Edgar Filing: OCWEN FINANCIAL CORP

2015.03.31 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2015



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from: ____________________ to ____________________

Commission File No. 1-13219

OCWEN FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)



Florida		65-0039856
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1000 Abernathy Road NE, Suite 210 Atlanta, Georgia		30328
(Address of principal executive office)		(Zip Code)

(561) 682-8000

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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:



Large Accelerated filer	x		Accelerated filer	o
Non-accelerated filer	o	(Do not check if a smaller reporting company)	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes o No x

Number of shares of common stock outstanding as of April 30, 2015: 125,306,121 shares

OCWEN FINANCIAL CORPORATION

FORM 10-Q

TABLE OF CONTENTS



		PAGE
PART I - FINANCIAL INFORMATION

Item 1.	Unaudited Consolidated Financial Statements	4

	Consolidated Balance Sheets at March 31, 2015 and December 31, 2014	4

	Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014	5

	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2015 and 2014	6

	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2015 and 2014	7

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014	8

	Notes to Unaudited Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	48

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	65

Item 4.	Controls and Procedures	67

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	67

Item 1A.	Risk Factors	67

Item 6.	Exhibits	68

Signatures		69

FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical fact included in this report, including, without limitation, statements regarding our financial position, business strategy and other plans and objectives for our future operations, are forward-looking statements.

These statements include declarations regarding our management’s beliefs and current expectations. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could”, “intend,” “consider,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict” or “continue” or the negative of such terms or other comparable terminology. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Forward-looking statements involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially from those suggested by such statements. Accordingly, you should not place undue reliance on any forward-looking statement. Important factors that could cause actual results to differ include, but are not limited to, the risks discussed in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014 and the following:


•	adverse effects on our business as a result of recent regulatory settlements;


•	reactions to the announcement of such settlements by key counterparties;


•	increased regulatory scrutiny and media attention, due to rumors or otherwise;


•	uncertainty related to claims, litigation and investigations brought by government agencies and private parties regarding our servicing, foreclosure, modification and other practices;


•	any adverse developments in existing legal proceedings or the initiation of new legal proceedings;


•	our ability to effectively manage our regulatory and contractual compliance obligations;


•	the adequacy of our financial resources, including our sources of liquidity and ability to fund and recover advances, repay borrowings and comply with our debt agreements;


•	our servicer and credit ratings as well as other actions from various rating agencies, including the impact of recent downgrades of our servicer and credit ratings;


•	volatility in our stock price;


•	the characteristics of our servicing portfolio, including prepayment speeds along with delinquency and advance rates;


•	our ability to contain and reduce our operating costs;


•	our ability to successfully modify delinquent loans, manage foreclosures and sell foreclosed properties;


•	uncertainty related to legislation, regulations, regulatory agency actions, regulatory examinations, government programs and policies, industry initiatives and evolving best servicing practices;


•	our dependence on New Residential Investment Corp. (NRZ) for a substantial portion of our advance funding for non-agency mortgage servicing rights;


•	uncertainties related to our long-term relationship with NRZ;


•	the loss of the services of our senior managers;


•	uncertainty related to general economic and market conditions, delinquency rates, home prices and disposition timelines on foreclosed properties;


•	uncertainty related to the actions of loan owners and guarantors, including mortgage-backed securities investors, trustees and government sponsored entities (GSEs), regarding loan put-backs, penalties and legal actions;


•	our ability to comply with our servicing agreements, including our ability to comply with our seller/servicer agreements with GSEs and maintain our status as an approved seller/servicer;


•	uncertainty related to the GSEs substantially curtailing or ceasing to purchase our conforming loan originations;


•	uncertainty related to the processes for judicial and non-judicial foreclosure proceedings, including potential additional costs or delays or moratoria in the future or claims pertaining to past practices;


•	our reserves, valuations, provisions and anticipated realization on assets;


•	our ability to execute on our strategy to reduce the size of our agency portfolio;


•	uncertainty related to the ability of third-party obligors and financing sources to fund servicing advances on a timely basis on loans serviced by us;


•	uncertainty related to the ability of our technology vendors to adequately maintain and support our systems, including our servicing systems, loan originations and financial reporting systems;


•	our ability to effectively manage our exposure to interest rate changes and foreign exchange fluctuations;


•	uncertainty related to our ability to adapt and grow our business;


•	our ability to integrate the systems, procedures and personnel of acquired assets and businesses;


•	our ability to maintain our technology systems and our ability to adapt such systems for future operating environments;


•	failure of our internal security measures or breach of our privacy protections; and


•	uncertainty related to the political or economic stability of foreign countries in which we have operations.

Further information on the risks specific to our business is detailed within this report and our other reports and filings with the Securities and Exchange Commission (SEC) including our Annual Report on Form 10-K for the year ended December 31, 2014 and our Current Reports on Form 8-K. Forward-looking statements speak only as of the date they were made and except for our ongoing obligations under the U.S. federal securities laws, we undertake no obligation to update or revise forward-looking statements whether as a result of new information, future events or otherwise.

PART I – FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)



	March 31, 2015			December 31, 2014
Assets
Cash	$	242,332		$	129,473
Mortgage servicing rights ($897,797 and $93,901 carried at fair value)	1,820,651			1,913,992
Advances	942,538			893,914
Match funded advances	2,252,967			2,409,442
Loans held for sale ($339,508 and $401,120 carried at fair value)	407,997			488,612
Loans held for investment - reverse mortgages, at fair value	1,808,141			1,550,141
Receivables, net	299,836			270,596
Deferred tax assets, net	68,708			76,987
Premises and equipment, net	42,945			43,310
Other assets ($7,701 and $7,355 carried at fair value)	500,659			490,811
Total assets	$	8,386,774		$	8,267,278

Liabilities and Equity
Liabilities
Match funded liabilities	$	2,000,676		$	2,090,247
Financing liabilities ($2,296,892 and $2,058,693 carried at fair value)	2,488,607			2,258,641
Other secured borrowings	1,603,707			1,733,691
Senior unsecured notes	350,000			350,000
Other liabilities	822,244			793,534
Total liabilities	7,265,234			7,226,113

Commitments and Contingencies (Notes 19 and 20)

Equity
Ocwen Financial Corporation (Ocwen) stockholders’ equity
Common stock, $.01 par value; 200,000,000 shares authorized; 125,302,788 and 125,215,615 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively	1,253			1,252
Additional paid-in capital	517,915			515,194
Retained earnings	607,562			530,361
Accumulated other comprehensive loss, net of income taxes	(7,995		)	(8,413		)
Total Ocwen stockholders’ equity	1,118,735			1,038,394
Non-controlling interest in subsidiaries	2,805			2,771
Total equity	1,121,540			1,041,165
Total liabilities and equity	$	8,386,774		$	8,267,278

The accompanying notes are an integral part of these unaudited consolidated financial statements

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)



	For the Three Months Ended March 31,
	2015			2014

Revenue
Servicing and subservicing fees	$	446,541		$	490,459
Gain on loans held for sale, net	44,504			43,987
Other revenues	19,399			16,815
Total revenue	510,444			551,261

Expenses
Compensation and benefits	105,144			105,637
Amortization of mortgage servicing rights	38,494			62,094
Servicing and origination	101,802			43,947
Technology and communications	39,351			36,976
Professional services	56,931			21,398
Occupancy and equipment	25,714			32,051
Other	10,922			47,091
Total expenses	378,358			349,194

Other income (expense)
Interest income	5,575			5,327
Interest expense	(119,396		)	(139,873		)
Gain on sale of mortgage servicing rights	26,406			—
Gain on extinguishment of debt	—			2,253
Other, net	(1,842		)	1,929
Total other expense, net	(89,257		)	(130,364		)

Income before income taxes	42,829			71,703
Income tax expense	8,440			11,217
Net income	34,389			60,486
Net (income) loss attributable to non-controlling interests	(34		)	15
Net income attributable to Ocwen stockholders	34,355			60,501
Preferred stock dividends	—			(581		)
Deemed dividends related to beneficial conversion feature of preferred stock	—			(416		)
Net income attributable to Ocwen common stockholders	$	34,355		$	59,504

Earnings per share attributable to Ocwen common stockholders
Basic	$	0.27		$	0.44
Diluted	$	0.27		$	0.43

Weighted average common shares outstanding
Basic	125,272,228			135,227,067
Diluted	126,999,662			141,089,455

The accompanying notes are an integral part of these unaudited consolidated financial statements

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)



	For the Three Months Ended March 31,
	2015			2014

Net income	$	34,389		$	60,486

Other comprehensive income, net of income taxes:
Reclassification adjustment for losses on cash flow hedges included in net income (1)	418			608
Other	—			1
Total other comprehensive income, net of income taxes	418			609

Comprehensive income	34,807			61,095
Comprehensive income attributable to non-controlling interests	(34		)	15
Comprehensive income attributable to Ocwen stockholders	$	34,773		$	61,110


(1)	Net of tax expense of $0.2 million for the three months ended March 31, 2014. These losses are reclassified to Other, net in the unaudited Consolidated Statements of Operations.

