UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DCD.C. 20549

FORM 10-Q

☒

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2017~~

March 31, 2020

☐

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission file ~~number~~number: 001-14667

~~WMIH Corp.~~

Mr. Cooper Group Inc.

(Exact name of registrant as specified in its charter)

~~Delaware~~			~~91-1653725~~

Delaware	91-1653725
(State or other jurisdiction of ~~incorporation)~~ incorporation or organization)	(~~IRS~~I.R.S. Employer Identification No.)
~~800 FIFTH AVENUE, SUITE 4100~~ ~~SEATTLE, WASHINGTON~~		~~98104~~
8950 Cypress Waters Blvd, Coppell, TX	75019
(Address of principal executive offices)	(Zip Code)

(469) 549-2000
Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.01 par value per share	COOP	The Nasdaq Stock Market

~~(206) 922-2957~~

~~(Registrant’s telephone number, including area code)~~

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes ☐x No

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). ☒Yes ☐x No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated ~~filer,”~~filer”, “accelerated filer” ~~and~~, “smaller reporting company”, and “emerging growth company” in Rule ~~12b-2~~12(b)-2 of the Exchange Act.

~~Large accelerated filer~~					☐	~~Accelerated filer~~		☒

~~Non-accelerated filer~~ Large Accelerated Filer	¨	☐ ~~(Do not check if a smaller reporting company)~~ Accelerated Filer	x
Non-Accelerated Filer	¨	Smaller reporting company		☐ ¨
		Emerging growth company		☐			¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐Yes ☒¨ No

~~Indicate the number~~x

Number of shares ~~outstanding of each of the issuer’s classes~~ of common stock, $0.01 par value, outstanding as of ~~the latest practicable date.~~

April 24, 2020 was 91,970,033.

MR. COOPER GROUP INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

~~Common Stock $0.00001 par value~~				~~206,714,132~~
~~(Class)~~		~~(Outstanding at November 1, 2017)~~

~~Forward-Looking Statements~~

Certain information included in this Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q that address activities, events, conditions or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business and these statements are not guarantees of future performance. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements may include the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “strategy,” “future,” “opportunity,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result” and similar expressions. Such forward-looking statements involve risks and uncertainties that may cause actual events, results or performance to differ materially from those indicated by such statements. Some of these risks are identified and discussed under Risk Factors in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016. These risk factors will be important to consider in determining future results and should be reviewed in their entirety. These forward-looking statements are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that the events, results or trends identified in these forward-looking statements will occur or be achieved. Forward-looking statements speak only as of the date they are made, and we do not undertake to update any forward-looking statement, except as required by law.

~~* * * * *~~

As used in this Quarterly Report on Form 10-Q, unless the context requires otherwise, (i) the terms “Company,” “we,” “us,” or “our” refer to WMIH Corp. (formerly WMI Holdings Corp.) and its subsidiaries on a consolidated basis; (ii) “WMIH” refers only to WMIH Corp., without regard to its subsidiaries; (iii) “WMIHC” refers only to WMI Holdings Corp., without regard to its subsidiaries; (iv) “WMMRC” means WM Mortgage Reinsurance Company, Inc. (a wholly-owned subsidiary of WMIH); and (v) “WMIIC” means WMI Investment Corp. (a wholly-owned subsidiary of WMIH).

~~WMIH CORP.~~

~~FORM 10-Q~~

~~INDEX~~

		~~Page~~
		Page
PART I –	FINANCIAL INFORMATION

Item 1. ~~Condensed~~	Financial Statements	3

	Consolidated Balance Sheets as of March 31, 2020 (unaudited) and December 31, 2019	3

	Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2020 and Three Months Ended March 31, 2019	4

	Consolidated Statements of Stockholders’ Equity (unaudited) for the Three Months Ended March 31, 2020 and Three Months Ended March 31, 2019	5

	Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2020 and Three Months Ended March 31, 2019	6

	Notes to Consolidated Financial Statements (unaudited).		3 8

Item 2. ~~Management’s~~	Management's Discussion and Analysis of Financial Condition and Results of Operations		29 43

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		45 80

Item 4.	Controls and ~~Procedures.~~Procedures		45 81



PART II –	OTHER INFORMATION

Item 1.	Legal Proceedings		46 82

Item 1A.	Risk Factors.		46 83
~~Item 6. Exhibits~~.		47
~~SIGNATURES~~ Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48 83

Item 3.	Defaults Upon Senior Securities	83

Item 4.	Mine Safety Disclosures	83

Item 5.	Other Information	83

Item 6.	Exhibits	84

PART I. Financial Information

~~PART I~~Item 1. Financial Statements

~~FINANCIAL INFORMATION~~

~~Item 1.~~

~~Condensed Consolidated Financial Statements.~~

~~WMIH CORP. AND SUBSIDIARIES~~

~~CONDENSED~~

MR. COOPER GROUP INC.

CONSOLIDATED BALANCE SHEETS

(~~in thousands,~~millions of dollars, except share data)

~~(Unaudited)~~

September 30, 2017

December 31, 2016 ⁽¹⁾

ASSETS:

Investments held in trust:

Fixed-maturity securities
$
9,022

$
29,206

Cash equivalents held in trust

6,804

2,176

Total investments held in trust

15,826

31,382

Cash and cash equivalents

25,542

2,491

Fixed-maturity securities

1,400

47,625

Restricted cash

577,220

573,347

Derivative asset - embedded conversion feature

111,877

80,651

Accrued investment income

109

187

Other assets

764

507

Total assets
$
732,738

$
736,190

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

Liabilities:

Notes payable - principal
$
—

$
18,774

Notes payable - interest

—

203

Losses and loss adjustment reserves

705

811

Losses payable

29

53

Unearned premiums

33

270

Accrued ceding commissions

57

22

Loss contract reserve

—

5,645

Other liabilities

13,774

14,063

Total liabilities

14,598

39,841

Commitments and contingencies

Redeemable convertible series B preferred stock, $0.00001 par value; 600,000 shares issued and outstanding as of September 30, 2017 and December 31, 2016; aggregate liquidation preference of $600,000,000 as of September 30, 2017 and December 31, 2016

502,213

502,213

Stockholders’ equity:

Convertible series A preferred stock, $0.00001 par value; 1,000,000 shares issued and outstanding as of September 30, 2017 and December 31, 2016; aggregate liquidation preference of $10 as of September 30, 2017 and December 31, 2016

—

—

Common stock, $0.00001 par value; 3,500,000,000 authorized; 206,714,132 and 206,380,800 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively

2

2

Additional paid-in capital

108,830

108,415

Retained earnings

107,095

85,719

Total stockholders’ equity

215,927

194,136

Total liabilities, redeemable convertible preferred stock and stockholders’ equity
$
732,738

$
736,190

~~The~~



	March 31, 2020			December 31, 2019
	(unaudited)
Assets
Cash and cash equivalents	$	579		$	329
Restricted cash	266			283
Mortgage servicing rights, $3,109 and $3,496 at fair value, respectively	3,115			3,502
Advances and other receivables, net of reserves of $193 and $175, respectively	685			988
Reverse mortgage interests, net of reserves of $3 and $3, respectively	5,955			6,279
Mortgage loans held for sale at fair value	3,922			4,077
Property and equipment, net of accumulated depreciation of $65 and $55, respectively	111			112
Deferred tax assets, net	1,411			1,345
Other assets	1,569			1,390
Total assets	$	17,613		$	18,305

Liabilities and Stockholders’ Equity
Unsecured senior notes, net	$	2,259		$	2,366
Advance facilities, net	489			422
Warehouse facilities, net	4,551			4,575
Payables and other liabilities	1,965			2,016
MSR related liabilities - nonrecourse at fair value	1,285			1,348
Mortgage servicing liabilities	53			61
Other nonrecourse debt, net	4,945			5,286
Total liabilities	15,547			16,074
Commitments and contingencies (Note 18)
Preferred stock at $0.00001 - 10 million shares authorized, 1 million shares issued and outstanding, respectively; aggregate liquidation preference of ten dollars, respectively	—			—
Common stock at $0.01 par value - 300 million shares authorized, 92.0 million and 91.1 million shares issued, respectively	1			1
Additional paid-in-capital	1,108			1,109
Retained earnings	961			1,122
Total Mr. Cooper stockholders’ equity	2,070			2,232
Non-controlling interests	(4		)	(1		)
Total stockholders’ equity	2,066			2,231
Total liabilities and stockholders’ equity	$	17,613		$	18,305

See accompanying notes ~~are an integral part of~~to the ~~condensed~~ consolidated financial ~~statements.~~

⁽¹⁾~~Balances derived from audited financial~~ statements ~~as of December 31, 2016.~~(unaudited).

~~WMIH CORP. AND SUBSIDIARIES~~

~~CONDENSED~~

MR. COOPER GROUP INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(~~in thousands,~~millions of dollars, except for earnings per share ~~amounts and share~~ data)

~~(Unaudited)~~

Three months
ended
September 30, 2017

Three months
ended
September 30, 2016

Nine months
ended
September 30, 2017

Nine months
ended
September 30, 2016

Revenues:

Premiums earned
$
344

$
786

$
1,103

$
2,426

Net investment income

1,943

498

4,826

1,747

Total revenues

2,287

1,284

5,929

4,173

Operating expenses:

Losses and loss adjustment expense

48

183

207

702

Ceding commission expense

44

75

137

234

General and administrative expense

2,117

1,357

5,915

4,878

Loss contract reserve reduction

(210
)

(565
)

(5,645
)

(2,362
)
Interest expense

579

636

1,788

1,994

Total operating expenses

2,578

1,686

2,402

5,446

Net operating (loss) income

(291
)

(402
)

3,527

(1,273
)
Other (income) expense:

Other (income)

(123
)

—

(123
)

—

Unrealized (gain) loss on change in fair value of derivative embedded conversion feature

(38,579
)

16,243

(31,226
)

(62,587
)
Total other (income) expense

(38,702
)

16,243

(31,349
)

(62,587
)
Income (loss) before income taxes

38,411

(16,645
)

34,876

61,314

Income tax expense (benefit)

—

—

—

—

Net income (loss)

38,411

(16,645
)

34,876

61,314

Redeemable convertible series B preferred stock dividends

(4,500
)

(4,500
)

(13,500
)

(13,500
)
Net income (loss) attributable to common and participating stockholders
$
33,911

$
(21,145
)

$
21,376

$
47,814

Basic net income (loss) per share attributable to common stockholders (Note 12)
$
0.06

$
(0.10
)

$
0.04

$
0.10

Shares used in computing basic net income (loss) per share

202,660,492

202,341,209

202,573,315

202,247,275

Diluted net income (loss) per share attributable to common stockholders (Note 12)
$
0.06

$
(0.10
)

$
0.04

$
0.09

Shares used in computing diluted net income (loss) per share

212,726,121

202,341,209

212,638,944

237,575,014

~~The~~



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Revenues:
Service related, net	$	(53	)	$	84
Net gain on mortgage loans held for sale	331			166
Total revenues	278			250
Expenses:
Salaries, wages and benefits	246			215
General and administrative	198			228
Total expenses	444			443
Other income (expenses), net:
Interest income	118			134
Interest expense	(192		)	(189		)
Other income, net	1			15
Total other income (expenses), net	(73		)	(40		)
Loss before income tax benefit	(239		)	(233		)
Less: Income tax benefit	(68		)	(47		)
Net loss	(171		)	(186		)
Less: Net loss attributable to non-controlling interests	(3		)	—
Net loss attributable to Mr. Cooper	(168		)	(186		)
Less: Undistributed earnings attributable to participating stockholders	—			—
Net loss attributable to common stockholders	$	(168	)	$	(186	)

Net loss per common share attributable to Mr. Cooper:
Basic	$	(1.84	)	$	(2.05	)
Diluted	$	(1.84	)	$	(2.05	)

See accompanying notes ~~are an integral part of~~to the ~~condensed~~ consolidated financial ~~statements.~~

statements (unaudited).

~~WMIH CORP. AND SUBSIDIARIES~~

~~CONDENSED~~

MR. COOPER GROUP INC.

UNAUDITED CONSOLIDATED STATEMENTS OF ~~CHANGES IN REDEEMABLE CONVERTIBLE~~

~~PREFERRED STOCK AND~~ STOCKHOLDERS’ EQUITY

(~~in thousands,~~millions of dollars, except share ~~amounts)~~

~~(Unaudited)~~

data)

Series B Redeemable Convertible
Preferred Stock

Series A Convertible
Preferred Stock

Common Stock

Shares

Amount

Shares

Amount

Shares

Amount

Additional
paid-in
capital

(Accumulated deficit) retained earnings

Total stockholders’ equity

Balance at January 1, 2016

600,000

502,213

1,000,000

—

206,168,035

2

107,757

(97,981
)

9,778

Net income

—

—

—

—

—

—

—

201,700

201,700

Redeemable convertible series B preferred stock dividends

—

—

—

—

—

—

—

(18,000
)

(18,000
)
Issuance of common stock under restricted stock compensation arrangement

—

—

—

—

212,765

—

—

—

—

Equity-based compensation

—

—

—

—

—

—

658

—

658

Balance at December 31, 2016

600,000

502,213

1,000,000

—

206,380,800

2

108,415

85,719

194,136

Net income

—

—

—

—

—

—

—

34,876

34,876

Redeemable convertible series B preferred stock dividends

—

—

—

—

—

—

—

(13,500
)

(13,500
)
Issuance of common stock under restricted stock compensation arrangement

—

—

—

—

333,332

—

—

—

—

Equity-based compensation

—

—

—

—

—

—

415

—

415

Balance at September 30, 2017

600,000

$
502,213

1,000,000

$
—

206,714,132

$
2

$
108,830

$
107,095

$
215,927

~~The~~



	Preferred Stock			Common Stock
	Shares (in thousands)	Amount		Shares (in thousands)	Amount		Additional Paid-in Capital			Retained Earnings			Total Mr. Cooper Stockholders’ Equity			Non-controlling Interests			Total Equity
Balance at January 1, 2019	1,000	$	—	90,821	$	1	$	1,093		$	848		$	1,942		$	3		$	1,945
Shares issued / (surrendered) under incentive compensation plan	—	—		221	—		(2		)	—			(2		)	—			(2		)
Share-based compensation	—	—		—	—		4			—			4			—			4
Net loss	—	—		—	—		—			(186		)	(186		)	—			(186		)
Balance at March 31, 2019	1,000	$	—	91,042	$	1	$	1,095		$	662		$	1,758		$	3		$	1,761

Balance at January 1, 2020	1,000	$	—	91,118	$	1	$	1,109		$	1,122		$	2,232		$	(1	)	$	2,231
Shares issued / (surrendered) under incentive compensation plan	—	—		852	—		(5		)	—			(5		)	—			(5		)
Share-based compensation	—	—		—	—		4			—			4			—			4
Cumulative effect adjustments pursuant to the adoption of ASU 2016-13	—	—		—	—		—			7			7			—			7
Net loss	—	—		—	—		—			(168		)	(168		)	(3		)	(171		)
Balance at March 31, 2020	1,000	$	—	91,970	$	1	$	1,108		$	961		$	2,070		$	(4	)	$	2,066

See accompanying notes ~~are an integral part of~~to the ~~condensed~~ consolidated financial ~~statements.~~

statements (unaudited).

~~WMIH CORP. AND SUBSIDIARIES~~

~~CONDENSED~~

MR. COOPER GROUP INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(~~in thousands)~~

~~(Unaudited)~~

millions of dollars)

Nine months ended
September 30, 2017

Nine months ended
September 30, 2016

Cash flows from operating activities:

Net income
$
34,876

$
61,314

Adjustments to reconcile net income to net cash (used in) operating activities:

Amortization of premium or discount on fixed maturity securities

108

247

Net realized loss (gain) on sale of investments

63

(19
)
Unrealized (gain) on trading securities

(67
)

(83
)
Unrealized (gain) on derivative embedded conversion feature

(31,226
)

(62,587
)
Equity-based compensation

415

484

Changes in assets and liabilities:

Accrued investment income

78

(18
)
Other assets

(257
)

(270
)
Cash equivalents held in trust

(4,628
)

1,358

Restricted cash

(3,873
)

(1,476
)
Losses and loss adjustment reserves

(106
)

(2,733
)
Losses payable

(24
)

(395
)
Unearned premiums

(237
)

(463
)
Accrued ceding commission expense

35

(8
)
Accrued interest on notes payable

(203
)

(24
)
Loss contract reserve

(5,645
)

(2,362
)
Other liabilities

(289
)

(626
)
Total adjustments

(45,856
)

(68,975
)
Net cash used in operating activities

(10,980
)

(7,661
)
Cash flows from investing activities:

Purchase of investments

(19,973
)

(130,469
)
Proceeds from sales and maturities of investments

86,278

146,920

Net cash provided by investing activities

66,305

16,451

Cash flows from financing activities:

Redeemable convertible series B preferred stock dividends

(13,500
)

(13,500
)
Notes payable – principal repayments

(18,774
)

(2,185
)
Net cash used in financing activities

(32,274
)

(15,685
)
Increase (decrease) in cash and cash equivalents

23,051

(6,895
)
Cash and cash equivalents, beginning of period

2,491

9,924

Cash and cash equivalents, end of period
$
25,542

$
3,029

Supplementary disclosure of cash flow information:

Cash paid during the period:

Interest
$
1,991

$
2,008

~~The~~



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Operating Activities
Net loss	$	(171	)	$	(186	)
Adjustments to reconcile net loss to net cash attributable to operating activities:
Deferred tax benefit	(68		)	(47		)
Net gain on mortgage loans held for sale	(331		)	(166		)
Interest income on reverse mortgage loans	(62		)	(82		)
Provision for reserves	8			11
Fair value changes and amortization/accretion of mortgage servicing rights/liabilities	526			379
Fair value changes in excess spread financing	(35		)	(69		)
Fair value changes in mortgage servicing rights financing liability	6			2
Fair value changes in mortgage loans held for investment	—			(1		)
Amortization of premiums, net of discount accretion	23			2
Depreciation and amortization for property and equipment and intangible assets	19			21
Share-based compensation	4			4
Other loss	7			—
Repurchases of forward loan assets out of Ginnie Mae securitizations	(919		)	(364		)
Mortgage loans originated and purchased for sale, net of fees	(12,375		)	(5,717		)
Sales proceeds and loan payment proceeds for mortgage loans held for sale and held for investment	13,724			6,197
Changes in assets and liabilities:
Advances and other receivables	300			120
Reverse mortgage interests	400			614
Other assets	(91		)	(216		)
Payables and other liabilities	(255		)	(217		)
Net cash attributable to operating activities	710			285

Investing Activities
Acquisitions, net of cash acquired	—			(85		)
Property and equipment additions, net of disposals	(12		)	(10		)
Purchase of forward mortgage servicing rights, net of liabilities incurred	(27		)	(130		)
Proceeds on sale of forward and reverse mortgage servicing rights	43			243
Net cash attributable to investing activities	4			18

Continued on following page. See accompanying notes ~~are an integral part~~to the consolidated financial statements (unaudited).

MR. COOPER GROUP INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Continued)

(millions of dollars)



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Financing Activities
(Decrease) increase in warehouse facilities	(25		)	307
Increase (decrease) in advance facilities	68			(30		)
Repayment of notes payable	—			(294		)
Proceeds from sale of HECM securitizations	—			20
Repayment of HECM securitizations	(99		)	(127		)
Proceeds from issuance of participating interest financing in reverse mortgage interests	55			86
Repayment of participating interest financing in reverse mortgage interests	(330		)	(494		)
Proceeds from the issuance of excess spread financing	24			245
Settlements and repayments of excess spread financing	(58		)	(50		)
Issuance of unsecured senior debt	600			—
Repayment of nonrecourse debt – legacy assets	—			(3		)
Redemption and repayment of unsecured senior notes	(698		)	—
Repayment of finance lease liability	(1		)	(1		)
Surrender of shares relating to stock vesting	(5		)	(2		)
Debt financing costs	(12		)	(1		)
Net cash attributable to financing activities	(481		)	(344		)
Net increase (decrease) in cash, cash equivalents, and restricted cash	233			(41		)
Cash, cash equivalents, and restricted cash - beginning of period	612			561
Cash, cash equivalents, and restricted cash - end of period⁽¹⁾	$	845		$	520

Supplemental Disclosures of Cash Activities
Cash paid for interest expense	$	89		$	74


⁽¹⁾	The following table provides a reconciliation of cash, cash equivalents and restricted cash to amount reported within the consolidated balance sheets.



	March 31, 2020		March 31, 2019
Cash and cash equivalents	$	579	$	181
Restricted cash	266		339
Total cash, cash equivalents, and restricted cash	$	845	$	520

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

MR COOPER GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(millions of dollars, unless otherwise stated)

1. Nature of Business and Basis of Presentation

Nature of Business

Mr. Cooper Group Inc., collectively with its consolidated subsidiaries, (“Mr. Cooper”, the “Company”, “we”, “us” or “our”) provides servicing, origination and transaction-based services related to single family residences throughout the United States with operations under its primary brands: Mr. Cooper® and Xome®. Mr. Cooper is one of the ~~condensed consolidated financial statements.~~

~~WMIH CORP. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~Unless otherwise indicated, financial information, including dollar values stated~~largest home loan originators and servicers in the ~~text~~country focused on delivering a variety of ~~the notes~~servicing and lending products, services and technologies. Xome provides real estate data as well as a range of services including real estate brokerage, title, closing, valuation and field services to ~~financial statements,~~lenders, investors and consumers. The Company’s corporate website is ~~expressed in thousands.~~

References herein, unless the context requires otherwise, to (i) the terms “Company,” “we,” “us” or “our” generally are intended to refer to WMIH Corp. (formerly WMI Holdings Corp.) and its subsidiaries on a consolidated basis; (ii) “WMIH” refers only to WMIH Corp. without regard to its subsidiaries; (iii) “WMIHC” refers only to WMI Holdings Corp. without regard to its subsidiaries; (iv) “WMMRC” means WM Mortgage Reinsurance Company, Inc. (a wholly-owned subsidiary of WMIH); and (v) “WMIIC” means WMI Investment Corp. (a wholly-owned subsidiary of WMIH)located at www.mrcoopergroup.com.

~~Note 1:~~ The Company has provided a glossary of terms, which defines certain industry-specific and ~~its Subsidiaries~~

~~WMIH Corp.~~

other terms that are used herein, in the MD&A section of this Form 10-Q.

Mr. Cooper, which was previously known as WMIH Corp. (“WMIH”), is a corporation duly organized and existing under the laws of the State of ~~Delaware. On~~Delaware since May 11, ~~2015, WMIH merged with its parent corporation, WMI Holdings Corp., a Washington corporation~~2015. On July 31, 2018, Wand Merger Corporation (“~~WMIHC”~~Merger Sub”), with WMIH as the surviving corporation in the merger (the “Merger”). The Merger occurred as part of the reincorporation of WMIHC from the State of Washington to the State of Delaware effective May 11, 2015 (the “Reincorporation Date”).

WMIH, formerly known as WMIHC and Washington Mutual, Inc. (“WMI”), is the direct parent of WM Mortgage Reinsurance Company, Inc., a Hawaii corporation (“WMMRC”), and WMI Investment Corp., a Delaware corporation (“WMIIC”). Since the emergence from bankruptcy on March 19, 2012, our business activities consist of operating WMMRC’s legacy reinsurance business in runoff mode. In addition, we are actively seeking acquisition opportunities across a broad array of industries with a specific focus in the financial services industry, including targets with consumer finance, specialty finance, leasing and insurance operations.

As of September 30, 2017, WMIH was authorized to issue up to 3,500,000,000 shares of common stock, and up to 10,000,000 shares of preferred stock (in one or more series), in each case with a par value of $0.00001 per share. As of September 30, 2017 and December 31, 2016, 206,714,132 and 206,380,800 shares, respectively, of WMIH’s common stock were issued and outstanding. As of September 30, 2017 and December 31, 2016, 1,000,000 shares of WMIH’s Series A Convertible Preferred Stock (the “Series A Preferred Stock”) were issued and outstanding. As of September 30, 2017 and December 31, 2016, 600,000 shares of WMIH’s 3% Series B Convertible Preferred Stock (the “Series B Preferred Stock”) were issued and outstanding.

While we remain committed to consummating an acquisition, we also are mindful that the Company’s Series B Preferred Stock is redeemable on January 5, 2018 if we have not consummated a Qualified Acquisition, as more fully described in Note 6: Service Agreements and Related Party Transactions, or executed a definitive agreement to consummate an Acquisition (as such term is defined in Article VI of WMIH’s Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”)), prior to that date. Accordingly, as previously disclosed, we formed the Finance Committee of the Company’s Board of Directors (the “Finance Committee”), comprised solely of independent directors, to explore potential financing and refinancing alternatives, including the potential restructuring or refinancing of the Series B Preferred Stock. The Finance Committee has retained financial advisors to provide certain financial advisory services in connection with the Finance Committee’s mandate to review the Company’s capital structure and potential financing alternatives. There can be no assurance that any transaction, including a refinancing of the Series B Preferred Stock, will occur or if so on what terms.

~~WMMRC~~

~~WMMRC is~~ a wholly-owned subsidiary of ~~WMIH. Prior to August 2008 (at which time WMMRC became a direct subsidiary of WMI)~~WMIH merged with and into Nationstar Mortgage Holdings Inc. (“Nationstar”), ~~WMMRC was~~with Nationstar continuing as a wholly-owned subsidiary of FA Out-of-State Holdings, Inc., a second-tier subsidiary of Washington Mutual Bank (“WMB”) and third-tier subsidiary of WMI. WMMRC is a pure captive insurance company domiciled in the State of Hawaii. WMMRC was incorporated on February 25, 2000, and received a Certificate of Authority, dated March 2, 2000, from the Insurance Division of the State of Hawaii.

WMMRC was originally organized to reinsure private mortgage insurance risk for seven primary mortgage insurers then offering private mortgage insurance on loans originated or purchased by former subsidiaries of WMI. The seven primary mortgage insurers are United Guaranty Residential Insurance Company (“UGRIC”), Genworth Mortgage Insurance Corporation (“GMIC”), Mortgage Guaranty Insurance Corporation (“MGIC”), PMI Mortgage Insurance Company (“PMI”), Radian Guaranty Incorporated (“Radian”), Republic Mortgage Insurance Company (“RMIC”) and Triad Guaranty Insurance Company (“Triad”WMIH (the “Merger”).

~~Due~~ Prior to the ~~then deteriorating performance~~Merger, WMIH had limited operations other than its reinsurance business that operated in ~~the mortgage guarantee markets and the closure and receivership of WMB, the reinsurance agreements with each of the primary mortgage insurers were terminated or placed into~~ runoff during 2008. The agreements with UGRIC and Triad were placed into runoff effective May 31, 2008. The agreements with all other primary mortgage insurers were placed into runoff effective September 26, 2008.mode. As a result ~~effective September 26, 2008, WMMRC’s continuing operations consisted solely~~ of the ~~runoff~~Merger, shares of ~~coverage associated~~Nationstar common stock were delisted from the New York Stock Exchange. Following the Merger closing, the combined company traded on NASDAQ under the ticker symbol “WMIH” until October 10, 2018, when WMIH changed its name to “Mr. Cooper Group Inc.” and its ticker symbol to “COOP”.

Basis of Presentation

The consolidated interim financial statements of the Company have been prepared in accordance with ~~mortgages placed with the primary mortgage carriers prior to September 26, 2008. In runoff, an insurer~~U.S. generally ~~writes no new business but continues to service its obligations under in force policies~~accepted accounting principles (“GAAP”) for interim financial information and otherwise continues as a licensed insurer. The reinsurance agreements with Triad, PMI and UGRIC were commuted on August 31, 2009, October 2, 2012 and April 3, 2014, respectively, and the related trust assets were distributed in accordance with the ~~commutation agreements. On October 23, 2017,~~instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the reinsurance agreement with Radian was commuted and the related trust assets were released to WMMRC. On September 13, 2017, the Insurance Division of the State of Hawaii approved this commutation and a related distribution of up to $10.7 million to WMIH, which distribution has not been completed as of the date of the filing of this Form 10-Q. For more information see Note 14: Subsequent Events. As a result, WMMRC’s current continuing operations, subsequent to the Radian commutation, consist solely of the runoff of coverage associated with mortgages placed with the following three remaining carriers, GMIC, MGIC and RMIC.

~~WMIIC~~

~~WMIIC does not currently have any operations and is fully eliminated upon consolidation.~~

~~Note 2: Significant Accounting Policies~~

~~Basis of Presentation~~

~~WMIH resumed timely filing of all periodic reports for a reporting company under the Exchange Act for all periods after emergence from bankruptcy on March 19, 2012 (the “Effective Date”).~~

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for quarterly reporting. Certain information and footnote disclosures normally included inSEC. Accordingly, the financial statements do not include all of the information and prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the disclosures included are appropriate. The condensed consolidated balance sheet as of December 31, 2016, included herein, was derived from the audited consolidatedfootnotes required by GAAP for complete financial statements ~~as of that date.~~

~~These interim unaudited condensed consolidated financial statements~~ and ~~notes thereto~~ should be read in conjunction with the ~~Company’s~~ audited consolidated financial statements and notes thereto ~~filed~~included in the Company’s Annual ~~Report~~Reports on Form 10-K ~~filed with~~for the ~~SEC on March 14, 2017. Interim information presented in the unaudited condensed~~year ended December 31, 2019.

The interim consolidated financial statements ~~has been prepared by management. In~~are unaudited; however, in the opinion of management, ~~the financial statements include~~ all adjustments, consisting of normal recurring items, considered necessary for a fair presentation ~~and that all such adjustments are of a normal, recurring nature and necessary for the fair statement~~ of the results of the interim periods have been included. Dollar amounts are reported in millions, except per share data and other key metrics, unless otherwise noted.

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

Basis of Consolidation

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 ~~cash flows for the periods presented in accordance with GAAP. The results of operations for the nine months ended September 30, 2017 are not necessarily indicative~~procedures of the ~~results to be expected~~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 ~~the full year ending December 31, 2017.~~

~~All significant intercompany~~as cost method investments. Intercompany balances and transactions ~~and balances~~on consolidated entities have been ~~eliminated~~eliminated. Business combinations are included in ~~preparing~~ the ~~condensed~~ consolidated financial ~~statements.~~

statements from their respective dates of acquisition.

Use of Estimates

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

Recent Accounting Guidance Adopted

Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326), (“ASU 2016-13”) requires expected credit losses for financial instruments held at the reporting date to be measured based on historical experience, current conditions and reasonable and supportable forecasts, which is referred to as the current expected credit loss (“CECL”) methodology. The update eliminates the initial recognition of credit losses on an incurred basis in current GAAP and instead reflects an entity’s current estimate of all expected credit losses over the life of the asset. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss. The new standard will reflect management’s best estimate of all expected credit losses for the Company’s financial assets that are recognized at amortized cost. The guidance is effective for the Company as of January 1, 2020, with a cumulative-effect adjustment to retained earnings as of that date.

Based upon management’s scoping analysis, 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. 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 other assets reserves, as of January 1, 2020 for the cumulative effect of adopting ASU 2016-13.

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 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, had limited impact from the adoption of CECL to the reserve methodology. See Note 4, Advances and Other Receivables, Net, Note 5, Reverse Mortgage Interests, Net, and Note 8, Other Assets, 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, 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. 2018-13, 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. The Company adopted ASU 2018-13 on January 1, 2020. The guidance does not have a material impact to the disclosures currently provided by the Company.

2. Acquisitions

Acquisition of Pacific Union Financial, LLC

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

The acquisition has been accounted for in accordance with Accounting Standards Codification 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 ~~disclosure~~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 ~~contingent~~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 ~~liabilities~~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.



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 $2 during the three months ended March 31, 2019, of which $1 is included in salaries, wages and benefits expense and $1 in general and administrative expense in the Company’s consolidated statements of operations. The acquisition costs were primarily related to legal, accounting and consulting services. There were no acquisition costs incurred by the Company in the three months ended March 31, 2020.

For the three months ended March 31, 2019, the operations contributed by this acquisition generated total revenues of $39 and income before income tax of $14, respectively, which are reported in the Company’s consolidated statements of operations.

The following unaudited pro forma financial information presents the combined results of operations for the three months ended March 31, 2019, as if the acquisition had occurred on January 1, 2019:



	Three Months Ended March 31, 2019
Pro forma financial information	(unaudited)
Pro forma total revenues	$	269

Pro forma net loss	$	(184	)

3. Mortgage Servicing Rights and Related Liabilities

The following table sets forth the carrying value of the Company’s mortgage servicing rights (“MSRs”) and the related liabilities:



MSRs and Related Liabilities	March 31, 2020		December 31, 2019
Forward MSRs - fair value	$	3,109	$	3,496
Reverse MSRs - amortized cost	6		6
Mortgage servicing rights	$	3,115	$	3,502

Mortgage servicing liabilities - amortized cost	$	53	$	61

Excess spread financing - fair value	$	1,242	$	1,311
Mortgage servicing rights financing - fair value	43		37
MSR related liabilities - nonrecourse at fair value	$	1,285	$	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:



Forward MSRs - Fair Value	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Fair value - beginning of period	$	3,496		$	3,665
Additions:
Servicing retained from mortgage loans sold	123			66
Purchases of servicing rights⁽¹⁾	24			409
Dispositions:
Sales of servicing assets	—			(260		)
Changes in fair value:
Changes in valuation inputs or assumptions used in the valuation model	(401		)	(332		)
Other changes in fair value	(133		)	(67		)
Fair value - end of period	$	3,109		$	3,481


⁽¹⁾	Purchases of servicing rights during the three months ended March 31, 2019 includes $271 of mortgage servicing rights that were acquired from Pacific Union. See Note 2, Acquisitions, for further discussion.

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 three months ended March 31, 2020 and 2019, the Company sold $40 and $19,409 in unpaid principal balance (“UPB”) of forward MSRs, of which none and $19,276 were retained by the Company as subservicer, respectively.

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

Credit sensitive portfolios generally consist of higher delinquency, single-family non-conforming residential forward mortgage loans serviced for agency and non-agency investors. Due to the ~~financial statements. Management has made~~Company’s focus on recapture and modifications, significant ~~estimates in certain areas, including valuing certain financial instruments, other assets and liabilities, the determination~~amounts of the ~~contingent risk liabilities,~~credit sensitive portfolio have been re-underwritten and, ~~in determining appropriate insurance reserves. Actual results could differ substantially from those estimates.~~

~~Fair Value~~therefore, behave more like the interest sensitive portfolio. Interest sensitive portfolios generally consist of ~~Certain Financial Instruments~~

~~Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Generally,~~lower delinquency, single-family conforming residential forward mortgage loans for ~~assets that are reported~~agency investors.

MSRs measured at fair value are also segregated between investor type into agency and non-agency pools (referred to herein as “investor pools”) based on upon contractual servicing agreements with investors at the respective balance sheet date to evaluate the MSR portfolio and fair value of the portfolio.

The following table provides a breakdown of UPB and fair value for the Company’s forward MSRs:



	March 31, 2020				December 31, 2019
Forward MSRs - UPB and fair value breakdown	UPB		Fair Value		UPB		Fair Value
Acquisition Pools
Credit sensitive	$	138,726	$	1,386	$	147,895	$	1,613
Interest sensitive	151,908		1,723		148,887		1,883
Total	$	290,634	$	3,109	$	296,782	$	3,496

Investors Pools
Agency⁽¹⁾	$	238,956	$	2,618	$	240,688	$	2,944
Non-agency⁽²⁾	51,678		491		56,094		552
Total	$	290,634	$	3,109	$	296,782	$	3,496


⁽¹⁾	Agency investors primarily consist of government sponsored enterprises (“GSE”), 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”).


⁽²⁾	Non-agency investors consist of investors in private-label securitizations.

The Company ~~uses quoted market prices or valuation models to estimate their fair value. These models incorporate~~used the following key weighted-average inputs ~~such as forward yield curves, market volatilities~~ and ~~pricing spreads, utilizing market-based inputs where readily available. The degree of management judgment involved~~assumptions in estimating the fair value of forward MSRs:



Forward MSRs - Key inputs and assumptions	March 31, 2020		December 31, 2019
Total MSR Portfolio
Discount rate	9.7	%	9.7	%
Prepayment speeds	13.4	%	13.1	%
Average life	5.7 years		5.8 years

Acquisition Pools:
Credit Sensitive
Discount rate	10.2	%	10.4	%
Prepayment speeds	13.0	%	12.7	%
Average life	5.9 years		6.0 years

Interest Sensitive
Discount rate	9.1	%	9.1	%
Prepayment speeds	13.8	%	13.5	%
Average life	5.5 years		5.7 years

Investor Pools:
Agency
Discount rate	9.0	%	9.0	%
Prepayment speeds	13.2	%	13.0	%
Average life	5.6 years		5.8 years

Non-agency
Discount rate	12.6	%	12.6	%
Prepayment speeds	14.3	%	13.8	%
Average life	6.1 years		6.2 years

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:



	Discount Rate						Total Prepayment Speeds
Forward MSRs - Hypothetical Sensitivities	100 bps Adverse Change			200 bps Adverse Change			10% Adverse Change			20% Adverse Change
March 31, 2020
Mortgage servicing rights	$	(111	)	$	(214	)	$	(158	)	$	(305	)

December 31, 2019
Mortgage servicing rights	$	(127	)	$	(245	)	$	(165	)	$	(317	)

These hypothetical sensitivities should be evaluated with care. The effect on fair value of a ~~financial instrument or~~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 asset is dependent upon the availability of quoted market prices or observable market inputs. For financial instruments that are actively traded in the marketplace or whose values are based on readily available market value data, little judgment is necessary when estimating the instrument’s fair value. When observable market prices and data are not readily available, significant management judgment often is necessary to estimate fair value.assumptions constant. In ~~those cases, different assumptions could result in significant~~reality, changes in ~~valuation.~~

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 ~~classifies fixed-maturity investments~~services certain HECM reverse mortgage loans with an unpaid principal balance of $21,590 and $22,725 as ~~trading securities, which are~~of March 31, 2020 and December 31, 2019, respectively. The following table sets forth the activities of reverse MSRs and mortgage servicing liabilities (“MSL”) for three months ended March 31, 2020 and 2019:



	Three Months Ended March 31,
	2020					2019
Reverse MSRs and Liabilities - Amortized Cost	Assets		Liabilities			Assets			Liabilities
Balance - beginning of period	$	6	$	61		$	11		$	71
Amortization/accretion	—		(8		)	—			(18		)
Adjustments⁽¹⁾	—		—			(4		)	37
Balance - end of the period	$	6	$	53		$	7		$	90
Fair value - end of period	$	6	$	27		$	7		$	75


⁽¹⁾	Reverse MSR and MSL net adjustments recorded by the Company during the three months ended March 31, 2019 primarily relate to the fair value adjustments for reverse MSR and MSL assumed from the Merger resulting from the revised cost to service assumption used in the valuation of reverse MSR and MSL during the measurement period.

Management evaluates reverse MSRs and MSLs each reporting period for impairment. Based on management’s assessment at ~~fair value. As such, changes in unrealized gains~~March 31, 2020, no impairment or increased obligation was needed.

Excess Spread Financing - Fair Value

In order to finance the acquisition of certain MSRs on various Portfolios, the Company has entered into sale and ~~losses on investments held at~~assignment agreements with third parties and sold to these entities the ~~balance sheet date are recognized and reported as~~right to receive a ~~component~~specified percentage of ~~net investment income on~~ the ~~condensed consolidated statement of operations. The Company believes fair value provides better matching of investment earnings to potential~~excess cash flow generated from the ~~investment~~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 escrows, and also incurs costs to service the specified pool. The Company is the legal owner and the servicer of the portfolios and provides all servicing and advancing functions.

