UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 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 x    No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x    No ¨
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 x  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 x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.
Common stock, $0.01 par value per share: 282,213,133 shares outstanding as of August 1, 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
 
ITEM 1. FINANCIAL STATEMENTS
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
 
 
June 30, 2014
 
December 31, 2013
 
(Unaudited)
 
Assets
 
 
 
Investments in:
 
 
 
Excess mortgage servicing rights, at fair value
$
372,416

 
$
324,151

Excess mortgage servicing rights, equity method investees, at fair value
330,220

 
352,766

Servicer advances, at fair value
3,679,105

 
2,665,551

Real estate securities, available-for-sale
1,463,903

 
1,973,189

Residential mortgage loans, held-for-investment
517,424

 
33,539

Consumer loans, equity method investees
250,048

 
215,062

Cash and cash equivalents
311,126

 
271,994

Restricted cash
37,327

 
33,338

Derivative assets
30,992

 
35,926

Other assets
46,755

 
53,142

 
$
7,039,316

 
$
5,958,658

 
 
 


Liabilities and Equity
 

 


 
 
 


Liabilities
 

 


Repurchase agreements
$
1,815,182

 
$
1,620,711

Notes payable
3,289,445

 
2,488,618

Trades payable

 
246,931

Due to affiliates
26,132

 
19,169

Dividends payable
70,553

 
63,297

Deferred tax liability
17,645



Accrued expenses and other liabilities
8,579

 
6,857

 
5,227,536

 
4,445,583

 
 
 


Commitments and Contingencies


 


 
 
 


Equity
 

 


Common Stock, $0.01 par value, 2,000,000,000 shares authorized, 282,213,133 and 253,197,974 issued and outstanding at June 30, 2014 and December 31, 2013, respectively
2,823

 
2,532

Additional paid-in capital
1,326,272

 
1,157,118

Retained earnings
160,396

 
102,986

Accumulated other comprehensive income, net of tax
8,988

 
3,214

Total New Residential stockholders’ equity
1,498,479

 
1,265,850

Noncontrolling interests in equity of consolidated subsidiaries
313,301

 
247,225

Total Equity
1,811,780

 
1,513,075

 
$
7,039,316

 
$
5,958,658

 
See notes to condensed consolidated financial statements.

1



NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except share data)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 Interest income
$
92,656

 
$
22,999

 
$
164,146

 
$
39,190

 Interest expense
36,512

 
2,651

 
75,509

 
3,550

Net Interest Income
56,144

 
20,348

 
88,637

 
35,640

 
 
 
 
 
 
 
 
Impairment
 
 
 
 
 
 
 
 Other-than-temporary impairment ("OTTI") on securities
615

 
3,756

 
943

 
3,756

 Valuation provision on loans
293

 

 
457

 

 
908

 
3,756

 
1,400

 
3,756

 


 


 


 


  Net interest income after impairment
55,236

 
16,592

 
87,237

 
31,884

 
 
 
 
 
 
 
 
Other Income
 
 
 
 
 
 
 
Change in fair value of investments in excess mortgage servicing rights
5,502

 
41,833

 
12,104

 
43,691

Change in fair value of investments in excess mortgage servicing rights, equity method
    investees
12,743

 
20,127

 
19,117

 
21,096

Change in fair value of investments in servicer advances
82,877

 

 
82,877

 

Earnings from investments in consumer loans, equity method investees
21,335

 
36,164

 
37,695

 
36,164

Gain on settlement of investments
52,539

 
58

 
56,896

 
58

Other income
2,893

 

 
4,250

 

 
177,889

 
98,182

 
212,939

 
101,009

 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
 General and administrative expenses
5,744

 
602

 
7,819

 
3,321

 Management fee allocated by Newcastle

 
1,809

 

 
4,134

 Management fee to affiliate
4,915

 
2,263

 
9,401

 
2,263

              Incentive compensation to affiliate
18,863

 
878

 
22,201

 
878

 
29,522

 
5,552

 
39,421

 
10,596

 


 


 


 


Income (Loss) Before Income Taxes
203,603

 
109,222

 
260,755

 
122,297

              Income tax expense
21,395

 

 
21,682

 