The accompanying notes are an integral part of these unaudited consolidated financial statements

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

(Dollars in thousands)



	Ocwen Stockholders
	Common Stock					Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net of Taxes			Non-controlling Interest in Subsidiaries			Total
	Shares		Amount			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net of Taxes			Non-controlling Interest in Subsidiaries			Total
Balance at December 31, 2014	125,215,615		$	1,252		$	515,194		$	530,361		$	(8,413	)	$	2,771		$	1,041,165
Net income	—		—			—			34,355			—			34			34,389
Cumulative effect of fair value election - Mortgage servicing rights	—		—			—			42,846			—			—			42,846
Exercise of common stock options	85,173		1			508			—			—			—			509
Equity-based compensation and other	2,000		—			2,213			—			—			—			2,213
Other comprehensive income, net of income taxes			—			—			—			418			—			418
Balance at March 31, 2015	125,302,788		$	1,253		$	517,915		$	607,562		$	(7,995	)	$	2,805		$	1,121,540


Balance at December 31, 2013	135,176,271		$	1,352		$	818,427		$	1,002,963		$	(10,151	)	$	—		$	1,812,591
Net income	—		—			—			60,501			—			(15		)	60,486
Preferred stock dividends ($9.38 per share)	—		—			—			(581		)	—			—			(581		)
Deemed dividend related to beneficial conversion feature of preferred stock	—		—			—			(416		)	—			—			(416		)
Conversion of preferred stock	—		—			—			—			—			—			—
Repurchase of common stock	(60,000	)	(1		)	(2,307		)	—			—			—			(2,308		)
Exercise of common stock options	244,000		3			1,036			—			—			—			1,039
Equity-based compensation and other	4,903		—			2,206			—			—			—			2,206
Non-controlling interest in connection with acquisition of controlling interest in Ocwen Structured Investments, LLC	—		—			—			—			—			2,526			2,526
Other comprehensive loss, net of income taxes	—		—			—			—			609			—			609
Balance at March 31, 2014	135,365,174		$	1,354		$	819,362		$	1,062,467		$	(9,542	)	$	2,511		$	1,876,152

The accompanying notes are an integral part of these unaudited consolidated financial statements

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)



For the Three Months Ended March 31,	2015			2014

Cash flows from operating activities
Net income	$	34,389		$	60,486
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of mortgage servicing rights	38,494			62,094
Amortization of debt issuance costs – senior secured term loan	3,755			1,087
Depreciation	4,344			5,540
Provision for bad debts	14,170			31,386
Impairment of mortgage servicing rights	17,769			—
Gain on sale of mortgage servicing rights	(26,406		)	—
Gain on loans held for sale, net	(44,504		)	(43,987		)
Realized and unrealized losses on derivative financial instruments	1,154			920
Gain on extinguishment of debt	—			(2,253		)
Loss on valuation of mortgage servicing rights, at fair value	33,175			5,148
Increase in deferred tax assets, net	(890		)	(3,680		)
Equity-based compensation expense	2,117			1,427
Origination and purchase of loans held for sale	(1,036,150		)	(2,378,056		)
Proceeds from sale and collections of loans held for sale	1,142,282			2,414,699
Changes in assets and liabilities:
Decrease in advances and match funded advances	104,258			13,434
Decrease in receivables and other assets, net	1,330			48,437
Increase (decrease) in other liabilities	20,127			(41,170		)
Other, net	15,604			20,270
Net cash provided by operating activities	325,018			195,782

Cash flows from investing activities
Cash paid to acquire ResCap Servicing Operations (a component of Residential Capital, LLC)	—			(54,220		)
Net cash paid to acquire controlling interest in Ocwen Structured Investments, LLC	—			(7,833		)
Purchase of mortgage servicing rights, net	(3,267		)	(6,698		)
Acquisition of advances in connection with the purchase of mortgage servicing rights	—			(83,942		)
Acquisition of advances in connection with the purchase of loans	—			(60,482		)
Proceeds from sale of advances and match funded advances	1,765			—
Proceeds from sale of mortgage servicing rights	49,465			—
Origination of loans held for investment – reverse mortgages	(235,271		)	(176,658		)
Principal payments received on loans held for investment - reverse mortgages	26,170			14,030
Additions to premises and equipment	(3,918		)	(3,308		)
Other	301			891
Net used in investing activities	(164,755		)	(378,220		)

Cash flows from financing activities
Repayment of match funded liabilities	(89,571		)	(3,151		)
Proceeds from other secured borrowings	1,858,258			1,497,669
Repayments of other secured borrowings	(2,042,969		)	(1,652,903		)
Payment of debt issuance costs	(12,643		)	(175		)
Proceeds from sale of mortgage servicing rights accounted for as a financing	—			123,551
Proceeds from sale of loans accounted for as a financing	238,615			226,626
Proceeds from sale of advances accounted for as a financing	472			55,702
Repurchase of common stock	—			(2,308		)
Payment of preferred stock dividends	—			(581		)
Proceeds from exercise of common stock options	413			1,176
Other	21			706
Net cash (used in) provided by financing activities	(47,404		)	246,312

Net increase in cash	112,859			63,874
Cash at beginning of year	129,473			178,512
Cash at end of period	$	242,332		$	242,386

Supplemental non-cash investing and financing activities
Transfer of loans held for sale to loans held for investment	$	—		$	110,874

The accompanying notes are an integral part of these unaudited consolidated financial statements

OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(Dollars in thousands, except per share data and unless otherwise indicated)

Note 1 – Description of Business and Basis of Presentation

Organization

Ocwen Financial Corporation (NYSE: OCN) (Ocwen, we, us and our) is a financial services holding company which, through its subsidiaries, is engaged in the servicing and origination of mortgage loans. Ocwen is headquartered in Atlanta, Georgia with offices throughout the United States (U.S.) and in the United States Virgin Islands (USVI) with support operations in India and the Philippines. Ocwen is a Florida corporation organized in February 1988.

Ocwen owns all of the common stock of its primary operating subsidiary, Ocwen Mortgage Servicing, Inc. (OMS), and directly or indirectly owns all of the outstanding stock of its other primary operating subsidiaries: Ocwen Loan Servicing, LLC (OLS), Ocwen Financial Solutions Private Limited, Homeward Residential, Inc. (Homeward), and Liberty Home Equity Solutions, Inc. (Liberty).

We perform primary and master servicer activities on behalf of investors and other servicers, including the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the GSEs), the Government National Mortgage Association (Ginnie Mae) and private-label securitizations (non-Agency). As primary servicer, we may be required to make certain payments of property taxes and insurance premiums, default and property maintenance payments, as well as advances of principal and interest payments before collecting them from borrowers. As master servicer, we collect mortgage payments from primary servicers and distribute the funds to investors in the mortgage-backed securities. To the extent the primary servicer does not advance the scheduled principal and interest, as master servicer we are responsible for advancing the shortfall subject to certain limitations.

We originate, purchase, sell and securitize conventional (conforming to the underwriting standards of Fannie Mae or Freddie Mac; collectively referred to as Agency loans) and government insured (Federal Housing Authority (FHA) or Department of Veterans Affairs (VA) forward and reverse mortgages. The GSEs or Ginnie Mae guarantee these securitizations.

Note 1A — Business Environment and Other Uncertainties

We are facing certain challenges and uncertainties that could have significant adverse effects on our business, liquidity and financing activities. We may be adversely impacted by the following, among other things:


•	Failure to maintain sufficient liquidity to operate our servicing and lending businesses;


•	Failure to comply with covenants;


•	Downgrades in our third-party servicer ratings;


•	Regulatory actions against us; or


•	Our relationship with Home Loan Servicing Solutions, Ltd. (HLSS).

Liquidity

Our ability to finance servicing advances is a significant factor that affects our liquidity. Our use of advance financing facilities is integral to our servicing advance financing strategy, as these advance financing facilities are necessary for us to meet our daily advance funding obligations under our servicing agreements. Our advance funding facilities have a 364-day term and the revolving periods for all of our advance funding facilities end in 2015. At March 31, 2015, we had $2.0 billion outstanding under these facilities. In the event we are unable to renew, replace or extend one or more of these advance funding facilities, repayment of the outstanding balance must begin at the end of the respective revolving period. In addition, we use mortgage loan warehouse facilities to fund newly originated loans on a short-term basis until they are sold to secondary market investors, including GSEs or other third-party investors. All of our master repurchase and participation agreements for financing new loan originations have 364-day terms and mature in 2015 under the same construct of 364-day facilities that are typically renewed annually. At March 31, 2015, we had $373.0 million outstanding under these financing arrangements.

We currently plan to renew, replace or extend all of these debt agreements consistent with our historical experience. We currently are in negotiations with our lenders for the renewal, replacement or extension of our debt arrangements that mature or begin amortization in 2015. We may also consider other capital markets transactions including, but not limited to, the sale and financing of advance receivables in the event we do not renew, replace or extend a portion or all of our existing advance financing facilities. We have entered into commitment letters to refinance certain of our debt agreements and extended certain facilities ahead of their scheduled maturity, as detailed below under “Recent Actions.” Our lenders’ obligations to fund under these commitment letters are subject to conditions precedent, some of which are outside our control. In the event we are unable

to renew, replace or extend all of these debt agreements, we may not have adequate sources of funding for our business. Due to the significant level of cash requirements related to servicing advances, we may not have sufficient levels of liquidity to fund the operations without our advance financing facilities. We typically require significantly more liquidity to meet our advance funding obligations than our available cash on hand.

Covenants

Under the terms of our existing debt agreements, we are subject to various qualitative and quantitative covenants. These covenants include:


•	Financial covenants;


•	Covenants to operate in material compliance with applicable laws;


•	Restrictions on our ability to engage in various activities, including but not limited to incurring additional debt, paying dividends, repurchasing or redeeming capital stock, transferring assets or making loans, investments or acquisitions;


•	Monitoring and reporting of various specified transactions or events, including specific reporting on defined events affecting collateral underlying certain debt agreements; and


•	Requirements to provide audited financial statements within specified timeframes, including a requirement under our SSTL that Ocwen’s financial statements and the related audit report be unqualified as to going concern.

Financial covenants in our debt agreements require that we maintain, among other things:


•	a specified interest coverage ratio, which is defined under our SSTL as the ratio of trailing four quarter adjusted EBITDA to trailing four quarter interest expense (each as defined therein);


•	a specified corporate leverage ratio, which is defined under our SSTL as consolidated debt to trailing four quarter adjusted EBITDA (each as defined therein);


•	a specified consolidated total debt to consolidated tangible net worth ratio;


•	a specified loan to value ratio, as defined under our SSTL; and


•	specified levels of consolidated tangible net worth, liquidity and, at the OLS level, net operating income.