In connection with the above transactions, the Company entered into recapture agreement 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 recaptures any loan in the portfolio. The new or replacement loan will be governed by the same terms set forth in the sale and ~~reduces subjectivity related to evaluating other-than-temporary impairment~~assignment agreement described above. Accordingly, a recapture assumption is included within excess spread valuation.

The Company used the following weighted-average assumptions in the Company’s valuation of excess spread financing:



Excess Spread Financing Assumptions	March 31, 2020		December 31, 2019
Discount rate	11.6	%	11.6	%
Prepayment speeds	12.8	%	12.6	%
Recapture rate	18.6	%	20.1	%
Average life	5.7 years		5.8 years

The following table shows the hypothetical effect on the Company’s ~~investment portfolio.~~

excess spread financing fair value when applying certain unfavorable variations of key assumptions to these liabilities for the dates indicated:



	Discount Rate				Prepayment Speeds
Excess Spread Financing - Hypothetical Sensitivities	100 bps Adverse Change		200 bps Adverse Change		10% Adverse Change		20% Adverse Change
March 31, 2020
Excess spread financing	$	43	$	89	$	48	$	98

December 31, 2019
Excess spread financing	$	46	$	95	$	46	$	96

These hypothetical sensitivities should be evaluated with care. The ~~carrying~~effect on fair value of ~~cash and cash equivalents, restricted cash, accounts payable and accrued liabilities approximate their respective fair values~~a 10% variation in assumptions generally cannot be determined because ~~of their short-term nature.~~

~~The carrying value~~the relationship of the ~~loss contract reserve approximates its~~change in assumptions to the fair value ~~and~~may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is ~~based on valuation methodologies using discounted cash flows at interest rates~~calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which ~~approximate~~could impact the ~~Company’s weighted-average cost of capital.~~

~~The~~above hypothetical effects. Also, a positive change in the above assumptions would not necessarily correlate with the corresponding decrease in the net carrying ~~value~~amount of the d~~erivative embedded conversion feature~~ ~~of the Series B Preferred Stock~~ ~~is adjusted to its~~excess spread financing. Excess Spread financing’s cash flow assumptions that are utilized in determining fair value ~~as determined using Level 3 inputs described below under fair value measurement.~~

~~The carrying value of notes payable approximates fair value based on time to maturity, underlying collateral, and prevailing interest rates.~~

~~Fair Value Measurement~~

~~The Company’s estimates of fair value for financial assets and financial liabilities~~ are based on the ~~framework established~~related cash flow assumptions used in the ~~Financial Accounting Standards Board~~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 ~~Measurements~~

From December 2013 through June 2014, the Company entered into agreements to sell a contractually specified base servicing fee component of certain MSRs and ~~Disclosures~~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 ~~guidance.~~purposes, ownership of the MSR resides with the Company. Accordingly, the Company records the MSR and an MSR financing liability associated with this transaction in its consolidated balance sheets. The ~~framework~~MSR financing liability reflects the incremental costs of this transaction relative to the market participant assumptions contained in the MSR valuation.

The following table sets forth the weighted-average assumptions used in the valuation of the mortgage servicing rights financing liability:



Mortgage Servicing Rights Financing Assumptions	March 31, 2020		December 31, 2019
Advance financing rates	1.7	%	3.5	%
Annual advance recovery rates	18.4	%	18.8	%

Servicing Segment Revenues

The following table sets forth the items comprising total revenues for the Servicing segment:



Total Revenues - Servicing	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Contractually specified servicing fees⁽¹⁾	$	297		$	281
Other service-related income⁽¹⁾	49			50
Incentive and modification income⁽¹⁾	10			7
Late fees⁽¹⁾	27			25
Reverse servicing fees	6			9
Mark-to-market adjustments⁽²⁾	(383		)	(293		)
Counterparty revenue share⁽³⁾	(76		)	(48		)
Amortization, net of accretion⁽⁴⁾	(76		)	(23		)
Total revenues - Servicing	$	(146	)	$	8


⁽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 for the Company was $10 and $11 for the three months ended March 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 $68 and $36 and MSL accretion of $8 and $18 for the three months ended March 31, 2020 and 2019, respectively.

4. Advances and Other Receivables, Net

Advances and other receivables, net consists of the following:



Advances and Other Receivables, Net	March 31, 2020			December 31, 2019
Servicing advances, net of $125 and $131 discount, respectively	$	688		$	970
Receivables from agencies, investors and prior servicers, net of $21 and $21 discount, respectively	190			193
Reserves	(193		)	(175		)
Total advances and other receivables, net	$	685		$	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 and hazard insurance and foreclosure costs. Advances are primarily recovered through reimbursement from the investor, proceeds from sale of loan collateral or mortgage insurance claims or the borrower. Reserves for advances and other receivables on loans liquidated or purchased out of the MSR portfolio are established within advances and other receivables.

The following table sets forth the activities of the servicing reserves for advances and other receivables:



Reserves for Advances and Other Receivables	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Balance - beginning of period	$	168		$	47
Provision and other additions⁽¹⁾	30			30
Write-offs	(5		)	(6		)
Balance - end of period	$	193		$	71

⁽¹⁾

The Company recorded a provision of $10 and $11 through the MTM adjustments in revenues - service related, net, in the consolidated statements of operations for the three months ended March 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 the acquisition of Pacific Union in February 2019, the Company recorded the acquired advances and other receivables at estimated fair value as of the acquisition date, which resulted in a purchase discount of $19. Refer to Note 2, Acquisitions, for discussion of the Pacific Union acquisition. In 2018, the Company recorded the acquired advances and other receivables in connection with the Merger at estimated fair value as of the acquisition date, which resulted in a purchase discount of $302.

As of March 31, 2020, a total of $175 purchase discount has been utilized, with $146 purchase discount remaining.

The following table sets forth the activities of the purchase discounts for advances and other receivables:



	Three Months Ended March 31, 2020					Three Months Ended March 31, 2019
Purchase Discounts	Servicing Advances			Receivables from Agencies, Investors and Prior Servicers		Servicing Advances			Receivables from Agencies, Investors and Prior Servicers
Balance - beginning of period	$	131		$	21	$	205		$	48
Addition from acquisition	—			—		19			—
Utilization of purchase discounts	(6		)	—		(55		)	—
Balance - end of period	$	125		$	21	$	169		$	48

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. Upon applying ASU 2016-13, the Company reduced its reserve for credit-related losses by $7 as of January 1, 2020. During the three months ended March 31, 2020, the Company increased the CECL reserve by $6. As of March 31, 2020, the total CECL reserve was $23.

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, Net

Reverse mortgage interests, net consists of the following:



Reverse Mortgage Interests, Net	March 31, 2020			December 31, 2019
Participating interests in HECM mortgage-backed securities (“HMBS”), net of $16 and $10 purchase discount and premium, respectively	$	4,027		$	4,292
Other interests securitized, net of $44 and $56 purchase discount, respectively	851			938
Unsecuritized interests, net of $69 and $68 purchase discount, respectively	1,080			1,052
Reserves	(3		)	(3		)
Total reverse mortgage interests, net	$	5,955		$	6,279

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 Company’s consolidated balance sheets. The Company does not originate reverse mortgages, but during the three months ended March 31, 2020 and 2019, a total of $52 and $82 in UPB associated with new draws on existing loans was 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 three months ended March 31, 2019. There was no such activity during the three months ended March 31, 2020.

Other Interests Securitized

Other interests securitized consist of reverse mortgage interests that no longer meet HMBS program eligibility criteria primarily because they have reached 98% of their Max Claim Amount (“MCA”), 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. No such securitizations occurred during the three months ended March 31, 2020 and 2019. The Company sold $20 UPB of Trust 2018-3 during the three months ended March 31, 2019. Refer to Other Nonrecourse Debt in Note 10, Indebtedness, for additional information.

Unsecuritized Interests

Unsecuritized interests in reverse mortgages consist of the following:



Unsecuritized interests	March 31, 2020			December 31, 2019
Repurchased HECM loans (exceeds 98% MCA)	$	782		$	789
HECM related receivables⁽¹⁾	257			250
Funded borrower draws not yet securitized	64			67
Real estate owned (“REO”) related receivables	46			14
Purchase discount, net	(69		)	(68		)
Total unsecuritized interests	$	1,080		$	1,052


⁽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 (“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 and in accordance with HMBS program guidelines. These unsecuritized interests are primarily financed through available warehouse lines. The Company repurchased a total of $383 and $740 of HECM loans out of GNMA HMBS securitizations during the three months ended March 31, 2020 and 2019, respectively, of which $103 and $188 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 $266 and $514 of HECM loans to HUD during the three months ended March 31, 2020 and 2019, respectively.

Reserves for Reverse Mortgage Interests

The Company records reserves related to reverse mortgage interests based on potential unrecoverable costs and loss exposures expected to be realized. Recoverability is primarily determined based on the Company’s ability to meet HUD servicing guidelines and is assessed with respect to both financial and operational exposures.

The following table sets forth the activities of the servicing reserves for reverse mortgage interests:



Reserves for reverse mortgage interests	Three Months Ended March 31, 2020		Three Months Ended March 31, 2019
Balance - beginning of period	$	3	$	13
Provision (release), net	—		—
Write-offs	—		(5		)
Balance - end of period	$	3	$	8

Purchase Discount for Reverse Mortgage Interests

In connection with the Merger, the Company recorded the acquired reverse mortgage interests at estimated fair value as of the acquisition date, which resulted in a purchase premium of $42 for participating interests in HMBS, and a purchase discount of $298 for Other Interest Securitized and Unsecuritized Interests due to the higher exposure to financial and operational losses of servicing the loans through foreclosure and collateral liquidation. The 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.

The following table sets forth the activities of the purchase premiums and discounts for reverse mortgage interests:



	Three Months Ended March 31, 2020
Purchase premiums and discounts for reverse mortgage interests	Net Discount for Participating Interests in HMBS⁽¹⁾			Net Discount for Other Interest Securitized⁽¹⁾			Net Discount for Unsecuritized Interests⁽¹⁾
Balance - beginning of period	$	10		$	(56	)	$	(68	)
Utilization of purchase discounts⁽²⁾	—			5			5
(Amortization)/Accretion	(44		)	17			2
Transfers⁽³⁾	18			(10		)	(8		)
Balance - end of period	$	(16	)	$	(44	)	$	(69	)



	Three Months Ended March 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⁽⁴⁾	(16		)	(2		)	(6		)
Utilization of purchase discounts⁽²⁾	—			6			22
(Amortization)/Accretion	(14		)	(15		)	18
Transfers⁽³⁾	8			(1		)	(7		)
Balance - end of period	$	36		$	(112	)	$	(95	)


⁽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 on liquidated loans, for which the remaining receivable was written-off.


⁽³⁾	Transfer of premium/(discount) based on the transfer of associated loans between categories consistent with the underlying loan characteristics.


⁽⁴⁾	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 during the measurement period.

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 March 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 Interest Income

The Company accrues interest income for its participating interest in reverse mortgages based on the stated rates underlying HECM loans, in accordance with FHA guidelines. Total interest earned on the Company’s reverse mortgage interests was $62 and $82 for the three months ended March 31, 2020 and 2019, respectively.

6. Mortgage Loans Held for Sale

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

Mortgage loans held for sale are recorded at fair value as set forth below:



Mortgage Loans Held for Sale	March 31, 2020		December 31, 2019
Mortgage loans held for sale – UPB	$	3,735	$	3,949
Mark-to-market adjustment⁽¹⁾	187		128
Total mortgage loans held for sale	$	3,922	$	4,077


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

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

The total UPB and fair value of mortgage loans held for sale on non-accrual status was as follows:



	March 31, 2020				December 31, 2019
Mortgage Loans Held for Sale	UPB		Fair Value		UPB		Fair Value
Non-accrual⁽¹⁾	$	33	$	23	$	29	$	22


⁽¹⁾	Non-accrual - UPB includes $28 and $25 of UPB related to Ginnie Mae repurchased loans as of March 31, 2020 and December 31, 2019, respectively.

The total UPB of mortgage loans held for sale for which the Company has begun formal foreclosure proceedings was $24 and $21 as of March 31, 2020 and December 31, 2019, respectively.

The following table sets forth the activities of mortgage loans held for sale:



Mortgage Loans Held for Sale	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Balance - beginning of period	$	4,077		$	1,631
Loans sold	(13,510		)	(6,088		)
Mortgage loans originated and purchased, net of fees⁽¹⁾	12,375			6,253
Repurchase of loans out of Ginnie Mae securitizations	919			364
Changes in fair value	61			10
Net transfers of mortgage loans held for sale⁽²⁾	—			—
Balance - end of period	$	3,922		$	2,170


⁽¹⁾	Mortgage loans originated and purchased during the three months ended March 31, 2019 includes $536 of loans held for sale that were acquired from Pacific Union. See Note 2, Acquisitions, for further discussion.


⁽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.

For the three months ended March 31, 2020 and 2019, the Company received proceeds of $13,724 and $6,194, respectively, on the sale of mortgage loans held for sale, resulting in gains of $275 and $106, respectively.

The Company has the right to repurchase any individual loan in a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. The majority of Ginnie Mae repurchased loans are repurchased 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.

7. Leases

Operating leases in which the Company is the lessee are recorded as operating lease right-of-use (“ROU”) assets and operating lease liabilities, included in other assets and payables and other liabilities, respectively, on the consolidated balance sheets as of March 31, 2020. 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. The Company’s leases relate primarily to office space and equipment, with remaining lease terms of generally 1 to 9 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 March 31, 2020, operating lease ROU assets and liabilities were $111 and $125, respectively.

The table below summarizes the Company’s net lease cost:



Net lease cost	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Operating lease cost	$	10		$	8
Short-term lease cost	—			1
Sublease income	(1		)	—
Net lease cost	$	9		$	9

The table below summarizes other information related to the Company’s operating leases:



Operating leases	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	10		$	6
Leased assets obtained in exchange for new operating lease liabilities	$	—		$	127
Weighted average remaining lease term	5.6 years			5.5 years
Weighted average discount rate	5.0		%	5.0		%

Maturities of operating lease liabilities as of March 31, 2020 are as follows:



Year Ending December 31,	Operating Leases
2020⁽¹⁾	$	37
2021	29
2022	20
2023	16
2024	11
2025 and thereafter	30
Total future minimum lease payments	143
Less: imputed interest	18
Total operating lease liabilities	$	125


⁽¹⁾	Excluding the three months ended March 31, 2020.

8. Other Assets

Other assets consist of the following:



Other assets	March 31, 2020		December 31, 2019
Loans subject to repurchase right from Ginnie Mae	$	468	$	560
Derivative financial instruments	294		153
Trade receivables and accrued revenues	143		126
Goodwill	120		120
Right-of-use assets	111		121
Intangible assets	61		74
Other	372		236
Total other assets	$	1,569	$	1,390

Loans Subject to Repurchase Right from Ginnie Mae

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

Derivative Financial Instruments

See Note 9, Derivative Financial Instruments, for further details on derivative financial instruments.

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. As described in Note 1, Nature of Business and Basis of Presentation, certain trade receivables and accrued revenues included in other assets are within the scope of ASU 2016-13, requiring an assessment of CECL losses. Upon applying ASU 2016-13, the Company reduced its other assets allowances by $2 as of January 1, 2020. The CECL reserve as of March 31, 2020 was $6.

The credit-risk characteristics of trade receivables included in other assets and within the scope of ASU 2016-13 do not change with time as they are primarily short-term in nature. However, the Company does monitor the financial status of customers to determine if any specific loss considerations are required.

Goodwill and Intangible Assets

In 2019, the Company recorded goodwill and intangible assets of $40 and $13, respectively, in connection with the acquisition of Pacific Union. See further discussion in Note 2, Acquisitions. The Company recorded a $4 impairment of technology intangible assets within Corporate/Other segment during the three months ended March 31, 2020 in connection with an ancillary business. The impairment charges were included in the general and administrative expenses in the consolidated statements of operations. There was no impairment expense for intangible assets during the three months ended March 31, 2019.

Right-of-Use Assets

See Note 7, Leases, for further details on right-of-use assets.

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 $12 and $11 of REO-related receivables with government insurance as of March 31, 2020 and December 31, 2019, respectively, limiting loss exposure to the Company.

9. 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”), forward Mortgage Backed Securities (“MBS”) purchase commitments, Eurodollar and Treasury futures and interest rate swap agreements.

Associated with the Company’s derivatives are $178 and $6 in collateral deposits on derivative instruments recorded in other assets on the Company’s consolidated balance sheets as of March 31, 2020 and December 31, 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 tables provide the outstanding notional balances, fair values of outstanding positions and recorded gains/(losses) for the derivative financial instruments:



		March 31, 2020				Three Months Ended March 31, 2020
Derivative Financial Instruments	Expiration Dates	Outstanding Notional		Fair Value		Recorded Gains/(Losses)
Assets
Mortgage loans held for sale
Loan sale commitments	2020	$	2,598	$	111	$	79
Derivative financial instruments
IRLCs	2020	6,923		263		128
LPCs	2020	834		25		13
Forward MBS trades	2020	886		6		—
Eurodollar futures	2020-2021	6		—		—
Total derivative financial instruments - assets		$	8,649	$	294	$	141
Liabilities
Derivative financial instruments
IRLCs	2020	$	22	$	—	$	—
LPCs	2020	10		—		(3		)
Forward MBS trades	2020	10,229		223		211
Eurodollar futures	2020-2021	6		—		—
Total derivative financial instruments - liabilities		$	10,267	$	223	$	208



		March 31, 2019				Three Months Ended March 31, 2019
Derivative Financial Instruments	Expiration Dates	Outstanding Notional		Fair Value		Recorded Gains/(Losses)
Assets
Mortgage loans held for sale
Loan sale commitments	2019	$	365	$	17	$	(9	)
Derivative financial instruments
IRLCs	2019	2,557		69		9
LPCs	2019	216		2		1
Forward MBS trades	2019	410		1		(1		)
Eurodollar futures	2019-2021	7		—		—
Total derivative financial instruments - assets		$	3,190	$	72	$	9
Liabilities
Derivative financial instruments
LPCs	2019	$	52	$	—	$	—
Forward MBS trades	2019	3,804		22		(3		)
Eurodollar futures	2019-2021	13		—		—
Total derivative financial instruments - liabilities		$	3,869	$	22	$	(3	)

10. Indebtedness

Notes Payable



						March 31, 2020					December 31, 2019
Advance Facilities	Interest Rate	Maturity Date	Collateral	Capacity Amount		Outstanding			Collateral Pledged		Outstanding		Collateral pledged
$325 advance facility⁽¹⁾	LIBOR+1.5% to 6.5%	August 2021	Servicing advance receivables	$	325	$	223		$	283	$	224	$	285
$250 advance facility⁽²⁾	LIBOR+1.5% to 2.6%	December 2020	Servicing advance receivables	250		118			138		98		167
$200 advance facility	LIBOR+2.5%	January 2021	Servicing advance receivables	200		83			117		63		125
$125 advance facility⁽³⁾	LIBOR+1.5% to 7.4%	July 2020	Servicing advance receivables	125		66			76		37		88
Advance facilities principal amount						490			$	614	422		$	665
Unamortized debt issuance costs						(1		)			—
Advance facilities, net						$	489				$	422


⁽¹⁾	The capacity amount was subsequently increased to $425 in April 2020 with a maturity date of October 2021.


⁽²⁾	This advance facility was subsequently terminated and transferred to another advance facility in April 2020.


⁽³⁾	The capacity amount was subsequently increased to $875 in April 2020 with a maturity date of April 2021.



						March 31, 2020					December 31, 2019
Warehouse Facilities	Interest Rate	Maturity Date	Collateral	Capacity Amount		Outstanding			Collateral pledged		Outstanding			Collateral pledged
$1,500 warehouse facility	LIBOR+1.0%	June 2020	Mortgage loans or MBS	$	1,500	$	1,214		$	1,160	$	759		$	733
$1,200 warehouse facility	LIBOR+1.5% to 3.0%	November 2020	Mortgage loans or MBS	1,200		566			602		683			724
$1,000 warehouse facility	LIBOR+1.4% to 2.3%	September 2020	Mortgage loans or MBS	1,000		593			608		762			783
$800 warehouse facility⁽¹⁾	LIBOR+2.1% to 3.8%	April 2021	Mortgage loans or MBS	800		528			639		589			656
$750 warehouse facility	LIBOR+1.4% to 2.8%	September 2020	Mortgage loans or MBS	750		347			355		411			425
$700 warehouse facility	LIBOR+1.3% to 2.2%	November 2020	Mortgage loans or MBS	700		628			649		469			488
$600 warehouse facility	LIBOR+2.0%	February 2021	Mortgage loans or MBS	600		169			203		174			202
$500 warehouse facility	LIBOR+2.0% to 4.0%	May 2020	Mortgage loans or MBS	500		22			23		336			349
$200 warehouse facility	LIBOR+1.4%	January 2021	Mortgage loans or MBS	200		100			101		136			136
$200 warehouse facility	LIBOR+1.2%	April 2021	Mortgage loans or MBS	200		21			21		27			27
$200 warehouse facility	LIBOR+2.0%	May 2020	Mortgage loans or MBS	200		59			83		54			78
$200 warehouse facility	LIBOR+1.3%	October 2020	Mortgage loans or MBS	200		—			—		—			—
$50 warehouse facility	LIBOR+2.0% to 6.0%	June 2020	Mortgage loans or MBS	50		4			6		11			15
$40 warehouse facility	LIBOR+3.3%	September 2020	Mortgage loans or MBS	40		6			7		5			6
Warehouse facilities principal amount						4,257			4,457		4,416			4,622
MSR Facility
$400 warehouse facility	LIBOR+3.5% or 6.1%	January 2023	Mortgage loans or MBS	400		150			836		150			945
$400 warehouse facility	LIBOR+2.3%	December 2020	Mortgage loans or MBS	400		75			190		—			200
$150 warehouse facility⁽¹⁾	LIBOR+2.8%	April 2021	Mortgage loans or MBS	150		40			119		—			130
$50 warehouse facility	LIBOR+2.8%	August 2020	Mortgage loans or MBS	50		30			71		10			84
MSR facilities principal amount						295			1,216		160			1,359
Warehouse and MSR facilities principal amount						4,552			$	5,673	4,576			$	5,981
Unamortized debt issuance costs						(1		)			(1		)
Warehouse facilities, net						$	4,551				$	4,575

Pledged Collateral:
Mortgage loans held for sale						$	3,659		$	3,748	$	3,826		$	3,931
Reverse mortgage interests						598			709		590			691
MSR						295			1,216		160			1,359


⁽¹⁾	Total capacity amount for this facility is $800 of which $150 is a sublimit for MSR financing.

Unsecured Senior Notes

Unsecured senior notes consist of the following:



Unsecured senior notes	March 31, 2020			December 31, 2019
$950 face value, 8.125% interest rate payable semi-annually, due July 2023	$	950		$	950
$750 face value, 9.125% interest rate payable semi-annually, due July 2026	750			750
$600 face value, 6.000% interest rate payable semi-annually, due January 2027⁽¹⁾	600			—
$600 face value, 6.500% interest rate payable semi-annually, due July 2021⁽²⁾	—			492
$300 face value, 6.500% interest rate payable semi-annually, due June 2022⁽²⁾	—			206
Unsecured senior notes principal amount	2,300			2,398
Unamortized debt issuance costs, premium and discount	(41		)	(32		)
Unsecured senior notes, net	$	2,259		$	2,366


⁽¹⁾	On January 16, 2020, the Company completed an offering of $600 aggregate principal amount of 6.000% Senior Notes due 2027 (the “2027 notes”).


⁽²⁾	This note was redeemed in full on February 15, 2020 using the net proceeds of the 2027 notes offering, together with cash on hand.

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

The indentures provide that on or before certain fixed dates, the Company may redeem up to 40% of the aggregate principal amount of the unsecured senior notes with the net proceeds of certain equity offerings at fixed redemption prices, plus accrued and unpaid interest, to the redemption dates, subject to compliance with certain conditions. In addition, the Company may redeem all or a portion of the unsecured senior notes at any time on or after certain fixed dates at the applicable redemption prices set forth in the indentures plus accrued and unpaid interest, to the redemption dates. During the three months ended March 31, 2020, the Company repaid $100 in principal of outstanding notes. Additionally, the Company redeemed $598 in principal of outstanding notes during the three months ended March 31, 2020, resulting in a gain of $1. No notes were repurchased or redeemed during the three months ended March 31, 2019.

As of March 31, 2020, the expected maturities of the Company’s unsecured senior notes based on contractual maturities are as follows:



Year Ending December 31,	Amount
2020	$	—
2021	—
2022	—
2023	950
2024	—
Thereafter	1,350
Total unsecured senior notes principal amount	$	2,300

Other Nonrecourse Debt

Other nonrecourse debt consists of the following:



						March 31, 2020		December 31, 2019
Other nonrecourse debt	Issue Date	Maturity Date	Class of Note	Collateral Amount		Outstanding		Outstanding
Participating interest financing⁽¹⁾	—	—	—	$	—	$	4,045	$	4,284
Securitization of nonperforming HECM loans
Trust 2019-2	November 2019	November 2029	A, M1, M2, M3, M4, M5	306		297		333
Trust 2019-1	June 2019	June 2029	A, M1, M2, M3, M4, M5	286		269		302
Trust 2018-3	November 2018	November 2028	A, M1, M2, M3, M4, M5	209		190		209
Trust 2018-2	July 2018	July 2028	A, M1, M2, M3, M4, M5	157		137		148
Other nonrecourse debt principal amount						4,938		5,276
Unamortized debt issuance costs, premium and discount						7		10
Other nonrecourse debt, net						$	4,945	$	5,286


⁽¹⁾	Amounts represent the Company’s participating interest in GNMA HMBS securitized portfolios.

Participating Interest Financing

Participating interest financing represents the obligation of HMBS pools to third-party security holders. The Company issues HMBS in connection with the securitization of borrower draws and accrues interest on HECM loans. Proceeds are received in exchange for securitized advances on the HECM loan amounts transferred to GNMA, and the Company retains a beneficial interest (referred to as a “participating interest”) in the securitization trust in which the HECM loans and HMBS obligations are held and assume both issuer and servicer responsibilities in accordance with GNMA HMBS program guidelines. Monthly cash flows generated from the HECM loans are used to service the HMBS obligations. The interest rate is based on the underlying HMBS rate with a range of 1.8% to 5.6%.

Securitizations of Nonperforming HECM Loans

From time to time, the Company securitizes its interests in non-performing reverse mortgages. The transactions provide investors with the ability to invest in a pool of both non-performing HECM loans secured by one-to-four-family residential properties and a pool of REO properties acquired through foreclosure of a deed in lieu of foreclosure in connection with HECM loans that are covered by FHA insurance. The transactions provide the Company with access to liquidity for the non-performing HECM loan portfolio, ongoing servicing fees, and potential residual returns. The transactions are structured as secured borrowings with the reverse mortgage loans included in the consolidated financial statements as reverse mortgage interests and the related financing included in other nonrecourse debt. Interest is accrued at a rate of 2.3% to 6.0% on the outstanding securitized notes and recorded as interest expense in consolidated statements of operations. The HECM securitizations are callable with expected weighted average lives of less than one to three years. The Company may re-securitize the previously called loans from earlier HECM securitizations to achieve a lower cost of funds.

Financial Covenants

The Company’s 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 the Company’s operating subsidiary, Nationstar Mortgage LLC. The Company was in compliance with its required financial covenants as of March 31, 2020.

11. Payables and Other Liabilities

Payables and other liabilities consist of the following:



Payables and other liabilities	March 31, 2020		December 31, 2019
Loans subject to repurchase right from Ginnie Mae	$	468	$	560
Payables to servicing and subservicing investors	407		423
Derivative financial instruments	223		15
Payable to GSEs and securitized trusts	148		182
Operating lease liabilities	125		135
Other liabilities	594		701
Total payables and other liabilities	$	1,965	$	2,016

Loans Subject to Repurchase Right from Ginnie Mae

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

Payables to Servicing and Subservicing Investors and Payables to GSEs and Securitized Trusts

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

Derivative Financial Instruments

See Note 9, Derivative Financial Instruments, for further details on derivative financial instruments.

Operating Lease Liabilities

See Note 7, Leases, for further details on operating lease liabilities.

MSR Purchases Payable Including Advances

MSR purchases payable including advances represents the amounts owed to the seller in connection with the purchase of MSRs.

Other Liabilities

Other liabilities primarily include accrued bonus and payroll, accrued interest, accrued legal expenses, payables to insurance carriers and insurance cancellation reserves, repurchase reserves, accounts payable and other accrued liabilities. Payables to insurance carriers and insurance cancellation reserves consist of insurance premiums received from borrower payments awaiting disbursement to the insurance carrier and/or amounts due to third-party investors on liquidated loans.

The following table sets forth the activities of the repurchase reserves:



Repurchase Reserves	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Balance - beginning of period	$	25		$	8
Provisions	5			8
Releases	(1		)	—
Balance - end of period	$	29		$	16

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

The Company regularly evaluates the adequacy of repurchase reserves based on trends in repurchase and indemnification requests, actual loss experience, settlement negotiation, estimated future loss exposure and other relevant factors including economic conditions. Current loss rates have significantly declined attributable to stronger underwriting standards and due to the falloff of loans underwritten prior to the mortgage loan crisis period prior to 2008. The Company believes its reserve balance as of March 31, 2020 is sufficient to cover loss exposure associated with repurchase contingencies.

12. Securitizations and Financings

Variable Interest Entities (VIE)

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

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

A summary of the assets and liabilities of the Company’s transactions with VIEs included in the Company’s consolidated financial statements is presented below:



	March 31, 2020				December 31, 2019
Consolidated transactions with VIEs	Transfers Accounted for as Secured Borrowings		Reverse Secured Borrowings		Transfers Accounted for as Secured Borrowings		Reverse Secured Borrowings
Assets
Restricted cash	$	53	$	43	$	66	$	42
Reverse mortgage interests, net⁽¹⁾	—		4,878		—		5,230
Advances and other receivables, net	498		—		540		—
Total assets	$	551	$	4,921	$	606	$	5,272

Liabilities
Advance facilities⁽²⁾	$	407	$	—	$	359	$	—
Payables and other liabilities	—		1		1		1
Participating interest financing	—		4,045		—		4,284
HECM Securitizations (HMBS)
Trust 2019-2	—		297		—		333
Trust 2019-1	—		269		—		302
Trust 2018-3	—		190		—		209
Trust 2018-2	—		137		—		148
Total liabilities	$	407	$	4,939	$	360	$	5,277


⁽¹⁾	Amounts include net purchase discount of $60 and $46 as of March 31, 2020 and December 31, 2019, respectively.


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

The following table shows a summary of the outstanding collateral and certificate balances for securitization trusts for which the Company was the transferor, including any retained beneficial interests and MSRs, that were not consolidated by the Company:



Unconsolidated securitization trusts	March 31, 2020		December 31, 2019
Total collateral balances - UPB	$	1,460	$	1,503
Total certificate balances	$	1,467	$	1,512

The Company has not retained any variable interests in the unconsolidated securitization trusts that were outstanding as of March 31, 2020 and December 31, 2019 and therefore does not have a significant maximum exposure to loss related to these unconsolidated VIEs.

A summary of mortgage loans transferred by the Company to unconsolidated securitization trusts that are 60 days or more past due are presented below:



Principal Amount of Transferred Loans 60 Days or More Past Due	March 31, 2020		December 31, 2019
Unconsolidated securitization trusts	$	184	$	193

13. Stockholders' Equity

Equity-based awards under the 2019 Omnibus Incentive Plan (the “2019 Plan”) include (i) restricted stock units (“RSUs”) granted to employees of the Company, consultants, and non-employee directors and (ii) performance stock units (“PSUs”) granted to certain executive officers. The RSUs are valued at the fair market value of the Company’s common stock on the grant date as defined in the 2019 Plan. The PSUs are valued at the fair market value of the Company’s common stock on the grant date as defined in the 2019 Plan and a Monte Carlo simulation model. During the three months ended March 31, 2020 and 2019, certain key employees of the Company, consultants, and non-employee directors of the Company were granted 1.1 million and 1.9 million RSUs, respectively. The stock awards for employees generally vest in equal installments on each of the first three anniversaries of the awards, provided that (i) the participant remains continuously employed with the Company during that time or (ii) the participant’s employment has terminated by reason of retirement. The stock awards for non-employee directors generally vest the earlier of (a) the first anniversary of the grant date or (b) the date of the next annual stockholders meeting following the grant date. In addition, upon death or disability, the unvested shares of an award will vest. During the three months ended March 31, 2020, certain executives of the Company were granted 0.5 million PSUs. For the 2020 PSU program, PSUs are eligible to vest and be settled into shares of Common Stock in an amount between 0% and 200% of a target award based on achievement of total shareholder return performance vesting criteria over a period of three years beginning March 1, 2020, with one-third of the units also eligible to vest based on performance through March 1, 2021.

The Company recorded $4 and $4 of expenses related to equity-based awards during the three months ended March 31, 2020 and 2019, respectively.

14. Earnings Per Share

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

The following table sets forth the computation of basic and diluted net loss per common share (amounts in millions, except per share amounts):



Computation of earnings per share	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Net loss attributable to Mr. Cooper	$	(168	)	$	(186	)
Less: Undistributed earnings attributable to participating stockholders	—			—
Net loss attributable to common stockholders	$	(168	)	$	(186	)

Net loss per common share attributable to Mr. Cooper:
Basic	$	(1.84	)	$	(2.05	)
Diluted	$	(1.84	)	$	(2.05	)

Weighted average shares of common stock outstanding (in thousands):
Basic	91,385			90,828
Dilutive effect of stock awards⁽¹⁾	—			—
Dilutive effect of participating securities⁽¹⁾	—			—
Diluted	91,385			90,828


⁽¹⁾	Due to year-to-date loss, the Company excluded potential common shares from the computation of diluted EPS because inclusion would be antidilutive.

15. Income Taxes

The components of income tax benefit were as follows:



Income taxes	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Loss before income tax benefit	$	(239	)	$	(233	)

Income tax benefit	$	(68	)	$	(47	)

Effective tax rate⁽¹⁾	28.4		%	20.3		%


⁽¹⁾	Effective tax rate is calculated using whole numbers.

For the three months ended March 31, 2020, the effective tax rate differed from the statutory federal rate of 21% primarily due to state income taxes, as well as unfavorable permanent differences including executive compensation disallowed under Internal Revenue Code Section 162(m). The increase in the effective tax rate as compared to the three months ended March 31, 2019 is primarily attributable to the increased relative unfavorable tax impacts of the permanent differences on the annual effective rate.

For the three months ended March 31, 2019, the effective tax rate differed from the statutory federal rate of 21% primarily due to permanent differences including executive compensation disallowed under Internal Revenue Code Section 162(m) and nondeductible meals and entertainment expenses, as well as other recurring items such as the state tax benefit.

16. Fair Value Measurements

Fair value is a market-based measurement, not an entity-specific measurement, and should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a three-tiered fair value hierarchy has been established based on the level of observable inputs used in ~~valuation and requires that observable inputs be used in~~ the ~~valuations when available. The disclosure~~measurement of fair value estimates in the fair value accounting guidance hierarchy is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions.

~~The three levels of the hierarchy are as follows:~~

(e.g., Level ~~1–Inputs to the valuation methodology are~~1 representing quoted prices for identical assets or liabilities ~~traded~~ in an active ~~markets.~~

market; Level 2–Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active,2 representing values using observable inputs other than quoted prices ~~that are observable for the asset or liability~~included within Level 1; and ~~market corroborated inputs.~~

Level ~~3–Valuations~~3 representing estimated values based on ~~models where~~ significant ~~inputs are not observable.~~ unobservable inputs).

The ~~unobservable inputs reflect~~following describes the ~~Company’s own~~methods and assumptions ~~about~~used by the ~~inputs that market participants would use.~~

~~Fair values are based on quoted prices~~Company in ~~active markets when available~~estimating fair values:

Cash and Cash Equivalents, Restricted Cash (Level 1). – The carrying amount reported in the consolidated balance sheets approximates fair value.

Mortgage Loans Held for Sale (Level 2) – The Company ~~receives~~originates mortgage loans in the ~~quoted prices from~~U.S. that it intends to sell into Fannie Mae, Freddie Mac and Ginnie Mae MBS. Additionally, the Company holds mortgage loans that it intends to sell into the secondary markets via whole loan sales or securitizations. The Company measures newly originated prime residential mortgage loans held for sale at fair value.

Mortgage loans held for sale are typically pooled together and sold into certain exit markets, depending upon underlying attributes of the loan, such as agency eligibility, product type, interest rate and credit quality. Mortgage loans held for sale are valued on a ~~third party, nationally recognized pricing service. When quoted~~recurring basis using a market approach by utilizing either: (i) the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, including the value attributable to mortgage servicing and credit risk, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted for credit risk and other individual loan characteristics. As these prices are ~~not available,~~derived from market observable inputs, the Company ~~utilizes~~classifies these valuations as Level 2 in the fair value disclosures.

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

The Company may also purchase loans out of a ~~pricing service~~Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. The Company has elected to ~~determine~~carry these loans at fair value. See Note 6, Mortgage Loans Held for Sale, for more information.

Mortgage Servicing Rights – Fair Value (Level 3) – The Company estimates the fair value of its forward MSRs on a recurring basis using a process that combines the use of a discounted cash flow model and analysis of current market data to arrive at an estimate of fair value. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, discount rates, ancillary revenues, earnings on escrow and costs to service. These assumptions are generated and applied based on collateral stratifications including product type, remittance type, geography, delinquency and coupon dispersion. These assumptions require the use of judgment by the Company and can have a significant impact on the fair value ~~is generally estimated using current market~~of the MSRs. Quarterly, management obtains third-party valuations to assess the reasonableness of the fair value calculations provided by the internal cash flow model. Because of the nature of the valuation inputs, ~~for similar financial instruments with comparable terms and credit quality, commonly referred to~~the Company classifies these valuations as ~~matrix pricing (Level 2). These valuation techniques involve some level of management estimation and judgment. The Company recognizes transfers between levels~~Level 3 in the fair value ~~hierarchy~~disclosures. See Note 3, Mortgage Servicing Rights and Related Liabilities, for more information.

Advances and Other Receivables, Net (Level 3) - Advances and other receivables, net are valued at their net realizable value after taking into consideration the ~~end~~reserves. Advances have no stated maturity. Their net realizable value approximates fair value as the net present value based on discounted cash flow is not materially different from the net realizable value. See Note 4, Advances and Other Receivables, Net for more information.

Reverse Mortgage Interests, Net (Level 3) – The Company’s reverse mortgage interests are primarily comprised of HECM loans that are insured by FHA and guaranteed by Ginnie Mae upon securitization. Quarterly, the Company estimates fair value using discounted cash flows, obtained from a third-party and supplemented with historical loss experience on similar assets, with the discount rate approximating that of similar financial instruments, as observed from recent trades with the HMBS. Key assumptions within the model are based on market participant benchmarks and include discount rates, cost to service, weighted average life of the ~~reporting period.~~

~~Fixed-Maturity Securities~~

~~Fixed-maturity securities consist~~portfolio, and estimated participating income. Discounted cash flows are applied based on collateral stratifications and include loan rate type, loan status (active vs. inactive), and securitization. Prices are also influenced from both internal models and other observable inputs. The Company determined fair value for all loans based on the applicable tranches established during the Merger valuation. Tranches are segregated based on participation percentages, original loan status as of ~~U.S. Treasury securities, obligations~~the Merger date, and interest rate types, and loan status (active vs inactive). Prices are also influenced from both internal models and other observable inputs, including applicable forward interest rate curves. Additionally, historical loss factors are considered within the overall valuation. Because of ~~U.S. government sponsored agencies~~the unobservable nature of the valuation inputs, the Company classifies these valuations as Level 3 in the fair value disclosures. See Note 5, Reverse Mortgage Interests, Net for more information.

