Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS

v3.2.0.727
INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS
6 Months Ended
Jun. 30, 2015
Transfers and Servicing [Abstract]  
INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS
INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS
 
The following table presents activity related to the carrying value of New Residential’s investments in Excess MSRs:
 
 
Servicer
 
 
Nationstar
 
SLS(A)
 
Ocwen(B)
 
Total
Balance as of December 31, 2014
 
$
409,076

 
$
8,657

 
$

 
$
417,733

Transfers from indirect ownership
 
98,258

 

 

 
98,258

Purchases
 
129,098

 

 
919,531

 
1,048,629

Interest income
 
29,297

 
192

 
19,908

 
49,397

Other income
 
1,577

 

 

 
1,577

Proceeds from repayments
 
(59,821
)
 
(660
)
 
(49,286
)
 
(109,767
)
Change in fair value
 
2,993

 
(1,459
)
 
(2,939
)
 
(1,405
)
Balance as of June 30, 2015
 
$
610,478

 
$
6,730

 
$
887,214

 
$
1,504,422


(A)
Specialized Loan Servicing LLC (“SLS”). See Note 6 for a description of the SLS Transaction.
(B)
Ocwen services the loans underlying the Excess MSRs and Servicer Advances acquired from HLSS. See Note 1.

Nationstar, SLS or Ocwen, as applicable, as servicer, performs all servicing and advancing functions, and retains the ancillary income, servicing obligations and liabilities as the servicer of the underlying loans in the portfolio.

On January 16, 2015, New Residential invested approximately $23.8 million to acquire a 33.3% interest in the Excess MSR on a portfolio of Freddie Mac residential mortgage loans with an aggregate UPB of $8.4 billion. On April 16, 2015, New Residential funded its remaining commitment on this portfolio of $2.6 million. Fortress-managed funds and Nationstar each agreed to acquire a 33.3% interest in the Excess MSRs. Nationstar as servicer agreed to 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 the 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.

On April 6, 2015, New Residential acquired Excess MSRs in connection with the HLSS Acquisition (Note 1).

On May 5, 2015, New Residential invested approximately $3.5 million to acquire a 33.3% interest in the Excess MSRs on a portfolio of Fannie Mae residential mortgage loans with an aggregate UPB of $1.6 billion. Fortress-managed funds and Nationstar each agreed to acquire a 33.3% interest in the Excess MSRs. Nationstar as servicer agreed to 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 the 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.

On May 11, 2015, New Residential invested approximately $26.9 million to acquire a 33.3% interest in the Excess MSRs on a portfolio of Freddie Mac residential mortgage loans with an aggregate UPB of $8.9 billion. Fortress-managed funds and Nationstar each agreed to acquire a 33.3% interest in the Excess MSRs. Nationstar as servicer agreed to 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 the 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.

On June 11, 2015, New Residential invested approximately $72.4 million to acquire a 40.0% interest in the Excess MSRs on a portfolio of Ginnie Mae residential mortgage loans with an aggregate UPB of $18.5 billion. Fortress-managed funds and Nationstar each agreed to acquire a 40.0% and 20.0% interest respectively, in the Excess MSRs. Nationstar as servicer agreed to 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 the 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 has entered into a “Recapture Agreement” in each of the Excess MSR investments serviced by Nationstar and SLS, including those Excess MSR investments made through investments in joint ventures (Note 5). Under such Recapture Agreements, New Residential is generally entitled to a pro rata interest in the Excess MSRs on any initial or subsequent refinancing by Nationstar of a loan in the original portfolio. New Residential has a similar recapture agreement with Ocwen; however, this agreement allows for Ocwen to retain the Excess MSR on recaptured loans up to a threshold and no payments have been made to New Residential under such arrangement to date. 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:
 
June 30, 2015
 
December 31, 2014
 
Unpaid Principal Balance (“UPB”) of Underlying Mortgages
 
Interest in Excess MSR
 
Weighted Average Life Years(A)
 
Amortized Cost Basis(B)
 
Carrying Value(C)
 
Carrying Value(C)
 
 
 
New Residential
 
Fortress-managed funds
 
Nationstar
 
 
 
 
 
 
 
 
Agency
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Original and Recaptured Pools
$
80,896,500

 
32.5% - 66.7%

 
0.0%-40.0%

 
20.0% - 35.0%

 
5.8
 
$
240,981

 
$
291,288

 
$
188,733

Recapture Agreements

 
32.5% - 66.7%

 
0.0%-40.0%

 
20.0% - 35.0%

 
11.5
 
26,945

 
50,239

 
28,786

 
80,896,500

 
 
 
 
 
 
 
6.4
 
267,926

 
341,527

 
217,519

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Agency(D)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nationstar and SLS Serviced:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Original and Recaptured Pools
$
103,812,302

 
33.3% - 80.0%

 
0.0% - 50.0%

 
0.0% - 33.3%

 
4.9
 
$
222,394

 
$
258,729

 
$
189,812

Recapture Agreements

 
33.3% - 80.0%

 
0.0% - 50.0%

 
0.0% - 33.3%

 
11.9
 
15,835

 
16,952

 
10,402

Ocwen Serviced Pools
150,934,856

 
100.0
%
 
%
 
%
 
5.4
 
890,153

 
887,214

 

 
254,747,158

 
 
 
 
 
 
 
5.4
 
1,128,382

 
1,162,895

 
200,214

Total
$
335,643,658

 
 
 
 
 
 
 
5.6
 
$
1,396,308

 
$
1,504,422

 
$
417,733

 
(A)
Weighted Average Life represents the weighted average expected timing of the receipt of expected cash flows for this investment.
(B)
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.
(C)
Carrying Value represents the fair value of the pools or Recapture Agreements, as applicable.
(D)
Excess MSR investments in which New Residential also invested in related servicer advances, including the basic fee component of the related MSR as of June 30, 2015 (Note 6).

Changes in fair value recorded in other income are comprised of the following:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Original and Recaptured Pools

$
(3,441
)
 
$
2,801

 
$
(5,418
)
 
$
9,888

Recapture Agreements

3,797

 
2,701

 
4,013

 
2,216

 
 
$
356

 
$
5,502

 
$
(1,405
)
 
$
12,104


In the second quarter of 2015, a weighted average discount rate of 9.8% was used to value New Residential’s investments in Excess MSRs (directly and through equity method investees).

The table below summarizes the geographic distribution of the underlying residential mortgage loans of the direct investments in Excess MSRs:
 
 
Percentage of Total Outstanding Unpaid Principal Amount as of
State Concentration
 
June 30, 2015
 
December 31, 2014
California
 
26.7
%
 
31.5
%
Florida
 
9.2
%
 
7.7
%
New York
 
7.0
%
 
4.3
%
Texas
 
4.5
%
 
4.2
%
New Jersey
 
4.0
%
 
3.2
%
Maryland
 
3.8
%
 
4.0
%
Illinois
 
3.4
%
 
3.2
%
Virginia
 
3.2
%
 
3.3
%
Washington
 
2.8
%
 
3.6
%
Massachusetts
 
2.6
%
 
2.1
%
Other U.S.
 
32.8
%
 
32.9
%
 
 
100.0
%
 
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.