Table of Contents


UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





(Mark One)


xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended June 30, 2012


or


 ̈TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from      to


Commission file number: 001-35449


Nationstar Mortgage Holdings Inc.


(Exact name of registrant as specified in its charter)


Delaware45-2156869(State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification No.)350 Highland DriveLewisville, TX75067(Address of principal executive offices)(Zip Code)


Registrant’s telephone number, including area code:


(469) 549-2000





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  ̈


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  ̈


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12(b)-2 of the Exchange Act (check one)


Large Accelerated Filer ̈Accelerated Filer ̈Non-Accelerated Filerx(Do not check if a smaller reporting company.)Smaller reporting company ̈


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


Number of shares of common stock, $0.01 par value, outstanding as of August 14, 2012: 89,166,667




---

Table of Contents





NATIONSTAR MORTGAGE HOLDINGS INC.


QUARTERLY REPORT ON FORM 10-Q


TABLE OF CONTENTS





PagePART IFINANCIAL INFORMATIONItem 1.Financial Statements5Consolidated Balance Sheets – June 30, 2012 (unaudited) and December 31, 20115Unaudited Consolidated Statements of Operations and Comprehensive Income - For the three and six months ended June 30, 2012 and 20116Consolidated Statements of Shareholders’ Equity - For the six months ended June 30, 2012 (unaudited) and year ended December 31, 20117Unaudited Consolidated Statements of Cash Flows - For the six months ended June 30, 2012 and 20118Notes to Unaudited Consolidated Financial Statements10Item 2.Management's Discussion and Analysis of  Financial Condition and Results of Operations53Item 3.Quantitative and Qualitative Disclosure About Market Risks73Item 4.Controls and Procedures76PART IIOTHER INFORMATIONItem 1.Legal Proceedings77Item 1A.Risk Factors77Item 2.Unregistered Sales of Equity Securities and Use of Proceeds81Item 3.Defaults Upon Senior Securities82Item 4.Mine Safety Disclosures82Item 5.Other Information82Item 6.Exhibits, Financial Statement Schedules83SignaturesExhibits





2


---

Table of Contents





CAUTIONS REGARDING FORWARD-LOOKING STATEMENTS


This report contains forward-looking statements within the meaning of the U.S. federal securities laws. Forward-looking statements include, without limitation, statements concerning plans, objectives, goals, projections, strategies, future events or performance, and underlying assumptions and other statements, which are not statements of historical facts. When used in this discussion, the words “anticipate,” “appears,” “believe,” “foresee,” “intend,” “should,” “expect,” “estimate,” “project,” “plan,” “may,” “could,” “will,” “are likely” and similar expressions are intended to identify forward-looking statements. These statements involve predictions of our future financial condition, performance, plans and strategies, and are thus dependent on a number of factors including, without limitation, assumptions and data that may be imprecise or incorrect. Specific factors that may impact performance or other predictions of future actions have, in many but not all cases, been identified in connection with specific forward-looking statements. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include:





|  |                                                                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | the delay in our foreclosure proceedings due to inquiries by certain state Attorneys General, court administrators, and state and federal government agencies;

|  |                                                                                                                                                                                                                                                                                                                                                        
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | the impact of the ongoing implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"), including the recent examination of our business begun by the Consumer Financial Protection Bureau ("CFPB"), on our business activities and practices, costs of operations and overall results of operations;

|  |                                                                                                                                                                                                                                                     
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | the impact on our servicing practices of enforcement consent orders against and agreements entered into by certain federal and state agencies with the largest mortgage servicers and ongoing inquiries regarding other non-bank mortgage servicers;

|  |                                               
|- | ----------------------------------------------
|• | increased legal proceedings and related costs;

|  |                                                                                                                                                                                                                                   
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | the continued uncertainty of the residential mortgage market, increase in monthly payments on adjustable rate mortgage loans, adverse economic conditions, decrease in property values and increase in delinquencies and defaults;

|  |                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------
|• | the deterioration of the market for reverse mortgages and increase in foreclosure rates for reverse mortgages;

|  |                                                      
|- | -----------------------------------------------------
|• | our ability to efficiently service higher risk loans;

|  |                                                                                    
|- | -----------------------------------------------------------------------------------
|• | our ability to mitigate the increased risks related to servicing reverse mortgages;

|  |                                                                                                              
|- | -------------------------------------------------------------------------------------------------------------
|• | our ability to compete successfully in the mortgage loan servicing and mortgage loan originations industries;

|  |                                                                                                                                                                                                                                                                                                                                             
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | our ability to maintain or grow the size of our servicing portfolio and realize our significant investments in personnel and our technology platform by successfully identifying attractive acquisition opportunities, including mortgage servicing rights ("MSRs"), subservicing contracts, servicing platforms and originations platforms;

|  |                                                                                                                                                                                                    
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | our ability to scale-up appropriately and integrate our acquisitions to realize the anticipated benefits of any such potential future acquisitions, including potentially significant acquisitions;

|  |                                                                             
|- | ----------------------------------------------------------------------------
|• | our ability to obtain sufficient capital to meet our financing requirements;

|  |                                                  
|- | -------------------------------------------------
|• | our ability to grow our loan originations volume;

|  |                                                                    
|- | -------------------------------------------------------------------
|• | the termination of our servicing rights and subservicing contracts;

|  |                                                                                                                                                                                      
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | changes to federal, state and local laws and regulations concerning loan servicing, loan origination, loan modification or the licensing of entities that engage in these activities;

|  |                      
|- | ---------------------
|• | loss of our licenses;

|  |                                                                                                                       
|- | ----------------------------------------------------------------------------------------------------------------------
|• | our ability to meet certain criteria or characteristics under the indentures governing our securitized pools of loans;

|  |                                                                                                                                       
|- | --------------------------------------------------------------------------------------------------------------------------------------
|• | our ability to follow the specific guidelines of government-sponsored enterprises ("GSEs") or a significant change in such guidelines;

|  |                                                                          
|- | -------------------------------------------------------------------------
|• | delays in our ability to collect or be reimbursed for servicing advances;

|  |                                                                                                                                                                                
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | changes to Home Affordable Modification Program ("HAMP"), Home Affordable Refinance Program ("HARP"), Making Home Affordable Plan ("MHA") or other similar government programs;

|  |                                                                                                                                                                                                                                                                                                            
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | changes in our business relationships with the Federal National Mortgage Association ("Fannie Mae"), the Federal Home Loan Mortgage Corporation ("Freddie Mac"), the Government National Mortgage Association ("Ginnie Mae") and others that facilitate the issuance of mortgage-backed securities ("MBS");

|  |                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------
|• | changes to the nature of the guarantees of Fannie Mae and Freddie Mac and the market implications of such changes;

|  |                                                          
|- | ---------------------------------------------------------
|• | errors in our financial models or changes in assumptions;

3


---

Table of Contents


|  |                                                        
|- | -------------------------------------------------------
|• | requirements to write down the value of certain assets;

|  |                                      
|- | -------------------------------------
|• | changes in prevailing interest rates;

|  |                                                                           
|- | --------------------------------------------------------------------------
|• | our ability to successfully mitigate our risks through hedging strategies;

|  |                                 
|- | --------------------------------
|• | changes to our servicer ratings;

|  |                                                                                 
|- | --------------------------------------------------------------------------------
|• | the accuracy and completeness of information about borrowers and counterparties;

|  |                                                                                                                        
|- | -----------------------------------------------------------------------------------------------------------------------
|• | 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;

|  |                                                          
|- | ---------------------------------------------------------
|• | failure of our vendors to comply with servicing criteria;

|  |                                                 
|- | ------------------------------------------------
|• | the loss of the services of our senior managers;

|  |                                                           
|- | ----------------------------------------------------------
|• | failure to attract and retain a highly skilled work force;

|  |                                                                                           
|- | ------------------------------------------------------------------------------------------
|• | changes in public opinion concerning mortgage originators or debt default specialists; and

|  |                                 
|- | --------------------------------
|• | changes in accounting standards.

All of the above factors are difficult to predict, contain uncertainties that may materially affect actual results, and may be beyond our control. New factors emerge from time to time, and it is not possible for our management to predict all such factors or to assess the effect of each such new factor on our business. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore any of these statements included herein may prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. Please refer to Item 1A. Risk Factors of Nationstar Mortgage LLC's Annual Report on Form 10-K filed on March 15, 2012, and Item 1A. Risk Factors of this Form 10-Q for further information on these and other factors affecting us.








4


---

Table of Contents


PART I.  Financial Information





Item 1.  Financial Statements


NATIONSTAR MORTGAGE HOLDINGS INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


(dollars and shares in thousands)


June 30, 2012December 31, 2011(unaudited)AssetsCash and cash equivalents$15,892$62,445Restricted cash119,51271,499Accounts receivable2,487,991562,300Mortgage loans held for sale837,906458,626Mortgage loans held for investment, subject to nonrecourse debt - Legacy Assets, net of allowance for loan losses of $6,101 and $5,824, respectively238,173243,480Reverse mortgage interests310,074—Receivables from affiliates13,0834,609Mortgage servicing rights – fair value596,462251,050Mortgage servicing rights – amortized cost8,357—Property and equipment, net of accumulated depreciation of $42,573 and $39,201, respectively39,09024,073Real estate owned (REO), net3,4293,668Other assets226,261106,181Total assets$4,896,230$1,787,931Liabilities and equityNotes payable$2,412,364$873,179Unsecured senior notes555,938280,199Payables and accrued liabilities639,839183,789Derivative financial instruments18,91112,370Mortgage servicing liabilities81,979—Nonrecourse debt - Legacy Assets106,271112,490Excess spread financing - fair value266,69344,595Participating interest financing181,114—Total liabilities4,263,1091,506,622Commitments and contingencies – See Note 18Members’ units related to Nationstar Mortgage LLC—281,309Preferred stock at $0.01 par value - 300,000 shares authorized, no shares issued and outstanding——Common stock at $0.01 par value - 1,000,000 shares authorized, 89,167 shares issued and outstanding892—Additional paid-in-capital550,757—Accumulated other comprehensive loss(423)—Retained earnings86,461—Common shares held by subsidiary(4,566)—Total equity633,121281,309Total liabilities and equity$4,896,230$1,787,931


See accompanying notes to the consolidated financial statements.


5


---

Table of Contents


NATIONSTAR MORTGAGE HOLDINGS INC. AND SUBSIDIARIES


UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME


(dollars and shares in thousands, except per share data)


For the three months ended June 30,For the six months ended June 30,2012201120122011Revenues:Servicing fee income$86,092$51,236$170,042$107,724Other fee income11,6108,14118,86316,339Total fee income97,70259,377188,905124,063Gain on mortgage loans held for sale102,34522,822172,85743,328Total revenues200,04782,199361,762167,391Expenses and impairments:Salaries, wages and benefits78,74748,372140,41295,295General and administrative46,41015,74675,52231,310Provision for loan losses855—1,6081,128Loss on foreclosed real estate1,4902,0993,7554,346Occupancy2,8702,1855,6524,444Total expenses and impairments130,37268,402226,949136,523Other income (expense):Interest income15,65016,72729,09135,045Interest expense(35,913)(25,185)(60,893)(50,553)Loss on interest rate swaps and caps(357)—(625)—Fair value changes in ABS securitizations—(3,613)—(6,265)Total other income (expense)(20,620)(12,071)(32,427)(21,773)Income before taxes49,0551,726102,3869,095Income tax expense12,780—15,925—Net income36,2751,72686,4619,095Other comprehensive loss, net of tax:Change in value of designated cash flow hedge(423)(1,210)(423)(1,071)Comprehensive income$35,852$516$86,038$8,024Earnings per share:Basic earnings per share$0.41$0.02$1.06$0.13Diluted earnings per share$0.41$0.02$1.05$0.13Weighted average shares:Basic88,50070,00081,44470,000Dilutive effect of stock awards1,028—649—Diluted89,52870,00082,09370,000Dividends declared per share$—$—$—$—


See accompanying notes to the consolidated financial statements.


6


---

Table of Contents


NATIONSTAR MORTGAGE HOLDINGS INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY


(dollars and shares in thousands)


Common SharesMembers’UnitsCommon StockAdditional Paid-in CapitalAccumulated  OtherComprehensive LossRetained EarningsCommon shares held by subsidiaryTotalShareholders’Units and                                                                                                                                                                                                                                       EquityBalance at December 31, 2010—$255,301$—$—$1,071$—$—$256,372Share-based compensation—14,815—————14,815Distributions to parent—(4,348)—————(4,348)Tax related share-based settlement of units by members—(5,346)—————(5,346)Net income—20,887—————20,887Change in value of cash flow hedge————(1,071)——(1,071)Balance at December 31, 2011—281,309—————281,309(unaudited)Contributions from parent – FIF HE—12,764—————12,764Change in value of cash flow hedge————(423)——(423)LLC conversion of equity to common shares70,000(294,073)700293,373————Common stock issuance19,167—192246,508———246,700Share-based compensation———8,030———8,030Excess tax benefit from share-based compensation———2,846———2,846Withholding tax related to share based settlement of common stock by management——————(4,566)(4,566)Net income—————86,461—86,461Balance at June 30, 201289,167$—$892$550,757$(423)$86,461$(4,566)$633,121


See accompanying notes to the consolidated financial statements.


7


---

Table of Contents


NATIONSTAR MORTGAGE HOLDINGS INC. AND SUBSIDIARIES


UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS


(dollars in thousands)


For the six months ended June 30,20122011Operating activitiesNet income$86,461$9,095Adjustments to reconcile net income to net cash (used in) / provided by operating activities:Share-based compensation8,03010,526Gain on mortgage loans held for sale(172,857)(43,328)Provision for loan losses1,6081,128Loss on foreclosed real estate3,7554,346Loss on equity method investments594521(Gain) / loss on derivatives including ineffectiveness on interest rate swaps and caps625(1,416)Fair value changes in ABS securitizations—6,265Fair value changes in excess spread financing7,263—Depreciation and amortization3,3851,560Fair value changes in mortgage servicing rights20,38011,722Amortization/Accretion of mortgage servicing rights at amortized cost(624)—Amortization of debt discount8,4816,446Amortization of discounts(2,630)(2,424)Mortgage loans originated and purchased, net of fees(2,996,372)(1,378,039)Cost of loans sold and principal payments and prepayments, and other changes in mortgage loans originated as held for sale, net of fees2,724,3701,515,612Changes in assets and liabilities:Accounts receivable, net(61,301)(30,799)Receivables from affiliates8711,642Reverse mortgage interests(220,788)—Other assets(81,893)(470)Payables and accrued liabilities314,0173,710Net cash (used in)/provided by operating activities(356,625)116,097


Continued on following page.


8


---

Table of Contents





NATIONSTAR MORTGAGE HOLDINGS INC. AND SUBSIDIARIES


UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Continued)


(dollars in thousands)


For the six months ended June 30,20122011Investing activitiesPrincipal payments received and other changes on mortgage loans held for investment, subject to ABS nonrecourse debt—14,285Property and equipment additions, net of disposals(8,102)(8,833)Acquisition of equity method investee—(6,600)Cash proceeds from assumption of reverse mortgage servicing obligations, net11,852—Purchase of forward mortgage servicing rights, net of liabilities incurred(1,979,836)(232)Loan repurchases from Ginnie Mae(4,464)—Proceeds from sales of REO11,89720,002Net cash (used in) / provided by investing activities(1,968,653)18,622Financing activitiesIssuance of Senior Unsecured Notes, net269,500—Transfers (to) / from restricted cash, net(101,609)6,794Issuance of common stock, net of IPO issuance costs249,550—Issuance of participating interest financing182,577—Issuance of excess spread financing187,438—Increase (decrease) in notes payable1,539,185(104,988)Repayment of nonrecourse debt – Legacy assets(7,231)(14,693)Repayment of ABS nonrecourse debt—(29,085)Repayment of excess servicing spread financing(5,507)—Distributions to parent – FIF—(3,900)Debt financing costs(35,178)(2,729)Tax related share-based settlement of units by members—(4,809)Net cash provided by / (used in) financing activities2,278,725(153,410)Net decrease in cash and cash equivalents(46,553)(18,691)Cash and cash equivalents at beginning of period62,44521,223Cash and cash equivalents at end of period$15,892$2,532Supplemental disclosures of non-cash activitiesTransfer of mortgage loans held for sale to REO at fair value$—$90Transfer of mortgage loans held for investment to REO at fair value3,1923,675Transfer of mortgage loans held for investment, subject to ABS nonrecourse debt to REO at fair value—9,616Change in value of cash flow hedge–accumulated other comprehensive loss(423)—Mortgage servicing rights resulting from sale or securitization of mortgage loans24,12817,985Excess tax benefit from share based compensation2,846—Tax related share-based settlement of common stock4,566—Liabilities incurred from acquired servicer advances107,117—


See accompanying notes to the consolidated financial statements.





9


---

Table of Contents


NATIONSTAR MORTGAGE HOLDINGS INC. AND SUBSIDIARIES


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(dollars in thousands, unless otherwise stated)


1. Nature of Business, Basis of Presentation and Material Transaction


Nature of Business


Nationstar Mortgage Holdings Inc. (Nationstar Inc. or the Company) is a Delaware corporation, formed in conjunction with and for the purpose of effecting an initial public offering by allowing common shareholders to own equity in a corporation instead of in a limited liability company.


Nationstar Inc. is a holding company that conducts no operating activities and owns no significant assets other than through its interests in its subsidiaries. Through its subsidiaries, Nationstar Inc. is engaged primarily in the servicing of residential mortgage loans for others and the origination and selling or securitization of single-family conforming mortgage loans to government-sponsored entities (GSE) or other third party investors in the secondary market.  Nationstar Mortgage LLC (Nationstar), the Company's principal operating subsidiary, is one of the largest high touch non-bank servicers in the United States.


Basis of Presentation


In conjunction with the initial public offering of Nationstar Inc., Nationstar became a wholly-owned indirect subsidiary of Nationstar Inc. Prior to the reorganization and initial public offering (Reorganization), Nationstar was a wholly-owned subsidiary of FIF HE Holdings LLC (FIF).  Nationstar Inc. was formed solely for the purpose of reorganizing the structure of FIF and Nationstar so that the common stock issuer was a corporation rather than a limited liability company. As such, investors own common stock rather than equity interests in a limited liability company.  Upon completion of the initial public offering and Reorganization, all of the equity interests in Nationstar were transferred from FIF to two direct wholly-owned subsidiaries of Nationstar Inc.  In conjunction with the Reorganization, FIF contributed certain assets to Nationstar.  The Reorganization has been accounted for as a reorganization under common control and, accordingly, there was no change in the basis of the assets and liabilities. As part of the Reorganization, FIF exchanged its equity in Nationstar for 70,000,000 shares of common stock in Nationstar Inc.


The consolidated financial statements include the accounts of Nationstar Inc. and its wholly-owned subsidiaries and those variable interest entities (VIEs) where Nationstar Inc.'s wholly-owned subsidiaries are the primary beneficiaries. Nationstar Inc. applies the equity method of accounting to investments when the entity is not a VIE and Nationstar Inc. is able to exercise significant influence, but not control, over the policies and procedures of the entity but owns less than 50% of the voting interests. Intercompany balances and transactions have been eliminated. Results of operations, assets and liabilities of VIEs are included from the date that Nationstar Inc. became the primary beneficiary through the date Nationstar Inc. ceases to be the primary beneficiary.


The interim consolidated financial statements are unaudited; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results of the interim periods have been included. The consolidated interim financial statements of Nationstar Inc. have been prepared in accordance with generally accepted accounting principles (GAAP) for interim information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (SEC). Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in Nationstar Mortgage LLC's Annual Report on Form 10-K filed on March 15, 2012 . The results of operations for the six month period ended June 30, 2012 , are not necessarily indicative of the results that may be expected for the year ended December 31, 2012 . Certain prior period amounts have been reclassified to conform to the current period presentation. Nationstar Inc. evaluated subsequent events through the date these interim consolidated financial statements were issued.


Material Transaction


On March 6, 2012, Nationstar entered into an asset purchase agreement with Aurora Bank FSB and Aurora Loan Services LLC, (collectively "Aurora").  Nationstar and Aurora closed the asset purchase in June 2012.  Nationstar paid Aurora approximately $2.0 billion that included mortgage servicing rights of approximately $271.5 million and servicing advance receivables of approximately $1.7 billion .  As a part of the purchase, certain other assets and liabilities were also acquired.  The mortgage servicing rights relate to approximately 300,000 residential mortgage loans with an unpaid principal balance of over $63 billion .  As of the closing date, Nationstar entered into certain financing arrangements amounting to approximately $1.3 billion


10


---

Table of Contents


for the servicing advance receivables and $176.5 million for excess spread financing related to the mortgage servicing rights.  The remainder of the purchase price was funded with Nationstar cash.


During June 2012, loans with an unpaid principal balance of $6.2 billion were boarded onto Nationstar's servicing platform, with the remaining $57.0 billion boarded in July 2012.  The loans boarded in July 2012 were subserviced by Aurora until they were boarded by Nationstar.





2. Recent Accounting Developments


Accounting Standards Update No. 2011-03, Reconsideration of Effective Control for Repurchase Agreements (Update No. 2011-03). Update No. 2011-03 is intended to improve the accounting and reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. This amendment removes the criterion pertaining to an exchange of collateral such that it should not be a determining factor in assessing effective control, including (i) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance implementation guidance related to that criterion. Other criteria applicable to the assessment of effective control are not changed by the amendments in the update. The amendments in this update were effective for interim and annual periods beginning after December 15, 2011. The adoption of Update No. 2011-03 did not have a material impact on the Company’s financial condition, liquidity or results of operations.


Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (Update No. 2011-04). Update No. 2011-04 is intended to provide common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards (IFRS). The changes required in this update include changing the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments in this update are to be applied prospectively and were effective for interim and annual periods beginning after December 15, 2011. Upon adoption, certain disclosure requirements were added to the Fair Value Measurements footnote. The adoption of Update No. 2011-04 did not have a material impact on the Company’s financial condition, liquidity or results of operations.


Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (Update No. 2011-05). Update No. 2011-05 is intended to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. Update No. 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and now requires that all non-owner changes in shareholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This update does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this update are to be applied retrospectively and were effective for interim and annual periods beginning after December 15, 2011. The adoption of Update No. 2011-05 did not have a material impact on the Company’s financial statements.


Accounting Standards Update No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No 2011-05 (Update No. 2011-12). Update 2011-12 is intended to temporarily defer the effective date of the requirement to present separate line items on the income statement for reclassification adjustments of items out of accumulated other comprehensive income into net income as required by Update No. 2011-05. All other requirements in Update 2011-05 are not affected by this update. This update does not change the requirement to present reclassifications adjustments within other comprehensive income either on the face of the statement that reports other comprehensive income or in the notes to the financial statements (Update 2011-05). The amendments in this update were effective for interim and annual periods beginning after December 15, 2011. The adoption of Update No. 2011-12 did not have a material impact on the Company's financial statements.





3. Variable Interest Entities and Securitizations


Nationstar has been the transferor in connection with a number of securitizations or asset-backed financing arrangements, from which Nationstar has continuing involvement with the underlying transferred financial assets. Nationstar aggregates these securitizations or asset-backed financing arrangements into two groups: 1) securitizations of residential mortgage loans and 2) transfers accounted for as secured borrowings.


On securitizations of residential mortgage loans, Nationstar’s continuing involvement typically includes acting as servicer for the mortgage loans held by the trust and holding beneficial interests in the trust. Nationstar’s responsibilities as servicer include, among other things, collecting monthly payments, maintaining escrow accounts, providing periodic reports and managing insurance in exchange for a contractually specified servicing fee. The beneficial interests held consist of both subordinate and residual securities that were retained at the time of the securitization and any mortgage servicing rights


11


---

Table of Contents


subsequently retained in the securitization.


Nationstar also maintains various agreements with special purpose entities (SPEs), under which Nationstar transfers mortgage loans and/or advances on residential mortgage loans in exchange for cash. These SPEs issue debt supported by collections on the transferred mortgage loans and/or advances. These transfers do not qualify for sale treatment because Nationstar continues to retain control over the transferred assets. As a result, Nationstar accounts for these transfers as financings and continues to carry the transferred assets and recognizes the related liabilities on Nationstar’s consolidated balance sheets. Collections on the mortgage loans and/or advances pledged to the SPEs are used to repay principal and interest and to pay the expenses of the entity. The holders of these beneficial interests issued by these SPEs do not have recourse to Nationstar and can only look to the assets of the SPEs themselves for satisfaction of the debt.


A Variable Interest Entity ( VIE) is an entity that has either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary, which is the entity that, through its variable interests has both the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.


Current accounting guidance requires that all existing SPEs be evaluated for consolidation. Nationstar identified certain securitization trusts where Nationstar, through its affiliates, continued to hold beneficial interests in these trusts. These retained beneficial interests obligate Nationstar to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant. In addition, Nationstar as master servicer on the related mortgage loans, retains the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE. When it is determined that Nationstar has both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE, the assets and liabilities of these VIEs are included in Nationstar’s consolidated financial statements. Upon consolidation of these VIEs, Nationstar derecognized all previously recognized beneficial interests obtained as part of the securitization, including any retained investment in debt securities, mortgage servicing rights, and any remaining residual interests. In addition, Nationstar recognized the securitized mortgage loans as mortgage loans held for investment, subject to ABS nonrecourse debt, and the related asset-backed certificates (ABS nonrecourse debt) acquired by third parties as ABS nonrecourse debt on Nationstar’s consolidated balance sheet.


As a result of market conditions and deteriorating credit performance on these consolidated VIEs, Nationstar expects minimal to no future cash flows on the economic residual. Under existing GAAP, Nationstar would be required to provide for additional allowances for loan losses on the securitization collateral as credit performance deteriorated, with no offsetting reduction in the securitization’s debt balances, even though any nonperformance of the assets will ultimately pass through as a reduction of amounts owed to the debt holders once they are extinguished. Therefore, Nationstar would be required to record accounting losses beyond its economic exposure.


To more accurately represent the future economic performance of the securitization collateral and related debt balances, Nationstar elected the fair value option provided for by Accounting Standards Codification (ASC) ASC 825-10, Financial Instruments-Overall . This option was applied to all eligible items within the VIE, including mortgage loans held for investment, subject to ABS nonrecourse debt, and the related ABS nonrecourse debt.





Subsequent to this fair value election, Nationstar no longer records an allowance for loan loss on mortgage loans held for investment, subject to ABS nonrecourse debt. Nationstar continues to record interest income in Nationstar’s consolidated statement of operations on these fair value elected loans until they are placed on a nonaccrual status when they are 90 days or more past due. The fair value adjustment recorded for the mortgage loans held for investment is classified within fair value changes of ABS securitizations in Nationstar’s consolidated statement of operations.


Subsequent to the fair value election for ABS nonrecourse debt, Nationstar continues to record interest expense in Nationstar’s consolidated statement of operations on the fair value elected ABS nonrecourse debt. The fair value adjustment recorded for the ABS nonrecourse debt is classified within fair value changes of ABS securitizations in Nationstar’s consolidated statement of operations.


Under the existing pooling and servicing agreements of these securitization trusts, the principal and interest cash flows on the underlying securitized loans are used to service the asset-backed certificates. Accordingly, the timing of the principal payments on this nonrecourse debt is dependent on the payments received on the underlying mortgage loans and liquidation of real estate owned.


Nationstar consolidates the SPEs created for the purpose of issuing debt supported by collections on loans and advances that


12


---

Table of Contents


have been transferred to it as VIEs, and Nationstar is the primary beneficiary of these VIEs. The Company consolidates the assets and liabilities of the VIEs onto its consolidated financial statements.


In December 2011 , Nationstar sold its remaining variable interest in a securitization trust that had been a consolidated VIE since January 1, 2010 and deconsolidated the VIE. In accordance with ASC 810 Nationstar has evaluated this securitization trust and determined that Nationstar no longer has both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE, and this securitization trust was derecognized as of December 31, 2011 . Upon deconsolidation of this VIE, Nationstar derecognized the securitized mortgage loans held for investment, subject to ABS nonrecourse debt, the related ABS nonrecourse debt, as well as certain other assets and liabilities of the securitization trust, and recognized any MSRs on the consolidated balance sheet. The impact of this derecognition on the Company’s consolidated statement of operations was recognized in the fourth quarter of 2011 in the fair value changes in ABS securitizations line item.





