Corporate/Other represents unallocated overhead expenses, including the costs of executive management and other corporate functions that are not directly attributable to our operating segments, and interest expense on our unsecured senior notes.
The following tables set forth the selected financial results of operations for the Corporate/Other segment:
|
| | | | |
Table 26.15. Corporate/Other SegmentSelected Financial Results of Operations |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| Year Ended December 31, | | | | |
2020 | | 2019 | | $ Change | | % Change |
Corporate/Other - Operations | | | | | | | |
Total expenses | $ | 157 | | | $ | 195 | | | $ | (38) | | | (19) | % |
Interest expense | (182) | | | (212) | | | 30 | | | (14) | % |
Other expenses, net | (139) | | | (7) | | | (132) | | | NM |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | | | | | |
Year Ended December 31, 2019 | | Five Months Ended December 31, 2018 | | | Seven Months Ended July 31, 2018 | | Combined(1) | | $ Change | | % Change |
Corporate/Other - Operations | | | | | | | | | | | | |
Total revenues | $ | 13 |
| | $ | — |
| | | $ | 1 |
| | $ | 1 |
| | $ | 12 |
| | 1,200 | % |
Total expenses | 198 |
| | 71 |
| | | 103 |
| | 174 |
| | 24 |
| | 14 | % |
Total other income (expenses), net | (212 | ) | | (85 | ) | | | (78 | ) | | (163 | ) | | (49 | ) | | 30 | % |
Loss before income tax benefit - Corporate/Other | $ | (397 | ) | | $ | (156 | ) | | | $ | (180 | ) | | $ | (336 | ) | | $ | (61 | ) | | 18 | % |
| | | | | | | | | | | | |
Corporate/Other - Expenses | | | | | | | | | | | | |
Salaries, wages and benefits | $ | 88 |
| | $ | 38 |
| | | $ | 45 |
| | $ | 83 |
| | $ | 5 |
| | 6 | % |
General and administrative | | | | | | | | | | | | |
Operational expenses | 62 |
| | 13 |
| | | 54 |
| | 67 |
| | (5 | ) | | (7 | )% |
Depreciation and amortization | 40 |
| | 20 |
| | | 4 |
| | 24 |
| | 16 |
| | 67 | % |
Loss on impairment of assets | 8 |
| | — |
| | | — |
| | — |
| | 8 |
| | 100 | % |
Total general and administrative | 110 |
| | 33 |
| | | 58 |
| | 91 |
| | 19 |
| | 21 | % |
Total expenses - Corporate/Other | $ | 198 |
| | $ | 71 |
| | | $ | 103 |
| | $ | 174 |
| | $ | 24 |
| | 14 | % |
| | | | | | | | | | | | |
Corporate/Other - Other Income (Expenses), Net | | | | | | | | | | | | |
Interest income, legacy portfolio | $ | 6 |
| | $ | 5 |
| | | $ | 7 |
| | $ | 12 |
| | $ | (6 | ) | | (50 | )% |
Other interest income | 1 |
| | 2 |
| | | — |
| | 2 |
| | (1 | ) | | (50 | )% |
Total interest income | 7 |
| | 7 |
| | | 7 |
| | 14 |
| | (7 | ) | | (50 | )% |
| | | | | | | | | | | | |
Interest expense, legacy portfolio | (1 | ) | | (1 | ) | | | (3 | ) | | (4 | ) | | 3 |
| | (75 | )% |
Interest expense on unsecured senior notes | (203 | ) | | (90 | ) | | | (77 | ) | | (167 | ) | | (36 | ) | | 22 | % |
Other interest expense | (8 | ) | | (2 | ) | | | (3 | ) | | (5 | ) | | (3 | ) | | 60 | % |
Total interest expense | (212 | ) | | (93 | ) | | | (83 | ) | | (176 | ) | | (36 | ) | | 20 | % |
Other (expense) income, net | (7 | ) | | 1 |
| | | (2 | ) | | (1 | ) | | (6 | ) | | 600 | % |
Total other income (expenses), net - Corporate/Other | $ | (212 | ) | | $ | (85 | ) | | | $ | (78 | ) | | $ | (163 | ) | | $ | (49 | ) | | 30 | % |
| | | | | | | | | | | | |
Weighted average cost - unsecured senior notes | 7.9 | % | | 7.1 | % | | | 7.4 | % | | 7.2 | % | | 0.7 | % | | 10 | % |
| |
(1)
| Refer to Basis of Presentation section for discussion on presentation of combined results.
|
NM = Not meaningful
Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 62
Loss before income tax benefit increasedTotal expenses decreased in the year ended December 31, 20192020 as compared to 2018, on a combined basis,2019 primarily due to an increasehigher salaries, wages and benefits, and general and administrative expense in 2019 driven by the acquisition and integration expenses related to the Pacific Union Financial, LLC (“Pacific Union”) acquisition and the Seterus acquisition in February 2019. The decrease in total expenses and the change in total other income (expenses), net. Total expenses increased primarily due to amortization of intangible assets related to the Merger with Nationstar. In addition, during the fourth quarter of 2019, we recorded an $8was partially offset by a $15 loss on impairment of assets in connection with technology write-offs and an ancillary business.business in 2020.
Total other income (expenses), net for the Corporate/Other segment consists of interestInterest expense on our unsecured senior notes, the interest income and expense from our legacy portfolio, and other interest related to a revolving facility used for general corporate purposes.
The change in total other income (expenses), netdecreased in the year ended December 31, 20192020 as compared to 2018, on a combined basis, was2019 primarily due to an increasea decrease in interest expense on unsecured senior notes as a result of a higher debt balancerepayment and higher borrowing rates underredemption in 2020 of the new unsecured senior notes that were issueddue 2021, 2022, 2023 and 2026. The decrease in July 2018total interest expense was partially offset by the issuance in 2020 of the unsecured senior notes due 2027, 2028 and 2030. For further discussion, refer to fund the Merger with Nationstar. In addition, net interest income related to the legacy portfolio declined due to the collapse of Trust 2009-A and the sale of loans heldNote 12, Indebtedness, in the trust. Other income (expenses),Notes to Consolidated Financial Statements.
The change in total other expenses, net, declined in the year ended December 31, 20192020 as compared to 2018, on a combined basis,2019 was primarily due to a $5 impairmentthe $138 loss on an equity investment.
Partially offsetting the increase in total expenses and the change in total other income (expenses), net was an increase in total revenues in the year ended December 31, 2019 as compared to 2018, on a combined basis, due to the gain recognized on the collapse of Trust 2009-A, our legacy portfolio, and the saleredemption of the loans held in the trust.unsecured senior notes due 2023 and 2026.
As a result of the collapse of Trust 2009-A and the sale of the loans held in the trust in September 2019, there was no legacy portfolio as of December 31, 2019.
|
| | | | |
Table 27. Legacy Portfolio Composition |
|
| | | |
| Successor |
December 31, 2018 |
Performing - UPB | $ | 145 |
|
Nonperforming (90+ delinquency) - UPB | 27 |
|
REO - estimated fair value | 4 |
|
Total legacy portfolio | $ | 176 |
|
63 Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K
|
| | | | |
Changes in Financial Position |
|
| | | | |
Table 28. Changes in Assets |
|
| | | | | | | | | | | | | | |
| Successor | | | | |
December 31, 2019 | | December 31, 2018 | | $ Change | | % Change |
Cash and cash equivalents | $ | 329 |
| | $ | 242 |
| | $ | 87 |
| | 36.0 | % |
Mortgage servicing rights | 3,502 |
| | 3,676 |
| | (174 | ) | | (4.7 | )% |
Advances and other receivables, net | 988 |
| | 1,194 |
| | (206 | ) | | (17.3 | )% |
Reverse mortgage interests, net | 6,279 |
| | 7,934 |
| | (1,655 | ) | | (20.9 | )% |
Mortgage loans held for sale at fair value | 4,077 |
| | 1,631 |
| | 2,446 |
| | 150.0 | % |
Deferred tax asset, net | 1,345 |
| | 967 |
| | 378 |
| | 39.1 | % |
Other | 1,785 |
| | 1,329 |
| | 456 |
| | 34.3 | % |
Total assets | $ | 18,305 |
| | $ | 16,973 |
| | $ | 1,332 |
| | 7.8 | % |
Total assets as of December 31, 2019 increased by $1,332 or 7.8% compared with December 31, 2018 primarily due to the increase in mortgage loans held for sale and other, partially offset by decreases in reverse mortgage interests, mortgage servicing rights, and advances and other receivables. Mortgage loans held for sale increased in 2019 primarily due to higher origination volumes in a declining interest rate environment, and the incremental volumes made available with the acquisition of Pacific Union and related origination channels, which occurred in February 2019. Other increased primarily due to $483 of other assets related to the Pacific Union acquisition, as indicated in Note 3, Acquisitions, in the notes to consolidated financial statements, and $121 of right of use assets recorded in 2019 as a result of adoption of ASU 2016-02. Reverse mortgage interests, net decreased $1,655 primarily due to the collection on participating interests in HMBS. Mortgage servicing rights decreased in 2019 primarily due to a negative mark-to-market adjustment driven by declining interest rates. Advances and other receivables decreased primarily due to recoveries on advances.
|
| | | | |
Table 29. Changes in Liabilities and Stockholder’s Equity |
|
| | | | | | | | | | | | | | |
| Successor | | | | |
December 31, 2019 | | December 31, 2018 | | $ Change | | % Change |
Unsecured senior notes, net | $ | 2,366 |
| | $ | 2,459 |
| | $ | (93 | ) | | (3.8 | )% |
Advance facilities, net | 422 |
| | 595 |
| | (173 | ) | | (29.1 | )% |
Warehouse facilities, net | 4,575 |
| | 2,349 |
| | 2,226 |
| | 94.8 | % |
MSR related liabilities - nonrecourse at fair value | 1,348 |
| | 1,216 |
| | 132 |
| | 10.9 | % |
Other nonrecourse debt, net | 5,286 |
| | 6,795 |
| | (1,509 | ) | | (22.2 | )% |
Other liabilities | 2,077 |
| | 1,614 |
| | 463 |
| | 28.7 | % |
Total liabilities | 16,074 |
| | 15,028 |
| | 1,046 |
| | 7.0 | % |
Total stockholders’ equity | 2,231 |
| | 1,945 |
| | 286 |
| | 14.7 | % |
Total liabilities and stockholders’ equity | $ | 18,305 |
| | $ | 16,973 |
| | $ | 1,332 |
| | 7.8 | % |
Total stockholders’ equity at December 31, 2019 increased by $286 or 14.7% compared with the balance as of December 31, 2018 primarily due to net income of $270 during the year ended December 31, 2019. Total liabilities at December 31, 2019 increased by $1,046 or 7.0% compared with the balance as of December 31, 2018 primarily due to an increase in warehouse facilities and other liabilities, which was partially offset by a decrease in other nonrecourse debt. Warehouse facilities increased by $2,226 primarily due to the warehouse facilities acquired as part of the Pacific Union acquisition and higher origination volumes. The increase in other liabilities was primarily due to $530 of payables and other liabilities related to the Pacific Union acquisition. Other nonrecourse debt decreased by $1,509 primarily due to repayments of reverse mortgage related nonrecourse debt, which was partially offset by proceeds from issuance of HECM securitizations.
Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 64
|
| | | | |
Liquidity and Capital Resources |
We measure liquidity by unrestricted cash and availability of borrowings on our MSR and other facilities. We recordedOur cash and cash equivalents on hand increased to $695 as of December 31, 2020 from $329 and total stockholders’ equity of $2,231 as of December 31, 2019. AsWe benefited from strong operating cash flow and repaid $175 of December 31, 2019, we had $1,359 collateral pledged against theincremental draws from our MSR facilities that were incurred at the start of the COVID-19 pandemic. Additionally, we repaid and redeemed $2,508 of unsecured senior notes through cash on hand and proceeds received from issuance of new unsecured senior notes, which we could borrow upextended the maturity of our unsecured senior notes to $840.2027. During the year ended December 31, 2019, operating activities generated cash totaling $702.2020, we bought back 2.6 million shares of our outstanding common stock as part of the $100 stock repurchase program.
We have sufficient borrowing capacity to support our operations. As of December 31, 2019,2020, total available borrowing capacity was $9,690,$13,690, of which $4,672we could borrow an additional $6,916. As of December 31, 2020, we had $1,217 collateral pledged against the MSR facilities, of which we could borrow an additional $390.
Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K 50
The economic impact of the COVID-19 pandemic has resulted in an increase in servicing advances and liquidity demands related to the utilization of forbearance programs offered by the CARES Act. We had an increase in forbearance plans during the second quarter of 2020, but the forbearance rate subsequently declined. Based on current modeling of expected forbearance rates within our portfolio, we believe that we are well-positioned to manage further increases in advances. In April 2020, we expanded our committed advance facility capacity by $850, including an expansion of capacity for private label advances for $200. In addition, in August 2020, we entered into a new financing facility for GNMA MSRs and advances with a capacity of $900, of which $640 was unused.allocated to advances as of December 31, 2020. With this addition, we expanded our total advance facility capacity to $2,040 and total unused advance capacity to $1,371 as of December 31, 2020. For more information on our MSR and advance facilities, see Note 12, Indebtedness, in the Notes to Consolidated Financial Statements. For non-agency servicing, we are reimbursed for advances relatively quickly, which should limit growth in balances with even higher forbearance rates.
Sources and Uses of Cash
Our primary sources of funds for liquidity include: (i) servicing fees and ancillary revenues; (ii) payments received from sale or securitization of loans; (iii) payments from the liquidation or securitization of our outstanding participating interests in reverse mortgage loans; (iv) advance and warehouse facilities, other secured borrowings and the unsecured senior notes; and (v) payments received in connection with the sale of advance receivables and excess spread.
Our primary uses of funds for liquidity include: (i) funding of servicing advances; (ii) originations of loans; (iii) payment of interest expenses; (iv) payment of operating expenses; (v) repayment of borrowings and repurchases or redemptions of outstanding indebtedness; (vi) payments for acquisitions of MSRs; (vii) scheduled and unscheduled draws on our serviced reverse residential mortgage loans; and (viii) payment of our technology expenses.
We service reverse mortgage loan portfolios with a UPB of $22,725 as of December 31, 2019, which includes $2,508 of reverse MSRs, $13,994 of reverse MSLs and $6,223 of reverse mortgage interests. Reverse mortgages provide seniors aged 62 and older with the ability to monetize the equity in their homes in a lump sum, line of credit or annualized draws. The unpaid principal balance of the loan is accreted for borrower draws and other costs such as mortgage insurance premiums, property taxes and insurance. Recovery of advances and draws related to reverse MSRs is generally recovered over a two to three-month period from the investor. However, for reverse mortgage portfolio recorded as a loan, the repayment of loan balances and collection of servicing fees occurs upon the payoff or other liquidation of the loan. We securitize our holdings in reverse mortgage loans in order to finance subsequent borrower draws and loan related costs. Draws on reverse mortgage loans totaled $242 in 2019, $316 in 2018, on a combined basis, and $403 in 2017.
We believe that our cash flows from operating activities, as well as capacity with existing facilities, provide adequate resources to fund our anticipated ongoing cash requirements. We rely on these facilities to fund operating activities. As the facilities mature, we anticipate renewal of these facilities will be achieved. Future debt maturities will be funded with cash and cash equivalents, cash flow from operating activities and, if necessary, future access to capital markets. We continue to optimize the use of balance sheet cash to avoid unnecessary interest carrying costs.
During 2019, we expanded our subservicing portfolios in orderIn addition, derivative instruments are used as part of the overall strategy to grow our operations without the capital required for acquisition costs and carrying costs of advances that ismanage exposure to market risks primarily associated with ownership of mortgage servicing rights. We completed boardings of $258 billion UPBfluctuations in connection with new and existing subservicing agreements.
On January 16, 2020, we completed an offering of $600 aggregate principal amount of 6.000% Senior Notes due 2027 (the “Notes”). The Notes will bear interest at 6.000% per annum and will mature on January 15, 2027. Interest onrates related to originations. See Note 11, Derivative Financial Instruments, in the Notes willto Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, which is incorporated herein for a summary of our derivative transactions.
In the normal course of business, we enter into various types of on- and off-balance sheet transactions with special purpose entities (“SPEs”) determined to be payable semi-annuallyvariable interest entities (“VIEs”), which primarily consist of securitization trusts established for a limited purpose. Generally, these SPEs are formed for the purpose of securitization transactions in which we transfer assets to an SPE, which then issues to investors various forms of debt obligations supported by those assets. In these securitization transactions, we typically receive cash and/or other interests in the SPE as proceeds for the transferred assets. See Note 13, Securitizations and Financings, in the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, which is incorporated herein for a summary of our transactions with VIEs and unconsolidated balances, and details of their impact on January 15 and July 15 of each year, beginning on July 15, 2020. In February 2020, the net proceeds of the offering, together with cash on hand, were used to redeem in full the outstanding 6.500% Senior Notes due 2021 and 6.500% Senior Notes due 2022.our consolidated financial statements.
65 Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K
Cash Flows
The table below presents the major sources and uses of cash flow for operating activities:
|
| | | | |
Table 30. Operating16. Cash FlowFlows |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| Year Ended December 31, | | | | |
2020 | | 2019 | | $ Change | | % Change |
Net cash attributable to: | | | | | | | |
Operating activities | $ | 331 | | | $ | 702 | | | $ | (371) | | | (53) | % |
Investing activities | (134) | | | (338) | | | 204 | | | (60) | % |
Financing activities | 104 | | | (313) | | | 417 | | | (133) | % |
Net increase in cash, cash equivalents and restricted cash | $ | 301 | | | $ | 51 | | | $ | 250 | | | 490 | % |
51 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | | | | | |
Year Ended December 31, 2019 | | Five Months Ended December 31, 2018 | | | Seven Months Ended July 31, 2018 | | Combined(1) | | $ Change | | % Change |
Net income | $ | 270 |
| | $ | 884 |
| | | $ | 154 |
| | $ | 1,038 |
| | $ | (768 | ) | | (74 | )% |
Fair value changes in MSRs, MSR related liabilities and mortgage loans held for investment | 838 |
| | 234 |
| | | (80 | ) | | 154 |
| | 684 |
| | 444 | % |
Deferred tax (benefit) expense | (366 | ) | | (1,021 | ) | | | 63 |
| | (958 | ) | | 592 |
| | (62 | )% |
Other non-cash adjustments to net income | (1,249 | ) | | (294 | ) | | | (388 | ) | | (682 | ) | | (567 | ) | | 83 | % |
Originations net sales activities | (1,204 | ) | | (10 | ) | | | 520 |
| | 510 |
| | (1,714 | ) | | (336 | )% |
Changes in working capital | 2,413 |
| | 1,458 |
| | | 2,025 |
| | 3,483 |
| | (1,070 | ) | | (31 | )% |
Net cash attributable to operating activities | $ | 702 |
| | $ | 1,251 |
| | | $ | 2,294 |
| | $ | 3,545 |
| | $ | (2,843 | ) | | (80 | )% |
| |
(1)
| Refer to Basis of Presentation section for discussion on presentation of combined results.
|
Operating activities
Our operating activities generated cash of $702$331 during the year ended December 31, 20192020 compared to $3,545$702 in 2018, on a combined basis.2019. The decreasechange in cash generated from operating activities was primarily due to the cash used in originations net sales activities and the changes in working capital.
Cash used in originations net sales activities was $1,204 during the year ended December 31, 2019 compared to $510 cash generated in 2018, on a combined basis. The change2020 was primarily due to a higher funding of $19,041 for loan origination activities driven by the declining interest rate environment, and an increase in funds used of $1,824 to repurchase forward loan assets out of Ginnie Mae securitizations. The increase in funding was partially offset by an increase in proceeds of $19,151 on the sales of previously originated loans and the sale of loans related to the collapse of Trust 2009-A, our legacy portfolio.
Cash generated from the changesdecrease in working capital was $2,413 during the year ended December 31, 2019 compared to $3,483 cash generated in 2018, on a combined basis. The change wasof $1,395, primarily due to less collections on reverse mortgage interests driven by normal portfolio run-off.run-off, partially offset by a decrease of $1,004 in cash used from originations net sales activities.
CashInvesting activities
Our investing activities used cash of $134 during the year ended December 31, 2020 compared to $338 in 2019. The decrease in cash used in investing activities was primarily due to a decrease of $417 in cash used for the purchase of forward mortgage servicing rights incurred, partially offset by a decrease in cash generated of $290 from fair value changes in MSRs, MSR related liabilities andproceeds on sale of forward mortgage loans held for investmentservicing rights. In addition, during the year ended December 31, 2019, increased by $684 when compared to 2018, on a combined basis. The change was primarily due to an increasewe used $85 cash in fair value changesconnection with the Pacific Union and amortization/accretionSeterus acquisitions.
Financing activities
Our financing activities generated cash of mortgage servicing rights/liabilities of $957, primarily due to the negative mark-to-market adjustment for the year ended December 31, 2019.
Cash used from the deferred tax benefit$104 during the year ended December 31, 2019 decreased by $592 when2020 compared to 2018, on a combined basis, primarily duecash used of $313 in 2019. Contributing to the reversalcash generated was $2,100 related to the issuance in 2020 of the valuation allowance associated with the NOL carryforwardsunsecured senior notes due 2027, 2028, and 2030, partially offset by an increase of WMIH in the five months ended December 31, 2018.
Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 66
The table below presents the major sources and uses of cash flow for investing activities:
|
| | | | |
Table 31. Investing Cash Flows |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | | | | | |
Year Ended December 31, 2019 | | Five Months Ended December 31, 2018 | | | Seven Months Ended July 31, 2018 | | Combined(1) | | $ Change | | % Change |
Acquisitions, net | $ | (85 | ) | | $ | (33 | ) | | | $ | — |
| | $ | (33 | ) | | $ | (52 | ) | | 158 | % |
Purchase of forward mortgage servicing rights, net of liabilities incurred | (547 | ) | | (307 | ) | | | (134 | ) | | (441 | ) | | (106 | ) | | 24 | % |
Proceeds on sale of assets | — |
| | — |
| | | 13 |
| | 13 |
| | (13 | ) | | (100 | )% |
Proceeds on sale of forward and reverse mortgage servicing rights | 343 |
| | 105 |
| | | — |
| | 105 |
| | 238 |
| | 227 | % |
Other | (49 | ) | | (15 | ) | | | (41 | ) | | (56 | ) | | 7 |
| | (13 | )% |
Net cash attributable to investing activities | $ | (338 | ) | | $ | (250 | ) | | | $ | (162 | ) | | $ | (412 | ) | | $ | 74 |
| | (18 | )% |
| |
(1)
| Refer to Basis of Presentation section for discussion on presentation of combined results.
|
Our investing activities used $338 during the year ended December 31, 2019, which decreased from $412 of$2,114 cash used in 2018, onthe redemption and repayment of unsecured senior notes and notes payable, primarily related to the redemption and repayment of unsecured senior debt due 2021, 2022, 2023, and 2026. Additionally, contributing to cash generated was a combined basis. The decrease$258 change in cash attributable to investing activities was primarilyadvance and warehouse facilities due to an increasea net increased borrowing of $1,776 in proceeds on sale of forward mortgage servicing rights of $238. Although we continue to seek to acquire servicing portfolios at advantageous pricing, the amountsadvance and timing of these opportunities is not of a consistent frequency and can result in cash flow variability between periods. Partially offsetting the increase in proceeds was an increase in cash used of $106 in the purchase of forward mortgage servicing rights, net of liabilities incurred, and net cash of $85 used in connection with the acquisitions of Pacific Union and Seterus.
67 Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K
The table below presents the major sources and uses of cash flow for financing activities:
|
| | | | |
Table 32. Financing Cash Flow |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | | | | | |
Year Ended December 31, 2019 | | Five Months Ended December 31, 2018 | | | Seven Months Ended July 31, 2018 | | Combined(1) | | $ Change | | % Change |
Increase (decrease) in warehouse facilities | $ | 1,704 |
| | $ | (351 | ) | | | $ | (585 | ) | | $ | (936 | ) | | $ | 2,640 |
| | (282 | )% |
(Decrease) increase in advance facilities | (186 | ) | | 45 |
| | | (305 | ) | | (260 | ) | | 74 |
| | (28 | )% |
Repayment of notes payable | (294 | ) | | — |
| | | — |
| | — |
| | (294 | ) | | (100 | )% |
Payment of unsecured senior notes and nonrecourse debt | (129 | ) | | (1,036 | ) | | | (69 | ) | | (1,105 | ) | | 976 |
| | (88 | )% |
Issuance of excess spread financing | 542 |
| | 255 |
| | | 70 |
| | 325 |
| | 217 |
| | 67 | % |
Repayment of excess spread financing | (27 | ) | | (38 | ) | | | (3 | ) | | (41 | ) | | 14 |
| | (34 | )% |
Settlement of excess spread financing | (219 | ) | | (77 | ) | | | (105 | ) | | (182 | ) | | (37 | ) | | 20 | % |
Decrease of participating interest financing | (1,591 | ) | | (831 | ) | | | (1,391 | ) | | (2,222 | ) | | 631 |
| | (28 | )% |
Changes in HECM securitizations | (99 | ) | | (31 | ) | | | 311 |
| | 280 |
| | (379 | ) | | (135 | )% |
Other | (14 | ) | | 1 |
| | | (34 | ) | | (33 | ) | | 19 |
| | (58 | )% |
Net cash attributable to financing activities | $ | (313 | ) | | $ | (2,063 | ) | | | $ | (2,111 | ) | | $ | (4,174 | ) | | $ | 3,861 |
| | (93 | )% |
| |
(1)
| Refer to Basis of Presentation section for discussion on presentation of combined results.
|
Our financing activities used $313 cash during the year ended December 31, 2019, which decreased from $4,174 of cash used in 2018, on a combined basis. The decrease in cash attributable to financing activities was primarily due to an increase of $1,704 in warehouse facilities during the year ended December 31, 20192020 compared to a pay down on warehouse facilities$1,518 in 2019.
The cash generated from the issuance of $936 in 2018, on a combined basis. Payment of warehouse facilities was higher in 2018, on a combined basis, dueexcess spread financing decreased $518 during the year ended December 31, 2020 compared to proceeds from HECM securitizations being used to pay down the facilities, which2019, as we did not occurenter into any new excess spread financing deals in the same period in 2019.2020. In addition, the cash used for payment of unsecured senior notes and nonrecourse debt decreased by $976 primarily due to the redemption and repayment of unsecured senior notes in 2018, on a combined basis. Cash used for participating interest financing decreased $676 in 20192020 primarily due to a lower repayment of participating interest financing in 2019 compared to the same period in 2018, on a combined basis. Partially offsetting these decreases in cash used is an increase in cash used for repayment of notes payable and HECM securitizations when compared to the same period in 2018, on a combined basis. During the year ended December 31, 2019, cash of $294 was used to pay off the notes payable assumed from the Pacific Union acquisition. The cash used in the change in HECM securitizations during the year ended December 31, 2019 increased due to scheduled pay downs and amounts incurred to settle the collapsed trusts exceeding proceeds from the securitization of new trusts, resulting in a net cash outflow of $99. In addition, during 2018, on a combined basis, proceeds from securitizations of new trusts exceeded scheduled pay downs and amounts incurred to settle the collapsed trusts, resulting in a net cash inflow of $280.2019.
Capital Resources
Capital Structure and Debt
We require access to external financing resources from time to time depending on our cash requirements, assessments of current and anticipated market conditions and after-tax cost of capital. If needed, we believe additional capital could be raised through a combination of issuances of equity, corporate indebtedness, asset-backed acquisition financing and/or cash from operations. Our access to capital markets can be impacted by factors outside our control, including economic conditions.
Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 68
Financial Covenants
Our credit facilities contain various financial covenants which primarily relate to required tangible net worth amounts, liquidity reserves, leverage requirements, and profitability requirements, which are measured at our operating subsidiary,
Nationstar Mortgage, LLC. As of December 31, 2019,2020, we were in compliance with our required financial covenants.
Seller/Servicer Financial Requirements
We are also subject to net worth, liquidity and capital ratio and liquidity requirements established by the Federal Housing Finance Agency (“FHFA”) for Fannie Mae and Freddie Mac Seller/Servicers, and Ginnie Mae for single family issuers. In both cases, theseissuers, as summarized below. These requirements apply to our operating subsidiary, Nationstar Mortgage, LLC.
Minimum Net Worth
•FHFA - a net worth base of $2.5 plus 25 basis points of outstanding UPB for total loans serviced.
The minimum•Ginnie Mae - a net worth equal to the sum of (i) base of $2.5 plus 35 basis points of the issuer’s total single-family effective outstanding obligations, and (ii) base of $5 plus 1% of the total effective outstanding HMBS obligations.
Minimum Liquidity
•FHFA - 3.5 basis points of total Agency Mortgage Servicing UPB plus incremental 200 basis points of total nonperforming Agency, measured at 90+ delinquencies, servicing in excess of 6% total Agency servicing UPB; and
•Ginnie Mae - the greater of $1 or 10 basis points of our outstanding single-family MBS and at least 20% of our net worth requirement for Fannie Mae and Freddie Mac is defined as follows:HECM MBS.
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▪ | Base of $2.5 plus 25 basis points of outstanding UPB for total loans serviced. |
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▪ | Tangible Net Worth comprises of total equity less goodwill, intangible assets, affiliate receivables and certain pledged assets. |
The minimum net worth requirement for Ginnie Mae is defined as follows:Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K 52
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▪ | The sum of (i) base of $2.5 plus 35 basis points of the issuer’s total single-family effective outstanding obligations, and (ii) base of $5 plus 1% of the total effective HMBS outstanding obligations. |
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▪ | Tangible Net Worth is defined as total equity less goodwill, intangible assets, affiliate receivables and certain pledged assets. Effective for fiscal year 2020, under the Ginnie Mae MBS Guide, the issuers will no longer be permitted to include deferred tax assets when computing the minimum net worth requirement. |
Minimum Capital Ratio
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▪ | In addition to the minimum net worth requirement, we are also required to hold a ratio of Tangible Net Worth to Total Assets (excluding HMBS securitizations) greater than 6%. |
Minimum Liquidity
The minimum liquidity requirement for Fannie Mae•FHFA and Freddie Mac is defined as follows:
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▪ | 3.5 basis points of total Agency servicing. |
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▪ | Incremental 200 basis points of total nonperforming Agency, measured as 90+ delinquencies, servicing in excess of 6% of the total Agency servicing UPB. |
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▪ | Allowable assets for liquidity may include: cash and cash equivalents (unrestricted), available for sale or held for trading investment grade securities (e.g., Agency MBS, Obligations of GSEs, US Treasury Obligations); and unused/available portion of committed servicing advance lines. |
The minimum liquidity requirement for Ginnie Mae is defined as follows:- a ratio of Tangible Net Worth to Total Assets (excluding HMBS securitizations) greater than 6%.
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▪ | Maintain liquid assets equal to the greater of $1 or 10 basis points of our outstanding single-family MBS. |
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▪ | Maintain liquid assets equal to at least 20% of our net worth requirement for HECM MBS. |
Secured Debt to Gross Tangible Asset Ratio
Under •Ginnie Mae guide, effective September 1, 2019, we are also required to maintain- a secured debt to gross tangible asset ratios no greater than 60%.
Effective September 1, 2019, since
As of December 31, 2020, we were in compliance with our seller/servicer financial requirements for FHFA and Ginnie Mae.
Since we have a Ginnie Mae single-family servicing portfolio that exceeds $75 billion in UPB, we are also required to obtain an external primary servicer rating and issuer credit ratings from two different rating agencies and receive a minimum rating of a B or its equivalent. Effective for fiscal year 2020, weWe are permitted to satisfy minimum liquidity requirements using a combination of AAA rated government securities that are marked to market in addition to cash and certain cash equivalents.
69 Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K
In addition, Fannie Mae or Freddie Mac may require capital ratios in excess of stated requirements. Refer to Note 20,18, Capital Requirements, in the notesNotes to consolidated financial statementsConsolidated Financial Statements for additional information. As of December 31, 2019, we were in compliance with our seller/servicer financial requirements for FHFA and Ginnie Mae.
| | | | | | | | | | | |
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| December 31, 2020 | | December 31, 2019 |
Advance facilities principal amount | $ | 669 | | | $ | 422 | |
Warehouse facilities principal amount | 5,835 | | | 4,416 | |
MSR facilities principal amount | 270 | | | 160 | |
Unsecured senior notes principal amount | 2,100 | | | 2,398 | |
|
| | | | | | | |
| Successor |
| December 31, 2019 | | December 31, 2018 |
Advance facilities, net | $ | 422 |
| | $ | 595 |
|
Warehouse facilities, net | 4,575 |
| | 2,349 |
|
Unsecured senior notes, net | 2,366 |
| | 2,459 |
|
Advance Facilities
As part of our normal course of business, we borrow money to fund servicing advances. Our servicing agreements require that we advance our own funds to meet contractual principal and interest payments for certain investors, and to pay taxes, insurance, foreclosure costs and various other items that are required to preserve the assets being serviced. Delinquency rates and prepayment speeds affect the size of servicing advance balances, along withand we exercise our ability to stop advancing principal and interest where the pooling and servicing agreements permit, where the advance policies.is deemed to be non-recoverable from future proceeds. These servicing requirements affect our liquidity. We rely upon several counterparties to provide us with financing facilities to fund a portion of our servicing advances. As of December 31, 2020, we had a total borrowing capacity of $2,040, of which we could borrow an additional $1,371. The maturity dates of our advance facilities range from October 2021 to August 2022. As of December 31, 2020, we had $192 of borrowings outstanding under facilities maturing within less than one year and $477 of borrowings outstanding under facilities maturing within the next three years.
Warehouse and MSR Facilities
Loan origination activities generally require short-term liquidity in excess of amounts generated by our operations. The loans we originate are financed through several warehouse lines on a short-term basis. We typically hold the loans for approximately 30 days and then sell or place the loans in government securitizations in order to repay the borrowings under the warehouse lines. Our ability to fund current operations depends upon our ability to secure these types of short-term financings on acceptable terms and to renew or replace the financings as they expire.As of December 31, 2020, we had a total borrowing capacity of $10,990 and $660 for warehouse and MSR facilities, of which we could borrow an additional $5,155 and $390, respectively. The maturity dates for our warehouse facilities range from March 2021 to September 2022. As of December 31, 2020, we had $4,078 of borrowings outstanding under warehouse facilities maturing within less than one year and $1,757 of borrowings outstanding under warehouse facilities maturing within the next three years. The maturity dates for our MSR facilities range from August 2021 to November 2022. As of December 31, 2020, we had $270 of borrowing outstanding under MSR facilities maturing within the next three years.
As servicer for reverse mortgage loans, among other things, we are required to fund borrower draws on the loans. We typically pool borrower draws for approximately 30 days before including them in a HMBS securitization. As of December 31, 2019,2020, unsecuritized borrower draws totaled $67,totaled $72, and our maximum unfunded advance obligation related to these reverse mortgage loans was $2,617.$2,202.
53 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
Unsecured Senior Notes
In 2013 and 2018,2020, we completed offerings of unsecured senior notes which mature on various dated through July 2026.with maturity dates ranging from 2027 to 2030. We pay interest semi-annually to the holders of these notes at interest rates ranging from 6.500%5.125% to 9.125%6.000%. We are scheduled to pay a total of $949 of interest payments from these notes over the next ten years, of which $116 is due within less than one year.
As of December 31, 2019,2020, the expected maturities of our unsecured senior notes based on contractual maturities are presented below:
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| | | | |
Table 34.18. Contractual Maturities - Unsecured Senior Notes |
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| | | | |
Year Ending December 31, | | Amount |
2020 | | $ | — |
|
2021(1) | | 492 |
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2022(1) | | 206 |
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2023 | | 950 |
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2024 | | — |
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Thereafter | | 750 |
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Unsecured senior notes principal amount | | 2,398 |
|
Unamortized debt issuance costs, premium and discount | | (32 | ) |
Unsecured senior notes, net | | $ | 2,366 |
|
| |
(1)
| This note was subsequently redeemed in full in February 2020. See Note 26, Subsequent Events, in the notes to consolidated financial statementsfor further information.
|
Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 70
The table below sets forth our contractual obligations, excluding our excess spread financing, MSR financing and participating interest financing at December 31, 2019:
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| | | | |
Table 35. Contractual ObligationsYear Ending December 31, | | Amount |
|
| | | | | | | | | | | | | | | | | | | |
| Less than 1 Year | | 1 - 3 Years | | 3-5 Years | | More than 5 Years | | Total |
Unsecured senior notes(1) | $ | — |
| | $ | 698 |
| | $ | 950 |
| | $ | 750 |
| | $ | 2,398 |
|
Interest payment from unsecured senior notes(2) | 191 |
| | 343 |
| | 214 |
| | 137 |
| | 885 |
|
Advance facilities | 135 |
| | 287 |
| | — |
| | — |
| | 422 |
|
Warehouse facilities | 4,263 |
| | 313 |
| | — |
| | — |
| | 4,576 |
|
Finance lease obligations | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
Operating lease obligations | 40 |
| | 55 |
| | 29 |
| | 32 |
| | 156 |
|
Total | $ | 4,631 |
| | $ | 1,696 |
| | $ | 1,193 |
| | $ | 919 |
| | $ | 8,439 |
|
2021 through 2025 | | $ | — | |
(1) Thereafter | On January 16, 2020, we completed an offering of $600 aggregate principal amount of 6.000% Senior Notes due 2027. In February 2020, the net proceeds of the offering, together with cash on hand, were used to redeem in full the outstanding 6.500% Senior Notes due 2021 and 6.500% Senior notes due 2022. See Note 26, Subsequent Events, in the notes to consolidated financial statements for additional information.
|
2,100 | |
(2) Unsecured senior notes principal amount | Interest expense on advance and warehouse facilities is not presented in this table due to the short-term nature of these facilities. | 2,100 | |
Unamortized debt issuance costs | | (26) | |
Unsecured senior notes, net | | $ | 2,074 | |
Other contractual obligations
In addition to the above contractual obligations, we have also been involved with several securitizations, which were structured as secured borrowings. These structures resulted in us carrying the securitized loans as mortgages on our consolidated balance sheets and recognizing the asset-backed certificates acquired by third parties as nonrecourse debt. The timing of the principal payments on this nonrecourse debt is dependent on the payments received on the underlying mortgage loans and liquidation of REO. For more information regarding our indebtedness, see Note 12, Indebtedness, in the notesNotes to consolidated financial statements.Consolidated Financial Statements.
Our operating lease obligations were primarily incurred for office space and equipment. The average lease terms are generally for 1 to 8 years. As of December 31, 2020, the total future minimum lease payments for our operating lease obligations was $123, of which $33 is due within less than a year. For more information regarding lease obligations, see Note 8, Leases, in the Notes to Consolidated Financial Statements.
71Mr. Cooper Group Inc. - 20192020 Annual Report on Form 10-K54
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Critical Accounting Policies and Estimates |
Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, we have identified the following policies that, due to the judgment, estimates and assumptions inherent in those policies, are critical to an understanding of our consolidated financial statements. These policies relate to fair value measurements, particularly those determined to be Level 3 as discussed in Note 18,17, Fair Value Measurements, in notesNotes to consolidated financial statements, business combinations andConsolidated Financial Statements, goodwill, and valuation and realization of deferred tax assets. We believe that the judgment, estimates and assumptions used in the preparation of our consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of our consolidated financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition. Fair value measurements considered to be Level 3 representing estimated values based on significant unobservable inputs include (i) the valuation of MSRs, (ii) the valuation of excess spread financing and (iii) the valuation of mortgage servicing rights financing liability.interest rate lock commitments (“IRLCs”).
MSRs at Fair Value
We generally retain the servicing rights for existing forward residential mortgage loans transferred to a third party. We recognize MSRs in such transfers that meet the requirements for sale accounting. Additionally, we may acquire the rights to service forward residential mortgage loans from third parties. We apply fair value accounting to this class of MSRs, with all changes in fair value recorded within revenues - service related, net in the consolidated statements of operations. We estimate the fair value of these MSRs using a process that combines the use of a discounted cash flow model, which incorporates prepayment speeds, delinquencies, discount rate, ancillary revenues, float earnings and analysis of currentother assumptions (including costs to service and forbearance rates) that management believes are consistent with the assumptions that other similar market data.participants use in valuing the MSRs. The key assumptions to determine fair value include prepayment speed, discount rate and cost to service. However, the discounted cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, discount rates and average life of loan.
