UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q
 
x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

or

o     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to _____________
 
Commission File Number: 001-35777
 
New Residential Investment Corp.
(Exact name of registrant as specified in its charter)
 
Delaware
 
45-3449660
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
1345 Avenue of the Americas, New York, NY
 
10105
(Address of principal executive offices)
 
(Zip Code)
 
(212) 798-3150
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o  Accelerated filer o  Non-accelerated filer x  (Do not check if a smaller reporting company)  Smaller reporting company o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.

Common stock, $0.01 par value per share: 253,186,279 shares outstanding as of November 8, 2013.
 


 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks and uncertainties. Such forward-looking statements relate to, among other things, the operating performance of our investments, the stability of our earnings, and our financing needs. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,” “believe,” “could,” “project,” “predict,” “continue” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Our ability to predict results or the actual outcome of future plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from forecasted results. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:
 
 
reductions in cash flows received from our investments;
 
 
our ability to take advantage of investment opportunities at attractive risk-adjusted prices;
 
 
our ability to take advantage of investment opportunities in excess mortgage servicing rights (“Excess MSRs”);
 
 
our ability to deploy capital accretively;
 
 
our counterparty concentration and default risks in Nationstar Mortgage LLC (“Nationstar”), Springleaf Finance, Inc. (“Springleaf”) and other third-parties;
 
 
a lack of liquidity surrounding our investments which could impede our ability to vary our portfolio in an appropriate manner;
 
 
the impact that risks associated with subprime mortgage loans and consumer loans, as well as deficiencies in servicing and foreclosure practices, may have on the value of our residential mortgage-backed securities (“RMBS”) and consumer loan portfolios;
 
 
the risks that default and recovery rates on our real estate securities, residential mortgage loans and consumer loans deteriorate compared to our underwriting estimates;
 
 
changes in prepayment rates on the loans underlying certain of our assets, including, but not limited to, our Excess MSRs;
 
 
the risk that projected recapture rates on the portfolios underlying our Excess MSRs are not achieved;
 
 
the relationship between yields on assets which are paid off and yields on assets in which such monies can be reinvested;
 
 
the relative spreads between the yield on the assets we invest in and the cost of financing;
 
 
changes in economic conditions generally and the real estate and bond markets specifically;
 
 
adverse changes in the financing markets we access affecting our ability to finance our investments;
 
 
the quality and size of the investment pipeline and the rate at which we can invest our cash;
 
 
 

 
 
 
changing risk assessments by lenders that potentially lead to increased margin calls, not extending our repurchase agreements or other financings in accordance with their current terms or entering into new financings with us;
 
 
changes in interest rates and/or credit spreads, as well as the success of any hedging strategy we may undertake in relation to such changes;
 
 
impairments in the value of the collateral underlying our investments and the relation of any such impairments to our judgments as to whether changes in the market value of our securities or loans are temporary or not and whether circumstances bearing on the value of such assets warrant changes in carrying values;
 
 
the availability and cost of capital for future investments;
 
 
competition within the finance and real estate industries;
 
 
the legislative/regulatory environment, including, but not limited to, the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), U.S. government programs intended to stabilize the economy, the federal conservatorship of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and legislation that permits modification of the terms of loans;
 
 
our ability to maintain our qualification as a real estate investment trust (“REIT”) for U.S. federal income tax purposes and the potentially onerous consequences that any failure to maintain such qualification would have on our business;
 
 
our ability to maintain our exemption from registration under the Investment Company Act of 1940 (the “1940 Act”) and the fact that maintaining such exemption imposes limits on our operations; and
 
 
other risks detailed from time to time below, particularly under the heading “Risk Factors,” and in our other reports filed with or furnished to the Securities and Exchange Commission (the “SEC”).

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. The factors noted above could cause our actual results to differ significantly from those contained in any forward-looking statement. New risks and uncertainties arise from time to time, and it is impossible for us to preduct those events or how they may affect us.

We caution that you should not place undue reliance on any of our forward-looking statements, which reflect our management’s views only as of the date of this report. Except as required by law, we are under no obligation (and expressly disclaim any obligation) to update or alter any forward-looking statement, whether written or oral, that we may make from time to time, whether as a result of new information, future events or otherwise.
 
 

 

SPECIAL NOTE REGARDING EXHIBITS

In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
 
 
should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;

 
have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;

 
may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
 
 
were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this Quarterly Report on Form 10-Q and the Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.

The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this report not misleading.
 
 
 

 

NEW RESIDENTIAL INVESTMENT CORP.
FORM 10-Q

INDEX
 
   
PAGE
     
 
1
     
 
1
     
 
1
     
 
2
     
 
3
     
 
4
     
 
5
     
 
7
     
 
36
     
 
62
     
 
64
     
 
65
     
 
65
     
 
65
     
 
93
     
 
93
     
 
93
     
 
93
     
 
95
     
 
99
 
 
 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)

CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
             
   
September 30, 2013
(Unaudited)
   
 
December 31, 2012
 
Assets
           
Real estate securities, available-for-sale
  $ 1,861,200     $ 289,756  
Investments in excess mortgage servicing rights, at fair value
    307,568       245,036  
Investments in excess mortgage servicing rights, equity method investees, at fair value
    358,032        
Investments in consumer loans, equity method investees
    192,498        
Residential mortgage loans, held-for-investment
    33,060        
Cash and cash equivalents
    172,203        
Other assets
    7,283       84  
    $ 2,931,844     $ 534,876  
                 
