19

 
$
—

 
$
215

Restricted cash
—

 
228

 
—

 
132

 
—

 
360

Mortgage servicing rights
—

 
2,910

 
—

 
31

 
—

 
2,941

Advances and other receivables, net
—

 
1,706

 
—

 
—

 
—

 
1,706

Reverse mortgage interests, net
—

 
9,110

 
—

 
874

 
—

 
9,984

Mortgage loans held for sale at fair value
—

 
1,891

 
—

 
—

 
—

 
1,891

Mortgage loans held for investment, net
—

 
1

 
—

 
138

 
—

 
139

Property and equipment, net
—

 
102

 
—

 
19

 
—

 
121

Other assets
—

 
585

 
182

 
779

 
(867
)
 
679

Investment in subsidiaries
1,846

 
522

 
—

 
—

 
(2,368
)
 
—

Total assets
$
1,846

 
$
17,250

 
$
183

 
$
1,992

 
$
(3,235
)
 
$
18,036

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Unsecured senior notes, net
$
—

 
$
1,874

 
$
—

 
$
—

 
$
—

 
$
1,874

Advance facilities, net
—

 
106

 
—

 
749

 
—

 
855

Warehouse facilities, net
—

 
3,285

 
—

 
—

 
—

 
3,285

Payables and accrued liabilities
—

 
1,202

 
1

 
36

 
—

 
1,239

MSR related liabilities - nonrecourse at fair value
—

 
987

 
—

 
19

 
—

 
1,006

Mortgage servicing liabilities
—

 
41

 
—

 
—

 
—

 
41

Other nonrecourse debt, net
—

 
7,167

 
—

 
847

 
—

 
8,014

Payables to affiliates
124

 
742

 
—

 
1

 
(867
)
 
—

Total liabilities
124

 
15,404

 
1

 
1,652

 
(867
)
 
16,314

Total stockholders' equity
1,722

 
1,846

 
182

 
340

 
(2,368
)
 
1,722

Total liabilities and stockholders' equity
$
1,846

 
$
17,250

 
$
183

 
$
1,992

 
$
(3,235
)
 
$
18,036


(1) Issuer balances exclude the balances of its guarantor and non-guarantor subsidiaries, as previously described.


69

MR. COOPER GROUP INC.
CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2017
 
Predecessor
 
Nationstar
 
Issuer (1)
 
Guarantor
(Subsidiaries of Issuer)
 
Non-Guarantor
(Subsidiaries of Issuer)
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Service related, net
$
—

 
$
181

 
$
7

 
$
64

 
$
—

 
$
252

Net gain on mortgage loans held for sale
—

 
153

 
—

 
1

 
—

 
154

Total revenues
—

 
334

 
7

 
65

 
—

 
406

Expenses:
 
 
 
 
 
 
 
 
 
 
 
Salaries, wages and benefits
—

 
153

 
1

 
29

 
—

 
183

General and administrative
—

 
154

 
4

 
27

 
—

 
185

Total expenses
—

 
307

 
5

 
56

 
—

 
368

Other income (expenses):
 
 
 
 
 
 
 
 
 
 
 
Interest income
—

 
147

 
—

 
12

 
—

 
159

Interest expense
—

 
(170
)
 
—

 
(13
)
 
—

 
(183
)
Other expenses
—

 
(3
)
 
—

 
1

 
—

 
(2
)
Gain (loss) from subsidiaries
7

 
11

 
—

 
—

 
(18
)
 
—

Total other income (expenses), net
7

 
(15
)
 
—

 
—

 
(18
)
 
(26
)
Income (loss) before income tax expense (benefit)
7

 
12

 
2

 
9

 
(18
)

12

Less: Income tax benefit
—

 
5

 
—

 
—

 
—

 
5

Net income (loss)
7

 
7

 
2

 
9

 
(18
)
 
7

Less: Net income attributable to non-controlling interests
—

 
—

 
—

 
—

 
—

 
—

Net income (loss) attributable to Nationstar
$
7

 
$
7

 
$
2

 
$
9

 
$
(18
)
 
$
7


(1) Issuer activities exclude the activities of its guarantor and non-guarantor subsidiaries, as previously described.

70

MR. COOPER GROUP INC.
CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2017
 
Predecessor
 
Nationstar
 
Issuer (1)
 
Guarantor
(Subsidiaries of Issuer)
 
Non-Guarantor
(Subsidiaries of Issuer)
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Service related, net
$
—

 
$
497

 
$
21

 
$
230

 
$
—

 
$
748

Net gain on mortgage loans held for sale
—

 
464

 
—

 
1

 
—

 
465

Total Revenues
—

 
961

 
21

 
231

 
—

 
1,213

Expenses:
 
 
 
 
 
 
 
 
 
 
 
Salaries, wages and benefits
—

 
451

 
3

 
103

 
—

 
557

General and administrative
—

 
435

 
10

 
102

 
—

 
547

Total expenses
—

 
886

 
13

 
205

 
—

 
1,104

Other income (expenses):
 
 
 
 
 
 
 
 
 
 
 
Interest income
—

 
398

 
—

 
39

 
—

 
437

Interest expense
—

 
(522
)
 
—

 
(42
)
 
—

 
(564
)
Other expense
—

 
(5
)
 
—

 
9

 
—

 
4

Gain (loss) from subsidiaries
(11
)
 
40

 
—

 
—

 
(29
)
 
—

Total other income (expenses), net
(11
)
 
(89
)
 
—

 
6

 
(29
)
 
(123
)
Income (loss) before taxes
(11
)
 
(14
)
 
8

 
32

 
(29
)
 
(14
)
Income tax benefit
—

 
(4
)
 
—

 
—

 
—

 
(4
)
Net income (loss)
(11
)
 
(10
)
 
8

 
32

 
(29
)
 
(10
)
Less: net income attributable to non-controlling interests
—

 
1

 
—

 
—

 
—

 
1

Net income (loss) attributable to Nationstar
$
(11
)
 
$
(11
)
 
$
8

 
$
32

 
$
(29
)
 
$
(11
)

(1) Issuer activities exclude the activities of its guarantor and non-guarantor subsidiaries, as previously described.


71

MR. COOPER GROUP INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2017
 
 
Predecessor
 
 
Nationstar
 
Issuer (1)
 
Guarantor
(Subsidiaries of Issuer)
 
Non-Guarantor
(Subsidiaries of Issuer)
 
Eliminations
 
Consolidated
Operating Activities
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to Nationstar
 
$
(11
)
 
$
(11
)
 
$
8

 
$
32

 
$
(29
)
 
$
(11
)
Adjustments to reconcile net income (loss) to net cash attributable to operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to non-controlling interests
 
—

 
1

 
—

 
—

 
—

 
1

(Gain) loss from subsidiaries
 
11

 
(40
)
 
—

 
—

 
29

 
—

Net gain on mortgage loans held for sale
 
—

 
(464
)
 
—

 
(1
)
 
—

 
(465
)
Reverse mortgage loan interest income
 
—

 
(370
)
 
—

 
—

 
—

 
(370
)
(Gain) loss on sale of assets
 
—

 
1

 
—

 
(9
)
 
—

 
(8
)
Provision for servicing reserves
 
—

 
97

 
—

 
—

 
—

 
97

Fair value changes and amortization of mortgage servicing rights
 
—

 
362

 
—

 
—

 
—

 
362

Fair value changes in excess spread financing
 
—

 
2

 
—

 
(2
)
 
—

 
—

Fair value changes in mortgage servicing rights financing liability
 
—

 
(7
)
 
—

 
—

 
—

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

 
55

 
—

 
8

 
—

 
63

Depreciation and amortization for property and equipment and intangible assets
 
—

 
33

 
—

 
11

 
—

 
44

Share-based compensation
 
—

 
9

 
—

 
4

 
—

 
13

Other loss
 
—

 
5

 
—

 
—

 
—

 
5

Repurchases of forward loans assets out of Ginnie Mae securitizations
 
—

 
(943
)
 
—

 
—

 
—

 
(943
)
Mortgage loans originated and purchased for sale, net of fees
 
—

 
(14,002
)
 
—

 
—

 
—

 
(14,002
)
Sale proceeds and loan payment proceeds for mortgage loans held for sale and held for investment
 
—

 
15,459

 
—

 
13

 
—

 
15,472

Excess tax benefit from share-based compensation
 
—

 
(1
)
 
—

 
—

 
—

 
(1
)
Changes in assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 


Advances and other receivables
 
—

 
71

 
—

 
—

 
—

 
71

Reverse mortgage interests
 
—

 
1,451

 
—

 
(225
)
 
—

 
1,226

Other assets
 
4

 
(99
)
 
(9
)
 
87

 
—

 
(17
)
Payables and accrued liabilities
 
—

 
(273
)
 
—

 
(11
)
 
—

 
(284
)
Net cash attributable to operating activities
 
4

 
1,336

 
(1
)
 
(93
)
 
—

 
1,246


(1) Issuer activities exclude the activities of its guarantor and non-guarantor subsidiaries, as previously described.

72

MR. COOPER GROUP INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2017
(Continued)
 
 
Predecessor
 
 
Nationstar
 
Issuer (1)
 
Guarantor
(Subsidiaries of Issuer)
 
Non-Guarantor
(Subsidiaries of Issuer)
 
Eliminations
 
Consolidated
Investing Activities
 
 
 
 
 
 
 
 
 
 
 
 
Property and equipment additions, net of disposals
 
—

 
(31
)
 
—

 
(3
)
 
—

 
(34
)
Purchase of forward mortgage servicing rights, net of liabilities incurred
 
—

 
(22
)
 
—

 
(6
)
 
—

 
(28
)
Net proceeds from acquisition of reverse mortgage servicing portfolio and HECM related receivables
 
—

 
16

 
—

 
—

 
—

 
16

Proceeds on sale of forward and reverse mortgage servicing rights
 
—

 
25

 
—

 
—

 
—

 
25

Proceeds on sale of assets
 
—

 
16

 
—

 
—

 
—

 
16

Net cash attributable to investing activities
 
—

 
4

 
—

 
(9
)
 
—

 
(5
)
Financing Activities
 
 
 
 
 
 
 
 
 
 
 
 
Increase in warehouse facilities
 
—

 
351

 
—

 
—

 
—

 
351

Decrease in advance facilities
 
—

 
(93
)
 
—

 
(205
)
 
—

 
(298
)
Proceeds from issuance of HECM securitizations
 
—

 
(1
)
 
—

 
707

 
—

 
706

Repayment of HECM securitizations
 
—

 
—

 
—

 
(484
)
 
—

 
(484
)
Proceeds from issuance of participating interest financing in reverse mortgage interests
 
—

 
437

 
—

 
—

 
—

 
437

Repayment of participating interest financing in reverse mortgage interests
 
—

 
(1,928
)
 
—

 
—

 
—

 
(1,928
)
Repayment of excess spread financing
 
—

 
(9
)
 
—

 
—

 
—

 
(9
)
Settlement of excess spread financing
 
—

 
(159
)
 
—

 
—

 
—

 
(159
)
Repayment of nonrecourse debt - legacy assets
 
—

 
—

 
—

 
(12
)
 
—

 
(12
)
Repurchase of unsecured senior notes
 
—

 
(122
)
 
—

 
—

 
—

 
(122
)
Surrender of shares relating to stock vesting
 
(4
)
 
—

 
—

 
—

 
—

 
(4
)
Debt financing costs
 
—

 
(11
)
 
—

 
—

 
—

 
(11
)
Dividends to non-controlling interests
 
—

 
(5
)
 
—

 
—

 
—

 
(5
)
Net cash attributable to financing activities
 
(4
)
 
(1,540
)
 
—

 
6

 
—

 
(1,538
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
 
—

 
(200
)
 
(1
)
 
(96
)
 
—

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

 
612

 
2

 
263

 
—

 
877

Cash, cash equivalents, and restricted cash - end of period
 
$
—

 
$
412

 
$
1

 
$
167

 
$
—

 
$
580


(1) Issuer activities exclude the activities of its guarantor and non-guarantor subsidiaries, as previously described.

73

21. Transactions with Affiliates

Nationstar entered into arrangements with Fortress Investment Group ("Fortress"), its subsidiaries managed funds, or affiliates for purposes of financing the Company's MSR acquisitions and performing services as a subservicer. Prior to the Merger with Nationstar on July 31, 2018, an affiliate of Fortress held a majority of the outstanding common shares of the Predecessor. Subsequent to the Merger, Fortress is no longer an affiliate of the Company. Refer to Note 3, Acquisitions , for additional information. The following summarizes the Predecessor transactions with affiliates of Fortress prior to the July 31, 2018 Merger.

New Residential Investment Corp. ("New Residential")
Excess Spread Financing
The Predecessor has entered into several agreements with certain entities managed by New Residential, in which New Residential and/or certain funds managed by Fortress own an interest (each a "New Residential Entity"). The Predecessor sold to the related New Residential Entity the right to receive a portion of the excess cash flow generated from certain acquired MSRs after a receipt of a fixed base servicing fee per loan. The Predecessor, as the servicer of the loans, retains all ancillary revenues and the remaining portion of the excess cash flow after payment of the fixed base servicing fee and also provides all advancing functions for the portfolio. The related New Residential Entity does not have prior or ongoing obligations associated with these MSR portfolios. Should the Company refinance any loan in such portfolios, subject to certain limitations, the Company will be required to transfer the new loan or a replacement loan of similar economic characteristics into the portfolios. The new or replacement loan will be governed by the same terms set forth in the agreements described above.

The fair value of the outstanding liability related to these agreements was $857 at December 31, 2017 . For the one month ended July 31, 2018 and three months ended September 30, 2017 , the fees paid to New Residential entity by the Predecessor totaled $17 and $59 , respectively. The fees paid to New Residential Entity by the Predecessor totaled $122 and $186 during the seven months ended July 31, 2018 and nine months ended September 30, 2017 , respectively, which are recorded as a reduction to servicing fee revenue, net.

Mortgage Servicing Rights Financing
From December 2013 through June 2014, the Predecessor entered into agreements to sell a contractually specified base fee component of certain MSRs and servicing advances under specified terms to a joint venture capitalized by New Residential and certain unaffiliated third-parties. 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 accounts for the MSRs and the related MSRs financing liability on its consolidated balance sheets. The Company will continue to sell future servicing advances to New Residential.

The fair value of the outstanding liability related to the sale agreement was $10 at December 31, 2017 . The Predecessor did not enter into any additional supplemental agreements with these affiliates in 2018 and 2017 .

Subservicing and Servicing
In January 2017, the Predecessor entered into a subservicing agreement with a subsidiary of New Residential. The boarding of loans related to this subservicing agreement was completed during the fourth quarter of 2017, with the Predecessor boarding a total UPB of $105 billion . The Predecessor earned $6 and $10 of subservicing fees and other subservicing revenues during the one month ended July 31, 2018 and three months ended September 30, 2017 , respectively, and $43 and $15 during the seven months ended July 31, 2018 and nine months ended September 30, 2017 , respectively.

In May 2014, the Predecessor entered into a servicing arrangement with New Residential whereby the Predecessor will service residential mortgage loans acquired by New Residential and/or its various affiliates and trust entities. For the one month ended July 31, 2018 and three months ended September 30, 2017 , the Predecessor recognized $1 and $11 , respectively, and $3 and $20 during the seven months ended July 31, 2018 and nine months ended September 30, 2017 , respectively, related to these service arrangements.

22. Subsequent Events

On November 5, 2018, Nationstar Mortgage LLC, a Delaware limited liability company and wholly-owned subsidiary of the Company, entered into a Unit Purchase Agreement (the “Purchase Agreement”) with Pacific Union Financial, LLC, a California limited liability company (“Pacific Union”). The Purchase Agreement provides that, upon and subject to the satisfaction or waiver of the conditions in the Purchase Agreement, the Company will acquire all the issued and outstanding limited liability units of Pacific Union.



74

CAUTIONS REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the U.S. federal securities laws. These forward-looking statements include, without limitation, statements concerning plans, objectives, goals, projections, strategies, core initiatives, future events or performance, and underlying assumptions and other statements, which are not statements of historical facts. When used in this discussion, the words "anticipate," "appears," "believe," "foresee," "intend," "should," "expect," "estimate," "project," "plan," "may," "could," "will," "are likely" and similar expressions are intended to identify forward-looking statements. These statements involve predictions of our future financial condition, performance, plans and strategies and are thus dependent on a number of factors including, without limitation, assumptions and data that may be imprecise or incorrect. Specific factors that may impact performance or other predictions of future actions have, in many but not all cases, been identified in connection with specific forward-looking statements. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances, and we are under no obligation to, and express disclaim any obligation, to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.

A number of important factors exist that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to:

•
our ability to maintain or grow the size of our servicing portfolio;
•
our ability to maintain or grow our originations volume;
•
our ability to recapture voluntary prepayments related to our existing servicing portfolio;
•
our shift in the mix of our servicing portfolio to subservicing, which is highly concentrated;
•
delays in our ability to collect or be reimbursed for servicing advances;
•
our ability to obtain sufficient capital to operate our business;
•
changes in prevailing interest rates;
•
our ability to finance and recover costs of our reverse servicing operations;
•
our ability to successfully implement our strategic initiatives;
•
our ability to realize anticipated benefits of the Merger and other acquisitions, including Assurant;
•
our ability to use net operating loss carryforwards and other tax attributes;
•
changes in our business relationships or changes in servicing guidelines with Fannie Mae, Freddie Mac and Ginnie Mae;
•
Xome's ability to compete in highly competitive markets;
•
our ability to pay down debt;
•
legal and regulatory examinations and enforcement investigations and proceedings, compliance requirements and related costs;
•
our ability to prevent cyber intrusions and mitigate cyber risks; and
•
loss of our licenses.

These factors should not be considered exhaustive and should be read with the other cautionary statements that are included or incorporated by reference. All of the factors are difficult to predict, contain uncertainties that may materially affect actual results and may be beyond our control. New factors emerge from time to time, and it is not possible for our management to predict all such factors or to assess the effect of each such new factor on our business. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and any of these statements included herein may prove to be inaccurate. Given the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. Please refer to Item 1A, Risk Factors, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in this report and in our Annual Report on Form 10-K for the year ended December 31, 2017 for further information on these and other risk factors affecting us.


75


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management's discussion and analysis of financial condition and results of operations ("MD&A") should be read in conjunction with the accompanying unaudited consolidated financial statements and in conjunction with Predecessor's Annual Report on Form 10-K for the year ended December 31, 2017 . The following discussion contains, in addition to the historical information, forward-looking statements that include risks, assumptions and uncertainties that could cause actual results to differ materially from those anticipated by such statements.

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

OVERVIEW

On July 31, 2018, WMIH acquired Nationstar. Prior to the acquisition, WMIH had limited operations other than its reinsurance business which is being operated in runoff mode. With the acquisition, WMIH became an integrated servicer, originator and provider of transaction based services for residential mortgages and one of the largest residential loan servicers in the United States. On October 10, 2018, WMIH changed its name to "Mr. Cooper Group Inc." and its ticker symbol to "COOP."

Our operations are conducted through three segments: Servicing, Originations and Xome. Our Servicing segment performs activities for originated and purchased loans and acts as a subservicer for certain clients that own the underlying servicing rights. Our Originations segment originates, purchases and sells mortgage loans. Our Servicing and Originations segments principally operate through our Mr. Cooper ® trade name. Our Xome segment offers technology and data enhanced solutions to home buyers, home sellers, real estate professionals and companies engaged in the servicing and origination of mortgage loans.

Our success depends on working with customers, investors and GSEs to deliver quality services and solutions that foster and preserve home ownership. We continue to demonstrate our emergence as a leader in the residential mortgage marketplace not only through the expansion of our serviced portfolios, but also through our customer-first focus.

Our Servicing segment serviced 3.2 million customers with an outstanding UPB of $514 billion as of September 30, 2018. Our Originations segment continues to grow in our correspondent and direct-to-consumer channels through an increased focus on new customers and purchase transactions. The Originations segment also continues to expand product offerings to attract existing and new customers. Xome continues to win third-party business. With the acquisition of Assurant Mortgage Solutions Group ("Assurant") in August 2018, Xome significantly increased its third party customer base which generated 56% of Xome's total revenues for the two months ended September 30, 2018 .

Reverse Stock Split

On October 10, 2018, we completed our previously-announced 1-for-12 reverse stock split. The reverse stock split reduced the shares of our common stock outstanding from approximately 1,089,738,735 shares to approximately 90,811,562 shares. In addition, the reverse stock split reduced the total authorized shares of our common stock from 3,500,000,000 to 300,000,000 and increased the par value of each share of common stock from $0.00001 per share to $0.01 per share. All issued and outstanding share and per share amounts in this quarterly report have been adjusted to reflect the reverse stock split for the successor period presented.

Third Quarter 2018 Highlights

Major highlights for the Successor period of the two months ended September 30, 2018 include the following:

•
Boarded $30,182 UPB comprised of $9,389 UPB of forward MSR and $20,793 UPB of subservicing
•
Provided 9,546 solutions to our mortgage servicing customers, reflecting our continued commitment to foster and preserve homeownership
•
Improved delinquency rate, measured as loans that are 60 or more days behind in payment, to 2.5% , the lowest in our history
•
Funded 15,459 loans totaling $3,459 which included $1,721 related to retaining customers in our servicing portfolio
•
Achieved recapture rate of 22.8%
•
Sold 1,730 properties and completed $276,937 of Xome service orders

76

Liquidity and Capital Resources
We recorded cash and cash equivalents on hand of $198 and total stockholders' equity of $2,078 as of September 30, 2018 . During the two months ended September 30, 2018, operating activities provided cash totaling $176 . We continue to maintain a capital position with ratios exceeding current regulatory guidelines and believe we have sufficient liquidity to conduct our business. We closely monitor our liquidity position and ongoing funding requirements and regularly monitor and project cash flows to minimize liquidity risk.

In recent years, we have pursued a capital-light strategy, including the sale of advances, excess financing and the expansion of our subservicing portfolio. The execution on this strategy has allowed us to add incremental margin to servicing with limited capital investment. The combination of subservicing, as well as the continuing improvement in portfolio performance, is expected to raise our return on equity and assets and deliver improving cash flows.

Our operating cash flow is primarily impacted by the receipt of servicing fees, changes in our servicing advance balances, the level of new loan production and the timing of sales and securitizations of forward and reverse mortgage loans. To the extent we sell MSRs, we accelerate the recovery of the related advances. Operating efficiencies have served to mitigate and limit losses incurred in the servicing of our portfolios, and responsive cost containment measures have allowed us to quickly adjust cost structures with changes in revenue volumes.

We have sufficient borrowing capacity to support our operations. As of September 30, 2018 , total available borrowing capacity is $7,615 , of which $4,131 is unused.

On July 13, 2018, Merger Sub issued $950 aggregate principal amount of the 8.125% Notes due 2023 and $750 aggregate principal amount of the 9.125% Notes due 2026. The proceeds from the New Notes were used, together with the proceeds from the issuance of WMIH’s common stock and WMIH’s cash and restricted cash on hand, to consummate the Merger with Nationstar and the refinancing of certain 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 assuming the obligations under the New Notes.




77

RESULTS OF OPERATIONS

Basis of Presentation

“Predecessor” financial information in the MD&A relates to Nationstar, and “Successor” relates to Mr. Cooper.”

The below presentation discusses the results of the Company for the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017. The financial results for the three and nine months ended September 30, 2017 reflect the results of the Predecessor entity for that time period. With respect to the three and nine months ended September 30, 2018, the Company has separately provided the financial results of the Predecessor for the period from July 1, 2018 through July 31, 2018, and the period from January 1, 2018 through July 31, 2018, and the financial results of the Successor for the period from August 1, 2018 through September 30, 2018, which, in each case, are presented under GAAP.

The below presentation also includes a “Combined” column that combines the Predecessor and Successor results referenced above with respect to the three and nine months ended September 30, 2018. Although the separate financial results of the Predecessor and Successor for the three and nine months ended September 30, 2017, the one month and seven months ended July 31, 2018 and the two months ended September 31, 2018 are presented under GAAP, the results reported in the “Combined” column reflect non-GAAP financial measures, as a different basis of accounting was used with respect to the financial results for the Predecessor as compared to the financial results of the Successor. The Company has not provided a reconciliation of the financial metrics reflected under the “Combined” column as such reconciliation cannot be provided without unreasonable effort as a result of this accounting variance.

The Company believes that non-GAAP financial measures should be considered in addition to, and not a substitute for, financial information prepared in accordance with GAAP. The Company presents non-GAAP financial measures in reporting its financial results to provide additional and supplemental disclosure to evaluate operating results. In particular, the Company believes that providing this “Combined” information is useful as a supplement to its standard GAAP financial presentation as it significantly enhances the period-over-period comparability of the Company’s financial results. In addition, management of the Company uses this “Combined” presentation to evaluate the Company’s ongoing operations and for internal planning and forecasting purposes.


78

Consolidated and Segment Results

Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 1. Consolidated Operations
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Combined (2)
 
Three Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Revenues - operational (1)
$
318

 
 
$
139

 
$
457

 
$
450

 
$
7

 
2
 %
Revenues - Mark-to-market (1)
24

 
 
25

 
49

 
(44
)
 
93

 
(211
)%
Total revenues
342

 
 
164

 
506

 
406

 
100

 
25
 %
Expenses
275

 
 
242

 
517

 
368

 
149

 
40
 %
Other income (expenses), net
(26
)
 
 
(5
)
 
(31
)
 
(26
)
 
(5
)
 
19
 %
Income (loss) before income tax expense
41

 
 
(83
)
 
(42
)
 
12

 
(54
)
 
(450
)%
Less: Income tax (benefit) expense
(979
)
 
 
(19
)
 
(998
)
 
5

 
(1,003
)
 
(20,060
)%
Net income (loss)
1,020

 
 
(64
)
 
956

 
7

 
949

 
13,557
 %
Less: Net income attributable to non-controlling interests
—

 
 
—

 
—

 
—

 
—

 
—
 %
Net income (loss) attributable to Mr. Cooper Group Inc.
$
1,020

 
 
$
(64
)
 
$
956

 
$
7

 
$
949

 
13,557
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective tax rate (3)
(2,377.1
)%
 
 
23.1
%
 
 
 
37.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income tax expense by operating and non-operating segments:
 
 
 
 
 
 
 
 
 
 
 
 
Servicing
$
88

 
 
$
(23
)
 
$
65

 
$
15

 
$
50

 
333
 %
Originations
21

 
 
11

 
32

 
45

 
(13
)
 
(29
)%
Xome
1

 
 
3

 
4

 
11

 
(7
)
 
(64
)%
Corporate and other
(69
)
 
 
(74
)
 
(143
)
 
(59
)
 
(84
)
 
142
 %
Consolidated income (loss) before income tax expense
$
41

 
 
$
(83
)
 
$
(42
)
 
$
12

 
$
(54
)
 
(450
)%

(1) In the fourth quarter of 2017, the Predecessor reevaluated presentation of adjustments related to certain GNMA early buyout activities and reclassified $4 from operational revenues to mark-to-market revenues in the three months ended September 30, 2017 . Net income was not affected by this reclassification adjustment.
(2) Refer to Basis of Presentation section for discussion on presentation of combined results.
(3) Effective tax rate is calculated using whole numbers.

During the three months ended September 30, 2018 , on a combined basis, income before income tax decreased compared to the same period in 2017 due to higher expenses. On a combined basis, consolidated expenses increased during the three months ended September 30, 2018 compared to the same period in 2017 primarily due to expenses related to the Nationstar acquisition and Xome's acquisition of Assurant in August 2018 and a change in estimate charge recorded for our reverse MSL.

On a combined basis, total revenues primarily driven by favorable MTM revenue adjustments associated with the rising interest rate environment. Operational revenue increased due to an increase in subservicing volume in Servicing.

79


Consolidated other income (expenses), net, on a combined basis, increased during the three months ended September 30, 2018 compared to the same period in 2017 . The increase was primarily due to an increase in interest expense in our Corporate segment in 2018 as a result of a higher debt balance and higher interest rates related to new unsecured senior notes.

On a combined basis, we had an income tax benefit for the three months ended September 30, 2018 . For the same period ended in 2017 , we had an income tax expense. The effective tax rates for the month ended July 31, 2018 and the two months ended September 30, 2018 were 23.1% and (2,377.1)% , respectively, as compared to the effective tax rate of 37.1% for the three months ended September 30, 2017 . The significant decrease in the effective tax rate in 2018 was primarily due to the reversal of the valuation allowance associated with the net operating losses of WMIH.

Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 1.1. Consolidated Operations
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Combined (2)
 
Nine Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Revenues - operational (1)
$
318

 
 
$
1,000

 
$
1,318

 
$
1,373

 
$
(55
)
 
(4
)%
Revenues - Mark-to-market (1)
24

 
 
196

 
220

 
(160
)
 
380

 
(238
)%
Total revenues
342

 
 
1,196

 
1,538

 
1,213

 
325

 
27
 %
Expenses
275

 
 
945

 
1,220

 
1,104

 
116

 
11
 %
Other income (expenses), net
(26
)
 
 
(49
)
 
(75
)
 
(123
)
 
48

 
(39
)%
Income (loss) before income tax expense
41

 
 
202

 
243

 
(14
)
 
257

 
(1,836
)%
Less: Income tax (benefit) expense
(979
)
 
 
48

 
(931
)
 
(4
)
 
(927
)
 
23,175
 %
Net income (loss)
1,020

 
 
154

 
1,174

 
(10
)
 
1,184

 
(11,840
)%
Less: Net income attributable to non-controlling interests
—

 
 
—

 
—

 
1

 
(1
)
 
(100
)%
Net income (loss) attributable to Mr. Cooper Group Inc.
$
1,020

 
 
$
154

 
$
1,174

 
$
(11
)
 
$
1,185

 
(10,773
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective tax rate (3)
(2,377.1
)%
 
 
23.8
%
 
 
 
29.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income tax expense by operating and non-operating segments:
 
 
 
 
 
 
 
 
 
 
 
 
Servicing
$
88

 
 
$
285

 
$
373

 
$
(1
)
 
$
374

 
(37,400
)%
Originations
21

 
 
62

 
83

 
123

 
(40
)
 
(33
)%
Xome
1

 
 
35

 
36

 
41

 
(5
)
 
(12
)%
Corporate and other
(69
)
 
 
(180
)
 
(249
)
 
(177
)
 
(72
)
 
41
 %
Consolidated income (loss) before income tax expense
$
41

 
 
$
202

 
$
243

 
$
(14
)
 
$
257

 
(1,836
)%

(1) In the fourth quarter of 2017, the Predecessor reevaluated presentation of adjustments related to certain GNMA early buyout activities and reclassified $16 from operational revenues to mark-to-market revenues in the nine months ended September 30, 2017 . Net income was not affected by this reclassification adjustment.

80

(2) Refer to Basis of Presentation section for discussion on presentation of combined results.
(3) Effective tax rate is calculated using whole numbers.

During the nine months ended September 30, 2018 , income before income tax on a combined basis increased compared to the same period in 2017 due to higher total revenues primarily driven by favorable MTM revenue adjustments associated with the rising interest rate environment. The favorable MTM revenue adjustments were partially offset by a decrease in operational revenues primarily due to increased correspondent volume in Originations.

On a combined basis, consolidated expenses increased during the nine months ended September 30, 2018 compared to the same period in 2017 primarily due to expenses related to the Nationstar acquisition and Xome's acquisition of Assurant.
 
Consolidated other income (expenses), net on a combined basis improved during the nine months ended September 30, 2018 compared to the same period in 2017 . The improvement was primarily due to a decline in interest expense in our Servicing segment in 2018 as a result of lower MSR financing related interest expense.

On a combined basis, we had income tax benefit for the nine months ended September 30, 2018 . For the same period ended in 2017 , we had income tax expense. The effective tax rates for the seven months ended July 31, 2018 and the two months ended September 30, 2018 were 23.8% and (2,377.1)% , respectively, as compared to the effective tax rate of 29.1% for the nine months ended September 30, 2017 . The decrease in the effective tax rate in 2018 was primarily due to the to the reversal of the valuation allowance associated with the net operating losses of WMIH.


Segment Results

The Company's segments are based upon the Company's organizational structure, which focuses primarily on the services offered. Corporate functional expenses are allocated to individual segments based on the actual cost of services performed based on direct resource utilization, estimate of percentage use for shared services or headcount percentage for certain functions. Facility costs are allocated to individual segments based on cost per headcount for specific facilities utilized. Group insurance costs are allocated to individual segments based on global cost per headcount. Non-allocated corporate expenses include the administrative costs of executive management and other corporate functions that are not directly attributable to our operating segments. Revenues generated on inter-segment services performed are valued based on similar services provided to external parties.

Servicing Segment

We service both forward and reverse mortgage loan portfolios. Our forward loan portfolios include loans for which we own the legal title to the servicing rights and loans where we act as the subservicer for which title to the servicing rights is owned by third parties. Our Mr. Cooper and Champion Mortgage ® brands together service approximately 3.2 million customers with an outstanding principal balance of approximately $514 billion . As of September 30, 2018 , the outstanding principal balance consisted of approximately $483 billion in forward loan portfolios, of which $209 billion was subservicing, and $31 billion in reverse servicing.


81

Forward MSR - Servicing revenues related to forward MSR portfolios include base, incentive and other servicing fees. Forward MSR portfolios are recorded at fair value, and revenues are adjusted to reflect the change in fair value each period. Fair value consists of both credit sensitive MSRs, primarily acquired through bulk acquisitions, and interest rate sensitive MSRs, primarily acquired through flow transactions generated from our origination activities. For MSRs marked at fair value that are interest rate sensitive, servicing values are typically correlated to interest rates such that when interest rates rise, the value of the servicing portfolio increases primarily as a result of expected lower prepayments. The value of credit sensitive MSRs is less influenced by movement in interest rates and more influenced by changes in loan performance factors which include involuntary prepayment speeds and delinquency rates.

Subservicing - Subservicing revenues are earned and recognized as the services are delivered. Subservicing consists of forward residential mortgage loans we service on behalf of others who are MSR or mortgage owners. We have limited advance obligations ,and no subservicing assets are recorded in our consolidated financial statements as the value of the servicing rights and the related obligations are not considered in excess of or less than customary fees that would be received for such services.

Reverse Servicing - Although we do not originate reverse mortgage loans, we service acquired reverse mortgage portfolios. A MSR or MSL is recorded for acquired servicing rights associated with unsecuritized portfolios. We also service reverse mortgage portfolios that have been securitized into GNMA securities. The total amounts of the securitized loan assets and related financing liabilities are recorded within the consolidated financial statements as reverse mortgage interests and nonrecourse debt because the securitization transactions do not qualify for sale accounting treatment. Reverse MSRs and MSLs are recorded at fair value upon acquisition and carried at amortized cost in subsequent periods. Reverse Mortgage Interests, related debt, MSRs and MSLs are reflected at fair values as of the acquisition date and will continue to be carried at the adjusted, amortized cost in subsequent periods, including the two months ended September 30, 2018 . We earn servicing fee income on all reverse mortgages. Fees associated with reverse MSRs and MSLs are recorded to servicing revenue, whereas fees associated with reverse mortgage interests are recorded to interest income. The interest income accrued for reverse mortgage HECM loans and the interest expense accrued for the respective HMBS are recorded in other income (expense). Accretion of the purchase price discount on certain portfolios is recorded to other income (expense).


82

The following tables set forth the results of operations for the Servicing segment.

Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 2. Servicing Operations
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Combined (2)
 
Three Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Operational (1)
$
190

 
 
$
88

 
$
278

 
$
295

 
$
(17
)
 
(6
)%
Amortization
(31
)
 
 
(16
)
 
(47
)
 
(60
)
 
(13
)
 
(22
)%
Mark-to-market (1)
24

 
 
25

 
49

 
(44
)
 
93

 
211
 %
Total revenues
183

 
 
97

 
280

 
191

 
89

 
47
 %
Expenses
104

 
 
126

 
230

 
185

 
45

 
24
 %
Total other income (expenses), net
9

 
 
6

 
15

 
9

 
6

 
67
 %
Income before income tax expense
$
88

 
 
$
(23
)
 
$
65

 
$
15

 
$
50

 
333
 %

(1) In the fourth quarter of 2017, the Predecessor reevaluated presentation of adjustments related to certain GNMA early buyout activities and reclassified $4 from operational revenues to mark-to-market revenues in the three months ended September 30, 2017 . Income before income tax expense was not affected by this reclassification adjustment.
(2) Refer to Basis of Presentation section for discussion on presentation of combined results.

For the three months ended September 30, 2018 , on a combined basis, total revenues increased compared to the same period in 2017 primarily due to favorable mark-to-market revenues and a decrease in amortization. The change in the combined basis mark-to-market revenue was primarily due to the higher interest rate environment when compared to the same period in 2017 . On a combined basis, the decrease in the operational revenues for the three months ended September 30, 2018 was primarily due to a decrease in other ancillary revenues and incentive fees, late fees and modification fees revenues. The decrease in other ancillary revenues was primarily driven by the lower gains related to the redelivery of reperforming GNMA loans as a result of the higher interest rate environment in 2018. The decrease in incentive fees, late fees and modification fees revenues was primarily driven by lower delinquency rates and lower base servicing fees. Partially offsetting the decrease in other ancillary revenues and incentive fees, late fees and modification fees revenues was an increase in combined basis subservicing fees due to the significant growth of the subservicing portfolio as of September 30, 2018 compared to September 30, 2017 . Combined basis amortization for the three months ended September 30, 2018 decreased due to lower prepayments and lower average MSR UPB compared to the same period in 2017 . Combined basis other income (expense), net, increased primarily due to a decline in interest expense related to MSR financing and improved interest income.

On a combined basis, expenses for the three months ended September 30, 2018 increased compared to the same period in 2017 primarily due to a change in estimate charge related to reverse mortgage service liabilities.

