10-Q 1 wacfy2017q2.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 _______________________________________________________________________________________
Form 10-Q
 _______________________________________________________________________________________ 

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________          
Commission File Number: 001-13417 
_______________________________________________________________________________________
Walter Investment Management Corp.
(Exact name of registrant as specified in its charter) 
_______________________________________________________________________________________ 
 
Maryland
 
13-3950486
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
1100 Virginia Drive, Suite 100
Fort Washington, PA
 
19034
(Address of principal executive offices)
 
(Zip Code)
(844) 714-8603
(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  o
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  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
 
 
 
 
 
 
Large accelerated filer
 
o
 
Accelerated filer
 
x
 
 
 
 
 
 
 
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
o
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
o
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
The registrant had 36,541,969 shares of common stock outstanding as of August 4, 2017.
_______________________________________________________________________________________ 


WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
FORM 10-Q
INDEX
 
 
 
 
 
 
Page
No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
 
June 30, 
 2017
 
December 31, 
 2016
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Cash and cash equivalents
 
$
478,374

 
$
224,598

Restricted cash and cash equivalents
 
172,677

 
204,463

Residential loans at amortized cost, net (includes $6,021 and $5,167 in allowance for loan losses at June 30, 2017 and December 31, 2016, respectively)
 
709,080

 
665,209

Residential loans at fair value
 
11,905,869

 
12,416,542

Receivables, net (includes $11,841 and $15,033 at fair value at June 30, 2017 and December 31, 2016, respectively)
 
155,250

 
267,962

Servicer and protective advances, net (includes $152,683 and $146,781 in allowance for uncollectible advances at June 30, 2017 and December 31, 2016, respectively)
 
915,185

 
1,195,380

Servicing rights, net (includes $870,758 and $949,593 at fair value at June 30, 2017 and December 31, 2016, respectively)
 
935,898

 
1,029,719

Goodwill
 
47,747

 
47,747

Intangible assets, net
 
9,718

 
11,347

Premises and equipment, net
 
66,162

 
82,628

Assets held for sale
 
—

 
71,085

Other assets (includes $40,522 and $87,937 at fair value at June 30, 2017 and December 31, 2016, respectively)
 
199,554

 
242,290

Total assets
 
$
15,595,514

 
$
16,458,970

LIABILITIES AND STOCKHOLDERS' DEFICIT
 
 
 
 
Payables and accrued liabilities (includes $5,924 and $11,804 at fair value at June 30, 2017 and December 31, 2016, respectively)
 
$
701,390

 
$
759,011

Servicer payables
 
143,785

 
146,332

Servicing advance liabilities
 
544,134

 
783,229

Warehouse borrowings
 
1,332,126

 
1,203,355

Servicing rights related liabilities at fair value
 
1,314

 
1,902

Corporate debt
 
2,116,960

 
2,129,000

Mortgage-backed debt (includes $470,600 and $514,025 at fair value at June 30, 2017 and December 31, 2016, respectively)
 
877,775

 
943,956

HMBS related obligations at fair value
 
9,986,409

 
10,509,449

Deferred tax liabilities, net
 
4,602

 
4,774

Liabilities held for sale
 
—

 
2,402

Total liabilities
 
15,708,495

 
16,483,410

Commitments and contingencies (Note 12)
 

 

Stockholders' deficit:
 
 
 
 
Preferred stock, $0.01 par value per share:
 
 
 
 
Authorized - 10,000,000 shares
 
 
 
 
Issued and outstanding - 0 shares at June 30, 2017 and December 31, 2016
 
—

 
—

Common stock, $0.01 par value per share:
 
 
 
 
Authorized - 90,000,000 shares
 
 
 
 
Issued and outstanding - 36,541,904 and 36,391,129 shares at June 30, 2017 and December 31, 2016, respectively
 
365

 
364

Additional paid-in capital
 
597,348

 
596,067

Accumulated deficit
 
(711,605
)
 
(621,804
)
Accumulated other comprehensive income
 
911

 
933

Total stockholders' deficit
 
(112,981
)
 
(24,440
)
Total liabilities and stockholders' deficit
 
$
15,595,514

 
$
16,458,970


3


The following table presents the assets and liabilities of the Company’s consolidated variable interest entities, which are included on the consolidated balance sheets above. The assets in the table below include those assets that can only be used to settle obligations of the consolidated variable interest entities. The liabilities in the table below include third-party liabilities of the consolidated variable interest entities only, and for which creditors or beneficial interest holders do not have recourse to the Company, and exclude intercompany balances that eliminate in consolidation.

 
 
June 30, 
 2017
 
December 31, 
 2016
ASSETS OF CONSOLIDATED VARIABLE INTEREST ENTITIES THAT CAN ONLY BE USED TO SETTLE THE OBLIGATIONS OF CONSOLIDATED VARIABLE INTEREST ENTITIES:
 
(unaudited)
 
 
Restricted cash and cash equivalents
 
$
32,903

 
$
45,843

Residential loans at amortized cost, net
 
442,566

 
462,877

Residential loans at fair value
 
406,006

 
492,499

Receivables, net
 
12,112

 
15,798

Servicer and protective advances, net
 
493,595

 
734,707

Other assets
 
23,362

 
19,831

Total assets
 
$
1,410,544

 
$
1,771,555

 
 
 
 
 
LIABILITIES OF THE CONSOLIDATED VARIABLE INTEREST ENTITIES FOR WHICH CREDITORS OR BENEFICIAL INTEREST HOLDERS DO NOT HAVE RECOURSE TO THE COMPANY:
 
 
 
 
Payables and accrued liabilities
 
$
2,565

 
$
2,985

Servicing advance liabilities
 
424,555

 
650,565

Mortgage-backed debt (includes $470,600 and $514,025 at fair value at June 30, 2017 and December 31, 2016, respectively)
 
877,775

 
943,956

Total liabilities
 
$
1,304,895

 
$
1,597,506

The accompanying notes are an integral part of the consolidated financial statements.


4


WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in thousands, except per share data)

 
 
For the Three Months 
 Ended June 30,
 
For the Six Months 
 Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
REVENUES
 
 
 
 
 
 
 
 
Net servicing revenue and fees
 
$
91,321

 
$
31,936

 
$
204,508

 
$
(73,826
)
Net gains on sales of loans
 
70,545

 
100,176

 
144,901

 
184,653

Net fair value gains on reverse loans and related HMBS obligations
 
7,872

 
7,650

 
22,574

 
42,858

Interest income on loans
 
10,489

 
11,849

 
21,469

 
24,020

Insurance revenue
 
2,650

 
11,277

 
7,590

 
21,644

Other revenues
 
25,910

 
24,585

 
53,030

 
54,895

Total revenues
 
208,787

 
187,473

 
454,072

 
254,244

 
 
 
 
 
 
 
 
 
EXPENSES
 
 
 
 
 
 
 
 
General and administrative
 
117,544

 
135,776

 
249,171

 
265,382

Salaries and benefits
 
101,071

 
133,681

 
209,028

 
266,320

Interest expense
 
60,884

 
64,400

 
121,294

 
128,648

Depreciation and amortization
 
10,042

 
14,540

 
20,974

 
28,963

Goodwill impairment
 
—

 
215,412

 
—

 
215,412

Other expenses, net
 
3,054

 
1,897

 
5,837

 
4,403

Total expenses
 
292,595

 
565,706

 
606,304

 
909,128

 
 
 
 
 
 
 
 
 
OTHER GAINS (LOSSES)
 
 
 
 
 
 
 
 
Gain on sale of business
 
7

 
—

 
67,734

 
—

Other net fair value losses
 
(8,105
)
 
(819
)
 
(3,022
)
 
(2,963
)
Gain (loss) on extinguishment
 
(709
)
 
—

 
(709
)
 
928

Other
 
—

 
(532
)
 
—

 
(1,556
)
Total other gains (losses)
 
(8,807
)
 
(1,351
)
 
64,003

 
(3,591
)
 
 
 
 
 
 
 
 
 
Loss before income taxes
 
(92,615
)
 
(379,584
)
 
(88,229
)
 
(658,475
)
Income tax expense
 
1,694

 
110,379

 
1,572

 
4,190

Net loss
 
$
(94,309
)
 
$
(489,963
)
 
$
(89,801
)
 
$
(662,665
)
 
 
 
 
 
 
 
 
 
Comprehensive loss
 
$
(94,314
)
 
$
(489,947
)
 
$
(89,823
)
 
$
(662,624
)
 
 
 
 
 
 
 
 
 
Net loss
 
$
(94,309
)
 
$
(489,963
)
 
$
(89,801
)
 
$
(662,665
)
Basic and diluted loss per common and common equivalent share
 
$
(2.58
)
 
$
(13.68
)
 
$
(2.46
)
 
$
(18.57
)
Weighted-average common and common equivalent shares outstanding — basic and diluted
 
36,536

 
35,811

 
36,475

 
35,679

The accompanying notes are an integral part of the consolidated financial statements.

5


WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
(Unaudited)
(in thousands, except share data)

 
 
Common Stock
 
Additional Paid-
In Capital
 
Accumulated Deficit
 
Accumulated Other
Comprehensive
Income
 
 
 
 
Shares
 
Amount
 
 
 
 
Total
Balance at January 1, 2017
 
36,391,129

 
$
364

 
$
596,067

 
$
(621,804
)
 
$
933

 
$
(24,440
)
Net loss
 
—

 
—

 
—

 
(89,801
)
 
—

 
(89,801
)
Other comprehensive loss, net of tax
 
—

 
—

 
—

 
—

 
(22
)
 
(22
)
Share-based compensation
 
—

 
—

 
1,346

 
—

 
—

 
1,346

Share-based compensation issuances, net
 
150,775

 
1

 
(65
)
 
—

 
—

 
(64
)
Balance at June 30, 2017
 
36,541,904

 
$
365

 
$
597,348

 
$
(711,605
)
 
$
911

 
$
(112,981
)
The accompanying notes are an integral part of the consolidated financial statements.



6


WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

 
 
For the Six Months 
 Ended June 30,
 
 
2017
 
2016
Operating activities
 
 
 
 
Net loss
 
$
(89,801
)
 
$
(662,665
)
Adjustments to reconcile net loss to net cash provided by operating activities
 
 
 
 
Net fair value gains on reverse loans and related HMBS obligations
 
(22,574
)
 
(42,858
)
Amortization of servicing rights
 
14,951

 
7,236

Change in fair value of servicing rights
 
120,230

 
514,073

Change in fair value of servicing rights related liabilities
 
—

 
(12,724
)
Change in fair value of charged-off loans
 
(11,868
)
 
(14,296
)
Other net fair value losses
 
5,926

 
6,815

Accretion of discounts on residential loans and advances
 
(1,799
)
 
(1,845
)
Accretion of discounts on debt and amortization of deferred debt issuance costs
 
15,556

 
16,195

Provision for uncollectible advances
 
22,486

 
22,356

Depreciation and amortization of premises and equipment and intangible assets
 
20,974

 
28,963

Provision for deferred income taxes
 
1,374

 
90,552

Share-based compensation
 
1,346

 
5,705

Purchases and originations of residential loans held for sale
 
(9,522,730
)
 
(10,078,201
)
Proceeds from sales of and payments on residential loans held for sale
 
9,837,393

 
10,239,448

Net gains on sales of loans
 
(144,901
)
 
(184,653
)
Gain on sale of business
 
(67,734
)
 
—

Goodwill impairment
 
—

 
215,412

Other
 
4,608

 
6,090

Changes in assets and liabilities
 
 
 
 
Decrease (increase) in receivables
 
73,023

 
(62,619
)
Decrease in servicer and protective advances
 
257,608

 
282,018

Decrease (increase) in other assets
 
38

 
(11,150
)
Decrease in payables and accrued liabilities
 
(115,822
)
 
(84,929
)
Increase in servicer payables, net of change in restricted cash
 
14,984

 
31,122

Cash flows provided by operating activities
 
413,268

 
310,045

 
 
 
 
 
Investing activities
 
 
 
 
Purchases and originations of reverse loans held for investment
 
(216,948
)
 
(384,816
)
Principal payments received on reverse loans held for investment
 
558,003

 
473,617

Principal payments received on mortgage loans held for investment
 
47,678

 
45,238

Payments received on charged-off loans held for investment
 
9,205

 
12,542

Payments received on receivables related to Non-Residual Trusts
 
6,294

 
4,011

Proceeds from sales of real estate owned, net
 
72,581

 
51,924

Purchases of premises and equipment
 
(2,312
)
 
(22,638
)
Decrease in restricted cash and cash equivalents
 
989

 
10,328

Payments for acquisitions of businesses, net of cash acquired
 
(1,019
)
 
(1,947
)
Acquisitions of servicing rights, net
 
(152
)
 
(8,410
)
Proceeds from sale of servicing rights, net
 
38,817

 
19,920

Proceeds from sale of business
 
131,074

 
—

Other
 
9,441

 
(2,174
)
Cash flows provided by investing activities
 
653,651

 
197,595

 
 
 
 
 

7


WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
 
 
 
 
 
 
 
For the Six Months 
 Ended June 30,
 
 
2017
 
2016
Financing activities
 
 
 
 
Payments on corporate debt
 
(21,285
)
 
(345
)
Extinguishments and settlement of debt
 
—

 
(6,327
)
Proceeds from securitizations of reverse loans
 
278,011

 
410,107

Payments on HMBS related obligations
 
(890,737
)
 
(590,678
)
Issuances of servicing advance liabilities
 
679,809

 
815,800

Payments on servicing advance liabilities
 
(919,933
)
 
(1,043,972
)
Net change in warehouse borrowings related to mortgage loans
 
(175,701
)
 
(59,801
)
Net change in warehouse borrowings related to reverse loans
 
304,472

 
115,515

Proceeds from financing of servicing rights
 
—

 
29,738

Payments on servicing rights related liabilities
 
(1,709
)
 
(9,639
)
Payments on mortgage-backed debt
 
(66,422
)
 
(52,017
)
Other debt issuance costs paid
 
(2,060
)
 
(5,912
)
Other
 
2,412

 
(44
)
Cash flows used in financing activities
 
(813,143
)
 
(397,575
)
 
 
 
 
 
Net increase in cash and cash equivalents
 
253,776

 
110,065

Cash and cash equivalents at beginning of the period
 
224,598

 
202,828

Cash and cash equivalents at end of the period
 
$
478,374

 
$
312,893

 
 
 
 
 
 Supplemental Disclosures of Cash Flow Information
 
 
 
 
Cash paid for interest
 
$
119,564

 
$
134,703

Cash paid (received) for taxes
 
(74,144
)
 
58

The accompanying notes are an integral part of the consolidated financial statements.

8


WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business and Basis of Presentation
Walter Investment Management Corp. and its subsidiaries, or the Company, is an independent servicer and originator of mortgage loans and servicer of reverse mortgage loans. The Company services a wide array of loans across the credit spectrum for its own portfolio and for GSEs, government agencies, third-party securitization trusts and other credit owners. Through the consumer, correspondent and wholesale lending channels, the Company originates and purchases residential mortgage loans that are predominantly sold to GSEs and government agencies. The Company also operates two complementary businesses; asset receivables management and real estate owned property management and disposition.
The Company operates throughout the U.S. through three reportable segments, Servicing, Originations, and Reverse Mortgage. Refer to Note 11 for additional information related to segment reporting.
Certain acronyms and terms used throughout these notes are defined in the Glossary of Terms in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Sale of Insurance Business
On December 30, 2016, the Company executed a stock purchase agreement pursuant to which the Company agreed to sell 100% of the stock of its indirect, wholly-owned subsidiary, GTI Holdings Corp., which was the holding company of the Company's primary licensed insurance agency, Green Tree Insurance Agency, Inc., to a wholly-owned subsidiary of Assurant, for a purchase price of $125.0 million in cash, subject to adjustment as specified in the agreement. Under the agreement, an affiliate of Assurant has also agreed to make potential earnout payments to the Company in an aggregate amount of up to $25.0 million in cash, with the amount of such payments to be based upon the gross written premium of certain voluntary homeowners' insurance written by certain affiliates of Assurant over a specified timeframe. As a result of this transaction, the assets and liabilities related to the insurance business, which were included in the Servicing segment, were reclassified to operations held for sale line items on the consolidated balance sheets at December 31, 2016. This transaction closed on February 1, 2017, at which time the Company received $131.1 million in cash, which included a working capital payment.
Restatement of Previously Issued Consolidated Financial Statements
On August 9, 2017, the Company amended its Annual Report on Form 10-K for the year ended December 31, 2016 and separately amended its Quarterly Reports on Form 10-Q for the quarterly periods ended June 30, 2016, September 30, 2016, and March 31, 2017, in each case, to reflect a correction to the net deferred tax assets balance. The restatement of the Company's previously issued consolidated financial statements resulted from an error in the calculation of the valuation allowance on the net deferred tax assets balance. In determining the amount of the valuation allowance in the prior periods, an error was made that resulted in the double-counting of expected future taxable income associated with the projected reversals of taxable temporary differences (i.e., deferred tax liabilities). Accordingly, the Company revised its calculation to reflect the removal of the duplicative amounts, and reevaluated all sources of estimated future taxable income on the recoverability of deferred tax assets under GAAP after taking into account both positive and negative evidence through the issuance date of the restated financial statements to consider the effect of the error. The impact of such corrections are reflected in the prior periods presented in these Consolidated Financial Statements.
Interim Financial Reporting
The accompanying unaudited interim Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and related notes required by GAAP for complete Consolidated Financial Statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. These unaudited interim Consolidated Financial Statements should be read in conjunction with the Company’s audited Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2016.

9


Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Although management is not currently aware of any factors that would significantly change its estimates and assumptions, actual results may differ from these estimates.
Recently Adopted Accounting Guidance
In March 2016, the FASB issued an accounting standards update revising certain aspects of share-based accounting guidance which includes income tax and forfeiture consequences. This guidance was effective for the Company beginning January 1, 2017. Adoption of this update did not have a material impact on the Company's income tax expense. The Company elected to continue with its current methodology of estimating expected forfeitures at the date of grant and adjust throughout the vesting term as needed.
Recent Accounting Guidance Not Yet Adopted
In May 2014, the FASB issued new revenue recognition guidance that supersedes most industry-specific guidance but does exclude insurance contracts and financial instruments. Under the new revenue recognition guidance, entities are required to identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when the entity satisfies a performance obligation. In April 2015, the FASB voted for a one-year deferral of the effective date, resulting in this new guidance being effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. Subsequent to the initial issuance, the FASB has continued to issue updates to this guidance to provide additional clarification and implementation instructions to issuers regarding (i) principal versus agent considerations, (ii) identifying performance obligations, (iii) licensing, and (iv) narrow-scope improvements and practical expedients relating to assessing collectability, presentation of sales taxes, non-cash consideration, and completed contracts and contract modifications at transition. The Company has reviewed the scope of the guidance and monitored the determinations of the FASB Transition Resource Group and concluded that a number of the Company's most significant revenue streams are not within the scope of the standard because the standard does not apply to revenue on contracts accounted for under the transfers and servicing of financial assets or financial instruments standards. Therefore, revenue recognition for these contracts will remain unchanged. However, the FASB has issued, and may issue in the future, interpretive guidance that may cause the Company’s evaluation to change. The Company continues to evaluate certain select revenue streams, including subservicing fees, for the effect that this guidance will have on its consolidated financial statements. Based on current guidance available, while there may be some impact on revenue recognition, the Company does not expect the adoption of this guidance to have a significant impact on the consolidated financial statements. The Company plans to adopt using a modified retrospective method.
In January 2016, the FASB issued an accounting standards update that amends the guidance on the classification and measurement of financial instruments. The new standard revises an entity's accounting related to (i) the classification and measurement of investments in equity securities and (ii) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. At June 30, 2017, the Company did not hold any equity securities measured at fair value, but did have certain financial liabilities measured at fair value. The significance of adoption is dependent upon the nature of those financial liabilities carried at fair value at the time of adoption.
In February 2016, the FASB issued an accounting standards update that requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset to not recognize lease assets and lease liabilities. In transition, lessees are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients that entities may elect to apply. This guidance is effective for fiscal years beginning after December 15, 2018, with early application permitted. While the Company continues to evaluate the full effect that this guidance will have on its consolidated financial statements, it will result in the recognition of certain operating leases as right-of-use assets and lease liabilities on the consolidated balance sheets.

10


In June 2016, the FASB issued an accounting standards update that amends the guidance for recognizing credit losses on financial instruments measured at amortized cost. This update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2019. The Company does not expect, based on the Company's current methodologies for accounting for financial instruments, that the adoption of this guidance will have a material impact on its consolidated financial statements. The significance of the adoption of this guidance may change at the time of adoption based on the nature of the Company's financial instruments at that time and the corresponding conclusions reached.
In August 2016, the FASB issued an accounting standards update that amends the guidance on the classification of certain cash receipts and cash payments presented within the statement of cash flows to reduce the existing diversity in practice. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The adoption may impact the presentation of cash flows, but will not otherwise have a material impact on the consolidated results of operations or financial condition.
In October 2016, the FASB issued an accounting standards update that amends the guidance on the classification of income taxes related to the intra-entity transfer of assets other than inventory. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the effect that this guidance will have on its consolidated financial statements. However, the significance of adoption is dependent on the nature of the transactions and corresponding tax laws in effect at the time of adoption.
In November 2016, the FASB issued an accounting standards update that amends the guidance on restricted cash within the statement of cash flows. The update amends the classification of restricted cash and cash equivalents to be included within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The adoption will impact the presentation of the cash flows, but will not otherwise have a material impact on the consolidated results of operations or financial condition.
In January 2017, the FASB issued an accounting standards update that amends the guidance on business combinations. The update clarifies the definition of a business and provides a framework that gives entities a basis for making reasonable judgments about whether a transaction should be accounted for as an acquisition of assets or a business. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company will apply this guidance to its assessment of applicable transactions, such as acquisitions and disposals of assets or business, consummated after the adoption date.
In January 2017, the FASB issued an accounting standards update that amends the guidance on goodwill. Under the update, goodwill impairment is measured as the amount by which a reporting unit’s carrying value exceeds its fair value, while not exceeding the carrying value of goodwill. The update eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. This guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently considering the timing of adoption and will apply this guidance to applicable impairment tests after the adoption date.
In February 2017, the FASB issued an accounting standards update that amends the guidance on derecognition of nonfinancial assets. This guidance clarifies the scope and accounting of a financial asset that meets the definition of an in substance nonfinancial asset and defines the term in substance nonfinancial asset. It also adds guidance for partial sales of nonfinancial assets. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. While the Company continues to evaluate the full effect that this guidance will have on its consolidated financial statements, it may impact the timing of the recognition of gain on sale of REO.
In May 2017, the FASB issued an accounting standards update that amends the guidance on share-based compensation. The update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The new guidance will be applied prospectively on awards modified on or after the adoption date.

11


2. Going Concern
The Company is facing certain challenges and uncertainties that could have significant adverse effects on its business, liquidity and financing activities. The Company may be adversely impacted by the following factors, among others: failure to maintain sufficient liquidity to operate its servicing and lending businesses due to the inability to renew, replace or extend its advance financing or warehouse facilities on favorable terms, or at all; failure to comply with covenants contained in its debt agreements or obtain any necessary waivers or amendments; failure to resolve its obligation with respect to the remaining mandatory clean-up calls; and failure to successfully restructure its corporate debt.
As disclosed in Note 9, the Company uses and relies upon short-term borrowing facilities to fund its servicing, originations and reverse mortgage operating businesses. As a result of continued losses, the need for additional waivers and/or amendments, including those required as a result of or in connection with the restatement discussed in Note 1, and the passage of time since the Company first announced its debt restructuring initiative, certain of the Company’s lenders have effected reductions in its advance rates and/or have required other changes to the terms of such facilities, which has negatively impacted the Company’s available liquidity and capital resources. Each of these facilities is typically subject to renewal each year. Borrowing capacity on the various facilities is dependent upon maintaining compliance with the representations, terms, conditions and covenants of the respective agreements. The Company intends to renew, replace, or expand its facilities consistent with its past practices and may seek waivers or amendments in the future, if necessary. The Company is in negotiations with current and prospective lenders regarding expanded financing capacity for its reverse loan repurchases and/or replacement financing capacity for its originations business in the event the Company experiences a material reduction in the financing capacity available to it under its existing borrowing facilities or otherwise requires additional financing capacity to support its businesses and obligations. No assurance can be given that the Company will be successful in maintaining adequate financing capacity with its current or prospective lenders.
The Company continues to focus on its debt restructuring initiative to seek to improve its capital structure through the restructuring of its corporate debt and continues to incur significant expense in connection therewith.
On July 31, 2017, the Company entered into a Restructuring Support Agreement with lenders holding, as of July 31, 2017, more than 50% of the loans and/or commitments outstanding under the 2013 Credit Agreement. As set forth in the Restructuring Support Agreement, the parties thereto have agreed to, among other things, the principal terms of a proposed financial restructuring of the Company, which will be implemented through an out-of-court restructuring and, in the absence of sufficient stakeholder support for an out-of-court restructuring, a prepackaged plan of reorganization under Chapter 11 of the Bankruptcy Code. The Restructuring Support Agreement contains a number of conditions and milestones, including reaching an agreement with the holders of at least 66⅔% aggregate principal amount of Senior Notes to a restructuring support agreement consistent with the terms specified in the Restructuring Support Agreement. The Company and its debt restructuring advisors intend to continue to negotiate with the financial and legal advisors to ad hoc groups of holders of the Senior Notes and the lenders under the 2013 Credit Agreement as the Company seeks to obtain sufficient stakeholder support for a comprehensive de-leveraging transaction.
Pursuant to the terms of the Restructuring Support Agreement, on the dates specified in the Restructuring Support Agreement, the Company is obligated to purchase at par (or in certain limited circumstances, voluntarily prepay) the term loans of the lenders who become party to the Restructuring Support Agreement in an aggregate principal amount of $100 million. On July 31, 2017, the Company entered into a third amendment to the 2013 Credit Agreement pursuant to which the 2013 Credit Agreement was amended to, among other things, require that upon receipt by the Company or certain of its subsidiaries of the gross proceeds of any disposition of certain Bulk MSR by the Company or such subsidiaries, the Company shall make a prepayment of the term loans in an amount equal to 80% of such gross proceeds; provided that, to the extent as of the earlier of 120 days following the effective date (as defined in the Restructuring Support Agreement) and February 15, 2018 the aggregate principal amount of term loans prepaid as a result of such prepayments is less than $100 million, the Company shall be required to prepay as of such date the term loans in an amount equal to $100 million minus the amount of proceeds of such dispositions of Bulk MSR previously applied to prepay the term loans after the date of the third amendment to the 2013 Credit Agreement pursuant to such mandatory prepayment. The Third Amendment also requires mandatory prepayments of the term loans in an amount equal to (i) 80% of the net sale proceeds of non-ordinary course asset sales and dispositions of certain Bulk MSR and (ii) 100% of the net sale proceeds of certain non-core assets, in each case, received by the Company and certain of its subsidiaries.
As discussed previously, the Company is subject to various financial and other covenants under its existing debt agreements, many of which contain cross default provisions such that if a default occurs under any one agreement, the lenders under certain of the Company’s other debt agreements could declare a default. The lenders can waive their contractual rights in the event of a default. In connection with the financial statement restatement discussed in Note 1 and the circumstances impacting the Company's ability to continue as a going concern included in this disclosure, the Company received waivers and/or amendments under its warehouse and advance financing facilities, the 2013 Credit Agreement and the Senior Notes Indenture to the extent necessary to waive any default, event of default, amortization event, termination event or similar event resulting or arising from the restatement discussed in Note 1 and the going concern matters discussed herein.

12


The Company is not currently in compliance with, and may be unable to regain and/or maintain compliance with, certain continued listing standards of the NYSE. If the Company is unable to cure any event of noncompliance with any continued listing standard of the NYSE within the applicable timeframe and other parameters set forth by the NYSE, or if the Company fails to maintain compliance with certain continued listing standards that do not provide for a cure period, it will result in the delisting of the Company’s common stock from the NYSE, which could negatively impact the trading price, trading volume and liquidity of, and have other material adverse effects on, the Company’s common stock. If the Company’s common stock is delisted from the NYSE, this could also have negative implications on the Company’s business relationships under the Company’s material agreements with lenders and other counterparties. If the Company’s common stock is delisted from the NYSE, it would constitute a fundamental change as that term is defined under the terms of the Convertible Notes, and require, among other things, that the Company take steps to make an offer to repay the Convertible Notes at 100% of the principal amount thereof. The Company currently is not permitted to repurchase the Convertible Notes pursuant to the terms of certain of its debt facilities and agreements. If the Company is delisted and is not able to satisfy this obligation, it would constitute an event of default under the indenture governing the Convertible Notes. In such event, the trustee or the holders of 25% in aggregate principal amount outstanding of the Convertible Notes will have the right to accelerate such indebtedness.
The Company’s subsidiaries are parties to seller/servicer agreements with, and/or subject to the guidelines and regulations of (collectively, the seller/servicer obligations), the GSEs and various government agencies, including HUD, FHA, VA and Ginnie Mae. These seller/servicer obligations include financial covenants and other requirements as defined by the applicable agency. To the extent that these seller/servicer obligations are not met, the applicable GSE or government agency may, at its option, take action to implement one or more of a variety of remedies including, without limitation, requiring certain Company subsidiaries to deposit funds as security for one or more of such subsidiaries’ obligations to the GSEs or government agencies, imposing sanctions on one or more of such subsidiaries, which could include monetary fines or penalties, forcing one or more subsidiaries to transfer servicing on all or a portion of the mortgage loans such subsidiary services for the applicable GSE or government agency, and/or suspending or terminating the approved seller/servicer status of one or more subsidiaries, which could prohibit or severely limit the ability of one or more subsidiaries to originate, service and/or securitize mortgage loans for the applicable GSE or agency. To date, none of the GSEs or government agencies with which the Company and its subsidiaries do business has communicated any material sanction, suspension or prohibition that would materially adversely affect the Company’s business; however, the GSEs and certain of such government agencies have required frequent reporting regarding the financial status of the Company, including preliminary financial results and the availability to the Company of financing capacity under its existing borrowing facilities. The GSEs and certain of such government agencies have also requested frequent telephonic updates with senior Company management regarding the status of the Company’s debt restructuring initiative and other matters. The Company’s subservicing agreements also contain requirements regarding servicing practices and other matters, and a failure to comply with these requirements could have an adverse impact on the Company’s business and liquidity.
As disclosed in Note 12, the Company is obligated to exercise the mandatory clean-up call obligations assumed as part of an agreement to acquire the rights to service the loans in the Non-Residual Trusts. Additionally, as part of its Reverse Mortgage segment, the Company is obligated to purchase loans out of Ginnie Mae securitization pools under certain circumstances.
To address the challenges and uncertainties set forth above, the Company is proactively engaged with its lenders and other counterparties as follows:
•
Prior to the issuance of the restated consolidated financial statements discussed in Note 1, the Company entered into amendments and/or obtained waivers from each lender, to the extent necessary, to waive any default, event of default, amortization event, termination event or similar event resulting or arising from the restatement discussed in Note 1 or the substantial doubt as to the Company’s ability to continue as a going concern described in this Note 2, and/or to allow for compliance with profitability covenants at the Ditech level;
•
As a result of the above waivers and/or amendments, no known events of default exist, and amounts due under the Company's outstanding material debt and financing agreements have not been accelerated;
•
While the Company believes that the debt facilities it relies on to support ongoing operations remain renewable in the ordinary course of business, the Company is seeking additional, or expansion of existing facilities to provide adequate financing capacity for new loan originations should existing facilities not be renewed at their maturity date. The Company may also consider temporary volume reductions within the business lending channel of the originations business, if necessary;

13


•
The Company is seeking additional, or expansion of existing, master repurchase or similar agreements for continued growth of the required reverse loan repurchases. As part of this effort, in August 2017, RMS has entered into an amendment that increases the size of an existing credit facility by $100.0 million on a committed basis. The facility expires in May 2018. Additionally, in the future, the Company may seek to access the securitization market, if such market is available to the Company, to provide adequate financing capacity for continued growth in the number and amount of required reverse loan repurchases;
•
The Company is in the process of negotiating a term sheet with a counterparty to resolve its obligations with respect to the remaining mandatory clean-up calls. The negotiated resolution is expected to cover all mandatory calls starting in the fourth quarter of 2017;
•
The Company has been in contact with the NYSE and is working to regain compliance with NYSE continued listing requirements, including, among other things, by restructuring its corporate debt. The Company continues to monitor other listing standards. No assurance can be given that the Company’s common stock will not be delisted from the NYSE; and
•
The Company continues to engage in communications with key stakeholders, including the GSEs, Ginnie Mae, HUD, regulators and government agencies in connection with the restatement discussed in Note 1, the status of the Company’s debt restructuring initiative, and the uncertainties regarding the Company’s ability to continue as a going concern as identified above. To date, none of these key stakeholders have communicated any material sanctions, suspensions or prohibitions.
The above factors have been taken into account in assessing the Company’s liquidity and ability to meet its obligations for the next twelve months from the date of issuance of these financial statements. Based on this assessment, management has concluded that while there can be no assurance that the Company’s recent and future actions will be successful in mitigating the above risks and uncertainties, the Company’s current plans provide enough liquidity to meets its obligations over the next twelve months from the date of issuance of these financial statements. However, as set forth in the Restructuring Support Agreement, the parties thereto have agreed to, among other things, the principal terms of a proposed financial restructuring of the Company, which will be implemented through an out-of-court restructuring and, in the absence of sufficient stakeholder support for an out-of-court restructuring, a prepackaged plan of reorganization under Chapter 11 of the Bankruptcy Code. The potential for a prepackaged Chapter 11 filing raises substantial doubt about the Company’s ability to continue as a going concern that has not been alleviated. The Company’s consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company will continue to monitor progress on its initiatives and the impact on its ongoing assessment of going concern in future periods.

14


3. Variable Interest Entities
Consolidated Variable Interest Entities
Included in Note 7 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2016 are descriptions of the Company’s Consolidated VIEs.
Included in the tables below are summaries of the carrying amounts of the assets and liabilities of consolidated VIEs (in thousands):
 
 
June 30, 2017
 
 
Residual
Trusts
 
Non-Residual
Trusts
 
Servicer and Protective Advance Financing Facilities
 
 Revolving Credit Facilities-Related VIEs
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Restricted cash and cash equivalents
 
$
12,861

 
$
10,714

 
$
9,328

 
$
—

 
$
32,903

Residential loans at amortized cost, net
 
442,566

 
—

 
—

 
—

 
442,566

Residential loans at fair value
 
—

 
406,006

 
—

 
—

 
406,006

Receivables, net
 
—

 
11,841

 
—

 
271

 
12,112

Servicer and protective advances, net
 
—

 
—

 
493,595

 
—

 
493,595

Other assets
 
9,652

 
653

 
618

 
12,439

 
23,362

Total assets
 
$
465,079

 
$
429,214

 
$
503,541

 
$
12,710

 
$
1,410,544

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Payables and accrued liabilities
 
$
1,997

 
$
—

 
$
568

 
$
—

 
$
2,565

Servicing advance liabilities
 
—

 
—

 
424,555

 
—

 
424,555

Mortgage-backed debt
 
407,175

 
470,600

 
—

 
—

 
877,775

Total liabilities
 
$
409,172

 
$
470,600

 
$
425,123

 
$
—

 
$
1,304,895

 
 
December 31, 2016
 
 
Residual
Trusts
 
Non-Residual
Trusts
 
Servicer and Protective Advance Financing Facilities
 
 Revolving Credit Facilities-Related VIEs
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Restricted cash and cash equivalents
 
$
13,321

 
$
10,257

 
$
22,265

 
$
—

 
$
45,843

Residential loans at amortized cost, net
 
462,877

 
—

 
—

 
—

 
462,877

Residential loans at fair value
 
—

 
450,377

 
—

 
42,122

 
492,499

Receivables, net
 
—

 
15,033

 
—

 
765

 
15,798

Servicer and protective advances, net
 
—

 
—

 
734,707

 
—

 
734,707

Other assets
 
10,028

 
1,028

 
1,440

 
7,335

 
19,831

Total assets
 
$
486,226

 
$
476,695

 
$
758,412

 
$
50,222

 
$
1,771,555

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Payables and accrued liabilities
 
$
2,140

 
$
—

 
$
845

 
$
—

 
$
2,985

Servicing advance liabilities
 
—

 
—

 
650,565

 
—

 
650,565

Mortgage-backed debt
 
429,931

 
514,025

 
—

 
—

 
943,956

Total liabilities
 
$
432,071

 
$
514,025

 
$
651,410

 
$
—

 
$
1,597,506


15


Unconsolidated Variable Interest Entities
Included in Note 7 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2016 are descriptions of the Company's variable interests in VIEs that it does not consolidate as it has determined that it is not the primary beneficiary of the VIEs. Additionally, refer to Note 14 for information on the Company's transactions with WCO.
4. Transfers of Residential Loans
Sales of Mortgage Loans
As part of its originations activities, the Company sells substantially all of its originated or purchased mortgage loans into the secondary market for securitization or to private investors as whole loans. The Company sells conventional-conforming and government-backed mortgage loans through GSE and agency-sponsored securitizations in which mortgage-backed securities are created and sold to third-party investors. The Company also sells non-conforming mortgage loans to private investors. The Company accounts for these transfers as sales. If the servicing rights are retained upon sale, the Company receives a fee for servicing the sold loans, which represents continuing involvement.
Certain guarantees arise from agreements associated with the sale of the Company's residential loans. Under these agreements, the Company may be obligated to repurchase loans, or otherwise indemnify or reimburse the credit owner or insurer for losses incurred, due to a breach of contractual representations and warranties. Refer to Note 12 for additional information.
The following table presents the carrying amounts of the Company’s net assets that relate to its continuing involvement with mortgage loans that have been sold with servicing rights retained and the unpaid principal balance of these sold loans (in thousands):
 
 
Carrying Value of Net Assets
Recorded on the Consolidated Balance Sheets
 
Unpaid
Principal
Balance of
Sold Loans
 
 
Servicing
Rights,
Net (1)
 
Servicer and
Protective
Advances, Net
 
Payables and Accrued Liabilities
 
Total
 
June 30, 2017
 
$
424,040

 
$
17,104

 
$
(1,314
)
 
$
439,830

 
$
37,442,262

December 31, 2016
 
439,062

 
21,825

 
(1,983
)
 
458,904

 
36,116,570

__________
(1)
The Company has revised the December 31, 2016 disclosed amount of net servicing rights for which the Company has continuing involvement. The total net servicing rights balance reported in the consolidated balance sheets as of December 31, 2016 was not impacted by this disclosure revision.
At June 30, 2017 and December 31, 2016, 1.4% and 1.3%, respectively, of mortgage loans sold and serviced by the Company were 60 days or more past due.
The following table presents a summary of cash flows related to sales of mortgage loans (in thousands):
 
 
For the Three Months 
 Ended June 30,
 
For the Six Months 
 Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Cash proceeds received from sales, net of fees
 
$
4,551,321

 
$
4,825,191

 
$
9,803,873

 
$
10,290,056

Servicing fees collected (1)
 
29,563

 
36,407

 
60,366

 
71,179

Repurchases of previously sold loans
 
13,509

 
10,386

 
31,012

 
16,318

__________
(1)
Represents servicing fees collected on all loans sold whereby the Company has continuing involvement with mortgage loans that have been sold with servicing rights retained.
In connection with these sales, the Company recorded servicing rights using either a fair value model that utilizes Level 3 unobservable inputs or using an agreed upon sales price considered to be Level 2. Refer to Note 7 for information relating to servicing of residential loans.

16


Transfers of Reverse Loans
The Company, through RMS, is an approved issuer of Ginnie Mae HMBS. The HMBS are guaranteed by Ginnie Mae and collateralized by participation interests in HECMs insured by the FHA. The Company both originated and purchased HECMs that were pooled and securitized into HMBS that the Company sold into the secondary market with servicing rights retained. Effective January 2017, the Company exited the reverse mortgage originations business. As of June 30, 2017, the Company did not have any reverse loans remaining in its originations pipeline and is in the process of finalizing the shutdown of the reverse mortgage originations business. The Company will continue to fund undrawn tails available to borrowers.
Based upon the structure of the Ginnie Mae securitization program, the Company has determined that it has not met all of the requirements for sale accounting and accounts for these transfers as secured borrowings. Under this accounting treatment, the reverse loans remain on the consolidated balance sheets as residential loans. The proceeds from the transfer of reverse loans are recorded as HMBS related obligations with no gain or loss recognized on the transfer. Ginnie Mae, as guarantor of the HMBS, is obligated to the holders of the HMBS in an instance of RMS default on its servicing obligations, or when the proceeds realized on HECMs are insufficient to repay all outstanding HMBS related obligations. Ginnie Mae has recourse to RMS to the extent of the participation interests in HECMs serving as collateral to the HMBS, but does not have recourse to the general assets of the Company, except that Ginnie Mae has recourse to RMS in connection with certain claims relating to the performance and obligations of RMS as both an issuer of HMBS and a servicer of HECMs underlying HMBS.
At June 30, 2017, the unpaid principal balance and the carrying value associated with both the reverse loans and the real estate owned pledged as collateral to the securitization pools were $9.4 billion and $9.8 billion, respectively.
5. Fair Value
Basis for Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A three-tier fair value hierarchy is used to prioritize the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:
Level 1 — Valuation is based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 — Valuation is based on quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 — Valuation is based on inputs that are both significant to the fair value measurement and unobservable.
The accounting guidance concerning fair value allows the Company to elect to measure financial instruments at fair value and report the changes in fair value through net income or loss. This election can only be made at certain specified dates and is irrevocable once made. Other than mortgage loans held for sale, which the Company has elected to measure at fair value, the Company does not have a fair value election policy, but rather makes the election on an instrument-by-instrument basis as assets and liabilities are acquired or incurred, other than for those assets and liabilities that are required to be recorded and subsequently measured at fair value.
Transfers into and out of the fair value hierarchy levels are assumed to be as of the end of the quarter in which the transfer occurred. There were no transfers between levels during the six months ended June 30, 2017 or 2016.

17


Items Measured at Fair Value on a Recurring Basis
The following table summarizes the assets and liabilities in each level of the fair value hierarchy (in thousands). There was an insignificant amount of assets or liabilities measured at fair value on a recurring basis utilizing Level 1 assumptions.
 
 
June 30, 
 2017
 
December 31, 
 2016
Level 2
 
 
 
 
Assets
 
 
 
 
Mortgage loans held for sale
 
$
1,000,830

 
$
1,176,280

Servicing rights carried at fair value
 
6,650

 
13,170

Freestanding derivative instruments
 
8,835

 
34,543

Level 2 assets
 
$
1,016,315

 
$
1,223,993

Liabilities
 
 
 
 
Freestanding derivative instruments
 
$
3,749

 
$
7,611

Servicing rights related liabilities
 
1,314

 
1,902

Level 2 liabilities
 
$
5,063

 
$
9,513

 
 
 
 
 
Level 3
 
 
 
 
Assets
 
 
 
 
Reverse loans
 
$
10,440,669

 
$
10,742,922

Mortgage loans related to Non-Residual Trusts
 
406,006

 
450,377

Mortgage loans held for sale
 
8,738

 
—

Charged-off loans
 
49,626

 
46,963

Receivables related to Non-Residual Trusts
 
11,841

 
15,033

Servicing rights carried at fair value
 
864,108

 
936,423

Freestanding derivative instruments (IRLCs)
 
31,687

 
53,394

Level 3 assets
 
$
11,812,675

 
$
12,245,112

Liabilities
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
2,175

 
$
4,193

Mortgage-backed debt related to Non-Residual Trusts
 
470,600

 
514,025

HMBS related obligations
 
9,986,409

 
10,509,449

Level 3 liabilities
 
$
10,459,184

 
$
11,027,667



18


The following assets and liabilities are measured on the consolidated balance sheets at fair value on a recurring basis utilizing significant unobservable inputs or Level 3 assumptions in their valuation. The following tables provide a reconciliation of the beginning and ending balances of these assets and liabilities (in thousands):

 
 
For the Three Months Ended June 30, 2017
 
 
Fair Value
April 1, 2017
 
Total
Gains (Losses)
Included in
Comprehensive Loss
 
Purchases
 
Sales and Other
 
Originations / Issuances
 
Settlements
 
Fair Value
June 30, 2017
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse loans
 
$
10,599,732

 
$
72,569

 
$
1,635

 
$
—

 
$
84,972

 
$
(318,239
)
 
$
10,440,669

Mortgage1loans related to Non-Residual Trusts (1)
 
440,219

 
(3,343
)
 
—

 
(8,890
)
 
—

 
(21,980
)
 
406,006

Mortgage loans held for sale (1)
 
—

 
6

 
—

 
8,890

 
—

 
(158
)
 
8,738

Charged-off loans (2)
 
52,071

 
8,161

 
—

 
—

 
—

 
(10,606
)
 
49,626

Receivables related to Non-Residual Trusts
 
13,848

 
533

 
—

 
—

 
—

 
(2,540
)
 
11,841

Servicing rights carried at fair value
 
909,270

 
(66,633
)
 
73

 
4,131

 
17,267

 
—

 
864,108

Freestanding derivative instruments (IRLCs)
 
45,347

 
(13,590
)
 
—

 
—

 
—

 
(70
)
 
31,687

Total assets
 
$
12,060,487

 
$
(2,297
)
 
$
1,708

 
$
4,131

 
$
102,239

 
$
(353,593
)
 
$
11,812,675

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
(714
)
 
$
(1,461
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
(2,175
)
Mortgage-backed debt related to Non-Residual Trusts
 
(498,768
)
 
(5,406
)
 
—

 
—

 
—

 
33,574

 
(470,600
)
HMBS related obligations
 
(10,289,505
)
 
(64,697
)
 
—

 
—

 
(123,695
)
 
491,488

 
(9,986,409
)
Total liabilities
 
$
(10,788,987
)
 
$
(71,564
)
 
$
—

 
$
—

 
$
(123,695
)
 
$
525,062

 
$
(10,459,184
)
__________
(1)
During the three months ended June 30, 2017, $8.9 million of loans transferred from mortgage loans related to Non-Residual Trusts to mortgage loans held for sale upon exercising a mandatory call obligation. See Note 12 for additional information on the mandatory call obligations.
(2)
Included in gains on charged-off loans are gains from instrument-specific credit risk, which primarily result from changes in assumptions related to collection rates and discount rates, of $1.7 million during the three months ended June 30, 2017.

19


 
 
For the Three Months Ended June 30, 2016
 
 
Fair Value
April 1, 2016
 
Total
Gains (Losses)
Included in
Comprehensive Loss
 
Purchases and Other
 
Sales
 
Originations / Issuances
 
Settlements
 
Fair Value
June 30, 2016
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse loans
 
$
10,872,891

 
$
141,375

 
$
84,935

 
$
—

 
$
118,807

 
$
(307,771
)
 
$
10,910,237

Mortgage loans related to Non-Residual Trusts 
 
506,337

 
6,418

 
—

 
—

 
—

 
(24,576
)
 
488,179

Charged-off loans (1)
 
53,246

 
9,668

 
—

 
—

 
—

 
(11,852
)
 
51,062

Receivables related to Non-Residual Trusts
 
14,118

 
618

 
—

 
—

 
—

 
(2,055
)
 
12,681

Servicing rights carried at fair value (2)
 
1,427,331

 
(187,493
)
 
(2,531
)
 
(28,235
)
 
46,279

 
—

 
1,255,351

Freestanding derivative instruments (IRLCs)
 
64,407

 
11,304

 
—

 
—

 
—

 
(234
)
 
75,477

Total assets
 
$
12,938,330

 
$
(18,110
)
 
$
82,404

 
$
(28,235
)
 
$
165,086

 
$
(346,488
)
 
$
12,792,987

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
(255
)
 
$
92

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(163
)
Servicing rights related liabilities
 
(105,559
)
 
1,903

 
—

 
—

 
(27,886
)
 
10,717

 
(120,825
)
Mortgage-backed debt related to Non-Residual Trusts
 
(564,832
)
 
(7,987
)
 
—

 
—

 
—

 
24,752

 
(548,067
)
HMBS related obligations
 
(10,697,435
)
 
(133,725
)
 
—

 
—

 
(207,160
)
 
321,172

 
(10,717,148
)
Total liabilities
 
$
(11,368,081
)
 
$
(139,717
)
 
$
—

 
$
—

 
$
(235,046
)
 
$
356,641

 
$
(11,386,203
)
__________
(1)
Included in gains on charged-off loans are gains from instrument-specific credit risk, which primarily result from changes in assumptions related to collection rates and discount rates, of $3.4 million during the three months ended June 30, 2016.
(2)
During the three months ended June 30, 2016, the Company sold mortgage servicing rights with a fair value of $28.2 million and recognized a total net loss on sale of $0.5 million.


20


 
 
For the Six Months Ended June 30, 2017
 
 
Fair Value
January 1, 2017
 
Total
Gains (Losses)
Included in
Comprehensive Loss
 
Purchases
 
Sales and Other
 
Originations / Issuances
 
Settlements
 
Fair Value
June 30, 2017
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse loans
 
$
10,742,922

 
$
115,181

 
$
44,769

 
$
—

 
$
172,034

 
$
(634,237
)
 
$
10,440,669

Mortgage1loans related to Non-Residual Trusts (1)
 
450,377

 
9,159

 
—

 
(8,890
)
 
—

 
(44,640
)
 
406,006

Mortgage loans held for sale (1)
 
—

 
6

 
—

 
8,890

 
—

 
(158
)
 
8,738

Charged-off loans (2)
 
46,963

 
22,752

 
—

 
—

 
—

 
(20,089
)
 
49,626

Receivables related to Non-Residual Trusts
 
15,033

 
3,102

 
—

 
—

 
—

 
(6,294
)
 
11,841

Servicing rights carried at fair value
 
936,423

 
(119,112
)
 
519

 
4,207

 
42,071

 
—

 
864,108

Freestanding derivative instruments (IRLCs)
 
53,394

 
(21,596
)
 
—

 
—

 
—

 
(111
)
 
31,687

Total assets
 
$
12,245,112

 
$
9,492

 
$
45,288

 
$
4,207

 
$
214,105

 
$
(705,529
)
 
$
11,812,675

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
(4,193
)
 
$
2,018

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(2,175
)
Mortgage-backed debt related to Non-Residual Trusts
 
(514,025
)
 
(13,965
)
 
—

 
—

 
—

 
57,390

 
(470,600
)
HMBS related obligations
 
(10,509,449
)
 
(92,607
)
 
—

 
—

 
(278,010
)
 
893,657

 
(9,986,409
)
Total liabilities
 
$
(11,027,667
)
 
$
(104,554
)
 
$
—

 
$
—

 
$
(278,010
)
 
$
951,047

 
$
(10,459,184
)
__________
(1)
During the six months ended June 30, 2017, $8.9 million of loans transferred from mortgage loans related to Non-Residual Trusts to mortgage loans held for sale upon exercising a mandatory call obligation. See Note 12 for additional information on the mandatory call obligations.
(2)
Included in gains on charged-off loans are gains from instrument-specific credit risk, which primarily result from changes in assumptions related to collection rates and discount rates, of $11.9 million during the six months ended June 30, 2017.