Liabilities and Equity
               
                 
Liabilities
               
Repurchase agreements
  $ 1,467,934     $ 150,922  
Trades payable
    149,181        
Due to affiliates
    7,109       5,136  
Dividends payable
    44,308        
Accrued expenses and other liabilities
    2,276       462  
      1,670,808       156,520  
                 
Commitments and contingencies
               
                 
Stockholders’ Equity
               
Common Stock, $0.01 par value, 2,000,000,000 shares authorized, 253,186,279 issued and outstanding at September 30, 2013
    2,532        
Additional paid-in capital
    1,157,040       362,830  
Retained earnings
    85,776        
Accumulated other comprehensive income
    15,688       15,526  
    Total Stockholders’ Equity     1,261,036       378,356  
    $ 2,931,844     $ 534,876  
 
See notes to consolidated financial statements.
 
1

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except per share data)
             
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Interest income
  $ 21,885     $ 12,295     $ 61,075     $ 18,811  
Interest expense
    3,443       298       6,993       298  
Net Interest Income
    18,442       11,997       54,082       18,513  
                                 
Impairment
                               
Other-than-temporary impairment (“OTTI”) on securities
                3,756        
Net interest income after impairment
    18,442       11,997       50,326       18,513  
                                 
Other Income
                               
Change in fair value of investments in excess mortgage servicing rights
    208       1,774       43,899       6,513  
Change in fair value of investments in excess mortgage servicing rights, equity method investees
    20,645             41,741        
Earnings from investments in consumer loans, equity method investees
    24,129             60,293        
Gain on settlement of securities
    11,213             11,271        
      56,195       1,774       157,204       6,513  
                                 
Operating Expenses
                               
General and administrative expenses
    2,538       686       5,859       2,363  
Management fee allocated by Newcastle
          1,317       4,134       1,733  
Management fee to affiliate
    4,484             6,747        
Incentive compensation to affiliate
    4,470             5,348        
      11,492       2,003       22,088       4,096  
                                 
Net Income
  $ 63,145     $ 11,768     $ 185,442     $ 20,930  
                                 
                                 
Income Per Share of Common Stock
                               
Basic
  $ 0.25     $ 0.05     $ 0.73     $ 0.08  
Diluted
  $ 0.24     $ 0.05     $ 0.72     $ 0.08  
                                 
                                 
Weighted Average Number of Shares of Common Stock Outstanding
                               
Basic
    253,072,788       253,025,645       253,041,532       253,025,645  
Diluted
    259,889,285       253,025,645       256,549,947       253,025,645  
                                 
                                 
Dividends Declared per Share of Common Stock
  $ 0.175     $     $ 0.245     $  
 
See notes to consolidated financial statements.
 
 
2

 
 
 NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(dollars in thousands)
   
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2013
   
2012
   
2013
   
2012
 
Net income
  $ 63,145     $ 11,768     $ 185,442     $ 20,930  
Other comprehensive income:
                               
Net unrealized gain (loss) on securities
    7,687       7,313       7,677       7,313  
Reclassification of net realized (gain) loss on securities into earnings
    (11,213 )           (7,515 )      
Other comprehensive income (loss)
    (3,526 )     7,313       162       7,313  
Comprehensive income
  $ 59,619     $ 19,081     $ 185,604     $ 28,243  
 
See notes to consolidated financial statements.
 
 
3

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013
(dollars in thousands)
   
 
 
Common Stock
                         
   
 
Shares
   
Amount
   
Additional
 Paid-in Capital
   
Retained Earnings
   
Accumulated Other Comprehensive Income
   
Total Stockholders’ Equity
 
Equity - December 31, 2012
        $     $ 362,830     $     $ 15,526     $ 378,356  
Dividends declared
                      (62,020 )           (62,020 )
Capital contributions
                893,466                   893,466  
Contributions in-kind
                1,093,684                   1,093,684  
Capital distributions
                (1,228,054 )                 (1,228,054 )
Issuance of common stock
    253,025,645       2,530       (2,530 )                  
Option exercise
    160,634       2       (2 )                  
Net income
                37,646       147,796             185,442  
Other comprehensive income
                            162       162  
Equity - September 30, 2013
    253,186,279     $ 2,532     $ 1,157,040     $ 85,776     $ 15,688     $ 1,261,036  
 
See notes to consolidated financial statements.
 
 
4

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
   
 
 
 
Nine Months Ended September 30,
 
   
 
2013
   
 
2012
 
Cash Flows From Operating Activities
           
Net income
 
$
185,442
   
$
20,930
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Change in fair value of investments in excess mortgage servicing rights
   
(43,899
)
   
(6,513
)
Change in fair value of investments in excess mortgage servicing rights, equity method investees
   
(41,741
)
   
 
Distributions of earnings from excess mortgage servicing rights, equity method investees
   
23,659
     
 
Earnings from consumer loan equity method investees
   
(60,293
)
   
 
Distributions of earnings from consumer loan equity method investees
   
60,293
     
 
Accretion of discount and other amortization
   
(8,008
)
   
(2,030
)
(Gain) / loss on settlement of investments (net)
   
(11,271
)
   
 
Other-than-temporary impairment (“OTTI”)
   
3,756
     
 
Changes in:
               
Other assets
   
(7,145
)
   
(58
)
Due to affiliates
   
1,973
     
1,647
 
Accrued expenses and other liabilities
   
1,752
     
1,406
 
Reduction of liability deemed as capital contribution by Newcastle
   
11,515
     
 
Other operating cash flows:
               