As a result of the covenants to which we are subject, we may be limited in the manner in which we conduct our business and may be limited in our ability to engage in favorable business activities or raise additional capital to finance future operations or satisfy future liquidity needs. In addition, breaches or events that may result in a default under our debt agreements include, among other things, noncompliance with our covenants, nonpayment of principal or interest, material misrepresentations, the occurrence of material adverse change, insolvency, bankruptcy, certain material judgments and changes of control. Covenants and defaults of this type are commonly found in debt agreements such as ours. Certain of these covenants and defaults are open to subjective interpretation and, if our interpretation were contested by a lender, a court may ultimately be required to determine compliance or lack thereof. In addition, our debt agreements generally include cross default provisions such that a default under one agreement could trigger defaults under other agreements. If we fail to comply with our debt agreements and are unable to avoid, remedy or secure a waiver of any resulting default, we may be subject to adverse action by our lenders, including termination of further funding, acceleration of outstanding obligations, enforcement of liens against the assets securing or otherwise supporting our obligations, and other legal remedies. Our lenders can waive their contractual rights in the event of a default.

OLS, Homeward and Liberty are parties to seller/servicer agreements and/or subject to guidelines and regulations (collectively, seller/servicer obligations) with one or more of the GSEs, the Department of Housing and Urban Development (HUD), FHA, VA and Ginnie Mae. These seller/servicer obligations include financial covenants that include capital requirements related to tangible net worth, as defined by the applicable agency, an obligation to provide audited consolidated financial statements within 90 days of the applicable entity’s fiscal year end as well as extensive requirements regarding servicing, selling and other matters. To the extent that these requirements are not met or waived, the applicable agency may, at its option, utilize a variety of remedies including, requirements to deposit funds as security for our obligations, sanctions, suspension or even termination of approved seller/servicer status, which would prohibit future originations or securitizations of forward or reverse mortgage loans or servicing for the applicable agency. To date, none of these agencies has communicated any material sanction, suspension or prohibition in connection with our seller/servicer obligations. We believe we were in compliance with the related net worth requirements at March 31, 2015. Our non-Agency servicing agreements also contain requirements regarding servicing practices and other matters, and a failure to comply with these requirements could have an adverse impact on our business.

Servicer Ratings

Standard & Poor’s (S&P), Moody’s Investors Service (Moody’s), Fitch Ratings Inc. (Fitch) and Morningstar, Inc. (Morningstar) rate us as a mortgage servicer. Each of these rating agencies has downgraded our servicer rating within the last nine months. Additionally, three of these rating agencies currently have our ratings outlook as ‘negative’ or ‘on review for downgrade.’ Maintaining minimum ratings from these agencies are important to the conduct of our loan servicing and lending

businesses. Further downgrades in servicer ratings could adversely affect our ability to finance servicing advances and maintain our status as an approved servicer by Fannie Mae and Freddie Mac. The servicer rating requirements of Fannie Mae do not necessarily require or imply immediate action, as Fannie Mae has discretion with respect to whether we are in compliance with their requirements and what actions it deems appropriate under the circumstances in the event that we fall below their desired servicer ratings.

In addition, out of approximately 4,100 non-Agency servicing agreements, approximately 700 with approximately $45.0 billion of UPB as of March 31, 2015 have minimum servicer ratings criteria. As a result of downgrades in our servicer ratings, termination rights have been triggered in approximately 400 of these non-Agency servicing agreements. This represents approximately $25.0 billion in UPB as of March 31, 2015, or approximately 12% of our total non-Agency servicing portfolio. We recently received notices terminating us as the servicer under four of our non-Agency servicing agreements due to rating downgrades. Pursuant to our servicing agreements, generally we are entitled to payment of accrued and unpaid servicing fees through termination as well as all advances and certain other previously unreimbursed amounts, although we lose the future servicing fee revenue. While the financial impact of the termination of servicing under these four servicing agreements, which represent 0.15% of our overall servicing portfolio as of March 31, 2015, is immaterial to our overall financial condition, we could be subject to further terminations, either as a result of recent servicer ratings downgrades or future adverse actions by rating agencies, which could have an adverse effect on our business, financing activities, financial condition and results of operations.

Under one of its advance financing agreements, OLS must maintain certain minimum servicer ratings assigned by S&P, Moody’s and Fitch. If any of these rating agencies withdraws its rating or if the assigned ratings falls below the minimum ratings established in the lending agreement, an early amortization event occurs under the lending agreement if the lender’s agent notifies the indenture trustee that an early amortization event has occurred. As a result of downgrades in our servicer ratings, the lender has the right to deliver such notice at any time. The lender has agreed not to deliver such a notice to the indenture trustee subject to its ongoing monthly review. If an early amortization event occurs and is not waived by the lender, no new advances can be funded under the facility, all collections on advances funded through the facility must be used to pay interest and principal on currently outstanding borrowings under the facility, minimum facility balance repayments would be instituted, and the interest rate margin on 1-month LIBOR would increase. At March 31, 2015, we had $348.3 million of borrowings outstanding under this facility out of a maximum borrowing capacity of $400.0 million. The scheduled date to begin amortization of this facility is June 2015. As described below under “Recent Actions,” one of our commitment letters provides for replacement financing should the existing lender seek not to renew or extend the revolving period upon its completion in June 2015.

Downgrades in our servicer ratings could also affect the terms and availability of debt financing facilities that we may seek in the future.

Our failure to maintain minimum or specified ratings could adversely affect our dealings with contractual counterparties, including GSEs, and regulators, any of which could have a material adverse effect on our business, financing activities, financial condition and results of operations.

Regulatory Uncertainties

As a result of the current regulatory environment, we have faced, and expect to continue to face, increased regulatory and public scrutiny as well as stricter and more comprehensive regulation of our business. We have recently entered into a number of regulatory settlements which have significantly impacted our ability to grow our servicing portfolio and which subject us to ongoing monitoring or reporting. See Note 18 - Regulatory Requirements and Note 20 - Contingencies for further information regarding regulatory requirements, our recent regulatory settlements and regulatory-related contingencies.

To the extent that an examination or other regulatory engagement reveals a failure by us to comply with applicable law, regulation or licensing requirement, or if we fail to comply with the commitments we have made under our regulatory settlements or if other regulatory actions are taken in the future against us of a similar or different nature, this could lead to (i) loss of our licenses and approvals to engage in our servicing and lending businesses, (ii) governmental investigations and enforcement actions, (iii) administrative fines and penalties and litigation, (iv) civil and criminal liability, including class action lawsuits, (v) breaches of covenants and representations under our servicing, debt or other agreements, (vi) inability to raise capital and (vii) inability to execute on our business strategy. Any of these occurrences could increase our operating expenses and reduce our revenues, hamper our ability to grow or otherwise materially and adversely affect our business, reputation, financial condition and results of operations.

Our Relationship with HLSS

We have sold rights to receive servicing fees, excluding ancillary income, with respect to certain non-Agency MSRs (Rights to MSRs), together with the related servicing advances, to HLSS. As of March 31, 2015 and through the date of HLSS’ sale transaction with New Residential Investment Corp. (NRZ) on April 6, 2015, we were dependent upon HLSS for financing

of servicing advance obligations for loans underlying Rights to MSRs where we are the servicer but HLSS assumed this obligation under the terms of our agreements with HLSS. HLSS, in turn, was dependent upon its advance financing facilities in order to fund a substantial portion of the servicing advances that it was contractually obligated to make pursuant to our agreements with HLSS. As of March 31, 2015, we were the servicer on Rights to MSRs pertaining to approximately $156.3 billion in UPB and the associated outstanding servicing advances as of such date were approximately $5.8 billion.

HLSS’ advance funding facilities had a 364-day term and the revolving periods for a significant portion of their advance funding facilities were scheduled to end in 2015. We are contractually required under our servicing agreements to make the relevant servicing advances even if HLSS did not, or was unable to, perform in accordance with its contractual obligations to fund those advances. If an event of default were to be determined, HLSS’ advance financing facilities revolving periods would terminate and the facilities would begin amortization. There were no provisions under which Ocwen would have been obligated to repay the HLSS advance financing facilities upon an event of default by HLSS. Instead, Ocwen, as servicer, would have been immediately responsible for all new advances. We do not have any committed or executed financial arrangements to provide for this need should it arise, and we cannot provide any assurances that such financing would be available, or if available, could be obtained at terms and conditions acceptable to us.

On April 6, 2015, HLSS closed on the sale of substantially all of its assets to NRZ. Following the sale, NRZ, is the owner of the Rights to MSRs and related advances and has assumed HLSS’ rights and obligations under the associated agreements. NRZ is a public company listed on the New York Stock Exchange, whose business is focused on investing in, and actively managing, investments related to residential real estate, including MSRs. NRZ is externally managed and advised by an affiliate of Fortress Investment Group LLC, a global investment management organization.

Recent Actions

To address the uncertainties set forth above, we have proactively engaged with our lenders to address our maturing debt agreements. Recent financing developments include the following:


•	On April 17, 2015, we entered into an agreement with a lender to provide, subject to a definitive master repurchase agreement and other funding conditions, up to $125.0 million of backup financing for new loan originations should existing facilities not renew at their maturity date.

•

On April 17, 2015, we entered into an amendment to the SSTL facility agreement. Effective as of April 20, 2015, the amendment, among other things (1) removed, with respect to the 2014 fiscal year, the requirement that our financial statements and the related audit report must be unqualified as to going concern; and (2) extended the required time period for delivery of the 2014 audited financial statements to May 29, 2015.

