We may pursue other types of investments as the market evolves, such as:
RESIDENTIAL MORTGAGE LOANS:
We believe there are pockets of opportunity for us to invest in portfolios of non-performing and other residential mortgage loans, including performing, re-performing and reverse mortgage loans.
In certain of these investments, we would expect to acquire the loans at a discount to their face amount, and we (either independently or with a servicing co-investor) would seek to resolve the loans at a substantially higher valuation. We would seek to improve performance by transferring the servicing to a reputable servicer, which we believe could increase unlevered yields. In addition, we may seek to employ leverage to increase returns, either through traditional financing lines or, if available, securitization options.
While a number of portfolios of non-performing residential loans have been sold since the financial crisis, we believe the volume of such sales may increase for a number of reasons:
- As bank balance sheets become healthier, many large banks will have more financial flexibility to recognize losses on non-performing assets.
- The U.S. Department of Housing and Urban Development (“HUD”), which acquires non-performing loans from Ginnie Mae securitizations, has been increasing the number of portfolio sales.
- Residential loan servicers—which have traditionally resorted to loan foreclosure procedures and subsequent property sales to maximize recoveries on non-performing loans—may increase sales of defaulted loans.
CONSUMER LOAN PORTFOLIO:
On April 1, 2013 we acquired from HSBC Finance Corporation (“HSBC”) a 30% equity interest in a consumer loan portfolio with an unpaid principal balance (“UPB”) of $4.2 billion as of December 31, 2012. We invested alongside Springleaf Finance, Inc. (“Springleaf”), a Fortress affiliate who will also be responsible for servicing the loans, and another third party (collectively the “co-investors”).
The total purchase price for the portfolio was approximately $3.0 billion, inclusive of closing costs, fees and adjustments related to estimated net cash flows received by HSBC between December 31, 2012 and March 31, 2013. The investment was initially financed using $2.2 billion of asset backed notes and the balance of the purchase price was funded with approximately $800 million of equity. Newcastle’s initial equity investment was approximately $250 million.
In September 2013, New Residential and the other co-investors issued and sold an additional $372 million of asset-backed notes for 96% of par. These notes were subordinate to the $2.2 billion of debt issued in April 2013, had a maturity of December 2024 and paid a coupon of 4%.
In October 2014, New Residential and its co-investors refinanced the outstanding asset-backed notes with an asset-backed securitization for approximately $2.6 billion. Through a combination of distributions and refinancing proceeds, our life-to-date cash flows exceeded our basis such that, as of March 31, 2015, the carrying value of our investment in consumer loans had been reduced to zero. We continue to own an interest in this entity, from which we expect to receive significant future cash flows.