83


Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 2.1. Servicing Operations
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Combined (2)
 
Nine Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Operational (1)
$
190

 
 
$
656

 
$
846

 
$
884

 
$
(38
)
 
(4
)%
Amortization
(31
)
 
 
(112
)
 
(143
)
 
(187
)
 
(44
)
 
(24
)%
Mark-to-market (1)
24

 
 
196

 
220

 
(160
)
 
380

 
238
 %
Total revenues
183

 
 
740

 
923

 
537

 
386

 
72
 %
Expenses
104

 
 
474

 
578

 
513

 
65

 
13
 %
Total other income (expenses), net
9

 
 
19

 
28

 
(25
)
 
53

 
(212
)%
Income (loss) before income tax expense
$
88

 
 
$
285

 
$
373

 
$
(1
)
 
$
374

 
(37,400
)%

(1) In the fourth quarter of 2017, the Predecessor reevaluated presentation of adjustments related to certain GNMA early buyout activities and reclassified $16 from operational revenues to mark-to-market revenues in the nine months ended September 30, 2017 . Income before income tax expense was not affected by this reclassification adjustment.
(2) Refer to Basis of Presentation section for discussion on presentation of combined results.

For the nine months ended September 30, 2018 , on a combined basis, total revenues increased compared to the same period in 2017 primarily due to favorable mark-to-market revenues and a decrease in amortization. The higher interest rate environment when compared to the same period in 2017 resulted in a positive change in the combined basis mark-to-market revenues for the nine months ended September 30, 2018 compared to the same period in 2017 . The decrease in combined basis amortization was primarily due to lower average MSR UPB and lower prepayments compared to the same period in 2017 . On a combined basis, operational revenues decreased for the nine months ended September 30, 2018 primarily due to a decrease in other ancillary revenues and incentive fees, late fees and modification fees revenues. The decrease in other ancillary revenues was primarily driven by the lower gains related to the redelivery of reperforming GNMA loans as a result of the higher interest rate environment in 2018. The decrease in incentive fees, late fees and modification fees revenues was primarily driven by lower delinquency rates and lower base servicing fees. Partially offsetting the decrease in other ancillary revenues and incentive fees, late fees and modification fees revenues was an increase in combined basis subservicing fees due to the significant growth of the subservicing portfolio as of September 30, 2018 compared to September 30, 2017 . On a combined basis, other income (expense), net, increased for the nine months ended September 30, 2018 primarily due to a decline in interest expense related to MSR financing and improved interest income.

Expenses on a combined basis for the nine months ended September 30, 2018 increased from the comparable period in 2017 primarily due to an increase in salaries, wages and benefits due to the significant expansion of the servicing portfolio in the second half of 2017 and a change in estimate charge related to reverse mortgage service liabilities.


84

The following table provides a rollforward of our forward servicing portfolio UPB, including loans subserviced for others.

 
Successor
 
 
Predecessor
Table 3. Forward Servicing and Subservicing Portfolio UPB Rollforward
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Three Months Ended September 30, 2017
 
For the Period January 1 - July 31, 2018
 
Nine Months Ended September 30, 2017
 
 
 
 
 
 
Balance - beginning of period
$
465,819

 
 
$
465,398

 
$
461,873

 
$
473,256

 
$
434,295

Additions:


 
 
 
 
 
 
 
 
 
Originations
3,448

 
 
1,694

 
5,019

 
12,327

 
14,173

Acquisitions
26,734

 
 
5,183

 
52,780

 
25,987

 
113,606

Deductions:


 
 
 
 
 
 
 
 
 
Dispositions
(574
)
 
 
(84
)
 
(910
)
 
(1,877
)
 
(3,015
)
Principal reductions and other
(3,137
)
 
 
(1,581
)
 
(4,957
)
 
(11,240
)
 
(12,931
)
Voluntary reductions (1)
(7,869
)
 
 
(4,343
)
 
(15,659
)
 
(29,172
)
 
(43,589
)
Involuntary reductions (2)
(769
)
 
 
(418
)
 
(1,606
)
 
(3,241
)
 
(5,699
)
Net changes in loans serviced by others
(60
)
 
 
(30
)
 
(111
)
 
(221
)
 
(411
)
Balance - end of period
$
483,592

 
 
$
465,819

 
$
496,429

 
$
465,819

 
$
496,429


(1) Voluntary reductions are related to loan payoffs by customers.
(2) Involuntary reductions refer to loan chargeoffs.

During the seven months ended July 31, 2018 , the Predecessor forward servicing and subservicing portfolio UPB decreased primarily due to loan run-off and reductions out-pacing the boarding of loans generated from Originations and acquisitions. Our forward servicing and subservicing portfolio UPB for the two months ended September 30, 2018 increased due to increased boarding of loans generated from acquisitions and portfolio growth from our subservicing clients.


85

The following tables provide the composition of revenues for the Servicing segment.

Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
 
 
Predecessor
 
 
 
 
 
 
 
 
Table 4. Servicing - Revenues
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Combined (1)
 
Three Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
Amt
 
bps (2)
 
 
Amt
 
bps (2)
 
Amt
 
bps (2)
 
Amt
 
bps (2)
 
Amt
 
bps (2)
 
Amt
 
bps (2)
Forward MSR Operational Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Base servicing fees
$
142

 
17

 
 
$
68

 
16

 
$
210

 
17

 
$
223

 
17

 
$
(13
)
 
—

 
(6
)%
 
—
 %
Modification fees (3)
5

 
1

 
 
1

 
—

 
6

 
1

 
7

 
1

 
(1
)
 
—

 
(14
)%
 
—
 %
Incentive fees (3)
2

 
—

 
 
2

 
1

 
4

 
—

 
11

 
1

 
(7
)
 
(1
)
 
(64
)%
 
(100
)%
Late payment fees (3)
11

 
1

 
 
6

 
2

 
17

 
1

 
19

 
1

 
(2
)
 
—

 
(11
)%
 
—
 %
Other ancillary revenues (3)(4)
16

 
2

 
 
10

 
2

 
26

 
2

 
38

 
3

 
(12
)
 
(1
)
 
(32
)%
 
(33
)%
Total forward MSR operational revenue
176

 
21

 
 
87

 
21

 
263

 
21

 
298

 
23

 
(35
)
 
(2
)
 
(12
)%
 
(9
)%
Base subservicing fees and other subservicing revenue (3)
27

 
4

 
 
13

 
3

 
40

 
3

 
34

 
2

 
6

 
1

 
18
 %
 
50
 %
Reverse servicing fees
13

 
2

 
 
4

 
1

 
17

 
1

 
16

 
1

 
1

 
—

 
6
 %
 
—
 %
Total servicing fee revenue
216

 
27

 
 
104

 
25

 
320

 
25

 
348

 
26

 
(28
)
 
(1
)
 
(8
)%
 
(4
)%
Amortization
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Forward MSR amortization
(53
)
 
(6
)
 
 
(27
)
 
(6
)
 
(80
)
 
(7
)
 
(100
)
 
(8
)
 
(20
)
 
(1
)
 
(20
)%
 
(13
)%
Excess spread accretion
22

 
2

 
 
11

 
3

 
33

 
3

 
41

 
3

 
(8
)
 
—

 
(20
)%
 
—
 %
Reverse MSR amortization
—

 
—

 
 
—

 
—

 
—

 
—

 
(1
)
 
—

 
(1
)
 
—

 
(100
)%
 
—
 %
Total amortization
(31
)
 
(4
)
 
 
(16
)
 
(3
)
 
(47
)
 
(4
)
 
(60
)
 
(5
)
 
(13
)
 
(1
)
 
(22
)%
 
(20
)%
MSR financing liability costs
(8
)
 
(1
)
 
 
(4
)
 
(1
)
 
(12
)
 
(1
)
 
(17
)
 
(1
)
 
(5
)
 
—

 
(29
)%
 
—
 %
Excess spread costs - principal
(18
)
 
(2
)
 
 
(12
)
 
(3
)
 
(30
)
 
(2
)
 
(36
)
 
(3
)
 
(6
)
 
(1
)
 
(17
)%
 
(33
)%
Total operational revenue
159

 
20

 
 
72

 
18

 
231

 
18

 
235

 
17

 
(4
)
 
(3
)
 
(2
)%
 
(18
)%
Mark-to-Market Adjustments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 


MSR MTM (4)(5)
49

 
6

 
 
44

 
11

 
93

 
8

 
(52
)
 
(4
)
 
145

 
12

 
(279
)%
 
(300
)%
Excess spread / financing MTM
(25
)
 
(3
)
 
 
(19
)
 
(5
)
 
(44
)
 
(4
)
 
8

 
1

 
(52
)
 
(5
)
 
(650
)%
 
(500
)%
Total MTM adjustments
24

 
3

 
 
25

 
6

 
49

 
4

 
(44
)
 
(3
)
 
93

 
7

 
(211
)%
 
(233
)%
Total revenues - Servicing
$
183

 
23

 
 
$
97

 
24

 
$
280

 
22

 
$
191

 
14

 
$
89

 
4

 
47
 %
 
29
 %

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.
(2) Calculated basis points ("bps") are as follows: Annualized dollar amount/Total average UPB X 10000.
(3) Certain ancillary and other non-base fees related to subservicing operations are separately presented as other subservicing revenues.
(4) In the fourth quarter of 2017, the Predecessor reevaluated presentation of adjustments related to certain GNMA early buyout activities and reclassified $4 from other ancillary revenues to MSR MTM for the three months ended September 30, 2017 . Total revenues were not affected by this reclassification adjustment.
(5) MSR MTM includes fair value adjustments on MSR, excess spread financing and MSR financing liabilities. The amount of MSR MTM reflected is net of cumulative incurred losses related to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio and these incurred losses have been transferred to reserves on

86

advances and other receivables. These cumulative incurred losses totaled $13 for the two months ended September 30, 2018 . The Predecessor cumulative incurred losses totaled $4 and $15 for the one month ended July 31, 2018 and three months ended September 30, 2017 , respectively.

Forward - Due to the decline of the forward MSR portfolio's UPB, base servicing fee revenue on a combined basis decreased for the three months ended September 30, 2018 as compared to the same period in 2017 . Despite the decrease, servicing fees per total average UPB remained consistent at 17 bps. On a combined basis, the improvement in delinquency rates as of September 30, 2018 contributed to the decrease in modification fees and late payment fees. Other ancillary revenues on a combined basis declined primarily due to lower gains on the redelivery of reperforming GNMA loans driven by higher interest rates.

On a combined basis, MSR prepayment and scheduled amortization decreased in the three months ended September 30, 2018 as compared to the same period in 2017 , primarily due to lower average MSR UPB and lower prepayments as a result of a higher interest rate environment during 2018.

Total MTM adjustments on a combined basis improved in the three months ended September 30, 2018 as compared to the same period in 2017 primarily due to the higher interest environment during 2018.

Subservicing - Combined basis subservicing fees increased for the three months ended September 30, 2018 as compared to the same period in 2017 , due to growth in the subservicing portfolio UPB during 2018.

Reverse - On a combined basis, servicing fees on reverse mortgage portfolios for the three months ended September 30, 2018 was comparable to the same period in 2017 .


87

Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
 
 
Predecessor
 
 
 
 
 
 
 
 
Table 4.1. Servicing - Revenues
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Combined (1)
 
Nine Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
Amt
 
bps (2)
 
 
Amt
 
bps (2)
 
Amt
 
bps (2)
 
Amt
 
bps (2)
 
Amt
 
bps (2)
 
Amt
 
bps (2)
Forward MSR Operational Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Base servicing fees
$
142

 
17

 
 
$
501

 
17

 
$
643

 
17

 
$
687

 
19

 
$
(44
)
 
(2
)
 
(6
)%
 
(11
)%
Modification fees (3)
5

 
1

 
 
21

 
1

 
26

 
1

 
35

 
1

 
(9
)
 
—

 
(26
)%
 
—
 %
Incentive fees (3)
2

 
—

 
 
13

 
—

 
15

 
—

 
24

 
1

 
(9
)
 
(1
)
 
(38
)%
 
(100
)%
Late payment fees (3)
11

 
1

 
 
45

 
2

 
56

 
2

 
63

 
2

 
(7
)
 
—

 
(11
)%
 
—
 %
Other ancillary revenues (3)(4)
16

 
2

 
 
63

 
2

 
79

 
2

 
120

 
3

 
(41
)
 
(1
)
 
(34
)%
 
(33
)%
Total forward MSR operational revenue
176

 
21

 
 
643

 
22

 
819

 
22

 
929

 
26

 
(110
)
 
(4
)
 
(12
)%
 
(15
)%
Base subservicing fees and other subservicing revenue (3)
27

 
4

 
 
87

 
2

 
114

 
3

 
86

 
2

 
28

 
1

 
33
 %
 
50
 %
Reverse servicing fees
13

 
2

 
 
37

 
1

 
50

 
1

 
43

 
1

 
7

 
—

 
16
 %
 
—
 %
Total servicing fee revenue
216

 
27

 
 
767

 
25

 
983

 
26

 
1,058

 
29

 
(75
)
 
(3
)
 
(7
)%
 
(10
)%
Amortization
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Forward MSR amortization
(53
)
 
(6
)
 
 
(190
)
 
(7
)
 
(243
)
 
(7
)
 
(307
)
 
(8
)
 
(64
)
 
(1
)
 
(21
)%
 
(13
)%
Excess spread accretion
22

 
2

 
 
78

 
3

 
100

 
3

 
123

 
3

 
(23
)
 
—

 
(19
)%
 
—
 %
Reverse MSR amortization
—

 
—

 
 
—

 
—

 
—

 
—

 
(3
)
 
—

 
(3
)
 
—

 
(100
)%
 
—
 %
Total amortization
(31
)
 
(4
)
 
 
(112
)
 
(4
)
 
(143
)
 
(4
)
 
(187
)
 
(5
)
 
(44
)
 
(1
)
 
(24
)%
 
(20
)%
MSR financing liability costs
(8
)
 
(1
)
 
 
(33
)
 
(1
)
 
(41
)
 
(1
)
 
(56
)
 
(2
)
 
(15
)
 
(1
)
 
(27
)%
 
(50
)%
Excess spread costs - principal
(18
)
 
(2
)
 
 
(78
)
 
(3
)
 
(96
)
 
(2
)
 
(118
)
 
(3
)
 
(22
)
 
(1
)
 
(19
)%
 
(33
)%
Total operational revenue
159

 
20

 
 
544

 
17

 
703

 
19

 
697

 
19

 
6

 
(6
)
 
1
 %
 
32
 %
Mark-to-Market Adjustments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MSR MTM (4)(5)
49

 
6

 
 
295

 
10

 
344

 
9

 
(166
)
 
(4
)
 
510

 
13

 
(307
)%
 
(325
)%
Excess spread / financing MTM
(25
)
 
(3
)
 
 
(99
)
 
(3
)
 
(124
)
 
(3
)
 
6

 
—

 
(130
)
 
(3
)
 
(2,167
)%
 
—
 %
Total MTM adjustments
24

 
3

 
 
196

 
7

 
220

 
6

 
(160
)
 
(4
)
 
380

 
10

 
(238
)%
 
(250
)%
Total revenues - Servicing
$
183

 
23

 
 
$
740

 
24

 
$
923

 
25

 
$
537

 
15

 
$
386

 
4

 
72
 %
 
27
 %

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.
(2) Calculated bps are as follows: Annualized dollar amount/Total average UPB X 10000.
(3) Certain ancillary and other non-base fees related to subservicing operations are separately presented as other subservicing revenues.
(4) In the fourth quarter of 2017, the Predecessor reevaluated presentation of adjustments related to certain GNMA early buyout activities and reclassified $16 from other ancillary revenues to MSR MTM for the nine months ended September 30, 2017 . Total revenues were not affected by this reclassification adjustment.
(5) MSR MTM includes fair value adjustments on MSR, excess spread financing and MSR financing liabilities. The amount of MSR MTM reflected is net of cumulative incurred losses related to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio and these incurred losses have been transferred to reserves on advances and other receivables. These cumulative incurred losses totaled $13 for the two months ended September 30, 2018 .

88

These cumulative incurred losses for the Predecessor totaled $38 and $53 for the seven months ended July 31, 2018 and nine months ended September 30, 2017 , respectively.

Forward - On a combined basis, base servicing fee revenue decreased in the nine months ended September 30, 2018 as compared to the same period in 2017 primarily due to the decline of the forward MSR portfolio's UPB. Servicing fees per total average UPB decreased from 19 bps in 2017 to 17 bps in 2018 as of a result of the shift between the MSR and subservicing portfolios. Modification fees and late payment fees on a combined basis decreased due to improvement in delinquency rates as of September 30, 2018 . Other ancillary revenues on a combined basis declined primarily due to lower gains on the redelivery of reperforming GNMA loans driven by higher interest rates.

MSR prepayment and scheduled amortization on a combined basis decreased in the nine months ended September 30, 2018 as compared to the same period in 2017 , primarily due to lower average MSR UPB and lower prepayments as a result of a higher interest rate environment.

On a combined basis, total MTM adjustments improved in the nine months ended September 30, 2018 as compared to the same period in 2017 primarily due to the higher interest environment during 2018.

Subservicing - Subservicing fees on a combined basis increased in the nine months ended September 30, 2018 as compared to the same period in 2017 , due to growth in the UPB of subserviced portfolios in 2018.

Reverse - On a combined basis, servicing fees on reverse mortgage portfolios increased in the nine months ended September 30, 2018 as compared to the same period in 2017 primarily due to the incremental recognition of additional consideration associated with the acquisition of servicing rights related to $9,305 UPB of Fannie Mae reverse mortgage loans in December 2016 and subsequent fair value adjustments related to the Merger.


89

 
Successor
 
 
Predecessor
Table 5. Servicing Portfolio - Unpaid Principal Balances
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Three Months Ended September 30, 2017
 
For the Period January 1 - July 31, 2018
 
Nine Months Ended September 30, 2017
 
 
 
 
 
 
Average UPB:
 
 
 
 
 
 
 
 
 
 
Forward MSRs
$
278,362

 
 
$
279,605

 
$
293,310

 
$
279,520

 
$
302,112

Subservicing and other (1)
192,163

 
 
185,871

 
191,655

 
187,407

 
155,839

Reverse portfolio
30,888

 
 
31,753

 
36,004

 
33,380

 
37,094

Total average UPB
$
501,413

 
 
$
497,229

 
$
520,969

 
$
500,307

 
$
495,045

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Successor
 
Predecessor
 
 
 
 
 
 
 
 
September 30,
 
 
 
 
 
 
 
 
2018
 
2017
Ending UPB:
 
 
 
 
 
 
 
 
 
 
Forward MSRs
 
 
 
 
 
 
 
 
 
 
Agency
 
 
 
 
 
 
 
$
205,201

 
$
210,957

Non-agency
 
 
 
 
 
 
 
69,285

 
77,493

Total Forward MSRs
 
 
 
 
 
 
 
274,486

 
288,450

 
 
 
 
 
 
 
 
 
 
 
Subservicing and other (1)
 
 
 
 
 
 
 
 
 
 
Agency
 
 
 
 
 
 
 
195,489

 
200,001

Non-agency
 
 
 
 
 
 
 
13,617

 
7,978

Total subservicing and other
 
 
 
 
 
 
 
209,106

 
207,979

 
 
 
 
 
 
 
 
 
 
 
Reverse loans
 
 
 
 
 
 
 
 
 
 
MSR
 
 
 
 
 
 
 
75

 
9,666

MSL
 
 
 
 
 
 
 
21,703

 
16,383

Securitized loans
 
 
 
 
 
 
 
8,882

 
10,363

Total reverse portfolio serviced
 
 
 
 
 
 
 
30,660

 
36,412

Total ending UPB

 
 
 
 
 
 
$
514,252

 
$
532,841


(1) Subservicing and other includes (i) loans we service for others, (ii) residential mortgage loans originated but have yet to be sold and (iii) agency REO balances for which we own the mortgage servicing rights.



90

Key Metrics

The tables below present the number of modifications and workout units with our serviced portfolios.

Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 6. Forward Loan Modifications and Workout Units
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Combined (1)
 
Three Months Ended September 30, 2017
 
Amount Change
 
% Change
 
 
 
 
 
 
HAMP modifications
3

 
 
7

 
10

 
515

 
(505
)
 
(98
)%
Non-HAMP modifications
6,730

 
 
3,446

 
10,176

 
5,916

 
4,260

 
72
 %
Workouts
2,813

 
 
1,449

 
4,262

 
6,119

 
(1,857
)
 
(30
)%
Total modification and workout units
9,546

 
 
4,902

 
14,448

 
12,550

 
1,898

 
15
 %

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.

On a combined basis, total modifications and workouts during the three months ended September 30, 2018 increased compared to the same period in 2017 primarily due to a higher volume of natural disaster-related Non-HAMP modifications.

Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 6.1. Forward Loan Modifications and Workout Units
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Combined (1)
 
Nine Months Ended September 30, 2017
 
Amount Change
 
% Change
 
 
 
 
 
 
HAMP modifications
3

 
 
38

 
41

 
7,090

 
(7,049
)
 
(99
)%
Non-HAMP modifications
6,730

 
 
16,828

 
23,558

 
17,236

 
6,322

 
37
 %
Workouts
2,813

 
 
22,700

 
25,513

 
20,998

 
4,515

 
22
 %
Total modification and workout units
9,546

 
 
39,566

 
49,112

 
45,324

 
3,788

 
8
 %

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.

On a combined basis, total modifications and workouts during the nine months ended September 30, 2018 increased compared to the same period in 2017 primarily due to a higher volume of repayment plans related to natural disasters that occurred in the fourth quarter of 2017.


91

The table below summarizes the overall performance of the forward servicing and subservicing portfolio.


Successor
 
Predecessor
Table 7. Key Performance Metrics - Forward Servicing and Subservicing Portfolio (1)
September 30,
 
2018
 
2017
Loan count
3,009,439

 
3,042,795

Average loan amount (2)
$
159,768

 
$
163,214

Average coupon - credit sensitive (3)
4.8
%
 
4.7
%
Average coupon - interest sensitive (3)
4.2
%
 
4.2
%
60+ delinquent (% of loans) (4)
2.5
%
 
3.2
%
90+ delinquent (% of loans) (4)
2.1
%
 
2.8
%
120+ delinquent (% of loans) (4)
1.9
%
 
2.6
%
Total prepayment speed (12-month constant prepayment rate)
11.1
%
 
13.8
%

(1) Characteristics and key performance metrics of our servicing portfolio exclude UPB and loan counts acquired but not yet boarded and currently serviced by others.
(2) Average loan amount is presented in whole dollar amounts.
(3) The weighted average coupon amounts for our credit and interest sensitive pools presented in the table above are only reflective of our owned forward MSR portfolio that is reported at fair value.
(4) Loan delinquency is based on the current contractual due date of the loan. In the case of a completed loan modification, delinquency is based on the modified due date of the loan.

Delinquency is a significant assumption in determining the mark-to-market adjustment and is a key indicator of MSR portfolio performance. Delinquent loans contribute to lower MSR values due to higher costs to service and increased carrying costs of advances. We continue to experience decreasing delinquency rates during the nine months ended September 30, 2018 , which preserves the value of our MSRs.


92

Servicer Ratings

We participate in ratings reviews with nationally recognized ratings agencies for its mortgage servicing operations. The attainment of favorable ratings is important to maintaining strong relationships with our customers and compliance with provisions in servicing and debt agreements. The table below sets forth our most recent ratings for our servicing operations as of September 30, 2018 .

Table 8. Servicer Ratings
Fitch
 
Moody's
 
S&P
Rating date
August 2017
 
June 2017
 
January &
February 2018
 
 
 
 
 
 
Residential
RPS2-
 
Not Rated
 
Above Average
Master Servicer
RMS2+
 
SQ2-
 
Above Average
Special Servicer
RSS2-
 
Not Rated
 
Above Average
Subprime Servicer
RPS2-
 
Not Rated
 
Above Average
 
 
 
 
 
 
Fitch Rating Scale of 1 (Highest Performance) to 5 (Low/No Proficiency)
Moody's Rating Scale of SQ1 (Strong Ability/Stability) to SQ5 (Weak Ability/Stability)
S&P's Rating Scale of Strong to Weak

In January 2018, Standard and Poor's Global Ratings ("S&P") affirmed our above average ranking as a residential master servicer. We believe the assessment is based on our seasoned management team with substantive industry knowledge, comprehensive policies and procedures, sound internal controls, as well as an efficient and stable platform with a market position as one of the largest residential mortgage master servicers as measured by portfolio size. The ranking of our outlook is stable as we continue to perform as an overall effective residential mortgage master servicer and have a sufficient financial position. We have been growing our servicing portfolio in a challenging environment and continue to enhance our systems and processes to accommodate new portfolio client and regulatory requirements.

In February 2018, S&P affirmed our above average ranking as a residential primary, subprime, and special servicer. We believe the rankings reflect our experienced management team with extensive industry experience, improved internal control environment, appropriate oversight within critical areas, such as compliance and vendor management, default, and servicing acquisitions, our experience in boarding loans, our controlled default compliance management processes with appropriate emphasis on customer, as well as onshore customer-facing functions which we believe has resulted in improved borrower satisfaction. The rankings of our outlook is stable as we continue to grow our portfolio at a moderate pace and have a sufficient financial position. We made improvements that will help ensure our operational environment remains sound while we continue to be competitive in the mortgage servicing industry.



93

Servicing Expenses

The tables below summarize expenses in the Servicing segment.

Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
 
 
Predecessor
 
 
 
 
 
 
 
 
Table 9. Servicing - Expenses
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Combined (1)
 
Three Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Amt
 
bps
 
 
Amt
 
bps
 
Amt
 
bps
 
Amt
 
bps
 
Amt
 
bps
 
Amt
 
bps
Salaries, wages and benefits
$
52

 
6
 
 
$
25

 
6
 
$
77

 
6
 
$
76

 
3
 
$
1

 
3
 
1
%
 
100%
General and administrative
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Servicing support fees
25

 
3
 
 
9

 
2
 
34

 
3
 
28

 
2
 
6

 
1
 
21
%
 
50%
Corporate and other general and administrative expenses
21

 
2
 
 
17

 
4
 
38

 
3
 
31

 
1
 
7

 
2
 
23
%
 
200%
Foreclosure and other liquidation related expenses
2

 
—
 
 
73

 
18
 
75

 
6
 
44

 
2
 
31

 
4
 
70
%
 
200%
Depreciation and amortization
4

 
—
 
 
2

 
1
 
6

 
—
 
6

 
—
 
—

 
—
 
—
%
 
—%
Total general and administrative expenses
52

 
5
 
 
101

 
25
 
153

 
12
 
109

 
5
 
44

 
7
 
40
%
 
140%
Total expenses - Servicing
$
104

 
11
 
 
$
126

 
31
 
$
230

 
18
 
$
185

 
8
 
$
45

 
10
 
24
%
 
125%

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.

On a combined basis, total expenses increased in the three months ended September 30, 2018 compared to the same period in 2017 primarily due to increased foreclosure and other liquidation related expenses as a result of a change in estimate charge on our reverse MSL. Servicing support fees and corporate and other general and administrative expenses increased on a combined basis in the three months ended September 30, 2018 primarily due to and increase in vendor and other loan related costs.


94

Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
 
 
Predecessor
 
 
 
 
 
 
 
 
Table 9.1. Servicing - Expenses
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Combined (1)
 
Nine Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
 
Amt
 
bps
 
 
Amt
 
bps
 
Amt
 
bps
 
Amt
 
bps
 
Amt
 
bps
 
Amt
 
bps
Salaries, wages and benefits
$
52

 
6
 
 
$
175

 
6
 
$
227

 
6
 
$
218

 
3
 
$
9

 
3
 
4
 %
 
100%
General and administrative
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Servicing support fees
25

 
3
 
 
71

 
2
 
96

 
2
 
93

 
1
 
3

 
1
 
3
 %
 
100%
Corporate and other general and administrative expenses
21

 
2
 
 
80

 
3
 
101

 
3
 
103

 
1
 
(2
)
 
2
 
(2
)%
 
200%
Foreclosure and other liquidation related expenses
2

 
—
 
 
133

 
4
 
135

 
4
 
83

 
1
 
52

 
3
 
63
 %
 
300%
Depreciation and amortization
4

 
—
 
 
15

 
—
 
19

 
—
 
16

 
—
 
3

 
—
 
19
 %
 
—%
Total general and administrative expenses
52

 
5
 
 
299

 
9
 
351

 
9
 
295

 
3
 
56

 
6
 
19
 %
 
200%
Total expenses - Servicing
$
104

 
11
 
 
$
474

 
15
 
$
578

 
15
 
$
513

 
6
 
$
65

 
9
 
13
 %
 
150%

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.

Total expenses on a combined basis increased in the nine months ended September 30, 2018 compared to the same period in 2017 primarily due to an increase in foreclosure and other liquidation related expenses as a result of a change in estimate charge on our reverse MSL. In addition, on a combined basis, salaries, wages and benefits expenses increased in the nine months ended September 30, 2018 due to the significant expansion of the servicing portfolio in the second half of 2017. Additionally, in the third quarter of 2017, the Predecessor launched its own reverse servicing system and terminated its existing contract with a subservicer. As a result, the Predecessor increased staff to perform tasks previously outsourced to the subservicer and eliminated the subservice fee paid to the vendor.


95

Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
 
 
Predecessor
 
 
 
 
 
 
 
 
Table 10. Servicing - Other Income (Expenses), Net
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Combined (1)
 
Three Months Ended September 30, 2017
 
Change
 
% Change
 
 
 
 
 
 
 
 
Amt
 
bps
 
 
Amt
 
bps
 
Amt
 
bps
 
Amt
 
bps
 
Amt
 
bps
 
Amt
 
bps
Reverse mortgage interest income
$
72

 
8

 
 
$
38

 
9

 
$
110

 
9

 
$
137

 
11

 
$
(27
)
 
(2
)
 
(20
)%
 
(18
)%
Other interest income
6

 
1

 
 
3

 
1

 
9

 
1

 
6

 
—

 
3

 
1

 
50
 %
 
100
 %
Interest income
78

 
9

 
 
41

 
10

 
119

 
10

 
143

 
11

 
(24
)
 
(1
)
 
(17
)%
 
(9
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse mortgage interest expense
(63
)
 
(7
)
 
 
(30
)
 
(7
)
 
(93
)
 
(7
)
 
(97
)
 
(7
)
 
(4
)
 
—

 
(4
)%
 
—
 %
Advance interest expense
(5
)
 
(1
)
 
 
(2
)
 
(1
)
 
(7
)
 
(1
)
 
(8
)
 
(1
)
 
(1
)
 
—

 
(13
)%
 
—
 %
Other interest expense
(6
)
 
(1
)
 
 
(3
)
 
(1
)
 
(9
)
 
(1
)
 
(27
)
 
(2
)
 
(18
)
 
(1
)
 
(67
)%
 
(50
)%
Interest expense
(74
)
 
(9
)
 
 
(35
)
 
(9
)
 
(109
)
 
(9
)
 
(132
)
 
(10
)
 
(23
)
 
(1
)
 
(17
)%
 
(10
)%
Other income (expense)
5

 
1

 
 
—

 
—

 
5

 
—

 
(2
)
 
—

 
7

 
—

 
350
 %
 
—
 %
Total other income (expenses), net - Servicing
$
9

 
1

 
 
$
6

 
1

 
$
15

 
1

 
$
9

 
1

 
$
6

 
—

 
67
 %
 
—
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average cost - advance facilities
4.0
%
 
 
 
 
4.1
%
 
 
 
 
 
 
 
3.1
%
 
 
 


 


 


 


Weighted average cost - excess spread financing
8.9
%
 
 
 
 
8.8
%
 
 
 
 
 
 
 
8.9
%
 
 
 


 


 


 



(1) Refer to Basis of Presentation section for discussion on presentation of combined results.

Total other income (expenses), net, on a combined basis, improved in the three months ended September 30, 2018 as compared to the same period in 2017 primarily due to a decrease in other interest expense and increase in other income (expense) offset by a decrease in reverse mortgage interest income. The decrease in other interest expense in a combined basis was primarily a result of a decrease in interest expense related to MSR financing, lower compensating interest expense and improved banking relationships. Other income (expense) on a combined basis improved as compared to the same period in 2017 primarily due to the gain on sale of MSR in the three months ended September 30, 2018 . Partially offsetting the decrease in other interest expense and increase in other income (expense) on a combined basis was a decrease in reverse mortgage interest income due to a decline in reverse mortgage interest in the three months ended September 30, 2018 and the September 2017 recognition of the initial discount on the purchase of an acquired portfolio.


96

Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
 
 
Predecessor
 
 
 
 
 
 
 
 
Table 10.1. Servicing - Other Income (Expenses), Net
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Combined (1)
 
Nine Months Ended September 30, 2017
 
Change
 
% Change
 
 
 
 
 
 
 
 
Amt
 
bps
 
 
Amt
 
bps
 
Amt
 
bps
 
Amt
 
bps
 
Amt
 
bps
 
Amt
 
bps
Reverse mortgage interest income
$
72

 
8

 
 
$
274

 
9

 
$
346

 
9

 
$
370

 
10

 
$
(24
)
 
(1
)
 
(6
)%
 
(10
)%
Other interest income
6

 
1

 
 
14

 
1

 
20

 
1

 
16

 
—

 
4

 
1

 
25
 %
 
100
 %
Interest income
78

 
9

 
 
288

 
10

 
366

 
10

 
386

 
10

 
(20
)
 
—

 
(5
)%
 
—
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse mortgage interest expense
(63
)
 
(7
)
 
 
(221
)
 
(7
)
 
(284
)
 
(7
)
 
(295
)
 
(8
)
 
(11
)
 
(1
)
 
(4
)%
 
(13
)%
Advance interest expense
(5
)
 
(1
)
 
 
(19
)
 
(1
)
 
(24
)
 
(1
)
 
(26
)
 
(1
)
 
(2
)
 
—

 
(8
)%
 
—
 %
Other interest expense
(6
)
 
(1
)
 
 
(28
)
 
(1
)
 
(34
)
 
(1
)
 
(88
)
 
(2
)
 
(54
)
 
(1
)
 
(61
)%
 
(50
)%
Interest expense
(74
)
 
(9
)
 
 
(268
)
 
(9
)
 
(342
)
 
(9
)
 
(409
)
 
(11
)
 
(67
)
 
(2
)
 
(16
)%
 
(18
)%
Other income (expense)
5

 
1

 
 
(1
)
 
—

 
4

 
—

 
(2
)
 
—

 
6

 
—

 
300
 %
 
—
 %
Total other income (expenses), net - Servicing
$
9

 
1

 
 
$
19

 
1

 
$
28

 
1

 
$
(25
)
 
(1
)
 
$
53

 
2

 
212
 %
 
200
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average cost - advance facilities
4.0
%
 
 
 
 
3.9
%
 
 
 
 
 
 
 
3.1
%
 
 
 


 


 


 


Weighted average cost - excess spread financing
8.9
%
 
 
 
 
8.8
%
 
 
 
 
 
 
 
8.9
%
 
 
 


 


 


 



(1) Refer to Basis of Presentation section for discussion on presentation of combined results.

On a combined basis, total other income (expenses), net improved in the nine months ended September 30, 2018 as compared to the same period in 2017 primarily due to a decrease in interest expense and an increase in other income (expense) offset by a decrease in reverse mortgage interest income. The decrease in interest expense on a combined basis is primarily a result of a decrease in other interest expense related to MSR financing, lower compensating interest expense and improved banking relationships. Reverse mortgage interest expense decreased on a combined basis due to a decline in reverse mortgage interest in the three months ended September 30, 2018 . Other income (expense) on a combined basis improved as compared to the same period in 2017 primarily due to the gain on sale of MSR in the three months ended September 30, 2018 . Offsetting the decrease in interest expense and increase in other income (expense) on a combined basis was a decrease in interest expense primarily due to a decrease in reverse mortgage interest expense as a result of the decline in reverse mortgage interest and the September 2017 recognition of the initial discount on the purchase of an acquired portfolio.


97

Serviced Portfolio and Liabilities

 
Successor
 
Predecessor
Table 11. Serviced Portfolios and Related Liabilities
September 30, 2018
 
December 31, 2017
 
UPB
 
Carrying Amount
 
Weighted Avg. Coupon
 
UPB
 
Carrying Amount
 
Weighted Avg. Coupon
Forward MSRs - fair value
 
 
 
 
 
 
 
 
 
 
 
Agency
$
205,201

 
$
2,795

 
4.5
%
 
$
202,868

 
$
2,251

 
4.5
%
Non-agency
69,285

 
690

 
4.7
%
 
78,512

 
686

 
4.6
%
Total Forward MSRs - fair value
274,486

 
3,485

 
4.5
%
 
281,380

 
2,937

 
4.5
%
 
 
 
 
 
 
 
 
 
 
 
 
Subservicing and other (1)
 
 
 
 
 
 
 
 
 
 
 
Agency
195,489

 
N/A

 
N/A

 
183,519

 
N/A

 
N/A

Non-agency
13,617

 
N/A

 
N/A

 
8,357

 
N/A

 
N/A

Total subservicing and other
209,106

 
N/A

 
N/A

 
191,876

 
N/A

 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
Reverse portfolio - amortized cost
 
 
 
 
 
 
 
 
 
 
 
MSR
75

 
15

 
N/A

 
9,395

 
4

 
N/A

MSL (2)
21,703

 
(79
)
 
N/A

 
15,729

 
(41
)
 
N/A

Securitized loans
8,882

 
8,886

 
N/A

 
9,988

 
9,984

 
N/A

Total reverse portfolio serviced
30,660

 
8,822

 
N/A

 
35,112

 
9,947

 
N/A

Total servicing portfolio unpaid principal balance
$
514,252

 
$
12,307

 
N/A

 
$
508,368

 
$
12,884

 
N/A


(1) Subservicing and other amounts include loans we service for others, residential mortgage loans originated but have yet to be sold and agency REO balances for which we own the mortgage servicing rights.

We assess whether acquired portfolios are more credit sensitive or interest sensitive in nature on the date of the acquisition. We consider numerous factors in making this assessment, with the primary factors consisting of the overall portfolio delinquency characteristics, portfolio seasoning and residential mortgage loan composition. Interest rate sensitive portfolios typically consist of single-family conforming residential forward mortgage loans serviced for GSEs or other third-party investors. Credit sensitive portfolio primarily consists of higher delinquency single-family non-conforming residential forward mortgage loans in private-label securitizations.

