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As filed with
the Securities and Exchange Commission on January 20,
2012
Registration
No. 333-174246
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2
to
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
NATIONSTAR
MORTGAGE HOLDINGS INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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6162
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45-2156869
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(State or Other Jurisdiction of Incorporation or Organization)
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(Primary Standard Industrial Classification Code Number)
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(I.R.S. Employer
Identification No.)
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350 Highland Drive
Lewisville, Texas
75067
(469) 549-2000
(Address, Including Zip Code, and
Telephone Number, Including Area Code, of Registrants
Principal Executive Offices)
Nationstar Mortgage Holdings
Inc.
350 Highland Drive
Lewisville, Texas,
75067
(469) 549-2000
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
(Copies of all communications,
including communications sent to agent for service)
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Duane McLaughlin, Esq.
Cleary Gottlieb Steen & Hamilton LLP
One Liberty Plaza
New York, New York 10006
(212) 225-2000
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Richard B. Aftanas, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
4 Times Square
New York, New York 10036
(212) 735-3000
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after this registration
statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933 check the
following
box: o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
The registrant hereby amends this registration statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act or until the registration statement shall
become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may
determine.
The information in
this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted.
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Subject to Completion
Preliminary Prospectus dated January 20, 2012
PROSPECTUS
Shares
Nationstar Mortgage Holdings
Inc.
Common Stock
This is an initial public offering of common stock of Nationstar
Mortgage Holdings Inc. We are
selling shares
of our common stock, and the Initial Stockholder identified in
this prospectus is selling an
additional shares
of our common stock. We will not receive any proceeds from the
sale of our common stock by the Initial Stockholder. After this
offering, the Initial Stockholder, an entity owned primarily by
certain private equity funds managed by an affiliate of Fortress
Investment Group LLC, will own
approximately % of our common stock
or %
if the underwriters over-allotment option is fully
exercised.
The estimated initial public offering price is between
$ and
$ per share. Our common stock has
been authorized for listing on the New York Stock Exchange
(NYSE) under the symbol
,
subject to official notice of issuance.
Investing in our common stock involves risks. See Risk
Factors beginning on page 15.
Neither the Securities and Exchange Commission (SEC)
nor any state securities commission has approved or disapproved
of these securities or determined if this prospectus is truthful
or complete. Any representation to the contrary is a criminal
offense.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds to us (before expenses)
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$
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$
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Proceeds to the Initial Stockholder (before expenses)
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$
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$
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We have granted the underwriters the right to purchase up
to
additional shares of common stock, and the Initial Stockholder
has granted the underwriters an option to purchase up
to
additional shares of common stock, in each case at the public
offering price less underwriting discounts and commissions, for
the purpose of covering over-allotments.
The underwriters expect to deliver the shares of common stock to
investors on or about , 2012.
BofA Merrill Lynch
The date of this prospectus
is ,
2012.
We are responsible for the information contained in this
prospectus and in any related free-writing prospectus we may
prepare or authorize to be delivered to you. We have not
authorized anyone to give you any other information, and we take
no responsibility for any other information that others may give
you. We are not, and the Initial Stockholder and underwriters
are not, making an offer of these securities in any jurisdiction
where the offer is not permitted. You should not assume that the
information contained in this prospectus is accurate as of any
date other than the date on the front of this prospectus.
TABLE OF
CONTENTS
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus. It may not contain all the information that may
be important to you. You should read the entire prospectus
carefully, including the section entitled Risk
Factors and our financial statements and the related notes
included elsewhere in this prospectus, before making an
investment decision to purchase shares of our common stock.
Nationstar Mortgage Holdings Inc. is a newly formed Delaware
corporation that has not, to date, conducted any activities
other than those incident to its formation and the preparation
of this registration statement. Unless the context suggests
otherwise, references in this prospectus to
Nationstar, the Company, we,
us, and our refer to Nationstar Mortgage
LLC and its consolidated subsidiaries prior to the consummation
of the Restructuring (as defined below), and to Nationstar
Mortgage Holdings Inc. and its consolidated subsidiaries after
the consummation of the Restructuring. References in this
prospectus to Fortress refer to Fortress Investment
Group LLC. For certain industry and other terms, investors are
referred to the section entitled Glossary of Industry and
Other Terms beginning on page 105. All amounts in
this prospectus are expressed in U.S. dollars and the
financial statements have been prepared in accordance with
generally accepted accounting principles in the United States
(GAAP).
Company
Overview
We are a leading high touch non-bank residential mortgage
servicer with a broad array of servicing capabilities across the
residential mortgage product spectrum. We have been the fastest
growing mortgage servicer since 2007 as measured by growth in
aggregate unpaid principal balance (UPB), having
grown 75% annually on a compounded basis. As of
September 30, 2011, we serviced over 612,000 residential
mortgage loans with an aggregate UPB of $102.7 billion,
making us the second largest high touch non-bank servicer in the
United States. Our clients include national and regional banks,
government organizations, securitization trusts, private
investment funds and other owners of residential mortgage loans
and securities.
We attribute our growth to our strong servicer performance and
high touch servicing model, which emphasizes borrower
interaction to improve loan performance and minimize loan
defaults and foreclosures. We believe our exceptional track
record as a servicer, coupled with our ability to scale our
operations without compromising servicer quality, have enabled
us to add new mortgage servicing portfolios with relatively low
capital investment. We are a preferred partner of many large
financial organizations, including government-sponsored
enterprises (GSEs) and other regulated institutions
that value our strong performance and also place a premium on
our entirely
U.S.-based
servicing operations. We employ over 2,500 people in the
United States and are a licensed servicer in all 50 states.
In addition to our core servicing business, we are one of only a
few non-bank servicers with a fully integrated loan originations
platform and suite of adjacent businesses designed to meet the
changing needs of the mortgage industry. Our originations
platform complements and enhances our servicing business by
allowing us to replenish our servicing portfolio as loans pay
off over time, while our adjacent businesses broaden our product
offerings by providing mortgage-related services spanning the
life cycle of a mortgage loan. We believe our integrated
approach, together with the strength and diversity of our
servicing operations and our strategies for growing substantial
portions of our business with minimal capital outlays (which we
refer to as our capital light approach), position us
to take advantage of the major structural changes currently
occurring across the mortgage industry.
Servicing
Industry Dynamics
Mortgage servicers provide
day-to-day
administration and servicing for loans on behalf of mortgage
owners and earn revenues based primarily on the UPB of loans
serviced. Servicers collect and remit monthly loan principal and
interest payments and provide related services in exchange for
contractual servicing fees.
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Servicers also provide special services such as overseeing the
resolution of troubled loans. As the mortgage industry continues
to struggle with elevated borrower delinquencies, this special
servicing function has become a particularly important component
of a mortgage servicers role and, we believe, a key
differentiator among mortgage servicers.
According to Inside Mortgage Finance, there were approximately
$10.3 trillion of U.S. residential mortgage loans
outstanding as of September 30, 2011. In the aftermath of
the U.S. financial crisis, the residential mortgage servicing
industry is undergoing major structural changes that affect the
way residential loans are originated, owned and serviced. These
changes have benefited and should continue to significantly
benefit non-bank mortgage servicers. Banks currently dominate
the residential mortgage servicing industry, servicing over 95%
of all residential mortgage loans. Over 50% of all residential
mortgage loan servicing is concentrated among just four banks.
However, banks are currently under tremendous pressure to exit
or reduce their exposure to the servicing business as a result
of increased regulatory scrutiny and capital requirements,
headline risk associated with sizeable legal settlements, as
well as potentially significant earnings volatility.
Furthermore, banks servicing operations, which have
historically been oriented towards payment processing, are often
ill-equipped to maximize loan performance through high touch
servicing.
As a result of these factors and the overall increased demands
on servicers by mortgage owners, mortgage servicing is shifting
from banks to non-bank servicers. Already, over the last
18 months, banks have completed or announced servicing
transfers on over $350 billion of loans. We believe this
represents a fundamental change in the mortgage servicing
industry and expect the trend to continue at an accelerated rate
in the future. Because the mortgage servicing industry is
characterized by high barriers to entry, including the need for
specialized servicing expertise and sophisticated systems and
infrastructure, compliance with GSE and client requirements,
compliance with
state-by-state
licensing requirements and the ability to adapt to regulatory
changes at the state and federal levels, we believe we are one
of the few mortgage servicers competitively positioned to
benefit from the shift.
Our
Business
Residential
Mortgage Servicing
Our leading residential mortgage servicing business serves a
diverse set of clients encompassing a broad range of mortgage
loans, including prime and non-prime loans, traditional and
reverse mortgage loans, GSE and government agency-insured loans,
as well as private-label loans issued by non-government
affiliated institutions. We have grown our residential mortgage
servicing portfolio from an aggregate UPB of $12.7 billion
as of December 31, 2007 to $102.7 billion as of
September 30, 2011. Over the last 36 months,
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we have added over $104 billion in UPB to our servicing
platform through over 290 separate transfers from 31 different
counterparties. This growth has been funded primarily through
internally generated cash flows and proceeds from debt
financings.
Our performance record stands out when compared to other
mortgage servicers:
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As of December 2011, a GSE ranked us in the top 5 out of over
1,000 approved servicers in foreclosure prevention workouts.
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In 2011, we were in the top tier of rankings for Federal Housing
Administration-(FHA) and Housing and Urban
Development-approved servicers, with a Tier 1 ranking (out
of four possible tiers).
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As of November 30, 2011, our delinquency and default rates
on non-prime mortgages we service on behalf of third party
investors in asset-backed securities (ABS) were each
40% lower than the peer group average.
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Our high touch, active servicing approach emphasizes increased
borrower contact in an effort to improve loan performance and
reduce loan defaults and foreclosures, thereby minimizing credit
losses and maximizing cash flows for our clients. Where
appropriate, we perform loan modifications, often facilitated by
government programs such as the Home Affordable Modification
Program (HAMP), which serve as an effective
alternative to foreclosure by keeping borrowers in their homes
and bringing them current on their loans. We believe our proven
servicing approach and relative outperformance have led large
financial institutions, GSEs and governmental organizations to
award major servicing and subservicing contracts to us, often on
a repeat basis.
Our systems and infrastructure play a key role in our servicing
success. Through careful monitoring and frequent direct
communication with borrowers, we are able to quickly identify
potential payment problems and work with borrowers to address
issues efficiently. To this end, we leverage our proprietary
processing, loss mitigation and caller routing systems to
implement a single point of contact model for troubled loans
that ensures smooth and prompt communication with borrowers,
consistent with standards imposed on the largest bank servicers
by the Office of the Comptroller of the Currency (the
OCC), the Federal Reserve and the Federal Deposit
Insurance Corporation (FDIC). Our core systems are
scalable to multiples of our current size.
We service loans as the owner of mortgage servicing rights
(MSRs), which we refer to as primary
servicing, and we provide servicing on behalf of other MSR
or mortgage owners, which we refer to as
subservicing. As of September 30, 2011, our
primary servicing and subservicing portfolios represented 45%
and 55%, respectively, of our total servicing portfolio.
Primary
Servicing
Primary servicers act as servicers on behalf of mortgage owners
and directly own the MSRs, which represent the contractual right
to a stream of cash flows (expressed as a percentage of UPB) in
exchange for performing specified mortgage servicing functions
and temporarily advancing funds to cover payments on delinquent
and defaulted mortgages.
We have grown our primary servicing portfolio to
$46.7 billion in UPB as of September 30, 2011 from
$12.7 billion in UPB as of December 31, 2007,
representing a compound annual growth rate of 41.5%. We plan to
continue growing our primary servicing portfolio principally by
acquiring MSRs from banks and other financial institutions under
pressure to exit or reduce their exposure to the mortgage
servicing business. As the servicing industry paradigm continues
to shift from bank to non-bank servicers at an increasing pace,
we believe there will be a significant opportunity for us to
increase our market share of the servicing business.
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We acquire MSRs on a standalone basis and have also developed an
innovative model for investing on a capital light basis by
co-investing with financial partners in excess MSRs.
Excess MSRs are the servicing fee cash flows (excess
fees) on a portfolio of mortgage loans after payment of a
basic servicing fee. In these transactions, we provide all
servicing functions in exchange for the basic servicing fee,
then share the excess fee with our co-investment partner on a
pro rata basis. Through December 31, 2011, we have added
$10 billion of loan servicing through excess MSRs and
expect to continue to deploy this co-investment structure in the
future.
Subservicing
Subservicers act on behalf of MSR or mortgage owners that choose
to outsource the loan servicing function. In our subservicing
portfolio, we earn a contractual fee per loan we service. The
loans we subservice often include pools of underperforming
mortgage loans requiring high touch servicing capabilities. Many
of our recent subservicing transfers have been facilitated by
GSEs and other large mortgage owners that are seeking to improve
loan performance through servicer upgrades. Subservicing
represents another capital light means of growing our servicing
business, as subservicing contracts are typically awarded on a
no-cost basis and do not require substantial capital.
We have grown our subservicing portfolio to $56.0 billion
in UPB as of September 30, 2011 by completing 288 transfers
with 25 counterparties since we entered the subservicing
business in August 2008. We expect to enter into additional
subservicing arrangements as mortgage owners seek to transfer
credit stressed loans to high touch subservicers with proven
track records and the infrastructure and expertise to improve
loan performance.
Adjacent
Businesses
We operate or have investments in several adjacent businesses
which provide mortgage-related services that are complementary
to our servicing and originations businesses. These businesses
offer an array of ancillary services, including providing
services for delinquent loans, managing loans in the
foreclosure/real estate owned (REO) process and
providing title insurance agency, loan settlement and valuation
services on newly originated and re-originated loans. We offer
these adjacent services in connection with loans we currently
service, as well as on a third party basis in exchange for base
and/or
incentive fees. In addition to enhancing our core businesses,
these adjacent services present an opportunity to increase
future earnings with minimal capital investment, including by
expanding the services we provide to large banks and other
financial institutions seeking to outsource these functions to a
third party.
Originations
We are one of only a few non-bank servicers with a fully
integrated loan originations platform to complement and enhance
our servicing business. Through September 30, 2011, we
originated approximately $2.3 billion of loans, up from
$2.0 billion for the comparable period in 2010. We
originate primarily conventional agency (GSE) and
government-insured residential mortgage loans and, to mitigate
risk, typically sell these loans within 30 days while
retaining the associated servicing rights.
A key determinant of the profitability of our primary servicing
portfolio is the longevity of the servicing cash flows before a
loan is repaid or liquidates. Our originations efforts are
primarily focused on re-origination, which involves
actively working with existing borrowers to refinance their
mortgage loans. By re-originating loans for existing borrowers,
we retain the servicing rights, thereby extending the longevity
of the servicing cash flows, which we refer to as
recapture. We recaptured 30% and 37% of the loans we
service that were refinanced or repaid by the borrower during
the nine months and three months ended September 30, 2011,
respectively, and our goal for 2012 is to achieve a recapture
rate of over 55%. Because the refinanced loans typically have
lower interest rates or lower monthly payments, and, in general,
subsequently refinance
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more slowly and default less frequently, these refinancings
also typically improve the overall quality of our primary
servicing portfolio.
With our in-house originations capabilities, we believe we are
better protected against declining servicing cash flows as we
replace servicing run-off through new loan originations or
retain our servicing portfolios through re-origination. In
addition, our re-origination strategy allows us to generate
additional loan servicing more cost-effectively than MSRs can
otherwise be acquired in the open market.
Strengths
We believe our servicing platform, coupled with our originations
and adjacent businesses, position us well for a variety of
market environments. The following competitive strengths
contribute to our leading market position and differentiate us
from our competitors:
Top
Performing Preferred Servicing Partner
Through careful monitoring and frequent direct communication
with borrowers, our high touch, high-quality servicing model
allows us to improve loan performance and reduce loan defaults
and foreclosures, thereby minimizing credit losses and
maximizing cash flows for our clients. In recognition of our
performance, as of December 2011, a GSE ranked us in the top 5
out of over 1,000 approved servicers in foreclosure prevention
workouts. Our demonstrated ability to achieve strong results and
relative outperformance, as well as our entirely
U.S.-based
servicing operations, have made us a preferred partner of large
financial institutions, GSEs and governmental organizations,
which have awarded major servicing and subservicing contracts to
us, often on a repeat basis.
Scalable
Technology and Infrastructure
Our highly scalable technology and infrastructure have enabled
us to manage rapid growth over the past several years while
maintaining our high servicing standards and enhancing loan
performance. We have made significant investments in loan
administration, customer service, compliance and loss
mitigation, as well as in employee training and retention. Our
staffing, training and performance tracking programs,
centralized in the Dallas/Fort Worth, Texas area, have
allowed us to expand the size of our servicing team while
maintaining high quality standards. With our core systems
scalable to multiples of our current size, we believe our
infrastructure positions us well to take advantage of structural
changes in the mortgage industry. Because the mortgage servicing
industry is characterized by high barriers to entry, we also
believe we are one of the few mortgage servicers competitively
positioned to benefit from existing and future market
opportunities.
Track
Record of Efficient Capital Deployment
We have an established track record of deploying capital to grow
our business. For example, over the last 36 months, we have
effectively used capital from internally generated cash flows
and proceeds from debt financings to add over $104 billion
in UPB to our servicing platform. In addition, we employ capital
light strategies, including our innovative structure for
co-investment in excess MSRs with financial partners as well as
subservicing arrangements, to add new mortgage servicing
portfolios with relatively low capital investment. Through
December 31, 2011, we have added $10 billion of loan
servicing through excess MSRs and expect to continue to deploy
this co-investment structure in the future, while also
evaluating subservicing arrangements as mortgage owners seek to
transfer credit stressed loans to high touch subservicers in
order to improve loan performance. We believe that our
experience of efficiently deploying capital for growth puts us
in a strong position to manage future growth opportunities.
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Attractive
Business Model with Strong Recurring Revenues
Banks are under tremendous pressure to exit or reduce their
exposure to the mortgage servicing business, and GSEs are
looking for strong mortgage servicers as the mortgage industry
continues to struggle with elevated borrower delinquencies. As
the shift from bank to non-bank servicers accelerates, we
believe there will be a significant opportunity for us to
achieve growth on attractive terms. Our senior management team
has already demonstrated its ability to identify, evaluate and
execute servicing portfolio acquisitions. We have developed an
attractive business model to grow our business and generate
strong, recurring, contractual fee-based revenue with minimal
credit risk. These revenue streams provide us with significant
capital to grow our business organically.
Integrated
Originations Capabilities
As one of only a few non-bank servicers with a fully integrated
loan originations platform, we are often able to extend the
longevity of our servicing cash flows through loan refinancings.
We recaptured 30% and 37% of the loans we service that were
refinanced or repaid by the borrower during the nine months and
three months ended September 30, 2011, respectively, and
our goal for 2012 is to achieve a recapture rate of over 55%.
Because, in general, refinanced loans subsequently refinance
more slowly and default less frequently than many currently
outstanding loans, these refinancings also typically improve the
overall quality of our primary servicing portfolio. We believe
our in-house originations capabilities allow us to generate
additional loan servicing more cost-effectively than MSRs can
otherwise be acquired in the open market.
Strong
and Seasoned Management Team
Our senior management team is comprised of experienced mortgage
industry executives with a track record of generating financial
and operational improvements. Our CEO has been with us for more
than a decade and has managed the company through the most
recent economic downturn and through multiple economic cycles.
Several members of our management team have held senior
positions at other residential mortgage companies. Our senior
management team has demonstrated its ability to adapt to
changing market conditions and has developed a proven ability to
identify, evaluate and execute successful portfolio and platform
acquisitions. We believe that the experience of our senior
management team and its management philosophy are significant
contributors to our operating performance.
Growth
Strategies
We expect to drive future growth in the following ways:
Grow
Residential Mortgage Servicing
We expect to grow our business primarily by adding to our
residential mortgage servicing portfolios through MSR
acquisitions and subservicing transfers. Over the last
18 months, banks and other financial institutions have
completed or announced a significant number of MSR sales and
subservicing transfers, and we expect an even greater number
over the next 18 months. We are continuously reviewing,
evaluating and, when attractive, pursuing MSR sales and
subservicing transfers, and we believe we are well-positioned to
compete effectively for these opportunities. We believe our
success in this area has been, and will continue to be, driven
by our strong servicer performance, as well as by the systems
and infrastructure we have implemented to meet specific client
requirements.
Pursue
Capital Light Servicing Opportunities
We intend to pursue capital light strategies that will allow us
to grow substantial portions of our business with minimal
capital outlays. Since August 2008, we have been involved in the
subservicing business and have grown our subservicing portfolio
by $56.0 billion since that date on a no-cost basis and
with
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relatively minimal commitment of capital. Many of our recent
subservicing transfers have been facilitated by GSEs and other
large mortgage owners and we expect to leverage our
relationships to complete additional subservicing transfers as
mortgage owners seek to transfer credit stressed loans to high
touch servicers through subservicing arrangements. In addition,
we have developed an innovative structure for co-investing on a
capital light basis in excess MSRs with financial partners.
Through December 31, 2011, we have added $10 billion
of loan servicing through excess MSRs and expect to continue to
deploy this co-investment structure in the future. We anticipate
that these capital light strategies will allow us to
significantly expand our mortgage servicing portfolio with
reduced capital investment.
Expand
Originations to Complement Servicing
We also expect our originations platform to play an important
role in driving our growth and, in particular, enhancing the
profitability of our servicing business. As one of only a few
non-bank servicers with a fully integrated loan originations
platform, we originate new GSE-eligible and FHA-insured loans
for sale into the securitization market and retain the servicing
rights associated with those loans. More importantly, we
re-originate loans from existing borrowers seeking to take
advantage of improved loan terms, thereby extending the
longevity of the related servicing cash flows, which increases
the profitability of that servicing pool and the credit quality
of the servicing portfolio. Through our originations platform,
we generate additional loan servicing more cost-effectively than
MSRs can otherwise be acquired in the open market. Finally, we
facilitate borrower access to government programs designed to
encourage refinancings of troubled or stressed loans, improving
overall loan performance. We believe this full range of
abilities makes us a more attractive counterparty to entities
seeking to transfer servicing to us, and we expect it to
contribute to the growth of our servicing portfolio.
Expand
to Meet Changing Needs of the Residential Mortgage
Industry
We expect to drive growth across all of our businesses by being
a solution provider to a wide range of financial organizations
as they navigate the structural changes taking place across the
mortgage industry. With banks under pressure to reduce their
exposure to the mortgage market, with GSE and government loans
already accounting for approximately 88% of all mortgage loans
originated during the nine months ended September 30, 2011
according to Inside Mortgage Finance, and with weak housing and
employment markets contributing to elevated loan delinquencies
and defaults, we expect there to be numerous compelling
situations requiring our expertise. We believe the greatest
opportunities will be available to servicers with the proven
track record, scalable infrastructure and range of services that
can be applied flexibly to address different organizations
needs. To position ourselves for these opportunities, since 2010
we have expanded our business development team and hired a
dedicated senior executive whose primary role is to identify,
evaluate, and enhance acquisition and partnership opportunities
across the mortgage industry, including with national and
regional banks, mortgage and bond insurers, private investment
funds and various governmental agencies. We have also expanded
and enhanced our loan transfer, collections and loss mitigation
infrastructure in order to be able to accommodate substantial
additional growth. We expect these efforts to position us to be
a key participant in the long term restructuring and recovery of
the mortgage sector.
Corporate
and Other Information
Nationstar Mortgage Holdings Inc. was recently incorporated for
the purpose of effecting this offering and currently holds no
material assets and does not engage in any operations. Prior to
the completion of this offering, all of the equity interests in
Nationstar Mortgage LLC will be transferred from FIF HE Holdings
LLC (our Initial Stockholder) to two direct,
wholly-owned subsidiaries of Nationstar Mortgage Holdings Inc.
(the Restructuring). Additionally, as part of the
Restructuring, certain parent entities of our Initial
Stockholder that do not have any material assets or material
liabilities other than their direct or indirect ownership of our
Initial Stockholder, or any operations, will be merged with and
into Nationstar Mortgage Holdings Inc., and the former
shareholders of those parent entities will receive equity
interests in our Initial
7
Stockholder. Upon the completion of the Restructuring, we will
conduct our business through Nationstar Mortgage LLC and its
consolidated subsidiaries.
Our executive offices are located at 350 Highland Drive,
Lewisville, Texas 75067 and our telephone number is
(469) 549-2000.
Our Internet website address is www.nationstarmtg.com.
Information on, or accessible through, our website is not part
of this prospectus.
Nationstar Mortgage LLC was formed in 1994 in Denver, Colorado
as Nova Credit Corporation, a Nevada corporation. In 1997, it
moved its executive offices and primary operations to Dallas,
Texas and changed its name to Centex Credit Corporation. In
2001, Centex Credit Corporation was merged into Centex Home
Equity Company, LLC, a Delaware limited liability company
(CHEC). In 2006, our Initial Stockholder acquired
all of its outstanding membership interests (the
Acquisition), and CHEC changed its name to
Nationstar Mortgage LLC.
Our
Principal Stockholder
Following the completion of this offering, our Initial
Stockholder, an entity owned primarily by certain private equity
funds managed by an affiliate of Fortress, a leading global
investment manager that offers alternative and traditional
investment products, will own
approximately % of our outstanding
common stock or % if the
underwriters over-allotment option is fully exercised.
After this offering, the Initial Stockholder will own shares
sufficient for the majority vote over fundamental and
significant corporate matters and transactions. See Risk
FactorsRisks Related to Our Organization and
Structure.
Ownership
Structure
Set forth below is the ownership structure of Nationstar
Mortgage Holdings Inc. and its subsidiaries upon consummation of
the Restructuring and this offering.
8
The
Offering
|
|
|
Common stock we are offering |
|
shares |
|
Common stock offered by the Initial Stockholder |
|
shares |
|
Common stock to be issued and outstanding after this offering |
|
shares |
|
|
|
Use of proceeds by us |
|
We estimate that the net proceeds to us from the sale of shares
in this offering, after deducting offering expenses payable by
us, will be approximately
$ million, assuming the
shares are offered at $ per share,
which is the midpoint of the estimated initial public offering
price range set forth on the cover page of this prospectus. We
intend to use the net proceeds from this offering for working
capital and other general corporate purposes, including
servicing acquisitions, which may include acquisitions from one
or more affiliates of the underwriters in this offering. See
Use of Proceeds. We will not receive any proceeds
from the sale of our common stock by the Initial Stockholder,
including any proceeds the Initial Stockholder may receive from
the exercise by the underwriters of their over-allotment option. |
|
|
|
Dividend policy |
|
We do not expect to pay dividends on our common stock for the
foreseeable future. Instead, we anticipate that all of our
earnings in the foreseeable future will be used for the
operation and growth of our business. |
|
|
|
|
|
Any future determination to pay dividends on our common stock
will be at the discretion of our board of directors and will
depend upon many factors, including our financial position,
results of operations, liquidity, legal requirements and
restrictions that may be imposed by the indenture governing our
10.875% senior notes due 2015 (the senior
notes). See Dividend Policy. |
|
|
|
Risk factors |
|
Please read the section entitled Risk Factors
beginning on page 15 for a discussion of some of the
factors you should carefully consider before deciding to invest
in our common stock. |
The number of shares of common stock to be issued and
outstanding after the completion of this offering is based
on shares
of common stock issued and outstanding as
of , 2012,
and excludes an
additional shares
reserved for issuance under our equity incentive plan, all of
which remain available for grant.
Except as otherwise indicated, all information in this
prospectus:
|
|
|
|
|
assumes an initial public offering price of
$ per share, the midpoint of the
estimated initial public offering price range set forth on the
cover page of this prospectus;
|
9
|
|
|
|
|
assumes no exercise by the underwriters of their option to
purchase an
additional shares
of common stock from us and an
additional shares
of common stock from the Initial Stockholder to cover
over-allotments; and
|
|
|
|
|
|
assumes shares
will be issued to certain of our directors
after ,
2012 but prior to completion of this offering.
|
10
SUMMARY
CONSOLIDATED FINANCIAL DATA
The following tables summarize consolidated financial
information of Nationstar Mortgage LLC, our predecessor company,
as well as pro forma information that reflects the impact of our
conversion to a taxable entity from a disregarded entity for tax
purposes. We were formed on May 9, 2011 and have not, to
date, conducted any activities other than those incident to our
formation and the preparation of this registration statement. We
were formed solely for the purpose of reorganizing the
organizational structure of the Initial Stockholder and
Nationstar Mortgage LLC, so that the issuer is a corporation
rather than a limited liability company and our existing
investors will own common stock rather than equity interests in
a limited liability company. You should read these tables along
with Managements Discussion and Analysis of
Financial Condition and Results of Operations,
Business and our consolidated financial statements
and the related notes included elsewhere in this prospectus.
The summary consolidated statement of operations data for the
years ended December 31, 2008, 2009 and 2010 and the
summary consolidated balance sheet data as of December 31,
2009 and 2010 have been derived from our audited financial
statements included elsewhere in this prospectus. The summary
consolidated balance sheet data as of December 31, 2008 has
been derived from our audited financial statements that are not
included in this prospectus.
The summary consolidated statement of operations data for the
nine months ended September 30, 2010 and 2011 and the
summary consolidated balance sheet data as of September 30,
2011 have been derived from our unaudited financial statements
included elsewhere in this prospectus. The unaudited financial
statements have been prepared on the same basis as the audited
financial statements and, in the opinion of our management,
include all material adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the
information set forth herein. Operating results for the nine
months ended September 30, 2011 are not necessarily
indicative of the results that may be expected for the year
ending December 31, 2011 or for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands, except per share data)
|
|
Statement of Operations DataConsolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
$74,007
|
|
|
|
$100,218
|
|
|
|
$184,084
|
|
|
|
$122,770
|
|
|
|
$184,754
|
|
Gain/(loss) on mortgage loans held for sale
|
|
|
(86,663
|
)
|
|
|
(21,349
|
)
|
|
|
77,344
|
|
|
|
51,754
|
|
|
|
73,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
(12,656
|
)
|
|
|
78,869
|
|
|
|
261,428
|
|
|
|
174,524
|
|
|
|
258,314
|
|
Total expenses and impairments
|
|
|
147,777
|
|
|
|
142,367
|
|
|
|
220,976
|
|
|
|
145,622
|
|
|
|
219,717
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
92,060
|
|
|
|
52,518
|
|
|
|
98,895
|
|
|
|
82,019
|
|
|
|
51,246
|
|
Interest expense
|
|
|
(65,548
|
)
|
|
|
(69,883
|
)
|
|
|
(116,163
|
)
|
|
|
(89,298
|
)
|
|
|
(76,929
|
)
|
Loss on interest rate swaps and caps
|
|
|
(23,689
|
)
|
|
|
(14
|
)
|
|
|
(9,801
|
)
|
|
|
(9,917
|
)
|
|
|
|
|
Fair value changes in ABS securitizations
|
|
|
|
|
|
|
|
|
|
|
(23,297
|
)
|
|
|
(19,115
|
)
|
|
|
(6,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
2,823
|
|
|
|
(17,379
|
)
|
|
|
(50,366
|
)
|
|
|
(36,311
|
)
|
|
|
(32,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
$(157,610
|
)
|
|
|
$(80,877
|
)
|
|
|
$(9,914
|
)
|
|
|
$(7,409
|
)
|
|
|
$5,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Information (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical net income (loss) before taxes
|
|
|
|
|
|
|
|
|
|
|
$(9,914
|
)
|
|
|
|
|
|
|
$5,995
|
|
Pro forma adjustment for
taxes(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
|
|
|
|
|
|
|
|
|
$(9,914
|
)
|
|
|
|
|
|
|
$5,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
outstanding(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
(1) |
|
Our pro forma effective tax rate for 2010 is 0%. The pro forma
tax provision (benefit), before valuation allowance, is ($3,612)
on pre-tax loss of ($9,914). We have determined that recognizing
a tax benefit and corresponding deferred tax asset is not
appropriate as management believes it is more likely than not
the deferred tax asset will not be realized. We will also assume
certain tax attributes of certain parent entities of our Initial
Stockholder as a result of the Restructuring, including
approximately $200 million of net operating loss carry
forwards as of December 31, 2010. We expect to record a
full valuation allowance against any resulting deferred tax
asset. The utilization of these tax attributes will be limited
pursuant to Sections 382 and 383 of the Internal Revenue
Code. |
|
|
|
(2) |
|
Represents the number of shares issued and outstanding after
giving effect to our sale of common stock in this offering and
does not include common stock that may be issued and sold upon
exercise of the underwriters
over-allotment
option. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
September 30,
|
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
|
(in thousands)
|
Balance Sheet DataConsolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
$9,357
|
|
|
|
$41,645
|
|
|
|
$21,223
|
|
|
|
$24,005
|
|
Mortgage servicing rights
|
|
|
110,808
|
|
|
|
114,605
|
|
|
|
145,062
|
|
|
|
246,916
|
|
Total assets
|
|
|
1,122,001
|
|
|
|
1,280,185
|
|
|
|
1,947,181
|
|
|
|
2,004,325
|
|
Notes
payable(1)
|
|
|
810,041
|
|
|
|
771,857
|
|
|
|
709,758
|
|
|
|
738,783
|
|
Unsecured senior
notes(2)
|
|
|
|
|
|
|
|
|
|
|
244,061
|
|
|
|
245,109
|
|
Legacy assets securitized
debt(3)
|
|
|
|
|
|
|
177,675
|
|
|
|
138,662
|
|
|
|
116,200
|
|
ABS nonrecourse debt (at fair value)
|
|
|
|
|
|
|
|
|
|
|
496,692
|
|
|
|
434,326
|
|
Total liabilities
|
|
|
866,079
|
|
|
|
1,016,362
|
|
|
|
1,690,809
|
|
|
|
1,739,537
|
|
Total members equity
|
|
|
255,922
|
|
|
|
263,823
|
|
|
|
256,372
|
|
|
|
264,788
|
|
|
|
|
(1) |
|
A summary of notes payable as of September 30, 2011 follows: |
|
|
|
|
|
Notes Payable
|
|
September 30, 2011
|
|
|
(in thousands)
|
Servicing
|
|
|
|
|
2009-ABS Advance Financing Facility
|
|
|
$203,596
|
|
MBS Advance Financing Facility
|
|
|
175,733
|
|
MSR Note
|
|
|
11,568
|
|
Originations
|
|
|
|
|
$300 Million Warehouse Facility
|
|
|
259,593
|
|
$100 Million Warehouse Facility
|
|
|
22,328
|
|
$175 Million Warehouse Facility
|
|
|
41,801
|
|
$50 Million Warehouse Facility
|
|
|
10,587
|
|
ASAP+ Short-Term Financing Facility
|
|
|
13,577
|
|
|
|
|
|
|
|
|
|
$738,783
|
|
|
|
|
|
|
|
|
|
(2) |
|
On December 19, 2011, Nationstar Mortgage LLC and
Nationstar Capital Corporation, as co-issuers, completed a
further issuance of $35.0 million aggregate principal
amount of 10.875% senior notes due 2015 on terms identical
to those of the existing senior notes, other than the issue date
and offering price. See Managements Discussion and
Analysis of Financial Condition and Results of
OperationsLiquidity and Capital ResourcesContractual
ObligationsDescription of Certain IndebtednessSenior
Notes. |
|
|
|
(3) |
|
In November 2009, we completed the securitization of our legacy
assets, which is a non-recourse term financing. See
Note 10 to Consolidated Financial
StatementsIndebtedness. |
12
The following tables summarize consolidated financial
information for our Operating Segments. Management analyzes our
performance in two separate segments, the Servicing Segment and
the Originations Segment, which together constitute our
Operating Segments. In addition, we have a legacy asset
portfolio, which primarily consists of non-prime and
non-conforming mortgage loans, most of which were originated
from April to July 2007. The Servicing Segment provides loan
servicing on our servicing portfolio and the Originations
Segment involves the origination, packaging and sale of GSE
mortgage loans into the secondary markets via whole loan sales
or securitizations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended December 31,
|
|
September 30,
|
|
|
2008
|
|
2009
|
|
2010
|
|
2010
|
|
2011
|
|
|
(in thousands)
|
Statement of Operations DataOperating Segments
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
$75,190
|
|
|
|
$101,289
|
|
|
|
$189,884
|
|
|
|
$125,346
|
|
|
|
$186,224
|
|
Gain on mortgage loans held for sale
|
|
|
21,985
|
|
|
|
54,437
|
|
|
|
77,498
|
|
|
|
51,887
|
|
|
|
73,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
97,175
|
|
|
|
155,726
|
|
|
|
267,382
|
|
|
|
177,233
|
|
|
|
260,056
|
|
Total expenses and impairments
|
|
|
85,832
|
|
|
|
118,429
|
|
|
|
194,203
|
|
|
|
134,099
|
|
|
|
199,581
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
12,792
|
|
|
|
8,404
|
|
|
|
12,111
|
|
|
|
8,684
|
|
|
|
11,089
|
|
Interest expense
|
|
|
(17,007
|
)
|
|
|
(29,315
|
)
|
|
|
(60,597
|
)
|
|
|
(44,767
|
)
|
|
|
(48,589
|
)
|
Loss on interest rate swaps and caps
|
|
|
|
|
|
|
|
|
|
|
(9,801
|
)
|
|
|
(9,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(4,215
|
)
|
|
|
(20,911
|
)
|
|
|
(58,287
|
)
|
|
|
(46,000
|
)
|
|
|
(37,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
$7,128
|
|
|
|
$16,386
|
|
|
|
$14,892
|
|
|
|
$(2,866
|
)
|
|
|
$22,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
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|
|
|
(in thousands)
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|
|
Net Income (loss) from Operating Segments to Adjusted EBITDA
Reconciliation:
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|
|
|
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|
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|
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|
|
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|
Net income (loss) from Operating Segments
|
|
|
$7,128
|
|
|
|
$16,386
|
|
|
|
$14,892
|
|
|
|
$(2,866
|
)
|
|
|
$22,975
|
|
Adjust for:
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|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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|
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|
Interest expense from unsecured senior notes
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|
|
|
|
|
|
|
|
|
|
24,628
|
|
|
|
17,084
|
|
|
|
22,622
|
|
Depreciation and amortization
|
|
|
1,172
|
|
|
|
1,542
|
|
|
|
1,873
|
|
|
|
1,291
|
|
|
|
2,187
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|
Change in fair value of MSRs
|
|
|
11,701
|
|
|
|
27,915
|
|
|
|
6,043
|
|
|
|
11,499
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|
|
|
30,757
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|
Share-based compensation
|
|
|
1,633
|
|
|
|
579
|
|
|
|
8,999
|
|
|
|
5,222
|
|
|
|
12,152
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|
Fair value changes on interest rate
swaps(1)
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|
|
|
|
|
|
|
|
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|
9,801
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|
|
|
9,917
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|
|
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|
Ineffective portion of cash flow hedge
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|
|
|
|
|
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|
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|
(930
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)
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|
|
|
|
|
|
(2,032
|
)
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|
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Adjusted
EBITDA(2)
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|
|
$21,634
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|
|
|
$46,422
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|
|
|
$65,306
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|
|
|
$42,147
|
|
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|
$88,661
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|
(1) |
|
Relates to an interest rate swap agreement which was treated as
an economic hedge under Financial Accounting Standards Board
(FASB) Accounting Standards Codification
(ASC) 815, Derivatives and
Hedging, since trade execution to September 30,
2010. |
|
|
|
(2) |
|
Adjusted EBITDA is a key performance measure used by management
in evaluating the performance of our segments. Adjusted EBITDA
represents our Operating Segments income (loss), and
excludes income and expenses that relate to the financing of the
senior notes, depreciable (or amortizable) asset base of the
business, income taxes (if any), exit costs from our
restructuring and certain non-cash items. Adjusted EBITDA also
excludes results from our legacy asset portfolio and certain
securitization trusts that were consolidated upon adoption of
the new accounting guidance eliminating the concept of a
qualifying special purpose entity (QSPE). |
13
|
|
|
|
|
Adjusted EBITDA provides us with a key measure of our Operating
Segments performance as it assists us in comparing our
Operating Segments performance on a consistent basis.
Management believes Adjusted EBITDA is useful in assessing the
profitability of our core business and uses Adjusted EBITDA in
evaluating our operating performance as follows: |
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|
|
|
|
Financing arrangements for our Operating Segments are secured by
assets that are allocated to these segments. Interest expense
that relates to the financing of the senior notes is not
considered in evaluating our operating performance because this
obligation is serviced by the excess earnings from our Operating
Segments after the debt obligations that are secured by their
assets.
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|
|
|
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|
To monitor operating costs of each Operating Segment excluding
the impact from depreciation, amortization and fair value change
of the asset base, exit costs from our restructuring and
non-cash operating expense, such as share-based compensation.
Operating costs are analyzed to manage costs per our operating
plan and to assess staffing levels, implementation of
technology-based solutions, rent and other general and
administrative costs.
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|
|
|
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|
Management does not assess the growth prospects and the
profitability of our legacy asset portfolio and certain
securitization trusts that were consolidated upon adoption of
the new accounting guidance, except to the extent necessary to
assess whether cash flows from the assets in the legacy asset
portfolio are sufficient to service its debt obligations. |
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|
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|
We also use Adjusted EBITDA (with additional adjustments) to
measure our compliance with covenants such as leverage coverage
ratios for our senior notes. |
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|
Adjusted EBITDA has limitations as an analytical tool and should
not be considered in isolation or as a substitute for analysis
of our results as reported under GAAP. Some of these limitations
are: |
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|
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|
Adjusted EBITDA does not reflect our cash expenditures or future
requirements for capital expenditures or contractual commitments;
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|
Adjusted EBITDA does not reflect changes in, or cash
requirements for, our working capital needs;
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|
Adjusted EBITDA does not reflect the cash requirements necessary
to service principal payments related to the financing of the
business;
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|
Adjusted EBITDA does not reflect the interest expense or the
cash requirements necessary to service interest or principal
payments on our corporate debt;
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|
although depreciation and amortization and changes in fair value
of MSRs are non-cash charges, the assets being depreciated and
amortized will often have to be replaced in the future and
Adjusted EBITDA does not reflect any cash requirements for such
replacements; and
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|
other companies in our industry may calculate Adjusted EBITDA
differently than we do, limiting its usefulness as a comparative
measure.
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|
Because of these and other limitations, Adjusted EBITDA should
not be considered as a measure of discretionary cash available
to us to invest in the growth of our business. Adjusted EBITDA
is presented to provide additional information about our
operations. Adjusted EBITDA is a non-GAAP measure and should be
considered in addition to, but not as a substitute for or
superior to, operating income, net income, operating cash flow
and other measures of financial performance prepared in
accordance with GAAP. We compensate for these limitations by
relying primarily on our GAAP results and using Adjusted EBITDA
only supplementally. |
14
RISK
FACTORS
Investing in our common stock involves a high degree of risk.
You should carefully consider the following risk factors, as
well as other information contained in this prospectus, before
deciding to invest in our common stock. The occurrence of any of
the following risks could materially and adversely affect our
business, prospects, financial condition, results of operations
and cash flow, in which case, the trading price of our common
stock could decline and you could lose all or part of your
investment.
Risks
Related to Our Business and Industry
Our
foreclosure proceedings in certain states have been delayed due
to inquiries by certain state Attorneys General, court
administrators and state and federal governmental agencies, the
outcome of which could have a negative effect on our operations,
earnings or liquidity.
Allegations of irregularities in foreclosure processes,
including so-called robo-signing by mortgage loan
servicers, have gained the attention of the Department of
Justice, regulatory agencies, state Attorneys General and the
media, among other parties. On December 1, 2011, the
Massachusetts Attorney General filed a lawsuit against five
large mortgage providers alleging unfair and deceptive business
practices, including the use of so-called
robo-signers. In response, one of the mortgage
providers has halted most lending in Massachusetts. Certain
state Attorneys General, court administrators and governmental
agencies, as well as representatives of the federal government,
have issued letters of inquiry to mortgage servicers, including
us, requesting written responses to questions regarding policies
and procedures, especially with respect to notarization and
affidavit procedures. These requests or any subsequent
administrative, judicial or legislative actions taken by these
regulators, court administrators or other governmental entities
may subject us to fines and other sanctions, including a
foreclosure moratorium or suspension. Additionally, because we
do business in all fifty states, our operations may be affected
by regulatory actions or court decisions that are taken at the
individual state level.
In addition to these inquiries, several state Attorneys General
have requested that certain mortgage servicers, including us,
suspend foreclosure proceedings pending internal review to
ensure compliance with applicable law, and we have received
requests from four such state Attorneys General. Pursuant to
these requests and in light of industry-wide press coverage
regarding mortgage foreclosure documentation practices, we, as a
precaution, had already delayed foreclosure proceedings in
23 states, so that we may evaluate our foreclosure
practices and underlying documentation. Upon completion of our
internal review and after responding to such inquiries, we
resumed these previously delayed proceedings. Such inquiries,
however, as well as continued court backlog and emerging court
processes may cause an extended delay in the foreclosure process
in certain states.
Even in states where we have not suspended foreclosure
proceedings or where we have lifted or will soon lift any such
delayed foreclosures, we have faced, and may continue to face,
increased delays and costs in the foreclosure process. For
example, we have incurred, and may continue to incur, additional
costs related to the re-execution and re-filing of certain
documents. We may also be required to take other action in our
capacity as a mortgage servicer in connection with pending
foreclosures. In addition, the current legislative and
regulatory climate could lead borrowers to contest foreclosures
that they would not otherwise have contested under ordinary
circumstances, and we may incur increased litigation costs if
the validity of a foreclosure action is challenged by a
borrower. Delays in foreclosure proceedings could also require
us to make additional servicing advances by drawing on our
servicing advance facilities, or delay the recovery of advances,
all or any of which could materially affect our earnings and
liquidity and increase our need for capital.
15
The
Dodd-Frank Act could increase our regulatory compliance burden
and associated costs, limit our future capital raising
strategies, and place restrictions on certain originations and
servicing operations all of which could adversely affect our
business, financial condition and results of
operations.
On July 21, 2010, President Obama signed the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010 (the
Dodd-Frank Act) into law. The Dodd-Frank Act
represents a comprehensive overhaul of the financial services
industry in the United States. The Dodd-Frank Act includes,
among other things: (i) the creation of a Financial
Stability Oversight Council to identify emerging systemic risks
posed by financial firms, activities and practices, and to
improve cooperation among federal agencies; (ii) the
creation of a Bureau of Consumer Financial Protection
(CFPB) authorized to promulgate and enforce consumer
protection regulations relating to financial products;
(iii) the establishment of strengthened capital and
prudential standards for banks and bank holding companies;
(iv) enhanced regulation of financial markets, including
the derivatives and securitization markets; and
(v) amendments to the Truth in Lending Act aimed at
improving consumer protections with respect to mortgage
originations, including originator compensation, minimum
repayment standards and prepayment considerations. On
July 21, 2011, the CFPB obtained enforcement authority
pursuant to the Dodd-Frank Act and began official operations. On
October 13, 2011, the CFPB issued guidelines governing how
it supervises mortgage transactions, which involves sending
examiners to banks and other institutions that service mortgages
to assess whether consumers interests are protected. On
January 11, 2012, the CFPB issued guidelines governing
examination procedures for bank and non-bank mortgage
originators. The exact scope and applicability of many of these
requirements to us are currently unknown as the regulations to
implement the Dodd-Frank Act generally have not yet been
finalized. These provisions of the Dodd-Frank Act and actions by
the CFPB could increase our regulatory compliance burden and
associated costs and place restrictions on certain originations
and servicing operations, all of which could in turn adversely
affect our business, financial condition and results of
operations.
The
enforcement consent orders by, and agreements with, certain
federal and state agencies against the largest mortgage
servicers related to foreclosure practices could impose
additional compliance costs on our servicing business, which
could materially and adversely affect our financial condition
and results of operations.
On April 13, 2011, the federal agencies overseeing certain
aspects of the mortgage market, the OCC, the Federal Reserve and
the FDIC, entered into enforcement consent orders with 14 of the
largest mortgage servicers in the United States regarding
foreclosure practices. The enforcement consent orders require
the servicers, among other things to: (i) promptly correct
deficiencies in residential mortgage loan servicing and
foreclosure practices; (ii) make significant modifications
in practices for residential mortgage loan servicing and
foreclosure processing, including communications with borrowers
and limitations on dual-tracking, which occurs when servicers
continue to pursue foreclosure during the loan modification
process; (iii) ensure that foreclosures are not pursued
once a mortgage has been approved for modification and establish
a single point of contact for borrowers throughout the loan
modification and foreclosure processes; and (iv) establish
robust oversight and controls pertaining to their third party
vendors, including outside legal counsel, that provide default
management or foreclosure services. While these enforcement
consent orders are considered not to be preemptive of the state
actions, it is currently unclear how state actions and
proceedings will be affected by the federal consents.
Although we are not a party to the above enforcement consent
orders, we could become subject to the terms of the consent
orders if (i) we subservice loans for the mortgage
servicers that are parties to the enforcement consent orders;
(ii) the agencies begin to enforce the consent orders by
looking downstream to our arrangement with certain mortgage
servicers; (iii) the mortgage servicers for which we
subservice loans request that we comply with certain aspects of
the consent orders, or (iv) we otherwise find it prudent to
comply with certain aspects of the consent orders. In addition,
the practices set forth in such consent orders may be adopted by
the industry as a whole, forcing us to comply with them in order
to follow standard industry practices, or may become required by
our servicing agreements. While we have made and continue to
make changes to our operating policies and procedures in light
of the consent orders, further changes could be required and
changes to our servicing practices will increase compliance
costs for our servicing business, which could materially and
adversely affect our financial condition or results of
operations.
16
On September 1, 2011 and November 10, 2011, the New
York Department of Financial Services entered into agreements
regarding mortgage servicing practices with seven financial
institutions. The additional requirements provided for in these
agreements will increase operational complexity and the cost of
servicing loans in New York. Other servicers, including us,
could be required to enter into similar agreements. In addition,
other states may also require mortgage servicers to enter into
similar agreements. These additional costs could also materially
and adversely affect our financial condition and results of
operations.
Legal
proceedings, state or federal governmental examinations or
enforcement actions and related costs could have a material
adverse effect on our liquidity, financial position and results
of operations.
We are routinely and currently involved in legal proceedings
concerning matters that arise in the ordinary course of our
business. These legal proceedings range from actions involving a
single plaintiff to class action lawsuits with potentially tens
of thousands of class members. An adverse result in governmental
investigations or examinations or private lawsuits, including
purported class action lawsuits, may adversely affect our
financial results. In addition, a number of participants in our
industry, including us, have been the subject of purported class
action lawsuits and regulatory actions by state regulators, and
other industry participants have been the subject of actions by
state Attorneys General. Although we believe we have meritorious
legal and factual defenses to the lawsuits in which we are
currently involved, the ultimate outcomes with respect to these
matters remain uncertain. Litigation and other proceedings may
require that we pay settlement costs, legal fees, damages,
penalties or other charges, any or all of which could adversely
affect our financial results. In particular, ongoing and other
legal proceedings brought under state consumer protection
statutes may result in a separate fine for each violation of the
statute, which, particularly in the case of class action
lawsuits, could result in damages substantially in excess of the
amounts we earned from the underlying activities and that could
have a material adverse effect on our liquidity, financial
position and results of operations.
Governmental investigations, both state and federal, can be
either formal or informal. The costs of responding to the
investigations can be substantial. In addition,
government-mandated changes to servicing practices could lead to
higher costs and additional administrative burdens, in
particular regarding record retention and informational
obligations.
The
continued deterioration of the residential mortgage market may
adversely affect our business, financial condition and results
of operations.
Since mid-2007, adverse economic conditions, including high
unemployment, have impacted the residential mortgage market,
resulting in unprecedented delinquency, default and foreclosure
rates, all of which have led to increased loss severities on all
types of residential mortgage loans due to sharp declines in
residential real estate values. Falling home prices have
resulted in higher loan-to-value ratios (LTVs),
lower recoveries in foreclosure and an increase in loss
severities above those that would have been realized had
property values remained the same or continued to increase. As
LTVs increase, borrowers are left with equity in their homes
that is not sufficient to permit them to refinance their
existing loans. This may also provide borrowers an incentive to
default on their mortgage loan even if they have the ability to
make principal and interest payments, which we refer to as
strategic defaults. Increased mortgage defaults negatively
impact our Servicing Segment because they reduce the number of
mortgages we service.
Adverse economic conditions may also impact our Originations
Segment. Declining home prices and increasing LTVs may preclude
many potential borrowers, including borrowers whose existing
loans we service, from refinancing their existing loans. An
increase in prevailing interest rates could decrease our
originations volume through our Consumer Direct Retail
originations channel, our largest originations channel by volume
from December 31, 2006 to September 30, 2011, because
this channel focuses predominantly on refinancing existing
mortgage loans.
17
A continued deterioration or a delay in any recovery in the
residential mortgage market may reduce the number of mortgages
we service or new mortgages that we originate, reduce the
profitability of mortgages currently serviced by us, adversely
affect our ability to sell mortgage loans originated by us or
increase delinquency rates. Any of the foregoing could adversely
affect our business, financial condition and results of
operations.
We may
experience serious financial difficulties as some mortgage
servicers and originators have experienced, which could
adversely affect our business, financial condition and results
of operations.
Since late 2006, a number of mortgage servicers and originators
of residential mortgage loans have experienced serious financial
difficulties and, in some cases, have gone out of business.
These difficulties have resulted, in part, from declining
markets for their mortgage loans as well as from claims for
repurchases of mortgage loans previously sold under provisions
requiring repurchase in the event of early payment defaults or
breaches of representations and warranties regarding loan
quality and certain other loan characteristics. Higher
delinquencies and defaults may contribute to these difficulties
by reducing the value of mortgage loan portfolios and requiring
originators to sell their portfolios at greater discounts to
par. In addition, the cost of servicing an increasingly
delinquent mortgage loan portfolio may rise without a
corresponding increase in servicing compensation. The value of
many residual interests retained by sellers of mortgage loans in
the securitization market has also been declining. Overall
originations volumes are down significantly in the current
economic environment. According to Inside Mortgage Finance,
total U.S. residential mortgage originations volume
decreased from $3.0 trillion in 2006 to $1.3 trillion for the
nine months ended September 30, 2011. Any of the foregoing
could adversely affect our business, financial condition and
results of operations.
We
service reverse mortgages, which subjects us to additional risks
and could have a material adverse effect on our business,
liquidity, financial condition and results of
operations.
In December 2011, we signed an agreement to purchase the
servicing rights to certain reverse mortgages (the Reverse
Mortgage Acquisition) from Bank of America, N.A.
(BANA), an affiliate of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, one of the underwriters of
this offering. The reverse mortgage business is subject to
substantial risks, including market, credit, interest rate,
liquidity, operational and legal risks. A reverse mortgage is a
loan available to seniors aged 62 or older that allows
homeowners to borrow money against the value of their home. No
repayment of the mortgage is required until the borrower dies or
the home is sold. A deterioration of the market for reverse
mortgages may reduce the number of reverse mortgages we service,
reduce the profitability of reverse mortgages currently serviced
by us and adversely affect our ability to sell reverse mortgages
in the market. Although foreclosures involving reverse mortgages
generally occur less frequently than forward mortgages, loan
defaults on reverse mortgages leading to foreclosures may occur
if borrowers fail to meet maintenance obligations, such as
payment of taxes or home insurance premiums. An increase in
foreclosure rates may increase our cost of servicing. As a
reverse mortgage servicer, we will also be responsible for
funding any payments due to borrowers in a timely manner,
remitting to investors interest accrued, and paying for interest
shortfalls. Advances on reverse mortgages are typically greater
than advances on forward residential mortgages. They are
typically recovered upon weekly or monthly reimbursement. In the
event we receive requests for advances in excess of amounts we
are able to fund, we may not be able to fund these advance
requests, which could materially and adversely affect our
liquidity. Finally, we are subject to negative headline risk in
the event that loan defaults on reverse mortgages lead to
foreclosures or even evictions of elderly homeowners. All of the
above factors could have a material adverse effect on our
business, liquidity, financial condition and results of
operations.
Borrowers
with adjustable rate mortgage loans are especially exposed to
increases in monthly payments and they may not be able to
refinance their loans, which could cause delinquency, default
and foreclosure and therefore adversely affect our
business.
Borrowers with adjustable rate mortgage loans are exposed to
increased monthly payments when the related mortgage loans
interest rate adjusts upward from an initial fixed rate or a low
introductory rate, as
18
applicable, to the rate computed in accordance with the
applicable index and margin. Borrowers with adjustable rate
mortgage loans seeking to refinance their mortgage loans to
avoid increased monthly payments as a result of an upwards
adjustment of the mortgage loans interest rate may no
longer be able to find available replacement loans at comparably
low interest rates. This increase in borrowers monthly
payments, together with any increase in prevailing market
interest rates, may result in significantly increased monthly
payments for borrowers with adjustable rate mortgage loans,
which may cause delinquency, default and foreclosure. Increased
mortgage defaults and foreclosures may adversely affect our
business as they reduce the number of mortgages we service.
We
principally service higher risk loans, which exposes us to a
number of different risks.
A significant percentage of the mortgage loans we service are
higher risk loans, meaning that the loans are to less
creditworthy borrowers or for properties the value of which has
decreased. These loans are more expensive to service because
they require more frequent interaction with customers and
greater monitoring and oversight. As a result, these loans tend
to have higher delinquency and default rates, which can have a
significant impact on our revenues, expenses and the valuation
of our MSRs. It may also be more difficult for us to recover
advances we are required to make with respect to higher risk
loans. In connection with the ongoing mortgage market reform and
regulatory developments, servicers of higher risk loans may be
subject to increased scrutiny by state and federal regulators or
may experience higher compliance costs, which could result in
higher servicing costs. We may not be able to pass along any
incremental costs we incur to our servicing clients. All of the
foregoing factors could therefore adversely affect our business,
financial condition or results of operations.
A
significant change in delinquencies for the loans we service
could adversely affect our business, financial condition and
results of operations.
Delinquency rates have a significant impact on our revenues, our
expenses and on the valuation of our MSRs as follows:
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Revenue. An increase in delinquencies will
result in lower revenue for loans we service for GSEs because we
only collect servicing fees from GSEs for performing loans.
Additionally, while increased delinquencies generate higher
ancillary fees, including late fees, these fees are not likely
to be recoverable in the event that the related loan is
liquidated. In addition, an increase in delinquencies lowers the
interest income we receive on cash held in collection and other
accounts.
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Expenses. An increase in delinquencies will
result in a higher cost to service due to the increased time and
effort required to collect payments from delinquent borrowers.
It may also result in an increase in interest expense as a
result of an increase in our advancing obligations.
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Liquidity. An increase in delinquencies could
also negatively impact our liquidity because of an increase in
borrowing under our advance facilities.
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Valuation of MSRs. We base the price we pay
for MSRs on, among other things, our projections of the cash
flows from the related pool of mortgage loans. Our expectation
of delinquencies is a significant assumption underlying those
cash flow projections. If delinquencies were significantly
greater than expected, the estimated fair value of our MSRs
could be diminished. If the estimated fair value of MSRs is
reduced, we could suffer a loss, which has a negative impact on
our financial results.
|
A further increase in delinquency rates could therefore
adversely affect our business, financial condition and results
of operations.
19
Decreasing
property values have caused an increase in LTVs, resulting in
borrowers having little or negative equity in their property,
which may reduce new loan originations and provide incentive to
borrowers to strategically default on their loans.
According to CoreLogic, from December 2006 to September 2011,
the percentage of borrowers who owe more on a related mortgage
loan than the property is worth, or have negative equity in
their property, increased from 7% to 22%. We believe that
borrowers with negative equity in their properties are more
likely to strategically default on mortgage loans, which could
materially affect our business. Also, with the exception of
loans modified under the Making Home Affordable plan
(MHA), we are unable to refinance loans with high
LTVs. Increased LTVs could reduce our ability to originate loans
for borrowers with low or negative equity and could adversely
affect our business, financial condition and results of
operations.
The
industry in which we operate is highly competitive and our
inability to compete successfully could adversely affect our
business, financial condition and results of
operations.
We operate in a highly competitive industry that could become
even more competitive as a result of economic, legislative,
regulatory and technological changes. In the servicing industry,
we face competition in areas such as fees and performance in
reducing delinquencies and entering successful modifications.
Competition to service mortgage loans comes primarily from large
commercial banks and savings institutions. These financial
institutions generally have significantly greater resources and
access to capital than we do, which gives them the benefit of a
lower cost of funds. Additionally, our servicing competitors may
decide to modify their servicing model to compete more directly
with our servicing model, or our servicing model may generate
lower margins as a result of competition or as overall economic
conditions improve.
In the mortgage loan originations industry, we face competition
in such areas as mortgage loan offerings, rates, fees and
customer service. Competition to originate mortgage loans comes
primarily from large commercial banks and savings institutions.
These financial institutions generally have significantly
greater resources and access to capital than we do, which gives
them the benefit of a lower cost of funds.
In addition, technological advances and heightened
e-commerce
activities have increased consumers accessibility to
products and services. This has intensified competition among
banks and non-banks in offering mortgage loans and loan
servicing.
We may be unable to compete successfully in our industries and
this could adversely affect our business, financial condition
and results of operations.
We may
not be able to maintain or grow our business if we cannot
identify and acquire MSRs or enter into additional subservicing
agreements on favorable terms.
Our servicing portfolio is subject to run off,
meaning that mortgage loans serviced by us may be repaid at
maturity, prepaid prior to maturity, refinanced with a mortgage
not serviced by us or liquidated through foreclosure,
deed-in-lieu
of foreclosure or other liquidation process or repaid through
standard amortization of principal. As a result, our ability to
maintain the size of our servicing portfolio depends on our
ability to originate additional mortgages and to acquire the
right to service additional pools of residential mortgages. We
may not be able to acquire MSRs or enter into additional
subservicing agreements on terms favorable to us or at all,
which could adversely affect our business, financial condition
and results of operations. In determining the purchase price for
MSRs and subservicing agreements, management makes certain
assumptions, many of which are beyond our control, including,
among other things:
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the rates of prepayment and repayment within the underlying
pools of mortgage loans;
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projected rates of delinquencies, defaults and liquidations;
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our cost to service the loans;
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ancillary fee income; and
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amounts of future servicing advances.
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We may
not be able to recover our significant investments in personnel
and our technology platform if we cannot identify and acquire
MSRs or enter into additional subservicing agreements on
favorable terms, which could adversely affect our business,
financial condition and results of operations.
We have made, and expect to continue to make, significant
investments in personnel and our technology platform to allow us
to service additional loans. In particular, prior to acquiring a
large portfolio of MSRs or entering into a large subservicing
contract, we invest significant resources in recruiting,
training, technology and systems. We may not realize the
expected benefits of these investments to the extent we are
unable to increase the pool of residential mortgages serviced,
we are delayed in obtaining the right to service such loans or
we do not appropriately value the MSRs that we do purchase or
the subservicing agreements we enter into. Any of the foregoing
could adversely affect our business, financial condition and
results of operations.
We may
not realize all of the anticipated benefits of potential future
acquisitions, which could adversely affect our business,
financial condition and results of operations.
Our ability to realize the anticipated benefits of potential
future acquisitions of servicing portfolios, originations
platforms or companies will depend, in part, on our ability to
scale-up to
appropriately service any such assets, and integrate the
businesses of such acquired companies with our business. The
process of acquiring assets or companies may disrupt our
business and may not result in the full benefits expected. The
risks associated with acquisitions include, among others:
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uncoordinated market functions;
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unanticipated issues in integrating information, communications
and other systems;
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unanticipated incompatibility of purchasing, logistics,
marketing and administration methods;
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not retaining key employees; and
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the diversion of managements attention from ongoing
business concerns.
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Moreover, the success of any acquisition will depend upon our
ability to effectively integrate the acquired servicing
portfolios, originations platforms or businesses. The acquired
servicing portfolios, originations platforms or businesses may
not contribute to our revenues or earnings to any material
extent, and cost savings and synergies we expect at the time of
an acquisition may not be realized once the acquisition has been
completed. If we inappropriately value the assets we acquire or
the value of the assets we acquire declines after we acquire
them, the resulting charges may negatively affect the carrying
value of the assets on our balance sheet and our earnings. See
We use financial models and estimates in determining
the fair value of certain assets, such as MSRs and investments
in debt securities. If our estimates or assumptions prove to be
incorrect, we may be required to record impairment charges,
which could adversely affect our earnings. Furthermore, if
we incur additional indebtedness to finance an acquisition, the
acquired business may not be able to generate sufficient cash
flow to service that additional indebtedness. Unsuitable or
unsuccessful acquisitions could adversely affect our business,
financial condition and results of operations.
21
We may be
unable to obtain sufficient capital to meet the financing
requirements of our business.
Our financing strategy includes the use of significant leverage.
Accordingly, our ability to finance our operations and repay
maturing obligations rests in large part on our ability to
borrow money. We are generally required to renew our financing
arrangements each year, which exposes us to refinancing and
interest rate risks. In addition, a large portion of our
outstanding debt matures prior to March 31, 2012. See
Note 10 to Unaudited Consolidated Financial
StatementsIndebtedness. Our ability to refinance
existing debt and borrow additional funds is affected by a
variety of factors including:
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limitations imposed on us under the indenture governing our
senior notes and other financing agreements that contain
restrictive covenants and borrowing conditions that may limit
our ability to raise additional debt;
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the decrease in liquidity in the credit markets;
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prevailing interest rates;
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the strength of the lenders from which we borrow;
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limitations on borrowings on advance facilities imposed by the
amount of eligible collateral pledged, which may be less than
the borrowing capacity of the advance facility; and
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accounting changes that may impact calculations of covenants in
our debt agreements.
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In the ordinary course of our business, we periodically borrow
money or sell newly-originated loans to fund our servicing and
originations operations. See Managements Discussion
and Analysis of Financial Condition and Results of
OperationsLiquidity and Capital Resources. Our
ability to fund current operations and meet our service advance
obligations depends on our ability to secure these types of
financings on acceptable terms and to renew or replace existing
financings as they expire. Such financings may not be available
with the GSEs or other counterparties on acceptable terms or at
all.
An event of default, a negative ratings action by a rating
agency, an adverse action by a regulatory authority or a general
deterioration in the economy that constricts the availability of
creditsimilar to the market conditions that we have
experienced during the last three yearsmay increase our
cost of funds and make it difficult for us to renew existing
credit facilities or obtain new lines of credit. We intend to
continue to pursue opportunities to acquire loan servicing
portfolios, originations platforms and businesses that engage in
loan servicing and loan originations. Our liquidity and capital
resources may be diminished by any such transactions.
Additionally, we believe that a significant acquisition may
require us to raise additional capital to facilitate such a
transaction, which may not be available on acceptable terms or
at all.
In June 2011, the Basel Committee on Banking Supervision of the
Bank of International Settlements announced the final framework
for strengthening capital requirements, known as Basel III,
which if implemented by U.S. bank regulatory agencies, will
increase the cost of funding on banking institutions that we
rely on for financing. Such Basel III requirements on
banking institutions could reduce our sources of funding and
increase the costs of originating and servicing mortgage loans.
If we are unable to obtain sufficient capital on acceptable
terms for any of the foregoing reasons, this could adversely
affect our business, financial condition or results of
operations.
We may
not be able to continue to grow our loan originations volume,
which could adversely affect our business, financial condition
and results of operations.
Our loan originations business consists primarily of refinancing
existing loans. While we intend to use sales lead aggregators
and Internet marketing to reach new borrowers, our Consumer
Direct Retail
22
originations platform may not succeed because of the
referral-driven nature of our industry. Further, our largest
customer base consists of borrowers whose existing loans we
service. Because we primarily service credit-sensitive loans,
many of our existing servicing customers may not be able to
qualify for conventional mortgage loans with us or may pose a
higher credit risk than other consumers. Furthermore, our
Consumer Direct Retail originations platform focuses
predominantly on refinancing existing mortgage loans. This type
of originations activity is sensitive to increases in interest
rates.
Our loan originations business also consists of providing
purchase money loans to homebuyers. The origination of purchase
money mortgage loans is greatly influenced by traditional
business clients in the home buying process such as realtors and
builders. As a result, our ability to secure relationships with
such traditional business clients will influence our ability to
grow our purchase money mortgage loan volume and, thus, our loan
originations business.
Our wholesale originations business operates largely through
third party mortgage brokers who are not contractually obligated
to do business with us. Further, our competitors also have
relationships with our brokers and actively compete with us in
our efforts to expand our broker networks. Accordingly, we may
not be successful in maintaining our existing relationships or
expanding our broker networks.
If we are unable to continue to grow our loan originations
business, this could adversely affect our business, financial
condition and results of operations.
Our
counterparties may terminate our servicing rights and
subservicing contracts, which could adversely affect our
business, financial condition and results of
operations.
The owners of the loans we service and the primary servicers of
the loans we subservice, may, under certain circumstances,
terminate our MSRs or subservicing contracts, respectively.
As is standard in the industry, under the terms of our master
servicing agreement with GSEs, GSEs have the right to terminate
us as servicer of the loans we service on their behalf at any
time and also have the right to cause us to sell the MSRs to a
third party. In addition, some GSEs may also have the right to
require us to assign the MSRs to a subsidiary and sell our
equity interest in the subsidiary to a third party. Under our
subservicing contracts, the primary servicers for which we
conduct subservicing activities have the right to terminate our
subservicing rights with or without cause, with little notice
and little to no compensation. In November and December 2010,
through our relationship with the same GSE, we boarded
subservicing rights totaling approximately $25 billion in
UPB. We expect to continue to acquire subservicing rights, which
could exacerbate these risks.
If we were to have our servicing or subservicing rights
terminated on a material portion of our servicing portfolio,
this could adversely affect our business, financial condition
and results of operations.
Federal,
state and local laws and regulations could materially adversely
affect our business, financial condition and results of
operations.
Federal, state and local governments have recently proposed or
enacted numerous laws, regulations and rules related to mortgage
loans generally and foreclosure actions in particular. These
laws, regulations and rules may result in delays in the
foreclosure process, reduced payments by borrowers, modification
of the original terms of mortgage loans, permanent forgiveness
of debt and increased servicing advances. In some cases, local
governments have ordered moratoriums on foreclosure activity,
which prevent a servicer or trustee, as applicable, from
exercising any remedies they might have in respect of
liquidating a severely delinquent mortgage loan. Several courts
also have taken unprecedented steps to slow the foreclosure
process or prevent foreclosure altogether.
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In addition, the Federal Housing Finance Agency (the
FHFA) recently proposed changes to mortgage
servicing compensation structures, including cutting servicing
fees and channeling funds toward reserve accounts for delinquent
loans.
Due to the highly regulated nature of the residential mortgage
industry, we are required to comply with a wide array of
federal, state and local laws and regulations that regulate,
among other things, the manner in which we conduct our servicing
and originations business and the fees we may charge. These
regulations directly impact our business and require constant
compliance, monitoring and internal and external audits. A
material failure to comply with any of these laws or regulations
could subject us to lawsuits or governmental action, which could
materially adversely affect our business, financial condition
and results of operations.
In addition, there continue to be changes in legislation and
licensing in an effort to simplify the consumer mortgage
experience, which require technology changes and additional
implementation costs for loan originators. We expect legislative
changes will continue in the foreseeable future, which may
increase our operating expenses.
Any of these changes in the law could adversely affect our
business, financial condition and results of operations.
Unlike
competitors that are banks, we are subject to state licensing
and operational requirements that result in substantial
compliance costs.
Because we are not a depository institution, we do not benefit
from a federal exemption to state mortgage banking, loan
servicing or debt collection licensing and regulatory
requirements. We must comply with state licensing requirements
and varying compliance requirements in all fifty states and the
District of Columbia, and we are sensitive to regulatory changes
that may increase our costs through stricter licensing laws,
disclosure laws or increased fees or that may impose conditions
to licensing that we or our personnel are unable to meet. In
addition, we are subject to periodic examinations by state
regulators, which can result in refunds to borrowers of certain
fees earned by us, and we may be required to pay substantial
penalties imposed by state regulators due to compliance errors.
Future state legislation and changes in existing regulation may
significantly increase our compliance costs or reduce the amount
of ancillary fees, including late fees, that we may charge to
borrowers. This could make our business cost-prohibitive in the
affected state or states and could materially affect our
business.
Federal
and state legislative and agency initiatives in mortgage-backed
securities (MBS) and securitization may adversely
affect our financial condition and results of
operations.
There are federal and state legislative and agency initiatives
that could, once fully implemented, adversely affect our
business. For instance, the risk retention requirement under the
Dodd-Frank Act requires securitizers to retain a minimum
beneficial interest in MBS they sell through a securitization,
absent certain qualified residential mortgage (QRM)
exemptions. Once implemented, the risk retention requirement may
result in higher costs of certain originations operations and
impose on us additional compliance requirements to meet
servicing and originations criteria for QRMs. Additionally, the
amendments to Regulation AB relating to the registration
statement required to be filed by ABS issuers recently adopted
by the SEC pursuant to the Dodd-Frank Act would increase
compliance costs for ABS issuers, which could in turn increase
our cost of funding and operations. Lastly, certain proposed
federal legislation would permit borrowers in bankruptcy to
restructure mortgage loans secured by primary residences.
Bankruptcy courts could, if this legislation is enacted, reduce
the principal balance of a mortgage loan that is secured by a
lien on mortgaged property, reduce the mortgage interest rate,
extend the term to maturity or otherwise modify the terms of a
bankrupt borrowers mortgage loan. Any of the foregoing
could materially affect our financial condition and results of
operations.
24
Our
business would be adversely affected if we lose our
licenses.
Our operations are subject to regulation, supervision and
licensing under various federal, state and local statutes,
ordinances and regulations. In most states in which we operate,
a regulatory agency regulates and enforces laws relating to
mortgage servicing companies and mortgage originations companies
such as us. These rules and regulations generally provide for
licensing as a mortgage servicing company, mortgage originations
company or third party debt default specialist, requirements as
to the form and content of contracts and other documentation,
licensing of our employees and employee hiring background
checks, licensing of independent contractors with which we
contract, restrictions on collection practices, disclosure and
record-keeping requirements and enforcement of borrowers
rights. In certain states, we are subject to periodic
examination by state regulatory authorities. Some states in
which we operate require special licensing or provide extensive
regulation of our business.
We believe that we maintain all material licenses and permits
required for our current operations and are in substantial
compliance with all applicable federal, state and local
regulations. We may not be able to maintain all requisite
licenses and permits, and the failure to satisfy those and other
regulatory requirements could result in a default under our
servicing agreements and have a material adverse effect on our
operations. The states that currently do not provide extensive
regulation of our business may later choose to do so, and if
such states so act, we may not be able to obtain or maintain all
requisite licenses and permits. The failure to satisfy those and
other regulatory requirements could result in a default under
our servicing agreements and have a material adverse effect on
our operations. Furthermore, the adoption of additional, or the
revision of existing, rules and regulations could adversely
affect our business, financial condition and results of
operations.
We may be
required to indemnify or repurchase loans we originated, or will
originate, if our loans fail to meet certain criteria or
characteristics or under other circumstances.
The indentures governing our securitized pools of loans and our
contracts with purchasers of our whole loans contain provisions
that require us to indemnify or repurchase the related loans
under certain circumstances. While our contracts vary, they
contain provisions that require us to repurchase loans if:
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our representations and warranties concerning loan quality and
loan circumstances are inaccurate, including representations
concerning the licensing of a mortgage broker;
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we fail to secure adequate mortgage insurance within a certain
period after closing;
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a mortgage insurance provider denies coverage; or
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we fail to comply, at the individual loan level or otherwise,
with regulatory requirements in the current dynamic regulatory
environment.
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We believe that, as a result of the current market environment,
many purchasers of residential mortgage loans are particularly
aware of the conditions under which originators must indemnify
or repurchase loans and would benefit from enforcing any
repurchase remedies they may have. We believe that our exposure
to repurchases under our representations and warranties includes
the current unpaid balance of all loans we have sold. In the
nine months ended September 30, 2011 and three years ended
December 31, 2008, 2009, and 2010, we sold an aggregate of
$6.4 billion of loans. To recognize the potential loan
repurchase or indemnification losses, we have recorded a reserve
of $7.4 million as of September 30, 2011. Such
reserve, however, may not be adequate to cover actual losses.
See Managements Discussion and Analysis of Financial
Condition and Results of OperationsAnalysis of Items on
Consolidated Balance SheetAs of September 30, 2011 and
December 31, 2010Liabilities and Members
Equity. If we are required to indemnify or repurchase
loans that we originate and sell or securitize that result in
losses that exceed our reserve, this could adversely affect our
business, financial condition and results of operations.
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We may
incur increased litigation costs and related losses if a
borrower challenges the validity of a foreclosure action or if a
court overturns a foreclosure, which could adversely affect our
liquidity, business, financial condition and results of
operations.
We may incur costs if we are required to, or if we elect to,
execute or re-file documents or take other action in our
capacity as a servicer in connection with pending or completed
foreclosures. We may incur litigation costs if the validity of a
foreclosure action is challenged by a borrower. If a court
overturns a foreclosure because of errors or deficiencies in the
foreclosure process, we may have liability to a title insurer or
the purchaser of the property sold in foreclosure. These costs
and liabilities may not be legally or otherwise reimbursable to
us, particularly to the extent they relate to securitized
mortgage loans. In addition, if certain documents required for a
foreclosure action are missing or defective, we could be
obligated to cure the defect or repurchase the loan. A
significant increase in litigation costs could adversely affect
our liquidity, and our inability to be reimbursed for an advance
could adversely affect our business, financial condition and
results of operations.
Because
we are required to follow the guidelines of the GSEs with which
we do business and are not able to negotiate our fees with these
entities for the purchase of our loans, our competitors may be
able to sell their loans to GSEs on more favorable
terms.
Even though we currently originate conventional agency and
government conforming loans, because we previously originated
non-prime mortgage loans, we believe we are required to pay a
higher fee to access the secondary market for selling our loans
to GSEs. We believe that because many of our competitors have
always originated conventional loans, they are able to sell
newly originated loans on more favorable terms than us. As a
result, these competitors are able to earn higher margins than
we earn on originated loans, which could materially impact our
business.
In our transactions with the GSEs, we are required to follow
specific guidelines that impact the way we service and originate
mortgage loans including:
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our staffing levels and other servicing practices;
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the servicing and ancillary fees that we may charge;
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our modification standards and procedures; and
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the amount of non-reimbursable advances.
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In particular, the FHFA has directed GSEs to align their
guidelines for servicing delinquent mortgages they own or
guarantee, which can result in monetary incentives for servicers
that perform well and penalties for those that do not. In
addition, FHFA has directed Fannie Mae to assess compensatory
fees against servicers in connection with delinquent loans,
foreclosure delays, and other breaches of servicing obligations.
We cannot negotiate these terms with the GSEs and they are
subject to change at any time. A significant change in these
guidelines that has the effect of decreasing our fees or
requires us to expend additional resources in providing mortgage
services could decrease our revenues or increase our costs,
which could adversely affect our business, financial condition
and results of operations.
We are
required to make servicing advances that can be subject to
delays in recovery or may not be recoverable in certain
circumstances, which could adversely affect our liquidity,
business, financial condition and results of
operations.
During any period in which a borrower is not making payments, we
are required under most of our servicing agreements to advance
our own funds to meet contractual principal and interest
remittance
26
requirements for investors, pay property taxes and insurance
premiums, legal expenses and other protective advances. We also
advance funds to maintain, repair and market real estate
properties on behalf of investors. As home values change, we may
have to reconsider certain of the assumptions underlying our
decisions to make advances and, in certain situations, our
contractual obligations may require us to make certain advances
for which we may not be reimbursed. In addition, in the event a
mortgage loan serviced by us defaults or becomes delinquent, the
repayment to us of the advance may be delayed until the mortgage
loan is repaid or refinanced or a liquidation occurs. A delay in
our ability to collect an advance may adversely affect our
liquidity, and our inability to be reimbursed for an advance
could adversely affect our business, financial condition and
results of operations.
Changes
to government mortgage modification programs could adversely
affect future incremental revenues.
Under HAMP and similar government programs, a participating
servicer may be entitled to receive financial incentives in
connection with any modification plans it enters into with
eligible borrowers and subsequent success fees to the extent
that a borrower remains current in any agreed upon loan
modification. While we participate in and dedicate numerous
resources to HAMP, we may not continue to participate in or
realize future revenues from HAMP or any other government
mortgage modification program. Changes in legislation or
regulation regarding HAMP that result in the modification of
outstanding mortgage loans and changes in the requirements
necessary to qualify for refinancing mortgage loans may impact
the extent to which we participate in and receive financial
benefits from such programs, or may increase the expense of our
participation in such programs. Changes in governmental loan
modification programs could also result in an increase to our
costs.
HAMP is currently scheduled to expire on December 31, 2012.
If HAMP is not extended, this could decrease our revenues, which
would adversely affect our business, financial condition and
results of operations.
Under the MHA, a participating servicer may receive a financial
incentive to modify qualifying loans, in accordance with the
plans guidelines and requirements. The MHA also allows us
to refinance loans with a high LTV of up to 125%. This allows us
to refinance loans to existing borrowers who have little or
negative equity in their homes. Changes in legislation or
regulations regarding the MHA could reduce our volume of
refinancing originations to borrowers with little or negative
equity in their homes. Changes to HAMP, the MHA and other
similar programs could adversely affect future incremental
revenues.
We are
highly dependent upon programs administered by GSEs such as
Fannie Mae and Freddie Mac to generate revenues through mortgage
loan sales to institutional investors. Any changes in existing
U.S. government-sponsored mortgage programs could materially and
adversely affect our business, liquidity, financial position and
results of operations.
In February 2011, the Obama Administration delivered a report to
Congress regarding a proposal to reform the housing finance
markets in the United States. The report, among other things,
outlined various potential proposals to wind down the GSEs and
reduce or eliminate over time the role of the GSEs in
guaranteeing mortgages and providing funding for mortgage loans,
as well as proposals to implement reforms relating to borrowers,
lenders and investors in the mortgage market, including reducing
the maximum size of loans that the GSEs can guarantee, phasing
in a minimum down payment requirement for borrowers, improving
underwriting standards and increasing accountability and
transparency in the securitization process.
Our ability to generate revenues through mortgage loan sales to
institutional investors depends to a significant degree on
programs administered by the GSEs, such as Fannie Mae and
Freddie Mac, a government agency, Ginnie Mae, and others that
facilitate the issuance of MBS in the secondary market. These
GSEs play a critical role in the residential mortgage industry
and we have significant business relationships with many of
them. Almost all of the conforming loans we originate qualify
under existing standards for inclusion in guaranteed mortgage
securities backed by GSEs. We also derive other material
financial benefits from these relationships, including the
assumption of credit risk by these GSEs on loans
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included in such mortgage securities in exchange for our
payment of guarantee fees and the ability to avoid certain loan
inventory finance costs through streamlined loan funding and
sale procedures.
Any discontinuation of, or significant reduction in, the
operation of these GSEs or any significant adverse change in the
level of activity in the secondary mortgage market or the
underwriting criteria of these GSEs could materially and
adversely affect our business, liquidity, financial position and
results of operations.
The
conservatorship of Fannie Mae and Freddie Mac and related
efforts, along with any changes in laws and regulations
affecting the relationship between Fannie Mae and Freddie Mac
and the U.S. federal government, could adversely affect our
business and prospects.
Due to increased market concerns about the ability of Fannie Mae
and Freddie Mac to withstand future credit losses associated
with securities held in their investment portfolios, and on
which they provide guarantees without the direct support of the
U.S. federal government, on July 30, 2008, the U.S.
government passed the Housing and Economic Recovery Act of 2008.
On September 7, 2008, the FHFA, placed Fannie Mae and
Freddie Mac into conservatorship and, together with the
U.S. Treasury, established a program designed to boost
investor confidence in their respective debt and MBS. As the
conservator of Fannie Mae and Freddie Mac, the FHFA controls and
directs the operations of Fannie Mae and Freddie Mac and may
(i) take over the assets and operations of Fannie Mae and
Freddie Mac with all the powers of the shareholders, the
directors and the officers of Fannie Mae and Freddie Mac and
conduct all business of Fannie Mae and Freddie Mac;
(ii) collect all obligations and money due to Fannie Mae
and Freddie Mac; (iii) perform all functions of Fannie Mae
and Freddie Mac which are consistent with the conservators
appointment; (iv) preserve and conserve the assets and
property of Fannie Mae and Freddie Mac; and (v) contract
for assistance in fulfilling any function, activity, action or
duty of the conservator.
In addition to the FHFA becoming the conservator of Fannie Mae
and Freddie Mac, the U.S. Treasury and the FHFA have
entered into preferred stock purchase agreements among the
U.S. Treasury, Fannie Mae and Freddie Mac pursuant to which
the U.S. Treasury will ensure that each of Fannie Mae and
Freddie Mac maintains a positive net worth.
Although the U.S. Treasury has committed capital to Fannie
Mae and Freddie Mac, these actions may not be adequate for their
needs. If these actions are inadequate, Fannie Mae and Freddie
Mac could continue to suffer losses and could fail to honor
their guarantees and other obligations. The future roles of
Fannie Mae and Freddie Mac could be significantly reduced and
the nature of their guarantees could be considerably limited
relative to historical measurements. Any changes to the nature
of the guarantees provided by Fannie Mae and Freddie Mac could
redefine what constitute agency and government conforming MBS
and could have broad adverse market implications. Such market
implications could adversely affect our business and prospects.
The
geographic concentration of our servicing portfolio may result
in a higher rate of delinquencies, which could adversely affect
our business, financial condition and results of
operations.
As of September 30, 2011, approximately 19%, 12% and 5% of
the aggregate outstanding loan balance in our servicing
portfolio was secured by properties located in California,
Florida and Texas, respectively. Some of these states have
experienced severe declines in property values and are
experiencing a disproportionately high rate of delinquencies and
foreclosures relative to other states. To the extent these
states continue to experience weaker economic conditions or
greater rates of decline in real estate values than the United
States generally, the concentration of loans we service in those
regions may increase the effect of the risks listed in this
Risk Factors section. The impact of property value
declines may increase in magnitude and it may continue for a
long period of time. Additionally, if states in which we have
greater concentrations of business were to change their
licensing or other regulatory requirements to make our business
cost-prohibitive, we may be required to stop doing business in
those states or may be subject to higher cost of
28
doing business in those states, which could adversely affect
our business, financial condition and results of operations.
We use
financial models and estimates in determining the fair value of
certain assets, such as MSRs and investments in debt securities.
If our estimates or assumptions prove to be incorrect, we may be
required to record impairment charges, which could adversely
affect our earnings.
We use internal financial models that utilize, wherever
possible, market participant data to value certain of our
assets, including our MSRs, newly originated loans held for sale
and investments in debt securities for purposes of financial
reporting. These models are complex and use asset-specific
collateral data and market inputs for interest and discount
rates. In addition, the modeling requirements of MSRs are
complex because of the high number of variables that drive cash
flows associated with MSRs. Even if the general accuracy of our
valuation models is validated, valuations are highly dependent
upon the reasonableness of our assumptions and the
predictability of the relationships that drive the results of
the models. If loan loss levels are higher than anticipated, due
to an increase in delinquencies or prepayment speeds, or
financial market illiquidity continues beyond our estimate, the
value of certain of our assets may decrease. We may be required
to record impairment charges, which could impact our ability to
satisfy minimum net worth covenants of $175.0 million and
borrowing conditions in our debt agreements and adversely affect
our business, financial condition or results of operations.
Errors in our financial models or changes in assumptions could
adversely affect our earnings. See We may not
realize all of the anticipated benefits of potential future
acquisitions, which could adversely affect our business,
financial condition and results of operations.
Our
earnings may decrease because of changes in prevailing interest
rates.
Our profitability is directly affected by changes in prevailing
interest rates. The following are the material risks we face
related to changes in prevailing interest rates:
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an increase in prevailing interest rates could generate an
increase in delinquency, default and foreclosure rates resulting
in an increase in both operating expenses and interest expense
and could cause a reduction in the value of our assets;
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a substantial and sustained increase in prevailing interest
rates could adversely affect our loan originations volume
because refinancing an existing loan would be less attractive
for homeowners and qualifying for a loan may be more difficult
for consumers;
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an increase in prevailing interest rates would increase the cost
of servicing our outstanding debt, including our ability to
finance servicing advances and loan originations;
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a decrease in prevailing interest rates may require us to record
a decrease in the value of our MSRs; and
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a change in prevailing interest rates could impact our earnings
from our custodial deposit accounts.
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Our
hedging strategies may not be successful in mitigating our risks
associated with interest rates.
From time to time, we have used various derivative financial
instruments to provide a level of protection against interest
rate risks, but no hedging strategy can protect us completely.
The derivative financial instruments that we select may not have
the effect of reducing our interest rate risks. In addition, the
nature and timing of hedging transactions may influence the
effectiveness of these strategies. Poorly designed strategies,
improperly executed and documented transactions or inaccurate
assumptions could actually increase our risks and losses. In
addition, hedging strategies involve transaction and other
costs. Our hedging strategies and the derivatives that we use
may not be able to adequately offset the risks of interest rate
volatility and our
29
hedging transactions may result in or magnify losses.
Furthermore, interest rate derivatives may not be available on
favorable terms or at all, particularly during economic
downturns. Any of the foregoing risks could adversely affect our
business, financial condition or results of operations.
A
downgrade in our servicer ratings could have an adverse effect
on our business, financial condition or results of
operations.
Standard & Poors and Fitch rate us as a
residential loan servicer. Our current favorable ratings from
the rating agencies are important to the conduct of our loan
servicing business. These ratings may be downgraded in the
future. Any such downgrade could adversely affect our business,
financial condition and results of operations.
We depend
on the accuracy and completeness of information about borrowers
and counterparties and any misrepresented information could
adversely affect our business, financial condition and results
of operations.
In deciding whether to extend credit or to enter into other
transactions with borrowers and counterparties, we may rely on
information furnished to us by or on behalf of borrowers and
counterparties, including financial statements and other
financial information. We also may rely on representations of
borrowers and counterparties as to the accuracy and completeness
of that information and, with respect to financial statements,
on reports of independent auditors. We additionally rely on
representations from public officials concerning the licensing
and good standing of the third party mortgage brokers through
which we do business. While we have a practice of independently
verifying the borrower information that we use in deciding
whether to extend credit or to agree to a loan modification,
including employment, assets, income and credit score, if any of
this information is intentionally or negligently misrepresented
and such misrepresentation is not detected prior to loan
funding, the value of the loan may be significantly lower than
expected. Whether a misrepresentation is made by the loan
applicant, the mortgage broker, another third party or one of
our employees, we generally bear the risk of loss associated
with the misrepresentation. We have controls and processes
designed to help us identify misrepresented information in our
loan originations operations. We, however, may not have detected
or may not detect all misrepresented information in our loan
originations or from our business clients. Any such
misrepresented information could adversely affect our business,
financial condition and results of operations.
Technology
failures could damage our business operations and increase our
costs, which could adversely affect our business, financial
condition and results of operations.
The financial services industry as a whole is characterized by
rapidly changing technologies, and system disruptions and
failures caused by fire, power loss, telecommunications
failures, unauthorized intrusion, computer viruses and disabling
devices, natural disasters and other similar events may
interrupt or delay our ability to provide services to our
borrowers. Security breaches, acts of vandalism and developments
in computer capabilities could result in a compromise or breach
of the technology that we use to protect our borrowers
personal information and transaction data. Systems failures
could cause us to incur significant costs and this could
adversely affect our business, financial condition and results
of operations.
The
success and growth of our business will depend upon our ability
to adapt to and implement technological changes.
Our mortgage loan originations business is currently dependent
upon our ability to effectively interface with our brokers,
borrowers and other third parties and to efficiently process
loan applications and closings. The originations process is
becoming more dependent upon technological advancement, such as
our continued ability to process applications over the Internet,
accept electronic signatures, provide process status updates
instantly and other borrower-expected conveniences. Maintaining
and improving this new technology and becoming proficient with
it may also require significant capital expenditures. As these
requirements
30
increase in the future, we will have to fully develop these
technological capabilities to remain competitive and any failure
to do so could adversely affect our business, financial
condition and results of operations.
Any
failure of our internal security measures or breach of our
privacy protections could cause harm to our reputation and
subject us to liability, any of which could adversely affect our
business, financial condition and results of
operations.
In the ordinary course of our business, we receive and store
certain confidential information concerning borrowers.
Additionally, we enter into third party relationships to assist
with various aspects of our business, some of which require the
exchange of confidential borrower information. If a third party
were to compromise or breach our security measures or those of
the vendors, through electronic, physical or other means, and
misappropriate such information, it could cause interruptions in
our operations and expose us to significant liabilities,
reporting obligations, remediation costs and damage to our
reputation. Any of the foregoing risks could adversely affect
our business, financial condition and results of operations.
Our
vendor relationships subject us to a variety of risks.
We have significant vendors that, among other things, provide us
with financial, technology and other services to support our
servicing and originations businesses. With respect to vendors
engaged to perform activities required by servicing criteria, we
have elected to take responsibility for assessing compliance
with the applicable servicing criteria for the applicable vendor
and are required to have procedures in place to provide
reasonable assurance that the vendors activities comply in
all material respects with servicing criteria applicable to the
vendor. In the event that a vendors activities do not
comply with the servicing criteria, it could negatively impact
our servicing agreements. In addition, if our current vendors
were to stop providing services to us on acceptable terms,
including as a result of one or more vendor bankruptcies due to
poor economic conditions, we may be unable to procure
alternatives from other vendors in a timely and efficient manner
and on acceptable terms, or at all. Further, we may incur
significant costs to resolve any such disruptions in service and
this could adversely affect our business, financial condition
and results of operations.
The loss
of the services of our senior managers could adversely affect
our business.
The experience of our senior managers is a valuable asset to us.
Our management team has significant experience in the
residential mortgage originations and servicing industry. We do
not maintain key life insurance policies relating to our senior
managers. The loss of the services of our senior managers could
adversely affect our business.
Our
business could suffer if we fail to attract and retain a highly
skilled workforce.
Our future success will depend on our ability to identify, hire,
develop, motivate and retain highly qualified personnel for all
areas of our organization, in particular skilled managers, loan
servicers, debt default specialists, loan officers and
underwriters. Trained and experienced personnel are in high
demand and may be in short supply in some areas. Many of the
companies with which we compete for experienced employees have
greater resources than we have and may be able to offer more
attractive terms of employment. In addition, we invest
significant time and expense in training our employees, which
increases their value to competitors who may seek to recruit
them. We may not be able to attract, develop and maintain an
adequate skilled workforce necessary to operate our businesses
and labor expenses may increase as a result of a shortage in the
supply of qualified personnel. If we are unable to attract and
retain such personnel, we may not be able to take advantage of
acquisitions and other growth opportunities that may be
presented to us and this could materially affect our business,
financial condition and results of operations.
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Negative
public opinion could damage our reputation and adversely affect
our earnings.
Reputation risk, or the risk to our business, earnings and
capital from negative public opinion, is inherent in our
business. Negative public opinion can result from our actual or
alleged conduct in any number of activities, including lending
and debt collection practices, corporate governance, and actions
taken by government regulators and community organizations in
response to those activities. Negative public opinion can also
result from media coverage, whether accurate or not. Negative
public opinion can adversely affect our ability to attract and
retain customers, trading counterparties and employees and can
expose us to litigation and regulatory action. Although we take
steps to minimize reputation risk in dealing with our customers
and communities, this risk will always be present in our
organization.
Risks
Related to Our Organization and Structure
If the
ownership of our common stock continues to be highly
concentrated, it may prevent you and other minority stockholders
from influencing significant corporate decisions and may result
in conflicts of interest.
Following the completion of this offering, the Initial
Stockholder, which is primarily owned by certain private equity
funds managed by an affiliate of Fortress, will own
approximately % of our outstanding
common stock or % if the
underwriters over-allotment option is fully exercised. As
a result, the Initial Stockholder will own shares sufficient for
the majority vote over all matters requiring a stockholder vote,
including: the election of directors; mergers, consolidations
and acquisitions; the sale of all or substantially all of our
assets and other decisions affecting our capital structure; the
amendment of our certificate of incorporation and our bylaws;
and our winding up and dissolution. This concentration of
ownership may delay, deter or prevent acts that would be favored
by our other stockholders. The interests of the Initial
Stockholder may not always coincide with our interests or the
interests of our other stockholders. This concentration of
ownership may also have the effect of delaying, preventing or
deterring a change in control of us. Also, the Initial
Stockholder may seek to cause us to take courses of action that,
in its judgment, could enhance its investment in us, but which
might involve risks to our other stockholders or adversely
affect us or our other stockholders, including investors in this
offering. As a result, the market price of our common stock
could decline or stockholders might not receive a premium over
the then-current market price of our common stock upon a change
in control. In addition, this concentration of share ownership
may adversely affect the trading price of our common stock
because investors may perceive disadvantages in owning shares in
a company with significant stockholders. See Principal and
Selling Stockholders and Description of Capital
StockAnti-Takeover Effects of Delaware Law, Our Amended
and Restated Certificate of Incorporation and Amended and
Restated Bylaws.
We are a
holding company with no operations and will rely on our
operating subsidiaries to provide us with funds necessary to
meet our financial obligations and to pay dividends.
We are a holding company with no material direct operations. Our
principal assets are the equity interests we directly or
indirectly hold in our operating subsidiaries, which own our
operating assets. As a result, we will be dependent on loans,
dividends and other payments from our subsidiaries to generate
the funds necessary to meet our financial obligations and to pay
dividends on our common stock. Our subsidiaries are legally
distinct from us and may be prohibited or restricted from paying
dividends or otherwise making funds available to us under
certain conditions. If we are unable to obtain funds from our
subsidiaries, we may be unable to, or our board may exercise its
discretion not to, pay dividends.
We do not
anticipate paying any dividends on our common stock in the
foreseeable future.
We do not expect to declare or pay any cash or other dividends
in the foreseeable future on our common stock because we intend
to use cash flow generated by operations to grow our business.
The indenture governing our senior notes restricts our ability
to pay cash dividends on our common stock. We may
32
also enter into credit agreements or other borrowing
arrangements in the future that restrict or limit our ability to
pay cash dividends on our common stock. See Dividend
Policy.
Certain
provisions of the Stockholders Agreement, our amended and
restated certificate of incorporation and our amended and
restated bylaws could hinder, delay or prevent a change in
control of us, which could adversely affect the price of our
common stock.
Certain provisions of our Stockholders Agreement with our
Initial Stockholder (the Stockholders Agreement),
our amended and restated certificate of incorporation and our
amended and restated bylaws will contain provisions that could
make it more difficult for a third party to acquire us without
the consent of our board of directors or the Initial
Stockholder. These provisions provide for:
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a classified board of directors with staggered three-year terms;
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removal of directors only for cause and only with the
affirmative vote of at least 80% of the voting interest of
stockholders entitled to vote (provided, however, that for so
long as the Initial Stockholder and certain other affiliates of
Fortress and permitted transferees (collectively, the
Fortress Stockholders) beneficially own at least 40%
of our issued and outstanding common stock, directors may be
removed with or without cause with the affirmative vote of a
majority of the voting interest of stockholders entitled to
vote);
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provisions in our amended and restated certificate of
incorporation and amended and restated bylaws will prevent
stockholders from calling special meetings of our stockholders
(provided, however, that for so long as the Fortress
Stockholders beneficially own at least 25% of our issued and
outstanding common stock, any stockholders that collectively
beneficially own at least 25% of our issued and outstanding
common stock may call special meetings of our stockholders);
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advance notice requirements by stockholders with respect to
director nominations and actions to be taken at annual meetings;
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certain rights to the Fortress Stockholders with respect to the
designation of directors for nomination and election to our
board of directors, including the ability to appoint a majority
of the members of our board of directors for so long as the
Fortress Stockholders continue to beneficially own at least 40%
of our issued and outstanding common stock. See Certain
Relationships and Related Party TransactionsStockholders
Agreement;
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no provision in our amended and restated certificate of
incorporation or amended and restated bylaws for cumulative
voting in the election of directors, which means that the
holders of a majority of the outstanding shares of our common
stock can elect all the directors standing for election;
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our amended and restated certificate of incorporation and our
amended and restated bylaws will only permit action by our
stockholders outside a meeting by unanimous written consent,
provided, however, that for so long as the Fortress Stockholders
beneficially own at least 25% of our issued and outstanding
common stock, our stockholders may act without a meeting by
written consent of a majority of our stockholders; and
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under our amended and restated certificate of incorporation, our
board of directors has authority to cause the issuance of
preferred stock from time to time in one or more series and to
establish the terms, preferences and rights of any such series
of preferred stock, all without approval of our stockholders.
