UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2014

 

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: 001-35777

 

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 ☒    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 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 ☒    No ☐

 

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 ☐  Accelerated filer ☐ Non-accelerated filer ☒ (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 ☒

 

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: 281,959,669 shares outstanding as of May 8, 2014.

 

 
 

 

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, our financing needs and the size and attractiveness of market opportunities. 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, cash flows or 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;
   
the quality and size of the investment pipeline and our ability to take advantage of investment opportunities at attractive risk-adjusted prices;
   
servicer advances may not be recoverable or may take longer to recover than we expect, which could cause us to fail to achieve our targeted return on our investment in servicer advances;
   
our ability to deploy capital accretively and the timing of such deployment;
   
our counterparty concentration and default risks in Nationstar, 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 Excess MSRs, servicer advances, RMBS and consumer loan portfolios;
   
the risks that default and recovery rates on our Excess MSRs, servicer advances, 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 on attractive terms, or at all;
   
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 not 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 terms 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 Act, U.S. government programs intended to stabilize the economy, the federal conservatorship of Fannie Mae and 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; and
   
our ability to maintain our exclusion from registration under the 1940 Act and the fact that maintaining such exclusion imposes limits on our operations.

 

We also direct readers to other risks and uncertainties referenced in this report, including those set forth under “Risk Factors.” We caution that you should not place undue reliance on any of our forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us. 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 New Residential Investment Corp. (the “Company,” “New Residential” or “we,” “our” and “us”) 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 provide 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. See “Business – Corporate Governance and Internet Address; Where Readers Can Find Additional Information.”

 

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
     
Part I. Financial Information   1
     
Item 1. Financial Statements   1
     
Consolidated Balance Sheets as of March 31, 2014 (Unaudited) and December 31, 2013   1
     
Consolidated Statements of Income (Unaudited) for the three months ended March 31, 2014 and 2013   2
     
Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended March 31, 2014 and 2013   3
     
Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the three months ended March 31, 2014   4
     
Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2014 and 2013   5
     
Notes to Consolidated Financial Statements (Unaudited)   7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   38
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk   74
     
Item 4. Controls and Procedures   77
     
Part II. Other Information   77
     
Item 1. Legal Proceedings   77
     
Item 1A. Risk Factors   78
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   114
     
Item 3. Defaults Upon Senior Securities   114
     
Item 4. Mine Safety Disclosures   114
     
Item 5. Other Information   114
     
Item 6. Exhibits   115
     
Signatures   121

 

 
 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

 

 

   March 31, 2014 (Unaudited)   December 31, 2013 
Assets        
Investments in:        
Excess mortgage servicing rights, at fair value  $341,704   $324,151 
Excess mortgage servicing rights, equity method investees, at fair value   338,307    352,766 
Servicer advances, at fair value   3,457,385    2,665,551 
Real estate securities, available-for-sale   2,345,221    1,973,189 
Residential mortgage loans, held-for-investment   34,045    33,539 
Consumer loans, equity method investees   231,422    215,062 
Cash and cash equivalents   140,495    271,994 
Restricted cash   34,607    33,338 
Derivative assets   45,040    35,926 
Other assets   30,608    53,142 
   $6,998,834   $5,958,658 
           
Liabilities and Equity          
           
Liabilities          
Repurchase agreements  $2,143,094   $1,620,711 
Notes payable   3,234,805    2,488,618 
Trades payable       246,931 
Due to affiliates   7,997    19,169 
Dividends payable   44,312    63,297 
Accrued expenses and other liabilities   7,977    6,857 
    5,438,185    4,445,583 
           
Commitments and Contingencies          
           
Equity          
           
Common Stock, $0.01 par value, 2,000,000,000 shares authorized, 253,209,669 and 253,197,974 issued and outstanding at March 31, 2014 and December 31, 2013, respectively   2,532    2,532 
Additional paid-in capital   1,156,408    1,157,118 
Retained earnings   107,446    102,986 
Accumulated other comprehensive income, net of tax   9,928    3,214 
Total New Residential stockholders’ equity   1,276,314    1,265,850 
Noncontrolling interests in equity of consolidated subsidiaries   284,335    247,225 
Total Equity   1,560,649    1,513,075 
   $6,998,834   $5,958,658 

 

See notes to consolidated financial statements.

 

1
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(dollars in thousands, except per share data)

 

 

   Three Months Ended March 31, 
   2014   2013 
         
Interest income  $71,490   $16,191 
Interest expense   38,997    899 
Net Interest Income   32,493    15,292 
           
Impairment          
Other-than-temporary impairment (“OTTI”) on securities   328     
Valuation allowance on loans   164     
    492     
           
Net interest income after impairment   32,001    15,292 
           
Other Income          
Change in fair value of investments in excess mortgage servicing rights   6,602    1,858 
Change in fair value of investments in excess mortgage servicing rights, equity method investees   6,374    969 
Earnings from investments in consumer loans, equity method investees   16,360     
Gain on settlement of investments   4,357     
Other income   1,357     
    35,050    2,827 
Operating Expenses          
General and administrative expenses   2,075    2,719 
Management fee allocated by Newcastle       2,325 
Management fee to affiliate   4,486     
Incentive compensation to affiliate   3,338     
    9,899    5,044 
Income (Loss) Before Income Taxes   57,152    13,075 
Income tax expense   287     
Net Income (Loss)  $56,865   $13,075 
Noncontrolling interests in Income (Loss) of Consolidated Subsidiaries  $8,093   $ 
Net Income (Loss) Attributable to Common Stockholders  $48,772   $13,075 
           
Net Income Per Share of Common Stock          
Basic  $0.19   $0.05 
Diluted  $0.19   $0.05 
           
Weighted Average Number of Shares of Common Stock Outstanding          
Basic   253,209,019    253,025,645 
Diluted   259,839,934    253,025,645 
           
Dividends Declared per Share of Common Stock  $0.175   $ 

 

See notes to consolidated financial statements.

 

2
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(dollars in thousands)

 

 

   Three Months Ended March 31, 
   2014   2013 
Comprehensive income (loss), net of tax        
Net income (loss)  $56,865   $13,075 
Other comprehensive income (loss)          
Net unrealized gain (loss) on securities   10,878    16,183 
Reclassification of net realized (gain) loss on securities into earnings   (4,164)    
    6,714    16,183 
Total comprehensive income (loss)  $63,579   $29,258 
Comprehensive income (loss) attributable to noncontrolling interests  $8,093   $ 
Comprehensive income (loss) attributable to common stockholders  $55,486   $29,258 

 

See notes to consolidated financial statements.

 

3
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED) 

FOR THE THREE MONTHS ENDED MARCH 31, 2014

(dollars in thousands)

 

 

   Common Stock                         
   Shares   Amount   Additional Paid-in Capital   Retained Earnings   Accumulated Other Comprehensive Income   Total New Residential Stockholders’ Equity   Noncontrolling Interests in Equity of Consolidated Subsidiaries   Total Equity 
Equity - December 31, 2013   253,197,974   $2,532   $1,157,118   $102,986   $3,214   $1,265,850   $247,225   $1,513,075 
Dividends declared               (44,312)       (44,312)       (44,312)
Capital contributions                           142,024    142,024 
Capital distributions                           (113,795)   (113,795)
Dilution impact of distributions from consolidated subsidiaries           (788)           (788)   788     
Director share grant   11,695        78            78        78 
Comprehensive income (loss) (net of tax)                                        
Net income (loss)               48,772        48,772    8,093    56,865 
Net unrealized gain (loss) on securities                   10,878    10,878        10,878 
Reclassification of net realized (gain) loss on securities into earnings                   (4,164)   (4,164)       (4,164)
Total comprehensive income (loss)                       55,486    8,093    63,579 
                                         
Equity - March 31, 2014   253,209,669   $2,532   $1,156,408   $107,446   $9,928   $1,276,314   $284,335   $1,560,649 

 

See notes to consolidated financial statements.

 

4
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(dollars in thousands)

 

 

    Three Months Ended March 31,  
    2014     2013  
Cash Flows From Operating Activities            
Net income (loss)   $ 56,865     $ 13,075  
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     (6,602 )     (1,858 )
Change in fair value of investments in excess mortgage servicing rights, equity method investees     (6,374 )     (969 )
Distributions of earnings from excess mortgage servicing rights, equity method investees     11,940       1,344  
Earnings from consumer loan equity method investees     (16,360 )      
Change in fair value of investments in derivative assets     (1,357 )      
Accretion of discount and other amortization     (42,834 )     (4,798 )
(Gain) / loss on settlement of investments (net)     (4,357 )      
Other-than-temporary impairment (“OTTI”)     328        
Valuation allowance on loans     164        
Non-cash directors’ compensation     78        
Changes in:                
Restricted cash     (1,269 )      
Other assets     5,531       (366 )
Due to affiliates     (11,172 )     2,648  
Accrued expenses and other liabilities     1,179       2,377  
Other operating cash flows:                
Interest received from servicer advance investments     16,304        
Cash proceeds from investments, in excess of interest income           34,436  
Net cash proceeds deemed as capital distributions to Newcastle           (45,889 )
Net cash provided by (used in) operating activities     2,064      
                 
Cash Flows From Investing Activities                
Acquisition of investments in excess mortgage servicing rights     (19,132 )      
Purchase of servicer advance investments     (2,205,070 )      
Purchase of Agency ARM RMBS     (37,922 )      
Purchase of Non-Agency RMBS     (1,038,721 )      
Purchase of derivative assets     (71,923 )      
Return of investments in excess mortgage servicing rights     8,121        
Return of investments in excess mortgage servicing rights, equity method investees     8,893        
Principal repayments from servicing advance investments     1,442,648        
Principal repayments from Agency ARM RMBS     75,470        
Principal repayments from Non-Agency RMBS     13,890        
Principal repayments from non-performing loans     1,900        
Proceeds from sale of Agency ARM RMBS     162,897        
Proceeds from sale of Non-Agency RMBS     258,449        
Net cash provided by (used in) investing activities     (1,400,500 )      

 

Continued on next page

 

5
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(dollars in thousands)

 

 

    Three Months Ended March 31,  
    2014     2013  
Cash Flows From Financing Activities            
Repayments of repurchase agreements     (1,080,197 )      
Margin deposits under repurchase agreements     (43,270 )      
Repayments of notes payable     (3,117,213 )      
Payment of deferred financing fees     (5,660 )      
Common stock dividends paid     (63,297 )      
Borrowings under repurchase agreements     1,618,664        
Return of margin deposits under repurchase agreements     66,899        
Borrowings under notes payable     3,862,782        
Capital contributions            
Noncontrolling interest in equity of consolidated subsidiaries - contributions     142,024        
Noncontrolling interest in equity of consolidated subsidiaries - distributions     (113,795 )        
Net cash provided by (used in) financing activities     1,266,937        
                 
Net Increase (Decrease) in Cash and Cash Equivalents     (131,499 )      
                 
Cash and Cash Equivalents, Beginning of Period     271,994        
                 
Cash and Cash Equivalents, End of Period   $ 140,495     $  
                 
Supplemental Disclosure of Cash Flow Information                
Cash paid during the period for interest expense   $ 35,194     $ 868  
Cash paid during the period for income tax expense            
                 
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   $     $ 34,436  
Acquisition of real estate securities           227,293  
Acquisition of investments in excess mortgage servicing rights, equity method investees at fair value           109,588  
Acquisition of residential mortgage loans, held-for-investment           35,138  
Borrowings under repurchase agreements           768,038  
Repayments of repurchase agreements           3,902  
Capital contributions by Newcastle           372,019  
Contributions in-kind by Newcastle           797,811  
Capital distributions to Newcastle           810,025  
                 
Supplemental Schedule of Non-Cash Investing and Financing Activities Subsequent to Date of Cash Contribution by Newcastle  
                 
Dividends declared but not paid   $ 44,312     $  

 

See notes to consolidated financial statements.

 

6
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data) 

 

1. GENERAL

 

New Residential Investment Corp. (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 13), which was completed on May 15, 2013. Newcastle is listed on the New York Stock Exchange (“NYSE”) 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 NYSE under the symbol “NRZ.”

 

New Residential intends to elect and qualify to be taxed as a REIT for U.S. federal income tax purposes for the tax year ended 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. The Manager also manages Newcastle and investment funds that own a majority of Nationstar Mortgage LLC (“Nationstar”), a leading residential mortgage servicer, and Springleaf Holdings, Inc. (“Springleaf”), managing member of the Consumer Loan Companies (Note 9).

 

As of March 31, 2014, New Residential conducted its business through the following segments: (i) investments in Excess MSRs, (ii) investments in servicer advances, (iii) investments in real estate securities, (iv) investments in real estate loans, (v) investments in consumer loans and (vi) corporate.

 

Approximately 5.3 million shares of New Residential’s common stock were held by Fortress, through its affiliates, and its principals as of March 31, 2014. In addition, Fortress, through its affiliates, held options to purchase approximately 15.2 million shares of New Residential’s common stock as of March 31, 2014. For recent activities related to Fortress’s ownership of New Residential’s common stock and options thereon, see Note 18.

 

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

 

7
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data) 

  

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 consolidated financial statements should be read in conjunction with New Residential’s consolidated financial statements for the year ended December 31, 2013 and notes thereto included in New Residential’s Annual Report on Form 10-K 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, 2013.