A summary of the assets and liabilities of Nationstar’s transactions with VIEs included in the Company’s consolidated financial statements as of June 30, 2012 and December 31, 2011 is presented in the following tables (in thousands):





June 30, 2012December 31, 2011TransfersAccounted for asSecuredBorrowingsTransfersAccounted for asSecuredBorrowingsASSETSRestricted cash$47,464$22,316Accounts receivable1,883,312279,414Mortgage loans held for investment, subject to nonrecourse debt229,797237,496REO2,5373,668Total Assets$2,163,110$542,894LIABILITIESNotes payable$1,528,791$244,574Payables and accrued liabilities1,469977Derivative financial instruments6,776—Nonrecourse debt–Legacy Assets106,271112,490Total Liabilities$1,643,307$358,041


A summary of the outstanding collateral and certificate balances for securitization trusts, including any retained beneficial interests and MSRs, that were not consolidated by Nationstar for the periods indicated are as follows (in thousands):


June 30, 2012December 31, 2011Total collateral balances$4,335,667$4,579,142Total certificate balances4,338,5524,582,598Total mortgage servicing rights at fair value28,18228,635


Nationstar has not retained any variable interests in the unconsolidated securitization trusts that were outstanding as of June 30, 2012 or December 31, 2011 , and therefore does not have a significant maximum exposure to loss related to these unconsolidated VIEs. A summary of mortgage loans transferred to unconsolidated securitization trusts that are 60 days or more past due and the credit losses incurred in the unconsolidated securitization trusts are presented below (in thousands):





As of or for the six months ended,June 30, 2012June 30, 2011PrincipalAmountof Loans60 Days orMore Past DueCredit LossesPrincipalAmountof Loans60 Days orMore Past DueCredit LossesTotal securitization trusts$891,261$154,425$751,431$120,290


Certain cash flows received from securitization trusts accounted for as sales for the dates indicated were as follows (in


13


---

Table of Contents


thousands):





For the three months endedFor the six months endedJune 30, 2012June 30, 2011June 30, 2012June 30, 2011Servicing FeesReceivedLoanRepurchasesServicing FeesReceivedLoanRepurchasesServicing FeesReceivedLoanRepurchasesServicing FeesReceivedLoanRepurchasesTotal securitization trusts$7,939$—$7,621$—$15,832$—$15,359$—





4. Consolidated Statement of Cash Flows-Supplemental Disclosure


Total interest paid for the six months ended June 30, 2012 and 2011 was approximately $46.4 million and $45.8 million , respectively.  Income taxes paid for the six months ended June 30, 2012 was $9.1 million .  There were no income taxes paid for the six months ended June 30, 2011 .


5. Accounts Receivable


Accounts receivable consist primarily of accrued interest receivable on mortgage loans and securitizations, accrued servicing fees, and  advances made to unconsolidated securitization trusts, as required under various servicing agreements related to delinquent loans, which are ultimately paid back to Nationstar from such trusts.


Accounts receivable consist of the following (in thousands):





June 30, 2012December 31, 2011Delinquent interest advances$1,286,525$213,737Corporate and escrow advances1,028,722299,946Insurance deposits1,7501,750Accrued interest3,4491,512Receivables from trusts16,9204,664Accrued servicing fees95,63220,865Other54,99319,826Total accounts receivable$2,487,991$562,300





6. Mortgage Loans Held for Sale and Investment


Mortgage loans held for sale


Nationstar maintains a strategy of originating mortgage loan products primarily for the purpose of selling to GSEs or other third party investors in the secondary market. Generally, all newly originated mortgage loans held for sale are delivered to third-party purchasers or securitized shortly after origination.


Nationstar has elected to measure newly originated prime residential mortgage loans held for sale at fair value, as permitted under ASC 825, Financial Instruments . Nationstar estimates fair value by evaluating a variety of market indicators, including recent trades and outstanding commitments, calculated on an aggregate basis (see Note 14 – Fair Value Measurements).


Mortgage loans held for sale consist of the following (in thousands):





June 30, 2012December 31, 2011Mortgage loans held for sale – unpaid principal balance$796,888$442,596Mark-to-market adjustment41,01816,030Total mortgage loans held for sale$837,906$458,626


We had no mortgage loans held for sale on a nonaccrual status at June 30, 2012 or December 31, 2011 .








14


---

Table of Contents


A reconciliation of the changes in mortgage loans held for sale to the amounts presented in the consolidated statements of cash flows for the dates indicated is presented in the following table (in thousands):





For the six months ended June 30,20122011Mortgage loans held for sale – beginning balance$458,626$369,617Mortgage loans originated and purchased, net of fees2,996,3721,378,039Cost of loans sold, net of fees(2,639,778)(1,490,814)Principal payments received on mortgage loans held for sale and other changes24,1884,465Transfer of mortgage loans held for sale to held for investment(1,502)(288)Mortgage loans held for sale – ending balance$837,906$261,019


Mortgage loans held for investment, subject to nonrecourse debt - legacy assets, net


Mortgage loans held for investment, subject to nonrecourse debt – legacy assets principally consist of nonconforming or subprime mortgage loans securitized which serve as collateral for the issued debt. These loans were transferred on October 1, 2009 from mortgage loans held for sale at fair value on the transfer date, as determined by the present value of expected future cash flows, with no valuation allowance recorded. The difference between the undiscounted cash flows expected and the investment in the loan is recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at transfer are not recognized as a yield adjustment or as a loss accrual or a valuation allowance. Increases in expected cash flows subsequent to the transfer are recognized prospectively through adjustment of the yield on the loans over the remaining life. Decreases in expected cash flows subsequent to transfer are recognized as a valuation allowance.


An allowance for loan losses is established by recording a provision for loan losses in the consolidated statement of operations when management believes a loss has occurred on a loan held for investment. When management determines that a loan held for investment is partially or fully uncollectible, the estimated loss is charged against the allowance for loan losses. Recoveries on losses previously charged to the allowance are credited to the allowance at the time the recovery is collected.





Nationstar accounts for the loans that were transferred to held for investment from held for sale during October 2009 in a manner similar to ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality . At the date of transfer, management evaluated such loans to determine whether there was evidence of deterioration of credit quality since acquisition and if it was probable that Nationstar would be unable to collect all amounts due according to the loan’s contractual terms. The transferred loans were aggregated into separate pools of loans based on common risk characteristics (loan delinquency). Nationstar considers expected prepayments, and estimates the amount and timing of undiscounted expected principal, interest, and other cash flows for each aggregated pool of loans. The determination of expected cash flows utilizes internal inputs such as prepayment speeds and credit losses. These internal inputs require the use of judgment and can have a significant impact on the accretion of income and/or valuation allowance. Nationstar determines the excess of the pool’s scheduled contractual principal and contractual interest payments over all cash flows expected as of the transfer date as an amount that should not be accreted (nonaccretable difference). The remaining amount is accreted into interest income over the remaining life of the pool of loans (accretable yield).


Over the life of the transferred loans, management continues to estimate cash flows expected to be collected. Nationstar evaluates at the balance sheet date whether the present value of the loans determined using the effective interest rates has decreased, and if so, records an allowance for loan loss. The present value of any subsequent increase in the transferred loans cash flows expected to be collected is used first to reverse any existing allowance for loan loss related to such loans. Any remaining increase in cash flows expected to be collected are used to adjust the amount of accretable yield recognized on a prospective basis over the remaining life of the loans.


Nationstar accounts for its allowance for loan losses for all other mortgage loans held for investment in accordance with ASC 450-20, Loss Contingencies . The allowance for loan losses represents management’s best estimate of probable losses inherent in the loans held for investment portfolio. Mortgage loans held for investment portfolio is comprised primarily of large groups of homogeneous residential mortgage loans. These loans are evaluated based on the loan’s present delinquency status. The entire allowance is available to absorb probable credit losses from the entire held for investment portfolio.











15


---

Table of Contents


Mortgage loans held for investment, subject to nonrecourse debt—legacy assets, net as of the dates indicated include (in thousands):





June 30, 2012December 31, 2011Mortgage loans held for investment, subject to nonrecourse debt - legacy assets, net – unpaid principal balance$365,258$375,720Transfer discountAccretable(22,193)(22,392)Non-accretable(98,791)(104,024)Allowance for loan losses(6,101)(5,824)Total mortgage loans held for investment, subject to nonrecourse debt -legacy assets, net$238,173$243,480





The changes in accretable yield on loans transferred to mortgage loans held for investment, subject to nonrecourse debt- legacy assets were as follows (in thousands):





Six months ended June 30, 2012Year ended December 31,2011Accretable YieldBalance at the beginning of the period$22,392$25,219Additions——Accretion(1,886)(4,131)Reclassifications from (to) nonaccretable discount1,6871,304Disposals——Balance at the end of the period$22,193$22,392


Nationstar may periodically modify the terms of any outstanding mortgage loans held for investment, subject to nonrecourse debt-legacy assets, net for loans that are either in default or in imminent default. Modifications often involve reduced payments by borrowers, modification of the original terms of the mortgage loans, forgiveness of debt and/or increased servicing advances. As a result of the volume of modification agreements entered into, the estimated average outstanding life in this pool of mortgage loans has been extended. Nationstar records interest income on the transferred loans on a level-yield method. To maintain a level-yield on these transferred loans over the estimated extended life, Nationstar reclassified approximately $0.5 million for the three months ended June 30, 2012, $1.7 million for the six months ended June 30, 2012 , and $1.3 million for the year ended December 31, 2011 from nonaccretable difference. Furthermore, Nationstar considers the decrease in principal, interest, and other cash flows expected to be collected arising from the transferred loans as an impairment, and Nationstar recorded provisions for loan losses of $0.9 million for the three months ended June 30, 2012 on the transferred loans to reflect this impairment.  There were no additional provision required for the three months period ended June 30, 2011. Nationstar recorded provisions for loan losses of $1.1 million for the six months ended June 30, 2011 , and $1.6 million for the six months ended June 30, 2012 on the transferred loans to reflect this impairment.


Nationstar collectively evaluates all mortgage loans held for investment, subject to nonrecourse debt-legacy assets for impairment. The changes in the allowance for loan losses on mortgage loans held for investment, subject to nonrecourse debt-legacy assets, net were as follows (in thousands) for the dates indicated:





Six months ended June 30, 2012PerformingNon-PerformingTotalBalance at the beginning of the period$1,641$4,183$5,824Provision for loan losses1,876(268)1,608Recoveries on loans previously charged-off———Charge-offs(978)(353)(1,331)Balance at the end of the period$2,539$3,562$6,101Ending balance – collectively evaluated for impairment$294,527$70,731$365,258





16


---

Table of Contents


Year ended December 31,2011PerformingNon-PerformingTotalBalance at the beginning of the period$829$2,469$3,298Provision for loan losses1,3462,1913,537Recoveries on loans previously charged-off———Charge-offs(534)(477)(1,011)Balance at the end of the period$1,641$4,183$5,824Ending balance – Collectively evaluated for impairment$283,770$91,950$375,720


Loan delinquency and loan-to-value ratio (LTV) are common credit quality indicators that Nationstar monitors and utilizes in its evaluation of the adequacy of the allowance for loan losses, of which the primary indicator of credit quality is loan delinquency. LTV refers to the ratio of comparing the loan’s unpaid principal balance to the property’s collateral value. Loan delinquencies and unpaid principal balances are updated monthly based upon collection activity. Collateral values are updated from third-party providers on a periodic basis. For an event requiring a decision based at least in part on the collateral value, Nationstar takes its last known value provided by a third party and then adjusts the value based on the applicable home price index.





The following tables provide the outstanding unpaid principal balance of Nationstar’s mortgage loans held for investment by credit quality indicators as of dates indicated.





June 30, 2012December 31, 2011(in thousands)Credit Quality by Delinquency StatusPerforming$294,527$283,770Non-Performing70,73191,950Total$365,258$375,720Credit Quality by Loan-to-Value RatioLess than 60$40,213$42,438Less than 70 and more than 6014,63715,968Less than 80 and more than 7022,47225,190Less than 90 and more than 8028,16932,620Less than 100 and more than 9035,84433,708Greater than 100223,923225,796Total$365,258$375,720


Performing loans refer to loans that are less than 90 days delinquent. Non-performing loans refer to loans that are greater than 90 days delinquent.


Reverse mortgage interests


Reverse mortgage interests consists of fees paid to taxing authorities for borrowers’ unpaid taxes and insurance, and payments made to borrowers for line of credit draws on the reverse mortgages. These advances include due and payable advances, which are recovered upon the sale of the subject property, and defaulted advances that can be securitized and sold. As of June 30, 2012 , Nationstar had $ 310.1 million in outstanding reverse mortgage interests.


Nationstar accounts for outstanding and future reverse mortgage interests as financing receivables in accordance with ASC 310, Receivables . Interest and other unpaid taxes and fees are accrued monthly and capitalized as part of the outstanding advance balance. When Nationstar determines that a loss on the advance balance is probable and that the carrying balance may be partially or fully uncollectible, an allowance for loan loss is established by recording a provision for loan losses in the consolidated statement of operations.





17


---

Table of Contents


7. Mortgage Servicing Rights (MSRs)


MSRs at fair value


Nationstar recognizes MSRs related to all existing residential mortgage loans transferred to a third party in a transfer that meets the requirements for sale accounting and for which the servicing rights are retained. Additionally, Nationstar may acquire the rights to service residential mortgage loans that do not relate to assets transferred by Nationstar through the purchase of these rights from third parties.


Nationstar identifies MSRs related to all existing forward residential mortgage loans transferred to a third party in a transfer that meets the requirements for sale accounting or through the acquisition of rights to service forward residential mortgage loans that do not relate to assets transferred by Nationstar through the purchase of these rights from third parties as a class of MSR.  Nationstar applies fair value accounting to this class of MSRs, with all changes in fair value recorded as charges or credits to servicing fee income in accordance with ASC 860-50, Servicing Assets and Liabilities .





MSRs arise from contractual agreements between Nationstar and investors in mortgage securities and mortgage loans. Nationstar records MSR assets when it sells loans on a servicing-retained basis, at the time of securitization or through the acquisition or assumption of the right to service a financial asset. Under these contracts, Nationstar performs loan servicing functions in exchange for fees and other remuneration.


The fair value of the MSRs is based upon the present value of the expected future cash flows related to servicing these loans. Nationstar receives a base servicing fee ranging from 0.25% to 0.50% annually on the remaining outstanding principal balances of the loans. The servicing fees are collected from investors. Nationstar determines the fair value of the MSRs by the use of a cash flow model that incorporates prepayment speeds, discount rate, and other assumptions (including servicing costs) that management believes are consistent with the assumptions other major market participants use in valuing the MSRs. Certain of the forward loans underlying the MSRs are prime agency and government conforming residential forward mortgage loans and as such are more interest rate sensitive whereas the remaining MSRs are more credit sensitive. The nature of the forward loans underlying the MSRs affects the assumptions that management believes other major market participants use in valuing the MSRs. Nationstar obtains third-party valuations for a portion of its MSRs to assess the reasonableness of the fair value calculated by the cash flow model.


Certain of the forward loans underlying the mortgage servicing rights carried at fair value that are owned by Nationstar are credit sensitive in nature and the value of these mortgage servicing rights are more likely to be affected from changes in credit losses than from interest rate movement. The remaining forward loans underlying Nationstar’s MSRs held at fair value are prime agency and government conforming residential mortgage loans for which the value of these MSRs are more likely to be affected from interest rate movement than changes in credit losses.


Nationstar used the following weighted average assumptions in estimating the fair value of MSRs for the dates indicated:





Credit Sensitive MSRsJune 30, 2012December 31, 2011Discount rate17.93%25.71%Total prepayment speeds20.09%15.80%Expected weighted-average life4.79 years5.15 yearsCredit losses25.09%35.42%Interest Rate Sensitive MSRsJune 30, 2012December 31, 2011Discount rate10.65%10.46%Total prepayment speeds18.03%19.02%Expected weighted-average life4.91 years5.04 yearsCredit losses10.22%9.73%





























18


---

Table of Contents





The activity of MSRs carried at fair value is as follows for the dates indicated (in thousands):


Six months ended June 30, 2012Year ended December 31,2011Fair value at the beginning of the period$251,050$145,062Additions:Servicing resulting from transfers of financial assets24,12836,474Recognition of servicing assets from derecognition of variable interest entities—5,714Purchases of servicing assets341,664102,800Changes in fair value:Due to changes in valuation inputs or assumptions used in the valuation model(1,686)(14,207)Other changes in fair value(18,694)(24,793)Fair value at the end of the period$596,462$251,050Unpaid principal balance of forward loans serviced for othersOriginated or purchased mortgage loansCredit sensitive loans$102,335,034$32,408,623Interest sensitive loans14,779,77211,844,831Total owned loans$117,114,806$44,253,454





The following table shows the hypothetical effect on the fair value of the MSRs using various unfavorable variations of the expected levels of certain key assumptions used in valuing these assets at June 30, 2012 and December 31, 2011 (in thousands):





Discount RateTotal PrepaymentSpeedsCredit Losses100 bpsAdverseChange200 bpsAdverseChange10%AdverseChange20%AdverseChange10%AdverseChange20%AdverseChangeJune 30, 2012Mortgage servicing rights$(18,914)$(36,648)$(68,006)$(137,411)$(51,448)$(107,296)December 31, 2011Mortgage servicing rights$(6,640)$(12,929)$(13,281)$(25,215)$(5,081)$(10,944)





These sensitivities are hypothetical and should be evaluated with care. The effect on fair value of a 10% variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors (e.g., a decrease in total prepayment speeds may result in an increase in credit losses), which could impact the above hypothetical effects.


MSRs at amortized cost


Additionally, Nationstar has acquired servicing rights for reverse mortgage loans. For this class of servicing rights, Nationstar applies the amortization method (i.e., lower of cost or market) with the capitalized cost of the MSRs amortized in proportion and over the period of the estimated net future servicing income and recognized as an adjustment to servicing fee income. The expected period of the estimated net servicing income is based, in part, on the expected prepayment period of the underlying reverse mortgages. This class of MSRs is periodically evaluated for impairment. For purposes of measuring impairment, MSRs are stratified based on predominant risk characteristics of the underlying serviced loans. These risk characteristics include loan type (fixed or adjustable rate), term and interest rate. Impairment, if any, represents the excess of amortized cost of an individual stratum over its estimated fair value and is recognized through a valuation allowance.


As of June 30, 2012, Nationstar owns the right to service certain reverse mortgage MSRs with an unpaid principal balance of $27.2 billion . The initial carrying amount of these MSRs is based on the relative fair value of the purchased assets and


19


---

Table of Contents


liabilities including reverse mortgage interests. These MSRs are subsequently accounted for using the amortization method. Amortization / accretion is recorded as service fee income on the statement of operations and comprehensive income. Nationstar utilizes a variety of assumptions in assessing the fair value of its servicing assets or liabilities, with the primary assumptions including discount rates and the expected weighted average life. At June 30, 2012, no impairment was identified.





The activity of MSRs carried at amortized cost is as follows for the date indicated (in thousands):





Six months EndedJune 30, 2012AssetsLiabilitiesActivity of MSRs at amortized costBalance at the beginning of the period$—$—Additions:Purchase /Assumptions of servicing rights/obligations9,00083,246Deductions:Amortization/Accretion(643)(1,267)Balance at end of the period$8,357$81,979


Subserviced loans


In addition to the two classes of MSRs that Nationstar services for others, Nationstar also subservices loans on behalf of owners of MSRs or loans for a fee. Nationstar has no recorded value for its subservicing arrangements. At June 30, 2012 and December 31, 2011 , the unpaid principal balances under subservicing arrangements were $47.6 billion and $53.7 billion , respectively.


Total servicing and ancillary fees from Nationstar’s servicing portfolio of residential mortgage loans are presented in the following table for the periods indicated (in thousands):





For the three months ended June 30For the six months ended June 302012201120122011Servicing fees$65,769$42,060$127,973$85,197Ancillary fees23,57318,71949,53837,076Total servicing and ancillary fees$89,342$60,779$177,511$122,273





20


---

Table of Contents


8. Other Assets


Other assets consisted of the following (in thousands):





June 30, 2012December 31, 2011Interest rate locks$53,193$11,302Deferred financing costs26,99512,059Deposit in escrow for ResCap acquisition72,000—Deposits pending on mortgage servicing rights acquisitions1,77028,904Loans subject to repurchase right from Ginnie Mae46,13035,735Equity method investment9,7276,493Margin call deposits7,3254,518Prepaid expenses3,1764,286Unsecured loans1,8181,827Other4,1271,057Total other assets$226,261$106,181


In conjunction with Nationstar's definitive agreement to acquire certain assets from Residential Capital, LLC (see Note 23), Nationstar was required to place in escrow $72.0 million toward the purchase price.  Also, as a part of the transaction, Newcastle Investment Corp. (Newcastle) remitted $25.2 million to Nationstar toward the escrow payment. Such amount has been recorded in payables and accrued liabilities in the Company's consolidated balance sheet and would be repaid to Newcastle in the event that the agreement is not consummated.


Deposits pending on mortgage servicing rights acquisitions primarily consist of amounts transferred to third parties for the future acquisition of mortgage servicing. In December 2011 , Nationstar entered into an agreement with a financial institution to acquire the rights to service reverse mortgages with an unpaid principal balance of approximately $9.5 billion , of which the underlying reserve mortgages are currently owned by an unaffiliated GSE. The purchase of these servicing rights was completed upon the approval of the GSE which was received in June 2012. Upon execut ion of the purchase, Nationstar assumed responsibility for advance obligations on the underlying reverse mortgage loans. Na tionstar paid $9.0 million for the purchase of these servicing rights which had previously been deposited with the financial institution. Also, as of December 31, 2011 , Nationstar had placed in escrow $17.9 million relating to the purchase of the mortgage servicing rights and related outstanding advance balances with the same financial institution. Such purchase was completed in January 2012 and these escrow amounts were released. In addition, Nationstar has entered into separate agreements to purchase forward mortgage servicing rights. These amounts are carried as deposits on acquired servicing rights acquisitions until the underlying forward residential mortgage loan balances are transferred to Nationstar. Nationstar has deposited with a counterparty for servicing rights on forward mortgages for $1.8 million as of June 30, 2012 that are expected to be originated and transferred to Nationstar during the third quarter of 2012 , and $2.0 million as of December 31, 2011 that were originated and transferred to Nationstar during the first quarter of 2012 .


For certain loans sold to GNMA (Ginnie Mae), Nationstar as the servicer has the unilateral right to repurchase without Ginnie Mae’s prior authorization any individual loan in a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. Once Nationstar has the unilateral right to repurchase the delinquent loan, Nationstar has effectively regained control over the loan, and under GAAP, must re-recognize the loan on its balance sheet and establish a corresponding repurchase liability regardless of Nationstar’s intention to repurchase the loan. Nationstar’s re-recognized loans included in other assets and the corresponding liability in payables and accrued liabilities was $46.1 million at June 30, 2012 and $35.7 million at December 31, 2011 .


In March 2011 , Nationstar acquired a 22% interest in ANC Acquisition LLC (ANC) for an initial investment of $6.6 million . ANC is the parent company of National Real Estate Information Services, LP (NREIS) a real estate services company. In March 2012 FIF contributed its 13% investment in ANC to Nationstar, increasing the overall investment to 35% . As Nationstar is able to exercise significant influence, but not control, over the policies and procedures of the entity, and Nationstar owns less than 50% of the voting interests, Nationstar applies the equity method of accounting. NREIS, an ancillary real estate services and vendor management company, offers comprehensive settlement and property valuation services for both originations and default management channels. Direct or indirect product offerings include title insurance agency, tax searches, flood certification, default valuations, full appraisals and broker price opinions.





21


---

Table of Contents





A summary of the assets, liabilities, and operations of ANC as of the following periods are presented in the following tables (in thousands):


June 30, 2012December 31, 2011ASSETSCash$3,100$2,486Accounts receivable2,6755,296Receivables from affiliates25792Equity method investments2,8812,788Property and equipment, net2,0441,995Goodwill and other intangible assets33,79633,876Other assets488590Total assets$45,241$47,123LIABILITIESNotes payable$4,724$4,724Payables and accrued liabilities13,88213,236Total liabilities$18,606$17,960Three months ended June 30,Six months ended June 30,2012201120122011REVENUESSales$13,083$12,201$28,379$12,201Cost of sales(10,080)(10,722)(21,431)(10,722)Net sales revenues3,0031,4796,9481,479OTHER INCOME/(EXPENSE)Operating costs(4,559)(3,951)(9,062)(3,951)Income from equity method investments5524051,255405Depreciation and amortization(373)(219)(761)(219)Other income/(expense)(39)(53)(69)(53)Loss from discontinued operations(12)(27)(35)(27)Total other income/(expense)(4,431)(3,845)(8,672)(3,845)Net loss$(1,428)$(2,366)$(1,724)$(2,366)


Nationstar recorded a net charge to earnings related to loss on equity method investments of $0.5 million and $0.6 million  for the three and six months ended  June 30, 2012 , respectively, and a $0.5 million loss related to the three and six months ended  June 30, 2011 , which is included as a component of other fee income in Nationstar’s consolidated statement of operations.





22


---



9.  Payables and Accrued Liabilities





Payables and accrued liabilities consist of the following (in thousands):





June 30, 2012December 31, 2011Payables to securitization trusts$10,250$10,665Loans subject to repurchase from Ginnie Mae46,13035,735Cancelled lease reserves7,8109,160Legal and professional fees9,3455,931MSR purchases payable169,2658,204Accrued bonus and payroll23,86421,236Accrued interest18,71510,225Mortgage insurance premiums and reserves58,60419,162Government sponsored entities43,49918,728Repurchase reserves12,42410,026Deposit from MSR co-investor for ResCap25,200—Reverse mortgage payables95,823—Originations closed not funded51,626—Taxes12,790154Other54,49434,563Total payables and accrued liabilities$639,839$183,789





10. Derivative Financial Instruments


Nationstar enters into interest rate lock commitments (IRLCs) with prospective borrowers. These commitments are carried at fair value in accordance with ASC 815, Derivatives and Hedging . ASC 815 clarifies that the expected net future cash flows related to the associated servicing of a loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The estimated fair values of IRLCs are based on quoted market values and are recorded in other assets in the consolidated balance sheets. The initial and subsequent changes in the value of IRLCs are a component of gain on mortgage loans held for sale.


Nationstar actively manages the risk profiles of its IRLCs and mortgage loans held for sale on a daily basis. To manage the price risk associated with IRLCs, Nationstar enters into forward sales of MBS in an amount equal to the portion of the IRLC expected to close, assuming no change in mortgage interest rates. In addition, to manage the interest rate risk associated with mortgage loans held for sale, Nationstar enters into forward sales of MBS to deliver mortgage loan inventory to investors. The estimated fair values of forward sales of MBS and forward sale commitments are based on quoted market values and are recorded as a component of other assets and mortgage loans held for sale, respectively, in the consolidated balance sheets. The initial and subsequent changes in value on forward sales of MBS and forward sale commitments are a component of gain on mortgage loans held for sale.


Periodically, Nationstar enters into interest rate swap agreements to hedge the interest payment on the warehouse debt. These interest rate swap agreements generally require Nationstar to pay a fixed interest rate and receive a variable interest rate based on LIBOR. Unless designated as an accounting hedge, Nationstar records losses on interest rate swaps as a component of gain/(loss) on interest rate swaps and caps in Nationstar’s consolidated statements of operations. Unrealized losses on undesignated interest rate derivatives are separately disclosed under operating activities in the consolidated statements of cash flows. Interest rate swaps designated as cash flow hedges under ASC 815 are recorded at fair value on the Company’s consolidated balance sheet, with any changes in fair value related to the effective portion of the hedge being recorded as an adjustment to other comprehensive income. To qualify as a cash flow hedge, the hedge must be highly effective at reducing the risk associated with the exposure being hedged and must be formally designated at hedge inception. Nationstar considers a hedge to be highly effective if the change in fair value of the derivative hedging instrument is within 80% to 125% of the change in the fair value of the hedged item attributable to the hedged risk. Ineffective portions of the cash flow hedge are reflected in earnings as they occur as a component of interest expense.





23


---

Table of Contents


During 2008 , Nationstar entered into interest rate cap agreements to hedge the interest payment on the servicing advance facility. These interest rate cap agreements generally require an upfront payment and receive cash flow only when a variable rate based on LIBOR exceeds a defined interest rate. These interest rate cap agreements are not designated as hedging instruments, and unrealized gains and losses are recorded in loss on interest rate swaps and caps in Nationstar’s consolidated statements of operations.


In conjunction with the Reorganization, FIF contributed outstanding interest rate swaps in March 2012 to Nationstar. These interest rate swaps on ABS debt generally require Nationstar to pay a fixed interest rate and receive a variable interest rate based on LIBOR. The outstanding interest rate swaps have not been designated as accounting hedges during the six months ended June 30, 2012 . Any changes in fair value are recorded as a component of gains or losses on interest rate swaps and caps in Nationstar’s consolidated statement of operations.





24


---

Table of Contents


The following table shows the effect of derivative financial instruments that were designated as accounting hedges for the three and six months ended June 30, 2012 and 2011.


The Effect of Derivative Instruments on the Statement of Operations


(in thousands) Derivatives in ASC 815 Cash Flow Hedging RelationshipsAmount ofGain (Loss)Recognizedin OCI onDerivative(EffectivePortion)Location of Gain(Loss) Reclassifiedfrom AccumulatedOCI into Income(Effective Portion)Amount ofGain (Loss)ReclassifiedfromAccumulatedOCI intoIncome(EffectivePortion)Location of Gain(Loss) Recognizedin Income onDerivative(IneffectivePortion andAmount ExcludedfromEffectivenessTesting)Amount of                                                                                                                                                                                                                                                      Gain (Loss)Recognized inIncome onDerivative(IneffectivePortion)For the three months ended June 30, 2012Interest Rate Swap$(423)Interest Expense$—Interest Expense$—For the three months ended June 30, 2011Interest Rate Swap$(1,210)Interest Expense$336Interest Expense$514For the six months ended June 30, 2012Interest Rate Swap$(423)Interest Expense$—Interest Expense$—For the six months ended June 30, 2011Interest Rate Swap$(1,071)Interest Expense$582Interest Expense$1,416


As of June 30, 2012, there was no credit risk related to contingent features in any of the Company's derivative agreements.