Nothing in our amended and restated certificate of incorporation
precludes
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future issuances without stockholder approval of the authorized
but unissued shares of our common stock.
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In addition, these provisions may make it difficult and
expensive for a third party to pursue a tender offer, change in
control or takeover attempt that is opposed by our Initial
Stockholder, our management or our board of directors. Public
stockholders who might desire to participate in these types of
transactions may not have an opportunity to do so, even if the
transaction is favorable to stockholders. These anti-takeover
provisions could substantially impede the ability of public
stockholders to benefit from a change in control or change our
management and board of directors and, as a result, may
adversely affect the market price of our common stock and your
ability to realize any potential change of control premium. See
Description of Capital StockAnti-Takeover Effects of
Delaware Law, Our Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws.
Certain
of our stockholders have the right to engage or invest in the
same or similar businesses as us.
The Fortress Stockholders have other investments and business
activities in addition to their ownership of us. Under our
amended and restated certificate of incorporation, the Fortress
Stockholders have the right, and have no duty to abstain from
exercising such right, to engage or invest in the same or
similar businesses as us, do business with any of our clients,
customers or vendors or employ or otherwise engage any of our
officers, directors or employees. If the Fortress Stockholders
or any of their officers, directors or employees acquire
knowledge of a potential transaction that could be a corporate
opportunity, they have no duty, to the fullest extent permitted
by law, to offer such corporate opportunity to us, our
stockholders or our affiliates.
In the event that any of our directors and officers who is also
a director, officer or employee of any of the Fortress
Stockholders acquires knowledge of a corporate opportunity or is
offered a corporate opportunity, provided that this knowledge
was not acquired solely in such persons capacity as our
director or officer and such person acts in good faith, then to
the fullest extent permitted by law such person is deemed to
have fully satisfied such persons fiduciary duties owed to
us and is not liable to us, if the Fortress Stockholder pursues
or acquires the corporate opportunity or if the Fortress
Stockholder does not present the corporate opportunity to us.
See Certain Relationships and Related Party
TransactionsStockholders Agreement.
Risks
Related to this Offering
An active
trading market for our common stock may never develop or be
sustained.
Although we have applied to have our common stock approved for
listing on the NYSE, an active trading market for our common
stock may not develop on that exchange or elsewhere or, if
developed, that market may not be sustained. Accordingly, if an
active trading market for our common stock does not develop or
is not maintained, the liquidity of our common stock, your
ability to sell your shares of common stock when desired and the
prices that you may obtain for your shares of common stock will
be adversely affected.
The
market price and trading volume of our common stock may be
volatile, which could result in rapid and substantial losses for
our stockholders.
Even if an active trading market develops, the market price of
our common stock may be highly volatile and could be subject to
wide fluctuations. In addition, the trading volume in our common
stock may fluctuate and cause significant price variations to
occur. The initial public offering price of our common stock
will be determined by negotiation between us, the Initial
Stockholder and the representatives of the underwriters based on
a number of factors and may not be indicative of prices that
will prevail in the open market following completion of this
offering. If the market price of our common stock declines
significantly, you may be unable to resell your shares at or
above your purchase price, if at all. The market price of our
34
common stock may fluctuate or decline significantly in the
future. Some of the factors that could negatively affect our
share price or result in fluctuations in the price or trading
volume of our common stock include:
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variations in our quarterly or annual operating results;
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changes in our earnings estimates (if provided) or differences
between our actual financial and operating results and those
expected by investors and analysts;
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the contents of published research reports about us or our
industry or the failure of securities analysts to cover our
common stock after this offering;
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additions or departures of key management personnel;
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any increased indebtedness we may incur in the future;
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announcements by us or others and developments affecting us;
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actions by institutional stockholders;
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litigation and governmental investigations;
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changes in market valuations of similar companies;
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speculation or reports by the press or investment community with
respect to us or our industry in general;
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increases in market interest rates that may lead purchasers of
our shares to demand a higher yield;
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announcements by us or our competitors of significant contracts,
acquisitions, dispositions, strategic relationships, joint
ventures or capital commitments; and
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general market, political and economic conditions, including any
such conditions and local conditions in the markets in which our
customers are located.
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These broad market and industry factors may decrease the market
price of our common stock, regardless of our actual operating
performance. The stock market in general has from time to time
experienced extreme price and volume fluctuations, including in
recent months. In addition, in the past, following periods of
volatility in the overall market and the market price of a
companys securities, securities class action litigation
has often been instituted against these companies. This
litigation, if instituted against us, could result in
substantial costs and a diversion of our managements
attention and resources.
Future
offerings of debt or equity securities by us may adversely
affect the market price of our common stock.
In the future, we may attempt to obtain financing or to further
increase our capital resources by issuing additional shares of
our common stock or offering debt or other equity securities,
including commercial paper, medium-term notes, senior or
subordinated notes, debt securities convertible into equity or
shares of preferred stock. Issuing additional shares of our
common stock or other equity securities or securities
convertible into equity may dilute the economic and voting
rights of our existing stockholders or reduce the market price
of our common stock or both. Upon liquidation, holders of such
debt securities and preferred shares, if issued, and lenders
with respect to other borrowings would receive a distribution of
our available assets prior to the holders of our common stock.
Debt securities convertible into equity could be subject to
adjustments in the conversion ratio pursuant to which certain
events may increase the number of equity
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securities issuable upon conversion. Preferred shares, if
issued, could have a preference with respect to liquidating
distributions or a preference with respect to dividend payments
that could limit our ability to pay dividends to the holders of
our common stock. Our decision to issue securities in any future
offering will depend on market conditions and other factors
beyond our control, which may adversely affect the amount,
timing or nature of our future offerings. Thus, holders of our
common stock bear the risk that our future offerings may reduce
the market price of our common stock and dilute their
stockholdings in us. See Description of Capital
Stock.
The
market price of our common stock could be negatively affected by
sales of substantial amounts of our common stock in the public
markets.
After this offering, there will
be shares
of common stock outstanding
or shares
outstanding if the underwriters exercise their over-allotment
option in full. Of our issued and outstanding shares, all the
common stock sold in this offering will be freely transferable,
except for any shares held by our affiliates, as
that term is defined in Rule 144 under the Securities Act
of 1933, as amended (the Securities Act). Following
completion of the offering,
approximately % of our outstanding
common stock (or % if the
underwriters exercise their over-allotment option in full) will
be held by the Initial Stockholder and members of our management
and employees and can be resold into the public markets in the
future in accordance with the requirements of Rule 144. See
Shares Eligible For Future Sale.
We and our executive officers, directors and the Initial
Stockholder (who will hold in the aggregate
approximately % of our outstanding
common stock immediately after the completion of this offering
or % if the underwriters exercise
their over-allotment option in full) have agreed with the
underwriters that, subject to limited exceptions, for a period
of
days after the date of this prospectus, we and they will not
directly or indirectly offer, pledge, sell, contract to sell,
sell any option or contract to purchase or otherwise dispose of
any common stock or any securities convertible into or
exercisable or exchangeable for common stock, or in any manner
transfer all or a portion of the economic consequences
associated with the ownership of common stock, or cause a
registration statement covering any common stock to be filed,
without the prior written consent of the designated
representatives. The designated representatives may waive these
restrictions at their discretion. Shares of common stock held by
our employees, other than our officers who are subject to the
lockup provisions referred to above,
representing % of our issued and
outstanding common stock immediately after the completion of
this offering or % if the
underwriters exercise their over-allotment option in full, are
not subject to these restrictions and may be sold without
restriction at any time.
Pursuant to the Stockholders Agreement, the Initial Stockholder
and certain of its affiliates and permitted third party
transferees will have the right, in certain circumstances, to
require us to register their
approximately shares
of our common stock under the Securities Act for sale into the
public markets. Upon the effectiveness of such a registration
statement, all shares covered by the registration statement will
be freely transferable. See Certain Relationships and
Related Party TransactionsStockholders Agreement.
The market price of our common stock may decline significantly
when the restrictions on resale by our existing stockholders
lapse. A decline in the price of our common stock might impede
our ability to raise capital through the issuance of additional
common stock or other equity securities.
The
future issuance of additional common stock in connection with
our incentive plans, acquisitions or otherwise will dilute all
other stockholdings.
After this offering, assuming the underwriters exercise their
over-allotment option in full, we will have an aggregate
of shares
of common stock authorized but unissued and not reserved for
issuance under our incentive plans. We may issue all of these
shares of common stock without any action or approval by our
stockholders, subject to certain exceptions. We also intend to
continue to evaluate acquisition opportunities and may issue
common stock in connection with these acquisitions. Any common
stock issued in
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connection with our incentive plans, acquisitions, the exercise
of outstanding stock options or otherwise would dilute the
percentage ownership held by the investors who purchase common
stock in this offering.
Investors
in this offering will suffer immediate and substantial
dilution.
The initial public offering price of our common stock will be
substantially higher than the as adjusted net tangible book
value per share issued and outstanding immediately after this
offering. Our net tangible book value per share as of
September 30, 2011 was approximately
$ and represents the amount of
book value of our total tangible assets minus the book value of
our total liabilities, excluding deferred gains, divided by the
number of our shares of common stock then issued and
outstanding. Investors who purchase common stock in this
offering will pay a price per share that substantially exceeds
the net tangible book value per share of common stock. If you
purchase shares of our common stock in this offering, you will
experience immediate and substantial dilution of
$ in the net tangible book value
per share, based upon the initial public offering price of
$ per share (the midpoint of the
estimated initial public offering price range set forth on the
cover of this prospectus). Investors that purchase common stock
in this offering will have
purchased % of the shares issued
and outstanding immediately after the offering, but will have
paid % of the total consideration
for those shares.
Conflicts
of interest may exist with respect to certain underwriters of
this offering.
BANA, an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated, one of the underwriters of this offering, is the
lender under our $175 Million Warehouse Facility and
Merrill Lynch, Pierce, Fenner & Smith Incorporated was an
initial purchaser in connection with the offering in March 2010
of our senior notes. In addition, in December 2011, we entered
into the Reverse Mortgage Acquisition with BANA. BANA is
obligated among other things, under certain circumstances and
subject to various terms and conditions, to repurchase certain
of the loans associated with the servicing rights that were sold
to us and, for a limited time, to make certain advances,
including principal advances, with respect to the underlying
mortgage loans to the borrower, and we are obligated to
reimburse BANA monthly for these advances for one year. Also, in
September 2011, we purchased certain MSRs relating to
residential mortgage loans with an aggregate UPB of
approximately $10 billion as of December 31, 2011 from
BANA for approximately $69.6 million. Additionally, we
intend to make further purchases of servicing rights from third
parties in the future, which could include our underwriters or
their affiliates, and it is possible that we may use a portion
of the proceeds of this offering to fund such future
acquisitions. Therefore, conflicts of interest could exist
because underwriters or their affiliates could receive proceeds
from this offering in addition to the underwriting discounts and
commissions described in this prospectus. See
UnderwritingOther Relationships.
We will
have broad discretion in the use of a significant part of the
net proceeds from this offering and may not use them
effectively.
Our management currently intends to use the net proceeds from
this offering in the manner described in Use of
Proceeds and will have broad discretion in the application
of a significant part of the net proceeds from this offering.
The failure by our management to apply these funds effectively
could affect our ability to operate and grow our business.
As a
public company, we will incur additional costs and face
increased demands on our management.
As a public company with shares listed on a U.S. exchange,
we will need to comply with an extensive body of regulations
that did not apply to us previously, including provisions of the
Sarbanes Oxley Act of 2002 (the Sarbanes-Oxley Act),
regulations of the SEC and requirements of the NYSE. We expect
these rules and regulations to increase our legal and financial
compliance costs and to make some activities more time-consuming
and costly. For example, as a result of becoming a public
company, we intend to add independent directors, create
additional board committees and adopt certain policies regarding
internal controls
37
and disclosure controls and procedures. In addition, we will
incur additional costs associated with our public company
reporting requirements and maintaining directors and
officers liability insurance. We are currently evaluating
and monitoring developments with respect to these rules, which
may impose additional costs on us and materially affect our
business, financial condition and results of operations.
We will
be required by Section 404 of the Sarbanes-Oxley Act to
evaluate the effectiveness of our internal controls by the end
of our fiscal year ending December 31, 2013, and the
outcome of that effort may adversely affect our business,
financial condition and results of operations.
As a
U.S.-listed
public company, we will be required to comply with
Section 404 of the Sarbanes-Oxley Act by December 31,
2013. Section 404 will require that we evaluate our
internal control over financial reporting to enable management
to report on, and our independent auditors to audit as of the
end of our fiscal year ended December 31, 2013, the
effectiveness of those controls. While we have begun the lengthy
process of evaluating our internal controls, we are in the early
phases of our review and will not complete our review until well
after this offering is completed. The outcome of our review may
adversely affect our business, financial condition and results
of operations. During the course of our review, we may identify
control deficiencies of varying degrees of severity, and we may
incur significant costs to remediate those deficiencies or
otherwise improve our internal controls. As a public company, we
will be required to report control deficiencies that constitute
a material weakness in our internal control over
financial reporting. We would also be required to obtain an
audit report from our independent auditors regarding the
effectiveness of our internal controls over financial reporting.
If we fail to implement the requirements of Section 404 in
a timely manner, we may be subject to sanctions or investigation
by regulatory authorities, including the SEC or the NYSE.
Furthermore, if we discover a material weakness or our auditor
does not provide an unqualified audit report, our share price
could decline and our ability to raise capital could be impaired.
Risks
Related to Taxation
Our
ability to use net operating loss and tax credit carryovers and
certain built-in losses to reduce future tax payments is limited
by provisions of the Internal Revenue Code, and may be subject
to further limitation as a result of the transactions
contemplated by this offering.
Sections 382 and 383 of the Internal Revenue Code contain
rules that limit the ability of a company that undergoes an
ownership change, which is generally any change in ownership of
more than 50% of its stock over a three-year period, to utilize
its net operating loss and tax credit carryforwards and certain
built-in losses recognized in years after the ownership change.
These rules generally operate by focusing on ownership changes
involving stockholders owning directly or indirectly 5% or more
of the stock of a company and any change in ownership arising
from a new issuance of stock by the company. Generally, if an
ownership change occurs, the yearly taxable income limitation on
the use of net operating loss and tax credit carryforwards and
certain built-in losses is equal to the product of the
applicable long-term tax exempt rate and the value of the
companys stock immediately before the ownership change. As
a result of the Restructuring, we will assume the net operating
losses, tax credit carryovers and built-in losses of certain
parent entities of our Initial Stockholder. However, our use of
the $ million of federal net
operating losses, the
$ million of tax credits and
certain built-in losses that we will assume in the Restructuring
will be subject to annual taxable income limitations. As a
result, we may be unable to offset our taxable income with
losses, or our tax liability with credits, before such losses
and credits expire and therefore would incur larger federal
income tax liability.
In addition, it is possible that the transactions described in
this offering, either on a standalone basis or when combined
with future transactions (including issuances of new shares of
our common stock and sales of shares of our common stock), will
cause us to undergo one or more ownership changes. In that
event, we generally would not be able to use our pre-change loss
or credit carryovers or certain built-in losses prior to such
ownership change to offset future taxable income in excess of
the annual limitations imposed by Sections 382 and 383 and
those attributes already subject to limitations (as a result of
prior ownership changes) may be subject to more stringent
limitations.
38
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under Prospectus Summary,
Risk Factors, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
Industry, Business and elsewhere in this
prospectus may contain forward-looking statements that reflect
our current views with respect to, among other things, future
events and financial performance. You can identify these
forward-looking statements by the use of forward-looking words
such as outlook, believes,
expects, potential,
continues, may, will,
should, could, seeks,
approximately, predicts,
intends, plans, estimates,
anticipates, target,
projects, contemplates or the negative
version of those words or other comparable words. Any
forward-looking statements contained in this prospectus are
based upon our historical performance and on our current plans,
estimates and expectations in light of information currently
available to us. The inclusion of this forward-looking
information should not be regarded as a representation by us,
Fortress, the Initial Stockholder, the underwriters or any other
person that the future plans, estimates or expectations
contemplated by us will be achieved. Such forward-looking
statements are subject to various risks and uncertainties and
assumptions relating to our operations, financial results,
financial condition, business, prospects, growth strategy and
liquidity. Accordingly, there are or will be important factors
that could cause our actual results to differ materially from
those indicated in these statements. We believe that these
factors include, but are not limited to:
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the delay in our foreclosure proceedings due to inquiries by
certain state Attorneys General, court administrators and state
and federal governmental agencies;
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the impact of the ongoing implementation of the Dodd-Frank Act
on our business activities and practices, costs of operations
and overall results of operations;
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the impact on our servicing practices of enforcement consent
orders and agreements entered into by certain federal and state
agencies against the largest mortgage servicers;
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increased legal proceedings and related costs;
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the continued deterioration of the residential mortgage market,
increase in monthly payments on adjustable rate mortgage loans,
adverse economic conditions, decrease in property values and
increase in delinquencies and defaults;
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the deterioration of the market for reverse mortgages and
increase in foreclosure rates for reverse mortgages;
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our ability to efficiently service higher risk loans;
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our ability to mitigate the increased risks related to servicing
reverse mortgages;
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our ability to compete successfully in the mortgage loan
servicing and mortgage loan originations industries;
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our ability to maintain or grow the size of our servicing
portfolio and realize our significant investments in personnel
and our technology platform by successfully identifying
attractive acquisition opportunities, including MSRs,
subservicing contracts, servicing platforms and originations
platforms;
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our ability to
scale-up
appropriately and integrate our acquisitions to realize the
anticipated benefits of any such potential future acquisitions;
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our ability to obtain sufficient capital to meet our financing
requirements;
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39
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our ability to grow our loan originations volume;
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the termination of our servicing rights and subservicing
contracts;
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changes to federal, state and local laws and regulations
concerning loan servicing, loan origination, loan modification
or the licensing of entities that engage in these activities;
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our ability to meet certain criteria or characteristics under
the indentures governing our securitized pools of loans;
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our ability to follow the specific guidelines of GSEs or a
significant change in such guidelines;
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delays in our ability to collect or be reimbursed for servicing
advances;
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changes to HAMP, HARP, MHA or other similar government programs;
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changes in our business relationships with Fannie Mae, Freddie
Mac, Ginnie Mae and others that facilitate the issuance of MBS;
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changes to the nature of the guarantees of Fannie Mae and
Freddie Mac and the market implications of such changes;
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errors in our financial models or changes in assumptions;
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requirements to write down the value of certain assets;
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changes in prevailing interest rates;
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our ability to successfully mitigate our risks through hedging
strategies;
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changes to our servicer ratings;
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the accuracy and completeness of information about borrowers and
counterparties;
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our ability to maintain our technology systems and our ability
to adapt such systems for future operating environments;
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failure of our internal security measures or breach of our
privacy protections;
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failure of our vendors to comply with servicing criteria;
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the loss of the services of our senior managers;
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changes to our income tax status;
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failure to attract and retain a highly skilled work force;
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changes in public opinion concerning mortgage originators or
debt collectors;
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changes in accounting standards;
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conflicts of interest with certain underwriters in this offering;
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conflicts of interest with Fortress and our Initial Stockholder;
and
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other risks described in the Risk Factors section of
this prospectus beginning on page 15.
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These factors should not be construed as exhaustive and should
be read in conjunction with the other cautionary statements that
are included in this prospectus. The forward-looking statements
made in this prospectus relate only to events as of the date on
which the statements are made. We do not undertake any
obligation to publicly update or review any forward-looking
statement except as required by law, whether as a result of new
information, future developments or otherwise.
If one or more of these or other risks or uncertainties
materialize, or if our underlying assumptions prove to be
incorrect, our actual results may vary materially from what we
may have expressed or implied by these forward-looking
statements. We caution that you should not place undue reliance
on any of our forward-looking statements. You should
specifically consider the factors identified in this prospectus
that could cause actual results to differ before making an
investment decision to purchase our common stock. Furthermore,
new risks and uncertainties arise from time to time, and it is
impossible for us to predict those events or how they may affect
us.
41
USE OF
PROCEEDS
The net proceeds to us from the sale of
the shares
of common stock offered hereby are estimated to be approximately
$ , assuming an initial public
offering price of $ per share (the
midpoint of the estimated initial public offering price range
set forth on the cover page of this prospectus) and after
deducting the offering expenses payable by us. We will not
receive any proceeds from the sale of our common stock by the
Initial Stockholder, including any shares sold by the Initial
Stockholder pursuant to the underwriters over-allotment
option. We intend to use the net proceeds from this offering for
working capital and other general corporate purposes, including
servicing acquisitions, which may include acquisitions from one
or more affiliates of the underwriters in this offering.
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share (the
midpoint of the estimated initial public offering price range
set forth on the cover page of this prospectus) would increase
(decrease) the net proceeds to us from this offering by
$ million, assuming the
number of shares of common stock offered by us, as set forth on
the cover page of this prospectus, remains the same and after
deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by us.
42
DIVIDEND
POLICY
We do not expect to pay dividends on our common stock for the
foreseeable future. Instead, we anticipate that all of our
earnings in the foreseeable future will be used for the
operation and growth of our business. Our ability to pay
dividends to holders of our common stock is limited as a
practical matter by the terms of some of our debt, including the
indenture governing the senior notes and other indebtedness. See
Managements Discussion and Analysis of Financial
Condition and Results of OperationsDescription of Certain
Indebtedness.
Any future determination to pay dividends on our common stock
will be at the discretion of our board of directors and will
depend upon many factors, including our financial position,
results of operations, liquidity, legal requirements,
restrictions that may be imposed by the terms in current and
future financing instruments and other factors deemed relevant
by our board of directors.
43
CAPITALIZATION
The following sets forth our cash and cash equivalents and
capitalization as of September 30, 2011:
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on an actual basis; and
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on an as adjusted basis to give effect to the Restructuring and
sale
of shares
of common stock by us in this offering, at an assumed initial
public offering price of $ per
share, the midpoint of the estimated initial public offering
price range set forth on the cover page of this prospectus,
after deducting the underwriting discount and estimated offering
expenses payable by us.
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You should read this table in conjunction with Use of
Proceeds, Selected Consolidated Historical Financial
Data and Managements Discussion and Analysis
of Financial Condition and Results of Operations and our
audited consolidated financial statements and related notes and
other financial information included elsewhere in this
prospectus.
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September 30, 2011
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Actual
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As Adjusted
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(in thousands)
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Cash and cash equivalents
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$
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24,005
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$
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Debt:
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Unsecured senior
notes(1)
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$
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245,109
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$
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Notes payable:
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Servicing:
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2009-ABS Advance Financing Facility
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203,596
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MBS Advance Financing Facility
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175,733
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MSR Note
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11,568
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Originations:
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$300 Million Warehouse Facility
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259,593
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$100 Million Warehouse Facility
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22,328
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$175 Million Warehouse Facility
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41,801
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$50 Million Warehouse Facility
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10,587
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ASAP+ Short-Term Financing Facility
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13,577
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Total notes payable
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738,783
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Non-recourse debtLegacy Assets
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116,200
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ABS non-recourse debt (at fair value)
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434,326
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Total debt
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1,534,418
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Stockholders and members equity:
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Members equity
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264,788
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Common stock, par value $ per
share; shares
authorized
and shares
issued and outstanding on a pro forma basis
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Additional paid-in capital
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Total stockholders and members equity
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264,788
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Total capitalization
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$
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1,799,206
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$
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(1) |
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On December 19, 2011, Nationstar Mortgage LLC and
Nationstar Capital Corporation, as co-issuers, completed a
further issuance of $35.0 million aggregate principal
amount of 10.875% senior notes due 2015 on terms identical to
those of the existing senior notes, other than the issue date
and offering price. See Managements Discussion and
Analysis of Financial Condition and Results of
OperationsLiquidity and Capital ResourcesContractual
ObligationsDescription of Certain IndebtednessSenior
Notes. |
44
DILUTION
If you invest in our common stock, your ownership interest will
be diluted to the extent of the difference between the initial
public offering price in this offering per share of our common
stock and the pro forma as adjusted net tangible book value per
share of our common stock upon consummation of this offering.
Net tangible book value per share represents the book value of
our total tangible assets less the book value of our total
liabilities divided by the number of shares of common stock then
issued and outstanding.
Our net tangible book value as of September 30, 2011 was
approximately $264.8 million, or approximately
$ per share based on
the shares
of common stock issued and outstanding as of such date. After
giving effect to our sale of common stock in this offering at
the initial public offering price of
$ per share (the midpoint of the
estimated initial public offering price range set forth on the
cover page of this prospectus), and after deducting the
estimated underwriting discounts and commissions and estimated
offering expenses payable by us, our pro forma as adjusted net
tangible book value as
of
would have been $ million, or
$ per share (assuming no exercise
of the underwriters over-allotment option). This
represents an immediate and substantial dilution of
$ per share to new investors
purchasing common stock in this offering. Sales of shares by the
Initial Stockholder in this offering do not affect our net
tangible book value. The following table illustrates this
dilution per share:
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Assumed initial public offering price per share
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$
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Net tangible book value per share as of September 30, 2011
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$
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Increase in net tangible book value per share attributable to
this offering
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Pro forma as adjusted net tangible book value per share after
giving effect to this offering
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Dilution per share to new investors in this offering
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$
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A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share (the
midpoint of the estimated initial public offering price range
set forth on the cover page of this prospectus) would increase
(decrease) our net tangible book value by
$ million, the pro forma as
adjusted net tangible book value per share after this offering
by $ per share and the dilution to
new investors in this offering by
$ per share, assuming the number
of shares of common stock offered by us, as set forth on the
cover page of this prospectus, remains the same and after
deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by us.
The following table summarizes, on a pro forma basis as of
September 30, 2011, the differences between the number of
shares of common stock purchased from us, the total price and
the average price per share paid by existing stockholders and by
the new investors in this offering, before deducting the
underwriting discounts and commissions and estimated offering
expenses payable by us, at an assumed initial public offering
price of $ per share (the midpoint
of the estimated initial public offering price range set forth
on the cover page of this prospectus).
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Average
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Shares Purchased
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Total Consideration
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Price per
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Number
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Percent
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Amount
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Percent
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Share
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(in thousands)
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(in thousands)
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Existing Stockholders
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New investors
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%
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$
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%
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$
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Total
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100%
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100%
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The sale
of shares
of our common shares to be sold by the Initial Stockholder in
this offering will reduce the number of shares of common stock
held by existing stockholders
to shares,
45
or % of the total shares
outstanding, and will increase the number of shares of common
stock held by new investors
to shares,
or % of the total common shares
outstanding.
A $1.00 increase (decrease) in the assumed initial offering
price would increase (decrease) total consideration paid by new
investors and average price per share paid by new investors by
$ million and
$ per share, respectively. An
increase (decrease) of 1.0 million in the number of shares
offered by us would increase (decrease) total consideration paid
by new investors and average price per share paid by new
investors by $ million and
$ per share, respectively.
If the underwriters over-allotment option is fully
exercised, the pro forma as adjusted net tangible book value per
share after this offering as of September 30, 2011 would be
approximately $ per share and the
dilution to new investors per share after this offering would be
$ per share. Furthermore, the
percentage of our shares held by existing equity owners after
the sale of shares by the Initial Stockholder would decrease to
approximately % and the percentage
of our shares held by new investors would increase to
approximately %, based
on shares
of common stock outstanding as of September 30, 2011.
46
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables present selected consolidated financial
information of Nationstar Mortgage LLC, our predecessor company,
as well as pro forma information that reflects the impact of our
conversion to a taxable entity from a disregarded entity for tax
purposes. We were formed on May 9, 2011 and have not, to
date, conducted any activities other than those incident to our
formation and the preparation of this registration statement. We
were formed solely for the purpose of reorganizing the
organizational structure of the Initial Stockholder and
Nationstar Mortgage LLC, so that the issuer is a corporation
rather than a limited liability company and our existing
investors will own common stock rather than equity interests in
a limited liability company.
This prospectus does not include financial statements of
Nationstar Mortgage Holdings Inc., as it has only been recently
incorporated for the purpose of effecting this offering and
currently holds no material assets and does not engage in any
operations. Prior to the completion of this offering, all of the
equity interests in Nationstar Mortgage LLC will be transferred
from our Initial Stockholder to two direct, wholly-owned
subsidiaries of Nationstar Mortgage Holdings Inc., pursuant to
the Restructuring. We anticipate this transaction will be
accounted for as a reorganization of entities under common
control. Accordingly, there will be no change in the basis of
the underlying assets and liabilities.
You should read these tables along with Managements
Discussion and Analysis of Financial Condition and Results of
Operations, Business and our consolidated
financial statements and the related notes included elsewhere in
this prospectus.
We have not presented selected consolidated statement of
operations and balance sheet data for periods prior to the
Acquisition. The entity that we acquired, CHEC, was a
consolidated subsidiary of Centex Financial Services
(CFS), and we did not receive separate audited or
unaudited financial statements of CHEC in connection with the
Acquisition. We only received consolidated financial statements
of CFS. In 2009, CFS was subsequently acquired by a third party.
We do not have, nor do we have the right to obtain, financial
statements for CHEC prior to the date of the Acquisition.
Therefore, because the information is not available to us, it
cannot be created without unreasonable effort and expense. We
also believe that financial information for the period from
April 1, 2006 to July 10, 2006 does not contribute to
an investors understanding of our historical financial
performance and financial condition because, before the
Acquisition, CHEC had historically operated as a subprime
mortgage lender. After the Acquisition, in the third fiscal
quarter of 2007, we transformed the business from a subprime
mortgage lender to a mortgage servicer and conforming loan
originator. As a result, financial information with respect to
the business conducted before the Acquisition would not provide
useful information to investors about trends in our financial
condition and results of operation.
The selected consolidated statement of operations data for the
years ended December 31, 2008, 2009 and 2010 and the
selected consolidated balance sheet data as of December 31,
2009 and 2010 have been derived from our audited financial
statements included elsewhere in this prospectus. The selected
consolidated statement of operations data for the year ended
December 31, 2007 and the selected consolidated balance sheet
data as of December 31, 2008 have been derived from our
audited financial statements that are not included in this
prospectus. The selected consolidated statement of operations
data for the period from July 11, 2006 to December 31, 2006 and
the selected consolidated balance sheet data as of December 31,
2006 and 2007 have been derived from our unaudited financial
statements, which are not included in this prospectus.
The selected consolidated statement of operations data for the
nine months ended September 30, 2010 and 2011 and the
selected consolidated balance sheet data as of
September 30, 2011 have been derived from our unaudited
financial statements included elsewhere in this prospectus. The
unaudited financial statements have been prepared on the same
basis as the audited financial statements and, in the opinion of
our management, include all material adjustments, consisting
only of normal recurring adjustments, necessary for a fair
presentation of the information set forth herein. Operating
results for the nine months ended September 30, 2011 are
not necessarily indicative of the results that may be expected
for the year ending December 31, 2011 or for any future
period.
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 11, 2006 to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands, except per share data)
|
|
Statement of Operations DataConsolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
$14,161
|
|
|
|
$46,301
|
|
|
|
$74,007
|
|
|
|
$100,218
|
|
|
|
$184,084
|
|
|
|
$122,770
|
|
|
|
$184,754
|
|
Gain/(loss) on mortgage loans held for sale
|
|
|
4,476
|
|
|
|
(94,673
|
)
|
|
|
(86,663
|
)
|
|
|
(21,349
|
)
|
|
|
77,344
|
|
|
|
51,754
|
|
|
|
73,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
18,637
|
|
|
|
(48,372
|
)
|
|
|
(12,656
|
)
|
|
|
78,869
|
|
|
|
261,428
|
|
|
|
174,524
|
|
|
|
258,314
|
|
Total expenses and impairments
|
|
|
98,837
|
|
|
|
259,222
|
|
|
|
147,777
|
|
|
|
142,367
|
|
|
|
220,976
|
|
|
|
145,622
|
|
|
|
219,717
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
75,114
|
|
|
|
163,022
|
|
|
|
92,060
|
|
|
|
52,518
|
|
|
|
98,895
|
|
|
|
82,019
|
|
|
|
51,246
|
|
Interest expense
|
|
|
(55,172
|
)
|
|
|
(118,553
|
)
|
|
|
(65,548
|
)
|
|
|
(69,883
|
)
|
|
|
(116,163
|
)
|
|
|
(89,298
|
)
|
|
|
(76,929
|
)
|
Loss on interest rate swaps and caps
|
|
|
|
|
|
|
(21,353
|
)
|
|
|
(23,689
|
)
|
|
|
(14
|
)
|
|
|
(9,801
|
)
|
|
|
(9,917
|
)
|
|
|
|
|
Fair value changes in ABS securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,297
|
)
|
|
|
(19,115
|
)
|
|
|
(6,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
19,942
|
|
|
|
23,116
|
|
|
|
2,823
|
|
|
|
(17,379
|
)
|
|
|
(50,366
|
)
|
|
|
(36,311
|
)
|
|
|
(32,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
$(60,258
|
)
|
|
|
$(284,478
|
)
|
|
|
$(157,610
|
)
|
|
|
$(80,877
|
)
|
|
|
$(9,914
|
)
|
|
|
$(7,409
|
)
|
|
|
$5,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Information (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical net income (loss) before taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$(9,914
|
)
|
|
|
|
|
|
|
$5,995
|
|
Pro forma adjustment for
taxes(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$(9,914
|
)
|
|
|
|
|
|
|
$5,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
outstanding(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our pro forma effective tax rate for 2010 is 0%. The pro forma
tax provision (benefit), before valuation allowance, is ($3,612)
on pre-tax loss of ($9,914). We have determined that recognizing
a tax benefit and corresponding deferred tax asset is not
appropriate as management believes it is more likely than not
the deferred tax asset will not be realized. We will also assume
certain tax attributes of certain parent entities of our Initial
Stockholder as a result of the Restructuring, including
approximately $200 million of net operating loss carry
forwards as of December 31, 2010. We expect to record a
full valuation allowance against any resulting deferred tax
asset. The utilization of these tax attributes will be limited
pursuant to Sections 382 and 383 of the Internal Revenue
Code. |
|
|
|
(2) |
|
Represents the number of shares issued and outstanding after
giving effect to our sale of common stock in this offering and
does not include common stock that may be issued and sold upon
exercise of the underwriters over-allotment option. |
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
September 30,
|
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
|
(in thousands)
|
Balance Sheet DataConsolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
$10,335
|
|
|
|
$41,251
|
|
|
|
$9,357
|
|
|
|
$41,645
|
|
|
|
$21,223
|
|
|
|
$24,005
|
|
Mortgage servicing rights
|
|
|
49,783
|
|
|
|
82,634
|
|
|
|
110,808
|
|
|
|
114,605
|
|
|
|
145,062
|
|
|
|
246,916
|
|
Total assets
|
|
|
2,145,007
|
|
|
|
1,303,221
|
|
|
|
1,122,001
|
|
|
|
1,280,185
|
|
|
|
1,947,181
|
|
|
|
2,004,325
|
|
Notes
payable(1)
|
|
|
1,966,368
|
|
|
|
967,307
|
|
|
|
810,041
|
|
|
|
771,857
|
|
|
|
709,758
|
|
|
|
738,783
|
|
Unsecured senior
notes(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244,061
|
|
|
|
245,109
|
|
Legacy assets securitized
debt(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
177,675
|
|
|
|
138,662
|
|
|
|
116,200
|
|
ABS nonrecourse debt (at fair value)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
496,692
|
|
|
|
434,326
|
|
Total liabilities
|
|
|
2,005,213
|
|
|
|
1,041,525
|
|
|
|
866,079
|
|
|
|
1,016,362
|
|
|
|
1,690,809
|
|
|
|
1,739,537
|
|
Total members equity
|
|
|
139,794
|
|
|
|
261,696
|
|
|
|
255,922
|
|
|
|
263,823
|
|
|
|
256,372
|
|
|
|
264,788
|
|
|
|
|
(1) |
|
A summary of notes payable as of September 30, 2011 follows: |
|
|
|
|
|
Notes Payable
|
|
September 30, 2011
|
|
|
(in thousands)
|
Servicing
|
|
|
|
|
2009-ABS Advance Financing Facility
|
|
$
|
203,596
|
|
MBS Advance Financing Facility
|
|
|
175,733
|
|
MSR Note
|
|
|
11,568
|
|
Originations
|
|
|
|
|
$300 Million Warehouse Facility
|
|
|
259,593
|
|
$100 Million Warehouse Facility
|
|
|
22,328
|
|
$175 Million Warehouse Facility
|
|
|
41,801
|
|
$50 Million Warehouse Facility
|
|
|
10,587
|
|
ASAP+ Short-Term Financing Facility
|
|
|
13,577
|
|
|
|
|
|
|
|
|
$
|
738,783
|
|
|
|
|
|
|
|
|
|
(2) |
|
On December 19, 2011, Nationstar Mortgage LLC and
Nationstar Capital Corporation, as co-issuers, completed a
further issuance of $35.0 million aggregate principal
amount of 10.875% senior notes due 2015 on terms identical
to those of the existing senior notes, other than the issue date
and offering price. See Managements Discussion and
Analysis of Financial Condition and Results of
OperationsLiquidity and Capital ResourcesContractual
ObligationsDescription of Certain IndebtednessSenior
Notes. |
|
|
|
(3) |
|
In November 2009, we completed the securitization of our legacy
assets, which is a non-recourse term financing. See
Note 10 to Consolidated Financial
StatementsIndebtedness. |
The following tables summarize consolidated financial
information for our Operating Segments. Management analyzes our
performance in two separate segments, the Servicing Segment and
the Originations Segment, which together constitute our
Operating Segments. In addition, we have a legacy asset
portfolio, which primarily consists of non-prime and
non-conforming mortgage loans, most of which were originated
from April to July 2007. The Servicing Segment provides loan
servicing on our servicing portfolio and the
49
Originations Segment involves the origination, packaging and
sale of GSE mortgage loans into the secondary markets via whole
loan sales or securitizations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended December 31,
|
|
September 30,
|
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2010
|
|
2011
|
|
|
(in thousands)
|
Statement of Operations DataOperating Segments
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
$50,123
|
|
|
|
$75,190
|
|
|
|
$101,289
|
|
|
|
$189,884
|
|
|
|
$125,346
|
|
|
|
$186,224
|
|
Gain on mortgage loans held for sale
|
|
|
88,489
|
|
|
|
21,985
|
|
|
|
54,437
|
|
|
|
77,498
|
|
|
|
51,887
|
|
|
|
73,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
138,612
|
|
|
|
97,175
|
|
|
|
155,726
|
|
|
|
267,382
|
|
|
|
177,233
|
|
|
|
260,056
|
|
Total expenses and impairments
|
|
|
196,995
|
|
|
|
85,832
|
|
|
|
118,429
|
|
|
|
194,203
|
|
|
|
134,099
|
|
|
|
199,581
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
52,097
|
|
|
|
12,792
|
|
|
|
8,404
|
|
|
|
12,111
|
|
|
|
8,684
|
|
|
|
11,089
|
|
Interest expense
|
|
|
(51,955
|
)
|
|
|
(17,007
|
)
|
|
|
(29,315
|
)
|
|
|
(60,597
|
)
|
|
|
(44,767
|
)
|
|
|
(48,589
|
)
|
Loss on interest rate swaps and caps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,801
|
)
|
|
|
(9,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
142
|
|
|
|
(4,215
|
)
|
|
|
(20,911
|
)
|
|
|
(58,287
|
)
|
|
|
(46,000
|
)
|
|
|
(37,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
$(58,241
|
)
|
|
|
$7,128
|
|
|
|
$16,386
|
|
|
|
$14,892
|
|
|
|
$(2,866
|
)
|
|
|
$22,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
Nine Months Ended
|
|
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|
Year Ended December 31,
|
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|
September 30,
|
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|
2007
|
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|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands)
|
|
|
Net Income (loss) from Operating Segments to Adjusted EBITDA
Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net income (loss) from Operating Segments
|
|
|
$(58,241
|
)
|
|
|
$7,128
|
|
|
|
$16,386
|
|
|
|
$14,892
|
|
|
|
$(2,866
|
)
|
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|
$22,975
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|
Adjust for:
|
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Interest expense from unsecured senior notes
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|
24,628
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|
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|
17,084
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|
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|
22,622
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|
Depreciation and amortization
|
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|
3,348
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|
|
|
1,172
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|
|
|
1,542
|
|
|
|
1,873
|
|
|
|
1,291
|
|
|
|
2,187
|
|
Change in fair value of MSRs
|
|
|
16,015
|
|
|
|
11,701
|
|
|
|
27,915
|
|
|
|
6,043
|
|
|
|
11,499
|
|
|
|
30,757
|
|
Share-based compensation
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|
|
1,633
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|
|
|
1,633
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|
|
|
579
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|
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|
8,999
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|
|
|
5,222
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|
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|
12,152
|
|
Goodwill impairment
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|
|
12,000
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|
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Fair value changes on interest rate
swaps(1)
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|
|
|
|
|
|
|
|
|
|
|
|
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|
9,801
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|
9,917
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|
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|
Ineffective portion of cash flow hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
(930
|
)
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|
|
|
|
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|
(2,032
|
)
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Adjusted
EBITDA(2)
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|
|
$(25,245
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)
|
|
|
$21,634
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|
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|
$46,422
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|
$65,306
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|
$42,147
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|
$88,661
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(1) |
|
Relates to an interest rate swap agreement which was treated as
an economic hedge under ASC 815, Derivatives and
Hedging, since trade execution to September 30, 2010. |
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|
(2) |
|
Adjusted EBITDA is a key performance measure used by management
in evaluating the performance of our segments. Adjusted EBITDA
represents our Operating Segments income (loss) and
excludes income and expenses that relate to the financing of the
senior notes, depreciable (or amortizable) asset base of the
business, income taxes (if any), exit costs from our
restructuring and certain non-cash items. Adjusted EBITDA also
excludes results from our legacy asset portfolio and certain
securitization trusts that were consolidated upon adoption of
the new accounting guidance eliminating the concept of a QSPE. |
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|
Adjusted EBITDA provides us with a key measure of our Operating
Segments performance as it assists us in comparing our
Operating Segments performance on a consistent basis.
Management believes Adjusted EBITDA is useful in assessing the
profitability of our core business and uses Adjusted EBITDA in
evaluating our operating performance as follows: |
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|
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|
Financing arrangements for our
Operating Segments are secured by assets that are allocated to
these segments. Interest expense that relates to the financing
of our senior notes is not considered in
|
50
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|
evaluating our operating performance because this obligation is
serviced by the excess earnings from our Operating Segments
after the debt obligations that are secured by their assets. |
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|
To monitor operating costs of each
Operating Segment excluding the impact from depreciation,
amortization and fair value change of the asset base, exit costs
from our restructuring and non-cash operating expense, such as
share-based compensation. Operating costs are analyzed to manage
costs per our operating plan and to assess staffing levels,
implementation of technology-based solutions, rent and other
general and administrative costs.
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|
Management does not assess the growth prospects and the
profitability of our legacy asset portfolio and certain
securitization trusts that were consolidated upon adoption of
the new accounting guidance, except to the extent necessary to
assess whether cash flows from the assets in the legacy asset
portfolio are sufficient to service its debt obligations. |
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|
We also use Adjusted EBITDA (with additional adjustments) to
measure our compliance with covenants such as leverage coverage
ratios for our senior notes. |
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|
Adjusted EBITDA has limitations as an analytical tool and should
not be considered in isolation or as a substitute for analysis
of our results as reported under GAAP. Some of these limitations
are: |
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|
Adjusted EBITDA does not reflect
our cash expenditures or future requirements for capital
expenditures or contractual commitments;
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|
Adjusted EBITDA does not reflect
changes in, or cash requirements for, our working capital needs;
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|
Adjusted EBITDA does not reflect
the cash requirements necessary to service principal payments
related to the financing of the business;
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Adjusted EBITDA does not reflect
the interest expense or the cash requirements necessary to
service interest or principal payments on our corporate debt;
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|
although depreciation and
amortization and changes in fair value of MSRs are non-cash
charges, the assets being depreciated and amortized will often
have to be replaced in the future and Adjusted EBITDA does not
reflect any cash requirements for such replacements; and
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other companies in our industry
may calculate Adjusted EBITDA differently than we do, limiting
its usefulness as a comparative measure.
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|
Because of these and other limitations, Adjusted EBITDA should
not be considered as a measure of discretionary cash available
to us to invest in the growth of our business. Adjusted EBITDA
is presented to provide additional information about our
operations. Adjusted EBITDA is a non-GAAP measure and should be
considered in addition to, but not as a substitute for or
superior to, operating income, net income, operating cash flow
and other measures of financial performance prepared in
accordance with GAAP. We compensate for these limitations by
relying primarily on our GAAP results and using Adjusted EBITDA
only supplementally. |
51
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Nationstar Mortgage Holdings Inc. is a newly formed Delaware
corporation that has not, to date, conducted any activities
other than those incident to its formation and the preparation
of this registration statement. Upon the completion of the
Restructuring, we will conduct our business through Nationstar
Mortgage LLC and its consolidated subsidiaries. The following
discussion and analysis of our financial condition and results
of operations should be read together with our financial
statements and related notes and other financial information
appearing elsewhere in this prospectus. This discussion and
analysis contains forward-looking statements that involve risk,
uncertainties and assumptions. See Special Note Regarding
Forward-Looking Statements. Our actual results could
differ materially from those anticipated in the forward-looking
statements as a result of many factors, including those
discussed in Risk Factors and elsewhere in this
prospectus. Except where the context otherwise requires, the
terms we, us, or our refer
to the business of Nationstar Mortgage LLC and its consolidated
subsidiaries.
General
Our
Business
We are a leading high touch non-bank residential mortgage
servicer with a broad array of servicing capabilities across the
residential mortgage product spectrum. We have been the fastest
growing mortgage servicer since 2007 as measured by annual
percentage growth in UPB, having grown 75% annually on a
compounded basis. As of September 30, 2011, we serviced
over 612,000 residential mortgage loans with an aggregate UPB of
$102.7 billion, making us the second largest high touch
non-bank servicer in the United States.
We service loans as the owner of the MSRs, which we refer to as
primary servicing, and we also provide servicing on
behalf of other MSR or mortgage owners, which we refer to as
subservicing. We acquire MSRs on a standalone basis
and have also developed an innovative model for investing on a
capital light basis by co-investing with financial partners in
excess MSRs. Subservicing represents another capital
light means of growing our servicing business, as subservicing
contracts are typically awarded on a no-cost basis and do not
require substantial capital. As of September 30, 2011, our
primary servicing and subservicing portfolios represented 45%
and 55%, respectively, of our total servicing portfolio. In
addition, we operate or have investments in a suite of adjacent
businesses designed to meet the changing needs of the mortgage
industry. These businesses provide an array of adjacent
services, including providing services for delinquent loans,
managing loans in the foreclosure/REO process and providing
title insurance agency, loan settlement and valuation services
on newly originated and re-originated loans.
We are one of only a few non-bank servicers with a fully
integrated loan originations platform to complement and enhance
our servicing business. We originate primarily conventional
agency (GSE) and government-insured residential mortgage loans
and, to mitigate risk, typically sell these loans within
30 days while retaining the associated servicing rights.
Our originations efforts are primarily focused on
re-origination, which involves actively working with
existing borrowers to refinance their mortgage loans. By
re-originating loans for existing borrowers, we retain the
servicing rights, thereby extending the longevity of the
servicing cash flows, which we refer to as recapture.
We also have a legacy asset portfolio, which consists primarily
of non-prime and nonconforming residential mortgage loans, most
of which we originated from April to July 2007. In November
2009, we engaged in a transaction through which we term-financed
our legacy assets with a non-recourse loan that requires no
additional capital or equity contributions. Additionally, we
consolidated certain securitization trusts where it was
determined that we had both the power to direct the activities
that most significantly impact the variable interest
entities (VIE) economic performance and the
obligation to absorb losses or the right to
52
receive benefits that could potentially be significant to the
VIE pursuant to new consolidation accounting guidance related to
VIEs adopted on January 1, 2010.
The analysis of our financial condition and results of
operations as discussed herein is primarily focused on the
combined results of our two Operating Segments: the Servicing
Segment and the Originations Segment.
Managing
Business Performance
Management is focused on several key initiatives to manage our
Operating Segments: (i) effective management of our
servicing portfolio; (ii) growing our servicing portfolio
through the acquisition of MSRs or entering into subservicing
contracts; (iii) originating and selling primarily
conventional agency (GSE) and government-insured residential
mortgage loans while retaining the MSRs; (iv) extending the
longevity of the servicing cash flows before loans are repaid or
liquidate by increasing our recapture rate; and (v) growing
our adjacent businesses. We also focus on access to diverse and
multiple liquidity sources to finance the acquisition of MSRs
and subservicing rights, our obligations to pay advances as
required by our servicing agreements, and our loan originations.
Servicing
Segment
As part of our primary servicing portfolio, we act as servicers
on behalf of mortgage owners by purchasing MSRs from existing
servicers, or from owners of mortgage loans or pools of mortgage
loans, or by retaining the MSRs related to the loans that we
originate and sell. We acquire MSRs on a standalone and a
capital light basis. Additionally, we enter into subservicing
contracts with MSR or mortgage owners that choose to outsource
the servicing function, pursuant to which we earn a contractual
fee per loan we service.
Servicing fee income is primarily based on the aggregate UPB of
loans serviced and varies by loan type. Other factors that
impact servicing fee income include delinquency rates,
prepayment speeds and loss mitigation activity. Delinquency
rates on the loans we service impact the contractual servicing
and ancillary fees we receive and the costs to service.
Delinquent loans cost more to service than performing loans due
to the additional resources and required servicing advances. We
monitor our delinquency levels through our staffing models, our
business plans and macroeconomic analysis.
The largest cost in our Servicing Segment is staffing cost,
which is primarily impacted by delinquency levels and the size
of our portfolio. Other operating costs in our Servicing Segment
include technology, occupancy and general and administrative
costs. The cost of financing our servicing advances is another
expense. Management continually monitors these costs to improve
efficiency by streamlining workflows and implementing
technology-based solutions.
We also provide an array of adjacent services, including
providing services for delinquent loans, managing loans in the
foreclosure/REO process and providing title insurance agency,
loan settlement and valuation services on newly originated and
re-originated loans.
Originations
Segment
In addition to our core servicing business, we are one of only a
few non-bank servicers with a fully integrated loan originations
platform. Because a key determinant of the profitability of our
primary servicing portfolio is the longevity of the servicing
cash flows before a loan is repaid or liquidates, our
originations efforts are primarily focused on
re-origination, which involves actively working with
existing borrowers to refinance their mortgage loans. By
re-originating loans for existing borrowers, we retain the
servicing rights, thereby extending the longevity of the
servicing cash flows, which we refer to as recapture.
53
Our originations platform complements and enhances our servicing
business by allowing us to replenish our servicing portfolio as
loans pay off over time. Because the refinanced loans typically
have lower interest rates or lower monthly payments, and, in
general, subsequently refinance more slowly and default less
frequently, these refinancings also typically improve the
overall quality of our primary servicing portfolio. In addition,
our re-originations strategy allows us to generate additional
loan servicing more cost-effectively than MSRs can otherwise be
acquired in the open market. Finally, with our in-house
originations capabilities, we believe we are better protected
against declining servicing cash flows as we replace servicing
run-off through new loan originations or retain our servicing
portfolios through re-originations.
Prevailing interest rates and housing market trends, with a
strong housing market leading to higher loan refinancings and a
weak housing market leading to lower loan refinancings, are the
key factors impacting the volume of re-originations and our
Originations Segment. Management continually evaluates interest
rate movements and trends to assess the impact on volume of
refinancings, as well as their corresponding impact on revenue
and costs.
In evaluating revenue per loan originated, management focuses on
various revenue sources, including loan origination points and
fees and overall gain or loss on the sale or securitization of
the loan. These components are compared to established revenue
targets and operating plans.
In addition to the cost of financing our originations, our
Originations Segment operating costs include staffing costs,
sales commissions, technology, rent and other general and
administrative costs. Management continually monitors costs
through comparisons to operating plans.
Market
Considerations
Revenues from our Operating Segments primarily consist of
(i) servicing fee income based generally on the aggregate
UPB of loans serviced and (ii) gain on mortgage loans held
for sale based generally on our originations volume. Maintaining
and growing our revenues depends on our ability to acquire
additional MSRs, enter into additional subservicing contracts
and opportunistically increase our originations volume and our
recapture rate.
Servicing
Segment
Current trends in the mortgage servicing industry include
elevated borrower delinquencies, a significant increase in loan
modifications and the need for high touch servicing expertise,
which emphasizes borrower interaction to improve loan
performance and reduce loan defaults and foreclosures.
In the aftermath of the U.S. financial crisis, the residential
mortgage servicing industry is undergoing major structural
changes that affect the way residential loans are originated,
owned and serviced. These changes have benefited and should
continue to benefit non-bank mortgage servicers. Banks currently
dominate the residential mortgage servicing industry, servicing
over 95% of all residential mortgage loans. Over 50% of all
residential mortgage loan servicing is concentrated among just
four banks. However, banks are currently under tremendous
pressure to exit or reduce their exposure to the servicing
business as a result of increased regulatory scrutiny and
capital requirements, headline risk associated with sizeable
legal settlements, as well as potentially significant earnings
volatility.
In addition, as the mortgage industry continues to struggle with
elevated borrower delinquencies, the special servicing function
has become a particularly important component of a mortgage
servicers role and, we believe, a key differentiator among
mortgage servicers, as GSEs and other mortgage owners are
focused on home ownership preservation and superior credit
performance. However, banks servicing operations, which
are primarily oriented towards payment processing, are often
ill-equipped to maximize loan performance through high touch
servicing. This trend has led to increased demand for
experienced high touch servicers and
54
provides us opportunities to acquire additional MSRs, including
co-investing with financial partners in excess MSRs, and to
enter into additional subservicing contracts.
As a result of these factors and the overall increased demands
on servicers by mortgage owners, mortgage servicing is shifting
from banks to non-bank servicers. Already, over the last
18 months, banks have completed or announced servicing
transfers on over $350 billion of loans. We believe this
represents a fundamental change in the mortgage servicing
industry and expect the trend to continue at an accelerated rate
in the future. Because the mortgage servicing industry is
characterized by high barriers to entry, including the need for
specialized servicing expertise and sophisticated systems and
infrastructure, compliance with GSE and client requirements,
compliance with state-by-state licensing requirements and the
ability to adapt to regulatory changes at the state and federal
levels, we believe we are one of the few mortgage servicers
competitively positioned to benefit from the shift.
However, we cannot predict how many, if any, MSRs or
subservicing opportunities will be available in the future; if
we will be able to acquire MSRs from third parties, on a
standalone basis or by co-investing with financial partners in
excess MSRs, if at all; if we will be able to enter into
additional subservicing contracts, including any transactions
facilitated by GSEs; or whether these MSRs will be available at
acceptable prices or on acceptable terms. See Risk
Factors.
Originations
Segment
Todays U.S. residential loan originations sector
primarily offers conventional agency and government conforming
mortgage loans. Non-prime and alternative lending programs and
products represent only a small fraction of total originations.
This has led to a consolidation among mortgage lenders in both
the retail and wholesale channels and has resulted in less
competition. In addition to such consolidation, some mortgage
originators have exited the market entirely.
Originations volume is impacted by changes in interest rates and
the housing market. Depressed home prices and increased LTVs may
preclude many potential borrowers, including borrowers whose
existing loans we service, from refinancing their existing
loans. An increase in prevailing interest rates could decrease
the originations volume through our Consumer Direct Retail
originations channel, our largest originations channel by
volume, because this channel focuses predominantly on
refinancing existing mortgage loans.
In addition, there continue to be changes in legislation and
licensing in an effort to simplify the consumer mortgage
experience, which require technology changes and additional
implementation costs for loan originators. We expect legislative
changes will continue in the foreseeable future, which may
increase our operating expenses. See
BusinessRegulation.
Critical
Accounting Policies
Various elements of our accounting policies, by their nature,
are inherently subject to estimation techniques, valuation
assumptions and other subjective assessments. In particular, we
have identified two policies that, due to the judgment,
estimates and assumptions inherent in those policies, are
critical to an understanding of our consolidated financial
statements. These policies relate to: (a) fair value
measurements and (b) sale of mortgage loans. We believe
that the judgment, estimates and assumptions used in the
preparation of our consolidated financial statements are
appropriate given the factual circumstances at the time.
However, given the sensitivity of our consolidated financial
statements to these critical accounting policies, the use of
other judgments, estimates and assumptions could result in
material differences in our results of operations or financial
condition. Management currently views its fair value
measurements, which include (i) the valuation of mortgage loans
held for sale, (ii) the valuation of mortgage loans held
for investment, subject to ABS nonrecourse debt, (iii) the
valuation of investment in debt securities available for sale,
(iv) the valuation of MSRs, (v) the valuation of
derivative instruments, (vi) the valuation of ABS
nonrecourse debt and (vii) sale of mortgage loans to be our
critical accounting policies.
55
Fair
Value Measurements
Mortgage
Loans Held for Sale
Through September 30, 2009, we recorded mortgage loans held
for sale at the lower of amortized cost or fair value on an
aggregate basis grouped by delinquency status. Effective
October 1, 2009, we elected to measure newly originated
conventional residential mortgage loans held for sale at fair
value, as permitted under current accounting guidance. We
estimate fair value by evaluating a variety of market indicators
including recent trades and outstanding commitments, calculated
on an aggregate basis.
Mortgage
Loans Held for Investment, Subject to ABS Nonrecourse
Debt
We determine the fair value on loans held for investment,
subject to ABS nonrecourse debt using internally developed
valuation models. These valuation models estimate the exit price
we expect to receive in the loans principal market.
Although we utilize and give priority to observable market
inputs, such as interest rates and market spreads within these
models, we typically are required to utilize internal inputs,
such as prepayment speeds, credit losses and discount rates.
These internal inputs require the use of our judgment and can
have a significant impact on the determination of the
loans fair value.
Investment
in Debt Securities
Investment in debt securities consists of beneficial interests
we retain in securitization transactions accounted for as a sale
under current accounting guidance. These securities are
classified as
available-for-sale
securities and are therefore carried at their market value with
the net unrealized gains or losses reported in the comprehensive
income (loss) component of members equity. We base our
valuation of debt securities on observable market prices when
available; however, due to illiquidity in the markets,
observable market prices were not available on these debt
securities at December 31, 2010 and 2009. When observable
market prices are not available, we base valuations on
internally developed discounted cash flow models that use a
market-based discount rate. The valuation considers recent
market transactions, experience with similar securities, current
business conditions and analysis of the underlying collateral,
as available. In order to estimate cash flows, we utilize a
variety of assumptions, including assumptions for prepayments,
cumulative losses and other variables.
We evaluate investment in debt securities for impairment each
quarter, and investment in debt securities is considered to be
impaired when the fair value of the investment is less than its
cost. The impairment is separated into impairments related to
credit losses, which are recorded in current period operations,
and impairments related to all other factors, which are recorded
in other comprehensive income (loss). Since January 1,
2010, we have held no investment in debt securities.
MSRs
We recognize MSRs related to all existing forward residential
mortgage loans transferred to a third party in a transfer that
meets the requirements for sale accounting. Additionally, we may
acquire the rights to service forward residential mortgage loans
through the purchase of these rights from third parties. We
apply fair value accounting to this class of MSRs, with all
changes in fair value recorded as a charge or credit to
servicing fee income in the consolidated statement of
operations. We estimate the fair value of these MSRs using a
process that combines the use of a discounted cash flow model
and analysis of current market data to arrive at an estimate of
fair value. The cash flow assumptions and prepayment assumptions
used in the model are based on various factors, with the key
assumptions being mortgage prepayment speeds, discount rates and
credit losses.
We use internal financial models that use, wherever possible,
market participant data to value these MSRs. These models are
complex and use asset-specific collateral data and market inputs
for interest and
56
discount rates. In addition, the modeling requirements of MSRs
are complex because of the high number of variables that drive
cash flows associated with MSRs. Even if the general accuracy of
our valuation models is validated, valuations are highly
dependent upon the reasonableness of our assumptions and the
predictability of the relationships that drive the results of
the models. On a periodic basis, a large portion of these MSRs
are reviewed by an outside valuation expert. At September 30,
2011, we had only one class of MSRs.
Derivative
Financial Instruments
We utilize certain derivative instruments in the ordinary course
of our business to manage our exposure to changes in interest
rates. These derivative instruments include forward sales of
MBS, forward loan sale commitments and interest rate swaps and
caps. We also issue interest rate lock commitments
(IRLCs) to borrowers in connection with single
family mortgage loan originations. We recognize all derivative
instruments on our consolidated statement of financial position
at fair value. The estimated fair values of forward sales of
MBS, forward sale commitments and interest rate swaps and caps
are based on quoted market values and are recorded as other
assets or derivative financial instruments liabilities in the
consolidated balance sheet. The initial and subsequent changes
in value on forward sales of MBS are a component of gain/(loss)
on mortgage loans held for sale in the consolidated statement of
operations. The estimated fair values of IRLCs are based on
quoted market values, as adjusted for expected execution of
outstanding loan commitments, and are recorded in other assets
in the consolidated balance sheet. The initial and subsequent
changes in value of IRLCs are a component of gain on mortgage
loans held for sale in the consolidated statement of operations.
ABS
Nonrecourse Debt
Effective January 1, 2010, new accounting guidance related
to VIEs eliminated the concept of a QSPE, and all existing
special purpose entities (SPEs) are now subject to
the new consolidation guidance. Upon adoption of this new
accounting guidance, we identified certain securitization trusts
where we, through our affiliates, continued to hold beneficial
interests in these trusts. These retained beneficial interests
obligate us to absorb losses of the VIE that could potentially
be significant to the VIE or the right to receive benefits from
the VIE that could potentially be significant. In addition, as
master servicer on the related mortgage loans, we retain the
power to direct the activities of the VIE that most
significantly impact the economic performance of the VIE. When
it is determined that we have both the power to direct the
activities that most significantly impact the VIEs
economic performance and the obligation to absorb losses or the
right to receive benefits that could potentially be significant
to the VIE, the assets and liabilities of these VIEs are
included in our consolidated financial statements. Upon
consolidation of these VIEs, we derecognized all previously
recognized beneficial interests obtained as part of the
securitization, including any retained investment in debt
securities, and any remaining residual interests. In addition,
we recognized the securitized mortgage loans as mortgage loans
held for investment, subject to ABS nonrecourse debt, and the
related asset-backed certificates acquired by third parties as
ABS nonrecourse debt on our consolidated balance sheet.
We estimate the fair value of ABS nonrecourse debt based on the
present value of future expected discounted cash flows with the
discount rate approximating current market value for similar
financial instruments.
Sale of
Mortgage Loans
Transfers of financial assets are accounted for as sales when
control over the assets has been surrendered by us. Control over
transferred assets is deemed to be surrendered when (1) the
assets have been isolated from us, (2) the transferee has
the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred
assets, and (3) we do not maintain effective control over
the transferred assets through either (a) an agreement that
entitles and obligates us to repurchase or redeem them before
their maturity or (b) the ability to unilaterally cause the
holder to return specific assets. Loan securitizations
structured as sales as well as whole loan sales are accounted
for as sales of mortgage loans and the resulting gains or losses
on such sales, net of any accrual for standard representations
and warranties, are
57
reported in operating results as a component of gain/(loss) on
mortgage loans held for sale in the consolidated statement of
operations during the period in which the securitization closes
or the sale occurs.
Recent
Developments
Updated
Loan Agreements
We amended our
2010-ABS
Advance Financing Facility in October 2011. This amendment
increased our borrowing capacity from $200 million to
$300 million and extended the maturity date to May 2014. In
conjunction with this amendment, we paid off the
2009-ABS
Advance Financing Facility and transferred the related
collateral to the amended
2010-ABS
Advance Financing Facility.
We executed the
2011-Agency
Advance Financing Facility in October 2011. This facility has
the capacity to purchase up to $75 million of advance
receivables. The interest rate of this facility is the London
Interbank Offered Rate (LIBOR) plus 2.50%, and it
matures in October 2012. This debt is nonrecourse to us.
In January 2012, we extended the maturity date of our
$75 million warehouse facility with BANA, an affiliate of
Merrill Lynch, Pierce, Fenner & Smith Incorporated, an
underwriter in this offering, to January 2013 and increased the
committed amount under this warehouse facility to
$175 million. We herein refer to this facility as our
$175 Million Warehouse Facility.
We increased the total borrowing on our As Soon As Pooled Plus,
or ASAP+, Short-Term Financing Facility in November
2011. The total commitment under this facility is now
$200 million.
We extended our MBS Advance Facility in December 2011. Under the
terms of this extension, this facility is now set to expire in
December 2012.
We extended our $100 Million Warehouse Facility in December
2011. This agreement is now set to expire in February 2012.
For a description of our facilities, see Managements
Discussion and Analysis of Financial Condition and Results of
OperationsContractual ObligationsDescription of
Certain Indebtedness.
Lease
Agreement
In October 2011, we entered into an operating sublease agreement
for approximately 53,000 square feet of office space in
Houston, Texas. This sublease began in November 2011 and expires
in November 2014. Our total obligation related to this agreement
will be approximately $4.0 million over the life of the
sublease.
Refocus
Originations Strategy
In November 2011, we made the decision to refocus our strategy
with respect to our originations platform. As part of this
activity, we will eliminate a substantial portion of our
distributed retail branch network in non-strategic locations in
favor of a more centralized retail originations structure. To
effect this change in structure, we will record a fourth fiscal
quarter 2011 charge of approximately $2.0 million to
$2.5 million for estimated severance costs, lease
termination and other related costs.
MSR
Financing Arrangement
In December 2011, we entered into a sale and assignment
agreement (the Sale Agreement) with an indirect
wholly owned subsidiary of Newcastle Investment Corp.
(Newcastle). We are an affiliate of Newcastles
manager, which is an affiliate of Fortress. We acquired MSRs on
a pool of agency residential mortgage loans in September 2011
(the Portfolio). Pursuant to the Sale Agreement, we
sold to Newcastle
58
the right to receive 65% of the excess cash flow generated from
the MSRs of the Portfolio after receipt of a fixed basic
servicing fee per loan. The sale price was $43.7 million.
We will retain all ancillary income associated with servicing
the Portfolio and 35% of the excess cash flow after receipt of
the fixed basic servicing fee. We will continue to be the
servicer of the loans and provide all servicing and advancing
functions for the Portfolio. Newcastle will not have prior or
ongoing obligations associated with the Portfolio.
Also in December 2011, we entered into a refinanced loan
agreement with Newcastle. If we refinance any loan in the
Portfolio, subject to certain limitations, we will be required
to transfer the new loan or a replacement loan into the
Portfolio. The new or replacement loan will be governed by the
same terms set forth in the Sale Agreement. This Sale Agreement
will be accounted for as a financing arrangement by us.
MSR
Purchase
In December 2011, we entered into a servicing rights sale and
issuer transfer agreement (the Servicing Rights Sale and
Issuer Transfer Agreement) with BANA, an affiliate of
Merrill Lynch, Pierce, Fenner & Smith Incorporated, an
underwriter in this offering. Under the Servicing Rights Sale
and Issuer Transfer Agreement, we agreed to purchase certain
servicing rights relating to reverse mortgage loans with an
aggregate UPB as of December 31, 2011 of approximately
$18 billion and assume certain liabilities associated with
such MSRs. On December 22, 2011, we acquired the MSRs
relating to reverse mortgage loans with an aggregate UPB as of
December 31, 2011 of approximately $7.8 billion for
cash of $4.3 million and assumption of a servicing
liability of $10.5 million. In addition, we acquired the
related advances to the MSRs for approximately
$24.1 million, subject to adjustment based on actual
balances at January 1, 2012. Our acquisition of MSRs
related to an additional $9.5 billion of UPB as of
December 31, 2011 is expected to close during 2012 upon
receipt of certain specified third party approvals. On
December 23, 2011, we paid a deposit of $9.0 million
related to such servicing. Additionally, we expect to subservice
on behalf of the bank certain reverse mortgage loans with a UPB
as of December 31, 2011 of approximately $1.4 billion
beginning in the later portion of 2012. These reverse mortgage
loan servicing rights represent a new class of servicing rights
for us and will be accounted for under the amortization method.
Issuance
of Senior Notes
On December 19, 2011, Nationstar Mortgage LLC and
Nationstar Capital Corporation, as co-issuers, completed a
further issuance of $35.0 million aggregate principal
amount of 10.875% senior notes due 2015 on terms identical
to those of the existing senior notes, other than the issue date
and offering price. By means of a separate prospectus,
Nationstar Mortgage LLC and Nationstar Capital Corporation
intend to offer to exchange up to $35.0 million aggregate
principal amount of 10.875% senior notes due 2015, or the
registered follow-on notes, for an equal principal
amount of the existing notes in an offering that will have been
registered under the Securities Act. The registered follow-on
notes will be fungible with the registered existing senior notes
upon issuance. This prospectus shall not be deemed to be an
offer to exchange such notes. The aggregate principal amount of
outstanding senior notes under this series is
$285.0 million.
Derecognition
of VIE
On December 23, 2011, we sold our remaining variable
interest in a securitization trust that had been a consolidated
VIE since January 1, 2010. In accordance with ASC 810,
Consolidation, we have evaluated this securitization
trust and determined that we no longer have both the power to
direct the activities that most significantly impact the
VIEs economic performance and the obligation to absorb
losses or the right to receive benefits that could potentially
be significant to the VIE and this securitization trust was
derecognized as of December 23, 2011. Upon derecognition of
this VIE, we derecognized the securitized mortgage loans held
for investment, subject to the related ABS nonrecourse debt, as
well as certain other assets and liabilities of the
securitization trust, and recognized any MSRs on the
consolidated balance sheet. Any impact of this derecognition on
our consolidated statement of operations will be recognized in
the fourth quarter of 2011.
59
Results
of Operations
The following table summarizes our consolidated operating
results for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
|
$165,636
|
|
|
|
$110,919
|
|
|
|
$167,126
|
|
|
|
$90,195
|
|
|
|
$68,052
|
|
Other fee income
|
|
|
19,118
|
|
|
|
11,851
|
|
|
|
16,958
|
|
|
|
10,023
|
|
|
|
5,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
184,754
|
|
|
|
122,770
|
|
|
|
184,084
|
|
|
|
100,218
|
|
|
|
74,007
|
|
Gain on mortgage loans held for sale
|
|
|
73,560
|
|
|
|
51,754
|
|
|
|
77,344
|
|
|
|
(21,349
|
)
|
|
|
(86,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
258,314
|
|
|
|
174,524
|
|
|
|
261,428
|
|
|
|
78,869
|
|
|
|
(12,656
|
)
|
Expenses and impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
|
146,199
|
|
|
|
104,689
|
|
|
|
149,115
|
|
|
|
90,689
|
|
|
|
61,783
|
|
General and administrative
|
|
|
56,707
|
|
|
|
34,931
|
|
|
|
58,913
|
|
|
|
30,494
|
|
|
|
22,194
|
|
Provision for loan losses
|
|
|
2,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sale of foreclosed real estate
|
|
|
6,904
|
|
|
|
|
|
|
|
3,503
|
|
|
|
7,512
|
|
|
|
2,567
|
|
Occupancy
|
|
|
7,902
|
|
|
|
6,002
|
|
|
|
9,445
|
|
|
|
6,863
|
|
|
|
6,021
|
|
Loss on
available-for-sale
securitiesother than temporary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,809
|
|
|
|
55,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses and impairments
|
|
|
219,717
|
|
|
|
145,622
|
|
|
|
220,976
|
|
|
|
142,367
|
|
|
|
147,777
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
51,246
|
|
|
|
82,019
|
|
|
|
98,895
|
|
|
|
52,518
|
|
|
|
92,060
|
|
Interest expense
|
|
|
(76,929
|
)
|
|
|
(89,298
|
)
|
|
|
(116,163
|
)
|
|
|
(69,883
|
)
|
|
|
(65,548
|
)
|
Gain/(loss) on interest rate swaps and caps
|
|
|
|
|
|
|
(9,917
|
)
|
|
|
(9,801
|
)
|
|
|
(14
|
)
|
|
|
(23,689
|
)
|
Fair value changes in ABS securitizations
|
|
|
(6,919
|
)
|
|
|
(19,115
|
)
|
|
|
(23,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(32,602
|
)
|
|
|
(36,311
|
)
|
|
|
(50,366
|
)
|
|
|
(17,379
|
)
|
|
|
2,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
|
$5,995
|
|
|
|
$(7,409
|
)
|
|
|
$(9,914
|
)
|
|
|
$(80,877
|
)
|
|
|
$(157,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We provide further discussion of our results of operations for
each of our reportable segments under Segment
Results below. Certain income and expenses not allocated
to our reportable segments are presented under
Legacy Portfolio and Other below and discussed
in Note 22 to Consolidated Financial
StatementsBusiness Segment Reporting.
Comparison
of Consolidated Results for the Nine Months Ended
September 30, 2011 and 2010
Revenues increased $83.8 million from $174.5 million
for the nine months ended September 30, 2010 to
$258.3 million for the nine months ended September 30,
2011, due to increases in both our total fee income and our gain
on mortgage loans held for sale offset by MSR fair value
adjustments. The increase in our total fee income was primarily
the result of (1) our higher average servicing portfolio
balance of $78.4 billion for the nine months ended
September 30, 2011, compared to $34.4 billion for the
nine months ended September 30, 2010, and (2) an
increase in modification fees earned from HAMP and other
non-HAMP modifications. The increase in the gain on loans held
for sale was a result of the $325.5 million, or 16.6%,
increase in the amount of loans originated during the 2011
period compared to the 2010 period and higher margins earned on
the sale of residential mortgage loans during the period.
Expenses and impairments increased $74.1 million from
$145.6 million for the nine months ended September 30,
2010 to $219.7 million for the nine months ended
September 30, 2011, primarily due to the increase in
compensation expenses related to increased staffing levels in
order to accommodate our larger servicing portfolio and
originations volumes as well as other related increases in
general and administrative expenses. Our 2011 expenses and
impairments included an increase of $4.7 million over the
comparable 2010
60
period due to revised compensation arrangements executed with
certain members of our executive team during the third quarter
of 2010.
Other expense decreased $3.7 million from
$36.3 million for the nine months ended September 30,
2010 to $32.6 million for the nine months ended
September 30, 2011, primarily due to the effects of the
derecognition of a previously consolidated VIE and the losses on
our outstanding interest rate swap positions during the 2010
period.
Comparison
of Consolidated Results for the Years Ended December 31,
2010 and 2009
Revenues increased $182.5 million from $78.9 million
for the year ended December 31, 2009 to $261.4 million
for the year ended December 31, 2010, primarily due to the
significant increase in our total fee income and an increase in
our gain on mortgage loans held for sale. The increase in our
total fee income was primarily a result of (1) our higher
average servicing portfolio balance of $38.7 billion for
the year ended December 31, 2010, compared to
$25.8 billion for the year ended December 31, 2009,
and (2) an increase in portfolio level performance-based
fees and fees earned for loss mitigation activities. The
increase in the gain on loans held for sale was a result of the
$1.3 billion, or 88.7%, increase in the amount of loans
originated during 2010 as well as the elimination of lower of
cost or market adjustments related to our legacy asset portfolio.
Expenses and impairments increased $78.6 million from
$142.4 million for the year ended December 31, 2009 to
$221.0 million for the year ended December 31, 2010,
primarily due to the increase in compensation expenses related
to increased staffing levels in order to accommodate our larger
servicing portfolio and originations as well as other related
increases in general and administrative expenses. Our 2010
operating results include an additional $12.1 million in
share-based compensation expense from revised compensation
arrangements executed with certain members of our executive
team. Additionally, expenses and impairments increased from the
consolidation of certain VIEs from January 1, 2010, and
from expenses associated with the settlement of certain claims.
Other expense increased $33.0 million from
$17.4 million for the year ended December 31, 2009 to
$50.4 million for the year ended December 31, 2010,
primarily due to the effects of the consolidation of certain
VIEs and the losses on our outstanding interest rate swap
positions during 2010.
Comparison
of Consolidated Results for the Years Ended December 31,
2009 and 2008
Revenues increased $91.6 million from $(12.7) million
for the year ended December 31, 2008 to $78.9 million
for the year ended December 31, 2009, primarily due to
(1) the increase in fee income as a result of the 57.7%
increase in our servicing portfolio year over year and
(2) the reduction in the loss on mortgage loans held for
sale. The decrease in loss was caused by the increase in our
loans originated during 2009 compared to 2008 and the reduction
in the lower of cost or market adjustments recorded in 2009
compared to 2008.
Expenses and impairments decreased $5.4 million from
$147.8 million for the year ended December 31, 2008 to
$142.4 million for the year ended December 31, 2009,
primarily due to the reduction in the
other-than-temporary
impairments recognized on available for sale securities during
2009, partially offset by the increase in all other expense
categories due to the increases in our loan originations and
loan servicing portfolio.
Other income (expense) increased $20.2 million from
$2.8 million for the year ended December 31, 2008 to
$(17.4) million for the year ended December 31, 2009,
primarily due to a decrease in interest income and an increase
in interest expense as a result of larger advance balances
caused by our increased servicing portfolio, offset by a
reduction in loss on interest rate swaps and caps.
61
Segment
Results
Our primary business strategy is to generate recurring, stable
income from managing and growing our servicing portfolio. We
operate through two business segments: the Servicing Segment and
the Originations Segment, which we refer to collectively as our
Operating Segments. We report the activity not related to either
operating segment in Legacy Portfolio and Other. Legacy
Portfolio and Other includes primarily all subprime mortgage
loans (i) originated in the latter portion of 2006 and
during 2007 or (ii) acquired from CHEC, and VIEs which were
consolidated pursuant to the January 1, 2010 adoption of
new consolidation guidance related to VIEs.
The accounting policies of each reportable segment are the same
as those of the consolidated financial statements except for
(i) expenses for consolidated back-office operations and
general overhead expenses such as executive administration and
accounting and (ii) revenues generated on inter-segment
services performed. Expenses are allocated to individual
segments based on the estimated value of the services performed,
including estimated utilization of square footage and corporate
personnel, as well as the equity invested in each segment.
Revenues generated or inter-segment services performed are
valued based on similar services provided to external parties.
Servicing
Segment
The Servicing Segment provides loan servicing on our primary and
subservicing portfolios, including the collection of principal
and interest payments and the generation of ancillary fees
related to the servicing of mortgage loans.
The following table summarizes our operating results from our
Servicing Segment for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
|
$168,990
|
|
|
|
$115,343
|
|
|
|
$175,569
|
|
|
|
$91,266
|
|
|
|
$69,235
|
|
Other fee income
|
|
|
6,251
|
|
|
|
5,512
|
|
|
|
7,273
|
|
|
|
8,867
|
|
|
|
5,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
175,241
|
|
|
|
120,855
|
|
|
|
182,842
|
|
|
|
100,133
|
|
|
|
74,601
|
|
Gain on mortgage loans held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
175,241
|
|
|
|
120,855
|
|
|
|
182,842
|
|
|
|
100,133
|
|
|
|
74,601
|
|
Expenses and impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
|
90,301
|
|
|
|
55,796
|
|
|
|
78,269
|
|
|
|
56,726
|
|
|
|
41,755
|
|
General and administrative
|
|
|
33,905
|
|
|
|
12,982
|
|
|
|
24,664
|
|
|
|
10,669
|
|
|
|
9,878
|
|
Occupancy
|
|
|
3,971
|
|
|
|
3,185
|
|
|
|
4,350
|
|
|
|
3,502
|
|
|
|
3,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses and impairments
|
|
|
128,177
|
|
|
|
71,963
|
|
|
|
107,283
|
|
|
|
70,897
|
|
|
|
55,037
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,529
|
|
|
|
357
|
|
|
|
263
|
|
|
|
4,143
|
|
|
|
10,872
|
|
Interest expense
|
|
|
(41,109
|
)
|
|
|
(38,723
|
)
|
|
|
(51,791
|
)
|
|
|
(25,877
|
)
|
|
|
(15,718
|
)
|
Gain/(loss) on interest rate swaps and caps
|
|
|
|
|
|
|
(9,917
|
)
|
|
|
(9,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(38,580
|
)
|
|
|
(48,283
|
)
|
|
|
(61,329
|
)
|
|
|
(21,734
|
)
|
|
|
(4,846
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
|
$8,484
|
|
|
|
$609
|
|
|
|
$14,230
|
|
|
|
$7,502
|
|
|
|
$14,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in aggregate UPB of our servicing portfolio primarily
governs the increase in revenues, expenses and other income
(expense) of our Servicing Segment.
62
The table below provides detail of the characteristics of our
servicing portfolio as of the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Servicing Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid principal balance (by investor):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special servicing
|
|
|
$10,621
|
|
|
|
$4,060
|
|
|
|
$4,893
|
|
|
|
$1,554
|
|
|
|
$1,218
|
|
GSEs
|
|
|
62,085
|
|
|
|
23,845
|
|
|
|
52,194
|
|
|
|
24,235
|
|
|
|
10,709
|
|
Non-agency securitizations
|
|
|
19,821
|
|
|
|
7,277
|
|
|
|
7,089
|
|
|
|
7,875
|
|
|
|
9,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total boarded unpaid principal balance
|
|
|
92,527
|
|
|
|
35,182
|
|
|
|
64,176
|
|
|
|
33,664
|
|
|
|
21,342
|
|
Servicing under contract
|
|
|
10,189
|
|
|
|
2,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total servicing portfolio unpaid principal balance
|
|
|
$102,716
|
|
|
|
$37,386
|
|
|
|
$64,176
|
|
|
|
$33,664
|
|
|
|
$21,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below provides detail of the characteristics and key
performance metrics of our servicing portfolio as of and for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Year Ended December 31,
|
|
|
|
2011(2)
|
|
|
2010(2)
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions, except for average loan amount and loan
count)
|
|
|
Loan countservicing
|
|
|
550,283
|
|
|
|
237,846
|
|
|
|
389,172
|
|
|
|
230,615
|
|
|
|
159,336
|
|
Ending unpaid principal balance
|
|
|
$92,527
|
|
|
|
$35,182
|
|
|
|
$64,176
|
|
|
|
$33,664
|
|
|
|
$21,342
|
|
Average unpaid principal balance
|
|
|
$78,351
|
|
|
|
$34,423
|
|
|
|
$38,653
|
|
|
|
$25,799
|
|
|
|
$12,775
|
|
Average loan amount
|
|
|
$168,144
|
|
|
|
$147,921
|
|
|
|
$164,904
|
|
|
|
$145,977
|
|
|
|
$133,943
|
|
Average coupon
|
|
|
5.46
|
%
|
|
|
6.04
|
%
|
|
|
5.74
|
%
|
|
|
6.76
|
%
|
|
|
7.49
|
%
|
Average FICO credit score
|
|
|
667
|
|
|
|
628
|
|
|
|
631
|
|
|
|
644
|
|
|
|
588
|
|
60+ delinquent (% of
loans)(1)
|
|
|
14.7
|
%
|
|
|
15.9
|
%
|
|
|
17.0
|
%
|
|
|
19.9
|
%
|
|
|
13.1
|
%
|
Total prepayment speed (12 month constant pre-payment rate
(CPR))
|
|
|
12.5
|
%
|
|
|
13.4
|
%
|
|
|
13.3
|
%
|
|
|
16.3
|
%
|
|
|
16.2
|
%
|
|
|
|
(1) |
|
Loan delinquency is based on the current contractual due date of
the loan. In the case of a completed loan modification,
delinquency is based on the modified due date of the loan. |
|
|
|
(2) |
|
For September 30, 2011 and 2010, our ending UPB excludes
our third quarter servicing portfolio acquisitions of mortgage
loans with a UPB of $10.2 billion and $2.2 billion,
respectively, for which servicing rights were acquired in the
third quarter but for an interim period continued to be
subserviced by the predecessor servicer. |
63
For the
Nine Months Ended September 30, 2011 and 2010
Servicing fee income consists of the following for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands)
|
|
|
Servicing fee income
|
|
|
$145,444
|
|
|
|
$77,791
|
|
Loss mitigation and performance-based incentive fees
|
|
|
10,178
|
|
|
|
15,376
|
|
Modification fees
|
|
|
22,303
|
|
|
|
14,410
|
|
Late fees and other ancillary charges
|
|
|
17,958
|
|
|
|
17,795
|
|
Other servicing fee related revenues
|
|
|
3,864
|
|
|
|
1,470
|
|
|
|
|
|
|
|
|
|
|
Total servicing fee income before MSR fair value adjustments
|
|
|
199,747
|
|
|
|
126,842
|
|
MSR fair value adjustments
|
|
|
(30,757
|
)
|
|
|
(11,499
|
)
|
|
|
|
|
|
|
|
|
|
Total servicing fee income
|
|
|
$168,990
|
|
|
|
$115,343
|
|
|
|
|
|
|
|
|
|
|
The following tables provide servicing fee income by primary
servicing, subservicing and adjacent businesses and UPB by
primary servicing and subservicing for and as of the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands)
|
|
|
Servicing fee income
|
|
|
|
|
|
|
|
|
Primary servicing
|
|
|
$111,880
|
|
|
|
$120,003
|
|
Subservicing
|
|
|
83,688
|
|
|
|
6,839
|
|
Adjacent
businesses(1)
|
|
|
4,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total servicing fee income before MSR fair value adjustments
|
|
|
$199,747
|
|
|
|
$126,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents loss recovery fees and fees for disposition of REO
properties for a GSE. |
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(in millions)
|
|
|
UPB
|
|
|
|
|
|
|
|
|
Primary
servicing(1)
|
|
|
$36,510
|
|
|
|
$31,286
|
|
Subservicing
|
|
|
56,017
|
|
|
|
3,896
|
|
|
|
|
|
|
|
|
|
|
Total unpaid principal balance
|
|
|
$92,527
|
|
|
|
$35,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes $10.2 billion of servicing under contract whose
servicing rights were acquired on September 30, 2011 but
for an interim period continued to be subserviced by the
predecessor servicer. |
Servicing fee income was $169.0 million for the nine months
ended September 30, 2011 compared to $115.3 million
for the nine months ended September 30, 2010, an increase
of $53.7 million, or 46.6%, primarily due to the net effect
of the following:
|
|
|
|
|
Increase of $67.6 million due to higher average UPB of
$78.4 billion in the 2011 period compared to
$34.4 billion in the comparable 2010 period. The increase
in our servicing portfolio
|
64
|
|
|
|
|
was primarily driven by an increase in average UPB for loans
serviced for GSEs and other subservicing contracts for third
party investors of $57.1 billion in the 2011 period
compared to $24.0 billion in the comparable 2010 period. In
addition, we also experienced an increase in average UPB for our
private asset-backed securitizations portfolio, which increased
to $13.5 billion in the nine month period ended
September 30, 2011 compared to $7.6 billion in the
comparable 2010 period.
|
|
|
|
|
|
Increase of $7.9 million due to higher modification fees
earned from HAMP and non-HAMP modifications.
|
|
|
|
|
|
Decrease of $5.2 million due to decreased loss mitigation
and performance-based incentive fees earned from a GSE.
|
|
|
|
|
|
Decrease of $19.3 million from change in fair value on MSRs
which was recognized in servicing fee income. The fair value of
our MSRs is based upon the present value of the expected future
cash flows related to servicing these loans. The revenue
components of the cash flows are servicing fees, interest earned
on custodial accounts, and other ancillary income. The expense
components include operating costs related to servicing the
loans (including delinquency and foreclosure costs) and interest
expenses on servicing advances. The expected future cash flows
are primarily impacted by prepayment estimates, delinquencies,
and market discount rates. Generally, the value of MSRs
increases when interest rates increase and decreases when
interest rates decline due to the effect those changes in
interest rates have on prepayment estimates. Other factors
affecting the MSR value includes the estimated effects of loan
modifications on expected cash flows. Such modifications tend to
positively impact cash flows by extending the expected life of
the affected MSR and potentially producing additional revenue
opportunities depending on the type of modification. In valuing
the MSRs, we believe our assumptions are consistent with the
assumptions other major market participants use. These
assumptions include a level of future modification activity that
we believe major market participants would use in their
valuation of MSRs. Internally, we have modification goals that
exceed the assumptions utilized in our valuation model.
Nevertheless, were we to apply an assumption of a level of
future modifications consistent with our internal goals to our
MSR valuation, we do not believe the resulting increase in value
would be material. Additionally, several state Attorneys General
have requested that certain mortgage servicers, including us,
suspend foreclosure proceedings pending internal review to
ensure compliance with applicable law, and we received requests
from four such state Attorneys General. Although we have resumed
those previously delayed proceedings, changes in the foreclosure
process that may be required by government or regulatory bodies
could increase the cost of servicing and diminish the value of
our MSRs. We utilize assumptions of servicing costs that include
delinquency and foreclosure costs that we believe major market
participants would use to value their MSRs. We periodically
compare our internal MSR valuation to third party valuation of
our MSRs to help substantiate our market assumptions. We have
considered the costs related to the delayed proceedings in our
assumptions and we do not believe that any resulting decrease in
the MSR was material given the expected short-term nature of the
issue.
|
Other fee income was $6.3 million for the nine months ended
September 30, 2011 compared to $5.5 million for the
nine months ended September 30, 2010, an increase of
$0.8 million, or 14.5%, due to higher commissions earned on
lender placed insurance and higher REO sales commissions. This
increase was partially offset by a $1.0 million charge to
other income from losses from ANC Acquisition LLC
(ANC), an ancillary real estate services and vendor
management company acquired in March 2011. We currently own a
22% interest in ANC. We apply the equity method of accounting to
investments when the entity is not a VIE and we are able to
exercise significant influence, but not control, over the
policies and procedures of the entity but own less than 50% of
the voting interests. ANC is the parent company of National Real
Estate Information Services LLP (NREIS), a real
estate services company which offers comprehensive settlement
and property
65
valuation services for both originations and default management
channels. Direct or indirect product offerings include title
insurance agency, tax searches, flood certification, default
valuations, full appraisals and broker price opinions.
The following table provides other fee income by primary
servicing, subservicing and adjacent businesses for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands)
|
|
|
Other fee income
|
|
|
|
|
|
|
|
|
Primary servicing
|
|
|
$3,265
|
|
|
|
$5,224
|
|
Subservicing
|
|
|
1,849
|
|
|
|
288
|
|
Adjacent businesses
|
|
|
1,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other fee income
|
|
|
$6,251
|
|
|
|
$5,512
|
|
|
|
|
|
|
|
|
|
|
Expenses and impairments were $128.2 million for the nine
months ended September 30, 2011 compared to
$72.0 million for the nine months ended September 30,
2010, an increase of $56.2 million, or 78.1%, primarily due
to the increase of $34.5 million in salaries, wages and
benefits expense resulting primarily from an increase in average
headcount from 959 in 2010 to 1,441 in 2011 and an increase of
$21.7 million in general and administrative and
occupancy-related expenses associated with increased headcount
and growth in the servicing portfolio. Our 2011 operating
results include a $7.9 million increase in share-based
compensation expense from revised compensation arrangements
executed with certain members of our executive team during the
third quarter of 2010.
The following table provides primary servicing, subservicing,
adjacent businesses and other Servicing Segment expenses for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands)
|
|
|
Expenses and impairments
|
|
|
|
|
|
|
|
|
Primary servicing
|
|
|
$51,149
|
|
|
|
$62,506
|
|
Subservicing
|
|
|
58,620
|
|
|
|
5,720
|
|
Adjacent businesses
|
|
|
6,217
|
|
|
|
|
|
Other Servicing Segment expenses
|
|
|
12,191
|
|
|
|
3,737
|
|
|
|
|
|
|
|
|
|
|
Total expenses and impairments
|
|
|
$128,177
|
|
|
|
$71,963
|
|
|
|
|
|
|
|
|
|
|
Other Servicing Segment expenses primarily include share-based
compensation expenses.
Total other income (expense) was $(38.6) million for the nine
months ended September 30, 2011 compared to $(48.3) million
for the nine months ended September 30, 2010, a decrease in
expense, net of income, of $9.7 million, or 20.1%,
primarily due to the net effect of the following:
|
|
|
|
|
Interest income was $2.5 million for the nine months ended
September 30, 2011 compared to $0.4 million for the
nine months ended September 30, 2010, an increase of
$2.1 million, or 525.0%, due to higher average outstanding
custodial cash deposit balances on custodial cash accounts.
|
66
|
|
|
|
|
Interest expense was $41.1 million for the nine months
ended September 30, 2011 compared to $38.7 million for
the nine months ended September 30, 2010, an increase of
$2.4 million, or 6.2%, primarily due to higher average
outstanding debt of $618.2 million in the nine month period
ended September 30, 2011 compared to $608.1 million in
the comparable 2010 period. The impact of the higher debt
balances is partially offset by lower interest rates due to
declines in the base LIBOR and decreases in the overall index
margin on outstanding servicer advance facilities. Interest
expense from the unsecured senior notes was $22.5 million
and $15.1 million, respectively, for the nine months ended
September 30, 2011 and 2010.
|
|
|
|
|
|
Loss on interest rate swaps and caps was $9.9 million for
the nine months ended September 30, 2010, with no
corresponding gain or loss recognized for the nine months ended
September 30, 2011. Effective October 1, 2010, we
designated an existing interest rate swap as a cash flow hedge
against outstanding floating rate financing associated with one
of our outstanding servicer advance facilities. This interest
rate swap is recorded at fair value, with any changes in fair
value related to the effective portion of the hedge being
recorded as an adjustment to other comprehensive income. Prior
to this designation, any changes in fair value were recorded as
a loss on interest rate swaps and caps on our statement of
operations.
|
For the
Years Ended December 31, 2010 and 2009
Servicing fee income consists of the following for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
Servicing fee income
|
|
|
$118,443
|
|
|
|
$83,659
|
|
Loss mitigation and performance-based incentive fees
|
|
|
16,621
|
|
|
|
7,658
|
|
Modification fees
|
|
|
21,792
|
|
|
|
3,868
|
|
Late fees and other ancillary charges
|
|
|
22,828
|
|
|
|
21,901
|
|
Other servicing fee related revenues
|
|
|
1,928
|
|
|
|
2,095
|
|
|
|
|
|
|
|
|
|
|
Total servicing fee income before MSR fair value adjustments
|
|
|
181,612
|
|
|
|
119,181
|
|
MSR fair value adjustments
|
|
|
(6,043
|
)
|
|
|
(27,915
|
)
|
|
|
|
|
|
|
|
|
|
Total servicing fee income
|
|
|
$175,569
|
|
|
|
$91,266
|
|
|
|
|
|
|
|
|
|
|
The following tables provide servicing fee income and UPB by
primary servicing and subservicing for and as of the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
Servicing fee income
|
|
|
|
|
|
|
|
|
Primary servicing
|
|
|
$161,312
|
|
|
|
$116,966
|
|
Subservicing
|
|
|
20,300
|
|
|
|
2,215
|
|
|
|
|
|
|
|
|
|
|
Total servicing fee income before MSR fair value adjustments
|
|
|
$181,612
|
|
|
|
$119,181
|
|
|
|
|
|
|
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in millions)
|
|
|
UPB
|
|
|
|
|
|
|
|
|
Primary servicing
|
|
|
$34,404
|
|
|
|
$32,871
|
|
Subservicing
|
|
|
29,772
|
|
|
|
793
|
|
|
|
|
|
|
|
|
|
|
Total unpaid principal balance
|
|
|
$64,176
|
|
|
|
$33,664
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income was $175.6 million for the year ended
December 31, 2010 compared to $91.3 million for the
year ended December 31, 2009, an increase of
$84.3 million, or 92.3%, primarily due to the net effect of
the following:
|
|
|
|
|
Increase of $34.8 million due to higher average UPB of
$38.7 billion in 2010 compared to $25.8 billion in
2009. The increase in our servicing portfolio was primarily
driven by an increase in average UPB for loans serviced for GSEs
and other subservicing contracts for third party investors of
$31.2 billion in 2010 compared to $17.2 billion in
2009. This increase was partially offset by a decrease in
average UPB for our asset-backed securitizations portfolio,
which decreased to $7.4 billion in 2010 compared to
$8.6 billion in 2009.
|
|
|
|
|
|
Increase of $8.9 million due to increased loss mitigation
and performance-based incentive fees earned from a GSE.
|
|
|
|
|
|
Increase of $17.9 million due to higher fees earned from
HAMP and from modification fees earned on non-HAMP
modifications. As a high touch servicer, we use modifications as
a key loss mitigation tool. Under HAMP, subject to a program
participation cap, we, as a servicer, will receive an initial
incentive payment of up to $1,500 for each loan modified in
accordance with HAMP subject to the condition that the borrower
successfully completes a trial modification period. With this
program, the servicer must forego any late fees and may not
charge any other fees. In addition, provided that a HAMP
modification does not become 90 days or more delinquent, we
will receive an additional incentive fee of up to $1,000.
Initial redefault rates have been favorable, averaging 10% to
20%. The HAMP program has an expiration date of
December 31, 2012 and is only applicable to first lien
mortgages that were originated on or before January 1,
2009. For non-HAMP modifications, we generally do not waive late
fees, and we charge a modification fee. These amounts are
collected at the time of the modification.
|
|
|
|
|
|
Increase of $21.9 million from change in fair value on MSRs
which was recognized in servicing fee income. The fair value of
our MSRs is based upon the present value of the expected future
cash flows related to servicing these loans. The revenue
components of the cash flows are servicing fees, interest earned
on custodial accounts, and other ancillary income. The expense
components include operating costs related to servicing the
loans (including delinquency and foreclosure costs) and interest
expenses on servicing advances. The expected future cash flows
are primarily impacted by prepayment estimates, delinquencies,
and market discount rates. Generally, the value of MSRs
increases when interest rates increase and decreases when
interest rates decline due to the effect those changes in
interest rates have on prepayment estimates. Other factors
affecting the MSR value includes the estimated effects of loan
modifications on expected cash flows. Such modifications tend to
positively impact cash flows by extending the expected life of
the affected MSR and potentially producing additional revenue
opportunities depending on the type of modification. In valuing
the MSRs, we believe our assumptions are consistent with the
assumptions other major market participants use. These
assumptions include a level of future modification activity that
we believe major market participants would use in their
valuation of MSRs. Internally, we have modification goals that
exceed the assumptions utilized in our valuation model.
Nevertheless, were we to utilize an assumption of a level of
|
68
|
|
|
|
|
future modifications consistent with our internal goals to our
MSR valuation, we do not believe the resulting increase in value
would be material.
|
|
|
|
|
|
Increase of $0.9 million due to an increase in ancillary
and late fees arising from growth in the servicing portfolio.
Late fees are recognized as revenue at collection.
|
Other fee income was $7.3 million for the year ended
December 31, 2010 compared to $8.9 million for the
year ended December 31, 2009, a decrease of
$1.6 million, or 18.0%, due to lower lender-placed
insurance commissions and lower REO sales commissions resulting
from a decline in REO sales managed by our internal REO sales
group.