 

Recent Accounting Pronouncements

 

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. OTHER INCOME, ASSETS AND LIABILITIES

 

Other income is comprised of the following:

 

   Three Months Ended March 31, 
   2014   2013 
         
Gain (loss) on non-hedge derivative instruments  $1,357   $ 
   $1,357   $ 

 

Other assets and liabilities are comprised of the following:

  

    Other Assets         Accrued Expenses and Other Liabilities  
    March 31,     December 31,         March 31,     December 31,  
    2014     2013         2014     2013  
Margin receivable   $ 16,503     $ 40,132     Interest payable   $ 5,033     $ 4,010  
Interest and other receivables     5,968       7,548     Accounts payable     2,573       2,829  
Deferred financing costs     11,201       5,541     Derivative liability     84       18  
Accumulated amortization     (4,006 )     (768 )   Current taxes payable     287        
Other     942       689         $ 7,977     $ 6,857  
    $ 30,608     $ 53,142                      

 

8
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data) 

  

As reflected on the consolidated statements of cash flows, accretion of discount and other amortization is comprised of the following:

 

   Three Months Ended March 31, 
   2014   2013 
Accretion of servicer advance interest income  $45,716   $ 
Accretion of net discount on securities and loans   356   4,798 
Amortization of deferred financing costs   (3,238)    
   $42,834   $4,798 

 

3. SEGMENT REPORTING

 

New Residential conducts its business through the following segments: (i) investments in Excess MSRs, (ii) investments in servicer advances, (iii) investments in real estate securities, (iv) investments in real estate loans, (v) investments in consumer loans, and (vi) corporate. The corporate segment consists primarily of (i) general and administrative expenses, (ii) the allocation of management fees by Newcastle until the spin-off on May 15, 2013, (iii) the management fees and incentive compensation owed to the Manager by New Residential following the spin-off, (iv) corporate cash and related interest income, and (v) the secured corporate loan and related interest expense.

 

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:

 

   Servicing Related Assets   Residential Securities and Loans             
   Excess MSRs   Servicer Advances   Real Estate Securities   Real Estate Loans   Consumer Loans   Corporate   Total 
Three Months Ended March 31, 2014                            
Interest income  $13,816   $45,716   $11,238   $720   $   $   $71,490 
Interest expense   1,291    31,956    4,069    198    1,483        38,997 
Net interest income   12,525    13,760    7,169    522    (1,483)       32,493 
Impairment           328    164            492 
Other income   12,976        5,042    671    16,360    1    35,050 
Operating expenses   65    250    60    90    23    9,411    9,899 
Income (Loss) Before Income Taxes   25,436    13,510    11,823    939    14,854    (9,410)   57,152 
                                    
Income tax expense       287                    287 
Net Income (Loss)  $25,436   $13,223   $11,823   $939   $14,854   $(9,410)  $56,865 
Noncontrolling interests in income (loss) of consolidated subsidiaries  $   $8,093   $   $   $   $   $8,093 
Net income (loss) attributable to common stockholders  $25,436   $5,130   $11,823   $939   $14,854   $(9,410)  $48,772 

 

9
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data) 

 

   Servicing Related Assets   Residential Securities and Loans             
   Excess MSRs   Servicer Advances   Real Estate Securities   Real Estate Loans   Consumer Loans   Corporate   Total 
March 31, 2014                            
Investments  $680,011   $3,457,385   $2,345,221   $34,045   $231,422   $   $6,748,084 
Cash and cash equivalents   3,704    75,408    10,425    127        50,831    140,495 
Restricted cash       34,607                    34,607 
Derivative assets           769    44,271            45,040 
Other assets       7,108    21,853    618    87    942    30,608 
Total assets  $683,715   $3,574,508   $2,378,268   $79,061   $231,509   $51,773   $6,998,834 
Debt  $   $3,142,292   $2,000,594   $23,458   $142,500   $69,055   $5,377,899 
Other liabilities   110    4,667    1,338    293    244    53,634    60,286 
Total liabilities   110    3,146,959    2,001,932    23,751    142,744    122,689    5,438,185 
Total equity   683,605    427,549    376,336    55,310    88,765    (70,916)   1,560,649 
Noncontrolling interests in equity of consolidated subsidiaries       284,335                    284,335 
Total New Residential stockholders’ equity  $683,605   $143,214   $376,336   $55,310   $88,765   $(70,916)  $1,276,314 
                                    
Investments in equity method investees  $338,307   $   $   $   $231,422   $   $569,729 

 

   Servicing Related Assets   Residential Securities and Loans             
   Excess MSRs   Servicer Advances   Real Estate Securities   Real Estate Loans   Consumer Loans   Corporate   Total 
Three Months Ended March 31, 2013                            
Interest income  $10,035   $   $6,156   $   $   $   $16,191 
Interest expense           899                899 
Net interest income   10,035        5,257                15,292 
Impairment                            
Other income   2,827                        2,827 
Operating expenses   62                1,951    3,031    5,044 
Income (Loss) Before Income Taxes   12,800        5,257       (1,951)   (3,031)   13,075 
Income tax expense                            
Net Income (Loss)  $12,800   $   $5,257   $   $(1,951)  $(3,031)  $13,075 
Noncontrolling interests in income (loss) of consolidated subsidiaries  $   $   $   $   $   $   $ 
Net income (loss) attributable to common stockholders  $12,800   $   $5,257   $   $(1,951 ) $(3,031)  $13,075 

  

4. 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

 

10
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data) 

 

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. In December 2013, New Residential entered into a corporate loan secured by the Excess MSRs related to Pool 5 (Note 11). New Residential, through co-investments made by its subsidiaries, has separately purchased the servicer advances and the basic fee component of the related MSRs associated with Pool 5. See Note 6 for information on New Residential’s investment in servicer advances with respect to Pool 5.

 

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 expired, Nationstar acquired the ability to refinance all of the loans in the pool. See Note 5 for information on New Residential’s other agreements with Nationstar with respect to Excess MSRs on 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. New Residential, through co-investments made by its subsidiaries, has separately purchased the servicer advances and the basic fee component of the related MSRs associated with this portfolio. See Note 6 for information on New Residential’s investment in servicer advances with respect to Pool 12.

 

Pool 17. On January 17, 2014, New Residential completed an additional closing of Excess MSRs that it agreed to acquire as part of a previously committed transaction between Nationstar and First Tennessee Bank (“Pool 17”). New Residential invested approximately $19.1 million in Pool 17 on loans with an aggregate UPB of approximately $8.1 billion.

 

New Residential agreed to acquire a one-third interest in Excess MSRs on the portfolio. Fortress-managed funds and Nationstar each agreed to acquire a one-third interest in the Excess MSRs. Nationstar as servicer will perform all servicing and advancing functions, and retain the ancillary income, servicing obligations and liabilities as the servicer of the underlying loans in the portfolio. 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. New Residential, through co-investments made by its subsidiaries, has separately purchased the servicer advances and the basic fee component of the related MSRs associated with this portfolio. See Note 6 for information on New Residential’s investment in servicer advances with respect to Pool 17.

 

Pool 18. In the fourth quarter of 2013, New Residential invested approximately $17.0 million to acquire a 40% interest in the Excess MSRs on a portfolio of residential mortgage loans (“Pool 18”) comprised of loans in private

 

11
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data) 

 

label securitizations. Fortress-managed funds also acquired a 40% interest in the Excess MSRs and the remaining 20% interest in the Excess MSR is owned by Nationstar. Nationstar performs all servicing and advancing functions and it retains the ancillary income, servicing obligations and liabilities associated with the 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. New Residential, through co-investments made by its subsidiaries, has separately purchased the servicer advances and the basic fee component of the related MSRs associated with this portfolio. See Note 6 for information on New Residential’s investment in servicer advances with respect to Pool 18.

 

As described above, New Residential has entered into a “Recapture Agreement” in each of the Excess MSR investments to date, including those Excess MSR investments made through investments in joint ventures (Note 5). 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. These Recapture Agreements do not apply to New Residential’s investments in servicer advances (Note 6).

 

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.

 

The following is a summary of New Residential’s direct investments in Excess MSRs:

 

   March 31, 2014   Three Months Ended March 31, 2014 
   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  $6,626,389    65.0%  $25,600   $35,442    12.5%   5.3   $(114)
MSR Pool 1 - Recapture Agreement       65.0%   517    6,019    12.5%   12.1    (209)
MSR Pool 2   7,689,490    65.0%   29,395    34,389    12.5%   5.5    (22)
MSR Pool 2 - Recapture Agreement       65.0%   696    5,969    12.5%   12.7    (62)
MSR Pool 3   7,595,633    65.0%   24,015    31,830    12.5%   5.2    (449)
MSR Pool 3 - Recapture Agreement       65.0%   2,237    6,065    12.5%   12.3    (81)
MSR Pool 4   4,940,045    65.0%   9,581    13,605    12.5%   4.9    77 
MSR Pool 4 - Recapture Agreement       65.0%   2,144    3,897    12.5%   12.1    (51)
MSR Pool 5 (E)   35,823,960    80.0%   115,186    141,967    12.5%   5.4    3,691 
MSR Pool 5 - Recapture Agreement       80.0%   9,193    5,735    12.5%   13.2    163 
MSR Pool 11   444,667    66.7%   2,059    2,369    12.5%   6.6    321 
MSR Pool 11 - Recapture Agreement       66.7%   254    280    12.5%   14.0    45 
MSR Pool 12 (E)   4,998,929    40.0%   15,519    17,180    12.5%   4.5    1,601 
MSR Pool 12 - Recapture Agreement       40.0%   467    328    12.5%   13.0    94 
MSR Pool 17 (E)   8,096,439    33.3%   18,112    18,471    12.5%   5.2    359 
MSR Pool 17 - Recapture Agreement       33.3%   1,123    598    12.5%   13.0    (526)
MSR Pool 18 (E)   8,463,426    40.0%   15,157    16,785    12.5%   4.6    1,624 
MSR Pool 18 - Recapture Agreement       40.0%   1,127    775    12.5%   12.6    141 
   $84,678,978        $272,382   $341,704    12.5%   5.8   $6,602 

 

(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.
(E) Pool in which New Residential also invested in related servicer advances, including the basic fee component of the related MSR as of March 31, 2014 (Note 6).

  

12
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(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 as of March 31, 2014:

 

State Concentration  Percentage of UPB 
California   30.6%
Florida   9.2%
New York   4.6%
Washington   4.1%
Maryland   4.1%
Texas   3.9%
Virginia   3.8%
Arizona   3.7%
New Jersey   3.3%
Colorado   3.0%
Other U.S.   29.7%
    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.

 

5. INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS EQUITY METHOD INVESTEES

 

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.

 

Pool 6. On January 4, 2013, New Residential, through a joint venture, co-invested in Excess MSRs on a portfolio of Government National Mortgage Association (“Ginnie Mae”) residential mortgage loans (“Pool 6”). Nationstar acquired the related servicing rights from Bank of America in November 2012. New Residential contributed approximately $28.9 million for a 50% interest in a joint venture which acquired an approximately 67% interest in the Excess MSRs on this portfolio. The remaining interests in the joint venture are owned by a Fortress-managed fund and the remaining interest of approximately 33% 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 the joint venture and Nationstar, subject to certain limitations.

 

Pools 7, 8, 9, 10. On January 6, 2013, New Residential, through joint ventures, agreed to co-invest in Excess MSRs on a portfolio of four pools of residential mortgage loans Nationstar acquired from Bank of America. At the time of acquisition, approximately 53% of the loans in this portfolio were in private label securitizations (“Pool 10”) and the remainder were owned, insured or guaranteed by Fannie Mae (“Pool 7”), Freddie Mac (“Pool 8”) or Ginnie Mae (“Pool 9”). New Residential committed to invest approximately $340 million for a 50% interest in joint ventures which were expected to acquire an approximately 67% interest in the Excess MSRs on these portfolios. The remaining interests in the joint ventures are owned by Fortress-managed funds and the remaining interest of approximately 33% in the Excess MSRs is owned by Nationstar. In September 2013, New Residential and a Fortress-managed fund each invested an additional $13.9 million into the joint venture invested in Pool 10 to acquire

  

13
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data) 

 

an additional 10% in the Excess MSRs held by the joint venture. 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 the joint ventures and Nationstar, subject to certain limitations. New Residential, through co-investments made by its subsidiaries, has separately purchased the servicer advances and the basic fee component of the related MSRs associated with Pool 10. See Note 6 for information on New Residential’s investment in servicer advances with respect to Pool 10.

 

Pool 11. On May 20, 2013, New Residential acquired, through a joint venture, an interest in Excess MSRs from Nationstar on a portfolio of Freddie Mac residential mortgage loans (“Pool 11”). New Residential has invested approximately $37.8 million for a 50% interest in a joint venture which acquired an approximately 67% interest in the Excess MSRs on this portfolio. The remaining interests in the joint venture are owned by a Fortress-managed fund and the remaining interest of approximately 33% in the Excess MSR 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 included in the portfolio, subject to certain limitations. See Note 4 for information on New Residential’s other agreements with respect to Pool 11.

 

The following tables summarize the investments in Excess MSR joint ventures, accounted for as equity method investees held by New Residential:

 

   March 31, 2014 
Excess MSR assets  $673,718 
Other assets   7,152 
Debt    
Other liabilities   (4,256)
Equity  $676,614 
New Residential’s investment  $338,307 
New Residential’s ownership   50.0%

 

   Three Months Ended March 31, 
   2014   2013 
Interest income  $18,493   $5,616 
Other income (loss)   (5,705)   (3,154)
Expenses   (40)   (524)
Net income  $12,748   $1,938 

 

The following is a summary of New Residential’s Excess MSR investments made through equity method investees:

 

14
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data) 

 

   March 31, 2014 
   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  $9,628,238    66.7%   50.0%  $37,424   $46,261    12.5%   5.1 
MSR Pool 6 - Recapture Agreement       66.7%   50.0%   6,922    9,165    12.5%   12.1 
MSR Pool 7   30,574,186    66.7%   50.0%   97,392    99,290    12.5%   5.2 
MSR Pool 7 - Recapture Agreement       66.7%   50.0%   14,156    24,498    12.5%   12.4 
MSR Pool 8   13,547,232    66.7%   50.0%   55,107    54,406    12.5%   5.1 
MSR Pool 8 - Recapture Agreement       66.7%   50.0%   5,836    13,050    12.5%   12.1 
MSR Pool 9   29,704,976    66.7%   50.0%   100,528    125,876    12.5%   4.8 
MSR Pool 9 - Recapture Agreement       66.7%   50.0%   32,271    31,743    12.5%   12.1 
MSR Pool 10 (D)   66,582,388    66.7-77.0%    50.0%   196,933    194,571    12.5%   5.4 
MSR Pool 10 - Recapture Agreement       66.7-77.0%    50.0%   13,658    7,304    12.5%   13.3 
MSR Pool 11   17,322,366    66.7%   50.0%   41,804    51,216    12.5%   5.7 
MSR Pool 11 - Recapture Agreement       66.7%   50.0%   22,849    16,338    12.5%   11.4 
   $167,359,386             $624,880   $673,718    12.5%   6.3 

 

(A)Represents the amortized cost basis of the equity method investees in which New Residential holds a 50% interest. 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)Represents the carrying value of the Excess MSRs held in equity method investees, in which New Residential holds a 50% interest. Carrying value represents the fair value of the pools or Recapture Agreements, as applicable.
(C)The weighted average life represents the weighted average expected timing of the receipt of cash flows of each investment.
(D)Pool in which New Residential also invested in related servicer advances, including the basic fee component of the related MSR as of March 31, 2014 (Note 6).