21


 
 
For the Six Months Ended June 30, 2016
 
 
Fair Value
January 1, 2016
 
Total
Gains (Losses)
Included in
Comprehensive Loss
 
Purchases and Other
 
Sales
 
Originations / Issuances
 
Settlements
 
Fair Value
June 30, 2016
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse loans
 
$
10,763,816

 
$
296,209

 
$
138,955

 
—

 
$
245,958

 
$
(534,701
)
 
$
10,910,237

Mortgage loans related to Non-Residual Trusts 
 
526,016

 
11,581

 
—

 
—

 
—

 
(49,418
)
 
488,179

Charged-off loans (1)
 
49,307

 
24,044

 
—

 
—

 
—

 
(22,289
)
 
51,062

Receivables related to Non-Residual Trusts
 
16,542

 
151

 
—

 
—

 
—

 
(4,012
)
 
12,681

Servicing rights carried at fair value (2)
 
1,682,016

 
(514,073
)
 
17,106

 
(28,235
)
 
98,537

 
—

 
1,255,351

Freestanding derivative instruments (IRLCs)
 
51,519

 
24,406

 
—

 
—

 
—

 
(448
)
 
75,477

Total assets
 
$
13,089,216

 
$
(157,682
)
 
$
156,061

 
$
(28,235
)
 
$
344,495

 
$
(610,868
)
 
$
12,792,987

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
(1,070
)
 
$
907

 
$
—

 
—

 
$
—

 
$
—

 
$
(163
)
Servicing rights related liabilities
 
(117,000
)
 
5,197

 
—

 
—

 
(27,886
)
 
18,864

 
(120,825
)
Mortgage-backed debt related to Non-Residual Trusts
 
(582,340
)
 
(14,919
)
 
—

 
—

 
—

 
49,192

 
(548,067
)
HMBS related obligations
 
(10,647,382
)
 
(253,351
)
 
—

 
—

 
(410,107
)
 
593,692

 
(10,717,148
)
Total liabilities
 
$
(11,347,792
)
 
$
(262,166
)
 
$
—

 
$
—

 
$
(437,993
)
 
$
661,748

 
$
(11,386,203
)
__________
(1)
Included in gains on charged-off loans are gains from instrument-specific credit risk, which primarily result from changes in assumptions related to collection rates and discount rates, of $14.3 million during the six months ended June 30, 2016.
(2)
During the six months ended June 30, 2016, the Company sold mortgage servicing rights with a fair value of $28.2 million and recognized a total net loss on sale of $0.5 million.
All gains and losses on assets and liabilities measured at fair value on a recurring basis and classified as Level 3 within the fair value hierarchy, with the exception of gains and losses on charged-off loans, IRLCs, servicing rights carried at fair value, and servicing rights related liabilities, are recognized in either other net fair value gains (losses) or net fair value gains on reverse loans and related HMBS obligations on the consolidated statements of comprehensive loss. Gains and losses related to charged-off loans are recorded in other revenues, while gains and losses relating to IRLCs are recorded in net gains on sales of loans on the consolidated statements of comprehensive loss. The change in fair value of servicing rights carried at fair value and servicing rights related liabilities are recorded in net servicing revenue and fees on the consolidated statements of comprehensive loss. Total gains and losses included in the financial statement line items disclosed above include interest income and interest expense at the stated rate for interest-bearing assets and liabilities, respectively, accretion and amortization, and the impact of the changes in valuation inputs and assumptions.
The Company’s Valuation Committee determines and approves valuation policies and unobservable inputs used to estimate the fair value of items measured at fair value on a recurring basis. The Valuation Committee, consisting of certain members of the senior executive management team, meets on a quarterly basis to review the assets and liabilities that require fair value measurement, including how each asset and liability has actually performed in comparison to the unobservable inputs and the projected performance. The Valuation Committee also reviews related available market data.
The following is a description of the methods used to estimate the fair values of the Company’s assets and liabilities measured at fair value on a recurring basis, as well as the basis for classifying these assets and liabilities as Level 2 or 3 within the fair value hierarchy. The Company’s valuations consider assumptions that it believes a market participant would consider in valuing the assets and liabilities, the most significant of which are disclosed below. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the valuations for recent historical experience, as well as for current and expected relevant market conditions.
Residential loans
•
Reverse loans, mortgage loans related to Non-Residual Trusts and charged-off loans — These loans are not traded in an active, open market with readily observable prices. Accordingly, the Company estimates fair value using Level 3 unobservable market inputs. The estimated fair value is based on the net present value of projected cash flows over the estimated life of the loans. The discount rate assumption for these assets considers, as applicable, collateral and credit risk characteristics of the loans, collection rates, current market interest rates, expected duration, and current market yields.

22


•
Mortgage loans held for sale — These loans are primarily valued using a market approach by utilizing observable quoted market prices, where available, or prices for other whole loans with similar characteristics. The Company classifies these loans as Level 2 within the fair value hierarchy. Loans held for sale also includes loans that are not traded in an active, open market with readily observable prices. Accordingly, the Company estimates fair value using Level 3 unobservable market inputs. The estimated fair value is based on the net present value of projected cash flows over the estimated life of the loans. The discount rate assumption for these assets considers, as applicable, collateral and credit risk characteristics of the loans, collection rates, current market interest rates, expected duration, and current market yields.
Receivables related to Non-Residual Trusts — The Company estimates the fair value of these receivables using the net present value of expected cash flows from the LOCs to be used to pay bondholders over the remaining life of the securitization trusts and applies Level 3 unobservable market inputs in its valuation. Receivables related to Non-Residual Trusts are recorded in receivables, net on the consolidated balance sheets.
Servicing rights carried at fair value — The Company accounts for servicing rights associated with the risk-managed loan class at fair value. The Company primarily uses a discounted cash flow model to estimate the fair value of these assets, unless there is an agreed upon sales price for a specific portfolio on or prior to the applicable reporting date relating to such reporting period, in which case the assets are valued at the price that the trade will be executed. The assumptions used in the discounted cash flow model vary based on collateral stratifications including product type, remittance type, geography, delinquency, and coupon dispersion of the underlying loan portfolio. The Company classifies servicing rights that are valued at the agreed upon sales price within Level 2 of the fair value hierarchy, and the servicing rights that are valued using a discounted cash flow model are classified within Level 3 of the fair value hierarchy. The Company obtains third-party valuations on a quarterly basis to assess the reasonableness of the fair values calculated by the cash flow model.
Freestanding derivative instruments — Fair values of IRLCs are derived using valuation models incorporating market pricing for instruments with similar characteristics and by estimating the fair value of the servicing rights expected to be recorded at sale of the loan. The fair values are then adjusted for anticipated loan funding probability. Both the fair value of servicing rights expected to be recorded at the date of sale of the loan and anticipated loan funding probability are significant unobservable inputs and, as a result, IRLCs are classified as Level 3 within the fair value hierarchy. The loan funding probability ratio represents the aggregate likelihood that loans currently in a lock position will ultimately close, which is largely dependent on the loan processing stage that a loan is currently in and changes in interest rates from the time of the rate lock through the time a loan is closed. IRLCs have positive fair value at inception and change in value as interest rates and loan funding probability change. Rising interest rates have a positive effect on the fair value of the servicing rights component of the IRLC fair value and increase the loan funding probability. An increase in loan funding probability (i.e., higher aggregate likelihood of loans estimated to close) will result in the fair value of the IRLC increasing if in a gain position, or decreasing, to a lower loss, if in a loss position. A significant increase (decrease) to the fair value of servicing rights component in isolation could result in a significantly higher (lower) fair value measurement.
The fair value of forward sales commitments and MBS purchase commitments is determined based on observed market pricing for similar instruments; therefore, these contracts are classified as Level 2 within the fair value hierarchy. Counterparty credit risk is taken into account when determining fair value, although the impact is diminished by daily margin posting on all forward sales and purchase commitments. Refer to Note 6 for additional information on freestanding derivative financial instruments.
Servicing rights related liabilities — The fair value of the MSR liabilities related to NRM sales is consistent with the fair value methodology of the related servicing rights.
Mortgage-backed debt related to Non-Residual Trusts — This debt is not traded in an active, open market with readily observable prices. Accordingly, the Company estimates fair value using Level 3 unobservable market inputs. The estimated fair value of the debt is based on the net present value of the projected principal and interest payments owed for the estimated remaining life of the securitization trusts. An analysis of the credit assumptions for the underlying collateral in each of the securitization trusts is performed to determine the required payments to bondholders.
HMBS related obligations — These obligations are not traded in an active, open market with readily observable prices. Accordingly, the Company estimates fair value using Level 3 unobservable market inputs. The estimated fair value is based on the net present value of projected cash flows over the estimated life of the liabilities. The discount rate assumption for these liabilities is based on an assessment of current market yields for HMBS, expected duration, and current market interest rates. The yield on seasoned HMBS is adjusted based on the duration of each HMBS and assuming a constant spread to LIBOR.

23


The following tables present the significant unobservable inputs used in the fair value measurement of the assets and liabilities described above. The Company utilizes a discounted cash flow model to estimate the fair value of all Level 3 assets and liabilities included on the Consolidated Financial Statements at fair value on a recurring basis, with the exception of IRLCs for which the Company utilizes a market approach. Significant increases or decreases in any of the inputs disclosed below could result in a significantly lower or higher fair value measurement.
 
 
 
 
June 30, 2017
 
December 31, 2016
 
 
Significant
Unobservable Input (1) (2)
 
Range of Input (3)
 
Weighted
Average of Input (3)
 
Range of Input (3)
 
Weighted
Average of Input (3)
Assets
 
 
 
 
 
 
 
 
 
 
Reverse loans
 
Weighted-average remaining life in years (4)
 
0.3 - 10.2
 
3.6

 
0.6 - 10.2
 
3.8

 
 
Conditional repayment rate
 
12.81% - 70.80%
 
30.91
%
 
13.23% - 55.32%
 
28.48
%
 
 
Discount rate
 
1.81% - 3.65%
 
3.05
%
 
1.93% - 3.69%
 
2.93
%
Mortgage loans related to Non-Residual Trusts
 
Conditional prepayment rate
 
1.97% - 2.52%
 
2.28
%
 
1.98% - 2.67%
 
2.27
%
 
 
Conditional default rate
 
1.06% - 5.17%
 
2.87
%
 
1.02% - 4.25%
 
2.61
%
 
 
Loss severity
 
87.95% - 100.00%
 
99.04
%
 
79.98% - 100.00%
 
96.61
%
 
 
Discount rate
 
8.00%
 
8.00
%
 
8.00%
 
8.00
%
Mortgage loans held for sale
 
Conditional prepayment rate
 
2.10%
 
2.10
%
 
—
 
—

 
 
Conditional default rate
 
1.49%
 
1.49
%
 
—
 
—

 
 
Loss severity
 
85.57%
 
85.57
%
 
—
 
—

 
 
Discount rate
 
8.00%
 
8.00
%
 
—
 
—

Charged-off loans
 
Collection rate
 
3.04% - 5.15%
 
3.15
%
 
2.69% - 3.55%
 
2.74
%
 
 
Discount rate
 
28.00%
 
28.00
%
 
28.00%
 
28.00
%
Receivables related to Non-Residual Trusts
 
Conditional prepayment rate
 
2.37% - 3.23%
 
2.83
%
 
2.22% - 3.17%
 
2.65
%
 
 
Conditional default rate
 
2.60% - 5.87%
 
3.78
%
 
2.32% - 4.66%
 
3.34
%
 
 
Loss severity
 
86.18% - 100.00%
 
97.41
%
 
77.88% - 100.00%
 
94.51
%
 
 
Discount rate
 
0.50%
 
0.50
%
 
0.50%
 
0.50
%
Servicing rights carried at fair value
 
Weighted-average remaining life in years (4)
 
2.5 - 7.1
 
5.9

 
2.6 - 7.4
 
6.0

 
 
Discount rate
 
10.62% - 15.22%
 
11.97
%
 
10.68% - 14.61%
 
11.56
%
 
 
Conditional prepayment rate
 
6.08% - 23.87%
 
9.82
%
 
5.76% - 21.67%
 
9.09
%
 
 
Conditional default rate
 
0.02% - 3.21%
 
0.85
%
 
0.04% - 2.97%
 
0.88
%
 
 
Cost to service
 
$62 - $1,260
 
$132
 
$62 - $1,260
 
$128
Interest rate lock commitments
 
Loan funding probability
 
1.00% - 100.00%
 
64.94
%
 
16.00% - 100.00%
 
75.86
%
 
 
Fair value of initial servicing rights multiple (5) 
 
0.01 - 5.16
 
2.67

 
0.01 - 5.98
 
3.06


24


 
 
 
 
June 30, 2017
 
December 31, 2016
 
 
Significant
Unobservable Input (1) (2)
 
Range of Input (3)
 
Weighted
Average of Input (3)
 
Range of Input (3)
 
Weighted
Average of Input (3)
Liabilities
 
 
 
 
 
 
 
 
 
 
Interest rate lock commitments
 
Loan funding probability
 
21.18% - 100.00%
 
83.12
%
 
34.40% - 100.00%
 
83.36
%
 
 
Fair value of initial servicing rights multiple (5)
 
0.21 - 5.08
 
3.39

 
0.04 - 6.04
 
3.69

Mortgage-backed debt related to Non-Residual Trusts
 
Conditional prepayment rate
 
2.37% - 3.23%
 
2.83
%
 
2.22% - 3.17%
 
2.65
%
 
 
Conditional default rate
 
2.60% - 5.87%
 
3.78
%
 
2.32% - 4.66%
 
3.34
%
 
 
Loss severity
 
86.18% - 100.00%
 
97.41
%
 
77.88% - 100.00%
 
94.51
%
 
 
Discount rate
 
6.00%
 
6.00
%
 
6.00%
 
6.00
%
HMBS related obligations
 
Weighted-average remaining life in years (4)
 
0.2 - 7.6
 
3.2

 
0.4 - 7.2
 
3.2

 
 
Conditional repayment rate
 
11.10% - 76.13%
 
30.09
%
 
11.49% - 57.76%
 
27.74
%
 
 
Discount rate
 
1.47% - 3.12%
 
2.70
%
 
1.50% - 3.17%
 
2.56
%
__________
(1)
Conditional repayment rate includes assumptions for both voluntary and involuntary rates as well as assumptions for the assignment of HECMs to HUD, in accordance with obligations as servicer.
(2)
Voluntary and involuntary prepayment rates have been presented as conditional prepayment rate and conditional default rate, respectively.
(3)
With the exception of loss severity, fair value of initial servicing rights embedded in IRLCs and discount rate on charged-off loans, all significant unobservable inputs above are based on the related unpaid principal balance of the underlying collateral, or in the case of HMBS related obligations, the balance outstanding. Loss severity is based on projected liquidations. Fair value of servicing rights embedded in IRLCs represents a multiple of the annual servicing fee. The discount rate on charged-off loans is based on the loan balance at fair value.
(4)
Represents the remaining weighted-average life of the related unpaid principal balance or balance outstanding of the underlying collateral adjusted for assumptions for conditional repayment rate, conditional prepayment rate and conditional default rate, as applicable.
(5)
Fair value of servicing rights embedded in IRLCs, which represents a multiple of the annual servicing fee, excludes the impact of certain IRLCs identified as servicing released for which the Company does not ultimately realize the benefits.
Fair Value Option
With the exception of freestanding derivative instruments, the Company has elected the fair value option for the assets and liabilities described above as measured at fair value on a recurring basis. The fair value option was elected for these assets and liabilities as the Company believes fair value best reflects their expected future economic performance.
Presented in the table below is the estimated fair value and unpaid principal balance of loans and debt instruments that have contractual principal amounts and for which the Company has elected the fair value option (in thousands):
 
 
June 30, 2017
 
December 31, 2016
 
 
Estimated
Fair Value
 
Unpaid Principal
Balance
 
Estimated
Fair Value
 
Unpaid Principal
Balance
Loans at fair value under the fair value option
 
 
 
 
 
 
 
 
Reverse loans (1)
 
$
10,440,669

 
$
10,018,774

 
$
10,742,922

 
$
10,218,007

Mortgage loans held for sale (1)
 
1,009,568

 
969,551

 
1,176,280

 
1,148,897

Mortgage loans related to Non-Residual Trusts
 
406,006

 
469,429

 
450,377

 
513,545

Charged-off loans
 
49,626

 
2,391,064

 
46,963

 
2,439,318

Total
 
$
11,905,869

 
$
13,848,818

 
$
12,416,542

 
$
14,319,767


 
 
 
 
 
 
 
 
Debt instruments at fair value under the fair value option
 
 
 
 
 
 
 
 
Mortgage-backed debt related to Non-Residual Trusts
 
$
470,600

 
$
474,980

 
$
514,025

 
$
518,317

HMBS related obligations (2)
 
9,986,409

 
9,481,428

 
10,509,449

 
9,916,383

Total
 
$
10,457,009

 
$
9,956,408

 
$
11,023,474

 
$
10,434,700

__________
(1)
Includes loans that collateralize master repurchase agreements. Refer to Note 9 for additional information.
(2)
For HMBS related obligations, the unpaid principal balance represents the balance outstanding.

25


Included in mortgage loans related to Non-Residual Trusts are loans that are 90 days or more past due that have been deemed to have no fair value at June 30, 2017, as a result of severity rates being greater than 100%, and a fair value of $1.6 million at December 31, 2016. These loans have an unpaid principal balance of $31.1 million and $29.5 million at June 30, 2017 and December 31, 2016, respectively. Mortgage loans held for sale that are 90 days or more past due are insignificant at June 30, 2017 and at December 31, 2016. Charged-off loans are predominantly 90 days or more past due.
Items Measured at Fair Value on a Non-Recurring Basis
The Company held real estate owned, net of $111.3 million and $104.6 million at June 30, 2017 and December 31, 2016, respectively. In addition, the Company had loans that were in the process of foreclosure of $209.1 million and $418.4 million at June 30, 2017 and December 31, 2016, respectively, which are included in residential loans at amortized cost, net and residential loans at fair value on the consolidated balance sheets. Real estate owned, net is included on the consolidated balance sheets within other assets and is measured at net realizable value on a non-recurring basis utilizing significant unobservable inputs or Level 3 assumptions in their valuation.
The following table presents the significant unobservable input used in the fair value measurement of real estate owned, net:
 
 
 
 
June 30, 2017
 
December 31, 2016
 
 
Significant
Unobservable Input
 
Range of Input
 
Weighted
Average of Input
 
Range of Input
 
Weighted
Average of Input
Real estate owned, net
 
Loss severity (1)
 
0.00% - 85.91%
 
6.80
%
 
0.00% - 61.61%
 
7.30
%
__________
(1)
Loss severity is based on the unpaid principal balance of the related loan at the time of foreclosure.
The Company held real estate owned, net in the Reverse Mortgage and Servicing segments and Other non-reportable segment of $98.3 million, $12.3 million and $0.7 million at June 30, 2017, respectively, and $90.7 million, $12.9 million and $1.0 million at December 31, 2016, respectively. In determining fair value, the Company either obtains appraisals or performs a review of historical severity rates of real estate owned previously sold by the Company. When utilizing historical severity rates, the properties are stratified by collateral type and/or geographical concentration and length of time held by the Company. The severity rates are reviewed for reasonableness by comparison to third-party market trends and fair value is determined by applying severity rates to the stratified population. In the determination of fair value of real estate owned associated with reverse mortgages, the Company considers amounts typically covered by FHA insurance. Management approves valuations that have been determined using the historical severity rate method.

26


Fair Value of Other Financial Instruments
The following table presents the carrying amounts and estimated fair values of financial assets and liabilities that are not recorded at fair value on a recurring or non-recurring basis and their respective levels within the fair value hierarchy (in thousands). This table excludes cash and cash equivalents, restricted cash and cash equivalents, servicer payables and warehouse borrowings as these financial instruments are highly liquid or short-term in nature and as a result, their carrying amounts approximate fair value.
 
 
 
 
June 30, 2017
 
December 31, 2016
 
 
Fair Value
Hierarchy
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
Financial assets
 
 
 
 
 
 
 
 
 
 
Residential loans at amortized cost, net (1)
 
Level 3
 
$
709,080

 
$
712,776

 
$
665,209

 
$
674,851

Servicer and protective advances, net
 
Level 3
 
915,185

 
864,023

 
1,195,380

 
1,147,155

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
 
Servicing advance liabilities (2)
 
Level 3
 
543,391

 
543,869

 
781,734

 
782,570

Corporate debt (3)
 
Level 2
 
2,114,857

 
1,715,781

 
2,126,176

 
1,967,518

Mortgage-backed debt carried at amortized cost
 
Level 3
 
407,175

 
417,212

 
429,931

 
435,679

__________
(1)
Includes loans subject to repurchase from Ginnie Mae.
(2)
The carrying amounts of servicing advance liabilities are net of deferred issuance costs, including those relating to line-of-credit arrangements, which are recorded in other assets.
(3)
The carrying amounts of corporate debt are net of the 2013 Revolver deferred issuance costs, which are recorded in other assets on the consolidated balance sheets.
The following is a description of the methods and significant assumptions used in estimating the fair value of the Company’s financial instruments that are not measured at fair value on a recurring or non-recurring basis.
Residential loans at amortized cost, net — The methods and assumptions used to estimate the fair value of residential loans carried at amortized cost are the same as those described above for mortgage loans related to Non-Residual Trusts.
Servicer and protective advances, net — The estimated fair value of these advances is based on the net present value of expected cash flows. The determination of expected cash flows includes consideration of recoverability clauses in the Company’s servicing agreements, as well as assumptions related to the underlying collateral and when proceeds may be used to recover these receivables.
Servicing advance liabilities — The estimated fair value of the majority of these liabilities approximates carrying value as these liabilities bear interest at a rate that is adjusted regularly based on a market index.
Corporate debt — The Company’s 2013 Term Loan, Convertible Notes, and Senior Notes are not traded in an active, open market with readily observable prices. The estimated fair value of corporate debt is primarily based on an average of broker quotes.
Mortgage-backed debt carried at amortized cost — The methods and assumptions used to estimate the fair value of mortgage-backed debt carried at amortized cost are the same as those described above for mortgage-backed debt related to Non-Residual Trusts.

27


Net Gains on Sales of Loans
Provided in the table below is a summary of the components of net gains on sales of loans (in thousands):
 
 
For the Three Months 
 Ended June 30,
 
For the Six Months 
 Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Realized gains on sales of loans
 
$
82,683

 
$
79,999

 
$
108,768

 
$
160,079

Change in unrealized gains on loans held for sale
 
(6,046
)
 
2,548

 
13,612

 
12,839

Gains (losses) on interest rate lock commitments
 
(15,052
)
 
11,395

 
(19,578
)
 
25,312

Losses on forward sales commitments
 
(2,858
)
 
(43,384
)
 
(23,406
)
 
(110,337
)
Losses on MBS purchase commitments
 
(14,102
)
 
(2,477
)
 
(2,218
)
 
(13,273
)
Capitalized servicing rights
 
19,006

 
46,279

 
51,390

 
98,537

Provision for repurchases
 
(2,003
)
 
(3,724
)
 
(3,798
)
 
(8,437
)
Interest income
 
9,222

 
9,540

 
20,425

 
19,933

Other
 
(305
)
 
—

 
(294
)
 
—

Net gains on sales of loans
 
$
70,545

 
$
100,176

 
$
144,901

 
$
184,653

Net Fair Value Gains on Reverse Loans and Related HMBS Obligations
Provided in the table below is a summary of the components of net fair value gains on reverse loans and related HMBS obligations (in thousands):
 
 
For the Three Months 
 Ended June 30,
 
For the Six Months 
 Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Interest income on reverse loans
 
$
113,644

 
$
113,631

 
$
226,946

 
$
224,225

Change in fair value of reverse loans
 
(41,075
)
 
27,744

 
(111,765
)
 
71,984

Net fair value gains on reverse loans
 
72,569

 
141,375

 
115,181

 
296,209

 
 
 
 
 
 
 
 
 
Interest expense on HMBS related obligations
 
(101,290
)
 
(103,368
)
 
(203,726
)
 
(206,622
)
Change in fair value of HMBS related obligations
 
36,593

 
(30,357
)
 
111,119

 
(46,729
)
Net fair value losses on HMBS related obligations
 
(64,697
)
 
(133,725
)
 
(92,607
)
 
(253,351
)
Net fair value gains on reverse loans and related HMBS obligations
 
$
7,872

 
$
7,650

 
$
22,574

 
$
42,858

6. Freestanding Derivative Financial Instruments
The following table provides the total notional or contractual amounts and related fair values of derivative assets and liabilities as well as cash margin (in thousands):
 
 
June 30, 2017
 
December 31, 2016
 
 
Notional/
Contractual
Amount
 
Fair Value
 
Notional/
Contractual
Amount
 
Fair Value
 
 
 
Derivative
Assets
 
Derivative
Liabilities
 
 
Derivative
Assets
 
Derivative
Liabilities
Interest rate lock commitments
 
$
2,215,331

 
$
31,687

 
$
2,175

 
$
3,046,549

 
$
53,394

 
$
4,193

Forward sales commitments
 
3,083,723

 
8,835

 
1,462

 
3,978,000

 
29,471

 
7,609

MBS purchase commitments
 
699,000

 
—

 
2,287

 
623,500

 
5,072

 
2

Total derivative instruments
 
 
 
$
40,522

 
$
5,924

 
 
 
$
87,937

 
$
11,804

Cash margin
 
 
 
$
865

 
$
2,387

 
 
 
$
—

 
$
30,941


28


Derivative positions subject to netting arrangements include all forward sale commitments, MBS purchase commitments, and cash margin, as reflected in the table above, and allow the Company to net settle asset and liability positions, as well as associated cash margin, with the same counterparty. After consideration of these netting arrangements and offsetting positions by counterparty, the total net settlement amount as it relates to these positions were asset positions of $4.9 million and $5.5 million, and liability positions of $1.5 million and $9.0 million, at June 30, 2017 and December 31, 2016, respectively. A master netting arrangement with one of the Company’s counterparties also allows for offsetting derivative positions and margin against amounts associated with the master repurchase agreement with that same counterparty. At June 30, 2017, the Company’s net derivative asset position with that counterparty of $0.5 million was comprised of a net derivative asset position of $0.8 million and $1.6 million of over-collateralized positions, partially offset by a cash margin received of $1.9 million associated with the master repurchase agreement.
The Company also has a master netting arrangement with another of the Company’s counterparties, which also allows for offsetting derivative positions and margin against amounts associated with the master repurchase agreement with the same counterparty. At June 30, 2017, the Company’s net derivative asset position with that counterparty was $0.8 million. Under the master netting arrangement, the Company is able to utilize certain over-collateralized positions and excess cash deposited with the counterparty associated with the master repurchase agreement to reduce potential cash margin posting requirements on derivative transactions. At June 30, 2017, there were $14.6 million of over-collateralized positions and $23.5 million in excess cash deposited with the counterparty related to the master repurchase agreement. The master netting agreement does not obligate the counterparty to transfer cash margin to the Company related to the master repurchase agreement over-collateralization and excess cash positions.
Over collateralized positions on master repurchase agreements are not reflected as margin in the table above. Refer to Note 5 for a summary of the gains and losses on freestanding derivative instruments.
7. Servicing of Residential Loans

The Company services residential loans and real estate owned for itself and on behalf of third-party credit owners. The Company’s total servicing portfolio consists of accounts serviced for others for which servicing rights have been capitalized, accounts subserviced for others, and residential loans and real estate owned carried on the consolidated balance sheets, but excludes charged-off loans managed by the Servicing segment.
Provided below is a summary of the Company’s total servicing portfolio (dollars in thousands):
 
 
June 30, 2017
 
December 31, 2016
 
 
Number
of Accounts
 
Unpaid Principal
Balance
 
Number
of Accounts
 
Unpaid Principal
Balance
Third-party credit owners
 
 
 
 
 
 
 
 
Capitalized servicing rights
 
960,478

 
$
105,904,354

 
1,032,676

 
$
112,936,287

Capitalized subservicing (1)
 
116,000

 
6,350,359

 
130,018

 
7,426,803

Subservicing (2)
 
771,501

 
109,068,633

 
804,461

 
113,392,035

Total third-party servicing portfolio
 
1,847,979

 
221,323,346

 
1,967,155

 
233,755,125

On-balance sheet residential loans and real estate owned
 
93,009

 
12,312,096

 
97,388

 
12,690,018

Total servicing portfolio
 
1,940,988

 
$
233,635,442

 
2,064,543

 
$
246,445,143

__________
(1)
Consists of subservicing contracts acquired through business combinations whereby the aggregate benefits from the contract are greater than adequate compensation for performing the servicing.
(2)
Includes $64.6 billion in unpaid principal balance of subservicing at December 31, 2016 that relates to transactions with NRM that closed in the fourth quarter of 2016, whereby the Company sold servicing rights with respect to pools of mortgage loans with subservicing retained.

29


Net Servicing Revenue and Fees
The Company earns servicing income from its third-party servicing portfolio. The following table presents the components of net servicing revenue and fees, which includes revenues earned by the Servicing and Reverse Mortgage segments (in thousands):
 
 
For the Three Months 
 Ended June 30,
 
For the Six Months 
 Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Servicing fees (1) (2)
 
$
129,154

 
$
177,082

 
$
262,547

 
$
354,836

Incentive and performance fees (1)
 
16,795

 
18,011

 
31,949

 
37,783

Ancillary and other fees (1) (3)
 
22,012

 
25,058

 
45,255

 
49,667

Servicing revenue and fees
 
167,961

 
220,151

 
339,751

 
442,286

Amortization of servicing rights (4) (5)
 
(9,926
)
 
(2,625
)
 
(14,951
)
 
(7,236
)
Change in fair value of servicing rights
 
(66,714
)
 
(187,493
)
 
(120,230
)
 
(514,073
)
Change in fair value of servicing rights related liabilities (2) (6)
 
—

 
1,903

 
(62
)
 
5,197

Net servicing revenue and fees
 
$
91,321

 
$
31,936

 
$
204,508

 
$
(73,826
)
__________
(1)
Includes subservicing fees and incentive, performance, ancillary and other fees related to servicing assets held by WCO of $1.2 million and $0.1 million, respectively, for the three months ended June 30, 2016 and $2.1 million and $0.3 million, respectively, for the six months ended June 30, 2016.
(2)
Includes a pass-through of $1.8 million and $3.0 million relating to servicing rights sold to WCO for the three and six months ended June 30, 2016, respectively.
(3)
Includes late fees of $14.9 million and $17.9 million for the three months ended June 30, 2017 and 2016, respectively, and $30.5 million and $33.7 million for the six months ended June 30, 2017 and 2016, respectively.
(4)
Includes amortization of a servicing liability of $1.3 million and $3.1 million for the three months ended June 30, 2017 and 2016, respectively, and $2.1 million and $4.3 million for the six months ended June 30, 2017 and 2016, respectively.
(5)
Includes impairment of servicing rights and a servicing liability of $8.0 million and $11.1 million for the three and six months ended June 30, 2017, respectively.
(6)
Includes interest expense on servicing rights related liabilities, which represents the accretion of fair value, of $3.1 million and $7.0 million for the three and six months ended June 30, 2016, respectively.
Servicing Rights
Servicing Rights Carried at Amortized Cost
The following table summarizes the activity in the carrying value of servicing rights carried at amortized cost by class (in thousands):
 
 
For the Six Months 
 Ended June 30, 2017
 
For the Six Months 
 Ended June 30, 2016
 
 
Mortgage Loan
 
Reverse Loan
 
Mortgage Loan
 
Reverse Loan
Balance at beginning of the period
 
$
74,621

 
$
5,505

 
$
99,302

 
$
7,258

Sales
 
—

 
—

 
(103
)
 
—

Amortization of servicing rights (1)
 
(5,162
)
 
(782
)
 
(10,626
)
 
(906
)
Impairment of servicing rights (2)
 
(9,042
)
 
—

 
—

 
—

Balance at end of the period
 
$
60,417

 
$
4,723

 
$
88,573

 
$
6,352

__________
(1)
Includes amortization of servicing rights for the mortgage loan class and the reverse loan class of $2.9 million and $0.4 million, respectively, for the three months ended June 30, 2017 and $5.2 million and $0.4 million, respectively, for the three months ended June 30, 2016.
(2)
Includes impairment of servicing rights related to the mortgage loan class of $7.7 million for the three months ended June 30, 2017.

30


Servicing rights accounted for at amortized cost are evaluated for impairment by strata based on their estimated fair values. The risk characteristics used to stratify servicing rights for purposes of measuring impairment are the type of loan products, which consist of manufactured housing loans, first lien residential mortgages and second lien residential mortgages for the mortgage loan class, and reverse mortgages for the reverse loan class. The fair value of servicing rights for the mortgage loan class and the reverse loan class was $62.0 million and $5.7 million, respectively at June 30, 2017, and $79.9 million and $7.3 million, respectively, at December 31, 2016. Fair value was estimated using the present value of projected cash flows over the estimated period of net servicing income.
The estimation of fair value requires significant judgment and uses key economic inputs and assumptions, which are provided in the table below:
 
 
June 30, 2017
 
December 31, 2016
 
 
Mortgage Loan
 
Reverse Loan
 
Mortgage Loan
 
Reverse Loan
Weighted-average remaining life in years (1)
 
4.4

 
2.8

 
5.1

 
2.6

Weighted-average discount rate
 
13.00
%
 
15.00
%
 
13.00
%
 
15.00
%
Conditional prepayment rate (2)
 
6.95
%
 
N/A

 
6.51
%
 
N/A

Conditional default rate (2)
 
2.40
%
 
N/A

 
2.33
%
 
N/A

Conditional repayment rate (3)
 
N/A

 
32.28
%
 
N/A

 
32.28
%
__________
(1)
Represents the remaining weighted-average life of the related unpaid principal balance of the underlying collateral adjusted for assumptions for conditional repayment rate, conditional prepayment rate and conditional default rate, as applicable.
(2)
Voluntary and involuntary prepayment rates have been presented as conditional prepayment rate and conditional default rate, respectively.
(3)
Conditional repayment rate includes assumptions for both voluntary and involuntary rates as well as assumptions for the assignment of HECMs to HUD, in accordance with obligations as servicer.
The valuation of servicing rights is affected by the underlying assumptions above. Should the actual performance and timing differ materially from the Company’s projected assumptions, the estimate of fair value of the servicing rights could be materially different.
Servicing Rights Carried at Fair Value
The following table summarizes the activity in servicing rights carried at fair value (in thousands):
 
 
For the Three Months 
 Ended June 30,
 
For the Six Months 
 Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Balance at beginning of the period
 
$
930,333

 
$
1,427,331

 
$
949,593

 
$
1,682,016

Purchases
 
73

 
2,202

 
519

 
21,839

Servicing rights capitalized upon sales of loans
 
19,392

 
46,279

 
53,296

 
98,537

Sales
 
(12,326
)
 
(28,235
)
 
(12,420
)
 
(28,235
)
Other
 
—

 
(4,733
)
 
—

 
(4,733
)
Change in fair value due to:
 
 
 
 
 
 
 
 
Changes in valuation inputs or other assumptions (1)
 
(34,751
)
 
(127,713
)
 
(52,281
)
 
(386,173
)
Other changes in fair value (2)
 
(31,963
)
 
(59,780
)
 
(67,949
)
 
(127,900
)
Total change in fair value
 
(66,714
)
 
(187,493
)
 
(120,230
)
 
(514,073
)
Balance at end of the period (3)
 
$
870,758

 
$
1,255,351

 
$
870,758

 
$
1,255,351

__________
(1)
Represents the change in fair value typically resulting from market-driven changes in interest rates and prepayment speeds.
(2)
Represents the realization of expected cash flows over time.
(3)
Includes servicing rights that were sold to WCO and accounted for as a financing transaction of $35.6 million at June 30, 2016.

31


The fair value of servicing rights accounted for at fair value was estimated using the present value of projected cash flows over the estimated period of net servicing income. The estimation of fair value requires significant judgment and uses key economic inputs and assumptions, which are described in Note 5. Should the actual performance and timing differ materially from the Company's projected assumptions, the estimate of fair value of the servicing rights could be materially different.
The following table summarizes the hypothetical effect on the fair value of servicing rights carried at fair value using adverse changes of 10% and 20% to the weighted average of the significant assumptions used in valuing these assets (dollars in thousands):
 
 
June 30, 2017
 
December 31, 2016
 
 
 
 
Decline in fair value due to
 
 
 
Decline in fair value due to
 
 
Assumption
 
10% adverse change
 
20% adverse change
 
Assumption
 
10% adverse change
 
20% adverse change
Weighted-average discount rate
 
11.97
%
 
$
(38,285
)
 
$
(73,495
)
 
11.56
%
 
$
(41,926
)
 
$
(80,512
)
Weighted-average conditional prepayment rate
 
9.82
%
 
(34,899
)
 
(69,918
)
 
9.09
%
 
(30,513
)
 
(59,083
)
Weighted-average conditional default rate
 
0.85
%
 
(27,968
)
 
(57,189
)
 
0.88
%
 
(28,370
)
 
(57,854
)
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the fair value of the servicing rights is calculated without changing any other assumption, while in reality changes in one factor may result in changes in another, which may either magnify or counteract the effect of the change.
Fair Value of Originated Servicing Rights
For mortgage loans sold with servicing retained, the Company used the following inputs and assumptions to determine the fair value of servicing rights at the dates of sale. These servicing rights are included in servicing rights capitalized upon sales of loans in the table presented above that summarizes the activity in servicing rights accounted for at fair value.
 
 
For the Three Months 
 Ended June 30,
 
For the Six Months 
 Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Weighted-average life in years
 
6.2
 
6.2
 
6.4
 
6.2
Weighted-average discount rate
 
14.62%
 
12.20%
 
14.02%
 
12.72%
Weighted-average conditional prepayment rate
 
9.79%
 
9.11%
 
8.72%
 
9.41%
Weighted-average conditional default rate
 
0.53%
 
0.46%
 
0.44%
 
0.38%

32


8. Payables and Accrued Liabilities
Payables and accrued liabilities consist of the following (in thousands):
 
 
June 30, 
 2017
 
December 31, 
 2016
Loans subject to repurchase from Ginnie Mae (1)
 
$
248,596

 
$
184,289

Accounts payable and accrued liabilities
 
129,291

 
155,556

Curtailment liability
 
120,043

 
121,305

Employee-related liabilities
 
51,741

 
91,063

Originations liability
 
44,020

 
62,969

Servicing rights and related advance purchases payable
 
15,341

 
18,187

Accrued interest payable
 
9,625

 
9,414

Uncertain tax positions (2)
 
7,015

 
9,414

Derivative instruments
 
5,924

 
11,804

Payables to insurance carriers
 
3,355

 
5,452

Margin payable on derivative instruments
 
2,387

 
30,941

Other
 
64,052

 
58,617

Total payables and accrued liabilities
 
$
701,390

 
$
759,011

__________
(1)
For certain mortgage loans that the Company has pooled and securitized with Ginnie Mae, the Company as the issuer has the unilateral right to repurchase, without Ginnie Mae’s prior authorization, any individual loan in a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. As a result of this unilateral right, the Company must recognize the delinquent loan on its consolidated balance sheets when the loan becomes 90 days delinquent and establish a corresponding liability regardless of the Company’s intention to repurchase the loan.
(2)
Included in the uncertain tax position at December 31, 2016 is $2.5 million related to the sale of insurance business as described in Note 1. In connection with the closing of the sale on February 1, 2017, the uncertain tax position related to the insurance business was reversed.
Costs Associated with Exit Activities
During 2015, the Company took distinct actions to improve efficiencies within the organization, which included re-branding its mortgage business by consolidating Ditech Mortgage Corp and Green Tree Servicing into one legal entity with one brand. Additionally, the Company took measures to restructure its mortgage loan servicing operations and improve the profitability of the reverse mortgage business by streamlining its geographic footprint and strengthening its retail originations channel. These actions resulted in costs relating to the closing of offices and the termination of certain employees, as well as other expenses to institute efficiencies. The Company completed these activities in the fourth quarter of 2015. Furthermore, the Company made the decision during the fourth quarter of 2015 to exit the consumer retail channel of the Originations segment. The actions to improve efficiencies, re-brand the mortgage business, restructure the servicing operations and exit from the consumer retail channel are collectively referred to as the 2015 Actions herein.
In addition, during 2016, the Company initiated actions in connection with its continued efforts to enhance efficiencies and streamline processes, which included various organizational changes to the scale and proficiency of the Company's leadership team and support functions. Further, effective January 2017, the Company exited the reverse mortgage originations business, while maintaining its reverse mortgage servicing operations. These actions resulted in costs relating to the termination of certain employees and closing of offices. These actions are collectively referred to as the 2016 Actions herein.
The Company continues with the transformation of the business during 2017 in an effort to optimize the workforce, processes and functional locations of its businesses as it seeks to achieve sustainable growth. Accordingly, the Company has incurred and will continue to incur costs, including severance and related costs, office closures, and other costs in connection with its transformation efforts during 2017. The actions that have been and will be taken in connection with these efforts are collectively referred to as the 2017 Actions herein.
Over the next few years, the Company intends to consolidate its operations into three “core” Ditech sites - Fort Washington, PA; Jacksonville, FL; and Tempe, AZ; and one “core” RMS site - Houston, TX. The Irving, TX location is expected to be closed by the end of 2017 and our remaining sites are undergoing strategic review and plans for them are expected to be finalized by early 2018. These strategic reviews could result in additional site closings or other outcomes. The costs associated with such actions will be included in the exit liability as such time that each action is approved by management.

33


The costs resulting from the 2015 Actions, 2016 Actions and 2017 Actions are recorded in salaries and benefits and general and administrative expenses on the Company's consolidated statements of comprehensive loss.
The following table presents the current period activity in the accrued exit liability resulting from each of the 2015 Actions, 2016 Actions and 2017 Actions described above, which is included in payables and accrued liabilities on the consolidated balance sheets, and the related charges and cash payments and other settlements associated with these actions (in thousands):
 
 
For the Six Months Ended June 30, 2017
 
 
2015 Actions
 
2016 Actions
 
2017 Actions
 
Total
Balance at January 1, 2017
 
$
988

 
$
11,878

 
$
—

 
$
12,866

Charges
 
 
 
 
 
 
 
 
Severance and related costs (1)
 
(57
)
 
118

 
6,990

 
7,051

Office closures and other costs
 
29

 
50

 
839

 
918

Total charges
 
(28
)
 
168

 
7,829

 
7,969

Cash payments or other settlements
 
 
 
 
 
 
 
 
Severance and related costs
 
(163
)
 
(10,609
)
 
(1,108
)
 
(11,880
)
Office closures and other costs
 
(328
)
 
(289
)
 
(128
)
 
(745
)
Total cash payments or other settlements
 
(491
)
 
(10,898
)
 
(1,236
)
 
(12,625
)
Balance at June 30, 2017
 
$
469

 
$
1,148

 
$
6,593

 
$
8,210

 
 
 
 
 
 
 
 
 
Cumulative charges incurred
 
 
 
 
 
 
 
 
Severance and related costs
 
7,181

 
19,886

 
6,990

 
34,057

Office closures and other costs
 
6,564

 
3,828

 
839

 
11,231

Total cumulative charges incurred
 
$
13,745

 
$
23,714

 
$
7,829

 
$
45,288

 
 
 
 
 
 
 
 
 
Total expected costs to be incurred (2)
 
$
13,745

 
$
23,738

 
$
11,490

 
$
48,973

__________
(1)
Includes adjustments to prior year accruals resulting from changes to previous estimates.
(2)
Total expected costs for the 2017 Actions are based on actions as set forth in the 2017 operating plan. These expected costs could change based on additional actions as determined by management throughout the year.

34


The following table presents the current period activity for each of the 2015 Actions, 2016 Actions, and 2017 Actions described above by reportable segment (in thousands):
 
 
For the Six Months Ended June 30, 2017
 
 
Servicing
 
Originations
 
Reverse
Mortgage
 
Other
 
Total
Consolidated
Balance at January 1, 2017
 
 
 
 
 
 
 
 
 
 
2015 Actions
 
$
453

 
$
260

 
$
275

 
$
—

 
$
988

2016 Actions
 
4,323

 
1,023

 
2,222

 
4,310

 
11,878

2017 Actions
 
—

 
—

 
—

 
—

 
—

Total balance at January 1, 2017
 
4,776

 
1,283

 
2,497

 
4,310

 
12,866

Charges
 
 
 
 
 
 
 
 
 
 
2015 Actions (1)
 
(57
)
 
21

 
8

 
—

 
(28
)
2016 Actions (1)
 
82

 
(126
)
 
94

 
118

 
168

2017 Actions
 
5,659

 
980

 
1,190

 
—

 
7,829

Total charges
 
5,684

 
875

 
1,292

 
118

 
7,969

Cash payments or other settlements
 
 
 
 
 
 
 
 
 
 
2015 Actions
 
(133
)
 
(185
)
 
(173
)
 
—

 
(491
)
2016 Actions
 
(3,875
)
 
(876
)
 
(1,899
)
 
(4,248
)
 
(10,898
)
2017 Actions
 
(618
)
 
(457
)
 
(161
)
 
—

 
(1,236
)
Total cash payments or other settlements
 
(4,626
)
 
(1,518
)
 
(2,233
)
 
(4,248
)
 
(12,625
)
Balance at June 30, 2017
 
 
 
 
 
 
 
 
 
 
2015 Actions
 
263

 
96

 
110

 
—

 
469

2016 Actions
 
530

 
21

 
417

 
180

 
1,148

2017 Actions
 
5,041

 
523

 
1,029

 
—

 
6,593

Total balance at June 30, 2017
 
$
5,834

 
$
640

 
$
1,556

 
$
180

 
$
8,210

 
 
 
 
 
 
 
 
 
 
 
Total cumulative charges incurred
 
 
 
 
 
 
 
 
 
 
2015 Actions
 
$
6,424

 
$
4,611

 
$
1,859

 
$
851

 
$
13,745

2016 Actions
 
11,684

 
1,010

 
5,320

 
5,700

 
23,714

2017 Actions
 
5,659

 
980

 
1,190

 
—

 
7,829

Total cumulative charges incurred
 
$
23,767

 
$
6,601

 
$
8,369

 
$
6,551

 
$
45,288

 
 
 
 
 
 
 
 
 
 
 
Total expected costs to be incurred
 
 
 
 
 
 
 
 
 
 
2015 Actions
 
$
6,424

 
$
4,611

 
$
1,859

 
$
851

 
$
13,745

2016 Actions
 
11,684

 
1,010

 
5,344

 
5,700

 
23,738

2017 Actions (2)
 
9,201

 
980

 
1,248

 
61

 
11,490

Total expected costs to be incurred
 
$
27,309

 
$
6,601

 
$
8,451

 
$
6,612

 
$
48,973

__________
(1)
Includes adjustments to prior year accruals resulting from changes to previous estimates.
(2)
Total expected costs for the 2017 Actions are based on actions as set forth in the 2017 operating plan. These expected costs could change based on additional actions as determined by management throughout the year.

35


9. Warehouse Borrowings
The Company's subsidiaries enter into master repurchase agreements with lenders providing warehouse facilities. The warehouse facilities are used to fund the origination and purchase of residential loans, as well as the repurchase of certain HECMs and real estate owned from Ginnie Mae securitization pools. The facilities had an aggregate funding capacity of $2.4 billion at June 30, 2017 and are secured by certain residential loans and real estate owned. At June 30, 2017, the interest rates on the facilities were primarily based on LIBOR plus between 2.10% and 3.13%, and have various expiration dates through May 2018. At June 30, 2017, $0.9 billion of the outstanding borrowings were secured by $1.0 billion in originated and purchased residential loans and $440.9 million of outstanding borrowings were secured by $522.5 million in repurchased HECMs and real estate owned.
In August 2017, one of the facilities used to repurchase HECMs and real estate owned from Ginnie Mae securitization pools was amended to increase the aggregate and committed capacity by an additional $100.0 million.
Borrowings utilized to fund the origination and purchase of residential loans are due upon the earlier of sale or securitization of the loan or within 60 to 90 days of borrowing. On average, the Company sells or securitizes these loans approximately 20 days from the date of borrowing. Borrowings utilized to repurchase HECMs and real estate owned are due upon the earlier of receipt of claim proceeds from HUD or receipt of proceeds from liquidation of the related real estate owned. In any event, borrowings associated with repurchased HECMs are due, depending on the status of the repurchased HECM and the agreement, within 120 to 364 days of borrowing, while certain borrowings relating to repurchased real estate owned are due, depending on the agreement, within 180 days or 364 days. In accordance with the terms of the agreements, the Company may be required to post cash collateral should the fair value of the pledged assets decrease below certain contractual thresholds or upon reaching certain aging limits. The Company is exposed to counterparty credit risk associated with the repurchase agreements in the event of non-performance by the counterparties. The amount at risk during the term of the repurchase agreement is equal to the difference between the amount borrowed by the Company and the fair value of the pledged assets. The Company mitigates this risk through counterparty monitoring procedures, including monitoring of the counterparties' credit ratings and review of their financial statements.
All of the Company’s master repurchase agreements contain customary events of default and covenants, the most significant of which are financial covenants. Financial covenants most sensitive to the Company’s operating results and financial position are minimum tangible net worth requirements, indebtedness to tangible net worth ratio requirements, and minimum liquidity and profitability requirements. The Company received waivers and/or amendments required as a result of the restatement of its consolidated financial statements as of and for the periods ended June 30, 2016, September 30, 2016, December 31, 2016 and March 31, 2017 and for conclusions reached regarding the Company's ability to continue as a going concern. Ditech Financial's master repurchase agreements that contain profitability covenants were also amended to the extent necessary to allow for a net loss under such covenants for the quarters ending September 30, 2017 and December 31, 2017 as applicable to the terms of each respective agreement. As a result of receiving these waivers, the Company was in compliance with all financial covenants relating to master repurchase agreements at June 30, 2017.
The Company's subsidiaries are dependent on the ability to secure warehouse facilities on acceptable terms and to renew, replace or resize existing facilities as they expire. If the Company fails to comply with the terms of an agreement that results in an event of default or breach of covenant without obtaining a waiver or amendment, the Company may be subject to termination of future funding, enforcement of liens against assets securing the respective facility, repurchase of assets pledged in a repurchase agreement, acceleration of outstanding obligations, or other adverse actions. The Company intends to renew, replace, or expand its facilities and may seek waivers or amendments in the future, if necessary. The Company has plans in place to strengthen its operating results under its new leadership team, including transformation of its originations business as well as cost reduction efforts and efficiency initiatives; however, there can be no assurance that these or others actions will be successful.
10. Common Stock and Loss Per Share
Rights Agreement
On November 11, 2016, the Company entered into an Amended and Restated Section 382 Rights Agreement with Computershare, which amends and restates the Rights Agreement between the Company and Computershare dated as of June 29, 2015, as previously amended. On June 29, 2015, the Company's Board of Directors had authorized and the Company declared a dividend of one preferred stock purchase right for each outstanding share of the Company's common stock. The dividend was payable on July 9, 2015 to stockholders of record as of the close of business on July 9, 2015 and entitled the registered holder thereof to purchase from the Company one one-thousandth of a fully paid non-assessable share of Junior Participating Preferred Stock, par value $0.01 per share, of the Company at a price of $74.16, subject to adjustment as provided in the Rights Agreement. Any shares of common stock issued by the Company after such date also receive such a right. The terms of the preferred stock purchase rights are set forth in the Rights Agreement.

36


Subsequent to the initial adoption of the Rights Agreement, it was amended to, among other things, permit certain stockholders to acquire up to 25% of the outstanding shares of the Company's common stock. The Company entered into the November 2016 amendment and restatement of the Rights Agreement to, among other things, lower the ownership thresholds permitted pursuant to the Rights Agreement such that if any person or group of persons, including persons who owned more than the threshold percentage of shares on the amendment date, but excluding certain exempted persons, acquires 4.99% or more of the Company's outstanding common stock or any other interest that would be treated as "stock" for the purposes of Section 382, there would be a triggering event potentially resulting in significant dilution in the voting power and economic ownership of such acquiring person or group. The Rights Agreement provides that the rights issued thereunder will expire on November 11, 2017 or upon the earlier occurrence of certain events, subject to the extension of the Rights Agreement by the Company's Board of Directors or the redemption or exchange of the rights by the Company, in each case as described in, and subject to the terms of, the Rights Agreement.
The November 2016 amendment to the Rights Agreement was intended to help protect the Company's "built-in tax losses" and certain other tax benefits by acting as a deterrent to any person or group of persons acting in concert from becoming or obtaining the right to become the beneficial owner (including through constructive ownership of securities owned by others) of 4.99% or more of the shares of the Company's common stock, or any other interest that would be treated as "stock" for the purposes of Section 382, then outstanding, without the approval of its Board of Directors, subject to certain exceptions.
Loss Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted loss per share computations shown on the consolidated statements of comprehensive loss (in thousands, except per share data):
 
 
For the Three Months 
 Ended June 30,
 
For the Six Months 
 Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Basic and diluted loss per share
 
 
 
 
 
 
 
 
Net loss available to common stockholders (numerator)
 
$
(94,309
)
 
$
(489,963
)
 
$
(89,801
)
 
$
(662,665
)
Weighted-average common shares outstanding (denominator)
 
36,536

 
35,811

 
36,475

 
35,679

Basic and diluted loss per common and common equivalent share
 
$
(2.58
)
 
$
(13.68
)
 
$
(2.46
)
 
$
(18.57
)
For periods in which there is income, certain securities would be antidilutive to the diluted earnings per share calculation. The following table summarizes antidilutive securities that would be excluded from the computation of dilutive earnings per share (in thousands):
 
 
For the Three Months 
 Ended June 30,
 
For the Six Months 
 Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Outstanding share-based compensation awards
 
 
 
 
 
 
 
 
Stock options (1)
 
3,567

 
3,018

 
3,567

 
2,942

Performance shares (2)
 
—

 
—

 
—

 
—

Restricted stock units
 
337

 
461

 
170

 
461

Assumed conversion of Convertible Notes
 
4,932

 
4,932

 
4,932

 
4,932

__________
(1)
Includes out-of-the-money stock options totaling 3.6 million and 3.1 million at June 30, 2017 and 2016, respectively.
(2)
Performance shares represent the number of shares expected to be issued based on the performance percentage as of the end of the reporting periods above.
The Convertible Notes are antidilutive when calculating earnings per share when the Company's average stock price is less than $58.80. Upon conversion of the Convertible Notes, the Company may pay or deliver, at its option, cash, shares of the Company’s common stock, or a combination of cash and shares of common stock.