Cash proceeds from investments, in excess of interest income
   
41,435
     
19,021
 
Net cash proceeds deemed as capital distributions to Newcastle
   
(52,888
)
   
(34,403
)
Net cash provided by (used in) operating activities
   
104,580
     
 
                 
Cash Flows From Investing Activities
               
Purchase of Agency ARM RMBS
   
(292,980
)
   
 
Purchase of Non-Agency RMBS
   
(202,484
)
   
 
Acquisition of investments in excess mortgage servicing rights
   
(46,421
)
   
 
Acquisition of investments in excess mortgage servicing rights, equity method investees
   
(226,837
)
   
 
Principal repayments from Agency ARM RMBS
   
219,187
     
 
Principal repayments from Non-Agency RMBS
   
50,878
     
 
Proceeds from sale of investments
   
123,130
     
 
Return of investments in excess mortgage servicing rights
   
15,132
     
 
Return of investments in excess mortgage servicing rights, equity method investees
   
4,018
     
 
Return of investments in consumer loan equity method investees
   
52,923
     
 
Principal repayments from residential mortgage loans
   
2,400
     
 
Net cash provided by (used in) investing activities
   
(301,054
)
   
 
 
Continued on next page
 
 
5

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
   
 
 
 
Nine Months Ended September 30,
 
   
 
2013
   
 
2012
 
Cash Flows From Financing Activities
           
Repayments of repurchase agreements
   
(1,283,567
)
   
 
Margin deposits under repurchase agreements
   
(210,507
)
   
 
Payment of deferred financing fees
   
(166
)
   
 
Common stock dividends paid
   
(17,712
)
   
 
Borrowings under repurchase agreements
   
1,425,413
     
 
Return of margin deposits under repurchase agreements
   
210,158
     
 
Capital contributions
   
245,058
     
 
Net cash provided by (used in) financing activities
   
368,677
     
 
                 
Net Increase (Decrease) in Cash and Cash Equivalents
   
172,203
     
 
                 
Cash and Cash Equivalents, Beginning of Period
   
     
 
                 
Cash and Cash Equivalents, End of Period
 
$
172,203
   
$
 
                 
Supplemental Disclosure of Cash Flow Information
               
Cash paid during the period for interest expense
 
$
6,853
   
$
280
 
                 
Supplemental Schedule of Non-Cash Investing and Financing Activities Prior to Date of Cash Contribution by Newcastle
               
Cash proceeds from investments, in excess of interest income
 
$
41,435
   
$
19,021
 
Acquisition of real estate securities
   
242,750
     
34,619
 
Acquisition of investments in excess mortgage servicing rights
   
     
218,642
 
Deposit paid on investment in excess mortgage servicing rights
   
     
25,200
 
Purchase price payable on investments in excess mortgage servicing rights
   
     
3,250
 
Acquisition of investments in excess mortgage servicing rights, equity method investees at fair value
   
125,099
     
 
Acquisition of investments in consumer loan equity method investees
   
245,421
     
 
Acquisition of residential mortgage loans, held-for-investment
   
35,138
     
 
Borrowings under repurchase agreements
   
1,179,068
     
60,772
 
Repayments of repurchase agreements
   
3,902
     
1,126
 
Capital contributions by Newcastle
   
648,408
     
278,461
 
Contributions in-kind by Newcastle
   
1,093,684
     
164,142
 
Capital distributions to Newcastle
   
1,228,054
     
94,049
 
                 
Supplemental Schedule of Non-Cash Investing and Financing Activities Subsequent to Date of Cash Contribution by Newcastle
               
                 
Dividends declared but not paid
 
$
44,308
   
$
 

See notes to consolidated financial statements.
 
6

 
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2013
(dollars in tables in thousands, except share data)
 
1.     GENERAL
 
New Residential Investment Corp. (formerly known as NIC MSR LLC) (together with its subsidiaries, “New Residential”) is a Delaware corporation that was formed as a limited liability company in September 2011 for the purpose of making real estate related investments and commenced operations on December 8, 2011. On December 20, 2012, New Residential was converted to a corporation. Newcastle Investment Corp. (“Newcastle”) was the sole stockholder of New Residential until the spin-off (Note 10), which was completed on May 15, 2013. Newcastle is listed on the New York Stock Exchange under the symbol “NCT.”
 
Following the spin-off, New Residential is an independent publicly traded real estate investment trust (“REIT”) primarily focused on investing in residential mortgage related assets. New Residential is listed on the New York Stock Exchange under the symbol “NRZ.”
 
As of September 30, 2013, New Residential had acquired, or committed to acquire, directly and through equity method investees, excess mortgage servicing rights (“Excess MSRs”) on twelve pools of residential mortgage loans from Nationstar Mortgage LLC (“Nationstar”), a leading residential mortgage servicer. Furthermore, New Residential had acquired real estate securities, residential mortgage loans, and consumer loans.
 
New Residential intends to elect and qualify to be taxed as a REIT for U.S. federal income tax purposes for the tax year ending December 31, 2013. As such, New Residential will generally not be subject to U.S. federal corporate income tax on that portion of its net income that is distributed to stockholders if it distributes at least 90% of its REIT taxable income to its stockholders by prescribed dates and complies with various other requirements.
 