 
Successor
 
Predecessor
Table 12. Fair Value MSR Valuation
September 30, 2018
 
December 31, 2017
 
UPB
 
Carrying Amount
 
bps
 
UPB
 
Carrying Amount
 
bps
MSRs - fair value
 
 
 
 
 
 
 
 
 
 
 
Credit sensitive
$
144,697

 
$
1,652

 
114
 
$
167,605

 
$
1,572

 
94
Interest sensitive - agency
129,789

 
1,833

 
141
 
113,775

 
1,365

 
120
Total MSRs - fair value
$
274,486

 
$
3,485

 
127
 
$
281,380

 
$
2,937

 
104

As of September 30, 2018 , when measuring the fair value of the portfolio as a basis point of the unpaid principal balance, our credit sensitive pool increased in value by 20 bps compared to the Predecessor's balance as of December 31, 2017 due to lower delinquency and foreclosure rates and lower forecasted prepayment speeds. The fair value of our interest sensitive portfolio increased by 21 bps at September 30, 2018 compared to the Predecessor's balance as of December 31, 2017 due to decreased forecasted prepayment speeds as a result of the rising interest expense environment in 2018.

98


The following table provides information on the fair value of our owned forward MSR portfolio.

 
Successor
 
 
Predecessor
Table 13. MSRs - Fair Value, Roll Forward
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Three Months Ended September 30, 2017
 
For the Period January 1 - July 31, 2018
 
Nine Months Ended September 30, 2017
 
 
 
 
 
 
Fair value - beginning of period
$
3,413

 
 
$
3,356

 
$
3,046

 
$
2,937

 
$
3,160

Additions:
 
 
 
 
 
 
 
 
 
 
Servicing retained from mortgage loans sold
43

 
 
22

 
48

 
162

 
151

Purchases of servicing rights
72

 
 
12

 
17

 
144

 
30

Dispositions:
 
 
 
 
 
 
 
 
 
 
Sales of servicing rights (1)
(63
)
 
 
—

 
(26
)
 
4

 
(24
)
Changes in fair value:
 
 
 
 
 
 
 
 
 
 
Due to changes in valuation inputs or assumptions used in the valuation model:
 
 
 
 
 
 
 
 
 
 
Credit sensitive
14

 
 
11

 
(12
)
 
203

 
(21
)
Interest sensitive
51

 
 
35

 
(27
)
 
127

 
(92
)
Other changes in fair value:
 
 
 
 
 
 
 
 
 
 
Scheduled principal payments
(20
)
 
 
(6
)
 
(20
)
 
(45
)
 
(62
)
Disposition of negative MSRs and other (2)
7

 
 
3

 
11

 
27

 
59

Prepayments
 
 
 
 
 
 
 
 
 
 
Voluntary prepayments
 
 
 
 
 
 
 
 
 
 
Credit sensitive
(14
)
 
 
(10
)
 
(42
)
 
(71
)
 
(131
)
Interest sensitive
(11
)
 
 
(8
)
 
(29
)
 
(54
)
 
(79
)
Involuntary prepayments
 
 
 
 
 
 
 
 
 
 
Credit sensitive
(3
)
 
 
(1
)
 
(6
)
 
(12
)
 
(22
)
Interest sensitive
(4
)
 
 
(1
)
 
(4
)
 
(9
)
 
(13
)
Fair value - end of period
$
3,485

 
 
$
3,413

 
$
2,956

 
$
3,413

 
$
2,956


(1) Amounts are related to the cost to dispose of negative MSR associated with nonperforming loan portfolios.
(2) Amounts primarily represent negative fair values reclassified from the MSR asset to reserves of advances and other receivables as underlying loans are removed from the MSR and other reclassification adjustments.


99

The following table sets forth the weighted average assumptions in estimating the fair value of MSRs.

 
Successor
 
Predecessor
Table 14. MSRs - Fair Value
September 30,
 
2018
 
2017
Credit Sensitive MSRs
 
 
 
Discount rate
11.2
%
 
11.4
%
Weighted average prepayment speeds
11.2
%
 
15.4
%
Weighted average life of loans
6.7 years

 
5.6 years

 
 
 
 
Interest Sensitive MSRs
 
 
 
Discount rate
9.2
%
 
9.2
%
Weighted average prepayment speeds
8.9
%
 
11.3
%
Weighted average life of loans
7.4 years

 
6.5 years


Discount rate for credit sensitive and interest sensitive MSRs remained consistent as of September 30, 2018 compared to the same period in 2017 . Weighted average lives increased for both credit sensitive and interest sensitive MSRs due to the decline in prepayment speeds, which was attributable to the interest rate increasing period over period.

The discount rate used to determine the present value of estimated future net servicing income is based on the required rate of return market investors would expect for an asset with similar risk characteristics. The discount rate is determined through review of recent market transactions as well as comparing the discount rate to those utilized by third-party valuation specialists.

Total prepayment speeds represent the annual rate at which borrowers are forecasted to repay their mortgage loan principal, which includes estimates for both voluntary and involuntary borrower liquidations. The expected weighted-average life represents the total years we expect to service the MSR.

Excess Spread Financing

As further disclosed in Note 4, Mortgage Servicing Rights and Related Liabilities , we have entered into sale and assignment agreements treated as financing arrangements whereby the acquirer has the right to receive a specified percentage of the excess cash flow generated from an MSR.

The servicing fees associated with a MSR can be segregated into (i) a base servicing fee and (ii) an excess servicing fee. The base servicing fee, along with ancillary income and other revenues, is designed to cover costs incurred to service the specified pool plus a reasonable margin. The remaining servicing fee is considered excess. We sell a percentage of the excess fee as a method for efficiently financing acquired MSRs. Excess spread financings are presently applicable only to acquired MSRs and originated pools of loans; however, they can be entered into at any time for both acquired and originated MSRs. These financings have been provided by companies including New Residential, certain funds managed by Fortress Investment Group, and third-parties associated with funds and accounts under management of BlackRock Financial Management, Inc and V ä rde Partners, Inc.

Excess spread financings are recorded at fair value, and the impact of fair value adjustments on future revenues and capital resources varies primarily due to changes in (i) prepayment speeds and (ii) our ability to recapture mortgage loan payoffs through the origination platform. In Note 4, Mortgage Servicing Rights and Related Liabilities , we discuss the range of assumptions and sensitivities related to the measurement of the excess spread financing liability as of September 30, 2018 and December 31, 2017 .


100

The following table sets forth the change in the excess spread liability and the related key weighted average assumptions.
 
 
Successor
 
 
Predecessor
Table 15. Excess Spread Financing
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Three Months Ended September 30, 2017
 
For the Period January 1 - July 31, 2018
 
Nine Months Ended September 30, 2017
 
 
 
 
 
 
Fair value - beginning of period
$
1,039

 
 
$
1,047

 
$
1,121

 
$
996

 
$
1,214

Additions:
 
 
 
 
 
 
 
 
 
 
New financings
84

 
 
—

 
—

 
70

 
—

Deductions:
 
 
 
 
 
 
 
 
 
 
Repayments of debt
(21
)
 
 
(1
)
 
(9
)
 
(3
)
 
(9
)
Settlements of principal balances
(31
)
 
 
(14
)
 
(51
)
 
(105
)
 
(159
)
Fair value changes:
 
 
 
 
 
 
 
 
 
 
Credit Sensitive
23

 
 
7

 
(12
)
 
73

 
5

Interest Sensitive
3

 
 
—

 
(3
)
 
8

 
(5
)
Fair value - end of period
$
1,097

 
 
$
1,039

 
$
1,046

 
$
1,039

 
$
1,046

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Successor
 
Predecessor
 
 
 
 
 
 
 
 
September 30,
Key Assumptions
 
 
 
 
 
 
 
2018
 
2017
Weighted average prepayment speeds
 
 
 
 
 
 
 
10.6
%
 
13.9
%
Weighted average life of loans
 
 
 
 
 
 
 
6.7 years

 
5.9 years

Discount rate
 
 
 
 
 
 
 
10.6
%
 
10.8
%
 
 
 
 
 
 
 
 
 
 
 
Credit Sensitive
 
 
 
 
 
 
 
 
 
 
Mortgage prepayment speeds
 
 
 
 
 
 
 
11.0
%
 
14.4
%
Average life of mortgage loans
 
 
 
 
 
 
 
6.6 years

 
5.8 years

Discount rate
 
 
 
 
 
 
 
11.1
%
 
11.1
%
 
 
 
 
 
 
 
 
 
 
 
Interest Sensitive
 
 
 
 
 
 
 
 
 
 
Mortgage prepayment speeds
 
 
 
 
 
 
 
9.3
%
 
11.6
%
Average life of mortgage loans
 
 
 
 
 
 
 
7.1 years

 
6.1 years

Discount rate
 
 
 
 
 
 
 
9.1
%
 
8.9
%

In conjunction with the excess spread financing servicing acquisition structure, we also entered into several sale agreements whereby we sold the right to receive servicing advances on private-label servicing advances and the right to receive a portion of the base fee component on the related MSRs as financing cost. These financings are recorded at fair value, and the change in fair value is recorded against servicing revenue and interest imputed on the outstanding liability is recorded as interest expense.

101


 
Successor
 
 
Predecessor
Table 16. MSRs Financing Liability - Rollforward
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Three Months Ended September 30, 2017
 
For the Period January 1 - July 31, 2018
 
Nine Months Ended September 30, 2017
 
 
 
 
 
 
Fair value - beginning of period
$
26

 
 
$
16

 
$
13

 
$
10

 
$
27

Changes in fair value: (1)
 
 
 
 
 
 
 
 
 
 
Changes in valuation inputs or assumptions used in the valuation model
3

 
 
11

 
6

 
22

 
(9
)
Other changes in fair value
(3
)
 
 
(1
)
 
1

 
(6
)
 
2

Fair value - end of period
$
26

 
 
$
26

 
$
20

 
$
26

 
$
20

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Successor
 
Predecessor
 
 
 
 
 
 
 
 
September 30,
 
 
 
 
 
 
 
 
2018
 
2017
Weighted Average Assumptions
 
 
 
 
 
 
 
 
 
 
Advance financing rates
 
 
 
 
 
 
 
4.9
%
 
3.5
%
Annual advance recovery rates
 
 
 
 
 
 
 
18.2
%
 
23.3
%

(1) The changes in fair value related to our MSRs' financing liability primarily relate to both scheduled and unscheduled principal payments reflected in the underlying MSRs and changes in the fair value model assumptions.

We estimate fair value of the MSR financing liability based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being advance financing rates and annual advance recovery rates.
The following table provides an overview of our forward servicing portfolio and amounts that have been transferred to our co-invest partners for the periods indicated.

 
Successor
 
Predecessor
Table 17. Leveraged Portfolio Characteristics
September 30,
 
2018
 
2017
Owned forward servicing portfolio - unencumbered
$
90,504

 
$
80,920

Owned forward servicing portfolio - encumbered
183,982

 
207,530

Subserviced forward servicing portfolio and other
209,106

 
207,979

Total unpaid principal balance
$
483,592

 
$
496,429


The encumbered forward servicing portfolio consists of residential mortgage loans included within our excess spread financing transactions and MSR financing liability. Subserviced and other amounts include (1) loans serviced for others, (2) residential mortgage loans originated but not yet sold and (3) agency REO balances for which we own the mortgage servicing rights.


102

Reverse - MSLs and Participating Interests - Amortized Cost

The table below provides detail of the characteristics and key performance metrics of the reverse servicing portfolio, which is included in MSLs and participating interests in reverse mortgages. Such assets are recorded at amortized cost.

 
Successor
 
Predecessor
Table 18. Reverse - Mortgage Portfolio Characteristics
September 30, 2018
 
December 31, 2017
Loan count
200,904

 
212,415

Ending unpaid principal balance
$
30,660

 
$
35,112

Average loan amount (1)
$
152,608

 
$
165,299

Average coupon
4.3
%
 
3.8
%
Average borrower age
79

 
79


(1) Average loan amount is presented in whole dollar amounts.

From time to time, we acquire servicing rights and participating interests in reverse mortgage portfolios. Reverse mortgage loans, known as HECMs, provide seniors 62 and older with a loan upon which draws can be made periodically. The draws are secured by the equity in the borrower's home. For acquired servicing rights on reverse mortgages, a MSR or MSL is established on the acquisition date at fair value, as applicable, based on the proceeds paid or received to service the reverse portfolio.

Each quarter, we accrete the MSL to service related revenue, net of the respective portfolios run-off. The MSL is assessed for increased obligation based on its fair value, using a variety of assumptions, with the primary assumption being discount rates, prepayment speeds and borrower life expectancy. The MSLs are stratified based on predominant risk characteristics of the underlying serviced loans. Impairment, if any, represents the excess of amortized cost of an individual stratum over its estimated fair value and is recognized through an increase in valuation allowance. Based on our assessment, no impairment was required for reverse MSLs as of September 30, 2018 .


Originations Segment

Our Originations segment comprises both direct-to-consumer and correspondent lending.

Our direct-to-consumer lending channel originates first-lien conventional and government-insured loans. Our direct-to-consumer strategy relies on call centers, our website and our mobile app to interact with customers. Our primary focus is to assist customers currently in our servicing portfolio with a refinance or home purchase. Through this process, we increase our originations margin by reducing marketing and other costs to acquire customers, as well as replenish our servicing portfolio. Our direct-to-consumer channel is also focused on building relationships and generating new customers to replenish the servicing portfolio.

Our correspondent lending channel acquires newly originated residential mortgage loans that have been underwritten to investor guidelines and MSRs through a co-issue program with clients. This includes both conventional and government-insured loans that qualify for inclusion in securitizations that are guaranteed by the GSEs. Our correspondent lending channel enables us to replenish servicing portfolio run-off typically at better return thresholds than traditional bulk or flow acquisitions.

To mitigate credit risk, we typically sell loans within 30 to 60 days of origination while retaining the associated servicing rights. Servicing rights can be retained, sold (servicing released) or given back to the investor, in part of in whole, depending on the subservicing or co-invest agreements.

The following tables set forth the results of operations for the Originations segment.

103

Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 19. Originations - Operations
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Combined (1)
 
Three Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Revenues
$
86

 
 
$
45

 
$
131

 
$
150

 
$
(19
)
 
(13
)%
Expenses
66

 
 
34

 
100

 
106

 
(6
)
 
(6
)%
Other income (expenses), net
1

 
 
—

 
1

 
1

 
—

 
—
 %
Income before income tax expense
$
21

 
 
$
11

 
$
32

 
$
45

 
$
(13
)
 
(29
)%
Income before taxes margin
24.4
%
 
 
24.4
%
 
24.4
%
 
30.0
%
 
(5.6
)%
 
(18.7
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
 
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Combined (1)
 
Three Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Revenue
$
86

 
 
$
45

 
$
131

 
$
150

 
$
(19
)
 
(13
)%
Pull through adjusted lock volume
$
3,421

 
 
$
1,606

 
$
5,027

 
$
4,930

 
$
97

 
2
 %
Revenue basis points (2)
2.51
%
 
 
2.80
%
 
2.61
%
 
3.04
%
 
(19.59
)%
 
(644.41
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses
$
66

 
 
$
34

 
$
100

 
$
106

 
$
(6
)
 
(6
)%
Funded volume
$
3,459

 
 
$
1,688

 
$
5,147

 
$
5,102

 
$
45

 
1
 %
Expenses basis points (3)
1.91
%
 
 
2.01
%
 
1.94
%
 
2.08
%
 
(13.33
)%
 
(640.87
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Margin
0.60
%
 
 
0.79
%
 
0.67
%
 
0.96
%
 
(6.26
)%
 
(652.08
)%

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.
(2) Calculated on pull-through adjusted lock volume as revenue is recognized at the time of loan lock.
(3) Calculated on funded volume as expenses are incurred based on closing of the loan.

On a combined basis, income before income tax expense decreased for the three months ended September 30, 2018 as compared to the same period in 2017 primarily due to a decline in revenues. The decline in revenues on a combined basis was primarily due to lower margins from a shift in channel mix from direct-to-consumer to higher correspondent mix. Expense basis points on a combined basis during the three months ended September 30, 2018 declined over the same period in 2017 due to increased productivity, cost reduction initiatives and channel mix change. Net margin on a combined basis in 2018 declined primarily as a result of a higher mix of volume in the correspondent channel period over period.


104

Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 19.1 Originations - Operations
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Combined (1)
 
Nine Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Revenues
$
86

 
 
$
306

 
$
392

 
$
449

 
$
(57
)
 
(13
)%
Expenses
66

 
 
245

 
311

 
326

 
(15
)
 
(5
)%
Other income (expenses), net
1

 
 
1

 
2

 
—

 
2

 
100
 %
Income before income tax expense
$
21

 
 
$
62

 
$
83

 
$
123

 
$
(40
)
 
(33
)%
Income before taxes margin
24.4
%
 
 
20.3
%
 
21.2
%
 
27.4
%
 
(6.2
)%
 
(22.6
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
 
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Combined (1)
 
Nine Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Revenue
$
86

 
 
$
306

 
$
392

 
$
449

 
$
(57
)
 
(13
)%
Pull through adjusted lock volume
$
3,421

 
 
$
11,907

 
$
15,328

 
$
12,935

 
$
2,393

 
19
 %
Revenue basis points (2)
2.51
%
 
 
2.57
%
 
2.56
%
 
3.47
%
 
(2.38
)%
 
(68.59
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses
$
66

 
 
$
245

 
$
311

 
$
326

 
$
(15
)
 
(5
)%
Funded volume
$
3,459

 
 
$
12,317

 
$
15,776

 
$
13,988

 
$
1,788

 
13
 %
Expenses basis points (3)
1.91
%
 
 
1.99
%
 
1.97
%
 
2.33
%
 
(0.84
)%
 
(36.05
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Margin
0.60
%
 
 
0.58
%
 
0.59
%
 
1.14
%
 
(1.54
)%
 
(135.09
)%

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.
(2) Calculated on pull-through adjusted lock volume as revenue is recognized at the time of loan lock.
(3) Calculated on funded volume as expenses are incurred based on closing of the loan.


105

On a combined basis, income before income tax expense decreased for the nine months ended September 30, 2018 as compared to the same period in 2017 primarily due to a decline in revenues. The decline in combined revenues was primarily due to lower overall weighted margins as a result in channel mix change from the direct-to-consumer to the correspondent channels has continued to grow. Revenue basis points on a combined basis during the nine months ended September 30, 2018 declined compared to the same period in 2017 primarily due to higher correspondent mix, which has a lower margin. Expense basis points on a combined basis in 2018 declined over 2017 due to increased productivity, expense management and correspondent channel growth. Net margin on a consolidated basis in 2018 declined due to a higher mix of correspondent loans, which have a lower margin than direct-to-consumer loans.

Gain on Mortgage Loans Held for Sale
Gain on mortgage loans held for sale represents the realized gains and losses on loan sales and settled derivatives. The gain on mortgage loans held for sale is a function of the volume, margin and channel mix of our originations activity and is impacted by fluctuations in interest rates.

Net Gain on Mortgage Loans Held for Sale
The net gain on mortgage loans held for sale includes gain on mortgage loans held for sale as well as capitalized servicing rights and mark-to-market adjustments on mortgage loans held for sale and related derivative financial instruments. We recognize the fair value of the interest rate lock commitments ("IRLC"), including the fair value of the related servicing rights, at the time we commit to originate or purchase a loan at specified terms. Loan origination costs are recognized as the obligations are incurred, which typically aligns with the date of loan funding for direct-to-consumer originations and the date of loan purchase for correspondent lending originations.


106

Revenues, including net gain on mortgage loans held for sale, for our Originations segment are set forth in the tables below.

Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 20. Originations - Revenues
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Combined (1)
 
Three Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Service related, net - Originations
$
10

 
 
$
4

 
$
14

 
$
16

 
$
(2
)
 
(13
)%
Net gain on mortgage loans held for sale
 
 
 
 
 
 
 
 
 
 
 
 
Gain on loans originated and sold
36

 
 
12

 
48

 
89

 
(41
)
 
(46
)%
Fair value adjustment on loans held for sale
(8
)
 
 
(1
)
 
(9
)
 
6

 
(15
)
 
(250
)%
Mark-to-market on locks and commitments (2)
(2
)
 
 
(1
)
 
(3
)
 
(1
)
 
(2
)
 
(200
)%
Mark-to-market on derivative/hedges
10

 
 
9

 
19

 
(4
)
 
23

 
575
 %
Capitalized servicing rights
41

 
 
22

 
63

 
46

 
17

 
37
 %
Provision of repurchase reserves, net of release
(1
)
 
 
—

 
(1
)
 
(2
)
 
1

 
50
 %
Total net gain on mortgage loans held for sale
76

 
 
41

 
117

 
134

 
(17
)
 
(13
)%
Total revenues - Originations
$
86

 
 
$
45

 
$
131

 
$
150

 
$
(19
)
 
(13
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Key Metrics
 
 
 
 
 
 
 
 
 
 
 
 
Consumer direct lock pull through adjusted volume (3)
$
1,524

 
 
$
828

 
$
2,352

 
$
3,006

 
$
(654
)
 
(22
)%
Other locked pull through adjusted volume (3)
1,897

 
 
778

 
2,675

 
1,924

 
751

 
39
 %
Total pull through adjusted volume
$
3,421

 
 
$
1,606

 
$
5,027

 
$
4,930

 
$
97

 
2
 %
Funded volume
$
3,459

 
 
$
1,688

 
$
5,147

 
$
5,102

 
$
45

 
1
 %
Funded HARP volume
$
135

 
 
$
72

 
$
207

 
$
772

 
$
(565
)
 
(73
)%
Recapture percentage
22.8
%
 
 
20.4
%
 
22.0
%
 
23.9
%
 
 
 
 
Purchase percentage of funded volume
52.8
%
 
 
52.2
%
 
52.6
%
 
36.3
%
 
 
 
 
Value of capitalized servicing
124 bps

 
 
120 bps

 
122 bps

 
93 bps

 
 
 
 

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.
(2) Mark-to-market on locks and commitments includes our fair value mark-to-market adjustments on IRLCs.
(3) Pull through adjusted volume represents the expected funding from locks taken during the period.


107

During the three months ended September 30, 2018 , total revenues on a combined basis decreased compared to the same period in 2017 primarily due to a decline in gain on loans originated and sold. Higher correspondent mix during the three months ended September 30, 2018 resulted in a lower margin. The decrease in gain on loans originated and sold on a combined basis was partially offset by an increase in mark-to-market on derivative/hedges revenue and capitalized servicing rights. For the three months ended September 30, 2018 , mark-to-market on derivatives/hedges revenue and capitalized servicing rights on a combined basis increased primarily due to a higher interest rate environment compared to the same period in 2017 .

108

Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 20.1. Originations - Revenues
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Combined (1)
 
Nine Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Service related, net - Originations
$
10

 
 
$
36

 
$
46

 
$
47

 
$
(1
)
 
(2
)%
Net gain on mortgage loans held for sale
 
 
 
 
 
 
 
 
 
 
 
 
Gain on loans originated and sold
36

 
 
113

 
149

 
293

 
(144
)
 
(49
)%
Fair value adjustment on loans held for sale
(8
)
 
 
—

 
(8
)
 
16

 
(24
)
 
(150
)%
Mark-to-market on locks and commitments (2)
(2
)
 
 
1

 
(1
)
 
(23
)
 
22

 
96
 %
Mark-to-market on derivative/hedges
10

 
 
1

 
11

 
(28
)
 
39

 
139
 %
Capitalized servicing rights
41

 
 
156

 
197

 
143

 
54

 
38
 %
Provision of repurchase reserves, net of release
(1
)
 
 
(1
)
 
(2
)
 
1

 
(3
)
 
(300
)%
Total net gain on mortgage loans held for sale
76

 
 
270

 
346

 
402

 
(56
)
 
(14
)%
Total revenues - Originations
$
86

 
 
$
306

 
$
392

 
$
449

 
$
(57
)
 
(13
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Key Metrics
 
 
 
 
 
 
 
 
 
 
 
 
Consumer direct lock pull through adjusted volume (3)
$
1,524

 
 
$
6,100

 
$
7,624

 
$
8,466

 
$
(842
)
 
(10
)%
Other locked pull through adjusted volume (3)
1,897

 
 
5,807

 
7,704

 
4,469

 
3,235

 
72
 %
Total pull through adjusted volume
$
3,421

 
 
$
11,907

 
$
15,328

 
$
12,935

 
$
2,393

 
19
 %
Funded volume
$
3,459

 
 
$
12,317

 
$
15,776

 
$
13,988

 
$
1,788

 
13
 %
Funded HARP volume
$
135

 
 
$
832

 
$
967

 
$
2,932

 
$
(1,965
)
 
(67
)%
Recapture percentage
22.8
%
 
 
23.8
%
 
23.6
%
 
26.5
%
 
 
 
 
Purchase percentage of funded volume
52.8
%
 
 
46.7
%
 
48.0
%
 
28.6
%
 
 
 
 
Value of capitalized servicing
124 bps

 
 
120 bps

 
124 bps

 
101 bps

 
 
 
 

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.
(2) Mark-to-market on locks and commitments includes our fair value mark-to-market adjustments on IRLCs.
(3) Pull through adjusted volume represents the expected funding from locks taken during the period.


109

During the nine months ended September 30, 2018 , total revenues decreased compared to the same period in 2017 primarily driven by a decrease in gain on loans originated and sold. Higher correspondent mix during the nine months ended September 30, 2018 resulted in a lower margin. The decrease in gain on loans originated and sold on a combined basis was partially offset by an increase in mark-to-market on derivative/hedges revenue and capitalized servicing rights. For the nine months ended September 30, 2018 , mark-to-market on derivatives/hedges revenue and capitalized servicing rights on a combined basis increased primarily due to a higher interest rate environment compared to the same period in 2017 .

Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 21. Originations - Expenses
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Combined (1)
 
Three Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Salaries, wages and benefits
$
39

 
 
$
21

 
$
60

 
$
66

 
$
(6
)
 
(9
)%
General and administrative
 
 
 
 
 
 
 
 
 
 
 
 
Loan origination expenses
9

 
 
5

 
14

 
13

 
1

 
8
 %
Corporate and other general and administrative expenses
7

 
 
3

 
10

 
10

 
—

 
—
 %
Marketing and professional service fee
9

 
 
4

 
13

 
14

 
(1
)
 
(7
)%
Depreciation and amortization
2

 
 
1

 
3

 
3

 
—

 
—
 %
Total general and administrative
27

 
 
13

 
40

 
40

 
—

 
—
 %
Total expenses - Originations
$
66

 
 
$
34

 
$
100

 
$
106

 
$
(6
)
 
(6
)%

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.

Total expenses on a combined basis decreased for the three months ended September 30, 2018 compared to the same period in 2017 primarily due to a decrease in salaries, wages and benefits as a result of lower volumes and headcount in the direct-to-consumer channel.


110

Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 21.1. Originations - Expenses
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Combined (1)
 
Nine Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Salaries, wages and benefits
$
39

 
 
$
148

 
$
187

 
$
195

 
$
(8
)
 
(4
)%
General and administrative
 
 
 
 
 
 
 
 
 
 
 
 
Loan origination expenses
9

 
 
32

 
41

 
46

 
(5
)
 
(11
)%
Corporate and other general and administrative expenses
7

 
 
26

 
33

 
36

 
(3
)
 
(8
)%
Marketing and professional service fee
9

 
 
32

 
41

 
41

 
—

 
—
 %
Depreciation and amortization
2

 
 
7

 
9

 
8

 
1

 
13
 %
Total general and administrative
27

 
 
97

 
124

 
131

 
(7
)
 
(5
)%
Total expenses - Originations
$
66

 
 
$
245

 
$
311

 
$
326

 
$
(15
)
 
(5
)%

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.

Total expenses on a combined basis for the nine months ended September 30, 2018 decreased as compared to the same period in 2017. On a combined basis, the decrease in salaries, wages and benefits was primarily due to a decline in volume and headcount in the direct-to-consumer channel. The reduction in general and administrative expenses on a combined basis was primarily attributed to cost reduction initiatives and improved efficiencies in the direct-to-consumer channel partially offset by volume growth in the correspondent channel.


111

Interest income primarily relates to mortgage loans held for sale. Interest expense is associated with the warehouse facilities utilized to originate new loans.

Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 22. Originations - Other Income (Expenses), Net
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Combined (1)
 
Three Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Interest income
$
10

 
 
$
6

 
$
16

 
$
14

 
$
2

 
14
%
Interest expense
(10
)
 
 
(6
)
 
(16
)
 
(13
)
 
3

 
23
%
Other income
1

 
 
—

 
1

 
—

 
1

 
100
%
Total other income, net - Originations
$
1

 
 
$
—

 
$
1

 
$
1

 
$
—

 
—
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average note rate - mortgage loans held for sale
4.8
%
 
 
4.8
%
 
 
 
4.1
%
 
 
 
 
Weighted average cost of funds (excluding facility fees)
4.5
%
 
 
4.2
%
 
 
 
3.6
%
 
 
 
 

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.

Interest income on a combined basis increased due to higher funded volume and higher average market rates offset by an increase in interest expense on a combined basis driven by higher cost of funds from an increase in the interest rate index.

Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 22.1. Originations - Other Income (Expenses), Net
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Combined (1)
 
Nine Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Interest income
$
10

 
 
$
38

 
$
48

 
$
39

 
$
9

 
23
%
Interest expense
(10
)
 
 
(37
)
 
(47
)
 
(39
)
 
8

 
21
%
Other income
1

 
 
—

 
1

 
—

 
1

 
100
%
Total other income, net - Originations
$
1

 
 
$
1

 
$
2

 
$
—

 
$
2

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average note rate - mortgage loans held for sale
4.8
%
 
 
4.5
%
 
 
 
4.1
%
 
 
 
 
Weighted average cost of funds (excluding facility fees)
4.5
%
 
 
4.2
%
 
 
 
3.5
%
 
 
 
 

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.

Higher funded volume and higher average market rates resulted in an increase in interest income on a combined basis. Interest expense on a combined basis increased primarily driven by higher cost of funds from an increase in the interest rate index.



112

Xome Segment

Our Xome segment is a leading provider of technology and data-enhanced solutions to home buyers, home sellers, real estate professionals and companies engaged in the origination and/or servicing of mortgage loans. Xome seeks to transform the real estate experience by making the challenge of buying or selling a home less complex and increasing transparency through the partnering of both online and offline components of the transaction cycle. The result provides customers a more streamlined and cohesive real estate environment. Xome is comprised of three revenue types categorized as Exchange, Services and Software as a Service ("SaaS").

Exchange revenue is comprised of real estate disposition services. The Xome.com auction platform leverages our proprietary auction technology designed to increase transparency, reduce fraud risk and provide better execution for property sales. Success of this platform is evidenced by generally higher sales prices and lower average days to sell compared to traditional property sales. On a combined basis, during the three and nine months ended September 30, 2018 , we added three and ten new Exchange clients, respectively.

Services revenue is comprised of title, escrow, valuation and field services related to real estate purchases, refinance and default transactions. We continue to serve existing third-party customers and capture refinance and default transactions generated by our Servicing and Originations segments. Today, significant opportunities still exist with respect to penetration of current and new customers. On a combined basis, during the three and nine months ended September 30, 2018 , we added two and twelve new Services clients, respectively. In August 2018, we acquired Assurant Mortgage Services ("Assurant"), a mortgage services division, from American Bankers Insurance Group for $35 million plus future contingent consideration if certain performance hurdles are attained. Assurant is a leading national provider of services, including valuations, title and field services, to a diverse range of customers in the mortgage services industry. The acquisition of Assurant further diversifies our revenue basis by adding over 100 additional third-party customers to our roster. The acquired Assurant businesses will be rebranded under Xome and Title365.

SaaS revenue includes sales of technology services including cloud-computing, predictive analytics, media and data solutions to mortgage servicers, originators and multiple listing service ("MLS") organizations and associations and commissions earned from our retail property sale business. In February 2018, Xome sold the software-based business of its Real Estate Digital ("RED") business, but retained RED's reDataVault proprietary offering, which is home to Xome's MLS data. Within our Xome platform, we intend to enhance the home buying and selling experience through smart investments in innovative technology and a sharp focus on customer service by making the home buying and selling transaction experience simpler, more transparent and more accessible for all market participants. Our Xome platform is accessible through a combination of a web-based platform and easy to use mobile apps, giving customers instant access to over 95% of all active MLS listings in the United States. Our platform allows users to search among distressed and non-distressed real estate listings on a single website - a significant advantage over our competitors' platforms which generally support either distressed or non-distressed listings, but not both. Our website 4salebyowner.com is our entry into the "Do It Yourself" ("DIY") real estate sales market of approximately 600,000 properties annually. Our value proposition to home buyers and sellers is to empower them to transact as they want, either through a traditional sales channel or through our proprietary auction technology, which leverages an artificial intelligence enabled listing, bidding and selling strategies and full-service brokerage support.

The following tables set forth the results of operation for the Xome segment.


113

Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 23. Xome - Operations
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Combined (1)
 
Three Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Revenues
$
73

 
 
$
22

 
$
95

 
$
65

 
$
30

 
46
 %
Expenses
71

 
 
19

 
90

 
54

 
36

 
67
 %
Other income (expenses), net
(1
)
 
 
—

 
(1
)
 
—

 
(1
)
 
—
 %
Income (loss) before income tax expense
$
1

 
 
$
3

 
$
4

 
$
11

 
$
(7
)
 
(64
)%
Income before taxes margin - Xome
1.4
%
 
 
13.6
%
 
4.2
%
 
16.9
%
 
(12.7
)%
 
(75.1
)%

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.

Income before income tax expense, on a combined basis, decreased for the three months ended September 30, 2018 as compared to the same period in 2017 primarily due to the loss incurred by Assurant, which was acquired in August 2018, and higher compensation related expenses related to the Assurant acquisition.

Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 23.1. Xome - Operations
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Combined (1)
 
Nine Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Revenues
$
73

 
 
$
149

 
$
222

 
$
226

 
$
(4
)
 
(2
)%
Expenses
71

 
 
123

 
194

 
193

 
1

 
1
 %
Other income (expenses), net
(1
)
 
 
9

 
8

 
8

 
—

 
—
 %
Income before income tax expense
$
1

 
 
$
35

 
$
36

 
$
41

 
$
(5
)
 
(12
)%
Income before taxes margin - Xome
1.4
%
 
 
23.5
%
 
16.2
%
 
18.1
%
 
(1.9
)%
 
(10.5
)%

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.

On a combined basis, income before income tax expense decreased for the nine months ended September 30, 2018 as compared to the same period in 2017 primarily due to a decrease in revenues. Revenues on a combined basis decreased primarily due to lower property listings sold in 2018 and the sale of RED in February 2018.


114

Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 24. Xome - Revenues
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Combined (1)
 
Three Months Ended September 30, 2017
 
Amount Change
 
% Change
 
 
 
 
 
 
 
Exchange
$
15

 
 
$
9

 
$
24

 
$
26

 
$
(2
)
 
(8
)%
Services
54

 
 
11

 
65

 
31

 
34

 
110
 %
SaaS
4

 
 
2

 
6

 
8

 
(2
)
 
(25
)%
Total revenues - Xome
$
73

 
 
$
22

 
$
95

 
$
65

 
$
30

 
46
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Key Metrics
 
 
 
 
 
 
 
 
 
 
 
 
Property listings sold
1,730

 
 
928

 
2,658

 
2,772

 
(114
)
 
(4
)%
REO listings at period end
5,490

 
 
5,867

 
5,490

 
6,633

 
(1,143
)
 
(17
)%
Xome services completed orders
276,937

 
 
35,599

 
312,536

 
99,407

 
213,129

 
214
 %
Percentage of revenue earned from third party customers (2)
56.4
%
 
 
26.0
%
 
49.3
%
 
32.6
%
 

 


(1) Refer to Basis of Presentation section for discussion on presentation of combined results.
(2) Due to the sale of the retail title division in June 2017 and RED in February 2018, the percentage of revenue earned from third party customers for the three months ended September 30, 2017 excludes the impact of the retail title division's operations and the RED sold operations. The percentage for the combined three months ended September 30, 2018 excludes the impact of the RED sold operations.

Exchange revenues, on a combined basis, for the three months ended September 30, 2018 decreased as compared to the same period in 2017 , primarily due to lower property listings sold in 2018. Sales volume was lower in 2018 as our sales outflow outpaced our referral inflow. Despite the overall decline in revenue, we continue to make progress in diversifying our customer base. On a combined basis, revenue and referral inflow from third-party customers increased 8% to 15% and 11% to 40%, respectively, in the three months ended September 30, 2018 as compared to the same period in 2017 .

Services revenues, on a combined basis, increased for the three months ended September 30, 2018 as compared to the same period in 2017 , primarily due to the acquisition of Assurant in August 2018, which expanded our valuations, title and field services businesses.

SaaS revenues, on a combined basis, decreased for the three months ended September 30, 2018 as compared to the same period in 2017, primarily due to the sale of RED by Predecessor in February 2018. This decline was partially offset by growth in revenues associated with our DIY solution described above.


115

Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 24.1. Xome - Revenues
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Combined (1)
 
Nine Months Ended September 30, 2017
 
Amount Change
 
% Change
 
 
 
 
 
 
 
Exchange
$
15

 
 
$
62

 
$
77

 
$
84

 
$
(7
)
 
(8
)%
Services
54

 
 
74

 
128

 
119

 
9

 
8
 %
SaaS
4

 
 
13

 
17

 
23

 
(6
)
 
(26
)%
Total revenues - Xome
$
73

 
 
$
149

 
$
222

 
$
226

 
$
(4
)
 
(2
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Key Metrics
 
 
 
 
 
 
 
 
 
 
 
 
Property listings sold
1,730

 
 
6,920

 
8,650

 
9,260

 
(610
)
 
(7
)%
REO listings at period end
5,490

 
 
5,867

 
5,490

 
5,867

 
(377
)
 
(6
)%
Xome services completed orders
276,937

 
 
264,031

 
540,968

 
326,377

 
214,591

 
66
 %
Percentage of revenue earned from third party customers (2)
56.4
%
 
 
27.8
%
 
37.2
%
 
37.4
%
 
 
 
 

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.
(2) Due to the sale of the retail title division in June 2017 and RED in February 2018, the percentage of revenue earned from third party customers for the nine months ended September 30, 2017 exclude the impact of the retail title division's operations and the RED sold operations. The percentage for the combined nine months ended September 30, 2018 excludes the impact of the RED sold operations.

