NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business and Basis of Presentation
Ditech Holding Corporation and its subsidiaries, or the Company (formerly Walter Investment Management Corp.), is an independent servicer and originator of mortgage loans and servicer of reverse mortgage loans. Through the consumer, correspondent and wholesale lending channels, the Company originates and purchases residential mortgage loans that are predominantly sold to GSEs and government agencies. The Company services a wide array of loans across the credit spectrum for its own portfolio and for GSEs, government agencies, third-party securitization trusts and other credit owners. The Company also operates
two
complementary businesses: asset receivables management and real estate owned property management and disposition.
As a result of Walter Investment Management Corp.'s emergence from bankruptcy under Chapter 11 of the Bankruptcy Code as discussed further below, on February 9, 2018, the Company changed its name to Ditech Holding Corporation. The terms “Ditech Holding” and the “Company,” as used throughout this report refer to Ditech Holding Corporation (Successor) and/or Walter Investment Management Corp. (Predecessor) and its consolidated subsidiaries.
The Company operates throughout the U.S. through
three
reportable segments, Servicing, Originations, and Reverse Mortgage. Refer to
Note 22
for additional information related to segment reporting.
Certain acronyms and terms used throughout these notes are defined in the Glossary of Terms in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Fresh Start Accounting
The Company met the conditions to qualify under GAAP for fresh start accounting, and accordingly adopted fresh start accounting effective
February 10, 2018
. The actual impact of fresh start accounting at emergence on
February 9, 2018
is shown in
Note 3
. The financial statements as of
February 10, 2018
and for subsequent periods report the results of the Successor with no beginning retained earnings. Any presentation of the Successor represents the financial position and results of operations of the Successor and is not comparable to prior periods.
Interim Financial Reporting
The accompanying unaudited interim Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and related notes required by GAAP for complete Consolidated Financial Statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. These unaudited interim Consolidated Financial Statements should be read in conjunction with the Company’s audited Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017
.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management is not currently aware of any factors that would significantly change its estimates and assumptions, actual results may differ from these estimates.
Changes in Presentation
Certain prior year amounts have been reclassified to conform to current year presentation.
The Company made an immaterial correction to the Consolidated Statement of Cash Flows for the six months ended June 30, 2017 relating to the payment of mandatory clean-up call obligations. In the quarterly report on Form 10-Q for the quarterly period ended June 30, 2017, this payment was presented as a financing cash outflow, included in payments on mortgage-backed debt, rather than an investing cash outflow, included in cash outflow from deconsolidation of variable interest entities. The change resulted in a decrease in cash flows provided by investing activities and cash flows used in financing activities of
$9.8 million
. This correction was appropriately reflected in the quarterly report on Form 10-Q for the quarterly period ended September 30, 2017, as well as the Annual Report on Form 10-K for the year ended December 31, 2017.
Revenue Recognition
In May 2014, the FASB issued new revenue recognition guidance that supersedes most industry-specific guidance but does exclude insurance contracts and financial instruments. Under the new revenue recognition guidance, entities are required to identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when the entity satisfies a performance obligation. This guidance was effective for the Company beginning January 1, 2018. The Company adopted the guidance using the modified retrospective method. The Company concluded that its most significant revenue streams are not within the scope of the standard because the standard does not apply to revenue on contracts accounted for under the transfers and servicing of financial assets or financial instruments standards. Therefore, revenue recognition for these contracts remained unchanged. The Company determined that certain immaterial revenue streams are within the scope of the guidance; however, the guidance did not impact current revenue recognition patterns for these in scope revenue streams and contracts. Accordingly, the adoption of this guidance did not have a significant impact on the consolidated financial statements.
Recent Accounting Guidance
In January 2016, the FASB issued an accounting standards update that amends the guidance on the classification and measurement of financial instruments. The new standard revises an entity's accounting related to (i) the classification and measurement of investments in equity securities and (ii) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. This guidance was effective for the Company beginning January 1, 2018. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued an accounting standards update that requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset to not recognize lease assets and lease liabilities. In transition, lessees are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients that entities may elect to apply. This guidance is effective for fiscal years beginning after December 15, 2018, with early application permitted. Upon adoption, the Company expects to record a right of use asset and a corresponding lease liability for the operating leases where the Company is the lessee. The potential impact on the Company's consolidated financial statements is largely based on the present value of future minimum lease payments, the amount of which will depend upon the population of leases in effect at the date of adoption. Future minimum lease payments totaled
$83.1 million
as of December 31, 2017, as disclosed in Note 30 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
In June 2016, the FASB issued an accounting standards update that amends the guidance for recognizing credit losses on financial instruments measured at amortized cost. This update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2019. Based on the Company's current methodologies for accounting for financial instruments, the adoption of this guidance is not expected to have a material impact on its consolidated financial statements. The significance of the adoption of this guidance may change at the time of adoption based on the nature and composition of the Company's financial instruments at that time and the corresponding conclusions reached.
In August 2016, the FASB issued an accounting standards update that amends the guidance on the classification of certain cash receipts and cash payments presented within the statement of cash flows to reduce the existing diversity in practice. This guidance was effective for the Company beginning January 1, 2018. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.
In October 2016, the FASB issued an accounting standards update that amends the guidance on the classification of income taxes related to the intra-entity transfer of assets other than inventory. This guidance was effective for the Company beginning January 1, 2018. The adoption of this guidance did not have a significant impact on the consolidated financial statements.
In November 2016, the FASB issued an accounting standards update that amends the guidance on restricted cash within the statement of cash flows. The update amends the classification of restricted cash and cash equivalents to be included within cash and cash equivalents when reconciling the beginning and ending cash amounts. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and cash equivalents in the statement of cash flows. This guidance was effective for the Company beginning January 1, 2018, and was applied retrospectively. The adoption impacted the presentation of the cash flows, but did not otherwise have a material impact on the consolidated results of operations or financial condition. For the
six months ended June 30, 2017
, cash flows provided by operating activities decreased by
$28.3 million
, cash flows provided by investing activities decreased by
$1.0 million
, and cash flows used in financing activities increased by
$2.5 million
.
In January 2017, the FASB issued an accounting standards update that amends the guidance on business combinations. The update clarifies the definition of a business and provides a framework that gives entities a basis for making reasonable judgments about whether a transaction should be accounted for as an acquisition of assets or a business. This guidance was effective for the Company beginning January 1, 2018. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued an accounting standards update that amends the guidance on goodwill. Under the update, goodwill impairment is measured as the amount by which a reporting unit’s carrying value exceeds its fair value, while not exceeding the carrying value of goodwill. The update eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. This guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company adopted this guidance for impairment tests effective January 1, 2018.
In February 2017, the FASB issued an accounting standards update that amends the guidance on derecognition of nonfinancial assets. This guidance clarifies the scope and accounting of a financial asset that meets the definition of an in substance nonfinancial asset and defines the term in substance nonfinancial asset. It also adds guidance for partial sales of nonfinancial assets. This guidance was effective for the Company beginning January 1, 2018. The adoption of this guidance resulted in changes to the statement of financial position, including (i) a reduction of
$115.0 million
in residential loans at amortized cost, net, (ii) an increase of
$123.1 million
in other assets, (iii) an increase of
$40.7 million
in accumulated deficit and (iv) an increase of
$48.7 million
in accrued liabilities under the modified retrospective adoption method. Additionally, the pattern of recognition of certain interest payments will change for properties where the Company finances sales of real estate owned and the Company has determined that collection of substantially all consideration is not yet probable.
In May 2017, the FASB issued an accounting standards update that amends the guidance on share-based compensation. The update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This guidance was effective for the Company beginning January 1, 2018. The new guidance will be applied prospectively to awards modified on or after the adoption date. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.
In February 2018, the FASB issued an accounting standards update that provides guidance related to accounting for the income tax effects of the Tax Act. This guidance provides clarification to address situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting under GAAP for certain income tax effects of the Tax Act. To the extent that a registrant's accounting for certain income tax effects of the Tax Act is incomplete, a reasonable estimate may be determined for those effects in the first reporting period in which the registrant was able to determine such reasonable estimate. A measurement period of one year from the enactment date of the Tax Act is provided whereby a registrant may adjust such provisional amounts. If a provisional amount cannot be determined in the initial period of enactment, the registrant may continue to account for taxes in accordance with tax laws that were in effect immediately prior to the Tax Act enactment date until such point in time that a reasonable estimate can be made. The Company's preliminary estimate of the Tax Act and the remeasurement of deferred tax assets and liabilities is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the Tax Act, changes to certain estimates and the filing of its tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the Tax Act may require further adjustments and changes in the Company's estimates. The final determination of the Tax Act and the remeasurement of the Company's deferred assets and liabilities will be completed as additional information becomes available, but no later than one year from the enactment of the Tax Act.
In June 2018, the FASB issued an accounting standards update
that amends the guidance related to accounting for nonemployee share-based payment transactions. This guidance expands the existing share-based compensation guidance to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance is effective for annual periods beginning after December 15, 2018, and interim periods within that reporting period. The Company is currently evaluating the effect that the updated standard will have on the Company’s consolidated financial statements.
2. Liquidity and Going Concern
In the normal course of business, the Company utilizes mortgage loan servicing advance facilities and master repurchase agreements with various counterparties to finance, on a short-term basis, mortgage loan related servicing advances, the repurchase of HECMs out of Ginnie Mae securitization pools, and funding of newly originated mortgage loans. Each of these facilities is typically subject to annual renewal and contain provisions, that in certain circumstances, could prevent the Company from utilizing any unused capacity under such facility and/or that could accelerate the repayment of amounts under such facility.
The Company’s ability to fund its operating businesses is a significant factor that affects its liquidity and its ability to operate and grow its businesses. The Company’s subsidiaries are dependent on the ability to secure these types of arrangements on acceptable terms and to renew, replace or resize existing financing facilities as they expire. Continued growth in Ginnie Mae buyout loan activity will require the Company to continue to seek additional Ginnie Mae buyout financing or to otherwise sell or securitize Ginnie Mae buyout assets. The Company's current facilities expire during February and April 2019 and the successful renewal or replacement of these facilities is a critical part of the Company’s plans to meet its obligations.
If the Company fails to renew or to comply with the terms of a facility that results in an event of default or breach of covenant without obtaining a waiver or amendment, the Company may be subject to cross default provisions with other indebtedness, termination of future funding, enforcement of liens against assets securing the respective facility, acceleration of outstanding obligations, or other adverse actions.
The Company intends to renew, replace or extend its facilities and obtain waivers or amendments as needed. The Company has historical experience in renewing, replacing and extending these facilities. Certain of these and other financing arrangements contain restrictions, covenants and representations and warranties that, among other conditions, require the Company to satisfy specified financial covenants and asset eligibility. In the past, the Company has obtained waivers or amendments from certain lenders in order to maintain compliance with certain covenants and other terms of the financing facilities. While the Company has been able to renew, replace or extend these facilities and obtain waivers or amendments as needed in the past, there can be no assurance that these or other actions will be successful.
In developing its liquidity forecast the Company considers how its liquidity needs are impacted by various factors including maximum needs during each month, changes to assets and liabilities due to business operations, and working capital needs. Based on forecasted results and cash flows, management determined that there were material uncertainties regarding the Company’s ability to meet the minimum required profitability levels, as well as to maintain the minimum level of cash liquidity required at all times under covenants imposed by certain of its creditors and other counterparties and, because of these uncertainties, the Company sought amendments to these covenants. On August 6, 2018, the Company entered into amendments with certain of its creditors to amend the profitability covenant at Ditech Financial for the third quarter of 2018 to permit a loss, the liquidity requirements at Ditech Financial and RMS and the advance rate at Ditech Financial.
The Company continues to forecast reductions in liquidity that may become more challenging if there is further deterioration due to required repayment terms and restrictive covenants of the Term Loan, recurring operating losses and negative cash flows in certain of its segments, including unforeseen increased collateral posting requirements. To address this situation, the Company is focused on liquidity and cash generation. The following actions have been completed to improve the Company’s liquidity position:
|
|
|
|
•
|
On April 23, 2018, the Company entered into an additional master repurchase agreement that provides up to
$212.0 million
in total capacity, and a minimum of
$200.0 million
in committed capacity to fund the repurchase of certain HECMs and real estate owned from Ginnie Mae securitization pools for a period of one year.
|
|
|
|
|
•
|
In May 2018, the profitability covenants included in the DAAT Facility, the DPAT II Facility and the Ditech Financial Exit Master Repurchase Agreement were amended to allow for a net loss under such covenants for the quarter ending June 30, 2018, as applicable to the terms of each agreement. In August 2018, the profitability covenants included in the DAAT Facility, the DPAT II Facility and the Ditech Financial Exit Master Repurchase Agreement were amended to allow for a net loss under such covenants for the quarter ending September 30, 2018, as applicable to the terms of each agreement. Additionally, the amendment reduced the advance rate with respect to certain mortgage loans financed under the Ditech Financial Exit Master Repurchase Agreement. Furthermore, the liquidity covenants included in the DAAT Facility, the DPAT II Facility and each of Ditech Financial's and RMS's master repurchase agreements were amended to reduce the liquidity requirements for the remaining term of each agreement.
|
|
|
|
|
•
|
In June 2018, the Company sold a pool of defaulted reverse Ginnie Mae buyout loans owned by the Company and financed under an existing master repurchase agreement for a sales price of
$241.3 million
. The proceeds from the sale were used to repay the related amount financed under the master repurchase agreement and to fund additional Ginnie Mae buyout loans. The Company continues to service these loans on behalf of the purchaser under a subservicing agreement.
|
|
|
|
|
•
|
In June 2018, the Company agreed to sell to New Penn Financial, which became an affiliate of NRM when acquired by NRM on July 3, 2018, additional MSR relating to mortgage loans having an aggregate unpaid principal balance of approximately
$4.7 billion
, and received approximately
$56.7 million
in cash proceeds. The proceeds from the sale were used primarily to make mandatory principal payments under the 2018 Credit Agreement.
|
In addition, the Company has developed a liquidity plan consisting of various steps to improve its liquidity position, which may involve one or more of the following:
|
|
|
|
•
|
During the second quarter of 2018, the Company’s Board of Directors initiated a process to evaluate strategic alternatives to enhance stockholder value. This review process, which is being conducted with the assistance of financial and legal advisors, is considering a range of potential strategic alternatives including, among other things, a sale of the Company, a business combination or continuing as a standalone entity. There can be no assurance that the exploration of strategic alternatives will result in any transaction, nor can there be any assurance should the Board of Directors approve a transaction, as to the value of such transaction to the Company’s stockholders thereof.
|
|
|
|
|
•
|
The Company is currently working with new lenders to increase and diversify financing capacity for Reverse Ginnie Mae buyout loans and new mortgage loan originations in an amount sufficient to provide adequate financing capacity.
|
|
|
|
|
•
|
The Company intends to continue disposing of defaulted Reverse Ginnie Mae buyout loans in order to meet future buyout funding requirements.
|
|
|
|
|
•
|
The Company intends to sell additional MSR assets in its Servicing segment if necessary to ensure adequate liquidity levels are maintained after giving consideration to the impact such sales may have on future results of operations, including revenue and net income. The Company believes there are sufficient marketable MSR assets available to alleviate foreseeable liquidity shortfalls.
|
|
|
|
|
•
|
The Company’s leadership team continues the transformation of the operating businesses by aggressively evaluating and implementing further cost reductions, operational enhancements and streamlining of the businesses including, but not limited to, the following initiatives:
|
|
|
|
|
◦
|
The Company has re-aligned resources in its Reverse segment to more efficiently and effectively monetize claims.
|
|
|
|
|
◦
|
The Company continues to focus on monetizing advance receivables, and actions implemented to date have materially reduced advance balances from
$813.4 million
at December 31, 2017 to
$563.3 million
on June 30, 2018, generating
$40.6 million
net of repayments on the servicing advance liabilities. Further, the Company has added resources fully dedicated to driving down advance balances to more normalized levels in the near term which is a key assumption in its liquidity projections.
|
The Company continues to actively refine its liquidity plan and intends to take all appropriate actions in an effort to ensure that it has adequate liquidity to meet its debt service obligations and other liabilities and commitments. The Company believes the execution of its liquidity plan will provide sufficient liquidity to meet its obligations, fund Reverse Ginnie Mae buyouts and operate its business. Given its liquidity plan the Company believes its sources of liquidity are adequate to fund its operations for at least the next 12 months following the issuance of these financial statements. There can be no assurance that the Company will be successful in implementing its liquidity plan, or if the Company is successful, there can be no assurances that the plan will be sufficient to meet the Company’s liquidity needs.
3. Emergence from Reorganization Proceedings
On November 30, 2017, Walter Investment Management Corp. filed a Bankruptcy Petition under the Bankruptcy Code to pursue the Prepackaged Plan announced on November 6, 2017. On January 17, 2018, the Bankruptcy Court approved the amended Prepackaged Plan and on January 18, 2018, entered a confirmation order approving the Prepackaged Plan. On February 9, 2018, the Prepackaged Plan became effective pursuant to its terms and Walter Investment Management Corp. emerged from the Chapter 11 Case. The Company continued to operate throughout the Chapter 11 Case and upon emergence changed its name to Ditech Holding Corporation. From and after effectiveness of the Prepackaged Plan, the Company has continued, in its previous organizational form, to carry out its business.
Reorganization Items
The Company's reorganization items and fresh start accounting adjustments consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
For the Period From February 10, 2018 Through June 30,
2018
|
|
|
For the Period From January 1, 2018 Through February 9,
2018
|
|
Gain on cancellation of corporate debt
|
|
$
|
—
|
|
|
|
$
|
556,937
|
|
|
Less: issuance of new equity to Convertible and Senior Noteholders
|
|
—
|
|
|
|
153,764
|
|
|
Net gain on cancellation of corporate debt
|
|
—
|
|
|
|
403,173
|
|
|
Less:
|
|
|
|
|
|
|
Legal and professional fees
(1)
|
|
—
|
|
|
|
12,461
|
|
|
Other expenses
|
|
110
|
|
|
|
3,378
|
|
|
Total expenses
|
|
110
|
|
|
|
15,839
|
|
|
Total reorganization items
|
|
(110
|
)
|
|
|
387,334
|
|
|
Fresh start accounting adjustments
|
|
—
|
|
|
|
77,229
|
|
|
Reorganization items and fresh start accounting adjustments
|
|
$
|
(110
|
)
|
|
|
$
|
464,563
|
|
__________
|
|
|
|
(1)
|
Professional fees are directly related to the reorganization.
|
The Company made cash payments for reorganization items of
$10.1 million
during the
three months ended June 30, 2018
and the
period from February 10, 2018 through June 30, 2018
and
$5.7 million
during the
period from January 1, 2018 through February 9, 2018
.
Liabilities Subject to Compromise
Liabilities subject to compromise included unsecured or under-secured liabilities incurred prior to the Effective Date. These liabilities represented the amounts expected to be allowed on known or potential claims to be resolved through the Chapter 11 Case and subject to future adjustments based on negotiated settlements with claimants, actions of the Bankruptcy Court, rejection of executory contracts, proofs of claims or other events. Additionally, liabilities subject to compromise also include certain items that may be assumed under a plan of reorganization, and as such, may be subsequently reclassified to liabilities not subject to compromise. Generally, actions to enforce or otherwise effect payment of pre-petition liabilities are subject to the automatic stay or an approved motion of the Bankruptcy Court.
Liabilities subject to compromise consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
December 31, 2017
|
|
Senior Notes
|
|
$
|
538,662
|
|
|
Convertible Notes
|
|
242,468
|
|
|
Accrued interest
(1)
|
|
25,807
|
|
|
Total liabilities subject to compromise
|
|
$
|
806,937
|
|
__________
|
|
|
|
(1)
|
Represents accrued interest on the Senior Notes and Convertible Notes as of November 30, 2017, the date the Company filed the Bankruptcy Petition. As interest on the Senior Notes and Convertible Notes subsequent to November 30, 2017 was not expected to be an allowed claim, this amount excludes interest that would have been accrued subsequent to November 30, 2017. For the period from January 1, 2018 through February 9, 2018, interest expense reported on the consolidated statements of comprehensive income excludes
$5.9 million
of interest on the Senior Notes and Convertible Notes that otherwise would have been accrued for the period.
|
On the Effective Date, all of the Company's obligations under the previously outstanding Convertible Notes and Senior Notes listed above were extinguished. Previously outstanding debt interests were exchanged for Second Lien Notes, common stock, Mandatorily Convertible Preferred Stock, Series A Warrants and/or Series B Warrants, as applicable.
Fresh Start Accounting
The Company met the conditions to qualify under GAAP for fresh start accounting, and accordingly, adopted fresh start accounting effective
February 10, 2018
. The actual impact at emergence on
February 9, 2018
is shown below. The financial statements as of
February 10, 2018
and for subsequent periods report the results of the Successor with no beginning retained earnings. Any presentation of the Successor represents the Company's financial position and results of operations post-emergence and is not comparable to prior periods.
Upon the application of fresh start accounting, the Company allocated the reorganization value to its individual assets based on their estimated fair values. Reorganization value represents the fair value of the Successor’s assets before considering liabilities, and the excess of reorganization value over the fair value of identified tangible and intangible assets is reported separately on the consolidated balance sheets in the Successor periods as goodwill.
The Company, with the assistance of external valuation specialists, estimated the enterprise value of the Company upon emergence from the Chapter 11 Case to be approximately
$1.4 billion
to
$1.5 billion
. Enterprise value is defined as the total invested capital, which includes cash and cash equivalents. The estimate is based on the aggregate fair value of total equity of the Company as approved by the Bankruptcy Court and the aggregate fair value of total debt of the Company. The equity of the Company consists of its publicly-traded common stock, Mandatorily Convertible Preferred Stock, Series A Warrants, and Series B Warrants. The debt of the Company consists of a 2018 Credit Agreement and Second Lien Notes Indenture.
In determining the value of total equity, the Company relied on the publicly-traded common stock price as of the time of emergence and the following 30 days, which was considered a level one input, and used a Monte-Carlo simulation to solve for the aggregate equity value across all classes of equity. A Monte-Carlo simulation is an analytical method used to estimate value by performing a large number of simulations or trial runs and thereby determining a value based on the possible outcomes from these trial runs. With the Monte-Carlo simulation, the Company was able to consider the rights and features of each of the equity classes and estimate a total equity value, which resulted in a common stock price equivalent to the publicly-traded price as of the time of emergence. The primary assumptions used in the simulation were risk-free rate, volatility, and terms consistent with the rights and features of the various equity classes.
In estimating the fair value of total debt, a synthetic credit rating analysis was performed based on the underlying financial metrics of the Company to estimate the nonperformance risk and determine appropriate market spreads for each debt security. With the resulting credit rating, market yields were observed for various indices with similar credit ratings, as well as consideration of similar rated bonds, with similar maturity dates. The range of implied credit spreads considered in the valuations were
6.0%
to
8.0%
and the range of implied yields considered in the valuations were
13.5%
to
15.5%
.
Pursuant to fresh start accounting, the Company allocated the determined reorganization value to the Successor Company’s assets at emergence as follows (in thousands):
|
|
|
|
|
|
|
|
|
Successor
|
|
|
February 10, 2018
|
|
Enterprise value
|
$
|
1,464,795
|
|
|
Plus: fair value of liabilities
|
12,137,344
|
|
|
Reorganization value
|
13,602,139
|
|
|
Less:
|
|
|
Fair value of tangible assets
|
13,508,179
|
|
|
Fair value of developed technology
|
41,000
|
|
|
Fair value of identifiable intangible assets
|
44,000
|
|
|
Goodwill
|
$
|
8,960
|
|
Upon the adoption of fresh start accounting, the Successor adopted the majority of the significant accounting policies of the Predecessor. The most significant change in accounting policy relates to the accounting for the Residual Trusts, which were formerly recorded at amortized cost and are now adjusted to fair value on a recurring basis. The adjustments set forth in the following table at
February 9, 2018
reflect the effect of the consummation of the transactions contemplated by the Prepackaged Plan (reflected in the column “Reorganization Adjustments”) as well as fair value adjustments as a result of the adoption of fresh start accounting (reflected in the column “Fresh Start Adjustments”) (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
Reorganization Adjustments
|
|
Fresh Start Adjustments
|
|
|
Successor
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
182,462
|
|
|
$
|
(39,039
|
)
|
(a)
|
$
|
—
|
|
|
|
$
|
143,423
|
|
|
Restricted cash and cash equivalents
|
|
105,041
|
|
|
—
|
|
|
—
|
|
|
|
105,041
|
|
|
Residential loans at amortized cost, net
|
|
787,860
|
|
|
—
|
|
|
(317,189
|
)
|
(c)
|
|
470,671
|
|
|
Residential loans at fair value
|
|
10,423,633
|
|
|
—
|
|
|
304,051
|
|
(c)
|
|
10,727,684
|
|
|
Receivables, net
|
|
151,892
|
|
|
—
|
|
|
(1,740
|
)
|
(d)
|
|
150,152
|
|
|
Servicer and protective advances, net
|
|
748,952
|
|
|
—
|
|
|
(24,367
|
)
|
(e)
|
|
724,585
|
|
|
Servicing rights, net
|
|
744,724
|
|
|
—
|
|
|
5,432
|
|
(f)
|
|
750,156
|
|
|
Goodwill
|
|
47,747
|
|
|
—
|
|
|
(38,787
|
)
|
(g)
|
|
8,960
|
|
|
Intangible assets, net
|
|
8,532
|
|
|
—
|
|
|
35,468
|
|
(h)
|
|
44,000
|
|
|
Premises and equipment, net
|
|
46,873
|
|
|
—
|
|
|
33,739
|
|
(i)
|
|
80,612
|
|
|
Deferred tax assets, net
|
|
1,273
|
|
|
44
|
|
(b)
|
—
|
|
|
|
1,317
|
|
|
Other assets
|
|
392,205
|
|
|
—
|
|
|
3,333
|
|
(j)
|
|
395,538
|
|
|
Total assets
|
|
$
|
13,641,194
|
|
|
$
|
(38,995
|
)
|
|
$
|
(60
|
)
|
|
|
$
|
13,602,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
Payables and accrued liabilities
|
|
$
|
993,805
|
|
|
$
|
(1,540
|
)
|
(a)
|
$
|
(7,444
|
)
|
(k)
|
|
$
|
984,821
|
|
|
Servicer payables
|
|
109,404
|
|
|
—
|
|
|
—
|
|
|
|
109,404
|
|
|
Servicing advance liabilities
|
|
387,813
|
|
|
—
|
|
|
—
|
|
|
|
387,813
|
|
|
Warehouse borrowings
|
|
1,007,310
|
|
|
—
|
|
|
—
|
|
|
|
1,007,310
|
|
|
Corporate debt
|
|
1,142,941
|
|
|
212,500
|
|
(a)(b)
|
(75,034
|
)
|
(l)
|
|
1,280,407
|
|
|
Mortgage-backed debt
|
|
727,909
|
|
|
—
|
|
|
6,246
|
|
(m)
|
|
734,155
|
|
|
HMBS related obligations at fair value
|
|
8,913,052
|
|
|
—
|
|
|
—
|
|
|
|
8,913,052
|
|
|
Deferred tax liabilities, net
|
|
866
|
|
|
(77
|
)
|
(b)
|
—
|
|
|
|
789
|
|
|
Total liabilities not subject to compromise
|
|
13,283,100
|
|
|
210,883
|
|
|
(76,232
|
)
|
|
|
13,417,751
|
|
|
Liabilities subject to compromise
|
|
806,937
|
|
|
(806,937
|
)
|
(b)
|
—
|
|
|
|
—
|
|
|
Total liabilities
|
|
14,090,037
|
|
|
(596,054
|
)
|
|
(76,232
|
)
|
|
|
13,417,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
—
|
|
|
1
|
|
(b)
|
—
|
|
|
|
1
|
|
|
Common stock
|
|
374
|
|
|
(331
|
)
|
(b)
|
—
|
|
|
|
43
|
|
|
Additional paid-in capital
|
|
598,731
|
|
|
(414,387
|
)
|
(b)
|
—
|
|
|
|
184,344
|
|
|
Accumulated deficit
|
|
(1,049,005
|
)
|
|
971,776
|
|
(b)
|
77,229
|
|
(b)
|
|
—
|
|
|
Accumulated other comprehensive income
|
|
1,057
|
|
|
—
|
|
|
(1,057
|
)
|
(n)
|
|
—
|
|
|
Total stockholders' equity (deficit)
|
|
(448,843
|
)
|
|
557,059
|
|
|
76,172
|
|
|
|
184,388
|
|
|
Total liabilities and stockholders' equity (deficit)
|
|
$
|
13,641,194
|
|
|
$
|
(38,995
|
)
|
|
$
|
(60
|
)
|
|
|
$
|
13,602,139
|
|
__________
|
|
|
|
|
|
|
Reorganization Adjustments:
|
|
|
|
|
|
(a)
|
|
Represents Effective Date term loan payment, inclusive of payment of interest accrued.