We use internal financial models that use market participant data to value MSRs. These models areis complex and use asset specificuses asset-specific collateral data and market inputs for interest and discount rates. In addition, the modeling requirements of MSRs are complex because of the high number of variables that drive cash flows associated with MSRs. AlthoughFor the general accuracyimpact of our valuation models is validated, valuations are highly dependent uponchanges in estimates on MSRs at fair value, see Item 7A. Quantitative and Qualitative Disclosures about Market Risk and Note 3, Mortgage Servicing Rights and Related Liabilities, in the reasonableness of our assumptions and the predictability of the relationships that drive the results of the models. On a quarterly basis, we obtain external market valuations from independent third-party MSR valuation experts in orderNotes to validate the reasonableness of our internal valuation.Consolidated Financial Statements
Excess Spread Financing
In conjunction with the acquisition of certain MSRs on various pools of residential mortgage loans (the “Portfolios”), we have entered into sale and assignment agreements related to its right to servicing fees, under which we account for as financings withsell to third parties associated with funds and accounts under management of New Residential, BlackRock Financial Management, Inc. and Värde Partners, Inc., whereby we sell the right to receive a portion of the excess cash flow generated from certain underlying MSR portfoliosthe Portfolios after receipt of a fixed base servicing fee per loan. We retain all ancillary revenues associated with servicing the portfolio and the remaining portion of the excess cash flow after receipt of the fixed base servicing fee. We measure these financing arrangements at fair value to more accurately represent the future economic performance of the acquired MSRs and related excess servicing financing, with all changes in fair value recorded as a charge or credit to servicing related revenue, net in the consolidated statements of operations. We estimate theThe fair value of these financings using a process that combines the use of a discounted cash flow model and analysis of current market dataon excess spread financing is based on the present value of future expected discounted cash flows with the underlying MSRs. In addition, should we refinance any loan in the portfolios, subject to certain limitations, we are required to transfer the new loan or a replacement loan of similar economic characteristics into the portfolios. The new or replacement loan will be governed by the same terms set forth in the sale and assignment agreement described above. This is referred to collectively as recapture component of excess spread financing liability.discount rate approximating current market value. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, recapture rates and discount rates, average liferate. However, the discounted cash flow model is complex and recapture rate.
uses asset-specific collateral data and market inputs. In addition, our total market risk is influenced by a wide variety of factors including market volatility and liquidity of the markets. For the impact of changes in estimates on excess spread financing, see Item 7A. Quantitative and Qualitative Disclosures about Market Risk and Note 3, Mortgage Servicing Rights Financing Liabilityand Related Liabilities, in the Notes to Consolidated Financial Statements
From time
Interest Rate Lock Commitments
IRLCs represent an agreement to time,extend credit to a mortgage loan applicant, or an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to funding. The fair values of interest rate lock commitments are subject to changes in mortgage interest rates from the date of the commitment through the sale of the loan into the secondary market. As a result, we are exposed to interest rate risk during the period from the date of the lock commitment through (i) the lock commitment cancellation or expiration date; or (ii) the date of sale into the secondary mortgage market. IRLCs are considered freestanding derivatives and are recorded at fair value at inception. Loan commitments generally range between 30 days and 90 days, and we typically sell mortgage loans within 30 days of origination. Changes in fair value subsequent to inception are based on changes in the fair value of the underlying loan, and changes in the probability that the loan will enter into certain transactions with third parties to sell certainfund within the terms of the commitment. Any changes in fair value are recorded in earnings as a component of net gain on mortgage servicer rights and servicer advances under specified terms. When these transfers qualifyloans held for sale treatment, we derecognizeon the transferred assetsconsolidated statement of operations and consolidated statement of cash flows. For the impact of changes in estimates on our consolidated balance sheets. We have determined that for a portion of these transactions, the related mortgage servicing rights sales are contingent upon the receipt of consents from various third parties. Until these required consents are obtained, legal ownership of the mortgage servicing rights continues to reside with us. We continue to account for the mortgage servicing rights on our consolidated balance sheets. Consequently, we record a mortgage servicing rights financing liability associated with this financing transaction.IRLCs, see Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
55Mr. Cooper Group Inc. - 20192020 Annual Report on Form 10-K72
We have elected to measure MSR financing agreements at fair value, with all changes in fair value recorded within revenues - service related, net in the consolidated statements of operations. The fair value of MSR financing is based on the present value of future expected discounted cash flows with the discount rate approximating current market rate for similar financial instruments. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being advance financing rates and advance recovery rates.
Business Combinations and Goodwill
Acquisitions that qualify as a business combination are accounted for using the acquisition method of accounting. The fair value of consideration transferred for an acquisition is allocated to the assets acquired and liabilities assumed based on their fair value as of the acquisition date. Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and identified intangible assets acquired under a business combination.
Under the acquisition method of accounting, we complete valuation procedures for an acquisition to determine the fair value of the assets acquired and liabilities assumed. These valuation procedures require management to make assumptions and apply significant judgment to estimate the fair value of the assets acquired and liabilities assumed. If the estimates or assumptions used should significantly change, the resulting differences could materially affect the fair value of net assets. We estimate the fair value of the intangible assets acquired generally through a combination of a discounted cash flow analysis (the income approach) and an analysis of comparable market transactions (the market approach). For the income approach, we base the inputs and assumptions used to develop these estimates on a market participant perspective which include estimates of projected revenues, discount rates, economic lives and income tax rates, among others, all of which require significant management judgment. For the market approach, we apply judgment to identify the most comparable market transactions to the transaction. Finite lived intangible assets, which are primarily comprised of customer relationships and technology, are amortized over their estimated useful lives using the straight-line method, or on a basis more representative of the time pattern over which the benefit is derived, and are assessed for impairment whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable.
Goodwill is not amortized but is reviewedinstead subject to impairment testing. We evaluate our goodwill for impairment annually as of October 1 of each year or more frequently if impairment indicators arise in accordance with Accounting Standards Codification (“ASC”) 350, Intangibles - Goodwill and monitored for interim triggering events on an ongoing basis. Goodwill is reviewedOther. When testing goodwill for impairment, utilizingwe may elect to perform either a qualitative assessmenttest or a quantitative goodwill impairment test. If we choosetest to perform a qualitative assessment and determines the fair valuedetermine if it is more likely than not exceedsthat the carrying value no further evaluationof a reporting unit exceeds its estimated fair value. During a qualitative analysis, we consider the impact of any changes to the following factors: macroeconomic, industry and market factors, cost factors, and changes in overall financial performance, as well as any other relevant events and uncertainties impacting a reporting unit. If the qualitative assessment does not conclude that it is necessary. Formore likely than not that the estimated fair value of the reporting units whereunit is greater than the carrying value, we perform thea quantitative goodwill impairmentanalysis. In a quantitative test, we compare the fair value of eacha reporting unit which we primarily determine using an income approachis determined based on a discounted cash flow analysis and further analyzed using other methods of valuation. A discounted cash flow analysis requires making various assumptions, including assumptions about future cash flows, growth rates and discount rates. The assumptions about future cash flows and growth rates are based on our long-term projections by reporting unit. The discount rate is based on our debt and equity balances, adjusted for current market conditions and investor expectations of return on our equity. If the presentfair value of discounted cash flows, to the respectivea reporting unit exceeds its carrying value, which includes goodwill.amount, there is no impairment. If not, we compare the fair value of the reporting unit with its carrying amount. To the extent the carrying amount of the reporting unit exceeds its carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, a write-down of the differencereporting unit’s goodwill would be recognized as annecessary.
In the years ended December 31, 2020 and 2019, the Company performed a quantitative and qualitative assessment, respectively, of its reporting units and determined that no impairment loss.of goodwill existed.
Realization of Deferred Tax Assets
Our provision for income taxes is calculated using the balance sheet method, which requires the recognition of deferred income taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and certain changes in the valuation allowance. We provide a valuation allowance against deferred tax assets if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining the adequacy of the valuation allowance, we consider all forms of evidence, including: (1) historic earnings or losses; (2) anticipated taxable income resulting from the reversal of taxable temporary differences; (3) tax planning strategies; and (4) anticipated future earnings exclusive of the reversal of taxable temporary differences. Of all of the sources of taxable income, we generally rely upon reversals of existing deferred tax liabilities, tax planning strategies, and future taxable income excluding reversing differences. In determining the appropriate amount of valuation allowance required, we consider (1) internal forecasts of our future pre-tax income exclusive of reversing temporary differences and carryforwards, (2) the nature and timing of future reversals of existing deferred tax assets and liabilities, (3) future originating temporary and permanent differences, and (4) NOL carryforward expiration dates, among others.
For the impact of changes in estimates on realization of deferred tax assets, see Note 16, Income Taxes, in the Notes to Consolidated Financial Statements.
73 Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K
Recent Accounting Developments
Below provides recently issued accounting pronouncements applicable to us but not yet effective.
Accounting Standards Update No. 2016-13, Financial Instruments2019-12, Income Taxes (Topic 740) - Credit Losses (Topic 326)Simplifying the Accounting for Income Taxes (“ASU 2016-13”2019-12”) requires expected credit lossessimplifies accounting for financial instruments held atincome taxes by removing certain exceptions from the reporting dategeneral principles in Topic 740 including elimination of the exception to be measured based on historical experience, current conditionsthe incremental approach for intraperiod tax allocation when there is a loss from continuing operations and reasonableincome or a gain from other items such as other comprehensive income. ASU 2019-12 also clarifies and supportable forecasts. The update eliminates the probable initial recognition thresholdamends certain guidance in current GAAP and instead reflects an entity’s current estimateTopic 740. ASU 2019-12 is effective for public companies for fiscal years beginning after December 15, 2020, including interim periods, with early adoption of all expected credit losses over the life of the asset. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss. The new standard requires the estimated loss amount to reflect management’s best estimate of all expected credit losses for the Company’s financial assets that are measured at amortized cost. The guidance became effective on January 1, 2020 for the Company. The standard requires a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption.
To implement and adopt this standard, management developed a detailed project plan, formed an internal committee from various internal departments, and performed a scoping analysis. As a result, the Company determined that Reverse Mortgage Interests, net of reserves, Advances and Other Receivables, net of reserves, and certain financial assets included in Other Assets are within the scope of ASU 2016-13. For each of these financial instruments carried at amortized cost, the Company enhanced its processes to consider and include the requirements of ASU 2016-13, as applicable, into the determination of credit-related losses. Specifically, the Company considered that the guarantee from HUD on Reverse Mortgage Interests limits the credit losses on this product primarily to those caused by operational errors from servicing; credit losses from adopting ASU 2016-13 are not material. For Advances and Other Receivables, the Company considered that the majority of estimated losses are due to servicing operational errors, while credit-related losses have historically been minimal and accordingly are estimated to not be material over the life of the receivable. For Other Assets, certain financial assets (i.e. trade receivables and other receivables) the Company considered that these are short-term in nature (less than one year), and the estimated credit-related losses over the life of these receivables are similar to those resulting from the Company’s existing loss reserve process. After considering and implementing the requirements of ASU 2016-13 as applicable, the Company does not expect a material impact of adopting ASU 2016-13 to the consolidated financial statements.
Accounting Standards Update No. 2018-13, Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement, (“ASU 2018-13”) removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 fair value measurement methodologies, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 measurements. For certain unobservable inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 will be effective for the Company on January 1, 2020. The guidance will not have a material impact to the disclosures currently provided by the Company.
Impact of Inflation and Changing Prices
Our consolidated financial statements and notes thereto presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike most industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Further, interest rates do not necessarily moveamendments in the same direction or toperiod permitted. We are currently assessing the same extent as the pricesimpact of goods and services.
Variable Interest Entities and Off Balance Sheet Arrangements
See Note 14, Securitizations and Financings, in the notes to consolidated financial statements in Item 8, Financial Statements and Supplementary Data, which is incorporated herein forASU 2019-12, but do not believe it will have a summary of our transactions with VIEs and unconsolidated balances, and details of theirmaterial impact on our consolidated financial statements.
Mr. Cooper Group Inc. - 20192020 Annual Report on Form 10-K 7456
Accounting Standards Update 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”) provides temporary optional expedients and exceptions for applying generally accepted accounting principles to contract modifications, hedge accounting and other transactions affected by the transitioning away from reference rates that are expected to be discontinued, such as interbank offered rates and LIBOR. If LIBOR ceases to exist or if the methods of calculating LIBOR change from current methods for any reasons, interest rates on our floating rate loans, obligation derivatives, and other financial instruments tied to LIBOR rates, may be affected and need renegotiation with its lenders. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. We are currently assessing the impact of ASU 2020-04 on our consolidated financial statements.
Derivatives
See Part II, Item 8, Note 11, Derivative Financial Instruments1, Nature of Business and Basis of Presentation, in the notesNotes to consolidated financial statements in Item 8, the Consolidated Financial Statements and Supplementary Data, which is incorporated herein for a summary of our derivative transactions.
information on recent accounting guidance adopted in 2020.
7557 Mr. Cooper Group Inc. - 20192020 Annual Report on Form 10-K
GLOSSARY OF TERMS
This Glossary of Terms defines some of the terms that are used throughout this report and does not represent a complete list of all defined terms used.
Advance Facility. A secured financing facility to fund advance receivables which is backed by a pool of mortgage servicing advance receivables made by a servicer to a certain pool of mortgage loans.
Agency. Government entities guaranteeing the mortgage investors that the principal amount of the loan will be repaid; the Federal Housing Administration, the Department of Veterans Affairs, the US Department of Agriculture and Ginnie Mae (and collectively, the “Agencies”)
Agency Conforming Loan. A mortgage loan that meets all requirements (loan type, maximum amount, LTV ratio and credit quality) for purchase by Fannie Mae, Freddie Mac, or insured by the FHA, USDA or guaranteed by the VA or sold into Ginnie Mae.
Asset-Backed Securities (“ABS”). A financial security whose income payments and value is derived from and collateralized (or “backed”) by a specified pool of underlying receivables or other financial assets.
Bulk acquisitions or purchases. MSR portfolio acquired on non-retained basis through an open market bidding process.
Base Servicing Fee. The servicing fee retained by the servicer, expressed in basis points, in an excess MSR arrangement in exchange for the provision of servicing functions on a portfolio of mortgage loans, after which the servicer and the co-investment partner share the excess fees on a pro rata basis.
Conventional Mortgage Loans. A mortgage loan that is not guaranteed or insured by the FHA, the VA or any other government agency. Although a conventional loan is not insured or guaranteed by the government, it can still follow the guidelines of GSEs and be sold to the GSEs.
Correspondent lender, lending channel or relationship. A correspondent lender is a lender that funds loans in their own name and then sells them off to larger mortgage lenders. A correspondent lender underwrites the loans to the standards of an investor and provides the funds at close.
Credit-Sensitive Loan. A mortgage loan with certain characteristics such as low borrower credit quality, relaxed original underwriting standards and high LTV, which we believe indicates that the mortgage loan presents an elevated credit risk of borrower default versus payoff.
Delinquent Loan. A mortgage loan that is 30 or more days past due from its contractual due date.
Department of Veterans Affairs (“VA”). The VA is a cabinet-level department of the U.S. federal government, which guarantees certain home loans for qualified borrowers eligible for securitization with GNMA.
Direct-to-consumer originations. A type of mortgage loan origination pursuant to which a lender markets refinancing and purchase money mortgage loans directly to selected consumers through telephone call centers, the Internet or other means.
Excess Servicing Fees. In an excess MSR arrangement, the servicing fee cash flows on a portfolio of mortgage loans after payment of the base servicing fee.
Excess Spread. MSRs with a co-investment partner where the servicer receives a base servicing fee and the servicer and co-investment partner share the excess servicing fees. This co-investment strategy reduces the required upfront capital from the servicer when purchasing or investing in MSRs.
Federal National Mortgage Association (“Fannie Mae” or “FNMA”). FNMA was federally chartered by the U.S. Congress in 1938 to support liquidity, stability, and affordability in the secondary mortgage market, where existing mortgage-related assets are purchased and sold. Fannie Mae buys mortgage loans from lenders and resells them as mortgage-backed securities in the secondary mortgage market.
Federal Housing Administration (“FHA”). The FHA is a U.S. federal government agency within the Department of Housing and Urban Development (HUD). It provides mortgage insurance on loans made by FHA-approved lenders in compliance with FHA guidelines throughout the United States.
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Federal Housing Finance Agency (“FHFA”). A U.S. federal government agency that is the regulator and conservator of Fannie Mae and Freddie Mac and the regulator of the 12 Federal Home Loan Banks.
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Federal Home Loan Mortgage Corporation (“Freddie Mac” or “FHLMC”). Freddie Mac was chartered by Congress in 1970 to stabilize the nation’s residential mortgage markets and expand opportunities for homeownership and affordable rental housing. Freddie Mac participates in the secondary mortgage market by purchasing mortgage loans and mortgage-related securities for investment and by issuing guaranteed mortgage-related securities.
Forbearance. An agreement between the mortgage servicer or lender and borrower for a temporary postponement of mortgage payments. It is a form of repayment relief granted by the lender or creditor in lieu of forcing a property into foreclosure.
Government National Mortgage Association (“Ginnie Mae” or “GNMA”). GNMA is a self-financing, wholly owned U.S. Government corporation within HUD. Ginnie Mae guarantees the timely payment of principal and interest on MBS backed by federally insured or guaranteed loans - mainly loans insured by the FHA or guaranteed by the VA. Ginnie Mae securities are the only MBS to carry the full faith and credit guarantee of the U.S. federal government.
Government-Sponsored Enterprise (“GSE”). Certain entities established by the U.S. Congress to provide liquidity, stability and affordability in residential housing. These agencies are Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks.
Home Affordable Modification Program (“HAMP”). A U.S. federal government program designed to help eligible homeowners avoid foreclosure through mortgage loan modifications. Participating servicers may be entitled to receive financial incentives in connection with loan modifications they enter into with eligible borrowers and subsequent success fees to the extent that a borrower remains current in any agreed upon loan modification.
Home Affordable Refinance Program (“HARP”). A U.S. federal government program designed to help eligible homeowners refinance their existing mortgage loans. The mortgage must be owned or guaranteed by a GSE, originated during a defined time period, and applicants must be up-to-date on their mortgage payments but unable to obtain refinancing because the value of their homes has declined.
Home Equity Conversion Mortgage (“HECM”). Reverse mortgage loans issued by FHA. HECMs provide seniors aged 62 and older with a loan secured by their home which can be taken as a lump sum, line of credit, or scheduled payments. HECM loan balances grow over the loan term through borrower draws of scheduled payments or line of credit draws as well as through the accrual of interest and FHA mortgage insurance premiums. In accordance with FHA guidelines, HECMs are designed to repay through foreclosure and subsequent liquidation of loan collateral after the loan becomes due and payable. Shortfalls experienced by the servicer of the HECM through the foreclosure and liquidation process can be claimed to FHA in accordance with applicable guidelines.
HECM mortgage-backed securities (“HMBS”). A type of asset-backed security that is secured by a group of HECM loans.
Interest Rate Lock Commitments (“IRLC”). Agreements under which the interest rate and the maximum amount of the mortgage loan are set prior to funding the mortgage loan.
Interest-Sensitive Loan. A mortgage loan which is primarily impacted by changes in forecasted interest rates, which in turn impacts voluntary prepayment speed. Interest-sensitive loans typically consist of single-family conforming residential forward mortgage loans serviced for GSEs or other third-party investors.
Loan Modification. Temporary or permanent modifications to loan terms with the borrower, including the interest rate, amortization period and term of the borrower’s original mortgage loan. Loan modifications are usually made to loans that are in default, or in imminent danger of defaulting.
Loan-to-Value Ratio (“LTV”). The unpaid principal balance of a mortgage loan as a percentage of the total appraised or market value of the property that secures the loan. An LTV over 100% indicates that the UPB of the mortgage loan exceeds the value of the property.
Lock period. A set of periods of time that a lender will guarantee a specific rate is set prior to funding the mortgage loan.
Loss Mitigation. The range of servicing activities provided by a servicer in an attempt to minimize the losses suffered by the owner of a defaulted mortgage loan. Loss mitigation techniques include short-sales, deed-in-lieu of foreclosures and loan modifications, among other options.
77 Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K
Mortgage-Backed Securities (“MBS”). A type of asset-backed security that is secured by a group of mortgage loans.
59 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
Mortgage Servicing Right (“MSRs”). The right and obligation to service a loan or pool of loans and to receive a servicing fee as well as certain ancillary income. MSRs may be bought and sold, resulting in the transfer of loan servicing obligations. MSRs are designated as such when the benefits of servicing the loans are expected to adequately compensate the servicer for performing the servicing.
MSR Facility. A line of credit backed by mortgage servicing rights that is used for financing purposes. In certain cases, these lines may be a sub-limit of another warehouse facility or alternatively exist on a stand-alone basis. These facilities allow for same or next day draws at the request of the borrower.
Mortgage Servicing Liability (“MSL”).The right and obligation to service a loan or pool of loans and to receive a servicing fee as well as certain ancillary income. MSLs may be bought and sold, resulting in the transfer of loan servicing obligations. MSLs are designated as such when the benefits of servicing the loans are not expected to adequately compensate the servicer for performing the servicing.
Non-Conforming Loan. A mortgage loan that does not meet the standards of eligibility for purchase or securitization by Fannie Mae, Freddie Mac or Ginnie Mae.
Originations. The process through which a lender provides a mortgage loan to a borrower.
Pull through adjusted lock volume. Represents the expected funding from locks taken during the period.
Prepayment Speed. The rate at which voluntary mortgage prepayments occur or are projected to occur. The statistic is calculated on an annualized basis and expressed as a percentage of the outstanding principal balance.
Primary Servicer. The servicer that owns the right to service a mortgage loan or pool of mortgage loans. This differs from a subservicer, which has a contractual agreement with the primary servicer to service a mortgage loan or pool of mortgage loans in exchange for a subservicing fee based upon portfolio volume and characteristics.
Prime Mortgage Loan. Generally, a high-quality mortgage loan that meets the underwriting standards set by Fannie Mae or Freddie Mac and is eligible for purchase or securitization in the secondary mortgage market. Prime Mortgage loans generally have lower default risk and are made to borrowers with excellent credit records and a monthly income at least three to four times greater than their monthly housing expenses (mortgage payments plus taxes and other debt payments) as well as significant other assets. Mortgages not classified as prime mortgage loans are generally called either sub-prime or Alt-A.
Private Label Securitizations. Securitizations that do not meet the criteria set by Fannie Mae, Freddie Mac or Ginnie Mae.
Real Estate Owned (”REO”). Property acquired by the servicer on behalf of the owner of a mortgage loan or pool of mortgage loans, usually through foreclosure or a deed-in-lieu of foreclosure on a defaulted loan. The servicer or a third-party real estate management firm is responsible for selling the REO. Net proceeds of the sale are returned to the owner of the related loan or loans. In most cases, the sale of REO does not generate enough to pay off the balance of the loan underlying the REO, causing a loss to the owner of the related mortgage loan.
Recapture. The refinancing of a loan currently in the portfolio, or the financing of a customer’s new purchase which resulted in the payoff of an existing loan.
Refinancing. The process of working with existing borrowers to refinance their mortgage loans. By refinancing loans for borrowers we currently service, we retain the servicing rights, thereby extending the longevity of the servicing cash flows.
Reverse Mortgage Loan. A reverse mortgage loan, most commonly a Home Equity Conversion Mortgage, enables seniors to borrow against the value of their home, and no payment of principal or interest is required until the death of the borrower or the sale of the home. These loans are designed to go through the foreclosure and claim process to recover loan balance.
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Servicing. The performance of contractually specified administrative functions with respect to a mortgage loan or pool of mortgage loans. Duties of a servicer typically include, among other things, collecting monthly payments, maintaining escrow accounts, providing periodic monthly statements to the borrower and monthly reports to the loan owners or their agents, managing insurance, monitoring delinquencies, executing foreclosures (as necessary), and remitting fees to guarantors, trustees and service providers. A servicer is generally compensated with a specific fee outlined in the contract established prior to the commencement of the servicing activities.
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Servicing Advances. In the course of servicing loans, servicers are required to make advances that are reimbursable from collections on the related mortgage loan or pool of loans. There are typically three types of servicing advances: P&I advances,Advances, T&I Advances and Corporate Advances.
(i) P&I advancesAdvances cover scheduled payments of principal and interest that have not been timely paid by borrowers. P&I Advances serve to facilitate the cash flows paid to holders of securities issued by the residential MBS trust. The servicer is not the insurer or guarantor of the MBS and thus has the right to cease the advancing of P&I, when the servicer deems the next advance nonrecoverable.
(ii) T&I advancesAdvances pay specified expenses associated with the preservation of a mortgaged property or the liquidation of defaulted mortgage loans, including but not limited to property taxes, insurance premiums or other property-related expenses that have not been timely paid by borrowers in order for the lien holder to maintain its interest in the property.
(iii) Corporate advancesAdvances pay costs, fees and expenses incurred in foreclosing upon, preserving defaulted loans and selling REO, including attorneys’ and other professional fees and expenses incurred in connection with foreclosure and liquidation or other legal proceedings arising in the course of servicing the defaulted mortgage loans.
Servicing advancesAdvances are reimbursed to the servicer if and when the borrower makes a payment on the underlying mortgage loan at the time the loan is modified or upon liquidation of the underlying mortgage loan but are primarily the responsibility of the investor/owner of the loan. The types of servicing advances that a servicer must make are set forth in its servicing agreement with the owner of the mortgage loan or pool of mortgage loans. In some instances, a servicer is allowed to cease Servicing Advances, if those advances will not be recoverable from the property securing the loan.
Subservicing. Subservicing is the process of outsourcing the duties of the primary servicer to a third-party servicer. The third-party servicer performs the servicing responsibilities for a fee and is typically not responsible for making servicing advances, which are subsequently reimbursed by the primary servicer. The primary servicer is contractually liable to the owner of the loans for the activities of the subservicer.
Unpaid Principal Balance (“UPB”). The amount of principal outstanding on a mortgage loan or a pool of mortgage loans. UPB is used together with the servicing fees and ancillary incomes as a means of estimating the future revenue stream for a servicer.
U.S. Department of Agriculture (“USDA”). The USDA is a cabinet-level department of the U.S. federal government, which guarantees certain home loans for qualified borrowers.
Warehouse Facility. A type of line of credit facility used to temporarily finance mortgage loan originations to be sold in the secondary market. Pursuant to a warehouse facility, a loan originator typically agrees to transfer to a counterparty certain mortgage loans against the transfer of funds by the counterpart, with a simultaneous agreement by the counterpart to transfer the loans back to the originator at a date certain, or on demand, against the transfer of funds from the originator.
Wholesale Originations. A type of mortgage loan origination pursuant to which a lender acquires refinancing and purchase money mortgage loans from third party correspondent lenders where the lender funds the loan.
7961 Mr. Cooper Group Inc. - 20192020 Annual Report on Form 10-K
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
Our principal market exposure is to interest rate risk due to the impact on our mortgage-related assets and commitments.commitments, with exception for the broad effects of COVID-19 pandemic. While the pandemic's effect on the macroeconomic environment has yet to be fully determined and could continue for months or years, the pandemic and governmental programs created as a response to the pandemic, has affected and will continue to affect our business, and such effects, if they continue for a prolonged period, may have a material adverse effect on our business, financial conditions and results of operations.
Interest Rate Risk
Changes in interest rates affect our operations primarily as follows:
Servicing Segment
•a decrease in interest rates may increase prepayment speeds which may lead to (i) increased amortization expense; (ii) decrease in servicing fees; and (iii) decrease in the value of our MSRs;
•a decrease in interest rates could reduce our earnings from our custodial deposit accounts;
•an increase in interest rates would increase the cost of servicing our outstanding debt, including our ability to finance servicing advances and for borrowing for acquisitions;
•an increase in interest rates, together with an increase in monthly payments when an adjustable mortgage loan’s interest rate adjusts upward from an initial fixed rate or a low introductory rate, may cause increased delinquency, default and foreclosure. Increased mortgage defaults and foreclosures may adversely affect our business as they increase our expenses and reduce the number of mortgages we service;
Originations Segment
•an increase in interest rates could adversely affect our loan originations volume because refinancing an existing loan would be less attractive for homeowners and qualifying for a purchase money loan may be more difficult for consumers;
•an increase in interest rates could also adversely affect our production margins due to increased competition among originators;
Xome Segment
•an increase in interest rates could adversely affect Xome Exchange’s property sales, particularly non-distressed sales, as financing may become less attractive to borrowers; and
•a substantial and sustained increase in prevailing interest rates could adversely affect the loan origination volumes of Xome’s clients since refinancing and purchase loans would be less attractive to borrowers, which would in turn adversely impact Xome Services’Solutions’ valuation and Xome Title’s title order volume.
We actively manage the risk profiles of interest rate lock commitments (“IRLCs”)IRLCs and mortgage loans held for sale on a daily basis and enter into forward sales of MBS in an amount equal to the portion of the IRLC expected to close, assuming no change in mortgage interest rates. In addition, to manage the interest rate risk associated with mortgage loans held for sale, we enter into forward sales of MBS to deliver mortgage loan inventory to investors. Refer to Part I, Item 1A. Risk Factors, for further discussion.
Sensitivity Analysis
We assess our market risk based on changes in interest rates utilizing a sensitivity analysis. The sensitivity analysis measures the potential impact on fair values based on hypothetical changes (increases and decreases) in interest rates.
We use a duration-based model in determining the impact of interest rate shifts on our loan portfolio, certain other interest-bearing liabilities measured at fair value and interest rate derivatives portfolios. The primary assumption used in these models is that an increase or decrease in the benchmark interest rate produces a parallel shift in the yield curve across all maturities.
Mr. Cooper Group Inc. - 20192020 Annual Report on Form 10-K 8062
We utilize a discounted cash flow analysis to determine the fair value of MSRs and the impact of parallel interest rate shifts on MSRs. The primary assumptions in thisdiscounted cash flow model areincorporates prepayment speeds, delinquencies, discount rate, ancillary revenues, float earnings relatedand other assumptions (including costs to floatservice and forbearance rates) that management believes are consistent with the assumptions that other similar market participants use in valuing the MSRs. The key assumptions to determine fair value include prepayment speed, discount rates.rate and cost to service. However, this analysis ignores the impact of interest rate changes on certain material variables, such as the benefit or detriment on the value of future loan originations, non-parallel shifts in the spread relationships between MBS, swaps and U.S. Treasury rates and changes in primary and secondary mortgage market spreads. For mortgage loans, IRLCs and forward delivery commitments on MBS, we rely on a model in determining the impact of interest rate shifts. In addition, the primary assumption used for IRLCs, is the borrower’s propensity to close their mortgage loans under the commitment.
Our total market risk is influenced by a wide variety of factors including market volatility and the liquidity of the markets. There are certain limitations inherent in the sensitivity analysis presented, including the necessity to conduct the analysis based on a single point in time and the inability to include the complex market reactions that normally would arise from the market shifts modeled.
We used December 31, 20192020 market rates on our instruments to perform the sensitivity analysis. The estimates are based on the market risk sensitive portfolios described in the preceding paragraphs and assume instantaneous, parallel shifts in interest rate yield curves. These sensitivities are hypothetical and presented for illustrative purposes only. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in fair value may not be linear.
The following table summarizes the estimated change in the fair value of our assets and liabilities sensitive to interest rates as of December 31, 20192020 given hypothetical instantaneous parallel shifts in the yield curve. Results could differ materially.
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Table 19. Change in Fair Value |
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| December 31, 2020 |
Down 25 bps | | Up 25 bps |
Increase (decrease) in assets | | | |
Mortgage servicing rights at fair value | $ | (152) | | | $ | 159 | |
Mortgage loans held for sale at fair value | 27 | | | (34) | |
Derivative financial instruments: | | | |
Interest rate lock commitments | 85 | | | (107) | |
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Total change in assets | (40) | | | 18 | |
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Increase (decrease) in liabilities | | | |
Mortgage servicing rights liabilities at fair value | (4) | | | 4 | |
Excess spread financing at fair value | (15) | | | 14 | |
Derivative financial instruments: | | | |
Interest rate lock commitments | (3) | | | 2 | |
Forward MBS trades | 113 | | | (144) | |
Total change in liabilities | 91 | | | (124) | |
Total, net change | $ | (131) | | | $ | 142 | |
63 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements:
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Table 36. Change in Fair Value |
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| December 31, 2019 |
Down 25 bps | | Up 25 bps |
Increase (decrease) in assets | | | |
Mortgage servicing rights at fair value | $ | (248 | ) | | $ | 244 |
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Mortgage loans held for sale at fair value | 20 |
| | (24 | ) |
Derivative financial instruments: | | | |
Interest rate lock commitments | 25 |
| | (32 | ) |
Forward MBS trades | (11 | ) | | 13 |
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Total change in assets | (214 | ) | | 201 |
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Increase (decrease) in liabilities | | | |
Mortgage servicing rights liabilities at fair value | (4 | ) | | 4 |
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Excess spread financing at fair value | (50 | ) | | 52 |
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Derivative financial instruments: | | | |
Interest rate lock commitments | (4 | ) | | 5 |
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Forward MBS trades | 33 |
| | (41 | ) |
Total change in liabilities | (25 | ) | | 20 |
|
Total, net change | $ | (189 | ) | | $ | 181 |
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81 Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Supplementary Data:
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Consolidated Statements of Operations for the YearYears Ended December 31, 2020 and 2019 and the Five Months Ended December 31, 2018 (Successor) and for the Seven Months Ended July 31, 2018 and the Year Ended December 31, 2017 (Predecessor) | |
Consolidated Statements of Stockholders’ Equity for the YearYears Ended December 31, 2020 and 2019 and the Five Months Ended December 31, 2018 (Successor) and for the Seven Months Ended July 31, 2018 and the Year Ended December 31, 2017 (Predecessor) | |
Consolidated Statements of Cash Flows for the YearYears Ended December 31, 2020 and 2019 and the Five Months Ended December 31, 2018 (Successor) and for the Seven Months Ended July 31, 2018 and the Year Ended December 31, 2017 (Predecessor) | |
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Mr. Cooper Group Inc. - 20192020 Annual Report on Form 10-K 8264
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Mr. Cooper Group Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Mr. Cooper Group Inc. (the Company) as of December 31, 20192020 and 20182019 (Successor), the related consolidated statements of operations, stockholders' equity and cash flows for the yearyears ended December 31, 2020 and 2019 (Successor) and for the five months ended December 31, 2018 (Successor), and the related notes. We have also audited the related consolidated statements of operations, stockholders’ equity and cash flows of Nationstar Mortgage Holdings Inc. (Nationstar) for the seven months ended July 31, 2018 (Predecessor) and for the year ended December 31, 2017 (Predecessor), and the related notes (collectively referred to as the “consolidated financial statements”).
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as ofat December 31, 20192020 and 20182019 (Successor), the results of its operations and its cash flows for the yearyears ended December 31, 2020 and 2019 (Successor) and for the five months ended December 31, 2018 (Successor), in conformity with U.S. generally accepted accounting principles. It is also our opinion that the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Nationstar for the seven months ended July 31, 2018 (Predecessor) and for the year ended December 31, 2017 (Predecessor), in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 28, 202023, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
65 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
| | | | | |
| Valuation of Forward Mortgage Servicing Rights and the Excess Spread Financing Liability |
Description of the Matter | The estimated fair values of forward mortgage servicing rights (MSRs) and the excess spread financing liability (ESL) were $2.7 billion and $0.9 billion, respectively, at December 31, 2020. The ESL is accounted for as a secured borrowing whereby the Company sold to third parties the right to receive a portion of excess cash flow generated from various pools of forward MSRs. As described in Notes 2 and 17 to the consolidated financial statements, the Company measures forward MSRs and the ESL at fair value on a recurring basis with changes in fair value recorded in the statement of operations. The fair values of forward MSRs and the ESL are based on the present value of future cash flows from servicing the loans. The significant unobservable assumptions used to estimate the forward MSR cash flows are the discount rate, the prepayment speed and the annual, per-loan cost to service, and the significant unobservable assumption used to estimate the ESL is the prepayment speed.
Auditing management’s estimate of forward MSRs and the related ESL is complex and required judgment due to the subjectivity of the significant unobservable assumptions utilized in the calculation of the fair value. Changes to any of these assumptions could have a material impact on the fair value of the forward MSRs and the related ESL. |
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How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s internal controls over the development of the significant unobservable assumptions and determination of the fair value of forward MSRs and the ESL. This included, among others, testing internal controls over management’s review of historical results and market-based information considered in developing these assumptions, management’s review comparing independent fair value ranges and assumptions obtained from third-party valuation firms to the internally developed fair value estimate and assumptions, and management’s review of the completeness and accuracy of data used in determining the assumptions and the fair value estimate.
To test the fair value of the forward MSRs and the ESL, our audit procedures included, among others, testing the reasonableness of the significant unobservable assumptions and the fair value estimate. We tested the reasonableness of the assumptions by comparing to historical Company results and independent, market-based information. We tested the completeness and accuracy of the data underlying the assumptions and historical results. We utilized an internal valuation specialist to assist in testing management’s assumptions and the fair value estimate and to identify potential sources of contrary information. We also compared the significant unobservable assumptions and the fair value estimate developed by management to those from the third-party valuation firms utilized by management and evaluated the competence and objectivity of these firms. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002.
Dallas, Texas
February 28, 202023, 2021
83Mr. Cooper Group Inc. - 20192020 Annual Report on Form 10-K66
Consolidated Financial Statements
MR. COOPER GROUP INC.
CONSOLIDATED BALANCE SHEETS
(millions of dollars, except share data)
| | | Successor | | Successor |
| December 31, 2019 | | December 31, 2018 | | December 31, 2020 | | December 31, 2019 |
Assets | | | | Assets | | | |
Cash and cash equivalents | $ | 329 |
| | $ | 242 |
| Cash and cash equivalents | $ | 695 | | | $ | 329 | |
Restricted cash | 283 |
| | 319 |
| Restricted cash | 218 | | | 283 | |
Mortgage servicing rights, $3,496 and $3,665 at fair value, respectively | 3,502 |
| | 3,676 |
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Advances and other receivables, net of reserves of $175 and $47, respectively | 988 |
| | 1,194 |
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Reverse mortgage interests, net of reserves of $3 and $13, respectively | 6,279 |
| | 7,934 |
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Mortgage servicing rights, $2,703 and $3,496 at fair value, respectively | | Mortgage servicing rights, $2,703 and $3,496 at fair value, respectively | 2,708 | | | 3,502 | |
Advances and other receivables, net of reserves of $208 and $175, respectively | | Advances and other receivables, net of reserves of $208 and $175, respectively | 940 | | | 988 | |
Reverse mortgage interests, net of purchase discount of $127 and $114, respectively | | Reverse mortgage interests, net of purchase discount of $127 and $114, respectively | 5,253 | | | 6,279 | |
Mortgage loans held for sale at fair value | 4,077 |
| | 1,631 |
| Mortgage loans held for sale at fair value | 5,720 | | | 4,077 | |
Mortgage loans held for investment at fair value | — |
| | 119 |
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Property and equipment, net of accumulated depreciation of $55 and $16, respectively | 112 |
| | 96 |
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Property and equipment, net of accumulated depreciation of $96 and $55, respectively | | Property and equipment, net of accumulated depreciation of $96 and $55, respectively | 116 | | | 112 | |
Deferred tax assets, net | 1,345 |
| | 967 |
| Deferred tax assets, net | 1,340 | | | 1,345 | |
Other assets | 1,390 |
| | 795 |
| Other assets | 7,175 | | | 1,390 | |
Total assets | $ | 18,305 |
| | $ | 16,973 |
| Total assets | $ | 24,165 | | | $ | 18,305 | |
| | | | | | | |
Liabilities and Stockholders’ Equity | | | | Liabilities and Stockholders’ Equity | |
Unsecured senior notes, net | $ | 2,366 |
| | $ | 2,459 |
| Unsecured senior notes, net | $ | 2,074 | | | $ | 2,366 | |
Advance facilities, net | 422 |
| | 595 |
| |
Warehouse facilities, net | 4,575 |
| | 2,349 |
| |
Advance and warehouse facilities, net | | Advance and warehouse facilities, net | 6,763 | | | 4,997 | |
Payables and other liabilities | 2,016 |
| | 1,543 |
| Payables and other liabilities | 7,392 | | | 2,016 | |
MSR related liabilities - nonrecourse at fair value | 1,348 |
| | 1,216 |
| MSR related liabilities - nonrecourse at fair value | 967 | | | 1,348 | |
Mortgage servicing liabilities | 61 |
| | 71 |
| Mortgage servicing liabilities | 41 | | | 61 | |
Other nonrecourse debt, net | 5,286 |
| | 6,795 |
| Other nonrecourse debt, net | 4,424 | | | 5,286 | |
Total liabilities | 16,074 |
| | 15,028 |
| Total liabilities | 21,661 | | | 16,074 | |
Commitments and contingencies (Note 21) |
| |
| |
Preferred stock at $0.00001 - 10 million shares authorized, 1 million shares issued and outstanding, respectively; aggregate liquidation preference of ten dollars, respectively | — |
| | — |
| |
Common stock at $0.01 par value - 300 million authorized, 91.1 million and 90.8 million shares issued, respectively | 1 |
| | 1 |
| |
Commitments and contingencies (Note 19) | | Commitments and contingencies (Note 19) | 0 | | 0 |
Preferred stock at $0.00001 par value - 10 million shares authorized, 1 million shares issued and outstanding, respectively; aggregate liquidation preference of 10 dollars, respectively | | Preferred stock at $0.00001 par value - 10 million shares authorized, 1 million shares issued and outstanding, respectively; aggregate liquidation preference of 10 dollars, respectively | 0 | | | 0 | |
Common stock at $0.01 par value - 300 million authorized, 92.0 million and 91.1 million shares issued, respectively | | Common stock at $0.01 par value - 300 million authorized, 92.0 million and 91.1 million shares issued, respectively | 1 | | | 1 | |
Additional paid-in-capital | 1,109 |
| | 1,093 |
| Additional paid-in-capital | 1,126 | | | 1,109 | |
Retained earnings | 1,122 |
| | 848 |
| Retained earnings | 1,434 | | | 1,122 | |
Treasury shares at cost - 2.6 million and 0 shares, respectively | | Treasury shares at cost - 2.6 million and 0 shares, respectively | (58) | | | 0 | |
Total Mr. Cooper stockholders’ equity | 2,232 |
| | 1,942 |
| Total Mr. Cooper stockholders’ equity | 2,503 | | | 2,232 | |
Non-controlling interests | (1 | ) | | 3 |
| Non-controlling interests | 1 | | | (1) | |
Total stockholders’ equity | 2,231 |
| | 1,945 |
| Total stockholders’ equity | 2,504 | | | 2,231 | |
Total liabilities and stockholders’ equity | $ | 18,305 |
| | $ | 16,973 |
| Total liabilities and stockholders’ equity | $ | 24,165 | | | $ | 18,305 | |
See accompanying Notes to Consolidated Financial Statements.