The following table provides other fee income by primary
servicing and subservicing for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
Other fee income
|
|
|
|
|
|
|
|
|
Primary servicing
|
|
|
$6,865
|
|
|
|
$8,867
|
|
Subservicing
|
|
|
408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other fee income
|
|
|
$7,273
|
|
|
|
$8,867
|
|
|
|
|
|
|
|
|
|
|
Expenses and impairments were $107.3 million for the year
ended December 31, 2010 compared to $70.9 million for
the year ended December 31, 2009, an increase of
$36.4 million, or 51.3%, primarily due to an increase of
$21.6 million in salaries, wages and benefits expense
resulting from an increase in headcount from 910 in 2009 to
1,178 in 2010 and $4.9 million in additional share-based
compensation from revised compensation arrangements with certain
of our executives. Additionally, we recognized an increase of
$14.8 million in general and administrative and occupancy
expenses associated with increased headcount, growth in the
servicing portfolio and increases in reserves for
non-recoverable advances.
The following table provides key primary servicing, subservicing
and other Servicing Segment expenses for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
|
Expenses and impairments
|
|
|
|
|
|
|
|
|
Primary servicing
|
|
|
$82,772
|
|
|
|
$67,330
|
|
Subservicing
|
|
|
18,276
|
|
|
|
2,232
|
|
Other Servicing Segment expenses
|
|
|
6,235
|
|
|
|
1,335
|
|
|
|
|
|
|
|
|
|
|
Total expenses and impairments
|
|
|
$107,283
|
|
|
|
$70,897
|
|
|
|
|
|
|
|
|
|
|
Other Servicing Segment expenses primarily include share-based
compensation expenses.
69
Total other income (expense) was $(61.3) million for the
year ended December 31, 2010 compared to
$(21.7) million for the year ended December 31, 2009,
an increase in expense, net of income, of $39.6 million, or
182.5%, primarily due to the net effect of the following:
|
|
|
|
|
Interest income decreased $3.8 million due to lower average
index rates received on custodial cash deposits associated with
mortgage loans serviced combined with lower average outstanding
custodial cash deposit balances.
|
|
|
|
|
|
Interest expense increased $25.9 million primarily due to
higher average outstanding debt of $638.6 million in 2010
compared to $313.3 million in 2009, offset by lower
interest rates due to declines in the base LIBOR and decreases
in the overall index margin on outstanding servicer advance
facilities. Additionally, in 2010, we have included the balances
related to our outstanding corporate note and senior unsecured
debt balances, and the related interest expense thereon, as a
component of our Servicing Segment. As a result of the weakening
housing market, we continued to carry approximately
$530.9 million in residential mortgage loans that we were
unable to securitize as mortgage loans held for sale on our
balance sheet throughout most of 2009. During this time period,
we allocated a portion of our outstanding corporate note balance
to Legacy Portfolio and Other to account for the increased
capacity and financing costs we incurred while these loans were
retained on our balance sheet. For the year ended
December 31, 2010, we recorded $22.1 million in
interest expense related to our outstanding corporate and senior
notes.
|
|
|
|
|
|
Loss on interest rate swaps and caps was $9.8 million for
the year ended December 31, 2010, with no corresponding
gain or loss recognized for the year ended December 31,
2009. The loss for the period was a result of a decline in fair
value recognized during the period on outstanding interest rate
swaps designed to economically hedge the interest rate risk
associated with our
2009-ADV1
Servicer Advance Facility. This facility was not executed until
the end of the fourth quarter of 2009, so we did not recognize
any corresponding fair value adjustments during the year ended
December 31, 2009.
|
For the
Years Ended December 31, 2009 and 2008
Servicing fee income consists of the following for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Servicing fee income
|
|
|
$83,659
|
|
|
|
$62,825
|
|
Loss mitigation and performance-based incentive fees
|
|
|
7,658
|
|
|
|
|
|
Modification fees
|
|
|
3,868
|
|
|
|
584
|
|
Late fees and other ancillary charges
|
|
|
21,901
|
|
|
|
14,859
|
|
Other servicing fee related revenues
|
|
|
2,095
|
|
|
|
2,668
|
|
|
|
|
|
|
|
|
|
|
Total servicing fee income before MSR fair value adjustments
|
|
|
119,181
|
|
|
|
80,936
|
|
MSR fair value adjustments
|
|
|
(27,915
|
)
|
|
|
(11,701
|
)
|
|
|
|
|
|
|
|
|
|
Total servicing fee income
|
|
|
$91,266
|
|
|
|
$69,235
|
|
|
|
|
|
|
|
|
|
|
70
The following tables provide servicing fee income and UPB by
primary servicing and subservicing for and as of the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Servicing fee income
|
|
|
|
|
|
|
|
|
Primary servicing
|
|
|
$116,966
|
|
|
|
$80,936
|
|
Subservicing
|
|
|
2,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total servicing fee income before MSR fair value adjustments
|
|
|
$119,181
|
|
|
|
$80,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
UPB
|
|
|
|
|
|
|
|
|
Primary servicing
|
|
|
$32,871
|
|
|
|
$21,342
|
|
Subservicing
|
|
|
793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unpaid principal balance
|
|
|
$33,664
|
|
|
|
$21,342
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income was $91.3 million for the year ended
December 31, 2009 compared to $69.2 million for the
year ended December 31, 2008, an increase of
$22.1 million, or 31.9%, primarily due to the net effect of
the following:
|
|
|
|
|
Increase of $20.8 million due to higher average UPB of
$25.8 billion in 2009 compared to $12.8 billion in
2008. The increase in our servicing portfolio was primarily
driven by an increase in average UPB for loans serviced for GSEs
and other subservicing contracts for third party investors in
2009 compared to 2008. This increase was partially offset by a
decrease in average UPB for our asset-backed securitizations
portfolio, which decreased in 2009 compared to 2008.
|
|
|
|
|
|
Increase of $7.7 million due to increased loss mitigation
and performance-based incentive fees earned from a GSE.
|
|
|
|
|
|
Increase of $3.3 million due to higher modification fees
earned from HAMP and from modification fees earned on non-HAMP
modifications.
|
|
|
|
|
|
Increase of $7.0 million due to increased collection of
late fees, primarily due to higher average UPB of our servicing
portfolio. Late fees are recognized as revenue at collection.
|
|
|
|
|
|
Decrease of $16.2 million from change in fair value on MSRs
which was recognized in servicing fee income.
|
Other fee income was $8.9 million for the year ended
December 31, 2009 compared to $5.4 million for the
year ended December 31, 2008, an increase of
$3.5 million, or 64.8%, due to higher lender-placed
insurance commissions, which is primarily due to higher
delinquency rates in 2009 compared to 2008.
Expenses and impairments were $70.9 million for the year
ended December 31, 2009 compared to $55.0 million for
the year ended December 31, 2008, an increase of
$15.9 million, or 28.9%, primarily due to the increase of
$14.9 million in salaries, wages and benefits expense
resulting from an increase in headcount from 570 in 2008 to 910
in 2009.
71
The following table provides key primary servicing, subservicing
and other Servicing Segment expenses for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Expenses and impairments
|
|
|
|
|
|
|
|
|
Primary servicing
|
|
|
$67,330
|
|
|
|
$53,315
|
|
Subservicing
|
|
|
2,232
|
|
|
|
|
|
Other Servicing Segment expenses
|
|
|
1,335
|
|
|
|
1,722
|
|
|
|
|
|
|
|
|
|
|
Total expenses and impairments
|
|
|
$70,897
|
|
|
|
$55,037
|
|
|
|
|
|
|
|
|
|
|
Other Servicing Segment expenses primarily include share-based
compensation expenses.
Total other income (expense), which for the most part consisted
of interest expense, was $(21.7) million for the year ended
December 31, 2009 compared to $(4.8) million for the
year ended December 31, 2008, an increase in expense, net
of income, of $16.9 million, or 352.1%, primarily due to
the net effect of the following:
|
|
|
|
|
Increase of $7.7 million from additional amortization of
deferred financing costs resulting from refinancing or renewal
of our advance financing facilities.
|
|
|
|
|
|
Increase of $6.8 million from decline in interest income
earned on custodial cash deposits associated with mortgage loans
serviced primarily due to lower average deposits and index rates.
|
|
|
|
|
|
Increase of $1.4 million from compensating interest due to
increased average UPB.
|
|
|
|
|
|
Increase of $1.1 million from higher average outstanding
debt of $313.3 million in 2009 compared to
$259.1 million in 2008, offset by lower interest rates due
to declines in the base LIBOR.
|
Originations
Segment
The Originations Segment involves the origination, packaging,
and sale of GSE mortgage loans into the secondary markets via
whole loan sales or securitizations.
72
The following table summarizes our operating results from our
Originations Segment for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
Other fee income
|
|
|
10,983
|
|
|
|
4,491
|
|
|
|
7,042
|
|
|
|
1,156
|
|
|
|
589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
10,983
|
|
|
|
4,491
|
|
|
|
7,042
|
|
|
|
1,156
|
|
|
|
589
|
|
Gain on mortgage loans held for sale
|
|
|
73,832
|
|
|
|
51,887
|
|
|
|
77,498
|
|
|
|
54,437
|
|
|
|
21,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
84,815
|
|
|
|
56,378
|
|
|
|
84,540
|
|
|
|
55,593
|
|
|
|
22,574
|
|
Expenses and impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
|
51,148
|
|
|
|
40,063
|
|
|
|
57,852
|
|
|
|
31,497
|
|
|
|
18,357
|
|
General and administrative
|
|
|
18,174
|
|
|
|
20,442
|
|
|
|
26,761
|
|
|
|
14,586
|
|
|
|
10,864
|
|
Occupancy
|
|
|
2,082
|
|
|
|
1,631
|
|
|
|
2,307
|
|
|
|
1,449
|
|
|
|
1,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses and impairments
|
|
|
71,404
|
|
|
|
62,136
|
|
|
|
86,920
|
|
|
|
47,532
|
|
|
|
30,795
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
8,560
|
|
|
|
8,327
|
|
|
|
11,848
|
|
|
|
4,261
|
|
|
|
1,920
|
|
Interest expense
|
|
|
(7,480
|
)
|
|
|
(6,044
|
)
|
|
|
(8,806
|
)
|
|
|
(3,438
|
)
|
|
|
(1,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
1,080
|
|
|
|
2,283
|
|
|
|
3,042
|
|
|
|
823
|
|
|
|
631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
|
$14,491
|
|
|
|
$(3,475
|
)
|
|
|
$662
|
|
|
|
$8,884
|
|
|
|
$(7,590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in originations volume primarily governs the increase
in revenues, expenses and other income (expense) of our
Originations Segment. The table below provides detail of the
loan characteristics of loans originated for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Originations Volume:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
$1,506
|
|
|
|
$1,128
|
|
|
|
$1,608
|
|
|
|
$1,093
|
|
|
|
$538
|
|
Wholesale
|
|
|
780
|
|
|
|
832
|
|
|
|
1,184
|
|
|
|
386
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Originations Volume
|
|
|
$2,286
|
|
|
|
$1,960
|
|
|
|
$2,792
|
|
|
|
$1,479
|
|
|
|
$542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Nine Months Ended September 30, 2011 and 2010
Total revenues were $84.8 million for the nine months ended
September 30, 2011 compared to $56.4 million for the
nine months ended September 30, 2010, an increase of
$28.4 million, or 50.4%, primarily due to the net effect of
the following:
|
|
|
|
|
Other fee income was $11.0 million for the nine months
ended September 30, 2011 compared to $4.5 million for
the nine months ended September 30, 2010, an increase of
$6.5 million, or 144.4%, primarily due to higher points and
fees collected as a result of the $325.5 million increase
in loan originations volume, combined with a decrease in fees
paid to third party mortgage brokers.
|
73
Gain on mortgage loans held for sale consists of the following
for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands)
|
|
|
Gain on sale
|
|
|
$42,260
|
|
|
|
$31,248
|
|
Provision for repurchases
|
|
|
(2,978
|
)
|
|
|
(2,553
|
)
|
Capitalized servicing rights
|
|
|
25,748
|
|
|
|
16,761
|
|
Fair value mark-to-market adjustments
|
|
|
9,292
|
|
|
|
7,728
|
|
Mark-to-market on derivatives/hedges
|
|
|
(490
|
)
|
|
|
(1,297
|
)
|
|
|
|
|
|
|
|
|
|
Total gain on mortgage loans held for sale
|
|
|
$73,832
|
|
|
|
$51,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on mortgage loans held for sale was $73.8 million for
the nine months ended September 30, 2011, compared to
$51.9 million for the nine months ended September 30,
2010, an increase of $21.9 million, or 42.2%, primarily due
to the net effect of the following:
|
|
|
|
|
(a)
|
Increase of $10.6 million from larger volume of
originations, which increased from $1,960.1 million in 2010
to $2,285.6 million in 2011, and higher margins earned on
the sale of residential mortgage loans during the period.
|
|
|
|
|
(b)
|
Increase of $8.9 million from capitalized MSRs due to the
larger volume of originations and subsequent retention of MSRs.
|
|
|
|
|
(c)
|
Increase of $1.6 million resulting from the change in fair
value on newly-originated loans.
|
|
|
|
|
(d)
|
Increase of $0.8 million from change in unrealized
gains/losses on derivative financial instruments. These include
IRLC and forward sales of MBS.
|
Expenses and impairments were $71.4 million for the nine
months ended September 30, 2011 compared to
$62.1 million for the nine months ended September 30,
2010, an increase of $9.3 million, or 15.0%, primarily due
to the net effect of the following:
|
|
|
|
|
Increase of $11.0 million in salaries, wages and benefits
expense from increase in average headcount of 537 in 2010 to 751
in 2011 and increases in performance-based compensation due to
increases in originations volume.
|
|
|
|
|
|
Decrease of $1.8 million in general and administrative
and occupancy expense primarily due to a settlement agreement
and consent order with the North Carolina Office of the
Commissioner of Banks resulting in an administrative penalty and
refund of fees to borrowers of $4.4 million during the
period ended September 30, 2010. These expenses were
partially offset by an increase in our overhead expenses from
the higher originations volume in the 2011 period.
|
Total other income (expense) was $1.1 million for the nine
months ended September 30, 2011 compared to
$2.3 million for the nine months ended September 30,
2010, a decrease in income, net of expense, of
$1.2 million, or 52.2%, primarily due to the net effect of
the following:
|
|
|
|
|
Interest income was $8.6 million for the nine months ended
September 30, 2011 compared to $8.3 million for the
nine months ended September 30, 2010, an increase of
$0.3 million, or 3.6%, representing interest earned from
originated loans prior to sale or securitization. The increase
is primarily due to the increase in the volume of originations.
Loans are typically sold within 30 days of origination.
|
74
|
|
|
|
|
Interest expense was $7.5 million for the nine months ended
September 30, 2011 compared to $6.0 million for the
nine months ended September 30, 2010, an increase of
$1.5 million, or 25.0%, primarily due to an increase in
originations volume in 2011 and associated financing required to
originate these loans, combined with a slight increase in
outstanding average days in warehouse on newly originated loans.
|
For the
Years Ended December 31, 2010 and 2009
Total revenues were $84.5 million for the year ended
December 31, 2010 compared to $55.6 million for the
year ended December 31, 2009, an increase of
$28.9 million, or 52.0%, primarily due to the net effect of
the following:
|
|
|
|
|
Other fee income was $7.0 million for the year ended
December 31, 2010 compared to $1.2 million for the
year ended December 31, 2009, an increase of
$5.8 million or 483.3%, primarily due to our election to
measure newly originated conventional residential mortgage loans
held for sale at fair value, effective October 1, 2009.
Subsequent to this election, any collected points and fees
related to originated mortgage loans held for sale are included
in other fee income. Prior to this election, points and fees
were recorded as deferred originations income and recognized
over the life of the mortgage loan as an adjustment to our
interest income yield or, when the related loan was sold to a
third party purchaser, included as a component of gain on
mortgage loans held for sale.
|
|
|
|
|
|
Gain on mortgage loans held for sale was $77.5 million for
the year ended December 31, 2010 compared to
$54.4 million for the year ended December 31, 2009, an
increase of $23.1 million, or 42.5%, primarily due to the
net effect of the following:
|
|
|
|
|
(a)
|
Increase of $22.4 million from improved margins and larger
volume of originations, which increased from $1.5 billion
for the year ended December 31, 2009 to $2.8 billion
for the year ended December 31, 2010.
|
|
|
|
|
(b)
|
Increase of $17.9 million from capitalized MSRs due to the
larger volume of originations and subsequent retention of
servicing rights.
|
|
|
|
|
(c)
|
Decrease of $0.7 million from change in unrealized
gains/(losses) on derivative financial instruments. These
include IRLCs and forward sales of MBS.
|
|
|
|
|
(d)
|
Decrease of $20.2 million from recognition of points and
fees earned on mortgage loans held for sale for the year ended
December 31, 2009. Effective October 1, 2009, all
points and fees are recognized at origination upon the election
to apply fair value accounting to newly-originated loans and are
recognized as a component of other fee income.
|
Expenses and impairments were $86.9 million for the year
ended December 31, 2010 compared to $47.5 million for
the year ended December 31, 2009, an increase of
$39.4 million, or 82.9%, primarily due to the net effect of
the following:
|
|
|
|
|
Increase of $26.4 million in salaries, wages and benefits
expense from increase in headcount of 452 in 2009 to 688 in 2010
and increases in performance-based compensation. Additionally,
we recognized $3.6 million in share-based compensation expense
from revised compensation arrangements with certain of our
executives.
|
|
|
|
|
|
Increase of $13.1 million in general and administrative and
occupancy expense primarily due to increase in overhead expenses
from the larger volume of originations in 2010 and expenses
associated with certain claims.
|
75
Total other income (expense) was $3.0 million for the year
ended December 31, 2010 compared to $0.8 million for
the year ended December 31, 2009, an increase in income,
net of expense, of $2.2 million, or 275.0%, primarily due
to the net effect of the following:
|
|
|
|
|
Interest income increased $7.5 million from interest earned
from originated loans prior to sale or securitization. The
increase is primarily due to the increase in the volume of
originations. Loans are typically sold within 30 days of
origination.
|
|
|
|
|
|
Interest expense increased $5.4 million primarily due to an
increase in originations volume in 2010 and associated financing
required to originate these loans combined with a slight
increase in outstanding average days in warehouse on newly
originated loans.
|
For the
Years Ended December 31, 2009 and 2008
Total revenues were $55.6 million for the year ended
December 31, 2009 compared to $22.6 million for the
year ended December 31, 2008, an increase of
$33.0 million, or 146.0%, primarily due to the net effect
of the following:
|
|
|
|
|
Gain on mortgage loans held for sale was $54.4 million for
the year ended December 31, 2009 compared to
$22.0 million for the year ended December 31, 2008, an
increase of $32.4 million, or 147.3%, primarily due to the
net effect of the following:
|
|
|
|
|
(a)
|
Increase of $24.8 million from larger volume of
originations, which increased from $0.5 billion in 2008 to
$1.5 billion in 2009.
|
|
|
|
|
(b)
|
Increase of $3.8 million from capitalized MSRs due to
larger volume of originations and subsequent retention of MSRs.
|
|
|
|
|
(c)
|
Increase of $3.8 million from change in unrealized
gains/(losses) on derivative financial instruments. These
include IRLCs and forward sales of MBS.
|
Expenses and impairments were $47.5 million for the year
ended December 31, 2009 compared to $30.8 million for
the year ended December 31, 2008, an increase of
$16.7 million, or 54.2%, primarily due to the net effect of
the following:
|
|
|
|
|
Increase of $13.1 million in salaries, wages and benefits
expense from increase in headcount of 311 in 2008 to 452 in 2009
and increases in performance based compensation.
|
|
|
|
|
|
Increase of $3.7 million in general and administrative
expense primarily due to increase in overhead expenses from
larger volume of originations in 2009.
|
76
Total other income (expense) was $0.8 million for the year
ended December 31, 2009 compared to $0.6 million for
the year ended December 31, 2008, an increase in income,
net of expense, of $0.2 million, or 33.3%, primarily due to
the net effect of the following:
|
|
|
|
|
Interest income increased $2.4 million primarily due to
interest earned from originated loans prior to sale or
securitization. Loans are typically sold within 30 days of
origination.
|
|
|
|
|
|
Interest expense increased $2.1 million primarily due to
interest expense from warehouse facilities that finance the
originations of loans.
|
Legacy
Portfolio and Other
Through December 2009, our Legacy Portfolio and Other consisted
primarily of non-prime and non-conforming residential mortgage
loans that we primarily originated from April to July 2007.
Revenues and expenses are primarily a result of mortgage loans
transferred to securitization trusts that were structured as
secured borrowings, resulting in carrying the securitized loans
as mortgage loans on our consolidated balance sheets and
recognizing the asset-backed certificates as nonrecourse debt.
Prior to September 2009, these residential mortgage loans
were classified as mortgage loans held for sale on our
consolidated balance sheet and carried at the lower of cost or
fair value and financed through a combination of our existing
warehouse facilities and our corporate note. These loans were
transferred on October 1, 2009, from mortgage loans held
for sale to a held-for-investment classification at fair value
on the transfer date. Subsequent to the transfer date, we
completed the securitization of the mortgage loans, which was
structured as a secured borrowing. This structure resulted in
carrying the securitized loans as mortgages on our consolidated
balance sheet and recognizing the asset-backed certificates
acquired by third parties as nonrecourse debt.
Effective January 1, 2010, new accounting guidance
eliminated the concept of a QSPE. Consequently, all existing
securitization trusts are considered VIEs and are now subject to
the new consolidation guidance. Upon consolidation of certain of
these VIEs, we recognized the securitized mortgage loans related
to these securitization trusts as mortgage loans held for
investment, subject to ABS nonrecourse debt. See
Note 3 to Consolidated Financial
Statements Variable Interest Entities and
Securitizations. Additionally, we elected the fair value
option provided for by ASC
825-10,
Financial Instruments-Overall. Assets and liabilities
related to these VIEs are included in Legacy Assets and Other in
our segmented results.
77
The following table summarizes our operating results from Legacy
Portfolio and Other for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
|
$1,952
|
|
|
|
$1,118
|
|
|
|
$820
|
|
|
|
$
|
|
|
|
$
|
|
Other fee income
|
|
|
1,884
|
|
|
|
1,848
|
|
|
|
2,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
3,836
|
|
|
|
2,966
|
|
|
|
3,463
|
|
|
|
|
|
|
|
|
|
Gain on mortgage loans held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75,786
|
)
|
|
|
(108,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
3,836
|
|
|
|
2,966
|
|
|
|
3,463
|
|
|
|
(75,786
|
)
|
|
|
(108,648
|
)
|
Expenses and impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
|
5,022
|
|
|
|
8,963
|
|
|
|
13,148
|
|
|
|
3,537
|
|
|
|
2,854
|
|
General and administrative
|
|
|
4,628
|
|
|
|
1,507
|
|
|
|
7,488
|
|
|
|
5,239
|
|
|
|
1,452
|
|
Provision for loan losses
|
|
|
2,005
|
|
|
|
|
|
|
|
3,298
|
|
|
|
|
|
|
|
|
|
Loss on sale of foreclosed real estate
|
|
|
6,904
|
|
|
|
|
|
|
|
205
|
|
|
|
7,512
|
|
|
|
2,567
|
|
Occupancy
|
|
|
1,849
|
|
|
|
1,186
|
|
|
|
2,788
|
|
|
|
1,912
|
|
|
|
1,043
|
|
Loss on available-for-sale securitiesother-than-temporary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,809
|
|
|
|
55,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses and impairments
|
|
|
20,408
|
|
|
|
11,656
|
|
|
|
26,927
|
|
|
|
25,009
|
|
|
|
63,128
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
34,851
|
|
|
|
67,793
|
|
|
|
77,521
|
|
|
|
44,114
|
|
|
|
79,268
|
|
Interest expense
|
|
|
(28,340
|
)
|
|
|
(44,531
|
)
|
|
|
(55,566
|
)
|
|
|
(40,568
|
)
|
|
|
(48,541
|
)
|
Loss on interest rate swaps and caps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
(23,689
|
)
|
Fair value changes in ABS securitizations
|
|
|
(6,919
|
)
|
|
|
(19,115
|
)
|
|
|
(23,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(408
|
)
|
|
|
4,147
|
|
|
|
(1,342
|
)
|
|
|
3,532
|
|
|
|
7,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
$(16,980
|
)
|
|
|
$(4,543
|
)
|
|
|
$(24,806
|
)
|
|
|
$(97,263
|
)
|
|
|
$(164,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below provides detail of the characteristics of our
securitization trusts included in Legacy Portfolio and Other for
the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011(1)
|
|
|
2010(1)
|
|
|
2010(1)
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Legacy Portfolio and Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PerformingUPB
|
|
|
$969,541
|
|
|
|
$1,072,377
|
|
|
|
$1,037,201
|
|
|
|
$345,516
|
|
|
|
$627,368
|
|
Nonperforming (90+ Delinquency)UPB
|
|
|
302,866
|
|
|
|
348,061
|
|
|
|
337,779
|
|
|
|
141,602
|
|
|
|
100,452
|
|
Real Estate OwnedEstimated Fair Value
|
|
|
15,411
|
|
|
|
29,384
|
|
|
|
27,337
|
|
|
|
10,262
|
|
|
|
21,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Legacy Portfolio and OtherUPB
|
|
|
$1,287,818
|
|
|
|
$1,449,822
|
|
|
|
$1,402,317
|
|
|
|
$497,380
|
|
|
|
$749,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts include one previously off-balance sheet securitization
which was consolidated upon adoption of ASC 810,
Consolidation, related to consolidation of certain VIEs. |
78
For the
Nine Months Ended September 30, 2011 and 2010
Expenses and impairments were $20.4 million for the nine
months ended September 30, 2011 compared to
$11.7 million for the nine months ended September 30,
2010, an increase of $8.7 million, or 74.4%, primarily a
result of higher provision for losses on residential mortgage
loans and losses on liquidated REO and higher overhead expenses.
Interest income, net of interest expense, decreased to
$6.6 million for the nine months ended September 30,
2011 as compared to $23.3 million for the nine months ended
September 30, 2010. The decrease in net interest income was
primarily due to the effects of the derecognition of previously
consolidated VIEs.
Fair value changes in ABS securitizations were $6.9 million
for the nine months ended September 30, 2011 as compared to
a $19.1 million decrease for the nine months ended
September 30, 2010. Fair value changes in ABS
securitizations is the net result of the reductions in the fair
value of the assets (mortgage loans held for investment and REO)
and the reductions in the fair value of the liabilities (ABS
nonrecourse debt).
For the
Years Ended December 31, 2010 and 2009
Total revenues were $3.5 million for the year ended
December 31, 2010, compared to $(75.8) million for the
year ended December 31, 2009. This increase was primarily a
result of a change in classification on mortgage loans held for
sale discussed above, with no gain on mortgage loans held for
sale recorded for the year ended December 31, 2010,
compared to a loss of $75.8 million recorded for the year
ended December 31, 2009.
Expenses and impairments were $26.9 million for the year
ended December 31, 2010 compared to $25.0 million for
the year ended December 31, 2009, an increase of
$1.9 million, or 7.6%, primarily due to an increase in
headcount and allocated expenses for corporate support functions
and executive oversight. Additionally, we recognized
$3.6 million in additional share-based compensation expense
from revised compensation arrangements with certain of our
executives, as well as a $3.3 million provision for loan
losses. These expense increases were offset by the net impact of
the adoption of new accounting guidance on the consolidation of
certain securitization trusts which resulted in a
$7.3 million reduction in charges from losses realized on
foreclosed real estate and a decrease of $6.8 million in
other-than-temporary
impairments recognized on our investment in debt securities
available-for-sale.
Total other income (expense) was $(1.3) million for the
year ended December 31, 2010 compared to $3.5 million
for the year ended December 31, 2009, a decrease of
$4.8 million, or 137.1%. The decrease was primarily due to
an increase in our net interest income, offset by fair value
changes in our ABS securitizations. Interest income, net of
interest expense, increased to $21.9 million for the year
ended December 31, 2010 as compared to $3.5 million
for the year ended December 31, 2009. The increase in
interest income, net was due to the consolidation of certain
securitization trusts upon the adoption of new accounting
guidance related to VIEs. Fair value changes in ABS
securitizations included a loss of $23.3 million for the
year ended December 31, 2010, with no corresponding amount
for the year ended December 31, 2009, due to the election
of the fair value option on consolidated VIEs.
For the
Years Ended December 31, 2009 and 2008
Total revenues were $(75.8) million for the year ended
December 31, 2009, compared to $(108.6) million for
the year ended December 31, 2008, an increase of
$32.8 million, or 30.2%. This increase was a result of
lower
mark-to-market
adjustments on our outstanding legacy portfolio. We accounted
for the excess of cost over fair value of these loans as a
valuation allowance with changes in the valuation allowance
included in loss on mortgage loans held for sale. For the year
ended December 31, 2009, the change in the
79
outstanding valuation allowance resulted in net income of
$8.8 million, compared to a net loss of $42.6 million
for the year ended December 31, 2008. These amounts were
partially offset by higher realized losses on existing portfolio
rewrites and liquidations on our existing legacy portfolio and
REO of $80.3 million for the year ended December 31,
2009, compared to a loss of $56.3 million for the year
ended December 31, 2008.
Expenses and impairments were $25.0 million for the year
ended December 31, 2009, compared to $63.1 million for
the year ended December 31, 2008, a decrease of
$38.1 million, or 60.4%, primarily due to a decrease of
$48.4 million in
other-than-temporary
impairments recognized on our investment in debt securities
available-for-sale attributable to lower overall outstanding
carrying balances on outstanding debt securities, offset by an
increase in unallocated corporate expenses and an increase in
losses realized on loans held for investment and foreclosed real
estate.
The deterioration of the housing market and related illiquidity
in the capital markets resulted in an overall decrease in the
credit quality of the residential mortgage loans that
collateralize our retained investment in debt securities. As a
result of these weakening conditions, in 2008 we determined that
we would not be able to fully recover all of our recorded
investment in these related debt securities, and recorded an
other-than-temporary
impairment of $55.2 million, compared to $6.8 million
in impairments for the year ended December 31, 2009. The
decrease in our recognized impairments was primarily a result of
our lower overall total outstanding investment in these debt
securities.
During late 2008 and 2009, increased foreclosure activities
resulted in an increase in REO, coupled with the continuing
deterioration of the housing market, our REO losses increased.
Our increased loss severities were also impacted by management
initiatives enacted in 2009 to liquidate existing foreclosed
real estate in advance of continued deterioration in certain
housing markets.
We estimate the fair value of the REO owned at the time that a
loan is transferred to the REO classification. REO is recorded
at estimated fair value less costs to sell at the date of
foreclosure. Fair value is estimated using the most recently
obtained appraised value or broker price opinion, as applicable,
adjusted as necessary to reflect expected price concessions
based on historical experience. Upon foreclosure, we obtain a
third party appraisal and a third party broker price opinion.
Subsequently, we obtain updated broker price opinions every
90 days for our REO. We review recent REO sales activity on
a quarterly basis to ensure that the resulting overall net sales
proceeds received are consistent with our estimated fair value.
Any subsequent declines in fair value are credited to a
valuation allowance and charged to operations as incurred.
Total other income was $3.5 million for the year ended
December 31, 2009 compared to $7.0 million for the
year ended December 31, 2008, a decrease of
$3.5 million, or 50.0%. The decrease was primarily due to a
decrease in net interest income year over year of approximately
$27.3 million, offset by a decrease in loss on interest
rate swaps and caps. The decrease in interest income, net was
attributable to an overall decrease in our total outstanding
performing legacy portfolio assets to $345.5 million as of
December 31, 2009, compared to $627.4 million as of
December 31, 2008. In addition, our weighted average
interest rates on our outstanding legacy portfolio assets
decreased to 7.58% for the year ended December 31, 2009
compared to 9.11% for the year ended December 31, 2008.
Loss on interest rate swaps and caps decreased to
$0.0 million for the year ended December 31, 2009 as
compared to $23.7 million for the year ended
December 31, 2008. Prior to 2009, we entered into interest
rate swap agreements to economically hedge the interest payments
on the warehouse debt and securitization of our mortgage loans
held for sale. The $23.7 million decrease in loss on
interest rate swaps and caps was due to our unwinding of
outstanding interest rate swap positions during 2008.
80
Analysis
of Items on Consolidated Balance Sheet
The following table presents our consolidated balance sheets for
the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
$24,005
|
|
|
|
$21,223
|
|
|
|
$41,645
|
|
Restricted cash
|
|
|
72,813
|
|
|
|
91,125
|
|
|
|
52,795
|
|
Accounts receivable, net
|
|
|
471,474
|
|
|
|
441,275
|
|
|
|
513,939
|
|
Mortgage loans held for sale
|
|
|
377,932
|
|
|
|
369,617
|
|
|
|
201,429
|
|
Mortgage loans held for investment, subject to nonrecourse
debtLegacy Assets
|
|
|
246,159
|
|
|
|
266,320
|
|
|
|
301,802
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt
|
|
|
477,748
|
|
|
|
538,440
|
|
|
|
|
|
Investment in debt
securitiesavailable-for-sale
|
|
|
|
|
|
|
|
|
|
|
2,486
|
|
Receivables from affiliates
|
|
|
6,082
|
|
|
|
8,993
|
|
|
|
12,574
|
|
Mortgage servicing rights
|
|
|
246,916
|
|
|
|
145,062
|
|
|
|
114,605
|
|
Property and equipment, net
|
|
|
20,990
|
|
|
|
8,394
|
|
|
|
6,575
|
|
Real estate owned, net (includes $11,169 and $17,509,
respectively, of real estate owned, subject to ABS nonrecourse
debt)
|
|
|
15,411
|
|
|
|
27,337
|
|
|
|
10,262
|
|
Other assets
|
|
|
44,795
|
|
|
|
29,395
|
|
|
|
22,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$2,004,325
|
|
|
|
$1,947,181
|
|
|
|
$1,280,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and members equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
$738,783
|
|
|
|
$709,758
|
|
|
|
$771,857
|
|
Unsecured senior notes
|
|
|
245,109
|
|
|
|
244,061
|
|
|
|
|
|
Payables and accrued liabilities
|
|
|
177,452
|
|
|
|
75,054
|
|
|
|
66,830
|
|
Derivative financial instruments
|
|
|
15,778
|
|
|
|
7,801
|
|
|
|
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
11,889
|
|
|
|
18,781
|
|
|
|
|
|
Nonrecourse debtLegacy Assets
|
|
|
116,200
|
|
|
|
138,662
|
|
|
|
177,675
|
|
ABS nonrecourse debt
|
|
|
434,326
|
|
|
|
496,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,739,537
|
|
|
|
1,690,809
|
|
|
|
1,016,362
|
|
Total members equity
|
|
|
264,788
|
|
|
|
256,372
|
|
|
|
263,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
|
$2,004,325
|
|
|
|
$1,947,181
|
|
|
|
$1,280,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 30, 2011 and December 31, 2010
Assets
Restricted cash consists of custodial accounts related to
collections on certain mortgage loans and mortgage loan advances
that have been pledged to debt counterparties under various
master repurchase agreements (MRAs). Restricted cash
was $72.8 million as of September 30, 2011, a decrease
of $18.3 million from December 31, 2010, primarily a
result of decreased servicer advance reimbursement amounts.
Accounts receivable consists primarily of accrued interest
receivable on mortgage loans and securitizations, collateral
deposits on surety bonds, and advances made to nonconsolidated
securitization trusts, as required under various servicing
agreements related to delinquent loans, which are ultimately
paid back to
81
us from the securitization trusts. Accounts receivable
increased $30.2 million to $471.5 million as of
September 30, 2011, primarily due to our larger outstanding
servicing portfolio, which resulted in a $33.3 million
increase in Corporate and Escrow advances and an
$8.7 million increase in outstanding delinquency advances.
Mortgage loans held for sale are carried at fair value under ASC
825, Financial Instruments. We estimate fair value by
evaluating a variety of market indicators including recent
trades and outstanding commitments. Mortgage loans held for sale
were $377.9 million as of September 30, 2011, an
increase of $8.3 million from December 31, 2010, as
$2,287.4 million in mortgage loan sales was partially
offset by $2,285.6 million in loan originations during the
nine month period ended September 30, 2011.
Mortgage loans held for investment, subject to nonrecourse
debtlegacy assets consist of nonconforming or subprime
mortgage loans securitized which serve as collateral for the
nonrecourse debt. Mortgage loans held for investment, subject to
nonrecourse debtlegacy assets was $246.2 million as
of September 30, 2011, a decrease of $20.1 million
from December 31, 2010, as $15.3 million UPB was
transferred to REO during the nine month period ended
September 30, 2011.
Mortgage loans held for investment, subject to ABS nonrecourse
debt consist of mortgage loans that were recognized upon the
adoption of new accounting guidance related to VIEs effective
January 1, 2010. To more accurately represent the future
economic performance of the securitization collateral and
related debt balances, we elected the fair value option provided
for by ASC
825-10,
Financial Instruments-Overall. Mortgage loans held for
investment, subject to ABS nonrecourse debt was
$477.7 million as of September 30, 2011, a decrease of
$60.7 million from December 31, 2010, as
$75.5 million was transferred to REO, combined with
$36.4 million in principal collections for the nine months
ended September 30, 2010.
Receivables from affiliates consist of periodic transactions
with Nationstar Regular Holdings, Ltd., a subsidiary of the
Initial Stockholder. These transactions typically involve the
monthly payment of principal and interest advances that are
required to be remitted to securitization trusts as required
under various Pooling and Servicing Agreements. These amounts
are later repaid to us when principal and interest advances are
recovered from the respective borrowers. Receivables from
affiliates were $6.1 million as of September 30, 2011,
a decrease of $2.9 million from December 31, 2010, as
a result of increased recoveries on outstanding principal and
interest advances.
MSRs consist of servicing assets related to all existing
residential mortgage loans transferred to a third party in a
transfer that meets the requirements for sale accounting, or
through the acquisition of the right to service residential
mortgage loans that do not relate to our assets. MSRs were
$246.9 million as of September 30, 2011, an increase
of $101.8 million from December 31, 2010, primarily as
a result of the purchase of two significant servicing portfolios
for $106.9 million combined with capitalization of
$25.7 million newly created MSRs, partially offset by
$30.8 million decrease in the fair value of our MSRs.
Property and equipment, net is comprised of land, furniture,
fixtures, leasehold improvements, computer software, and
computer hardware. These assets are stated at cost less
accumulated depreciation. Property and equipment, net increased
$12.6 million as we invested in information technology
systems to support volume growth in both our Servicing Segment
and Originations Segment.
Real estate owned, net represents property we acquired as a
result of foreclosures on delinquent mortgage loans. Real estate
owned, net is recorded at estimated fair value, less costs to
sell, at the date of foreclosure. Any subsequent operating
activity and declines in value are charged to earnings. Real
estate owned, net was $15.4 million as of
September 30, 2011, a decrease of $11.9 million from
December 31, 2010. This decrease was primarily a result of
sales of real estate, partially offset by transfers from
mortgage loans held for investment.
82
Other assets include deferred financing costs, derivative
financial instruments, prepaid expenses, and other equity method
investments. Other assets increased $15.4 million from
December 31, 2010, primarily due to a 22% investment in ANC
for $6.6 million. See Note 8 to Unaudited
Consolidated Financial StatementsOther Assets.
Liabilities
and Members Equity
As of September 30, 2011, total liabilities were
$1,739.5 million, a $48.7 million increase from
December 31, 2010. The increase in total liabilities was
primarily a result of a $102.4 million increase in our
payables and accrued liabilities due primarily to our September
2011 servicing portfolio acquisition offset by
$73.3 million principal payments on our outstanding
non-recourse debt. Final payments related to this acquisition
are not scheduled to be settled until the fourth quarter of 2011.
Included in our payables and accrued liabilities caption on our
balance sheet is our reserve for repurchases and
indemnifications of $7.4 million and $7.3 million as
of September 30, 2011 and December 31, 2010,
respectively. This liability represents our (i) estimate of
losses to be incurred on the repurchase of certain loans that we
previously sold and (ii) an estimate of losses to be
incurred for indemnification of losses incurred by purchasers or
insurers with respect to loans that we sold. Certain sale
contracts include provisions requiring us to repurchase a loan
or indemnify the purchaser or insurer for losses if a borrower
fails to make certain initial loan payments due to the acquirer
or if the accompanying mortgage loan fails to meet certain
customary representations and warranties. These representations
and warranties are made to the loan purchasers or insurers about
various characteristics of the loans, such as the manner of
origination, the nature and extent of underwriting standards
applied and the types of documentation being provided and
typically are in place for the life of the loan. Although the
representations and warranties are in place for the life of the
loan, we believe that most repurchase requests occur within the
first five years of the loan. In the event of a breach of the
representations and warranties, we may be required to either
repurchase the loan or indemnify the purchaser for losses it
sustains on the loan. In addition, an investor may request that
we refund a portion of the premium paid on the sale of mortgage
loans if a loan is prepaid within a certain amount of time from
the date of sale. We record a provision for estimated
repurchases, loss indemnification and premium recapture on loans
sold, which is charged to gain (loss) on mortgage loans held for
sale.
The activity of our outstanding repurchase reserves were as
follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
|
|
(in thousands)
|
|
|
Repurchase reserves, beginning of period
|
|
|
$7,321
|
|
|
|
$3,648
|
|
Additions
|
|
|
2,978
|
|
|
|
4,649
|
|
Charge-offs
|
|
|
(2,939
|
)
|
|
|
(976
|
)
|
|
|
|
|
|
|
|
|
|
Repurchase reserves, end of period
|
|
|
$7,360
|
|
|
|
$7,321
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the changes in UPB related to
unresolved repurchase and indemnification requests for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
|
|
(in millions)
|
|
|
Beginning balance
|
|
|
$4.3
|
|
|
|
$1.3
|
|
Repurchases & indemnifications
|
|
|
(5.5
|
)
|
|
|
(1.9
|
)
|
Claims initiated
|
|
|
21.6
|
|
|
|
10.8
|
|
Rescinded
|
|
|
(12.6
|
)
|
|
|
(5.9
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
$7.8
|
|
|
|
$4.3
|
|
|
|
|
|
|
|
|
|
|
83
The following table details our loan sales for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
|
|
Count
|
|
|
$
|
|
|
Count
|
|
|
$
|
|
|
|
(in billions)
|
|
|
Loan sales
|
|
|
11,677
|
|
|
|
$2.3
|
|
|
|
13,090
|
|
|
|
$2.6
|
|
We increase the reserve by applying an estimated loss factor to
the principal balance of loan sales. Secondarily, the reserve
may be increased based on outstanding claims received. We have
observed an increase in repurchase requests in each of the last
two years and into 2011. We believe that because of the increase
in our originations during 2009, 2010 and the first nine months
of 2011, we expect that repurchase requests are likely to
increase. Should home values continue to decrease, our realized
losses from loan repurchases and indemnifications may increase
as well. As such, our reserve for repurchases may be required to
increase beyond our current expectations. While the ultimate
amount of repurchases and premium recapture is an estimate, we
consider the liability to be adequate at each balance sheet date.
As of September 30, 2011, outstanding members equity
was $264.8 million, an $8.4 million increase from
December 31, 2010, which is primarily attributable to our
net income of $6.0 million in the first nine months of
2011, $12.2 million share-based compensation, partially
offset by a $3.9 million distribution to parent and a
$4.8 million redemption of units by our existing partners.
As of
December 31, 2010 and 2009
Assets
Restricted cash consists of custodial accounts related to
collections on certain mortgage loans and mortgage loan advances
that have been pledged to debt counterparties under various
MRAs. Restricted cash was $91.1 million as of
December 31, 2010, an increase of $38.3 million from
December 31, 2009, primarily as a result of the increase in
custodial deposits from mortgage loan advances. These custodial
deposits are held in trust until they are remitted to the bond
investors to pay down the asset-backed certificates.
Accounts receivable consists primarily of accrued interest
receivable on mortgage loans and securitizations, collateral
deposits on surety bonds, and advances made to nonconsolidated
securitization trusts, as required under various servicing
agreements related to delinquent loans, which are ultimately
paid back to us from the securitization trusts. Accounts
receivable was $441.3 million as of December 31, 2010,
a decrease of $72.6 million from December 31, 2009.
The decrease in accounts receivable was primarily a result of
decreases in outstanding delinquency and corporate and escrow
advances of $57.6 million and $41.6 million,
respectively. During the period, the GSEs began to repurchase
loans from securitization trusts that we service for them that
are 120 days or more past due. In conjunction with these
repurchases, principal and interest advances that we had made as
servicer for these loans were repaid. As such, our accounts
receivable balance decreased significantly during the period as
well as our corresponding borrowings under our MBS Advance
Funding facility that we utilize to fund such advances.
Mortgage loans held for sale are carried at fair value, as
permitted under ASC 825, Financial Instruments. We
estimate fair value by evaluating a variety of market indicators
including recent trades and outstanding commitments. Mortgage
loans held for sale was $369.6 million at December 31,
2010, an increase of $168.2 million from December 31,
2009, a result of higher originations volume during the 2010
period.
Mortgage loans held for investment, subject to nonrecourse
debtlegacy assets consist of nonconforming or subprime
mortgage loans securitized which serve as collateral for the
nonrecourse debt. These loans were transferred on
October 1, 2009, from mortgage loans held for sale at fair
value on the transfer date, as determined by the present value
of expected future cash flows, with no valuation allowance
recorded. Any decreases in expected cash flows subsequent to the
transfer are recognized as a valuation
84
allowance. Mortgage loans held for investment, subject to
nonrecourse debtlegacy assets was $266.3 million as
of December 31, 2010, a decrease of $35.5 million from
December 31, 2009 as a result of principal collections and
liquidations on the outstanding mortgage loans.
Mortgage loans held for investment, subject to ABS nonrecourse
debt consist of mortgage loans that were recognized upon the
adoption of new accounting guidance related to VIEs effective
January 1, 2010. To more accurately represent the future
economic performance of the securitization collateral and
related debt balances, we elected the fair value option provided
for by
ASC 825-10,
Financial Instruments-Overall. This option was applied to
all eligible items within the VIE, including mortgage loans held
for investment, subject to ABS nonrecourse debt, and the related
ABS nonrecourse debt.
Investment in debt
securitiesavailable-for-sale
consists of beneficial interests we retain in securitization
transactions accounted for as a sale under the guidance of
ASC 860, Transfers and Servicing. Effective
January 1, 2010, new accounting guidance for VIEs
eliminated the concept of a QSPE and all existing securitization
trusts are considered VIEs and are now subject to the new
consolidation guidance. Upon consolidation of these VIEs, we
derecognized all previously recognized beneficial interests,
including retained investment in debt securities, obtained as
part of the securitization. See Note 3 to
Consolidated Financial StatementsVariable Interest
Entities and Securitizations.
Receivables from affiliates consist of periodic transactions
with Nationstar Regular Holdings, Ltd., a subsidiary of the
Initial Stockholder. These transactions typically involve the
monthly payment of principal and interest advances that are
required to be remitted to securitization trusts as required
under various Pooling and Servicing Agreements. These amounts
are later repaid to us when principal and interest advances are
recovered from the respective borrowers. Receivables from
affiliates were $9.0 million as of December 31, 2010,
a decrease of $3.6 million from December 31, 2009, as
a result of increased recoveries on outstanding principal and
interest advances.
MSRs consist of servicing assets related to all existing
residential mortgage loans transferred to a third party in a
transfer that meets the requirements for sale accounting, or
through the acquisition of the right to service residential
mortgage loans that do not relate to our assets. MSRs were
$145.1 million as of December 31, 2010, an increase of
$30.5 million over December 31, 2009. The increase was
primarily a result of the capitalization of newly created MSRs
of $26.3 million, combined with the purchase of
$17.8 million in MSRs, offset by the de-recognition of
previously recognized MSRs on the consolidation of certain
securitization trusts for the adoption of new accounting
guidance related to VIEs of $7.6 million, and the change in
fair value of MSRs.
Property and equipment, net increased by approximately
$1.8 million, primarily as a result of expenditures related
to newly opened retail branches and increased hardware
acquisitions to support servicing expansion.
Real estate owned, net represents property we acquired as a
result of foreclosures on delinquent mortgage loans. Real estate
owned, net is recorded at estimated fair value, less costs to
sell, at the date of foreclosure. Any subsequent operating
activity and declines in value are charged to earnings. Real
estate owned, net was $27.3 million as of December 31,
2010, an increase of $17.0 million from December 31,
2009. This increase was primarily a result of the adoption of
the new accounting guidance related to VIEs, resulting in the
recognition of $17.5 million in REO properties from a
consolidated VIE.
Other assets consist principally of deferred financing costs,
derivative financial instruments, and prepaid expenses. Other
assets were $29.4 million as of December 31, 2010, an
increase of $7.3 million from December 31, 2009. This
increase was primarily a result of an increase in deferred
financing costs from our March 2010 offering and other higher
prepaid expenses.
85
Liabilities
and Members Equity
As of December 31, 2010, total liabilities were
$1.7 billion, a $0.7 billion increase from
December 31, 2009. The increase in total liabilities was
primarily a result of the adoption of new accounting guidance
related to VIEs, resulting in the recognition of
$0.5 billion in asset-backed certificates from a
consolidated VIE combined with the March 2010 offering of senior
notes of $243 million.
Included in our payables and accrued liabilities caption on our
balance sheet is our reserve for repurchases and
indemnifications of $7.3 million and $3.6 million as
of December 31, 2010 and 2009, respectively. This liability
represents our (i) estimate of losses to be incurred on the
repurchase of certain loans that we previously sold and
(ii) an estimate of losses to be incurred for
indemnification of losses incurred by purchasers or insurers
with respect to loans that we sold.
The activity of our outstanding repurchase reserves were as
follows for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Repurchase reserves, beginning of period
|
|
|
$3,648
|
|
|
|
$3,965
|
|
Additions
|
|
|
4,649
|
|
|
|
820
|
|
Charge-offs
|
|
|
(976
|
)
|
|
|
(1,137
|
)
|
|
|
|
|
|
|
|
|
|
Repurchase reserves, end of period
|
|
|
$7,321
|
|
|
|
$3,648
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the changes in UPB related to
unresolved repurchase and indemnification requests for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in millions)
|
|
Beginning balance
|
|
|
$1.3
|
|
|
|
$0.3
|
|
Repurchases & indemnifications
|
|
|
(1.9
|
)
|
|
|
(2.7
|
)
|
Claims initiated
|
|
|
10.8
|
|
|
|
4.6
|
|
Rescinded
|
|
|
(5.9
|
)
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
$4.3
|
|
|
|
$1.3
|
|
|
|
|
|
|
|
|
|
|
The following table details our loan sales for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Count
|
|
|
$
|
|
|
Count
|
|
|
$
|
|
|
|
(in billions)
|
|
Loan sales
|
|
|
13,090
|
|
|
|
$2.6
|
|
|
|
5,344
|
|
|
|
$1.0
|
|
During 2010, the reserve for repurchases and indemnifications
increased by approximately $3.7 million. This increase was
principally due to the significant increase in loan sales during
2010 over the 2009 period. We increase the reserve by applying
an estimated loss factor to the principal balance of loan sales.
Secondarily, the reserve was increased based on outstanding
claims received, and 2010 represented the first year that we
have received make whole requests that we considered to be
probable and estimable. We have observed an increase in
repurchase requests in each of the last two years. We believe
that because of the increase in our originations during 2009 and
2010, we expect that repurchase requests are likely to increase.
Should home values continue to decrease, our realized losses
from loan repurchases and indemnifications may increase as well.
As such, our reserve for repurchases may be required to increase
beyond our current
86
expectations. While the ultimate amount of repurchases and
premium recapture is an estimate, we consider the liability to
be adequate at each balance sheet date.
As of December 31, 2010, outstanding members equity
was $256.4 million, a $7.4 million decrease from
December 31, 2009. The decrease in members equity was
primarily driven by an $9.9 million net loss for the fiscal
year ended December 31, 2010, a cumulative effect
adjustment from the adoption of new accounting guidance related
to VIEs resulting in a cumulative effect decrease in our
beginning members units of $8.1 million, offset by
$9.5 million in share-based compensation (net of taxes)
during the period and $1.1 million in the change in value
of a cash flow hedge.
Recent
Accounting Developments
Accounting Standards Update
No. 2011-02,
A Creditors Determination of Whether a Restructuring is
a Troubled Debt Restructuring (Update
No. 2011-02).
Update
No. 2011-02
is intended to reduce the diversity in identifying troubled debt
restructurings (TDRs), primarily by clarifying
certain factors around concessions and financial difficulty. In
evaluating whether a restructuring constitutes a TDR, a creditor
must separately conclude that: (1) the restructuring
constitutes a concession; and (2) the debtor is
experiencing financial difficulties. The clarifications will
generally result in more restructurings being considered
troubled. The amendments in this update became effective for
interim and annual periods beginning June 15, 2011. The
adoption of
Update No. 2011-02
did not have a material impact on our financial condition,
liquidity or results of operations.
Accounting Standards Update
No. 2011-03,
Reconsideration of Effective Control for Repurchase
Agreements (Update
No. 2011-03).
Update
No. 2011-03
is intended to improve the accounting and reporting of
repurchase agreements and other agreements that both entitle and
obligate a transferor to repurchase or redeem financial assets
before their maturity. This amendment removes the criterion
pertaining to an exchange of collateral such that it should not
be a determining factor in assessing effective control,
including (1) the criterion requiring the transferor to
have the ability to repurchase or redeem the financial assets on
substantially the agreed terms, even in the event of default by
the transferee, and (2) the collateral maintenance
implementation guidance related to that criterion. Other
criteria applicable to the assessment of effective control are
not changed by the amendments in the update. The amendments in
this update will be effective for interim and annual periods
beginning after December 15, 2011. The adoption of Update
No. 2011-03
is not expected to have a material impact on our financial
condition, liquidity or results of operations.
Accounting Standards Update
No. 2011-04,
Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in U.S. GAAP and IFRS (Update
No. 2011-04).
Update
No. 2011-04
is intended to provide common fair value measurement and
disclosure requirements in GAAP and International Financial
Reporting Standards (IFRS). The changes required in
this update include changing the wording used to describe many
of the requirements in GAAP for measuring fair value and for
disclosing information about fair value measurements. The
amendments in this update are to be applied prospectively and
are effective for interim and annual periods beginning after
December 15, 2011. The adoption of Update
No. 2011-04
is not expected to have a material impact on our financial
condition, liquidity or results of operations.
Accounting Standards Update
No. 2011-05,
Presentation of Comprehensive Income
(Update No. 2011-05).
Update
No. 2011-05
is intended to improve the comparability, consistency, and
transparency of financial reporting and to increase the
prominence of items reported in other comprehensive income.
Update
No. 2011-05
eliminates the option to present components of other
comprehensive income as part of the statement of changes in
stockholders equity and now requires that all non-owner
changes in stockholders equity be presented either in a
single continuous statement of comprehensive income or in two
separate but consecutive statements. This update does not change
the items that must be reported in other comprehensive income or
when an item of other comprehensive income must be reclassified
to net income.
87
The amendments in this update are to be applied retrospectively
and are effective for interim and annual periods beginning after
December 15, 2011. The adoption of Update
No. 2011-05
is not expected to have a material impact on our financial
condition, liquidity or results of operations.
Accounting Standards Update No. 2011-12, Deferral of the
Effective Date for Amendments to the Presentation of
Reclassifications of Items Out of Accumulated Other
Comprehensive Income in Accounting Standards Update No 2011-05
(Update No. 2011-12). Update 2011-12 is intended to
temporarily defer the effective date of the requirement to
present separate line items on the income statement for
reclassification adjustments of items out of accumulated other
comprehensive income into net income as required by Update No.
2011-05. All other requirements in Update 2011-05 are not
affected by this update. This update does not change the
requirement to present reclassifications adjustments within
other comprehensive income either on the face of the statement
that reports other comprehensive income or in the notes to the
financial statements (Update 2011-05). The amendments in this
update are effective for interim and annual periods beginning
after December 15, 2011. The adoption of Update No. 2011-12
is not expected to have a material impact on our financial
condition liquidity or results of operations.
Liquidity
and Capital Resources
Liquidity measures our ability to meet potential cash
requirements, including the funding of servicing advances, the
payment of operating expenses, the originations of loans and the
repayment of borrowings. Our cash balance increased from
$21.2 million as of December 31, 2010 to
$24.0 million as of September 30, 2011, primarily due
to cash inflows in our operating activities, partially offset by
cash outflows from investing and financing activities. Our cash
balance decreased from $41.6 million as of
December 31, 2009 to $21.2 million as of
December 31, 2010, primarily due to greater cash outflows
from our financing activities to repay our outstanding debt
facilities.
We grew our servicing portfolio from $33.7 billion in UPB
as of December 31, 2009 to $102.7 billion in UPB as of
September 30, 2011. We shifted our strategy after 2007 to
leverage our industry-leading servicing capabilities and
capitalize on the opportunities to grow our originations
platform which has led to the strengthening of our liquidity
position. As a part of our shift in strategy, we ceased
originating non-prime loans in 2007, and new originations have
been focused on loans that are eligible to be sold to GSEs.
Since 2008, substantially all originated loans have either been
sold or are pending sale.
As part of the normal course of our business, we borrow money
periodically to fund servicing advances and loan originations.
The loans we originate are financed through several warehouse
lines on a short-term basis. We typically hold the loans for
approximately 30 days and then sell the loans or place them
in government securitizations and repay the borrowings under the
warehouse lines. We rely upon several counterparties to provide
us with financing facilities to fund a portion of our servicing
advances and to fund our loan originations on a short-term
basis. Our ability to fund current operations depends upon our
ability to secure these types of short-term financings on
acceptable terms and to renew or replace the financings as they
expire.
At this time, we see no material negative trends that we believe
would affect our access to
long-term
borrowings, short-term borrowings or bank credit lines
sufficient to maintain our current operations, or would likely
cause us to cease to be in compliance with any applicable
covenants in our indebtedness or that would inhibit our ability
to fund operations and capital commitments for the next
12 months.
Our primary sources of funds for liquidity include:
(i) lines of credit, other secured borrowings and the
senior notes; (ii) servicing fees and ancillary fees;
(iii) payments received from sale or securitization of
loans; and (iv) payments received from mortgage loans held
for sale.
88
Our primary uses of funds for liquidity include:
(i) funding of servicing advances; (ii) originations
of loans; (iii) payment of interest expenses;
(iv) payment of operating expenses; (v) repayment of
borrowings; and (vi) payments for acquisitions of MSRs.
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 meet contractual principal and interest
payments for certain investors and to pay taxes, insurance,
foreclosure costs and various other items that are required to
preserve the assets being serviced. Delinquency rates and
prepayment speed affect the size of servicing advance balances.
As a result of the agreement we entered into to purchase the
servicing rights to certain reverse mortgages from BANA, we will
be required to fund payments due to borrowers, which advances
are typically greater than advances on forward residential
mortgages. These advances are typically recovered upon weekly or
monthly reimbursement.
We intend to continue to seek opportunities to acquire loan
servicing portfolios
and/or
businesses that engage in loan servicing
and/or loan
originations. We cannot predict the extent to which our
liquidity and capital resources will be diminished by any such
transactions. Additionally, we believe that a significant
acquisition may require us to raise additional capital to
facilitate such a transaction. We would likely finance
acquisitions through a combination of corporate debt issuances,
asset-backed acquisition financing
and/or cash
from operations.
Operating
Activities
Our operating activities provided $49.9 million cash flow
for the nine months ended September 30, 2011 compared to
$24.5 million of cash flow for the same period in the prior
year. The increase of $25.4 million during the 2011 period
was primarily due to higher volume sales of residential mortgage
loans offset by higher cash outflows for working capital. The
improvement was primarily due to the net effect of the following:
|
|
|
|
|
$455.7 million improvement in proceeds received from sale
of originated loans, which provided $2,287.4 million and
$1,831.7 million for the nine month periods ending
September 30, 2011 and 2010, respectively, partially offset
by $325.5 million increase in cash used to originate loans.
Mortgage loans originated and purchased, net of fees, used
$2,285.6 million and $1,960.1 million in the nine
month period ending September 30, 2011 and 2010,
respectively.
|
|
|
|
|
|
$139.4 million decrease in cash outflows provided by
working capital, which provided $3.5 million cash for the
nine months ended September 30, 2011 and provided
$142.9 million during the same period in the prior year.
|
Our operating activities used ($101.7) million and
($83.6) million of cash flow for the years ended
December 31, 2010 and 2009, respectively. The decrease of
$18.1 million was primarily due to the net effect of the
following:
|
|
|
|
|
Increase of $1,613.9 million attributable to increased
proceeds received from sale of loans, offset by decrease in cash
attributable to $1,311.1 million increase in originations
volume.
|
|
|
|
|
|
Decrease in principal payments/prepayments received and other
changes in mortgages loans held for sale of $439.2 million.
|
|
|
|
|
|
Increase of $136.2 million primarily due to decreased
delinquency advances to investors to cover scheduled payments of
principal and interest that are required to be remitted to
securitization trusts.
|
89
|
|
|
|
|
Increase of $71.0 million attributable to a decrease in net
loss period over period, primarily as a result of increased
revenues from our higher servicing portfolio and increased
volume in loan originations.
|
Our operating activities provided (used) $(83.6) million
and $40.2 million of cash flow for the years ended
December 31, 2009 and 2008, respectively. The decrease in
operating cash flow from 2008 to 2009 was primarily due to
$934.6 million higher volume of originations in 2009,
offset by $493.5 million increase from proceeds received
from sale of loans and $270.7 million increase in principal
payments received from loans.
Investing
Activities
Our investing activities used $9.8 million and provided
$85.9 million of cash flow for the nine months ended
September 30, 2011 and 2010, respectively. The
$95.7 million decrease in cash flows from investing
activities from the 2010 period to the 2011 period was primarily
a result of a $35.6 million decrease in cash proceeds from
sales of REO and $34.4 million increase in purchases of
MSRs. Also, in March 2011, we acquired a 22% interest in ANC for
$6.6 million. ANC is the parent company of NREIS, a real
estate services company.
Our investing activities provided (used) $101.2 million,
$30.0 million and $(34.6) million of cash flow for the
years ended December 31, 2010, 2009 and 2008, respectively.
The increase in cash flows from investing activities from 2009
to 2010 was primarily a result of an increase in cash proceeds
from sales of REO and principal payments received and other
changes on mortgage loans held for investment, subject to ABS
nonrecourse debt. The increase in cash flow from investing
activities from 2008 to 2009 was primarily due to the absence of
interest rate swap settlements in 2009 compared to
$51.6 million of settlements in 2008 and a
$17.8 million decrease in cash used for the purchase of
MSRs, net of liabilities, offset by no principal payments
received from debt securities in 2009 compared to
$8.4 million in 2008.
Financing
Activities
Our financing activities used $37.4 million cash flow
during the nine month period ending September 30, 2011 and
used $124.5 million of cash flow for the nine months ended
September 30, 2010. During the nine month period ended
September 30, 2011, we used $9.2 million less cash for
debt financing costs and $49.3 million less cash to repay
ABS and legacy nonrecourse debt compared with the 2010 period.
During the nine months ended September 30, 2011, we used
$47.2 million to repay ABS nonrecourse debt, used
$2.7 million for debt financing costs, and provided
$29.0 million to repay the outstanding notes payable. The
primary source of financing cash flow during the nine months
ended September 30, 2010 was $243.0 million proceeds
from offering the senior notes. During the nine months ended
September 30, 2010, we used $85.4 million to repay ABS
nonrecourse debt, used $11.9 million for debt financing
costs, and used $239.6 million to repay the outstanding
notes payable.
Our financing activities provided (used) $(20.0) million,
$85.9 million and $(37.5) million of cash flow for the
years ended December 31, 2010, 2009 and 2008, respectively.
The increase in cash outflow from financing activities from 2009
to 2010 was primarily a result of repayment of ABS and Legacy
Asset nonrecourse debt. We also did not receive any capital
contributions from our existing members in 2010, compared to
$20.7 million in capital contributions received in 2009. In
2009, we issued
non-recourse
debt, which provided $191.3 million in cash. The increase in
cash flow from financing activities from 2008 to 2009 was
primarily due to the non-recourse debt, net issued in 2009
related to the secured financing of our legacy assets.
90
Contractual
Obligations
The table below sets forth our contractual obligations,
excluding our legacy asset securitized debt and ABS nonrecourse
debt, as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2014
|
|
|
After
|
|
|
|
|
|
|
2011
|
|
|
to 2013
|
|
|
to 2015
|
|
|
2015
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Senior Unsecured
Notes(1)
|
|
|
$
|
|
|
|
$
|
|
|
|
$250,000
|
|
|
|
$
|
|
|
|
$250,000
|
|
Interest expense from Senior Unsecured Notes
|
|
|
27,188
|
|
|
|
54,375
|
|
|
|
33,985
|
|
|
|
|
|
|
|
115,548
|
|
MBS Advance Financing Facility
|
|
|
114,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114,562
|
|
2009-ABS Advance Financing Facility
|
|
|
236,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
236,808
|
|
MSR Note
|
|
|
5,552
|
|
|
|
10,181
|
|
|
|
|
|
|
|
|
|
|
|
15,733
|
|
$300 Million Warehouse Facility
|
|
|
209,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
209,477
|
|
$100 Million Warehouse Facility
|
|
|
39,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,014
|
|
$175 Million Warehouse Facility
|
|
|
43,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,059
|
|
ASAP+ Short-Term Financing Facility
|
|
|
51,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,105
|
|
Operating
leases(2)
|
|
|
7,015
|
|
|
|
13,299
|
|
|
|
7,972
|
|
|
|
1,243
|
|
|
|
29,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$733,780
|
|
|
|
$77,855
|
|
|
|
$291,957
|
|
|
|
$1,243
|
|
|
|
$1,104,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On December 19, 2011, Nationstar Mortgage LLC and
Nationstar Capital Corporation, as co-issuers, completed a
further issuance of $35.0 million aggregate principal
amount of 10.875% senior notes due 2015 on terms identical
to those of the existing senior notes, other than the issue date
and offering price. See Description of Certain
IndebtednessSenior Notes. |
|
|
|
(2) |
|
In July 2011, we entered into an amendment to a lease agreement
for approximately 80,000 square feet in a building that we
previously leased in October 2010. The lease term with respect
to the additional space is sixty eight months with monthly base
rent payments averaging approximately $101,000. In addition, the
term on the original space was extended for a year to correspond
to the term of the additional space. This agreement increased
the total square footage leased by us at this site to
approximately 163,000, and extended the expiration date of the
lease through March 2017. Our total obligation related to this
new agreement will be approximately $7.0 million over the
life of the lease. In October 2011, we entered into an operating
sublease agreement for approximately 53,000 square feet of
office space in Houston, Texas. This sublease begins in November
2011 and expires November 2014. Our total obligation related to
this agreement will be approximately $4.0 million over the
life of the sublease. |
In addition to the above contractual obligations, we have also
been involved with several securitizations of ABS, which were
structured as secured borrowings. These structures resulted in
us carrying the securitized loans as mortgages on our
consolidated balance sheet and recognizing the asset-backed
certificates acquired by third parties as nonrecourse debt. The
timing of the principal payments on this nonrecourse debt is
dependent on the payments received on the underlying mortgage
loans and liquidation of REO. The outstanding principal balance
on our Nonrecourse DebtLegacy Assets and ABS nonrecourse
debt was $161.2 million and $1,037.9 million respectively, as of
December 31, 2010.
Description
of Certain Indebtedness
Senior
Unsecured Notes
On March 26, 2010, Nationstar Mortgage LLC and Nationstar
Capital Corporation, as co-issuers, completed a private offering
of $250.0 million aggregate principal amount of
10.875% senior notes due 2015, or the existing
notes. By means of a separate prospectus, Nationstar
Mortgage LLC and Nationstar Capital Corporation completed an
exchange of $250.0 million aggregate principal amount of
10.875% senior notes due 2015, or the registered
notes, for an equal principal amount of the existing notes
in an offering that was
91
registered under the Securities Act. On December 19, 2011,
Nationstar Mortgage LLC and Nationstar Capital Corporation, as
co-issuers, completed a further issuance of $35.0 million
aggregate principal amount of 10.875% senior notes due 2015
on terms identical to those of the existing senior notes, other
than the issue date and offering price. By means of a separate
prospectus, Nationstar Mortgage LLC and Nationstar Capital
Corporation intend to offer to exchange up to $35.0 million
aggregate principal amount of 10.875% senior notes due
2015, or the registered follow on notes, for an
equal principal amount of the existing senior notes in an
offering that will have been registered under the Securities
Act. The registered follow-on notes will be fungible with the
registered notes upon issuance. This prospectus shall not be
deemed to be an offer to exchange such notes. The existing
notes, the registered notes, the follow-on notes, and the
registered follow-on notes are referred to herein as the senior
notes. The aggregate principal amount of outstanding senior
notes under this series is $285.0 million.
Interest is payable on the senior notes semi-annually in arrears
on April 1 and October 1, starting on October 1, 2010,
with interest accruing from March 26, 2010.
We may redeem some or all of the senior notes at any time before
April 1, 2013 at a price equal to 100% of the aggregate
principal amount thereof plus accrued and unpaid interest, if
any, to the redemption date and a make-whole premium. The
make-whole premium is the greater of (i) 1.0% of the then
outstanding principal amount of the note or (ii) the sum of
(a)(i) the redemption price of the note at April 1, 2013
(such redemption price being set forth in the table below) and
(ii) all required interest payments due on the note through
April 1, 2013 (excluding accrued but unpaid interest to
such redemption date), computed using a discount rate equal to
the applicable treasury rate plus 50 basis points over
(b) the then outstanding principal amount of the note. On
or after April 1, 2013, we may also redeem the senior
notes, in whole or in part, at the following redemption prices
set forth below (expressed as percentages of principal amount),
plus accrued and unpaid interest, if any, if redeemed during the
12-month
period commencing on April 1 of the years set forth below:
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|
|
|
|
Year
|
|
Percentage
|
|
|
2013
|
|
|
105.438
|
%
|
2014 and thereafter
|
|
|
100.00
|
%
|
In addition, on or prior to April 1, 2013, we may use the
net cash proceeds of one or more equity offerings to redeem up
to 35.0% of the principal amount of all senior notes issued at a
redemption price equal to 110.875% of the principal amount of
the senior notes redeemed plus accrued and unpaid interest.
Upon a change of control (as defined in the
indenture), we (or a third party) must offer to redeem all of
the senior notes for a payment equal to 101% of the senior
notes principal amount plus accrued and unpaid interest
thereon. This offering will not result in a change of control.
The senior notes are guaranteed, jointly and severally, on a
senior basis by all of our current and future wholly-owned
domestic restricted subsidiaries other than securitization
entities and subsidiaries designated as unrestricted
subsidiaries. The senior notes are our and the guarantors
general unsecured obligation and are pari passu in right
of payment with all existing and any future senior indebtedness;
effectively junior in right of payment to all existing and
future senior unsecured indebtedness to the extent of the assets
securing such indebtedness; and senior in right of payment to
all existing and future subordinated indebtedness.
The indenture governing the senior notes contains certain
limitations and restrictions on us and our restricted
subsidiaries ability to, among other things:
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incur additional indebtedness;
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issue preferred and disqualified stock;
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92
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purchase or redeem capital stock;
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make certain investments;
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pay dividends or make other payments or loans or transfer
property;
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enter into certain types of transactions with affiliates
involving consideration in excess of $5.0 million; and
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sell all or substantially all of the our or a guarantors
assets or merge with or into another company.
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The covenants are subject to important exceptions and
qualifications described below.
We and our restricted subsidiaries are prohibited from incurring
or issuing additional indebtedness and disqualified stock and
its restricted subsidiaries are prohibited from issuing
preferred stock unless our corporate indebtedness to tangible
net worth ratio for the most recently ended four full fiscal
quarters would be less than 1.10 to 1.00 on a pro forma basis
and the consolidated leverage ratio for the most recently ended
four fiscal quarters would be less than 4.50 to 1.00. In
addition, we may, among other things, incur certain working
capital credit facilities debt not to exceed $35 million;
indebtedness of foreign subsidiaries not to exceed 5% of total
assets of foreign subsidiaries; acquired debt so long as we
would be permitted to incur at least an additional $1 of
indebtedness under the debt ratios; and a general debt basket
not to exceed $12.5 million.
Furthermore, we and our restricted subsidiaries are prohibited
from purchasing or redeeming capital stock; making certain
investments, paying dividends or making other payments or loans
or transfers of property, unless we could incur an additional
dollar of indebtedness under our debt ratios and such payment is
less than 50% of our consolidated net income minus 100% of any
loss plus certain other items that increase the size of the
payment basket. In addition, we may, among other things, make
any payment from the proceeds of a capital contribution or
concurrent offering of our equity interests; make stock
buy-backs from current and former employees/directors in an
amount to not exceed $2.5 million per year, subject to
carryover of unused amounts into subsequent years and subject to
increase for cash proceeds from certain equity issuances to
employees/directors and cash proceeds from key man life
insurance; make investments in joint ventures in an amount not
to exceed (i) $5 million and (ii) 1.00% of total
assets; pay dividends following a public offering up to 6% per
annum of the net proceeds received by us; make any other
restricted payments up to $17.5 million. Moreover, we may
make investments in an amount not to exceed the greater of
(i) $30 million and (ii) 1.00% of total assets.
The indenture contains certain events of default, including
(subject, in some cases, to customary cure periods and
materiality thresholds) defaults based on (i) the failure
to make payments under the indenture when due, (ii) breach
of covenants, (iii) cross-defaults to certain other
indebtedness, (iv) certain bankruptcy or insolvency events,
(v) material judgments and (vi) invalidity of material
guarantees.
Consolidated EBITDA, as defined in the indenture governing the
senior notes, is the key financial covenant measure that
monitors our ability to undertake investing and financing
functions, such as making investments/acquisitions, paying
dividends, and incurring additional indebtedness.
The ratios included in the indenture for the senior notes are
incurrence based compared to the customary ratio covenants that
are often found in credit agreements that require a company to
maintain a certain ratio.
93
The consolidated leverage ratio as defined in the indenture is
equal to Corporate Indebtedness, as defined in the indenture,
divided by Consolidated EBITDA, and limits our activities as
discussed above, if the ratio is equal to or greater than 4.5.
Consolidated EBITDA is computed as follows:
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Twelve Months Ended
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|
|
|
September 30, 2011
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|
(in thousands)
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|
|
Net income
|
|
|
$3,490
|
|
Adjust for:
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|
|
|
|
Impact from consolidation of securitization
trusts(1)
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|
|
1,395
|
|
Interest expense from unsecured senior notes
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|
30,167
|
|
Depreciation and amortization
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|
3,218
|
|
Change in fair value of
MSRs(2)
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|
25,390
|
|
Exit costs
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|
|
2,500
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|
Share-based compensation
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|
|
17,599
|
|
Fair value changes on interest rate swap
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|
|
(116
|
)
|
Ineffective portion of cash flow hedge
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|
|
(2,962
|
)
|
(Gain) loss from asset sales and other than temporary impairment
of assets
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|
|
12,755
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|
Amortization/write-off of deferred financing cost for debt
obligations in existence prior to issuance of senior notes
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|
|
6,139
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|
Servicing resulting from transfers of financial assets
|
|
|
(35,240
|
)
|
Other
|
|
|
263
|
|
|
|
|
|
|
Consolidated EBITDA
|
|
|
$64,598
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|
|
|
|
|
|
|
|
|
(1) |
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Represents impact to net income from the consolidation of
certain securitization trusts. Net income, as defined in the
Indenture, is based on GAAP in effect as of December 31,
2009, and does not include the impact of the consolidation of
identified VIEs where we have both the power to direct the
activities that most significantly impact the VIEs
economic performance and the obligation to absorb losses or the
right to receive benefits that could potentially be significant
to the VIE. |
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|
(2) |
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Represents change in fair value of MSRs after deconsolidation of
the securitization trusts as discussed in note (1) above. |
Servicing
Our Servicing Segments debt consists of senior unsecured
notes, advance financing facilities, and our MSR Note and
Facility.
Advance
Financing Facilities
Our advance financing facilities are used to finance our
obligations to pay advances as required by our servicing
agreements. These servicing agreements may require us to advance
certain payments to the owners of the mortgage loans we service,
including P&I advances, T&I advances, or legal fees,
maintenance and preservation costs, or corporate advances. We
draw on one or more of our advance financing facilities
periodically throughout the month, as necessary, and we repay
any facilities on which we have drawn when advances are
recovered through liquidations, prepayments and reimbursement of
advances from modifications.
94
MBS
Advance Financing Facility
In September 2009, we entered into our MBS Advance Financing
Facility. This facility is maintained with a GSE and currently
has a total size of $275.0 million. The interest rate on
this facility is based on LIBOR plus a margin of 2.50%, and its
stated maturity date is December 2012.
Our MBS Advance Facility is secured by certain servicing advance
receivables and is subject to margin calls in the event that the
value of our collateral decreases. The facility requires us to
comply with various customary operating covenants and
performance tests on the underlying receivables related to
payment rates and minimum balance. As of September 30,
2011, we were in compliance with all covenants and performance
tests under this facility and had an aggregate principal amount
of $175.7 million outstanding.
2009-ABS
Advance Financing Facility
In November 2007, we entered into our 2009-ABS Advance Financing
Facility. This facility was maintained with a financial services
company and, before repayment, had a total size of
$350.0 million, comprised of $174.0 million in term
notes the balance of which stayed constant and
$176.0 million in variable funding notes the balance of
which fluctuated with our financing needs. The interest rate on
this facility was based on LIBOR, subject to an interest rate
swap, and had a weighted average cost of 4.82% during the year
ended December 31, 2010. The stated maturity date of this
facility was December 2013, twenty-four months after the stated
repayment date of December 2011.
Our 2009-ABS Advance Financing Facility was secured by certain
servicing advance receivables and was a nonrecourse obligation.
The facility required us to comply with various customary
operating covenants and performance tests on the underlying
receivables related to payment rates and minimum balance. As of
September 30, 2011, we were in compliance with all
covenants and performance tests under this facility and had an
aggregate principal amount of $203.6 million outstanding.
This facility was repaid in October 2011.
2010-ABS
Advance Financing Facility
In December 2010, we entered into our
2010-ABS
Advance Financing Facility. This facility is maintained with a
financial institution and currently has a total size of
$300 million. The interest rate on this facility is based
on LIBOR plus a margin of 3.00%, and its stated maturity date is
May 2014.
Our 2010-ABS
Advance Financing Facility is secured by certain servicing
advance receivables and is a nonrecourse obligation. In October
2011, upon repayment of our
2009-ABS
Financing Facility, we transferred the collateral on the
2009-ABS
Financing Facility to the
2010-ABS
Advance Financing Facility.
2011-Agency
Advance Financing Facility
In October 2011, we entered into our
2011-Agency
Advance Financing Facility. This facility is maintained with a
financial institution and currently has a total size of
$75 million. The interest rate on this facility is based on
LIBOR plus 2.50%, and its stated maturity date is October 2012.
Our
2011-Agency
Advance Financing Facility is secured by certain servicing
advance receivables and is a nonrecourse obligation.
MSR
Note
In October 2009, we entered into our MSR Note. This note is
maintained with a GSE and had an original aggregate principal
amount of $22.2 million. The interest rate on this note is
based on LIBOR plus a margin of 2.50%, and its stated maturity
date is October 2013.
95
Our MSR Note was used to finance our acquisition of certain MSRs
and is secured by all of our rights, title and interest in the
acquired MSRs. The MSR Note requires us to comply with various
customary operating covenants, specific covenants, including
maintaining a disaster recovery plan and maintaining priority of
the lenders lien, and certain covenants related to the
collateral and limitations on the creation of liens on the
collateral or assigned servicing compensation. As of
September 30, 2011, we were in compliance with all
covenants and had an aggregate principal amount of
$11.6 million outstanding under the MSR Note.
MSR
Facility
In September 2011, we also entered into an MSR Facility. This
facility was maintained with a financial institution in
conjunction with the acquisition financed with our MSR Note and
had a total size of $37.5 million. The interest rate on
this facility was based on LIBOR plus a spread of 3.50%, and its
stated maturity date was September 2016. This facility was
secured by all of our rights, title, and interest in the
acquired MSRs, and was a nonrecourse obligation. Subsequent to
September 30, 2011, we terminated this facility without
drawing upon it.
Originations
Our Originations Segments debt consists of warehouse
facilities and our ASAP+ Short-Term Financing Facility.
Warehouse
Facilities
Our warehouse facilities are used to finance our loan
originations on a short-term basis. In the ordinary course, we
originate mortgage loans on a near-daily basis, and we use a
combination of our four warehouse facilities and cash to fund
the loans. We agree to transfer to our counterparty certain
mortgage loans against the transfer of funds by the
counterparty, with a simultaneous agreement by the counterparty
to transfer the loans back to us at a date certain, or on demand
by us, against the transfer of funds from us. We typically
renegotiate our warehouse facilities on an annual basis. See
IndustryIndustry Overview. We sell our newly
originated mortgage loans to our counterparty to finance the
originations of our mortgage loans and typically repurchase the
loans within 30 days of origination when we sell the loans
to a GSE or into a government securitization.
$300
Million Warehouse Facility
In July 2006, we entered into our $300 Million Warehouse
Facility, which is maintained with a financial services company.
The interest rate on this facility is based on LIBOR plus a
margin of 3.25%, and its stated maturity date is February 2012.
Our $300 Million Warehouse Facility requires us to comply with
various customary operating covenants and specific covenants,
including maintaining a minimum tangible net worth of
$175.0 million, limitations on transactions with
affiliates, maintenance of liquidity of $20 million and the
maintenance of additional funding through warehouse loans. As of
September 30, 2011, we were in compliance with all
covenants and performance tests under this facility and had an
aggregate principal amount of $259.6 million outstanding.
$175
Million Warehouse Facility
In February 2010, we entered into a $75 million warehouse
facility and in January 2012, we extended the maturity date of
this warehouse facility to January 2013 and increased the
committed amount under this warehouse facility to $175 million.
We herein refer to this facility as our $175 Million Warehouse
Facility. This facility is maintained with BANA, an affiliate of
Merrill Lynch, Pierce, Fenner & Smith Incorporated, an
96
underwriter in this offering. The interest rate on this
facility is based on LIBOR plus a spread ranging from 1.75% to
2.50%.
Our $175 Million Warehouse Facility requires us to comply with
various customary operating covenants and specific covenants,
including financial covenants regarding our liquidity ratio of
liabilities and warehouse credit to net worth, maintenance of a
minimum tangible net worth of $175.0 million, maintenance
of additional warehouse facilities and limitations on entering
into warehouse facilities with more favorable terms (with
respect to the lender) than this facility without also applying
those more favorable terms to this facility. As of
September 30, 2011, we were in compliance with all
covenants and performance tests under this facility and had an
aggregate principal amount of $41.8 million outstanding.
$100
Million Warehouse Facility
In October 2009, we entered into our $100 Million Warehouse
Facility, which is maintained with a financial services company.
The interest rate on this facility is based on LIBOR plus a
margin of 3.50%, and its stated maturity date is February 2012.
Our $100 Million Warehouse Facility requires us to comply with
various customary operating covenants and specific covenants,
including maintaining additional warehouse facilities,
restrictions on the assignment of purchased loans, limits on
transactions with affiliates and certain financial covenants,
including maintaining a minimum tangible net worth of
$150.0 million. As of September 30, 2011, we were in
compliance with all covenants and performance tests under this
facility and had an aggregate principal amount of
$22.3 million outstanding.
$50
Million Warehouse Facility
In March 2011, we entered into our $50 Million Warehouse
Facility, which is maintained with a financial institution. The
interest rate on this facility is based on LIBOR plus a spread
of 1.45% to 3.95%, which varies based on the underlying
transferred collateral, and its stated maturity date is March
2012. As of September 30, 2011, we were in compliance with
all covenants and performance tests under this facility.
ASAP+
Short-Term Financing Facility
In March 2009, we entered into our ASAP+ Short-Term Financing
Facility. This facility is maintained with a GSE and currently
has a total facility size of $200 million. The interest
rate on this facility is based on LIBOR plus a margin of 1.50%,
and the agreements executed pursuant to this facility typically
have a maturity of up to 45 days.
Our ASAP+ Short-Term Financing Facility is used to finance our
loan originations on a short-term basis. Pursuant to these
agreements, we agree to transfer to the GSE certain mortgage
loans against the transfer of funds by the GSE, with a
simultaneous agreement by the counterparty to transfer the loans
back to us at a date certain, or on demand by us, against the
transfer of funds from us. As of September 30, 2011, we had
an aggregate principal amount of $13.6 million outstanding.
Legacy
Assets and Other
Legacy
Asset Term-Funded Notes
In November 2009, we completed the securitization of mortgage
assets and issued approximately $222.4 million of our
Legacy Asset Term-Funded Notes. The interest rate is 7.50%,
subject to an available funds cap. In conjunction with the
securitization, we reclassified our legacy assets as held
for investment on our consolidated balance sheet and
recognize the Legacy Asset Term-Funded Notes as non-recourse
debt. We pay the principal and interest on these notes using the
cash flows from the underlying legacy assets, which
97
serve as collateral for the debt. As of September 30,
2011, the aggregate UPB of the legacy assets that secure our
Legacy Asset Term-Funded Notes was $380.2 million. Monthly
cash flows generated from the legacy assets are used to service
the debt, which has a final legal maturity of October 2039. As
of September 30, 2011, our Legacy Asset Term-Funded Notes
had a par amount and carrying value, net of financing costs and
unamortized discount of $135.1 million and
$116.2 million, respectively.
ABS
Nonrecourse Debt
Effective January 1, 2010, new accounting guidance
eliminated the concept of a QSPE, and all existing
securitization trusts are considered VIEs and are now subject to
new consolidation guidance provided in ASC 810,
Consolidation. Upon consolidation of these VIEs, we
derecognized all previously recognized beneficial interests
obtained as part of the securitization. In addition, we
recognized the securitized mortgage loans as mortgage loans held
for investment, subject to ABS nonrecourse debt, and the related
asset-backed certificates acquired by third parties as ABS
nonrecourse debt on our consolidated balance sheet.
Additionally, we elected the fair value option provided for by
ASC 825-10,
Financial Instruments-Overall. The principal and interest on
these notes are paid using the cash flows from the underlying
mortgage loans, which serve as collateral for the debt. The
interest rate paid on the outstanding securities is based on
LIBOR plus a spread ranging from 0.13% to 2.00%, which is
subject to an interest rate cap. The total outstanding principal
balance on the underlying mortgage loans serving as collateral
for the debt was approximately $937.7 million as of
September 30, 2011. The timing of the principal payments on
this ABS nonrecourse debt is dependent on the payments received
on the underlying mortgage loans. The outstanding principal
balance on the outstanding notes related to these consolidated
securitization trusts was $945.1 million as of
September 30, 2011.
Variable
Interest Entities
We have been the transferor in connection with a number of
securitizations or asset-backed financing arrangements, from
which we have continuing involvement with the underlying
transferred financial assets. We aggregate these securitizations
or asset-backed financing arrangements into two
groups: (1) securitizations of residential mortgage
loans and (2) transfers accounted for as secured
borrowings.
On securitizations of residential mortgage loans, our continuing
involvement typically includes acting as servicer for the
mortgage loans held by the trust and holding beneficial
interests in the trust. Our responsibilities as servicer
include, among other things, collecting monthly payments,
maintaining escrow accounts, providing periodic reports and
managing insurance in exchange for a contractually specified
servicing fee. The beneficial interests held consist of both
subordinate and residual securities that were retained at the
time of the securitization. Prior to January 1, 2010, each
of these securitization trusts was considered a QSPE, and these
trusts were excluded from our consolidated financial statements.
We also maintain various agreements with SPEs, under which we
transfer mortgage loans
and/or
advances on residential mortgage loans in exchange for cash.
These SPEs issue debt supported by collections on the
transferred mortgage loans
and/or
advances. These transfers do not qualify for sale treatment
because we continue to retain control over the transferred
assets. As a result, we account for these transfers as
financings and continue to carry the transferred assets and
recognize the related liabilities on our consolidated balance
sheets. Collections on the mortgage loans
and/or
advances pledged to the SPEs are used to repay principal and
interest and to pay the expenses of the entity. The holders of
these beneficial interests issued by these SPEs do not have
recourse to us and can only look to the assets of the SPEs
themselves for satisfaction of the debt.
Prior to January 1, 2010, we evaluated each SPE for
classification as a QSPE. QSPEs were not consolidated in our
consolidated financial statements. When a SPE was determined to
not be a QSPE, we further evaluated it for classification as a
VIE. When a SPE met the definition of a VIE, and when it was
determined that we were the primary beneficiary, we included the
SPE in our consolidated financial statements.
98
A VIE is an entity that has either a total equity investment
that is insufficient to permit the entity to finance its
activities without additional subordinated financial support or
whose equity investors lack the characteristics of a controlling
financial interest. A VIE is consolidated by its primary
beneficiary, which is the entity that, through its variable
interests has both the power to direct the activities of a VIE
that most significantly impact the VIEs economic performance and
the obligation to absorb losses of the VIE that could
potentially be significant to the VIE or the right to receive
benefits from the VIE that could potentially be significant to
the VIE.
Effective January 1, 2010, new accounting guidance
eliminated the concept of a QSPE and all existing SPEs are now
subject to new consolidation guidance. Upon adoption of this new
accounting guidance, we identified certain securitization trusts
where we, through our affiliates, continued to hold beneficial
interests in these trusts. These retained beneficial interests
obligate us to absorb losses of the VIE that could potentially
be significant to the VIE or the right to receive benefits from
the VIE that could potentially be significant. In addition, we
as master servicer on the related mortgage loans, retain the
power to direct the activities of the VIE that most
significantly impact the economic performance of the VIE. When
it is determined that we have both the power to direct the
activities that most significantly impact the VIEs
economic performance and the obligation to absorb losses or the
right to receive benefits that could potentially be significant
to the VIE, the assets and liabilities of these VIEs are
included in our consolidated financial statements. Upon
consolidation of these VIEs, we derecognized all previously
recognized beneficial interests obtained as part of the
securitization, including any retained investment in debt
securities, MSRs, and any remaining residual interests. In
addition, we recognized the securitized mortgage loans as
mortgage loans held for investment, subject to ABS nonrecourse
debt, and the related asset-backed certificates (ABS nonrecourse
debt) acquired by third parties as ABS nonrecourse debt on our
consolidated balance sheet. The net effect of the accounting
change on January 1, 2010 members equity was an
$8.1 million charge to members equity.
As a result of market conditions and deteriorating credit
performance on these consolidated VIEs, we expect minimal to no
future cash flows on the economic residual. Under GAAP, we would
be required to provide for additional allowances for loan losses
on the securitization collateral as credit performance
deteriorated, with no offsetting reduction in the
securitizations debt balances, even though any
nonperformance of the assets will ultimately pass through as a
reduction of amounts owed to the debt holders, once they are
extinguished. Therefore, we would be required to record
accounting losses beyond our economic exposure.
To more accurately represent the future economic performance of
the securitization collateral and related debt balances, we
elected the fair value option provided for by ASC
825-10,
Financial InstrumentsOverall. This option was
applied to all eligible items within the VIE, including mortgage
loans held for investment, subject to ABS nonrecourse debt, and
the related ABS nonrecourse debt.
Subsequent to this fair value election, we no longer record an
allowance for loan loss on mortgage loans held for investment,
subject to ABS nonrecourse debt. We continue to record interest
income in our consolidated statement of operations on these fair
value elected loans until they are placed on a nonaccrual status
when they are 90 days or more past due. The fair value
adjustment recorded for the mortgage loans held for investment
is classified within fair value changes of ABS securitizations
in our consolidated statement of operations.
Subsequent to the fair value election for ABS nonrecourse debt,
we continue to record interest expense in our consolidated
statement of operations on the fair value elected ABS
nonrecourse debt. The fair value adjustment recorded for the ABS
nonrecourse debt is classified within fair value changes of ABS
securitizations in our consolidated statement of operations.
Under the existing pooling and servicing agreements of these
securitization trusts, the principal and interest cash flows on
the underlying securitized loans are used to service the
asset-backed certificates.
99
Accordingly, the timing of the principal payments on this
nonrecourse debt is dependent on the payments received on the
underlying mortgage loans and liquidation of REO.
We consolidate the SPEs created for the purpose of issuing debt
supported by collections on loans and advances that have been
transferred to it as VIEs, and we are the primary beneficiary of
these VIEs. We consolidate the assets and liabilities of the
VIEs onto our consolidated financial statements.
A summary of the assets and liabilities of our transactions with
VIEs included in our consolidated financial statements as of
September 30, 2011 is presented in the following table:
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Transfers
|
|
|
|
|
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|
|
Accounted for
|
|
|
|
|
|
|
Securitization
|
|
|
as Secured
|
|
|
|
|
September 30, 2011
|
|
Trusts
|
|
|
Borrowings
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Assets
|
Restricted cash
|
|
|
$69
|
|
|
|
$20,134
|
|
|
|
$20,203
|
|
Accounts receivable
|
|
|
2,431
|
|
|
|
251,615
|
|
|
|
254,046
|
|
Mortgage loans held for investment, subject to nonrecourse debt
|
|
|
|
|
|
|
240,256
|
|
|
|
240,256
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt
|
|
|
477,748
|
|
|
|
|
|
|
|
477,748
|
|
Real estate owned
|
|
|
11,169
|
|
|
|
4,184
|
|
|
|
15,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
$491,417
|
|
|
|
$516,189
|
|
|
|
$1,007,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
Notes payable
|
|
|
$
|
|
|
|
$203,596
|
|
|
|
$203,596
|
|
Payables and accrued liabilities
|
|
|
75
|
|
|
|
988
|
|
|
|
1,063
|
|
Outstanding servicer advances(1)
|
|
|
32,961
|
|
|
|
|
|
|
|
32,961
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
11,889
|
|
|
|
|
|
|
|
11,889
|
|
Nonrecourse debtLegacy Assets
|
|
|
|
|
|
|
116,200
|
|
|
|
116,200
|
|
ABS nonrecourse debt
|
|
|
434,326
|
|
|
|
|
|
|
|
434,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
$479,251
|
|
|
|
$320,784
|
|
|
|
$800,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Outstanding servicer advances consists of principal and interest
advances paid by us to cover scheduled payments and interest
that have not been timely paid by borrowers, which excludes
outstanding pool level advances of approximately
$3.3 million. These outstanding servicer advances are
eliminated upon the consolidation of the securitization trusts. |
On December 23, 2011, we sold our remaining variable
interest in a securitization trust that has been a consolidated
VIE since January 1, 2010. In accordance with ASC 810,
Consolidation, we have evaluated this securitization
trust and determined that we no longer have both the power to
direct the activities that most significantly impact the
VIEs economic performance and the obligation to absorb
losses or the right to receive benefits that could potentially
be significant to the VIE and this securitization trust was
derecognized as of December 23, 2011. Upon derecognition of
this VIE, we derecognized the securitized mortgage loans held
for investment, subject to ABS nonrecourse debt, the related ABS
nonrecourse debt, as well as certain other assets and
liabilities of the securitization trust, and recognized any MSRs
on the consolidated balance sheet. Any impact of this
derecognition on our consolidated statement of operations will
be recognized in the fourth quarter of 2011.
100
Off
Balance Sheet Arrangements
A summary of the outstanding collateral and certificate balances
for securitization trusts, including any retained beneficial
interests and MSRs, that were not consolidated by us for the
periods indicated are presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2011(1)
|
|
|
2010
|
|
|
2009(2)
|
|
|
|
(in thousands)
|
|
|
Total collateral balance
|
|
|
$3,751,789
|
|
|
|
$4,038,978
|
|
|
|
$3,240,879
|
|
Total certificate balance
|
|
|
3,738,836
|
|
|
|
4,026,844
|
|
|
|
3,262,995
|
|
Total MSRs at fair value
|
|
|
24,227
|
|
|
|
26,419
|
|
|
|
20,505
|
|
|
|
|
(1) |
|
Unconsolidated securitization trusts consist of VIEs where
we have neither the power to direct the activities that most
significantly impact the VIEs economic performance or the
obligation to absorb losses or the right to receive benefits
that could potentially be significant to the VIE. |
|
|
|
(2) |
|
Unconsolidated securitization trusts as of December 31,
2009 consists of those qualifying for sale treatment under ASC
860, Transferring and Servicing. |
Derivatives
We record all derivative transactions at fair value on our
consolidated balance sheets. We use these derivatives primarily
to manage our interest rate risk and price risk associated with
IRLCs. We actively manage the risk profiles of our IRLCs and
mortgage loans held for sale on a daily basis. To manage the
price risk associated with IRLCs, we enter into forward sales of
MBS in an amount equal to the portion of the IRLC we expected to
close, assuming no change in interest rates.
In addition, to manage the interest rate risk associated with
mortgage loans held for sale, we enter into forward sales of MBS
to deliver mortgage loan inventory to investors.
We also entered into interest rate cap agreements to hedge the
interest payments on our 2009-ABS Advance Financing Facility and
our MBS Advance Financing Facility. These interest rate cap
agreements generally require an upfront payment and receive cash
flow only when a variable rate based on LIBOR exceeds a defined
interest rate. As of September 30, 2011, these interest
rate cap agreements were out of the money and, unless there is a
significant change to LIBOR, we do not anticipate a material
effect to our consolidated financial statements.
To hedge the aggregate risk of interest rate fluctuations with
respect to our outstanding borrowings, we have entered into swap
agreements whereby we receive floating rate payments in exchange
for fixed rate payments, effectively converting our outstanding
borrowings to fixed rate debt.
As part of our January 1, 2010 adoption of new accounting
guidance related to VIEs, we were required to consolidate
certain VIEs related to previous asset-backed securitizations
that were treated as sales under GAAP. Accordingly, we
recognized all assets and liabilities held by these
securitization trusts in our consolidated balance sheet. As a
form of credit enhancement to the senior note holders, these
securitization trusts contained embedded interest rate swap
agreements to hedge the required interest payments on the
underlying asset-backed certificates. These interest rate swap
agreements generally require the securitization trust to pay a
variable interest rate and receive a fixed interest rate based
on LIBOR.
101
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of market risks which include
interest rate risk, consumer credit risk and counterparty credit
risk.
Interest
Rate Risk
Changes in interest rates affect our operations primarily as
follows:
Servicing Segment
|
|
|
|
|
an increase in interest rates would increase our costs of
servicing our outstanding debt, including our ability to finance
servicing advances;
|
|
|
|
|
|
a decrease (increase) in interest rates would generally increase
(decrease) prepayment rates and may require us to report a
decrease (increase) in the value of our MSRs;
|
|
|
|
|
|
a change in prevailing interest rates could impact our earnings
from our custodial deposit accounts; and
|
|
|
|
an increase in interest rates could generate an increase in
delinquency, default and foreclosure rates resulting in an
increase in both operating expenses and interest expense and
could cause a reduction in the value of our assets.
|
Originations Segment
|
|
|
|
|
a substantial and sustained increase in prevailing interest
rates could adversely affect our loan originations volume
because refinancing an existing loan would be less attractive
and qualifying for a loan may be more difficult; and
|
|
|
|
|
|
an increase in interest rates would increase our costs of
servicing our outstanding debt, including our ability to finance
loan originations;
|
We actively manage the risk profiles of IRLCs and mortgage loans
held for sale on a daily basis and enter into forward sales of
MBS in an amount equal to the portion of the IRLC expected to
close, assuming no change in mortgage interest rates. In
addition, to manage the interest rate risk associated with
mortgage loans held for sale, we enter into forward sales of MBS
to deliver mortgage loan inventory to investors.
Consumer
Credit Risk
We sell our loans on a non-recourse basis. We also provide
representations and warranties to purchasers and insurers of the
loans sold that typically are in place for the life of the loan.
In the event of a breach of these representations and
warranties, we may be required to repurchase a mortgage loan or
indemnify the purchaser, and any subsequent loss on the mortgage
loan may be borne by us. If there is no breach of a
representation and warranty provision, we have no obligation to
repurchase the loan or indemnify the investor against loss. The
outstanding UPB of loans sold by us represents the maximum
potential exposure related to representation and warranty
provisions.