Derivative Financial Instruments (Level 2) – The Company enters into a variety of derivative financial instruments as part of its hedging strategy and ~~domestic and foreign corporate debt securities. Fixed-maturity securities held~~measures these instruments at fair value on a recurring basis in ~~trust~~the consolidated balance sheets. These derivatives are exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, the Company utilizes the exchange price or dealer market price for the ~~benefit of the primary insurers as more fully described in Note 3: Insurance Activity. Investments in fixed-maturity securities are reported at their estimated fair values and~~particular derivative contract; therefore, these contracts are classified as ~~trading securities in accordance~~Level 2. In addition, the Company enters into IRLCs and LPCs with ~~applicable accounting guidance. Realized gains~~prospective borrowers and ~~losses~~other loan originators. These commitments are carried at fair value based on the ~~sale~~fair value of ~~fixed-maturity securities are determined using the specific identification method and are reported as a component of net investment income within the condensed consolidated statement of operations.~~

~~Investments Held in Trust~~

~~Investments held in trust consist of cash equivalents, which include highly liquid overnight money market instruments, and fixed-maturity securities~~underlying mortgage loans which are ~~held in trust for~~based on observable market data. The Company adjusts the ~~benefit of the primary insurers, as more fully described in Note 3: Insurance Activity and Note 4: Investment Securities, and are subject to the restrictions~~outstanding IRLCs with prospective borrowers based on ~~distribution of net assets of subsidiaries as described below.~~

~~Third Party Restrictions on Distribution of Net Assets of Wholly-Owned Subsidiaries~~

~~The net assets of WMMRC are subject to restrictions on distribution from multiple sources, including the primary insurers who have approval control of distributions from the trust,~~an expectation that it will be exercised, and the Insurance Division of the State of Hawaii who has approval authority over distributions or intercompany advances. As more fully described in Note 14: Subsequent Events, a distribution from WMMRC to WMIH of up to $10.7 million was approved by the Insurance Division of the State of Hawaii on September 13, 2017.

~~Premium Recognition~~

~~Premiums assumed are earned on a daily pro-rata basis over the underlying policy terms. Premiums assumed relating to the unexpired portion of policies in force at the balance sheet date~~loan will be funded. IRLCs and LPCs are recorded in derivative financial instruments in the consolidated balance sheets. These commitments are classified as ~~unearned premiums. Unearned premiums also include a reserve for post default premium reserves. Post default premium reserves occur when a loan is~~Level 2 in ~~a default position and~~ the ~~servicer continues to advance~~fair value disclosures, as the ~~premiums. If the loan ultimately goes to claim, the premiums advanced during the period of default~~valuations are ~~subject to recapture. The Company records a default premium reserve~~ based on information provided by the underlying mortgage insurers when they provide information on the default premium reserve separately from other reserves. The change in the post default premium reserve is reflected as a reduction or increase, as the case may be, in premiums assumed.market observable inputs. The Company has entered into Eurodollar futures contracts as part of its hedging strategy. The futures contracts are measured at fair value on a recurring basis and classified as Level 2 in the fair value disclosures as the valuation is based on market observable data. Derivative financial instruments are recorded ~~unearned premiums totaling $33 thousand~~in other assets and ~~$0.3 million as~~payables and other liabilities within the consolidated balance sheets. See Note 9, Derivative Financial Instruments, for more information.

Advance Facilities and Warehouse Facilities (Level 2) – As the underlying warehouse and advance finance facilities bear interest at a rate that is periodically adjusted based on a market index, the carrying amount reported at amortized cost on the consolidated balance sheets approximates fair value. See Note 10, Indebtedness, for more information.

Unsecured Senior Notes (Level 1) – The fair value of ~~September 30, 2017~~unsecured senior notes, which are carried at amortized cost, is based on quoted market prices and ~~December 31, 2016, respectively.~~

is considered Level 1 from the market observable inputs used to determine fair value. See Note 10, Indebtedness, for more information.

Excess Spread Financing (Level 3) –The Company ~~recognizes premium deficiencies when there is~~estimates fair value on a ~~probable loss~~recurring basis based on ~~an insurance contract. Premium deficiencies are recognized if the sum of~~ the present value of future expected ~~losses~~discounted cash flows with the discount rate approximating current market value for similar financial instruments. The cash flow assumptions and ~~loss adjustment expenses, unamortized deferred acquisition costs,~~prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, average life, recapture rates and ~~maintenance costs, excluding intercompany charges, exceed~~discount rate. As these prices are derived from a combination of internally developed valuation models and quoted market prices based on the value of the underlying MSRs, the Company classifies these valuations as Level 3 in the fair value disclosures. Excess spread financing is recorded in MSR related liabilities within the consolidated balance sheets. See Note 3, Mortgage Servicing Rights and Related Liabilities, for more information.

Mortgage Servicing Rights Financing Liability (Level 3) - The Company estimates fair value on a recurring basis based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being advance financing rates and annual advance recovery rates. As these assumptions are derived from internally developed valuation models based on the value of the underlying MSRs, the Company classifies these valuations as Level 3 in the fair value disclosures. Mortgage servicing rights financing liability is recorded in MSR related liabilities within the consolidated balance sheets. See Note 3, Mortgage Servicing Rights and Related Liabilities, for more information.

Participating Interest Financing (Level 3) – The Company estimates fair value based on the present value of future ~~unearned premiums~~expected discounted cash flows with the discount rate approximating that of similar financial instruments. As the prices are derived from both internal models and ~~anticipated investment income. Premium deficiency reserves have been~~other observable inputs, the Company classifies these valuations as Level 3 in the fair value disclosures. Participating interest financing is recorded ~~totaling $0.5 million~~in other nonrecourse debt within the consolidated balance sheets. See Note 5, Reverse Mortgage Interests, Net, and ~~$0.3 million~~Note 10, Indebtedness, for more information.

HECM Securitizations (Level 3) – The Company estimates fair value using a market approach by utilizing the fair value of executed HECM securitizations. Since the executed HECM securitizations are private placements, the Company classifies these valuations as Level 3 in the fair value disclosures. HECM securitizations are recorded at amortized cost in other nonrecourse debt within the consolidated balance sheets. See Note 10, Indebtedness for more information.

The following table presents the estimated carrying amount and fair value of ~~September 30, 2017~~the Company’s financial instruments and other assets and liabilities measured at fair value on a recurring basis:



	March 31, 2020
			Recurring Fair Value Measurements
Fair value - Recurring basis	Total Fair Value		Level 1		Level 2		Level 3
Assets
Mortgage loans held for sale	$	3,922	$	—	$	3,922	$	—
Forward mortgage servicing rights	3,109		—		—		3,109
Derivative financial instruments
IRLCs	263		—		263		—
Forward MBS trades	6		—		6		—
LPCs	25		—		25		—
Total assets	$	7,325	$	—	$	4,216	$	3,109
Liabilities
Derivative financial instruments
Forward MBS trades	$	223	$	—	$	223	$	—
Mortgage servicing rights financing	43		—		—		43
Excess spread financing	1,242		—		—		1,242
Total liabilities	$	1,508	$	—	$	223	$	1,285



	December 31, 2019
			Recurring Fair Value Measurements
Fair value - Recurring basis	Total Fair Value		Level 1		Level 2		Level 3
Assets
Mortgage loans held for sale	$	4,077	$	—	$	4,077	$	—
Forward mortgage servicing rights	3,496		—		—		3,496
Derivative financial instruments
IRLCs	135		—		135		—
Forward MBS trades	7		—		7		—
LPCs	12		—		12		—
Total assets	$	7,727	$	—	$	4,231	$	3,496
Liabilities
Derivative financial instruments
Forward MBS trades	$	12	$	—	$	12	$	—
LPCs	3		—		3		—
Mortgage servicing rights financing	37		—		—		37
Excess spread financing	1,311		—		—		1,311
Total liabilities	$	1,363	$	—	$	15	$	1,348

The tables below present a reconciliation for all of the Company’s Level 3 assets and liabilities measured at fair value on a recurring basis:



	Three Months Ended March 31, 2020
	Assets			Liabilities
Fair value - Level 3 assets and liabilities	Mortgage servicing rights			Excess spread financing			Mortgage servicing rights financing
Balance - beginning of period	$	3,496		$	1,311		$	37
Total gains or losses included in earnings	(534		)	(35		)	6
Purchases, issuances, sales, repayments and settlements
Purchases	24			—			—
Issuances	123			24			—
Settlements and repayments	—			(58		)	—
Balance - end of period	$	3,109		$	1,242		$	43



	Three Months Ended March 31, 2019
	Assets			Liabilities
Fair value - Level 3 assets and liabilities	Mortgage servicing rights			Excess spread financing			Mortgage servicing rights financing
Balance - beginning of period	$	3,665		$	1,184		$	32
Total gains or losses included in earnings	(399		)	(69		)	2
Purchases, issuances, sales, repayments and settlements
Purchases	409			—			—
Issuances	66			245			—
Sales	(260		)	—			—
Settlements and repayments	—			(51		)	—
Balance - end of period	$	3,481		$	1,309		$	34

As of March 31, 2020 and December 31, ~~2016,~~2019, the Company had no financial instruments classified as mortgage loans held for investment as the related portfolio was sold in September 2019. During the three months ended March 31, 2019, the Company had an immaterial change in mortgage loans held for investment.

No transfers were made into or out of Level 3 fair value assets and liabilities for the Company for the three months ended March 31, 2020 and 2019, respectively. ~~Intercompany administrative costs are excluded from the computation of premium deficiencies.~~

The ~~Company’s premium deficiency analysis was performed on~~tables below present a single book basis and includes all book years and reinsurance treaties aggregated together using assumptions based on the actuarial best estimates at the balance sheet date. The calculation for premium deficiency requires significant judgment and includes estimates of future expected premiums, claims, loss adjustment expenses and investment income assummary of the ~~balance sheet date. To~~estimated carrying amount and fair value of the ~~extent ultimate losses are higher or premiums are lower than estimated, additional premium deficiency reserves may be required~~Company’s financial instruments:



	March 31, 2020
	Carrying Amount		Fair Value
Financial instruments			Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	579	$	579	$	—	$	—
Restricted cash	266		266		—		—
Advances and other receivables, net	685		—		—		685
Reverse mortgage interests, net	5,955		—		—		6,015
Mortgage loans held for sale	3,922		—		3,922		—
Derivative financial instruments	294		—		294		—
Financial liabilities
Unsecured senior notes⁽¹⁾	2,259		2,055		—		—
Advance facilities⁽¹⁾	489		—		489		—
Warehouse facilities⁽¹⁾	4,551		—		4,551		—
Mortgage servicing rights financing liability	43		—		—		43
Excess spread financing	1,242		—		—		1,242
Derivative financial instruments	223		—		223		—
Participating interest financing⁽¹⁾	4,056		—		—		4,056
HECM Securitization (HMBS)⁽¹⁾
Trust 2019-2	295		—		—		295
Trust 2019-1	268		—		—		268
Trust 2018-3	189		—		—		189
Trust 2018-2	137		—		—		137


⁽¹⁾	The amounts are presented net of unamortized debt issuance costs, premium and discount.



	December 31, 2019
	Carrying Amount		Fair Value
Financial instruments			Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	329	$	329	$	—	$	—
Restricted cash	283		283		—		—
Advances and other receivables, net	988		—		—		988
Reverse mortgage interests, net	6,279		—		—		6,318
Mortgage loans held for sale	4,077		—		4,077		—
Derivative financial instruments	153		—		153		—
Financial liabilities
Unsecured senior notes⁽¹⁾	2,366		2,505		—		—
Advance facilities	422		—		422		—
Warehouse facilities⁽¹⁾	4,575		—		4,575		—
Mortgage servicing rights financing liability	37		—		—		37
Excess spread financing	1,311		—		—		1,311
Derivative financial instruments	15		—		15		—
Participating interest financing⁽¹⁾	4,299		—		—		4,299
HECM Securitization (HMBS)⁽¹⁾
Trust 2019-2	331		—		—		331
Trust 2019-1	300		—		—		300
Trust 2018-3	208		—		—		208
Trust 2018-2	148		—		—		148


⁽¹⁾	The amounts are presented net of unamortized debt issuance costs, premium and discount.

17. Capital Requirements

Certain of the Company’s secondary market investors require minimum net worth (“capital”) requirements, as specified in the ~~future.~~

~~Cash~~respective selling and ~~Cash Equivalents~~

Cash and cash equivalents include cash on hand, amounts due from banks, U.S. Treasury bills and overnight investments. Except as described above in Investments Held in Trust, the Company considers all amounts that are invested in highly liquid overnight money market instruments to be cash equivalents. The Federal Deposit Insurance Corporation (“FDIC”) insures amounts on deposit with each financial institution up to limits as prescribed by law. The Companyservicing agreements. In addition, these investors may ~~hold funds with financial institutions~~require capital ratios in excess of the ~~FDIC insured amount, however,~~stated requirements to approve large servicing transfers. To the extent that these requirements are not met, the Company’s secondary market investors may utilize a range of remedies ranging from sanctions, suspension or ultimately termination of the Company’s selling and servicing agreements, which would prohibit the Company ~~has not experienced any losses in such accounts~~from further originating or securitizing these specific types of mortgage loans or being an approved servicer. The Company’s various capital requirements related to its outstanding selling and ~~management believes it is not exposed to any significant credit risk on cash and cash equivalents.~~

~~Restricted Cash~~

~~Restricted cash includes (i) amounts held for the express purposes of paying principal, interest and related fees~~servicing agreements are measured based on the ~~Runoff Notes (as defined in Note 7: Notes Payable) pursuant to the terms~~Company’s operating subsidiary, Nationstar Mortgage LLC. As of ~~the Indentures (as defined in Note 7: Notes Payable) and (ii) proceeds of the Series B Preferred Stock offering held in escrow.~~

~~Ceding Commission Expense~~

~~The Company is required to pay a ceding commission to certain primary insurers pursuant to certain reinsurance agreements.~~

~~Losses and Loss Adjustment Reserves~~

The losses and loss adjustment reserves include case basis estimates of reported losses and supplemental amounts for incurred but not reported (“IBNR”) losses. A default is considered the incident (e.g., the failure to make timely payment of mortgage payments) that may give rise to a claim for mortgage insurance. In establishing the losses and loss adjustment reserve,March 31, 2020, the Company ~~based its estimates primarily on the ceded loss and loss adjustment reserves as provided by the primary mortgage guaranty carriers.~~

~~WMMRC has recorded reserves~~ at the ceded case reserves and IBNR loss levels established and reported by the primary mortgage guaranty carriers as of September 30, 2017 and December 31, 2016, respectively. Management believes that the recorded aggregate liability for unpaid losses and loss adjustment expenses at period end represents the Company’s best estimate, based upon the available data, of the amount necessary to cover the current cost of losses. However, due to the inherent uncertainty arising from fluctuations in the persistency rate of mortgage insurance claims, the Company’s size and lack of prior operating history, external factors such as future changes in regional or national economic conditions, judicial decisions, federal and state legislation related to mortgage restructuring and foreclosure restrictions, claims denials and coverage rescissions by primary carriers and other factors beyond the Company’s control, it is not presently possible to determine whether actual loss experience will conform to the assumptions used in determining the estimated amounts for such liability at the balance sheet date. Accordingly, the ultimate liability could be significantly higher or lower, as the case may be, than the amount indicated in the financial statements and there can be no assurance that the reserve amounts recorded will be sufficient. As adjustments to these estimates become necessary, such adjustments are reflected in current operations.

~~Loss Contract Reserve~~

~~A loss contract reserve relating to contractual obligations of WMMRC~~ was ~~established at March 19, 2012 as a result of applying fresh start accounting and~~ in compliance with Accounting Standards Codification (“ASC”) 805-10-55-21 (b) (1) which defines a loss contract as “a contract in which the unavoidable costs of meeting the obligation under the contract exceed the economic benefits expected to be received under it.” The value of this reserve is analyzed quarterlyits selling and ~~is adjusted accordingly. The adjustment (if any) to the reserve produces an expense or contra-expense in the condensed consolidated statements of operations.~~

~~Derivative Embedded Conversion Feature~~

servicing capital requirements.

18. Commitments and Contingencies

Litigation and Regulatory

The Company ~~has recorded~~and its subsidiaries are routinely and currently involved in a ~~derivative embedded conversion feature~~significant number of legal proceedings, including, but not limited to, judicial, arbitration, regulatory and governmental proceedings related to matters that arise in connection with the conduct of the ~~Series B Preferred Stock which is adjusted to its fair value as determined using Level 3 inputs described above under~~Company’s business. The legal proceedings are at varying stages of adjudication, arbitration or investigation and are generally based on alleged violations of consumer protection, securities, employment, contract, tort, common law fraud and other numerous laws, including, without limitation, the Equal Credit Opportunity Act, Fair ~~Value Measurement. The change~~Debt Collection Practices Act, Fair Credit Reporting Act, Real Estate Settlement Procedures Act, National Housing Act, Homeowners Protection Act, Service Member’s Civil Relief Act, Telephone Consumer Protection Act, Truth in ~~fair value~~Lending Act, Financial Institutions Reform, Recovery, and Enforcement Act of 1989, unfair, deceptive or abusive acts or practices in violation of the ~~derivative embedded conversion feature is calculated at each reporting date~~Dodd-Frank Act, the Securities Act of 1933, the Securities Exchange Act of 1934, the Home Mortgage Disclosure Act, Title 11 of the United States Code (aka the “Bankruptcy Code”), False Claims Act and ~~recorded as other income or other expense on the condensed consolidated statement of operations.~~

~~Other Liabilities~~

At September 30, 2017, the total balance of $13.8 million of other liabilities is comprised of $12.3 million of accrued fees relating to the Series B Preferred Stock offering, an accrual for professional fees and recurring business expenses currently payable of approximately $0.8 million and $0.7 million of accrued dividends relating to the Series B Preferred Stock. The accrued fees would be paidMaking Home Affordable loan modification programs.

In addition, along with others in ~~the event of a Qualified Acquisition, as more fully described in Note 6: Service Agreements and Related Party Transactions.~~

~~Comprehensive Income~~

~~The Company has no comprehensive income other than the net income disclosed in the condensed consolidated statement of operations.~~

~~Net Income Per Common Share~~

~~In calculating earnings per share,~~its industry, the Company ~~follows the two-class method, which distinguishes between the classes of securities based on the proportionate p~~articipation rights of each security type in the Company's undistributed income. The Series A Preferred Stock and the Series B Preferred Stock are treated as one class for purposes of applying the two-class method, because they have substantially equal rights and share equally on an as converted basis with respect to income available to WMIH common stockholders.

~~Basic net income per WMIH common share~~ is computed by dividing net income attributable to WMIH’s common stockholders by the weighted-average number of common shares outstanding for the period after subtracting the weighted-average of any unvested restricted shares outstanding, as these are subject to repurchase. Basic net income attributable to common stockholders is computed by deducting preferred dividends and the basic calculation of undistributed earnings attributable to participating securities from net income.

Diluted net income per WMIH common share is computed by dividing net income attributable to WMIH’s common stockholders by the weighted-average number of common shares outstanding during the period after subtracting the weighted-average of any unvested restricted shares outstanding, as these are subject to repurchase and ~~adding any potentially dilutive WMIH common stock equivalents outstanding during~~indemnification claims and may continue to receive claims in the ~~period. Diluted net income attributable~~future, regarding alleged breaches of representations and warranties relating to ~~common stockholders~~the sale of mortgage loans, the placement of mortgage loans into securitization trusts or the servicing of mortgage loans securitizations. The Company is ~~computed~~also subject to legal actions or proceedings related to loss sharing and indemnification provisions of its various acquisitions. Certain of the pending or threatened legal proceedings include claims for substantial compensatory, punitive and/or statutory damages or claims for an indeterminate amount of damages.

The Company’s business is also subject to extensive examinations, investigations and reviews by ~~deducting preferred dividends~~various federal, state and local governmental, regulatory and enforcement agencies. The Company has historically had a number of open investigations with these agencies and that trend continues. The Company is currently the ~~diluted calculation~~subject of ~~undistributed earnings attributable~~various governmental or regulatory investigations, subpoenas, examinations and inquiries related to ~~participating securities from net income.~~

~~If common stock equivalents exist,~~its residential loan servicing and origination practices, bankruptcy and collections practices, its financial reporting and other aspects of its businesses. These matters include investigations by the Consumer Financial Protection Bureau (the “CFPB”), the Securities and Exchange Commission, the Executive Office of the United States Trustees, the Department of Justice, the Office of the Special Inspector General for the Troubled Asset Relief Program, the U.S. Department of Housing and Urban Development, the multi-state committee of mortgage banking regulators and various State Attorneys General. These specific matters and other pending or potential future investigations, subpoenas, examinations or inquiries may lead to administrative, civil or criminal proceedings or settlements, and possibly result in ~~periods where there is a net loss, diluted net loss per common share would be equal to~~remedies including fines, penalties, restitution, or ~~less than basic net loss per common share, since the effect of including any common stock equivalents would be antidilutive.~~

~~Equity-Based Compensation~~

~~On May 22, 2012, WMIH’s Board of Directors (the “Board” or “Board of Directors”) approved~~alterations in the Company’s ~~2012 Long-Term Incentive Plan (the “2012 Plan”) so that awards~~business practices, and additional expenses and collateral costs. Responding to these matters requires the Company to devote substantial resources, resulting in higher costs and lower net cash flows.

For example, the Company continues to progress towards resolution of ~~restricted stock could be made~~certain legacy regulatory matters involving examination findings for alleged violations of certain laws related to ~~its non-employee directors~~the Company’s business practices. The Company has been in discussions with the multi-state committee of mortgage banking regulators and various State Attorneys General concerning a potential resolution of their investigations. The Company is continuing to ~~have a plan in place for awards of equity based compensation to executives~~cooperate with all parties and ~~others~~ in connection with these discussions, the Company’s operations and future strategic plans. A total of 2.0 million shares of WMIH’s common stock were initially reserved for future issuance under the 2012 Plan, which became effective upon the Board approval on May 22, 2012. On February 10, 2014, the Board approved and adoptedCompany previously recorded an accrual. These discussions may not result in a First Amendment to the 2012 Plan, pursuant to which the number of shares of WMIH’s common stock reserved and available for grants under the 2012 Plan was increased from 2.0 million shares to 3.0 million shares, and the termssettlement of the ~~2012 Plan were modified to permit~~matter; furthermore, any such ~~an increase through action of~~settlement may exceed the Board, except when stockholder approval is necessary to comply with any applicable law, regulation or rule of any stock exchange on which WMIH’s shares are listed, quoted or traded. On February 25, 2015, the number of shares authorized and available for awards under the 2012 Plan was increased from 3.0 million to 12.0 million shares of WMIH’s common stock, subject to approval of stockholders of WMIH. This approval was received at the Company’s Annual Meeting of Stockholders on April 28, 2015. The 2012 Plan provides for the granting of restricted shares and other cash and share based awards. The value of restricted stock is generally determined using the fair market value determined to be the trading price at the close of business on the respective date the awards were granted.

~~Income Taxes~~

The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the carrying amounts and tax bases of assets and liabilities and losses carried forward and tax credits. Deferred tax assets and liabilities are measured using enacted tax rates and laws applicable to the years in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to the extent that it is more likely than not that deferred tax assets will not be realized.

The Company recognizes the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. Penalties and interest, of which there are none, would be reflected in income tax expense. Tax years are open to the extent the Company has net operating loss (“NOL”) carry-forwards available to be utilized currently.

~~Dividend Policy~~

~~WMIH has paid no dividends on its common stock on or after the Effective Date and currently has no plans to pay a dividend on its common stock.~~

WMIH has declared and paid $13.5 million and $18.0 million of dividends on its Series B Preferred Stock for the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively. Additionally, WMIH hasamount accrued ~~unpaid and undeclared dividends of $0.7 million, based on the Series B Preferred Stock 3% interest rate,~~ as of ~~both September 30, 2017~~March 31, 2020. Moreover, if the discussions do not result in a settlement, the regulators and ~~December 31, 2016.~~

~~New Accounting Pronouncements~~

~~The Company has reviewed new accounting pronouncements issued between August 9, 2017, the filing date of our most recent prior Form 10-Q,~~State Attorneys General may seek to exercise their enforcement authority through litigation or other proceedings and ~~the filing date of this Form 10-Q~~seek injunctive relief, damages, restitution and ~~has determined that no pronouncements issued are relevant to the Company, and/or~~civil monetary penalties, which could have a material ~~impact~~adverse effect on the Company’s ~~consolidated~~business, reputation, financial ~~position,~~condition and results of ~~operations or disclosure requirements.~~

~~Note 3: Insurance Activity~~

~~The Company, through WMMRC, reinsures mortgage guaranty risks of mortgage loans originated by affiliates of~~operations.

Further, on April 24, 2018, the Company during the period from 1997 through 2008. WMMRC is (or was) a party to reinsurance agreements with UGRIC, GMIC, MGIC, PMI, Radian, RMIC and Triad. The agreements with UGRIC and Triad were placed into runoff effective May 31, 2008. The agreements with all other primary mortgage insurers were placed into runoff effective September 26, 2008. The reinsurance agreements with Triad, PMI and UGRIC were commuted on August 31, 2009, October 2, 2012 and April 3, 2014, respectively. On October 23, 2017, the reinsurance agreement with Radian was commuted and the related trust assets were released to WMMRC. For more information see Note 14: Subsequent Events.

All agreements between WMMRC and the primary mortgage insurers are on an excess of loss basis, except for a reinsurance treaty with GMIC during 2008, which is reinsured on a 50% quota share basis. Pursuant to the excess of loss reinsurance treaties, WMMRC reinsures a second loss layer which ranges from 5% to 10% of the risk in force in excess of the primary mortgage insurer’s first loss percentage which range from 4% to 5%. Each calendar year, or book year, is treated separately from other years when calculating losses. In return for accepting a portion of the risk, WMMRC receives, net of ceding commission, a percentage of the premiumCFPB notified Nationstar that, ~~ranges from 25% to 40%.~~

As security for the ceding insurers, WMMRC has entered into separate trust agreements with each of the primary mortgage insurance companies whereby a portion of the funds from premiums assumed are held in trust accounts for the benefit of each separate insurer. Pursuant to the terms of the reinsurance agreements, WMMRC is required to keep such assets in trust for a minimum of five years and is subject to claims for up to ten years from termination of obligations arising from the last year in which insurance business was written prior to runoff. Release of funds from the trust by WMMRC requires approval from the primary mortgage insurance companies.

~~Premiums assumed and earned are as follows for the periods ended September 30, 2017 and 2016, respectively:~~

Three months
ended
September 30, 2017

Three months
ended
September 30, 2016

Nine months
ended
September 30, 2017

Nine months
ended
September 30, 2016

Premiums assumed
$
342

$
739

$
866

$
1,963

Change in unearned premiums

2

47

237

463

Premiums earned
$
344

$
786

$
1,103

$
2,426

~~The components of the liability for losses and loss adjustment reserves are as follows as of September 30, 2017 and December 31, 2016, respectively:~~

September 30, 2017

December 31, 2016

Case-basis reserves
$
174

$
553

IBNR reserves

1

—

Premium deficiency reserves

530

258

Total losses and loss adjustment reserves
$
705

$
811

~~Losses and loss adjustment reserve activity are as follows for the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively:~~

Nine months ended
September 30, 2017

Year ended
December 31, 2016

Balance at beginning of period
$
811

$
5,063

Incurred (released) - prior periods

207

(669
)
Paid or terminated - prior periods

(313
)

(3,583
)
Total losses and loss adjustment reserves
$
705

$
811

The loss contract reserve balance is analyzed and adjusted quarterly. The balance in the reserve was zero and $5.6 million as of September 30, 2017 and December 31, 2016, respectively. The value of this reserve decreased by $5.6 million during the nine months ended September 30, 2017 and decreased by $2.3 million during the nine months ended September 30, 2016. In periods during which a reduction in the loss contract reserve occurs, a corresponding decrease in expense is reflected in the condensed consolidated statement of operations for the respective period.

~~Note 4: Investment Securities~~

The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of total fixed-maturity securities and total fixed-maturity securities held in trust at September 30, 2017, are as follows:

September 30, 2017

Class of securities:
Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Estimated Fair Value

U.S. government treasury securities
$
250

$
—

$
—

$
250

Obligations of U.S. government sponsored enterprises

2,749

—

(7
)

2,742

Corporate debt securities

3,683

—

(2
)

3,681

Foreign corporate debt securities

3,750

—

(1
)

3,749

Total fixed-maturity securities

10,432

—

(10
)

10,422

Less total unrestricted fixed-maturity securities

1,402

—

(2
)

1,400

Total fixed-maturity securities held in trust
$
9,030

$
—

$
(8
)

$
9,022

December 31, 2016

Class of securities:
Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Estimated Fair Value

U.S. government treasury securities
$
249

$
—

$
—

$
249

Obligations of U.S. government sponsored enterprises

59,450

1

(80
)

59,371

Corporate debt securities

11,415

9

(9
)

11,415

Foreign corporate debt securities

5,798

5

(7
)

5,796

Total fixed-maturity securities

76,912

15

(96
)

76,831

Less total unrestricted fixed-maturity securities

47,635

—

(10
)

47,625

Total fixed-maturity securities held in trust
$
29,277

$
15

$
(86
)

$
29,206

~~Amortized cost and estimated fair value of fixed-maturity securities at September 30, 2017 by contractual maturity are as follows:~~

Amortized
Cost

Estimated
Fair Value

Maturity in:

2017
$
6,750

$
6,749

2018

3,682

3,673

Total fixed-maturity securities
$
10,432

$
10,422

~~Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.~~

~~Net investment income for the three and nine months ended September 30, 2017 and 2016, respectively, is summarized as follows:~~

Three months
ended
September 30, 2017

Three months
ended
September 30, 2016

Nine months
ended
September 30, 2017

Nine months
ended
September 30, 2016

Investment income:

Amortization of premium or discount on fixed-maturity securities
$
(32
)

$
(74
)

$
(108
)

$
(247
)
Investment income on fixed-maturity securities

72

233

403

792

Interest income on cash and cash equivalents

1,895

405

4,527

1,100

Realized net (loss) gain from sale of investments

(36
)

18

(63
)

19

Unrealized gain (loss) on trading securities held at period end

44

(84
)

67

83

Net investment income
$
1,943

$
498

$
4,826

$
1,747

~~The following table shows how the Company’s investments are categorized~~ in accordance with ~~fair value measurement, as~~the CFPB’s discretionary Notice and Opportunity to Respond and Advise (“NORA”) process, the CFPB’s Office of

~~September 30, 2017:~~

September 30, 2017

Level 1

Level 2

Level 3

Total

Class of securities:

U.S. government treasury securities
$
250

$
—

$
—

$
250

Obligations of U.S. government sponsored enterprises

1,497

1,245

—

2,742

Corporate debt securities

3,151

530

—

3,681

Foreign corporate debt securities

3,749

—

—

3,749

Total fixed-maturity securities

8,647

1,775

—

10,422

Money market funds

32,007

—

—

32,007

Total
$
40,654

$
1,775

$
—

$
42,429

Enforcement is considering whether to recommend that the CFPB take enforcement action against the Company, alleging violations of the Real Estate Settlement Procedures Act, the Consumer Financial Protection Act, and the Homeowners Protection Act, which stems from a 2014 examination. The ~~following table shows how~~purpose of a NORA letter is to provide a party being investigated an opportunity to present its position to the CFPB before an enforcement action may be recommended or commenced. The CFPB may seek to exercise its enforcement authority through settlement, administrative proceedings or litigation and seek injunctive relief, damages, restitution and civil monetary penalties, which could have a material adverse effect on the Company’s ~~investments are categorized in accordance with fair value measurement, as~~business, reputation, financial condition and results of ~~December 31, 2016:~~

December 31, 2016

Level 1

Level 2

Level 3

Total

Class of securities:

U.S. government treasury securities
$
249

$
—

$
—

$
249

Obligations of U.S. government sponsored enterprises

47,489

11,882

—

59,371

Corporate debt securities

7,033

4,382

—

11,415

Foreign corporate debt securities

5,796

—

—

5,796

Total fixed-maturity securities

60,567

16,264

—

76,831

Money market funds

4,548

—

—

4,548

Total
$
65,115

$
16,264

$
—

$
81,379

A review of the fair value hierarchy classifications of the Company’s investments is conducted quarterly. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Reclassifications are reported as transfers in or transfers out of the applicable Level at the end of the calendar quarter in which the reclassifications occur. During the nine months ended September 30, 2017 and the year ended December 31, 2016, $0.9 million and $11.0 million, respectively, of investments were transferred from Level 2 to Level 1 as a result of improving market conditions for short-term and investment grade corporate securities.

January 1, 2017 to
September 30, 2017

January 1, 2016 to
December 31, 2016

Transfers
from Level 1 to
Level 2

Transfers
from Level 2
to Level 1

Transfers
from Level 1 to
Level 2

Transfers
from Level 2
to Level 1

Class of securities:

Corporate debt securities
$
—

$
901

$
—

$
5,737

Foreign corporate debt securities

—

—

—

5,295

Total transfers
$
—

$
901

$
—

$
11,032

~~Note 5: Income Taxes~~

~~For the nine months ended September 30, 2017, the Company recorded net income attributable to common and participating stockholders of approximately $21.4 million.~~operations. The Company projects tax losses for the year ending December 31, 2017. Due to this projected tax loss and the existence of NOL carry-forwards which have a 100% valuation allowance recorded to reduce them to zero, the Company has not recorded an ~~income tax~~accrual related to this matter as of March 31, 2020 because it does not believe that the possible loss or range of loss arising from any such action is estimable. The Company is continuing to cooperate with the CFPB.

Similarly, the Company is in discussions with the Executive Office of the United States Trustees concerning certain legacy issues with respect to bankruptcy servicing practices. In connection with these discussions, the Company is undertaking certain voluntary remediation activities with respect to loans at issue in these matters. While the Company and the Executive Office of the United States Trustees are engaged in discussions to potentially resolve these issues, there is no guarantee a resolution will occur. Moreover, if the discussions do not result in a resolution, the Executive Office of the United States Trustees may seek redress through litigation or other proceedings and seek injunctive relief, damages and restitution in addition to the remediation activities, which could have a material adverse effect on the Company’s business, reputation, financial condition and results of operations. However, the Company believes it is premature to predict the potential outcome or to estimate the financial impact to the Company in connection with any potential action or settlement arising from this matter, including the voluntary remediation activities undertaken and to be undertaken by the Company.

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

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

As a legal matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is both probable and estimable. If, at the time of evaluation, the loss contingency is not both probable and reasonably estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and reasonably estimable. Once the matter is deemed to be both probable and reasonably estimable, the Company will establish an accrued liability and record a corresponding amount to legal-related expense. The Company will continue to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established. Legal-related expense ~~or benefit~~ for the ~~nine~~Company, which includes legal settlements and the fees paid to external legal service providers, of $15 and $11 for the three months ended ~~September 30, 2017.~~March 31, 2020 and 2019, respectively, was included in general and administrative expenses on the consolidated statements of operations.

For a number of matters for which a loss is probable or reasonably possible in future periods, whether in excess of a related accrued liability or where there is no accrued liability, the Company may be able to estimate a range of possible loss. In determining whether it is possible to provide an estimate of loss or range of possible loss, the Company reviews and evaluates its material legal matters on an ongoing basis, in conjunction with any outside counsel handling the matter. For those matters for which an estimate is possible, management currently believes the aggregate range of reasonably possible loss is $17 to $47 in excess of the accrued liability (if any) related to those matters as of March 31, 2020. This estimated range of possible loss is based upon currently available information and is subject to significant judgment, numerous assumptions and known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary substantially from the current estimate. Those matters for which an estimate is not possible are not included within the estimated range. Therefore, this estimated range of possible loss represents what management believes to be an estimate of possible loss only for certain matters meeting these criteria. It does not represent the Company’s maximum loss exposure and the Company cannot provide assurance that its litigations reserves will not need to be adjusted in the future. Thus, the Company’s exposure and ultimate losses may be higher, possibly significantly so, than the amounts accrued or this aggregate amount.

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

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

Other Loss Contingencies

As part of the Company’s ongoing operations, it acquires servicing rights of forward and reverse mortgage loan portfolios that are subject to indemnification based on the representations and warranties of the seller. From time to time, the Company will seek recovery under these representations and warranties for incurred costs. The Company believes all balances sought from sellers recorded in advances and other receivables and reverse mortgage interests represent valid claims. However, the Company acknowledges that the claims process can be prolonged due to the required time to perfect claims at the loan level. Because of the required time to perfect or remediate these claims, management relies on the sufficiency of documentation supporting the claim, current negotiations with the counterparty and other evidence to evaluate whether a reserve is required for non-recoverable balances. In the absence of successful negotiations with the seller, all amounts claimed may not be recovered. Balances may be written-off and charged against earnings when management identifies amounts where recoverability from the seller is not likely. As of March 31, 2020, the Company believes all recorded balances for which recovery is sought from the seller are valid claims, and no ~~income tax expense or benefit~~evidence suggests additional reserves are warranted.

Loan and Other Commitments

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

The Company had certain reverse MSRs, reverse MSLs and reverse mortgage loans related to approximately $21,590 and $22,725 of UPB in reverse mortgage loans as of March 31, 2020 and December 31, ~~2016 due~~2019, respectively. As a servicer for these reverse mortgage loans, among other things, the Company is obligated to ~~tax losses in that period.~~

~~The Company files a consolidated federal income tax return. Pursuant~~fund borrowers’ draws to ~~a tax sharing agreement, WMMRC’s federal income tax liability is calculated on a separate return basis determined by applying 35% to taxable income,~~the loan customers as required in accordance with the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), that apply to property and casualty insurance companies. WMIH, as WMMRC’s parent, pays federal income taxes on behalf of WMMRC and settles the federal income tax obligation on a current basis in accordance with the tax sharingloan agreement. ~~WMMRC made no tax payments to WMIH during the nine months ended September 30, 2017 or the year ended December 31, 2016 associated with the Company’s tax liability from the preceding year.~~

Deferred federal income taxes arise from temporary differences between the valuation of assets and liabilities as determined for financial reporting purposes and income tax purposes. Temporary differences principally relate to discounting of loss reserves, accruals, derivate instruments, net operating losses and unrealized gains and losses on investments. As of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, the Company’s maximum unfunded advance obligation to fund borrower draws related to these MSRs and loans was approximately $2,504 and $2,617, respectively. Upon funding any portion of these draws, the Company ~~recorded a valuation allowance equal~~expects to ~~100%~~securitize and sell the advances in transactions that will be accounted for as secured borrowings.