The following tables provide the outstanding notional balances and fair values of outstanding positions for the dates indicated, and recorded gains/(losses) during the periods indicated (in thousands):





ExpirationDatesOutstandingNotionalFairValueRecordedGains /(Losses)For the six months ended June 30, 2012MORTGAGE LOANS HELD FOR SALELoan sale commitments2012$7,782$306$(328)OTHER ASSETSIRLCs20122,443,48953,19341,891LIABILITIESInterest rate swaps and caps2012-2015675,1246,778188Interest rate swaps on ABS debt(1)2012-2017963,9731,243(813)Forward MBS trades20122,154,80010,890(5,060)Year ended December 31,2011MORTGAGE LOANS HELD FOR SALELoan sale commitments2012$28,047$634$592OTHER ASSETSIRLCs2012736,37711,3026,598LIABILITIESInterest rate swaps and caps2012-2015193,5006,5401,261Forward MBS trades2012691,7255,830(9,792)Interest rate swap, subject to ABS nonrecourse debt(2)———(8,058)





25


---

Table of Contents


|    |                                                                                                
|--- | -----------------------------------------------------------------------------------------------
|(1) | InMarch 2012, Nationstar received interest rate swaps from FIF as a part of the reorganization.

|    |                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | InDecember 2011, Nationstar sold its remaining variable interest in a securitization trust that had been a consolidated VIE sinceJanuary 1, 2010and deconsolidated the VIE. Upon deconsolidation of this VIE, Nationstar derecognized the related ABS nonrecourse debt and therefore the underlying interest rate swap, subject to ABS nonrecourse debt.




11. Indebtedness


Notes Payable


A summary of the balances of notes payable for the dates indicated is presented below (in thousands).





June 30, 2012December 31, 2011OutstandingCollateralPledgedOutstandingCollateralPledgedServicing Segment Notes PayableMBS advance financing facility$157,241$160,450$179,904$182,096Securities repurchase facility (2011)11,77455,60311,77455,6032010-ABS advance financing facility197,085227,987219,563249,4992011-1 Agency advance financing facility42,70547,49225,01128,811MSR note7,40414,36710,18016,2302012-AW Agency advance financing facility84,151102,164——2012-C ABS advance financing facility533,217690,097——2012-R ABS advance financing facility312,092371,422——2012-W ABS advance financing facility359,541442,912——Reverse participations financing facility————Originations Segment Notes Payable$375 million warehouse facility297,743314,76346,81051,040$150 million warehouse facility77,25183,891251,722265,083$250 million warehouse facility (2011)109,729115,5097,3107,672$100 million warehouse facility (2009)98,747102,86116,04716,715ASAP+ facility123,684121,458104,858104,006Total notes payable$2,412,364$2,850,976$873,179$976,755


Servicing Segment Notes Payable


MBS advance financing facility - Nationstar has a one -year committed facility agreement with a GSE, under which Nationstar may transfer to the GSE certain servicing advance receivables against the transfer of funds by the GSE. This facility has the capacity to purchase up to $325 million in eligible servicing advance receivables. The interest rate is based on LIBOR plus a spread of 2.50% . The maturity date of this facility is currently December 2012 .


Securities repurchase facility (2011) - In December 2011 , Nationstar entered into a securities repurchase facility with a financial services company that was amended in February 2012 to extend the expiration to February 22, 2013 . The MRA states that Nationstar may from time to time transfer to the financial services company eligible securities against the transfer of funds by the financial services company, with a simultaneous agreement by the financial services company to transfer such securities to Nationstar at a certain date, or on demand by Nationstar, against the transfer of funds from Nationstar. Additionally, the financial services company may elect to extend the transfer date for an additional 90 days at mutually agreed upon terms. The interest rate is based on LIBOR plus a margin of 3.50% . As of June 30, 2012 , Nationstar has pledged the Company’s $55.6 million outstanding retained interest in the outstanding Nonrecourse debt—Legacy Assets securitization which was structured as a financing.


2010-ABS advance financing facility - In December 2010 , Nationstar executed the 2010-ABS Advance Financing Facility with a financial institution. This facility has the capacity to purchase up to $300 million of advance receivables. The interest rate is based on LIBOR plus a spread of 3.00% . This facility matures in May 2014 . This debt is nonrecourse to Nationstar.





26


---

Table of Contents


2011-1 Agency advance financing facility - In October 2011 , Nationstar executed the 2011-1 Agency Advance Financing Facility with a financial institution. This facility has the capacity to borrow up to $300 million and the interest rate is based on LIBOR plus a spread ranging from 2.5% to 6.50% depending upon class of the note . The maturity date of this facility is October 2012 . This facility is secured by servicing advance receivables and is nonrecourse to Nationstar.


MSR note - In connection with the October 2009 MSR acquisition, Nationstar executed a four -year note agreement with a GSE. As collateral for this note, Nationstar has pledged Nationstar’s rights, title, and interest in the acquired servicing portfolio. The interest rate is based on LIBOR plus 2.50% . The maturity date of this facility is October 2013 .


2012-AW Agency advance financing facility - In June 2012 , Nationstar executed the 2012-AW Agency Advance Financing Facility with a financial institution. This facility has the capacity to borrow up to $100 million and the interest rate is based on LIBOR plus a spread of 2.50% . The maturity date of this facility is June 2013 . This facility is secured by servicing advance receivables and is nonrecourse to Nationstar.


2012-C ABS advance financing facility - In June 2012 , Nationstar executed the 2012-C ABS Advance Financing Facility with a financial institution. This facility has the capacity to borrow up to $600 million and the interest rate is based on LIBOR plus a spread ranging from 3.50% to 4.50% . The maturity date of this facility is June 2014 . This facility is secured by servicing advance receivables and is nonrecourse to Nationstar.


2012-R ABS advance financing facility - In June 2012 , Nationstar executed the 2012-R ABS Advance Financing Facility with a financial institution. This facility has the capacity to borrow up to $350 million and the interest rate is based on LIBOR plus a spread ranging from 3.37% to 8.00% . The maturity date of this facility is June 2014 . This facility is secured by servicing advance receivables and is nonrecourse to Nationstar.


2012-W ABS advance financing facility - In June 2012 , Nationstar executed the 2012-W ABS Advance Financing Facility with a financial institution. This facility has the capacity to borrow up to $450 million and the interest rate is based on LIBOR plus a spread of 3.75% . The maturity date of this facility is June 2013 . This facility is secured by servicing advance receivables and is nonrecourse to Nationstar.


Reverse participations financing facility - In June 2012, Nationstar executed a reverse participation financing facility with a financial institution. This facility has capacity to borrow up to $150 million and the interest rate is based on LIBOR plus a spread of 4.00% . The maturity date of this facility is June 2014. This facility is secured by reverse mortgage interest.





Originations Segment Notes Payable


$375M warehouse facility - In February 2010 , Nationstar executed a Master Repurchase Agreement (MRA) with a financial institution, which will expire in January 2013 . The MRA states that from time to time Nationstar may enter into transactions, for an aggregate amount of $375 million , in which Nationstar agrees to transfer to the same financial institution certain mortgage loans against the transfer of funds by the same financial institution, with a simultaneous agreement by the same financial institution to transfer such mortgage loans to Nationstar at a date certain, or on demand by Nationstar, against the transfer of funds from Nationstar. In June 2012, Nationstar amended the agreement to increase the borrowing capacity from $175 million to $375 million . The interest rate is based on LIBOR plus a spread ranging from 1.75% to 2.50% .


$150M warehouse facility - Nationstar has an MRA with a financial services company, which was amended in February 2012 to expire in February 2013 and reduce the committed amount from $300 million to $150 million . The MRA states that from time to time Nationstar may enter into transactions in which Nationstar agrees to transfer to the financial services company certain mortgage loans or MBS against the transfer of funds by the financial services company, with a simultaneous agreement by the financial services company to transfer such mortgage loans or MBS to Nationstar at a certain date, or on demand by Nationstar, against the transfer of funds from Nationstar. The interest rate is based on LIBOR plus a margin of 3.25% .


$250M warehouse facility (2011) - In March 2011 , Nationstar executed an MRA with a financial institution, under which Nationstar may enter into transactions, for an aggregate amount of $250 million in which Nationstar agrees to transfer to the same financial institution certain mortgage loans and certain securities against the transfer of funds by the same financial institution, with a simultaneous agreement by the same financial institution to transfer such mortgage loans and securities to Nationstar at a date certain, or on demand by Nationstar, against the transfer of funds from Nationstar. In June 2012, Nationstar amended the agreement to increase the borrowing capacity from $100 million to $250 million . The maturity is February 2013 with the interest rate based on LIBOR plus a spread of 2.25% to 3.00% , which varies based on the underlying transferred collateral.








27


---

Table of Contents


$100M warehouse facility (2009) - In October 2009 , Nationstar executed a MRA with a financial institution. This MRA states that from time to time Nationstar may enter into transactions, for an aggregate amount of $100 million , in which Nationstar agrees to transfer to the financial institution certain mortgage loans against the transfer of funds by the financial institution, with a simultaneous agreement by the financial institution to transfer such mortgage loans to Nationstar at a certain date, or on demand by Nationstar, against the transfer of funds from Nationstar. The interest rate is based on LIBOR plus a spread of 3.50% . The maturity date of this MRA with the financial institution is January 2013 .


ASAP + facility - During 2009, Nationstar began executing As Soon As Pooled Plus agreements with a GSE, under which Nationstar transfers to the GSE eligible mortgage loans that are to be pooled into the GSE MBS against the transfer of funds by the GSE. The interest rate is based on LIBOR plus a spread of 1.50% . These agreements typically have a maturity of up to 45 days.


Unsecured Senior Notes


A summary of the balances of unsecured senior notes is presented below (in thousands):


June 30, 2012December 31, 2011$285 million face value, 10.875% interest rate payable semi-annually, due April 2015.$280,938$280,199$275 million face value, 9.625% interest rate payable semi-annually, due May 2019.275,000—Total$555,938$280,199


In March 2010 , Nationstar completed the offering of $250 million of unsecured senior notes, which were issued with an issue discount of $7.0 million for net cash proceeds of $243.0 million , with a maturity date of April 2015 . In December 2011 , Nationstar completed an additional offering of $35 million of unsecured senior notes under the same indenture. The additional offering was issued with an issue discount of $0.3 million for net cash proceeds of $34.7 million . These unsecured senior notes pay interest semi-annually at an interest rate of 10.875% .  These unsecured notes have been registered under the Securities Act of 1933.


In April 2012, Nationstar completed an offering of $275.0 million in senior unsecured notes, the proceeds of this offering were $269.5 million , with a maturity of May 2019.  These unsecured senior notes pay interest semi-annually at an interest rate of 9.625% . These unsecured notes were issued in a private placement and have not been registered under the Securities Act of 1933.


The indentures for the unsecured senior notes contain various covenants and restrictions that limit the Company's, Nationstar's, or certain of its subsidiaries’, ability to incur additional indebtedness, pay dividends, make certain investments, create liens, consolidate, merge or sell substantially all of their assets, or enter into certain transactions with affiliates.


The expected maturities of Nationstar's  senior unsecured notes based on contractual maturities are as follows (in thousands).


YearAmount2013$—2014—2015285,0002016—2017—Thereafter275,000Total$560,000


Legacy Asset and Other Financing


Nonrecourse Debt–Legacy Assets


In November 2009 , Nationstar completed the securitization of approximately $222 million of ABS, which was structured as a secured borrowing. This structure resulted in Nationstar carrying the securitized loans as mortgages on Nationstar’s consolidated bal ance sheet and recognizing the asset-backed certificates acquired by third parties as nonrecourse debt, totaling


28


---

Table of Contents


approximately $106.3 million and $112.5 million at June 30, 2012 , and December 31, 2011 , respectively. The principal and interest on these notes are paid using the cash flows from the underlying mortgage loans, which serve as collateral for the debt. The interest rate paid on the outstanding securities is 7.50% , which is subject to an available funds cap. The total outstanding principal balance on the underlying mortgage loans serving as collateral for the debt was approximately $353.1 million and $373.1 million at June 30, 2012 and December 31, 2011 , respectively. Accordingly, the timing of the principal payments on this nonrecourse debt is dependent on the payments received on the underlying mortgage loans. The unpaid principal balance on the outstanding notes was $123.6 million and $130.8 million at June 30, 2012 and December 31, 2011 , respectively.


Excess Spread Financing Debt at Fair Value


In conjunction with Nationstar's acquisition of certain mortgage servicing rights on various pools of residential mortgage loans (the Portfolios), Nationstar has entered into sale and assignment agreements which are treated as financings with an indirect wholly-owned subsidiary of Newcastle. Nationstar is an affiliate of Newcastle’s manager. Nationstar, in transactions accounted for as financing arrangements, sold to Newcastle the right to receive 65% of the excess cash flow generated from the Portfolios after receipt of a fixed basic servicing fee per loan.


Nationstar retains all ancillary income associated with servicing the Portfolios and 35% of the excess cash flow after receipt of the fixed basic servicing fee. Nationstar continues to be the servicer of the Portfolios and provides all servicing and advancing functions. Newcastle has no prior or ongoing obligations associated with the Portfolios.


Contemporaneous with the above, Nationstar entered into refinanced loan agreements with Newcastle. Should Nationstar refinance any loan in the Portfolios, subject to certain limitations, Nationstar will be required to transfer the new loan or a replacement loan of similar economic characteristics into the Portfolios. The new or replacement loan will be governed by the same terms set forth in the sale and assignment agreement described above.





The total carrying amount of the outstanding excess spread financing agreements was $266.7 million and $44.6 million at June 30, 2012 and December 31, 2011 , respectively.


Participating Interest Financing


Participating interest financing represent the issuance of pools of Home Equity Conversion Mortgage Backed Securities (HMBS) to third-party security holders which are guaranteed by certain GSEs. Nationstar has accounted for the transfer of these advances in the related Home Equity Conversion Mortgages (HECM) loans as secured borrowings, retaining the initial Reverse mortgage interests on its balance sheet, and recording the pooled HMBS as participating interest financing liabilities on the Company’s balance sheet. Monthly cash flows generated from the HECM loans are used to service the HMBS. The interest rate is based on the underlying HMBS rate with a range of 0.53% to 7.17% . The participating interest financing was $181.1 million at June 30, 2012. There was none outstanding at December 31, 2011.


Financial Covenants


As of June 30, 2012 , Nationstar was in compliance with its covenants on its borrowing arrangements and credit facilities. These covenants generally relate to Nationstar’s tangible net worth, liquidity reserves, and leverage requirements.


















































12. General and Administrative Expenses


General and administrative expenses consist of the following for the dates indicated (in thousands):


29


---

Table of Contents





For the three months endedFor the six months endedJune 30, 2012June 30, 2011June 30, 2012June 30, 2011Servicing$22,553$5,129$36,443$8,995Legal and professional fees9,4651,54114,5674,637Depreciation and amortization1,8548083,3851,560Advertising1,3061,2042,0482,053Equipment1,7711,0863,1191,994Telecommunications1,1599712,3281,791Postage1,3478982,6612,415Stationary and supplies1,0599492,0531,951Travel1,8848182,7051,512Dues and fees1,6871,4712,5992,444Insurance, taxes, and other2,3258713,6141,958Total general and administrative expenses$46,410$15,746$75,522$31,310


13. Income Taxes


The financial statements through December 31, 2011 and for the period January 1, 2012 up to Reorganization do not include income tax expense or benefit or any current or deferred income tax assets or liabilities.  Nationstar Inc.'s corporate subsidiaries were subject to income taxes prior to the Reorganization, however, income tax expense (primarily state) and related tax liabilities were not material for presentation purposes.


As a result of the Reorganization, Nationstar Inc. and its subsidiaries, including Nationstar, became a new corporate consolidated group for income tax purposes.  As a result of the change in income tax status, the Company is required to record deferred taxes on the difference between book and tax bases in assets and liabilities as of the Reorganization date.  The net deferred tax asset or liability is recorded through the consolidated statement of operations as a component of income tax expense.  As of the Reorganization date, the Company recorded a $70.8 million deferred tax asset for net operating and other loss carryforwards inherited as a result of the Reorganization, and a $16.5 million deferred tax liability related to basis differences in Nationstar's assets and liabilities.  In addition, the Company recorded a $54.3 million valuation allowance for deferred tax assets that management concluded will likely not be realized.


The Company recorded an income tax provision of $12.8 million on pretax income for the three months ended June 30, 2012.  For the six months ended June 30, 2012, income tax expense was $15.9 million . The Company recorded an income tax provision of $3.1 million on pretax income of $12.4 million earned from the Reorganization date through March 31, 2012.





14. Fair Value Measurements


ASC 820, Fair Value Measurements and Disclosures, provides a definition of fair value, establishes a framework for measuring fair value, and requires expanded disclosures about fair value measurements. The standard applies when GAAP requires or allows assets or liabilities to be measured at fair value and, therefore, does not expand the use of fair value in any new circumstance.


ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tiered fair value hierarchy based on the level of observable inputs used in the measurement of fair value (e.g., Level 1 representing quoted prices for identical assets or liabilities in an active market; Level 2 representing values using observable inputs other than quoted prices included within Level 1; and Level 3 representing estimated values based on significant unobservable inputs). In addition, ASC 820 requires an entity to consider all aspects of nonperformance risk, including its own credit standing, when measuring the fair value of a liability. Under ASC 820, related disclosures are segregated for assets and liabilities measured at fair value based on the level used within the hierarchy to determine their fair values.


The following describes the methods and assumptions used by Nationstar in estimating fair values:


Cash and Cash Equivalents, Restricted Cash – The carrying amount reported in the consolidated balance sheets


30


---

Table of Contents


approximates fair value.


Mortgage Loans Held for Sale – Nationstar originates mortgage loans in the U.S. that it intends to sell to Fannie Mae, Freddie Mac, and Ginnie Mae (collectively, the Agencies). Additionally, Nationstar holds mortgage loans that it intends to sell into the secondary markets via whole loan sales or securitizations. Nationstar measures newly originated prime residential mortgage loans held for sale at fair value.


Mortgage loans held for sale are typically pooled together and sold into certain exit markets, depending upon underlying attributes of the loan, such as agency eligibility, product type, interest rate, and credit quality. Mortgage loans held for sale are valued using a market approach by utilizing either: (i) the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, including the value attributable to mortgage servicing and credit risk, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted for credit risk and other individual loan characteristics. As these prices are derived from quoted market prices, Nationstar classifies these valuations as Level 2 in the fair value disclosures.


Mortgage Loans Held for Investment, subject to nonrecourse debt – Legacy Assets – Nationstar determines the fair value of loans held for investment, subject to nonrecourse debt – Legacy Assets using internally developed valuation models. These valuation models estimate the exit price Nationstar expects to receive in the loan’s principal market. Although Nationstar utilizes and gives priority to observable market inputs such as interest rates and market spreads within these models, Nationstar typically is required to utilize internal inputs, such as prepayment speeds, credit losses, and discount rates. These internal inputs require the use of judgment by Nationstar and can have a significant impact on the determination of the loan’s fair value. As these prices are derived from a combination of internally developed valuation models and quoted market prices, Nationstar classifies these valuations as Level 3 in the fair value disclosures.


Mortgage Servicing Rights – Fair Value – Nationstar recognizes MSRs related to all existing residential mortgage loans transferred to a third party in a transfer that meets the requirements for sale accounting and for which the servicing rights are retained. Additionally, Nationstar may acquire the rights to service residential mortgage loans that do not relate to assets transferred by Nationstar through the purchase of these rights from third parties. Nationstar estimates the fair value of its forward MSRs using a process that combines the use of a discounted cash flow model and analysis of current market data to arrive at an estimate of fair value. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds and discount rates. These assumptions are generated and applied based on collateral stratifications including product type, remittance type, geography, delinquency and coupon dispersion. These assumptions require the use of judgment by Nationstar and can have a significant impact on the determination of the MSR’s fair value. Periodically, management obtains third party valuations of a portion of the portfolio to assess the reasonableness of the fair value calculations provided by the cash flow model. Because of the nature of the valuation inputs, Nationstar classifies these valuations as Level 3 in the fair value disclosures.


Reverse Mortgage Interests – Nationstar’s reverse mortgage advances consist of fees paid to taxing authorities for borrowers unpaid taxes and insurance, and payments made to borrowers for line of credit draws on reverse mortgages. These advances include due and payable advances, which are recovered upon the foreclosure and sale of the subject property, and defaulted advances that can be securitized. Nationstar estimates the fair value using a market approach by utilizing the fair value of securities backed by similar advances on reverse mortgage loans, adjusted for certain factors. Nationstar classifies these valuations as Level 2 in the fair value disclosures.





REO – Nationstar determines the fair value of REO properties through the use of third-party appraisals and broker price opinions, adjusted for estimated selling costs. Such estimated selling costs include realtor fees and other anticipated closing costs. These values are adjusted to take into account factors that could cause the actual liquidation value of foreclosed properties to be different than the appraised values. This valuation adjustment is based upon Nationstar’s historical experience with REO. REO is classified as Level 3 in the fair value disclosures.


Derivative Instruments – Nationstar enters into a variety of derivative financial instruments as part of its hedging strategy. The majority of these derivatives are exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, Nationstar utilizes the exchange price or dealer market price for the particular derivative contract; therefore, these contracts are classified as Level 2. In addition, Nationstar enters into IRLCs with prospective borrowers. These commitments are carried at fair value based on fair value of related mortgage loans which is based on observable market data. Nationstar adjusts the outstanding IRLCs with prospective borrowers based on an expectation that it will be exercised and the loan will be funded. IRLCs are recorded in other assets in the consolidated balance sheets. These IRLCs are classified as Level 2 in the fair value disclosures.


Notes Payable – Notes payable consists of outstanding borrowing on Nationstar's warehouse and advance financing facilities.


31


---

Table of Contents


As the underlying warehouse and advance finance facilities bear interest at a rate that is periodically adjusted based on a market index, the carrying amount reported on the consolidated balance sheet approximates fair value. Nationstar classifies these valuations as Level 3 in the fair value disclosures.


Unsecured Senior Notes – The fair value of unsecured senior notes is based on quoted market prices and is considered Level 1 from the market observable inputs used to determine fair value.


Nonrecourse Debt – Legacy Assets – Nationstar estimates fair value based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. These prices are derived from a combination of internally developed valuation models and quoted market prices, and are classified as Level 3.


Excess Spread Financing – Nationstar estimates fair value based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions at June 30, 2012 being mortgage prepayment speeds of 19.0% , average life of 3.6 years , and discount rate of 14.8% . Changes in fair value to the excess spread financing are recorded as a component of service fee income in Nationstar's consolidated statement of operations.  As these prices are derived from a combination of internally developed valuation models and quoted market prices based on the value of the underlying MSRs, Nationstar classifies these valuations as Level 3 in the fair value disclosures.


Participating Interest Financing – Nationstar estimates the fair value using a market approach by utilizing the fair value of securities backed by similar participating interests in reverse mortgage loans. Nationstar classifies these valuations as Level 2 in the fair value disclosures.


32


---

Table of Contents





The estimated carrying amount and fair value of Nationstar’s financial instruments and other assets and liabilities measured at fair value on a recurring basis is as follows for the dates indicated (in thousands):


June 30, 2012Recurring Fair Value MeasurementsTotal Fair ValueLevel 1Level 2Level 3ASSETSMortgage loans held for sale(1)$837,906$—$837,906$—Mortgage servicing rights – fair value(1)596,462——596,462Other assets:IRLCs53,193—53,193—Total assets$1,487,561$—$891,099$596,462LIABILITIESDerivative financial instrumentsInterest rate swaps and caps$6,778$—$6,778$—Interest rate swaps on ABS debt1,243—1,243—Forward MBS trades10,890—10,890—Excess spread financing (at fair value)266,693——266,693Total liabilities$285,604$—$18,911$266,693December 31, 2011Recurring Fair Value MeasurementsTotal Fair ValueLevel 1Level 2Level 3ASSETSMortgage loans held for sale(1)$458,626$—$458,626$—Mortgage servicing rights – fair value(1)251,050——251,050Other assets:IRLCs11,302—11,302—Total assets$720,978$—$469,928$251,050LIABILITIESDerivative financial instrumentsInterest rate swaps and caps$6,540$—$6,540$—Forward MBS trades5,830—5,830—Excess spread financing (at fair value)44,595——44,595Total liabilities$56,965$—$12,370$44,595


|    |                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on the nature and risks of these assets and liabilities, the Company has determined that presenting them as a single class is appropriate.

























33


---

Table of Contents


The table below presents a reconciliation for all of Nationstar’s Level 3 assets and liabilities measured at fair value on a recurring basis for the dates indicated (in thousands):





ASSETSLIABILITIESFor the three months ended June 30, 2012Mortgageservicing rightsExcess spreadfinancingBeginning balance$266,169$47,324Transfers into Level 3——Transfers out of Level 3——Total gains or lossesIncluded in earnings(20,875)2,412Included in other comprehensive income——Purchases, issuances, sales and settlementsPurchases340,106—Issuances11,062220,374Sales——Settlements—(3,417)Ending balance$596,462$266,693


ASSETSLIABILITIESFor the six months ended June 30, 2012Mortgageservicing rightsExcess spreadfinancingBeginning balance$251,050$44,595Transfers into Level 3——Transfers out of Level 3——Total gains or lossesIncluded in earnings(20,380)7,263Included in other comprehensive income——Purchases, issuances, sales and settlementsPurchases341,664—Issuances24,128220,342Sales——Settlements—(5,507)Ending balance$596,462$266,693


ASSETSLIABILITIESFor the year ending December 31, 2011Mortgageservicing rightsExcess spreadfinancingBeginning balance$145,062$—Transfers into Level 3——Transfers out of Level 3——Total gains or lossesIncluded in earnings(39,000)3,060Included in other comprehensive income——Purchases, issuances, sales and settlementsPurchases102,800—Issuances36,47443,742Sales——Settlements5,714(2,207)Ending balance$251,050$44,595











34


---

Table of Contents


The table below presents the items which Nationstar measures at fair value on a nonrecurring basis (in thousands).





Nonrecurring Fair ValueMeasurementsTotal EstimatedFair ValueTotal Gains(Losses) Includedin EarningsLevel 1Level 2Level 3Three months ended June 30, 2012AssetsREO(1)$—$—$3,429$3,429$(1,490)Total assets$—$—$3,429$3,429$(1,490)Six months ended June 30, 2012AssetsREO(1)$—$—$3,429$3,429$(3,755)Total assets$—$—$3,429$3,429$(3,755)Year ended December 31,2011AssetsREO(1)$—$—$3,668$3,668$(6,833)Total assets$—$—$3,668$3,668$(6,833)


|    |                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on the nature and risks of these assets and liabilities, the Company has determined that presenting them as a single class is appropriate.





























































35


---

Table of Contents


The table below presents a summary of the estimated carrying amount and fair value of Nationstar’s financial instruments (in thousands).





June 30, 2012CarryingAmountFair ValueLevel 1Level 2Level 3Financial assets:Cash and cash equivalents$15,892$15,892$—$—Restricted cash119,512119,512——Mortgage loans held for sale837,906—837,906—Mortgage loans held for investment, subject to nonrecourse debt – Legacy assets238,173——229,010Reverse mortgage interests310,074—310,074—Derivative instruments53,193—53,193—Financial liabilities:Notes payable2,412,364——2,412,364Unsecured senior notes555,938599,842——Derivative financial instruments18,911—18,911—Nonrecourse debt - Legacy assets106,271——107,640Excess spread financing266,693——266,693Participating interest financing181,114—181,114—December 31, 2011CarryingAmountFair ValueLevel 1Level 2Level 3Financial assets:Cash and cash equivalents$62,445$62,445$—$—Restricted cash71,49971,499——Mortgage loans held for sale458,626—458,626—Mortgage loans held for investment, subject to nonrecourse debt – Legacy assets243,480——226,890Derivative instruments11,302—11,302—Financial liabilities:Notes payable873,179——873,179Unsecured senior notes280,199282,150——Derivative financial instruments12,370—12,370—Nonrecourse debt - Legacy assets112,490——114,037Excess spread financing44,595——44,595





15. Shareholders’ Equity


Share-based compensation is recognized in accordance with ASC 718, Compensation-Stock Compensation . This guidance requires all share-based payments to employees, including grants of employee stock options, to be recognized as an expense in the consolidated statements of operations, based on the fair values. The amount of compensation is measured at the fair value of the awards when granted and this cost is expensed over the required service period, which is normally the vesting period of the award.


Nationstar Inc. has adopted the 2012 Incentive Compensation Plan (the “2012 Plan”), that offers certain key employees of Nationstar, consultants and non-employee directors equity-based awards. In connection with the initial public offering, on March 7, 2012 , Nationstar Inc. made grants of restricted stock to management in the total amount of 1,191,117 shares and also to members of the Board in the total amount of 85,716 shares.


The restricted stock, net of forfeitures, is scheduled to vest over 3 years with 419,358 shares vesting in February 2013, 419,358


36


---

Table of Contents


shares vesting in February 2014 , and 420,617 shares vesting in February 2015 . The weighted average grant date fair value of the restricted stock was $14.00 .