We maintain a reserve for losses on loans repurchased or
indemnified as a result of breaches of representations and
warranties on our sold loans. Our estimate is based on our most
recent data regarding loan repurchases and indemnity payments,
actual credit losses on repurchased loans, recovery history,
among other factors. Our assumptions are affected by factors
both internal and external in nature. Internal factors include,
among other things, level of loan sales, as well as to whom the
loans are sold, the expectation of credit loss on
102
repurchases and indemnifications, our success rate at appealing
repurchase demands and our ability to recover any losses from
third parties. External factors that may affect our estimate
includes, among other things, the overall economic condition in
the housing market, the economic condition of borrowers, the
political environment at investor agencies and the overall
U.S. and world economy. Many of the factors are beyond our
control and may lead to judgments that are susceptible to change.
Counterparty
Credit Risk
We are exposed to counterparty credit risk in the event of
non-performance by counterparties to various agreements. We
monitor the credit ratings of our counterparties and do not
anticipate losses due to counterparty non-performance.
Sensitivity
Analysis
We assess our market risk based on changes in interest rates
utilizing a sensitivity analysis. The sensitivity analysis
measures the potential impact on fair values based on
hypothetical changes (increases and decreases) in interest rates.
We use a duration-based model in determining the impact of
interest rate shifts on our loan portfolio, certain other
interest-bearing liabilities measured at fair value and interest
rate derivatives portfolios. The primary assumption used in
these models is that an increase or decrease in the benchmark
interest rate produces a parallel shift in the yield curve
across all maturities.
We utilize a discounted cash flow analysis to determine the fair
value of MSRs and the impact of parallel interest rate shifts on
MSRs. The primary assumptions in this model are prepayment
speeds, market discount rates and cost to service. However, this
analysis ignores the impact of interest rate changes on certain
material variables, such as the benefit or detriment on the
value of future loan originations, non-parallel shifts in the
spread relationships between MBS, swaps and U.S. Treasury
rates and changes in primary and secondary mortgage market
spreads. For mortgage loans, IRLCs and forward delivery
commitments on MBS, we rely on a model in determining the impact
of interest rate shifts. In addition, for IRLCs, the
borrowers propensity to close their mortgage loans under
the commitment is used as a primary assumption.
Our total market risk is influenced by a wide variety of factors
including market volatility and the liquidity of the markets.
There are certain limitations inherent in the sensitivity
analysis presented, including the necessity to conduct the
analysis based on a single point in time and the inability to
include the complex market reactions that normally would arise
from the market shifts modeled.
We used September 30, 2011 market rates on our instruments
to perform the sensitivity analysis. The estimates are based on
the market risk sensitive portfolios described in the preceding
paragraphs and assume instantaneous, parallel shifts in interest
rate yield curves. These sensitivities are hypothetical and
presented for illustrative purposes only. Changes in fair value
based on variations in assumptions generally cannot be
extrapolated because the relationship of the change in fair
value may not be linear.
103
The following table summarizes the estimated change in the fair
value of our assets and liabilities sensitive to interest rates
as of September 30, 2011 given hypothetical instantaneous
parallel shifts in the yield curve:
|
|
|
|
|
|
|
|
|
|
|
Change in Fair Value
|
|
|
|
Down
|
|
|
Up
|
|
|
|
25 bps
|
|
|
25 bps
|
|
|
|
(in thousands)
|
|
|
Increase (decrease) in assets
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale
|
|
|
$3,031
|
|
|
|
$(3,617)
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt
|
|
|
(1,738)
|
|
|
|
1,806
|
|
Mortgage servicing rights
|
|
|
(5,811)
|
|
|
|
6,990
|
|
Other assets (derivatives)
|
|
|
|
|
|
|
|
|
IRLCs
|
|
|
2,814
|
|
|
|
(4,455)
|
|
|
|
|
|
|
|
|
|
|
Total change in assets
|
|
|
(1,704)
|
|
|
|
724
|
|
Increase (decrease) in liabilities
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
Interest rate swaps and caps
|
|
|
1,263
|
|
|
|
(1,241)
|
|
Forward MBS trades
|
|
|
6,728
|
|
|
|
(8,032)
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
(599)
|
|
|
|
598
|
|
ABS nonrecourse debt
|
|
|
(1,239)
|
|
|
|
1,314
|
|
|
|
|
|
|
|
|
|
|
Total change in liabilities
|
|
|
6,153
|
|
|
|
(7,361)
|
|
|
|
|
|
|
|
|
|
|
Total, net change
|
|
|
$(7,857)
|
|
|
|
$8,085
|
|
|
|
|
|
|
|
|
|
|
104
GLOSSARY
OF INDUSTRY AND OTHER TERMS
Adjustable Rate Mortgage. A mortgage loan
where the interest rate on the loan adjusts periodically based
on a specified index and margin agreed to at the time the loan
is originated.
Agency and Government Conforming Loan. A
mortgage loan that meets all requirements (loan type, maximum
amount, LTV ratio and credit quality) for purchase by Fannie
Mae, Freddie Mac or FHA (as defined below).
Basic Servicing Fee. The servicing fee paid in
an excess MSR arrangement to a servicer in exchange for the
provision of servicing functions on a portfolio of mortgage
loans, after which the servicer and the co-investment partner
share the excess fees on a pro rata basis.
Compensating Interest. Money paid to the owner
of a mortgage loan or pool of mortgage loans on a monthly basis
(typically by the servicer from its own funds) to compensate the
owner of the mortgage loan for interest shortfalls caused by
intra-month prepayments.
Consumer Direct Retail Originations. A type of
mortgage loan origination pursuant to which a lender markets
refinancing and purchase money mortgage loans directly to
selected consumers through telephone call centers or the
Internet.
Conventional Mortgage Loans. A mortgage loan
that is not guaranteed or insured by the FHA, the VA (as defined
below) or any other government agency. Although a conventional
loan is not insured or guaranteed by the government, it can
still follow the guidelines of GSEs (as defined below).
Corporate Advance. A servicing advance to pay
costs and expenses incurred in foreclosing upon, preserving and
selling REO, including attorneys and other professional
fees and expenses incurred in connection with foreclosure and
liquidation or other legal proceedings arising in the course of
servicing the mortgage loans.
Credit-Sensitive Loan. A mortgage loan with
certain characteristics such as low borrower credit quality,
relaxed original underwriting standards and high LTV, which we
believe indicates that the mortgage loan presents an elevated
credit risk.
Delinquent Loan. A mortgage loan that is 30 or
more days past due from its scheduled due date.
Department of Veterans Affairs
(VA). The VA is a cabinet-level
department of the U.S. federal government, which guarantees
certain home loans for qualified borrowers.
Distributed Retail Originations. A type of
mortgage loan origination pursuant to which a lender markets
primarily purchase money mortgage loans directly to consumers
from local branches.
Excess Fees. In an excess MSR arrangement, the
servicing fee cash flows on a portfolio of mortgage loans after
payment of the basic servicing fee.
Excess MSRs. MSRs with a co-investment partner
pursuant to which the servicer receives a basic servicing fee
and the servicer and co-investment partner share the excess
fees. This co-investment structure reduces the required upfront
capital from the servicer.
Fannie Mae. The Federal National Mortgage
Association, a federally chartered association that buys
mortgage loans from lenders and resells them as securities in
the secondary mortgage market.
105
Federal Housing Administration
(FHA). The FHA is a U.S. federal
government agency within the Department of Housing and Urban
Development. It provides mortgage insurance on loans made by
FHA-approved lenders in compliance with FHA guidelines
throughout the United States.
Float Income. Interest income earned by a
servicer on (i) funds collected from borrowers during the
period of time between receipt of the funds and the remittance
of the funds to investors and (ii) funds collected from
borrowers for the payment of taxes and insurance, where
applicable.
Freddie Mac. The Federal Home Loan Mortgage
Corporation, a federally chartered corporation that buys
mortgage loans from lenders and resells them as securities in
the secondary mortgage market.
Ginnie Mae. The Government National Mortgage
Association, a wholly-owned U.S. federal government
corporation that is an agency of the Department of Housing and
Urban Development. The main focus of Ginnie Mae is to ensure
liquidity for U.S. federal government-insured mortgages
including those insured by the FHA. Ginnie Mae guarantees to
investors who purchase MBS the timely payment of principal and
interest. Ginnie Mae securities are the only MBS to carry the
full faith and credit guarantee of the U.S. federal
government.
Government-Sponsored Enterprise
(GSE). Financing corporations
established by the U.S. Congress, including Fannie Mae,
Freddie Mac and the Federal Home Loan Banks.
High Touch Servicing. A servicing model that
is designed to increase borrower repayment performance with a
view towards home ownership preservation and to decrease
borrower delinquencies and defaults on mortgage portfolios. This
model emphasizes a focus on loss mitigation and frequent
interactions with borrowersvia telephone, mail, electronic
communications and other personal contact methods.
Home Affordable Modification Program
(HAMP). A U.S. federal
government program designed to help eligible homeowners avoid
foreclosure through mortgage loan modifications. Participating
servicers may be entitled to receive financial incentives in
connection with loan modifications they enter into with eligible
borrowers and subsequent success fees to the extent that a
borrower remains current in any agreed upon loan modification.
Home Affordable Refinance Program
(HARP). A U.S. federal
government program designed to help eligible homeowners
refinance their existing mortgage loans. The mortgage must be
owned or guaranteed by a GSE, and applicants must be
up-to-date
on their mortgage payments but unable to obtain refinancing
because the value of their homes has declined.
Independent Loan Servicer. A loan servicer
that is not affiliated with a depository institution.
Loan Modification. Temporary or permanent
modifications, including re-modifications, to the terms and
conditions of a borrowers original mortgage loan. Loan
modifications are usually made to loans that are in default, or
in imminent danger of defaulting.
Loan-to-Value
Ratio (LTV). The UPB of a mortgage
loan as a percentage of the total appraised value of the
property that secures the loan. LTV is one of the key risk
factors that originators assess when qualifying borrowers for a
mortgage loan. A loan with a low LTV is seen as less of a credit
risk than a loan with a high LTV. An LTV over 100% indicates
that the UPB of the mortgage loan exceeds the value of the
property.
Loss Mitigation. The range of servicing
activities designed by a servicer to minimize the losses
suffered by the owner of a mortgage loan in connection with a
borrower default. Loss mitigation techniques include
short-sales,
deed-in-lieu
of foreclosures and loan modifications, among other options.
106
Making Home Affordable Plan
(MHA). Also known as the President of
the United States Homeowner Affordability and Stability
Plan. A U.S. federal government program designed to help
eligible homeowners avoid foreclosure and keep their homes by
refinancing their existing mortgages. MHA loans are available to
eligible homeowners with LTVs ratios of up to 125%.
Mortgage Servicing Right
(MSR). The right to service a loan or
pool of loans and to receive a servicing fee. MSRs may be bought
and sold, resulting in the transfer of loan servicing
obligations.
Non-Conforming Mortgage Loan. A mortgage loan
that does not meet the standards of eligibility for purchase or
securitization by Fannie Mae, Freddie Mac or Ginnie Mae.
Non-Recoverable Advance. A servicing advance
made by a servicer, which will not ultimately be recoverable by
the servicer from funds received upon liquidation of the
underlying property of the mortgage loan.
Originations. The process through which a
lender provides a mortgage loan to a borrower.
P&I Advance. A servicing advance to cover
scheduled payments of principal and interest that have not been
timely paid by borrowers. P&I Advances serve to ensure the
cash flows paid to holders of securities issued by the
residential MBS trust.
Prepayment Speed. The rate at which mortgage
prepayments occur or are projected to occur. The statistic is
calculated on an annualized basis and expressed as a percentage
of the outstanding principal balance.
Primary Servicer. The servicer that owns the
right to service a mortgage loan or pool of mortgage loans. This
differs from a subservicer, which has a contractual right with
the primary servicer to service a mortgage loan or pool of
mortgage loans in exchange for a subservicing fee.
Prime Mortgage Loan. Generally, a high-quality
mortgage loan that meets the underwriting standards set by
Fannie Mae, Freddie Mac and Ginnie Mae and is eligible for
purchase or securitization in the secondary mortgage market.
Conventional mortgage loans generally have lower default risk
and are made to borrowers with good credit records and a monthly
income at least three to four times greater than their monthly
housing expenses (mortgage payments plus taxes and other debt
payments). Mortgages not classified as conventional mortgages
are generally called either jumbo prime, non-prime or Alt-A.
Real Estate Owned (REO). Property
acquired by the servicer on behalf of the owner of a mortgage
loan or pool of mortgage loans, usually through foreclosure or a
deed-in-lieu
of foreclosure on a defaulted loan. The servicer or a third
party real estate management firm is responsible for selling the
REO. Net proceeds of the sale are returned to the owner of the
related loan or loans. In most cases, the sale of REO does not
generate enough to pay off the balance of the loan underlying
the REO, causing a loss to the owner of the related mortgage
loan.
Recapture Rate. For refinance eligible
portfolios, the ratio of the UPB of loans re-originated to the
UPB of the loans voluntarily paid off by the borrowers over a
defined measurement period. The present calculation of the
denominator includes borrowers who may have paid off their
mortgage by any means including selling their house.
Re-origination. The process of actively
working with existing borrowers to refinance their mortgage
loans. By re-originating loans for existing borrowers, we retain
the servicing rights, thereby extending the longevity of the
servicing cash flows.
Residential Mortgage-Backed Security. A fixed
income security backed by pools of residential mortgages.
107
Servicing. The performance of contractually
specified administrative functions with respect to a mortgage
loan or pool of mortgage loans. Duties of a servicer typically
include, among other things, collecting monthly payments,
maintaining escrow accounts, providing periodic reports and
managing insurance. A servicer is generally compensated with a
specific fee outlined in the contract established prior to the
commencement of the servicing activities.
Servicing Advance. In the course of servicing
loans, servicers are required to make servicing advances that
are reimbursable from collections on the related mortgage loan.
There are typically three types of servicing advances: P&I
Advances, T&I Advances and Corporate Advances. Servicing
advances are reimbursed to the servicer if and when the borrower
makes a payment on the underlying mortgage loan or upon
liquidation of the underlying mortgage loan. The types of
servicing advances that a servicer must make are set forth in
its servicing agreement with the owner of the mortgage loan or
pool of mortgage loans.
Servicing Advance Facility. A secured
financing facility backed by a pool of mortgage servicing
advance receivables made by a servicer to the owner of a
mortgage loan or pool of mortgage loans.
Special Servicers. Special servicers are
responsible for enhancing recoveries on delinquent loans and REO
assets. Loans are transferred to a special servicer based on
predetermined delinquency or other performance measures.
Subservicing. Subservicing is the process of
outsourcing the duties of the primary servicer to a third party
servicer. The third party servicer performs the servicing
responsibilities for a fee and is typically not responsible for
making servicing advances.
T&I Advance. A servicing advance to pay
specified expenses associated with the preservation of a
mortgaged property or the liquidation of defaulted mortgage
loans, including but not limited to property taxes, insurance
premiums or other property-related expenses that have not been
timely paid by borrowers in order for the lien holder to
maintain their interest in the property.
Unpaid Principal Balance
(UPB). The amount of principal
outstanding on a mortgage loan or a pool of mortgage loans. UPB
is used as a means of estimating the future revenue stream for a
servicer.
Warehouse Facility. A type of facility used to
finance mortgage loan originations. Pursuant to a warehouse
facility, a loan originator typically agrees to transfer to a
counterparty certain mortgage loans against the transfer of
funds by the counterparty, with a simultaneous agreement by the
counterparty to transfer the loans back to the originator at a
date certain, or on demand, against the transfer of funds from
the originator.
Wholesale Originations. A type of mortgage
loan origination pursuant to which a lender acquires refinancing
and purchase money mortgage loans from third party mortgage
brokers or correspondent lenders.
108
INDUSTRY
We conduct our business in the residential mortgage industry in
the United States. We participate in two distinct, but related,
sectors of the mortgage industry: residential mortgage loan
servicing, which includes primary servicing and subservicing,
and residential mortgage loan originations.
Servicing
Industry Overview
According to Inside Mortgage Finance, there were approximately
$10.3 trillion in residential mortgage loans outstanding in the
United States as of September 30, 2011. Each mortgage loan
must be serviced by a loan servicer. Primary servicers, which
are loan servicers that own the MSRs they service, generally
earn a contractual per loan fee of 25 to 50 basis points
per annum on the UPB of loans serviced, as well as incentive
fees and associated ancillary fees, such as late fees.
Subservicers, which are loan servicers that service loans on
behalf of other MSR or mortgage owners, generally receive a
contractual per loan fee the equivalent of between 5 to 45 basis
points per annum on the UPB of loans serviced. Consequently, a
loan servicer can create value for both itself and the mortgage
owner and, in the case of a subservicing arrangement, for the
owner of the MSRs, by increasing the number of borrowers that
remain current in their repayment obligations. Owners may
include a lender, third party investor or, in the case of a
securitized pool of mortgages, a residential MBS trust.
Loan servicing, including primary servicing and subservicing,
predominantly involves the calculation, collection and
remittance of principal and interest payments, the
administration of mortgage escrow accounts, the collection of
insurance claims, the administration of foreclosure procedures,
the management of REO and the disbursement of required advances.
In a weak economic and credit environment with elevated
delinquencies and defaults, servicing is operationally more
challenging and more capital intensive as servicers need to add
and train staff to manage the increase in delinquent borrowers.
In addition, servicers are generally required to make advances
on delinquent mortgage loans for principal and interest
payments, taxes, insurance, legal fees and property maintenance
fees, all of which are typically recovered upon foreclosure or
liquidation. According to Calculated Risk, completed
foreclosures have increased from 514,000 in 2007 to 1,070,000 in
2010. Furthermore, Fannie Mae estimates that as of
December 31, 2010 and September 30, 2011, it had
$764 billion and $724 billion of assets, respectively,
within its own portfolio with characteristics that we believe
make them credit-sensitive.
Mortgage
Servicing Functions
Loan servicers play a key role in the residential mortgage
market by providing loan servicing functions on behalf of MSR or
mortgage owners, including collecting and remitting monthly loan
principal and interest payments, taxes and insurance, performing
customer service functions and taking active steps to minimize
any potential losses associated with borrower delinquencies and
defaults.
Primary
Servicing
Typically, a primary servicer is contractually obligated to
service a mortgage loan in accordance with accepted servicing
industry practices as well as applicable regulations and
statutes. A primary servicers rights and obligations are
governed by the pooling and servicing agreement for the
underlying loans.
To the extent a borrower does not make a payment, primary
servicers are generally required to make advances of principal
and interest, taxes, insurance and legal fees until such time as
the underlying property is liquidated or the servicer determines
that additional advances will not be recoverable from future
payments, proceeds or other collections on the mortgage loan. In
the event of a foreclosure, primary servicers are entitled
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to reimbursement of advances from the sale proceeds of the
related property, and, if these advances are non-recoverable,
from collections on other mortgage loans in the related mortgage
pool.
Collection efforts attempt to maximize early contact with late
or newly delinquent borrowers, with more focused attention on
borrowers of lower credit quality. In addition, primary
servicers are responsible for closely managing their collection
calls and letter campaigns which are tailored to specific loan
products.
Subservicing
A subservicers rights and obligations are governed by the
subservicing agreement with the third party that owns the
related MSRs.
As a result of more timely reimbursement of advances,
subservicing is distinct from, and generally requires much less
capital than, primary servicing. Subservicers typically are only
required to make advances on an intra-month basis. Like primary
servicers, in the event of a foreclosure, subservicers are
entitled to reimbursement of monthly advances from the sale
proceeds of the related property or, if these advances are
non-recoverable, from collections on co-pooled mortgage loans.
Additionally, subservicers are typically entitled to direct
monthly reimbursement from the owner of the MSRs of any
shortfall between the aggregate amount advanced by the
subservicer and the aggregate amount of reimbursement from the
sale proceeds of related property or from the collections on
co-pooled mortgage loans.
As with primary servicers, subservicers attempt to maximize
early contact with late or newly delinquent borrowers and must
closely manage their product-tailored collection calls and
letter campaigns.
Loan
Servicing Landscape
The
Traditional Bank Servicing Model
The majority of loan servicing in the United States is performed
by the nations money center banks such as Bank of America,
Wells Fargo, JPMorgan Chase and Citigroup, which together
serviced over 50% of all outstanding mortgage loans on
one-to-four-family residences as of September 30, 2011.
These traditional bank servicers primarily service conventional,
performing mortgages and are most effective at routine account
management of portfolios with low delinquencies that require
limited interaction with the borrowers, or so-called front-end
activities.
The traditional bank servicer model, which was developed to
process simple payments and to minimize costs, functioned well
in environments characterized by low delinquencies and defaults,
and is best described as traditional servicing. In
the current environment of elevated delinquencies, foreclosures,
liquidation proceedings and REO activity, however, traditional
servicers are experiencing higher operating costs, and their
performance metrics are declining. According to Calculated Risk,
from 2007 through 2010, approximately 3.4 million homes
were lost to foreclosure and, based on information from the
Mortgage Bankers Association, as of December 31, 2010,
approximately 3.7 million mortgages either were in
foreclosure or were 90 or more days delinquent.
At the same time, banks are currently under tremendous pressure
to exit or reduce their exposure to the servicing business as a
result of increased regulatory scrutiny and capital
requirements, headline risk associated with sizeable legal
settlements and potentially significant earnings volatility.
The High
Touch Servicing Model
In contrast to the traditional bank servicer model, the high
touch servicer model emphasizes increased borrower contact in an
effort to improve loan performance and reduce loan defaults and
foreclosures, thereby minimizing credit losses and maximizing
cash flows, or so-called back-end activities. In addition to
more
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normalized environments, the high touch servicing model
functions well in environments characterized by elevated
delinquencies, foreclosures, liquidation proceedings and REO
activity. We believe there is a very limited number of servicers
such as us that are able to operate both front- and back-end
activities effectively in a variety of market environments.
Finally, we believe current market opportunities favor and are
greatest for servicers of this nature, as compared to
traditional, bank-owned servicers.
Servicer
Compensation
Loan servicers earn servicing fees through their MSRs and
subservicing contracts, as the case may be, and these fees
represent the largest source of revenue from loan servicing
operations.
Primary
Servicer Compensation
By purchasing MSRs, primary servicers generally receive a
contractual per loan servicing fee of 25 to 50 basis points
per annum on the UPB of the loans serviced. The servicing fees
are typically supplemented by incentive fees and ancillary fees.
Incentive fees include modification initiation and success fees
from the HAMP program and modification or collateral workout
related incentives from various pool owners and GSEs. Ancillary
fees include late fees, non-sufficient funds fees, convenience
fees and interest income earned on loan payments that have been
collected but have not yet been remitted to the owner of the
mortgage loan.
Primary servicers have additional opportunities to provide
value-added services to the owners of the loans they service.
These value-added adjacent services include providing services
for delinquent loans, managing loans in the foreclosure/REO
process and providing title insurance agency, loan settlement
and valuation services on newly originated and re-originated
loans.
Subservicer
Compensation
Under subservicing arrangements, where loan servicers do not pay
to acquire MSRs and only have intra-month advancing obligations,
the subservicers generally receive a contractual per loan
servicing fee the equivalent of between 5 to 45 basis
points per annum on the UPB of the loans serviced. As with
primary servicers, subservicers typically supplement their
subservicing fees through incentive and ancillary fees as well
as the provision of adjacent services.
Advances
In the course of servicing delinquent loans, servicers are
required to make advances that are reimbursable from collections
on the related mortgage loan, or in the event of a
non-recoverable advance, from collections on other mortgage
loans in the related mortgage pool.
There are generally three types of advances: P&I Advances,
T&I Advances and Corporate Advances.
P&I Advances: Advances to cover scheduled
payments of principal and interest that have not been timely
paid by borrowers. P&I Advances serve to smooth the cash
flows paid to holders of securities issued by the residential
MBS trust.
T&I Advances: Advances to pay specified
expenses associated with the preservation of a mortgaged
property or the liquidation of defaulted mortgage loans,
including, but not limited to, property taxes, insurance
premiums or other property-related expenses that have not been
timely paid by borrowers.
Corporate Advances: Advances to pay costs and
expenses incurred in foreclosing upon, preserving and selling
REO, including attorneys and other professional fees and
expenses incurred in
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connection with foreclosure and liquidation or other legal
proceedings arising in the course of servicing mortgage loans.
A servicer may decide to stop making P&I Advances prior to
liquidation of the mortgage loan if the servicer deems future
P&I Advances to be non-recoverable. In this circumstance,
T&I Advances and Corporate Advances will likely continue in
order to preserve existing value of the mortgage loan and
complete the foreclosure and REO sale process.
Servicers of GSE securities are reimbursed by the GSE for their
advances upon completion of the foreclosure sale at which point
the mortgage loan is repurchased out of the MBS by the GSE.
Servicers of GSE securities are not responsible for managing
REO. Conversely, servicers of non-agency MBS are obligated under
the servicing agreement to make advances through liquidation of
the related REO.
Advances are non-interest bearing assets. Non-bank servicers
typically utilize securitizations or match funded liabilities to
finance their advances. The securitizations are generally
non-recourse to the servicer, and the advances are financed at a
discount to par accounting for the non-interest bearing nature
of the asset. Advance rates for securitizations generally range
between 70% to 85% depending upon the rating and structure.
Industry
Dynamics
We believe a number of factors associated with the dislocation
in the mortgage industry have led to a supply and demand
imbalance in the residential mortgage servicing market, creating
a market opportunity for high touch servicers. These factors
include:
Elevated
delinquencies, defaults, foreclosures and REO
According to Calculated Risk, completed foreclosures have
increased from 514,000 in 2007 to 1,070,000 in 2010. The
Mortgage Bankers Association forecasts that delinquent loans and
loans in foreclosure peaked in early 2010 and will stay elevated
for quite some time. Moodys Analytics projects that home
prices will not begin to recover until 2013. In a period of
elevated mortgage delinquencies and defaults, servicing becomes
operationally more challenging as servicers need to dedicate
more resources to manage the higher volume of delinquent
borrowers. In the current environment of elevated delinquencies,
foreclosures, liquidation proceedings and REO activity, we
believe traditional bank servicers will continue to recognize
the importance of high touch servicing characterized by a strong
emphasis on superior asset performance and loss mitigation
expertise, and seek to partner with servicers that they believe
can be more effective at minimizing credit losses and maximizing
loan performance.
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Source: Mortgage Bankers Association, HOPE NOW, CoreLogic,
Calculated Risk
Regulatory
and legislative factors
We believe banks are under significant pressure to exit or
reduce their exposure to the servicing business as a result of
increased regulatory scrutiny and capital requirements, headline
risk associated with sizeable legal settlements and potentially
significant earnings volatility. As a result of the severe
dislocation in the U.S. housing market and the related
fallout, regulatory and legislative attention on the mortgage
industry has increased. Numerous legislative and regulatory
actions have been proposed, and we believe the following factors
will continue to increase compliance costs for the largest
servicers and cause many of them to exit or reduce their
exposure to the mortgage servicing business.
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Increased Capital Requirements
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Pending Basel III standards impose material capital charges
for banks holding mortgage servicing assets
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Earnings Volatility
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QRM provision in the Dodd-Frank Act requires banks to retain
risk on balance sheet
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Mark-to-market exposure creates earnings volatility
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Difficult to hedge variability
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Demonization of Banking System
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Signed consent orders with the OCC, the Federal Reserve and the
FDIC
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Negotiations with state Attorneys General
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Regulatory Scrutiny & Headline Risk
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Mortgage settlements with RMBS holders
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Robo-signing headlines
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Robust loan put-back from GSEs
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Servicing requirements regarding delinquent mortgages
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Modification of servicing compensation related to Fannie Mae
and Freddie Mac loans
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New regulations from the recently formed CFPB
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Additional litigation brought by Attorneys General of
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Additionally, we believe there is a limited number of non-bank
servicers such as us who are positioned to capitalize upon these
opportunities and provide a high level of service. We believe
these factors will continue to drive a separation within the
servicing market between front-end and back-end servicing
compensation.
Reform of GSEs
On September 7, 2008, FHFA placed Fannie Mae and Freddie
Mac into conservatorship and, together with the
U.S. Treasury, established a program designed to boost
investor confidence in their respective debt and MBS. The
U.S. government has expressed interest in reforming and
significantly reducing the participation of the GSEs in the
residential mortgage market. As a result of their
conservatorship and the anticipation of their eventual reduced
participation in the residential mortgage market, we believe the
GSEs will continue to facilitate servicing transfers to strong,
proven servicers with a track record of improving asset
performance and mitigating credit losses. We expect these
transfers to accelerate as market forces continue to erode
portfolio performance. Due to our history of strong asset
performance and our long-standing relationships with the GSEs,
we believe we are among a very limited number of servicers
positioned to acquire additional GSE-controlled servicing.
In addition to the market opportunities that we have identified
and we believe will continue to present themselves, numerous
government programs and initiatives continue to provide
advantages for servicers with loss mitigation expertise. We
expect servicers that are flexible and adept at implementing
government hardship assistance programs will be rewarded with
higher incentive fees and more servicing transfers from the
GSEs. In contrast, we expect that, as a part of a recent FHFA
initiative, servicers not meeting certain performance benchmarks
will be penalized with compensatory fees and potential servicing
revocations. We believe these trends favor servicers such as us
that have a track record of improving asset performance on the
loans they service.
Opportunities under HAMP
In response to the rising level of foreclosures, in February
2009, the U.S. Treasury announced the implementation of HAMP
designed to keep borrowers in their homes. HAMP provides
financial incentives to loan servicers and borrowers to
successfully modify qualifying residential mortgages. Under the
program, servicers receive an up-front fee of $1,000 for each
completed modification and an additional $500 if the loan is
current, but are at risk of imminent default while the borrower
is in the HAMP trial period, typically a three-month period in
which no foreclosure sales can occur and the borrowers
ability to meet the modified loans terms and conditions is
gauged. Servicers also receive success fees of as much as $1,000
each year for up to three years, which accrue monthly and are
paid annually on the anniversary of the month in which the trial
period plan was executed. The annual incentives are predicated
on the borrower remaining in good standing, meaning that the
borrower must not be more than two months delinquent at any time
during the year.
Originations
Industry Overview
According to Inside Mortgage Finance, total residential mortgage
originations in the United States were $1.0 trillion for the
nine months ended September 30, 2011, a decrease of 16.7%
compared to the same period in 2010. Of the 2011 originations,
approximately 88% were conforming mortgages guaranteed by GSEs,
including Fannie Mae and Freddie Mac, or government agencies
such as the FHA and the VA. From
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2006 to September 30, 2011, the annual aggregate principal
balance of newly originated mortgage loans that were either
insured or guaranteed by government agencies or sold to GSEs or
into government securitizations remained relatively flat,
decreasing to $1.0 trillion on an annual run-rate basis.
The U.S. residential mortgage market consists of a primary
mortgage market that links borrowers and lenders and a secondary
mortgage market that links lenders and investors. In the primary
mortgage market, residential mortgage lenders such as mortgage
banking companies, commercial banks, savings institutions,
credit unions and other financial institutions originate or
provide mortgages to borrowers. Lenders obtain liquidity for
originations in a variety of ways, including by selling
mortgages or mortgage-related securities into the secondary
mortgage market. Banks that originate mortgage loans also have
access to customer deposits to fund their originations business.
The secondary mortgage market consists of institutions engaged
in buying and selling mortgages in the form of whole loans,
which represent mortgages that have not been securitized, and
mortgage-related securities. The GSEs and a government agency,
Ginnie Mae, participate in the secondary mortgage market by
purchasing mortgage loans and mortgage-related securities for
investment and by issuing guaranteed mortgage-related securities.
Loan
Originations Process
Residential mortgage loans are generally originated through
either a direct retail lending channel or a wholesale mortgage
brokerage network.
A direct retail lending channel consists of a centralized retail
platform
and/or
distributed retail branches. A centralized retail platform is a
telephone based platform with multiple loan officers in one
location. Typical loan originations channels for a direct retail
lending network include realtors, homebuilders, credit unions,
banks, the Internet and refinances from existing servicing
portfolios. In a direct lending retail network, the lender
controls all loan originations processes, including sourcing the
borrower, taking the application and setting the interest rate,
ordering the appraisal and underwriting, processing, closing and
funding the loan.
Loans sourced by mortgage brokers are funded by the lender and
generally closed in the lenders name. When originating
loans through mortgage brokers, the mortgage brokers role
is to identify the applicant, assist in completing the loan
application, gather necessary information and documents and
serve as the liaison to the borrower through the lending
process. The lender reviews and underwrites the application
submitted by the mortgage broker, approves or denies the
application, sets the interest rate and other terms of the loan
and, upon acceptance by the borrower and satisfaction of all
conditions required by the lender, funds the loan. Because
mortgage brokers conduct their own marketing, employ their own
personnel to complete the loan applications and maintain contact
with the borrowers, mortgage brokers represent an efficient loan
originations channel.
The length of time from the origination or purchase of a
mortgage loan to its sale or securitization generally ranges
from 10 to 60 days, depending on a variety of factors
including loan volume, product type, interest rates and capital
market conditions. An important source of capital for the
residential mortgage industry is warehouse lending. These
facilities provide funding to mortgage loan originators until
the loans are sold to investors in the secondary mortgage loan
market.
Types of
Mortgage Loans
Mortgage loans generally fall into one of the following five
categories: prime conforming mortgage loans, prime
non-conforming mortgage loans, government mortgage loans,
non-prime mortgage loans and prime second-lien mortgage loans.
Prime Conforming Mortgage Loans: These are
prime credit quality first-lien mortgage loans (i.e. mortgage
loans that, in the event of default, have priority over all
other liens or claims) secured by single-
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family residences that meet or conform to the
underwriting standards established by Fannie Mae or Freddie Mac
for inclusion in their guaranteed mortgage securities programs.
Prime Non-Conforming Mortgage Loans: These are
prime credit quality first-lien mortgage loans secured by
single-family residences that either (i) do not conform to
the underwriting standards established by Fannie Mae or Freddie
Mac, because they have original principal amounts exceeding
Fannie Mae and Freddie Mac limits, which are commonly referred
to as jumbo mortgage loans, or (ii) have alternative
documentation requirements and property or credit-related
features (e.g., higher LTV or debt-to-income ratios) but are
otherwise considered prime credit quality due to other
compensating factors.
Government Mortgage Loans: These are
first-lien mortgage loans secured by single-family residences
that are insured by the FHA or guaranteed by the VA and
securitized into Ginnie Mae securities.
Non-prime Mortgage Loans: These are first-lien
and certain junior lien mortgage loans secured by single-family
residences, made to individuals with credit profiles that do not
qualify for a prime loan, have credit-related features that fall
outside the parameters of traditional prime mortgage loans or
have performance characteristics that otherwise expose us to
comparatively higher risk of loss.
Prime Second-Lien Mortgage Loans: These are
open- and closed-end mortgage loans (i.e. mortgage loans that
do, in the case of an open-end loan, or do not, in the case of a
closed-end loan, allow the borrower to increase the amount of
the mortgage at a later time) secured by a second or more junior
lien on single-family residences, which include home equity
mortgage loans.
Due to the significant stress in the residential mortgage
industry experienced over the last few years, underwriting
standards have improved. Some of these improvements include the
elimination or significant reduction of mortgage affordability
products such as no income verification loans, limited or no
documentation loans, option adjustable rate mortgage loans and
non-owner occupied loans. Also, underwriting standards now
include higher minimum credit scores and lower maximum LTVs than
were acceptable under past lending practices. These improvements
in underwriting standards should lead to improved performance.
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BUSINESS
Company
Overview
We are a leading high touch non-bank residential mortgage
servicer with a broad array of servicing capabilities across the
residential mortgage product spectrum. We have been the fastest
growing mortgage servicer since 2007 as measured by growth in
aggregate unpaid principal balance (UPB), having
grown 75% annually on a compounded basis. As of
September 30, 2011, we serviced over 612,000 residential
mortgage loans with an aggregate UPB of $102.7 billion,
making us the second largest high touch non-bank servicer in the
United States. Our clients include national and regional banks,
government organizations, securitization trusts, private
investment funds and other owners of residential mortgage loans
and securities.
We attribute our growth to our strong servicer performance and
high touch servicing model, which emphasizes borrower
interaction to improve loan performance and minimize loan
defaults and foreclosures. We believe our exceptional track
record as a servicer, coupled with our ability to scale our
operations without compromising servicer quality, have enabled
us to add new mortgage servicing portfolios with relatively low
capital investment. We are a preferred partner of many large
financial organizations, including government-sponsored
enterprises (GSEs) and other regulated institutions
that value our strong performance and also place a premium on
our entirely
U.S.-based
servicing operations. We employ over 2,500 people in the
United States and are a licensed servicer in all 50 states.
In addition to our core servicing business, we are one of only a
few non-bank servicers with a fully integrated loan originations
platform and suite of adjacent businesses designed to meet the
changing needs of the mortgage industry. Our originations
platform complements and enhances our servicing business by
allowing us to replenish our servicing portfolio as loans pay
off over time, while our adjacent businesses broaden our product
offerings by providing mortgage-related services spanning the
life cycle of a mortgage loan. We believe our integrated
approach, together with the strength and diversity of our
servicing operations and our strategies for growing substantial
portions of our business with minimal capital outlays (which we
refer to as our capital light approach), position us
to take advantage of the major structural changes currently
occurring across the mortgage industry.
Servicing
Industry Dynamics
Mortgage servicers provide
day-to-day
administration and servicing for loans on behalf of mortgage
owners and earn revenues based primarily on the UPB of loans
serviced. Servicers collect and remit monthly loan principal and
interest payments and provide related services in exchange for
contractual servicing fees. Servicers also provide special
services such as overseeing the resolution of troubled loans. As
the mortgage industry continues to struggle with elevated
borrower delinquencies, this special servicing function has
become a particularly important component of a mortgage
servicers role and, we believe, a key differentiator among
mortgage servicers.
According to Inside Mortgage Finance, there were approximately
$10.3 trillion of U.S. residential mortgage loans
outstanding as of September 30, 2011. In the aftermath of
the U.S. financial crisis, the residential mortgage servicing
industry is undergoing major structural changes that affect the
way residential loans are originated, owned and serviced. These
changes have benefited and should continue to significantly
benefit non-bank mortgage servicers. Banks currently dominate
the residential mortgage servicing industry, servicing over 95%
of all residential mortgage loans. Over 50% of all residential
mortgage loan servicing is concentrated among just four banks.
However, banks are currently under tremendous pressure to exit
or reduce their exposure to the servicing business as a result
of increased regulatory scrutiny and capital requirements,
headline risk associated with sizeable legal settlements, as
well as potentially significant earnings volatility.
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Furthermore, banks servicing operations, which have
historically been oriented towards payment processing, are often
ill-equipped to maximize loan performance through high touch
servicing.
As a result of these factors and the overall increased demands
on servicers by mortgage owners, mortgage servicing is shifting
from banks to non-bank servicers. Already, over the last
18 months, banks have completed or announced servicing
transfers on over $350 billion of loans. We believe this
represents a fundamental change in the mortgage servicing
industry and expect the trend to continue at an accelerated rate
in the future. Because the mortgage servicing industry is
characterized by high barriers to entry, including the need for
specialized servicing expertise and sophisticated systems and
infrastructure, compliance with GSE and client requirements,
compliance with
state-by-state
licensing requirements and the ability to adapt to regulatory
changes at the state and federal levels, we believe we are one
of the few mortgage servicers competitively positioned to
benefit from the shift.
Our
Business
Residential
Mortgage Servicing
Our leading residential mortgage servicing business serves a
diverse set of clients encompassing a broad range of mortgage
loans, including prime and non-prime loans, traditional and
reverse mortgage loans, GSE and government agency-insured loans,
as well as private-label loans issued by non-government
affiliated institutions. We have grown our residential mortgage
servicing portfolio from an aggregate UPB of $12.7 billion
as of December 31, 2007 to $102.7 billion as of
September 30, 2011. Over the last 36 months, we have
added over $104 billion in UPB to our servicing platform
through over 290 separate transfers from 31 different
counterparties. This growth has been funded primarily through
internally generated cash flows and proceeds from debt
financings.
Our performance record stands out when compared to other
mortgage servicers:
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As of December 2011, a GSE ranked us in the top 5 out of over
1,000 approved servicers in foreclosure prevention workouts.
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In 2011, we were in the top tier of rankings for Federal Housing
Administration-(FHA) and Housing and Urban
Development-approved servicers, with a Tier 1 ranking (out
of four possible tiers).
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As of November 30, 2011, our delinquency and default rates
on non-prime mortgages we service on behalf of third party
investors in asset-backed securities (ABS) were each
40% lower than the peer group average.
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Our high touch, active servicing approach emphasizes increased
borrower contact in an effort to improve loan performance and
reduce loan defaults and foreclosures, thereby minimizing credit
losses and maximizing cash flows for our clients. Where
appropriate, we perform loan modifications, often facilitated by
government programs such as the Home Affordable Modification
Program (HAMP), which serve as an effective
alternative to foreclosure by keeping borrowers in their homes
and bringing them current on their loans. We believe our proven
servicing approach and relative outperformance have led large
financial institutions, GSEs and governmental organizations to
award major servicing and subservicing contracts to us, often on
a repeat basis.
Our systems and infrastructure play a key role in our servicing
success. Through careful monitoring and frequent direct
communication with borrowers, we are able to quickly identify
potential payment problems and work with borrowers to address
issues efficiently. To this end, we leverage our proprietary
processing, loss mitigation and caller routing systems to
implement a single point of contact model for troubled loans
that ensures smooth and prompt communication with borrowers,
consistent with standards imposed on the largest bank servicers
by the Office of the Comptroller of the Currency (the
OCC), the Federal Reserve and the Federal Deposit
Insurance Corporation (FDIC). Our core systems are
scalable to multiples of our current size.
We service loans as the owner of mortgage servicing rights
(MSRs), which we refer to as primary
servicing, and we provide servicing on behalf of other MSR
or mortgage owners, which we refer to as
subservicing. As of September 30, 2011, our
primary servicing and subservicing portfolios represented 45%
and 55%, respectively, of our total servicing portfolio.
Primary
Servicing
Primary servicers act as servicers on behalf of mortgage owners
and directly own the MSRs, which represent the contractual right
to a stream of cash flows (expressed as a percentage of UPB) in
exchange for performing specified mortgage servicing functions
and temporarily advancing funds to cover payments on delinquent
and defaulted mortgages.
We have grown our primary servicing portfolio to
$46.7 billion in UPB as of September 30, 2011 from
$12.7 billion in UPB as of December 31, 2007,
representing a compound annual growth rate of 41.5%. We plan to
continue growing our primary servicing portfolio principally by
acquiring MSRs from banks and other financial institutions under
pressure to exit or reduce their exposure to the mortgage
servicing business. As the servicing industry paradigm continues
to shift from bank to non-bank servicers at an increasing pace,
we believe there will be a significant opportunity for us to
increase our market share of the servicing business.
We acquire MSRs on a standalone basis and have also developed an
innovative model for investing on a capital light basis by
co-investing with financial partners in excess MSRs.
Excess MSRs are the servicing fee cash flows (excess
fees) on a portfolio of mortgage loans after payment of a
basic servicing fee. In these transactions, we provide all
servicing functions in exchange for the basic servicing fee,
then share the excess fee with our co-investment partner on a
pro rata basis. Through December 31, 2011, we have added
$10 billion of loan servicing through excess MSRs and
expect to continue to deploy this co-investment structure in the
future.
119
Subservicing
Subservicers act on behalf of MSR or mortgage owners that choose
to outsource the loan servicing function. In our subservicing
portfolio, we earn a contractual fee per loan we service. The
loans we subservice often include pools of underperforming
mortgage loans requiring high touch servicing capabilities. Many
of our recent subservicing transfers have been facilitated by
GSEs and other large mortgage owners that are seeking to improve
loan performance through servicer upgrades. Subservicing
represents another capital light means of growing our servicing
business, as subservicing contracts are typically awarded on a
no-cost basis and do not require substantial capital.
We have grown our subservicing portfolio to $56.0 billion
in UPB as of September 30, 2011 by completing 288 transfers
with 25 counterparties since we entered the subservicing
business in August 2008. We expect to enter into additional
subservicing arrangements as mortgage owners seek to transfer
highly credit stressed loans to high touch subservicers with
proven track records and the infrastructure and expertise to
improve loan performance.
Adjacent
Businesses
We operate or have investments in several adjacent businesses
which provide mortgage-related services that are complementary
to our servicing and originations businesses. These businesses
offer an array of ancillary services, including providing
services for delinquent loans, managing loans in the
foreclosure/real estate owned (REO) process and
providing title insurance agency, loan settlement and valuation
services on newly originated and re-originated loans. We offer
these adjacent services in connection with loans we currently
service, as well as on a third party basis in exchange for base
and/or
incentive fees. In addition to enhancing our core businesses,
these adjacent services present an opportunity to increase
future earnings with minimal capital investment, including by
expanding the services we provide to large banks and other
financial institutions seeking to outsource these functions to a
third party.
Originations
We are one of only a few non-bank servicers with a fully
integrated loan originations platform to complement and enhance
our servicing business. Through September 30, 2011, we
originated approximately $2.3 billion of loans, up from
$2.0 billion for the comparable period in 2010. We
originate primarily conventional agency (GSE) and
government-insured residential mortgage loans and, to mitigate
risk, typically sell these loans within 30 days while
retaining the associated servicing rights.
A key determinant of the profitability of our primary servicing
portfolio is the longevity of the servicing cash flows before a
loan is repaid or liquidates. Our originations efforts are
primarily focused on re-origination, which involves
actively working with existing borrowers to refinance their
mortgage loans. By re-originating loans for existing borrowers,
we retain the servicing rights, thereby extending the longevity
of the servicing cash flows, which we refer to as
recapture. We recaptured 30% and 37% of the loans we
service that were refinanced or repaid by the borrower during
the nine months and three months ended September 30, 2011,
respectively, and our goal for 2012 is to achieve a recapture
rate of over 55%. Because the refinanced loans typically have
lower interest rates or lower monthly payments, and, in general,
subsequently refinance more slowly and default less frequently,
these refinancings also typically improve the overall quality of
our primary servicing portfolio.
With our in-house originations capabilities, we believe we are
better protected against declining servicing cash flows as we
replace servicing run-off through new loan originations or
retain our servicing portfolios through re-origination. In
addition, our re-origination strategy allows us to generate
additional loan servicing more cost-effectively than MSRs can
otherwise be acquired in the open market.
120
Strengths
We believe our servicing platform, coupled with our originations
and adjacent businesses, position us well for a variety of
market environments. The following competitive strengths
contribute to our leading market position and differentiate us
from our competitors:
Top
Performing Preferred Servicing Partner
Through careful monitoring and frequent direct communication
with borrowers, our high touch, high-quality servicing model
allows us to improve loan performance and reduce loan defaults
and foreclosures, thereby minimizing credit losses and
maximizing cash flows for our clients. In recognition of our
performance, as of December 2011, a GSE ranked us in the top 5
out of over 1,000 approved servicers in foreclosure prevention
workouts. Our demonstrated ability to achieve strong results and
relative outperformance, as well as our entirely
U.S.-based
servicing operations, have made us a preferred partner of large
financial institutions, GSEs and governmental organizations,
which have awarded major servicing and subservicing contracts to
us, often on a repeat basis.
Scalable
Technology and Infrastructure
Our highly scalable technology and infrastructure have enabled
us to manage rapid growth over the past several years while
maintaining our high servicing standards and enhancing loan
performance. We have made significant investments in loan
administration, customer service, compliance and loss
mitigation, as well as in employee training and retention. Our
staffing, training and performance tracking programs,
centralized in the Dallas/Fort Worth, Texas area, have
allowed us to expand the size of our servicing team while
maintaining high quality standards. With our core systems
scalable to multiples of our current size, we believe our
infrastructure positions us well to take advantage of structural
changes in the mortgage industry. Because the mortgage servicing
industry is characterized by high barriers to entry, we also
believe we are one of the few mortgage servicers competitively
positioned to benefit from existing and future market
opportunities.
Track
Record of Efficient Capital Deployment
We have an established track record of deploying capital to grow
our business. For example, over the last 36 months, we have
effectively used capital from internally generated cash flows
and proceeds from debt financings to add over $104 billion
in UPB to our servicing platform. In addition, we employ capital
light strategies, including our innovative structure for
co-investment in excess MSRs with financial partners as well as
subservicing arrangements, to add new mortgage servicing
portfolios with relatively low capital investment. Through
December 31, 2011, we have added $10 billion of loan
servicing through excess MSRs and expect to continue to deploy
this co-investment structure in the future, while also
evaluating subservicing arrangements as mortgage owners seek to
transfer credit stressed loans to high touch subservicers in
order to improve loan performance. We believe that our
experience of efficiently deploying capital for growth puts us
in a strong position to manage future growth opportunities.
Attractive
Business Model with Strong Recurring Revenues
Banks are under tremendous pressure to exit or reduce their
exposure to the mortgage servicing business, and GSEs are
looking for strong mortgage servicers as the mortgage industry
continues to struggle with elevated borrower delinquencies. As
the shift from bank to non-bank servicers accelerates, we
believe there will be a significant opportunity for us to
achieve growth on attractive terms. Our senior management team
has already demonstrated its ability to identify, evaluate and
execute servicing portfolio acquisitions. We have developed an
attractive business model to grow our business and generate
strong, recurring, contractual fee-based revenue with minimal
credit risk. These revenue streams provide us with significant
capital to grow our business organically.
121
Integrated Originations Capabilities
As one of only a few non-bank servicers with a fully integrated
loan originations platform, we are often able to extend the
longevity of our servicing cash flows through loan refinancings.
We recaptured 30% and 37% of the loans we service that were
refinanced or repaid by the borrower during the nine months and
three months ended September 30, 2011, respectively, and
our goal for 2012 is to achieve a recapture rate of over 55%.
Because, in general, refinanced loans subsequently refinance
more slowly and default less frequently than many currently
outstanding loans, these refinancings also typically improve the
overall quality of our primary servicing portfolio. We believe
our in-house originations capabilities allow us to generate
additional loan servicing more cost-effectively than MSRs can
otherwise be acquired in the open market.
Strong and Seasoned Management Team
Our senior management team is comprised of experienced mortgage
industry executives with a track record of generating financial
and operational improvements. Our CEO has been with us for more
than a decade and has managed the company through the most
recent economic downturn and through multiple economic cycles.
Several members of our management team have held senior
positions at other residential mortgage companies. Our senior
management team has demonstrated its ability to adapt to
changing market conditions and has developed a proven ability to
identify, evaluate and execute successful portfolio and platform
acquisitions. We believe that the experience of our senior
management team and its management philosophy are significant
contributors to our operating performance.
Growth
Strategies
We expect to drive future growth in the following ways:
Grow
Residential Mortgage Servicing
We expect to grow our business primarily by adding to our
residential mortgage servicing portfolios through MSR
acquisitions and subservicing transfers. Over the last
18 months, banks and other financial institutions have
completed or announced a significant number of MSR sales and
subservicing transfers, and we expect an even greater number
over the next 18 months. We are continuously reviewing,
evaluating and, when attractive, pursuing MSR sales and
subservicing transfers, and we believe we are well-positioned to
compete effectively for these opportunities. We believe our
success in this area has been, and will continue to be, driven
by our strong servicer performance, as well as by the systems
and infrastructure we have implemented to meet specific client
requirements.
Pursue
Capital Light Servicing Opportunities
We intend to pursue capital light strategies that will allow us
to grow substantial portions of our business with minimal
capital outlays. Since August 2008, we have been involved in the
subservicing business and have grown our subservicing portfolio
by $56.0 billion since that date on a no-cost basis and
with relatively minimal commitment of capital. Many of our
recent subservicing transfers have been facilitated by GSEs and
other large mortgage owners and we expect to leverage our
relationships to complete additional subservicing transfers as
mortgage owners seek to transfer credit stressed loans to high
touch servicers through subservicing arrangements. In addition,
we have developed an innovative structure for co-investing on a
capital light basis in excess MSRs with financial partners.
Through December 31, 2011, we have added $10 billion
of loan servicing through excess MSRs and expect to continue to
deploy this co-investment structure in the future. We anticipate
that these capital light strategies will allow us to
significantly expand our mortgage servicing portfolio with
reduced capital investment.
122
Expand
Originations to Complement Servicing
We also expect our originations platform to play an important
role in driving our growth and, in particular, enhancing the
profitability of our servicing business. As one of only a few
non-bank servicers with a fully integrated loan originations
platform, we originate new GSE-eligible and FHA-insured loans
for sale into the securitization market and retain the servicing
rights associated with those loans. More importantly, we
re-originate loans from existing borrowers seeking to take
advantage of improved loan terms, thereby extending the
longevity of the related servicing cash flows, which increases
the profitability of that servicing pool and the credit quality
of the servicing portfolio. Through our originations platform,
we generate additional loan servicing more cost-effectively than
MSRs can otherwise be acquired in the open market. Finally, we
facilitate borrower access to government programs designed to
encourage refinancings of troubled or stressed loans, improving
overall loan performance. We believe this full range of
abilities makes us a more attractive counterparty to entities
seeking to transfer servicing to us, and we expect it to
contribute to the growth of our servicing portfolio.
Expand
to Meet Changing Needs of the Residential Mortgage
Industry
We expect to drive growth across all of our businesses by being
a solution provider to a wide range of financial organizations
as they navigate the structural changes taking place across the
mortgage industry. With banks under pressure to reduce their
exposure to the mortgage market, with GSE and government loans
already accounting for approximately 88% of all mortgage loans
originated during the nine months ended September 30, 2011
according to Inside Mortgage Finance, and with weak housing and
employment markets contributing to elevated loan delinquencies
and defaults, we expect there to be numerous compelling
situations requiring our expertise. We believe the greatest
opportunities will be available to servicers with the proven
track record, scalable infrastructure and range of services that
can be applied flexibly to address different organizations
needs. To position ourselves for these opportunities, since 2010
we have expanded our business development team and hired a
dedicated senior executive whose primary role is to identify,
evaluate, and enhance acquisition and partnership opportunities
across the mortgage industry, including with national and
regional banks, mortgage and bond insurers, private investment
funds and various governmental agencies. We have also expanded
and enhanced our loan transfer, collections and loss mitigation
infrastructure in order to be able to accommodate substantial
additional growth. We expect these efforts to position us to be
a key participant in the long term restructuring and recovery of
the mortgage sector.
Our
Operations
Residential
Mortgage Servicing
We are a leading high touch non-bank residential mortgage
servicer with a broad array of servicing capabilities across the
residential mortgage product spectrum. We service loans as the
owner of MSRs, which we refer to as primary
servicing, and we provide servicing on behalf of other MSR
or mortgage owners, which we refer to as
subservicing. The servicing portfolio consists of
acquired MSRs, subservicing transferred from various third
parties and loans originated by our integrated originations
platform.
We service these loans using a high touch servicing model
designed to increase borrower repayment performance and home
ownership preservation and decrease borrower delinquencies and
defaults. Certain of the loans underlying the MSRs that we own
are credit sensitive in nature and the value of these MSRs is
more likely to be affected by changes in credit losses than by
interest rate movement. The remaining loans underlying our MSRs
are prime agency and government conforming residential mortgage
loans for which the value of these MSRs is more likely to be
affected by interest rate movement than changes in credit losses.
As of September 30, 2011, we serviced over 612,000
residential mortgage loans with an aggregate UPB of
$102.7 billion. As of September 30, 2011, our primary
servicing and subservicing portfolios
123
represented 45% and 55%, respectively, of our total servicing
portfolio. The table below indicates the portion of our
servicing portfolio that is primary servicing and subserviced
for others, as well as the portion of our primary servicing
portfolio that is credit sensitive and interest rate sensitive
as of and for the periods indicated. Our subservicing portfolio
is assumed to be credit sensitive in nature.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Servicing Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid principal balance (by investor):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Sensitive Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GSE/FHA
|
|
|
$10,227
|
|
|
|
$22,897
|
|
|
|
$19,675
|
|
|
|
$17,595
|
|
RMBS
|
|
|
9,415
|
|
|
|
8,390
|
|
|
|
7,519
|
|
|
|
6,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Credit Sensitive Loans
|
|
|
19,642
|
|
|
|
31,287
|
|
|
|
27,194
|
|
|
|
24,567
|
|
Interest Sensitive Loans-GSE/FHA
|
|
|
1,700
|
|
|
|
1,584
|
|
|
|
7,210
|
|
|
|
11,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Primary Portfolio
|
|
|
21,342
|
|
|
|
32,871
|
|
|
|
34,404
|
|
|
|
36,510
|
|
Subservicing Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid principal balance (by investor):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Servicing
|
|
|
|
|
|
|
793
|
|
|
|
4,078
|
|
|
|
9,730
|
|
GSE/FHA
|
|
|
|
|
|
|
|
|
|
|
25,674
|
|
|
|
33,023
|
|
RMBS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Subservicing Portfolio
|
|
|
|
|
|
|
793
|
|
|
|
29,772
|
|
|
|
56,017
|
|
Servicing under contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Servicing Portfolio
|
|
|
$21,342
|
|
|
|
$33,664
|
|
|
|
$64,176
|
|
|
|
$102,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Summary Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
$74,601
|
|
|
|
$100,133
|
|
|
|
$182,842
|
|
|
|
$175,241
|
|
Net income
|
|
|
14,718
|
|
|
|
7,502
|
|
|
|
14,230
|
|
|
|
8,484
|
|
The table below provides detail of the characteristics and key
performance metrics of our servicing portfolio as of or for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011(2)
|
|
|
|
(in millions, except for average loan amount and loan
count)
|
|
|
Loan countservicing
|
|
|
159,336
|
|
|
|
230,615
|
|
|
|
389,172
|
|
|
|
550,283
|
|
Ending unpaid principal balance
|
|
|
$21,342
|
|
|
|
$33,664
|
|
|
|
$64,176
|
|
|
|
$92,527
|
|
Average unpaid principal balance
|
|
|
$12,775
|
|
|
|
$25,799
|
|
|
|
$38,653
|
|
|
|
$78,351
|
|
Average loan amount
|
|
|
$133,943
|
|
|
|
$145,977
|
|
|
|
$164,904
|
|
|
|
$168,144
|
|
Average coupon
|
|
|
7.49
|
%
|
|
|
6.76
|
%
|
|
|
5.74
|
%
|
|
|
5.46
|
%
|
Average FICO credit score
|
|
|
588
|
|
|
|
644
|
|
|
|
631
|
|
|
|
667
|
|
60+ delinquent (% of
loans)(1)
|
|
|
13.1
|
%
|
|
|
19.9
|
%
|
|
|
17.0
|
%
|
|
|
14.7
|
%
|
Total prepayment speed (12 month constant pre-payment rate)
|
|
|
16.2
|
%
|
|
|
16.3
|
%
|
|
|
13.3
|
%
|
|
|
12.5
|
%
|
|
|
|
(1) |
|
Loan delinquency is based on the current contractual due date of
the loan. In the case of a completed loan modification,
delinquency is based on the modified due date of the loan. |
|
|
|
(2) |
|
For September 30, 2011, our ending UPB excludes our
September 30, 2011 servicing portfolio acquisition
consisting of approximately 62,000 residential mortgage loans
with a UPB of $10.2 billion whose servicing rights were
acquired on September 30, 2011 but for an interim period
continued to be subserviced by the predecessor servicer. |
124
Our
Servicing Model
Our servicing business produces strong recurring, contractual
fee-based revenue with minimal credit risk. Servicing fees are
primarily based on the aggregate UPB of the loans serviced and
the payment structure varies by loan source and type. For loans
that we do not originate, the services we provide and the fees
we receive vary depending on our agreement with the owner of the
mortgage loan or the owner of the MSR, as the case may be. These
include differences in rate of servicing fees as a percentage of
UPB and in the structure of advances. For a more detailed
description of advances, see IndustryServicing
Industry Overview.
Our high touch servicing model emphasizes individual default
specialist accountability for asset performance, which we refer
to as credit loss ownership, and loss mitigation
practices to improve asset performance and reduce loan defaults
and foreclosures. We seek to ensure that each loan that we
service is paid in accordance with its terms. In circumstances
where the borrower is, or is at risk of becoming, delinquent or
in default, we employ both industry standard and proprietary
strategies to work proactively with borrowers in an effort to
avoid foreclosure by keeping borrowers in their homes and
bringing them current on their loans. We refer to this frequent
interaction with borrowersvia phone, Internet, mailings,
and personal contact methodsas high touch loan servicing.
Our high touch servicing model and operating culture have proven
especially valuable in the current environment characterized by
elevated borrower delinquencies.
To ensure a customer-centric focus, we have separate account
resolution and foreclosure prevention groups for each type of
mortgage owner for which we service loans. We maintain
centralized loan administration and default management groups,
which provide services to all customers.
We are dedicated to a culture of customer service and credit
ownership for our servicing employees. We hire recent college
graduates and train them in the mortgage servicing business by
systematically rotating them through a variety of our business
teams. Our new employees initially work on performing loans and
loans that are less than 30 days past due. After gaining
experience in this environment, we train our employees in the
more challenging 60 and 90 day delinquent categories, where
we particularly emphasize a culture of ownership and
accountability.
To select the best resolution option for a delinquent loan, we
perform a structured analysis of all options using information
provided by the borrower as well as external data. We use recent
broker price opinions, automated valuation models and other
methods to value the property. We then determine the option with
the best expected outcome for the owner of the mortgage loan.
Where appropriate, we perform modifications, often facilitated
by government programs such as HAMP. In the current environment,
such loan modifications often provide a better outcome for
owners of mortgage loans than foreclosure. We believe that our
high touch servicing model is more effective in keeping
borrowers in their homes and bringing them current on their
loans. This is a win-win situation for the owners of mortgage
loans or MSRs, as the case may be, as well as for the borrowers
that we serve. We conducted over 21,000 loan modifications in
the nine months ended September 30, 2011 as compared to
over 41,000 in 2010. The majority of loans modified were
delinquent, although we modified some performing loans
proactively under the American Securitization Forum guidelines.
Although the most common term modified is the interest rate,
some modifications also involve the forbearance or rescheduling
of delinquent principal and interest. Of the loans we modified
in the nine months ended September 30, 2011, over 8,000
were modified pursuant to the Making Home Affordable plan
(MHA). Under the MHA, we receive an annual financial
incentive for up to four years, provided certain conditions are
met. At the same time, we forego uncollected late fees incurred
in the year of modification for each qualifying loan
modification.
125
The GSEs act as a source of liquidity for the secondary mortgage
market and contract with various independent servicers to
service their mortgage loan portfolio. In transactions with the
GSEs, we are required to follow specific guidelines that impact
the way we service and originate mortgage loans including:
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our staffing levels and other servicing practices;
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the servicing and ancillary fees that we may charge;
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our modification standards and procedures; and
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the amount of advances that are reimbursable.
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In December 2009, we entered into a strategic relationship with
a GSE, which contemplates, among other things, significant MSRs
and subservicing transfers to us upon terms to be determined.
Under this arrangement, if certain delivery thresholds have been
met, the GSE may require us to establish an operating division
or newly created subsidiary with separate, dedicated employees
within a specified timeline to service the loans underlying the
MSRs or subservice the MSRs underlying the subservicing
transfers. After a specified time period, the GSE may purchase
the subsidiary at an agreed upon price.
Our
Servicing Portfolio
Our servicing portfolio consists of MSRs we retain from loans
that we originate; MSRs we acquire from third party investors,
including in transactions facilitated by GSEs, such as Fannie
Mae and Freddie Mac; and MSRs we manage through subservicing
contracts with third party investors. Our loan servicing
operations are located in Lewisville, Texas. In October 2011, we
entered into an operating sublease agreement for approximately
53,000 square feet of office space in Houston, Texas, which
we plan to use as we continue to grow our servicing business.
The loans we service have typically been
securitizedmeaning that the originator of the loan has
pooled the loan together with multiple other loans and then sold
securities to third party investors that are secured by loans in
the securitization pool. We typically service loans that have
been securitized pursuant to one of two arrangements: as a
primary servicer or as a subservicer.
Primary
Servicing
As a primary servicer, we service loans by purchasing the MSRs
from the owner of the loans or retaining the MSRs related to the
loans we originate. Pursuant to our servicing arrangements, we
generally receive a contractual per loan fee between 25 to 50
basis points annually on the UPB, with a weighted average across
our servicing portfolio of approximately 33 basis points.
The servicing fees are typically supplemented by incentive fees
and ancillary fees. Incentive fees include modification
initiation and success fees from HAMP and modification or
collateral workout related incentives from various pool owners
and GSEs. Ancillary fees include late fees, non-sufficient funds
fees, convenience fees and interest income earned on loan
payments that have been collected but have not yet been remitted
to the owner of the mortgage loan, or float.
In addition to acquiring MSRs on a standalone basis, we have
also developed an innovative model for investing on a capital
light basis by co-investing with financial partners in excess
MSRs. In these transactions, we provide all servicing functions
in exchange for the basic servicing fee, then share the excess
fee with our co-investment partner on a pro rata basis.
A key determinant of the profitability of our primary servicing
portfolio is the longevity of the servicing cash flows before a
loan is repaid or liquidates. As one of only a few non-bank
servicers with an integrated originations platform, we are often
able to extend the longevity of the servicing cash flows through
loan refinancings by retaining the servicing rights of the loans
we re-originate. Because the refinanced loans
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typically have lower interest rates or lower monthly payments,
and, in general, subsequently refinance more slowly and default
less frequently, these refinancings also typically improve the
overall quality of our primary servicing portfolio.
As a primary servicer, we have additional opportunities to
provide an array of adjacent services, including providing
services for delinquent loans, managing loans in the
foreclosure/REO process and providing title insurance agency,
loan settlement and valuation services on newly originated and
re-originated loans for a base or incentive fee. See
Adjacent Businesses.
As of September 30, 2011, our primary servicing portfolio
consisted of loans with an aggregate UPB of $46.7 billion,
representing 45% of our total servicing portfolio. We have grown
our primary servicing portfolio to $46.7 billion in UPB as
of September 30, 2011 from $12.7 billion in UPB in
2007, representing a compound annual growth rate of 41.5%.
The charts below illustrate the composition of our primary
servicing portfolio by type and product as of September 30,
2011.
As set forth in the chart below, our primary servicing portfolio
is diversified with respect to geography. As of
September 30, 2011, 56.8% of the aggregate UPB of the loans
we service were secured by properties located in the ten largest
states by population. Therefore, we are not as susceptible to
local and regional real estate price fluctuations as primary
servicers whose portfolios are more concentrated in a single
state or region.
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Subservicing
Alternatively, we may enter into a subservicing agreement with
MSR or mortgage owners pursuant to which we agree to service the
loans on behalf of such MSR or mortgage owners. Under such
subservicing arrangements, where we do not pay to acquire the
MSRs and only have intra-month advance obligations, we generally
receive a contractual per loan fee the equivalent of between 5
to 45 basis points annually on the UPB.
As with our primary servicing arrangements, we typically
supplement our subservicing fees through incentive and ancillary
fees as well as the provision of adjacent services. See
Adjacent Businesses.
As of September 30, 2011, our subservicing portfolio consisted
of loans with an aggregate UPB of $56.0 billion, representing
55% of our total servicing portfolio. Since we entered the
subservicing business in August 2008, we have grown our
subservicing portfolio to $56.0 billion as of September 30, 2011.
The charts below illustrate the composition of our subservicing
portfolio by type and product as of September 30, 2011.
As set forth in the chart below, our subservicing portfolio is
diversified with respect to geography. As of September 30,
2011, 59.4% of the aggregate UPB of the loans we subservice were
secured by properties located in the ten largest states by
population. Therefore, we are not as susceptible to local and
regional real estate price fluctuations as subservicers whose
portfolios are more concentrated in a single state or region.
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Adjacent
Businesses
We operate or have investments in several adjacent businesses
which provide mortgage-related services that are complementary
to our servicing and originations businesses. These businesses
offer an array of ancillary services, including providing
services for delinquent loans, managing loans in the
foreclosure/REO process and providing title insurance agency,
loan settlement and valuation services on newly originated and
re-originated loans. We offer these adjacent services in
connection with loans we currently service, as well as on a
third party basis in exchange for base and/or incentive fees. In
addition to enhancing our core businesses, these adjacent
services present an opportunity to increase future earnings with
minimal capital investment, including by expanding the services
we provide to large banks and other financial institutions
seeking to outsource these functions to a third party.
Key
Drivers of Profitability
The following key factors drive the amount of profit we generate
from our servicing operations.
Aggregate UPB: Servicing fees are usually
earned as a percentage of UPB or a per loan amount and growth in
the UPB of a portfolio means growth in servicing fees.
Additionally, a larger servicing portfolio generates increased
ancillary fees and leads to larger custodial balances that
generate greater float income. A larger servicing portfolio also
drives increases in expenses, including additional interest
expense to finance the servicing advances as the size of our
portfolio increases.
In addition, servicers of GSE-insured loans collect servicing
fees only on performing loans while servicers of non-GSE
residential mortgage-backed securities (MBS) are
entitled to servicing fees on both performing loans and
delinquent loans. The servicing fee relating to delinquent loans
is accrued and paid from liquidation proceeds ahead of the
reimbursement of advances. The aggregate UPB from which we earn
fees thus depends partly on the relative number of
non-performing GSEs we have in our portfolio. Because our high
touch servicer model places more emphasis on borrower contact
and interaction, we believe we can effectively minimize the
percentage of such non-performing assets and therefore maximize
the UPB from which we earn servicing fees.
Stability and longevity of servicing cash
flows: We are able to generate servicing fees by
extending the longevity of our serving cash flows. Prepayment
speed, which is the measurement of how quickly UPB is reduced,
thus significantly affects our profitability. Items reducing UPB
include normal monthly principal
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payments, refinancings, voluntary property sales and
involuntary property sales such as foreclosures or short sales.
Prepayment speed impacts future servicing fees, amortization of
servicing rights, float income, interest expense on advances and
compensating interest expense. When prepayment speed increases,
our servicing fees decrease faster than projected due to the
shortened life of a portfolio. The converse is true when
prepayment speed decreases.
Prepayment speed affects our float income as well. Decreased
prepayment speed typically leads to our holding lower float
balances before remitting payoff collections to the investor and
lower float income due to a lower invested balance. Lower
prepayments have been associated with higher delinquency rates,
higher advance balances and interest expense.
In addition, as one of only a few non-bank servicers with an
integrated originations platform, we are often able to extend
the longevity of the servicing cash flows through loan
refinancings by retaining the servicing rights of the loans we
re-originate. Because the refinanced loans typically have lower
interest rates or lower monthly payments, and in general,
subsequently refinance more slowly and default less frequently,
these refinancings also typically improve the overall quality of
our primary servicing portfolio.
Ability to add new servicing business: We seek
to increase the size of our servicing portfolio in several ways.
We increase our primary servicing portfolio by acquiring MSRs,
either on a standalone basis or by co-investing with financial
partners in excess MSRs. We also grow our
subservicing portfolio by entering into additional subservicing
arrangements with MSR or mortgage owners.
In addition, we have highly scalable technology and
infrastructure, which have enabled us to manage rapid growth
over the past several years while maintaining our high servicing
standards and enhancing loan performance. We have made
significant investments in loan administration, customer
service, compliance and loss mitigation, as well as in employee
training and retention. In addition, our staffing, training and
performance tracking programs, centralized in the Dallas/Fort
Worth, Texas area, have allowed us to expand the size of our
servicing team while maintaining high quality standards.
Cost of servicing: Our profitability is
inversely proportional to our cost of servicing. As a result, we
actively manage our servicing costs in order to maximize
profitability. However, several factors affect our servicing
costs.
Delinquent loans are more expensive to service than performing
loans because our cost of servicing is higher and, although
credit losses are generally not a concern for our financial
results, our advances to investors increase, which results in
higher financing costs. Performing loans include those loans
that are current or have been delinquent for less than
30 days in accordance with their original terms and those
loans on which borrowers are making scheduled payments under
loan modifications, forbearance plans or bankruptcy plans. We
consider all other loans to be delinquent.
When borrowers are delinquent, the amount of funds that we are
required to advance to the owners of the loans on behalf of the
borrowers increases. While the collectability of advances is
generally not an issue, we do incur significant costs to finance
those advances. We intend to utilize both securitization and
revolving credit facilities to finance our advances. As a
result, increased delinquencies result in increased interest
expense.
The cost of servicing delinquent loans is higher than the cost
of servicing performing loans primarily because the loss
mitigation techniques that we employ to keep borrowers in their
homes are more costly than the techniques used in handling a
performing loan. When loans are performing, we have limited
interaction with the borrowers, and relatively low-cost customer
service personnel conduct most of the interaction. Once a loan
becomes delinquent, however, we must employ our loss mitigation
capabilities to work with the borrower to return the loan to
performing status. These procedures involve increased contact
with the borrower and the development of forbearance plans, loan
modifications or other techniques by highly skilled consultants
with
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higher compensation. On those occasions when loans go into
foreclosure, we incur additional costs related to both
coordinating the work of local attorneys to represent us in the
foreclosure process and employing specialists to service the
real estate and manage the sale of those foreclosed properties
on behalf of our investors. A significant increase in
delinquencies would cause us to increase our activities in these
areas resulting in increased operating expenses.
Our high touch servicer model, which seeks to improve asset
performance and reduce loan defaults and foreclosures, allows us
to minimize the additional costs associated with such defaults
and foreclosures.
Capital efficiency: Our ability to use our
capital efficiently in managing growth is also a significant
driver of our profitability. We employ capital light strategies,
including our innovative structure for co-investment in excess
MSRs with financial partners as well as subservicing
arrangements, to add new mortgage servicing portfolios with
relatively low capital investment. Through December 31,
2011, we have added $10 billion of loan servicing through
excess MSRs and expect to continue to deploy this co-investment
structure in the future, while also evaluating subservicing
arrangements as mortgage owners seek to transfer credit stressed
loans to high touch servicers to improve loan performance.
Servicing Organization
The servicing organization is comprised of four primary
functional areas as detailed below.
Loan Administration: The loan administration
area includes the customer service, payment processing, loan
accounting, escrow, taxes and insurance and document
administration groups. The customer service group is primarily
responsible for handling borrower inquiries including date of
last payment, date of next payment due, arranging for a payment,
refinance assistance and standard escrow and balance questions.
In November 2011, the customer service group managed over
123,000 calls and service inquiries. The payment processing
group is responsible for posting borrower payments and managing
any payment-related issues. The majority of the borrower
payments are posted electronically via our lock-box operation,
Western Union, Automated Clearing House or web-based payments.
The loan accounting group manages the payoff of loans. The
escrow, taxes and insurance group manage all escrow balances and
the external vendors we utilize for property insurance and tax
tracking. The document administration group manages the lien
release process upon the payoff of a loan and the tracking of
loan documents for new originations.
Account Resolution: The account resolution
group is responsible for early stage collections (borrowers who
are 1 to 59 days delinquent). For accounts where payments
are past due but not yet delinquent (less than 30 days past
due), we use a behavioral scoring methodology to prioritize our
borrower calling efforts. The key drivers of behavioral score
are payment pattern behavior (i.e., if the borrower historically
has made their payment on the 5th of each month and that
pattern changes more attention will be paid to the borrower) and
updated credit scores. For accounts 31 to 59 days
delinquent, default specialists are assigned individual accounts
and are charged with making contact with the delinquent borrower
to understand the reason for delinquency and attempt to collect
a payment or work on an alternative solution. In the account
resolution group, we use a combination of predictive dialer
technology and account level assignments to contact the
borrowers. The primary objective of this group is to reduce
delinquency levels.
Foreclosure Prevention: The foreclosure
prevention group, commonly referred to in the industry as loss
mitigation, is responsible for late stage collections (borrowers
who are 60 or more days delinquent). The primary focus of this
group is reducing delinquency levels. All accounts in this group
are assigned to individual default specialists loss mitigators.
The primary role of the default specialist loss mitigator is to
contact the borrower and understand the reasons for the
borrowers delinquency and the borrowers desire and
ability to stay in their house. The foreclosure prevention group
performs most of our government and other loan modifications.
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Default Management: The default management
area includes the foreclosure, bankruptcy, REO and claims
processing groups. The foreclosure group manages accounts
involved in the foreclosure process. In the late stage
delinquency status, we will initiate foreclosure proceedings in
accordance with state foreclosure timelines. Accounts in the
foreclosure group are assigned to foreclosure specialists based
on a state-specific assignment. The primary focus of the
foreclosure group is to perform the foreclosure process in
accordance with the state timelines. Any account which has filed
for bankruptcy is assigned to a bankruptcy specialist who will
administer the bankruptcy plan proceedings in accordance with
applicable law and in conjunction with an outsourcing firm. The
REO group manages properties within the servicing portfolio that
have completed the foreclosure process. We use both internal and
external resources to manage the disposition of the REO
properties. The primary goal of the REO team is to dispose of
the property within an acceptable timeframe at the lowest
possible loss.
Originations
We are one of only a few non-bank servicers with a fully
integrated loan originations platform. We are licensed to
originate residential mortgage loans in all the 48 contiguous
states plus Alaska and the District of Columbia and have
obtained all required federal approvals to originate FHA,
Department of Veterans Affairs (VA) and conventional
loans. We originate primarily conventional agency and government
conforming residential mortgage loans, which we either sell to
other secondary market participants, referred to as conduits, or
securitize through the issuance of Fannie Mae, Freddie Mac or
Ginnie Mae bonds. As such, we minimize any credit or interest
rate risk by not retaining loans on our balance sheet for more
than approximately 30 days beyond funding. As set forth in
the table below, originations volumes have increased
significantly as we have expanded our conventional market
footprint.
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Nine Months
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Ended
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Year Ended December 31,
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September 30,
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2008
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2009
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2010
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2011
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(unaudited)
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(in millions)
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Originations Volume:
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Retail
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$538
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$1,093
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$1,608
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$1,506
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Wholesale
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4
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386
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1,184
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780
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Total Originations
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$542
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$1,479
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$2,792
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$2,286
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(in thousands)
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Summary Financial Data:
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Total revenue
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$22,574
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$55,593
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$84,540
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$84,815
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Net income (loss)
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(7,590
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8,884
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662
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14,491
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We view our originations platform as an important tool to
complement and enhance our servicing business. A key determinant
of the profitability of our primary servicing portfolio is the
longevity of the servicing cash flows before a loan is repaid or
liquidates. Our originations efforts are primarily focused on
re-origination, which involves actively
working with existing borrowers to refinance their mortgage
loans. Because the refinanced loans typically have lower
interest rates or lower monthly payments, and, in general,
subsequently refinance more slowly and default less frequently,
these refinancings also typically improve the overall quality of
our primary servicing portfolio. In addition, our re-origination
strategy allows us to generate additional loan servicing more
cost-effectively than the MSRs can otherwise be acquired in the
open market. Finally, with our in-house originations
capabilities, we believe we are better protected against
declining servicing cash flows as we replace servicing run-off
through new loan originations or retain our servicing portfolios
through re-origination. While our originations business is
profitable on a standalone basis, we believe its primary value
is to stabilize and enhance our loan servicing cash flows.
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Our
Originations Platform
We originate loans through our Consumer Direct Retail channel
and our Wholesale channel. Our largest channel is our Consumer
Direct Retail channel, which operates as a centralized call
center. Our second largest channel, the Wholesale channel,
involves brokers sourcing borrowers for us. In 2011, we reduced
the footprint of our traditional retail branch network by
closing offices in non-strategic locations (Alabama, Tennessee,
Vermont and Massachusetts). Our remaining retail branches in
Texas and the Midwest are focused on building our core
relationships with builders and realtors. Our strategy enables
us to diversify and grow our originations in all interest rate
cycles without becoming overly reliant on any single segment of
the mortgage loan market.
We originate purchase money loans and refinance existing loans,
including those that we service. Our strategy is to mitigate the
credit, market and interest rate risk from loan originations by
either selling newly originated loans or placing them in GSEs or
government securitizations. We typically sell new loans within
30 days of origination, and we do not expect to hold any of
the loans that we currently originate on our balance sheet on a
long-term basis. At the time of sale, we have the option to
retain the MSRs on loans we originate.
Our originations capability differentiates us from other
non-bank, high touch loan servicers without an integrated
originations platform by:
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providing us with an organic source of new loans to service as
existing loans are repaid or otherwise
liquidatedoriginated loans serviced by us generate higher
returns than comparable MSRs that we would acquire from a third
party;
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providing an attractive complement to servicing by allowing us
to modify and refinance mortgage loans, including loans that we
service;
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creating a diversified source of revenue that we believe will
remain stable in a variety of interest rate
environments; and
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building brand recognition.
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Originations
Organization
Each of our loan originations channels has dedicated operations,
support and fulfillment functions, including processing,
underwriting, closing and shipping, which are primarily
performed at our offices in Lewisville, Texas. As part of our
efforts to manage credit risk and enhance operating
efficiencies, the underwriting, closing, funding and shipping
for all of our originations channels are managed centrally.
Centralizing these functions enables us to control loan quality,
loan processing times, cost and, ultimately, borrower
satisfaction. Our two mortgage loan originations channels are
discussed in more detail below:
Consumer
Direct Retail Originations
In the nine months ended September 30, 2011, our largest
originations channel was our Consumer Direct Retail channel. We
employ a single centralized call center strategy leveraging
multiple potential borrower lead sources. In our Consumer Direct
Retail channel, each sales team typically consists of between 10
and 12 mortgage professionals managed by a sales leader. Three
to four sales leaders report to a senior vice president
responsible for the specific lead source.
Our primary divisions within our Consumer Direct Retail channel
are Renewal, New Customer Acquisition, and Partner Plus. Each
division specializes in meeting the needs of their specific
target borrowers.
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This strategy provides a flexible organizational structure
capable of shifting to new opportunities quickly. The three
divisions of our Consumer Direct Retail channel are as follows:
Renewal: Focuses on retaining current
borrowers in our servicing portfolio and utilizes an integrated
approach with our Servicing Segment to capture borrowers who
either qualify to refinance their current mortgage or who take
action indicating they may be paying off their loan. The Renewal
teams receive leads for borrowers from telemarketing, live
transfers and scheduled callbacks from Customer Service and
website programs.
New Customer Acquisition: Focuses on
generating new mortgage business from prospective borrowers. We
use credit bureau modeling to identify borrowers who are likely
to be in the market for and likely to qualify to refinance their
existing mortgage loan. Marketing channels include
telemarketing, direct marketing, Internet lead aggregators,
credit bureau triggers such as mortgage inquiries and website
programs.
Partner Plus: Focuses on serving the needs of
strategic and joint marketing clients who, in many cases, do not
have the originations capabilities to provide refinancing for
their own portfolios. Currently, we are providing origination
services to several servicers without originations capability.
In many instances, these alliances involve providing certain
incentives for the borrower to refinance, such as the payment of
closing fees. These programs typically begin with a direct mail
announcement of the relationship followed by direct marketing
campaigns to increase borrower responses. This channel also
offers REO financing for us and our partners through a
centralized platform in Lewisville, Texas.
Wholesale
Originations
The primary business strategy of the Wholesale channel is to
acquire high-quality servicing at a reduced price through a
network of non-exclusive relationships with various approved
mortgage companies and mortgage brokers. The Wholesale channel
is comprised of five sales regions throughout the United States,
each staffed with a regional sales manager, and three
centralized sales regions that operate out of our offices in
Lewisville, Texas. Each region generally has 8 to 12 account
executives whose primary responsibility is to source and service
mortgage brokers. We provide a variety of conforming
conventional mortgage loans to our brokers to allow them to
better service their borrowers.
Mortgage brokers identify applicants, help them complete a loan
application, gather required information and documents, and act
as our liaison with the borrower during the lending process. We
review and underwrite an application submitted by a broker,
accept or reject the application, determine the range of
interest rates and other loan terms, and fund the loan upon
acceptance by the borrower and satisfaction of all conditions to
the loan. By relying on brokers to market our products and
assist the borrower throughout the loan application process, we
can increase loan volume through our Wholesale channel with
proportionately lower increases in overhead costs compared with
the costs of increasing loan volume in loan originations through
our retail channels.
New brokers are sourced through our account executives, industry
trade shows forums and our website. The broker approval process
is critical to maintaining a high quality network of brokers.
Brokers must meet various requirements and must complete the
broker application package, provide evidence of appropriate
state licenses, articles of incorporation, financial statements,
resumes of key personnel and other information as needed. The
Wholesale operations team reviews all submitted materials to
determine whether the broker should be approved. The broker
application is reviewed and investigated by our quality control
and risk management department before final approval is
provided. The process is designed to ensure that borrowers we
acquire through our Wholesale channel are working with reputable
and legitimate mortgage brokers.
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Our ongoing investment in technology has allowed us to provide
our broker network with the ability to obtain instantaneous
online loan decisions, product options and corresponding
pricing. We believe that the utility and convenience of online
loan decisions and product options are a value-added service
that has and will continue to solidify our business
relationships. In addition, our website provides our brokers
with loan status reports, product guidelines, loan pricing,
interest rate locks and other added features. We expect to
continue to adapt web-based technologies to enhance our
one-on-one
relationships with our brokers.
Technology
In the vast majority of cases, our key, critical systems are
hosted, managed and maintained by our in-house Information
Technology team. Our key systems consist of a combination of
vendor developed applications as well as internally developed
proprietary systems. On our most critical vendor developed
applications (OPUS, XpressQual, TMO, LSAMS, FORTRACS, and
Equator) we maintain license rights to the source code to enable
in-house customization of these systems to meet our business
needs in a time effective manner.
Servicing
For our Servicing Segment, our system of record is LSAMS, which
we use for all loan accounting functions, claims functions and
supports our Customer Service functions. Our early stage account
collection efforts are focused and prioritized through the use
of ESP, our proprietary early delinquency score model, used to
identify higher risk accounts. Our collections and loss
mitigation efforts are supported by Remedy, a proprietary
default management system which, along with our proprietary Net
Present Value engine and our proprietary Property Valuation
Management system, enables our loan resolution personnel to
guide our borrowers to the optimal economic workout alternative
based on the unique factors of each borrowers situation.
For our foreclosure and bankruptcy processes, we use the
FORTRACS system, which integrates with the Lendstar system to
enable online communications and case tracking with our attorney
network. For properties whereby we complete foreclosure and take
them into REO status, we utilize the web-based REO management
system REOTrans to manage the marketing and disposition of our
owned real estate. To support our Investor Reporting functions,
we use a combination of systems that include LSAMS and Lewtan
ABS, a vendor hosted system. We also have a website,
www.NationstarMtg.com, that is a fully automated system to apply
and process mortgage loan applications and that our existing
borrowers can access to receive information on their account.
Information on, or accessible through, our website is not a part
of this prospectus.
Originations
The critical systems that support our loan originations
activities include:
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MLS (Marketing Lead System), our proprietary marketing lead
system which routes, tracks and delivers leads to our loan
officers, who we refer to as our mortgage professionals;
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OPUS, a web-based
point-of-sale
system that provides product eligibility and pricing to our
retail sales force;
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TMO, our loan originations system used for loan processing,
underwriting and closing;
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XpressQual, a web-based
point-of-sale
system that provides product eligibility and pricing to our
wholesale brokers and allows them to submit loans to us online;
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www.NationstarBroker com, our website for wholesale brokers to
receive information on our products and services;
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CLASS, our proprietary system used to manage our sales
relationships and licensing of our wholesale brokers;
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ODE, a rules-based pricing and eligibility engine that is
integrated with OPUS, XpressQual and TMO;
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High Cost Fee Engine, our proprietary compliance fee engine that
enforces both federal and local high cost and fee limits
throughout the loan originations process; and
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CLT (Compliance License Tracker), our proprietary system that
maintains and tracks all mortgage professionals locational
licensing to ensure that leads and applications are only
processed by properly licensed mortgage professionals.
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For our Consumer Direct Retail channel, the loan originations
process starts when a lead is imported (or accepted) into our
Marketing Lead System (MLS), a propriety system that our
mortgage professionals use to manage the initial borrower
contact process. Once a mortgage professional has made contact
with a potential borrower, the mortgage professional moves the
lead into OPUS, our web-based
point-of-sale
system. Here, our mortgage professionals capture the necessary
loan application information, obtain credit reports to determine
full product eligibility and establish pricing to facilitate the
sales process. Once our mortgage professionals have helped our
borrowers determine the program and pricing that meets their
needs, the loan application is transferred into TMO, our loan
originations system where we complete the loan process,
underwrite the loan, prepare the closing documents and complete
the loan process.
For our Wholesale originations channel, we provide our brokers a
web-based point of sale system, XpressQual, to use to access
product eligibility and pricing and to submit loans online. We
also use TMO in this channel for the processing, underwriting
and closing functions. Through XpressQual, our brokers have
access to a web-based portal where they can upload their loan
applications to determine product eligibility and loan pricing.
Once they select a program and price, the broker is able to
submit the file to us for processing as well as lock the rate
using XpressQual. As in our retail originations channels, once
submitted for processing, the file is transferred into TMO to
verify the application information, clear conditions, underwrite
and close the loan. Supporting OPUS, XpressQual and TMO, we also
utilize a vendor developed rules-based pricing and eligibility
engine called ODE as well as a proprietary compliance fee engine
that enforces high cost and fee limits throughout the entire
originations process. There is also a Compliance License Tracker
system that maintains and tracks all mortgage professional and
location level licensing. All systems are fully integrated and
share information to ensure complete,
up-to-date
and accurate information for reporting purposes. To protect our
business in the event of disaster, we have implemented a
disaster recovery data facility in a co-location in Irving,
Texas where we maintain near real-time replication of all
critical servicing systems and data.
Employees
As of September 30, 2011, we had a total of
2,584 employees, all of whom are based in the United
States. None of our employees are members of any labor union or
subject to any collective bargaining agreement and we have never
experienced any business interruption as a result of any labor
dispute. Our employees are allocated among our business
functions as follows:
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59% are in our Servicing Segment;
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28% are in our Originations Segment; and
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13% are in support functions, including Human Resources,
Accounting and other corporate functions.
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In our Servicing Segment, we hire recent college graduates and
teach them our high touch servicing model. Our loan servicers
and debt default specialists follow a training program in which
they first service performing loans and slightly delinquent
loans. As they gain experience, they service more delinquent
loans and assume increased personal responsibility for servicing
a certain set of loans and contacting certain borrowers.
In our Originations Segment, we hire experienced conventional
mortgage originators and provide them with training to acclimate
them to us, as well as compliance and regulatory training.
Regulation
Our business is subject to extensive federal, state and local
regulation. Our loan originations, loan servicing and debt
collection operations are primarily regulated at the state level
by state licensing authorities and administrative agencies.
Because we do business in all fifty states and the District of
Columbia, we, along with certain of our employees who engage in
regulated activities, must apply for licensing as a mortgage
banker or lender, loan servicer
and/or debt
default specialist, pursuant to applicable state law. These
state licensing requirements typically require an application
process, processing fees, background checks and administrative
review. Our servicing operations center in Lewisville, Texas is
licensed (or maintains an appropriate statutory exemption) to
service mortgage loans in all fifty states and the District of
Columbia. Our retail loan originations channel is licensed to
originate loans in at least the states in which it operates, and
our direct originations channel is licensed to originate loans
in the 48 contiguous states plus Alaska and the District of
Columbia. From time to time, we receive requests from states and
other agencies for records, documents and information regarding
our policies, procedures and practices regarding our loan
originations, loan servicing and debt collection business
activities, and undergo periodic examinations by state
regulatory agencies. We incur significant ongoing costs to
comply with these licensing requirements.
While the U.S. federal government does not primarily
regulate loan originations, the federal Secure and Fair
Enforcement for Mortgage Licensing Act of 2008, the (SAFE
Act), requires all states to enact laws that require all
U.S. sales representatives to be individually licensed or
registered if they intend to offer mortgage loan products. These
licensing requirements include enrollment in the Nationwide
Mortgage Licensing System, application to state regulators for
individual licenses, a minimum of 20 hours of pre-licensing
education, an annual minimum of eight hours of continuing
education and the successful completion of both national and
state exams.
In addition to licensing requirements, we must comply with a
number of federal consumer protection laws, including, among
others:
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the Gramm-Leach-Bliley Act, which requires us to maintain
privacy with respect to certain consumer data in our possession
and to periodically communicate with consumers on privacy
matters;
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the Fair Debt Collection Practices Act, which regulates the
timing and content of debt collection communications;
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the Truth in Lending Act and Regulation Z thereunder, which
require certain disclosures to the mortgagors regarding the
terms of the mortgage loans;
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the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the credit history of
consumers;
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the Equal Credit Opportunity Act and Regulation B
thereunder, which prohibit discrimination on the basis of age,
race and certain other characteristics, in the extension of
credit;
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the Homeowners Protection Act, which requires the cancellation
of mortgage insurance once certain equity levels are reached;
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the Home Mortgage Disclosure Act and Regulation C
thereunder, which require financial institutions to report
certain public loan data;
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the Fair Housing Act, which prohibits discrimination in housing
on the basis of race, sex, national origin, and certain other
characteristics; and
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Regulation AB under the Securities Act, which requires
certain registration, disclosure and reporting for MBS.
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We must also comply with applicable state and local consumer
protection laws, which may impose more comprehensive and costly
restrictions than the regulations listed above. In a response to
the decline in the housing market and the increase in
foreclosures, many local governments have extended the time
period necessary prior to initiating foreclosure proceedings,
which prevent a servicer or trustee, as applicable, from
exercising any remedies they might have in respect of
liquidating a severely delinquent mortgage loan in a timely
manner.
On May 28, 2009, we voluntarily entered into an agreement
to actively participate as a loan servicer in HAMP, which
enables eligible borrowers to avoid foreclosure through a more
affordable and sustainable loan modification made in accordance
with HAMP guidelines, procedures, directives and requirements.
Loan modifications pursuant to HAMP may include a rescheduling
of payments or a reduction in the applicable interest rates and,
in some cases, a reduction in the principal amount due. Under
HAMP, subject to a program participation cap, we, as a servicer,
will receive an initial incentive payment of up to $1,500 for
each loan modified in accordance with HAMP subject to the
condition that the borrower successfully completes a trial
modification period. In addition, provided that a HAMP
modification does not become 90 days or more delinquent, we
will receive an incentive of up to $1,000. As of
November 30, 2011, 23,771 loans with a UPB of
$5.2 billion after modification had been modified through
HAMP.
On July 21, 2010, President Obama signed the Dodd-Frank Act
into law. The Dodd-Frank Act represents a comprehensive overhaul
of the financial services industry in the United States. The
Dodd-Frank Act includes, among other things: (1) the
creation of a Financial Stability Oversight Council to identify
emerging systemic risks posed by financial firms, activities and
practices, and to improve cooperation among federal agencies;
(2) the creation of the Bureau of Consumer Financial
Protection (CFPB) authorized to promulgate and
enforce consumer protection regulations relating to financial
products; (3) the establishment of strengthened capital and
prudential standards for banks and bank holding companies;
(4) enhanced regulation of financial markets, including
derivatives and securitization markets; (5) amendments to
the Truth in Lending Act aimed at improving consumer protections
with respect to mortgage originations, including originator
compensation, minimum repayment standards, and prepayment
considerations. On July 21, 2011, the CFPB obtained
enforcement authority pursuant to the Dodd-Frank Act and began
official operations. On October 13, 2011, the CFPB issued
guidelines governing how the agency supervises mortgage
transactions, which involves sending examiners to banks and
other institutions that service mortgages to assess whether
consumers interests are protected. On January 11,
2012, the CFPB issued guidelines governing examination
procedures for bank and non-bank mortgage originators. The exact
scope of and applicability of many of these requirements to us
are currently unknown, as the regulations to implement the
Dodd-Frank Act generally have not yet been finalized. These
provisions of the Dodd-Frank Act and actions by the CFPB could
increase our regulatory compliance burden and associated costs
and place restrictions on certain originations and servicing
operations, all of which could in turn adversely affect our
business, financial condition or results of operations.
On April 13, 2011, the federal agencies overseeing certain
aspects of the mortgage market, the OCC, the Federal Reserve and
the FDIC, entered into enforcement consent orders with 14 of the
largest mortgage
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servicers in the United States regarding foreclosure practices.
The enforcement consent orders require the servicers, among
other things, to: (1) promptly correct deficiencies in
residential mortgage loan servicing and foreclosure practices;
(2) make significant modifications in practices for
residential mortgage loan servicing and foreclosure processing,
including communications with borrowers and limitations on
dual-tracking, which occurs when servicers continue to pursue
foreclosure during the loan modification process;
(3) ensure that foreclosures are not pursued once a
mortgage has been approved for modification and establish a
single point of contact for borrowers throughout the loan
modification and foreclosure processes; and (4) establish
robust oversight and controls pertaining to their third party
vendors, including outside legal counsel, that provide default
management or foreclosure services. While these enforcement
consent orders are considered not to be preemptive of the state
actions, it is currently unclear how state actions and
proceedings will be affected by the federal consents.
On September 1, 2011 and November 10, 2011, the New
York Department of Financial Services entered into agreements
regarding mortgage servicing practices with seven financial
institutions. The additional requirements provided for in these
agreements will increase operational complexity and the cost of
servicing loans in New York. Other servicers, including us,
could be required to enter into similar agreements. In addition,
other states may also require mortgage servicers to enter into
similar agreements.
On December 1, 2011, the Massachusetts Attorney General
filed a lawsuit against five large mortgage providers alleging
unfair and deceptive business practices, including the use of
so-called robo-signers. In response, one of the
mortgage providers has halted most lending in Massachusetts.
Although we are not a party to the above enforcement consent
orders, we could become subject to the terms of the consent
orders if (1) we subservice loans for the servicers that
are parties to the enforcement consent orders; (2) the
agencies begin to enforce the consent orders by looking
downstream to our arrangement with certain mortgage servicers;
(3) the mortgage servicers for which we subservice loans
request that we comply with certain aspects of the consent
orders; or (4) we otherwise find it prudent to comply with
certain aspects of the consent orders. In addition, the
practices set forth in such consent orders may be adopted by the
industry as a whole, forcing us to comply with them in order to
follow standard industry practices, or may become required by
our servicing agreements. While we have made and continue to
make changes to our operating policies and procedures in light
of the consent orders, further changes could be required, and
changes to our servicing practices will increase compliance
costs for our servicing business, which could materially and
adversely affect our financial condition or results of
operations.
Competition
In our Servicing Segment, we compete with large financial
institutions and with other independent servicers. Our ability
to differentiate ourselves from other loan servicers through our
high touch servicing model and culture of credit largely
determines our competitive position within the mortgage loan
servicing industry.
In our Originations Segment, we compete with large financial
institutions and local and regional mortgage bankers and
lenders. Our ability to differentiate the value of our financial
products primarily through our mortgage loan offerings, rates,
fees and customer service determines our competitive position
within the mortgage loan originations industry.
Seasonality
Our Originations Segment is subject to seasonal fluctuations,
and activity tends to diminish somewhat in the winter months of
December, January and February, when home sales volume and loan
originations volume are at their lowest. This typically causes
seasonal fluctuations in our Originations Segments
revenue. Our Servicing Segment is not subject to seasonality.
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Intellectual
Property
We use a variety of methods, such as trademarks, patents,
copyrights and trade secrets, to protect our intellectual
property. We also place appropriate restrictions on our
proprietary information to control access and prevent
unauthorized disclosures.
Properties
Our principal executive headquarters is located in Lewisville,
Texas. At our main campus in Lewisville, Texas, we lease two
buildings containing an aggregate of approximately
201,000 square feet of general office space, pursuant to
two leases, both of which are currently due to expire in the
first half of 2014. In addition to serving as our principal
executive headquarters, our main Lewisville campus houses a
portion of our servicing operations and all of our Consumer
Direct Retail originations platform. We also own a parcel of
undeveloped land at our campus location which can be used for
future expansion.
