Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN SERVICER ADVANCES

v3.4.0.3
INVESTMENTS IN SERVICER ADVANCES
3 Months Ended
Mar. 31, 2016
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, purchased the outstanding Servicer Advances related to a portfolio of residential mortgage loans that is serviced by Nationstar and is a subset of the same portfolio of loans in which New Residential has invested in a portion of the Excess MSRs (Notes 4 and 5), including the basic fee component of the related MSRs. 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 March 31, 2016. As of March 31, 2016, 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 March 31, 2016, the third-party co-investors and New Residential had previously funded their commitments, however the Buyer may recall $256.9 million and $206.2 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.

The Buyer has purchased Servicer Advances from Nationstar, is required to purchase all future Servicer Advances made with respect to this portfolio of loans 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 March 31, 2016 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.

New Residential also acquired a portion of the call rights related to this portfolio of loans.

In December 2014, New Residential agreed to acquire (the “SLS Transaction”) 50% of the Excess MSRs and all of the Servicer Advances and related basic fee portion of the MSR (the “SLS Advance Fee”), and a portion of the call rights related to a portfolio of residential mortgage loans which is serviced by SLS. Fortress-managed funds acquired the other 50% of the Excess MSRs. SLS will continue to service the loans in exchange for a servicing fee of 10.75 bps times the UPB of the underlying loans 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 and Excess MSRs in connection with the HLSS Acquisition. Ocwen will continue to service the underlying loans in exchange for a servicing fee of approximately 5.3 bps times the UPB of the underlying loans and an incentive fee which is reduced by LIBOR plus 2.75% per annum of the amount, if any, of servicer advances outstanding in excess of a defined target.

In connection with the HLSS Acquisition, New Residential acquired from Ocwen the call rights related to the mortgage loans underlying the Excess MSRs and Servicer Advances acquired from HLSS.

New Residential continues to evaluate the call rights it acquired from Nationstar, SLS and 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)
March 31, 2016
 
 
 
 
 
 
 
 
 
Servicer Advances(C)
$
7,005,501

 
$
7,001,004

 
5.5
%
 
5.3
%
 
4.5
As of December 31, 2015
 
 
 
 
 
 
 
 
 
Servicer Advances(C)
$
7,400,068

 
$
7,426,794

 
5.6
%
 
5.5
%
 
4.4
  
(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.
(C)
Excludes New Residential asset-backed securities collateralized by Servicer Advances, which have aggregate face amounts of $431.0 million and $431.0 million and aggregate carrying values of $431.0 million and $430.3 million as of March 31, 2016 and December 31, 2015, respectively. See Note 7 for details related to these securities.
 
 
Three Months Ended March 31,
 
 
2016

2015
Changes in Fair Value Recorded in Other Income
 
$
(31,224
)
 
$
(7,669
)

The following is additional information regarding the Servicer Advances and related financing:
 
 
 
 
 
 
 
 
 
 
Loan-to-Value(A)
 
Cost of Funds(C)
 
 
UPB of Underlying Residential Mortgage Loans
 
Outstanding Servicer Advances
 
Servicer Advances to UPB of Underlying Residential Mortgage Loans
 
Face Amount of Notes and Bonds Payable
 
Gross
 
Net(B)
 
Gross
 
Net
March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Servicer Advances(D)
 
$
212,135,668

 
$
7,203,924

 
3.4
%
 
$
6,880,413

 
93.9
%
 
92.8
%
 
3.4
%
 
2.7
%
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Servicer Advances(D)
 
$
220,256,804

 
$
7,578,110

 
3.4
%
 
$
7,058,094

 
91.2
%
 
90.2
%
 
3.4
%
 
2.6
%
 
(A)
Based on outstanding Servicer Advances, excluding purchased but unsettled Servicer Advances and certain deferred servicing fees (“DSF”) on which New Residential receives financing. If New Residential were to include these DSF in the servicer advance balance, gross and net LTV as of March 31, 2016 would be 89.4% and 88.4%, respectively. Also excludes retained non-agency bonds with a current face amount of $175.8 million from the outstanding Servicer Advances debt. If New Residential were to sell these bonds, gross and net LTV as of March 31, 2016 would be 96.3% and 95.2%, respectively.
(B)
Ratio of face amount of borrowings to par amount of servicer advance collateral, net of any general reserve.
(C)
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.
(D)
The following types of advances comprise the investments in Servicer Advances:
    


March 31, 2016

December 31, 2015
Principal and interest advances

$
2,016,073


$
2,229,468

Escrow advances (taxes and insurance advances)

3,504,808


3,687,559

Foreclosure advances

1,683,043


1,661,083

Total

$
7,203,924

 
$
7,578,110


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


Three Months Ended March 31,


2016

2015
Interest income, gross of amounts attributable to servicer compensation

$
227,288


$
63,357

Amounts attributable to base servicer compensation

(29,509
)

(6,601
)
Amounts attributable to incentive servicer compensation

(119,142
)

(14,407
)
Interest income from investments in Servicer Advances

$
78,637

 
$
42,349


New Residential has determined that the Buyer is a VIE. The following table presents information on the assets and liabilities related to this consolidated VIE.
 
 
As of
 
 
March 31, 2016
 
December 31, 2015
Assets
 
 
 
 
Servicer advance investments, at fair value
 
2,263,311

 
$
2,344,245

Cash and cash equivalents
 
31,711

 
40,761

All other assets
 
25,711

 
25,092

Total assets(A)
 
$
2,320,733

 
$
2,410,098

Liabilities
 
 
 
 
Notes and bonds payable
 
$
1,982,944

 
$
2,060,347

All other liabilities
 
6,574

 
6,111

Total liabilities(A)
 
$
1,989,518

 
$
2,066,458


(A)
The creditors of the Buyer do not have recourse to the general credit of New Residential and the assets of the Buyer are not directly available to satisfy New Residential’s obligations.

Others’ interests in the equity of the Buyer is computed as follows:
 
 
March 31, 2016
 
December 31, 2015
Total Advance Purchaser LLC equity
 
$
331,215

 
$
343,640

Others’ ownership interest
 
55.5
%
 
55.5
%
Others’ interest in equity of consolidated subsidiary
 
$
183,754

 
$
190,647


Others’ interests in the Buyer’s net income is computed as follows:
 
 
Three Months Ended March 31,
 
 
2016
 
2015
Net Advance Purchaser LLC income
 
$
7,575

 
$
10,496

Others’ ownership interest as a percent of total(A)
 
55.5
%
 
55.5
%
Others’ interest in net income of consolidated subsidiaries
 
$
4,202

 
$
5,823


(A)
As a result, New Residential owned 44.5% and 44.5% of the Buyer, on average during the three months ended March 31, 2016 and 2015, respectively.