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SEC Filings

10-K
DITECH HOLDING CORP filed this Form 10-K on 04/16/2019
Entire Document
 

 
Predecessor
 
December 31, 2017
 
Down 50 bps
 
Down 25 bps
 
Up 25 bps
 
Up 50 bps
Servicing segment
 
 
 
 
 
 
 
Servicing rights carried at fair value
$
(148,094
)
 
$
(60,902
)
 
$
46,154

 
$
83,445

Net change in fair value - Servicing segment
$
(148,094
)
 
$
(60,902
)
 
$
46,154

 
$
83,445

 
 
 
 
 
 
 
 
Originations segment
 
 
 
 
 
 
 
Residential loans held for sale
$
7,273

 
$
4,038

 
$
(5,224
)
 
$
(11,275
)
Freestanding derivatives (1)
(9,907
)
 
(5,406
)
 
5,308

 
11,236

Net change in fair value - Originations segment
$
(2,634
)
 
$
(1,368
)
 
$
84

 
$
(39
)
 
 
 
 
 
 
 
 
Reverse Mortgage segment
 
 
 
 
 
 
 
Reverse loans
$
103,753

 
$
49,454

 
$
(56,922
)
 
$
(109,026
)
HMBS related obligations
(90,590
)
 
(42,211
)
 
52,801

 
99,451

Net change in fair value - Reverse Mortgage segment
$
13,163

 
$
7,243

 
$
(4,121
)
 
$
(9,575
)
__________
(1)
Consists of IRLCs, forward sales commitments and MBS purchase commitments.
We used December 31, 2018 and 2017 market rates on our instruments to perform the sensitivity analysis. These sensitivities measure the potential impact on fair value, are hypothetical, and presented for illustrative purposes only. There are certain limitations inherent in the sensitivity analysis presented, including the necessity to conduct the analysis based on a single point in time and the inability to include complex market reactions that normally would arise from the market shifts modeled. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in fair value may not be linear.
Servicing Rights Carried at Fair Value
Servicing rights carried at fair value are subject to prepayment risk as the mortgage loans underlying the servicing rights permit the borrowers to prepay the loans. Consequently, the value of these servicing rights generally tend to diminish in periods of declining interest rates (as prepayments increase) and tend to increase in periods of rising interest rates (as prepayments decrease). This analysis ignores the impact of changes on certain material variables, such as non-parallel shifts in interest rates, or changing consumer behavior to incremental changes in interest rates.
Although the level of interest rates is a key driver of prepayment activity, there are other factors that influence prepayments, including home prices, underwriting standards, availability of government-sponsored refinance programs and other product characteristics. Since our Originations segment’s results of operations are positively impacted when interest rates decline, our Originations segment’s results of operations may partially offset the change in fair value of servicing rights over time. The interaction between the results of operations of these activities is a core component of our overall interest rate risk assessment. We take into account the estimated benefit of originations on our Originations segment’s results of operations to determine the impact on net economic value from a decline in interest rates, and we continuously assess our ability to replenish lost value of servicing rights and cash flow due to increased prepayments. We do not currently use derivative instruments to hedge the interest rate risk inherent in the value of servicing rights, but we may choose to use such instruments in the future. The amount and composition of derivatives used to hedge the value of servicing rights, if any, will depend on the exposure to loss of value on the servicing rights, the expected cost of the derivatives, expected liquidity needs, and the expected increase to earnings generated by the origination of new loans resulting from the decline in interest rates. The sensitivity of servicing rights carried at fair value to interest rate changes decreased at December 31, 2018 as compared to December 31, 2017 due primarily to a decrease in the size of the portfolio and, to a lesser extent, the higher interest rate environment.

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