•

On May 11, 2015, we entered into an agreement with a global financial institution to refinance, subject to definitive documentation, the maintenance of our current servicer ratings with Standard & Poor’s Ratings Services, and other funding conditions, $500.0 million of commitments under an existing $1.8 billion servicing advance financing facility and to extend the applicable revolving period to or beyond March 31, 2016.


•	Prior to the issuance of these unaudited consolidated financial statements, we entered into amendments or obtained waivers from each lender, to the extent necessary, extending the contractually required time period for delivery of audited financial statements for fiscal year 2014 to May 29, 2015.

On April 6, 2015, we entered into an amendment to certain of the agreements governing our relationship with HLSS. In consideration of our consent to the assignment by HLSS to NRZ of all HLSS’ right, title and interest in, to and under our arrangements with HLSS (including the Rights to MSRs), the amendment, among other things:


•	extended the term during which we are scheduled to be the servicer on loans underlying the Rights to MSRs (along with the associated economic benefits) for two additional years or until April 30, 2020, whichever is earlier, which would depend on the sale date for the applicable Rights to MSRs (existing terms ranged from February 2018 through October 2019 prior to the amendment);


•	provided that such extension will not apply with respect to any servicing agreement that, as of the date that it was scheduled to terminate under our original agreements, is affected by an uncured termination event due to a downgrade of our servicer rating to “Below Average” or lower by S&P or to “SQ4” or lower by Moody’s;


•	provided that the parties will commence negotiating in good faith for an extension of the contract term and the servicing fees payable to us no later than six months prior to the end of the applicable term as extended pursuant to the amendment; and


•	imposed a two-year standstill (until April 6, 2017 and subject to certain conditions) on the rights of NRZ to replace us as servicer.

In the event there is a future downgrade of our S&P servicer rating below our current rating of “Average,” we have also agreed to compensate NRZ, as successor to HLSS, for certain increased costs associated with its servicing advance financing facilities, including increased costs of funding, to the extent such costs are the direct result of such downgrade. The amendment provided that any such compensation, if required, shall not exceed $3.0 million for any calendar month or $36.0 million in the

aggregate. In such an event, NRZ has agreed to use commercially reasonable efforts to assist us in curing any potential cost increases by obtaining amendments to the relevant financing agreements.

Consistent with our strategic plan to sell a significant portion of our Agency MSRs, we have announced or completed a number of asset sales, including the following:

•

On March 2, 2015, we signed a letter of intent with JPMorgan Chase & Co. for the sale of MSRs on a portfolio consisting of approximately 250,000 performing Agency loans owned by Fannie Mae with a total UPB of approximately $42.0 billion. On May 13, 2015, we signed a definitive agreement having obtained all necessary approvals. This transaction is scheduled to close on June 1, 2015. In connection with this transaction, on April 17, 2015, we entered into a letter agreement with Fannie Mae pursuant to which we will designate a portion of the expected proceeds as prepayments to secure against certain future obligations. These future obligations include repurchases, indemnifications and various fees. The total cash pre-payments are $15.4 million, including $3.2 million paid on April 27, 2015 with the remainder to be paid on June 1, 2015. Another $37.5 million of escrowed collateral will be set aside on June 1, 2015 to secure potential future obligations not covered by the prepaid amount.

•

On March 18, 2015, OLS and Green Tree Loan Servicing, a subsidiary of Walter Investment Management Corp. (collectively Walter), signed an agreement in principle for the sale of residential MSRs on a portfolio consisting of approximately 54,000 largely performing loans owned by Freddie Mac with a total UPB of approximately $9.2 billion. We executed a definitive agreement on April 29, 2015 and initial funding occurred on April 30, 2015. We expect that servicing will begin to transfer on or around June 16, 2015.

•

On March 24, 2015, we announced that OLS and Nationstar Mortgage LLC, an indirectly held, wholly owned subsidiary of Nationstar Mortgage Holdings Inc. (collectively, “Nationstar”), have agreed in principle to the sale of residential MSRs on a portfolio consisting of approximately 140,000 loans owned by Freddie Mac and Fannie Mae with a total UPB of approximately $24.9 billion. We closed on the sale of a portion of these MSRs, with a total UPB of approximately $2.7 billion, on April 30, 2015. The sale of the remaining MSRs, subject to a definitive agreement, approvals by Fannie Mae and FHFA and other customary conditions, is expected to close in June 2015.


•	On March 31, 2015, OLS closed on a sale agreement with Nationstar for the sale of residential MSRs on a portfolio consisting of 76,000 performing loans owned by Freddie Mac with a UPB of $9.1 billion. Servicing was successfully transferred on April 16, 2015.

We currently expect to receive approximately $860.0 million of proceeds from the above described transactions, subject in each case to necessary approvals and the satisfaction of closing conditions. We expect that the majority of such proceeds will be used for prepayments under our SSTL. In addition, on April 30, 2015, we announced agreements with Fannie Mae and Freddie Mac to sell portfolios of non-performing loan servicing. We expect these transactions to close over the coming months, with the first transfer having occurred on May 1, 2015. These transactions will include payments to the GSEs to assume the delinquent servicing and may, in some cases, include settlements of certain indemnification obligations. We expect these transactions to be cash flow positive as we will be reimbursed for outstanding advances.

We have been, and continue to, engage in communications with the ratings agencies and key stakeholders, including the GSEs, in connection with recent and planned future actions and developments, including the uncertainties identified above.

We also continue to work with our regulators, including the CFPB and state regulators and attorneys general, on enhancing our risk and compliance management systems and remediating deficiencies. We are currently unaware of any significant unresolved issues with state agencies and not aware of, nor anticipating, any material regulatory fines, penalties or settlements. We are not aware of any pending or threatened actions to suspend or revoke any state licenses.

There can be no assurances that management’s recent and future actions will be successful in mitigating the above risks and uncertainties in our business.

Note 1B - Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions of the Securities and Exchange Commission (SEC) to Form 10-Q and SEC Regulation S-X, Article 10, Rule 10-01 for interim financial statements. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (GAAP) for complete financial statements. In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. The results of operations and other data for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2015. The unaudited consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014.

Reclassifications

Within the Other income (expense) section of the unaudited Consolidated Statement of Operations for the three months ended March 31, 2014, we reclassified Interest income from Other, net to a separate line item to conform to the current year presentation.

Certain insignificant amounts in the unaudited Consolidated Statement of Cash Flows for the three months ended March 31, 2014 have been reclassified to conform to the current year presentation. These reclassifications had no impact on our consolidated cash flows from operating, investing or financing activities.

Use of Estimates and Assumptions

The preparation of financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses during the reporting period and the related disclosures in the accompanying notes. Such estimates and assumptions include, but are not limited to, those that relate to fair value measurements, the provision for potential losses that may arise from litigation proceedings, and representation and warranty and other indemnification obligations. In developing estimates and assumptions, management uses all available information; however, actual results could materially differ because of uncertainties associated with estimating the amounts, timing and likelihood of possible outcomes.

Note 2 – Securitizations and Variable Interest Entities

We securitize, sell and service forward and reverse residential mortgage loans and regularly transfer financial assets in connection with asset-backed financing arrangements. We have aggregated these securitizations and asset-backed financing arrangements into two groups: (1) securitizations of residential mortgage loans and (2) financings of advances on loans serviced for others.

We have determined that the special purpose entities (SPEs) created in connection with our match funded advance financing facilities are variable interest entities (VIEs) for which we are the primary beneficiary.

Securitizations of Residential Mortgage Loans

Currently, we securitize forward and reverse residential mortgage loans involving the GSEs and Ginnie Mae and loans insured by the FHA or VA. We retain the right to service these loans and receive servicing fees based upon the securitized loan balances and certain ancillary fees, all of which are reported in Servicing and subservicing fees on the unaudited Consolidated Statements of Operations.

Transfers of Forward Loans

We sell or securitize forward loans that we originate or that we purchase from third parties, generally in the form of mortgage-backed securities guaranteed by the GSEs or Ginnie Mae. Securitization usually occurs within 30 days of loan closing or purchase. We retain the servicing rights associated with the transferred loans and receive a servicing fee for services provided. We act only as a fiduciary and do not have a variable interest in the securitization trusts. As a result, we account for these transactions as sales upon transfer.

We report the gain or loss on the transfer of the loans held for sale in Gain on loans held for sale, net in the unaudited Consolidated Statements of Operations along with the changes in fair value of the loans and the gain or loss on any related derivatives. We include all changes in loans held for sale and related derivative balances in operating activities in the unaudited Consolidated Statements of Cash Flows.

The following table presents a summary of cash flows received from and paid to securitization trusts related to transfers accounted for as sales that were outstanding during the three months ended March 31:



	2015		2014
Proceeds received from securitizations	$	1,070,772	$	1,534,251
Servicing fees collected	347		5,194
Purchases of previously transferred assets, net of claims reimbursed	500		—
	$	1,071,619	$	1,539,445

In connection with these transfers, we retained MSRs of $8.5 million and $11.6 million during the three months ended March 31, 2015 and 2014, respectively. We initially record the MSRs at fair value and subsequently account for them at amortized cost.

Certain obligations arise from the agreements associated with our transfers of loans. Under these agreements, we may be obligated to repurchase the loans, or otherwise indemnify or reimburse the investor or insurer for losses incurred due to material breach of contractual representations and warranties.

The following table presents the carrying amounts of our assets that relate to our continuing involvement with forward loans that we have transferred with servicing rights retained as well as our maximum exposure to loss including the unpaid principal balance (UPB) of the transferred loans at the dates indicated:



	March 31, 2015		December 31, 2014
Carrying value of assets:
Mortgage servicing rights, at amortized cost	$	85,215	$	82,542
Mortgage servicing rights, at fair value	2,656		2,840
Advances and match funded advances	481		1,236
UPB of loans transferred (1)	10,345,586		9,353,187
Maximum exposure to loss	$	10,433,938	$	9,439,805


(1)	The UPB of the loans transferred is the maximum exposure to loss under our standard representations and warranties obligations.