The following table summarizes information about our restricted stock as of June 30, 2012 under the 2012 Plan (restricted stock in thousands):


SharesGrant Date Fair ValueRemaining Contractual TermRestricted Stock outstanding at March 31, 20121,277$14.002.7Granted—Forfeited(18)Restricted Stock outstanding at June 30, 20121,259Restricted Stock unvested and expected to vest at June 30, 20121,259Restricted Stock vested and payable at  June 30, 2012—


In addition to the 2012 Plan, Nationstar management also had interests in certain of the predecessor parent company FIF’s restricted preferred units which fully vested on June 30, 2012 . The weighted average grant date fair value of these units was $4.23 . In conjunction with the final vesting under this plan, certain participants remitted a portion of their Nationstar Inc. common stock to Nationstar Mortgage LLC in payment of a portion of their federal tax withholdings on their vested shares.  The participants paid the remainder of their required tax payments with cash.  As a result of the above activity, Nationstar Mortgage LLC holds 212,156 shares of Nationstar Inc. common shares at their cost of $4.6 million .  These shares are reflected in Nationstar's consolidated balance sheet as common shares held by subsidiary, a contra equity account.  The shares are expected to be held by Nationstar Mortgage LLC until they can be distributed to Nationstar Inc. and retired.


Total compensation expense, net of forfeitures, for both the 2012 Plan and the predecessor plan recognized for the three and six months ended June 30, 2012 was $5.6 million and $8.0 million , respectively. Total compensation expense for the three and six months ended June 30, 2011 was $5.3 million and $10.5 million , respectively. Total compensation expenses, net of forfeitures, for the predecessor plan for the three and six months ended June 30, 2012, was $5.3 million and $10.5 million, respectively. Nationstar expects to recognize $5.4 million of compensation expense in the last six months of 2012, $5.9 million in 2013, $2.5 million in 2014, and $0.4 million in 2015.





16. Earnings Per Share





Net income per share is computed under the provisions of ASC 260, Earnings Per Share . Basic net income per share is computed based on the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed based on the weighted-average number of common shares plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares represent outstanding restricted stock.


17. Capital Requirements


Certain of Nationstar’s secondary market investors require various capital adequacy requirements, as specified in the respective selling and servicing agreements. To the extent that these mandatory, imposed capital requirements are not met, Nationstar’s secondary market investors may ultimately terminate Nationstar’s selling and servicing agreements, which would prohibit Nationstar from further originating or securitizing these specific types of mortgage loans. In addition, these secondary market investors may impose additional net worth or financial condition requirements based on an assessment of market conditions or other relevant factors.


Among Nationstar’s various capital requirements related to its outstanding selling and servicing agreements, the most restrictive of these requires Nationstar to maintain a minimum adjusted net worth balance of $293.8 million . As of June 30, 2012 , Nationstar was in compliance with all of its selling and servicing capital requirements.


Additionally, Nationstar is required to maintain a minimum tangible net worth of at least $175.0 million as of each quarter-end related to its outstanding Master Repurchase Agreements on its outstanding repurchase facilities. As of June 30, 2012 , Nationstar was in compliance with these minimum tangible net worth requirements.





37


---

Table of Contents





18. Commitments and Contingencies


Litigation and Regulatory Matters


In the ordinary course of business, Nationstar Inc. and its subsidiaries and current and former officers and employees are routinely named as defendants in various legal actions, including class actions and other litigation, arising in connection with activities related to a national mortgage servicer and lender. Certain of the actual or threatened legal actions include claims for substantial compensatory, punitive and/or, statutory damages or claims for an indeterminate amount of damages. Further, in the ordinary course of business the Company and certain related parties can be or are involved in governmental and regulatory examinations, information gathering requests, investigations and proceedings (both formal and informal), regarding the Company’s business, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief.


The Company seeks to resolve all litigation and regulatory matters in the manner management believes is in the best interest of the Company and contests liability, allegations of wrongdoing and, where applicable, the amount of damages or scope of any penalties or other relief sought as appropriate in each pending matter. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with outstanding legal and regulatory proceedings utilizing the latest information available. Where available information indicates that it is probable a liability has been incurred and the Company can reasonably estimate the amount of that loss an accrued liability is established. The actual costs of resolving these proceedings may be substantially higher or lower than the amounts accrued.


A 50 state task force of attorneys general as well as certain federal agencies are investigating issues related to the conduct of certain mortgage servicing companies and related service providers, in connection with mortgage foreclosures. While the Company is not involved in the investigation or negotiations regarding a settlement, the ultimate outcome could have a material impact on other mortgage servicers, including the Company.


When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. As a litigation or regulatory matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. If, at the time of evaluation, the loss contingency is not both probable and estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and estimable. Once the matter is deemed to be both probable and estimable, the Company will establish an accrued liability and record a corresponding amount to litigation related expense. The Company will continue to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established. Litigation related expense, which includes the fees paid to external legal providers, of $4.6 million and $6.2 million were included in general and administrative expense on the consolidated statements of operations for the three and six months ended  June 30, 2012 , respectively, and $1.5 million for the six months ended June 30, 2011.  There were no significant additional litigation related expenses for the three months ended June 30, 2011.


Based on current knowledge, and after consultation with counsel, management believes that the current legal accrued liability is appropriate, and the amount of any incremental liability arising from these matters is not expected to have a material adverse effect on the consolidated financial condition of the Company, although the outcome of such proceedings could be material to the Company’s operating results and cash flows for a particular period depending on among other things, the level of the Company’s revenues or income for such period. However, in the event of significant developments on existing cases, it is possible that the ultimate resolution, if unfavorable, may be material to the Company’s consolidated financial statements.





Lease Commitments


Nationstar leases various office facilities under non-cancelable lease agreements with primary terms extending through 2019. These lease agreements generally provide for market-rate renewal options, and may provide for escalations in minimum rentals over the lease term. Minimum annual rental commitments for office leases with unrelated parties and with initial or remaining terms of one year or more, net of sublease payments, are presented below (in thousands).





38


---

Table of Contents


YearAmount2012$6,103201316,397201414,212201511,84520168,450Thereafter12,113Total$69,120


Loan and Other Commitments


Nationstar enters into IRLCs with prospective borrowers whereby the Company commits to lend a certain loan amount under specific terms and interest rates to the borrower. These IRLCs are treated as derivatives and are carried at fair value (See Note 10, Derivative Financial Instruments).





In 2012, Nationstar completed its acquisitions of certain MSRs related to approximately $27.2 billion of unpaid principal balance in reverse mortgage loans from financial services companies. As servicer for these reverse mortgage loans, among other things, the Company is obligated to make advances to the loan customers as required. At June 30, 2012, the Company’s maximum unfunded advance obligation related to these MSRs was approximately $4.5 billion . Upon funding any portion of these advances, the Company expects to securitize and sell the advances in transactions that will be accounted for as financing arrangements.





Other Contingencies


In June 2011, Nationstar entered into an agreement to subservice loans for a financial services company. Nationstar began to subservice these loans in July and August 2011. This subservicing agreement included, among other things, a loss incentive and sharing arrangement. Under this arrangement, Nationstar can earn incentive fees of up to $2.5 million for successfully mitigating losses within a specific subserviced population of loans. This incentive fee would be recognized when earned. For this same population of loans, Nationstar is subject to loss sharing under certain conditions. Should losses in this population of loans exceed a specified level, Nationstar would be required to share a portion of the losses on such loans up to a maximum of $10.0 million . Losses under this arrangement would be recognized at the point at which Nationstar determines that a liability is expected to be incurred. At June 30, 2012, Nationstar has estimated no liability under this agreement.





During December 2009, Nationstar entered into a strategic relationship with a major mortgage market participant, which


contemplates, among other things, significant mortgage servicing rights and subservicing transfers to Nationstar upon terms to be determined. Under this arrangement, if certain delivery thresholds have been met, the market participant may require Nationstar to establish an operating division or newly created subsidiary with separate, dedicated employees within a specified timeline to service such mortgage servicing rights and subservicing. After a specified time period, this market participant may purchase the subsidiary at an agreed upon price. Since December 2010, all of the required delivery thresholds with this market participant have been met, but the market participant has not required the Company to establish an operating division or newly created subsidiary with separate, dedicated employees.





19. Business Segment Reporting


Nationstar currently conducts business in two separate operating segments: Servicing and Originations. The Servicing segment provides loan servicing on Nationstar’s total servicing portfolio, including the collection of principal and interest payments and the assessment of ancillary fees related to the servicing of mortgage loans. The Originations segment involves the origination, packaging, and sale of agency mortgage loans into the secondary markets via whole loan sales or securitizations. Nationstar reports the activity not related to either operating segment in the Legacy Portfolio and Other column. The Legacy Portfolio and Other column includes primarily all subprime mortgage loans originated in the latter portion of 2006 and during 2007 or acquired from Nationstar’s predecessor and consolidated VIEs which were consolidated pursuant to consolidation guidance related to VIEs adopted on January 1, 2010.


Nationstar’s segments are based upon Nationstar’s organizational structure which focuses primarily on the services offered. The accounting policies of each reportable segment are the same as those of Nationstar except for 1) expenses for consolidated back-office operations and general overhead-type expenses such as executive administration and accounting and 2) revenues generated on inter-segment services performed. Expenses are allocated to individual segments based on the estimated value of services performed, including total revenue contributions, personnel headcount, and the equity invested in each segment. Revenues generated or inter-segment services performed are valued based on similar services provided to external parties.


39


---

Table of Contents


To reconcile to Nationstar’s consolidated results, certain inter-segment revenues and expenses are eliminated in the “Elimination” column in the following tables.


The following tables are a presentation of financial information by segment for the periods indicated (in thousands):


Three months ended June 30, 2012ServicingOriginationsOperatingSegmentsLegacyPortfolioand OtherEliminationsConsolidatedREVENUES:Servicing fee income$85,926$—$85,926$620$(454)$86,092Other fee income5,9695,73911,708(98)11,610Total fee income91,8955,73997,634522(454)97,702Gain/(loss) on mortgage loans held for sale—102,335102,335—10102,345Total revenues91,895108,074199,969522(444)200,047Total expenses and impairments73,65647,980121,6368,72610130,372Other income (expense):Interest income5,2375,01710,2544,94245415,650Interest expense(28,295)(4,014)(32,309)(3,604)—(35,913)Gain (loss) on interest rate swaps and caps150—150(507)—(357)Total other income (expense)(22,908)1,003(21,905)831454(20,620)Income (loss) before taxes$(4,669)$61,097$56,428$(7,373)$—$49,055Depreciation and amortization$1,238$520$1,758$96$—$1,854Total assets3,553,8831,071,2514,625,134271,096—4,896,230








Three months ended June 30, 2011ServicingOriginationsOperatingSegmentsLegacyPortfolioand OtherEliminationsConsolidatedREVENUES:Servicing fee income$52,665$—$52,665$345$(1,774)$51,236Other fee income3,4663,8257,291850—8,141Total fee income56,1313,82559,9561,195(1,774)59,377Gain/(loss) on mortgage loans held for sale—22,91122,911—(89)22,822Total revenues56,13126,73682,8671,195(1,863)82,199Total expenses and impairments39,89623,70263,5984,893(89)68,402Other income (expense):Interest income6552,9013,55611,3971,77416,727Interest expense(13,491)(2,510)(16,001)(9,184)—(25,185)Fair value changes ABS securitizations———(3,613)—(3,613)Total other income (expense)(12,836)391(12,445)(1,400)1,774(12,071)Income before taxes$3,399$3,425$6,824$(5,098)$—18$1,726Depreciation and amortization$396$298$694$114$—$808Total assets702,501305,0231,007,524783,218—1,790,742


40


---

Table of Contents


Six months ended June 30, 2012ServicingOriginationsOperatingSegmentsLegacyPortfolioand OtherEliminationsConsolidatedREVENUES:Servicing fee income$169,726$—$169,726$1,237$(921)$170,042Other fee income13,2715,72018,991(128)18,863Total fee income182,9975,720188,7171,109(921)188,905Gain (loss) on mortgage loans held for sale—172,835172,835—22172,857Total revenues182,997178,555361,5521,109(899)361,762Total expenses and impairments132,88676,454209,34017,609—226,949Other income (expense):Interest income9,8628,55818,4209,75092129,091Interest expense(45,223)(7,791)(53,014)(7,857)(22)(60,893)Gain (loss) on interest rate swaps and caps188—188(813)—(625)Total other income (expense)(35,173)767(34,406)1,080899(32,427)Income before taxes$14,938$102,868$117,806$(15,420)$—$102,386Depreciation and amortization$2,098$903$3,001$384$—$3,385Total assets3,553,8831,071,2514,625,134271,096—4,896,230








Six months ended June 30, 2011ServicingOriginationsOperatingSegmentsLegacyPortfolioand OtherEliminationsConsolidatedREVENUES:Servicing fee income$110,585$—$110,585$737$(3,598)$107,724Other fee income6,6647,86914,5331,806—16,339Total fee income117,2497,869125,1182,543(3,598)124,063Gain (loss) on mortgage loans held for sale—43,48043,480—(152)43,328Total revenues117,24951,349168,5982,543(3,750)167,391Total expenses and impairments80,30345,514125,81710,858(152)136,523Other income (expense):Interest income1,6225,5047,12624,3213,59835,045Interest expense(26,948)(4,491)(31,439)(19,114)—(50,553)Fair value changes - ABS securitizations———(6,265)—(6,265)Total other income (expense)(25,326)1,013(24,313)(1,058)3,598(21,773)Income before taxes$11,620$6,848$18,468$(9,373)$—$9,095Depreciation and amortization$768$567$1,335$225$—$1,560Total assets702,501305,0231,007,524783,218—1,790,742


























41


---

Table of Contents


20. Guarantor Financial Statement Information


Nationstar has $ 560.0 million aggregate principal amount of unsecured senior notes which mature on  various dates through May 1, 2019 . The notes are jointly and severally guaranteed on an unsecured senior basis by all of Nationstar’s existing and future wholly-owned domestic restricted subsidiaries with certain exceptions. All guarantor subsidiaries are 100% owned by Nationstar.  Effective June 30, 2012, Nationstar Inc. and its two direct wholly-owned subsidiaries became guarantors of the unsecured senior notes as well.  Presented below are consolidating financial statements of Nationstar Inc., Nationstar LLC, and the guarantor subsidiaries for the periods indicated.





NATIONSTAR MORTGAGE HOLDINGS INC.CONSOLIDATING BALANCE SHEETJUNE 30, 2012(IN THOUSANDS)AssetsNationstar Inc.IssuerGuarantor(Subsidiaries)Non-Guarantor(Subsidiaries)EliminationsConsolidatedCash and cash equivalents$—$15,574$318$—$—$15,892Restricted cash—74,087345,422—119,512Accounts receivable, net—2,486,7531951,238(195)2,487,991Mortgage loans held for sale—837,906———837,906Mortgage loans held for investment, subject to nonrecourse debt–Legacy Asset, net—8,376—229,797—238,173Participating interest in reverse mortgages—310,074———310,074Receivables from affiliates——77,4391,446,695(1,511,051)13,083Mortgage servicing rights – fair value—596,462———596,462Investment in subsidiaries608,474159,596——(768,070)—Mortgage servicing rights – amortized cost—8,357———8,357Property and equipment, net—38,255835——39,090REO, net—892—2,537—3,429Other assets24,647226,261——(24,647)226,261Total assets$633,121$4,762,593$78,790$1,725,689$(2,303,963)$4,896,230Liabilities and shareholders’ equityNotes payable$—$881,996$—$1,530,368$—$2,412,364Unsecured senior notes—555,938———555,938Payables and accrued liabilities—663,213—1,468(24,842)639,839Payables to affiliates—1,511,051——(1,511,051)—Derivative financial instruments—12,135—6,776—18,911Mortgage Servicing Liability—81,979———81,979Nonrecourse debt–Legacy Assets———106,271—106,271Excess spread financing - at fair value—266,693———266,693Participating interest financing—181,114———181,114Total liabilities—4,154,119—1,644,883(1,535,893)4,263,109Total shareholders’ equity633,121608,47478,79080,806(768,070)633,121Total liabilities and shareholders’ equity$633,121$4,762,593$78,790$1,725,689$(2,303,963)$4,896,230








42


---

Table of Contents


NATIONSTAR MORTGAGE INCCONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOMEFOR THE THREE MONTHS ENDED JUNE 30, 2012(IN THOUSANDS)Nationstar Inc.IssuerGuarantor(Subsidiaries)Non-Guarantor(Subsidiaries)EliminationsConsolidatedRevenues:Servicing fee income$—$84,093$—$2,453$(454)$86,092Other fee income—4,9826,511117—11,610Total fee income—89,0756,5112,570(454)97,702Gain on mortgage loans held for sale—102,345———102,345Total Revenues—191,4206,5112,570(454)200,047Expenses and impairments:Salaries, wages and benefits—76,0052,742——78,747General and administrative—43,1738112,426—46,410Provision for loan losses—(461)—1,316—855Loss on foreclosed real estate and other—124—1,366—1,490Occupancy—2,870———2,870Total expenses and impairments—121,7113,5535,108—130,372Other income (expense):Interest income—9,902—5,29445415,650Interest expense—(28,637)—(7,276)—(35,913)Gain/(Loss) on interest rate swaps and caps—(506)—149—(357)Gain/(loss) from subsidiaries32,602(1,448)——(31,154)—Total other income (expense)32,602(20,689)—(1,833)(30,700)(20,620)Income before taxes32,60249,0202,958(4,371)(31,154)49,055Income tax expense3,673(16,418)(5)(30)—(12,780)Net income/(loss)36,27532,6022,953(4,401)(31,154)36,275Other comprehensive income, net of tax:Change in value of cash flow hedges———(423)—(423)Comprehensive income / (loss)$36,275$32,602$2,953$(4,824)$(31,154)$35,852








43


---

Table of Contents


NATIONSTAR MORTGAGE HOLDINGS INC.CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOMEFOR THE SIX MONTHS ENDED JUNE 30, 2012(IN THOUSANDS)Nationstar Inc.IssuerGuarantor(Subsidiaries)Non-Guarantor(Subsidiaries)EliminationsConsolidatedRevenues:Servicing fee income$—$166,024$—$4,939$(921)$170,042Other fee income—4,98213,649232—18,863Total fee income—171,00613,6495,171(921)188,905Gain on mortgage loans held for sale—172,857———172,857Total Revenues—343,86313,6495,171(921)361,762Expenses and impairments:Salaries, wages and benefits—135,5884,824——140,412General and administrative—69,1991,3774,946—75,522Provision for loan losses———1,608—1,608Loss on foreclosed real estate and other—124—3,631—3,755Occupancy—5,652———5,652Total expenses and impairments—210,5636,20110,185—226,949Other income (expense):Interest income—18,029—10,14192129,091Interest expense—(46,832)—(14,061)—(60,893)Gain/(Loss) on interest rate swaps and caps—(812)—187—(625)Gain/(loss) from subsidiaries64,660(1,334)——(63,326)—Total other income (expense)64,660(30,949)—(3,733)(62,405)(32,427)Income before taxes64,660102,3517,448(8,747)(63,326)102,386Income tax expense21,801(37,691)(5)(30)—(15,925)Net income/(loss)86,46164,6607,443(8,777)(63,326)86,461Other comprehensive income, net of tax:Change in value of cash flow hedges———(423)—(423)Comprehensive income / (loss)$86,461$64,660$7,443$(9,200)$(63,326)$86,038












































44


---

Table of Contents


NATIONSTAR MORTGAGE HOLDINGS INC.CONSOLIDATING STATEMENT OF CASH FLOWSFOR THE SIX MONTHS ENDED JUNE 30, 2012(IN THOUSANDS)Nationstar Inc.IssuerGuarantor(Subsidiaries)Non-Guarantor(Subsidiaries)EliminationsConsolidatedOperating activities:Net income/(loss)$86,461$64,660$7,443$(8,777)$(63,326)$86,461Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:(Gain)/loss from subsidiaries(64,660)1,334——63,326—Share-based compensation—8,030———8,030Gain on mortgage loans held for sale—(172,857)———(172,857)Provision for loan losses———1,608—1,608Loss on foreclosed real estate and other—124—3,631—3,755Loss on equity method investments—594———594(Gain)/loss on ineffectiveness on interest rate swaps and cap—812—(187)—625Fair value changes in excess spread financing—7,263———7,263Depreciation and amortization—3,385———3,385Change in fair value of mortgage servicing rights—20,380———20,380Accretion of mortgage servicing liability—(624)———(624)Amortization of debt discount—7,469—1,012—8,481Amortization of premiums/(discounts)—(55)—(2,575)—(2,630)Mortgage loans originated and purchased, net of fees—(2,996,372)———(2,996,372)Cost of loans sold and principal payments and prepayments, and other changes in mortgage loans originated as held for sale, net of fees—2,723,337—1,033—2,724,370Changes in assets and liabilities:Accounts receivable—(340,581)(188)279,273195(61,301)Receivables from/(payables to) affiliates—1,541,884(7,181)(1,533,832)—871Reverse funded advances due to securitization—(220,788)———(220,788)Other assets(27,498)(79,042)——24,647(81,893)Accounts payable and accrued liabilities2,847337,788—(1,776)(24,842)314,017Net cash provided by/(used in) operating activities(2,850)906,74174(1,260,590)—(356,625)


45


---

Table of Contents


Nationstar Inc.IssuerGuarantor(Subsidiaries)Non-Guarantor(Subsidiaries)EliminationsConsolidatedInvesting activities:Property and equipment additions, net of disposals—(8,102)———(8,102)Cash Proceeds from assumption of reverse mortgage servicing obligations, net—11,852———11,852Deposit on / purchase of mortgage servicing rights, net of liabilities incurred—(1,979,836)———(1,979,836)Repurchases of REO from Ginnie Mae—(4,464)———(4,464)Proceeds from sales of REO—6,764—5,133—11,897Net cash provided by/(used in) investing activities—(1,973,786)—5,133—(1,968,653)Financing activities:Issuance of Senior Unsecured Notes—269,500———269,500Transfers to/from restricted cash—(78,503)—(23,106)—(101,609)Issuance of common stock, net of IPO issuance costs249,550————249,550Issuance of participating interest financing—182,577———182,577Issuance of excess spread financing—187,438———187,438Increase (decrease) in notes payable, net—253,391—1,285,794—1,539,185Repayment of nonrecourse debt–Legacy assets———(7,231)—(7,231)Repayment of excess servicing spread financing—(5,507)———(5,507)Distribution to subsidiaries(246,700)———246,700—Contributions of parent—246,700——(246,700)—Debt financing costs—(35,178)———(35,178)Net cash provided by/(used in) financing activities2,8501,020,418—1,255,457—2,278,725Net increase/(decrease) in cash—(46,627)74——(46,553)Cash and cash equivalents at beginning of period—62,201244——62,445Cash and cash equivalents at end of period$—$15,574$318$—$—$15,892









































46


---

Table of Contents


NATIONSTAR MORTGAGE LLCCONSOLIDATING BALANCE SHEETDECEMBER 31, 2011(IN THOUSANDS)Issuer(Parent)Guarantor(Subsidiaries)Non-Guarantor(Subsidiaries)EliminationsConsolidatedAssetsCash and cash equivalents$62,201$244$—$—$62,445Restricted cash49,180322,316—71,499Accounts receivable, net281,7827280,511—562,300Mortgage loans held for sale458,626———458,626Mortgage loans held for investment, subject to nonrecourse debt–Legacy Asset, net5,984—237,496—243,480Receivables from affiliates41,96170,541—(107,893)4,609Mortgage servicing rights – fair value251,050———251,050Investment in subsidiaries140,880——(140,880)—Property and equipment, net23,238835——24,073REO, net——3,668—3,668Other assets106,181———106,181Total assets$1,421,083$71,630$543,991$(248,773)$1,787,931Liabilities and members’ equityNotes payable$628,605$—$244,574$—$873,179Unsecured senior notes280,199———280,199Payables and accrued liabilities180,545—3,244—183,789Payables to affiliates——107,893(107,893)—Derivative financial instruments5,830—6,540—12,370Derivative financial instruments, subject to ABS nonrecourse debt—————Nonrecourse debt–Legacy Assets——112,490—112,490Excess spread financing – fair value44,595———44,595ABS nonrecourse – fair value—————Total liabilities1,139,774—474,741(107,893)1,506,622Total members’ equity281,30971,63069,250(140,880)281,309Total liabilities and members’ equity$1,421,083$71,630$543,991$(248,773)$1,787,931



































47


---

Table of Contents


NATIONSTAR MORTGAGE LLC                                                                                                                                                                                                                                                     CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOMEFOR THE THREE MONTHS ENDED JUNE 30, 2011(IN THOUSANDS)IssuerGuarantor(Subsidiaries)Non-Guarantor(Subsidiaries)EliminationsConsolidatedRevenues:Servicing fee income$51,571$1,439$—$(1,774)$51,236Other fee income5,5092,423209—8,141Total fee income57,0803,862209(1,774)59,377Gain on mortgage loans held for sale22,822———22,822Total Revenues79,9023,862209(1,774)82,199Expenses and impairments:Salaries, wages and benefits47,527845——48,372General and administrative14,5291,2134—15,746Provision for loan losses—————Loss on foreclosed real estate(43)—2,142—2,099Occupancy2,14243——2,185Total expenses and impairments64,1552,1012,146—68,402Other income / (expense):Interest income4,580—10,3731,77416,727Interest expense(13,130)—(12,055)—(25,185)Fair value changes in ABS securitizations——(3,477)(136)(3,613)Gain / (loss) from subsidiaries(10,244)——10,244—Total other income / (expense)(18,794)—(5,159)11,882(12,071)Net income / (loss)(3,047)1,761(7,096)10,1081,726Other comprehensive income, net of tax:Change in value of cash flow hedges——(1,210)—(1,210)Comprehensive income / (loss)$(3,047)$1,761$(8,306)$10,108$516











48


---

Table of Contents


NATIONSTAR MORTGAGE LLCCONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOMEFOR THE SIX MONTHS ENDED JUNE 30, 2011(IN THOUSANDS)Issuer(Parent)Guarantor(Subsidiaries)Non-Guarantor(Subsidiaries)EliminationsConsolidatedRevenues:Servicing fee income$109,883$1,439$—$(3,598)$107,724Other fee income10,0055,654680—16,339Total fee income119,8887,093680(3,598)124,063Gain on mortgage loans held for sale43,328———43,328Total Revenues163,2167,093680(3,598)167,391Expenses and impairments:Salaries, wages and benefits93,6571,638——95,295General and administrative29,4691,8347—31,310Provision for loan losses724—404—1,128Loss on foreclosed real estate202—4,144—4,346Occupancy4,34698——4,444Total expenses and impairments128,3983,5704,555—136,523Other income / (expense):Interest income8,199(5)23,2533,59835,045Interest expense(26,725)—(23,828)—(50,553)Fair value changes in ABS securitizations——(6,382)117(6,265)Gain / (loss) from subsidiaries(7,314)——7,314—Total other income / (expense)(25,840)(5)(6,957)11,029(21,773)Net income / (loss)$8,978$3,518$(10,832)$7,431$9,095Other comprehensive income, net of tax:Change in value of cash flow hedges——(1,071)—(1,071)Comprehensive income / (loss)$8,978$3,518$(11,903)$7,431$8,024



























































49


---

Table of Contents


NATIONSTAR MORTGAGE LLCCONSOLIDATING STATEMENT OF CASH FLOWSFOR THE SIX MONTHS ENDED JUNE 30, 2011(IN THOUSANDS)Issuer(Parent)Guarantor(Subsidiaries)Non-Guarantor(Subsidiaries)EliminationsConsolidatedOperating activities:Net income/(loss)$8,978$3,518$(10,832)$7,431$9,095Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:Loss on equity method investments521521Share-based compensation10,526———10,526Gain on mortgage loans held for sale(43,328)———(43,328)Provision for loan losses724—404—1,128Loss on foreclosed real estate and other202—4,144—4,346(Gain)/loss on ineffectiveness on interest rate swaps and cap——(1,416)—(1,416)Fair value changes in ABS securitizations——6,382(117)6,265Loss from subsidiaries7,314——(7,314)—Depreciation and amortization1,560———1,560Change in fair value of mortgage servicing rights11,722———11,722Amortization of debt discount4,389—2,057—6,446Amortization of premiums/(discounts)——(2,424)—(2,424)Mortgage loans originated and purchased, net of fees(1,378,039)———(1,378,039)Cost of loans sold, net of fees1,490,814———1,490,814Principal payments/prepayments received and other changes in mortgage loans originated as held for sale19,336—5,462—24,798Changes in assets and liabilities:Accounts receivable(30,448)—(351)—(30,799)Receivables from/(payables to) affiliates(29,292)(3,680)34,614—1,642Other assets(470)———(470)Accounts payable and accrued liabilities3,885—(175)—3,710Net cash provided by/(used) in operating activities78,394(162)37,865—116,097


50


---

Table of Contents


Issuer(Parent)Guarantor(Subsidiaries)Non-Guarantor(Subsidiaries)EliminationsConsolidatedInvesting activities:Principal payments received and other changes on mortgage loans held for investment, subject to ABS nonrecourse debt——14,285—14,285Property and equipment additions, net of disposals(8,833)———(8,833)Acquisition of equity method investment(6,600)———(6,600)Purchase of mortgage servicing rights(232)———(232)Proceeds from sales of REO313—19,689—20,002Net cash provided by/(used) in investing activities(15,352)—33,974—18,622Financing activities:Transfers to/from restricted cash8,754(3)(1,957)—6,794Decrease in notes payable, net(78,884)—(26,104)—(104,988)Repayment of nonrecourse debt–Legacy assets——(14,693)—(14,693)Repayment of ABS nonrecourse debt——(29,085)—(29,085)Debt financing costs(2,729)———(2,729)Distribution to parent(3,900)———(3,900)Tax related share-based settlement of units by members(4,809)———(4,809)Net cash provided by/(used) in financing activities(81,568)(3)(71,839)—(153,410)Net increase/(decrease) in cash(18,526)(165)——(18,691)Cash and cash equivalents at beginning of period20,904319——21,223Cash and cash equivalents at end of period$2,378$154$—$—$2,532


21. Disclosures Related to Transactions with Affiliates of Fortress Investment Group LLC


Nationstar maintains a marketing agreement with Springleaf Home Equity, Inc., formerly known as American General Home Equity, Inc., Springleaf General Financial Services of Arkansas, Inc., formerly known as American General Financial Services of Arkansas, Inc. and MorEquity, Inc. (collectively “Springleaf”), each of which are indirectly owned by investment funds managed by affiliates of Fortress Investment Group LLC. Pursuant to this agreement, Nationstar markets mortgage originations products to customers of Springleaf, and is compensated by the originations fees of loans that Nationstar refinances.