We lease an additional approximately 40,000 square feet of space
in Lewisville, Texas, which is currently due to expire in August
2013. This building houses our wholesale loan originations
platform and some administrative support functions. We also
maintain two separate leases of approximately 83,000 and
80,000 square feet at another location in Lewisville,
Texas, which are currently due to expire in March 2017. In
October 2011, we entered into an operating sublease agreement
for approximately 53,000 square feet of office space in
Houston, Texas, which will expire in November 2014, which we
plan to use to tap into the ample human capital resources
available in the market while we continue to grow our servicing
business.
As of November 30 2011, we had seven Distributed Retail
branch leases. Our typical Distributed Retail branch office is
between 1,200 and 3,000 square feet with lease terms of
five years or less.
We have one lease of approximately 80,000 square feet on
property located in Parsippany, New Jersey which we no longer
utilize and which is being actively marketed for disposal.
Additionally, we have leases on 21 locations that we no longer
utilize. These leases are for square footage ranging from
approximately 150 square feet to 4,100 square feet and
expire at various dates through June 2014.
Legal
Proceedings
We are routinely and currently involved in legal proceedings
concerning matters that arise in the ordinary course of our
business. These legal proceedings range from actions involving a
single plaintiff to class action lawsuits with potentially tens
of thousands of class members. An adverse result in governmental
investigations or examinations, or private lawsuits, including
purported class action lawsuits, could have a material adverse
effect on our financial results. In addition, a number of
participants in our industry, including us, have been the
subject of purported class action lawsuits and regulatory
actions by state regulators, and other industry participants
have been the subject of actions by states Attorneys
General. Although we believe that we have meritorious legal and
factual defenses to the lawsuits in which we are currently
involved, the ultimate outcomes with respect to these matters
remain uncertain. Litigation and other proceedings may require
that we pay settlement costs, legal fees, damages, penalties or
other charges, which could adversely affect our financial
results. In particular, ongoing and other legal proceedings
brought under state consumer protection statutes may result in a
separate fine for each violation of the statute, which,
particularly in the case of class action lawsuits, could result
in damages substantially in excess of the amounts we earned from
the underlying activities and that could have a material adverse
effect on our liquidity and financial position.
Governmental investigations, both state and federal, can be
either formal or informal. The costs of responding to the
investigations can be substantial. In addition,
government-mandated changes to servicing practices could lead to
higher costs and additional administrative burdens, in
particular, those regarding record retention and informational
obligations.
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MANAGEMENT
Directors
and Executive Officers
The following table sets forth the name, age and position of
individuals who currently serve as directors and executive
officers of Nationstar Mortgage LLC. Except as otherwise noted
below, each of the individuals listed below served as a manager
or officer of Nationstar Mortgage LLC and has been named to the
corresponding position at Nationstar Mortgage Holdings Inc. in
connection with our initial public offering. The following also
includes certain information regarding our directors
individual experience qualifications, attributes and skills that
led us to conclude that they should serve as directors.
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Name
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Age
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Position
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Anthony H. Barone
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Chairman and Director
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Peter M. Smith
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Director
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Jay Bray
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President, Chief Executive Officer, Chief Financial Officer
and Director
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Robert Appel
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Executive Vice President of Servicing
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Amar Patel
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Executive Vice President of Portfolio Investments
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Lisa Rogers
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Executive Vice President of Retail Production
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Douglas Krueger
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Executive Vice President of Capital Markets
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Anthony H. Barone is the Chairman of the Board of
Managers of Nationstar Mortgage LLC and has served as a Manager
since 2006. Mr. Barone also served as President and Chief
Executive Officer of Nationstar Mortgage LLC from 1997 to 2011.
Mr. Barone has over 30 years of experience in the
mortgage industry. From 1980 to 1986, Mr. Barone held
management positions in loan servicing, originations, secondary
marketing and credit administration at General Electric Capital
Corporation. From 1987 to 1989, Mr. Barone held management
positions in loan servicing, originations, secondary marketing
and credit administration at Meritor Credit Corporation. From
1990 to 1997, Mr. Barone served as Executive Vice President
of Ford Consumer Finance, a former mortgage lending and
servicing subsidiary of Ford Motor Credit Corporation.
Mr. Barone holds a B.A. in Economics from the University of
Connecticut. As a result of his service as Nationstar Mortgage
LLCs President and Chief Executive Officer for over 14
years and Nationstar Mortgage LLCs Manager for over five
years, as well as his over 30 years of experience in the
mortgage industry, we believe Mr. Barone brings a deep
understanding of our business and the mortgage industry, and
therefore should serve on the board.
Peter M. Smith has served as a Manager of Nationstar
Mortgage LLC since 2007 (but he is not a director of Nationstar
Mortgage Holdings Inc.). Mr. Smith is a managing director in the
Private Equity business at Fortress Investment Group LLC and is
also a member of the firms Management Committee. In
addition Mr. Smith is a member of the board of directors of
Springleaf Finance, Inc., Springleaf Finance Corporation, ANC
Acquisition Sub Manager LLC and Eurocastle Investment Limited.
Mr. Smith joined Fortress in May 1998, prior to which he worked
at UBS and, before that, at BlackRock Financial Management Inc.
from 1996 to 1998. Mr. Smith worked at CRIIMI MAE Inc. from 1991
to 1996. Mr. Smith received a BBA in Finance from Radford
University and a MBA in Finance from George Washington
University.
Jay Bray is the President, Chief Executive Officer and
Chief Financial Officer of Nationstar Mortgage LLC.
Mr. Bray has served as the President of Nationstar Mortgage
LLC since July 2011, as the Chief Executive Officer of
Nationstar Mortgage LLC since October 2011 and as the Chief
Financial Officer since he joined Nationstar Mortgage LLC in May
2000. Mr. Bray has served as a Manager of Nationstar
Mortgage LLC since October 2011 and also as a Director of
Nationstar Capital Corporation since March 2010. Mr. Bray
has over 22 years of experience in the mortgage servicing
and originations industry. From 1988 to 1994, Mr. Bray
worked with Arthur Andersen in Atlanta, Georgia, where he served
as an audit manager from 1992 to 1994. From 1994 to 2000,
Mr. Bray held a variety of leadership roles at Bank of
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America and predecessor entities, where he managed the Asset
Backed Securitization process for mortgage-related products,
developed and implemented a secondary execution strategy and
profitability plan and managed investment banking relationships,
secondary marketing operations and investor relations.
Additionally, Mr. Bray led the portfolio acquisition,
pricing and modeling group. Mr. Bray holds a B.A.A. in
Accounting from Auburn University and is a Certified Public
Accountant in the State of Georgia. As a result of his service
as Nationstar Mortgage LLCs Chief Financial Officer for
over 11 years, as well as his over 22 years of
experience in the mortgage industry, we believe Mr. Bray brings
a deep understanding of our business and the mortgage industry
and therefore should serve on the board.
Robert Appel is the Executive Vice President of Servicing
of Nationstar Mortgage LLC and has served in this capacity since
joining us in February 2008. Mr. Appel has over 21 years of
experience in the mortgage industry and five years of public
accounting experience. From 1985 to 1990, he served as an audit
manager with Ernst and Young LLP. From 1990 to 1992, he held a
position as Vice President of Control for Tyler Cabot Mortgage
Securities Fund, a NYSE listed bond fund. From 1992 to 1999, Mr.
Appel held a position at Capstead Mortgage where he started a
master servicing organization and later became Senior Vice
President of Default Management for Capsteads primary
servicer. From 1999 to 2003, he was Managing Director of
GMACs Master Servicing operation. From 2003 to 2005, Mr.
Appel was Chief Executive Officer of GMACs United Kingdom
mortgage lending business. From 2005 to 2008, he served as
Servicing Manager of GMACs $100 billion non-prime
residential servicing platform. Mr. Appel holds a B.S., cum
laude, in Business Control Systems from the University of North
Texas and was formerly a Certified Public Accountant, Certified
Financial Planner and a former member of the Freddie Mac Default
Advisory Group.
Amar Patel is the Executive Vice President of Portfolio
Investments of Nationstar Mortgage LLC and has served in this
capacity since joining us in June 2006. Mr. Patel has over
19 years of experience in the mortgage industry. From 1993
to 2006, Mr. Patel held various management roles at
Capstead Mortgage Corporation, last serving as Senior Vice
President of Asset and Liability Management. Mr. Patel
holds a B.B.A. in Finance and Mathematics from Baylor University
and an M.B.A. from Southern Methodist University.
Lisa A. Rogers is the Executive Vice President, National
Production Manager of Nationstar Mortgage LLC. Ms. Rogers
has over 18 years of leadership experience in the mortgage
industry. Prior to joining us in September 2011, Ms. Rogers
was Senior Vice President, National Wholesale Operations and
Support Manager for Wells Fargo Home Mortgage. Ms. Rogers
had been with Wells Fargo since 1993 in a variety of roles
including production risk management and strategic development.
Ms. Rogers is a Master Certified Mortgage Banker and a
graduate of both the School of Mortgage Banking and the Mortgage
Bankers Association Future Leaders Program. Ms. Rogers is a
past instructor of the School of Mortgage Banking.
Douglas Krueger is the Executive Vice President of
Capital Markets and has served in this capacity since joining
Nationstar in February 2009. Mr. Krueger has over
20 years of experience in the mortgage industry. For five
years, Mr. Krueger held various senior leadership roles
with CitiMortgage managing the secondary marketing and master
servicing areas. Mr. Krueger also served as Senior Vice
President with Principal Residential Mortgage for 13 years.
Mr. Krueger holds a B.B.A. from the University of Iowa and
has earned the Chartered Financial Analyst designation.
Board of
Directors
In connection with the Restructuring, we will adopt a new
certificate of incorporation and new bylaws. Our amended and
restated bylaws will provide that our board shall consist of not
less than and not more
than directors as the board of
directors may from time to time determine. Our board of
directors is divided into three classes that are, as nearly as
possible, of equal size. Each class of directors is elected for
a three-year term of office, but the terms are staggered so that
the term of only one class of directors expires at each annual
general meeting. The initial terms of the Class I,
Class II and Class III directors will expire in 2013,
2014 and 2015, respectively.
Messrs. ,
and
will each serve as a Class I
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director,
Messrs.
and
will each serve as a Class II director and
Messrs.
and
will each serve as a Class III director. All officers serve
at the discretion of the board of directors. Under our
stockholders agreement, or the Stockholders
Agreement, with our Initial Stockholder, which we and the
Initial Stockholder will execute prior to the completion of this
offering, we are required to take all reasonable actions within
our control (including nominating as directors the individuals
designated by our Initial Stockholder that otherwise meet our
reasonable standards for board nominations), subject to
applicable regulatory and listing requirements (including the
director independence requirements of the NYSE), so that up to a
majority (depending upon the level of ownership of the Initial
Stockholder and certain other affiliates of Fortress and
permitted transferees (referred to in this prospectus,
collectively, as the Fortress Stockholders) of the
members of our board of directors are individuals designated by
our Initial Stockholder. Upon completion of this offering, and
in accordance with our Stockholders Agreement, our board of
directors will consist
of
directors,
of whom will be independent, as defined under the
rules of the NYSE. Our board of directors has determined that
Messrs. , ,
and
will be our independent directors.
Our amended and restated certificate of incorporation will not
provide for cumulative voting in the election of directors,
which means that the holders of a majority of the outstanding
shares of common stock can elect all of the directors standing
for election, and the holders of the remaining shares will not
be able to elect any directors, subject to our obligations under
our Stockholders Agreement discussed in the previous paragraph.
Committees
of the Board of Directors
Upon completion of this offering, we will establish the
following committees of our board of directors.
Audit Committee
The audit committee:
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reviews the audit plans and findings of our independent
registered public accounting firm and our internal audit and
risk review staff, as well as the results of regulatory
examinations, and tracks managements corrective action
plans where necessary;
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reviews our financial statements, including any significant
financial items
and/or
changes in accounting policies, with our senior management and
independent registered public accounting firm;
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reviews our financial risk and control procedures, compliance
programs and significant tax, legal and regulatory
matters; and
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has the sole discretion to appoint annually our independent
registered public accounting firm, evaluate its independence and
performance and set clear hiring policies for employees or
former employees of the independent registered public accounting
firm.
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The members of the committee have not yet been appointed. We
will be required to have one director on our audit committee
beginning on the date of effectiveness of the registration
statement filed with the Commission in connection with this
offering and of which this prospectus is a part. After such
90-day
period and until one year from the date of effectiveness of the
registration statement, we are required to have a majority of
independent directors on our audit committee. Thereafter, our
audit committee is required to be
143
comprised entirely of independent directors. By effectiveness
of the registration statement, we will have appointed at least
one member to this committee who is an independent
director as defined under the rules of the NYSE and
Rule 10A-3
of the Securities Exchange Act of 1934, as amended, (the
Exchange Act). Each director appointed to the audit
committee will be determined to be financially literate by our
board, and one is expected to be our audit committee financial
expert.
Nominating, Corporate Governance and Conflicts Committee
The nominating, corporate governance and conflicts committee:
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reviews the performance of our board of directors and makes
recommendations to the board regarding the selection of
candidates, qualification and competency requirements for
service on the board and the suitability of proposed nominees as
directors;
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advises the board with respect to the corporate governance
principles applicable to us;
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oversees the evaluation of the board and management;
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reviews and approves in advance any related party transaction,
other than those that are pre-approved pursuant to pre-approval
guidelines or rules established by the committee; and
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established guidelines or rules to cover specific categories of
transactions.
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The members of the committee have not yet been appointed. We
expect to have independent
nominating, corporate governance and conflicts committee member,
as defined under the rules of the NYSE, upon the listing of our
common stock on the NYSE, a majority of independent directors
within 90 days of such listing and all independent
directors within one year of such listing.
Compensation Committee
The compensation committee:
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reviews and recommends to the board the salaries, benefits and
equity incentive grants for all employees, consultants,
officers, directors and other individuals we compensate;
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reviews and approves corporate goals and objectives relevant to
Chief Executive Officer compensation, evaluates the Chief
Executive Officers performance in light of those goals and
objectives, and determines the Chief Executive Officers
compensation based on that evaluation; and
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oversees our compensation and employee benefit plans.
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The members of the compensation committee have not yet been
appointed. We expect to
have independent compensation
committee member, as defined under the rules of the NYSE, upon
the listing of our common stock on the NYSE, a majority of
independent directors within 90 days of such listing and
all independent directors within one year of such listing. Any
independent directors, as defined under the rules of
the NYSE, appointed to the compensation committee will also be
non-employee directors as defined in
Rule 16b-3(b)(3)
under the Exchange Act and outside directors within
the meaning of Section 162(m)(4)(c)(i) of the Code.
144
COMPENSATION
DISCUSSION & ANALYSIS
This Compensation Discussion and Analysis is designed to provide
an understanding of the compensation program for our CEO and
CFO, Jay Bray, our Executive Vice President, Servicing, Robert
L. Appel, our Executive Vice President, Portfolio Investments,
Amar Patel, our Executive Vice President, Capital Markets,
Douglas Krueger and, our Chairman and former CEO, Anthony H.
Barone, (collectively, our named executive officers or
NEOs), with respect to our 2011 fiscal year.
Effective October 7, 2011, Mr. Bray became our CEO and
Mr. Barone became the Chairman of the Board of Managers of
Nationstar Mortgage LLC. Our executive officers receive no
direct compensation from us. The executives who run our Company
are compensated by Nationstar Mortgage LLC, and therefore, the
disclosure in this section relates to the compensation
arrangements of Nationstar Mortgage LLC. References to
our compensation policies in this section refer to
the joint policies and practices of us and Nationstar Mortgage
LLC.
Compensation
Philosophy and Objectives
Our primary executive compensation goals are to attract,
motivate and retain the most talented and dedicated executives
and to align annual and long-term incentives while enhancing
unitholder value. To achieve these goals we maintain
compensation plans that:
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Deliver a mix of fixed and at-risk compensation, including
through the grants of restricted units and restricted preferred
units.
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Through dividend equivalents on grants of restricted units and
restricted preferred units, tie a portion of the overall
compensation of executive officers to the dividends we pay to
our unitholders.
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Encourage the achievement of our short- and long-term goals on
both the individual and company levels.
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Process
for Setting Executive Officer Compensation
Peter Smith, the designated manager (the Manager) of
our Initial Stockholder, the sole member of the Company (our
Parent), and its unitholders evaluate our
performance, including the achievement of key investment and
capital raising goals, and the individual performance of each
NEO, with a goal of setting overall compensation at levels that
our Parent and its unitholders believe are appropriate.
Participation of Management. Our NEOs are not
directly responsible for determining our CEOs
compensation, although they regularly provide information to our
Parent and its unitholders that is relevant to its evaluation of
the NEOs compensation (for instance, in terms of our
performance against established compensation goals and
otherwise). By contrast, the CEO plays a more active role in
determining the compensation of the other NEOs, who are his
subordinates. He regularly advises our Parent and its
unitholders of his own evaluation of their job performance and
offers for consideration his own recommendations for their
compensation levels. Final compensation decisions are executed
by the Manager.
Compensation Consultant. We have not retained
a compensation consultant to review our policies and procedures
with respect to executive compensation, although the Company or
Parent may elect in the future to retain a compensation
consultant if they determine that doing so would assist it in
implementing and maintaining compensation plans.
Risk Considerations. In developing and
reviewing the executive incentive programs, our Parent and
unitholders consider the business risks inherent in program
designs to ensure they do not induce executives to take
unacceptable levels of business risk for the purpose of
increasing their incentive plan awards. Our Parent and
unitholders believe that the mix of compensation components used
in the determination of our NEOs
145
compensation reflects the performance of our Company and the
performance of the individual employee and does not encourage
our NEOs to take unreasonable risks relating to the business.
Our NEOs ownership interest in the Company aligns our
NEOs interests with our long-term performance and
discourages excessive risk taking.
Elements
of Compensation
Our executive compensation consists of the elements set forth
below. Determinations regarding any one element of compensation
affect determinations regarding each other element of
compensation, because the goal of our Parent and unitholders is
to set overall compensation at an appropriate level. Our Parent
and unitholders take into account in this regard the extent to
which different compensation elements are at-risk. Accordingly,
for example, the amount of salary paid to an NEO is considered
by our Parent and unitholders in determining the amount of any
cash bonus or restricted unit or restricted preferred unit
award, but the relationship among the elements is not formulaic
because of the need to balance the likelihood that the at-risk
components of compensation will actually be paid at any
particular level. We further base overall compensation packages
of our executive officers on their experience, current market
conditions, business trends, and overall Company performance. As
a result, the total compensation of our NEOs in 2011 consisted
of the following elements: (1) base salary,
(2) non-equity incentive plan awards, (3) equity
awards, and (4) participation in employee benefit plans.
Base Salary
We utilize base salary as the foundation of our compensation
program. Base salaries for our NEOs are established based upon
the scope of their responsibilities and what is necessary to
recruit and retain skilled executives. We believe that our
executives base salaries are comparable with salaries paid
to executives at companies of a similar size and with a similar
performance to us. Base salaries are reviewed annually in
accordance with the NEOs annual performance evaluation and
increased from time to time in view of each NEOs
individual responsibilities, individual and company performance,
and experience.
Messrs. Bray, Patel, Krueger and Barone had entered into
employment agreements with the Company that set a minimum salary
upon execution of the agreement; however, their employment
agreements expired in 2011 and they are currently employees at
will. Mr. Appel has entered into a employment agreement
with the Company that set a minimum salary upon execution of the
agreement. These base salaries are intended to complement the
at-risk components of the Companys compensation program by
assuring that our NEOs will receive an appropriate minimum level
of compensation.
Annual Bonus Plans
Annual bonus incentives keyed to short-term objectives form an
important part of our compensation program. Our annual bonus
plans are designed to provide incentives to achieve certain
financial goals of the Company, as well as personal objectives.
The Incentive Plan for Messrs. Barone, Bray, Appel and
Patel. Messrs. Barone, Bray, Appel, and
Patel participate in our Annual Incentive Compensation Plan (the
Incentive Plan). The Incentive Plan provides for
payment of annual cash incentive bonuses from a pool equal to 5%
of the Companys Operating Cash Flow. Operating Cash Flow
is generally equal to Adjusted EBITDA from the Operating
Segments less servicing resulting from transfers of financial
assets. In calculating Operating Cash Flow, non-cash components
affecting Adjusted EBITDA both positively and negatively, if
any, are excluded. This measure of Operating Cash Flow is
intended to represent the Companys cash revenues less all
fully allocated cash and accrued expenses. Tying bonus payments
to Operating Cash Flow puts a significant portion of these
executives salary at risk and ties their compensation to
our operational and financial results. The Incentive Plan is
maintained by Nationstar Mortgage LLC and is administered by our
Parent. Our Parent chose the
146
Companys Operating Cash Flow as an incentive metric
believing that it reflects the efficiency with which our
management team manages the Company on a short- and long-term
basis.
Our Parent may not decrease the amount of the bonus pool. Each
fiscal year, our Parent determines each applicable NEOs
allocable portion of the bonus pool for that fiscal year,
provided, however, that our Parent may not reduce any
executives allocable percentage to less than 75% of the
executives percentage for the prior fiscal year. To
receive the actual award, the NEO must be employed by the
Company (and not have given notice of intent to resign) on the
last day of the fiscal year to which the bonus relates.
The following are our NEOs target bonus percentages for
2011:
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Allocable
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Percentage of the
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Bonus Pool
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Jay Bray
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31.7%
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Robert L. Appel
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17.2%
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Amar Patel
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15.5%
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Anthony H. Barone
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35.6%
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Annual Incentive Program for
Mr. Krueger. Mr. Krueger participates
in our annual cash incentive program, which includes Company and
individual performance measures. Mr. Kruegers key
objectives for 2011 were Operating Cash Flow (20% weight factor
in final payout), secondary marketing profit/loss (30% weight)
and other deliverables (50% weight). In 2011, Mr. Kruegers
other responsibilities were associated with managing hedging
risks, execution of loan sales, GSE and investor relations and
frequency of repurchase requests. Under the annual incentive
program, Company and individual performance measures are
established at the beginning of the fiscal year by the
Companys Board of Managers. At year end, the Board of
Managers rates the results for each key objective on a scale of
one to five. The rating is multiplied by the weight of each key
objective to result in a weighted score, with five being the
highest possible score. The weighted score is converted into a
percentage and multiplied by Mr. Kruegers bonus
opportunity to result in the annual cash incentive awarded. The
annual cash incentive is generally paid in a single installment
in the first quarter following completion of the plan year.
Mr. Krueger must be employed by the Company on December 31
of the award year and not have given notice of termination by
the time that the award is paid to receive the bonus. As a
condition of participation in the annual incentive plan,
Mr. Krueger is subject to a non-solicitation covenant.
Following our public offering, we anticipate Mr. Krueger
will continue to receive annual incentive awards but the
Compensation Committee has made no definitive decisions
regarding future awards.
Long-Term Incentive Plans
Equity Incentive Plan. We have provided
long-term incentives in the form of grants of Series 1 and
Series 2 Class A units (Units) and
restricted preferred units relating to Series 1
Class C and Class D preferred units (RSUs)
of the Initial Stockholder to our NEOs to promote sustained high
performance. Units and RSUs are granted pursuant to the limited
liability company agreement of the Initial Stockholder and
individual award agreements. No Units or RSUs were granted to
NEOs in 2011. In 2010, substantial one-time grants of Units and
RSUs, subject to three-year vesting, were granted to each of
Messrs. Bray, Appel, Patel and Barone based on a review of our
existing compensation arrangements with our most highly valued
executives and the business environment. Specifically, the
grants were intended to both serve as a long-term incentive
device, a retention device and to further align the interests of
Messrs. Bray, Appel, Patel and Barone with the Company in the
future.
The Units and RSUs vest over a three year period. Each RSU
represents the right to receive one Series 1 Class C
preferred unit or one Series 1 Class D preferred unit,
as applicable, upon vesting and settlement of the RSU. If the
Company pays a dividend to Class C or Class D
unitholders (other than with
147
respect to any pre-2010 preferred yield), the executive will be
entitled to receive a proportionate payment based on the number
of RSUs he holds, whether or not they have vested.
Our equity arrangements provide for accelerated vesting of the
number of Units and RSUs scheduled to vest on the next scheduled
vesting date, if any, where the employment of an applicable NEO
is terminated without cause (other than within six
months after a change in control), by such NEO for
good reason or upon death or disability, subject to
the NEO executing a general release of claims in favor of the
Company. If the employment of an applicable NEO is terminated
without cause within six months following a change in control,
subject to the NEO executing a general release of claims in
favor of the Company, all unvested Units and RSUs will vest. We
believe that such a provision benefits the Company and its
unitholders by giving our NEOs some protection so they may make
decisions about the Company and any potential transaction free
from concerns about the impact to their unvested equity awards.
On any other termination of employment, all unvested Units and
RSUs will be forfeited.
Following termination of employment, the applicable series will
have certain repurchase rights with respect to the Series 1
and Series 2 Class A units and the Series 1
Class C and Class D preferred units. The applicable
series, and if the series elects not to exercise its right, the
Fortress Funds, which own the Initial Stockholder, may
repurchase the applicable units for 30 days following the
executives termination of employment. The repurchase price
per unit is calculated as set forth in the limited liability
company agreement of the Initial Stockholder and the applicable
award agreements. Thus, the repurchase price differs based on
the units series, as well as the reason for termination.
Class A units granted to Messrs. Bray, Appel, Patel and
Barone, may be repurchased (a) following a termination for
cause at the lesser of fair market value on the date of
(i) termination or (ii) grant, and (b) following
a termination for any other reason, for fair market value on the
date of termination. Class C and D units may be repurchased
for an amount equal to the sum of (i) the purchase price of
the units plus any additional capital contributions less any
distribution paid with respect to the units and (ii) any
accrued and preferred yield less any accrued unpaid pre-2010
preferred yield.
Equity Plan Adopted in Connection with our Initial Public
Offering. Prior to the completion of the
offering, we intend to adopt, subject to stockholder approval
the 2012 Equity Incentive Plan (the Plan), which
will enable us to offer certain key employees, consultants and
non-employee directors equity-based awards. The purpose of the
Plan is to enhance our profitability and value for the benefit
of stockholders by enabling us to offer equity-based incentives
in order to attract, retain and reward such individuals, while
strengthening the mutuality of interests between those
individuals and our stockholders. Up
to shares
of our common stock may be issued under the plan with annual
increases
of shares
of common stock per year (subject to adjustment to reflect
certain transactions and events specified in the Plan, as
described below). The maximum aggregate awards that may be
granted during any fiscal year will
be shares.
We intend to file with the Securities and Exchange Commission
(SEC) a registration statement on
Form S-8
covering the shares issuable under the Plan.
The following is a summary of the material terms and provisions
of the Plan and certain tax effects of participation in the
Plan. This summary is qualified in its entirety by reference to
the complete text of the Plan, which is attached hereto as
Exhibit and incorporated
herein. To the extent that there is a conflict between this
summary and the Plan, the terms of the Plan will govern.
Capitalized terms that are used but not defined in this summary
have the meanings given to them in the Plan.
Description of the Plan
Plan Administration. The Plan will be
administered by the compensation committee (the
Committee), which will have discretion and authority
to interpret the Plan, prescribe, amend and rescind rules and
regulations regarding the Plan, select Participants to receive
Awards, determine the form, terms and conditions of Awards, and
take other actions it deems necessary or advisable for the
proper operation or administration of the Plan.
148
Stock Options and Stock Appreciation
Rights. All Stock Options granted under the Plan
are intended to be non-qualified share options and are not
intended to qualify as incentive stock options
within the meaning of Section 422 of the Internal Revenue
Code. Stock Appreciation Rights may be awarded either alone or
in tandem with Nonqualified Stock Options. Stock Options and
Stock Appreciation Rights will have maximum terms of ten years.
Stock Options and Stock Appreciation Rights will be subject to
the following terms and conditions:
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The Exercise Price for each Share subject to a Stock Option or
Stock Appreciation Right will be not less than the Fair Market
Value of a Share on the date of grant.
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Restricted Units, Restricted Stock, Deferred Shares and
Performance Shares. Restricted Units, Restricted
Stock, Deferred Shares and Performance Shares are subject to the
following terms and conditions:
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The Committee will determine the purchase price, the vesting
schedule and performance objectives, if any, with respect to the
grant of Restricted Shares, Restricted Units, Deferred Shares
and Performance Shares.
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Other Stock-Based Awards. The Committee may,
from time to time, grant Awards other than those referred to
above that consist of, are denominated in, or are otherwise
related to Shares. These Awards may include, among other things,
stock units or phantom or hypothetical shares. The Committee has
broad discretion to determine any terms and conditions that will
apply to Other Stock-Based Awards under the Plan.
Cash-Based Awards. The Committee may grant
Cash-Based Awards that may be settled in cash or other property,
including shares of Common Stock. The Committee has broad
discretion to determine any terms and conditions that will apply
to Cash-Based Awards under the Plan.
Transfer. Awards may not be transferred by a
Participant other than by will or the laws of descent and
distribution, except that Restricted Stock may be freely
transferred after the restrictions lapse or are satisfied and
the Shares are delivered.
Adjustments. The maximum number of Shares
available for issuance under the Plan, the individual and
aggregate limits described above, the number of Shares
underlying outstanding Awards and the Exercise Price applicable
to outstanding Awards shall be equitably adjusted upon certain
events effecting the capitalization of Nationstar Mortgage
Holdings Inc. such as a recapitalization or stock split. Upon
the occurrence of certain extraordinary corporate transactions,
such as a dissolution, sale, or merger of Nationstar Mortgage
Holdings Inc., the Committee has discretion to cancel each Award
in exchange for an amount in cash or to provide for the exchange
of each Award for an Award with respect to some or all of the
property which a holder of the number of shares of Common Stock
subject to such Award would have received in the transaction.
Change in Control. The Committee has
discretion to provide for acceleration of vesting
and/or
payment of Awards upon a Change in Control, as defined in the
Plan.
Amendment and Termination. The Committee has
authority at any time to amend or terminate the Plan, provided
that such amendment may not be prejudicial to any Participant.
No material revision to the Plan may become effective without
stockholder approval. For this purpose, a revision will be
deemed to be material based on the rules adopted by the NYSE
from time to time or if it materially increases the number of
Shares that may be issued under the Plan (other than as a result
of an adjustment described above or automatic increases). NYSE
rules currently provide that material revisions which require
stockholder approval include a material increase in the number
of shares available under the Plan, a material expansion of the
types of awards available under the plan, a material expansion
of the class of employees, directors, or other service providers
eligible under the Plan, a material extension of the term of the
Plan, a material change in the method of determining the strike
price of options under the Plan and an amendment to permit
option repricing. The Plan
149
will terminate, if not sooner as a result of Committee action,
on the 10th anniversary of the date the Plan is adopted.
Summary of Federal Income Tax Consequences of Awards
The following is a brief summary of the principal U.S. federal
income tax consequences of Awards and transactions under the
Plan. This summary is not intended to be exhaustive and, among
other things, does not describe state, local or foreign tax
consequences.
Nonqualified Stock Options and Stock Appreciation
Rights. A Participant will not recognize any
income at the time a Nonqualified Stock Option or Stock
Appreciation Right is granted, nor will we be entitled to a
deduction at that time. When a Nonqualified Stock Option is
exercised, the Participant will recognize ordinary income in an
amount equal to the excess of the Fair Market Value of the
Shares received as of the date of exercise over the Exercise
Price. When a Stock Appreciation Right is exercised, the
Participant will recognize ordinary income in an amount equal to
the cash received or, if the Stock Appreciation Right is paid in
Shares, the Fair Market Value of the Shares received as of the
date of exercise. Payroll taxes are required to be withheld from
the Participant on the amount of ordinary income recognized by
the Participant. We will be entitled to a tax deduction with
respect to a Nonqualified Stock Option or Stock Appreciation
Right in the same amount as the Participant recognizes income.
Restricted Units, Restricted Stock and Performance
Awards. A Participant will not recognize any
income at the time a Restricted Unit, Share of Restricted Stock
or Performance Award is granted, nor will we be entitled to a
deduction at that time. When a Restricted Unit is redeemed, the
Participant will recognize ordinary income in an amount equal to
the Fair Market Value of the Shares received or, if the
Restricted Unit is paid in cash, the amount payable. In the year
in which Shares of Restricted Stock or the Performance Award are
no longer subject to a substantial risk of forfeiture
(i.e., in the year that the Shares vest), the Participant
will recognize ordinary income in an amount equal to the excess
of the Fair Market Value of the Shares on the date of vesting
over the amount, if any, the Participant paid for the Shares. A
Participant may, however, elect within 30 days after
receiving Restricted Stock to recognize ordinary income in the
year of receipt instead of the year of vesting. If an election
is made, the amount of income recognized by the Participant will
be equal to the excess of the Fair Market Value of the Shares on
the date of receipt over the amount, if any, the Participant
paid for the Shares. Payroll taxes are required to be withheld
from the Participant on the amount of ordinary income recognized
by the Participant. We will be entitled to a tax deduction in
the same amount as the Participant recognizes income.
Deferred Shares. In general, the grant of
Deferred Shares will not result in income for the Participant or
in a tax deduction for us. Upon the settlement of such an award,
the Participant will recognize ordinary income equal to the
aggregate value of the payment received, and we generally will
be entitled to a tax deduction in the same amount.
Cash-Based Awards. A Participant will not
recognize any income at the time of the grant to the Participant
of a Cash-Based Award. The Participant will recognize income at
the time that cash is paid to the participant pursuant to a
Cash-Based Award, in the amount paid. Payroll taxes will be
required to be withheld at that time. We will be entitled to a
tax deduction in the same amount as the amount the Participant
recognizes income.
Long-Term Incentive Plan. Mr. Krueger
participates in a long-term incentive plan which is designed to
reward company and individual performance and serve as a
retention device. Awards are determined at the conclusion of the
plan year (calendar) based upon the Companys overall
financial performance and Mr. Kruegers contribution
to those results. The Company made no long-term incentive awards
to NEOs in 2011. However, Messrs. Bray, Patel and Barone
received awards in 2008 that vested in 2011 in the amounts of
$200,000, $150,000 and $300,000, respectively. Following our
public offering, we anticipate Mr. Krueger will continue to
receive long-term incentive awards. However, the Compensation
Committee has made no
150
definitive decisions regarding future awards. Awards are
approved by our Board of Managers with an award date of December
31 of the year just concluded. The award is generally subject to
a three year cliff vesting requirement from the date of the
award, which provides an important retention incentive as the
executive must remain employed by the Company to receive the
award. The award ordinarily is paid in a single installment in
the first quarter of the third year following grant.
Mr. Krueger must be employed by the Company on the date of
payout to receive the award.
Severance Benefits
As noted above, we have entered into an employment agreement
with Mr. Appel and we had entered into employment
agreements with Messrs. Bray, Patel, Krueger and Barone
that expired in 2011. While the employment agreements are in
effect, the agreements provide severance benefits to such
officers in the circumstances described in greater detail below
in the section entitled Employment Agreements.
Other Compensation Components
All of our executive officers are eligible to participate in our
employee benefit plans, including medical, dental, life
insurance and 401(k) plans. These plans are available to all
employees and do not discriminate in favor of our NEOs. In
addition, we reimburse Mr. Barone and Mr. Bray for the
cost of life insurance premiums pursuant to our Executive Life
Program. We do not view perquisites as a significant element of
our comprehensive compensation structure; however, we believe
some perquisites are necessary for the Company to attract and
retain superior management talent for the benefit of all
unitholders. The value of these benefits to the NEOs is set
forth in the Summary Compensation Table under the column
All Other Compensation and details about each
benefit is set forth in a table following the Summary
Compensation Table.
Summary
Compensation Table
The following table sets forth the annual compensation for the
NEOs serving at the end of fiscal year 2011.
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Non-Stock
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Stock
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Incentive Plan
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All Other
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Salary
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Bonus
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Awards
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Compensation
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Compensation
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Total
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Name
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Year
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($)
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($)
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($)(1)
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($)
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($)
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($)
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Jay Bray
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2011
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320,000
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1,633,459
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(2)
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11,048
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(6)
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1,964,507
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2010
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320,000
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9,918,148
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809,434
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(3)
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11,048
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(6)
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11,058,630
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2009
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289,800
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|
|
|
|
630,235
|
(5)
|
|
|
11,069
|
(7)
|
|
|
931,104
|
|
Robert L. Appel
|
|
|
2011
|
|
|
|
275,000
|
|
|
|
|
|
|
|
|
|
|
|
886,495
|
(2)
|
|
|
6,875
|
(8)
|
|
|
1,168,370
|
|
|
|
|
2010
|
|
|
|
275,000
|
|
|
|
|
|
|
|
6,467,985
|
|
|
|
439,288
|
(3)
|
|
|
5,500
|
(8)
|
|
|
7,187,773
|
|
|
|
|
2009
|
|
|
|
275,000
|
|
|
|
|
|
|
|
|
|
|
|
342,035
|
(5)
|
|
|
5,500
|
(8)
|
|
|
622,535
|
|
Amar Patel
|
|
|
2011
|
|
|
|
255,000
|
|
|
|
|
|
|
|
|
|
|
|
797,958
|
(2)
|
|
|
6,231
|
(8)
|
|
|
1,059,189
|
|
|
|
|
2010
|
|
|
|
255,000
|
|
|
|
|
|
|
|
4,147,863
|
|
|
|
395,415
|
(3)
|
|
|
6,231
|
(8)
|
|
|
4,804,509
|
|
|
|
|
2009
|
|
|
|
255,000
|
|
|
|
|
|
|
|
|
|
|
|
307,875
|
(5)
|
|
|
6,231
|
(8)
|
|
|
569,106
|
|
Douglas Krueger
|
|
|
2011
|
|
|
|
257,500
|
|
|
|
|
|
|
|
|
|
|
|
350,000
|
(2)
|
|
|
7,725
|
(8)
|
|
|
615,225
|
|
|
|
|
2010
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
425,000
|
(9)
|
|
|
3,125
|
(8)
|
|
|
678,125
|
|
|
|
|
2009
|
|
|
|
215,064
|
|
|
|
50,000
|
(10)
|
|
|
|
|
|
|
350,000
|
(11)
|
|
|
41,239
|
(12)
|
|
|
656,303
|
|
Anthony H. Barone
|
|
|
2011
|
|
|
|
424,350
|
|
|
|
|
|
|
|
|
|
|
|
1,832,088
|
(2)
|
|
|
17,036
|
(13)
|
|
|
2,273,474
|
|
|
|
|
2010
|
|
|
|
424,350
|
|
|
|
|
|
|
|
9,584,458
|
|
|
|
907,862
|
(3)
|
|
|
16,116
|
(4)
|
|
|
10,932,786
|
|
|
|
|
2009
|
|
|
|
424,350
|
|
|
|
|
|
|
|
|
|
|
|
706,872
|
(5)
|
|
|
16,116
|
(4)
|
|
|
1,147,338
|
|
|
|
|
(1) |
|
Represents the aggregate grant date fair value, as computed in
accordance with Financial Accounting Standards Board
(FASB) Accounting Standards Codification
(ASC) Topic 718, CompensationStock
Compensation excluding the effect of estimated forfeitures
during the applicable vesting periods, of units |
151
|
|
|
|
|
and RSUs granted to the NEOs. Information with respect to
vesting of these awards is disclosed in the Grant of Plan Based
Awards table and the accompanying notes. |
|
|
|
(2) |
|
These amounts will be paid in the first quarter of fiscal year
2012 but represent awards with respect to the Companys and
individual performance in fiscal year 2011. |
|
|
|
(3) |
|
These amounts were paid in the first quarter of fiscal year 2011
but represent awards with respect to the Companys and
individual performance in fiscal year 2010. |
|
|
|
(4) |
|
Represents payment of a life insurance premium equal to $9,216
and a $6,900 contribution to Mr. Barones 401(k)
account. |
|
|
|
(5) |
|
These amounts were paid in the first quarter of fiscal 2010 but
represent awards with respect to the Companys and
individual performance in fiscal year 2009. |
|
|
|
(6) |
|
Represents payment of a life insurance premium equal to $5,998
and a $5,050 contribution to Mr. Brays 401(k) account. |
|
|
|
(7) |
|
Represents payment of a life insurance premium equal to $5,998
and a $5,071 contribution to Mr. Brays 401(k) account. |
|
|
|
(8) |
|
Represents a contribution to the NEOs 401(k) account. |
|
|
|
(9) |
|
Of this amount, $300,000 was paid in the first quarter of fiscal
year 2011, although it represents an award with respect to the
Companys and Mr. Kruegers individual
performance in fiscal year 2010. The remaining $125,000 is
pursuant to the Long-Term Incentive Plan, described above, and
is subject to three-year time-based cliff vesting; this amount
will become vested on December 31, 2013 as long as
Mr. Krueger remains employed with the Company. |
|
|
|
(10) |
|
Represents a sign-on bonus Mr. Krueger received pursuant to
his employment agreement when he joined the Company. |
|
|
|
(11) |
|
Of this amount, $225,000 was paid in the first quarter of fiscal
year 2010, although it represents an award with respect to the
Companys and Mr. Kruegers individual
performance in fiscal year 2009, as described in Annual
Incentive Program for Mr. Krueger. The remaining
$125,000 is pursuant to the Long-Term Incentive Plan, described
above, and is subject to three-year time-based cliff vesting;
this amount will become vested on December 31, 2012 as long
as Mr. Krueger remains employed with the Company. |
|
|
|
(12) |
|
Represents payment of a relocation expenses equal to $39,469 and
a $1,770 contribution to Mr. Kruegers 401(k) account. |
|
|
|
(13) |
|
Represents payment of a life insurance premium equal to $9,216
and a $7,820 contribution to Mr. Barones 401(k)
account. |
Grants of
Plan-Based Awards
The following table sets forth, for each of the Executive
Officers, the grants of awards under any plan during the fiscal
year ended December 31, 2011.
|
|
|
|
|
|
|
Estimated
|
|
|
|
Future
|
|
|
|
Payouts
|
|
|
|
Under
|
|
|
|
Non-Equity
|
|
|
|
Incentive Plan
|
|
|
|
Awards
|
|
Name
|
|
Target ($)
|
|
|
Jay Bray
|
|
|
1,633,459(1
|
)
|
Robert L. Appel
|
|
|
886,495(1
|
)
|
Amar Patel
|
|
|
797,958(1
|
)
|
Douglas Krueger
|
|
|
350,000(2
|
)
|
Anthony H. Barone
|
|
|
1,832,088(1
|
)
|
152
|
|
|
(1) |
|
Represents amounts granted under the Incentive Plan as described
in Incentive Plan for Messrs. Barone, Bray, Appel and
Patel. |
|
|
|
(2) |
|
Represents the amount granted under the Annual Incentive Program
for Mr. Krueger, as described above. |
Outstanding
Equity Awards at Fiscal Year End
The following table sets forth, for each of the NEOs the
outstanding equity awards as of the end of the fiscal year ended
December 31, 2011, as described in greater detail in
Long-Term
Incentive Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards
|
|
|
|
Number of Units That Have
|
|
|
Market Value of Units That Have
|
|
|
|
Not Vested (#)
|
|
|
Not Vested ($)
|
|
Name
|
|
1A
|
|
|
2A
|
|
|
C&D
|
|
|
1A
|
|
|
2A
|
|
|
C&D
|
|
|
Jay
Bray(1)
|
|
|
56,880
|
|
|
|
10,633
|
|
|
|
692,917
|
|
|
|
4,492,347
|
|
|
|
7,908
|
|
|
|
961,338
|
|
Robert L.
Appel(2)
|
|
|
34,128
|
|
|
|
6,379
|
|
|
|
415,750
|
|
|
|
2,695,408
|
|
|
|
4,744
|
|
|
|
576,803
|
|
Amar
Patel(3)
|
|
|
22,752
|
|
|
|
4,254
|
|
|
|
277,167
|
|
|
|
1,796,939
|
|
|
|
3,164
|
|
|
|
384,535
|
|
Douglas Krueger
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anthony H.
Barone(4)
|
|
|
68,256
|
|
|
|
12,758
|
|
|
|
831,500
|
|
|
|
5,390,816
|
|
|
|
9,488
|
|
|
|
1,153,606
|
|
|
|
|
(1) |
|
This award is subject to vesting. With respect to the
Series 1 Class A, the award will vest with respect to
56,880 Series 1 Class A units on June 30, 2012.
With respect to the Series 2 Class A, the award will
vest with respect to 10,633 Series 2 Class A units on
June 30, 2012. With respect to the Series 1
Class C and D preferred units, the award will vest with
respect to 692,917 units on June 30, 2012. |
|
|
|
(2) |
|
This award is subject to vesting. With respect to the
Series 1 Class A, the award will vest with respect to
34,128 units on June 30, 2012. With respect to the
Series 2 Class A, the award will vest with respect to
6,379 units on June 30, 2012. With respect to the
Series 1 Class C and D preferred units, the award will
vest with respect to 415,750 units on June 30, 2012. |
|
|
|
(3) |
|
This award is subject to vesting. With respect to the
Series 1 Class A, the award will vest with respect to
22,752 Series 1 Class A units on June 30, 2012.
With respect to the Series 2 Class A, the award will
vest with respect to 4,254 Series 2 Class A units on
June 30, 2012. With respect to the Series 1
Class C and D preferred units, the award will vest with
respect to 277,167 units on June 30, 2012. |
|
|
|
(4) |
|
This award is subject to vesting. With respect to the
Series 1 Class A, the award will vest with respect to
68,256 Series 1 Class A units on June 30, 2012.
With respect to the Series 2 Class A, the award will
vest with respect to 12,758 on June 30, 2012. With respect
to the Series 1 Class C and D preferred units, the
award will vest with respect to 831,500 units on
June 30, 2012. |
Stock
Vested
The following table sets forth, for each of the NEOs,
information with respect to the vesting of equity-based awards
during the fiscal year ended December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards
|
|
|
|
Number of Shares
|
|
|
|
|
|
|
Acquired on Vesting (#)
|
|
|
Value Realized on Vesting ($)
|
|
Name
|
|
1A
|
|
|
2A
|
|
|
C&D
|
|
|
1A
|
|
|
2A
|
|
|
C&D
|
|
|
Jay Bray
|
|
|
56,880
|
|
|
|
10,631
|
|
|
|
692,917
|
|
|
|
3,651,920
|
|
|
|
8,079
|
|
|
|
888,060
|
|
Robert L. Appel
|
|
|
34,128
|
|
|
|
6,379
|
|
|
|
415,750
|
|
|
|
2,191,152
|
|
|
|
4,847
|
|
|
|
532,836
|
|
Amar Patel
|
|
|
22,752
|
|
|
|
4,252
|
|
|
|
277,167
|
|
|
|
1,460,768
|
|
|
|
3,231
|
|
|
|
355,223
|
|
Douglas Krueger
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anthony H. Barone
|
|
|
68,256
|
|
|
|
12,758
|
|
|
|
831,500
|
|
|
|
4,382,303
|
|
|
|
9,695
|
|
|
|
1,065,672
|
|
153
Employment
Agreements
The Company has entered into employment agreements with all of
our named executive officers.
Employment
Agreements of Messrs. Barone and Bray
Mr. Barone and the Company entered into an amended and
restated employment agreement pursuant to which Mr. Barone
agreed to serve as our Chief Executive Officer on
September 17, 2010. Mr. Bray and the Company entered
into an amended and restated employment agreement pursuant to
which Mr. Bray agreed to serve as our Chief Financial
Officer on September 17, 2010. Pursuant to their terms, the
agreements expired on September 17, 2011 and July 10,
2011, respectively. Pursuant to the employment agreements, upon
a termination for any reason or no reason, Messrs. Barone
and Bray are bound by one-year post-termination non-competition,
non-solicitation, confidentiality and non-disparagement
covenants. These covenants survive the termination or expiration
of Messrs. Barones and Brays employment
agreements.
Prior to expiration, the employment agreements provided, among
other things, for payments to the executive following certain
terminations of employment. If prior to the expiration,
Mr. Barones employment or Mr. Brays
employment had been terminated by the Company without
cause or had been terminated by him for good
reason, subject to his execution of a release of claims,
he would have been entitled to (1) 18 months of
continued base salary, (2) an amount equal to 150% of the
average of his annual cash bonus for the three most recently
completed fiscal years and (3) continued coverage under the
Companys medical plan until the earlier of (a) the
time he becomes eligible for coverage from a new employer and
(b) 12 months following the date of termination. If
Mr. Barones or Mr. Brays employment would
have terminated due to his resignation, subject to his execution
of a release of claims, he would have been entitled to
(1) six months of continued base salary and (2) 50% of
the average of his annual cash bonus for the three most recently
completed fiscal years. Following the expiration of the term,
Mr. Barone and Mr. Bray continued as employees at-will
and are not entitled to any severance payments under their
respective employment agreements upon any subsequent termination.
Employment
Agreement of Mr. Appel
Mr. Appel and the Company entered into an amended
employment agreement pursuant to which Mr. Appel agreed to
serve as our Executive Vice President, Servicing on
September 17, 2010. The initial term of the employment
agreement ends on February 3, 2011 and will be
automatically renewed for two additional periods of one year
commencing on each of February 4, 2011 and February 4,
2012 unless either party gives the other notice of intent not to
renew by no later than January 4, 2011 and January 4,
2012, respectively. Failure by the Company to renew
Mr. Appels term of employment on February 4,
2011 and February 4, 2012, would entitle Mr. Appel to
terminate his employment for good reason and receive
the severance payments described below. Pursuant to the
employment agreement, upon a termination for any reason or no
reason, Mr. Appel is bound by one-year post-termination
non-competition, non-solicitation, confidentiality and
non-disparagement covenants. These covenants survive the
termination or expiration of Mr. Appels employment
agreement.
The employment agreement provides for a one-time cash retention
bonus of $400,000 if Mr. Appel is employed by the Company
on February 4, 2013 (and has not given notice of his intent
to resign). If Mr. Appels employment is terminated by
the Company without cause or is terminated by
Mr. Appel for good reason, subject to his
execution of a release of claims, he would be entitled to
(1) an amount equal to (a) 12 months of base
salary plus (b) a lump sum severance payment of $175,000,
(2) a prorated portion of the annual cash incentive bonus
for the year of termination, (3) if such termination occurs
prior to February 4, 2013, the retention bonus, and
(4) continued coverage under the Companys medical
plan until the earlier of (a) the time Mr. Appel
becomes eligible for coverage from a new employer and
(b) 12 months following the date of termination.
Following February 3, 2013, absent an earlier termination
of his employment agreement,
154
Mr. Appel will continue as an employee at-will and will
not be entitled to any severance payments under his employment
agreement upon any subsequent termination.
Employment
Agreement of Mr. Patel
Mr. Patel and the Company entered into an amended and
restated employment agreement pursuant to which Mr. Patel
agreed to serve as our Executive Vice President on
September 17, 2010. Pursuant to its terms, the agreement
expired on June 1, 2011. Pursuant to the employment
agreement, upon a termination for any reason or no reason,
Mr. Patel is bound by one-year post-termination
non-competition, non-solicitation, confidentiality and
non-disparagement covenants. These covenants survive the
termination or expiration of Mr. Patels employment
agreement.
Prior to the expiration of the agreement, if
Mr. Patels employment had been terminated by the
Company without cause or had been terminated by
Mr. Patel for good reason, subject to
Mr. Patels execution of a release of claims, he would
have been entitled to (1) six months of continued base
salary, (2) an amount equal to 50% of his annual cash bonus
paid to him for the most recently completed fiscal year and
(3) continued coverage under the Companys medical
plan until the earlier of (a) the time he became eligible
for coverage from a new employer and (b) six months
following the date of termination. Following June 1, 2011,
Mr. Patel continued as an employee at-will and will not be
entitled to any severance payments under his employment
agreement upon any subsequent termination.
Employment
Agreement of Mr. Krueger
Mr. Krueger and the Company entered into an employment
agreement pursuant to which Mr. Krueger agreed to serve as
our Executive Vice President, Capital Markets on
February 19, 2009. Pursuant to its terms, the agreement
expired on February 18, 2011. Pursuant to the agreement,
Mr. Krueger is bound by a six-month post-termination
non-competition, a one-year post-termination non-solicitation,
confidentiality and non-disparagement covenants. These covenants
survive the termination or expiration of Mr. Kruegers
employment agreement.
Prior to the expiration of the agreement, if
Mr. Kruegers employment had been terminated by the
Company without cause or had been terminated by
Mr. Krueger for good reason, subject to
Mr. Kruegers execution of a release of claims, he
would have been entitled to (1) accrued benefits,
(2) an amount equal to Mr. Kruegers unpaid base
salary and guaranteed bonus through February 18, 2011 and
(3) continued coverage under the Companys medical
plan until the earlier of (a) the time he becomes eligible
for coverage from a new employer and (b) six months
following the date of termination. Following February 18,
2011, Mr. Krueger continued as an employee at-will and will
not be entitled to any severance payments under his employment
agreement upon any subsequent termination.
155
Potential
Payments Upon Termination or Change in Control
The following table sets forth the value of benefits that would
have been payable to the NEOs assuming a termination of
employment or change of control on December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination without
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
Cause Other than
|
|
|
Control,
|
|
|
|
|
|
|
|
|
|
|
|
|
After A Change in
|
|
|
Termination
|
|
|
|
|
|
|
|
|
|
Voluntary
|
|
|
Control or for Good
|
|
|
without
|
|
|
|
Death
|
|
|
Disability
|
|
|
Termination
|
|
|
Reason
|
|
|
Cause
|
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Jay Bray
|
|
|
5,461,593
|
(1)
|
|
|
5,461,593
|
(1)
|
|
|
0
|
|
|
|
5,461,593
|
(1)
|
|
|
5,461,593
|
(2)
|
Robert L. Appel
|
|
|
3,276,955
|
(1)
|
|
|
3,276,955
|
(1)
|
|
|
0
|
|
|
|
5,027,275
|
(2)(3)
|
|
|
5,027,275
|
(2)(3)
|
Amar Patel
|
|
|
2,184,638
|
(1)
|
|
|
2,184,638
|
(1)
|
|
|
0
|
|
|
|
2,184,638
|
(1)
|
|
|
2,184,638
|
(2)
|
Douglas Krueger
|
|
|
125,000
|
(4)
|
|
|
125,000
|
(4)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Anthony H. Barone
|
|
|
6,553,910
|
(1)
|
|
|
6,553,910
|
(1)
|
|
|
0
|
|
|
|
6,553,910
|
(1)
|
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6,553,910
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(2)
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(1) |
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Pursuant to the award agreements granting each of
Messrs. Barone, Bray, Appel and Patel units and RSUs, in
the event the NEOs employment terminates as a result of
the NEOs death, disability or voluntary resignation for
good reason or as a result of the Company terminating the
NEOs employment without cause other than in connection
with a change in control, an additional tranche of any
outstanding and unvested equity awards will become vested. |
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(2) |
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Pursuant to the award agreements granting each of
Messrs. Barone, Bray, Appel and Patel units and RSUs, in
the event the NEOs employment terminates as a result the
Company terminating the NEOs employment without cause
within 6 months following a change in control, all of the
NEOs outstanding and unvested equity awards will become
vested. |
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(3) |
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Pursuant to his employment agreement upon a termination without
cause, Mr. Appel will receive a severance payment of
$1,750,320 ($275,000 of salary continuation, $400,000 retention
bonus, $175,000 lump sum, $886,495 pro rated bonus (full year as
of December 31, 2011) and $13,825 medical benefits). The
remaining amount of $3,276,955 is pursuant to the unit and RSU
award agreements described in Note (2) above. |
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(4) |
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Pursuant to the Long-Term Incentive Plan, in the event of
termination due to death or disability Mr. Krueger will
receive a pro rata payout of his outstanding awards. |
Director
Compensation
Nationstar Mortgage Holdings Inc. has not yet paid any
compensation to our directors. Following completion of this
offering, we will pay an annual fee to each independent director
equal to
$ ,
payable in semi-annual installments. In addition, an annual fee
of $
will be paid to each member of the audit committee of the board
of directors, and an annual fee of
$ will
be paid to each member of the nominating, corporate governance
and conflicts committee and the compensation committee of the
board of directors. The chairman of each committee will receive
an additional annual fee of
$ .
Fees to independent directors may be made by issuance of common
stock, based on the value of such common stock at the date of
issuance, rather than in cash, provided that any such issuance
does not prevent such director from being determined to be
independent and such shares are granted pursuant to a
stockholder approved plan or the issuance is otherwise exempt
from NYSE listing requirements. Affiliated directors, however,
will not be separately compensated by us. All members of the
board of directors will be reimbursed for reasonable costs and
expenses incurred in attending meetings of our board of
directors. Following the completion of this offering, each
independent director will be eligible to receive awards of our
common stock under the Plan described above.
156
The Nationstar Mortgage LLC Board of Managers is comprised of
managers elected by our unitholders. We currently have three
members on the Board of Managers: Anthony Barone, Peter Smith
and Jay Bray. Each of Messrs. Barone, Smith and Bray receives no
payments in addition to what has been described as a result of
his service on the Board of Managers (earned but unpaid salary,
accrued but unpaid time off, reimbursable business expenses,
vested benefits and benefit continuation pursuant to employee
benefit plans).
157
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Under SEC rules, a related person is an officer, director,
nominee for director or beneficial holder of more than 5% of any
class of our voting securities since the beginning of the last
fiscal year or an immediate family member of any of the
foregoing. Our board of directors is primarily responsible for
developing and implementing processes and controls to obtain
information from our directors, executive officers and
significant stockholders regarding related-person transactions
and then determining, based on the facts and circumstances,
whether we or a related person has a direct or indirect material
interest in these transactions. We currently do not have a
standalone written policy for evaluating related party
transactions. Our officers and directors use an established
process to review, approve and ratify transactions with related
parties. When considering potential transactions involving a
related party that may require board approval, our officers
notify our board of directors of the proposed transaction,
provide a brief background of the transaction and schedule a
meeting with the board of directors to review the matter. At
such meetings, our Chief Executive Officer, Chief Financial
Officer and other members of management, as appropriate, provide
information to the board of directors regarding the proposed
transaction, after which the board of directors and management
discuss the transaction and the implications of engaging a
related party as opposed to an unrelated third party. If the
board of directors (or specified directors as required by
applicable legal requirements) determines that the transaction
is in our best interests, it will vote to approve entering into
the transaction with the applicable related party. Other than
compensation agreements and other arrangements which are
described under Compensation Discussion and Analysis
and the transactions described below, since January 1,
2010, there has not been, and there is not currently proposed,
any transaction or series of similar transactions to which we
were or will be a party in which the amount involved exceeded or
will exceed $120,000 and in which any related person had or will
have a direct or indirect material interest.
We currently serve as the loan servicer for two securitized loan
portfolios managed by Newcastle Investment Corp.
(Newcastle), which is managed by an affiliate of
Fortress, for which we receive a monthly net servicing fee equal
to 0.5% per annum on the UPB of the portfolios. For the years
ended December 31, 2009 and 2010, and for the nine months
ended September 30, 2011, we received servicing fees of
$7.4 million, $6.3 million and $4.4 million,
respectively. The outstanding UPB as of December 31, 2010
and September 30, 2011, was $1.2 billion and
$1.2 billion, respectively.
In December 2011, we entered into a sale and assignment
agreement (the Sale Agreement) with an indirect
wholly owned subsidiary of Newcastle Investment Corp.
(Newcastle). We are an affiliate of Newcastles
manager, which is an affiliate of Fortress. We acquired MSRs on
a pool of agency residential mortgage loans in September 2011
(the Portfolio). Pursuant to the Sale Agreement, we
sold to Newcastle the right to receive 65% of the excess cash
flow generated from the MSRs of the Portfolio after receipt of a
fixed basic servicing fee per loan. The sale price was
$43.7 million. We will retain all ancillary income
associated with servicing the Portfolio and 35% of the excess
cash flow after receipt of the fixed basic servicing fee. We
will continue to be the servicer of the loans and provide all
servicing and advancing functions for the Portfolio. Newcastle
will not have prior or ongoing obligations associated with the
Portfolio. Also in December 2011, we entered into a refinanced
loan agreement with Newcastle. Should we refinance any loan in
the Portfolio, subject to certain limitations, we will be
required to transfer the new loan or a replacement loan into the
Portfolio. The new or replacement loan will be governed by the
same terms set forth in the Sale Agreement described above. This
Sale Agreement will be accounted for as a financing arrangement
by us.
We currently serve as the loan subservicer for three loan
portfolios managed by FCDB FF1 LLC, FCDB 8020 REO LLC, FCDB FF1
2008-1
Trust, FCDB UB 8020 Residential LLC and FCDB GMPL
2008-1
Trust, which is managed by an affiliate of Fortress, for which
we receive a monthly per loan subservicing fee and other
performance incentive fees subject to our agreement with them.
For the years ended December 31, 2009, December 31,
2010, and for the nine months ended September 30, 2011, we
received $1.0 million, $0.6 million and
$0.2 million of subservicing fees, respectively. The
outstanding UPB as of December 31, 2010 and
September 30, 2011, was $121.1 million and
$81.1 million, respectively.
158
In September 2010, we entered into a marketing agreement with
Springleaf Home Equity, Inc., Springleaf Financial Services of
Arkansas, Inc. and MorEquity, Inc. (collectively, the
Entities), each of which are indirectly owned by
investment funds managed by affiliates of Fortress. Pursuant to
this agreement, we market our mortgage origination products to
customers of the Entities, and are compensated by the
origination fees of loans that we refinance. For the year ended
December 31, 2010, and for the nine months ended
September 30, 2011 we recognized revenue of
$0.4 million and $2.2 million, respectively. The
marketing agreement is set to expire on December 31, 2012.
Additionally, in January 2011, we entered into three agreements
to act as the loan subservicer for the Entities for a whole loan
portfolio and two securitized loan portfolios totaling
$4.4 billion for which we receive a monthly per loan
subservicing fee and other performance incentive fees subject to
our agreement with the Entities. For the nine months ended
September 30, 2011, we recognized revenue of
$7.4 million in additional servicing and other performance
incentive fees related to these portfolios.
Stockholders
Agreement
General
Prior to the completion of this offering, we will enter into the
Stockholders Agreement with the Initial Stockholder.
As discussed further below, the Stockholders Agreement that we
will enter into prior to completion of this offering provides
certain rights to the Initial Stockholder with respect to the
designation of directors for nomination and election to our
board of directors, as well as registration rights for certain
of our securities owned by the Fortress Stockholders.
Our Stockholders Agreement will provide that the parties thereto
will use their respective reasonable efforts (including voting
or causing to be voted all of our voting shares beneficially
owned by each) so that no amendment is made to our amended and
restated certificate of incorporation or amended and restated
bylaws in effect as of the date of the Stockholders Agreement
that would add restrictions to the transferability of our shares
by the Initial Stockholder or its permitted transferees which
are beyond those provided for in our amended and restated
certificate of incorporation, amended and restated bylaws, the
Stockholders Agreement or applicable securities laws, or that
nullify the rights set out in the Stockholders Agreement of the
Initial Stockholder or its permitted transferees unless such
amendment is approved by the Initial Stockholder.
Designation
and Election of Directors
Our Stockholders Agreement will provide that, for so long as the
Stockholders Agreement is in effect, we and the Fortress
Stockholders shall take all reasonable actions within our
respective control (including voting or causing to be voted all
of the securities entitled to vote generally in the election of
our directors held of record or beneficially owned by the
Fortress Stockholders, and, with respect to us, including in the
slate of nominees recommended by the board those individuals
designated by the Initial Stockholder) so as to elect to
the board, and to cause to continue in office, not more
than directors (or such other
number as the Initial Stockholder may agree in writing), of
whom, at any given time:
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at least a majority of such directors shall be individuals
designated by the Initial Stockholder, for so long as the
Fortress Stockholders beneficially own at least 40% of our
voting power;
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159
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at least directors
( if the board consists of more
than directors) shall be
individuals designated by the Initial Stockholder, for so long
as the Fortress Stockholders beneficially own less than 40% but
at least 20% of our voting power;
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at least directors shall be
individuals designated by the Initial Stockholder for so long as
the Fortress Stockholders beneficially own less than 20% but at
least 10% of our voting power; and
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at least director shall be an
individual designated by the Initial Stockholder for so long as
the Fortress Stockholders has beneficially own less than 10% but
at least 5% of our voting power.
|
In accordance with the Stockholders Agreement, the Initial
Stockholder will
designate , ,
and
for election to our board of directors prior to the completion
of this offering.
Registration
Rights
Demand Rights. Under our Stockholders
Agreement, the Fortress Stockholders will have, for so long as
the Fortress Stockholders beneficially own an amount of our
common stock (whether owned at the time of this offering or
subsequently acquired) equal to or greater than 1% of our shares
of common stock issued and outstanding immediately after the
consummation of this offering (a Registrable
Amount), demand registration rights that allow
the Fortress Stockholders, at any time
after days following the
consummation of this offering, to request that we register under
the Securities Act an amount equal to or greater than a
Registrable Amount. The Fortress Stockholders will be entitled
to unlimited demand registrations so long as such persons,
together, beneficially own a Registrable Amount. We are also not
required to effect any demand registration within three months
of a firm commitment underwritten offering to which
the requestor held piggyback rights, described
below, and which included at least 50% of the shares of common
stock requested by the requestor to be included. We are not
obligated to grant a request for a demand registration within
three months of any other demand registration.
Piggyback Rights. For so long as the Fortress
Stockholders beneficially own an amount of our common stock
equal to or greater than 1% of our common stock issued and
outstanding immediately after the consummation of this offering,
such Fortress Stockholders will also have piggyback
registration rights that allow them to include the common stock
that they own in any public offering of equity securities
initiated by us (other than those public offerings pursuant to
registration statements on
Forms S-4
or S-8) or
by any of our other stockholders that have registration rights.
The piggyback registration rights of the Fortress
Stockholders are subject to proportional cutbacks based on the
manner of the offering and the identity of the party initiating
such offering.
Shelf Registration. Under our Stockholders
Agreement, we will grant to the Initial Stockholder or any of
its respective permitted transferees, for so long as it
beneficially owns a Registrable Amount, the right to request a
shelf registration on
Form S-3
providing for offerings of our common stock to be made on a
continuous basis until all shares covered by such registration
have been sold, subject to our right to suspend the use of the
shelf registration prospectuses for a reasonable period of time
(not exceeding 60 days in succession or 90 days in the
aggregate in any 12 month period) if we determine that
certain disclosures required by the shelf registration
statements would be detrimental to us or our stockholders. In
addition, the Initial Stockholder may elect to participate in
such shelf registrations within ten days after notice of the
registration is given.
Indemnification; Expenses; Lock-ups. Under our
Stockholders Agreement, we will agree to indemnify the
applicable selling stockholder and its officers, directors,
employees, managers, members partners, agents and controlling
persons against any losses or damages resulting from any untrue
statement or omission of material fact in any registration
statement or prospectus pursuant to which it sells shares of our
160
common stock, unless such liability arose from the applicable
selling stockholders misstatement or omission, and the
applicable selling stockholder has agreed to indemnify us
against all losses caused by its misstatements or omissions. We
will pay all registration expenses incidental to our performance
under the Stockholders Agreement, and the applicable selling
stockholder will pay its portion of all underwriting discounts,
commissions and transfer taxes, if any, relating to the sale of
its shares of common stock under the Stockholders Agreement. We
have agreed to enter into, and to cause our officers and
directors to enter into, lock-up agreements in connection with
any exercise of registration rights by the Fortress Stockholders.
161
PRINCIPAL
AND SELLING STOCKHOLDERS
Prior to this offering, all of the shares of outstanding common
stock of Nationstar Mortgage Holdings Inc. were owned by the
Initial Stockholder, FIF HE Holdings LLC.
The following table sets forth information regarding the
ownership of our common stock. Other than the Initial
Stockholder and its direct and indirect equity holders, we are
not aware of any person, or group of affiliated persons, who
beneficially owns more than five percent of our outstanding
common stock. The percentage of beneficial ownership is based
on shares
of common stock outstanding after giving effect to the
Restructuring,
and shares
of common stock to be outstanding after the completion of this
offering, assuming no exercise of the underwriters
over-allotment option.
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Number of Shares
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Number of Shares
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Beneficially Owned
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Number
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Beneficially Owned
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Prior to the Offering
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of Shares
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After the Offering
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Number
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Percentage
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Being
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Number
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Percentage
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Name
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of Shares
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of Shares
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Offered
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of Shares
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of Shares
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Initial
Stockholder(1)
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100
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%
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(1) |
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FIF HE Holdings LLC. The address of the Initial Stockholder is
c/o Fortress
Investment Group LLC, 1345 Avenue of the Americas, 46th Floor,
New York, New York 10105. The text below contains information
with respect to the beneficial ownership the Initial Stockholder. |
The following table sets forth information as of January 1,
2012 regarding the beneficial ownership of the Initial
Stockholders issued and outstanding
Series 1 units by:
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each person or group who is known by us to own beneficially more
than 5% of the Initial Stockholders issued and outstanding
Series 1 Class A units;
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each of our directors;
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all of our directors and executive officers as a group.
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Beneficial ownership for the purposes of the following table is
determined in accordance with the rules and regulations of the
SEC. These rules generally provide that a person is the
beneficial owner of securities if such person has or shares the
power to vote or direct the voting of securities, or to dispose
or direct the disposition of securities or has the right to
acquire such powers within 60 days. The information does
not necessarily indicate beneficial ownership for any other
purpose. Except as disclosed in the footnotes to this table and
subject to applicable community property laws, we believe that
each beneficial owner identified in the table possesses sole
voting and investment power over all Series 1 units
shown as beneficially owned by the beneficial owner. For
purposes of the calculations in the table below, the number of
Series 1 units deemed outstanding includes
Series 1 units issuable upon exercise of options held
by the respective person which may be exercised within
60 days after January 1, 2012. For purposes of
calculating each persons percentage ownership,
Series 1 units issuable pursuant to options
exercisable within 60 days after January 1, 2012 are
included as outstanding and beneficially owned for that person
or group, but are not deemed outstanding for the purposes of
computing the percentage ownership of any other person. Unless
otherwise indicated in the table or footnotes below, the address
for each beneficial owner is
c/o Nationstar
Mortgage LLC, 350 Highland Drive, Lewisville, Texas 75067.
The Initial Stockholder has four types of issued and outstanding
Series 1 units. Series 1 Class A units have
voting rights. Series 1 Class B preferred units,
Series 1 Class C preferred units and Series 1
Class D
162
units do not have voting rights. The percentage of beneficial
ownership of the Initial Stockholders
Series 1 units is based on 13,210,932 Series 1
Class A units, 1,000 Series 1 Class B units,
81,938,773 Series 1 Class C preferred units and
83,028,948 Series 1 Class D preferred units issued and
outstanding as of January 1, 2012. The table excludes the
Series 1 Class B units as they are beneficially owned
by the Initial Stockholder and an employee who is not an
executive officer or director. The table assumes that the
underwriters will not exercise their over-allotment option.
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Number of Shares Beneficially
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Owned
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Number of
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Percentage of
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Series 1
Units(2)
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Series 1
Units(2)
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Series 1
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Series 1
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Series 1
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Series 1
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Series 1
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Series 1
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Name of Beneficial Owner
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Class A
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Class C
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Class D
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Class A
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Class C
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Class D
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Executive Officers and Directors
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Peter Smith
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*
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*
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*
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Anthony H. Barone
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104,828
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531,037
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537,552
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*
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*
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*
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Jay Bray
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77,473
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442,530
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447,959
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*
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*
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*
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Robert Appel
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44,744
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340,725
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345,262
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*
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*
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*
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Amar Patel
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31,116
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227,149
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230,175
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*
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*
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*
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Douglas Krueger
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*
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*
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*
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All executive officers, managers and directors as a group
(6 persons)
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258,161
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1,541,441
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1,560,948
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2.0
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%
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1.9
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%
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1.9
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%
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5% Interest holders
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Fortress Fund III
Funds(1)
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6,434,408
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40,198,666
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20,147,999
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48.7
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%
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49.1
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%
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24.3
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%
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Fortress Fund IV
Funds(1)
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6,434,411
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40,198,666
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61,320,001
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48.7
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%
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49.1
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%
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73.9
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%
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(1) |
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Fortress Fund III Funds represent Fortress Investment
Fund III LP, Fortress Investment Fund III
(Fund B) LP, Fortress Investment Fund III
(Fund C) LP, Fortress Investment Fund III (Fund
D) L.P., Fortress Investment Fund III
(Fund E) L.P., FIF III B HE BLKR LLC, and FIF III C HE
BLKR LLC. Fortress Fund IV Funds represent Fortress
Investment Fund IV (Fund A) L.P., Fortress
Investment Fund IV (Fund B) L.P., Fortress
Investment Fund IV (Fund C) L.P., Fortress
Investment Fund IV (Fund D) L.P., Fortress
Investment Fund IV (Fund E) L.P., Fortress
Investment Fund IV (Fund F) L.P. and Fortress
Investment Fund IV (Fund G) L.P., FIF IV B HE
BLKR LLC and FIF IV CFG HE BLKR LLC. Fortress Fund III GP
LLC is the general partner of each of the Fortress Fund III
Funds (excluding FIF III B HE BLKR LLC and FIF III C HE BLKR
LLC, which are wholly owned by Fortress Investment Fund III
(Fund B) L.P. and Fortress Investment Fund III
(Fund C) L.P., respectively). The sole managing member
of Fortress Fund III GP LLC is Fortress Investment
Fund GP (Holdings) LLC. The sole managing member of
Fortress Investment Fund III GP (Holdings) LLC is Fortress
Operating Entity I LP (FOE I). FIG Corp. is the
general partner of FOE I, and FIG Corp. is wholly owned by
Fortress Investment Group LLC. Fortress Fund IV GP L.P. is
the general partner of each of the Fortress Fund IV Funds
(excluding FIF IV HE BLKR LLC and FIF IV CFG HE BLKR LLC, which
are wholly owned by Fortress Investment Fund IV
(Fund B) L.P., and Fortress Investment Fund IV
(Fund C) L.P., Fortress Investment Fund IV
(Fund F) L.P. and Fortress Investment Fund IV
(Fund G) L.P., respectively). Fortress Fund IV GP
Holdings Ltd. is the general partner of Fortress Fund IV GP
L.P. Fortress Fund IV GP Holdings Ltd. is wholly owned by
FOE I. FIG Corp. is the general partner of FOE I. FIG Corp. is
wholly owned by Fortress Investment Group LLC
(Fortress). As of January 1, 2012, Wesley R.
Edens owned approximately 14.14% of Fortress. By virtue of his
ownership interest in Fortress and certain of its affiliates, as
well as his role in advising certain investment funds,
Wesley R. Edens may be deemed to be the natural person
that has sole or shared voting and investment control over the
shares listed as beneficially owned by Nationstar Mortgage
Holdings Inc. Mr. Edens disclaims beneficial ownership of such
shares except to the extent of his |
163
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pecuniary interest therein. The address of all persons listed
above is c/o Fortress Investment Group LLC, 1345 Avenue of the
Americas, 46th Floor, New York, New York 10105. |
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(2) |
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The Initial Stockholder issues its equity interests in two
series, each of which relate to certain specified assets of the
LLC: Series 1 units, which relate to all the issued
and outstanding membership interests in Nationstar Mortgage LLC;
and Series 2 units, which relate to equity interests
in a separate entity, which is not a subsidiary of Nationstar
Mortgage LLC. Certain executive compensation arrangements
include equity grants of the Series 2 units of our
Initial Stockholder. See Compensation Discussion and
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DESCRIPTION
OF CAPITAL STOCK
The following descriptions are summaries of the material
terms of our amended and restated certificate of incorporation
and amended and restated bylaws as will be in effect upon the
consummation of this offering. These descriptions contain all
information which we consider to be material, but may not
contain all of the information that is important to you. To
understand them fully, you should read our amended and restated
certificate of incorporation and amended and restated bylaws,
copies of which are filed with the SEC as exhibits to the
registration statement of which this prospectus is a part.
Please note that, with respect to any of our shares held in
book-entry form through The Depository Trust Company or any
other share depositary, the depositary or its nominee will be
the sole registered and legal owner of those shares, and
references in this prospectus to any stockholder or
holder of those shares means only the depositary or
its nominee. Persons who hold beneficial interests in our shares
through a depositary will not be registered or legal owners of
those shares and will not be recognized as such for any purpose.
For example, only the depositary or its nominee will be entitled
to vote the shares held through it, and any dividends or other
distributions to be paid, and any notices to be given, in
respect of those shares will be paid or given only to the
depositary or its nominee. Owners of beneficial interests in
those shares will have to look solely to the depositary with
respect to any benefits of share ownership, and any rights they
may have with respect to those shares will be governed by the
rules of the depositary, which are subject to change from time
to time. We have no responsibility for those rules or their
application to any interests held through the depositary.
Under our amended and restated certificate of incorporation, our
authorized capital stock will consist of:
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shares
of common stock, par value $0.01 per share; and
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preferred
shares, par value $0.01 per share.
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Upon completion of this offering, there will be
outstanding shares
of common stock (assuming no exercise of the underwriters
over-allotment option) and no outstanding shares of preferred
stock.
The following is a description of the material terms of our
amended and restated certificate of incorporation and amended
and restated bylaws. We refer you to our amended and restated
certificate of incorporation and amended and restated bylaws,
copies of which have been filed with the SEC as exhibits to our
registration statement of which this prospectus forms a part.
Common
Stock
Each holder of common stock is entitled to one vote for each
share of common stock held on all matters submitted to a vote of
stockholders. Except as provided with respect to any other class
or series of stock, the holders of our common stock will possess
the exclusive right to vote for the election of directors and
for all other purposes. Our amended and restated certificate of
incorporation does not provide for cumulative voting in the
election of directors, which means that the holders of a
majority of the outstanding shares of common stock can elect all
of the directors standing for election, and the holders of the
remaining shares will not be able to elect any directors;
provided, however, that pursuant to the Stockholders Agreement
that we will enter into with the Initial Stockholder prior to
the completion of this offering, we will be required to take all
reasonable actions within our control (including nominating as
directors the individuals designated by the Initial
Stockholder) so that up to a majority (or other number,
depending upon the level of ownership of the Initial
Stockholder) of the members of our board of directors are
individuals designated by the Initial Stockholder.
Subject to any preference rights of holders of any preferred
stock that we may issue in the future, holders of our common
stock are entitled to receive dividends, if any, declared from
time to time by our board
165
of directors out of legally available funds. In the event of
our liquidation, dissolution or winding up, the holders of our
common stock are entitled to share ratably in all assets
remaining after the payment of liabilities, subject to any
rights of holders of our preferred stock prior to distribution.
Holders of our common stock have no preemptive, subscription,
redemption or conversion rights. Any shares of common stock sold
under this prospectus will be validly issued, fully paid and
nonassessable upon issuance against full payment of the purchase
price for such shares.
Preferred
Stock
Our board of directors has the authority, without action by our
stockholders, to issue preferred stock and to fix voting powers
for each class or series of preferred stock, and to provide that
any class or series may be subject to redemption, entitled to
receive dividends, entitled to rights upon dissolution, or
convertible or exchangeable for shares of any other class or
classes of capital stock. The rights with respect to a series or
class of preferred stock may be greater than the rights attached
to our common stock. It is not possible to state the actual
effect of the issuance of any shares of our preferred stock on
the rights of holders of our common stock until our board of
directors determines the specific rights attached to that
preferred stock. The effect of issuing preferred stock could
include, among other things, one or more of the following:
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restricting dividends in respect of our common stock;
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diluting the voting power of our common stock or providing that
holders of preferred stock have the right to vote on matters as
a class;
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impairing the liquidation rights of our common stock; or
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delaying or preventing a change of control of us.
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Stockholders
Agreement
For a description of the Stockholders Agreement that we will
enter into with the Initial Stockholder prior to the completion
of this offering, see Certain Relationships and Related
Party TransactionsStockholders Agreement.
Anti-Takeover
Effects of Delaware Law, Our Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws
The following is a summary of certain provisions of our amended
and restated certificate of incorporation and amended and
restated bylaws that may be deemed to have an anti-takeover
effect and may delay, deter or prevent a tender offer or
takeover attempt that a stockholder might consider to be in its
best interest, including those attempts that might result in a
premium over the market price for the shares held by
stockholders.
Authorized
but Unissued Shares
The authorized but unissued shares of our common stock and our
preferred stock will be available for future issuance without
obtaining stockholder approval. These additional shares may be
utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate
acquisitions and employee benefit plans. The existence of
authorized but unissued shares of our common stock and preferred
stock could render more difficult or discourage an attempt to
obtain control over us by means of a proxy contest, tender
offer, merger or otherwise.
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Delaware
Business Combination Statute
We are organized under Delaware law. Some provisions of Delaware
law may delay or prevent a transaction that would cause a change
in our control.
Our amended and restated certificate of incorporation provides
that Section 203 of the Delaware General Corporation Law,
as amended, an anti-takeover law, will not apply to us. In
general, this statute prohibits a publicly held Delaware
corporation from engaging in a business combination with an
interested stockholder for a period of three years after the
date of the transaction by which that person became an
interested stockholder, unless the business combination is
approved in a prescribed manner. For purposes of
Section 203, a business combination includes a merger,
asset sale or other transaction resulting in a financial benefit
to the interested stockholder, and an interested stockholder is
a person who, together with affiliates and associates, owns, or
within three years prior, did own, 15% or more of voting stock.
Other
Provisions of Our Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws
Our amended and restated certificate of incorporation provides
for a staggered board of directors consisting of three classes
of directors. Directors of each class are chosen for three-year
terms upon the expiration of their current terms and each year
one class of our directors will be elected by our stockholders.
The terms of the first, second and third classes will expire in
2013, 2014 and 2015, respectively. We believe that
classification of our board of directors will help to assure the
continuity and stability of our business strategies and policies
as determined by our board of directors. Additionally, there is
no cumulative voting in the election of directors. This
classified board provision could have the effect of making the
replacement of incumbent directors more time consuming and
difficult. At least two annual meetings of stockholders, instead
of one, will generally be required to effect a change in a
majority of our board of directors. Thus, the classified board
provision could increase the likelihood that incumbent directors
will retain their positions. The staggered terms of directors
may delay, defer or prevent a tender offer or an attempt to
change control of us, even though a tender offer or change in
control might be believed by our stockholders to be in their
best interest. In addition, our amended and restated certificate
of incorporation and amended and restated bylaws provide that
directors may be removed only for cause and only with the
affirmative vote of at least 80% of the voting interest of
stockholders entitled to vote; provided, however, that for so
long as the Fortress Stockholders beneficially own at least 40%
of our issued and outstanding common stock, directors may be
removed with or without cause with the affirmative vote of a
majority of the voting interest of stockholders entitled to vote.
Pursuant to our amended and restated certificate of
incorporation, shares of our preferred stock may be issued from
time to time, and the board of directors is authorized to
determine and alter all rights, preferences, privileges,
qualifications, limitations and restrictions without limitation.
See Preferred Stock.
Ability
of our Stockholders to Act
Our amended and restated certificate of incorporation and
amended and restated bylaws do not permit our stockholders to
call special stockholders meetings; provided, however, that for
so long as the Fortress Stockholders beneficially own at least
25% of our issued and outstanding common stock, any stockholders
that collectively beneficially own at least 25% of our issued
and outstanding common stock may call special meetings of our
stockholders. Written notice of any special meeting so called
shall be given to each stockholder of record entitled to vote at
such meeting not less than 10 or more than 60 days before
the date of such meeting, unless otherwise required by law.
Under our amended and restated certificate of incorporation and
amended and restated bylaws, any action required or permitted to
be taken at a meeting of our stockholders may be taken without a
meeting by written consent of a majority of our stockholders for
so long as the Fortress Stockholders beneficially own at least
25% of our issued and outstanding common stock. After the
Fortress Stockholders beneficially own less
167
than 25% of our issued and outstanding stock, only action by
unanimous written consent of our stockholders can be taken
without a meeting.
Our amended and restated bylaws provide that nominations of
persons for election to our board of directors may be made at
any annual meeting of our stockholders, or at any special
meeting of our stockholders called for the purpose of electing
directors, (a) by or at the direction of our board of
directors or (b) by any of our stockholders. In addition to
any other applicable requirements, for a nomination to be
properly brought by a stockholder, such stockholder must have
given timely notice thereof in proper written form to our
Secretary of the Company. To be timely, a stockholders
notice must be delivered to or mailed and received at our
principal executive offices (a) in the case of an annual
meeting of stockholders, not less than 90 days nor more
than 120 days prior to the anniversary date of the
immediately preceding annual meeting of stockholders; provided,
however, that in the event that the annual meeting is called for
a date that is not within 25 days before or after such
anniversary date, notice by a stockholder in order to be timely
must be so received not later than the close of business on the
tenth day following the day on which such notice of the date of
the annual meeting was mailed or such public disclosure of the
date of the annual meeting was made, whichever first occurs; and
(b) in the case of a special meeting of our stockholders
called for the purpose of electing directors, not later than the
close of business on the tenth day following the day on which
notice of the date of the special meeting was mailed or public
disclosure of the date of the special meeting was made,
whichever first occurs.
Our amended and restated bylaws provide that no business may be
transacted at any annual meeting of our stockholders, other than
business that is either (a) specified in the notice of
meeting given by or at the direction of our board of directors,
(b) otherwise properly brought before the annual meeting by
or at the direction of our board of directors, or
(c) otherwise properly brought by any of our stockholders.
In addition to any other applicable requirements, for business
to be properly brought before an annual meeting by a
stockholder, such stockholder must have given timely notice
thereof in proper written form to our Secretary. To be timely, a
stockholders notice must be delivered to or mailed and
received at our principal executive offices not less than
90 days nor more than 120 days prior to the
anniversary date of the immediately preceding annual meeting of
stockholders; provided, however, that in the event that the
annual meeting is called for a date that is not within
25 days before or after such anniversary date, notice by a
stockholder in order to be timely must be so received not later
than the close of business on the tenth day following the day on
which such notice of the date of the annual meeting was mailed
or such public disclosure of the date of the annual meeting was
made, whichever first occurs.
Limitations
on Liability and Indemnification of Directors and
Officers
Our amended and restated certificate of incorporation and
amended and restated bylaws provide that our directors will not
be personally liable to us or our stockholders for monetary
damages for breach of a fiduciary duty as a director, except for
the following (to the extent such exemption is not permitted
under the Delaware General Corporation Law, as amended from time
to time):
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any breach of the directors duty of loyalty to us or our
stockholders;
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intentional misconduct or a knowing violation of law;
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liability under Delaware corporate law for an unlawful payment
of dividends or an unlawful stock purchase or redemption of
stock; or
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any transaction from which the director derives an improper
personal benefit.
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Our amended and restated certificate of incorporation provides
that we must indemnify our directors and officers to the fullest
extent permitted by law. We are also expressly authorized to
advance certain expenses (including attorneys fees and
disbursements and court costs) to our directors and officers and
carry directors and officers insurance providing
indemnification for our directors and officers for some
liabilities.
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We believe that these indemnification provisions and insurance
are useful to attract and retain qualified directors and
executive officers.
Prior to the completion of this offering, we intend to enter
into separate indemnification agreements with each of our
directors and executive officers. Each indemnification agreement
will provide, among other things, for indemnification to the
fullest extent permitted by law and our amended and restated
certificate of incorporation against (i) any and all
expenses and liabilities, including judgments, fines, penalties
and amounts paid in settlement of any claim with our approval
and counsel fees and disbursements, (ii) any liability
pursuant to a loan guarantee, or otherwise, for any of our
indebtedness, and (iii) any liabilities incurred as a
result of acting on our behalf (as a fiduciary or otherwise) in
connection with an employee benefit plan. The indemnification
agreements will provide for the advancement or payment of all
expenses to the indemnitee and for reimbursement to us if it is
found that such indemnitee is not entitled to such
indemnification under applicable law and our amended and
restated certificate of incorporation. These provisions and
agreements may have the practical effect in some cases of
eliminating our stockholders ability to collect monetary
damages from our directors and executive officers.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or
persons controlling the registrant pursuant to the foregoing
provisions, we have been informed that, in the opinion of the
SEC such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
Corporate
Opportunity
Under our amended and restated certificate of incorporation, to
the extent permitted by law:
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the Fortress Stockholders have the right to, and have no duty to
abstain from, exercising such right to, engage or invest in the
same or similar business as us, do business with any of our
clients, customers or vendors or employ or otherwise engage any
of our officers, directors or employees;
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if the Fortress Stockholders or any of their officers, directors
or employees acquire knowledge of a potential transaction that
could be a corporate opportunity, they have no duty to offer
such corporate opportunity to us, our stockholders or affiliates;
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we have renounced any interest or expectancy in, or in being
offered an opportunity to participate in, such corporate
opportunities; and
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in the event that any of our directors and officers who is also
a director, officer or employee of any of the Fortress
Stockholders acquires knowledge of a corporate opportunity or is
offered a corporate opportunity, provided that this knowledge
was not acquired solely in such persons capacity as our
director or officer and such person acted in good faith, then
such person is deemed to have fully satisfied such persons
fiduciary duty and is not liable to us if any of the Fortress
Stockholders pursues or acquires such corporate opportunity or
if such person did not present the corporate opportunity to us.
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Transfer
Agent
The registrar and transfer agent for our common stock
is .
Listing
Our common stock has been authorized for listing on the NYSE
under the symbol
,
subject to official notice of issuance.
169
SHARES ELIGIBLE
FOR FUTURE SALE
Prior to this offering, there has been no public market for our
common stock, and we cannot predict the effect, if any, that
sales of shares or availability of any shares for sale will have
on the market price of our common stock prevailing from time to
time. Sales of substantial amounts of common stock (including
shares issued on the exercise of options, warrants or
convertible securities, if any) or the perception that such
sales could occur, could adversely affect the market price of
our common stock and our ability to raise additional capital
through a future sale of securities.
Upon completion of this offering, we will
have shares
of common stock issued and outstanding (or a maximum
of shares
if the underwriters exercise their over-allotment option in
full). All of
the shares
of our common stock sold in this offering
(or shares
if the underwriters exercise their over-allotment option in
full) will be freely tradable without restriction or further
registration under the Securities Act unless such shares are
purchased by affiliates as that term is defined in
Rule 144 under the Securities Act. Upon completion of this
offering, approximately % of our
outstanding common stock will be held by the Initial Stockholder
and members of our management and employees. These shares will
be restricted securities as that phrase is defined
in Rule 144. Subject to certain contractual restrictions,
including the
lock-up
agreements described below, holders of restricted shares will be
entitled to sell those shares in the public market if they
qualify for an exemption from registration under Rule 144
or any other applicable exemption under the Securities Act.
Subject to the
lock-up
agreements described below and the provisions of Rules 144
and 701, additional shares will be available for sale as set
forth below.
Lock-Up
Agreements
We and our executive officers, directors and the Initial
Stockholder have agreed with the underwriters, subject to
certain exceptions, not to dispose of or hedge any of their
shares of common stock or securities convertible into or
exchangeable for shares during the period from the date of this
prospectus continuing through the date days after
the date of this prospectus, except with the prior written
consent of the designated representatives. This agreement does
not apply to any existing incentive programs.
The -day restricted period described in the preceding
paragraph will be automatically extended if (i) during the
last 17 days of the -day restricted period we
issue an earnings release or announce material news or a
material event relating to us occurs or (ii) prior to the
expiration of the -day restricted period, we announce
that we will release earnings results during the
16-day
period following the last day of the -day restricted
period, in which case the restrictions described in the
preceding paragraph will continue to apply until the expiration
of the
18-day
period beginning on the issuance of the earnings release or the
announcement of the material news or material event, unless the
designated representatives provide a written waiver of such
extension. The designated representatives have no present intent
or arrangement to release any of the securities subject to these
lock-up
agreements. The release of any
lock-up is
considered on a case by case basis. Factors in deciding whether
to release shares may include the length of time before the
lock-up
expires, the number of shares involved, the reason for the
requested release, market conditions, the trading price of our
common stock, historical trading volumes of our common stock and
whether the person seeking the release is an officer, director
or affiliate of the Company.
Rule 144
In general, under Rule 144 under the Securities Act, a
person (or persons whose shares are aggregated) who is not
deemed to have been an affiliate of ours at any time during the
three months preceding a sale, and who has beneficially owned
restricted securities within the meaning of Rule 144 for at
least six months (including any period of consecutive ownership
of preceding non-affiliated holders) would be entitled to sell
those shares, subject only to the availability of current public
information about us. A non-affiliated person who has
beneficially owned restricted securities within the meaning of
Rule 144 for at least one year would be entitled to sell
those shares without regard to the provisions of Rule 144.
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A person (or persons whose shares are aggregated) who is deemed
to be an affiliate of ours and who has beneficially owned
restricted securities within the meaning of Rule 144 for at
least six months would be entitled to sell within any
three-month period a number of shares that does not exceed the
greater of one percent of the then outstanding shares of our
common stock or the average weekly trading volume of our common
stock reported through the NYSE during the four calendar weeks
preceding such sale. Such sales are also subject to certain
manner of sale provisions, notice requirements and the
availability of current public information about us.
Rule 701
In general, under Rule 701 of the Securities Act, most of
our employees, consultants or advisors who purchased shares from
us in connection with a qualified compensatory stock plan or
other written agreement are eligible to resell those shares
90 days after the date of this prospectus in reliance on
Rule 144, but without compliance with the holding period or
certain other restrictions contained in Rule 144.
Registration
Rights
Pursuant to the Stockholders Agreement that we will enter into
prior to completion of this offering, the Initial Stockholder
and certain of its affiliates and permitted third party
transferees will have the right, in certain circumstances, to
require us to register their shares of our common stock under
the Securities Act for sale into the public markets at any time
following the expiration of
the -day
lock-up
period described above. The Initial Stockholder and certain of
its affiliates and permitted third party transferees will also
be entitled to piggyback registration rights with respect to any
future registration statement that we file for an underwritten
public offering of our securities. Upon the effectiveness of
such a registration statement, all shares covered by the
registration statement will be freely transferable. If these
rights are exercised and the Initial Stockholder sells a large
number of shares of common stock, the market price of our common
stock could decline. See Certain Relationships and Related
Party TransactionsStockholders Agreement for a more
detailed description of these registration rights.
171
CERTAIN
U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS
TO NON-U.S.
HOLDERS
The following discussion is a summary of certain
U.S. federal income and estate tax considerations generally
applicable to the purchase, ownership and disposition of our
common stock by
Non-U.S. Holders.
A
Non-U.S. Holder
means a person (other than a partnership) that is not a citizen
or resident of the United States, a U.S. domestic
corporation, or a person that would otherwise be subject to
U.S. federal income tax on a net income basis in respect of
such common stock. This discussion deals only with our common
stock held as capital assets by holders who purchase common
stock in this offering. This discussion does not cover all
aspects of U.S. federal income taxation that may be
relevant to the purchase, ownership or disposition of our common
stock by prospective investors in light of their particular
circumstances. In particular, this discussion does not address
all of the tax considerations that may be relevant to persons in
special tax situations, including persons that will hold shares
of our common stock in connection with a U.S. trade or
business or a U.S. permanent establishment, hold more than
5% of our common stock, are a controlled foreign
corporation or a passive foreign investment
company, or are otherwise subject to special treatment
under the Code. You should consult your own tax advisors about
the tax consequences of the purchase, ownership, and disposition
of our common stock in light of your own particular
circumstances, including the tax consequences under state,
local, foreign and other tax laws and the possible effects of
any changes in applicable tax laws.
Furthermore, this summary is based upon the provisions of the
Code, the Treasury regulations promulgated thereunder and
administrative and judicial interpretations thereof, all as of
the date hereof. Such authorities may be repealed, revoked,
modified or subject to differing interpretations, possibly on a
retroactive basis, so as to result in U.S. federal income
tax or estate tax consequences different from those discussed
below. This discussion does not address any other
U.S. federal tax considerations (such as gift tax) or any
state, local or
non-U.S. tax
considerations.
Dividends
As discussed under Dividend Policy above, we do not
currently expect to pay dividends. In the event that we do make
a distribution of cash or property with respect to our common
stock, any such distributions generally will constitute
dividends for U.S. federal income tax purposes to the
extent of our current or accumulated earnings and profits, as
determined under U.S. federal income tax principles. If a
distribution exceeds our current and accumulated earnings and
profits, the excess will be treated as a tax-free return of the
Non-U.S. Holders
investment, up to such holders tax basis in the common
stock. Any remaining excess will be treated as capital gain,
subject to the tax treatment described below in Sale,
Exchange or Other Taxable Disposition of Common Stock.
Dividends paid to you generally will be subject to
U.S. federal withholding tax at a 30% rate, or such lower
rate as may be specified by an applicable tax treaty. Even if
you are eligible for a lower treaty rate, we and other payors
will generally be required to withhold at a 30% rate (rather
than the lower treaty rate) on dividend payments to you, unless:
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you have furnished to us or such other payor a valid Internal
Revenue Service (IRS)
Form W-8BEN
or other documentary evidence establishing your entitlement to
the lower treaty rate with respect to such payments, and
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in the case of actual or constructive dividends paid to a
foreign entity after December 31, 2013, you or the foreign
entity, if required, have provided the withholding agent with
certain information with respect to your or the entitys
direct and indirect U.S. owners, and, if you hold the
common stock through a foreign financial institution, such
institution has entered into an agreement with the
U.S. government to collect and provide to the U.S. tax
authorities information about its accountholders (including
certain investors in such institution or entity).
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172
If you are eligible for a reduced rate of U.S. federal
withholding tax pursuant to an applicable income tax treaty or
otherwise, you may obtain a refund of any excess amounts
withheld by timely filing an appropriate claim for refund with
the IRS. Investors are encouraged to consult with their own tax
advisors regarding the possible implications of these
withholding requirements on their investment in the common stock.
Sale,
Exchange or Other Taxable Disposition of Common Stock
You generally will not be subject to U.S. federal income
tax with respect to gain recognized on a sale, exchange or other
taxable disposition of shares of our common stock unless you are
an individual present in the United States for 183 or more days
in the taxable year of the sale, exchange or other taxable
disposition, and certain other requirements are met. If you are
such an individual, you will generally be subject to a flat 30%
tax on any gain derived from the sale, exchange or other taxable
disposition that may be offset by U.S. source capital
losses (even though you are not considered a resident of the
United States).
In the case of the sale or disposition of common stock after
December 31, 2014, you may be subject to a 30% withholding
tax on the gross proceeds of the sale or disposition unless the
requirements described in the last bullet point above under
Dividends are satisfied. Investors are
encouraged to consult with their own tax advisors regarding the
possible implications of these withholding requirements on their
investment in the common stock and the potential for a refund or
credit in the case of any withholding tax.
Information
Reporting and Backup Withholding
We must report annually to the IRS and to each
Non-U.S. holder
the amount of dividends paid to such holder and the tax withheld
with respect to such dividends, regardless of whether
withholding was required. Copies of the information returns
reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the
Non-U.S. holder
resides under the provisions of an applicable income tax treaty.
A
Non-U.S. holder
may be subject to backup withholding for dividends paid to such
holder unless such holder certifies under penalty of perjury
that it is a
Non-U.S. holder
or such holder otherwise establishes an exemption. Any amounts
withheld under the backup withholding rules may be allowed as a
refund or a credit against a
Non-U.S. holders
U.S. federal income tax liability provided the required
information is timely furnished to the IRS.
U.S.
Federal Estate Tax
Shares of our common stock held (or deemed held) by an
individual
Non-U.S. Holder
at the time of his or her death will be included in such
Non-U.S. Holders
gross estate for U.S. federal estate tax purposes, unless
an applicable estate tax treaty provides otherwise.
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UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated is
acting as representative of each of the underwriters named
below. Subject to the terms and conditions set forth in an
underwriting agreement among us, the Initial Stockholder and the
underwriters, we and the Initial Stockholder have agreed to sell
to the underwriters, and each of the underwriters has agreed,
severally and not jointly, to purchase from us and the Initial
Stockholder, the number of shares of common stock set forth
opposite its name below.