37


11. Segment Reporting
Management has organized the Company into three reportable segments based primarily on its services as follows:
•
Servicing — performs servicing for the Company's mortgage loan portfolio and on behalf of third-party credit owners of mortgage loans for a fee and also performs subservicing for third-party owners of MSR. The Servicing segment also operates complementary businesses including a collections agency that performs collections of post charge-off deficiency balances for third parties and the Company. Commencing February 1, 2017, another insurance agency owned by the Company began to provide insurance marketing services to a third party with respect to voluntary insurance policies, including hazard insurance (refer to Note 1 for additional information). In addition, the Servicing segment holds the assets and mortgage-backed debt of the Residual Trusts.
•
Originations — originates and purchases mortgage loans that are intended for sales to third parties.
•
Reverse Mortgage — primarily focuses on the servicing of reverse loans for the Company's own reverse mortgage portfolio and subservicing on behalf of third-party credit owners of reverse loans. The Reverse Mortgage segment also provides complementary services for the reverse mortgage market, such as real estate owned property management and disposition, for a fee. Effective January 2017, the Company exited the reverse mortgage originations business. As of June 30, 2017, the Company did not have any reverse loans remaining in its originations pipeline and is in the process of finalizing the shutdown of the reverse mortgage originations business. The Company will continue to fund undrawn tails available to borrowers.
The following tables present select financial information for the reportable segments (in thousands). The Company has presented the revenue and expenses of the Non-Residual Trusts and other non-reportable operating segments, as well as certain corporate expenses that have not been allocated to the business segments, in Other. Intersegment revenues and expenses have been eliminated.
 
 
For the Three Months Ended June 30, 2017
 
 
Servicing
 
Originations
 
Reverse
Mortgage
 
Other
 
Eliminations
 
Total
Consolidated
Total revenues (1) (2) (3)
 
$
117,426

 
$
80,520

 
$
15,409

 
$
200

 
$
(4,768
)
 
$
208,787

Income (loss) before income taxes
 
(43,986
)
 
20,007

 
(16,500
)
 
(52,136
)
 
—

 
(92,615
)
 
 
For the Three Months Ended June 30, 2016
 
 
Servicing
 
Originations
 
Reverse
Mortgage
 
Other
 
Eliminations
 
Total
Consolidated
Total revenues (1) (2) (3)
 
$
72,813

 
$
110,209

 
$
16,137

 
$
45

 
$
(11,731
)
 
$
187,473

Income (loss) before income taxes
 
(356,026
)
 
45,615

 
(26,944
)
 
(42,229
)
 
—

 
(379,584
)
__________
(1)
The Servicing segment recorded intercompany servicing revenue and fees from activity with the Originations segment and the Other non-reportable segment of $2.4 million and $3.1 million for the three months ended June 30, 2017 and 2016, respectively. Included in these amounts are late fees that were waived as an incentive for borrowers refinancing their loans of $0.6 million and $1.0 million for the three months ended June 30, 2017 and 2016, respectively, which reduced net gains on sales of loans recognized by the Originations segment.
(2)
The Servicing segment recorded intercompany revenues for fees earned related to certain loan originations completed by the Originations segment from leads generated through the Servicing segment's servicing portfolio of $3.0 million and $9.5 million for the three months ended June 30, 2017 and 2016, respectively.
(3)
The Originations segment recorded intercompany revenues for fees earned supporting the Servicing segment in administrative functions relating to the acquisition of certain servicing rights of less than $0.1 million and $0.2 million for the three months ended June 30, 2017 and 2016, respectively.

38


 
 
For the Six Months Ended June 30, 2017
 
 
Servicing
 
Originations
 
Reverse
Mortgage
 
Other
 
Eliminations
 
Total
Consolidated
Total revenues (1) (2) (3)
 
$
265,206

 
$
161,328

 
$
37,902

 
$
710

 
$
(11,074
)
 
$
454,072

Income (loss) before income taxes
 
(10,819
)
 
30,842

 
(21,799
)
 
(86,453
)
 
—

 
(88,229
)
 
 
For the Six Months Ended June 30, 2016
 
 
Servicing
 
Originations
 
Reverse
Mortgage
 
Other
 
Eliminations
 
Total
Consolidated
Total revenues (1) (2) (3)
 
$
9,558

 
$
210,486

 
$
60,232

 
$
75

 
$
(26,107
)
 
$
254,244

Income (loss) before income taxes
 
(612,347
)
 
62,016

 
(21,917
)
 
(86,227
)
 
—

 
(658,475
)
__________
(1)
The Servicing segment recorded intercompany servicing revenue and fees from activity with the Originations segment and the Other non-reportable segment of $5.3 million and $6.2 million for the six months ended June 30, 2017 and 2016, respectively. Included in these amounts are late fees that were waived as an incentive for borrowers refinancing their loans of $1.6 million and $2.0 million for the six months ended June 30, 2017 and 2016, respectively, which reduced net gains on sales of loans recognized by the Originations segment.
(2)
The Servicing segment recorded intercompany revenues for fees earned related to certain loan originations completed by the Originations segment from leads generated through the Servicing segment's servicing portfolio of $7.4 million and $21.0 million for the six months ended June 30, 2017 and 2016, respectively.
(3)
The Originations segment recorded intercompany revenues for fees earned supporting the Servicing segment in administrative functions relating to the acquisition of certain servicing rights of less than $0.1 million and $0.9 million for the six months ended June 30, 2017 and 2016, respectively.
12. Commitments and Contingencies
Letter of Credit Reimbursement Obligation
As part of an agreement to service the loans in the original eleven securitization trusts, the Company has an obligation to reimburse a third party for the final $165.0 million in LOCs, if drawn, issued to the eleven trusts by a third party as credit enhancements to these trusts. The total amount available on nine securitization trusts with LOCs remaining was $250.0 million at June 30, 2017. The securitization trusts will draw on these LOCs if there are insufficient cash flows from the underlying collateral to pay the bondholders of the securitization trusts. Based on the Company’s estimates of the underlying performance of the collateral in the securitizations, the Company does not expect that the final $165.0 million will be drawn and, therefore, no liability for the fair value of this obligation has been recorded on the Company’s consolidated balance sheets; however, actual performance may differ from this estimate in the future.
Mandatory Clean-Up Call Obligation
The Company is obligated to exercise the mandatory clean-up call obligations assumed as part of an agreement to acquire the rights to service the loans in the Non-Residual Trusts. The Company is required to call these securitizations when the principal amount of each loan pool falls to 10% or below of the original principal amount. The Company began to make such calls in the second quarter of 2017 and will continue through 2019. The Company made a payment for the mandatory clean-up call obligations of $9.8 million during the three months ended June 30, 2017, which is included in payments on mortgage-backed debt on the consolidated statement of cash flows. The total outstanding balance of the residential loans expected to be called at the respective call dates is $407.2 million at June 30, 2017. The Company estimates remaining call obligations of $90.8 million, $253.3 million and $63.1 million during the years ending December 31, 2017, 2018 and 2019, respectively. Remaining call obligations in 2017 are estimated to be $18.8 million and $72.0 million in the third and fourth quarters, respectively. The Company expects to use available cash to settle the $18.8 million call obligation during the third quarter of 2017 and is reviewing a number of potential alternatives to resolve its obligation with respect to the remaining mandatory clean-up calls. At this time, the Company cannot provide any assurances as to whether any of these potential alternatives may be implemented.

39


Unfunded Commitments
Reverse Mortgage Loans
At June 30, 2017, the Company had floating-rate reverse loans in which the borrowers have additional borrowing capacity of $1.2 billion and similar commitments on fixed-rate reverse loans of $0.3 million primarily in the form of undrawn lines-of-credit. The borrowing capacity includes $1.0 billion in capacity that was available to be drawn by borrowers at June 30, 2017 and $161.8 million in capacity that will become eligible to be drawn by borrowers through the twelve months ending July 1, 2018, assuming the loans remain performing. In addition, the Company has other commitments of $28.3 million to fund taxes and insurance on borrowers’ properties to the extent of amounts that were set aside for such purpose upon the origination of the related reverse loan. There is no termination date for these drawings so long as the loan remains performing.
Mortgage Loans
The Company has short-term commitments to lend $2.2 billion and commitments to purchase loans totaling $34.4 million at June 30, 2017. In addition, the Company had commitments to sell $3.1 billion and purchase $0.7 billion in mortgage-backed securities at June 30, 2017.
HMBS Issuer Obligations
As an HMBS issuer, the Company assumes certain obligations related to each security issued. The most significant obligation is the requirement to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM is equal to or greater than 98% of the maximum claim amount. Performing repurchased loans are conveyed to HUD and payment is received from HUD typically within a short timeframe of repurchase. HUD reimburses the Company for the outstanding principal balance on the loan up to the maximum claim amount. The Company bears the risk of exposure if the amount of the outstanding principal balance on a loan exceeds the maximum claim amount. Recent regulatory changes introduced by HUD increased the requirements for completing an assignment to HUD. These new requirements may increase the time interval between when a loan is repurchased and when the assignment claim is filed with HUD, and inability to meet such requirements could preclude assignment. During this period, accruals for interest, HUD-required mortgage insurance payments, and borrower draws may cause the unpaid balance on the loan to increase and ultimately exceed the maximum claim amount. Nonperforming repurchased loans are generally liquidated through foreclosure and subsequent sale of real estate owned.
The Company currently relies upon certain master repurchase agreements and operating cash flows, to the extent necessary, to repurchase these Ginnie Mae loans. Given continued growth in the number and amount of reverse loan repurchases, the Company may seek additional, or expansion of existing, master repurchase or similar agreements and/or may seek to access the securitization market to provide financing capacity for future required loan repurchases. The timing and amount of the Company's obligation to repurchase HECMs is uncertain as repurchase is predicated on certain factors such as whether a borrower event of default occurs prior to the HECM reaching the mandatory repurchase threshold under which the Company is obligated to repurchase the loan. During the six months ended June 30, 2017 and 2016, the Company repurchased $510.0 million and $259.5 million, respectively, in reverse loans and real estate owned from securitization pools. At June 30, 2017, the Company had repurchased reverse loans and real estate owned totaling $625.1 million, with a fair value of $599.3 million, and unfunded commitments to repurchase reverse loans and real estate owned of $110.0 million. Repurchases of reverse loans and real estate owned have increased significantly as compared to prior periods and are expected to continue to increase due to the increased flow of HECMs and real estate owned that are reaching 98% of their maximum claim amount.
Mortgage Origination Contingencies
The Company sells substantially all of its originated or purchased mortgage loans into the secondary market for securitization or to private investors as whole loans. The Company sells conventional-conforming and government-backed mortgage loans through GSE and agency-sponsored securitizations in which mortgage-backed securities are created and sold to third-party investors. The Company also sells non-conforming mortgage loans to private investors. In doing so, representations and warranties regarding certain attributes of the loans are made to the third-party investor. Subsequent to the sale, if it is determined that a loan sold is in breach of these representations or warranties, the Company generally has an obligation to cure the breach. In general, if the Company is unable to cure such breach, the purchaser of the loan may require the Company to repurchase such loan for the unpaid principal balance, accrued interest, and related advances, and in any event, the Company must indemnify such purchaser for certain losses and expenses incurred by such purchaser in connection with such breach. The Company’s credit loss may be reduced by any recourse it has to correspondent lenders that, in turn, have sold such residential loans to the Company and breached similar or other representations and warranties.

40


The Company's representations and warranties are generally not subject to stated limits of exposure, with the exception of certain loans originated under HARP, which limits exposure based on payment history of the loan. At June 30, 2017, the Company’s maximum exposure to repurchases due to potential breaches of representations and warranties was $67.4 billion, and was based on the original unpaid principal balance of loans sold from the beginning of 2013 through June 30, 2017, adjusted for voluntary payments made by the borrower on loans for which the Company performs servicing. A majority of the Company's loan sales were servicing retained.
The Company’s obligations vary based upon the nature of the repurchase demand and the current status of the mortgage loan. The Company’s estimate of the liability associated with representations and warranties exposure was $19.3 million at June 30, 2017 and is included in originations liability as part of payables and accrued liabilities on the consolidated balance sheets.
Servicing Contingencies
The Company’s servicing obligations are set forth in industry regulations established by HUD, the FHA, the VA, and other government agencies and in servicing and subservicing agreements with the applicable counterparties, such as Fannie Mae, Freddie Mac and other credit owners. Both the regulations and the servicing agreements provide that the servicer may be liable for failure to perform its servicing obligations and further provide remedies for certain servicer breaches.
Reverse Mortgage Loans
FHA regulations provide that servicers meet a series of event-specific timeframes during the default, foreclosure, conveyance, and mortgage insurance claim cycles. Failure to timely meet any processing deadline may stop the accrual of debenture interest otherwise payable in satisfaction of a claim under the FHA mortgage insurance contract and the servicer may be responsible to HUD for debenture interest that is not self-curtailed by the servicer, or for making the credit owner whole for any interest curtailed by FHA due to not meeting the required event-specific timeframes. The Company had a curtailment obligation liability of $100.3 million at June 30, 2017 related to the foregoing, which reflects management’s best estimate of the probable incurred claim. The curtailment liability is recorded in payables and accrued liabilities on the consolidated balance sheets. During the six months ended June 30, 2017, the Company recorded a provision, net of expected third-party recoveries, related to the curtailment obligation liability of $1.2 million. The Company has potential estimated maximum financial statement exposure for an additional $150.6 million related to similar claims, which are reasonably possible, but which the Company believes are the responsibility of third parties (e.g., prior servicers and/or credit owners).
Mortgage Loans
The Company had a curtailment obligation liability of $19.8 million at June 30, 2017 related to sales of servicing rights, advance curtailment exposure and mortgage loan servicing that it primarily assumed through an acquisition of servicing rights. The Company is obligated to service the related mortgage loans in accordance with Ginnie Mae requirements, including repayment to credit owners for corporate advances and interest curtailment. The curtailment liability is recorded in payables and accrued liabilities on the consolidated balance sheets.
Litigation and Regulatory Matters
In the ordinary course of business, the Parent Company and its subsidiaries are defendants in, or parties to, pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. Many of these actions and proceedings are based on alleged violations of consumer protection laws governing the Company's servicing and origination activities. In some of these actions and proceedings, claims for substantial monetary damages are asserted against the Company.
The Company, in the ordinary course of business, is also subject to regulatory and governmental examinations, information requests and subpoenas, inquiries, investigations and threatened legal actions and proceedings. In connection with formal and informal inquiries, the Company receives numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of the Company’s activities.
In view of the inherent difficulty of predicting outcomes of such litigation, regulatory and governmental matters, particularly where the claimants seek very large or indeterminate restitution, penalties or damages, or where the matters present novel legal theories or involve a large number of parties, the Company generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be.

41


Reserves are established for pending or threatened litigation, regulatory and governmental matters when it is probable that a loss has been incurred and the amount of such loss can be reasonably estimated. In light of the inherent uncertainties involved in litigation and other legal proceedings, it is not always possible to determine a reasonable estimate of the amount of a probable loss, and the Company may estimate a range of possible loss for consideration in its estimated accruals. The estimates are based upon currently available information, including advice of counsel, and involve significant judgment taking into account the varying stages and inherent uncertainties of such matters. Accordingly, the Company’s estimates may change from time to time and such changes may be material to the consolidated financial results.
At June 30, 2017, the Company’s recorded reserves associated with legal and regulatory contingencies for which a loss is probable and can be reasonably estimated were approximately $36 million. There can be no assurance that the ultimate resolution of the Company’s pending or threatened litigation, claims or assessments will not result in losses in excess of the Company’s recorded reserves. As a result, the ultimate resolution of any particular legal matter, or matters, could be material to the Company’s results of operations or cash flows for the period in which such matter is resolved.
For matters involving a probable loss where the Company can estimate the range but not a specific loss amount, the aggregate estimated amount of reasonably possible losses in excess of the recorded liability was $0 to approximately $14 million at June 30, 2017. Given the inherent uncertainties and status of the Company’s outstanding legal and regulatory matters, the range of reasonably possible losses cannot be estimated for all matters; therefore, this estimated range does not represent the Company’s maximum loss exposure. As new information becomes available, the matters for which the Company is able to estimate, as well as the estimates themselves, will be adjusted accordingly.
The following is a description of certain litigation and regulatory matters:
The Company has received various subpoenas for testimony and documents, motions for examinations pursuant to Federal Rule of Bankruptcy Procedure 2004, and other information requests from certain Offices of the U.S. Trustees, acting through trial counsel in various federal judicial districts, seeking information regarding an array of the Company's policies, procedures and practices in servicing loans to borrowers who are in bankruptcy and the Company's compliance with bankruptcy laws and rules. The Company has provided information in response to these subpoenas and requests and has met with representatives of certain Offices of the U.S. Trustees to discuss various issues that have arisen in the course of these inquiries, including the Company's compliance with bankruptcy laws and rules. The Company cannot predict the outcome of the aforementioned proceedings and investigations, which could result in requests for damages, fines, sanctions, or other remediation. The Company could face further legal proceedings in connection with these matters. The Company may seek to enter into one or more agreements to resolve these matters. Any such agreement may require the Company to pay fines or other amounts for alleged breaches of law and to change or otherwise remediate the Company's business practices. Legal proceedings relating to these matters and the terms of any settlement agreement could have a material adverse effect on the Company's reputation, business, prospects, results of operations, liquidity and financial condition.
From time to time, federal and state authorities investigate or examine aspects of the Company's business activities, such as its mortgage origination, servicing, collection and bankruptcy practices, among other things. It is the Company's general policy to cooperate with such investigations, and the Company has been responding to information requests and otherwise cooperating with various ongoing investigations and examinations by such authorities. The Company cannot predict the outcome of any of the ongoing proceedings and cannot provide assurances that investigations and examinations will not have a material adverse effect on the Company.
Walter Energy Matters
The Company may become liable for U.S. federal income taxes allegedly owed by the Walter Energy consolidated group for the 2009 and prior tax years. Under federal law, each member of a consolidated group for U.S. federal income tax purposes is severally liable for the federal income tax liability of each other member of the consolidated group for any year in which it was a member of the consolidated group at any time during such year. Certain former subsidiaries of the Company (which were subsequently merged or otherwise consolidated with certain current subsidiaries of the Company) were members of the Walter Energy consolidated tax group prior to the Company's spin-off from Walter Energy on April 17, 2009. As a result, to the extent the Walter Energy consolidated group’s federal income taxes (including penalties and interest) for such tax years are not favorably resolved on the merits or otherwise paid, the Company could be liable for such amounts.

42


Walter Energy Tax Matters. According to Walter Energy’s Form 10-Q, or the Walter Energy Form 10-Q, for the quarter ended September 30, 2015 (filed with the SEC on November 5, 2015) and certain other public filings made by Walter Energy in its bankruptcy proceedings currently pending in Alabama, described below, as of the date of such filing, certain tax matters with respect to certain tax years prior to and including the year of the Company's spin-off from Walter Energy remained unresolved, including certain tax matters relating to: (i) a "proof of claim" for a substantial amount of taxes, interest and penalties with respect to Walter Energy’s fiscal years ended August 31, 1983 through May 31, 1994, which was filed by the IRS in connection with Walter Energy’s bankruptcy filing on December 27, 1989 in the U.S. Bankruptcy Court for the Middle District of Florida, Tampa Division; (ii) an IRS audit of Walter Energy’s federal income tax returns for the years ended May 31, 2000 through December 31, 2008; and (iii) an IRS audit of Walter Energy’s federal income tax returns for the 2009 through 2013 tax years.
Walter Energy 2015 Bankruptcy Filing. On July 15, 2015, Walter Energy filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Northern District of Alabama. On August 18, 2015, Walter Energy filed a motion with the Florida bankruptcy court requesting that the court transfer venue of its disputes with the IRS to the Alabama bankruptcy court. In that motion, Walter Energy asserted that it believed the liability for the years at issue "will be materially, if not completely, offset by the [r]efunds" asserted by Walter Energy against the IRS. The Florida bankruptcy court transferred venue of the matter to the Alabama bankruptcy court, where it remains pending.
On November 5, 2015, Walter Energy, together with certain of its subsidiaries, entered into the Walter Energy Asset Purchase Agreement with Coal Acquisition, a Delaware limited liability company formed by members of Walter Energy’s senior lender group, pursuant to which, among other things, Coal Acquisition agreed to acquire substantially all of Walter Energy’s assets and assume certain liabilities, subject to, among other things, a number of closing conditions set forth therein. On January 8, 2016, after conducting a hearing, the Bankruptcy Court entered an order approving the sale of Walter Energy's assets to Coal Acquisition free and clear of all liens, claims, interests and encumbrances of the debtors. The sale of such assets pursuant to the Walter Energy Asset Purchase Agreement was completed on March 31, 2016 and was conducted under the provisions of Sections 105, 363 and 365 of the Bankruptcy Code. Based on developments in the Alabama bankruptcy proceedings following completion of this asset sale, such asset sale appears to have resulted in (i) limited value remaining in Walter Energy’s bankruptcy estate and (ii) to date, limited recovery for certain of Walter Energy’s unsecured creditors, including the IRS.
On January 9, 2017, Walter Energy filed with the Alabama Bankruptcy Court a motion to convert its Chapter 11 bankruptcy case to a Chapter 7 liquidation. In that motion, Walter Energy stated that, other than with respect to 1% of the equity of the acquirer of Walter Energy's core assets, no prospect of payment of unsecured claims exists. On January 23, 2017, the IRS filed an objection to Walter Energy's motion to convert, in which the IRS requested that a judgment be entered against Walter Energy in connection with the tax matters described above. The IRS further asserted that entry of a final judgment was necessary so that it could pursue collection of tax liabilities from former members of Walter Energy's consolidated group that are not debtors.
On January 30, 2017, the Bankruptcy Court held a hearing at which it denied the IRS's request for entry of a judgment and announced its intent to grant Walter Energy's motion to convert. The Bankruptcy Court entered an order on February 2, 2017 converting Walter Energy's Chapter 11 bankruptcy to a Chapter 7 liquidation. During February 2017, Andre Toffel was appointed Chapter 7 trustee of Walter Energy's bankruptcy estate.
The Company cannot predict whether or to what extent it may become liable for federal income taxes of the Walter Energy consolidated tax group during the tax years in which the Company was a part of such group, in part because the Company believes, based on publicly available information, that: (i) the amount of taxes owed by the Walter Energy consolidated tax group for the periods from 1983 through 2009 remains unresolved; and (ii) in light of Walter Energy’s conversion from a Chapter 11 bankruptcy to a Chapter 7 bankruptcy, it is unclear whether the IRS will seek to make a direct claim against the Company for such taxes. Further, because the Company cannot currently estimate its' liability, if any, relating to the federal income tax liability of Walter Energy’s consolidated tax group during the tax years in which it was a part of such group, the Company cannot determine whether such liabilities, if any, could have a material adverse effect on the Company's business, financial condition, liquidity and/or results of operations.
Tax Separation Agreement. In connection with the Company's spin-off from Walter Energy, the Company and Walter Energy entered into a Tax Separation Agreement, dated April 17, 2009. Notwithstanding any several liability the Company may have under federal tax law described above, under the Tax Separation Agreement, Walter Energy agreed to retain full liability for all U.S. federal income or state combined income taxes of the Walter Energy consolidated group for 2009 and prior tax years (including any interest, additional taxes or penalties applicable thereto), subject to limited exceptions. The Company therefore filed proofs of claim in the Alabama bankruptcy proceedings asserting claims for any such amounts to the extent the Company is ultimately held liable for the same. However, the Company expects to receive little or no recovery from Walter Energy for any filed proofs of claim for indemnification.

43


It is unclear whether claims made by the Company under the Tax Separation Agreement would be enforceable against Walter Energy in connection with, or following the conclusion of, the various Walter Energy bankruptcy proceedings described above, or if such claims would be rejected or disallowed under bankruptcy law. It is also unclear whether the Company would be able to recover some or all of any such claims given Walter Energy's limited assets and limited recoveries for unsecured creditors in the Walter Energy bankruptcy proceedings described above.
Furthermore, the Tax Separation Agreement provides that Walter Energy has, in its sole discretion, the exclusive right to represent the interests of the consolidated group in any audit, court proceeding or settlement of a claim with the IRS for the tax years in which certain of the Company’s former subsidiaries were members of the Walter Energy consolidated tax group. However, in light of the conversion of Walter Energy’s bankruptcy proceeding from a Chapter 11 proceeding to a Chapter 7 proceeding, the Company may choose to take a direct role in proceedings involving the IRS’s claim for tax years in which the Company was a member of the Walter Energy consolidated tax group. Moreover, the Tax Separation Agreement obligates the Company to take certain tax positions that are consistent with those taken historically by Walter Energy. In the event the Company does not take such positions, it could be liable to Walter Energy to the extent the Company's failure to do so results in an increased tax liability or the reduction of any tax asset of Walter Energy. These arrangements may result in conflicts of interests between the Company and Walter Energy, particularly with regard to the Walter Energy bankruptcy proceedings described above.
Lastly, according to its public filings, Walter Energy’s 2009 tax year is currently under audit. Accordingly, if it is determined that certain distribution taxes and other amounts are owed related to the Company's spin-off from Walter Energy in 2009, the Company may be liable under the Tax Separation Agreement for all or a portion of such amounts.
The Company is unable to estimate reasonably possible losses for the matter described above.
13. Separate Financial Information of Subsidiary Guarantors of Indebtedness
In accordance with the Senior Notes Indenture, certain existing and future 100% owned domestic subsidiaries of the Parent Company have fully and unconditionally guaranteed the Senior Notes on a joint and several basis. These guarantor subsidiaries also guarantee the Parent Company's obligations under the 2013 Secured Credit Facilities. The indenture governing the Senior Notes contains customary exceptions under which a guarantor subsidiary may be released from its guarantee without the consent of the holders of the Senior Notes, including (i) the permitted sale, transfer or other disposition of all or substantially all of a guarantor subsidiary's assets or common stock; (ii) the designation of a restricted guarantor subsidiary as an unrestricted subsidiary; (iii) the release of a guarantor subsidiary from its obligation under the 2013 Secured Credit Facilities and its guarantee of all other indebtedness of the Parent Company and other guarantor subsidiaries; and (iv) the defeasance of the obligations of the guarantor subsidiary by payment of the Senior Notes.
Presented below are the condensed consolidating financial information of the Parent Company, the guarantor subsidiaries on a combined basis, and the non-guarantor subsidiaries on a combined basis.

44


Condensed Consolidating Balance Sheet
June 30, 2017
Unaudited
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Parent Company
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries and VIEs
 
Eliminations
and Reclassifications
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
1,012

 
$
400,362

 
$
77,000

 
$
—

 
$
478,374

Restricted cash and cash equivalents
 
1,502

 
139,485

 
31,690

 
—

 
172,677

Residential loans at amortized cost, net
 
12,146

 
254,368

 
442,566

 
—

 
709,080

Residential loans at fair value
 
—

 
11,499,863

 
406,006

 
—

 
11,905,869

Receivables, net
 
17,180

 
125,949

 
12,121

 
—

 
155,250

Servicer and protective advances, net
 
—

 
440,864

 
455,100

 
19,221

 
915,185

Servicing rights, net
 
—

 
935,898

 
—

 
—

 
935,898

Goodwill
 
—

 
47,747

 
—

 
—

 
47,747

Intangible assets, net
 
—

 
9,718

 
—

 
—

 
9,718

Premises and equipment, net
 
979

 
65,183

 
—

 
—

 
66,162

Deferred tax assets, net
 
856

 
—

 
—

 
(856
)
 
—

Other assets
 
27,540

 
148,652

 
23,362

 
—

 
199,554

Due from affiliates, net
 
363,630

 
—

 
—

 
(363,630
)
 
—

Investments in consolidated subsidiaries and VIEs
 
1,614,885

 
68,052

 
—

 
(1,682,937
)
 
—

Total assets
 
$
2,039,730

 
$
14,136,141

 
$
1,447,845

 
$
(2,028,202
)
 
$
15,595,514

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
 
 
 
 
 
 
 
 
Payables and accrued liabilities
 
$
35,751

 
$
668,206

 
$
4,994

 
$
(7,561
)
 
$
701,390

Servicer payables
 
—

 
143,785

 
—

 
—

 
143,785

Servicing advance liabilities
 
—

 
119,579

 
424,555

 
—

 
544,134

Warehouse borrowings
 
—

 
1,332,126

 
—

 
—

 
1,332,126

Servicing rights related liabilities at fair value
 
—

 
1,314

 
—

 
—

 
1,314

Corporate debt
 
2,116,960

 
—

 
—

 
—

 
2,116,960

Mortgage-backed debt
 
—

 
—

 
877,775

 
—

 
877,775

HMBS related obligations at fair value
 
—

 
9,986,409

 
—

 
—

 
9,986,409

Deferred tax liabilities, net
 
—

 
5,458

 
—

 
(856
)
 
4,602

Obligation to fund Non-Guarantor VIEs
 
—

 
51,394

 
—

 
(51,394
)
 
—

Due to affiliates, net
 
—

 
358,997

 
4,633

 
(363,630
)
 
—

Total liabilities
 
2,152,711

 
12,667,268

 
1,311,957

 
(423,441
)
 
15,708,495

 
 
 
 
 
 
 
 
 
 
 
Stockholders' equity (deficit):
 
 
 
 
 
 
 
 
 
 
Total stockholders' equity (deficit)
 
(112,981
)
 
1,468,873

 
135,888

 
(1,604,761
)
 
(112,981
)
Total liabilities and stockholders' equity (deficit)
 
$
2,039,730

 
$
14,136,141

 
$
1,447,845

 
$
(2,028,202
)
 
$
15,595,514


45


Condensed Consolidating Balance Sheet
December 31, 2016
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Parent Company
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries and VIEs
 
Eliminations
and Reclassifications
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
773

 
$
221,825

 
$
2,000

 
$
—

 
$
224,598

Restricted cash and cash equivalents
 
1,502

 
158,204

 
44,757

 
—

 
204,463

Residential loans at amortized cost, net
 
12,891

 
189,441

 
462,877

 
—

 
665,209

Residential loans at fair value
 
—

 
11,924,043

 
492,499

 
—

 
12,416,542

Receivables, net
 
97,424

 
154,852

 
15,686

 
—

 
267,962

Servicer and protective advances, net
 
—

 
481,099

 
688,961

 
25,320

 
1,195,380

Servicing rights, net
 
—

 
1,029,719

 
—

 
—

 
1,029,719

Goodwill
 
—

 
47,747

 
—

 
—

 
47,747

Intangible assets, net
 
—

 
11,347

 
—

 
—

 
11,347

Premises and equipment, net
 
1,181

 
81,447

 
—

 
—

 
82,628

Assets held for sale
 
—

 
65,045

 
6,040

 
—

 
71,085

Other assets
 
30,789

 
191,671

 
19,830

 
—

 
242,290

Due from affiliates, net
 
392,998

 
—

 
—

 
(392,998
)
 
—

Investments in consolidated subsidiaries and VIEs
 
1,620,339

 
134,612

 
—

 
(1,754,951
)
 
—

Total assets
 
$
2,157,897

 
$
14,691,052

 
$
1,732,650

 
$
(2,122,629
)
 
$
16,458,970

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
 
 
 
 
 
 
 
 
 
Payables and accrued liabilities
 
$
53,337

 
$
708,070

 
$
5,474

 
$
(7,870
)
 
$
759,011

Servicer payables
 
—

 
146,332

 
—

 
—

 
146,332

Servicing advance liabilities
 
—

 
132,664

 
650,565

 
—

 
783,229

Warehouse borrowings
 
—

 
1,203,355

 
—

 
—

 
1,203,355

Servicing rights related liabilities at fair value
 
—

 
1,902

 
—

 
—

 
1,902

Corporate debt
 
2,129,000

 
—

 
—

 
—

 
2,129,000

Mortgage-backed debt
 
—

 
—

 
943,956

 
—

 
943,956

HMBS related obligations at fair value
 
—

 
10,509,449

 
—

 
—

 
10,509,449

Deferred tax liabilities, net
 
—

 
3,204

 
1,570

 
—

 
4,774

Liabilities held for sale
 
—

 
1,179

 
1,223

 
—

 
2,402

Obligation to fund Non-Guarantor VIEs
 
—

 
46,417

 
—

 
(46,417
)
 
—

Due to affiliates, net
 
—

 
392,812

 
185

 
(392,997
)
 
—

Total liabilities
 
2,182,337

 
13,145,384

 
1,602,973

 
(447,284
)
 
16,483,410

 
 
 
 
 
 
 
 
 
 
 
Stockholders' equity (deficit):
 
 
 
 
 
 
 
 
 
 
Total stockholders' equity (deficit)
 
(24,440
)
 
1,545,668

 
129,677

 
(1,675,345
)
 
(24,440
)
Total liabilities and stockholders' equity (deficit)
 
$
2,157,897

 
$
14,691,052

 
$
1,732,650

 
$
(2,122,629
)
 
$
16,458,970



46


Condensed Consolidating Statement of Comprehensive Loss
For the Three Months Ended June 30, 2017
Unaudited
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Parent Company
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries and VIEs
 
Eliminations
and Reclassifications
 
Consolidated
REVENUES
 
 
 
 
 
 
 
 
 
 
Net servicing revenue and fees
 
$
—

 
$
93,323

 
$
—

 
$
(2,002
)
 
$
91,321

Net gains on sales of loans
 
—

 
70,545

 
—

 
—

 
70,545

Net fair value gains on reverse loans and related HMBS obligations
 
—

 
7,872

 
—

 
—

 
7,872

Interest income on loans
 
235

 
344

 
9,910

 
—

 
10,489

Insurance revenue
 
—

 
2,650

 
—

 
—

 
2,650

Other revenues
 
27

 
25,869

 
14,682

 
(14,668
)
 
25,910

Total revenues
 
262

 
200,603

 
24,592

 
(16,670
)
 
208,787

 
 
 
 
 
 
 
 
 
 
 
EXPENSES
 
 
 
 
 
 
 
 
 
 
General and administrative
 
13,660

 
116,254

 
2,712

 
(15,082
)
 
117,544

Salaries and benefits
 
10,319

 
90,752

 
—

 
—

 
101,071

Interest expense
 
35,137

 
14,175

 
11,587

 
(15
)
 
60,884

Depreciation and amortization
 
182

 
9,860

 
—

 
—

 
10,042

Corporate allocations
 
(16,890
)
 
16,890

 
—

 
—

 
—

Other expenses, net
 
62

 
2,091

 
901

 
—

 
3,054

Total expenses
 
42,470

 
250,022

 
15,200

 
(15,097
)
 
292,595

 
 
 
 
 
 
 
 
 
 
 
OTHER GAINS (LOSSES)
 
 
 
 
 
 
 
 
 
 
Gain on sale of business
 
—

 
7

 
—

 
—

 
7

Other net fair value gains (losses)
 
—

 
141

 
(8,246
)
 
—

 
(8,105
)
Loss on extinguishment
 
—

 
(266
)
 
(443
)
 
—

 
(709
)
Total other losses
 
—

 
(118
)
 
(8,689
)
 
—

 
(8,807
)
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
(42,208
)
 
(49,537
)
 
703

 
(1,573
)
 
(92,615
)
Income tax expense (benefit)
 
(11,051
)
 
10,629

 
2,196

 
(80
)
 
1,694

Income (loss) before equity in losses of consolidated subsidiaries and VIEs
 
(31,157
)
 
(60,166
)
 
(1,493
)
 
(1,493
)
 
(94,309
)
Equity in losses of consolidated subsidiaries and VIEs
(63,152
)
 
(3,469
)
 
—

 
66,621

 
—

Net loss
 
$
(94,309
)
 
$
(63,635
)
 
$
(1,493
)
 
$
65,128

 
$
(94,309
)
 
 
 
 
 
 
 
 
 
 
 
Comprehensive loss
 
$
(94,314
)
 
$
(63,635
)
 
$
(1,493
)
 
$
65,128

 
$
(94,314
)

47


Condensed Consolidating Statement of Comprehensive Loss
For the Three Months Ended June 30, 2016
Unaudited
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Parent Company
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries and VIEs
 
Eliminations
and Reclassifications
 
Consolidated
REVENUES
 
 
 
 
 
 
 
 
 
 
Net servicing revenue and fees
 
$
—

 
$
34,179

 
$
—

 
$
(2,243
)
 
$
31,936

Net gains on sales of loans
 
—

 
100,176

 
—

 
—

 
100,176

Net fair value gains (losses) on reverse loans and related HMBS obligations
 
—

 
7,876

 
(226
)
 
—

 
7,650

Interest income on loans
 
295

 
98

 
11,456

 
—

 
11,849

Insurance revenue
 
—

 
10,433

 
1,032

 
(188
)
 
11,277

Other revenues, net
 
(402
)
 
25,728

 
16,469

 
(17,210
)
 
24,585

Total revenues
 
(107
)
 
178,490

 
28,731

 
(19,641
)
 
187,473

 
 
 
 
 
 
 
 
 
 
 
EXPENSES
 
 
 
 
 
 
 
 
 
 
General and administrative
 
11,348

 
137,748

 
3,261

 
(16,581
)
 
135,776

Salaries and benefits
 
18,583

 
115,098

 
—

 
—

 
133,681

Interest expense
 
35,920

 
12,136

 
17,119

 
(775
)
 
64,400

Depreciation and amortization
 
175

 
14,191

 
174

 
—

 
14,540

Goodwill impairment
 
—

 
215,412

 
—

 
—

 
215,412

Corporate allocations
 
(29,255
)
 
29,255

 
—

 
—

 
—

Other expenses, net
 
146

 
725

 
1,026

 
—

 
1,897

Total expenses
 
36,917

 
524,565

 
21,580

 
(17,356
)
 
565,706

 
 
 
 
 
 
 
 
 
 
 
OTHER GAINS (LOSSES)
 
 
 
 
 
 
 
 
 
 
Other net fair value gains (losses)
 
—

 
154

 
(973
)
 
—

 
(819
)
Other
 
—

 
(532
)
 
—

 
—

 
(532
)
Total other losses
 
—

 
(378
)
 
(973
)
 
—

 
(1,351
)
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
(37,024
)
 
(346,453
)
 
6,178

 
(2,285
)
 
(379,584
)
Income tax expense (benefit)
 
(15,276
)
 
122,851

 
3,149

 
(345
)
 
110,379

Income (loss) before equity in earnings (losses) of consolidated subsidiaries and VIEs
 
(21,748
)
 
(469,304
)
 
3,029

 
(1,940
)
 
(489,963
)
Equity in earnings (losses) of consolidated subsidiaries and VIEs
(468,215
)
 
305

 
—

 
467,910

 
—

Net income (loss)
 
$
(489,963
)
 
$
(468,999
)
 
$
3,029

 
$
465,970

 
$
(489,963
)
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
$
(489,947
)
 
$
(468,999
)
 
$
3,029

 
$
465,970

 
$
(489,947
)

48


Condensed Consolidating Statement of Comprehensive Loss
For the Six Months Ended June 30, 2017
Unaudited
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Parent Company
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries and VIEs
 
Eliminations
and Reclassifications
 
Consolidated
REVENUES
 
 
 
 
 
 
 
 
 
 
Net servicing revenue and fees
 
$
—

 
$
208,588

 
$
—

 
$
(4,080
)
 
$
204,508

Net gains on sales of loans
 
—

 
144,901

 
—

 
—

 
144,901

Net fair value gains on reverse loans and related HMBS obligations
 
—

 
22,532

 
42

 
—

 
22,574

Interest income on loans
 
474

 
624

 
20,371

 
—

 
21,469

Insurance revenue
 
—

 
7,338

 
309

 
(57
)
 
7,590

Other revenues
 
171

 
52,832

 
31,711

 
(31,684
)
 
53,030

Total revenues
 
645

 
436,815

 
52,433

 
(35,821
)
 
454,072

 
 
 
 
 
 
 
 
 
 
 
EXPENSES
 
 
 
 
 
 
 
 
 
 
General and administrative
 
29,366

 
243,848

 
5,340

 
(29,383
)
 
249,171

Salaries and benefits
 
21,821

 
187,207

 
—

 
—

 
209,028

Interest expense
 
70,223

 
27,253

 
23,848

 
(30
)
 
121,294

Depreciation and amortization
 
362

 
20,559

 
53

 
—

 
20,974

Corporate allocations
 
(41,001
)
 
41,001

 
—

 
—

 
—

Other expenses, net
 
203

 
3,230

 
2,404

 
—

 
5,837

Total expenses
 
80,974

 
523,098

 
31,645

 
(29,413
)
 
606,304

 
 
 
 
 
 
 
 
 
 
 
OTHER GAINS (LOSSES)
 
 
 
 
 
 
 
 
 
 
Gain on sale of business
 
—

 
67,734

 
—

 
—

 
67,734

Other net fair value losses
 
—

 
(1,206
)
 
(1,816
)
 
—

 
(3,022
)
Loss on extinguishment
 
—

 
(266
)
 
(443
)
 
—

 
(709
)
Total other gains (losses)
 
—

 
66,262


(2,259
)
 
—

 
64,003

 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
(80,329
)
 
(20,021
)
 
18,529

 
(6,408
)
 
(88,229
)
Income tax expense (benefit)
 
(34,582
)
 
33,327

 
3,162

 
(335
)
 
1,572

Income (loss) before equity in earnings (losses) of consolidated subsidiaries and VIEs
 
(45,747
)
 
(53,348
)
 
15,367

 
(6,073
)
 
(89,801
)
Equity in earnings (losses) of consolidated subsidiaries and VIEs
(44,054
)
 
11,357

 
—

 
32,697

 
—

Net income (loss)
 
$
(89,801
)
 
$
(41,991
)
 
$
15,367

 
$
26,624

 
$
(89,801
)
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
$
(89,823
)
 
$
(41,991
)
 
$
15,367

 
$
26,624

 
$
(89,823
)

49


Condensed Consolidating Statement of Comprehensive Loss
For the Six Months Ended June 30, 2016
Unaudited
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Parent Company
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries and VIEs
 
Eliminations
and Reclassifications
 
Consolidated
REVENUES
 
 
 
 
 
 
 
 
 
 
Net servicing revenue and fees
 
$
—

 
$
(69,296
)
 
$
—

 
$
(4,530
)
 
$
(73,826
)
Net gains on sales of loans
 
—

 
184,653

 
—

 
—

 
184,653

Net fair value gains (losses) on reverse loans and related HMBS obligations
 
—

 
43,084

 
(226
)
 
—

 
42,858

Interest income on loans
 
612

 
202

 
23,206

 
—

 
24,020

Insurance revenue
 
—

 
19,928

 
2,100

 
(384
)
 
21,644

Other revenues, net
 
(808
)
 
57,242

 
32,085

 
(33,624
)
 
54,895

Total revenues
 
(196
)
 
235,813

 
57,165

 
(38,538
)
 
254,244

 
 
 
 
 
 
 
 
 
 
 
EXPENSES
 
 
 
 
 
 
 
 
 
 
General and administrative
 
22,589

 
271,565

 
6,396

 
(35,168
)
 
265,382

Salaries and benefits
 
31,093

 
235,227

 
—

 
—

 
266,320

Interest expense
 
71,816

 
23,709

 
34,735

 
(1,612
)
 
128,648

Depreciation and amortization
 
364

 
28,246

 
353

 
—

 
28,963

Goodwill impairment
 
—

 
215,412

 
—

 
—

 
215,412

Corporate allocations
 
(51,123
)
 
51,123

 
—

 
—

 
—

Other expenses, net
 
417

 
1,964

 
2,022

 
—

 
4,403

Total expenses
 
75,156

 
827,246

 
43,506

 
(36,780
)
 
909,128

 
 
 
 
 
 
 
 
 
 
 
OTHER GAINS (LOSSES)
 
 
 
 
 
 
 
 
 
 
Other net fair value gains (losses)
 
—

 
370

 
(3,333
)
 
—

 
(2,963
)
Gain on extinguishment
 
928

 
—

 
—

 
—

 
928

Other
 
—

 
(1,556
)
 
—

 
—

 
(1,556
)
Total other gains (losses)
 
928

 
(1,186
)
 
(3,333
)
 
—

 
(3,591
)
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
(74,424
)
 
(592,619
)
 
10,326

 
(1,758
)
 
(658,475
)
Income tax expense (benefit)
 
(12,742
)
 
12,979

 
4,097

 
(144
)
 
4,190

Income (loss) before equity in earnings (losses) of consolidated subsidiaries and VIEs
 
(61,682
)
 
(605,598
)
 
6,229

 
(1,614
)
 
(662,665
)
Equity in earnings (losses) of consolidated subsidiaries and VIEs
(600,983
)
 
678

 
—

 
600,305

 
—

Net income (loss)
 
$
(662,665
)
 
$
(604,920
)
 
$
6,229

 
$
598,691

 
$
(662,665
)
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
$
(662,624
)
 
$
(604,920
)
 
$
6,229

 
$
598,691

 
$
(662,624
)

50


Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2017
Unaudited
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Parent Company
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries and VIEs
 
Eliminations
and Reclassifications
 
Consolidated
Cash flows provided by operating activities
 
$
12,930

 
$
133,943

 
$
266,395

 
$
—

 
$
413,268

 
 
 
 
 
 
 
 
 
 
 
Investing activities
 
 
 
 
 
 
 
 
 
 
Purchases and originations of reverse loans held for investment
 
—

 
(216,948
)
 
—

 
—

 
(216,948
)
Principal payments received on reverse loans held for investment
 
—

 
558,003

 
—

 
—

 
558,003

Principal payments received on mortgage loans held for investment
 
738

 
—

 
46,940

 
—

 
47,678

Payments received on charged-off loans held for investment
 
—

 
9,205

 
—

 
—

 
9,205

Payments received on receivables related to Non-Residual Trusts
 
—

 
—

 
6,294

 
—

 
6,294

Proceeds from sales of real estate owned, net
 
34

 
70,619

 
1,928

 
—

 
72,581

Purchases of premises and equipment
 
(159
)
 
(2,153
)
 
—

 
—

 
(2,312
)
Decrease in restricted cash and cash equivalents
 
—

 
530

 
459

 
—

 
989

Payments for acquisitions of businesses, net of cash acquired
 
—

 
(1,019
)
 
—

 
—

 
(1,019
)
Acquisitions of servicing rights, net
 
—

 
(152
)
 
—

 
—

 
(152
)
Proceeds from sale of servicing rights, net
 
—

 
38,817

 
—

 
—

 
38,817

Proceeds from sale of business
 
—

 
131,074

 
—

 
—

 
131,074

Capital contributions to subsidiaries and VIEs
 
(98,803
)
 
(3,718
)
 
—

 
102,521

 
—

Returns of capital from subsidiaries and VIEs
 
145,667

 
46,395

 
—

 
(192,062
)
 
—

Change in due from affiliates
 
32,529

 
77,767

 
8,502

 
(118,798
)
 
—

Other
 
11,500

 
(2,059
)
 
—

 
—

 
9,441

Cash flows provided by investing activities
 
91,506

 
706,361

 
64,123

 
(208,339
)
 
653,651

 
 
 
 
 
 
 
 
 
 
 
Financing activities
 
 
 
 
 
 
 
 
 
 
Payments on corporate debt
 
(21,285
)
 
—

 
—

 
—

 
(21,285
)
Proceeds from securitizations of reverse loans
 
—

 
278,011

 
—

 
—

 
278,011

Payments on HMBS related obligations
 
—

 
(890,737
)
 
—

 
—

 
(890,737
)
Issuances of servicing advance liabilities
 
—

 
85,779

 
594,030

 
—

 
679,809

Payments on servicing advance liabilities
 
—

 
(98,865
)
 
(821,068
)
 
—

 
(919,933
)
Net change in warehouse borrowings related to mortgage loans
 
—

 
(175,701
)
 
—

 
—

 
(175,701
)
Net change in warehouse borrowings related to reverse loans
 
—

 
304,472

 
—

 
—

 
304,472

Payments on servicing rights related liabilities
 
—

 
(1,709
)
 
—

 
—

 
(1,709
)
Payments on mortgage-backed debt
 
—

 
—

 
(66,422
)
 
—

 
(66,422
)
Other debt issuance costs paid
 
—

 
(1,926
)
 
(134
)
 
—

 
(2,060
)
Capital contributions
 
—

 
23,804

 
78,717

 
(102,521
)
 
—

Capital distributions
 
—

 
(144,341
)
 
(47,721
)
 
192,062

 
—

Change in due to affiliates
 
(82,848
)
 
(40,883
)
 
4,933

 
118,798

 
—

Other
 
(64
)
 
329

 
2,147

 
—

 
2,412

Cash flows used in financing activities
 
(104,197
)
 
(661,767
)
 
(255,518
)
 
208,339

 
(813,143
)
 
 
 
 
 
 
 
 
 
 

Net increase in cash and cash equivalents
 
239

 
178,537

 
75,000

 
—

 
253,776

Cash and cash equivalents at the beginning of the period
 
773

 
221,825

 
2,000

 
—

 
224,598

Cash and cash equivalents at the end of the period
 
$
1,012

 
$
400,362

 
$
77,000

 
$
—

 
$
478,374


51


Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2016
Unaudited
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Parent Company
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries and VIEs
 
Eliminations
and
Reclassifications
 
Consolidated
Cash flows provided by (used in) operating activities
 
$
(88,861
)
 
$
166,164

 
$
232,742

 
$
—

 
$
310,045

 
 
 
 
 
 
 
 
 
 
 
Investing activities
 
 
 
 
 
 
 
 
 
 
Purchases and originations of reverse loans held for investment
 
—

 
(384,816
)
 
—

 
—

 
(384,816
)
Principal payments received on reverse loans held for investment
 
—

 
473,617

 
—

 
—

 
473,617

Principal payments received on mortgage loans held for investment
 
654

 
—

 
44,584

 
—

 
45,238

Payments received on charged-off loans held for investment
 
—

 
12,542

 
—

 
—

 
12,542

Payments received on receivables related to Non-Residual Trusts
 
—

 
—

 
4,011

 
—

 
4,011

Proceeds from sales of real estate owned, net
 
4

 
50,091

 
1,829

 
—

 
51,924

Purchases of premises and equipment
 
(411
)
 
(22,227
)
 
—

 
—

 
(22,638
)
Decrease in restricted cash and cash equivalents
 
9,011

 
1,260

 
57

 
—

 
10,328

Payments for acquisitions of businesses, net of cash acquired
 
—

 
(1,947
)
 
—

 
—

 
(1,947
)
Acquisitions of servicing rights, net
 
—

 
(8,410
)
 
—

 
—

 
(8,410
)
Proceeds from sales of servicing rights
 
—

 
19,920

 
—

 
—

 
19,920

Capital contributions to subsidiaries and VIEs
 
—

 
(4,122
)
 
—

 
4,122

 
—

Returns of capital from subsidiaries and VIEs
 
9,410

 
6,693

 
—

 
(16,103
)
 
—

Change in due from affiliates
 
71,923

 
43,029

 
(6,960
)
 
(107,992
)
 
—

Other
 
162

 
(2,336
)
 
—

 
—

 
(2,174
)
Cash flows provided by investing activities
 
90,753

 
183,294

 
43,521

 
(119,973
)
 
197,595

 
 
 
 
 
 
 
 
 
 
 
Financing activities
 
 
 
 
 
 
 
 
 
 
Payments on corporate debt
 
—

 
(345
)
 
—

 
—

 
(345
)
Extinguishments and settlement of debt
 
(6,327
)
 
—

 
—

 
—

 
(6,327
)
Proceeds from securitizations of reverse loans
 
—

 
410,107

 
—

 
—

 
410,107

Payments on HMBS related obligations
 
—

 
(590,678
)
 
—

 
—

 
(590,678
)
Issuances of servicing advance liabilities
 
—

 
128,450

 
687,350

 
—

 
815,800

Payments on servicing advance liabilities
 
—

 
(182,557
)
 
(861,415
)
 
—

 
(1,043,972
)
Net change in warehouse borrowings related to mortgage loans
 
—

 
(59,801
)
 
—

 
—

 
(59,801
)
Net change in warehouse borrowings related to reverse loans
 
—

 
115,515

 
—

 
—

 
115,515

Proceeds from financing of servicing rights
 
—

 
29,738

 
—

 
—

 
29,738

Payments on servicing rights related liabilities
 
—

 
(9,639
)
 
—

 
—

 
(9,639
)
Payments on mortgage-backed debt
 
—

 
—

 
(52,017
)
 
—

 
(52,017
)
Other debt issuance costs paid
 
—

 
(5,870
)
 
(42
)
 
—

 
(5,912
)
Capital contributions
 
—

 
—

 
4,122

 
(4,122
)
 
—

Capital distributions
 
—

 
(5,840
)
 
(10,263
)
 
16,103

 
—

Change in due to affiliates
 
1,442

 
(64,531
)
 
(44,903
)
 
107,992

 
—

Other
 
(703
)
 
(246
)
 
905

 
—

 
(44
)
Cash flows used in financing activities
 
(5,588
)
 
(235,697
)
 
(276,263
)
 
119,973

 
(397,575
)
 
 
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
(3,696
)
 
113,761

 
—

 
—

 
110,065

Cash and cash equivalents at the beginning of the period
 
4,016

 
196,812

 
2,000

 
—

 
202,828

Cash and cash equivalents at the end of the period
 
$
320

 
$
310,573

 
$
2,000

 
$
—

 
$
312,893


52


14. Related-Party Transactions
WCO was established to invest in mortgage-related assets. In November 2016, WCO entered into a series of agreements whereby it agreed to sell substantially all of its assets, including the sale of substantially all of its MSR portfolio to NRM. In connection with the December 2016 closing of the transactions relating thereto, WCO commenced liquidation activities and the Company does not expect to sell further assets to WCO.
The Company's investment in WCO was $8.0 million and $19.4 million at June 30, 2017 and December 31, 2016, respectively. The Company recorded income (losses) relating to its investment in WCO of less than $(0.1) million and $(0.5) million for the three months ended June 30, 2017 and 2016, respectively, and less than $0.1 million and $(1.0) million for the six months ended June 30, 2017 and 2016, respectively. Additionally, the Company received dividends of $11.5 million and $1.0 million from WCO during the six months ended June 30, 2017 and 2016, respectively.
The Company’s subsidiary, GTIM, earned fees for providing investment advisory and management services to WCO and administering its business activities and day-to-day operations of less than $0.1 million and $0.4 million for the three months ended June 30, 2017 and 2016, respectively, and $0.1 million and $0.8 million for the six months ended June 30, 2017 and 2016, respectively, which are recorded in other revenues on the consolidated statements of comprehensive loss. The Company had $0.1 million and $0.9 million included in receivables, net on the consolidated balance sheets at June 30, 2017 and December 31, 2016, respectively, relating to fees earned for the aforementioned investment advisory and management services provided to WCO, as well as pass-throughs to WCO related to general and administrative and payroll-related expenses.
WCO lacks sufficient equity at risk to finance its activities without subordinated financial support, and, as such, is a VIE. WCO’s board of directors have decision making authority as it relates to the activities that most significantly impact the economic performance of WCO, including making decisions related to significant investments, servicing, capital and debt financing. As a result, the Company is not deemed to be the primary beneficiary of WCO as it does not have the power to direct the activities that most significantly impact WCO’s economic performance.
The following table presents the carrying amounts of the Company’s assets and liabilities that relate to WCO, as well as the size of the unconsolidated VIE (in thousands):
 
 
Carrying Value of Assets and Liabilities
Recorded on the Consolidated Balance Sheets
 
 
 
 
Servicer and Protective Advances, Net
 
Receivables, Net
 
Other
Assets (1)
 
Payables and Accrued Liabilities
 
Net Assets
 
Size of VIE (2)
June 30, 2017
 
$
5,275

 
$
107

 
$
7,953

 
$
—

 
$
13,335

 
$
24,871

December 31, 2016
 
6,980

 
1,392

 
19,403

 
(1,353
)
 
26,422

 
194,556

__________
(1)
Other assets at June 30, 2017 and December 31, 2016 are primarily comprised of the Company's investment in WCO.
(2)
The size of the VIE is deemed to be WCO's net assets.