 

The table below summarizes the geographic distribution of the underlying residential mortgage loans of the Excess MSR investments made through equity method investees at March 31, 2014:

 

State Concentration  Percentage of UPB 
California   23.5%
Florida   9.1%
New York   5.4%
Texas   4.9%
Georgia   4.0%
New Jersey   3.8%
Illinois   3.5%
Virginia   3.2%
Maryland   3.1%
Washington   2.8%
Other U.S.   36.7%
    100.0%

 

6. INVESTMENTS IN SERVICER ADVANCES

 

On December 17, 2013, New Residential and third-party co-investors, through a joint venture entity (Advance Purchaser LLC, the “Buyer”) consolidated by New Residential, agreed to purchase $3.2 billion of outstanding servicer advances on a portfolio of loans, which is a subset of the same portfolio of loans in which New Residential invests in a portion of the Excess MSR (Pools 10, 17 and 18) (Notes 4 and 5), including the basic fee component of the related MSRs. During the three months ended March 31, 2014, the Buyer also agreed to purchase outstanding servicer advances on a portfolio of loans underlying Pools 5 and 12. As of March 31, 2014, New Residential and

 

15
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data) 

 

third-party co-investors had settled $3.4 billion of servicer advances, net of recoveries, financed with $3.1 billion of notes payables outstanding (Note 11). A taxable wholly owned subsidiary of New Residential is the managing member of the Buyer that holds its investments in servicer advances and owned an approximately 33.5% interest in the Buyer as of March 31, 2014. Noncontrolling third-party investors owning the remaining interest in the Buyer have aggregate capital commitments to the Buyer of $390.3 million, which were fully funded as of March 31, 2014. As of March 31, 2014, New Residential had capital commitments to the Buyer of $197.9 million, which were fully funded. The Buyer may call capital up to the commitment amount on unfunded commitments and recall capital to the extent the Buyer makes distributions to the co-investors, including New Residential. Neither the third-party co-investors nor New Residential is obligated to fund amounts in excess of their respective capital commitments, regardless of the capital requirements of the Buyer that holds its investments in servicer advances.

 

The Buyer has purchased servicer advances from Nationstar, is required to purchase all future servicer advances made with respect to these pools from Nationstar, and receives cash flows from advance recoveries and the basic fee component of the related MSRs, net of compensation paid back to Nationstar in consideration of Nationstar’s servicing activities. The compensation paid to Nationstar is approximately 9.2% of the basic fee component of the related MSRs plus a performance fee that represents a portion (up to 100%) of the cash flows in excess of those required for the Buyer to obtain a specified return on its equity.

 

New Residential elected to record its investments in servicer advances, including the right to the basic fee component of the related MSRs, 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 market factors.

 

The following is a summary of the investments in servicer advances, including the right to the basic fee component of the related MSRs, made by the Buyer, which New Residential consolidates:

 

   March 31, 2014   Three Months Ended March 31, 2014 
   Amortized Cost Basis   Carrying Value (A)   Weighted Average Yield   Weighted Average Life (Years) (B)   Change in Fair Value Recorded in Other Income 
Servicer advances  $3,457,385   $3,457,385    5.8%   3.2     

  

(A)Carrying value represents the fair value of the investments in servicer advances, including the basic fee component of the related MSRs.
(B)Weighted Average Life represents the weighted average expected timing of the receipt of expected net cash flows for this investment.

 

The following is additional information regarding the servicer advances, and related financing, of the Buyer, which New Residential consolidates as of March 31, 2014:

  

               Loan-to-Value   Cost of Funds (B) 
   UPB of Underlying Residential Mortgage Loans   Outstanding Servicer Advances   Servicer Advances to UPB of Underlying Residential Mortgage Loans   Carrying Value of Notes Payable   Gross   Net (A)   Gross   Net 
Servicer advances (C)  $79,687,268   $3,430,473    4.3%  $3,142,292    91.6%   90.6%   3.0%   2.2%

 

(A)Ratio of face amount of borrowings to par amount of servicer advance collateral, net of an interest reserve maintained by the Buyer.
(B)Annualized measure of the cost associated with borrowings. Gross Cost of Funds primarily includes interest expense and facility fees. Net Cost of Funds excludes facility fees.

  

16
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data) 

  

(C)The following types of advances comprise the investments in servicer advances:

 

   March 31, 2014 
Principal and interest advances  $1,615,067 
Escrow advances (taxes and insurance advances)   1,393,014 
Foreclosure advances   422,392 
Total  $3,430,473 

 

Interest income recognized by New Residential related to its investments in servicer advances for the three months ended March 31, 2014 was comprised of the following:

 

Interest income, gross of amounts attributable to servicer compensation  $67,138 
Amounts attributable to servicer compensation   (21,422)
Interest income from investments in servicer advances  $45,716 

 

7. INVESTMENTS IN REAL ESTATE SECURITIES

 

During the three months ended March 31, 2014, New Residential acquired $1.4 billion face amount of Non-Agency RMBS for approximately $863.4 million and no new Agency ARM RMBS. New Residential sold Non-Agency RMBS with a face amount of approximately $437.9 million and an amortized cost basis of approximately $244.6 million for approximately $248.5 million, recording a gain on sale of approximately $3.8 million. Furthermore, New Residential sold Agency ARM RMBS with a face amount of $154.2 million and an amortized cost basis of approximately $162.2 million for approximately $162.9 million, recording a gain on sale of approximately $0.7 million.

 

On March 6, 2014, New Residential and Merrill Lynch, Pierce, Fenner & Smith Incorporated entered into an agreement pursuant to which New Residential agreed to purchase approximately $625 million face amount of Non-Agency residential mortgage securities for approximately $553 million. The purchased securities represent 75% of the mezzanine and subordinate tranches of a securitization previously sponsored by Springleaf. The securitization, including the purchased securities, is collateralized by residential mortgage loans with a face amount of approximately $0.9 billion.

 

The following is a summary of New Residential’s real estate securities as of March 31, 2014, 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, except for securities that are other-than-temporarily impaired.

  

           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)  $1,085,447   $1,162,098   $4,131   $(3,579)  $1,162,650    109   AAA   3.16%   1.53%   4.3    N/A 
Non-Agency RMBS (G)   1,780,864    1,173,195    14,962    (5,586)   1,182,571    121   CC   0.97%   4.68%   8.4    14.9%
Total/Weighted Average (H)  $2,866,311   $2,335,293   $19,093   $(9,165)  $2,345,221    230   BBB-   1.80%   3.49%   6.8      

 

(A)Fair value, which is equal to carrying value for all securities. See Note 12 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. This excludes the ratings of the collateral underlying four bonds that are no longer rated and four bonds for which New Residential was unable to obtain rating information. For each security rated by multiple rating agencies, the lowest rating is used. New Residential used an implied AAA rating for the Agency ARM RMBS. 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.

 

17
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data) 

  

(D)Percentage of the outstanding face amount of securities that is subordinate to New Residential’s investments. Excludes Other ABS securities representing 0.2% of the carrying value of the Non-Agency RMBS portfolio.
(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 $8.6 million.
(G)Includes Other ABS securities representing 0.2% of the carrying value of the Non-Agency RMBS portfolio.

 

                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)
Other ABS   $ 207,431     $ 2,160     $ 60     $     $ 2,220       1     N/A     0.21 %     4.93 %     7.5     N/A

 

(H)The total outstanding face amount was $584.0 million for fixed rate securities and $2.3 billion for floating rate securities.

 

Unrealized losses that are considered other than temporary are recognized currently in earnings. During the three months ended March 31, 2014, New Residential recorded other-than-temporary impairment charges (“OTTI”) of $0.3 million with respect to real estate securities. 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.

 

The following table summarizes New Residential’s securities in an unrealized loss position as of March 31, 2014.

 

       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 (B)  Coupon   Yield   Life
(Years)
 
                                            
Less than Twelve Months  $1,165,919   $1,046,734   $(1,090)  $1,045,644   $(8,843)  $1,036,801    80   BBB   1.90%   3.55%   6.2 
                                                      
Twelve or More Months   47,733    51,102    (703)   50,399    (322)   50,077    8   AAA   3.32%   1.40%   3.5 
                                                      
Total/Weighted Average  $1,213,652   $1,097,836   $(1,793)  $1,096,043   $(9,165)  $1,086,878    88   BBB+   1.96%   3.46%   6.1 

 

(A)This amount represents other-than-temporary impairment recorded on securities that are in an unrealized loss position as of March 31, 2014.
(B)The rating of securities in an unrealized loss position for less than twelve months excludes the rating of one bond which has not been rated.

 

New Residential performed an assessment of all of its debt securities that are in an unrealized loss position (an unrealized loss position exists when a security’s amortized cost basis, excluding the effect of OTTI, exceeds its fair value) and determined the following:

 

   March 31, 2014 
       Amortized Cost Basis   Unrealized Losses 
   Fair Value   After Impairment   Credit (A)   Non-Credit (B) 
Securities New Residential intends to sell (C)  $62,742   $63,825   $(121)  $(1,084)
Securities New Residential is more likely than not to be required to sell (D)                N/A  
Securities New Residential has no intent to sell and is not more likely than not to be required to sell:                    
Credit impaired securities   238,162    240,857    (1,793)   (2,695)
Non credit impaired securities   797,997    803,384        (5,386)
Total debt securities in an unrealized loss position  $1,098,901   $1,108,066   $(1,914)  $(9,165)

 

18
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data) 

  

(A)This amount is required to be recorded as other-than-temporary impairment through earnings. In measuring the portion of credit losses, New Residential’s management estimates the expected cash flow for each of the securities. This evaluation includes a review of the credit status and the performance of the collateral supporting those securities, including the credit of the issuer, key terms of the securities and the effect of local, industry and broader economic trends. Significant inputs in estimating the cash flows include management’s expectations of prepayment speeds, default rates and loss severities. Credit losses are measured as the decline in the present value of the expected future cash flows discounted at the investment’s effective interest rate.
(B)This amount represents unrealized losses on securities that are due to non-credit factors and recorded through other comprehensive income.
(C)A portion of securities New Residential intends to sell have a fair value equal to their amortized cost basis after impairment, and, therefore do not have unrealized losses reflected in other comprehensive income as of March 31, 2014.
(D)New Residential may, at times, be more likely than not to be required to sell certain securities for liquidity purposes. While the amount of the securities to be sold may be an estimate, and the securities to be sold have not yet been identified, New Residential must make its best estimate, which is subject to significant judgment regarding future events, and may differ materially from actual future sales.

 

The following table summarizes the activity related to credit losses on debt securities:

 

   Three Months Ended March 31, 2014 
Beginning balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income  $2,071 
Increases to credit losses on securities for which an OTTI was previously recognized and a portion of an OTTI was recognized in other comprehensive income   104 
Additions for credit losses on securities for which an OTTI was not previously recognized   225 
Reduction for credit losses on securities for which no OTTI was recognized in other comprehensive income at the current measurement date   (607)
Ending balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income  $1,793 

 

The table below summarizes the geographic distribution of the collateral securing New Residential’s Non-Agency RMBS as of March 31, 2014:

 

Geographic Location (A)  Outstanding Face Amount   Percentage of Total Outstanding 
Western U.S.  $452,630    28.8%
Southeastern U.S.   437,365    27.8%
Northeastern U.S.   301,484    19.1%
Midwestern U.S.   248,757    15.8%
Southwestern U.S.   93,646    6.0%
Other (B)   39,551    2.5%
   $1,573,433    100.0%

  

(A)Excludes Other ABS securities representing 0.2% of the carrying value of the Non-Agency RMBS portfolio.
(B)Represents collateral for which New Residential was unable to obtain geographic information.

 

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 three months ended March 31, 2014, the face amount of these real estate securities was $353.0 million, with total expected cash flows of $330.0 million and a fair value of $252.0 million on the dates that New Residential purchased the respective securities.

 

19
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data) 

  

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, 2013 and March 31, 2014:

 

    Outstanding Face Amount   Carrying Value 
March 31, 2014   $787,134   $533,155 
December 31, 2013   $729,895   $483,680 

 

The following is a summary of the changes in accretable yield for these securities:

 

   For the Three Months Ended March 31, 
   2014 
Beginning Balance  $143,067 
Additions   78,028 
Accretion   (3,541)
Reclassifications from non-accretable difference   (577)
Disposals   (32,763)
Ending Balance  $184,214 

 

8. 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 $83.1 million as of December 31, 2012. New Residential has invested approximately $35.1 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.

 

The following is a summary of residential mortgage loans at March 31, 2014, all of which are classified as held for investment:

 

    Outstanding Face Amount (A)     Amortized Cost Basis (A)     Carrying Value (A)     Loan Count     Wtd. Avg. Yield     Weighted Average Coupon (B)     Weighted Average Life (Years) (C)     Floating Rate Loans as a % of Face Amount     Delinquent Face Amount (A)(D)  
Loan Type                                                      
Residential Mortgage Loans Held-for- Investment (E)   $ 57,818     $ 34,045     $ 34,045       321       10.3 %     5.1 %     3.6       21.7 %   $ 47,919  

 

(A)Represents a 70% interest New Residential holds in the reverse mortgage loans. The average loan balance outstanding based on total UPB is $0.3 million.
(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.
(D)Includes loans that have either experienced (i) a termination event or (ii) an event of default, substantially all of which are more than 90 days past the time at which they were considered delinquent or real estate owned (“REO”). Collateral value underlying loans considered delinquent is generally sufficient, however $3.6 million face amount of REO loans, representing New Residential’s 70% interest therein, was on non-accrual status resulting from the uncertainty of cash collections as of March 31, 2014.

 

20
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data) 

  

(E)80% of these loans have reached a termination event. As a result, the borrower can no longer make draws on these loans. Each loan matures upon the occurrence of a termination event.