Net Income (Loss)
$
182,208

 
$
109,222

 
$
239,073

 
$
122,297

Noncontrolling interests in Income (Loss) of Consolidated Subsidiaries
$
58,705

 
$

 
$
66,798

 
$

Net Income (Loss) Attributable to Common Stockholders
$
123,503

 
$
109,222

 
$
172,275

 
$
122,297

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income Per Share of Common Stock


 


 


 


  Basic
$
0.45

 
$
0.43

 
$
0.65

 
$
0.48

  Diluted
$
0.44

 
$
0.43

 
$
0.64

 
$
0.48

 


 


 


 


Weighted Average Number of Shares of Common Stock Outstanding


 


 


 


  Basic
272,930,907

 
253,025,645

 
263,124,444

 
253,025,645

  Diluted
279,336,255

 
256,659,488

 
269,581,580

 
254,852,605

 
 
 
 
 
 
 
 
Dividends Declared per Share of Common Stock
$
0.250

 
$
0.070

 
$
0.425

 
$
0.070

 
See notes to condensed consolidated financial statements.
 

2



NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(dollars in thousands)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Net income (loss)
$
182,208

 
$
109,222

 
$
239,073

 
$
122,297

Other comprehensive income (loss)
 

 
 

 
 
 
 
Net unrealized gain (loss) on securities
55,729

 
(16,193
)
 
66,607

 
(10
)
Reclassification of net realized (gain) loss on
   securities into earnings
(56,669
)
 
3,698

 
(60,833
)
 
3,698

 
(940
)
 
(12,495
)
 
5,774

 
3,688

Total comprehensive income (loss)
$
181,268

 
$
96,727

 
$
244,847

 
$
125,985

Comprehensive income (loss) attributable to
    noncontrolling interests
$
58,705

 
$

 
$
66,798

 
$

Comprehensive income (loss) attributable to common
    stockholders
$
122,563

 
$
96,727

 
$
178,049

 
$
125,985

 
See notes to condensed consolidated financial statements.


3



NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED) 
FOR THE SIX MONTHS ENDED JUNE 30, 2014
(dollars in thousands, except share data)
 
 
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

 

 

 
(114,865
)
 

 
(114,865
)
 

 
(114,865
)
Capital contributions

 

 

 

 

 

 
142,082

 
142,082

Capital distributions

 

 

 

 

 

 
(144,196
)
 
(144,196
)
Issuance of common stock
28,750,000

 
288

 
169,617

 

 

 
169,905

 

 
169,905

Option exercise
215,000

 
2

 
601

 

 

 
603

 

 
603

Dilution impact of distributions from consolidated subsidiaries

 

 
(1,392
)
 

 

 
(1,392
)
 
1,392

 

Director share grant
50,159

 
1

 
328

 

 

 
329

 

 
329

Comprehensive income (loss) (net of tax)
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income (loss)

 

 

 
172,275

 

 
172,275

 
66,798

 
239,073

Net unrealized gain (loss) on securities

 

 

 

 
66,607

 
66,607

 

 
66,607

Reclassification of net realized (gain) loss on securities into earnings

 

 

 

 
(60,833
)
 
(60,833
)
 

 
(60,833
)
Total comprehensive income (loss)


 


 


 


 


 
178,049

 
66,798

 
244,847

Equity - June 30, 2014
282,213,133

 
$
2,823

 
$
1,326,272

 
$
160,396

 
$
8,988

 
$
1,498,479

 
$
313,301

 
$
1,811,780

 
See notes to condensed consolidated financial statements.


4



NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
 
 
Six Months Ended June 30,
 
2014
 
2013
Cash Flows From Operating Activities
 
 
 
Net income (loss)
$
239,073

 
$
122,297

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
(12,104
)
 
(43,691
)
Change in fair value of investments in excess mortgage servicer rights, equity method
    investees
(19,117
)
 
(21,096
)
              Change in fair value of investments in servicer advances
(82,877
)
 

Earnings from consumer loan equity method investees
(37,695
)
 
(36,164
)
Change in fair value of investments in derivative assets
2,444

 

Accretion and other amortization
(134,339
)
 
(27,377
)
(Gain) / loss on settlement of investments (net)
(56,896
)
 
(58
)
(Gain) / loss on transfer of loans to REO
(6,694
)
 