19. Business Segment Reporting

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

The following tables present financial information by segment:



	Three Months Ended March 31, 2020
Financial information by segment	Servicing			Originations			Xome		Elimination			Total Operating Segments			Corporate/Other			Consolidated
Revenues
Service related, net	$	(180	)	$	20		$	106	$	(1	)	$	(55	)	$	2		$	(53	)
Net gain on mortgage loans held for sale	34			297			—		—			331			—			331
Total revenues	(146		)	317			106		(1		)	276			2			278
Total expenses	149			166			96		(1		)	410			34			444
Other income (expenses), net:
Interest income	83			34			—		—			117			1			118
Interest expense	(113		)	(27		)	—		—			(140		)	(52		)	(192		)
Other income (expenses), net	—			—			1		—			1			—			1
Total other income (expenses), net	(30		)	7			1		—			(22		)	(51		)	(73		)
(Loss) income before income tax (benefit) expense	$	(325	)	$	158		$	11	$	—		$	(156	)	$	(83	)	$	(239	)
Depreciation and amortization for property and equipment and intangible assets	$	3		$	3		$	3	$	—		$	9		$	10		$	19
Total assets	$	10,142		$	9,608		$	534	$	(5,964	)	$	14,320		$	3,293		$	17,613



	Three Months Ended March 31, 2019
Financial information by segment	Servicing			Originations			Xome		Elimination			Total Operating Segments			Corporate/Other			Consolidated
Revenues
Service related, net	$	(27	)	$	15		$	96	$	—		$	84		$	—		$	84
Net gain on mortgage loans held for sale	35			131			—		—			166			—			166
Total revenues	8			146			96		—			250			—			250
Total expenses	195			104			99		—			398			45			443
Other income (expenses), net:
Interest income	115			17			—		—			132			2			134
Interest expense	(114		)	(18		)	—		—			(132		)	(57		)	(189		)
Other income, net	—			4			11		—			15			—			15
Total other income (expenses), net	1			3			11		—			15			(55		)	(40		)
(Loss) income before income tax (benefit) expense	$	(186	)	$	45		$	8	$	—		$	(133	)	$	(100	)	$	(233	)
Depreciation and amortization for property and equipment and intangible assets	$	4		$	3		$	4	$	—		$	11		$	10		$	21
Total assets	$	13,642		$	4,865		$	502	$	(4,100	)	$	14,909		$	2,737		$	17,646

CAUTIONS REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the ~~net deferred~~U.S. federal ~~income tax asset due~~securities laws. These forward-looking statements include, without limitation, statements concerning plans, objectives, goals, projections, strategies, core initiatives, future events or performance, and underlying assumptions and other statements, which are not statements of historical facts, including the projected impact of COVID-19 on our business, financial performance and operating results. When used in this discussion, the words “anticipate,” “appears,” “believe,” “foresee,” “intend,” “should,” “expect,” “estimate,” “project,” “plan,” “may,” “could,” “will,” “are likely” and similar expressions are intended to identify forward-looking statements. These statements involve predictions of our future financial condition, performance, plans and strategies and are thus dependent on a number of factors including, without limitation, assumptions and data that may be imprecise or incorrect. Specific factors that may impact performance or other predictions of future actions have, in many but not all cases, been identified in connection with specific forward-looking statements. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty ~~regarding~~ and changes in circumstances, and we are under no obligation to, and express disclaim any obligation, to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.

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

the ~~Company’s~~severity and duration of the COVID-19 pandemic; the pandemic’s impact on the U.S. and global economies; and federal, state and local governmental responses to the pandemic

our ability to maintain or grow the size of our servicing portfolio;

our ability to maintain or grow our originations volume and profitability;

our ability to recapture voluntary prepayments related to our existing servicing portfolio;

our shift in the mix of our servicing portfolio to subservicing, which is highly concentrated;

delays in our ability to collect or be reimbursed for servicing advances;

our ability to obtain sufficient liquidity and capital to operate our business;

changes in prevailing interest rates;

our ability to finance and recover costs of our reverse servicing operations;

our ability to successfully implement our strategic initiatives;

our ability to realize anticipated benefits of our previous acquisitions;

our ability to use net operating loss carryforwards and other tax attributes;

changes in our business relationships or changes in servicing guidelines with Fannie Mae, Freddie Mac and Ginnie Mae;

Xome’s ability to compete in highly competitive markets;

our ability to pay down debt;

our ability to manage legal and regulatory examinations and enforcement investigations and proceedings, compliance requirements and related costs;

our ability to prevent cyber intrusions and mitigate cyber risks; and

our ability to maintain our licenses and other regulatory approvals.

All of these ~~benefits in~~factors are difficult to predict, contain uncertainties that may materially affect actual results and may be beyond our control. New factors emerge from time to time, and it is not possible for our management to predict all such factors or to assess the ~~future.~~

~~On March 19, 2012, WMIH emerged from bankruptcy. Prior to emergence, WMI abandoned the stock~~effect of WMB, thereby generating a worthless stock deduction of approximately $8.37 billion which gave rise to a NOL for the year ended December 31, 2012. Under Section 382 of the Code (“Section 382”), and basedeach such new factor on ~~the Company’s analysis,~~our business. Although we believe that the ~~Company experienced an “ownership change” (generally defined~~assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and any of these statements included herein may prove to be inaccurate. Given the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a ~~greater than 50% change (by value) in our equity ownership over a three-year period) on March 19, 2012, and our ability to use our pre-change of control NOLs and~~representation by us or any other pre-change tax attributes against our post-change income was limited. The Section 382 limitation is applied annually so as to limit the use of our pre-change NOLs to an amount that generally equals the value of our stock immediately before the ownership change multiplied by a designated federal long-term tax-exempt rate. Due to applicable limitations under Section 382 and a reduction of tax attributes due to cancellation of indebtedness, a portion of these NOLs were limited and will expire unused. We believeperson that the ~~total available~~results or conditions described in such statements or our objectives and ~~utilizable NOL carry-forward at December 31, 2016 was approximately $6.0 billion. At September 30, 2017, there was no limitation on the use~~plans will be achieved. Please refer to Risk Factor, and Management’s Discussion and Analysis of ~~these NOLs. These NOLs will begin to expire~~Financial Condition and Results of Operations, included in ~~2031. The Company’s ability to utilize the NOLs or realize any benefits related to the NOLs is subject to a number of risks. (See Part I-Item 1A. Risk Factors~~this report and in our Annual Report on Form 10-K for the year ended December 31, ~~2016).~~

The Company accounts for uncertain tax positions in accordance with the income tax accounting guidance. The Company has analyzed filing positions in the federal and state jurisdictions where it is required to file tax returns, as well as the open tax years in these jurisdictions. Tax years 2011 to present are subject to examination by the Internal Revenue Service. The Company believes that its federal income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain federal income tax positions have been recorded. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the provision for federal income taxes. The Company did not incur any federal income tax related interest income, interest expense or penalties for the nine months ended September 30, 2017 or for the year ended December 31, 2016.

~~Note 6: Service Agreements and Related Party Transactions~~

WMMRC has engaged a Hawaii-based service provider, Marsh Management Services, Inc., to provide accounting and related management services for its operations. In exchange for performing these services, WMMRC pays such service provider a management fee.

WMIH entered into an Investment Management Agreement and an Administrative Services Agreement with WMMRC on March 19, 2012. Each of these agreements was approved by WMMRC’s primary regulator, the Insurance Division of the State of Hawaii. Total amounts incurred under these agreements totaled $1.0 million and $1.0 million for the nine months ended September 30, 2017 and 2016, respectively. The expense and related income eliminate on consolidation. These agreements are described below.

Under the terms of such Investment Management Agreement, WMIH receives from WMMRC a fee equal to the product of (x) the ending dollar amount of assets under management during the calendar month in question and (y) .002 divided by 12. WMIH is responsible for investing the funds of WMMRC based on applicable investment criteria and subject to rules and regulations to which WMMRC is subject.

Under the terms of such Administrative Services Agreement, WMIH receives from WMMRC a fee of $110 thousand per month. WMIH is responsible for providing administrative services to support, among other things, supervision, governance, financial administration and reporting, risk management and claims management as may be necessary, together with such other general or specific administrative services that may be reasonably required or requested by WMMRC in the ordinary course of its business.

On March 22, 2012, WMIH and the WMI Liquidating Trust (the “Trust”) entered into a Transition Services Agreement (the “TSA”). Pursuant to the TSA, the Trust makes available certain services and employees. The TSA provides the Company with basic infrastructure and support services to facilitate the Company’s operations. The TSA, as amended, extends the term of the agreement through January 31, 2019 with automatic renewals thereafter for successive additional three-month terms, subject to non-renewal at the end of any additional term upon written notice by either party at least 30 days prior to the expiration of the additional term.

In connection with implementing the Company’s Seventh Amended Joint Plan of Affiliated Debtors Pursuant to Chapter 11 of the United States Bankruptcy Code (as modified, the “Plan”), certain holders of specified “Allowed Claims” had the right to elect to receive such holder’s “Pro Rata Share of the Common Stock Allotment.” Essentially, the Plan defines the “Pro Rata Share of the Common Stock Allotment” as a pro rata share of ten million (10,000,000) shares of WMIH’s common stock (i.e. five percent (5%)) issued and outstanding on the Effective Date. Holders exercising the foregoing election did so in lieu of receiving (i) 50% of such holder’s interest in and to certain litigation proceeds that could be realized by the Trust on account of certain claims and causes of action asserted by the Trust as contemplated by the Plan (“Litigation Proceeds”), and (ii) some or all of the Runoff Notes to which such holder may be entitled (if such holder elected to receive Runoff Notes in accordance with the terms of the Plan).

If a holder exercised the election described above and, as a result of such election, received shares of WMIH’s common stock, then such holder’s share of Runoff Notes to which the election was effective (i.e., One Dollar ($1.00) of original principal amount of Runoff Notes for each share of WMIH’s common stock) were not issued. In addition, as a result of making the aforementioned election, such holders conveyed to WMIH, and WMIH retained an economic interest in Litigation Proceeds, if any, recovered by the Trust in connection with certain litigation brought by the Trust as contemplated by the Plan. Distributions, if any, to WMIH on account of the foregoing will be effected in accordance with the Plan and the court order confirming the Plan.

On or about October 14, 2014, the Trust filed a lawsuit in King County Superior Court in the State of Washington against 16 former directors and officers of WMI (the “D&O Litigation”). The Trust’s complaint alleged, among other things, that the defendants named therein breached their fiduciary duties to WMI and committed corporate waste and fraud by squandering WMI’s financial resources. In connection with the settlement of the D&O Litigation, during the year ended December 31, 2015, among the Trust, certain former directors and officers of WMI and certain insurance carriers that underwrote director and officer liability insurance policies for the benefit of WMI and its affiliates (including such former directors and officers), such insurance carriers agreed to pay the Trust $37.0 million, of which $3.0 million would be placed into a segregated reserve account (the “RSA Reserve”) to be administered by a third party pursuant to the terms of a Reserve Settlement Agreement (the “RSA”).

During the years ended December 31, 2016 and 2015, WMIH had other income of $123 thousand and $7.8 million, respectively, as a result of its receipt of net Litigation Proceeds related to the D&O Litigation. As of September 30, 2017, $1.5 million remained in the RSA Reserve. Under the RSA, funds are released from the RSA Reserve to the Trust if and when certain designated conditions are satisfied. If and when these funds are released to the Trust, and to the extent WMIH is entitled to receive such funds in accordance with the Plan, it is anticipated the Trust will make payments to WMIH in an amount equal to WMIH’s share of Litigation Proceeds as provided under the Plan. Due to the contingent nature of future distributions from the RSA Reserve, there can be no assurance that WMIH will receive any distributions from the remaining balance in the RSA Reserve in the future. During the nine months ended September 30, 2017, WMIH has recorded income from Litigation Proceeds of $123 thousand. As of September 30, 2017, WMIH has not received any Litigation Proceeds, other than as described above.

In preparation for the offering of the Series B Preferred Stock, WMIH engaged KKR Capital Markets LLC (“KCM”), an affiliate of KKR & Co. L.P., to act as a joint book-running manager for the Series B Preferred Stock offering. KCM also acted as an initial purchaser of the Series B Preferred Stock. During the year ended December 31, 2015, as a result of satisfying a post-closing covenant to reincorporate in the State of Delaware within 180 days following the closing of the Series B Preferred Stock offering, we paid $8.25 million to KCM. Upon consummation of a “Qualified Acquisition” (as such term is defined in Article VI of the Certificate of Incorporation), we will pay KCM an additional fee (the “KCM Deferred Fee”) of $8.25 million. We have recorded the KCM Deferred Fee in “other liabilities” on our condensed consolidated balance sheet and this amount was included in “accrued fees relating to Series B Preferred Stock issuance” on our condensed consolidated statements of cash flows.

~~Note 7: Notes Payable~~

On the Effective Date, WMIH issued $110.0 million aggregate principal amount of its 13% Senior First Lien Notes due 2030 (the “First Lien Notes”) under an indenture, dated as of March 19, 2012 (the “First Lien Indenture”), between WMIH and Wilmington Trust, National Association, as Trustee. Additionally, WMIH issued $20.0 million aggregate principal amount of its 13% Senior Second Lien Notes due 2030 (the “Second Lien Notes” and, together with the First Lien Notes, the “Runoff Notes”) under an indenture, dated as of March 19, 2012 (the “Second Lien Indenture” and, together with the First Lien Indenture, the “Indentures”), between WMIH and Law Debenture Trust Company of New York, as Trustee. On January 5, 2017, The Law Debenture Trust Company of New York notified WMIH that it had completed the transfer of substantially all of its corporate trust business to Delaware Trust Company, and that Delaware Trust Company had become the successor trustee under the Second Lien Indenture. The Runoff Notes were scheduled to mature on March 19, 2030 and pay interest quarterly.

The Runoff Notes were secured by, and had a specified priority in right of payment in, a securities or deposit account into which WMIH was required to deposit distributions it received of Runoff Proceeds (as defined in the Indentures) (the “Collateral Account”). WMIH agreed to cause WMMRC, while the Runoff Notes were outstanding, to deposit all distributions, dividends or other receipts in respect of Runoff Proceeds Distributions (as defined in the Indentures) on the date paid to WMIH in the Collateral Account established in accordance with the terms of the Indentures. On any interest payment date, payments were made from the Collateral Account and from any other Runoff Proceeds Distributions in the priority set forth in the Indentures. In connection with certain interest payments due and payable in respect of the First and Second Lien Notes, WMIH elected, consistent with the terms of the Indentures, to issue payment-in-kind notes in lieu of making such interest payments in cash when no cash was available.

~~As of April 15, 2015, the First Lien Notes were fully redeemed by the Company, and on April 27, 2015, the First Lien Indenture was satisfied and discharged.~~

Second Lien Note principal outstanding totaled zero and approximately $18.8 million as of September 30, 2017 and December 31, 2016, respectively. Approximately $18.8 million of Second Lien Note principal was paid during the nine months ended September 30, 2017, and $2.9 million of Second Lien Note principal was paid during the year ended December 31, 2016. Interest on Second Lien Notes paid in cash totaled approximately $2.0 million during each of the nine months ended September 30, 2017 and 2016. ~~As of September 29, 2017, the Second Lien Notes were fully redeemed by the Company, and on October 2, 2017, the Second Lien Indenture was satisfied and discharged.~~ As a result of the satisfaction and discharge of the Second Lien Indenture the Collateral Account was subsequently closed and remaining funds transferred to cash and cash equivalents to be used for general corporate purposes. For more information see Note 14: Subsequent Events.

~~Note 8: Financing Arrangements~~

As of September 30, 2017, the Company had no debt financing arrangements in place. As of December 31, 2016, the Company had no debt financing arrangements in place other than the Second Lien Notes which are described in Note 7: Notes Payable.

~~Note 9: Capital Stock and Derivative Instruments~~

On the Effective Date, all shares of common and preferred equity securities previously issued by WMI were cancelled and extinguished. As of the Effective Date, and pursuant to WMIHC’s Amended and Restated Articles of Incorporation (the “Articles”), WMIHC was authorized to issue up to 500,000,000 shares of common stock and up to 5,000,000 shares of blank check preferred stock, in one or more series, each with a par value of $0.00001 per share. 200,000,000 shares of common stock were issued by WMIHC pursuant to the Plan and in reliance on Section 1145 of the United States Bankruptcy Code on the Effective Date.

On the Reincorporation Date all shares of common and preferred equity securities previously issued by WMIHC automatically were converted into one share of the substantially similar common stock, Series A Preferred Stock or Series B Preferred Stock, as applicable, of WMIH. At the same time, each outstanding option, right or warrant to acquire shares of WMIH’s common stock was converted into an option, right or warrant to acquire an equal number of shares of WMIH’s common stock under the same terms and conditions as the original options, rights or warrants. As of the Reincorporation Date, and pursuant to the Certificate of Incorporation, WMIH is authorized to issue up to 3,500,000,000 shares of common stock and up to 10,000,000 shares of blank check preferred stock, in one or more series, each with a par value of $0.00001 per share.

All of the terms of the agreements described below and attributed to WMIH are also attributable to WMIHC relative to the various agreements and instruments prior to the Reincorporation Date. The references to WMIH are based on the date this Form 10-Q has been filed. The references would have been to WMIHC prior to the Reincorporation Date.

On January 30, 2014, WMIH entered into (i) an investment agreement, dated as of January 30, 2014 (the “Investment Agreement”), with KKR Fund Holdings L.P. (“KKR Fund”) and, for limited purposes, KKR Management Holdings L.P., and (ii) an investor rights agreement, dated as of January 30, 2014 (the “Investor Rights Agreement”), with KKR Fund. On January 30, 2014, pursuant to the Investment Agreement, WMIH issued 1,000,000 shares of its Series A Preferred Stock having the terms, rights, obligations and preferences contained in the Articles of Amendment of WMIH dated January 30, 2014 for a purchase price equal to $11.1 million and has issued to KKR Fund warrants to purchase, in the aggregate, 61.4 million shares of WMIH’s common stock, 30.7 million of which have an exercise price of $1.32 per share and 30.7 million of which have an exercise price of $1.43 per share (together, the “Warrants”).

The Series A Preferred Stock has rights substantially similar to those associated with WMIH’s common stock, with the exception of a liquidation preference, conversion rights and customary anti-dilution protections. The Series A Preferred Stock has a liquidation preference equal to the greater of (i) $10.00 per one million shares of Series A Preferred Stock plus declared but unpaid dividends on such shares and (ii) the amount that the holder would be entitled to in a relevant transaction had the Series A Preferred Stock been converted to common stock of WMIH. The Series A Preferred Stock is convertible at a conversion price of $1.10 per share into shares of common stock of WMIH either at the option of the holder or automatically upon transfer by KKR Fund to a non-affiliated party. As a result of the calculation of a beneficial conversion feature as required by ASC topic 470 - Debt a preferred deemed dividend of $9.5 million was recorded in conjunction with the issuance of the Series A Preferred Stock. This preferred deemed dividend resulted in an increase to our accumulated deficit, and an increase in additional paid in capital. Further, KKR Fund, as the holder of the Series A Preferred Stock and the Warrants, has received other rights pursuant to the Investor Rights Agreement as described below.

The Warrants have a five-year term from the date of issuance and are subject to customary structural adjustment provisions for stock splits, combinations, recapitalizations and other similar transactions. KKR Fund’s rights as a holder of the Series A Preferred Stock and the Warrants, and the rights of any subsequent holder that is an affiliate of KKR Fund (together with KKR Fund, the “Series A Holders”) are governed by the Investor Rights Agreement.

In accordance with the Investor Rights Agreement, except for the issuance of WMIH’s common stock in respect of the Warrants and the Series A Preferred Stock, KKR Fund and its affiliates shall not purchase or acquire any equity securities of WMIH or its subsidiaries without WMIH’s prior written consent, subject to certain exceptions.

The Investor Rights Agreement also provides the Series A Holders with registration rights, including three long form demand registration rights, unlimited short form demand registration rights and customary piggyback registration rights with respect to WMIH’s common stock (and WMIH’s common stock underlying the Series A Preferred Stock and the Warrants), subject to certain minimum thresholds, customary blackout periods and lockups of 180 days. On July 1, 2015, WMIH filed a shelf registration statement (the “Initial Registration Statement”) covering resales of Series B Preferred Stock and WMIH’s common stock issuable upon mandatory conversion of the Series B Preferred Stock. On November 23, 2015, WMIH amended the Initial Registration Statement to cover WMIH’s common stock issuable upon conversion of the Series A Preferred Stock and shares of WMIH’s common stock issuable upon exercise of warrants issued in connection with the issuance of our Series A Preferred Stock currently outstanding (as amended, the “Registration Statement”). The Registration Statement was declared effective under the Securities Act on November 25, 2015.

For as long as the Series A Holders beneficially own any shares of common stock of WMIH or Series A Preferred Stock or any of the Warrants, WMIH has agreed to provide customary Rule 144A information rights, to provide the Series A Holders with regular audited and unaudited financial statements and to allow the Series A Holders or their representatives to inspect WMIH’s books and records.

The foregoing description of (i) the Investor Rights Agreement is qualified in its entirety by reference to the Investor Rights Agreement, which was filed with the SEC as Exhibit 4.2 on Form 8-K on January 31, 2014, and incorporated by reference, (ii) the Warrants are qualified in their entirety by reference to the Form of Tranche A Warrant and Form of Tranche B Warrant, which were filed with the SEC as Exhibits 4.3 and 4.4, respectively, on Form 8-K on January 31, 2014, and incorporated by reference, (iii) the Series A Preferred Stock is qualified in its entirety by reference to the Articles of Amendment of WMIH dated January 30, 2014, which were filed with the SEC as Exhibit 4.5 on Form 8-K on January 31, 2014, and incorporated by reference, the Form of Series A Convertible Preferred Stock Certificate, which was filed with the SEC as Exhibit 4.6 on Form 8-K on January 31, 2014, and incorporated by reference, and the Certificate of Incorporation, which was filed with the SEC as Exhibit 3.1 on Form 8-K12G3 on May 13, 2015, and incorporated by reference, and (iv) the Investment Agreement is qualified in its entirety by reference to the Investment Agreement, which was filed with the SEC as Exhibit 10.1 on Form 8-K on January 31, 2014, and incorporated by reference.

On January 5, 2015, WMIH, in connection with an offering of 600,000 shares of its Series B Preferred Stock, filed with the Secretary of State of Washington Articles of Amendment of Articles of Incorporation (the “Articles of Amendment”) containing the Designation of Rights and Preferences of the 3% Series B Convertible Preferred Stock (the “Certificate of Designation”) creating the Series B Preferred Stock and designating the rights and preferences of the Series B Preferred Stock.

The foregoing descriptions of the Articles of Amendment and the Certificate of Designation are qualified in their entirety by the provisions of the Articles of Amendment and the Certificate of Designation, filed as Exhibits 3.1 and 4.1 to a Form 8-K on January 5, 2015, respectively, and incorporated by reference herein~~, and the Certificate of Incorporation, which was filed with the SEC as Exhibit 3.1 on Form 8-K12G3 on May 13, 2015, and incorporated by reference~~.

On January 5, 2015, in connection with the offering and pursuant to that certain Purchase Agreement, dated December 19, 2014 (the “Purchase Agreement”), by and among WMIH, Citigroup Global Markets Inc. (“Citi”) and KCM (KCM and Citi together, the “Initial Purchasers”), WMIH entered into a Registration Rights Agreement with the Initial Purchasers (the “Registration Rights Agreement”), pursuant to which WMIH has agreed that, subject to certain conditions, WMIH will use its reasonable efforts to (i) file a shelf registration statement covering resales of WMIH’s common stock issuable upon mandatory conversion of the Series B Preferred Stock no later than six months after January 5, 2015 (the “Issue Date”); (ii) file a shelf registration statement covering resales of the Series B Preferred Stock no later than one year after the Issue Date; and (iii) cause each of these shelf registration statements to be declared effective under the Securities Act. On July 1, 2015, WMIH filed the Initial Registration Statement covering resales of Series B Preferred Stock and shares of WMIH’s common stock issuable upon mandatory conversion of the Series B Preferred Stock. On November 23, 2015, WMIH amended the Initial Registration Statement to cover WMIH’s common stock issuable upon conversion of the Series A Preferred Stock and shares of WMIH’s common stock issuable upon exercise of warrants issued in connection with the issuance of our Series A Preferred Stock currently outstanding. ~~The Registration Statement was declared effective under the Securities Act on November 25, 2015.~~

The foregoing description of the Registration Rights Agreement is qualified in its entirety by the provisions of the Registration Rights Agreement, filed on Form 8-K on January 5, 2015, as Exhibit 10.1 and incorporated by reference herein.

On January 5, 2015, in connection with the offering and pursuant to the Purchase Agreement, WMIH entered into an Escrow Agreement (the “Escrow Agreement”) with Citibank, N.A., as Escrow Agent (the “Escrow Agent”), pursuant to which WMIH caused to be deposited with the Escrow Agent the amount of $598.5 million, representing the proceeds of the offering of Series B Preferred Stock less offering fees payable on the Issue Date but before payment of other offering fees and expenses (including fees contingent upon future events). These net proceeds have been, and will be, released from escrow from time to time to WMIH as instructed by WMIH in amounts necessary to (i) pay certain fees related to the offering that may become payable to the Initial Purchasers, (ii) finance WMIH’s efforts to explore and/or fund, in whole or in part, acquisitions, whether completed or not, including reasonable attorney fees and expenses related thereto, accounting expenses, due diligence and financial advisor fees and expenses, (iii) pay certain amounts that may become payable to the holders of the Series B Preferred Stock upon the occurrence of certain put events, (iv) pay certain amounts that would become payable to the holders of the Series B Preferred Stock upon a mandatory redemption of the Series B Preferred Stock, and (v) pay certain expenses related to the offering. The entire net proceeds will be released from escrow as instructed by WMIH upon consummation of a Qualified Acquisition (as defined in Article VI of the Certificate of Incorporation). If a Qualified Acquisition is not consummated by January 5, 2018, and no Acquisitions (as defined in Article VI of the Certificate of Incorporation) have been consummated such that all of the Series B Preferred Stock remains outstanding and has not been converted to WMIH’s common stock, the outstanding Series B Preferred Stock becomes redeemable. The aggregate redemption costs, assuming all 600,000 shares remain outstanding, of all of the Series B Preferred Stock is $600.0 million, plus accrued and unpaid dividends, if any, whether or not declared. As of September 30, 2017 and December 31, 2016, the balance remaining in the escrow account totaled approximately $577.2 million and $572.9 million, respectively. The foregoing description of the Escrow Agreement is qualified in its entirety by the provisions of the Escrow Agreement, filed on Form 8-K on January 5, 2015, as Exhibit 10.2 and incorporated by reference herein.

If the Series B Preferred Stock is redeemed or determined likely to be redeemed, the Company would be required to record a charge to earnings of approximately $97.8 million to accrete the value of the Series B Preferred Stock to the $600 million redemption value. The Company continues to pursue its business strategy of consummating an acquisition, and to explore potential financing and refinancing alternatives, and as of September 30, 2017, the Company has determined that recording for accretion to the Series B Preferred Stock’s redemption value is not required.

The Series B Preferred Stock are hybrid financial instruments that blend characteristics of both equity and debt securities. The terms of the Series B Preferred Stock provide for either redemption of the principal and interest for cash at maturity or in the event of certain predetermined circumstances (“Forward Component”) or mandatory conversion into WMIH’s common stock (“Embedded Conversion Feature” or “ECF”). The Series B Preferred Stock also embody contingent equity-linked share price protections on the ECF in the form of a variable conversion price based on a 20 trading day average of volume weighted-average price. Upon any conversion of Series B Preferred Stock in accordance with its terms, the Series B Preferred Stock shall convert based on the outstanding principal and accrued interest, subject to a floor of $1.75 per share of WMIH’s common stock and a maximum of $2.25 per share. As a result, the Company determined that the Series B Preferred Stock contain certain embedded derivative features. Management’s evaluation resulted in the conclusion that the compound derivative financial instrument required bifurcation and separately accounted for the embedded conversion feature option as a derivative. A derivative liability results primarily when the Company average stock price (as defined in the Certificate of Incorporation) exceeds the conversion price, including the ceiling conversion price of $2.25, as defined by the Certificate of Incorporation. A derivative asset results primarily when the Company’s average stock price is less than the conversion price, including the floor price of $1.75. The aggregate fair value of the embedded conversion feature was a liability of $66.2 million on the date of issuance of the Series B Preferred Stock. At September 30, 2017, September 30, 2016 and December 31, 2016, the fair value of the embedded conversion feature was an asset of $111.9 million, a liability of $58.3 million and an asset of $80.7 million, respectively. Any change in the fair value of the embedded conversion feature will constitute other income or expense, as the case may be, in the applicable reporting period. Upon conversion or redemption of the Series B Preferred Stock, any asset or liability related to the embedded conversion feature would be eliminated. During the year ended December 31, 2016, the fair value of the embedded conversion feature changed by $201.5 million and this change is included as other income in the condensed consolidated statement of operations for the year ended December 31, 2016. During the three and nine months ended September 30, 2017, the fair value of the derivative asset increased by $38.6 million and $31.2 million, respectively. During the three and nine months ended September 30, 2016, the fair value of the derivative liability increased by $16.2 million and decreased by $62.6 million, respectively. The change in fair value is included as other income or expense, as the case may be, in the condensed consolidated statement of operations for the respective periods.

On June 1, 2017 and on June 1, 2016, WMIH issued restricted stock grants to members of the Board totaling $0.4 million and $0.5 million, respectively, of aggregate fair value. The restricted shares noted above vest over a three-year period.

On May 15, 2015, WMIH issued restricted stock grants to our Chief Executive Officer, William C. Gallagher, and our Chief Operating Officer, Thomas L. Fairfield, in conjunction with employment agreements totaling $9.8 million of aggregate fair value (the “Exec Grants”) based on the $2.76 trading price of WMIH shares at the close of business on the date issued. ~~WMIH may be required to issue additional shares if the conversion price applicable to the Series B Preferred Stock is less than $2.25 per share.~~ ~~The Exec Grants~~ will vest in full and will be recognized as compensation expense upon the consummation of a Qualified Acquisition, subject to the executives continued employment with the Company until such time. The foregoing description of the restricted stock agreement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Gallagher Restricted Stock Agreement and the Fairfield Restricted Stock Agreement (the “Executive Agreements”), which were filed as Exhibit 10.3 and Exhibit 10.5, respectively, of Form 8-K12G3 filed on May 13, 2015 and incorporated herein by reference. The fair market value of the Exec Grants as of September 30, 2017 approximates $4.3 million as a result of the terms of the Executive Agreements which would result in additional share issuances if the value is below $2.25 per share limited to a maximum of shares based on a minimum conversion price of $1.75 per share. The stock price was $0.95 per share at the close of the market on September 30, 2017 and if the Exec Grants had vested then the minimum conversion price of $1.75 per share would have been utilized, therefore, a total of 1,015,874 additional shares (the “Exec Additional Shares”) would have been required to be issued, 507,937 additional shares each to both Mr. Gallagher and Mr. Fairfield.

~~The unamortized value related to the unvested restricted share grants totals $5.0 million and $7.7 million at September 30, 2017 and December 31, 2016, respectively.~~

The unamortized value of $5.0 million at September 30, 2017, if all are ultimately vested, would be amortized according to the following schedule. The fair value of the Exec Grants will vest and be recognized on the date of the consummation of a Qualified Acquisition. Additionally, any Exec Additional Shares required to be issued, would be issued and immediately vest on the date of the consummation of a Qualified Acquisition.

Amortization Schedule
(in thousands)

September 30, 2017 unamortized dollar value

4th quarter 2017

$
103

1st quarter 2018

98

2nd quarter 2018

71

3rd quarter 2018

71

4th quarter 2018

71

1st quarter 2019

66

2nd quarter 2019

36

3rd quarter 2019

36

4th quarter 2019

36

1st quarter 2020

31

Unamortized fair-value - subject to vesting schedule

619

Unamortized fair-value - event dependent

4,343

Total unamortized dollar value

4,962

Equity-based compensation totaled $0.4 million and $0.5 million for the nine months ended September 30, 2017 and September 30, 2016, respectively. The restricted stock awards were issued at the fair market value determined to be the trading price at the close of business on the respective date the awards were granted.

~~A summary of WMIH’s restricted stock award activity for the nine months ended September 30, 2017 and year ended December 31, 2016 is presented below:~~

Number of restricted stock awards outstanding

Weighted-average grant date fair value

Aggregate fair value
(in thousands)

Outstanding—January 1, 2016

6,168,035

2.1230

13,095

Restricted stock awards granted during 2016

212,765

2.3500

500

Restricted stock awards released or forfeited during 2016

—

—

—

Outstanding—December 31, 2016

6,380,800

$
2.1306

$
13,595

Restricted stock awards granted during 2017

333,332

1.2000

400

Restricted stock awards released or forfeited during 2017

—

—

—

Outstanding—September 30, 2017

6,714,132

$
2.0844

$
13,995

WMIH has issued the total number of shares subject to the restricted stock grants, however, until vested they are subject to repurchase. Shares subject to repurchase totaled 4,053,640 on September 30, 2017 and 4,039,591 on December 31, 2016. The Exec Grants vest upon future events, and are not time specific, and for this reason we have used 1st quarter 2018 as the vesting date in the following table as this date corresponds with the Series B Preferred Stock potential redemption date. The shares subject to repurchase at September 30, 2017 will vest, assuming circumstances remain unchanged, according to the following schedule:

~~Vesting schedule of shares subject to repurchase~~	~~September 30, 2017 unvested shares~~
~~4th quarter 2017~~		—
~~1st quarter 2018~~		~~3,774,684~~
~~2nd quarter 2018~~		—
~~3rd quarter 2018~~		—
~~4th quarter 2018~~		—
~~1st quarter 2019~~		~~167,848~~
~~2nd quarter 2019~~		—
~~3rd quarter 2019~~		—
~~4th quarter 2019~~		—
~~1st quarter 2020~~		~~111,108~~
~~Total unvested shares~~		~~4,053,640~~

Pursuant to a restricted stock agreement, WMIH has the right, but not the obligation, to repurchase any unvested (but issued) shares of common stock subject to the restricted stock agreement at $0.0001 per share upon the termination of service in the case of a director, or in the case of the Exec Grants, on January 5, 2018 if the Series B Preferred Stock are redeemed or as a result of certain circumstances as defined by the terms of the Exec Grants.

~~A summary of WMIH’s restricted shares issued and subject to repurchase as of September 30, 2017 and December 31, 2016 is presented below:~~

~~Vesting schedule of shares subject to repurchase~~	~~Unvested shares~~
~~Shares subject to repurchase—January 1, 2016~~		~~4,197,396~~
~~Shares issued subject to vesting during 2016~~		~~212,765~~
~~Unvested shares repurchased during 2016~~		—
~~Shares vested during 2016~~		~~(370,570~~	)
~~Shares subject to repurchase—December 31, 2016~~		~~4,039,591~~
~~Shares issued subject to vesting during 2017~~		~~333,332~~
~~Unvested shares repurchased during 2017~~		—
~~Shares vested during 2017~~		~~(319,283~~	)
~~Shares subject to repurchase—September 30, 2017~~		~~4,053,640~~

On June 1, 2017 and June 1, 2016, WMIH issued 333,332 and 212,765 restricted stock grants, respectively, to members of the Board totaling $0.4 million and $0.5 million, respectively, of aggregate fair value. The share price was determined based on the closing sales price of $1.20 and $2.35 on the respective dates of the awards.

As of September 30, 2017 and December 31, 2016, 206,714,132 and 206,380,800, respectively, of WMIH’s common stock were issued and outstanding. As of September 30, 2017 and December 31, 2016, 1,000,000 shares of the Series A Preferred Stock were issued and outstanding. As of September 30, 2017 and December 31, 2016, 600,000 shares of the Series B Preferred Stock were issued and outstanding. As of September 30, 2017 and December 31, 2016, 61,400,000 warrants to purchase WMIH’s common stock were issued and outstanding.

~~See Note 12: Net Income Per Common Share~~ for further information on ~~shares used for EPS calculations.~~

~~Note 10: Pending Litigation~~

~~As of September 30, 2017, the Company was not a party to, or aware of, any pending legal proceedings or investigations requiring disclosure at this time.~~

~~Note 11: Restriction on Distribution of Net Assets from Subsidiary~~

~~WMMRC has net assets totaling $17.7 million~~these and $33.8 million as of September 30, 2017 and December 31, 2016, respectively. These net assets are not immediately available for distribution to WMIH due to restrictions imposed by trust agreements, and the requirement that the Insurance Division of the State of Hawaii must approve dividends from WMMRC. Prior to ~~September 29, 2017, when the Second Lien Notes were fully redeemed by the Company and October 2, 2017 when the Second Lien Indenture was satisfied and discharged~~other risk factors affecting us., distributions from WMMRC to WMIH were further restricted by the terms of the Runoff Notes and Indentures described in Note 7: Notes Payable. As more fully described in Note 14: Subsequent Events, a distribution from WMMRC to WMIH of up to $10.7 million was approved by the Insurance Division of the State of Hawaii on September 13, 2017.

~~Note 12: Net Income (Loss) Per Common Share~~

In calculating earnings per share, the Company follows the two-class method, which distinguishes between the classes of securities based on the proportionate participation rights of each security type in the Company's undistributed income. The Series A Preferred Stock and the Series B Preferred Stock are treated as one class for purposes of applying the two-class method, because they have substantially equal rights and share equally on an as converted basis with respect to income available to WMIH common stockholders.

Basic net income per WMIH share attributable to common stockholders is computed by dividing net income attributable to WMIH’s common stockholders by the weighted-average number of common shares outstanding for the period after subtracting the weighted-average of any unvested restricted shares outstanding, as these shares are subject to repurchase. Basic net income attributable to common stockholders is computed by deducting preferred dividends and the basic calculation of undistributed earnings attributable to participating securities from net income.

Diluted net income per WMIH share is computed by dividing net income attributable to WMIH’s common stockholders for the period by the weighted-average number of common shares outstanding after subtracting the weighted-average of any incremental unvested restricted shares outstanding and adding any potentially dilutive common equivalent shares outstanding during the period, if dilutive. Potentially dilutive common equivalent shares are comprised of the incremental common shares issuable upon the exercise of warrants for WMIH’s common stock and the potential conversion of preferred shares to common shares and the dilutive effect of unvested restricted stock. Diluted net income attributable to common stockholders is computed by deducting preferred dividends and the diluted calculation of undistributed earnings attributable to participating securities from net income.

The dilutive effect of outstanding warrants and restricted stock subject to repurchase is reflected in diluted earnings per share by application of the treasury stock method. There would be no dilutive effects from any equity instruments for periods presented reflecting a net loss, therefore diluted net loss per share would be the same as basic net loss for periods that reflect a net loss attributable to common stockholders. Certain unvested restricted shares and convertible preferred stock are excluded from the calculation of diluted earnings per share until the non-market based contingency occurs.