 

Activities related to the carrying value of residential mortgage loans were as follows:

  

   For the Three Months Ended March 31, 2014 
Balance at December 31, 2013  $33,539 
Purchases/additional fundings    
Proceeds from repayments   (50)
Accretion of loan discount and other amortization   720 
Valuation allowance   (164)
     
Balance at March 31, 2014  $34,045 

 

Activities related to the valuation allowance on residential mortgage loans were as follows:

 

   For the Three Months Ended March 31, 2014 
Balance at December 31, 2013  $461 
Charge-offs    
Valuation allowance on loans   164 
Balance at March 31, 2014  $625 

 

The table below summarizes the geographic distribution of the underlying residential mortgage loans as of March 31, 2014:

  

State Concentration  Percentage of Total Outstanding Unpaid Principal Amount 
New York   22.3%
Florida   21.4%
Illinois   7.4%
New Jersey   6.9%
California   5.6%
Massachusetts   4.2%
Washington   4.0%
Connecticut   3.9%
Virginia   3.2%
Maryland   2.8%
Other U.S.   18.3%
    100.0%

 

21
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data) 

  

In the first quarter of 2014, New Residential invested in portfolios of non-performing loans and financed the transactions with the same counterparties from which it purchased them. New Residential accounts for the contemporaneous purchase of the investments and the associated financings as linked transactions. Accordingly, New Residential records a non-hedge derivative instrument on a net basis, with changes in market value recorded as “Other Income” in the Consolidated Statements of Income. For further information on the transactions, see below and Note 10.

 

On January 15, 2014, New Residential purchased a portfolio of non-performing residential mortgage loans with a UPB of approximately $65.6 million at a price of approximately $33.7 million. To finance this purchase, on January 15, 2014, New Residential entered into a $25.3 million repurchase agreement with Credit Suisse. The repurchase agreement, which contains customary covenants and event of default provisions and is subject to margin calls, matures on January 15, 2015. This purchase was accounted for as a linked transaction (Note 10).

 

On March 28, 2014, New Residential purchased a portfolio of non-performing mortgage loans with a UPB of approximately $7.0 million at a price of approximately $3.8 million. The investment was financed with a $2.5 million master repurchase agreement with RBS. The repurchase agreement, which contains customary covenants and event of default provisions and is subject to margin calls, matures on November 24, 2014. This acquisition is accounted for as a "linked transaction" (Note 10).

 

9.INVESTMENTS IN CONSUMER LOAN EQUITY METHOD INVESTEES

 

On April 1, 2013, New Residential completed, through newly formed limited liability companies (together, the “Consumer Loan Companies”) a co-investment in a portfolio of consumer loans with a UPB of approximately $4.2 billion as of December 31, 2012. The portfolio includes over 400,000 personal unsecured loans and personal homeowner loans originated through subsidiaries of HSBC Finance Corporation. The Consumer Loan Companies acquired the portfolio from HSBC Finance Corporation and its affiliates. New Residential invested approximately $250 million for 30% membership interests in each of the Consumer Loan Companies. Of the remaining 70% of the membership interests, Springleaf acquired 47% and an affiliate of Blackstone Tactical Opportunities Advisors L.L.C. acquired 23%. Springleaf acts as the managing member of the Consumer Loan Companies. The Consumer Loan Companies initially financed $2.2 billion ($1.4 billion outstanding as of March 31, 2014) of the approximately $3.0 billion purchase price with asset-backed notes. In September 2013, the Consumer Loan Companies issued and sold an additional $0.4 billion of asset-backed notes for 96% of par. These notes are subordinate to the $2.2 billion of debt issued in April 2013. The Consumer Loan Companies were formed on March 19, 2013, for the purpose of making this investment, and commenced operations upon the completion of the investment. After a servicing transition period, Springleaf became the servicer of the loans and provides all servicing and advancing functions for the portfolio.

 

The following tables summarize the investment in the Consumer Loan Companies held by New Residential:

 

   March 31, 2014 
Consumer loan assets  $2,428,397 
Other assets   189,049 
Debt (A)   (1,815,734)
Other liabilities   (30,306)
Equity  $771,406 
New Residential’s investment  $231,422 
New Residential’s ownership   30.0%

 

(A) Represents the Class A asset-backed notes with a face amount of $1.4 billion, an interest rate of 3.75% and a maturity of April 2021 and the Class B asset-backed notes with a face amount of $0.4 billion, an interest rate of 4.0% and a maturity of December 2024. Substantially all of the net cash flow generated by the Consumer Loan Companies is required to be used to pay down the Class A notes. When the balance of the outstanding Class A notes is reduced to 50% of the outstanding UPB of the performing consumer loans and the managing member is reimbursed by the consumer loan companies for expenses accumulated up to that date, 70% of the net cash flow generated is required to be used to pay down the Class A notes and the equity holders of the Consumer Loan Companies and holders of the Class B notes will each be entitled to receive 15% of the net cash flow of the Consumer Loan Companies on a periodic basis.

 

22
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data) 

  

   Three Months Ended March 31, 2014 
Interest income  $142,815 
Interest expense   (22,195)
Provision for finance receivable losses   (34,156)
Other expenses, net   (20,452)
Change in fair value of debt   (16,867)
Net income  $49,145 
New Residential’s equity in net income  $16,360 
New Residential’s ownership   30.0%

 

The following is a summary of New Residential’s consumer loan investments made through equity method investees:

 

   March 31, 2014 
   Unpaid Principal Balance   Interest in  Consumer Loan Companies   Carrying Value (A)   Weighted Average Coupon (B)   Weighted Average Asset Yield   Weighted Average Expected Life (Years) (C) 
Consumer Loans  $3,098,138    30.0%  $2,428,397    18.1%   15.9%   3.2 

 

(A)Represents the carrying value of the consumer loans held by the Consumer Loan Companies.
(B)Substantially all of the cash flows received on the loans is required to be used to make payments on the notes described above.
(C)Weighted Average Life represents the weighted average expected timing of the receipt of expected cash flows for this investment.

 

New Residential’s investments in consumer loans, equity method investees changed during the three months ended March 31, 2014 as follows:

  

  

For the Three Months Ended

March 31, 2014

 
Balance at December 31, 2013  $215,062 
Contributions to equity method investees    
Distributions of earnings from equity method investees    
Distributions of capital from equity method investees    
Earnings from investments in consumer loan equity method investees   16,360 
Balance at March 31, 2014  $231,422 

 

10. DERIVATIVES

 

As of March 31, 2014, New Residential’s derivative instruments include both economic hedges that were not designated as hedges for accounting purposes as well as non-performing loans accounted for as linked transactions that were not entered into for risk management purposes or for hedging activity. New Residential uses economic hedges to hedge a portion of its interest rate risk exposure. Interest rate risk is sensitive to many factors including governmental monetary and tax policies, domestic and international economic and political considerations and other factors. New Residential’s credit risk with respect to economic hedges and linked transactions is the risk of default on New Residential’s investments that results from a borrower’s or counterparty’s inability or unwillingness to make contractually required payments.

 

23
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data) 

  

As of March 31, 2014, New Residential also held to-be-announced forward contract positions (“TBAs”) with $850.0 million in a long notional amount of Agency RMBS and $975.0 million in short notional amount of Agency RMBS, and any amounts or obligations owed by or to New Residential are subject to the right of set-off with the TBA counterparty. In addition, as of March 31, 2014, New Residential held a $300.0 million short position of 3-year forward U.S. Treasury (“U.S.T.”) notes, and $100.0 million notional exposure of an interest rate swap. New Residential’s net short position in TBAs of $125.0 million notional, 3-year forward U.S.T. short position, and interest rate swaps were entered into as economic hedges in order to mitigate New Residential’s interest rate risk assumed as part of its purchased securities with Merrill Lynch, Pierce, Fenner & Smith Incorporated that were previously sponsored by Springleaf, and planned resecuritization of certain Non-Agency RMBS. Furthermore, New Residential’s interest swaps are subject to certain customary margin requirements.

  

New Residential’s derivatives are recorded at fair value on the Consolidated Balance Sheets as follows:

 

        March 31,     December 31,  
    Balance Sheet Location   2014     2013  
Derivative assets                
Real Estate Securities (A)   Derivative assets   $     $ 1,452  
Non-Performing Loans (A)   Derivative assets     44,271       34,474  
TBAs   Derivative assets     362        
U.S.T. Short Positions   Derivative assets     407        
        $ 45,040     $ 35,926  
                     
Derivative liabilities                    
Interest Rate Swaps   Other liabilities   $ 84     $  
        $ 84     $  

 

(A)

Investments purchased from, and financed by, the selling counterparty that New Residential accounts for as linked transactions and are reflected as derivatives.

 

The following table summarizes information related to derivatives:

 

    March 31,     December 31,  
    2014     2013  
Notional amount of Non-Performing Loans (A)   $ 228,540     $ 164,598  
Notional amount of U.S.T. Short Positions     300,000        
Notional amount of Interest Rate Swap Agreements (B)     100,000        
Notional amount of Real Estate Securities (C)           10,000  
                 
Notional amount of TBAs, long position (D)   $ 850,000     $  
Notional amount of TBAs, short position (D)     975,000        
Notional amount of TBAs, net   $ (125,000 )   $  

 

(A)Represents the UPB of the underlying loans of the non-performing loan pools within linked transactions.
(B)Receives LIBOR and pays a fixed rate.
(C)Represents the current face amount of the real estate securities within linked transactions.
(D)Represents the notional amount of Agency RMBS, classified as derivatives.

 

The following table summarizes gains (losses) recorded in relation to derivatives:

 

24
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data) 

 

      For the Three Months Ended March 31, 
   Income Statement Location  2014   2013 
Non-Performing Loans (A)  Other income (loss)  $671   $ 
TBAs  Other income (loss)   362     
U.S.T. Short Positions  Other income (loss)   408     
Interest Rate Swaps  Other income (loss)   (84)    
      $1,357   $ 

 

(A)Investments purchased from, and financed by, the selling counterparty that New Residential accounts for as linked transactions and are reflected as derivatives.

 

The following table presents both gross and net information about linked transactions:

 

   March 31,   December 31, 
   2014   2013 
Non-Performing Loans          
Non-performing loan assets, at fair value (A)  $128,957   $95,014 
Repurchase agreements (B)   84,686    60,540 
    44,271    34,474 
Real Estate Securities          
Real estate securities, at fair value (C)       9,952 
Repurchase agreements (B)       8,500 
        1,452 
Net assets recognized as linked transactions  $44,271   $35,926 

 

(A)Non-performing loans that had a UPB of $228.5 million as of March 31, 2014, which represents the notional amount of the linked transaction and accrued interest.
(B)Represents carrying amount that approximates fair value.
 (C)Real estate securities that had a current face amount of $10.0 million as of December 31, 2013, which represents the notional amount of the linked transaction.

 

11. DEBT OBLIGATIONS

 

The following table presents certain information regarding New Residential’s debt obligations:

  

March 31, 2014 (A)
                                      Collateral  
Debt Obligations/ Collateral   Month Issued     Outstanding Face Amount     Carrying Value     Final Stated Maturity   Weighted Average Funding Cost     Weighted Average Life (Years)     Outstanding Face     Amortized Cost Basis     Carrying Value     Weighted Average Life (Years)  
Repurchase Agreements (B)                                                          
 Agency ARM RMBS (C)     Various     $ 1,117,592     $ 1,117,592     Jun-14     0.34 %     0.3     $ 1,085,447     $ 1,153,504     $ 1,154,057       4.3  
 Non-Agency RMBS (D)     Various       883,002       883,002     Apr-14 to Oct-14     1.98 %     0.1       1,501,192       1,156,794       1,163,721       8.8  
 Consumer Loans (E)     Jan-14       142,500       142,500     Jun-14     4.16 %     0.3       N/A       N/A       231,422       3.2  
Total Repurchase Agreements             2,143,094       2,143,094           1.27 %     0.2                                  
Notes Payable                                                                            
 Secured Corporate Loan (F)     Dec-13       69,055       69,055     May-14     4.16 %     0.2       35,823,960       124,379       147,702       6.0  
 Servicer Advances (G)     Various       3,142,292       3,142,292     Sep-14 to Mar-17     3.01 %     1.2       3,430,473       3,457,385       3,457,385       3.2  
 Residential Mortgage Loans (H)     Dec-13       23,458       23,458     Sep-14     3.41 %     0.5       57,818       34,045       34,045       3.6  
Total Notes Payable             3,234,805       3,234,805           3.03 %     1.1                                  
Total           $ 5,377,899     $ 5,377,899           2.33 %     0.8                                  

 

(A)Excludes debt related to linked transactions (Note 10).
(B)These repurchase agreements had approximately $0.7 million of associated accrued interest payable as of March 31, 2014.
(C)The counterparties of these repurchase agreements are Mizuho ($160.8 million), Morgan Stanley ($160.5 million), Daiwa ($315.0 million) and Jefferies ($481.3 million) and were subject to customary margin call provisions.
(D)The counterparties of these repurchase agreements are Barclays ($34.7 million), Credit Suisse ($132.3 million), Royal Bank of Scotland ($42.5 million), Bank of America ($459.9 million), Goldman Sachs ($83.3 million), UBS ($74.6 million) and Royal Bank of Canada

 

25
 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data) 

 

 ($55.7 million) and were subject to customary margin call provisions. All of the Non-Agency repurchase agreements have LIBOR-based floating interest rates. Includes $103.2 million borrowed under a master repurchase agreement, which bears interest at one-month LIBOR plus 1.75%.
(E)The repurchase agreement is payable to Credit Suisse and bears interest equal to one-month LIBOR plus 4.0%.
(F)The loan bears interest equal to one-month LIBOR plus 4.0%. The outstanding face of the collateral represents the UPB of the residential mortgage loans underlying the Excess MSRs that secure this corporate loan, which is subject to monthly principal amortization payments.
(G)The notes bear interest equal to the sum of (i) a floating rate index rate equal to one-month LIBOR or a cost of funds rate, as applicable, and (ii) a margin ranging from 1.3% to 2.5%.
(H)The note is payable to Nationstar and bears interest equal to one-month LIBOR plus 3.25%.