Other-than-temporary impairment (“OTTI”)
943

 
3,756

Valuation provision on loans
457

 

Non-cash directors’ compensation
329

 

       Deferred tax liability
17,645

 

Changes in:


 


Restricted cash
(3,989
)
 

Other assets
(3,213
)
 
(3,907
)
Due to affiliates
6,963

 
(2,715
)
Accrued expenses and other liabilities
1,800

 
574

      Reduction of liability deemed as capital contribution by Newcastle

 
11,515

Other operating cash flows:


 


Interest received from excess mortgage servicing rights
25,509

 
3,464

Interest received from servicer advance investments
65,321

 

Interest received from residential mortgage loans, held-for-investment
1,223

 

Distributions of earnings from excess mortgage servicing rights, equity method investees
20,500

 
4,822

Distributions of earnings from consumer loan equity method investees
2,152

 
769

Cash proceeds from investments, in excess of interest income

 
41,435

Net cash proceeds deemed as capital distributions to Newcastle

 
(35,571
)
Net cash provided by (used in) operating activities
27,435

 
18,053

 


 
 
Cash Flows From Investing Activities


 
 
Acquisition of investments in excess mortgage servicing rights
(55,289
)
 
(2,391
)
Acquisition of investments in excess mortgage servicing rights, equity method investees

 
(53,766
)
Purchase of servicer advance investments
(3,955,602
)
 

Purchase of Agency ARM RMBS
(354,838
)
 
(140,924
)
Purchase of Non-Agency RMBS
(1,057,464
)
 
(124,176
)
Purchase of residential mortgage loans, held-for-investment
(733,693
)
 

Purchase of derivative assets
(70,027
)
 

Purchase of real estate owned
(3,391
)
 

Payment for settlement of derivatives at a loss
(17,273
)
 

Return of investments in excess mortgage servicing rights
19,421

 
6,600

Return of investments in excess mortgage servicing rights, equity method investees
21,163

 
4,018

Principal repayments from servicing advance investments
3,062,259

 

Principal repayments from Agency ARM RMBS
143,735

 
102,553

Principal repayments from Non-Agency RMBS
49,175

 
23,592

Principal repayments from residential mortgage loans, held-for-investment
8,289

 
1,789

Proceeds from sale of Agency ARM RMBS
324,379

 

Proceeds from sale of Non-Agency RMBS
1,273,190

 
4,421

Proceeds from settlement of derivatives
13,271

 

Proceeds from sale of residential mortgage loans
249,690

 

Proceeds from sale of real estate owned
2,880

 

Net cash provided by (used in) investing activities
(1,080,125
)
 
(178,284
)
 
Continued on next page.

5






NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
 
 
Six Months Ended June 30,
 
2014
 
2013
Cash Flows From Financing Activities
 
 
 
Repayments of repurchase agreements
(2,274,155
)
 
(290,747
)
Margin deposits under repurchase agreements
(115,961
)
 
(87,579
)
Repayments of notes payable
(4,216,985
)
 

Payment of deferred financing fees
(6,530
)
 

Common stock dividends paid
(107,609
)
 

Borrowings under repurchase agreements
2,473,920

 
415,982

Return of margin deposits under repurchase agreements
152,936

 
87,216

Borrowings under notes payable
5,017,812



Issuance of common stock
173,201



Costs related to issuance of common stock
(2,693
)


Capital contributions



Contributions in kind

 
245,058

Noncontrolling interest in equity of consolidated subsidiaries - contributions
142,082

 

Noncontrolling interest in equity of consolidated subsidiaries - distributions
(144,196
)
 

Net cash provided by (used in) financing activities
1,091,822

 
369,930

 
 
 
 
Net Increase (Decrease) in Cash and Cash Equivalents
39,132

 
209,699

 
 
 
 
Cash and Cash Equivalents, Beginning of Period
271,994

 

 
 
 
 
Cash and Cash Equivalents, End of Period
$
311,126

 
$
209,699

 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid during the period for interest
$
72,100

 
$
3,029

Cash paid during the period for income taxes
3,510

 

 
 
 
 
Supplemental Schedule of Non-Cash Investing and Financing Activities Prior to Date of Cash Contribution by Newcastle
Cash proceeds from investments, in excess of interest income
$