At March 31, 2015 and December 31, 2014, 4.9% and 5.1%, respectively, of the transferred residential loans that we service were 60 days or more past due. During the three months ended March 31, 2015, there were no charge-offs, net of recoveries, associated with these transferred loans.

Transfers of Reverse Mortgages

We are an approved issuer of Ginnie Mae Home Equity Conversion Mortgage-Backed Securities (HMBS) that are guaranteed by Ginnie Mae. We originate Home Equity Conversion Mortgages (HECMs, or reverse mortgages) that are insured by the FHA. We then pool the loans into HMBS that we sell into the secondary market with servicing rights retained. We have determined that loan transfers in the HMBS program do not meet the definition of a participating interest because of the servicing requirements in the product that require the issuer/servicer to absorb some level of interest rate risk, cash flow timing risk and incidental credit risk. As a result, the transfers of the HECMs do not qualify for sale accounting, and therefore, we account for these transfers as financings. Under this accounting treatment, the HECMs are classified as Loans held for investment - reverse mortgages, at fair value, on our unaudited Consolidated Balance Sheets. We record the proceeds from the transfer of assets as secured borrowings (HMBS-related borrowings) in Financing liabilities and recognize no gain or loss on the transfer. Holders of participating interests in the HMBS have no recourse against the assets of Ocwen, except for standard representations and warranties and our contractual obligation to service the HECMs and the HMBS.

We have elected to measure the HECMs and HMBS-related borrowings at fair value. The changes in fair value of the HECMs and HMBS-related borrowings are included in Other revenues in our unaudited Consolidated Statements of Operations. Included in net fair value gains on the HECMs and related HMBS borrowings are the interest income that we expect to be collected on the HECMs and the interest expense that we expect to be paid on the HMBS-related borrowings. We report originations and collections of HECMs in investing activities in the unaudited Consolidated Statements of Cash Flows. We report net fair value gains on HECMs and the related HMBS borrowings as an adjustment to the net cash provided by or used in operating activities in the unaudited Consolidated Statements of Cash Flows. Proceeds from securitizations of HECMs and payments on HMBS-related borrowings are included in financing activities in the unaudited Consolidated Statements of Cash Flows.

At March 31, 2015 and December 31, 2014, we had HMBS-related borrowings of $1.7 billion and $1.4 billion and HECMs pledged as collateral to the pools of $1.8 billion and $1.6 billion, respectively.

Financings of Advances on Loans Serviced for Others

Match funded advances on loans serviced for others result from our transfers of residential loan servicing advances to SPEs in exchange for cash. We consolidate these SPEs because we have determined that Ocwen is the primary beneficiary of the SPE. These SPEs issue debt supported by collections on the transferred advances.

We make the transfers to these SPEs under the terms of our advance financing facility agreements. We classify the transferred advances on our unaudited Consolidated Balance Sheets as Match funded advances and the related liabilities as Match funded liabilities. The SPEs use collections of the pledged advances to repay principal and interest and to pay the expenses of the SPE. Holders of the debt issued by these entities can look only to the assets of the SPE for satisfaction of the debt and have no recourse against Ocwen. The assets and liabilities of the advance financing SPEs are comprised solely of

Match funded advances, Debt service accounts, Match funded liabilities and amounts due to affiliates. Amounts due to affiliates are eliminated in consolidation in our unaudited Consolidated Balance Sheets.

Note 3 – Fair Value

Fair value is estimated based on a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs to valuation techniques into three broad levels whereby the highest priority is given to Level 1 inputs and the lowest to Level 3 inputs.


Level 1:	Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.


Level 2:	Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.


Level 3:	Unobservable inputs for the asset or liability.

We classify assets in their entirety based on the lowest level of input that is significant to the fair value measurement.

The carrying amounts and the estimated fair values of our financial instruments and certain of our nonfinancial assets measured at fair value on a recurring or non-recurring basis or disclosed, but not carried, at fair value are as follows at the dates indicated:



		March 31, 2015						December 31, 2014
	Level	Carrying Value			Fair Value			Carrying Value			Fair Value
Financial assets:
Loans held for sale:
Loans held for sale, at fair value (a)	2	$	339,508		$	339,508		$	401,120		$	401,120
Loans held for sale, at lower of cost or fair value (b)	3	68,489			68,489			87,492			87,492
Total Loans held for sale		$	407,997		$	407,997		$	488,612		$	488,612
Loans held for investment - Reverse mortgages, at fair value (a)	3	$	1,808,141		$	1,808,141		$	1,550,141		$	1,550,141
Advances and match funded advances (c)	3	3,195,505			3,195,505			3,303,356			3,303,356
Receivables, net (c)	3	299,836			299,836			270,596			270,596
Mortgage-backed securities, at fair value (a)	3	7,701			7,701			7,335			7,335

Financial liabilities:
Match funded liabilities (c)	3	$	2,000,676		$	2,000,676		$	2,090,247		$	2,090,247
Financing liabilities:
HMBS-related borrowings, at fair value (a)	3	$	1,702,397		$	1,702,397		$	1,444,252		$	1,444,252
Financing liability - MSRs pledged (a)	3	594,495			594,495			614,441			614,441
Other (c)	3	191,715			172,610			199,948			189,648
Total Financing liabilities		$	2,488,607		$	2,469,502		$	2,258,641		$	2,248,341
Other secured borrowings:
Senior secured term loan (c)	2	$	1,196,498		$	1,155,166		$	1,273,219		$	1,198,227
Other (c)	3	407,209			407,209			460,472			460,472
Total Other secured borrowings		$	1,603,707		$	1,562,375		$	1,733,691		$	1,658,699

Senior unsecured notes (c)	2	$	350,000		$	304,500		$	350,000		$	321,563

Derivative financial instruments assets (liabilities) (a):
Interest Rate Lock Commitments (IRLCs)	2	$	9,516		$	9,516		$	6,065		$	6,065
Forward MBS trades	1	(5,249		)	(5,249		)	(2,854		)	(2,854		)
Interest rate caps	3	203			203			567			567

MSRs:
MSRs, at fair value (a)	3	$	897,797		$	897,797		$	93,901		$	93,901
MSRs, at amortized cost (c) (d)	3	922,854			1,064,134			1,820,091			2,237,703
Total MSRs		$	1,820,651		$	1,961,931		$	1,913,992		$	2,331,604


(a)	Measured at fair value on a recurring basis.


(b)	Measured at fair value on a non-recurring basis.


(c)	Disclosed, but not carried, at fair value.


(d)	The balance at March 31, 2015 includes our impaired government-insured stratum of amortization method MSRs, which is measured at fair value on a non-recurring basis. The carrying value of this stratum at March 31, 2015 was $127.1 million, net of a valuation allowance of $17.8 million.

The following tables present a reconciliation of the changes in fair value of Level 3 assets and liabilities that we measure at fair value on a recurring basis.



	Loans Held for Investment - Reverse Mortgages			HMBS-Related Borrowings			Mortgage-Backed Securities		Financing Liability - MSRs Pledged			Derivatives			MSRs			Total
Three months ended March 31, 2015
Beginning balance	$	1,550,141		$	(1,444,252	)	$	7,335	$	(614,441	)	$	567		$	93,901		$	(406,749	)
Purchases, issuances, sales and settlements:
Purchases	—			—			—		—			—			—			—
Issuances	235,271			(238,615		)	—		—			—			(1,169		)	(4,513		)
Transfer from MSRs, at amortized cost	—			—			—		—			—			839,157			839,157
Transfer from loans held for sale, at fair value	—			—			—		—			—			—			—
Sales	—			—			—		—			—			(917		)	(917		)
Settlements (1)	(26,233		)	25,985			—		19,946			—			—			19,698
	209,038			(212,630		)	—		19,946			—			837,071			853,425
Total realized and unrealized gains and (losses) (2):
Included in earnings	48,962			(45,515		)	366		—			(364		)	(33,175		)	(29,726		)
Included in Other comprehensive income	—			—			—		—			—			—			—
	48,962			(45,515		)	366		—			(364		)	(33,175		)	(29,726		)
Transfers in and / or out of Level 3	—			—			—		—			—			—			—
Ending balance	$	1,808,141		$	(1,702,397	)	$	7,701	$	(594,495	)	$	203		$	897,797		$	416,950



	Loans Held for Investment - Reverse Mortgages			HMBS-Related Borrowings			Mortgage-Backed Securities			Financing Liability - MSRs Pledged			Derivatives			MSRs			Total
Three months ended March 31, 2014
Beginning balance	$	618,018		$	(615,576	)	$	—		$	(633,804	)	$	442		$	116,029		$	(514,891	)
Purchases, issuances, sales and settlements:
Purchases	—			—			7,677			—			—			—			7,677
Issuances	176,658			(226,626		)	—			—			24			—			(49,944		)
Transfer from loans held for sale, at fair value	110,874			—			—			—			—			—			110,874
Sales	—			—			—			—						—			—
Settlements	(14,029		)	5,386			—			(595		)	—			—			(9,238		)
	273,503			(221,240		)	7,677			(595		)	24			—			59,369
Total realized and unrealized gains and (losses):
Included in earnings	31,943			(33,646		)	(156		)	—			(142		)	(5,203		)	(7,204		)
Included in Other comprehensive income	—			—			—			—			—			—			—
	31,943			(33,646		)	(156		)	—			(142		)	(5,203		)	(7,204		)
Transfers in and / or out of Level 3	—			—			—			—			—			—			—
Ending balance	$	923,464		$	(870,462	)	$	7,521		$	(634,399	)	$	324		$	110,826		$	(462,726	)


(1)	In the event of a transfer of servicing to another party related to Rights to MSRs sold to HLSS, and now NRZ, we are required to reimburse HLSS, and now NRZ, at predetermined contractual rates for the loss of servicing revenues. Settlements for Financing liability - MSRs pledged for the three months ended March 31, 2015 includes $2.2 million of such reimbursements.