 

Certain of the debt obligations included above are obligations of New Residential’s consolidated subsidiaries, which own the related collateral. In some cases, including the servicer advances, such collateral is not available to other creditors of New Residential.

 

As of March 31, 2014, New Residential held TBA positions with $850.0 million in a long notional amount of Agency RMBS and $975.0 million in short notional amount of Agency RMBS, and any amounts or obligations owed by or to New Residential are subject to the right of set-off with the TBA counterparty. As part of executing these trades, New Residential has entered into agreements with its TBA counterparties that govern the transactions for the TBA purchases or sales made, including margin maintenance, payment and transfer, events of default, settlements, and various other provisions. New Residential has fulfilled all obligations and requirements entered into under these agreements.

 

On January 8, 2014, New Residential financed all of its ownership interest in each of the Consumer Loan Companies under a $150.0 million master repurchase agreement with Credit Suisse Securities (USA) LLC which matures on June 30, 2014. Borrowings under the facility bear interest equal to the sum of (i) a floating rate index rate equal to one-month LIBOR and (ii) a margin of 4.00%. The facility contains customary covenants, event of default provisions, and is subject to required monthly principal payments.

 

On March 31, 2014, New Residential obtained approximately $415 million in financing from Merrill Lynch, Pierce, Fenner & Smith Incorporated (a wholly-owned subsidiary of Bank of America) to settle its purchase of approximately $625 million face amount of Non-Agency RMBS for approximately $553 million, which represents 75% of the mezzanine and subordinate tranches of a securitization previously sponsored by an affiliate of Springleaf. The securitization is collateralized by residential mortgage loans with a face amount of approximately $0.9 billion. Merrill Lynch, Pierce, Fenner & Smith Incorporated purchased the remaining 25% of the mezzanine and subordinate tranches on the securitization on the same terms as New Residential’s purchase.

 

In March 2014, the Buyer prepaid all of the notes issued pursuant to one servicer advance facility and a portion of the notes issued pursuant to another servicer advance facility. The notes were prepaid with the proceeds of new notes issued pursuant to an advance receivables trust (the “NRART Master Trust”) that issued (i) variable funding notes (“VFNs”) with borrowing capacity of up to $1.1 billion and (ii) $1.0 billion of term notes (“Term Notes”) to institutional investors. The VFNs generally bear interest at a rate equal to the sum of (i) LIBOR or a cost of funds rate plus (ii) a spread of 1.375% to 2.5% depending on the class of the notes. The expected repayment date of the VFNs is March 2015. The Term Notes generally bear interest at approximately 2.0% and have expected repayment dates in March 2015 and March 2017. The VFNs and the Term Notes are secured by servicer advances, and the financing is nonrecourse to the Buyer, except for customary recourse provisions.

 

Maturities

 

New Residential’s debt obligations as of March 31, 2014 had contractual maturities as follows:

 

26
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data) 

   

Year   Nonrecourse   Recourse (A)   Total 
April 1 through December 31, 2014   $1,633,561   $2,145,202  $3,778,763 
2015    1,101,336        1,101,336 
2016             
2017    497,800        497,800 
    $3,232,697   $2,145,202   $5,377,899 

 

(A)Excludes recourse debt related to linked transactions (Note 10).

 

Borrowing Capacity

 

The following table represents New Residential’s borrowing capacity as of March 31, 2014:

 

Debt Obligations/ Collateral  Collateral Type  Borrowing Capacity   Balance Outstanding   Available Financing 
Repurchase Agreements               
Residential Mortgage Loans (A)  Real Estate Loans  $300,000   $59,190   $240,810 
Notes Payable                  
Secured Corporate Loan  Excess MSRs   75,000    69,055    5,945 
Servicer Advances (B)  Servicer Advances   4,647,900    3,142,292    1,505,608 
      $5,022,900   $3,270,537   $1,752,363 

  

(A)Financing related to linked transaction (Note 10).
(B)New Residential’s unused borrowing capacity is available if New Residential has additional eligible collateral to pledge and meets other borrowing conditions. New Residential pays a 0.5% fee on the unused borrowing capacity.

 

New Residential was in compliance with all of its debt covenants as of March 31, 2014.

 

12. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The carrying values and fair values of New Residential’s financial assets recorded at fair value on a recurring basis, as well as other financial instruments for which fair value is disclosed, as of March 31, 2014 were as follows:

 

27
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data)

 

               Fair Value 
   Principal Balance or Notional Amount   Carrying Value   Level 1   Level 2   Level 3   Total 
Assets:                              
Investments in:                              
Excess mortgage servicing rights, at fair value (A)  $84,678,978   $341,704   $   $   $341,704   $341,704 
Excess mortgage servicing rights, equity  method investees, at fair value (A)   167,359,386    338,307            338,307    338,307 
Servicer advances   3,430,473    3,457,385            3,457,385    3,457,385 
Real estate securities, available-for-sale   2,866,311    2,345,221        1,162,650    1,182,571    2,345,221 
Residential mortgage loans,
held for investment (B)
   57,818    34,045            34,045    34,045 
Non-hedge derivative investments (C)   228,540    45,040        769    44,271    45,040 
Cash and cash equivalents   140,495    140,495    140,495            140,495 
Restricted cash   34,607    34,607    34,607            34,607 
   $258,796,608   $6,736,804   $175,102   $1,163,419   $5,398,283   $6,736,804 
Liabilities:                              
Repurchase agreements  $2,143,094   $2,143,094   $   $2,000,594   $142,500   $2,143,094 
Notes payable   3,234,805    3,234,805            3,234,805    3,234,805 
   $5,377,899   $5,377,899   $   $2,000,594   $3,377,305   $5,377,899 

 

(A)The notional amount represents the total unpaid principal balance of the mortgage loans underlying the Excess MSRs. New Residential does not receive an excess mortgage servicing amount on non-performing loans in Agency portfolios.
(B)Represents New Residential’s 70% interest in the total unpaid principal balance of the Residential Mortgage Loans.
(C)Notional amount consists of the aggregate current face and UPB amounts of the securities and loans, respectively, that comprise the asset portion of the linked transaction.

 

New Residential’s financial assets measured at fair value on a recurring basis using Level 3 inputs changed during the three months ended March 31, 2014 as follows:

 

   Level 3     
   Excess MSRs (A)   Excess MSRs in Equity Method Investees(A) (B)                 
   Agency   Non-Agency   Agency   Non-Agency   Servicer Advances   Non-Agency RMBS   Linked Transactions   Total 
Balance at December 31, 2013  $144,660   $179,491   $245,399   $107,367   $2,665,551   $570,425   $35,926   $3,948,819 
Transfers (C)                                       
Transfers from Level 3                                
Transfers to Level 3                                
Gains (losses) included in net income                                       
Included in other-than-temporary impairment (“OTTI”) on securities (D)                       (328)       (328)
Included in change in fair value of investments in excess mortgage servicing rights (D)   (545)   7,147                        6,602 
                                         
Included in change in fair value of investments in excess mortgage servicing rights, equity method investees (D)           (739)   (2,114)               (2,853)
Included in gain on settlement of investments                       3,810        3,810 
Included in other income (D)                           671    671 
Gains (losses) included in other comprehensive income, net of tax (E)                       5,710    43    5,753 
Interest income   4,747    9,069    6,721    2,526    45,716    2,007        70,786 
Purchases, sales and repayments                                       
Purchases       19,132            2,205,070    863,291    9,758    3,097,251 
Purchase adjustments   (60)                           (60)
Proceeds from sales                       (248,454)   (1,495)   (249,949)
Proceeds from repayments   (8,937)   (13,000)   (14,044)   (6,809)   (1,458,952)   (13,890)   (632)   (1,516,264)
Balance at March 31, 2014  $139,865   $201,839   $237,337   $100,970   $3,457,385   $1,182,571   $44,271   $5,364,238 

 

(A)Includes the Recapture Agreement for each respective pool.

 

28
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data)

 

(B)Amounts represent New Residential’s portion of the Excess MSRs held by the respective joint ventures in which New Residential has a 50% interest.
(C)Transfers are assumed to occur at the beginning of the respective period.
(D)The gains (losses) recorded in earnings during the period are attributable to the change in unrealized gains (losses) relating to Level 3 assets still held at the reporting dates.
(E)These gains (losses) were included in net unrealized gain (loss) on securities in the Consolidated Statements of Comprehensive Income.

 

Investments in Excess MSRs Valuation

 

The following table summarizes certain information regarding the inputs used in valuing the Excess MSRs owned directly and through equity method investees as of March 31, 2014:

 

   Significant Inputs 
Held Directly (Note 4)  Prepayment Speed
(A)
   Delinquency
(B)
   Recapture Rate
(C)
   Excess Mortgage Servicing Amount
(bps)(D)
   Discount Rate 
MSR Pool 1   12.4%   8.7%   35.4%   26    12.5%
MSR Pool 1 - Recapture Agreement   8.0%   5.0%   35.0%   21    12.5%
MSR Pool 2   12.6%   10.0%   35.5%   22    12.5%
MSR Pool 2 - Recapture Agreement   8.0%   5.0%   35.0%   21    12.5%
MSR Pool 3   12.8%   11.0%   35.5%   22    12.5%
MSR Pool 3 - Recapture Agreement   8.0%   5.0%   35.0%   21    12.5%
MSR Pool 4   15.5%   14.8%   36.5%   17    12.5%
MSR Pool 4 - Recapture Agreement   8.0%   5.0%   35.0%   21    12.5%
MSR Pool 5   11.5%   N/A(E)   9.3%   14    12.5%
MSR Pool 5 - Recapture Agreement   8.0%   N/A(E)   35.0%   21    12.5%
MSR Pool 11 - Recapture Agreement   7.8%   5.0%   35.0%   19    12.5%
MSR Pool 12   16.0%   N/A(E)   9.0%   26    12.5%
MSR Pool 12 - Recapture Agreement   8.0%   N/A(E)   35.0%   19    12.5%
MSR Pool 17   11.4%   N/A(E)   9.3%   19    12.5%
MSR Pool 17 - Recapture Agreement   8.0%   N/A(E)   35.0%   19    12.5%
MSR Pool 18   15.0%   N/A(E)   9.0%   16    12.5%
MSR Pool 18 - Recapture Agreement   8.0%   N/A(E)   35.0%   19    12.5%
                          
Held through Equity Method Investees (Note 5)                          
MSR Pool 6   15.4%   7.7%   30.5%   25    12.5%
MSR Pool 6 - Recapture Agreement   8.0%   5.0%   35.0%   23    12.5%
MSR Pool 7   12.8%   7.8%   35.6%   15    12.5%
MSR Pool 7 - Recapture Agreement   8.0%   5.0%   35.0%   19    12.5%
MSR Pool 8   13.9%   6.7%   35.5%   19    12.5%
MSR Pool 8 - Recapture Agreement   8.0%   5.0%   35.0%   19    12.5%
MSR Pool 9   15.7%   5.0%   30.1%   22    12.5%
MSR Pool 9 - Recapture Agreement   8.0%   5.0%   35.0%   26    12.5%
MSR Pool 10   11.3%   N/A(E)   9.3%   11    12.5%
MSR Pool 10 - Recapture Agreement   8.0%   N/A(E)   35.0%   19    12.5%
MSR Pool 11   13.9%   10.0%   36.0%   15    12.5%
MSR Pool 11 - Recapture Agreement   8.0%   5.0%   35.0%   19    12.5%

 

(A)Projected annualized weighted average lifetime voluntary and involuntary prepayment rate using a prepayment vector.
(B)Projected percentage of mortgage loans in the pool that will miss their mortgage payments.
(C)Percentage of voluntarily prepaid loans that are expected to be refinanced by Nationstar.
(D)Weighted average total mortgage servicing amount in excess of the basic fee.
(E)The Excess MSR will be paid on the total UPB of the mortgage portfolio (including both performing and delinquent loans until REO).

 

29
 

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data)

 

Excess Mortgage Servicing Rights Equity Method Investees Valuation

 

New Residential’s investments in equity method investees measured at fair value on a recurring basis using Level 3 inputs changed during the three months ended March 31, 2014 as follows:

 

Balance at December 31, 2013  $352,766 
Contributions to equity method investees    
Distributions of earnings from equity method investees   (11,940)
Distributions of capital from equity method investees   (8,893)
Change in fair value of investments in equity method investees   6,374 
Balance at March 31, 2014  $338,307 

 

Investments in Servicer Advances Valuation

 

The following table summarizes certain information regarding the inputs used in valuing the servicer advances:

 

   Significant Inputs
   Weighted Average          
   Outstanding Servicer Advances to UPB of Underlying Residential Mortgage Loans  Prepayment Speed   Delinquency   Mortgage Servicing Amount   Discount Rate 
March 31, 2014  2.3%  15.0%   17.0%   19.8 bps    5.8%
December 31, 2013  2.7%  13.3%   20.0%   21.2 bps    5.6%

 

Real Estate Securities Valuation

 

As of March 31, 2013, New Residential’s securities valuation methodology and results are further detailed as follows:

 

           Fair Value 
Asset Type  Outstanding Face Amount   Amortized Cost Basis   Multiple Quotes (A)   Total   Level 
                          
Agency ARM RMBS  $1,085,447   $1,162,098   $1,162,650   $1,162,650    2 
Non-Agency RMBS   1,780,864    1,173,195    1,182,571    1,182,571    3 
Total  $2,866,311   $2,335,293   $2,345,221   $2,345,221      

 

(A)Management generally obtained pricing service quotations or broker quotations from two sources, one of which was generally the seller (the party that sold New Residential the security) for Non-Agency RMBS. Management selected one of the quotes received as being most representative of the fair value and did not use an average of the quotes. Even if New Residential receives two or more quotes on a particular security that come from non-selling brokers or pricing services, it does not use an average because management believes using an actual quote more closely represents a transactable price for the security than an average level. Furthermore, in some cases there is a wide disparity between the quotes New Residential receives. Management believes using an average of the quotes in these cases would not represent the fair value of the asset. Based on New Residential’s own fair value analysis, management selects one of the quotes which is believed to more accurately reflect fair value. New Residential never adjusts quotes received. These quotations are generally received via email and contain disclaimers which state that they are “indicative” and not “actionable” — meaning that the party giving the quotation is not bound to actually purchase the security at the quoted price.