 
$
41,435

Acquisition of real estate securities

 
242,750

Acquisition of investments in excess mortgage servicing rights, equity method investees at fair value

 
125,099

Acquisition of residential mortgage loans, held-for-investment

 
35,138

Acquisition of investments in consumer loan equity method investees

 
245,421

Borrowings under repurchase agreements

 
1,179,068

Repayments of repurchase agreements

 
3,902

Capital contributions by Newcastle

 
648,408

Contributions in-kind by Newcastle

 
1,093,684

Capital distributions to Newcastle

 
1,228,054

 
 
 
 
Supplemental Schedule of Non-Cash Investing and Financing Activities Subsequent to Date of Cash Contribution by Newcastle
 
 
 
 
Dividends declared but not paid
$
70,553

 
$
17,712

Non-cash distribution from Consumer Loan Companies
557



 
See notes to condensed consolidated financial statements.

6



NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 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. See Note 17 regarding New Residential's taxable REIT subsidiaries.
 
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 June 30, 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 June 30, 2014. In addition, Fortress, through its affiliates, held options to purchase approximately 17.9 million shares of New Residential’s common stock as of June 30, 2014.

The consolidated financial statements for periods prior to May 15, 2013 have been prepared on a spin-off basis from the consolidated financial statements and accounting records of Newcastle and reflect New Residential’s historical results of operations, financial position and cash flows, in accordance with U.S. GAAP. As presented in the Consolidated Statements of Cash Flows, New Residential did not have any cash balance during periods prior to April 5, 2013, which is the first date Newcastle contributed cash to New Residential. All of its cash activity occurred in Newcastle’s accounts during these periods. The consolidated financial statements for periods prior to May 15, 2013 do not necessarily reflect what New Residential’s consolidated results of operations, financial position and cash flows would have been had New Residential operated as an independent company prior to the spin-off.
 
Certain expenses of Newcastle, comprised primarily of a portion of its management fee, have been allocated to New Residential to the extent they were directly associated with New Residential for periods prior to the spin-off on May 15, 2013. The portion of the management fee allocated to New Residential prior to the spin-off represents the product of the management fee rate payable by Newcastle (1.5%) and New Residential’s gross equity, which management believes is a reasonable method for quantifying the expense of the services provided by the employees of the Manager to New Residential. The incremental cost of certain legal, accounting and other expenses related to New Residential’s operations prior to May 15, 2013 are reflected in the accompanying consolidated financial statements. New Residential and Newcastle do not share any expenses following the spin-off.
 
The accompanying condensed 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

7

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2014
(dollars in tables in thousands, except share data) 
 

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.
 
Certain prior period amounts have been reclassified to conform to the current period's presentation.
Recently Adopted Accounting Policies
Purchased Credit-Impaired (PCI) Loans
New Residential evaluates the credit quality of its loans, as of the acquisition date, for evidence of credit quality deterioration. Loans with evidence of credit deterioration since their origination, and where it is probable that New Residential will not collect all contractually required principal and interest payments, are PCI loans. At acquisition, New Residential aggregates PCI loans into pools based on common risk characteristics and loans aggregated into pools are accounted for as if each pool were a single loan with a single composite interest rate and an aggregate expectation of cash flows.

The excess of the total cash flows (both principal and interest) expected to be collected over the carrying value of the PCI loans is referred to as the accretable yield. This amount is not reported on New Residential’s Condensed Consolidated Balance Sheets but is accreted into interest income at a level rate of return over the remaining estimated life of the pool of loans.

On a quarterly basis, New Residential estimates the total cash flows expected to be collected over the remaining life of each pool. Probable decreases in expected cash flows trigger the recognition of impairment. Impairments are recognized through the valuation provision for loans and an increase in the allowance for loan losses. Probable and significant increases in expected cash flows would first reverse any previously recorded allowance for loan losses with any remaining increases recognized prospectively as a yield adjustment over the remaining estimated life of the pool of loans.

The excess of the total contractual cash flows over the cash flows expected to be collected is referred to as the nonaccretable difference. This amount is not reported on New Residential's Condensed Consolidated Balance Sheets and represents an estimate of the amount of principal and interest that will not be collected.