|
|
|
|
|
|
(b)
|
|
On the Effective Date, all of the Company's obligations under the previously outstanding Convertible Notes and Senior Notes listed above were extinguished. Previously outstanding debt interests were exchanged for Second Lien Notes, common stock, Mandatorily Convertible Preferred Stock, Series A Warrants and/or Series B Warrants. Accordingly: (i) new Second Lien Notes and Warrants were recorded, (ii) liabilities subject to compromise was eliminated, (iii) Predecessor common stock, additional paid in capital, retained deficit, and accumulated other comprehensive income were set to zero, and (iv) Successor common stock, additional paid in capital, and preferred stock were recorded. The resulting total stockholders' equity balance of the Successor of $184.4 million represents the estimated fair value of total stockholders' equity at the Effective Date as determined with the assistance of an independent valuation specialist. The estimated fair values on a per share/unit basis on the Effective Date of the common stock, Mandatorily Convertible Preferred Stock, Series A Warrants and Series B Warrants were $10.25, $1,231.70, $1.68 and $0.94, respectively.
|
|
|
|
|
|
|
|
|
|
Fresh Start Accounting Adjustments:
|
|
|
|
|
|
(c)
|
|
A successor emerging entity applying fresh start accounting upon emergence from bankruptcy may select new accounting policies upon emergence from bankruptcy protection. Prior to the Effective Date, loans of Residual Trusts were carried at amortized cost. In connection with fresh start reporting, the Company made an election to record loans of the Residual Trusts at fair value on a recurring basis. Accordingly, adjustments to residential loans carried at amortized cost, net and residential loans at fair value represent: (i) reclassification of $317.2 million loans of the Residual Trusts from residential loans carried at amortized cost, net to residential loans at fair value and (ii) a $13.1 million reduction of residential loans at fair value to record such Residual Trusts to fair value.
|
|
|
|
|
|
(d)
|
|
Represents adjustment to decrease the carrying value of holdback receivables carried at amortized cost by $1.7 million to reflect the estimated fair value based on the net present value of expected cash flows. Other remaining receivables, net are short-term in nature and, as a result, carrying value approximates fair value.
|
|
|
|
|
|
(e)
|
|
Represents adjustment to reflect estimated fair value based on the net present value of expected cash flows.
|
|
|
|
|
|
(f)
|
|
Represents adjustment to increase the carrying value of servicing rights carried at amortized cost to reflect estimated fair value.
|
|
|
|
|
|
(g)
|
|
The goodwill of the Predecessor has been eliminated and the fair market value of the assets in excess of the reorganization value has been allocated to assets and liabilities as shown above.
|
|
|
|
|
|
(h)
|
|
Represents adjustment to record intangible assets. The fair value of intangible assets was estimated under the relief-from-royalty and lost profits methods. Resulting intangible assets at the Effective Date are comprised of institutional and customer relationships of $24.0 million and trade names of $20.0 million. Refer to Note 11 for additional information.
|
|
|
|
|
|
(i)
|
|
Represents adjustment to increase the carrying value of premises and equipment, net to estimated fair value, reflecting the implied value of internally developed technology. The fair value of internally developed technology was estimated using the relief-from-royalty approach.
|
|
|
|
|
|
(j)
|
|
Represents adjustment to (i) increase the carrying value of real estate owned, net carried at the lower of cost or net realizable value by $5.6 million to estimated fair value and to (ii) eliminate previously existing unamortized deferred debt issuance costs of $2.3 million associated with servicing advance liabilities with line-of-credit arrangements and the 2013 Revolver. The Company had previously elected and disclosed that deferred debt issuance costs associated with revolving facilities were recorded in other assets on the consolidated balance sheets.
|
|
|
|
|
|
(k)
|
|
Represents adjustment to remove liabilities not intended to cash settle, primarily related to liabilities in connection with lease obligations.
|
|
|
|
|
|
(l)
|
|
Represents adjustment to decrease the carrying value of the 2013 Term Loan from amortized cost, net to estimated fair value. The reduction includes the elimination of previous unamortized issuance discounts and unamortized debt issuance costs prior to recording the 2013 Term Loan at estimated fair value. Additionally, represents adjustment of $60.5 million to decrease the carrying value of the Second Lien Notes issued at par value in connection with the Prepackaged Plan to estimated fair value.
|
|
|
|
|
|
(m)
|
|
Represents adjustment to increase the carrying value of mortgage back debt associated with the Residual Trusts, carried at amortized cost, net of discounts and deferred debt issuance costs to estimated fair value.
|
|
|
|
|
|
(n)
|
|
Represents elimination of other comprehensive income on available for sale investments and other post-retirement benefits at the Effective Date.
|
4. Transactions with NRM
NRM Flow and Bulk Agreement
On August 8, 2016, the Company and NRM executed the NRM Flow and Bulk Agreement whereby the Company agreed to sell to NRM all of the Company’s right, title and interest in mortgage servicing rights with respect to a pool of mortgage loans, with subservicing retained. The NRM Flow and Bulk Agreement provides that, from time to time, the Company may sell additional MSR to NRM in bulk or as originated or acquired on a flow basis, subject in each case to the parties agreeing on price and certain other terms.
On January 17, 2018, the Company agreed to sell to NRM MSR relating to mortgage loans having an aggregate unpaid principal balance of approximately
$11.3 billion
as of such sale date, with subservicing retained, and received approximately
$90.4 million
in cash proceeds from NRM as partial consideration for this MSR sale. The Company used
80%
of such cash proceeds to repay borrowings under the 2013 Credit Agreement and used the remaining cash proceeds for general corporate purposes. During June 2018, under an agreement similar to the NRM Flow and Bulk Agreement, the Company agreed to sell to New Penn Financial, which became an affiliate of NRM when acquired by NRM on July 3, 2018, MSR relating to mortgage loans having an aggregate unpaid principal balance of approximately
$4.7 billion
as of the sale date, with servicing released, and received approximately
$56.7 million
in cash proceeds from NRM as partial consideration for the MSR sale. Since entering into the NRM Flow and Bulk Agreement and through
June 30, 2018
, in various bulk transactions under the NRM Flow and Bulk Agreement and a similar agreement, the Company has sold MSR to NRM relating to mortgage loans having an aggregate unpaid principal balance of
$75.8 billion
as of the applicable closing dates of such transactions. As of
June 30, 2018
, the Company had received
$397.1 million
in cash proceeds relating to such sales, which proceeds do not include certain holdback amounts relating to such sales that is expected to be paid to the Company over time. For the
six months ended June 30, 2018
, the Company received
$16.8 million
in cash proceeds relating to these holdback amounts and at
June 30, 2018
and
December 31, 2017
had a servicing rights holdback receivable, net from NRM of
$32.9 million
and
$31.3 million
, respectively, which is recorded in receivables, net on the consolidated balance sheets.
The Company also transferred MSR to NRM under flow transactions relating to mortgage loans consisting entirely of co-issue loans with an aggregate unpaid principal balance of
$1.5 billion
and
$469.5 million
for the periods from
February 10, 2018 through June 30, 2018
and from
January 1, 2018 through February 9, 2018
, respectively. For the
six months ended June 30, 2017
, the Company transferred MSR to NRM under flow transactions relating to mortgage loans with an aggregate unpaid principal balance of
$4.3 billion
, which included co-issue loans with an aggregate unpaid principal balance of
$3.2 billion
. These transfers included recapture activities of generally non-NRM portfolio serviced loans with an aggregate unpaid balance of
$740.0 million
and
$236.9 million
for the periods from
February 10, 2018 through June 30, 2018
and from
January 1, 2018 through February 9, 2018
, respectively. In addition, these transfers generated revenues of
$9.2 million
and
$16.5 million
for the
three months ended June 30, 2018 and 2017
, respectively, and
$13.7 million
,
$3.8 million
and
$35.9 million
for
the period from February 10, 2018 through June 30, 2018, the period from January 1, 2018 through February 9, 2018 and the six months ended June 30, 2017, respectively
, which are recorded in net gains on sales of loans on the consolidated statements of comprehensive income (loss).
NRM Subservicing Agreement
On August 8, 2016, the Company and NRM entered into the NRM Subservicing Agreement whereby the Company acts as subservicer for the mortgage loans whose MSR are sold by the Company to NRM under the NRM Flow and Bulk Agreement and for other mortgage loans as may be agreed upon by the Company and NRM from time to time, in exchange for a subservicing fee. Under the NRM Subservicing Agreement and a related agreement, the Company performs all daily servicing obligations on behalf of NRM, including collecting payments from borrowers and offering refinancing options to borrowers for purposes of minimizing portfolio runoff. On January 17, 2018, the Company and NRM executed a Side Letter Agreement pursuant to which, among other things, certain provisions of the NRM Subservicing Agreement were amended and/or waived. On June 28, 2018, the Company and NRM executed an additional Side Letter Agreement, pursuant to which, among other things, NRM agreed to use commercially reasonable efforts to add additional loans to the NRM Subservicing Agreement for the Company to subservice.
With respect to the Company, for mortgage loans that were being subserviced by the Company under the NRM Subservicing Agreement prior to January 17, 2018, and for any additional mortgage loans that the Company may subservice under the NRM Subservicing Agreement that are added to such agreement after such date (other than (i) mortgage loans relating to MSR sold to NRM by the Company in a bulk sale agreed to by the parties on January 17, 2018 and (ii) mortgage loans relating to MSR sold to NRM by the Company on a flow basis under the NRM Flow and Bulk Agreement after such date), the initial term of the NRM Subservicing Agreement expired on August 8, 2017 and was automatically renewed for a successive
one
year term, and will further be automatically renewed for successive
one
-year terms thereafter, unless the Company elects to terminate the NRM Subservicing Agreement without cause at the end of any subsequent
one
-year renewal term by providing notice to NRM at least
120
days prior to the end of the applicable term. The Company did not provide such notice 120 days prior to the August 8, 2018 expiration date.
With respect to the Company, for mortgage loans relating to MSR sold to NRM by the Company in a bulk MSR sale agreed to by the parties on January 17, 2018 and mortgage loans relating to MSR sold to NRM by the Company on a flow basis under the NRM Flow and Bulk Agreement after such date, the initial term of the NRM Subservicing Agreement expires on January 17, 2019 (with respect to the aforementioned bulk MSR sale) or, with respect to each flow MSR assignment agreement executed by the parties after such date in connection with any flow MSR sales by the Company to NRM after such date, if any, the first anniversary of the first day of the calendar quarter following the calendar quarter during which such flow MSR assignment agreement was executed.
In each case, the NRM Subservicing Agreement will automatically renew for successive
one
-year terms thereafter, unless the Company elects to terminate the NRM Subservicing Agreement without cause at the end of any such
one
-year term by providing notice to NRM at least
120
days prior to the end of the applicable term. If the Company elects to terminate the NRM Subservicing Agreement without cause, the Company will not be entitled to receive any deconversion fee, will be responsible for certain servicing transfer costs and will owe NRM a transfer fee if such termination occurs within
five
years from the effective date of the agreement. The Company may also terminate the NRM Subservicing Agreement immediately for cause upon the occurrence of certain events, including, without limitation, any failure by NRM to remit payments (subject to a cure period), certain bankruptcy or insolvency events of NRM, NRM ceasing to be an approved servicer in good standing with Fannie Mae or Freddie Mac (unless caused by the Company) and any failure by NRM to perform, in any material respect, its obligations under the agreement (subject to a cure period). Upon any termination of the NRM Subservicing Agreement by the Company for cause, NRM will owe the Company a deconversion fee and be responsible for certain servicing transfer costs.
With respect to NRM, for mortgage loans that were being subserviced by the Company under the NRM Subservicing Agreement prior to January 17, 2018, and for any additional mortgage loans that the Company may subservice under the NRM Subservicing Agreement that are added to such agreement after such date (other than (i) mortgage loans relating to MSR sold to NRM by the Company in a bulk sale agreed to by the parties on January 17, 2018 and (ii) mortgage loans relating to MSR sold to NRM by the Company on a flow basis under the NRM Flow and Bulk Agreement after such date), the initial term of the NRM Subservicing Agreement expired on August 8, 2017 and thereafter the agreement automatically terminates with respect to such mortgage loans, unless renewed by NRM on a monthly basis. Since the expiration of the initial term, NRM has renewed the NRM Subservicing Agreement each month thereafter.
In the case of mortgage loans relating to MSR sold to NRM by the Company in a bulk MSR sale agreed to by the parties on January 17, 2018 and mortgage loans relating to MSR sold to NRM by the Company on a flow basis under the NRM Flow and Bulk Agreement after such date, the initial term of the NRM Subservicing Agreement expires on January 17, 2019 (with respect to the aforementioned bulk MSR sale) or, with respect to each flow MSR assignment agreement executed by the parties after such date in connection with any flow MSR sales by the Company to NRM after such date, if any, the first anniversary of the first day of the calendar quarter following the calendar quarter during which such flow MSR assignment agreement was executed, and following the applicable initial term the agreement automatically terminates with respect to the applicable mortgage loans unless renewed by NRM on a quarterly basis. If NRM fails to renew the agreement, it will owe the Company a deconversion fee. In addition, if NRM elects to terminate the NRM Subservicing Agreement without cause, it will owe the Company a deconversion fee and be responsible for certain servicing transfer costs.
NRM may also terminate the NRM Subservicing Agreement immediately for cause upon the occurrence of certain events, including, without limitation, the Company's failure to remit payments (subject to a cure period), its failure to provide reports to NRM (subject to a cure period), a change of control of Ditech Financial or Ditech Holding, its failure to satisfy certain portfolio performance measures relating to delinquency rates or advances, the Company ceasing to be an approved servicer in good standing with Fannie Mae or Freddie Mac, any failure by Ditech Financial or Ditech Holding to satisfy certain financial metrics, certain bankruptcy or insolvency events of Ditech Financial or Ditech Holding and any failure by the Company to perform, in any material respect, its obligations under the agreement (subject to a cure period). Because certain of these events have already occurred, NRM has the ability to terminate the NRM Subservicing Agreement immediately for cause with respect to mortgage loans that were being subserviced by the Company under the NRM Subservicing Agreement prior to January 17, 2018, and for any additional mortgage loans that the Company may subservice under the NRM Subservicing Agreement that are added to such agreement after such date (other than (i) mortgage loans relating to MSR sold to NRM by the Company in a bulk sale agreed to by the parties on January 17, 2018 and (ii) mortgage loans relating to MSR sold to NRM by the Company on a flow basis under the NRM Flow and Bulk Agreement after such date), but has not terminated such agreement with respect to any such mortgage loans. Pursuant to the January 17, 2018 Side Letter Agreement the Company entered into with NRM, NRM agreed to, among other things, waive its right to terminate the Subservicing Agreement for cause due to the occurrence of certain of these events with respect to mortgage loans relating to MSR sold to NRM by the Company in a bulk sale agreed to by the parties on January 17, 2018 and mortgage loans relating to MSR sold to NRM by the Company on a flow basis under the NRM Flow and Bulk Agreement after such date. Upon any termination of the NRM Subservicing Agreement by NRM for cause, the Company will not be entitled to receive any deconversion fee, will be responsible for certain servicing transfer costs and will owe NRM a transfer fee if such termination occurs within
five
years from the effective date of the agreement.
5. Variable Interest Entities
Consolidated Variable Interest Entities
Included in Note 6 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017
are descriptions of the Company’s Consolidated VIEs.
Non-Residual Trusts
During the three months ended June 30, 2018 and for the period from February 10, 2018 through June 30, 2018, the counterparty under the Clean-up Call Agreement for the Non-Residual Trusts fulfilled its obligation for the mandatory clean-up call on one of the remaining trusts by making a payment to the trust of
$62.8 million
, at which point the counterparty took control of the remaining collateral in the trust, including loans and REO with a carrying value of
$54.3 million
and
$0.3 million
, respectively. The trust was then deconsolidated. As a result of the counterparty exercising its clean-up call obligation and the deconsolidation of the trust, the trust recognized a gain of
$7.2 million
during the three months ended June 30, 2018 and for the period from February 10, 2018 through June 30, 2018, which is included in other gains (losses) on the consolidated statements of comprehensive income (loss). Additionally, the Company expensed
$6.2 million
,
$6.8 million
and
$0.5 million
of the Clean-up Call Agreement inducement fee for the
three months ended June 30, 2018
, for the
period from February 10, 2018 through June 30, 2018
and for the
period from January 1, 2018 through February 9, 2018
, respectively, which is included in general and administrative expenses on the consolidated statements of comprehensive income (loss). The Clean-up Call Agreement inducement fee had a remaining balance of
$22.0 million
, which is included in other assets on the consolidated balance sheet at June 30, 2018.
Included in the tables below are summaries of the carrying amounts of the assets and liabilities of consolidated VIEs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
June 30, 2018
|
|
|
|
Residual
Trusts
|
|
Non-Residual
Trusts
|
|
Servicer and Protective Advance Financing Facilities
|
|
Revolving Credit Facilities-Related VIEs
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and cash equivalents
|
|
$
|
12,979
|
|
|
$
|
6,981
|
|
|
$
|
9,838
|
|
|
$
|
—
|
|
|
$
|
29,798
|
|
|
Residential loans at fair value
(1)
|
|
287,215
|
|
|
232,250
|
|
|
—
|
|
|
—
|
|
|
519,465
|
|
|
Receivables, net
|
|
—
|
|
|
2,143
|
|
|
—
|
|
|
789
|
|
|
2,932
|
|
|
Servicer and protective advances, net
|
|
—
|
|
|
—
|
|
|
335,379
|
|
|
—
|
|
|
335,379
|
|
|
Other assets
|
|
128,417
|
|
|
864
|
|
|
2,110
|
|
|
16,669
|
|
|
148,060
|
|
|
Total assets
|
|
$
|
428,611
|
|
|
$
|
242,238
|
|
|
$
|
347,327
|
|
|
$
|
17,458
|
|
|
$
|
1,035,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Payables and accrued liabilities
|
|
$
|
50,399
|
|
|
$
|
—
|
|
|
$
|
630
|
|
|
$
|
—
|
|
|
$
|
51,029
|
|
|
Servicing advance liabilities
|
|
—
|
|
|
—
|
|
|
304,920
|
|
|
—
|
|
|
304,920
|
|
|
Mortgage-backed debt
(1)
|
|
370,010
|
|
|
263,234
|
|
|
—
|
|
|
—
|
|
|
633,244
|
|
|
Total liabilities
|
|
$
|
420,409
|
|
|
$
|
263,234
|
|
|
$
|
305,550
|
|
|
$
|
—
|
|
|
$
|
989,193
|
|
__________
|
|
|
|
(1)
|
In connection with the adoption of fresh start accounting effective
February 10, 2018
, the Company changed its method of accounting for the residential loans and mortgage-backed debt of the Residual Trusts from amortized cost to fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
December 31, 2017
|
|
|
|
Residual
Trusts
|
|
Non-Residual
Trusts
|
|
Servicer and Protective Advance Financing Facilities
|
|
Revolving Credit Facilities-Related VIEs
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and cash equivalents
|
|
$
|
12,687
|
|
|
$
|
8,020
|
|
|
$
|
23,669
|
|
|
$
|
—
|
|
|
$
|
44,376
|
|
|
Residential loans at amortized cost, net
|
|
424,420
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
424,420
|
|
|
Residential loans at fair value
|
|
—
|
|
|
301,435
|
|
|
—
|
|
|
—
|
|
|
301,435
|
|
|
Receivables, net
|
|
—
|
|
|
5,608
|
|
|
—
|
|
|
216
|
|
|
5,824
|
|
|
Servicer and protective advances, net
|
|
—
|
|
|
—
|
|
|
446,799
|
|
|
—
|
|
|
446,799
|
|
|
Other assets
|
|
9,924
|
|
|
1,072
|
|
|
1,301
|
|
|
27,540
|
|
|
39,837
|
|
|
Total assets
|
|
$
|
447,031
|
|
|
$
|
316,135
|
|
|
$
|
471,769
|
|
|
$
|
27,756
|
|
|
$
|
1,262,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Payables and accrued liabilities
|
|
$
|
2,178
|
|
|
$
|
—
|
|
|
$
|
908
|
|
|
$
|
—
|
|
|
$
|
3,086
|
|
|
Servicing advance liabilities
(1)
|
|
—
|
|
|
—
|
|
|
444,563
|
|
|
—
|
|
|
444,563
|
|
|
Mortgage-backed debt
|
|
387,200
|
|
|
348,682
|
|
|
—
|
|
|
—
|
|
|
735,882
|
|
|
Total liabilities
|
|
$
|
389,378
|
|
|
$
|
348,682
|
|
|
$
|
445,471
|
|
|
$
|
—
|
|
|
$
|
1,183,531
|
|
__________
|
|
|
|
(1)
|
The notes outstanding under Servicer and Protective Advance Financing Facilities were acquired by a subsidiary during the fourth quarter of 2017, primarily with proceeds from the Securities Master Repurchase Agreement. These notes are therefore eliminated upon consolidation at December 31, 2017.
|
Unconsolidated Variable Interest Entities
Included in Note 6 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017
are descriptions of the Company's variable interests in VIEs that it does not consolidate as it has determined that it is not the primary beneficiary of the VIEs.
6. Transfers of Residential Loans
Sales of Mortgage Loans
As part of its originations activities, the Company sells substantially all of its originated or purchased mortgage loans into the secondary market. The Company sells conventional-conforming and government-backed mortgage loans through GSE and agency-sponsored programs. The Company also sells non-conforming mortgage loans to private investors. The Company accounts for these transfers as sales. If the servicing rights are retained upon sale, the Company receives a fee for servicing the sold loans, which represents continuing involvement.
Certain guarantees arise from agreements associated with the sale of the Company's residential loans. Under these agreements, the Company may be obligated to repurchase loans, or otherwise indemnify or reimburse the credit owner or insurer for losses incurred, due to material breach of contractual representations and warranties. Refer to
Note 23
for further information.
The following table presents the carrying amounts of the Company’s assets that relate to its continued involvement with mortgage loans that have been sold with servicing rights retained and the unpaid principal balance of these sold loans (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value of Net Assets
Recorded on the Consolidated Balance Sheets
|
|
Unpaid
Principal
Balance of
Sold Loans
|
|
|
|
Servicing
Rights, Net
|
|
Servicer and
Protective
Advances, Net
|
|
Payables and Accrued Liabilities
|
|
Total
|
|
|
Successor
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
$
|
359,344
|
|
|
$
|
12,040
|
|
|
$
|
—
|
|
|
$
|
371,384
|
|
|
$
|
28,878,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
$
|
385,744
|
|
|
$
|
30,762
|
|
|
$
|
(32
|
)
|
|
$
|
416,474
|
|
|
$
|
36,274,449
|
|
At
June 30, 2018
and
December 31, 2017
,
2.3%
and
2.9%
, respectively, of mortgage loans sold and serviced by the Company were
60 days or more
past due.
The following table presents a summary of cash flows related to sales of mortgage loans (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
For the Three Months Ended June 30, 2018
|
|
|
For the Three Months Ended June 30, 2017
|
|
|
For the Period From February 10, 2018 Through June 30, 2018
|
|
|
For the Period From January 1, 2018 Through February 9, 2018
|
|
For the Six Months Ended June 30, 2017
|
|
Cash proceeds received from sales, net of fees
|
|
$
|
2,748,433
|
|
|
|
$
|
4,551,321
|
|
|
|
$
|
4,055,897
|
|
|
|
$
|
1,415,435
|
|
|
$
|
9,803,873
|
|
|
Servicing fees collected
(1)
|
|
28,981
|
|
|
|
29,563
|
|
|
|
44,413
|
|
|
|
13,884
|
|
|
60,366
|
|
|
Repurchases of previously sold loans
(2)
|
|
31,702
|
|
|
|
13,509
|
|
|
|
49,594
|
|
|
|
14,948
|
|
|
31,012
|
|
__________
|
|
|
|
(1)
|
Represents servicing fees collected on all loans sold whereby the Company has continuing involvement with mortgage loans that have been sold with servicing rights retained.
|
|
|
|
|
(2)
|
Includes Ginnie Mae buyout loans of
$29.9 million
and
$11.7 million
for the
three months ended June 30, 2018 and 2017
, respectively, and
$46.8 million
,
$14.2 million
and
$25.2 million
for
the period from February 10, 2018 through June 30, 2018, the period from January 1, 2018 through February 9, 2018 and the six months ended June 30, 2017, respectively
.
|
In connection with these sales, the Company recorded servicing rights using a fair value model that utilizes Level 3 unobservable inputs or using an agreed upon sales price considered to be Level 2 within the fair value hierarchy. Refer to
Note 10
for information relating to servicing of residential loans.
Transfers of Reverse Loans
The Company, through RMS, is an approved issuer of Ginnie Mae HMBS. The HMBS are guaranteed by Ginnie Mae and collateralized by participation interests in HECMs insured by the FHA. The Company both originated and purchased HECMs that were pooled and securitized into HMBS that the Company sold into the secondary market with servicing rights retained.
Effective January 2017, the Company exited the reverse mortgage originations business. The Company no longer has any reverse loans remaining in its originations pipeline and has finalized the shutdown of the reverse mortgage originations business. The Company will continue to fund undrawn tails available to borrowers.
Based upon the structure of the Ginnie Mae securitization program, the Company has determined that it has not met all of the requirements for sale accounting and accounts for these transfers as secured borrowings. Under this accounting treatment, the reverse loans remain on the consolidated balance sheets as residential loans. The proceeds from the transfer of reverse loans are recorded as HMBS related obligations with no gain or loss recognized on the transfer. Ginnie Mae, as guarantor of the HMBS, is obligated to the holders of the HMBS in an instance of RMS default on its servicing obligations, or when the proceeds realized on HECMs are insufficient to repay all outstanding HMBS related obligations. Ginnie Mae has recourse to RMS to the extent of the participation interests in HECMs serving as collateral to the HMBS, but does not have recourse to the general assets of the Company, except that Ginnie Mae has recourse to RMS in connection with certain claims relating to the performance and obligations of RMS as both an issuer of HMBS and a servicer of HECMs underlying HMBS.