 

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data)

 

 Residential Mortgage Loans for Which Fair Value is Only Disclosed

 

The fair values of New Residential’s reverse mortgage loans held-for-investment were estimated based on a discounted cash flow analysis using internal pricing models. The significant inputs to these models include discount rates and the timing and amount of expected cash flows that management believes market participants would use in determining the fair values on similar pools of reverse mortgage loans. New Residential’s loans held-for-investment are categorized within Level 3 of the fair value hierarchy.

 

The following table summarizes the inputs used in valuing reverse mortgage loans as of March 31, 2014:

 

                   Significant Inputs
Loan Type  Outstanding Face Amount (A)   Carrying Value (A)   Fair Value   Valuation Allowance/ (Reversal) In Current Year   Discount Rate  Weighted Average Life (Years) (B) 
                             
Reverse Mortgage Loans  $57,818   $34,045   $34,045   $164   10.3%   3.6 

 

(A)Represents a 70% interest New Residential holds in the reverse mortgage loans.
(B)The weighted average life is based on the expected timing of the receipt of cash flows.

 

Derivative Valuation

New Residential financed certain investments with the same counterparty from which it purchased those investments, and accounts for the contemporaneous purchase of the investments and the associated financings as linked transactions (Note 10). The linked transactions are valued on a net basis considering their underlying components, the investment value and the related repurchase financing agreement value, generally determined consistently with the relevant instruments as described in this note. Values of investments in non-performing loans are estimated based on a discounted cash flow analysis using internal pricing models that employ market-based assumptions regarding the timing and amount of expected cash flows primarily based upon the performance of the loan pool and liquidation attributes. The linked transactions, which are categorized as Level 3, are recorded as a non-hedge derivative instrument on a net basis.

New Residential also enters into economic hedges including interest rate swaps and U.S.T. short positions, which are categorized as Level 2 in the valuation hierarchy. Management generally values such derivatives using quotations, similarly to the method of valuation used for New Residential’s other assets that are categorized as Level 2.

Liabilities for Which Fair Value is Only Disclosed

Repurchase agreements and notes payable are not measured at fair value; however, management believes that their carrying value approximates fair value. Repurchase agreements and notes payable are generally considered to be Level 2 and Level 3 in the valuation hierarchy, respectively, with significant valuation variables including the amount and timing of expected cash flows, interest rates and collateral funding spreads.

Short-term repurchase agreements and notes payable have an estimated fair value equal to their carrying value due to their short duration and generally floating interest rates. Longer-term notes payable, representing the securitized portion of the servicer advance financing, are valued based on internal models utilizing both observable and unobservable inputs. As of March 31, 2014, these recently issued notes also have an estimated fair value equal to their carrying value since market interest rates and spreads have not fluctuated significantly since their issuance.

 

13. EQUITY AND EARNINGS PER SHARE

 

Equity and Dividends

 

On April 26, 2013, Newcastle announced that its board of directors had formally declared the distribution of shares of common stock of New Residential, a then wholly owned subsidiary of Newcastle. Following the spin-off, New Residential is an independent, publicly-traded REIT primarily focused on investing in residential mortgage related assets. The spin-off was completed on May 15, 2013 and New Residential began trading on the New York Stock Exchange under the symbol “NRZ.” The spin-off transaction was effected as a taxable pro rata distribution by Newcastle of all the outstanding shares of common stock of New Residential to the stockholders of record of Newcastle as of May 6, 2013. The stockholders of Newcastle as of the record date received one share of New Residential common stock for each share of Newcastle common stock held.

 

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data)

 

On April 29, 2013, New Residential’s certificate of incorporation was amended so that its authorized capital stock now consists of 2,000,000,000 shares of common stock, par value $0.01 per share, and 100,000,000 shares of preferred stock, par value $0.01 per share. At the time of the completion of the spin-off, there were 253,025,645 outstanding shares of common stock which was based on the number of Newcastle’s shares of common stock outstanding on May 6, 2013 and a distribution ratio of one share of New Residential common stock for each share of Newcastle common stock.

 

For recent activity related to New Residential’s common stock and options thereon, see Note 18.

 

On December 17, 2013, New Residential declared a quarterly dividend of $0.175 per common share and a special cash dividend of $0.075 per common share, totaling $63.3 million, for the quarter ended December 31, 2013. The combined dividend of $0.25 was paid on January 31, 2014. On March 19, 2014, New Residential declared a quarterly dividend of $0.175 per common share, or $44.3 million, for the quarter ended March 31, 2014, which was paid in April 2014.

 

Approximately 5.3 million shares of New Residential’s common stock were held by Fortress, through its affiliates, and its principals at March 31, 2014.

 

Option Plan

 

New Residential’s outstanding options at March 31, 2014 consisted of the following:

 

    Number of Options   Strike Price   Maturity Date
     343,275   $13.86   05/25/14
     162,500    16.95   11/22/14
     330,000    15.97   01/12/15
     2,000    16.68   08/01/15
     170,000    15.87   11/01/16
     242,000    16.90   01/23/17
     456,000    14.96   04/11/17
     1,580,166    3.29   03/29/21
     2,424,833    2.49   09/27/21
     2,000    2.74   12/20/21
     1,867,167    3.41   04/03/22
     2,265,000    3.67   05/21/22
     2,499,167    3.67   07/31/22
     5,750,000    5.12   01/11/23
     2,300,000    5.74   02/15/23
     8,000    6.79   06/02/23
Total/Weighted Average    20,402,108   $5.11 

 

As of March 31, 2014, New Residential’s outstanding options were summarized as follows:

 

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data)

 

Held by the Manager   15,232,638 
Issued to the Manager and subsequently transferred to certain of the Manager’s employees   5,157,470 
Issued to the independent directors   12,000 
Total   20,402,108 

 

For recent activities related to option exercises, see Note 18.

 

Income and Earnings Per Share

 

Net income earned prior to the spin-off is included in additional paid-in capital instead of retained earnings since the accumulation of retained earnings began as of the date of spin-off.

 

New Residential is required to present both basic and diluted earnings per share (“EPS”). Basic EPS is calculated by dividing net income by the weighted average number of shares of common stock outstanding. Diluted EPS is computed by dividing net income by the weighted average number of shares of common stock outstanding plus the additional dilutive effect, if any, of common stock equivalents during each period. New Residential’s common stock equivalents are its outstanding stock options. During the three months ended March 31, 2014, based on the treasury stock method, New Residential had 6,630,915 dilutive common stock equivalents. During the three months ended March 31, 2013, New Residential did not have any dilutive common stock equivalents outstanding.

 

For the purposes of computing EPS for periods prior to the spin-off on May 15, 2013, New Residential treated the common shares issued in connection with the spin-off as if they had been outstanding for all periods presented, similar to a stock split. For the purposes of computing diluted EPS for periods prior to the spin-off on May 15, 2013, New Residential treated the 21.5 million options issued on the spin-off date as a result of the conversion of Newcastle options as if they were granted on May 15, 2013 since no New Residential awards were outstanding prior to that date.

 

Noncontrolling Interests

 

Noncontrolling interests is comprised of the interests held by third parties in consolidated entities that hold New Residential’s investments in servicer advances (Note 6).

 

14. COMMITMENTS AND CONTINGENCIES

 

Litigation – New Residential may, from time to time, be a defendant in legal actions from transactions conducted in the ordinary course of business. As of March 31, 2014, New Residential is not subject to any material litigation, individually or in the aggregate, nor, to management’s knowledge, is any material litigation currently threatened against New Residential.

 

Indemnifications – In the normal course of business, New Residential and its subsidiaries enter into contracts that contain a variety of representations and warranties and that provide general indemnifications. New Residential’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against New Residential that have not yet occurred. However, based on Newcastle’s and its own experience, New Residential expects the risk of material loss to be remote.

 

Capital Commitments — As of March 31, 2014, New Residential had outstanding capital commitments related to investments in the following investment types (also refer to Note 18 for additional capital commitments entered into subsequent to March 31, 2014, including investments in residential mortgage loans):

 

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data)

 

Excess MSRs — As of March 31, 2014, New Residential had outstanding capital commitments of $26.0 million related to the acquisition of four pools (Pools 13-16) of Excess MSRs on portfolios comprised of Fannie Mae and Freddie Mac residential mortgage loans. See Notes 4 and 5 for information on New Residential’s investments in excess MSRs, as well as Note 18 for Excess MSR pools subsequently closed.

 

Servicer Advances — New Residential and third-party co-investors agreed to purchase, through the Buyer, future servicer advances related to the Non-Agency mortgage loans. The actual amount of future advances purchased will be based on: (a) the credit and prepayment performance of the underlying loans, (b) the amount of advances recoverable prior to liquidation of the related collateral and (c) the percentage of the loans with respect to which no additional advance obligations are made. The actual amount of future advances is subject to significant uncertainty. See Note 6 for information on New Residential’s investments in servicer advances.

 

Debt Covenants — New Residential’s debt obligations contain various customary loan covenants (Notes 8 & 11).

 

Certain Tax-Related Covenants — If New Residential is treated as a successor to Newcastle under applicable U.S. federal income tax rules, and if Newcastle fails to qualify as a REIT, New Residential could be prohibited from electing to be a REIT. Accordingly, Newcastle has (i) represented that it has no knowledge of any fact or circumstance that would cause New Residential to fail to qualify as a REIT, (ii) covenanted to use commercially reasonable efforts to cooperate with New Residential as necessary to enable New Residential to qualify for taxation as a REIT and receive customary legal opinions concerning REIT status, including providing information and representations to New Residential and its tax counsel with respect to the composition of Newcastle’s income and assets, the composition of its stockholders, and its operation as a REIT; and (iii) covenanted to use its reasonable best efforts to maintain its REIT status for each of Newcastle’s taxable years ending on or before December 31, 2014 (unless Newcastle obtains an opinion from a nationally recognized tax counsel or a private letter ruling from the IRS to the effect that Newcastle’s failure to maintain its REIT status will not cause New Residential to fail to qualify as a REIT under the successor REIT rule referred to above). Additionally, New Residential covenanted to use its reasonable best efforts to qualify for taxation as a REIT for its taxable year ended December 31, 2013.

 

15. TRANSACTIONS WITH AFFILIATES AND AFFILIATED ENTITIES

 

Due to affiliate is comprised of the following amounts:

 

   March 31, 2014   December 31, 2013 
Management fees  $1,495   $1,495 
Incentive compensation   5,855    16,847 
Expense reimbursements and other   647    827 
   $7,997   $19,169 

 

Affiliate expenses and fees were comprised of:

 

   Three Months Ended March 31, 
   2014   2013 
Management fees  $4,486   $2,325 
Incentive compensation   3,338     
Expense reimbursements (A)   125     
  Total  $7,949   $2,325 

 

(A)Included in General and Administrative Expenses in the Consolidated Statements of Income.

 

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data)

 

See Notes 4, 5, 6, 7, 8, 11, 14 and 18 for a discussion of transactions with Nationstar. As of March 31, 2014, a total face amount of $900.0 million of New Residential’s Non-Agency portfolio was serviced by Nationstar. The total UPB of the loans underlying these Nationstar serviced Non-Agency RMBS was approximately $12.2 billion as of March 31, 2014.

 

See Notes 9 and 18 for a discussion of a transaction with Springleaf.

 

16. RECLASSIFICATION FROM ACCUMULATED OTHER COMPREHENSIVE INCOME INTO NET INCOME

 

The following table summarizes the amounts reclassified out of accumulated other comprehensive income into net income:

 

Accumulated Other Comprehensive
 Income Components
  Statement of Income Location  Three Months Ended March 31, 2014 
 Reclassification of net realized (gain) loss on securities into earnings  Gain on settlement of securities  $(4,492)
 Reclassification of net realized (gain) loss on securities into earnings  Other-than-temporary impairment  on securities   328 
 Total reclassifications     $(4,164)

 

17. INCOME TAXES

 

The provision for income taxes consists of the following:

 

   Three Months Ended March 31, 
   2014   2013 
Current:          
Federal  $217   $ 
State and Local   70     
Total Current Provision   287     
Deferred:          
Federal        
State and Local        
Total Deferred Provision        
Total Provision for Income Taxes  $287   $ 

 

New Residential intends to qualify as a REIT for the tax years ending December 31, 2013 and 2014. A REIT is generally not subject to U.S. federal corporate income tax on that portion of its 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 was a wholly owned subsidiary of Newcastle until May 15, 2013 and, as a qualified REIT subsidiary, was a disregarded entity until such date. As a result, no provision or liability for U.S. federal or state income taxes has been included in the accompanying consolidated financial statements for the three months ended March 31, 2013.

 

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data)

 

New Residential has made certain investments, particularly its investments in servicer advances (Note 6), through TRSs and is subject to regular corporate income taxes on these investments. New Residential and its TRSs will file income tax returns with the U.S. federal government and various state and local jurisdictions for the tax years ending December 31, 2013 and 2014. Generally, these income tax returns will be subject to tax examinations by tax authorities for a period of three years after the date of filing.

 

18. RECENT ACTIVITIES

 

These financial statements include a discussion of material events that have occurred subsequent to March 31, 2014 (referred to as “subsequent events”) through the issuance of these consolidated financial statements. Events subsequent to that date have not been considered in these financial statements.

 

Excess MSRs

 

On May 12, 2014 New Residential invested approximately $34.0 million to acquire a one-third interest in the Excess MSRs on each of three portfolios of GSE residential mortgage loans (Pools 14, 16 and 19) with an aggregate UPB of $12.9 billion. Fortress-managed funds and Nationstar each agreed to acquire a one-third interest in the Excess MSRs. On May 13, 2014, New Residential invested approximately $2.2 million to acquire a one-third interest in the Excess MSRs on a portfolio of GSE residential mortgage loans (Pool 20) with an aggregate UPB of $0.7 billion. Fortress-managed funds and Nationstar each agreed to acquire a one-third interest in the Excess MSRs.

 

Nationstar as servicer will perform all servicing and advancing functions, and retain the ancillary income, servicing obligations and liabilities as the servicer of the underlying loans in each of the portfolios. Under the terms of these investments, to the extent that any loans in the portfolios 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.