67Mr. Cooper Group Inc. - 20192020 Annual Report on Form 10-K84
MR. COOPER GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(millions of dollars, except for earnings per share data)
| | | Successor | | | Predecessor | | Successor | | | Predecessor |
| Year Ended December 31, 2019 | | Five Months Ended December 31, 2018 | | | Seven Months Ended July 31, 2018 | | Year Ended December 31, 2017 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 | | Five Months Ended December 31, 2018 | | | Seven Months Ended July 31, 2018 |
Revenues: | | | | | | | | | Revenues: | | | | | | | | |
Service related, net | $ | 909 |
| | $ | 418 |
| | | $ | 901 |
| | $ | 1,043 |
| Service related, net | $ | 423 | | | $ | 909 | | | $ | 418 | | | | $ | 901 | |
Net gain on mortgage loans held for sale | 1,098 |
| | 176 |
| | | 295 |
| | 607 |
| Net gain on mortgage loans held for sale | 2,310 | | | 1,098 | | | 176 | | | | 295 | |
Total revenues | 2,007 |
| | 594 |
| | | 1,196 |
| | 1,650 |
| Total revenues | 2,733 | | | 2,007 | | | 594 | | | | 1,196 | |
Expenses: | | | | | | | | | Expenses: | | | | | | | | |
Salaries, wages and benefits | 957 |
| | 337 |
| | | 426 |
| | 742 |
| Salaries, wages and benefits | 1,068 | | | 957 | | | 337 | | | | 426 | |
General and administrative | 894 |
| | 370 |
| | | 519 |
| | 733 |
| General and administrative | 763 | | | 894 | | | 370 | | | | 519 | |
Total expenses | 1,851 |
| | 707 |
| | | 945 |
| | 1,475 |
| Total expenses | 1,831 | | | 1,851 | | | 707 | | | | 945 | |
Other income (expenses), net: | | | | | | | | | Other income (expenses), net: | | | | | | | | |
Interest income | 605 |
| | 256 |
| | | 333 |
| | 597 |
| Interest income | 334 | | | 605 | | | 256 | | | | 333 | |
Interest expense | (779 | ) | | (293 | ) | | | (388 | ) | | (731 | ) | Interest expense | (702) | | | (779) | | | (293) | | | | (388) | |
Other income, net | 15 |
| | 13 |
| | | 6 |
| | 3 |
| |
Other (expense) income, net | | Other (expense) income, net | (135) | | | 15 | | | 13 | | | | 6 | |
Total other income (expenses), net | (159 | ) | | (24 | ) | | | (49 | ) | | (131 | ) | Total other income (expenses), net | (503) | | | (159) | | | (24) | | | | (49) | |
(Loss) income before income tax (benefit) expense | (3 | ) | | (137 | ) | | | 202 |
| | 44 |
| |
Less: Income tax (benefit) expense | (273 | ) | | (1,021 | ) | | | 48 |
| | 13 |
| |
Income (loss) before income tax expense (benefit) | | Income (loss) before income tax expense (benefit) | 399 | | | (3) | | | (137) | | | | 202 | |
Less: Income tax expense (benefit) | | Less: Income tax expense (benefit) | 92 | | | (273) | | | (1,021) | | | | 48 | |
Net income | 270 |
| | 884 |
| | | 154 |
| | 31 |
| Net income | 307 | | | 270 | | | 884 | | | | 154 | |
Less: Net (loss) income attributable to non-controlling interests | (4 | ) | | — |
| | | — |
| | 1 |
| |
Less: Net income (loss) attributable to non-controlling interests | | Less: Net income (loss) attributable to non-controlling interests | 2 | | | (4) | | | 0 | | | | 0 | |
Net income attributable to Successor/Predecessor | 274 |
| | 884 |
| | | 154 |
| | 30 |
| Net income attributable to Successor/Predecessor | 305 | | | 274 | | | 884 | | | | 154 | |
Less: Undistributed earnings attributable to participating stockholders | 2 |
| | 8 |
| | | — |
| | — |
| Less: Undistributed earnings attributable to participating stockholders | 3 | | | 2 | | | 8 | | | | 0 | |
Net income attributable to common stockholders | $ | 272 |
| | $ | 876 |
| | | $ | 154 |
| | $ | 30 |
| |
Net income attributable to Successor/Predecessor common stockholders | | Net income attributable to Successor/Predecessor common stockholders | $ | 302 | | | $ | 272 | | | $ | 876 | | | | $ | 154 | |
| | | | | | | | | | | | | | | | | |
Net income per common share attributable to Successor/Predecessor common stockholders: | | | | | | | | | Net income per common share attributable to Successor/Predecessor common stockholders: | | | | |
Basic | $ | 2.99 |
| | $ | 9.65 |
| | | $ | 1.57 |
| | $ | 0.31 |
| Basic | $ | 3.31 | | | $ | 2.99 | | | $ | 9.65 | | | | $ | 1.57 | |
Diluted | $ | 2.95 |
| | $ | 9.54 |
| | | $ | 1.55 |
| | $ | 0.30 |
| Diluted | $ | 3.20 | | | $ | 2.95 | | | $ | 9.54 | | | | $ | 1.55 | |
See accompanying Notes to Consolidated Financial Statements.
85Mr. Cooper Group Inc. - 20192020 Annual Report on Form 10-K68
MR. COOPER GROUP INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(millions of dollars, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Common Stock | | | | | | | | | | | | |
| Shares (in thousands) | | Amount | | Shares (in thousands) | | Amount | | Additional Paid-in Capital | | Retained Earnings | | Treasury Shares Amount | | Total Nationstar Stockholders’ Equity and Mr. Cooper Stockholders’ Equity, respectively | | Non-controlling Interests | | Total Stockholders’ Equity |
Predecessor | | | | | | | | | | | | | | | | | | | |
Balance at January 1, 2018 | 0 | | | $ | 0 | | | 97,728 | | | $ | 1 | | | $ | 1,131 | | | $ | 731 | | | $ | (148) | | | $ | 1,715 | | | $ | 7 | | | $ | 1,722 | |
Shares issued / (surrendered) under incentive compensation plan | — | | | — | | | 450 | | | — | | | (6) | | | — | | | (3) | | | (9) | | | — | | | (9) | |
Share-based compensation | — | | | — | | | — | | | — | | | 17 | | | — | | | — | | | 17 | | | — | | | 17 | |
Dividends to non-controlling interests | — | | | — | | | — | | | — | | | 5 | | | — | | | — | | | 5 | | | (6) | | | (1) | |
Net income | — | | | — | | | — | | | — | | | — | | | 154 | | | — | | | 154 | | | — | | | 154 | |
Balance at July 31, 2018 | 0 | | | $ | 0 | | | 98,178 | | | $ | 1 | | | $ | 1,147 | | | $ | 885 | | | $ | (151) | | | $ | 1,882 | | | $ | 1 | | | $ | 1,883 | |
| | | | | | | | | | | | | | | | | | | |
Successor | | | | | | | | | | | | | | | | | | | |
Balance at August 1, 2018 | 1,000 | | | $ | 0 | | | 90,806 | | | $ | 1 | | | $ | 1,091 | | | $ | (36) | | | $ | 0 | | | $ | 1,056 | | | $ | 0 | | | $ | 1,056 | |
Non-controlling interests acquired | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 3 | | | 3 | |
Shares issued under incentive compensation plan | — | | | — | | | 15 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Share-based compensation | — | | | — | | | — | | | — | | | 2 | | | — | | | — | | | 2 | | | — | | | 2 | |
Net income | — | | | — | | | — | | | — | | | — | | | 884 | | | — | | | 884 | | | — | | | 884 | |
Balance at December 31, 2018 | 1,000 | | | 0 | | | 90,821 | | | 1 | | | 1,093 | | | 848 | | | 0 | | | 1,942 | | | 3 | | | 1,945 | |
Shares issued / (surrendered) under incentive compensation plan | — | | | — | | | 297 | | | — | | | (2) | | | — | | | — | | | (2) | | | — | | | (2) | |
Share-based compensation | — | | | — | | | — | | | — | | | 18 | | | — | | | — | | | 18 | | | — | | | 18 | |
Net income | — | | | — | | | — | | | — | | | — | | | 274 | | | — | | | 274 | | | (4) | | | 270 | |
Balance at December 31, 2019 | 1,000 | | | 0 | | | 91,118 | | | 1 | | | 1,109 | | | 1,122 | | | 0 | | | 2,232 | | | (1) | | | 2,231 | |
Shares issued / (surrendered) under incentive compensation plan | — | | | — | | | 923 | | | — | | | (5) | | | — | | | — | | | (5) | | | — | | | (5) | |
Share-based compensation | — | | | — | | | — | | | — | | | 22 | | | — | | | — | | | 22 | | | — | | | 22 | |
Cumulative effect adjustments pursuant to the adoption of ASU 2016-13 | — | | | — | | | — | | | — | | | — | | | 7 | | | — | | | 7 | | | — | | | 7 | |
Repurchase of common stock | — | | | — | | | (2,584) | | | — | | | — | | | — | | | (58) | | | (58) | | | — | | | (58) | |
Net income | — | | | — | | | — | | | — | | | — | | | 305 | | | — | | | 305 | | | 2 | | | 307 | |
Balance at December 31, 2020 | 1,000 | | | $ | 0 | | | 89,457 | | | $ | 1 | | | $ | 1,126 | | | $ | 1,434 | | | $ | (58) | | | $ | 2,503 | | | $ | 1 | | | $ | 2,504 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Common Stock | | | | | | | | | | | | |
| Shares (in thousands) | | Amount | | Shares (in thousands) | | Amount | | Additional Paid-in Capital | | Retained Earnings | | Treasury Shares Amount | | Total Nationstar Stockholders’ Equity and Mr. Cooper Stockholders’ Equity, respectively | | Non-controlling Interests | | Total Equity |
Predecessor | | | | | | | | | | | | | | | | | | | |
Balance at January 1, 2017 | — |
| | $ | — |
| | 97,497 |
| | $ | 1 |
| | $ | 1,122 |
| | $ | 701 |
| | $ | (147 | ) | | $ | 1,677 |
| | $ | 6 |
| | $ | 1,683 |
|
Shares issued / (surrendered) under incentive compensation plan | — |
| | — |
| | 231 |
| | — |
| | (3 | ) | | — |
| | (1 | ) | | (4 | ) | | — |
| | (4 | ) |
Share-based compensation | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
| | — |
| | 17 |
| | — |
| | 17 |
|
Dividends to non-controlling interests | — |
| | — |
| | — |
| | — |
| | (5 | ) | | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 30 |
| | — |
| | 30 |
| | 1 |
| | 31 |
|
Balance at December 31, 2017 | — |
| | — |
| | 97,728 |
| | 1 |
| | 1,131 |
| | 731 |
| | (148 | ) | | 1,715 |
| | 7 |
| | 1,722 |
|
Shares issued / (surrendered) under incentive compensation plan | — |
| | — |
| | 450 |
| | — |
| | (6 | ) | | — |
| | (3 | ) | | (9 | ) | | — |
| | (9 | ) |
Share-based compensation | — |
| | — |
| | — |
| | — |
| | 17 |
| | — |
| | — |
| | 17 |
| | — |
| | 17 |
|
Dividends to non-controlling interests | — |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| | — |
| | 5 |
| | (6 | ) | | (1 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 154 |
| | — |
| | 154 |
| | — |
| | 154 |
|
Balance at July 31, 2018 | — |
| | $ | — |
| | 98,178 |
| | $ | 1 |
| | $ | 1,147 |
| | $ | 885 |
| | $ | (151 | ) | | $ | 1,882 |
| | $ | 1 |
| | $ | 1,883 |
|
| | | | | | | | | | | | | | | | | | | |
Successor | | | | | | | | | | | | | | | | | | | |
Balance at August 1, 2018 | 1,000 |
| | $ | — |
| | 90,806 |
| | $ | 1 |
| | $ | 1,091 |
| | $ | (36 | ) | | $ | — |
| | $ | 1,056 |
| | $ | — |
| | $ | 1,056 |
|
Non-controlling interests acquired | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
| | 3 |
|
Shares issued under incentive compensation plan | — |
| | — |
| | 15 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Share-based compensation | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | — |
| | 2 |
| | — |
| | 2 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 884 |
| | — |
| | 884 |
| | — |
| | 884 |
|
Balance at December 31, 2018 | 1,000 |
| | — |
| | 90,821 |
| | 1 |
| | 1,093 |
| | 848 |
| | — |
| | 1,942 |
| | 3 |
| | 1,945 |
|
Shares issued / (surrendered) under incentive compensation plan | — |
| | — |
| | 297 |
| | — |
| | (2 | ) | | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
Share-based compensation | — |
| | — |
| | — |
| | — |
| | 18 |
| | — |
| | — |
| | 18 |
| | — |
| | 18 |
|
Net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | 274 |
| | — |
| | 274 |
| | (4 | ) | | 270 |
|
Balance at December 31, 2019 | 1,000 |
| | $ | — |
| | 91,118 |
| | $ | 1 |
| | $ | 1,109 |
| | $ | 1,122 |
| | $ | — |
| | $ | 2,232 |
| | $ | (1 | ) | | $ | 2,231 |
|
See accompanying Notes to Consolidated Financial Statements.
69Mr. Cooper Group Inc. - 20192020 Annual Report on Form 10-K86
MR. COOPER GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions of dollars)
| | | Successor | | | Predecessor | | Successor | | | Predecessor |
| Year Ended December 31, 2019 | | Five Months Ended December 31, 2018 | | | Seven Months Ended July 31, 2018 | | Year Ended December 31, 2017 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 | | Five Months Ended December 31, 2018 | | | Seven Months Ended July 31, 2018 |
Operating Activities | | | | | | | | | Operating Activities | | | | | | | | |
Net income | $ | 270 |
| | $ | 884 |
| | | $ | 154 |
| | $ | 31 |
| Net income | $ | 307 | | | $ | 270 | | | $ | 884 | | | | $ | 154 | |
Adjustments to reconcile net income to net cash attributable to operating activities: | | | | | | | | | Adjustments to reconcile net income to net cash attributable to operating activities: | | | |
Deferred tax (benefit) expense | (366 | ) | | (1,021 | ) | | | 63 |
| | (46 | ) | |
Deferred tax expense (benefit) | | Deferred tax expense (benefit) | 3 | | | (366) | | | (1,021) | | | | 63 | |
Net gain on mortgage loans held for sale | (1,098 | ) | | (176 | ) | | | (295 | ) | | (607 | ) | Net gain on mortgage loans held for sale | (2,310) | | | (1,098) | | | (176) | | | | (295) | |
Interest income on reverse mortgage loans | (307 | ) | | (206 | ) | | | (274 | ) | | (490 | ) | Interest income on reverse mortgage loans | (200) | | | (307) | | | (206) | | | | (274) | |
Loss (gain) on sale of assets | 2 |
| | — |
| | | (9 | ) | | (8 | ) | |
MSL related increased obligation | — |
| | — |
| | | 59 |
| | — |
| |
Provision for servicing reserves | 66 |
| | 38 |
| | | 70 |
| | 148 |
| |
Provision for servicing and non-servicing reserves | | Provision for servicing and non-servicing reserves | 22 | | | 66 | | | 38 | | | | 70 | |
Fair value changes and amortization/accretion of mortgage servicing rights/liabilities | 1,005 |
| | 225 |
| | | (177 | ) | | 430 |
| Fair value changes and amortization/accretion of mortgage servicing rights/liabilities | 1,576 | | | 1,005 | | | 225 | | | | (177) | |
Fair value changes in excess spread financing | (169 | ) | | 5 |
| | | 81 |
| | 12 |
| |
Fair value changes in mortgage servicing rights financing liability | 5 |
| | 6 |
| | | 16 |
| | (17 | ) | |
Fair value changes in mortgage loans held for investment | (3 | ) | | (2 | ) | | | — |
| | — |
| |
Fair value changes in MSR related liabilities | | Fair value changes in MSR related liabilities | (198) | | | (164) | | | 11 | | | | 97 | |
Amortization of premiums, net of discount accretion | (32 | ) | | 9 |
| | | 8 |
| | 82 |
| Amortization of premiums, net of discount accretion | 57 | | | (32) | | | 9 | | | | 8 | |
Depreciation and amortization for property and equipment and intangible assets | 91 |
| | 39 |
| | | 33 |
| | 59 |
| Depreciation and amortization for property and equipment and intangible assets | 74 | | | 91 | | | 39 | | | | 33 | |
Share-based compensation | 18 |
| | 2 |
| | | 17 |
| | 17 |
| Share-based compensation | 22 | | | 18 | | | 2 | | | | 17 | |
Other loss | 11 |
| | — |
| | | 3 |
| | 6 |
| |
Loss on redemption of unsecured senior notes | | Loss on redemption of unsecured senior notes | 138 | | | 0 | | | 0 | | | | 0 | |
Other loss (gain) | | Other loss (gain) | 22 | | | 10 | | | (2) | | | | 53 | |
Repurchases of forward loan assets out of Ginnie Mae securitizations | (2,895 | ) | | (527 | ) | | | (544 | ) | | (1,249 | ) | Repurchases of forward loan assets out of Ginnie Mae securitizations | (4,822) | | | (2,895) | | | (527) | | | | (544) | |
Mortgage loans originated and purchased for sale, net of fees | (40,257 | ) | | (8,888 | ) | | | (12,328 | ) | | (19,159 | ) | Mortgage loans originated and purchased for sale, net of fees | (63,233) | | | (40,257) | | | (8,888) | | | | (12,328) | |
Sales proceeds and loan payment proceeds for mortgage loans held for sale and held for investment | 41,948 |
| | 9,405 |
| | | 13,392 |
| | 20,776 |
| Sales proceeds and loan payment proceeds for mortgage loans held for sale and held for investment | 67,855 | | | 41,948 | | | 9,399 | | | | 13,392 | |
Changes in assets and liabilities: | | | | | | | | | Changes in assets and liabilities: | | | |
Advances and other receivables | 228 |
| | 43 |
| | | 377 |
| | (30 | ) | Advances and other receivables | 23 | | | 224 | | | 44 | | | | 377 | |
Reverse mortgage interests | 2,192 |
| | 1,544 |
| | | 1,601 |
| | 1,672 |
| Reverse mortgage interests | 1,293 | | | 2,192 | | | 1,544 | | | | 1,601 | |
Other assets | 78 |
| | (61 | ) | | | (41 | ) | | (75 | ) | Other assets | 62 | | | 376 | | | (7) | | | | (41) | |
Payables and other liabilities | (85 | ) | | (68 | ) | | | 88 |
| | (193 | ) | Payables and other liabilities | (360) | | | (379) | | | (117) | | | | 88 | |
Net cash attributable to operating activities | 702 |
| | 1,251 |
| | | 2,294 |
| | 1,359 |
| Net cash attributable to operating activities | 331 | | | 702 | | | 1,251 | | | | 2,294 | |
| | | | | | | | | | | | | | | | | |
Investing Activities | | | | | | | | | Investing Activities | | | |
Acquisitions, net of cash acquired | (85 | ) | | (33 | ) | | | — |
| | — |
| Acquisitions, net of cash acquired | 0 | | | (85) | | | (33) | | | | 0 | |
Property and equipment additions, net of disposals | (49 | ) | | (15 | ) | | | (40 | ) | | (42 | ) | Property and equipment additions, net of disposals | (57) | | | (49) | | | (15) | | | | (40) | |
Purchase of forward mortgage servicing rights, net of liabilities incurred | (547 | ) | | (307 | ) | | | (134 | ) | | (63 | ) | |
Net payment related to acquisition of HECM related receivables | — |
| | — |
| | | (1 | ) | | — |
| |
Net proceeds from acquisition of reverse mortgage servicing portfolio and HECM-related receivables | — |
| | — |
| | | — |
| | 16 |
| |
Proceeds on sale of forward and reverse mortgage servicing rights | 343 |
| | 105 |
| | | — |
| | 71 |
| |
Proceeds on sale of assets | — |
| | — |
| | | 13 |
| | 16 |
| |
Purchase of cost-method investments | — |
| | — |
| | | — |
| | (4 | ) | |
Purchase of forward mortgage servicing rights | | Purchase of forward mortgage servicing rights | (130) | | | (547) | | | (307) | | | | (134) | |
Proceeds on sale of forward mortgage servicing rights | | Proceeds on sale of forward mortgage servicing rights | 53 | | | 343 | | | 105 | | | | 0 | |
Other investing activities | | Other investing activities | 0 | | | 0 | | | 0 | | | | 12 | |
Net cash attributable to investing activities | (338 | ) | | (250 | ) | | | (162 | ) | | (6 | ) | Net cash attributable to investing activities | (134) | | | (338) | | | (250) | | | | (162) | |
Continued on following page. See accompanying Notes to Consolidated Financial Statements.
87Mr. Cooper Group Inc. - 20192020 Annual Report on Form 10-K70
MR. COOPER GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
|
| | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2019 | | Five Months Ended December 31, 2018 | | | Seven Months Ended July 31, 2018 | | Year Ended December 31, 2017 |
Financing Activities | | | | | | | | |
Increase (decrease) in warehouse facilities | 1,704 |
| | (351 | ) | | | (585 | ) | | 863 |
|
(Decrease) increase in advance facilities | (186 | ) | | 45 |
| | | (305 | ) | | (241 | ) |
Repayment of notes payable | (294 | ) | | — |
| | | — |
| | — |
|
Proceeds from issuance of HECM securitizations | 751 |
| | 343 |
| | | 759 |
| | 707 |
|
Proceeds from sale of HECM securitizations | 20 |
| | — |
| | | — |
| | — |
|
Repayment of HECM securitizations | (870 | ) | | (374 | ) | | | (448 | ) | | (572 | ) |
Proceeds from issuance of participating interest financing | 277 |
| | 112 |
| | | 208 |
| | 575 |
|
Repayment of participating interest financing | (1,868 | ) | | (943 | ) | | | (1,599 | ) | | (2,597 | ) |
Proceeds from issuance of excess spread financing | 542 |
| | 255 |
| | | 70 |
| | — |
|
Repayment of excess spread financing | (27 | ) | | (38 | ) | | | (3 | ) | | (23 | ) |
Settlement of excess spread financing | (219 | ) | | (77 | ) | | | (105 | ) | | (207 | ) |
Repayment of nonrecourse debt - legacy assets | (29 | ) | | (6 | ) | | | (7 | ) | | (15 | ) |
Redemption and repayment of unsecured senior notes | (100 | ) | | (1,030 | ) | | | (62 | ) | | (123 | ) |
Repayment of finance lease liability | (4 | ) | | — |
| | | — |
| | — |
|
Proceeds from non-controlling interests | — |
| | 3 |
| | | — |
| | — |
|
Surrender of shares relating to stock vesting | (2 | ) | | — |
| | | (9 | ) | | (4 | ) |
Debt financing costs | (8 | ) | | (2 | ) | | | (24 | ) | | (13 | ) |
Dividends to non-controlling interests | — |
| | — |
| | | (1 | ) | | (5 | ) |
Net cash attributable to financing activities | (313 | ) | | (2,063 | ) | | | (2,111 | ) | | (1,655 | ) |
Net increase (decrease) in cash and cash equivalents | 51 |
| | (1,062 | ) | | | 21 |
| | (302 | ) |
Cash and cash equivalents - beginning of period | 561 |
| | 1,623 |
| | | 575 |
| | 877 |
|
Cash and cash equivalents - end of period(1) | $ | 612 |
| | $ | 561 |
| | | $ | 596 |
| | $ | 575 |
|
| | | | | | | | |
Supplemental Disclosures of Cash Activities | | | | | | | | |
Cash paid for interest expense | $ | 174 |
| | $ | 283 |
| | | $ | 417 |
| | $ | 765 |
|
Net cash paid (refunded) for income taxes | $ | 42 |
| | $ | (37 | ) | | | $ | 36 |
| | $ | 102 |
|
| | | | | | | | |
Supplemental Disclosures of Non-cash Investing Activities | | | | | | | | |
Forward mortgage servicing rights sales price holdback | $ | 49 |
| | $ | — |
| | | $ | — |
| | $ | — |
|
Purchase of forward mortgage servicing rights | $ | 28 |
| | $ | — |
| | | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2020 | | Year Ended December 31, 2019 | | Five Months Ended December 31, 2018 | | | Seven Months Ended July 31, 2018 |
Financing Activities | | | | | | | | |
Increases (decrease) in advance and warehouse facilities | 1,776 | | | 1,518 | | | (306) | | | | (890) | |
Proceeds from issuance and sale of HECM securitizations | 516 | | | 771 | | | 343 | | | | 759 | |
Repayment of HECM securitizations | (565) | | | (870) | | | (374) | | | | (448) | |
Proceeds from issuance of participating interest financing in reverse mortgage interests | 181 | | | 277 | | | 112 | | | | 208 | |
Repayment of participating interest financing in reverse mortgage interests | (1,096) | | | (1,868) | | | (943) | | | | (1,599) | |
Proceeds from issuance of excess spread financing | 24 | | | 542 | | | 255 | | | | 70 | |
Settlement and repayment of excess spread financing | (207) | | | (246) | | | (115) | | | | (108) | |
Issuance of unsecured senior debt | 2,100 | | | 0 | | | 0 | | | | 0 | |
Redemption and repayment of unsecured senior notes and notes payable | (2,508) | | | (394) | | | (1,030) | | | | (62) | |
Repurchase of common stock | (58) | | | 0 | | | 0 | | | | 0 | |
Debt financing costs | (53) | | | (8) | | | (2) | | | | (24) | |
Other financing activities | (6) | | | (35) | | | (3) | | | | (17) | |
Net cash attributable to financing activities | 104 | | | (313) | | | (2,063) | | | | (2,111) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | 301 | | | 51 | | | (1,062) | | | | 21 | |
Cash, cash equivalents and restricted cash - beginning of period | 612 | | | 561 | | | 1,623 | | | | 575 | |
Cash, cash equivalents and restricted cash - end of period(1) | $ | 913 | | | $ | 612 | | | $ | 561 | | | | $ | 596 | |
| | | | | | | | |
Supplemental Disclosures of Cash Activities | | | | | | | | |
Cash paid for interest expense | $ | 206 | | | $ | 174 | | | $ | 283 | | | | $ | 417 | |
Net cash paid (refunded) for income taxes | $ | 76 | | | $ | 42 | | | $ | (37) | | | | $ | 36 | |
| | | | | | | | |
Supplemental Disclosures of Non-cash Investing Activities | | | | | | | | |
Forward mortgage servicing rights sales price holdback | $ | 0 | | | $ | 49 | | | $ | 0 | | | | $ | 0 | |
Purchase of forward mortgage servicing rights | $ | 5 | | | $ | 28 | | | $ | 0 | | | | $ | 0 | |
| |
(1)
| The following table provides a reconciliation of cash, cash equivalents and restricted cash to amount reported within the consolidated balance sheets. |
|
| | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| December 31, 2019 | | December 31, 2018 | | | July 31, 2018 | | December 31, 2017 |
Cash and cash equivalents | $ | 329 |
| | $ | 242 |
| | | $ | 166 |
| | $ | 215 |
|
Restricted cash | 283 |
| | 319 |
| | | 430 |
| | 360 |
|
Total cash, cash equivalents and restricted cash | $ | 612 |
| | $ | 561 |
| | | $ | 596 |
| | $ | 575 |
|
(1)The following table provides a reconciliation of cash, cash equivalents and restricted cash to amount reported within the consolidated balance sheets. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| December 31, 2020 | | December 31, 2019 | | December 31, 2018 | | | July 31, 2018 |
Cash and cash equivalents | $ | 695 | | | $ | 329 | | | $ | 242 | | | | $ | 166 | |
Restricted cash | 218 | | | 283 | | | 319 | | | | 430 | |
Total cash, cash equivalents and restricted cash | $ | 913 | | | $ | 612 | | | $ | 561 | | | | $ | 596 | |
See accompanying Notes to Consolidated Financial Statements.
71Mr. Cooper Group Inc. - 20192020 Annual Report on Form 10-K88
MR. COOPER GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(millions of dollars, unless otherwise stated)
1. Nature of Business and Basis of Presentation
Nature of Business
Mr. Cooper Group Inc. collectively with its consolidated subsidiaries, (“Mr. Cooper”,Cooper,” the “Company”, “we”,“Company,” “we,” “us” or “our”) provides servicing, origination and transaction-based services related to single family residences throughout the United States with operations under its primary brands: Mr. Cooper® and Xome®. Mr. Cooper is one of the largest home loan servicers in the country focused on delivering a variety of servicing and lending products, services and technologies. Xome provides technology and data enhanced solutions to homebuyers, home sellers, real estate agents and mortgage companies. The Company’s corporate website is located at www.mrcoopergroup.com.Company has provided a glossary of terms, which defines certain industry-specific and other terms that are used herein, in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Form 10-K.
Mr. Cooper, which was previously known as WMIH Corp. (“WMIH”), is a corporation duly organized and existing under the laws of the State of Delaware since May 11, 2015. On July 31, 2018, Wand Merger Corporation, a wholly owned subsidiary of WMIH merged with and into Nationstar Mortgage Holdings Inc. (“Nationstar”), with Nationstar continuing as a wholly owned subsidiary of WMIH (the “Merger”). Prior to the Merger, WMIH had limited operations other than its reinsurance business that operated in runoff mode and focused on identifying and consummating an accretive acquisition transaction across a broad array of industries, with a primary focus on the financial institutions sector. As a result of the Merger, shares of Nationstar common stock were delisted from the New York Stock Exchange. Following the Merger closing, the combined companyCompany traded on NASDAQ under the ticker symbol “WMIH” until October 10, 2018, when WMIH changed its name to “Mr. Cooper Group Inc.” and its ticker symbol to “COOP”.
On February 1, 2019, the Company completed the acquisition of all the limited liability units of Pacific Union Financial, LLC (“Pacific Union”), a California limited liability company. The final purchase price was $116, paid in cash, and the purchase price allocation was finalized as of December 31, 2019. Pacific Union was a privately held Company that was engaged in the origination, as well as servicing of residential mortgage loans, and operated throughout the United States. The acquisition allows the Company to expand its servicing portfolio and increase its mortgage lending volume and capabilities.
Basis of Presentation
For the purpose of financial statement presentation, Mr. Cooper was determined to be the accounting acquirer in the Merger, and Nationstar’s assets and liabilities were recorded at estimated fair value as of the acquisition date. Mr. Cooper’s interim consolidated financial statements for periods following the Merger closing are labeled “Successor” and reflect the acquired assets and assumed liabilities from Nationstar.
Under Securities and Exchange Commission (“SEC”) rules, when a registrant succeeds to acquire substantially all of the business of another entity and the registrant’s own operations before the succession appear insignificant relative to the operations assumed or acquired, the registrant is required to present financial information for the acquired entity (the “Predecessor”) for all comparable periods being presented before the acquisition. Due to the acquisition, the Predecessor and Successor financial statements have been prepared on different basis of accounting and are therefore not comparable.
Pursuant to the Merger, Nationstar is considered the predecessor company.Company. Therefore, the Company is providing additional information in the accompanying consolidated financial statements regarding Nationstar’s business for periodsthe period prior to July 31, 2018. The predecessor’s companypredecessor Company’s financial information is labeled “Predecessor” in these consolidated financial statements.
The consolidated financial statements of the Company and Predecessor have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The significant accounting policies described below, together with the other notes that follow, are an integral part of the consolidated financial statements.
Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K 72
Basis of Consolidation
The basis of consolidation described below was adopted by Nationstar and applied to the Predecessor financial statements for the periods impacted by the adoption. The Successor’s financial statements reflect the adoption of such standards.
The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, other entities in which the Company has a controlling financial interest, and those variable interest entities (“VIE”) where the Company’s wholly owned subsidiaries are the primary beneficiaries. Assets and liabilities of VIEs and their respective results of operations are consolidated from the date that the Company became the primary beneficiary through the date the Company ceases to be the primary beneficiary. The Company applies the equity method of accounting to investments where it is able to exercise significant influence, but not control, over the policies and procedures of the entity and owns less than 50% of the voting interests. Investments in certain companies over which the Company does not exert significant influence are accounted for as cost method investments. Intercompany balances and transactions on consolidated entities have been eliminated.
89 Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates due to factors such as adverse changes in the economy, increases in interest rates, secondary market pricing for loans held for sale and derivatives, strength of underwriting and servicing practices, changes in prepayment assumptions, declines in home prices or discrete events adversely affecting specific borrowers, uncertainties in the economy from the COVID-19 pandemic, and such differences could be material.
Recent Accounting Guidance Adopted
Accounting Standards Update No. 2016-02, Leases2016-13, Financial Instruments - Credit Losses (Topic 842)326), (“ASU 2016-02”2016-13”), No. 2018-10, Codification Improvements requires expected credit losses for financial instruments held at the reporting date to Topic 842, Leasesbe measured based on historical experience, current conditions and reasonable and supportable forecasts, which is referred to as the current expected credit loss (“ASU 2018-10”CECL”), and No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”), primarily impact lessee accounting by requiring methodology. The update eliminates the initial recognition of a right-of-use assetcredit losses on an incurred basis in current GAAP and a corresponding lease liability oninstead reflects an entity’s current estimate of all expected credit losses over the balance sheetlife of the asset. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss. The new standard will reflect management’s best estimate of all expected credit losses for long-term lease agreements. ASU 2016-02the Company’s financial assets that are recognized at amortized cost. The guidance was effective for the Company onas of January 1, 2019. ASU 2016-02 provides for2020, with a modified retrospective transition approach requiring lesseescumulative-effect adjustment to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented orretained earnings as of the beginning of the period of adoption with the option to elect certain practical expedients. The Company has elected to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) and has not restated comparative periods. The Company elected the package of practical expedients, which, among other items, permitsthat date.
Based upon management’s scoping analysis, the Company not to reassess under the new standard its prior conclusions about lease identification, lease classificationdetermined that reverse mortgage interests, net of reserves, advances and initial direct costs. The Company also elected the short-term lease recognition exemption for all leases that qualify. Under this practical expedient, for those leases that qualify, the Company does not recognize right-of-use (“ROU”) assets or lease liabilities, which includes not recognizing ROU assets or lease liabilities for existing short-term leasesother receivables, net of those assets in transition. The Company also elected the practical expedient to not separate leasereserves, and non-lease components for all of our leases. The Company did not elect the use-of-hindsight practical expedient. As a result of implementing ASU 2016-02, the Company recognized an operating lease ROU asset of $114 and an operating lease liability of $124 on January 1, 2019, with no impact on its consolidated statement of operations. The ROU asset and operating lease liability are recordedcertain financial instruments included in other assets are within the scope of ASU 2016-13. Certain financial instruments within these respective line items have been determined to have limited expected credit-related losses due to the contractual servicing agreements with agencies and payablesloan product guarantees. For advances and other liabilities, respectively,receivables, net, the Company determined that the majority of estimated losses are due to servicing operational errors and credit-related losses are not significant because of the contractual relationships with the agencies. For reverse mortgage interests, the Company determined that the guarantee from Federal Housing Administration (“FHA”) on Home Equity Conversion Mortgage (“HECM”) loan products limits credit-related losses to an immaterial amount with substantially all losses related to servicing operational errors. For other assets, primarily trade receivables, the Company determined that these are short-term in nature (less than one year), and the estimated credit-related losses over the life of these receivables are similar to those resulting from the Company’s existing loss reserve process. For each of the aforementioned financial instruments carried at amortized cost, the Company enhanced its processes to consider and include the requirements of ASU 2016-13, as applicable, into the determination of credit-related losses.
On January 1, 2020, the Company adopted ASU 2016-13 using the modified retrospective method for the above-mentioned financial assets. Results for reporting periods after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded transition adjustments aggregating to a net increase of $9, or $7 after tax, to retained earnings and a reduction of $7 to the advances and other receivables reserve and a $2 reduction in the consolidated balance sheets.other assets reserves, as of January 1, 2020 for the cumulative effect of adopting ASU 2016-13.
73 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
In connection with adoption of ASU 2016-13, the Company updated its accounting policies as follows:
For certain financial instruments included in advances and other receivables, net, and certain trade receivables and accrued revenues included in other assets that are within the scope of ASU 2016-13, the reserve methodology was revised to consider CECL losses. The revised CECL methodology considers expected lifetime loss rates calculated from historical data using a weighted average life to determine the current expected credit loss required. Due to the nature of the financial instrument, reverse mortgage interests, net of reserves, and advances and other receivables had limited impact from the adoption of CECL to the reserve methodology. See Note 9, Leases4, Advances and Other Receivables, and Note 5, Reverse Mortgage Interests for additional information.
Factors that influenced management’s current estimate of expected credit losses for certain advances and other receivables and certain trade receivables and accrued revenues included the following: historical collection and loss rates, passage of time, weighted average life of receivables, and various qualitative factors including current economic conditions.
Factors that influenced management’s current estimate of expected credit related losses for certain reverse mortgage interests included the following: historical collection and loss rates, foreclosure timelines, and values of underlying collateral.
Accounting Standards Update No. 2018-15, Intangibles 2018-13, Fair Value Measurement (Topic 820)- Goodwill and Other - Internal-Use Software (Subtopic 350-40 - Customer's AccountingChanges to the Disclosure Requirements for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract"Fair Value Measurement, (“ASU 2018-15”2018-13”) alignsremoves the requirementsrequirement to disclose the amount of and reasons for capitalizing implementation costs incurredtransfers between Level 1 and Level 2 fair value measurement methodologies, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in a hosting arrangement that is a service contract withunrealized gains and losses for the requirementsperiod included in other comprehensive income for capitalizing implementation costs incurredrecurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).Level 3 measurements. For certain unobservable inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The Company adopted ASU 2018-15 was effective for the Company2018-13 on January 1, 2020. Early adoption is permitted, including adoption in any interim period. In the first quarter of 2019, the Company early adopted ASU 2018-15. The standard didguidance does not have a material impact to the Company’s consolidated financial statements.disclosures currently provided by the Company.
2. Significant Accounting Policies
The significant accounting policies described below were implemented by Nationstar and applied to the Predecessor’s financial statements, unless otherwise noted. Upon the consummation of the Merger, the Company adopted these significant accounting policies, which are applicable to the Successor’s financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include unrestricted cash on hand and other interest-bearing investments with original maturity dates of 90 days or less.
Restricted Cash
Restricted cash includes collected funds pledged to certain advance and warehouse facilities, collected fees payable to third parties, and contractual escrow funds.
Mortgage Servicing Rights (“MSR”)
The Company recognizes the rights to service mortgage loans for others, or MSRs, whether acquired or as a result of the sale of loans the Company originates with servicing retained, as assets. The Company initially records all MSRs at fair value. MSRs related to reverse mortgages are subsequently recorded at amortized cost. The Company has elected to subsequently measure forward MSRs at fair value.
Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 90
For MSRs initially recorded and subsequently measured at fair value, the fair value of the MSRs is based upon the present value of the expected future net cash flows related to servicing the underlying loans. The Company determines the fair value of the MSRs by the use of a discounted cash flow model which incorporates prepayment speeds, delinquencies, discount rate, ancillary revenues, float earnings and other assumptions (including costs to service)service and forbearance rates) that management believes are consistent with the assumptions that other similar market participants use in valuing the MSRs. The key assumptions to determine fair value include prepayment speed, discount rate and cost to service. The credit quality and stated interest rates of the forward loans underlying the MSRs affects the assumptions used in the cash flow models. The Company obtains third-party valuations quarterly to assess the reasonableness of the fair value calculated by the cash flow model. Fair value adjustments are recorded within revenues - service related, net in the consolidated statements of operations. The Company receives a base servicing fee annually
Mr. Cooper Group Inc. - 2020 Annual Report on the outstanding principal balances of the loans, which is collected from investors.Form 10-K 74
Additionally, the Company owns servicing rights for certain reverse mortgage loans. For this separate class of servicing rights, the Company initially records an MSR or mortgage servicing liability (“MSL”) on the acquisition date based on the fair value of the future cash flows associated with the pool and whether adequate compensation is to be received for servicing. The Company applies the amortized cost method for subsequent measurement of the loan pools with the capitalized cost of the MSRs amortized in proportion and over the period of the estimated net future servicing income and the MSL accreted ratably over the expected life of the portfolio. The expected period of the estimated net servicing income is based, in part, on the expected prepayment period of the underlying mortgages. The Company adjusts MSR amortization and MSL accretion prospectively in response to changes in estimated projections of future cash flows. Reverse MSRs and MSLs are stratified and evaluated each reporting period for impairment or increased obligation, as applicable, based on predominant risk characteristics of the underlying serviced loans. These stratification characteristics include investor, loanThe Company has determined that the predominant characteristic inherent in the reverse mortgage servicing portfolios is the product type (fixed or adjustable rate), term and interest rate.(i.e. GNMA vs FNMA). Impairment of the reverse MSR or additional obligation associated with the MSL areis recorded through a valuation allowance, unless considered other-than-temporary, and areis recognized as a charge to general and administrative expense. Amounts amortized or accreted are recognized as an adjustment to revenues - service related, net, along with monthly servicing fees received, generally stated at a fixed rate per loan.
Advances and Other Receivables, Net
The Company advances funds to or on behalf of the investors when the borrower fails to meet contractual payments (e.g., principal, interest, property taxes, insurance) in accordance with terms of its servicing agreements. Other receivables consist of advances funded to maintain and market underlying loan collateral through foreclosure and ultimate liquidation on behalf of the investors. Advances are recovered from borrowers for performing loans and from the investors and loan proceeds for non-performing loans.
The Company may also acquire servicer advances in connection with the acquisition of MSRs through asset acquisitions or business combinations. These advances are recorded at their relative fair value amounts upon acquisition. The Company records receivables upon determining that collection of amounts due from loan proceeds, investors, mortgage insurers, or prior servicers is probable. Reserves related to recoverability of advances and other receivables are discussed below in Reserves for Forward Servicing Activity.
