Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVES

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DERIVATIVES
6 Months Ended
Jun. 30, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVES
DERIVATIVES
 
As of June 30, 2015, New Residential’s derivative instruments included economic hedges that were not designated as hedges for accounting purposes. 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, as well as other factors. New Residential’s credit risk with respect to economic hedges 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.
  
As of June 30, 2015, New Residential held to-be-announced forward contract positions (“TBAs”) of $954.0 million in a 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. New Residential’s net short position in TBAs was entered into as an economic hedge in order to mitigate New Residential’s interest rate risk on certain specified mortgage backed securities. 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.

As of June 30, 2015, New Residential separately held TBAs of $200 million in a long notional amount of Agency RMBS and any amounts or obligations owed by or to New Residential are subject to the right of setoff with the TBA counterparty. New Residential purchased these TBAs during the second quarter, but as the specific securities were not identified as of June 30, 2015, the positions are recorded as a derivative within the Accrued expenses and other liabilities line in the condensed financial statements. 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.

As a result of ASU No. 2014-11 (Note 2), New Residential determined that, as of January 1, 2015, its linked transactions are accounted for as secured borrowings. As a result, $32.4 million carrying amount of derivatives was removed from the balance sheet and replaced with $116.8 million carrying amount of Non-Agency RMBS, $1.8 million carrying amount of Residential Mortgage Loans, Held-for-Investment, $86.0 million of Repurchase Agreements, and $0.2 million of other liabilities.

New Residential’s derivatives are recorded at fair value on the Condensed Consolidated Balance Sheets as follows:
 
Balance Sheet Location
 
June 30, 2015
 
December 31, 2014
Derivative assets
 
 
 
 
 
Real Estate Securities(A)
Derivative assets
 
$

 
$
32,090

Non-Performing Loans(A)
Derivative assets
 

 
312

Interest Rate Caps
Derivative assets
 
1,701

 
195

 
 
 
$
1,701

 
$
32,597

Derivative liabilities
 
 
 
 
 
TBAs
Accrued expenses and other liabilities
 
$
1,800

 
$
4,985

Interest Rate Swaps
Accrued expenses and other liabilities
 
14,324

 
9,235

 
 
 
$
16,124

 
$
14,220

 
(A)
For December 31, 2014, investments purchased from, and financed by, the selling counterparty that New Residential accounted for as linked transactions are reflected as derivatives. Upon the adoption of ASU No. 2014-11 on January 1, 2015, these transactions are accounted for as secured borrowings.

The following table summarizes notional amounts related to derivatives:
 
June 30, 2015
 
December 31, 2014
Non-Performing Loans(A)
$

 
$
2,931

Real Estate Securities(B)

 
186,694

TBAs, short position(C)
954,000

 
1,234,000

TBAs, long position(C)
200,000

 

Interest Rate Caps(D)
2,560,000

 
210,000

Interest Rate Swaps, short positions(E)
2,144,000

 
1,107,000


(A)
For December 31, 2014, represents the UPB of the underlying loans of the non-performing loan pools within linked transactions.
(B)
For December 31, 2014, represents the face amount of the real estate securities within linked transactions.
(C)
Represents the notional amount of Agency RMBS, classified as derivatives.
(D)
Caps LIBOR at 3.0%.
(E)
Receive LIBOR and pay a fixed rate.

The following table summarizes gains (losses) recorded in relation to derivatives:
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Other income (loss)
 
 
 
 
 
 
 
 
Non-Performing Loans(A)
 
$

 
$
(985
)
 
$

 
$
(314
)
Real Estate Securities(A)
 

 

 

 
26

TBAs
 
1,754

 
(132
)
 
(1,800
)
 
230

Interest Rate Swaps
 
(1,737
)
 
(2,276
)
 
(5,089
)
 
(2,386
)
U.S.T. Short Positions
 

 
(408
)
 

 

Interest Rate Caps
 
(1,246
)
 

 
(1,370
)
 

 
 
(1,229
)
 
(3,801
)
 
(8,259
)
 
(2,444
)
Gain (loss) on settlement of investments
 
 
 
 
 
 
 
 
Real Estate Securities(A)
 

 

 

 
43

TBAs
 
12,529

 
(3,824
)
 
(3,504
)
 
(4,002
)
Interest Rate Swaps
 
1,240

 

 
(5,317
)
 

U.S.T. Short Positions
 

 
176

 

 
176

 
 
13,769

 
(3,648
)
 
(8,821
)
 
(3,783
)
Total gains (losses)
 
$
12,540

 
$
(7,449
)
 
$
(17,080
)
 
$
(6,227
)
 
(A)
For December 31, 2014, investments purchased from, and financed by, the selling counterparty that New Residential accounted for as linked transactions are reflected as derivatives. Upon the adoption of ASU No. 2014-11 on January 1, 2015, these transactions are accounted for as secured borrowings.