New Residential has entered into a management agreement (the “Management Agreement”) with FIG LLC (the “Manager”), an affiliate of Fortress Investment Group LLC (“Fortress”), under which the Manager advises New Residential on various aspects of its business and manages its day-to-day operations, subject to the supervision of New Residential’s board of directors. For its services, the Manager is entitled to management fees and incentive compensation, both defined in, and in accordance with the terms of, the Management Agreement. For a further discussion of the Management Agreement, see Note 12. The Manager also manages Newcastle and investment funds that own a majority of Nationstar.
 
As of September 30, 2013, New Residential operated in the following business segments: (i) investments in Excess MSRs, (ii) investments in real estate securities and loans, (iii) investments in consumer loans and (iv) corporate.
 
The consolidated financial statements for periods prior to May 15, 2013 have been prepared on a spin-off basis from the consolidated financial statements and accounting records of Newcastle and reflect New Residential’s historical results of operations, financial position and cash flows, in accordance with U.S. GAAP. As presented in the Consolidated Statements of Cash Flows, New Residential did not have any cash balance during periods prior to April 5, 2013, which is the first date Newcastle contributed cash to New Residential. All of its cash activity occurred in Newcastle’s accounts during these periods. The consolidated financial statements for periods prior to May 15, 2013 do not necessarily reflect what New Residential’s consolidated results of operations, financial position and cash flows would have been had New Residential operated as an independent company prior to the spin-off.
 
Certain expenses of Newcastle, comprised primarily of a portion of its management fee, have been allocated to New Residential to the extent they were directly associated with New Residential for periods prior to the spin-off on May 15, 2013. The portion of the management fee allocated to New Residential prior to the spin-off represents the product of the management fee rate payable by Newcastle (1.5%) and New Residential’s gross equity, which management believes is a reasonable method for quantifying the expense of the services provided by the employees of the Manager to New Residential. The incremental cost of certain legal, accounting and other expenses related to New Residential’s operations prior to May 15, 2013 are reflected in the accompanying consolidated financial statements. New Residential and Newcastle do not share any expenses following the spin-off.
 
The accompanying consolidated financial statements and related notes of New Residential have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under U.S. generally accepted accounting principles have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of New Residential’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with New Residential’s consolidated financial statements for the year ended December 31, 2012 and notes thereto included in New Residential’s Registration Statement on Form 10 filed with the Securities and Exchange Commission. Capitalized terms used herein, and not otherwise defined, are defined in New Residential’s consolidated financial statements for the year ended December 31, 2012.
 
 
7

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2013
(dollars in tables in thousands, except share data)
 
Recent Accounting Pronouncements
 
In February 2013, the FASB issued new guidance regarding the reporting of reclassifications out of accumulated other comprehensive income. The new guidance does not change current requirements for reporting net income or other comprehensive income in the financial statements. However, it requires companies to present the effects on the line items of net income of significant amounts reclassified out of accumulated OCI if the item reclassified is required to be reclassified to net income in its entirety during the same reporting period. Presentation should occur either on the face of the income statement where net income is presented or in the notes to the financial statements. New Residential has adopted this accounting standard and presents this information in Note 13.
 
The FASB has recently issued or discussed a number of proposed standards on such topics as consolidation, financial statement presentation, revenue recognition, financial instruments, hedging, and contingencies. Some of the proposed changes are significant and could have a material impact on New Residential’s reporting. New Residential has not yet fully evaluated the potential impact of these proposals, but will make such an evaluation as the standards are finalized.
 
2.     SEGMENT REPORTING
 
New Residential conducts its business through the following segments: (i) investments in Excess MSRs, (ii) investments in real estate securities and loans, (iii) investments in consumer loans, and (iv) corporate. The corporate segment consists primarily of general and administrative expenses, the allocation of management fees by Newcastle until the spin-off on May 15, 2013, and the management fees and incentive compensation owed to the Manager by New Residential following the spin-off.
 
Summary financial data on New Residential’s segments is given below, together with a reconciliation to the same data for New Residential as a whole:
 
   
Excess MSRs
   
Real Estate Securities and Loans
   
Consumer Loans
   
Corporate
   
Total
 
Three Months Ended September 30, 2013
                             
Interest income
  $ 9,761     $ 12,120     $     $ 4     $ 21,885  
Interest expense
          3,443                   3,443  
Net interest income
    9,761       8,677             4       18,442  
Impairment
                             
Other income
    20,853       11,213       24,129             56,195  
Operating expenses
    82       104       1       11,305       11,492  
Net income (loss)
  $ 30,532     $ 19,786     $ 24,128     $ (11,301 )   $ 63,145  
 
 
8

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2013
(dollars in tables in thousands, except share data)
 
   
Excess MSRs
   
Real Estate Securities and Loans
   
Consumer Loans
   
Corporate
   
Total
 
Nine Months Ended September 30, 2013
                             
Interest income
  $ 30,541     $ 30,492     $     $ 42     $ 61,075  
Interest expense
          6,993                   6,993  
Net interest income
    30,541       23,499             42       54,082  
Impairment
          3,756                   3,756  
Other income
    85,640       11,271       60,293             157,204  
Operating expenses
    178       256       1,952       19,702       22,088  
Net income (loss)
  $ 116,003     $ 30,758     $ 58,341     $ (19,660 )   $ 185,442  
 