As a result ofthe Merger and the acquisition of Pacific Union, the Advances and Other Receivables assets were recorded at their estimated fair value as of the acquisition date. In both transactions, recording the estimated fair value resulted in a discount within Advances and Other Receivables. Subsequently, this discount will be utilized as the advance balances associated with the discount are recovered or written off.
91 Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K
Reverse Mortgage Interests, Net
Reverse mortgage interests are comprised of the Company’s interest in reverse mortgage loans that consists of participating interests in Home Equity Conversion Mortgages (“HECMs”) mortgage-backed securities (“HMBS”), other interests securitized and unsecuritized interests, as well as related claims receivables and real estate owned (“REO”) related receivables. The Company acquires and services previously acquired interests in reverse mortgage loans insured by the Federal Housing Administration (“FHA”) known as HECMs. HECMs provide seniors aged 62 and older with a loan secured by their home which can be taken as a lump sum, line of credit, or scheduled payments. HECM loan balances grow over the loan term through borrower draws of scheduled payments or line of credit draws, funded by the Company, as well as through the accrual of interest, servicing fees and FHA mortgage insurance premiums. Growth in the loan balances are capitalized and recorded as reverse mortgage interests within the Company’s consolidated balance sheet. Additionally, loan balances including borrower draws, mortgage insurance premiums, and servicing fees may be eligible for securitization through Ginnie Mae’s HMBS program. In accordance with FHA guidelines, the HECM’s recovery isHECMs are designed to repay through assignment to the Department of Housing and Urban Development (“HUD”) under the FHA guide or foreclosure and subsequent liquidation of loan collateral after the loan becomes due and payable. ShortfallsAny shortfalls experienced by the servicer of the HECM through the foreclosure and liquidation process can be claimed to FHA in accordance with applicable guidelines. Other interests securitized consist of reverse mortgage interests that no longer meet HMBS program eligibility criteria and have been repurchased out of HMBS. These reverse mortgage interests have subsequently been transferred to private securitization trusts and are accounted for as a secured borrowing. Unsecuritized interests include repurchased HECM loans for which the Company is required to repurchase from the HMBS pool when the outstanding principal balance of the HECM loan is equal to or greater than 98% of the maximum claim amount (“MCA”) established at origination in accordance with HMBS program guidelines.
As the HECM loan moves through the foreclosure and claims process, the Company classifies reverse mortgage interests as REO related receivables and HECM related receivables, respectively. Interest income is accrued monthly based upon the borrower interest rates within interest income on the consolidated statements of operations. The Company includes the cash outflow from funding these amounts as operating activities in the consolidated statements of cash flows as a component of reverse mortgage interests.
75 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
The Company is an authorized Ginnie Mae (“GNMA”) HMBS program issuer and servicer. In accordance with GNMA HMBS program guidelines, borrower draws of scheduled payments or line of credit draws, servicing fee and interest accruals and mortgage insurance premium accruals are eligible for HMBS participation securitizations as each of these items increases underlying HECM loan balances. The Company pools and securitizes such eligible items into GNMA HMBS as issuer and servicer. In accordance with the HMBS program, issuers are responsible for purchasing HECM loans out of the HMBS pool when the outstanding principal balance of the related HECM loan is equal or greater than 98% of the maximum claim amount at which point the HECM loans are no longer eligible to remain in the HMBS pool. Upon purchase from the HMBS pool, the Company will assign active HECM loans to HUDthe U.S. Department of Housing and Urban Development (“HUD”) or a prior servicer (as applicable and permitted by acquisition agreements) or service inactive HECM loans through foreclosure and liquidation. Based upon the structure of the GNMA HMBS program, the Company has determined that the securitizations of the HECM loans into HMBS pools do not meet all requirements for sale accounting. Accordingly, these transactions are accounted for as secured borrowings.
If the Company has repurchased an inactive HECM loan that cannot be assigned to HUD, the Company may pool and securitize these loans into a private HECM securitization. These securitizations are also recorded as secured borrowings in the consolidated balance sheets. Interest expense on the participating interest financing is accrued monthly based upon the underlying HMBS rates and is recorded to interest expense in the consolidated statements of operations. Both the acquisition and assumption of HECM loans and related GNMA HMBS debt are presented as investing and financing activities, respectively, in the consolidated statements of cash flows. Subsequent proceeds received from securitizations, and subsequent repayments on the securitized debt are presented as financing activities in the consolidated statements of cash flows. Reserves related to recoverability of reverse mortgage interests are discussed below in Reserves for Reverse Mortgage Interests.
As a result ofIn connection with the Merger, the Company recorded the acquired reverse mortgage interest assets were recordedinterests at their estimated fair value as of the acquisition date. Recording the estimated fair valuedate, which resulted in a premiumnet purchase discount associated with financial and operational losses on the participating interests in HMBS loans and a discount on the unsecuritized interests and other interests securitized within reverse mortgage interests. Subsequently,interests associated with servicing the loans through foreclosure and collateral liquidation. The premium and the discount will beare amortized and accreted, respectively, to other income, based on the effective yield method, whereby the Company will updateupdates its prepayment assumptions for actual prepayments on a quarterly basis. In addition,Consistent with the discount will be adjusted asCompany’s accounting policy, the Company calculates reserve requirements on the reverse mortgage interest balancesinterests portfolio each reporting period and compares such calculated reserve requirements against the remaining net purchase discount. If the calculated reserve requirements exceed the remaining net purchase discount, the Company will record an additional reserve and associated with the discount are utilized through recoveries or write-offs.provision to general and administrative expense.
Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 92
Mortgage Loans Held for Sale
The Company originates prime residential mortgage loans with the intention of selling such loans on a servicing-retained basis in the secondary market. As these loans are originated with intent to sell, the loans are classified as held for sale and the Company has elected to measure these loans held for sale at fair value. The Company estimates fair value of mortgage loans held for sale by using a market approach by utilizing either: (i) the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, including the value attributable to mortgage servicing and credit risk, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted for credit risk and other individual loan characteristics. In connection with the Company’s election to measure originated mortgage loans held for sale at fair value, the Company records the loan originations fees when earned, net of direct loan originations costs associated with these loans. Loan origination fees, gains or losses recognized upon sale of loans, and fair value adjustments are recorded in net gain on sale of mortgage loans held for sale in the consolidated statements of operations.
From time to time, the Company exercises its right to repurchase individual delinquent loans in GNMA securitization pools to minimize interest spread losses, to re-pool into new GNMA securitizations or to otherwise sell to third-party investors.
The Company mayhas the right to repurchase loansany individual loan in a GNMA securitization pool if that were previously transferred to GNMA if those loans meetloan meets certain criteria, including payments not being delinquentreceived from borrowers for greater than 90 days. It is the Company’s intention to re-pool into new GNMA securitizations upon re-performance of the loan or to otherwise sell such loans;to third-party investors; therefore, the Company classifies such loans as loans held for sale and has elected to measure these repurchased loans at fair value.
Mortgage Loans Held for Investment
Mortgage loans held for investment consisted of nonconforming or subprime mortgage loans that were transferred in 2009 from mortgage loans held for sale at fair value. In connection with the Merger, the Company elected the fair value option for mortgage loans held for investment effective August 1, 2018. The Company determines the fair value of loans held for investment,Mr. Cooper Group Inc. - 2020 Annual Report on a recurring basis, based on various underlying attributes such as market participants’ views, loan delinquency, recent observable loan pricing and sales for similar loans, individual loan characteristics and internal market evaluation. These internal market evaluations require the use of judgment by the Company and can have a significant impact on the determination of the loan’s fair value. The Predecessor recorded mortgage loans held for investment at amortized cost. In September 2019, the Company collapsed Trust 2009-A and executed the sale of the loans held in the trust. As of December 31, 2019, the Company has no financial instruments classified as mortgage loans held for investment.Form 10-K 76
MSR Related Liabilities - Nonrecourse
Excess Spread Financing
In conjunction with the acquisition of certain MSRs on various pools of residential mortgage loans (the “Portfolios”), the Company has entered into sale and assignment agreements related to its right to servicing fees, under which the Company sells to third parties the right to receive a portion of the excess cash flow generated from the Portfolios after receipt of a fixed base servicing fee per loan. The excess cash flow payments made to third parties are considered counterparty payments, which are recorded as an adjustment to the Company’s revenues - service related, net in the consolidated statement of operations. The agreements consist of two components - current excess spread, or remittance of a percentage of excess spread on currently serviced loans, and future excess spread, or the obligation to transfer currently serviced loans that have been refinanced into current excess spread or a replacement loan of similar economic characteristics into the portfolios. The new or replacement loan will be governed by the same terms set forth in the sale and assignment agreement described above. The sale of these rights is accounted for as secured borrowings, with the total proceeds received being recorded as a component of MSR related liabilities - nonrecourse at fair value in the consolidated balance sheets. The Company determines the effective interest rate on these liabilities and allocates total repayments between interest expense and the outstanding liability.
The Company has elected to measure the outstanding financings related to the excess spread financing agreements at fair value with all changes in fair value recorded to revenues - service related, net in the consolidated statements of operations. The fair value on excess spread financing is based on the present value of future expected discounted cash flows with the discount rate approximating current market value. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, recapture rates and discount rate.
Mortgage Servicing Rights Financing
The Company hasFrom December 2013 through June 2014, the Predecessor entered into certain transactions with third partiesagreements to sell a contractually specified base servicing fee component of certain MSRs and servicerservicing advances under specified terms.terms to a joint venture capitalized by third-party investors. The purpose of this transaction was to facilitate the financing of advances for private label mortgages. The Company evaluated these transactionscontinues to determine if they are sales or secured borrowings. When these transfers qualifybe the named servicer and, for sale treatment,accounting purposes, ownership of the mortgage servicing rights continues to reside with the Company. Accordingly, the Company derecognizesrecords the transferred assetsMSR and an MSR financing liability associated with this transaction in its consolidated balance sheets. The Company has determined that for a portionMSR financing liability reflects the incremental costs of these transactions,this transaction relative to the related MSRs sales are contingent onmarket participant assumptions contained in the receipt of consents from various third parties. Until these required consents are obtained, for accounting purposes, legal ownership of the MSR’s continues to reside with the Company.MSR valuation. The Company continues to account for the MSRs in its consolidated balance sheets. In addition, the Company records a mortgage servicing rightshad MSR financing liability associated with this financing transaction.of $33 and $37 as of December 31, 2020 and 2019, respectively. Counterparty payments related to this financing arrangement are recorded as an adjustment to the Company’s revenues - service related, net in the consolidated statement of operations.
93 Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K
The Company has elected to measure the mortgage servicing rights financing liabilities at fair value with all changes in fair value recorded to revenues - service related, net in the consolidated statements of operations. The fair value on mortgage servicing right financings is based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being advance financing rates and advance recovery rates.
Revenue RecognitionProperty and Equipment, Net
Property and equipment is comprised of building, furniture, fixtures, leasehold improvements, computer software, and computer hardware. These assets are stated at cost less accumulated depreciation. Repairs and maintenance are expensed as incurred which is included in general and administrative expenses in the consolidated statements of operations. Depreciation, which includes depreciation and amortization on capital leases, is recorded using the straight-line method over the estimated useful lives of the related assets. Cost and accumulated depreciation applicable to assets retired or sold are eliminated from the accounts, and any resulting gains or losses are recognized at such time through a charge or credit to general and administrative expenses. Costs to internally developed computer software are capitalized during the development stage and include external direct costs of materials and services as well as employee costs related to time spent on the project.
Long-lived assets shall be tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of its property and equipment might not be recoverable. The Company will perform a quarterly evaluation to determine whether such events have occurred. If events and circumstances indicate the carrying values exceed the fair value of the fixed assets, the Company will proceed with an impairment testing. Impairment loss shall be recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of undiscounted cash flows expected to result from the use and eventual disposition of the asset. The impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value.
77 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
Leases
If the Company determines an arrangement contains a lease or lease components, then the lease will be accounted for under Accounting Standards Codification (“ASC”) 842 and classified as either a finance or operating lease. At the lease commencement date, the Company recognizes a leased right-of-use (“ROU”) asset and corresponding lease liability based on the present value of the lease payments over the lease term. Leased ROU assets are tested for impairment in accordance with ASC 360, Property, Plant, and Equipment.
ASC 842 provides for two policy elections. The first refers to leases with a term of 12 months or less and the second relates to separating lease components from nonlease components. The Company elected not to recognize lease assets and lease liabilities for leases with a term of 12 months or less and not to separate lease components from nonlease components.
Leases primarily consist of various corporate and other office facilities. Operating leases in which the Company is the lessee are recorded as operating lease ROU assets and operating lease liabilities, which are included in other assets and payables and other liabilities, respectively, on the consolidated balance sheets. Operating lease ROU assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commencement date, as most of the Company’s leases do not provide an implicit rate. ROU assets are further adjusted for lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term and is recorded in general and administrative expenses in the consolidated statements of operations. Operating lease activity is included in operating activities within the consolidated statements of cash flows.
A finance lease is recorded as a leased property or equipment asset with a corresponding finance lease liability at an amount equal to the present value of minimum lease payments at the commencement date. Assets acquired under a finance lease are depreciated on a straight-line basis based on the shorter of the Company’s depreciation policy for owned assets (i.e. useful life) or the lease term. Lease payments are allocated between a reduction of the lease liability and interest expense to produce a constant periodic interest rate on the remaining balance of the lease liability. Interest expense on the lease liability is recognized separately from the amortization of the leased ROU asset in the consolidated statements of operations. Finance lease assets and liabilities are included in property and equipment, net, and payables and other liabilities on the consolidated balance sheets, respectively. Finance lease activity is included in financing activities within the consolidated statements of cash flows.
Derivative Financial Instruments
Derivative instruments are used as part of the overall strategy to manage exposure to market risks primarily associated with fluctuations in interest rates related to originations. The Company recognizes all derivatives at fair value on a recurring basis in other assets and payables and other liabilities on its consolidated balance sheets. The Company treats all of its derivative instruments as economic hedges, therefore none of its derivative instruments are designated as accounting hedges.
Derivative instruments utilized by the Company primarily include interest rate lock commitments (“IRLCs”), loan purchase commitments (“LPCs”), forward Mortgage Backed Securities (“MBS”) purchase commitments, Eurodollar futures, Treasury futures, interest rate swap agreements and interest rate caps.
IRLCs represent an agreement to extend credit to a mortgage loan applicant, or an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to funding. The fair values of mortgage loans held for sale, which are held in inventory awaiting sale into the secondary market, and interest rate lock commitments, are subject to changes in mortgage interest rates from the date of the commitment through the sale of the loan into the secondary market. As a result, the Company is exposed to interest rate risk during the period from the date of the lock commitment through (i) the lock commitment cancellation or expiration date; or (ii) the date of sale into the secondary mortgage market. IRLCs are considered freestanding derivatives and are recorded at fair value at inception. Loan commitments generally range between 30 days and 90 days, and the Company typically sells mortgage loans within 30 days of origination. Changes in fair value subsequent to inception are based on changes in the fair value of the underlying loan, and changes in the probability that the loan will fund within the terms of the commitment. Any changes in fair value are recorded in earnings as a component of net gain on mortgage loans held for sale on the consolidated statement of operations and consolidated statement of cash flows.
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The Company uses other derivative financial instruments, primarily forward sales commitments, to manage exposure to interest rate risk and changes in the fair value of IRLCs and mortgage loans held for sale. These commitments are recorded at fair value based on the dealer’s market. The forward sales commitments fix the forward sales price that will be realized in the secondary market and thereby reduce the interest rate and price risk to the Company. The Company’s expectation of the amount of its interest rate lock commitments that will ultimately close is a key factor in determining the notional amount of derivatives used in economically hedging the position. The Company may also enter into commitments to purchase MBS as part of its overall hedging strategy. The estimated fair values of forward MBS are based on the exchange prices. The changes in value on the forward sales commitments and forward sales of MBS are recorded as a charge or credit to net gain on mortgage loans held for sale on the consolidated statement of operations and consolidated statement of cash flows.
The Company also purchases interest rate swaps, Eurodollar futures and Treasury futures to mitigate exposure to interest rate risk related to cash flows on securitized mortgage borrowings.
Intangible Assets
Intangible assets primarily consist of customer relationships and technology acquired through business combinations. Those intangible assets are deemed to have finite useful lives and are amortized either on a straight-line basis over their estimated useful lives (trade name, technology and internally developed software), or on a basis more representative of the time pattern over which the benefit is derived (customer relationships). Intangible assets are recorded at their estimated fair value at the date of acquisition.
Intangible assets with finite useful lives are tested for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable by comparing the carrying value of the assets to the estimated future undiscounted cash flows to be generated by the asset. If an impairment is determined to exist for intangible assets, the carrying value of the asset is reduced to the estimated fair value.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations and is assigned to the reporting unit in which the acquired business will operate. Goodwill is not amortized but is instead subject to impairment testing. The Company evaluates its goodwill for impairment annually as of October 1 of each year or more frequently if impairment indicators arise in accordance with ASC 350, Intangibles - Goodwill and Other. When testing goodwill for impairment, the Company may elect to perform either a qualitative test or a quantitative test to determine if it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value.
During a qualitative analysis, the Company considers the impact of any changes to the following factors: macroeconomic, industry and market factors, cost factors, and changes in overall financial performance, as well as any other relevant events and uncertainties impacting a reporting unit. If the qualitative assessment does not conclude that it is more likely than not that the estimated fair value of the reporting unit is greater than the carrying value, the Company performs a quantitative analysis. In a quantitative test, the carrying value of the reporting unit is compared to its estimated fair value.
In a quantitative test, the fair value of a reporting unit is determined based on a discounted cash flow analysis and further analyzed using other methods of valuation. A discounted cash flow analysis requires the Company to make various assumptions, including assumptions about future cash flows, growth rates and discount rates. The assumptions about future cash flows and growth rates are based on the Company’s long-term projections by reporting unit. In addition, an assumed terminal value is used to project future cash flows beyond base years. Assumptions used in the Company’s impairment testing are consistent with its internal forecasts and operating plans. The discount rate is based on the Company’s debt and equity balances, adjusted for current market conditions and investor expectations of return on the Company’s equity. If the fair value of a reporting unit exceeds its carrying amount, there is no impairment. If not, the Company compares the fair value of the reporting unit with its carrying amount. To the extent the carrying amount of the reporting unit exceeds its fair value, a write-down of the reporting unit’s goodwill would be necessary.
Revenue Recognition
ASC 606, Revenue from Contracts with Customers, establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers as performance obligations are satisfied in an amount that reflects the consideration that itthe entity expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.services. The majority of the Company’s revenue-generating transactions are not subject to ASC 606,in the Servicing and Originations segments, including revenue generated from financial instruments, such as the Company’s loans and derivatives, as well as revenue related to the Company’s mortgage servicing activities, are not within the scope of ASC 606 as these activities are subject to other GAAP discussed elsewhere within the Company’s disclosures. All revenues from Xome fall within the scope of ASC 606.
79 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
Revenues from Servicing Activities
•Revenues from Forward Servicing Activities - Service related revenues primarily include contractually specified servicing fees, late charges, prepayment penalties, fair value adjustments, and other ancillary revenues. The servicing fees are based on a contractual percentage of the outstanding principal balance and recognized as revenue as earned which is generally upon collectionduring the life of the payments from the borrower.loan. Corresponding loan servicing costs are charged to expense as incurred. The Company recognizes ancillary revenues and earnings on float as they are earned, which is generally upon collection of the payments from the borrower.
earned.
In addition, the Company receives various fees in the course of providing servicing on its various portfolios. These fees include modification fees for modifications performed outside of government programs, modification fees for modifications pursuant to various government programs, and incentive fees for servicing performance on specific government-sponsored entities (“GSE”) portfolios. Fees recorded on modifications of mortgage loans serviced by the Company for others are recognized on collection and are recorded as a component of revenues - service related, net. Fees recorded on modifications pursuant to various government programs are recognized based upon completion of all necessary steps by the Company and the minimum loan performance time frame to establish eligibility for the fee. Revenue earned on modifications pursuant to various government programs is included as a component of revenues - service related, net. Incentive fees for servicing performance on specific GSE portfolios are recognized as various incentive standards are achieved and are recorded as a component of revenues - service related, net.
Fair value adjustments related to MSRs, excess spread financing and MSRs financing are recorded as component of revenue – service related, net.
The Company also acts as a subservicer for certain parties that own the underlying servicing rights and receives subservicing fees, which are typically a stated monthly fee per loan that varies based on types of loans. Fees related to the subserviced portfolio are accrued in the period the services are performed.
Net gain on mortgage loans held for sale includes the realized and unrealized gains and losses on sales of mortgage loans and the fair market value adjustments related to mortgage loans held for sale.
•Revenues from Reverse Mortgage Servicing and Reverse Mortgage Interests - The Company performs servicing of reverse mortgage loans, similar to its forward servicing business, and receives servicing fees from investors, which are recorded in revenues - service related, net in the consolidated statements of operations. For reverse mortgage interests, where the Company records entire participating interest in HECM loans, the Company accrues interest in accordance with FHA guidelines and records interest income on the consolidated statements of operations.
Revenues from Origination Activities
•Revenues from Origination and other loan fees - Loan origination and other loan fees generally represent flat, per-loan fee amounts and are recognized as revenue, net of loan origination costs, at the time the loans are funded.
•Net gain on mortgage loans held for sale - Net gain on loans held for sale includes the realized and unrealized gains and losses on sales of mortgage loans, as well as the changes in fair value of all loan-related derivatives, including interest rate lock commitments.
Revenues from Xome
Xome’s operations are comprised of Exchange, ServicesTitle and Data/Technology,Solutions, as follows:
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•Exchange is a national technology-enabled platform that manages and sells residential properties through its Xome.com platform. Revenue-generating activities include commission and buyer’s premium of winning bids on auctioned real estate owned (“REO”) and short sale properties. Revenue is recognized when the performance obligation is completed, which is at the closing of real estate transactions and there is transfer of ownership to the buyer.
Services connects•Title and Solutions connect the major touch points of the real estate transactions process by providing title, escrow, collateral valuation and field services for purchase, refinance and default transactions. Major revenue-generating activities include title and escrow services and valuation services. Revenue is recognized when the performance obligation is completed, which is when services are rendered to customers.
Data/Technology includes the Company’s software as a service platform which provides integrated technology, media and data solutionsMr. Cooper Group Inc. - 2020 Annual Report on Form 10-K 80
Reserves for Origination Activity
The Company provides for reserves, included within payables and accrued liabilities, in connection with loan origination activities. Reserves on loan origination activities primarily include reserves for the repurchase of loans from GSEs, GNMA, and third-party investors primarily due to delinquency or foreclosure and are initially recorded upon sale of the loan to a third party with subsequent reserves recorded based on repurchase demands. The provision for reserves associated with loan origination activities is a component of net gain on mortgage loans held for sale onin the consolidated statements of operations.
The Company utilizes internal models to estimate reserves for loan origination activities based upon its expectation of future defaults and the historical defect rate for government insured loans and is based upon judgments and assumptions which can be influenced by many factors and may change over the life of the underlying loans, including: (i) historical loss rate, (ii) secondary market pricing of loans; (iii) home prices and the levels of home equity; (iv) the quality of Company’s underwriting procedures; (v) borrower delinquency and default patterns; and (vi) other Company-specific and macro-economic factors. On a quarterly basis, management corroborates these assumptions using third-party data, where applicable.
Reserves for Forward Servicing Activity
In connection with forward loan servicing activities, the Company records reserves primarily for the recoverability of advances, from investors, interest claims, and mortgage insurance claims. Reserves for advances and other receivables associated with loans in the MSR portfolio are considered within the MSR valuation, and the provision expense for such advances is recorded in the mark-to-market adjustment in revenues - service related, net in the consolidated statement of operations. Such valuation gives consideration to the expected cash outflows and inflows for advances and other receivables in accordance with the fair value framework. Reserves for advances and other receivables on loans transferred out of the MSR portfolio are established within advances and other receivables, net. As loans serviced transfer out of the MSR portfolio, any negative MSR value associated with the loans transferred is reclassified from the MSR to the reserve within advances and other receivables, net, to the extent such reserves continue to be required for balances remaining on the consolidated balance sheets. Management evaluates reserves for sufficiency each reporting period and any additional reserve requirements are recorded as a provision in general and administrative expense, as needed.
The Company records reserves for advances and other receivables and evaluates the sufficiency of such reserves through internal models considering both historical and expected recovery rates on claims filed with government agencies, government sponsored enterprises, vendors, prior servicer and other counterparties. Key assumptions used in the model include but are not limited to expected recovery rates by loan types and aging of the receivable. Recovery of advances and other receivables is subject to judgment based on the Company’s assessment of its compliance with servicing guidelines, its ability to produce the necessary documentation to support claims, its ability to support amounts from prior servicers and to effectively negotiate settlements, as needed. Management reviews recorded advances and other receivables and upon determination that no further recourse for recovery is available from all means known to management, the recorded balances associated with these receivables are written-off against the reserve.
95 Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K
Reserves for Reverse Mortgage Interests
The Company records a reserve for reverse mortgage interests based on unrecoverable costs and estimates of probable loss exposures. The Company estimates reserve requirements upon the realization of a triggering event indicating a probable loss exposure. Internal models are utilized to estimate loss exposures at the loan level associated with the Company’s ability to meet servicing guidelines set forth by regulatory agencies and GSEs. Key assumptions within the models include but are not limited to expected recovery rates by loan and borrower characteristics, foreclosure timelines, value of underlying collateral, future carrying and foreclosure costs, and other macro-economic factors. If the calculated reserve requirements exceed the recorded allowance for reserves and discounts, a provision is recorded to general and administrative expense, as needed. Releases to reserves are also recorded against provision in general and administrative expenses. Reserve requirements are subject to significant judgment and estimates based on the Company’s assessment of its compliance with servicing guidelines and its ability to produce the necessary documentation to support claims, its ability to support amounts from prior servicers and to effectively negotiate settlements, as needed. Each period, management reviews recorded reverse mortgage interests and upon determination that no further recourse for recovery is available from all means known to management, the recorded balances associated with these receivables are written-off against the reserve at the loan level.
Amounts Due from Prior ServicersCredit Loss Reserves
The Company services its loan portfolios under guidelines set forth by regulatory agencies and investor guidelines. OperationalASC 326 – Financial Instruments – Credit Losses requires expected credit losses canfor financial instruments held at the reporting date to be incurred if the underlying loans are not serviced in accordance with established guidelines, resulting in the assessment of fines and the inability to recover interest and costs incurred. Prior servicers associated with the underlying loans may have contributed to the losses if their prior servicing practices did not allow for timely compliance with servicing guidelines set forth. To mitigate the risk of loss to the Company, indemnification provisions are incorporated into the executed acquisition and servicing agreements that allow for the recovery of realized losses which can be attributed to prior servicers. As part of its servicing operations, the Company estimates and records an asset in advances and other receivables on the consolidated balance sheet for probable recoveries from prior servicers for their respective portion of these losses. Estimated recoveries from prior servicers aremeasured based on historical experience, current conditions and reasonable and supportable forecasts, which is referred to as the current expected credit loss, or CECL, methodology. The new standard reflects management’s best estimate of allocatedall expected credit losses among servicing parties, terms of the indemnification provisions, prior recovery experience, current negotiations and the servicer’s ability to pay requested amounts. The Company updates its estimate of recovery each reporting period based on the facts and circumstances known at the time. Recovery of amounts due from prior servicers is subject to judgment based onfor the Company’s assessment of the prior servicer’s responsibility for losses incurred, its ability to provide related support for such amounts and its ability to effectively negotiate settlement of amounts due from prior servicers if needed.
Property and Equipment, Net
Property and equipment, net is comprised of building, furniture, fixtures, leasehold improvements, computer software, and computer hardware. Thesefinancial assets are stated at cost less accumulated depreciation. Repairs and maintenance are expensed as incurred which is included in general and administrative expenses in the consolidated statements of operations. Depreciation, which includes depreciation and amortization on capital leases, is recorded using the straight-line method over the estimated useful lives of the related assets. Cost and accumulated depreciation applicable to assets retired or sold are eliminated from the accounts, and any resulting gains or lossesthat are recognized at such time throughamortized cost. The revised CECL methodology considers expected lifetime loss rates calculated from historical data using a charge orweighted average life and considering reasonable and supportable forecasts to determine the current expected credit to general and administrative expenses. Costs to internally develop computer software are capitalized during the development stage and include external direct costs of materials and services as well as employee costs related to time spent on the project.
The Company periodically reviews its property and equipment when events or changes in circumstances indicate that the carrying amount of its property and equipment might not be recoverable under the recoverability test, whereby the expected future undiscounted cash flows from the assets are estimated and compared with the carrying amount of the assets. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the assets, an impairment loss is recorded to general and administrative expense, as needed. The impairment loss is measured by comparing the fair value of the assets with their carrying amounts. Fair value is determined based on discounted cash flow.
Leases
If the Company determines an arrangement contains a lease or lease components, then the lease will be accounted for under ASU 2016-02 and classified as either finance or operating. At the lease commencement date, the Company recognizes a leased ROU asset and corresponding lease liability based on the present value of the lease payments over the lease term. Leased ROU assets are tested for impairment in accordance with ASC 360, Property, Plant, and Equipment.
required.
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Leases primarily consistThe Company determined that reverse mortgage interests, net of various corporatereserves, advances and other office facilities. Operating leases in which the Company is the lessee are recorded as operating lease ROU assetsreceivables, net of reserves, and operating lease liabilities,certain financial instruments included in other assets are within the scope of ASU 2016-13. Certain financial instruments within these respective line items have been determined to have limited expected credit-related losses due to the contractual servicing agreements with agencies and payablesloan product guarantees.
For advances and other liabilities, respectively,receivables, net, the Company determined that the majority of estimated losses are due to servicing operational errors, and credit-related losses are not significant because of the contractual relationships with the agencies. The Company determined that the credit-related risk associated with certain applicable financial instruments can increase with the passage of time. The CECL reserve methodology considers these financial instruments collectible to a point in time of 39 months. Any projected remaining balance at the end of the collection period is considered a loss and factors into the overall CECL loss rate required.
For reverse mortgage interests, net, the Company determined that the guarantee from the FHA on the consolidated balance sheets. Operating lease ROU assets representHECM loan products limits credit-related losses to an immaterial amount with substantially all losses related to servicing operational errors. Any expected credit-related losses are contemplated in the Company’s rightexisting reserve methodology due to use an underlying asset during the lease termnature of this financial instrument. The credit-risk characteristics of reverse mortgage interests do not vary with time as the financial instruments have no contractual life or financial profile as the primary counterparty is the government agency insuring the loans.
For other assets, primarily trade receivables and operating lease liabilities representservice fees earned but not received, the Company determined that these are short-term in nature (less than one year), and the estimated credit-related losses over the life of these receivables are similar to those resulting from the Company’s obligationexisting loss reserve process. The Company monitors the financial status of customers to make lease payments arising from the lease. ROU assets and operating lease liabilitiesdetermine if any specific loss considerations are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commencement date, as most of the Company’s leases do not provide an implicit rate. ROU assets are further adjusted for lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term and is recorded in general and administrative expenses in the consolidated statements of operations.required.
A finance lease is recorded as a leased property or equipment asset with a corresponding finance lease liability at an amount equal to the present value of minimum lease payments at the commencement date. Assets acquired under a finance lease are depreciated on a straight-line basis based on the shorter of the Company’s depreciation policy for owned assets (i.e. useful life) or the lease term. Lease payments are allocated between a reduction of the lease liability and interest expense to produce a constant periodic interest rate on the remaining balance of the lease liability. Interest expense on the lease liability is recognized separately from the amortization of the leased ROU asset in the consolidated statements of operations. Finance lease assets and liabilities are included in property and equipment, net, and payables and other liabilities on the consolidated balance sheets, respectively.
Variable Interest Entities
In the normal course of business, the Company enters into various types of on- and off-balance sheet transactions with special purpose entities (“SPEs”), which primarily consist of securitization trusts established for a limited purpose. Generally, these SPEs are formed for the purpose of securitization transactions in which the Company transfers assets to an SPE, which then issues to investors various forms of debt obligations supported by those assets. In these securitization transactions, the Company typically receives cash and/or other interests in the SPE as proceeds for the transferred assets. The Company will typically retain the right to service the transferred receivables and to repurchase the transferred receivables from the SPE if the outstanding balance of the receivables falls to a level where the cost exceeds the benefits of servicing the transferred receivables.
The Company evaluates its interests in each SPE for classification as a Variable Interest Entity (“VIE”). When an SPE meets the definition of a VIE and the Company determines that the Company is the primary beneficiary, the Company includes the SPE in its consolidated financial statements.
The Company consolidates SPEs connected with both forward and reverse mortgage activities. See Note 14,13, Securitizations and Financings, for more information on Company SPEs, and Note 12, Indebtedness, for certain debt activity connected with SPEs.
Securitizations and Asset-Backed Financing Arrangements
The Company and its subsidiaries have been a transferor in connection with a number of securitizations and asset-backed financing arrangements. The Company has continuing involvement with the financial assets of the securitizations and the asset-backed financing arrangements. The Company has aggregated these transactions into two groups: (1) securitizations of residential mortgage loans accounted for as sales and (2) financings of advances on loans serviced for others accounted for as secured borrowings.
Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K 82
Securitizations Treated as Sales
The Company’s continuing involvement typically includes acting as servicer for the mortgage loans held by the trust and holding beneficial interests in the trust. The Company’s responsibilities as servicer include, among other things, collecting monthly payments, maintaining escrow accounts, providing periodic reports and managing insurance in exchange for a contractually specified servicing fee. The beneficial interests held consist of both subordinate and residual securities that were retained at the time of securitization. These securitizations generally do not result in consolidation of the VIE as the beneficial interests that are held in the unconsolidated securitization trusts have no value and no potential for significant cash flows in the future. In addition, at December 31, 2019,2020, the Company had no other significant assets in its consolidated financial statements related to these trusts. The Company has no obligation to provide financial support to unconsolidated securitization trusts and has provided no such support. The creditors of the trusts can look only to the assets of the trusts themselves for satisfaction of the debt issued by the trusts and have no recourse against the assets of the Company. The general creditors of the Company have no claim on the assets of the trusts. The Company’s exposure to loss as a result of its continuing involvement with the trusts is limited to the carrying values, if any, of its investments in the residual and subordinate securities of the trusts, the MSRs that are related to the trusts and the advances to the trusts. The Company considers the probability of loss arising from its advances to be remote because of their position ahead of most of the other liabilities of the trusts. See Note 5,4, Advances and Other Receivables Net, and Note 4,3, Mortgage Servicing Rights and Related Liabilities, for additional information regarding advances and MSRs.
97 Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K
Financings
The Company transfers advances on loans serviced for others to SPEs in exchange for cash. The Company consolidates these SPEs because the Company is the primary beneficiary of the VIE.
These VIEs issue debt supported by collections on the transferred advances. The Company made these transfers under the terms of its advance facility agreements. The Company classifies the transferred advances on its consolidated balance sheets as advances and classifies the related liabilities as advance facilities and other nonrecourse debt. The SPEs use collections of the pledged advances to repay principal and interest and to pay the expenses of the entity. Holders of the debt issued by these entities can look only to the assets of the entities themselves for satisfaction of the debt and have no recourse against the Company.
Financings include the HMBS and private securitization trusts as previously discussed.
Derivative Financial Instruments
Derivative instruments are used as part of the overall strategy to manage exposure to market risks primarily associated with fluctuations in interest rates related to originations. The Company recognizes all derivatives on its consolidated balance sheets at fair value on a recurring basis. The Company treats all of its derivative instruments as economic hedges, therefore none of its derivative instruments are designated as accounting hedges.
Derivative instruments utilized by the Company primarily include interest rate lock commitments (“IRLCs”), loan purchase commitments (“LPCs”), forward Mortgage Backed Securities (“MBS”) purchase commitments, Eurodollar futures, Treasury futures, interest rate swap agreements and interest rate caps.
IRLCs represent an agreement to extend credit to a mortgage loan applicant, or an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to funding. The fair values of mortgage loans held for sale, which are held in inventory awaiting sale into the secondary market, and interest rate lock commitments, are subject to changes in mortgage interest rates from the date of the commitment through the sale of the loan into the secondary market. As a result, the Company is exposed to interest rate risk during the period from the date of the lock commitment through (i) the lock commitment cancellation or expiration date; or (ii) the date of sale into the secondary mortgage market. IRLCs are considered freestanding derivatives and are recorded at fair value at inception. Loan commitments generally range between 30 days and 90 days, and the Company typically sells mortgage loans within 30 days of origination. Changes in fair value subsequent to inception are based on changes in the fair value of the underlying loan, and changes in the probability that the loan will fund within the terms of the commitment. Any changes in fair value are recorded in earnings as a component of net gain on mortgage loans held for sale on the consolidated statement of operations and consolidated statement of cash flows.
The Company uses other derivative financial instruments, primarily forward sales commitments, to manage exposure to interest rate risk and changes in the fair value of IRLCs and mortgage loans held for sale. These commitments are recorded at fair value based on the dealer’s market. The forward sales commitments fix the forward sales price that will be realized in the secondary market and thereby reduce the interest rate and price risk to the Company. The Company’s expectation of the amount of its interest rate lock commitments that will ultimately close is a key factor in determining the notional amount of derivatives used in economically hedging the position. The Company may also enter into commitments to purchase MBS as part of its overall hedging strategy. The estimated fair values of forward MBS are based on the exchange prices. The changes in value on the forward sales commitments and forward sales of MBS are recorded as a charge or credit to net gain on mortgage loans held for sale on the consolidated statement of operations and consolidated statement of cash flows.
The Company also purchases interest rate swaps, Eurodollar futures and Treasury futures to mitigate exposure to interest rate risk related to cash flows on securitized mortgage borrowings.
Intangible Assets
Intangible assets primarily consist of customer relationships and technology acquired through the acquisition of Nationstar and the acquisition of Assurant Mortgage Solutions (“AMS”). Those intangible assets are deemed to have finite useful lives and are amortized either on a straight-line basis over their estimated useful lives (trade name, technology and internally developed software), or on a basis more representative of the time pattern over which the benefit is derived (customer relationships).
Intangible assets with finite useful lives are tested for impairment on an annual basis or whenever events or circumstances indicate that their carrying amount may not be recoverable. If the carrying value of the asset cannot be recovered from estimated future undiscounted cash flows, the fair value of the asset is calculated using the present value of net future cash flows. If the carrying amount of the asset exceeds its fair value, an impairment is recorded.
Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 98
Goodwill
Goodwill is initially recorded as the excess of the purchase price over the fair value of net assets acquired in a business combination and is subsequently evaluated for impairment at least annually or when events or circumstances make it more likely than not that an impairment may have occurred. Goodwill impairment testing is performed at the reporting unit level, equivalent to a business segment or one level below. The Company has determined that each of its operating segments (Servicing, Originations and Xome) represents a reporting unit, resulting in three total reporting units.
The Company performs its annual goodwill impairment test as of October 1 and monitored for interim triggering events on an ongoing basis. Goodwill is reviewed for impairment utilizing either a qualitative assessment or a quantitative goodwill impairment test. If the Company chooses to perform a qualitative assessment and determines the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. For reporting units where the Company performs the quantitative goodwill impairment test, the Company compares the fair value of each reporting unit, which the Company primarily determines using an income approach based on the present value of discounted cash flows, to the respective carrying value, which includes goodwill. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, the difference would be recognized as an impairment loss.
Loans Subject to Repurchase Rights from Ginnie Mae
For certain forward loans sold to GNMA, the Company as the issuer has the unilateral right to repurchase, without GNMA’s prior authorization, any individual loan in a GNMA securitization pool if that loan meets certain criteria, including payments not being delinquentreceived from borrowers for greater than 90 days. Once the Company has the unilateral right to repurchase a delinquent loan, the Company has effectively regained control over the loan, and under GAAP, must recognize the right to the loan in its consolidated balance sheets and establish a corresponding repurchase liability regardless of the Company’s intention to repurchase the loan. The Company recognizesrecords the right to purchase these mortgage loans in other assets at their unpaid principal balances, which approximate fair value, and records a corresponding liability in payables and other liabilities for mortgage loans eligible for repurchase in its consolidated balance sheets.
Interest Income
Interest income is recognized on loans held for sale for the period from loan funding to sale, which is typically within 30 days. Loans are placed on non-accrual status when any portion of the principal or interest is greater than 90 days past due. Loans return to accrual status when the principal and interest become current and it is probable that the amounts are fully collectible. For individual loans that have been modified, a period of six timely payments is required before the loan is returned to an accrual basis.
Interest income also includes interest earned on custodial cash deposits associated with the mortgage loans serviced, and interest earned on reverse mortgage interests. Reverse mortgage interests accrue interest income in accordance with FHA guidelines.
Share-Based Compensation
Share-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant) on a straight-line basis in salaries, wages and benefits within the consolidated statements of operations.
83 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
Advertising Costs
Advertising costs are expensed as incurred and are included as part of general and administrative expenses. The Company incurred advertising costs of $38, $33 and $17 for the yearyears ended December 31, 2020 and 2019 and five months ended December 31, 2018, respectively. The Predecessor incurred advertising costs of $33 and $57 for the seven months ended July 31, 2018 and the year ended December 31, 2017, respectively.2018.
Income Taxes
The Company is subject to the income tax laws of the U.S., its states and municipalities.municipalities and several U.S. territories. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities.
Deferred income taxes are determined using the balance sheet method. Deferred taxes are recognized for the future tax consequences attributable to differences between the consolidated financial statementstatements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.