(2)	Total losses attributable to derivative financial instruments still held at March 31, 2015 were $0.4 million for the three months ended March 31, 2015.

The methodologies that we use and key assumptions that we make to estimate the fair value of financial instruments and other assets and liabilities measured at fair value on a recurring or non-recurring basis and those disclosed, but not carried, at fair value are described below.

Loans Held for Sale

We originate and purchase residential mortgage loans that we intend to sell to the GSEs. We also own residential mortgage loans that are not eligible to be sold to the GSEs due to delinquency or other factors. Residential forward and reverse mortgage loans that we intend to sell to the GSEs are carried at fair value as a result of a fair value election. Such loans are subject to changes in fair value due to fluctuations in interest rates from the closing date through the date of the sale of the loan into the secondary market. These loans are classified within Level 2 of the valuation hierarchy because the primary component of the price is obtained from observable values of mortgage forwards for loans of similar terms and characteristics. We have the ability to access this market, and it is the market into which conventional and government-insured mortgage loans are typically sold.

We repurchase certain loans from Ginnie Mae guaranteed securitizations in connection with loan modifications and loan resolution activity as part of our contractual obligations as the servicer of the loans. These loans are classified as loans held for sale at the lower of cost or fair value, in the case of modified loans, as we expect to redeliver (sell) the loans to new Ginnie Mae guaranteed securitizations. The fair value of these loans is estimated using published forward Ginnie Mae prices. Loans repurchased in connection with loan resolution activities are modified or otherwise remediated through loss mitigation activities or are reclassified to receivables. Because these loans are insured or guaranteed by the FHA or VA, the fair value of these loans represents the net recovery value taking into consideration the insured or guaranteed claim.

For all other loans held for sale, which we report at the lower of cost or fair value, market illiquidity has reduced the availability of observable pricing data. When we enter into an agreement to sell a loan or pool of loans to an investor at a set price, we value the loan or loans at the commitment price. We base the fair value of uncommitted loans on the expected future cash flows discounted at a rate commensurate with the risk of the estimated cash flows.

Loans Held for Investment – Reverse Mortgages

We have elected to measure these loans at fair value. For transferred reverse mortgage loans that do not qualify as sales for accounting purposes, we base the fair value on the expected future cash flows discounted over the expected life of the loans at a rate commensurate with the risk of the estimated cash flows. Significant assumptions include expected prepayment and delinquency rates and cumulative loss curves. The discount rate assumption for these assets is primarily based on an assessment of current market yields on newly originated reverse mortgage loans, expected duration of the asset and current market interest rates.

The more significant assumptions used in the March 31, 2015 valuation include:


•	Life in years ranging from 6.47 to 10.48 (weighted average of 6.96);


•	Conditional repayment rate ranging from 4.81% to 53.75% (weighted average of 19.25%); and


•	Discount rate of 2.80%.

Significant increases or decreases in any of these assumptions in isolation could result in a significantly lower or higher fair value, respectively. The effects of changes in the assumptions used to value the loans held for investment are largely offset by the effects of changes in the assumptions used to value the HMBS-Related Borrowings that are associated with these loans.

Mortgage Servicing Rights

The significant components of the estimated future cash inflows for MSRs include servicing fees, late fees, float earnings and other ancillary fees. Significant cash outflows include the cost of servicing, the cost of financing servicing advances and compensating interest payments.

Third-party valuation experts generally utilize: (a) transactions involving instruments with similar collateral and risk profiles, adjusted as necessary based on specific characteristics of the asset or liability being valued; and/or (b) industry-standard modeling, such as a discounted cash flow model, in arriving at their estimate of fair value. The prices provided by the valuation experts reflect their observations and assumptions related to market activity, including risk premiums and liquidity adjustments. The models and related assumptions used by the valuation experts are owned and managed by them and, in many cases, the significant inputs used in the valuation techniques are not reasonably available to us. However, we have an internal understanding of the processes and assumptions used to develop the prices based on our ongoing due diligence, which includes regular discussions with the valuation experts. We believe that the procedures executed by the valuation experts, supported by our internal verification and analytical procedures, provide assurance that the prices used in our Consolidated Financial Statements comply with the accounting guidance for fair value measurements and disclosures and reflect the assumptions that a market participant would use.

We evaluate the reasonableness of our third party experts’ assumptions using historical experience adjusted for prevailing market conditions. Assumptions used in the valuation of MSRs include:



•	Mortgage prepayment speeds	•	Interest rate used for computing the cost of financing servicing advances
•	Cost of servicing	•	Interest rate used for computing float earnings
•	Discount rate	•	Compensating interest expense
•	Delinquency rates	•	Collection rate of other ancillary fees

Amortized Cost MSRs

We estimate the fair value of MSRs carried at amortized cost using a process that involves either actual sale prices obtained or the use of third-party valuation experts, supported by commercially available discounted cash flow models and analysis of current market data. To provide greater price transparency to investors, we disclose actual Ocwen sale prices for orderly transactions where available in lieu of third-party valuations.

The more significant assumptions used in the March 31, 2015 valuation include:



Weighted average prepayment speed	12.57		%
Weighted average delinquency rate	10.81		%
Advance financing cost	5-year swap
Interest rate for computing float earnings	5-year swap
Weighted average discount rate	9.38		%
Weighted average cost to service (in dollars)	$	86

We perform an impairment analysis based on the difference between the carrying amount and fair value after grouping the underlying loans into the applicable strata. In response to the significant change in the composition of our MSR portfolio as a result of recent acquisitions, our strata are defined as conventional and government-insured.

Fair Value MSRs

MSRs carried at fair value are classified within Level 3 of the valuation hierarchy. The fair value is equal to the mid-point of the range of prices provided by third-party valuation experts, without adjustment, except in the event we have a potential or completed Ocwen sale, including transactions where we have executed letters of intent, in which case the fair value of the MSRs is carried at the estimated sale price. Fair value reflects actual Ocwen sale prices for orderly transactions where available in lieu of independent third-party valuations. Our valuation process includes discussions of bid pricing with the third-party valuation experts and presumably are contemplated along with other market-based transactions for their model validation.

A change in the valuation inputs utilized by the valuation experts might result in a significantly higher or lower fair value measurement. Changes in market interest rates tend to impact the fair value for Agency MSRs via prepayment speeds by altering the borrower refinance incentive, and for Non-Agency MSRs via a market rate indexed cost of advance funding. Other key assumptions used in the valuation of these MSRs include delinquency rates and discount rates.

The primary assumptions used in the March 31, 2015 valuation include:



	Agency			Non Agency
Weighted average prepayment speed	10.47		%	17.28		%
Weighted average delinquency rate	0.86		%	30.02		%
Advance financing cost	5-year swap			1ML plus 3.5%
Interest rate for computing float earnings	5-year swap			1ML
Weighted average discount rate	9.01		%	14.95		%
Weighted average cost to service (in dollars)	$	69		$	339

Advances

We value advances at their net realizable value, which generally approximates fair value, because advances have no stated maturity, are generally realized within a relatively short period of time and do not bear interest.

Receivables

The carrying value of receivables generally approximates fair value because of the relatively short period of time between their origination and realization.

Mortgage-Backed Securities

Our subordinate and residual securities are not actively traded, and therefore, we estimate the fair value of these securities based on the present value of expected future cash flows from the underlying mortgage pools. We use our best estimate of the key assumptions we believe are used by market participants. We calibrate our internally developed discounted cash flow models for trading activity when appropriate to do so in light of market liquidity levels. Key inputs include expected prepayment rates, delinquency and cumulative loss curves and discount rates commensurate with the risks. Where possible, we use observable inputs in the valuation of our securities. However, the subordinate and residual securities in which we have invested trade infrequently and therefore have few or no observable inputs and little price transparency. Additionally, during periods of market dislocation, the observability of inputs is further reduced.

Discount rates for the subordinate and residual securities are determined based upon an assessment of prevailing market conditions and prices for similar assets. We project the delinquency, loss and prepayment assumptions based on a comparison to actual historical performance curves adjusted for prevailing market conditions.

Match Funded Liabilities

For match funded liabilities that bear interest at a rate that is adjusted regularly based on a market index, the carrying value approximates fair value. For match funded liabilities that bear interest at a fixed rate, we determine fair value by discounting the future principal and interest repayments at a market rate commensurate with the risk of the estimated cash flows. We estimate principal repayments of match funded liabilities during the amortization period based on our historical advance collection rates and taking into consideration any plans to refinance the notes. At March 31, 2015 and December 31, 2014, the interest on all borrowings under match funded facilities was based on a variable rate adjusted regularly using a market index, and therefore, the carrying value approximates fair value.

Financing Liabilities

HMBS-Related Borrowings

We have elected to measure these borrowings at fair value. We recognize the proceeds from the transfer of reverse mortgages as a secured borrowing that we account for at fair value. These borrowings are not actively traded, and therefore, quoted market prices are not available. We determine fair value by discounting the future principal and interest repayments over the estimated life of the borrowing at a market rate commensurate with the risk of the estimated cash flows. Significant assumptions include prepayments, discount rate and borrower mortality rates for reverse mortgages. The discount rate assumption for these liabilities is based on an assessment of current market yields for newly issued HMBS, expected duration and current market interest rates.