Additionally, in January 2011 , Nationstar entered into three agreements to act as the loan subservicer for Springleaf for a whole loan portfolio and two securitized loan portfolios totaling $4.4 billion for which Nationstar receives a monthly per loan subservicing fee and other performance incentive fees subject to the agreements with Springleaf. For the six months ended June 30,  2012 and 2011 , Nationstar recognized revenue of $5.1 million and $4.9 million , respectively, in additional servicing and other performance incentive fees related to these portfolios.  For the three months ended June 30, 2012 and 2011 , Nationstar recognized revenue of $2.5 million and $2.7 million , respectively, in additional servicing and other performance incentive fees related to these portfolios. At June 30, 2012 and December 31, 2011 , Nationstar had an outstanding receivable from Springleaf of $0.5 million and $0.6 million , respectively, which was included as a component of accounts receivable.


Nationstar is the loan servicer for two securitized loan portfolios managed by Newcastle, which is managed by an affiliate of Fortress Investment Group LLC, for which Nationstar receives a monthly net servicing fee equal to 0.50% per annum on the unpaid principal balance of the portfolios, which was $1.0 billion and $1.2 billion , as of June 30, 2012 and 2011 , respectively. For the three months ended June 30,  2012 and 2011 , Nationstar received servicing fees and other performance incentive fees of $1.3 million and $1.5 million , respectively. For the six months ended June 30,  2012 and 2011 , Nationstar received servicing fees and other performance incentive fees of $2.6 million and $3.0 million , respectively.


Additionally, from December 2011 through June 2012 , Nationstar entered into several agreements with Newcastle, where Nationstar sold to Newcastle the right to receive approximately 65% of the excess cash flow generated from certain acquired MSRs after receipt of a fixed basic servicing fee per loan. Nationstar will retain all ancillary income associated with servicing such MSRs and 35% of the excess cash flow after receipt of the fixed basic servicing fee. Nationstar will continue to be the servicer of the loans and provide all servicing and advancing functions for the portfolio. Newcastle will not have prior or ongoing obligations associated with this MSR portfolio. Furthermore, should Nationstar refinance any loan in such portfolio, subject to certain limitations, Nationstar will be required to transfer the new loan or a replacement loan of similar economic


51


---

Table of Contents


characteristics into the portfolio. The new or replacement loan will be governed by the same terms set forth in the agreement described above.


The fair value on the outstanding liability related to these agreements was $266.7 million at June 30, 2012 . Additionally, as a component of the underlying agreements, Newcastle held back a portion of the sales price, amounting to $34.5 million , pending certain conditions being satisfied by Nationstar. Such amount is recorded in accounts receivable and is expected to be received in third quarter 2012 .


22. Related Party Disclosure


In March 2011 , Nationstar entered into a limited partnership agreement with ANC. ANC is the parent company of NREIS, which through the ANC partnership Nationstar holds a non-controlling interest in NREIS, an ancillary real estate services and vendor management company that directly and indirectly provides title agency settlement or valuation services for loan originations and default management. As Nationstar is able to exercise significant influence, but not control, over the policies and procedures of the entity, and Nationstar owns less than 50% of the voting interests, Nationstar applies the equity method of accounting. In March 2012 as part of the initial public offering restructuring, Nationstar assumed FIF’s 13% ownership in NREIS, increasing the total Nationstar investment to 35% . For the three months ended June 30,  2012 and the year ending December 31, 2011 , Nationstar disbursed $3.1 million and $4.9 million , respectively, for servicing-related advances. For the six months ended June 30,  2012 and the year ending December 31, 2011 , Nationstar disbursed $7.8 million and $4.9 million , respectively, for servicing-related advances. Additionally, during May 2012, Nationstar advanced NREIS $2.0 million for future services.  The amount is recorded in accounts receivable other in these financial statements.


23. Definitive Agreement to Acquire Certain Mortgage Servicing Assets of Residential Capital, LLC


On May 13, 2012, Nationstar signed a definitive agreement (the “Agreement”) which was subsequently amended on June 28, 2012 to acquire certain residential mortgage servicing assets and other assets (collectively, “Mortgage Servicing Assets”) from Residential Capital, LLC and related entities (collectively, “ResCap”) in connection with ResCap’s proceedings before the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy court”).


Nationstar expects the acquired Mortgage Servicing Assets to total approximately $371 billion, including $196 billion in primary residential MSRs and $174 billion in subservicing contracts, as measured by unpaid principal balances as of March 31, 2012, approximately $1.8 billion of related servicing advance receivables and certain other assets. The sale of the Mortgage Servicing Assets is expected to close by the first quarter of 2013, subject to certain conditions and auction described below.


The aggregate purchase price for the Mortgage Servicing Assets under the Agreement is approximately $2.4 billion. Nationstar expects to fund such purchase price through a combination of cash, the proceeds of a co-investment with Newcastle of up to $450 million, proceeds of advance financing facilities and the issuance of debt or equity.


Although Nationstar has been approved as the stalking-horse bidder by the Bankruptcy Court, other bidders may submit bids for the assets the Company is seeking to acquire.  The auction for the mortgage servicing asset is scheduled to commence on October 23, 2012.  If any such bidders submit bids, Nationstar can provide no assurances that it will be the winning bidder and ultimately permitted to purchase the assets Nationstar is seeking to acquire or that it will not be required to make changes, which changes could be material, to the terms of the Agreement in order to purchase the assets.  If the Agreement is terminated as a result of the Bankruptcy Court's approval of a competing bidder, ResCap will be required to pay Nationstar a $24 million break-up fee in cash (a portion of which will be payable to Newcastle).


24. Subsequent Events


On July 19, 2012, Nationstar offered $100 million aggregate principal amount of 9.625% Senior Notes due 2019, in a private placement transaction. The notes were issued with an issue premium of $5.5 million for net cash proceeds of $104.0 million. The notes are a further issuance of the $275 million aggregate principal amount of 9.625% Senior Notes due 2019, issued in April 2012 (the "Existing Notes") and are guaranteed on an unsecured basis by each of Nationstar's current and future domestic subsidiaries, other than its securitization and certain finance subsidiaries and subsidiaries that in the future can be designated as excluded restricted and unrestricted subsidiaries.  The notes are a further issuance of the Existing Notes and form a single series of debt securities with the Existing Notes.


52


---

Table of Contents


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


In conjunction with the completion of Nationstar Mortgage Holdings Inc.'s initial public offering, Nationstar Mortgage LLC became a wholly-owned indirect subsidiary of Nationstar Mortgage Holdings Inc.   Nationstar Mortgage Holdings Inc. was formed as a Delaware corporation for the purpose of reorganizing the structure of FIF HE Holdings LLC (FIF) and Nationstar Mortgage LLC so that the common stock issuer was a corporation rather than a limited liability company.  Investors in FIF exchanged their membership units for shares in Nationstar Mortgage Holdings Inc.  Because Nationstar Mortgage Holdings Inc. had no operations prior to the reorganization and initial public offering, Nationstar Mortgage LLC is the predecessor company. The following discussion and analysis relates to the operations of Nationstar Mortgage Holdings Inc. and its consolidated subsidiaries.  The terms “we,” “us”, or “our” refer to the business of Nationstar Mortgage Holdings Inc. or its predecessor Nationstar Mortgage LLC as appropriate.


General


Our Business


We are a leading high touch non-bank residential mortgage servicer with a broad array of servicing capabilities across the residential mortgage product spectrum.  We have been the fastest growing mortgage servicer since 2007 as measured by annual percentage growth in UPB, having grown 83.1% annually on a compounded basis.  As of June 30, 2012 , we serviced almost 1.1 million residential mortgage loans with an aggregate UPB of $193.1 billion, making us the largest high touch non-bank servicer in the United States.  Our total servicing portfolio as of June 30, 2012 includes approximately $27.2 billion of servicing related to reverse residential mortgage loans which were acquired in January 2012 and June 2012.  We currently outsource the servicing of our reverse residential mortgage loan portfolio to several servicing counterparties.  Additionally, we made several acquisitions of forward MSRs in June 2012 related to UPB of approximately $72.8 billion.  Of these acquisitions, approximately $6.2 billion of the underlying UPB were boarded in June 2012.  The remainder were boarded in July 2012.


We service loans as the owner of the forward MSRs, which we refer to as “primary servicing,” and we service loans on behalf of other MSR or mortgage owners, which we refer to as “subservicing”.  We acquire MSRs on a standalone basis and have also developed an innovative model for investing on a capital light basis by co-investing with financial partners in “excess MSRs.” Subservicing represents another capital light means of growing our servicing business, as subservicing contracts are typically awarded on a no-cost basis and do not require substantial capital.  As of June 30, 2012 , our primary servicing and subservicing, represented 61.1% and 24.8%, respectively of our total servicing portfolio, with 14.1% of our outstanding servicing portfolio consisting of reverse residential mortgage loans.  In addition, we operate or have investments in several adjacent businesses designed to meet the changing needs of the mortgage industry. These businesses offer an array of ancillary services, including providing services for delinquent loans, managing loans in the foreclosure/REO process and providing title insurance agency, loan settlement and valuation services on newly originated and re-originated loans.


In June 2012, we closed an asset purchase agreement with Aurora Bank FSB and Aurora Loan Services LLC, (collectively “Aurora”).  Under the Asset Purchase Agreement, we purchased MSRs to approximately 300,000 residential mortgage loans with a total unpaid principal balance of over $63 billion , $1.7 billion of servicing advance receivables, and certain other assets.  The composition of the acquired MSR portfolio is approximately 75% non-conforming loans in private label securitizations and approximately 25% conforming loans in GSE pools.  We also assumed certain liabilities.


In January 2012, we acquired the mortgage servicing rights related to a portfolio of reverse residential mortgage loans with an unpaid principal balance of approximately $7.9 billion .  In June 2012, we completed two additional acquisitions of MSRs related to reverse mortgages.  These acquisitions total approximately $19.4 billion in unpaid principal balance. Reverse mortgages provide seniors (62 years and older) with a loan secured by their home. The majority of reverse mortgages are secured by the Federal Housing Administration (FHA) and are referred to as “HECMs” or Home Equity Conversion Mortgages. Like a typical home equity loan, reverse mortgages are designed to enable seniors to borrow against the value of their home. Unlike a typical home equity loan, no payment of principal or interest is required until the death of the borrower or sale of the home and the amount of the loan is dependent on the appraised value of the home at the time of origination, the interest rate on the loan and the borrower's age. Reverse mortgages may be either fully funded (fixed rate loan) or can provide for a line of credit that can be drawn periodically (adjustable rate “ARM” loan).


We are one of only a few non-bank servicers with a fully integrated loan originations platform to complement and enhance our servicing business.  We originate primarily conventional agency (GSE) and government-insured residential mortgage loans and, to mitigate risk, typically sell these loans within 30 days while retaining the associated servicing rights.  Our originations efforts are primarily focused on “re-origination,” which involves actively working with existing borrowers to refinance their mortgage loans.  By re-originating loans for existing borrowers, we retain the servicing rights, thereby extending the longevity of the servicing cash flows, which we refer to as “recapture.”


53


---

Table of Contents


We also have a legacy asset portfolio, which consists primarily of non-prime and nonconforming residential mortgage loans, most of which we originated from April to July 2007 .  In November 2009 , we engaged in a transaction through which we term-financed our legacy assets with a nonrecourse loan.  Additionally, we consolidated certain securitization trusts where it was determined that we had both the power to direct the activities that most significantly impact the variable interest entities' (VIE) economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE pursuant to new consolidation accounting guidance related to VIEs adopted on January 1, 2010 .


The analysis of our financial condition and results of operations as discussed herein is primarily focused on the combined results of our two Operating Segments: the Servicing Segment and the Originations Segment.


Our internet address is www.nationstarholdings.com.  Through this internet website (under the “Investor Relations / Financial Information” link), we make available, free of charge, its reports that are electronically filed with or furnished to the Securities and Exchange Commission (SEC).  We also make available on our Web site other shareholder information such as share price and current events.  Information contained on or available through this website is not incorporated by reference herein.


Critical Accounting Policies


Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments.  In particular, we have identified four policies that, due to the judgment, estimates and assumptions inherent in those policies, are critical to an understanding of our consolidated financial statements. These policies relate to: (a) fair value measurements, (b) sale of mortgage loans, (c) accounting for mortgage loans held for investment, subject to nonrecourse debt and (d) valuation of deferred tax assets.  We believe that the judgment, estimates and assumptions used in the preparation of our consolidated financial statements are appropriate given the factual circumstances at the time.  However, given the sensitivity of our consolidated financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition.





For further information on our critical accounting policies, please refer to our Quarterly Report on Form 10-Q for the period ended March 31, 2012.  There have been no material changes to our critical accounting policies since March 31, 2012.





Selected Financial Data


Selected consolidated balance sheet, statement of operations and other selected data are as follows (dollars in thousands) .


June 30, 2012December 31, 2011Consolidated Balance Sheets Data:Cash and cash equivalents$15,892$62,445Accounts Receivable2,487,991562,300Mortgage servicing rights (at fair value)596,462251,050Total assets4,896,2301,787,931Notes payable2,412,364873,179Unsecured senior notes555,938280,199Nonrecourse debt-legacy assets106,271112,490Excess spread financing (at fair value)266,69344,595Total liabilities4,263,1091,506,622Total shareholders' equity633,121281,309





54


---

Table of Contents


Consolidated Statements of Operations and Comprehensive Income Data:For the three months ended  June 30,For the six months ended  June 30,2012201120122011Total revenues$200,047$82,199$361,762$167,391Total expenses and impairments130,37268,402226,949136,523Total other income (expense)(20,620)(12,071)(32,427)(21,773)Income before taxes49,0551,726102,3869,095Total income tax expense12,780—15,925—Net income36,2751,72686,4619,095Change in value of designated cash flow hedge(423)(1,210)(423)(1,071)Comprehensive income$35,852$516$86,038$8,024Other Financial Data:Net cash provided by / (used in):Operating activities$(491,908)$(15,490)$(356,625)$116,097Investing activities(1,966,271)13,344(1,968,653)18,622Financing activities2,118,077(43,742)2,278,925(153,410)Adjusted EBITDA1(non-GAAP measure)101,20127,712178,44355,665Operating Segments:Interest expense from unsecured senior notes13,5167,53122,05815,079Change in fair value of mortgage servicing rights20,8757,93820,38011,722Depreciation and amortization1,7586943,0011,335Share-based compensation6,3535,2388,74710,476


1 Adjusted EBITDA is a key performance measure used by management in evaluating the performance of our segments.  Adjusted EBITDA represents our Operating Segments' income, and excludes income and expenses that relate to the financing of the unsecured senior notes, depreciable (or amortizable) asset base of the business, income taxes (if any), exit costs from our 2007 restructuring and certain non-cash items.  Adjusted EBITDA also excludes results from our legacy asset portfolio and certain securitization trusts that were consolidated upon adoption of the accounting guidance eliminating the concept of a QSPE.


Adjusted EBITDA


Adjusted EBITDA provides us with a key measure of our Operating Segments' performance as it assists us in comparing our Operating Segments' performance on a consistent basis. Management believes Adjusted EBITDA is useful in assessing the profitability of our core business and uses Adjusted EBITDA in evaluating our operating performance as follows:


|  |                                                                                                                                                                                                                                                                                                                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Financing arrangements for our Operating Segments are secured by assets that are allocated to these segments.  Interest expense that relates to the financing of our unsecured senior notes is not considered in evaluating our operating performance because this obligation is serviced by the excess earnings from our Operating Segments after the debt obligations that are secured by their assets.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | To monitor operating costs of each Operating Segment excluding the impact from depreciation, amortization and fair value change of the asset base, exit costs from our restructuring and non-cash operating expense, such as share-based compensation.  Operating costs are analyzed to manage costs per our operating plan and to assess staffing levels, implementation of technology based solutions, rent and other general and administrative costs.

Management does not assess the growth prospects and the profitability of our legacy asset portfolio and certain securitization trusts that were previously consolidated, except to the extent necessary to assess whether cash flows from the assets in the legacy asset portfolio are sufficient to service its debt obligations.


We also use Adjusted EBITDA (with additional adjustments) to measure our compliance with covenants such as leverage coverage ratios for our unsecured senior notes.


Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation, or as a substitute for analysis


55


---

Table of Contents


of our results as reported under GAAP. Some of these limitations are :


|  |                                                                                                                                   
|- | ----------------------------------------------------------------------------------------------------------------------------------
|• | Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

|  |                                                                                                  
|- | -------------------------------------------------------------------------------------------------
|• | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

|  |                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------
|• | Adjusted EBITDA does not reflect the cash requirements necessary to service principal payments related to the financing of the business;

|  |                                                                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our corporate debt;

|  |                                                                                                                                                                                                                                                                             
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | although depreciation and amortization and changes in fair value of MSRs are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and Adjusted EBITDA does not reflect any cash requirements for such replacements; and

|  |                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------
|• | other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these and other limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. Adjusted EBITDA is presented to provide additional information about our operations.  Adjusted EBITDA is a non-GAAP measure and should be considered in addition to, but not as a substitute for or superior to, operating income, net income, operating cash flow and other measures of financial performance prepared in accordance with GAAP.  We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only supplementally.


For the three months ended June 30,For the six months ended June 30,Net Income/(Loss) from Operating Segments to  Adjusted EBITDA Reconciliation (dollars in thousands):2012201120122011Net income$36,275$1,726$86,461$9,095Plus:Net (income)/loss from Legacy Portfolio and Other7,3735,09815,4209,373Income tax expense12,780—15,925—Income/(loss) from Operating Segments56,4286,824117,80618,468Adjust for:Interest expense from unsecured senior notes13,5167,53122,05815,079Depreciation and amortization1,7586943,0011,335Change in fair value of mortgage servicing rights20,8757,93820,38011,722Amortization of mortgage servicing rights/obligations - at amortized cost9—(624)—Share-based compensation6,3535,2388,74710,476Fair value changes on excess spread financing2,412—7,263—Fair value changes in derivatives(150)—(188)—Ineffective portion of cash flow hedge—(513)—(1,415)Adjusted EBITDA$101,201$27,712$178,443$55,665





Recent Developments


On July 19, 2012, Nationstar offered $100 million aggregate principal amount of 9.625% Senior Notes due 2019, in a private placement transaction. We issued the notes with an issue premium of $5.5 million for net cash proceeds of $104.0 million. The notes are a further issuance of the $275 million aggregate principal amount of 9.625% Senior Notes due 2019, issued in April 2012 (the "Existing Notes") and are guaranteed on an unsecured basis by each of Nationstar's current and future domestic subsidiaries, other than its securitization and certain finance subsidiaries and subsidiaries that in the future can be designated as excluded restricted and unrestricted subsidiaries.  The notes are a further issuance of the Existing Notes and form a single series of debt securities with the Existing Notes. Effective June 30, 2012, Nationstar Inc. and its two direct wholly-owned subsidiaries became guarantors of the unsecured notes as well.





56


---

Table of Contents





Definitive Agreement to Acquire Certain Mortgage Servicing Assets of Residential Capital, LLC


On May 13, 2012, Nationstar signed a definitive agreement (the “Agreement”) which was subsequently amended on June 28, 2012 to acquire certain residential mortgage servicing assets and other assets (collectively, “Mortgage Servicing Assets”) from Residential Capital, LLC and related entities (collectively, “ResCap”) in connection with ResCap’s proceedings before the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy court”).


Nationstar expects the acquired Mortgage Servicing Assets to total approximately $371 billion, including $196 billion in primary residential MSRs and $174 billion in subservicing contracts, as measured by unpaid principal balances as of March 31, 2012, approximately $1.8 billion of related servicing advance receivables and certain other assets. The sale of Mortgage Servicing Assets is expected to close by the first quarter of 2013, subject to certain conditions and auction described below.


The aggregate purchase price for the Mortgage Servicing Assets under the Agreement is approximately $2.4 billion. Nationstar expects to fund such purchase price through a combination of cash, the proceeds of a co-investment with Newcastle of up to $450 million, the proceeds of advance and financing facilities, and the issuance of debt or equity.


Although Nationstar has been approved as the stalking-horse bidder by the Bankruptcy Court, other bidders may submit bids for the assets the Company is seeking to acquire.  The auction for the assets is scheduled to commence on October 23, 2012.  If any such bidders submit bids, Nationstar can provide no assurances that it will be the winning bidder and ultimately permitted to purchase the assets Nationstar is seeking to acquire or that it will not be required to make changes, which changes could be material, to the terms of the Agreement in order to purchase the assets.  If the Agreement is terminated as a result of the Bankruptcy Court's approval of a competing bidder, ResCap will be required to pay Nationstar a $24 million break-up fee in cash (a portion of which will be payable to Newcastle).


57


---

Table of Contents


Results of Operations


Below is a summarization of our consolidated operating results for the periods indicated. We provide further discussion of our results of operations for each of our reportable segments under “Segment Results” below. Certain income and expenses not allocated to our reportable segments are presented under “Legacy Portfolio and Other” below and discussed in “Note 19—Business Segment Reporting”, in the accompanying Notes to Consolidated Financial Statements.


Comparison of Consolidated Results for the Three Months Ended June 30, 2012 and 2011


Revenues increased $117.8 million from $82.2 million for the three months ended June 30, 2011 to $200.0 million for the three months ended June 30, 2012 , due to increases in both our total fee income and our gain on mortgage loans held for sale. The increase in our total fee income was primarily the result of our higher average forward servicing portfolio balance of $95.8 billion for the three months ended June 30, 2012 , compared to $66.2 billion for the three months ended June 30, 2011 and an increase in loss mitigation and performance based incentive fees combined with fees earned from our reverse mortgage portfolio, which we began servicing in January 2012 . The increase in the gain on loans held for sale was a result of the $1,082.5 million , or 149.5% , increase in the amount of loans originated during the 2012 period compared to the 2011 period, higher margins earned on the sale of residential mortgage loans during the period and an increase in the value of our outstanding derivative financial instruments as a result of an increase in our outstanding mortgage loan commitments.


Expenses and impairments increased $62.0 million from $68.4 million for the three months ended June 30, 2011 to $130.4 million for the three months ended June 30, 2012 , primarily due to the increase in compensation expenses related to increased staffing levels in order to accommodate our larger servicing portfolio and originations volumes as well as other related increases in general and administrative expenses.


Other expense increased $8.5 million from $12.1 million for the three months ended June 30, 2011 to $20.6 million for the three months ended June 30, 2012 , primarily due to a decrease in our net interest margin resulting from higher average outstanding balances on our outstanding warehouse and advance facilities combined with a higher average outstanding balance on our senior unsecured notes.


For the three months ended June 30, 2012, we incurred tax expense of $12.8 million, with no corresponding tax expense during the comparable 2011 period. During March 2012, we became a taxable entity in conjunction with our initial public offering.


Comparison of Consolidated Results for the Six Months Ended June, 30 2012 and 2011


Revenues increased $194.4 million from $167.4 million for the six months ended June 30, 2011 to $361.8 million for the six months ended June 30, 2012 , due to increases in both our total fee income and our gain on mortgage loans held for sale. The increase in our total fee income was primarily the result of our higher average forward servicing portfolio balance of $96.0 billion for the six months ended June 30, 2012 , compared to $66.0 billion for the six months ended June 30, 2011 and an increase in loss mitigation and performance based incentive fees combined with fees earned from our reverse mortgage portfolio, which we began servicing in January 2012 . The increase in the gain on loans held for sale was a result of the $1,618.3 million, or 117.4% , increase in the amount of loans originated during the 2012 period compared to the 2011 period, higher margins earned on the sale of residential mortgage loans during the period and an increase in the value of our outstanding derivative financial instruments as a result of an increase in our outstanding mortgage loan commitments.


Expenses and impairments increased $90.4 million from $136.5 million for the six months ended June 30, 2011 to $226.9 million for the six months ended June 30, 2012 , primarily due to the increase in compensation expenses related to increased staffing levels in order to accommodate our larger servicing portfolio and originations volumes as well as other related increases in general and administrative expenses.


Other expense increased $10.6 million from $21.8 million for the six months ended June 30, 2011 to $32.4 million for the six months ended June 30, 2012 , primarily due to a decrease in our net interest margin resulting from higher average outstanding balances on our outstanding warehouse and advance facilities combined with a higher average outstanding balance on our senior unsecured notes.


For the six months ended June 30, 2012, we incurred tax expense of $15.9 million, with no corresponding expense during the comparable 2011 period. During March 2012, we became a taxable entity in conjunction with our initial public offering.


Segment Results


Our primary business strategy is to generate recurring, stable income from managing and growing our servicing portfolio. We operate through two business segments: the Servicing Segment and the Originations Segment, which we refer to collectively as our Operating Segments. We report the activity not related to either operating segment in Legacy Portfolio and Other. Legacy


58


---

Table of Contents


Portfolio and Other includes primarily all subprime mortgage loans originated mostly from April to July 2007 or acquired, and VIEs which were consolidated pursuant to the adoption of consolidation guidance related to VIEs.  As of June 30, 2012, we had no consolidated VIEs.


The accounting policies of each reportable segment are the same as those of the consolidated financial statements except for (i) expenses for consolidated back-office operations and general overhead expenses such as executive administration and accounting and (ii) revenues generated on inter-segment services performed. Expenses are allocated to individual segments based on the estimated value of the services performed, including total revenue contributions, personnel headcount, and the equity invested in each segment. Revenues generated or inter-segment services performed are valued based on similar serviced provided to external parties.





Servicing Segment


The Servicing Segment provides loan servicing on our primary and subservicing portfolios, including the collection of principal and interest payments and the generation of ancillary fees related to the servicing of mortgage loans. We also service approximately $27.2 billion in reverse residential mortgage loans which we acquired in 2012. Servicing reverse mortgage loans involves monitoring the condition of the property, advancing for delinquent taxes and insurance, advancing for line of credit draws, and dealing with foreclosure and recovery in the event of default.


Increase in aggregate UPB of our servicing portfolio primarily governs the increase in revenues, expenses and other income (expense) of our Servicing Segment.


The table below provides detail of the UPB of our servicing portfolio at the periods indicated.





June 30, 2012June 30, 2011Servicing Portfolio (in millions)Unpaid principal balance (by investor):Special servicing$8,996$8,298Government-sponsored enterprises72,89950,675Non-Agency securitizations17,3336,736Total boarded forward servicing portfolio99,22865,709Acquired Servicing Rights owned - serviced by predecessor66,615—Total forward servicing portfolio165,84365,709Reverse mortgage servicing27,232—Total servicing portfolio unpaid principal balance$193,075$65,709


The table below provides detail of the characteristics and key performance metrics of our forward servicing portfolio for the periods indicated.





Six months ended June 30,2012(1)2011($ in millions, except for average loan amount)Loan count-servicing608,212398,033Ending unpaid principal balance$99,228$65,709Average unpaid principal balance$95,965$66,047Average loan amount$163,147$165,084Average coupon5.52%5.57%Average FICO67264960+ delinquent (% of loans)(2)11.7%16.7%Total prepayment speed (12 month constant pre-payment rate)15.5%12.3%





|    |                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 2012 characteristics and key performance metrics of our servicing portfolio exclude approximately $66.6 billion and approximately 309,000 units of forward residential mortgage loans acquired in two separate transactions. These loans were boarded in July 2012 and have been excluded from our key performance metrics above.

59


---

Table of Contents


|    |                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Loan delinquency is based on the current contractual due date of the loan. In the case of a completed loan modification, delinquency is based on the modified due date of the loan.

The table below provides detail of the characteristics and key performance metrics of our reverse servicing portfolio for the six months ended June 30, 2012.