   
Excess MSRs
   
Real Estate Securities and Loans
   
Consumer Loans
   
Corporate
   
Total
 
September 30, 2013
                             
Investments
  $ 665,600     $ 1,894,260     $ 192,498     $     $ 2,752,358  
Cash and cash equivalents
                      172,203       172,203  
Other assets
          6,563             720       7,283  
Total assets
    665,600       1,900,823       192,498       172,923       2,931,844  
Debt
          1,467,934                   1,467,934  
Other liabilities
    82       149,352             53,440       202,874  
Total liabilities
    82       1,617,286             53,440       1,670,808  
GAAP book value
  $ 665,518     $ 283,537     $ 192,498     $ 119,483     $ 1,261,036  
                                         
Investments in equity method investees
  $ 358,032     $     $ 192,498     $     $ 550,530  
 
   
Excess MSRs
   
Real Estate Securities and Loans
   
Consumer Loans
   
Corporate
   
Total
 
Three Months Ended September 30, 2012
                             
Interest income
  $ 9,903     $ 2,392     $     $     $ 12,295  
Interest expense
          298                   298  
Net interest income
    9,903       2,094                   11,997  
Other income
    1,774                         1,774  
Operating expenses
    994                   1,009       2,003  
Net income (loss)
  $ 10,683     $ 2,094     $     $ (1,009 )   $ 11,768  
 
 
9

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2013
(dollars in tables in thousands, except share data)
 
   
Excess MSRs
   
Real Estate Securities and Loans
   
Consumer Loans
   
Corporate
   
Total
 
Nine Months Ended September 30, 2012
                             
Interest income
  $ 16,419     $ 2,392     $     $     $ 18,811  
Interest expense
          298                   298  
Net interest income
    16,419       2,094                   18,513  
Other income
    6,513                         6,513  
Operating expenses
    2,141                   1,955       4,096  
Net income (loss)
  $ 20,791     $ 2,094     $     $ (1,955 )   $ 20,930  
 
3.    INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS AT FAIR VALUE
 
Pool 1. On December 13, 2011, Newcastle announced the completion of the first co-investment between New Residential and Nationstar in Excess MSRs related to mortgage servicing rights acquired by Nationstar. New Residential invested approximately $43.7 million to acquire a 65% interest in the Excess MSRs on a portfolio of government-sponsored enterprise (“GSE”) residential mortgage loans (“Pool 1”). Nationstar has co-invested on a pari passu basis with New Residential in 35% of the Excess MSRs and is the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, the servicing obligations and liabilities associated with this portfolio as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential and Nationstar, subject to certain limitations.
 
Pool 2. On June 5, 2012, Newcastle announced the completion of a co-investment between New Residential and Nationstar in Excess MSRs related to mortgage servicing rights Nationstar acquired from Bank of America. New Residential invested approximately $42.3 million to acquire a 65% interest in the Excess MSRs on a portfolio of residential mortgage loans (“Pool 2”), comprised of loans in GSE pools. Nationstar has co-invested on a pari passu basis with New Residential in 35% of the Excess MSRs and is the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, servicing obligations and liabilities associated with this portfolio as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential and Nationstar, subject to certain limitations.
 
Pools 3, 4 and 5. On June 29, 2012, Newcastle announced the completion of a co-investment between New Residential and Nationstar in Excess MSRs related to mortgage servicing rights Nationstar acquired from Aurora Bank FSB, a subsidiary of Lehman Brothers Bancorp Inc. New Residential invested approximately $176.5 million to acquire a 65% interest in the Excess MSRs on a portfolio of residential mortgage loans, comprised of approximately 25% conforming loans in Fannie Mae (“Pool 3”) and Freddie Mac (“Pool 4”) GSE pools as well as approximately 75% non-conforming loans in private label securitizations (“Pool 5”). Nationstar had co-invested on a pari passu basis with New Residential in 35% of the Excess MSRs and is the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, servicing obligations and liabilities associated with this portfolio as the servicer. In September 2013, New Residential invested an additional $26.6 million to acquire an additional 15% interest in the Excess MSRs related to Pool 5 from Nationstar. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential and Nationstar, subject to certain limitations.
 
 
10

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2013
(dollars in tables in thousands, except share data)
 
Pool 11. On May 20, 2013, New Residential entered into an excess spread agreement with Nationstar to purchase a two-thirds interest in the Excess MSRs on a portion of the loans in the pool which are eligible to be refinanced by a specific third party for a period of time for $2.4 million, with Nationstar retaining the remaining one-third interest in the Excess MSRs and all servicing rights. After this period expires, Nationstar will have the ability to refinance all of the loans in the pool. See Note 6 for information on our other agreements with Nationstar with respect to Pool 11.
 
Pool 12.  On September 23, 2013, New Residential invested approximately $17.4 million to acquire a 40% interest in the Excess MSRs on a portfolio of residential mortgage loans (“Pool 12”), comprised of loans in private label securitizations. Fortress-managed funds also acquired a 40% interest in the Excess MSRs and the remaining 20% interest in the Excess MSRs is owned by Nationstar. Nationstar performs all servicing and advancing functions, and it retains the ancillary income, servicing obligations and liabilities associated with this portfolio as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential, the Fortress-managed funds and Nationstar, subject to certain limitations.
 
As described above, New Residential has entered into a “Recapture Agreement” in each of the Excess MSR investments to date. Under the Recapture Agreements, New Residential is generally entitled to a pro rata interest in the Excess MSRs on any initial or subsequent refinancing by Nationstar of a loan in the original portfolio.
 
New Residential elected to record its investments in Excess MSRs at fair value pursuant to the fair value option for financial instruments in order to provide users of the financial statements with better information regarding the effects of prepayment risk and other market factors on the Excess MSRs.
   