The more significant assumptions used in the March 31, 2015 valuation include:


•	Life in years ranging from 4.90 to 10.48 (weighted average of 5.61);


•	Conditional repayment rate ranging from 4.81% to 53.75% (weighted average of 19.25%); and


•	Discount rate of 2.05%.

Significant increases or decreases in any of these assumptions in isolation would result in a significantly higher or lower fair value.

MSRs Pledged

We periodically sell Rights to MSRs. Because we have retained legal title to the MSRs, the sales of Rights to MSRs are accounted for as financings. We initially establish the value of the Financing Liability - MSRs Pledged based on the price at which the Rights to MSRs are sold. Thereafter, the carrying value of the Financing Liability - MSRs pledged is adjusted to fair value at each reporting date. We determine fair value by applying the price of the underlying MSRs to the remaining principal balance related to the underlying MSRs. Since we have elected fair value for our portfolio of private-label MSRs, future fair value changes in the Financing Liability - MSRs Pledged will be largely offset by changes in the fair value of the related MSRs.

The more significant assumptions used in determination of the price of the underlying MSRs at March 31, 2015 include:



Weighted average prepayment speed	17.83		%
Weighted average delinquency rate	31.00		%
Advance financing cost	1ML plus 3.5%
Interest rate for computing float earnings	1ML
Weighted average discount rate	15.22		%
Weighted average cost to service (in dollars)	$	345

Significant increases or decreases in these assumptions in isolation would result in a significantly higher or lower fair value

Secured Notes

We issued Ocwen Asset Servicing Income Series (OASIS), Series 2014-1 Notes secured by Ocwen-owned MSRs relating to Freddie Mac mortgages. We accounted for this transaction as a financing. We determine the fair value based on bid prices provided by third parties involved in the issuance and placement of the notes.

Other Secured Borrowings

The carrying value of secured borrowings that bear interest at a rate that is adjusted regularly based on a market index approximates fair value. For other secured borrowings that bear interest at a fixed rate, we determine fair value by discounting the future principal and interest repayments at a market rate commensurate with the risk of the estimated cash flows. For the SSTL, we based the fair values at March 31, 2015 and December 31, 2014 on quoted prices in a market with limited trading activity.

Senior Unsecured Notes

We base the fair value on quoted prices in a market with limited trading activity.

Derivative Financial Instruments

IRLCs represent an agreement to purchase loans from a third-party originator or an agreement to extend credit to a mortgage applicant (locked pipeline), whereby the interest rate is set prior to funding. IRLCs are classified within Level 2 of the valuation hierarchy as the primary component of the price is obtained from observable values of mortgage forwards for loans of similar terms and characteristics. Fair value amounts of IRLCs are adjusted for expected “fallout” (locked pipeline loans not expected to close) using models that consider cumulative historical fallout rates and other factors.

We enter into forward mortgage-backed securities (MBS) trades to provide an economic hedge against changes in fair value of residential forward and reverse mortgage loans held for sale that we carry at fair value. Forward MBS trades are primarily used to fix the forward sales price that will be realized upon the sale of mortgage loans into the secondary market. Forward contracts are actively traded in the market and we obtained unadjusted market quotes for these derivatives, thus they are classified within Level 1 of the valuation hierarchy.

In addition, we may use interest rate caps to minimize future interest rate exposures on variable rate debt issued on servicing advance financing facilities from increases in one-month LIBOR interest rates. The fair value for interest rate caps is based on counterparty market prices and adjusted for counterparty credit risk.

Note 4 — Sales of Advances and MSRs to HLSS

In order to efficiently finance our assets and operations and to create liquidity, we periodically sell MSRs, Rights to MSRs and servicing advances to market participants, including HLSS. We typically retain the right to subservice loans when we sell MSRs and we remain the servicer on the Rights to MSRs sold to HLSS. Counterparties may also acquire advance financing SPEs and the related match funded liabilities. In connection with sales of Rights to MSRs, we retain legal ownership of the MSRs and continue to service the related mortgage loans until such time as all necessary consents are received. We are obligated to transfer legal ownership of the MSRs to NRZ, upon it obtaining all required third-party consents and licenses.

On April 6, 2015, HLSS MSR-EBO Acquisition, LLC, a subsidiary of NRZ, entered into a transaction to acquire substantially all of the assets of HLSS, including HLSS Holdings, LLC, and Ocwen entered into a consent to this transfer and amendment of its agreements with NRZ. NRZ, through its subsidiaries, is now the owner of the Rights to MSRs and has assumed HLSS’ rights and obligations under the associated agreements.

Pursuant to our agreements, HLSS and now NRZ, assumed the obligation to fund new servicing advances with respect to the Rights to MSRs. However, because we remain the servicer on the loans for which the Rights to MSRs have been sold to HLSS, in the event HLSS, and now NRZ, were to fail to fulfill its advance funding obligations, as the servicer under our servicing agreements, we would be contractually obligated to fund such advances. At March 31, 2015, HLSS had outstanding advances of approximately $5.8 billion in connection with the Rights to MSRs. On April 6, 2015, we entered into an amendment to the various purchase and sale supplement agreements with NRZ.

As it relates to the sale of Rights to MSRs to HLSS (together with the sale of the related servicing advances, the HLSS Transactions), if and when such transfer of legal ownership occurs, OLS will subservice the loans pursuant to a subservicing agreement, as amended, with NRZ. There were no sales to HLSS during the first quarter of either 2015 or 2014.

We have also, and in the future may, sell MSRs in transactions accounted for as sales. We may retain subservicing in connection with the transactions.

To the extent we retain legal title to the MSRs, the sales of Rights to MSRs are accounted for as financings. Upon receipt of third-party consents, we would derecognize the related MSRs. Upon derecognition, any resulting gain or loss is deferred and amortized over the expected life of the related subservicing agreement. Until derecognition, we continue to recognize the full amount of servicing revenue and amortization of the MSRs.

The sales of the related advances generally meet the requirements for sale accounting, and the advances are derecognized from our financial statements at the time of the sale.

In 2014, Ocwen sold advances related to certain FHA-insured mortgage loans to subsidiaries of HLSS, now subsidiaries of NRZ. These advance sales did not qualify for sales treatment and were accounted for as financings.

Note 5 – Loans Held for Sale

Loans Held for Sale - Fair Value

Loans held for sale, at fair value, represent residential mortgage loans originated or purchased and held until sold to secondary market investors, such as the GSEs or other third parties. The following table summarizes the activity in the balance during the three months ended March 31:



	2015			2014
Beginning balance	$	401,120		$	503,753
Originations and purchases	922,254			1,416,797
Proceeds from sales	(990,634		)	(1,481,403		)
Transfers to loans held for investment - reverse mortgages	—			(110,874		)
Gain on sale of loans	15,265			12,863
Other	(8,497		)	(2,908		)
Ending balance	$	339,508		$	338,228

At March 31, 2015, loans held for sale, at fair value with a UPB of $311.0 million were pledged to secure warehouse lines of credit in our Lending segment.

Loans Held for Sale - Lower of Cost or Fair Value

Loans held for sale, at lower of cost or fair value, include residential loans that we do not intend to hold to maturity. The following table summarizes the activity in the balance during the three months ended March 31:



	2015			2014
Beginning balance	$	87,492		$	62,907
Purchases	113,896			959,756
Proceeds from sales	(140,948		)	(835,786		)
Principal collections	(13,863		)	(96,300		)
Transfers to accounts receivable	(16,572		)	(66,187		)
Transfers to real estate owned	(2,296		)	(648		)
Gain on sale of loans	17,271			23,031
Decrease (increase) in valuation allowance	19,728			(4,163		)
Other	3,781			2,865
Ending balance (1) (2)	$	68,489		$	45,475

(1)

The balances at March 31, 2015 and March 31, 2014 are net of valuation allowances of $29.9 million and $36.0 million, respectively. The decrease in the valuation allowance for the three months ended March 31, 2015 resulted principally from the reversal of $22.5 million of the allowance that was associated with loans that were sold to an unrelated third party in March 2015. This decrease was partly offset by an increase of $0.9 million in the allowance resulting from transfers from the liability for indemnification obligations for the initial valuation adjustment that we recognized on certain loans that we repurchased from Fannie Mae and Freddie Mac guaranteed securitizations. For the three months ended March 31, 2014 the increase in the allowance was principally the result of $5.4 million of such transfers from the liability for indemnification obligations.


(2)	The balances at March 31, 2015 and March 31, 2014 include $43.9 million and $6.1 million, respectively, of loans that we were required to repurchase from Ginnie Mae guaranteed securitizations as part of our servicing obligations. Repurchased loans are modified or otherwise remediated through loss mitigation activities or are reclassified to receivables.

At March 31, 2015, Loans held for sale, at lower of cost or fair value with a UPB of $33.1 million were pledged to secure a warehouse line of credit in our Servicing segment.

In March 2014, we purchased delinquent FHA-insured loans with a UPB of $549.4 million out of Ginnie Mae guaranteed securitizations under the terms of a conditional repurchase option whereby as servicer we have the right, but not the obligation,

to repurchase delinquent loans at par plus delinquent interest (the Ginnie Mae early buy-out (EBO) program). Immediately after their purchase, we sold the loans (the Ginnie Mae EBO Loans) and related advances to HLSS Mortgage for $612.3 million ($556.6 million for the Ginnie Mae EBO Loans and $55.7 million for the related servicing advances). We recognized a gain of $7.2 million on the sale of the loans.

The sales of advances to HLSS Mortgage did not qualify for sales treatment and were accounted for as a financing. We refer to the purchase and sale of the Ginnie Mae EBO Loans and the sale of the related advances to HLSS Mortgage as the Ginnie Mae EBO Transactions.

In March 2015, we recognized a gain of $12.9 million on sales of loans with a total UPB of $42.7 million to an unrelated third party. We had repurchased these loans under the representation, warranty and indemnification provisions of our contractual obligations to the GSEs as primary servicer of the loans.