 

New Residential has remaining commitments of $20.8 million to invest in Excess MSRs on portfolios of GSE residential mortgages comprised of two pools (Pools 13 and 15) with an aggregate outstanding unpaid principal balance of approximately $8.3 billion that New Residential committed to in 2013. Commitments related to GSE residential mortgage loans are contingent upon GSE approval of Nationstar to service such loans and transfer Excess MSRs to New Residential.

 

Servicer Advances

 

Subsequent to March 31, 2014 and prior to May 5, 2014, the Buyer funded a total of $911.0 million of servicer advances, including the purchase of $617.5 million of additional advances described below, and recovered $545.2 million of existing servicer advances. Notes payable outstanding increased by $346.9 million and restricted cash increased approximately $5.0 million in relation to these fundings. Additionally, the Buyer received $12.3 million from Nationstar to satisfy a targeted return shortfall.

 

On May 2, 2014, the Buyer received $86.4 million from New Residential to fund the purchase of $617.5 million of additional servicer advances, which were financed with a new note issued to Morgan Stanley bearing interest at a rate equal 2.10% and maturing in May 2016. As of May 2, 2014, the principal balance of this note was approximately $580.5 million.

 

Real Estate Securities

 

Subsequent to March 31, 2014, New Residential acquired Agency ARM RMBS with an aggregate face amount of approximately $223.9 million for approximately $238.1 million, financed with repurchase agreements. Furthermore, New Residential acquired Non-Agency RMBS with an aggregate face amount of approximately $50.7 million for approximately $14.2 million, financed with repurchase agreements. New Residential sold no Agency ARM RMBS and sold Non-Agency RMBS with a face amount of $207.1 million and an amortized cost basis of approximately $138.5 million for approximately $145.0 million and recorded a gain of $6.5 million.

 

Subsequent to March 31, 2014, New Residential acquired additional net short TBA positions that increased our net short notional position by $30.0 million of Agency RMBS, and any amounts or obligations owed by or to

 

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2014

(dollars in tables in thousands, except share data)

 

New Residential are subject to the right of set-off with the TBA counterparty. New Residential also entered into two additional interest rate swaps with a total notional amount of $400.0 million in order to mitigate New Residential’s interest rate risk assumed as part of its purchased securities with Merrill Lynch, Pierce, Fenner & Smith Incorporated that were previously sponsored by Springleaf, and its planned resecuritization of certain Non-Agency RMBS.

 

Other Investments

 

Subsequent to March 31, 2014, New Residential paid down approximately $7.5 million of the master repurchase agreement secured by its ownership interest in the consumer loan companies.

 

Corporate Activities

 

On March 19, 2014, New Residential’s board of directors declared a first quarter 2014 dividend of $0.175 per share of common stock, or $44.3 million, which was paid on April 30, 2014 to stockholders of record as of March 31, 2014.

 

In April 2014, New Residential issued 27,750,000 shares of its common stock in a public offering at a price to the public of $6.10 per share for net proceeds of approximately $164.1 million. One of New Residential’s executive officers participated in this offering and purchased an additional 1,000,000 shares at the public offering price for net proceeds of approximately $6.1 million. For the purpose of compensating the Manager for its successful efforts in raising capital for New Residential, in connection with this offering, New Residential granted options to the Manager to purchase 2,875,000 shares of New Residential’s common stock at a price of $6.10, which had a fair value of approximately $1.4 million as of the grant date. The assumptions used in valuing the options were: a 2.87% risk-free rate, a 12.584% dividend yield, 25.66% volatility and a 10 year term.

 

An employee of the Manager exercised 215,000 options with a weighted average exercise price of $2.81 on May 7, 2014. Upon exercise, 215,000 shares of common stock of New Residential were issued.

 

37
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Management’s discussion and analysis of financial condition and results of operations is intended to help the reader understand the results of operations and financial condition of New Residential. The following should be read in conjunction with the unaudited consolidated financial statements and notes thereto included herein, and with Part II, Item 1A, “Risk Factors.”

 

GENERAL

 

New Residential is a publicly traded REIT (NYSE: NRZ) primarily focused on investing in residential mortgage related assets. We became an independent public company following our spin-off from Newcastle on May 15, 2013. We are externally managed by an affiliate of Fortress. Our goal is to drive strong risk-adjusted returns primarily through investments in servicing related assets, residential securities and loans and other investments including, but not limited to, Excess MSRs, servicer advances, real estate securities and real estate loans. Our investment guidelines are purposefully broad to enable us to make investments in a wide array of assets in diverse markets, including non-real estate related assets such as consumer loans. We generally target assets that generate significant current cash flows and/or have the potential for meaningful capital appreciation. We aim to generate attractive returns for our stockholders without the excessive use of financial leverage.

 

Our portfolio is currently composed of servicing related assets, residential securities and loans and other investments. Our asset allocation and target assets may change over time, depending on our Manager’s investment decisions in light of prevailing market conditions. The assets in our portfolio are described in more detail below under “—Our Portfolio.”

 

Market CONsiderations

 

Various market factors, which are outside of our control, affect our results of operations and financial condition. One such factor is developments in the U.S. residential housing market, which we believe are generating significant investment opportunities. Since the 2008 financial crisis, the residential mortgage industry has been undergoing major structural changes that are transforming the way mortgages are originated, owned and serviced. Historically, the majority of the approximately $10 trillion mortgage market has been serviced by large banks, which generally focus on conventional mortgages with low delinquency rates. This has allowed for low-cost routine payment processing and required minimal borrower interaction. Following the credit crisis, the need for “high-touch” specialty servicers, such as Nationstar, increased as loan performance declined, delinquencies rose and servicing complexities broadened. Specialty servicers have proven more willing and better equipped to perform the operationally intensive activities (e.g., collections, foreclosure avoidance and loan workouts) required to service credit-sensitive loans. 

 

Since 2010, banks have sold or committed to sell MSRs totaling more than $1 trillion. An MSR provides a mortgage servicer with the right to service a pool of mortgages in exchange for a portion of the interest payments made on the underlying mortgages. This amount typically ranges from 25 to 50 bps multiplied by the UPB of the mortgages. Approximately 77% of MSRs were owned by banks as of the fourth quarter of 2013, according to Inside Mortgage Finance. We expect this number to decline as banks face pressure to reduce their MSR exposure as a result of heightened capital reserve requirements under Basel III, regulatory scrutiny and a more challenging servicing environment. As a result, we believe the volume of MSR sales is likely to be substantial for some period of time.

 

We estimate that MSRs on approximately $200 – 300 billion of mortgages are currently for sale, which would require a capital investment of approximately $2 – 3 billion based on current pricing dynamics. We believe that non-bank servicers who are constrained by capital limitations, such as Nationstar, will continue to sell a portion of the Excess MSRs or other servicing assets, such as advances. We also estimate that approximately $1 – 2 trillion of MSRs could be sold over the next several years. In addition, approximately $1.2 trillion of new loans are expected to be created annually, according to the Mortgage Bankers Association. We believe this creates an opportunity to enter into “flow arrangements,” whereby loan originators agree to sell Excess MSRs on newly originated loans on a recurring basis (often monthly or quarterly). We believe that MSRs are being sold at a discount to historical pricing levels, although increased competition for these assets has driven prices higher recently. There can be no assurance that we will make additional investments in Excess MSRs or that any future investment in Excess MSRs will generate returns similar to the returns on our original investments in Excess MSRs.

 

38
 

 

Beginning in April 2012, we began to invest in RMBS as a complement to our Excess MSR portfolio. As of the fourth quarter of 2013, approximately $7 trillion of the $10 trillion of residential mortgages outstanding had been securitized, according to Inside Mortgage Finance. Approximately $6 trillion were Agency RMBS according to Inside Mortgage Finance, which are securities issued or guaranteed by a U.S. Government agency, such as Ginnie Mae, or by a GSE, such as Fannie Mae or Freddie Mac. The balance has been securitized by either public trusts or PLS, and are referred to as Non-Agency RMBS.

 

Since the onset of the financial crisis in 2007, there has been significant volatility in the prices for Non-Agency RMBS, which resulted from a widespread contraction in capital available for this asset class, deteriorating housing fundamentals, and an increase in forced selling by institutional investors (often in response to rating agency downgrades). While the prices of these assets have started to recover from their lows, from time to time there may be opportunities to acquire Non-Agency RMBS at attractive risk-adjusted yields, with the potential for upside if the U.S. economy and housing market continue to strengthen. We believe the value of existing Non-Agency RMBS may also rise if the number of buyers returns to pre-2007 levels. Furthermore, we believe that in many Non-Agency RMBS vehicles there is a meaningful discrepancy between the value of the Non-Agency RMBS and the recovery value of the underlying collateral. We intend to pursue opportunities to structure transactions that would enable us to realize this difference. We actively monitor the market for Non-Agency RMBS and our portfolio to determine when to strategically purchase and sell Non-Agency RMBS from time to time. We currently expect that the size of our Non-Agency portfolio will fluctuate depending primarily on our Manager’s assessment of expected yields and alternative investment opportunities. The primary causes of mark-to-market changes in our RMBS portfolio are changes in interest rates and credit spreads.

 

Interest rates have risen significantly in recent months and may continue to increase, although the timing of any further increases is uncertain. In periods of rising interest rates, the rates of prepayments and delinquencies with respect to mortgage loans generally decline. Generally, the value of our Excess MSRs is expected to increase when interest rates rise or delinquencies decline, and the value is expected to decrease when interest rates decline or delinquencies increase, due to the effect of changes in interest rates on prepayment speeds and delinquencies. However, prepayment speeds and delinquencies could increase even in the current interest rate environment, as a result of, among other things, a general economic recovery, government programs intended to foster refinancing activity or other reasons, which could reduce the value of our investments. Moreover, the value of our Excess MSRs is subject to a variety of factors, as described under “Risk Factors.” In the first quarter of 2014, the fair value of our investments in Excess MSRs (directly and through equity method investees) increased by approximately $3.6 million and the weighted average discount rate of the portfolio remained relatively unchanged at 12.5%.

 

We do not expect changes in interest rates to have a meaningful impact on the net interest spread of our Agency ARM and Non-Agency portfolios. Our RMBS are primarily floating rate or hybrid (i.e., fixed to floating rate) securities, which we generally finance with floating rate debt. Therefore, while rising interest rates will generally result in a higher cost of financing, they will also result in a higher coupon payable on the securities. The net interest spread on our Agency ARM RMBS portfolio as of March 31, 2014 was 1.19%, compared to 0.94% as of December 31, 2013. The net interest spread on our Non-Agency RMBS portfolio as of March 31, 2014 was 2.67%, compared to 2.83% as of December 31, 2013.

 

In November 2013, we made our first investment in non-performing loans. We are seeing substantial volumes of distressed residential mortgage loan sales.

 

Credit performance also affects the value of our portfolio. Higher rates of delinquency and/or defaults can reduce the value of our Excess MSRs, Non-Agency RMBS, Agency RMBS and loan portfolios. For our Excess MSRs on Agency portfolios and our Agency RMBS, delinquency and default rates have an effect similar to prepayment rates. Our Excess MSRs on Non-Agency portfolios are not affected by delinquency rates because the servicer continues to advance principal and interest until a default occurs on the applicable loan; defaults have an effect similar to prepayments. For our Non-Agency RMBS and loans, higher default rates can lead to greater loss of principal.

 

Credit spreads continued to decrease, or “tighten,” in the first quarter of 2014 relative to the fourth quarter of 2013, which has had a favorable impact on the value of our securities and loan portfolio. Credit spreads measure the yield relative to a specified benchmark that the market demands on securities and loans based on such assets’ credit risk. For a discussion of the way in which interest rates, credit spreads and other market factors affect us, see “Quantitative and Qualitative Disclosures About Market Risk.”

 

The value of our consumer loan portfolio is influenced by, among other factors, the U.S. macroeconomic environment, and unemployment rates in particular. We believe that losses are highly correlated to unemployment; therefore, we expect that an improvement in unemployment rates would support the value of our investment, while deterioration in unemployment rates would result in a decline in its value.

 

39
 

 

OUR Portfolio

 

Our portfolio is currently composed of servicing related assets, residential securities and loans and other investments, as described in more detail below. Our asset allocation and target assets may change over time, depending on our Manager’s investment decisions in light of prevailing market conditions. The assets in our portfolio are described in more detail below.

 

           Percentage of       Weighted 
       Amortized   Total       Average 
   Outstanding   Cost Basis   Amortized   Carrying   Life (years) 
   Face Amount   (A)   Cost Basis   Value   (B) 
Investments in:                         
Excess MSRs (C)  $252,038,364   $584,822    9.1%  $680,011    6.1 
Servicer Advances (C)   3,430,473    3,457,385    53.9%   3,457,385    3.2 
Agency ARM RMBS   1,085,447    1,162,098    18.1%   1,162,650    4.3 
Non-Agency RMBS   1,780,864    1,173,195    18.3%   1,182,571    8.4 
Residential Mortgage Loans   57,818    34,045    0.6%   34,045    3.6 
Consumer Loans (C)   3,098,138    N/A    N/A    231,422    3.2 
Total/ Weighted Average  $261,491,104   $6,411,545    100.0%  $6,748,084    4.6 
                          
Reconciliation to GAAP total assets:                         
Cash and restricted cash                  175,102      
Derivative assets                  45,040      
Other assets                  30,608      
                          
GAAP total assets                 $6,998,834      

 

(A)Net of impairment.
(B)Weighted average life is based on the timing of expected principal reduction on the asset.
(C)The outstanding face amount of Excess MSRs, servicer advances, and consumer loans is based on 100% of the face amount of the underlying residential mortgage loans, currently outstanding advances, and consumer loans respectively.

 

Servicing Related Assets

 

Excess MSRs

 

As of March 31, 2014, we had approximately $680.0 million estimated carrying value of Excess MSRs (held directly and through joint ventures). As of March 31, 2014, our completed investments represent an effective 33% to 80% interest in the Excess MSRs (held either directly or through joint ventures) on pools of mortgage loans with an aggregate UPB of approximately $252.0 billion. Nationstar is the servicer of the loans underlying all of our investments in Excess MSRs to date, and it earns a basic fee in exchange for providing all servicing functions. In addition, Nationstar retains a 20% to 35% interest in the Excess MSRs and all ancillary income associated with the portfolios. In our capacity as owner of the Excess MSR, we do not have any servicing duties, liabilities or obligations associated with the servicing of the portfolios underlying any of our Excess MSRs. However, we, through co-investments made by our subsidiaries, may separately agree to do so and have separately purchased the servicer advances, including the right to receive the basic fee component of related MSRs, on the Non-Agency portfolios (Pools 5, 10, 12, 17 and 18) underlying our Excess MSR investments. See “—Servicer Advances” below.