 
11

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2013
(dollars in tables in thousands, except share data)
 
The following is a summary of New Residential’s direct investments in Excess MSRs:
 
   
September 30, 2013
   
Nine Months
Ended September 30,
2013
 
   
Unpaid Principal
Balance (“UPB”) of Underlying Mortgages
   
Interest in Excess MSR
   
Amortized
Cost Basis (A)
   
Carrying Value (B)
   
Weighted Average Yield
   
Weighted Average Life
(Years) (C)
   
Changes in Fair Value Recorded in Other
 Income (D)
 
MSR Pool 1
  $ 7,171,426       65.0 %   $ 27,255     $ 37,907       12.5 %     4.9     $ 4,914  
MSR Pool 1 - Recapture Agreement
          65.0 %     2,230       4,629       12.5 %     11.3       1,893  
MSR Pool 2
    8,217,751       65.0 %     30,806       35,592       12.5 %     5.2       3,742  
MSR Pool 2 - Recapture Agreement
          65.0 %     1,934       5,882       12.5 %     12.3       3,767  
MSR Pool 3
    8,066,890       65.0 %     25,250       34,063       12.5 %     4.8       5,958  
MSR Pool 3 - Recapture Agreement
          65.0 %     3,608       5,231       12.5 %     11.6       1,699  
MSR Pool 4
    5,222,892       65.0 %     10,032       13,743       12.5 %     5.2       2,693  
MSR Pool 4 - Recapture Agreement
          65.0 %     2,509       3,446       12.5 %     11.6       951  
MSR Pool 5
    38,315,786       80.0 %     121,544       142,387       12.7 %     5.4       18,864  
MSR Pool 5 - Recapture Agreement
          80.0 %     9,277       4,779       12.7 %     12.5       (656 )
MSR Pool 11 - Recapture Agreement
          66.7 %     2,391       2,391       12.5 %     10.2        
MSR Pool 12
    5,321,060       40.0 %     16,963       17,032       16.4 %     4.6       69  
MSR Pool 12 - Recapture Agreement
          40.0 %     479       486       16.4 %     13.6       5  
    $ 72,315,805             $ 254,278     $ 307,568       12.9 %     5.8     $ 43,899  
 
(A)
The amortized cost basis of the Recapture Agreements is determined based on the relative fair values of the Recapture Agreements and related Excess MSRs at the time they were acquired.
   
(B)
Carrying Value represents the fair value of the pools or Recapture Agreements, as applicable.
   
(C)
Weighted Average Life represents the weighted average expected timing of the receipt of expected cash flows for this investment.
   
(D)
The portion of the change in fair value of the Recapture Agreements relating to loans recaptured to date is reflected in the respective pool.
 
 
12

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2013
(dollars in tables in thousands, except share data)
 
The table below summarizes the geographic distribution of the underlying residential mortgage loans of the direct investments in Excess MSRs at September 30, 2013:
 
State Concentration
 
Percentage of Total Outstanding
 
California
    30.3 %
Florida
    10.1 %
New York
    4.7 %
Texas
    4.2 %
Washington
    4.1 %
Arizona
    3.7 %
Maryland
    3.6 %
Colorado
    3.3 %
New Jersey
    3.3 %
Virginia
    3.1 %
Other U.S.
    29.6 %
      100.0 %
 
Geographic concentrations of investments expose New Residential to the risk of economic downturns within the relevant states. Any such downturn in a state where New Residential holds significant investments could affect the underlying borrower’s ability to make mortgage payments and therefore could have a meaningful, negative impact on the Excess MSRs.
 
4.     INVESTMENTS IN REAL ESTATE SECURITIES
 
During 2013, New Residential acquired $661.2 million face amount of Non-Agency RMBS for approximately $450.0 million and $413.2 million face amount of Agency ARM RMBS for approximately $437.3 million. In addition, Newcastle contributed $1.0 billion face amount of Agency ARM RMBS to New Residential during this period. New Residential sold $153.5 million face amount of Non-Agency RMBS for approximately $123.1 million and recorded a gain of $11.3 million.
 
During the third quarter of 2013, Nationstar exercised their cleanup call option related to four Non-Agency RMBS deals, in which Nationstar was the master servicer. New Residential owned $2.6 million face amount of Non-Agency RMBS in these deals. New Residential received par on these securities, which had an amortized cost basis of $2.1 million prior to the repayment, and recorded interest income of $0.6 million related to these securities in the third quarter of 2013.
 
 
13

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2013
(dollars in tables in thousands, except share data)
 
The following is a summary of New Residential’s real estate securities at September 30, 2013, all of which are classified as available-for-sale and are, therefore, reported at fair value with changes in fair value recorded in other comprehensive income.
 
                
Gross Unrealized
             
Weighted Average
 
Asset Type
 
Outstanding Face Amount
   
Amortized Cost Basis
   
Gains
   
Losses
   
Carrying
Value (A)
   
Number of
Securities
 
Rating (B)
 
Coupon
   
Yield
   
Life (Years) (C)
   
Principal Subordination (D)
 
                                                               
Agency ARM RMBS (E) (F)
  $ 1,203,293     $ 1,285,532     $ 1,480     $ (7,562 )   $ 1,279,450       95  
 AAA
    3.15 %     1.30 %     3.0       N/A  
Non-Agency RMBS
    851,504       559,980       28,089       (6,319 )     581,750       95  
 CC
    0.82 %     5.20 %     4.2       9.1 %
Total/Weighted Average (G)
  $ 2,054,797     $ 1,845,512     $ 29,569     $ (13,881 )   $ 1,861,200       190  
 BBB
    2.18 %     2.48 %     3.5          

(A)
Fair value, which is equal to carrying value for all securities. See Note 9 regarding the estimation of fair value.
   
