Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN SERVICER ADVANCES

v3.2.0.727
INVESTMENTS IN SERVICER ADVANCES
6 Months Ended
Jun. 30, 2015
Investments, All Other Investments [Abstract]  
INVESTMENTS IN SERVICER ADVANCES
INVESTMENTS IN SERVICER ADVANCES
 
In December 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 the 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 MSRs (Notes 4 and 5), including the basic fee component of the related MSRs. As of June 30, 2015, the Buyer had settled $2.6 billion of servicer advances, net of recoveries, financed with $2.4 billion of notes payables outstanding (Note 11). A taxable wholly owned subsidiary of New Residential is the managing member of the Buyer and owned an approximately 44.5% interest in the Buyer as of June 30, 2015. As of June 30, 2015, noncontrolling third-party investors, owning the remaining interest in the Buyer, have funded capital commitments to the Buyer of $389.6 million and New Residential has funded capital commitments to the Buyer of $312.7 million. The Buyer may call capital up to the commitment amount on unfunded commitments and recall capital to the extent the Buyer makes a distribution to the co-investors, including New Residential. As of June 30, 2015, the third-party co-investors and New Residential had previously funded their commitments, however the Buyer may recall $221.7 million and $177.9 million of capital distributed to the third-party co-investors and New Residential, respectively.  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 investment in servicer advances.

The Buyer has purchased servicer advances from Nationstar, is required to purchase all future servicer advances made with respect to certain residential loan 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 as of June 30, 2015 was approximately 9.3% 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.

In December 2014, New Residential agreed to acquire (the “SLS Transaction”) 50% of the Excess MSRs, all of the servicer advances and related basic fee portion of the MSRs (the “Advance Fee”), and a portion of the call rights related to an underlying pool of residential mortgage loans with a UPB of approximately $3.0 billion which is serviced by SLS. New Residential continues to evaluate the call rights it purchased from SLS, and its ability to exercise such rights and realize the benefits therefrom are subject to a number of risks. The actual UPB of the mortgage loans on which New Residential can successfully exercise call rights and realize the benefits therefrom may differ materially from its initial assumptions. Fortress-managed funds acquired the other 50% of the Excess MSRs. The aggregate purchase price was approximately $229.7 million. The par amount of the total advance commitments for the SLS Transaction was $219.2 million (with related financing of $195.5 million). As of December 31, 2014, the closed portion of the purchase of $93.8 million included $8.4 million for 50% of the Excess MSRs, $83.8 million for servicer advances and Advance Fee (of which $74.3 million was financed as of December 31, 2014), and $1.6 million to fund a portion of the call rights on 57 of the 99 underlying securitization trusts. The remaining portion of the purchase price of $135.9 million included servicer advances and Advance Fee unfunded commitments of approximately $133.8 million that were funded in January 2015 (with approximately $121.2 million of related financing) and $2.1 million to fund the remaining portion of the call rights on 57 of the 99 underlying securitization trusts. As of June 30, 2015, New Residential had settled $155.2 million of servicer advances, net of recoveries, financed with $138.4 million of notes payable outstanding (Note 11). SLS will continue to service the loans in exchange for a servicing fee of 10.75 bps and an incentive fee (the “SLS Incentive Fee”) which is based on the ratio of the outstanding servicer advances to the UPB of the underlying loans.
On April 6, 2015, New Residential acquired servicer advances in connection with the HLSS Acquisition (Note 1).

In April 2015, New Residential acquired the call rights related to an underlying pool of residential mortgage loans with a UPB of approximately $107.1 billion from Ocwen. The pool of underlying mortgage loans represents the mortgage loans underlying the Excess MSR and Servicer Advances investments acquired from HLSS (Note 1). New Residential continues to evaluate the call rights it acquired from Ocwen, and its ability to exercise such rights and realize the benefits therefrom are subject to a number of risks. The actual UPB of the mortgage loans on which New Residential can successfully exercise call rights and realize the benefits therefrom may differ materially from its initial assumptions.

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:
 
Amortized Cost Basis

Carrying Value(A)

Weighted Average Discount Rate
 
Weighted Average Yield

Weighted Average Life (Years)(B)
June 30, 2015
 
 
 
 
 
 
 
 
 
Servicer advances
$
8,081,258

 
$
8,182,400

 
5.5
%
 
5.6
%
 
4.3
As of December 31, 2014
 
 
 
 
 
 
 
 
 
Servicer advances
$
3,186,622

 
$
3,270,839

 
5.4
%
 
5.4
%
 
4.0
  
(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.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015

2014

2015

2014
Changes in Fair Value Recorded in Other Income
 
$
24,562

 
$
82,877

 
$
16,893

 
$
82,877


The following is additional information regarding the servicer advances and related financing:
 
 
 
 
 
 
 
 
 
 
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
 
Face Amount of Notes Payable
 
Gross
 
Net(A)
 
Gross
 
Net
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Servicer advances(C)
 
$
238,526,743

 
$
8,278,685

 
3.5
%
 
$
7,687,572

 
92.9
%
 
91.6
%
 
3.0
%
 
2.2
%
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Servicer advances(C)
 
$
96,547,773

 
$
3,102,492

 
3.2
%
 
$
2,890,230

 
91.4
%
 
90.4
%
 
3.0
%
 
2.3
%
 
(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.
(C)
The following types of advances comprise the investments in servicer advances:
    


June 30, 2015

December 31, 2014
Principal and interest advances

$
2,467,831


$
729,713

Escrow advances (taxes and insurance advances)

4,135,900


1,600,713

Foreclosure advances

1,674,954


772,066

Total

$
8,278,685

 
$
3,102,492


 
Interest income recognized by New Residential related to its investments in servicer advances was comprised of the following:


Three Months Ended June 30,
 
Six Months Ended June 30,


2015

2014

2015

2014
Interest income, gross of amounts attributable to servicer compensation

$
226,961


$
86,546


$
290,318


$
153,684

Amounts attributable to base servicer compensation

(31,957
)

(43,026
)

(38,558
)

(49,306
)
Amounts attributable to incentive servicer compensation

(86,416
)

13,587


(100,823
)

(1,555
)
Interest income from investments in servicer advances

$
108,588

 
$
57,107

 
$
150,937

 
$
102,823


Others’ interests in the equity of the Buyer is computed as follows:
 
 
June 30, 2015
 
December 31, 2014
Total Advance Purchaser LLC equity
 
$
417,481

 
$
457,545

Others’ ownership interest
 
55.5
%
 
55.5
%
Others’ interest in equity of consolidated subsidiary
 
$
231,652

 
$
253,836


Others’ interests in the Buyer’s net income is computed as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Net Advance Purchaser LLC income
 
$
16,725

 
$
105,882

 
$
27,222

 
$
119,393

Others’ ownership interest as a percent of total(A)
 
55.5
%
 
55.4
%
 
55.5
%
 
55.9
%
Others’ interest in net income (loss) of consolidated subsidiaries(B)
 
$
9,279

 
$
58,705

 
$
15,102

 
$
66,798


(A)
As a result, New Residential owned 44.5% and 44.6% of the Buyer, on average during the three months ended June 30, 2015 and 2014, respectively, and 44.5% and 44.1% of the Buyer, on average during the six months ended June 30, 2015 and 2014, respectively.
(B)
Excludes HLSS shareholders’ interests in the net income (loss) of HLSS of $5.1 million, $0.0 million, $5.1 million, and $0.0 million during these periods, respectively.