~~The following table presents the calculation of basic net (loss) income per share~~ ~~for periods presented:~~

~~(in thousands, except per share data):~~

Three months
ended
September 30, 2017

Three months
ended
September 30, 2016

Nine months
ended
September 30, 2017

Nine months
ended
September 30, 2016

Numerator for basic net income (loss) per share:

Net income (loss)
$
38,411

$
(16,645
)

$
34,876

$
61,314

Less: Series B preferred stock dividends

(4,500
)

(4,500
)

(13,500
)

(13,500
)
Less: undistributed earnings attributed to participating securities (basic calculation)

(21,541
)

—

(13,581
)

(27,625
)
Basic net income (loss) attributable to common stockholders
$
12,370

$
(21,145
)

$
7,795

$
20,189

Denominator for basic net income (loss) per share:

Weighted-average shares outstanding

206,714,132

206,380,800

206,529,762

206,261,993

Weighted-average unvested restricted shares outstanding

(4,053,640
)

(4,039,591
)

(3,956,447
)

(4,014,718
)
Denominator for basic net income (loss) per share

202,660,492

202,341,209

202,573,315

202,247,275

Basic net income (loss) per share attributable to common stockholders
$
0.06

$
(0.10
)

$
0.04

$
0.10

~~The following table presents the calculation of diluted net (loss) income per share~~ ~~for periods presented:~~

~~(in thousands, except per share data):~~

Three months
ended
September 30, 2017

Three months
ended
September 30, 2016

Nine months
ended
September 30, 2017

Nine months
ended
September 30, 2016

Numerator for diluted net income (loss) per share:

Net income (loss)
$
38,411

$
(16,645
)

$
34,876

$
61,314

Less: Series B preferred stock dividends

(4,500
)

(4,500
)

(13,500
)

(13,500
)
Less: undistributed earnings attributed to participating securities (diluted calculation)

(21,541
)

—

(13,581
)

(26,241
)
Diluted net income (loss) attributable to common stockholders
$
12,370

$
(21,145
)

$
7,795

$
21,573

Denominator for diluted net income (loss) per share:

Weighted-average shares outstanding

206,714,132

206,380,800

206,529,762

206,261,993

Weighted-average unvested restricted shares outstanding

(4,053,640
)

(4,039,591
)

(3,956,447
)

(4,014,718
)
Effect of dilutive potential shares

10,065,629

—

10,065,629

35,327,739

Denominator for diluted net income (loss) per share

212,726,121

202,341,209

212,638,944

237,575,014

Diluted net income (loss) per share attributable to common stockholders
$
0.06

$
(0.10
)

$
0.04

$
0.09

The following table summarizes shares subject to exercise or vesting conditions as more fully described in Note 9: Capital Stock and Derivative Instruments. These shares could potentially be dilutive in future periods if we realize net income attributable to common and participating stockholders and the contingent or unvested stock is converted to WMIH common stock. The cash payment of $84.4 million, which would be received upon exercise of the warrants, has not been considered as an offset to the dilutive shares under warrants outstanding below.

Potential dilution to common stock

Minimum shares

Maximum shares

Restricted shares subject to vesting

4,053,640

4,053,640

Series A Preferred Stock

10,065,629

10,065,629

Warrants outstanding

61,400,000

61,400,000

Dilutive shares to be issued if Series B Preferred Stock conversion is below $2.25

—

1,015,872

Series B Preferred Stock

266,666,667

342,857,143

Potential dilutive shares if converted to common stock

342,185,936

419,392,284

~~Note 13:~~ ~~Fair Value Measurement~~

We use a fair-value approach to value certain assets and liabilities. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. We use a fair value hierarchy, which distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

•	~~Level 1 — Inputs to the valuation methodology are quoted prices for identical assets or liabilities traded in active markets;~~

•	Level 2 — Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market corroborated inputs; and

•	~~Level 3 — Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company’s own assumptions about the inputs that market participants would use.~~

Determining which category an asset or liability falls within the fair value accounting guidance hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter. Assets and liabilities measured at fair value on a recurring basis are summarized as follows:

~~The financial instrument that is measured at fair value on a recurring basis is summarized as follows as of September 30, 2017:~~

(in thousands)

Assets

Level 1

Level 2

Level 3

September 30, 2017

Derivative embedded conversion feature

$
—

$
—

$
111,877

$
111,877

~~The financial instrument that is measured at fair value on a recurring basis is summarized as follows as of December 31, 2016:~~

(in thousands)

Assets

Level 1

Level 2

Level 3

December 31, 2016

Derivative embedded conversion feature

$
—

$
—

$
80,651

$
80,651

~~The following table shows the change in Level 3 assets and liabilities measured at fair value on a recurring basis for the year ended December 31, 2016 and the nine months ended September 30, 2017:~~

Derivative asset (liability) embedded conversion feature
(in thousands)

Balance, January 1, 2016

$
(120,848
)
Unrealized gain on change in fair value

201,499

Balance, December 31, 2016

80,651

Unrealized gain on change in fair value

31,226

Balance, September 30, 2017

$
111,877

On January 5, 2015, WMIH raised $600.0 million of capital (less transaction costs) through the issuance of 600,000 shares of Series B Preferred Stock. The shares carry a liquidation preference of $1,000 per share, equal to the purchase price, and a mandatory redemption right three years from issuance date at a price equal to the purchase price, plus accrued dividends at 3% per annum.

~~The proceeds from the issuance of the Series B Preferred Stock are to be used to pursue strategic acquisitions. If one or more~~ acquisitions are made on or prior to January 5, 2018 (or such later time as may be permitted pursuant to the terms governing the Series B Preferred Stock), then some or all of such Series B Preferred Stock shall be mandatorily converted into common stock of ~~WMIH at a conversion price that is the lesser of:~~

~~$2.25 per share of WMIH common stock; and~~

~~ii)~~

the arithmetic average of daily volume weighted-average prices of WMIH’s common stock during the 20 trading day period ending on the trading day immediately preceding the public announcement by WMIH of its entry into a definitive agreement for such acquisition, subject to a floor of $1.75 per share of WMIH common stock.

The mandatory conversion feature of the Series B Preferred Stock is subject to fair value accounting and, in connection therewith, since the time of issuance, the Company has used a binomial lattice option model to determine fair value of the Series B Preferred Stock. The fair value of the Series B Preferred Stock embedded conversion feature is revalued each balance sheet date utilizing the binomial lattice option model. The fair value computations are reported in the condensed consolidated statement of operations as unrealized gain or (loss) on change in fair value of derivative embedded conversion feature, respectively.

Such binomial lattice option model utilizes several inputs to determine such fair value. Such inputs include WMIH’s common stock price as of each reporting date, as well as variable assumptions including, but not limited to, volatility of our stock price, the risk free interest rate, the probability that the Company consummates a Qualified Acquisition and the time of completing any such Qualified Acquisition.

As of September 30, 2017 the following variable assumptions were included in the binomial option model: expected stock price volatility over the term of the convertible preferred securities was estimated at 60%, as compared to 40% as of December 31, 2016; the risk-free interest rate was estimated at 1.1% as compared to 0.6% as of December 31, 2016; the probability of the Company consummating a Qualified Acquisition was estimated at 50% as compared with 90% as of December 31, 2016; and the anticipated timing of the Company consummating a Qualified Acquisition was estimated at 6 months from both September 30, 2017 and December 31, 2016.

The foregoing assumptions were adopted by the Company’s management in order to determine the market value of the embedded conversion feature applicable to the Series B Preferred Stock. Such assumptions necessarily involved and continue to involve the exercise of management’s judgement, as well as the judgement of the third party the Company uses in connection with the embedded derivative valuation process and for no other purpose. Such assumptions are monitored and adjusted from time to time. As assumptions and circumstances change, results may differ and past assumptions and valuations are not indicative of future assumptions or results.

Our reported net income attributable to common and participating stockholders (“Year to Date Net Income” or “Year to Date Net Loss”) was approximately $21.4 million for the nine months ended September 30, 2017. The change to our net income attributable to common and participating stockholders resulting from the calculation of the fair value of the embedded conversion feature is analyzed at the end of each reporting period to assess the impact of a 10% change to the various inputs and the result of each change to Year to Date Net Income is highlighted in the following scenarios. If the closing stock price of our common stock had been 10% lower, our Year to Date Net Income would have been approximately $17.7 million higher ($39.1 million). If the closing stock price of our common stock had been 10% higher, our Year to Date Net Income would have been approximately $17.6 million less ($3.8 million). If our volatility assumption on September 30, 2017 had been 10% lower, our Year to Date Net Income would have been approximately $3.0 million higher ($24.4 million). If our volatility assumption had been 10% higher, our Year to Date Net Income would have been approximately $3.3 million less ($18.1 million). If our probability of a transaction occurring assumption on September 30, 2017 had been 10% lower, our Year to Date Net Income would have been approximately $22.4 million less resulting in Year to Date Net Loss of $1.0 million. If our probability of a transaction occurring assumption had been 10% higher, our Year to Date Net Income would have been approximately $22.4 million higher ($43.8 million).

~~Note 14: Subsequent Events~~

On October 23, 2017, the reinsurance agreement with Radian was commuted and the related trust assets were released to WMMRC. On September 13, 2017, the Insurance Division of the State of Hawaii approved this commutation.

On September 13, 2017, the Insurance Division of the State of Hawaii approved a transfer of up to $10.7 million from funds which were held in trust at WMMRC as of September 30, 2017. As of the date of the filing of this Form 10-Q, these funds have not been transferred to WMIH; however, they are no longer held in trust and are available for general corporate purposes.

~~On October 2, 2017, the Second Lien Indenture was satisfied and discharged.~~ ~~As a result of the satisfaction and discharge of the Second Lien Indenture the~~ ~~Collateral~~ ~~Account was subsequently closed and remaining funds transferred to cash and cash equivalents to be used for general corporate purposes. For more information see Note 7: Notes Payable.~~

~~Item 2.~~

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

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

~~The following~~

Management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with ~~our~~the accompanying unaudited consolidated financial statements and ~~the related notes, included~~ in ~~Item 1 of Part I of this Quarterly Report on Form 10-Q. The following is a discussion and analysis of~~conjunction with our results of operations for the three and nine months ended September 30, 2017 and 2016 and financial condition as of September 30, 2017 and December 31, 2016 (dollars in thousands, except share and per share data and as otherwise indicated).

References as used herein, unless the context requires otherwise, to (i) the “Company,” “we,” “us,” or “our” refer to WMIH Corp. (formerly WMI Holdings Corp.) and its subsidiaries on a consolidated basis; (ii) “WMIH” refers only to WMIH Corp., without regard to its subsidiaries; (iii) “WMIHC” refers only to WMI Holdings Corp., without regard to its subsidiaries; (iv) “WMMRC” refers to WM Mortgage Reinsurance Company, Inc. (a wholly-owned subsidiary of WMIH); and (v) “WMIIC” refers to WMI Investment Corp. (a wholly-owned subsidiary of WMIH).

~~FORWARD-LOOKING STATEMENTS AND INFORMATION~~

This quarterly report includes forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact included in this report that address activities, events, conditions or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business and these statements are not guarantees of future performance. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements may include the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “strategy,” “future,” “opportunity,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result” and similar expressions. Such forward-looking statements involve risks and uncertainties that may cause actual events, results or performance to differ materially from those indicated by such statements. These risks are identified and discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016 under Risk Factors~~2019. The following discussion contains, in ~~Part I, Item 1A. These risk factors will be important~~addition to ~~consider in determining future results and should be reviewed in their entirety. These~~the historical information, forward-looking statements that include risks, assumptions and uncertainties that could cause actual results to differ materially from those anticipated by such statements.

Dollar amounts are ~~expressed~~reported in ~~good faith~~millions, except per share data and ~~we believe there~~other key metrics, unless otherwise noted.

Overview

We are a leading servicer and originator of residential mortgage loans, and a provider of real estate services through our Xome subsidiary. Our purpose is ~~a reasonable basis for them. However, there can be no assurance that~~to keep the ~~events, results or trends identified in these forward-looking statements will occur or be achieved. Forward-looking statements speak only as~~dream of ~~the date they are made,~~homeownership alive, and we do ~~not undertake~~this as a servicer by helping mortgage borrowers manage what is typically their largest financial asset, and by helping our investors maximize the returns from their portfolios of residential mortgages. We have a track record of significant growth, having expanded our servicing portfolio from $10 billion in 2009 to ~~update any forward-looking statement, except as required by law. Therefore, you should not rely on these statements being current~~$629 billion as of ~~any time other than the time at~~March 31, 2020. We believe this track record reflects our strong operating capabilities, which ~~this document was filed with the Securities~~include a proprietary low-cost servicing platform, strong loss mitigation skills, a commitment to compliance, a customer-centric culture, a demonstrated ability to retain customers, growing origination capabilities, and ~~Exchange Commission.~~

~~OVERVIEW~~

~~Our Business Strategy and Operating Environment~~

WMIH Corp. (“WMIH”) is a corporation duly organized and existing under the laws of the State of Delaware. On May 11, 2015, WMIH merged with its parent corporation, WMI Holdings Corp., a Washington corporation (“WMIHC”), with WMIH as the surviving corporationsignificant investment in the merger (the “Merger”). The Merger occurred as part of the reincorporation of WMIHC from the State of Washington to the State of Delaware effective May 11, 2015 (the “Reincorporation Date”).

~~WMIH, formerly known as WMIHC and Washington Mutual, Inc. (“WMI”), is the direct parent of WM Mortgage Reinsurance Company, Inc. (~~“~~WMMRC”) and WMI Investment Corp. (~~“WMIIC”), which has no assets or liabilities. Since emergence from bankruptcy on March 19, 2012 (the “Effective Date”), we have had limited operations other than WMMRC’s legacy reinsurance business, which is being operated in runoff mode. We continue to operate WMMRC’s business in runoff mode and our primary strategic objective is to consummate one or more acquisitions of an operating business, either through a merger, purchase, business combination or other form of acquisition, and grow our business.

We continue to seek, identify and evaluate acquisition opportunities of varying sizes across an array of industries for the purpose of facilitating an acquisition by WMIH of one or more operating businesses. Our management team meets regularly with our Board of Directors (the “Board” or “Board of Directors”), the Finance Committee of the Board (the “Finance Committee”) and the Corporate Strategy and Development Committee of the Board (the “CS&D Committee”), as the case may be, to discuss and evaluate potential acquisition targets. During the nine months ended September 30, 2017 and the year ended December 31, 2016, the Finance Committee, the CS&D Committee and the Board of Directors met formally and informally numerous times to assess various opportunities. We have focused primarily on acquisition targets in the financial services industry, including targets with consumer finance, commercial finance, specialty finance, leasing and insurance operations. We also may review potential targets in other industries, such as information technology, industrials, business services, healthcare and other sectors.

~~On January 5, 2015,~~ ~~we announced that WMIH had~~ completed an offering (the “Series B Preferred Stock Financing”) of 600,000 shares of its 3% Series B Convertible Preferred Stock, par value $0.00001, liquidation preference $1,000 per share (the “Series B Preferred Stock”) in the amount of a~~ggregate gross proceeds equal to $600 million. Net proceeds of $598.5 million were deposited into an escrow account and have been, and will be, released from escrow to us from time to time in amounts needed to finance our efforts to explore and~~ ~~fund, in whole or in part, certain acquisitions, whether completed or not, including reasonable attorney fees and expenses, accounting expenses, due diligence and financial advisor fees and expenses. For further~~technology. More information on the ~~Series B Preferred Stock Financing~~Company is available at ~~, see Note 9: Capital Stock~~investors.mrcoopergroup.com. Information contained on our websites is not, and ~~Derivative Instruments,~~should not be deemed to ~~the condensed consolidated financial statements in Item 1 of Part I~~be, a part of this ~~Quarterly Report~~report.

Our strategy is to position the Company for sustainable long-term growth, drive improved efficiency and profitability, and generate a return on ~~Form 10-Q.~~

~~WMIH~~tangible equity of 12% or higher. Key strategic priorities include the following:

Strengthen our balance sheet, by reducing leverage, building liquidity, and managing interest rate and credit risk;

Improve efficiency by driving continuous improvement in unit costs for Servicing, Originations, and Xome, as well as by taking corporate actions to eliminate costs throughout the organizations

Grow and strengthen our customer base, in each our segments

Reinvent the customer experience, by acting as the customer’s advocate and by harnessing technology to deliver user-friendly digital solutions

Sustain the talent of our people and the culture of our organization

Maintain strong relationships with agencies, investors, regulators, and other counterparties and a strong reputation for compliance and customer service.

Impact of COVID-19 Pandemic

The COVID-19 pandemic introduces unprecedented uncertainty in the economy, including the risk of a significant employment shock and recessionary conditions, with implications for the health and safety of our employees, borrower delinquency rates, servicing advances, origination volumes, the availability of financing, and our overall profitability and liquidity. We have taken aggressive steps to address these risks, including moving in excess of 95% of our staff to work-from-home status as well as implementing other practices for mitigating the risk of the pandemic, including restrictions on non-essential travel and face-to-face meetings and enhanced sanitization of our facilities. We have also implemented the provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which makes available forbearance plans for up to one year for borrowers under government and government agency mortgage programs, which we have extended to borrowers in our private label mortgage servicing portfolio. As of April 27, 2020, approximately 194,000 or 5.6% of our customers were on a forbearance plan.

Depending on how long the pandemic continues to ~~evaluate acquisition opportunities~~disrupt the economy and ~~work~~employment, our Servicing segment could experience our cost-to-service increase as we deal with ~~our strategic partner, an affiliate of KKR & CO. L.P. (together with its affiliates, “KKR”), to identify, consider~~higher delinquencies and evaluate potential mergers, acquisitions, business combinations and other strategic opportunities. As of September 30, 2017, and through the date of the filing of this Form 10-Q, we had not entered into definitive documentation relating to an acquisition or consummated an acquisition. Ifforeclosures. However, we have not ~~entered into definitive documentation relating~~seen a deterioration in 30-day or 60-day delinquencies at this time. We expect servicing costs to ~~an Acquisition (as defined below), or consummated a Qualified Acquisition (as defined below),~~be moderately elevated for loans on ~~or prior~~forbearance, offset by servicing fees earned during the period. As the pandemic began to ~~January 5, 2018, we will be required~~impact the mortgage capital markets, our Originations segment took several steps to ~~redeem all of~~rapidly de-risk the outstanding Series B Preferred Stock on January 5, 2018 (the “Series B Redemption Date”). A “Qualified Acquisition” means an Acquisition (as defined below) that, taken together, with prior Acquisitions (if any), collectively utilizes aggregate net proceeds of the Series B Preferred Stock Financing of $450 million. “Acquisition” means any acquisition by the Company (or any of its direct or indirect wholly-owned subsidiaries), in a single transaction or a series of transactions, whether by purchase, merger or otherwise, of all or substantially all of the assets of, or equity interests in, or a business line, unit or division of, any person.

~~Assuming all 600,000 shares are outstanding on the Series B Redemption Date, the aggregate redemption cost will be $600.0 million, plus accrued~~pipeline. We slowed correspondent production, and ~~unpaid dividends, if any, whether or not declared. If, prior~~closed our wholesale lending channel, which had only been marginally profitable and reallocated those resources to the ~~Series B Redemption Date, we publicly announce that we have entered into a definitive agreement for an Acquisition,~~direct-to-consumer channel. As the ~~Series B Redemption Date will~~foreclosure process is currently on hold, with moratoriums in place at the national level and in some local markets, Xome’s revenues, particularly revenues of Exchange division, are expected to be extended to the earlier to occur of (i) July 5, 2018, and (ii) the day immediately following (x) the date such definitive agreement is terminated or (y) the date such Acquisition is closed. The consummation of an Acquisition would result in the mandatory conversion of some or all of the Series B Preferred Stock into common stock in accordance with provisions set forth in Article VI of the Certificate of Incorporation.

While we remain focused on identifying an Acquisition and executing definitive documentation relating to or consummating an Acquisition on or prior to the Series B Redemption Date we can provide no assurance that we will be able to do so and, if so, on what terms.negatively impacted. In the ~~event~~short term, however once the moratoriums are lifted, we ~~are required~~expect Xome to ~~redeem the Series B Preferred Stock, our available cash, absent a new financing, will be substantially depleted and our ability~~return to (i) utilize our net operating loss (“NOL”) carry-forward, (ii) access significant alternative uses of capital and (iii) to continue business operations would likely be significantly and adversely impaired.

As previously disclosed, the Finance Committee is authorized, among other things, (i) to review the long-term financial structure, objectives and policies of the Company, and to make recommendations to the Board regarding such structure, objectives and policies, if appropriate, (ii) to evaluate the financing requirements of the Company and management’s proposed financing and refinancing plans and to recommend to the Board those actions, authorizations, filings and applications necessary and appropriate to enable management to execute such plans and (iii) to consider and make recommendations to the Board regarding the terms, timing, amount and other material factors (e.g., potential dilution of existing shareholders and the impact of any financing or restructuring on the Company’s tax attributes under Section 382 of the Code),profitability. See liquidity discussion related to ~~the possible restructuring or amendment of the Company’s outstanding equity securities, issuance of new equity securities~~COVID-19 pandemic in one or more private or public transactions, redemption of outstanding securities, or other transactions related to the Company’s outstanding securities, capital structure or fundraising to meet the Company’s future liquidityLiquidity and ~~capital resources needs,~~Capital Resources section in ~~each case as the Finance Committee deems appropriate.~~

In connection with the foregoing, and as has previously been disclosed, the Finance Committee has retained financial advisors to help the Company assess its overall capital structure and liquidity requirements and to develop potential financing alternatives. As part of these efforts, as of the date of this report, the Finance Committee and its advisers are engaged in discussions relating to, among other things, a possible restructuring or amendment of the Series B Preferred Stock. We can provide no assurance we will be able to restructure, amend or refinance the Series B Preferred Stock and, if so, on what terms.

With respect to our current operations, the Company currently operates a single business through its subsidiary, WMMRC, whose sole activity is the reinsurance of mortgage insurance policies. WMMRC has been operated in runoff mode since September 26, 2008. Since that date, WMMRC has not underwritten any new policies (and by extension any new risk). WMMRC, through predecessor companies, began reinsuring risks in 1997 and continued reinsuring risks through September 25, 2008.

MD&A.

All of WMMRC’s reinsurance agreements are on an excess of loss basis, except for a reinsurance treaty with Genworth Mortgage Insurance Corporation during 2008, which is reinsured on a 50% quota share basis. Pursuant to the excess of loss reinsurance treaties, WMMRC reinsures a second loss layer which ranges from 5% to 10% of the risk in force in excess of the primary mortgage insurer’s first loss percentages which range from 4% to 5%. Each calendar year, or book year, is treated separately from other years when calculating losses. In return for accepting a portion of the risk, WMMRC receives, net of ceding commission, a percentage of the premium that ranges from 25% to 40%.

WMMRC previously commuted three reinsurance agreements, one each, in 2009, 2012 and 2014, respectively, and the related trust assets were distributed in accordance with the commutation agreements. On October 23, 2017, the reinsurance agreement with Radian was commuted and the related trust assets were released to WMMRC. On September 13, 2017, the Insurance Division of the State of Hawaii approved this commutation and a distribution of up to $10.7 million to WMIH. As of the date of the filing of this Form 10-Q, this distribution has not yet been completed. For more information see Note 14: Subsequent Events to the condensed consolidated financial statements ~~in Item 1 of Part I of this Quarterly Report on Form 10-Q~~. We also may seek opportunities to extract excess capital through commutation of one or more of WMMRC’s remaining reinsurance agreements or otherwise, with a view toward accelerating the distribution of trust assets in excess of the amounts needed to pay claims.

Beginning in 2006, the U.S. housing market and related credit markets experienced a multi-year downturn. During that period, housing prices declined materially, credit guidelines tightened, delays in mortgage servicing and foreclosure activities occurred, and deterioration in the credit performance of mortgage loans occurred. In addition, the macro-economic environment during that period demonstrated limited economic growth, stubbornly high unemployment, and limited median wage gains. Beginning in 2012, home prices began to rise again. The current outlook for the housing market is optimistic with low interest rates, steady employment growth, increased household formation rates and less restrictive credit conditions. Nevertheless, WMMRC’s operating environment remains somewhat uncertain as much of its results over the next two years will be directly affected by the inventory of pending defaulted mortgages at its ceding companies arising primarily from mortgages originated in calendar years 2007 and 2008. However, its financial exposure to that environment has been materially reduced as the remaining net aggregate risk exposure has decreased due to the runoff nature of its operations.

~~Our Financial Information~~

~~The financial information in this Quarterly Report on Form 10-Q has been derived from our condensed consolidated financial statements.~~

~~Critical Accounting Policies~~

Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”), which requires management to make estimates and assumptions that affect reported and disclosed amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. We believe that the critical accounting policies set forth in the accompanying condensed consolidated financial statements describe the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. These accounting policies pertain to premium revenues and risk transfer, valuation of investments, loss and loss adjustment expense reserves, our values under fresh start accounting, the resulting loss contract reserve and the valuation of the derivative instrument relating to the embedded conversion feature of the Series B Preferred Stock. If actual events differ significantly from the underlying judgments or estimates used by management in the application of these accounting policies, there could be a material effect on our results of operations and financial condition.

Recently issued accounting standards and their impact on the Company have been presented under “New Accounting Pronouncements” in Note 2: Significant Accounting Policies to the condensed consolidated financial statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.

~~Segments~~

The Company manages its business on the basis of one operating segment, mortgage reinsurance, in accordance with GAAP. Within the mortgage reinsurance segment, our current risks arise solely from the reinsurance of mortgage insurance policies that were placed on certain residential mortgage loans prior to the bankruptcy of WMI. The majority of these policies were required by mortgage lenders as a stipulation to approve the mortgage loans. The mortgage insurance policies protect the beneficiaries of the policy from all or a portion of default-related losses.

~~Overview of Revenues and Expenses~~

Because WMIH has no current significant operations of its own, its cash flow is derived almost entirely from earnings on its investment portfolio, and payments it receives from, and dividends paid by, WMMRC. All dividends received by WMIH from

WMMRC that constituted Runoff Proceeds, historically, were required to be distributed to holders of WMIH’s Second Lien Notes in accordance with the terms of the Second Lien Indenture as described below in this Item 2 under “Notes Payable.” As of September 29, 2017, the Second Lien Notes were fully redeemed by the Company and the Second Lien Indenture was satisfied and discharged, therefore future distributions from WMMRC to WMIH will be available for general corporate purposes.

~~WMMRC’s revenues consist primarily of the following:~~

~~net premiums earned on reinsurance contracts;~~

~~positive changes to (and corresponding releases from) loss reserves; and~~

~~net investment income and net gains (losses) on WMMRC’s investment portfolio.~~

~~WMMRC’s expenses consist primarily of the following:~~

~~underwriting expenses; and~~

~~general and administrative expenses.~~

Results of Operations ~~for the three and nine months ended September 30, 2017 and September 30, 2016~~

~~For the three and nine months ended September 30, 2017, we reported~~

Table 1. Consolidated Operations



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019			$ Change			% Change
Revenues - operational	$	661		$	543		$	118		22	%
Revenues - Mark-to-market	(383		)	(293		)	(90		)	31	%
Total revenues	278			250			28			11	%
Total expenses	444			443			1			—	%
Total other income (expenses), net	(73		)	(40		)	(33		)	83	%
Loss before income tax expense benefit	(239		)	(233		)	(6		)	3	%
Less: Income tax benefit	(68		)	(47		)	(21		)	45	%
Net loss	(171		)	(186		)	15			(8	)%
Less: Net loss attributable to non-controlling interests	(3		)	—			(3		)	(100	)%
Net loss attributable to Mr. Cooper	$	(168	)	$	(186	)	$	18		(10	)%

We recorded a net ~~operating~~ loss of $0.3 million and net operating income of $3.5 million, respectively. This compares to net operating losses of $0.4 million and $1.3 million for the three and nine months ended September 30, 2016, respectively. The components that gave rise to a net operating loss for the three months and net operating income for the nine months ended September 30, 2017 and net operating losses for the three and nine months ended September 30, 2016 are summarized in the tables below under the Net Income (Loss) section. The most significant variances between the comparative three month periods ended September 30, 2017 and September 30, 2016 include (i) increased revenue of approximately $1.0 million, (ii) an increase in general and administrative expense of $0.8 million, (iii) a minimal change in interest expense of $0.1 million, (iv) a net decrease in underwriting expense of $0.2 million and (v) a reduction of the loss contract reserve of $0.2 million$171 during the three months ended ~~September 30, 2017 versus~~March 31, 2020 compared to a ~~reduction~~net loss of ~~$0.5 million~~$186 during the same period in ~~2016.~~2019. The net loss ~~contract reserve decrease, during the three and nine months ended September 30, 2017, is attributed~~in 2020 was lower primarily to changes in the expected timing of assets being released from trust accounts held at WMMRC which are discounted to present value. When assets are expected to be released from trust earlier than anticipated, a smaller present value discount is applieddue to the ~~loss contract reserve, thus reducing~~income tax benefit. Consolidated operational revenues increased primarily due to increased revenue in our Originations segment, driven by higher originations volume in a declining interest rate environment and incremental volumes associated with the ~~reserve. For more information see Note 14: Subsequent Events to~~acquisition of Pacific Union, which was completed in February 2019. Partially offsetting the ~~condensed consolidated financial statements~~increase in ~~Part I, Item 1 of this Quarterly Report on Form 10-Q. The most significant variances between the comparative nine month periods ended September 30, 2017 and September 30, 2016 include (i)~~operational revenues was an increase in revenue of approximately $1.7 million, (ii) an increase in general and administrative expense of $1.0 million (iii) a reduction in interest expense of $0.2 million, (iv) a net decrease in underwriting expense of $0.6 million and (v) a reduction of the loss contract reserve of $5.6 million during the nine months ended September 30, 2017 versus a reduction of $2.3 million during the same period in 2016.

For the three months ended September 30, 2017, we reported net income attributable to common and participating stockholders of $33.9 million compared to a net loss attributable to common and participating stockholders of $21.1 millionnegative mark-to-market (“MTM”) adjustments for the three months ended ~~September 30, 2016. This $55.0 million reduction~~March 31, 2020 compared to the same period in ~~net loss attributable to common and participating stockholders, when comparing~~2019. Total expenses for the three months ended ~~September 30, 2017 to~~March 31, 2020 were consistent with the same period in 2019.

Total other income (expenses), net increased for the three months ended ~~September 30, 2016, is~~March 31, 2020 compared to the same period in 2019 primarily ~~the~~due to a decrease in interest income and other income (expenses), net. Interest income decreased primarily due to a decrease in income earned on reverse mortgage interest, as a result of the decline in the reverse mortgage interests balance. Other income (expenses), net was higher in three months ended March 31, 2019 primarily due to income related to the change in fair value of the contingent consideration for the acquisition of Assurant Mortgage Solutions (“AMS”).



Table 2. Provision for Income Taxes



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019			$ Change			% Change
Income tax benefit	$	(68	)	$	(47	)	$	(21	)	45	%

Effective tax rate⁽¹⁾	28.4		%	20.3		%


⁽¹⁾	Effective tax rate is calculated using whole numbers.

For the three months ended March 31, 2020 and 2019, we had an ~~embedded derivative. This embedded derivative~~income tax benefit. The effective tax rate for the three months ended March 31, 2020 was 28.4% as compared to the effective tax rate of 20.3% for the three months ended March 31, 2019. The change in effective tax rate is primarily attributable to the increased relative unfavorable tax impacts of permanent differences such as nondeductible executive compensation and nondeductible meals and entertainment expenses on the annual effective rate, and discrete tax items in the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.



Segment Results

Our operations are conducted through four segments: Servicing, Originations, Xome, and Corporate/Other.

The Servicing segment performs operational activities on behalf of investors or owners of the underlying mortgages, including collecting and disbursing borrower payments, investor reporting, customer service, modifying loans where appropriate to help borrowers stay current, and when necessary performing collections, foreclosures, and the sale of REO.

The Originations segment originates residential mortgage loans through our direct-to-consumer channel, which provides refinance options for our existing customers, and through our correspondent and wholesale channels which purchase or originate loans from mortgage bankers and brokers.

The Xome segment provides a variety of real estate services to mortgage originators, mortgage and real estate investors, and mortgage servicers, including valuation, title, and field services, and operates an exchange which facilitates the sale of foreclosed properties.

The Corporate/Other segment represents unallocated overhead expenses, including the costs of executive management and other corporate functions that are not directly attributable to our operating segments, our senior unsecured notes, and the results of a legacy mortgage investment portfolio, which consists of non-prime and non-conforming residential mortgage loans that were transferred to a securitization trust (“Trust 2009-A”) in 2009. We collapsed Trust 2009-A and executed the sale of the loans held in the trust in September 2019.

Table 3. Segment Results



	Three Months Ended March 31, 2020
	Servicing			Originations			Xome		Elimination			Total Operating Segments			Corporate/Other			Consolidated
Revenues
Service related, net	$	(180	)	$	20		$	106	$	(1	)	$	(55	)	$	2		$	(53	)
Net gain on mortgage loans held for sale	34			297			—		—			331			—			331
Total revenues	(146		)	317			106		(1		)	276			2			278
Total expenses	149			166			96		(1		)	410			34			444
Other income (expenses), net:
Interest income	83			34			—		—			117			1			118
Interest expense	(113		)	(27		)	—		—			(140		)	(52		)	(192		)
Other income (expenses), net	—			—			1		—			1			—			1
Total other income (expenses), net	(30		)	7			1		—			(22		)	(51		)	(73		)
(Loss) income before income tax (benefit) expense	$	(325	)	$	158		$	11	$	—		$	(156	)	$	(83	)	$	(239	)



	Three Months Ended March 31, 2019
	Servicing			Originations			Xome		Elimination		Total Operating Segments			Corporate/Other			Consolidated
Revenues
Service related, net	$	(27	)	$	15		$	96	$	—	$	84		$	—		$	84
Net gain on mortgage loans held for sale	35			131			—		—		166			—			166
Total revenues	8			146			96		—		250			—			250
Total expenses	195			104			99		—		398			45			443
Other income (expenses), net:
Interest income	115			17			—		—		132			2			134
Interest expense	(114		)	(18		)	—		—		(132		)	(57		)	(189		)
Other income, net	—			4			11		—		15			—			15
Total other income (expenses), net	1			3			11		—		15			(55		)	(40		)
(Loss) income before income tax (benefit) expense	$	(186	)	$	45		$	8	$	—	$	(133	)	$	(100	)	$	(233	)



Servicing Segment

The Servicing segment’s strategy is to generate income by growing the portfolio and maximizing the servicing margin. We believe several competitive strengths have been critical to our long-term growth as a servicer, including our low-cost platform, our skill in mitigating losses for investors, our commitment to strong customer service and regulatory compliance, our history of successfully boarding new loans, and the ability to retain existing customers by offering attractive refinance options. We believe that our operational capabilities are reflected in strong servicer ratings.



Table 4. Servicer Ratings



	Fitch⁽¹⁾	Moody’s⁽²⁾	S&P⁽³⁾
Rating date	January 2020	May 2019	May 2019

Residential	RPS2-	Not Rated	Above Average
Master Servicer	RMS2+	SQ2	Above Average
Special Servicer	RSS2-	Not Rated	Above Average
Subprime Servicer	RPS2-	Not Rated	Above Average


⁽¹⁾	Fitch Rating Scale of 1 (Highest Performance) to 5 (Low/No Proficiency)


⁽²⁾	Moody’s Rating Scale of SQ1 (Strong Ability/Stability) to SQ5 (Weak Ability/Stability)


⁽³⁾	S&P’s Rating Scale of Strong to Weak

Servicing Portfolio Composition

As of March 31, 2020, the unpaid principal balance in our servicing portfolio consisted of approximately $290.6 billion in forward loans, $316.9 billion in subservicing and other, and $21.6 billion in reverse mortgage loans.

The term “forward” refers to loans we service which are not “reverse mortgages,” as discussed below.

Our subservicing portfolio consists of loans where we perform the servicing responsibilities for a contractual fee, but do not own the servicing rights and therefore do not record an MSR on our balance sheet.

Reverse mortgage loans, most commonly HECMs, provide seniors 62 and older with a loan upon which draws can be made periodically. The draws are secured by the equity in the borrower’s home. We have acquired our reverse mortgages in prior years through several transactions and it is now in run-off mode. For a significant portion of our reverse mortgages, we record MSRs on our balance sheet, similar to the accounting for forward mortgages, except in cases where the costs of servicing are expected to exceed revenues, in which case a Mortgage Servicing Liability (“MSL”) is created. Additionally, due to program requirements, we consolidate certain reverse mortgages on our balance sheet and accrue interest income and expense.

The charts below set forth the portfolio mix between serviced, subserviced and reverse mortgage loans, and the composition of our servicing portfolio ending UPB by investor group as of March 31, 2020 and 2019:

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



Table 5. Servicing Segment Results of Operations



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019			$ Change			% Change
Revenues
Operational	$	313		$	324		$	(11	)	(3	)%
Amortization, net of accretion	(76		)	(23		)	(53		)	230	%
Mark-to-market	(383		)	(293		)	(90		)	31	%
Total revenues	(146		)	8			(154		)	(1,925	)%
Total expenses	149			195			(46		)	(24	)%
Total other income (expenses), net	(30		)	1			(31		)	(3,100	)%
Loss before income tax benefit	$	(325	)	$	(186	)	$	(139	)	75	%

For the three months ended March 31, 2020, we incurred a loss before income tax benefit of $325 compared to a loss before income tax benefit of $186 for the same period in 2019. The change in loss before income tax benefit was primarily due to a decrease in total revenues, partially offset by a decrease in total expenses. Total revenues decreased primarily as a result of elevated negative mark-to-market revenues during the three months ended March 31, 2020 compared to the same period in 2019. Amortization, net of accretion, for the three months ended March 31, 2020 increased compared to the same period in 2019, primarily due to an increase in amortization of forward MSRs as a result of growth in the forward MSR portfolio and elevated prepayments driven by the declining interest rate environment. Total expenses for the three months ended March 31, 2020 decreased compared to the same period in 2019 primarily due to a decrease in foreclosure and other liquidation expenses. The decrease in foreclosure and other liquidation expenses was primarily driven by operational improvements of the reverse portfolio with respect to assignments and adherence to HUD curtailment guidelines. Total other income (expense), net for the three months ended March 31, 2020 decreased compared to the same period in 2019 primarily due to a decrease in interest income. The decrease in interest income was primarily due to a decrease in income earned on reverse mortgage interest, primarily driven by the decline in the reverse mortgage interests balance and the amortization of a net premium into income. Refer to Table 10. Servicing - Revenues, Table 11. Servicing - Expenses and Table 12. Servicing - Other Income (Expenses), Net, for further discussions on the changes in total revenues, total expenses and total other income (expenses), net, respectively.



Table 6. Servicing Portfolio - Unpaid Principal Balances



	Three Months Ended March 31, 2020		Three Months Ended March 31, 2019
Average UPB
Forward MSRs	$	303,578	$	308,984
Subservicing and other⁽¹⁾	310,160		239,468
Reverse loans	22,059		27,472
Total average UPB	$	635,797	$	575,924

	March 31, 2020		March 31, 2019
Ending UPB
Forward MSRs
Agency	$	238,956	$	238,937
Non-agency	51,678		64,755
Total forward MSRs	290,634		303,692

Subservicing and other⁽¹⁾
Agency	302,060		273,786
Non-agency	14,873		27,405
Total subservicing and other	316,933		301,191

Reverse loans
MSR	2,332		3,559
MSL	13,360		15,928
Securitized loans	5,898		7,527
Total reverse portfolio serviced	21,590		27,014
Total ending UPB	$	629,157	$	631,897


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

The following table provides a rollforward of our forward servicing and subservicing and other portfolio UPB:



Table 7. Forward Servicing and Subservicing and Other Portfolio UPB Rollforward



	Three Months Ended March 31, 2020									Three Months Ended March 31, 2019
	Forward MSR			Subservicing and Other			Total			Forward MSR			Subservicing and Other			Total
Balance - beginning of period	$	296,782		$	323,983		$	620,765		$	295,481		$	223,886		$	519,367
Additions:
Originations	11,635			662			12,297			4,891			404			5,295
Acquisitions / Increase in subservicing	(673		)	23,352			22,679			13,404			84,406			97,810
Deductions:
Dispositions	(40		)	(10,359		)	(10,399		)	(133		)	(1,118		)	(1,251		)
Principal reductions and other	(2,748		)	(2,965		)	(5,713		)	(2,827		)	(2,317		)	(5,144		)
Voluntary reductions⁽¹⁾	(13,864		)	(17,672		)	(31,536		)	(6,297		)	(3,975		)	(10,272		)
Involuntary reductions⁽²⁾	(387		)	(68		)	(455		)	(762		)	(95		)	(857		)
Net changes in loans serviced by others	(71		)	—			(71		)	(65		)	—			(65		)
Balance - end of period	$	290,634		$	316,933		$	607,567		$	303,692		$	301,191		$	604,883


⁽¹⁾	Voluntary reductions are related to loan payoffs by customers.