 

Each of our Excess MSR investments to date is subject to a recapture agreement with Nationstar. Under the recapture agreements, we are 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. In other words, we are generally entitled to a pro rata interest in the Excess MSRs on both (i) a loan resulting from a refinancing by Nationstar of a loan in the original portfolio, and (ii) a loan resulting from a refinancing by Nationstar of a previously recaptured loan.

 

40
 

 

The tables below summarize the terms of our investments in Excess MSRs completed as of March 31, 2014.

 

Summary of Direct Excess MSR Investments as of March 31, 2014
                                      
                 MSR Component(A)           Excess MSR 
   Investment Date  Initial UPB (bn)   Current UPB (bn)(B)   Loan Type(C)  MSR (bps)    Excess MSR (bps)    Interest in Excess MSR (%)   Purchase Price (mm)   Carrying Value (mm) 
Pool 1  Dec-11  $9.9   $6.6   GSE   32 bps    26 bps  65%  $43.7   $41.5 
Pool 2  Jun-12   10.4    7.7   GSE   30     22     65%   42.3    40.3 
Pool 3  Jun-12   9.8    7.6   GSE   30     22     65%   36.2    37.9 
Pool 4  Jun-12   6.3    4.9   GSE   26     17     65%   15.4    17.5 
Pool 5(D)  Jun-12   47.6    35.8   PLS   33     14     80%   151.5    147.7 
Pool 11 (direct portion)(E)  May-13       0.5   GSE   25     19     67%   2.4    2.6 
Pool 12(D)  Sep-13   5.4    5.0   PLS   50     26     40%   17.4    17.5 
Pool 17(D)  Jan-14   8.1    8.1   PLS   34     19     33%   19.1    19.1 
Pool 18(D)  Nov-13   9.2    8.5   PLS   37     16     40%   17.0    17.6 
 Total/Weighted Average     $106.7   $84.7       33 bps    18 bps      $345.0   $341.7 

 

(A)The MSR is a weighted average as of March 31, 2014, and the Excess MSR represents the difference between the weighted average MSR and the basic fee (which fee remains constant).
(B)As of March 31, 2014.
(C)“GSE” refers to loans in Fannie Mae or Freddie Mac securitizations. “PLS” refers to loans in private label securitizations.
(D)Pool in which we also invested in related servicer advances, including the basic fee component of the related MSR as of March 31, 2014 (Note 6 to our consolidated financial statements included herein).
(E)A portion of our investment in Pool 11 was made as a direct investment, and the remainder was made as an investment through a joint venture accounted for as an equity method investee, as described in the chart below. The direct investment in Pool 11 includes loans that, upon refinancing by a third-party, became serviced by Nationstar and subject to a 67% Excess MSR owned by us.

 

Summary Excess MSR Investments Through Equity Method Investees as of March 31, 2014

 

                        MSR Component(A)                      
    Commitment/ Investment Date     Initial UPB (bn)     Current UPB (bn)(B)     Loan Type(C)   MSR (bps)       Excess MSR (bps)     NRZ Interest in Investee (%)     Investee Interest in Excess MSR (%) (D)     NRZ Effective Ownership (%)(D)     Investee Carrying Value (mm)  
Pool 6   Jan-13     $ 13.0     $ 9.6     GM     40   bps     25   bps   50 %     67 %     33.5 %   $ 55.4  
Pool 7   Jan-13       38.0       30.6     GSE     26         15       50 %     67 %     33.5 %     123.8  
Pool 8   Jan-13       17.6       13.5     GSE     28         19       50 %     67 %     33.5 %     67.5  
Pool 9   Jan-13       33.8       29.7     GM     39         22       50 %     67 %     33.5 %     157.6  
Pool 10(E)   Jan-13       75.6       66.7     PLS     34         11       50 %     67-77 %     33.5-38.5 %     201.8  
Pool 11 (indirect portion)(F)   May-13       22.8       17.3     GSE     25         15       50 %     67 %     33.5 %     67.6  
Total/Weighted Average         $ 200.8     $ 167.4           32   bps     16   bps                         $ 673.7  

 

(A)The MSR is a weighted average as of March 31, 2014, and the Excess MSR represents the difference between the weighted average MSR and the basic fee (which fee remains constant).
(B)As of March 31, 2014.
(C)“GM” refers to loans in Ginnie Mae securitizations. “GSE” refers to loans in Fannie Mae or Freddie Mac securitizations. “PLS” refers to loans in private label securitizations.
(D)The equity method investee purchased an additional interest in a portion of Pool 10. Investee interest in Excess MSR and NRZ effective ownership in Pool 10 represent the range of ownership interests in the pool.
(E)Pool in which we also invested in related servicer advances, including the basic fee component of the related MSR as of March 31, 2013 (Note 6 to our consolidated financial statements included herein).
(F)A portion of our investment in Pool 11 was made as a direct investment and the remainder was made as an investment through a joint venture accounted for as an equity method investee, as described in the chart above.

 

41
 

 

The tables below summarize the terms of our investments in Excess MSRs that were not yet completed as of May 12, 2014:

  

Summary of Pending Excess MSR Investments (Committed but Not Closed)
                                             
                      MSR Component(A)                
                                             
    Commitment
Date
  Initial
UPB (bn)
    Current
UPB (bn)(B)
  Loan
Type(C)
  MSR (bps)     Excess
MSR (bps)
    NRZ
Interest in
Investee
(%)
  Direct
Interest in
Excess
MSR (%)
    NRZ
Excess
MSR
Initial
Investment
(mm)(D)
Pool 13 (Direct Investment)   Nov-13   $ 6.1     $ 6.1   GSE     25  bps     19  bps   N/A     33 %   $ 14.5
Pool 15 (Direct Investment)   Nov-13     2.2       2.2   GSE     37       27     N/A     33 %     6.3
Pool 20 (Direct Investment)   Apr-14     0.7       0.7   GSE     42       32     N/A     33 %     2.3
Total/Weighted Average       $ 9.0     $ 9.0         29  bps     22  bps               $ 23.1

 

 

(A)The MSR is a weighted average as of the commitment date, and the Excess MSR represents the difference between the weighted average MSR and the basic fee (which fee remains constant).
(B)As of commitment date.
(C)“PLS” refers to loans in private label securitizations. “GSE” refers to loans in Fannie Mae or Freddie Mac securitizations.
(D)The actual amount invested will be based on the UPB at the time of close.

  

Summary of Excess MSR Investments closed subsequent to March 31, 2014
 
                 MSR Component(A)           
   Commitment
Date
  Initial
UPB (bn)
  Current
UPB
(bn)(B)
  Loan
Type(C)
  MSR (bps)  Excess
MSR (bps)
  NRZ
Interest in
Investee
(%)
  Direct
Interest in
Excess
MSR (%)
  NRZ
Excess
MSR
Initial
Investment
(mm)(D)
Pool 14 (Direct Investment)  Nov-13  $ 1.0  $1.0   GSE   25    19   N/A   33%  $ 2.4
Pool 16 (Direct Investment)  Nov-13    1.5   1.5   GSE   27    17   N/A   33%    2.9
Pool 19 (Direct Investment)  Apr-14    10.4   10.4   GSE   25    19   N/A   33%    28.7
      $ 12.9  $12.9      25 bps   19 bps        $ 34.0

 

42
 

 

The following table summarizes the collateral characteristics of the loans underlying our direct Excess MSR investments as of March 31, 2013 (dollars in thousands):

 

   Collateral Characteristics 
   Current Carrying Amount   Original Principal Balance   Current Principal Balance   Number of Loans   WA FICO Score

(A)
   WA Coupon   WA Maturity (months)   Average Loan Age (months)   Adjustable Rate Mortgage %
(B)
   1 Month CPR
(C)
   1 Month CRR
(D)
   1 Month CDR
(E)
   1 Month Recapture Rate 
Pool 1                                                                 
Original Pool  $26,918   $9,940,385   $4,964,917    37,172    672    5.5%   274    89    21.0%   25.4%   22.4%   3.9%   42.4%
Recaptured Loans   8,524        1,661,472    8,947    727    4.4%   319    10        1.8%   1.5%   0.2%   7.7%
Recapture Agreements   6,019                                                 
    41,461    9,940,385    6,626,389    46,119    686    5.2%   285    69    15.7%   19.5%   17.2%   3.0%   33.7%
                                                                  
Pool 2                                                                 
Original Pool   27,791    10,383,891    6,429,723    34,178    668    4.7%   319    77    11.0%   17.6%   12.9%   5.4%   42.0%
Recaptured Loans   6,598        1,259,767    6,624    732    4.4%   319    8        2.3%   2.3%        
Recapture Agreements   5,969                                                 
    40,358    10,383,891    7,689,490    40,802    678    4.7%   319    66    9.2%   15.1%   11.2%   4.5%   35.1%
                                                                  
Pool 3                                                                 
Original Pool   27,702    9,844,114    6,807,396    42,792    677    4.0%   285    101    42.0%   16.6%   12.6%   4.5%   39.0%
Recaptured Loans   4,128        788,237    4,841    722    4.4%   315    7        1.9%   1.9%        
Recapture Agreements   6,065                                                 
    37,895    9,844,114    7,595,633    47,633    682    4.1%   288    91    37.6%   15.0%   11.5%   4.0%   35.0%
                                                                  
Pool 4                                                                 
Original Pool   12,466    6,250,549    4,720,539    23,804    678    3.3%   304    92    59.0%   13.3%   6.6%   7.1%   37.3%
Recaptured Loans   1,139        219,506    1,131    736    4.5%   328    7        2.4%   2.4%        
Recapture Agreements   3,897                                                 
    17,502    6,250,549    4,940,045    24,935    681    3.3%   305    89    56.4%   12.8%   6.4%   6.8%   35.7%
                                                                  
Pool 5                                                                 
Original Pool (F)   141,693    47,572,905    35,780,280    155,613    658    4.3%   285    97    53.0%   10.5%   5.0%   5.8%   1.9%
Recaptured Loans   274        43,680    185    755    3.8%   315    7    2.0%   0.1%   0.1%        
Recapture Agreements   5,735                                                 
    147,702    47,572,905    35,823,960    155,798    658    4.3%   285    97    52.9%   10.5%   5.0%   5.8%   1.9%
                                                                  
Pool 11 (direct portion)(G)                                                                 
Original Pool                                                    
Recaptured Loans   2,369        444,667    2,733        4.2%   306    8        1.0%   1.0%        
Recapture Agreements   280                                                 
    2,649        444,667    2,733        4.2%   306    8        1.0%   1.0%        
                                                                  
Pool 12                                                                 
Original Pool (F)   17,164    5,375,157    4,992,898    40,495    597    5.7%   311    100    33.0%   9.7%   2.9%   7.0%   2.9%
Recaptured Loans   16        6,031    44    684    4.3%   281    3                     
Recapture Agreements   328                                                 
    17,508    5,375,157    4,998,929    40,539    597    5.7%   311    100    33.0%   9.7%   2.9%   7.0%   2.9%
Pool 17                                                                 
Original Pool (F)   18,471    8,088,574    8,096,010    33,572    692    4.5%   258    98    44.0%   8.8%   6.8%   2.1%   0.2%
Recaptured Loans           429    2    777    4.3%   323    1                     
Recapture Agreements   598                                                 
    19,069    8,088,574    8,096,439    33,574    692    4.5%   258    98    44.0%   8.8%   6.8%   2.1%   0.2%
Pool 18                                                                 
Original Pool (F)   16,784    9,238,001    8,462,896    42,318    673    4.9%   241    108    50.0%   11.4%   8.0%   3.8%   0.7%
Recaptured Loans   1        530    4    698    5.0%   288    1                     
Recapture Agreements   775                                                 
    17,560    9,238,001    8,463,426    42,322    673    4.9%   241    108    50.0%   11.4%   8.0%   3.8%   0.7%
Total/Weighted Average  $341,704   $106,693,576   $84,678,978    434,455    663    4.5%   284    92    42.3%   12.0%   7.5%   4.8%   12.1%

 

Continued on next page.

 

43
 

 

   Collateral Characteristics 
   Uncollected
Payments (H)
   Delinquency 30 Days (H)   Delinquency 60 Days (H)   Delinquency 90+ Days (H)   Loans in
Foreclosure
   Real
Estate
Owned
   Loans in
Bankruptcy
 
Pool 1                                   
Original Pool   9.5%   5.7%   1.9%   1.6%   3.9%   1.3%   2.9%
Recaptured Loans   0.6%   0.5%   0.1%   0.2%   0.1%       0.1%
Recapture Agreements                            
    7.3%   4.4%   1.4%   1.2%   2.9%   1.0%   2.2%
                                    
Pool 2                                   
Original Pool   13.5%   4.7%   1.9%   1.7%   6.3%   2.5%   5.1%
Recaptured Loans   0.9%   0.6%   0.1%   0.1%   0.1%       0.2%
Recapture Agreements                            
    11.5%   4.1%   1.6%   1.5%   5.3%   2.1%   4.3%
                                    
Pool 3                                   
Original Pool   12.3%   4.4%   1.2%   1.1%   6.1%   2.6%   3.4%
Recaptured Loans   0.6%   0.8%   0.1%               0.2%
Recapture Agreements                            
    11.1%   4.0%   1.1%   1.0%   5.5%   2.3%   3.1%
                                    
Pool 4                                   
Original Pool   14.2%   3.4%   1.5%   1.4%   7.9%   2.7%   4.2%
Recaptured Loans   0.6%   0.5%   0.1%               0.1%
Recapture Agreements                            
    13.6%   3.3%   1.4%   1.3%   7.6%   2.5%   4.0%
                                    
Pool 5                                   
Original Pool (F)   22.5%   10.1%   2.2%   4.4%   11.9%&nb