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Number
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Underwriter
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of Shares
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Merrill Lynch, Pierce, Fenner & Smith
Incorporated
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Total
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Subject to the terms and conditions set forth in the
underwriting agreement, the underwriters have agreed, severally
and not jointly, to purchase all of the shares sold under the
underwriting agreement if any of these shares are purchased. If
an underwriter defaults, the underwriting agreement provides
that the purchase commitments of the nondefaulting underwriters
may be increased or the underwriting agreement may be terminated.
We and the Initial Stockholder have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect of those
liabilities.
The underwriters are offering the shares, subject to prior sale,
when, as and if issued to and accepted by them, subject to
approval of legal matters by their counsel, including the
validity of the shares, and other conditions contained in the
underwriting agreement, such as the receipt by the underwriters
of officers certificates and legal opinions. The
underwriters reserve the right to withdraw, cancel or modify
offers to the public and to reject orders in whole or in part.
Commissions
and Discounts
The representative has advised us and the Initial Stockholder
that the underwriters propose initially to offer the shares to
the public at the public offering price set forth on the cover
page of this prospectus and to dealers at that price less a
concession not in excess of
$ per share. After the
initial offering, the public offering price, concession or any
other term of the offering may be changed.
The following table shows the public offering price,
underwriting discount and proceeds before expenses to us and the
Initial Stockholder. The information assumes either no exercise
or full exercise by the underwriters of their option to purchase
additional shares.
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Per Share
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Without Option
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With Option
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Public offering price
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$
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$
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$
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Underwriting discount
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$
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$
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$
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Proceeds, before expenses, to us
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$
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$
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$
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Proceeds, before expenses, to the Initial Stockholder
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$
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$
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$
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The expenses of the offering, not including the underwriting
discount, are estimated at $ and
are payable by us and the Initial Stockholder.
174
Option to
Purchase Additional Shares
We and the Initial Stockholder have granted an option to the
underwriters, exercisable for 30 days after the date of
this prospectus, to purchase up
to
additional shares at the public offering price, less the
underwriting discount. If the underwriters exercise this option,
each will be obligated, subject to conditions contained in the
underwriting agreement, to purchase a number of additional
shares proportionate to that underwriters initial amount
reflected in the above table.
No Sales
of Similar Securities
We, the Initial Stockholder, our executive officers and
directors have agreed not to sell or transfer any common stock
or securities convertible into, exchangeable for, exercisable
for, or repayable with common stock,
for days after the date of
this prospectus without first obtaining the written consent of
Merrill Lynch, Pierce, Fenner & Smith Incorporated.
Specifically, we and these other persons have agreed, with
certain limited exceptions, not to directly or indirectly
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offer, pledge, sell or contract to sell any common stock,
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sell any option or contract to purchase any common stock,
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purchase any option or contract to sell any common stock,
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grant any option, right or warrant for the sale of any common
stock,
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lend or otherwise dispose of or transfer any common stock,
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request or demand that we file a registration statement related
to the common stock, or
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enter into any swap or other agreement that transfers, in whole
or in part, the economic consequence of ownership of any common
stock whether any such swap or transaction is to be settled by
delivery of shares or other securities, in cash or otherwise.
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This lock-up provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable
with common stock. It also applies to common stock owned now or
acquired later by the person executing the agreement or for
which the person executing the agreement later acquires the
power of disposition. In the event that either (x) during
the last 17 days of the lock-up period referred to above,
we issue an earnings release or material news or a material
event relating to us occurs or (y) prior to the expiration
of the lock-up period, we announce that we will release earnings
results or become aware that material news or a material event
will occur during the 16-day period beginning on the last day of
the lock-up period, the restrictions described above shall
continue to apply until the expiration of the 18-day period
beginning on the issuance of the earnings release or the
occurrence of the material news or material event.
NYSE
Listing
We expect the shares to be approved for listing on the NYSE
under the symbol . In
order to meet the requirements for listing on that exchange, the
underwriters have undertaken to sell a minimum number of shares
to a minimum number of beneficial owners as required by that
exchange.
Before this offering, there has been no public market for our
common stock. The initial public offering price will be
determined through negotiations among us, the Initial
Stockholder and the representative. In addition to prevailing
market conditions, the factors to be considered in determining
the initial public offering price are:
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the valuation multiples of publicly traded companies that the
representative believes to be comparable to us,
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175
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our financial information,
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the history of, and the prospects for, our company and the
industry in which we compete,
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an assessment of our management, its past and present
operations, and the prospects for, and timing of, our future
revenues,
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the present state of our development, and
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the above factors in relation to market values and various
valuation measures of other companies engaged in activities
similar to ours.
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An active trading market for the shares may not develop. It is
also possible that after the offering the shares will not trade
in the public market at or above the initial public offering
price.
The underwriters do not expect to sell more than 5% of the
shares in the aggregate to accounts over which they exercise
discretionary authority.
Price
Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may
limit underwriters and selling group members from bidding for
and purchasing our common stock. However, the representative may
engage in transactions that stabilize the price of the common
stock, such as bids or purchases to peg, fix or maintain that
price.
In connection with the offering, the underwriters may purchase
and sell our common stock in the open market. These transactions
may include short sales, purchases on the open market to cover
positions created by short sales and stabilizing transactions.
Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the
offering. Covered short sales are sales made in an
amount not greater than the underwriters option to
purchase additional shares described above. The underwriters may
close out any covered short position by either exercising their
option to purchase additional shares or purchasing shares in the
open market. In determining the source of shares to close out
the covered short position, the underwriters will consider,
among other things, the price of shares available for purchase
in the open market as compared to the price at which they may
purchase shares through the option granted to them.
Naked short sales are sales in excess of such
option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position
is more likely to be created if the underwriters are concerned
that there may be downward pressure on the price of our common
stock in the open market after pricing that could adversely
affect investors who purchase in the offering. Stabilizing
transactions consist of various bids for or purchases of shares
of common stock made by the underwriters in the open market
prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representative has repurchased shares sold by or for the account
of such underwriter in stabilizing or short covering
transactions.
Similar to other purchase transactions, the underwriters
purchases to cover the syndicate short sales may have the effect
of raising or maintaining the market price of our common stock
or preventing or retarding a decline in the market price of our
common stock. As a result, the price of our common stock may be
higher than the price that might otherwise exist in the open
market. The underwriters may conduct these transactions on the
NYSE, in the over-the-counter market or otherwise.
Neither we nor any of the underwriters make any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
our common stock. In addition, neither we nor any of the
underwriters make any representation that the representative
will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.
176
Electronic
Distribution
In connection with the offering, certain of the underwriters or
securities dealers may distribute prospectuses by electronic
means, such as
e-mail.
Other
Relationships
Bank of America, N.A. (BANA), an affiliate of
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
one of the underwriters of this offering, is the lender under
our $175 Million Warehouse Facility and Merrill Lynch, Pierce,
Fenner & Smith Incorporated was an initial purchaser
in connection with the offering in March 2010 of our senior
notes.
Some of the underwriters and their affiliates have engaged in,
and may in the future engage in, investment banking and other
commercial dealings in the ordinary course of business with us
or our affiliates. They have received, or may in the future
receive, customary fees and commissions for these transactions.
In addition, in the ordinary course of their business
activities, the underwriters and their affiliates may make or
hold a broad array of investments and actively trade debt and
equity securities (or related derivative securities) and
financial instruments (including bank loans) for their own
account and for the accounts of their customers. Such
investments and securities activities may involve securities
and/or
instruments of ours or our affiliates. The underwriters and
their affiliates may also make investment recommendations
and/or
publish or express independent research views in respect of such
securities or financial instruments and may hold, or recommend
to clients that they acquire, long
and/or short
positions in such securities and instruments.
In December 2011, we signed an agreement to purchase the
servicing rights to certain reverse mortgages (the Reverse
Mortgage Acquisition) from BANA. Under the Reverse
Mortgage Acquisition, we agreed to purchase certain servicing
rights relating to reverse mortgage loans with an aggregate UPB
as of December 31, 2011 of approximately $18 billion
and assume certain liabilities associated with such MSRs. On
December 22, 2011, we acquired the MSRs relating to reverse
mortgage loans with an aggregate UPB as of December 31,
2011 of approximately $7.8 billion for cash of
$4.3 million and assumption of a servicing liability of
$10.5 million. In addition, we acquired the related
advances to the MSRs for approximately $24.1 million,
subject to adjustment based on actual balances at
January 1, 2012. Our acquisition of MSRs related to an
additional $9.5 billion of UPB as of December 31, 2011
is expected to close during 2012 upon receipt of certain
specified third party approvals. On December 23, 2011, we
paid a deposit of $9.0 million related to such servicing.
Additionally, we expect to subservice on behalf of the bank
certain reverse mortgage loans with a UPB as of
December 31, 2011 of approximately $1.4 billion
beginning in the later portion of 2012.
The purchase agreement for the Reverse Mortgage Acquisition
provides for customary mutual representations and warranties and
cross-indemnities. BANA is obligated among other things, under
certain circumstances and subject to various terms and
conditions, to repurchase certain of the loans associated with
the servicing rights that were sold to us and, for a limited
time, to make certain advances, including principal advances,
with respect to the underlying mortgage loans to the borrower,
and we are obligated to reimburse BANA monthly for these
advances for one year.
Also, in September 2011, we purchased certain MSRs relating to
residential mortgage loans with an aggregate UPB of
approximately $10 billion as of December 31, 2011 from
BANA for approximately $69.6 million. In connection with
this transaction, we and BANA made customary representations and
warranties to each other and agreed to customary
cross-indemnities.
We intend to continue to actively seek additional servicing
acquisitions from third parties, potentially including from the
underwriters or their affiliates.
177
In connection with the settlement agreement that BANA, certain
affiliates of Bank of America and Countrywide Financial
Corporation (Countrywide) entered into with The Bank
of New York Mellon relating to certain legacy Countrywide
residential mortgage-backed securitization repurchase exposures
(the Settlement), BANA agreed to transfer the
servicing related to certain high-risk loans to approved
subservicers. The Company is an approved subservicer under the
Settlement. While the Settlement has not received final court
approval, BANA expects to transfer the servicing under the
Settlement of certain loans to us in accordance with the terms
of the Settlement for which we expect to be paid subservicing
fees in accordance with the Settlement.
Notice to
Prospective Investors in the European Economic Area
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a
Relevant Member State), will effect from and
including the date on which the Prospectus Directive is
implemented in that Relevant Member State (the Relevant
Implementation Date), no offer of shares may be made to
the public in that Relevant Member State other than:
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A.
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to any legal entity which is a qualified investor as defined in
the Prospectus Directive;
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B.
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to fewer than 100 or, if the Relevant Member State has
implemented the relevant provision of the 2010 PD Amending
Directive, 150, natural or legal persons (other than qualified
investors as defined in the Prospectus Directive), as permitted
under the Prospectus Directive, subject to obtaining the prior
consent of the representative; or
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C.
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in any other circumstances falling within Article 3(2) of
the Prospectus Directive,
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provided that no such offer of shares shall require the Company
or the representative to publish a prospectus pursuant to
Article 3 of the Prospectus Directive or supplement a
prospectus pursuant to Article 16 of the Prospectus
Directive.
Each person in a Relevant Member State (other than a Relevant
Member State where there is a Permitted Public Offer) who
initially acquires any shares or to whom any offer is made will
be deemed to have represented, acknowledged and agreed that
(A) it is a qualified investor within the
meaning of the law in that Relevant Member State implementing
Article 2(1)(e) of the Prospectus Directive, and
(B) in the case of any shares acquired by it as a financial
intermediary, as that term is used in Article 3(2) of the
Prospectus Directive, the shares acquired by it in the offering
have not been acquired on behalf of, nor have they been acquired
with a view to their offer or resale to, persons in any Relevant
Member State other than qualified investors as
defined in the Prospectus Directive, or in circumstances in
which the prior consent of the representative has been given to
the offer or resale. In the case of any shares being offered to
a financial intermediary as that term is used in
Article 3(2) of the Prospectus Directive, each such
financial intermediary will be deemed to have represented,
acknowledged and agreed that the shares acquired by it in the
offer have not been acquired on a non-discretionary basis on
behalf of, nor have they been acquired with a view to their
offer or resale to, persons in circumstances which may give rise
to an offer of any shares to the public other than their offer
or resale in a Relevant Member State to qualified investors as
so defined or in circumstances in which the prior consent of the
representative has been obtained to each such proposed offer or
resale.
The Company, the representative and their affiliates will rely
upon the truth and accuracy of the foregoing representation,
acknowledgement and agreement.
This prospectus has been prepared on the basis that any offer of
shares in any Relevant Member State will be made pursuant to an
exemption under the Prospectus Directive from the requirement to
publish a prospectus for offers of shares. Accordingly any
person making or intending to make an offer in that Relevant
Member State of shares which are the subject of the offering
contemplated in this prospectus may only do so in circumstances
in which no obligation arises for the Company or any of the
underwriters to publish a
178
prospectus pursuant to Article 3 of the Prospectus
Directive in relation to such offer. Neither the Company nor the
underwriters have authorized, nor do they authorize, the making
of any offer of shares in circumstances in which an obligation
arises for the Company or the underwriters to publish a
prospectus for such offer.
For the purpose of the above provisions, the expression an
offer to the public in relation to any shares in any
Relevant Member State means the communication in any form and by
any means of sufficient information on the terms of the offer
and the shares to be offered so as to enable an investor to
decide to purchase or subscribe the shares, as the same may be
varied in the Relevant Member State by any measure implementing
the Prospectus Directive in the Relevant Member State and the
expression Prospectus Directive means
Directive 2003/71/EC (including the 2010 PD Amending
Directive, to the extent implemented in the Relevant Member
States) and includes any relevant implementing measure in the
Relevant Member State and the expression 2010
PD Amending Directive means Directive 2010/73/EU.
Notice to
Prospective Investors in the United Kingdom
In addition, in the United Kingdom, this document is being
distributed only to, and is directed only at, and any offer
subsequently made may only be directed at persons who are
qualified investors (as defined in the Prospectus
Directive) (i) who have professional experience in matters
relating to investments falling within Article 19(5) of the
Financial Services and Markets Act 2000 (Financial Promotion)
Order 2005, as amended (the Order) and/or
(ii) who are high net worth companies (or persons to whom
it may otherwise be lawfully communicated) falling within
Article 49(2)(a) to (d) of the Order (all such persons
together being referred to as relevant persons).
This document must not be acted on or relied on in the United
Kingdom by persons who are not relevant persons. In the United
Kingdom, any investment or investment activity to which this
document relates is only available to, and will be engaged in
with, relevant persons.
Notice to
Prospective Investors in Switzerland
The shares may not be publicly offered in Switzerland and will
not be listed on the SIX Swiss Exchange (SIX)
or on any other stock exchange or regulated trading facility in
Switzerland. This document has been prepared without regard to
the disclosure standards for issuance prospectuses under
art. 652a or art. 1156 of the Swiss Code of
Obligations or the disclosure standards for listing prospectuses
under art. 27 ff. of the SIX Listing Rules or the
listing rules of any other stock exchange or regulated trading
facility in Switzerland. Neither this document nor any other
offering or marketing material relating to the shares or the
offering may be publicly distributed or otherwise made publicly
available in Switzerland.
Neither this document nor any other offering or marketing
material relating to the offering, the Company, the shares have
been or will be filed with or approved by any Swiss regulatory
authority. In particular, this document will not be filed with,
and the offer of shares will not be supervised by, the Swiss
Financial Market Supervisory Authority FINMA (FINMA), and the
offer of shares has not been and will not be authorized under
the Swiss Federal Act on Collective Investment Schemes
(CISA). The investor protection afforded to
acquirers of interests in collective investment schemes under
the CISA does not extend to acquirers of shares.
Notice to
Prospective Investors in the Dubai International Financial
Centre
This prospectus supplement relates to an Exempt Offer in
accordance with the Offered Securities Rules of the Dubai
Financial Services Authority (DFSA). This prospectus
supplement is intended for distribution only to persons of a
type specified in the Offered Securities Rules of the DFSA. It
must not be delivered to, or relied on by, any other person. The
DFSA has no responsibility for reviewing or verifying any
documents in connection with Exempt Offers. The DFSA has not
approved this prospectus supplement nor taken steps to verify
the information set forth herein and has no responsibility for
the prospectus supplement. The shares to which this prospectus
supplement relates may be illiquid and/or subject to
restrictions on their resale. Prospective purchasers of the
shares offered should conduct their own due diligence on the
shares. If you do not understand the contents of this prospectus
supplement you should consult an authorized financial advisor.
179
LEGAL
MATTERS
Certain legal matters relating to this offering will be passed
upon for us and the Initial Stockholder by Cleary Gottlieb
Steen & Hamilton LLP, New York, New York. Skadden,
Arps, Slate, Meagher & Flom LLP, New York, New York will
act as counsel to the underwriters.
EXPERTS
The consolidated financial statements of Nationstar Mortgage LLC
at December 31, 2010 and 2009, and for each of the three
years in the period ended December 31, 2010, appearing in
this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent registered public
accounting firm, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report
given on the authority of such firm as experts in accounting and
auditing.
180
MARKET
AND INDUSTRY DATA AND FORECASTS
Certain market and industry data included in this prospectus has
been obtained from third party sources that we believe to be
reliable. Market estimates are calculated by using independent
industry publications, government publications and third party
forecasts in conjunction with our assumptions about our markets.
We have not independently verified such third party information.
While we are not aware of any misstatements regarding any
market, industry or similar data presented herein, such data
involves risks and uncertainties and is subject to change based
on various factors, including those discussed under the headings
Special Note Regarding Forward-Looking Statements
and Risk Factors in this prospectus.
181
WHERE YOU
CAN FIND MORE INFORMATION
We have filed a registration statement, of which this prospectus
is a part, on
Form S-1
with the SEC relating to this offering. This prospectus does not
contain all of the information in the registration statement and
the exhibits included with the registration statement.
References in this prospectus to any of our contracts,
agreements or other documents are not necessarily complete, and
you should refer to the exhibits attached to the registration
statement for copies of the actual contracts, agreements or
documents. You may read and copy the registration statement, the
related exhibits and other material we file with the SEC at the
SECs public reference room in Washington, D.C. at
100 F Street, Room 1580, N.E.,
Washington, D.C. 20549. You can also request copies of
those documents, upon payment of a duplicating fee, by writing
to the SEC. Please call the Commission at
1-800-SEC-0330
for further information on the operation of the public reference
rooms. The SEC also maintains an internet site that contains
reports, proxy and information statements and other information
regarding issuers that file with the SEC. The website address is
http://www.sec.gov.
Upon the effectiveness of the registration statement, we will be
subject to the informational requirements of the Exchange Act,
and, in accordance with the Exchange Act, will file reports,
proxy and information statements and other information with the
SEC. Such annual, quarterly and special reports, proxy and
information statements and other information can be inspected
and copied at the locations set forth above. We intend to make
this information available on the investors relations section of
our website, www.nationstarmtg.com. Information on, or
accessible through, our website is not part of this prospectus.
182
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Audited Consolidated Financial Statements
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F-2
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F-3
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F-4
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F-5
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F-6
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F-8
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Unaudited Consolidated Financial Statements
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F-60
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F-61
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F-62
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F-63
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F-65
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F-1
REPORT OF
INDEPENDENT AUDITORS
The Members
Nationstar Mortgage LLC
We have audited the accompanying consolidated balance sheets of
Nationstar Mortgage LLC and subsidiaries (the Company) as of
December 31, 2010 and 2009, and the related consolidated
statements of operations, members equity, and cash flows
for each of the three years in the period ended
December 31, 2010. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Nationstar Mortgage LLC and
subsidiaries at December 31, 2010 and 2009, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2010, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 3 to the consolidated financial
statements, the Company changed its method of accounting for
transfers of financial assets and consolidation of variable
interest entities, effective January 1, 2010.
Dallas, Texas
March 28, 2011
F-2
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
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December 31,
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2010
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2009
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(in thousands)
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Assets
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Cash and cash equivalents
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$21,223
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$41,645
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Restricted cash (includes $1,472 and $0, respectively, of
restricted cash, subject to ABS nonrecourse debt)
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91,125
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52,795
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Accounts receivable, net (includes $2,392 and $0, respectively,
of accrued interest, subject to ABS nonrecourse debt)
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441,275
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513,939
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Mortgage loans held for sale
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369,617
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201,429
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Mortgage loans held for investment, subject to nonrecourse
debtLegacy Assets, net of allowance for loan losses of
$3,298 and $0, respectively
|
|
|
266,320
|
|
|
|
301,802
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt (at fair value)
|
|
|
538,440
|
|
|
|
|
|
Investment in debt
securitiesavailable-for-sale
|
|
|
|
|
|
|
2,486
|
|
Receivables from affiliates
|
|
|
8,993
|
|
|
|
12,574
|
|
Mortgage servicing rights
|
|
|
145,062
|
|
|
|
114,605
|
|
Property and equipment, net
|
|
|
8,394
|
|
|
|
6,575
|
|
Real estate owned, net (includes $17,509 and $0, respectively,
of real estate owned, subject to ABS nonrecourse debt)
|
|
|
27,337
|
|
|
|
10,262
|
|
Other assets
|
|
|
29,395
|
|
|
|
22,073
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$1,947,181
|
|
|
|
$1,280,185
|
|
|
|
|
|
|
|
|
|
|
Liabilities and members equity
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
$709,758
|
|
|
|
$771,857
|
|
Unsecured senior notes
|
|
|
244,061
|
|
|
|
|
|
Payables and accrued liabilities (includes $95 and $0,
respectively, of accrued interest payable, subject to ABS
nonrecourse debt)
|
|
|
75,054
|
|
|
|
66,830
|
|
Derivative financial instruments
|
|
|
7,801
|
|
|
|
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
18,781
|
|
|
|
|
|
Nonrecourse debtLegacy Assets
|
|
|
138,662
|
|
|
|
177,675
|
|
ABS nonrecourse debt (at fair value)
|
|
|
496,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,690,809
|
|
|
|
1,016,362
|
|
Commitments and contingencies (Note 14)
|
|
|
|
|
|
|
|
|
Total members equity
|
|
|
256,372
|
|
|
|
263,823
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
|
$1,947,181
|
|
|
|
$1,280,185
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-3
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
|
$167,126
|
|
|
|
$90,195
|
|
|
|
$68,052
|
|
Other fee income
|
|
|
16,958
|
|
|
|
10,023
|
|
|
|
5,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
184,084
|
|
|
|
100,218
|
|
|
|
74,007
|
|
Gain/(loss) on mortgage loans held for sale
|
|
|
77,344
|
|
|
|
(21,349
|
)
|
|
|
(86,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
261,428
|
|
|
|
78,869
|
|
|
|
(12,656
|
)
|
Expenses and impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
|
149,115
|
|
|
|
90,689
|
|
|
|
61,783
|
|
General and administrative
|
|
|
58,913
|
|
|
|
30,494
|
|
|
|
22,194
|
|
Provision for loan losses
|
|
|
3,298
|
|
|
|
|
|
|
|
|
|
Loss on foreclosed real estate
|
|
|
205
|
|
|
|
7,512
|
|
|
|
2,567
|
|
Occupancy
|
|
|
9,445
|
|
|
|
6,863
|
|
|
|
6,021
|
|
Loss on
available-for-sale
securitiesother-than-temporary
|
|
|
|
|
|
|
6,809
|
|
|
|
55,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses and impairments
|
|
|
220,976
|
|
|
|
142,367
|
|
|
|
147,777
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
98,895
|
|
|
|
52,518
|
|
|
|
92,060
|
|
Interest expense
|
|
|
(116,163
|
)
|
|
|
(69,883
|
)
|
|
|
(65,548
|
)
|
Loss on interest rate swaps and caps
|
|
|
(9,801
|
)
|
|
|
(14
|
)
|
|
|
(23,689
|
)
|
Fair value changes in ABS securitizations
|
|
|
(23,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(50,366
|
)
|
|
|
(17,379
|
)
|
|
|
2,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
$(9,914
|
)
|
|
|
$(80,877
|
)
|
|
|
$(157,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma information (Note 25):
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical net loss before taxes
|
|
|
$(9,914
|
)
|
|
|
|
|
|
|
|
|
Pro forma adjustment for taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
|
$(9,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-4
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
Years
Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Member
|
|
|
Comprehensive
|
|
|
Members
|
|
|
|
Units
|
|
|
Loss
|
|
|
Equity
|
|
|
|
(in thousands)
|
|
|
Balance at January 1, 2008
|
|
|
$265,599
|
|
|
|
$(3,903
|
)
|
|
|
$261,696
|
|
Capital contributions
|
|
|
145,600
|
|
|
|
|
|
|
|
145,600
|
|
Share-based compensation
|
|
|
2,333
|
|
|
|
|
|
|
|
2,333
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(157,610
|
)
|
|
|
|
|
|
|
(157,610
|
)
|
Reclassification of loss on investment in debt securities due to
other-than-temporary
impairments
|
|
|
|
|
|
|
3,903
|
|
|
|
3,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(153,707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
255,922
|
|
|
|
|
|
|
|
255,922
|
|
Capital contributions
|
|
|
87,951
|
|
|
|
|
|
|
|
87,951
|
|
Share-based compensation
|
|
|
827
|
|
|
|
|
|
|
|
827
|
|
Net loss and comprehensive loss
|
|
|
(80,877
|
)
|
|
|
|
|
|
|
(80,877
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
263,823
|
|
|
|
|
|
|
|
263,823
|
|
Cumulative effect of change in accounting principles as of
January 1, 2010 related to adoption of new accounting
guidance on consolidation of variable interest entities
|
|
|
(8,068
|
)
|
|
|
|
|
|
|
(8,068
|
)
|
Share-based compensation
|
|
|
12,856
|
|
|
|
|
|
|
|
12,856
|
|
Tax related share-based settlement of units by members
|
|
|
(3,396
|
)
|
|
|
|
|
|
|
(3,396
|
)
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(9,914
|
)
|
|
|
|
|
|
|
(9,914
|
)
|
Change in value of cash flow hedge
|
|
|
|
|
|
|
1,071
|
|
|
|
1,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(8,843
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
$255,301
|
|
|
|
$1,071
|
|
|
|
$256,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
$(9,914
|
)
|
|
|
$(80,877
|
)
|
|
|
(157,610
|
)
|
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
12,856
|
|
|
|
827
|
|
|
|
2,333
|
|
Loss/(gain) on mortgage loans held for sale
|
|
|
(77,344
|
)
|
|
|
21,349
|
|
|
|
86,663
|
|
Provision for loan losses
|
|
|
3,298
|
|
|
|
|
|
|
|
|
|
Loss on foreclosed real estate
|
|
|
205
|
|
|
|
7,512
|
|
|
|
2,567
|
|
Depreciation and amortization
|
|
|
2,117
|
|
|
|
1,767
|
|
|
|
1,309
|
|
Accretion of discount on securities
|
|
|
|
|
|
|
|
|
|
|
(4,422
|
)
|
Impairment of investments in debt securities
|
|
|
|
|
|
|
6,809
|
|
|
|
55,212
|
|
Fair value changes in ABS securitizations
|
|
|
23,297
|
|
|
|
|
|
|
|
|
|
Loss on interest rate swaps and caps
|
|
|
8,872
|
|
|
|
14
|
|
|
|
23,689
|
|
Unrealized gains/losses on derivative financial instruments
|
|
|
|
|
|
|
(2,436
|
)
|
|
|
2,077
|
|
Change in fair value of mortgage servicing rights
|
|
|
6,043
|
|
|
|
27,915
|
|
|
|
11,701
|
|
Amortization of debt discount
|
|
|
18,731
|
|
|
|
21,287
|
|
|
|
8,879
|
|
Amortization of premiums/discounts
|
|
|
(4,526
|
)
|
|
|
(1,394
|
)
|
|
|
(85
|
)
|
Mortgage loans originated and purchased, net of fees
|
|
|
(2,791,639
|
)
|
|
|
(1,480,549
|
)
|
|
|
(545,860
|
)
|
Cost of loans sold, net of fees
|
|
|
2,621,275
|
|
|
|
1,007,369
|
|
|
|
513,924
|
|
Principal payments/prepayments received and other changes in
mortgage loans originated as held for sale
|
|
|
32,668
|
|
|
|
471,882
|
|
|
|
201,184
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
41,148
|
|
|
|
(157,964
|
)
|
|
|
(165,567
|
)
|
Receivables from affiliates
|
|
|
3,958
|
|
|
|
66,940
|
|
|
|
2,452
|
|
Other assets
|
|
|
(861
|
)
|
|
|
(6,961
|
)
|
|
|
38,364
|
|
Payables and accrued liabilities
|
|
|
8,163
|
|
|
|
12,869
|
|
|
|
(36,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(101,653
|
)
|
|
|
(83,641
|
)
|
|
|
40,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued on following page
F-6
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments received and other changes on mortgage loans
held for investment, subject to ABS nonrecourse debt
|
|
|
$48,838
|
|
|
|
$
|
|
|
|
$
|
|
Proceeds from sales of real estate owned
|
|
|
74,107
|
|
|
|
34,181
|
|
|
|
29,276
|
|
Purchase of mortgage servicing rights, net of liabilities
incurred
|
|
|
(17,812
|
)
|
|
|
(1,169
|
)
|
|
|
(19,013
|
)
|
Interest rate swap settlements
|
|
|
|
|
|
|
|
|
|
|
(51,570
|
)
|
Property and equipment additions, net of disposals
|
|
|
(3,936
|
)
|
|
|
(3,029
|
)
|
|
|
(1,772
|
)
|
Principal payments received on debt securities
|
|
|
|
|
|
|
|
|
|
|
8,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
101,197
|
|
|
|
29,983
|
|
|
|
(34,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers to restricted cash, net
|
|
|
(33,731
|
)
|
|
|
(31,763
|
)
|
|
|
(9,871
|
)
|
Issuance of non-recourse debt, net
|
|
|
|
|
|
|
191,272
|
|
|
|
|
|
Issuance of unsecured notes, net of issue discount
|
|
|
243,013
|
|
|
|
|
|
|
|
|
|
Repayment of nonrecourse debtLegacy assets
|
|
|
(45,364
|
)
|
|
|
(15,809
|
)
|
|
|
|
|
Repayment of ABS nonrecourse debt
|
|
|
(103,466
|
)
|
|
|
|
|
|
|
|
|
Decrease in notes payable, net
|
|
|
(62,099
|
)
|
|
|
(60,395
|
)
|
|
|
(157,266
|
)
|
Debt financing costs
|
|
|
(14,923
|
)
|
|
|
(18,059
|
)
|
|
|
(15,926
|
)
|
Tax related share-based settlement of units by members
|
|
|
(3,396
|
)
|
|
|
|
|
|
|
|
|
Capital contributions from members
|
|
|
|
|
|
|
20,700
|
|
|
|
145,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(19,966
|
)
|
|
|
85,946
|
|
|
|
(37,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(20,422
|
)
|
|
|
32,288
|
|
|
|
(31,894
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
41,645
|
|
|
|
9,357
|
|
|
|
41,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
|
$21,223
|
|
|
|
$41,645
|
|
|
|
$9,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of noncash activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of mortgage loans held for sale to real estate owned
|
|
|
$352
|
|
|
|
$36,164
|
|
|
|
$36,712
|
|
Mortgage servicing rights resulting from sale or securitization
of mortgage loans
|
|
|
26,253
|
|
|
|
8,332
|
|
|
|
4,522
|
|
Transfer of mortgage loans held for investment to real estate
owned
|
|
|
18,928
|
|
|
|
5,561
|
|
|
|
|
|
Transfer of mortgage loans held for investment, subject to ABS
nonrecourse debt, to real estate owned
|
|
|
37,127
|
|
|
|
|
|
|
|
|
|
Transfer of mortgage loans held for sale to mortgage loans held
for investment
|
|
|
|
|
|
|
319,183
|
|
|
|
|
|
Contribution of intercompany payable from parent
|
|
|
|
|
|
|
67,251
|
|
|
|
|
|
Financing of acquisition of mortgage servicing rights
|
|
|
|
|
|
|
22,211
|
|
|
|
|
|
Change in value of cash flow hedgeaccumulated other
comprehensive income
|
|
|
1,071
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-7
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
|
|
1.
|
Description
of the Companies and Basis of Presentation
|
General
The consolidated financial statements include the accounts of
Nationstar Mortgage LLC (Nationstar), formerly Centex Home
Equity Company, LLC (CHEC), a Delaware limited liability
company, and its wholly owned subsidiaries, after the
elimination of intercompany balances and transactions.
Nationstar is a subsidiary of FIF HE Holdings LLC (FIF), a
subsidiary of Fortress Private Equity Funds III and IV
(Fortress).
Nature of
Business
Nationstars principal business is the servicing of
residential mortgage loans for others and the origination and
selling or securitization of single-family conforming mortgage
loans to government-sponsored entities (GSE).
The sale or securitization of mortgage loans typically involves
Nationstar retaining the right to service the mortgage loans
that it sells. The servicing of mortgage loans includes the
collection of principal and interest payments and the assessment
of ancillary fees related to the servicing of mortgage loans.
Additionally, Nationstar may occasionally obtain additional
servicing rights through the acquisition of servicing portfolios
from third parties.
|
|
2.
|
Significant
Accounting Policies
|
Use of
Estimates in Preparation of Consolidated Financial
Statements
The accompanying consolidated financial statements were prepared
in conformity with accounting principles generally accepted in
the United States (GAAP). The preparation of the financial
statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from these estimates due to factors such as adverse
changes in the economy, increases in interest rates, declines in
home prices or discrete events adversely affecting specific
borrowers, and such differences could be material.
Nationstar evaluated subsequent events through the date these
consolidated financial statements were issued.
Reclassification
Adjustments
Certain prior-period amounts have been reclassified to conform
to the current-period presentation.
Cash and
Cash Equivalents
Cash and cash equivalents include unrestricted cash on hand and
other highly liquid investments having an original maturity of
less than three months.
Restricted
Cash
Restricted cash consists of custodial accounts related to
Nationstars portfolio securitizations or to collections on
certain mortgage loans and mortgage loan advances that have been
pledged to a financial services company under a Master
Repurchase Agreement. Restricted cash also includes certain fees
collected
F-8
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
2.
|
Significant
Accounting Policies (continued)
|
on mortgage loan payments that are required to be remitted to a
GSE to settle outstanding guarantee fee requirements.
Mortgage
Loans Held for Sale
Nationstar maintains a strategy of originating mortgage loan
products primarily for the purpose of selling to GSEs or other
third-party investors in the secondary market. Generally, all
newly originated mortgage loans held for sale are delivered to
third-party purchasers or securitized within three months after
origination.
Through September 30, 2009, mortgage loans held for sale
were carried at the lower of amortized cost or fair value on an
aggregate basis grouped by delinquency status. Nationstar
estimates fair value by evaluating a variety of market
indicators including recent trades and outstanding commitments,
calculated on an aggregate basis. See Note 16 to
Consolidated Financial StatementsFair Value
Measurements.
Effective October 1, 2009, Nationstar elected to measure
newly originated prime residential mortgage loans held for sale
at fair value, as permitted under Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC) 825,
Financial Instruments.
In connection with Nationstars election to measure
mortgage loans held for sale at fair value, Nationstar is no
longer permitted to defer the loan origination fees, net of
direct loan origination costs associated with these loans. Prior
to October 1, 2009, Nationstar deferred all nonrefundable
fees and costs as required under ASC 310,
Receivables. In accordance with this guidance, loan
origination fees, net of direct loan origination costs were
capitalized and added as an adjustment to the basis of the
individual loans originated. These fees are accreted into income
as an adjustment to the loan yield over the life of the loan or
recognized when the loan is sold to a third party purchaser.
Mortgage
Loans Held for Investment, Net
Mortgage loans held for investment principally consist of
nonconforming or subprime mortgage loans securitized which serve
as collateral for the issued debt. These loans were transferred
on October 1, 2009, from mortgage loans held for sale at
fair value on the transfer date, as determined by the present
value of expected future cash flows, with no valuation allowance
recorded. The difference between the undiscounted cash flows
expected and the investment in the loan is recognized as
interest income on a level-yield method over the life of the
loan. Contractually required payments for interest and principal
that exceed the undiscounted cash flows expected at transfer are
not recognized as a yield adjustment or as a loss accrual or a
valuation allowance. Increases in expected cash flows subsequent
to the transfer are recognized prospectively through adjustment
of the yield on the loans over the remaining life. Decreases in
expected cash flows subsequent to transfer are recognized as a
valuation allowance.
Allowance
for Loan Losses on Mortgage Loans Held for Investment
An allowance for loan losses is established by recording a
provision for loan losses in the consolidated statement of
operations when management believes a loss has occurred on a
loan held for investment. When management determines that a loan
held for investment is partially or fully uncollectible, the
estimated loss is charged against the allowance for loan losses.
Recoveries on losses previously charged to the allowance are
credited to the allowance at the time the recovery is collected.
F-9
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
2.
|
Significant
Accounting Policies (continued)
|
Nationstar accounts for the loans that were transferred to held
for investment from held for sale during October 2009 in a
manner similar to
ASC 310-30,
Loans and Debt Securities Acquired with Deteriorated Credit
Quality. At the date of transfer, management evaluated such
loans to determine whether there was evidence of deterioration
of credit quality since acquisition and if it was probable that
Nationstar would be unable to collect all amounts due according
to the loans contractual terms. The transferred loans were
aggregated into separate pools of loans based on common risk
characteristics (loan delinquency). Nationstar considers
expected prepayments, and estimates the amount and timing of
undiscounted expected principal, interest, and other cash flows
for each aggregated pool of loans. Nationstar determines the
excess of the pools scheduled contractual principal and
contractual interest payments over all cash flows expected as of
the transfer date as an amount that should not be accreted
(nonaccretable difference). The remaining amount is accreted
into interest income over the remaining life of the pool of
loans (accretable yield).
Over the life of the transferred loans, management continues to
estimate cash flows expected to be collected. Nationstar
evaluates at the balance sheet date whether the present value of
the loans determined using the effective interest rates has
decreased, and if so, records an allowance for loan loss. The
present value of any subsequent increase in the transferred
loans cash flows expected to be collected is used first to
reverse any existing allowance for loan loss related to such
loans. Any remaining increase in cash flows expected to be
collected are used to adjust the amount of accretable yield
recognized on a prospective basis over the remaining life of the
loans.
Nationstar accounts for its allowance for loan losses for all
other mortgage loans held for investment in accordance with
ASC 450-20,
Loss Contingencies. The allowance for loan losses represents
managements best estimate of probable losses inherent in
the loans held for investment portfolio. Mortgage loans held for
investment portfolio is comprised primarily of large groups of
homogeneous residential mortgage loans. These loans are
evaluated based on the loans present delinquency status.
The estimate of probable losses on these loans considers the
rate of default of the loans and the amount of loss in the event
of default. The rate of default is based on historical
experience related to the migration of these from each
delinquency category to default over a twelve-month period. The
entire allowance is available to absorb probable credit losses
from the entire held for investment portfolio.
Substantially, all mortgage loans held for investment were
transferred from mortgage loans held for sale at fair value in
October 2009.
Investment
in Debt Securities
Investment in debt securities consists of beneficial interests
Nationstar retains in securitization transactions accounted for
as a sale under the guidance of ASC 860, Transfers and
Servicing. These securities are classified as
available-for-sale
securities, and are therefore carried at their market value with
the net unrealized gains or losses reported in the comprehensive
income (loss) component of members equity. Nationstar
accounts for debt securities based on ASC 320,
InvestmentsDebt and Equity Securities. Nationstar
evaluates investment in debt securities for impairment each
quarter, and investment in debt securities is considered to be
impaired when the fair value of the investment is less than its
cost. The impairment is separated into impairments related to
credit losses, which are recorded in current-period operations,
and impairments related to all other factors, which are recorded
in other comprehensive income/(loss). Substantially all
impairments related to Nationstars investment in debt
securities were credit related.
F-10
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
2.
|
Significant
Accounting Policies (continued)
|
Receivables
from Affiliates
Nationstar engages in periodic transactions with Nationstar
Regular Holdings, Ltd., a subsidiary of FIF. These transactions
typically involve the monthly payment of principal and interest
advances that are required to be remitted to the securitization
trusts as required under various Pooling and Servicing
Agreements. These amounts are later repaid to Nationstar when
principal and interest advances are recovered from the
respective borrowers.
Mortgage
Servicing Rights (MSRs)
Nationstar recognizes MSRs related to all existing forward
residential mortgage loans transferred to a third party in a
transfer that meets the requirements for sale accounting and for
which the servicing rights are retained. Additionally,
Nationstar may acquire the rights to service forward residential
mortgage loans that do not relate to assets transferred by
Nationstar through the purchase of these rights from third
parties. Nationstar applies fair value accounting to this class
of MSRs, with all changes in fair value recorded as charges or
credits to servicing fee income. The Company currently has only
one class of MSRs.
Property
and Equipment, Net
Property and equipment, net is comprised of land, furniture,
fixtures, leasehold improvements, computer software, and
computer hardware. These assets are stated at cost less
accumulated depreciation. Repairs and maintenance are expensed
as incurred. Depreciation is recorded using the straight-line
method over the estimated useful lives of the related assets,
usually three to ten years. Cost and accumulated depreciation
applicable to assets retired or sold are eliminated from the
accounts, and any resulting gains or losses are recognized at
such time through a charge or credit to general and
administrative expenses.
Real
Estate Owned, Net
Nationstar holds real estate owned as a result of foreclosures
on delinquent mortgage loans. Real estate owned is recorded at
estimated fair value less costs to sell at the date of
foreclosure. Any subsequent declines in fair value are credited
to a valuation allowance and charged to operations as incurred.
Variable
Interest Entities
Nationstar has been the transferor in connection with a number
of securitizations or asset-backed financing arrangements, from
which Nationstar has continuing involvement with the underlying
transferred financial assets. Nationstar aggregates these
securitizations or asset-backed financing arrangements into two
groups: 1) securitizations of residential mortgage loans
that were accounted for as sales and 2) financings
accounted for as secured borrowings.
On securitizations of residential mortgage loans,
Nationstars continuing involvement typically includes
acting as servicer for the mortgage loans held by the trust and
holding beneficial interests in the trust. Nationstars
responsibilities as servicer include, among other things,
collecting monthly payments, maintaining escrow accounts,
providing periodic reports and managing insurance in exchange
for a contractually specified servicing fee. The beneficial
interests held consist of both subordinate and residual
securities that were retained at the time of the securitization.
Prior to January 1, 2010, each of these securitization
trusts were considered QSPEs, and these trusts were excluded
from Nationstars consolidated financial statements.
F-11
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
2.
|
Significant
Accounting Policies (continued)
|
Nationstar also maintains various agreements with special
purpose entities (SPEs), under which Nationstar transfers
mortgage loans
and/or
advances on residential mortgage loans in exchange for cash.
These SPEs issue debt supported by collections on the
transferred mortgage loans
and/or
advances. These transfers do not qualify for sale treatment
because Nationstar continues to retain control over the
transferred assets. As a result, Nationstar accounts for these
transfers as financings and continues to carry the transferred
assets and recognizes the related liabilities on
Nationstars consolidated balance sheets. Collections on
the mortgage loans
and/or
advances pledged to the SPEs are used to repay principal and
interest and to pay the expenses of the entity. The holders of
these beneficial interests issued by these SPEs do not have
recourse to Nationstar and can only look to the assets of the
SPEs themselves for satisfaction of the debt.
Prior to January 1, 2010, Nationstar evaluated each special
purpose entity (SPE) for classification as a QSPE. QSPEs were
not consolidated in Nationstars consolidated financial
statements. When an SPE was determined to not be a QSPE,
Nationstar further evaluated it for classification as a VIE.
When an SPE met the definition of a VIE, and when it was
determined that Nationstar was the primary beneficiary,
Nationstar included the SPE in its consolidated financial
statements.
Nationstar considers the SPEs created for the purpose of issuing
debt supported by collections on loans
and/or
advances that have been transferred to it as VIEs, and
Nationstar is the primary beneficiary of these VIEs. Nationstar
consolidates the assets and liabilities of the VIEs into its
consolidated financial statements.
Effective January 1, 2010, new accounting guidance
eliminated the concept of a QSPE and all existing SPEs are now
subject to new consolidation guidance. Upon adoption of this new
accounting guidance, Nationstar identified certain
securitization trusts where Nationstar, or through its
affiliates, continued to hold beneficial interests in these
trusts. These retained beneficial interests obligate Nationstar
to absorb losses of the VIE that could potentially be
significant to the VIE or the right to receive benefits from the
VIE that could potentially be significant. In addition,
Nationstar as Master Servicer on the related mortgage loans,
retains the power to direct the activities of the VIE that most
significantly impact the economic performance of the VIE. When
it is determined that Nationstar has both the power to direct
the activities that most significantly impact the VIEs
economic performance and the obligation to absorb losses or the
right to receive benefits that could potentially be significant
to the VIE, the assets and liabilities of these VIEs are
included in Nationstars consolidated financial statements.
Upon consolidation of these VIEs, Nationstar derecognized all
previously recognized beneficial interests obtained as part of
the securitization, including any retained investment in debt
securities, MSRs and any remaining residual interests. In
addition, Nationstar recognized the securitized mortgage loans
as mortgage loans held for investment, subject to ABS
nonrecourse debt, and the related asset-backed certificates (ABS
nonrecourse debt) acquired by third parties as ABS nonrecourse
debt on Nationstars consolidated balance sheet.
Derivative
Financial Instruments
Nationstar enters into interest rate lock commitments (IRLCs)
with prospective borrowers. These commitments are carried at
fair value in accordance with ASC 815, Derivatives and
Hedging. ASC 815 clarifies that the expected net future cash
flows related to the associated servicing of a loan should be
included in the measurement of all written loan commitments that
are accounted for at fair value through earnings. The estimated
fair values of IRLCs are based on quoted market values and are
recorded in other assets in the consolidated balance sheets. The
initial and subsequent changes in the value of IRLCs are a
component of gain (loss) on mortgage loans held for sale.
F-12
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
2.
|
Significant
Accounting Policies (continued)
|
Nationstar actively manages the risk profiles of its IRLCs and
mortgage loans held for sale on a daily basis. To manage the
price risk associated with IRLCs, Nationstar enters into forward
sales of mortgage backed securities (MBS) in an amount equal to
the portion of the IRLC expected to close, assuming no change in
mortgage interest rates. In addition, to manage the interest
rate risk associated with mortgage loans held for sale,
Nationstar enters into forward sales of MBS to deliver mortgage
loan inventory to investors. The estimated fair values of
forward sales of MBS and forward sale commitments are based on
quoted market values and are recorded as a component of mortgage
loans held for sale in the consolidated balance sheets. The
initial and subsequent changes in value on forward sales of MBS
are a component of gain (loss) on mortgage loans held for sale.
Periodically, Nationstar has entered into interest rate swap
agreements to hedge the interest payment on the warehouse debt
and securitization of its mortgage loans held for sale. These
interest rate swap agreements generally require Nationstar to
pay a fixed interest rate and receive a variable interest rate
based on LIBOR. Unless designated as an accounting hedge,
Nationstar records losses on interest rate swaps as a component
of loss on interest rate swaps and caps in Nationstars
consolidated statements of operations. Unrealized losses on
undesignated interest rate derivatives are separately disclosed
under operating activities in the consolidated statements of
cash flows. At December 31, 2009, Nationstar had no
interest rate swap agreements designated as accounting hedges.
On October 1, 2010, the Company designated an existing
interest rate swap as a cash flow hedge against outstanding
floating rate financing associated with the Nationstar Mortgage
Advance Receivables
Trust 2009-ADV1
financing. Under the swap agreement, the Company receives
interest equivalent to one month LIBOR and pays a fixed rate of
2.0425% based on an amortizing notional of $268 million as
of December 31, 2010, with settlements occurring monthly
until November 2013. This interest rate swap is a cash flow
hedge under ASC 815, Derivatives and Hedging, and is
recorded at fair value on the Companys consolidated
balance sheet, with any changes in fair value being recorded as
an adjustment to other comprehensive income. To qualify as a
cash flow hedge, the hedge must be highly effective at reducing
the risk associated with the exposure being hedged and must be
formally designated at hedge inception. Nationstar considers a
hedge to be highly effective if the change in fair value of the
derivative hedging instrument is within 80% to 125% of the
opposite change in the fair value of the hedged item
attributable to the hedged risk. Ineffective portions of the
cash flow hedge are reflected in earnings as they occur as a
component of interest expense.
During 2008, Nationstar entered into interest rate cap
agreements to hedge the interest payment on the servicing
advance facility. These interest rate cap agreements generally
require an upfront payment and receive cash flow only when a
variable rate based on LIBOR exceeds a defined interest rate.
These interest rate cap agreements are not designated as hedging
instruments, and unrealized gains and losses are recorded in
loss on interest rate swaps and caps in Nationstars
consolidated statements of operations.
Interest
Income
Interest income is recognized using the interest method. Revenue
accruals for individual loans are suspended and accrued amounts
reversed when the mortgage loan becomes contractually delinquent
for 90 days or more. Delinquency payment status is based on
the most recently received payment from the borrower. The
accrual is resumed when the individual mortgage loan becomes
less than 90 days contractually delinquent. For individual
loans that have been modified, a period of six timely payments
is required before the loan is returned to an accrual basis.
Interest income also includes (1) interest earned on
custodial cash deposits associated with the mortgage loans
serviced and (2) deferred origination income, net of
deferred
F-13
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
2.
|
Significant
Accounting Policies (continued)
|
origination costs and other revenues derived from the
origination of mortgage loans, which is deferred and recognized
over the life of a mortgage loan or recognized when the related
loan is sold to a third-party purchaser. Effective
October 1, 2009, in connection with Nationstars
election to measure mortgage loans held for sale at fair value,
Nationstar is no longer permitted to defer the loan origination
fees, net of direct loan origination costs for such loans
originated subsequent to the election date.
Servicing
Fee Income
Servicing fees include contractually specified servicing fees,
late charges, prepayment penalties and other ancillary charges.
Servicing encompasses, among other activities, the following
processes: billing, collection of payments, movement of cash to
the payment clearing bank accounts, investor reporting, customer
service, recovery of delinquent payments, instituting
foreclosure, and liquidation of the underlying collateral.
Nationstar recognizes servicing and ancillary fees as they are
earned, which is generally upon collection of the payments from
the borrower. In addition, Nationstar also receives various fees
in the course of providing servicing on its various portfolios.
These fees include modification fees for modifications performed
outside of government programs, modification fees for
modifications pursuant to various government programs, and
incentive fees for servicing performance on specific GSE
portfolios.
Fees recorded on modifications of mortgage loans held for
investment performed outside of government programs are deferred
and recognized as an adjustment to the loans held for
investment. These fees are accreted into interest income as an
adjustment to the loan yield over the life of the loan. Fees
recorded on modifications of mortgage loans serviced by
Nationstar for others are recognized on collection and are
recorded as a component of service fee income. Fees recorded on
modifications pursuant to various government programs are
recognized when Nationstar has completed all necessary steps and
the loans have performed for the minimum required time frame to
establish eligibility for the fee. Revenue earned on
modifications pursuant to various government programs are
included as a component of service fee income. Incentive fees
for servicing performance on specific GSE portfolios are
recognized as various incentive standards are achieved and are
recorded as a component of service fee income.
Sale of
Mortgage Loans
Transfers of financial assets are accounted for as sales when
control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the
assets have been isolated from Nationstar, (2) the
transferee has the right (free of conditions that constrain it
from taking advantage of that right) to pledge or exchange the
transferred assets, and (3) Nationstar does not maintain
effective control over the transferred assets through either
(a) an agreement that entitles and obligates Nationstar to
repurchase or redeem them before their maturity or (b) the
ability to unilaterally cause the holder to return specific
assets.
Loan securitizations structured as sales, as well as whole loan
sales, are accounted for in accordance with ASC 860,
Transfers and Servicing, and the resulting gains on such
sales, net of any accrual for recourse obligations, are reported
in operating results during the period in which the
securitization closes or the sale occurs.
F-14
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
2.
|
Significant
Accounting Policies (continued)
|
Share-Based
Compensation Expense
Share-based compensation is recognized in accordance with
ASC 718, CompensationStock Compensation. This
guidance requires all share-based payments to employees,
including grants of employee stock options, to be recognized as
an expense in the consolidated statements of operations, based
on their fair values. The amount of compensation is measured at
the fair value of the awards when granted and this cost is
expensed over the required service period, which is normally the
vesting period of the award.
Advertising
Costs
Advertising costs are expensed as incurred and are included as
part of general and administrative expenses.
Income
Taxes
For federal income tax purposes, Nationstar has elected to be a
disregarded entity and is treated as a branch of its parent, FIF
HE Holdings LLC. FIF HE Holdings LLC is taxed as a partnership,
whereby all income is taxed at the member level. Certain states
impose income taxes on LLCs. However, Nationstar does not
believe it is subject to material state or local income tax in
any of the jurisdictions in which it does business.
Consolidated
Statement of Cash FlowsSupplemental Disclosure
Total interest paid for the years ended December 31, 2010,
2009, and 2008, was approximately $91.8 million,
$47.6 million, and $58.8 million, respectively.
New
Accounting Standards
On January 1, 2010, the Company adopted new FASB accounting
guidance on transfers of financial assets and consolidation of
VIEs. This new accounting guidance revises sale accounting
criteria for transfers of financial assets, including
elimination of the concept of and accounting for qualifying
special purpose entities (QSPEs), and significantly changes the
criteria for consolidation of a VIE. The adoption of this new
accounting guidance resulted in the consolidation of certain
VIEs that previously were QSPEs that were not recorded on the
Companys Consolidated Balance Sheet prior to
January 1, 2010. The adoption of this new accounting
guidance resulted in a net incremental increase in assets of
$905.5 million and a net increase in liabilities of
$913.6 million. These amounts are net of retained interests
in securitizations held on the Consolidated Balance Sheet at
December 31, 2009. The Company recorded an
$8.1 million charge to members equity on
January 1, 2010 for the cumulative effect of the adoption
of this new accounting guidance, which resulted principally from
the derecognition of the retained interests in the
securitizations. Initial recording of these assets and
liabilities on the Companys Consolidated Balance Sheet had
no impact at the date of adoption on consolidated results of
operations. See Note 3 to Consolidated Financial
StatementsVariable Interest Entities and
Securitizations.
Accounting Standards Update
No. 2010-06,
Fair Value Measurements and Disclosures (Topic 820):
Improving Disclosures about Fair Value Measurements (Update
No. 2010-06).
Update
No. 2010-06
requires additional disclosures about fair value measurements,
including separate disclosures of significant transfers in and
out of Level 1 and Level 2 fair value measurements and
the reasons for the transfers. Additionally, the reconciliation
for fair value measurements using significant unobservable
inputs (Level 3) should present separately information
about purchases, sales, issuances, and settlements. Update
No. 2010-06
also clarifies
F-15
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
2.
|
Significant
Accounting Policies (continued)
|
previous disclosure requirements, including the requirement that
entities provide disclosures about the valuation techniques and
inputs used to measure fair value for both recurring and
nonrecurring fair value measurements for both Level 2 and
Level 3 measurements. The new disclosures and
clarifications of existing disclosures required under Update
No. 2010-06
is effective for interim and annual reporting periods beginning
after December 15, 2009, and was adopted for the interim
reporting period ending March 31, 2010, except for the
disclosures about purchases, sales, issuances, and settlement in
the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods
within those fiscal years.
Accounting Standards Update
No. 2010-18,
Effect of a Loan Modification When the Loan Is Part of a Pool
That Is Accounted for as a Single Asset (Update
No. 2010-18).
Update
No. 2010-18
clarifies the accounting treatment for modifications of loans
that are accounted for within a pool under Subtopic
310-30,
ReceivablesLoans and Debt Securities Acquired with
Deteriorated Credit Quality (Subtopic
310-30),
requiring an entity to continue to include modified loans in the
pool even if the modification of those loans would otherwise be
considered a troubled debt restructuring. Loans accounted for
individually under Subtopic
310-30
continue to be subject to the troubled debt restructuring
accounting provisions within Subtopic
310-40,
ReceivablesTroubled Debt Restructurings by
Creditors. The amendments in this update were effective for
Nationstar for modifications of loans accounted for within pools
under Subtopic
310-30
occurring in the first interim or annual period ending on or
after July 15, 2010. The adoption of Update
No. 2010-18
did not have a material impact on Nationstars financial
condition, liquidity or results of operations.
Accounting Standards Update
No. 2010-20,
Disclosures about the Credit Quality of Financing Receivables
and the Allowance for Credit Losses (Update
No. 2010-20).
Update
No. 2010-20
is intended to provide users of financial statements with
greater transparency regarding a companys allowance for
credit losses and the credit quality of its financing
receivables. It is intended to provide additional information to
assist financial statement users in assessing an entitys
credit risk exposures and evaluating the adequacy of its
allowance for credit losses. The additional disclosure
requirements for this amendment were initially to be effective
for Nationstar for annual reporting periods ending on or after
December 15, 2011, but was subsequently deferred by
Accounting Standards Update
No. 2011-01,
Deferral of the Effective Date of Disclosures about Troubled
Debt Restructurings in Update
No. 2010-20.
In the proposed Update for determining what constitutes a
troubled debt restructuring, the clarifications would be
effective for interim and annual periods ending after
June 15, 2011. The adoption of Update
No. 2010-20
will not have a material impact on Nationstars financial
condition, liquidity or results of operations.
|
|
3.
|
Variable
Interest Entities and Securitizations
|
A VIE is an entity that has either a total equity investment
that is insufficient to permit the entity to finance its
activities without additional subordinated financial support or
whose equity investors lack the characteristics of a controlling
financial interest. A VIE is consolidated by its primary
beneficiary, which is the entity that, through its variable
interests has both the power to direct the activities of a VIE
that most significantly impact the VIEs economic performance and
the obligation to absorb losses of the VIE that could
potentially be significant to the VIE or the right to receive
benefits from the VIE that could potentially be significant to
the VIE.
Effective January 1, 2010, new accounting guidance
eliminated the concept of a QSPE and all existing SPEs are now
subject to new consolidation guidance. Upon adoption of this new
accounting guidance, Nationstar identified certain
securitization trusts where Nationstar had both the power to
direct the activities that most significantly impacted the
VIEs economic performance and the obligation to absorb
losses or the
F-16
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
3.
|
Variable
Interest Entities and Securitizations (continued)
|
right to receive benefits that could potentially be significant
to the VIE, the assets and liabilities of these VIEs are
included in Nationstars consolidated financial statements.
The net incremental impact of this accounting change on the
Companys Consolidated Balance Sheet is set forth in the
following table. The net effect of the accounting change on
January 1, 2010 members equity was an
$8.1 million charge to members equity (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
|
|
|
|
Beginning Balance
|
|
|
|
Sheet
|
|
|
Net Increase/
|
|
|
Sheet
|
|
|
|
December 31, 2009
|
|
|
(Decrease)
|
|
|
January 1, 2010
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
$41,645
|
|
|
|
$
|
|
|
|
$41,645
|
|
Restricted cash
|
|
|
52,795
|
|
|
|
6,183
|
|
|
|
58,978
|
|
Accounts receivable
|
|
|
509,974
|
|
|
|
(39,612
|
)
|
|
|
470,362
|
|
Mortgage loans held for sale
|
|
|
203,131
|
|
|
|
|
|
|
|
203,131
|
|
Mortgage loans held for investment, subject to nonrecourse
debtLegacy Assets
|
|
|
301,910
|
|
|
|
|
|
|
|
301,910
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt
|
|
|
|
|
|
|
928,891
|
|
|
|
928,891
|
|
Investment in debt
securitiesavailable-for-sale
|
|
|
2,486
|
|
|
|
(2,486
|
)
|
|
|
|
|
Receivables from affiliates
|
|
|
12,574
|
|
|
|
|
|
|
|
12,574
|
|
Mortgage servicing rights
|
|
|
114,605
|
|
|
|
(10,431
|
)
|
|
|
104,174
|
|
Property and equipment, net
|
|
|
6,575
|
|
|
|
|
|
|
|
6,575
|
|
Real estate owned, net
|
|
|
10,262
|
|
|
|
22,970
|
|
|
|
33,232
|
|
Other assets
|
|
|
24,228
|
|
|
|
|
|
|
|
24,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$1,280,185
|
|
|
|
$905,515
|
|
|
|
$2,185,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and members equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
$771,857
|
|
|
|
$
|
|
|
|
$771,857
|
|
Payables and accrued liabilities
|
|
|
66,830
|
|
|
|
123
|
|
|
|
66,953
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
|
|
|
|
28,614
|
|
|
|
28,614
|
|
Nonrecourse debtLegacy Assets
|
|
|
177,675
|
|
|
|
|
|
|
|
177,675
|
|
ABS nonrecourse debt
|
|
|
|
|
|
|
884,846
|
|
|
|
884,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,016,362
|
|
|
|
913,583
|
|
|
|
1,929,945
|
|
Total members equity
|
|
|
263,823
|
|
|
|
(8,068
|
)
|
|
|
255,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
|
$1,280,185
|
|
|
|
$905,515
|
|
|
|
$2,185,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of market conditions and deteriorating credit
performance on these consolidated VIEs, Nationstar expects
minimal to no future cash flows on the economic residual. Under
existing GAAP, Nationstar would be required to provide for
additional allowances for loan losses on the securitization
collateral as credit performance deteriorated, with no
offsetting reduction in the securitizations debt balances,
even though any nonperformance of the assets will ultimately
pass through as a reduction of amounts owed to the debt holders,
once the economic residuals are extinguished. Therefore,
Nationstar would be required to record accounting losses beyond
its economic exposure.
F-17
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
3.
|
Variable
Interest Entities and Securitizations (continued)
|
To more accurately represent the future economic performance of
the securitization collateral and related debt balances,
Nationstar elected the fair value option provided for by
ASC 825-10,
Financial Instruments-Overall. This option was applied to
all eligible items within the VIE, including mortgage loans held
for investment, subject to ABS nonrecourse debt, and the related
ABS nonrecourse debt.
Subsequent to this fair value election, Nationstar no longer
records an allowance for loan loss on mortgage loans held for
investment, subject to ABS nonrecourse debt. Nationstar
continues to record interest income in Nationstars
consolidated statement of operations on these fair value elected
loans until they are placed on a nonaccrual status when they are
90 days or more past due. The fair value adjustment
recorded for the mortgage loans held for investment is
classified within fair value changes of ABS securitizations in
Nationstars consolidated statement of operations.
Subsequent to the fair value election for ABS nonrecourse debt,
Nationstar continues to record interest expense in
Nationstars consolidated statement of operations on the
fair value elected ABS nonrecourse debt. The fair value
adjustment recorded for the ABS nonrecourse debt is classified
within fair value changes of ABS securitizations in
Nationstars consolidated statement of operations.
Under the existing pooling and servicing agreements of these
securitization trusts, the principal and interest cash flows on
the underlying securitized loans are used to service the
asset-backed certificates. Accordingly, the timing of the
principal payments on this nonrecourse debt is dependent on the
payments received on the underlying mortgage loans and
liquidation of real estate owned.
Nationstar consolidates the SPEs created for the purpose of
issuing debt supported by collections on loans and advances that
have been transferred to it as VIEs, and Nationstar is the
primary beneficiary of these VIEs. Nationstar consolidates the
assets and liabilities of the VIEs into its consolidated
financial statements.
F-18
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
3.
|
Variable
Interest Entities and Securitizations (continued)
|
A summary of the assets and liabilities of Nationstars
transactions with VIEs included in Nationstars
consolidated financial statements as of December 31, 2010
is presented in the following table (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers
|
|
|
|
|
|
|
|
|
|
Accounted for as
|
|
|
|
|
|
|
Securitization
|
|
|
Secured
|
|
|
|
|
|
|
Trusts
|
|
|
Borrowings
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
$1,472
|
|
|
|
$32,075
|
|
|
|
$33,547
|
|
Accounts receivable
|
|
|
2,392
|
|
|
|
286,808
|
|
|
|
289,200
|
|
Mortgage loans held for investment, subject to nonrecourse debt
|
|
|
|
|
|
|
261,305
|
|
|
|
261,305
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt
|
|
|
538,440
|
|
|
|
|
|
|
|
538,440
|
|
Real estate owned
|
|
|
17,509
|
|
|
|
9,505
|
|
|
|
27,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
$559,813
|
|
|
|
$589,693
|
|
|
|
$1,149,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
$
|
|
|
|
$236,808
|
|
|
|
$236,808
|
|
Payables and accrued liabilities
|
|
|
95
|
|
|
|
1,173
|
|
|
|
1,268
|
|
Outstanding servicer advances(1)
|
|
|
32,284
|
|
|
|
|
|
|
|
32,284
|
|
Derivative financial instruments
|
|
|
|
|
|
|
7,801
|
|
|
|
7,801
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
18,781
|
|
|
|
|
|
|
|
18,781
|
|
Nonrecourse debtLegacy Assets
|
|
|
|
|
|
|
138,662
|
|
|
|
138,662
|
|
ABS nonrecourse debt
|
|
|
497,289
|
|
|
|
|
|
|
|
497,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
$548,449
|
|
|
|
$384,444
|
|
|
|
$932,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Outstanding servicer advances consists of principal and interest
advances paid by Nationstar to cover scheduled payments and
interest that have not been timely paid by borrowers. These
outstanding servicer advances are eliminated upon the
consolidation of the securitization trusts. |
F-19
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
3.
|
Variable
Interest Entities and Securitizations (continued)
|
A summary of the assets and liabilities of Nationstars
transactions with VIEs included in Nationstars
consolidated financial statements as of December 31, 2009
is presented in the following table (in thousands).
|
|
|
|
|
|
|
Transfers
|
|
|
|
Accounted for as
|
|
|
|
Secured
|
|
|
|
Borrowings
|
|
|
Assets
|
|
|
|
|
Restricted cash
|
|
|
$11,318
|
|
Accounts receivable
|
|
|
294,973
|
|
Mortgage loans held for investment, subject to nonrecourse debt
|
|
|
297,737
|
|
Real estate owned
|
|
|
10,262
|
|
|
|
|
|
|
Total Assets
|
|
|
$614,290
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Notes payable
|
|
|
$240,935
|
|
Payables and accrued liabilities
|
|
|
1,393
|
|
Nonrecourse debtLegacy Assets
|
|
|
177,675
|
|
|
|
|
|
|
Total Liabilities
|
|
|
$420,003
|
|
|
|
|
|
|
As of July 1, 2010, cumulative realized losses related to a
consolidated securitization trust were in excess of
Nationstars retained beneficial interests. In accordance
with ASC 810, Consolidation, Nationstar has
evaluated this securitization trust and determined that
Nationstar no longer has both the power to direct the activities
that most significantly impact the VIEs economic
performance and the obligation to absorb losses or the right to
receive benefits that could potentially be significant to the
VIE, and this securitization trust was derecognized on
July 1, 2010. Upon derecognition of this VIE, Nationstar
derecognized the securitized mortgage loans held for investment,
subject to ABS nonrecourse debt, and the related ABS nonrecourse
debt, and recognized any MSRs on Nationstars consolidated
balance sheet. The impact of this derecognition on
Nationstars consolidated statement of operations was a
decrease in net income of approximately $0.7 million during
2010.
A summary of the outstanding collateral and certificate balances
for securitization trusts, including any retained beneficial
interests and MSRs, that were not consolidated by Nationstar for
the years ended December 31, 2010 and 2009 are presented in
the following table (in thousands).
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010(1)
|
|
|
2009
|
|
|
Total collateral balance
|
|
|
$4,038,978
|
|
|
|
$3,240,879
|
|
Total certificate balance
|
|
|
4,026,844
|
|
|
|
3,262,995
|
|
Total beneficial interests held at fair value
|
|
|
|
|
|
|
2,486
|
|
Total mortgage servicing rights at fair value
|
|
|
26,419
|
|
|
|
20,505
|
|
|
|
|
(1) |
|
Unconsolidated securitization trusts as of December 31,
2010 consist of VIEs where Nationstar does not have both
the power to direct the activities that most significantly
impact the VIEs economic performance and the obligation to
absorb losses or the right to receive benefits that could
potentially be significant to the VIE. |
F-20
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
3.
|
Variable
Interest Entities and Securitizations (continued)
|
Nationstar has no recorded variable interests in the
unconsolidated securitization trusts that were outstanding as of
December 31, 2010, and does not have any exposure to loss
related to these unconsolidated VIEs.
A summary of mortgage loans transferred to unconsolidated
securitization trusts that are 60 days or more past due and
the credit losses incurred in the unconsolidated securitization
trusts are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
Principal Amount of
|
|
|
|
Principal Amount of
|
|
|
|
Principal Amount of
|
|
|
|
|
Loans 60 Days or
|
|
Credit
|
|
Loans 60 Days or
|
|
Credit
|
|
Loans 60 Days or
|
|
Credit
|
|
|
More Past Due
|
|
Losses
|
|
More Past Due
|
|
Losses
|
|
More Past Due
|
|
Losses
|
|
Total securitization Trusts
|
|
|
$830,953
|
|
|
|
$18,341
|
|
|
|
$1,172,822
|
|
|
|
$27,734
|
|
|
|
$979,556
|
|
|
|
$16,708
|
|
Certain cash flows received from securitization trusts accounted
for as sales for the dates indicated were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
Servicing
|
|
|
|
Servicing
|
|
|
|
Servicing
|
|
|
|
|
Fees
|
|
Loan
|
|
Fees
|
|
Loan
|
|
Fees
|
|
Loan
|
|
|
Received
|
|
Repurchases
|
|
Received
|
|
Repurchases
|
|
Received
|
|
Repurchases
|
|
Total securitization trusts
|
|
|
$29,129
|
|
|
|
$
|
|
|
|
$32,593
|
|
|
|
$
|
|
|
|
$25,535
|
|
|
|
$
|
|
Accounts receivable consist primarily of accrued interest
receivable on mortgage loans and securitizations, collateral
deposits on surety bonds, and advances made to securitization
trusts, as required under various servicing agreements related
to delinquent loans, which are ultimately paid back to
Nationstar from such trusts.
Accounts receivable consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Delinquency advances
|
|
|
$148,751
|
|
|
|
$206,446
|
|
Corporate and escrow advances
|
|
|
241,618
|
|
|
|
275,001
|
|
Insurance deposits
|
|
|
6,390
|
|
|
|
6,025
|
|
Accrued interest (includes $2,392 and $0, respectively, subject
to ABS nonrecourse debt)
|
|
|
4,302
|
|
|
|
3,353
|
|
Receivable from trusts
|
|
|
21,910
|
|
|
|
1,779
|
|
Other
|
|
|
18,304
|
|
|
|
21,335
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable
|
|
|
$441,275
|
|
|
|
$513,939
|
|
|
|
|
|
|
|
|
|
|
F-21
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
5.
|
Mortgage
Loans Held for Sale and Investment
|
Mortgage
loans held for sale
Mortgage loans held for sale consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Mortgage loans held for saleunpaid principal balance
|
|
|
$365,337
|
|
|
|
$199,419
|
|
Mark-to-market
adjustment
|
|
|
4,280
|
|
|
|
2,010
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans held for sale
|
|
|
$369,617
|
|
|
|
$201,429
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale on a nonaccrual status are
presented in the following table for the years indicated (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Mortgage loans held for sale
|
|
|
$371
|
|
|
|
$252
|
|
|
|
$98,412
|
|
A reconciliation of the changes in mortgage loans held for sale
to the amounts presented in the consolidated statements of cash
flows for the dates indicated is presented in the following
table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Mortgage loans held for salebeginning balance
|
|
|
$201,429
|
|
|
|
$560,354
|
|
Mortgage loans originated and purchased, net of fees
|
|
|
2,791,639
|
|
|
|
1,480,549
|
|
Cost of loans sold, net of fees
|
|
|
(2,621,275
|
)
|
|
|
(1,007,369
|
)
|
Principal payments/prepayments received on mortgage loans held
for sale and other changes (including fair value
mark-to-market
adjustments from adoption of ASC 825, Financial
Instruments, and other lower of cost or market valuation
adjustments)
|
|
|
(1,349
|
)
|
|
|
(439,658
|
)
|
Transfer of mortgage loans held for sale to mortgage loans held
for investment
|
|
|
|
|
|
|
(319,183
|
)
|
Transfer of mortgage loans held for sale to real estate owned
|
|
|
(827
|
)
|
|
|
(73,264
|
)
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for saleending balance
|
|
|
$369,617
|
|
|
|
$201,429
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans held for investment, subject to nonrecourse
debtLegacy Assets, net
In November 2009, Nationstar completed the securitization of
approximately $222 million of asset-backed securities,
which was structured as a secured borrowing, resulting in
carrying the securitized loans as mortgage loans on
Nationstars consolidated balance sheets and recognizing
the asset-backed certificates as nonrecourse debt. Prior to this
securitization, Nationstar transferred $530.9 million in
mortgage loans held for sale to mortgage loans held for
investment. These mortgage loans were transferred to the held
for investment classification at their fair value of
$319.2 million with no associated allowance for loan
losses, in accordance with ASC 310, Receivables.
Subsequent to the transfer date, mortgage loans held for sale
consisted principally of single-family conforming loans
originated for sale to GSEs or the other third-party investors
in the secondary market.
F-22
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
5.
|
Mortgage
Loans Held for Sale and Investment (continued)
|
Mortgage loans held for investment, subject to nonrecourse
debtLegacy Assets, net consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Mortgage loans held for investment, subject to nonrecourse
debtLegacy Assets, netunpaid principal balance
|
|
|
$411,878
|
|
|
|
$490,502
|
|
Transfer discount
|
|
|
|
|
|
|
|
|
Accretable
|
|
|
(25,219
|
)
|
|
|
(22,040
|
)
|
Non-accretable
|
|
|
(117,041
|
)
|
|
|
(166,660
|
)
|
Allowance for loan losses
|
|
|
(3,298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans held for investment, subject to nonrecourse
debtLegacy Assets, net
|
|
|
$266,320
|
|
|
|
$301,802
|
|
|
|
|
|
|
|
|
|
|
Over the life of the loan pools, Nationstar continues to
estimate cash flows expected to be collected. Nationstar
considers expected prepayments and estimates the amount and
timing of undiscounted expected principal, interest, and other
cash flows (expected as of the transfer date) for each aggregate
pool of loans. Nationstar evaluates at the balance sheet date
whether the present value of its loans determined using the
effective interest rates, has decreased and if so, recognizes a
valuation allowance subsequent to the transfer date. The present
value of any subsequent increase in the loan pools actual
cash flows expected to be collected is used first to reverse any
existing valuation allowance for that loan pool. Any remaining
increase in cash flows expected to be collected adjusts the
amount of accretable yield recognized on a prospective basis
over the loan pools remaining life.
The changes in accretable yield on loans transferred to mortgage
loans held for investment, subject to nonrecourse
debtLegacy Assets, net were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance at the beginning of the period
|
|
|
$22,040
|
|
|
|
$
|
|
Additions
|
|
|
|
|
|
|
23,331
|
|
Accretion
|
|
|
(4,082
|
)
|
|
|
(1,291
|
)
|
Reclassifications from (to) nonaccretable discount
|
|
|
7,261
|
|
|
|
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
|
$25,219
|
|
|
|
$22,040
|
|
|
|
|
|
|
|
|
|
|
Nationstar will occasionally modify the terms of any outstanding
mortgage loans held for investment, subject to nonrecourse
debtLegacy Assets, net for loans that are either in
default or in imminent default. Modifications often involve
reduced payments by borrowers, modification of the original
terms of the mortgage loans, forgiveness of debt
and/or
increased servicing advances. As a result of the volume of
modification agreements entered into, the estimated average
outstanding life in this pool of mortgage loans has been
extended. Nationstar records interest income on the transferred
loans on a level-yield method. To maintain a level-yield on
these transferred loans over the estimated extended life,
Nationstar reclassified approximately $7.3 million from
nonaccretable difference. Furthermore, the Company considers the
decrease in principal, interest, and other cash flows expected
to be collected arising from the transferred loans as an
F-23
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
5.
|
Mortgage
Loans Held for Sale and Investment (continued)
|
impairment, and Nationstar recorded a $3.3 million
provision for loan losses on the transferred loans to reflect
this impairment.
The changes in the allowance for loan losses on mortgage loans
held for investment, subject to nonrecourse debtLegacy
Assets, net were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
Performing
|
|
|
Performing
|
|
|
Total
|
|
|
Balance at the beginning of the period
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
Provision for loan losses
|
|
|
829
|
|
|
|
2,469
|
|
|
|
3,298
|
|
Recoveries on loans previously charged-off
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
|
$829
|
|
|
|
$2,469
|
|
|
|
$3,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: Collectively evaluated for impairment
|
|
|
$310,730
|
|
|
|
$101,148
|
|
|
|
$411,878
|
|
Loan delinquency, and Loan-to-Value Ratio (LTV) are common
credit quality indicators that Nationstar monitors and utilizes
in its evaluation of the adequacy of the allowance for loan
losses, of which the primary indicator of credit quality being
loan delinquency. LTV refers to the ratio of comparing the
loans unpaid principal balance to the propertys
collateral value. Loan delinquencies and unpaid principal
balances are updated monthly based upon collection activity.
Collateral values are updated on an as needed basis, which is
generally described as an event requiring a decision based at
least in part on the collateral value. The collateral values
used to derive the LTVs shown below were obtained at
various points during the prior eighteen months.
The following tables provide the outstanding unpaid principal
balance of Nationstars mortgage loans held for investment,
subject to nonrecourse debtLegacy Assets, net by credit
quality indicators as of December 31, 2010 (in thousands).
|
|
|
|
|
|
|
December 31, 2010
|
|
|
Credit Quality by Delinquency Status
|
|
|
|
|
Performing
|
|
|
$310,730
|
|
Non-Performing
|
|
|
101,148
|
|
|
|
|
|
|
Total
|
|
|
$411,878
|
|
|
|
|
|
|
Credit Quality by
Loan-to-Value
Ratio
|
|
|
|
|
Less than 60
|
|
|
$47,568
|
|
Less than 70 and more than 60
|
|
|
17,476
|
|
Less than 80 and more than 70
|
|
|
26,771
|
|
Less than 90 and more than 80
|
|
|
36,079
|
|
Less than 100 and more than 90
|
|
|
37,551
|
|
Greater than 100
|
|
|
246,433
|
|
|
|
|
|
|
Total
|
|
|
$411,878
|
|
|
|
|
|
|
F-24
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
5.
|
Mortgage
Loans Held for Sale and Investment (continued)
|
Mortgage
loans held for investment, subject to ABS nonrecourse
debt
Effective January 1, 2010, new accounting guidance
eliminated the concept of a QSPE, and all existing
securitization trusts are considered VIEs and are now subject to
new consolidation guidance provided in ASC 810,
Consolidation. Upon consolidation of these VIEs,
Nationstar recognized the securitized mortgage loans related to
these securitization trusts as mortgage loans held for
investment, subject to ABS nonrecourse debt. See
Note 3 to Consolidated Financial
StatementsVariable Interest Entities and
Securitizations. Additionally, Nationstar elected the fair
value option provided for by
ASC 825-10,
Financial InstrumentsOverall.
Mortgage loans held for investment, subject to ABS nonrecourse
debt as of December 31, 2010 includes (in thousands):
|
|
|
|
|
|
|
December 31, 2010
|
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debtunpaid principal balance
|
|
|
$983,106
|
|
Fair value adjustment
|
|
|
(444,666
|
)
|
|
|
|
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt, net
|
|
|
$538,440
|
|
|
|
|
|
|
As of December 31, 2010, approximately $223.5 million
of the unpaid principal balance of mortgage loans held for
investment, subject to ABS nonrecourse debt were over
90 days past due. The fair value of such loans was
approximately $117.6 million.
|
|
6.
|
Investment
in Debt Securities
|
Effective January 1, 2010, new accounting guidance
eliminated the concept of a QSPE, and all existing
securitization trusts are considered VIEs and are now subject to
new accounting guidance provided in ASC 810,
Consolidation. Upon consolidation of these VIEs,
Nationstar derecognized all previously recognized beneficial
interests, including retained investment in debt securities,
obtained as part of the securitization.
See Note 3 to Consolidated Financial
StatementsVariable Interest Entities and
Securitizations.
The following table presents a summary of Nationstars
bonds retained from securitization trusts as of
December 31, 2009, which are classified as
available-for-sale
securities, and are therefore carried at fair value (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Outstanding
|
|
|
Accreted
|
|
|
Fair
|
|
|
|
Face
|
|
|
Cost
|
|
|
Value
|
|
|
Retained bonds security rating
|
|
|
|
|
|
|
|
|
|
|
|
|
BBs
|
|
|
$68,432
|
|
|
|
$2,486
|
|
|
|
$2,486
|
|
Bs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total retained bonds
|
|
|
68,432
|
|
|
|
2,486
|
|
|
|
2,486
|
|
Retained net interest margin securities
|
|
|
11,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment in debt securities
|
|
|
$80,382
|
|
|
|
$2,486
|
|
|
|
$2,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
6.
|
Investment
in Debt Securities (continued)
|
The following table presents a summary of unrealized gains
(losses), both temporary and
other-than-temporary,
recognized on outstanding debt securities for the periods
indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Other-than-
|
|
|
Gains
|
|
|
Other-than-
|
|
|
Gains
|
|
|
|
Temporary
|
|
|
(Losses)(1)
|
|
|
Temporary(2)
|
|
|
(Losses)(1)
|
|
|
Retained bonds security rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BBs
|
|
|
$(5,505
|
)
|
|
|
$
|
|
|
|
$(40,901
|
)
|
|
|
$
|
|
Bs
|
|
|
(1,214
|
)
|
|
|
|
|
|
|
(3,670
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total retained bonds
|
|
|
(6,719
|
)
|
|
|
|
|
|
|
(44,571
|
)
|
|
|
|
|
Retained net interest margin securities
|
|
|
(90
|
)
|
|
|
|
|
|
|
(10,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment in debt securities
|
|
|
$(6,809
|
)
|
|
|
$
|
|
|
|
$(55,212
|
)
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Unrealized gains (losses) are recorded as a component of other
comprehensive income (loss). |
|
(2) |
|
As part of the 2008 impairment charges, Nationstar reclassified
approximately $3.9 million in unrealized losses from other
comprehensive income (loss). |
|
|
7.
|
Mortgage
Servicing Rights
|
MSRs arise from contractual agreements between Nationstar and
investors in mortgage securities and mortgage loans. Nationstar
records MSR assets when it sells loans on a servicing-retained
basis, at the time of securitization or through the acquisition
or assumption of the right to service a financial asset. Under
these contracts, Nationstar performs loan servicing functions in
exchange for fees and other remuneration.
The fair value of the MSRs is based upon the present value of
the expected future cash flows related to servicing these loans.
Nationstar receives a base servicing fee ranging from 0.25% to
0.50% annually on the remaining outstanding principal balances
of the loans. The servicing fees are collected from investors.
Nationstar determines the fair value of the MSRs by the use of a
cash flow model that incorporates prepayment speeds, discount
rate, and other assumptions (including servicing costs) that
management believes are consistent with the assumptions other
major market participants use in valuing the MSRs. Certain of
the loans underlying the MSRs are prime agency and government
conforming residential mortgage loans and as such are more
interest rate sensitive whereas the remaining MSRs are more
credit sensitive. The nature of the loans underlying the MSRs
affects the assumptions that management believes other major
market participants use in valuing the MSRs. During 2010,
Nationstar obtained third-party valuations of a portion of its
MSRs to assess the reasonableness of the fair value calculated
by the cash flow model.
F-26
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
7.
|
Mortgage
Servicing Rights (continued)
|
Nationstar used the following weighted average assumptions in
estimating the fair value of MSRs for the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
Credit Sensitive MSRs
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
24.96%
|
|
|
|
26.49%
|
|
Total prepayment speeds
|
|
|
18.13%
|
|
|
|
21.37%
|
|
Expected weighted-average life
|
|
|
4.90 years
|
|
|
|
4.05 years
|
|
Credit losses
|
|
|
36.71%
|
|
|
|
56.31%
|
|
Interest Rate Sensitive MSRs
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
13.57%
|
|
|
|
15.00%
|
|
Total prepayment speeds
|
|
|
17.19%
|
|
|
|
17.79%
|
|
Expected weighted-average life
|
|
|
5.12 years
|
|
|
|
4.80 years
|
|
Credit losses
|
|
|
8.80%
|
|
|
|
15.09%
|
|
The activity of MSRs carried at fair value is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
Fair value at the beginning of the period
|
|
|
$114,605
|
|
|
|
$110,808
|
|
Additions:
|
|
|
|
|
|
|
|
|
Servicing resulting from transfers of financial assets
|
|
|
26,253
|
|
|
|
8,332
|
|
Recognition of MSRs from derecognition of variable interest
entities
|
|
|
2,866
|
|
|
|
|
|
Purchases of servicing assets
|
|
|
17,812
|
|
|
|
23,380
|
|
Deductions:
|
|
|
|
|
|
|
|
|
Derecognition of servicing assets due to new accounting guidance
on consolidation of variable interest entities
|
|
|
(10,431
|
)
|
|
|
|
|
Changes in fair value:
|
|
|
|
|
|
|
|
|
Due to changes in valuation inputs or assumptions used in the
valuation model
|
|
|
9,455
|
|
|
|
(9,355
|
)
|
Other changes in fair value
|
|
|
(15,498
|
)
|
|
|
(18,560
|
)
|
|
|
|
|
|
|
|
|
|
Fair value at the end of the period
|
|
|
$145,062
|
|
|
|
$114,605
|
|
|
|
|
|
|
|
|
|
|
Unpaid principal balance of loans serviced for others
|
|
|
|
|
|
|
|
|
Originated or purchased mortgage loans
|
|
|
|
|
|
|
|
|
Credit sensitive loans
|
|
|
$24,964,329
|
|
|
|
$30,771,426
|
|
Interest sensitive loans
|
|
|
6,722,312
|
|
|
|
1,338,121
|
|
|
|
|
|
|
|
|
|
|
Total owned loans
|
|
|
31,686,641
|
|
|
|
32,109,547
|
|
Subserviced for others
|
|
|
30,649,472
|
|
|
|
793,428
|
|
|
|
|
|
|
|
|
|
|
Total unpaid principal balance of loans serviced for others
|
|
|
$62,336,113
|
|
|
|
$32,902,975
|
|
|
|
|
|
|
|
|
|
|
F-27
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
7.
|
Mortgage
Servicing Rights (continued)
|
The following table shows the hypothetical effect on the fair
value of the MSRs using various unfavorable variations of the
expected levels of certain key assumptions used in valuing these
assets at December 31, 2010 and 2009 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Prepayment
|
|
|
|
|
Discount Rate
|
|
Speeds
|
|
Credit Losses
|
|
|
100 bps
|
|
200 bps
|
|
10%
|
|
20%
|
|
10%
|
|
20%
|
|
|
Adverse
|
|
Adverse
|
|
Adverse
|
|
Adverse
|
|
Adverse
|
|
Adverse
|
|
|
Change
|
|
Change
|
|
Change
|
|
Change
|
|
Change
|
|
Change
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights
|
|
|
$(3,828
|
)
|
|
|
$(7,458
|
)
|
|
|
$(8,175
|
)
|
|
|
$(16,042
|
)
|
|
|
$(4,310
|
)
|
|
|
$(9,326
|
)
|
These sensitivities are hypothetical and should be evaluated
with care. The effect on fair value of a 10% variation in
assumptions generally cannot be determined because the
relationship of the change in assumptions to the fair value may
not be linear. Additionally, the impact of a variation in a
particular assumption on the fair value is calculated while
holding other assumptions constant. In reality, changes in one
factor may lead to changes in other factors (e.g., a decrease in
total prepayment speeds may result in an increase in credit
losses), which could impact the above hypothetical effects.
In November 2008, Nationstar acquired MSRs on a portfolio of
residential mortgage loans with an aggregate unpaid principal
balance of $12.7 billion from a third-party servicer.
Nationstars share of the acquisition price was
$35.4 million. An additional amount was paid by a
third-party investor in the underlying loans to the previous
servicer. Contemporaneously, Nationstar and the third-party
investor entered into a supplemental servicing agreement, which,
among other matters, established that any sale by Nationstar of
these servicing rights had to be approved by the investor and
that if Nationstar were to sell the MSRs in the five-year period
following the acquisition transaction, Nationstar would be
entitled to the proceeds from the sale of up to a specified
amount of the then existing aggregate unpaid principal balance
of the underlying mortgage loans, the investor would be entitled
to a specified amount, and the remaining excess proceeds, if
any, over and above these allocations would be retained by
Nationstar. In October 2009, Nationstar acquired MSRs on a
portfolio of residential mortgage loans with an aggregate unpaid
principal balance of $12.3 billion from another third party
servicer. Nationstars share of the acquisition price of
these servicing rights was $23.4 million. An additional
amount was paid by a third-party investor in the underlying
loans to the previous servicer. Contemporaneously, Nationstar
and the third-party investor entered into a supplemental
servicing agreement, which, among other matters, established
that any sale by Nationstar of these servicing rights had to be
approved by the investor and that if Nationstar were to sell the
MSRs following the acquisition transaction, Nationstar would be
entitled to the proceeds from the sale of up to a specified
amount of the then existing aggregate unpaid principal balance
of the underlying mortgage loans, the investor would be entitled
to a specified amount, and the remaining excess proceeds, if
any, over and above these allocations would be retained by
Nationstar. Nationstar carries these MSRs at their estimated
fair value, which includes consideration of the effect of the
restriction on any sale by Nationstar due to the investors
right to approve such sale. Under the supplemental servicing
agreement, Nationstar is entitled to all of the contractually
specified servicing fees, ancillary fees and also certain
incentive fees, if certain performance conditions are met, and
does not share these servicing revenues with the investor.
F-28
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
7.
|
Mortgage
Servicing Rights (continued)
|
Total servicing and ancillary fees from Nationstars
portfolio of residential mortgage loans are presented in the
following table for the years indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Servicing fees
|
|
|
$103,690
|
|
|
|
$89,893
|
|
|
|
$60,021
|
|
Ancillary fees
|
|
|
70,130
|
|
|
|
28,642
|
|
|
|
19,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total servicing and ancillary fees
|
|
|
$173,820
|
|
|
|
$118,535
|
|
|
|
$79,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred financing costs
|
|
|
$14,396
|
|
|
|
$11,786
|
|
Derivative financial instruments
|
|
|
8,666
|
|
|
|
7,236
|
|
Prepaid expenses
|
|
|
3,379
|
|
|
|
2,791
|
|
Other
|
|
|
2,954
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
$29,395
|
|
|
|
$22,073
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
Derivative
Financial Instruments
|
On October 1, 2010, the Company designated an existing
interest rate swap as a cash flow hedge against outstanding
floating rate financing associated with the Nationstar Mortgage
Advance Receivables
Trust 2009-ADV1
financing. Under the swap agreement, the Company receives
interest equivalent to one month LIBOR and pays a fixed rate of
2.0425% based on an amortizing notional of $268.0 million
as of December 31, 2010, with settlements occurring monthly
until November 2013. Unrealized gains associated with the
effective portion of this cash flow hedge of approximately
$1.1 million were recorded in accumulated other
comprehensive income for the year ended December 31, 2010.
Realized gains associated with the ineffective portion of this
cash flow hedge of approximately $0.9 million were recorded
as a component of interest expense for the year ended
December 31, 2010.
As of December 31, 2010, there are no credit risk related
contingent features in any of the Companys derivative
agreements. The amount of OCI expected to be reclassified to the
consolidated statement of operations in the next 12 months
is $0.8 million.
F-29
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
9.
|
Derivative
Financial Instruments (continued)
|
The following tables provide the outstanding notional balances
and fair values of outstanding positions for the dates
indicated, and recorded gains (losses) during the years
indicated (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
|
Expiration
|
|
Outstanding
|
|
|
Fair
|
|
|
Gains /
|
|
|
|
Dates
|
|
Notional
|
|
|
Value
|
|
|
Losses
|
|
|
Year ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MORTGAGE LOANS HELD FOR SALE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan sale commitments
|
|
2011
|
|
|
$28,641
|
|
|
|
$42
|
|
|
|
$(1,397
|
)
|
Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
|
2011
|
|
|
391,990
|
|
|
|
4,703
|
|
|
|
2,289
|
|
Forward MBS trades
|
|
2011
|
|
|
546,500
|
|
|
|
3,963
|
|
|
|
580
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps and caps
|
|
2011-2013
|
|
|
429,000
|
|
|
|
7,801
|
|
|
|
8,872
|
|
Interest rate swap,subject to ABS nonrecourse debt
|
|
2013
|
|
|
245,119
|
|
|
|
18,781
|
|
|
|
2,049
|
|
Year ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
|
2010
|
|
|
$278,181
|
|
|
|
$2,414
|
|
|
|
$1,207
|
|
Forward MBS trades
|
|
2010
|
|
|
292,553
|
|
|
|
3,383
|
|
|
|
(210
|
)
|
Loan sale commitments
|
|
2010
|
|
|
56,131
|
|
|
|
1,439
|
|
|
|
1,439
|
|
Interest rate cap agreements
|
|
2011
|
|
|
344,075
|
|
|
|
|
|
|
|
(14
|
)
|
Interest rate swap
|
|
2013
|
|
|
220,000
|
|
|
|
|
|
|
|
|
|
F-30
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
Notes
Payable
A summary of the balances of notes payable for the dates
indicated is presented below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Collateral
|
|
|
|
|
|
Collateral
|
|
|
|
Outstanding
|
|
|
Pledged
|
|
|
Outstanding
|
|
|
Pledged
|
|
|
Financial institutions repurchase facility (2010)
|
|
|
$43,059
|
|
|
|
$45,429
|
|
|
|
$
|
|
|
|
$
|
|
Financial services company repurchase facility
|
|
|
209,477
|
|
|
|
223,119
|
|
|
|
149,449
|
|
|
|
159,281
|
|
Financial services company unsecured line of credit
|
|
|
|
|
|
|
N/A
|
|
|
|
88,915
|
|
|
|
N/A
|
|
Financial institutions repurchase facility (2009)
|
|
|
39,014
|
|
|
|
40,640
|
|
|
|
31,582
|
|
|
|
33,245
|
|
Financial services company
2009-ADV1
advance facility
|
|
|
236,808
|
|
|
|
285,226
|
|
|
|
240,935
|
|
|
|
291,462
|
|
Financial institutions
2010-ADV1
advance facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GSE MSR facility
|
|
|
15,733
|
|
|
|
18,951
|
|
|
|
21,286
|
|
|
|
23,185
|
|
GSE ASAP+ facility
|
|
|
51,105
|
|
|
|
53,230
|
|
|
|
7,755
|
|
|
|
7,803
|
|
GSE EAF facility
|
|
|
114,562
|
|
|
|
142,327
|
|
|
|
231,935
|
|
|
|
252,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
|
$709,758
|
|
|
|
$808,922
|
|
|
|
$771,857
|
|
|
|
$767,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In February 2010, Nationstar executed a Master Repurchase
Agreement (MRA) with a financial institution, under which
Nationstar may currently enter into transactions, for an
aggregate amount of $75 million, in which Nationstar agrees
to transfer to the same financial institution certain mortgage
loans against the transfer of funds by the same financial
institution, with a simultaneous agreement by the same financial
institution to transfer such mortgage loans to Nationstar at a
date certain, or on demand by Nationstar, against the transfer
of funds from Nationstar. The interest rate is based on LIBOR
plus a spread ranging from 2.75% to 3.50%, with a minimum
interest rate of 4.75%. The maturity date of this MRA is October
2011.
Nationstar has a second MRA with a financial services company,
which expires in February 2011. The MRA states that from time to
time Nationstar may enter into transactions, for an aggregate
amount of $300 million, in which Nationstar agrees to
transfer to the financial services company certain mortgage
loans or mortgage-backed securities against the transfer of
funds by the financial services company, with a simultaneous
agreement by the financial services company to transfer such
mortgage loans or mortgage-backed securities to Nationstar at a
certain date, or on demand by Nationstar, against the transfer
of funds from Nationstar. The interest rate is based on LIBOR
plus a margin of 2.00%, with a minimum interest rate of 4.00%.
In October 2009, Nationstar executed a third MRA with a
financial institution. This MRA states that from time to time
Nationstar may currently enter into transactions, for an
aggregate amount of $100 million, in which Nationstar
agrees to transfer to the financial institution certain mortgage
loans against the transfer of funds by the financial
institution, with a simultaneous agreement by the financial
institution to transfer such mortgage loans to Nationstar at a
certain date, or on demand by Nationstar, against the transfer
of funds from Nationstar. The interest rate is based on LIBOR
plus a spread of 3.50%. The maturity date of this MRA with the
financial institution is December 2011.
F-31
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
10.
|
Indebtedness
(continued)
|
Nationstar maintains a facility with a financial services
company, the
2009-ADV1
Advance Facility. This facility has the capacity to purchase up
to $350 million of advance receivables. The interest rate
is based on LIBOR plus a spread ranging from 3.00% to 12.00%.
The maturity date of this facility with the financial services
company is December 2011. This debt is nonrecourse to Nationstar.
In December 2010, Nationstar executed the
2010-ADV1
Advance Facility with a financial institution. This facility has
the capacity to purchase up to $200 million of advance
receivables. The interest rate is based on LIBOR plus a spread
of 3.00%. The maturity date of this facility with the financial
institution is July 2011, which may be extended if Nationstar
elects to pledge any additional advances to this facility. This
debt is nonrecourse to Nationstar.
In connection with the October 2009 MSRs acquisition, Nationstar
executed a four-year note agreement with a GSE. As collateral
for this note, Nationstar has pledged Nationstars rights,
title, and interest in the acquired servicing portfolio. The
interest rate is based on LIBOR plus 2.50%. The maturity date of
this facility is October 2013.
During 2009, Nationstar began executing As Soon As Pooled Plus
agreements with a GSE, under which Nationstar transfers to the
GSE eligible mortgage loans that are to be pooled into the GSE
MBS against the transfer of funds by the GSE. The interest rate
is based on LIBOR plus a spread of 1.50%. These agreements
typically have a maturity of up to 45 days.
In September 2009, Nationstar executed a committed facility
agreement with a GSE, under which Nationstar agrees to transfer
to the GSE certain servicing advance receivables against the
transfer of funds by the GSE. This facility currently has the
capacity to purchase up to $275 million in eligible
servicing advance receivables. The interest rate is based on
LIBOR plus a spread of 2.50%. The maturity date of this facility
is December 2011.
Senior
Notes
In March 2010, Nationstar completed the offering of $250 million
of unsecured senior notes, which were issued with an issue
discount of $7.0 million for net cash proceeds of $243.0
million, with a maturity date of April 2015. These unsecured
senior notes pay interest biannually at an interest rate of
10.875%.
The indenture for the senior notes contains various covenants
and restrictions that limit Nationstar, or certain of its
subsidiaries, ability to incur additional indebtedness,
pay dividends, make certain investments, create liens,
consolidate, merge or sell substantially all the assets, or
enter into certain transactions with affiliates.
Nonrecourse
DebtLegacy Assets
In November 2009, Nationstar completed the securitization of
approximately $222 million of asset-backed securities,
which was structured as a secured borrowing. This structure
resulted in Nationstar carrying the securitized loans as
mortgages on Nationstars consolidated balance sheet and
recognizing the asset-backed certificates acquired by third
parties as nonrecourse debt, totaling approximately
$138.7 million and $177.7 million at December 31,
2010 and 2009, respectively. The principal and interest on these
notes are paid using the cash flows from the underlying mortgage
loans, which serve as collateral for the debt. The interest rate
paid on the outstanding securities is 7.50%, which is subject to
an available funds cap. The total outstanding principal balance
on the underlying mortgage loans serving as collateral for the
debt was
F-32
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
10.
|
Indebtedness
(continued)
|
approximately $430.0 million and $515.5 million at
December 31, 2010 and December 31, 2009, respectively.