⁽²⁾	Involuntary reductions refer to loan chargeoffs.

As of March 31, 2020, our forward servicing UPB decreased when compared to 2019, primarily due to increased voluntary reductions in a low interest rate environment, partially offset by increased origination volumes. As of March 31, 2020, our subservicing and other portfolio ending UPB increased when compared to 2019, primarily driven by portfolio growth from our subservicing clients, partially offset by increased dispositions primarily due to various MSR sales.

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



Table 8. Key Performance Metrics - Forward Servicing and Subservicing Portfolio⁽¹⁾



	March 31, 2020			March 31, 2019
Loan count	3,506,998			3,616,323
Average loan amount⁽²⁾	$	173,231		$	167,266
Average coupon - credit sensitive⁽³⁾	4.7		%	4.9		%
Average coupon - interest sensitive⁽³⁾	4.3		%	4.3		%
Average coupon - agency⁽³⁾	4.4		%	4.4		%
Average coupon - non-agency⁽³⁾	4.7		%	4.8		%
60+ delinquent (% of loans)⁽⁴⁾	1.9		%	2.4		%
90+ delinquent (% of loans)⁽⁴⁾	1.6		%	2.1		%
120+ delinquent (% of loans)⁽⁴⁾	1.4		%	1.9		%
Total prepayment speed (12-month constant prepayment rate)	19.2		%	8.2		%


⁽¹⁾	Characteristics and key performance metrics of our servicing portfolio exclude UPB and loan counts acquired but not yet boarded and currently serviced by others.


⁽²⁾	Average loan amount is presented in whole dollar amounts.


⁽³⁾	The weighted average coupon amounts presented in the table above are only reflective of our owned forward MSR portfolio that is reported at fair value.


⁽⁴⁾	Loan delinquency is based on the current contractual due date of the loan. In the case of a completed loan modification, delinquency is based on the modified due date of the loan.

Delinquency is a significant assumption in determining the mark-to-market adjustment and is a key indicator of MSR portfolio performance. Delinquent loans contribute to lower MSR values due to higher costs to service and increased carrying costs of advances. We continue to experience low delinquency rates during the three months ended March 31, 2020 which preserves the value of our MSRs. At this time, it is too early to estimate the potential impact the COVID-19 pandemic will have on future delinquencies.



Table 9. Forward Loan Modifications and Workout Units



	Three Months Ended March 31, 2020	Three Months Ended March 31, 2019	Amount Change		% Change
Modifications	4,715	5,189	(474	)	(9	)%
Workouts	3,994	4,401	(407	)	(9	)%
Total modifications and workout units	8,709	9,590	(881	)	(9	)%

Total modifications and workouts during the three months ended March 31, 2020 decreased compared to the same period in 2019 primarily due to lower delinquency rates. At this time, it is too early to estimate the potential impact the COVID-19 pandemic will have on future delinquencies and corresponding modification activity.

The following table provides the composition of revenues for the Servicing segment:



Table 10. Servicing - Revenues



	Three Months Ended March 31, 2020				Three Months Ended March 31, 2019				$ Change				% Change
	Amt			bps⁽¹⁾	Amt			bps⁽¹⁾	Amt			bps⁽¹⁾	Amt		bps⁽¹⁾
Forward MSR Operational Revenue
Base servicing fees	$	250		16	$	240		17	$	10		(1)	4	%	(6	)%
Modification fees⁽²⁾	3			—	3			—	—			—	—	%	—	%
Incentive fees⁽²⁾	4			—	1			—	3			—	300	%	—	%
Late payment fees⁽²⁾	23			2	19			2	4			—	21	%	—	%
Other ancillary revenues⁽²⁾	38			2	48			3	(10		)	(1)	(21	)%	(33	)%
Total forward MSR operational revenue	318			20	311			22	7			(2)	2	%	(9	)%
Base subservicing fees and other subservicing revenue⁽³⁾	65			4	52			4	13			—	25	%	—	%
Reverse servicing fees	6			—	9			—	(3		)	—	(33	)%	—	%
Total servicing fee revenue	389			24	372			26	17			(2)	5	%	(8	)%
MSR financing liability costs	(8		)	—	(12		)	(1)	4			1	(33	)%	100	%
Excess spread costs - principal	(68		)	(4)	(36		)	(2)	(32		)	(2)	89	%	100	%
Total operational revenue	313			20	324			23	(11		)	(3)	(3	)%	(13	)%
Amortization, net of accretion
Forward MSR amortization	(152		)	(10)	(79		)	(6)	(73		)	(4)	92	%	67	%
Excess spread accretion	68			4	36			3	32			1	89	%	33	%
Reverse MSL accretion	8			1	18			1	(10		)	—	(56	)%	—	%
Reverse MSR amortization	—			—	2			—	(2		)	—	(100	)%	—	%
Total amortization, net of accretion	(76		)	(5)	(23		)	(2)	(53		)	(3)	230	%	150	%
Mark-to-Market Adjustments
MSR MTM⁽³⁾	(412		)	(26)	(360		)	(25)	(52		)	(1)	14	%	4	%
Excess spread / financing MTM	29			2	67			5	(38		)	(3)	(57	)%	(60	)%
Total MTM adjustments	(383		)	(24)	(293		)	(20)	(90		)	(4)	31	%	20	%
Total revenues - Servicing	$	(146	)	(9)	$	8		1	$	(154	)	(10)	(1,925	)%	(1,000	)%


⁽¹⁾	Calculated basis points (“bps”) are as follows: Annualized dollar amount/Total average UPB X 10000.


⁽²⁾	Certain ancillary and other non-base fees related to subservicing operations are separately presented as other subservicing revenues.

⁽³⁾

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 $10 and $11 for the three months ended March 31, 2020 and 2019, respectively.

Forward - Due to the shift in the forward MSR portfolio mix, base servicing fee revenue increased for the three months ended March 31, 2020 as compared to the same period in 2019. The decrease in BPS is primarily driven by an increase in the average loan size due to a shift in portfolio mix.

MSR prepayment and forward MSR amortization increased for the three months ended March 31, 2020 as compared to the same period in 2019, primarily due to higher prepayments driven by the lower interest rate environment.

Total negative MTM adjustments increased for the three months ended March 31, 2020 as compared to the same period in 2019 primarily due to the declining interest rate environment during 2020.

Subservicing - Subservicing fees increased for the three months ended March 31, 2020 as compared to the same period in 2019, due to significant growth in the subservicing portfolio UPB.

Reverse - Servicing fees and reverse MSL accretion on reverse mortgage portfolios for the three months ended March 31, 2020 decreased as compared to the same period in 2019, primarily due to the decline in the reverse mortgage portfolio. Reverse MSL accretion was further impacted by $6 pertaining to accumulated accretion recorded during the three months ended March 31, 2019 related to fair value adjustments for MSL assumed from the Merger. The fair value adjustment resulted from the revised cost to service assumption used in the valuation of MSL during the measurement period.

The tables below summarize expenses for the Servicing segment:



Table 11. Servicing - Expenses



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019			Change				% Change
	Amt		bps⁽¹⁾	Amt		bps⁽¹⁾	Amt			bps⁽¹⁾	Amt		bps⁽¹⁾
Salaries, wages and benefits	$	86	5	$	86	6	$	—		(1)	—	%	(17	)%
General and administrative
Servicing support fees	25		2	39		3	(14		)	(1)	(36	)%	(33	)%
Corporate and other general and administrative expenses	35		2	39		3	(4		)	(1)	(10	)%	(33	)%
Foreclosure and other liquidation related expenses	—		—	27		2	(27		)	(2)	(100	)%	(100	)%
Depreciation and amortization	3		—	4		—	(1		)	—	(25	)%	—	%
Total general and administrative expenses	63		4	109		8	(46		)	(4)	(42	)%	(50	)%
Total expenses - Servicing	$	149	9	$	195	14	$	(46	)	(5)	(24	)%	(36	)%


⁽¹⁾	Calculated basis points (“bps”) are as follows: Annualized dollar amount/Total average UPB X 10000.

Total expenses decreased during the three months ended March 31, 2020 compared to the same period in 2019, primarily driven by a decrease in foreclosure and other liquidation expenses. Foreclosure and other liquidation related expenses were lower during the three months ended March 31, 2020 as compared to the same period in 2019, primarily due to operational improvements of the reverse portfolio with respect to assignments and adherence to HUD curtailment guidelines, in addition to recovery of $5 prior period operating losses from a previous sub-servicer during the three months ended March 31, 2020. Servicing support fees decreased in 2020 compared to the same period in 2019 primarily due to lower legal and tax service expenses.



Table 12. Servicing - Other Income (Expenses), Net



	Three Months Ended March 31, 2020				Three Months Ended March 31, 2019				Change				% Change
	Amt			bps⁽¹⁾	Amt			bps⁽¹⁾	Amt			bps⁽¹⁾	Amt		bps⁽¹⁾
Income earned on Reverse mortgage interest	$	43		3	$	82		6	$	(39	)	(3)	(48	)%	(50	)%
Other interest income	40			2	33			2	7			—	21	%	—	%
Interest income	83			5	115			8	(32		)	(3)	(28	)%	(38	)%

Reverse mortgage interest expense	(52		)	(3)	(71		)	(5)	19			2	(27	)%	(40	)%
Advance interest expense	(5		)	—	(9		)	(1)	4			1	(44	)%	100	%
Other interest expense	(56		)	(4)	(34		)	(2)	(22		)	(2)	65	%	100	%
Interest expense	(113		)	(7)	(114		)	(8)	1			1	(1	)%	(13	)%
Total other income (expenses), net - Servicing	$	(30	)	(2)	$	1		—	$	(31	)	(2)	(3,100	)%	(100	)%

Weighted average cost - advance facilities	3.0		%		4.7		%		(1.7		)%		(36	)%
Weighted average cost - excess spread financing	9.0		%		9.0		%		—		%		—	%


⁽¹⁾	Calculated basis points (“bps”) are as follows: Annualized dollar amount/Total average UPB X 10000.

Total other income (expenses), net decreased during the three months ended March 31, 2020 as compared to the same period in 2019 primarily due to a decrease in interest income. The decrease in interest income was primarily due to a decrease in income earned on reverse mortgage interest, partially offset by an increase in other interest income. Income earned on reverse mortgage interest decreased due to the decline in the reverse mortgage interests balance and the amortization of a net asset premium into income. Other interest income increased primarily driven by an increase in earnings credits and bank fee credits. Interest expense remained relatively flat during the three months ended March 31, 2020 as compared to the same period in 2019, primarily due to an increase in other interest expense primarily driven by higher compensating interest expense and bank fees, partially offset by a decrease in reverse mortgage interest expense due to the decline in the reverse mortgage interest portfolio.

Servicing Portfolio and Related Liabilities

The tables below summarize the servicing portfolio and related liabilities in the Servicing segment:



Table 13. Servicing Portfolios and Related Liabilities



	March 31, 2020						December 31, 2019
	UPB		Carrying Amount			bps	UPB		Carrying Amount			bps
Forward MSRs - acquisition pool:
Credit sensitive	$	138,726	$	1,386		100	$	147,895	$	1,613		109
Interest sensitive	151,908		1,723			113	148,887		1,883			126
Total forward MSRs - fair value	$	290,634	$	3,109		107	$	296,782	$	3,496		118

Forward MSRs - investor pool:
Agency	$	238,956	$	2,618		110	$	240,688	$	2,944		122
Non-agency	51,678		491			95	56,094		552			98
Total forward MSRs - fair value	$	290,634	$	3,109		107	$	296,782	$	3,496		118

Total forward MSRs	$	290,634	$	3,109			$	296,782	$	3,496

Subservicing and other⁽¹⁾
Agency	302,060		N/A				308,532		N/A
Non-agency	14,873		N/A				15,451		N/A
Total subservicing and other	316,933		N/A				323,983		N/A

Reverse portfolio - amortized cost
MSR	2,332		6				2,508		6
MSL	13,360		(53		)		13,994		(61		)
Securitized loans	5,898		5,955				6,223		6,279
Total reverse portfolio serviced	21,590		5,908				22,725		6,224
Total servicing portfolio unpaid principal balance	$	629,157	$	9,017			$	643,490	$	9,720


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

As of March 31, 2020, when measuring the fair value of the portfolio as a basis point of the unpaid principal balance, our credit sensitive pool decreased in value by 9 bps and interest sensitive pool decreased in value 13 bps, compared to December 31, 2019 due to higher forecasted prepayment speeds as a result of the ~~variable conversion feature~~declining interest rate environment in 2020.

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

The following table provides information on the fair value of our ~~Series B Preferred Stock~~owned forward MSR portfolio:



Table 14. MSRs - Fair Value, Rollforward



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Fair value - beginning of period	$	3,496		$	3,665
Additions:
Servicing retained from mortgage loans sold	123			66
Purchases of servicing rights	24			409
Dispositions:
Sales and cancellation of servicing assets	—			(260		)
Changes in fair value:
Due to changes in valuation inputs or assumptions used in the valuation model:
Credit sensitive	(181		)	(121		)
Interest sensitive	(220		)	(211		)
Other changes in fair value:
Scheduled principal payments	(23		)	(22		)
Disposition of negative MSRs and other⁽¹⁾	20			12
Prepayments
Voluntary prepayments
Credit sensitive	(24		)	(19		)
Interest sensitive	(102		)	(32		)
Involuntary prepayments
Credit sensitive	(1		)	(2		)
Interest sensitive	(3		)	(4		)
Fair value - end of period	$	3,109		$	3,481


⁽¹⁾	Amounts primarily represent negative fair values reclassified from the MSR asset to reserves as underlying loans are removed from the MSR and other reclassification adjustments.

The following table sets forth the weighted-average key assumptions in estimating the fair value of forward MSRs:



Table 15. MSRs - Fair Value



	March 31, 2020		March 31, 2019
Total MSRs Portfolio
Discount rate	9.7	%	10.3	%
Prepayment speeds	13.4	%	13.0	%
Average life	5.7 years		6.0 years

Acquisition Pools:
Credit Sensitive
Discount rate	10.2	%	11.3	%
Prepayment speeds	13.0	%	13.5	%
Average life	5.9 years		6.0 years

Interest Sensitive
Discount rate	9.1	%	9.4	%
Prepayment speeds	13.8	%	12.5	%
Average life	5.5 years		6.1 years

Investor Pools:
Agency
Discount rate	9.0	%	9.4	%
Prepayment speeds	13.2	%	12.4	%
Average life	5.6 years		6.1 years

Non-Agency
Discount rate	12.6	%	13.6	%
Prepayment speeds	14.3	%	15.4	%
Average life	6.1 years		5.9 years

The weighted-average discount rate for total MSRs portfolio decreased as of March 31, 2020 compared to the same period in 2019 due to the declining interest rate environment in 2020. Weighted-average life for total MSRs portfolio decreased due to the increase in prepayment speeds, which was attributable to the interest rate decline period over period.

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

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

In determining key assumptions in estimating fair value of forward MSRs, we took into account the situations created by COVID-19 pandemic.

Excess Spread Financing

As further disclosed in Note 3, Mortgage Servicing Rights and Related Liabilities,we have entered into sale and assignment agreements treated as financing arrangements whereby the acquirer has the right to receive a specified percentage of the excess cash flow generated from an MSR.

The servicing fees associated with an MSR can be segregated into (i) a base servicing fee and (ii) an excess servicing fee. The base servicing fee, along with ancillary income and other revenues, is designed to cover costs incurred to service the specified pool plus a reasonable margin. The remaining servicing fee is considered excess. We sell a percentage of the excess fee as a method for efficiently financing acquired MSRs and the purchase of loans.

Excess spread financings are recorded at fair value, and the impact of fair value adjustments on future revenues and capital resources varies primarily due to (i) prepayment speeds and (ii) our ability to recapture mortgage prepayments through the origination platform. See Note 3, Mortgage Servicing Rights and Related Liabilities, for additional information regarding the range of assumptions and sensitivities related to the measurement of the excess spread financing liability as of March 31, 2020 and December 31, 2019.

The following table sets forth the change in ~~fair~~the excess spread liability and the related weighted-average assumptions:



Table 16. Excess Spread Financing



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Fair value - beginning of period	$	1,311		$	1,184
Additions:
New financings	24			245
Deductions:
Settlements and repayments	(58		)	(51		)
Changes in fair value:
Credit Sensitive	(2		)	(32		)
Interest Sensitive	(33		)	(37		)
Fair value - end of period	$	1,242		$	1,309

Key Weighted-Average Assumptions:	March 31, 2020			March 31, 2019
Total Excess Spread Portfolio
Discount rate	11.6		%	10.4		%
Prepayment speeds	12.8		%	12.9		%
Recapture rate	18.6		%	20.4		%
Average life	5.7 years			5.9 years

Credit Sensitive
Discount rate	12.3		%	10.9		%
Prepayment speeds	12.3		%	13.2		%
Recapture rate	18.4		%	21.7		%
Average life	5.9 years			5.9 years

Interest Sensitive
Discount rate	10.3		%	9.1		%
Prepayment speeds	13.5		%	12.4		%
Recapture rate	19.8		%	17.3		%
Average life	5.5 years			6.1 years

The following table sets forth the change in the MSRs financing liability and the related weighted-average assumptions.



Table 17. MSRs Financing Liability - Rollforward



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Fair value - beginning of period	$	37		$	32
Changes in fair value:
Changes in valuation inputs or assumptions used in the valuation model	9			6
Other changes in fair value	(3		)	(4		)
Fair value - end of period	$	43		$	34

	March 31, 2020			March 31, 2019
Weighted-Average Assumptions
Advance financing rates	1.7		%	3.9		%
Annual advance recovery rates	18.4		%	19.3		%

We entered into several sale agreements whereby we sold the right to receive repayment of servicing advances on private-label servicing advances and the right to receive a portion of the base fee component on the related MSRs, and also transferred the obligations to make future advances. These transactions are recorded as an MSR Financing Liability in our consolidated balance sheets and represent the incremental costs relative to the market participant assumptions contained in the MSR valuation. Changes in the value of the MSR financing liability are recorded against servicing revenue and interest imputed on the outstanding liability is ~~reflected on our condensed consolidated statements of operations~~recorded as ~~the other income or expense item, “change in~~interest expense.

We estimate fair value of the MSR financing liability based on the present value of future expected discounted cash flows with the discount rate approximating current market 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 annual advance recovery rates.

The following table provides an overview of our forward servicing portfolio and amounts that involve excess spread financing with our co-invest partners for the periods indicated.



Table 18. Leveraged Portfolio Characteristics



	March 31, 2020		March 31, 2019
Owned forward servicing portfolio - unencumbered	$	85,124	$	88,995
Owned forward servicing portfolio - encumbered	205,510		214,697
Subserviced forward servicing portfolio and other	316,933		301,191
Total unpaid principal balance	$	607,567	$	604,883

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

Reverse - MSRs Participating Interests - Amortized Cost

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



Table 19. Reverse - Mortgage Portfolio Characteristics



	March 31, 2020			March 31, 2019
Loan count	158,838			184,807
Ending unpaid principal balance	$	21,590		$	27,014
Average loan amount⁽¹⁾	$	135,924		$	146,173
Average coupon	3.3		%	4.4		%
Average borrower age	81			80


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

Historically, the Company acquired servicing rights and participating interests in reverse mortgage portfolios. Reverse mortgage loans, most commonly HECMs, provide seniors 62 and older with a loan upon which draws can be made periodically. The draws are secured by the equity in the borrower’s home. For acquired servicing rights, an MSR or MSL is established on the acquisition date at fair value, as applicable, based on the expected discounted cash flow from servicing the reverse portfolio.

Each quarter, we accrete the MSL to revenues - service related, net of the respective portfolios run-off. The MSL is assessed for increased obligation based on its fair value, using a variety of assumptions, with the key assumptions being discount rates, prepayment speeds and borrower life expectancy. The MSLs are stratified based on predominant risk characteristics of the underlying serviced loans. Impairment, if any, represents the excess of amortized cost of an individual stratum over its estimated fair value and is recognized through an increase in the valuation allowance.

Based on our assessment, no impairment or increased obligation was required to be recorded for reverse MSRs and MSLs as of March 31, 2020.



Originations Segment

The strategy of our Originations segment is to originate or acquire new loans for the servicing portfolio at a more attractive cost than purchasing MSRs in bulk transactions and to retain our existing customers by providing them with attractive refinance options. The Originations segment plays a strategically important role because its profitability is typically counter cyclical to that of the Servicing segment. Furthermore, by originating or acquiring loans at a more attractive cost than would be the case in bulk MSR acquisitions, the Originations segment improves our overall profitability and cash flow. Growing the Originations segment has been a strategic focus for us for several years.

The Originations segment includes three channels:

Our direct-to-consumer lending channel relies on our call centers, our website and mobile apps to interact with customers. Our primary focus is to assist our customers with a refinance or home purchase by providing them with a needs-based approach to understanding their current mortgage options.

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

Our wholesale lending channel works with mortgage brokers to source loans which are underwritten and funded by us in our name. Counterparty risk is mitigated through quality and compliance monitoring and all brokers are subject to our eligibility requirements coupled with an annual recertification process. Subsequent to March 31, 2020, we closed our wholesale lending channel.

The charts below set forth the pull through adjusted lock volume and funded volume by channel and channel mix:

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



Table 20. Originations Segment Results of Operations



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019			$ Change			% Change
Total revenues	$	317		$	146		$	171		117	%
Total expenses	166			104			62			60	%
Total other income (expenses), net	7			3			4			133	%
Income before income tax expense	$	158		$	45		$	113		251	%

Originations Margin
Revenue	$	317		$	146		$	171		117	%
Pull through adjusted lock volume	$	12,677		$	5,960		$	6,717		113	%
Revenue as a percentage of pull through adjusted lock volume⁽¹⁾	2.50		%	2.45		%	0.05		%	2	%

Expenses	$	166		$	104		$	62		60	%
Funded volume	$	12,359		$	5,716		$	6,643		116	%
Expenses as a percentage of funded volume⁽²⁾	1.34		%	1.82		%	(0.48		)%	(26	)%

Originations Margin	1.16		%	0.63		%	0.53		%	84	%


⁽¹⁾	Calculated on pull-through adjusted lock volume as revenue is recognized at the time of loan lock.


⁽²⁾	Calculated on funded volume as expenses are incurred based on closing of the loan.

Income before income tax expense increased for the three months ended March 31, 2020 as compared to the same period in 2019 primarily due to an increase in revenues driven by origination volume growth. The growth in origination volume was primarily due to declining interest rates and incremental volumes associated with the acquisition of Pacific Union. The Originations Margin for the three months ended March 31, 2020 increased as compared to the same period in 2019 primarily due to lower expenses as a percentage of funded volume as the increase in total expenses was partially offset by expense reduction initiatives relative to the significant increase in funded volume.

Originations Segment Revenues

Service related fee, net - Originations refers to fees collected from customers for originated loans and from other lenders for loans purchased through the correspondent channel, and includes loan application, underwriting, and other similar fees.

Net gain on loans originated and sold represents the gains and losses from the origination, purchase, and sale of loans and related derivative ~~- embedded conversion feature”~~instruments. Gains from the origination and sale of loans are affected by the volume and margin of our originations activity and is impacted by fluctuation in interest rates.

Capitalized servicing rights represents the fair value attributed to mortgage servicing rights at the time in which ~~resulted~~they are retained in ~~$38.6 million~~connection with the sale of loans during the period.

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



Table 21. Originations - Revenues



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019			$ Change			% Change
Service related, net - Originations	$	20		$	15		$	5		33	%
Net gain on mortgage loans held for sale
Net gain on loans originated and sold	183			72			111			154	%
Capitalized servicing rights	119			61			58			95	%
Provision for repurchase reserves, net of release	(5		)	(2		)	(3		)	150	%
Total net gain on mortgage loans held for sale	297			131			166			127	%
Total revenues - Originations	$	317		$	146		$	171		117	%

Key Metrics
Consumer direct lock pull through adjusted volume⁽¹⁾	$	7,423		$	2,333		$	5,090		218	%
Other locked pull through adjusted volume⁽¹⁾	5,254			3,627			1,627			45	%
Total pull through adjusted volume	$	12,677		$	5,960		$	6,717		113	%
Funded volume	$	12,359		$	5,716		$	6,643		116	%
Volume of loans sold	$	13,255		$	6,235		$	7,020		113	%
Recapture percentage	29.8		%	27.5		%	2.3		%	7	%
Purchase as a percentage of funded volume	26.0		%	51.7		%	(25.7		)%	(50	)%
Value of capitalized servicing on retained settlements	137		bps	141		bps	(4) bps			(3	)%


⁽¹⁾	Pull through adjusted volume represents the expected funding from locks taken during the period.

Total revenues increased for the three months ended March 31, 2020 compared to the same period in 2019 primarily driven by the higher volumes in a declining interest rate environment and the incremental volumes made available with the Pacific Union acquisition and related origination channels, which occurred in February 2019. Total revenue increased $171 or 117% period over period as pull through adjusted lock volume increased 113% during the same period.

The table below summarizes expenses for the Originations segment:



Table 22. Originations - Expenses



	Three Months Ended March 31, 2020		Three Months Ended March 31, 2019		$ Change		% Change
Salaries, wages and benefits	$	117	$	69	$	48	70	%
General and administrative
Loan origination expenses	16		10		6		60	%
Corporate and other general and administrative expenses	18		14		4		29	%
Marketing and professional service fees	12		8		4		50	%
Depreciation and amortization	3		3		—		—	%
Total general and administrative	49		35		14		40	%
Total expenses - Originations	$	166	$	104	$	62	60	%

Total expenses for the three months ended March 31, 2020 increased when compared to the same period in 2019 primarily due to growth in volumes, which was driven by the low interest rate environment and the incremental volumes made available with the Pacific Union acquisition and related origination channels. The volume growth contributed to the increase in salaries, wages and benefits, due to increased compensation and headcount related costs, and loan origination expenses. The increase in loan origination expenses attributable to higher volume was partially offset by expense reduction initiatives. In addition, corporate and other general and administrative expenses increased during the three months ended March 31, 2020 primarily driven by higher outsourcing costs.

The table below summarizes other income (expenses), net for the Originations segment:



Table 23. Originations - Other Income (Expenses), Net



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019			$ Change			% Change
Interest income	$	34		$	17		$	17		100	%
Interest expense	(27		)	(18		)	(9		)	50	%
Other income, net	—			4			(4		)	(100	)%
Total other income (expenses), net - Originations	$	7		$	3		$	4		133	%

Weighted average note rate - mortgage loans held for sale	3.8		%	4.9		%	(1.1		)%	(22	)%
Weighted average cost of funds (excluding facility fees)	3.2		%	4.7		%	(1.5		)%	(32	)%

Interest income relates primarily to mortgage loans held for sale. Interest expense is associated with the warehouse facilities utilized to finance newly originated loans.

Interest income for the three months ended ~~September 30, 2017,~~March 31, 2020 increased when compared to the same period in 2019 primarily driven by higher funded volume. The increase in interest income was offset by an increase in interest expense due to an increase in originations volume, partially offset by a lower cost of funds. Other income, net was higher in 2019 due to recognition of incentives we received related to our financing of certain loans satisfying certain customer relief characteristics. In September 2018, we entered into a master repurchase agreement that provided us with incentives to finance mortgage loans satisfying certain consumer relief characteristics as provided in the agreement. We recorded $4 in other ~~expense of $16.2 million~~income, net related to such incentives for the three months ended ~~September 30, 2016.~~March 31, 2019. The master repurchase agreement expired during the third quarter of 2019.



Xome Segment

Xome is a real estate data and services company that provides services for mortgage originators and servicers, including Mr. Cooper, as well as mortgage and real estate investors. Xome is strategically important because it generates fee income that complements our servicing and origination businesses without requiring a significant amount of capital or exposing us to the same level of interest rate or credit risk.

Xome is organized into three divisions: Exchange, Services and Data/Technology.

The Exchange division consists of the Xome.com auction platform which utilizes proprietary technology designed to provide efficient execution for sales of foreclosed properties.

The Services division includes title, escrow, collateral valuation and field services related to real estate investments or transactions including purchases, sales, refinances and defaults.

The Data/Technology division contains a diversified set of businesses that provide technology solutions to real estate service providers, aggregators, and a variety of investors. This ~~item is solely attributable~~includes providing aggregation, standardization and licensing for one of the nation’s largest set of MLS, public records and neighborhood demographic data.

The charts below set forth the Xome’s total revenues, Exchange properties sold, and Services completed orders:



Table 24. Xome Segment Results of Operations



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019			$ Change			% Change
Xome - Operations
Total revenues	$	106		$	96		$	10		10	%
Total expenses	96			99			(3		)	(3	)%
Total other income (expenses), net	1			11			(10		)	(91	)%
Income before income tax expense	$	11		$	8		$	3		38	%
Income before taxes margin - Xome	10.4		%	8.3		%	2.1		%	25	%

Xome - Revenues
Exchange	$	16		$	20		$	(4	)	(20	)%
Services	85			71			14			20	%
Data/Technology	5			5			—			—	%
Total revenues - Xome	$	106		$	96		$	10		10	%

Key Metrics
Exchange properties sold	2,114			2,421			(307		)	(13	)%
Average Exchange properties under management	17,777			6,634			11,143			168	%
Services completed orders	408,734			379,585			29,149			8	%
Percentage of revenue earned from third-party customers	54.6		%	53.0		%	1.6		%	3	%

Xome - Expenses
Salaries, wages and benefits	$	35		$	38		$	(3	)	(8	)%
General and administrative
Operational expenses	58			57			1			2	%
Depreciation and amortization	3			4			(1		)	(25	)%
Total general and administrative	61			61			—			—	%
Total expenses - Xome	$	96		$	99		$	(3	)	(3	)%

Income before income tax expense increased for the three months ended March 31, 2020 as compared to the same period in 2019 primarily due to an increase in total revenues, offset by a decrease in other income (expense), net. The increase in total revenues was driven by an increase in Services revenues from higher volumes of units for valuation and field services, partially offset by a decrease in Exchange revenues due to the decrease in defaults and foreclosures nationwide. The decrease in other income (expense), net was due to $11 for the change in fair value of the ~~derivative–embedded conversion feature and is a non-cash item. Fluctuations~~contingent consideration in 2019 for the acquisition of AMS.



Corporate/Other Segment

The following table sets forth the results of operations for the Corporate/Other segment:



Table 25. Corporate/Other Segment Results of Operations



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019			$ Change			% Change
Corporate/Other - Operations
Total revenues	$	2		$	—		$	2		100	%
Total expenses	34			45			(11		)	(24	)%
Total other income (expenses), net	(51		)	(55		)	4			(7	)%
Loss before income tax benefit - Corporate/Other	$	(83	)	$	(100	)	$	17		(17	)%

Corporate/Other - Expenses
Salaries, wages and benefits	$	8		$	22		$	(14	)	(64	)%
General and administrative
Operational expenses	8			13			(5		)	(38	)%
Depreciation and amortization	10			10			—			—	%
Loss on impairment of assets	8			—			8			100	%
Total general and administrative	26			23			3			13	%
Total expenses - Corporate/Other	$	34		$	45		$	(11	)	(24	)%

Corporate/Other - Other Income (Expenses), Net
Total interest income	$	1		$	2		$	(1	)	(50	)%
Interest expense on unsecured senior notes	(51		)	(51		)	—			—	%
Other interest expense	(1		)	(6		)	5			(83	)%
Total interest expense	(52		)	(57		)	5			(9	)%
Total other income (expenses), net - Corporate/Other	$	(51	)	$	(55	)	$	4		(7	)%

Weighted average cost - unsecured senior notes	7.8		%	7.9		%	(0.1		)%	(1	)%

Loss before income tax benefit decreased in the ~~price of WMIH’s common stock directly impact~~three months ended March 31, 2020 as compared to the ~~fair value~~same period in 2019 primarily due to a decrease in total expenses. Total expenses decreased primarily due to lower salaries, wages and benefits, which were higher in the three months ended March 31, 2019 due to the Pacific Union acquisition and the acquisition of the ~~derivative instrument.~~Seterus mortgage servicing platform and assumption of certain assets related thereto from IBM (“Seterus acquisition”). The ~~fair value~~decrease in salaries, wages and benefits was partially offset by an $8 loss on impairment of ~~this derivative instrument~~assets in connection with an ancillary business.

Other income (expenses), net for the Corporate/Other segment consists of interest expense on our unsecured senior notes, the interest income and expense from our legacy portfolio, and other interest related to a revolving facility used for general corporate purposes.

The change in total other income (expenses), net in the three months ended March 31, 2020 as compared to the same period in 2019 was primarily due to a decrease in other interest expense as a result of lower commitment and facility fees, which were higher in 2019 due to the Pacific Union acquisition.



Changes in Financial Position



Table 26. Changes in Assets



	March 31, 2020		December 31, 2019		$ Change			% Change
Cash and cash equivalents	$	579	$	329	$	250		76	%
Mortgage servicing rights	3,115		3,502		(387		)	(11	)%
Advances and other receivables, net	685		988		(303		)	(31	)%
Reverse mortgage interests, net	5,955		6,279		(324		)	(5	)%
Mortgage loans held for sale at fair value	3,922		4,077		(155		)	(4	)%
Deferred tax assets, net	1,411		1,345		66			5	%
Other	1,946		1,785		161			9	%
Total assets	$	17,613	$	18,305	$	(692	)	(4	)%

Total assets as of March 31, 2020 decreased by $692 or 4% compared with December 31, 2019 primarily due to the decrease in mortgage servicing rights, reverse mortgage interests, net and advances and other receivables, net, partially offset by an increase in cash and cash equivalents. Mortgage servicing rights decreased in 2019 primarily due to a negative mark-to-market adjustment of $383 driven by declining interest rates. Reverse mortgage interests, net decreased $324 primarily due to the collection on participating interests in HMBS. Advances and other receivables decreased primarily due to recoveries on advances through claim proceeds, customer payments and servicing transfers. Cash and cash equivalents was higher as of March 31, 2020 compared with December 31, 2019 primarily due to additional funds drawn on our MSR facilities given the market risk at the end of the quarter in relation to COVID-19 pandemic.



Table 27. Changes in Liabilities and Stockholders’ Equity



	March 31, 2020		December 31, 2019		$ Change			% Change
Unsecured senior notes, net	$	2,259	$	2,366	$	(107	)	(5	)%
Advance facilities, net	489		422		67			16	%
Warehouse facilities, net	4,551		4,575		(24		)	(1	)%
MSR related liabilities - nonrecourse at fair value	1,285		1,348		(63		)	(5	)%
Other nonrecourse debt, net	4,945		5,286		(341		)	(6	)%
Other liabilities	2,018		2,077		(59		)	(3	)%
Total liabilities	15,547		16,074		(527		)	(3	)%
Total stockholders’ equity	2,066		2,231		(165		)	(7	)%
Total liabilities and stockholders’ equity	$	17,613	$	18,305	$	(692	)	(4	)%

Total stockholders’ equity at March 31, 2020 decreased by $165 or 7% compared with the balance as of December 31, 2019 primarily due to net loss of $171 during the three months ended March 31, 2020. Total liabilities at March 31, 2020 decreased by $527 or 3% compared with the balance as of December 31, 2019 primarily due to a decrease in other nonrecourse debt and unsecured senior notes, net. Other nonrecourse debt decreased by $341 primarily due to repayments of reverse mortgage related nonrecourse debt. Unsecured senior notes, net, decreased by $107 primarily due to the repayment and redemption of the 2021 and 2022 unsecured senior notes, partially offset by the issuance of the 2027 unsecured senior notes.



Liquidity and Capital Resources

We measure liquidity by unrestricted cash and availability of borrowings on our MSR facilities. Our cash and cash equivalents on hand increased to $579 as of March 31, 2020 from $329 as of December 31, 2019. As of March 31, 2020, we had $1,216 collateral pledged against the MSR facilities, of which we could borrow an additional $705. During the three months ended March 31, 2020, operating activities used cash totaling $710. As of March 31, 2020, total available borrowing capacity is ~~analyzed each period and should not be relied upon~~$9,690, of which $4,648 is unused.

We expect the economic impact of the COVID-19 pandemic to ~~produce changes of this magnitude on an on-going basis as it could also~~ result in a ~~non-cash expense~~significant increase in servicing advances and liquidity demands related to the utilization of forbearance programs offered by the CARES Act. Based on current modeling of expected forbearance rates within our portfolio, we believe that we are well-positioned to manage a significant increase 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, which we believe will be adequate for our needs. We plan to finance GNMA advances with existing MSR lines and corporate cash flow, along with GNMA’s Pass-Through Assistance Program as a backup. For non-agency servicing, we are reimbursed for advances relatively quickly, which should limit growth in balances even with 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 ~~benefit~~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, which are expected to increase in the near future ~~periods.~~ due to COVID-19 pandemic; (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 believe that our cash flows from operating activities, as well as capacity through existing facilities, provide adequate resources to fund our anticipated ongoing cash requirements. We rely on these facilities to fund operating activities. As the facilities mature, we anticipate renewal of these facilities will be achieved. Future debt maturities will be funded with cash and cash equivalents, cash flow from operating activities and, if necessary, future access to capital markets. We continue to optimize the use of balance sheet cash to avoid unnecessary interest carrying costs. Reverse mortgage loans provide seniors with the ability to monetize the equity in their homes in a lump sum, line of credit or monthly draws. We securitize our holdings in reverse mortgage loans in order to finance subsequent borrower draws and loan related costs.

Cash Flows

The table below presents the major sources and uses of cash flow for operating activities:



Table 28. Operating Cash Flow



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019			$ Change			% Change
Net loss	$	(171	)	$	(186	)	$	15		(8	)%
Fair value changes in MSRs, MSR related liabilities and mortgage loans held for investment	497			311			186			60	%
Deferred tax benefit	(68		)	(47		)	(21		)	45	%
Other non-cash adjustments to net loss	(332		)	(210		)	(122		)	58	%
Originations net sales activities	430			116			314			271	%
Changes in working capital	354			301			53			18	%
Net cash attributable to operating activities	$	710		$	285		$	425		149	%

Our operating activities generated cash of $710 during the three months ended March 31, 2020 compared to $285 cash generated in the same period in 2019. The increase was primarily due to the cash generated in originations net sales activities.

Cash generated in originations net sales activities was $430 during the three months ended March 31, 2020 compared to $116 in the same period in 2019. The change was primarily due to an increase in proceeds of $7,527 on the sales of previously originated loans, partially offset by higher funding of $6,658 for loan origination activities driven by the declining interest rate environment and an increase in funds used of $555 to repurchase forward loan assets out of Ginnie Mae securitizations.

Cash generated from fair value ofchanges in MSRs, MSR related liabilities and mortgage loans held for investment during the ~~embedded conversion feature will become equity upon conversion of the Series B Preferred Stock, or be reduced to zero upon redemption of the Series B Preferred Stock, as the case may be.~~ ~~For additional details on the derivative–embedded conversion feature, see Note 9: Capital Stock and Derivative Instruments and Note 13: Fair Value Measurement~~three months ended March 31, 2020 increased by $186 when compared to the ~~condensed consolidated financial statements~~same period in ~~Part I, Item 1~~2019. The change was primarily due to an increase in fair value changes and amortization/accretion of ~~this Quarterly Report on Form 10-Q. In addition~~mortgage servicing rights/liabilities of $147, primarily due to ~~this change, several other items had a favorable impact on earnings~~the negative mark-to-market adjustment for the three months ended ~~September 30, 2017, including~~March 31, 2020.