At
June 30, 2018
, the unpaid principal balance and the carrying value associated with both the reverse loans and the real estate owned pledged as collateral to the securitization pools were
$7.8 billion
and
$8.1 billion
, respectively.
7. Fair Value
Basis for Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A three-tier fair value hierarchy is used to prioritize the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:
Level 1 — Valuation is based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 — Valuation is based on quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 — Valuation is based on inputs that are both significant to the fair value measurement and unobservable.
The accounting guidance concerning fair value allows the Company to elect to measure financial instruments at fair value and report the changes in fair value through net income or loss. This election can only be made at certain specified dates and is irrevocable once made. Other than mortgage loans held for sale, which the Company has elected to measure at fair value, the Company does not have a fair value election policy, but rather makes the election on an instrument-by-instrument basis as assets and liabilities are acquired or incurred, other than for those assets and liabilities that are required to be recorded and subsequently measured at fair value.
Transfers into and out of the fair value hierarchy levels are assumed to be as of the end of the quarter in which the transfer occurred.
Items Measured at Fair Value on a Recurring Basis
The following table summarizes the assets and liabilities in each level of the fair value hierarchy (in thousands). There was an insignificant amount of assets or liabilities measured at fair value on a recurring basis utilizing Level 1 assumptions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Level 2
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Mortgage loans held for sale
|
|
$
|
671,008
|
|
|
|
$
|
588,485
|
|
|
Freestanding derivative instruments
|
|
1,244
|
|
|
|
2,757
|
|
|
Level 2 assets
|
|
$
|
672,252
|
|
|
|
$
|
591,242
|
|
|
Liabilities
|
|
|
|
|
|
|
Freestanding derivative instruments
|
|
$
|
4,960
|
|
|
|
$
|
981
|
|
|
Servicing rights related liabilities
|
|
—
|
|
|
|
32
|
|
|
Level 2 liabilities
|
|
$
|
4,960
|
|
|
|
$
|
1,013
|
|
|
|
|
|
|
|
|
|
Level 3
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Reverse loans
|
|
$
|
9,151,736
|
|
|
|
$
|
9,789,444
|
|
|
Mortgage loans related to Non-Residual Trusts
|
|
232,250
|
|
|
|
301,435
|
|
|
Mortgage loans related to Residual Trusts and other loans held for investment
(1)
|
|
293,952
|
|
|
|
—
|
|
|
Mortgage loans held for sale
|
|
64
|
|
|
|
68
|
|
|
Charged-off loans
|
|
45,771
|
|
|
|
45,800
|
|
|
Receivables related to Non-Residual Trusts
|
|
2,143
|
|
|
|
5,608
|
|
|
Servicing rights carried at fair value
|
|
633,125
|
|
|
|
714,774
|
|
|
Freestanding derivative instruments (IRLCs)
|
|
19,861
|
|
|
|
26,637
|
|
|
Level 3 assets
|
|
$
|
10,378,902
|
|
|
|
$
|
10,883,766
|
|
|
Liabilities
|
|
|
|
|
|
|
Freestanding derivative instruments (IRLCs)
|
|
$
|
503
|
|
|
|
$
|
269
|
|
|
Mortgage-backed debt related to Non-Residual Trusts
|
|
263,234
|
|
|
|
348,682
|
|
|
Mortgage-backed debt related to Residual Trusts
(1)
|
|
370,010
|
|
|
|
—
|
|
|
HMBS related obligations
|
|
8,294,703
|
|
|
|
9,175,128
|
|
|
Level 3 liabilities
|
|
$
|
8,928,450
|
|
|
|
$
|
9,524,079
|
|
__________
|
|
|
|
(1)
|
In connection with the adoption of fresh start accounting effective
February 10, 2018
, the Company elected to change its method of accounting for mortgage loans related to Residual Trusts and other loans held for investment as well as mortgage-backed debt related to Residual Trusts from amortized cost to fair value.
|
The following assets and liabilities are measured on the consolidated balance sheets at fair value on a recurring basis utilizing significant unobservable inputs or Level 3 assumptions in their valuation. The following tables provide a reconciliation of the beginning and ending balances of these assets and liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
For the Three Months Ended June 30, 2018
|
|
|
Fair Value
April 1, 2018
|
|
Total Gains (Losses) Included in Comprehensive Loss
|
|
Purchases and Other
|
|
Sales
|
|
Originations / Issuances
|
|
Settlements
|
|
Fair Value
June 30, 2018
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse loans
|
$
|
9,603,314
|
|
|
$
|
45,004
|
|
|
$
|
—
|
|
|
$
|
(210,173
|
)
|
|
$
|
67,021
|
|
|
$
|
(353,430
|
)
|
|
$
|
9,151,736
|
|
|
Mortgage loans related to Non-Residual Trusts
|
293,011
|
|
|
7,978
|
|
|
—
|
|
|
(54,252
|
)
|
|
—
|
|
|
(14,487
|
)
|
|
232,250
|
|
|
Mortgage loans related to Residual Trusts and other loans held for investment
|
299,558
|
|
|
1,684
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,290
|
)
|
|
293,952
|
|
|
Mortgage loans held for sale
|
67
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
64
|
|
|
Charged-off loans
|
48,072
|
|
|
7,301
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,602
|
)
|
|
45,771
|
|
|
Receivables related to Non-Residual Trusts
|
3,484
|
|
|
(297
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,044
|
)
|
|
2,143
|
|
|
Servicing rights carried at fair value
|
675,176
|
|
|
3,503
|
|
|
42
|
|
|
(64,504
|
)
|
|
18,908
|
|
|
—
|
|
|
633,125
|
|
|
Freestanding derivative instruments (IRLCs)
|
26,746
|
|
|
(6,875
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10
|
)
|
|
19,861
|
|
|
Total assets
|
$
|
10,949,428
|
|
|
$
|
58,299
|
|
|
$
|
42
|
|
|
$
|
(328,929
|
)
|
|
$
|
85,929
|
|
|
$
|
(385,867
|
)
|
|
$
|
10,378,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freestanding derivative instruments (IRLCs)
|
$
|
(227
|
)
|
|
$
|
(276
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(503
|
)
|
|
Mortgage-backed debt related to Non-Residual Trusts
|
(335,848
|
)
|
|
(3,954
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
76,568
|
|
|
(263,234
|
)
|
|
Mortgage-backed debt related to Residual Trusts
|
(381,340
|
)
|
|
648
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,682
|
|
|
(370,010
|
)
|
|
HMBS related obligations
|
(8,798,059
|
)
|
|
(46,742
|
)
|
|
—
|
|
|
—
|
|
|
(71,031
|
)
|
|
621,129
|
|
|
(8,294,703
|
)
|
|
Total liabilities
|
$
|
(9,515,474
|
)
|
|
$
|
(50,324
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(71,031
|
)
|
|
$
|
708,379
|
|
|
$
|
(8,928,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
For the Three Months Ended June 30, 2017
|
|
|
Fair Value
April 1, 2017
|
|
Total
Gains (Losses)
Included in
Comprehensive Loss
|
|
Purchases
|
|
Sales and Other
|
|
Originations / Issuances
|
|
Settlements
|
|
Fair Value
June 30, 2017
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse loans
|
$
|
10,599,732
|
|
|
$
|
72,569
|
|
|
$
|
1,635
|
|
|
$
|
—
|
|
|
$
|
84,972
|
|
|
$
|
(318,239
|
)
|
|
$
|
10,440,669
|
|
|
Mortgage loans related to Non-Residual Trusts
|
440,219
|
|
|
(3,343
|
)
|
|
—
|
|
|
(8,890
|
)
|
|
—
|
|
|
(21,980
|
)
|
|
406,006
|
|
|
Mortgage loans held for sale
(1)
|
—
|
|
|
6
|
|
|
—
|
|
|
8,890
|
|
|
—
|
|
|
(158
|
)
|
|
8,738
|
|
|
Charged-off loans
(2)
|
52,071
|
|
|
8,161
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,606
|
)
|
|
49,626
|
|
|
Receivables related to Non-Residual Trusts
|
13,848
|
|
|
533
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,540
|
)
|
|
11,841
|
|
|
Servicing rights carried at fair value
|
909,270
|
|
|
(66,633
|
)
|
|
73
|
|
|
4,131
|
|
|
17,267
|
|
|
—
|
|
|
864,108
|
|
|
Freestanding derivative instruments (IRLCs)
|
45,347
|
|
|
(13,590
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(70
|
)
|
|
31,687
|
|
|
Total assets
|
$
|
12,060,487
|
|
|
$
|
(2,297
|
)
|
|
$
|
1,708
|
|
|
$
|
4,131
|
|
|
$
|
102,239
|
|
|
$
|
(353,593
|
)
|
|
$
|
11,812,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freestanding derivative instruments (IRLCs)
|
(714
|
)
|
|
(1,461
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
(2,175
|
)
|
|
Mortgage-backed debt related to Non-Residual Trusts
|
(498,768
|
)
|
|
(5,406
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
33,574
|
|
|
(470,600
|
)
|
|
HMBS related obligations
|
(10,289,505
|
)
|
|
(64,697
|
)
|
|
—
|
|
|
—
|
|
|
(123,695
|
)
|
|
491,488
|
|
|
(9,986,409
|
)
|
|
Total liabilities
|
$
|
(10,788,987
|
)
|
|
$
|
(71,564
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(123,695
|
)
|
|
$
|
525,062
|
|
|
$
|
(10,459,184
|
)
|
__________
|
|
|
|
(1)
|
During the
three months ended June 30, 2017
,
$8.9 million
of loans transferred from mortgage loans related to Non-Residual Trusts to mortgage loans held for sale upon exercising a mandatory call obligation.
|
|
|
|
|
(2)
|
Included in gains on charged-off loans are gains from instrument-specific credit risk, which primarily result from changes in assumptions related to collection rates and discount rates, of
$1.7 million
during the
three months ended June 30, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
For the Period From February 10, 2018 Through June 30,
2018
|
|
|
Fair Value
February 10, 2018
|
|
Total Gains (Losses) Included in Comprehensive Loss
|
|
Purchases and Other
|
|
Sales
|
|
Originations / Issuances
|
|
Settlements
|
|
Fair Value
June 30, 2018
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse loans
|
$
|
9,702,263
|
|
|
$
|
90,861
|
|
|
$
|
—
|
|
|
$
|
(210,173
|
)
|
|
$
|
104,464
|
|
|
$
|
(535,679
|
)
|
|
$
|
9,151,736
|
|
|
Mortgage loans related to Non-Residual Trusts
|
299,790
|
|
|
10,498
|
|
|
—
|
|
|
(54,252
|
)
|
|
—
|
|
|
(23,786
|
)
|
|
232,250
|
|
|
Mortgage loans related to Residual Trusts and other loans held for investment
|
304,051
|
|
|
875
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,974
|
)
|
|
293,952
|
|
|
Mortgage loans held for sale
|
67
|
|
|
21
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(24
|
)
|
|
64
|
|
|
Charged-off loans
|
50,299
|
|
|
10,321
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(14,849
|
)
|
|
45,771
|
|
|
Receivables related to Non-Residual Trusts
|
4,730
|
|
|
(708
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,879
|
)
|
|
2,143
|
|
|
Servicing rights carried at fair value
|
688,466
|
|
|
(16,795
|
)
|
|
10
|
|
|
(64,504
|
)
|
|
25,948
|
|
|
—
|
|
|
633,125
|
|
|
Freestanding derivative instruments (IRLCs)
|
24,460
|
|
|
(4,579
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(20
|
)
|
|
19,861
|
|
|
Total assets
|
$
|
11,074,126
|
|
|
$
|
90,494
|
|
|
$
|
10
|
|
|
$
|
(328,929
|
)
|
|
$
|
130,412
|
|
|
$
|
(587,211
|
)
|
|
$
|
10,378,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freestanding derivative instruments (IRLCs)
|
$
|
(3,023
|
)
|
|
$
|
2,520
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(503
|
)
|
|
Mortgage-backed debt related to Non-Residual Trusts
|
(344,002
|
)
|
|
(5,423
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
86,191
|
|
|
(263,234
|
)
|
|
Mortgage-backed debt related to Residual Trusts
|
(390,152
|
)
|
|
2,211
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17,931
|
|
|
(370,010
|
)
|
|
HMBS related obligations
|
(8,913,052
|
)
|
|
(91,710
|
)
|
|
—
|
|
|
—
|
|
|
(124,014
|
)
|
|
834,073
|
|
|
(8,294,703
|
)
|
|
Total liabilities
|
$
|
(9,650,229
|
)
|
|
$
|
(92,402
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(124,014
|
)
|
|
$
|
938,195
|
|
|
$
|
(8,928,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
For the Period From January 1, 2018 Through February 9,
2018
|
|
|
Fair Value
January 1, 2018
|
|
Total
Gains (Losses)
Included in
Comprehensive Income
|
|
Purchases and Other
|
|
Sales
|
|
Originations / Issuances
|
|
Settlements
|
|
Fresh Start Accounting Adjustment
|
|
Fair Value
February 9, 2018
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse loans
|
$
|
9,789,444
|
|
|
$
|
31,476
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
33,300
|
|
|
$
|
(151,957
|
)
|
|
$
|
—
|
|
|
$
|
9,702,263
|
|
|
Mortgage loans related to Non-Residual Trusts
|
301,435
|
|
|
5,690
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,335
|
)
|
|
—
|
|
|
299,790
|
|
|
Mortgage loans related to Residual Trusts and other loans held for investment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
304,051
|
|
|
304,051
|
|
|
Mortgage loans held for sale
|
68
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
67
|
|
|
Charged-off loans
(1)
|
45,800
|
|
|
8,843
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,344
|
)
|
|
—
|
|
|
50,299
|
|
|
Receivables related to Non-Residual Trusts
|
5,608
|
|
|
848
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,726
|
)
|
|
—
|
|
|
4,730
|
|
|
Servicing rights carried at fair value
|
714,774
|
|
|
64,663
|
|
|
(7
|
)
|
|
(100,399
|
)
|
|
9,435
|
|
|
—
|
|
|
—
|
|
|
688,466
|
|
|
Freestanding derivative instruments (IRLCs)
|
26,637
|
|
|
(2,171
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
24,460
|
|
|
Total assets
|
$
|
10,883,766
|
|
|
$
|
109,349
|
|
|
$
|
(7
|
)
|
|
$
|
(100,399
|
)
|
|
$
|
42,735
|
|
|
$
|
(165,369
|
)
|
|
$
|
304,051
|
|
|
$
|
11,074,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freestanding derivative instruments (IRLCs)
|
$
|
(269
|
)
|
|
$
|
(2,754
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(3,023
|
)
|
|
Mortgage-backed debt related to Non-Residual Trusts
|
(348,682
|
)
|
|
(2,956
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,636
|
|
|
—
|
|
|
(344,002
|
)
|
|
Mortgage-backed debt related to Residual Trusts
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(390,152
|
)
|
|
(390,152
|
)
|
|
HMBS related obligations
|
(9,175,128
|
)
|
|
(20,900
|
)
|
|
—
|
|
|
—
|
|
|
(27,881
|
)
|
|
310,857
|
|
|
—
|
|
|
(8,913,052
|
)
|
|
Total liabilities
|
$
|
(9,524,079
|
)
|
|
$
|
(26,610
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(27,881
|
)
|
|
$
|
318,493
|
|
|
$
|
(390,152
|
)
|
|
$
|
(9,650,229
|
)
|
__________
|
|
|
|
(1)
|
Included in gains on charged-off loans are gains from instrument-specific credit risk, which primarily result from changes in assumptions related to collection rates and discount rates, of
$5.7 million
during the
period from January 1, 2018 through February 9,
2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
For the Six Months Ended June 30, 2017
|
|
|
Fair Value
January 1, 2017
|
|
Total
Gains (Losses)
Included in
Comprehensive Loss
|
|
Purchases
|
|
Sales and Other
|
|
Originations / Issuances
|
|
Settlements
|
|
Fair Value
June 30, 2017
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse loans
|
$
|
10,742,922
|
|
|
$
|
115,181
|
|
|
$
|
44,769
|
|
|
$
|
—
|
|
|
$
|
172,034
|
|
|
$
|
(634,237
|
)
|
|
$
|
10,440,669
|
|
|
Mortgage loans related to Non-Residual Trusts
(1)
|
450,377
|
|
|
9,159
|
|
|
—
|
|
|
(8,890
|
)
|
|
—
|
|
|
(44,640
|
)
|
|
406,006
|
|
|
Mortgage loans held for sale
(1)
|
—
|
|
|
6
|
|
|
—
|
|
|
8,890
|
|
|
—
|
|
|
(158
|
)
|
|
8,738
|
|
|
Charged-off loans
(2)
|
46,963
|
|
|
22,752
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(20,089
|
)
|
|
49,626
|
|
|
Receivables related to Non-Residual Trusts
|
15,033
|
|
|
3,102
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,294
|
)
|
|
11,841
|
|
|
Servicing rights carried at fair value
|
936,423
|
|
|
(119,112
|
)
|
|
519
|
|
|
4,207
|
|
|
42,071
|
|
|
—
|
|
|
864,108
|
|
|
Freestanding derivative instruments (IRLCs)
|
53,394
|
|
|
(21,596
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(111
|
)
|
|
31,687
|
|
|
Total assets
|
$
|
12,245,112
|
|
|
$
|
9,492
|
|
|
$
|
45,288
|
|
|
$
|
4,207
|
|
|
$
|
214,105
|
|
|
$
|
(705,529
|
)
|
|
$
|
11,812,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freestanding derivative instruments (IRLCs)
|
$
|
(4,193
|
)
|
|
$
|
2,018
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(2,175
|
)
|
|
Mortgage-backed debt related to Non-Residual Trusts
|
(514,025
|
)
|
|
(13,965
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
57,390
|
|
|
(470,600
|
)
|
|
HMBS related obligations
|
(10,509,449
|
)
|
|
(92,607
|
)
|
|
—
|
|
|
—
|
|
|
(278,010
|
)
|
|
893,657
|
|
|
(9,986,409
|
)
|
|
Total liabilities
|
$
|
(11,027,667
|
)
|
|
$
|
(104,554
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(278,010
|
)
|
|
$
|
951,047
|
|
|
$
|
(10,459,184
|
)
|
__________
|
|
|
|
(1)
|
During the
six months ended June 30, 2017
,
$8.9 million
of loans transferred from mortgage loans related to Non-Residual Trusts to mortgage loans held for sale upon exercising a mandatory call obligation.
|
|
|
|
|
(2)
|
Included in gains on charged-off loans are gains from instrument-specific credit risk, which primarily result from changes in assumptions related to collection rates and discount rates, of
$11.9 million
during the
six months ended June 30, 2017
.
|
All gains and losses on assets and liabilities measured at fair value on a recurring basis and classified as Level 3 within the fair value hierarchy, with the exception of gains and losses on mortgage loans held for sale, charged-off loans, IRLCs, servicing rights carried at fair value, and servicing rights related liabilities, are recognized in either other net fair value gains (losses) or net fair value gains on reverse loans and related HMBS obligations on the consolidated statements of comprehensive income (loss). Gains and losses related to charged-off loans are recorded in other revenues, while gains and losses relating to IRLCs and mortgage loans held for sale are recorded in net gains on sales of loans on the consolidated statements of comprehensive income (loss). The change in fair value of servicing rights carried at fair value and servicing rights related liabilities are recorded in net servicing revenue and fees on the consolidated statements of comprehensive income (loss). Total gains and losses included above include interest income and interest expense at the stated rate for interest-bearing assets and liabilities, respectively, accretion and amortization, and the impact of the changes in valuation inputs and assumptions.
The Company’s Valuation Committee determines and approves valuation policies and unobservable inputs used to estimate the fair value of items measured at fair value on a recurring basis. The Valuation Committee, consisting of certain members of the senior executive management team, meets on a quarterly basis to review the assets and liabilities that require fair value measurement, including how each asset and liability has actually performed in comparison to the unobservable inputs and the projected performance. The Valuation Committee also reviews related available market data. Fair value adjustments relating to fresh start accounting are discussed in more detail in
Note 3
.
The following is a description of the methods used to estimate the fair values of the Company’s assets and liabilities measured at fair value on a recurring basis, as well as the basis for classifying these assets and liabilities as Level 2 or 3 within the fair value hierarchy. The Company’s valuations consider assumptions that it believes a market participant would consider in valuing the assets and liabilities, the most significant of which are disclosed below. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the valuations for recent historical experience, as well as for current and expected relevant market conditions.
Residential loans
|
|
|
|
•
|
Reverse loans, mortgage loans related to Non-Residual Trusts, mortgage loans related to Residual Trusts and charged-off loans
— These loans are not traded in an active, open market with readily observable prices. Accordingly, the Company estimates fair value using Level 3 unobservable market inputs. The estimated fair value is based on the net present value of projected cash flows over the estimated life of the loans. The discount rate assumption for these assets considers, as applicable, collateral and credit risk characteristics of the loans, collection rates, current market interest rates, expected duration, and current market yields.
|
|
|
|
|
•
|
Mortgage loans held for sale
— These loans are primarily valued using a market approach by utilizing observable quoted market prices, where available, or prices for other whole loans with similar characteristics. The Company classifies these loans as Level 2 within the fair value hierarchy. Loans held for sale also includes loans that are not traded in an active, open market with readily observable prices. Accordingly, the Company estimates fair value using Level 3 unobservable market inputs. The estimated fair value is based on the net present value of projected cash flows over the estimated life of the loans. The discount rate assumption for these assets considers, as applicable, collateral and credit risk characteristics of the loans, collection rates, current market interest rates, expected duration, and current market yields.
|
Receivables related to Non-Residual Trusts
— The Company estimates the fair value of these receivables using the net present value of expected cash flows from the LOCs to be used to pay bondholders over the remaining life of the securitization trusts and applies Level 3 unobservable market inputs in its valuation. Receivables related to Non-Residual Trusts are recorded in receivables, net on the consolidated balance sheets.
Servicing rights carried at fair value
— The Company accounts for servicing rights associated with the risk-managed loan class at fair value. The Company primarily uses a discounted cash flow model to estimate the fair value of these assets, unless there is an agreed upon sales price for a specific portfolio on or prior to the applicable reporting date relating to such reporting period, in which case the assets are valued at the price that the trade will be executed. The assumptions used in the discounted cash flow model vary based on collateral stratifications including product type, remittance type, geography, delinquency, and coupon dispersion of the underlying loan portfolio. The Company classifies servicing rights that are valued at the agreed upon sales price within Level 2 of the fair value hierarchy, and the servicing rights that are valued using a discounted cash flow model are classified within Level 3 of the fair value hierarchy. The Company obtains third-party valuations on a quarterly basis to assess the reasonableness of the fair values calculated by the cash flow model.
Freestanding derivative instruments
— Fair values of IRLCs are derived using valuation models incorporating market pricing for instruments with similar characteristics and by estimating the fair value of the servicing rights expected to be recorded at sale of the loan. The fair values are then adjusted for anticipated loan funding probability. Both the fair value of servicing rights expected to be recorded at the date of sale of the loan and anticipated loan funding probability are significant unobservable inputs and, as a result, IRLCs are classified as Level 3 within the fair value hierarchy. The loan funding probability ratio represents the aggregate likelihood that loans currently in a lock position will ultimately close, which is largely dependent on the loan processing stage that a loan is currently in and changes in interest rates from the time of the rate lock through the time a loan is closed. IRLCs have positive fair value at inception and change in value as interest rates and loan funding probability change. Rising interest rates have a positive effect on the fair value of the servicing rights component of the IRLC fair value and increase the loan funding probability. An increase in loan funding probability (i.e., higher aggregate likelihood of loans estimated to close) will result in the fair value of the IRLC increasing if in a gain position, or decreasing, to a lower loss, if in a loss position. A significant increase (decrease) to the fair value of servicing rights component in isolation could result in a significantly higher (lower) fair value measurement.
The fair value of forward sales commitments and MBS purchase commitments is determined based on observed market pricing for similar instruments; therefore, these contracts are classified as Level 2 within the fair value hierarchy. Counterparty credit risk is taken into account when determining fair value, although the impact is diminished by daily margin posting on all forward sales and purchase commitments. Refer to
Note 8
for additional information on freestanding derivative financial instruments.
Mortgage-backed debt related to Non-Residual Trusts and mortgage-backed debt related to Residual Trusts
— This debt is not traded in an active, open market with readily observable prices. Accordingly, the Company estimates fair value using Level 3 unobservable market inputs. The estimated fair value of the debt is based on the net present value of the projected principal and interest payments owed for the estimated remaining life of the securitization trusts. An analysis of the credit assumptions for the underlying collateral in each of the securitization trusts is performed to determine the required payments to bondholders.
HMBS related obligations
— These obligations are not traded in an active, open market with readily observable prices. Accordingly, the Company estimates fair value using Level 3 unobservable market inputs. The estimated fair value is based on the net present value of projected cash flows over the estimated life of the liabilities. The discount rate assumption for these liabilities is based on an assessment of current market yields for HMBS, expected duration, and current market interest rates. The yield on seasoned HMBS is adjusted based on the duration of each HMBS and assuming a constant spread to LIBOR.