The liquidation of PCI loans, which may include sales of loans, receipt of payment in full by the borrower, or foreclosure, results in removal of the loans from the underlying PCI pool. When the amount of the liquidation proceeds, if any, is less than the unpaid principal balance of the loan, the difference is first applied against the PCI pool’s nonaccretable difference. When the nonaccretable difference for a particular loan pool has been fully depleted, any excess of the unpaid principal balance of the loan over the liquidation proceeds is written off against the PCI pool’s allowance for loan losses.

Recent Accounting Pronouncements

In January 2014, the FASB issued ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The standard clarifies the timing of when a creditor is considered to have taken physical possession of residential real estate collateral for a consumer mortgage loan, resulting in the reclassification of the loan receivable to real estate owned. A creditor has taken physical possession of the property when either (1) the creditor obtains legal title through foreclosure, or (2) the borrower transfers all interests in the property to the creditor via a deed in lieu of foreclosure or a similar legal agreement. The standard also requires disclosure of the amount of foreclosed residential real estate property held by the creditor and the recorded investment in residential real estate mortgage loans that are in process of foreclosure. The ASU is effective for New Residential in the first quarter of 2015. Early adoption is permitted. New Residential is currently evaluating the new guidance to determine the impact that it may have on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenues from Contracts with Customers (Topic 606). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance

8

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2014
(dollars in tables in thousands, except share data) 
 

obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The ASU is effective for New Residential in the first quarter of 2017. Early application is not permitted. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance in the ASU. New Residential is currently evaluating the new guidance to determine the impact it may have on its consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The standard changes the accounting for repurchase-to-maturity transactions and linked repurchase financing transactions to secured borrowing accounting. The ASU also expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers accounted for as secured borrowings. The ASU is effective for New Residential in the first quarter of 2015. Early application is not permitted. Disclosures are not required for comparative periods presented before the effective date. New Residential is currently evaluating the new guidance to determine the impact it may have on its consolidated financial statements.

The FASB has recently issued or discussed a number of proposed standards on such topics as consolidation, financial statement presentation, financial instruments and hedging. 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 June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Gain (loss) on derivative instruments
$
(3,801
)
 
$

 
$
(2,444
)
 
$

Gain (loss) on transfer of loans to REO
6,694

 

 
6,694

 

 
$
2,893

 
$

 
$
4,250

 
$

 
Other assets and liabilities are comprised of the following:
 
Other Assets
 
 
 
Accrued Expenses and Other Liabilities
 
June 30, 2014
 
December 31, 2013
 
 
 
June 30, 2014
 
December 31, 2013
Margin receivable
$
772

 
$
40,132

 
Interest payable
 
$
2,185

 
$
4,010

Interest and other receivables
5,936

 
7,548

 
Accounts payable
 
4,950

 
2,829

Deferred financing costs, net(A)
5,554

 
4,773

 
Derivative liability
 

 
18

Real estate owned(B)
30,976

 

 
Current taxes payable
 
527

 

Other assets
3,517

 
689

 
Other liabilities
 
917

 

 
$
46,755

 
$
53,142

 
 
 
$
8,579

 
$
6,857


(A)
Deferred financing costs is net of accumulated amortization of $6,517 and $768 as of June 30, 2014 and December 31, 2013, respectively.

(B)
Real estate owned ("REO") assets are those individual properties New Residential purchased or received in satisfaction of a debt (e.g., by taking legal title or physical possession). REO assets are initially recognized at fair value less costs to sell and the carrying value of the acquired property is reviewed on a recurring basis and adjusted, if necessary, to the lower of cost or fair value.