Cash used from the other non-cash adjustments to net ~~revenues and decreased interest expense. Our revenues~~loss during the three months ended March 31, 2020 increased by $122 when compared to the same period in 2019 primarily due to ~~improved earnings~~the $165 increase in net gain on ~~our investment portfolio including~~mortgage loans held for sale primarily driven by the ~~restricted~~higher volumes in a declining interest rate environment and the incremental volumes made available with the February 2019 Pacific Union acquisition and related origination channels.

The table below presents the major sources and uses of cash ~~equivalents. Interest expense decreased as~~flow for investing activities:



Table 29. Investing Cash Flows



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019			$ Change			% Change
Acquisitions, net	$	—		$	(85	)	$	85		(100	)%
Purchase of forward mortgage servicing rights, net of liabilities incurred	(27		)	(130		)	103			(79	)%
Proceeds on sale of forward and reverse mortgage servicing rights	43			243			(200		)	(82	)%
Other	(12		)	(10		)	(2		)	20	%
Net cash attributable to investing activities	$	4		$	18		$	(14	)	(78	)%

Our investing activities generated $4 during the three months ended March 31, 2020 compared to $18 during the same period in 2019. The decrease in cash generated from investing activities was primarily due to a decrease of $200 in proceeds on sale of forward mortgage servicing rights. Partially offsetting the decrease in cash generated was a $103 decrease in cash used in the purchase of forward mortgage servicing rights, net of liabilities incurred, and an $85 decrease in cash used in connection with the Pacific Union and Seterus acquisitions, which were acquired during the three months ended March 31, 2019. Although we continue to seek to acquire servicing portfolios at advantageous pricing, the amounts and timing of these opportunities is not of a consistent frequency and can result in cash flow variability between periods.

The table below presents the major sources and uses of cash flow for financing activities:



Table 30. Financing Cash Flow



	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019			$ Change			% Change
(Decrease) increase in warehouse facilities	$	(25	)	$	307		$	(332	)	(108	)%
Increase (decrease) in advance facilities	68			(30		)	98			(327	)%
Repayment of notes payable	—			(294		)	294			(100	)%
Redemption and repayment of unsecured senior notes and nonrecourse debt	(698		)	(3		)	(695		)	23,167	%
Issuance of unsecured senior debt	600			—			600			100	%
Issuance of excess spread financing	24			245			(221		)	(90	)%
Settlements and repayments of excess spread financing	(58		)	(50		)	(8		)	16	%
Decrease of participating interest financing	(275		)	(408		)	133			(33	)%
Changes in HECM securitizations	(99		)	(107		)	8			(7	)%
Other	(18		)	(4		)	(14		)	350	%
Net cash attributable to financing activities	$	(481	)	$	(344	)	$	(137	)	40	%

Our financing activities used $481 cash during the three months ended March 31, 2020 compared to $344 cash used in the same period in 2019. Contributing to the increase in cash used was the repayment of unsecured senior debt and nonrecourse debt of $698 during the three months ended March 31, 2020 compared to $3 in the same period in 2019. The $695 increase in cash used for the payment of unsecured senior debt and nonrecourse debt is primarily due to the repayment and redemption of the ~~reduction~~2021 and 2022 unsecured senior notes in ~~our Runoff Note balances discussed further below.~~February 2020. Cash used also increased due to a net pay down of $25 in warehouse facilities during the three months ended March 31, 2020 compared to a net increase of $307 in the same period in 2019. The ~~loss contract reserve~~cash generated from the issuance of excess spread financing decreased by ~~$0.2 million~~$221 due to a decline in excess spread financing deals in the three months ended ~~September 30, 2017, as~~March 31, 2020 compared to ~~$0.5 million~~the same period in 2019.

Offsetting these increases in cash used was a decrease in cash used for the repayment of notes payable. During the three months ended ~~September 30, 2016, resulting~~March 31, 2019, cash of $294 was used to pay off the notes payable assumed from the Pacific Union acquisition. In addition, there was an increase in ~~a positive improvement to operating income. Underwriting expenses were lower on a comparative basis, primarily~~cash generated of $600 due to ~~smaller increases~~the issuance of the 2027 unsecured senior notes in ~~premium deficiency~~January 2020.

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. In April 2020, we expanded our committed advance capacity by $850.

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. These covenants are measured at our operating subsidiary, Nationstar Mortgage LLC. As of March 31, 2020, we were in compliance with our required financial covenants.

Seller/Servicer Financial Requirements

We are also subject to net worth, 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, these requirements apply to our operating subsidiary, Nationstar Mortgage LLC. As of March 31, 2020, we were in compliance with our seller/servicer financial requirements for FHFA and Ginnie Mae.

Minimum Net Worth

The minimum net worth requirement for Fannie Mae and Freddie Mac is defined as follows:


▪	Base of $2.5 plus 25 basis points of outstanding UPB for total loans serviced.


▪	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:


▪	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.


▪	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


▪	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 and Freddie Mac is defined as follows:


▪	3.5 basis points of total Agency servicing.


▪	Incremental 200 basis points of total nonperforming Agency, measured as 90+ delinquencies, servicing in excess of 6% of the total Agency servicing UPB.


▪	Allowable assets for liquidity may include: cash and cash equivalents (unrestricted), available for sale or held for trading investment grade securities (e.g., Agency MBS, Obligations of GSEs, US Treasury Obligations); and unused/available portion of committed servicing advance lines.

The minimum liquidity requirement for Ginnie Mae is defined as follows:


▪	Maintain liquid assets equal to the greater of $1 or 10 basis points of our outstanding single-family MBS.


▪	Maintain liquid assets equal to at least 20% of our net worth requirement for HECM MBS.

Secured Debt to Gross Tangible Asset Ratio

Under the Ginnie Mae guide, we are also required to maintain a secured debt to gross tangible asset ratios no greater than 60%.

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, we 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.

In addition, Fannie Mae or Freddie Mac may require capital ratios in excess of stated requirements. Refer to Note 17, Capital Requirements, in the ~~three months ended September 30, 2017 as compared~~notes to increases in premium deficiency reserves during the three months ended September 30, 2016 as further described below in this Item 2 of Part I, under “Losses or Benefits Incurred and Losses and Loss Adjustment Expenses.”

For the nine months ended September 30, 2017, we reported net income attributable to common and participating stockholders of $21.4 million compared to net income attributable to common and participating stockholders of $47.8 million for the nine months ended September 30, 2016. This $26.4 million decline in net income attributable to common and participating stockholders, when comparing the nine months ended September 30, 2017 to the nine months ended September 30, 2016, is primarily the result of the change in fair value of an embedded derivative. This embedded derivative was recorded as a result of the variable conversion feature in our Series B Preferred Stock and the change in fair value is reflected on our condensed consolidated statements of operations as the other income or expense item “c~~hange in fair value of derivative embedded conversion feature”~~ which resulted in $31.2 million of other income for the nine months ended September 30, 2017, compared to other income of $62.6 million for the nine months ended September 30, 2016. This item is solely attributable to a change in fair value of the derivative embedded conversion feature, which is further described above. In addition to this change, the other large variance was the positive impact from the loss contract reserve decreasing by $5.6 million for the nine months ended September 30, 2017, as compared to $2.3 million in the same period in 2016.

The total revenue for the three and nine months ended September 30, 2017 was $2.3 million and $5.9 million, respectively, compared to revenue of $1.3 million and $4.2 million, respectively, for the three and nine months ended September 30, 2016. The increase in revenue is attributable to improved earnings on our investment portfolio including the restricted cash equivalents, however, WMMRC continues to experience decreasing premium revenue due to operating in runoff mode. In addition, because WMMRC is operating in runoff mode, we expect premiums-earned revenue to continue to decrease, as no new business is being undertaken.

Underwriting expenses (defined as losses and loss adjustment expenses and ceding commission expenses) decreased by $0.2 million to a $0.1 million expense for the three months ended September 30, 2017 compared to an expense of $0.3 million for the three months ended September 30, 2016. Underwriting expenses decreased by $0.6 million to a $0.3 million expense for the nine months ended September 30, 2017 compared to an expense of $0.9 million for the nine months ended September 30, 2016. This decrease was primarily the result of the $0.5 million and $1.0 million additional premium deficiency reserves which were recorded during the three and nine months ended September 30, 2016, respectively, compared to a minimal change and a $0.2 million increase in the premium deficiency reserve during the three and nine months ended September 30, 2017, respectively. These changes in expense are related to the operation of WMMRC in runoff mode and the corresponding decrease in revenues and the change in premium deficiency reserves as further described below in this Item 2 of Part I under “Losses or Benefits Incurred and Losses and Loss Adjustment Expenses.” As more fully described in Note 2: Significant Accounting Policies to the condensed consolidated financial statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, due to the current condition of the mortgage insurance market, WMMRC has recorded reserves based on ceded case reserves and incurred but not recorded (“IBNR”) loss levels established and reported by the primary mortgage guaranty carriers as of each reporting period. Management believes that its estimate of aggregate liability for ~~unpaid losses and loss adjustment expenses as of September 30, 2017 represents its best estimate, based upon the available data, of the amount necessary to cover the current cost of losses.~~

additional information.



Table 31. Debt



	March 31, 2020		December 31, 2019
Advance facilities, net	$	489	$	422
Warehouse facilities, net	4,551		4,575
Unsecured senior notes, net	2,259		2,366

Advance Facilities

As of September 30, 2017, the loss contract reserve was analyzed and determined to have a value of zero compared to $5.6 million at December 31, 2016. The value of the loss contract reserve decreased by $0.2 million and $5.6 million, respectively, during the three and nine months ended September 30, 2017 and decreased by $0.5 million and $2.3 million during the three and nine months ended September 30, 2016, respectively. Consequently, there was a related reduction of expenses due to the change in value of the loss contract reserve for the three and nine months ended September 30, 2017. The loss contract reserve was established at a value of $63.1 million on March 19, 2012 as a resultpart of our ~~reorganization. The loss contract reserve decrease during~~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 ~~three and nine months ended September 30, 2017 is attributed primarily to changes in the expected timing of~~ assets being ~~released~~serviced. Delinquency rates and prepayment speeds affect the size of servicing advance balances, and we exercise our ability to stop advancing principal and interest where the pooling and servicing agreements permit, where the advance is deemed to be non-recoverable from ~~trust accounts held at WMMRC. For more information see Note 14: Subsequent Events~~future proceeds. These servicing requirements affect our liquidity. We rely upon several counterparties to ~~the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.~~

~~For the three and nine months ended September 30, 2017, our investment portfolio reported net investment income of $1.9 million and $4.8 million, respectively, as compared~~provide us with financing facilities to net investment income of $0.5 million and $1.7 million, respectively, for the three and nine months ended September 30, 2016. The increase in investment income is primarily the result of higher short term interest rates during 2017 compared to 2016. The components of the investment income are more fully described below in this Item 2 of Part I, under “Net Investment Income.”

~~General and Administrative Expenses~~

For the three and nine months ended September 30, 2017 our general and administrative expenses totaled $2.1 million and $5.9 million, respectively, compared to $1.4 million and $4.9 million for the three and nine months ended September 30, 2016. General and administrative expenses primarily increased due to expenses related to assistance with transaction sourcing and debt and equity restructuring activities.

~~Interest Expense~~

For the three and nine months ended September 30, 2017, we incurred $0.6 million and $1.8 million, respectively, of interest expense on the Second Lien Notes, which is further described below in this Item 2 of Part I, under “Notes Payable.” This compares to $0.6 million and $2.0 million of interest expense, all of which related to the Second Lien Notes, which was incurred during the three and nine months ended September 30, 2016, respectively. The interest related to Second Lien Notes decreased primarily due to the reduction of Second Lien Note principal balances by $18.8 million during the nine months ended September 30, 2017 and by $2.9 million during the year ended December 31, 2016. Because sufficient Runoff Proceeds have not always been available to pay accrued interest on the Runoff Notes,fund a portion of our servicing advances.

Warehouse 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 a servicer for reverse mortgage loans, among other things, we are required to fund borrower draws on the loans. We typically pool borrower draws for approximately 30 days before including them in a HMBS securitization. As of March 31, 2020, unsecuritized borrower draws totaled $64, and our maximum unfunded advance obligation related to these reverse mortgage loans was $2,504.

Unsecured Senior Notes

In 2018 and 2020, we completed offerings of unsecured senior notes, which mature on various dated through January 2027. We pay interest onsemi-annually to the ~~Runoff Notes has been satisfied using~~holders of these notes at interest rates ranging from 6.000% to 9.125%.

As of March 31, 2020, the “pay-in-kind” or “PIK” feature available under the Indentures. The accrued interest is converted to PIK Notes at the next payment date if there is not sufficient cash available to satisfy the required interest payment. For the nine months ended September 30, 2017 and 2016, no PIK Notes were issued in satisfactionexpected maturities of our ~~obligation to pay interest~~unsecured senior notes based on ~~the Second Lien Notes. For the nine months ended September 30, 2017 and September 30, 2016, respectively, $2.0 million and $2.0 million, of interest was paid in cash.~~

~~Unrealized Gain (Loss) on Change in Fair Value of Derivative~~

The fair value of the derivative embedded conversion feature is revalued each reportable balance sheet date with the decrease or increase in fair value being reported in the consolidated statements of operations as unrealized gain or (loss) on change in fair value of derivative embedded conversion feature, respectively. The primary factors affecting the fair value of the embedded conversion featurecontractual maturities are ~~the probability of occurrence and timing of a Qualified Acquisition, our stock price and our stock price volatility.~~ During the three and nine months ended September 30, 2017, the fair value of the asset increased by $38.6 million and $31.2 million, respectively, and unrealized income was recorded. During the three and nine months ended September 30, 2016, the fair value of the liability increased by $16.2 million and decreased by $62.6 million, respectively, resulting in the recognition of a respective unrealized loss and gain.

~~Net Income (Loss)~~

The net operating (loss) income for the three and nine months ended September 30, 2017 totaled an operating loss of $0.3 million and operating income of $3.5 million, respectively, compared to net operating losses of $0.4 million and $1.3 million, respectively, for the three and nine months ended September 30, 2016.

For the three and nine months ended September 30, 2017, we reported net income attributable to common and participating stockholders of $33.9 million and $21.4 million, respectively. This result compares to net loss attributable to common and participating stockholders of $21.1 million and net income attributable to common and participating stockholders $47.8 million, for the three and nine months ended September 30, 2016, respectively.

The primary factors impacting the change in net operating (loss) income and the change in net income (loss) attributable to common and participating stockholders for the three and nine months ended September 30, 2017 compared to the results for the three and nine months ended September 30, 2016, are summarized in the tables below.

Three months ended September 30, 2017 versus three months ended September 30, 2016 summary of change in net operating (loss) income and net income (loss) attributable to common and participating stockholders (in thousands):

presented below:

Three months
ended
September 30, 2017

Three months
ended
September 30, 2016

Percentage change favorable
(unfavorable)

Dollar value change
favorable
(unfavorable)

Net revenues
$
2,287

$
1,284

78
%

$
1,003

Underwriting expense (net)

92

258

64
%

166

General and administrative expenses

2,117

1,357

(56
%)

(760
)
Loss contract reserve reduction

(210
)

(565
)

(63
%)

(355
)
Interest expense

579

636

9
%

57

Net operating (loss)

(291
)

(402
)

28
%

111

Other income

123

—

N/A

123

Unrealized gain (loss) on change in value of derivative embedded conversion feature

38,579

(16,243
)

338
%

54,822

Redeemable convertible series B preferred stock dividends

(4,500
)

(4,500
)

0
%

—

Net income (loss) attributable to common and participating stockholders
$
33,911

$
(21,145
)

260
%

$
55,056



Table 32. Contractual Maturities - Unsecured Senior Notes



Year Ending December 31,	Amount
2020	$	—
2021	—
2022	—
2023	950
2024	—
Thereafter	1,350
Unsecured senior notes principal amount	2,300
Unamortized debt issuance costs, premium and discount	(41		)
Unsecured senior notes, net	$	2,259

~~Nine months ended September 30, 2017 versus nine months ended September 30, 2016 summary~~

As of ~~change in net operating (loss) and net income attributable~~March 31, 2020, no material changes to ~~common and participating stockholders (in thousands):~~

Nine months
ended
September 30, 2017

Nine months
ended
September 30, 2016

Percentage change favorable
(unfavorable)

Dollar value change
favorable
(unfavorable)

Net revenues
$
5,929

$
4,173

42
%

$
1,756

Underwriting expenses (net)

344

936

63
%

592

General and administrative expenses

5,915

4,878

(21
%)

(1,037
)
Loss contract reserve reduction

(5,645
)

(2,362
)

139
%

3,283

Interest expense

1,788

1,994

10
%

206

Net operating income (loss)

3,527

(1,273
)

377
%

4,800

Other income

123

—

N/A

123

Unrealized gain on change in fair value of derivative liability - embedded conversion feature

31,226

62,587

(50
%)

(31,361
)
Redeemable convertible series B preferred stock dividends

(13,500
)

(13,500
)

0
%

—

Net income attributable to common and participating stockholders
$
21,376

$
47,814

(55
%)

$
(26,438
)

~~Comprehensive Income~~

~~The Company has no comprehensive income other than~~our outstanding contractual obligations were made from the ~~net income~~amounts previously disclosed in ~~the condensed consolidated statement of operations.~~

~~Premiums Earned~~

The majority of WMMRC’s reinsurance contracts require premiums to be written and earned monthly. In a few cases, the premiums earned reflect the pro rata inclusion into income of premiums written over the life of the reinsurance contracts. Details of premiums earned are provided in the following table:

For the three and nine months ended September 30, 2017, premiums earned totaled $0.3 million and $1.1 million, respectively, a decrease of $0.5 million and $1.3 million, respectively, when compared to premiums earned of $0.8 million and $2.4 million, respectively, for the three and nine months ended September 30, 2016. The Company’s premiums earned are expected to continue to decrease due to WMMRC operating in runoff mode.

~~Losses or Benefits Incurred and Losses and Loss Adjustment Expenses~~

Losses incurred include losses paid and changes in loss reserves, including reserves for IBNR losses, premium deficiency reserves net of actual and estimated loss recoverable amounts. Details of net losses or benefits incurred for the three and nine months ended September 30, 2017 and September 30, 2016, respectively, are provided in the following table:

Three months
ended
September 30, 2017

Three months
ended
September 30, 2016

Nine months
ended
September 30, 2017

Nine months
ended
September 30, 2016

Losses and loss adjustment expense
$
48

$
183

$
207

$
702

We establish reserves for each contract based on estimates of the ultimate cost of all losses including losses incurred but not reported. These estimated reserves are based on reports received from ceding companies, industry data and historical experience as well as our own actuarial estimates. Quarterly, we review these estimates on a contract by contract basis and adjust the estimates as we deem necessary based on updated information and our internal actuarial estimates.

For the three and nine months ended September 30, 2017, the loss ratios were 14% and 19%, respectively, compared to loss ratios of 23% and 29%, respectively, for the three and nine months ended September 30, 2016. The loss or benefit ratio is calculated by dividing incurred benefit or losses for the period by earned premiums. The ratio provides a measure of underwriting profit or loss. Loss reinsurance contracts (which represent the significant majority of our loss exposure) are generally structured with limits set on the aggregate amount of losses that can be incurred over the life of such contract. Upon reaching such limits, no additional losses may be realized under the terms of the contract. Nevertheless, even when applicable contract limits are reached, revenues from premiums collected continue to be ceded for the remaining life of the contract. Beginning in 2013, a majority of WMMRC’s reinsurance arrangements for the 2006 through 2008 book years reached their respective loss limits. As a result, WMMRC does not expect to incur any additional losses for those book years; however, WMMRC may continue to realize revenues from those book years, to the extent premiums are ceded therefrom.

~~The components of the liability for losses and loss adjustment reserves are as follows at September 30, 2017 and December 31, 2016, respectively:~~

September 30, 2017

December 31, 2016

Case-basis reserves
$
174

$
553

IBNR reserves

1

—

Premium deficiency reserves

530

258

Total losses and loss adjustment reserves
$
705

$
811

~~Losses and loss adjustment reserve activity are as follows for the periods ended September 30, 2017 and December 31, 2016, respectively:~~

~~Net Investment Income~~

The increase in investment income during the three and nine months ended September 30, 2017 compared to the same periods in 2016 is primarily the result of higher short term interest rates during 2017 as compared to 2016. A summary of our net investment income for the periods ended September 30, 2017 and 2016, respectively, is as follows:

~~Federal Income Taxes~~

The Company has no current tax expense or liability due as a result of its tax loss position for periods ended September 30, 2017, September 30, 2016 and December 31, 2016. More detailed information regarding the Company’s tax position including NOL carry-forwards is provided in Note 6: Income Taxes to the consolidated financial statements in Item 8 of the Annual Report on Form 10-K for the year ended December 31, ~~2016~~2019 except for the following, in connection with the issuance of the 2027 notes and ~~in Note 5: Income Taxes~~redemption of the 2021 and 2022 notes during the three months ended March 31, 2020:



Table 33. Contractual Obligations



	Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years		Total
Unsecured senior notes	$	—	$	—	$	950	$	1,350	$	2,300
Interest payment from unsecured senior notes	182		363		248		175		968
Total	$	182	$	363	$	1,198	$	1,525	$	3,268



Critical Accounting Policies

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, we have identified the following policies that, due to the ~~condensed~~judgment, estimates and assumptions inherent in those policies, are critical to an understanding of our consolidated financial statements. These policies relate to fair value measurements, particularly those determined to be Level 3 as discussed in Note 16, Fair Value Measurements, in notes to consolidated financial statements, business combinations and goodwill, and valuation and realization of deferred tax assets. We believe that the judgment, estimates and assumptions used in ~~Part I, Item 1~~the preparation of ~~this Quarterly Report~~our consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of these critical accounting policies on ~~Form 10-Q.~~

~~The Company files a~~our consolidated ~~federal income tax return. Pursuant~~financial statements, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition. Fair value measurements considered to ~~a tax sharing agreement, WMMRC’s federal income tax liability is calculated~~be Level 3 representing estimated values based on a separate return basis determined by applying 35% to taxable income, in accordance with the provisions of the Internal Revenue Code (the “Code”) that apply to mortgage insurance companies. WMIH, as WMMRC’s parent, pays federal income taxes on behalf of WMMRC and settles the federal income tax obligation on a current basis in accordance with the tax sharing agreement. WMMRC made no tax payments to WMIH during the periods ended September 30, 2017 and December 31, 2016 associated with the Company’s tax liability from the current or preceding periods.

~~Deferred federal income taxes arise from temporary differences between~~significant unobservable inputs include (i) the valuation of ~~assets~~MSRs, (ii) the valuation of excess spread financing and liabilities as determined for financial reporting purposes and income tax purposes. Temporary differences principally relate to discounting of loss reserves, recognition of unearned premiums, changes in value of loss contract reserves and embedded derivatives, net operating losses and unrealized gains and losses on investments.

~~We believe WMIH experienced an ownership change under Section 382~~(iii) the valuation of the ~~Code in connection with its bankruptcy plan becoming effective. Prior~~mortgage servicing rights financing liability. For further information on our critical accounting policies, please refer to ~~emergence from bankruptcy, WMI abandoned~~ the ~~stock of Washington Mutual Bank, thereby generating a worthless stock deduction of approximately $8.37 billion, which gave rise to a NOL carry-forward~~Company’s Annual Reports on Form 10-K for the year ended December 31, ~~2012. We believe that the total available and utilizable NOL carry-forward at~~2019. There have been no material changes to our critical accounting policies since December 31, ~~2016 was approximately $6.0 billion and at September 30, 2017~~2019. During the three months ended March 31, 2020, we ~~believe~~updated the policies for reserves related to certain financial assets that ~~there was no limit under Section 382~~are subject to CECL accounting in connection with adoption of ~~the Code~~ASU 2016-13. The update did not have material impact on the ~~use~~consolidated financial statements. See Note 1, Nature of ~~these NOLs. As~~Business and Basis of September 30, 2017 and December 31, 2016, the Company recorded a valuation allowance equal to 100% of the net deferred federal income tax asset due to uncertainty regarding the Company’s ability to realize these benefitsPresentation, in the ~~future.~~

On November 2, 2017, the Ways and Means Committee of the U.S. House of Representatives introduced a bill containing various amendments to the Internal Revenue Code, including, among other things changes to corporate income tax rates and certain provisions governing NOLs. There can be no assurance that the bill will be approved in its current form or at all and the final form of any tax legislation that is enacted could contain provisions that adversely affect the utility or potential value of the Company’s NOLs.

~~Investments~~

~~General~~

We hold investments at both WMIH and WMMRC and the two portfolios consist entirely of fixed income instruments, excluding funds in overnight money market funds, totaling $10.4 million and $76.8 million as of September 30, 2017 and December 31, 2016, respectively. The Company held $577.2 million and $572.9 million of restricted cash from the Series B Preferred Stock Financing in its escrow account at September 30, 2017 and December 31, 2016, respectively.

The value of the consolidated Company’s total cash and investments decreased during the nine months ended September 30, 2017. Cash and investments, which excludes restricted cash of $577.2 million and $573.3 million at September 30, 2017 and December 31, 2016, respectively, totaled $42.8 million and $81.5 million at September 30, 2017 and December 31, 2016, respectively. The primary factors that contributed to this decrease in investments were (i) the payment of a total of $13.5 million in Series B Preferred Stock cash dividends during the nine months ended September 30, 2017; and (ii) the redemption in full of the $18.8 million of Second Lien Notes which were outstanding at December 31, 2016, and the payment of related interest of approximately $2.0 million.

We work with investment broker dealers and, in the case of WMMRC, collateral trustees, in determining whether a market for a financial instrument is active or inactive. We regularly obtain indicative pricing from market makers and from multiple dealers and compare the level of pricing variances as a way to observe market liquidity for certain investment securities. We also obtain trade history and live market quotations from publicly quoted sources, such as Bloomberg, for trade volume and frequency observation. While we obtain market pricing information from broker dealers, the ultimate fair value of our investments is based on portfolio statements provided by financial institutions that hold our accounts.

During the nine months ended September 30, 2017 and the year ended December 31, 2016, we transferred $0.9 million and $11.0 million, respectively, of corporate securities that mature within 12 months from Level 2 to Level 1, due to improved liquidity in capital markets for those securities. Please refer to Note 4: Investment Securities to the condensed consolidated financial statements which is incorporated herein for details.

Recent Accounting Developments

Below lists recently issued accounting pronouncements applicable to us but not yet effective.

Accounting Standards Update 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes (“ASU 2019-12”) simplifies accounting for income taxes by removing certain exceptions from the general principles in ~~Item 1~~Topic 740 including elimination of ~~Part I~~the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items such as other comprehensive income. ASU 2019-12 also clarifies and amends certain guidance in Topic 740. ASU 2019-12 is effective for public companies for fiscal years beginning after December 15, 2020, including interim periods, with early adoption of ~~this Quarterly Report on Form 10-Q, for additional information regarding our investment securities.~~

~~WMIH~~

~~WMIH’s investments are valued at fair value and any unrealized gains or losses are reflected in net investment income~~all amendments in the ~~condensed consolidated statements~~same period permitted. The Company is currently assessing the impact of income. At September 30, 2017 and at December 31, 2016, WMIH had zero and $45.0 million, respectively, of investments in obligations of U.S. government sponsored enterprises, all of which will mature within the respective next 12 months. WMIH also had $25.0 million and $2.1 million in cash and cash equivalents at September 30, 2017 and December 31, 2016, respectively.

~~WMMRC~~

WMMRC’s investments are valued at fair value and any unrealized gains or losses are reflected in net investment income in the condensed consolidated statements of operations. At September 30, 2017, approximately 89% of WMMRC’s cash and investments were held in four trusts for the benefit of primary mortgage insurers with whom WMMRC established agreements to reinsure private mortgage insurance risk. The total portfolio, excluding funds in overnight money market instruments, was valued at approximately $10.4 million and $31.9 million at September 30, 2017 and December 31, 2016, respectively. At September 30, 2017, approximately 90% of the portfolio consisted of securities that will mature within the next 12 months and the remainder of the securities will mature between one and two years from September 30, 2017. WMMRC also had $7.3 million in cash and cash equivalents at September 30, 2017.

~~Liquidity and Capital Resources~~

~~General~~

WMIH is organized as a holding company and has limited operations of its own. With respect to its own operations, WMIH’s continuing cash needs are limited to the payment of general and administrative expenses, costs related to possible acquisitions, dividends on the Series B Preferred Stock and, prior to the redemption thereof, principal and interest payments on the Second Lien Notes described below in this Item 2 of Part I, under “Notes Payable.” ~~As of September 29, 2017, the Second Lien Notes were fully redeemed by the Company and, as of October 2, 2017, the Second Lien Indenture was satisfied and discharged.~~

~~Our significant business operations are conducted through our wholly-owned reinsurance subsidiary, WMMRC, which formerly underwrote risks associated with our mortgage reinsurance programs,~~ASU 2019-12, but ~~has been operated in runoff and has not written any new business since September 26, 2008. There are restrictions on WMMRC’s ability to pay dividends which are described in more detail below. WMIH~~ does not ~~currently expect to pay dividends~~believe it will have a material impact on its ~~common shares.~~

~~WMMRC may seek opportunities to commute one or more~~consolidated financial statements.

Impact of its remaining reinsurance agreements, with a view toward accelerating the distribution of trust assets in excess of the amount needed to pay claims. Any such distributions would be available for general corporate purposes. ~~There can be no assurance that any such commutations will be consummated, or if so, on what terms.~~

~~In regard to the Series B Preferred Stock, we are required (if~~Inflation and ~~when declared by our Board~~Changing Prices

Our consolidated financial statements and until the Series B Preferred Stock is converted, redeemed or repurchased) to pay cumulative regular dividends out of funds legally available therefor at an annual rate of 3% per share of the liquidation preference of $1,000 per share of Series B Preferred Stock. WMIH has declared and paid $13.5 million, $13.5 million and $18.0 million of dividends on its Series B Preferred Stock during the nine months ended September 30, 2017 and 2016 and the year ended December 31, 2016, respectively, and has accrued an additional $0.7 million of dividends based on the 3% interest rate during each of the periods ended September 30, 2017 and 2016 and the year ended December 31, 2016, respectively.

The repayment of $18.8 million of Second Lien Notes and the $13.5 million in dividends on our Series B Preferred Stock were our largest uses of cash during the nine months ended September 30, 2017. The Second Lien Notesnotes thereto presented herein have been paid in full, however, the dividend obligation is likely to continue to be a significant financial obligation of the Company until we either consummate a Qualified Acquisition or redeem or repurchase the Series B Preferred Stock.

~~Unless we consummate a Qualified Acquisition, or enter into a definitive agreement to consummate an Acquisition (or the Series B Redemption Date is extended~~prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the Series B Preferred Stock), we will be required to redeem the Series B Preferred Stock on the Series B Redemption Date. Consummation of an Acquisition would cause the conversion into common stock of shares of Series B Preferred Stock having an aggregate liquidation preference equal to the cash proceeds utilizedchanges in the ~~Acquisition (unless~~relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the ~~Acquisition is a Qualified Acquisition, in which case~~increased cost of our operations. Unlike most industrial companies, nearly all of ~~the Series B Preferred Stock would be converted into common stock). The redemption of the Series B Preferred Stock would substantially deplete~~ our ~~available cash for acquisitions~~assets and business operations; could have a material adverse effect on our financial condition; and could adversely impact our ability to continue business operations. While we continue to work diligently to identify and consummate an Acquisition, there can be no assurance that we will consummate, or enter into a definitive agreement to consummate, an Acquisition prior to the Series B Redemption Date.

~~In connection with the foregoing, and because we~~liabilities are ~~mindful of the adverse consequences that could result upon a redemption of the Series B Preferred Stock, our Finance Committee and management have been working with financial advisors~~monetary in an effort to amend and extend the terms of the Series B Preferred Stock. We can provide no assurance we will be able to restructure, amend or refinance the Series B Preferred Stock and, if so, on what terms. For additional information regarding the foregoing, please see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview – Our Business Strategy and Operating Environment”.

~~Liquidity Management~~

The objective of liquidity management is to ensure the Company has the continuing ability to maintain cash flows that are adequate to fund operations and meet obligations and other commitments on a timely and cost-effective basis. The Company establishes and maintains liquidity guidelines for WMIH as well as for WMMRC, its principal operating subsidiary. Funds held by WMMRC are not available to WMIH to satisfy its liquidity needs. Any dividend or payment by WMMRC to WMIH must be approved by the Insurance Division of the State of Hawaii. In light of the restrictions on dividends applicable to WMMRC, WMIH’s principal sources of liquidity are its unrestricted investments, investment income derived from these investments and fees paid to WMIH by WMMRC with respect to services provided pursuant to the two services agreements approved by the Insurance Division of the State of Hawaii. Additionally, WMIH also has approximately $577.2 million of restricted cash held in escrow, which was received by WMIH in connection with the Series B Preferred Stock Financing. Because of the runoff nature of WMMRC’s business, as discussed above, all cash available to WMMRC is primarily used to pay reinsurance losses and loss adjustment expenses, ceding commissions, dividends to WMIH to pay interest and principal obligations on the Runoff Notes (prior to the full redemption which occurred on September 29, 2017), and general and administrative expenses.

The Company monitors operating activities, forecasts liquidity needs and adjusts composition of investment securities in order to address liquidity needs. The Company currently has negative monthly cash flows primarily due to loss expenses at WMMRC, general and administrative costs and dividend payments on the Series B Preferred Stock.nature. As a result, interest rates have a greater impact on our performance than do the ~~Company maintains a very high quality and short duration investment portfolio in order to match its liability profile at both~~effects of general levels of inflation. Further, interest rates do not necessarily move in the ~~consolidated organization.~~

~~WMMRC has net assets totaling $17.7 million~~same direction or to the same extent as the prices of goods and ~~$33.8 million as~~services.

GLOSSARY OF TERMS

This Glossary of ~~September 30, 2017~~Terms defines some of the terms that are used throughout this report and ~~December 31, 2016, respectively. These net assets are~~does not ~~immediately available~~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 ~~distribution to WMIH due to restrictions imposed~~purchase by Fannie Mae, Freddie Mac, or insured by the ~~trust arrangements referenced above,~~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 ~~requirement that~~co-investment partner share the Insurance Division of the State of Hawaii must approve dividends from WMMRC. Distributions from WMMRC to WMIH were, prior to full redemption on September 29, 2017, further restricted by the terms of the Runoff Notes described in Note 7: Notes Payable to the condensed consolidated financial statements in Item 1 of Part I of this Quarterly Report on Form 10-Q. Additionally, as more fully described in Note 14: Subsequent Events to the condensed consolidated financial statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, a distribution from WMMRC to WMIH of up to $10.7 million was approved by the Insurance Division of the State of Hawaii on September 13, 2017.

~~Capital Structure and Management~~

WMIH’s capital structure consists of stockholders’ equity, Series B Preferred Stock proceeds held in escrow which is classified as mezzanine and no term debt as of September 30, 2017. We issued term debt of $130.0 million represented by the Runoff Notes on the Effective Date. The First Lien Notes were redeemed in their entirety on April 15, 2015 and the First Lien Indenture was satisfied and discharged on April 27, 2015. The Second Lien Notes were redeemed in their entirety on September 29, 2017 and the Second Lien Indenture was satisfied and discharged on October 2, 2017

On the Effective Date, all shares of common and preferred equity securities previously issued by WMI were cancelled and extinguished. Prior to reincorporation, WMIH was authorized to issue up to 500,000,000 shares of common stock and up to 5,000,000 shares of preferred stock, each with a par value of $0.00001 per share. Upon reincorporation in Delaware, which is more fully described in Note 1: The Company and its Subsidiaries to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, and pursuant to WMIH’s Amended and Restated Certificate of Incorporation (“Certificate of Incorporation”), WMIH is authorized to issue up to 3,500,000,000 shares of common stock and up to 10,000,000 shares of preferred stock, each with a par value of $0.00001 per share. As of September 30, 2017, 206,714,132 shares of WMIH’s common stock were issued and outstanding, and 1,600,000 shares of its preferred stock were issued and outstanding.

On January 30, 2014, pursuant to an Investment Agreement, WMIH issued 1,000,000 shares of Series A Convertible Preferred Stock (the “Series A Preferred Stock”) for a purchase price of $11.1 million and warrants to purchase 61,400,000 shares of WMIH’s common stock, 30,700,000 of which have an exercise price of $1.32 per share and 30,700,000 of which have an exercise price of $1.43 per share. The Series A Preferred Stock has rights substantially similar to those associated with WMIH’s common stock, with the exception of a liquidation preference, conversion rights and customary anti-dilution protections. The Series A Preferred Stock has a liquidation preference equal to the greater of (i) $10.00 per one million shares of Series A Preferred Stock plus declared but unpaid dividends on such shares and (ii) the amount that the holder would be entitled to in a relevant transaction had the Series A Preferred Stock been converted to common stock of WMIH. The Series A Preferred Stock is convertible at a conversion price of $1.10 per share into shares of common stock of WMIH, either at the option of the holder or automatically upon transfer by KKR Fund Holdings L.P. (“KKR Fund”) to a non-affiliated party. As a result of the calculation of a beneficial conversion feature as required by Accounting Standards Codification 470, a preferred deemed dividend of $9.5 million was recorded in conjunction with the issuance of the Series A Preferred Stock. This preferred deemed dividend resulted in an increase to our accumulated deficit and an increase in additional paid in capital. Further, KKR Fund, as the holder of the Series A Preferred Stock and the warrants, has received other rights pursuant to the Investor Rights Agreement as more fully de~~scribed in~~ ~~Note 9: Capital Stock and Derivative Instruments to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.~~

On January 5, 2015, WMIH announced that it had completed the Series B Preferred Stock Financing and issued 600,000 shares of Series B Preferred Stock for aggregate gross proceeds of $600.0 million, pursuant to the Purchase Agreement with Citigroup Global Markets Inc. and KKR Capital Markets LLC (together the “Initial Purchasers”). In connection with the Series B Preferred Stock Financing, WMIH entered into an Escrow Agreement (the “Escrow Agreement”) with Citibank, N.A., as Escrow Agent, pursuant to which WMIH caused to be deposited with the Escrow Agent the amount of $598.5 million representing the net proceeds of the Series B Preferred Stock Financing less offeringexcess fees payable on January 5, 2015 but before payment of other offering fees and expenses (including fees contingent upon future events). These net proceeds will be released from escrow from time to time to WMIH as instructed by WMIH in amounts necessary to, among other things, explore and/or fund, in whole or in part, acquisitions, whether completed or not. The entire net proceeds will be released from escrow as instructed by WMIH as needed to consummate a Qualified Acquisition.

In connection with the Series B Preferred Stock Financing, WMIH filed with the Secretary of State of Washington Articles of Amendment of Articles of Incorporation (the “Articles of Amendment”) containing the Certificate of Designation creating the Series B Preferred Stock and designating the rights and preferences of the Series B Preferred Stock. Holders of shares of the Series B Preferred Stock are entitled to receive, when, as and if declared, cumulative regular dividends at an annual rate of 3% per share of the liquidation preference of $1,000 per share of Series B Preferred Stock, payable in cash. On each date that WMIH closes any Acquisition, outstanding shares of Series B Preferred Stock having an aggregate liquidation preference equal to the net proceeds of the offering utilized in such Acquisition (as defined below), on a pro rata ~~basis,~~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.

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.

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

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

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

Home 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 ~~automatically convert into shares~~guarantee a specific rate is set prior to funding the mortgage loan.