Six months ended June 30,2012($ in millions, except for average loan amount)Loan count168,961Ending unpaid principal balance$27,232Average loan amount$162,170Average coupon3.20%Average borrower age76


Servicing Fee Income


Servicing fee income consists of the following for the periods indicated (in thousands).





For the three months ended June 30,For the six months ended June 30,2012201120122011Servicing fee income$82,080$46,475$142,693$93,401Loss mitigation and performance-based incentive fees7,0462,03814,9544,184Modification fees7,2176,43914,53213,000Late fees and other ancillary charges6,6575,71214,29412,120Reverse mortgage fees6,164—10,142—Other servicing fee related revenues58(61)131(398)Total servicing fee income before MSR fair value adjustments109,22260,603196,746122,307Fair value adjustments on excess spread financing(2,412)—(7,264)—Reverse mortgage servicing liability accretion(9)—624—MSR fair value adjustments(20,875)(7,938)(20,380)(11,722)Total servicing fee income$85,926$52,665$169,726$110,585





The following tables provide servicing fee income and UPB by primary servicing, subservicing, adjacent businesses and reverse servicing for and at the periods indicated (in thousands).





For the three months ended June 30,For the six months ended June 30,2012201120122011Primary servicing$69,420$33,927$119,061$71,844Subservicing31,72825,37563,64648,371Adjacent businesses1,9101,3013,8972,092Reverse servicing6,164—10,142—Total servicing fee income before MSR fair value adjustments$109,222$60,603$196,746$122,307





60


---

Table of Contents


June 30, 2012June 30, 2011UPB (in millions)Primary servicing$119,131$33,459Subservicing46,71232,250Reverse servicing27,232—Total unpaid principal balance$193,075$65,709





Servicing Segment for the Three Months Ended June 30, 2012 and 2011


Service Fee Income


Servicing fee income was $85.9 million for the three months ended June 30, 2012 compared to $52.7 million for the three months ended June 30, 2011 , an increase of $33.2 million , or 63.0% , primarily due to the net effect of the following:





|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Increase of$35.6 milliondue to higher average UPB on our forward servicing portfolio of$95.8 billionin the2012period compared to$66.2 billionin the comparable2011period. The increase in our servicing portfolio was primarily driven by an increase in average UPB for loans serviced for GSEs and other subservicing contracts for third-party investors of$70.5 billionin the2012period compared to$51.0 billionin the comparable2011period. In addition, we also experienced an increase in average UPB for our private asset-backed securitizations portfolio, which increased to$17.7 billionin the three months endedJune 30, 2012compared to$6.8 billionin the comparable2011period.

|  |                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------
|• | Increase of$5.0 milliondue to increased loss mitigation and performance-based incentive fees earned from a GSE.

|  |                                                                                                    
|- | ---------------------------------------------------------------------------------------------------
|• | Increase of$0.8 milliondue to higher modification fees earned from HAMP and non-HAMP modifications.

|  |                                                                                                
|- | -----------------------------------------------------------------------------------------------
|• | Increase of $1.0 million from increased collections from late fees and other ancillary charges.

|  |                                                                                                                         
|- | ------------------------------------------------------------------------------------------------------------------------
|• | Increase of$6.2 millionfrom fees earned from our reverse mortgage portfolio for which we began servicing inJanuary 2012.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Decrease of$13.0 millionfrom change in fair value on MSRs which was recognized in servicing fee income. The fair value of our MSRs is based upon the present value of the expected future cash flows related to servicing these loans. The revenue components of the cash flows are servicing fees, interest earned on custodial accounts, and other ancillary income. The expense components include operating costs related to servicing the loans (including delinquency and foreclosure costs) and interest expenses on servicing advances. The expected future cash flows are primarily impacted by prepayment estimates, delinquencies, and market discount rates. Generally, the value of MSRs increases when interest rates increase and decreases when interest rates decline due to the effect those changes in interest rates have on prepayment estimates. Other factors affecting the MSR value includes the estimated effects of loan modifications on expected cash flows. Such modifications tend to positively impact cash flows by extending the expected life of the affected MSR and potentially producing additional revenue opportunities depending on the type of modification. In valuing the MSRs, we believe our assumptions are consistent with the assumptions other major market participants use. These assumptions include a level of future modification activity that we believe major market participants would use in their valuation of MSRs. Internally, we have modification goals that exceed the assumptions utilized in our valuation model. Nevertheless, were we to apply an assumption of a level of future modifications consistent with our internal goals to our MSR valuation, we do not believe the resulting increase in value would be material. Additionally, several state attorneys general have previously requested that certain mortgage servicers, including us, suspend foreclosure proceedings pending internal review to ensure compliance with applicable law, and we received requests from four such state attorneys general. Although we have resumed those previously delayed proceedings, changes in the foreclosure process that may be required by government or regulatory bodies could increase the cost of servicing and diminish the value of our MSRs. We utilize assumptions of servicing costs that include delinquency and foreclosure costs that we believe major market participants would use to value their MSRs. We periodically compare our internal MSR valuation to third-party valuation of our MSRs to help substantiate our market assumptions. We have considered the costs related to the delayed proceedings in our assumptions and we do not believe that any resulting decrease in the MSR was material given the expected short-term nature of the issue.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Decrease of$2.4 millionfrom change in fair value of our excess spread financing arrangements. In conjunction with various MSR acquisitions, we have entered into sale and assignment agreements, which we treated as financings, whereby we sold the right to receive65%of the excess cash flow generated from certain underlying MSR portfolios after receipt of a fixed basic servicing fee per loan. We measure these financing arrangements at fair value.




61


---

Table of Contents


Other Fee Income


Other fee income was $6.0 million for the three months ended June 30, 2012 compared to $3.5 million for the three months ended June 30, 2011 , an increase of $2.5 million , or 71.4% , due to higher commissions earned on lender placed insurance and higher REO sales commissions.


The following table provides other fee income by primary servicing, subservicing and adjacent businesses for the periods indicated (in thousands).





For the three months ended      June 30,20122011Primary servicing$1,066$1,361Subservicing63822Adjacent businesses4,8401,283Total other fee income$5,969$3,466


Expenses and Impairments


Expenses and impairments were $73.7 million for the three months ended June 30, 2012 compared to $39.9 million the three months ended June 30, 2011 , an increase of $33.8 million , or 84.7% , primarily due to the increase of $9.6 million in salaries, wages and benefits expense resulting primarily from an increase in average headcount from 1,509 in the 2011 period to 1,859 in the 2012 period and an increase of $24.2 million in general and administrative and occupancy-related expenses associated with increased headcount and growth in the servicing portfolio.





The following table provides primary servicing, subservicing, reverse servicing, adjacent businesses and other Servicing Segment expenses for the periods indicated (in thousands).





For the three months ended June 30,20122011Primary servicing$29,887$15,950Subservicing29,20316,780Reverse servicing6,959—Adjacent businesses2,4462,075Other Servicing Segment expenses5,1615,091Total expenses and impairments$73,656$39,896


Other Servicing Segment expenses primarily include share-based compensation expenses.


Other Income (Expense)


Total other income (expense) was $(22.9) million for the three months ended June 30, 2012 compared to $(12.8) million for the three months ended June 30, 2011 , an increase in expense, net of income, of $10.1 million , or 78.9%, primarily due to the net effect of the following:





|  |                                                                                                                                                                                                                                                                                                                                                                  
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Interest income was$5.2 millionfor the three months endedJune 30, 2012compared to$0.7 millionfor the three months endedJune 30, 2011, an increase of$4.5 millionprimarily attributable to interest earned on our outstanding participating interests in reverse mortgages of$5.3 million, with no respective interest amounts earned in the comparable2011period.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Interest expense was$28.3 millionfor the three months endedJune 30, 2012compared to$13.5 millionfor the three endedJune 30, 2011, an increase of$14.8 million, or109.6%, primarily due to higher average outstanding debt of $1,151.6 million for the three months endedJune 30, 2012compared to$610.3 millionin the comparable2011period. The impact of the higher debt balances is partially offset by lower interest rates due to declines in the base LIBOR and decreases in the overall index margin on outstanding servicer advance facilities. Interest expense from the senior

62


---

Table of Contents


unsecured notes was $13.5 million and $7.5 million , respectively, for the three months ended June 30, 2012 and 2011 . Interest expense for June 30, 2011 also includes gains for the ineffective portion of a cash flow hedge of $0.5 million , with no respective amounts for the 2012 period.





Servicing Segment for the Six Months Ended June 30, 2012 and 2011


Servicing Fee Income


Servicing fee income was $169.7 million for the six months ended June 30, 2012 compared to $110.6 million for the six months ended June 30, 2011 , an increase of $59.1 million, or 53.4%, primarily due to the net effect of the following:





|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Increase of$49.3 milliondue to higher average UPB on our forward servicing portfolio of$96.0 billionin the2012period compared to$66.0 billionin the comparable2011period. The increase in our servicing portfolio was primarily driven by an increase in average UPB for loans serviced for GSEs and other subservicing contracts for third-party investors of$71.3 billionin the2012period compared to$51.4 billionin the comparable2011period. In addition, we also experienced an increase in average UPB for our private asset-backed securitizations portfolio, which increased to$18.1 billionin thesixmonths endedJune 30, 2012compared to$6.9 billionin the comparable2011period.

|  |                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------
|• | Increase of$10.8 milliondue to increased loss mitigation and performance-based incentive fees earned from a GSE.

|  |                                                                                                    
|- | ---------------------------------------------------------------------------------------------------
|• | Increase of$1.5 milliondue to higher modification fees earned from HAMP and non-HAMP modifications.

|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
|• | Increase of $2.2 million from higher collections from late fees and other ancillary charges.

|  |                                                                                                                          
|- | -------------------------------------------------------------------------------------------------------------------------
|• | Increase of$10.1 millionfrom fees earned from our reverse mortgage portfolio for which we began servicing inJanuary 2012.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Decrease of$8.7 millionfrom change in fair value on MSRs which was recognized in servicing fee income. The fair value of our MSRs is based upon the present value of the expected future cash flows related to servicing these loans. The revenue components of the cash flows are servicing fees, interest earned on custodial accounts, and other ancillary income. The expense components include operating costs related to servicing the loans (including delinquency and foreclosure costs) and interest expenses on servicing advances. The expected future cash flows are primarily impacted by prepayment estimates, delinquencies, and market discount rates. Generally, the value of MSRs increases when interest rates increase and decreases when interest rates decline due to the effect those changes in interest rates have on prepayment estimates. Other factors affecting the MSR value includes the estimated effects of loan modifications on expected cash flows. Such modifications tend to positively impact cash flows by extending the expected life of the affected MSR and potentially producing additional revenue opportunities depending on the type of modification. In valuing the MSRs, we believe our assumptions are consistent with the assumptions other major market participants use. These assumptions include a level of future modification activity that we believe major market participants would use in their valuation of MSRs. Internally, we have modification goals that exceed the assumptions utilized in our valuation model. Nevertheless, were we to apply an assumption of a level of future modifications consistent with our internal goals to our MSR valuation, we do not believe the resulting increase in value would be material. Additionally, several state attorneys general have previously requested that certain mortgage servicers, including us, suspend foreclosure proceedings pending internal review to ensure compliance with applicable law, and we received requests from four such state attorneys general. Although we have resumed those previously delayed proceedings, changes in the foreclosure process that may be required by government or regulatory bodies could increase the cost of servicing and diminish the value of our MSRs. We utilize assumptions of servicing costs that include delinquency and foreclosure costs that we believe major market participants would use to value their MSRs. We periodically compare our internal MSR valuation to third party valuation of our MSRs to help substantiate our market assumptions. We have considered the costs related to the delayed proceedings in our assumptions and we do not believe that any resulting decrease in the MSR was material given the expected short-term nature of the issue.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Decrease of$7.3 millionfrom change in fair value of our excess spread financing arrangement. In conjunction with various MSR acquisitions, we have entered into sale and assignment agreements, which we treated as financings, whereby we sold the right to receive65%of the excess cash flow generated from certain underlying MSR portfolios after receipt of a fixed basic servicing fee per loan. We measure these financing arrangements at fair value.

Other Fee Income


Other fee income was $13.3 million for the six months ended June 30, 2012 compared to $6.7 million for the six months ended June 30, 2011 , an increase of $6.6 million , or 98.5% , due to higher commissions earned on lender placed insurance and higher REO sales commissions.


63


---

Table of Contents


The following table provides other fee income by primary servicing, subservicing and adjacent businesses for the periods indicated (in thousands).


For the six months ended      June 30,20122011Primary servicing$3,426$2,845Subservicing2,3321,578Adjacent businesses7,5132,241Total other fee income$13,271$6,664


Expenses and impairments


Expenses and impairments were $132.9 million for the six months ended June 30, 2012 compared to $80.3 million the six months ended June 30, 2011 , an increase of $52.6 million , or 65.5% , primarily due to the increase of $17.5 million in salaries, wages and benefits expense resulting primarily from an increase in average headcount from 1,509 in the 2011 period to 1,876 in the 2012 period and an increase of $35.1 million in general and administrative and occupancy-related expenses associated with increased headcount and growth in the servicing portfolio.





The following table provides primary servicing, subservicing, reverse servicing, adjacent businesses and other Servicing Segment expenses for the periods indicated (in thousands).





For the six months ended June 30,20122011Primary servicing$54,213$32,663Subservicing56,41233,979Reverse servicing8,872—Adjacent businesses5,2133,502Other Servicing Segment expenses8,17610,159Total expenses and impairments$132,886$80,303


Other Income (Expense)


Total other income (expense) was $(35.2) million for the six months ended June 30, 2012 compared to $(25.3) million for the six months ended June 30, 2011 , an increase in expense, net of income, of $9.9 million, or 39.1%, primarily due to the net effect of the following:





|  |                                                                                                                                                                                                                                                                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Interest income was $9.9 million for thesixmonths endedJune 30, 2012compared to $1.6 million for thesixmonths endedJune 30, 2011, an increase of $8.3 million primarily attributable to interest earned on our outstanding participating interests in reverse mortgages of $9.9 million, with no respective interest amounts earned in the comparable2011period.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Interest expense was $45.2 million for thesixmonths endedJune 30, 2012compared to $26.9 million for thesixendedJune 30, 2011, an increase of $18.3 million, or 68.0%, primarily due to higher average outstanding debt of $871.9 million for thesixmonths endedJune 30, 2012compared to $617.1 million in the comparable2011period. The impact of the higher debt balances is partially offset by lower interest rates due to declines in the base LIBOR and decreases in the overall index margin on outstanding servicer advance facilities. Interest expense from the senior unsecured notes was $22.1 million and $15.1 million, respectively, for thesixmonths endedJune 30, 2012and2011. Interest expense forJune 30, 2011also includes gains for the ineffective portion of a cash flow hedge of $1.4 million, with no respective amounts for the2012period.

Originations Segment


The Originations Segment involves the origination, packaging, and sale of GSE mortgage loans into the secondary markets via whole loan sales or securitizations.


64


---

Table of Contents


Increase in originations volume primarily governs the increase in revenues, expenses and other income (expense) of our Originations Segment. The table below provides detail of the loan characteristics of loans originated for the periods indicated.





For the three months ended June 30,For the six months ended June 30,Originations Volume (in millions)2012201120122011Retail$1,211.4$491.0$1,885.0$915.6Wholesale595.0232.91,112.0462.5Total Originations$1,806.4$723.9$2,997.0$1,378.1


Originations Segment for the Three Months Ended June 30, 2012 and 2011


Originations Revenue


Total revenues were $108.1 million for the three months ended June 30, 2012 compared to $26.7 million for the three months ended June 30, 2011 , an increase of $81.4 million , or 304.9% , primarily due to the net effect of the following:





Other fee income was $5.7 million for the three months ended June 30, 2012 compared to $3.8 million for the three months ended June 30, 2011 , an increase of $1.9 million , or 50.0% , primarily due to an increase in net points and fees collected as a result of the $1.1 billion increase in loan origination volume.





Gain on mortgage loans held for sale consists of the following for the periods indicated (in thousands).





For the three months ended June 30,20122011Gain on sale$48,579$14,547Provision for repurchases(2,776)(1,271)Capitalized servicing rights11,0628,104Fair value mark-to-market adjustments30,942841Mark-to-market on derivatives/hedges14,528690Total gain on mortgage loans held for sale$102,335$22,911





Gain on mortgage loans held for sale was $102.3 million for the three months ended June 30, 2012 , compared to $22.9 million for the three months ended June 30, 2011 , an increase of $79.4 million, or 346.7%, primarily due to the net effect of the following:





|  |                                                                                                                                                                                                                     
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Increase of $34.1 million from larger volume of originations, which increased from $0.7 billion in2011to $1.8 billion in2012, and higher margins earned on the sale of residential mortgage loans during the period.

|  |                                                                                                                          
|- | -------------------------------------------------------------------------------------------------------------------------
|• | Increase of $3.0 million from capitalized MSRs due to the larger volume of originations and subsequent retention of MSRs.

|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
|• | Increase of $30.1 million resulting from the change in fair value on newly-originated loans.

|  |                                                                                                                                                    
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|• | Increase of $13.8 million from change in unrealized gains/losses on derivative financial instruments. These include IRLCs and forward sales of MBS.

|  |                                                                                                                                
|- | -------------------------------------------------------------------------------------------------------------------------------
|• | Decrease of $1.5 million from an increase in our provision for repurchases as a result of the increase in our loan sale volume.

Expenses and Impairments


Expenses and impairments were $48.0 million for the three months ended June 30, 2012 compared to $23.7 million for the three months ended June 30, 2011 , an increase of $24.3 million, or 102.5%, primarily due to the net effect of the following:





|  |                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------
|• | Increase of $18.0 million in salaries, wages and benefits expense from increase in average headcount of783in2011to

65


---

Table of Contents


948 in 2012 and increases in performance-based compensation due to increases in originations volume.


|  |                                                                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Increase of $6.2 million in general and administrative and occupancy expense primarily due to an increase in our overhead expenses from the higher originations volume in the2012period.

Other Income and Expenses


Total other income (expense) was $1.0 million for the three months ended June 30, 2012 compared to $0.4 million for the three months ended June 30, 2011 , an increase in income, net of expense, of $0.6 million, or 150.0% primarily due to the net effect of the following:





|  |                                                                                                                                                                                                                                                                                                                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Interest income was $5.0 million for the three months endedJune 30, 2012compared to $2.9 million for the three months endedJune 30, 2011, an increase of $2.1 million, or 72.4%, representing interest earned from originated loans prior to sale or securitization. The increase is primarily due to the increase in the volume of originations. Loans are typically sold within 30 days of origination.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Interest expense was $4.0 million for the three months endedJune 30, 2012compared to $2.5 million for the three months endedJune 30, 2011, an increase of $1.5 million, or 60.0%, primarily due to an increase in originations volume in2012and associated financing required to originate these loans, combined with a slight increase in outstanding average days in warehouse on newly originated loans. Additionally, we recognized$0.8 millionin additional amortization on our outstanding debt facilities due to recent amendments and modifications on our outstanding warehouse facilities.

Originations Segment for the Six Months Ended June 30, 2012 and 2011


Originations Revenue


Total revenues were $178.6 million for the six months ended June 30, 2012 compared to $51.3 million for the six months ended June 30, 2011 , an increase of $127.3 million , or 248.1% , primarily due to the net effect of the following:





Other fee income was $5.7 million for the six months ended June 30, 2012 compared to $7.9 million for the six months ended June 30, 2011 , a decrease of $2.2 million , or 27.8% , primarily due to a decrease in net points and fees collected as a result of an increase in fees paid to third party mortgage brokers. Our wholesale originations business operates largely through third-party mortgage brokers. For the six months ended June 30, 2012 , wholesale consisted of 37.1% of our total origination volume, compared to 33.6% for the comparable 2011 period.





Gain on mortgage loans held for sale consists of the following for the periods indicated (in thousands).





For the six months ended June 30,20122011Gain on sale$92,494$25,991Provision for repurchases(5,781)(2,200)Capitalized servicing rights24,12817,985Fair value mark-to-market adjustments25,2943,130Mark-to-market on derivatives/hedges36,700(1,426)Total gain on mortgage loans held for sale$172,835$43,480





Gain on mortgage loans held for sale was $172.8 million for the six months ended June 30, 2012 , compared to $43.5 million for the six months ended June 30, 2011 , an increase of $129.3 million , or 297.2% , primarily due to the net effect of the following:





|  |                                                                                                                                                                                                              
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Increase of $66.5 millionfrom larger volume of originations, which increased from$1.4 billion2011to$3.0 billionin2012, and higher margins earned on the sale of residential mortgage loans during the period.

|  |                                                                                                                        
|- | -----------------------------------------------------------------------------------------------------------------------
|• | Increase of$6.1 millionfrom capitalized MSRs due to the larger volume of originations and subsequent retention of MSRs.

66


---

Table of Contents


|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
|• | Increase of $22.2 million resulting from the change in fair value on newly-originated loans.

|  |                                                                                                                                                  
|- | -------------------------------------------------------------------------------------------------------------------------------------------------
|• | Increase of$38.1 millionfrom change in unrealized gains/losses on derivative financial instruments. These include IRLCs and forward sales of MBS.

|  |                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------
|• | Decrease of$3.6 millionfrom an increase in our provision for repurchases as a result of the increase in our loan sale volume.

Expenses and Impairments


Expenses and impairments were $76.5 million for the six months ended June 30, 2012 compared to $45.5 million for the six months ended June 30, 2011 , an increase of $31.0 million , or 68.1% , primarily due to the net effect of the following:





|  |                                                                                                                                                                                                                  
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Increase of$22.9 millionin salaries, wages and benefits expense from increase in average headcount of783in2011to909in2012and increases in performance-based compensation due to increases in originations volume.

|  |                                                                                                                                                                                       
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Increase of$8.1 millionin general and administrative and occupancy expense primarily due to an increase in our overhead expenses from the higher originations volume in the2012period.

Other Income and Expenses


Total other income (expense) was $0.8 million for the six months ended June 30, 2012 compared to $1.0 million for the six months ended June 30, 2011 , a decrease in income, net of expense, of $0.2 million, or 20.0% primarily due to the net effect of the following:





|  |                                                                                                                                                                                                                                                                                                                                                                                                  
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Interest income was $8.6 million for thesixmonths endedJune 30, 2012compared to $5.5 million for thesixmonths endedJune 30, 2011, an increase of $3.1 million, or 56.4%, representing interest earned from originated loans prior to sale or securitization. The increase is primarily due to the increase in the volume of originations. Loans are typically sold within 30 days of origination.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Interest expense was $7.8 million for thesixmonths endedJune 30, 2012compared to $4.5 million for thesixmonths endedJune 30, 2011, an increase of $3.3 million, or 73.3%, primarily due to an increase in originations volume in2012and associated financing required to originate these loans, combined with a slight increase in outstanding average days in warehouse on newly originated loans. Additionally, we recognized an additional $1.2 million in amortization on our outstanding debt facilities due to recent amendments and modifications on our outstanding warehouse facilities.




Legacy Portfolio and Other


Our Legacy Portfolio and Other consist primarily of non-prime and nonconforming residential mortgage loans that we primarily originated from April to July 2007 . Revenues and expenses are primarily a result of mortgage loans transferred to securitization trusts that were structured as secured borrowings, resulting in carrying the securitized loans as mortgage loans on our consolidated balance sheets and recognizing the asset-backed certificates as nonrecourse debt. These loans were transferred on October 1, 2009 , from mortgage loans held for sale to a held-for-investment classification at fair value on the transfer date. Subsequent to the transfer date, we completed the securitization of the mortgage loans, which was structured as a secured borrowing. This structure resulted in carrying the securitized loans as mortgages on our consolidated balance sheet and recognizing the asset-backed certificates acquired by third parties as nonrecourse debt.


Effective January 1, 2010 , new accounting guidance eliminated the concept of a QSPE. Consequently, all existing securitization trusts are considered VIEs and are now subject to the new consolidation guidance. Upon consolidation of certain of these VIEs, we recognized the securitized mortgage loans related to these securitization trusts as mortgage loans held for investment, subject to ABS nonrecourse debt. See “Note 3 – Variable Interest Entities and Securitizations” to our Consolidated Financial Statements. Additionally, we elected the fair value option provided for by ASC 825-10, Financial Instruments-Overall . Assets and liabilities related to these VIEs are included in Legacy Assets and Other in our segmented results.


In December 2011 , we sold our remaining variable interest in a securitization trust that had been a consolidated VIE since January 1, 2010 and deconsolidated the variable interest. Upon deconsolidation of this VIE, we derecognized the related mortgage loans held for investment, subject to ABS nonrecourse debt and the ABS nonrecourse debt.


The table below provides detail of the characteristics of our securitization trusts included in Legacy Portfolio and other for the periods indicated (in thousands).





67


---

Table of Contents


June 30,20122011(1)Performing – UPB$294,527$1,029,550Nonperforming (90+ Delinquency) - UPB70,731308,643REO - Estimated Fair Value3,42917,249Total Legacy Portfolio and Other – UPB$368,687$1,355,442





|    |                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Amounts include one previously off-balance sheet securitization which was consolidated upon adoption of ASC 810,Consolidation, related to consolidation of certain VIEs.

Legacy Portfolio and Other for the Three Months Ended June 30, 2012 and 2011


Total revenues were $0.5 million for the three months ended June 30, 2012 compared to $1.2 million for the three months ended June 30, 2011 , a decrease of $0.7 million . This decrease was primarily a result of decreased ancillary income on our legacy portfolio.


Total expenses and impairments were $8.7 million for the three months ended June 30, 2012 compared to $4.9 million for the three months ended June 30, 2011 , an increase of $3.8 million , or 77.6% . This change was primarily due to an increase in total allocated overhead charges to our Legacy Portfolio and Other as a result of our overall growth.


Interest income, net of interest expense, decreased to $1.3 million for the three months ended June 30, 2012 as compared to $2.2 million for the three months ended June 30, 2011 . The decrease in net interest income was primarily due to the effects of the derecognition of a previously consolidated VIE as of December 31, 2011 .


Fair value changes in ABS securitizations were $3.6 million for the three months ended June 30, 2011 , with no related charges for the 2012 period due to the ABS nonrecourse debt and related mortgage loans held for investment and related REO that was deconsolidated in December 2011 on the previously consolidated VIE.


Legacy Portfolio and Other for the Six Months Ended June 30, 2012 and 2011


Total revenues were $1.1 million for the six months ended June 30, 2012 compared to $2.5 million for the six months ended June 30, 2011 , a decrease of $1.4 million . This decrease was primarily a result of decreased ancillary income on our legacy portfolio.


Total expenses and impairments were $17.6 million for the six months ended June 30, 2012 compared to $10.9 million for the six months ended June 30, 2011 , an increase of $6.7 million , or 61.5% . This change was primarily due to an increase in total allocated overhead charges to our Legacy Portfolio and Other as a result of our overall growth.


Interest income, net of interest expense, decreased to $1.9 million for the six months ended June 30, 2012 as compared to $5.2 million for the six months ended June 30, 2011 . The decrease in net interest income was primarily due to the effects of the derecognition of a previously consolidated VIE as of December 31, 2011 .


Fair value changes in ABS securitizations were $6.3 million for the six months ended June 30, 2011 , with no related charges for the 2012 period due to the ABS nonrecourse debt and related mortgage loans held for investment and related REO that was deconsolidated in December 2011 on the previously consolidated VIE.





Analysis of Items on Consolidated Balance Sheet


Assets


Restricted cash consists of certain custodial accounts related to collections on certain mortgage loans and mortgage loan advances that have been pledged to debt counterparties under various master repurchase agreements (MRAs). Restricted cash was $119.5 million at June 30, 2012, an increase of $48.0 million from December 31, 2011, primarily a result of higher servicer advance reimbursement amounts. Additionally, in 2012, we began servicing reverse residential mortgages. Our June 2012 restricted cash balance contains approximately $28.3 million in custodial deposits related to reverse mortgage loans which will be remitted to certain GSEs as required under various securities agreements.





Accounts receivable consists primarily of accrued interest receivable on mortgage loans and securitizations, collateral deposits on surety bonds and advances made to nonconsolidated securitization trusts, as required under various servicing agreements related to delinquent loans, which are ultimately paid back to us from the securitization trusts. Accounts receivable increased $1.9 billion to $2.5 billion at June 30, 2012, primarily due to the acquisition of the Aurora MSRs and related advances.


68


---

Table of Contents





Mortgage loans held for sale are carried at fair value. We estimate fair value by evaluating a variety of market indicators including recent trades and outstanding commitments. Mortgage loans held for sale were $837.9 million at June 30, 2012, an increase of $379.3 million from December 31, 2011, primarily due to $3.0 billion of loan originations during the 2012 period offset by $2.7 billion in mortgage loan sales.





Mortgage loans held for investment, subject to nonrecourse debt - Legacy Assets consist of nonconforming or subprime mortgage loans securitized which serve as collateral for the nonrecourse debt. Mortgage loans held for investment, subject to nonrecourse debt - Legacy Assets was $238.2 million at June 30, 2012, a decrease of $5.3 million from December 31, 2011, as $3.2 million UPB was transferred to REO during the six months ended June 30, 2012.