Exchange revenues, on a combined basis, decreased for the nine months ended September 30, 2018 as compared to the same period in 2017 , primarily due to lower property listings sold in 2018. Despite the overall decline in revenue, we continue to make progress in diversifying our customer base. On a combined basis, revenue and referral inflow from third-party customers increased 10% to 15% and 15% to 38%, respectively, in the nine months ended September 30, 2018 as compared to the comparable period in 2017.

Services revenues, on a combined basis, increased for the nine months ended September 30, 2018 as compared to the same period in 2017 , primarily due to the acquisition of Assurant in August 2018 and was partially offset by the sale of the Predecessor's retail title division in June 2017.

SaaS revenues, on a combined basis, decreased for the nine months ended September 30, 2018 as compared to the same period in 2017, primarily due to the sale of RED in February 2018. This decline was partially offset by growth in revenues associated with our DIY solution described above.


116

Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 25. Xome - Expenses
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Combined (1)
 
Three Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Salaries, wages and benefits
$
29

 
 
$
9

 
$
38

 
$
27

 
$
11

 
41
%
General and administrative
 
 
 
 
 
 
 
 
 
 
 
 
Operational expenses
40

 
 
9

 
49

 
24

 
25

 
104
%
Depreciation and amortization
2

 
 
1

 
3

 
3

 
—

 
—
%
Loss on impairment of assets
—

 
 
—

 
—

 
—

 
—

 
—
%
Total general and administrative
42

 
 
10

 
52

 
27

 
25

 
93
%
Total expenses - Xome
$
71

 
 
$
19

 
$
90

 
$
54

 
$
36

 
67
%

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.

On a combined basis, both salaries, wages and benefits expenses , and operational expenses increased for the three months ended September 30, 2018 as compared to the same period in 2017 , primarily driven by the acquisition of Assurant in August 2018. Excluding the expenses associated with Assurant, operational expenses for the three months ended September 30, 2018 increased $3 million as compared to the same period in 2017. The remaining increase in operational expenses was due to our build-out of the field services business in 2018.

Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 25.1. Xome - Expenses
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Combined (1)
 
Nine Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Salaries, wages and benefits
$
29

 
 
$
58

 
$
87

 
$
98

 
$
(11
)
 
(11
)%
General and administrative
 
 
 
 
 
 
 
 
 
 
 
 
Operational expenses
40

 
 
58

 
98

 
83

 
15

 
18
 %
Depreciation and amortization
2

 
 
7

 
9

 
10

 
(1
)
 
(10
)%
Loss on impairment of assets
—

 
 
—

 
—

 
2

 
(2
)
 
(100
)%
Total general and administrative
42

 
 
65

 
107

 
95

 
12

 
13
 %
Total expenses - Xome
$
71

 
 
$
123

 
$
194

 
$
193

 
$
1

 
1
 %

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.


117

The Predecessor sold its retail title division in June 2017 and RED in February 2018. The Successor completed its acquisition of Assurant in August 2018. The impact from those transactions on salaries, wages and benefits expenses offset each other. Operational expenses, on a combined basis, increased for the nine months ended September 30, 2018 as compared to the same period in 2017 , primarily due to the acquisition of Assurant in August 2018.


Corporate and Other

The following tables set forth the results of operations for the Corporate and Other segment.

Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 27. Corporate and Other - Operations
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Combined (1)
 
Three Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Revenues
$
—

 
 
$
—

 
$
—

 
$
—

 
$
—

 
—
%
Expenses
34

 
 
63

 
97

 
23

 
74

 
322
%
Other income (expenses), net
(35
)
 
 
(11
)
 
(46
)
 
(36
)
 
(10
)
 
28
%
Loss before income tax benefit
$
(69
)
 
 
$
(74
)
 
$
(143
)
 
$
(59
)
 
$
(84
)
 
142
%

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.

Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 27.1. Corporate and Other - Operations
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Combined (1)
 
Nine Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Revenues
$
—

 
 
$
1

 
$
1

 
$
1

 
$
—

 
—
%
Expenses
34

 
 
103

 
137

 
72

 
65

 
90
%
Other income (expenses), net
(35
)
 
 
(78
)
 
(113
)
 
(106
)
 
(7
)
 
7
%
Loss before income tax benefit
$
(69
)
 
 
$
(180
)
 
$
(249
)
 
$
(177
)
 
$
(72
)
 
41
%

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.

Our Corporate and Other segment records interest expense on our unsecured senior notes and other corporate debt, income or loss from our legacy portfolio consisting of non-prime and nonconforming residential mortgage loans and corporate expenses that are not directly attributable to our operating segments. The legacy portfolio consists of Predecessor loans that were transferred to a securitization trust in 2009 that was structured as a secured borrowing. The securitized loans are recorded as mortgage loans on our consolidated balance sheets and the asset backed certificates acquired by third parties are recorded as nonrecourse debt.

Non-allocated corporate expenses include the administrative costs of executive management and other corporate functions that are not directly attributable to our operating segments.


118

 
Successor
 
Predecessor
Table 28. Legacy Portfolio
September 30, 2018
 
December 31, 2017
Performing - UPB
$
144

 
$
153

Nonperforming (90+ delinquency) - UPB
32

 
39

REO - estimated fair value
5

 
1

Total legacy portfolio
$
181

 
$
193

 
Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 29. Corporate and Other - Expenses
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Combined (1)
 
Three Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Salaries, wages and benefits
$
19

 
 
$
14

 
$
33

 
$
16

 
$
17

 
106
%
General and administrative
 
 
 
 
 
 
 
 
 
 
 
 
Operational expenses
8

 
 
49

 
57

 
4

 
53

 
1,325
%
Depreciation and amortization
7

 
 
—

 
7

 
3

 
4

 
133
%
Total general and administrative
15

 
 
49

 
64

 
7

 
57

 
814
%
Total expenses - Corporate and Other
$
34

 
 
$
63

 
$
97

 
$
23

 
$
74

 
322
%

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.

On a combined basis, total expenses increased in the three months ended September 30, 2018 as compared to the same period in 2017 , primarily due to increased expenses related to the Nationstar acquisition.

Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 29.1. Corporate and Other - Expenses
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Combined (1)
 
Nine Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Salaries, wages and benefits
$
19

 
 
$
45

 
$
64

 
$
46

 
$
18

 
39
%
General and administrative
 
 
 
 
 
 
 
 
 
 
 
 
Operational expenses
8

 
 
54

 
62

 
16

 
46

 
288
%
Depreciation and amortization
7

 
 
4

 
11

 
10

 
1

 
10
%
Total general and administrative
15

 
 
58

 
73

 
26

 
47

 
181
%
Total expenses - Corporate and Other
$
34

 
 
$
103

 
$
137

 
$
72

 
$
65

 
90
%


119

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.

On a combined basis, total expenses increased in the nine months ended September 30, 2018 as compared to the same period in 2017 , primarily due to increased expenses related to the Nationstar acquisition.

Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 30. Corporate and Other - Other Income (Expenses), Net
For the Period August 1 - September 30, 2018
 
 
For the Period July 1 - July 31, 2018
 
Combined (1)
 
Three Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Interest income, legacy portfolio
$
2

 
 
$
1

 
$
3

 
$
2

 
$
1

 
50
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense, legacy portfolio
—

 
 
(1
)
 
(1
)
 
(2
)
 
(1
)
 
(50
)%
Interest expense on unsecured senior notes
(36
)
 
 
(11
)
 
(47
)
 
(36
)
 
11

 
31
 %
Other interest, net
(1
)
 
 
—

 
(1
)
 
—

 
1

 
1
 %
Total interest expense
(37
)
 
 
(12
)
 
(49
)
 
(38
)
 
11

 
29
 %
Other income (expense)
—

 
 
—

 
—

 
—

 
—

 
—
 %
Other income (expenses), net - Corporate and Other
$
(35
)
 
 
$
(11
)
 
$
(46
)
 
$
(36
)
 
$
(10
)
 
(28
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average cost - unsecured senior notes
7.9
%
 
 
7.9
%
 
 
 
7.3
%
 
 
 
 

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.

Other income (expenses), net for the Corporate and Other segment consists of interest expense on our unsecured senior notes, the interest income and expense from our legacy portfolio, and other interest related to a revolving facility used for general corporate purposes.

On a combined basis, total other income (expenses), net declined in the three months ended September 30, 2018 as compared to the same period in 2017 . Interest expense on unsecured senior notes on a combined basis increased in the three months ended September 30, 2018 compared to the same period in 2017 due to a higher debt balance and higher interest rates for the unsecured senior notes.

120

Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 30.1. Corporate and Other - Other Income (Expenses), Net
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Combined (1)
 
Nine Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Interest income, legacy portfolio
$
2

 
 
$
7

 
$
9

 
$
12

 
$
(3
)
 
(25
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense, legacy portfolio
—

 
 
(3
)
 
(3
)
 
(5
)
 
(2
)
 
(40
)%
Interest expense on unsecured senior notes
(36
)
 
 
(77
)
 
(113
)
 
(109
)
 
4

 
4
 %
Other interest, net
(1
)
 
 
(3
)
 
(4
)
 
(2
)
 
2

 
100
 %
Total interest expense
(37
)
 
 
(83
)
 
(120
)
 
(116
)
 
4

 
3
 %
Other income (expense)
—

 
 
(2
)
 
(2
)
 
(2
)
 
—

 
—
 %
Other income (expenses), net - Corporate and Other
$
(35
)
 
 
$
(78
)
 
$
(113
)
 
$
(106
)
 
$
(7
)
 
(7
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average cost - unsecured senior notes
7.9
%
 
 
7.4
%
 
 
 
7.3
%
 
 
 
 

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.

On a combined basis, total other income (expenses), net declined in the nine months ended September 30, 2018 compared to the same period in 2017 as a result of increased interest expense on unsecured senior notes and lower interest income. Interest expense on unsecured senior notes on a combined basis increased in the nine months ended September 30, 2018 compared to the same period in 2017 due to a higher debt balance and higher interest rates related to new unsecured senior notes. Interest income, legacy portfolio on a combined basis decreased compared to the same period in 2017 due to the decline in the legacy portfolio.


Changes in Financial Position

 
Successor
 
Predecessor
 
 
 
 
Table 31. Assets
September 30, 2018
 
December 31, 2017
 
$ Change
 
% Change
Cash and cash equivalents
$
198

 
$
215

 
$
(17
)
 
(7.9
)%
Mortgage servicing rights
3,500

 
2,941

 
559

 
19.0
 %
Advances and other receivables, net
1,174

 
1,706

 
(532
)
 
(31.2
)%
Reverse mortgage interests, net
8,886

 
9,984

 
(1,098
)
 
(11.0
)%
Mortgage loans held for sale at fair value
1,681

 
1,891

 
(210
)
 
(11.1
)%
Deferred tax asset
934

 
—

 
934

 
100.0
 %
Other
1,355

 
1,299

 
56

 
4.3
 %
Total assets
$
17,728

 
$
18,036

 
$
(308
)
 
(1.7
)%


121

Total assets as of September 30, 2018 decreased by $308 or 1.7% compared with the Predecessor total assets as of December 31, 2017 primarily due to the decrease in advances and other receivables, reverse mortgage interests, net and mortgage loans held for sale. Advances and other receivables decreased $532 primarily due to stronger recoveries of advances in 2018. Mortgage loans held for sale decreased $210 due to sale of loans exceeding originations during 2018. Reverse mortgage interests, net decreased $1,098 due to the collection on participating interests in HMBS and repayments of HECM loans. In addition, reverse mortgage interests were adjusted down to fair value as of July 31, 2018 in connection with the Nationstar acquisition. These declines were partially offset by the increase in mortgage servicing rights and the increase in the net federal deferred tax asset. Mortgage servicing rights increased primarily due to favorable fair value adjustments driven by rising interest rates. Net federal deferred tax asset increased due to the release of the valuation allowance associated with the NOL carryforwards of WMIH in the two months ended September 30, 2018 .

 
Successor
 
Predecessor
 
 
 
 
Table 32. Liabilities and Stockholders' Equity
September 30, 2018
 
December 31, 2017
 
$ Change
 
% Change
Unsecured senior notes, net
$
2,457

 
$
1,874

 
$
583

 
31.1
 %
Advance facilities, net
596

 
855

 
(259
)
 
(30.3
)%
Warehouse facilities, net
2,888

 
3,285

 
(397
)
 
(12.1
)%
MSR related liabilities - nonrecourse at fair value
1,123

 
1,006

 
117

 
11.6
 %
Other nonrecourse debt, net
7,165

 
8,014

 
(849
)
 
(10.6
)%
Other liabilities
1,421

 
1,280

 
141

 
11.0
 %
Total liabilities
15,650

 
16,314

 
(664
)
 
(4.1
)%
Total stockholders' equity attributable to Nationstar
2,078

 
1,715

 
363

 
21.2
 %
Noncontrolling interest
—

 
7

 
(7
)
 
(100.0
)%
Total liabilities and stockholders' equity
$
17,728

 
$
18,036

 
$
(308
)
 
(1.7
)%

Stockholders' equity at September 30, 2018 increased by $363 or 21.2% compared with the Predecessor balance as of December 31, 2017 primarily due to the December 31, 2017 balance representing the Predecessor basis of equity. The September 30, 2018 balance represents the Successor's basis of equity after the Merger. Within liabilities, the advance facilities decreased by $259 as the portfolio balance declined due to the repayments of advances along with the decision to use cash balances to reduce borrowings. Warehouse facilities decreased by $397 primarily due to the Predecessor's repayment from the proceeds of the issuance of the HECM securitization during the first quarter of 2018. Other nonrecourse debt decreased by $849 primarily due to the collection on participating interests in HMBS and repayments of HECM loans. Unsecured senior notes increased 31.1% due to the issuance of certain new unsecured senior notes totaling $1,700 offset by redemption and repayment of certain existing unsecured senior notes totaling $1,023 , as discussed in Note 10, Indebtedness .


LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Sources and Uses of Cash

Our primary sources of funds for liquidity include: (i) servicing fees and ancillary revenues; (ii) payments received from sale or securitization of loans; (iii) payments from the liquidation or securitization of our outstanding participating interests in reverse mortgage loans; (iv) advance and warehouse facilities, other secured borrowings and the unsecured senior notes; and (v) payments received in connection with the sale of advance receivables and excess spread.

Our primary uses of funds for liquidity include: (i) funding of servicing advances; (ii) originations of loans; (iii) payment of interest expenses; (iv) payment of operating expenses; (v) repayment of borrowings and repurchases or redemptions of outstanding indebtedness; (vi) payments for acquisitions of MSRs; (vii) scheduled and unscheduled draws on our serviced reverse residential mortgage loans; and (viii) payment of our marketing and technology expenses.


122


Our business is subject to extensive regulation, investigations and reviews by various federal, state and local regulatory and enforcement agencies. We are also subject to various legal proceedings in the ordinary course of our business. Addressing these regulations, reviews and legal proceedings and implementing any resulting remedial measures may require us to devote substantial resources to legal and regulatory compliance or to make other changes to our business practices, resulting in higher costs which may adversely affect our cash flows.

We believe that our cash flows from operating activities, as well as capacity through existing facilities, provide adequate resources to fund our anticipated ongoing cash requirements. We rely on these facilities to fund operating activities. As the facilities mature, we anticipate renewal of these facilities will be achieved. Future debt maturities will be funded with cash and cash equivalents, cash flow from operating activities and, if necessary, future access to capital markets. We continue to optimize the use of balance sheet cash to avoid unnecessary interest carrying costs.

We service and subservice reverse mortgage loan portfolios with a UPB of $30,660 as of September 30, 2018 , which includes $21,703 of net reverse MSLs and $8,882 of reverse mortgage interests. Reverse mortgages provide seniors with the ability to monetize the equity in their homes in a lump sum, line of credit or monthly draws. The unpaid principal balance of the loan is accreted for borrower draws and other costs such as mortgage insurance premiums, property taxes and insurance. Recovery of advances and draws related to reverse MSRs is generally recovered over a two to three month period from the investor. However, for reverse assets recorded as a loan, the repayment of loan balances and collection of servicing fees occurs upon the payoff or other liquidation of the loan. We securitize our holdings in reverse mortgage loans in order to finance subsequent borrower draws and loan related costs.


Cash Flows

The table below presents the major sources and uses of cash flow for operating activities.

 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 33 Operating Cash Flow
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Combined (1)
 
Nine Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Originations net sales activities
$
(135
)
 
 
$
520

 
$
385

 
$
527

 
$
(142
)
 
(27
)%
Cash provided by operating profits and changes in working capital and other assets
311

 
 
1,774

 
2,085

 
719

 
1,366

 
190
 %
Net cash attributable to operating activities
$
176

 
 
$
2,294

 
$
2,470

 
$
1,246

 
$
1,224

 
98
 %

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.

Cash generated from originations net sales activities was $385 during the nine months ended September 30, 2018 , on a combined basis, compared to $527 in the same period in 2017 . The decrease was primarily due to a lower funding of $1,784 for loan origination activities driven by increased interest rate environment. The decrease in funding was partially offset by an increase in proceeds of $1,466 on the sales of previously originated loans and decrease in funds used of $176 to repurchase forward loan assets out of Ginnie Mae securitizations.

Cash generated from other operating activities and from changes in working capital and other assets during the nine months ended September 30, 2018 , on a combined basis, increased by $1,366 when compared to the same period in 2017 . The increase was primarily due to an increase of $817 and $382 in collection of reverse mortgage interest and advances and other receivables, respectively.


123

 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 34. Investing Cash Flows
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Combined (1)
 
Nine Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Acquisitions, net
$
(33
)
 
 
$
—

 
$
(33
)
 
$
—

 
$
(33
)
 
(100
)%
Purchase of forward mortgage servicing rights, net of liabilities incurred
(63
)
 
 
(134
)
 
(197
)
 
(28
)
 
(169
)
 
604
 %
Proceeds on sale of assets
—

 
 
13

 
13

 
16

 
(3
)
 
(19
)%
Other
46

 
 
(41
)
 
5

 
7

 
(2
)
 
(29
)%
Net cash attributable to investing activities
$
(50
)
 
 
$
(162
)
 
$
(212
)
 
$
(5
)
 
$
(207
)
 
4,140
 %

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.

Our investing activities used $212 , on a combined basis, and $5 of cash during the nine months ended September 30, 2018 and 2017 , respectively. The change in investing activities was primarily due to an increase of $169 in purchase of forward mortgage servicing rights, net of liabilities incurred and the net cash of $33 used in connection with the acquisition of Assurant. Although we continue to seek to acquire servicing portfolios at advantageous pricing, the amounts and timing of these opportunities is not of a consistent frequency and can result in cash flow variability between periods.

 
Successor
 
 
Predecessor
 
 
 
Predecessor
 
 
 
 
Table 35. Financing Cash Flow
For the Period August 1 - September 30, 2018
 
 
For the Period January 1 - July 31, 2018
 
Combined (1)
 
Nine Months Ended September 30, 2017
 
$ Change
 
% Change
 
 
 
 
 
 
 
Changes in advance facilities
$
46

 
 
$
(305
)
 
$
(259
)
 
$
(298
)
 
$
39

 
(13
)%
Changes in warehouse facilities
186

 
 
(585
)
 
(399
)
 
351

 
(750
)
 
(214
)%
Payment of unsecured senior notes and nonrecourse debt
(1,034
)
 
 
(93
)
 
(1,127
)
 
(145
)
 
(982
)
 
677
 %
Issuance of excess spread financing
84

 
 
70

 
154

 
—

 
154

 
100
 %
Repayment of excess spread financing
(21
)
 
 
(3
)
 
(24
)
 
(9
)
 
(15
)
 
167
 %
Decrease in participating interest financing in reverse mortgage interests
(358
)
 
 
(1,391
)
 
(1,749
)
 
(1,491
)
 
(258
)
 
17
 %
Changes in HECM securitizations
(91
)
 
 
311

 
220

 
222

 
(2
)
 
(1
)%
Other
(31
)
 
 
(115
)
 
(146
)
 
(168
)
 
22

 
(13
)%
Net cash attributable to financing activities
$
(1,219
)
 
 
$
(2,111
)
 
$
(3,330
)
 
$
(1,538
)
 
$
(1,792
)
 
117
 %

(1) Refer to Basis of Presentation section for discussion on presentation of combined results.

Our financing activities used $3,330 cash, on a combined basis, during the nine months ended September 30, 2018 , an increase of $1,792 when compared with $1,538 cash used in the same period in 2017. The change in cash flows from financing activities was primarily due to $1,030 of cash used to redeem and repay unsecured senior notes in August 2018. Payment of warehouse facilities increased in 2018 when compared with same period in 2017 primarily due to proceeds from HECM securitizations being used to pay down the facilities, which did not occur in the same period in 2017.

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Capital Resources

Capital Structure and Debt

We require access to external financing resources from time to time depending on our cash requirements, assessments of current and anticipated market conditions and after-tax cost of capital. If needed, we believe additional capital could be raised through a combination of issuances of equity, corporate indebtedness, asset-backed acquisition financing and/or cash from operations. Our access to capital markets can be impacted by factors outside our control, including economic conditions.

Financial Covenants
The Company and the Predecessor’s borrowing arrangements and credit facilities contain various financial covenants which primarily relate to required tangible net worth amounts, liquidity reserves, leverage requirements, and profitability requirements.  The Predecessor performed an evaluation of its mortgage servicing liabilities and recorded a change in estimate for the month ended July 31, 2018. As a result of this charge, the Predecessor was unable to meet the profitability requirement in one of its outstanding warehouse facilities. The Company asked for, and amended the agreement from this financial institution on this profitability requirement for the period ended September 30, 2018. As a result of this amendment, the Company is in compliance with its required financial covenants.

Seller/Servicer Financial Requirements
The Federal Housing Finance Agency minimum financial requirements for Fannie Mae and Freddie Mac Seller/Servicers are set forth below.

Minimum Net Worth
▪
Base of $2.5 plus 25 basis points of UPB for total loans serviced.
▪
Tangible Net Worth comprises total equity less goodwill, intangible assets, affiliate receivables and certain pledged assets.

Minimum Capital Ratio
▪
Tangible Net Worth/Total Assets greater than 6%.

Minimum Liquidity
▪
3.5 basis points of total Agency servicing (Fannie Mae, Freddie Mac, Ginnie Mae) plus,
▪
Incremental 200 basis points of total nonperforming Agency, measured as 90+ delinquencies, servicing in excess of 6% of the total Agency servicing UPB,
▪
Allowable assets for liquidity may include: cash and cash equivalents (unrestricted), available for sale or held for trading investment grade securities (e.g., Agency MBS, Obligations of GSEs, US Treasury Obligations); and unused/available portion of committed servicing advance lines.

In addition, Fannie Mae or Freddie Mac may require capital ratios in excess of stated requirements. Refer to Financial Covenants in Note 10, Indebtedness , and Note 17, Capital Requirements , for additional information. As of September 30, 2018 , we were in compliance with our seller/servicer financial requirements.

 
Successor
 
Predecessor
Table 36. Debt
September 30, 2018
 
December 31, 2017
Advance facilities, net
$
596

 
$
855

Warehouse facilities, net
2,888

 
3,285

Unsecured senior notes, net
2,457

 
1,874


Advance Facilities
As part of our normal course of business, we borrow money to fund servicing advances. Our servicing agreements require that we advance our own funds to meet contractual principal and interest payments for certain investors and to pay taxes, insurance, foreclosure costs and various other items that are required to preserve the assets being serviced. Delinquency rates and prepayment speeds affect the size of servicing advance balances along with our stop advance policies. These servicing requirements affect our liquidity. We rely upon several counterparties to provide us with financing facilities to fund a portion of our servicing advances. Pursuant to the terms of our agreements, New Residential has the obligation to fund future advances on the private-label securitized loans subject to the agreements.


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Warehouse Facilities
Loan origination activities generally require short-term l iquidity in excess of amounts generated by our operations. The loans we originate are financed through several warehouse lines on a short-term basis. We typically hold the loans for approximately 30 days and then sell or place the loans in government securitizations in order to repay the borrowings under the warehouse lines. Our ability to fund current operations depends upon our ability to secure these types of short-term financings on acceptable terms and to renew or replace the financings as they expire.

As a servicer for reverse mortgage loans, among other things, we are required to fund borrower draws on the loans. We typically pool borrower draws for approximately 30 days before including them in a HMBS securitization. At September 30, 2018 , unsecuritized borrower draws totaled $381 , and our maximum unfunded advance obligation related to these reverse mortgage loans was $3,274 .

Unsecured Senior Notes
In 2013 and 2018, we completed offerings of unsecured senior notes, which mature on various dated through July 2026. We pay interest semi-annually to the holders of these notes at interest rates ranging from 6.5% to 9.625% .

Table 37. Contractual Maturities - Unsecured Senior Notes

On July 13, 2018, Merger Sub issued $950 aggregate principal amount of the 8.125% Notes due 2023 and $750 aggregate principal amount of the 9.125% Notes due 2026. The proceeds from the New Notes were used, together with the proceeds from the issuance of WMIH’s common stock and WMIH’s cash and restricted cash on hand, to consummate the Merger with Nationstar and the refinancing of certain of Nationstar’s existing debt and to pay Merger related fees and expenses. At the consummation of the acquisition, Merger Sub merged with and into Nationstar with Nationstar assuming the obligations under the New Notes.

In August 2018, we redeemed the $375 9.625% unsecured senior note due 2019 and $400 7.875% unsecured senior note due 2020 and paid off the $475 6.500% unsecured senior note due 2018.

As of September 30, 2018 , the expected maturities of our unsecured senior notes based on contractual maturities are presented below.
Year Ending December 31,
 
Amount
2018
 
$
—

2019
 
—

2020
 
—

2021
 
592

2022
 
206

Thereafter
 
1,700

Total
 
$
2,498




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Table 38. Contractual Obligations

The table below sets forth our contractual obligations, excluding legacy asset securitized debt, excess spread financing, MSR financing and participating interest financing at September 30, 2018 .
 
Less than 1 Year
 
1 - 3 Years

 
3-5 Years
 
More than 5 Years
 
Total
Unsecured senior notes
$
—

 
$
—

 
$
798

 
$
1,700

 
$
2,498

Interest payment from unsecured senior notes (1)
198

 
395

 
305

 
206

 
1,104

Advance facilities
99

 
497

 
—

 
—

 
596

Warehouse facilities
2,611

 
277

 
—

 
—

 
2,888

Capital lease obligations
3

 
—

 
—

 
—

 
3

Operating lease obligations
27

 
52

 
30

 
37

 
146

Total
$
2,938

 
$
1,221

 
$
1,133

 
$
1,943

 
$
7,235

(1) Interest expense on advance and warehouse facilities is not presented in this table due to the short term nature of these facilities.
In addition to the above contractual obligations, we have also been involved with several securitizations, which were structured as secured borrowings. These structures resulted in us carrying the securitized loans as mortgages on our consolidated balance sheets and recognizing the asset-backed certificates acquired by third parties as nonrecourse debt. The timing of the principal payments on this nonrecourse debt is dependent on the payments received on the underlying mortgage loans and liquidation of REO. For more information regarding our indebtedness, see Note 10, Indebtedness , in the consolidated financial statements.



127

CRITICAL ACCOUNTING POLICIES

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, we have identified the following policies that, due to the judgment, estimates and assumptions inherent in those policies, are critical to an understanding of our consolidated financial statements. These policies relate to fair value measurements, particularly those determined to be Level 3 as discussed in Note 16, Fair Value Measurements , and valuation and reserves for deferred tax assets. We believe that the judgment, estimates and assumptions used in the preparation of our consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of these critical accounting policies on our consolidated financial statements, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition. Fair value measurements considered to be Level 3 representing estimated values based on significant unobservable inputs include (i) the valuation of MSRs, (ii) the valuation of excess spread financing and (iii) the valuation of the mortgage servicing rights financing liability. For further information on our critical accounting policies, please refer to the Company's and Predecessor's Annual Reports on Form 10-K for the year ended December 31, 2017 . There have been no material changes to our critical accounting policies since December 31, 2017 .

Recent Accounting Developments

See Note 1, Nature of Business and Basis of Presentation , in the consolidated financial statements which is incorporated herein for details of recently issued accounting pronouncements and the expected impact on our consolidated financial statements.

Impact of Inflation and Changing Prices

Our consolidated financial statements and notes thereto presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike most industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Further, interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Variable Interest Entities and Off-Balance Sheet Arrangements

See Note 12, Securitizations and Financings , in the Consolidated Financial Statements in Item 1, Financial Statements, which is incorporated herein for a summary of our transactions with VIEs and unconsolidated balances details of their impact on our consolidated financial statements.

Derivatives

See Note 9, Derivative Financial Instrument , in the Consolidated Financial Statements in Item 1, Financial Statements, which is incorporated herein for a summary of our derivative transactions.

Income Taxes
See Note 15, Income Taxes , in the Consolidated Financial Statements in Item 1, Financial Statements, which is incorporated herein for a summary of our income tax considerations.


128

Item 3. Quantitative and Qualitative Disclosures about Market Risk

As a result of the Merger, the Quantitative and Qualitative Disclosures about Market Risk are those of Nationstar which is included in Part II, Item 7A of Nationstar's Annual Report on Form 10-K for the year ended December 31, 2017 . There have been no material changes in the types of market risks faced by us since December 31, 2017 .

We assess our market risk based on changes in interest rates utilizing a sensitivity analysis. The sensitivity analysis measures the potential impact on fair values based on hypothetical changes (increases and decreases) in interest rates. We use a duration-based model in determining the impact of interest rate shifts on our loan portfolio, certain other interest-bearing liabilities measured at fair value and interest rate derivatives portfolios. The primary assumption used in these models is that an increase or decrease in the benchmark interest rate produces a parallel shift in the yield curve across all maturities.

We utilize a discounted cash flow analysis to determine the fair value of MSRs and the impact of parallel interest rate shifts on MSRs. The primary assumptions in this model are prepayment speeds and market discount rates. However, this analysis ignores the impact of interest rate changes on certain material variables, such as the benefit or detriment on the value of future loan originations, non-parallel shifts in the spread relationships between MBS, swaps and U.S. Treasury rates and changes in primary and secondary mortgage market spreads. For mortgage loans, IRLCs and forward delivery commitments on MBS, we rely on a model in determining the impact of interest rate shifts. In addition, for IRLCs, the borrower’s propensity to close their mortgage loans under the commitment is used as a primary assumption.

Our total market risk is influenced by a wide variety of factors including market volatility and the liquidity of the markets. There are certain limitations inherent in the sensitivity analysis presented, including the necessity to conduct the analysis based on a single point in time and the inability to include the complex market reactions that normally would arise from the market shifts modeled.

We use market rates on our instruments to perform the sensitivity analysis. The estimates are based on the market risk sensitive portfolios described in the preceding paragraphs and assume instantaneous, parallel shifts in interest rate yield curves. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in fair value may not be linear. We believe that on the whole our estimated net changes to the fair value of our assets and liabilities at September 30, 2018 are within acceptable ranges based on the materiality of our financial statements.


Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As a result of the Merger, we adopted the controls and procedures of the Predecessor. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended ("Exchange Act"), as of September 30, 2018 .
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2018 , our disclosure controls and procedures are effective. Disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the three months ended September 30, 2018 , no changes in our internal control over financial reporting occurred that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

129

PART II – OTHER INFORMATION
Item 1. Legal Proceedings

We are a state licensed, non-bank mortgage lender, servicer and ancillary services provider. From time to time, we and our subsidiaries are involved in a number of legal proceedings, including, but not limited to, judicial, arbitration, regulatory and governmental proceedings relating to matters that arise in connection with the conduct of our business. These legal proceedings are generally based on alleged violations of federal, state and local laws and regulations governing our mortgage servicing and lending activities including, without limitation, consumer protection laws, but may also include alleged violations of securities, employment, contract, tort, common law fraud and other laws. Legal proceedings include open and pending examinations, information gathering requests and investigations by governmental, regulatory and enforcement agencies as well as litigation in judicial forums and arbitration proceedings.

Our business is subject to extensive examinations, investigations and reviews by various federal, state and local governmental, regulatory and enforcement agencies. We have historically had and continue to have a number of open investigations with these agencies. We continue to receive governmental and regulatory requests for information, subpoenas, examinations and other inquiries. We are currently the subject of various governmental or regulatory investigations, subpoenas, examinations and inquiries related to our residential loan servicing and origination practices, bankruptcy and collections practices, financial reporting and other aspects of our businesses. These matters include investigations by the Bureau of Consumer Financial Protection (the "BCFP"), the Securities and Exchange Commission, the Executive Office of the United States Trustees, the Department of Justice, the Office of the Special Inspector General for the Troubled Asset Relief Program, the U.S. Department of Housing and Urban Development, the multi-state coalition of mortgage banking regulators and various State Attorneys General. These specific matters and other pending or potential future investigations, subpoenas, examinations or inquiries may lead to administrative, civil or criminal proceedings or settlements and possibly result in remedies including fines, penalties, restitution, or alterations in our business practices and in additional expenses and collateral costs. We are cooperating fully in these matters.

For example, we continue to progress towards resolution of certain legacy regulatory matters involving regulatory examination findings in prior years for alleged violations of certain laws related to our business practices. We have been in discussions with the multi-state coalition of mortgage banking regulators and various State Attorneys General concerning a potential resolution of their investigation. We are continuing to cooperate with all parties. In connection with these discussions, we previously recorded an accrual. These discussions may not result in a settlement of the matter; furthermore, any such settlement may exceed the amount accrued as of September 30, 2018. Moreover, if the discussions do not result in a settlement, the regulators and State Attorneys General may seek to exercise their enforcement authority through litigation or other proceedings and seek injunctive relief, damages, restitution and civil monetary penalties, which could have a material adverse effect on our business, reputation, financial condition and results of operations.

Further, on April 24, 2018, the BCFP notified us that, in accordance with the BCFP’s discretionary Notice and Opportunity to Respond and Advise (NORA) process, the BCFP’s Office of Enforcement is considering whether to recommend that the BCFP take enforcement action against us, alleging violations of the Real Estate Settlement Procedures Act, the Consumer Financial Protection Act, and the Homeowners Protection Act, which stems from a 2014 examination. The purpose of a NORA letter is to provide a party being investigated an opportunity to present its position to the BCFP before an enforcement action may be recommended or commenced. The BCFP may seek to exercise its enforcement authority through settlement, administrative proceedings or litigation and seek injunctive relief, damages, restitution and civil monetary penalties, which could have a material adverse effect on our business, reputation, financial condition and results of operations. Similarly, while we are in discussions with regard to the status and various issues arising in the investigation by the Executive Office of the United States Trustees, we cannot predict the outcome of this investigation or whether they will exercise their enforcement authority through a settlement or other proceeding in which they seek to impose additional remedial measures or other financial sanctions, which could have a material adverse effect on our business, reputation, financial condition and results of operation. However, we believe it is premature to predict the potential outcome or to estimate any potential financial impact in connection with any potential enforcement action or settlement arising from either of the BCFP or United States Trustees matters. We have not recorded an accrual related to these matters as of September 30, 2018 as we do not believe that the possible loss or range of loss arising from any such action is estimable. We are continuing to cooperate with the BCFP and the Executive Office of the United States Trustees.


130

In addition, we are a defendant in a class action proceeding originally filed in state court in March 2012, and then removed to the United States District Court for the Eastern District of Washington under the caption Laura Zamora Jordan v. Nationstar Mortgage LLC. The suit was filed on behalf of a class of Washington borrowers and challenges property preservation measures we took, as loan servicer, after the borrowers defaulted and our vendors determined that the borrowers had vacated or abandoned their properties. The case raises claims for (i) common law trespass, (ii) statutory trespass, and (iii) violation of Washington’s Consumer Protection Act, and seeks recovery of actual, statutory, and treble damages, as well as attorneys’ fees and litigation costs. On July 25, 2018, we entered into a settlement agreement to resolve this matter. The parties are currently seeking approval of the settlement from the court.

We are a defendant in a proceeding filed on January 2, 2018 in the U.S. District Court for the Northern District of California under the caption Collateral Analytics LLC v. Nationstar Mortgage LLC et al. The plaintiff alleges that we and certain affiliated entities misappropriated plaintiff's intellectual property for the purpose of replicating plaintiff's products. The case raises federal and state law claims for misappropriation of trade secrets and breach of contract and seeks an award of actual damages, unjust enrichment, lost profits and/or a reasonable royalty, exemplary damages and injunctive relief preventing further misuse or disclosure of plaintiff's intellectual property. We believe we have meritorious defenses and will vigorously defend ourselves in this matter.

We are also a defendant in a proceeding filed on October 23, 2015 in the U.S. District Court for the Central District of California under the caption Alfred Zaklit and Jessy Zaklit, individually and on behalf of all others similarly situated v. Nationstar Mortgage LLC et al. The plaintiff alleges that we improperly recorded telephone calls without the knowledge or consent of borrowers in violation of the California Penal Code. On July 24, 2017, the court certified a class comprised of California borrowers who, from October 2014 to May 2016, participated in outbound telephone conversations with our employees who recorded the conversations without first informing the borrowers that the conversations were being recorded. The class seeks statutory damages and attorney's fees. On September 10, 2018, we reached an agreement in principal to settle this matter.