The following tables present the significant unobservable inputs used in the fair value measurement of the assets and liabilities described above. The Company utilizes a discounted cash flow model to estimate the fair value of all Level 3 assets and liabilities included on the Consolidated Financial Statements at fair value on a recurring basis, with the exception of IRLCs for which the Company utilizes a market approach. Significant increases or decreases in any of the inputs disclosed below could result in a significantly lower or higher fair value measurement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
June 30, 2018
|
|
|
February 9, 2018
|
|
December 31, 2017
|
|
Significant
Unobservable Input
(1)(2)
|
|
Range of Input
(3)
|
|
Weighted
Average of Input
(3)
|
|
|
Range of Input
(3)
|
|
Weighted
Average of Input
(3)
|
|
Range of Input
(3)
|
|
Weighted
Average of Input
(3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining life in years
(4)
|
|
0.2 - 9.9
|
|
3.3
|
|
|
|
0.3 - 10.2
|
|
3.5
|
|
|
0.3 - 10.2
|
|
3.8
|
|
|
Conditional repayment rate
|
|
12.66% - 71.73%
|
|
33.60
|
%
|
|
|
12.61% - 71.68%
|
|
34.43
|
%
|
|
12.61% - 71.68%
|
|
30.23
|
%
|
|
Discount rate
|
|
2.97% - 4.31%
|
|
3.69
|
%
|
|
|
2.79% - 4.17%
|
|
3.59
|
%
|
|
3.05% - 4.17%
|
|
3.60
|
%
|
|
Mortgage loans related to Non-Residual Trusts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conditional prepayment rate
|
|
2.01% - 2.54%
|
|
2.33
|
%
|
|
|
1.99% - 2.51%
|
|
2.30
|
%
|
|
2.08% - 2.53%
|
|
2.34
|
%
|
|
Conditional default rate
|
|
1.00% - 4.24%
|
|
2.31
|
%
|
|
|
1.05% - 4.70%
|
|
2.55
|
%
|
|
1.01% - 4.97%
|
|
2.61
|
%
|
|
Loss severity
|
|
85.70% - 100.00%
|
|
98.54
|
%
|
|
|
96.30% - 100.00%
|
|
99.79
|
%
|
|
90.60% - 100.00%
|
|
99.46
|
%
|
|
Discount rate
|
|
8.32%
|
|
8.32
|
%
|
|
|
8.32%
|
|
8.32
|
%
|
|
8.32%
|
|
8.32
|
%
|
|
Mortgage loans related to Residual Trusts and other loans held for investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conditional prepayment rate
|
|
2.77% - 3.43%
|
|
3.11
|
%
|
|
|
2.66% - 3.57%
|
|
3.06
|
%
|
|
—
|
|
—
|
|
|
Conditional default rate
|
|
4.02% - 5.19%
|
|
4.44
|
%
|
|
|
4.13% - 5.32%
|
|
4.53
|
%
|
|
—
|
|
—
|
|
|
Loss severity
|
|
24.00% - 30.00%
|
|
27.49
|
%
|
|
|
27.00% - 30.00%
|
|
28.25
|
%
|
|
—
|
|
—
|
|
|
Discount rate
|
|
8.25%
|
|
8.25
|
%
|
|
|
8.25%
|
|
8.25
|
%
|
|
—
|
|
—
|
|
|
Mortgage loans held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conditional prepayment rate
|
|
4.81%
|
|
4.81
|
%
|
|
|
4.81%
|
|
4.81
|
%
|
|
4.81%
|
|
4.81
|
%
|
|
Conditional default rate
|
|
2.46%
|
|
2.46
|
%
|
|
|
2.46%
|
|
2.46
|
%
|
|
2.46%
|
|
2.46
|
%
|
|
Loss severity
|
|
99.40%
|
|
99.40
|
%
|
|
|
99.40%
|
|
99.40
|
%
|
|
99.40%
|
|
99.40
|
%
|
|
Discount rate
|
|
9.80%
|
|
9.80
|
%
|
|
|
9.80%
|
|
9.80
|
%
|
|
9.80%
|
|
9.80
|
%
|
|
Charged-off loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collection rate
|
|
3.17% - 5.58%
|
|
3.28
|
%
|
|
|
3.42% - 6.05%
|
|
3.55
|
%
|
|
2.84% - 4.47%
|
|
2.92
|
%
|
|
Discount rate
|
|
28.00%
|
|
28.00
|
%
|
|
|
28.00%
|
|
28.00
|
%
|
|
28.00%
|
|
28.00
|
%
|
|
Receivables related to Non-Residual Trusts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conditional prepayment rate
|
|
2.45% - 3.61%
|
|
3.26
|
%
|
|
|
2.46% - 3.29%
|
|
3.02
|
%
|
|
2.49% - 3.01%
|
|
2.79
|
%
|
|
Conditional default rate
|
|
1.47% - 4.27%
|
|
3.42
|
%
|
|
|
1.99% - 5.32%
|
|
3.50
|
%
|
|
1.72% - 6.02%
|
|
3.61
|
%
|
|
Loss severity
|
|
83.81% - 100.00%
|
|
93.15
|
%
|
|
|
94.86% - 100.00%
|
|
98.89
|
%
|
|
88.88% - 100.00%
|
|
97.71
|
%
|
|
Discount rate
|
|
0.50%
|
|
0.50
|
%
|
|
|
0.50%
|
|
0.50
|
%
|
|
0.50%
|
|
0.50
|
%
|
|
Servicing rights carried at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining life in years
(4)
|
|
2.31 - 7.32
|
|
5.8
|
|
|
|
2.4 - 7.5
|
|
5.9
|
|
|
2.4 - 7.1
|
|
5.6
|
|
|
Discount rate
|
|
9.32% - 13.60%
|
|
11.03
|
%
|
|
|
9.63% - 14.62%
|
|
11.70
|
%
|
|
9.91% - 14.97%
|
|
11.92
|
%
|
|
Conditional prepayment rate
|
|
6.15% - 26.61%
|
|
9.97
|
%
|
|
|
6.07% - 27.00%
|
|
9.70
|
%
|
|
6.80% - 25.85%
|
|
11.10
|
%
|
|
Conditional default rate
|
|
0.09% - 6.15%
|
|
0.87
|
%
|
|
|
0.09% - 10.22%
|
|
0.90
|
%
|
|
0.06% - 3.20%
|
|
0.91
|
%
|
|
Cost to service
|
|
$62 - $1260
|
|
$135
|
|
|
$62 - $1,260
|
|
$137
|
|
$62 - $1,260
|
|
$136
|
|
Interest rate lock commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan funding probability
|
|
3.38% - 100.00%
|
|
65.41
|
%
|
|
|
1.00% - 100.00%
|
|
62.49
|
%
|
|
1.00% - 100.00%
|
|
62.97
|
%
|
|
Fair value of initial servicing rights multiple
(5)
|
|
0.03 - 7.07
|
|
3.21
|
|
|
|
0.02 - 5.64
|
|
2.79
|
|
|
0.01 - 5.24
|
|
2.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
June 30, 2018
|
|
|
February 9, 2018
|
|
December 31, 2017
|
|
Significant
Unobservable Input
(1)(2)
|
|
Range of Input
(3)
|
|
Weighted
Average of Input
(3)
|
|
|
Range of Input
(3)
|
|
Weighted
Average of Input
(3)
|
|
Range of Input
(3)
|
|
Weighted
Average of Input
(3)
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan funding probability
|
|
53.61% - 100.00%
|
|
85.11
|
%
|
|
|
14.19% - 100.00%
|
|
82.62
|
%
|
|
33.64% - 100.00%
|
|
84.76
|
%
|
|
Fair value of initial servicing rights multiple
(5)
|
|
0.31 - 6.71
|
|
3.50
|
|
|
|
0.08 - 5.86
|
|
3.39
|
|
|
0.24 - 4.92
|
|
3.32
|
|
|
Mortgage-backed debt related to Non-Residual Trusts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conditional prepayment rate
|
|
2.45% - 3.61%
|
|
3.26
|
%
|
|
|
2.46% - 3.29%
|
|
3.02
|
%
|
|
2.49% - 3.01%
|
|
2.79
|
%
|
|
Conditional default rate
|
|
1.47% - 4.27%
|
|
3.42
|
%
|
|
|
1.99% - 5.32%
|
|
3.50
|
%
|
|
1.72% - 6.02%
|
|
3.61
|
%
|
|
Loss severity
|
|
83.81% - 100.00%
|
|
93.15
|
%
|
|
|
94.86% - 100.00%
|
|
98.89
|
%
|
|
88.88% - 100.00%
|
|
97.71
|
%
|
|
Discount rate
|
|
6.00%
|
|
6.00
|
%
|
|
|
6.00%
|
|
6.00
|
%
|
|
6.00%
|
|
6.00
|
%
|
|
Mortgage-backed debt related to Residual Trusts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conditional prepayment rate
|
|
2.77% - 3.43%
|
|
3.11
|
%
|
|
|
2.66% - 3.57%
|
|
3.06
|
%
|
|
—
|
|
—
|
|
|
Conditional default rate
|
|
4.02% - 5.19%
|
|
4.44
|
%
|
|
|
4.13% - 5.32%
|
|
4.53
|
%
|
|
—
|
|
—
|
|
|
Loss severity
|
|
24.00% - 30.00%
|
|
27.49
|
%
|
|
|
27.00% - 30.00%
|
|
28.25
|
%
|
|
—
|
|
—
|
|
|
Discount rate
|
|
6.00%
|
|
6.00
|
%
|
|
|
6.00%
|
|
6.00
|
%
|
|
—
|
|
—
|
|
|
HMBS related obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining life in years
(4)
|
|
0.1 - 7.4
|
|
3.2
|
|
|
|
0.2 - 10.1
|
|
3.6
|
|
|
0.4 - 7.8
|
|
3.7
|
|
|
Conditional repayment rate
|
|
12.95% - 86.92%
|
|
36.26
|
%
|
|
|
12.61% - 71.68%
|
|
34.45
|
%
|
|
12.90% - 86.87%
|
|
32.07
|
%
|
|
Discount rate
|
|
3.01% - 3.84%
|
|
3.45
|
%
|
|
|
2.80% - 4.21%
|
|
3.60
|
%
|
|
3.02% - 3.98%
|
|
3.45
|
%
|
__________
|
|
|
|
(1)
|
Conditional repayment rate includes assumptions for both voluntary and involuntary rates as well as assumptions for the assignment of HECMs to HUD, in accordance with obligations as servicer.
|
|
|
|
|
(2)
|
Voluntary and involuntary prepayment rates have been presented as conditional prepayment rate and conditional default rate, respectively.
|
|
|
|
|
(3)
|
With the exception of loss severity, fair value of initial servicing rights embedded in IRLCs and discount rate on charged-off loans, all significant unobservable inputs above are based on the related unpaid principal balance of the underlying collateral, or in the case of HMBS related obligations, the balance outstanding. Loss severity is based on projected liquidations. Fair value of servicing rights embedded in IRLCs represents a multiple of the annual servicing fee. The discount rate on charged-off loans is based on the loan balance at fair value.
|
|
|
|
|
(4)
|
Represents the remaining weighted-average life of the related unpaid principal balance or balance outstanding of the underlying collateral adjusted for assumptions for conditional repayment rate, conditional prepayment rate and conditional default rate, as applicable.
|
|
|
|
|
(5)
|
Fair value of servicing rights embedded in IRLCs, which represents a multiple of the annual servicing fee, excludes the impact of certain IRLCs identified as servicing released for which the Company does not ultimately realize the benefits.
|
Fair Value Option
With the exception of freestanding derivative instruments, the Company has elected the fair value option for the assets and liabilities described above as measured at fair value on a recurring basis. The fair value option was elected for these assets and liabilities as the Company believes fair value best reflects their expected future economic performance.
Presented in the table below is the estimated fair value and unpaid principal balance of loans and debt instruments that have contractual principal amounts and for which the Company has elected the fair value option (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Estimated
Fair Value
|
|
Unpaid Principal
Balance
|
|
|
Estimated
Fair Value
|
|
Unpaid Principal
Balance
|
|
Loans at fair value under the fair value option
|
|
|
|
|
|
|
|
|
|
|
Reverse loans
(1)
|
|
$
|
9,151,736
|
|
|
$
|
8,899,596
|
|
|
|
$
|
9,789,444
|
|
|
$
|
9,460,616
|
|
|
Mortgage loans held for sale
(1)
|
|
671,072
|
|
|
645,697
|
|
|
|
588,553
|
|
|
567,492
|
|
|
Mortgage loans related to Non-Residual Trusts
|
|
232,250
|
|
|
260,108
|
|
|
|
301,435
|
|
|
344,421
|
|
|
Mortgage loans related to Residual Trusts and other loans held for investment
|
|
293,952
|
|
|
330,044
|
|
|
|
—
|
|
|
—
|
|
|
Charged-off loans
|
|
45,771
|
|
|
2,267,161
|
|
|
|
45,800
|
|
|
2,333,820
|
|
|
Total
|
|
$
|
10,394,781
|
|
|
$
|
12,402,606
|
|
|
|
$
|
10,725,232
|
|
|
$
|
12,706,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt instruments at fair value under the fair value option
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed debt related to Non-Residual Trusts
|
|
$
|
263,234
|
|
|
$
|
268,912
|
|
|
|
$
|
348,682
|
|
|
$
|
353,262
|
|
|
Mortgage-backed debt related to Residual Trusts
|
|
370,010
|
|
|
369,914
|
|
|
|
—
|
|
|
—
|
|
|
HMBS related obligations
(2)
|
|
8,294,703
|
|
|
7,921,517
|
|
|
|
9,175,128
|
|
|
8,743,700
|
|
|
Total
|
|
$
|
8,927,947
|
|
|
$
|
8,560,343
|
|
|
|
$
|
9,523,810
|
|
|
$
|
9,096,962
|
|
__________
|
|
|
|
(1)
|
Includes loans that collateralize master repurchase agreements. Refer to
Note 16
for additional information.
|
|
|
|
|
(2)
|
For HMBS related obligations, the unpaid principal balance represents the balance outstanding.
|
Included in mortgage loans related to Non-Residual Trusts are loans that are
90 days
or more past due that have been deemed to have
no
fair value at
June 30, 2018
and
December 31, 2017
as a result of severity rates being greater than
100%
. These loans have an unpaid principal balance of
$17.1 million
and
$22.2 million
at
June 30, 2018
and
December 31, 2017
, respectively. Mortgage loans related to Residual Trusts that are
90 days
or more past due had an unpaid principal balance of
$33.9 million
at
June 30, 2018
. Mortgage loans held for sale that are
90 days
or more past due had an unpaid principal balance of
$8.1 million
and
$10.1 million
at
June 30, 2018
and
December 31, 2017
, respectively. Charged-off loans are predominantly
90 days
or more past due.
Items Measured at Fair Value on a Non-Recurring Basis
The Company held real estate owned, net of
$208.9 million
and
$116.6 million
at
June 30, 2018
and
December 31, 2017
, respectively. In addition,
the Company had
loans that were in the process of foreclosure
of
$303.8 million
and
$489.0 million
at
June 30, 2018
and
December 31, 2017
, respectively, which are included in residential loans at amortized cost, net and residential loans at fair value on the consolidated balance sheets.
Real estate owned, net is included on the consolidated balance sheets within other assets and is measured at net realizable value on a non-recurring basis utilizing significant unobservable inputs or Level 3 assumptions in the valuation. The increase in real estate owned results from the adoption of new accounting guidance relating to sales of nonfinancial assets effective January 1, 2018, which resulted in loans being derecognized and placed back into real estate owned when the loans resulted from prior seller-financed real estate owned sales and the Company determined collection of substantially all of the sales price is not probable.
The following table presents the significant unobservable input used in the fair value measurement of real estate owned, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
June 30, 2018
|
|
|
February 9, 2018
|
|
December 31, 2017
|
|
Significant
Unobservable Input
|
|
Range of Input
|
|
Weighted
Average of Input
|
|
|
Range of Input
|
|
Weighted
Average of Input
|
|
Range of Input
|
|
Weighted
Average of Input
|
|
Real estate owned, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss severity
(1)
|
|
0.00% - 88.32 %
|
|
8.33
|
%
|
|
|
0.00% - 68.66%
|
|
7.54
|
%
|
|
0.00% - 78.76%
|
|
6.16
|
%
|
__________
|
|
|
|
(1)
|
Loss severity is based on the unpaid principal balance of the related loan at the time of foreclosure.
|
The Company held real estate owned, net in the Servicing and Reverse Mortgage segments and the Corporate and Other non-reportable segment of
$131.0 million
,
$77.0 million
and
$0.9 million
, respectively, at
June 30, 2018
and
$13.7 million
,
$101.8 million
and
$1.1 million
, respectively, at
December 31, 2017
. In determining fair value, the Company either obtains appraisals or performs a review of historical severity rates of real estate owned previously sold by the Company. When utilizing historical severity rates, the properties are stratified by collateral type and/or geographical concentration and length of time held by the Company. The severity rates are reviewed for reasonableness by comparison to third-party market trends and fair value is determined by applying severity rates to the stratified population. In the determination of fair value of real estate owned associated with reverse mortgages, the Company considers amounts typically covered by FHA insurance. Management approves valuations that have been determined using the historical severity rate method.
Fair Value of Other Financial Instruments
The following table presents the carrying amounts and estimated fair values of financial assets and liabilities that are not recorded at fair value on a recurring or non-recurring basis and their respective levels within the fair value hierarchy (in thousands). This table excludes cash and cash equivalents, restricted cash and cash equivalents, servicer payables and warehouse borrowings as these financial instruments are highly liquid or short-term in nature and as a result, their carrying amounts approximate fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Fair Value
Hierarchy
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential loans at amortized cost, net
(1) (5)
|
|
Level 3
|
|
$
|
7,442
|
|
|
7,199
|
|
|
|
$
|
443,056
|
|
|
$
|
432,518
|
|
|
Servicer and protective advances, net
|
|
Level 3
|
|
563,296
|
|
|
559,860
|
|
|
|
813,433
|
|
|
778,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing advance liabilities
(2)
|
|
Level 3
|
|
303,203
|
|
|
304,920
|
|
|
|
478,838
|
|
|
483,462
|
|
|
Corporate debt
(3)(4)
|
|
Level 2
|
|
1,215,266
|
|
|
1,225,986
|
|
|
|
1,994,411
|
|
|
1,553,076
|
|
|
Mortgage-backed debt carried at amortized cost
(5)
|
|
Level 3
|
|
—
|
|
|
—
|
|
|
|
387,200
|
|
|
391,539
|
|
__________
|
|
|
|
(1)
|
Excludes loans subject to repurchase from Ginnie Mae and the related liability.
|
|
|
|
|
(2)
|
The carrying amounts of servicing advance liabilities are net of deferred issuance costs, including those relating to line-of-credit arrangements, which are recorded in other assets.
|
|
|
|
|
(3)
|
At December 31, 2017, the carrying amount of corporate debt is net of the 2013 Revolver deferred issuance costs, which are recorded in other assets on the consolidated balance sheet.
|
|
|
|
|
(4)
|
Includes liabilities subject to compromise with a carrying value of
$781.1 million
and an estimated fair value of
$358.8 million
at December 31, 2017.
|
|
|
|
|
(5)
|
In connection with the adoption of fresh start accounting effective
February 10, 2018
, the Company changed its method of accounting for the residential loans and mortgage-backed debt of the Residual Trusts from amortized cost to fair value.
|
The following is a description of the methods and significant assumptions used in estimating the fair value of the Company’s financial instruments that are not measured at fair value on a recurring or non-recurring basis.
Residential loans at amortized cost, net
— The methods and assumptions used to estimate the fair value of residential loans carried at amortized cost are the same as those described above for mortgage loans related to Non-Residual Trusts and Residual Trusts.
Servicer and protective advances, net
— The estimated fair value of these advances is based on the net present value of expected cash flows. The determination of expected cash flows includes consideration of recoverability clauses in the Company’s servicing agreements, as well as assumptions related to the underlying collateral and when proceeds may be used to recover these receivables.
Servicing advance liabilities
— The estimated fair value of the majority of these liabilities approximates carrying value as these liabilities bear interest at a rate that is adjusted regularly based on a market index.
Corporate debt
— The Company’s 2013 Term Loan, 2018 Term Loan, Convertible Notes, Senior Notes and Second Lien Notes are not traded in an active, open market with readily observable prices. The estimated fair value of corporate debt is primarily based on an average of broker quotes.
Mortgage-backed debt carried at amortized cost
— The methods and assumptions used to estimate the fair value of mortgage-backed debt carried at amortized cost are the same as those described above for mortgage-backed debt related to Non-Residual Trusts and Residual Trusts.
Net Gains on Sales of Loans
Provided in the table below is a summary of the components of net gains on sales of loans (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
For the Three Months Ended June 30, 2018
|
|
|
For the Three Months Ended June 30, 2017
|
|
|
For the Period From February 10, 2018 Through June 30, 2018
|
|
|
For the Period From January 1, 2018 Through February 9, 2018
|
|
For the Six Months Ended June 30, 2017
|
|
Realized gains on sales of loans
|
|
$
|
18,479
|
|
|
|
$
|
82,683
|
|
|
|
$
|
19,351
|
|
|
|
$
|
3,582
|
|
|
$
|
108,768
|
|
|
Change in unrealized gains on loans held for sale
|
|
(1,478
|
)
|
|
|
(6,046
|
)
|
|
|
7,234
|
|
|
|
(9,343
|
)
|
|
13,612
|
|
|
Losses on interest rate lock commitments
|
|
(7,151
|
)
|
|
|
(15,052
|
)
|
|
|
(2,059
|
)
|
|
|
(4,926
|
)
|
|
(19,578
|
)
|
|
Gains (losses) on forward sales commitments
|
|
(1,139
|
)
|
|
|
(2,858
|
)
|
|
|
(13,852
|
)
|
|
|
24,570
|
|
|
(23,406
|
)
|
|
Gains (losses) on MBS purchase commitments
|
|
2,023
|
|
|
|
(14,102
|
)
|
|
|
14,728
|
|
|
|
(872
|
)
|
|
(2,218
|
)
|
|
Capitalized servicing rights
|
|
28,092
|
|
|
|
19,006
|
|
|
|
39,649
|
|
|
|
13,227
|
|
|
51,390
|
|
|
Provision for repurchases
|
|
(1,546
|
)
|
|
|
(2,003
|
)
|
|
|
(2,368
|
)
|
|
|
(729
|
)
|
|
(3,798
|
)
|
|
Interest income
|
|
5,882
|
|
|
|
9,222
|
|
|
|
8,967
|
|
|
|
2,298
|
|
|
20,425
|
|
|
Other
|
|
40
|
|
|
|
(305
|
)
|
|
|
70
|
|
|
|
156
|
|
|
(294
|
)
|
|
Net gains on sales of loans
|
|
$
|
43,202
|
|
|
|
$
|
70,545
|
|
|
|
$
|
71,720
|
|
|
|
$
|
27,963
|
|
|
$
|
144,901
|
|
Net Fair Value Gains on Reverse Loans and Related HMBS Obligations
Provided in the table below is a summary of the components of net fair value gains on reverse loans and related HMBS obligations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Successor
|
|
|
Predecessor
|
|
|
For the Three Months Ended June 30, 2018
|
|
|
For the Three Months Ended June 30, 2017
|
|
|
For the Period From February 10, 2018 Through June 30, 2018
|
|
|
For the Period From January 1, 2018 Through February 9, 2018
|
|
For the Six Months Ended June 30, 2017
|
|
Interest income on reverse loans
|
$
|
108,530
|
|
|
|
$
|
113,644
|
|
|
|
$
|
170,472
|
|
|
|
$
|
47,116
|
|
|
$
|
226,946
|
|
|
Change in fair value of reverse loans
|
(63,526
|
)
|
|
|
(41,075
|
)
|
|
|
(79,611
|
)
|
|
|
(15,640
|
)
|
|
(111,765
|
)
|
|
Net fair value gains on reverse loans
|
45,004
|
|
|
|
72,569
|
|
|
|
90,861
|
|
|
|
31,476
|
|
|
115,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on HMBS related obligations
(1)
|
(89,892
|
)
|
|
|
(101,290
|
)
|
|
|
(141,971
|
)
|
|
|
(40,427
|
)
|
|
(203,726
|
)
|
|
Change in fair value of HMBS related obligations
|
43,150
|
|
|
|
36,593
|
|
|
|
50,261
|
|
|
|
19,527
|
|
|
111,119
|
|
|
Net fair value losses on HMBS related obligations
|
(46,742
|
)
|
|
|
(64,697
|
)
|
|
|
(91,710
|
)
|
|
|
(20,900
|
)
|
|
(92,607
|
)
|
|
Net fair value gains (losses) on reverse loans and related HMBS obligations
|
$
|
(1,738
|
)
|
|
|
$
|
7,872
|
|
|
|
$
|
(849
|
)
|
|
|
$
|
10,576
|
|
|
$
|
22,574
|
|
__________
|
|
|
|
(1)
|
Excludes interest expense related to the warehouse facilities used to fund Ginnie Mae buyouts.
|
8. Freestanding Derivative Financial Instruments
The following table provides the total notional or contractual amounts and related fair values of derivative assets and liabilities as well as cash margin (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Notional/
Contractual
Amount
|
|
Fair Value
|
|
|
Notional/
Contractual
Amount
|
|
Fair Value
|
|
|
|
|
Derivative
Assets
|
|
Derivative
Liabilities
|
|
|
|
Derivative
Assets
|
|
Derivative
Liabilities
|
|
Interest rate lock commitments
|
|
$
|
1,432,757
|
|
|
$
|
19,861
|
|
|
$
|
503
|
|
|
|
$
|
1,509,712
|
|
|
$
|
26,637
|
|
|
$
|
269
|
|
|
Forward sales commitments
|
|
2,012,942
|
|
|
679
|
|
|
4,862
|
|
|
|
1,724,500
|
|
|
2,224
|
|
|
903
|
|
|
MBS purchase commitments
|
|
417,500
|
|
|
565
|
|
|
98
|
|
|
|
298,000
|
|
|
533
|
|
|
78
|
|
|
Total derivative instruments
|
|
|
|
$
|
21,105
|
|
|
$
|
5,463
|
|
|
|
|
|
$
|
29,394
|
|
|
$
|
1,250
|
|
|
Cash margin
|
|
|
|
$
|
4,018
|
|
|
$
|
193
|
|
|
|
|
|
$
|
—
|
|
|
$
|
1,533
|
|
Derivative positions subject to netting arrangements include all forward sale commitments, MBS purchase commitments, and cash margin, as reflected in the table above, and allow the Company to net settle asset and liability positions, as well as associated cash margin, with the same counterparty. After consideration of these netting arrangements and offsetting positions by counterparties, the total net settlement amount as it relates to these positions were asset positions of
$0.9 million
and liability positions of
$0.6 million
at
June 30, 2018
and
December 31, 2017
.
During the fourth quarter of 2017, the Company terminated the previously disclosed master netting arrangements with two counterparties and entered into a new master netting arrangement associated with an existing master repurchase agreement amended under the DIP Warehouse Facilities. On February 9, 2018, upon the Effective Date of the Prepackaged Plan the DIP Warehouse Facilities transitioned into the Exit Warehouse Facilities, whereupon the master repurchase agreement amended under the DIP Warehouse Facilities continues to provide financing for the origination business. This new master netting arrangement allows for periodic offsetting of derivative positions and margins of two of the Company's counterparties against amounts associated with the Exit Warehouse Facilities. The Company had aggregate net derivative asset positions with the two counterparties of
$0.3 million
and
$0.4 million
at
June 30, 2018
and
December 31, 2017
, respectively. Refer to
Note 16
for additional information regarding the Exit Warehouse Facilities.
Refer to
Note 7
for a summary of the gains and losses on freestanding derivative instruments.
9. Residential Loans at Amortized Cost, Net
Residential loans at amortized cost, net consist of mortgage loans held for investment. The majority of these residential loans consist of loans subject to repurchase from Ginnie Mae and, at December 31, 2017, loans held in securitization trusts that have been consolidated.
Residential loans at amortized cost, net are comprised of the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Unpaid principal balance
(1)
|
|
$
|
336,455
|
|
|
|
$
|
1,021,172
|
|
|
Unamortized discounts and other cost basis adjustments, net
(2)
|
|
(5,860
|
)
|
|
|
(29,371
|
)
|
|
Allowance for loan losses
|
|
(924
|
)
|
|
|
(6,347
|
)
|
|
Residential loans at amortized cost, net
(3)
|
|
$
|
329,671
|
|
|
|
$
|
985,454
|
|
__________
|
|
|
|
(1)
|
Includes loans subject to repurchase from Ginnie Mae of
$322.2 million
and
$542.4 million
at
June 30, 2018
and
December 31, 2017
, respectively.
|
|
|
|
|
(2)
|
Includes
$0.1 million
and
$4.5 million
of accrued interest receivable at
June 30, 2018
and
December 31, 2017
, respectively.
|
|
|
|
|
(3)
|
Includes
$561.0 million
of mortgage loans that are not related to consolidated VIEs at
December 31, 2017
. The balance at
June 30, 2018
does not include any mortgage loans related to consolidated VIEs.
|
In connection with the adoption of fresh start accounting, the Company elected fair value accounting for its mortgage loans related to the Residual Trusts, which resulted in a reduction to residential loans at amortized cost totaling
$317.2 million
at
February 9, 2018
due to the reclassification of these loans from residential loans at amortized cost, net to residential loans at fair value. Refer to
Note 3
for additional information regarding fresh start accounting adjustments.
10. Servicing of Residential Loans
The Company services residential loans and real estate owned for itself and on behalf of third-party credit owners. The Company’s total servicing portfolio consists of accounts serviced for others for which servicing rights have been capitalized, accounts subserviced for others, and residential loans and real estate owned carried on the consolidated balance sheets, but excludes charged-off loans managed by the Servicing segment.