Gain on Loans Held for Sale, Net

The following table summarizes the activity in Gain on loans held for sale, net, during the three months ended March 31:



	2015			2014
Gain on sales of loans	$	51,400		$	54,993
Change in fair value of IRLCs	(2,233		)	986
Change in fair value of loans held for sale	(4,008		)	1,800
Loss on economic hedge instruments	(427		)	(13,610		)
Other	(228		)	(182		)
	$	44,504		$	43,987

Gains on loans held for sale, net include $8.5 million and $11.6 million for the three months ended March 31, 2015 and 2014, respectively, representing the value assigned to MSRs retained on transfers of forward loans.

Also included in Gains on loans held for sale, net are gains of $4.3 million and $22.8 million recorded during the three months ended March 31, 2015 and 2014, respectively, on sales of repurchased Ginnie Mae loans, which are carried at the lower of cost or fair value.

Fair value gains recognized in connection with sales of reverse mortgages into Ginnie Mae guaranteed securitizations are also included in Gains on loans held for sale, net and amounted to $25.6 million and $16.1 million for the three months ended March 31, 2015 and 2014, respectively.

Note 6 – Advances

Advances, net, representing payments made on behalf of borrowers or on foreclosed properties, consisted of the following at the dates indicated:



	March 31, 2015		December 31, 2014
Servicing:
Principal and interest	$	137,929	$	128,217
Taxes and insurance	467,716		467,891
Foreclosures, bankruptcy and other (1)	332,829		293,340
	938,474		889,448
Corporate Items and Other	4,064		4,466
	$	942,538	$	893,914


(1)	The balances at March 31, 2015 and December 31, 2014 are net of an allowance for losses of $71.9 million and $70.0 million, respectively.

The following table summarizes the activity in advances for the three months ended March 31:



	2015			2014
Beginning balance	$	893,914		$	890,832
Acquisitions	—			98,875
Transfers to match funded advances	—			(10,156		)
Sales of advances	(1,765		)	—
New advances (collections of advances), net and other	50,389			(41,625		)
Ending balance	$	942,538		$	937,926

Note 7 – Match Funded Advances

Match funded advances on residential loans we service for others are comprised of the following at the dates indicated:



	March 31, 2015		December 31, 2014
Principal and interest	$	1,249,364	$	1,349,048
Taxes and insurance	807,267		847,064
Foreclosures, bankruptcy, real estate and other	196,336		213,330
	$	2,252,967	$	2,409,442

The following table summarizes the activity in match funded advances for the three months ended March 31:



	2015			2014
Beginning balance	$	2,409,442		$	2,552,383
Acquisitions	—			85,521
Transfers from advances	—			10,156
New advances (collections of pledged advances), net and other	(156,475		)	7,794
Ending balance	$	2,252,967		$	2,655,854

Note 8 – Mortgage Servicing

Mortgage Servicing Rights – Amortization Method

The following table summarizes the activity in the carrying value of amortization method servicing assets for the three months ended March 31. Amortization of mortgage servicing rights is reported net of the amortization of any servicing liabilities and includes the amount of charges we recognized to increase servicing liability obligations, if any.



	2015			2014
Beginning balance	$	1,820,091		$	1,953,352
Fair value election - transfer to MSRs carried at fair value (1)	(787,142		)	—
Additions recognized in connection with business acquisitions	—			20,324
Additions recognized in connection with asset acquisitions	3,267			6,697
Additions recognized on the sale of mortgage loans	8,528			11,614
Sales (2)	(65,627		)	—
Servicing transfers and adjustments	—			(364		)
	979,117			1,991,623
Amortization	(38,494		)	(62,094		)
Impairment (3)	(17,769		)	—
Ending balance	$	922,854		$	1,929,529

Estimated fair value at end of period	$	1,064,134		$	2,774,910


(1)	Effective January 1, 2015, we elected fair value accounting for a newly-created class of non-Agency MSRs, which were previously accounted for using the amortization method. This irrevocable election applies to all subsequently acquired or

originated servicing assets and liabilities that have characteristics consistent with this class. We recorded a cumulative-effect adjustment of $52.0 million (before deferred income taxes of $9.2 million) to retained earnings as of January 1, 2015 to reflect the excess of the fair value of these MSRs over their carrying amount. At December 31, 2014, the UPB of the non-Agency MSRs for which the fair value election was made was $195.3 billion.


(2)	On March 31, 2015, we closed on the sale of Agency MSRs on a portfolio consisting of 76,000 performing loans owned by Freddie Mac with a total UPB of $9.1 billion. We completed the transfer of the loan servicing on April 16, 2015.

(3)

We established a $17.8 million valuation allowance related to impairment on our government-insured MSRs, as the fair value for this stratum was less than its carrying value. This impairment was primarily due to the FHA reducing the mortgage insurance premium rate by 50 basis points during the quarter, which created a significantly lower interest rate for existing FHA borrowers and in turn, generated higher projected prepayment speed and shorter asset life inputs used to value these MSRs. The impairment charge is recognized in Servicing and origination expense in the unaudited Consolidated Statements of Operations.

Mortgage Servicing Rights—Fair Value Measurement Method

This portfolio comprises servicing rights for which we elected the fair value option and includes Agency residential mortgage loans for which we previously hedged the related market risks and a new class of non-Agency residential mortgage loans for which we elected fair value as of January 1, 2015.

The following table summarizes the activity related to fair value servicing assets for the three months ended March 31:



	2015									2014
	Agency			Non-Agency			Total
Beginning balance	$	93,901		$	—		$	93,901		$	116,029
Fair value election - transfer from MSRs carried at amortized cost	—			787,142			787,142			—
Cumulative effect of fair value election	—			52,015			52,015
Sales	—			(947		)	(947		)	—
Servicing transfers and adjustments	—			(1,139		)	(1,139		)	—
Changes in fair value (1):
Changes in valuation inputs or other assumptions	(6,110		)	—			(6,110		)	(3,155		)
Realization of expected future cash flows and other changes	(3,276		)	(23,789		)	(27,065		)	(2,048		)
Ending balance	$	84,515		$	813,282		$	897,797		$	110,826


(1)	Changes in fair value are recognized in Servicing and origination expense in the unaudited Consolidated Statements of Operations.

Because the mortgages underlying these MSRs permit the borrowers to prepay the loans, the value of the MSRs generally tends to diminish in periods of declining interest rates (as prepayments increase) and increase in periods of rising interest rates (as prepayments decrease). The following table summarizes the estimated change in the value of the MSRs that we carry at fair value as of March 31, 2015 given hypothetical instantaneous parallel shifts in the yield curve:



	Adverse change in fair value
	10%			20%
Weighted average prepayment speeds	$	(40,557	)	$	(101,371	)
Discount rate (option-adjusted spread)	$	(22,770	)	$	(44,842	)

The sensitivity analysis measures the potential impact on fair values based on hypothetical changes (increases and decreases) in interest rates.

Portfolio of Assets Serviced

The following table presents the composition of our primary servicing and subservicing portfolios by type of property serviced as measured by UPB. The servicing portfolio represents loans for which we own the MSRs while subservicing represents all other loans. The UPB of assets serviced for others are not included on our unaudited Consolidated Balance Sheets.



	Residential		Commercial		Total
UPB at March 31, 2015
Servicing (1)	$	337,125,187	$	—	$	337,125,187
Subservicing	45,088,815		161,887		45,250,702
	$	382,214,002	$	161,887	$	382,375,889
UPB at December 31, 2014
Servicing (1)	$	361,288,281	$	—	$	361,288,281
Subservicing	37,439,446		149,737		37,589,183
	$	398,727,727	$	149,737	$	398,877,464
UPB at March 31, 2014
Servicing (1)	$	391,701,237	$	—	$	391,701,237
Subservicing	57,869,359		318,507		58,187,866
	$	449,570,596	$	318,507	$	449,889,103


(1)	Includes primary servicing UPB of $156.3 billion, $160.8 billion and $170.8 billion at March 31, 2015, December 31, 2014 and March 31, 2014, respectively, for which the Rights to MSRs have been sold to HLSS.

Residential assets serviced includes foreclosed real estate. Residential assets serviced also includes small-balance commercial assets with a UPB of $2.1 billion, $2.3 billion and $2.5 billion at March 31, 2015, December 31, 2014 and March 31, 2014, respectively. Commercial assets consist of large-balance foreclosed real estate.

A significant portion of the servicing agreements for our non-Agency servicing portfolio contain provisions where we could be terminated as servicer without compensation upon the failure of the serviced loans to meet certain portfolio delinquency or cumulative loss thresholds or in the event we fail to maintain required servicer ratings, among other provisions. As a result of the economic downturn of recent years, the portfolio delinquency and/or cumulative loss threshold provisions have been breached by many private-label securitizations in our non-Agency servicing portfolio. Terminations as servicer as a result of a breach of any of these provisions have been minimal. In the event we are terminated as servicer and the Rights to MSRs were sold to HLSS, now owned by NRZ, we are obligated to compensate NRZ. As a result of the transfer of servicing to another party during the three months ended March 31, 2015 related to Rights to MSRs sold to HLSS, we were required to reimburse HLSS $2.2 million for a percentage of the purchase price for the related Rights to MSRs in accordance with our agreements.

Servicing Revenue

The following table presents the components of servicing and subservicing fees for the three months ended March 31:



	2015		2014
Loan servicing and subservicing fees:
Servicing	$	320,085	$	351,823
Subservicing	30,457		33,725
	350,542		385,548
Home Affordable Modification Program (HAMP) fees	35,176		36,699
Late charges	24,122		36,835
Loan collection fees	9,563		8,294
Custodial accounts (float earnings)</