53


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The terms "Walter Investment", the "Company", "we", "us", and "our" as used throughout this report refer to Walter Investment Management Corp. and its consolidated subsidiaries. The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing elsewhere in this Form 10-Q and in our Annual Report on Form 10-K/A for the year ended December 31, 2016 filed with the SEC on August 9, 2017 and with the information under the heading "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in that Annual Report on Form 10-K/A. Historical results and trends discussed herein and therein may not be indicative of future operations. Our results of operations and financial condition, as reflected in the accompanying Consolidated Financial Statements and related footnotes, reflect management’s evaluation and interpretation of business conditions, changing capital market conditions, and other factors. We use certain acronyms and terms throughout this Quarterly Report on Form 10-Q that are defined in the Glossary of Terms of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Our website can be found at www.walterinvestment.com. We make available free of charge on our website or provide a link on our website to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after those reports are electronically filed with, or furnished to, the SEC. To access these filings, go to our website, click on "Investor Relations" and then click on "SEC Filings." We also make available through our website other reports filed with or furnished to the SEC under the Exchange Act, including our proxy statements and reports filed by officers and directors under Section 16(a) of the Exchange Act, as well as our Code of Conduct and Ethics, our Corporate Governance Guidelines, and charters for our Audit Committee, Compensation and Human Resources Committee, Nominating and Corporate Governance Committee, Finance Committee and Compliance Committee. In addition, our website may include disclosure relating to certain non-GAAP financial measures that we may make public orally, telephonically, by webcast, by broadcast, or by similar means from time to time.
From time to time, we may use our website as a channel of distribution of material company information. Financial and other material information regarding the Company is routinely posted on and accessible at http://investor.walterinvestment.com.
Any information on our website or obtained through our website is not part of this Quarterly Report on Form 10-Q.
Our Investor Relations Department can be contacted at 3000 Bayport Drive, Suite 1100, Tampa, Florida 33607, Attn: Investor Relations, telephone (813) 421-7694.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Certain statements in this report, including matters discussed under this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Part II, Item 1. Legal Proceedings, and including matters discussed elsewhere in this report constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Statements that are not historical fact are forward-looking statements. Certain of these forward-looking statements can be identified by the use of words such as "believes," "anticipates," "expects," "intends," "plans," "projects," "estimates," "assumes," "may," "should," "will," "seeks," "targets," or other similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, and our actual results, performance or achievements could differ materially from future results, performance or achievements expressed in these forward-looking statements. These forward-looking statements are based on our current beliefs, intentions and expectations. These statements are not guarantees or indicative of future performance, nor should any conclusions be drawn or assumptions be made as to any potential outcome of any strategic review we conduct. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those factors, risks and uncertainties described below and in more detail under the caption "Risk Factors" of our Annual Report on Form 10-K/A for the year ended December 31, 2016, our Quarterly Report on Form 10-Q/A for the quarterly period ended March 31, 2017, this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017, and in our other filings with the SEC.
In particular (but not by way of limitation), the following important factors, risks and uncertainties could affect our future results, performance and achievements and could cause actual results, performance and achievements to differ materially from those expressed in the forward-looking statements:
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risks and uncertainties relating to the Company's proposed financial restructuring, including: the ability of the Company to comply with the terms of the RSA, including completing various stages of the restructuring within the dates specified by the RSA; the ability of the Company to obtain requisite support of the restructuring from various stakeholders; and the effects of disruption from the proposed restructuring making it more difficult to maintain business, financing and operational relationships;

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risks and uncertainties relating to, or arising in connection with, the restatement of financial statements included in the amendments to our Annual Report on Form 10-K for the year ended December 31, 2016 and our Quarterly Reports on Form 10-Q for the quarterly periods ended June 30, 2016, September 30, 2016 and March 31, 2017, including: reactions from the Company’s creditors, stockholders, or business partners; and the impact and result of any litigation or regulatory inquiries or investigations related to the findings of the Company’s assessment or the restatement;
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our ability to operate our business in compliance with existing and future laws, rules, regulations and contractual commitments affecting our business, including those relating to the origination and servicing of residential loans, default servicing and foreclosure practices, the management of third-party assets and the insurance industry, and changes to, and/or more stringent enforcement of, such laws, rules, regulations and contracts;
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scrutiny of our industry by, and potential enforcement actions by, federal and state authorities;
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the substantial resources (including senior management time and attention) we devote to, and the significant compliance costs we incur in connection with, regulatory compliance and regulatory examinations and inquiries, and any consumer redress, fines, penalties or similar payments we make in connection with resolving such matters;
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uncertainties relating to interest curtailment obligations and any related financial and litigation exposure (including exposure relating to false claims);
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potential costs and uncertainties, including the effect on future revenues, associated with and arising from litigation, regulatory investigations and other legal proceedings, and uncertainties relating to the reaction of our key counterparties to the announcement of any such matters;
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our dependence on U.S. GSEs and agencies (especially Fannie Mae, Freddie Mac and Ginnie Mae) and their residential loan programs and our ability to maintain relationships with, and remain qualified to participate in programs sponsored by, such entities, our ability to satisfy various existing or future GSE, agency and other capital, net worth, liquidity and other financial requirements applicable to our business, and our ability to remain qualified as a GSE and agency approved seller, servicer or component servicer, including the ability to continue to comply with the GSEs’ and agencies' respective residential loan selling and servicing guides;
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uncertainties relating to the status and future role of GSEs and agencies, and the effects of any changes to the origination and/or servicing requirements of the GSEs, agencies or various regulatory authorities or the servicing compensation structure for mortgage servicers pursuant to programs of GSEs, agencies or various regulatory authorities;
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our ability to maintain our loan servicing, loan origination or collection agency licenses, or any other licenses necessary to operate our businesses, or changes to, or our ability to comply with, our licensing requirements;
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our ability to comply with the terms of the stipulated orders resolving allegations arising from an FTC and CFPB investigation of Ditech Financial and a CFPB investigation of RMS;
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operational risks inherent in the mortgage servicing and mortgage originations businesses, including our ability to comply with the various contracts to which we are a party, and reputational risks;
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risks related to the significant amount of senior management turnover and employee reductions recently experienced by the Company;
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risks related to our substantial levels of indebtedness, including our ability to comply with covenants contained in our debt agreements or obtain any necessary waivers or amendments, generate sufficient cash to service such indebtedness and refinance such indebtedness on favorable terms, or at all, as well as our ability to incur substantially more debt;
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our ability to renew advance financing facilities or warehouse facilities on favorable terms, or at all, and maintain adequate borrowing capacity under such facilities;
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our ability to maintain or grow our residential loan servicing or subservicing business and our mortgage loan originations business;
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our ability to achieve our strategic initiatives, particularly our ability to: increase the mix of our fee-for-service business, including by entering into new subservicing arrangements; improve servicing performance; successfully develop our originations capabilities in the consumer and wholesale lending channels; effectuate a satisfactory debt restructuring; and execute and realize planned operational improvements and efficiencies, including those relating to our core and non-core framework;
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the success of our business strategy in returning us to sustained profitability;
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changes in prepayment rates and delinquency rates on the loans we service or subservice;

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the ability of Fannie Mae, Freddie Mac and Ginnie Mae, as well as our other clients and credit owners, to transfer or otherwise terminate our servicing or subservicing rights, with or without cause;
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a downgrade of, or other adverse change relating to, or our ability to improve, our servicer ratings or credit ratings;
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our ability to collect reimbursements for servicing advances and earn and timely receive incentive payments and ancillary fees on our servicing portfolio;
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our ability to collect indemnification payments and enforce repurchase obligations relating to mortgage loans we purchase from our correspondent clients and our ability to collect in a timely manner indemnification payments relating to servicing rights we purchase from prior servicers;
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local, regional, national and global economic trends and developments in general, and local, regional and national real estate and residential mortgage market trends in particular, including the volume and pricing of home sales and uncertainty regarding the levels of mortgage originations and prepayments;
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uncertainty as to the volume of originations activity we can achieve and the effects of the expiration of HARP, which is scheduled to occur on September 30, 2017, including uncertainty as to the number of "in-the-money" accounts we may be able to refinance and uncertainty as to what type of product or government program will be introduced, if any, to replace HARP;
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risks associated with the reverse mortgage business, including changes to reverse mortgage programs operated by FHA, HUD or Ginnie Mae, our ability to accurately estimate interest curtailment liabilities, our ability to fund HECM repurchase obligations, our ability to fund principal additions on our HECM loans, and our ability to securitize our HECM tails;
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our ability to realize all anticipated benefits of past, pending or potential future acquisitions or joint venture investments;
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the effects of competition on our existing and potential future business, including the impact of competitors with greater financial resources and broader scopes of operation;
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changes in interest rates and the effectiveness of any hedge we may employ against such changes;
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risks and potential costs associated with technology and cybersecurity, including: the risks of technology failures and of cyber-attacks against us or our vendors; our ability to adequately respond to actual or alleged cyber-attacks; and our ability to implement adequate internal security measures and protect confidential borrower information;
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risks and potential costs associated with the implementation of new or more current technology, such as MSP, the use of vendors (including offshore vendors) or the transfer of our servers or other infrastructure to new data center facilities;
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our ability to comply with evolving and complex accounting rules, many of which involve significant judgment and assumptions;
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risks related to our deferred tax assets, including the risk of an "ownership change" under Section 382 of the Code;
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our ability to regain and maintain compliance with the continued listing requirements of the NYSE, and risks arising from the potential suspension of trading of our common stock on, and delisting of our common stock from, the NYSE;
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our ability to continue as a going concern;
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uncertainties regarding impairment charges relating to our goodwill or other intangible assets;
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risks associated with one or more material weaknesses identified in our internal controls over financial reporting, including the timing, expense and effectiveness of our remediation plans;
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our ability to implement and maintain effective internal controls over financial reporting and disclosure controls and procedures;
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our ability to manage potential conflicts of interest relating to our relationship with WCO; and
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risks related to our relationship with Walter Energy and uncertainties arising from or relating to its bankruptcy filings and liquidation proceedings, including potential liability for any taxes, interest and/or penalties owed by the Walter Energy consolidated group for the full or partial tax years during which certain of the Company's former subsidiaries were a part of such consolidated group and certain other tax risks allocated to us in connection with our spin-off from Walter Energy.
All of the above factors, risks and uncertainties are difficult to predict, contain uncertainties that may materially affect actual results and may be beyond our control. New factors, risks and uncertainties emerge from time to time, and it is not possible for our management to predict all such factors, risks and uncertainties.

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Although we believe that the assumptions underlying the forward-looking statements (including those relating to our outlook) contained herein are reasonable, any of the assumptions could be inaccurate, and therefore any of these statements included herein may prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made, except as otherwise required under the federal securities laws. If we were in any particular instance to update or correct a forward-looking statement, investors and others should not conclude that we would make additional updates or corrections thereafter except as otherwise required under the federal securities laws.
In addition, this report may contain statements of opinion or belief concerning market conditions and similar matters. In certain instances, those opinions and beliefs could be based upon general observations by members of our management, anecdotal evidence and/or our experience in the conduct of our business, without specific investigation or statistical analyses. Therefore, while such statements reflect our view of the industries and markets in which we are involved, they should not be viewed as reflecting verifiable views and such views may not be shared by all who are involved in those industries or markets.
Executive Summary
The Company
We are an independent servicer and originator of mortgage loans and servicer of reverse mortgage loans. We service a wide array of loans across the credit spectrum for our own portfolio and for GSEs, government agencies, third-party securitization trusts and other credit owners. Through our consumer, correspondent and wholesale lending channels, we originate and purchase residential mortgage loans that we predominantly sell to GSEs and government agencies. We also operate two complementary businesses; asset receivables management and real estate owned property management and disposition. Our goal is to become a partner with our customers by assisting them with the originations process and through the life of their loan, using a highly regarded originations and servicing platform and by providing quality customer service in an open, honest and straightforward manner.
During 2017, we changed our principal executive offices from Tampa, Florida to Fort Washington, Pennsylvania, which was due to, among other things, the Chief Executive Officer and President and certain other senior executive officers of the Parent Company being based in Fort Washington.
At June 30, 2017, we serviced 1.9 million residential loans with a total unpaid principal balance of $233.6 billion. We originated $9.2 billion in mortgage loan volume during the first six months of 2017.
Part of our strategy is to move towards a fee-for-service model in our servicing business by increasing the proportion of subservicing activity in our business mix. For example, in 2016, we entered into several transactions with NRM pursuant to which we sold MSR to NRM and were retained by NRM to subservice these and other MSR, and in 2017, we began selling MSR to NRM on both a traditional flow sale as well as a concurrent assignment or co-issue basis, each with subservicing retained. Largely as a result of these transactions, and based on unpaid principal loan balance, the portion of our servicing portfolio represented by subservicing rose from 21% (or $56.8 billion in unpaid principal loan balance) at December 31, 2015 to 49% (or $115.4 billion in unpaid principal loan balance) at June 30, 2017. Our subservicing fees vary considerably from contract to contract, and in general subservicing fees are lower than the servicing fee associated with owning the MSR and servicing the related loans. Therefore, our servicing revenues have been and are expected to continue to be negatively affected by the sale of our MSR, even in situations where we are engaged to subservice the loans relating to such MSR following their sale. However, as the portion of our servicing portfolio represented by subservicing increases, we generally expect to benefit from lower advance funding costs and from the elimination of amortization charges associated with the MSR we have sold.
During the six months ended June 30, 2017, we added to the unpaid principal balance of our third-party mortgage loan servicing portfolio with $2.1 billion relating to subservicing contracts and $4.5 billion relating to servicing rights capitalized upon sales of mortgage loans, which was more than offset by $18.7 billion of payoffs and sales, net of recapture activities. In addition, we added to the unpaid principal balance of our third-party reverse loan servicing portfolio with $968.1 million in new business and tails, which was more than offset by $1.4 billion in payoffs, sales and curtailments.

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Our mortgage loan originations business diversifies our revenue base and helps us replenish our servicing portfolio. During the six months ended June 30, 2017, we originated $3.2 billion of mortgage loans through our consumer and wholesale channels, the majority of which resulted from retention activities associated with our existing servicing portfolio. In addition, we purchased $6.0 billion of mortgage loans through our correspondent channel during the first half of 2017. Substantially all of these purchased and originated mortgage loans were added to our servicing portfolio upon loan sale. In addition, we originated and purchased $223.7 million in reverse mortgage volume and issued $254.5 million in HMBS during the six months ended June 30, 2017, although, as discussed below, we exited the reverse mortgage originations business at the beginning of 2017.
We manage our Company in three reportable segments: Servicing, Originations, and Reverse Mortgage. A description of the business conducted by each of these segments is provided below:
Servicing - Our Servicing segment performs servicing for our own mortgage loan portfolio and on behalf of third-party credit owners of mortgage loans for a fee and also performs subservicing for third-party owners of MSR. The Servicing segment also operates complementary businesses including a collections agency that performs collections of post charge-off deficiency balances for third parties and us. In addition, the Servicing segment holds the assets and mortgage-backed debt of the Residual Trusts.
At June 30, 2017, we were the subservicer for 0.9 million accounts with an unpaid principal loan balance of $115.4 billion. These subserviced accounts represented approximately 49% of our total servicing portfolio based on unpaid principal loan balance at that date. Our largest subservicing customer, NRM, represented approximately 63% of our total subservicing portfolio based on unpaid principal loan balance on June 30, 2017. Our next largest subservicing customer represented approximately 21% of our total subservicing portfolio based on unpaid principal loan balance on June 30, 2017.
The subservicing contracts pursuant to which we are retained to subservice mortgage loans generally provide that our customer, the owner of the MSR that we subservice, can terminate us as subservicer with or without cause, and each such contract has unique terms establishing the fees we will be paid for our work under the contract or upon the termination of the contract, if any, and the standards of performance we are required to meet in servicing the relevant mortgage loans, such that the profitability of our subservicing activity may vary among different contracts. We believe that our subservicing customers consider various factors from time to time in determining whether to retain or change subservicers, including the financial strength and servicer ratings of the subservicer, the subservicer's record of compliance with regulatory and contractual obligations (including any enhanced, "high touch" processes required by the contract) and the success of the subservicer in limiting the delinquency rate of the relevant portfolio. The termination of one or more of our subservicing contracts could have a material adverse effect on us, including on our business, financial condition, liquidity and results of operations. Refer to Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K/A for the year ended December 31, 2016 for a discussion of certain additional risks and uncertainties relating to our subservicing contracts.
In April 2017, during discussions with a subservicing counterparty regarding our business relationship and our review of our core and legacy portfolios, this counterparty indicated it was exploring alternatives for certain portfolios we subservice for such counterparty that we have preliminarily determined are legacy because such portfolios, for example, relate to non-GSE and non-Ginnie Mae mortgage loans. In July 2017, this counterparty initiated the transfer of servicing on certain legacy mortgage loan portfolios we subservice for such counterparty, which transfer is expected to take up to six months to complete. This transfer is expected to involve the transfer by us to other subservicers or counterparties subservicing on mortgage loans with an aggregate unpaid principal balance of approximately $7.7 billion as of June 30, 2017. As of June 30, 2017, the mortgage loans we subservice for this counterparty accounted for 7% of our mortgage loan subservicing portfolio and 3% of our overall residential loan servicing portfolio (in each case based on unpaid principal loan balance as of such date).
Originations - Our Originations segment originates and purchases mortgage loans that are intended for sale to third parties. During the six months ended June 30, 2017, the mix of mortgage loans sold by our Originations segment, based on unpaid principal balance, consisted of (i) 46% Fannie Mae conventional conforming loans, (ii) 42% Ginnie Mae loans and (iii) 12% Freddie Mac conventional conforming loans.
Reverse Mortgage - Our Reverse Mortgage segment primarily focuses on the servicing of reverse loans. Effective January 2017, we exited the reverse mortgage originations business. As of June 30, 2017, we did not have any reverse loans remaining in the originations pipeline and are in the process of finalizing the shutdown of the reverse mortgage originations business. We will continue to fund undrawn tails available to borrowers.
Other - As of June 30, 2017, our Other non-reportable segment holds the assets and liabilities of the Non-Residual Trusts and corporate debt. This segment also includes our asset management business, which we are in the process of winding down.

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Overview
Our Servicing segment revenue is primarily impacted by the size and mix of our capitalized servicing and subservicing portfolios and is generated through servicing of mortgage loans for clients and/or credit owners. Net servicing revenue and fees include the change in fair value of servicing rights carried at fair value and the amortization of all other servicing rights. Our servicing fee income generation is influenced by the volume and timing of entrance into subservicing contracts and purchases and sales of servicing rights. The fair value of our servicing rights is largely dependent on the size of the related portfolio, discount rates, and prepayment and default speeds. Our Originations segment revenue, which is primarily comprised of net gains on sales of loans, is impacted by interest rates and the volume of loans locked as well as the margins earned in our various originations channels. Net gains on sales of loans include the cost of additions to the representations and warranties reserve. Our Reverse Mortgage segment is impacted by subservicing contracts, the fair value of reverse loans and HMBS, draws on existing reverse loans, and historically, the volume of new reverse loan originations.
Our results of operations are also affected by expenses such as salaries and benefits, information technology, occupancy, legal and professional fees, the provision for advances, curtailment, interest expense and other operating expenses. Refer to the Financial Highlights, Results of Operations and Business Segment Results sections below for further information.
Our principal sources of liquidity are the cash flows generated from our business segments and funds available from our master repurchase agreements, mortgage loan servicing advance facilities, issuance of GMBS, and issuance of HMBS to fund our tail commitments. We may generate additional liquidity through sales of MSR, any portion thereof, or other assets. Refer to the Liquidity and Capital Resources section below for additional information.
Financial Highlights
Total revenues for the three months ended June 30, 2017 were $208.8 million, which represented an increase of $21.3 million as compared to the same period of 2016. The increase in revenue reflects a $59.4 million increase in net servicing revenue and fees, offset in part by a $29.6 million decrease in net gains on sales of loans and an $8.6 million decrease in insurance revenue. The increase in net servicing revenue and fees was driven by $120.8 million in lower fair value losses on servicing rights, offset in part by $47.9 million in lower servicing fees.
Total revenues for the six months ended June 30, 2017 were $454.1 million, which represented an increase of $199.8 million as compared to the same period of 2016. The increase in revenue reflects a $278.3 million increase in net servicing revenue and fees, offset in part by a $39.8 million decrease in net gains on sales of loans, a $20.3 million decrease in net fair value gains on reverse loans and related HMBS obligations, and a $14.1 million decrease in insurance revenue. The increase in net servicing revenue and fees was driven by $393.8 million in lower fair value losses on servicing rights, offset in part by $92.3 million in lower servicing fees.
Losses recorded on the fair value of servicing rights is discussed in the Servicing segment section under our Business Segment Results section below. The decrease in servicing fees was due to the planned shift of our third-party servicing portfolio from servicing to subservicing and runoff of the portfolio. The decrease in net gains on sales of loans resulted from an overall lower volume of locked loans combined with a shift in mix from the higher margin consumer channel to the lower margin correspondent and wholesale channels. The decrease in net fair value gains on reverse loans and related HMBS obligations for the six months ended June 30, 2017 as compared to the same period of 2016 resulted from valuation model assumption adjustments for buyout loans in the second quarter of 2017 and a flattening of the interest rate curve in 2017 as compared to 2016. The decrease in insurance revenue was due to the sale of our insurance business during the first quarter of 2017.
Total expenses for the three and six months ended June 30, 2017 were $292.6 million and $606.3 million, respectively, which represented decreases as compared to the same periods of 2016, primarily driven by $215.4 million in goodwill impairment recorded during the second quarter of 2016, and $32.6 million and $57.3 million, respectively, in lower salaries and benefits and $18.2 million and $16.2 million, respectively, in lower general and administrative expenses.
We incurred $215.4 million in impairment charges in our Servicing segment during three and six months ended June 30, 2016 as a result of a goodwill evaluation performed in the second quarter of 2016. Salaries and benefits decreased as a result of a lower average headcount driven by site closures and various organizational changes to the scale and proficiency of the leadership team and support functions, as well as our decision to exit the reverse mortgage originations business. General and administrative expenses decreased primarily as a result of lower contractor costs, compensating interest, and other cost savings, offset in part by higher costs associated with corporate strategic initiatives.

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Our cash flows provided by operating activities were $413.3 million for the six months ended June 30, 2017. Cash and cash equivalents was $478.4 million at June 30, 2017. Cash flows provided by operating activities increased $103.2 million during the six months ended June 30, 2017 as compared to the same period of 2016. The increase in cash provided by operating activities was primarily a result of an increase in cash provided by origination activities resulting from a higher volume of loans sold in relation to loans originated during the first half of 2017 as compared to the same period of 2016 and a decrease in income tax receivables.
Refer to the Results of Operations and Business Segment Results sections below for further information on the changes addressed above. Also included in our Business Segment Results is a discussion of changes in our non-GAAP financial measures. A description of our non-GAAP financial measures is included in the Non-GAAP Financial Measures section below.
Strategy
Beginning in the fourth quarter of 2016, after the appointment of Anthony Renzi as the Company’s Chief Executive Officer and President, we made extensive changes to our leadership team, installing among other things new heads of compliance, default servicing, performing servicing, reverse mortgage, and human resources. In conjunction with the Board, this new leadership team has developed a strategy and business plan for 2017 that is focused on our core mortgage servicing and originations businesses, with a view to improving both financial and operating performance during the year.
In Servicing, the ongoing shift of our servicing portfolio from servicing to subservicing has resulted in, and is expected to continue to result in, a decline in revenue. Our ability to implement initiatives to reduce costs on pace with or faster than declining revenues is a key factor to us achieving a return to profitability within the servicing business. We have already achieved cost reductions in a number of areas, but there can be no assurance that we will be able to reduce costs so as to enable the servicing business to return to profitability in the near-term or at all. We expect to continue to execute numerous initiatives to improve the efficiency of our operations, through such measures as better processes, site consolidation and improved use of technology. We are also concentrating on improving the performance of our servicing business, by, for example, improving customer service, lowering delinquency rates and improving standards and compliance. We plan to prioritize these initiatives over the pursuit of significant new servicing or subservicing opportunities, though over time as we improve operations we aim to be able to compete effectively and profitably for opportunities to subservice for others. Recent operating results have been negatively impacted by costs associated with legacy matters within default servicing operations and costs associated with site consolidation plans, and we expect to continue to incur similar costs as we execute on our core and legacy strategy.
In Originations, our goal is to achieve revenue growth over time, primarily from increased wholesale lending, increased outbound contact efforts and improved retention. As we endeavor to expand our originations business, we expect that we will need to increase significantly the amount of purchase money loans we originate, particularly in our consumer direct and wholesale channels. This will require us to enhance our brand awareness among potential customers, and we are working on plans to develop a digital marketing presence. We believe our strategy will require us to hire a considerable number of new loan officers and other employees.
Our operating results have been negatively impacted by a number of factors, including a greater than anticipated decline in origination volumes as new leads, pull-through rates and recapture rates within the consumer lending channel have been below expectations. We continue to face challenges in our ability to achieve growth in the originations business as we transition from a principally refinance-focused strategy directed at our captive servicing portfolio to a strategy that also focuses on new customer acquisition and includes purchase money originations. We have been working to develop new lead sources leveraging digital and mobile technologies, achieve deeper integration of our originations business with our servicing business to better identify viable customer opportunities and streamline and shorten processes in an effort to increase pull-through rates. Additionally, volumes and pricing in the correspondent and wholesale channels are being negatively impacted by a challenging business lending environment, our ability to attract talent to the wholesale channel and our ability to enter into flow arrangements to sell MSR acquired in those channels. As a result of these recent developments, management is closely monitoring performance of the originations segment in connection with our evaluation of the recoverability of our remaining goodwill and intangible assets.
In Reverse Mortgage, having exited the originations business, we are working to improve the efficiency of our servicing activities in order to reduce expected future losses. We have also been evaluating options for our reverse mortgage business, including the possibility of selling some or all of its assets or pursuing alternative solutions for the business that include collaboration with other parties. Additionally, new HUD requirements have led to additional working capital needs in relation to Ginnie Mae buyouts.

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Our profitability for the Reverse segment has been and will continue to be negatively impacted by new HUD requirements, which have led to additional working capital needs in relation to Ginnie Mae buyouts, and by the level of defaults we are experiencing with HECM loans. When a HECM loan is in default, we earn interest at the debenture rate, which is generally lower than the note rate we must pay. Additionally, if we miss HUD prescribed milestones in the foreclosure and claims filing process, HUD curtails the debenture interest being earned on loans in default. For loans in default, servicing costs generally increase as a result of foreclosure related activities such as legal costs, property preservation expense and other costs, which may include bankruptcy related activities. Further, after a foreclosure sale occurs and we obtain title to the property, we are responsible for the sale of the REO property. If we are unable to sell the property underlying a defaulted reverse loan for an acceptable price within the timeframe established by HUD, we are required to make an appraisal-based claim to HUD. In such cases, HUD reimburses us for the loan balance, eligible expenses and debenture interest, less the appraised value of the underlying property. Thereafter all the risks and costs associated with maintaining and liquidating the property remains with us. We may incur additional losses on REO properties as they progress through the claims and liquidation processes. The significance of future losses associated with appraisal-based claims is dependent upon the volume of defaulted loans, condition of foreclosed properties and the general real estate market.
Improving the effectiveness and efficiency of our information technology group is an important element of our strategy across all of our operations. We use numerous systems and incur considerable expense to support our lending, servicing, reverse and other business activities. We have initiated measures to reduce the complexity and cost of our information technology operations and are continuing our review of this function to identify further areas of opportunity.
Investments in MSR
From time to time over the past five years, to support our servicing business, we have bought or sold MSR. With a view to using our capital efficiently, in 2016 we began to limit our investment in MSR. We plan to continue that approach in the future and to move towards more of a fee-for-service model in the servicing business. Accordingly, we expect that from time to time we will sell MSR we now own or those we create in connection with our mortgage originations activities. We expect that normally we will retain the right to subservice such MSR sold by us, but we may also sell MSR with servicing released. We may also engage in other transactions to limit or reduce our investment in MSR, including sales of excess servicing spread.
In 2016, we executed a number of transactions that helped us reduce our investment in MSR. In particular, we entered into several transactions with NRM pursuant to which we sold MSR to NRM and were retained by NRM to subservice these and other MSR. We may seek to sell additional MSR to NRM in the future and may also seek to enter into arrangements to sell MSR to other buyers. For the three and six months ended June 30, 2017, we transferred MSR to NRM under a traditional flow sale agreement related to mortgage loans with an aggregate UPB of $1.6 billion. Additionally, we simultaneously assigned servicing to NRM concurrent with the loan delivery to Fannie Mae with UPB of $1.8 billion and $3.2 billion for the three and six months ended June 30, 2017, respectively.
Non-Core Assets
Since early 2015, we have sold various assets we considered to be "non-core" or "legacy" assets. On February 1, 2017, we sold our insurance business for a cash purchase price of $125.0 million, subject to adjustment, with potential earnout payments of up to $25.0 million in cash. At that time, the Company received $131.1 million in cash, which included a working capital payment.
We are continuing to review our assets and activities to determine those that should be considered "core" or "non-core" in relation to our strategic goals, and we are advancing analysis and developing strategy with respect to such "non-core" assets and activities, which will include non-strategic operations, locations and portfolios. These may in the future be sold, wound down or otherwise managed in a manner designed to limit the investment, costs and attention we are required to devote to them. Over the next few years, we intend to consolidate our operations into three “core” Ditech sites - Fort Washington, PA; Jacksonville, FL; and Tempe, AZ; and one “core” RMS site - Houston, TX. Our Irving, TX location is expected to be closed by the end of 2017 and our remaining sites are undergoing strategic review and plans for them are expected to be finalized by early 2018. These strategic reviews could result in additional site closings or other outcomes.

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Operating Improvements
Since 2016, we have focused our efforts on improving our financial performance through increasing efficiency and cost reductions. During 2016, we initiated actions in connection with our continued efforts to enhance efficiencies and streamline processes, which included various organizational changes to the scale and proficiency of our leadership team and support functions, which continued into 2017. For example, we exited the reverse mortgage originations business effective January 2017 while maintaining our reverse mortgage servicing operations, and in July 2017 we announced certain site consolidation plans, as discussed above. While our goals for 2017 include expense reductions, there can be no assurance that we will be successful in reducing costs. In 2017, we expect to continue to incur advisory, severance and other expenses associated with the improvement of our business, and we may incur unexpected expenses, including expenses arising from unanticipated operational problems, legal and regulatory matters, and other matters that are beyond our control. If we are not successful in reducing our expenses, our results of operations, financial condition and liquidity could be materially adversely affected.
In addition to improving the financial performance of our operations, we are focused on ensuring that our servicing operations meet legal and regulatory requirements and our contractual servicing obligations and that we improve our servicing performance, as measured by the owners of the loans we service (such as GSEs) and by customers for whom we subservice. By some measures, such as delinquency rates for our mortgage loan servicing portfolio, during 2016 our servicing performance deteriorated significantly relative to our past performance and to that of other servicers, following the introduction of new servicing technology, changes in servicing practices, site consolidation, and other developments. The GSEs and other parties for whom we service or subservice regularly monitor our performance and communicate their observations and expectations to us. Several important such counterparties noted our recent performance deterioration and have requested that we improve various aspects of our performance, which we are endeavoring to do. At Freddie Mac’s request, we recently completed the voluntary transfer of MSR relating to Freddie Mac mortgage loans that are 90 days or more delinquent to another special default servicer with a related unpaid principal loan balance totaling approximately $537 million. With a view to improving our performance, we have been enhancing our processes and have made management changes and introduced new procedures to track key performance metrics. We may need to make further enhancements to our people, processes or technologies to achieve acceptable levels of servicing performance and satisfy evolving legal and regulatory requirements and best practices. In addition, these enhancements could require significant unplanned expenditures that could adversely affect our financial results. We cannot be certain that our efforts to improve our servicing performance will have sufficient or timely results. If we are unable to improve our servicing performance metrics, we could face various material adverse consequences, including competitive disadvantage, the inability to win new subservicing business, the termination of servicing rights or subservicing contracts and GSEs or other counterparties asking us to transfer to other servicers, or otherwise limit or reduce, certain assets in our servicing portfolio.
While we plan to continue to take actions across our businesses to improve efficiency, identify revenue opportunities, and reduce expense, certain other costs have risen or are expected to arise. For example, we have been making investments and taking other measures to enhance the structure and effectiveness of our compliance and risk processes and associated programs across the Company, with a view to improving our customers’ experience, our compliance results and our performance and ratings under our subservicing contracts and our obligations to GSEs and loan investors. We believe additional investments and process improvements in these areas will be required. The mortgage industry generally, including our Company, is subject to extensive and evolving regulation and continues to be under scrutiny from federal and state regulators, enforcement agencies and other government entities. This oversight has led, in our case, to ongoing investigations and examinations of several of our business areas, and we have been and will be required to dedicate internal and external resources to providing information to and otherwise cooperating with such government entities. In addition, we have incurred, and expect that in the future we will incur, significant expenses (i) associated with the remediation or other resolution of breaches, findings or concerns raised by regulators, enforcement agencies, other government entities, customers or ourselves, (ii) to enhance the effectiveness of our risk and compliance program and (iii) to address operational issues and other events of noncompliance we have discovered, or may in the future discover, through our compliance program or otherwise. Investments to enhance our operational, compliance and risk processes may also result in an improved customer experience and competitive advantage for our business.
Debt Restructuring Initiative
On July 31, 2017, the Company entered into a RSA with the Consenting Term Lenders. As set forth in the RSA (including in the Restructuring Term Sheet attached thereto), the parties to the RSA have agreed to the principal terms of a proposed financial restructuring of the Company, which will be implemented through an out-of-court restructuring (as described below) and, in the absence of sufficient stakeholder support for the out-of-court restructuring, a prepackaged plan of reorganization under Chapter 11 of the Bankruptcy Code.

62


Concurrently with the execution of the RSA, the Company and the Consenting Term Lenders entered into a waiver of certain events of default under the 2013 Credit Agreement and an amendment of the 2013 Credit Agreement, and the Company and the beneficial owners of a majority in aggregate principal amount of the Senior Notes entered into a waiver and forbearance agreement, in each case, as further described below. Any capitalized terms appearing in the following subsections not defined in the Glossary are as defined in the agreement to which that subsection relates, unless otherwise noted.
Restructuring Support Agreement
Pursuant to the terms of the RSA, the Company has agreed to purchase the term loans of the Consenting Term Lenders through open market buybacks in an aggregate amount equal to $100.0 million out of an escrow account created by the Company for the purpose of completing such purchases, $75.0 million of such purchases will be completed upon the earlier to occur of (i) the date on which lenders holding 100% of the loans and/or commitments outstanding under the 2013 Credit Agreement have become parties to the RSA and (ii) August 21, 2017. The remaining $25.0 million purchase will be completed by September 1, 2017 (unless such date is extended by the Company and the Requisite Term Lenders), unless the Company has determined to pay such amount prior to such date.
As contemplated by the RSA, the Company will seek to negotiate a restructuring support agreement with Senior Noteholders holding at least 66 2/3% of the aggregate outstanding principal amount of the Senior Notes.
With respect to the Out-of-Court Restructuring, the RSA provides that if the Requisite Senior Notes Threshold is attained, the Company will:
•
undertake the Consent Solicitation and Exchange Offer, including both (a) the solicitation of consents from Senior Noteholders with respect to certain proposed amendments to the Senior Notes Indenture and (b) an exchange offer to be effected pursuant to the terms set forth on Annex C to the Restructuring Term Sheet; and
•
undertake a Tender Offer to purchase the Convertible Notes for an aggregate purchase price of not more than $40.0 million, in value in the form of cash, equity and/or other consideration, as determined by the Company and the Requisite Term Lenders.
Pursuant to the terms of the RSA, if all of the conditions to the Out-of-Court Restructuring are satisfied or waived (with the prior written consent of the Company and the Requisite Term Lenders) on or prior to November 1, 2017 (unless such date is extended by the Company and the Requisite Term Lenders, the Out-of-Court Outside Date), then the Restructuring will be consummated pursuant to the Out-of-Court Restructuring unless the Company and the Requisite Term Lenders agree to consummate the Restructuring through the In-Court Restructuring. If all the conditions precedent to consummation of the Out-of-Court Restructuring other than the Minimum Participation Threshold (as defined below) are satisfied or waived (with the prior written consent of the Company and the Requisite Term Lenders) on or prior to the Out-of-Court Outside Date, then the Company will implement the In-Court Restructuring, on the terms and subject to the conditions set forth in the RSA. As provided in the RSA, Minimum Participation Threshold means, in each case consistent with the terms of the RSA, all of the following: (i) Term Lenders holding at least 95% of the aggregate principal amount of the Term Loans (as defined in the 2013 Credit Agreement) outstanding under the 2013 Credit Agreement will have consented to the Credit Agreement Amendment; (ii) Senior Noteholders holding Senior Notes representing at least 95% of the aggregate principal amount of Senior Notes outstanding will have validly tendered and not withdrawn such Senior Notes, and consented to the amendments to the Senior Notes Indenture, in the Consent Solicitation and Exchange Offer; and (iii) Convertible Noteholders holding Convertible Notes representing at least 95% of the aggregate principal amount of Convertible Notes outstanding will have (x) validly tendered and not withdrawn their Convertible Notes into the Tender Offer and (y) voted in favor of the Restructuring.
Pursuant to the terms of the RSA, each Consenting Term Lender has agreed, among other things, subject to certain conditions, to (i) use its commercially reasonable efforts to support the Restructuring, and to act in good faith and take all reasonable actions necessary to consummate the Restructuring, (ii) vote to accept the Prepackaged Plan (and not change or withdraw such vote), (iii) refrain from taking any actions that are inconsistent with, or that would delay, prevent, frustrate or impede the Restructuring, and (iv) negotiate in good faith with the Company regarding an alternative in-court restructuring sponsored by the Consenting Term Lenders pursuant to which such Consenting Term Lenders may agree, among other things, to convert a mutually agreeable portion of their Claims into equity of the Company as reorganized and such other terms as may be mutually agreeable to the Company and such Consenting Term Lenders, which alternative restructuring will be operative only if Senior Noteholders holding at least the Requisite Senior Notes Threshold have not executed the Senior Notes restructuring support agreement by August 31, 2017, or such later date as the Company and the Requisite Term Lenders may agree.

63


In the event that the Out-of-Court Restructuring is consummated, as of the effective date of the Out-of-Court Restructuring:
•
the Company and the Consenting Term Lenders will (i) enter into a new credit facility and (ii) agree that the Company will make cash payments of not less than $300.0 million in the aggregate (payable in the manner set forth in the RSA, the Credit Agreement Annex and/or the Interim Amendment, less amounts already paid in accordance with the RSA, to the Term Lenders;
•
the Company will issue the Second Lien Notes in accordance with the Consent Solicitation and Exchange Offer, and may issue an amount of shares of common stock that is not yet determined, and the Company and the Senior Noteholders will amend the Senior Notes Indenture to reflect a customary removal of covenants; and
•
each Convertible Noteholder who accepts the Tender Offer will receive their pro rata share of value (in the form of cash, equity, and/or other consideration, as determined by the Company and the Requisite Term Lenders) in an amount no greater than $40.0 million.
In the event that the In-Court Restructuring is consummated:
•
any plan of reorganization in connection with the Restructuring (including the Prepackaged Plan) shall provide that the Company, as reorganized pursuant to the Plan, will enter into a credit agreement that is consistent with the 2013 Credit Agreement, as modified by the amendment contemplated by Annex A to the Restructuring Term Sheet;
•
the Company will issue the Second Lien Notes in accordance with the Consent Solicitation and Exchange Offer, and may issue an amount of shares of common stock that is not yet determined, and the Company and the Senior Noteholders will amend the Senior Notes Indenture to reflect a customary removal of covenants;
•
the Plan will treat the holders of Convertible Notes in a manner acceptable to the Required Parties that is consistent with the Bankruptcy Code, provided that, if holders of at least 66 2/3% of the aggregate outstanding principal amount of Convertible Notes do not vote to accept the Plan, then the holders of Convertible Notes will not receive or retain any property under the Plan;
•
the definitive documentation for the Restructuring will treat Equity Interests (as defined in the Restructuring Term Sheet) in a manner acceptable to the Company and the Requisite Term Lenders that is consistent with the applicable law; and
•
all other claims will be unimpaired or refinanced in a manner reasonably acceptable to the Requisite Term Lenders.
The RSA may be terminated upon the occurrence of, among other events, the following: (i) certain breaches of the RSA by the Company or the Consenting Term Lenders (that remain uncured for five business days); (ii) the issuance of any ruling, judgment or order by any governmental authority enjoining the consummation of or rendering illegal the Prepackaged Plan; or (iii) the failure to complete various stages of the Restructuring by certain dates. Such milestones include that the Company will (a) execute the Senior Notes restructuring support agreement by August 31, 2017, (b) commence the Consent Solicitation and Exchange Offer and the Tender Offer by October 1, 2017, (c) if the Minimum Participation Threshold has been satisfied, consummate the Out-of-Court Restructuring by November 1, 2017 (unless the Company and the Requisite Term Lenders agree to pursue the In-Court Restructuring), and (d) if applicable, consummate the In-Court Restructuring by January 15, 2017. The RSA may also be terminated if (x) the Company has not obtained votes accepting the Prepackaged Plan from holders of the Term Loans sufficient to satisfy the conditions for acceptance set forth in section 1126(c) of the Bankruptcy Code on or before the voting deadline to be set forth in the solicitation materials distributed in connection with the Prepackaged Plan or (y) the Minimum Participation Threshold has not been satisfied and Senior Noteholders holding at least the Requisite Senior Notes Threshold have not voted in favor of the Prepackaged Plan by the Out-of-Court Outside Date. Upon termination of the RSA, each vote or any consents given by any Consenting Term Lender prior to such termination shall be deemed, for all purposes, to be null and void.
Any new securities to be issued pursuant to the restructuring transaction have not been registered under the Securities Act or any state securities laws. Therefore, the new securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and any applicable state securities laws. This Quarterly Report on Form 10-Q does not constitute an offer to sell or buy, nor the solicitation of an offer to sell or buy, any securities referred to herein, nor is this Quarterly Report on Form 10-Q a solicitation of consents to or votes to accept any Chapter 11 plan. Any solicitation or offer will only be made pursuant to a confidential offering memorandum and disclosure statement and only to such persons and in such jurisdictions as is permitted under applicable law.

64


Credit Agreement Waiver
On July 31, 2017, the Company and the Consenting Term Lenders entered into waiver to the 2013 Credit Agreement. Pursuant to the Credit Agreement Waiver, the Consenting Term Lenders representing the Required Lenders (as defined in the 2013 Credit Agreement) waived, subject to the conditions specified therein, certain events of default under the 2013 Credit Agreement as a result of or arising from (i) any breach of any representation or warranty made prior to July 31, 2017 as a result of the Company being required to restate its financial statements as of and for the periods ended June 30, 2016, September 30, 2016, December 31, 2016 and March 31, 2017, (ii) a “going concern” or like qualification in the auditor report delivered in connection with the restatement of the Original Filings, (iii) any default, event of default or similar event under instruments governing other Indebtedness (as defined in the 2013 Credit Agreement) arising from or as a result of the foregoing and (iv) any failure to deliver any notice to Credit Suisse AG, as administrative agent under the 2013 Credit Agreement or the Lenders (as defined in the 2013 Credit Agreement) with respect to all or any portion of the foregoing. The Credit Agreement Waiver became effective upon its execution by the Required Lenders and the execution and effectiveness of the RSA and the Third Amendment (as described below).
Third Amendment to the 2013 Credit Agreement
On July 31, 2017, the Company also entered into Amendment No. 3 to its Credit Agreement. This amends the 2013 Credit Agreement to make certain changes to the mandatory prepayment provisions and negative covenants thereof and certain technical changes. See “Liquidity and Capital Resources” for additional information regarding the terms of the Third Amendment.
The Third Amendment became effective upon its execution by the Required Lenders and the execution and effectiveness of the RSA and the Credit Agreement Waiver.
Waiver of Default and Forbearance
On July 31, 2017, the beneficial owners of a majority in aggregate principal amount of the Senior Notes agreed that (i) any existing defaults as a result of the Company being required to restate the Original Filings shall be waived and shall be deemed to cease to exist, and any event of default arising therefrom shall be waived and deemed to have been cured for every purpose of the Senior Notes Indenture, and (ii) they will not enforce or otherwise take any action or direct enforcement of, any rights or remedies available under the Senior Notes Indenture with respect to the original filings.
Walter Capital Opportunity Corp.
In 2014, we established WCO, a company formed to invest in mortgage-related assets, including MSR and excess servicing spread related to MSR. We own approximately 10% of WCO; third-party investors own the remainder of WCO.
In November 2016, WCO entered into a series of agreements whereby it agreed to sell substantially all of its assets, including the sale of substantially all of its MSR portfolio to NRM. In connection with the December 2016 closing of the transactions relating thereto, WCO commenced liquidation activities and we do not expect to sell further assets to WCO. We received $11.5 million in distributions from our equity investment in WCO during 2017, which are included in other investing activities in the consolidated statements of cash flows.
Regulatory Developments
Our business is subject to extensive regulation by federal, state and local authorities, including the CFPB, HUD, VA, the SEC and various state agencies that license, audit and conduct examinations of our mortgage servicing and mortgage originations businesses. We are also subject to a variety of regulatory and contractual obligations imposed by credit owners, investors, insurers and guarantors of the mortgages we originate and service, including, but not limited to, Fannie Mae, Freddie Mac, Ginnie Mae, FHFA, USDA and the VA/FHA. Furthermore, our industry has been under scrutiny by federal and state regulators over the past several years, and we expect this scrutiny to continue. Laws, rules, regulations and practices that have been in place for many years may be changed, and new laws, rules, regulations and administrative guidance have been, and may continue to be, introduced in order to address real and perceived problems in our industry. We expect to incur ongoing costs in order to comply with these evolving rules and regulations.
Originations Segment
On July 7, 2017, the CFPB issued final rule changes to its “Know Before You Owe” mortgage disclosure rule, which changes are intended to formalize guidance in the rule, provide greater clarity and certainty and help facilitate compliance by the mortgage industry. The final rule will become effective 60 days after its publication in the Federal Register, but compliance is not mandatory until October 1, 2018.

65


Refer to our Annual Report on Form 10-K/A for the year ended December 31, 2016 and our Quarterly Report on Form 10-Q/A for the quarterly period ended March 31, 2017 for additional information about the regulatory framework under which we operate.