On May 8, 2018, a purported class action lawsuit styled as Franchi v. Nationstar Mortgage Holdings Inc., et al., was filed in the United States District Court for the Northern District of Texas naming Nationstar, WMIH Corp., Wand Merger Corporation and the individual members of the Nationstar board of directors as defendants. The complaint alleged that the defendants violated the Exchange Act by disseminating a false and misleading registration statement.  In order to, among other things, eliminate the burden, inconvenience, expense, risk, and disruption of continued litigation, on June 26, 2018, the plaintiff and the defendants (together, the “Parties”) entered into a memorandum of understanding (the “MOU”) to resolve the claims asserted by the plaintiff without the defendants admitting any wrongdoing or conceding the materiality of any supplemental disclosures. Pursuant to the MOU, the Parties agreed that the defendants would cause to be made certain supplemental disclosures set forth in a Form 8-K filed with the SEC on June 26, 2018. On August 7, 2018, the Parties filed a stipulation of dismissal of the purported class action lawsuit which dismissed plaintiff’s individual claims with prejudice, and dismissed the claims purportedly asserted on behalf of a putative class of Nationstar shareholders without prejudice.

Responding to these matters requires us to devote substantial resources, resulting in higher costs and lower net cash flows. Adverse results in any of these matters could further increase our operating expenses and reduce our revenues, require us to change business practices and limit our ability to grow and otherwise materially and adversely affect our business, reputation, financial condition or results of operation.


Item 1A. Risk Factors
In addition to the information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in “Part I-Item 1A. Risk Factors” in WMIH's Annual Report on Form 10-K for the year ended December 31, 2017 and the factors discussed below.
Risks Related to Our Business
Financial Reporting, Credit and Liquidity Risks
We may be unable to obtain sufficient capital to operate our business.
Our financing strategy includes the use of significant leverage because, in order to make servicing advances and fund originations, we require liquidity in excess of that generated by our operations. Accordingly, our ability to finance our operations depends on our ability to secure financing on acceptable terms and to renew or replace existing financings as they expire. These financings may not be available on acceptable terms or at all. If we are unable to obtain these financings, we may need to raise the funds we require in the capital markets or through other means, any of which may increase our cost of funds.

131

We are generally required to renew our financing arrangements each year, which exposes us to refinancing and interest rate risks. Our ability to refinance existing debt and borrow additional funds is affected by a variety of factors including:
•
the available liquidity in the credit markets;
•
prevailing interest rates;
•
an event of default, a negative ratings action by a rating agency and limitations imposed on us under the indentures governing our current debt that contain restrictive covenants and borrowing conditions that may limit our ability to raise additional debt;
•
the strength of the lenders from which we borrow; and
•
limitations on borrowings on advance facilities imposed by the amount of eligible collateral pledged, which may be less than the borrowing capacity of the advance facility.
If we are unable to obtain sufficient capital on acceptable terms for any of the foregoing reasons, this could adversely affect our business, financial condition and results of operations.
Our substantial indebtedness may limit our financial and operating activities and our ability to incur additional debt to fund future needs.
As of September 30, 2018, the aggregate principal amount of our unsecured senior notes was $2,498 . Although we and our subsidiaries have substantial indebtedness, we believe we have the ability to incur additional indebtedness in the future, subject to the limitations contained in the agreements governing our indebtedness. These agreements generally restrict us and our restricted subsidiaries from incurring additional indebtedness; however, these restrictions are subject to important exceptions and qualifications. If we incur additional debt, the related risks could be magnified and could limit our financial and operating activities.
Our current and any future indebtedness could:
•
require us to dedicate a substantial portion of cash flow from operations to the payment of principal and interest on our current indebtedness and any indebtedness we may incur in the future, thereby reducing the funds available for other purposes;
•
make it more difficult for us to satisfy and comply with our obligations with respect to the unsecured senior notes;
•
subject us to increased sensitivity to increases in prevailing interest rates;
•
place us at a competitive disadvantage to competitors with relatively less debt in economic downturns, adverse industry conditions or catastrophic external events; or
•
reduce our flexibility in planning for or responding to changing business, industry and economic conditions.
 
In addition, our substantial level of indebtedness could limit our ability to obtain additional financing on acceptable terms or at all to fund future acquisitions, working capital, capital expenditures, debt service requirements, general corporate and other purposes, which could have a material adverse effect on our business and financial condition. Our liquidity needs could vary significantly and may be affected by general economic conditions, industry trends, performance and many other factors outside of our control. Our substantial obligations could have other important consequences. For example, our failure to comply with the restrictive covenants in the agreements governing our indebtedness, which limit our ability to incur liens, to incur debt and to sell assets, could result in an event of default that, if not cured or waived, could harm our business or prospects and could result in our bankruptcy.
We may not realize all of the anticipated benefits of the Merger or other previous or potential future acquisitions.
Our ability to realize the anticipated benefits of the Merger, the Assurant acquisition or other previous or potential future acquisitions, including the acquisition of assets, will depend, in part, on our ability to scale-up to appropriately service these assets and integrate the businesses of the acquired companies with our business. The process of acquiring assets or companies may disrupt our business

132

including diverting management’s attention from ongoing business concerns and may not result in the full benefits expected. The risks associated with acquisitions include, among others:
•
unknown or contingent liabilities;
•
unanticipated issues in integrating information, management style, servicing practices, communications and other systems including information technology systems;
•
unanticipated incompatibility of purchasing, logistics, marketing and administration methods; and
•
not retaining key employees.
 
In the event that we acquire a platform, we may elect to operate this platform in addition to our current platform for a period of time or indefinitely. Individually or collectively, these transactions could substantially increase the UPB, or alter the composition of our portfolio of mortgage loans that we service or have an otherwise significant impact on our business. We can provide no assurances that we will enter into any such agreements or as to the timing of any potential acquisitions. Additionally, we may make potentially significant acquisitions which could expose us to greater risks than we currently experience in servicing our current portfolio and adversely affect our business, financial condition and results of operations. We also may not realize all of the anticipated benefits of potential future acquisitions, which could adversely affect our business, financial condition and results of operations.
 
Our earnings may decrease because of changes in prevailing interest rates.
Our profitability is directly affected by changes in prevailing interest rates. The following are certain material risks we face related to changes in interest rates:
Servicing:
•
a decrease in interest rates may increase prepayment speeds which may lead to (i) increased amortization expense; (ii) decrease in servicing fees; and (iii) decrease in the value of our MSRs;
•
an increase in interest rates, together with an increase in monthly payments when an adjustable mortgage loan’s interest rate adjusts upward from an initial fixed rate or a low introductory rate, may cause increased delinquency, default and foreclosure. Increased mortgage defaults and foreclosures may adversely affect our business as they increase our expenses and reduce the number of mortgages we service;
Originations:
•
an increase in interest rates could adversely affect our loan originations volume because refinancing an existing loan would be less attractive for homeowners and qualifying for a purchase money loan may be more difficult for consumers;
  Xome:
•
an increase in interest rates could adversely affect Exchange’s property sales, particularly non-distressed sales, as financing may become less attractive to borrowers;
•
a substantial and sustained increase in prevailing interest rates could adversely affect the loan origination volumes of Xome’s clients since refinancing and purchase loans would be less attractive to borrowers, which would in turn adversely impact Services’ valuation and title order volume;
 
Other:
•
an increase in interest rates would increase the cost of servicing our outstanding debt, including our ability to finance servicing advances and loan originations and for borrowing for acquisitions; and
•
a decrease in interest rates could reduce our earnings from our custodial deposit accounts.
 
Any of the foregoing could adversely affect our business, financial condition and results of operation.

133

We use financial models that heavily rely on estimates in determining the fair value of certain assets and liabilities, such as MSRs and excess spread, and if our estimates or assumptions prove to be incorrect, it may affect our earnings.
We use internal financial models that utilize, wherever possible, market participant data to value certain of our assets, including our MSRs, newly originated loans held for sale and MSR financing liabilities for purposes of financial reporting. These models are complex and use asset-specific collateral data and market inputs for interest and discount rates. In addition, the modeling requirements of MSRs are complex because of the high number of variables that drive cash flows associated with MSRs. Even if the general accuracy of our valuation models is validated, valuations are highly dependent upon the reasonableness of our assumptions and the predictability of the relationships that drive the results of the models. In determining value for MSRs we make certain assumptions, many of which are beyond our control, including, among other things:
•
the rates of prepayment and repayment within the underlying pools of mortgage loans;
•
projected rates of delinquencies, defaults and liquidations;
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future interest rates;
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our cost to service the loans;
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ancillary revenues; and
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amounts of future servicing advances.
 
If these assumptions or relationships prove to be inaccurate, if market conditions change or if errors are found in our models, the value of certain assets may decrease or the value of certain liabilities could increase, which could impact our ability to satisfy minimum net worth covenants and borrowing conditions in our debt agreements governing our advance facilities, warehouse facilities, MSR facilities and other nonrecourse debt and adversely affect our business, financial condition or results of operations.
Our hedging strategies may not be successful in mitigating our risks associated with interest rates.
In our Originations segment, we use various derivative financial instruments to provide a level of protection against interest rate risks, but no hedging strategy can protect us completely. We may hedge MSRs in certain rate environments. The nature and timing of hedging transactions influence the effectiveness of these strategies. Poorly designed strategies, improperly executed and documented transactions or inaccurate assumptions could increase our risks and losses. In addition, hedging strategies involve transaction and other costs. Our hedging strategies and the derivatives that we use may not be able to adequately offset the risks of interest rate volatility, and our hedging transactions may result in or magnify losses. Furthermore, interest rate derivatives may not be available on favorable terms or at all, particularly during economic downturns. Any of the foregoing risks could adversely affect our business, financial condition and results of operations.
We have third-party credit and servicer risks which could have a material adverse effect on our business, liquidity, financial condition and results of operation.
Consumer Credit Risk: We provide representations and warranties to purchasers and insurers of the loans that we sell that typically are in place for the life of the loan. In the event of a breach of these representations and warranties, we may be required to repurchase a mortgage loan or indemnify the purchaser, and any subsequent loss on the mortgage loan may be borne by us. Our loss estimates are affected by factors both internal and external in nature, including, level of loan sales, as well as to whom the loans are sold, the expectation of credit loss on repurchases and indemnifications, our success rate at appealing repurchase demands, our ability to recover any losses from third parties, the overall economic condition in the housing market, the economic condition of borrowers, the political environment at investor agencies and the overall U.S. and world economies. Many of the factors are beyond our control and may lead to judgments that are susceptible to change. In adverse market conditions, loans may decrease in value due to an increase in delinquencies, borrower defaults and non-payments. In addition, property values may experience losses at liquidation due to extensions in foreclosure and REO sales timelines as well as home price depreciation.
Counterparty Credit Risk: We are exposed to counterparty credit risk in the event of non-performance by counterparties to various agreements. Although certain credit facilities and warehouse lines are committed, we may experience a disruption in operations due to a lender withholding a funding of a borrowing requested on the respective credit facility.
Prior Servicer Risk: We service mortgage loans under guidelines set forth by regulatory agencies and GSEs. Failure to meet stipulations of the servicing guidelines can result in the assessment of fines and loss of reimbursement of loan related advances, expenses, interest and servicing fees. When the servicing of a portfolio is assumed either through purchase of servicing rights or through a subservicing arrangement, various loans in the acquired portfolio may have been previously serviced in a manner that

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will contribute towards our not meeting certain servicing guidelines. If not recovered from a prior servicer, such events frequently lead to the eventual realization of a loss to us. The recovery process against a prior servicer can be prolonged based upon time required by us to meet minimum loss deductibles under the indemnification provisions in our agreements with the prior servicer and for the time requirements by the prior servicer to review underlying loss events and our request for indemnification. The amounts ultimately recovered from prior servicers may differ from our estimated recoveries recorded based on the prior servicer’s interpretation of responsibility for loss, which could lead to our realization of additional losses.
Any of the above could adversely affect our business, liquidity, financial condition and results of operations.
Lapses in disclosure controls and procedures or internal control over financial reporting could materially and adversely affect our operations, profitability or reputation.
Our disclosure controls and procedures may not be effective in every circumstance. Similarly, we may experience a material weakness or significant deficiency in internal control over financial reporting. Any lapses or deficiencies may materially and adversely affect our business and results of operations or financial condition, restrict our ability to access the capital markets, require us to expend significant resources to correct the lapses or deficiencies, expose us to regulatory or legal proceedings, subject us to fines, penalties or judgments, harm our reputation, or otherwise cause a decline in investor confidence.
Operational Risks
Servicing
A significant increase in delinquencies for the loans we own and service could have a material impact on our revenues, expenses and liquidity and on the valuation of our MSRs.
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Revenue. An increase in delinquencies will result in lower revenue for loans we service for GSEs and the Government National Mortgage Association (“Ginnie Mae”) because we only collect servicing fees from GSEs and Ginnie Mae for performing loans. Additionally, while increased delinquencies generate higher ancillary revenues, including late fees, these fees are not likely to be recoverable in the event that the related loan is liquidated. In addition, an increase in delinquencies lowers the interest income we receive on cash held in collection and other accounts.
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Expenses. An increase in delinquencies will result in a higher cost to service due to the increased time and effort required to collect payments from delinquent borrowers and an increase in interest expense as a result of an increase in our advancing obligations.
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Liquidity. An increase in delinquencies could also negatively impact our liquidity because of an increase in borrowings under advance facilities.
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Valuation of MSRs. We base the price we pay for MSRs on, among other things, our projections of the cash flows from the related pool of mortgage loans. Our expectation of delinquencies is a significant assumption underlying those cash flow projections. If delinquencies were significantly greater than expected, the estimated fair value of our MSRs could be diminished. If the estimated fair value of MSRs is reduced, we may not be able to satisfy minimum net worth covenants and borrowing conditions in our debt agreements, and we could suffer a loss, which has a negative impact on our financial results.
 
An increase in delinquency rates could therefore adversely affect our business, financial condition and results of operations.
We may not be able to adjust to operational changes in a timely manner to sustain profitability.
We may enter into arrangements with investors or other counterparties to subservice loans or provide services in areas that are new to us. We perform due diligence procedures to evaluate the feasibility of such ventures or transactions prior to their execution. The achievement of expected returns is often dependent on attainment of certain operating assumptions, such as lower operating costs or attainment of key performance metrics. To the extent we are unfamiliar with investor and/or risks assumed, or to the extent we have not demonstrated past proven performance on the operating metrics, we may not be able to adjust costs or achieve the desired operating metrics in a timely manner that will allow the return on investment as planned, which could expose us to significant financial loss.

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We may not be able to maintain or grow our business if we do not acquire MSRs or enter into additional subservicing agreements on favorable terms.
Our servicing portfolio is subject to “run off,” meaning that mortgage loans serviced by us may be prepaid prior to maturity or repaid through standard amortization of principal. As a result, our ability to maintain the size of our servicing portfolio depends on our ability to acquire the right to service additional pools of residential mortgages, enter into additional subservicing agreements or to originate additional mortgages. We have also shifted the mix of our servicing portfolio to a greater mix of subserviced loans. While we expect this strategy to have longer-term benefits, in the short-term this shift in our servicing portfolio to subservicing could reduce our revenue and earnings as measured by basis points. In addition, we may not be able to maintain our pipeline of subservicing opportunities.
The Federal Housing Finance Agency (“FHFA”) could enact more stringent requirements on the GSEs, or other federal or state agencies may enact additional requirements that are more stringent regarding the purchase or sale of MSRs. Additionally, if we do not comply with our seller/servicer obligations, the GSEs may not consent to approve future transfers of MSRs.
If we do not acquire MSRs or enter into additional subservicing agreements on terms favorable to us, our business, financial condition and results of operations could be adversely affected.
Some of the loans we service are higher risk loans, which are more expensive to service than conventional mortgage loans.
Some of the mortgage loans we service are higher risk loans, meaning that the loans are to less credit worthy borrowers or for properties the value of which has decreased. These loans are more expensive to service because they require more frequent interaction with customers and greater monitoring and oversight. Additionally, in connection with the ongoing mortgage market reform and regulatory developments, servicers of higher risk loans are subject to increased scrutiny by state and federal regulators and will experience higher compliance costs, which could result in a further increase in servicing costs. We may not be able to pass along any of the additional expenses we incur in servicing higher risk loans to our servicing clients. The greater cost of servicing higher risk loans, which may be further increased through regulatory reform, consent decrees or enforcement, could adversely affect our business, financial condition and results of operations.
We are required to make servicing advances that can be subject to delays in recovery or may not be recoverable in certain circumstances.
Forward Mortgage Servicing Rights : During any period in which a borrower is not making payments, we are required under most of our servicing agreements to advance our own funds to meet contractual principal and interest remittance requirements for investors, pay property taxes and insurance premiums, legal expenses and other protective advances. We also advance funds to maintain, repair and market real estate properties on behalf of investors. As home values change, we may have to reconsider certain of the assumptions underlying our decisions to make advances, and in certain situations our contractual obligations may require us to make certain advances for which we may not be reimbursed. In addition, when a mortgage loan serviced by us defaults or becomes delinquent, the repayment to us of the advance may be delayed until the mortgage loan is repaid or refinanced or liquidation occurs.

We have sold to a joint venture capitalized by certain entities formed and managed by New Residential and certain third-party investors the rights to mortgage servicing rights and servicer advances related to certain loan pools. In connection with these transactions, New Residential purchased the equity of wholly-owned special purpose subsidiaries of Mr. Cooper Group that issued limited recourse funding to finance the advances. We continue to service these loans. In the event that New Residential receives requests for advances in excess of amounts that they or their co-investors are willing or able to fund, we are obligated to fund these advance requests. Since we have transferred the related advance facilities to New Residential, we may have to obtain other sources of financing which may not be available.
Our inability to fund these advances could result in a termination event under the applicable servicing agreement, an event of default under the advance facilities and a breach of our purchase agreement with New Residential. Our inability to fund these advance requests could adversely affect our business, financial condition and results of operations.
Reverse Mortgages : As a reverse mortgage servicer, we are also responsible for funding draws due to borrowers in a timely manner, remitting to investors interest accrued and paying for interest shortfalls. Advances on reverse mortgages are typically greater than advances on forward residential mortgages. They are typically recovered upon weekly or monthly reimbursement or from sales in the market. In the event we receive requests for advances in excess of amounts we are able to fund, we may not be able to fund these advance requests, which could materially and adversely affect our business operations. A delay in our ability to collect an

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advance may adversely affect our liquidity, and our inability to be reimbursed for an advance could adversely affect our business, financial condition and results of operations.
Our counterparties may terminate our servicing rights and subservicing contracts.
The owners of the loans we service and the primary servicers of the loans we subservice may, under certain circumstances, terminate our MSRs or subservicing contracts, respectively.
Agency Servicing : We are party to seller/servicer agreements and/or subject to guidelines and regulations (collectively, seller/servicer obligations) with one or more of the GSEs, FHA and Ginnie Mae. As is standard in the industry, under the terms of these seller/servicer agreements, the agencies have the right to terminate us as servicer of the loans we service on their behalf at any time and also have the right to cause us to sell the MSRs to a third party. These seller/servicer obligations include financial covenants that include capital requirements related to tangible net worth. To the extent that these capital requirements are not met, the applicable agency may suspend or terminate these agreements, which would prohibit us from further servicing these specific types of mortgage loans or being an approved servicer. If we are unable to meet these capital requirements, this could adversely affect our business, financial condition and results of operations.
Subservicing : Our subservicing portfolio is highly concentrated with a small number of parties who may elect to transfer their subservicing relationship to other counterparties or may go out of business. As of December 31, 2017, 96% of our subservicing portfolio was with four counterparties. Under our subservicing contracts, the primary servicers for which we conduct subservicing activities have the right to terminate our subservicing contracts with or without cause, with limited notice and with no termination fee upon a change of control. For example, we realized a decline in our subservicing portfolio of $47 billion in UPB in the fourth quarter of 2017 due to the termination of a subservicing agreement when the servicer of record sold its ownership interest and the new owner did not retain us as subservicer. Entering into additional subservicing contracts may exacerbate these risks.
If our servicing rights or subservicing contracts are terminated on a material portion of our servicing portfolio, this could adversely affect our business, financial condition and results of operations.
 
We service reverse mortgages, which subjects us to additional risks and could have a material adverse effect on our business, liquidity, financial condition and results of operations.
The reverse mortgage business is subject to substantial risks, including market, credit, interest rate, liquidity, operational, reputational and legal risks. Loan defaults on reverse mortgages leading to foreclosures may occur if borrowers fail to maintain their property, fail to pay taxes or home insurance premiums, die or fail to occupy their property for 12 consecutive months. Higher than anticipated foreclosures could result in increased losses. We use financial models that rely heavily on estimates to forecast loss exposure related to certain reverse mortgage assets and liabilities. These models are complex and use asset specific collateral data and market inputs for mortality, interest rates and prepayments. In addition, the models use investor and state required time lines for certain default related activities. Even if the general accuracy of our loss models is validated, loss estimates are highly dependent upon the reasonableness of our assumptions and the predictability of the relationships that drive the results of the models. If these assumptions or relationships prove to be inaccurate or if the market conditions change, the actual loss experience could be higher than modeled.
Additionally, we could become subject to negative headline risk in the event that loan defaults on reverse mortgages lead to foreclosures or evictions of elderly homeowners.
We could have a downgrade in our servicer ratings.
Standard & Poor’s, Moody’s and Fitch rate us as a residential loan servicer. Favorable ratings from these agencies are important to the conduct of our loan servicing business. Downgrades in servicer ratings could:
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adversely affect our ability to finance servicing advances and maintain our status as an approved servicer by Fannie Mae, Freddie Mac and Ginnie Mae;
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lead to the early termination of existing advance facilities and affect the terms and availability of advance facilities that we may seek in the future;
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cause our termination as servicer in our servicing agreements that require that we maintain specified servicer ratings; and
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further impair our ability to consummate future servicing transactions.

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Any of the above could adversely affect our business, financial condition and results of operations.
Originations
We may not be able to maintain the volumes in our loan originations business, which would adversely affect our ability to replenish our servicing business.
The volume of loans funded within our loan originations business is subject to multiple factors, including changes in interest rates and availability of government programs. Volume in our originations business is based in large part on the refinancing of existing mortgage loans that we service, which is highly dependent on interest rates and other macroeconomic factors. Our loan origination volume may decline if interest rates increase or if government programs terminate and are not replaced with similar programs or if we cannot replace this volume with other loan origination channels such as Correspondent, new customer acquisitions or purchase money loans. If we are unable to maintain our loan originations volume then our business, financial condition and results of operations could be adversely affected.

We may be required to indemnify or repurchase loans we sold, or will sell, if these loans fail to meet certain criteria or characteristics or under other circumstances.
The indentures governing our securitized pools of loans and our contracts with purchasers of our whole loans contain provisions that require us to indemnify or repurchase the related loans under certain circumstances. While our contracts vary, they contain provisions that require us to repurchase loans if:
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our representations and warranties concerning loan quality and loan circumstances are inaccurate, including representations concerning the licensing of a mortgage broker;
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we fail to secure adequate mortgage insurance within a certain period after closing;
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a mortgage insurance provider denies coverage;
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we fail to comply, at the individual loan level or otherwise, with regulatory requirements in the current dynamic regulatory environment; or
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the borrower fails to make certain initial loan payments due to the purchaser. We are subject to repurchase claims and may continue to receive claims in the future. If we are required to indemnify or repurchase loans that we originate or have previously originated and sell or securitize that result in losses that exceed our reserve, this could adversely affect our business, financial condition and results of operations.
Termination of government mortgage refinancing programs could adversely affect future revenues.
Under the HARP we may be entitled to receive financial incentives and success fees in connection with a mortgage refinancing we enter into with eligible borrowers. Programs such as HARP have been a significant driver of our originations revenue. Changes in legislation or regulation regarding these programs and changes in the requirements necessary to qualify for refinancing mortgage loans may impact the extent to which we participate in and receive financial benefits from such programs, or may increase the expense of our participation in such programs. We expect refinancing volumes, revenues and margins to continue to decline in 2018 as we believe peak HARP refinancings have already occurred. HARP is scheduled to expire on December 31, 2018. If HARP is not extended, planned replacement programs are not implemented or our financial benefits from such programs decrease, our revenues could decrease, which could adversely affect our business, financial condition and results of operations.
We are highly dependent upon loan programs administered by GSEs such as the Fannie Mae, Freddie Mac, FHA, Department of Veterans Affairs (“VA”), USDA and by Ginnie Mae to generate revenues through mortgage loan sales to institutional investors.
There are various proposals which deal with GSE reform, including winding down the GSEs and reducing or eliminating over time the role of the GSEs in guaranteeing mortgages and providing funding for mortgage loans, as well as proposals to implement reforms relating to borrowers, lenders and investors in the mortgage market, including reducing the maximum size of loans that the GSEs can guarantee, phasing in a minimum down payment requirement for borrowers, improving underwriting standards and increasing accountability and transparency in the securitization process. Thus, the long-term future of the GSEs is still in doubt.

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Our ability to generate revenues through mortgage loan sales to institutional investors depends to a significant degree on programs administered by the GSEs, Ginnie Mae, and others that facilitate the issuance of MBS in the secondary market. These entities play a critical role in the residential mortgage industry, and we have significant business relationships with many of them. Almost all of the conforming loans we originate qualify under existing standards for inclusion in guaranteed mortgage securities backed by one of these entities. We also derive other material financial benefits from these relationships, including the assumption of credit risk on loans included in such mortgage securities in exchange for our payment of guarantee fees and the ability to avoid certain loan inventory finance costs through streamlined loan funding and sale procedures. If it is not possible for us to complete the sale or securitization of certain of our mortgage loans due to changes in GSE and Ginnie Mae programs, we may lack liquidity under our mortgage financing facilities to continue to fund mortgage loans, and our revenues and margins on new loan originations would be materially and negatively impacted.
Any discontinuation of, or significant reduction in, the operation of these GSEs, FHA, VA, USDA and Ginnie Mae or any significant adverse change in the level of activity in the secondary mortgage market or the underwriting criteria of these entities could materially and adversely affect our business, liquidity, financial position and results of operations.
Xome
Xome participates in highly competitive markets and pressure from existing and new companies could adversely affect Xome’s businesses.
The markets for Xome’s services are very competitive, and Xome’s success depends on its ability to continue to attract additional customers, consumers and real estate professionals to its mobile applications and websites. Xome’s existing and potential competitors include companies that operate, or could develop, national and local real estate mobile applications and websites. These companies could devote greater technical and other resources than we have available and leverage their existing user bases and proprietary technologies to provide products and services that end-users might view as superior to our offerings. Any of Xome’s future or existing competitors may introduce different products that provide solutions similar to our own but with either better user interfaces, branding and marketing resources, or at a lower price. In addition, the time and expense associated with switching from Xome’s competitors’ services and technologies to ours may limit Xome’s growth. If we are unable to continue to innovate and grow the number of end-users of Xome’s mobile applications and websites, we may not remain competitive or may face downward pricing pressures, and our business and financial performance could suffer. Additionally, third parties may assert claims against Xome, asserting that Xome’s content, website processes or software applications infringe their intellectual property rights. If any infringement claim is successful, Xome may be required to pay substantial damages, obtain a license from the third party or be prohibited from using content that incorporates the challenged intellectual property, which could materially and adversely affect our business, liquidity, financial position and results of operations.
Xome is subject to extensive government regulation at the federal, state and local levels, and any failure to comply with existing new regulations may adversely impact us, our clients and our results of operations.
Xome is subject to licensing and regulation as a real estate broker, auctioneer, appraisal management company, title agent and/or insurance agent in a number of states and may be subject to new licensing and regulation as it expands service offerings. Xome is subject to audits and examinations that are conducted by federal and state regulatory authorities and, as a vendor, is also subject to similar audit requirements imposed on its clients, including us. Our employees and subsidiaries may be required to be licensed by various state licensing authorities for the particular type of service provided and to participate in regular background checks, fingerprinting requirements and continuing education programs. We may incur significant ongoing costs to comply with governmental regulations, and new laws and regulations may be adopted that prohibit us from engaging Xome as a vendor, which could adversely affect our business, financial condition and results of operations.
Xome’s revenue from clients in the mortgage and real estate industries is affected by the strength of the economy and the housing market generally, including the volume of real estate transactions.
Real estate markets are subject to fluctuations, due to factors such as the relative relationship of supply to demand, the availability of alternative investment products, the unemployment rate, real wage increases, inflation and the general economic environment. An economic slowdown or recession, in addition to other non-economic factors such as an excess supply in properties, a change in consumer preferences towards rental properties or declining consumer confidence in the economy, could have a material adverse effect on values of residential real estate properties. The volume of mortgage origination, mortgage refinancing and residential real estate transactions is highly variable. The level of real estate transactions is primarily affected by the average price of real estate sales, the availability of funds to finance purchases, mortgage interest rates, consumer confidence in the economy and general economic factors affecting the real estate markets. Reductions in these transaction volumes could have a material adverse effect on Xome’s business, financial condition and results of operations.

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We could have, appear to have or be alleged to have conflicts of interest with Xome.
Xome provides services to us which could create, appear to create or be alleged to create conflicts of interest. By obtaining services from a subsidiary, there is risk of possible claims of collusion or claims that such services are not provided by Xome upon market terms. We have adopted policies, procedures and practices, and engage an independent third party to conduct a pricing study to ensure that the fees charged are customary and reasonable. However, there can be no assurance that such measures will be effective in eliminating all conflicts of interest or that third parties will refrain from making such allegations.
Strategic
We may not be successful in implementing certain strategic initiatives.
Certain strategic initiatives, which are designed to improve our results of operations and drive long-term stockholder value, include:
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attracting new customers through our purchase money loan originations channel which will require expanded products, technologies, teams and multi-channel marketing campaigns;
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focusing on relevant originations product expansion and profitable new growth platforms;
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increasing third-party business at Xome;
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re-entering the field services business by Xome; and
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balancing disciplined UPB growth while meeting target unit economics.
There is no assurance that we will be able to successfully implement these strategic initiatives and our efforts may be more expensive and time consuming than we expect, which could adversely affect our business, financial condition and results of operations.
Other Risks
Technology failures or cyber-attacks against us or our vendors could damage our business operations and new laws and regulations could increase our costs.
The financial services industry as a whole is characterized by rapidly changing technologies, and system disruptions and failures caused by fire, power loss, telecommunications failures, unauthorized intrusion (cyber-attack), computer viruses and disabling devices, natural disasters and other similar events may interrupt or delay our ability to provide services to our borrowers. Security breaches, acts of vandalism and developments in computer intrusion capabilities could result in a compromise or breach of the technology that we or our vendors use to protect our borrowers’ personal information and transaction data. Despite our efforts to ensure the integrity of our systems, it is possible that we may not be able to anticipate or implement effective preventive measures against all security breaches, especially because the techniques used change frequently, are becoming more sophisticated and are not recognized until launched, and because security attacks can originate from a wide variety of sources, including third parties such as hackers, terrorists, persons involved with organized crime or associated with external service providers. Those parties may also attempt to fraudulently induce employees, customers or other users of our systems to disclose sensitive information in order to gain access to our data or that of our customers or clients. These risks may increase in the future as we continue to increase our reliance on telecommunication technologies (including mobile devices), the internet and use of web-based product offerings.
While we have implemented policies and procedures designed to help mitigate cybersecurity risks and cyber intrusions, there can be no assurance that any such cyber intrusions will not occur or, if they do occur, that they will be adequately addressed. A successful penetration or circumvention of the security of our or our vendors’ systems or a defect in the integrity of our or our vendors’ systems or cybersecurity could cause serious negative consequences for our business, including significant disruption of our operations, misappropriation of our confidential information or that of our customers, or damage to our computers or operating systems and to those of our customers and counterparties. Any of the foregoing events could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of confidence in our security measures, customer dissatisfaction, significant litigation exposure and harm to our reputation, all of which could adversely affect our business, financial condition and results of operations.

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In addition, increasing attention is being paid by the media, regulators and legislators to matters relating to cybersecurity, and regulators and legislators may enact laws or regulations regarding cybersecurity. For example, the New York Department of Financial Services has adopted regulations that are far-ranging in scope, including not only specific technical safeguards but also requirements regarding governance, incident planning, data management and system testing. New laws and regulations could result in significant compliance costs, which may adversely affect our cash flows.
Our capital investments in technology may not achieve anticipated returns.
Our business is becoming increasingly reliant on technology investments, and the returns on these investments are less predictable. We are currently making, and will continue to make, significant technology investments to support our service offering, implement improvements to our customer-facing technology, and evolve our information processes, and computer systems to more efficiently run our business and remain competitive and relevant to our customers. These technology initiatives might not provide the anticipated benefits or may provide them on a delayed schedule or at a higher cost. We must monitor and choose the right investments and implement them at the right pace. Failing to make the best investments, or making an investment commitment significantly above or below our needs could result in the loss of our competitive position and adversely impact our financial condition or results of operations.
We and our vendors have operations in India and/or the Philippines that could be adversely affected by changes in political or economic stability or by government policies.
We currently have operations located in India and we have reduced our costs by contracting with certain third parties with operations in India and the Philippines, although we plan to terminate our third-party relationships in the Philippines. These countries are subject to relatively higher degrees of political and social instability and may lack the infrastructure to withstand political unrest or natural disasters. The political or regulatory climate in the United States, or elsewhere, also could change so that it would not be lawful or practical for us to use international operations in the manner in which we currently use them. If we or our vendors had to curtail or cease operations in these countries and transfer some or all of these operations to another geographic area, we would incur significant transition costs as well as higher future overhead costs that could materially and adversely affect our results of operations. In many foreign countries, particularly in those with developing economies, it may be common to engage in business practices that are prohibited by laws and regulations applicable to us, such as The Foreign Corrupt Practices Act of 1977, as amended (“FCPA”). Any violations of the FCPA or local anti-corruption laws by us, our subsidiaries or our local agents, could have an adverse effect on our business and reputation and result in substantial financial penalties or other sanctions.
Our vendor relationships subject us to a variety of risks.
We have significant vendors that, among other things, provide us with financial, technology and other services to support our businesses. With respect to vendors engaged to perform activities required by the applicable servicing criteria, we assess compliance with the applicable servicing criteria for the applicable vendor (or in certain cases require vendors to provide their own assessments and attestations) and are required to have procedures in place to provide reasonable assurance that the vendor’s activities comply in all material respects with servicing criteria applicable to the vendor. In the event that a vendor’s activities do not comply with the servicing criteria, it could negatively impact our servicing agreements. In addition, if our current vendors were to stop providing services to us on acceptable terms, including as a result of one or more vendor bankruptcies, we may be unable to procure alternatives from other vendors in a timely and efficient manner and on acceptable terms, or at all. Further, we may incur significant costs to resolve any such disruptions in service and this could adversely affect our business, financial condition and results of operations.
Our risk management policies and procedures may not be effective.
Our risk management framework seeks to mitigate risk and appropriately balance risk and return. We have established policies and procedures intended to identify, monitor and manage the types of risk to which we are subject, including credit risk, market and interest rate risk, liquidity risk, cyber risk, regulatory, legal and reputational risk. Although we have devoted significant resources to develop our risk management policies and procedures and expect to continue to do so in the future, these policies and procedures, as well as our risk management techniques such as our hedging strategies, may not be fully effective. There may also be risks that exist, or that develop in the future, that we have not appropriately anticipated, identified or mitigated. As regulations and markets in which we operate continue to evolve, our risk management framework may not always keep sufficient pace with those changes. If our risk management framework does not effectively identify or mitigate our risks, we could suffer unexpected losses and could be materially adversely affected.
Negative public opinion could damage our reputation and adversely affect our business.

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Reputational risk, or the risk to our business, earnings and capital from negative public opinion, is inherent in our business. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending and debt collection practices, foreclosures or evictions of elderly homeowners who default on reverse mortgages, technology failures, corporate governance, and actions taken by government regulators and community organizations in response to those activities. Negative public opinion can also result from media coverage, whether accurate or not. Negative public opinion can adversely affect our ability to attract and retain customers, trading counterparties and employees and can expose us to litigation and regulatory action. Although we take steps to minimize reputation risk in dealing with our customers and communities, this risk will always be present in our organization.
Regulatory and Legal Risks
We operate within a highly regulated industry on a federal, state and local level, and our business results are significantly impacted by the laws and regulations to which we are subject.
As a national mortgage services firm, we are subject to extensive and comprehensive regulation under federal, state and local laws in the United States. These laws and regulations significantly affect the way that we do business and can restrict the scope of our existing businesses and limit our ability to expand our product offerings or to pursue acquisitions, or can make our costs to service or originate loans higher, which could impact our financial results.
Regulatory requirements or changes to existing requirements that the BCFP may promulgate could require changes in our business, result in increased compliance and operational costs and impair the profitability of such business. For example, the BCFP adopted rules effective in August 2017 regarding mortgage servicing practices which require significant modifications and enhancements to our mortgage servicing processes and systems. In addition, in October 2017 the BCFP announced amendments to certain parts of the mortgage servicing rules which became effective in April 2018. Additionally, the BCFP issued a rule, effective in January 2018, amending Regulation C of the Home Mortgage Disclosure Act (“HMDA”) that greatly expands the scope of data required to be collected and reported for every loan application from approximately 23 to 48 data elements. These new requirements for gathering and submitting large amounts of data regarding loan applications to regulators and the public is complex. Thus, any inadvertent errors in our gathering or reporting the data could result in fines or penalties being levied by the BCFP or other regulators against us. In addition, the authority of state attorneys general to bring actions to enforce federal consumer protection legislation, as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), could be expanded and we could be subject to additional state lawsuits and enforcement actions, thereby further increasing our legal and compliance costs. The cumulative effect of these changes could result in a material impact on our earnings.
The implementation of the originations and servicing rules by the BCFP and the BCFP’s continuing examinations of our business could increase our regulatory compliance burden and associated costs and place restrictions on our operations, which could in turn adversely affect our business, financial condition and results of operations.
We could be subject to additional regulatory requirements or changes under the Dodd-Frank Act beyond those currently proposed, adopted or contemplated. There also continues to be discussion of potential GSE reform which would likely affect markets for mortgages and mortgage securities in ways that cannot be predicted. In addition, FHFA initiatives may be implemented by the GSEs that could materially affect the market for conventional and/or government insured loans.
In addition, under the Trump Administration, a level of heightened uncertainty exists with respect to the future of the Dodd-Frank Act and the BCFP. We cannot predict the specific legislative or executive actions that may result or what actions state regulators or enforcement agencies might take in response to changes to the federal regulatory environment. Such actions could impact the industry generally, could impact our relationships with other regulators and could limit our ability to reach acceptable resolution with the BCFP or other regulatory or enforcement agencies on outstanding investigations, examinations or reviews. Any changes in our current regulatory environment could create uncertainty and result in increasing legal and compliance costs.
Certain regulators took steps to block the acquisition of MSRs by one of our competitors. It is possible that we could become subject to similar actions with respect to our acquisition of MSRs or other key business operations such as entering into subservicing contracts, which could adversely affect our business, financial condition and results of operations.
We are subject to numerous legal proceedings, federal, state or local governmental examinations and enforcement investigations. Some of these matters are highly complex and slow to develop, and results are difficult to predict or estimate.