As reflected on the Condensed Consolidated Statements of Cash Flows, accretion and other amortization is comprised of the following:

9

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2014
(dollars in tables in thousands, except share data) 
 

 
 
Six Months Ended June 30,
 
 
2014
 
2013
Accretion of servicer advance interest income
 
$
102,823

 
$

Accretion of excess mortgage servicing rights income
 
24,789

 
20,781

Accretion of net discount on securities and loans
 
12,477

 
6,596

Amortization of deferred financing costs
 
(5,750
)
 

 
 
$
134,339

 
$
27,377

 
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 June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
10,973

 
$
57,107

 
$
19,522

 
$
5,054

 
$

 
$

 
$
92,656

Interest expense

 
29,772

 
3,512

 
1,191

 
1,538

 
499

 
36,512

Net interest income (expense)
10,973

 
27,335

 
16,010

 
3,863

 
(1,538
)
 
(499
)
 
56,144

Impairment

 

 
615

 
293

 

 

 
908

Other income
18,245

 
82,709

 
53,413

 
2,187

 
21,335

 

 
177,889

Operating expenses
320

 
769

 
571

 
887

 
90

 
26,885

 
29,522

Income (Loss) Before Income Taxes
28,898

 
109,275

 
68,237

 
4,870

 
19,707

 
(27,384
)
 
203,603

Income tax expense

 
21,395

 

 

 

 

 
21,395

Net Income (Loss)
$
28,898

 
$
87,880

 
$
68,237

 
$
4,870

 
$
19,707

 
$
(27,384
)
 
$
182,208

Noncontrolling interests in income
   (loss) of consolidated subsidiaries
$

 
$
58,705

 
$

 
$

 
$

 
$

 
$
58,705

Net income (loss) attributable to
   common stockholders
$
28,898

 
$
29,175

 
$
68,237

 
$
4,870

 
$
19,707

 
$
(27,384
)
 
$
123,503



10

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 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
Six Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
24,789

 
$
102,823

 
$
30,760

 
$
5,774

 
$

 
$

 
$
164,146

Interest expense
1,291

 
61,728

 
7,581

 
1,389

 
3,021

 
499

 
75,509

Net interest income (expense)
23,498

 
41,095

 
23,179

 
4,385

 
(3,021
)
 
(499
)
 
88,637

Impairment

 

 
943

 
457

 

 

 
1,400

Other income
31,221

 
82,709

 
58,455

 
2,858

 
37,695

 
1

 
212,939

Operating expenses
385

 
1,019

 
631

 
977

 
113

 
36,296

 
39,421

Income (Loss) Before Income Taxes
54,334

 
122,785

 
80,060

 
5,809

 
34,561

 
(36,794
)
 
260,755

Income tax expense

 
21,682

 

 

 

 

 
21,682

Net Income (Loss)
$
54,334

 
$
101,103

 
$
80,060

 
$
5,809

 
$
34,561

 
$
(36,794
)
 
$
239,073

Noncontrolling interests in income
    (loss) of consolidated subsidiaries
$

 
$
66,798

 
$

 
$

 
$

 
$

 
$
66,798

Net income (loss) attributable to
    common stockholders
$
54,334

 
$
34,305

 
$
80,060

 
$
5,809

 
$
34,561

 
$
(36,794
)
 
$
172,275


 
Servicing Related Assets
 
Residential Securities and Loans
 
 
 
 
 
 
 
Excess MSRs
 
Servicer Advances
 
Real Estate Securities
 
Real Estate Loans
 
Consumer Loans
 
Corporate
 
Total
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments
$
702,636

 
$
3,679,105

 
$
1,463,903

 
$
517,424

 
$
250,048

 
$

 
$
6,613,116

Cash and cash equivalents
3,405

 
120,722

 
22,714

 
617

 
2,152

 
161,516

 
311,126

Restricted cash

 
37,327

 

 

 

 

 
37,327

Derivative assets

 

 
256

 
30,736

 

 

 
30,992

Other assets

 
7,925

 
6,499

 
31,435

 
557

 
339

 
46,755

Total assets
$
706,041

 
$
3,845,079

 
$
1,493,372

 
$
580,212

 
$
252,757

 
$
161,855

 
$
7,039,316

Debt
$

 
$
3,265,530

 
$
1,331,354

 
$
382,743

 
$
125,000

 
$

 
$
5,104,627

Other liabilities
1,205

 
20,595

 
254

 
1,925

 
519

 
98,411

 
122,909

Total liabilities
1,205

 
3,286,125

 
1,331,608

 
384,668

 
125,519

 
98,411

 
5,227,536

Total equity
704,836

 
558,954

 
161,764

 
195,544

 
127,238

 
63,444

 
1,811,780

Noncontrolling interests in equity
    of consolidated subsidiaries

 
313,301

 

 

 

 