66


Results of Operations — Comparison of Consolidated Results of Operations (dollars in thousands):
 
For the Three Months 
 Ended June 30,
 
Variance
 
For the Six Months 
 Ended June 30,
 
Variance
 
2017
 
2016
 
$
 
%
 
2017
 
2016
 
$
 
%
REVENUES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net servicing revenue and fees
$
91,321

 
$
31,936

 
$
59,385

 
186
 %
 
$
204,508

 
$
(73,826
)
 
$
278,334

 
(377
)%
Net gains on sales of loans
70,545

 
100,176

 
(29,631
)
 
(30
)%
 
144,901

 
184,653

 
(39,752
)
 
(22
)%
Net fair value gains on reverse loans and related HMBS obligations
7,872

 
7,650

 
222

 
3
 %
 
22,574

 
42,858

 
(20,284
)
 
(47
)%
Interest income on loans
10,489

 
11,849

 
(1,360
)
 
(11
)%
 
21,469

 
24,020

 
(2,551
)
 
(11
)%
Insurance revenue
2,650

 
11,277

 
(8,627
)
 
(77
)%
 
7,590

 
21,644

 
(14,054
)
 
(65
)%
Other revenues
25,910

 
24,585

 
1,325

 
5
 %
 
53,030

 
54,895

 
(1,865
)
 
(3
)%
Total revenues
208,787

 
187,473

 
21,314

 
11
 %
 
454,072

 
254,244

 
199,828

 
79
 %
 
 
 
 
 
 
 


 
 
 
 
 
 
 


EXPENSES
 
 
 
 
 
 


 
 
 
 
 
 
 


General and administrative
117,544

 
135,776

 
(18,232
)
 
(13
)%
 
249,171

 
265,382

 
(16,211
)
 
(6
)%
Salaries and benefits
101,071

 
133,681

 
(32,610
)
 
(24
)%
 
209,028

 
266,320

 
(57,292
)
 
(22
)%
Interest expense
60,884

 
64,400

 
(3,516
)
 
(5
)%
 
121,294

 
128,648

 
(7,354
)
 
(6
)%
Depreciation and amortization
10,042

 
14,540

 
(4,498
)
 
(31
)%
 
20,974

 
28,963

 
(7,989
)
 
(28
)%
Goodwill impairment
—

 
215,412

 
(215,412
)
 
(100
)%
 
—

 
215,412

 
(215,412
)
 
(100
)%
Other expenses, net
3,054

 
1,897

 
1,157

 
61
 %
 
5,837

 
4,403

 
1,434

 
33
 %
Total expenses
292,595

 
565,706

 
(273,111
)
 
(48
)%
 
606,304

 
909,128

 
(302,824
)
 
(33
)%
 
 
 
 
 
 
 


 
 
 
 
 
 
 


OTHER GAINS (LOSSES)
 
 
 
 
 
 


 
 
 
 
 
 
 


Gain on sale of business
7

 
—

 
7

 
n/m

 
67,734

 
—

 
67,734

 
n/m

Other net fair value losses
(8,105
)
 
(819
)
 
(7,286
)
 
890
 %
 
(3,022
)
 
(2,963
)
 
(59
)
 
2
 %
Gain (loss) on extinguishment
(709
)
 
—

 
(709
)
 
n/m

 
(709
)
 
928

 
(1,637
)
 
(176
)%
Other
—

 
(532
)
 
532

 
(100
)%
 
—

 
(1,556
)
 
1,556

 
(100
)%
Total other gains (losses)
(8,807
)
 
(1,351
)
 
(7,456
)
 
552
 %
 
64,003

 
(3,591
)
 
67,594

 
n/m

 
 
 
 
 
 
 


 
 
 
 
 
 
 


Loss before income taxes
(92,615
)
 
(379,584
)
 
286,969

 
(76
)%
 
(88,229
)
 
(658,475
)
 
570,246

 
(87
)%
Income tax expense
1,694

 
110,379

 
(108,685
)
 
(98
)%
 
1,572

 
4,190

 
(2,618
)
 
(62
)%
Net loss
$
(94,309
)
 
$
(489,963
)
 
$
395,654

 
(81
)%
 
$
(89,801
)
 
$
(662,665
)
 
$
572,864

 
(86
)%

67


Net Servicing Revenue and Fees
A summary of net servicing revenue and fees is provided below (dollars in thousands):
 
For the Three Months 
 Ended June 30,
 
Variance
 
For the Six Months 
 Ended June 30,
 
Variance
 
2017
 
2016
 
$
 
%
 
2017
 
2016
 
$
 
%
Servicing fees
$
129,154

 
$
177,082

 
$
(47,928
)
 
(27
)%
 
$
262,547

 
$
354,836

 
$
(92,289
)
 
(26
)%
Incentive and performance fees
16,795

 
18,011

 
(1,216
)
 
(7
)%
 
31,949

 
37,783

 
(5,834
)
 
(15
)%
Ancillary and other fees
22,012

 
25,058

 
(3,046
)
 
(12
)%
 
45,255

 
49,667

 
(4,412
)
 
(9
)%
Servicing revenue and fees
167,961

 
220,151

 
(52,190
)
 
(24
)%
 
339,751

 
442,286

 
(102,535
)
 
(23
)%
Changes in valuation inputs or other assumptions (1)
(34,751
)
 
(127,713
)
 
92,962

 
(73
)%
 
(52,281
)
 
(386,173
)
 
333,892

 
(86
)%
Other changes in fair value (2)
(31,963
)
 
(59,780
)
 
27,817

 
(47
)%
 
(67,949
)
 
(127,900
)
 
59,951

 
(47
)%
Change in fair value of servicing rights
(66,714
)
 
(187,493
)
 
120,779

 
(64
)%
 
(120,230
)
 
(514,073
)
 
393,843

 
(77
)%
Amortization of servicing rights
(9,926
)
 
(2,625
)
 
(7,301
)
 
278
 %
 
(14,951
)
 
(7,236
)
 
(7,715
)
 
107
 %
Change in fair value of servicing rights related liabilities
—

 
1,903

 
(1,903
)
 
(100
)%
 
(62
)
 
5,197

 
(5,259
)
 
(101
)%
Net servicing revenue and fees
$
91,321


$
31,936


$
59,385

 
186
 %
 
$
204,508

 
$
(73,826
)
 
$
278,334

 
(377
)%
__________
(1)
Represents the net change in servicing rights carried at fair value resulting primarily from market-driven changes in interest rates and prepayment speeds.
(2)
Represents the realization of expected cash flows over time.
We recognize servicing revenue and fees on servicing performed for third parties in which we either own the servicing right or act as subservicer. This revenue includes contractual fees earned on the serviced loans; incentive and performance fees, including those earned based on the performance of certain loans or loan portfolios serviced by us, loan modification fees and asset recovery income; and ancillary fees such as late fees and expedited payment fees. Servicing revenue and fees are adjusted for the amortization and change in fair value of servicing rights and the change in fair value of the servicing rights related liabilities.
Servicing fees decreased $47.9 million and $92.3 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, due primarily to a planned shift of our third-party servicing portfolio from servicing to subservicing combined with runoff of the portfolio. Incentive and performance fees decreased $1.2 million and $5.8 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, due primarily to lower fees earned under HAMP and lower asset recovery income. Ancillary and other fees decreased $3.0 million and $4.4 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, due to lower late fee income.
Changes in the fair value of servicing rights improved $120.8 million and $393.8 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively. Refer to the Servicing segment section under our Business Segment Results section below for additional information on the changes in fair value relating to servicing rights and our servicing rights related liabilities.
Net Gains on Sales of Loans
Net gains on sales of loans include realized and unrealized gains and losses on loans held for sale, fair value adjustments on IRLCs and other related freestanding derivatives, values of the initial capitalized servicing rights, and a provision for the repurchase of loans. Net gains on sales of loans decreased $29.6 million and $39.8 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, primarily due to an overall lower volume of locked loans combined with a shift in mix from the higher margin consumer channel to the lower margin correspondent and wholesale channels.
Net Fair Value Gains on Reverse Loans and Related HMBS Obligations
Net fair value gains on reverse loans and related HMBS obligations include the contractual interest income earned on reverse loans, including those not yet securitized or bought out of securitization pools, net of interest expense on HMBS related obligations, and the change in fair value of these assets and liabilities. Refer to the Reverse Mortgage segment discussion under our Business Segment Results section below for additional information including a detailed breakout of the components of net fair value gains on reverse loans and related HMBS obligations.

68


Net fair value gains on reverse loans and related HMBS obligations decreased $20.3 million for the six months ended June 30, 2017 as compared to the same period of 2016 resulting primarily from valuation model assumption adjustments for buyout loans in the second quarter of 2017 and a flattening in the interest rate curve in 2017 as compared 2016, which resulted in net non-cash fair value losses in the first half of 2017 as compared to net non-cash fair value gains in the first half of 2016. Reverse loans and related HMBS obligations are generally subject to net fair value gains when interest rates decline primarily as a result of a longer duration of reverse loans as compared to HMBS related obligations. Our reverse loans have longer durations primarily as a result of our obligations as issuer of HMBS, which includes the requirement to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM is equal to or greater than 98% of the maximum claim amount.
Interest Income on Loans
We earn interest income on the residential loans held in the Residual Trusts and on our unencumbered mortgage loans, both of which are accounted for at amortized cost. Interest income on loans decreased $1.4 million and $2.6 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, primarily due to runoff of the overall mortgage loan portfolio and a lower average yield on loans due to an increase in delinquencies that are 90 days or more past due.
Provided below is a summary of the average balances of residential loans carried at amortized cost and the related interest income and average yields (dollars in thousands):
 
 
For the Three Months 
 Ended June 30,
 
 
 
For the Six Months 
 Ended June 30,
 
 
 
 
2017
 
2016
 
Variance
 
2017
 
2016
 
Variance
Residential loans at amortized cost
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
10,489

 
$
11,849

 
$
(1,360
)
 
$
21,469

 
$
24,020

 
$
(2,551
)
Average balance (1) (2)
 
474,395

 
513,411

 
(39,016
)
 
479,094

 
517,195

 
(38,101
)
Annualized average yield
 
8.84
%
 
9.23
%
 
(0.39
)%
 
8.96
%
 
9.29
%
 
(0.33
)%
__________
(1)
Average balance is calculated as the average recorded investment in the loans at the beginning of each month during the period.
(2)
Average balance excludes delinquent mortgage loans that we are required to record on our consolidated balance sheets as a result of our unilateral right to repurchase such loans from Ginnie Mae as we do not own these mortgage loans and, therefore, are not entitled to any interest income they generate. Refer to Note 8 to the Consolidated Financial Statements for further information.
Insurance Revenue
Insurance revenue consists of commission income and fees earned on voluntary and lender-placed insurance policies issued and other products sold to borrowers, net of estimated future policy cancellations. Commission income is based on a percentage of the premium of the insurance policy issued, which varies based on the type of policy. Insurance revenue decreased $8.6 million and $14.1 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, due primarily to the sale of our principal insurance agency and substantially all of our insurance agency business on February 1, 2017. As a result of this sale, we no longer receive any insurance commissions on lender-placed insurance policies. Commencing February 1, 2017, another insurance agency owned by us began to provide insurance marketing services to a third party with respect to voluntary insurance policies, including hazard insurance. This insurance agency receives premium-based commissions for its insurance marketing services. Refer to Note 1 to the Consolidated Financial Statements for additional information on the sale of our insurance business.
Other Revenues
Other revenues decreased $1.9 million for the six months ended June 30, 2017 as compared to the same period of 2016 due primarily to $5.5 million in lower origination fee income primarily related to the consumer channel as loans continued to fund in 2017 under a program in place through December 31, 2016 in which certain fees were waived, partially offset by $5.1 million in higher other interest income. Origination fee income was $15.9 million and $21.4 million for the six months ended June 30, 2017 and 2016, respectively.

69


General and Administrative
General and administrative expenses decreased $18.2 million for the three months ended June 30, 2017 as compared to the same period of 2016 resulting primarily from $9.0 million in lower contractor costs related to our servicing platform conversion that occurred in the second quarter of 2016 as well as efforts to reduce contractor costs throughout the Company's operations, $5.7 million in lower compensating interest due to a shift from servicing to subservicing, $2.9 million in lower charges associated with foreclosure and bankruptcy practices, $2.9 million in lower advertising expenses resulting from a decrease in mail solicitations due to a strategy shift in lead acquisition for our originations segment, $2.5 million in lower postage and printing costs driven by additional mailings made during the second quarter of 2016 in connection with our servicing platform conversion, $1.7 million in lower curtailment-related accruals, $1.0 million in lower loss accruals relating to servicing advances, and $8.1 million in other cost savings, partially offset by $7.5 million in higher costs associated with corporate strategic initiatives, $5.8 million in lower reduction to the representations and warranty reserve, and $2.2 million in higher advance loss provision.
General and administrative expenses decreased $16.2 million for the six months ended June 30, 2017 as compared to the same period of 2016 resulting primarily from $12.3 million in lower contractor costs related to our servicing platform conversion that occurred in the first half of 2016 as well as efforts to reduce contractor costs throughout the Company's operations, $11.0 million in lower compensating interest due to a shift from servicing to subservicing, $6.7 million in lower advertising expenses resulting from a decrease in mail solicitations due to a strategy shift in lead acquisition for our originations segment, $5.6 million in lower postage and printing costs driven by additional mailings made during the second quarter of 2016 in connection with our servicing platform conversion, $3.6 million in lower curtailment-related accruals, $2.6 million in lower loss accruals relating to servicing advances, and $10.5 million in other cost savings, partially offset by $10.2 million in higher costs associated with corporate strategic initiatives, $7.2 million in additional costs associated with the use of MSP and outsourcing initiatives throughout the Company, $5.6 million in higher charges associated with foreclosure and bankruptcy practices, $4.7 million in lower reduction to the representations and warranty reserve, $3.7 million in higher legal expenses, and $3.4 million in higher advance loss provision.
Salaries and Benefits
Salaries and benefits decreased $32.6 million and $57.3 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, due to a decrease of $16.2 million and $29.1 million, respectively, in compensation and benefits resulting primarily from a lower average headcount driven by site closures and various organizational changes to the scale and proficiency of the leadership team and support functions, as well as our decision to exit the reverse mortgage originations business, a decrease of $6.2 million and $10.1 million, respectively, primarily related to a change in the commissions structure, a reduction of $4.4 million and $5.7 million, respectively, in severance due to the departure of certain senior executives in the second quarter of 2016, a reduction of $4.4 million and $4.4 million, respectively, in stock compensation expense related to increased forfeitures, a reduction of $1.7 million and $5.1 million, respectively, in overtime driven by cost reduction measures, and a decrease of $0.5 million and $5.1 million, respectively, in bonus accruals. Headcount decreased by approximately 1,200 full-time employees from approximately 5,600 at June 30, 2016 to approximately 4,400 at June 30, 2017.
Interest Expense
We incur interest expense on our corporate debt, servicing advance liabilities, master repurchase agreements, and mortgage-backed debt issued by the Residual Trusts, all of which are accounted for at amortized cost. Interest expense decreased $3.5 million and $7.4 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, driven by a decrease in interest expense related to servicing advance liabilities, offset in part by an increase in interest expense related to master repurchase agreements. Interest expense related to servicing advance liabilities decreased due primarily to the net pay down of our advance facilities resulting from advance reimbursements received in connection with the sale of loans and servicing rights in the fourth quarter of 2016. Interest expense related to master repurchase agreements increased primarily as a result of a higher average interest rate. Refer to the Liquidity and Capital Resources section below for additional information on our debt.

70


Provided below is a summary of the average balances of our corporate debt, servicing advance liabilities, master repurchase agreements, and mortgage-backed debt of the Residual Trusts, as well as the related interest expense and average rates (dollars in thousands):
 
 
For the Three Months 
 Ended June 30,
 
 
 
For the Six Months 
 Ended June 30,
 
 
 
 
2017
 
2016
 
Variance
 
2017
 
2016
 
Variance
Corporate debt (1)
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
$
35,137

 
$
35,920

 
$
(783
)
 
$
70,223

 
$
71,817

 
$
(1,594
)
Average balance (2)
 
2,133,570

 
2,181,624

 
(48,054
)
 
2,140,743

 
2,182,970

 
(42,227
)
Annualized average rate
 
6.59
%
 
6.59
%
 
0.00
%
 
6.56
%
 
6.58
%
 
(0.02
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Servicing advance liabilities (3)
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
$
6,369

 
$
11,109

 
$
(4,740
)
 
$
13,229

 
$
22,291

 
$
(9,062
)
Average balance (2)
 
666,853

 
1,213,136

 
(546,283
)
 
698,615

 
1,223,965

 
(525,350
)
Annualized average rate
 
3.82
%
 
3.66
%
 
0.16
%
 
3.79
%
 
3.64
%
 
0.15
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Master repurchase agreements (4)
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
$
12,894

 
$
10,207

 
$
2,687

 
$
24,695

 
$
20,067

 
$
4,628

Average balance (2)
 
1,176,012

 
1,184,447

 
(8,435
)
 
1,205,741

 
1,174,321

 
31,420

Annualized average rate
 
4.39
%
 
3.45
%
 
0.94
%
 
4.10
%
 
3.42
%
 
0.68
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed debt of the Residual Trusts (3)
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
$
6,484

 
$
7,164

 
$
(680
)
 
$
13,147

 
$
14,473

 
$
(1,326
)
Average balance (5)
 
416,397

 
460,025

 
(43,628
)
 
422,371

 
464,443

 
(42,072
)
Annualized average rate
 
6.23
%
 
6.23
%
 
0.00
%
 
6.23
%
 
6.23
%
 
0.00
 %
__________
(1)
Corporate debt includes our 2013 Term Loan, Senior Notes and Convertible Notes. Corporate debt activities are included in the Other non-reportable segment.
(2)
Average balance for corporate debt, servicing advance liabilities and master repurchase agreements is calculated as the average daily carrying value.
(3)
Servicing advance liabilities and mortgage-backed debt of the Residual Trusts are held by our Servicing segment.
(4)
Master repurchase agreements are held by the Originations and Reverse Mortgage segments.
(5)
Average balance for mortgage-backed debt of the Residual Trusts is calculated as the average carrying value at the beginning of each month during the period.
Depreciation and Amortization
Depreciation and amortization decreased $4.5 million and $8.0 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, primarily due to the sale of assets related to our insurance business in the first quarter of 2017 and as a result of certain assets having reached the end of their estimated useful lives at the end of 2016.
Goodwill Impairment
We incurred $215.4 million in impairment charges in our Servicing segment during three and six months ended June 30, 2016 as a result of a goodwill evaluation performed in the second quarter of 2016.
Gain on Sale of Business
Gain on sale of business of $67.7 million for the six months ended June 30, 2017 relates to the sale of our principal insurance agency and substantially all of our insurance agency business, which was completed on February 1, 2017.

71


Other Net Fair Value Losses
Other net fair value losses increased $7.3 million for the three months ended June 30, 2017 as compared to the same period of 2016 due primarily to the impact of higher delinquencies on the value of the assets and liabilities of the Non-Residual Trusts.
Income Tax Expense
We calculate income tax expense based on our estimated annual effective tax rate, which takes into account all expected ordinary activity for the calendar year. The decrease in income tax expense for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, is due primarily to the valuation allowance recorded against the net deferred tax assets balance during 2016, offset in part by the lower tax benefit derived from lower losses before income taxes during 2017 as compared to 2016.
Non-GAAP Financial Measures
We manage our Company in three reportable segments: Servicing, Originations and Reverse Mortgage. We evaluate the performance of our business segments through the following measures: income (loss) before income taxes, Adjusted Earnings (Loss), and Adjusted EBITDA. Management considers Adjusted Earnings (Loss) and Adjusted EBITDA, both non-GAAP financial measures, to be important in the evaluation of our business segments and of the Company as a whole, as well as for allocating capital resources to our segments. Adjusted Earnings (Loss) and Adjusted EBITDA are supplemental metrics utilized by management to assess the underlying key drivers and operational performance of the continuing operations of the business. In addition, analysts, investors, and creditors may use these measures when analyzing our operating performance. Adjusted Earnings (Loss) and Adjusted EBITDA are not presentations made in accordance with GAAP and our use of these measures and terms may vary from other companies in our industry.
Adjusted Earnings (Loss) is defined as income (loss) before income taxes, plus changes in fair value due to changes in valuation inputs and other assumptions; goodwill and intangible assets impairment, if any; a portion of the provision for curtailment expense, net of expected third-party recoveries, if applicable; share-based compensation expense or benefit; non-cash interest expense; exit costs; estimated settlements and costs for certain legal and regulatory matters; fair value to cash adjustments for reverse loans; and select other cash and non-cash adjustments primarily including severance; gain or loss on extinguishment of debt; the net impact of the Non-Residual Trusts; transaction and integration costs; and certain non-recurring costs, as applicable. Adjusted Earnings (Loss) excludes unrealized changes in fair value of MSR that are based on projections of expected future cash flows and prepayments. Adjusted Earnings (Loss) includes both cash and non-cash gains from mortgage loan origination activities. Non-cash gains are net of non-cash charges or reserves provided. Adjusted Earnings (Loss) includes cash generated from reverse mortgage origination activities for the period in which we were originating reverse mortgages. Adjusted Earnings (Loss) may from time to time also include other adjustments, as applicable based upon facts and circumstances, consistent with the intent of providing investors with a supplemental means of evaluating our operating performance.
We revised our method of calculating Adjusted Earnings (Loss) beginning with the Annual Report on Form 10-K for the fiscal year ended December 31, 2016 to eliminate adjustments for the step-up depreciation and amortization, which represents depreciation and amortization costs related to the increased basis in assets (including servicing rights and subservicing contracts) acquired within business combination transactions. Prior period amounts have been adjusted to reflect this revision.
Adjusted EBITDA eliminates the effects of financing, income taxes and depreciation and amortization. Adjusted EBITDA is defined as income (loss) before income taxes, plus amortization of servicing rights and other fair value adjustments; interest expense on corporate debt; depreciation and amortization; goodwill and intangible assets impairment, if any; a portion of the provision for curtailment expense, net of expected third-party recoveries, if applicable; share-based compensation expense or benefit; exit costs; estimated settlements and costs for certain legal and regulatory matters; fair value to cash adjustments for reverse loans; select other cash and non-cash adjustments primarily the net provision for the repurchase of loans sold; non-cash interest income; severance; gain or loss on extinguishment of debt; interest income on unrestricted cash and cash equivalents; the net impact of the Non-Residual Trusts; the provision for loan losses; Residual Trust cash flows; transaction and integration costs; servicing fee economics; and certain non-recurring costs, as applicable. Adjusted EBITDA includes both cash and non-cash gains from mortgage loan origination activities. Adjusted EBITDA excludes the impact of fair value option accounting on certain assets and liabilities and includes cash generated from reverse mortgage origination activities for the period in which we were originating reverse mortgages. Adjusted EBITDA may also include other adjustments, as applicable based upon facts and circumstances, consistent with the intent of providing investors a supplemental means of evaluating our operating performance.

72


Adjusted Earnings (Loss) and Adjusted EBITDA should not be considered as alternatives to (i) net income (loss) or any other performance measures determined in accordance with GAAP or (ii) operating cash flows determined in accordance with GAAP. Adjusted Earnings (Loss) and Adjusted EBITDA have important limitations as analytical tools, and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP. Some of the limitations of these metrics are:
•
Adjusted Earnings (Loss) and Adjusted EBITDA do not reflect cash expenditures for long-term assets and other items that have been and will be incurred, future requirements for capital expenditures or contractual commitments;
•
Adjusted Earnings (Loss) and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
•
Adjusted Earnings (Loss) and Adjusted EBITDA do not reflect certain tax payments that represent reductions in cash available to us;
•
Adjusted Earnings (Loss) and Adjusted EBITDA do not reflect any cash requirements for the assets being depreciated and amortized that may have to be replaced in the future;
•
Adjusted Earnings (Loss) and Adjusted EBITDA do not reflect non-cash compensation that is and will remain a key element of our overall long-term incentive compensation package;
•
Adjusted Earnings (Loss) and Adjusted EBITDA do not reflect the change in fair value due to changes in valuation inputs and other assumptions;
•
Adjusted EBITDA does not reflect the change in fair value resulting from the realization of expected cash flows; and
•
Adjusted EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our servicing rights related liabilities and corporate debt, although it does reflect interest expense associated with our servicing advance liabilities, master repurchase agreements, mortgage-backed debt, and HMBS related obligations.
Because of these limitations, Adjusted Earnings (Loss) and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted Earnings (Loss) and Adjusted EBITDA only as supplements. Users of our financial statements are cautioned not to place undue reliance on Adjusted Earnings (Loss) and Adjusted EBITDA.

73


The following tables reconcile Adjusted Loss and Adjusted EBITDA to net loss, which we consider to be the most directly comparable GAAP financial measure to Adjusted Loss and Adjusted EBITDA (in thousands):
Adjusted Loss
 
 
For the Six Months 
 Ended June 30, 2017
Net loss
 
$
(89,801
)
Income tax expense
 
1,572

Loss before income taxes
 
(88,229
)
Adjustments to loss before income taxes
 
 
Gain on sale of business
 
(67,734
)
Changes in fair value due to changes in valuation inputs and other assumptions (1)
 
40,414

Fair value to cash adjustment for reverse loans (2)
 
15,378

Transaction and integration costs (3)
 
14,294

Exit costs (4)
 
7,969

Non-cash interest expense
 
6,948

Share-based compensation expense
 
1,346

Other (5)
 
8,812

Total adjustments
 
27,427

Adjusted Loss
 
$
(60,802
)
__________
(1)
Consists of the change in fair value due to changes in valuation inputs and other assumptions relating to servicing rights and charged-off loans.
(2)
Represents the non-cash fair value adjustment to arrive at cash generated from reverse mortgage origination activities.
(3)
Transaction and integration costs result primarily from the Company's debt restructuring initiative.
(4)
Exit costs include expenses related to the closing of offices and the termination and replacement of certain employees as well as other expenses to institute efficiencies. Exit costs incurred for the six months ended June 30, 2017 include those relating to our exit from the consumer retail channel of the Originations segment, our exit from the reverse mortgage originations business, and actions initiated in 2015, 2016 and 2017 in connection with our continued efforts to enhance efficiencies and streamline processes in the organization. Refer to Note 8 to the Consolidated Financial Statements for additional information regarding exit costs.
(5)
Includes severance, costs associated with transforming the business, and the net impact of the Non-Residual Trusts.

74


Adjusted EBITDA
 
 
For the Six Months 
 Ended June 30, 2017
Net loss
 
$
(89,801
)
Income tax expense
 
1,572

Loss before income taxes
 
(88,229
)
EBITDA Adjustments
 
 
Amortization of servicing rights and other fair value adjustments (1)
 
123,313

Interest expense
 
71,758

Gain on sale of business
 
(67,734
)
Depreciation and amortization
 
20,974

Fair value to cash adjustment for reverse loans (2)
 
15,378

Transaction and integration costs (3)
 
14,294

Exit costs (4)
 
7,969

Share-based compensation expense
 
1,346

Other (5)
 
5,522

Total adjustments
 
192,820

Adjusted EBITDA
 
$
104,591

__________
(1)
Consists of the change in fair value due to changes in valuation inputs and other assumptions relating to servicing rights and charged-off loans as well as the amortization of servicing rights and the realization of expected cash flows relating to servicing rights carried at fair value.
(2)
Represents the non-cash fair value adjustment to arrive at cash generated from reverse mortgage origination activities.
(3)
Transaction and integration costs result primarily from the Company's debt restructuring initiative.
(4)
Exit costs include expenses related to the closing of offices and the termination and replacement of certain employees as well as other expenses to institute efficiencies. Exit costs incurred for the six months ended June 30, 2017 include those relating to our exit from the consumer retail channel of the Originations segment, our exit from the reverse mortgage originations business, and actions initiated in 2015, 2016 and 2017 in connection with our continued efforts to enhance efficiencies and streamline processes in the organization. Refer to Note 8 to the Consolidated Financial Statements for additional information regarding exit costs.
(5)
Includes the net provision for the repurchase of loans sold, non-cash interest income, severance, interest income on unrestricted cash and cash equivalents, costs associated with transforming the business, the net impact of the Non-Residual Trusts, the provision for loan losses, and the Residual Trust cash flows.

75


Business Segment Results
In calculating income (loss) before income taxes for our segments, we allocate indirect expenses to our business segments. Indirect expenses are allocated to our Servicing, Originations, Reverse Mortgage and certain non-reportable segments based on headcount.
We reconcile our income (loss) before income taxes for our business segments to our GAAP consolidated loss before income taxes and report the financial results of our Non-Residual Trusts, other non-reportable operating segments and certain corporate expenses as other activity. Additional information regarding the results of operations for our Servicing, Originations and Reverse Mortgage segments is presented below. Refer to Note 11 to the Consolidated Financial Statements for a reconciliation of our income (loss) before income taxes for our business segments to our GAAP consolidated loss before income taxes.
Reconciliation of GAAP Consolidated Income (Loss) Before Income Taxes to Adjusted Earnings (Loss) and Adjusted EBITDA (in thousands):
 
 
For the Three Months Ended June 30, 2017
 
 
Servicing
 
Originations
 
Reverse
Mortgage
 
Other
 
Total
Consolidated
Income (loss) before income taxes
 
$
(43,986
)
 
$
20,007

 
$
(16,500
)
 
$
(52,136
)
 
$
(92,615
)
 
 
 
 
 
 
 
 
 
 
 
Adjustments to income (loss) before income taxes
 
 
 
 
 
 
 
 
 
 
Gain on sale of business
 
(7
)
 
—

 
—

 
—

 
(7
)
Changes in fair value due to changes in valuation inputs and other assumptions
 
33,017

 
—

 
—

 
—

 
33,017

Fair value to cash adjustment for reverse loans
 
—

 
—

 
12,039

 
—

 
12,039

Transaction and integration costs
 
2,158

 
—

 
—

 
6,928

 
9,086

Exit costs
 
4,861

 
442

 
614

 
181

 
6,098

Non-cash interest expense
 
22

 
—

 
—

 
2,742

 
2,764

Share-based compensation expense
 
279

 
132

 
70

 
—

 
481

Other
 
109

 
(344
)
 
(31
)
 
9,597

 
9,331

Total adjustments
 
40,439

 
230

 
12,692

 
19,448

 
72,809

Adjusted Earnings (Loss)
 
(3,547
)
 
20,237

 
(3,808
)
 
(32,688
)
 
(19,806
)
 
 
 
 
 
 
 
 
 
 
 
EBITDA adjustments
 
 
 
 
 
 
 
 
 
 
Amortization of servicing rights and other fair value adjustments
 
41,505

 
—

 
383

 
—

 
41,888

Interest expense on debt
 
—

 
—

 
—

 
32,396

 
32,396

Depreciation and amortization
 
8,473

 
704

 
865

 
—

 
10,042

Other
 
(833
)
 
(2,428
)
 
27

 
2

 
(3,232
)
Total adjustments
 
49,145

 
(1,724
)
 
1,275

 
32,398

 
81,094

Adjusted EBITDA
 
$
45,598

 
$
18,513

 
$
(2,533
)
 
$
(290
)
 
$
61,288


76



 
 
For the Three Months Ended June 30, 2016
 
 
Servicing
 
Originations
 
Reverse
Mortgage
 
Other
 
Total
Consolidated
Income (loss) before income taxes
 
$
(356,026
)
 
$
45,615

 
$
(26,944
)
 
$
(42,229
)
 
$
(379,584
)
 
 
 
 
 
 
 
 
 
 
 
Adjustments to income (loss) before income taxes
 
 
 
 
 
 
 
 
 
 
Changes in fair value due to changes in valuation inputs and other assumptions
 
118,825

 
—

 
—

 
—

 
118,825

Fair value to cash adjustment for reverse loans
 
—

 
—

 
14,512

 
—

 
14,512

Transaction and integration costs
 
—

 
—

 
—

 
539

 
539

Exit costs
 
4,126

 
303

 
407

 
—

 
4,836

Non-cash interest expense
 
18

 
—

 
—

 
2,940

 
2,958

Share-based compensation expense
 
3,160

 
820

 
610

 
256

 
4,846

Goodwill impairment
 
215,412

 
—

 
—

 
—

 
215,412

Other
 
6,065

 
1,515

 
1,398

 
3,854

 
12,832

Total adjustments
 
347,606

 
2,638

 
16,927

 
7,589

 
374,760

Adjusted Earnings (Loss) (1)
 
(8,420
)
 
48,253

 
(10,017
)
 
(34,640
)
 
(4,824
)
 
 
 
 
 
 
 
 
 
 
 
EBITDA adjustments
 
 
 
 
 
 
 
 
 
 
Amortization of servicing rights and other fair value adjustments
 
61,960

 
—

 
446

 
—

 
62,406

Interest expense on debt
 
1,251

 
—

 
—

 
32,979

 
34,230

Depreciation and amortization
 
10,704

 
2,248

 
1,587

 
1

 
14,540

Other
 
(767
)
 
(7,013
)
 
21

 
169

 
(7,590
)
Total adjustments
 
73,148

 
(4,765
)
 
2,054

 
33,149

 
103,586

Adjusted EBITDA
 
$
64,728

 
$
43,488

 
$
(7,963
)
 
$
(1,491
)
 
$
98,762

__________
(1)
We revised our method of calculating Adjusted Earnings (Loss) beginning with the Annual Report on Form 10-K for the fiscal year ended December 31, 2016 to eliminate adjustments for step-up depreciation and amortization, which represents depreciation and amortization costs related to the increased basis in assets (including servicing rights and subservicing contracts) acquired within business combination transactions. Prior period amounts have been adjusted to reflect this revision.

77


 
 
For the Six Months Ended June 30, 2017
 
 
Servicing
 
Originations
 
Reverse
Mortgage
 
Other
 
Total
Consolidated
Income (loss) before income taxes
 
$
(10,819
)
 
$
30,842

 
$
(21,799
)
 
$
(86,453
)
 
$
(88,229
)
 
 
 
 
 
 
 
 
 
 
 
Adjustments to income (loss) before income taxes
 
 
 
 
 
 
 
 
 
 
Gain on sale of business
 
(67,734
)
 
—

 
—

 
—

 
(67,734
)
Changes in fair value due to changes in valuation inputs and other assumptions
 
40,414

 
—

 
—

 
—

 
40,414

Fair value to cash adjustment for reverse loans
 
—

 
—

 
15,378

 
—

 
15,378

Transaction and integration costs
 
4,331

 
—

 
—

 
9,963

 
14,294

Exit costs
 
5,684

 
875

 
1,292

 
118

 
7,969

Non-cash interest expense
 
1,535

 
—

 
—

 
5,413

 
6,948

Share-based compensation expense (benefit)
 
421

 
(50
)
 
204

 
771

 
1,346

Other
 
3,043

 
727

 
174

 
4,868

 
8,812

Total adjustments
 
(12,306
)
 
1,552

 
17,048

 
21,133

 
27,427

Adjusted Earnings (Loss)
 
(23,125
)
 
32,394

 
(4,751
)
 
(65,320
)
 
(60,802
)
 
 
 
 
 
 
 
 
 
 
 
EBITDA adjustments
 
 
 
 
 
 
 
 
 
 
Amortization of servicing rights and other fair value adjustments
 
82,117

 
—

 
782

 
—

 
82,899

Interest expense on debt
 
—

 
—

 
—

 
64,810

 
64,810

Depreciation and amortization
 
17,384

 
1,671

 
1,919

 
—

 
20,974

Other
 
(76
)
 
(3,161
)
 
55

 
(108
)
 
(3,290
)
Total adjustments
 
99,425

 
(1,490
)
 
2,756

 
64,702

 
165,393

Adjusted EBITDA
 
$
76,300

 
$
30,904

 
$
(1,995
)
 
$
(618
)
 
$
104,591




78


 
 
For the Six Months Ended June 30, 2016
 
 
Servicing
 
Originations
 
Reverse
Mortgage
 
Other
 
Total
Consolidated
Income (loss) before income taxes
 
$
(612,347
)
 
$
62,016

 
$
(21,917
)
 
$
(86,227
)
 
$
(658,475
)
 
 
 
 
 
 
 
 
 
 
 
Adjustments to income (loss) before income taxes
 
 
 
 
 
 
 
 
 
 
Changes in fair value due to changes in valuation inputs and other assumptions
 
359,154

 
—

 
—

 
—

 
359,154

Fair value to cash adjustment for reverse loans
 
—

 
—

 
(3,197
)
 
—

 
(3,197
)
Transaction and integration costs
 
370

 
—

 
—

 
2,486

 
2,856

Exit costs
 
6,007

 
2,099

 
407

 
227

 
8,740

Non-cash interest expense
 
(11
)
 
—

 
—

 
5,807

 
5,796

Share-based compensation expense
 
3,941

 
233

 
923

 
608

 
5,705

Goodwill impairment
 
215,412

 
—

 
—

 
—

 
215,412

Other
 
8,199

 
1,515

 
2,446

 
7,510

 
19,670

Total adjustments
 
593,072

 
3,847

 
579

 
16,638

 
614,136

Adjusted Earnings (Loss) (1)
 
(19,275
)
 
65,863

 
(21,338
)
 
(69,589
)
 
(44,339
)
 
 
 
 
 
 
 
 
 
 
 
EBITDA adjustments
 
 
 
 
 
 
 
 
 
 
Amortization of servicing rights and other fair value adjustments
 
134,230

 
—

 
906

 
—

 
135,136

Interest expense on debt
 
3,986

 
—

 
—

 
66,009

 
69,995

Depreciation and amortization
 
21,485

 
4,593

 
2,875

 
10

 
28,963

Other
 
(1,102
)
 
(3,212
)
 
54

 
347

 
(3,913
)
Total adjustments
 
158,599

 
1,381

 
3,835

 
66,366

 
230,181

Adjusted EBITDA
 
$
139,324

 
$
67,244

 
$
(17,503
)
 
$
(3,223
)
 
$
185,842

__________
(1)
We revised our method of calculating Adjusted Earnings (Loss) beginning with the Annual Report on Form 10-K for the fiscal year ended December 31, 2016 to eliminate adjustments for step-up depreciation and amortization, which represents depreciation and amortization costs related to the increased basis in assets (including servicing rights and subservicing contracts) acquired within business combination transactions. Prior period amounts have been adjusted to reflect this revision.




79


Servicing
Provided below is a summary of results of operations, Adjusted Loss and Adjusted EBITDA for our Servicing segment (dollars in thousands):
 
For the Three Months 
 Ended June 30,
 
Variance
 
For the Six Months 
 Ended June 30,
 
Variance
 
2017
 
2016
 
$
 
%
 
2017
 
2016
 
$
 
%
Net servicing revenue and fees
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Third parties
$
84,238

 
$
24,935

 
$
59,303

 
238
 %
 
$
189,917

 
$
(87,736
)
 
$
277,653

 
(316
)%
Intercompany
2,410

 
3,066

 
(656
)
 
(21
)%
 
5,272

 
6,217

 
(945
)
 
(15
)%
Total net servicing revenue and fees
86,648

 
28,001

 
58,647

 
209
 %
 
195,189

 
(81,519
)
 
276,708

 
(339
)%
Interest income on loans
10,477

 
11,837

 
(1,360
)
 
(11
)%
 
21,445

 
23,995

 
(2,550
)
 
(11
)%
Insurance revenue
2,650

 
11,277

 
(8,627
)
 
(77
)%
 
7,590

 
21,644

 
(14,054
)
 
(65
)%
Intersegment retention revenue
2,968

 
9,461

 
(6,493
)
 
(69
)%
 
7,357

 
20,994

 
(13,637
)
 
(65
)%
Net losses on sales of loans
(997
)
 
(1,191
)
 
194

 
(16
)%
 
(1,317
)
 
(5,727
)
 
4,410

 
(77
)%
Other revenues
15,680

 
13,428

 
2,252

 
17
 %
 
34,942

 
30,171

 
4,771

 
16
 %
Total revenues
117,426

 
72,813

 
44,613

 
61
 %
 
265,206

 
9,558

 
255,648

 
n/m

General and administrative and allocated indirect expenses
87,935

 
112,446

 
(24,511
)
 
(22
)%
 
193,665

 
207,426

 
(13,761
)
 
(7
)%
Salaries and benefits
50,226

 
70,475

 
(20,249
)
 
(29
)%
 
101,609

 
138,095

 
(36,486
)
 
(26
)%
Interest expense
12,860

 
18,330

 
(5,470
)
 
(30
)%
 
26,393

 
36,892

 
(10,499
)
 
(28
)%
Depreciation and amortization
8,473

 
10,704

 
(2,231
)
 
(21
)%
 
17,384

 
21,485

 
(4,101
)
 
(19
)%
Goodwill impairment
—

 
215,412

 
(215,412
)
 
(100
)%
 
—

 
215,412

 
(215,412
)
 
(100
)%
Other expenses, net
1,327

 
1,075

 
252

 
23
 %
 
2,681

 
2,289

 
392

 
17
 %
Total expenses
160,821

 
428,442

 
(267,621
)
 
(62
)%
 
341,732

 
621,599

 
(279,867
)
 
(45
)%
Gain on sale of business
7

 
—

 
7

 
n/m

 
67,734

 
—

 
67,734

 
n/m

Other net fair value gains (losses)
111

 
135

 
(24
)
 
(18
)%
 
(1,318
)
 
226

 
(1,544
)
 
n/m

Loss on extinguishment
(709
)
 
—

 
(709
)
 
n/m

 
(709
)
 
—

 
(709
)
 
n/m

Other
—

 
(532
)
 
532

 
(100
)%
 
—

 
(532
)
 
532

 
(100
)%
Total other gains (losses)
(591
)
 
(397
)
 
(194
)
 
49
 %
 
65,707

 
(306
)
 
66,013

 
n/m

Loss before income taxes
(43,986
)
 
(356,026
)
 
312,040

 
(88
)%
 
(10,819
)
 
(612,347
)
 
601,528

 
(98
)%
Adjustments to loss before income taxes
 
 
 
 
 
 


 
 
 
 
 
 
 


Gain on sale of business
(7
)
 
—

 
(7
)
 
n/m

 
(67,734
)
 
—

 
(67,734
)
 
n/m

Changes in fair value due to changes in valuation inputs and other assumptions
33,017

 
118,825

 
(85,808
)
 
(72
)%
 
40,414

 
359,154

 
(318,740
)
 
(89
)%
Exit costs
4,861

 
4,126

 
735

 
18
 %
 
5,684

 
6,007

 
(323
)
 
(5
)%
Transaction and integration costs
2,158

 
—

 
2,158

 
n/m

 
4,331

 
370

 
3,961

 
n/m

Non-cash interest expense
22

 
18

 
4

 
22
 %
 
1,535

 
(11
)
 
1,546

 
n/m

Share-based compensation expense
279

 
3,160

 
(2,881
)
 
(91
)%
 
421

 
3,941

 
(3,520
)
 
(89
)%
Goodwill impairment
—

 
215,412

 
(215,412
)
 
(100
)%
 
—

 
215,412

 
(215,412
)
 
(100
)%
Other
109

 
6,065

 
(5,956
)
 
(98
)%
 
3,043

 
8,199

 
(5,156
)
 
(63
)%
Total adjustments
40,439

 
347,606

 
(307,167
)
 
(88
)%
 
(12,306
)
 
593,072

 
(605,378
)
 
(102
)%
Adjusted Loss (1)
(3,547
)
 
(8,420
)
 
4,873

 
(58
)%
 
(23,125
)
 
(19,275
)
 
(3,850
)
 
20
 %
EBITDA adjustments
 
 
 
 
 
 


 
 
 
 
 
 
 


Amortization of servicing rights and other fair value adjustments
41,505

 
61,960

 
(20,455
)
 
(33
)%
 
82,117

 
134,230

 
(52,113
)
 
(39
)%
Depreciation and amortization
8,473

 
10,704

 
(2,231
)
 
(21
)%
 
17,384

 
21,485

 
(4,101
)
 
(19
)%
Interest expense on debt
—

 
1,251

 
(1,251
)
 
(100
)%
 
—

 
3,986

 
(3,986
)
 
(100
)%
Other
(833
)
 
(767
)
 
(66
)
 
9
 %
 
(76
)
 
(1,102
)
 
1,026

 
(93
)%
Total adjustments
49,145

 
73,148

 
(24,003
)
 
(33
)%
 
99,425

 
158,599

 
(59,174
)
 
(37
)%
Adjusted EBITDA
$
45,598


$
64,728


$
(19,130
)
 
(30
)%
 
$
76,300

 
$
139,324

 
$
(63,024
)
 
(45
)%
__________
(1)
We revised our method of calculating Adjusted Earnings (Loss) beginning with the Annual Report on Form 10-K for the fiscal year ended December 31, 2016 to eliminate adjustments for step-up depreciation and amortization, which represents depreciation and amortization costs related to the increased basis in assets (including servicing rights and subservicing contracts) acquired within business combination transactions. Prior period amounts have been adjusted to reflect this revision.

80


Mortgage Loan Servicing Portfolio
Provided below are summaries of the activity in our mortgage loan servicing portfolio (dollars in thousands):
 
For the Six Months 
 Ended June 30, 2017
 
For the Six Months 
 Ended June 30, 2016
 
Number
of Accounts
 
Unpaid Principal Balance
 
Number
of Accounts
 
Unpaid Principal Balance
Third-party servicing portfolio (1)
 
 
 
 
 
 
 
Balance at beginning of the period
1,910,605

 
$
223,414,398

 
2,087,618

 
$
244,124,312

Loan sales with servicing retained (2)
20,916

 
4,478,260

 
30,929

 
6,517,586

Other new business added (3)
9,790

 
2,142,197

 
90,369

 
15,609,071

Sales
(5,553
)
 
(785,164
)
 
—

 
—

Payoffs and other adjustments, net (3) (4)
(140,697
)
 
(17,875,409
)
 
(142,376
)
 
(19,990,443
)
Balance at end of the period
1,795,061

 
211,374,282

 
2,066,540

 
246,260,526

On-balance sheet residential loans and real estate owned (5)
33,493

 
2,182,682

 
35,328

 
2,350,565

Total mortgage loan servicing portfolio
1,828,554

 
$
213,556,964

 
2,101,868

 
$
248,611,091

__________
(1)
Third-party servicing includes servicing rights capitalized, subservicing rights capitalized and subservicing rights not capitalized. Subservicing rights capitalized consist of contracts acquired through business combinations whereby the benefits from the contract are greater than adequate compensation for performing the servicing.
(2)
Includes sales on a flow basis to NRM.
(3)
Consists of activities associated with servicing and subservicing contracts and includes co-issue to NRM.
(4)
Amounts presented are net of loan sales associated with servicing retained of $2.8 billion and $3.1 billion for the six months ended June 30, 2017 and 2016, respectively.
(5)
On-balance sheet residential loans and real estate owned include mortgage loans held for sale, the assets of the Non-Residual Trusts and Residual Trusts, and delinquent mortgage loans that we are required to record on our consolidated balance sheets as a result of our unilateral right to repurchase such loans from Ginnie Mae.
At Freddie Mac’s request, we completed the voluntary transfer of $537.0 million in unpaid principal balance of MSR relating to Freddie Mac mortgage loans that are 90 days or more delinquent to another special default servicer during the six months ended June 30, 2017. This transfer is included in sales in the table above. Ditech Financial’s status as an approved seller/servicer for Freddie Mac has not been, and the Company does not expect such status to be, adversely impacted by the consummation of this voluntary MSR transfer.
The portfolio disappearance rate, consisting of contractual payments, voluntary prepayments, and defaults, net of recapture, of the total mortgage loan servicing portfolio was 14.11% and 14.29% for the six months ended June 30, 2017 and 2016, respectively.
Provided below is a summary of the composition of our mortgage loan servicing portfolio (dollars in thousands):
 
 
At June 30, 2017
 
 
Number
of Accounts
 
Unpaid Principal
Balance
 
Weighted Average
Contractual Servicing Fee (1)
 
30 Days or
More Past Due (2)
Third-party servicing portfolio
 
 
 
 
 
 
 
 
First lien mortgages
 
1,482,187

 
$
202,029,494

 
0.21
%
 
9.83
%
Second lien mortgages
 
123,494

 
3,942,934

 
0.44
%
 
4.74
%
Manufactured housing and other
 
189,380

 
5,401,854

 
1.08
%
 
11.10
%
Total accounts serviced for third parties (3)
 
1,795,061

 
211,374,282

 
0.24
%
 
9.77
%
On-balance sheet residential loans and real estate owned (4)
 
33,493

 
2,182,682

 
 
 
18.29
%
Total mortgage loan servicing portfolio
 
1,828,554

 
$
213,556,964

 
 
 
9.86
%


81


 
 
At December 31, 2016
 
 
Number
of Accounts
 
Unpaid Principal
Balance
 
Weighted Average
Contractual Servicing Fee (1)
 
30 Days or
More Past Due (2)
Third-party servicing portfolio
 
 
 
 
 
 
 
 
First lien mortgages
 
1,565,300

 
$
212,990,240


0.22
%
 
11.11
%
Second lien mortgages
 
142,172

 
4,579,757

 
0.45
%
 
4.90
%
Manufactured housing and other
 
203,133

 
5,844,401

 
1.08
%
 
11.67
%
Total accounts serviced for third parties (3)
 
1,910,605

 
223,414,398


0.24
%
 
10.99
%
On-balance sheet residential loans and real estate owned (4)
 
34,903

 
2,368,593

 
 
 
14.52
%
Total mortgage loan servicing portfolio
 
1,945,508

 
$
225,782,991

 
 
 
11.03
%
__________
(1)
The weighted average contractual servicing fee is calculated as the sum of the product of the contractual servicing fee and the ending unpaid principal balance divided by the total ending unpaid principal balance.
(2)
Past due status is measured based on either the MBA method or the OTS method as specified in the servicing agreement. Under the MBA method, a loan is considered past due if its monthly payment is not received by the end of the day immediately preceding the loan's next due date. Under the OTS method, a loan is considered past due if its monthly payment is not received by the loan's due date in the following month. Past due status is based on the current contractual due date of the loan, except in the case of an approved repayment plan, including a plan approved by the bankruptcy court, or a completed loan modification, in which case past due status is based on the modified due date or status of the loan.
(3)
Consists of $104.0 billion and $107.4 billion in unpaid principal balance associated with servicing and subservicing contracts, respectively, at June 30, 2017 and $110.9 billion and $112.5 billion, respectively, at December 31, 2016.
(4)
Includes residential loans and real estate owned held by the Servicing segment for which it does not recognize servicing fees. The Servicing segment receives intercompany servicing fees related to on-balance sheet assets of the Originations segment and the Other non-reportable segment.
The unpaid principal balance of our third-party servicing portfolio decreased $12.0 billion at June 30, 2017 as compared to December 31, 2016 primarily due to runoff of the portfolio, partially offset by portfolio additions related primarily to loans originated with servicing retained. The decrease in the unpaid principal balance of our on-balance sheet residential loans and real estate owned of $185.9 million can be attributed to a decrease in mortgage loans held for sale of $179.3 million and portfolio runoff of the assets held by the Residual and Non-Residual Trusts, offset in part by an increase in delinquent mortgage loans that we are required to record on our consolidated balance sheets as a result of our unilateral right to repurchase such loans from Ginnie Mae.
The delinquencies associated with our third-party servicing portfolio decreased at June 30, 2017 as compared to December 31, 2016 primarily due to efforts to improve the collections coverage on delinquent loans by making adjustments to our dialing and coverage strategies, increasing resources allocated to the lower performing portfolios and reducing the level of delinquent loans allocated to each collector, as well as the transfer of certain non-performing loans out of our servicing portfolio. Additionally, delinquencies at December 31, 2016 were also still being negatively impacted by the closure of our regional offices. The delinquencies associated with our on-balance sheet residential loans and real estate owned have increased due to an increase in delinquent mortgage loans that we are required to record on our consolidated balance sheets as a result of our unilateral right to repurchase such loans from Ginnie Mae and modification buyouts, partially offset by the favorable impact of seasonality.