142

Legal Proceedings : We are routinely and currently involved in a significant number of legal proceedings concerning matters that arise in the ordinary course of our business. There is no assurance that the number of legal proceedings will not increase in the future, and it is possible that one or more class or mass actions may be certified against us. These legal proceedings range from actions involving a single plaintiff to putative class action lawsuits with potentially tens of thousands of class members. These actions and proceedings are generally based on alleged violations of consumer protection, securities, employment, contract, tort, common law fraud and numerous other laws, including, but not limited to, the Equal Credit Opportunity Act, Fair Debt Collection Practices Act, Fair Credit Reporting Act, Real Estate Settlement Procedures Act, National Housing Act, Homeowners Protection Act, Service Member’s Civil Relief Act, Telephone Consumer Protection Act, Truth in Lending Act, Financial Institutions Reform, Recovery, and Enforcement Act of 1989, unfair, deceptive or abusive acts or practices in violation of the Dodd-Frank Act, the Securities Act of 1933, the Securities Exchange Act of 1934, the Home Mortgage Disclosure Act, the Bankruptcy Code, False Claims Act and Making Home Affordable loan modification programs. Additionally, along with others in our industry, we are subject to repurchase and indemnification claims and may continue to receive claims in the future, regarding alleged breaches of representations and warranties relating to the sale of mortgage loans, the placement of mortgage loans into securitization trusts or the servicing of mortgage loans securitizations. We are also subject to legal actions or proceedings related to loss sharing and indemnification provisions of our various acquisitions. Certain of the pending or threatened legal proceedings include claims for substantial compensatory, punitive and/or, statutory damages or claims for an indeterminate amount of damages.
Litigation and other proceedings may require that we pay settlement costs, legal fees, damages, including punitive damages, penalties or other charges, or be subject to injunctive relief affecting our business practices, any or all of which could adversely affect our financial results. In particular, ongoing and other legal proceedings brought under state consumer protection statutes may result in a separate fine for each violation of the statute, which, particularly in the case of class action lawsuits, could result in damages substantially in excess of the amounts we earned from the underlying activities and that could have a material adverse effect on our liquidity, financial position and results of operations. The costs of responding to the investigations can be substantial.
Regulatory Matters : Our business is subject to extensive examinations, investigations and reviews by various federal, state and local regulatory and enforcement agencies. We have historically had a number of open investigations with various regulators or enforcement agencies and that trend continues. We are currently the subject of various regulatory or governmental investigations, subpoenas, examinations and inquiries related to our residential loan servicing and origination practices, bankruptcy and collections practices, our financial reporting and other aspects of our businesses. These matters include investigations by the Bureau of Consumer Financial Protection, the SEC, the Executive Office of the United States Trustees, the Office of the Special Inspector General for the Troubled Asset Relief Program, the Department of Justice, the U.S. Department of Housing and Urban Development, the multistate coalition of mortgage banking regulators, and various State Attorneys General. We continue to progress towards resolution of certain legacy regulatory matters involving regulatory examination findings for alleged violations of certain laws related to our business practices. Several large mortgage originators or servicers have been subject to similar matters, which have resulted in the payment of fines and penalties, changes to business practices and the entry of consent decrees or settlements. We continue to manage our response to each matter, but it is not possible for us to confidently or reliably predict the outcome of any of them, including predicting any possible losses resulting from any judgments or fines.
On April 24, 2018, the BCFP notified us that, in accordance with the BCFP’s discretionary Notice and Opportunity to Respond and Advise (“NORA”) process, the BCFP’s Office of Enforcement is considering whether to recommend that the BCFP take enforcement action against us, alleging violations of the Real Estate Settlement Procedures Act, the Consumer Financial Protection Act, and the Homeowners Protection Act, which stems from a 2014 examination. The purpose of a NORA letter is to provide a party being investigated an opportunity to present its position to the BCFP before an enforcement action may be recommended or commenced. We are continuing to cooperate with the BCFP. There can be no assurance that the BCFP will not seek to exercise its enforcement authority through settlement, administrative proceedings or litigation and seek injunctive relief, damages, restitution and civil monetary penalties, which could have a material adverse effect on our business, reputation, financial condition and results of operations. However, we believe it is premature to predict the potential outcome or to estimate any potential financial impact in connection with any potential BCFP enforcement action. We have not recorded an accrual related to this matter as of September 30, 2018 as we do not believe a loss is probable. There is a reasonable possibility that a loss may be incurred; however, the possible loss or range of loss is not estimable.

143

Responding to these matters requires us to devote substantial legal and regulatory resources, resulting in higher costs and lower net cash flows. Adverse results in any of these matters could further increase our operating expenses and reduce our revenues, require us to change business practices, limit our ability to grow and otherwise materially and adversely affect our business, reputation, financial condition or results of operation. To the extent that an examination or other regulatory engagement reveals a failure by us to comply with applicable law, regulation or licensing requirement this could lead to (i) loss of our licenses and approvals to engage in our businesses, (ii) damage to our reputation in the industry and loss of client relationships, (iii) governmental investigations and enforcement actions, (iv) administrative fines and penalties and litigation, (v) civil and criminal liability, including class action lawsuits, and actions to recover incentive and other payments made by governmental entities, (vi) enhanced compliance requirements, (vii) breaches of covenants and representations under our servicing, debt or other agreements, (viii) inability to raise capital and (ix) inability to execute on our business strategy. Any of these occurrences could further increase our operating expenses and reduce our revenues, require us to change business practices and procedures and limit our ability to grow or otherwise materially and adversely affect our business, reputation, financial condition or results of operation.
Moreover, regulatory changes resulting from the Dodd-Frank Act and other regulatory changes such as the BCFP having its own examination and enforcement authority and the “whistleblower” provisions of the Dodd-Frank Act could further increase the number of legal and regulatory enforcement proceedings against us. In addition, while we take numerous steps to prevent and detect employee misconduct, such as fraud, employee misconduct cannot always be deterred or prevented and could subject us to additional liability.
We establish reserves for pending or threatened litigation and regulatory matters when it is probable that a loss has been incurred and the amount of such loss can be reasonably estimated. Litigation and regulatory matters are inherently uncertain, and our estimates of loss are based on judgments and information available at that time. Our estimates may change from time to time for various reasons, including factual or legal developments in these matters. There cannot be any assurance that the ultimate resolution of our litigation and regulatory matters will not involve losses, which may be material, in excess of our recorded accruals or estimates of reasonably probable losses.
There are numerous federal, state and local laws and regulations in the mortgage industry.
Federal, state and local governments have recently proposed or enacted numerous laws, regulations and rules related to mortgage loans generally and loan modifications as well as foreclosure actions. These laws, regulations and rules may result in delays in the foreclosure process, reduced payments by borrowers, modification of the original terms of mortgage loans, permanent forgiveness of debt and increased servicing advances.
Due to the highly regulated nature of the residential mortgage industry, we are required to comply with a wide array of federal, state and local laws and regulations that regulate, among other things, the manner in which we conduct our servicing, originations and ancillary business and the fees we may charge. These regulations directly impact our business and require constant compliance, which includes enhancing our compliance program, procedures and controls, monitoring and internal and external audits. A failure in maintaining an effective compliance program or a material failure to comply with any of these laws or regulations could subject us to lawsuits or governmental actions, which could materially adversely affect our business, financial condition and results of operations.
In addition, there continue to be changes in legislation and licensing, which require technology changes and additional implementation costs for loan originators. We expect legislative changes will continue in the foreseeable future, which may increase our operating expenses.
Furthermore, there continue to be changes in state laws that are adverse to mortgage servicers that increase costs and operational complexity of our business and impose significant penalties for violation.
Any of these changes in law could adversely affect our business, financial condition and results of operations.

Unlike competitors that are national banks, we are subject to state licensing and operational requirements that result in substantial compliance costs.

144

Because we are not a depository institution, we do not benefit from a federal exemption to state mortgage banking, loan servicing or debt collection licensing and regulatory requirements. We must comply with state licensing requirements and varying compliance requirements in all 50 states and the District of Columbia, and we are sensitive to regulatory changes that may increase our costs through stricter licensing laws, disclosure laws or increased fees or that may impose conditions to licensing that we or our personnel are unable to meet. In addition, we are subject to periodic examinations by state regulators, which can result in refunds to borrowers of certain fees earned by us, and we may be required to pay substantial penalties imposed by state regulators due to compliance errors. Future state legislation and changes in existing regulation may significantly increase our compliance costs or reduce the amount of ancillary revenues, including late fees that we may charge to borrowers. This could make our business cost-prohibitive in the affected state or states and could materially affect our business.
Our business would be adversely affected if we lose our licenses.
Our operations are subject to regulation, supervision and licensing under numerous federal, state and local statutes, ordinances and regulations. In most states in which we operate, a regulatory agency regulates and enforces laws relating to mortgage servicing companies and mortgage originations companies such as us as well as regulating our ancillary service providers. These rules and regulations generally provide for licensing as a mortgage servicing company, mortgage originations company or third-party debt default specialist, title insurance agency, appraisal management company, licensed auctioneer, and other similar types of requirements as to the form and content of contracts and other documentation, licensing of our employees and employee hiring background checks, licensing of independent contractors with which we contract, restrictions on certain practices, disclosure and record-keeping requirements and enforcement of borrowers’ rights. We are subject to periodic examination by state regulatory authorities.
We believe that we maintain all material licenses and permits required for our current operations and are in substantial compliance with all applicable federal, state and local laws, rules, regulations and ordinances. We may not be able to maintain all requisite licenses and permits, and the failure to satisfy those and other regulatory requirements could result in a default under our servicing or other agreements and have a material adverse effect on our operations. The states that currently do not provide extensive regulation of our businesses may later choose to do so, and if such states so act, we may not be able to obtain or maintain all requisite licenses and permits. The failure to satisfy those and other regulatory requirements could result in a default under our servicing agreements and have a material adverse effect on our operations. Furthermore, the adoption of additional, or the revision of existing, rules and regulations could adversely affect our business, financial condition and results of operations.
We may incur increased litigation costs and related losses if a borrower, or class of borrowers, challenges the validity of a foreclosure action or if a court overturns a foreclosure or if a loan we are servicing becomes subordinate to a Home Owners Association lien.
We may incur costs if we are required to, or if we elect to, execute or re-file documents or take other action in our capacity as a servicer in connection with pending or completed foreclosures. We may incur increased litigation costs if the validity of a foreclosure action is challenged by a borrower or a class of borrowers under a variety of theories including, without limitation, standing, proper notice and statute of limitations. In addition, if a court rules that the lien of a Homeowners Association takes priority over the lien we service, we may incur legal liabilities and costs to defend such actions. If a court dismisses or overturns a foreclosure because of errors or deficiencies in the foreclosure process, we may have liability to the loan owner, a borrower, title insurer or the purchaser of the property sold in foreclosure. These costs and liabilities may not be legally or otherwise reimbursable to us, particularly to the extent they relate to securitized mortgage loans. A significant increase in litigation costs could adversely affect our liquidity, and our inability to be reimbursed for an advance could adversely affect our business, financial condition and results of operations.
Residential mortgage foreclosure proceedings in certain states have been delayed due to lack of judicial resources and legislation, all of which could have a negative effect on our ability to liquidate loans timely and slow the recovery of advances and thus impact our earnings or liquidity.
In some states, such as New York, our industry has faced, and may continue to face, increased delays and costs caused by state law and local court rules and processes. In addition, California and Nevada have enacted Homeowner’s Bill of Rights legislation to establish mandatory loss mitigation practices for homeowners which cause delays in foreclosure proceedings. Delays in foreclosure proceedings could also require us to make additional servicing advances by drawing on our servicing advance facilities, or delay the recovery of advances, all or any of which could materially affect our earnings and liquidity and increase our need for capital.



145

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities
(in thousands except Average Price Paid per Share)
Period
(a) Total Number of Shares (or Units) Purchased  
(in thousands)
 
(b) Average Price Paid per Share (or Unit)
 
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (1)
(in thousands)
 
(d) Maximum Number (or Appropriate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Program
(in millions)
Predecessor
 
 
 
 
 
 
 
July 1 - 31, 2018
642

(1)  
$
18.27

 
642

 
$
—

 
 
 
 
 
 
 
 
Successor
 
 
 
 
 
 
 
August 1 - 31, 2018
—

 
$
—

 
—

 
$
—

September 1 - 30, 2018
—

 
$
—

 
—

 
$
—

Total
642

 
 
 
642

 
 

(1) In July of 2018, approximately 642 thousand shares of common stock were surrendered at an average price of $18.27 per share to the Predecessor by certain employees in an amount equal to the amount of tax withheld to satisfy minimum statutory tax requirements in connection with the vesting of restricted shares. As of the date of this report, we have no publicly announced plans or programs to repurchase our common stock.


Item 3. Defaults Upon Senior Securities
None.


Item 4. Mine Safety Disclosures
Not applicable.


Item 5. Other Information

Amended and Restated Bylaws

On November 5, 2018, our Board of Directors (the "Board") adopted and approved, effective immediately, the Amended and Restated Bylaws of the Company (the “Amended and Restated Bylaws”) to, among other things:
•
change the voting standard for the election of directors from plurality voting to majority voting in uncontested elections;
•
update the advance notice provisions for director nominations and stockholder proposals;
•
update and clarify the requirements and procedures for stockholders to call a special meeting of stockholders;
•
update and clarify the requirements and procedures for stockholders to act by written consent;
•
provide the Board with the ability to postpone, adjourn or cancel a previously-scheduled meeting of stockholders;
•
clarify the powers of the chairman of a stockholder meeting with respect to the conduct of such meeting;
•
allow for emergency meetings of the Board with less than 24 hours’ notice; and

146

•
designate the Court of Chancery of the State of Delaware as the exclusive forum for certain actions and proceedings involving the Company (such provision, the “Exclusive Forum Provision”).

The Board determined that the adoption of the Exclusive Forum Provision is in the best interests of the Company and its stockholders because, among other reasons, it will limit the ability of plaintiffs in certain cases to forum shop, which can result in a court located outside of Delaware interpreting Delaware law, and to litigate in multiple jurisdictions, which can result in conflicting decisions by different courts and significant expense to the Company. While the Amended and Restated Bylaws, including the Exclusive Forum Provision, were effective upon approval by the Board on November 5, 2018, the Board intends to seek stockholder ratification of the Exclusive Forum Provision at the Company’s 2019 annual meeting of stockholders.

The foregoing description of the Amended and Restated Bylaws is qualified in its entirety by reference to the full text of the Amended and Restated Bylaws, which is filed as Exhibit 3.2 and incorporated herein by reference.

Stockholder Proposal Deadline

The Board has established May 16, 2019 as the date of our 2019 Annual Stockholders Meeting (the "2019 Annual Meeting"). Since the date of the 2019 Annual Meeting is more than 30 calendar days from the anniversary date of our 2018 Annual Stockholders Meeting, we are informing our stockholders of the updated deadline for submitting any qualified stockholder proposal in accordance with the rules and regulations promulgated by the SEC and our Amended and Restated Bylaws. If a stockholder intends to nominate a candidate for election to the Board or to propose other business for consideration at the 2019 Annual Meeting to be included in our proxy statement relating to the 2019 Annual Meeting, our Corporate Secretary must receive the notice at our principal executive office no later than 5:00 p.m. Eastern Time on February 14, 2019, which we have determined to be a reasonable time before we expect to mail our proxy materials prior to the 2019 Annual Meeting. Any such proposal must also meet the requirements set forth in the Amended and Restated Bylaws and the rules and regulations of the SEC in order to be eligible for inclusion in the proxy materials for the 2019 Annual Meeting.



147

Item 6. Exhibits
 
 
 
Incorporated by Reference
 
Exhibit Number
Description
Form
File No.
Exhibit
Filing Date
Filed or Furnished Herewith
 
 
 
 
 
 
 
3.1
8-K
001-14667
3.1
10/10/2018
 
3.2
 
 
 
 
X
4.1
 
 
 
 
X
4.2
8-K
001-14667
4.1
07/13/2018
 
4.3
8-K
001-14667
4.3
08/01/2018
 
4.4
8-K
001-14667
4.1
08/01/2018
 
4.5
8-K
001-14667
4.2
08/01/2018
 
10.1*
8-K
001-35449
10.1
05/12/2016
 
10.2*
8-K
001-14667
10.2
08/01/2018
 
10.3*
 
 
 
 
X
10.4*
8-K
001-14667
10.3
08/01/2018
 
10.5*
8-K
001-14667
10.4
08/01/2018
 
10.6*
8-K
001-14667
10.5
08/01/2018
 
10.7*
8-K
001-14667
10.6
08/01/2018
 
31.1




X

148

 
 
Incorporated by Reference
 
Exhibit Number
Description
Form
File No.
Exhibit
Filing Date
Filed or Furnished Herewith
31.2
 
 
 
 
X
32.1




X
32.2
 
 
 
 
X
101.INS
XBRL Instance Document




X
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
 
 
X
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document




X
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
X
101.LAB
XBRL Taxonomy Extension Label Linkbase Document




X
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
X
*  Management Contract or Compensatory Plan or Arrangement.


149

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
NATIONSTAR MORTGAGE HOLDINGS INC.
 
 
 
November 9, 2018
 
/s/ Jay Bray
Date
 
Jay Bray
Chief Executive Officer
(Principal Executive Officer)
 
 
 
November 9, 2018
 
/s/ Amar R. Patel
Date
 
Amar R. Patel
Chief Financial Officer
(Principal Financial and Accounting Officer)


150

Exhibit 3.2




AMENDED AND RESTATED
BYLAWS
OF
MR. COOPER GROUP INC.
(a Delaware corporation)








TABLE OF CONTENTS
Page
Article I OFFICES
1
1.1
Registered Office and Agent      1
1.2
Principal Offices      1
1.3
Other Offices      1
Article II MEETINGS OF STOCKHOLDERS
1
2.1
Annual Meeting      1
2.2
Special Meeting      2
2.3
Place of Meetings      5
2.4
Notice      5
2.5
Voting List      6
2.6
Quorum; Adjournment      6
2.7
Required Vote; Withdrawal of Quorum      6
2.8
Method of Voting; Proxies      7
2.9
Record Date      7
2.10
Conduct of Meeting      8
2.11
Inspectors      8
2.12
Approval of Corporate Action by Stockholders Without Meeting      9
2.13
Advance Notice by Stockholders of Nominations and Proposals of Business      12
Article III DIRECTORS
21
3.1
Management      21
3.2
Number; Qualification; Election; Term      21
3.3
Change in Number      21
3.4
Vacancies      21
3.5
Meetings of Directors      21
3.6
Annual Meeting      22
3.7
Regular Meetings      22
3.8
Special Meetings      22
3.9
Notice      22
3.10
Quorum; Majority Vote      22
3.11
Procedure      22
3.12
Compensation      23
3.13
Chairman of the Board      23
3.14
Action by Board or Committees Without Meeting      23
3.15
Removal      23
Article IV COMMITTEES
23
4.1
Designation      23
4.2
Number; Qualification; Term      23
4.3
Authority      24
4.4
Committee Changes      24
4.5
Regular Meetings      24
4.6
Special Meetings      24
4.7
Quorum; Majority Vote      24
4.8
Minutes      25



4.9
Compensation      25
4.10
Responsibility      25
Article V NOTICE
25
5.1
Method      25
5.2
Waiver      25
Article VI OFFICERS
26
6.1
Number; Titles; Term of Office      26
6.2
Removal      26
6.3
Vacancies      26
6.4
Authority      26
6.5
Compensation      26
6.6
Chief Executive Officer      26
6.7
President      26
6.8
Chief Financial Officer      27
6.9
Vice Presidents      27
6.10
Treasurer      27
6.11
Assistant Treasurers      27
6.12
Secretary      27
6.13
Assistant Secretaries      28
Article VII CERTIFICATES AND STOCKHOLDERS
28
7.1
Certificates for Shares      28
7.2
Replacement of Lost or Destroyed Certificates      28
7.3
Facsimile Signatures      29
7.4
Transfer of Shares      29
7.5
Registered Stockholders      29
7.6
Regulations      29
7.7
Legends      29
Article VIII INDEMNIFICATION/ADVANCEMENT OF EXPENSES
29
8.1
Nature of Indemnity      29
8.2
Advances for Expenses      30
8.3
Procedure for Indemnification and Advancement      30
8.4
Other Rights; Continuation of Right to Indemnification      31
8.5
Insurance      31
8.6
Savings Clause      31
Article IX MISCELLANEOUS PROVISIONS
31
9.1
Dividends      32
9.2
Reserves      32
9.3
Books and Records      32
9.4
Fiscal Year      32
9.5
Seal      32
9.6
Resignations      32
9.7
Securities of Other Corporations      32
9.8
Telephone Meetings      32
9.9
Treasury Regulation 1.382-3      32
9.10
Invalid Provisions      33
9.11
Mortgages, etc      33
9.12
Headings      33

ii

9.13
References      33
9.14
Exclusive Forum      33
9.15
Amendments      34


iii


AMENDED AND RESTATED
BYLAWS
OF
MR. COOPER GROUP INC.
(a Delaware corporation)
As Amended and Restated through November 5, 2018
PREAMBLE
These Amended and Restated Bylaws (as may be amended from time to time, these “ Bylaws ”) are subject to, and governed by, the General Corporation Law of the State of Delaware (“ DGCL ”) and the Amended and Restated Certificate of Incorporation (as may be amended and/or restated from time to time, the “ Charter ”) of Mr. Cooper Group Inc., a Delaware corporation (the “ Corporation ”). In the event of a direct conflict between the provisions of these Bylaws and the mandatory provisions of the DGCL or the Charter, such provisions of the DGCL or the Charter, as the case may be, shall control.

ARTICLE I
OFFICES

1.1     Registered Office and Agent . The registered office and registered agent of the Corporation shall be as designated from time to time by the appropriate filing by the Corporation in the office of the Secretary of State of the State of Delaware.

1.2     Principal Offices . The principal office for the transaction of the business of the Corporation shall be at such place as may be established by the board of directors of the Corporation (the “ Board ”), within or without the State of Delaware. The Board is granted full power and authority to change said principal office from one location to another.

1.3     Other Offices . The Corporation may also have offices at such other places, both within and without the State of Delaware, as the Board may from time to time determine or as the business of the Corporation may require.

ARTICLE II
MEETINGS OF STOCKHOLDERS

2.1     Annual Meeting . An annual meeting of stockholders of the Corporation shall be held on such date and at such time as shall be designated from time to time by the Board and stated in the notice of the meeting. At such meeting, the stockholders shall, subject to Article III hereof, elect directors and transact such other business as may properly be brought before the meeting in accordance with these Bylaws. The Board may, at any time prior to the holding of an annual meeting of stockholders and for any reason, postpone, reschedule or cancel any annual meeting of stockholders previously scheduled by the Board.


1

2.2     Special Meeting .
  
(a) A special meeting of the stockholders may be called at any time by the Chairman of the Board, the Lead Independent Director, if any, the President, or the Board, and shall be called by the President or the Secretary of the Corporation (the “ Secretary ”) at the request in writing of the stockholders of record of not less than ten percent (10%) of all shares entitled to vote at such meeting, if such stockholders comply with the procedures set forth in this Section 2.2 , or as otherwise provided by the Charter. Except as otherwise required by applicable law, only business within the purpose or purposes described in the notice of special meeting may be conducted at a special meeting of stockholders. For purposes hereof, a “ Meeting Requesting Person ” shall mean (i) the stockholder of record making the request to fix a Requested Record Date (as defined below) for the purpose of determining the stockholders entitled to request that the Secretary call a special meeting, (ii) the beneficial owner or beneficial owners, if different from the stockholder of record, on whose behalf such request is made, and (iii) any affiliate of such stockholder of record or beneficial owner(s). Any special meeting of the stockholders shall be held either within or without the State of Delaware, at such place, if any, and on such date and time, as shall be specified in the notice of such special meeting. The Board may, at any time prior to a special meeting of stockholders and for any reason, postpone, reschedule or cancel any special meeting of stockholders previously scheduled by the Board.

(b) No stockholder may request that the Secretary call a special meeting of stockholders pursuant to these Bylaws (a “ Stockholder Requested Special Meeting ”) unless a stockholder of record has first submitted a request in writing that the Board fix a record date (a “ Requested Record Date ”) for the purpose of determining stockholders entitled to request that the Secretary call such special meeting, which request shall be in proper form and delivered to the Secretary at the principal executive office of the Corporation. To be in proper form, such request shall:

(i) bear the signature and the date of signature by the stockholder of record submitting such request and set forth the name and address of such stockholder as they appear in the Corporation’s books;

(ii) include (A) a reasonably brief description of the purpose or purposes of the Stockholder Requested Special Meeting and the business proposed to be conducted at the Stockholder Requested Special Meeting (the “ Proposed Business ”) and (B) the reasons for conducting the Proposed Business at the Stockholder Requested Special Meeting; and

(iii) include, as to each item of Proposed Business and each Meeting Requesting Person and Stockholder Associated Person (as defined below), the information required to be set forth in a notice under Article II , Section 2.13 of these Bylaws as if such Proposed Business were to be considered at an annual meeting of stockholders, except that for purposes of this Section 2.2(b)(iii) , the term “Meeting Requesting Person” shall be substituted for the term “stockholder” in all places it appears in Article II , Section 2.13 of these Bylaws.

(c) Within 10 business days after the Secretary receives a request to fix a Requested Record Date in proper form and otherwise in compliance with this Section 2.2 from any stockholder of record, the Board may adopt a resolution fixing a Requested Record Date for the purpose of determining the stockholders entitled to request that the Secretary call a special meeting, which date shall not precede the date upon which the resolution fixing the Requested Record Date is adopted by the Board. Notwithstanding anything in this Section 2.2(c) to the contrary, no Requested Record Date shall be fixed if the Board determines that the request or requests that would otherwise be submitted following such

2

Requested Record Date could not comply with the requirements set forth in clause (ii) or (iv) of Section 2.2(e) below.

(d) Without qualification, a Stockholder Requested Special Meeting shall not be called unless one or more stockholders (such stockholders requesting such Stockholder Requested Special Meeting, or, if different from the stockholder of record, the beneficial owner or beneficial owners requesting such Stockholder Requested Special Meeting or any affiliate of such stockholder of record or beneficial owner(s), a “ Calling Person ”) owning as of the Requested Record Date not less than ten percent (10%) of all shares entitled to vote at such meeting (the “ Requisite Percentage ”) timely provide one or more requests to call such special meeting in writing and in proper form to the Secretary at the principal executive office of the Corporation. To be timely, a stockholder’s request to call a special meeting must be delivered to the Secretary at the principal executive office of the Corporation not later than the 60th day following the Requested Record Date. To be in proper form for purposes of this Section 2.2(d) , a request to call a special meeting shall include the signature and the date of signature by the stockholder submitting such request and set forth (i) if such stockholder is a stockholder of record, the name and address of such stockholder as they appear in the Corporation’s books and, if such stockholder is not a stockholder of record, the name and address of such stockholder, (ii) the Proposed Business, (iii) the reasons for conducting the Proposed Business at the Stockholder Requested Special Meeting and (iv) as to each item of Proposed Business and each Calling Person and Stockholder Associated Person (as defined below), except for any Solicited Stockholder (as defined below), the information required to be set forth in a notice under Article II , Section 2.13 of these Bylaws as if such Proposed Business were to be considered at an annual meeting of stockholders, except that for purposes of this Section 2.2(d)(iii) , the term “Calling Person” shall be substituted for the term “stockholder” in all places it appears in Article II , Section 2.13) of these Bylaws. For purposes hereof, “ Solicited Stockholder ” means any stockholder that has provided a request to call a special meeting in response to a solicitation made pursuant to, and in accordance with, Section 14 of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), and the rules and regulations promulgated thereunder by way of a definitive consent solicitation statement filed on Schedule 14A, and the term “ Special Meeting Request ” refers to a request to call a special meeting that is delivered to the Secretary by a stockholder as of the Requested Record Date and is timely and in proper form under this Section 2 .

(e) The Secretary shall not accept, and shall consider ineffective, any Special Meeting Request that (i) does not comply with this Section 2.2 , (ii) relates to an item of business proposed to be transacted at the special meeting that is not a proper subject for stockholder action under applicable law, (iii) includes an item of business proposed to be transacted at such meeting that did not appear on the written request that resulted in the determination of the Requested Record Date or (iv) otherwise does not comply with applicable law.

(f) A stockholder may revoke a Special Meeting Request by written revocation delivered to the Secretary at any time prior to the Stockholder Requested Special Meeting. If written revocation(s) of the Special Meeting Request have been delivered to the Secretary and the result is that (after giving effect to all revocations) stockholders holding less than the Requisite Percentage have delivered Special Meeting Requests to the Secretary: (i) if the notice of meeting has not already been mailed to stockholders, the Secretary shall refrain from mailing the notice of the Stockholder Requested Special Meeting or (ii) if the notice of meeting has already been mailed to stockholders, the Secretary shall revoke the notice of the meeting. If, subsequent to the refraining from mailing of the notice of meeting pursuant to clause (i) of the immediately preceding sentence or subsequent to the revocation of the notice of meeting pursuant to clause (ii) of the immediately preceding sentence, as applicable (but in any event on or prior to the 60th day after the Requested Record Date), the Secretary has received

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Special Meeting Requests from stockholders holding the Requisite Percentage, then, at the Board’s option, either (A) the original record date, meeting date and time, and location for the Stockholder Requested Special Meeting set in accordance with Section 2.2(g) below shall apply with respect to the Stockholder Requested Special Meeting or (B) the Board may disregard the original record date, meeting date and time, and location for the Stockholder Requested Special Meeting from those originally set in accordance with Section 2.2(g) below and, within 10 days following the date on which the Secretary has received the Special Meeting Requests from stockholders holding the Requisite Percentage, set a new record date, meeting date and time, and location for the Stockholder Requested Special Meeting (and in such case notice of the Stockholder Requested Special Meeting shall be given in accordance with Section 2.4 below).

(g) Subject to Section 2.2(f) above, within ten (10) days following the date on which the Secretary has received Special Meeting Requests in accordance with this Section 2.2 from stockholders holding the Requisite Percentage, the Board shall fix the record date, meeting date and time, and location for the Stockholder Requested Special Meeting; provided, however , that the date of any such Stockholder Requested Special Meeting shall not be more than 90 days after the date on which valid Special Meeting Requests from stockholders holding the Requisite Percentage are delivered to the Secretary (and are not revoked). Notwithstanding anything in these Bylaws to the contrary, the Board may submit its own proposal or proposals for consideration at any Stockholder Requested Special Meeting. Subject to Section 2.2(f) above, the record date for the Stockholder Requested Special Meeting shall be fixed in accordance with this Section 2.2(g) , and the Board shall provide notice of the Stockholder Requested Special Meeting in accordance with Section 2.4 below.

(h) In connection with a Stockholder Requested Special Meeting called in accordance with this Section 2.2 , the stockholders of record (except for any Solicited Stockholder) who requested that the Board fix a Requested Record Date in accordance with Section 2.2 or the stockholders who delivered a Special Meeting Request to the Secretary in accordance with this Section 2.2 shall further update the information previously provided to the Corporation in connection with such request, if necessary, so that the information provided or required to be provided in such request pursuant to this Section 2.2 remains true and correct as of the record date for stockholders entitled to vote at the Stockholder Requested Special Meeting and as of the date that is 10 business days prior to the Stockholder Requested Special Meeting or any adjournment or postponement thereof, and such update shall be delivered to the Secretary at the principal executive office of the Corporation not later than 5:00 p.m. Eastern Time five business days after the record date for stockholders entitled to vote at the Stockholder Requested Special Meeting (in the case of the update required to be made as of such record date) and not later than 5:00 p.m. Eastern Time seven business days prior to the date for the Stockholder Requested Special Meeting or, if practicable, any adjournment or postponement thereof (and, if not practicable, on the first practicable date prior to the date to which the Stockholder Requested Special Meeting has been adjourned or postponed) (in the case of the update required to be made as of ten business days prior to the Stockholder Requested Special Meeting or any adjournment or postponement thereof).

(i) Notwithstanding anything in these Bylaws to the contrary, the Secretary shall not be required to call a special meeting except in accordance with this Section 2.2 . If the Board determines that any request to fix a Requested Record Date or Special Meeting Request was not properly made in accordance with this Section 2.2 , or determines that the stockholders of record requesting that the Board fix such Requested Record Date or stockholders making the Special Meeting Request have not otherwise complied with this Section 2.2 , then the Board shall not be required to fix such Requested Record Date, to fix a special meeting record date or to call and hold a special meeting. In addition to the requirements of this Section 2.2 , each Meeting Requesting Person and stockholder making a Special Meeting Request

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shall comply with all requirements of applicable law, including all requirements of the Exchange Act, with respect to any request to fix a Requested Record Date or to call a special meeting.

2.3     Place of Meetings . An annual meeting of stockholders may be held at any place within or without the State of Delaware designated by the Board. A special meeting of stockholders may be held at any place within or without the State of Delaware designated in the notice of the meeting. Meetings of stockholders shall be held at the principal office of the Corporation unless another place is designated for meetings in the manner provided herein.

2.4     Notice . Notice stating the place, if any, date and time of each meeting of the stockholders, the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, the record date for determining the stockholders entitled to vote at the meeting, if such date is different from the record date for determining stockholders entitled to notice of the meeting, and, in case of a special meeting, the purpose or purposes for which the meeting is called shall, unless otherwise provided by law, the Charter or these Bylaws, be delivered not less than ten (10) nor more than sixty (60) days before the date of the meeting, to each stockholder of record entitled to vote at such meeting, as of the record date for determining the stockholders entitled to notice of the meeting. If such notice is to be sent by United States mail, it shall be directed to such stockholder at such stockholder’s address as it appears on the records of the Corporation, unless such stockholder shall have filed with the Secretary of the Corporation a written request that notices to such stockholder be mailed to some other address, in which case it shall be directed to such stockholder at such other address and such notice shall be deemed to have been given when deposited in the United States mail postage prepaid. Notice of any meeting of stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy and shall not, at the beginning of such meeting, object to the transaction of any business because the meeting is not lawfully called or convened, or who shall, either before or after the meeting, submit a signed waiver of notice, in person or by proxy. Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders may be given by electronic transmission in the manner provided in Section 232 of the DGCL.

2.5     Voting List . At least ten (10) days before each meeting of stockholders, the officer of the Corporation who has charge of the Corporation’s stock ledger shall prepare a complete list of stockholders entitled to vote thereat; provided, however , if the record date for determining the stockholders entitled to vote is less than ten (10) days before the date of the meeting, the list shall reflect the stockholders entitled to vote as of the tenth day before the meeting date, arranged in alphabetical order and showing the address of each stockholder and number of shares registered in the name of each stockholder. For a period of ten (10) days prior to such meeting, such list shall be available for inspection by any stockholder during ordinary business hours, at the principal place of business of the Corporation or on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of meeting. If the meeting is to be held at a place, then a list of stockholders entitled to vote at the meeting shall be produced and kept at the time and place of the meeting during the whole time thereof and may be examined by any stockholder who is present. If the meeting is to be held solely by means of remote communication, then the list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting. Such list shall be open to examination by any stockholder for any purpose germane to the meeting. Except as otherwise provided by law, the stock ledger shall be the only evidence as to who are the stockholders entitled to examine the list of stockholders required by this Section 2.5 or to vote in person or by proxy at any meeting of stockholders.

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2.6     Quorum; Adjournment . The holders of a majority in voting power of the outstanding shares entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum at any meeting of stockholders, except as otherwise provided by law, the Charter, or these Bylaws. Where a separate vote by a class or classes or series is required, a majority of the voting power of the shares of such class or classes or series present in person or represented by proxy shall constitute a quorum entitled to take action with respect to that vote on that matter. Regardless of whether a quorum shall be present, the presiding person of the meeting or the Board may adjourn any meeting of stockholders for any reason from time to time. Notice need not be given of the new date, time or place for the adjourned meeting if the new date, time or place is announced at the meeting before adjournment. If the adjournment is for more than thirty (30) days, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. If after the adjournment a new record date for determination of stockholders entitled to vote is fixed for the adjourned meeting, the Board shall fix as the record date for determining stockholders entitled to notice of such adjourned meeting the same or an earlier date as that fixed for determination of stockholders entitled to vote at the adjourned meeting, and shall give notice of the adjourned meeting to each stockholder of record as of the record date so fixed for notice of such adjourned meeting. At any adjourned meeting at which a quorum shall be present, in person or by proxy, any business may be transacted that may have been transacted at the original meeting had a quorum been present.

2.7     Required Vote; Withdrawal of Quorum . When a quorum is present at any meeting, the affirmative vote of the holders of at least a majority in voting power of the outstanding shares entitled to vote who are present, in person or by proxy, at the meeting and entitled to vote on the subject matter shall decide any question brought before such meeting, unless the question is one on which, by applicable law or any rule or regulation applicable to the Corporation or its stock, or under an express provision of the Charter or these Bylaws, a minimum or different vote is required, in which case the other or minimum vote required under such applicable law, rule or regulation, or such express provision shall be the vote required on such question. Once a share is represented for any purpose at a meeting other than solely to object, at the beginning of the meeting, to holding the meeting or transacting business at the meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for that adjourned meeting.