 
313,301

Total New Residential
    stockholders’ equity
$
704,836

 
$
245,653

 
$
161,764

 
$
195,544

 
$
127,238

 
$
63,444

 
$
1,498,479

Investments in equity method
    investees
$
330,220

 
$

 
$

 
$

 
$
250,048

 
$

 
$
580,268

 

11

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 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
Three Months Ended June 30, 2013
 

 

 

 

 

 

 
Interest income
$
10,745


$


$
11,378


$
838


$


$
38


$
22,999

Interest expense




2,651








2,651

    Net interest income (expense)
10,745




8,727


838




38


20,348

Impairment




3,756








3,756

Other income
61,960




58




36,164




98,182

Operating expenses
34




27


125




5,366


5,552

Income (Loss) Before Income Taxes
72,671




5,002


713


36,164


(5,328
)

109,222

Income tax expense













Net Income (Loss)
$
72,671


$


$
5,002


$
713


$
36,164


$
(5,328
)

$
109,222

Noncontrolling interests in income
    (loss) of consolidated subsidiaries
$


$


$


$


$


$


$

Net income (loss) attributable to
    common stockholders
$
72,671


$


$
5,002


$
713


$
36,164


$
(5,328
)

$
109,222


 
Servicing Related Assets
 
Residential Securities and Loans
 
 
 
 
 
 
 
Excess MSRs
 
Servicer Advances
 
Real Estate Securities
 
Real Estate Loans
 
Consumer Loans
 
Corporate
 
Total
Six Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
20,780

 
$

 
$
17,188

 
$
1,184

 
$

 
$
38

 
$
39,190

Interest expense

 

 
3,550

 

 

 

 
3,550

Net interest income (expense)
20,780

 

 
13,638

 
1,184

 

 
38

 
35,640

Impairment

 

 
3,756

 

 

 

 
3,756

Other income
64,787

 

 
58

 

 
36,164

 

 
101,009

Operating expenses
96

 

 
22

 
130

 
1,951

 
8,397

 
10,596

Income (Loss) Before Income Taxes
85,471

 

 
9,918

 
1,054

 
34,213

 
(8,359
)
 
122,297

Income tax expense

 

 

 

 

 

 

Net Income (Loss)
$
85,471

 
$

 
$
9,918

 
$
1,054

 
$
34,213

 
$
(8,359
)
 
$
122,297

Noncontrolling interests in income (loss) of consolidated subsidiaries
$

 
$

 
$

 
$

 
$

 
$

 
$

Net income (loss) attributable to common stockholders
$
85,471

 
$

 
$
9,918

 
$
1,054

 
$
34,213

 
$
(8,359
)
 
$
122,297

  

12

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2014
(dollars in tables in thousands, except share data) 
 

4. INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS
 
Pool 1. On December 13, 2011, Newcastle announced the completion of the first co-investment between New Residential and Nationstar in Excess MSRs related to mortgage servicing rights acquired by Nationstar. New Residential invested approximately $43.7 million to acquire a 65% interest in the Excess MSRs on a portfolio of government-sponsored enterprise (“GSE”) residential mortgage loans (“Pool 1”). Nationstar has co-invested on a pari passu basis with New Residential in 35% of the Excess MSRs and is the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, the servicing obligations and liabilities associated with this portfolio as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential and Nationstar, subject to certain limitations.
 
Pool 2. On June 5, 2012, Newcastle announced the completion of a co-investment between New Residential and Nationstar in Excess MSRs related to mortgage servicing rights Nationstar acquired from Bank of America. New Residential invested approximately $42.3 million to acquire a 65% interest in the Excess MSRs on a portfolio of residential mortgage loans (“Pool 2”), comprised of loans in GSE pools. Nationstar has co-invested on a pari passu basis with New Residential in 35% of the Excess MSRs and is the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, servicing obligations and liabilities associated with this portfolio as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential and Nationstar, subject to certain limitations.
 