Provided below is a summary of the Company’s total servicing portfolio (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Number
of Accounts
|
|
Unpaid Principal
Balance
|
|
|
Number
of Accounts
|
|
Unpaid Principal
Balance
|
|
Third-party credit owners
|
|
|
|
|
|
|
|
|
|
|
Capitalized servicing rights
|
|
707,199
|
|
|
$
|
73,414,818
|
|
|
|
854,292
|
|
|
$
|
93,599,077
|
|
|
Capitalized subservicing
(1)
|
|
26,904
|
|
|
2,945,425
|
|
|
|
29,681
|
|
|
3,242,241
|
|
|
Subservicing
|
|
772,390
|
|
|
110,239,481
|
|
|
|
712,040
|
|
|
99,500,678
|
|
|
Total third-party servicing portfolio
|
|
1,506,493
|
|
|
186,599,724
|
|
|
|
1,596,013
|
|
|
196,341,996
|
|
|
On-balance sheet residential loans and real estate owned
|
|
73,819
|
|
|
10,686,779
|
|
|
|
82,480
|
|
|
11,522,817
|
|
|
Total servicing portfolio
|
|
1,580,312
|
|
|
$
|
197,286,503
|
|
|
|
1,678,493
|
|
|
$
|
207,864,813
|
|
__________
|
|
|
|
(1)
|
Consists of subservicing contracts acquired through business combinations whereby the aggregate benefits from the contract are greater than adequate compensation for performing the servicing.
|
Net Servicing Revenue and Fees
The Company earns servicing income from its third-party servicing portfolio. The following table presents the components of net servicing revenue and fees, which includes revenues earned by the Servicing and Reverse Mortgage segments and, beginning in March 2018, the Corporate and Other non-reportable segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Successor
|
|
|
Predecessor
|
|
|
For the Three Months Ended June 30, 2018
|
|
|
For the Three Months Ended June 30, 2017
|
|
|
For the Period From February 10, 2018 Through June 30, 2018
|
|
|
For the Period From January 1, 2018 Through February 9, 2018
|
|
For the Six Months Ended June 30, 2017
|
|
Servicing fees
|
$
|
98,799
|
|
|
|
$
|
129,154
|
|
|
|
$
|
150,974
|
|
|
|
$
|
52,855
|
|
|
$
|
262,547
|
|
|
Incentive and performance fees
|
11,928
|
|
|
|
16,795
|
|
|
|
19,183
|
|
|
|
6,019
|
|
|
31,949
|
|
|
Ancillary and other fees
(1)
|
18,569
|
|
|
|
22,012
|
|
|
|
30,325
|
|
|
|
7,335
|
|
|
45,255
|
|
|
Servicing revenue and fees
|
129,296
|
|
|
|
167,961
|
|
|
|
200,482
|
|
|
|
66,209
|
|
|
339,751
|
|
|
Change in fair value of servicing rights
|
3,460
|
|
|
|
(66,714
|
)
|
|
|
(16,883
|
)
|
|
|
64,663
|
|
|
(120,230
|
)
|
|
Amortization of servicing rights
(2)(3)
|
(2,659
|
)
|
|
|
(9,926
|
)
|
|
|
(5,147
|
)
|
|
|
(2,187
|
)
|
|
(14,951
|
)
|
|
Change in fair value of servicing rights related liabilities
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
(62
|
)
|
|
Net servicing revenue and fees
|
$
|
130,097
|
|
|
|
$
|
91,321
|
|
|
|
$
|
178,452
|
|
|
|
$
|
128,685
|
|
|
$
|
204,508
|
|
_________
|
|
|
|
(1)
|
Includes late fees of
$13.3 million
and
$14.9 million
for the
three months ended June 30, 2018 and 2017
, respectively, and
$21.9 million
,
$5.1 million
and
$30.5 million
for
the period from February 10, 2018 through June 30, 2018, the period from January 1, 2018 through February 9, 2018 and the six months ended June 30, 2017, respectively
.
|
|
|
|
|
(2)
|
Includes amortization of a servicing liability of
$1.3 million
for the
three months ended June 30, 2018 and 2017
and
$1.9 million
,
$0.6 million
and
$2.1 million
for
the period from February 10, 2018 through June 30, 2018, the period from January 1, 2018 through February 9, 2018 and the six months ended June 30, 2017, respectively
.
|
|
|
|
|
(3)
|
Includes impairment of servicing rights and a servicing liability of
$0.5 million
and
$8.0 million
for the
three months ended June 30, 2018 and 2017
, respectively, and
$2.0 million
,
$1.6 million
and
$11.1 million
for
the period from February 10, 2018 through June 30, 2018, the period from January 1, 2018 through February 9, 2018 and the six months ended June 30, 2017, respectively
.
|
Servicing Rights
Servicing Rights Carried at Amortized Cost
The following table summarizes the activity in the carrying value of servicing rights carried at amortized cost by class (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
For the Period From February 10, 2018 Through June 30,
2018
|
|
|
For the Period From January 1, 2018 Through February 9,
2018
|
|
For the Six Months
Ended June 30, 2017
|
|
|
|
Mortgage Loan
|
|
Reverse Loan
|
|
|
Mortgage Loan
|
|
Reverse Loan
|
|
Mortgage Loan
|
|
Reverse Loan
|
|
Balance at beginning of the period
|
|
$
|
57,148
|
|
|
$
|
4,542
|
|
|
|
$
|
54,466
|
|
|
$
|
4,011
|
|
|
$
|
74,621
|
|
|
$
|
5,505
|
|
|
Fresh start accounting adjustment
|
|
—
|
|
|
—
|
|
|
|
4,221
|
|
|
1,211
|
|
|
—
|
|
|
—
|
|
|
Amortization
(1)
|
|
(4,478
|
)
|
|
(577
|
)
|
|
|
(944
|
)
|
|
(148
|
)
|
|
(5,162
|
)
|
|
(782
|
)
|
|
Impairment
(2)
|
|
(293
|
)
|
|
(273
|
)
|
|
|
(595
|
)
|
|
(532
|
)
|
|
(9,042
|
)
|
|
—
|
|
|
Balance at end of the period
|
|
$
|
52,377
|
|
|
$
|
3,692
|
|
|
|
$
|
57,148
|
|
|
$
|
4,542
|
|
|
$
|
60,417
|
|
|
$
|
4,723
|
|
__________
|
|
|
|
(1)
|
Includes amortization of servicing rights for the mortgage loan class and reverse loan class of
$3.0 million
and
$0.4 million
, respectively, for the
three months ended June 30, 2018
and
$2.9 million
and
$0.4 million
, respectively, for the
three months ended June 30, 2017
.
|
|
|
|
|
(2)
|
Includes impairment of servicing rights related to the mortgage loan class of
$7.7 million
for the
three months ended June 30, 2017
and impairment of servicing rights related to the reverse loan class of
$0.1 million
for the
three months ended June 30, 2018
.
|
Servicing rights accounted for at amortized cost are evaluated for impairment by strata based on their estimated fair values. The risk characteristics used to stratify servicing rights for purposes of measuring impairment are the type of loan products, which consist of manufactured housing loans, first lien residential mortgages and second lien residential mortgages for the mortgage loan class, and reverse mortgages for the reverse loan class. The fair value of servicing rights for the mortgage loan class and the reverse loan class was
$70.4 million
and
$3.7 million
, respectively, at
June 30, 2018
, and
$59.7 million
and
$4.8 million
, respectively, at
December 31, 2017
. Fair value was estimated using the present value of projected cash flows over the estimated period of net servicing income.
The estimation of fair value requires significant judgment and uses key economic inputs and assumptions, which are provided in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
June 30, 2018
|
|
|
February 9, 2018
|
|
December 31, 2017
|
|
|
|
Mortgage Loan
|
|
Reverse Loan
|
|
|
Mortgage Loan
|
|
Reverse Loan
|
|
Mortgage Loan
|
|
Reverse Loan
|
|
Weighted-average remaining life in years
(1)
|
|
4.5
|
|
|
2.7
|
|
|
|
4.5
|
|
|
2.7
|
|
|
4.5
|
|
|
2.8
|
|
|
Weighted-average discount rate
|
|
13.00
|
%
|
|
15.00
|
%
|
|
|
13.00
|
%
|
|
15.00
|
%
|
|
13.00
|
%
|
|
15.00
|
%
|
|
Conditional prepayment rate
(2)
|
|
5.46
|
%
|
|
N/A
|
|
|
|
5.34
|
%
|
|
N/A
|
|
|
5.91
|
%
|
|
N/A
|
|
|
Conditional default rate
(2)
|
|
2.36
|
%
|
|
N/A
|
|
|
|
2.48
|
%
|
|
N/A
|
|
|
2.45
|
%
|
|
N/A
|
|
|
Conditional repayment rate
(3)
|
|
N/A
|
|
|
37.86
|
%
|
|
|
N/A
|
|
|
36.68
|
%
|
|
N/A
|
|
|
36.01
|
%
|
__________
|
|
|
|
(1)
|
Represents the remaining weighted-average life of the related unpaid principal balance of the underlying collateral adjusted for assumptions for conditional repayment rate, conditional prepayment rate and conditional default rate, as applicable.
|
|
|
|
|
(2)
|
Voluntary and involuntary prepayment rates have been presented as conditional prepayment rate and conditional default rate, respectively.
|
|
|
|
|
(3)
|
Conditional repayment rate includes assumptions for both voluntary and involuntary rates as well as assumptions for the assignment of HECMs to HUD, in accordance with obligations as servicer.
|
The valuation of servicing rights is affected by the underlying assumptions above. Should the actual performance and timing differ materially from the Company’s projected assumptions, the estimate of fair value of the servicing rights could be materially different.
Servicing Rights Carried at Fair Value
The following table summarizes the activity in servicing rights carried at fair value (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Successor
|
|
|
Predecessor
|
|
|
For the Three Months Ended June 30, 2018
|
|
|
For the Three Months Ended June 30, 2017
|
|
|
For the Period From February 10, 2018 Through June 30,
2018
|
|
|
For the Period From January 1, 2018 Through February 9,
2018
|
|
For the Six Months Ended June 30, 2017
|
|
Balance at beginning of the period
|
$
|
675,176
|
|
|
|
$
|
930,333
|
|
|
|
$
|
688,466
|
|
|
|
$
|
714,774
|
|
|
$
|
949,593
|
|
|
Purchases
|
44
|
|
|
|
73
|
|
|
|
80
|
|
|
|
—
|
|
|
519
|
|
|
Servicing rights capitalized upon sales of loans
|
30,818
|
|
|
|
19,392
|
|
|
|
43,796
|
|
|
|
14,493
|
|
|
53,296
|
|
|
Sales
|
(76,372
|
)
|
|
|
(12,326
|
)
|
|
|
(82,265
|
)
|
|
|
(105,457
|
)
|
|
(12,420
|
)
|
|
Other
|
(1
|
)
|
|
|
—
|
|
|
|
(69
|
)
|
|
|
(7
|
)
|
|
—
|
|
|
Change in fair value due to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in valuation inputs or other assumptions
(1)
|
31,592
|
|
|
|
(34,751
|
)
|
|
|
25,075
|
|
|
|
78,132
|
|
|
(52,281
|
)
|
|
Other changes in fair value
(2)
|
(28,132
|
)
|
|
|
(31,963
|
)
|
|
|
(41,958
|
)
|
|
|
(13,469
|
)
|
|
(67,949
|
)
|
|
Total change in fair value
|
3,460
|
|
|
|
(66,714
|
)
|
|
|
(16,883
|
)
|
|
|
64,663
|
|
|
(120,230
|
)
|
|
Balance at end of the period
|
$
|
633,125
|
|
|
|
$
|
870,758
|
|
|
|
$
|
633,125
|
|
|
|
$
|
688,466
|
|
|
$
|
870,758
|
|
__________
|
|
|
|
(1)
|
Represents the change in fair value typically resulting from market-driven changes in interest rates and prepayment speeds.
|
|
|
|
|
(2)
|
Represents the realization of expected cash flows over time.
|
The fair value of servicing rights accounted for at fair value was estimated using the present value of projected cash flows over the estimated period of net servicing income. The estimation of fair value requires significant judgment and uses key economic inputs and assumptions, which are described in
Note 7
. Should the actual performance and timing differ materially from the Company's projected assumptions, the estimate of fair value of the servicing rights could be materially different.
The following table summarizes the hypothetical effect on the fair value of servicing rights carried at fair value using adverse changes of
10%
and
20%
to the weighted average of the significant assumptions used in valuing these assets (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
Decline in fair value due to
|
|
|
|
|
Decline in fair value due to
|
|
|
|
Assumption
|
|
10% adverse change
|
|
20% adverse change
|
|
|
Assumption
|
|
10% adverse change
|
|
20% adverse change
|
|
Weighted-average discount rate
|
|
11.03
|
%
|
|
(25,870
|
)
|
|
$
|
(49,816
|
)
|
|
|
11.92
|
%
|
|
$
|
(29,892
|
)
|
|
$
|
(57,517
|
)
|
|
Weighted-average conditional prepayment rate
|
|
9.97
|
%
|
|
(20,330
|
)
|
|
(39,308
|
)
|
|
|
11.10
|
%
|
|
(27,261
|
)
|
|
(52,551
|
)
|
|
Weighted-average conditional default rate
|
|
0.87
|
%
|
|
(26,784
|
)
|
|
(54,244
|
)
|
|
|
0.91
|
%
|
|
(31,610
|
)
|
|
(63,832
|
)
|
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the fair value of the servicing rights is calculated without changing any other assumption, while in reality changes in one factor may result in changes in another, which may either magnify or counteract the effect of the change.
Fair Value of Originated Servicing Rights
For mortgage loans sold with servicing retained, the Company used the following inputs and assumptions to determine the fair value of servicing rights at the dates of sale. These servicing rights are included in servicing rights capitalized upon sales of loans in the table presented above that summarizes the activity in servicing rights accounted for at fair value. This table excludes inputs and assumptions related to servicing rights capitalized under the Company's co-issue program with NRM, which are classified as Level 2 within the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Successor
|
|
|
Predecessor
|
|
|
For the Three Months Ended June 30, 2018
|
|
|
For the Three Months Ended June 30, 2017
|
|
|
For the Period From February 10, 2018 Through June 30,
2018
|
|
|
For the Period From January 1, 2018 Through February 9,
2018
|
|
For the Six Months Ended June 30, 2017
|
|
Weighted-average life in years
|
5.8
|
|
|
6.2
|
|
|
5.9
|
|
|
6.3
|
|
6.4
|
|
Weighted-average discount rate
|
14.31%
|
|
|
14.62%
|
|
|
14.44%
|
|
|
14.75%
|
|
14.02%
|
|
Weighted-average conditional prepayment rate
|
10.48%
|
|
|
9.79%
|
|
|
10.11%
|
|
|
8.74%
|
|
8.72%
|
|
Weighted-average conditional default rate
|
0.98%
|
|
|
0.53%
|
|
|
0.98%
|
|
|
0.92%
|
|
0.44%
|
11. Goodwill and Intangible Assets, Net
Goodwill and intangible assets of the Predecessor were recorded in connection with various business combinations. Goodwill and intangible assets of the Successor were recorded in connection with fresh start accounting. Refer to
Note 3
for further information on fresh start accounting.
Goodwill
The table below sets forth the activity in goodwill, which relates entirely to the Originations segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
For the Period From February 10, 2018 Through June 30,
2018
|
|
|
For the Period From January 1, 2018 Through February 9,
2018
|
|
Balance at beginning of the period
(1)
|
|
$
|
8,960
|
|
|
|
$
|
47,747
|
|
|
Fresh start accounting adjustment
(2)
|
|
—
|
|
|
|
(38,787
|
)
|
|
Impairment
|
|
(8,960
|
)
|
|
|
—
|
|
|
Balance at end of the period
(3)
|
|
$
|
—
|
|
|
|
$
|
8,960
|
|
__________
|
|
|
|
(1)
|
There were accumulated impairment losses of
$470.6 million
and
$138.8 million
relating to the Servicing and Reverse Mortgage segments, respectively, at December 31, 2017. These accumulated impairment losses were reset in connection with fresh start accounting.
|
|
|
|
|
(2)
|
In connection with the adoption of fresh start accounting, the Company revalued goodwill to its estimated fair value at
February 9, 2018
. This resulted in a reduction to goodwill totaling
$38.8 million
at
February 9, 2018
as further described in
Note 3
.
|
|
|
|
|
(3)
|
There were accumulated impairment losses of
$9.0 million
relating to the Originations segment at
June 30, 2018
.
|
The Company completes its annual impairment testing effective October 1st, or more often if indicators are present that it is more likely than not that the goodwill of a reporting unit is impaired. As a result of lower projected financial performance within the Originations reporting unit subsequent to the Company's emergence from bankruptcy, which was driven by certain market factors including increasing mortgage interest rates driving lower originations volume, a flattening of the interest rate curve resulting in margin compression, aggressive pricing by certain competitors and continued challenges in shifting to a purchase money lender, the Company determined that there were indicators present that would require an interim impairment analysis as of March 31, 2018. The Company chose to early adopt the accounting guidance that measures the amount of goodwill impairment as the amount by which the reporting unit's carrying value exceeds its fair value. The carrying value of the Originations reporting unit exceeded its estimated fair value. Accordingly, the Company recorded a goodwill impairment charge of
$9.0 million
relating to the Originations reporting unit. As a result of this charge, there is no longer any goodwill for the Company.
Intangible Assets, Net
Amortization expense associated with intangible assets was
$3.9 million
and
$0.7 million
for the
three months ended June 30, 2018 and 2017
, respectively, and
$6.4 million
,
$0.2 million
and
$2.2 million
for
the period from February 10, 2018 through June 30, 2018, the period from January 1, 2018 through February 9, 2018 and the six months ended June 30, 2017, respectively
.
Intangible assets, net consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
Gross Carrying Amount
(1)
|
|
Accumulated Amortization
|
|
Accumulated Impairment
|
|
Net Carrying Amount
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Accumulated Impairment
|
|
Net Carrying Amount
|
|
Institutional and customer relationships
|
$
|
24,000
|
|
|
$
|
(6,200
|
)
|
|
$
|
—
|
|
|
$
|
17,800
|
|
|
|
$
|
41,041
|
|
|
$
|
(30,793
|
)
|
|
$
|
(6,340
|
)
|
|
$
|
3,908
|
|
|
Trademarks and trade names
(2)
|
20,000
|
|
|
—
|
|
|
(2,000
|
)
|
|
18,000
|
|
|
|
10,000
|
|
|
(4,780
|
)
|
|
(395
|
)
|
|
4,825
|
|
|
Other
|
650
|
|
|
(217
|
)
|
|
—
|
|
|
433
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total intangible assets
|
$
|
44,650
|
|
|
$
|
(6,417
|
)
|
|
$
|
(2,000
|
)
|
|
$
|
36,233
|
|
|
|
$
|
51,041
|
|
|
$
|
(35,573
|
)
|
|
$
|
(6,735
|
)
|
|
$
|
8,733
|
|
__________
|
|
|
|
(1)
|
In connection with the adoption of fresh start accounting, the Company revalued its intangible assets to their estimated fair value at
February 9, 2018
. This resulted in an increase to intangible assets totaling
$35.5 million
, which included
$20.2 million
for institutional and customer relationships and
$15.2 million
for trade names. Refer to
Note 3
for additional information regarding fresh start accounting adjustments.
|
|
|
|
|
(2)
|
Trade names recorded in connection with fresh start accounting were determined to have an indefinite life.
|
Institutional and customer relationships and other intangible assets are being amortized over a weighted-average period of
3.2
years and
1.0
year, respectively, subsequent to the adoption of fresh start accounting on
February 10, 2018
. Based on the balance of intangible assets, net at
June 30, 2018
, the following is an estimate of amortization expense for the remainder of 2018 and for each of the next four years (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
Amortization Expense
(1)
|
|
For the remainder of 2018
|
|
$
|
7,765
|
|
|
2019
|
|
7,545
|
|
|
2020
|
|
2,591
|
|
|
2021
|
|
320
|
|
|
2022
|
|
12
|
|
|
Total
|
|
$
|
18,233
|
|
__________
|
|
|
|
(1)
|
Excludes
$18.0 million
relating to trade names that were determined to have an indefinite useful life.
|
During the first quarter of 2018, the Company recorded an impairment charge of
$1.0 million
related to the trade name of the Servicing reporting unit, and during the second quarter of 2018, the Company recorded an impairment charge of
$1.0 million
related to the trade name of the Originations reporting unit. The Company tested these intangible assets for recoverability due to changes in facts and circumstances associated with rising mortgage interest rates and lower projected originations business financial performance. Based on the testing results, it was determined that the carrying value of the intangible assets was not fully recoverable and an impairment charge was recorded to the extent that carrying value exceeded estimated fair value. The Company primarily used the income approach to determine the fair value of the intangible assets and calculate the amount of impairment.
The Company is likely to continue to be impacted in the near term by certain company-specific matters, overall market performance within the sector, and a continued level of regulatory scrutiny. Company management will continue to monitor overall economic and sector conditions and other events or circumstances, including the ability to execute on strategic objectives, amongst other factors. Unanticipated outcomes in these areas may result in further impairment of intangible assets and have a related impact on income taxes in the future.
12. Premises and Equipment, Net
Premises and equipment, net consist of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Computer software
|
|
$
|
70,970
|
|
|
|
$
|
246,271
|
|
|
Leasehold improvements and other
|
|
6,803
|
|
|
|
12,699
|
|
Computer hardware
|
|
2,154
|
|
|
|
33,154
|
|
|
Assets in development
|
|
1,797
|
|
|
|
2,008
|
|
Furniture and fixtures
|
|
521
|
|
|
|
7,812
|
|
|
Total premises and equipment
|
|
82,245
|
|
|
|
301,944
|
|
|
Less: accumulated depreciation and amortization
|
|
(6,661
|
)
|
|
|
(251,731
|
)
|
|
Premises and equipment, net
|
|
$
|
75,584
|
|
|
|
$
|
50,213
|
|
In connection with the adoption of fresh start accounting on
February 9, 2018
, the Company adjusted premises and equipment to fair value, which included an adjustment to increase computer software by
$33.7 million
to reflect the fair value of internally developed technology. With the exception of computer software, the net carrying value of the assets noted in the table above approximated fair value. Accordingly, the accumulated depreciation for each asset classification was netted against the gross asset amount to arrive at the gross asset balances under fresh start accounting. Refer to
Note 3
for additional information regarding fresh start accounting adjustments.
The Company recorded depreciation and amortization expense for premises and equipment of
$4.4 million
and
$9.3 million
for the
three months ended June 30, 2018 and 2017
, respectively, and
$6.7 million
,
$3.6 million
and
$18.7 million
for
the period from February 10, 2018 through June 30, 2018, the period from January 1, 2018 through February 9, 2018 and the six months ended June 30, 2017, respectively
. These amounts included amortization expense for computer software of
$3.6 million
and
$7.9 million
for the
three months ended June 30, 2018 and 2017
, respectively, and
$5.3 million
,
$3.2 million
and
$15.7 million
for
the period from February 10, 2018 through June 30, 2018, the period from January 1, 2018 through February 9, 2018 and the six months ended June 30, 2017, respectively
. Unamortized computer software costs were
$65.7 million
and
$38.7 million
at
June 30, 2018
and
December 31, 2017
, respectively.
13. Other Assets
Other assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Real estate owned, net
(1)
|
|
$
|
208,929
|
|
|
|
$
|
116,553
|
|
|
Clean-up Call Agreement inducement fee
|
|
22,030
|
|
|
|
29,256
|
|
|
Deposits
|
|
21,517
|
|
|
|
2,432
|
|
|
Derivative instruments
|
|
21,105
|
|
|
|
29,394
|
|
|
Prepaid expenses
|
|
17,679
|
|
|
|
26,834
|
|
|
Investment in WCO
|
|
7,100
|
|
|
|
7,816
|
|
|
Deferred debt issuance costs
|
|
6,748
|
|
|
|
21,341
|
|
|
Other
|
|
6,313
|
|
|
|
1,969
|
|
|
Total other assets
|
|
$
|
311,421
|
|
|
|
$
|
235,595
|
|
_________
|
|
|
|
(1)
|
The adoption of the new accounting guidance relating to sales of nonfinancial assets effective January 1, 2018 resulted in loans being derecognized and placed back into real estate owned when the loans resulted from prior seller-financed real estate owned sales and the Company determined collection of substantially all of the sales price is not probable. This resulted in an increase to real estate owned and a real estate owned deposit obligation.
|
In connection with the adoption of fresh start accounting, the Company recorded adjustments resulting in an increase to other assets totaling
$3.3 million
at
February 9, 2018
, as further described in
Note 3
.
14. Payables and Accrued Liabilities
Payables and accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Loans subject to repurchase from Ginnie Mae
|
|
$
|
322,229
|
|
|
|
$
|
542,398
|
|
|
Curtailment liability
|
|
139,383
|
|
|
|
140,905
|
|
|
Accounts payable and accrued liabilities
|
|
114,944
|
|
|
|
129,731
|
|
|
Real estate owned deposit obligations
(1)
|
|
49,645
|
|
|
|
—
|
|
|
Employee-related liabilities
|
|
40,639
|
|
|
|
52,097
|
|
|
Loan repurchase obligation
|
|
32,079
|
|
|
|
31,704
|
|
|
Originations liability
|
|
24,049
|
|
|
|
25,613
|
|
|
Servicing rights and related advance purchases payable
|
|
14,884
|
|
|
|
14,923
|
|
|
Accrued interest payable
|
|
8,296
|
|
|
|
33,322
|
|
|
Uncertain tax positions
|
|
5,695
|
|
|
|
5,601
|
|
|
Other
|
|
41,023
|
|
|
|
44,006
|
|
|
Subtotal
|
|
792,866
|
|
|
|
1,020,300
|
|
|
Less: Liabilities subject to compromise
(2)
|
|
—
|
|
|
|
25,807
|
|
|
Total payables and accrued liabilities
|
|
$
|
792,866
|
|
|
|
$
|
994,493
|
|
__________
|
|
|
|
(1)
|
The adoption of the new accounting guidance relating to sales of nonfinancial assets effective January 1, 2018 resulted in loans being derecognized and placed back into real estate owned when the loans resulted from prior seller-financed real estate owned sales and the Company determined collection of substantially all of the sales price is not probable. This resulted in a higher real estate owned balance and a real estate owned deposit obligation.
|
|
|
|
|
(2)
|
Liabilities subject to compromise consist of accrued interest related to the Senior Notes and Convertibles Notes. Refer to
Note 3
for additional information.
|
In connection with the adoption of fresh start accounting, the Company recorded adjustments resulting in a reduction to payables and accrued liabilities totaling
$7.4 million
at
February 9, 2018
, as further described in
Note 3
.
Costs Associated with Exit Activities
The Company made the decision during the fourth quarter of 2015 to exit the consumer retail channel of the Originations segment. Further, following a decision made in December 2016 and effective January 2017, the Company exited the reverse mortgage originations business, while maintaining its reverse mortgage servicing operations. These actions resulted in costs relating to the termination of certain employees and closing of offices. These actions are collectively referred to as the 2016 and Prior Actions herein.
The Company continued with the transformation of the business during 2017 in an effort to optimize the workforce, processes and functional locations of its businesses as it seeks to achieve sustainable growth. Accordingly, the Company incurred costs, including severance and related costs, office closures, which included the Irving, TX location, and other costs in connection with its transformation efforts during 2017. The actions that were taken in connection with these efforts are collectively referred to as the 2017 Actions herein.