99 Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K
The Company regularly reviews the carrying amount of its deferred tax assets to determine if the establishment of a valuation allowance is necessary. If based on the available evidence, it is more likely than not that all or a portion of the Company’s deferred tax assets will not be realized in future periods, a deferred tax valuation allowance is established. Consideration is given to various positive and negative factorsevidence that could affect the realization of the deferred tax assets. In evaluating this available evidence, management considers, among other things, historical financial performance, expectation of future earnings, length of statutory carryforward periods, experience with operating tax loss and tax credit carryforwards which may expire unused, the use of tax planning strategies and the timing of reversals of temporary differences. The Company’s evaluation is based on current tax laws as well as management’s expectations of future performance.
The Company initially recognizes tax positions in the consolidated financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority, assuming the tax authority has full knowledge of the position and all relevant facts. In establishing a provision for income tax expense, the Company makes judgments and interpretations about the application of these inherently complex tax laws within the framework of existing GAAP.laws. The Company recognizes interest and penalties related to uncertain tax positions as a component of provisionprovisions for income taxes.taxes in accordance with ASC 740.
Earnings Per Share
The Company computes earnings per share using the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. The Series A Preferred Stock is considered participating securities because it has dividend rights determined on an as-converted basis in the event of Company’s declaration of a dividend or distribution for common shares.
Basic net income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income per common share is computed by dividing net income available to common stockholders by the sum of the weighted average number of common shares outstanding and any dilutive securities for the period.
3. Acquisitions
Acquisition of Pacific Union Financial, LLC
On February 1, 2019, the Company completed the acquisition of all the limited liability units of Pacific Union Financial, LLC (“Pacific Union”), a California limited liability company. Pacific Union was a privately held company that was engaged in the origination, as well as servicing of residential mortgage loans, and operated throughout the United States. The acquisition allows the Company to expand its servicing portfolio and increase its mortgage lending volume and capabilities.
The acquisition has been accounted for in accordance with ASC 805, Business Combinations, using the acquisition method of accounting. Under the acquisition method of accounting, the Company allocated the purchase price of the acquisition to identifiable assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The determination of fair value estimates requires management to make certain estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and may require adjustments. The final purchase price was $116, paid in cash. Based on the allocation of fair value, goodwill of $40 was recorded, which represents the excess of the purchase price over the estimated fair value of tangible and intangible assets acquired, net of the liabilities assumed. The goodwill is primarily attributable to the assembled workforce and synergies with the Company’s current operations. $28 and $12 of the goodwill is assigned to the Originations and Servicing segments, respectively, based on expected cash flows, and is expected to be deductible for tax purposes.
Mr. Cooper Group Inc. - 20192020 Annual Report on Form 10-K 10084
|
| | | |
Final Estimated Fair Value of Net Assets Acquired: | |
Cash and cash equivalents | $ | 37 |
|
Restricted cash | 2 |
|
Mortgage servicing rights | 271 |
|
Advances and other receivables | 84 |
|
Mortgage loans held for sale | 536 |
|
Mortgage loans held for investment | 1 |
|
Property and equipment | 8 |
|
Other assets | 483 |
|
Fair value of assets acquired | 1,422 |
|
Notes payable(1) | 294 |
|
Advance facilities | 13 |
|
Warehouse facilities | 393 |
|
Payables and other liabilities | 530 |
|
Other nonrecourse debt | 129 |
|
Fair value of liabilities assumed | 1,359 |
|
Total fair value of net tangible assets acquired | 63 |
|
Intangible assets: | |
Customer relationships(2) | 13 |
|
Goodwill | 40 |
|
Final purchase price | $ | 116 |
|
| |
(1)
| Notes payable was subsequently paid off in February 2019 after the consummation of the acquisition. |
| |
(2)
| The estimated fair values for customer relationships were measured using the excess earnings method and were determined to have a remaining useful life of 10 years. |
The Company incurred total acquisition costs of $4 during the year ended December 31, 2019, of which $2 are included in salaries, wages and benefits expense and $2 in general and administrative expense in the Company’s consolidated statements of operations. The acquisition costs were primarily related to legal, accounting and consulting services.
For the year ended December 31, 2019, the operations contributed by this acquisition generated total revenues of $280 and income before income tax of $140, respectively, which are reported in the Company’s consolidated statements of operations.
The following unaudited pro forma financial information presents the combined results of operations for the year ended December 31, 2019, as if the acquisition had occurred on January 1, 2019.
|
| | | |
| Year Ended December 31, 2019 |
| (unaudited) |
Pro forma total revenues | $ | 2,026 |
|
| |
Pro forma net income | $ | 273 |
|
Acquisition of Nationstar Mortgage Holdings Inc.
Upon the Merger with Nationstar on July 31, 2018, each share of Nationstar’s common stock issued and outstanding immediately prior to the Effective Time was converted into the right to receive, at the election of the holder of such share, (i) $18.00 per share in cash, without interest, or (ii) 12.7793 shares (prior to the 1-for-12 reverse stock split) of validly issued, fully paid and nonassessable shares of WMIH common stock (the “Merger Consideration”). The Merger Consideration was subject to automatic proration and adjustment pursuant to the Merger Agreement to ensure that the total amount of cash paid (excluding cash paid in lieu of fractional shares) equaled approximately $1,226.
101 Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K
Pursuant to the Merger Agreement, immediately prior to the Effective Time, subject to certain exceptions, (i) each then-outstanding share of Nationstar restricted stock automatically vested in full and was converted into the right to receive the Merger Consideration, as elected by the holder, and (ii) each then-outstanding Nationstar restricted stock unit, whether vested or unvested, was automatically vested in full, assumed by WMIH and converted into a WMIH restricted stock unit entitling the holder thereof to receive upon settlement the Merger Consideration, as elected by the holder.
Upon closing the Merger, all outstanding WMIH Series B Preferred Stock and all outstanding warrants to purchase shares of WMIH common stock were converted into WMIH common stock.
Total purchase price was approximately $1,777, consisting of cash paid of $1,226 and transferred stock valued at $551. The purchase price was funded from available cash on hand and borrowings under senior unsecured notes (see discussion below). Prior to the acquisition, Nationstar was a publicly held company that earned fees through the delivery of servicing, origination and transaction-based services related primarily to single-family residences throughout the United States. This acquisition marks the Company’s initial entry into the mortgage servicing industry that Nationstar operates in and is consistent with the Company’s business strategy.
On July 13, 2018, Merger Sub closed the offering of $950 aggregate principal amount of 8.125% Notes due 2023 (the “2023 Notes”) and $750 aggregate principal amount of 9.125% Notes due 2026 (the “2026 Notes” and, together with the 2023 Notes, the “New Notes”). The proceeds from the New Notes were used, together with the proceeds from the issuance of the Company’s common stock and the Company’s cash and restricted cash on hand, to consummate the Company’s acquisition of Nationstar and the refinancing of certain Nationstar’s existing debt, and to pay related fees and expenses. At the consummation of the acquisition, Merger Sub merged with and into Nationstar, with Nationstar continuing as a wholly owned subsidiary of the Company. After the Merger, Nationstar assumed all of Merger Sub’s obligations under the New Notes.
The acquisition has been accounted for in accordance with ASC 805, Business Combinations, using the acquisition method of accounting. Under the acquisition method of accounting, the Company allocated the purchase price of the acquisition to identifiable assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The Company recorded final goodwill of $65, which represents the excess of the purchase price over the estimated fair value of tangible and intangible assets acquired, net of the liabilities assumed. The goodwill is primarily attributable to the assembled workforce and synergies from the future growth and strategic advantages in the mortgage industry. The entire goodwill is assigned to the Servicing segment and will not be deductible for tax purposes.
The table below presents the calculation of aggregate purchase price:
|
| | | |
Purchase Price | |
Converted WMIH common shares in millions (prior to the 1-for-12 reverse stock split) | 394 |
|
Price per share, based on price of $1.398 for WMIH stock on July 31, 2018 | $ | 1.398 |
|
Purchase price from common stock issued | 551 |
|
Purchase price from cash payment | 1,226 |
|
Total purchase price | $ | 1,777 |
|
The allocation of the fair value of the acquired business was based on final valuations of the estimated net fair value of the assets acquired. The determination of fair value estimates required management to make certain estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and may require adjustments. The Company’s estimates were subject to change as the Company obtained additional information and finalized its review of estimates during the measurement period (up to one year from the acquisition date). The Company recorded any adjustments to the preliminary fair value estimates in the reporting period in which the adjustments were determined.
Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 102
The final allocation of the purchase price to the acquired assets and liabilities is as follows:
|
| | | |
Final Estimated Fair Value of Net Assets Acquired | |
Cash and cash equivalents | $ | 166 |
|
Restricted cash | 430 |
|
Mortgage servicing rights | 3,422 |
|
Advances and other receivables | 1,262 |
|
Reverse mortgage interests | 9,189 |
|
Mortgage loans held for sale | 1,514 |
|
Mortgage loans held for investment | 125 |
|
Property and equipment | 96 |
|
Other assets | 610 |
|
Fair value of assets acquired | 16,814 |
|
Unsecured senior notes | 1,830 |
|
Advance facilities | 551 |
|
Warehouse facilities | 2,701 |
|
Payables and accrued liabilities | 1,352 |
|
MSR related liabilities—nonrecourse | 1,065 |
|
Mortgage servicing liabilities | 123 |
|
Other nonrecourse debt | 7,583 |
|
Fair value of liabilities assumed | 15,205 |
|
Total fair value of net tangible assets acquired | 1,609 |
|
Intangible assets(1) | 103 |
|
Goodwill | 65 |
|
Purchase price | $ | 1,777 |
|
| |
(1)
| The following intangible assets were acquired in the Nationstar acquisition: |
|
| | | | | |
| Useful Life (Years) | | Fair Value |
Customer relationships (i) | 6 | | $ | 61 |
|
Tradename (ii) | 5 | | 8 |
|
Technology (ii) | 3-5 | | 11 |
|
Internally developed software(iii) | 2 | | 23 |
|
Total | | | $ | 103 |
|
| |
(i)
| The estimated fair values for customer relationships were measured using the excess earnings method. |
| |
(ii)
| The estimated fair values for tradename and technology were measured using the relief-from-royalty method. This method assumes the tradename and technology have value to the extent the owner is relieved of the obligation to pay royalties for the benefits received from these assets. |
| |
(iii)
| The estimated fair values for internally developed software were measured using the replacement cost method. |
The preliminary allocation of fair value as of December 31, 2018 resulted in goodwill of $10. During the first quarter of 2019, the Company obtained additional information in finalizing its review regarding a market participant view of the cost to service assumption related to the valuation of reverse mortgage assets and liabilities. This additional information was used in finalizing the Company’s review of the fair value of the reverse mortgage assets and liabilities and resulted in a reduction of $24 in reverse mortgage interests, a reduction of $6 in reverse mortgage servicing rights and an increase of $37 in mortgage servicing liabilities. In addition, a reduction of $12 in payables and other liabilities was recorded for the tax impact related to the revised valuation, for a total adjustment to goodwill of $55. During the second quarter of 2019, the Company finalized its allocation of purchase price which did not result in any significant additional measurement period adjustments. Based on the adjustments recorded during the period, there was recorded total goodwill of $65 as of December 31, 2019 after taking into account these measurement period adjustments.
103 Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K
WMIH incurred total acquisition costs of $92 prior to the consummation of the Merger. No significant additional acquisition costs were recorded during the remainder of fiscal 2018. The acquisition costs were primarily related to legal, accounting and consulting services and were expensed as incurred through July 31, 2018. Included in the total acquisition costs was a transaction fee of $25 to KKR Capital Markets LLC (“KCM”), an affiliate of KKR Wand Investors Corporation, which is WMIH’s largest stockholder, for acting as a non-exclusive financial advisor to WMIH with respect to the Merger and an arrangement fee of $7 to KCM for acting as a placement agent with respect to a bridge financing facility in connection with the Merger that was not executed. In addition, WMIH incurred $38 of costs related to borrowings under the Notes, which were capitalized in debt costs.
WMIH also paid KCM a deferred fee of $8, which initially reduced the carrying value of the Series B Preferred Stock. This fee was payable in connection with the conversion of Series B Preferred Stock to WMIH’s common stock upon consummation of the Merger.
Included in the Predecessor’s consolidated statements of operations were $27 of acquisition costs incurred by Nationstar for the seven months ended July 31, 2018. The acquisition costs were primarily related to legal, accounting and consulting services.
Included in the Successor’s consolidated statements of operations were $10 of acquisition costs related to the compensation arrangements incurred by the Company related to the merger for the five months ended December 31, 2018.
The following unaudited pro forma financial information presents the combined results of operations for the year ended December 31, 2018 as if the transaction had occurred on January 1, 2018:
|
| | | |
| Year Ended December 31, 2018 |
| (unaudited) |
Pro forma total revenues | $ | 1,790 |
|
| |
Pro forma net income | $ | 16 |
|
The unaudited pro forma financial information above does not include the pro forma effects of the Company’s acquisition of Assurant Mortgage Solutions as presented below. The above unaudited pro forma financial information is presented for illustrative purposes only and is not indicative of the results of operations that would have actually occurred had the Merger occurred on January 1, 2018. In addition, the unaudited pro forma financial information is not indicative of, nor does it purport to project, the future operating results of the Company. Further, the unaudited financial information excludes acquisition and integration costs and does not give effect to any estimated and potential cost savings or other operating efficiencies, if any, that might result from the acquisition.
Acquisition of Assurant Mortgage Solutions (“AMS”)
On August 1, 2018, Xome Holdings LLC, a wholly-owned subsidiary of the Company, acquired AMS for $38 in cash with additional contingent consideration dependent on the achievement of certain future performance targets, which was estimated at $15 as of December 31, 2018 for a total estimated purchase price of $53. The acquisition expands Xome’s product footprint and grows its third-party client portfolio across its valuation, title and field services businesses. The Company finalized its purchase price allocation and recorded intangible assets of $24 and goodwill of $13 in 2018. The Company does not expect the entire goodwill balance to be deductible for tax purposes. Under ASC 805, Business Combinations, the contingent consideration was remeasured to fair value on a quarterly basis. As of September 30, 2019, the contingent consideration was remeasured and determined to have zero fair value. The change in the fair value of $15 was included in other income (expenses), net within the consolidated statements of operations for the year ended December 31, 2019.
Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 104
4.3. Mortgage Servicing Rights and Related Liabilities
The following table sets forth the carrying value of the Company’s mortgage servicing rights (“MSRs”)MSRs and the related liabilities:liabilities. In estimating the fair value of certain servicing rights and related liabilities, the impact of forbearance due tothe COVID-19 pandemic was considered in the determination of key assumptions.
| | | | | | | | | | | |
| Successor |
MSRs and Related Liabilities | December 31, 2020 | | December 31, 2019 |
Forward MSRs - fair value | $ | 2,703 | | | $ | 3,496 | |
Reverse MSRs - amortized cost | 5 | | | 6 | |
Mortgage servicing rights | $ | 2,708 | | | $ | 3,502 | |
| | | |
Mortgage servicing liabilities - amortized cost | $ | 41 | | | $ | 61 | |
| | | |
Excess spread financing - fair value | $ | 934 | | | $ | 1,311 | |
Mortgage servicing rights financing - fair value | 33 | | | 37 | |
MSR related liabilities - nonrecourse at fair value | $ | 967 | | | $ | 1,348 | |
|
| | | | | | | |
| Successor |
MSRs and Related Liabilities | December 31, 2019 | | December 31, 2018 |
Forward MSRs - fair value | $ | 3,496 |
| | $ | 3,665 |
|
Reverse MSRs - amortized cost | 6 |
| | 11 |
|
Mortgage servicing rights | $ | 3,502 |
| | $ | 3,676 |
|
| | | |
Mortgage servicing liabilities - amortized cost | $ | 61 |
| | $ | 71 |
|
| | | |
Excess spread financing - fair value | $ | 1,311 |
| | $ | 1,184 |
|
Mortgage servicing rights financing - fair value | 37 |
| | 32 |
|
MSR related liabilities - nonrecourse at fair value | $ | 1,348 |
| | $ | 1,216 |
|
Mortgage Servicing Rights
The Company owns and records at fair value the rights to service traditional residential mortgage (“forward”) loans for others either as a result of purchase transactions or from the retained servicing associated with the sales and securitizations of loans originated. MSRs are comprised of servicing rights of both agency and non-agency loans.
The following table sets forth the activities of forward MSRs:
| | | | | | | | | | | |
| Successor |
| Year Ended December 31, |
Forward MSRs - Fair Value | 2020 | | 2019 |
Fair value - beginning of year | $ | 3,496 | | | $ | 3,665 | |
Additions: | | | |
Servicing retained from mortgage loans sold | 687 | | | 434 | |
Purchases of servicing rights(1) | 124 | | | 858 | |
Dispositions: | | | |
Sales of servicing assets | (9) | | | (408) | |
Changes in fair value: | | | |
Changes in valuation inputs or assumptions used in the valuation model | (889) | | | (589) | |
Other changes in fair value | (706) | | | (464) | |
Fair value - end of year | $ | 2,703 | | | $ | 3,496 | |
|
| | | | | | | | | | | | |
| Successor | | | Predecessor |
Forward MSRs - Fair Value | Year Ended December 31, 2019 | | Five Months Ended December 31, 2018 | | | Seven Months Ended July 31, 2018 |
Fair value - beginning of period | $ | 3,665 |
| | $ | 3,413 |
| | | $ | 2,937 |
|
Additions: | | | | | | |
Servicing retained from mortgage loans sold | 434 |
| | 120 |
| | | 162 |
|
Purchases of servicing rights(1) | 858 |
| | 479 |
| | | 144 |
|
Dispositions: | | | | | | |
Sales of servicing assets(2) | (408 | ) | | (111 | ) | | | 4 |
|
Changes in fair value: | | | | | | |
Changes in valuation inputs or assumptions used in the valuation model | (589 | ) | | (123 | ) | | | 330 |
|
Other changes in fair value | (464 | ) | | (113 | ) | | | (164 | ) |
Fair value - end of period | $ | 3,496 |
| | $ | 3,665 |
| | | $ | 3,413 |
|
(1)Purchases of servicing rights during the year ended December 31, 2019 include $271 of mortgage servicing rights that were acquired from Pacific Union. See Note 1, Nature of Business and Basis of Presentation, for further discussion. In addition, in 2019, the Company entered into a subservicing contract, resulting in additional $253 servicing rights during the second quarter of 2019.
| |
(1)
| Purchases of servicing rights during the year ended December 31, 2019 include $271 of mortgage servicing rights that were acquired from Pacific Union. See Note 3, Acquisitions, for further discussion. In addition, on January 3, 2019, the Company entered into a subservicing contract for $24 billion unpaid principal balance in mortgages. The related servicing rights were subsequently purchased on May 1, 2019, resulting in additional $253 servicing rights during the second quarter of 2019.
|
| |
(2)
| Amount for the seven months ended July 31, 2018 is related to the sale of MSRs collateralized by nonperforming loans, which have a negative MSR value. |
From time to time, the Company sells its ownership interest in certain MSRs and is retained as the subservicer for the sold assets. The Company has evaluated the sale accounting requirements related to these transactions, including the Company’s continued involvement as the subservicer, and concluded that these transactions qualify for sale accounting treatment. During the yearyears ended December 31, 20192020 and five months ended December 31, 2018,2019, the Company sold $35,152$1,070 and $10,746$35,152 in unpaid principal balance (“UPB”) of forward MSRs, of which $20,560$960 and none$20,560 was retained by the Company as subservicer, respectively. During the seven months ended July 31, 2018, the Predecessor sold $1,203 in UPB of forward MSRs, of which $1 was retained by the Predecessor as subservicer.
10585 Mr. Cooper Group Inc. - 20192020 Annual Report on Form 10-K
MSRs measured at fair value are segregated between credit sensitive and interest sensitive pools. Credit sensitive pools are primarily impacted by borrower performance under specified repayment terms, which most directly impacts involuntary prepayments and delinquency rates. Interest sensitive pools are primarily impacted by changes in forecasted interest rates, which in turn impact voluntary prepayment speeds. The Company assesses whether acquired portfolios are more credit sensitive or interest sensitive in nature on the date of acquisition. Numerous factors are considered in making this assessment, including loan-to-value ratios, FICO scores, percentage of portfolio previously modified, portfolio seasoning and similar criteria. The determination between credit sensitive and interest sensitive for a pool is made at the date of acquisition, and no subsequent changes are made.
Credit sensitive portfolios generally consist of higher delinquency, single-family non-conforming residential forward mortgage loans serviced forinvestor type into agency and non-agency investors. Duepools (referred to herein as “investor pools”) based upon contractual servicing agreements with investors at the Company’s focus on recapturerespective balance sheet date to evaluate the MSR portfolio and modifications, significant amountsfair value of the credit sensitive portfolio have been re-underwritten and, therefore, behave more like the interest sensitive portfolio. Interest sensitive portfolios generallyAgency investors primarily consist of lower delinquency, single-family conforming residential forward mortgage loans for agency investors.GSEs, such as the Federal National Mortgage Association (“Fannie Mae” or “FNMA”) and the Federal Home Loan Mortgage Corp (“Freddie Mac” or “FHLMC”), and the Government National Mortgage Association (“Ginnie Mae” or “GNMA”). Non-agency investors consist of investors in private-label securitizations.
The following table provides a breakdown of credit sensitiveUPB and interest sensitive UPBfair value for the Company’s forward MSRs:
| | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| December 31, 2020 | | December 31, 2019 |
Forward MSRs - UPB and Fair Value Breakdown | UPB | | Fair Value | | UPB | | Fair Value |
Investor Pools | | | | | | | |
Agency | $ | 227,136 | | | $ | 2,305 | | | $ | 240,688 | | | $ | 2,944 | |
Non-agency | 44,053 | | | 398 | | | 56,094 | | | 552 | |
Total | $ | 271,189 | | | $ | 2,703 | | | $ | 296,782 | | | $ | 3,496 | |
|
| | | | | | | | | | | | | | | |
| Successor |
| December 31, 2019 | | December 31, 2018 |
Forward MSRs - Sensitivity Pools | UPB | | Fair Value | | UPB | | Fair Value |
Credit sensitive | $ | 147,895 |
| | $ | 1,613 |
| | $ | 135,752 |
| | $ | 1,495 |
|
Interest sensitive | 148,887 |
| | 1,883 |
| | 159,729 |
| | 2,170 |
|
Total | $ | 296,782 |
| | $ | 3,496 |
| | $ | 295,481 |
| | $ | 3,665 |
|
The Company used the followingRefer to Note 17, Fair Value Measurements, for further discussion on key weighted-average inputs and assumptions used in estimating the fair value of forward MSRs:MSRs.
|
| | | | | |
| Successor |
| December 31, 2019 | | December 31, 2018 |
Total MSR Portfolio | | | |
Discount rate | 9.7 | % | | 10.2 | % |
Prepayment speeds | 13.1 | % | | 10.8 | % |
Average life | 5.8 years |
| | 6.7 years |
|
| | | |
Credit Sensitive | | | |
Discount rate | 10.4 | % | | 11.3 | % |
Prepayment speeds | 12.7 | % | | 11.8 | % |
Average life | 6.0 years |
| | 6.4 years |
|
| | | |
Interest Sensitive | | | |
Discount rate | 9.1 | % | | 9.3 | % |
Prepayment speeds | 13.5 | % | | 10.0 | % |
Average life | 5.7 years |
| | 7.0 years |
|
Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 106
The following table shows the hypothetical effect on the fair value of the Company’s forward MSRs when applying certain unfavorable variations of key assumptions to these assets for the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| Discount Rate | | Total Prepayment Speeds | | Cost to Service per Loan |
Forward MSRs - Hypothetical Sensitivities | 100 bps Adverse Change | | 200 bps Adverse Change | | 10% Adverse Change | | 20% Adverse Change | | 10% Adverse Change | | 20% Adverse Change |
December 31, 2020 | | | | | | | | | | | |
Mortgage servicing rights | $ | (100) | | | $ | (192) | | | $ | (181) | | | $ | (347) | | | $ | (45) | | | $ | (89) | |
| | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | |
Mortgage servicing rights | $ | (127) | | | $ | (245) | | | $ | (165) | | | $ | (317) | | | N/A | | N/A |
|
| | | | | | | | | | | | | | | |
| Successor |
| Discount Rate | | Total Prepayment Speeds |
Forward MSRs - Hypothetical Sensitivities | 100 bps Adverse Change | | 200 bps Adverse Change | | 10% Adverse Change | | 20% Adverse Change |
December 31, 2019 | | | | | | | |
Mortgage servicing rights | $ | (127 | ) | | $ | (245 | ) | | $ | (165 | ) | | $ | (317 | ) |
| | | | | | | |
December 31, 2018 | | | | | | | |
Mortgage servicing rights | $ | (137 | ) | | $ | (265 | ) | | $ | (129 | ) | | $ | (250 | ) |
These hypothetical sensitivities should be evaluated with care. The effect on fair value of a 10% adverse change in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.
Reverse Mortgage Servicing Rights and Liabilities - Amortized Cost
The Company services certain HECM reverse mortgage loans with an unpaid principal balance of $22,725$18,091 and $28,415$22,725 as of December 31, 20192020 and 2018,2019, respectively. The carrying valuefollowing table sets forth the activities of reverse MSRs and mortgage servicing liabilities (“MSL”) was $61:
| | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| Year Ended December 31, |
| 2020 | | 2019 |
Reverse MSRs and Liabilities - Amortized Cost | Assets | | Liabilities | | Assets | | Liabilities |
Balance - beginning of year | $ | 6 | | | $ | 61 | | | $ | 11 | | | $ | 71 | |
Amortization/accretion | (1) | | | (20) | | | (1) | | | (47) | |
Adjustments(1) | 0 | | | 0 | | | (4) | | | 37 | |
Balance - end of year | $ | 5 | | | $ | 41 | | | $ | 6 | | | $ | 61 | |
Fair value - end of year | $ | 6 | | | $ | 37 | | | $ | 6 | | | $ | 28 | |
(1)Reverse MSR and $71 as of December 31, 2019 and 2018, respectively. ForMSL net adjustments recorded by the Company during the year ended December 31, 2019 and five months ended December 31, 2018,primarily relate to the Company accreted $47 and $15finalization of the MSL, respectively. In addition, the Company recorded an MSL adjustment of $37 during the year ended December 31, 2019. The MSL adjustment recorded by the Company relates to thepreliminary fair value adjustments for MSL assumed fromestimates recorded in connection with the Merger resulting from the revised costMerger.
Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K 86
The carrying value of reverse MSR was $6 and $11 as of December 31, 2019 and 2018, respectively. For the year ended December 31, 2019 and five months ended December 31, 2018, the Company recorded $1 and $4 of amortization, respectively. In addition, for the year ended December 31, 2019 the Company recorded other MSR net adjustments of $4. The MSR net adjustments recorded by the Company primarily relates to fair value adjustments for MSR assumed from the Merger resulting from the revised cost to service assumption used in the valuation of MSR during the measurement period. See Note 3, Acquisitions, for further information. For the seven months ended July 31, 2018, the Predecessor recorded an impairment of $4.
The fair value of the MSL was $28 and $53 as of December 31, 2019 and 2018, respectively. The fair value of the reverse MSR was $6 and $11 as of December 31, 2019 and 2018, respectively. Management evaluates reverse MSRs and MSLs each reporting period for impairment. Based on management’s assessment at December 31, 2020 and 2019, and 2018, no0 impairment or increased obligation was needed.
Excess Spread Financing - Fair Value
In order to finance the acquisition of certain MSRs on various Portfolios,portfolios, the Company haspreviously entered into sale and assignment agreements with third parties and sold to these entities the right to receive a specified percentage of the excess cash flow generated from the portfolios in excess of a fixed base servicing fee per loan. The Company retains all the base servicing fee, ancillary income and interest float earnings on principal along with interest payments and escrow, and also incurs costs to service the specified pool. The Company is the legal owner and the servicer of the portfolios and provides all servicing and advancing functions.
In connection with the above transactions, the Company entered into refinanced loan obligations with third parties that require the Company to transfer the new loan or a replacement loan of similar economic characteristics into the respective portfolio if the Company refinances any loan in the portfolio. The new or replacement loan will be governed by the same terms set forth in the sale and assignment agreement described above.
107 Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K
The Company used the followinghad excess spread financing liability of $934 and $1,311 as of December 31, 2020 and 2019, respectively.
Refer to Note 17, Fair Value Measurements, for further discussion on key weighted-average inputs and assumptions used in the Company’s valuation of excess spread financing:financing.
|
| | | | | |
| Successor |
Excess Spread Financing Assumptions | December 31, 2019 | | December 31, 2018 |
Discount rate | 11.6 | % | | 10.4 | % |
Prepayment speeds | 12.6 | % | | 11.0 | % |
Recapture rate | 20.1 | % | | 18.6 | % |
Average life | 5.8 years |
| | 6.5 years |
|
The following table shows the hypothetical effect on the Company’s excess spread financing fair value when applying certain unfavorable variations of key assumptions to these liabilities for the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| Discount Rate | | Prepayment Speeds |
Excess Spread Financing - Hypothetical Sensitivities | 100 bps Adverse Change | | 200 bps Adverse Change | | 10% Adverse Change | | 20% Adverse Change |
December 31, 2020 | | | | | | | |
Excess spread financing | $ | 30 | | | $ | 62 | | | $ | 41 | | | $ | 84 | |
| | | | | | | |
December 31, 2019 | | | | | | | |
Excess spread financing | $ | 46 | | | $ | 95 | | | $ | 46 | | | $ | 96 | |
|
| | | | | | | | | | | | | | | |
| Successor |
| Discount Rate | | Prepayment Speeds |
Excess Spread Financing - Hypothetical Sensitivities | 100 bps Adverse Change | | 200 bps Adverse Change | | 10% Adverse Change | | 20% Adverse Change |
December 31, 2019 | | | | | | | |
Excess spread financing | $ | 46 |
| | $ | 95 |
| | $ | 46 |
| | $ | 96 |
|
| | | | | | | |
December 31, 2018 | | | | | | | |
Excess spread financing | $ | 47 |
| | $ | 99 |
| | $ | 38 |
| | $ | 81 |
|
These hypothetical sensitivities should be evaluated with care. The effect on fair value of a 10% variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects. Also, a positive change in the above assumptions would not necessarily correlate with the corresponding decrease in the net carrying amount of the excess spread financing. Excess spread financing’s cash flow assumptions that are utilized in determining fair value are based on the related cash flow assumptions used in the financed MSRs. Any fair value change recognized in the financed MSRs attributable to related cash flows assumptions would inherently have an inverse impact on the carrying amount of the related excess spread financing.
Mortgage Servicing Rights Financing - Fair Value
From December 2013 through June 2014, the Predecessor entered into agreements to sell a contractually specified base servicing fee component of certain MSRs and servicing advances under specified terms to a joint venture capitalized by third-party investors. The purpose of this transaction was to facilitate the financing of advances for private label mortgages. The Company continues to be the named servicer and, for accounting purposes, ownership of the mortgage servicing rights continues to reside with the Company. Accordingly, the Company records the MSR and anhad MSR financing liability associated with this transaction in its consolidated balance sheets. Theof $33 and $37 as of December 31, 2020 and 2019, respectively. Refer to Note 2, Significant Accounting Policies, for further discussion on MSR financing, liability reflects the incremental costs of this transaction relative to the market participant assumptions contained in the MSR valuation.
The following table sets forth the weighted averageand Note 17, Fair Value Measurements, for further discussion on key weighted-average inputs and assumptions used in the valuation of the mortgage servicing rightsMSR financing liability:liability.
|
| | | | | |
| Successor |
Mortgage Servicing Rights Financing Assumptions | December 31, 2019 | | December 31, 2018 |
Advance financing rates | 3.5 | % | | 4.2 | % |
Annual advance recovery rates | 18.8 | % | | 19.0 | % |
87Mr. Cooper Group Inc. - 20192020 Annual Report on Form 10-K108
Servicing Segment Revenues
The following table sets forth the items comprising total revenues for the Servicing segment:
| | | | | | | | | | | |
| Successor |
| Year Ended December 31, |
Total Revenues - Servicing | 2020 | | 2019 |
Contractually specified servicing fees(1) | $ | 1,141 | | | $ | 1,194 | |
Other service-related income(1) | 290 | | | 182 | |
Incentive and modification income(1) | 39 | | | 40 | |
Late fees(1) | 83 | | | 110 | |
Reverse servicing fees | 24 | | | 31 | |
Mark-to-market adjustments(2) | (679) | | | (505) | |
Counterparty revenue share(3) | (371) | | | (284) | |
Amortization, net of accretion(4) | (420) | | | (236) | |
Total revenues - Servicing | $ | 107 | | | $ | 532 | |
(1)The Company recognizes revenue on an earned basis for services performed. Amounts include subservicing related revenues.
(2)Mark-to-market (“MTM”) adjustments include fair value adjustments on MSR, excess spread financing and MSR financing liabilities. The amount of MSR MTM includes the impact of negative modeled cash flows which have been transferred to reserves on advances and other receivables. The negative modeled cash flows relate to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio. The impact of negative modeled cash flows was $28 and $62 for the years ended December 31, 2020 and 2019, respectively.
(3)Counterparty revenue share represents the excess servicing fee that the Company pays to the counterparties under the excess spread financing arrangements and the payments made associated with MSR financing arrangements.
(4)Amortization for the Company is net of excess spread accretion of $338 and $243 and MSL accretion of $20 and $47 for the years ended December 31, 2020 and 2019, respectively.
|
| | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
Total Revenues - Servicing | Year Ended December 31, 2019 | | Five Months Ended December 31, 2018 | | | Seven Months Ended July 31, 2018 | | Year Ended December 31, 2017 |
Contractually specified servicing fees(1) | $ | 1,194 |
| | $ | 421 |
| | | $ | 574 |
| | $ | 1,003 |
|
Other service-related income(1)(2) | 182 |
| | 44 |
| | | 66 |
| | 168 |
|
Incentive and modification income(1) | 40 |
| | 17 |
| | | 37 |
| | 80 |
|
Late fees(1) | 110 |
| | 34 |
| | | 53 |
| | 89 |
|
Reverse servicing fees | 31 |
| | 16 |
| | | 37 |
| | 58 |
|
Mark-to-market adjustments(3) | (505 | ) | | (164 | ) | | | 196 |
| | (160 | ) |
Counterparty revenue share(4) | (284 | ) | | (68 | ) | | | (111 | ) | | (230 | ) |
Amortization, net of accretion(5) | (236 | ) | | (64 | ) | | | (112 | ) | | (242 | ) |
Total revenues - Servicing | $ | 532 |
| | $ | 236 |
| | | $ | 740 |
| | $ | 766 |
|
| |
(1)
| Amounts include subservicing related revenues. |
| |
(2)
| Amount for the year ended December 31, 2019 includes a gain of $21 from the execution of a clean-up call option on a reverse mortgage loan trust, as the Company was master servicer and holder of clean-up call rights. |
| |
(3)
| Mark-to-market (“MTM”) adjustments include fair value adjustments on MSR, excess spread financing and MSR financing liabilities. The amount of MSR MTM includes the impact of negative modeled cash flows which have been transferred to reserves on advances and other receivables. The negative modeled cash flows relate to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio. The impact of negative modeled cash flows was $62 and $25 for the year ended December 31, 2019 and five months ended December 31, 2018, respectively. The impact of negative modeled cash flows for the Predecessor was $38 for the seven months ended July 31, 2018 and $72 for the year ended December 31, 2017, respectively. |
| |
(4)
| Counterparty revenue share represents the excess servicing fee that the Company pays to the counterparties under the excess spread financing arrangements and the payments made associated with MSR financing arrangements. |
| |
(5)
| Amortization for the Company is net of excess spread accretion of $243 and $53 and MSL accretion of $47 and $15 for the year ended December 31, 2019 and the five months ended December 31, 2018, respectively. Amortization for the Predecessor is net of excess spread accretion of $78 for the seven months ended July 31, 2018 and $161 for the year ended December 31, 2017, respectively. The Predecessor recorded MSL accretion within reverse servicing fees, whereas the Successor has elected to record MSL accretion within Amortization, net of accretion. |
5.4. Advances and Other Receivables Net
Advances and other receivables, net consists of the following:
| | | | | | | | | | | |
| Successor |
Advances and Other Receivables, Net | December 31, 2020 | | December 31, 2019 |
Servicing advances, net of $72 and $131 purchase discount, respectively | $ | 975 | | | $ | 970 | |
Receivables from agencies, investors and prior servicers, net of $21 and $21 purchase discount, respectively | 173 | | | 193 | |
Reserves | (208) | | | (175) | |
Total advances and other receivables, net | $ | 940 | | | $ | 988 | |
|
| | | | | | | |
| Successor |
| December 31, 2019 | | December 31, 2018 |
Servicing advances, net of $131 and $205 discount, respectively | $ | 970 |
| | $ | 1,000 |
|
Receivables from agencies, investors and prior servicers, net of $21 and $48 discount, respectively | 193 |
| | 241 |
|
Reserves | (175 | ) | | (47 | ) |
Total advances and other receivables, net | $ | 988 |
| | $ | 1,194 |
|
The Company, as loan servicer, is contractually responsible to advance funds on behalf of the borrower and investor primarily for loan principal and interest, property taxes, hazard insurance, and foreclosure costs. Advances are primarily recovered through reimbursement from the investor, proceeds from sale of loan collateral, or mortgage insurance claims. Reserves for advances and other receivables on loans transferred out of the MSR portfolio are established within advances and other receivables.
109Mr. Cooper Group Inc. - 20192020 Annual Report on Form 10-K88
The following table sets forth the activities of the servicing reserves for advances and other receivables:
| | | | | | | | | | | |
| Successor |
| Year Ended December 31, |
Reserves for Advances and Other Receivables | 2020 | | 2019 |
Balance - beginning of year(1) | $ | 168 | | | $ | 47 | |
Provision and other additions(2) | 108 | | | 160 | |
Write-offs | (68) | | | (32) | |
Balance - end of year | $ | 208 | | | $ | 175 | |
|
| | | | | | | | | | | | |
| Successor | | | Predecessor |
Reserves for Advances and Other Receivables | Year Ended December 31, 2019 | | Five Months Ended December 31, 2018 | | | Seven Months Ended July 31, 2018 |
Balance - beginning of period | $ | 47 |
| | $ | — |
| | | $ | 284 |
|
Provision and other additions(1) | 160 |
| | 47 |
| | | 69 |
|
Write-offs | (32 | ) | | — |
| | | (56 | ) |
Balance - end of period | $ | 175 |
| | $ | 47 |
| | | $ | 297 |
|
(1)As described in Note 1, Nature of Business and Basis of Presentation, the Company recorded a transition adjustment of $7 to the advances and other receivables reserve as of January 1, 2020 for the cumulative effect of adopting ASU 2016-13.
| |
(1)(2)The Company recorded a provision of $28 and $62 through the MTM adjustments in revenues - service related, net, in the consolidated statements of operations during the years ended December 31, 2020 and 2019, respectively, for inactive and liquidated loans that are no longer part of the MSR portfolio. Other additions represent reclassifications of required reserves provisioned within other balance sheet accounts as associated serviced loans become inactive or liquidate.
| The Company recorded a provision of $62 and $25, and the Predecessor recorded a provision of $38 through the MTM adjustments in revenues - service related, net in the consolidated statements of operations for the year ended December 31, 2019, five months ended December 31, 2018 and seven months ended July 31, 2018, respectively, for inactive and liquidated loans that are no longer part of the MSR portfolio. Other additions represent reclassifications of required reserves provisioned within other balance sheet accounts as associated serviced loans become inactive or liquidate. |
Purchase DiscountMortgage Loans Held for AdvancesSale
The Company originates prime residential mortgage loans with the intention of selling such loans on a servicing-retained basis in the secondary market. As these loans are originated with intent to sell, the loans are classified as held for sale and Other Receivables
the Company has elected to measure these loans held for sale at fair value. The Company estimates fair value of mortgage loans held for sale by using a market approach by utilizing either: (i) the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, including the value attributable to mortgage servicing and credit risk, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted for credit risk and other individual loan characteristics. In connection with the Company’s election to measure originated mortgage loans held for sale at fair value, the Company records the loan originations fees when earned, net of direct loan originations costs associated with these loans. Loan origination fees, gains or losses recognized upon sale of loans, and fair value adjustments are recorded in net gain on sale of mortgage loans held for sale in the consolidated statements of operations.
From time to time, the Company exercises its right to repurchase individual delinquent loans in GNMA securitization pools to minimize interest spread losses, to re-pool into new GNMA securitizations or to otherwise sell to third-party investors.
The Company has the right to repurchase any individual loan in a GNMA securitization pool if that loan meets certain criteria, including payments not being received from borrowers for greater than 90 days. It is the Company’s intention to re-pool into new GNMA securitizations upon re-performance of the loan or to otherwise sell to third-party investors; therefore, the Company classifies such loans as loans held for sale and has elected to measure these repurchased loans at fair value.
Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K 76
MSR Related Liabilities - Nonrecourse
Excess Spread Financing
In conjunction with the acquisition of Pacific Union in February 2019,certain MSRs on various pools of residential mortgage loans (the “Portfolios”), the Company entered into sale and assignment agreements related to its right to servicing fees, under which the Company sells to third parties the right to receive a portion of the excess cash flow generated from the Portfolios after receipt of a fixed base servicing fee per loan. The excess cash flow payments made to third parties are considered counterparty payments, which are recorded as an adjustment to the Company’s revenues - service related, net in the consolidated statement of operations. The agreements consist of two components - current excess spread, or remittance of a percentage of excess spread on currently serviced loans, and future excess spread, or the obligation to transfer currently serviced loans that have been refinanced into current excess spread or a replacement loan of similar economic characteristics into the portfolios. The new or replacement loan will be governed by the same terms set forth in the sale and assignment agreement described above. The sale of these rights is accounted for as secured borrowings, with the total proceeds received being recorded as a component of MSR related liabilities - nonrecourse at fair value in the consolidated balance sheets. The Company determines the effective interest rate on these liabilities and allocates total repayments between interest expense and the outstanding liability.