2.8     Method of Voting; Proxies . Except as otherwise provided in the Charter or by law, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of stockholders. Elections of directors need not be by written ballot. At any meeting of stockholders, every stockholder having the right to vote may vote either in person or by a proxy executed in writing by the stockholder or transmitted by the stockholder as permitted by law, including, without limitation, electronically, via telegram, internet, interactive voice response system, or other means of electronic transmission executed or authorized by such stockholder or by such stockholder’s duly authorized attorney-in-fact. Each such proxy shall be filed with the Secretary of the Corporation before or at the time the polls are closed on the matters to be voted on at the meeting. Any such proxy transmitted electronically shall set forth information from which it can be determined by the Secretary of the Corporation that such electronic transmission was authorized by the stockholder. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. Each proxy shall be revocable unless expressly provided therein to be irrevocable and coupled with an interest sufficient in law to support an irrevocable power or unless otherwise made irrevocable by law.

2.9     Record Date . For the purpose of determining stockholders entitled to notice of any meeting of stockholders (other than a Stockholder Requested Special Meeting), or any adjournment or

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postponement thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion, or exchange of stock or for the purpose of any other lawful action (other than stockholder action by written consent, which is governed by Section 2.12 hereof), the Board may fix a record date, for any such determination of stockholders, such date in any case to be not more than sixty (60) days before the date of such meeting or action, and, in the case of a record date for a meeting, not less than ten (10) days prior to such meeting. If the Board so fixes a record date for a meeting, such date shall also be the record date for determining the stockholders entitled to vote at such meeting unless the Board determines, at the time it fixes such record date, that a later date on or before the date of the meeting shall be the date for making such determination. If no record date is fixed:

(a)    The record date for determining stockholders entitled to notice of a meeting of stockholders shall be at 5:00 p.m. Eastern Time on the day next preceding the day on which notice is given or, if notice is waived, at 5:00 p.m. Eastern Time on the day next preceding the day on which the meeting is held.

(b)    The record date for determining stockholders for any other purpose shall be at 5:00 p.m. Eastern Time on the day on which the Board adopts the resolution relating thereto.

(c)    A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however , that the Board may fix a new record date for the adjourned meeting.

2.10     Conduct of Meeting . At every meeting of stockholders the presiding person shall be the Chairman of the Board or, in the event of their absence or disability, the Lead Independent Director, if any, or, in the event of their absence or disability, a presiding person chosen by resolution of the Board. The Secretary, or in the event of his or her absence or disability, the Assistant Secretary, if any, or if there is no Assistant Secretary, in the absence of the Secretary, an appointee of the presiding person shall act as secretary of the meeting. The Board may adopt by resolution such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to any such rules and regulations, the presiding person of any meeting shall have the right and authority to convene and to recess and/or adjourn the meeting, to prescribe rules, regulations and procedures for such meeting and to take all such actions as in the judgment of the presiding person are appropriate for the proper conduct of such meetings. Such rules, regulations or procedures, whether adopted by the Board or prescribed by the presiding person of the meeting, may include, without limitation, the following: (a) the establishment of an agenda or order of business for the meeting; (b) rules and procedures for maintaining order at the meeting and the safety of those present; (c) limitations on attendance at or participation in the meeting to stockholders of record of the Corporation, such stockholders duly authorized and constituted proxies or such other persons as the presiding person of the meeting shall determine; (d) restrictions on entry to the meeting after the time fixed for the commencement thereof; (e) limiting the time allotted to questions or comments; (f) determining when and for how long the polls should be opened and when the polls should be closed; (g) maintaining order and security at the meeting; (h) removing any stockholder or any other individual who refuses to comply with meeting procedures, rules or guidelines as set forth by the presiding person of the meeting; (i) concluding the meeting or recessing or adjourning the meeting, whether or not a quorum is present, to a later date and time and at a place announced at the meeting; (j) restricting the use of audio/video recording devices and cell phones; and (k) complying with any state and local laws and regulations concerning safety and security. The presiding person at any meeting of stockholders, in addition to making any other determinations that may be appropriate to the conduct of the meeting, shall determine and declare to the meeting that a

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matter or business was not properly brought before the meeting and, if such presiding person should so determine, such presiding person shall so declare to the meeting and any such matter of business not properly brought before the meeting shall not be transacted or considered. Unless and to the extent determined by the Board or the person presiding over the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure.

2.11     Inspectors . The Board or the Chairman of the Board may, and shall if required by law, in advance of any meeting of stockholders, appoint one or more inspectors to act at such meeting or any adjournment thereof. If any of the inspectors so appointed shall fail to appear or act, the presiding person of the meeting shall, or if inspectors shall not have been appointed, the presiding person of the meeting may, appoint one or more inspectors. Each inspector, before entering upon the discharge of such inspector’s duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of such inspector’s ability. The inspectors shall determine the number of shares represented at the meeting, the existence of a quorum and the authenticity and validity of proxies and ballots and shall receive votes, ballots, or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots, or consents, determine the results, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the presiding person of the meeting, the inspectors shall make a report in writing of any challenge, request, or matter determined by them and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as an inspector of an election of directors. Inspectors need not be stockholders.

2.12     Approval of Corporate Action by Stockholders Without Meeting .

(a)    Unless otherwise restricted by the Charter, any action required or permitted to be taken at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and if the procedures set forth in this Section 2.12 shall have been complied with and such consent or consents shall be delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which minutes of proceedings of stockholders are recorded. Delivery made to the Corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested. Prompt notice of the taking of corporate action without a meeting by less than unanimous written consent shall, to the extent required by law, be given to those stockholders who have not consented in writing and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for notice of such meeting had been the date that written consents signed by a sufficient number of holders to take the action were delivered to the Corporation.

(b)    In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board may fix a record date (the “ Consent Record Date ”), which date shall not precede the date upon which the resolution fixing the Consent Record Date is adopted by the Board, and which date shall not be more than 10 days after the date upon which the resolution fixing the Consent Record Date is adopted by the Board. Any stockholder seeking to have the stockholders authorize or take corporate action by written consent (a “ Stockholder Requested Consent Solicitation ”) shall, by written notice to the Secretary at the principal executive offices of the Corporation, first request the Board to fix a Consent Record Date for such purpose, which request shall be in proper

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form as provided in Article II , Section 2.12(c) of these Bylaws. The Board shall promptly, but in all events within 10 days after the date on which such a request is received or five days after delivery of any information requested by the Corporation to determine the validity of any such request or whether the action to which such request relates is an action that may be taken by written consent of stockholders in lieu of a meeting, determine the validity of such request and whether such request relates to an action that may be taken by written consent of the stockholders in lieu of a meeting under this Section 2.12(b) and applicable law. If such request is valid, the Board may adopt a resolution fixing the Consent Record Date (unless a Consent Record Date has previously been fixed by the Board pursuant to the first sentence of this Section 2.12(b) ). If (i) the request required by this Section 2.12(b) has been determined by the Board to be valid and to relate to an action that may be effected by written consent in accordance with this Section 2.12 and applicable law or (ii) no such determination shall have been made by the date required by this Section 2.12(b) , and in either event no Consent Record Date has been fixed by the Board, the Consent Record Date shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation in accordance with Article II , Section 2.12(d) of these Bylaws. If no Consent Record Date has been fixed by the Board and prior action by the Board is required by applicable law, the Consent Record Date shall be at 5:00 p.m. Eastern Time on the date on which the Board adopts the resolution taking such prior action. For purposes hereof, a “ Consent Requesting Person ” shall mean (x) the stockholder or stockholders of record making the request to fix a Consent Record Date, (y) the beneficial owner or beneficial owners, if different from the stockholder of record, on whose behalf such request is made and (z) any affiliate of such stockholder of record or beneficial owner(s).

(c)    To be in proper form for purposes of Article II , Section 2.12(b) of these Bylaws, a request by a stockholder for the Board to fix a Consent Record Date shall set forth the action proposed to be taken by written consent of stockholders in lieu of a meeting and, as to each matter to be submitted for stockholder action by written consent in the Stockholder Requested Consent Solicitation and each Consent Requesting Person and Stockholder Associated Person (as defined below), include any other information required to be set forth in a notice under Article II , Section 2.1 3 of these Bylaws as if such matter were to be considered at an annual meeting of stockholders, except that for purposes of this Section 2.12(c)(iii) , the term “Consent Requesting Person” shall be substituted for the term “stockholder” in all places it appears in Article II , Section 2.1 3 of these Bylaws. Notwithstanding anything to the contrary contained in this Section 2.12(c) , upon receipt of a request by a stockholder to set a record date in order to have stockholders authorize or take corporate action by written consent, the Board may require the stockholder(s) submitting such request to furnish such other information as may be requested by the Board to determine the validity of the request required by this Section 2.12(c) and to determine whether such request relates to an action that may be effected by written consent of stockholders in lieu of a meeting under this Section 2.12 and applicable law and any other information that could be material to the stockholders.

(d)    The Secretary shall not accept, and shall consider ineffective, any request to set a Consent Record Date that (i) does not comply with this Section 2.12 , (ii) relates to an action proposed to be taken by written consent of stockholders in lieu of a meeting that is not a proper subject for stockholder action under applicable law, (iii) includes an action proposed to be taken by written consent of stockholders in lieu of a meeting that did not appear on the written request that resulted in the determination of the Consent Record Date or (iv) otherwise does not comply with applicable law. Notwithstanding anything in these Bylaws to the contrary, if the Board determines that any request to fix a Consent Record Date was not properly made in accordance with this Section 2.12 , or determines that the stockholders of record requesting that the Board fix such Consent Record Date have not otherwise complied with this Section 2.12 , then the Board shall not be required to fix such Consent Record Date.

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(e)    Every written consent pursuant to this Section 2.12 shall bear the date of signature of each stockholder who shall sign such consent and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the date of the earliest dated consent delivered to the Corporation in the manner required by this Section 2.12 , written consents signed by a sufficient number of stockholders to take action shall be delivered to the Corporation by delivery to its registered office in the State of Delaware, to its principal place of business or to an officer or agent of the Corporation having custody of the book in which proceedings of meetings of the stockholders are recorded. Delivery of written consents under this Section 2.12 shall be by hand or by certified or registered mail, return receipt requested.

(f)    In the event of the delivery to the Corporation of a written consent or consents purporting to represent the requisite voting power to authorize or take corporate action and/or related revocations, the Secretary of the Corporation shall provide for the safekeeping of such consents and revocations and shall promptly engage nationally recognized independent inspectors of election for the purpose of promptly performing a ministerial review of the validity of the consents and revocations. No action by written consent without a meeting shall be effective until such inspectors of election have completed their review, determined that the requisite number of valid and unrevoked consents has been obtained to authorize or take the action specified in the consents and certified such determination for entry in the records of the Corporation kept for the purpose of recording the proceedings of meetings of stockholders.

(g)    Any stockholder seeking an action proposed to be taken by written consent shall further update the information previously provided by such stockholder to the Corporation in connection therewith, if necessary, so that the information provided or required to be provided pursuant to this Section 2.12 shall be true and correct (i) as of the record date for determining the stockholders eligible to take such action and (ii) as of the date that is 10 days prior to the date the consent solicitation is commenced. Such update shall be delivered to, or mailed and received by, the Secretary of the Corporation at the principal executive office of the Corporation not later than 5:00 p.m. Eastern Time five business days after the Consent Record Date (in the case of the update required to be made as of the record date) and not later than five business days prior to the date that the consent solicitation is commenced (in the case of the update required to be made as of 10 business days prior to the date the consent solicitation is commenced). Any stockholder giving a written consent, or the stockholder’s proxy holder, may revoke the consent in any manner permitted by applicable law.

(h)    In addition to the requirements of this Section 2.12 , each Consent Requesting Person shall comply with all requirements of applicable law, including all requirements of the Exchange Act, with respect to any Stockholder Requested Consent Solicitation. Notwithstanding anything in these Bylaws to the contrary, any action by written consent of stockholders in lieu of the meeting that does not comply with the requirements of this Section 1.11 shall be considered invalid and the Secretary shall not accept, and shall consider ineffective, any consents delivered to the Corporation in connection therewith.

(i)    Notwithstanding anything to the contrary set forth above, (i) none of this Section 2.12 shall apply to any solicitation of stockholder action by written consent in lieu of a meeting by or at the direction of the Board and (ii) the Board shall be entitled to solicit stockholder action by written consent in accordance with applicable law.


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2.13     Advance Notice by Stockholders of Nominations and Proposals of Business
.
(a)     Annual Meetings of Stockholders .

(i) Nominations of persons for election to the Board and proposals of business to be transacted by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the Corporation’s proxy materials with respect to such meeting (or any supplement thereto), (ii) by or at the direction of the Board, or (iii) by any stockholder of the Corporation who is a stockholder of record at the time of the giving of the notice required in Section 2.13(b ) through the date of such stockholder meeting, who is entitled to vote at such meeting and who has complied with the notice procedures set forth in this Section 2.13 . The foregoing clause (iii) shall be the exclusive means for a stockholder to make nominations or propose business (other than matters included in the Corporation’s proxy materials pursuant to Rule 14a-8 or Rule 14a-11 under the Exchange Act) at a meeting of stockholders.

(ii) In order to assure that stockholders and the Corporation have a reasonable opportunity to consider nominations and other business proposed to be brought before a meeting of stockholders and to allow for full information to be distributed to stockholders, a stockholder properly may bring nominations or other business before an annual meeting of stockholders only if (i) the stockholder has given timely notice thereof in writing to the Secretary of the Corporation, and (ii) any such business (other than the nominations for persons for election to the Board) is a proper matter for stockholder action under the DGCL. To be timely, a stockholder’s notice must be received by the Secretary at the principal executive offices of the Corporation not earlier than 5:00 p.m. Eastern Time on the 120th calendar day, and not later than 5:00 p.m. Eastern Time on the 90th calendar day prior to the one-year anniversary of the date on which the Corporation’s proxy statement was released to stockholders in connection with the previous year’s annual meeting of stockholders; provided, however , that, subject to the last sentence of this subsection (b), if the meeting is convened more than thirty (30) days prior to or delayed by more than seventy (70) days after the anniversary of the preceding year’s annual meeting, or if no annual meeting was held in the preceding year, notice by the stockholder to be timely must be received not later than 5:00 p.m. Eastern Time on the later of the ninetieth day before such annual meeting, and the tenth (10th) day following the day on which public disclosure of the date of such meeting is first made. In no event shall an adjournment or postponement of an annual meeting for which notice has been given commence a new time period (or extend any time period) for the giving of a stockholder’s notice.

(iii) Such stockholder’s notice shall set forth:

(A) as to each individual whom the stockholder proposes to nominate for election or reelection as a director (each, a “ Proposed Nominee ”), if any:

(I) the name, age, business address and residence address of such Proposed Nominee;

(II) the principal occupation and employment of such Proposed Nominee;


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(III) a written questionnaire with respect to the background and qualification of such Proposed Nominee completed by the Proposed Nominee in the form required by the Corporation (which form the stockholder shall request in writing from the Secretary and which the Secretary shall provide to such stockholder within ten (10) days of receiving such request);

(IV) such Proposed Nominee’s executed written consent to being named in the proxy statement as a nominee;

(V) such Proposed Nominee’s written representation and agreement in the form required by the Corporation (which form the stockholder shall request in writing from the Secretary and which the Secretary shall provide to such stockholder within ten (10) days of receiving such request) that: (1) such Proposed Nominee is not and will not become party to any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how such person, if elected as a director of the Corporation, will act or vote on any issue or question (a “ Voting Commitment ”) that has not been disclosed to the Corporation or any Voting Commitment that could limit or interfere with such person’s ability to comply, if elected as a director of the Corporation, with such person’s fiduciary duties under applicable law; (2) such Proposed Nominee is not and will not become a party to any agreement, arrangement, or understanding with any person or entity other than the Corporation with respect to any direct or indirect compensation, reimbursement, or indemnification in connection with service or action as a director that has not been disclosed to the Corporation; (3) such Proposed Nominee would, if elected as a director, comply with applicable law of the exchanges upon which the Corporation’s shares of common stock trade, all of the Corporation’s corporate governance, ethics, conflict of interest, confidentiality and stock ownership and trading policies and guidelines applicable generally to the Corporation’s directors, and applicable fiduciary duties under state law and, if elected as a director of the Corporation, such person currently would be in compliance with any such policies and guidelines that have been publicly disclosed; (4) such Proposed Nominee intends to serve a full term if elected as a director of the Corporation; and (5) such Proposed Nominee will provide facts, statements and other information in all communications with the Corporation and its stockholders that are or will be true and correct in all material respects, and that do not and will not omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading;

(VI) all information relating to such person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with the solicitation of proxies for the election of directors in a Contested Election (as defined below), or may otherwise be required, pursuant to Section 14 of the Exchange Act (or pursuant to any law or statute replacing such section), and the rules and regulations promulgated thereunder; and

(VII) a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the

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past three years, and any other material relationships, between or among such person being nominated, on the one hand, and the stockholder and any Stockholder Associated Person, on the other hand, including, without limitation all information that would be required to be disclosed pursuant to Item 404 promulgated under Regulation S-K if the stockholder making the nomination and any Stockholder Associated Person were the “registrant” for purposes of such rule and the person being nominated were a director or executive officer of such registrant;

(B) as to each matter the stockholder proposes to bring before the meeting:

(I) a brief description of the business desired to be brought before the meeting;

(II) the text of the proposal (including the complete text of any resolutions proposed for consideration and, in the event that such business includes a proposal to amend any incorporation document, including, but not limited to, the Charter or these Bylaws, the language of the proposed amendment); and

(III) a complete and accurate description of any material interest in such business of each stockholder and any Stockholder Associated Person (as defined below), individually or in the aggregate, including any anticipated benefit to the stockholder and any Stockholder Associated Person therefrom, and all other information related to such proposed business that would be required to be disclosed in a proxy statement or other filing required to be made by the stockholder or any Stockholder Associated Person in connection with the solicitation of proxies or consents in support of such proposed business by such stockholder or any Stockholder Associated Person pursuant to Regulation 14A under the Exchange Act;

(C) as to the stockholder giving notice, any Proposed Nominee and any Stockholder Associated Person (as defined below):

(I) the name and record address of such stockholder, Proposed Nominee and Stockholder Associated Person (including, if applicable, as they appear on the Corporation’s books and records);

(II) the class and series and number of shares of each class and series of capital stock of the Corporation which are, directly or indirectly, owned beneficially and/or of record by such stockholder, any Proposed Nominee or any Stockholder Associated Person, and the date or dates such shares were acquired and the investment intent of such acquisition;

(III) the nominee holder for, and number of, any Corporation securities owned beneficially but not of record by such stockholder, Proposed Nominee or Stockholder Associated Person;


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(IV) short interest of such stockholder, Proposed Nominee or Stockholder Associated Person in any security of the Corporation (for purposes of these Bylaws, a person shall be deemed to have a short interest in a security if such person, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has the opportunity to profit or share in any profit derived from any decrease in the value of the subject security);

(V) a complete and accurate description of all agreements, arrangements or understandings (whether written or oral) (including any derivative or short positions, profit interests, options, warrants, convertible securities, stock appreciation or similar rights with an exercise or conversion privilege or a settlement payment or mechanism at a price related to any class or series of capital stock of the Corporation or with a value derived in whole or in part from the value of any class or series of capital stock of the Corporation, hedging transactions, and borrowed or loaned shares) (a “ Derivative Instrument ”), that have been entered into as of the date of the stockholder’s notice or any supplement thereto by, or on behalf of, such stockholder, Proposed Nominee or Stockholder Associated Person, whether or not such instrument or right shall be subject to settlement in underlying shares of capital stock of the Corporation;

(VI) any rights to dividends on the shares of the Corporation owned beneficially by such stockholder, Proposed Nominee or Stockholder Associated Person;

(VII) any proportionate interest in shares of capital stock of the Corporation or Derivative Instruments held, directly or indirectly, by a general or limited partnership or similar entity in which such stockholder, Proposed Nominee or Stockholder Associated Person (1) is a general partner or, directly or indirectly, beneficially owns an interest in a general partner, or (2) is the manager, managing member or, directly or indirectly, beneficially owns an interest in the manager or managing member of a limited liability company or similar entity;

(VIII) any substantial interest, direct or indirect (including, without limitation, any existing or prospective commercial, business or contractual relationship with the Corporation), by security holdings or otherwise, of such stockholder, Proposed Nominee or Stockholder Associated Person, in the Corporation or any affiliate thereof, other than an interest arising from the ownership of Company securities where such stockholder, Proposed Nominee or Stockholder Associated Person receives no extra or special benefit not shared on a pro rata basis by all other holders of the same class or series;

(IX) a complete and accurate description of all agreements, arrangements or understandings, written or oral, and formal or informal, (1) between or among the stockholder giving the notice and any of the Stockholder Associated Persons or (2) between or among the stockholder giving the notice or any of the Stockholder Associated Persons and any other person or entity (naming each such person or entity) in connection with or related to the foregoing or any Proposed Nominee, including without limitation (x) any proxy, contract, arrangement, understanding or relationship pursuant to which such proposing

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stockholder or Stockholder Associated Person has the right to vote any shares of any security of the Corporation; (y) any understanding, formal or informal, written or oral, that the stockholder giving the notice or any of the Stockholder Associated Persons may have reached with any stockholder of the Corporation (including their names) with respect to how such stockholder will vote its shares in the Corporation at any meeting of the Corporation’s stockholders or take other action in support of any Proposed Nominee, or other action to be taken, by the proposing stockholder or any of the Stockholder Associated Persons, and (z) any other agreements that would be required to be disclosed by the stockholder giving the notice or any Stockholder Associated Person or any other person or entity pursuant to Item 5 or Item 6 of a Schedule 13D that would be filed pursuant to the Exchange Act and the rules and regulations promulgated thereunder (regardless of whether the requirement to file a Schedule 13D is applicable to the stockholder giving the notice, or any Proposed Nominee or any Stockholder Associated Person or other person or entity);

(X) a complete and accurate description of any performance-related fees (other than an asset-based fee) to which any such stockholder, Proposed Nominee or Stockholder Associated Person may be entitled as a result of any increase or decrease in the value of shares of the Corporation or any Derivative Instruments; and

(XI) the investment strategy or objective, if any, of such stockholder and each such Stockholder Associated Person who is not an individual and a copy of the prospectus, offering memorandum or similar document, if any, provided to investors or potential investors in such stockholder and each such Stockholder Associated Person;

(D) a complete and accurate description of any pending or, to such stockholder’s knowledge, threatened legal proceeding in which such stockholder, any Proposed Nominee or any Stockholder Associated Person is a party or participant involving the Corporation or any officer, affiliate or associate of the Corporation;

(E) a representation from the stockholder as to whether the stockholder or any Stockholder Associated Person intends or is part of a group which intends (I) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation’s outstanding capital stock required to approve or adopt the proposal and/or (II) otherwise to solicit proxies in support of such proposal;

(F) a representation from the stockholder as to whether the stockholder or any Stockholder Associated Person intends or is part of a group which intends (I) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation’s outstanding capital stock required to elect the Proposed Nominee and/or (II) otherwise to solicit proxies in support of such Proposed Nominee;

(G) whether and the extent to which any agreement, arrangement or understanding has been made, the effect or intent of which is to increase or decrease the voting power of such stockholder or such Stockholder Associated Person with respect to any shares of the capital stock of the Corporation, without regard to whether such

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transaction is required to be reported on a Schedule 13D in accordance with the Exchange Act;

(H) such other information regarding each matter of business to be proposed by such stockholder, regarding the stockholder in his or her capacity as a proponent of a stockholder proposal, or regarding any Stockholder Associated Person, that would be required to be disclosed in a proxy statement or other filings required to be made in connection with the solicitations of proxies for such business or the election of any Proposed Nominee, or is otherwise required, pursuant to Section 14 of the Exchange Act (or pursuant to any law or statute amending, restating or replacing such section) and the rules and regulations promulgated thereunder;

(I) a representation that such stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting, that such stockholder intends to vote such stock at such meeting, and that such stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting, and an acknowledgment that, if such stockholder does not appear to present such proposal at such annual meeting, the Corporation need not present such proposal for a vote at such meeting, notwithstanding that proxies in respect of such vote may have been received by the Corporation; and

(J) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to nominate any Proposed Nominees, and an acknowledgment that if such stockholder does not appear to present such any such Proposed Nominees at such annual meeting, the Corporation need not present such nominee for a vote at such meeting, notwithstanding that proxies in respect of such vote may have been received by the Corporation.

In addition to the information required above, the Corporation may require any Proposed Nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such Proposed Nominee to serve as an independent director of the Corporation or that could be material to a reasonable stockholder’s understanding of the independence, or lack thereof, of such nominee, under the listing standards of each principal securities exchange upon which the shares of the Corporation are listed, any applicable rules of the Securities and Exchange Commission and any publicly disclosed standards used by the Board in determining and disclosing the independence of the Corporation’s directors, including those applicable to a director’s service on any of the committees of the Board.
(b)     Special Meeting of Stockholders. Only such business as shall have been brought before the special meeting of the stockholders pursuant to the Corporation’s notice of meeting shall be conducted at such meeting. Nominations of persons for election to the Board may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation’s notice of meeting (i) by or at the direction of the Board or a committee appointed by the Board for such purpose or (ii) provided that the Board has determined that the directors shall be elected at such meeting, by any stockholder of the Corporation who is entitled to vote at the meeting, who complies with the notice procedures set forth in these Bylaws and who is a stockholder of record at the time such notice is delivered to the Secretary of the Corporation. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors of the Corporation, any stockholder entitled to vote at such

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meeting may nominate a person or persons, as the case may be, for election to such position(s) as specified by the Corporation, if the stockholder’s notice including all information required to be set forth in a notice for the nomination of a director under this Section 2.13 shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not earlier than the one-hundred twenty (120) days prior to such special meeting and not later than 5:00 pm Eastern Time ninety (90) days prior to such special meeting or, if public disclosure of the date of the special meeting and of the nominees proposed by the Board to be elected at such meeting is first made less than ninety (90) days prior to the date of the special meeting, the tenth (10th) day following the day on which such public disclosure is first made.

(c)     General .

(i) Except as provided in this Section 2.13 , a person shall not be eligible for election or reelection as a director at an annual meeting unless the person is nominated by a stockholder in accordance with this Section 2.13 or the person is nominated by or at the direction of the Board, and no business shall be conducted at an annual or special meeting except business brought in accordance with the procedures set forth in this Section 2.13 . Except as otherwise required by law, the Charter or these Bylaws, the Chairman of the Board or other person presiding the meeting shall have the power and the duty to determine whether a nomination or any business proposed to be brought before the meeting has been made in accordance with the procedures set forth in these Bylaws and, if any proposed nomination or business is not in compliance with these Bylaws, to declare that such defectively proposed business or nomination shall not be presented for stockholder action at the meeting and shall be disregarded. Notwithstanding the foregoing provisions of this Section 2.13 , if the stockholder (or a qualified representative of the stockholder) proposing a nominee for director or business to be conducted at a meeting does not appear at the meeting of stockholders of the Corporation to present such nomination or business, such nomination shall be disregarded and such proposed business shall not be transacted, notwithstanding that proxies in respect of such vote may have been received by the Corporation.

(ii) A stockholder providing notice under this Section 2.13 shall update such notice, if necessary, so that the information provided or required to be provided in such notice shall continue to be true and correct (A) as of the record date for the meeting and (B) as of the date that is ten (10) business days prior to the meeting (or any postponement, adjournment or recess thereof), and such update shall be delivered to, or mailed and received by, the Secretary of the Corporation at the principal executive office of the Corporation not later than five (5) business days after the record date for the meeting (in the case of an update required to be made as of the record date) and not later than seven business days prior to the date for the meeting, if practicable or, if not practicable, on the first practicable date prior to the special meeting or any adjournment, recess or postponement thereof (in the case of an update required to be made as of ten (10) business days prior to the meeting or any adjournment, recess or postponement thereof).

(iii) If any information submitted pursuant to this Section 2.13. by any stockholder proposing business for consideration or individuals to nominate for election or reelection as a director at an annual meeting shall be inaccurate in any respect, such information may be deemed not to have been provided in accordance with these Bylaws. Any such stockholder shall notify the Corporation of any inaccuracy or change in any such information within two business days of becoming aware of such inaccuracy or change. Upon written request by the Secretary, the Board or any committee thereof, any such stockholder shall provide, within seven business days of delivery of such request (or such other period as may be specified in such request), (A) written

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verification, reasonably satisfactory to the Board, any committee thereof or any authorized officer of the Corporation, to demonstrate the accuracy of any information submitted by the stockholder pursuant to this Bylaw, and (B) a written update of any information (including written confirmation by such stockholder that it continues to intend to bring such nomination or other business proposal before the meeting) submitted by the stockholder pursuant to this Section 2.13 as of an earlier date. If a stockholder fails to provide such written verification within such period, the information as to which written verification was requested may be deemed not to have been provided in accordance with this Section 2.13 .

(iv) Notwithstanding the foregoing provisions of this Section 2.13 , a stockholder shall also comply with all applicable requirements of state law and all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to matters set forth herein, provided , however , that any references in these Bylaws to the Exchange Act or the rules promulgated thereunder are not intended to and shall not limit the requirements applicable to stockholder proposals to be considered pursuant to this Section 2.13 .

(v) Nothing in this Section 2.13 shall be deemed to affect any rights (A) of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act or (B) of stockholders to request inclusion of nominees in the Corporation’s proxy statement pursuant to Rule 14a-11 under the Exchange Act or (C) of the holders of any series of Preferred Stock to elect directors pursuant to any applicable provisions of the Charter. Subject to Rule 14a-8 and Rule 14a-11 under the Exchange Act, nothing in these Bylaws shall be construed to permit any stockholder, or give any stockholder the right, to include or have disseminated or described in the Corporation’s proxy statement any nomination of a director or directors or any other business proposal.

(vi) As used in these Bylaws, including this Section 2.13 , (A) an “ affiliate ” and “ associate ” each have the respective meanings set forth in Rule 12b-2 under the Exchange Act; (B) “ Stockholder Associated Person ” shall mean (I) any person who is a member of a “group” (as such term is used in Rule 13d‑5 of the Exchange Act) with or otherwise acting in concert with such stockholder, (II) any beneficial owner of shares of stock of the Corporation owned of record or beneficially by such stockholder (other than a stockholder that is a depositary), (III) any person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such stockholder or such Stockholder Associated Person and beneficially owns, directly or indirectly, shares of stock of the Corporation, (IV) any person that directly, or indirectly through one or more intermediaries, controls such stockholder or any Stockholder Associated Person and (V) any participant (as defined in paragraphs (a)(ii)‑(vi) of Instruction 3 to Item 4 of Schedule 14A, or any successor instructions) with such stockholder or other Stockholder Associated Person in respect of any proposals or nominations, as applicable; and (C) “ public disclosure ” shall be deemed to include a disclosure made in a press release reported by a national news service, in a document filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act, or in a notice pursuant to the applicable rules of an exchange on which the securities of the Corporation are listed.


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ARTICLE III
DIRECTORS

3.1Management . The business and affairs of the Corporation shall be managed by or under the direction of the Board. The Board may exercise all such authority and powers of the Corporation and do all such lawful acts and things as are not by statute or the Charter directed or required to be exercised or done solely by the stockholders.

3.2     Number; Qualification; Election; Term . The number of directors that shall constitute the entire Board shall not be more than eleven (11), or such greater number as may be determined by the Board. Except as otherwise provided by the Bylaws or the Charter, the directors shall be elected at each annual meeting of stockholders at which a quorum is present. Directors shall be elected by a majority of the votes cast (as defined below) by the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors, provided , however , that directors shall be elected by a plurality of the votes cast by the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors for which (a) the Secretary receives a notice that a stockholder has nominated one or more candidates for election to the Board in compliance with the requirements set forth in these Bylaws; and (b) such nomination has not been withdrawn by such stockholder on or prior to the tenth (10th) day preceding the date that the Corporation first mails its notice of meeting for such meeting to the stockholders. The term “votes cast” includes votes to withhold authority in each case but excludes abstentions and broker non-votes with respect to a director’s election. Each director elected at an annual meeting of stockholders shall hold office until the date of the subsequent annual meeting following the annual meeting at which such director was elected or, if earlier, until such director’s death, resignation, or removal from office. None of the directors need be a stockholder of the Corporation or a resident of the State of Delaware. Each director must have attained the age of majority.

3.3     Change in Number . No decrease in the number of directors constituting the entire Board shall have the effect of shortening the term of any incumbent director.
3.4     Vacancies . Except as otherwise provided in the Charter or these Bylaws, newly created directorships resulting from any vacancies on the Board resulting from death, resignation, retirement, disqualification, removal from office or any other cause shall, unless otherwise required by the DGCL, be filled only by the Board, provided that if the directors then in office constitute less than a quorum of the Board, they may fill the vacancy by the affirmative vote of a majority of the directors then in office.

3.5     Meetings of Directors . The directors may hold their meetings and may have an office and keep the books of the Corporation, except as otherwise provided by statute, in such place or places within or without the State of Delaware as the Board may from time to time determine or as shall be specified in the notice of such meeting or duly executed waiver of notice of such meeting.

3.6     Annual Meeting . The annual meeting of the Board for the purpose of organization, the election of officers and the transaction of other business may be held on the same day and at the same place as the annual meeting of stockholders or at such other time and place (within or without the State of Delaware) as shall be specified in a notice of the annual meeting of the Board given as hereinafter provided in Section 3.9 of this Article III .

3.7     Regular Meetings . Regular meetings of the Board shall be held at such times and places, if any, as shall be designated from time to time by resolution of the Board.


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3.8     Special Meetings . Special meetings of the Board shall be held whenever called by the Chairman of the Board, the Lead Independent Director (if any), the President, or the Secretary. In addition, if the Board has appointed a Lead Independent Director, then the Lead Independent Director may convene a meeting of the independent directors or non-management members of the Board.

3.9     Notice . The Secretary shall give notice of each annual, regular or special meeting of the Board to each director for which notice is required, at least (i) twenty-four (24) hours before the meeting if by telephone or by being personally delivered or sent by telex, telecopy, electronic transmission or similar means or (ii) five (5) days before the meeting if delivered by mail to the director’s residence or usual place of business; provided , however , that if the Chairman of the Board or the President determines that it is otherwise necessary or advisable to hold the meeting sooner, the Chairman of the Board or the President, as the case may be, may prescribe a shorter notice to be given personally or by email, telephone, facsimile or any other similar means of communication. Such notice shall be deemed to be delivered when deposited in the United States mail so addressed, with first class postage prepaid, or when transmitted if sent by telex, telecopy, electronic transmission or similar means. Neither the business to be transacted at nor the purpose of any annual, regular or special meeting of the Board need be specified in the notice or waiver of notice of such meeting. Any director may waive notice of any meeting, either before or after the meeting, by a writing signed by the director entitled to the notice, or by electronic transmission by the director, and filed with the minutes or corporate records. Notice of any such meeting need not be given to any director who shall attend such meeting without protesting, prior to or at its commencement, the lack of notice.

3.10     Quorum; Majority Vote . At all meetings of the Board, a majority of the directors then in office shall constitute a quorum for the transaction of business. If at any meeting of the Board there be less than a quorum present, a majority of those present or any director solely present may adjourn the meeting from time to time without further notice until a quorum is present. Unless the act of a greater number is required by law, the Charter, or these Bylaws, the act of a majority of the directors present at a meeting at which a quorum is in attendance shall be the act of the Board. At any time that the Charter provides that directors elected by the holders of a class or series of stock shall have more or less than one vote per director on any matter, every reference in these Bylaws to a majority or other proportion of directors shall refer to a majority or other proportion of the votes of such directors.

3.11     Procedure . At meetings of the Board, business shall be transacted in such order as from time to time the Board may determine. The Chairman of the Board, if such office has been filled, and, if not or if the Chairman of the Board is absent or otherwise unable to act, the President shall preside at all meetings of the Board. In the absence or inability to act of either such officer, a chairman shall be chosen by the Board from among the directors present. The Secretary of the Corporation shall act as the secretary of each meeting of the Board unless the Board appoints another person to act as secretary of the meeting. The Board shall keep regular minutes of its proceedings which shall be placed in the minute book of the Corporation.

3.12     Compensation . The Board shall have the authority to fix the compensation, including fees and reimbursement of expenses, paid to directors for attendance at regular or special meetings of the Board or any committee thereof; provided, however , that nothing contained in these Bylaws shall be construed to preclude any director from serving the Corporation in any other capacity or receiving compensation therefor.

3.13     Chairman of the Board . The Chairman of the Board shall be chosen from among the directors. Except as otherwise provided in these Bylaws, the Chairman of the Board shall preside at all

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meetings of the stockholders and all meetings of the Board. The Chairman of the Board shall be the medium of communication to the Board and to the standing committees of all matters presented for their consideration, and shall have such powers and perform such duties as may from time to time be assigned to the Chairman by the Board. The Chairman of the Board may but need not be an employee of the Corporation. In addition to the election of the Chairman of the Board, the Board may elect one or more vice-chairpersons or lead directors to perform such other duties as may be designated by the Board.

3.14     Lead Independent Director . At its discretion, the Board may appoint a Lead Independent Director. The Lead Independent Director shall convene and chair sessions of the independent directors (as defined under the rules of any stock exchange on which the Corporation’s securities are traded) or non-management members of the Board and shall have such other powers and duties as the Board may assign from time to time. In the absence of the Chairman of the Board, or if the Chairman of the Board is unable to preside, the Lead Independent Director shall preside at all meetings of the Board and at all meetings of shareholders. If at any Board meeting neither of the Chairman nor the Lead Independent Director is present or able to act, the Board shall select one of its members as acting chair of the meeting or any portion thereof.

3.15     Action by Board or Committees Without Meeting . Any corporate action that could be approved at a meeting of the Board or of any committee created by the Board may be approved without a meeting if one or more consents, in writing or by electronic transmission, setting forth the corporate action so approved are executed by all the directors or by all the members of the committee, and such consents are filed with the minutes of proceedings of the board or committee in accordance with applicable law.

3.16     Removal . Subject to the Charter, any director may be removed, with or without cause, from office at any time, at a meeting called for that purpose or at an annual meeting, and only by the affirmative vote of the holders of a majority of the voting power of the issued and outstanding shares entitled to vote for the election of directors.