Reverse mortgage interests consists of scheduled and unscheduled draws on reverse residential mortgage loans, capitalized interest and servicing fees, and fees paid to taxing authorities to cover unpaid taxes and insurance. In January and June 2012, we purchased the servicing rights to certain reverse mortgages. Reverse mortgage interests were $310.1 million at June 30, 2012, with no corresponding balance at December 31, 2011.





Receivables from affiliates consist of periodic transactions with Nationstar Regular Holdings, Ltd., a subsidiary of FIF. These transactions typically involve the monthly payment of principal and interest advances that are required to be remitted to securitization trusts as required under various Pooling and Servicing Agreements. These amounts are later repaid to us when principal and interest advances are recovered from the respective borrowers. Receivables from affiliates were $13.1 million at June 30, 2012, an increase of $8.5 million from December 31, 2011. Prior to our March 2012 restructuring in conjunction with our initial public offering, FIF contributed a portion of the outstanding balance in receivables from affiliates related to outstanding interest rate swap settlements to the Company eliminating this payable amount.





MSRs at fair value consist of servicing assets related to all existing forward residential mortgage loans transferred to a third party in a transfer that meets the requirements for sale accounting or through the acquisition of the right to service residential mortgage loans that do not relate to our assets. MSRs were $596.5 million at June 30, 2012, an increase of $345.4 million over December 31, 2011, primarily a result of the purchase of servicing portfolios for $341.7 million combined with capitalization of $24.1 million newly created MSRs, and a $20.4 million decrease in the fair value of our MSRs.





MSRs at amortized cost of $8.4 million at June 30, 2012 represents MSRs for certain reverse loans that we acquired during 2012.  Prior to 2012, we had no reverse mortgage servicing rights.  Our MSRs for reverse loans are treated as a separate class of servicing assets.





Property and equipment, net is comprised of land, furniture, fixtures, leasehold improvements, computer software, computer hardware, and software in development and other. These assets are stated at cost less accumulated depreciation. Property and equipment, net was $39.1 million at June 30, 2012, an increase of $15.0 million from December 31, 2011, as we invested in information technology systems to support volume growth in both our Servicing and Originations Segments, as well as the addition of certain property acquired from the Aurora purchase.





REO, net represents property we acquired as a result of foreclosures on delinquent mortgage loans. REO, net is recorded at estimated fair value, less costs to sell, at the date of foreclosure. Any subsequent operating activity and declines in value are charged to earnings. REO, net was $3.4 million at June 30, 2012, a decrease of $0.3 million from December 31, 2011. This change was primarily due to the transfer of $3.2 million of mortgage loans held for investment to REO, offset by liquidations.





Other assets include deferred financing costs, derivative financial instruments, prepaid expenses, loans subject to repurchase rights from Ginnie Mae and equity method investments. Other assets increased $120.1 million from December 31, 2011 to $226.3 million, primarily due to $41.9 million in increase in derivative financial instruments, $10.4 million increase in loans subject to repurchase rights from Ginnie Mae, and $3.2 million increase in equity method investment in ANC Acquisition LLC (ANC) due to an additional 13% ownership transfer from FIF from the corporate restructuring, offset by a $27.1 million decrease in deposits on MSR acquisitions that were completed in 2012. In addition, we had $72 million placed in escrow at June 30, 2012 related to our definitive agreement to acquire certain assets from Residential Capital, LLC (see Note 8, Other Assets).





Liabilities and Shareholders' Equity





At June 30, 2012, total liabilities were $4.3 billion, a $2.8 billion increase from December 31, 2011. The increase was primarily due to a $1.5 billion increase in notes payable, our issuance of $275 million in unsecured senior notes in April 2012, an increase in payables and accrued liabilities of $456.0 million, an increase in excess spread financing of $222.1 million, and an increase


69


---

Table of Contents


in participating interest financing of $181.1 million.  The increases are generally the result of our acquisitions of MSR portfolios, including Aurora, the increase in our mortgage origination business and our entry into servicing reverse mortgages.





Included in our payables and accrued liabilities caption on our balance sheet is our reserve for repurchases and indemnifications of $12.4 million and $10.0 million at June 30, 2012 and December 31, 2011, respectively. This liability represents our (i) estimate of losses to be incurred on the repurchase of certain loans that we previously sold and (ii) estimate of losses to be incurred for indemnification of losses incurred by purchasers or insurers with respect to loans that we sold. Certain sale contracts include provisions requiring us to repurchase a loan or indemnify the purchaser or insurer for losses if a borrower fails to make certain initial loan payments due to the acquirer or if the accompanying mortgage loan fails to meet certain customary representations and warranties. These representations and warranties are made to the loan purchasers or insurers about various characteristics of the loans, such as the manner of origination, the nature and extent of underwriting standards applied and the types of documentation being provided and typically are in place for the life of the loan. Although the representations and warranties are in place for the life of the loan, we believe that most repurchase requests occur within the first five years of the loan. In the event of a breach of the representations and warranties, we may be required to either repurchase the loan or indemnify the purchaser for losses it sustains on the loan. In addition, an investor may request that we refund a portion of the premium paid on the sale of mortgage loans if a loan is prepaid within a certain amount of time from the date of sale. We record a provision for estimated repurchases, loss indemnification and premium recapture on loans sold, which is charged to gain (loss) on mortgage loans held for sale.





The activity of our outstanding repurchase reserves were as follows for the periods indicated (in thousands).





Six Months Ended June 30, 2012Year Ended December 31, 2011Repurchase reserves, beginning of period$10,026$7,321Additions5,7815,534Charge-offs(3,383)(2,829)Repurchase Reserves, end of period$12,424$10,026








The following table summarizes the changes in UPB and loan count related to unresolved repurchase and indemnification requests for the periods indicated (dollars in millions):


Six Months Ended            June 30, 2012Year Ended                December 31, 2011UPBCountUPBCountBeginning balance$12.962$4.321Repurchases & indemnifications(4.3)(19)(6.9)(37)Claims initiated10.16232.4155Rescinded(9.7)(44)(16.9)(77)$9.061$12.962





The following table details our loan sales by period (dollars in billions):





Six Months Ended June 30, 2012Year Ended December 31,20122011201020092008Total$Count$Count$Count$Count$Count$CountLoan Sales$2.612,282$3.316,629$2.613,090$1.05,344$0.53,412$10.050,757








70


---

Table of Contents








We increase the reserve by applying an estimated loss factor to the principal balance of loan sales. Secondarily, the reserve may be increased based on outstanding claims received. We have observed an increase in repurchase requests in each of the last four years. We believe that because of the increase in our loan originations since 2008, repurchase requests are likely to increase. Should home values continue to decrease, our realized loan losses from loan repurchases and indemnifications may increase as well. As such, our reserve for repurchases may increase beyond our current expectations. While the ultimate amount of repurchases and premium recapture is an estimate, we consider the liability to be adequate at each balance sheet date.





At June 30, 2012, total shareholders' equity was $633.1 million, a $351.8 million increase from December 31, 2011, which is primarily attributable to net income of $86.5 million in the 2012 period, $246.5 million in IPO proceeds, contributions of $12.8 million from FIF and $8.0 million in share-based compensation.





Impact of Inflation and Changing Prices


Our consolidated financial statements and notes thereto presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike most industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflations. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.





Recent Accounting Developments


See Note 2, Recent Accounting Developments, of the notes to the consolidated financial statements for details of recently issued accounting pronouncements and their expected impact on our consolidated financial statements.





Liquidity and Capital Resources


Liquidity measures our ability to meet potential cash requirements, including the funding of servicing advances, the payment of operating expenses, the originations of loans and the repayment of borrowings. Our cash balance decreased from $62.4 million as of December 31, 2011 to $15.9 million as of June 30, 2012, primarily due to cash outflows in our operating and investing activities, offset by cash inflows from financing activities.





In March 2012 we completed an initial public offering. As part of this offering we raised approximately $247 million in additional capital, net of expenses.





In April 2012, we completed the offering of $275.0 million of unsecured senior notes, with a maturity date of May 2019. After deduction the initial purchasers' discounts, we received net cash proceeds of approximately $269.5 million. Under the terms of these unsecured senior notes, we pay interest biannually to the note holders at an interest rate of 9.625%. We intend to use a portion of the cash proceeds for general corporate purposes, which may include future acquisitions and transfers of servicing portfolios. In addition, in July 2012, we issued an additional $100 million of unsecured senior notes as an add on to the $275 million of unsecured senior notes issued in April 2012.





We grew our servicing portfolio from $65.7 billion in UPB as of June 30, 2011 to $193.1 billion in UPB as of June 30, 2012. We shifted our strategy after 2007 to leverage our industry-leading servicing capabilities and capitalize on the opportunities to grow our originations platform which has led to the strengthening of our liquidity position. As a part of our shift in strategy, we ceased originating non-prime loans in 2007, and new originations have been focused on loans that are eligible to be sold to GSEs. Since 2008, substantially all originated loans have either been sold or are pending sale.





As part of the normal course of our business, we borrow money periodically to fund servicing advances and loan originations. The loans we originate are financed through several warehouse lines on a short-term basis. We typically hold the loans for approximately 30 days and then sell the loans or place them in government securitizations and repay the borrowings under the warehouse lines. We rely upon several counterparties to provide us with financing facilities to fund a portion of our servicing advances and to fund our loan originations on a short- term basis. Our ability to fund current operations depends upon our ability to secure these types of short term financings on acceptable terms and to renew or replace the financings as they expire.





At this time, we see no material negative trends that we believe would affect our access to long-term borrowings, short-term borrowings or bank credit lines sufficient to maintain our current operations, or would likely cause us to cease to be in compliance with any applicable covenants in our indebtedness or that would inhibit our ability to fund operations and capital commitments for the next 12 months.





71


---

Table of Contents


Our primary sources of funds for liquidity include: (i) lines of credit, other secured borrowings and the unsecured senior notes; (ii) servicing fees and ancillary fees; (iii) payments received from sale or securitization of loans; (iv) payments received from mortgage loans held for sale; and (v) payments from the liquidation or securitization of our outstanding participating interests in reverse mortgage loans.





Our primary uses of funds for liquidity include: (i) funding of servicing advances; (ii) originations of loans; (iii) payment of interest expenses; (iv) payment of operating expenses; (v) repayment of borrowings; (vi) payments for acquisitions of MSRs; and (vii) scheduled and unscheduled draws on our serviced reverse residential mortgage loans.





Our servicing agreements impose on us various rights and obligations that affect our liquidity. Among the most significant of these obligations is the requirement that we advance our own funds to meet contractual principal and interest payments for certain investors and to pay taxes, insurance, foreclosure costs and various other items that are required to preserve the assets being serviced. Delinquency rates and prepayment speed affect the size of servicing advance balances. As a result of the agreement we entered into to purchase the servicing rights to certain reverse mortgages from a financial institution, we will be required to fund payments due to borrowers, which advances are typically greater than advances on forward residential mortgages. These advances are typically recovered upon weekly or monthly reimbursement or from sale in the market.





We intend to continue to seek opportunities to acquire loan servicing portfolios and/or businesses, including ResCap, that engage in loan servicing and/or loan originations. Any future acquisitions could require substantial additional capital in excess of cash from operations. We would expect to finance the capital required for acquisitions through a combination of additional issuances of equity, corporate indebtedness, asset backed acquisition financing and/or cash from operations.





Operating Activities





Our operating activities used $356.6 million of cash flow for the six months ended June 30, 2012 compared to providing $116.1 million of cash flow for the same period in the prior year. The increase in cash used by operating activities of $472.7 million during the 2012 period was primarily due to higher volume originations of residential mortgage loans partially offset by higher volume of sales of mortgage loans. The decrease was primarily due to the net effect of the following:





|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Decrease of $1,618.4 million due to higher originations volume.  We originated $2,996.4 million in residential mortgage loans during the six month period ended June 30, 2012, compared to $1,378.0 in mortgage originations for the comparable 2011 period.  This decrease was partially offset by an increase of $1,208.8 million in our cash inflows from proceeds received from the sale of our residential mortgage loans and payments received on mortgage loans.  We received $2,724.4 million in cash proceeds from loan sales and principal collections for the six month ended June 30, 2012, compared to $1,515.6 million for the comparable 2011 period.

|  |                                                                                                                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Increase of $23.1 million in cash outflows used by working capital which used $49.1 million for the six months ended June 30, 2012 compared to $26.0 million in cash outflow for the comparable 2011 period.




Investing Activities





Our investing activities used $1,968.7 million and provided $18.6 million of cash flow for the six months ended June 30, 2012 and 2011, respectively. The $1,987.3 million decrease in cash flows used by investing activities from the 2011 period to the 2012 period was primarily a result of our two significant MSR acquisitions. In May 2012, we acquired the servicing rights of a $10.4 billion forward residential servicing portfolio, which was scheduled to fully transfer in July 2012.  We made an initial deposit on this MSR purchase in June 2012 of $16.1 million. Additionally in June 2012, we acquired the servicing rights of another $63 billion forward residential servicing portfolio, which was scheduled to fully transfer in July 2012.  In June 2012, we paid the full purchase price of $1,960.8 million.





Financing Activities





Our financing activities provided $2,278.7 million and used $153.4 million of cash flow during the six months ended June 30, 2012 and 2011, respectively. The $2,125.3 million increase in cash flows provided by our financing activities was primarily the result of our June 2012 MSR acquisition, as we leveraged our existing facilities to finance the additional delinquency and servicer advances which were acquired. As a result of these acquisitions, combined with the increase our originations volume, we increased our borrowings on our outstanding advance and warehouse facilities by $1,539.2 million for the six months ended June 30, 2012, as compared to a $105.0 million paydown during the comparable 2011 period. During the six month period ended June 30, 2012, we also completed our March 2012 initial public offering in which we raised approximately $250 million in capital, combined with proceeds from our April 2012 high yield debt offering in which we received $269.5 million in net cash proceeds.


72


---

Table of Contents





Contractual Obligations





The table below sets forth our contractual obligations, excluding our legacy asset securitized debt and our excess spread financing, at June 30, 2012:


20122013 to 20142015 to 2016After 2016TotalUnsecured senior notes$—$—$285,000$275,000$560,000Interest expense from unsecured senior notes28,731114,92660,68661,713266,056MBS advance financing facility157,241———157,241Securities repurchase facility (2011)—11,774——11,7742010-ABS advance financing facility—197,085——197,0852011-1 Agency advance financing facility42,705———42,705MSR note2,7774,627——7,4042012-AW Agency advance financing facility—84,151——84,1512012-C ABS advance financing facility—533,217——533,2172012-R ABS advance financing facility—312,092——312,0922012-W ABS advance financing facility—359,541——359,541$175 million warehouse facility—297,743——297,743$150 million warehouse facility—77,251——77,251$100 million warehouse facility (2011)—109,729——109,729$100 million warehouse facility (2009)—98,747——98,747ASAP+ facility123,684———123,684Operating leases6,10330,60920,29512,11369,120Total$361,241$2,231,492$365,981$348,826$3,307,540








In addition to the above contractual obligations, we have also been involved with several securitizations of ABS, which were structured as secured borrowings. These structures resulted in us carrying the securitized loans as mortgages on our consolidated balance sheet and recognizing the asset-backed certificates acquired by third parties as nonrecourse debt. The timing of the principal payments on this nonrecourse debt is dependent on the payments received on the underlying mortgage loans and liquidation of REO. The outstanding principal balance on our Nonrecourse Debt-Legacy Assets was $106.3 million at June 30, 2012 . The repayment of our excess spread financing is based on amounts received on the underlying mortgage loans. As such, we have excluded the financing from the table above. The fair value of our excess spread financing was $266.7 million at June 30, 2012 .





Variable Interest Entities and Off Balance Sheet Arrangements





See Note 3, Variable Interest Entities and Securitizations, of the notes of the consolidated financial statements for a summary of Nationstar's transactions with VIEs and unconsolidated balances details of their impact on our consolidated financial statements.





Derivatives





See Note 10, Derivative Financial Instruments, of the notes of the consolidated financial statements for a summary of Nationstar's derivative transactions.





Item 3. Quantitative and Qualitative Disclosures about Market Risk





We are exposed to a variety of market risks which include interest rate risk, consumer credit risk and counterparty credit risk.





Interest Rate Risk





73


---

Table of Contents


Changes in interest rates affect our operations primarily as follows:








Servicing Segment





|  |                                                                                                                                               
|- | ----------------------------------------------------------------------------------------------------------------------------------------------
|• | an increase in interest rates would increase our costs of servicing our outstanding debt, including our ability to finance servicing advances;

|  |                                                                                                                                                                          
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | a decrease (increase) in interest rates would generally increase (decrease) prepayment rates and may require us to report a decrease (increase) in the value of our MSRs;

|  |                                                                                                         
|- | --------------------------------------------------------------------------------------------------------
|• | a change in prevailing interest rates could impact our earnings from our custodial deposit accounts; and

|  |                                                                                                                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | an increase in interest rates could generate an increase in delinquency, default and foreclosure rates resulting in an increase in both operating expenses and interest expense and could cause a reduction in the value of our assets.




Originations Segment





|  |                                                                                                                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | a substantial and sustained increase in prevailing interest rates could adversely affect our loan originations volume because refinancing an existing loan would be less attractive and qualifying for a loan may be more difficult; and

|  |                                                                                                                                              
|- | ---------------------------------------------------------------------------------------------------------------------------------------------
|• | an increase in interest rates would increase our costs of servicing our outstanding debt, including our ability to finance loan originations;




We actively manage the risk profiles of IRLCs and mortgage loans held for sale on a daily basis and enter into forward sales of MBS in an amount equal to the portion of the IRLC expected to close, assuming no change in mortgage interest rates. In addition, to manage the interest rate risk associated with mortgage loans held for sale, we enter into forward sales of MBS to deliver mortgage loan inventory to investors.





Consumer Credit Risk





We sell our loans on a nonrecourse basis. We also provide representations and warranties to purchasers and insurers of the loans sold that typically are in place for the life of the loan. In the event of a breach of these representations and warranties, we may be required to repurchase a mortgage loan or indemnify the purchaser, and any subsequent loss on the mortgage loan may be borne by us. If there is no breach of a representation and warranty provision, we have no obligation to repurchase the loan or indemnify the investor against loss. The outstanding UPB of loans sold by us represents the maximum potential exposure related to representation and warranty provisions.





We maintain a reserve for losses on loans repurchased or indemnified as a result of breaches of representations and warranties on our sold loans. Our estimate is based on our most recent data regarding loan repurchases and indemnity payments, actual credit losses on repurchased loans, recovery history, among other factors. Our assumptions are affected by factors both internal and external in nature. Internal factors include, among other things, level of loan sales, as well as to whom the loans are sold, the expectation of credit loss on repurchases and indemnifications, our success rate at appealing repurchase demands and our ability to recover any losses from third parties. External factors that may affect our estimate includes, among other things, the overall economic condition in the housing market, the economic condition of borrowers, the political environment at investor agencies and the overall U.S. and world economy. Many of the factors are beyond our control and may lead to judgments that are susceptible to change.





Counterparty Credit Risk





We are exposed to counterparty credit risk in the event of non-performance by counterparties to various agreements. We monitor the credit ratings of our counterparties and do not anticipate losses due to counterparty non-performance.





Sensitivity Analysis





We assess our market risk based on changes in interest rates utilizing a sensitivity analysis. The sensitivity analysis measures the potential impact on fair values based on hypothetical changes (increases and decreases) in interest rates.





We use a duration-based model in determining the impact of interest rate shifts on our loan portfolio, certain other interest-bearing liabilities measured at fair value and interest rate derivatives portfolios. The primary assumption used in these models is that an increase or decrease in the benchmark interest rate produces a parallel shift in the yield curve across all maturities.





We utilize a discounted cash flow analysis to determine the fair value of MSRs and the impact of parallel interest rate shifts on


74


---

Table of Contents


MSRs. The primary assumptions in this model are prepayment speeds, market discount rates and cost to service. However, this analysis ignores the impact of interest rate changes on certain material variables, such as the benefit or detriment on the value of future loan originations, non-parallel shifts in the spread relationships between MBS, swaps and U.S. Treasury rates and changes in primary and secondary mortgage market spreads. For mortgage loans, IRLCs and forward delivery commitments on MBS, we rely on a model in determining the impact of interest rate shifts. In addition, for IRLCs, the borrower’s propensity to close their mortgage loans under the commitment is used as a primary assumption.





Our total market risk is influenced by a wide variety of factors including market volatility and the liquidity of the markets. There are certain limitations inherent in the sensitivity analysis presented, including the necessity to conduct the analysis based on a single point in time and the inability to include the complex market reactions that normally would arise from the market shifts modeled.





We used June 30, 2012 market rates on our instruments to perform the sensitivity analysis. The estimates are based on the


market risk sensitive portfolios described in the preceding paragraphs and assume instantaneous, parallel shifts in interest rate yield curves. These sensitivities are hypothetical and presented for illustrative purposes only. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in fair value may not be linear.





The following table summarizes the estimated change in the fair value of our assets and liabilities sensitive to interest rates as of June 30, 2012 given hypothetical instantaneous parallel shifts in the yield curve:





Change in Fair ValueJune 30, 2012(in thousands)Down 25 bpsUp 25 bpsIncrease (decrease) in assetsMortgage loans held for sale$5,234$(6,418)Mortgage servicing rights – fair value(6,272)6,309Other assets (derivatives)IRLCs5,726(8,648)Total change in assets4,688(8,757)Increase (decrease) in liabilitiesDerivative financial instrumentsInterest rate swaps and caps(2,313)2,299Forward MBS trades12,294(14,690)Excess spread financing (at fair value)2,262(972)Total change in liabilities12,243(13,363)Total, net change$(7,555)$4,606
























































75


---

Table of Contents


Item 4.  Controls and Procedures


Evaluation of Disclosure Controls and Procedures


Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (Exchange Act), as of June 30, 2012 .


Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of June 30, 2012 , our disclosure controls and procedures are effective. Disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.


Changes in Internal Control over Financial Reporting


There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


Limitations on Effectiveness of Controls and Procedures


In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.


76


---

Table of Contents





PART II – OTHER INFORMATION


Item 1.  Legal Proceedings


From time to time, we are party to various legal proceedings that have arisen in the normal course of conducting business. Although the outcome of these proceedings cannot be predicted with certainty, management does not currently expect any of the proceedings pending against us, individually or in the aggregate, to have a material effect on our business, financial condition and results of operations (see Note 18, Commitments and Contingencies).


Item 1A.  Risk Factors


There have been no material changes or additions to the risk factors previously disclosed under “Risk Factors” included in the Nationstar Mortgage LLC's Annual Report on Form 10-K filed with the SEC on March 15, 2012 other than the risk factors provided below:





The Dodd-Frank Act could increase our regulatory compliance burden and associated costs, limit our future capital raising strategies, and place restrictions on certain originations and servicing operations all of which could adversely affect our business, financial condition and results of operations.


On July 21, 2010, President Obama signed the Dodd-Frank Act into law. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry in the United States. The Dodd-Frank Act includes, among other things: (i) the creation of a Financial Stability Oversight Council to identify emerging systemic risks posed by financial firms, activities and practices, and to improve cooperation among federal agencies; (ii) the creation of a Bureau of Consumer Financial Protection (“CFPB”) authorized to promulgate and enforce consumer protection regulations relating to financial products; (iii) the establishment of strengthened capital and prudential standards for banks and bank holding companies; (iv) enhanced regulation of financial markets, including the derivatives and securitization markets; and (v) amendments to the Truth in Lending Act aimed at improving consumer protections with respect to mortgage originations, including originator compensation, minimum repayment standards and prepayment considerations. On July 21, 2011, the CFPB obtained enforcement authority pursuant to the Dodd-Frank Act and began official operations. On October 13, 2011, the CFPB issued guidelines governing how it supervises mortgage transactions, which involves sending examiners to banks and other institutions that service mortgages to assess whether consumers' interests are protected. On January 11, 2012, the CFPB issued guidelines governing examination procedures for bank and non-bank mortgage originators. The exact scope and applicability of many of these requirements to us are currently unknown as the regulations to implement the Dodd-Frank Act generally have not yet been finalized. Pursuant to these new guidelines, the CFPB has begun an examination of our business. These provisions of the Dodd-Frank Act and recent examination or future actions by the CFPB could increase our regulatory compliance burden and associated costs and place restrictions on certain originations and servicing operations, all of which could in turn adversely affect our business, financial condition and results of operations.


The enforcement consent orders by, agreements with, and settlements of, certain federal and state agencies against the largest mortgage servicers related to foreclosure practices and other inquiries regarding other non-bank mortgage servicers could impose additional compliance costs on our servicing business, which could materially and adversely affect our financial condition and results of operations.


On April 13, 2011, the federal agencies overseeing certain aspects of the mortgage market, the OCC, the Federal Reserve and the FDIC, entered into enforcement consent orders with 14 of the largest mortgage servicers in the United States regarding foreclosure practices. The enforcement consent orders require the servicers, among other things to: (i) promptly correct deficiencies in residential mortgage loan servicing and foreclosure practices; (ii) make significant modifications in practices for residential mortgage loan servicing and foreclosure processing, including communications with borrowers and limitations on dual-tracking, which occurs when servicers continue to pursue foreclosure during the loan modification process; (iii) ensure that foreclosures are not pursued once a mortgage has been approved for modification and establish a single point of contact for borrowers throughout the loan modification and foreclosure processes; and (iv) establish robust oversight and controls pertaining to their third party vendors, including outside legal counsel, that provide default management or foreclosure services. While these enforcement consent orders are considered not to be preemptive of the state actions, it is currently unclear how state actions and proceedings will be affected by the federal consents.


On February 9, 2012, federal and state agencies announced a $25 billion settlement with five large banks that resulted from investigations of foreclosure practices. As part of the settlement, the banks have agreed to comply with various servicing standards relating to foreclosure and bankruptcy proceedings, documentation of borrowers' account balances, chain of title, and


77


---

Table of Contents


evaluation of borrowers for loan modifications and short sales as well as servicing fees and the use of force-placed insurance. The settlement also provides for certain financial relief to homeowners.


Although we are not a party to the above enforcement consent orders and settlements, we could become subject to the terms of the consent orders and settlements if (i) we subservice loans for the mortgage servicers that are parties to the enforcement consent orders and settlements; (ii) the agencies begin to enforce the consent orders and settlements by looking downstream to our arrangement with certain mortgage servicers; (iii) the mortgage servicers for which we subservice loans request that we comply with certain aspects of the consent orders and settlements, or (iv) we otherwise find it prudent to comply with certain aspects of the consent orders and settlements. We have been made aware that certain other non-bank mortgage servicers will be meeting with the CFPB with respect to the applicability of the consent orders to their business. If such non-bank mortgage servicers are required to become a party to the consent orders, we can provide no assurances that we will not also be requested to become a party to the consent orders. In addition, the practices set forth in such consent orders and settlements may be adopted by the industry as a whole, forcing us to comply with them in order to follow standard industry practices, or may become required by our servicing agreements. In addition, some states have begun adopting laws which impose requirements similar to those contained in the consent orders on mortgage servicers, which will increase our costs and operational complexity and may subject us to significant penalties. While we have made and continue to make changes to our operating policies and procedures in light of the consent orders and settlements, further changes could be required and changes to our servicing practices will increase compliance costs for our servicing business, which could materially and adversely affect our financial condition or results of operations.


On September 1, 2011 and November 10, 2011, the New York State Department of Financial Services entered into agreements regarding mortgage servicing practices with seven financial institutions. The additional requirements provided for in these agreements will increase operational complexity and the cost of servicing loans in New York. Other servicers, including us, could be required to enter into similar agreements. In addition, other states may also require mortgage servicers to enter into similar agreements. These additional costs could also materially and adversely affect our financial condition and results of operations.


Legal proceedings, state or federal governmental examinations or enforcement actions and related costs could have a material adverse effect on our liquidity, financial position and results of operations.


We are routinely and currently involved in legal proceedings and regulatory examinations and investigations concerning matters that arise in the ordinary course of our business. These legal proceedings range from actions involving a single plaintiff to class action lawsuits with potentially tens of thousands of class members. An adverse result in governmental investigations or examinations or private lawsuits, including purported class action lawsuits, may adversely affect our financial results. In addition, a number of participants in our industry, including us, have been the subject of purported class action lawsuits and regulatory actions by state regulators, and other industry participants have been the subject of actions by state Attorneys General. Additionally, along with others in our industry, we are subject to repurchase claims and may continue to receive claims in the future. Although we believe we have meritorious legal and factual defenses to the lawsuits in which we are currently involved, the ultimate outcomes with respect to these matters remain uncertain. Litigation and other proceedings may require that we pay settlement costs, legal fees, damages, penalties or other charges, any or all of which could adversely affect our financial results. In particular, ongoing and other legal proceedings brought under state consumer protection statutes may result in a separate fine for each violation of the statute, which, particularly in the case of class action lawsuits, could result in damages substantially in excess of the amounts we earned from the underlying activities and that could have a material adverse effect on our liquidity, financial position and results of operations.


Governmental investigations, both state and federal, can be either formal or informal. The costs of responding to the investigations, as well as governmental examinations, can be substantial. In addition, government-mandated changes to servicing practices could lead to higher costs and additional administrative burdens, in particular regarding record retention and informational obligations.


We may experience serious financial difficulties as some mortgage servicers and originators have experienced, which could adversely affect our business, financial condition and results of operations.