Accordingly, the timing of the principal payments on this
nonrecourse debt is dependent on the payments received on the
underlying mortgage loans. The unpaid principal balance on the
outstanding notes was $161.2 million and
$206.6 million at December 31, 2010 and
December 31, 2009, respectively.
ABS
Nonrecourse Debt
Effective January 1, 2010, new accounting guidance
eliminated the concept of a QSPE, and all existing
securitization trusts are considered VIEs and are now subject to
new consolidation guidance provided in ASC 810,
Consolidation. Upon consolidation of these VIEs,
Nationstar derecognized all previously recognized beneficial
interests obtained as part of the securitization. In addition,
Nationstar recognized the securitized mortgage loans as mortgage
loans held for investment, subject to ABS nonrecourse debt, and
the related asset-backed certificates acquired by third parties
as ABS nonrecourse debt on Nationstars consolidated
balance sheet. See Note 3 to Consolidated Financial
StatementsVariable Interest Entities and
Securitizations. Additionally, Nationstar elected the fair
value option provided for by
ASC 825-10,
Financial InstrumentsOverall. The principal and
interest on these notes are paid using the cash flows from the
underlying mortgage loans, which serve as collateral for the
debt. The interest rate paid on the outstanding securities is
based on LIBOR plus a spread ranging from 0.13% to 2.00%, which
is subject to an interest rate cap. The total outstanding
principal balance on the underlying mortgage loans serving as
collateral for the debt was approximately $1,025.3 million
at December 31, 2010. The timing of the principal payments
on this ABS nonrecourse debt is dependent on the payments
received on the underlying mortgage loans. The outstanding
principal balance on the outstanding notes related to these
consolidated securitization trusts was $1,037.9 million at
December 31, 2010.
Financial
Covenants
As of December 31, 2010, Nationstar was in compliance with
its covenants on Nationstars borrowing arrangements and
credit facilities. These covenants generally relate to
Nationstars tangible net worth, liquidity reserves, and
leverage requirements.
Certain whole loan sale contracts include provisions requiring
Nationstar to repurchase a loan if a borrower fails to make
certain initial loan payments due to the acquirer or if the
accompanying mortgage loan fails to meet customary
representations and warranties. These representations and
warranties are made to the loan purchasers about various
characteristics of the loans, such as manner of origination, the
nature and extent of underwriting standards applied and the
types of documentation being provided and typically are in place
for the life of the loan. In the event of a breach of the
representations and warranties, the Company may be required to
either repurchase the loan or indemnify the purchaser for losses
it sustains on the loan. In addition, an investor may request
that Nationstar refund a portion of the premium paid on the sale
of mortgage loans if a loan is prepaid within a certain amount
of time from the date of sale. Nationstar records a provision
for estimated repurchases and premium recapture on loans sold,
which is charged to gain (loss) on mortgage loans held for sale.
The reserve for repurchases is included as a component of
payables and accrued liabilities. The current unpaid principal
balance of loans sold by Nationstar represents the maximum
potential exposure to repurchases related to representations and
warranties. Reserve levels are a function of expected losses
based on actual pending and expected claims, repurchase
requests, historical experience, and loan volume. While the
amount of repurchases and premium recapture is uncertain,
Nationstar considers the liability to be adequate.
F-33
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
11.
|
Repurchase
Reserves (continued)
|
The activity of the outstanding repurchase reserves were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Repurchase reserves, beginning of period
|
|
|
$3,648
|
|
|
|
$3,965
|
|
|
|
$4,196
|
|
Additions
|
|
|
4,649
|
|
|
|
820
|
|
|
|
1,164
|
|
Charge-offs
|
|
|
(976
|
)
|
|
|
(1,137
|
)
|
|
|
(1,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase reserves, end of period
|
|
|
$7,321
|
|
|
|
$3,648
|
|
|
|
$3,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
General
and Administrative
|
General and administrative expense consists of the following for
the dates indicated (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Depreciation and amortization
|
|
|
$2,117
|
|
|
|
$1,767
|
|
|
|
$1,309
|
|
Advertising
|
|
|
4,559
|
|
|
|
3,882
|
|
|
|
3,318
|
|
Equipment
|
|
|
3,862
|
|
|
|
3,300
|
|
|
|
3,359
|
|
Servicing
|
|
|
14,122
|
|
|
|
1,951
|
|
|
|
1,739
|
|
Telecommunications
|
|
|
2,347
|
|
|
|
1,590
|
|
|
|
1,479
|
|
Legal and professional fees
|
|
|
14,736
|
|
|
|
9,610
|
|
|
|
6,184
|
|
Postage
|
|
|
4,220
|
|
|
|
2,315
|
|
|
|
1,057
|
|
Stationary and supplies
|
|
|
2,594
|
|
|
|
1,500
|
|
|
|
903
|
|
Travel
|
|
|
2,231
|
|
|
|
827
|
|
|
|
740
|
|
Dues and fees
|
|
|
4,114
|
|
|
|
2,264
|
|
|
|
1,383
|
|
Insurance and taxes
|
|
|
2,798
|
|
|
|
1,218
|
|
|
|
1,680
|
|
Other
|
|
|
1,213
|
|
|
|
270
|
|
|
|
(957
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expense
|
|
|
$58,913
|
|
|
|
$30,494
|
|
|
|
$22,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The limited liability company interests in FIF HE Holdings LLC
are represented by four separate classes of units, Class A
Units, Class B Units, Class C Preferred Units, and
Class D Preferred Units, as defined in the FIF HE Holdings
LLC Amended and Restated Limited Liability Company Agreement
dated December 31, 2008 (the Agreement). Class A Units
have voting rights and Class B Units, Class C
Preferred Units, and Class D Preferred Units have no voting
rights. Distributions and allocations of profits and losses to
members are made in accordance with the Agreement. Class C
Preferred Units and Class D Preferred Units represent
preferred priority return units, accruing distribution
preference on any contributions at an annual rate of 15% and
20%, respectively.
A total of 100,887 Company Match Class A Units were granted
to certain management members on the date of the acquisition of
CHEC. Subsequently, the Company Match Class A Units were
increased to 141,707, net of forfeitures. No consideration was
paid for the Company Match Class A Units, and these units
F-34
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
13.
|
Members
Equity (continued)
|
vest in accordance with the Vesting Schedule per the Agreement,
generally in years three through five after grant date.
Effective September 17, 2010, FIF HE Holdings LLC executed
the FIF HE Holdings LLC Fifth Amended and Restated Limited
Liability Company Agreement (the Fifth Agreement). This Fifth
Agreement provided for a total of 457,526 Class A Units to
be granted to certain management members. No consideration was
paid for the granted units, and the units vest in accordance
with the Vesting Schedule per the Fifth Agreement.
Simultaneously to the execution of the Fifth Agreement, FIF HE
Holdings LLC executed several Restricted Series I Preferred
Stock Unit Award Agreements (PRSU Agreements). These Agreements
provided for a total of 3,304,000 Class C Units and
3,348,000 Class D Units to be granted to certain management
members. No consideration was paid for the granted units, and
the units vest in accordance with the Vesting Schedule per the
PRSU Agreements.
These awards were valued using a sum of the parts analysis in
computing the fair value of the companys equity. The
analysis adds the value of the servicing and originations
businesses to the value of the assets and securities that
Nationstar owns. The value of the servicing and originations
businesses is derived using both a market approach and an income
approach. The market approach considers market multiples from
public company examples in the industry. The income approach
employs a discounted cash flow analysis that utilizes several
factors to capture the ongoing cash flows of the business and
then is discounted with an assumed equity cost of capital. The
valuation of the assets applies a net asset value method
utilizing a variety of assumptions, including assumptions for
prepayments, cumulative losses, and other variables. Recent
market transactions, experience with similar assets and
securities, current business combinations, and analysis of the
underlying collateral, as available, are considered in the
valuation.
The Class A, Class C and Class D Units vest over
1.8 years, vesting schedule of these Units are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 17, 2010
|
|
June 30, 2011
|
|
June 30, 2012
|
|
Total
|
|
Class A Units
|
|
|
93,494
|
|
|
|
182,016
|
|
|
|
182,016
|
|
|
|
457,526
|
|
Class C Units
|
|
|
1,101,332
|
|
|
|
1,101,334
|
|
|
|
1,101,334
|
|
|
|
3,304,000
|
|
Class D Units
|
|
|
1,116,000
|
|
|
|
1,116,000
|
|
|
|
1,116,000
|
|
|
|
3,348,000
|
|
The weighted average grant date fair value of the Units was
$4.23. Subsequent to December 31, 2010, Nationstar expects
to recognize $16.9 million of compensation expense over the
next 1.6 years.
In 2010, certain management members elected to settle a portion
of the units which vested during the year to offset tax
liabilities of $3.4 million that these members have
incurred related to these awarded units.
Total share-based compensation expense, net of forfeitures, is
provided in the table below for the years indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Share-based compensation
|
|
|
$12,856
|
|
|
|
$827
|
|
|
|
$2,333
|
|
F-35
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
13.
|
Members
Equity (continued)
|
|
|
14.
|
Commitments
and Contingencies
|
Nationstar leases various office facilities under noncancelable
lease agreements with primary terms extending through fiscal
2016. These lease agreements generally provide for market-rate
renewal options, and may provide for escalations in minimum
rentals over the lease term. See Note 19 to
Consolidated Financial StatementsRestructuring
Charges.
Minimum annual rental commitments for office leases with
unrelated parties and with initial or remaining terms of one
year or more, net of sublease payments, are presented below (in
thousands).
|
|
|
|
|
2011
|
|
|
$7,015
|
|
2012
|
|
|
6,756
|
|
2013
|
|
|
6,543
|
|
2014
|
|
|
4,591
|
|
Thereafter
|
|
|
4,624
|
|
|
|
|
|
|
Total
|
|
|
$29,529
|
|
|
|
|
|
|
Nationstar enters into IRLCs with prospective borrowers whereby
the Company commits to lend a certain loan amount under specific
terms and interest rates to the borrower. These IRLCs are
treated as derivatives and are carried at fair value. See
Note 9 to Consolidated Financial
StatementsDerivative Financial Instruments.
Nationstar is engaged in legal actions arising from the normal
course of business. In managements opinion, Nationstar has
adequate legal defenses with respect to these actions, and the
resolution of these matters is not expected to have a material
adverse effect upon the consolidated results of operations or
financial condition of Nationstar.
During December 2009, Nationstar entered into a strategic
relationship with a major mortgage market participant, which
contemplates, among other things, significant MSRs and
subservicing transfers to Nationstar upon terms to be
determined. Under this arrangement, if certain delivery
thresholds have been met, the market participant may require
Nationstar to establish an operating division or newly created
subsidiary with separate, dedicated employees within a specified
timeline to service such MSRs and subservicing. After a
specified time period, this market participant may purchase the
subsidiary at an agreed upon price. As of December 2010, all of
the required delivery thresholds with this market participant
have been met, but the market participant has not required the
Company to establish an operating division or newly created
subsidiary with separate, dedicated employees.
Nationstar holds a contributory defined contribution plan
(401(k) plan) that covers substantially all full-time employees.
Nationstar matches 50% of participant contributions, up to 6% of
each participants total annual base compensation. Matching
contributions totaled approximately $1.5 million,
$1.0 million, and $0.8 million for the years ended
December 31, 2010, 2009, and 2008, respectively.
|
|
16.
|
Fair
Value Measurements
|
ASC 820, Fair Value Measurements and Disclosures,
provides a definition of fair value, establishes a framework for
measuring fair value, and requires expanded disclosures about
fair value measurements. The
F-36
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
16.
|
Fair
Value Measurements (continued)
|
standard applies when GAAP requires or allows assets or
liabilities to be measured at fair value and, therefore, does
not expand the use of fair value in any new circumstance.
ASC 820 emphasizes that fair value is a market-based
measurement, not an entity-specific measurement. Therefore, a
fair value measurement should be determined based on the
assumptions that market participants would use in pricing the
asset or liability. As a basis for considering market
participant assumptions in fair value measurements, ASC 820
establishes a three-tiered fair value hierarchy based on the
level of observable inputs used in the measurement of fair value
(e.g., Level 1 representing quoted prices for identical
assets or liabilities in an active market; Level 2
representing values using observable inputs other than quoted
prices included within Level 1; and Level 3
representing estimated values based on significant unobservable
inputs). In addition, ASC 820, Fair Value Measurements and
Disclosures Financial Instruments, requires an entity to
consider all aspects of nonperformance risk, including its own
credit standing, when measuring the fair value of a liability.
Under ASC 820, related disclosures are segregated for
assets and liabilities measured at fair value based on the level
used within the hierarchy to determine their fair values.
The following describes the methods and assumptions used by
Nationstar in estimating fair values:
Cash and Cash Equivalents, Restricted Cash, Notes
PayableThe carrying amount reported in the
consolidated balance sheets approximates fair value.
Mortgage Loans Held for SaleNationstar originates
mortgage loans in the U.S. that it intends to sell to
Fannie Mae, Freddie Mac, and GNMA (collectively, the Agencies).
Additionally, Nationstar holds mortgage loans that it intends to
sell into the secondary markets via whole loan sales or
securitizations. Effective October 2009, in conjunction with
Nationstars election under ASC 825, Financial
Instruments, Nationstar began measuring newly originated
prime residential mortgage loans held for sale at fair value.
Mortgage loans held for sale are typically pooled together and
sold into certain exit markets, depending upon underlying
attributes of the loan, such as agency eligibility, product
type, interest rate, and credit quality.
Mortgage loans held for sale are valued using a market approach
by utilizing either: (i) the fair value of securities
backed by similar mortgage loans, adjusted for certain factors
to approximate the fair value of a whole mortgage loan,
including the value attributable to mortgage servicing and
credit risk, (ii) current commitments to purchase loans or
(iii) recent observable market trades for similar loans,
adjusted for credit risk and other individual loan
characteristics. As these prices are derived from quoted market
prices, Nationstar classifies these valuations as Level 2
in the fair value disclosures.
Mortgage Loans Held for Investment, subject to nonrecourse
debtNationstar determines the fair value on loans held
for investment using internally developed valuation models.
These valuation models estimate the exit price Nationstar
expects to receive in the loans principal market. Although
Nationstar utilizes and gives priority to observable market
inputs such as interest rates and market spreads within these
models, Nationstar typically is required to utilize internal
inputs, such as prepayment speeds, credit losses, and discount
rates. These internal inputs require the use of judgment by
Nationstar and can have a significant impact on the
determination of the loans fair value. As these prices are
derived from a combination of internally developed valuation
models and quoted market prices, Nationstar classifies these
valuations as Level 3 in the fair value disclosures.
F-37
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
16.
|
Fair
Value Measurements (continued)
|
Mortgage Loans Held for Investment, subject to ABS
nonrecourse debtNationstar determines the fair value
on loans held for investment, subject to ABS nonrecourse debt
using internally developed valuation models. These valuation
models estimate the exit price Nationstar expects to receive in
the loans principal market. Although Nationstar utilizes
and gives priority to observable market inputs such as interest
rates and market spreads within these models, Nationstar
typically is required to utilize internal inputs, such as
prepayment speeds, credit losses, and discount rates. These
internal inputs require the use of judgment by Nationstar and
can have a significant impact on the determination of the
loans fair value. As these prices are derived from a
combination of internally developed valuation models and quoted
market prices, Nationstar classifies these valuations as
Level 3 in the fair value disclosures.
Investment in Debt SecuritiesNationstar bases its
valuation of debt securities on observable market prices when
available; however, due to illiquidity in the markets,
observable market prices were not available on these debt
securities at December 31, 2009. When observable market
prices are not available, Nationstar bases valuations on
internally developed discounted cash flow models that use a
market-based discount rate. The valuation considers recent
market transactions, experience with similar securities, current
business conditions, and analysis of the underlying collateral,
as available. In order to estimate cash flows, Nationstar
utilizes a variety of assumptions, including assumptions for
prepayments, cumulative losses, and other variables. These
assumptions require the use of judgment by Nationstar and can
have a significant impact on the determination of the
securities fair values. Accordingly, Nationstar classifies
these valuations as Level 3 in the fair value disclosures.
Mortgage Servicing RightsNationstar will typically
retain the servicing rights when it sells loans into the
secondary market. Nationstar estimates the fair value of its
MSRs using a process that combines the use of a discounted cash
flow model and analysis of current market data to arrive at an
estimate of fair value. The cash flow assumptions and prepayment
assumptions used in the model are based on various factors, with
the key assumptions being mortgage prepayment speeds, discount
rates and credit losses. These assumptions are generated and
applied based on collateral stratifications including product
type, remittance type, geography, delinquency and coupon
dispersion. These assumptions require the use of judgment by
Nationstar and can have a significant impact on the
determination of the MSRs fair value. During 2010,
management obtained third-party valuations that covered portions
of the portfolio to assess the reasonableness of the fair value
calculations provided by the cash flow model. Because of the
nature of the valuation inputs, Nationstar classifies these
valuations as Level 3 in the fair value disclosures.
Real Estate OwnedNationstar determines the fair
value of real estate owned properties through the use of
third-party appraisals and broker price opinions, adjusted for
estimated selling costs. Such estimated selling costs include
realtor fees and other anticipated closing costs. These values
are adjusted to take into account factors that could cause the
actual liquidation value of foreclosed properties to be
different than the appraised values. This valuation adjustment
is based upon Nationstars historical experience with real
estate owned. Nationstar regularly reviews recent sales activity
of its real estate owned properties in order to ensure that the
estimated realizable value is consistent with the recorded
amount. Real estate owned is classified as Level 3 in the
fair value disclosures.
Derivative InstrumentsNationstar enters into a
variety of derivative financial instruments as part of its
hedging strategy. The majority of these derivatives are
exchange-traded or traded within highly active dealer markets.
In order to determine the fair value of these instruments,
Nationstar utilizes the exchange price or dealer market price
for the particular derivative contract; therefore, these
contracts are classified as Level 2.
F-38
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
16.
|
Fair
Value Measurements (continued)
|
Unsecured Senior NotesThe fair value of unsecured
senior notes are based on quoted market prices, and Nationstar
classifies these valuations as Level 1 in the fair value
disclosures.
Nonrecourse Debt Legacy
AssetsNationstar estimates fair value based on the
present value of future expected discounted cash flows with the
discount rate approximating current market value for similar
financial instruments. As these prices are derived from a
combination of internally developed valuation models and quoted
market prices, Nationstar classifies these valuations as
Level 3 in the fair value disclosures.
ABS Nonrecourse DebtNationstar estimates fair value
based on the present value of future expected discounted cash
flows with the discount rate approximating current market value
for similar financial instruments. As these prices are derived
from a combination of internally developed valuation models and
quoted market prices, Nationstar classifies these valuations as
Level 3 in the fair value disclosures.
The estimated carrying amount and fair value of
Nationstars financial instruments and other assets and
liabilities measured at fair value on a recurring basis is as
follows for the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Total
|
|
|
Recurring Fair Value Measurements
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale(1)
|
|
|
$369,617
|
|
|
|
$
|
|
|
|
$369,617
|
|
|
|
$
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt(1)
|
|
|
538,440
|
|
|
|
|
|
|
|
|
|
|
|
538,440
|
|
Mortgage servicing rights(1)
|
|
|
145,062
|
|
|
|
|
|
|
|
|
|
|
|
145,062
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
|
|
4,703
|
|
|
|
|
|
|
|
4,703
|
|
|
|
|
|
Forward MBS trades
|
|
|
3,963
|
|
|
|
|
|
|
|
3,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$1,061,785
|
|
|
|
$
|
|
|
|
$378,283
|
|
|
|
$683,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
$7,801
|
|
|
|
$
|
|
|
|
$7,801
|
|
|
|
$
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
18,781
|
|
|
|
|
|
|
|
18,781
|
|
|
|
|
|
ABS nonrecourse debt(1)
|
|
|
496,692
|
|
|
|
|
|
|
|
|
|
|
|
496,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
$523,274
|
|
|
|
$
|
|
|
|
$26,582
|
|
|
|
$496,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on the nature and risks of these assets and liabilities,
the Company has determined that presenting them as a single
class is appropriate. |
F-39
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
16.
|
Fair
Value Measurements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Total
|
|
|
Recurring Fair Value Measurements
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale(1)
|
|
|
$201,429
|
|
|
|
$
|
|
|
|
$201,429
|
|
|
|
$
|
|
Investment in debt securities(1)
|
|
|
2,486
|
|
|
|
|
|
|
|
|
|
|
|
2,486
|
|
Mortgage servicing rights(1)
|
|
|
114,605
|
|
|
|
|
|
|
|
|
|
|
|
114,605
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
|
|
2,414
|
|
|
|
|
|
|
|
2,414
|
|
|
|
|
|
Forward MBS trades
|
|
|
3,383
|
|
|
|
|
|
|
|
3,383
|
|
|
|
|
|
Loan sale commitments
|
|
|
1,439
|
|
|
|
|
|
|
|
1,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$325,756
|
|
|
|
$
|
|
|
|
$208,665
|
|
|
|
$117,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on the nature and risks of these assets and liabilities,
the Company has determined that presenting them as a single
class is appropriate. |
The table below presents a reconciliation for all of
Nationstars Level 3 assets measured at fair value on
a recurring basis (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Recurring Fair Value Measurements
|
|
|
|
|
|
|
Total Gains (Losses) Included in
|
|
|
Purchases,
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
Other
|
|
|
Sale,
|
|
|
Transfers
|
|
|
|
|
|
|
Beginning of
|
|
|
Net Income
|
|
|
Comprehensive
|
|
|
Issuances, and
|
|
|
In/Out of
|
|
|
Fair Value
|
|
|
|
Period(1)
|
|
|
(Loss)
|
|
|
Income
|
|
|
Settlements
|
|
|
Level 3
|
|
|
End of Period
|
|
|
Year ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt
|
|
|
$928,891
|
|
|
|
$71,239
|
|
|
|
$
|
|
|
|
$(461,690
|
)
|
|
|
$
|
|
|
|
$538,440
|
|
Mortgage servicing rights
|
|
|
104,174
|
|
|
|
20,210
|
|
|
|
|
|
|
|
20,678
|
|
|
|
|
|
|
|
145,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$1,033,065
|
|
|
|
$91,449
|
|
|
|
$
|
|
|
|
$(441,012
|
)
|
|
|
$
|
|
|
|
$683,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABS nonrecourse debt
|
|
|
$884,846
|
|
|
|
$(16,937
|
)
|
|
|
$
|
|
|
|
$(371,217
|
)
|
|
|
$
|
|
|
|
$496,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in debt securities
|
|
|
$9,294
|
|
|
|
$(6,808
|
)
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$2,486
|
|
Mortgage servicing rights
|
|
|
110,808
|
|
|
|
(19,583
|
)
|
|
|
|
|
|
|
23,380
|
|
|
|
|
|
|
|
114,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$120,102
|
|
|
|
$(26,391
|
)
|
|
|
$
|
|
|
|
$23,380
|
|
|
|
$
|
|
|
|
$117,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts include derecognition of previously retained beneficial
interests and MSRs upon adoption of ASC 810,
Consolidation, related to consolidation of certain VIEs. |
F-40
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
16.
|
Fair
Value Measurements (continued)
|
The table below presents the items which Nationstar measures at
fair value on a nonrecurring basis (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains
|
|
|
|
Nonrecurring Fair Value
|
|
|
Total
|
|
|
(Losses)
|
|
|
|
Measurements
|
|
|
Estimated
|
|
|
Included in
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
Earnings
|
|
|
Year ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate owned(1)
|
|
|
$
|
|
|
|
$
|
|
|
|
$27,337
|
|
|
|
$27,337
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$
|
|
|
|
$
|
|
|
|
$27,337
|
|
|
|
$27,337
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate owned(1)
|
|
|
$
|
|
|
|
$
|
|
|
|
$10,262
|
|
|
|
$10,262
|
|
|
|
$(7,512
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$
|
|
|
|
$
|
|
|
|
$10,262
|
|
|
|
$10,262
|
|
|
|
$(7,512
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on the nature and risks of these assets and liabilities,
the Company has determined that presenting them as a single
class is appropriate. |
For the year ended December 31, 2009, Nationstar
transferred approximately $530.9 million in mortgage loans
held for sale to the held for investment classification in
connection with the securitization of approximately
$222 million of asset-backed securities, which was
structured as a secured borrowing. These loans were classified
as Level 3 assets that were measured on a nonrecurring
basis for the year ended December 31, 2008, but were not
measured at fair value for the year ended December 31,
2009. In addition, Nationstar elected under ASC
825-10,
Financial InstrumentsOverall to measure newly
originated prime residential mortgage loans held for sale at
fair value at origination. These newly originated prime
residential mortgage loans were classified as Level 2
assets that were measured on a nonrecurring basis for the year
ended December 31, 2008, but are measured on a recurring
basis for the year ended December 31, 2009.
F-41
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
16.
|
Fair
Value Measurements (continued)
|
The table below presents a summary of the estimated carrying
amount and fair value of Nationstars financial instruments
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
$21,223
|
|
|
|
$21,223
|
|
|
|
$41,645
|
|
|
|
$41,645
|
|
Restricted cash
|
|
|
91,125
|
|
|
|
91,125
|
|
|
|
52,795
|
|
|
|
52,795
|
|
Mortgage loans held for sale
|
|
|
369,617
|
|
|
|
369,617
|
|
|
|
201,429
|
|
|
|
201,429
|
|
Mortgage loans held for investment, subject to nonrecourse
debtLegacy assets
|
|
|
266,320
|
|
|
|
238,515
|
|
|
|
301,802
|
|
|
|
284,666
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt
|
|
|
538,440
|
|
|
|
538,440
|
|
|
|
|
|
|
|
|
|
Investment in debt securities
|
|
|
|
|
|
|
|
|
|
|
2,486
|
|
|
|
2,486
|
|
Derivative instruments
|
|
|
8,666
|
|
|
|
8,666
|
|
|
|
7,236
|
|
|
|
7,236
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
709,758
|
|
|
|
709,758
|
|
|
|
771,857
|
|
|
|
771,857
|
|
Unsecured senior notes
|
|
|
244,061
|
|
|
|
244,375
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
7,801
|
|
|
|
7,801
|
|
|
|
|
|
|
|
|
|
Derivative instruments, subject to ABS nonrecourse debt
|
|
|
18,781
|
|
|
|
18,781
|
|
|
|
|
|
|
|
|
|
Nonrecourse debt
|
|
|
138,662
|
|
|
|
140,197
|
|
|
|
177,675
|
|
|
|
178,161
|
|
ABS nonrecourse debt
|
|
|
496,692
|
|
|
|
496,692
|
|
|
|
|
|
|
|
|
|
|
|
17.
|
Termination
of the Company
|
The duration of Nationstars existence is indefinite per
the Agreement and shall continue until dissolved in accordance
with the terms of the Agreement and the Delaware Limited
Liability Company Act (DLLCA).
|
|
18.
|
Limited
Liability of Members
|
The members of a Delaware limited liability company are
generally not liable for the acts and omissions of the company,
much in the same manner as the shareholders, officers, and
directors of a corporation are generally limited by the
provisions of the DLLCA and by applicable case law.
|
|
19.
|
Restructuring
Charges
|
To respond to the decreased demand in the home equity mortgage
market and other market conditions, Nationstar initiated a
program to reduce costs and improve operating effectiveness in
2007. This program included the closing of several offices and
the termination of a large portion of Nationstars
workforce. As part of this plan, Nationstar expected to incur
lease and other contract termination costs. Nationstar recorded
restructuring charges totaling $2.3 million,
$2.2 million, and $1.2 million for the years ended
December 31, 2010, 2009, and 2008, respectively, related to
cancelled lease expenses that are reflected in general and
administrative expenses. In addition, Nationstar recorded
severance and other employee
F-42
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
19.
|
Restructuring
Charges (continued)
|
termination benefits totaling $0.3 million for the year
ended December 31, 2008. No severance or other employee
termination benefits were incurred for the years ended
December 31, 2010 and 2009.
The following table summarizes, by category, the Companys
restructuring charge activity for the dates indicated (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Balance
|
|
|
Restructuring
|
|
|
Restructuring
|
|
|
Liability Balance
|
|
|
|
at January 1
|
|
|
Adjustments
|
|
|
Settlements
|
|
|
at December 31
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance and other
|
|
|
$1,048
|
|
|
|
$270
|
|
|
|
$(1,318
|
)
|
|
|
$
|
|
Lease terminations
|
|
|
18,310
|
|
|
|
1,237
|
|
|
|
(8,644
|
)
|
|
|
10,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$19,358
|
|
|
|
$1,507
|
|
|
|
$(9,962
|
)
|
|
|
$10,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease terminations
|
|
|
$10,903
|
|
|
|
$2,222
|
|
|
|
$(3,660
|
)
|
|
|
$9,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$10,903
|
|
|
|
$2,222
|
|
|
|
$(3,660
|
)
|
|
|
$9,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease terminations
|
|
|
$9,465
|
|
|
|
$2,287
|
|
|
|
$(2,569
|
)
|
|
|
$9,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$9,465
|
|
|
|
$2,287
|
|
|
|
$(2,569
|
)
|
|
|
$9,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.
|
Concentrations
of Credit Risk
|
Properties collateralizing mortgage loans held for investment
and real estate owned were geographically disbursed throughout
the United States (measured by principal balance and expressed
as a percent of the total outstanding mortgage loans held for
investment and real estate owned).
The following table details the geographical concentration of
mortgage loans held for investment and real estate owned by
state for the dates indicated (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Unpaid
|
|
|
% of
|
|
|
Unpaid
|
|
|
% of
|
|
|
|
Principal
|
|
|
Total
|
|
|
Principal
|
|
|
Total
|
|
State
|
|
Balance
|
|
|
Outstanding
|
|
|
Balance
|
|
|
Outstanding
|
|
|
Florida
|
|
|
$62,775
|
|
|
|
14.4
|
%
|
|
|
$78,331
|
|
|
|
15.1
|
%
|
Texas
|
|
|
58,815
|
|
|
|
13.4
|
%
|
|
|
65,519
|
|
|
|
12.6
|
%
|
California
|
|
|
41,019
|
|
|
|
9.4
|
%
|
|
|
55,785
|
|
|
|
10.7
|
%
|
All other states(1)
|
|
|
274,235
|
|
|
|
62.8
|
%
|
|
|
320,010
|
|
|
|
61.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$436,844
|
|
|
|
100.0
|
%
|
|
|
$519,645
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
No other state contains more than 5.0% of the total outstanding. |
Additionally, certain loan products contractual terms may
give rise to a concentration of credit risk and increase
Nationstars exposure to risk of nonpayment or realization.
F-43
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
20.
|
Concentrations
of Credit Risk (continued)
|
The following table details the unpaid principal balance of ARM
loans included in mortgage loans held for investment that are
subject to future payment increases for the dates indicated (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Interest only ARMs
|
|
|
$43,687
|
|
|
|
$57,745
|
|
Amortizing ARMs:
|
|
|
|
|
|
|
|
|
2/28
|
|
|
71,614
|
|
|
|
108,052
|
|
3/27
|
|
|
5,608
|
|
|
|
9,900
|
|
All other ARMs
|
|
|
11,173
|
|
|
|
5,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$132,082
|
|
|
|
$181,314
|
|
|
|
|
|
|
|
|
|
|
Certain of Nationstars secondary market investors require
various capital adequacy requirements, as specified in the
respective selling and servicing agreements. To the extent that
these mandatory, imposed capital requirements are not met,
Nationstars secondary market investors may ultimately
terminate Nationstars selling and servicing agreements,
which would prohibit Nationstar from further originating or
securitizing these specific types of mortgage loans. In
addition, these secondary market investors may impose additional
net worth or financial condition requirements based on an
assessment of market conditions or other relevant factors.
Among Nationstars various capital requirements related to
its outstanding selling and servicing agreements, the most
restrictive of these requires Nationstar to maintain a minimum
adjusted net worth balance of $83.2 million.
As of December 31, 2010, Nationstar was in compliance with
all of its selling and servicing capital requirements.
Additionally, Nationstar is required to maintain a minimum
tangible net worth of at least $150 million as of each
quarter-end related to its outstanding Master Repurchase
Agreements on our outstanding repurchase facilities. As of
December 31, 2010, Nationstar was in compliance with these
minimum tangible net worth requirements.
|
|
22.
|
Business
Segment Reporting
|
Nationstar currently conducts business in two separate operating
segments: Servicing and Originations. The Servicing segment
provides loan servicing on Nationstars total servicing
portfolio, including the collection of principal and interest
payments and the assessment of ancillary fees related to the
servicing of mortgage loans. The Originations segment involves
the origination, packaging, and sale of agency mortgage loans
into the secondary markets via whole loan sales or
securitizations. Nationstar reports the activity not related to
either operating segment in the Legacy Portfolio and Other
column. The Legacy Portfolio and Other column primarily includes
all
sub-prime
mortgage loans originated in the latter portion of 2006 and
during 2007 or acquired from CHEC and consolidated VIEs which
were consolidated pursuant to the adoption of new accounting
guidance related to VIEs adopted on January 1, 2010.
Nationstars segments are based upon Nationstars
organizational structure which focuses primarily on the services
offered. The accounting policies of each reportable segment are
the same as those of Nationstar
F-44
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
22.
|
Business
Segment Reporting (continued)
|
except for 1) expenses for consolidated back-office
operations and general overhead-type expenses such as executive
administration and accounting and 2) revenues generated on
inter-segment services performed. Expenses are allocated to
individual segments based on the estimated value of services
performed, including estimated utilization of square footage and
corporate personnel as well as the equity invested in each
segment. Revenues generated or inter-segment services performed
are valued based on similar services provided to external
parties.
To reconcile to Nationstars consolidated results, certain
inter-segment revenues and expenses costs are eliminated in the
Elimination column in the following tables.
The following tables are a presentation of financial information
by segment for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Legacy Portfolio
|
|
|
|
|
|
|
|
|
|
Servicing
|
|
|
Originations
|
|
|
Segments
|
|
|
and Other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
|
$175,569
|
|
|
|
$
|
|
|
|
$175,569
|
|
|
|
$820
|
|
|
|
$(9,263
|
)
|
|
|
$167,126
|
|
Other fee income
|
|
|
7,273
|
|
|
|
7,042
|
|
|
|
14,315
|
|
|
|
2,643
|
|
|
|
|
|
|
|
16,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
182,842
|
|
|
|
7,042
|
|
|
|
189,884
|
|
|
|
3,463
|
|
|
|
(9,263
|
)
|
|
|
184,084
|
|
Gain (loss) on mortgage loans held for sale
|
|
|
|
|
|
|
77,498
|
|
|
|
77,498
|
|
|
|
|
|
|
|
(154
|
)
|
|
|
77,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
182,842
|
|
|
|
84,540
|
|
|
|
267,382
|
|
|
|
3,463
|
|
|
|
(9,417
|
)
|
|
|
261,428
|
|
Total expenses and impairments
|
|
|
107,283
|
|
|
|
86,920
|
|
|
|
194,203
|
|
|
|
26,927
|
|
|
|
(154
|
)
|
|
|
220,976
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
263
|
|
|
|
11,848
|
|
|
|
12,111
|
|
|
|
77,521
|
|
|
|
9,263
|
|
|
|
98,895
|
|
Interest expense
|
|
|
(51,791
|
)
|
|
|
(8,806
|
)
|
|
|
(60,597
|
)
|
|
|
(55,566
|
)
|
|
|
|
|
|
|
(116,163
|
)
|
Loss on interest rate swaps and caps
|
|
|
(9,801
|
)
|
|
|
|
|
|
|
(9,801
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,801
|
)
|
Change in fair value on ABS nonrecourse debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,297
|
)
|
|
|
|
|
|
|
(23,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(61,329
|
)
|
|
|
3,042
|
|
|
|
(58,287
|
)
|
|
|
(1,342
|
)
|
|
|
9,263
|
|
|
|
(50,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
|
$14,230
|
|
|
|
$662
|
|
|
|
$14,892
|
|
|
|
$(24,806
|
)
|
|
|
$
|
|
|
|
$(9,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
$1,092
|
|
|
|
$781
|
|
|
|
$1,873
|
|
|
|
$244
|
|
|
|
$
|
|
|
|
$2,117
|
|
Total assets
|
|
|
689,923
|
|
|
|
402,627
|
|
|
|
1,092,550
|
|
|
|
854,631
|
|
|
|
|
|
|
|
1,947,181
|
|
F-45
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
22.
|
Business
Segment Reporting (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Legacy Portfolio
|
|
|
|
|
|
|
|
|
|
Servicing
|
|
|
Originations
|
|
|
Segments
|
|
|
and Other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
|
$91,266
|
|
|
|
$
|
|
|
|
$91,266
|
|
|
|
$
|
|
|
|
$(1,071
|
)
|
|
|
$90,195
|
|
Other fee income
|
|
|
8,867
|
|
|
|
1,156
|
|
|
|
10,023
|
|
|
|
|
|
|
|
|
|
|
|
10,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
100,133
|
|
|
|
1,156
|
|
|
|
101,289
|
|
|
|
|
|
|
|
(1,071
|
)
|
|
|
100,218
|
|
Gain (loss) on mortgage loans held for sale
|
|
|
|
|
|
|
54,437
|
|
|
|
54,437
|
|
|
|
(75,786
|
)
|
|
|
|
|
|
|
(21,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100,133
|
|
|
|
55,593
|
|
|
|
155,726
|
|
|
|
(75,786
|
)
|
|
|
(1,071
|
)
|
|
|
78,869
|
|
Total expenses and impairments
|
|
|
70,897
|
|
|
|
47,532
|
|
|
|
118,429
|
|
|
|
25,009
|
|
|
|
(1,071
|
)
|
|
|
142,367
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
4,143
|
|
|
|
4,261
|
|
|
|
8,404
|
|
|
|
44,114
|
|
|
|
|
|
|
|
52,518
|
|
Interest expense
|
|
|
(25,877
|
)
|
|
|
(3,438
|
)
|
|
|
(29,315
|
)
|
|
|
(40,568
|
)
|
|
|
|
|
|
|
(69,883
|
)
|
Loss on interest rate swaps and caps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(21,734
|
)
|
|
|
823
|
|
|
|
(20,911
|
)
|
|
|
3,532
|
|
|
|
|
|
|
|
(17,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
|
$7,502
|
|
|
|
$8,884
|
|
|
|
$16,386
|
|
|
|
$(97,263
|
)
|
|
|
$
|
|
|
|
$(80,877
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
$1,004
|
|
|
|
$538
|
|
|
|
$1,542
|
|
|
|
$225
|
|
|
|
$
|
|
|
|
$1,767
|
|
Total assets
|
|
|
681,543
|
|
|
|
239,202
|
|
|
|
920,745
|
|
|
|
359,440
|
|
|
|
|
|
|
|
1,280,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Legacy Portfolio
|
|
|
|
|
|
|
|
|
|
Servicing
|
|
|
Originations
|
|
|
Segments
|
|
|
and Other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
|
$69,235
|
|
|
|
$
|
|
|
|
$69,235
|
|
|
|
$
|
|
|
|
$(1,183
|
)
|
|
|
$68,052
|
|
Other fee income
|
|
|
5,366
|
|
|
|
589
|
|
|
|
5,955
|
|
|
|
|
|
|
|
|
|
|
|
5,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
74,601
|
|
|
|
589
|
|
|
|
75,190
|
|
|
|
|
|
|
|
(1,183
|
)
|
|
|
74,007
|
|
Gain (loss) on mortgage loans held for sale
|
|
|
|
|
|
|
21,985
|
|
|
|
21,985
|
|
|
|
(108,648
|
)
|
|
|
|
|
|
|
(86,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
74,601
|
|
|
|
22,574
|
|
|
|
97,175
|
|
|
|
(108,648
|
)
|
|
|
(1,183
|
)
|
|
|
(12,656
|
)
|
Total expenses and impairments
|
|
|
55,037
|
|
|
|
30,795
|
|
|
|
85,832
|
|
|
|
63,128
|
|
|
|
(1,183
|
)
|
|
|
147,777
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
10,872
|
|
|
|
1,920
|
|
|
|
12,792
|
|
|
|
79,268
|
|
|
|
|
|
|
|
92,060
|
|
Interest expense
|
|
|
(15,718
|
)
|
|
|
(1,289
|
)
|
|
|
(17,007
|
)
|
|
|
(48,541
|
)
|
|
|
|
|
|
|
(65,548
|
)
|
Loss on interest rate swaps and caps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,689
|
)
|
|
|
|
|
|
|
(23,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(4,846
|
)
|
|
|
631
|
|
|
|
(4,215
|
)
|
|
|
7,038
|
|
|
|
|
|
|
|
2,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
|
$14,718
|
|
|
|
$(7,590
|
)
|
|
|
$7,128
|
|
|
|
$(164,738
|
)
|
|
|
$
|
|
|
|
$(157,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
$789
|
|
|
|
$383
|
|
|
|
$1,172
|
|
|
|
$137
|
|
|
|
$
|
|
|
|
$1,309
|
|
Total assets
|
|
|
479,819
|
|
|
|
72,888
|
|
|
|
552,707
|
|
|
|
569,294
|
|
|
|
|
|
|
|
1,122,001
|
|
|
|
23.
|
Guarantor
Financial Statement Information
|
In March 2010, Nationstar and Nationstar Capital Corporation
(the Issuers), sold in a private offering
$250.0 million aggregate principal amount of
10.875% senior unsecured notes which mature on
April 1, 2015. In December 2010, the Company filed with the
Securities and Exchange Commission a
F-46
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
23.
|
Guarantor
Financial Statement Information (continued)
|
Form S-4
registration statement to exchange the privately placed notes
with registered notes. The terms of the registered notes are
substantially identical to those of the privately placed notes.
The notes are jointly and severally guaranteed on a senior
unsecured basis by all of the Issuers existing and future
wholly-owned domestic restricted subsidiaries, with certain
exceptions. All guarantor subsidiaries are 100% owned by the
Issuer. All amounts in the following tables are in thousands.
F-47
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
23.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING
BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Assets
|
Cash and cash equivalents
|
|
|
$20,904
|
|
|
|
$319
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$21,223
|
|
Restricted cash
|
|
|
57,579
|
|
|
|
|
|
|
|
33,546
|
|
|
|
|
|
|
|
91,125
|
|
Accounts receivable, net
|
|
|
437,300
|
|
|
|
|
|
|
|
3,975
|
|
|
|
|
|
|
|
441,275
|
|
Mortgage loans held for sale
|
|
|
369,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
369,617
|
|
Mortgage loans held for investment, subject to nonrecourse
debt-Legacy Assets, net
|
|
|
5,016
|
|
|
|
|
|
|
|
261,304
|
|
|
|
|
|
|
|
266,320
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt (at fair value)
|
|
|
|
|
|
|
|
|
|
|
538,440
|
|
|
|
|
|
|
|
538,440
|
|
Investment in debt
securitiesavailable-for-sale
|
|
|
597
|
|
|
|
|
|
|
|
|
|
|
|
(597
|
)
|
|
|
|
|
Investment in subsidiaries
|
|
|
158,276
|
|
|
|
|
|
|
|
|
|
|
|
(158,276
|
)
|
|
|
|
|
Receivables from affiliates
|
|
|
|
|
|
|
62,171
|
|
|
|
132,353
|
|
|
|
(185,531
|
)
|
|
|
8,993
|
|
Mortgage servicing rights
|
|
|
145,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,062
|
|
Property and equipment, net
|
|
|
7,559
|
|
|
|
835
|
|
|
|
|
|
|
|
|
|
|
|
8,394
|
|
Real estate owned, net
|
|
|
323
|
|
|
|
|
|
|
|
27,014
|
|
|
|
|
|
|
|
27,337
|
|
Other assets
|
|
|
29,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$1,231,628
|
|
|
|
$63,325
|
|
|
|
$996,632
|
|
|
|
$(344,404
|
)
|
|
|
$1,947,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and members equity
|
Notes payable
|
|
|
$472,950
|
|
|
|
$
|
|
|
|
$236,808
|
|
|
|
$
|
|
|
|
$709,758
|
|
Unsecured senior notes
|
|
|
244,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244,061
|
|
Payables and accrued liabilities
|
|
|
73,785
|
|
|
|
|
|
|
|
1,269
|
|
|
|
|
|
|
|
75,054
|
|
Payables to affiliates
|
|
|
185,531
|
|
|
|
|
|
|
|
|
|
|
|
(185,531
|
)
|
|
|
|
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
7,801
|
|
|
|
|
|
|
|
7,801
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
|
|
|
|
|
|
|
|
18,781
|
|
|
|
|
|
|
|
18,781
|
|
Nonrecourse debtLegacy Assets
|
|
|
|
|
|
|
|
|
|
|
138,662
|
|
|
|
|
|
|
|
138,662
|
|
ABS nonrecourse debt (at fair value)
|
|
|
|
|
|
|
|
|
|
|
497,289
|
|
|
|
(597
|
)
|
|
|
496,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
976,327
|
|
|
|
|
|
|
|
900,610
|
|
|
|
(186,128
|
)
|
|
|
1,690,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total members equity
|
|
|
255,301
|
|
|
|
63,325
|
|
|
|
96,022
|
|
|
|
(158,276
|
)
|
|
|
256,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
|
$1,231,628
|
|
|
|
$63,325
|
|
|
|
$996,632
|
|
|
|
$(344,404
|
)
|
|
|
$1,947,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-48
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
23.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING
STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
|
$174,660
|
|
|
|
$1,730
|
|
|
|
$
|
|
|
|
$(9,264
|
)
|
|
|
$167,126
|
|
Other fee income
|
|
|
8,259
|
|
|
|
7,551
|
|
|
|
1,148
|
|
|
|
|
|
|
|
16,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
182,919
|
|
|
|
9,281
|
|
|
|
1,148
|
|
|
|
(9,264
|
)
|
|
|
184,084
|
|
Gain on mortgage loans held for sale
|
|
|
77,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
260,263
|
|
|
|
9,281
|
|
|
|
1,148
|
|
|
|
(9,264
|
)
|
|
|
261,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses and impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
|
146,746
|
|
|
|
2,369
|
|
|
|
|
|
|
|
|
|
|
|
149,115
|
|
General and administrative
|
|
|
57,329
|
|
|
|
1,642
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
58,913
|
|
Provision for loan losses
|
|
|
1,558
|
|
|
|
|
|
|
|
1,740
|
|
|
|
|
|
|
|
3,298
|
|
Loss on foreclosed real estate
|
|
|
|
|
|
|
|
|
|
|
205
|
|
|
|
|
|
|
|
205
|
|
Occupancy
|
|
|
9,289
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
9,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses and impairments
|
|
|
214,922
|
|
|
|
4,167
|
|
|
|
1,887
|
|
|
|
|
|
|
|
220,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
17,019
|
|
|
|
6
|
|
|
|
72,606
|
|
|
|
9,264
|
|
|
|
98,895
|
|
Interest expense
|
|
|
(54,075
|
)
|
|
|
|
|
|
|
(62,088
|
)
|
|
|
|
|
|
|
(116,163
|
)
|
Loss on interest rate swaps and caps
|
|
|
|
|
|
|
|
|
|
|
(9,801
|
)
|
|
|
|
|
|
|
(9,801
|
)
|
Fair value changes in ABS securitizations
|
|
|
|
|
|
|
|
|
|
|
(23,748
|
)
|
|
|
451
|
|
|
|
(23,297
|
)
|
Gain (loss) from subsidiaries
|
|
|
(18,650
|
)
|
|
|
|
|
|
|
|
|
|
|
18,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(55,706
|
)
|
|
|
6
|
|
|
|
(23,031
|
)
|
|
|
28,365
|
|
|
|
(50,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
$(10,365
|
)
|
|
|
$5,120
|
|
|
|
$(23,770
|
)
|
|
|
$19,101
|
|
|
|
$(9,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-49
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
23.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING
STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
$(10,365
|
)
|
|
|
$5,120
|
|
|
|
$(23,770
|
)
|
|
|
$19,101
|
|
|
|
$(9,914
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from subsidiaries
|
|
|
18,650
|
|
|
|
|
|
|
|
|
|
|
|
(18,650
|
)
|
|
|
|
|
Share-based compensation
|
|
|
12,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,856
|
|
Gain on mortgage loans held for sale
|
|
|
(77,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77,344
|
)
|
Provision for loan losses
|
|
|
1,558
|
|
|
|
|
|
|
|
1,740
|
|
|
|
|
|
|
|
3,298
|
|
Loss on foreclosed real estate
|
|
|
|
|
|
|
|
|
|
|
205
|
|
|
|
|
|
|
|
205
|
|
Depreciation and amortization
|
|
|
2,104
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
2,117
|
|
Fair value changes in ABS securitization
|
|
|
|
|
|
|
|
|
|
|
23,297
|
|
|
|
|
|
|
|
23,297
|
|
Loss on interest rate swaps and caps
|
|
|
|
|
|
|
|
|
|
|
8,872
|
|
|
|
|
|
|
|
8,872
|
|
Change in fair value of mortgage servicing rights
|
|
|
6,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,043
|
|
Amortization of debt discount
|
|
|
12,380
|
|
|
|
|
|
|
|
6,351
|
|
|
|
|
|
|
|
18,731
|
|
Amortization of premiums/discounts
|
|
|
|
|
|
|
|
|
|
|
(4,526
|
)
|
|
|
|
|
|
|
(4,526
|
)
|
Mortgage loans originated and purchased, net of fees
|
|
|
(2,791,639
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,791,639
|
)
|
Cost of loans sold, net of fees
|
|
|
2,621,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,621,275
|
|
Principal payments/prepayments received and other changes in
mortgage loans originated as held for sale
|
|
|
49,302
|
|
|
|
|
|
|
|
(16,634
|
)
|
|
|
|
|
|
|
32,668
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
73,124
|
|
|
|
3
|
|
|
|
(31,979
|
)
|
|
|
|
|
|
|
41,148
|
|
Payables to affiliates
|
|
|
(52,594
|
)
|
|
|
(5,110
|
)
|
|
|
61,662
|
|
|
|
|
|
|
|
3,958
|
|
Other assets
|
|
|
(861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(861
|
)
|
Payables and accrued liabilities
|
|
|
8,444
|
|
|
|
(96
|
)
|
|
|
(185
|
)
|
|
|
|
|
|
|
8,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used) in operating activities
|
|
|
(127,067
|
)
|
|
|
(70
|
)
|
|
|
25,033
|
|
|
|
451
|
|
|
|
(101,653
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-50
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
23.
|
Guarantor
Financial Statement Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments received and other changes on mortgage loans
held for investment, subject to ABS nonrecourse debt
|
|
|
|
|
|
|
|
|
|
|
48,838
|
|
|
|
|
|
|
|
48,838
|
|
Proceeds from sales of real estate owned
|
|
|
504
|
|
|
|
|
|
|
|
73,603
|
|
|
|
|
|
|
|
74,107
|
|
Purchase of mortgage servicing rights, net of liabilities
incurred
|
|
|
(17,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,812
|
)
|
Property and equipment additions, net of disposals
|
|
|
(3,923
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used) in investing activities
|
|
|
(21,231
|
)
|
|
|
(13
|
)
|
|
|
122,441
|
|
|
|
|
|
|
|
101,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers to/from restricted cash, net
|
|
|
(38,617
|
)
|
|
|
|
|
|
|
4,886
|
|
|
|
|
|
|
|
(33,731
|
)
|
Issuance of unsecured notes, net of issue discount
|
|
|
243,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
243,013
|
|
Repayment of non-recourse debtLegacy assets
|
|
|
|
|
|
|
|
|
|
|
(45,364
|
)
|
|
|
|
|
|
|
(45,364
|
)
|
Repayment of ABS nonrecourse debt
|
|
|
(146
|
)
|
|
|
|
|
|
|
(102,869
|
)
|
|
|
(451
|
)
|
|
|
(103,466
|
)
|
Decrease in notes payable, net
|
|
|
(57,972
|
)
|
|
|
|
|
|
|
(4,127
|
)
|
|
|
|
|
|
|
(62,099
|
)
|
Debt financing costs
|
|
|
(14,923
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,923
|
)
|
Tax related share-based settlement of units by members
|
|
|
(3,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
127,959
|
|
|
|
|
|
|
|
(147,474
|
)
|
|
|
(451
|
)
|
|
|
(19,966
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(20,339
|
)
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
(20,422
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
41,243
|
|
|
|
402
|
|
|
|
|
|
|
|
|
|
|
|
41,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
|
$20,904
|
|
|
|
$319
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$21,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-51
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
23.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING
BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
$41,243
|
|
|
|
$402
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$41,645
|
|
Restricted cash
|
|
|
18,962
|
|
|
|
|
|
|
|
33,833
|
|
|
|
|
|
|
|
52,795
|
|
Accounts receivable, net
|
|
|
510,425
|
|
|
|
3
|
|
|
|
3,511
|
|
|
|
|
|
|
|
513,939
|
|
Mortgage loans held for sale
|
|
|
201,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201,429
|
|
Mortgage loans held for investment, subject to nonrecourse
debtLegacy Assets, net
|
|
|
6,305
|
|
|
|
|
|
|
|
295,497
|
|
|
|
|
|
|
|
301,802
|
|
Investment in debt
securitiesavailable-for-sale
|
|
|
2,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,486
|
|
Investment in subsidiaries
|
|
|
275,661
|
|
|
|
|
|
|
|
|
|
|
|
(275,661
|
)
|
|
|
|
|
Receivables from affiliates
|
|
|
|
|
|
|
160,645
|
|
|
|
190,772
|
|
|
|
(338,843
|
)
|
|
|
12,574
|
|
Mortgage servicing rights
|
|
|
114,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114,605
|
|
Property and equipment, net
|
|
|
5,740
|
|
|
|
835
|
|
|
|
|
|
|
|
|
|
|
|
6,575
|
|
Real estate owned, net
|
|
|
|
|
|
|
|
|
|
|
10,262
|
|
|
|
|
|
|
|
10,262
|
|
Other assets
|
|
|
22,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$1,198,929
|
|
|
|
$161,885
|
|
|
|
$533,875
|
|
|
|
$(614,504
|
)
|
|
|
$1,280,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and members equity
|
Notes payable
|
|
|
$530,922
|
|
|
|
$
|
|
|
|
$240,935
|
|
|
|
$
|
|
|
|
$771,857
|
|
Payables and accrued liabilities
|
|
|
65,341
|
|
|
|
96
|
|
|
|
1,393
|
|
|
|
|
|
|
|
66,830
|
|
Payables to affiliates
|
|
|
338,843
|
|
|
|
|
|
|
|
|
|
|
|
(338,843
|
)
|
|
|
|
|
Nonrecourse debtLegacy Assets
|
|
|
|
|
|
|
|
|
|
|
177,675
|
|
|
|
|
|
|
|
177,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
935,106
|
|
|
|
96
|
|
|
|
420,003
|
|
|
|
(338,843
|
)
|
|
|
1,016,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total members equity
|
|
|
263,823
|
|
|
|
161,789
|
|
|
|
113,872
|
|
|
|
(275,661
|
)
|
|
|
263,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
|
$1,198,929
|
|
|
|
$161,885
|
|
|
|
$533,875
|
|
|
|
$(614,504
|
)
|
|
|
$1,280,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-52
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
23.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING
STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
|
$89,151
|
|
|
|
$1,044
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$90,195
|
|
Other fee income
|
|
|
4,823
|
|
|
|
5,200
|
|
|
|
|
|
|
|
|
|
|
|
10,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
93,974
|
|
|
|
6,244
|
|
|
|
|
|
|
|
|
|
|
|
100,218
|
|
Loss on mortgage loans held for sale
|
|
|
(21,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
72,625
|
|
|
|
6,244
|
|
|
|
|
|
|
|
|
|
|
|
78,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses and impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
|
88,075
|
|
|
|
2,614
|
|
|
|
|
|
|
|
|
|
|
|
90,689
|
|
General and administrative
|
|
|
30,111
|
|
|
|
379
|
|
|
|
4
|
|
|
|
|
|
|
|
30,494
|
|
Loss on foreclosed real estate
|
|
|
(1,352
|
)
|
|
|
(10,925
|
)
|
|
|
19,789
|
|
|
|
|
|
|
|
7,512
|
|
Occupancy
|
|
|
6,621
|
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
|
6,863
|
|
Loss on
available-for-sale
securities-other-than-temporary
|
|
|
6,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses and impairments
|
|
|
130,264
|
|
|
|
(7,690
|
)
|
|
|
19,793
|
|
|
|
|
|
|
|
142,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
42,160
|
|
|
|
233
|
|
|
|
10,125
|
|
|
|
|
|
|
|
52,518
|
|
Interest expense
|
|
|
(52,810
|
)
|
|
|
(2,694
|
)
|
|
|
(14,379
|
)
|
|
|
|
|
|
|
(69,883
|
)
|
Loss on interest rate swaps and caps
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
Gain (loss) from subsidiaries
|
|
|
(12,574
|
)
|
|
|
|
|
|
|
|
|
|
|
12,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(23,238
|
)
|
|
|
(2,461
|
)
|
|
|
(4,254
|
)
|
|
|
12,574
|
|
|
|
(17,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
|
$(80,877
|
)
|
|
|
$11,473
|
|
|
|
$(24,047
|
)
|
|
|
$12,574
|
|
|
|
$(80,877
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-53
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
23.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING
STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
$(80,877
|
)
|
|
|
$11,473
|
|
|
|
$(24,047
|
)
|
|
|
$12,574
|
|
|
|
$(80,877
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from subsidiaries
|
|
|
12,574
|
|
|
|
|
|
|
|
|
|
|
|
(12,574
|
)
|
|
|
|
|
Share-based compensation
|
|
|
827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
827
|
|
Loss on mortgage loans held for sale
|
|
|
21,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,349
|
|
Loss on foreclosed real estate
|
|
|
(1,352
|
)
|
|
|
(10,925
|
)
|
|
|
19,789
|
|
|
|
|
|
|
|
7,512
|
|
Loss on interest rate swaps and caps
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
Unrealized gain on derivative financial instruments
|
|
|
(2,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,436
|
)
|
Depreciation and amortization
|
|
|
1,728
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
1,767
|
|
Impairment of investments in debt securities
|
|
|
6,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,809
|
|
Change in fair value of mortgage servicing rights
|
|
|
27,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,915
|
|
Amortization of debt discount
|
|
|
19,075
|
|
|
|
|
|
|
|
2,212
|
|
|
|
|
|
|
|
21,287
|
|
Amortization of premiums/discounts
|
|
|
(1,394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,394
|
)
|
Mortgage Loans originated and purchased, net of fees
|
|
|
(1,480,549
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,480,549
|
)
|
Cost of loans sold, net of fees
|
|
|
1,007,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,007,369
|
|
Principal payments/prepayments received and other changes in
mortgage loans originated as held for sale
|
|
|
405,066
|
|
|
|
|
|
|
|
66,816
|
|
|
|
|
|
|
|
471,882
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(155,566
|
)
|
|
|
1,113
|
|
|
|
(3,511
|
)
|
|
|
|
|
|
|
(157,964
|
)
|
Payables to affiliates
|
|
|
247,676
|
|
|
|
(47,397
|
)
|
|
|
(133,339
|
)
|
|
|
|
|
|
|
66,940
|
|
Other assets
|
|
|
(6,961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,961
|
)
|
Payables and accrued liabilities
|
|
|
11,550
|
|
|
|
(12
|
)
|
|
|
1,331
|
|
|
|
|
|
|
|
12,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used) in operating activities
|
|
|
32,817
|
|
|
|
(45,709
|
)
|
|
|
(70,749
|
)
|
|
|
|
|
|
|
(83,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-54
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
23.
|
Guarantor
Financial Statement Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of real estate owned
|
|
|
1,896
|
|
|
|
32,202
|
|
|
|
83
|
|
|
|
|
|
|
|
34,181
|
|
Purchase of mortgage servicing rights, net of liabilities
incurred
|
|
|
(1,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,169
|
)
|
Property and equipment additions, net of disposals
|
|
|
(2,990
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,029
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used) in investing activities
|
|
|
(2,263
|
)
|
|
|
32,163
|
|
|
|
83
|
|
|
|
|
|
|
|
29,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers to/from restricted cash, net
|
|
|
(18,444
|
)
|
|
|
13,737
|
|
|
|
(27,056
|
)
|
|
|
|
|
|
|
(31,763
|
)
|
Issuance of non-recourse debt, net
|
|
|
|
|
|
|
|
|
|
|
191,272
|
|
|
|
|
|
|
|
191,272
|
|
(Decrease) increase in notes payable, net
|
|
|
17,346
|
|
|
|
|
|
|
|
(77,741
|
)
|
|
|
|
|
|
|
(60,395
|
)
|
Repayment of non-recourse debtLegacy assets
|
|
|
|
|
|
|
|
|
|
|
(15,809
|
)
|
|
|
|
|
|
|
(15,809
|
)
|
Debt financing costs
|
|
|
(18,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,059
|
)
|
Capital contributions from members
|
|
|
20,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,543
|
|
|
|
13,737
|
|
|
|
70,666
|
|
|
|
|
|
|
|
85,946
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
32,097
|
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
|
32,288
|
|
Cash and cash equivalents at beginning of year
|
|
|
9,146
|
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
9,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
|
$41,243
|
|
|
|
$402
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$41,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-55
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
23.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
|
$67,876
|
|
|
|
$74
|
|
|
|
$102
|
|
|
|
$
|
|
|
|
$68,052
|
|
Other fee income
|
|
|
1,304
|
|
|
|
4,651
|
|
|
|
|
|
|
|
|
|
|
|
5,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
69,180
|
|
|
|
4,725
|
|
|
|
102
|
|
|
|
|
|
|
|
74,007
|
|
Loss on mortgage loans held for sale
|
|
|
(86,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(86,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
(17,483
|
)
|
|
|
4,725
|
|
|
|
102
|
|
|
|
|
|
|
|
(12,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses and impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
|
60,808
|
|
|
|
975
|
|
|
|
|
|
|
|
|
|
|
|
61,783
|
|
General and administrative
|
|
|
22,059
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
22,194
|
|
Loss on foreclosed real estate
|
|
|
(1,011
|
)
|
|
|
3,578
|
|
|
|
|
|
|
|
|
|
|
|
2,567
|
|
Occupancy
|
|
|
5,989
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
6,021
|
|
Loss on
available-for-sale
securities-other-than-temporary
|
|
|
55,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses and impairments
|
|
|
143,057
|
|
|
|
4,720
|
|
|
|
|
|
|
|
|
|
|
|
147,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
92,030
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
92,060
|
|
Interest expense
|
|
|
(52,931
|
)
|
|
|
(45
|
)
|
|
|
(12,572
|
)
|
|
|
|
|
|
|
(65,548
|
)
|
Loss on interest rate swaps and caps
|
|
|
(23,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,689
|
)
|
Gain (loss) from subsidiaries
|
|
|
(12,480
|
)
|
|
|
|
|
|
|
|
|
|
|
12,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
2,930
|
|
|
|
(15
|
)
|
|
|
(12,572
|
)
|
|
|
12,480
|
|
|
|
2,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
$(157,610
|
)
|
|
|
$(10
|
)
|
|
|
$(12,470
|
)
|
|
|
$12,480
|
|
|
|
$(157,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-56
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
23.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING
STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
$(157,610
|
)
|
|
|
$(10
|
)
|
|
|
$(12,470
|
)
|
|
|
$12,480
|
|
|
|
$(157,610
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from subsidiaries
|
|
|
12,480
|
|
|
|
|
|
|
|
|
|
|
|
(12,480
|
)
|
|
|
|
|
Share-based compensation
|
|
|
2,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,333
|
|
Loss on mortgage loans held for sale
|
|
|
86,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,663
|
|
Loss on foreclosed real estate
|
|
|
(1,011
|
)
|
|
|
3,578
|
|
|
|
|
|
|
|
|
|
|
|
2,567
|
|
Loss on interest rate swaps and caps
|
|
|
23,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,689
|
|
Unrealized loss on derivative financial instruments
|
|
|
2,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,077
|
|
Depreciation and amortization
|
|
|
1,301
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
1,309
|
|
Accretion of discount on securities
|
|
|
(4,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,422
|
)
|
Impairment of investments in debt securities
|
|
|
55,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,212
|
|
Change in fair value of mortgage servicing rights
|
|
|
11,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,701
|
|
Amortization of debt discount
|
|
|
8,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,879
|
|
Amortization of premiums/discounts
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(85
|
)
|
Mortgage loans originated and purchased, net of fees
|
|
|
(545,860
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(545,860
|
)
|
Cost of loans sold, net of fees
|
|
|
513,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
513,924
|
|
Principal payments/prepayments received and other changes in
mortgage loans originated as held for sale
|
|
|
201,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201,184
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(164,962
|
)
|
|
|
(605
|
)
|
|
|
|
|
|
|
|
|
|
|
(165,567
|
)
|
Payables to affiliates
|
|
|
129,110
|
|
|
|
128,659
|
|
|
|
(255,317
|
)
|
|
|
|
|
|
|
2,452
|
|
Other assets
|
|
|
38,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,364
|
|
Payables and accrued liabilities
|
|
|
(36,363
|
)
|
|
|
(297
|
)
|
|
|
62
|
|
|
|
|
|
|
|
(36,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used) in operating activities
|
|
|
176,604
|
|
|
|
131,333
|
|
|
|
(267,725
|
)
|
|
|
|
|
|
|
40,212
|
|
F-57
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
23.
|
Guarantor
Financial Statement Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of real estate owned
|
|
|
52,764
|
|
|
|
(23,488
|
)
|
|
|
|
|
|
|
|
|
|
|
29,276
|
|
Purchase of mortgage servicing rights, net of liabilities
incurred
|
|
|
(19,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,013
|
)
|
Interest rate swap settlements
|
|
|
(51,570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51,570
|
)
|
Property and equipment additions, net of disposals
|
|
|
(1,764
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,772
|
)
|
Principal payments received on debt securities
|
|
|
8,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(11,147
|
)
|
|
|
(23,496
|
)
|
|
|
|
|
|
|
|
|
|
|
(34,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers to/from restricted cash, net
|
|
|
(517
|
)
|
|
|
(8,402
|
)
|
|
|
(952
|
)
|
|
|
|
|
|
|
(9,871
|
)
|
(Decrease)/increase in notes payable, net
|
|
|
(325,943
|
)
|
|
|
(100,000
|
)
|
|
|
268,677
|
|
|
|
|
|
|
|
(157,266
|
)
|
Debt financing costs
|
|
|
(15,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,926
|
)
|
Capital contributions from members
|
|
|
145,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(196,786
|
)
|
|
|
(108,402
|
)
|
|
|
267,725
|
|
|
|
|
|
|
|
(37,463
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(31,329
|
)
|
|
|
(565
|
)
|
|
|
|
|
|
|
|
|
|
|
(31,894
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
40,475
|
|
|
|
776
|
|
|
|
|
|
|
|
|
|
|
|
41,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
|
$9,146
|
|
|
|
$211
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$9,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In February 2011, Nationstar amended one of its outstanding
Master Repurchase Agreements with a financial services company.
Under the terms of this new agreement, Nationstar is now
required to maintain a minimum tangible net worth of not less
than $175 million and is now set to expire in February
2012. In addition, the interest rate paid on any transfer loans
has been amended to LIBOR plus a margin of 3.25%.
In March 2011, Nationstar executed a MRA with a financial
institution, under which Nationstar may enter into transactions,
for an aggregate amount of $50.0 million, in which
Nationstar agrees to transfer to the same financial institution
certain mortgage loans and certain securities against the
transfer of funds by the same financial institution, with a
simultaneous agreement by the same financial institution to
transfer such mortgage loans and securities to Nationstar at a
date certain, or on demand by Nationstar, against the transfer
F-58
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
24.
|
Subsequent
Events (continued)
|
of funds Nationstar. The interest rate is based on LIBOR plus a
spread of 1.45% to 3.95%, which varies based on the underlying
transferred collateral. The maturity date of this MRA is March
2012.
|
|
25.
|
Unaudited
Pro Forma Tax Information
|
Nationstar has elected to be a disregarded entity for federal
tax purposes and is treated as a branch of its parent, FIF. FIF
is taxed as a partnership, whereby all income is taxed at the
member (partner) level. Historically Nationstar has generated
net operating losses for federal and state income tax purposes
but has incurred de minimis amounts of state capital, franchise
and minimum tax. It is expected that Nationstar will become a
wholly owned indirect subsidiary of Nationstar Mortgage Holdings
Inc. a new C corporation upon the Restructuring. See
Note 1 to Consolidated Financial
StatementsDescription of the Companies and Basis of
Presentation. It is anticipated that Nationstar Mortgage
Holdings Inc., Nationstar and all affiliates will join in a
consolidated income tax return for US purposes.
Nationstars pro forma effective tax rate for 2010 is 0%.
The pro forma tax provision (benefit), before valuation
allowance, is ($3,612) on pre-tax loss of ($9,914). Nationstar
has determined that recognizing a tax benefit and corresponding
deferred tax asset is not appropriate as management believes it
is more likely than not the deferred tax asset will not be
realized. Nationstar will also assume certain tax attributes of
certain parent entities of FIF HE Holdings LLC as a result of
the Restructuring, including approximately $200 million of
net operating loss carry forwards as of December 31, 2010.
Nationstar expects to record a full valuation allowance against
any resulting deferred tax asset. The utilization of these tax
attributes will be limited pursuant to Sections 382 and 383
of the Internal Revenue Code.
F-59
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
(thousands of dollars)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
$24,005
|
|
|
|
$21,223
|
|
Restricted cash (includes $69 and $1,472, respectively, of
restricted cash, subject to ABS nonrecourse debt)
|
|
|
72,813
|
|
|
|
91,125
|
|
Accounts receivable (includes $2,431 and $2,392, respectively,
of accrued interest, subject to ABS nonrecourse debt)
|
|
|
471,474
|
|
|
|
441,275
|
|
Mortgage loans held for sale
|
|
|
377,932
|
|
|
|
369,617
|
|
Mortgage loans held for investment, subject to nonrecourse
debtLegacy Assets, net of allowance for loan losses of
$5,303 and $3,298, respectively
|
|
|
246,159
|
|
|
|
266,320
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt (at fair value)
|
|
|
477,748
|
|
|
|
538,440
|
|
Receivables from affiliates
|
|
|
6,082
|
|
|
|
8,993
|
|
Mortgage servicing rights at fair value
|
|
|
246,916
|
|
|
|
145,062
|
|
Property and equipment, net
|
|
|
20,990
|
|
|
|
8,394
|
|
Real estate owned, net (includes $11,169 and $17,509,
respectively, of real estate owned, subject to ABS nonrecourse
debt)
|
|
|
15,411
|
|
|
|
27,337
|
|
Other assets
|
|
|
44,795
|
|
|
|
29,395
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$2,004,325
|
|
|
|
$1,947,181
|
|
|
|
|
|
|
|
|
|
|
Liabilities and members equity
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
$738,783
|
|
|
|
$709,758
|
|
Unsecured senior notes
|
|
|
245,109
|
|
|
|
244,061
|
|
Payables and accrued liabilities (includes $75 and $95,
respectively, of accrued interest payable, subject to ABS
nonrecourse debt)
|
|
|
177,452
|
|
|
|
75,054
|
|
Derivative financial instruments
|
|
|
15,778
|
|
|
|
7,801
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
11,889
|
|
|
|
18,781
|
|
Nonrecourse debtLegacy Assets
|
|
|
116,200
|
|
|
|
138,662
|
|
ABS nonrecourse debt (at fair value)
|
|
|
434,326
|
|
|
|
496,692
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,739,537
|
|
|
|
1,690,809
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingenciesSee Note 15
|
|
|
|
|
|
|
|
|
Total members equity
|
|
|
264,788
|
|
|
|
256,372
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
|
$2,004,325
|
|
|
|
$1,947,181
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-60
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(thousands of dollars)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
|
$165,636
|
|
|
|
$110,919
|
|
Other fee income
|
|
|
19,118
|
|
|
|
11,851
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
184,754
|
|
|
|
122,770
|
|
Gain on mortgage loans held for sale
|
|
|
73,560
|
|
|
|
51,754
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
258,314
|
|
|
|
174,524
|
|
Expenses and impairments:
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
|
146,199
|
|
|
|
104,689
|
|
General and administrative
|
|
|
56,707
|
|
|
|
34,931
|
|
Provision for loan losses
|
|
|
2,005
|
|
|
|
|
|
Loss on foreclosed real estate
|
|
|
6,904
|
|
|
|
|
|
Occupancy
|
|
|
7,902
|
|
|
|
6,002
|
|
|
|
|
|
|
|
|
|
|
Total expenses and impairments
|
|
|
219,717
|
|
|
|
145,622
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
51,246
|
|
|
|
82,019
|
|
Interest expense
|
|
|
(76,929
|
)
|
|
|
(89,298
|
)
|
Loss on interest rate swaps and caps
|
|
|
|
|
|
|
(9,917
|
)
|
Fair value changes in ABS securitizations
|
|
|
(6,919
|
)
|
|
|
(19,115
|
)
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(32,602
|
)
|
|
|
(36,311
|
)
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
|
$5,995
|
|
|
|
$(7,409
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma information (Note 20):
|
|
|
|
|
|
|
|
|
Historical net income before taxes
|
|
|
$5,995
|
|
|
|
|
|
Pro forma adjustment for taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
|
$5,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
Total Members
|
|
|
|
Members
|
|
|
Comprehensive
|
|
|
Units and
|
|
|
|
Units
|
|
|
Income
|
|
|
Members Equity
|
|
|
|
(thousands of dollars)
|
|
|
Balance at January 1, 2010
|
|
|
$263,823
|
|
|
|
$
|
|
|
|
$263,823
|
|
Cumulative effect of change in accounting principles as of
January 1, 2010 related to adoption of new accounting
guidance on consolidation of variable interest entities
|
|
|
(8,068
|
)
|
|
|
|
|
|
|
(8,068
|
)
|
Share-based compensation
|
|
|
12,856
|
|
|
|
|
|
|
|
12,856
|
|
Tax related share-based settlement of units by members
|
|
|
(3,396
|
)
|
|
|
|
|
|
|
(3,396
|
)
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(9,914
|
)
|
|
|
|
|
|
|
(9,914
|
)
|
Change in value of cash flow hedge
|
|
|
|
|
|
|
1,071
|
|
|
|
1,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(8,843
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
255,301
|
|
|
|
1,071
|
|
|
|
256,372
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
12,201
|
|
|
|
|
|
|
|
12,201
|
|
Distribution to parent
|
|
|
(3,900
|
)
|
|
|
|
|
|
|
(3,900
|
)
|
Tax related share-based settlement of units by members
|
|
|
(4,809
|
)
|
|
|
|
|
|
|
(4,809
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
5,995
|
|
|
|
|
|
|
|
5,995
|
|
Change in value of cash flow hedge
|
|
|
|
|
|
|
(1,071
|
)
|
|
|
(1,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
4,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2011
|
|
|
$264,788
|
|
|
|
$
|
|
|
|
$264,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-62
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(thousands of dollars)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
|
$5,995
|
|
|
|
$(7,409
|
)
|
Adjustments to reconcile net income/(loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
12,201
|
|
|
|
7,459
|
|
Gain on mortgage loans held for sale
|
|
|
(73,560
|
)
|
|
|
(51,754
|
)
|
Provision for loan losses
|
|
|
2,005
|
|
|
|
|
|
Loss on foreclosed real estate
|
|
|
6,904
|
|
|
|
|
|
Loss on equity method investments
|
|
|
971
|
|
|
|
|
|
(Gain)/loss on ineffectiveness on interest rate swaps and caps
|
|
|
(2,032
|
)
|
|
|
9,917
|
|
Fair value changes in ABS securitizations
|
|
|
6,919
|
|
|
|
19,115
|
|
Depreciation and amortization
|
|
|
2,551
|
|
|
|
1,450
|
|
Change in fair value on mortgage servicing rights
|
|
|
30,757
|
|
|
|
11,499
|
|
Amortization of debt discount
|
|
|
10,324
|
|
|
|
15,168
|
|
Amortization of discounts
|
|
|
(4,001
|
)
|
|
|
(3,561
|
)
|
Mortgage loans originated and purchased, net of fees
|
|
|
(2,285,558
|
)
|
|
|
(1,960,089
|
)
|
Cost of loans sold, net of fees
|
|
|
2,287,430
|
|
|
|
1,831,708
|
|
Principal payments/prepayments received and other changes in
mortgage loans originated as held for sale
|
|
|
45,534
|
|
|
|
8,112
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(30,199
|
)
|
|
|
58,656
|
|
Receivables from affiliates
|
|
|
2,911
|
|
|
|
3,607
|
|
Other assets
|
|
|
(5,050
|
)
|
|
|
2,700
|
|
Payables and accrued liabilities
|
|
|
35,840
|
|
|
|
77,892
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
49,942
|
|
|
|
24,470
|
|
|
|
|
|
|
|
|
|
|
Continued on following page.
F-63
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(thousands of dollars)
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Principal payments received and other changes on mortgage loans
held for investment, subject to ABS nonrecourse debt
|
|
|
$29,395
|
|
|
|
$36,401
|
|
Property and equipment additions, net of disposals
|
|
|
(15,147
|
)
|
|
|
(3,177
|
)
|
Acquisition of equity method investee
|
|
|
(6,600
|
)
|
|
|
|
|
Purchase of mortgage servicing rights, net of liabilities
incurred
|
|
|
(40,305
|
)
|
|
|
(5,863
|
)
|
Proceeds from sales of real estate owned
|
|
|
22,897
|
|
|
|
58,506
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) investing activities
|
|
|
(9,760
|
)
|
|
|
85,867
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Transfers from restricted cash, net
|
|
|
18,312
|
|
|
|
6,560
|
|
Issuance of unsecured notes, net of issue discount
|
|
|
|
|
|
|
243,012
|
|
Increase/(decrease) in notes payable
|
|
|
29,025
|
|
|
|
(239,585
|
)
|
Repayment of non-recourse debtLegacy assets
|
|
|
(26,119
|
)
|
|
|
(37,240
|
)
|
Repayment of ABS nonrecourse debt
|
|
|
(47,175
|
)
|
|
|
(85,386
|
)
|
Distribution to parent
|
|
|
(3,900
|
)
|
|
|
|
|
Debt financing costs
|
|
|
(2,734
|
)
|
|
|
(11,894
|
)
|
Tax related share-based settlement of units by members
|
|
|
(4,809
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(37,400
|
)
|
|
|
(124,533
|
)
|
|
|
|
|
|
|
|
|
|
Net increase/(decrease) in cash and cash equivalents
|
|
|
2,782
|
|
|
|
(14,196
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
21,223
|
|
|
|
41,645
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
|
$24,005
|
|
|
|
$27,449
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of noncash activities
|
|
|
|
|
|
|
|
|
Transfer of mortgage loans held for investment, subject to
nonrecourse debtLegacy Assets to real estate owned
|
|
|
$4,875
|
|
|
|
$15,034
|
|
Transfer of mortgage loans held for sale to real estate owned
|
|
|
90
|
|
|
|
124
|
|
Transfer of mortgage loans held for investment, subject to ABS
nonrecourse debt to real estate owned
|
|
|
13,712
|
|
|
|
34,775
|
|
Mortgage servicing rights resulting from sale or securitization
of mortgage loans
|
|
|
25,748
|
|
|
|
16,761
|
|
Liabilities incurred from purchase of mortgage servicing rights
|
|
|
66,558
|
|
|
|
5,156
|
|
See accompanying notes.
F-64
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
(thousands of dollars, unless otherwise stated)
The accompanying unaudited interim consolidated financial
statements include the accounts of Nationstar, and its wholly
owned subsidiaries and those variable interest entities (VIEs)
where Nationstar is the primary beneficiary. Nationstar applies
the equity method of accounting to investments when the entity
is not a VIE and Nationstar is able to exercise significant
influence, but not control, over the policies and procedures of
the entity but owns less than 50% of the voting interests.
Intercompany balances and transactions have been eliminated.
Results of operations, assets and liabilities of VIEs are
included from the date that the Company became the primary
beneficiary. In addition, certain prior period amounts have been
reclassified to conform to the current period presentation.
The unaudited consolidated financial statements of Nationstar
have been prepared in accordance with generally accepted
accounting principles (GAAP) for interim information and in
accordance with the instructions to
Form 10-Q
and Article 10 of
Regulation S-X
as promulgated by the Securities and Exchange Commission (SEC).
The accompanying interim financial statements are unaudited;
however, in the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. The results of
operations for the nine month period ended September 30,
2011, are not necessarily indicative of the results that may be
expected for the year ended December 31, 2011.
|
|
2.
|
Recent
Accounting Developments
|
Accounting Standards Update
No. 2011-02,
A Creditors Determination of Whether a Restructuring is
a Troubled Debt Restructuring (Update
No. 2011-02).
Update
No. 2011-02
is intended to reduce the diversity in identifying troubled debt
restructurings (TDRs), primarily by clarifying certain factors
around concessions and financial difficulty. In evaluating
whether a restructuring constitutes a troubled debt
restructuring, a creditor must separately conclude that:
1) the restructuring constitutes a concession; and
2) the debtor is experiencing financial difficulties. The
clarifications will generally result in more restructurings
being considered troubled. The amendments in this update are
effective for this quarter, with retrospective application to
the beginning of this year. The adoption of Update
No. 2011-02
did not have a material impact on Nationstars financial
condition, liquidity or results of operations.
Accounting Standards Update
No. 2011-03,
Reconsideration of Effective Control for Repurchase
Agreements (Update
No. 2011-03).
Update
No. 2011-03
is intended to improve the accounting and reporting of
repurchase agreements and other agreements that both entitle and
obligate a transferor to repurchase or redeem financial assets
before their maturity. This amendment removes the criterion
pertaining to an exchange of collateral such that it should not
be a determining factor in assessing effective control,
including (1) the criterion requiring the transferor to
have the ability to repurchase or redeem the financial assets on
substantially the agreed terms, even in the event of default by
the transferee, and (2) the collateral maintenance
implementation guidance related to that criterion. Other
criteria applicable to the assessment of effective control are
not changed by the amendments in the update. The amendments in
this update will be effective for interim and annual periods
beginning after December 15, 2011. The adoption of Update
No. 2011-03
is not expected to have a material impact on Nationstars
financial condition, liquidity or results of operations.
Accounting Standards Update
No. 2011-04,
Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in U.S. GAAP and IFRS (Update
No. 2011-04).
Update
No. 2011-04
is intended to provide common fair value measurement and
disclosure requirements in U.S. GAAP and IFRS. The changes
required in this update include changing the wording used to
describe
F-65
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
2.
|
Recent
Accounting Developments (continued)
|
many of the requirements in U.S. GAAP for measuring fair
value and for disclosing information about fair value
measurements. The amendments in this update are to be applied
prospectively and are effective for interim and annual periods
beginning after December 15, 2011. The adoption of Update
No. 2011-04
is not expected to have a material impact on Nationstars
financial condition, liquidity or results of operations.
Accounting Standards Update
No. 2011-05,
Presentation of Comprehensive Income (Update
No. 2011-05).
Update
No. 2011-05
is intended to improve the comparability, consistency, and
transparency of financial reporting and to increase the
prominence of items reported in other comprehensive income.
Update
No. 2011-05
eliminates the option to present components of other
comprehensive income as part of the statement of changes in
stockholders equity and now requires that all non-owner
changes in stockholders equity be presented either in a
single continuous statement of comprehensive income or in two
separate but consecutive statements. This update does not change
the items that must be reported in other comprehensive income or
when an item of other comprehensive income must be reclassified
to net income. The amendments in this update are to be applied
retrospectively and are effective for interim and annual periods
beginning after December 15, 2011. The adoption of Update
No. 2011-05
is not expected to have a material impact on Nationstars
financial condition, liquidity or results of operations.
|
|
3.
|
Variable
Interest Entities and Securitizations
|
A summary of the assets and liabilities of Nationstars
transactions with VIEs included in Nationstars
consolidated financial statements as of September 30, 2011
and December 31, 2010 is presented in the following table
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers
|
|
|
|
|
|
|
|
|
|
Accounted for as
|
|
|
|
|
|
|
Securitization
|
|
|
Secured
|
|
|
|
|
September 30, 2011
|
|
Trusts
|
|
|
Borrowings
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
$69
|
|
|
|
$20,134
|
|
|
|
$20,203
|
|
Accounts receivable
|
|
|
2,431
|
|
|
|
251,615
|
|
|
|
254,046
|
|
Mortgage loans held for investment, subject to nonrecourse debt
|
|
|
|
|
|
|
240,256
|
|
|
|
240,256
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt
|
|
|
477,748
|
|
|
|
|
|
|
|
477,748
|
|
Real estate owned
|
|
|
11,169
|
|
|
|
4,184
|
|
|
|
15,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
$491,417
|
|
|
|
$516,189
|
|
|
|
$1,007,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
$
|
|
|
|
$203,596
|
|
|
|
$203,596
|
|
Payables and accrued liabilities
|
|
|
75
|
|
|
|
988
|
|
|
|
1,063
|
|
Outstanding servicer advances(1)
|
|
|
32,961
|
|
|
|
|
|
|
|
32,961
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
11,889
|
|
|
|
|
|
|
|
11,889
|
|
Nonrecourse debtLegacy Assets
|
|
|
|
|
|
|
116,200
|
|
|
|
116,200
|
|
ABS nonrecourse debt
|
|
|
434,326
|
|
|
|
|
|
|
|
434,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
$479,251
|
|
|
|
$320,784
|
|
|
|
$800,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-66
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
3.
|
Variable
Interest Entities and Securitizations (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers
|
|
|
|
|
|
|
|
|
|
Accounted for as
|
|
|
|
|
|
|
Securitization
|
|
|
Secured
|
|
|
|
|
December 31, 2010
|
|
Trusts
|
|
|
Borrowings
|
|
|
Total
|
|
|
Assets
|
Restricted cash
|
|
|
$1,472
|
|
|
|
$32,075
|
|
|
|
$33,547
|
|
Accounts receivable
|
|
|
2,392
|
|
|
|
286,808
|
|
|
|
289,200
|
|
Mortgage loans held for investment, subject to nonrecourse debt
|
|
|
|
|
|
|
261,305
|
|
|
|
261,305
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt
|
|
|
538,440
|
|
|
|
|
|
|
|
538,440
|
|
Real estate owned
|
|
|
17,509
|
|
|
|
9,505
|
|
|
|
27,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
$559,813
|
|
|
|
$589,693
|
|
|
|
$1,149,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
Notes payable
|
|
|
$
|
|
|
|
$236,808
|
|
|
|
$236,808
|
|
Payables and accrued liabilities
|
|
|
95
|
|
|
|
1,173
|
|
|
|
1,268
|
|
Outstanding servicer advances(1)
|
|
|
32,284
|
|
|
|
|
|
|
|
32,284
|
|
Derivative financial instruments
|
|
|
|
|
|
|
7,801
|
|
|
|
7,801
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
18,781
|
|
|
|
|
|
|
|
18,781
|
|
Nonrecourse debtLegacy Assets
|
|
|
|
|
|
|
138,662
|
|
|
|
138,662
|
|
ABS nonrecourse debt
|
|
|
497,289
|
|
|
|
|
|
|
|
497,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
$548,449
|
|
|
|
$384,444
|
|
|
|
$932,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Outstanding servicer advances consists of principal and interest
advances paid by Nationstar to cover scheduled payments and
interest that have not been timely paid by borrowers. These
outstanding servicer advances are eliminated upon the
consolidation of the securitization trusts. |
A summary of the outstanding collateral and certificate balances
for securitization trusts, including any retained beneficial
interests and mortgage servicing rights, that were not
consolidated by Nationstar for the periods ending
September 30, 2011 and December 31, 2010 is presented
in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
|
Total collateral balance
|
|
|
$3,751,789
|
|
|
|
$4,038,978
|
|
Total certificate balance
|
|
|
3,738,836
|
|
|
|
4,026,844
|
|
Total mortgage servicing rights at fair value
|
|
|
24,227
|
|
|
|
26,419
|
|
Nationstar has not retained any variable interests in the
unconsolidated securitization trusts that were outstanding as of
September 30, 2011 or 2010, and therefore does not have a
significant maximum exposure to loss related to these
unconsolidated VIEs.
F-67
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
3.
|
Variable
Interest Entities and Securitizations (continued)
|
A summary of mortgage loans transferred to unconsolidated
securitization trusts that are 60 days or more past due and
the credit losses incurred in the unconsolidated securitization
trusts are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2011
|
|
2010
|
|
|
Principal Amount
|
|
|
|
Principal Amount
|
|
|
|
|
of Loans 60 Days or
|
|
Credit
|
|
of Loans 60 Days or
|
|
Credit
|
|
|
More Past Due
|
|
Losses
|
|
More Past Due
|
|
Losses
|
|
Total Securitization Trusts
|
|
|
$801,216
|
|
|
|
$182,991
|
|
|
|
$855,981
|
|
|
|
$177,077
|
|
Certain cash flows received from securitization trusts accounted
for as sales for the dates indicated were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Servicing
|
|
|
Loan
|
|
|
Servicing
|
|
|
Loan
|
|
|
|
Fees Received
|
|
|
Repurchases
|
|
|
Fees Received
|
|
|
Repurchases
|
|
|
Total Securitization Trust
|
|
|
$21,221
|
|
|
|
$
|
|
|
|
$21,414
|
|
|
|
$
|
|
|
|
4.
|
Consolidated
Statement of Cash Flows-Supplemental Disclosure
|
Total interest paid for the nine months ended September 30,
2011 and 2010 was approximately $61.8 million and
$60.9 million, respectively.
Accounts receivable consist primarily of accrued interest
receivable on mortgage loans and securitizations, collateral
deposits on surety bonds, and advances made to unconsolidated
securitization trusts, as required under various servicing
agreements related to delinquent loans, which are ultimately
paid back to Nationstar from such trusts.
Accounts receivable consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Delinquency advances
|
|
|
$157,438
|
|
|
|
$148,751
|
|
Corporate and escrow advances
|
|
|
274,912
|
|
|
|
241,618
|
|
Insurance deposits
|
|
|
1,750
|
|
|
|
6,390
|
|
Accrued interest (includes $2,431 and $2,392, respectively,
subject to ABS nonrecourse debt)
|
|
|
3,971
|
|
|
|
4,302
|
|
Receivables from trusts
|
|
|
6,348
|
|
|
|
21,910
|
|
Other
|
|
|
27,055
|
|
|
|
18,304
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable
|
|
|
$471,474
|
|
|
|
$441,275
|
|
|
|
|
|
|
|
|
|
|
F-68
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
6.
|
Mortgage
Loans Held for Sale and Investment
|
Mortgage
loans held for sale
Mortgage loans held for sale consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Mortgage loans held for saleunpaid principal balance
|
|
|
$364,403
|
|
|
|
$365,337
|
|
Mark-to-market
adjustment
|
|
|
13,529
|
|
|
|
4,280
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans held for sale
|
|
|
$377,932
|
|
|
|
$369,617
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale on a nonaccrual status are
presented in the following table for the periods indicated (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Mortgage loans held for saleNon-performing
|
|
|
$
|
|
|
|
$371
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the changes in mortgage loans held for sale
to the amounts presented in the consolidated statements of cash
flows for the dates indicated is presented in the following
table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
Mortgage loans held for salebeginning balance
|
|
|
$369,617
|
|
|
|
$203,131
|
|
Mortgage loans originated and purchased, net of fees
|
|
|
2,285,558
|
|
|
|
1,960,089
|
|
Cost of loans sold, net of fees
|
|
|
(2,287,430
|
)
|
|
|
(1,831,708
|
)
|
Principal payments received on mortgage loans held for sale and
other changes
|
|
|
10,475
|
|
|
|
11,254
|
|
Transfer of mortgage loans held for sale to real estate owned
|
|
|
(288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for saleending balance
|
|
|
$377,932
|
|
|
|
$342,766
|
|
|
|
|
|
|
|
|
|
|
F-69
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
6.
|
Mortgage
Loans Held for Sale and Investment (continued)
|
Mortgage
loans held for investment, subject to nonrecourse debt- Legacy
Assets, net
Mortgage loans held for investment, subject to nonrecourse debt-
Legacy Assets, net as of the dates indicated include (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Mortgage loans held for investment, subject to nonrecourse debt-
Legacy Assets, netunpaid principal balance
|
|
|
$379,418
|
|
|
|
$411,878
|
|
Transfer discount
|
|
|
|
|
|
|
|
|
Accretable
|
|
|
(22,764
|
)
|
|
|
(25,219
|
)
|
Non-accretable
|
|
|
(105,192
|
)
|
|
|
(117,041
|
)
|
Allowance for loan losses
|
|
|
(5,303
|
)
|
|
|
(3,298
|
)
|
|
|
|
|
|
|
|
|
|
Total mortgage loans held for investment, subject to nonrecourse
debt-Legacy Assets, net
|
|
|
$246,159
|
|
|
|
$266,320
|
|
|
|
|
|
|
|
|
|
|
Over the life of the loan pools, Nationstar continues to
estimate cash flows expected to be collected. Nationstar
considers expected prepayments and estimates the amount and
timing of undiscounted expected principal, interest, and other
cash flows (expected as of the transfer date) for each aggregate
pool of loans. Nationstar evaluates at the balance sheet date
whether the present value of its loans determined using the
effective interest rates has decreased and, if so, recognizes a
valuation allowance subsequent to the transfer date. The present
value of any subsequent increase in the loan pools actual
cash flows expected to be collected is used first to reverse any
existing valuation allowance for that loan pool. Any remaining
increase in cash flows expected to be collected adjusts the
amount of accretable yield recognized on a prospective basis
over the loan pools remaining life.
The changes in accretable yield on loans transferred to mortgage
loans held for investment, subject to nonrecourse debt-Legacy
Assets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Balance at the beginning of the period
|
|
|
$25,219
|
|
|
|
$22,040
|
|
Additions
|
|
|
|
|
|
|
|
|
Accretion
|
|
|
(3,185
|
)
|
|
|
(4,082
|
)
|
Reclassifications from (to) nonaccretable discount
|
|
|
730
|
|
|
|
7,261
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
|
$22,764
|
|
|
|
$25,219
|
|
|
|
|
|
|
|
|
|
|
Nationstar may periodically modify the terms of any outstanding
mortgage loans held for investment, subject to nonrecourse
debt-Legacy Assets, net for loans that are either in default or
in imminent default. Modifications often involve reduced
payments by borrowers, modification of the original terms of the
mortgage loans, forgiveness of debt
and/or
increased servicing advances. As a result of the volume of
modification agreements entered into, the estimated average
outstanding life in this pool of mortgage loans has been
extended. Nationstar records interest income on the transferred
loans on a level-yield method. To maintain a level-yield on
these transferred loans over the estimated extended life,
Nationstar reclassified approximately $0.7 million for
F-70
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
6.
|
Mortgage
Loans Held for Sale and Investment (continued)
|
the nine months ended September 30, 2011 and
$7.3 million from the year ended December 31, 2010
from nonaccretable difference. Furthermore, the Company
considers the decrease in principal, interest, and other cash
flows expected to be collected arising from the transferred
loans as an impairment, and Nationstar recorded a
$2.0 million provision for loan losses for the nine months
ended September 30, 2011, and a $3.3 million provision
for loan losses for the year ended December 31, 2010 on the
transferred loans to reflect this impairment.
Nationstar collectively evaluates all mortgage loans held for
investment, subject to nonrecourse debt-Legacy Assets for
impairment. The changes in the allowance for loan losses on
mortgage loans held for investment, subject to nonrecourse
debt-Legacy Assets, net were as follows (in thousands) for the
dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2011
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
Performing
|
|
|
Performing
|
|
|
Total
|
|
|
Balance at the beginning of the period
|
|
|
$829
|
|
|
|
$2,469
|
|
|
|
$3,298
|
|
Provision for loan losses
|
|
|
134
|
|
|
|
1,871
|
|
|
|
2,005
|
|
Recoveries on loans previously charged-off
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
|
$963
|
|
|
|
$4,340
|
|
|
|
$5,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balanceCollectively evaluated for impairment
|
|
|
$300,718
|
|
|
|
$78,700
|
|
|
|
$379,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
Performing
|
|
|
Performing
|
|
|
Total
|
|
|
Balance at the beginning of the period
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
Provision for loan losses
|
|
|
829
|
|
|
|
2,469
|
|
|
|
3,298
|
|
Recoveries on loans previously charged-off
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
|
$829
|
|
|
|
$2,469
|
|
|
|
$3,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balanceCollectively evaluated for impairment
|
|
|
$310,730
|
|
|
|
$101,148
|
|
|
|
$411,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan delinquency and
Loan-to-Value
Ratio (LTV) are common credit quality indicators that Nationstar
monitors and utilizes in its evaluation of the adequacy of the
allowance for loan losses, of which the primary indicator of
credit quality is loan delinquency. LTV refers to the ratio of
comparing the loans unpaid principal balance to the
propertys collateral value. Loan delinquencies and unpaid
principal balances are updated monthly based upon collection
activity. Collateral values are updated from third party
providers on a periodic basis. The collateral values used to
derive the LTVs shown below were obtained at various
dates, but the majority were within the last twelve months and
virtually all were obtained with the last eighteen months. For
an event requiring a decision based at least in part on the
collateral value, the Company takes its last known value
provided by a third party and then adjusts the value based on
the applicable home price index.
F-71
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
6.
|
Mortgage
Loans Held for Sale and Investment (continued)
|
The following tables provide the outstanding unpaid principal
balance of Nationstars mortgage loans held for investment
by credit quality indicators as of September 30, 2011 and
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Credit Quality by Delinquency Status
|
|
|
|
|
|
|
|
|
Performing
|
|
|
$300,718
|
|
|
|
$310,730
|
|
Non-Performing
|
|
|
78,700
|
|
|
|
101,148
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$379,418
|
|
|
|
$411,878
|
|
|
|
|
|
|
|
|
|
|
Credit Quality by
Loan-to-Value
Ratio
|
|
|
|
|
|
|
|
|
Less than 60
|
|
|
$43,156
|
|
|
|
$47,568
|
|
Less than 70 and more than 60
|
|
|
16,923
|
|
|
|
17,476
|
|
Less than 80 and more than 70
|
|
|
24,575
|
|
|
|
26,771
|
|
Less than 90 and more than 80
|
|
|
33,811
|
|
|
|
36,079
|
|
Less than 100 and more than 90
|
|
|
33,802
|
|
|
|
37,551
|
|
Greater than 100
|
|
|
227,151
|
|
|
|
246,433
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$379,418
|
|
|
|
$411,878
|
|
|
|
|
|
|
|
|
|
|
Performing loans refer to loans that are less than 90 days
delinquent. Non-performing loans refer to loans that are greater
than 90 days delinquent.
Mortgage
loans held for investment, subject to ABS nonrecourse
debt
Effective January 1, 2010, new accounting guidance
eliminated the concept of a QSPE and all existing securitization
trusts are considered VIEs and are now subject to new
consolidation guidance provided in ASC 810,
Consolidation. Upon consolidation of these VIEs, Nationstar
recognized the securitized mortgage loans related to these
securitization trusts as mortgage loans held for investment,
subject to ABS nonrecourse debt. Additionally, Nationstar
elected the fair value option provided for by
ASC 825-10,
Financial InstrumentsOverall.