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

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

Mortgage Servicing Right (“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 addition, on the date WMIH closes a Qualified Acquisition, all outstanding shares of Series B Preferred Stock will automatically convert into shares of WMIH’s common stock. Each date that WMIH closes an Acquisition (including a Qualified Acquisition) willcertain cases, these lines may be a ~~“Mandatory Conversion Date.” Unless the Series B Preferred Stock has been previously repurchased~~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 ~~option~~request of the borrower.

Mortgage Servicing Liability (“MSL”).The right and obligation to service a ~~holder~~ ~~upon the occurrence~~loan or pool of loans and to receive a servicing fee as well as certain ~~put events~~ or mandatorily converted, WMIH will redeem all outstanding shares of Series B Preferred Stock, if any, on the Series B Redemption Date, which is the third anniversary of January 5, 2015 (or January 5, 2018). The reincorporation of WMIH from the State of Washington to the State of Delaware resultedancillary income. MSLs may be bought and sold, resulting in the ~~increase~~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 ~~size~~outstanding principal balance.

Primary Servicer. The servicer that owns the right to service a mortgage loan or pool of ~~its Board~~mortgage loans. This differs from a subservicer, which has a contractual agreement with the primary servicer to service a mortgage loan or pool of ~~Directors from 7~~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 upborrowers with excellent credit records and a monthly income at least three to ~~11 members~~four times greater than their monthly housing expenses (mortgage payments plus taxes and ~~increased WMIH’s authorized number of shares of common stock in an amount sufficient to permit~~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 ~~conversion of all shares of Series B Preferred Stock (collectively, the “Reincorporation”~~criteria set by Fannie Mae, Freddie Mac or Ginnie Mae.

Real Estate Owned (”REO”).

The foregoing transactions pertaining to the Series A Preferred Stock and Series B Preferred Stock are more fully described in Note 9: Capital Stock and Derivative Instruments to the condensed consolidated financial statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.

~~WMIH may, subject to market conditions, determine to incur additional indebtedness or raise additional equity capital in connection with undertaking one or more acquisitions.~~

While WMIH is not subject to regulatory capital requirements, WMMRC is required to comply with various solvency and liquidity requirements pursuant to the insurance laws of the State of Hawaii. WMMRC is required to maintain minimum capital and surplus requirements of an amount established under applicable Hawaii law and deemed appropriate Property acquired by the Insurance Division of the State of Hawaii. As of September 30, 2017, management believes that WMMRC is compliant with applicable statutory solvency, liquidity and minimum capital and surplus requirements. The payment of dividends by WMMRC is subject to statutory restrictions imposed by Hawaii insurance laws and regulations and requires approval from the Insurance Division of the State of Hawaii. In addition, the Second Lien Indenture, prior to the discharge and release on September 29, 2017, imposed restrictions on WMMRC business activities. During the nine months ended September 30, 2017 and the year ended December 31, 2016, WMMRC paid $16.0 million and $5.7 million, respectively, in dividends to WMIH.

~~On the Effective Date, WMI and WMIIC (together, the “Debtors”) (and now the~~ ~~WMI Liquidating Trust (the “Trust”)~~servicer on behalf of the ~~Debtors) continued~~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 ~~dispute whether~~ the ~~interests~~owner of ~~certain former~~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.

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.

Servicing Advances. In the course of servicing loans, servicers are required to make advances that are reimbursable from collections on the related mortgage loan or pool of loans. There are typically three types of servicing advances: P&I advances, T&I Advances and Corporate Advances.

(i) P&I advances cover scheduled payments of principal and interest that have not been timely paid by borrowers. P&I Advances serve to facilitate the cash flows paid to holders of ~~“Equity Interests”~~securities issued by the residential MBS trust. The servicer is not the insurer or ~~“Claims” (in each case as those terms are defined~~guarantor of the MBS and thus has the right to cease the advancing of P&I, when the servicer deems the next advance nonrecoverable.

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

(iii) Corporate advances pay costs, fees and expenses incurred in foreclosing upon, preserving defaulted loans and selling REO, including attorneys’ and other professional fees and expenses incurred in connection with foreclosure and liquidation or other legal proceedings arising in the course of ~~Affiliated Debtors Pursuant to Chapter 11 of~~servicing the ~~United States Bankruptcy Code (as modified, the “Plan”)) against the Debtors should be allowed. As a result, pursuant~~defaulted mortgage loans.

Servicing advances are reimbursed to the Plan, on the Effective Date, a “Disputed Equity Escrow” (as defined in the Plan) was created for the benefit of each holder of a “Disputed Equity Interest” (as defined in the Plan). Such Disputed Equity Escrow was created to hold shares of WMIH’s common stock (as well as any dividends, gains or income attributable in respect of such common stock) allocable, on a pro rata basis, to each holder of such a Disputed Equity Interestservicer if and when ~~such Disputed Equity Interest becomes an “Allowed Equity Interest” (as such term~~the borrower makes a payment on the underlying mortgage loan at the time the loan is ~~defined~~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 ~~Plan). All such Equity Interests~~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 ~~constitute Disputed Equity Interests pursuant~~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 ~~Plan until such time, or from time to time, as each Disputed Equity Interest has been compromised and settled or allowed or disallowed by a final order~~owner of the ~~bankruptcy court.~~

~~The liquidating trustee~~loans for the activities of the ~~Trust, William Kosturos (the “Liquidating Trustee”~~subservicer.

Unpaid Principal Balance (“UPB”), acts as escrow agent with respect to the Disputed Equity Escrow. As of December 31, 2016, 1,546,294 shares of WMIH’s common stock were held in the Disputed Equity Escrow. Until such time as all of WMIH’s common stock has been distributed from the Disputed Equity Escrow in accordance with the Plan (e.g., as a result of all “Disputed Equity Claims” (as such term is defined in the Plan) becoming Allowed Equity Interests or all Disputed Equity Claims being disallowed), the Liquidating Trustee is vested with the authority to exercise voting or consent rights with respect to such stock; provided, however, that the Liquidating Trustee is obligated to vote or consent, as the case may be, as to such stock in the same proportion as all other holders of WMIH’s common stock have voted or consented, in each case on an issue-by-issue basis. . The Trust has no right to or entitlement in any shares of WMIH’s common stock held in the Disputed Equity Escrow. Additionally, WMIH does not have any right to, or interest in, any shares of its common stock held by the Disputed Equity Escrow.

~~Notes Payable~~

~~On the Effective Date, WMIH issued $110.0 million aggregate principal~~ amount of ~~its 13% Senior First Lien Notes due 2030 (the “First Lien Notes”) under an Indenture, dated as~~principal outstanding on a mortgage loan or a pool of March 19, 2012 (the “First Lien Indenture”), between WMIH and Wilmington Trust, National Association, as Trustee. In addition, WMIH issued $20.0 million aggregate principal amount of its 13% Senior Second Lien Notes due 2030 (the “Second Lien Notes” and,mortgage loans. UPB is used together with the ~~First Lien Notes,~~servicing fees and ancillary incomes as a means of estimating the ~~“Runoff Notes”) under an Indenture, dated as~~future revenue stream for a servicer.

U.S. Department of ~~March 19, 2012 (the “Second Lien Indenture” and, together with~~Agriculture (“USDA”). The USDA is a cabinet-level department of the ~~First Lien Indenture,~~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 ~~“Indentures”), between WMIH and Law Debenture Trust Company of New York, as Trustee.~~ ~~On January 5, 2017, we were notified by The Law Debenture Company of New York that it had completed~~secondary market. Pursuant to a warehouse facility, a loan originator typically agrees to transfer to a counterparty certain mortgage loans against the transfer of ~~substantially all of its corporate trust business~~funds by the counterpart, with a simultaneous agreement by the counterpart to ~~Delaware Trust Company, and that Delaware Trust Company had become~~transfer the ~~successor trustee under the Second Lien Indenture. The First Lien Notes were redeemed in their entirety on April 15, 2015, and the First Lien Indenture was satisfied and discharged on April 27, 2015.~~ ~~The Second Lien Notes~~ ~~were redeemed in their entirety on September 29, 2017, and the Second Lien Indenture was satisfied and discharged on October 2, 2017.~~

~~Contractual Obligations, Commitments and Contingencies~~

WMMRC has engaged a Hawaii-based service provider, Marsh Management Services Inc., to provide accounting and related management services for its operations. In exchange for performing these services, WMMRC pays such service provider a management fee.

~~On March 19, 2012, WMIH entered into an Investment Management Agreement with WMMRC. Under the terms of this agreement, WMIH receives a fee from WMMRC equal~~loans back to the ~~product~~originator at a date certain, or on demand, against the transfer of ~~(x)~~funds from the ~~ending dollar amount~~originator.

Wholesale Originations. A type of assets under management during the calendar month in question and (y) .002 divided by 12. WMIH is responsible for investing the funds of WMMRC based on applicable investment criteria and subject to rules and regulationsmortgage loan origination pursuant to which ~~WMMRC is subject. The Investment Management Agreement has been approved by the Insurance Division of the State of Hawaii.~~

~~On March 19, 2012, WMIH entered into an Administrative Services Agreement with WMMRC. Under the terms of this agreement, WMIH receives~~a lender acquires refinancing and purchase money mortgage loans from WMMRC a fee of $110 thousand per month. WMIH is responsible for providing administrative services to support, among other things, supervision, governance, financial administration and reporting, risk management and claims management as may be necessary, together with such other general or specific administrative services that may be reasonably required or requested by WMMRC in the ordinary course of its business. The Administrative Services Agreement has been approved by the Insurance Division of the State of Hawaii.

Total amounts incurred under the Investment Management Agreement and Administrative Services Agreement totaled $1.0 million and $1.0 million for the nine months ended September 30, 2017 and 2016, respectively. The expense and related income eliminate on consolidation.

On March 22, 2012, WMIH and the WMI Liquidating Trust (the “Trust”) entered into a Transition Services Agreement (the “TSA”). Pursuant to the TSA, the Trust makes available certain services and employees to the Company. The TSA provided the Company with office space (prior to the Company entering into its own lease) for its current employees and continues to provide basic infrastructure and support services to facilitate the Company’s operations. The TSA as amended, extends the term of the agreement through January 31, 2018, with automatic renewals thereafter for successive additional three-month terms, subject to non-renewal at the end of any additional term upon written notice by either party at least 30 days prior to the expiration of the additional term.

In connection with implementing the Plan, certain holders of specified “Allowed Claims” had the right to elect to receive such holder’s “Pro Rata Share of the Common Stock Allotment.” Essentially, the Plan defines the “Pro Rata Share of the Common Stock Allotment” as a pro rata share of ten million (10,000,000) shares of WMIH’s common stock (i.e. five percent (5%)) issued and outstanding on the Effective Date. Holders exercising the foregoing election did so in lieu of receiving (i) 50% of such holder’s interest in and to certain litigation proceeds that could be realized by the Trust on account of certain claims and causes of action asserted by the Trust as contemplated by the Plan (“Litigation Proceeds”), and (ii) some or all of the Runoff Notes to which such holder may be entitled (if such holder elected to receive Runoff Notes in accordance with the terms of the Plan).

On or about October 14, 2014, the Trust filed a lawsuit in King County Superior Court in the State of Washington against 16 former directors and officers of WMI (the “D&O Litigation”). The Trust’s complaint alleged, among other things, that the defendants named therein breached their fiduciary duties to WMI and committed corporate waste and fraud by squandering WMI’s financial resources. In connection with the settlement of the D&O Litigation, during the year ended December 31, 2015, among the Trust, certain former directors and officers of WMI and certain insurance carriers that underwrote director and officer liability insurance policies for the benefit of WMI and its affiliates (including such former directors and officers), such insurance carriers agreed to pay the Trust $37.0 million, of which $3.0 million was placed into a segregated reserve account (the “RSA Reserve”) to be administered by a third party ~~pursuant to~~correspondent lenders where the ~~terms of a Reserve Settlement Agreement (the “RSA”).~~

~~During~~lender funds the year ended December 31, 2016 and 2015, WMIH had other income of $123 thousand and $7.8 million, respectively, as a result of its receipt of its share of net Litigation Proceeds related to the D&O Litigation. As of September 30, 2017, $1.5 million remained in the RSA Reserve. Under the RSA, funds are released from the RSA Reserve to the Trust if and when certain designated conditions are satisfied. If and when these funds are released to the Trust, and to the extent WMIH is entitled to receive such funds in accordance with the Plan, it is anticipated the Trust will make payments to WMIH in an amount equal to WMIH’s share of Litigation Proceeds as provided under the Plan. Due to the contingent nature of future distributions from the RSA Reserve, there can be no assurance that WMIH will receive any distributions from the remaining balance in the RSA Reserve in the future. During the nine months ended September 30, 2017, WMIH has recorded income from Litigation Proceeds of $123 thousand. As of September 30, 2017, WMIH had not received any Litigation Proceeds, other than as described above.

As a member of the Litigation Subcommittee of the Trust, Mr. Willingham, who serves as a WMIH Board member and Chairman of the WMIH Audit Committee, participates in overseeing the prosecution of recovery claims by the Trust.

As a result of the Company’s reorganization in bankruptcy, an intangible asset was identified related to reinsurance contracts which were held by WMMRC. The contracts were evaluated to determine whether the value attributable to such contracts was either above market or in a loss contract position. After taking such evaluation into consideration, a loss contract reserve totaling $63.1 million was recorded on the Effective Date. The reserve will be evaluated at each reporting date for changes to its value. As of September 30, 2017 and December 31, 2016, the loss contract reserve was analyzed and determined to have a value of zero and $5.6 million, respectively. The value of this reserve decreased by $5.6 million during the nine months ended September 30, 2017 and decreased by $2.3 million during the nine months ended September 30, 2016. The value of this reserve has been reduced to zero, primarily due to the extraction of cash proceeds from WMMRC occurring earlier than initially projected and the elimination of the higher cost of capital associated with the Runoff Notes which have now been paid in their entirety. For additional information see Note 2: Significant Accounting Policies in Item 1 of Part I of this Quarterly Report on Form 10-Q.

As of January 30, 2014, pursuant to the terms and conditions of the Investment Agreement, WMIH sold to KKR Fund 1,000,000 shares of Series A Preferred Stock, having the terms, rights, obligations and preferences contained in the Certificate of Incorporation, for a purchase price equal to $11.1 million and issued to KKR Fund warrants to purchase, in the aggregate, 61.4 million shares of WMIH’s common stock, 30.7 million of which have an exercise price of $1.32 per share and 30.7 million of which have an exercise price of $1.43 per share (together, the “Warrants”). KKR Fund’s rights as a holder of the Series A Preferred Stock and the Warrants, and the rights of any subsequent holder that is an affiliate of KKR Fund (together with KKR Fund, the “Holders”) are governed by the Investor Rights Agreement. The Investor Rights Agreement provides the Holders with registration rights, including three long form demand registration rights, unlimited short form demand registration rights and customary piggyback registration rights with respect to WMIH’s common stock (and WMIH’s common stock underlying the Series A Preferred Stock and the Warrants), subject to certain minimum thresholds, customary blackout periods and lockups of 180 days. On July 1, 2015, WMIH filed a shelf registration statement (the “Initial Registration Statement”) covering resales of Series B Preferred Stock and WMIH’s common stock issuable upon mandatory conversion of the Series B Preferred Stock. On November 23, 2015, WMIH amended the Initial Registration Statement to cover WMIH’s common stock issuable upon conversion of the Series A Preferred Stock and shares of WMIH’s common stock issuable upon exercise of warrants issued in connection with the issuance of our Series A Preferred Stock currently outstanding (as amended, the “Registration Statement”). The Registration Statement was declared effective under the Securities Act on November 25, 2015. Moreover, for as long as the Holders beneficially own any shares of common stock of WMIH or Series A Preferred Stock or any of the Warrants, WMIH has agreed to provide customary Rule 144A information rights, to provide the Holders with regular audited and unaudited financial statements and to allow the Holders or their representatives to inspect WMIH’s books and records. For further information on the Investment Agreement and the Investor Rights Agreement, see Note 8: Financing Arrangements and Note 9: Capital Stock and Derivative Instruments, to the condensed consolidated financial statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.loan.

In conjunction with the Series B Preferred Stock Financing, the Company is contractually committed to make certain fee payments if future events occur. These fees are recorded and presented on our condensed consolidated balance sheets as other liabilities. At September 30, 2017, the total balance of $13.8 million of other liabilities is comprised of $12.3 million of accrued fees relating to the Series B Preferred Stock Financing, an accrual for professional fees currently payable of approximately $0.8 million, $0.7 million of accrued dividends relating to the Series B Preferred Stock and several small accruals for recurring business expenses.

~~Off-Balance Sheet Financing Arrangements~~

We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.

~~Item 3.~~

~~Quantitative and Qualitative Disclosures About Market Risk.~~

Item 3. Quantitative and Qualitative Disclosures about Market Risk

~~We are principally exposed~~

Refer to ~~three types~~the discussion included in Part II, Item 7A of ~~market risk:~~

~~interest rate risk;~~

~~credit risk; and~~

~~liquidity risk.~~

~~There have been no material changes to our market risks as disclosed in~~ our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~

2019. There have been no material changes in the types of market risks faced by us since December 31, 2019 except for the broad effects of the COVID-19 pandemic. As we cannot predict the duration or scope of the COVID-19 pandemic, the negative financial impact to our results cannot be reasonably estimated at this time.

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.

We utilize a discounted cash flow analysis to determine the fair value of MSRs and the impact of parallel interest rate shifts on MSRs. The primary assumptions in this model are prepayment speeds, earnings related to float and market discount rates. However, this analysis ignores the impact of interest rate changes on certain material variables, such as the benefit or detriment on the value of future loan originations, non-parallel shifts in the spread relationships between MBS, swaps and U.S. Treasury rates and changes in primary and secondary mortgage market spreads. For mortgage loans, IRLCs and forward delivery commitments on MBS, we rely on a model in determining the impact of interest rate shifts. In addition, 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 March 31, 2020 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 March 31, 2020 given hypothetical instantaneous parallel shifts in the yield curve. Results could differ materially.



Table 34. Change in Fair Value



	March 31, 2020
	Down 25 bps			Up 25 bps
Increase (decrease) in assets
Mortgage servicing rights at fair value	$	(229	)	$	235
Mortgage loans held for sale at fair value	10			(12		)
Derivative financial instruments:
Interest rate lock commitments	31			(37		)
Total change in assets	(188		)	186
Increase (decrease) in liabilities
Mortgage servicing rights liabilities at fair value	(5		)	4
Excess spread financing at fair value	(46		)	51
Derivative financial instruments:
Forward MBS trades	36			(44		)
Total change in liabilities	(15		)	11
Total, net change	$	(173	)	$	175

~~Item 4.~~

~~Controls and Procedures.~~

Item 4.Controls and Procedures

Evaluation of ~~disclosure controls~~Disclosure Controls and ~~procedures.~~

Procedures

Our management, ~~has evaluated, under the supervision and~~ with the participation of our Chief Executive Officer and ~~Interim~~ Chief Financial Officer, evaluated the effectiveness of ~~the~~our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of ~~the Company~~1934, as amended (“Exchange Act”), as of ~~September 30, 2017.~~ March 31, 2020.

Based on ~~that~~this evaluation, our Chief Executive Officer and ~~Interim~~ Chief Financial Officer ~~have~~ concluded that, as of ~~September 30, 2017, the~~March 31, 2020, our disclosure controls and procedures ~~(as defined~~are effective. Disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in ~~Rules 13a-15(e) and 15d-15(e)~~reports that we file or submit under the Exchange ~~Act) were effective in ensuring that information required to be disclosed by the Company in reports the Company files or submits under the Exchange Act:~~

~~(1)~~Act is recorded, processed, summarized, and reported within the time periods specified in the ~~Securities and Exchange Commission~~SEC’s rules and forms, and

~~(2)~~ that such information is accumulated and communicated to ~~the Company’s~~our management, including ~~the Company’s principal executive~~our Chief Executive Officer and ~~principal financial officers, or persons performing similar functions,~~Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control ~~Over~~over Financial Reporting

~~There was~~

During the three months ended March 31, 2020, no ~~change~~changes in ~~the Company’s~~our internal control over financial reporting ~~(as~~occurred that ~~term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during its most recent fiscal quarter that has~~have materially affected, or isare reasonably likely to materially affect, ~~the Company’s~~our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

PART ~~II—~~II – OTHER INFORMATION

~~Item 1.~~

~~Legal Proceedings.~~

Item 1.Legal Proceedings

We are a state licensed, non-bank mortgage lender, servicer and ancillary services provider. From time to time, we and our subsidiaries are involved in a number of ~~September 30, 2017,~~legal proceedings, including, but not limited to, judicial, arbitration, regulatory and governmental proceedings relating to matters that arise in connection with the ~~Company was~~conduct of our business. These legal proceedings are generally based on alleged violations of federal, state and local laws and regulations governing our mortgage servicing and lending activities including, without limitation, consumer protection laws, but may also include alleged violations of securities, employment, contract, tort, common law fraud and other laws. Legal proceedings include open and pending examinations, information gathering requests and investigations by governmental, regulatory and enforcement agencies as well as litigation in judicial forums and arbitration proceedings.

Our business is subject to extensive examinations, investigations and reviews by various federal, state and local governmental, regulatory and enforcement agencies. We have historically had and continue to have a number of open investigations with these agencies. We continue to receive governmental and regulatory requests for information, subpoenas, examinations and other inquiries. We are currently the subject of various governmental or regulatory investigations, subpoenas, examinations and inquiries related to our residential loan servicing and origination practices, bankruptcy and collections practices, financial reporting and other aspects of our businesses. These matters include investigations by the Consumer Financial Protection Bureau (the “CFPB”), the Securities and Exchange Commission, the Executive Office of the United States Trustees, the Department of Justice, the Office of the Special Inspector General for the Troubled Asset Relief Program, the U.S. Department of Housing and Urban Development, the multi-state coalition of mortgage banking regulators and various State Attorneys General. These specific matters and other pending or potential future investigations, subpoenas, examinations or inquiries may lead to administrative, civil or criminal proceedings or settlements and possibly result in remedies including fines, penalties, restitution, or alterations in our business practices and in additional expenses and collateral costs. We are cooperating fully in these matters.

For example, we continue to progress towards resolution of certain legacy regulatory matters involving examination findings in prior years for alleged violations of certain laws related to our business practices. We have been in discussions with the multi-state committee of mortgage banking regulators and various State Attorneys General concerning a potential resolution of their investigations. We are continuing to cooperate with all parties. In connection with these discussions, we previously recorded an accrual. These discussions may not result in a settlement of the matter; furthermore, any such settlement may exceed the amount accrued as of March 31, 2020. Moreover, if the discussions do not result in a settlement, the regulators and State Attorneys General may seek to exercise their enforcement authority through litigation or other proceedings and seek injunctive relief, damages, restitution and civil monetary penalties, which could have a material adverse effect on our business, reputation, financial condition and results of operations.

Further, on April 24, 2018, the CFPB notified us that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (NORA) process, the CFPB’s Office of Enforcement is considering whether to recommend that the CFPB take enforcement action against us, alleging violations of the Real Estate Settlement Procedures Act, the Consumer Financial Protection Act, and the Homeowners Protection Act, which stems from a 2014 examination. The purpose of a NORA letter is to provide a party being investigated an opportunity to present its position to the CFPB before an enforcement action may be recommended or ~~aware of, any pending legal~~commenced. The CFPB may seek to exercise its enforcement authority through settlement, administrative proceedings or ~~investigations requiring disclosure~~litigation and seek injunctive relief, damages, restitution and civil monetary penalties, which could have a material adverse effect on our business, reputation, financial condition and results of operations. We have not recorded an accrual related to this matter as of March 31, 2020 as we do not believe that the possible loss or range of loss arising from any such action is estimable. We are continuing to cooperate with the CFPB.

Similarly, we are in discussions with the Executive Office of the United States Trustees concerning certain legacy issues with respect to bankruptcy servicing practices. In connection with these discussions, we are undertaking certain voluntary remediation activities with respect to loans at issue in these matters. While we and the Executive Office of the United States Trustees are engaged in discussions to potentially resolve these issues, there is no guarantee a resolution will occur. Moreover, if the discussions do not result in a resolution, the Executive Office of the United States Trustees may seek redress through litigation or other proceedings and seek injunctive relief, damages and restitution in addition to the remediation activities, which could have a material adverse effect on our business, reputation, financial condition and results of operations. However, we believe it is premature to predict the potential outcome or to estimate the financial impact to us in connection with any potential action or settlement arising from this ~~time.~~

matter, including the voluntary remediation activities undertaken and to be undertaken by us.

Responding to these matters requires us to devote substantial resources, resulting in higher costs and lower net cash flows. Adverse results in any of these matters could further increase our operating expenses and reduce our revenues, require us to change business practices and limit our ability to grow and otherwise materially and adversely affect our business, reputation, financial condition or results of operation.

~~Item 1A.~~

~~Risk Factors.~~

Item 1A.Risk Factors

~~In addition~~

There have been no material changes or additions to the ~~information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the~~risk factors ~~discussed in “Part I-Item 1A. Risk~~previously disclosed under “Risk Factors” included in our Annual Report on Form 10-K filed for the year ended December 31, ~~2016. There have been no material changes~~2019, except for the following:

The COVID-19 pandemic may adversely impact our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic introduces unprecedented uncertainty in the economy, including the risk of a significant employment shock and recessionary conditions, with implications for the health and safety of our ~~risk factors from those disclosed~~employees, borrower delinquency rates, forbearance take-up rates under the forbearance program included in ~~such Annual Report.~~the CARES Act and the related funding for the P&I and T&I servicing advances, the sources, adequacy and availability of financing to fund advances, origination volumes and our overall profitability and liquidity.

The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

We did not make any repurchases of our shares during the three months ended March 31, 2020.

Item 3. Defaults Upon Senior Securities

None.

Item 4.Mine Safety Disclosures

Not applicable.

Item 5.Other Information

None.

Item 6.Exhibits

~~Item 6.~~

		Incorporated by Reference
Exhibit Number	Description	Form	File No.	Exhibit	Filing Date	Filed or Furnished Herewith

10.1**	Form of Performance Stock Unit Agreement - Employee					X
10.2**	Form of Performance Stock Unit Agreement - Special Retirement Provisions					X
10.3	Amendment Number Thirteen to the Second Amended and Restated Master Repurchase Agreement Dated as of January 29, 2016 between Barclays Bank PLC, as Agent and Nationstar Mortgage LLC, as Seller, dated March 30, 2020~~Exhibits.~~					X
31.1	Certification by Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
31.2	Certification by Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
32.1	Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002					X
32.2	Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002					X
101.INS	XBRL Instance Document					X
101.SCH	XBRL Taxonomy Extension Schema Document					X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document					X
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document					X
101.LAB	XBRL Taxonomy Extension Label Linkbase Document					X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document					X

~~The following exhibits are filed~~

** Management contract, compensatory plan or ~~incorporated by reference as part of this Quarterly Report on Form 10-Q.~~

Incorporated by reference

Exhibit
Number

Exhibit Description
Form

Exhibit

Filing Date

Filed Herewith

3.1

Amended and Restated Certificate of Incorporation of WMIH Corp.

8-K12G3

3.1

5/13/15

��

3.2

Amended and Restated Bylaws of WMIH Corp.

8-K12G3

3.2

5/13/15

12.1

Statement Regarding Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Dividends

X

31.1

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

X

31.2

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

X

32.1

Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

X

101.INS

XBRL Instance Document.

X

101.SCH

XBRL Taxonomy Extension Schema Document.

X

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

X

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

X

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

X

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

X

arrangement.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	~~WMIH CORP.~~ MR. COOPER GROUP INC.
	~~(Registrant)~~
~~Dated: November 9, 2017~~ April 30, 2020	~~By:~~	/s/ ~~William C. Gallagher~~ Jay Bray
Date	~~Name:~~	~~William C. Gallagher~~
	~~Title:~~	Jay Bray Chief Executive Officer (Principal Executive Officer)
~~Dated: November 9, 2017~~	~~By:~~	~~/s/ Timothy F. Jaeger~~
April 30, 2020	~~Name:~~	~~Timothy F. Jaeger~~ /s/ Christopher G. Marshall
Date	~~Title:~~	~~Interim~~ Christopher G. Marshall Vice Chairman & Chief Financial Officer (Principal Financial and Accounting Officer)

	September 30, 2017		December 31, 2016 ⁽¹⁾
ASSETS:
Investments held in trust:
Fixed-maturity securities	$	9,022	$	29,206
Cash equivalents held in trust		6,804		2,176
Total investments held in trust		15,826		31,382
Cash and cash equivalents		25,542		2,491
Fixed-maturity securities		1,400		47,625
Restricted cash		577,220		573,347
Derivative asset - embedded conversion feature		111,877		80,651
Accrued investment income		109		187
Other assets		764		507
Total assets	$	732,738	$	736,190
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Liabilities:
Notes payable - principal	$	—	$	18,774
Notes payable - interest		—		203
Losses and loss adjustment reserves		705		811
Losses payable		29		53
Unearned premiums		33		270
Accrued ceding commissions		57		22
Loss contract reserve		—		5,645
Other liabilities		13,774		14,063
Total liabilities		14,598		39,841
Commitments and contingencies
Redeemable convertible series B preferred stock, $0.00001 par value; 600,000 shares issued and outstanding as of September 30, 2017 and December 31, 2016; aggregate liquidation preference of $600,000,000 as of September 30, 2017 and December 31, 2016		502,213		502,213
Stockholders’ equity:
Convertible series A preferred stock, $0.00001 par value; 1,000,000 shares issued and outstanding as of September 30, 2017 and December 31, 2016; aggregate liquidation preference of $10 as of September 30, 2017 and December 31, 2016		—		—
Common stock, $0.00001 par value; 3,500,000,000 authorized; 206,714,132 and 206,380,800 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively		2		2
Additional paid-in capital		108,830		108,415
Retained earnings		107,095		85,719
Total stockholders’ equity		215,927		194,136
Total liabilities, redeemable convertible preferred stock and stockholders’ equity	$	732,738	$	736,190

	Three months ended September 30, 2017			Three months ended September 30, 2016			Nine months ended September 30, 2017			Nine months ended September 30, 2016
Revenues:
Premiums earned	$	344		$	786		$	1,103		$	2,426
Net investment income		1,943			498			4,826			1,747
Total revenues		2,287			1,284			5,929			4,173
Operating expenses:
Losses and loss adjustment expense		48			183			207			702
Ceding commission expense		44			75			137			234
General and administrative expense		2,117			1,357			5,915			4,878
Loss contract reserve reduction		(210	)		(565	)		(5,645	)		(2,362	)
Interest expense		579			636			1,788			1,994
Total operating expenses		2,578			1,686			2,402			5,446
Net operating (loss) income		(291	)		(402	)		3,527			(1,273	)
Other (income) expense:
Other (income)		(123	)		—			(123	)		—
Unrealized (gain) loss on change in fair value of derivative embedded conversion feature		(38,579	)		16,243			(31,226	)		(62,587	)
Total other (income) expense		(38,702	)		16,243			(31,349	)		(62,587	)
Income (loss) before income taxes		38,411			(16,645	)		34,876			61,314
Income tax expense (benefit)		—			—			—			—
Net income (loss)		38,411			(16,645	)		34,876			61,314
Redeemable convertible series B preferred stock dividends		(4,500	)		(4,500	)		(13,500	)		(13,500	)
Net income (loss) attributable to common and participating stockholders	$	33,911		$	(21,145	)	$	21,376		$	47,814
Basic net income (loss) per share attributable to common stockholders (Note 12)	$	0.06		$	(0.10	)	$	0.04		$	0.10
Shares used in computing basic net income (loss) per share		202,660,492			202,341,209			202,573,315			202,247,275
Diluted net income (loss) per share attributable to common stockholders (Note 12)	$	0.06		$	(0.10	)	$	0.04		$	0.09
Shares used in computing diluted net income (loss) per share		212,726,121			202,341,209			212,638,944			237,575,014

	Series B Redeemable Convertible Preferred Stock				Series A Convertible Preferred Stock				Common Stock
	Shares		Amount		Shares		Amount		Shares		Amount		Additional paid-in capital		(Accumulated deficit) retained earnings			Total stockholders’ equity
Balance at January 1, 2016		600,000		502,213		1,000,000		—		206,168,035		2		107,757		(97,981	)		9,778
Net income		—		—		—		—		—		—		—		201,700			201,700
Redeemable convertible series B preferred stock dividends		—		—		—		—		—		—		—		(18,000	)		(18,000	)
Issuance of common stock under restricted stock compensation arrangement		—		—		—		—		212,765		—		—		—			—
Equity-based compensation		—		—		—		—		—		—		658		—			658
Balance at December 31, 2016		600,000		502,213		1,000,000		—		206,380,800		2		108,415		85,719			194,136
Net income		—		—		—		—		—		—		—		34,876			34,876
Redeemable convertible series B preferred stock dividends		—		—		—		—		—		—		—		(13,500	)		(13,500	)
Issuance of common stock under restricted stock compensation arrangement		—		—		—		—		333,332		—		—		—			—
Equity-based compensation		—		—		—		—		—		—		415		—			415
Balance at September 30, 2017		600,000	$	502,213		1,000,000	$	—		206,714,132	$	2	$	108,830	$	107,095		$	215,927

	Nine months ended September 30, 2017			Nine months ended September 30, 2016
Cash flows from operating activities:
Net income	$	34,876		$	61,314
Adjustments to reconcile net income to net cash (used in) operating activities:
Amortization of premium or discount on fixed maturity securities		108			247
Net realized loss (gain) on sale of investments		63			(19	)
Unrealized (gain) on trading securities		(67	)		(83	)
Unrealized (gain) on derivative embedded conversion feature		(31,226	)		(62,587	)
Equity-based compensation		415			484
Changes in assets and liabilities:
Accrued investment income		78			(18	)
Other assets		(257	)		(270	)
Cash equivalents held in trust		(4,628	)		1,358
Restricted cash		(3,873	)		(1,476	)
Losses and loss adjustment reserves		(106	)		(2,733	)
Losses payable		(24	)		(395	)
Unearned premiums		(237	)		(463	)
Accrued ceding commission expense		35			(8	)
Accrued interest on notes payable		(203	)		(24	)
Loss contract reserve		(5,645	)		(2,362	)
Other liabilities		(289	)		(626	)
Total adjustments		(45,856	)		(68,975	)
Net cash used in operating activities		(10,980	)		(7,661	)
Cash flows from investing activities:
Purchase of investments		(19,973	)		(130,469	)
Proceeds from sales and maturities of investments		86,278			146,920
Net cash provided by investing activities		66,305			16,451
Cash flows from financing activities:
Redeemable convertible series B preferred stock dividends		(13,500	)		(13,500	)
Notes payable – principal repayments		(18,774	)		(2,185	)
Net cash used in financing activities		(32,274	)		(15,685	)
Increase (decrease) in cash and cash equivalents		23,051			(6,895	)
Cash and cash equivalents, beginning of period		2,491			9,924
Cash and cash equivalents, end of period	$	25,542		$	3,029
Supplementary disclosure of cash flow information:
Cash paid during the period:
Interest	$	1,991		$	2,008

	September 30, 2017		December 31, 2016
Case-basis reserves	$	174	$	553
IBNR reserves		1		—
Premium deficiency reserves		530		258
Total losses and loss adjustment reserves	$	705	$	811


	Nine months ended September 30, 2017			Year ended December 31, 2016
Balance at beginning of period	$	811		$	5,063
Incurred (released) - prior periods		207			(669	)
Paid or terminated - prior periods		(313	)		(3,583	)
Total losses and loss adjustment reserves	$	705		$	811

	September 30, 2017
Class of securities:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. government treasury securities	$	250	$	—	$	—		$	250
Obligations of U.S. government sponsored enterprises		2,749		—		(7	)		2,742
Corporate debt securities		3,683		—		(2	)		3,681
Foreign corporate debt securities		3,750		—		(1	)		3,749
Total fixed-maturity securities		10,432		—		(10	)		10,422
Less total unrestricted fixed-maturity securities		1,402		—		(2	)		1,400
Total fixed-maturity securities held in trust	$	9,030	$	—	$	(8	)	$	9,022

	Amortized Cost		Estimated Fair Value
Maturity in:
2017	$	6,750	$	6,749
2018		3,682		3,673
Total fixed-maturity securities	$	10,432	$	10,422


	January 1, 2017 to September 30, 2017				January 1, 2016 to December 31, 2016
	Transfers from Level 1 to Level 2		Transfers from Level 2 to Level 1			Transfers from Level 1 to Level 2		Transfers from Level 2 to Level 1
Class of securities:
Corporate debt securities	$	—	$	901		$	—	$	5,737
Foreign corporate debt securities		—		—			—		5,295
Total transfers	$	—	$	901		$	—	$	11,032

Amortization Schedule (in thousands)	September 30, 2017 unamortized dollar value
4th quarter 2017	$	103
1st quarter 2018		98
2nd quarter 2018		71
3rd quarter 2018		71
4th quarter 2018		71
1st quarter 2019		66
2nd quarter 2019		36
3rd quarter 2019		36
4th quarter 2019		36
1st quarter 2020		31
Unamortized fair-value - subject to vesting schedule		619
Unamortized fair-value - event dependent		4,343
Total unamortized dollar value		4,962

	Number of restricted stock awards outstanding		Weighted-average grant date fair value		Aggregate fair value (in thousands)
Outstanding—January 1, 2016		6,168,035		2.1230		13,095
Restricted stock awards granted during 2016		212,765		2.3500		500
Restricted stock awards released or forfeited during 2016		—		—		—
Outstanding—December 31, 2016		6,380,800	$	2.1306	$	13,595
Restricted stock awards granted during 2017		333,332		1.2000		400
Restricted stock awards released or forfeited during 2017		—		—		—
Outstanding—September 30, 2017		6,714,132	$	2.0844	$	13,995

	Potential dilution to common stock
	Minimum shares		Maximum shares
Restricted shares subject to vesting		4,053,640		4,053,640
Series A Preferred Stock		10,065,629		10,065,629
Warrants outstanding		61,400,000		61,400,000
Dilutive shares to be issued if Series B Preferred Stock conversion is below $2.25		—		1,015,872
Series B Preferred Stock		266,666,667		342,857,143
Potential dilutive shares if converted to common stock		342,185,936		419,392,284

	(in thousands)
Assets	Level 1		Level 2		Level 3		September 30, 2017
Derivative embedded conversion feature	$	—	$	—	$	111,877	$	111,877

	Derivative asset (liability) embedded conversion feature (in thousands)
Balance, January 1, 2016	$	(120,848	)
Unrealized gain on change in fair value		201,499
Balance, December 31, 2016		80,651
Unrealized gain on change in fair value		31,226
Balance, September 30, 2017	$	111,877


	Three months ended September 30, 2017			Three months ended September 30, 2016			Percentage change favorable (unfavorable)			Dollar value change favorable (unfavorable)
Net revenues	$	2,287		$	1,284			78	%	$	1,003
Underwriting expense (net)		92			258			64	%		166
General and administrative expenses		2,117			1,357			(56	%)		(760	)
Loss contract reserve reduction		(210	)		(565	)		(63	%)		(355	)
Interest expense		579			636			9	%		57
Net operating (loss)		(291	)		(402	)		28	%		111
Other income		123			—		N/A				123
Unrealized gain (loss) on change in value of derivative embedded conversion feature		38,579			(16,243	)		338	%		54,822
Redeemable convertible series B preferred stock dividends		(4,500	)		(4,500	)		0	%		—
Net income (loss) attributable to common and participating stockholders	$	33,911		$	(21,145	)		260	%	$	55,056