82


Net Servicing Revenue and Fees
A summary of net servicing revenue and fees for our Servicing segment is provided below (dollars in thousands):
 
For the Three Months 
 Ended June 30,
 
Variance
 
For the Six Months 
 Ended June 30,
 
Variance
 
2017
 
2016
 
$
 
%
 
2017
 
2016
 
$
 
%
Servicing fees
$
127,589

 
$
175,611

 
$
(48,022
)
 
(27
)%
 
$
259,476

 
$
351,966

 
$
(92,490
)
 
(26
)%
Incentive and performance fees
14,372

 
15,671

 
(1,299
)
 
(8
)%
 
27,054

 
33,089

 
(6,035
)
 
(18
)%
Ancillary and other fees
20,944

 
24,488

 
(3,544
)
 
(14
)%
 
43,120

 
48,632

 
(5,512
)
 
(11
)%
Servicing revenue and fees
162,905

 
215,770

 
(52,865
)
 
(25
)%
 
329,650

 
433,687

 
(104,037
)
 
(24
)%
Changes in valuation inputs or other assumptions (1)
(34,751
)
 
(127,713
)
 
92,962

 
(73
)%
 
(52,281
)
 
(386,173
)
 
333,892

 
(86
)%
Other changes in fair value (2)
(31,963
)
 
(59,780
)
 
27,817

 
(47
)%
 
(67,949
)
 
(127,900
)
 
59,951

 
(47
)%
Change in fair value of servicing rights
(66,714
)
 
(187,493
)
 
120,779

 
(64
)%
 
(120,230
)
 
(514,073
)
 
393,843

 
(77
)%
Amortization of servicing rights
(9,543
)
 
(2,179
)
 
(7,364
)
 
338
 %
 
(14,169
)
 
(6,330
)
 
(7,839
)
 
124
 %
Change in fair value of servicing rights related liabilities (3)
—

 
1,903

 
(1,903
)
 
(100
)%
 
(62
)
 
5,197

 
(5,259
)
 
(101
)%
Net servicing revenue and fees
$
86,648

 
$
28,001

 
$
58,647

 
209
 %
 
$
195,189

 
$
(81,519
)
 
$
276,708

 
(339
)%
__________
(1)
Represents the net change in servicing rights carried at fair value resulting primarily from market-driven changes in interest rates and prepayment speeds.
(2)
Represents the realization of expected cash flows over time.
(3)
Includes interest expense on servicing rights related liabilities, which represents the accretion of fair value, of $3.1 million and $7.0 million for the three and six months ended June 30, 2016.
Servicing fees decreased $48.0 million and $92.5 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, primarily due to the planned shift of our third-party servicing portfolio from servicing to subservicing combined with runoff of the portfolio. We expect servicing fees to continue to decline as a result of the shift of our portfolio towards subservicing as we earn a lower fee for subservicing accounts in relation to servicing accounts. Average loans serviced decreased $34.8 billion, or 14%, and $31.3 billion, or 12%, for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively.
Incentive and performance fees include modification fees, fees earned under HAMP, asset recovery income, and other incentives. Fees earned under HAMP decreased $1.1 million and $3.2 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, due primarily to fewer loans having been eligible for these fees due to the expiration of HAMP on December 31, 2016. Other modification fees increased $1.4 million for the three months ended June 30, 2017 as compared to the same period of 2016 due primarily to a shift from HAMP incentives to Fannie Mae incentives and an increase in resources dedicated to helping customers complete modifications. Incentives relating to the performance of certain loan pools serviced by us decreased $0.5 million and $1.6 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively. We expect incentives relating to the performance of loan pools serviced by us to continue to decline as a result of market conditions and other factors, including changes in incentive programs, runoff of the related loan portfolio and improving economic conditions, which may reduce the opportunity to earn these incentives. Asset recovery income decreased $1.1 million and $1.2 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, due primarily to runoff of the related portfolio.
Ancillary and other fees decreased $3.5 million and $5.5 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, primarily due to lower late fee income resulting from a smaller portfolio in 2017.

83


Provided below is a summary of the average unpaid principal balance of loans serviced and the related average servicing fee for our Servicing segment (dollars in thousands):
 
 
For the Three Months 
 Ended June 30,
 
 
 
For the Six Months 
 Ended June 30,
 
 
 
 
2017
 
2016
 
Variance
 
2017
 
2016
 
Variance
Average unpaid principal balance of loans serviced (1)
 
$
217,877,144

 
$
252,656,638

 
$
(34,779,494
)
 
$
220,815,888

 
$
252,145,125

 
$
(31,329,237
)
Annualized average servicing fee (2)
 
0.23
%
 
0.28
%
 
(0.05
)%
 
0.24
%
 
0.28
%
 
(0.04
)%
__________
(1)
Average unpaid principal balance of loans serviced is calculated as the average of the average monthly unpaid principal balances. The average unpaid principal balance presented above includes on-balance sheet loans owned by the Servicing segment for which it does not earn a servicing fee.
(2)
Average servicing fee is calculated by dividing gross servicing fees by the average unpaid principal balance of loans serviced.
The decrease in average servicing fee of five and four basis points for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, related primarily to the shift of our third-party servicing portfolio from servicing to subservicing.
Servicing Rights Carried at Fair Value
Changes in the fair value of servicing rights, which reflect our quarterly valuation process, have a significant effect on net servicing revenue and fees. A summary of key economic inputs and assumptions used in estimating the fair value of servicing rights carried at fair value is presented below (dollars in thousands):
 
 
June 30, 
 2017
 
December 31, 
 2016
 
Variance
Servicing rights at fair value
 
$
870,758

 
$
949,593

 
$
(78,835
)
Unpaid principal balance of accounts
 
95,370,268

 
101,387,913

 
(6,017,645
)
Inputs and assumptions
 
 
 
 
 
 
Weighted-average remaining life in years
 
5.9

 
6.0

 
(0.1
)
Weighted-average stated borrower interest rate on underlying collateral
 
4.14
%
 
3.95
%
 
0.19
 %
Weighted-average discount rate
 
11.97
%
 
11.56
%
 
0.41
 %
Weighted-average conditional prepayment rate
 
9.82
%
 
9.09
%
 
0.73
 %
Weighted-average conditional default rate
 
0.85
%
 
0.88
%
 
(0.03
)%
The decrease in servicing rights carried at fair value at June 30, 2017 as compared to December 31, 2016 related primarily to a reduction in fair value of $120.2 million, partially offset by $53.3 million in servicing rights capitalized upon sales of loans. The reduction in fair value of servicing rights in 2017 was attributable to a loss of $52.3 million in changes in valuation inputs or other assumptions and a loss of $67.9 million in other changes in fair value, which reflect the impact of the realization of expected cash flows resulting from both regularly scheduled and unscheduled payments and payoffs of loan principal.
The loss resulting from changes in valuation inputs or other assumptions of $52.3 million for the six months ended June 30, 2017 was driven by market interest rate decreases during the period, increases in House Price Index projections, an adjustment to prepayment models for specific products, and updates to valuation assumptions related to collateral performance at June 30, 2017 as compared to December 31, 2016. In comparison, the loss resulting from changes in valuation inputs or other assumptions of $386.2 million for the six months ended June 30, 2016 was due primarily to a higher assumed conditional prepayment rate at June 30, 2016 as compared to December 31, 2015 resulting from declining interest rates and forward projections of interest rate curves, offset in part by a decline in discount rates.
The realization of expected cash flows decreased $60.0 million for the six months ended June 30, 2017 as compared to the same period in 2016 due primarily to a smaller capitalized servicing portfolio resulting from sales of servicing rights and portfolio runoff.
Servicing Rights Related Liabilities
The net change in fair value of servicing rights related liabilities decreased $1.9 million and $5.3 million for the three and six months ended June 30, 2017 as compared to the same periods in 2016, respectively, as a result of the derecognition of the servicing rights related liabilities in the fourth quarter of 2016.

84


Interest Income on Loans
Interest income on loans decreased $1.4 million and $2.6 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, primarily due to runoff of the overall mortgage loan portfolio and a lower average yield on loans due to an increase in delinquencies that are 90 days or more past due.
Insurance Revenue
Insurance revenue decreased $8.6 million and $14.1 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, due primarily to the sale of our principal insurance agency and substantially all of our insurance agency business on February 1, 2017. As a result of this sale, we no longer receive any insurance commissions on lender-placed insurance policies. Commencing February 1, 2017, another insurance agency owned by us began to provide insurance marketing services to a third party with respect to voluntary insurance policies, including hazard insurance. This insurance agency receives premium-based commissions for its insurance marketing services. Refer to Note 1 to the Consolidated Financial Statements for additional information on the sale of our insurance business.
Intersegment Retention Revenue
Intersegment retention revenue relates to fees the Servicing segment charges to the Originations segment for loan originations completed that resulted from access to the Servicing segment’s servicing portfolio related to capitalized servicing rights. The decrease in intersegment retention revenue of $6.5 million and $13.6 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, was due primarily to lower overall retention volume and a smaller capitalized servicing portfolio resulting from sales of servicing rights and portfolio runoff.
Net Losses on Sales of Loans
Net gains or losses on sales of loans include realized and unrealized gains and losses on loans as well as the changes in fair value of our IRLCs and other freestanding derivatives. A substantial portion of the gain or loss on sales of loans is recognized at the time we commit to originate or purchase a loan at specified terms as we recognize the value of the IRLC at the time of commitment. The fair value of the IRLC includes an estimate of the fair value of the servicing right we expect to receive upon sale of the loan.
The Originations segment recognizes the initial fair value of the entire commitment, including the servicing rights component, on the date of the commitment, while the Servicing segment historically recognized the change in fair value of the servicing rights component of our IRLCs and loans held for sale that occurred subsequent to the date of our commitment through the sale of the loan. Beginning with new locks occurring after January 1, 2017, the Servicing segment recognizes the change in fair value of the servicing rights component of the IRLCs and loans held for sale for Ginnie Mae loans that occur subsequent to the date of our commitment through the sale of the loan; however, the change in fair value of GSE loans is now in the Originations segment due to flow arrangements in place with third parties. Net losses on sales of loans for the Servicing segment consist of this change in fair value as well as net gains or losses on sales of loans to third parties. Net losses on sales of loans decreased $0.2 million and $4.4 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, primarily due to smaller decrease in mortgage rates during the first half of 2017 as compared to the same period of 2016 and the related impact on realized and unrealized losses on originated mortgage servicing rights associated with the mortgage loan pipeline and mortgage loans held for sale.
Other Revenues
Other revenues increased $2.3 million and $4.8 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, primarily due to higher other interest income.
General and Administrative and Allocated Indirect Expenses
General and administrative and allocated indirect expenses decreased $24.5 million for the three months ended June 30, 2017 as compared to the same period of 2016 resulting primarily from $9.3 million due to lower expense allocations, $6.9 million and $1.9 million in lower contractor costs and postage and printing costs, respectively, related to our servicing platform conversion that occurred in the second quarter of 2016, $5.7 million in lower compensating interest due to a shift from servicing to subservicing, and $2.9 million in lower charges associated with foreclosure and bankruptcy practices, offset in part by $2.9 million in higher costs associated with the use of MSP and outsourcing initiatives, and $2.2 million in higher advance loss provision.

85


General and administrative and allocated indirect expenses decreased $13.8 million for the six months ended June 30, 2017 as compared to the same period of 2016 resulting primarily from $11.0 million due to lower compensating interest due to a shift from servicing to subservicing, $8.6 million and $4.2 million in lower contractor costs and postage and printing costs, respectively, related to our servicing platform conversion that occurred in the second quarter of 2016, and $8.6 million in lower expense allocations, offset in part by $7.2 million in higher costs associated with the use of MSP and outsourcing initiatives, $5.6 million in higher charges associated with foreclosure and bankruptcy practices, and $4.0 million in higher legal expenses.
Salaries and Benefits
Salaries and benefits expense decreased $20.2 million and $36.5 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, due to a $16.6 million and $28.0 million decrease, respectively, in compensation and benefits resulting primarily from a lower average headcount driven by site closures, organizational changes and a shift from full-time employees to outsourced services, a $5.1 million and $8.6 million decrease, respectively, related to a change in the commissions structure, and a $1.2 million and $2.4 million reduction, respectively, in overtime driven by cost reduction measures. Headcount assigned directly to our Servicing segment decreased by approximately 1,100 full-time employees from approximately 3,700 at June 30, 2016 to approximately 2,600 at June 30, 2017.
Interest Expense
Interest expense decreased $5.5 million and $10.5 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, driven by a decrease in interest expense related to servicing advance liabilities due primarily to the net pay down of our advance facilities resulting from advance reimbursements received in connection with the sale of loans and servicing rights in the fourth quarter of 2016.
Depreciation and Amortization
Depreciation and amortization decreased $2.2 million and $4.1 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, primarily due to the sale of assets related to our insurance business in the first quarter of 2017 and the runoff of fixed assets and intangible assets.
Goodwill Impairment
We incurred $215.4 million in impairment charges during three and six months ended June 30, 2016 as a result of a goodwill evaluation performed in the second quarter of 2016.
Gain on Sale of Business
Gain on sale of business of $67.7 million for the six months ended June 30, 2017 relates to the sale of our principal insurance agency and substantially all of our insurance agency business on February 1, 2017.
Adjusted Loss and Adjusted EBITDA
Provided below is a summary of our Servicing segment's margin (in basis points):
 
 
For the Three Months 
 Ended June 30,
 
 
 
For the Six Months 
 Ended June 30,
 
 
 
 
2017
 
2016
 
Variance
 
2017
 
2016
 
Variance
Adjusted Loss margin (1)
 
(1
)
 
(1
)
 
—

 
(2
)
 
(2
)
 
—

Adjusted EBITDA margin (1)
 
8

 
10

 
(2
)
 
7

 
11

 
(4
)
__________
(1)
Margins are calculated by dividing the applicable non-GAAP measure by the average unpaid principal balance of loans serviced during the period as set forth in the table above under Net Servicing Revenue and Fees.
Adjusted EBITDA margin decreased by two and four basis points for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, primarily due to lower revenues (adjusted for the impact of the change in fair value) per average UPB of loans serviced, which resulted from the decline in servicing fees, insurance revenue and intersegment retention revenue, partially offset by lower expenses per average UPB of loans serviced, which resulted primarily from the decrease in salaries and benefits.

86


Originations
Provided below is a summary of results of operations, Adjusted Earnings and Adjusted EBITDA for our Originations segment (dollars in thousands):
 
 
For the Three Months 
 Ended June 30,
 
Variance
 
For the Six Months 
 Ended June 30,
 
Variance
 
 
2017
 
2016
 
$
 
%
 
2017
 
2016
 
$
 
%
Net gains on sales of loans
 
$
70,910

 
$
100,358

 
$
(29,448
)
 
(29
)%
 
$
144,614

 
$
188,340

 
$
(43,726
)
 
(23
)%
Other revenues
 
9,610

 
9,851

 
(241
)
 
(2
)%
 
16,714

 
22,146

 
(5,432
)
 
(25
)%
Total revenues
 
80,520

 
110,209

 
(29,689
)
 
(27
)%
 
161,328

 
210,486

 
(49,158
)
 
(23
)%
Salaries and benefits
 
28,030

 
27,168

 
862

 
3
 %
 
58,733

 
60,245

 
(1,512
)
 
(3
)%
General and administrative and allocated indirect expenses
 
20,212

 
17,981

 
2,231

 
12
 %
 
44,726

 
46,627

 
(1,901
)
 
(4
)%
Interest expense
 
8,599

 
7,736

 
863

 
11
 %
 
17,999

 
16,011

 
1,988

 
12
 %
Intersegment retention expense
 
2,968

 
9,461

 
(6,493
)
 
(69
)%
 
7,357

 
20,994

 
(13,637
)
 
(65
)%
Depreciation and amortization
 
704

 
2,248

 
(1,544
)
 
(69
)%
 
1,671

 
4,593

 
(2,922
)
 
(64
)%
Total expenses
 
60,513

 
64,594

 
(4,081
)
 
(6
)%
 
130,486

 
148,470

 
(17,984
)
 
(12
)%
Income before income taxes
 
20,007

 
45,615

 
(25,608
)
 
(56
)%
 
30,842

 
62,016

 
(31,174
)
 
(50
)%
 
 
 
 
 
 
 
 


 
 
 
 
 
 
 


Adjustments to income before income taxes
 
 
 
 
 
 
 


 
 
 
 
 
 
 


Exit costs
 
442

 
303

 
139

 
46
 %
 
875

 
2,099

 
(1,224
)
 
(58
)%
Share-based compensation expense (benefit)
 
132

 
820

 
(688
)
 
(84
)%
 
(50
)
 
233

 
(283
)
 
(121
)%
Other
 
(344
)
 
1,515

 
(1,859
)
 
(123
)%
 
727

 
1,515

 
(788
)
 
(52
)%
Total adjustments
 
230

 
2,638

 
(2,408
)
 
(91
)%
 
1,552

 
3,847

 
(2,295
)
 
(60
)%
Adjusted Earnings (1)
 
20,237

 
48,253

 
(28,016
)
 
(58
)%
 
32,394

 
65,863

 
(33,469
)
 
(51
)%
 
 
 
 
 
 
 
 


 
 
 
 
 
 
 


EBITDA adjustments
 
 
 
 
 
 
 


 
 
 
 
 
 
 


Depreciation and amortization
 
704

 
2,248

 
(1,544
)
 
(69
)%
 
1,671

 
4,593

 
(2,922
)
 
(64
)%
Other
 
(2,428
)
 
(7,013
)
 
4,585

 
(65
)%
 
(3,161
)
 
(3,212
)
 
51

 
(2
)%
Total adjustments
 
(1,724
)
 
(4,765
)
 
3,041

 
(64
)%
 
(1,490
)
 
1,381

 
(2,871
)
 
(208
)%
Adjusted EBITDA
 
$
18,513

 
$
43,488

 
$
(24,975
)
 
(57
)%
 
$
30,904

 
$
67,244

 
$
(36,340
)
 
(54
)%
__________
(1)
We revised our method of calculating Adjusted Earnings (Loss) beginning with the Annual Report on Form 10-K for the fiscal year ended December 31, 2016 to eliminate adjustments for step-up depreciation and amortization, which represents depreciation and amortization costs related to the increased basis in assets (including servicing rights and subservicing contracts) acquired within business combination transactions. Prior period amounts have been adjusted to reflect this revision.

87


The volume of our originations activity and changes in market rates primarily govern the fluctuations in revenues and expenses of our Originations segment. Provided below are summaries of our originations volume by channel (in thousands):
 
 
For the Three Months Ended June 30, 2017
 
For the Three Months Ended June 30, 2016
 
 
Correspondent
 
Consumer
 
Wholesale (1)
 
Total
 
Correspondent
 
Consumer
 
Retail (2)
 
Total
Locked Volume (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase
 
$
1,987,438

 
$
31,437

 
$
151,509

 
$
2,170,384

 
$
2,393,529

 
$
30,134

 
$
—

 
$
2,423,663

Refinance
 
742,148

 
1,201,230

 
119,248

 
2,062,626

 
1,246,967

 
1,636,481

 
—

 
2,883,448

Total
 
$
2,729,586

 
$
1,232,667

 
$
270,757

 
$
4,233,010

 
$
3,640,496

 
$
1,666,615

 
$
—

 
$
5,307,111

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Funded Volume
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase
 
$
2,028,952

 
$
26,826

 
$
125,112

 
$
2,180,890

 
$
2,068,751

 
$
34,982

 
$
—

 
$
2,103,733

Refinance
 
749,425

 
1,168,392

 
97,207

 
2,015,024

 
1,120,269

 
1,526,088

 
—

 
2,646,357

Total
 
$
2,778,377

 
$
1,195,218

 
$
222,319

 
$
4,195,914

 
$
3,189,020

 
$
1,561,070

 
$
—

 
$
4,750,090

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sold Volume
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase
 
$
2,061,932

 
$
22,110

 
$
98,251

 
$
2,182,293

 
$
1,887,492

 
$
34,080

 
$
—

 
$
1,921,572

Refinance
 
789,676

 
1,272,254

 
83,701

 
2,145,631

 
1,091,314

 
1,573,204

 
523

 
2,665,041

Total
 
$
2,851,608

 
$
1,294,364

 
$
181,952

 
$
4,327,924

 
$
2,978,806

 
$
1,607,284

 
$
523

 
$
4,586,613

 
 
For the Six Months Ended June 30, 2017
 
For the Six Months Ended June 30, 2016
 
 
Correspondent
 
Consumer
 
Wholesale (1)
 
Total
 
Correspondent
 
Consumer
 
Retail (2)
 
Total
Locked Volume (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase
 
$
4,296,845

 
$
44,154

 
$
240,297

 
$
4,581,296

 
$
4,243,259

 
$
61,445

 
$
5,893

 
$
4,310,597

Refinance
 
1,782,716

 
2,546,814

 
207,390

 
4,536,920

 
2,418,990

 
3,153,327

 
5,030

 
5,577,347

Total
 
$
6,079,561

 
$
2,590,968

 
$
447,687

 
$
9,118,216

 
$
6,662,249

 
$
3,214,772

 
$
10,923

 
$
9,887,944

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Funded Volume
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase
 
$
4,202,660

 
$
38,587

 
$
168,533

 
$
4,409,780

 
$
4,052,899

 
$
81,144

 
$
10,900

 
$
4,144,943

Refinance
 
1,823,333

 
2,833,251

 
153,111

 
4,809,695

 
2,295,863

 
3,273,183

 
3,983

 
5,573,029

Total
 
$
6,025,993

 
$
2,871,838

 
$
321,644

 
$
9,219,475

 
$
6,348,762

 
$
3,354,327

 
$
14,883

 
$
9,717,972

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sold Volume
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase
 
$
4,160,812

 
$
36,468

 
$
125,163

 
$
4,322,443

 
$
3,987,931

 
$
75,511

 
$
34,456

 
$
4,097,898

Refinance
 
1,916,802

 
3,021,824

 
142,432

 
5,081,058

 
2,288,003

 
3,364,863

 
30,211

 
5,683,077

Total
 
$
6,077,614

 
$
3,058,292

 
$
267,595

 
$
9,403,501

 
$
6,275,934

 
$
3,440,374

 
$
64,667

 
$
9,780,975

__________
(1)
During the third quarter of 2016 we re-entered the wholesale channel in an effort to expand our customer base.
(2)
We exited the consumer retail channel in January 2016.
(3)
Volume has been adjusted by the percentage of mortgage loans not expected to close based on previous historical experience and change in interest rates.


88


Net Gains on Sales of Loans
Net gains on sales of loans include realized and unrealized gains and losses on loans, the initial fair value of the capitalized servicing rights upon loan sales with servicing retained, as well as the changes in fair value of our IRLCs and other freestanding derivatives. The amount of net gains on sales of loans is a function of the volume and margin of our originations activity and is impacted by fluctuations in interest rates. A substantial portion of our gains on sales of loans is recognized at the time we commit to originate or purchase a loan at specified terms, as we recognize the value of the IRLC at the time of commitment. The fair value of the IRLC includes our estimate of the fair value of the servicing right we expect to receive upon sale of the loan. We recognize loan origination costs as incurred, which typically align with the date of loan funding for consumer originations and the date of loan purchase for correspondent lending. These expenses are primarily included in general and administrative expenses and salaries and benefits on the consolidated statements of comprehensive loss. In addition, we record a provision for losses relating to representations and warranties made as part of the loan sale transaction at the time the loan is sold.
The volatility in the gain on sale spread is attributable to market pricing, which changes with demand, channel mix, and the general level of interest rates. While many factors may affect consumer demand for mortgages, generally, pricing competition on mortgage loans is lower in periods of low or declining interest rates, as consumer demand is greater. This provides opportunities for originators to increase volume and earn wider margins. Conversely, pricing competition increases when interest rates rise as consumer demand lessens. This reduces overall origination volume and may lead originators to reduce margins. The level and direction of interest rates are not the sole determinant of consumer demand for mortgages. Other factors such as secondary market conditions, home prices, credit spreads or legislative activity may impact consumer demand more significantly than interest rates in any given period.
Net gains on sales of loans for our Originations segment consist of the following (dollars in thousands):
 
For the Three Months 
 Ended June 30,
 
Variance
 
For the Six Months 
 Ended June 30,
 
Variance
 
2017
 
2016
 
$
 
%
 
2017
 
2016
 
$
 
%
Realized gains on sales of loans
$
81,393

 
$
77,601

 
$
3,792

 
5
 %
 
$
106,131

 
$
154,867

 
$
(48,736
)
 
(31
)%
Change in unrealized gains on loans held for sale
(5,973
)
 
3,123

 
(9,096
)
 
(291
)%
 
13,441

 
14,416

 
(975
)
 
(7
)%
Gains (losses) on interest rate lock commitments (1)
(15,586
)
 
11,855

 
(27,441
)
 
(231
)%
 
(20,094
)
 
27,014

 
(47,108
)
 
(174
)%
Losses on forward sales commitments (1)
(2,858
)
 
(43,384
)
 
40,526

 
(93
)%
 
(23,406
)
 
(110,337
)
 
86,931

 
(79
)%
Losses on MBS purchase commitments (1)
(14,102
)
 
(2,477
)
 
(11,625
)
 
n/m

 
(2,218
)
 
(13,273
)
 
11,055

 
(83
)%
Capitalized servicing rights
21,138

 
47,832

 
(26,694
)
 
(56
)%
 
54,459

 
104,202

 
(49,743
)
 
(48
)%
Provision for repurchases
(2,003
)
 
(3,724
)
 
1,721

 
(46
)%
 
(3,798
)
 
(8,437
)
 
4,639

 
(55
)%
Interest income
9,206

 
9,532

 
(326
)
 
(3
)%
 
20,393

 
19,888

 
505

 
3
 %
Other
(305
)
 
—

 
(305
)
 
n/m

 
(294
)
 
—

 
(294
)
 
n/m

Net gains on sales of loans
$
70,910

 
$
100,358

 
$
(29,448
)
 
(29
)%
 
$
144,614

 
$
188,340

 
$
(43,726
)
 
(23
)%
__________
(1)
Realized losses on freestanding derivatives were $33.7 million and $30.1 million for the three months ended June 30, 2017 and 2016, respectively, and $3.6 million and $89.4 million for the six months ended June 30, 2017 and 2016, respectively.
The decrease in net gains on sales of loans for the three and six months ended June 30, 2017 as compared to the same periods of 2016 was primarily due to an overall lower volume of locked loans combined with a shift in mix from the higher margin consumer channel to the lower margin correspondent and wholesale channels. In addition, consumer channel locked volume declined due to lower HARP volume in 2017, a market shift away from loan refinance towards home purchase volume, and a reduction in direct mail lead generation. Capitalized servicing rights declined as a result of our agreement with NRM in which a significant portion of our conventional servicing rights are transferred to NRM on a flow or co-issue basis at the time of the sale.
The three and six months ended June 30, 2017 and 2016 included the benefit of higher margins from HARP, which is scheduled to expire on September 30, 2017. HARP is a federal program of the U.S. that helps homeowners refinance their mortgage. Our strategy includes significant efforts to maintain retention volumes through traditional refinancing opportunities and HARP, although we believe peak HARP refinancing occurred in prior periods.

89


Provided below is a summary of origination economics for all channels (in basis points):
 
 
For the Three Months 
 Ended June 30,
 
Variance
 
For the Six Months 
 Ended June 30,
 
Variance
 
 
2017
 
2016
 
Amount
 
%
 
2017
 
2016
 
Amount
 
%
Gain on sale of loans (1)
 
168

 
189

 
(21
)
 
(11
)%
 
159

 
190

 
(31
)
 
(16
)%
Fee income (2)
 
23

 
21

 
2

 
10
 %
 
18

 
23

 
(5
)
 
(22
)%
Direct expenses (2)
 
(121
)
 
(123
)
 
2

 
(2
)%
 
(116
)
 
(130
)
 
14

 
(11
)%
Direct margin
 
70

 
87

 
(17
)
 
(20
)%
 
61

 
83

 
(22
)
 
(27
)%
__________
(1)
Calculated on pull-through adjusted lock volume.
(2)
Calculated on funded volume.
The decrease in direct margin for the three and six months ended June 30, 2017 as compared to the same periods of 2016 was primarily due to lower gain on sale of loans margins, partially offset by lower direct expense margins. Gain on sale of loans margins decreased in part due to the shift in mix to the lower margin correspondent and wholesale channels. In addition, there were lower margins in the consumer channel due to lower pull-through of locked loans and a lower portion of HARP volume and lower margins in the correspondent channel as a result of our agreement with NRM as discussed above. Our correspondent and wholesale volume represented 72% of total pull-through adjusted locked volume during the six months ended June 30, 2017 as compared to 67% during the six months ended June 30, 2016.
Fee income margins declined during the six months ended June 30, 2017 as compared to the same period of 2016 related to the consumer channel as loans continued to fund in 2017 under a program in place through December 31, 2016 in which certain fees were waived. Direct expense margins declined during the three and six months ended June 30, 2017 as compared to the same periods of 2016 primarily due to lower intersegment expense as a result of lower overall retention volume and a smaller capitalized servicing portfolio resulting from sales and runoff of the portfolio.
Other Revenues
Other revenues, which consist primarily of origination fee income and interest on cash equivalents, decreased $5.4 million for the six months ended June 30, 2017 as compared to the same period of 2016 resulting primarily from $4.9 million in lower origination fee income related to the consumer channel as loans continued to fund in 2017 under a program in place through December 31, 2016 in which certain fees were waived.
General and Administrative and Allocated Indirect Expenses
General and administrative and allocated indirect expenses increased $2.2 million for the three months ended June 30, 2017 as compared to the same period of 2016 primarily due to a $5.8 million lower reduction to the representations and warranty reserve due to a change in estimate of the liability in the second quarter of 2016, offset in part by $1.4 million in lower advertising costs resulting from a decrease in mail solicitations due to a strategy shift in lead acquisition as well as lower sponsorship costs.
General and administrative and allocated indirect expenses decreased $1.9 million for the six months ended June 30, 2017 as compared to the same period of 2016 primarily due to $4.0 million in lower advertising costs resulting from a decrease in mail solicitations attributable to a strategy shift in lead acquisition and decreases in sponsorship costs and gift card campaigns, and $1.5 million in lower document custody and overnight delivery costs, partially offset by $4.7 million of lower reduction to the representations and warranty reserve.
Interest Expense
Interest expense increased $0.9 million and $2.0 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, primarily due to a higher average cost of debt, offset in part by lower average borrowings on master repurchase agreements due to a lower volume of loan fundings.
Intersegment Retention Expense
Intersegment retention expense relates to fees charged by the Servicing segment to the Originations segment in relation to loan originations completed that resulted from access to the Servicing segment’s servicing portfolio related to capitalized servicing rights. The decrease in intersegment retention expense of $6.5 million and $13.6 million during the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, was due primarily to lower overall retention volume and a smaller capitalized servicing portfolio resulting from sales of servicing rights and portfolio runoff.

90


Adjusted Earnings and Adjusted EBITDA
Adjusted Earnings decreased $28.0 million and $33.5 million and Adjusted EBITDA decreased $25.0 million and $36.3 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, due primarily to lower net gains on sales of loans, partially offset by a decrease in intersegment retention expense as discussed above.

91


Reverse Mortgage
Provided below is a summary of results of operations, Adjusted Loss and Adjusted EBITDA for our Reverse Mortgage segment (dollars in thousands):
 
 
For the Three Months 
 Ended June 30,
 
Variance
 
For the Six Months 
 Ended June 30,
 
Variance
 
 
2017
 
2016
 
$
 
%
 
2017
 
2016
 
$
 
%
Net fair value gains on reverse loans and related HMBS obligations
 
$
7,872

 
$
7,650

 
$
222

 
3
 %
 
$
22,574

 
$
42,858

 
$
(20,284
)
 
(47
)%
Net servicing revenue and fees
 
7,083

 
7,001

 
82

 
1
 %
 
14,591

 
13,910

 
681

 
5
 %
Other revenues
 
454

 
1,486

 
(1,032
)
 
(69
)%
 
737

 
3,464

 
(2,727
)
 
(79
)%
Total revenues
 
15,409

 
16,137

 
(728
)
 
(5
)%
 
37,902

 
60,232

 
(22,330
)
 
(37
)%
Salaries and benefits
 
12,459

 
16,350

 
(3,891
)
 
(24
)%
 
25,988

 
34,398

 
(8,410
)
 
(24
)%
General and administrative and allocated indirect expenses
 
12,743

 
21,967

 
(9,224
)
 
(42
)%
 
22,462

 
37,962

 
(15,500
)
 
(41
)%
Interest expense
 
4,288

 
2,414

 
1,874

 
78
 %
 
6,679

 
3,929

 
2,750

 
70
 %
Depreciation and amortization
 
865

 
1,587

 
(722
)
 
(45
)%
 
1,919

 
2,875

 
(956
)
 
(33
)%
Other expenses, net
 
1,554

 
763

 
791

 
104
 %
 
2,653

 
1,961

 
692

 
35
 %
Total expenses
 
31,909

 
43,081

 
(11,172
)
 
(26
)%
 
59,701

 
81,125

 
(21,424
)
 
(26
)%
Other losses
 
—

 
—

 
—

 
—
 %
 
—

 
(1,024
)
 
1,024

 
(100
)%
Loss before income taxes
 
(16,500
)
 
(26,944
)
 
10,444

 
(39
)%
 
(21,799
)
 
(21,917
)
 
118

 
(1
)%
 
 
 
 
 
 
 
 


 
 
 
 
 
 
 


Adjustments to loss before income taxes
 
 
 
 
 
 
 


 
 
 
 
 
 
 


Fair value to cash adjustment for reverse loans

12,039

 
14,512

 
(2,473
)
 
(17
)%
 
15,378

 
(3,197
)
 
18,575

 
n/m

Exit costs
 
614

 
407

 
207

 
51
 %
 
1,292

 
407

 
885

 
217
 %
Share-based compensation expense
 
70

 
610

 
(540
)
 
(89
)%
 
204

 
923

 
(719
)
 
(78
)%
Other
 
(31
)
 
1,398

 
(1,429
)
 
(102
)%
 
174

 
2,446

 
(2,272
)
 
(93
)%
Total adjustments
 
12,692

 
16,927

 
(4,235
)
 
(25
)%
 
17,048

 
579

 
16,469

 
n/m

Adjusted Loss (1)
 
(3,808
)
 
(10,017
)
 
6,209

 
(62
)%
 
(4,751
)
 
(21,338
)
 
16,587

 
(78
)%
 
 
 
 
 
 
 
 


 
 
 
 
 
 
 


EBITDA adjustments
 
 
 
 
 
 
 


 
 
 
 
 
 
 


Depreciation and amortization
 
865

 
1,587

 
(722
)
 
(45
)%
 
1,919

 
2,875

 
(956
)
 
(33
)%
Amortization of servicing rights
 
383

 
446

 
(63
)
 
(14
)%
 
782

 
906

 
(124
)
 
(14
)%
Other
 
27

 
21

 
6

 
29
 %
 
55

 
54

 
1

 
2
 %
Total adjustments
 
1,275

 
2,054

 
(779
)
 
(38
)%
 
2,756

 
3,835

 
(1,079
)
 
(28
)%
Adjusted EBITDA
 
$
(2,533
)
 
$
(7,963
)
 
$
5,430

 
(68
)%
 
$
(1,995
)
 
$
(17,503
)
 
$
15,508

 
(89
)%
__________
(1)
We revised our method of calculating Adjusted Loss beginning with the Annual Report on Form 10-K for the fiscal year ended December 31, 2016 to eliminate adjustments for step-up depreciation and amortization, which represents depreciation and amortization costs related to the increased basis in assets (including servicing rights and subservicing contracts) acquired within business combination transactions. Prior period amounts have been adjusted to reflect this revision.


92


Reverse Mortgage Servicing Portfolio
Provided below are summaries of the activity in our third-party servicing portfolio for our reverse mortgage business, which included accounts serviced for third parties for which we earn servicing revenue. These summaries excluded servicing performed related to reverse mortgage loans and real estate owned recognized on our consolidated balance sheets, as the securitized loans are accounted for as a secured borrowing (dollars in thousands):
 
 
For the Six Months 
 Ended June 30, 2017
 
For the Six Months 
 Ended June 30, 2016
 
 
Number
of Accounts
 
Unpaid Principal Balance
 
Number
of Accounts
 
Unpaid Principal Balance
Third-party servicing portfolio
 
 
 
 
 
 
 
 
Balance at beginning of the period
 
56,550

 
$
10,340,727

 
56,046

 
$
9,818,400

New business added
 
2,810

 
581,175

 
5,801

 
951,265

Other additions (1)
 
—

 
386,897

 
—

 
387,373

Payoffs and sales
 
(6,442
)
 
(1,359,735
)
 
(4,632
)
 
(966,607
)
Balance at end of the period
 
52,918

 
$
9,949,064

 
57,215

 
$
10,190,431

__________
(1)
Other additions include additions to the principal balance serviced related to draws on lines-of-credit, interest, servicing fees, mortgage insurance and advances owed by the existing borrower.
Provided below are summaries of our reverse loan servicing portfolio (dollars in thousands):
 
 
At June 30, 2017
 
At December 31, 2016
 
 
Number
of Accounts
 
Unpaid Principal
Balance
 
Number
of Accounts
 
Unpaid Principal
Balance
Third-party servicing portfolio (1)
 
52,918

 
$
9,949,064

 
56,550

 
$
10,340,727

On-balance sheet residential loans and real estate owned
 
59,516

 
10,129,414

 
62,485

 
10,321,425

Total reverse loan servicing portfolio
 
112,434

 
$
20,078,478

 
119,035

 
$
20,662,152

__________
(1)
We earn a fixed dollar amount per loan on a majority of our third-party reverse loan servicing portfolio. The weighted-average contractual servicing fee for our third-party servicing portfolio, which is calculated as the annual average servicing fee divided by the ending unpaid principal balance, was 0.13% at June 30, 2017 and December 31, 2016.
Net Fair Value Gains on Reverse Loans and Related HMBS Obligations
Provided in the table below is a summary of the components of net fair value gains on reverse loans and related HMBS obligations (dollars in thousands):
 
 
For the Three Months 
 Ended June 30,
 
Variance
 
For the Six Months 
 Ended June 30,
 
Variance
 
 
2017
 
2016
 
$
 
%
 
2017
 
2016
 
$
 
%
Interest income on reverse loans
 
$
113,644

 
$
113,631

 
$
13

 
—%
 
$
226,946

 
$
224,225

 
$
2,721

 
1%
Interest expense on HMBS related obligations
 
(101,290
)
 
(103,368
)
 
2,078

 
(2)%
 
(203,726
)
 
(206,622
)
 
2,896

 
(1)%
Net interest income on reverse loans and HMBS related obligations
 
12,354

 
10,263

 
2,091

 
20%
 
23,220

 
17,603

 
5,617

 
32%
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 

Change in fair value of reverse loans
 
(41,075
)
 
27,744

 
(68,819
)
 
(248)%
 
(111,765
)
 
71,984

 
(183,749
)
 
(255)%
Change in fair value of HMBS related obligations
 
36,593

 
(30,357
)
 
66,950

 
(221)%
 
111,119

 
(46,729
)
 
157,848

 
(338)%
Net change in fair value on reverse loans and HMBS related obligations
 
(4,482
)
 
(2,613
)
 
(1,869
)
 
72%
 
(646
)
 
25,255

 
(25,901
)
 
(103)%
Net fair value gains on reverse loans and related HMBS obligations
 
$
7,872

 
$
7,650

 
$
222

 
3%
 
$
22,574

 
$
42,858

 
$
(20,284
)
 
(47)%

93


Net fair value gains on reverse loans and related HMBS obligations include the contractual interest income earned on reverse loans, including those not yet securitized or no longer in securitization pools, net of interest expense on HMBS related obligations, and the change in fair value of these assets and liabilities. Included in the change in fair value are gains due to loan originations that include tails. Tails are participations in previously securitized HECMs and are created by additions to principal for borrower draws on lines-of-credit, interest, servicing fees, and mortgage insurance premiums. Economic gains and losses result from the pricing of an aggregated pool of loans exceeding the cost of the origination or acquisition of the loan as well as the change in fair value resulting from changes to market pricing on HECMs and HMBS. No gain or loss is recognized as a result of the securitization of reverse loans as these transactions are accounted for as secured borrowings. However, HECMs and HMBS related obligations are marked to fair value, which can result in a net gain or loss related to changes in market pricing.
Net interest income on reverse loans and HMBS related obligations increased $2.1 million and $5.6 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, primarily as a result of a decrease in HMBS related obligations as a result of an increase in buyouts, partially offset by an increase in nonperforming reverse loans, which have lower interest rates than performing loans. If the net interest income were adjusted for interest expense from debt financing on buyouts, the increase would be $0.2 million and $2.9 million for the three and six months ended June 30, 2017, respectively. The net change in fair value on reverse loans and HMBS related obligations is comprised of cash generated by origination, purchase, and securitization of HECMs as well as non-cash fair value gains or losses. Cash generated by the origination, purchase and securitization of HECMs decreased $4.3 million and $7.3 million during the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, primarily as a result of overall lower origination volumes due to our exit from the reverse mortgage originations business, partially offset by a shift in mix from lower margin new originations to higher margin tails. Net non-cash fair value losses decreased by $2.5 million for the three months ended June 30, 2017 as compared to the same period of 2016 due primarily to valuation model assumption adjustments for buyout loans in the second quarter of 2017 offset by a flattening of the interest rate curve in the second quarter of 2017 as compared to the second quarter of 2016. Net non-cash fair value adjustments decreased $18.6 million for the six months ended June 30, 2017 as compared to the same period of 2016 due primarily to the aforementioned valuation model assumption adjustments for buyout loans and a flattening of the interest rate curve in 2017 as compared to 2016.
Reverse loans and related HMBS obligations are generally subject to net fair value gains when interest rates decline primarily as a result of a longer duration of reverse loans as compared to HMBS related obligations. Our reverse loans have longer durations primarily as a result of our obligations as issuer of HMBS, which includes the requirement to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM is equal to or greater than 98% of the maximum claim amount. The conditional repayment rates utilized in the valuation of reverse loans and HMBS related obligations has increased from 28.48% and 27.74%, respectively, at December 31, 2016 to 30.91% and 30.09%, respectively, at June 30, 2017 primarily due to the aging of the portfolio.
Provided below are summaries of our funded volume, which represent purchases and originations of reverse loans, and volume of securitizations into HMBS (dollars in thousands):
 
 
For the Three Months 
 Ended June 30,
 
Variance
 
For the Six Months 
 Ended June 30,
 
Variance
 
 
2017
 
2016
 
$
 
%
 
2017
 
2016
 
$
 
%
Funded volume
 
$
91,955

 
$
200,634

 
$
(108,679
)
 
(54
)%
 
$
223,692

 
$
385,024

 
$
(161,332
)
 
(42
)%
Securitized volume (1)
 
113,713

 
188,506

 
(74,793
)
 
(40
)%
 
254,499

 
376,385

 
(121,886
)
 
(32
)%
__________
(1)
Securitized volume includes $84.8 million and $113.6 million of tails securitized for the three months ended June 30, 2017 and 2016, respectively, and $175.9 million and $228.9 million of tails securitized for the six months ended June 30, 2017 and 2016, respectively. Tail draws associated with the HECM IDL product were $47.5 million and $69.5 million for the three months ended June 30, 2017 and 2016, respectively, and $99.5 million and $138.5 million for the six months ended June 30, 2017 and 2016, respectively.
Funded and securitized volumes decreased for the three and six months ended June 30, 2017 as compared to the same periods of 2016 primarily due to the decision made by management during December 2016 to exit the reverse mortgage originations business. As of June 30, 2017, there were no reverse loans in the originations pipeline, and certain activities are currently underway to finalize the shutdown of the reverse mortgage originations business. We will continue to fund undrawn tails available to customers. Refer to Note 8 to Consolidated Financial Statements for additional information regarding exit activities.

94


Net Servicing Revenue and Fees
A summary of net servicing revenue and fees for our Reverse Mortgage segment is provided below (dollars in thousands):
 
 
For the Three Months 
 Ended June 30,
 
Variance
 
For the Six Months 
 Ended June 30,
 
Variance
 
 
2017
 
2016
 
$
 
%
 
2017
 
2016
 
$
 
%
Servicing fees
 
$
3,343

 
$
3,529

 
$
(186
)
 
(5
)%
 
$
6,739

 
$
7,047

 
$
(308
)
 
(4
)%
Performance fees
 
2,423

 
2,340

 
83

 
4
 %
 
4,895

 
4,694

 
201

 
4
 %
Ancillary and other fees
 
1,700

 
1,578

 
122

 
8
 %
 
3,739

 
3,075

 
664

 
22
 %
Servicing revenue and fees
 
7,466

 
7,447

 
19

 
—
 %
 
15,373

 
14,816

 
557

 
4
 %
Amortization of servicing rights
 
(383
)
 
(446
)
 
63

 
(14
)%
 
(782
)
 
(906
)
 
124

 
(14
)%
Net servicing revenue and fees
 
$
7,083

 
$
7,001

 
$
82

 
1
 %
 
$
14,591

 
$
13,910

 
$
681

 
5
 %
The increase in net servicing revenue and fees of $0.7 million for the six months ended June 30, 2017 as compared to the same period in 2016 was due primarily to an increase in ancillary and other fees due to additional fees related to boarding and subservicing of loans.
Salaries and Benefits
Salaries and benefits expense decreased $3.9 million and $8.4 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, due primarily to lower compensation, bonuses and commissions as a result of lower origination volume and lower average headcount resulting from our decision to exit the reverse mortgage originations business. Headcount assigned directly to our Reverse Mortgage segment decreased by approximately 200 full-time employees from 900 at June 30, 2016 to 700 at June 30, 2017.
General and Administrative and Allocated Indirect Expenses
General and administrative and allocated indirect expenses decreased $9.2 million for the three months ended June 30, 2017 as compared to the same period of 2016, due primarily to a $1.7 million decrease in curtailment-related accruals, a $1.0 million decrease in loss accruals related to servicing advances, $1.4 million of lower advertising costs, a $1.0 million decrease in contractor fees, and a $0.7 million decrease in purchased services due to our exit from the reverse mortgage originations business during 2017. In addition, corporate allocations decreased $1.9 million for the three months ended June 30, 2017 as compared to the same period of 2016.
General and administrative and allocated indirect expenses decreased $15.5 million for the six months ended June 30, 2017 as compared to the same period of 2016, due primarily to a $3.6 million decrease in curtailment-related accruals, a $2.6 million decrease in loss accruals related to servicing advances, $2.5 million of lower advertising costs, a $1.6 million decrease in contractor fees, and a $1.0 million decrease in purchased services due to our exit from the reverse mortgage originations business during 2017. In addition, corporate allocations decreased $2.2 million for the six months ended June 30, 2017 as compared to the same period of 2016.
Interest Expense
Interest expense increased $1.9 million and $2.8 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, due primarily to higher average borrowings on master repurchase agreements and higher average cost of debt.
Adjusted Loss and Adjusted EBITDA
Adjusted Loss decreased $6.2 million and $16.6 million and Adjusted EBITDA improved $5.4 million and $15.5 million for the three and six months ended June 30, 2017 as compared to the same periods of 2016, respectively, primarily due to the decrease in general and administrative expenses and in salaries and benefits as described above.

95


Other Non-Reportable
Other revenues consist primarily of asset management advisory fees, investment income and other interest income. Other revenues and total expenses remained relatively flat for the three and six months ended June 30, 2017 as compared to the same periods of 2016.
The increase in other net fair value losses from $1.0 million for the three months ended June 30, 2016 to $8.2 million for the same period in 2017, was primarily driven by negative assumption change impacts on the assets and liabilities of the Non-Residual Trusts predominately due to higher conditional default rates resulting from higher delinquencies. The decline in other net fair value losses from $3.2 million during the six months ended June 30, 2016 to $1.7 million for the same period in 2017 was primarily related to lower negative LIBOR impacts during 2017, partially offset by the aforementioned higher negative assumption change impacts on the assets and liabilities of the Non-Residual Trusts.
Liquidity and Capital Resources
Overview
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay debt and meet the financial obligations of our operations including funding acquisitions; mortgage loan and reverse loan servicing advances; obligations associated with the repurchase of reverse loans from securitization pools; funding additional customer borrowings on reverse loans; origination of mortgage loans; and other general business needs, including the cost of compliance with changing legislation and related rules. Our liquidity is measured as our consolidated cash and cash equivalents excluding subsidiary minimum cash requirement balances, which are typically associated with our servicer licensing or financing agreements with third parties. This measure also includes our borrowing capacity available under the 2013 Revolver.
At June 30, 2017, our liquidity was $431.4 million. As discussed further in the Corporate Debt section below, at June 30, 2017 we did not have access to borrowings under the 2013 Revolver. At June 30, 2017, we had contractual obligations, subject to certain conditions and adjustments, to utilize approximately $8.3 million of our liquidity to fund acquisitions of servicing rights, including related servicer and protective advances.
We endeavor to maintain our liquidity at a level sufficient to fund certain known or expected payments and to fund our working capital needs. Our principal sources of liquidity are the cash flows generated from our business segments and funds available from our master repurchase agreements, mortgage loan servicing advance facilities, the 2013 Revolver, issuance of GMBS, and issuance of HMBS to fund our tail commitments. We may generate additional liquidity through sales of MSR, any portion thereof, or other assets. From time to time, we utilize our excess cash to reinvest in the business, including but not limited to investment in MSR and the repurchase of reverse loans from securitization pools.
We believe that, based on current forecasts and anticipated market conditions, our current liquidity, along with the funds generated from our principal sources of liquidity discussed above, will allow us to meet anticipated cash requirements to fund operating needs and expenses, servicing advances, loan originations and repurchases of mortgage loans and HECMs, planned capital expenditures, business and asset acquisitions, cash taxes and cash requirements associated with mandatory clean-up call obligations on the Non-Residual trusts and all required debt service obligations for the next 12 months. Our operating cash flows and liquidity are significantly influenced by numerous factors, including interest rates, the continued availability of financing, our debt restructuring initiative and related RSA, and other factors discussed below. Our liquidity outlook assumes we are able to maintain or renew, replace, or resize our existing mortgage loan servicing advance facilities, mortgage loan master repurchase agreements and reverse loan master repurchase agreements to fund repurchases of HECMs with enough capacity to meet projected needs, and/or are able to implement other financing solutions to meet such needs. However, there can be no assurance that these facilities or other solutions will be available to us in the future. We continually monitor our cash flows and liquidity in order to be responsive to changing conditions and other factors, including recent adverse pressures on the Company’s relationships with certain counterparties and key stakeholders who are critical to its business, which adverse pressures the Company expects to continue as a result of, among other things, the potential delisting of the Company’s common stock from the NYSE, the status of the Company’s debt restructuring initiative and the terms of the RSA, including the possibility of an In-Court Restructuring and the substantial doubt about the Company’s ability to continue as a going concern related thereto, and the restatement of certain of the Company’s previously issued consolidated financial statements to reflect a correction to the net deferred tax assets balance.
We are facing certain challenges and uncertainties that could have significant adverse effects on our business, liquidity and financing activities. Our business may be adversely impacted by the following factors, among others: failure to maintain sufficient liquidity to operate our servicing and lending businesses due to the inability to renew, replace or extend our advance financing or warehouse facilities on favorable terms, or at all; failure to comply with covenants contained in our debt agreements or obtain any necessary waivers and/or amendments; failure to resolve our obligation with respect to the remaining mandatory clean-up calls; and failure to successfully restructure our corporate debt.

96


We use and rely upon short-term borrowing facilities to fund our servicing, originations and reverse mortgage operating businesses. As a result of continued losses, the need for additional waivers and/or amendments, including those required as a result of or in connection with the restatement discussed in Note 1 to the Consolidated Financial Statements, and the passage of time since we first announced our debt restructuring initiative, certain of our lenders have effected reductions in advance rates and/or have required other changes to the terms of such facilities, which has negatively impacted our available liquidity and capital resources. Each of these facilities is typically subject to renewal each year. Borrowing capacity on the various facilities is dependent upon maintaining compliance with the representations, terms, conditions and covenants of the respective agreements. We intend to renew, replace, or expand our facilities consistent with our past practices and may seek waivers or amendments in the future, if necessary. We are in negotiations with current and prospective lenders regarding expanded financing capacity for our reverse loan repurchases and/or replacement financing capacity for our originations business in the event we experience a material reduction in the financing capacity available to us under our existing borrowing facilities or otherwise require additional financing capacity to support our businesses and obligations. No assurance can be given that we will be successful in maintaining adequate financing capacity with our current or prospective lenders. See Notes 2 and 9 to the Consolidated Financial Statements.
As discussed above under Debt Restructuring Initiative, we continue to focus on our debt restructuring initiative to seek to improve our capital structure through the restructuring of our corporate debt and continue to incur significant expense in connection therewith.
On July 31, 2017, we entered into the RSA with the Consenting Term Lenders, pursuant to which the parties thereto have agreed to, among other things, the principal terms of a proposed financial restructuring of the Company, which will be implemented through an Out-of-Court Restructuring and, in the absence of sufficient stakeholder support for an Out-of-Court Restructuring, an In-Court Restructuring.
Pursuant to the terms of the RSA, on the dates specified in the RSA, we are obligated to purchase at par (or in certain limited circumstances, voluntarily prepay) the term loans of the Consenting Term Lenders in an aggregate principal amount of $100 million. On July 31, 2017, we entered into a third amendment to the Credit Agreement pursuant to which the 2013 Credit Agreement was amended to, among other things, require that upon receipt by the Company or certain of its subsidiaries of the gross proceeds of any disposition of certain Bulk MSR (as defined in the 2013 Credit Agreement) by the Company or such subsidiaries, the Company shall make a prepayment of the term loans in an amount equal to 80% of such gross proceeds; provided that, to the extent as of the earlier of 120 days following the Effective Date (as defined in the RSA) and February 15, 2018 the aggregate principal amount of term loans prepaid as a result of such prepayments is less than $100 million, the Company shall be required to prepay as of such date the term loans in an amount equal to $100 million minus the amount of proceeds of such dispositions of Bulk MSR previously applied to prepay the term loans after the date of the Third Amendment pursuant to such mandatory prepayment. The Third Amendment also requires mandatory prepayments of the term loans in an amount equal to (i) 80% of the net sale proceeds of non-ordinary course asset sales and dispositions of certain Bulk MSR and (ii) 100% of the net sale proceeds of certain non-core assets, in each case, received by the Company and certain of its subsidiaries.
The Company is subject to various financial and other covenants under its existing debt agreements, many of which contain cross default provisions such that if a default occurs under any one agreement, the lenders under the Company’s other debt agreements could declare a default. The lenders can waive their contractual rights in the event of a default. In connection with the financial statement restatement discussed in Note1 to the Consolidated Financial Statements and the conclusions reached regarding going concern included Note 2 to the Consolidated Financial Statements, the Company received waivers and/or amendments under its warehouse and advance financing facilities, the Credit Agreement and the Senior Notes Indenture to the extent necessary to waive any default, event of default, amortization event, termination event or similar event resulting or arising from the restatement discussed in Note 1 and the going concern matters discussed herein.
The Company is not currently in compliance with, and may be unable to regain and/or maintain compliance with, certain continued listing standards of the NYSE. If the Company is unable to cure any event of noncompliance with any continued listing standard of the NYSE within the applicable timeframe and other parameters set forth by the NYSE, or if the Company fails to maintain compliance with certain continued listing standards that do not provide for a cure period, it will result in the delisting of the Company’s common stock from the NYSE, which could negatively impact the trading price, trading volume and liquidity of, and have other material adverse effects on, the Company’s common stock. If the Company’s common stock is delisted from the NYSE, this could also have negative implications on the Company’s business relationships under the Company’s material agreements with lenders and other counterparties. If the Company’s common stock is delisted from the NYSE, it would constitute a fundamental change as that term is defined under the terms of the Convertible Notes, and require, among other things, that the Company take steps to make an offer to repay the Convertible Notes at 100% of the principal amount thereof. The Company currently is not permitted to repurchase the Convertible Notes pursuant to the terms of certain of its debt facilities and agreements. If the Company is delisted and is not able to satisfy this obligation, it would constitute an event of default under the indenture governing the Convertible Notes and result in a cross-default under certain of the Company’s other debt agreements. In such event, the trustee or the holders of 25% in aggregate principal amount outstanding of the convertible notes will have the right to accelerate such indebtedness.