During 2018, the Company continues to optimize its operations, which includes consideration of further site consolidations, process improvements and workforce rationalization. Accordingly, the Company incurred and will continue to incur costs, including severance and related costs, office closures, and other costs during 2018. The actions that have been and will be taken in connection with these efforts are collectively referred to as the 2018 Actions herein. These strategic reviews could result in additional site closings or other outcomes. The costs associated with such actions will be included in the exit liability at such time that each action is approved by management.
The costs resulting from the 2016 and Prior Actions, 2017 Actions and 2018 Actions are recorded in salaries and benefits and general and administrative expenses on the Company's consolidated statements of comprehensive income (loss).
The following table presents the current period activity in the accrued exit liability resulting from each of the 2016 and Prior Actions, 2017 Actions and 2018 Actions described above, which is included in payables and accrued liabilities on the consolidated balance sheets, and the related charges and cash payments and other settlements associated with these actions (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
For the Period From February 10, 2018 Through June 30,
2018
|
|
|
|
2016 and Prior Actions
|
|
2017 Actions
|
|
2018 Actions
|
|
Total
|
|
Balance at February 10, 2018
|
|
$
|
472
|
|
|
$
|
14,837
|
|
|
$
|
616
|
|
|
$
|
15,925
|
|
|
Charges
|
|
|
|
|
|
|
|
|
|
Severance and related costs
(1)
|
|
19
|
|
|
81
|
|
|
3,676
|
|
|
3,776
|
|
|
Office closures and other costs
(1)
|
|
(49
|
)
|
|
586
|
|
|
—
|
|
|
537
|
|
|
Total charges, net
|
|
(30
|
)
|
|
667
|
|
|
3,676
|
|
|
4,313
|
|
|
Cash payments or other settlements
|
|
|
|
|
|
|
|
|
|
Severance and related costs
|
|
(79
|
)
|
|
(1,261
|
)
|
|
(1,213
|
)
|
|
(2,553
|
)
|
|
Office closures and other costs
|
|
(145
|
)
|
|
(1,687
|
)
|
|
—
|
|
|
(1,832
|
)
|
|
Total cash payments or other settlements
|
|
(224
|
)
|
|
(2,948
|
)
|
|
(1,213
|
)
|
|
(4,385
|
)
|
|
Balance at June 30, 2018
|
|
$
|
218
|
|
|
$
|
12,556
|
|
|
$
|
3,079
|
|
|
$
|
15,853
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative charges incurred
|
|
|
|
|
|
|
|
|
|
Severance and related costs
|
|
26,972
|
|
|
9,212
|
|
|
4,303
|
|
|
40,487
|
|
|
Office closures and other costs
|
|
10,416
|
|
|
14,019
|
|
|
—
|
|
|
24,435
|
|
|
Total cumulative charges incurred
|
|
$
|
37,388
|
|
|
$
|
23,231
|
|
|
$
|
4,303
|
|
|
$
|
64,922
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expected costs to be incurred
(2)
|
|
$
|
37,388
|
|
|
$
|
23,231
|
|
|
$
|
5,006
|
|
|
$
|
65,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
For the Period From January 1, 2018 Through February 9,
2018
|
|
|
|
2016 and Prior Actions
|
|
2017 Actions
|
|
2018 Actions
|
|
Total
|
|
Balance at January 1, 2018
|
|
$
|
540
|
|
|
$
|
15,955
|
|
|
$
|
—
|
|
|
$
|
16,495
|
|
|
Charges
|
|
|
|
|
|
|
|
|
|
Severance and related costs
(1)
|
|
(21
|
)
|
|
72
|
|
|
627
|
|
|
678
|
|
|
Office closures and other costs
(1)
|
|
19
|
|
|
234
|
|
|
—
|
|
|
253
|
|
|
Total charges, net
|
|
(2
|
)
|
|
306
|
|
|
627
|
|
|
931
|
|
|
Cash payments or other settlements
|
|
|
|
|
|
|
|
|
|
Severance and related costs
|
|
—
|
|
|
(948
|
)
|
|
(11
|
)
|
|
(959
|
)
|
|
Office closures and other costs
|
|
(66
|
)
|
|
(476
|
)
|
|
—
|
|
|
(542
|
)
|
|
Total cash payments or other settlements
|
|
(66
|
)
|
|
(1,424
|
)
|
|
(11
|
)
|
|
(1,501
|
)
|
|
Balance at February 9, 2018
|
|
$
|
472
|
|
|
$
|
14,837
|
|
|
$
|
616
|
|
|
$
|
15,925
|
|
__________
|
|
|
|
(1)
|
Includes adjustments to prior year accruals resulting from changes to previous estimates.
|
|
|
|
|
(2)
|
Total expected costs for the 2018 Actions could change based on additional actions as determined by management throughout the year.
|
The following table presents the current period activity for each of the 2016 and Prior Actions, 2017 Actions, and 2018 Actions described above by reportable segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
For the Period From February 10, 2018 Through June 30,
2018
|
|
|
|
Servicing
|
|
Originations
|
|
Reverse
Mortgage
|
|
Corporate and Other
|
|
Total
Consolidated
|
|
Balance at February 10, 2018
|
|
|
|
|
|
|
|
|
|
|
|
2016 and Prior Actions
|
|
$
|
289
|
|
|
$
|
68
|
|
|
$
|
18
|
|
|
$
|
97
|
|
|
$
|
472
|
|
|
2017 Actions
|
|
13,718
|
|
|
44
|
|
|
387
|
|
|
688
|
|
|
14,837
|
|
|
2018 Actions
|
|
527
|
|
|
16
|
|
|
27
|
|
|
46
|
|
|
616
|
|
|
Total balance at February 10, 2018
|
|
14,534
|
|
|
128
|
|
|
432
|
|
|
831
|
|
|
15,925
|
|
|
Charges
|
|
|
|
|
|
|
|
|
|
|
|
2016 and Prior Actions
(1)
|
|
(8
|
)
|
|
(41
|
)
|
|
19
|
|
|
—
|
|
|
(30
|
)
|
|
2017 Actions
(1)
|
|
637
|
|
|
(2
|
)
|
|
(84
|
)
|
|
116
|
|
|
667
|
|
|
2018 Actions
|
|
1,236
|
|
|
883
|
|
|
430
|
|
|
1,127
|
|
|
3,676
|
|
|
Total charges, net
|
|
1,865
|
|
|
840
|
|
|
365
|
|
|
1,243
|
|
|
4,313
|
|
|
Cash payments or other settlements
|
|
|
|
|
|
|
|
|
|
|
|
2016 and Prior Actions
|
|
(118
|
)
|
|
(27
|
)
|
|
—
|
|
|
(79
|
)
|
|
(224
|
)
|
|
2017 Actions
|
|
(2,112
|
)
|
|
(36
|
)
|
|
(278
|
)
|
|
(522
|
)
|
|
(2,948
|
)
|
|
2018 Actions
|
|
(486
|
)
|
|
(361
|
)
|
|
(37
|
)
|
|
(329
|
)
|
|
(1,213
|
)
|
|
Total cash payments or other settlements
|
|
(2,716
|
)
|
|
(424
|
)
|
|
(315
|
)
|
|
(930
|
)
|
|
(4,385
|
)
|
|
Balance at June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
2016 and Prior Actions
|
|
163
|
|
|
—
|
|
|
37
|
|
|
18
|
|
|
218
|
|
|
2017 Actions
|
|
12,243
|
|
|
6
|
|
|
25
|
|
|
282
|
|
|
12,556
|
|
|
2018 Actions
|
|
1,277
|
|
|
538
|
|
|
420
|
|
|
844
|
|
|
3,079
|
|
|
Total balance at June 30, 2018
|
|
$
|
13,683
|
|
|
$
|
544
|
|
|
$
|
482
|
|
|
$
|
1,144
|
|
|
$
|
15,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cumulative charges incurred
|
|
|
|
|
|
|
|
|
|
|
|
2016 and Prior Actions
|
|
$
|
18,059
|
|
|
$
|
5,590
|
|
|
$
|
7,160
|
|
|
$
|
6,579
|
|
|
$
|
37,388
|
|
|
2017 Actions
|
|
20,086
|
|
|
1,548
|
|
|
1,482
|
|
|
115
|
|
|
23,231
|
|
|
2018 Actions
|
|
1,763
|
|
|
910
|
|
|
457
|
|
|
1,173
|
|
|
4,303
|
|
|
Total cumulative charges incurred
|
|
$
|
39,908
|
|
|
$
|
8,048
|
|
|
$
|
9,099
|
|
|
$
|
7,867
|
|
|
$
|
64,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expected costs to be incurred
|
|
|
|
|
|
|
|
|
|
|
|
2016 and Prior Actions
|
|
$
|
18,059
|
|
|
$
|
5,590
|
|
|
$
|
7,160
|
|
|
$
|
6,579
|
|
|
$
|
37,388
|
|
|
2017 Actions
|
|
20,086
|
|
|
1,548
|
|
|
1,482
|
|
|
115
|
|
|
23,231
|
|
|
2018 Actions
(2)
|
|
2,023
|
|
|
910
|
|
|
539
|
|
|
1,534
|
|
|
5,006
|
|
|
Total expected costs to be incurred
|
|
$
|
40,168
|
|
|
$
|
8,048
|
|
|
$
|
9,181
|
|
|
$
|
8,228
|
|
|
$
|
65,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
For the Period From January 1, 2018 Through February 9,
2018
|
|
|
|
Servicing
|
|
Originations
|
|
Reverse
Mortgage
|
|
Corporate and Other
|
|
Total
Consolidated
|
|
Balance at January 1, 2018
|
|
|
|
|
|
|
|
|
|
|
|
2016 and Prior Actions
(3)
|
|
$
|
348
|
|
|
$
|
77
|
|
|
$
|
18
|
|
|
$
|
97
|
|
|
$
|
540
|
|
|
2017 Actions
(3)
|
|
14,317
|
|
|
91
|
|
|
483
|
|
|
1,064
|
|
|
15,955
|
|
|
2018 Actions
(3)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total balance at January 1, 2018
(3)
|
|
14,665
|
|
|
168
|
|
|
501
|
|
|
1,161
|
|
|
16,495
|
|
|
Charges
|
|
|
|
|
|
|
|
|
|
|
|
2016 and Prior Actions
(1)
|
|
(5
|
)
|
|
3
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
2017 Actions
(1)
|
|
289
|
|
|
16
|
|
|
2
|
|
|
(1
|
)
|
|
306
|
|
|
2018 Actions
|
|
527
|
|
|
27
|
|
|
27
|
|
|
46
|
|
|
627
|
|
|
Total charges, net
|
|
811
|
|
|
46
|
|
|
29
|
|
|
45
|
|
|
931
|
|
|
Cash payments or other settlements
|
|
|
|
|
|
|
|
|
|
|
|
2016 and Prior Actions
|
|
(54
|
)
|
|
(12
|
)
|
|
—
|
|
|
—
|
|
|
(66
|
)
|
|
2017 Actions
|
|
(888
|
)
|
|
(63
|
)
|
|
(98
|
)
|
|
(375
|
)
|
|
(1,424
|
)
|
|
2018 Actions
|
|
—
|
|
|
(11
|
)
|
|
—
|
|
|
—
|
|
|
(11
|
)
|
|
Total cash payments or other settlements
|
|
(942
|
)
|
|
(86
|
)
|
|
(98
|
)
|
|
(375
|
)
|
|
(1,501
|
)
|
|
Balance at February 9, 2018
|
|
|
|
|
|
|
|
|
|
|
|
2016 and Prior Actions
|
|
289
|
|
|
68
|
|
|
18
|
|
|
97
|
|
|
472
|
|
|
2017 Actions
|
|
13,718
|
|
|
44
|
|
|
387
|
|
|
688
|
|
|
14,837
|
|
|
2018 Actions
|
|
527
|
|
|
16
|
|
|
27
|
|
|
46
|
|
|
616
|
|
|
Total balance at February 9, 2018
|
|
$
|
14,534
|
|
|
$
|
128
|
|
|
$
|
432
|
|
|
$
|
831
|
|
|
$
|
15,925
|
|
__________
|
|
|
|
(1)
|
Includes adjustments to prior year accruals resulting from changes to previous estimates.
|
|
|
|
|
(2)
|
Total expected costs for the 2018 Actions could change based on additional actions as determined by management throughout the year.
|
|
|
|
|
(3)
|
Effective January 1, 2018, the Company no longer allocates corporate overhead to its operating segments. These amounts are now included in the Corporate and Other non-reportable segment. Prior year balances have been restated to conform to current year presentation.
|
15. Servicing Advance Liabilities
Servicing advance liabilities, which are carried at amortized cost, consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Servicing Advance Facilities
|
|
$
|
304,920
|
|
|
|
$
|
421,165
|
|
|
Early Advance Reimbursement Agreement
|
|
—
|
|
|
|
62,297
|
|
|
Total servicing advance liabilities
|
|
$
|
304,920
|
|
|
|
$
|
483,462
|
|
At December 31, 2017, the Company's subsidiaries had a Securities Master Repurchase Agreement under the DIP Warehouse Facilities and an Early Advance Reimbursement Agreement with Fannie Mae, which, in each case, was used to fund servicer and protective advances that are the responsibility of the Company under certain servicing agreements. Payments on the amounts due under these agreements are paid from certain proceeds received by the subsidiaries (i) in connection with the liquidation of mortgaged properties, (ii) from repayments received from mortgagors, or (iii) from reimbursements received from the owners of the mortgage loans, such as Fannie Mae, Freddie Mac and private label securitization trusts, or (iv) issuance of new notes or other refinancing transactions. Accordingly, repayment of the servicing advance liabilities is dependent on the proceeds that are received on the underlying advances associated with the agreements.
On February 12, 2018, the Securities Master Repurchase Agreement was repaid with proceeds from the issuance of variable funding notes under
two
new servicing advance facilities, the DAAT Facility and DPAT II Facility. The DAAT Facility and DPAT II Facility acquired the outstanding advances from the GTAAFT Facility and DPAT Facility, respectively, and the variable funding notes under the GTAAFT Facility and DPAT Facility, which had been pledged as collateral under the Securities Master Repurchase Agreement, were fully redeemed. The DAAT Facility and DPAT II Facility have aggregate capacities of
$465.0 million
and
$85.0 million
, respectively. The interest on the variable funding notes issued under the DAAT Facility and DPAT II Facility is based on the
lender's applicable index
, plus a per annum margin of
2.25%
, and have an expected repayment date of
February 2019
. These facilities, together with the Ditech Financial Exit Master Repurchase Agreement used to fund originations and the RMS Exit Master Repurchase Agreement used to finance the repurchases of certain HECMs and real estate owned from Ginnie Mae securitization pools, are subject, collectively, to a combined maximum outstanding amount of
$1.9 billion
under the Exit Warehouse Facilities.
In connection with the DAAT Facility and DPAT II Facility, Ditech Financial sells and/or contributes the rights to reimbursement for servicer and protective advances to a depositor entity, which then sells and/or contributes such rights to reimbursement to an issuer entity. Each of the issuer and the depositor entities under these facilities is structured as a bankruptcy remote special purpose entity and is the sole owner of its respective assets. Advances made under the DAAT Facility and DPAT II Facility are held in two separate trusts: the existing DAAT, used to hold GSE advances, and DPAT II, used to hold non-GSE advances. These facilities provide funding for servicer and protective advances made in connection with Ditech Financial's servicing of certain Fannie Mae, Freddie Mac and other mortgage loans, and is non-recourse to the Company. These facilities contain customary events of default and covenants, including financial covenants. Financial covenants most sensitive to the Company's operating results and financial position are the requirements that Ditech Financial maintain minimum tangible net worth, indebtedness to tangible net worth, minimum liquidity and profitability requirements. In May 2018, the profitability covenants included in the DAAT Facility and DPAT II Facility were amended to allow for a net loss under such covenants for the quarter ending June 30, 2018, as applicable to the terms of each respective agreement. Ditech Financial was in compliance with the terms of the DAAT Facility and DPAT II Facility, including financial covenants, at
June 30, 2018
.
In August 2018, the profitability covenants included in the DAAT Facility and the DPAT II Facility were amended to allow for a net loss under such covenants for the quarter ending September 30, 2018, as applicable to the terms of each agreement. Additionally, the liquidity covenants included in the DAAT Facility and the DPAT II Facility were amended to reduce the liquidity requirements for the remaining term of each agreement.
The Company's subsidiaries are dependent on the ability to secure servicing advance financing facilities on acceptable terms and to renew, replace or resize existing facilities as they expire. If the Company fails to comply with the terms of an agreement that results in an event of default or breach of covenant without obtaining a waiver or amendment, the Company may be subject to termination of future funding, enforcement of liens against assets securing the respective facility, repurchase of assets pledged in a repurchase agreement, acceleration of outstanding obligations, or other adverse actions.
In April 2018, the Company entered into an acknowledgment agreement with Fannie Mae, whereupon the Early Advance Reimbursement Agreement was terminated. The Company fully repaid the outstanding balance on the Early Advance Reimbursement Agreement upon termination, and the advances were pledged as collateral on the DAAT Facility.
16. Warehouse Borrowings
The Company's subsidiaries enter into master repurchase agreements with lenders providing warehouse facilities. The warehouse facilities are used to fund the origination and purchase of residential loans, as well as the repurchase of certain HECMs and real estate owned from Ginnie Mae securitization pools. Effective December 5, 2017, the Company entered an agreement with certain existing warehouse lenders to provide the DIP Warehouse Facilities during the Chapter 11 Case. At December 31, 2017, the DIP Warehouse Facilities, which had a total capacity of
$1.9 billion
, included a master repurchase agreement that provided up to
$750.0 million
to finance Ditech Financial's origination business and a master repurchase agreement that provided up to
$800.0 million
to finance the repurchase of certain HECMs and real estate owned from Ginnie Mae securitization pools. The capacity under these master repurchase agreements was provided on a committed basis.
On February 9, 2018, upon the Effective Date of the Prepackaged Plan, the DIP Warehouse Facilities transitioned into the Exit Warehouse Facilities whereupon the Ditech Financial Exit Master Repurchase Agreement and RMS Exit Master Repurchase Agreement amended under the DIP Warehouse Facilities will continue to provide financing for Ditech Financial's origination business and will continue to finance the repurchases of certain HECMs and real estate owned from Ginnie Mae securitization pools. Upon the Effective Date, the facilities were amended to, among other things, extend the maturity date to
February 2019
, change the interest rate to the
lender's applicable index
, plus a per annum margin of
2.25%
on originated and purchased residential loans and
3.25%
on repurchased HECMs and real estate owned, increase the amount available to finance Ditech Financial's origination business from
$750.0 million
to
$1.0 billion
and increase the maximum repayment term for certain repurchased HECMs from
180 days
to
365 days
. These facilities, together with the DAAT Facility and DPAT II Facility used to fund advances, are subject, collectively, to a combined maximum outstanding amount of
$1.9 billion
under the Exit Warehouse Facilities.
On April 23, 2018, RMS entered into an additional master repurchase agreement that provides up to
$212.0 million
in total capacity, and a minimum of
$200.0 million
in committed capacity to fund the repurchase of certain HECMs and real estate owned from Ginnie Mae securitization pools for a period of one year. The interest rate on this facility is based the applicable index rate plus
3.25%
.
At
June 30, 2018
,
$611.8 million
of the outstanding borrowings under the master repurchase agreements were secured by
$656.6 million
in originated and purchased residential loans and
$766.8 million
of outstanding borrowings were secured by
$881.6 million
and
$19.8 million
in repurchased HECMs and real estate owned, respectively.
Borrowings utilized to fund the origination and purchase of residential loans are due upon the earlier of sale or securitization of the loan or within
90 days
of borrowing. On average, the Company sells or securitizes these loans approximately
20 days
from the date of borrowing. Borrowings utilized to repurchase HECMs and real estate owned are due upon the earlier of receipt of claim proceeds from HUD or receipt of proceeds from liquidation of the related real estate owned. In any event, borrowings associated with certain repurchased HECMs and real estate owned are due within
180 days
to
365 days
. In accordance with the terms of the agreements, the Company may be required to post cash collateral should the fair value of the pledged assets decrease below certain contractual thresholds. The Company is exposed to counterparty credit risk associated with the repurchase agreements in the event of non-performance by the counterparties. The amount at risk during the term of the repurchase agreement is equal to the difference between the amount borrowed by the Company and the fair value of the pledged assets. The Company mitigates this risk through counterparty monitoring procedures, including monitoring of the counterparties' credit ratings and review of their financial statements.
All of the Company’s master repurchase agreements contain customary events of default and financial covenants. Financial covenants that are most sensitive to the operating results of the Company's subsidiaries and resulting financial position are minimum tangible net worth requirements, indebtedness to tangible net worth ratio requirements, and minimum liquidity and profitability requirements. In May 2018, the profitability covenant included in the Ditech Financial Exit Master Repurchase Agreement was amended to allow for a net loss under such covenant for the quarter ending June 30, 2018, as applicable to the terms of the agreement. The Company's subsidiaries were in compliance with the terms of these agreements, including financial covenants, at
June 30, 2018
.
In August 2018, the profitability covenant included in the Ditech Financial Exit Master Repurchase Agreement was amended to allow for a net loss under such covenant for the quarter ending September 30, 2018, as applicable to the terms of the agreement. Additionally, the amendment reduced the advance rate with respect to certain mortgage loans financed under the Ditech Financial Exit Master Repurchase Agreement. Furthermore, the liquidity covenants included in each of Ditech Financial's and RMS's master repurchase agreements were amended to reduce the liquidity requirements for the remaining term of each agreement.
The Company's subsidiaries are dependent on the ability to secure warehouse facilities on acceptable terms and to renew, replace or resize existing facilities as they expire. If the Company fails to comply with the terms of an agreement that results in an event of default or breach of covenant without obtaining a waiver or amendment, the Company may be subject to termination of future funding, enforcement of liens against assets securing the respective facility, repurchase of assets pledged in a repurchase agreement, acceleration of outstanding obligations, or other adverse actions.
17. Corporate Debt
Corporate debt consists of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Amortized Cost
|
|
Weighted- Average Stated Interest Rate
(1)
|
|
|
Amortized Cost
|
|
Weighted- Average Stated Interest Rate
(1)
|
|
2018 Term Loan (unpaid principal balance of $1,056,359 at June 30, 2018)
|
|
$
|
1,021,550
|
|
|
8.09
|
%
|
|
|
$
|
—
|
|
|
—
|
%
|
|
Second Lien Notes (unpaid principal balance of $251,575 at June 30, 2018)
(2)
|
|
193,716
|
|
|
9.00
|
%
|
|
|
—
|
|
|
—
|
%
|
|
2013 Term Loan (unpaid principal balance of $1,229,590 at December 31, 2017)
|
|
—
|
|
|
—
|
%
|
|
|
1,214,663
|
|
|
5.31
|
%
|
|
Senior Notes (unpaid principal balance of $538,662 at December 31, 2017)
|
|
—
|
|
|
—
|
%
|
|
|
538,662
|
|
|
7.875
|
%
|
|
Convertible Notes (unpaid principal balance of $242,468 at December 31, 2017)
|
|
—
|
|
|
—
|
%
|
|
|
242,468
|
|
|
4.50
|
%
|
|
Subtotal
|
|
1,215,266
|
|
|
|
|
|
1,995,793
|
|
|
|
|
Less: Liabilities subject to compromise
(3)
|
|
—
|
|
|
|
|
|
781,130
|
|
|
|
|
Total corporate debt
|
|
$
|
1,215,266
|
|
|
|
|
|
$
|
1,214,663
|
|
|
|
__________
|
|
|
|
(1)
|
Represents the weighted-average stated interest rate, which may be different from the effective rate, which considers the amortization of discounts and issuance costs.
|
|
|
|
|
(2)
|
During the three months ended June 30, 2018, the unpaid principal balance on the Second Lien Notes increased
$1.6 million
due to the additional PIK interest.
|
|
|
|
|
(3)
|
Liabilities subject to compromise consist of the Senior Notes and Convertibles Notes at December 31, 2017. Refer to
Note 3
for additional information.
|
Pre-Bankruptcy Emergence
2013 Credit Agreement
At December 31, 2017, the Company had the 2013 Term Loan in the original principal amount of
$1.5 billion
and unpaid principal amount of
$1.2 billion
. The Company also had the 2013 Revolver with a maximum availability of
$20.0 million
at December 31, 2017, and with
$19.5 million
outstanding in issued LOCs reducing the amount available on the 2013 Revolver, the Company had
$0.5 million
in available capacity. The Company's obligations under the 2013 Secured Credit Facilities were guaranteed by substantially all of its subsidiaries and secured by substantially all of its assets subject to certain exceptions, the most significant of which are the assets of the consolidated Residual and Non-Residual Trusts, the residential loans and real estate owned of the Ginnie Mae securitization pools, and advances of the consolidated financing entities that have been recorded on the consolidated balance sheets.
Senior Notes
In December 2013, the Company completed the sale of
$575.0 million
aggregate principal amount of Senior Notes, which paid interest semi-annually at an interest rate of
7.875%
and were scheduled to mature on
December 15, 2021
. The balance outstanding on the Senior Notes was
$538.7 million
at December 31, 2017. At December 31, 2017, the outstanding balance of Senior Notes as well as accrued interest on the Senior Notes of
$19.4 million
was included in liabilities subject to compromise on the consolidated balance sheets. On February 9, 2018, upon the Effective Date of the Prepackaged Plan, the Senior Notes were canceled and each holder of a Senior Notes claim received its pro rata share of (a) Second Lien Notes and (b) Mandatorily Convertible Preferred Stock. See below for additional information on the Second Lien Notes and refer to
Note 21
for additional information regarding the Mandatorily Convertible Preferred Stock.
Convertible Notes
In October 2012, the Company closed on a registered underwritten public offering of
$290.0 million
aggregate principal amount of Convertible Notes.
The Convertible Notes paid interest semi-annually on May 1 and November 1, commencing on May 1, 2013
, at a rate of
4.50%
per annum, and were scheduled to mature on
November 1, 2019
. The balance outstanding on the Convertible Notes was
$242.5 million
at December 31, 2017. At December 31, 2017, the outstanding balance of Convertible Notes as well as accrued interest on the Convertible Notes of
$6.4 million
were included in liabilities subject to compromise on the consolidated balance sheets. On February 9, 2018, upon the Effective Date of the Prepackaged Plan, the Convertible Notes were canceled and each holder of a Convertible Notes claim received common stock and warrants. Refer to the Emergence from Reorganization Proceedings section of Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information.
Post-Bankruptcy Emergence
2018 Credit Agreement
On February 9, 2018, the Company entered into the 2018 Credit Agreement, which includes a
$1.2 billion
2018 Term Loan. The 2018 Credit Agreement amends and restates the Company’s 2013 Credit Agreement and was subsequently amended as described below. The 2013 Revolver and issued letters of credit were terminated upon entry into the 2018 Credit Agreement. The Company's obligations under the 2018 Credit Agreement are guaranteed by substantially all of the Company’s subsidiaries and secured by substantially all of the assets of the Company subject to certain exceptions, the most significant of which are the assets of the consolidated Residual and Non-Residual Trusts, the residential loans and real estate owned of the Ginnie Mae securitization pools, and advances of the consolidated financing entities that have been recorded on the Company's consolidated balance sheets. Refer to the Consolidated Variable Interest Entities section of
Note 5
for additional information.