The Company has elected to measure the outstanding financings related to the excess spread financing agreements at fair value with all changes in fair value recorded to revenues - service related, net in the consolidated statements of operations. The fair value on excess spread financing is based on the present value of future expected discounted cash flows with the discount rate approximating current market value. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, recapture rates and discount rate.
Mortgage Servicing Rights Financing
From December 2013 through June 2014, the Predecessor entered into agreements to sell a contractually specified base servicing fee component of certain MSRs and servicing advances under specified terms to a joint venture capitalized by third-party investors. The purpose of this transaction was to facilitate the financing of advances for private label mortgages. The Company continues to be the named servicer and, for accounting purposes, ownership of the mortgage servicing rights continues to reside with the Company. Accordingly, the Company records the MSR and an MSR financing liability associated with this transaction in its consolidated balance sheets. The MSR financing liability reflects the incremental costs of this transaction relative to the market participant assumptions contained in the MSR valuation. The Company had MSR financing liability of $33 and $37 as of December 31, 2020 and 2019, respectively. Counterparty payments related to this financing arrangement are recorded as an adjustment to the Company’s revenues - service related, net in the consolidated statement of operations.
The Company has elected to measure the mortgage servicing rights financing liabilities at fair value with all changes in fair value recorded to revenues - service related, net in the consolidated statements of operations. The fair value on mortgage servicing right financings is based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being advance financing rates and advance recovery rates.
Property and Equipment, Net
Property and equipment is comprised of building, furniture, fixtures, leasehold improvements, computer software, and computer hardware. These assets are stated at cost less accumulated depreciation. Repairs and maintenance are expensed as incurred which is included in general and administrative expenses in the consolidated statements of operations. Depreciation, which includes depreciation and amortization on capital leases, is recorded using the straight-line method over the estimated useful lives of the related assets. Cost and accumulated depreciation applicable to assets retired or sold are eliminated from the accounts, and any resulting gains or losses are recognized at such time through a charge or credit to general and administrative expenses. Costs to internally developed computer software are capitalized during the development stage and include external direct costs of materials and services as well as employee costs related to time spent on the project.
Long-lived assets shall be tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of its property and equipment might not be recoverable. The Company will perform a quarterly evaluation to determine whether such events have occurred. If events and circumstances indicate the carrying values exceed the fair value of the fixed assets, the Company will proceed with an impairment testing. Impairment loss shall be recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of undiscounted cash flows expected to result from the use and eventual disposition of the asset. The impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value.
77 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
Leases
If the Company determines an arrangement contains a lease or lease components, then the lease will be accounted for under Accounting Standards Codification (“ASC”) 842 and classified as either a finance or operating lease. At the lease commencement date, the Company recognizes a leased right-of-use (“ROU”) asset and corresponding lease liability based on the present value of the lease payments over the lease term. Leased ROU assets are tested for impairment in accordance with ASC 360, Property, Plant, and Equipment.
ASC 842 provides for two policy elections. The first refers to leases with a term of 12 months or less and the second relates to separating lease components from nonlease components. The Company elected not to recognize lease assets and lease liabilities for leases with a term of 12 months or less and not to separate lease components from nonlease components.
Leases primarily consist of various corporate and other office facilities. Operating leases in which the Company is the lessee are recorded as operating lease ROU assets and operating lease liabilities, which are included in other assets and payables and other liabilities, respectively, on the consolidated balance sheets. Operating lease ROU assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commencement date, as most of the Company’s leases do not provide an implicit rate. ROU assets are further adjusted for lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term and is recorded in general and administrative expenses in the consolidated statements of operations. Operating lease activity is included in operating activities within the consolidated statements of cash flows.
A finance lease is recorded as a leased property or equipment asset with a corresponding finance lease liability at an amount equal to the present value of minimum lease payments at the commencement date. Assets acquired under a finance lease are depreciated on a straight-line basis based on the shorter of the Company’s depreciation policy for owned assets (i.e. useful life) or the lease term. Lease payments are allocated between a reduction of the lease liability and interest expense to produce a constant periodic interest rate on the remaining balance of the lease liability. Interest expense on the lease liability is recognized separately from the amortization of the leased ROU asset in the consolidated statements of operations. Finance lease assets and liabilities are included in property and equipment, net, and payables and other liabilities on the consolidated balance sheets, respectively. Finance lease activity is included in financing activities within the consolidated statements of cash flows.
Derivative Financial Instruments
Derivative instruments are used as part of the overall strategy to manage exposure to market risks primarily associated with fluctuations in interest rates related to originations. The Company recognizes all derivatives at fair value on a recurring basis in other assets and payables and other liabilities on its consolidated balance sheets. The Company treats all of its derivative instruments as economic hedges, therefore none of its derivative instruments are designated as accounting hedges.
Derivative instruments utilized by the Company primarily include interest rate lock commitments (“IRLCs”), loan purchase commitments (“LPCs”), forward Mortgage Backed Securities (“MBS”) purchase commitments, Eurodollar futures, Treasury futures, interest rate swap agreements and interest rate caps.
IRLCs represent an agreement to extend credit to a mortgage loan applicant, or an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to funding. The fair values of mortgage loans held for sale, which are held in inventory awaiting sale into the secondary market, and interest rate lock commitments, are subject to changes in mortgage interest rates from the date of the commitment through the sale of the loan into the secondary market. As a result, the Company is exposed to interest rate risk during the period from the date of the lock commitment through (i) the lock commitment cancellation or expiration date; or (ii) the date of sale into the secondary mortgage market. IRLCs are considered freestanding derivatives and are recorded at fair value at inception. Loan commitments generally range between 30 days and 90 days, and the Company typically sells mortgage loans within 30 days of origination. Changes in fair value subsequent to inception are based on changes in the fair value of the underlying loan, and changes in the probability that the loan will fund within the terms of the commitment. Any changes in fair value are recorded in earnings as a component of net gain on mortgage loans held for sale on the consolidated statement of operations and consolidated statement of cash flows.
Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K 78
The Company uses other derivative financial instruments, primarily forward sales commitments, to manage exposure to interest rate risk and changes in the fair value of IRLCs and mortgage loans held for sale. These commitments are recorded at fair value based on the dealer’s market. The forward sales commitments fix the forward sales price that will be realized in the secondary market and thereby reduce the interest rate and price risk to the Company. The Company’s expectation of the amount of its interest rate lock commitments that will ultimately close is a key factor in determining the notional amount of derivatives used in economically hedging the position. The Company may also enter into commitments to purchase MBS as part of its overall hedging strategy. The estimated fair values of forward MBS are based on the exchange prices. The changes in value on the forward sales commitments and forward sales of MBS are recorded as a charge or credit to net gain on mortgage loans held for sale on the consolidated statement of operations and consolidated statement of cash flows.
The Company also purchases interest rate swaps, Eurodollar futures and Treasury futures to mitigate exposure to interest rate risk related to cash flows on securitized mortgage borrowings.
Intangible Assets
Intangible assets primarily consist of customer relationships and technology acquired through business combinations. Those intangible assets are deemed to have finite useful lives and are amortized either on a straight-line basis over their estimated useful lives (trade name, technology and internally developed software), or on a basis more representative of the time pattern over which the benefit is derived (customer relationships). Intangible assets are recorded at their estimated fair value at the date of acquisition.
Intangible assets with finite useful lives are tested for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable by comparing the carrying value of the assets to the estimated future undiscounted cash flows to be generated by the asset. If an impairment is determined to exist for intangible assets, the carrying value of the asset is reduced to the estimated fair value.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations and is assigned to the reporting unit in which the acquired business will operate. Goodwill is not amortized but is instead subject to impairment testing. The Company evaluates its goodwill for impairment annually as of October 1 of each year or more frequently if impairment indicators arise in accordance with ASC 350, Intangibles - Goodwill and Other. When testing goodwill for impairment, the Company may elect to perform either a qualitative test or a quantitative test to determine if it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value.
During a qualitative analysis, the Company considers the impact of any changes to the following factors: macroeconomic, industry and market factors, cost factors, and changes in overall financial performance, as well as any other relevant events and uncertainties impacting a reporting unit. If the qualitative assessment does not conclude that it is more likely than not that the estimated fair value of the reporting unit is greater than the carrying value, the Company performs a quantitative analysis. In a quantitative test, the carrying value of the reporting unit is compared to its estimated fair value.
In a quantitative test, the fair value of a reporting unit is determined based on a discounted cash flow analysis and further analyzed using other methods of valuation. A discounted cash flow analysis requires the Company to make various assumptions, including assumptions about future cash flows, growth rates and discount rates. The assumptions about future cash flows and growth rates are based on the Company’s long-term projections by reporting unit. In addition, an assumed terminal value is used to project future cash flows beyond base years. Assumptions used in the Company’s impairment testing are consistent with its internal forecasts and operating plans. The discount rate is based on the Company’s debt and equity balances, adjusted for current market conditions and investor expectations of return on the Company’s equity. If the fair value of a reporting unit exceeds its carrying amount, there is no impairment. If not, the Company compares the fair value of the reporting unit with its carrying amount. To the extent the carrying amount of the reporting unit exceeds its fair value, a write-down of the reporting unit’s goodwill would be necessary.
Revenue Recognition
ASC 606, Revenue from Contracts with Customers, establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers as performance obligations are satisfied in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for those goods or services. The majority of the Company’s revenue-generating transactions in the Servicing and Originations segments, including revenue generated from financial instruments, such as the Company’s loans and derivatives, as well as revenue related to the Company’s mortgage servicing activities, are not within the scope of ASC 606 as these activities are subject to other GAAP discussed elsewhere within the Company’s disclosures. All revenues from Xome fall within the scope of ASC 606.
79 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
Revenues from Servicing Activities
•Revenues from Forward Servicing Activities - Service related revenues primarily include contractually specified servicing fees, late charges, prepayment penalties, fair value adjustments, and other ancillary revenues. The servicing fees are based on a contractual percentage of the outstanding principal balance and recognized as revenue as earned during the life of the loan. Corresponding loan servicing costs are charged to expense as incurred. The Company recognizes ancillary revenues and earnings on float as they are earned.
In addition, the Company receives various fees in the course of providing servicing on its various portfolios. These fees include modification fees for modifications performed outside of government programs, modification fees for modifications pursuant to various government programs, and incentive fees for servicing performance on specific government-sponsored entities (“GSE”) portfolios. Fees recorded on modifications of mortgage loans serviced by the Company for others are recognized on collection and are recorded as a component of revenues - service related, net. Fees recorded on modifications pursuant to various government programs are recognized based upon completion of all necessary steps by the Company and the minimum loan performance time frame to establish eligibility for the fee. Revenue earned on modifications pursuant to various government programs is included as a component of revenues - service related, net. Incentive fees for servicing performance on specific GSE portfolios are recognized as various incentive standards are achieved and are recorded as a component of revenues - service related, net.
Fair value adjustments related to MSRs, excess spread financing and MSRs financing are recorded as component of revenue – service related, net.
The Company also acts as a subservicer for certain parties that own the underlying servicing rights and receives subservicing fees, which are typically a stated monthly fee per loan that varies based on types of loans. Fees related to the subserviced portfolio are accrued in the period the services are performed.
Net gain on mortgage loans held for sale includes the realized and unrealized gains and losses on sales of mortgage loans and the fair market value adjustments related to mortgage loans held for sale.
•Revenues from Reverse Mortgage Servicing and Reverse Mortgage Interests - The Company performs servicing of reverse mortgage loans, similar to its forward servicing business, and receives servicing fees from investors, which are recorded in revenues - service related, net in the consolidated statements of operations. For reverse mortgage interests, where the Company records entire participating interest in HECM loans, the Company accrues interest in accordance with FHA guidelines and records interest income on the consolidated statements of operations.
Revenues from Origination Activities
•Revenues from Origination and other loan fees - Loan origination and other loan fees generally represent flat, per-loan fee amounts and are recognized as revenue, net of loan origination costs, at the time the loans are funded.
•Net gain on mortgage loans held for sale - Net gain on loans held for sale includes the realized and unrealized gains and losses on sales of mortgage loans, as well as the changes in fair value of all loan-related derivatives, including interest rate lock commitments.
Revenues from Xome
Xome’s operations are comprised of Exchange, Title and Solutions, as follows:
•Exchange is a national technology-enabled platform that manages and sells residential properties through its Xome.com platform. Revenue-generating activities include commission and buyer’s premium of winning bids on auctioned real estate owned (“REO”) and short sale properties. Revenue is recognized when the performance obligation is completed, which is at the closing of real estate transactions and there is transfer of ownership to the buyer.
•Title and Solutions connect the major touch points of the real estate transactions process by providing title, escrow, collateral valuation and field services for purchase, refinance and default transactions. Major revenue-generating activities include title and escrow services and valuation services. Revenue is recognized when the performance obligation is completed, which is when services are rendered to customers.
Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K 80
Reserves for Origination Activity
The Company provides for reserves, included within payables and accrued liabilities, in connection with loan origination activities. Reserves on loan origination activities primarily include reserves for the repurchase of loans from GSEs, GNMA, and third-party investors primarily due to delinquency or foreclosure and are initially recorded upon sale of the loan to a third party with subsequent reserves recorded based on repurchase demands. The provision for reserves associated with loan origination activities is a component of net gain on mortgage loans held for sale in the consolidated statements of operations.
The Company utilizes internal models to estimate reserves for loan origination activities based upon its expectation of future defaults and the historical defect rate for government insured loans and is based upon judgments and assumptions which can be influenced by many factors and may change over the life of the underlying loans, including: (i) historical loss rate, (ii) secondary market pricing of loans; (iii) home prices and the levels of home equity; (iv) the quality of Company’s underwriting procedures; (v) borrower delinquency and default patterns; and (vi) other Company-specific and macro-economic factors. On a quarterly basis, management corroborates these assumptions using third-party data, where applicable.
Reserves for Forward Servicing Activity
In connection with forward loan servicing activities, the Company records reserves primarily for the recoverability of advances, interest claims, and mortgage insurance claims. Reserves for advances and other receivables at estimated fair value asassociated with loans in the MSR portfolio are considered within the MSR valuation, and the provision expense for such advances is recorded in the mark-to-market adjustment in revenues - service related, net in the consolidated statement of operations. Such valuation gives consideration to the acquisition date, which resulted in a purchase discount of $19. Refer to Note 3, Acquisitions,expected cash outflows and inflows for discussion of the Pacific Union acquisition. In 2018, the Company recorded the acquired advances and other receivables in connectionaccordance with the Merger at estimated fair value as of the acquisition date, which resulted in purchase discount of $302.
As of December 31, 2019, a total of $169 purchase discount has been utilized, with $152 purchase discount remaining.
The following table sets forth the activities of the purchase discountframework. Reserves for advances and other receivables:receivables on loans transferred out of the MSR portfolio are established within advances and other receivables, net. As loans serviced transfer out of the MSR portfolio, any negative MSR value associated with the loans transferred is reclassified from the MSR to the reserve within advances and other receivables, net, to the extent such reserves continue to be required for balances remaining on the consolidated balance sheets. Management evaluates reserves for sufficiency each reporting period and any additional reserve requirements are recorded as a provision in general and administrative expense, as needed.
|
| | | | | | | | | | | | | | | |
| Successor |
| Year Ended December 31, 2019 | | Five Months Ended December 31, 2018 |
Purchase Discounts | Servicing Advances | | Receivables from Agencies, Investors and Prior Servicers | | Servicing Advances | | Receivables from Agencies, Investors and Prior Servicers |
Balance - beginning of period | $ | 205 |
| | $ | 48 |
| | $ | 246 |
| | $ | 56 |
|
Addition from acquisition | 19 |
| | — |
| | — |
| | — |
|
Utilization of purchase discounts | (93 | ) | | (27 | ) | | (41 | ) | | (8 | ) |
Balance - end of period | $ | 131 |
| | $ | 21 |
| | $ | 205 |
| | $ | 48 |
|
The Company records reserves for advances and other receivables and evaluates the sufficiency of such reserves through internal models considering both historical and expected recovery rates on claims filed with government agencies, government sponsored enterprises, vendors, prior servicer and other counterparties. Key assumptions used in the model include but are not limited to expected recovery rates by loan types and aging of the receivable. Recovery of advances and other receivables is subject to judgment based on the Company’s assessment of its compliance with servicing guidelines, its ability to produce the necessary documentation to support claims, its ability to support amounts from prior servicers and to effectively negotiate settlements, as needed. Management reviews recorded advances and other receivables and upon determination that no further recourse for recovery is available from all means known to management, the recorded balances associated with these receivables are written-off against the reserve.
6.Reserves for Reverse Mortgage Interests Net
ReverseThe Company records a reserve for reverse mortgage interests net consistsbased on unrecoverable costs and estimates of probable loss exposures. The Company estimates reserve requirements upon the following:realization of a triggering event indicating a probable loss exposure. Internal models are utilized to estimate loss exposures at the loan level associated with the Company’s ability to meet servicing guidelines set forth by regulatory agencies and GSEs. Key assumptions within the models include but are not limited to expected recovery rates by loan and borrower characteristics, foreclosure timelines, value of underlying collateral, future carrying and foreclosure costs, and other macro-economic factors. If the calculated reserve requirements exceed the recorded allowance for reserves and discounts, a provision is recorded to general and administrative expense, as needed. Releases to reserves are also recorded against provision in general and administrative expenses. Reserve requirements are subject to significant judgment and estimates based on the Company’s assessment of its compliance with servicing guidelines and its ability to produce the necessary documentation to support claims, support amounts from prior servicers and to effectively negotiate settlements, as needed. Each period, management reviews recorded reverse mortgage interests and upon determination that no further recourse for recovery is available from all means known to management, the recorded balances associated with these receivables are written-off against the reserve at the loan level.
Credit Loss Reserves
ASC 326 – Financial Instruments – Credit Losses requires expected credit losses for financial instruments held at the reporting date to be measured based on historical experience, current conditions and reasonable and supportable forecasts, which is referred to as the current expected credit loss, or CECL, methodology. The new standard reflects management’s best estimate of all expected credit losses for the Company’s financial assets that are recognized at amortized cost. The revised CECL methodology considers expected lifetime loss rates calculated from historical data using a weighted average life and considering reasonable and supportable forecasts to determine the current expected credit loss required.
|
| | | | | | | |
| Successor |
| December 31, 2019 | | December 31, 2018 |
Participating interests in HECM mortgage-backed securities, including $10 and $58 purchase premium, respectively | $ | 4,292 |
| | $ | 5,664 |
|
Other interests securitized, net of $56 and $100 purchase discount, respectively | 938 |
| | 1,064 |
|
Unsecuritized interests, net of $68 and $122 purchase discount, respectively | 1,052 |
| | 1,219 |
|
Reserves | (3 | ) | | (13 | ) |
Total reverse mortgage interests, net | $ | 6,279 |
| | $ | 7,934 |
|
81Mr. Cooper Group Inc. - 20192020 Annual Report on Form 10-K110
Participating Interests in HMBS
Participating interests in HMBS consist of the Company’sThe Company determined that reverse mortgage interests, net of reserves, advances and other receivables, net of reserves, and certain financial instruments included in HECM loans whichother assets are within the scope of ASU 2016-13. Certain financial instruments within these respective line items have been transferreddetermined to GNMAhave limited expected credit-related losses due to the contractual servicing agreements with agencies and subsequently securitized throughloan product guarantees.
For advances and other receivables, net, the issuanceCompany determined that the majority of HMBS.estimated losses are due to servicing operational errors, and credit-related losses are not significant because of the contractual relationships with the agencies. The Company does not owndetermined that the credit-related risk associated with certain applicable financial instruments can increase with the passage of time. The CECL reserve methodology considers these loans, but duefinancial instruments collectible to HMBS program buyout requirements, sucha point in time of 39 months. Any projected remaining balance at the end of the collection period is considered a loss and factors into the overall CECL loss rate required.
For reverse mortgage interests, net, the Company determined that the guarantee from the FHA on HECM loan products limits credit-related losses to an immaterial amount with substantially all losses related to servicing operational errors. Any expected credit-related losses are consolidatedcontemplated in the Company’s consolidated balance sheets.existing reserve methodology due to the nature of this financial instrument. The Company does not originate reverse mortgages, but during the year ended December 31, 2019 and five months ended December 31, 2018, a total of $265 and $107 in UPB associated with new draws on existing loans were transferred to GNMA and securitized by the Company, respectively. During the seven months ended July 31, 2018 a total of $198 in UPB was transferred to GNMA and securitized by the Predecessor.
In March 2019, the Company entered into an agreement with Fannie Mae for the transfer of reverse mortgage loans. As a result, $61 was transferred from Fannie Mae and securitized into GNMA HMBS during the year ended December 31, 2019.
Other Interests Securitized
Other interests securitized consistcredit-risk characteristics of reverse mortgage interests do not vary with time as the financial instruments have no contractual life or financial profile as the primary counterparty is the government agency insuring the loans.
For other assets, primarily trade receivables and service fees earned but not received, the Company determined that these are short-term in nature (less than one year), and the estimated credit-related losses over the life of these receivables are similar to those resulting from the Company’s existing loss reserve process. The Company monitors the financial status of customers to determine if any specific loss considerations are required.
Variable Interest Entities
In the normal course of business, the Company enters into various types of on- and off-balance sheet transactions with special purpose entities (“SPEs”), which primarily consist of securitization trusts established for a limited purpose. Generally, these SPEs are formed for the purpose of securitization transactions in which the Company transfers assets to an SPE, which then issues to investors various forms of debt obligations supported by those assets. In these securitization transactions, the Company typically receives cash and/or other interests in the SPE as proceeds for the transferred assets. The Company will typically retain the right to service the transferred receivables and to repurchase the transferred receivables from the SPE if the outstanding balance of the receivables falls to a level where the cost exceeds the benefits of servicing the transferred receivables.
The Company evaluates its interests in each SPE for classification as a Variable Interest Entity (“VIE”). When an SPE meets the definition of a VIE and the Company determines that the Company is the primary beneficiary, the Company includes the SPE in its consolidated financial statements.
The Company consolidates SPEs connected with both forward and reverse mortgage activities. See Note 13, Securitizations and Financings, for more information on Company SPEs, and Note 12, Indebtedness, for certain debt activity connected with SPEs.
Securitizations and Asset-Backed Financing Arrangements
The Company and its subsidiaries have been a transferor in connection with a number of securitizations and asset-backed financing arrangements. The Company has continuing involvement with the financial assets of the securitizations and the asset-backed financing arrangements. The Company has aggregated these transactions into two groups: (1) securitizations of residential mortgage loans accounted for as sales and (2) financings of advances on loans serviced for others accounted for as secured borrowings.
Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K 82
Securitizations Treated as Sales
The Company’s continuing involvement typically includes acting as servicer for the mortgage loans held by the trust and holding beneficial interests in the trust. The Company’s responsibilities as servicer include, among other things, collecting monthly payments, maintaining escrow accounts, providing periodic reports and managing insurance in exchange for a contractually specified servicing fee. The beneficial interests held consist of both subordinate and residual securities that were retained at the time of securitization. These securitizations generally do not result in consolidation of the VIE as the beneficial interests that are held in the unconsolidated securitization trusts have no longer meet HMBS program eligibility criteria primarilyvalue and no potential for significant cash flows in the future. In addition, at December 31, 2020, the Company had no other significant assets in its consolidated financial statements related to these trusts. The Company has no obligation to provide financial support to unconsolidated securitization trusts and has provided no such support. The creditors of the trusts can look only to the assets of the trusts themselves for satisfaction of the debt issued by the trusts and have no recourse against the assets of the Company. The general creditors of the Company have no claim on the assets of the trusts. The Company’s exposure to loss as a result of its continuing involvement with the trusts is limited to the carrying values, if any, of its investments in the residual and subordinate securities of the trusts, the MSRs that are related to the trusts and the advances to the trusts. The Company considers the probability of loss arising from its advances to be remote because they have reached 98% of their MCA,position ahead of most of the other liabilities of the trusts. See Note 4, Advances and Other Receivables, and Note 3, Mortgage Servicing Rights and Related Liabilities, for additional information regarding advances and MSRs.
Financings
The Company transfers advances on loans serviced for others to SPEs in exchange for cash. The Company consolidates these SPEs because the Company is the primary beneficiary of the VIE.
These VIEs issue debt supported by collections on the transferred advances. The Company made these transfers under the terms of its advance facility agreements. The Company classifies the transferred advances on its consolidated balance sheets as advances and classifies the related liabilities as advance facilities and other nonrecourse debt. The SPEs use collections of the pledged advances to repay principal and interest and to pay the expenses of the entity. Holders of the debt issued by these entities can look only to the assets of the entities themselves for satisfaction of the debt and have no recourse against the Company.
Financings include the HMBS and private securitization trusts as previously discussed.
Loans Subject to Repurchase Rights from Ginnie Mae
For certain forward loans sold to GNMA, the Company as the issuer has the unilateral right to repurchase, without GNMA’s prior authorization, any individual loan in a GNMA securitization pool if that loan meets certain criteria, including payments not being received from borrowers for greater than 90 days. Once the Company has the unilateral right to repurchase a delinquent loan, the Company has effectively regained control over the loan, and under GAAP, must recognize the right to the loan in its consolidated balance sheets and establish a corresponding repurchase liability regardless of the Company’s intention to repurchase the loan. The Company records the right to purchase these mortgage loans in other assets at their unpaid principal balances, which approximate fair value, and records a corresponding liability in payables and other liabilities for mortgage loans eligible for repurchase in its consolidated balance sheets.
Interest Income
Interest income is recognized on loans held for sale for the period from loan funding to sale, which is established at originationtypically within 30 days. Loans are placed on non-accrual status when any portion of the principal or interest is greater than 90 days past due. Loans return to accrual status when the principal and interest become current and it is probable that the amounts are fully collectible. For individual loans that have been modified, a period of six timely payments is required before the loan is returned to an accrual basis.
Interest income also includes interest earned on custodial cash deposits associated with the mortgage loans serviced, and interest earned on reverse mortgage interests. Reverse mortgage interests accrue interest income in accordance with HMBS program guidelines, requiringFHA guidelines.
Share-Based Compensation
Share-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant) on a repurchasestraight-line basis in salaries, wages and benefits within the consolidated statements of loans from the respective HMBS trust. These reverse mortgage interests have subsequently been transferredoperations.
83 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
Advertising Costs
Advertising costs are expensed as incurred and are accountedincluded as part of general and administrative expenses. The Company incurred advertising costs of $38, $33 and $17 for as a secured borrowing. During the yearyears ended December 31, 2019, the Company securitized a total of $751 UPB through Trust 2019-12020 and Trust 2019-2 and a total of $476 UPB from Trust 2017-2 and Trust 2018-1 was called and the related debt was extinguished. The Company sold $20 UPB of Trust 2018-3 retained bonds during the year ended December 31, 2019. During the five months ended December 31, 2018, the Company securitized a total of $364 UPB through Trust 2018-3 and a total of $188 UPB from Trust 2017-1 was called and the related debt was extinguished. During the seven months ended July 31, 2018, the Predecessor securitized a total of $760 UPB through Trust 2018-1 and Trust 2018-2 and a total of $284 UPB from Trust 2016-2 and Trust 2016-3 was called and the related debt was extinguished. Refer to Other Nonrecourse Debt in Note 12, Indebtedness, for additional information.
Unsecuritized Interests
Unsecuritized interests in reverse mortgages consists of the following:
|
| | | | | | | |
| Successor |
| December 31, 2019 | | December 31, 2018 |
Repurchased HECM loans (exceed 98% MCA) | $ | 789 |
| | $ | 949 |
|
HECM related receivables(1) | 250 |
| | 300 |
|
Funded borrower draws not yet securitized | 67 |
| | 76 |
|
REO-related receivables | 14 |
| | 16 |
|
Purchase discount | (68 | ) | | (122 | ) |
Total unsecuritized interests | $ | 1,052 |
| | $ | 1,219 |
|
| |
(1)
| HECM related receivables consist primarily of receivables from FNMA for corporate advances and service fees and claims receivables from the U.S. Department of Housing and Urban Development on reverse mortgage interests. |
Unsecuritized interests include repurchased HECM loans for which the Company is required to repurchase from the HMBS pool when the outstanding principal balance of the HECM loan is equal to or greater than 98% of the MCA established at origination in accordance with HMBS program guidelines. These unsecuritized interests are primarily financed through available warehouse lines. The Company repurchased a total of $2,333 and $1,429 of HECM loans out of GNMA HMBS securitizations during the year ended December 31, 2019 and five months ended December 31, 2018, respectively, of which $616 and $328 were subsequently assigned to a third party in accordance with applicable servicing agreements, respectively. The Predecessor repurchased a total of $2,439 of HECM loans out of GNMA HMBS securitizations during the seven months ended July 31, 2018, of which, $512 was subsequently assigned to a third party in accordance with applicable servicing agreements. To the extent a loan is not subject to applicable servicing agreements and assigned to a third party, the loan is either subject to assignment to HUD, per contractual obligations with GNMA, liquidated via a payoff from the borrower or liquidated via a foreclosure according to the terms of the underlying mortgage. The Company assigned a total of $1,819 and $1,493 of HECM loans to HUD during the year ended December 31, 2019 and five months ended December 31, 2018, respectively. The Predecessor assigned a totalincurred advertising costs of $1,712 of HECM loans to HUD during$33 for the seven months ended July 31, 2018.
Income Taxes
The Company is subject to the income tax laws of the U.S., its states and municipalities and several U.S. territories. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities.
Deferred income taxes are determined using the balance sheet method. Deferred taxes are recognized for the future tax consequences attributable to differences between the consolidated financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.
The Company regularly reviews the carrying amount of its deferred tax assets to determine if the establishment of a valuation allowance is necessary. If based on the available evidence, it is more likely than not that all or a portion of the Company’s deferred tax assets will not be realized in future periods, a deferred tax valuation allowance is established. Consideration is given to various positive and negative evidence that could affect the realization of the deferred tax assets. In evaluating this available evidence, management considers, among other things, historical financial performance, expectation of future earnings, length of statutory carryforward periods, experience with operating tax loss and tax credit carryforwards which may expire unused, the use of tax planning strategies and the timing of reversals of temporary differences. The Company’s evaluation is based on current tax laws as well as management’s expectations of future performance.
The Company initially recognizes tax positions in the consolidated financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority, assuming the tax authority has full knowledge of the position and all relevant facts. In establishing a provision for income tax expense, the Company makes judgments and interpretations about the application of these inherently complex tax laws. The Company recognizes interest and penalties related to uncertain tax positions as a component of provisions for income taxes in accordance with ASC 740.
Earnings Per Share
The Company computes earnings per share using the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. The Series A Preferred Stock is considered participating securities because it has dividend rights determined on an as-converted basis in the event of Company’s declaration of a dividend or distribution for common shares.
Basic net income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income per common share is computed by dividing net income available to common stockholders by the sum of the weighted average number of common shares outstanding and any dilutive securities for the period.
111Mr. Cooper Group Inc. - 20192020 Annual Report on Form 10-K84
3. Mortgage Servicing Rights and Related Liabilities
Reserves for Reverse
The following table sets forth the carrying value of the Company’s MSRs and the related liabilities. In estimating the fair value of certain servicing rights and related liabilities, the impact of forbearance due tothe COVID-19 pandemic was considered in the determination of key assumptions.
| | | | | | | | | | | |
| Successor |
MSRs and Related Liabilities | December 31, 2020 | | December 31, 2019 |
Forward MSRs - fair value | $ | 2,703 | | | $ | 3,496 | |
Reverse MSRs - amortized cost | 5 | | | 6 | |
Mortgage servicing rights | $ | 2,708 | | | $ | 3,502 | |
| | | |
Mortgage servicing liabilities - amortized cost | $ | 41 | | | $ | 61 | |
| | | |
Excess spread financing - fair value | $ | 934 | | | $ | 1,311 | |
Mortgage servicing rights financing - fair value | 33 | | | 37 | |
MSR related liabilities - nonrecourse at fair value | $ | 967 | | | $ | 1,348 | |
Mortgage InterestsServicing Rights
The Company owns and records reserves relatedat fair value the rights to reverseservice traditional residential mortgage interests based on potential unrecoverable costs(“forward”) loans for others either as a result of purchase transactions or from the retained servicing associated with the sales and loss exposures expected to be realized. Recoverability is determined based on the Company’s ability to meet HUDsecuritizations of loans originated. MSRs are comprised of servicing guidelinesrights of both agency and is assessed with respect to both financial and operational exposures.non-agency loans.
The following table setsets forth the activities of forward MSRs:
| | | | | | | | | | | |
| Successor |
| Year Ended December 31, |
Forward MSRs - Fair Value | 2020 | | 2019 |
Fair value - beginning of year | $ | 3,496 | | | $ | 3,665 | |
Additions: | | | |
Servicing retained from mortgage loans sold | 687 | | | 434 | |
Purchases of servicing rights(1) | 124 | | | 858 | |
Dispositions: | | | |
Sales of servicing assets | (9) | | | (408) | |
Changes in fair value: | | | |
Changes in valuation inputs or assumptions used in the valuation model | (889) | | | (589) | |
Other changes in fair value | (706) | | | (464) | |
Fair value - end of year | $ | 2,703 | | | $ | 3,496 | |
(1)Purchases of servicing rights during the year ended December 31, 2019 include $271 of mortgage servicing reservesrights that were acquired from Pacific Union. See Note 1, Nature of Business and Basis of Presentation, for further discussion. In addition, in 2019, the Company entered into a subservicing contract, resulting in additional $253 servicing rights during the second quarter of 2019.
From time to time, the Company sells its ownership interest in certain MSRs and is retained as the subservicer for the sold assets. The Company has evaluated the sale accounting requirements related to these transactions, including the Company’s continued involvement as the subservicer, and concluded that these transactions qualify for sale accounting treatment. During the years ended December 31, 2020 and 2019, the Company sold $1,070 and $35,152 in unpaid principal balance of forward MSRs, of which $960 and $20,560 was retained by the Company as subservicer, respectively.
85 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
MSRs measured at fair value are segregated between investor type into agency and non-agency pools (referred to herein as “investor pools”) based upon contractual servicing agreements with investors at the respective balance sheet date to evaluate the MSR portfolio and fair value of the portfolio. Agency investors primarily consist of GSEs, such as the Federal National Mortgage Association (“Fannie Mae” or “FNMA”) and the Federal Home Loan Mortgage Corp (“Freddie Mac” or “FHLMC”), and the Government National Mortgage Association (“Ginnie Mae” or “GNMA”). Non-agency investors consist of investors in private-label securitizations.
The following table provides a breakdown of UPB and fair value for the Company’s forward MSRs:
| | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| December 31, 2020 | | December 31, 2019 |
Forward MSRs - UPB and Fair Value Breakdown | UPB | | Fair Value | | UPB | | Fair Value |
Investor Pools | | | | | | | |
Agency | $ | 227,136 | | | $ | 2,305 | | | $ | 240,688 | | | $ | 2,944 | |
Non-agency | 44,053 | | | 398 | | | 56,094 | | | 552 | |
Total | $ | 271,189 | | | $ | 2,703 | | | $ | 296,782 | | | $ | 3,496 | |
Refer to Note 17, Fair Value Measurements, for further discussion on key weighted-average inputs and assumptions used in estimating the fair value of forward MSRs.
The following table shows the hypothetical effect on the fair value of the Company’s forward MSRs when applying certain unfavorable variations of key assumptions to these assets for the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| Discount Rate | | Total Prepayment Speeds | | Cost to Service per Loan |
Forward MSRs - Hypothetical Sensitivities | 100 bps Adverse Change | | 200 bps Adverse Change | | 10% Adverse Change | | 20% Adverse Change | | 10% Adverse Change | | 20% Adverse Change |
December 31, 2020 | | | | | | | | | | | |
Mortgage servicing rights | $ | (100) | | | $ | (192) | | | $ | (181) | | | $ | (347) | | | $ | (45) | | | $ | (89) | |
| | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | |
Mortgage servicing rights | $ | (127) | | | $ | (245) | | | $ | (165) | | | $ | (317) | | | N/A | | N/A |
These hypothetical sensitivities should be evaluated with care. The effect on fair value of a 10% adverse change in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.
Reverse Mortgage Servicing Rights and Liabilities - Amortized Cost
The Company services certain HECM reverse mortgage interests:loans with an unpaid principal balance of $18,091 and $22,725 as of December 31, 2020 and 2019, respectively. The following table sets forth the activities of reverse MSRs and mortgage servicing liabilities (“MSL”):
| | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| Year Ended December 31, |
| 2020 | | 2019 |
Reverse MSRs and Liabilities - Amortized Cost | Assets | | Liabilities | | Assets | | Liabilities |
Balance - beginning of year | $ | 6 | | | $ | 61 | | | $ | 11 | | | $ | 71 | |
Amortization/accretion | (1) | | | (20) | | | (1) | | | (47) | |
Adjustments(1) | 0 | | | 0 | | | (4) | | | 37 | |
Balance - end of year | $ | 5 | | | $ | 41 | | | $ | 6 | | | $ | 61 | |
Fair value - end of year | $ | 6 | | | $ | 37 | | | $ | 6 | | | $ | 28 | |
(1)Reverse MSR and MSL net adjustments recorded by the Company during the year ended December 31, 2019 primarily relate to the finalization of the preliminary fair value estimates recorded in connection with the Merger.
Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K 86
|
| | | | | | | | | | | | |
| Successor | | | Predecessor |
Reserves for reverse mortgage interests | Year Ended December 31, 2019 | | Five Months Ended December 31, 2018 | | | Seven Months Ended July 31, 2018 |
Balance - beginning of period | $ | 13 |
| | $ | — |
| | | $ | 115 |
|
Provisions (release), net | (3 | ) | | 13 |
| | | 32 |
|
Write-offs | (7 | ) | | — |
| | | (18 | ) |
Balance - end of period | $ | 3 |
| | $ | 13 |
| | | $ | 129 |
|
Management evaluates reverse MSRs and MSLs each reporting period for impairment. Based on management’s assessment at December 31, 2020 and 2019, 0 impairment or increased obligation was needed.
Purchase Discount for Reverse Mortgage InterestsExcess Spread Financing - Fair Value
In order to finance the acquisition of certain MSRs on various portfolios, the Company previously entered into sale and assignment agreements with third parties and sold to these entities the right to receive a specified percentage of the excess cash flow generated from the portfolios in excess of a fixed base servicing fee per loan. The Company retains all the base servicing fee, ancillary income and interest float earnings on principal along with interest payments and escrow, and also incurs costs to service the specified pool. The Company is the legal owner and the servicer of the portfolios and provides all servicing and advancing functions.
In connection with the Merger,above transactions, the Company recordedentered into refinanced loan obligations with third parties that require the acquired reverse mortgage interests at estimatedCompany to transfer the new loan or a replacement loan of similar economic characteristics into the respective portfolio if the Company refinances any loan in the portfolio. The new or replacement loan will be governed by the same terms set forth in the sale and assignment agreement described above.
The Company had excess spread financing liability of $934 and $1,311 as of December 31, 2020 and 2019, respectively.
Refer to Note 17, Fair Value Measurements, for further discussion on key weighted-average inputs and assumptions used in the valuation of excess spread financing.
The following table shows the hypothetical effect on the Company’s excess spread financing fair value aswhen applying certain unfavorable variations of key assumptions to these liabilities for the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| Discount Rate | | Prepayment Speeds |
Excess Spread Financing - Hypothetical Sensitivities | 100 bps Adverse Change | | 200 bps Adverse Change | | 10% Adverse Change | | 20% Adverse Change |
December 31, 2020 | | | | | | | |
Excess spread financing | $ | 30 | | | $ | 62 | | | $ | 41 | | | $ | 84 | |
| | | | | | | |
December 31, 2019 | | | | | | | |
Excess spread financing | $ | 46 | | | $ | 95 | | | $ | 46 | | | $ | 96 | |
These hypothetical sensitivities should be evaluated with care. The effect on fair value of a 10% variation in assumptions generally cannot be determined because the relationship of the acquisition date, which resultedchange in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a purchase premiumparticular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects. Also, a positive change in the above assumptions would not necessarily correlate with the corresponding decrease in the net carrying amount of $42 for Participating Intereststhe excess spread financing. Excess spread financing’s cash flow assumptions that are utilized in HMBS, and a purchase discount of $298 for Other Interest Securitized and Unsecuritized Interests due to the higher exposure to financial and operational losses of servicing the loans through foreclosure and collateral liquidation. The premium and discountdetermining fair value are amortized and accreted, respectively, based on the effective yield method, wherebyrelated cash flow assumptions used in the financed MSRs. Any fair value change recognized in the financed MSRs attributable to related cash flows assumptions would inherently have an inverse impact on the carrying amount of the related excess spread financing.
Mortgage Servicing Rights Financing - Fair Value
The Company had MSR financing liability of $33 and $37 as of December 31, 2020 and 2019, respectively. Refer to Note 2, Significant Accounting Policies, for further discussion on MSR financing, and Note 17, Fair Value Measurements, for further discussion on key weighted-average inputs and assumptions used in the valuation of the MSR financing liability.