Mortgage loans held for investment, subject to ABS nonrecourse
debt as of September 30, 2011 and December 31, 2010
includes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debtunpaid principal balance
|
|
|
$918,347
|
|
|
|
$983,106
|
|
Fair value adjustment
|
|
|
(440,599
|
)
|
|
|
(444,666
|
)
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt, net
|
|
|
$477,748
|
|
|
|
$538,440
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2011 and December 31, 2010,
respectively, approximately $216.4 million and
$223.5 million of the unpaid principal balance of mortgage
loans held for investment, subject to ABS
F-72
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
6.
|
Mortgage
Loans Held for Sale and Investment (continued)
|
nonrecourse debt were over 90 days past due. The fair value
of such loans was approximately $109.9 million and
$117.6 million, respectively.
|
|
7.
|
Mortgage
Servicing Rights (MSRs)
|
MSRs arise from contractual agreements between Nationstar and
investors in mortgage securities and mortgage loans. Nationstar
records MSR assets or liabilities when it sells loans on a
servicing-retained basis, at the time of securitization or
through the acquisition or assumption of the right to service a
financial asset. Under these contracts, Nationstar performs loan
servicing functions in exchange for fees and other remuneration.
Nationstar accounts for its forward MSRs at fair value in
accordance with
ASC 860-50,
Servicing Assets and Liabilities. Nationstar identifies
MSRs related to all existing forward residential mortgage loans
transferred to a third party in a transfer that meets the
requirements for sale accounting or through the acquisition of
the right to forward service residential mortgage loans that do
not relate to assets of Nationstar as a class of servicing
rights. Nationstar elected to apply fair value accounting to
these MSRs, with all changes in fair value recorded as a charge
to servicing fee income. As of September 30, 2011, this
class represents all of Nationstars MSRs.
Certain of the loans underlying the mortgage servicing rights
that are owned by Nationstar are credit sensitive in nature and
the value of these mortgage servicing rights is more likely to
be affected from changes in credit losses than from interest
rate movement. The remaining loans underlying Nationstars
MSRs are prime agency and government conforming residential
mortgage loans for which the value of these MSRs is more likely
to be affected from interest rate movement than changes in
credit losses.
In July 2011, Nationstar acquired interest sensitive MSRs
representing loans with unpaid principal balances of
approximately $3.6 billion from a financial institution for
approximately $33 million. These MSRs were boarded in
September 2011. In September 2011, Nationstar acquired credit
sensitive MSRs representing loans with unpaid principal balances
of $10.2 billion for approximately $72 million from a
financial institution. These MSRs will be boarded in the fourth
quarter of 2011.
Nationstar used the following weighted average assumptions in
estimating the fair value of MSRs for the dates indicated:
|
|
|
|
|
Credit Sensitive MSRs
|
|
September 30, 2011
|
|
December 31, 2010
|
|
Discount rate
|
|
25.64%
|
|
24.96%
|
Total prepayment speeds
|
|
15.20%
|
|
18.13%
|
Expected weighted-average life
|
|
5.37 years
|
|
4.90 years
|
Credit losses
|
|
36.38%
|
|
36.71%
|
|
|
|
|
|
Interest Rate Sensitive MSRs
|
|
September 30, 2011
|
|
December 31, 2010
|
|
Discount rate
|
|
10.49%
|
|
13.57%
|
Total prepayment speeds
|
|
16.99%
|
|
17.19%
|
Expected weighted-average life
|
|
4.96 years
|
|
5.12 years
|
Credit losses
|
|
9.23%
|
|
8.80%
|
F-73
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
7.
|
Mortgage
Servicing Rights (MSRs) (continued)
|
The activity of MSRs carried at fair value is as follows for the
nine month period ended September 30, 2011 and for the year
ended December 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Fair value at the beginning of the period
|
|
|
$145,062
|
|
|
|
$114,605
|
|
Additions:
|
|
|
|
|
|
|
|
|
Servicing resulting from transfers of financial assets
|
|
|
25,748
|
|
|
|
26,253
|
|
Recognition of servicing assets from derecognition of variable
interest entities
|
|
|
|
|
|
|
2,866
|
|
Purchases of servicing assets
|
|
|
106,863
|
|
|
|
17,812
|
|
Deductions:
|
|
|
|
|
|
|
|
|
Derecognition of servicing assets due to new accounting guidance
on consolidation of variable interest entities
|
|
|
|
|
|
|
(10,431
|
)
|
Changes in fair value:
|
|
|
|
|
|
|
|
|
Due to changes in valuation inputs or assumptions used in the
valuation model
|
|
|
(15,511
|
)
|
|
|
9,455
|
|
Other changes in fair value
|
|
|
(15,246
|
)
|
|
|
(15,498
|
)
|
|
|
|
|
|
|
|
|
|
Fair value at the end of the period
|
|
|
$246,916
|
|
|
|
$145,062
|
|
|
|
|
|
|
|
|
|
|
Unpaid principal balance of loans serviced for others
|
|
|
|
|
|
|
|
|
Originated or purchased mortgage loans
|
|
|
|
|
|
|
|
|
Credit sensitive loans
|
|
|
$32,803,236
|
|
|
|
$24,980,980
|
|
Interest sensitive loans
|
|
|
11,360,987
|
|
|
|
6,705,661
|
|
|
|
|
|
|
|
|
|
|
Total owned loans
|
|
|
44,164,223
|
|
|
|
31,686,641
|
|
Subserviced for others
|
|
|
56,757,975
|
|
|
|
30,649,472
|
|
|
|
|
|
|
|
|
|
|
Total unpaid principal balance of loans serviced for others
|
|
|
$100,922,198
|
|
|
|
$62,336,113
|
|
|
|
|
|
|
|
|
|
|
The following table shows the hypothetical effect on the fair
value of the MSRs using various unfavorable variations of the
expected levels of certain key assumptions used in valuing these
assets at September 30, 2011 and December 31, 2010 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Prepayment
|
|
|
|
|
|
|
Discount Rate
|
|
|
Speeds
|
|
|
Credit Losses
|
|
|
|
100 bps
|
|
|
200 bps
|
|
|
10%
|
|
|
20%
|
|
|
10%
|
|
|
20%
|
|
|
|
Adverse
|
|
|
Adverse
|
|
|
Adverse
|
|
|
Adverse
|
|
|
Adverse
|
|
|
Adverse
|
|
|
|
Change
|
|
|
Change
|
|
|
Change
|
|
|
Change
|
|
|
Change
|
|
|
Change
|
|
|
SEPTEMBER 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights
|
|
|
$(6,583
|
)
|
|
|
$(12,812
|
)
|
|
|
$(14,024
|
)
|
|
|
$(26,675
|
)
|
|
|
$(4,923
|
)
|
|
|
$(10,556
|
)
|
DECEMBER 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights
|
|
|
$(3,828
|
)
|
|
|
$(7,458
|
)
|
|
|
$(8,175
|
)
|
|
|
$(16,042
|
)
|
|
|
$(4,310
|
)
|
|
|
$(9,326
|
)
|
These sensitivities are hypothetical and should be evaluated
with care. The effect on fair value of a 10% variation in
assumptions generally cannot be determined because the
relationship of the change in assumptions to the fair value may
not be linear. Additionally, the impact of a variation in a
particular assumption on the fair value is calculated while
holding other assumptions constant. In reality, changes in one
F-74
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
7.
|
Mortgage
Servicing Rights (MSRs) (continued)
|
factor may lead to changes in other factors (e.g., a decrease in
total prepayment speeds may result in an increase in credit
losses), which could impact the above hypothetical effects.
Total servicing and ancillary fees from Nationstars
servicing portfolio of residential mortgage loans are presented
in the following table for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
Servicing fees
|
|
|
$133,338
|
|
|
|
$69,717
|
|
Ancillary fees
|
|
|
62,848
|
|
|
|
51,494
|
|
|
|
|
|
|
|
|
|
|
Total servicing and ancillary fees
|
|
|
$196,186
|
|
|
|
$121,211
|
|
|
|
|
|
|
|
|
|
|
Other assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Derivative financial instruments
|
|
|
$16,272
|
|
|
|
$8,666
|
|
Deferred financing costs
|
|
|
10,425
|
|
|
|
14,396
|
|
Equity method investment
|
|
|
5,629
|
|
|
|
|
|
Margin call deposits
|
|
|
5,240
|
|
|
|
|
|
Prepaid expenses
|
|
|
4,658
|
|
|
|
3,379
|
|
Unsecured loans
|
|
|
1,843
|
|
|
|
2,064
|
|
Other
|
|
|
728
|
|
|
|
890
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
$44,795
|
|
|
|
$29,395
|
|
|
|
|
|
|
|
|
|
|
In March 2011, Nationstar acquired a 22% interest in ANC
Acquisition LLC (ANC) for $6.6 million. ANC is the parent
company of National Real Estate Information Services, LP (NREIS)
a real estate services company. As Nationstar is able to
exercise significant influence, but not control, over the
policies and procedures of the entity, and Nationstar owns less
than 50% of the voting interests, Nationstar applies the equity
method of accounting.
NREIS, an ancillary real estate services and vendor management
company, offers comprehensive settlement and property valuation
services for both origination and default management channels.
Direct or indirect product offerings include title insurance
agency, tax searches, flood certification, default valuations,
full appraisals and broker price opinions.
F-75
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
8.
|
Other
Assets (continued)
|
A summary of the assets, liabilities, and operations of ANC as
of September 30, 2011 are presented in the following tables
(in thousands):
|
|
|
|
|
|
|
September 30, 2011
|
|
|
ASSETS
|
|
|
|
|
Cash
|
|
|
$1,219
|
|
Accounts receivable
|
|
|
6,239
|
|
Receivables from affiliates
|
|
|
228
|
|
Equity method investments
|
|
|
18,752
|
|
Property and equipment, net
|
|
|
1,775
|
|
Goodwill and other intangible assets
|
|
|
18,442
|
|
Other assets
|
|
|
952
|
|
|
|
|
|
|
Total Assets
|
|
|
$47,607
|
|
|
|
|
|
|
LIABILITIES
|
Notes payable
|
|
|
$4,741
|
|
Payables and accrued liabilities
|
|
|
18,789
|
|
|
|
|
|
|
Total Liabilities
|
|
|
$23,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Acquisition
|
|
|
|
through
|
|
|
|
September 30, 2011
|
|
|
REVENUES
|
|
|
|
|
Sales
|
|
|
$25,382
|
|
Cost of sales
|
|
|
(21,593
|
)
|
|
|
|
|
|
Net sales revenues
|
|
|
3,789
|
|
OTHER INCOME/(EXPENSE)
|
|
|
|
|
Operating costs
|
|
|
(9,004
|
)
|
Income from equity method investments
|
|
|
1,176
|
|
Depreciation and amortization
|
|
|
(359
|
)
|
Other income / (expenses)
|
|
|
39
|
|
Loss from discontinued operations
|
|
|
(54
|
)
|
|
|
|
|
|
Total Other income/(expense)
|
|
|
(8,202
|
)
|
|
|
|
|
|
Net loss
|
|
|
$(4,413
|
)
|
|
|
|
|
|
Nationstar recorded a net charge to earnings of $971 thousand
for the nine months ended September 30, 2011, related to
loss on equity method investments, which is included as a
component of other fee income in Nationstars consolidated
statement of operations.
F-76
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
9.
|
Derivative
Financial Instruments
|
On October 1, 2010, the Company designated an existing
interest rate swap as a cash flow hedge against outstanding
floating rate financing associated with the Nationstar Mortgage
Advance Receivables
2009-ADV1
Trust. Under the swap agreement, the Company receives interest
equivalent to one month LIBOR and pays a fixed rate of 2.0425%
based on an amortizing notional of $322.0 million as of
September 30, 2011, with settlements occurring monthly
until November 2013. This interest rate swap is a cash flow
hedge under ASC 815, Derivatives and Hedging, and is
recorded at fair value on the Companys consolidated
balance sheet, with any changes in fair value being recorded as
an adjustment to other comprehensive income. To qualify as a
cash flow hedge, the hedge must be highly effective at reducing
the risk associated with the exposure being hedged and must be
formally designated at hedge inception. Nationstar considers a
hedge to be highly effective if the change in fair value of the
derivative hedging instrument is within 80% to 125% of the
opposite change in the fair value of the hedged item
attributable to the hedged risk. Ineffective portions of the
cash flow hedge are reflected in earnings as they occur as a
component of interest expense.
THE
EFFECT OF DERIVATIVE INSTRUMENTS ON THE STATEMENT OF
OPERATIONS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized
|
|
|
|
|
|
|
|
|
|
Location of
|
|
|
Amount of
|
|
|
in Income on
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
Gain (Loss)
|
|
|
Derivative
|
|
|
Amount of
|
|
|
|
Amount of
|
|
|
Reclassified
|
|
|
Reclassified
|
|
|
(Ineffective
|
|
|
Gain (Loss)
|
|
Derivatives in
|
|
Gain (Loss)
|
|
|
from
|
|
|
from
|
|
|
Portion and
|
|
|
Recognized
|
|
ASC815
|
|
Recognized
|
|
|
Accumulated
|
|
|
Accumulated
|
|
|
Amount
|
|
|
in Income on
|
|
Cash Flow
|
|
in OCI on
|
|
|
OCI into
|
|
|
OCI into
|
|
|
Excluded from
|
|
|
Derivative
|
|
Hedging
|
|
Derivative
|
|
|
Income
|
|
|
Income
|
|
|
Effectiveness
|
|
|
(Ineffective
|
|
Relationships
|
|
(Effective Portion)
|
|
|
(Effective Portion)
|
|
|
(Effective Portion)
|
|
|
Testing)
|
|
|
Portion)
|
|
|
For the Nine Months Ended September 30,
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap
|
|
|
$(1,071
|
)
|
|
|
Interest Expense
|
|
|
|
$582
|
|
|
|
Interest Expense
|
|
|
|
$2,032
|
|
For the Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap
|
|
|
$1,071
|
|
|
|
Interest Expense
|
|
|
|
$
|
|
|
|
Interest Expense
|
|
|
|
$930
|
|
F-77
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
9.
|
Derivative
Financial Instruments (continued)
|
The following tables provide the outstanding notional balances
and fair values of outstanding positions for the dates
indicated, and recorded gains (losses) during the periods
indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
|
Expiration
|
|
|
Outstanding
|
|
|
|
|
|
Gains /
|
|
|
|
Dates
|
|
|
Notional
|
|
|
Fair Value
|
|
|
(Losses)
|
|
|
NINE MONTHS ENDED SEPTEMBER 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MORTGAGE LOANS HELD FOR SALE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan sale commitments
|
|
|
2011
|
|
|
|
$28,305
|
|
|
|
$920
|
|
|
|
$878
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
|
|
2011
|
|
|
|
966,232
|
|
|
|
16,272
|
|
|
|
11,569
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps and caps
|
|
|
2011-2013
|
|
|
|
350,000
|
|
|
|
6,839
|
|
|
|
2,032
|
|
Forward MBS trades
|
|
|
2011
|
|
|
|
789,944
|
|
|
|
8,939
|
|
|
|
(12,902
|
)
|
Interest rate swap, subject to ABS nonrecourse debt
|
|
|
2013
|
|
|
|
190,969
|
|
|
|
11,889
|
|
|
|
6,892
|
|
YEAR ENDED DECEMBER 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MORTGAGE LOANS HELD FOR SALE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan sale commitments
|
|
|
2011
|
|
|
|
$28,641
|
|
|
|
$42
|
|
|
|
$(1,397
|
)
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
|
|
2011
|
|
|
|
391,990
|
|
|
|
4,703
|
|
|
|
2,289
|
|
Forward MBS trades
|
|
|
2011
|
|
|
|
546,500
|
|
|
|
3,963
|
|
|
|
580
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps and caps
|
|
|
2011-2013
|
|
|
|
429,000
|
|
|
|
7,801
|
|
|
|
8,872
|
|
Interest rate swap, subject to ABS nonrecourse debt
|
|
|
2013
|
|
|
|
245,119
|
|
|
|
18,781
|
|
|
|
2,049
|
|
F-78
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Notes
Payable
A summary of the balances of notes payable for the dates
indicated is presented below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
Collateral
|
|
|
|
|
|
Collateral
|
|
|
|
Outstanding
|
|
|
Pledged
|
|
|
Outstanding
|
|
|
Pledged
|
|
|
Financial institutions repurchase facility (2011)
|
|
|
$10,587
|
|
|
|
$11,140
|
|
|
|
$
|
|
|
|
$
|
|
Financial institutions repurchase facility (2010)
|
|
|
41,801
|
|
|
|
44,923
|
|
|
|
43,059
|
|
|
|
45,429
|
|
Financial services company repurchase facility
|
|
|
259,593
|
|
|
|
274,684
|
|
|
|
209,477
|
|
|
|
223,119
|
|
Financial institutions repurchase facility (2009)
|
|
|
22,328
|
|
|
|
23,258
|
|
|
|
39,014
|
|
|
|
40,640
|
|
Financial services company
2009-ADV1
advance facility
|
|
|
203,596
|
|
|
|
250,381
|
|
|
|
236,808
|
|
|
|
285,226
|
|
Financial institutions
2010-ADV1
advance facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial institutions MSR Facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GSE MSR facility
|
|
|
11,568
|
|
|
|
16,930
|
|
|
|
15,733
|
|
|
|
18,951
|
|
GSE ASAP+ facility
|
|
|
13,577
|
|
|
|
13,468
|
|
|
|
51,105
|
|
|
|
53,230
|
|
GSE EAF facility
|
|
|
175,733
|
|
|
|
179,442
|
|
|
|
114,562
|
|
|
|
142,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
|
$738,783
|
|
|
|
$814,226
|
|
|
|
$709,758
|
|
|
|
$808,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In March 2011, Nationstar executed a Master Repurchase Agreement
(MRA) with a financial institution, under which Nationstar may
enter into transactions, for an aggregate amount of
$50 million, in which Nationstar agrees to transfer to the
same financial institution certain mortgage loans and certain
securities against the transfer of funds by the same financial
institution, with a simultaneous agreement by the same financial
institution to transfer such mortgage loans and securities to
Nationstar at a date certain, or on demand by Nationstar,
against the transfer of funds from Nationstar. The interest rate
is based on LIBOR plus a spread of 1.45% to 3.95%, which varies
based on the underlying transferred collateral. The maturity
date of this MRA is March 2012.
In February 2010, Nationstar executed a MRA with a financial
institution, which was set to expire in October 2011, but was
extended through January 2012. The MRA states that from time to
time Nationstar may enter into transactions, for an aggregate
amount of $75 million, in which Nationstar agrees to
transfer to the same financial institution certain mortgage
loans against the transfer of funds by the same financial
institution, with a simultaneous agreement by the same financial
institution to transfer such mortgage loans to Nationstar at a
date certain, or on demand by Nationstar, against the transfer
of funds from Nationstar. The interest rate is based on LIBOR
plus a spread ranging from 2.75% to 3.50%.
Nationstar has a MRA with a financial services company, which
expires in February 2012. The MRA states that from time to time
Nationstar may enter into transactions, for an aggregate amount
of $300 million, in which Nationstar agrees to transfer to
the financial services company certain mortgage loans or
mortgage-backed securities against the transfer of funds by the
financial services company, with a simultaneous agreement by the
financial services company to transfer such mortgage loans or
mortgage-backed securities to Nationstar at a certain date, or
on demand by Nationstar, against the transfer of funds from
Nationstar. The interest rate is based on LIBOR plus a margin of
3.25%.
F-79
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
10.
|
Indebtedness
(continued)
|
In October 2009, Nationstar executed a MRA with a financial
institution. This MRA states that from time to time Nationstar
may enter into transactions, for an aggregate amount of
$100 million, in which Nationstar agrees to transfer to the
financial institution certain mortgage loans against the
transfer of funds by the financial institution, with a
simultaneous agreement by the financial institution to transfer
such mortgage loans to Nationstar at a certain date, or on
demand by Nationstar, against the transfer of funds from
Nationstar. The interest rate is based on LIBOR plus a spread of
3.50%. The maturity date of this MRA with the financial
institution is December 2011.
Nationstar maintains a facility with a financial services
company, the
2009-ADV1
Advance Facility. This facility has the capacity to purchase up
to $350 million of advance receivables. The interest rate
is based on LIBOR plus a spread ranging from 3.00% to 12.00%.
The maturity date of this facility with the financial services
company is December 2011. This debt is nonrecourse to Nationstar.
In December 2010, Nationstar executed the
2010-ADV1
Advance Facility with a financial institution. This facility has
the capacity to purchase up to $300 million of advance
receivables. The interest rate is based on LIBOR plus a spread
of 3.00%. This facility was amended in October 2011, and matures
in May 2014. This debt is nonrecourse to Nationstar.
In connection with the September 2011 MSR acquisition,
Nationstar executed a MSR Facility with a financial institution.
This facility has the capacity to borrow up to
$37.5 million and the interest rate is based on LIBOR plus
a spread of 3.50%. The maturity date of this facility is
September 2016. As collateral for this note, Nationstar has
pledged Nationstars rights, title, and interest in the
acquired servicing portfolio.
In connection with the October 2009 MSR acquisition, Nationstar
executed a four-year note agreement with a government-sponsored
enterprise (GSE). As collateral for this note, Nationstar has
pledged Nationstars rights, title, and interest in the
acquired servicing portfolio. The interest rate is based on
LIBOR plus 2.50%. The maturity date of this facility is October
2013.
During 2009, Nationstar began executing As Soon As Pooled Plus
agreements with a GSE, under which Nationstar transfers to the
GSE eligible mortgage loans that are to be pooled into the GSE
MBS against the transfer of funds by the GSE. The interest rate
is based on LIBOR plus a spread of 1.50%. These agreements
typically have a maturity of up to 45 days.
In September 2009, Nationstar executed a one-year committed
facility agreement with a GSE, under which Nationstar agrees to
transfer to the GSE certain servicing advance receivables
against the transfer of funds by the GSE. This facility has the
capacity to purchase up to $275 million in eligible
servicing advance receivables. The interest rate is based on
LIBOR plus a spread of 2.50%. The maturity date of this facility
is December 2011.
Senior
Unsecured Notes
In March 2010, Nationstar completed the offering of
$250 million of unsecured senior notes, which were issued
with an issue discount of $7.0 million for net cash
proceeds of $243.0 million, with a maturity date of April
2015. These unsecured senior notes pay interest biannually at an
interest rate of 10.875%. In September 2011, Nationstar
completed an exchange offer of the $250.0 million in
10.875% senior unsecured notes for new notes that have been
registered under the Securities Act of 1933. The exchange notes
are identical in all material respects to the privately issued
notes, except for the transfer restrictions and registrations
rights that do not apply to the exchanged notes, and different
administrative terms.
F-80
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
10.
|
Indebtedness
(continued)
|
The indenture for the unsecured senior notes contains various
covenants and restrictions that limit Nationstars, or
certain of its subsidiaries, ability to incur additional
indebtedness, pay dividends, make certain investments, create
liens, consolidate, merge or sell substantially all of their
assets, or enter into certain transactions with affiliates.
Nonrecourse
DebtLegacy Assets
In November 2009, Nationstar completed the securitization of
approximately $222 million of asset-backed securities,
which was structured as a secured borrowing. This structure
resulted in Nationstar carrying the securitized loans as
mortgages on Nationstars consolidated balance sheet and
recognizing the asset-backed certificates acquired by third
parties as nonrecourse debt, totaling approximately
$116.2 million and $138.7 million at
September 30, 2011 and December 31, 2010,
respectively. The principal and interest on these notes are paid
using the cash flows from the underlying mortgage loans, which
serve as collateral for the debt. The interest rate paid on the
outstanding securities is 7.50%, which is subject to an
available funds cap. The total outstanding principal balance on
the underlying mortgage loans serving as collateral for the debt
was approximately $380.2 million and $430.0 million at
September 30, 2011 and December 31, 2010,
respectively. Accordingly, the timing of the principal payments
on this nonrecourse debt is dependent on the payments received
on the underlying mortgage loans. The unpaid principal balance
on the outstanding notes was $135.1 million and
$161.2 million at September 30, 2011 and
December 31, 2010, respectively.
ABS
Nonrecourse Debt
Effective January 1, 2010, new accounting guidance
eliminated the concept of a QSPE, and all existing
securitization trusts are considered VIEs and are now subject to
new consolidation guidance provided in ASC 810,
Consolidation. Upon consolidation of these VIEs,
Nationstar derecognized all previously recognized beneficial
interests obtained as part of the securitization. In addition,
Nationstar recognized the securitized mortgage loans as mortgage
loans held for investment, subject to ABS nonrecourse debt, and
the related asset-backed certificates acquired by third parties
as ABS nonrecourse debt on Nationstars consolidated
balance sheet. Additionally, Nationstar elected the fair value
option provided for by
ASC 825-10,
Financial InstrumentsOverall. The principal and
interest on these notes are paid using the cash flows from the
underlying mortgage loans, which serve as collateral for the
debt. The interest rate paid on the outstanding securities is
based on LIBOR plus a spread ranging from 0.13% to 2.00%, which
is subject to an interest rate cap. The total outstanding
principal balance on the underlying mortgage loans and real
estate owned serving as collateral for the debt was
approximately $937.7 million and $1,025.3 million at
September 30, 2011 and December 31, 2010,
respectively. The timing of the principal payments on this ABS
nonrecourse debt is dependent on the payments received on the
underlying mortgage loans. The outstanding principal balance on
the outstanding notes related to these consolidated
securitization trusts was $945.1 million and
$1,037.9 million at September 30, 2011 and
December 31, 2010, respectively.
Financial
Covenants
As of September 30, 2011, Nationstar was in compliance with
its covenants on Nationstars borrowing arrangements and
credit facilities. These covenants generally relate to
Nationstars tangible net worth, liquidity reserves, and
leverage requirements.
F-81
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
11.
|
General
and Administrative
|
General and administrative expense consists of the following for
the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
Depreciation and amortization
|
|
|
$2,551
|
|
|
|
$1,450
|
|
Advertising
|
|
|
3,457
|
|
|
|
3,602
|
|
Equipment
|
|
|
3,246
|
|
|
|
2,726
|
|
Servicing
|
|
|
14,313
|
|
|
|
4,230
|
|
Telecommunications
|
|
|
2,746
|
|
|
|
1,742
|
|
Legal and professional fees
|
|
|
12,956
|
|
|
|
9,661
|
|
Postage
|
|
|
3,937
|
|
|
|
2,904
|
|
Stationary and supplies
|
|
|
2,896
|
|
|
|
1,802
|
|
Travel
|
|
|
2,383
|
|
|
|
1,499
|
|
Insurance, Taxes, and Other
|
|
|
8,222
|
|
|
|
5,315
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expense
|
|
|
$56,707
|
|
|
|
$34,931
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
Fair
Value Measurements
|
ASC 820, Fair Value Measurements and Disclosures,
provides a definition of fair value, establishes a framework for
measuring fair value, and requires expanded disclosures about
fair value measurements. The standard applies when GAAP requires
or allows assets or liabilities to be measured at fair value
and, therefore, does not expand the use of fair value in any new
circumstance.
ASC 820 emphasizes that fair value is a market-based
measurement, not an entity-specific measurement. Therefore, a
fair value measurement should be determined based on the
assumptions that market participants would use in pricing the
asset or liability. As a basis for considering market
participant assumptions in fair value measurements, ASC 820
establishes a three-tiered fair value hierarchy based on the
level of observable inputs used in the measurement of fair value
(e.g., Level 1 representing quoted prices for identical
assets or liabilities in an active market; Level 2
representing values using observable inputs other than quoted
prices included within Level 1; and Level 3
representing estimated values based on significant unobservable
inputs). In addition, ASC 820 requires an entity to
consider all aspects of nonperformance risk, including its own
credit standing, when measuring the fair value of a liability.
Under ASC 820, related disclosures are segregated for
assets and liabilities measured at fair value based on the level
used within the hierarchy to determine their fair values.
The following describes the methods and assumptions used by
Nationstar in estimating fair values:
Cash and Cash Equivalents, Restricted Cash, Notes
PayableThe carrying amount reported in the
consolidated balance sheets approximates fair value.
Mortgage Loans Held for SaleNationstar originates
mortgage loans in the U.S. that it intends to sell to
Fannie Mae, Freddie Mac, and Ginnie Mae (collectively, the
Agencies). Additionally, Nationstar holds mortgage loans that it
intends to sell into the secondary markets via whole loan sales
or securitizations. Nationstar measures newly originated prime
residential mortgage loans held for sale at fair value.
F-82
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
12.
|
Fair
Value Measurements (continued)
|
Mortgage loans held for sale are typically pooled together and
sold into certain exit markets, depending upon underlying
attributes of the loan, such as agency eligibility, product
type, interest rate, and credit quality.
Mortgage loans held for sale are valued using a market approach
by utilizing either: (i) the fair value of securities
backed by similar mortgage loans, adjusted for certain factors
to approximate the fair value of a whole mortgage loan,
including the value attributable to mortgage servicing and
credit risk, (ii) current commitments to purchase loans or
(iii) recent observable market trades for similar loans,
adjusted for credit risk and other individual loan
characteristics. As these prices are derived from quoted market
prices, Nationstar classifies these valuations as Level 2
in the fair value disclosures.
Mortgage Loans Held for Investment, subject to nonrecourse
debtLegacy AssetsNationstar determines the fair
value of loans held for investment, subject to nonrecourse
debtLegacy Assets using internally developed valuation
models. These valuation models estimate the exit price
Nationstar expects to receive in the loans principal
market. Although Nationstar utilizes and gives priority to
observable market inputs such as interest rates and market
spreads within these models, Nationstar typically is required to
utilize internal inputs, such as prepayment speeds, credit
losses, and discount rates. These internal inputs require the
use of judgment by Nationstar and can have a significant impact
on the determination of the loans fair value.
Mortgage Loans Held for Investment, subject to ABS
nonrecourse debtNationstar determines the fair value
of loans held for investment, subject to ABS nonrecourse debt
using internally developed valuation models. These valuation
models estimate the exit price Nationstar expects to receive in
the loans principal market. Although Nationstar utilizes
and gives priority to observable market inputs such as interest
rates and market spreads within these models, Nationstar
typically is required to utilize internal inputs, such as
prepayment speeds, credit losses, and discount rates. These
internal inputs require the use of judgment by Nationstar and
can have a significant impact on the determination of the
loans fair value. As these prices are derived from a
combination of internally developed valuation models and quoted
market prices, Nationstar classifies these valuations as
Level 3 in the fair value disclosures.
Mortgage Servicing RightsNationstar will typically
retain the servicing rights when it sells loans into the
secondary market. Nationstar estimates the fair value of its
MSRs using a process that combines the use of a discounted cash
flow model and analysis of current market data to arrive at an
estimate of fair value. The cash flow assumptions and prepayment
assumptions used in the model are based on various factors, with
the key assumptions being mortgage prepayment speeds and
discount rates. These assumptions are generated and applied
based on collateral stratifications including product type,
remittance type, geography, delinquency and coupon dispersion.
These assumptions require the use of judgment by Nationstar and
can have a significant impact on the determination of the
MSRs fair value. Periodically, management obtains
third-party valuations of a portion of the portfolio to assess
the reasonableness of the fair value calculations provided by
the cash flow model. Because of the nature of the valuation
inputs, Nationstar classifies these valuations as Level 3
in the fair value disclosures.
Real Estate OwnedNationstar determines the fair
value of real estate owned properties through the use of
third-party appraisals and broker price opinions, adjusted for
estimated selling costs. Such estimated selling costs include
realtor fees and other anticipated closing costs. These values
are adjusted to take into account factors that could cause the
actual liquidation value of foreclosed properties to be
different than the appraised values. This valuation adjustment
is based upon Nationstars historical experience with real
estate owned. Real estate owned is classified as Level 3 in
the fair value disclosures.
F-83
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
12.
|
Fair
Value Measurements (continued)
|
Derivative InstrumentsNationstar enters into a
variety of derivative financial instruments as part of its
hedging strategy. The majority of these derivatives are
exchange-traded or traded within highly active dealer markets.
In order to determine the fair value of these instruments,
Nationstar utilizes the exchange price or dealer market price
for the particular derivative contract; therefore, these
contracts are classified as Level 2. In addition,
Nationstar enters into IRLCs with prospective borrowers. These
commitments are carried at fair value based on fair value of
related mortgage loans which is based on observable market data.
Nationstar adjusts the outstanding IRLCs with prospective
borrowers based on an expectation that it will be exercised and
the loan will be funded. IRLCs are recorded in other assets in
the consolidated balance sheets. These IRLCs are classified as
Level 2 in the fair value disclosures.
Unsecured Senior NotesThe fair value of unsecured
senior notes is based on quoted market prices.
Nonrecourse DebtLegacy AssetsNationstar
estimates fair value based on the present value of future
expected discounted cash flows with the discount rate
approximating current market value for similar financial
instruments. These prices are derived from a combination of
internally developed valuation models and quoted market prices.
ABS Nonrecourse DebtNationstar estimates fair value
based on the present value of future expected discounted cash
flows with the discount rate approximating current market value
for similar financial instruments. As these prices are derived
from a combination of internally developed valuation models and
quoted market prices, Nationstar classifies these valuations as
Level 3 in the fair value disclosures.
The estimated carrying amount and fair value of
Nationstars financial instruments and other assets and
liabilities measured at fair value on a recurring basis is as
follows for the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
|
|
|
|
|
Recurring Fair Value Measurements
|
|
|
|
Total Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale(1)
|
|
|
$377,932
|
|
|
|
$
|
|
|
|
$377,932
|
|
|
|
$
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt(1)
|
|
|
477,748
|
|
|
|
|
|
|
|
|
|
|
|
477,748
|
|
Mortgage servicing rights(1)
|
|
|
246,916
|
|
|
|
|
|
|
|
|
|
|
|
246,916
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Lock Commitments (IRLC)
|
|
|
16,272
|
|
|
|
|
|
|
|
16,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$1,118,868
|
|
|
|
$
|
|
|
|
$394,204
|
|
|
|
$724,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps and caps
|
|
|
$6,839
|
|
|
|
$
|
|
|
|
$6,839
|
|
|
|
$
|
|
Forward MBS trades
|
|
|
8,939
|
|
|
|
|
|
|
|
8,939
|
|
|
|
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
11,889
|
|
|
|
|
|
|
|
11,889
|
|
|
|
|
|
ABS nonrecourse debt(1)
|
|
|
434,326
|
|
|
|
|
|
|
|
|
|
|
|
434,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
$461,993
|
|
|
|
$
|
|
|
|
$27,667
|
|
|
|
$434,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on the nature and risks of these assets and liabilities,
the Company has determined that presenting them as a single
class is appropriate. |
F-84
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
12.
|
Fair
Value Measurements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
Recurring Fair Value Measurements
|
|
|
|
Total Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for sale(1)
|
|
|
$369,617
|
|
|
|
$
|
|
|
|
$369,617
|
|
|
|
$
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt(1)
|
|
|
538,440
|
|
|
|
|
|
|
|
|
|
|
|
538,440
|
|
Mortgage servicing rights(1)
|
|
|
145,062
|
|
|
|
|
|
|
|
|
|
|
|
145,062
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs
|
|
|
4,703
|
|
|
|
|
|
|
|
4,703
|
|
|
|
|
|
Forward MBS trades
|
|
|
3,963
|
|
|
|
|
|
|
|
3,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$1,061,785
|
|
|
|
$
|
|
|
|
$378,283
|
|
|
|
$683,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps and caps
|
|
|
$7,801
|
|
|
|
$
|
|
|
|
$7,801
|
|
|
|
$
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
18,781
|
|
|
|
|
|
|
|
18,781
|
|
|
|
|
|
ABS nonrecourse debt(1)
|
|
|
496,692
|
|
|
|
|
|
|
|
|
|
|
|
496,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
$523,274
|
|
|
|
$
|
|
|
|
$26,582
|
|
|
|
$496,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on the nature and risks of these assets and liabilities,
the Company has determined that presenting them as a single
class is appropriate. |
The table below presents a reconciliation for all of
Nationstars Level 3 assets and liabilities measured
at fair value on a recurring basis for the dates indicated (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
LIABILITIES
|
|
|
|
Mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
held for investment,
|
|
|
|
|
|
|
|
|
|
|
|
|
subject to ABS
|
|
|
Mortgage
|
|
|
|
|
|
ABS non-
|
|
|
|
nonrecourse debt
|
|
|
servicing rights
|
|
|
Total assets
|
|
|
recourse debt
|
|
|
NINE MONTHS ENDED SEPTEMBER 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
$ 538,440
|
|
|
|
$ 145,062
|
|
|
|
$ 683,502
|
|
|
|
$ 496,692
|
|
Transfers into Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers out of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
9,062
|
|
|
|
(30,757
|
)
|
|
|
(21,695
|
)
|
|
|
15,778
|
|
Included in other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances, sales and settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
|
|
|
|
106,863
|
|
|
|
106,863
|
|
|
|
|
|
Issuances
|
|
|
|
|
|
|
25,748
|
|
|
|
25,748
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlements
|
|
|
(69,754
|
)
|
|
|
|
|
|
|
(69,754
|
)
|
|
|
(78,144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
$477,748
|
|
|
|
$246,916
|
|
|
|
$724,664
|
|
|
|
$434,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-85
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
12.
|
Fair
Value Measurements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
LIABILITIES
|
|
|
|
Mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
held for investment,
|
|
|
|
|
|
|
|
|
|
|
|
|
subject to ABS
|
|
|
Mortgage
|
|
|
|
|
|
ABS non-
|
|
|
|
nonrecourse debt
|
|
|
servicing rights
|
|
|
Total assets
|
|
|
recourse debt
|
|
|
YEAR ENDED DECEMBER 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance(1)
|
|
|
$928,891
|
|
|
|
$104,174
|
|
|
|
$1,033,065
|
|
|
|
$884,846
|
|
Transfers into Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers out of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
71,239
|
|
|
|
(6,043
|
)
|
|
|
65,196
|
|
|
|
16,938
|
|
Included in other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances, sales and settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
|
|
|
|
17,812
|
|
|
|
17,812
|
|
|
|
|
|
Issuances
|
|
|
|
|
|
|
26,253
|
|
|
|
26,253
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlements
|
|
|
(461,690
|
)
|
|
|
2,866
|
|
|
|
(458,824
|
)
|
|
|
(405,092
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
$538,440
|
|
|
|
$145,062
|
|
|
|
$683,502
|
|
|
|
$496,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts include derecognition of previously retained beneficial
interests and mortgage servicing rights upon adoption of
ASC 810, Consolidation, related to consolidation of
certain VIEs. |
The table below presents the items which Nationstar measures at
fair value on a nonrecurring basis (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Total Gains
|
|
|
|
Nonrecurring Fair Value Measurements
|
|
|
Estimated
|
|
|
(Losses) Included
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
in Earnings
|
|
|
Nine Months Ended September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate owned(1)
|
|
|
$
|
|
|
|
$
|
|
|
|
$15,411
|
|
|
|
$15,411
|
|
|
|
$(6,904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$
|
|
|
|
$
|
|
|
|
$15,411
|
|
|
|
$15,411
|
|
|
|
$(6,904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate owned(1)
|
|
|
$
|
|
|
|
$
|
|
|
|
$27,337
|
|
|
|
$27,337
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$
|
|
|
|
$
|
|
|
|
$27,337
|
|
|
|
$27,337
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on the nature and risks of these assets and liabilities,
the Company has determined that presenting them as a single
class is appropriate. |
F-86
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
12.
|
Fair
Value Measurements (continued)
|
The table below presents a summary of the estimated carrying
amount and fair value of Nationstars financial instruments
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
Fair
|
|
|
|
Carrying Amount
|
|
|
Value
|
|
|
Carrying Amount
|
|
|
Value
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
$24,005
|
|
|
|
$24,005
|
|
|
|
$21,223
|
|
|
|
$21,223
|
|
Restricted cash
|
|
|
72,813
|
|
|
|
72,813
|
|
|
|
91,125
|
|
|
|
91,125
|
|
Mortgage loans held for sale
|
|
|
377,932
|
|
|
|
377,932
|
|
|
|
369,617
|
|
|
|
369,617
|
|
Mortgage loans held for investment, subject to nonrecourse
debtLegacy assets
|
|
|
246,159
|
|
|
|
229,050
|
|
|
|
266,320
|
|
|
|
238,515
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt
|
|
|
477,748
|
|
|
|
477,748
|
|
|
|
538,440
|
|
|
|
538,440
|
|
Derivative instruments
|
|
|
16,272
|
|
|
|
16,272
|
|
|
|
8,666
|
|
|
|
8,666
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
738,783
|
|
|
|
738,783
|
|
|
|
709,758
|
|
|
|
709,758
|
|
Unsecured senior notes
|
|
|
245,109
|
|
|
|
251,250
|
|
|
|
244,061
|
|
|
|
244,375
|
|
Derivative financial instruments
|
|
|
15,778
|
|
|
|
15,778
|
|
|
|
7,801
|
|
|
|
7,801
|
|
Derivative instruments, subject to ABS nonrecourse debt
|
|
|
11,889
|
|
|
|
11,889
|
|
|
|
18,781
|
|
|
|
18,781
|
|
Nonrecourse debtLegacy assets
|
|
|
116,200
|
|
|
|
118,038
|
|
|
|
138,662
|
|
|
|
140,197
|
|
ABS nonrecourse debt
|
|
|
434,326
|
|
|
|
434,326
|
|
|
|
496,692
|
|
|
|
496,692
|
|
Subsequent to September 30, 2011, Nationstar expects to
recognize $1.6 million of compensation expense related to
share-based compensation over the final three months of 2011,
and $3.2 million of compensation expense in the first six
months of 2012.
Total share-based compensation expense, net of forfeitures,
recognized for the nine months ended, September 30, 2011
and 2010, is provided in the table below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
Share-based compensation
|
|
|
$12,201
|
|
|
|
$7,459
|
|
|
|
|
|
|
|
|
|
|
Certain of Nationstars secondary market investors require
various capital adequacy requirements, as specified in the
respective selling and servicing agreements. To the extent that
these mandatory, imposed capital requirements are not met,
Nationstars secondary market investors may ultimately
terminate Nationstars selling and servicing agreements,
which would prohibit Nationstar from further originating or
securitizing these specific types of mortgage loans. In
addition, these secondary market investors may impose additional
net worth or financial condition requirements based on an
assessment of market conditions or other relevant factors.
F-87
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
14.
|
Capital
Requirements (continued)
|
Among Nationstars various capital requirements related to
its outstanding selling and servicing agreements, the most
restrictive of these requires Nationstar to maintain a minimum
adjusted net worth balance of $137.7 million. As of
September 30, 2011, Nationstar was in compliance with all
of its selling and servicing capital requirements.
Additionally, Nationstar is required to maintain a minimum
tangible net worth of at least $175 million as of each
quarter-end related to its outstanding Master Repurchase
Agreements on its outstanding repurchase facilities. As of
September 30, 2011, Nationstar was in compliance with these
minimum tangible net worth requirements.
|
|
15.
|
Commitments
and Contingencies
|
In the normal course of business, Nationstar and its
subsidiaries have been named, from time to time, as a defendant
in various legal actions, including class actions and other
litigation, arising in connection with its activities as a
national mortgage lender and servicer. Certain of the actual or
threatened legal actions include claims for substantial
compensatory, punitive and/or, statutory damages or claims for
an indeterminate amount of damages.
The Company can be or is involved, from time to time, in audits,
reviews, examinations by governmental agencies, including the
GSEs, regarding the Companys business, certain of
which may result in adverse judgments, settlements, fines,
penalties, injunctions or other relief.
The Company contests liability
and/or the
amount of damages as appropriate in each matter. On at least a
quarterly basis, the Company assesses its liabilities and
contingencies in connection with outstanding legal proceedings
utilizing the latest information available. Where available
information indicates that it is probable a liability has been
incurred and the Company can reasonably estimate the amount of
that loss, reserves are established. The actual costs of
resolving these proceedings may be substantially higher or lower
than the amounts reserved. Litigation related expense of
$7.8 million and $6.4 million were included in general
and administrative expense on the consolidated statements of
operations, for the nine months ended September 30, 2011
and 2010, respectively. Based on current knowledge, and after
consultation with counsel, management believes that current
legal reserves are adequate, and the amount of any incremental
liability arising from these matters is not expected to have a
material adverse effect on the consolidated financial condition
of the Company, although the outcome of such proceedings could
be material to the Companys operating results and cash
flows for a particular period depending on among other things,
the level of the Companys revenues or income for such
period. However, in the event of significant developments on
existing cases, it is possible that the ultimate resolution, if
unfavorable, may be material to the Companys consolidated
financial statements.
|
|
16.
|
Business
Segment Reporting
|
Nationstar currently conducts business in two separate operating
segments: Servicing and Originations. The Servicing segment
provides loan servicing on Nationstars total servicing
portfolio, including the collection of principal and interest
payments and the assessment of ancillary fees related to the
servicing of mortgage loans. The Originations segment involves
the origination, packaging, and sale of agency mortgage loans
into the secondary markets via whole loan sales or
securitizations. Nationstar reports the activity not related to
either operating segment in the Legacy Portfolio and Other
column. The Legacy Portfolio and Other column includes primarily
all subprime mortgage loans originated in the latter portion of
2006 and during
F-88
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
16.
|
Business
Segment Reporting (continued)
|
2007 or acquired from CHEC and consolidated VIEs which were
consolidated pursuant to the adoption of new consolidation
guidance related to VIEs adopted on January 1, 2010.
Nationstars segments are based upon Nationstars
organizational structure which focuses primarily on the services
offered. The accounting policies of each reportable segment are
the same as those of Nationstar except for 1) expenses for
consolidated back-office operations and general overhead-type
expenses such as executive administration and accounting and
2) revenues generated on inter-segment services performed.
Expenses are allocated to individual segments based on the
estimated value of services performed, including estimated
utilization of square footage and corporate personnel as well as
the equity invested in each segment. Revenues generated or
inter-segment services performed are valued based on similar
services provided to external parties.
To reconcile to Nationstars consolidated results, certain
inter-segment revenues and expenses are eliminated in the
Elimination column in the following tables.
The following tables are a presentation of financial information
by segment for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2011
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Legacy Portfolio
|
|
|
|
|
|
|
|
|
|
Servicing
|
|
|
Originations
|
|
|
Segments
|
|
|
and Other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
|
$168,990
|
|
|
|
$
|
|
|
|
$168,990
|
|
|
|
$1,952
|
|
|
|
$(5,306
|
)
|
|
|
$165,636
|
|
Other fee income
|
|
|
6,251
|
|
|
|
10,983
|
|
|
|
17,234
|
|
|
|
1,884
|
|
|
|
|
|
|
|
19,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
175,241
|
|
|
|
10,983
|
|
|
|
186,224
|
|
|
|
3,836
|
|
|
|
(5,306
|
)
|
|
|
184,754
|
|
Gain (loss) on mortgage loans held for sale
|
|
|
|
|
|
|
73,832
|
|
|
|
73,832
|
|
|
|
|
|
|
|
(272
|
)
|
|
|
73,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
175,241
|
|
|
|
84,815
|
|
|
|
260,056
|
|
|
|
3,836
|
|
|
|
(5,578
|
)
|
|
|
258,314
|
|
Total expenses and impairments
|
|
|
128,177
|
|
|
|
71,404
|
|
|
|
199,581
|
|
|
|
20,408
|
|
|
|
(272
|
)
|
|
|
219,717
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,529
|
|
|
|
8,560
|
|
|
|
11,089
|
|
|
|
34,851
|
|
|
|
5,306
|
|
|
|
51,246
|
|
Interest expense
|
|
|
(41,109
|
)
|
|
|
(7,480
|
)
|
|
|
(48,589
|
)
|
|
|
(28,340
|
)
|
|
|
|
|
|
|
(76,929
|
)
|
Fair value changes in ABS Securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,919
|
)
|
|
|
|
|
|
|
(6,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(38,580
|
)
|
|
|
1,080
|
|
|
|
(37,500
|
)
|
|
|
(408
|
)
|
|
|
5,306
|
|
|
|
(32,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
|
$8,484
|
|
|
|
$14,491
|
|
|
|
$22,975
|
|
|
|
$(16,980
|
)
|
|
|
$
|
|
|
|
$5,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
$1,293
|
|
|
|
$894
|
|
|
|
$2,187
|
|
|
|
$364
|
|
|
|
$
|
|
|
|
$2,551
|
|
Total assets
|
|
|
810,157
|
|
|
|
429,661
|
|
|
|
1,239,818
|
|
|
|
764,507
|
|
|
|
|
|
|
|
2,004,325
|
|
F-89
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
16.
|
Business
Segment Reporting (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Legacy Portfolio
|
|
|
|
|
|
|
|
|
|
Servicing
|
|
|
Originations
|
|
|
Segments
|
|
|
and Other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
|
$115,343
|
|
|
|
$
|
|
|
|
$115,343
|
|
|
|
$1,118
|
|
|
|
$(5,542
|
)
|
|
|
$110,919
|
|
Other fee income
|
|
|
5,512
|
|
|
|
4,491
|
|
|
|
10,003
|
|
|
|
1,848
|
|
|
|
|
|
|
|
11,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
120,855
|
|
|
|
4,491
|
|
|
|
125,346
|
|
|
|
2,966
|
|
|
|
(5,542
|
)
|
|
|
122,770
|
|
Gain (loss) on mortgage loans held for sale
|
|
|
|
|
|
|
51,887
|
|
|
|
51,887
|
|
|
|
|
|
|
|
(133
|
)
|
|
|
51,754
|
|
Total revenues
|
|
|
120,855
|
|
|
|
56,378
|
|
|
|
177,233
|
|
|
|
2,966
|
|
|
|
(5,675
|
)
|
|
|
174,524
|
|
Total expenses and impairments
|
|
|
71,963
|
|
|
|
62,136
|
|
|
|
134,099
|
|
|
|
11,656
|
|
|
|
(133
|
)
|
|
|
145,622
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
357
|
|
|
|
8,327
|
|
|
|
8,684
|
|
|
|
67,793
|
|
|
|
5,542
|
|
|
|
82,019
|
|
Interest expense
|
|
|
(38,723
|
)
|
|
|
(6,044
|
)
|
|
|
(44,767
|
)
|
|
|
(44,531
|
)
|
|
|
|
|
|
|
(89,298
|
)
|
Loss on interest rate swaps
|
|
|
(9,917
|
)
|
|
|
|
|
|
|
(9,917
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,917
|
)
|
Fair value changes in ABS Securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,115
|
)
|
|
|
|
|
|
|
(19,115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(48,283
|
)
|
|
|
2,283
|
|
|
|
(46,000
|
)
|
|
|
4,147
|
|
|
|
5,542
|
|
|
|
(36,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
|
$609
|
|
|
|
$(3,475
|
)
|
|
|
$(2,866
|
)
|
|
|
$(4,543
|
)
|
|
|
$
|
|
|
|
$(7,409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
$753
|
|
|
|
$538
|
|
|
|
$1,291
|
|
|
|
$159
|
|
|
|
$
|
|
|
|
$1,450
|
|
F-90
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
17.
|
Guarantor
Financial Statement Information
|
Presented below are consolidating financial statements of
Nationstar and the guarantor subsidiaries for the periods
indicated.
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2011
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
$23,251
|
|
|
|
$754
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$24,005
|
|
Restricted cash
|
|
|
52,607
|
|
|
|
3
|
|
|
|
20,203
|
|
|
|
|
|
|
|
72,813
|
|
Accounts receivable, net
|
|
|
467,810
|
|
|
|
5
|
|
|
|
3,659
|
|
|
|
|
|
|
|
471,474
|
|
Mortgage loans held for sale
|
|
|
377,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
377,932
|
|
Mortgage loans held for investment, subject to nonrecourse
debtLegacy Asset, net
|
|
|
5,903
|
|
|
|
|
|
|
|
240,256
|
|
|
|
|
|
|
|
246,159
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt (at fair value)
|
|
|
|
|
|
|
|
|
|
|
477,748
|
|
|
|
|
|
|
|
477,748
|
|
Investment in debt
securitiesavailable-for-sale
|
|
|
613
|
|
|
|
|
|
|
|
|
|
|
|
(613
|
)
|
|
|
|
|
Investment in subsidiaries
|
|
|
151,518
|
|
|
|
|
|
|
|
|
|
|
|
(151,518
|
)
|
|
|
|
|
Receivables from affiliates
|
|
|
|
|
|
|
67,165
|
|
|
|
100,055
|
|
|
|
(161,138
|
)
|
|
|
6,082
|
|
Mortgage servicing rights
|
|
|
246,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
246,916
|
|
Property and equipment, net
|
|
|
20,155
|
|
|
|
835
|
|
|
|
|
|
|
|
|
|
|
|
20,990
|
|
Real estate owned, net
|
|
|
57
|
|
|
|
|
|
|
|
15,354
|
|
|
|
|
|
|
|
15,411
|
|
Other assets
|
|
|
44,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
$1,391,557
|
|
|
|
$68,762
|
|
|
|
$857,275
|
|
|
|
$(313,269
|
)
|
|
|
$2,004,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and members equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
$535,187
|
|
|
|
$
|
|
|
|
$203,596
|
|
|
|
$
|
|
|
|
$738,783
|
|
Unsecured senior notes
|
|
|
245,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245,109
|
|
Payables and accrued liabilities
|
|
|
176,396
|
|
|
|
|
|
|
|
1,056
|
|
|
|
|
|
|
|
177,452
|
|
Payables to affiliates
|
|
|
161,138
|
|
|
|
|
|
|
|
|
|
|
|
(161,138
|
)
|
|
|
|
|
Derivative financial instruments
|
|
|
8,939
|
|
|
|
|
|
|
|
6,839
|
|
|
|
|
|
|
|
15,778
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
|
|
|
|
|
|
|
|
11,889
|
|
|
|
|
|
|
|
11,889
|
|
Nonrecourse debtLegacy Assets
|
|
|
|
|
|
|
|
|
|
|
116,200
|
|
|
|
|
|
|
|
116,200
|
|
ABS nonrecourse debt (at fair value)
|
|
|
|
|
|
|
|
|
|
|
434,939
|
|
|
|
(613
|
)
|
|
|
434,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,126,769
|
|
|
|
|
|
|
|
774,519
|
|
|
|
(161,751
|
)
|
|
|
1,739,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total members equity
|
|
|
264,788
|
|
|
|
68,762
|
|
|
|
82,756
|
|
|
|
(151,518
|
)
|
|
|
264,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
|
$1,391,557
|
|
|
|
$68,762
|
|
|
|
$857,275
|
|
|
|
$(313,269
|
)
|
|
|
$2,004,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-91
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
17.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
|
$164,456
|
|
|
|
$2,624
|
|
|
|
$3,862
|
|
|
|
$(5,306
|
)
|
|
|
$165,636
|
|
Other fee income
|
|
|
9,932
|
|
|
|
8,245
|
|
|
|
941
|
|
|
|
|
|
|
|
19,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
174,388
|
|
|
|
10,869
|
|
|
|
4,803
|
|
|
|
(5,306
|
)
|
|
|
184,754
|
|
Gain on mortgage loans held for sale
|
|
|
73,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
247,948
|
|
|
|
10,869
|
|
|
|
4,803
|
|
|
|
(5,306
|
)
|
|
|
258,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses and impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
|
143,646
|
|
|
|
2,553
|
|
|
|
|
|
|
|
|
|
|
|
146,199
|
|
General and administrative
|
|
|
50,054
|
|
|
|
2,705
|
|
|
|
3,948
|
|
|
|
|
|
|
|
56,707
|
|
Loan loss provision
|
|
|
2,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,005
|
|
Loss on foreclosed real estate and other
|
|
|
1,436
|
|
|
|
|
|
|
|
5,468
|
|
|
|
|
|
|
|
6,904
|
|
Occupancy
|
|
|
7,765
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
7,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses and impairments
|
|
|
204,906
|
|
|
|
5,395
|
|
|
|
9,416
|
|
|
|
|
|
|
|
219,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
11,070
|
|
|
|
|
|
|
|
34,870
|
|
|
|
5,306
|
|
|
|
51,246
|
|
Interest expense
|
|
|
(41,411
|
)
|
|
|
|
|
|
|
(35,518
|
)
|
|
|
|
|
|
|
(76,929
|
)
|
Fair value changes in ABS securitizations
|
|
|
|
|
|
|
|
|
|
|
(6,935
|
)
|
|
|
16
|
|
|
|
(6,919
|
)
|
Gain/(loss) from subsidiaries
|
|
|
(6,722
|
)
|
|
|
|
|
|
|
|
|
|
|
6,722
|
|
|
|
|
|
Total other income (expense)
|
|
|
(37,063
|
)
|
|
|
|
|
|
|
(7,583
|
)
|
|
|
12,044
|
|
|
|
(32,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
|
$5,979
|
|
|
|
$5,474
|
|
|
|
$(12,196
|
)
|
|
|
$6,738
|
|
|
|
$5,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-92
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
17.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
|
$5,979
|
|
|
|
$5,474
|
|
|
|
$(12,196
|
)
|
|
|
$6,738
|
|
|
|
$5,995
|
|
Adjustments to reconcile net income/(loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from subsidiaries
|
|
|
6,722
|
|
|
|
|
|
|
|
|
|
|
|
(6,722
|
)
|
|
|
|
|
Loss on equity method investments
|
|
|
971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
971
|
|
Share-based compensation
|
|
|
12,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,201
|
|
Gain on mortgage loans held for sale
|
|
|
(73,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(73,560
|
)
|
Fair value changes in ABS securitizations
|
|
|
|
|
|
|
|
|
|
|
6,935
|
|
|
|
(16
|
)
|
|
|
6,919
|
|
Provision for loan losses
|
|
|
2,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,005
|
|
Loss on foreclosed real estate and other
|
|
|
554
|
|
|
|
|
|
|
|
6,350
|
|
|
|
|
|
|
|
6,904
|
|
Loss/(gain) on derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
(2,032
|
)
|
|
|
|
|
|
|
(2,032
|
)
|
Depreciation and amortization
|
|
|
2,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,551
|
|
Change in fair value of mortgage servicing rights
|
|
|
30,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,757
|
|
Amortization of debt discount
|
|
|
6,667
|
|
|
|
|
|
|
|
3,657
|
|
|
|
|
|
|
|
10,324
|
|
Amortization of premiums/(discounts)
|
|
|
|
|
|
|
|
|
|
|
(4,001
|
)
|
|
|
|
|
|
|
(4,001
|
)
|
Mortgage loans originated and purchased, net of fees
|
|
|
(2,285,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,285,558
|
)
|
Cost of loans sold, net of fees
|
|
|
2,287,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,287,430
|
|
Principal payments/prepayments received and other changes in
mortgage loans originated as held for sale
|
|
|
35,777
|
|
|
|
|
|
|
|
9,757
|
|
|
|
|
|
|
|
45,534
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(30,510
|
)
|
|
|
(5
|
)
|
|
|
316
|
|
|
|
|
|
|
|
(30,199
|
)
|
Receivables from/(payables to) affiliates
|
|
|
(24,356
|
)
|
|
|
(5,031
|
)
|
|
|
32,298
|
|
|
|
|
|
|
|
2,911
|
|
Other assets
|
|
|
(5,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,050
|
)
|
Accounts payable and accrued liabilities
|
|
|
36,053
|
|
|
|
|
|
|
|
(213
|
)
|
|
|
|
|
|
|
35,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used) in operating activities
|
|
|
8,633
|
|
|
|
438
|
|
|
|
40,871
|
|
|
|
|
|
|
|
49,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-93
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
17.
|
Guarantor
Financial Statement Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments received and other changes on mortgage loans
held for investment, subject to ABS nonrecourse debt
|
|
|
|
|
|
|
|
|
|
|
29,395
|
|
|
|
|
|
|
|
29,395
|
|
Property and equipment additions, net of disposals
|
|
|
(15,147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,147
|
)
|
Acquisition of equity method investment
|
|
|
(6,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,600
|
)
|
Purchase of mortgage servicing rights
|
|
|
(40,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,305
|
)
|
Proceeds from sales of real estate owned
|
|
|
|
|
|
|
|
|
|
|
22,897
|
|
|
|
|
|
|
|
22,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used) in investing activities
|
|
|
(62,052
|
)
|
|
|
|
|
|
|
52,292
|
|
|
|
|
|
|
|
(9,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers to/from restricted cash
|
|
|
4,972
|
|
|
|
(3
|
)
|
|
|
13,343
|
|
|
|
|
|
|
|
18,312
|
|
Decrease in notes payable, net
|
|
|
62,237
|
|
|
|
|
|
|
|
(33,212
|
)
|
|
|
|
|
|
|
29,025
|
|
Repayment of non-recourse debtLegacy assets
|
|
|
|
|
|
|
|
|
|
|
(26,119
|
)
|
|
|
|
|
|
|
(26,119
|
)
|
Repayment of ABS non-recourse debt
|
|
|
|
|
|
|
|
|
|
|
(47,175
|
)
|
|
|
|
|
|
|
(47,175
|
)
|
Distribution to parent
|
|
|
(3,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,900
|
)
|
Debt financing costs
|
|
|
(2,734
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,734
|
)
|
Tax related share-based settlement of units by members
|
|
|
(4,809
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,809
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used) in financing activities
|
|
|
55,766
|
|
|
|
(3
|
)
|
|
|
(93,163
|
)
|
|
|
|
|
|
|
(37,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
2,347
|
|
|
|
435
|
|
|
|
|
|
|
|
|
|
|
|
2,782
|
|
Cash and cash equivalents at beginning of period
|
|
|
20,904
|
|
|
|
319
|
|
|
|
|
|
|
|
|
|
|
|
21,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
|
$23,251
|
|
|
|
$754
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$24,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-94
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
17.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING
BALANCE SHEET
DECEMBER 31, 2010
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
ASSETS
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Cash and cash equivalents
|
|
|
$20,904
|
|
|
|
$319
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$21,223
|
|
Restricted cash
|
|
|
57,579
|
|
|
|
|
|
|
|
33,546
|
|
|
|
|
|
|
|
91,125
|
|
Accounts receivable, net
|
|
|
437,300
|
|
|
|
|
|
|
|
3,975
|
|
|
|
|
|
|
|
441,275
|
|
Mortgage loans held for sale
|
|
|
369,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
369,617
|
|
Mortgage loans held for investment, subject to nonrecourse debt,
Legacy Assets, net
|
|
|
5,016
|
|
|
|
|
|
|
|
261,304
|
|
|
|
|
|
|
|
266,320
|
|
Mortgage loans held for investment, subject to ABS nonrecourse
debt (at fair value)
|
|
|
|
|
|
|
|
|
|
|
538,440
|
|
|
|
|
|
|
|
538,440
|
|
Investment in debt
securitiesavailable-for-sale
|
|
|
597
|
|
|
|
|
|
|
|
|
|
|
|
(597
|
)
|
|
|
|
|
Investment in subsidiaries
|
|
|
158,276
|
|
|
|
|
|
|
|
|
|
|
|
(158,276
|
)
|
|
|
|
|
Receivables from affiliates
|
|
|
|
|
|
|
62,171
|
|
|
|
132,353
|
|
|
|
(185,531
|
)
|
|
|
8,993
|
|
Mortgage servicing rights
|
|
|
145,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,062
|
|
Property and equipment, net
|
|
|
7,559
|
|
|
|
835
|
|
|
|
|
|
|
|
|
|
|
|
8,394
|
|
Real estate owned, net
|
|
|
323
|
|
|
|
|
|
|
|
27,014
|
|
|
|
|
|
|
|
27,337
|
|
Other assets
|
|
|
29,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
$1,231,628
|
|
|
|
$63,325
|
|
|
|
$996,632
|
|
|
|
$(344,404
|
)
|
|
|
$1,947,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
$472,950
|
|
|
|
$
|
|
|
|
$236,808
|
|
|
|
$
|
|
|
|
$709,758
|
|
Unsecured senior notes
|
|
|
244,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244,061
|
|
Payables and accrued liabilities
|
|
|
73,785
|
|
|
|
|
|
|
|
1,269
|
|
|
|
|
|
|
|
75,054
|
|
Payables to affiliates
|
|
|
185,531
|
|
|
|
|
|
|
|
|
|
|
|
(185,531
|
)
|
|
|
|
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
7,801
|
|
|
|
|
|
|
|
7,801
|
|
Derivative financial instruments, subject to ABS nonrecourse debt
|
|
|
|
|
|
|
|
|
|
|
18,781
|
|
|
|
|
|
|
|
18,781
|
|
Nonrecourse debtLegacy Assets
|
|
|
|
|
|
|
|
|
|
|
138,662
|
|
|
|
|
|
|
|
138,662
|
|
ABS nonrecourse debt (at fair value)
|
|
|
|
|
|
|
|
|
|
|
497,289
|
|
|
|
(597
|
)
|
|
|
496,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
976,327
|
|
|
|
|
|
|
|
900,610
|
|
|
|
(186,128
|
)
|
|
|
1,690,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total members equity
|
|
|
255,301
|
|
|
|
63,325
|
|
|
|
96,022
|
|
|
|
(158,276
|
)
|
|
|
256,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
|
$1,231,628
|
|
|
|
$63,325
|
|
|
|
$996,632
|
|
|
|
$(344,404
|
)
|
|
|
$1,947,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-95
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
17.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee income
|
|
|
$115,244
|
|
|
|
$1,217
|
|
|
|
$
|
|
|
|
$(5,542
|
)
|
|
|
$110,919
|
|
Other fee income
|
|
|
5,697
|
|
|
|
5,670
|
|
|
|
484
|
|
|
|
|
|
|
|
11,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
120,941
|
|
|
|
6,887
|
|
|
|
484
|
|
|
|
(5,542
|
)
|
|
|
122,770
|
|
Gain on mortgage loans held for sale
|
|
|
51,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
172,695
|
|
|
|
6,887
|
|
|
|
484
|
|
|
|
(5,542
|
)
|
|
|
174,524
|
|
Expenses and impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
|
102,927
|
|
|
|
1,762
|
|
|
|
|
|
|
|
|
|
|
|
104,689
|
|
General and administrative
|
|
|
33,860
|
|
|
|
1,134
|
|
|
|
(63
|
)
|
|
|
|
|
|
|
34,931
|
|
Occupancy
|
|
|
5,888
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
6,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses and impairments
|
|
|
142,675
|
|
|
|
3,010
|
|
|
|
(63
|
)
|
|
|
|
|
|
|
145,622
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
12,646
|
|
|
|
|
|
|
|
63,831
|
|
|
|
5,542
|
|
|
|
82,019
|
|
Interest expense
|
|
|
(39,643
|
)
|
|
|
|
|
|
|
(49,655
|
)
|
|
|
|
|
|
|
(89,298
|
)
|
Loss on interest rate swaps and caps
|
|
|
|
|
|
|
|
|
|
|
(9,917
|
)
|
|
|
|
|
|
|
(9,917
|
)
|
Fair value changes in ABS securitizations
|
|
|
|
|
|
|
|
|
|
|
(19,115
|
)
|
|
|
|
|
|
|
(19,115
|
)
|
Gain/(loss) from subsidiaries
|
|
|
(10,432
|
)
|
|
|
|
|
|
|
|
|
|
|
10,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(37,429
|
)
|
|
|
|
|
|
|
(14,856
|
)
|
|
|
15,974
|
|
|
|
(36,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
|
$(7,409
|
)
|
|
|
$3,877
|
|
|
|
$(14,309
|
)
|
|
|
$10,432
|
|
|
|
$(7,409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-96
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
17.
|
Guarantor
Financial Statement Information (continued)
|
NATIONSTAR
MORTGAGE LLC
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
|
$(7,409
|
)
|
|
|
$3,877
|
|
|
|
$(14,309
|
)
|
|
|
$10,432
|
|
|
|
$(7,409
|
)
|
Adjustments to reconcile net income/(loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from subsidiaries
|
|
|
10,432
|
|
|
|
|
|
|
|
|
|
|
|
(10,432
|
)
|
|
|
|
|
Share-based compensation
|
|
|
7,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,459
|
|
Gain on mortgage loans held for sale
|
|
|
(51,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51,754
|
)
|
Fair value changes in ABS securitizations
|
|
|
|
|
|
|
|
|
|
|
19,115
|
|
|
|
|
|
|
|
19,115
|
|
Loss/(gain) on derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
9,917
|
|
|
|
|
|
|
|
9,917
|
|
Depreciation and amortization
|
|
|
1,441
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
1,450
|
|
Change in fair value of mortgage servicing rights
|
|
|
11,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,499
|
|
Amortization of debt discount
|
|
|
9,954
|
|
|
|
|
|
|
|
5,214
|
|
|
|
|
|
|
|
15,168
|
|
Amortization of premiums/discounts
|
|
|
|
|
|
|
|
|
|
|
(3,561
|
)
|
|
|
|
|
|
|
(3,561
|
)
|
Mortgage Loans originated and purchased, net of fees
|
|
|
(1,960,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,960,089
|
)
|
Cost of loans sold, net of fees
|
|
|
1,831,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,831,708
|
|
Principal Payments/Prepayments Received and other changes in
mortgage loans originated as held for sale
|
|
|
21,147
|
|
|
|
|
|
|
|
(13,035
|
)
|
|
|
|
|
|
|
8,112
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
91,535
|
|
|
|
3
|
|
|
|
(32,882
|
)
|
|
|
|
|
|
|
58,656
|
|
Receivables from/(payables to) affiliates
|
|
|
(54,382
|
)
|
|
|
(3,480
|
)
|
|
|
61,469
|
|
|
|
|
|
|
|
3,607
|
|
Other assets
|
|
|
2,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,700
|
|
Accounts payable and accrued liabilities
|
|
|
78,277
|
|
|
|
(197
|
)
|
|
|
(188
|
)
|
|
|
|
|
|
|
77,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used) in operating activities
|
|
|
(7,482
|
)
|
|
|
212
|
|
|
|
31,740
|
|
|
|
|
|
|
|
24,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-97
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
17.
|
Guarantor
Financial Statement Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
(Parent)
|
|
|
(Subsidiaries)
|
|
|
(Subsidiaries)
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments received and other changes on mortgage loans
held for investment, subject to ABS nonrecourse debt
|
|
|
|
|
|
|
|
|
|
|
36,401
|
|
|
|
|
|
|
|
36,401
|
|
Purchase of mortgage servicing rights, net of liabilities
incurred
|
|
|
(5,863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,863
|
)
|
Property and equipment additions, net of disposals
|
|
|
(3,169
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,177
|
)
|
Proceeds from sales of real estate owned
|
|
|
|
|
|
|
|
|
|
|
58,506
|
|
|
|
|
|
|
|
58,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used) in investing activities
|
|
|
(9,032
|
)
|
|
|
(8
|
)
|
|
|
94,907
|
|
|
|
|
|
|
|
85,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers (to)/from restricted cash
|
|
|
(4,408
|
)
|
|
|
|
|
|
|
10,968
|
|
|
|
|
|
|
|
6,560
|
|
Issuance of unsecured notes, net of issue discount
|
|
|
243,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
243,012
|
|
Decrease in notes payable, net
|
|
|
(224,451
|
)
|
|
|
|
|
|
|
(15,134
|
)
|
|
|
|
|
|
|
(239,585
|
)
|
Repayment of non-recourse debtLegacy assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to members
|
|
|
(11,894
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,894
|
)
|
Repayment of ABS non-recourse debt
|
|
|
|
|
|
|
|
|
|
|
(37,240
|
)
|
|
|
|
|
|
|
(37,240
|
)
|
Debt financing costs
|
|
|
(145
|
)
|
|
|
|
|
|
|
(85,241
|
)
|
|
|
|
|
|
|
(85,386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
2,114
|
|
|
|
|
|
|
|
(126,647
|
)
|
|
|
|
|
|
|
(124,533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(14,400
|
)
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
|
(14,196
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
41,243
|
|
|
|
402
|
|
|
|
|
|
|
|
|
|
|
|
41,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
|
$26,843
|
|
|
|
$606
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$27,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.
|
Related
Party Disclosures
|
In September 2010, Nationstar entered into a marketing agreement
with Springleaf Home Equity, Inc., formerly known as American
General Home Equity, Inc., Springleaf General Financial Services
of Arkansas, Inc., formerly known as American General Financial
Services of Arkansas, Inc. and MorEquity, Inc. (collectively
Springleaf), each of which are indirectly owned by
investment funds managed by affiliates of Fortress Investment
Group LLC. Pursuant to this agreement, Nationstar markets
mortgage origination products to customers of Springleaf, and is
compensated by the origination fees of loans that Nationstar
refinances.
Additionally, in January 2011, Nationstar entered into three
agreements to act as the loan subservicer for Springleaf for a
whole loan portfolio and two securitized loan portfolios
totaling $4.4 billion for which Nationstar receives a
monthly per loan subservicing fee and other performance
incentive fees subject to the agreements with Springleaf. For
the nine month period ended September 30, 2011, Nationstar
recognized revenue of $7.4 million in additional servicing
and other performance incentive fees related to these
portfolios.
F-98
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
18.
|
Related
Party Disclosures (continued)
|
At September 30, 2011, Nationstar had an outstanding
receivable from Springleaf of $0.6 million which was
included as a component of accounts receivable.
Nationstar is the loan servicer for two securitized loan
portfolios managed by Newcastle Investment Corp.
(Newcastle), which is managed by an affiliate of
Fortress Investment Group LLC, for which Nationstar receives a
monthly net servicing fee equal to 0.50% per annum on the unpaid
principal balance of the portfolios. For the nine month periods
ended September 30, 2011 and 2010, Nationstar received
servicing fees and other performance incentive fees of
$4.4 million and $4.9 million, respectively.
In October 2011, Nationstar amended its
2010-ADV1
Advance Facility with a financial institution. This amendment
increased Nationstars borrowing capacity from
$200 million to $300 million, and extended the
maturity date to May 2014. In conjunction with this amendment,
Nationstar paid off the
2009-ADV1
facility and transferred the related collateral to the amended
2010-ADV1
facility.
Also in October 2011, Nationstar extended one of its MRA with a
financial institution that was set to expire in October 2011.
Under the terms of this extension, this agreement is now set to
expire in January 2012. Additionally, Nationstar executed the
2011-ADV1
Advance Facility with a financial institution in October 2011.
This facility has the capacity to purchase up to
$75 million of advance receivables. The interest rate is
LIBOR plus 2.50% and matures in October 2012. This debt is
nonrecourse to Nationstar.
In October, 2011, Nationstar entered into an operating sublease
agreement for office space in Houston, Texas. This sublease
begins the fourth quarter 2011, and expires fourth quarter 2014.
Nationstars total obligation related to this agreement
will be approximately $1.3 million per year over the life
of the sublease.
In November 2011, Nationstar made the decision to refocus its
strategy with respect to its origination platform. As a part of
this activity, Nationstar will eliminate a substantial portion
of its distributed retail branch network in non-strategic
locations in favor of a more centralized retail origination
structure. To effect this change in structure, Nationstar will
record a fourth quarter 2011 charge of approximately
$2.0 million to $2.5 million for estimated severance
costs, lease termination and other related costs.
In December 2011, Nationstar entered into a sale and assignment
agreement (the Sale Agreement) with an indirect
wholly owned subsidiary of Newcastle. Nationstar is an affiliate
of Newcastles manager Fortress Investment Group LLC.
Nationstar acquired mortgage servicing rights on a pool of
agency residential mortgage loans in September 2011 (the
Portfolio). Pursuant to the Sale Agreement,
Nationstar sold to Newcastle the right to receive 65% of the
excess cash flow generated from the mortgage servicing rights of
the Portfolio after receipt of a fixed base servicing fee per
loan. The sale price was $43.7 million. Nationstar will
retain all ancillary income associated with servicing the
Portfolio and 35% of the excess cash flow after receipt of the
fixed base servicing fee. Nationstar will continue to be the
servicer of the loans and provide all servicing and advancing
functions for the Portfolio. Newcastle will not have prior or
ongoing obligations associated with the Portfolio. Also in
December 2011, Nationstar entered into a refinanced loan
agreement with Newcastle. Should Nationstar refinance any loan
in the Portfolio, subject to certain limitations, Nationstar
will be required to transfer the new loan or a replacement loan
into the Portfolio. The new or replacement loan will be governed
by the same terms set forth in the Sale Agreement described
above. This Sale Agreement will be accounted for as a financing
arrangement by Nationstar.
F-99
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
19.
|
Subsequent
Events (continued)
|
In December 2011, Nationstar entered into a servicing rights
sale and issuer transfer agreement (the Servicing Rights
Sale and Issuer Transfer Agreement) with a bank. Under the
Servicing Rights Sale and Issuer Transfer Agreement, Nationstar
agreed to purchase certain servicing rights relating to reverse
mortgage loans with an aggregate unpaid principal balance of
approximately $18 billion and assume certain liabilities
associated with such servicing rights. On December 22,
2011, Nationstar acquired the servicing rights relating to
reverse mortgage loans with an aggregate unpaid principal
balance of approximately $7.8 billion for cash of
$4.3 million and assumption of a servicing liability of
$10.5 million. In addition, Nationstar acquired the related
advances to the servicing rights for approximately
$24.1 million, subject to adjustment based on actual
balances at January 1, 2012. Servicing rights related to an
additional $9.5 billion in unpaid principal balance are
expected to close during 2012 upon receipt of certain specified
third-party approvals. On December 23, 2011, Nationstar
paid a deposit of $9.0 million related to such servicing.
Additionally, Nationstar expects to subservice on behalf of the
bank, certain reverse mortgage loans with an unpaid principal
balance of approximately $1.4 billion beginning in the
later portion of 2012. The aforementioned reverse mortgage loan
servicing rights represent a new class of servicing rights for
Nationstar and will be accounted for under the amortization
method.
In December 2011, Nationstar completed an offering by Nationstar
Mortgage LLC and Nationstar Capital Corporation for
$35.0 million additional 10.875% Senior Notes due
2015, which are not registered under the Securities Act of 1933,
as amended. The additional notes are a follow-on issue to
Nationstars $250.0 million aggregate principal amount
of 10.875% Senior Notes due 2015 issued on March 26,
2010 and form a single series of debt securities with the
existing notes. The additional notes will become fungible,
following completion of an exchange offer pursuant to a
registration rights agreement, and vote together with the
existing notes immediately upon issuance. The aggregate
principal amount of outstanding notes under this series is
$285.0 million.
On December 23, 2011, Nationstar sold its remaining
variable interest in a securitization trust that has been a
consolidated VIE since January 1, 2010. In accordance with
ASC 810, Consolidation, Nationstar has evaluated
this securitization trust and determined that Nationstar no
longer has both the power to direct the activities that most
significantly impact the VIEs economic performance and the
obligation to absorb losses or the right to receive benefits
that could potentially be significant to the VIE, and this
securitization trust was derecognized as of December 23,
2011. Upon derecognition of this VIE, Nationstar derecognized
the securitized mortgage loans held for investment, subject to
ABS nonrecourse debt, the related ABS nonrecourse debt, as well
as certain other assets and liabilities of the securitization
trust, and recognized any mortgage servicing rights on the
consolidated balance sheet. Any impact of this derecognition on
Nationstars consolidated statement of operations will be
recognized in the fourth quarter of 2011.
In December 2011, Nationstar extended its MBS Advance Facility
that was set to expire in December 2011. Under the terms of this
extension, this agreement is now set to expire in December 2012.
Additionally in December 2011, the $100 million Warehouse
Facility was extended from December 2011 to February 2012.
In January 2012, Nationstar amended its $75 million
Warehouse Facility, increasing the line to $175 million and
extending the maturity to January 2013 with the rate of LIBOR
plus a margin between 1.75% to 2.50%.
F-100
NATIONSTAR
MORTGAGE LLC AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
|
|
20.
|
Pro Forma
Tax Information
|
Nationstars pro forma effective tax rate for the nine
months ended September 30, 2011 is 0%. The pro forma tax
provision, before any valuation adjustments, is $2,587 on
pre-tax income of $5,995. Nationstar assumes for pro forma
purposes that the previously recorded valuation allowance will
be released to the extent necessary to eliminate any tax
provision.
F-101
Until ,
2012 (25 days after the date of this prospectus), all
dealers that buy, sell or trade our common stock, whether or not
participating in this offering, may be required to deliver a
prospectus. This is in addition to each dealers obligation
to deliver a prospectus when acting as underwriter and with
respect to its unsold allotments or subscriptions.
Shares
Nationstar Mortgage Holdings
Inc.
Common Stock
PROSPECTUS
BofA Merrill Lynch
, 2012
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution.
|
The following table sets forth the estimated fees and expenses
(except for the SEC registration fee, the Financial Industry
Regulatory Authority, Inc. (FINRA), filing fee and
the NYSE listing fee) payable by the registrant in connection
with the distribution of our common stock:
|
|
|
|
|
SEC registration fee
|
|
$
|
46,440
|
|
FINRA filing fee
|
|
|
40,500
|
|
NYSE listing fee
|
|
|
*
|
|
Printing and engraving expenses
|
|
|
*
|
|
Legal fees and expenses
|
|
|
*
|
|
Accounting fees and expenses
|
|
|
*
|
|
Transfer agent and registrar fees and expenses
|
|
|
*
|
|
Blue Sky fees and expenses
|
|
|
*
|
|
Miscellaneous
|
|
|
*
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
|
|
|
|
|
|
|
* |
|
To be provided by amendment. |
We will bear all of the expenses shown above.
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
Section 102 of the Delaware General Corporation Law, as
amended, or the DGCL, allows a corporation to eliminate the
personal liability of directors to a corporation or its
stockholders for monetary damages for a breach of a fiduciary
duty as a director, except where the director breached his duty
of loyalty, failed to act in good faith, engaged in intentional
misconduct or knowingly violated a law, authorized the payment
of a dividend or approved a stock repurchase or redemption in
violation of Delaware corporate law or obtained an improper
personal benefit.
Section 145 of the DGCL provides, among other things, that
a corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (other than an action by or
in the right of the corporation) by reason of the fact that the
person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the corporations
request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise, against expenses, including attorneys fees,
judgments, fines and amounts paid in settlement actually and
reasonably incurred by the person in connection with the action,
suit or proceeding. The power to indemnify applies if
(i) such person is successful on the merits or otherwise in
defense of any action, suit or proceeding or (ii) such
person acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful. The power to indemnify applies to actions brought by
or in the right of the corporation as well, but only to the
extent of defense expenses (including attorneys fees but
excluding amounts paid in settlement) actually and reasonably
incurred and not to any satisfaction of judgment or settlement
of the claim itself, and with the further limitation that in
such actions no indemnification shall be made in the event of
any adjudication of negligence or misconduct in the performance
of his duties to the corporation, unless a court believes that
in light of all the circumstances indemnification should apply.
II-1
Section 174 of the DGCL provides, among other things, that
a director who willfully and negligently approves of an unlawful
payment of dividends or an unlawful stock purchase or redemption
may be held liable for such actions. A director who was either
absent when the unlawful actions were approved or dissented at
the time, may avoid liability by causing his or her dissent to
such actions to be entered in the books containing the minutes
of the meetings of the board of directors at the time the action
occurred or immediately after the absent director receives
notice of the unlawful acts.
The Companys amended and restated certificate of
incorporation states that no director shall be personally liable
to us or any of our stockholders for monetary damages for breach
of fiduciary duty as a director, except to the extent such
exemption from liability or limitation thereof is not permitted
under the DGCL as it exists or may be amended. A director is
also not exempt from liability for any transaction from which he
or she derived an improper personal benefit, or for violations
of Section 174 of the DGCL. To the maximum extent permitted
under Section 145 of the DGCL, our amended and restated
certificate of incorporation authorizes us to indemnify any and
all persons whom we have the power to indemnify under the law.
Our bylaws provide that the Company will indemnify, to the
fullest extent permitted by the DGCL, each person who was or is
made a party or is threatened to be made a party in any legal
proceeding by reason of the fact that he or she is or was a
director or officer of the Company or is or was a director or
officer of the Company serving at the request of the Company as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise. However,
such indemnification is permitted only if such person acted in
good faith and in a manner such person reasonably believed to be
in or not opposed to the best interests of the Company, and,
with respect to any criminal action or proceeding, had no
reasonable cause to believe such persons conduct was
unlawful. Indemnification is authorized on a
case-by-case
basis by (1) our board of directors by a majority vote of
disinterested directors, (2) a committee of the
disinterested directors, (3) independent legal counsel in a
written opinion if (1) and (2) are not available, or
if disinterested directors so direct, or (4) the
stockholders. Indemnification of former directors or officers
shall be determined by any person authorized to act on the
matter on our behalf. Expenses incurred by a director or officer
in defending against such legal proceedings are payable before
the final disposition of the action, provided that the director
or officer undertakes to repay us if it is later determined that
he or she is not entitled to indemnification.
Prior to completion of this offering, the Company intends to
enter into separate indemnification agreements with its
directors and officers. Each indemnification agreement will
provide, among other things, for indemnification to the fullest
extent permitted by law and our amended and restated certificate
of incorporation and amended and restated bylaws against any and
all expenses, judgments, fines, penalties and amounts paid in
settlement of any claim. The indemnification agreements will
provide for the advancement or payment of all expenses to the
indemnitee and for reimbursement to us if it is found that such
indemnitee is not entitled to such indemnification under
applicable law and our amended and restated certificate of
incorporation and bylaws.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or
persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that, in the opinion
of the SEC such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
We maintain directors and officers liability
insurance for our officers and directors.
The Registrant maintains standard policies of insurance under
which coverage is provided (a) to its directors and
officers against loss rising from claims made by reason of
breach of duty or other wrongful act, and (b) to the
Registrant with respect to payments which may be made by the
Registrant to such officers and directors pursuant to the above
indemnification provision or otherwise as a matter of law.
II-2
|
|
Item 15.
|
Recent
Sales of Unregistered Securities.
|
In the last three years, we have not issued or sold any
unregistered securities.
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules.
|
(a) Exhibits: The list of exhibits is set forth in
beginning on page II-5 of this Registration Statement and
is incorporated herein by reference.
(b) Financial Statement Schedules: No financial statement
schedules are provided because the information called for is not
applicable or is shown in the financial statements or notes
thereto.
* (f) The undersigned registrant hereby undertakes to
provide to the underwriters at the closing specified in the
underwriting agreement, certificates in such denominations and
registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
* (h) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to
directors, officers, and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer, or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
* (i) The undersigned registrant hereby undertakes that:
|
|
|
|
|
For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by us
pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
|
|
|
|
For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
|
|
|
|
* |
|
Paragraph references correspond to those of
Regulation S-K,
Item 512. |
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Lewisville, State of Texas on
January 20, 2012.
Nationstar Mortgage Holdings Inc.
|
|
|
|
Title:
|
President, Chief Executive Officer and
Chief Financial Officer
|
Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed below by
the following persons in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Jay
Bray
Jay
Bray
|
|
President, Chief Executive Officer,
Chief Financial Officer and Director
(principal executive, financial
and accounting officer)
|
|
January 20, 2012
|
|
|
|
|
|
/s/ Anthony
H. Barone
Anthony
H. Barone
|
|
Director
|
|
January 20, 2012
|
II-4
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement
|
|
3
|
.1*
|
|
Form of Amended and Restated Certificate of Incorporation of
Nationstar Mortgage Holdings Inc.
|
|
3
|
.2*
|
|
Form of Amended and Restated Bylaws of Nationstar Mortgage
Holdings Inc.
|
|
3
|
.3
|
|
Certificate of Incorporation of Nationstar Mortgage Holdings Inc.
|
|
3
|
.4
|
|
Bylaws of Nationstar Mortgage Holdings Inc.
|
|
4
|
.1
|
|
Form of Stockholders Agreement by and among Nationstar Mortgage
Holdings Inc and FIF HE Holdings LLC.
|
|
5
|
.1*
|
|
Opinion of Cleary Gottlieb Steen & Hamilton LLP.
|
|
10
|
.1
|
|
Amended and Restated Servicer Advance Early Reimbursement
Addendum, dated as of August 16, 2010, between Nationstar
Mortgage LLC and Fannie Mae (incorporated by reference to
Exhibit 10.1 to Nationstar Mortgage LLCs Registration
Statement on Form S-4 filed with the SEC on December 23, 2010).
|
|
10
|
.2
|
|
Fifth Amended and Restated Master Repurchase Agreement, dated as
of January 27, 2010, between The Royal Bank of Scotland plc, as
buyer, and Nationstar Mortgage LLC, as seller (incorporated by
reference to Exhibit 10.2 to Nationstar Mortgage LLCs
Registration Statement on Form S-4 filed with the SEC on
December 23, 2010).
|
|
10
|
.3
|
|
Amendment Number One to Fifth Amended and Restated Master
Repurchase Agreement, and Amendment Number One to Fifth Amended
and Restated Pricing Side Letter, both dated as of April 6,
2010, between The Royal Bank of Scotland Plc and Nationstar
Mortgage LLC. (incorporated by reference to Exhibit 10.3 to
Amendment No. 3 to Nationstar Mortgage LLCs Registration
Statement on Form S-4 filed with the SEC on April 27, 2011).
|
|
10
|
.4
|
|
Amendment Number Two to Fifth Amended and Restated Master
Repurchase Agreement, and Amendment Number Two to Fifth Amended
and Restated Pricing Side Letter, both dated as of February 25,
2011, between The Royal Bank of Scotland Plc and Nationstar
Mortgage LLC. (incorporated by reference to Exhibit 10.4 to
Amendment No. 3 to Nationstar Mortgage LLCs Registration
Statement on Form S-4 filed with the SEC on April 27, 2011).
|
|
10
|
.5
|
|
Subservicing Agreement, dated as of October 29, 2010, between
Fannie Mae and Nationstar Mortgage LLC (incorporated by
reference to Exhibit 10.3 to Amendment No. 1 to Nationstar
Mortgage LLCs Registration Statement on Form S-4 filed
with the SEC on February 9, 2011).
|
|
10
|
.6
|
|
Strategic Relationship Agreement, dated as of December 16, 2009,
between Fannie Mae and Nationstar Mortgage LLC (incorporated by
reference to Exhibit 10.4 to Nationstar Mortgage LLCs
Registration Statement on Form S-4 filed with the SEC on
December 23, 2010).
|
|
10
|
.7
|
|
Subservicing Agreement, dated as of February 1, 2011, among
MorEquity, Inc., American General Financial Services of
Arkansas, Inc. and American General Home Equity, Inc. as owners
and as servicers, and Nationstar Mortgage LLC, as subservicer.
(incorporated by reference to Exhibit 10.5 to Amendment No. 2 to
Nationstar Mortgage LLCs Registration Statement on Form
S-4 filed with the SEC on March 28, 2011).
|
|
10
|
.8
|
|
Subservicing Agreement (American General Mortgage Loan Trust
2006-1), dated as of February 1, 2011, between MorEquity, Inc.,
as servicer, and Nationstar Mortgage LLC, as subservicer
(incorporated by reference to Exhibit 10.6 to Amendment No. 2 to
Nationstar Mortgage LLCs Registration Statement on Form
S-4 filed with the SEC on March 28, 2011).
|
|
10
|
.9
|
|
Subservicing Agreement (American General Mortgage Loan Trust
2010-1), dated as of February 1, 2011, between MorEquity, Inc.,
as servicer, and Nationstar Mortgage LLC, as subservicer.
(incorporated by reference to Exhibit 10.7 to Amendment No. 2 to
Nationstar Mortgage LLCs Registration Statement on Form
S-4 filed with the SEC on March 28, 2011).
|
II-5
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.10
|
|
Sale and Servicing Agreement, dated as of April 6, 2010, between
The Financial Asset Securities Corp., as Depositor, Centex Home
Equity Company, LLC, as Originator and Servicer, Newcastle
Mortgage Securities Trust 2006-1, as Issuer, and JPMorgan Chase
Bank, N.A. (incorporated by reference to Exhibit 10.10 to
Amendment No. 5 to Nationstar Mortgage LLCs Registration
Statement on Form S-4 filed with the SEC on June 6, 2011).
|
|
10
|
.11
|
|
Sale and Servicing Agreement, dated as of July 12, 2007, between
Bear Stearns Asset-Backed Securities I LLC, as Depositor,
Nationstar Mortgage LLC, as Servicer, Newcastle Mortgage
Securities Trust 2007-1, as Issuing Entity, Wells Fargo Bank,
N.A., as Master Servicer, Securities Administrator and
Custodian, and The Bank of New York, as Indenture Trustee.
(incorporated by reference to Exhibit 10.11 to Amendment No. 5
to Nationstar Mortgage LLCs Registration Statement on Form
S-4 filed with the SEC on June 6, 2011).
|
|
10
|
.12
|
|
Subservicing Agreement, effective as of June 21, 2011, between
First Tennessee Bank National Association, as Owner and Master
Servicer, and Nationstar Mortgage LLC, as Servicer and
Subservicer (incorporated by reference to Exhibit 10.12 to
Amendment No. 6 to Nationstar Mortgage LLCs Registration
Statement on Form S-4 filed with the SEC on June 30, 2011).
|
|
10
|
.13
|
|
Employment Agreement, dated as of January 29, 2008, by and
between Nationstar Mortgage LLC and Robert L. Appel
(incorporated by reference to Exhibit 10.5 to Nationstar
Mortgage LLCs Registration Statement on Form S-4 filed
with the SEC on December 23, 2010).
|
|
10
|
.14
|
|
Amendment, dated as of September 17, 2010, to Employment
Agreement dated January 29, 2008 by and between Nationstar
Mortgage LLC and Robert L. Appel (incorporated by reference to
Exhibit 10.6 to Nationstar Mortgage LLCs Registration
Statement on Form S-4 filed with the SEC on December 23, 2010).
|
|
10
|
.15
|
|
Employment Agreement, dated as of February 19, 2009, by and
between Nationstar Mortgage LLC and Douglas Krueger
(incorporated by reference to Exhibit 10.7 to Nationstar
Mortgage LLCs Registration Statement on Form S-4 filed
with the SEC on December 23, 2010).
|
|
10
|
.16
|
|
Employment Agreement, dated as of September 17, 2010, by and
between Nationstar Mortgage LLC and Anthony H. Barone
(incorporated by reference to Exhibit 10.8 to Nationstar
Mortgage LLCs Registration Statement on Form S-4 filed
with the SEC on December 23, 2010).
|
|
10
|
.17
|
|
Employment Agreement, dated as of September 17, 2010, by and
between the Company and Jesse K. Bray (incorporated by reference
to Exhibit 10.9 to Nationstar Mortgage LLCs Registration
Statement on Form S-4 filed with the SEC on December 23, 2010).
|
|
10
|
.18
|
|
Employment Agreement, dated as of September 17, 2010, by and
between Nationstar Mortgage LLC and Amar Patel (incorporated by
reference to Exhibit 10.10 to Nationstar Mortgage LLCs
Registration Statement on Form S-4 filed with the SEC on
December 23, 2010).
|
|
10
|
.19
|
|
Form of Restricted Series 1 Preferred Unit Award Agreement under
FIF HE Holdings LLC Fifth Amended and Restated Limited Liability
Company Agreement (incorporated by reference to Exhibit 10.11 to
Nationstar Mortgage LLCs Registration Statement on Form
S-4 filed with the SEC on December 23, 2010).
|
|
10
|
.20
|
|
Form of Series 1 Class A Unit Award Agreement under FIF HE
Holdings LLC Fifth Amended and Restated Limited Liability
Company (incorporated by reference to Exhibit 10.12 to
Nationstar Mortgage LLCs Registration Statement on Form
S-4 filed with the SEC on December 23, 2010).
|
|
10
|
.21
|
|
Form of Series 2 Class A Unit Award Agreement under FIF HE
Holdings LLC Fifth Amended and Restated Limited Liability
Company (incorporated by reference to Exhibit 10.13 to
Nationstar Mortgage LLCs Registration Statement on Form
S-4 filed with the SEC on December 23, 2010).
|
|
10
|
.22
|
|
Nationstar Mortgage LLC Annual Incentive Compensation Plan
(incorporated by reference to Exhibit 10.14 to Nationstar
Mortgage LLCs Registration Statement on Form S-4 filed
with the SEC on December 23, 2010).
|
II-6
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.23
|
|
Nationstar Mortgage LLC Incentive Program Summary (incorporated
by reference to Exhibit 10.15 to Nationstar Mortgage
LLCs Registration Statement on Form S-4 filed with the SEC
on December 23, 2010).
|
|
10
|
.24
|
|
Nationstar Mortgage LLC Long-Term Incentive Plan for Mr.
Krueger. (incorporated by reference to Exhibit 10.16 to
Nationstar Mortgage LLCs Registration Statement on Form
S-4 filed with the SEC on December 23, 2010).
|
|
10
|
.25
|
|
Fifth Amended and Restated Limited Liability Company Agreement
of FIF HE HOLDINGS LLC (incorporated by reference to Exhibit
10.25 to Amendment No. 6 to Nationstar Mortgage LLCs
Registration Statement on Form S-4 filed with the SEC on June
30, 2011).
|
|
10
|
.26
|
|
Mortgage Servicing Rights Purchase and Sale Agreement, dated and
effective as of September 30, 2011, between Bank of
America, National Association, as seller, and Nationstar
Mortgage LLC, as buyer (incorporated by reference to
Exhibit 2.1 to Nationstar Mortgage LLCs Quarterly
Report on Form 10-Q filed with the SEC on November 14,
2011).
|
|
10
|
.27
|
|
Servicer Rights Sale and Issuer Transfer Agreement, dated
December 5, 2011, between Bank of America, National
Association, as seller, and Nationstar Mortgage LLC, as buyer.
|
|
10
|
.28
|
|
Sale Agreement, dated December 8, 2011, between Newcastle
Investment Corp., as buyer, and Nationstar Mortgage LLC, as
seller.
|
|
10
|
.29
|
|
Replacement Agreement, dated December 8, 2011, between
Newcastle Investment Corp. and Nationstar Mortgage LLC.
|
|
10
|
.30
|
|
As Soon As Pooled Plus Agreement, dated March 24, 2009,
between Fannie Mae and Nationstar Mortgage LLC.
|
|
10
|
.31
|
|
Amended and Restated Master Repurchase Agreement, dated October
21, 2010, between Bank of America, N.A., as buyer, and
Nationstar Mortgage LLC, as seller.
|
|
10
|
.32**
|
|
Amended and Restated Transactions Terms Letter, dated October
21, 2010, between Bank of America, N.A., as buyer, and
Nationstar Mortgage LLC, as seller.
|
|
10
|
.33
|
|
Amendment Number One to the Amended and Restated Master
Repurchase Agreement, dated November 24, 2010, between Bank of
America, N.A., as buyer, and Nationstar Mortgage LLC, as seller.
|
|
10
|
.34
|
|
Amendment Number Two to the Amended and Restated Master
Repurchase Agreement, dated October 20, 2011, between Bank of
America, N.A., as buyer, and Nationstar Mortgage LLC, as seller.
|
|
10
|
.35
|
|
Amendment Number Three to the Amended and Restated Master
Repurchase Agreement, dated January 17, 2012, between Bank
of America, N.A., as buyer, and Nationstar Mortgage LLC, as
seller.
|
|
10
|
.36**
|
|
Amendment Number Three to the Amended and Restated Transactions
Terms Letter, dated January 17, 2012, between Bank of
America, N.A., as buyer, and Nationstar Mortgage LLC, as seller.
|
|
10
|
.37
|
|
Mortgage Selling and Servicing Contract, dated July 31,
1997, between Fannie Mae and Centex Home Equity Corp.
|
|
10
|
.38
|
|
Addendum to Mortgage Selling and Servicing Contract, dated
September 12, 2006, between Fannie Mae and Nationstar
Mortgage LLC.
|
|
10
|
.39*
|
|
Consulting Agreement,
dated ,
between Anthony Barone, as consultant, and Nationstar Mortgage
LLC.
|
|
10
|
.40*
|
|
Letter Agreement,
dated ,
between Anthony Barone, Nationstar Mortgage LLC, and FIF HE
Holdings LLC.
|
|
21
|
.1*
|
|
Subsidiaries of the Registrants.
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP, Independent Registered Public
Accounting Firm.
|
|
23
|
.2*
|
|
Consent of Cleary Gottlieb Steen & Hamilton LLP (included
in Exhibit 5.1).
|
II-7
|
|
|
* |
|
To be filed by amendment |
|
|
|
** |
|
Certain portions of this exhibit have been omitted and have been
filed separately with the SEC pursuant to a request for
confidential treatment under Rule 406 as promulgated under
the Securities Act. |
II-8