(B)
Represents the weighted average of the ratings of all securities in each asset type, expressed as an S&P equivalent rating. For each security rated by multiple rating agencies, the lowest rating is used. Ratings provided were determined by third party rating agencies, and represent the most recent credit ratings available as of the reporting date and may not be current.
   
(C)
The weighted average life is based on the timing of expected principal reduction on the assets.
   
(D)
Percentage of the outstanding face amount of securities and residual interests that is subordinate to New Residential’s investments.
   
(E)
Includes securities issued or guaranteed by U.S. Government agencies such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”).
   
(F)
Amortized cost basis and carrying value include principal receivable of $10.7 million.
   
(G)
The total outstanding face amount was $16.4 million for fixed rate securities and $2.0 billion for floating rate securities.
 
Unrealized losses that are considered other than temporary are recognized currently in earnings. During the nine months ended September 30, 2013, New Residential recorded other-than-temporary impairment charges (“OTTI”) of $3.8 million with respect to real estate securities held prior to the spin-off on May 15, 2013. Based on Newcastle management’s analysis of these securities, Newcastle determined it did not have the intent to hold the securities past May 15, 2013. Any remaining unrealized losses on New Residential’s securities were primarily the result of changes in market factors, rather than issue-specific credit impairment. New Residential performed analyses in relation to such securities, using management’s best estimate of their cash flows, which support its belief that the carrying values of such securities were fully recoverable over their expected holding period. New Residential has no intent to sell, and is not more likely than not to be required to sell, these securities.
 
 
14

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2013
(dollars in tables in thousands, except share data)
 
The following table summarizes New Residential’s securities in an unrealized loss position as of September 30, 2013.
 
          
Amortized Cost Basis
                     
Weighted Average
 
Securities in an
Unrealized Loss
 Position
 
Outstanding Face Amount
   
Before Impairment
   
Other-Than-Temporary Impairment (A)
   
After Impairment
   
Gross Unrealized Losses
   
Carrying Value
   
Number of Securities
   
Rating
   
Coupon
   
Yield
   
Life
(Years)
 
                                                                   
Less than Twelve Months
  $ 1,015,349     $ 995,953     $ (2,653 )   $ 993,300     $ (13,676 )   $ 979,624       85       A       2.72 %     2.00 %     3.2  
Twelve or More Months
    30,939       33,451       (411 )   $ 33,040       (205 )     32,835       4    
AAA
      3.50 %     1.28 %     2.6  
Total/Weighted Average
  $ 1,046,288     $ 1,029,404     $ (3,064 )   $ 1,026,340     $ (13,881 )   $ 1,012,459       89       A       2.74 %     1.98 %     3.2  
 
(A)
Other than temporary impairment was recorded in connection with unrealized losses at the time of spin-off as Newcastle did not have the intent and ability to hold the securities past May 15, 2013. The losses were not recorded as the result of New Residential’s intent to sell the securities and are not the result of credit impairment.
 
The table below summarizes the geographic distribution of the collateral securing New Residential’s Non-Agency RMBS at September 30, 2013:
 
Geographic Location
 
Outstanding Face Amount
   
Percentage of Total Outstanding
 
Western U.S.
  $ 344,107       40.4 %
Southeastern U.S.
    195,278       22.9 %
Northeastern U.S.
    165,401       19.4 %
Midwestern U.S.
    99,404       11.7 %
Southwestern U.S.
    47,314       5.6 %
    $ 851,504       100.0 %
 
New Residential evaluates the credit quality of its real estate securities, as of the acquisition date, for evidence of credit quality deterioration. As a result, New Residential identified a population of real estate securities for which it was determined that it was probable that New Residential would be unable to collect all contractually required payments. For securities acquired during the nine months ended September 30, 2013, the face amount of these real estate securities was $549.4 million, with total expected cash flows of $442.2 million and a fair value of $354.4 million on the dates that New Residential purchased the respective securities.
 
The following is the outstanding face amount and carrying value for securities, for which, as of the acquisition date, it was probable that New Residential would be unable to collect all contractually required payments, at December 31, 2012 and September 30, 2013:
 
             
             
   
Outstanding Face Amount
   
Carrying Value
 
December 31, 2012
  $ 342,013     $ 212,129  
September 30, 2013
  $ 726,930     $ 476,570  
 
 
15

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2013
(dollars in tables in thousands, except share data)
 
The following is a summary of the changes in accretable yield for these securities:
 
       
   
For the Nine Months
Ended September 30, 2013
 
Balance at December 31, 2012
  $ 90,077  
Additions
    87,756  
Accretion
    (14,797 )
Reclassifications from nonaccretable difference
    38,662  
Disposals     (18,672
Balance at September 30, 2013
  $ 183,026  
 
5.     INVESTMENTS IN RESIDENTIAL MORTGAGE LOANS
 
On February 27, 2013, New Residential, through a subsidiary, entered into an agreement to co-invest in reverse mortgage loans with a UPB of approximately $83 million as of December 31, 2012. New Residential has invested approximately $35 million to acquire a 70% interest in the reverse mortgage loans. Nationstar has co-invested on a pari passu basis with New Residential in 30% of the reverse mortgage loans and is the servicer of the loans performing all servicing and advancing functions and retaining the ancillary income, servicing obligations and liabilities as the servicer.
 