Since late 2006, a number of mortgage servicers and originators of residential mortgage loans have experienced serious financial difficulties and, in some cases, have gone out of business. These difficulties have resulted, in part, from declining markets for their mortgage loans as well as from claims for repurchases of mortgage loans previously sold under provisions requiring repurchase in the event of early payment defaults or breaches of representations and warranties regarding loan quality and certain other loan characteristics. Higher delinquencies and defaults may contribute to these difficulties by reducing the value of mortgage loan portfolios and requiring originators to sell their portfolios at greater discounts to par. In


78


---

Table of Contents


addition, the cost of servicing an increasingly delinquent mortgage loan portfolio may rise without a corresponding increase in servicing compensation. Private-label mortgage loans are at greater risk of such delinquency than GSE and government agency-insured mortgage loans. Therefore, as we increase the percentage of private-label mortgages in our servicing portfolio as measured by UPB (which we have done pursuant to the Aurora Purchase Agreement), our servicing portfolio may become increasingly delinquent. The value of many residual interests retained by sellers of mortgage loans in the securitization market has also been declining. Overall originations volumes are down significantly in the current economic environment. According to Inside Mortgage Finance, total U.S. residential mortgage originations volume decreased from $3.0 trillion in 2006 to $1.5 trillion for the twelve months ended June 30, 2012. Any of the foregoing could adversely affect our business, financial condition and results of operations.


We service reverse mortgages, which subjects us to additional risks and could have a material adverse effect on our business, liquidity, financial condition and results of operations.


As of June 30, 2012, our reverse mortgage servicing portfolio had grown to approximately $27.2 billion in UPB. We expect to continue to grow our reverse mortgage servicing portfolio. The reverse mortgage business is subject to substantial risks, including market, credit, interest rate, liquidity, operational and legal risks. A reverse mortgage is a loan available to seniors aged 62 or older that allows homeowners to borrow money against the value of their home. No repayment of the mortgage is required until the borrower dies or the home is sold. A deterioration of the market for reverse mortgages may reduce the number of reverse mortgages we service, reduce the profitability of reverse mortgages currently serviced by us and adversely affect our ability to sell reverse mortgages in the market. Although foreclosures involving reverse mortgages generally occur less frequently than forward mortgages, loan defaults on reverse mortgages leading to foreclosures may occur if borrowers fail to meet maintenance obligations, such as payment of taxes or home insurance premiums. An increase in foreclosure rates may increase our cost of servicing. As a reverse mortgage servicer, we will also be responsible for funding any payments due to borrowers in a timely manner, remitting to investors interest accrued, and paying for interest shortfalls. Advances on reverse mortgages are typically greater than advances on forward residential mortgages. They are typically recovered upon weekly or monthly reimbursement or from sale in the market. In the event we receive requests for advances in excess of amounts we are able to fund, we may not be able to fund these advance requests, which could materially and adversely affect our liquidity. Additionally, we currently outsource the servicing of our reverse mortgages to several servicing counterparties. Finally, we are subject to negative headline risk in the event that loan defaults on reverse mortgages lead to foreclosures or even evictions of elderly homeowners. All of the above factors could have a material adverse effect on our business, liquidity, financial condition and results of operations and will increase as we grow our reverse mortgage servicing portfolio.


We principally service higher risk loans, which exposes us to a number of different risks.


A significant percentage of the mortgage loans we service are higher risk loans, meaning that the loans are to less creditworthy borrowers or for properties the value of which has decreased. These loans are more expensive to service because they require more frequent interaction with customers and greater monitoring and oversight. As a result, these loans tend to have higher delinquency and default rates, which can have a significant impact on our revenues, expenses and the valuation of our MSRs. Private-label mortgage loans are at greater risk of such delinquency than GSE and government agency-insured mortgage loans. Therefore, as we  increase the percentage of private-label mortgages in our servicing portfolio as measured by UPB (which we have done pursuant to the Aurora Purchase Agreement), our servicing portfolio may become increasingly delinquent. It may also be more difficult for us to recover advances we are required to make with respect to higher risk loans. In connection with the ongoing mortgage market reform and regulatory developments, servicers of higher risk loans may be subject to increased scrutiny by state and federal regulators or may experience higher compliance costs, which could result in higher servicing costs. We may not be able to pass along any incremental costs we incur to our servicing clients. All of the foregoing factors could therefore adversely affect our business, financial condition and results of operations.


We may be unable to realize the anticipated benefits of an acquisition pursuant to the ResCap Purchase Agreement.


We have entered into the ResCap Purchase Agreement to purchase the Mortgage Servicing Assets from ResCap. We are required to obtain the approval of the Bankruptcy Court in order to close on this agreement. Although we have been approved as the stalking-horse bidder by the Bankruptcy Court, other bidders may submit bids for the assets we are seeking to acquire. The auction for the Mortgage Servicing Assets is scheduled to commence on October 23, 2012. If any such bidders submit bids, we can provide no assurances that we will be the winning bidder and ultimately be permitted to purchase the assets we are seeking to acquire or that we will not be required to make changes, which changes could be material, to the terms of the ResCap Purchase Agreement in order to purchase the assets. If the Bankruptcy Court approves a competing bidder in the auction process, this agreement will be terminated and we will not close the transaction. The ResCap Purchase Agreement is also subject to a number of other closing conditions, the failure of any of which may prevent us from closing the transaction.


79


---

Table of Contents


Moreover, we are unable to control the timing of the Bankruptcy Court's approval process. We may experience significant delays in closing the ResCap Purchase Agreement as a result of this approval process or because of complications arising from any other closing condition. Failure to close on the ResCap Purchase Agreement or delays in closing on this agreement could adversely affect our business, financial condition and results of operations.


If this transaction does close, it will substantially increase the UPB of mortgage loans that we service to multiples of our current size. We may be unable to scale up to appropriately service these assets. Similarly, our potential acquisition pursuant to the ResCap Purchase Agreement would also alter the composition of the portfolio of mortgage loans that we service. We may be unable to adapt our current operations to appropriately service this altered portfolio. Furthermore, approximately 34% of the loans in the ResCap portfolio are loans that are not owned, insured or guaranteed by the GSEs. Therefore, as we increase the percentage of non-GSE loans in our servicing portfolio, our servicing portfolio may become increasingly delinquent. Failure to effectively service all or a portion of our portfolio following an acquisition pursuant to the ResCap Purchase Agreement could adversely affect our business, financial condition and results of operations.


In addition to MSRs and subservicing rights, if the transaction closes, we will also acquire an origination platform and certain other components of ResCap's systems and infrastructure. We may elect to operate this platform in addition to our current platform for a period of time or indefinitely. Whether by operating this platform separately or otherwise, the success of our potential acquisition depends on our ability to effectively integrate these acquired elements into our existing operations, which we may be unable to accomplish. Failure to effectively employ the platform and other components of systems and infrastructure acquired pursuant to the ResCap Purchase Agreement could adversely affect our business, financial condition and results of operations.


Federal, state and local laws and regulations could materially adversely affect our business, financial condition and results of operations.


Federal, state and local governments have recently proposed or enacted numerous laws, regulations and rules related to mortgage loans generally and foreclosure actions in particular. These laws, regulations and rules may result in delays in the foreclosure process, reduced payments by borrowers, modification of the original terms of mortgage loans, permanent forgiveness of debt and increased servicing advances. In some cases, local governments have ordered moratoriums on foreclosure activity, which prevent a servicer or trustee, as applicable, from exercising any remedies they might have in respect of liquidating a severely delinquent mortgage loan. Several courts also have taken unprecedented steps to slow the foreclosure process or prevent foreclosure altogether.


In addition, the Federal Housing Finance Agency (the “FHFA”) recently proposed changes to mortgage servicing compensation structures, including cutting servicing fees and channeling funds toward reserve accounts for delinquent loans. Due to the highly regulated nature of the residential mortgage industry, we are required to comply with a wide array of federal, state and local laws and regulations that regulate, among other things, the manner in which we conduct our servicing and originations business and the fees we may charge. These regulations directly impact our business and require constant compliance, monitoring and internal and external audits. A material failure to comply with any of these laws or regulations could subject us to lawsuits or governmental actions, which could materially adversely affect our business, financial condition and results of operations.


In addition, there continue to be changes in legislation and licensing in an effort to simplify the consumer mortgage experience, which require technology changes and additional implementation costs for loan originators. We expect legislative changes will continue in the foreseeable future, which may increase our operating expenses.


Furthermore, there continue to be changes in state law that are adverse to mortgage servicers that increase costs and operational complexity of our business and impose significant penalties for violation.


Any of these changes in the law could adversely affect our business, financial condition and results of operations.


Unlike competitors that are banks, we are subject to state licensing and operational requirements that result in substantial compliance costs, which are in addition to the requirements imposed by the federal government.


Because we are not a depository institution, we do not benefit from a federal exemption to state mortgage banking, loan servicing or debt collection licensing and regulatory requirements. We must comply with state licensing requirements and varying compliance requirements in all fifty states and the District of Columbia, and we are sensitive to regulatory changes that may increase our costs, impose complex mortgage servicing requirements that impact our efficiency, as well as increase burdens due to stricter licensing laws, disclosure laws or increased fees or that may impose conditions to licensing that we or


80


---

Table of Contents


our personnel are unable to meet. In addition, we are subject to periodic examinations by state and federal regulators, which can result in refunds to borrowers of certain fees earned by us, and we may be required to pay substantial penalties imposed by state or federal regulators due to compliance errors. Future state and federal legislation and changes in existing regulation may significantly increase our compliance costs or reduce the amount of ancillary fees, including late fees, that we may charge to borrowers. This could make our business cost-prohibitive in the affected state or states and could materially affect our business.


We may be required to indemnify or repurchase loans we originated, or will originate, if our loans fail to meet certain criteria or characteristics or under other circumstances.


The indentures governing our securitized pools of loans and our contracts with purchasers of our whole loans contain provisions that require us to indemnify or repurchase the related loans under certain circumstances. While our contracts vary, they contain provisions that require us to repurchase loans if:


|  |                                                                                                                                                                           
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | our representations and warranties concerning loan quality and loan circumstances are inaccurate, including representations concerning the licensing of a mortgage broker;

|  |                                                                                     
|- | ------------------------------------------------------------------------------------
|• | we fail to secure adequate mortgage insurance within a certain period after closing;

|  |                                                  
|- | -------------------------------------------------
|• | a mortgage insurance provider denies coverage; or

|  |                                                                                                                                          
|- | -----------------------------------------------------------------------------------------------------------------------------------------
|• | we fail to comply, at the individual loan level or otherwise, with regulatory requirements in the current dynamic regulatory environment.

We believe that, as a result of the current market environment, many purchasers of residential mortgage loans are particularly aware of the conditions under which originators must indemnify or repurchase loans and would benefit from enforcing any repurchase remedies they may have. Along with others in our industry, we are subject to repurchase claims and may continue to receive claims in the future. See “-Legal proceedings, state or federal government examinations or enforcement actions and related costs could have a material adverse effect on our liquidity, financial position and results of operations.” We believe that our exposure to repurchases under our representations and warranties includes the current unpaid balance of all loans we have sold. In the years ended December 31, 2008, 2009, 2010 and 2011 and the six months ended June 30, 2012, we sold an aggregate of $10.0 billion of loans. To recognize the potential loan repurchase or indemnification losses, we have recorded a reserve of $12.4 million as of June 30, 2012. Because of the increase in our loan originations since 2008, we expect that repurchase requests are likely to increase. Should home values continue to decrease, our realized loan losses from loan repurchases and indemnifications may increase as well. As such, our reserve for repurchases may increase beyond our current expectations. If we are required to indemnify or repurchase loans that we originate and sell or securitize that result in losses that exceed our reserve, this could adversely affect our business, financial condition and results of operations.


Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds





The effective date of our registration statement filed on Form S-1 under the Securities Act of 1933, as amended (File No. 333-174246) relating to our initial public offering of common stock was March 7, 2012.  A total of 19,166,667 shares of common stock were registered and sold, including shares of common stock sold pursuant to the underwriters' overallotment option.


The sale of 19,166,667 shares of common stock was completed on March 13, 2012, including shares of common stock sold pursuant to the underwriters' overallotment option.  Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC and Wells Fargo Securities, LLC acted as representatives of the several underwriters.  The aggregate offering price for the shares of common stock was $268.3 million, including exercise of the underwriters' overallotment option.  The aggregate underwriting discounts were $17.4 million and we incurred approximately $3.8 million of expenses in connection with the initial public offering.  The proceeds to us, net of total expenses, were approximately $247.1 million, including exercise of the underwriters' overallotment option.  As of June 30, 2012, we had used the net proceeds of the initial public offering, together with cash on hand for working capital and other general corporate purposes, including servicing acquisitions.


None of the underwriting discounts or other expenses incurred in connection with the initial public offering, including the exercise of the underwriters' overallotment option, were paid, directly or indirectly, to directors, officers, general partners of us or their associates, to persons owning 10% or more of any class of equity securities of us or our affiliates.


81


---

Table of Contents


None of the use of proceeds in connection with the initial public offering was a direct or indirect payment to directors, officers, general partners of us or their associates, to persons owning 10% or more of any class of equity securities of us or to our affiliates.


Purchase of Equity Securities By the Issuer and Affiliated Purchasers


Period(a)                                  Total Number of Shares (or Units) Purchased1(b)                                  Average Price Paid per Share (or Unit)(b)                                  Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs(d)                       Maximum Number (or Appropriate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or ProgramApril 1, 2012 - April 30, 2012————May 1, 2012 - May 31, 2012————June 1, 2012 - June 30, 2012212,156 Shares$21.52——Total212,156 Shares$21.52——





1 The 212,156 shares of common stock of Nationstar Mortgage Holdings Inc. (the "Issuer") reported herein represent the transfer of these shares to Nationstar Mortgage LLC in an amount equal to the amount of tax withheld by Nationstar Mortgage LLC in satisfaction of the withholding obligations of certain employees in connection with the vesting of restricted shares on June 30, 2012. This transfer was not made pursuant to publicly announced plans or programs. As of the date of this report, Nationstar has no publicly announced plans or programs to repurchase Nationstar Mortgage Holdings Inc.'s common stock.





Item 3. Defaults Upon Senior Securities


None.





Item 4.  Mine Safety Disclosures


None.


Item 5.  Other Information


None.


82


---

Table of Contents





Item 6.  Exhibits, Financial Statement Schedules





Exhibit No.DescriptionFormFile No.ExhibitFiling DateFiled or Furnished Herewith1.1Purchase Agreement, dated as of April 20, 2012, by and among Nationstar Mortgage LLC, Nationstar Capital Corporation, the guarantors party thereto, and Credit Suisse Securities (USA) LLC, Barclays Capital Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., RBS Securities Inc. and Wells Fargo Securities, LLC, as representatives of the several initial purchasers8-K001-354491.1April 25, 20122.1Amended and Restated Asset Purchase Agreement, dated as of June 28, 2012 between Nationstar Mortgage LLC and Residential Capital, LLC, Residential Funding Company, LLC, GMAC Mortgage, LLC, Executive Trustee Services LLC, ETS of Washington, Inc., EPRE LLC, EPRE LLC, GMACM Borrower LLC and RFC Borrower LLC8-K001-354492.1July 5, 20124.1Indenture, dated as of April 25, 2012, by and among Nationstar Mortgage LLC, Nationstar Capital Corporation, the guarantors thereto and Wells Fargo Bank, National Association, as trustee8-K001-354494.1April 25, 20124.2*Indenture, dated as of June 12, 2012 between Nationstar Agency Advance Funding Trust 2012-AW and Wells Fargo Bank, National Association, as indenture trusteeX4.3*Indenture, dated as of June 26, 2012 between Nationstar Advance Funding Trust 2012-W and Wells Fargo Bank, National Association, as indenture trusteeX4.4*Indenture, dated as of June 26, 2012, between Nationstar Advance Funding Trust 2012-R and Wells Fargo Bank, National Association, as indenture trusteeX4.5*Indenture, dated as of June 26, 2012 between Nationstar Advance Funding Trust 2012-C and Wells Fargo Bank, National Association, as indenture trusteeX10.1Registration Rights Agreement, dated as of April 25, 2012, among Nationstar Mortgage LLC, Nationstar Capital Corporation, the guarantors party thereto, and Credit Suisse Securities (USA) LLC, Barclays Capital Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., RBS Securities Inc. and Wells Fargo Securities, LLC, as representatives of the several initial purchasers8-K001-3544910.1April 25, 2012


83


---

Table of Contents


10.2Asset Purchase Agreement, dated as of May 13, 2012, between Nationstar Mortgage LLC and Residential Capital, LLC, Residential Funding Company, LLC, GMAC Mortgage, LLC, Executive Trustee Services, LLC, ETS of Washington, Inc., EPRE LLC and the additional Sellers identified on Schedule A thereto8-K001-3544910.1May 16, 201210.3Current Excess Servicing Spread Acquisition Agreement for FNMA Mortgage Loans, dated as of May 13, 2012, between Nationstar Mortgage LLC and NIC MSR V LLC8-K001-3544910.2May 16, 201210.4Future Spread Agreement for FNMA Mortgage Loans, dated May 13, 2012, between Nationstar Mortgage LLC and NIC MSR V LLC8-K001-3544910.3May 16, 201210.5Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, dated as of May 13, 2012, between Nationstar Mortgage LLC and NIC MSR IV LLC8-K001-3544910.4May 16, 201210.6Future Spread Agreement for FHLMC Mortgage Loans, dated May 13, 2012, between Nationstar Mortgage LLC and NIC MSR IV LLC8-K001-3544910.5May 16, 201210.7Current Excess Servicing Spread Acquisition Agreement for Non-Agency Mortgage Loans, dated as of May 13, 2012, between Nationstar Mortgage LLC and NIC MSR VI LLC8-K001-3544910.6May 16, 201210.8Future Spread Agreement for Non-Agency Mortgage Loans, dated May 13, 2012, between Nationstar Mortgage LLC and NIC MSR VI LLC8-K001-3544910.7May 16, 201210.9Current Excess Servicing Spread Acquisition Agreement for GNMA Mortgage Loans, dated as of May 13, 2012, between Nationstar Mortgage LLC and NIC MSR VII LLC8-K001-3544910.8May 16, 201210.10Future Spread Agreement for GNMA Mortgage Loans, dated May 13, 2012, between Nationstar Mortgage LLC and NIC MSR VII LLC8-K001-3544910.9May 16, 201210.11First Letter Agreement, dated as of June 1, 2012 among Aurora Bank FSB, Aurora Loan Services LLC and Nationstar Mortgage LLC8-K001-3544910.1June 7, 201210.12Second Letter Agreement, dated as of June 1, 2012 among Aurora Bank FSB, Aurora Loan Services LLC and Nationstar Mortgage LLC8-K001-3544910.2June 7, 201210.13Amended and Restated Asset Purchase Agreement, dated as of June 12, 2012, among Aurora Bank FSB, Aurora Loan Services LLC and Nationstar Mortgage LLC8-K001-3544910.1June 14, 201210.14Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FNMA Mortgage Loans, dated as of June 28, 2012, between Nationstar Mortgage LLC and NIC MSR V LLC8-K001-3544910.1July 5, 2012


84


---

Table of Contents


10.15Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, dated as of June 28, 2012, between Nationstar Mortgage LLC and NIC MSR IV LLC8-K001-3544910.2July 5, 201210.16Amended and Restated Current Excess Servicing Spread Acquisition Agreement for Non-Agency Mortgage Loans, dated as of June 28, 2012, between Nationstar Mortgage LLC and NIC MSR VI LLC8-K001-3544910.3July 5, 201210.17Amended and Restated Current Excess Servicing Spread Acquisition Agreement for GNMA Mortgage Loans, dated as of June 28, 2012, between Nationstar Mortgage LLC and NIC MSR VII LLC8-K001-3544910.4July 5, 201210.18Registration Rights Agreement, dated as of July 24, 2012, among Nationstar Mortgage LLC, Nationstar Capital Corporation, the guarantors party thereto, and Credit Suisse Securities (USA) LLC, RBS Securities Inc. and Wells Fargo Securities, LLC, as representatives of the several initial purchasers8-K001-3544910.1July 24, 201210.19Receivables Purchase Agreement, dated as of June 12, 2012, among Nationstar Agency Advance Funding Trust 2012-AW, Nationstar Agency Advance Funding 2012-AW, LLC and Nationstar Mortgage LLCX10.20Receivables Purchase Agreement, dated as of June 26, 2012, among Nationstar Advance Funding Trust 2012-C, Nationstar Advance Funding 2012-C, LLC and Nationstar Mortgage LLCX10.21Receivables Purchase Agreement, dated as of June 26, 2012, among Nationstar Advance Funding Trust 2012-R, Nationstar Advance Funding 2012-R, LLC and Nationstar Mortgage LLCX10.22Receivables Purchase Agreement, dated as of June 26, 2012, among Nationstar Advance Funding Trust 2012-W, Nationstar Advance Funding 2012-W, LLC and Nationstar Mortgage LLCX31.1Certification by Chief Executive Officer pursuant to Rules 13a 14(a) and 15d 14(a) under the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002X31.2Certification by Chief Financial Officer pursuant to Rules 13a 14(a) and 15d 14(a) under the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002X32.1Certification by Chief Executive Officer pursuant to 18 USC. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002X32.2Certification by Chief Financial Officer pursuant to 18 USC. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002X


85


---

Table of Contents


*Certain portions of this exhibit have been omitted and have been filed separately with the SEC pursuant to a request for confidential treatment under Rule 24b-2 as promulgated with the Securities Exchange Act of 1934, as amended.








86


---

Table of Contents


SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





NATIONSTAR MORTGAGE HOLDINGS INC.August 14, 2012/s/ JayBrayDateJay BrayChief Executive OfficerAugust 14, 2012/s/ David C. HiseyDateDavid C.HiseyChief Financial Officer





87


---

Table of Contents


EXHIBIT INDEX





Exhibit No.DescriptionFormFile No.ExhibitFiling DateFiled or Furnished Herewith1.1Purchase Agreement, dated as of April 20, 2012, by and among Nationstar Mortgage LLC, Nationstar Capital Corporation, the guarantors party thereto, and Credit Suisse Securities (USA) LLC, Barclays Capital Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., RBS Securities Inc. and Wells Fargo Securities, LLC, as representatives of the several initial purchasers8-K001-354491.1April 25, 20122.1Amended and Restated Asset Purchase Agreement, dated as of June 28, 2012 between Nationstar Mortgage LLC and Residential Capital, LLC, Residential Funding Company, LLC, GMAC Mortgage, LLC, Executive Trustee Services LLC, ETS of Washington, Inc., EPRE LLC, EPRE LLC, GMACM Borrower LLC and RFC Borrower LLC8-K001-354492.1July 5, 20124.1Indenture, dated as of April 25, 2012, by and among Nationstar Mortgage LLC, Nationstar Capital Corporation, the guarantors thereto and Wells Fargo Bank, National Association, as trustee8-K001-354494.1April 25, 20124.2*Indenture, dated as of June 12, 2012 between Nationstar Agency Advance Funding Trust 2012-AW and Wells Fargo Bank, National Association, as indenture trusteeX4.3*Indenture, dated as of June 26, 2012 between Nationstar Advance Funding Trust 2012-W and Wells Fargo Bank, National Association, as indenture trusteeX4.4*Indenture, dated as of June 26, 2012, between Nationstar Advance Funding Trust 2012-R and Wells Fargo Bank, National Association, as indenture trusteeX4.5*Indenture, dated as of June 26, 2012 between Nationstar Advance Funding Trust 2012-C and Wells Fargo Bank, National Association, as indenture trusteeX10.1Registration Rights Agreement, dated as of April 25, 2012, among Nationstar Mortgage LLC, Nationstar Capital Corporation, the guarantors party thereto, and Credit Suisse Securities (USA) LLC, Barclays Capital Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., RBS Securities Inc. and Wells Fargo Securities, LLC, as representatives of the several initial purchasers8-K001-3544910.1April 25, 2012


88


---

Table of Contents


10.2Asset Purchase Agreement, dated as of May 13, 2012, between Nationstar Mortgage LLC and Residential Capital, LLC, Residential Funding Company, LLC, GMAC Mortgage, LLC, Executive Trustee Services, LLC, ETS of Washington, Inc., EPRE LLC and the additional Sellers identified on Schedule A thereto8-K001-3544910.1May 16, 201210.3Current Excess Servicing Spread Acquisition Agreement for FNMA Mortgage Loans, dated as of May 13, 2012, between Nationstar Mortgage LLC and NIC MSR V LLC8-K001-3544910.2May 16, 201210.4Future Spread Agreement for FNMA Mortgage Loans, dated May 13, 2012, between Nationstar Mortgage LLC and NIC MSR V LLC8-K001-3544910.3May 16, 201210.5Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, dated as of May 13, 2012, between Nationstar Mortgage LLC and NIC MSR IV LLC8-K001-3544910.4May 16, 201210.6Future Spread Agreement for FHLMC Mortgage Loans, dated May 13, 2012, between Nationstar Mortgage LLC and NIC MSR IV LLC8-K001-3544910.5May 16, 201210.7Current Excess Servicing Spread Acquisition Agreement for Non-Agency Mortgage Loans, dated as of May 13, 2012, between Nationstar Mortgage LLC and NIC MSR VI LLC8-K001-3544910.6May 16, 201210.8Future Spread Agreement for Non-Agency Mortgage Loans, dated May 13, 2012, between Nationstar Mortgage LLC and NIC MSR VI LLC8-K001-3544910.7May 16, 201210.9Current Excess Servicing Spread Acquisition Agreement for GNMA Mortgage Loans, dated as of May 13, 2012, between Nationstar Mortgage LLC and NIC MSR VII LLC8-K001-3544910.8May 16, 201210.1Future Spread Agreement for GNMA Mortgage Loans, dated May 13, 2012, between Nationstar Mortgage LLC and NIC MSR VII LLC8-K001-3544910.9May 16, 201210.11First Letter Agreement, dated as of June 1, 2012 among Aurora Bank FSB, Aurora Loan Services LLC and Nationstar Mortgage LLC8-K001-3544910.1June 7, 201210.12Second Letter Agreement, dated as of June 1, 2012 among Aurora Bank FSB, Aurora Loan Services LLC and Nationstar Mortgage LLC8-K001-3544910.2June 7, 201210.13Amended and Restated Asset Purchase Agreement, dated as of June 12, 2012, among Aurora Bank FSB, Aurora Loan Services LLC and Nationstar Mortgage LLC8-K001-3544910.1June 14, 201210.14Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FNMA Mortgage Loans, dated as of June 28, 2012, between Nationstar Mortgage LLC and NIC MSR V LLC8-K001-3544910.1July 5, 2012


89


---

Table of Contents


10.15Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, dated as of June 28, 2012, between Nationstar Mortgage LLC and NIC MSR IV LLC8-K001-3544910.2July 5, 201210.15Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, dated as of June 28, 2012, between Nationstar Mortgage LLC and NIC MSR IV LLC8-K001-3544910.2July 5, 201210.16Amended and Restated Current Excess Servicing Spread Acquisition Agreement for Non-Agency Mortgage Loans, dated as of June 28, 2012, between Nationstar Mortgage LLC and NIC MSR VI LLC8-K001-3544910.3July 5, 201210.17Amended and Restated Current Excess Servicing Spread Acquisition Agreement for GNMA Mortgage Loans, dated as of June 28, 2012, between Nationstar Mortgage LLC and NIC MSR VII LLC8-K001-3544910.4July 5, 201210.18Registration Rights Agreement, dated as of July 24, 2012, among Nationstar Mortgage LLC, Nationstar Capital Corporation, the guarantors party thereto, and Credit Suisse Securities (USA) LLC, RBS Securities Inc. and Wells Fargo Securities, LLC, as representatives of the several initial purchasers8-K001-3544910.1July 24, 201210.19Receivables Purchase Agreement, dated as of June 12, 2012, among Nationstar Agency Advance Funding Trust 2012-AW, Nationstar Agency Advance Funding 2012-AW, LLC and Nationstar Mortgage LLCX10.20Receivables Purchase Agreement, dated as of June 26, 2012, among Nationstar Advance Funding Trust 2012-C, Nationstar Advance Funding 2012-C, LLC and Nationstar Mortgage LLCX10.21Receivables Purchase Agreement, dated as of June 26, 2012, among Nationstar Advance Funding Trust 2012-R, Nationstar Advance Funding 2012-R, LLC and Nationstar Mortgage LLCX10.22Receivables Purchase Agreement, dated as of June 26, 2012, among Nationstar Advance Funding Trust 2012-W, Nationstar Advance Funding 2012-W, LLC and Nationstar Mortgage LLCX31.1Certification by Chief Executive Officer pursuant to Rules 13a 14(a) and 15d 14(a) under the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002X


90


---

Table of Contents


31.2Certification by Chief Financial Officer pursuant to Rules 13a 14(a) and 15d 14(a) under the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002X32.1Certification by Chief Executive Officer pursuant to 18 USC. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002X32.2Certification by Chief Financial Officer pursuant to 18 USC. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002X


*Certain portions of this exhibit have been omitted and have been filed separately with the SEC pursuant to a request for confidential treatment under Rule 24b-2 as promulgated with the Securities Exchange Act of 1934, as amended.








91