87 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
Servicing Segment Revenues
The following table sets forth the items comprising total revenues for the Servicing segment:
| | | | | | | | | | | |
| Successor |
| Year Ended December 31, |
Total Revenues - Servicing | 2020 | | 2019 |
Contractually specified servicing fees(1) | $ | 1,141 | | | $ | 1,194 | |
Other service-related income(1) | 290 | | | 182 | |
Incentive and modification income(1) | 39 | | | 40 | |
Late fees(1) | 83 | | | 110 | |
Reverse servicing fees | 24 | | | 31 | |
Mark-to-market adjustments(2) | (679) | | | (505) | |
Counterparty revenue share(3) | (371) | | | (284) | |
Amortization, net of accretion(4) | (420) | | | (236) | |
Total revenues - Servicing | $ | 107 | | | $ | 532 | |
(1)The Company recognizes revenue on an earned basis for services performed. Amounts include subservicing related revenues.
(2)Mark-to-market (“MTM”) adjustments include fair value adjustments on MSR, excess spread financing and MSR financing liabilities. The amount of MSR MTM includes the impact of negative modeled cash flows which have been transferred to reserves on advances and other receivables. The negative modeled cash flows relate to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio. The impact of negative modeled cash flows was $28 and $62 for the years ended December 31, 2020 and 2019, respectively.
(3)Counterparty revenue share represents the excess servicing fee that the Company updates it prepayment assumptionspays to the counterparties under the excess spread financing arrangements and the payments made associated with MSR financing arrangements.
(4)Amortization for actual prepaymentsthe Company is net of excess spread accretion of $338 and $243 and MSL accretion of $20 and $47 for the years ended December 31, 2020 and 2019, respectively.
4. Advances and Other Receivables
Advances and other receivables, net consists of the following:
| | | | | | | | | | | |
| Successor |
Advances and Other Receivables, Net | December 31, 2020 | | December 31, 2019 |
Servicing advances, net of $72 and $131 purchase discount, respectively | $ | 975 | | | $ | 970 | |
Receivables from agencies, investors and prior servicers, net of $21 and $21 purchase discount, respectively | 173 | | | 193 | |
Reserves | (208) | | | (175) | |
Total advances and other receivables, net | $ | 940 | | | $ | 988 | |
The Company, as loan servicer, is contractually responsible to advance funds on a quarterly basis.behalf of the borrower and investor primarily for loan principal and interest, property taxes, hazard insurance, and foreclosure costs. Advances are primarily recovered through reimbursement from the investor, proceeds from sale of loan collateral, or mortgage insurance claims. Reserves for advances and other receivables on loans transferred out of the MSR portfolio are established within advances and other receivables.
Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K 88
The following table sets forth the activities of the purchase premiumsservicing reserves for advances and discounts for reverse mortgage interests:other receivables:
| | | | | | | | | | | |
| Successor |
| Year Ended December 31, |
Reserves for Advances and Other Receivables | 2020 | | 2019 |
Balance - beginning of year(1) | $ | 168 | | | $ | 47 | |
Provision and other additions(2) | 108 | | | 160 | |
Write-offs | (68) | | | (32) | |
Balance - end of year | $ | 208 | | | $ | 175 | |
|
| | | | | | | | | | | |
| Successor |
| Year Ended December 31, 2019 |
Purchase premiums and discounts for reverse mortgage interests | Net Premium for Participating Interests in HMBS(1) | | Net Discount for Other Interest Securitized(1) | | Net Discount for Unsecuritized Interests(1) |
Balance - beginning of period | $ | 58 |
| | $ | (100 | ) | | $ | (122 | ) |
Adjustments(2) | (16 | ) | | (2 | ) | | (6 | ) |
Utilization of purchase discounts(3) | — |
| | 33 |
| | 63 |
|
(Amortization)/Accretion | (49 | ) | | 23 |
| | 4 |
|
Transfers(4) | 17 |
| | (10 | ) | | (7 | ) |
Balance - end of period | $ | 10 |
| | $ | (56 | ) | | $ | (68 | ) |
|
| | | | | | | | | | | |
| Successor |
| Five Months Ended December 31, 2018 |
Purchase premiums and discounts for reverse mortgage interests | Net Premium for Participating Interests in HMBS(1) | | Net Discount for Other Interest Securitized(1) | | Net Discount for Unsecuritized Interests(1) |
Balance - beginning of period | $ | 58 |
| | $ | (117 | ) | | $ | (173 | ) |
Utilization of purchase discounts(3) | — |
| | — |
| | 43 |
|
Accretion/(Amortization) | — |
| | 17 |
| | 8 |
|
Balance - end of period | $ | 58 |
| | $ | (100 | ) | | $ | (122 | ) |
| |
(1)
| Net position as certain items are in a premium/(discount) position, based on the characteristics of underlying tranches of loans. |
| |
(2)
| Adjustments to premium/(discount) due to revised cost to service assumption utilized in the valuation of reverse mortgage assets and liabilities acquired from the Merger. See Note 3, Acquisitions(1)As described in Note 1, Nature of Business and Basis of Presentation, for additional information.
|
| |
(3)
| Utilization of purchase discounts to mitigate loss on liquidated loans, for which the remaining receivable was written-off. |
| |
(4)
| Transfer of premium/(discount) based on the transfer of associated loans between categories consistent with the underlying loan characteristics. |
Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 112
In connection with previous reverse mortgage portfolio acquisitions, the PredecessorCompany recorded a purchase discount within Unsecuritized Interests. The following table sets forthtransition adjustment of $7 to the activitiesadvances and other receivables reserve as of January 1, 2020 for the purchase discounts for reverse mortgage interests:cumulative effect of adopting ASU 2016-13.
|
| | | |
| Predecessor |
Purchase discounts for reverse mortgage interests | Seven Months Ended July 31, 2018 |
Balance - beginning of period | $ | (89 | ) |
Additions | (7 | ) |
Accretion | 14 |
|
Balance - end of period | $ | (82 | ) |
Reverse Mortgage Interest Income
(2)The Company accrues interest income for its participating interestrecorded a provision of $28 and $62 through the MTM adjustments in reverse mortgages based onrevenues - service related, net, in the stated rates underlying HECM loans and FHA guidelines. Total interest earned onconsolidated statements of operations during the Company’s reverse mortgage interests was $307 and $206 for the yearyears ended December 31, 2020 and 2019, respectively, for inactive and five months ended December 31, 2018, respectively. Total interest earned onliquidated loans that are no longer part of the Predecessor’s reverse mortgage interests was $274 and $490 for the seven months ended July 31, 2018 and year ended December 31, 2017, respectively.MSR portfolio. Other additions represent reclassifications of required reserves provisioned within other balance sheet accounts as associated serviced loans become inactive or liquidate.
7. Mortgage Loans Held for Sale and Investment
Mortgage Loans Held for Sale
The Company originates prime residential mortgage loans with the intention of selling such loans on a servicing-retained basis in the secondary market. As these loans are originated with intent to sell, the loans are classified as held for sale and the Company has elected to measure these loans held for sale at fair value. The Company estimates fair value of mortgage loans held for sale by using a market approach by utilizing either: (i) the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, including the value attributable to mortgage servicing and credit risk, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted for credit risk and other individual loan characteristics. In connection with the Company’s election to measure originated mortgage loans held for sale at fair value, the Company records the loan originations fees when earned, net of direct loan originations costs associated with these loans. Loan origination fees, gains or losses recognized upon sale of loans, and fair value adjustments are recorded in net gain on sale of mortgage loans held for sale in the consolidated statements of operations.
From time to time, the Company exercises its right to repurchase individual delinquent loans in GNMA securitization pools to minimize interest spread losses, to re-pool into new GNMA securitizations or to otherwise sell to third-party investors.
The Company has the right to repurchase any individual loan in a GNMA securitization pool if that loan meets certain criteria, including payments not being received from borrowers for greater than 90 days. It is the Company’s intention to re-pool into new GNMA securitizations upon re-performance of the loan or to otherwise sell to third-party investors; therefore, the Company classifies such loans as loans held for sale and has elected to measure these repurchased loans at fair value.
Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K 76
MSR Related Liabilities - Nonrecourse
Excess Spread Financing
In conjunction with the acquisition of certain MSRs on various pools of residential mortgage loans (the “Portfolios”), the Company entered into sale and assignment agreements related to its right to servicing fees, under which the Company sells to third parties the right to receive a portion of the excess cash flow generated from the Portfolios after receipt of a fixed base servicing fee per loan. The excess cash flow payments made to third parties are considered counterparty payments, which are recorded as an adjustment to the Company’s revenues - service related, net in the consolidated statement of operations. The agreements consist of two components - current excess spread, or remittance of a percentage of excess spread on currently serviced loans, and future excess spread, or the obligation to transfer currently serviced loans that have been refinanced into current excess spread or a replacement loan of similar economic characteristics into the portfolios. The new or replacement loan will be governed by the same terms set forth in the sale and assignment agreement described above. The sale of these rights is accounted for as secured borrowings, with the total proceeds received being recorded as a component of MSR related liabilities - nonrecourse at fair value in the consolidated balance sheets. The Company determines the effective interest rate on these liabilities and allocates total repayments between interest expense and the outstanding liability.
The Company has elected to measure the outstanding financings related to the excess spread financing agreements at fair value with all changes in fair value recorded to revenues - service related, net in the consolidated statements of operations. The fair value on excess spread financing is based on the present value of future expected discounted cash flows with the discount rate approximating current market value. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, recapture rates and discount rate.
Mortgage Servicing Rights Financing
From December 2013 through June 2014, the Predecessor entered into agreements to sell a contractually specified base servicing fee component of certain MSRs and servicing advances under specified terms to a joint venture capitalized by third-party investors. The purpose of this transaction was to facilitate the financing of advances for private label mortgages. The Company continues to be the named servicer and, for accounting purposes, ownership of the mortgage servicing rights continues to reside with the Company. Accordingly, the Company records the MSR and an MSR financing liability associated with this transaction in its consolidated balance sheets. The MSR financing liability reflects the incremental costs of this transaction relative to the market participant assumptions contained in the MSR valuation. The Company had MSR financing liability of $33 and $37 as of December 31, 2020 and 2019, respectively. Counterparty payments related to this financing arrangement are recorded as an adjustment to the Company’s revenues - service related, net in the consolidated statement of operations.
The Company has elected to measure the mortgage servicing rights financing liabilities at fair value with all changes in fair value recorded to revenues - service related, net in the consolidated statements of operations. The fair value on mortgage servicing right financings is based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being advance financing rates and advance recovery rates.
Property and Equipment, Net
Property and equipment is comprised of building, furniture, fixtures, leasehold improvements, computer software, and computer hardware. These assets are stated at cost less accumulated depreciation. Repairs and maintenance are expensed as incurred which is included in general and administrative expenses in the consolidated statements of operations. Depreciation, which includes depreciation and amortization on capital leases, is recorded using the straight-line method over the estimated useful lives of the related assets. Cost and accumulated depreciation applicable to assets retired or sold are eliminated from the accounts, and any resulting gains or losses are recognized at such time through a charge or credit to general and administrative expenses. Costs to internally developed computer software are capitalized during the development stage and include external direct costs of materials and services as well as employee costs related to time spent on the project.
Long-lived assets shall be tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of its property and equipment might not be recoverable. The Company will perform a quarterly evaluation to determine whether such events have occurred. If events and circumstances indicate the carrying values exceed the fair value of the fixed assets, the Company will proceed with an impairment testing. Impairment loss shall be recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of undiscounted cash flows expected to result from the use and eventual disposition of the asset. The impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value.
77 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
Leases
If the Company determines an arrangement contains a lease or lease components, then the lease will be accounted for under Accounting Standards Codification (“ASC”) 842 and classified as either a finance or operating lease. At the lease commencement date, the Company recognizes a leased right-of-use (“ROU”) asset and corresponding lease liability based on the present value of the lease payments over the lease term. Leased ROU assets are tested for impairment in accordance with ASC 360, Property, Plant, and Equipment.
ASC 842 provides for two policy elections. The first refers to leases with a term of 12 months or less and the second relates to separating lease components from nonlease components. The Company elected not to recognize lease assets and lease liabilities for leases with a term of 12 months or less and not to separate lease components from nonlease components.
Leases primarily consist of various corporate and other office facilities. Operating leases in which the Company is the lessee are recorded as operating lease ROU assets and operating lease liabilities, which are included in other assets and payables and other liabilities, respectively, on the consolidated balance sheets. Operating lease ROU assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commencement date, as most of the Company’s leases do not provide an implicit rate. ROU assets are further adjusted for lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term and is recorded in general and administrative expenses in the consolidated statements of operations. Operating lease activity is included in operating activities within the consolidated statements of cash flows.
A finance lease is recorded as a leased property or equipment asset with a corresponding finance lease liability at an amount equal to the present value of minimum lease payments at the commencement date. Assets acquired under a finance lease are depreciated on a straight-line basis based on the shorter of the Company’s depreciation policy for owned assets (i.e. useful life) or the lease term. Lease payments are allocated between a reduction of the lease liability and interest expense to produce a constant periodic interest rate on the remaining balance of the lease liability. Interest expense on the lease liability is recognized separately from the amortization of the leased ROU asset in the consolidated statements of operations. Finance lease assets and liabilities are included in property and equipment, net, and payables and other liabilities on the consolidated balance sheets, respectively. Finance lease activity is included in financing activities within the consolidated statements of cash flows.
Derivative Financial Instruments
Derivative instruments are used as part of the overall strategy to manage exposure to market risks primarily associated with fluctuations in interest rates related to originations. The Company recognizes all derivatives at fair value on a recurring basis in other assets and payables and other liabilities on its consolidated balance sheets. The Company treats all of its derivative instruments as economic hedges, therefore none of its derivative instruments are designated as accounting hedges.
Derivative instruments utilized by the Company primarily include interest rate lock commitments (“IRLCs”), loan purchase commitments (“LPCs”), forward Mortgage Backed Securities (“MBS”) purchase commitments, Eurodollar futures, Treasury futures, interest rate swap agreements and interest rate caps.
IRLCs represent an agreement to extend credit to a mortgage loan applicant, or an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to funding. The fair values of mortgage loans held for sale, which are held in inventory awaiting sale into the secondary market, and interest rate lock commitments, are subject to changes in mortgage interest rates from the date of the commitment through the sale of the loan into the secondary market. As a result, the Company is exposed to interest rate risk during the period from the date of the lock commitment through (i) the lock commitment cancellation or expiration date; or (ii) the date of sale into the secondary mortgage market. IRLCs are considered freestanding derivatives and are recorded at fair value at inception. Loan commitments generally range between 30 days and 90 days, and the Company typically sells mortgage loans within 30 days of origination. Changes in fair value subsequent to inception are based on changes in the fair value of the underlying loan, and changes in the probability that the loan will fund within the terms of the commitment. Any changes in fair value are recorded in earnings as a component of net gain on mortgage loans held for sale on the consolidated statement of operations and consolidated statement of cash flows.
Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K 78
The Company uses other derivative financial instruments, primarily forward sales commitments, to manage exposure to interest rate risk and changes in the fair value of IRLCs and mortgage loans held for sale. These commitments are recorded at fair value based on the dealer’s market. The forward sales commitments fix the forward sales price that will be realized in the secondary market and thereby reduce the interest rate and price risk to the Company. The Company’s expectation of the amount of its interest rate lock commitments that will ultimately close is a key factor in determining the notional amount of derivatives used in economically hedging the position. The Company may also enter into commitments to purchase MBS as part of its overall hedging strategy. The estimated fair values of forward MBS are based on the exchange prices. The changes in value on the forward sales commitments and forward sales of MBS are recorded as a charge or credit to net gain on mortgage loans held for sale on the consolidated statement of operations and consolidated statement of cash flows.
The Company also purchases interest rate swaps, Eurodollar futures and Treasury futures to mitigate exposure to interest rate risk related to cash flows on securitized mortgage borrowings.
Intangible Assets
Intangible assets primarily consist of customer relationships and technology acquired through business combinations. Those intangible assets are deemed to have finite useful lives and are amortized either on a straight-line basis over their estimated useful lives (trade name, technology and internally developed software), or on a basis more representative of the time pattern over which the benefit is derived (customer relationships). Intangible assets are recorded at their estimated fair value at the date of acquisition.
Intangible assets with finite useful lives are tested for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable by comparing the carrying value of the assets to the estimated future undiscounted cash flows to be generated by the asset. If an impairment is determined to exist for intangible assets, the carrying value of the asset is reduced to the estimated fair value.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations and is assigned to the reporting unit in which the acquired business will operate. Goodwill is not amortized but is instead subject to impairment testing. The Company evaluates its goodwill for impairment annually as of October 1 of each year or more frequently if impairment indicators arise in accordance with ASC 350, Intangibles - Goodwill and Other. When testing goodwill for impairment, the Company may elect to perform either a qualitative test or a quantitative test to determine if it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value.
During a qualitative analysis, the Company considers the impact of any changes to the following factors: macroeconomic, industry and market factors, cost factors, and changes in overall financial performance, as well as any other relevant events and uncertainties impacting a reporting unit. If the qualitative assessment does not conclude that it is more likely than not that the estimated fair value of the reporting unit is greater than the carrying value, the Company performs a quantitative analysis. In a quantitative test, the carrying value of the reporting unit is compared to its estimated fair value.
In a quantitative test, the fair value of a reporting unit is determined based on a discounted cash flow analysis and further analyzed using other methods of valuation. A discounted cash flow analysis requires the Company to make various assumptions, including assumptions about future cash flows, growth rates and discount rates. The assumptions about future cash flows and growth rates are based on the Company’s long-term projections by reporting unit. In addition, an assumed terminal value is used to project future cash flows beyond base years. Assumptions used in the Company’s impairment testing are consistent with its internal forecasts and operating plans. The discount rate is based on the Company’s debt and equity balances, adjusted for current market conditions and investor expectations of return on the Company’s equity. If the fair value of a reporting unit exceeds its carrying amount, there is no impairment. If not, the Company compares the fair value of the reporting unit with its carrying amount. To the extent the carrying amount of the reporting unit exceeds its fair value, a write-down of the reporting unit’s goodwill would be necessary.
Revenue Recognition
ASC 606, Revenue from Contracts with Customers, establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers as performance obligations are satisfied in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for those goods or services. The majority of the Company’s revenue-generating transactions in the Servicing and Originations segments, including revenue generated from financial instruments, such as the Company’s loans and derivatives, as well as revenue related to the Company’s mortgage servicing activities, are not within the scope of ASC 606 as these activities are subject to other GAAP discussed elsewhere within the Company’s disclosures. All revenues from Xome fall within the scope of ASC 606.
79 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
Revenues from Servicing Activities
•Revenues from Forward Servicing Activities - Service related revenues primarily include contractually specified servicing fees, late charges, prepayment penalties, fair value adjustments, and other ancillary revenues. The servicing fees are based on a contractual percentage of the outstanding principal balance and recognized as revenue as earned during the life of the loan. Corresponding loan servicing costs are charged to expense as incurred. The Company recognizes ancillary revenues and earnings on float as they are earned.
In addition, the Company receives various fees in the course of providing servicing on its various portfolios. These fees include modification fees for modifications performed outside of government programs, modification fees for modifications pursuant to various government programs, and incentive fees for servicing performance on specific government-sponsored entities (“GSE”) portfolios. Fees recorded on modifications of mortgage loans serviced by the Company for others are recognized on collection and are recorded as a component of revenues - service related, net. Fees recorded on modifications pursuant to various government programs are recognized based upon completion of all necessary steps by the Company and the minimum loan performance time frame to establish eligibility for the fee. Revenue earned on modifications pursuant to various government programs is included as a component of revenues - service related, net. Incentive fees for servicing performance on specific GSE portfolios are recognized as various incentive standards are achieved and are recorded as a component of revenues - service related, net.
Fair value adjustments related to MSRs, excess spread financing and MSRs financing are recorded as component of revenue – service related, net.
The Company also acts as a subservicer for certain parties that own the underlying servicing rights and receives subservicing fees, which are typically a stated monthly fee per loan that varies based on types of loans. Fees related to the subserviced portfolio are accrued in the period the services are performed.
Net gain on mortgage loans held for sale includes the realized and unrealized gains and losses on sales of mortgage loans and the fair market value adjustments related to mortgage loans held for sale.
•Revenues from Reverse Mortgage Servicing and Reverse Mortgage Interests - The Company performs servicing of reverse mortgage loans, similar to its forward servicing business, and receives servicing fees from investors, which are recorded in revenues - service related, net in the consolidated statements of operations. For reverse mortgage interests, where the Company records entire participating interest in HECM loans, the Company accrues interest in accordance with FHA guidelines and records interest income on the consolidated statements of operations.
Revenues from Origination Activities
•Revenues from Origination and other loan fees - Loan origination and other loan fees generally represent flat, per-loan fee amounts and are recognized as revenue, net of loan origination costs, at the time the loans are funded.
•Net gain on mortgage loans held for sale - Net gain on loans held for sale includes the realized and unrealized gains and losses on sales of mortgage loans, as well as the changes in fair value of all loan-related derivatives, including interest rate lock commitments.
Revenues from Xome
Xome’s operations are comprised of Exchange, Title and Solutions, as follows:
•Exchange is a national technology-enabled platform that manages and sells residential properties through its Xome.com platform. Revenue-generating activities include commission and buyer’s premium of winning bids on auctioned real estate owned (“REO”) and short sale properties. Revenue is recognized when the performance obligation is completed, which is at the closing of real estate transactions and there is transfer of ownership to the buyer.
•Title and Solutions connect the major touch points of the real estate transactions process by providing title, escrow, collateral valuation and field services for purchase, refinance and default transactions. Major revenue-generating activities include title and escrow services and valuation services. Revenue is recognized when the performance obligation is completed, which is when services are rendered to customers.
Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K 80
Reserves for Origination Activity
The Company provides for reserves, included within payables and accrued liabilities, in connection with loan origination activities. Reserves on loan origination activities primarily include reserves for the repurchase of loans from GSEs, GNMA, and third-party investors primarily due to delinquency or foreclosure and are initially recorded upon sale of the loan to a third party with subsequent reserves recorded based on repurchase demands. The provision for reserves associated with loan origination activities is a component of net gain on mortgage loans held for sale in the consolidated statements of operations.
The Company utilizes internal models to estimate reserves for loan origination activities based upon its expectation of future defaults and the historical defect rate for government insured loans and is based upon judgments and assumptions which can be influenced by many factors and may change over the life of the underlying loans, including: (i) historical loss rate, (ii) secondary market pricing of loans; (iii) home prices and the levels of home equity; (iv) the quality of Company’s underwriting procedures; (v) borrower delinquency and default patterns; and (vi) other Company-specific and macro-economic factors. On a quarterly basis, management corroborates these assumptions using third-party data, where applicable.
Reserves for Forward Servicing Activity
In connection with forward loan servicing activities, the Company records reserves primarily for the recoverability of advances, interest claims, and mortgage insurance claims. Reserves for advances and other receivables associated with loans in the MSR portfolio are considered within the MSR valuation, and the provision expense for such advances is recorded in the mark-to-market adjustment in revenues - service related, net in the consolidated statement of operations. Such valuation gives consideration to the expected cash outflows and inflows for advances and other receivables in accordance with the fair value framework. Reserves for advances and other receivables on loans transferred out of the MSR portfolio are established within advances and other receivables, net. As loans serviced transfer out of the MSR portfolio, any negative MSR value associated with the loans transferred is reclassified from the MSR to the reserve within advances and other receivables, net, to the extent such reserves continue to be required for balances remaining on the consolidated balance sheets. Management evaluates reserves for sufficiency each reporting period and any additional reserve requirements are recorded as a provision in general and administrative expense, as needed.
The Company records reserves for advances and other receivables and evaluates the sufficiency of such reserves through internal models considering both historical and expected recovery rates on claims filed with government agencies, government sponsored enterprises, vendors, prior servicer and other counterparties. Key assumptions used in the model include but are not limited to expected recovery rates by loan types and aging of the receivable. Recovery of advances and other receivables is subject to judgment based on the Company’s assessment of its compliance with servicing guidelines, its ability to produce the necessary documentation to support claims, its ability to support amounts from prior servicers and to effectively negotiate settlements, as needed. Management reviews recorded advances and other receivables and upon determination that no further recourse for recovery is available from all means known to management, the recorded balances associated with these receivables are written-off against the reserve.
Reserves for Reverse Mortgage Interests
The Company records a reserve for reverse mortgage interests based on unrecoverable costs and estimates of probable loss exposures. The Company estimates reserve requirements upon the realization of a triggering event indicating a probable loss exposure. Internal models are utilized to estimate loss exposures at the loan level associated with the Company’s ability to meet servicing guidelines set forth by regulatory agencies and GSEs. Key assumptions within the models include but are not limited to expected recovery rates by loan and borrower characteristics, foreclosure timelines, value of underlying collateral, future carrying and foreclosure costs, and other macro-economic factors. If the calculated reserve requirements exceed the recorded allowance for reserves and discounts, a provision is recorded to general and administrative expense, as needed. Releases to reserves are also recorded against provision in general and administrative expenses. Reserve requirements are subject to significant judgment and estimates based on the Company’s assessment of its compliance with servicing guidelines and its ability to produce the necessary documentation to support claims, support amounts from prior servicers and to effectively negotiate settlements, as needed. Each period, management reviews recorded reverse mortgage interests and upon determination that no further recourse for recovery is available from all means known to management, the recorded balances associated with these receivables are written-off against the reserve at the loan level.
Credit Loss Reserves
ASC 326 – Financial Instruments – Credit Losses requires expected credit losses for financial instruments held at the reporting date to be measured based on historical experience, current conditions and reasonable and supportable forecasts, which is referred to as the current expected credit loss, or CECL, methodology. The new standard reflects management’s best estimate of all expected credit losses for the Company’s financial assets that are recognized at amortized cost. The revised CECL methodology considers expected lifetime loss rates calculated from historical data using a weighted average life and considering reasonable and supportable forecasts to determine the current expected credit loss required.
81 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
The Company determined that reverse mortgage interests, net of reserves, advances and other receivables, net of reserves, and certain financial instruments included in other assets are within the scope of ASU 2016-13. Certain financial instruments within these respective line items have been determined to have limited expected credit-related losses due to the contractual servicing agreements with agencies and loan product guarantees.
For advances and other receivables, net, the Company determined that the majority of estimated losses are due to servicing operational errors, and credit-related losses are not significant because of the contractual relationships with the agencies. The Company determined that the credit-related risk associated with certain applicable financial instruments can increase with the passage of time. The CECL reserve methodology considers these financial instruments collectible to a point in time of 39 months. Any projected remaining balance at the end of the collection period is considered a loss and factors into the overall CECL loss rate required.
For reverse mortgage interests, net, the Company determined that the guarantee from the FHA on HECM loan products limits credit-related losses to an immaterial amount with substantially all losses related to servicing operational errors. Any expected credit-related losses are contemplated in the Company’s existing reserve methodology due to the nature of this financial instrument. The credit-risk characteristics of reverse mortgage interests do not vary with time as the financial instruments have no contractual life or financial profile as the primary counterparty is the government agency insuring the loans.
For other assets, primarily trade receivables and service fees earned but not received, the Company determined that these are short-term in nature (less than one year), and the estimated credit-related losses over the life of these receivables are similar to those resulting from the Company’s existing loss reserve process. The Company monitors the financial status of customers to determine if any specific loss considerations are required.
Variable Interest Entities
In the normal course of business, the Company enters into various types of on- and off-balance sheet transactions with special purpose entities (“SPEs”), which primarily consist of securitization trusts established for a limited purpose. Generally, these SPEs are formed for the purpose of securitization transactions in which the Company transfers assets to an SPE, which then issues to investors various forms of debt obligations supported by those assets. In these securitization transactions, the Company typically receives cash and/or other interests in the SPE as proceeds for the transferred assets. The Company will typically retain the right to service the transferred receivables and to repurchase the transferred receivables from the SPE if the outstanding balance of the receivables falls to a level where the cost exceeds the benefits of servicing the transferred receivables.
The Company evaluates its interests in each SPE for classification as a Variable Interest Entity (“VIE”). When an SPE meets the definition of a VIE and the Company determines that the Company is the primary beneficiary, the Company includes the SPE in its consolidated financial statements.
The Company consolidates SPEs connected with both forward and reverse mortgage activities. See Note 13, Securitizations and Financings, for more information on Company SPEs, and Note 12, Indebtedness, for certain debt activity connected with SPEs.
Securitizations and Asset-Backed Financing Arrangements
The Company and its subsidiaries have been a transferor in connection with a number of securitizations and asset-backed financing arrangements. The Company has continuing involvement with the financial assets of the securitizations and the asset-backed financing arrangements. The Company has aggregated these transactions into two groups: (1) securitizations of residential mortgage loans accounted for as sales and (2) financings of advances on loans serviced for others accounted for as secured borrowings.
Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K 82
Securitizations Treated as Sales
The Company’s continuing involvement typically includes acting as servicer for the mortgage loans held by the trust and holding beneficial interests in the trust. The Company’s responsibilities as servicer include, among other things, collecting monthly payments, maintaining escrow accounts, providing periodic reports and managing insurance in exchange for a contractually specified servicing fee. The beneficial interests held consist of both subordinate and residual securities that were retained at the time of securitization. These securitizations generally do not result in consolidation of the VIE as the beneficial interests that are held in the unconsolidated securitization trusts have no value and no potential for significant cash flows in the future. In addition, at December 31, 2020, the Company had no other significant assets in its consolidated financial statements related to these trusts. The Company has no obligation to provide financial support to unconsolidated securitization trusts and has provided no such support. The creditors of the trusts can look only to the assets of the trusts themselves for satisfaction of the debt issued by the trusts and have no recourse against the assets of the Company. The general creditors of the Company have no claim on the assets of the trusts. The Company’s exposure to loss as a result of its continuing involvement with the trusts is limited to the carrying values, if any, of its investments in the residual and subordinate securities of the trusts, the MSRs that are related to the trusts and the advances to the trusts. The Company considers the probability of loss arising from its advances to be remote because of their position ahead of most of the other liabilities of the trusts. See Note 4, Advances and Other Receivables, and Note 3, Mortgage Servicing Rights and Related Liabilities, for additional information regarding advances and MSRs.
Financings
The Company transfers advances on loans serviced for others to SPEs in exchange for cash. The Company consolidates these SPEs because the Company is the primary beneficiary of the VIE.
These VIEs issue debt supported by collections on the transferred advances. The Company made these transfers under the terms of its advance facility agreements. The Company classifies the transferred advances on its consolidated balance sheets as advances and classifies the related liabilities as advance facilities and other nonrecourse debt. The SPEs use collections of the pledged advances to repay principal and interest and to pay the expenses of the entity. Holders of the debt issued by these entities can look only to the assets of the entities themselves for satisfaction of the debt and have no recourse against the Company.
Financings include the HMBS and private securitization trusts as previously discussed.
Loans Subject to Repurchase Rights from Ginnie Mae
For certain forward loans sold to GNMA, the Company as the issuer has the unilateral right to repurchase, without GNMA’s prior authorization, any individual loan in a GNMA securitization pool if that loan meets certain criteria, including payments not being received from borrowers for greater than 90 days. Once the Company has the unilateral right to repurchase a delinquent loan, the Company has effectively regained control over the loan, and under GAAP, must recognize the right to the loan in its consolidated balance sheets and establish a corresponding repurchase liability regardless of the Company’s intention to repurchase the loan. The Company records the right to purchase these mortgage loans in other assets at their unpaid principal balances, which approximate fair value, and records a corresponding liability in payables and other liabilities for mortgage loans eligible for repurchase in its consolidated balance sheets.
Interest Income
Interest income is recognized on loans held for sale for the period from loan funding to sale, which is typically within 30 days. Loans are placed on non-accrual status when any portion of the principal or interest is greater than 90 days past due. Loans return to accrual status when the principal and interest become current and it is probable that the amounts are fully collectible. For individual loans that have been modified, a period of six timely payments is required before the loan is returned to an accrual basis.
Interest income also includes interest earned on custodial cash deposits associated with the mortgage loans serviced, and interest earned on reverse mortgage interests. Reverse mortgage interests accrue interest income in accordance with FHA guidelines.
Share-Based Compensation
Share-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant) on a straight-line basis in salaries, wages and benefits within the consolidated statements of operations.
83 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
Advertising Costs
Advertising costs are expensed as incurred and are included as part of general and administrative expenses. The Company incurred advertising costs of $38, $33 and $17 for the years ended December 31, 2020 and 2019 and five months ended December 31, 2018, respectively. The Predecessor incurred advertising costs of $33 for the seven months ended July 31, 2018.
Income Taxes
The Company is subject to the income tax laws of the U.S., its states and municipalities and several U.S. territories. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities.
Deferred income taxes are determined using the balance sheet method. Deferred taxes are recognized for the future tax consequences attributable to differences between the consolidated financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.
The Company regularly reviews the carrying amount of its deferred tax assets to determine if the establishment of a valuation allowance is necessary. If based on the available evidence, it is more likely than not that all or a portion of the Company’s deferred tax assets will not be realized in future periods, a deferred tax valuation allowance is established. Consideration is given to various positive and negative evidence that could affect the realization of the deferred tax assets. In evaluating this available evidence, management considers, among other things, historical financial performance, expectation of future earnings, length of statutory carryforward periods, experience with operating tax loss and tax credit carryforwards which may expire unused, the use of tax planning strategies and the timing of reversals of temporary differences. The Company’s evaluation is based on current tax laws as well as management’s expectations of future performance.
The Company initially recognizes tax positions in the consolidated financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority, assuming the tax authority has full knowledge of the position and all relevant facts. In establishing a provision for income tax expense, the Company makes judgments and interpretations about the application of these inherently complex tax laws. The Company recognizes interest and penalties related to uncertain tax positions as a component of provisions for income taxes in accordance with ASC 740.
Earnings Per Share
The Company computes earnings per share using the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. The Series A Preferred Stock is considered participating securities because it has dividend rights determined on an as-converted basis in the event of Company’s declaration of a dividend or distribution for common shares.
Basic net income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income per common share is computed by dividing net income available to common stockholders by the sum of the weighted average number of common shares outstanding and any dilutive securities for the period.
Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K 84
3. Mortgage Servicing Rights and Related Liabilities
The following table sets forth the carrying value of the Company’s MSRs and the related liabilities. In estimating the fair value of certain servicing rights and related liabilities, the impact of forbearance due tothe COVID-19 pandemic was considered in the determination of key assumptions.
| | | | | | | | | | | |
| Successor |
MSRs and Related Liabilities | December 31, 2020 | | December 31, 2019 |
Forward MSRs - fair value | $ | 2,703 | | | $ | 3,496 | |
Reverse MSRs - amortized cost | 5 | | | 6 | |
Mortgage servicing rights | $ | 2,708 | | | $ | 3,502 | |
| | | |
Mortgage servicing liabilities - amortized cost | $ | 41 | | | $ | 61 | |
| | | |
Excess spread financing - fair value | $ | 934 | | | $ | 1,311 | |
Mortgage servicing rights financing - fair value | 33 | | | 37 | |
MSR related liabilities - nonrecourse at fair value | $ | 967 | | | $ | 1,348 | |
Mortgage Servicing Rights
The Company owns and records at fair value the rights to service traditional residential mortgage (“forward”) loans for others either as a result of purchase transactions or from the retained servicing associated with the sales and securitizations of loans originated. MSRs are comprised of servicing rights of both agency and non-agency loans.
The following table sets forth the activities of forward MSRs:
| | | | | | | | | | | |
| Successor |
| Year Ended December 31, |
Forward MSRs - Fair Value | 2020 | | 2019 |
Fair value - beginning of year | $ | 3,496 | | | $ | 3,665 | |
Additions: | | | |
Servicing retained from mortgage loans sold | 687 | | | 434 | |
Purchases of servicing rights(1) | 124 | | | 858 | |
Dispositions: | | | |
Sales of servicing assets | (9) | | | (408) | |
Changes in fair value: | | | |
Changes in valuation inputs or assumptions used in the valuation model | (889) | | | (589) | |
Other changes in fair value | (706) | | | (464) | |
Fair value - end of year | $ | 2,703 | | | $ | 3,496 | |
(1)Purchases of servicing rights during the year ended December 31, 2019 include $271 of mortgage servicing rights that were acquired from Pacific Union. See Note 1, Nature of Business and Basis of Presentation, for further discussion. In addition, in 2019, the Company entered into a subservicing contract, resulting in additional $253 servicing rights during the second quarter of 2019.
From time to time, the Company sells its ownership interest in certain MSRs and is retained as the subservicer for the sold assets. The Company has evaluated the sale accounting requirements related to these transactions, including the Company’s continued involvement as the subservicer, and concluded that these transactions qualify for sale accounting treatment. During the years ended December 31, 2020 and 2019, the Company sold $1,070 and $35,152 in unpaid principal balance of forward MSRs, of which $960 and $20,560 was retained by the Company as subservicer, respectively.
85 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
MSRs measured at fair value are segregated between investor type into agency and non-agency pools (referred to herein as “investor pools”) based upon contractual servicing agreements with investors at the respective balance sheet date to evaluate the MSR portfolio and fair value of the portfolio. Agency investors primarily consist of GSEs, such as the Federal National Mortgage Association (“Fannie Mae” or “FNMA”) and the Federal Home Loan Mortgage Corp (“Freddie Mac” or “FHLMC”), and the Government National Mortgage Association (“Ginnie Mae” or “GNMA”). Non-agency investors consist of investors in private-label securitizations.
The following table provides a breakdown of UPB and fair value for the Company’s forward MSRs:
| | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| December 31, 2020 | | December 31, 2019 |
Forward MSRs - UPB and Fair Value Breakdown | UPB | | Fair Value | | UPB | | Fair Value |
Investor Pools | | | | | | | |
Agency | $ | 227,136 | | | $ | 2,305 | | | $ | 240,688 | | | $ | 2,944 | |
Non-agency | 44,053 | | | 398 | | | 56,094 | | | 552 | |
Total | $ | 271,189 | | | $ | 2,703 | | | $ | 296,782 | | | $ | 3,496 | |
Refer to Note 17, Fair Value Measurements, for further discussion on key weighted-average inputs and assumptions used in estimating the fair value of forward MSRs.
The following table shows the hypothetical effect on the fair value of the Company’s forward MSRs when applying certain unfavorable variations of key assumptions to these assets for the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| Discount Rate | | Total Prepayment Speeds | | Cost to Service per Loan |
Forward MSRs - Hypothetical Sensitivities | 100 bps Adverse Change | | 200 bps Adverse Change | | 10% Adverse Change | | 20% Adverse Change | | 10% Adverse Change | | 20% Adverse Change |
December 31, 2020 | | | | | | | | | | | |
Mortgage servicing rights | $ | (100) | | | $ | (192) | | | $ | (181) | | | $ | (347) | | | $ | (45) | | | $ | (89) | |
| | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | |
Mortgage servicing rights | $ | (127) | | | $ | (245) | | | $ | (165) | | | $ | (317) | | | N/A | | N/A |
These hypothetical sensitivities should be evaluated with care. The effect on fair value of a 10% adverse change in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.
Reverse Mortgage Servicing Rights and Liabilities - Amortized Cost
The Company services certain HECM reverse mortgage loans with an unpaid principal balance of $18,091 and $22,725 as of December 31, 2020 and 2019, respectively. The following table sets forth the activities of reverse MSRs and mortgage servicing liabilities (“MSL”):
| | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| Year Ended December 31, |
| 2020 | | 2019 |
Reverse MSRs and Liabilities - Amortized Cost | Assets | | Liabilities | | Assets | | Liabilities |
Balance - beginning of year | $ | 6 | | | $ | 61 | | | $ | 11 | | | $ | 71 | |
Amortization/accretion | (1) | | | (20) | | | (1) | | | (47) | |
Adjustments(1) | 0 | | | 0 | | | (4) | | | 37 | |
Balance - end of year | $ | 5 | | | $ | 41 | | | $ | 6 | | | $ | 61 | |
Fair value - end of year | $ | 6 | | | $ | 37 | | | $ | 6 | | | $ | 28 | |
(1)Reverse MSR and MSL net adjustments recorded by the Company during the year ended December 31, 2019 primarily relate to the finalization of the preliminary fair value estimates recorded in connection with the Merger.
Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K 86
Management evaluates reverse MSRs and MSLs each reporting period for impairment. Based on management’s assessment at December 31, 2020 and 2019, 0 impairment or increased obligation was needed.
Excess Spread Financing - Fair Value
In order to finance the acquisition of certain MSRs on various portfolios, the Company previously entered into sale and assignment agreements with third parties and sold to these entities the right to receive a specified percentage of the excess cash flow generated from the portfolios in excess of a fixed base servicing fee per loan. The Company retains all the base servicing fee, ancillary income and interest float earnings on principal along with interest payments and escrow, and also incurs costs to service the specified pool. The Company is the legal owner and the servicer of the portfolios and provides all servicing and advancing functions.
In connection with the above transactions, the Company entered into refinanced loan obligations with third parties that require the Company to transfer the new loan or a replacement loan of similar economic characteristics into the respective portfolio if the Company refinances any loan in the portfolio. The new or replacement loan will be governed by the same terms set forth in the sale and assignment agreement described above.
The Company had excess spread financing liability of $934 and $1,311 as of December 31, 2020 and 2019, respectively.
Refer to Note 17, Fair Value Measurements, for further discussion on key weighted-average inputs and assumptions used in the valuation of excess spread financing.