Loans for which New Residential has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are classified as held-for-investment. Loans are presented in the consolidated balance sheet at cost net of any unamortized discount (or gross of any unamortized premium). New Residential determines at acquisition whether loans will be aggregated into pools based on common risk characteristics (credit quality, loan type, and date of origination or acquisition); loans aggregated into pools are accounted for as if each pool were a single loan. Income on these loans is recognized similarly to that on securities using a level yield methodology.
 
To the extent that residential mortgage loans are classified as held-for-investment, New Residential must periodically evaluate each of these loans or loan pools for possible impairment. Impairment is indicated when it is deemed probable that New Residential will be unable to collect all amounts due according to the contractual terms of the loan, or for loans acquired at a discount for credit losses, when it is deemed probable that New Residential will be unable to collect as anticipated. Upon determination of impairment, New Residential would establish a specific valuation allowance with a corresponding charge to earnings. New Residential continually evaluates its loans receivable for impairment. New Residential’s residential mortgage loans are aggregated into pools for evaluation based on like characteristics, such as loan type and acquisition date. Pools of loans are evaluated based on criteria such as an analysis of borrower performance, credit ratings of borrowers, loan to value ratios, the estimated value of the underlying collateral, the key terms of the loans and historical and anticipated trends in defaults and loss severities for the type and seasoning of loans being evaluated. This information is used to estimate provisions for estimated unidentified incurred losses on pools of loans. Significant judgment is required in determining impairment and in estimating the resulting loss allowance. Furthermore, New Residential must assess its intent and ability to hold its loan investments on a periodic basis. If New Residential does not have the intent to hold a loan for the foreseeable future or until its expected payoff, the loan must be classified as “held for sale” and recorded at the lower of cost or estimated value.
 
 
16

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2013
(dollars in tables in thousands, except share data)
 
The following is a summary of residential mortgage loans at September 30, 2013, all of which are classified as held for investment:
 
Loan Type
 
Outstanding
Face Amount (A)
   
Carrying
Value (A)
   
Loan Count
   
Weighted Average Yield
   
Weighted Average Coupon (B)
   
Weighted Average Life (Years) (C)
   
Floating Rate Loans as a % of Face Amount
   
Delinquent Face Amount
 
Reverse Mortgage Loans
  $ 56,738     $ 33,060       327       10.3 %     5.1 %     3.8       22.0 %     N/A  
 
(A) Represents a 70% interest New Residential holds in the reverse mortgage loans.
   
(B)
Represents the stated interest rate on the loans. Accrued interest on reverse mortgage loans is generally added to the principal balance and paid when the loan is resolved.
   
(C)
The weighted average life is based on the expected timing of the receipt of cash flows.
 
Activities related to the carrying value of residential mortgage loans are as follows:
 
       
   
For the nine months ended September 30, 2013
 
Balance at December 31, 2012
  $  
Purchases/additional fundings
    35,138  
Proceeds from repayments
    (3,945 )
Accretion of loan discount and other amortization
    1,867  
Balance at September 30, 2013
  $ 33,060  
 
6.     INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS EQUITY METHOD INVESTEES
 
During the nine months ended September 30, 2013, New Residential entered into investments in joint ventures (“Excess MSR joint ventures”) jointly controlled by New Residential and Fortress-managed funds investing in Excess MSRs. New Residential elected to record these investments at fair value pursuant to the fair value option for financial instruments to provide users of the financial statements with better information regarding the effects of prepayment risk and other market factors.
 
The following tables summarize the investments in equity method investees held by New Residential at September 30, 2013:
 
       
   
September 30, 2013
 
Excess MSR Assets
  $ 719,780  
Other Assets
    1,991  
Debt
     
Other Liabilities
    (5,707 )
Equity
  $ 716,064  
New Residential’s Investment
  $ 358,032  
New Residential’s Ownership
    50.0 %
 
 
17

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2013
(dollars in tables in thousands, except share data)
 
   
Nine Months Ended September 30, 2013
 
Interest Income
  $ 30,501  
Other Income
    56,483  
Expenses
    (3,502 )
Net Income
  $ 83,482  
 
The following is a summary of New Residential’s Excess MSR investments made through equity method investees:
 
    September 30, 2013  
   
Unpaid
Principal
Balance
   
Investee
 Interest in
 Excess MSR
   
New Residential Interest
in Investees
   
Amortized
Cost Basis (A)
   
Carrying Value (B)
   
Weighted Average Yield
   
Weighted Average Life (Years) (C)
 
MSR Pool 6
  $ 10,585,764       66.7 %     50.0 %   $ 37,957     $ 43,908       12.5 %     4.6  
MSR Pool 6 - Recapture Agreement
          66.7 %     50.0 %     9,653       12,295       12.5 %     10.9  
MSR Pool 7
    33,239,259       66.7 %     50.0 %     101,125       111,962       12.5 %     5.0  
MSR Pool 7 - Recapture Agreement
          66.7 %     50.0 %     20,031       23,785       12.5 %     12.0  
MSR Pool 8
    14,798,521       66.7 %     50.0 %     56,457       58,936       12.5 %     4.8  
MSR Pool 8 - Recapture Agreement
          66.7 %     50.0 %     10,069       12,926       12.5 %     11.9  
MSR Pool 9
    32,068,608       66.7 %     50.0 %