97


The Company’s subsidiaries are parties to seller/servicer agreements with, and/or subject to the guidelines and regulations of (collectively, the seller/servicer obligations), the GSEs and various government agencies, including HUD, FHA, VA and Ginnie Mae. These seller/servicer obligations include financial covenants and other requirements as defined by the applicable agency. To the extent that these seller/servicer obligations are not met, the applicable GSE or government agency may, at its option, take action to implement one or more of a variety of remedies including, without limitation, requiring certain Company subsidiaries to deposit funds as security for one or more of such subsidiaries’ obligations to the GSEs or government agencies, imposing sanctions on one or more of such subsidiaries, which could include monetary fines or penalties, forcing one or more subsidiaries to transfer servicing on all or a portion of the mortgage loans such subsidiary services for the applicable GSE or government agency, and/or suspending or terminating the approved seller/servicer status of one or more subsidiaries, which could prohibit or severely limit the ability of one or more subsidiaries to originate, service and/or securitize mortgage loans for the applicable GSE or agency. To date, none of the GSEs or government agencies with which the Company and its subsidiaries do business has communicated any material sanction, suspension or prohibition that would materially adversely affect the Company’s business; however, the GSEs and certain of such government agencies have required frequent reporting regarding the financial status of the Company, including preliminary financial results and the availability to the Company of financing capacity under its existing borrowing facilities. The GSEs and certain of such government agencies have also requested frequent telephonic updates with senior Company management regarding the status of the Company’s debt restructuring initiative and other matters. The Company’s subservicing agreements also contain requirements regarding servicing practices and other matters, and a failure to comply with these requirements could have an adverse impact on the Company’s business and liquidity.
As disclosed in Note 12 to the Consolidated Financial Statements, the Company is obligated to exercise the mandatory clean-up call obligations assumed as part of an agreement to acquire the rights to service the loans in the Non-Residual Trusts. Additionally, as part of its Reverse Mortgage segment, the Company is obligated to purchase loans out of Ginnie Mae securitization pools under certain circumstances.
The Company is proactively engaged with its lenders and other counterparties to address the challenges and uncertainties set forth above, including obtaining requisite waivers, seeking access to the securitization market, obtaining bids from various counterparties with regard to its clean-up call obligations, working to regain compliance with NYSE continued listing standards and continuing to engage with key stakeholders. See Note 2 to the Consolidated Financial Statements.
The above factors have been taken into account in assessing the Company’s liquidity and ability to meets is obligations for the next twelve months from the date of issuance of the financial statements included in this quarterly report on Form 10-Q. Based on this assessment, management has concluded that while there can be no assurance that the Company’s recent and future actions will be successful in mitigating the risks and uncertainties applicable to its business, the Company’s current plans provide enough liquidity to meet its obligations over the next twelve months from the date of issuance of the financial statements. However, as set forth in the RSA, the parties thereto have agreed to, among other things, the principal terms of a proposed financial restructuring of the Company, which will be implemented through an Out-of-Court Restructuring and, in the absence of sufficient stakeholder support for an Out-of-Court Restructuring, an In-Court Restructuring. The potential for an In-Court Restructuring raises substantial doubt about the Company’s ability to continue as a going concern. The Company’s Consolidated Financial Statements have been prepared assuming the Company will continue as a going concern. The Company will continue to monitor progress on its initiatives and the impact on its ongoing assessment of going concern in future periods.
Mortgage Loan Servicing Business
Our servicing agreements impose on us various rights and obligations that affect our liquidity. Among the most significant of these obligations is the requirement that we advance our own funds to pay property taxes, insurance premiums and foreclosure costs and various other items, referred to as protective advances. Protective advances are required to preserve the collateral underlying the residential loans being serviced. In addition, we advance our own funds to meet contractual payment requirements for credit owners. As a result of bulk servicing rights acquisitions in 2013 and 2014, we experienced and continue to incur an elevated level of advance funding requirements. Subservicers are generally reimbursed for advances in the month following the advance, so our advance funding requirements may continue to be reduced if we succeed in transitioning to a greater mix of subservicing in our portfolio. In the normal course of business, we borrow money from various counterparties who provide us with financing to fund a portion of our mortgage loan related servicing advances on a short-term basis or provide for reimbursement within an agreed-upon period. Our ability to fund servicing advances is a significant factor that affects our liquidity, and to operate and grow our servicing portfolio we depend upon our ability to secure these types of arrangements on acceptable terms and to renew, replace or resize existing financing facilities as they expire. However, there can be no assurance that these facilities will be available to us in the future. The servicing advance financing agreements that support our servicing operations are discussed below.

98


Servicing Advance Liabilities
Ditech Financial has four servicing advance facilities through several lenders and an Early Advance Reimbursement Agreement with Fannie Mae, which, in each case, are used to fund servicer and protective advances that are its responsibility under certain servicing agreements. The servicing advance facilities and the Early Advance Reimbursement Agreement had an aggregate capacity of $975.0 million at June 30, 2017, of which we had utilized approximately $545.5 million as of such date. The interest rates for the servicing advance facilities and Early Advance Reimbursement Agreement are either fixed or are primarily based on LIBOR plus between 2.50% and 3.00% and have various expiration dates from August 2017 to October 2018. Payments on the amounts due under these agreements are paid from certain proceeds received (i) in connection with the liquidation of mortgaged properties, (ii) from repayments received from mortgagors, (iii) from reimbursements received from the owners of the mortgage loans, such as Fannie Mae, Freddie Mac and private label securitization trusts, or (iv) issuance of new notes or other refinancing transactions. Accordingly, repayment of the servicing advance liabilities is dependent on the proceeds that are received on the underlying advances associated with the agreements. Two of the servicing advance facilities, with total borrowing capacity of approximately $775.0 million at June 30, 2017, are non-recourse to us.
The servicing advance facilities contain customary events of default and covenants, including, in certain transactions, financial covenants. Financial covenants most sensitive to our operating results and financial position are the requirements that Ditech Financial maintain minimum tangible net worth, indebtedness to tangible net worth and minimum liquidity. Ditech Financial received waivers from each of its lenders to the extent necessary to waive any default, event of default, amortization event, termination event or similar event resulting from or arising from the restatement, as described in Note 3 to the Consolidated Financial Statements.
GTAAFT Facility
Ditech Financial has a non-recourse servicer advance facility that provides funding for servicer and protective advances made in connection with its servicing of certain Fannie Mae and Freddie Mac mortgage loans. In connection with this facility, Ditech Financial sells and/or contributes the rights to reimbursement for servicer and protective advances to a depositor entity, which then sells and/or contributes such rights to reimbursement to an issuer entity. Each of the issuer and the depositor entities under this facility is structured as a bankruptcy remote special purpose entity and is the sole owner of its respective assets.
At June 30, 2017, the GTAAFT Facility consists of (i) Series 2016-T1 two-year term notes issued September 30, 2016 with an aggregate principal balance of $300.0 million and an expected repayment date of October 15, 2018, and (ii) up to $400.0 million of Series 2014-VF2 variable funding notes with an expected repayment date of October 4, 2017. On June 15, 2017, the Series 2015-T2 three year term notes with an aggregate principal balance of $140.0 million and which had an expected repayment date of October 15, 2018 were fully redeemed. We recognized a loss on extinguishment of $0.7 million, which included $0.4 million for the write-off of deferred financing fees and a $0.3 million prepayment premium. At June 30, 2017, an aggregate principal balance of $358.8 million of notes were outstanding under this facility: $300.0 million principal balance of 2016-T1 term notes; and $58.8 million principal balance of variable funding notes.
The collateral securing the term notes and the variable funding notes consists primarily of rights to reimbursement for servicer and protective advances in respect of certain mortgage loans serviced by Ditech Financial on behalf of Freddie Mac and Fannie Mae as well as cash.
The Series 2016-T1 term notes were issued in four classes. Interest on the term notes is based on a fixed rate per annum ranging from approximately 2.38% to 4.06%. If the Series 2016-T1 term notes are not redeemed or refinanced on or prior to October 15, 2018, one-twelfth of the related note balances will be required to be repaid on October 15, 2018 and each monthly payment date thereafter. Failure to make any such one-twelfth payment will result in an event of default.
The interest on the variable funding notes is based on one-month LIBOR, (or, in certain circumstances, the higher of (i) the prime rate and (ii) the federal funds rate plus 0.50%) plus a per annum margin ranging from approximately 1.85% to 3.92%. The maximum permitted principal balance of the variable funding notes that can be drawn at any given time is dependent upon the amount of eligible collateral owned by the issuer of the notes and may not exceed $400.0 million in the aggregate. We may repay and redraw the variable funding notes issued for 364-days from and including October 5, 2016, subject to the satisfaction of various funding conditions including the Parent Company not being in default under warehouse, repurchase, credit or other similar agreements relating to indebtedness in certain amounts and there being no breaches or representations, warranties and covenants by us under the GTAAFT transaction agreements. If such 364-day period is not extended, the variable funding notes will become due and payable on October 4, 2017.

99


Under this facility, the holders of the term notes and variable funding notes (and other creditors of the issuer and depositor entities) have no recourse to any assets or revenues of Ditech Financial or the Parent Company other than to the extent of Ditech Financial’s or the Parent Company’s obligations with respect to various representations and warranties, covenants and indemnities under this facility and the Parent Company’s obligations as a guarantor of certain of Ditech Financial's representations, warranties, covenants and indemnities under the facility. These representations and warranties, covenants and indemnities include various representations and warranties as to the nature of the receivables, covenants to service and administer the collateral for the GTAAFT Facility and perform obligations under Ditech Financial’s servicing agreements with Freddie Mac and Fannie Mae, and covenants to make an indemnity payment for, or to repurchase, any receivable in respect of which the eligibility representations and warranties were not true as of the date the related receivable was transferred to the depositor entity. Creditors of the Parent Company and Ditech Financial do not have recourse to any assets or revenues of either the issuer or depositor entities under the facility.
The facility's base indenture and indenture supplements include facility events of default and target amortization events customary for financings of this type. The target amortization events include, among other events, events related to breaches of representations, covenants and certain tests related to the collection and performance of the receivables securing the notes issued pursuant to the base indenture and the applicable indenture supplement, and with respect to the variable funding notes, defaults under certain other material indebtedness, material judgments, certain financial tests, and change of control. Upon the occurrence of a target amortization event for any series of notes, such series of notes enter into a scheduled amortization period. In the case of the variable funding notes, one third of the outstanding principal balance of the variable funding notes at the time of the occurrence of the target amortization event is payable on the first three monthly payment dates occurring after the occurrence of such target amortization event. In the case of the term notes, one twelfth of the outstanding principal balance of the term notes at the time of the occurrence of the target amortization event is payable on the first twelve monthly payment dates occurring after the occurrence of such target amortization event. Failure to make requisite payments on the notes following the occurrence of a target amortization event could lead to an event of default. Upon the occurrence of an event of default, specified percentages of noteholders have the right to terminate all commitments and accelerate the notes under the base indenture, enforce their rights with respect to the collateral and take certain other actions. The events of default include, among other events, the occurrence of any failure to make payments (subject to certain cure periods and including balances due after the occurrence of a target amortization event), failure of Ditech Financial to satisfy various deposit and remittance obligations as servicer of certain mortgage loans, the requirement of the issuer to be registered as an "investment company" under the Investment Company Act of 1940, as amended, certain tests related to the collection and performance of the receivables securing the notes issued pursuant to the base indenture and applicable indenture supplement, removal of Ditech Financial’s status as an approved seller or servicer by either Fannie Mae or Freddie Mac and bankruptcy events.
In connection with this facility, we entered into an acknowledgment with Fannie Mae, dated as of December 19, 2014, and a fifth amended and restated consent agreement with Freddie Mac, dated as of September 30, 2016, which (i) in the case of Fannie Mae, waived or (ii) in the case of Freddie Mac, subordinated, their respective rights of set-off against rights to reimbursement for certain servicer advances and delinquency advances subject to this facility. The Fannie Mae acknowledgment agreement remains in effect unless Fannie Mae withdraws its consent (i) at each yearly anniversary of the agreement by providing 30 days' advance written notice or (ii) upon certain other specified events. The Freddie Mac consent agreement automatically renews for successive annual terms; however, Freddie Mac may terminate its consent on 30 days' written notice. If either Fannie Mae or Freddie Mac were to withdraw such waiver or subordination, as applicable, of its respective rights of set-off, our ability to increase the draws on the variable funding notes or maintain the drawn balances thereunder could be materially limited or eliminated.
Early Advance Reimbursement Agreement
Ditech Financial's Early Advance Reimbursement Agreement with Fannie Mae is used exclusively to fund certain principal and interest and servicer and protective advances that are the responsibility of Ditech Financial under its Fannie Mae servicing agreements. This agreement was renewed in March 2017 and expires on March 31, 2018. If not renewed in 2018, there will be no additional funding by Fannie Mae of new advances under the agreement. In addition, collections recovered during the 18 months following the expiration of the agreement are to be remitted to Fannie Mae to settle any remaining outstanding balance due under such agreement. Upon expiration of the 18 month period, any remaining balance would become due and payable. At June 30, 2017, we had borrowings of $69.2 million under the Early Advance Reimbursement Agreement, which has a capacity of $100.0 million.
Other Servicing Advance Facilities
Ditech Financial has three additional servicing advance facilities through several lenders that are used to fund servicer and protective advances that are its responsibility under certain servicing agreements. These servicing advance facilities had an aggregate capacity amount of $175.0 million at June 30, 2017. The interest rates are primarily based on LIBOR plus between 2.50% and 3.00% and have various expiration dates from August 2017 to July 2018. One of these servicing advance facilities, with total borrowing capacity of $75.0 million, is non-recourse to us. At June 30, 2017, we had borrowings of $117.6 million under these facilities.

100


Mortgage Loan Originations Business
Master Repurchase Agreements
Ditech Financial utilizes master repurchase agreements to fund the origination and purchase of residential loans. These agreements were entered into by Ditech Financial and various warehouse lenders. Our five repurchase agreements had an aggregate capacity of $1.9 billion at June 30, 2017. At June 30, 2017, the interest rates under our repurchase agreements were primarily based on LIBOR plus between 2.10% and 3.00% and have various expiration dates from August 2017 to May 2018. These facilities provide creditors a security interest in the mortgage loans that meet the eligibility requirements under the terms of the particular facility in exchange for cash proceeds used to originate or purchase mortgage loans. We agree to repay borrowings under these facilities within a specified timeframe, and the source of repayment is typically from the sale or securitization of the underlying loans into the secondary mortgage market. We evaluate our needs under these facilities based on forecasted mortgage loan origination volume; however, there can be no assurance that these facilities will be available to us in the future. At June 30, 2017, $1.0 billion of the aggregate capacity has been provided on an uncommitted basis. To the extent uncommitted funds are requested to purchase or originate mortgage loans, the counterparties have no obligation to fulfill such request. All obligations of Ditech Financial under its master repurchase agreements are guaranteed by the Parent Company. We had $891.2 million of short-term borrowings under these master repurchase agreements at June 30, 2017, which included $187.1 million of borrowings utilizing uncommitted funds.
Based on our projected future funding needs, in February 2017 we entered in to an amendment with a lender to, among other things, shift $100.0 million of uncommitted capacity under a Ditech Financial master repurchase agreement with such lender to a RMS master repurchase agreement with such lender. Furthermore, in May 2017, upon execution of the annual renewal for a master repurchase agreement with another lender, an additional $100.0 million of capacity ($50.0 million in committed capacity and $50.0 million in uncommitted capacity) under the Ditech Financial master repurchase agreement with such lender was shifted to the RMS master repurchase agreement with such lender.
Our ability to utilize our master repurchase facilities from time to time depends, among other things, upon us being able to make representations and warranties as to our solvency, the accuracy of information we have furnished, no material adverse changes having occurred, maintenance of our approved seller/servicer status with GSEs, no notices of adverse actions having been received from GSEs or agencies, the adequacy of our control program, our ability to service loans in accordance with accepted servicing practices and our compliance with applicable laws. All of our master repurchase agreements contain customary events of default and covenants, the most significant of which are financial covenants. Financial covenants that are most sensitive to the operating results and resulting financial position are minimum tangible net worth requirements, indebtedness to tangible net worth ratio requirements, and minimum liquidity and profitability requirements. Ditech Financial was in compliance with all financial covenants relating to master repurchase agreements at June 30, 2017.
Ditech Financial received waivers and/or amendments required as a result of the restatement of its and the Company's consolidated financial statements as of and for the periods ended June 30, 2016, September 30, 2016, December 31, 2016 and March 31, 2017 and conclusions reached regarding the Company's ability to continue as a going concern, as described in Note 2 to the Consolidated Financial Statements. The Ditech Financial master repurchase agreements that contain profitability covenants were also amended to allow for a net loss under such covenants for the quarters ending September 30, 2017 and December 31, 2017 as applicable to the terms of each respective agreement. These amendments, among other things, reduced the advance rates on certain facilities. Additionally, upon executing an extension of one of the facilities, the capacity on the facility was reduced by $100.0 million. As a result of receiving these waivers, Ditech Financial was in compliance with the terms of these facilities at June 30, 2017.
We are dependent on the ability to secure warehouse facilities on acceptable terms and to renew, replace or resize existing facilities as they expire. If we fail to comply with the terms of an agreement that results in an event of default or breach of covenant without obtaining a waiver or amendment, we may be subject to termination of future funding, enforcement of liens against assets securing the respective facility, repurchase of assets pledged in a repurchase agreement, acceleration of outstanding obligations, or other adverse actions. We intend to renew, replace, or expand our facilities and may seek waivers or amendments in the future, if necessary; however, there can be no assurance that these or others actions will be successful.

101


Representations and Warranties
In conjunction with our originations business, we provide representations and warranties on loan sales. We sell substantially all of our originated or purchased mortgage loans into the secondary market for securitization or to private investors as whole loans. We sell conventional conforming and government-backed mortgage loans through GSE and agency-sponsored securitizations in which mortgage-backed securities are created and sold to third-party investors. We also sell non-conforming mortgage loans to private investors. In doing so, representations and warranties regarding certain attributes of the loans are made to the third-party investor. Subsequent to the sale, if it is determined that a loan sold is in breach of these representations or warranties, we generally have an obligation to cure such breach. In general, if we are unable to cure such breach, the purchaser of the loan may require us to repurchase such loan for the unpaid principal balance, accrued interest, and related advances, and in any event, we must indemnify such purchaser for certain losses and expenses incurred by such purchaser in connection with such breach. Our credit loss may be reduced by any recourse we have to correspondent lenders that, in turn, have sold such residential loans to us and breached similar or other representations and warranties.
Our representations and warranties are generally not subject to stated limits of exposure with the exception of certain loans originated under HARP, which limits exposure based on payment history of the loan. At June 30, 2017, our maximum exposure to repurchases due to potential breaches of representations and warranties was $67.4 billion, and was based on the original unpaid principal balance of loans sold from the beginning of 2013 through June 30, 2017 adjusted for voluntary payments made by the borrower on loans for which we perform the servicing. A majority of our loan sales during this period were servicing retained.
Rollforwards of the liability associated with representations and warranties are included below (in thousands):
 
 
For the Three Months 
 Ended June 30,
 
For the Six Months 
 Ended June 30,
 
 
2017
 
2016
 
2017

2016
Balance at beginning of the period
 
$
21,562

 
$
27,106

 
$
22,094

 
$
23,145

Provision for new sales
 
2,003

 
3,724

 
3,798

 
8,437

Change in estimate of existing reserves (1)
 
(4,238
)
 
(10,086
)
 
(6,014
)
 
(10,759
)
Net realized losses on repurchases
 
(58
)
 
(481
)
 
(609
)
 
(560
)
Balance at end of the period
 
$
19,269

 
$
20,263

 
$
19,269

 
$
20,263

__________
(1)
The change in estimate of existing reserves during the three and six months ended June 30, 2017 primarily relates to portfolio performance, voluntary loan payoffs and paydowns, clean loan reviews, and loans meeting certain age triggers which reduces estimated loss exposure.
Rollforwards of loan repurchase requests based on the original unpaid principal balance are included below (dollars in thousands):
 
 
For the Three Months 
 Ended June 30, 2017
 
For the Three Months 
 Ended June 30, 2016
 
 
No. of Loans
 
Unpaid Principal Balance
 
No. of Loans
 
Unpaid Principal Balance
Balance at beginning of the period
 
22

 
$
4,564

 
40

 
$
10,466

Repurchases and indemnifications
 
(10
)
 
(2,225
)
 
(9
)
 
(2,570
)
Claims initiated
 
37

 
8,238

 
61

 
12,891

Rescinded
 
(18
)
 
(3,855
)
 
(62
)
 
(13,791
)
Balance at end of the period
 
31

 
$
6,722

 
30

 
$
6,996


102


 
 
For the Six Months 
 Ended June 30, 2017
 
For the Six Months 
 Ended June 30, 2016
 
 
No. of Loans
 
Unpaid Principal Balance
 
No. of Loans
 
Unpaid Principal Balance
Balance at beginning of the period
 
29

 
$
5,974

 
30

 
$
6,225

Repurchases and indemnifications
 
(20
)
 
(4,138
)
 
(19
)
 
(4,416
)
Claims initiated
 
59

 
12,265

 
110

 
24,725

Rescinded
 
(37
)
 
(7,379
)
 
(91
)
 
(19,538
)
Balance at end of the period
 
31

 
$
6,722

 
30

 
$
6,996

The following table presents our maximum exposure to repurchases due to potential breaches of representations and warranties at June 30, 2017 based on the original unpaid principal balance of loans sold adjusted for voluntary payments made by the borrower on loans for which we perform the servicing by vintage year (in thousands):
 
 
Unpaid Principal Balance
2013
 
$
9,019,387

2014
 
11,441,525

2015
 
18,864,919

2016
 
18,769,963

2017
 
9,322,584

Total
 
$
67,418,378

Reverse Mortgage Business
Master Repurchase Agreements
Through RMS's warehouse facilities under master repurchase agreements we finance the origination or purchase of reverse loans and repurchases of certain HECMs and real estate owned from Ginnie Mae securitization pools. At June 30, 2017, the two facilities had an aggregate capacity of $500.0 million, all of which could be used to repurchase HECMs and real estate owned from Ginnie Mae securitization pools. At June 30, 2017, the interest rates on the facilities were based on LIBOR or other applicable index plus between 3.13% and 3.25% and have expiration dates of February 2018 and May 2018. These facilities are secured by the underlying assets and provide creditors a security interest in the assets that meet the eligibility requirements under the terms of the particular facility. We agree to repay the borrowings under these facilities within a specified timeframe, and the source of repayment is typically from proceeds received on the securitization of the underlying reverse loans, claim proceeds received from HUD or liquidation proceeds from the sale of real estate owned. We evaluate our needs under these facilities based on forecasted reverse loan repurchases and timing of reimbursement from HUD; however, there can be no assurance that these facilities will be available to us in the future. At June 30, 2017, $250.0 million of the aggregate capacity has been provided on an uncommitted basis, and as such, to the extent these funds are requested to purchase or originate reverse loans or repurchase HECMs and real estate owned from Ginnie Mae securitization pools, the counterparties have no obligation to fulfill such request. We had $440.9 million of borrowings under these master repurchase agreements at June 30, 2017 relating to repurchases of HECMs and real estate owned, which included $190.9 million of borrowings utilizing uncommitted funds. All obligations of RMS under the master repurchase agreements are guaranteed by the Parent Company.
One of RMS's warehouse facilities, utilized to finance the origination of reverse loans, and which had total and uncommitted capacity of $125.0 million, matured on February 11, 2017. Borrowings under this facility were fully repaid on or prior to the maturity date. Effective January 17, 2017, we exited the reverse mortgage originations business, and as such we do not anticipate that the termination of this facility will have an adverse impact on liquidity.

103


Based on our projected future funding needs, in February 2017 we entered in to an amendment with a lender to, among other things, shift $100.0 million of uncommitted capacity under a Ditech Financial master repurchase agreement with such lender to a RMS master repurchase agreement with such lender. The amendment to the RMS master repurchase agreement also served to, among other things, renew the facility for another approximately one-year term and lower the required adjusted EBITDA (as determined pursuant to this agreement). In April 2017, in order to access uncommitted funds on this facility, we entered into an additional amendment with the lender. This amendment, among other things, reduced our advance rates and shortened the maximum time loans can remain outstanding on the facility. In May 2017, upon execution of the annual renewal for a master repurchase agreement with another lender, an additional $100.0 million of capacity ($50.0 million in committed capacity and $50.0 million in uncommitted capacity) under the Ditech Financial master repurchase agreement with such lender was shifted to the RMS master repurchase agreement with such lender. In August 2017 this facility was further amended to increase the aggregate and committed capacity by an additional $100.0 million.
All of RMS's master repurchase agreements contain customary events of default and covenants, the most significant of which are financial covenants relating to RMS. Financial covenants that are most sensitive to the operating results and resulting financial position are minimum tangible net worth requirements, indebtedness to tangible net worth ratio requirements, and minimum liquidity and profitability requirements. In July 2017, RMS received waivers and/or amendments required as a result of the restatement of its and the Company's consolidated financial statements as of and for the periods ended June 30, 2016, September 30, 2016, December 31, 2016 and March 31, 2017 and conclusions reached regarding the Company's ability to continue as a going concern, as described in Note 2 to the Consolidated Financial Statements. These amendments, among other things, reduced the advance rates on certain facilities. As a result of receiving these waivers, RMS was in compliance with the terms of these facilities, including financial covenants, at June 30, 2017.
We are dependent on our ability to secure warehouse facilities on acceptable terms and to renew, replace or resize existing facilities as they expire. If we fail to comply with the terms of an agreement that results in an event of default or breach of covenant without obtaining a waiver or amendment, we may be subject to termination of future funding, enforcement of liens against assets securing the respective facility, repurchase of assets pledged in a repurchase agreement, acceleration of outstanding obligations, or other adverse actions. We intend to renew and expand our existing facilities and may seek waivers or amendments in the future, if necessary. We have plans in place to strengthen our operating results under our new leadership team, including cost reduction efforts and servicing efficiency initiatives; however, there can be no assurance that these or others actions will be successful.
Reverse Loan Securitizations
We transfer reverse loans that we have originated or purchased through the Ginnie Mae HMBS issuance process. The proceeds from the transfer of the HMBS are accounted for as a secured borrowing and are classified on the consolidated balance sheets as HMBS related obligations. The proceeds from the transfer are used to repay borrowings under our master repurchase agreements. At June 30, 2017, we had $9.5 billion in unpaid principal balance outstanding on the HMBS related obligations. At June 30, 2017, $9.4 billion in unpaid principal balance of reverse loans and real estate owned was pledged as collateral to the HMBS beneficial interest holders, and are not available to satisfy the claims of our creditors. Ginnie Mae, as guarantor of the HMBS, is obligated to the holders of the HMBS in an instance of RMS default on its servicing obligations, or when the proceeds realized on HECMs are insufficient to repay all outstanding HMBS related obligations. Ginnie Mae has recourse to RMS in connection with certain claims relating to the performance and obligations of RMS as both an issuer of HMBS and a servicer of HECMs underlying HMBS.
Borrower remittances received on the reverse loans, if any, proceeds received from the sale of real estate owned and our funds used to repurchase reverse loans are used to reduce the HMBS related obligations by making payments to Ginnie Mae, who will then remit the payments to the holders of the HMBS. The maturity of the HMBS related obligations is directly affected by the liquidation of the reverse loans or liquidation of real estate owned and events of default as stipulated in the reverse loan agreements with borrowers. Refer to the section below for additional information on repurchases of reverse loans.

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HMBS Issuer Obligations
As an HMBS issuer, we assume certain obligations related to each security issued. The most significant obligation is the requirement to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM is equal to or greater than 98% of the maximum claim amount. Performing repurchased loans are conveyed to HUD and payment is received from HUD typically within a short timeframe of repurchase. HUD reimburses the Company for the outstanding principal balance on the loan up to the maximum claim amount. The Company bears the risk of exposure if the amount of the outstanding principal balance on a loan exceeds the maximum claim amount. Recent regulatory changes introduced by HUD increased the requirements for completing an assignment to HUD. These new requirements may increase the time interval between when a loan is repurchased and when the assignment claim is filed with HUD, and inability to meet such requirements could preclude assignment. During this period, accruals for interest, HUD-required mortgage insurance payments, and borrower draws may cause the unpaid balance on the loan to increase and ultimately exceed the maximum claim amount. Nonperforming repurchased loans are generally liquidated through foreclosure and subsequent sale of real estate owned. Loans are considered nonperforming upon events such as, but not limited to, the death of the mortgagor, the mortgagor no longer occupying the property as their principal residence, or the property taxes or insurance not being paid.
We currently rely upon certain master repurchase agreements and operating cash flows, to the extent necessary, to repurchase these Ginnie Mae loans. Given continued growth in the number and amount of our reverse loan repurchases, we may seek additional, or expansion of existing, master repurchase or similar agreements and/or may seek to access the securitization market to provide financing capacity for future required loan repurchases. The timing and amount of our obligation to repurchase HECMs is uncertain as repurchase is predicated on certain factors such as whether or not a borrower event of default occurs prior to the HECM reaching the mandatory repurchase threshold under which we are obligated to repurchase the loan.
Rollforwards of reverse loan and real estate owned repurchase activity (by unpaid principal balance) are included below (in thousands):
 
 
For the Three Months 
 Ended June 30,
 
For the Six Months 
 Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Balance at beginning of the period
 
$
443,681

 
$
245,442

 
$
346,983

 
$
191,123

Repurchases and other additions (1)
 
283,917

 
134,572

 
510,005

 
259,485

Liquidations
 
(102,524
)
 
(116,784
)
 
(231,914
)
 
(187,378
)
Balance at end of the period
 
$
625,074

 
$
263,230

 
$
625,074

 
$
263,230

__________
(1)
Other additions include additions to the principal balance related to interest, servicing fees, mortgage insurance and advances.
Our repurchases of reverse loans and real estate owned have increased significantly during the six months ended June 30, 2017 as compared to the same period in 2016. We expect a continued increase to repurchase requirements due to the increased flow of HECMs and real estate owned that are reaching 98% of their maximum claim amount. At June 30, 2017, we have commitments to repurchase reverse loans and real estate owned of $110.0 million, and we have $59.1 million available under our master repurchase agreements for repurchases of reverse loans and real estate owned. In August 2017, we entered into an amendment that increases the size of our existing credit facility by $100.0 million on a committed basis. There can be no assurance that we will be able to maintain or expand our borrowing capacity to fund loan repurchases. Refer to Note 4 of the Consolidated Financial Statements for further discussion.
Reverse Loan Servicer Obligations
Similar to our mortgage loan servicing business, our reverse mortgage servicing agreements impose on us obligations to advance our own funds to meet contractual payment requirements for customers and credit owners and to pay protective advances, which are required to preserve the collateral underlying the residential loans being serviced. We rely upon operating cash flows to fund these obligations.

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As servicer of reverse loans, we are also obligated to fund additional borrowings by customers in the form of undrawn lines of credit on floating rate and fixed rate reverse loans. We rely upon our operating cash flows to fund these additional borrowings on a short-term basis prior to securitization (when performing services of both the issuer and servicer) or reimbursement by the issuer (when providing third-party servicing). The additional fundings made by us, as issuer and servicer, are generally securitized within 30 days after funding. Similarly the additional fundings made by us, as third-party servicer, are typically reimbursed by the issuer within 30 days after funding. Our commitment to fund additional borrowings by customers was $1.2 billion at June 30, 2017, which includes $1.0 billion in capacity that was available to be drawn by borrowers at June 30, 2017 and $161.8 million in capacity that will become eligible to be drawn by borrowers through the twelve months ending July 1, 2018 assuming the loans remain performing. There is no termination date for these drawings so long as the loan remains performing. The obligation to fund these additional borrowings could have a significant impact on our liquidity.
Corporate Debt
As market conditions warrant, we may from time to time, subject to limitations in our debt facilities and securities and by our other contractual and regulatory obligations, repurchase debt securities issued by us, in privately negotiated or open market transactions, by tender offer or otherwise, or repay corporate or other debt, and we may engage in other transactions designed to reduce, extend, exchange or otherwise modify the terms or amount of our debt. We have retained advisors to assist in exploring certain of these opportunities.
Term Loans and Revolver
We have a 2013 Term Loan in the original principal amount of $1.5 billion and a $100.0 million 2013 Revolver. Our obligations under the 2013 Secured Credit Facilities are guaranteed by substantially all of our subsidiaries and secured by substantially all of our assets subject to certain exceptions, the most significant of which are the assets of the consolidated Residual and Non-Residual Trusts, the residential loans and real estate owned of the Ginnie Mae securitization pools, and advances of the consolidated financing entities that have been recorded on our consolidated balance sheets. The balance outstanding on the 2013 Term Loan was $1.4 billion at June 30, 2017.
In July 2017, we entered into Amendment No. 3 to the Credit Agreement. The amendment amends the Credit Agreement to make certain changes to the mandatory prepayment provisions and negative covenants thereof and certain technical changes.
The material terms of our 2013 Secured Credit Facilities are summarized in the table below:
Debt Agreement
 
Interest Rate
 
Amortization
 
Maturity/Expiration
2013 Term Loan
 
LIBOR plus 3.75%
LIBOR floor of 1.00%

 
1.00% per annum beginning 1st quarter of 2014; remainder at final maturity
 
December 18, 2020
2013 Revolver
 
LIBOR plus 3.75%
 
Bullet payment at maturity
 
December 19, 2018
At June 30, 2017, as a result of the restatement of our consolidated financial statements as of and for the periods ended June 30, 2016, September 30, 2016, December 31, 2016 and March 31, 2017 and conclusions reached regarding the Company's ability to continue as a going concern, as described in Note 2 to the Consolidated Financial Statements, we were not in compliance with the terms of the 2013 Credit Agreement, and therefore did not have access to borrowings under the 2013 Revolver. We received waivers from each of the requisite holders of our term loans to the extent necessary to waive any default, event of default, amortization event, termination event or similar event resulting from or arising from the restatements discussed in Note 1 to the Consolidated Financial Statements and conclusions reached regarding our ability to continue as a going concern. Under the Credit Agreement, in order to borrow in excess of 20% of the committed amount under the 2013 Revolver, each quarter we must satisfy both a specified Interest Coverage Ratio and a specified Total Leverage Ratio on a pro forma basis after giving effect to the borrowing. As of June 30, 2017, we did not satisfy these ratios, and as a result the maximum amount we would have been able to borrow on the 2013 Revolver, upon receiving the aforementioned waivers, was $20.0 million. Under certain master repurchase agreements, at any time there are obligations outstanding under such agreements, we are prohibited from having more than $20.0 million outstanding under the 2013 Revolver. The $20.0 million available under the 2013 Revolver may be used for the issuance of LOCs in addition to the borrowings of revolving loans. Any amounts outstanding in issued LOCs reduces availability for cash borrowings under the 2013 Revolver. Upon receiving the aforementioned waivers, $10.5 million remains available on the 2013 Revolver and $9.5 million outstanding in issued LOCs.

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The commitment fee on the unused portion of the 2013 Revolver is 0.50% per year. The 2013 Secured Credit Facilities contain restrictive covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to incur or guarantee additional indebtedness, pay dividends on or redeem or repurchase our capital stock, make certain types of investments, create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries, incur certain liens, sell or otherwise dispose of certain assets, enter into transactions with affiliates, enter into sale and leaseback transactions, prepay certain indebtedness (including the Senior Notes and the Convertible Notes), and consolidate or merge with or into, or sell all or substantially all of our assets to, another person. These covenants are subject to a number of important limitations and exceptions. The 2013 Secured Credit Facilities also contain customary events of default, including the failure to make timely payments on the 2013 Term Loan and 2013 Revolver or other material indebtedness, the failure to satisfy certain covenants and specified events of bankruptcy and insolvency.
Under the 2013 Term Loan, we are required to make a principal payment based on Excess Cash Flow of the preceding year. Depending on the Total Net Leverage Ratio for the year, a principal payment of between zero and fifty percent of Excess Cash Flow is required to be made during the first quarter of the following year, and no later than the third business day subsequent to delivery of the financial statements. During the first quarter of 2017, we made a principal payment of $21.3 million on the 2013 Term Loan, relating to the 2016 Excess Cash Flow.
Senior Notes
In December 2013, we completed the sale of $575.0 million aggregate principal amount of Senior Notes, which pay interest semi-annually at an interest rate of 7.875% and mature on December 15, 2021. The balance outstanding on the Senior Notes was $538.7 million at June 30, 2017.
The Senior Notes were offered and sold in a transaction exempt from the registration requirements under the Securities Act, and resold to qualified institutional buyers in reliance on Rule 144A and Regulation S under the Securities Act. The Senior Notes were issued pursuant to an indenture, dated as of December 17, 2013, among us, the guarantor parties thereto and Wells Fargo Bank, National Association, as trustee. The Senior Notes are guaranteed on an unsecured senior basis by each of our current and future wholly-owned domestic subsidiaries that guarantee our obligations under our 2013 Term Loan. On October 14, 2014, we filed with the SEC a registration statement under the Securities Act so as to allow holders of the Senior Notes to exchange their Senior Notes for the same principal amount of a new issue of notes, or the Exchange Notes, with identical terms, except that the Exchange Notes are not subject to certain restrictions on transfer. The registration statement was declared effective by the SEC on October 27, 2014 and the exchange closed on December 2, 2014.
We may on any one or more occasions redeem some or all of the Senior Notes at a purchase price equal to 105.906% of the principal amount of the Senior Notes, plus accrued and unpaid interest, if any, as of the redemption date, such optional redemption prices decreasing to 103.938% on or after December 15, 2017, 101.969% on or after December 15, 2018 and 100.000% on or after December 15, 2019.
If a change of control, as defined under the Senior Notes Indenture, occurs, the holders of our Senior Notes may require that we purchase with cash all or a portion of these Senior Notes at a purchase price equal to 101% of the principal amount of the Senior Notes, plus accrued and unpaid interest to the redemption date.
The Senior Notes Indenture contains restrictive covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to incur or guarantee additional indebtedness, pay dividends on or redeem or repurchase our capital stock, make certain types of investments, create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries, incur certain liens, sell or otherwise dispose of certain assets, enter into transactions with affiliates, enter into sale and leaseback transactions, prepay subordinated indebtedness (including the Convertible Notes), and consolidate or merge with or into, or sell all or substantially all of our assets to, another person. These covenants are subject to a number of important limitations and exceptions. The Senior Notes Indenture also contains customary events of default, including the failure to make timely payments on the Senior Notes or other material indebtedness, the failure to satisfy certain covenants and specified events of bankruptcy and insolvency.
The beneficial owners of the requisite principal amount of the Senior Notes agreed to waive any default or event of default as a result of the restatement of its consolidated financial statements as of and for the periods ended June 30, 2016, September 30, 2016, December 31, 2016 and March 31, 2017.
Convertible Notes
In October 2012, we closed on a registered underwritten public offering of $290.0 million aggregate principal amount of Convertible Notes. The Convertible Notes pay interest semi-annually on May 1 and November 1, commencing on May 1, 2013, at a rate of 4.50% per annum, and mature on November 1, 2019. 

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Prior to May 1, 2019, the Convertible Notes will be convertible only upon specified events including the satisfaction of a sales price condition, satisfaction of a trading price condition or specified corporate events and during specified periods, and, on or after May 1, 2019, at any time. The Convertible Notes will initially be convertible at a conversion rate of 17.0068 shares of our common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $58.80 per share, which is a 40% premium to the public offering price of our common stock in the 2012 Common Stock Offering of $42.00. Upon conversion, we may pay or deliver, at our option, cash, shares of our common stock, or a combination of cash and shares of common stock. It is our intent to settle all conversions through combination settlement, which involves repayment of an amount of cash equal to the principal amount and any excess of conversion value over the principal amount in shares of common stock.
If we fail to regain and maintain compliance with the continued listing standards of the NYSE, it may result in the delisting of our common stock from the NYSE, which would constitute a fundamental change under the terms of our Convertible Notes and require us to take steps to make an offer to repay the Convertible Notes at 100% of the principal amount thereof, and if we are not able to do that, it will be an event of default under those notes and cause a cross default under our other debt agreements. Each of these occurrences, individually or in the aggregate, could have a material adverse effect on our business, results of operations, financial condition, liquidity and stock price.
The balance outstanding on the Convertible Notes was $242.5 million at June 30, 2017.
Mortgage-Backed Debt
We funded the residential loan portfolio in the consolidated Residual Trusts through the securitization market. We record on our consolidated balance sheets the assets and liabilities, including mortgage-backed debt, of the Non-Residual Trusts as a result of certain obligations to exercise mandatory clean-up calls for each of these trusts at their earliest exercisable dates. The total unpaid principal balance of mortgage-backed debt was $886.6 million at June 30, 2017.
At June 30, 2017, mortgage-backed debt was collateralized by $894.3 million of assets including residential loans, receivables related to the Non-Residual Trusts, real estate owned and restricted cash and cash equivalents. All of the mortgage-backed debt is non-recourse and not cross-collateralized and, therefore, must be satisfied exclusively with the proceeds from the residential loans and real estate owned held in each securitization trust and also from draws on the LOCs of certain Non-Residual Trusts.
Borrower remittances received on the residential loans of the Residual and Non-Residual Trusts collateralizing this debt and draws under LOCs issued by a third party and serving as credit enhancements to certain of the Non-Residual Trusts are used to make principal and interest payments due on the mortgage-backed debt. The maturity of the mortgage-backed debt is directly affected by the rate of principal prepayments on the collateral. As a result, the actual maturity of the mortgage-backed debt is likely to occur earlier than the stated maturity. Certain of our mortgage-backed debt issued by the Residual Trusts is subject to voluntary redemption according to the specific terms of the respective indenture agreements, including an option by us to exercise a clean-up call. Under the mortgage-backed debt issued by the Non-Residual Trusts, we have certain obligations to exercise mandatory clean-up calls for each of these trusts at their earliest exercisable date, which is the date the principal amount of each loan pool falls to 10% of the original principal amount. During the second quarter of 2017, one of the securitization trusts reached its call date and we exercised the call. We expect the remaining calls to continue through 2019 based upon our current cash flow projections for the Non-Residual Trusts. The majority of the call obligations in 2017 will occur during the second half of the year. We made a payment for the mandatory clean-up call obligations of $9.8 million during the three months ended June 30, 2017. At June 30, 2017, the total estimated outstanding balance of the residential loans expected to be called at the respective call dates is $407.2 million. We estimate remaining call obligations of $90.8 million, $253.3 million and $63.1 million during the years ending December 31, 2017, 2018 and 2019, respectively. Remaining call obligations in 2017 are estimated to be $18.8 million and $72.0 million in the third and fourth quarters, respectively. We expect to use available cash to settle the $18.8 million call obligation during the third quarter of 2017 and are reviewing a number of potential alternatives to resolve our obligation with respect to the remaining mandatory clean-up calls. At this time, we cannot provide any assurances as to whether any of these potential alternatives may be implemented.
We expect to finance the capital required to exercise the mandatory clean-up call primarily through cash on hand, asset-backed financing or in partnership with a capital provider, or through any combination of the foregoing. However, there can be no assurance that we will be able to sell the loans or obtain financing when needed, and we have not arranged any financing facilities, capital provider or other external financing for the purpose of providing us cash in connection with our mandatory clean-up call obligations. Our obligation for the mandatory clean-up call could have a significant impact on our liquidity.

108


Certain Capital Requirements and Guarantees
We, including our subsidiaries, are required to comply with requirements under federal and state laws and regulations, including requirements imposed in connection with certain licenses and approvals, as well as requirements of federal, state, GSE, Ginnie Mae and other business partner loan programs, some of which are financial covenants related to minimum levels of net worth and other financial requirements. If these mandatory imposed capital requirements are not met, our selling and servicing agreements could be terminated and lending and servicing licenses could be suspended or revoked. As a result of the restatement of our consolidated financial statements as of and for the periods ended June 30, 2016, September 30, 2016, December 31, 2016 and March 31, 2017, RMS was not in compliance with certain financial covenants required by Ginnie Mae and Fannie Mae as of December 31, 2016. As of June 30, 2017, RMS was in compliance with such financial covenants.
Noncompliance with those requirements for which we have not received a waiver could have a negative impact on our Company, which could include suspension or termination of the selling and servicing agreements, which would prohibit future origination or securitization of mortgage loans or being an approved seller or servicer for the applicable GSE.
We also have financial covenant requirements relating to our servicing advance facilities and master repurchase agreements. Refer to additional information at the Mortgage Loan Servicing Business, Mortgage Loan Originations Business and Reverse Mortgage Business sections above for further information.
Dividends
We have no current plans to pay any cash dividends on our common stock. Any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our Board of Directors may deem relevant. In addition, our ability to pay dividends is limited by covenants in our 2013 Credit Agreement and the Senior Notes Indenture. Refer to the Corporate Debt section above.
Sources and Uses of Cash
The following table sets forth selected consolidated cash flow information (in thousands):
 
 
For the Six Months 
 Ended June 30,
 
 
 
 
2017
 
2016
 
Variance
Cash flows provided by operating activities:
 
 
 
 
 
 
Net loss adjusted for non-cash operating activities
 
$
(131,226
)
 
$
(5,644
)
 
$
(125,582
)
Changes in assets and liabilities
 
229,831

 
154,442

 
75,389

Net cash provided by originations activities (1)
 
314,663

 
161,247

 
153,416

Cash flows provided by operating activities
 
413,268

 
310,045

 
103,223

Cash flows provided by investing activities
 
653,651

 
197,595

 
456,056

Cash flows used in financing activities
 
(813,143
)
 
(397,575
)
 
(415,568
)
Net increase in cash and cash equivalents
 
$
253,776

 
$
110,065

 
$
143,711

__________
(1)
Represents purchases and originations of residential loans held for sale, net of proceeds from sales and payments.
Operating Activities
The primary sources and uses of cash for operating activities are purchases, originations and sales activity of residential loans held for sale, changes in assets and liabilities, or operating working capital, and net loss adjusted for non-cash items. Cash provided by operating activities increased $103.2 million during the six months ended June 30, 2017 as compared to the same period of 2016. The increase in cash provided by operating activities was primarily a result of an increase in cash provided by origination activities resulting from a higher volume of loans sold in relation to loans originated during the first half of 2017 as compared to the same period of 2016 and a decrease in income tax receivables.

109


Investing Activities
The primary sources and uses of cash for investing activities relate to purchases, originations and payment activity on reverse loans, payments received on mortgage loans held for investment, and payments made for business and servicing rights acquisitions. Cash provided by investing activities increased $456.1 million during the six months ended June 30, 2017 as compared to the same period of 2016. Cash provided by principal payments received on reverse loans held for investment, net of purchases and originations, increased $252.3 million primarily as a result of a lower funded volume of reverse loans and higher principal repayments and payments received for loans conveyed to HUD. In addition, we received cash proceeds of $131.1 million from the sale of our insurance business in the first quarter of 2017 and higher cash proceeds of $39.6 million from the sale of servicing rights and real estate owned during the six months ended June 30, 2017 as compared to the same period of 2016.
Financing Activities
The primary sources and uses of cash for financing activities relate to securing cash for our originations, reverse mortgage and servicing businesses, as well as for our corporate investing activities. Cash used in financing activities increased by $415.6 million during the six months ended June 30, 2017 as compared to the same period of 2016. Cash payments on HMBS related obligations, net of cash generated from the securitization of reverse loans, increased $432.2 million primarily as a result of a lower volume of reverse loan securitizations due to our exit from the reverse mortgage originations business in December 2016 and an increase in the repurchase of certain HECMs and real estate owned from securitization pools. Net cash borrowings on warehouse borrowings used to fund the origination and purchase of residential loans increased $73.1 million due to an increase in buyouts of reverse loans, offset in part by a reduction in the purchase and origination of mortgage loans held for sale.
Credit Risk
Consumer Credit Risk
In conjunction with our originations business, we provide representations and warranties on loan sales. Subsequent to the sale, if it is determined that a loan sold is in breach of these representations or warranties, we generally have an obligation to cure such breach. In general, if we are unable to cure such breach, the purchaser of the loan may require us to repurchase such loan for the unpaid principal balance, accrued interest, and related advances, and in any event, we must indemnify such purchaser for certain losses and expenses incurred by such purchaser in connection with such breach. In the case we repurchase the loan, we bear any subsequent credit loss on the loan. Our credit loss may be reduced by any recourse we have to correspondent lenders that, in turn, have sold such residential loans to us and breached similar or other representations and warranties. We maintain a reserve for losses on our representations and warranties obligations. Refer to Notes 4 and 12 to the Consolidated Financial Statements and to the Liquidity and Capital Resources section for additional information regarding these transactions.
We are also subject to credit risk associated with mortgage loans that we purchase and originate during the period of time prior to the sale of these loans. We consider the credit risk associated with these loans to be insignificant as we hold the loans, on average, for approximately 20 days from the date of borrowing, and the market for these loans continues to be highly liquid.
Counterparty Credit Risk

We are exposed to counterparty credit risk in the event of non-performance by counterparties to various agreements we enter into from time to time, including but not limited to our subservicing agreements, our agreements with GSEs and government agencies relating to our residential loan servicing and originations businesses, our master repurchase agreements we use to fund our residential loan originations business and our HECM repurchase obligations, certain of our advance financing facility agreements, and other agreements relating to our mortgage loan sales and MBS purchase commitments. We are also exposed to counterparty credit risk with respect to wholesale and correspondent lenders with whom we do business, and counterparties from whom we have purchased MSR. We attempt to minimize our counterparty credit risk through, among other things, conducting quality control reviews of wholesale and correspondent lenders, reviewing compliance by wholesale and correspondent lenders with applicable underwriting standards and our client guide, our use of internal monitoring procedures, including monitoring of our counterparties’ credit ratings, reviewing of our counterparties' financial statements and general credit worthiness, and the establishment of collateral requirements. Counterparty credit risk, as well as our own credit risk, is taken into account when determining fair value, although its impact is diminished by any requisite margin posting and other collateral requirements.