The following table shows the hypothetical effect on the Company’s excess spread financing fair value when applying certain unfavorable variations of key assumptions to these liabilities for the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| Discount Rate | | Prepayment Speeds |
Excess Spread Financing - Hypothetical Sensitivities | 100 bps Adverse Change | | 200 bps Adverse Change | | 10% Adverse Change | | 20% Adverse Change |
December 31, 2020 | | | | | | | |
Excess spread financing | $ | 30 | | | $ | 62 | | | $ | 41 | | | $ | 84 | |
| | | | | | | |
December 31, 2019 | | | | | | | |
Excess spread financing | $ | 46 | | | $ | 95 | | | $ | 46 | | | $ | 96 | |
These hypothetical sensitivities should be evaluated with care. The effect on fair value of a 10% variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects. Also, a positive change in the above assumptions would not necessarily correlate with the corresponding decrease in the net carrying amount of the excess spread financing. Excess spread financing’s cash flow assumptions that are utilized in determining fair value are based on the related cash flow assumptions used in the financed MSRs. Any fair value change recognized in the financed MSRs attributable to related cash flows assumptions would inherently have an inverse impact on the carrying amount of the related excess spread financing.
Mortgage Servicing Rights Financing - Fair Value
The Company had MSR financing liability of $33 and $37 as of December 31, 2020 and 2019, respectively. Refer to Note 2, Significant Accounting Policies, for further discussion on MSR financing, and Note 17, Fair Value Measurements, for further discussion on key weighted-average inputs and assumptions used in the valuation of the MSR financing liability.
87 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
Servicing Segment Revenues
The following table sets forth the items comprising total revenues for the Servicing segment:
| | | | | | | | | | | |
| Successor |
| Year Ended December 31, |
Total Revenues - Servicing | 2020 | | 2019 |
Contractually specified servicing fees(1) | $ | 1,141 | | | $ | 1,194 | |
Other service-related income(1) | 290 | | | 182 | |
Incentive and modification income(1) | 39 | | | 40 | |
Late fees(1) | 83 | | | 110 | |
Reverse servicing fees | 24 | | | 31 | |
Mark-to-market adjustments(2) | (679) | | | (505) | |
Counterparty revenue share(3) | (371) | | | (284) | |
Amortization, net of accretion(4) | (420) | | | (236) | |
Total revenues - Servicing | $ | 107 | | | $ | 532 | |
(1)The Company recognizes revenue on an earned basis for services performed. Amounts include subservicing related revenues.
(2)Mark-to-market (“MTM”) adjustments include fair value adjustments on MSR, excess spread financing and MSR financing liabilities. The amount of MSR MTM includes the impact of negative modeled cash flows which have been transferred to reserves on advances and other receivables. The negative modeled cash flows relate to advances and other receivables associated with inactive and liquidated loans that are no longer part of the MSR portfolio. The impact of negative modeled cash flows was $28 and $62 for the years ended December 31, 2020 and 2019, respectively.
(3)Counterparty revenue share represents the excess servicing fee that the Company pays to the counterparties under the excess spread financing arrangements and the payments made associated with MSR financing arrangements.
(4)Amortization for the Company is net of excess spread accretion of $338 and $243 and MSL accretion of $20 and $47 for the years ended December 31, 2020 and 2019, respectively.
4. Advances and Other Receivables
Advances and other receivables, net consists of the following:
| | | | | | | | | | | |
| Successor |
Advances and Other Receivables, Net | December 31, 2020 | | December 31, 2019 |
Servicing advances, net of $72 and $131 purchase discount, respectively | $ | 975 | | | $ | 970 | |
Receivables from agencies, investors and prior servicers, net of $21 and $21 purchase discount, respectively | 173 | | | 193 | |
Reserves | (208) | | | (175) | |
Total advances and other receivables, net | $ | 940 | | | $ | 988 | |
The Company, as loan servicer, is contractually responsible to advance funds on behalf of the borrower and investor primarily for loan principal and interest, property taxes, hazard insurance, and foreclosure costs. Advances are primarily recovered through reimbursement from the investor, proceeds from sale of loan collateral, or mortgage insurance claims. Reserves for advances and other receivables on loans transferred out of the MSR portfolio are established within advances and other receivables.
Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K 88
The following table sets forth the activities of the servicing reserves for advances and other receivables:
| | | | | | | | | | | |
| Successor |
| Year Ended December 31, |
Reserves for Advances and Other Receivables | 2020 | | 2019 |
Balance - beginning of year(1) | $ | 168 | | | $ | 47 | |
Provision and other additions(2) | 108 | | | 160 | |
Write-offs | (68) | | | (32) | |
Balance - end of year | $ | 208 | | | $ | 175 | |
(1)As described in Note 1, Nature of Business and Basis of Presentation, the Company recorded a transition adjustment of $7 to the advances and other receivables reserve as of January 1, 2020 for the cumulative effect of adopting ASU 2016-13.
(2)The Company recorded a provision of $28 and $62 through the MTM adjustments in revenues - service related, net, in the consolidated statements of operations during the years ended December 31, 2020 and 2019, respectively, for inactive and liquidated loans that are no longer part of the MSR portfolio. Other additions represent reclassifications of required reserves provisioned within other balance sheet accounts as associated serviced loans become inactive or liquidate.
Purchase Discount for Advances and Other Receivables
In connection with previous acquisitions, the Company recorded the acquired advances and other receivables at estimated fair value as of the acquisition date, which resulted in a purchase discount. As of December 31, 2020, a total of $228 purchase discount has been utilized, with $93 purchase discount remaining.
The following table sets forth the activities of the purchase discount for advances and other receivables:
| | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
Purchase Discount for Advances and Other Receivables | Servicing Advances | | Receivables from Agencies, Investors and Prior Servicers | | Servicing Advances | | Receivables from Agencies, Investors and Prior Servicers |
Balance - beginning of year | $ | 131 | | | $ | 21 | | | $ | 205 | | | $ | 48 | |
Addition from acquisition | 0 | | | 0 | | | 19 | | | 0 | |
Utilization of purchase discounts | (59) | | | 0 | | | (93) | | | (27) | |
Balance - end of year | $ | 72 | | | $ | 21 | | | $ | 131 | | | $ | 21 | |
Credit Loss for Advances and Other Receivables
As described in Note 1, Nature of Business and Basis of Presentation, advances and other receivables are within the scope of ASU 2016-13, and the Company modified its accounting policy regarding its assessment of reserves for credit-related losses in accordance with CECL framework. During the year ended December 31, 2020, the Company increased the CECL reserve by $21. As of December 31, 2020, the total CECL reserve was $38, of which $21 and $17 was recorded in reserves and purchase discount for advances and other receivables, respectively.
Based upon the Company’s application of ASU 2016-13, the Company determined that the credit-related risk associated with applicable financial instruments typically increase with the passage of time. The CECL reserve methodology considers these financial instruments collectible to a point in time of 39 months. Any projected remaining balance at the end of the collection period is considered a loss and factors into the overall CECL loss rate required.
5. Reverse Mortgage Interests
Reverse mortgage interests, net, consists of the following:
| | | | | | | | | | | |
| Successor |
Reverse Mortgage Interests, Net | December 31, 2020 | | December 31, 2019 |
Participating interests in HECM mortgage-backed securities | $ | 3,471 | | | $ | 4,282 | |
Unsecuritized interests | 964 | | | 1,117 | |
Other interests securitized | 945 | | | 994 | |
Purchase discount, net | (127) | | | (114) | |
Total reverse mortgage interests, net | $ | 5,253 | | | $ | 6,279 | |
89 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
Participating Interests in HMBS
Participating interests in HMBS consist of the Company’s reverse mortgage interests in HECM loans which have been transferred to GNMA and subsequently securitized through the issuance of HMBS. The Company does not own these loans, but due to HMBS program buyout requirements, such interests are consolidated in the Company’s consolidated balance sheets. The Company does not originate reverse mortgages, but during the years ended December 31, 2020 and 2019, a total of $173 and $265 in UPB associated with new draws on existing loans were transferred to GNMA and securitized by the Company, respectively.
In March 2019, the Company entered into an agreement with Fannie Mae for the transfer of reverse mortgage loans. As a result, $61 was transferred from Fannie Mae and securitized into GNMA HMBS during the year ended December 31, 2019. There was 0 such activity during the year ended December 31, 2020.
Other Interests Securitized
Other interests securitized consist of reverse mortgage interests that no longer meet HMBS program eligibility criteria primarily because they are equal to or greater than 98% of their MCA, which is established at origination and in accordance with HMBS program guidelines, requiring a repurchase of loans from the respective HMBS trust. These reverse mortgage interests have subsequently been transferred to private securitization trusts and are accounted for as a secured borrowing. During the year ended December 31, 2020, the Company securitized a total of $516 UPB through Trust 2020-1 and called a total of $337 UPB from Trust 2018-2 and Trust 2018-3 with the related debt being extinguished. During the year ended December 31, 2019, the Company securitized a total of $751 UPB through Trust 2019-1 and Trust 2019-2 and called a total of $476 UPB from Trust 2017-2 and Trust 2018-1 with the related debt being extinguished. The Company sold $20 UPB of Trust 2018-3 retained bonds during the year ended December 31, 2019. Refer to Other Nonrecourse Debt in Note 12, Indebtedness, for additional information.
Unsecuritized Interests
Unsecuritized interests in reverse mortgages consists of the following:
| | | | | | | | | | | |
| Successor |
Unsecuritized Interests | December 31, 2020 | | December 31, 2019 |
Repurchased HECM loans (exceeds 98% MCA) | $ | 665 | | | $ | 789 | |
HECM related receivables(1) | 208 | | | 250 | |
Funded borrower draws not yet securitized | 72 | | | 64 | |
REO related receivables | 19 | | | 14 | |
Total unsecuritized interests | $ | 964 | | | $ | 1,117 | |
(1)HECM related receivables consist primarily of receivables from FNMA for corporate advances and service fees and claims receivables from HUD on reverse mortgage interests.
Unsecuritized interests include repurchased HECM loans for which the Company is required to repurchase from the HMBS pool when the outstanding principal balance of the HECM loan is equal to or greater than 98% of the MCA established at origination in accordance with HMBS program guidelines. These unsecuritized interests are primarily financed through available warehouse lines. The Company repurchased a total of $1,153 and $2,333 of HECM loans out of GNMA HMBS securitizations during the years ended December 31, 2020 and 2019, respectively, of which $306 and $616 were subsequently assigned to a third party in accordance with applicable servicing agreements, respectively. To the extent a loan is not subject to applicable servicing agreements and assigned to a third party, the loan is either subject to assignment to HUD, per contractual obligations with GNMA, liquidated via a payoff from the borrower or liquidated via a foreclosure according to the terms of the underlying mortgage. The Company assigned a total of $771 and $1,819 of HECM loans to HUD during the years ended December 31, 2020 and 2019, respectively.
Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K 90
Purchase Discount, net, for Reverse Mortgage Interests
In connection with the Merger, the Company recorded the acquired reverse mortgage interests at estimated fair value as of the acquisition date, which resulted in a net purchase discount of $256 associated with financial and operational losses on reverse mortgage interests associated with servicing the loans through foreclosure and collateral liquidation. The premium and discount are amortized and accreted, respectively, based on the effective yield method, whereby the Company updates its prepayment assumptions for actual prepayments on a quarterly basis. Consistent with the Company’s accounting policy, the Company calculates reserve requirements on the reverse mortgage interests portfolio each reporting period and compares such calculated reserve requirements against the remaining net purchase discount. If the calculated reserve requirements exceed the remaining net purchase discount, the Company will record an additional reserve and associated provision to general and administrative expense. No additional reserves were required to be recorded as of December 31, 2020.
The following table sets forth the activities of the purchase discounts, net, for reverse mortgage interests:
| | | | | | | | | | | |
| Successor |
| Year Ended December 31, |
Purchase Discount, Net, for Reverse Mortgage Interests(1) | 2020 | | 2019 |
Balance - beginning of year | $ | (114) | | | $ | (164) | |
Amortization, net of accretion | (44) | | | (22) | |
Utilization of purchase discounts(2) | 31 | | | 96 | |
Adjustments(3) | 0 | | | (24) | |
Balance - end of year | $ | (127) | | | $ | (114) | |
(1)Net position as certain items are in a premium/(discount) position, based on the characteristics of underlying tranches of loans.
(2)Utilization of purchase discounts to mitigate loss on liquidated loans, for which the remaining receivable was written-off.
(3)Adjustments during the year ended December 31, 2019 is due to revised cost to service assumption utilized in the valuation of reverse mortgage assets and liabilities acquired from the Merger.
Credit Loss for Reverse Mortgage Interests
As described in Note 1, Nature of Business and Basis of Presentation, reverse mortgage interests are within the scope of ASU 2016-13, requiring an assessment of reserves regarding credit-related losses in accordance with the CECL framework. Upon applying ASU 2016-13, the Company determined that credit-related losses are immaterial given the government insured nature of the HECM loan product. Any expected credit-related losses are contemplated in the Company’s existing reserve methodology due to the nature of this financial instrument. Accordingly, no cumulative effect adjustment was required upon adoption of ASU 2016-13 on January 1, 2020 and no additional CECL reserve was recorded as of December 31, 2020. The credit-risk characteristics of reverse mortgage interests do not vary with time as the financial instruments have no contractual life or financial profile as the primary counterparty is the government agency insuring the loans.
Reverse Mortgage Interests Income
The Company accrues interest income for its participating interest in reverse mortgages based on the stated rates underlying HECM loans and FHA guidelines. Total interest earned on the Company’s reverse mortgage interests was $200 and $307 for the years ended December 31, 2020 and 2019, respectively.
6. Mortgage Loans Held for Sale
Mortgage Loans Held for Sale
The Company maintains a strategy of originating and purchasing residential mortgage loan products primarily for the purpose of selling to GSEs or other third-party investors in the secondary market on a servicing-retained basis. The Company purchases closed loans through its correspondent channel and assists customers currently in the Company’s servicing portfolio with refinancing of loans or new home purchases through its Direct to Consumer channel. Generally, all newly originated mortgage loans held for sale are securitized and transferred to GSEs or delivered to third-party purchasers shortly after origination on a servicing-retained basis.
91 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
Mortgage loans held for sale are recorded at fair value as set forth below:
| | | | | | | | | | | |
| Successor |
| Year Ended December 31, |
Mortgage Loans Held for Sale | 2020 | | 2019 |
Mortgage loans held for sale - UPB | $ | 5,438 | | | $ | 3,949 | |
Mark-to-market adjustment(1) | 282 | | | 128 | |
Total mortgage loans held for sale | $ | 5,720 | | | $ | 4,077 | |
|
| | | | | | | |
| Successor |
| December 31, 2019 | | December 31, 2018 |
Mortgage loans held for sale - UPB | $ | 3,949 |
| | $ | 1,568 |
|
Mark-to-market adjustment(1) | 128 |
| | 63 |
|
Total mortgage loans held for sale | $ | 4,077 |
| | $ | 1,631 |
|
| |
(1)
| (1)The mark-to-market adjustment includes net change in unrealized gain/loss, premium on correspondent loans and fees on direct-to-consumer loans. The mark-to-market adjustment is recorded in net gain on mortgage loans held for sale in the consolidated statements of operations. |
The Company accrues interest income as earned and places loans on non-accrual status after any portion of principal or interest has been delinquent for more than 90 days. Accrued interest is recorded as interest income in the consolidated statements of operations.
The total UPB of mortgage loans held for sale on non-accrual status was as follows:
|
| | | | | | | | | | | | | | | |
| Successor |
| December 31, 2019 | | December 31, 2018 |
Mortgage loans held for sale - UPB | UPB | | Fair Value | | UPB | | Fair Value |
Non-accrual(1) | $ | 29 |
| | $ | 22 |
| | $ | 45 |
| | $ | 42 |
|
| |
(1)
| Non-accrual includes $25 and $40 of UPB related to Ginnie Mae repurchased loans as of December 31, 2019 and 2018, respectively. |
The total UPB of mortgage loans held for sale for which the Company has begun formal foreclosure proceedings was $21 and $33 as of December 31, 2019 and 2018, respectively.
113 Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K
The following table sets forth the activities of mortgage loans held for sale:
| | | | | | | | | | | |
| Successor |
| Year Ended December 31, |
Mortgage Loans Held for Sale | 2020 | | 2019 |
Balance - beginning of year | $ | 4,077 | | | $ | 1,631 | |
Loans sold | (66,545) | | | (41,269) | |
Mortgage loans originated and purchased, net of fees | 63,233 | | | 40,793 | |
Repurchase of loans out of Ginnie Mae securitizations(1) | 4,822 | | | 2,895 | |
Net change in unrealized gain on loans held for sale | 123 | | | 9 | |
Net transfers of mortgage loans held for sale(2) | 10 | | | 18 | |
Balance - end of year | $ | 5,720 | | | $ | 4,077 | |
|
| | | | | | | | | | | | |
| Successor | | | Predecessor |
Mortgage loans held for sale | Year Ended December 31, 2019 | | Five Months Ended December 31, 2018 | | | Seven Months Ended July 31, 2018 |
Balance - beginning of period | $ | 1,631 |
| | $ | 1,514 |
| | | $ | 1,891 |
|
Loans sold | (41,289 | ) | | (9,304 | ) | | | (13,255 | ) |
Mortgage loans originated and purchased, net of fees(1) | 40,772 |
| | 8,890 |
| | | 12,319 |
|
Repurchase of loans out of Ginnie Mae securitizations | 2,895 |
| | 527 |
| | | 544 |
|
Net transfers of mortgage loans held for sale to/from REO in other assets and transfer from mortgage loans held for investment(2)(3) | 34 |
| | 5 |
| | | 14 |
|
Changes in fair value | 29 |
| | 6 |
| | | (1 | ) |
Other purchase-related activities(4) | 21 |
| | (2 | ) | | | 9 |
|
Transfer of mortgage loans held for sale to advances and other receivables, net related to claims(5) | (16 | ) | | (5 | ) | | | (7 | ) |
Balance - end of period | $ | 4,077 |
| | $ | 1,631 |
| | | $ | 1,514 |
|
| |
(1)
| Mortgage loans originated and purchased during the year ended December 31, 2019 includes $536 of loans held for sale that were acquired from Pacific Union. See Note 3, Acquisitions for further discussion.
|
| |
(2)
| Net amounts are comprised of REO in the sales process which are transferred to other assets and certain government insured mortgage REO which are transferred from other assets upon completion of the sale so that the claims process can begin. |
| |
(3)
| Amount for the year ended December 31, 2019 includes $12 transfer from mortgage loans held for investment upon collapse of Trust 2009-A, the Company’s legacy portfolio, and sale of the loans held in the trust. See mortgage loans held for investment discussed in section below for additional information. |
| |
(4)
| Amounts are comprised primarily of non-Ginnie Mae loan purchases and buyouts. |
| |
(5)
| Amounts are comprised of claims made on certain government insured mortgage loans upon completion of the REO sale. |
For the year ended December 31, 2019 and five months ended December 31, 2018, the Company received proceeds of $41,809 and $9,397, respectively, on the sale of mortgage loans held for sale, resulting in gains of $549 and $93, respectively. For the seven months ended July 31, 2018 and the year ended December 31, 2017, the Predecessor received proceeds of $13,382 and $20,772, respectively, on the sale of mortgage loans held for sale, resulting in gains of $127 and $454 respectively.
(1)The Company has the right to repurchase any individual loan in a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. The majority of Ginnie Mae repurchased loans are repurchased in connection with loan modifications and loan resolution activity, with the intent to re-pool into new Ginnie Mae securitizations upon re-performance of the loan or to otherwise sell to third-party investors. Therefore, these loans are classified as held for sale.
(2)Amount reflects transfers to other assets for loans transitioning into REO status and transfers to advances and other receivables, net, for claims made on certain government insurance mortgage loans. Transfers out are net of transfers in upon receipt of proceeds from an REO sale or claim filing.
Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 114
Mortgage Loans Held for Investment
In SeptemberFor the years ended December 31, 2020 and 2019, the Company collapsed Trust 2009-A, its legacy portfolio,received proceeds of $67,855 and executed$41,809, respectively, on the sale of the loans held in the trust for a total purchase price of $130. The Company recognized a gain of $32, which was recorded in the net gain on mortgage loans held for sale, resulting in gains of $1,310 and $540, respectively.
The Company accrues interest income as earned and places loans on non-accrual status after any portion of principal or interest has been delinquent for more than 90 days. Accrued interest is recorded as interest income in the consolidated statements of operations. $21 and $11 of the gain were recorded in the Servicing and Corporate/Other segments, respectively. In connection with this transaction, $94 UPB of the mortgage loans held for investment was called and the related debt was extinguished. The Company transferred the remaining $12 UPB to mortgage loans held for sale and $5 UPB to real estate owned.
The following table sets forth the activities of mortgage loans held for investment:
|
| | | | | | | |
| Successor |
Mortgage loans held for investment at fair value | Year Ended December 31, 2019 | | Five Months Ended December 31, 2018 |
Balance - beginning of period | $ | 119 |
| | $ | 125 |
|
Sale of mortgage loans | (94 | ) | | — |
|
Transfers to mortgage loans held for sale | (12 | ) | | — |
|
Payments received from borrowers | (11 | ) | | (5 | ) |
Transfers to real estate owned | (5 | ) | | — |
|
Changes in fair value | 3 |
| | 2 |
|
Charge-offs | — |
| | (3 | ) |
Balance - end of period | $ | — |
| | $ | 119 |
|
The following sets forth the composition of mortgage loans held for investment as of December 31, 2018:
|
| | | | |
| | Successor |
| | December 31, 2018 |
Mortgage loans held for investment – UPB | | $ | 156 |
|
Fair value adjustments | | (37 | ) |
Total mortgage loans held for investment at fair value | | $ | 119 |
|
The total UPB of mortgage loans held for investmentsale on non-accrual status was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| December 31, 2020 | | December 31, 2019 |
Mortgage Loans Held for Sale - UPB | UPB | | Fair Value | | UPB | | Fair Value |
Non-accrual(1) | $ | 64 | | | $ | 54 | | | $ | 29 | | | $ | 22 | |
|
| | | | | | | |
| Successor |
| December 31, 2018 |
Mortgage loans held for investment - UPB | UPB | | Fair Value |
Non-accrual | $ | 27 |
| | $ | 13 |
|
(1)Non-accrual includes $44 and $25 of UPB related to Ginnie Mae repurchased loans as of December 31, 2020 and 2019, respectively.
The total UPB of mortgage loans held for investmentsale for which the Company has begun formal foreclosure proceedings was $15was $20 and $21 as of December 31, 2018.2020 and 2019, respectively.
115Mr. Cooper Group Inc. - 20192020 Annual Report on Form 10-K92
8.7. Property and Equipment Net
The composition of property and equipment, net, and the corresponding ranges of estimated useful lives were as follows:
| | | | | | | | | | | | | | | | | |
| | | |
| Successor | | |
Property and Equipment, Net | December 31, 2020 | | December 31, 2019 | | Estimated Useful Life |
Furniture, fixtures, and equipment | $ | 55 | | | $ | 50 | | | 3 - 5 years |
Capitalized software costs | 87 | | | 54 | | | 3 - 5 years |
Software in development and other | 29 | | | 31 | | | |
Leasehold improvements | 33 | | | 24 | | | 3 - 5 years |
Long-term finance leases - computer equipment | 8 | | | 8 | | | 5 years |
Property and equipment | 212 | | | 167 | | | |
Less: Accumulated depreciation | (96) | | | (55) | | | |
Total property and equipment, net | $ | 116 | | | $ | 112 | | | |
|
| | | | | | | | | |
| Successor | | |
| December 31, 2019 | | December 31, 2018 | | Estimated Useful Life |
Furniture, fixtures, and equipment | $ | 50 |
| | $ | 32 |
| | 3 - 5 years |
Capitalized software costs | 54 |
| | 24 |
| | 3 - 5 years |
Software in development and other | 31 |
| | 24 |
| | |
Leasehold improvements | 24 |
| | 22 |
| | 3 - 5 years |
Long-term finance leases - computer equipment | 8 |
| | 10 |
| | 5 years |
Property and equipment | 167 |
| | 112 |
| | |
Less: Accumulated depreciation | (55 | ) | | (16 | ) | | |
Total property and equipment, net | $ | 112 |
| | $ | 96 |
| | |
The Company recorded depreciation expense on property and equipment of $41$42 and $16$41 for the yearyears ended December 31, 20192020 and five months ended December 31, 2018, respectively. The Predecessor recorded depreciation expense on property and equipment of $31 and $54 for the seven months ended July 31, 2018 and the year ended December 31, 2017,2019, respectively. The Company has entered into various lease agreements for computer equipment, which are classified as finance leases. See Note 9,8, Leases, for more information.
There were no significantThe Company recorded impairment charges recorded byof $12 and $4 during the Company during the yearyears ended December 31, 2020 and 2019 and five months ended December 31, 2018 and the Predecessor for the seven months ended July 31, 2018 and year ended December 31, 2017.
9. Leases
Operating leases in which the Company is the lessee are recorded as operating lease ROU assets and operating lease liabilities,respectively. The impairment charges were included in other assets and payables and other liabilities, respectively, on the consolidated balance sheets as of December 31, 2019. The Company does not currently have any significant finance leases in which it is the lessee. Operating lease ROU assets represent the Company’s right to use an underlying asset during the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commencement date. ROU assets are further adjusted for lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term and is recorded in general and administrative expenses in the consolidated statements of operations.
8. Leases
The Company’s leases primarily relate primarily to office space and equipment, with remaining lease terms of generally 1 to 98 years. Certain lease arrangements contain extension options, which typically range from 3 to 5 years, at the then fair market rental rates. As these extension options are not generally considered reasonably certain of exercise, they are not included in the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. As of December 31, 2020 and 2019, operating lease ROU assets were $97 and $121, respectively, and liabilities were $121$108 and $135, respectively.respectively, which were included in other assets, and payables and other liabilities, respectively, on the consolidated balance sheets. The Company does not currently have any significant finance leases in which it is the lessee.
Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K 116
The table below summarizes the Company’s net lease cost:
| | | | | | | | | | | |
| Successor |
| Year Ended December 31, |
Net Lease Cost | 2020 | | 2019 |
Operating lease cost | $ | 37 | | | $ | 40 | |
Sublease income | (6) | | | (3) | |
Short-term lease cost | 0 | | | 1 | |
| | | |
Total net lease cost | $ | 31 | | | $ | 38 | |
|
| | | |
| Successor |
| Year Ended December 31, 2019 |
Operating lease cost | $ | 40 |
|
Short-term lease cost | 1 |
|
Sublease income | (3 | ) |
Net lease cost | $ | 38 |
|
The table below summarizes other information related to the Company’s operating leases:
| | | | | | | | | | | |
| Successor |
| Year Ended December 31, |
Operating Leases - Other Information | 2020 | | 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $ | 35 | | | $ | 30 | |
Leased assets obtained in exchange for new operating lease liabilities | $ | 14 | | | $ | 154 | |
Weighted average remaining lease term - operating leases, in years | 5.3 | | 5.5 |
Weighted average discount rate - operating leases | 4.9 | % | | 5.0 | % |
93 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
|
| | | |
| Successor |
| Year Ended December 31, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | 30 |
|
Leased assets obtained in exchange for new operating lease liabilities | $ | 154 |
|
Weighted average remaining lease term - operating leases, in years | 5.5 |
|
Weighted average discount rate - operating leases | 5.0 | % |
Maturities of operating lease liabilities as of December 31, 20192020 are as follows:
| | | | | | | | |
Year Ending December 31, | | Operating Leases |
2021 | | $ | 33 | |
2022 | | 25 | |
2023 | | 19 | |
2024 | | 13 | |
2025 | | 9 | |
Thereafter | | 24 | |
Total future minimum lease payments | | 123 | |
Less: imputed interest | | 15 | |
Total operating lease liabilities | | $ | 108 | |
|
| | | | |
Year Ending December 31, | | Operating Leases |
2020 | | $ | 40 |
|
2021 | | 32 |
|
2022 | | 23 |
|
2023 | | 17 |
|
2024 | | 12 |
|
2025 and thereafter | | 32 |
|
Total future minimum lease payments | | 156 |
|
Less: imputed interest | | 21 |
|
Total operating lease liabilities | | $ | 135 |
|
10. Other Assets
Other assets consist of the following:
|
| | | | | | | |
| Successor |
| December 31, 2019 | | December 31, 2018 |
Loans subject to repurchase right from Ginnie Mae | $ | 560 |
| | $ | 266 |
|
Derivative financial instruments | 153 |
| | 49 |
|
Trade receivables and accrued revenues | 126 |
| | 145 |
|
Right-of-use assets | 121 |
| | — |
|
Goodwill | 120 |
| | 23 |
|
Intangible assets | 74 |
| | 117 |
|
Other | 236 |
| | 195 |
|
Total other assets | $ | 1,390 |
| | $ | 795 |
|
117 Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K
9. Loans Subject to Repurchase Right from Ginnie Mae
Forward loans are sold to Ginnie Mae in conjunction with the issuance of mortgage backed securities. The Company, as the issuer of the mortgage backed securities, has the unilateral right to repurchase any individual loan in a Ginnie Mae securitization pool if that loan meets certain criteria, including payments not being delinquentreceived from borrowers for greater than 90 days. Once the Company has the unilateral right to repurchase a delinquent loan, it has effectively regained control over the loan and recognizes these rights to the loan on its consolidated balance sheets and establishes a corresponding repurchaserepurchase liability regardless of the Company’s intention to repurchase the loan. The amountCompany had loans subject to repurchase from Ginnie Mae of $6,159 and $560 as of December 31, 2020 and 2019, includes $336 attributablerespectively, which are included in both other assets and payables and other liabilities in the consolidated balance sheets. Loans subject to Pacific Union.repurchase from Ginnie Mae as of December 31, 2020 included $5,879 of loans in forbearance related to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) whereby no payments have been received from borrowers for greater than 90 days.
Derivative Financial Instruments
See Note 11, Derivative Financial Instruments, for further details on derivative financial instruments.
10. Goodwill and Intangible Assets
Trade Receivables and Accrued Revenues
Trade receivables and accrued revenues are primarily comprised of trade receivables and service fees earned but not received based upon the terms of the Company’s servicing and subservicing agreements.
Right of Use Assets
Right of use assets are recognized for operating leases as a result of adoption of ASC 842. See Note 9, Leases, for additional information.
Goodwill
The table below presents changes in the carrying amount of goodwill forgoodwill:
| | | | | | | | | | | |
| Successor |
| Year Ended December 31, |
Goodwill | 2020 | | 2019 |
Balance - beginning of year | $ | 120 | | | $ | 23 | |
Addition from acquisitions | 0 | | | 42 | |
Measurement period adjustment related to merger | 0 | | | 55 | |
Balance - end of year | $ | 120 | | | $ | 120 | |
During the yearyears ended December 31, 2019:
|
| | | | | | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2019 | | Five Months Ended December 31, 2018 | | | Seven Months Ended July 31, 2018 |
Balance - beginning of period | $ | 23 |
| | $ | 10 |
| | | $ | 72 |
|
Addition from acquisitions(1) | 42 |
| | 13 |
| | | — |
|
Measurement period adjustment related to Merger(2) | 55 |
| | — |
| | | — |
|
Balance - end of period | $ | 120 |
| | $ | 23 |
| | | $ | 72 |
|
| |
(1)
| As discussed in Note 3, Acquisitions, the Company recorded goodwill of $40 in connection with the acquisition of Pacific Union. In addition, on February 28,2020 and 2019, the Company completed the acquisition of the Seterus mortgage servicing platform and assumed certain assets related thereto from IBM (“Seterus acquisition”). In connection with the Seterus acquisition, the Company recorded $2 in goodwill.
|
| |
(2)
| The Company recorded a total measurement period adjustment of $55 to goodwill in 2019 related to the acquisition of Nationstar. See further discussion in Note 3, Acquisitions.
|
The Company performed a quantitative and qualitative assessment, respectively, of its reporting units and determined that no0 impairment of goodwill existed in the year endedexisted. As of December 31, 2020 and 2019, $80, $28 and five months ended December 31, 2018. The Predecessor did not recognize$12 of the goodwill impairmentis assigned to the Servicing, Originations and Xome segments, respectively. Goodwill is recorded in other assets within the seven months ended July 31, 2018 and the year ended December 31, 2017.consolidated balance sheets.
In 2018, the Company recorded goodwill of $10 and $13 in connection with the acquisitions of Nationstar and AMS, respectively. See further discussion in Note 3, Acquisitions.
94Mr. Cooper Group Inc. - 20192020 Annual Report on Form 10-K118
Intangible Assets
The following tables present the composition of intangible assets:
| | | | | | | | | | | | | | | | | | | | | | | |
| Successor |
| December 31, 2020 |
Intangible Assets | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Remaining Life in Years |
Customer relationships | $ | 86 | | | $ | (65) | | | $ | 21 | | | 5.5 |
Technology | 39 | | | (30) | | | 9 | | | 1.8 |
Trade name | 8 | | | (4) | | | 4 | | | 2.6 |
Total intangible assets | $ | 133 | | | $ | (99) | | | $ | 34 | | | 4.2 |
| | | | | | | | | | | Successor |
| Successor | | December 31, 2019 |
| December 31, 2019 | |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Remaining Life in Years | |
Intangible Assets | | Intangible Assets | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Remaining Life in Years |
Customer relationships | $ | 90 |
| | $ | (45 | ) | | $ | 45 |
| | 5.9 | Customer relationships | $ | 90 | | | $ | (45) | | | $ | 45 | | | 5.9 |
Technology | 46 |
| | (23 | ) | | 23 |
| | 2.9 | Technology | 46 | | | (23) | | | 23 | | | 2.9 |
Trade name | 8 |
| | (2 | ) | | 6 |
| | 3.6 | Trade name | 8 | | | (2) | | | 6 | | | 3.6 |
Other | 1 |
| | (1 | ) | | — |
| | 2.8 | Other | 1 | | | (1) | | | 0 | | | 2.8 |
Total intangible assets | $ | 145 |
| | $ | (71 | ) | | $ | 74 |
| | 4.7 | Total intangible assets | $ | 145 | | | $ | (71) | | | $ | 74 | | | 4.7 |
Intangible assets are recorded in other assets within the consolidated balance sheets. |
| | | | | | | | | | | | | |
| Successor |
| December 31, 2018 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Remaining Life in Years |
Customer relationships | $ | 77 |
| | $ | (14 | ) | | $ | 63 |
| | 5.6 |
Technology | 52 |
| | (8 | ) | | 44 |
| | 3.6 |
Trade name | 8 |
| | (1 | ) | | 7 |
| | 4.6 |
Other(1) | 3 |
| | — |
| | 3 |
| | 4.8 |
Total intangible assets | $ | 140 |
| | $ | (23 | ) | | $ | 117 |
| | 4.7 |
| |
(1)
| Accumulated amortization amount is less than $1 for the specified dates. |
In 2019, the Company recorded intangible assets of $13 in connection with the acquisition of Pacific Union. In 2018, the Company recorded intangible assets of $103 and $24 in connection with the acquisitions of Nationstar and AMS, respectively. See further discussion in Note 3, Acquisitions.
The Company recognized $50$32 and $23$50 of amortization expense related to intangible assets during the yearyears ended December 31, 2020 and 2019, and five monthsrespectively.
During the years ended December 31, 2018, respectively. The Predecessor recognized amortization expense of $2 during the seven months ended July 31, 20182020 and $5 during the year ended December 31, 2017, respectively.
During the fourth quarter of 2019, in connection with an ancillary business, the Company recorded ana $10 and $7 impairment of technology and other intangible assets within Corporate/Other, segment.respectively. The impairment charges were included in the general and administrative expenses in the consolidated statements of operations.
The following table presents the estimated aggregate amortization expense for existing amortizable intangible assets for the years indicated:
| | | | | | | | |
Year Ending December 31, | | Amount |
2021 | | $ | 14 | |
2022 | | 10 | |
2023 | | 6 | |
2024 | | 1 | |
2025 | | 1 | |
Thereafter | | 2 | |
Total future amortization expense | | $ | 34 | |
|
| | | | |
Year Ending December 31, | | Amount |
2020 | | $ | 32 |
|
2021 | | 17 |
|
2022 | | 13 |
|
2023 | | 8 |
|
2024 | | 1 |
|
Thereafter | | 3 |
|
Total future amortization expense | | $ | 74 |
|
Other
Other primarily includes prepaid expenses, margin call deposits, REO, tax receivables, receivables related to recent loan transfers and various receivables due from investors. REO, net includes $11 and $10 of REO-related receivables with government insurance as of December 31, 2019 and 2018, respectively, limiting loss exposure to the Company.
119 Mr. Cooper Group Inc. - 2019 Annual Report on Form 10-K
11. Derivative Financial Instruments
Derivative instruments are used as part of the overall strategy to manage exposure to market risks primarily associated with fluctuations in interest rates related to originations. Derivative instruments utilized by the Company primarily include interest rate lock commitments (“IRLCs”), loan purchase commitments (“LPCs”),IRLCs, LPCs, forward Mortgage Backed Securities (“MBS”)MBS purchase commitments, Eurodollar and Treasury futures and interest rate swap agreements.
95 Mr. Cooper Group Inc. - 2020 Annual Report on Form 10-K
The following table provides the outstanding notional balances, fair values of outstanding positions and recorded gains/(losses) for the derivative financial instruments:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Successor |
| | | December 31, 2020 | | Year Ended December 31, 2020 |
Derivative Financial Instruments | Expiration Dates | | Outstanding Notional | | Fair Value | | Recorded Gains/(Losses) |
Assets | | | | | | | |
Mortgage loans held for sale | | | | | | | |
Loan sale commitments | 2021 | | $ | 2,710 | | | $ | 102 | | | $ | 70 | |
Derivative financial instruments | | | | | | | |
IRLCs | 2021 | | 10,179 | | | 414 | | | 279 | |
LPCs | 2021 | | 5,406 | | | 38 | | | 26 | |
Forward sales of MBS | 2021 | | 5,853 | | | 37 | | | 31 | |
Total derivative financial instruments - assets | | | $ | 21,438 | | | $ | 489 | | | $ | 336 | |
Liabilities | | | | | | | |
Derivative financial instruments | | | | | | | |
IRLCs | 2021 | | $ | 2 | | | $ | 0 | | | $ | 0 | |
LPCs | 2021 | | 280 | | | 1 | | | (2) | |
Forward sales of MBS | 2021 | | 25,156 | | | 156 | | | 144 | |
Swap futures | 2021 | | 60 | | | 0 | | | 0 | |
Total derivative financial instruments - liabilities | | | $ | 25,498 | | | $ | 157 | | | $ | 142 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Successor |
| | | December 31, 2019 | | Year Ended December 31, 2019 |
Derivative Financial Instruments | Expiration Dates | | Outstanding Notional | | Fair Value | | Recorded Gains/(Losses) |
Assets | | | | | | | |
Mortgage loans held for sale | | | | | | | |
Loan sale commitments | 2020 | | $ | 1,202 | | | $ | 32 | | | $ | 7 | |
Derivative financial instruments | | | | | | | |
IRLCs | 2020 | | 4,838 | | | 135 | | | 75 | |
LPCs | 2020 | | 1,094 | | | 12 | | | 10 | |
Forward sales of MBS | 2020 | | 3,120 | | | 7 | | | 5 | |
| | | | | | | |
Eurodollar futures | 2020-2021 | | 6 | | | 0 | | | 0 | |
| | | | | | | |
Total derivative financial instruments - assets | | | $ | 9,058 | | | $ | 154 | | | $ | 90 | |
Liabilities | | | | | | | |
Derivative financial instruments | | | | | | | |
IRLCs | 2020 | | $ | 12 | | | $ | 0 | | | $ | 0 | |
LPCs | 2020 | | 540 | | | 3 | | | 2 | |
Forward sales of MBS | 2020 | | 6,036 | | | 12 | | | (12) | |
Eurodollar futures | 2020-2021 | | 7 | | | 0 | | | 0 | |
Total derivative financial instruments - liabilities | | | $ | 6,595 | | | $ | 15 | | | $ | (10) | |
| | | | | | | |
Associated with the Company’s derivatives are $6$61 and $12$6 in collateral deposits on derivative instruments recorded in other assets on the Company’s consolidated balance sheets as of December 31, 20192020 and 2018,2019, respectively. The Company does not offset fair value amounts recognized for derivative instruments with amounts collected or deposited on derivative instruments in the consolidated balance sheets.
The following table provides the outstanding notional balances, fair values of outstanding positions and recorded gains/(losses) for the derivative financial instruments:
|
| | | | | | | | | | | | | |
| | | Successor |
| | | December 31, 2019 | | Year Ended December 31, 2019 |
| Expiration Dates | | Outstanding Notional | | Fair Value | | Recorded Gains/(Losses) |
Assets | | | | | | | |
Mortgage loans held for sale | | | | | | | |
Loan sale commitments | 2020 | | $ | 1,202 |
| | $ | 32.3 |
| | $ | 6.5 |
|
Derivative financial instruments | | | | | | | |
IRLCs | 2020 | | 4,838 |
| | 134.7 |
| | 75.0 |
|
LPCs | 2020 | | 1,094 |
| | 12.2 |
| | 10.5 |
|
Forward sales of MBS | 2020 | | 3,120 |
| | 6.5 |
| | 4.6 |
|
Eurodollar futures(1) | 2020-2021 | | 6 |
| | — |
| | — |
|
Total derivative financial instruments - assets | | | $ | 9,058 |
| | $ | 153.4 |
| | $ | 90.1 |
|
Liabilities | | | | | | | |
Derivative financial instruments | | | | | | | |
IRLCs(1) | 2020 | | $ | 12 |
| | $ | — |
| | $ | — |
|
LPCs | 2020 | | 540 |
| | 2.6 |
| | 2.1 |
|
Forward sales of MBS | 2020 | | 6,036 |
| | 12.3 |
| | (11.6 | ) |
Eurodollar futures(1) | 2020-2021 | | 7 |
| | — |
| | — |
|
Total derivative financial instruments - liabilities | | | $ | 6,595 |
| | $ | 14.9 |
| | $ | (9.5 | ) |
Mr. Cooper Group Inc. - 20192020 Annual Report on Form 10-K 12096