ARTICLE IV
COMMITTEES

4.1     Designation . The Board may, by resolution, designate one or more committees.

4.2     Number; Qualification; Term . Each committee shall consist of two or more directors appointed by resolution adopted by the Board. The number of committee members may be increased or decreased (but not below two directors) from time to time by resolution adopted by the Board. Each committee member shall serve as such until the earliest of (i) the expiration of such committee member’s term as director, (ii) such committee member’s resignation as a committee member or as a director, or (iii) such committee member’s removal as a committee member or as a director. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of the committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he, she or they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in place of any such absent or disqualified member.

4.3     Authority . Each committee, to the extent expressly provided in the resolution establishing such committee, shall have and may exercise all of the authority of the Board in the management of the business and property of the Corporation except to the extent expressly restricted by law, the Charter,

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or these Bylaws, and may authorize the seal of the Corporation to be affixed to all papers which may require it.

4.4     Committee Changes . The Board shall have the power at any time to fill vacancies in, to change the membership of, and to discharge any committee.

4.5     Regular Meetings . Regular meetings of any committee may be held at such time and place as may be designated from time to time by the committee and communicated to all members thereof at least (i) twenty-four (24) hours before the meeting if by telephone or by being personally delivered or sent by telex, telecopy, electronic transmission or similar means or (ii) five (5) days before the meeting if delivered by mail to the director’s residence or usual place of business. Such notice shall be deemed to be delivered when deposited in the United States mail so addressed, with postage prepaid, or when transmitted if sent by telex, telecopy, electronic transmission or similar means.

4.6     Special Meetings . Special meetings of any committee may be held whenever called by any committee member. The committee member calling any special meeting shall cause notice of such special meeting, including therein the time and place of such special meeting, to be given to each committee member at least (i) twenty-four (24) hours before the meeting if by telephone or by being personally delivered or sent by telex, telecopy, electronic transmission or similar means or (ii) five (5) days before the meeting if delivered by mail to the director’s residence or usual place of business; provided , however , that if the chair of the committee determines that it is otherwise necessary or advisable to hold the meeting sooner, the chair of the committee may prescribe a shorter notice to be given personally or by email, telephone, facsimile or any other similar means of communication. Such notice shall be deemed to be delivered when deposited in the United States mail so addressed, with postage prepaid, or when transmitted if sent by telex, telecopy, electronic transmission or similar means. Notice of any special meeting of any committee need not be given to any director who attends such meeting without protesting the lack of notice to him or her, prior to or at the commencement of such meeting, or to any director who submits a signed waiver of notice (including by electronic transmission). Neither the business to be transacted at nor the purpose of any special meeting of any committee need be specified in the notice or waiver of notice of any special meeting.

4.7     Quorum; Majority Vote . At meetings of any committee, a majority of the number of members designated by the Board shall constitute a quorum for the transaction of business. If a quorum is not present at a meeting of any committee, a majority of the members present may adjourn the meeting from time to time, without notice other than an announcement at the meeting, until a quorum is present. The act of a majority of the members present at any meeting at which a quorum is in attendance shall be the act of a committee, unless the act of a greater number is required by law, the Charter, or these Bylaws.

4.8     Minutes . Each committee shall cause minutes of its proceedings to be prepared and shall report the same to the Board upon the request of the Board. The minutes of the proceedings of each committee shall be delivered to the Secretary of the Corporation for placement in the minute books of the Corporation.

4.9     Compensation . Committee members may, by resolution of the Board, be allowed a fixed sum and expenses of attendance, if any, for attending any committee meeting or a stated salary.


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4.10     Responsibility . The designation of any committee and the delegation of authority to it shall not operate to relieve the Board or any director of any responsibility imposed upon it or such director by law.

ARTICLE V
NOTICE

5.1     Method . Whenever by statute, the Charter, or these Bylaws, notice is required to be given to any director, committee member or stockholder and no provision is made as to how such notice shall be given, personal notice shall not be required and any such notice may be given (i) in writing, by mail, postage prepaid, addressed to such committee member, director or stockholder at such person’s address as it appears on the books or (in the case of a stockholder) the stock transfer records of the Corporation, or (ii) by any other method permitted by law (including, without limitation, by facsimile telecommunication, when directed to a number at which a stockholder has consented to receive notice, electronic mail, when directed to an electronic mail address at which a stockholder has consented to receive notice, posting on an electronic network together with separate notice to a stockholder of such specific posting and by any other form of electronic transmission, when directed to a stockholder). Any notice required or permitted to be given by overnight courier service shall be deemed effective when dispatched with all charges prepaid and addressed as aforesaid. Any notice required or permitted to be given by telegram, cablegram or other electronic transmission as permitted by law shall be deemed effective at the time it is dispatched with all charges prepaid and addressed as aforesaid.

5.2     Waiver . Whenever any notice is required to be given to any stockholder, director, or committee member of the Corporation by statute, the Charter, or these Bylaws, a waiver thereof in writing, or by electronic transmission (subject to compliance with applicable law), executed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. Attendance of a stockholder, director, or committee member at a meeting shall constitute a waiver of notice of such meeting, except where such person attends for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.

ARTICLE VI
OFFICERS

6.1     Number; Titles; Term of Office . The officers of the Corporation shall be a Chief Executive Officer, a President, a Chief Financial Officer, a Secretary, and such other officers as the Board may from time to time elect or appoint, including, without limitation, one or more Vice Presidents (with each Vice President to have such descriptive title, if any, as the Board shall determine), and a Treasurer. Each officer shall hold office until such officer’s successor shall have been duly elected and shall have qualified, or, if earlier, until such officer’s death, or until such officer shall resign or shall have been removed in the manner hereinafter provided. Any two or more offices may be held by the same person. None of the officers need be a stockholder or a director of the Corporation or a resident of the State of Delaware.

6.2     Removal . Any officer or agent elected or appointed by the Board may be removed by the Board whenever in its judgment the best interest of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights.


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6.3     Vacancies . Any vacancy occurring in any office of the Corporation (by death, resignation, removal, or otherwise) may be filled by the Board.

6.4     Authority . Officers shall have such authority and perform such duties in the management of the Corporation as are provided in these Bylaws or as may be determined by resolution of the Board not inconsistent with these Bylaws.

6.5     Compensation . The compensation, if any, of officers and agents shall be fixed from time to time by the Board; provided, however , that the Board may delegate the power to determine the compensation of any officer and agent (other than the officer to whom such power is delegated) to the Chairman of the Board or the President.

6.6     Chief Executive Officer . The Chief Executive Officer shall be the chief executive officer of the Corporation and shall have the powers and perform the duties incident to that position. If the Chief Executive Officer is a director, the Chief Executive Officer shall, in the absence of the Chairman of the Board, or if a Chairman of the Board shall not have been elected, preside at each meeting of the Board or the stockholders. Subject to the powers of the Board, the Chief Executive Officer shall be in the general and active charge of the entire business and affairs of the Corporation, including authority over its officers, agents and employees, and shall have such other duties as may from time to time be assigned to the Chief Executive Officer by the Board. The Chief Executive Officer shall see that all orders and resolutions of the Board are carried into effect, and execute bonds, mortgages and other contracts requiring a seal under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board to some other officer or agent of the Corporation.

6.7     President . The President shall be the chief operating officer of the Corporation. They shall perform all duties incident to the office of President, and be responsible for the general direction of the operations of the business, reporting to the Chief Executive Officer, and shall have such other duties as may from time to time be assigned to the President by the Board or as may be provided in these Bylaws. At the written request of the Chief Executive Officer, or in the Chief Executive Officer’s absence or in the event of the Chief Executive Officer’s inability to act, the President shall perform the duties of the Chief Executive Officer, and, when so acting, shall have the powers of and be subject to the restrictions placed upon the Chief Executive Officer in respect of the performance of such duties.

6.8     Chief Financial Officer . The Chief Financial Officer shall (i) have charge and custody of, and be responsible for, all the funds and securities of the Corporation, (ii) keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation, (iii) deposit all moneys and other valuables to the credit of the Corporation in such depositories as may be designated by the Board or pursuant to its direction, (iv) receive, and give receipts for, moneys due and payable to the Corporation from any source whatsoever, (v) disburse the funds of the Corporation and supervise the investments of its funds, taking proper vouchers therefor, (vi) render to the Board, whenever the Board may require, an account of the financial condition of the Corporation, and (vii) in general, perform all duties incident to the office of Chief Financial Officer and such other duties as from time to time may be assigned to the Chief Financial Officer by the Board. The Chief Financial Officer may also be the Treasurer if so determined by the Board and perform the duties hereinafter provided in Section 6.10 of this Article VI .

6.9     Vice Presidents . Each Vice President shall have such powers and duties as may be assigned to such Vice President by the Board or the President, and (in order of their seniority as determined by

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the Board or, in the absence of such determination, as determined by the length of time they have held the office of Vice President) shall exercise the powers of the President during that officer’s absence or inability to act. As between the Corporation and third parties, any action taken by a Vice President in the performance of the duties of the President shall be conclusive evidence of the absence or inability to act of the President at the time such action was taken.

6.10     Treasurer . The Treasurer shall have custody of the Corporation’s funds and securities, shall keep full and accurate account of receipts and disbursements, shall deposit all monies and valuable effects in the name and to the credit of the Corporation in such depository or depositories as may be designated by the Board, and shall perform such other duties as may be prescribed by the Board or the President.

6.11     Assistant Treasurers . Each Assistant Treasurer shall have such powers and duties as may be assigned to such Assistant Treasurer by the Board or the President. The Assistant Treasurers (in the order of their seniority as determined by the Board or, in the absence of such a determination, as determined by the length of time they have held the office of Assistant Treasurer) shall exercise the powers of the Treasurer during that officer’s absence or inability to act.

6.12     Secretary . Except as otherwise provided in these Bylaws, the Secretary shall keep the minutes of all meetings of the Board and of the stockholders in books provided for that purpose, and the Secretary shall attend to the giving and service of all notices. The Secretary shall have custody of the corporate seal of the Corporation (if any) and shall have authority to affix the same to any instrument requiring it and to attest it. The Secretary shall have charge of the certificate books, transfer books, and stock papers as the Board may direct, all of which shall at all reasonable times be open to inspection by any director upon application at the office of the Corporation during ordinary business hours. The Secretary shall in general perform all duties that are incident to the office of the Secretary, subject to the control of the Board and the President.

6.13     Assistant Secretaries . Each Assistant Secretary shall have such powers and duties as may be assigned to such Assistant Secretary by the Board or the President. The Assistant Secretaries (in the order of their seniority as determined by the Board or, in the absence of such a determination, as determined by the length of time they have held the office of Assistant Secretary) shall exercise the powers of the Secretary during that officer’s absence or inability to act.

ARTICLE VII
CERTIFICATES AND STOCKHOLDERS

7.1     Certificates for Shares . The Board may issue stock certificates, or may provide by resolution or resolutions that some or all of any or all classes or series of stock of the Corporation shall be uncertificated shares of stock. Any issued stock certificates for shares of stock or series of stock of the Corporation shall be in such form as shall be approved by the Board. The certificates shall be signed by the Chairman of the Board or the President or a Vice President and also by the Secretary or an Assistant Secretary or by the Treasurer or an Assistant Treasurer. Any and all signatures on the certificate may be sealed with the seal of the Corporation or a facsimile thereof. If any officer, transfer agent, or registrar who has signed, or whose facsimile signature has been placed upon, a certificate has ceased to be such officer, transfer agent, or registrar before such certificate is issued, such certificate may be issued by the Corporation with the same effect as if they were such officer, transfer agent, or registrar at the date of issue. The certificates shall be consecutively numbered and shall be entered in the books of the Corporation as they are issued and shall exhibit the holder’s name and the number of shares. A certificate

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representing shares issued by the Corporation shall, if the Corporation is authorized to issue more than one class or series of stock, set forth upon the face or back of the certificate, or shall state that the Corporation will furnish to any stockholder upon request and without charge, a full statement of the designations, powers, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. The Corporation shall furnish to any holder of uncertificated shares, upon request and without charge, a full statement of the designations, powers, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

7.2     Replacement of Lost or Destroyed Certificates . The Board may direct a new certificate or certificates to be issued in place of a certificate or certificates theretofore issued by the Corporation and alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate or certificates representing shares to be lost or destroyed. When authorizing such issue of a new certificate or certificates the Board may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or such owner’s legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond with a surety or sureties satisfactory to the Corporation in such sum as it may direct as indemnity against any claim, or expense resulting from a claim, that may be made against the Corporation in respect of the certificate or certificates alleged to have been lost or destroyed.

7.3     Facsimile Signatures . Any or all of the signatures on a certificate may be a facsimile, engraved or printed. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue.

7.4     Transfer of Shares . Shares of stock of the Corporation shall be transferable only on the books of the Corporation by the holders thereof in person or by their duly authorized attorneys or legal representatives. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate (if any) representing shares duly endorsed or accompanied by proper evidence of succession, assignment, or authority to transfer, the Corporation or its transfer agent shall issue (if requested) a new certificate to the person entitled thereto, cancel the old certificate (if any), and record the transaction upon its books, provided, however , that the Corporation shall be entitled to recognize and enforce any lawful restriction on transfer.

7.5     Registered Stockholders . The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law.

7.6     Regulations . The Board shall have the power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer, and registration or the replacement of certificates for shares of stock of the Corporation.

7.7     Legends . The Board shall have the power and authority to provide that certificates representing shares of stock bear such legends as the Board deems appropriate to assure that the Corporation does not become liable for violations of federal or state securities laws or other applicable law.

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ARTICLE VIII
INDEMNIFICATION/ADVANCEMENT OF EXPENSES

8.1     Nature of Indemnity . Each person who was or is made a party or is threatened to be made a party to or is involved (including, without limitation, as a witness) in any actual or threatened action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter, a “ proceeding ”), by reason of the fact that such person is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director or officer of another corporation or of a partnership, limited liability company, joint venture, trust or other enterprise, including, without limitation, service with respect to an employee benefit plan (hereinafter, an “ Indemnitee ”), whether the basis of such proceeding is alleged action in an official capacity as a director or officer or in any other capacity while so serving, shall be indemnified and held harmless by the Corporation to the full extent permitted by the DGCL, as the same exists or may hereafter be amended, or by other applicable law as then in effect, against all expense, liability and loss (including, without limitation, attorneys’ fees, costs and charges, judgments, fines, excise taxes or penalties under the Employee Retirement Income Security Act of 1974, as amended from time to time (“ ERISA ”), penalties and amounts paid or to be paid in settlement) actually and reasonably incurred or suffered by such Indemnitee in connection therewith; provided, however , that except as provided in Section 8.3 of this Article VIII with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such Indemnitee in connection with a proceeding (or part thereof) initiated by such Indemnitee only if such proceeding (or part thereof) was authorized by the Board. Each person who is or was serving as a director or officer of a majority-owned subsidiary of the Corporation shall be deemed to be serving, or have served, at the request of the Corporation.

8.2     Advances for Expenses . Reasonable expenses (including, without limitation, attorneys’ fees, costs and charges) incurred by an Indemnitee in defending a proceeding shall be paid by the Corporation in advance of the final disposition of such proceeding upon receipt of (a) a written affirmation of the director’s good faith belief that the director has met the standard of conduct described in Section 145 of the DGCL, and (b) an undertaking by or on behalf an Indemnitee to repay all amounts so advanced in the event that it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such Indemnitee is not entitled to be indemnified by the Corporation as authorized in this Article VIII . The Board may, upon approval of such Indemnitee, authorize the Corporation’s counsel to represent such person in any proceeding, whether or not the Corporation is a party to such proceeding.

8.3     Procedure for Indemnification and Advancement . Any indemnification or advance of expenses (including, without limitation, attorney’s fees, costs and charges) under this Article VIII shall be made promptly, and in any event within 60 days, or, in the case of a claim for an advancement of expenses, within 20 days, upon the written request of an Indemnitee (and, in the case of advance of expenses, receipt of a written undertaking by or on behalf of such Indemnitee to repay such amount if it shall ultimately be determined that such Indemnitee is not entitled to be indemnified therefor pursuant to the terms of this Article VIII ). The right to indemnification or advancement as granted by this Article VIII shall be enforceable by such Indemnitee in any court of competent jurisdiction, if the Corporation denies such request, in whole or in part, or if no disposition thereof is made within 60 days (or 20 days with respect to advancement of expenses). Such Indemnitee’s costs and expenses incurred in connection with successfully establishing such Indemnitiee’s right to indemnification or advancement, in whole or in part, in any such action shall also be indemnified by the Corporation to the fullest extent permitted by law. It shall be a defense to any such action (other than an action brought to enforce a claim for the advance of expenses (including, without limitation, attorney’s fees, costs and charges) under this Article

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VIII where the required affirmation and undertaking, if any, has been received by the Corporation) that the claimant has not met the standard of conduct set forth in the DGCL, as the same exists or hereafter may be amended, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its directors who are not parties to such action, a committee of such directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because the claimant has met the applicable standard of conduct set forth in the DGCL, as the same exists or hereafter may be amended, nor the fact that there has been an actual determination by the Corporation (including its directors who are not parties to such action, a committee of such directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct.

8.4     Other Rights; Continuation of Right to Indemnification . The indemnification and advancement of expenses provided by this Article VIII shall not be deemed exclusive of any other rights to which a person seeking indemnification or advancement of expenses may be entitled under any law (common or statutory), bylaw, agreement, vote of stockholders or directors or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding office or while employed by or acting as agent for the Corporation, and shall continue as to a person who has ceased to be a director or officer, and shall inure to the benefit of the estate, heirs, executors and administers of such person. All rights to indemnification and advancement of expenses under this Article VIII shall be deemed to be a contract between the Corporation and each Indemnitee. Any repeal or modification of this Article VIII or any repeal or modification of relevant provisions of the DGCL or any other applicable laws shall not in any way diminish any rights to indemnification or to advancement of expenses of such Indemnitee or the obligations of the Corporation arising hereunder with respect to any proceeding arising out of, or relating to, any actions, transactions or facts occurring prior to the final adoption of such repeal or modification.

8.5     Insurance . The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, limited liability company, joint venture, trust or other enterprise (including, without limitation, with respect to an employee benefit plan), against any liability asserted against them and incurred by such person or on such person’s behalf in any such capacity, or arising out of such person’s status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article VIII ; provided, however , that such insurance is available on acceptable terms, which determination shall be made by a vote of a majority of the Board.

8.6     Savings Clause . If this Article VIII or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each person entitled to indemnification under the first paragraph of this Article VIII as to all expense, liability and loss (including, without limitation, attorneys’ fees, costs and charges, fines, ERISA excise taxes and penalties, penalties and amounts paid or to be paid in settlement) actually and reasonably incurred or suffered by such person and for which indemnification is available to such person pursuant to this Article VIII to the full extent permitted by any applicable portion of this Article VIII that shall not have been invalidated and to the full extent permitted by applicable law.


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ARTICLE IX
MISCELLANEOUS PROVISIONS

9.1     Dividends . Subject to provisions of law and the Charter, dividends may be declared by the Board at any regular or special meeting and may be paid in cash, in property, or in shares of stock of the Corporation. Such declaration and payment shall be at the discretion of the Board.

9.2     Reserves . There may be created by the Board out of funds of the Corporation legally available therefor such reserve or reserves as the Board from time to time, in its discretion, considers proper to provide for contingencies, to equalize dividends, or to repair or maintain any property of the Corporation, or for such other purpose as the Board shall consider beneficial to the Corporation, and the Board may modify or abolish any such reserve in the manner in which it was created.

9.3     Books and Records . The Corporation shall keep correct and complete books and records of account, shall keep minutes of the proceedings of its stockholders and Board and shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its stockholders, giving the names and addresses of all stockholders and the number and class of the shares held by each.

9.4     Fiscal Year . The fiscal year of the Corporation shall be fixed by the Board; provided, however , that if such fiscal year is not fixed by the Board and the selection of the fiscal year is not expressly deferred by the Board, the fiscal year shall be the calendar year.

9.5     Seal . The seal of the Corporation shall be such as from time to time may be approved by the Board.

9.6     Resignations . Any director, committee member, or officer may resign by so stating at any meeting of the Board or by giving written notice to the Board, the Chairman of the Board, the President, or the Secretary. Such resignation shall take effect at the time specified therein or, if no time is specified therein, immediately upon its acceptance by the Chairman of the Board or the Chief Executive Officer.

9.7     Securities of Other Corporations . The Chairman of the Board, the President, or any Vice President of the Corporation shall have the power and authority to transfer, endorse for transfer, vote, consent, or take any other action in respect of any securities of another issuer that may be held or owned by the Corporation and to make, execute, and deliver any waiver, proxy, or consent in respect of any such securities.

9.8     Telephone Meetings . Members of the Board, members of a committee of the Board and the stockholders may participate in and hold a meeting by means of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 9.8 shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.

9.9     Treasury Regulation 1.382-3 . For purposes of applying Article VIII of the Charter, if the Board reasonably believes that any person may have violated the Article VIII provisions (including whether a person is part of an single entity under Treasury Regulation Section 1.382-3 and thus is a Substantial Holder), then the Board shall be authorized to require such person to provide such information,

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representations, agreements and/or opinions of counsel (which if required shall be “should” level opinions issued by nationally recognized counsel approved by the Board, and, for the avoidance of doubt, can include the stockholder’s regular counsel) in support of the position that no violation has occurred.

9.10     Invalid Provisions . If any part of these Bylaws shall be held invalid or inoperative for any reason, the remaining parts, so far as it is possible and reasonable, shall remain valid and operative.

9.11     Mortgages, etc . In respect of any deed, deed of trust, mortgage, or other instrument executed by the Corporation through its duly authorized officer or officers, the attestation to such execution by the Secretary of the Corporation shall not be necessary to constitute such deed, deed of trust, mortgage, or other instrument a valid and binding obligation against the Corporation unless the resolutions, if any, of the Board authorizing such execution expressly state that such attestation is necessary.

9.12     Headings . The headings used in these Bylaws have been inserted for administrative convenience only and do not constitute matter to be construed in interpretation.

9.13     References . Whenever herein the singular number is used, the same shall include the plural where appropriate, and words of any gender should include each other gender where appropriate.

9.14     Exclusive Forum . Unless the Corporation consents in writing to the selection of an alternative forum (an “ Alternative Forum Consent ”), the Delaware Court of Chancery shall be the sole and exclusive forum for, and shall have exclusive jurisdiction with respect to, (a) any derivative action or proceeding brought on behalf of the Corporation, (b) any action asserting a claim of breach of a fiduciary duty owed by any current or former director, officer, stockholder, employee or agent of the Corporation to the Corporation or the Corporation’s stockholders, including a claim alleging the aiding and abetting of such a breach of fiduciary duty, (c) any action asserting a claim against the Corporation or any current or former director, officer, stockholder, employee or agent of the Corporation arising out of or relating to any provision of the DGCL, the Charter or these Bylaws, (d) any action asserting a claim related to or involving the Corporation or any director, officer, stockholder, employee or agent of the Corporation that is governed by the internal affairs doctrine of the State of Delaware, or (e) any action asserting an “internal corporate claim” as that term is defined in Section 115 of the DGCL;  provided, however , that, in the event that the Delaware Court of Chancery lacks subject matter jurisdiction over any such action or proceeding, the sole and exclusive forum for such action or proceeding shall be another state or federal court located within the State of Delaware. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Section 9.14. If any action the subject matter of which is within the scope of this Section 9.14 is filed in a court other than the Delaware Court of Chancery (or any other state or federal court located within the State of Delaware, as applicable) (a “ Foreign Action ”) by or in the name of any stockholder, such stockholder shall be deemed to have notice of and consented to (i) the exclusive personal jurisdiction of the Delaware Court of Chancery (or such other state or federal court located within the State of Delaware, as applicable) in connection with any action brought in any such court to enforce this Section 9.14 and (ii) having service of process made upon such stockholder in any such action by service upon such stockholder’s counsel in the Foreign Action as agent for such stockholder. The existence of any prior Alternative Forum Consent shall not act as a waiver of the Corporation’s ongoing consent right as set forth above in this Section 9.14 with respect to any current or future actions or claims. Failure to enforce the foregoing provisions would cause the Corporation irreparable harm and the Corporation shall be entitled to equitable relief, including injunctive relief and specific performance, to enforce the foregoing provisions.

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9.15     Amendments . These Bylaws may be amended or repealed or new Bylaws adopted only in accordance with Article IX of the Charter.

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EXHIBIT41_IMAGE1A01.GIF

EXHIBIT41_IMAGE2A01.GIF


Exhibit 10.3

NATIONSTAR MORTGAGE HOLDINGS INC.
SECOND AMENDED AND RESTATED
2012 INCENTIVE COMPENSATION PLAN
RESTRICTED STOCK UNIT AGREEMENT



Grantee: __________________________
Grant Date: _________________________
Number of Restricted Stock Units: ___________________
 
1.     Grant of Restricted Stock Units . Pursuant to, and subject to, the terms and conditions set forth herein and in the Nationstar Mortgage Holdings Inc. Second Amended and Restated 2012 Incentive Compensation Plan (as it may be amended, the “ Plan ”), and in consideration of the covenants and promises of the Grantee herein contained, the Company hereby grants, as of the Grant Date, to the Grantee the number of restricted stock units (“ Restricted Stock Units ”) set forth above. Each Restricted Stock Unit granted hereby entitles the Grantee to receive one share of Common Stock upon settlement of such Restricted Stock Unit, subject to the terms and conditions set forth in this Agreement and the Plan.  
    
2.     Vesting; Settlement .

(a)     Vesting . The Restricted Stock Units shall become vested as follows: (i) 33.3% of the Restricted Stock Units shall vest on the first anniversary of the Grant Date; (ii) 33.3% of the Restricted Stock Units shall vest on the second anniversary of the Grant Date; and (iii) 33.4% of the Restricted Stock Units shall vest on the third anniversary of the Grant Date (each of clauses (i), (ii), and (iii), a “ Time Vesting Date ” and collectively, the “ Time Vesting Dates ”) and once vested, except as otherwise provided for herein, shall be settled in accordance with Section 2(b) below; provided , that , (x) the Grantee remains continuously employed by the Company or any of its Subsidiaries and in good standing, in each case, through the applicable Time Vesting Date or the Grantee’s employment with the Company or any of its Subsidiaries is terminated by reason of Retirement (as defined below) and (y) the Grantee has not breached the provisions of Section 4 of this Agreement. Notwithstanding the foregoing, (1) in the event that the Grantee’s employment with the Company or any of its Subsidiaries terminates due to the Grantee’s death or Disability (as defined below) at any time prior to a Time Vesting Date or the CIC Vesting Date (as defined below), all unvested Restricted Stock Units not previously forfeited shall immediately vest on the date of such termination of employment (the “ Death or Disability Vesting Date ”) and once vested shall be settled in accordance with Section 2(b) below and (2) in the event that a Change in Control occurs at any time prior to the last Time Vesting Date or the Death or Disability Vesting Date, all unvested Restricted Stock Units not previously forfeited shall vest on the date of such Change in Control (a “ CIC Vesting Date ,” and together with the Time Vesting Dates and the Death or Disability Vesting Date, each a “ Vesting Date ”) and once vested, except as otherwise provided for herein, shall be settled in accordance with Section 2(b) below; provided , that , in each case, (x) the Grantee remains continuously employed by the Company or any of its Subsidiaries and in good standing, in each case, through the applicable Vesting Date and (y) the Grantee has not breached the provisions of Section 4 of this Agreement.

(b)     Settlement . The Restricted Stock Units will be settled no later than the thirtieth (30 th ) day following the applicable Vesting Date (such actual date, the “ Settlement Date ”). The Grantee shall have no rights as a shareholder with respect to the shares of Common Stock underlying the Restricted Stock Units until the Settlement Date.

3.     Dividend Equivalents . The Grantee shall not be entitled to any Dividend Equivalents with respect to the Restricted Stock Units to reflect any dividends payable on shares of Common Stock.

4.     Restrictive Covenants . In consideration of the grant of Restricted Stock Units hereunder, the Grantee agrees that during the period commencing on the Grant Date and ending on the Settlement Date, the Grantee shall not, directly or indirectly, either as a principal, agent, employee, employer, consultant, partner, shareholder of a closely held corporation or shareholder in excess of five (5%) percent of a publicly traded corporation, corporate officer or director, or in any other individual or representative capacity, engage or otherwise participate in any manner or fashion in any business that is in competition in any manner whatsoever with the mortgage and real estate services businesses of the Company or any of its Subsidiaries or of any other business in which the Company or any of its Subsidiaries is engaged or which is part of the Company’s or any of its Subsidiaries’ Developing Business (as defined below), within states in which the Company or any of its Subsidiaries is engaged in such business or Developing Business. In addition, from and after the Grant Date until the later of (i) the Settlement Date or (ii) the first (1 st ) anniversary of the Grantee’s termination of employment with the Company or any of its Subsidiaries for any reason, the Grantee covenants and agrees not to, directly or indirectly, solicit or induce any officer, director, employee, agent, independent contractor or consultant or client of the Company or any of its Subsidiaries to terminate his, her or its employment or other relationship with the Company or any of its Subsidiaries, or otherwise encourage any such person or entity to leave or sever his, her or its employment or other relationship with the Company or any of its Subsidiaries for any reason. Further, from and after the Grant Date until the later of (i) the Settlement Date or (ii) the first (1 st ) anniversary of the Grantee’s termination of employment with the Company or any of its Subsidiaries for any reason, the Grantee agrees that the Grantee shall not make any disparaging or defamatory comments regarding the Company or any of its Subsidiaries or their respective directors, officers, executives or employees, or, after termination of the Grantee’s employment relationship with the Company or any of its Subsidiaries, make any such comments concerning any aspect of the termination of their relationship. The obligations of the Grantee under this subparagraph shall not apply to disclosures required by applicable law, regulation or order of any court or governmental agency; provided , that , the Grantee shall promptly notify the Company in writing of any such obligation. The Grantee further covenants and agrees that these restrictive covenants are reasonable as to duration, terms and geographical area and that the same protect the legitimate interests of the Company and its Subsidiaries, impose no undue hardship on the Grantee, are not injurious to the public, and that any violation of these restrictive covenants shall be specifically enforceable in any court with jurisdiction in the matter.
5.     Forfeiture . Subject to the provisions of the Plan and Section 2(a) of this Agreement, Restricted Stock Units which have not become vested as of the date the Grantee’s employment terminates for any reason shall immediately be forfeited on such date. Furthermore, notwithstanding anything herein to the contrary, the termination of the Grantee’s employment by the Company for Cause (as defined below), including a Deemed for Cause Termination (as defined below) or the failure of the Grantee to comply with Section 4 hereof will result in the forfeiture of all unsettled Restricted Stock Units without consideration therefor, and the Grantee shall cease to have any rights with respect thereto.

6.     Withholding Tax . The Grantee hereby agrees that the Company shall have the right pursuant to Section 15 of the Plan to require the Grantee to remit to the Company or one of its Subsidiaries in cash or withhold from any payment required to be made with respect to the Restricted Stock Units, an amount sufficient to satisfy any federal, state and local withholding and employment tax requirements that become payable in respect of the Restricted Stock Units. The Company hereby approves any election that may be made by the Grantee pursuant to Sections 15(b) and 15(c) of the Plan, which approval is subject to revocation at any time by any duly authorized officer of the Company.

7.     Section 409A of the Code . This Agreement is intended to comply with, or be exempt from, the provisions of Section 409A of the Code (“ Section 409A ”), and this Agreement shall be construed and interpreted in accordance with such intent. Without limiting the foregoing, the Committee will have the right to amend the terms and conditions of this Agreement in any respect as may be necessary or appropriate to comply with Section 409A, including without limitation by delaying the issuance of the shares of Common Stock contemplated hereunder. Notwithstanding any other provision of this Agreement to the contrary, (i) the Company, any of its Subsidiaries and their respective officers, directors, employees, or agents make no guarantee that the terms of this Agreement as written comply with the provisions of Section 409A, and none of the foregoing shall have any liability for the failure of the terms of this Agreement as written to comply with the provisions of Section 409A and (ii) if the Grantee is a “specified employee” within the meaning of Section 409A, and is subject to U.S. federal income tax, no payments in respect of any Restricted Stock Unit that is “deferred compensation” subject to Section 409A and which would otherwise be payable upon the Grantee’s “separation from service” (as defined in Section 409A) will be made to the Grantee prior to the date that is six (6) months after the date of the Grantee’s “separation from service” or, if earlier, the Grantee’s date of death. Following any applicable six (6)-month delay, all such delayed payments will be paid in a single lump sum on the earliest date permitted under Section 409A that is also a business day. Each payment in a series of payments hereunder will be deemed to be a separate payment for the purposes of Section 409A.

8.     Incorporation of the Plan and Definitions . All terms, conditions and restrictions of the Plan are incorporated herein and made part hereof as if stated herein. If there is any conflict between the terms and conditions of the Plan and this Agreement, the terms and conditions of this Agreement, as interpreted by the Board of Directors or the Committee shall govern.

Unless otherwise indicated herein, all capitalized terms used herein shall have the meanings given to such terms in the Plan. For purposes of this Agreement:

“Cause” shall mean (i) the Grantee’s conviction of, guilty plea or plea of nolo contendere concerning or confession of any felony, (ii) any act of misappropriation or fraud committed by the Grantee in connection with the Company’s or any of its Subsidiaries’ or affiliates’ businesses, (iii) any material breach of any reasonable and lawful rule or directive of the Company or any of its Subsidiaries (including, without limitation, cooperation with any regulatory investigations, inquiries or third-party litigation) or any obligation the Grantee has to the Company or any of its Subsidiaries pursuant to an agreement or otherwise, (iv) the gross or willful neglect of duties or gross misconduct by the Grantee, or (v) the use of drugs or excessive use of alcohol to the extent that any of such uses in the Company’s good faith determination materially interferes with the performance of the Grantee’s duties. Following the Grantee’s termination of employment with the Company or any of its Subsidiaries for any reason other than a termination by the Company or any of its Subsidiaries for Cause, if the Company reasonably and in good faith determines that the Grantee’s employment could have been terminated by the Company or any of its Subsidiaries for Cause, or the Grantee violates any post-termination obligations that he or she may have to the Company or any of its Subsidiaries (including as provided in Section 4 of this Agreement), the Grantee’s employment shall be deemed to have been terminated by the Company or any of its Subsidiaries for Cause for purposes of this Agreement (a “ Deemed for Cause Termination ”).
“Developing Business” shall mean the new business concepts and services the Company or any of its Subsidiaries has developed and is in the process of developing during the Grantee’s employment with the Company or any of its Subsidiaries.
“Disability” shall mean (i) “Disability” as defined in the Grantee’s written contract of employment or engagement with the Company or any of its Subsidiaries, if any, as may be in effect at the time of the occurrence of any acts or omissions that may constitute “Disability”; or (ii) in the event that the Grantee is not party to any such written contract of employment or engagement with the Company or any of its Subsidiaries or the Grantee’s written contract of employment or engagement does not contain a definition of “Disability”, a mental or physical condition which, with or without reasonable accommodations, renders the Grantee permanently unable or incompetent to carry out the responsibilities he or she held or tasks and duties to which he or she was assigned at the time the condition was incurred, with such determination to be made by the Committee on the basis of such medical and other competent evidence as the Committee in its sole discretion shall deem relevant.

“Retirement” shall mean (i) the Grantee (a) if an Executive Vice President, provided at least six months written notice to the Company or any of its Subsidiaries of his or her intention to retire prior to the date of his or her retirement or (b) if a Senior Vice President or Vice President, provided at least three months written notice of his or her intention to retire prior to the date of his or her retirement (the “ Notice Period ”), (ii) the Grantee met the Retirement Criteria at the commencement of the Notice Period and (iii) the Grantee remained employed with the Company or any of its Subsidiaries during the Notice Period and sustained a level of performance during the Notice Period that would not be a basis of a termination by the Company or any of its Subsidiaries for Cause.
“Retirement Criteria” shall mean the Grantee’s termination of employment with the Company or any of its Subsidiaries if Grantee’s (i) age plus (ii) his or her years of service with the Company or any of its Subsidiaries is equal to or greater than seventy (70); provided , that , the Grantee must (a) be at least fifty-five (55) years of age and (b) have at least five (5) years of service with the Company or any of its Subsidiaries.
9.     Integration . This Agreement and the Plan contain the entire understanding of the parties with respect to the subject matter hereof. There are no restrictions, agreements, promises, representations, warranties, covenants or undertakings with respect to the subject matter hereof other than those expressly set forth herein and in the Plan. This Agreement and the Plan supersede all prior agreements and understandings between the parties with respect to the subject matter hereof.

10.     Grantee Acknowledgment . The Grantee hereby acknowledges receipt of a copy of the Plan. The Grantee hereby acknowledges that all decisions, determinations and interpretations of the Board, or the Committee, in respect of the Plan, this Agreement and this Award of Restricted Stock Units shall be final, binding and conclusive.




1


Exhibit 31.1

Certification Pursuant to Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
I, Jay Bray, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of Mr. Cooper Group Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 15(e) and 15d - 15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a - 15(f) and 15d - 15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 
 
 
Date:
November 9, 2018
 
 
 
/s/ Jay Bray
 
 
 
Jay Bray
 
 
 
Chief Executive Officer






Exhibit 31.2

Certification Pursuant to Rules 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
I, Amar Patel, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of Mr. Cooper Group Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 15(e) and 15d - 15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a - 15(f) and 15d - 15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 
 
 
Date:
November 9, 2018
 
 
 
/s/ Amar R. Patel
 
 
 
Amar R. Patel
 
 
 
Chief Financial Officer







Exhibit 32.1

Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Mr. Cooper Group Inc. (the “Company”) on Form 10-Q, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jay Bray, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 
Date:
November 9, 2018
 
/s/ Jay Bray
 
Jay Bray
 
Chief Executive Officer





Exhibit 32.2

Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Mr. Cooper Group Inc. (the “Company”) on Form 10-Q, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Amar Patel, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 
Date:
November 9, 2018
 
/s/ Amar R. Patel
 
Amar R. Patel
 
Chief Financial Officer