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Real Estate Market Risk
We include on our consolidated balance sheets assets secured by real property and property obtained directly as a result of foreclosures. Residential property values are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as an oversupply of housing); changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our loans, which could also cause us to suffer losses.
We held real estate owned, net of $98.3 million, $12.3 million and $0.7 million in the Reverse Mortgage, Servicing and Other non-reportable segments, respectively, at June 30, 2017. We held real estate owned, net of $90.7 million, $12.9 million and $1.0 million in the Reverse Mortgage, Servicing and Other non-reportable segments, respectively, at December 31, 2016.
A nonperforming reverse loan for which the maximum claim amount has not been met is generally foreclosed upon on behalf of Ginnie Mae with the real estate owned remaining in the securitization pool until liquidation. Although performing and nonperforming loans are covered by FHA insurance, we may incur expenses and losses in the process of repurchasing and liquidating these loans that are not reimbursable by FHA in accordance with program guidelines. In addition, in certain circumstances, we may be subject to real estate price risk to the extent we are unable to liquidate real estate owned within the FHA program guidelines. We attempt to mitigate this risk by monitoring the aging of real estate owned and managing our marketing and sales program based on this aging. The growth in the real estate owned portfolio held by the Reverse Mortgage segment was due to the increased flow of HECMs that move through the foreclosure process.
Ratings
We receive various credit and servicer ratings as set forth below. Our ratings may be subject to a revision or withdrawal at any time by the assigning rating agency, and each rating should be evaluated independently of any other rating. Rating agency ratings are not a recommendation to buy, sell or hold any security.
Credit Ratings
Credit ratings are intended to be an indicator of the creditworthiness of a particular company, security or obligation and are considered by lenders in connection with the setting of interest rates and terms for a company's borrowings. Our ability to obtain adequate and cost effective financing depends, in part, on our credit ratings. Further, downgrades in our credit ratings could negatively affect our cost of, and ability to access, capital. The following table summarizes our credit ratings and outlook as of the date of this report.
 
 
Moody's
 
S&P
Corporate / CCR
 
Caa3
 
CCC-
Senior Secured Debt
 
Caa2
 
CCC-
Senior Unsecured Debt
 
Ca
 
C
Outlook
 
Negative
 
Negative
Date of Last Action
 
August 2017
 
July 2017

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Servicer Ratings
Residential loan and manufactured housing servicer ratings reflect the applicable rating agency's assessment of a servicer’s operational risk and how the quality and experience of the servicer affect loan performance. The following table summarizes the servicer ratings and outlook assigned to certain of our servicer subsidiaries as of the date of this report. Unless otherwise specified, these servicer ratings relate to Ditech Financial as a servicer of mortgage loans.
 
 
Moody's
 
S&P
Residential Prime Servicer
 
—
 
—
Residential Subprime Servicer
 
SQ3+
 
Above Average
Residential Special Servicer
 
—
 
Above Average
Residential Second/Subordinated Lien Servicer
 
SQ2-
 
Above Average
Manufactured Housing Servicer
 
SQ2-
 
Above Average
Residential HLTV Servicer
 
—
 
—
Residential HELOC Servicer
 
—
 
—
Residential Reverse Mortgage Servicer
 
—
 
Strong (1)
Outlook
 
Not on review
 
Negative
Date of Last Action
 
December 2015
 
May 2017
__________
(1)
S&P last affirmed its rating for RMS as a residential reverse mortgage servicer in November 2015 with a stable outlook.
Cybersecurity
We devote significant resources to maintain and regularly update our systems and processes that are designed to protect the security of our computer systems, software, networks and other technology assets against attempts by unauthorized parties to obtain access to confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage. From time to time we, our vendors and other companies that store or process confidential borrower personal and transactional data are targeted by unauthorized parties using malicious code and viruses or otherwise attempting to breach the security of our or our vendors’ systems and data. We employ extensive layered security at all levels within our organization to help us detect malicious activity, both from within the organization and from external sources. It is company protocol to investigate the cause and extent of all instances of cyber-attack, potential or confirmed, and take any additional necessary actions including: conducting additional internal investigation; engaging third-party forensic experts; updating our defenses; and involving senior management. We have established, and continue to establish on an ongoing basis, defenses to identify and mitigate these cyber-attacks and, to date, we have not experienced any material disruption to our operations due to a cyber-attack. Cyber-attacks resulting in loss, unauthorized access to, or misuse of confidential or personal information could disrupt our operations, damage our reputation, and expose us to claims from customers, financial institutions, regulators, employees and other persons, any of which could have an adverse effect on our business, financial condition and results of operations.
In addition to our vendors, other third parties with whom we do business or that facilitate our business activities (e.g., GSEs, transaction counterparties and financial intermediaries) could also be sources of cybersecurity risk to us, including with respect to breakdowns or failures of their systems, misconduct by the employees of such parties, or cyber-attacks, which could affect their ability to deliver a product or service to us or result in lost or compromised information of us or our consumers. We work with our vendors and other third parties with whom we do business, to enhance our defenses and improve resiliency to cybersecurity threats. Systems failures could result in reputational damage to our business and cause us to incur significant costs and third-party liability, and this could adversely affect our business, financial condition and results of operations.

112


Off-Balance Sheet Arrangements
We have certain off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, revenues and expenses, results of operations, liquidity, capital expenditures or capital resources.
We have exposure to representations and warranties obligations as a result of our loan sales activities. If it is determined that loans sold are in breach of these representations or warranties and we are unable to cure such breach, we generally have an obligation to either repurchase the loan for the unpaid principal balance, accrued interest, and related advances, and in any event, we must indemnify the purchaser of the loans for certain losses and expenses incurred by such purchaser in connection with such breach. Our credit loss may be reduced by any recourse we have to correspondent lenders that, in turn, have sold such residential loans to us and breached similar or other representations and warranties. We record an estimate of the liability associated with our representations and warranties exposure on our consolidated balance sheets. Refer to Notes 4 and 12 to the Consolidated Financial Statements for the financial effect of these arrangements and to the Liquidity and Capital Resources section for additional information.
We have a variable interest in WCO, which provided financing to us from 2014 to 2016 through the sale of excess servicing spreads and servicing rights. In addition, we performed subservicing for WCO through 2016. Refer to Notes 7 and 14 to the Consolidated Financial Statements for additional information on servicing activities and transactions with WCO. We also have other variable interests in other entities that we do not consolidate as we have determined we are not the primary beneficiary. Included in Note 7 to the Consolidated Financial Statements of our Annual Report on Form 10-K/A for the year ended December 31, 2016 are descriptions of our variable interests in VIEs that we do not consolidate as we have determined that we are not the primary beneficiary of such VIEs.
Critical Accounting Estimates
The critical accounting estimates used in preparation of our Consolidated Financial Statements are described in the Critical Accounting Estimates section of Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K/A for the year ended December 31, 2016 filed with the SEC on August 9, 2017. There have been no material changes to our critical accounting policies or estimates and the methodologies or assumptions we apply under them.


113


Glossary of Terms
This Glossary of Terms includes acronyms and defined terms that are used throughout this Quarterly Report on Form 10-Q.
2013 Credit Agreement
Credit agreement entered into on December 19, 2013 among the Company, Credit Suisse AG, as administrative agent and collateral agent, the lenders from time to time party thereto and other parties thereto
2013 Revolver
Senior secured revolving credit facility entered into on December 19, 2013, as amended
2013 Term Loan
Senior secured first lien term loan entered into on December 19, 2013, as amended
2013 Secured Credit Facilities
2013 Term Loan and 2013 Revolver, collectively
Adjusted EBITDA
Adjusted earnings before interest, taxes, depreciation and amortization, a non-GAAP financial measure; refer to Non-GAAP Financial Measures section under Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for a complete description of this metric, including how management uses this non-GAAP financial measure and some of the important limitations of this non-GAAP financial measure as an analytical tool
Adjusted Earnings (Loss)
Adjusted earnings or loss before taxes, a non-GAAP financial measure; refer to Non-GAAP Financial Measures section under Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for a complete description of this metric, including how management uses this non-GAAP financial measure and some of the important limitations of this non-GAAP financial measure as an analytical tool
Assurant
Assurant, Inc.
Bankruptcy Code
Title 11 of the United States Code
Borrowers
Borrowers under residential mortgage loans and installment obligors under residential retail installment agreements
Bps
Basis points
Bulk MSR
Bulk MSR as defined under the 2013 Credit Agreement
CCR
Corporate credit rating
CFPB
Consumer Financial Protection Bureau
Charged-off loans
Defaulted consumer and residential loans acquired by the Company at substantial discounts to face value acquired during 2014, which are also referred to as post charge-off deficiency balances
Coal Acquisition
Warrior Met Coal, LLC (f/k/a Coal Acquisition LLC)
Code
Internal Revenue Code of 1986, as amended
Computershare
Computershare Trust Company, N.A., as Rights Agent to the Rights Agreement
Consenting Term Lenders
Lenders holding, as of July 31, 2017, more than 50% of the loans and/or commitments outstanding under the 2013 Credit Agreement
Consolidated Financial Statements
The consolidated financial statements of Walter Investment Management Corp. and its subsidiaries and the notes thereto included in Item 1 of this Form 10-Q
Convertible Notes
4.50% convertible senior subordinated notes due 2019 sold in a registered underwritten public offering on October 23, 2012
Credit Agreement Waiver
Waiver to Amended and Restated Credit Agreement, dated as of July 31, 2017, by and among the Company and the lenders listed on the signature page thereto, constituting the Required Lenders
Distribution taxes
Taxes imposed on Walter Energy or a Walter Energy shareholder as a result of the potential determination that the Company's spin-off from Walter Energy was not tax-free pursuant to Section 355 of the Code
Ditech Financial
Ditech Financial LLC, formerly Green Tree Servicing LLC, an indirect wholly-owned subsidiary of the Company
Ditech Mortgage Corp
Formerly an indirect wholly-owned subsidiary of the Company; Ditech Mortgage Corp and DT Holdings LLC were merged with and into Green Tree Servicing LLC, with Green Tree Servicing LLC continuing as the surviving entity, which was renamed Ditech Financial LLC
EBITDA
Earnings before interest, taxes, depreciation, and amortization

114


Early Advance Reimbursement
Agreement
Financing facility between Ditech Financial and Fannie Mae
ECOA
Equal Credit Opportunity Act
EFTA
Electronic Fund Transfer Act
Excess Cash Flow
Excess Cash Flow as defined under the 2013 Credit Agreement
Exchange Act
Securities Exchange Act of 1934, as amended
Exchange Notes
New issue of registered notes with identical terms of the Company's $575 million aggregate principal amount of 7.875% Senior Notes due 2021, except that they will not be subject to certain restrictions on transfer
Fannie Mae
Federal National Mortgage Association
FASB
Financial Accounting Standards Board
FCRA
Fair Credit Reporting Act
FHA
Federal Housing Administration
FHFA
Federal Housing Finance Agency
Forward sales commitments
Forward sales of agency to-be-announced securities, a freestanding derivative financial instrument
Freddie Mac
Federal Home Loan Mortgage Corporation
FTC
Federal Trade Commission
GAAP
United States Generally Accepted Accounting Principles
Ginnie Mae
Government National Mortgage Association
GMBS
Government National Mortgage Association mortgage-backed securities
Green Tree Servicing
Green Tree Servicing LLC; former name of Ditech Financial. Ditech Mortgage Corp and DT Holdings LLC were merged with and into Green Tree Servicing LLC, with Green Tree Servicing LLC continuing as the surviving entity, which was renamed Ditech Financial LLC
GSE
Government-sponsored entity
GTAAFT Facility
Green Tree Agency Advance Funding Trust financing facility
GTIM
Green Tree Investment Management, LLC, an indirect wholly-owned subsidiary of the Company
HAMP
Home Affordable Modification Program
HARP
Home Affordable Refinance Program
HECM
Home Equity Conversion Mortgage
HECM IDL
Home Equity Conversion Mortgage Initial Disbursement Limit
HELOC
Home equity line of credit
HLTV
High loan-to-value
HMBS
Home Equity Conversion Mortgage-Backed Securities
HUD
U.S. Department of Housing and Urban Development
Interest Coverage Ratio
Interest Coverage Ratio as defined under the 2013 Credit Agreement
IRLC
Interest rate lock commitment, a freestanding derivative financial instrument
IRS
Internal Revenue Service
"Know Before You Owe"
mortgage disclosure rule
Mortgage disclosure rule amending Regulation X of RESPA and Regulation Z of TILA to integrate certain mortgage loan disclosure forms and requirements, which became effective October 3, 2015

115


Lender-placed
Also referred to as "force-placed" insurance is an insurance policy placed by a bank or mortgage servicer on a home when the homeowners’ own property insurance may have lapsed or where the bank deems the homeowners’ insurance insufficient
LIBOR
London Interbank Offered Rate
LOC
Letter of Credit
MBA
Mortgage Bankers Association
MBS
Mortgage-backed securities
MBS purchase commitments
Commitments to purchase mortgage-backed securities, a freestanding derivative financial instrument
Moody's
Moody's Investors Service Limited, a nationally recognized statistical rating organization designated by the SEC
Mortgage loans
Traditional mortgage loans and residential retail installment agreements, which include manufactured housing loans as well as consumer loans
MSP
A mortgage and consumer loan servicing platform licensed from Black Knight Financial Services, LLC
MSR
Mortgage servicing rights
N/A
Not applicable
Net realizable value
Fair value less cost to sell
n/m
Not meaningful
Non-Residual Trusts
Securitization trusts that the Company consolidates and in which the Company does not hold residual interests
NRM
New Residential Mortgage LLC, a wholly owned subsidiary of New Residential Investment Corp., a Delaware Corporation
NYSE
New York Stock Exchange    
OTS
Office of Thrift Supervision
Parent Company
Walter Investment Management Corp.
Requisite Senior Notes Threshold
Senior Noteholders holding at least 66 2/3% of the aggregate outstanding principal amount of the Senior Notes
REO
Real estate owned
Residential loans
Residential mortgage loans, including traditional mortgage loans, reverse mortgage loans and residential retail installment agreements, which include manufactured housing loans as well as consumer loans
Residual Trusts
Securitization trusts that the Company consolidates and in which it holds a residual interest
RESPA
Real Estate Settlement Procedures Act
Restructuring Support Agreement
Restructuring Support Agreement, dated as of July 31, 2017, by and among Walter Investment Management Corp. and the Consenting Term Lenders
Reverse loans
Reverse mortgage loans, including HECMs
Rights Agreement
The Amended and Restated Section 382 Rights Agreement, dated as of November 11, 2016, which amends and restates the Rights Agreement, dated as of June 29, 2015, between Walter Investment Management Corp. and Computershare Trust Company, N.A., as Rights Agent, as previously amended by Amendment No. 1, dated as of November 16, 2015, Amendment No. 2, dated as of November 22, 2015, and Amendment No. 3, dated as of June 28, 2016
RMS
Reverse Mortgage Solutions, Inc., an indirect wholly-owned subsidiary of the Company
RSA
Restructuring Support Agreement
SEC
U.S. Securities and Exchange Commission
Section 382
Section 382 of the Internal Revenue Code
Securities Act
Securities Act of 1933, as amended
Senior Notes
$575 million aggregate principal amount of 7.875% senior notes due 2021 issued on December 17, 2013

116


Senior Notes Indenture
Indenture for the 7.875% Senior Notes due 2021 dated as of December 17, 2013 among the Company, the guarantors and Wilmington Savings Fund Society, FSB, as successor trustee
S&P
Standard and Poor's Ratings Services, a nationally recognized statistical rating organization designated by the SEC
Tails
Participations in previously securitized HECMs created by additions to principal for borrower draws on lines of credit, interest, servicing fees, and mortgage insurance premiums
TBAs
To-be-announced securities
TCPA
Telephone Consumer Protection Act
Third Amendment
Third amendment to the 2013 Credit Agreement made on July 31, 2017
TILA
Truth in Lending Act
Total Leverage Ratio
Total Leverage Ratio as defined under the 2013 Credit Agreement
Total Net Leverage Ratio
Total Net Leverage Ratio as defined under the 2013 Credit Agreement
UPB
Unpaid principal balance
U.S.
United States of America
U.S. Treasury
U.S. Department of the Treasury
USDA
United States Department of Agriculture
VA
United States Department of Veteran Affairs
VIE
Variable interest entity
Walter Energy
Walter Energy, Inc.
Walter Energy Asset Purchase
Agreement
Stalking horse asset purchase agreement entered into by Walter Energy, together with certain of its subsidiaries, and Coal Acquisition on November 5, 2015 and amended and restated on March 31, 2016
Warehouse borrowings
Borrowings under master repurchase agreements
WCO
Walter Capital Opportunity Corp. and its consolidated subsidiaries

117


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We seek to manage the risks inherent in our business — including, but not limited to, credit risk, liquidity risk, real estate market risk, and interest rate risk — in a prudent manner designed to enhance our earnings and preserve our capital. In general, we seek to assume risks that can be quantified from historical experience, to actively manage such risks, and to maintain capital levels consistent with these risks. For information regarding our credit risk, real estate market risk and liquidity risk, refer to the Credit Risk, Real Estate Market Risk and Liquidity and Capital Resources sections under Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Interest Rate Risk
Interest rate risk is the risk of loss of future earnings or fair value due to changes in interest rates. Our principal market exposure associated with interest rate risk relates to changes in long-term U.S. Treasury and mortgage interest rates and LIBOR.
We provide sensitivity analysis surrounding changes in interest rates in the Servicing, Originations and Reverse Mortgage Segments and Other Financial Instruments sections below. However, there are certain limitations inherent in any sensitivity analysis, 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.
Servicing, Originations and Reverse Mortgage Segments
Sensitivity Analysis
The following tables summarize the estimated change in the fair value of certain assets and liabilities given hypothetical instantaneous parallel shifts in the interest rate yield curve (in thousands):
 
June 30, 2017
 
Down 50 bps
 
Down 25 bps
 
Up 25 bps
 
Up 50 bps
Servicing segment
 
 
 
 
 
 
 
Servicing rights carried at fair value
$
(137,108
)
 
$
(58,178
)
 
$
44,042

 
$
81,121

Net change in fair value - Servicing segment
$
(137,108
)
 
$
(58,178
)
 
$
44,042

 
$
81,121

 
 
 
 
 
 
 
 
Originations segment
 
 
 
 
 
 
 
Residential loans held for sale
$
15,580

 
$
8,653

 
$
(10,356
)
 
$
(21,845
)
Freestanding derivatives (1)
(17,797
)
 
(9,511
)
 
10,492

 
22,641

Net change in fair value - Originations segment
$
(2,217
)
 
$
(858
)
 
$
136

 
$
796

 
 
 
 
 
 
 
 
Reverse Mortgage segment
 
 
 
 
 
 
 
Reverse loans
$
91,754

 
$
45,473

 
$
(44,726
)
 
$
(88,708
)
HMBS related obligations
(75,186
)
 
(37,338
)
 
36,860

 
73,234

Net change in fair value - Reverse Mortgage segment
$
16,568

 
$
8,135

 
$
(7,866
)
 
$
(15,474
)

118


 
December 31, 2016
 
Down 50 bps
 
Down 25 bps
 
Up 25 bps
 
Up 50 bps
Servicing segment
 
 
 
 
 
 
 
Servicing rights carried at fair value
$
(115,168
)
 
$
(51,147
)
 
$
41,295

 
$
76,804

Net change in fair value - Servicing segment
$
(115,168
)
 
$
(51,147
)
 
$
41,295

 
$
76,804

 
 
 
 
 
 
 
 
Originations segment
 
 
 
 
 
 
 
Residential loans held for sale
$
21,851

 
$
12,410

 
$
(14,099
)
 
$
(29,869
)
Freestanding derivatives (1)
(28,898
)
 
(15,606
)
 
14,949

 
30,292

Net change in fair value - Originations segment
$
(7,047
)
 
$
(3,196
)
 
$
850

 
$
423

 
 
 
 
 
 
 
 
Reverse Mortgage segment
 
 
 
 
 
 
 
Reverse loans
$
110,485

 
$
54,754

 
$
(53,822
)
 
$
(106,714
)
HMBS related obligations
(90,327
)
 
(44,867
)
 
44,287

 
87,983

Net change in fair value - Reverse Mortgage segment
$
20,158

 
$
9,887

 
$
(9,535
)
 
$
(18,731
)
__________
(1)
Consists of IRLCs, forward sales commitments and MBS purchase commitments.
We used June 30, 2017 and December 31, 2016 market rates on our instruments to perform the sensitivity analysis. These sensitivities measure the potential impact on fair value, are hypothetical, and presented for illustrative purposes only. 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 complex market reactions that normally would arise from the market shifts modeled. 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. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor can have an effect on other factors (i.e., a decrease in total prepayment speeds may result in an increase in credit losses), which could impact the above hypothetical effects.
Servicing Rights Carried at Fair Value
Servicing rights carried at fair value are subject to prepayment risk as the mortgage loans underlying the servicing rights permit the borrowers to prepay the loans. Consequently, the value of these servicing rights generally tend to diminish in periods of declining interest rates (as prepayments increase) and tend to increase in periods of rising interest rates (as prepayments decrease). This analysis ignores the impact of changes on certain material variables, such as non-parallel shifts in interest rates, or changing consumer behavior to incremental changes in interest rates.
Although the level of interest rates is a key driver of prepayment activity, there are other factors that influence prepayments, including home prices, underwriting standards, availability of government-sponsored refinance programs and other product characteristics. Since our Originations segment’s results of operations are positively impacted when interest rates decline, our Originations segment’s results of operations may partially offset the change in fair value of servicing rights over time. The interaction between the results of operations of these activities is a core component of our overall interest rate risk assessment. We take into account the estimated benefit of originations on our Originations segment’s results of operations to determine the impact on net economic value from a decline in interest rates, and we continuously assess our ability to replenish lost value of servicing rights and cash flow due to increased prepayments. We do not currently use derivative instruments to hedge the interest rate risk inherent in the value of servicing rights, but we may choose to use such instruments in the future. The amount and composition of derivatives used to hedge the value of servicing rights, if any, will depend on the exposure to loss of value on the servicing rights, the expected cost of the derivatives, expected liquidity needs, and the expected increase to earnings generated by the origination of new loans resulting from the decline in interest rates. The servicing rights carried at fair value sensitivity to interest rate changes has remained relatively consistent at June 30, 2017 as compared to December 31, 2016.

119


Residential Loans Held for Sale and Related Freestanding Derivatives
We are subject to interest rate risk and price risk on mortgage loans held for sale during the short time from the loan funding date until the date the loan is sold into the secondary market. Interest rate lock commitments represent an agreement to extend credit to a mortgage loan applicant or to purchase loans from a third-party originator, collectively referred to as IRLC, whereby the interest rate of the loan is set prior to funding or purchase. IRLCs, which are considered freestanding derivatives, are subject to interest rate risk and related price risk during the period from the date of the commitment through the loan funding date or expiration date. Loan commitments generally range from 35 to 50 days from lock to funding of the mortgage loan and our holding period from funding to sale is an average of approximately 20 days.
An integral component of our interest rate risk management strategy is our use of freestanding derivative instruments to minimize significant fluctuations in earnings caused by changes in interest rates that affect the value of our IRLCs and mortgage loans held for sale. The derivatives utilized to hedge the interest rate risk are forward sales commitments, which are forward sales of agency TBAs. These TBAs are primarily used to fix the forward sales price that will be realized upon the sale of the mortgage loans into the secondary market. We also enter into commitments to purchase MBS as part of our overall hedging strategy.
Reverse Loans and HMBS Related Obligations
We are subject to interest rate risk on our reverse loans and HMBS related obligations as a result of different expected cash flows and longer expected durations for loans as compared to HMBS related obligations. Our reverse loans have longer durations primarily as a result of our obligations as issuer of HMBS, which include the requirement to purchase loans out of the Ginnie Mae securitization pools once the outstanding principal balance of the related HECM is equal to or greater than 98% of the maximum claim amount.
Other Financial Instruments
For quantitative and qualitative disclosures about interest rate risk on other financial instruments, refer to Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk of our Annual Report on Form 10-K/A for the year ended December 31, 2016 filed with the SEC on August 9, 2017. These risks have not changed materially since December 31, 2016.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the Company's reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of June 30, 2017.
The Company previously identified material weaknesses in internal control over financial reporting that were described in Management’s Report on Internal Control Over Financial Reporting which were included in the Company’s Form 10-K/A for the year ended December 31, 2016 together with various corrective actions that are being undertaken in order to remediate the material weaknesses. However, because these remedial actions are not yet complete and have not yet been tested, the Company has not been able to conclude that these material weaknesses have been remediated. Therefore, the Company’s Chief Executive Officer and its Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) is accumulated and communicated to the Company’s management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting
Other than with respect to the remediation efforts outlined below, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2017 covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

120


Remediation of the Material Weaknesses in Internal Control Over Financial Reporting
During the fourth quarter of 2016, the Company began placing new leadership throughout Ditech Financial to strengthen operations and improve oversight of controls and processes throughout the business. During 2017, Management’s emphasis will be to design and implement certain remediation measures to address the material weaknesses and enhance the Company’s internal control over financial reporting. Management, with the oversight of our Audit Committee, expects to take the following actions to improve the design and operating effectiveness of our internal control over financial reporting in order to remediate the material weaknesses, for Ditech Financial operational processes and over the deferred tax asset valuation allowance, respectively:
Ditech Financial operational processes:
•
Management will design, document, and implement control procedures related to the review of foreclosure liens, foreclosure related advance coding, and bankruptcy plans.
•
Management will test and evaluate the design and operating effectiveness of control procedures throughout the default servicing function.
•
Management will assess the effectiveness of the remediation plan.
Deferred tax asset valuation allowance:
•
Management will enhance the key control over the review of the calculation of the deferred tax asset valuation allowances in accordance with GAAP.
•
Management will supplement its current tax professionals with personnel who have expertise in accounting for deferred tax asset valuation allowances and/or will augment the internal review procedures to include consultation and external review procedures over the quarterly and annual income tax calculations that are used to determine the deferred tax asset valuation, as applicable.
Management intends to implement the remediation measures outlined above, relating to default servicing and deferred tax asset valuation allowance, respectively, with an expected completion date of no later than December 31, 2017. Management believes the remediation measures will strengthen the Company's internal control over financial reporting and remediate the material weaknesses identified. Management utilized third-party tax advisors for the three and six months ended June 30, 2017 and expects to continue to utilize these third-party tax advisors in subsequent filing periods as needed. If management is unsuccessful in fully implementing the new controls to address the material weaknesses and to strengthen the overall internal control environment, our financial condition and results of operations may result in inaccurate and untimely reporting. Management will continue to monitor the effectiveness of these remediation measures and will make any changes and take such other actions that management deems appropriate given the circumstances.



121


PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are, and expect that, from time to time, we will continue to be, involved in litigation, arbitration, examinations, inquiries, investigations and claims. These include pending examinations, inquiries and investigations by governmental and regulatory agencies, including but not limited to the SEC, state attorneys general and other state regulators, Offices of the U.S. Trustees and the CFPB, into whether certain of our residential loan servicing and originations practices, bankruptcy practices and other aspects of its business comply with applicable laws and regulatory requirements.
From time to time, we have received and may in the future receive subpoenas and other information requests from federal and state governmental and regulatory agencies that are examining or investigating us. We cannot provide any assurance as to the outcome of these exams or investigations or that such outcomes will not have a material adverse effect on our reputation, business, prospects, results of operations, liquidity or financial condition.
RMS received a subpoena dated June 16, 2016 from the Office of Inspector General of HUD requiring RMS to produce documents and other materials relating to, among other things, the origination, underwriting and appraisal of reverse mortgages for the time period since January 1, 2005. RMS also received a subpoena from the Office of Inspector General of HUD dated January 12, 2017 requesting certain documents and information relating to the origination and underwriting of certain specified loans. This investigation, which is being conducted in coordination with the U.S. Department of Justice, Civil Division, could lead to a demand or claim under the False Claims Act, which allows for penalties and treble damages, or other statutes.
On July 27, 2016, RMS received a letter from the New York Department of Financial Services requesting information on RMS's reverse mortgage servicing business in New York.
RMS received a subpoena dated March 30, 2017 from the Office of the Attorney General of the State of New York requiring RMS to produce documents and information relating to, among other things, the servicing of HECMs insured by the FHA during the period since January 1, 2012.
We are cooperating with these inquiries relating to RMS.
We have received various subpoenas for testimony and documents, motions for examinations pursuant to Federal Rule of Bankruptcy Procedure 2004, and other information requests from certain Offices of the U.S. Trustees, acting through trial counsel in various federal judicial districts, seeking information regarding an array of our policies, procedures and practices in servicing loans to borrowers who are in bankruptcy and our compliance with bankruptcy laws and rules. We have provided information in response to these subpoenas and requests and have met with representatives of certain Offices of the U.S. Trustees to discuss various issues that have arisen in the course of these inquiries, including our compliance with bankruptcy laws and rules. We cannot predict the outcome of the aforementioned proceedings and inquiries, which could result in requests for damages, fines, sanctions, or other remediation. We could face further legal proceedings in connection with these matters. We may seek to enter into one or more agreements to resolve these matters. Any such agreement may require us to pay fines or other amounts for alleged breaches of law and to change or otherwise remediate our business practices. Legal proceedings relating to these matters and the terms of any settlement agreement could have a material adverse effect on our reputation, business, prospects, results of operations, liquidity and financial condition.
Since mid-2014, we have received subpoenas for documents and other information requests from the offices of various state attorneys general who have, as a group and individually, been investigating our mortgage servicing practices. We have provided information in response to these subpoenas and requests and have had discussions with representatives of the states involved in the investigations to explain our practices. We cannot predict whether litigation or other legal proceedings will be commenced by, or an agreement will be reached with, one or more states in relation to these investigations. Any legal proceedings and any agreement resolving these matters could have a material adverse effect on our reputation, business, prospects, results of operation, liquidity and financial condition.

122


We are involved in litigation, including putative class actions, and other legal proceedings concerning, among other things, lender-placed insurance, private mortgage insurance, bankruptcy practices, employment practices, the Consumer Financial Protection Act, the Fair Debt Collection Practices Act, the TCPA, the Fair Credit Reporting Act, TILA, RESPA, EFTA, the ECOA, and other federal and state laws and statutes. In Sanford Buckles v. Green Tree Servicing LLC and Walter Investment Management Corporation, filed on August 18, 2015 in the U.S. District Court for the District of Nevada, Ditech Financial (the Parent Company has since been dismissed) is subject to a putative class action suit alleging that Ditech Financial, within the three years prior to the filing of the complaint, improperly recorded phone calls received from, and/or made to, persons in Nevada at the time of the call, and did so without their prior consent in violation of Nevada state law. The plaintiff in this suit, on behalf of himself and others similarly situated, seeks punitive damages, statutory penalties and attorneys’ fees. Ditech Financial moved to dismiss the complaint, and the court determined that the relevant issue is a question of Nevada law to be decided by the Nevada Supreme Court. Accordingly, further proceedings in the U.S. District Court are stayed pending a decision by the Nevada Supreme Court.
In Kamimura, Lee C. v. Green Tree Servicing LLC, filed on April 8, 2016 in the U.S. District Court for the District of Nevada, Ditech Financial is subject to a putative nationwide class action suit alleging FCRA violations by obtaining credit bureau information without a permissible purpose after the discharge of debt owed to Ditech Financial pursuant to Chapter 13 of the Bankruptcy Code. The plaintiff in this suit, on behalf of himself and others similarly situated, seeks actual and punitive damages, statutory penalties, and attorneys’ fees and litigation costs.
Ditech Financial is also subject to several putative class action suits alleging violations of the TCPA for placing phone calls to plaintiffs’ cell phones using an automatic telephone dialing system without their prior consent. The plaintiffs in these suits, on behalf of themselves and others similarly situated, seek statutory damages for both negligent and knowing or willful violations of the TCPA.
A federal securities fraud complaint was filed against the Company, George M. Awad, Denmar J. Dixon, Anthony N. Renzi, and Gary L. Tillett on March 16, 2017. The case, captioned Courtney Elkin, et al. vs. Walter Investment Management Corp., et al., Case No. 2:17-cv-202025-AB, is pending in the Eastern District of Pennsylvania. The complaint seeks monetary damages and asserts claims under Sections 10(b) and 20(a) of the Exchange Act. The complaint alleges (i) that the defendants made materially false and misleading statements and omissions about our internal controls over financial reporting related to Ditech Financial, (ii) that these statements artificially inflated the price of the Company’s common stock, and (iii) that when the Company disclosed that it discovered a material weakness in its internal controls on March 14, 2017, the Company’s stockholders suffered losses because the price of the Company’s common stock dropped by approximately 38% or $1.30 per share. The court has appointed a lead plaintiff in the action who may file an amended complaint no later than August 18, 2017.
A stockholder derivative complaint purporting to assert claims on behalf of the Company was filed against the current members of the Company’s Board of Directors on June 22, 2017. The case, captioned Michael E. Vacek, Jr., et al. vs. George M. Awad, et. al, Case No. 2:17-cv-02820-AB, is pending in the Eastern District of Pennsylvania. The complaint seeks monetary damages for the Company and equitable relief and asserts a claim for breach of fiduciary duty arising out of the Company’s alleged failure to disclose that: (i) the Company was involved in fraudulent practices that violated the False Claims Act; (ii) Ditech Financial had a material weakness in its internal controls over financial reporting; (iii) the Company had a material weakness relating to the ineffective review of the tax calculations associated with the valuation allowance on deferred tax asset balances; and (iv) the Company lacked adequate internal controls over financial reporting.
The outcome of all of our regulatory matters, litigations and other legal proceedings (including putative class actions) is uncertain, and it is possible that adverse results in such proceedings (which could include restitution, penalties, punitive damages and injunctive relief affecting our business practices) and the terms of any settlements of such proceedings could, individually or in the aggregate, have a material adverse effect on our reputation, business, prospects, results of operations, liquidity or financial condition. In addition, governmental and regulatory agency examinations, inquiries and investigations may result in the commencement of lawsuits or other proceedings against us or our personnel. Although we have historically been able to resolve the preponderance of our ordinary course litigations on terms we considered acceptable and individually not material, this pattern may not continue and, in any event, individual cases could have unexpected materially adverse outcomes, requiring payments or other expenses in excess of amounts already accrued. Certain of the litigations against us include claims for substantial compensatory, punitive and/or statutory damages, and in many cases the claims involve indeterminate damages. In some cases, including in some putative class actions, there could be fines or other damages for each separate instance in which a violation occurred. Certification of a class, particularly in such cases, could substantially increase our exposure to damages. We cannot predict whether or how any legal proceeding will affect our business relationship with actual or potential customers, our creditors, rating agencies and others. In addition, cooperating in, defending and resolving these legal proceedings consume significant amounts of management time and attention and could cause us to incur substantial legal, consulting and other expenses and to change our business practices, even in cases where there is no determination that our conduct failed to meet applicable legal or regulatory requirements.
For a description of certain legal proceedings, please see Note 12 to the Consolidated Financial Statements.

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ITEM 1A. RISK FACTORS
You should carefully review and consider the risks and uncertainties described under the caption "Risk Factors" in our Annual Report on Form 10-K/A for the year ended December 31, 2016 and our Quarterly Report on Form 10-Q/A for the quarterly period ended March 31, 2017, which are risks and uncertainties that could materially adversely affect our business, prospects, financial condition, cash flows, liquidity and results of operations, our ability to pay dividends to our stockholders and/or our stock price. In addition, to the extent that any of the information contained in this report or in the aforementioned periodic report constitute forward-looking information, the risk factors set forth below are cautionary statements identifying important factors that could cause our actual results for various financial reporting periods to differ materially from those expressed in any forward-looking statements made by or on our behalf.
Risks Related to our Business
If we fail to regain and maintain compliance with the continued listing standards of the NYSE, it may result in the delisting of our common stock from the NYSE and have other negative implications under our material agreements with lenders and counterparties.
Our common shares are currently and have been listed for trading on the NYSE, and the continued listing of our common shares on the NYSE is subject to our compliance with a number of listing standards. To maintain compliance with these continued listing standards, the Company is required, among other things, to maintain an average closing price per share of $1.00 or more over a consecutive 30 trading-day period. On July 13, 2017, we received written notification from the NYSE that the average closing price of our common stock had fallen below $1.00 per share over a consecutive 30 trading-day period as of July 10, 2017, and, as a result, the average closing price per share of our common stock was below the minimum average closing price required to maintain listing on the NYSE. We have notified the NYSE of our intent to cure this noncompliance and are considering various options we may take in an effort to cure this deficiency and regain compliance. Additionally, as of the date we file this report, we will be considered to be below compliance with another NYSE continued listing standard because the Company's average global market capitalization over a consecutive 30 trading-day period has fallen below $50.0 million at the same time our stockholders' equity is less than $50.0 million.
In addition, our common stock could be delisted if the trading price of our common stock on the NYSE is abnormally low, which has generally been interpreted to mean at levels below $0.16 per share, or if our average market capitalization over a consecutive 30 day-trading period is less than $15 million. In these events, we would not have an opportunity to cure the deficiency, and our shares would be delisted immediately and suspended from trading on the NYSE.
If we are unable to cure any event of noncompliance with any continued listing standard of the NYSE within the applicable timeframe and other parameters set forth by the NYSE, or if we fail to maintain compliance with certain continued listing standards that do not provide for a cure period, it will result in the delisting of our common stock from the NYSE, which could negatively impact the trading price, trading volume and liquidity of, and have other material adverse effects on, our common stock. If our common stock is delisted from the NYSE, this could also have negative implications on our business relationships under our material agreements with lenders and other counterparties. If our common stock is delisted from the NYSE, it would constitute a fundamental change as that term is defined under the terms of the Convertible Notes, and require, among other things, that we take steps to make an offer to repay the Convertible Notes at 100% of the principal amount thereof. We currently are not permitted to make such an offer pursuant to the terms of certain of our debt facilities and agreements. If our common stock is delisted from the NYSE and we are not able to satisfy this repurchase obligation, it would constitute an event of default under the indenture governing the Convertible Notes and result in a cross default under certain of our other debt agreements. In such event, the holders of 25% in aggregate principal amount outstanding of the Convertible Notes will have the right to accelerate such indebtedness. Lenders under the 2013 Credit Agreement and under the warehouse facilities would similarly be able to accelerate the indebtedness thereunder if we are unable to fulfill such obligations and if indebtedness in excess of $75.0 million in the aggregate were so accelerated, holders of the Senior Notes could similarly accelerate the Senior Notes indebtedness. Each of these occurrences, individually or in the aggregate, could have a material adverse effect on our business, results of operations, financial condition, liquidity and stock price.

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Risks Related to our Proposed Restructuring
The Restructuring Support Agreement is subject to significant conditions and milestones that may be beyond our control and may be difficult for us to satisfy. If the Restructuring Support Agreement is terminated, our ability to consummate a restructuring of our debt could be materially and adversely affected.
The Restructuring Support Agreement sets forth certain conditions we must satisfy, including seeking to negotiate a restructuring support agreement with at least 66 2/3% of the Senior Noteholders and the timely satisfaction of conditions and milestones to consummate the restructuring. Our ability to timely satisfy such conditions and milestones is subject to risks and uncertainties that, in certain instances, are beyond our control, including whether we receive the requisite level of participation from each of the holders of the 2013 Term Loan, Senior Notes and Convertible Notes to consummate the transactions contemplated by the Restructuring Support Agreement. The Restructuring Support Agreement gives the Consenting Term Lenders the ability to terminate the Restructuring Support Agreement under certain circumstances, including the failure of certain conditions or milestones to be satisfied. Should the Restructuring Support Agreement be terminated, all obligations of the parties to the Restructuring Support Agreement will terminate (except as expressly provided in the Restructuring Support Agreement). A termination of the Restructuring Support Agreement may result in the loss of support for a restructuring and our ability to effect a restructuring in the future could be materially and adversely affected.
In the event we pursue the in-court restructuring and file for relief under the Bankruptcy Code, we may be subject to the risks and uncertainties associated with Chapter 11 proceedings.
The terms of the Restructuring Support Agreement provide that in the absence of sufficient stakeholder support for the out-of-court restructuring and subject to certain other conditions, the parties thereto will implement the proposed financial restructuring through a prepackaged plan of reorganization under Chapter 11 of the Bankruptcy Code. In the event we pursue the in-court restructuring and file for relief under the Bankruptcy Code, our operations, our ability to develop and execute our business plan and our continuation as a going concern will be subject to the risks and uncertainties associated with bankruptcy proceedings, including, among others: the high costs of bankruptcy proceedings and related fees; our ability to obtain sufficient financing to allow us to emerge from bankruptcy and execute our business plan post-emergence, and our ability to comply with terms and conditions of that financing; our ability to maintain our relationships with our lenders, counterparties, employees and other third parties; our ability to maintain contracts that are critical to our operations on reasonably acceptable terms and conditions; the ability of third parties to use certain limited safe harbor provisions of the Bankruptcy Code to terminate contracts without first seeking bankruptcy court approval; and the actions and decisions of our creditors and other third parties who have interests in our Chapter 11 proceedings that may be inconsistent with our operational and strategic plans.
The Consolidated Financial Statements included herein contain disclosures that express substantial doubt about our ability to continue as a going concern due to the possibility that we may implement a prepackaged plan of reorganization under Chapter 11 of the Bankruptcy Code.
As set forth in the Restructuring Support Agreement, the parties thereto have agreed to, among other things, the principal terms of a proposed financial restructuring of the Company, which will be implemented through an out-of-court restructuring and, in the absence of sufficient stakeholder support for an out-of-court restructuring, a prepackaged plan of reorganization under Chapter 11 of the Bankruptcy Code. The potential for a prepackaged Chapter 11 filing raises substantial doubt about the Company’s ability to continue as a going concern. The Company’s consolidated financial statements have been prepared assuming the Company will continue as a going concern, and management has concluded that while there can be no assurance that the Company’s recent and future actions will be successful in mitigating the various risks and uncertainties to which the Company is currently subject, the Company’s current plans provide enough liquidity to meet its obligations over the next twelve months from the date of issuance of the Consolidated Financial Statements. The Company will continue to monitor progress on its debt restructuring initiatives and the impact on its ongoing assessment of going concern in future periods.

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We may not be able to obtain sufficient stakeholder support for the transactions contemplated by the Restructuring Support Agreement.
There can be no assurance that the proposed financial restructuring of the Company as contemplated in the Restructuring Support Agreement will receive the necessary level of support to be implemented either through an out-of-court restructuring or an in-court-restructuring. The success of any restructuring will depend on the willingness of existing creditors to agree to the exchange or modification of their claims, and if applicable, approval by the bankruptcy court, and there can be no guarantee of success with respect to those matters. We may receive objections to the terms of the transactions contemplated by the Restructuring Support Agreement, including objection to the confirmation of any plan of reorganization from various stakeholders in any Chapter 11 proceedings. We cannot predict the impact that any objection or third party motion may have on a bankruptcy court’s decision to confirm a plan of reorganization or our ability to complete an in-court restructuring as contemplated by the Restructuring Support Agreement or otherwise. Any objection may cause us to devote significant resources in response which could materially and adversely affect our business, financial condition and results of operations.
The pursuit of the Restructuring Support Agreement has consumed, and compliance with the terms thereof will consume, a substantial portion of the time and attention of our management, which may have an adverse effect on our business and results of operations.
It is impossible to predict with certainty the amount of time and resources necessary to successfully implement the restructuring contemplated by the Restructuring Support Agreement, particularly if we must proceed with an in-court restructuring. Compliance with the terms of the Restructuring Support Agreement will involve additional expense and our management will be required to spend a significant amount of time and effort focusing on the proposed transactions. This diversion of attention may materially adversely affect the conduct of our business, and, as a result, our financial condition and results of operations.
Furthermore, loss of key personnel, significant employee attrition or material erosion of employee morale has negatively impacted and could have a material adverse effect on our ability to effectively conduct our business, and could impair our ability to execute our strategy and implement operational initiatives, thereby having a material adverse effect on our business and on our financial condition and results of operations.
If we are unable to effectuate a satisfactory debt restructuring transaction this could have a material adverse effect on the Company.
If the Company is unable to effectuate a satisfactory debt restructuring transaction, the adverse pressures the Company has recently experienced with respect to its:
•
relationships with counterparties and key stakeholders who are critical to its business;
•
ability to access the capital markets;
•
ability to execute on its operational and strategic goals;
•
ability to recruit and/or retain key personnel; and
•
business, prospects, results of operations and liquidity generally,

are expected to continue and potentially intensify, and could have a material adverse effect on the Company’s business, prospects, results of operations, liquidity and financial condition.
Even if the restructuring is consummated, we may not be able to achieve our stated goals and continue as a going concern.
Even if the debt restructuring is consummated, whether by means of the out-of-court restructuring or in-court restructuring, we will continue to face a number of risks, including our ability to reduce expenses, return our servicing and originations businesses to sustained profitability, implement our strategic initiatives, including those related to our “core” and “non-core” framework and generally maintain favorable relationships with and secure the confidence of our counterparties. Accordingly, we cannot guarantee that the proposed financial restructuring will achieve our stated goals nor can we give any assurance of our ability to continue as a going concern.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
a)
Not applicable.
b)
Not applicable.
c)
Not applicable.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The Index to Exhibits, which appears immediately following the signature page below, is incorporated by reference herein.

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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.

 
 
WALTER INVESTMENT MANAGEMENT CORP.
 
 
 
 
 
Dated: August 9, 2017
 
By:
 
/s/ Anthony N. Renzi
 
 
 
 
Anthony N. Renzi
 
 
 
 
Chief Executive Officer and President
(Principal Executive Officer)
 
 
 
 
 
Dated: August 9, 2017
 
By:
 
/s/ Gary L. Tillett
 
 
 
 
Gary L. Tillett
 
 
 
 
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
 

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INDEX TO EXHIBITS
Exhibit No.
 
Note
 
Description
 
 
 
 
 
4.1
 
(1)
 
Agreement of Resignation, Appointment and Acceptance, dated as of July 14, 2017 by and among Walter Investment Management Corp., Wilmington Savings Fund Society, FSB and Wells Fargo Bank, National Association
 
 
 
 
 
10.1
 
(1)
 
Employment Letter Agreement between Walter Investment Management Corp. and Jeffrey Baker, dated May 24, 2017.
 
 
 
 
 
10.2
 
 
 
Reserved.
 
 
 
 
 
10.3.1
 
(1)
 
Amended and Restated Master Repurchase Agreement, dated May 22, 2017, among Barclays Bank PLC, as Purchaser and Agent, Reverse Mortgage Solutions, Inc., as a Seller and RMS REO BRC, LLC, as a Seller.
 
 
 
 
 
10.3.2
 
(1)
 
Amended and Restated Guaranty, dated May 22, 2017, by Walter Investment Management Corp., as Guarantor, and acknowledged and agreed by Barclays Bank PLC, as Agent and Purchaser.
 
 
 
 
 
10.3.3
 
(1)
 
Limited Waiver with respect to Amended and Restated Master Repurchase Agreement, dated as of May 29, 2017, among Reverse Mortgage Solutions, Inc., RMS REO BRC, LLC, Walter Investment Management Corp. and Barclays Bank PLC.
 
 
 
 
 
10.3.4
 
(1)
 
Limited Waiver with respect to Amended and Restated Master Repurchase Agreement, dated as of June 9, 2017, among Reverse Mortgage Solutions, Inc., RMS REO BRC, LLC, Walter Investment Management Corp. and Barclays Bank PLC.
 
 
 
 
 
10.3.5
 
(1)
 
Limited Waiver with respect to Amended and Restated Master Repurchase Agreement, dated as of July 7, 2017, among Reverse Mortgage Solutions, Inc., RMS REO BRC, LLC, Walter Investment Management Corp. and Barclays Bank PLC.
 
 
 
 
 
10.3.6
 
(1)
 
Limited Waiver with respect to Amended and Restated Master Repurchase Agreement, dated as of July 21, 2017, among Reverse Mortgage Solutions, Inc., RMS REO BRC, LLC, Walter Investment Management Corp. and Barclays Bank PLC.
 
 
 
 
 
10.4.1
 
(1)
 
Limited Waiver with respect to Amended and Restated Master Repurchase Agreements, dated as of May 29, 2017, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, Ditech Financial LLC, Reverse Mortgage Solutions, Inc., RMS REO CS, LLC and Walter Investment Management Corp.
 
 
 
 
 
10.4.2
 
(1)
 
Limited Waiver with respect to Amended and Restated Master Repurchase Agreements, dated as of June 9, 2017, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, Ditech Financial LLC, Reverse Mortgage Solutions, Inc., RMS REO CS, LLC and Walter Investment Management Corp.
 
 
 
 
 
10.4.3
 
(1)
 
Limited Waiver with respect to Amended and Restated Master Repurchase Agreements, dated as of July 7, 2017, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, Ditech Financial LLC, Reverse Mortgage Solutions, Inc., RMS REO CS, LLC and Walter Investment Management Corp.
 
 
 
 
 
10.4.4
 
(1)
 
Limited Waiver with respect to Amended and Restated Master Repurchase Agreements, dated as of July 21, 2017, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, Ditech Financial LLC, Reverse Mortgage Solutions, Inc., RMS REO CS, LLC and Walter Investment Management Corp.
 
 
 
 
 
10.5.1
 
(1)
 
 Limited Waiver with respect to Amended and Restated Receivables Loan Agreement, dated as of May 26, 2017, among Green Tree Advance Receivables II LLC, Ditech Financial LLC, Walter Investment Management Corp., and Wells Fargo Bank, National Association.
 
 
 
 
 
10.5.2
 
(1)
 
Limited Waiver with respect to Amended and Restated Receivables Loan Agreement, dated as of June 9, 2017, among Green Tree Advance Receivables II LLC, Ditech Financial LLC, Walter Investment Management Corp., and Wells Fargo Bank, National Association.
 
 
 
 
 
10.5.3
 
(1)
 
Limited Waiver with respect to Amended and Restated Receivables Loan Agreement, dated as of July 7, 2017, among Green Tree Advance Receivables II LLC, Ditech Financial LLC, Walter Investment Management Corp., and Wells Fargo Bank, National Association.
 
 
 
 
 
10.5.4
 
(1)
 
Limited Waiver with respect to Amended and Restated Receivables Loan Agreement, dated as of July 21, 2017, among Green Tree Advance Receivables II LLC, Ditech Financial LLC, Walter Investment Management Corp., and Wells Fargo Bank, National Association.
 
 
 
 
 
10.6.1
 
 
 
Restructuring Support Agreement, dated as of July 31, 2017, by and among Walter Investment Management Corp. and the Consenting Term Lenders (Incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 1, 2017).
 
 
 
 
 
10.6.2
 
(1)
 
First Amendment to Restructuring Support Agreement, dated as of August 2, 2017, by and among Walter Investment Management Corp. and the Consenting Term Lenders.
 
 
 
 
 
10.7.1
 
 
 
Credit Agreement Waiver, dated July 31, 2017, to that certain Amended and Restated Credit Agreement, dated as of December 19, 2013, by and among the Company, as the borrower, Credit Suisse AG, as administrative agent, and the lenders party thereto (Incorporated herein by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 1, 2017).
 
 
 
 
 
10.7.2
 
(1)
 
Amendment No. 3 to the Credit Agreement, dated July 31, 2017, to that certain Amended and Restated Credit Agreement, dated as of December 19, 2013, by and among the Company, as the borrower, Credit Suisse AG, as administrative agent, and the lenders party thereto.
 
 
 
 
 

129


Exhibit No.
 
Note
 
Description
10.8
 
 
 
Consent of Beneficial Owners of Notes to Waiver of Default and Forbearance (Incorporated herein by reference to Exhibit 10.4 to the Registrant's Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 1, 2017).
 
 
 
 
 
31.1
 
(1)
 
Certification by Anthony N. Renzi pursuant to Securities Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
31.2
 
(1)
 
Certification by Gary L. Tillett pursuant to Securities Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
32
 
(1)
 
Certification by Anthony N. Renzi and Gary L. Tillett pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
101
 
(1)
 
XBRL (Extensible Business Reporting Language) — The following materials from Walter Investment Management Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, formatted in XBRL (Extensible Business Reporting Language); (i) Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016; (ii) Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2017 and 2016; (iii) Consolidated Statement of Stockholders’ Deficit for the six months ended June 30, 2017; (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016; and (v) Notes to Consolidated Financial Statements.
Note
 
Notes to Exhibit Index
 
 
 
(1)
 
Filed or furnished herewith.

130