Quarterly report pursuant to Section 13 or 15(d)

Servicing Activities

v3.21.2
Servicing Activities
 6 Months Ended
Jun. 30, 2021
Disclosures Pertaining to Servicing Assets and Servicing Liabilities [Abstract]  
Servicing Activities Servicing Activities
Mortgage Servicing Rights, at Fair Value
A wholly owned subsidiary of the Company has approvals from Fannie Mae and Freddie Mac to own and manage MSR, which represent the right to control the servicing of residential mortgage loans. The Company and its subsidiaries do not originate or directly service mortgage loans, and instead contract with appropriately licensed subservicers to handle substantially all servicing functions in the name of the subservicer for the loans underlying the Company’s MSR.
The following table summarizes activity related to MSR for the three and six months ended June 30, 2021 and 2020.
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2021 2020 2021 2020
Balance at beginning of period $ 2,091,761  $ 1,505,163  $ 1,596,153  $ 1,909,444 
Purchases of mortgage servicing rights
 198,526  21,551  373,749  205,334 
Sales of mortgage servicing rights
 —  381  —  1,814 
Changes in fair value due to:
Changes in valuation inputs or assumptions used in the valuation model (1)
(72,910) (111,013) 428,783  (611,776)
Other changes in fair value (2)
(195,141) (127,778) (369,396) (213,680)
Other changes (3)
(2,130) (9,109) (9,183) (11,941)
Balance at end of period (4)
$ 2,020,106  $ 1,279,195  $ 2,020,106  $ 1,279,195 
____________________
(1)Includes the impact of acquiring MSR at a cost different from fair value.
(2)Primarily represents changes due to the realization of expected cash flows.
(3)Includes purchase price adjustments, contractual prepayment protection, and changes due to the Company’s purchase of the underlying collateral.
(4)Based on the principal balance of the loans underlying the MSR reported by servicers on a month lag, adjusted for current month purchases.

At June 30, 2021 and December 31, 2020, the Company pledged MSR with a carrying value of $1.8 billion and $1.1 billion, respectively, as collateral for repurchase agreements, revolving credit facilities and term notes payable. See Note 11 - Repurchase Agreements, Note 12 - Revolving Credit Facilities and Note 13 - Term Notes Payable.
As of June 30, 2021 and December 31, 2020, the key economic assumptions and sensitivity of the fair value of MSR to immediate 10% and 20% adverse changes in these assumptions were as follows:
(dollars in thousands, except per loan data) June 30,
2021		 December 31,
2020
Weighted average prepayment speed: 13.4  % 19.4  %
Impact on fair value of 10% adverse change $ (112,850) $ (121,973)
Impact on fair value of 20% adverse change $ (216,017) $ (229,676)
Weighted average delinquency: 1.5  % 2.2  %
Impact on fair value of 10% adverse change $ (3,030) $ (2,038)
Impact on fair value of 20% adverse change $ (4,855) $ (4,161)
Weighted average option-adjusted spread: 4.7  % 4.8  %
Impact on fair value of 10% adverse change $ (38,638) $ (28,678)
Impact on fair value of 20% adverse change $ (75,936) $ (56,211)
Weighted average per loan annual cost to service: $ 67.20  $ 68.27 
Impact on fair value of 10% adverse change $ (24,652) $ (21,708)
Impact on fair value of 20% adverse change $ (50,105) $ (43,527)

These assumptions and sensitivities are hypothetical and should be considered with caution. Changes in fair value based on 10% and 20% variations in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of MSR is calculated without changing any other assumptions. In reality, changes in one factor may result in changes in another (e.g., increased market interest rates may result in lower prepayments and increased credit losses) that could magnify or counteract the sensitivities. Further, these sensitivities show only the change in the asset balances and do not show any expected change in the fair value of the instruments used to manage the interest rates and prepayment risks associated with these assets.
Risk Mitigation Activities
The primary risk associated with the Company’s MSR is interest rate risk and the resulting impact on prepayments. A significant decline in interest rates could lead to higher-than-expected prepayments that could reduce the value of the MSR. The Company economically hedges the impact of these risks primarily with its Agency RMBS portfolio.
Mortgage Servicing Income
The following table presents the components of servicing income recorded on the Company’s condensed consolidated statements of comprehensive (loss) income for the three and six months ended June 30, 2021 and 2020:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2021 2020 2021 2020
Servicing fee income $ 111,083  $ 104,463  $ 216,248  $ 222,354 
Ancillary and other fee income 622  476  1,238  997 
Float income 1,111  7,952  2,449  20,337 
Total $ 112,816  $ 112,891  $ 219,935  $ 243,688 
Mortgage Servicing Advances
As the servicer of record for the MSR assets, the Company may be required to advance principal and interest payments to security holders, and intermittent tax and insurance payments to local authorities and insurance companies on mortgage loans that are in forbearance, delinquency or default. The Company is responsible for funding these advances, potentially for an extended period of time, before receiving reimbursement from Fannie Mae and Freddie Mac. Servicing advances are priority cash flows in the event of a loan principal reduction or foreclosure and ultimate liquidation of the real estate-owned property, thus making their collection reasonably assured. These servicing advances totaled $99.5 million and $80.9 million and were included in other assets on the condensed consolidated balance sheets as of June 30, 2021 and December 31, 2020, respectively. At June 30, 2021 and December 31, 2020, mortgage loans in 60+ day delinquent status (whether or not subject to forbearance) accounted for approximately 2.2% and 3.2%, respectively, of the aggregate principal balance of loans for which the Company had servicing advance funding obligations.
During the year ended December 31, 2020, the Company entered into a new revolving credit facility to finance its servicing advance obligations. At June 30, 2021 and December 31, 2020, the Company had pledged servicing advances with a carrying value of $29.1 million and $28.5 million, respectively, as collateral for this revolving credit facility. See Note 12 - Revolving Credit Facilities.
Serviced Mortgage Assets
The Company’s total serviced mortgage assets consist of residential mortgage loans underlying its MSR assets, off-balance sheet residential mortgage loans owned by other entities for which the Company acts as servicing administrator and other assets. The following table presents the number of loans and unpaid principal balance of the mortgage assets for which the Company manages the servicing as of June 30, 2021 and December 31, 2020:
June 30, 2021 December 31, 2020
(dollars in thousands) Number of Loans Unpaid Principal Balance Number of Loans Unpaid Principal Balance
Mortgage servicing rights 784,334  $ 185,209,738  781,905  $ 177,861,483 
Residential mortgage loans
 1,106  681,799  1,674  1,067,500 
Other assets 2  46  —  — 
Total serviced mortgage assets 785,442  $ 185,891,583  783,579  $ 178,928,983