The 2018 Term Loan bears interest at a rate equal to, at the Company's option (i)
LIBOR
plus
6.00%
, subject to a
LIBOR
floor of
1.00%
or (ii) an
alternate base rate
plus
5.00%
(
which interest will be payable (a) with respect to any alternate base rate loan, the last business day of each March, June, September and December, and (b) with respect to any LIBOR loan, the last day of the interest period applicable to the borrowing of which such loan is a part
). The 2018 Term Loan matures on
June 30, 2022
. The Company made principal payments on the 2013 Term Loan and 2018 Term Loan totaling
$62.6 million
during the
period from February 10, 2018 through June 30, 2018
and
$110.6 million
during the period from January 1, 2018 to February 9, 2018. The balance outstanding on the 2018 Term Loan was
$1.1 billion
at
June 30, 2018
. The Company is required to make quarterly payments on the 2018 Term Loan in the amounts listed below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
Repayment Date
|
|
Principal Amount
|
|
September 2018
|
|
$
|
7,500
|
|
|
December 2018
|
|
7,500
|
|
|
March 2019
|
|
10,000
|
|
|
June 2019
|
|
26,700
|
|
|
September 2019
|
|
36,700
|
|
|
December 2019
|
|
36,700
|
|
|
each March, June, September and December thereafter
|
|
15,000
|
|
In addition to the quarterly installments detailed above, mandatory repayment obligations under the 2018 Credit Agreement include, subject to exceptions, (i)
100%
of the net sale proceeds from the sale or other disposition of certain non-core assets of the Company and of certain of the Company’s subsidiaries, (ii)
80%
of the net sale proceeds of certain non-ordinary course asset sales and dispositions of certain bulk MSR, (iii)
100%
of the net cash proceeds from the issuance of certain indebtedness and (iv) beginning with the fiscal year ending December 31, 2018,
50%
of the Company’s excess cash flow as defined in the agreement. The 2018 Credit Agreement allows the Company to prepay, in whole or in part, the Company’s borrowings outstanding thereunder, together with any accrued and unpaid interest, with prior notice and subject to the prepayment premium described below and breakage or redeployment costs.
The 2018 Credit Agreement contains affirmative and negative covenants and representations and warranties customary for financings of this type, including restrictions on liens, dispositions of assets, fundamental changes, dividends, the ability to incur additional indebtedness, investments, transactions with affiliates, modifications of certain agreements, certain restrictions on subsidiaries, issuance of certain equity interests, changes in lines of business, creation of additional subsidiaries and prepayments of other indebtedness, in each case subject to customary exceptions. The 2018 Credit Agreement permits the incurrence of an additional incremental letter of credit facility in an aggregate principal amount at any time outstanding not to exceed
$30.0 million
. The 2018 Credit Agreement also contains financial covenants requiring compliance with certain asset coverage ratios and, commencing in 2020 as described below, an interest expense coverage ratio and a first lien net leverage ratio.
On March 29, 2018, the Company entered into an amendment to 2018 Credit Agreement to (i) waive the Company’s compliance with the first lien net leverage ratio covenant and the interest expense coverage ratio covenant until the test period ending March 31, 2020, (ii) require the Company to make additional principal payments from March 29, 2018 to December 31, 2018 in an aggregate amount equal to
$30.0 million
, which the Company satisfied during the three months ended June 30, 2018, (iii) provide for a
one percent
prepayment premium in connection with prepayments of the term loans made during the first
18 months
after entering into the amendment (for all prepayments of principal other than mandatory amortization payments and the payments described in the foregoing clause (ii)), and (iv) increase the minimum requirement for Asset Coverage Ratio A for all test periods ending on March 31, 2018 through December 31, 2018.
Second Lien Notes
On February 9, 2018, pursuant to the terms of the Prepackaged Plan, the Company issued
$250.0 million
aggregate principal amount of Second Lien Notes to each holder of a Senior Notes claim on a pro rata basis.
The Second Lien Notes pay interest in arrears semi-annually on June 15 and December 15, commencing on June 15, 2018
, at a rate of
9.00%
per year, and mature
December 31, 2024
. The Second Lien Notes require payment of interest in cash, except that interest on up to
$50.0 million
principal amount, at the election of the Company, may be paid by increasing the principal amount of the outstanding notes or by issuing additional notes. The terms of the 2018 Credit Agreement require that the Company exercise such election. The Second Lien Notes are secured on a second-priority basis by substantially all of the Company's assets and are guaranteed by substantially all of the Company's subsidiaries. The Second Lien Notes and the guarantees thereof are subordinated to the prior payment in full of the 2018 Credit Agreement and certain other senior indebtedness (as defined and to the extent set forth in the Second Lien Notes Indenture).
The Company may redeem all or a portion of the Second Lien Notes prior to December 15, 2020 by paying a specified premium, or at any time on or after December 15, 2020 at applicable redemption prices, in each case, plus accrued and unpaid interest. In addition, on or before December 15, 2020, the Company may redeem up to
35%
of the aggregate principal amount of the Second Lien Notes with the net proceeds of certain equity offerings at the redemption price of
109.000%
of the principal amount of Second Lien Notes redeemed, plus accrued and unpaid interest. If the Company experiences specific kinds of changes of control, the Company must offer to repurchase the Second Lien Notes at
101%
of their principal amount, plus accrued and unpaid interest. In addition, if the Second Lien Notes would otherwise constitute “applicable high-yield discount obligations,” at the end of each accrual period ending on or after February 9, 2023, the Company will be required to redeem a portion of the Second Lien Notes. The Second Lien Notes Indenture limits the Company's ability to, among other things, pay dividends and make distributions or repurchase stock; make certain investments; incur additional debt; sell assets; enter into certain transactions with affiliates; create or incur liens; materially change its lines of business; and merge or consolidate or transfer or sell all or substantially all of its assets. The Second Lien Notes Indenture contains certain customary events of default, including the failure to make timely payments on the Second Lien Notes, failure to satisfy certain covenants and specified events of bankruptcy and insolvency.
18. Mortgage-Backed Debt
Mortgage-backed debt consists of debt issued by the Residual and Non-Residual Trusts that have been consolidated by the Company. The mortgage-backed debt of the Residual Trusts was carried at amortized cost at December 31, 2017. In connection with the adoption of fresh start accounting effective
February 9, 2018
, the Company changed its method of accounting for mortgage-backed debt of the Residual Trusts to fair value. The mortgage-backed debt of the Non-Residual Trusts is carried at fair value.
Provided in the table below is information regarding the mortgage-backed debt (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Carrying Value
|
|
Weighted-Average Stated Interest Rate
(1)
|
|
|
Carrying Value
|
|
Weighted-Average Stated Interest Rate
(1)
|
|
Mortgage-backed debt at fair value (unpaid principal balance of $638,826 and $353,262 at June 30, 2018 and December 31, 2017, respectively)
|
|
$
|
633,244
|
|
|
6.16
|
%
|
|
|
$
|
348,682
|
|
|
6.26
|
%
|
|
Mortgage-backed debt at amortized cost (unpaid principal balance of $391,208 at December 31, 2017)
|
|
—
|
|
|
—
|
%
|
|
|
387,200
|
|
|
6.07
|
%
|
|
Total mortgage-backed debt
|
|
$
|
633,244
|
|
|
6.16
|
%
|
|
|
$
|
735,882
|
|
|
6.16
|
%
|
__________
|
|
|
|
(1)
|
Represents the weighted-average stated interest rate, which may be different from the effective rate, which considers the amortization of discounts and issuance costs.
|
In connection with the adoption of fresh start accounting, the Company recorded adjustments resulting in an increase to mortgage-backed debt totaling
$6.2 million
at
February 9, 2018
, as further described in
Note 3
.
19. Share-Based Compensation
On the Effective Date, all outstanding options and non-vested awards at December 31, 2017 were canceled in connection with the Company's emergence from bankruptcy. Accordingly, the Company was required to recognize the entire amount of any previously unrecognized compensation cost, which totaled
$0.4 million
at February 9, 2018.
During the second quarter of 2018, the Company announced the appointment of Thomas F. Marano as Chief Executive Officer and Ritesh Chaturbedi as Chief Operating Officer. In connection with his appointment as Chief Executive Officer, Mr. Marano received PSUs on July 18, 2018 with the number of shares earned to be determined based upon the average closing price of the Company's stock for the 20 trading days immediately prior to April 18, 2019. The number of shares earned under the applicable award agreement will be determined by the Compensation Committee in accordance with the stock performance ranges detailed within the applicable award agreement up to a maximum number of
500,000
shares. Subject to Mr. Marano's continued service with the Company on each applicable vesting date, fifty percent of the earned shares will vest on April 18, 2019 while the remaining earned shares will vest one year later.
Mr. Chaturbedi was granted PSUs on July 18, 2018 with the number of shares earned to be determined based upon the average closing price of the Company's stock for the 20 trading days immediately prior to and including December 31, 2020. The number of shares earned under the applicable award agreement will be determined by the Compensation Committee in accordance with the stock performance ranges detailed within the applicable award agreement up to a maximum number of
20,000
shares. Subject to Mr. Chaturbedi's continued service with the Company, fifty percent of the earned shares will vest on December 31, 2020 and the remaining shares will vest one year later.
Total expected compensation expense for the awards granted to Mr. Marano and Mr. Chaturbedi is expected to be calculated using a Monte Carlo valuation technique, which considers the probability of all of the possible outcomes of the performance target.
During the second quarter of 2018, the Company granted
251,632
immediately vesting RSUs to non-employee directors, which included
37,746
RSUs being accounted for as liability-classified awards in accordance with GAAP and requires them to be marked-to-market each period. The weighted-average grant date fair value of
$5.50
for these awards was based on the closing market price of the Company's stock on the grant date.
During July 2018, the Company granted Tier I or Tier II PSUs to certain employees. Tier I awards totaled
315,882
target PSUs and contain a performance condition based on the achievement of liquidity measures in addition to a service component. The Tier II awards totaled
336,636
target PSUs and contain performance conditions based on the achievement of liquidity measures as well as individual goals in addition to a service component. For the Tier II awards, the liquidity measure accounts for
60%
of the target PSUs while the remaining
40%
of the target PSUs are attributable to the individual goals metric. The measurement date for both of the aforementioned performance conditions is December 31, 2018, with an ongoing liquidity requirement for the Tier 1 awards and the liquidity portion of the Tier II awards. These PSUs vest in equal installments on March 15, 2019, March 15, 2020 and March 15, 2021. The number of shares that ultimately vest will be based on the performance percentages, which can range from
0%
to
165%
of target for the PSUs relating to the liquidity performance metric and
0%
to
100%
of target for the PSUs relating to the individual performance metric. The weighted-average grant date fair value of both the Tier I and Tier II PSUs of
$5.33
was based on the closing market price of the Company's stock on the grant date. Each PSU has one share of Company common stock underlying such PSU.
Share-Based Compensation Expense
Share-based compensation expense recognized by the Company is net of actual forfeitures. Share-based compensation expense of
$1.4 million
for the
three months ended June 30, 2018
and the
period from February 10, 2018 through June 30, 2018
and
$0.5 million
during the
period from January 1, 2018 through February 9, 2018
, is included in salaries and benefits expense on the consolidated statements of comprehensive income (loss).
20. Income Taxes
The Company calculates income tax expense (benefit) for each interim reporting period based on the estimated annual effective tax rate, which takes into account all expected ordinary activity for the year. The Company recognized income tax expense of
$0.2 million
and
$0.4 million
for the
three months ended June 30, 2018
and the
period from February 10, 2018 through June 30, 2018
, respectively. Deferred tax assets have been reduced by a valuation allowance due to a determination that it is more likely than not that some or all of the deferred tax assets will not be realized based on the weight of all available evidence. The effective tax rate and tax expense continue to be low as a result of the Company not recognizing an income tax benefit associated with net losses.
The Company recorded income tax benefit of
$18 thousand
for the
period from January 1, 2018 through February 9, 2018
, which reflects the tax impact of the Predecessor operations, reorganization adjustments and the impact of fresh start accounting adjustments.
Under the Prepackaged Plan, a substantial amount of the Company’s debt was discharged. Absent an exception, a debtor recognizes cancellation of indebtedness income, or CODI, upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. The amount of CODI recognized by a taxpayer is the adjusted issue price of any indebtedness discharged less the sum of (i) the amount of cash paid, (ii) the issue price of any new indebtedness issued and (iii) the fair market value of any other consideration, including equity, issued.
The Code provides that a debtor whose debt is discharged pursuant to a confirmed chapter 11 plan does not recognize taxable CODI but must reduce certain of its tax attributes by the amount of the CODI excluded from taxable income. The reduction in the Company's tax attributes for excluded CODI will not be effected until after the determination of Company's tax liability for the tax year ending December 31, 2018.
As provided by Section 382 of the Code and similar state tax law provisions, utilization of certain tax attributes may be subject to substantial annual limitations due to an ownership change in the Company. Under the rules, statutorily defined ownership changes may limit the amount of tax attributes that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382 for federal income tax purposes, results from transactions that increase the ownership of statutorily defined
5%
stockholders in the stock of a corporation by more than
50%
in the aggregate over a testing period, generally
three years
.
The Company experienced an ownership change in connection with the Company's emergence from the Chapter 11 Case on February 9, 2018. The Company currently expects to apply the rules under Section 382(l)(5) of the Code and the Treasury regulations thereunder that would allow the Company to mitigate the limitations imposed under Section 382 with respect to the Company's remaining tax attributes and the Company’s deferred tax assets and liabilities have been computed on such basis. However, the application of such provision remains subject to examination by the IRS. Taxpayers who qualify for this provision may, at their option, elect not to apply it. If such provision does not apply, the Company's ability to realize the value of its tax attributes would be subject to limitation and the amount of its deferred tax assets and liabilities may differ. Also, an ownership change subsequent to the Company's emergence from bankruptcy could severely limit or effectively eliminate its ability to realize the value of its tax attributes.
The Company estimates that a portion of the NOLs disclosed in its Annual Report on Form 10-K for the year ended December 31, 2017 and the entire tax loss generated during the December 31, 2018 tax year will be eliminated as a result of the consummation of the Company's Prepackaged Plan. These estimates are subject to revision through the filing of the tax returns for the Successor period ending December 31, 2018.
21. Equity and Earnings (Loss) Per Share
On the Effective Date, all shares of the Predecessor common stock were canceled and
4,252,500
shares of the Successor common stock, par value
$0.01
per share, were issued to the previous shareholders of common stock and Convertible Noteholders. The Successor common stock was valued based on its initial trading price of
$10.25
per share for a total value of
$43.6 million
. The Company reserved
3,193,750
shares of common stock for issuance under an equity incentive plan.
On the Effective Date, the Company issued
100,000
shares of Mandatorily Convertible Preferred Stock initially valued at
$123.2 million
to the Senior Noteholders, which are mandatorily convertible into
11,497,500
shares of common stock (a conversion multiple of
114.9750
) upon the earliest of (i) February 9, 2023, (ii) at any time following
one year
after the Effective Date, the time that the volume weighted-average pricing of the common stock exceeds
150%
of the conversion price per share of
$8.6975
, subject to adjustment as described in the Articles of Amendment and Restatement, for at least
45
trading days in a
60
consecutive trading day period, including each of the last
20 days
in such
60
consecutive trading day period, and (iii) a change of control transaction in which the consideration paid or payable per share of common stock is greater than or equal to the conversion price per share, which, subject to adjustment as described in the Articles of Amendment and Restatement, is
$8.6975
.
In the event of a voluntary or involuntary liquidation, winding-up or dissolution of the Company, each holder of Mandatorily Convertible Preferred Stock will be entitled to receive the greater of (i) a liquidation preference per share of Mandatorily Convertible Preferred Stock, prior to any distribution with respect to any other equity security of the Company, equal to the Liquidation Preference, and (ii) the amount payable per share, participating on an “as converted” basis, upon liquidation to the holders of the Successor common stock. The “Liquidation Preference” equals (i) the face amount of the Mandatorily Convertible Preferred Stock, increased by (ii) the amount of interest that would have accumulated on the face amount of the Mandatorily Convertible Preferred Stock up to (but excluding) the date of any liquidation, winding-up or dissolution of the Company, compounding quarterly at a rate of
7%
per annum. Thereafter, holders of Mandatorily Convertible Preferred Stock will have no right or claim to the remaining assets, if any, of the Company.
Further, on the Effective Date, the Company issued to the holders of its common stock, as well as the Convertible Noteholders, Series A Warrants to purchase up to an aggregate of
7,245,000
shares of common stock at
$20.63
per share and Series B Warrants to purchase up to an aggregate of
5,748,750
shares of common stock at
$28.25
per share. All unexercised warrants expire and the rights of the warrant holders to purchase shares of common stock terminate on February 9, 2028, at 5:00 p.m., Eastern Standard Time, which is the 10th anniversary of the Effective Date. The estimated fair values of the Series A and B Warrants, on the Effective Date, were determined to be
$1.68
and
$0.94
per warrant, respectively, and are classified within additional paid-in capital on the consolidated balance sheets.
Termination of Rights Agreement
The Company had previously adopted the Rights Agreement, dated as of June 29, 2015, and subsequently amended and restated on November 11, 2016 and further amended on November 9, 2017 and February 9, 2018, which was intended to help protect the Company's “built-in tax losses” and certain other tax benefits by acting as a deterrent to any person or group of persons acting in concert from becoming or obtaining the right to become the beneficial owner (including through constructive ownership of securities owned by others) of
4.99%
or more of the shares of the Company's common stock.
On the Effective Date, the Company and Computershare entered into Amendment No. 2 to the Rights Agreement, which accelerated the scheduled expiration date of the Rights (as defined in the Rights Agreement) to the Effective Date. The Rights issued pursuant to the Rights Agreement, which were also canceled by operation of the Prepackaged Plan, have expired and are no longer outstanding, and the Rights Agreement has terminated.
In connection with the adoption of the Rights Agreement, the Company filed articles supplementary with the State Department of Assessments and Taxation of Maryland, setting forth the rights, powers, and preferences of the Company’s junior participating preferred stock issuable upon exercise of the rights. The cancellation of all existing equity interests by operation of the Prepackaged Plan included the cancellation of any rights issued under the Rights Agreement. In addition, on the Effective Date, the Company filed Articles of Amendment with the State Department of Assessments and Taxation of Maryland, which among other things, served to eliminate the Company’s junior participating preferred stock. The Company’s Articles of Amendment and Restatement, adopted on the Effective Date, include transfer restriction provisions intended to protect the tax benefits described above.
Registration Rights Agreement
On the Effective Date and pursuant to the Prepackaged Plan, the Company entered into a Registration Rights Agreement that provided certain registration rights to certain parties (together with any person or entity that becomes a party to the Registration Rights Agreement pursuant to the terms thereof) that received shares of the Company’s common stock, warrants and Mandatorily Convertible Preferred Stock on the Effective Date as provided in the Prepackaged Plan. The Registration Rights Agreement provides such persons with registration rights for the holders’ registrable securities (as defined in the Registration Rights Agreement).
Pursuant to the Registration Rights Agreement, the Company agreed to file, within
60 days
of the receipt of a request by holders of at least
40%
of the registrable securities, an initial shelf registration statement covering resales of the registrable securities held by the holders. Subject to limited exceptions, the Company is required to maintain the effectiveness of any such registration statement until the earlier of (i)
three years
following the Effective Date and (ii) the date that all registrable securities covered by the shelf registration statement are no longer registrable securities.
In addition, holders with rights under the Registration Rights Agreement beneficially holding
10%
or more of the common stock have the right to a Demand Registration to effect the registration of any or all of the registrable securities and/or effectuate the distribution of any or all of their registrable securities by means of an underwritten shelf takedown offering. The Company is not obligated to effect more than three Demand Registrations, and it need not comply with such a request if (i) the aggregate gross proceeds from such a sale will not exceed
$25 million
, unless the Demand Registration includes all of the then-outstanding registrable securities or (ii) a registration statement shall have previously been declared effective by the SEC within
90 days
preceding the date of such request.
Holders with rights under the Registration Rights Agreement also have customary piggyback registration rights, subject to the limitations set forth in the Registration Rights Agreement.
These registration rights are subject to certain conditions and limitations, including the right of the underwriters to limit the number of shares to be included in a registration statement and the Company’s right to delay or withdraw a registration statement under certain circumstances. The Company will generally pay the registration expenses in connection with its obligations under the Registration Rights Agreement, regardless of whether a registration statement is filed or becomes effective. The registration rights granted in the Registration Rights Agreement are subject to customary indemnification and contribution provisions, as well as customary restrictions such as blackout periods.
Earnings (Loss) Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings (loss) per share computations shown on the consolidated statements of comprehensive income (loss) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Successor
|
|
|
Predecessor
|
|
|
For the Three Months Ended June 30, 2018
|
|
|
For the Three Months Ended June 30, 2017
|
|
|
For the Period From February 10, 2018 Through June 30, 2018
|
|
|
For the Period From January 1, 2018 Through February 9,
2018
|
|
For the Six Months Ended June 30, 2017
|
|
Numerator for basic and diluted earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders (numerator)
|
$
|
(40,470
|
)
|
|
|
$
|
(94,309
|
)
|
|
|
$
|
(94,619
|
)
|
|
|
$
|
521,007
|
|
|
$
|
(89,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding (Basic denominator)
|
4,707
|
|
|
|
36,536
|
|
|
|
4,546
|
|
|
|
37,374
|
|
|
36,475
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
|
—
|
|
|
Weighted-average common shares outstanding (Dilutive denominator)
|
4,707
|
|
|
|
36,536
|
|
|
|
4,546
|
|
|
|
37,424
|
|
|
36,475
|
|
The Company’s Mandatorily Convertible Preferred Stock are considered to be participating securities. During periods of net income, the calculation of earnings per share for common stock is adjusted to exclude the income attributable to the participating securities from the numerator and exclude the dilutive impact of those shares from the denominator. During periods of net loss, as was the case for the
three months ended June 30, 2018
and the
period from February 10, 2018 through June 30, 2018
, no effect is given to the participating securities because they do not share in the losses of the Company.
For periods in which there is income, certain securities would be antidilutive to the diluted earnings per share calculation. The following table summarizes securities that could potentially dilute earnings per share in the future but have been excluded from the computation of dilutive earnings per share in the periods that the Company has earnings (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Successor
|
|
|
Predecessor
|
|
|
For the Three Months Ended June 30, 2018
|
|
|
For the Three Months Ended June 30, 2017
|
|
|
For the Period From February 10, 2018 Through June 30, 2018
|
|
|
For the Period From January 1, 2018 Through February 9, 2018
|
|
For the Six Months Ended June 30, 2017
|
|
Outstanding share-based compensation awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
(1)
|
—
|
|
|
|
3,567
|
|
|
|
—
|
|
|
|
3,533
|
|
|
3,567
|
|
|
Restricted stock units
|
—
|
|
|
|
337
|
|
|
|
—
|
|
|
|
327
|
|
|
170
|
|
|
Assumed conversion of Convertible Notes
|
—
|
|
|
|
4,932
|
|
|
|
—
|
|
|
|
4,932
|
|
|
4,932
|
|
|
Assumed conversion of Convertible Preferred Shares
|
11,344
|
|
|
|
—
|
|
|
|
11,232
|
|
|
|
—
|
|
|
—
|
|
|
Outstanding Series A and B Warrants
|
12,994
|
|
|
|
—
|
|
|
|
12,994
|
|
|
|
—
|
|
|
—
|
|
__________
|
|
|
|
(1)
|
All antidilutive stock options at February 9, 2018 and
June 30, 2017
were out-of-the-money. There were no stock options granted during the
period from February 10, 2018 through June 30, 2018
.
|
The outstanding Series A and B Warrants are antidilutive when calculating earnings per share when the Company's average stock price was less than
$20.63
and
$28.25
, respectively. Upon exercise of warrants, the Company shall either deliver, against payment of the exercise price, a number of shares of common stock equal to the number of warrants exercised, or, if a cashless exercise is elected, the net share settlement amount of common stock equal to number of shares of common stock calculated by dividing the product of the number of shares of common stock underlying the warrants multiplied by the fair market value less the exercise price, by the fair market value.
The Convertible Notes were antidilutive when calculating earnings per share when the Company's average stock price was less than
$58.80
. Upon conversion of the Convertible Notes, the Company may have paid or delivered, at its option, cash, shares of the Company’s common stock, or a combination of cash and shares of common stock.
22. Segment Reporting
Management has organized the Company into
three
reportable segments, based primarily on its services as follows:
|
|
|
|
•
|
Servicing
— performs servicing for the Company's mortgage loan portfolio and on behalf of third-party credit owners of mortgage loans for a fee and also performs subservicing for third-party owners of MSR. The Servicing segment also operates complementary businesses including a collections agency that performs collections of post charge-off deficiency balances for third parties and the Company. Commencing February 1, 2017, an insurance agency owned by the Company began to provide insurance marketing services to a third party with respect to voluntary insurance policies, including hazard insurance. In addition, the Servicing segment holds the assets and mortgage-backed debt of the Residual Trusts.
|
|
|
|
|
•
|
Originations
— originates and purchases mortgage loans that are intended for sales to third parties.
|
|
|
|
|
•
|
Reverse Mortgage
— primarily focuses on the servicing of reverse loans for the Company's own reverse mortgage portfolio and subservicing on behalf of third-party credit owners of reverse loans. The Reverse Mortgage segment also provides complementary services for the reverse mortgage market, such as real estate owned property management and disposition, for a fee.
Effective January 2017, the Company exited the reverse mortgage originations business. The Company no longer has any reverse loans remaining in its originations pipeline and has finalized the shutdown of the reverse mortgage originations business. The Company will continue to fund undrawn tails available to borrowers.
|
The following tables present select financial information for the reportable segments (in thousands). The Company has presented the revenues and expenses of the Non-Residual Trusts and other non-reportable operating segments, as well as corporate expenses, in Corporate and Other. Intersegment revenues and expenses have been eliminated.