Pools 3, 4 and 5. On June 29, 2012, Newcastle announced the completion of a co-investment between New Residential and Nationstar in Excess MSRs related to mortgage servicing rights Nationstar acquired from Aurora Bank FSB, a subsidiary of Lehman Brothers Bancorp Inc. New Residential invested approximately $176.5 million to acquire a 65% interest in the Excess MSRs on a portfolio of residential mortgage loans, comprised of approximately 25% conforming loans in Fannie Mae (“Pool 3”) and Freddie Mac (“Pool 4”) GSE pools as well as approximately 75% non-conforming loans in private label securitizations (“Pool 5”). Nationstar had co-invested on a pari passu basis with New Residential in 35% of the Excess MSRs and is the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, servicing obligations and liabilities associated with this portfolio as the servicer. In September 2013, New Residential invested an additional $26.6 million to acquire an additional 15% interest in the Excess MSRs related to Pool 5 from Nationstar. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential and Nationstar, subject to certain limitations. 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 were 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.
 

13

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2014
(dollars in tables in thousands, except share data) 
 

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 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.

Pool 14, 16 and 19.  On May 12, 2014 New Residential invested approximately $33.9 million to acquire a one-third interest in the Excess MSRs on each of three portfolios of GSE residential mortgage loans (”Pool 14," "Pool 16" and "Pool 19”) with an aggregate UPB of $12.8 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 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.

Pool 20.  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 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.

 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.
 

14

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2014
(dollars in tables in thousands, except share data) 
 

The following is a summary of New Residential’s direct investments in Excess MSRs:
 
June 30, 2014
 
Six Months Ended June 30, 2014
 
Unpaid Principal Balance (“UPB”) of Underlying Mortgages
 
Interest in Excess MSR
 
Amortized Cost Basis(A)
 
Carrying Value(B)
 
Weighted Average Life (Years)(C)
 
Changes in Fair Value Recorded in Other Income(D)
MSR Pool 1
$
6,431,132

 
65.0
%
 
$
24,518

 
$
34,313

 
5.3
 
$
(161
)
MSR Pool 1 - Recapture
    Agreement

 
65.0
%
 
108

 
6,102

 
12.0
 
283

MSR Pool 2
7,461,126

 
65.0
%
 
28,157

 
32,951

 
5.5
 
(222
)
MSR Pool 2 - Recapture
    Agreement

 
65.0
%
 
327

 
6,089

 
12.6
 
427

MSR Pool 3
7,369,718

 
65.0
%
 
23,233

 
31,000

 
5.1
 
(497
)
MSR Pool 3 - Recapture
    Agreement

 
65.0
%
 
1,877

 
6,226

 
12.1
 
440

MSR Pool 4
4,803,347

 
65.0
%
 
9,399

 
13,852

 
4.8
 
505

MSR Pool 4 - Recapture
    Agreement

 
65.0
%
 
2,020

 
3,860

 
12.1
 
36

MSR Pool 5(E)
34,537,052

 
80.0
%
 
110,258

 
136,962

 
5.4
 
3,613

MSR Pool 5 - Recapture
    Agreement

 
80.0
%
 
8,913

 
6,111

 
13.0
 
818

MSR Pool 11
437,676

 
66.7
%
 
1,996

 
2,356

 
6.5
 
371

MSR Pool 11 -
    Recapture Agreement

 
66.7
%
 
254

 
293

 
13.9
 
57

MSR Pool 12(E)
4,814,648

 
40.0
%
 
14,990

 
17,574

 
4.8
 
2,525

MSR Pool 12 -
    Recapture Agreement

 
40.0
%
 
462

 
236

 
12.7
 
6

MSR Pool 14
952,767

 
33.3
%
 
2,252

 
2,470

 
5.3
 
218

MSR Pool 14 -
 Recapture Agreement

 
33.3
%
 
140

 
170

 
12.9
 
30

MSR Pool 16
1,412,598

 
33.3
%
 
2,177

 
2,211

 
5.5
 
33

MSR Pool 16 -
    Recapture Agreement

 
33.3
%
 
662

 
767

 
11.1
 
106

MSR Pool 17(E)
7,953,370

 
33.3
%
 
18,481

 
18,876

 
5.2
 
395

MSR Pool 17 -
    Recapture Agreement

 
33.3
%
 
1,114

 
644

 
12.8
 
(470
)
MSR Pool 18(E)
8,041,279

 
40.0
%
 
14,395

 
15,743

 
4.6
 
1,345

MSR Pool 18 -
    Recapture Agreement

 
40.0
%