Effective January 1, 2018, the Company no longer allocates corporate overhead, including depreciation and amortization, to its operating segments. These amounts are now included in the Corporate and Other non-reportable segment. Prior year balances have been restated to conform to current year presentation
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
For the Three Months Ended June 30, 2018
|
|
|
|
Servicing
|
|
Originations
|
|
Reverse
Mortgage
|
|
Corporate and Other
|
|
Eliminations
|
|
Total
Consolidated
|
|
Total revenues
(1)(2)
|
|
$
|
148,066
|
|
|
$
|
47,844
|
|
|
$
|
5,792
|
|
|
$
|
228
|
|
|
$
|
(3,402
|
)
|
|
$
|
198,528
|
|
|
Income (loss) before income taxes
|
|
50,513
|
|
|
(8,428
|
)
|
|
(29,648
|
)
|
|
(52,658
|
)
|
|
—
|
|
|
(40,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
For the Three Months Ended June 30, 2017
|
|
|
|
Servicing
|
|
Originations
|
|
Reverse
Mortgage
|
|
Corporate and Other
|
|
Eliminations
|
|
Total
Consolidated
|
|
Total revenues
(1)(2)
|
|
$
|
117,426
|
|
|
$
|
80,520
|
|
|
$
|
15,409
|
|
|
$
|
200
|
|
|
$
|
(4,768
|
)
|
|
$
|
208,787
|
|
|
Income (loss) before income taxes
|
|
(33,849
|
)
|
|
23,784
|
|
|
(13,634
|
)
|
|
(68,916
|
)
|
|
—
|
|
|
(92,615
|
)
|
__________
|
|
|
|
(1)
|
The Servicing segment recorded intercompany servicing revenue and fees from activity with the Originations segment and the Corporate and Other non-reportable segment of
$1.6 million
and
$2.4 million
for the
three months ended June 30, 2018 and 2017
,
respectively. Included in these amounts are late fees that were waived as an incentive for borrowers refinancing their loans of
$0.3 million
and
$0.6 million
for the
three months ended June 30, 2018 and 2017
,
respectively, which reduced net gains on sales of loans recognized by the Originations segment.
|
|
|
|
|
(2)
|
The Servicing segment recorded intercompany revenues for fees earned related to certain loan originations completed by the Originations segment from leads generated through the Servicing segment's servicing portfolio of
$2.1 million
and
$3.0 million
for the
three months ended June 30, 2018 and 2017
,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
For the Period From February 10, 2018 Through June 30,
2018
|
|
|
|
Servicing
|
|
Originations
|
|
Reverse
Mortgage
|
|
Corporate and Other
|
|
Eliminations
|
|
Total
Consolidated
|
|
Total revenues
(1)(2)
|
|
$
|
204,934
|
|
|
$
|
79,285
|
|
|
$
|
10,628
|
|
|
$
|
399
|
|
|
$
|
(5,503
|
)
|
|
$
|
289,743
|
|
|
Income (loss) before income taxes
|
|
52,646
|
|
|
(20,210
|
)
|
|
(41,317
|
)
|
|
(85,300
|
)
|
|
—
|
|
|
(94,181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
Total assets
|
|
$
|
2,313,741
|
|
|
$
|
943,825
|
|
|
$
|
9,421,614
|
|
|
$
|
345,278
|
|
|
$
|
(196,276
|
)
|
|
$
|
12,828,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
For the Period From January 1, 2018 Through February 9,
2018
|
|
|
|
Servicing
|
|
Originations
|
|
Reverse
Mortgage
|
|
Corporate and Other
|
|
Eliminations
|
|
Total
Consolidated
|
|
Total revenues
(1)(2)
|
|
$
|
145,551
|
|
|
$
|
29,885
|
|
|
$
|
13,207
|
|
|
$
|
89
|
|
|
$
|
(1,459
|
)
|
|
$
|
187,273
|
|
|
Income (loss) before income taxes
|
|
69,614
|
|
|
7,977
|
|
|
(1,133
|
)
|
|
444,531
|
|
|
—
|
|
|
520,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
For the Six Months Ended June 30, 2017
|
|
|
|
Servicing
|
|
Originations
|
|
Reverse
Mortgage
|
|
Corporate and Other
|
|
Eliminations
|
|
Total
Consolidated
|
|
Total revenues
(1)(2)
|
|
$
|
265,206
|
|
|
$
|
161,328
|
|
|
$
|
37,902
|
|
|
$
|
710
|
|
|
$
|
(11,074
|
)
|
|
$
|
454,072
|
|
|
Income (loss) before income taxes
|
|
14,513
|
|
|
40,112
|
|
|
(15,650
|
)
|
|
(127,204
|
)
|
|
—
|
|
|
(88,229
|
)
|
__________
|
|
|
|
(1)
|
The Servicing segment recorded intercompany servicing revenue and fees from activity with the Originations segment and the Corporate and Other non-reportable segment of
$2.5 million
,
$0.8 million
and
$5.3 million
for
the period from February 10, 2018 through June 30, 2018, the period from January 1, 2018 through February 9, 2018 and the six months ended June 30, 2017, respectively
. Included in these amounts are late fees that were waived as an incentive for borrowers refinancing their loans of
$0.5 million
,
$0.3 million
and
$1.6 million
for
the period from February 10, 2018 through June 30, 2018, the period from January 1, 2018 through February 9, 2018 and the six months ended June 30, 2017, respectively
, which reduced net gains on sales of loans recognized by the Originations segment.
|
|
|
|
|
(2)
|
The Servicing segment recorded intercompany revenues for fees earned related to certain loan originations completed by the Originations segment from leads generated through the Servicing segment's servicing portfolio of
$3.5 million
,
$0.9 million
and
$7.4 million
for
the period from February 10, 2018 through June 30, 2018, the period from January 1, 2018 through February 9, 2018 and the six months ended June 30, 2017, respectively
.
|
23. Commitments and Contingencies
Mandatory Clean-Up Call and Letter of Credit Reimbursement Obligation
Historically, the Company was obligated to exercise the mandatory clean-up call obligations assumed as part of a prior agreement to acquire the rights to service the loans in the Non-Residual Trusts. The Company was required to call these securitizations when the principal amount of each loan pool fell to
10%
or below of the original principal amount. On October 10, 2017, the Company entered into a Clean-up Call Agreement with a counterparty. Pursuant to the Clean-up Call Agreement, the Company paid an inducement fee in the amount of
$36.5 million
to the counterparty, which was deferred and is being amortized as the counterparty executes the clean-up calls per the agreement. With the execution of the Clean-Up Call Agreement, the counterparty assumed the Company’s mandatory obligation to exercise the clean-up calls for the remaining securitization trusts. In connection with the exercise of each clean-up call, the counterparty agreed to reimburse the Company for certain outstanding advances previously made by the Company with respect to the related trusts, up to an aggregate amount of approximately
$6.4 million
for the
eight
remaining trusts. At
June 30, 2018
, the outstanding advances available for the remaining trusts to be called totaled
$4.1 million
. The Clean-up Call Agreement inducement fee had a balance of
$22.0 million
at
June 30, 2018
, which was recorded within other assets on the consolidated balance sheets.
As part of an agreement to service the loans in the original
eleven
securitization trusts and as a result of the Clean-up Call Agreement, the Company has an obligation to reimburse a third party for amounts drawn on the LOCs in excess of
$17.0 million
in the aggregate related to the
seven
remaining consolidated securitization trusts from July 1, 2017 through each individual call date. The total draws on the LOCs was
$11.8 million
at
June 30, 2018
.
Unfunded Commitments
Reverse Mortgage Loans
At
June 30, 2018
, the Company had floating-rate reverse loans in which the borrowers have additional borrowing capacity of
$1.0 billion
and similar commitments on fixed-rate reverse loans of
$0.1 million
, primarily in the form of undrawn lines-of-credit. The borrowing capacity of
$1.0 billion
was available to be drawn by borrowers at
June 30, 2018
. In addition, the Company has other commitments of
$24.6 million
to fund taxes and insurance on borrowers’ properties to the extent of amounts that were set aside for such purpose upon the origination of the related reverse loan. There is no termination date for these drawings so long as the loan remains performing.
Mortgage Loans
The Company has short-term commitments to lend
$1.4 billion
and commitments to purchase loans totaling
$17.3 million
at
June 30, 2018
. In addition, the Company had commitments to sell
$2.0 billion
and purchase
$417.5 million
in mortgage-backed securities and commitments to sell whole loans of
$47.8 million
at
June 30, 2018
.
HMBS Issuer Obligations
As an HMBS issuer, the Company assumes certain obligations related to each security issued. The most significant obligation is the requirement to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM is equal to or greater than
98%
of the maximum claim amount. Performing repurchased loans are conveyed to HUD and payment is received from HUD typically within
a short timeframe
of repurchase. HUD reimburses the Company for the outstanding principal balance on the loan up to the maximum claim amount. The Company bears the risk of exposure if the amount of the outstanding principal balance on a loan exceeds the maximum claim amount. Recent regulatory changes introduced by HUD increased the requirements for completing an assignment to HUD. These new requirements have increased the time interval between when a loan is repurchased and when the assignment claim is filed with HUD, and inability to meet such requirements could preclude assignment. During this period, accruals for interest, HUD-required mortgage insurance payments, and borrower draws may cause the unpaid balance on the loan to increase and ultimately exceed the maximum claim amount. Nonperforming repurchased loans are generally liquidated through foreclosure and subsequent sale of real estate owned.
The Company currently relies upon certain master repurchase agreements and operating cash flows, to the extent necessary, to repurchase these Ginnie Mae loans. Given continued growth in the number and amount of reverse loan repurchases, the Company may continue to seek additional, or expansion of existing, master repurchase or similar agreements, to provide financing capacity for future required loan repurchases, and/or may seek to sell previously repurchased HECMs. The timing and amount of the Company's obligation to repurchase HECMs is uncertain as repurchase is predicated on certain factors such as whether a borrower event of default occurs prior to the HECM reaching the mandatory repurchase threshold under which the Company is obligated to repurchase the loan. The Company repurchased
$600.7 million
,
$257.1 million
and
$510.0 million
in reverse loans and real estate owned from securitization pools during
the period from February 10, 2018 through June 30, 2018, the period from January 1, 2018 through February 9, 2018 and the six months ended June 30, 2017, respectively
. At
June 30, 2018
, the Company had repurchased reverse loans and real estate owned totaling
$1.0 billion
, with a fair value of
$993.9 million
, and unfunded commitments to repurchase reverse loans and real estate owned of
$144.9 million
. Repurchases of reverse loans and real estate owned have increased significantly as compared to prior periods and are expected to continue to increase due to the increased flow of HECMs and real estate owned that are reaching
98%
of their maximum claim amount.
Mortgage Origination Contingencies
The Company sells substantially all of its originated or purchased mortgage loans into the secondary market for securitization or to private investors as whole loans. The Company sells conventional-conforming and government-backed mortgage loans through GSE and agency-sponsored securitizations in which mortgage-backed securities are created and sold to third-party investors. The Company also sells non-conforming mortgage loans to private investors. In doing so, representations and warranties regarding certain attributes of the loans are made to the third-party investor. Subsequent to the sale, if it is determined that a loan sold is in breach of these representations or warranties, the Company generally has an obligation to cure the breach. In general, if the Company is unable to cure such breach, the purchaser of the loan may require the Company to repurchase such loan for the unpaid principal balance, accrued interest, and related advances, and in any event, the Company must indemnify such purchaser for certain losses and expenses incurred by such purchaser in connection with such breach. The Company’s credit loss may be reduced by any recourse it has to correspondent lenders that, in turn, have sold such residential loans to the Company and breached similar or other representations and warranties.
The Company's representations and warranties are generally not subject to stated limits of exposure, with the exception of certain loans originated under HARP, which limits exposure based on payment history of the loan. At
June 30, 2018
, the Company’s maximum exposure to repurchases due to potential breaches of representations and warranties was
$69.7 billion
, and was based on the original unpaid principal balance of loans sold from the beginning of 2013 through
June 30, 2018
, adjusted for voluntary payments made by the borrower on loans for which the Company performs servicing. A majority of the Company's loan sales were servicing retained.
The Company’s obligations vary based upon the nature of the repurchase demand and the current status of the mortgage loan. The Company’s estimate of the liability associated with representations and warranties exposure was
$13.7 million
at
June 30, 2018
, and is included in originations liability as part of payables and accrued liabilities on the consolidated balance sheets.
Servicing Contingencies
The Company’s servicing obligations are set forth in industry regulations established by HUD, the FHA, the VA, and other government agencies and in servicing and subservicing agreements with the applicable counterparties, such as Fannie Mae, Freddie Mac and other credit owners. Both the regulations and the servicing agreements provide that the servicer may be liable for failure to perform its servicing obligations and further provide remedies for certain servicer breaches.
Reverse Mortgage Loans
FHA regulations provide that servicers meet a series of event-specific timeframes during the default, foreclosure, conveyance, and mortgage insurance claim cycles. Failure to timely meet any processing deadline may stop the accrual of debenture interest otherwise payable in satisfaction of a claim under the FHA mortgage insurance contract and the servicer may be responsible to HUD for debenture interest that is not self-curtailed by the servicer, or for making the credit owner whole for any interest curtailed by FHA due to not meeting the required event-specific timeframes. The Company had a curtailment obligation liability of
$99.1 million
at
June 30, 2018
related to the foregoing, which reflects management’s best estimate of the probable incurred claim. The curtailment liability is recorded in payables and accrued liabilities on the consolidated balance sheets. The Company recorded (reduced) a provision, net of expected third-party recoveries, related to the curtailment obligation liability of
$(3.4) million
and
$0.4 million
during
the period from February 10, 2018 through June 30, 2018 and the period from January 1, 2018 through February 9, 2018, respectively
. The Company has potential estimated maximum financial statement exposure for an additional
$153.2 million
related to similar claims, which are reasonably possible, but which the Company believes are the responsibility of third parties (e.g., prior servicers and/or credit owners).
Mortgage Loans
The Company had a curtailment obligation liability of
$40.3 million
at
June 30, 2018
related to sales of servicing rights, advance curtailment exposure and mortgage loan servicing that it primarily assumed through an acquisition of servicing rights. The Company is obligated to service the related mortgage loans in accordance with Ginnie Mae requirements, including repayment to credit owners for corporate advances and interest curtailment. The curtailment liability is recorded in payables and accrued liabilities on the consolidated balance sheets.
Litigation and Regulatory Matters
In the ordinary course of business, the Company and its subsidiaries are defendants in, or parties to, pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. Many of these actions and proceedings are based on alleged violations of consumer protection laws governing the Company's servicing and origination activities. In some of these actions and proceedings, claims for substantial monetary damages are asserted against the Company.
The Company, in the ordinary course of business, is also subject to regulatory and governmental examinations, information requests and subpoenas, inquiries, investigations and threatened legal actions and proceedings. In connection with formal and informal inquiries, the Company receives numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of the Company’s activities.
In view of the inherent difficulty of predicting outcomes of such litigation, regulatory and governmental matters, particularly where the claimants seek very large or indeterminate restitution, penalties or damages, or where the matters present novel legal theories or involve a large number of parties, the Company generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be.
Reserves are established for pending or threatened litigation, regulatory and governmental matters when it is probable that a loss has been incurred and the amount of such loss can be reasonably estimated. In light of the inherent uncertainties involved in litigation and other legal proceedings, it is not always possible to determine a reasonable estimate of the amount of a probable loss, and the Company may estimate a range of possible loss for consideration in its estimated accruals. The estimates are based upon currently available information, including advice of counsel, and involve significant judgment taking into account the varying stages and inherent uncertainties of such matters. Accordingly, the Company’s estimates may change from time to time and such changes may be material to the consolidated financial results.
At
June 30, 2018
, the Company’s recorded reserves associated with legal and regulatory contingencies for which a loss is probable and can be reasonably estimated were approximately
$26 million
. There can be no assurance that the ultimate resolution of the Company’s pending or threatened litigation, claims or assessments will not result in losses in excess of the Company’s recorded reserves. As a result, the ultimate resolution of any particular legal matter, or matters, could be material to the Company’s results of operations or cash flows for the period in which such matter is resolved.
For matters involving a probable loss where the Company can estimate the range but not a specific loss amount, the aggregate estimated amount of reasonably possible losses in excess of the recorded liability was
$0
to approximately
$10 million
at
June 30, 2018
. Given the inherent uncertainties and status of the Company’s outstanding legal and regulatory matters, the range of reasonably possible losses cannot be estimated for all matters; therefore, this estimated range does not represent the Company’s maximum loss exposure. As new information becomes available, the matters for which the Company is able to estimate, as well as the estimates themselves, will be adjusted accordingly.
The following is a description of certain litigation and regulatory matters:
The Company has received various subpoenas for testimony and documents, motions for examinations pursuant to Federal Rule of Bankruptcy Procedure 2004, and other information requests from certain Offices of the U.S. Trustees, acting through trial counsel in various federal judicial districts, seeking information regarding an array of the Company's policies, procedures and practices in servicing loans to borrowers who are in bankruptcy and the Company's compliance with bankruptcy laws and rules. The Company has provided information in response to these subpoenas and requests and has met with representatives of certain Offices of the U.S. Trustees to discuss various issues that have arisen in the course of these inquiries, including the Company's compliance with bankruptcy laws and rules. The Company cannot predict the outcome of the aforementioned proceedings and investigations, which could result in requests for damages, fines, sanctions, or other remediation. The Company could face further legal proceedings in connection with these matters. The Company may seek to enter into one or more agreements to resolve these matters. Any such agreement may require the Company to pay fines or other amounts for alleged breaches of law and to change or otherwise remediate the Company's business practices. Legal proceedings relating to these matters and the terms of any settlement agreement could have a material adverse effect on the Company's reputation, business, prospects, results of operations, liquidity and financial condition.
A federal securities fraud complaint was filed against the Company, George M. Awad, Denmar J. Dixon, Anthony N. Renzi, and Gary L. Tillett on March 16, 2017. The case, captioned
Courtney Elkin, et al. vs. Walter Investment Management Corp., et al.
, Case No. 2:17-cv-02025-JCJ, is pending in the Eastern District of Pennsylvania. The court has appointed a lead plaintiff in the action who filed an amended complaint on September 15, 2017. The amended complaint seeks monetary damages and asserts claims under Sections 10(b) and 20(a) of the Exchange Act during a class period alleged to begin on August 9, 2016 and conclude on August 1, 2017. The amended complaint alleges that: (i) defendants made material misstatements about the value of the Company's deferred tax assets; (ii) the material misstatement about the value of the Company's deferred tax assets required the Company to restate certain financials in the Quarterly Reports on Form 10-Q for the periods ended June 30, 2016, September 30, 2016 and March 31, 2017 and the Annual Report on Form 10-K for the year ended December 31, 2016, and caused the Company to violate the financial covenants and obligations in agreements with the Company's lenders and GSEs; and (iii) defendants made material misstatements concerning the Company's initiatives to deleverage the Company's capital structure. On November 3, 2017, the lead plaintiff voluntarily dismissed defendant Denmar J. Dixon from the action. On November 14, 2017, the remaining defendants moved to dismiss the amended complaint. From December 1, 2017 to February 9, 2018, the action was stayed pursuant to section 362 of the Bankruptcy Code. On July 13, 2018, the parties entered into a formal settlement agreement to settle the action for
$2.95 million
,
subject to notice to the alleged class and court approval, and the plaintiff moved the court for preliminary approval of the settlement. The settlement, if completed, will be paid by the Company's directors’ and officers’ insurance carrier.
A stockholder derivative complaint purporting to assert claims on behalf of the Company was filed against certain current and former members of the Board of Directors on June 22, 2017. The case, captioned
Michael E. Vacek, Jr., et al. vs. George M. Awad, et al
., Case No. 2:17-cv-02820-JCJ, is pending in the Eastern District of Pennsylvania. The plaintiff filed an amended complaint in the action on September 13, 2017. The amended complaint seeks monetary damages for the Company and equitable relief and asserts a claim for breach of fiduciary duty arising out of: (i) a material weakness in the Company's internal controls over financial reporting related to operational processes associated with Ditech Financial default servicing activities, including identifying foreclosure tax liens and resolving such liens efficiently, foreclosure related advances, and the processing and oversight of loans in bankruptcy status, which resulted in several adjustments to reserves during the fourth quarter of 2016; (ii) an accounting error that caused an overstatement of the value of the Company's deferred tax assets; and (iii) subpoenas seeking documents relating to RMS’s origination and underwriting of reverse mortgages and loans. The Company and the defendants moved to dismiss the amended complaint on October 5, 2017. From December 1, 2017 to February 9, 2018, the action was stayed pursuant to section 362 of the Bankruptcy Code. On April 26, 2018, the Court denied the motion to dismiss. On May 9, 2018, the Company and the defendants moved for reconsideration or certification of the Court’s denial of the motion to dismiss. On July 2, 2018, the parties reached an agreement in principle to settle the action for certain corporate governance measures subject to the negotiation of a formal settlement agreement, notice to stockholders, and court approval. Plaintiff’s counsel is seeking a payment of attorneys’ fees for the benefit he claims the Company received as a result of the corporate governance measures expected to be agreed to in the settlement. If the parties cannot agree on an amount of attorneys’ fees to be paid to plaintiff’s counsel, he will seek an award of attorneys’ fees from the court. Any attorneys’ fees paid to plaintiff’s counsel will be paid by the Company’s directors’ and officers’ insurance carrier.
From time to time, federal and state authorities investigate or examine aspects of the Company's business activities, such as its mortgage origination, servicing, collection and bankruptcy practices, among other things. It is the Company's general policy to cooperate with such investigations, and the Company has been responding to information requests and otherwise cooperating with various ongoing investigations and examinations by such authorities. The Company cannot predict the outcome of any of the ongoing proceedings and cannot provide assurances that investigations and examinations will not have a material adverse effect on the Company.
Walter Energy Matters
The Company may become liable for U.S. federal income taxes allegedly owed by the Walter Energy consolidated group for the 2009 and prior tax years. Under federal law, each member of a consolidated group for U.S. federal income tax purposes is severally liable for the federal income tax liability of each other member of the consolidated group for any year in which it was a member of the consolidated group at any time during such year. Certain former subsidiaries of the Company (which were subsequently merged or otherwise consolidated with certain current subsidiaries of the Company) were members of the Walter Energy consolidated tax group prior to the Company's spin-off from Walter Energy on
April 17, 2009
. As a result, to the extent the Walter Energy consolidated group’s federal income taxes (including penalties and interest) for such tax years are not favorably resolved on the merits or otherwise paid, the Company could be liable for such amounts.
Walter Energy Tax Matters.
According to Walter Energy’s Form 10-Q, or the Walter Energy Form 10-Q, for the quarter ended September 30, 2015 (filed with the SEC on November 5, 2015) and certain other public filings made by Walter Energy in its bankruptcy proceedings currently pending in Alabama, described below, as of the date of such filing, certain tax matters with respect to certain tax years prior to and including the year of the Company's spin-off from Walter Energy remained unresolved, including certain tax matters relating to: (i) a "proof of claim" for a substantial amount of taxes, interest and penalties with respect to Walter Energy’s fiscal years ended August 31, 1983 through May 31, 1994, which was filed by the IRS in connection with Walter Energy’s bankruptcy filing on December 27, 1989 in the U.S. Bankruptcy Court for the Middle District of Florida, Tampa Division; (ii) an IRS audit of Walter Energy’s federal income tax returns for the years ended May 31, 2000 through December 31, 2008; and (iii) an IRS audit of Walter Energy’s federal income tax returns for the 2009 through 2013 tax years.
Walter Energy 2015 Bankruptcy Filing.
On July 15, 2015, Walter Energy filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Northern District of Alabama. On August 18, 2015, Walter Energy filed a motion with the Florida bankruptcy court requesting that the court transfer venue of its disputes with the IRS to the Alabama bankruptcy court. In that motion, Walter Energy asserted that it believed the liability for the years at issue "will be materially, if not completely, offset by the [r]efunds" asserted by Walter Energy against the IRS. The Florida Bankruptcy Court transferred venue of the matter to the Alabama Bankruptcy Court, where it remains pending.
On November 5, 2015, Walter Energy, together with certain of its subsidiaries, entered into the Walter Energy Asset Purchase Agreement with Coal Acquisition, a Delaware limited liability company formed by members of Walter Energy’s senior lender group, pursuant to which, among other things, Coal Acquisition agreed to acquire substantially all of Walter Energy’s assets and assume certain liabilities, subject to, among other things, a number of closing conditions set forth therein. On January 8, 2016, after conducting a hearing, the Alabama Bankruptcy Court entered an order approving the sale of Walter Energy's assets to Coal Acquisition free and clear of all liens, claims, interests and encumbrances of the debtors. The sale of such assets pursuant to the Walter Energy Asset Purchase Agreement was completed on March 31, 2016 and was conducted under the provisions of Sections 105, 363 and 365 of the Bankruptcy Code. Based on developments in the Alabama bankruptcy proceedings following completion of this asset sale, such asset sale appears to have resulted in (i) limited value remaining in Walter Energy’s bankruptcy estate and (ii) to date, limited recovery for certain of Walter Energy’s unsecured creditors, including the IRS.
On January 9, 2017, Walter Energy filed with the Alabama Bankruptcy Court a motion to convert its Chapter 11 bankruptcy case to a Chapter 7 liquidation. In that motion, Walter Energy stated that, other than with respect to
1%
of the equity of the acquirer of Walter Energy's core assets, no prospect of payment of unsecured claims exists. On January 23, 2017, the IRS filed an objection to Walter Energy's motion to convert, in which the IRS requested that a judgment be entered against Walter Energy in connection with the tax matters described above. The IRS further asserted that entry of a final judgment was necessary so that it could pursue collection of tax liabilities from former members of Walter Energy's consolidated group that are not debtors.
On January 30, 2017, the Alabama Bankruptcy Court held a hearing at which it denied the IRS's request for entry of a judgment and announced its intent to grant Walter Energy's motion to convert. The Alabama Bankruptcy Court entered an order on February 2, 2017 converting Walter Energy's Chapter 11 bankruptcy to a Chapter 7 liquidation. During February 2017, Andre Toffel was appointed Chapter 7 trustee of Walter Energy's bankruptcy estate.
The Company cannot predict whether or to what extent it may become liable for federal income taxes of the Walter Energy consolidated tax group during the tax years in which the Company was a part of such group, in part because the Company believes, based on publicly available information, that: (i) the amount of taxes owed by the Walter Energy consolidated tax group for the periods from 1983 through 2009 remains unresolved; and (ii) in light of Walter Energy’s conversion from a Chapter 11 bankruptcy to a Chapter 7 bankruptcy, it is unclear whether the IRS will seek to make a direct claim against the Company for such taxes. Further, because the Company cannot currently estimate its liability, if any, relating to the federal income tax liability of Walter Energy’s consolidated tax group during the tax years in which it was a part of such group, the Company cannot determine whether such liabilities, if any, could have a material adverse effect on the Company's business, financial condition, liquidity and/or results of operations.
Tax Separation Agreement
. In connection with the Company's spin-off from Walter Energy, the Company and Walter Energy entered into a Tax Separation Agreement, dated
April 17, 2009
. Notwithstanding any several liability the Company may have under federal tax law described above, under the Tax Separation Agreement, Walter Energy agreed to retain full liability for all U.S. federal income or state combined income taxes of the Walter Energy consolidated group for 2009 and prior tax years (including any interest, additional taxes or penalties applicable thereto), subject to limited exceptions. The Company therefore filed proofs of claim in the Alabama bankruptcy proceedings asserting claims for any such amounts to the extent the Company is ultimately held liable for the same. However, the Company expects to receive little or no recovery from Walter Energy for any filed proofs of claim for indemnification.
It is unclear whether claims made by the Company under the Tax Separation Agreement would be enforceable against Walter Energy in connection with, or following the conclusion of, the various Walter Energy bankruptcy proceedings described above, or if such claims would be rejected or disallowed under bankruptcy law. It is also unclear whether the Company would be able to recover some or all of any such claims given Walter Energy's limited assets and limited recoveries for unsecured creditors in the Walter Energy bankruptcy proceedings described above.
Furthermore, the Tax Separation Agreement provides that Walter Energy has, in its sole discretion, the exclusive right to represent the interests of the consolidated group in any audit, court proceeding or settlement of a claim with the IRS for the tax years in which certain of the Company’s former subsidiaries were members of the Walter Energy consolidated tax group. However, in light of the conversion of Walter Energy’s bankruptcy proceeding from a Chapter 11 proceeding to a Chapter 7 proceeding, the Company may choose to take a direct role in proceedings involving the IRS’s claim for tax years in which the Company was a member of the Walter Energy consolidated tax group. Moreover, the Tax Separation Agreement obligates the Company to take certain tax positions that are consistent with those taken historically by Walter Energy. In the event the Company does not take such positions, it could be liable to Walter Energy to the extent the Company's failure to do so results in an increased tax liability or the reduction of any tax asset of Walter Energy. These arrangements may result in conflicts of interests between the Company and Walter Energy, particularly with regard to the Walter Energy bankruptcy proceedings described above.
Lastly, according to its public filings, Walter Energy’s 2009 tax year is currently under audit. Accordingly, if it is determined that certain distribution taxes and other amounts are owed related to the Company's spin-off from Walter Energy in 2009, the Company may be liable under the Tax Separation Agreement for all or a portion of such amounts.
The Company is unable to estimate reasonably possible losses for the matter described above.
