Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN REAL ESTATE SECURITIES

v3.4.0.3
INVESTMENTS IN REAL ESTATE SECURITIES
3 Months Ended
Mar. 31, 2016
Investments, Debt and Equity Securities [Abstract]  
INVESTMENTS IN REAL ESTATE SECURITIES
INVESTMENTS IN REAL ESTATE SECURITIES

Agency residential mortgage backed securities (“RMBS”) are issued by a government sponsored enterprise, such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Non-Agency RMBS are issued by either public trusts or private label securitization entities.

Activities related to New Residential’s investments in real estate securities were as follows:
 
Three Months Ended 
 March 31, 2016
 
(in millions)
 
Agency
 
Non Agency
Purchases
 
 
 
Face
$
2,216.7

 
$
1,032.1

Purchase Price
$
2,300.3

 
$
443.1

 
 
 
 
Sales
 
 
 
Face
$
1,632.6

 
$
59.9

Amortized Cost
$
1,673.7

 
$
51.9

Sale Price
$
1,698.3

 
$
43.4

Gain (Loss) on Sale
$
24.6

 
$
(8.5
)


As of March 31, 2016, New Residential sold and purchased $1.4 billion and $1.3 billion face amount of Agency RMBS for $1.5 billion and $1.3 billion, respectively, and purchased $0.2 billion face amount of Non-Agency RMBS for $0.1 billion, which had not yet been settled. These unsettled sales and purchases were recorded on the balance sheet on trade date as Trades Receivable and Trades Payable.

New Residential has exercised its call rights with respect to Non-Agency RMBS trusts and purchased performing and non-performing residential mortgage loans and REO contained in such trusts prior to their termination. In certain cases, New Residential sold portions of the purchased loans through securitizations, and retained bonds issued by such securitizations. In addition, New Residential received par on the securities issued by the called trusts which it owned prior to such trusts’ termination. Refer to Note 8 for further details on these transactions.

The following is a summary of New Residential’s real estate securities, all of which are classified as available-for-sale and are, therefore, reported at fair value with changes in fair value recorded in other comprehensive income, except for securities that are other-than-temporarily impaired and except for securities which New Residential elected to carry at fair value and record changes to valuation through the income statement.
 
 
March 31, 2016
 
December 31, 2015
 
 
 
 
 
 
Gross Unrealized
 
 
 
 
 
Weighted Average
 
 
Asset Type
 
Outstanding Face Amount
 
Amortized Cost Basis
 
Gains
 
Losses
 
Carrying Value(A)
 
Number of Securities
 
Rating(B)
 
Coupon(C)
 
Yield
 
Life (Years)(D)
 
Principal Subordination(E)
 
Carrying Value
Agency
  RMBS(F) (G)
 
$
1,450,299

 
$
1,524,194

 
$
531

 
$
(1,522
)
 
$
1,523,203

 
39

 
AAA
 
3.39
%
 
1.95
%
 
6.1
 
N/A

 
$
917,598

Non-Agency
    RMBS(H) (I)
 
4,316,034

 
1,928,849

 
21,699

 
(31,961
)
 
1,918,587

 
280

 
BB-
 
1.70
%
 
5.23
%
 
7.5
 
11.2
%
 
1,584,283

Total/
   Weighted
    Average
 
$
5,766,333

 
$
3,453,043

 
$
22,230

 
$
(33,483
)
 
$
3,441,790

 
319

 
BBB+
 
2.42
%
 
3.78
%
 
6.9
 
 
 
$
2,501,881

 
(A)
Fair value, which is equal to carrying value for all securities. See Note 12 regarding the estimation of fair value.
(B)
Represents the weighted average of the ratings of all securities in each asset type, expressed as an S&P equivalent rating. This excludes the ratings of the collateral underlying 84 bonds with a carrying value of $341.6 million which either have never been rated or for which rating information is no longer provided. For each security rated by multiple rating agencies, the lowest rating is used. New Residential used an implied AAA rating for the Agency RMBS. Ratings provided were determined by third party rating agencies, and represent the most recent credit ratings available as of the reporting date and may not be current.
(C)
Excludes residual bonds, and certain other Non-Agency bonds, with a carrying value of $220.5 million and $0.0 million, respectively, for which no coupon payment is expected.
(D)
The weighted average life is based on the timing of expected principal reduction on the assets.
(E)
Percentage of the amortized cost basis of securities that is subordinate to New Residential’s investments, excluding interest-only bonds and servicer advance bonds.
(F)
Includes securities issued or guaranteed by U.S. Government agencies such as Fannie Mae or Freddie Mac.
(G)
The total outstanding face amount was $1.3 billion for fixed rate securities and $175.7 million for floating rate securities as of March 31, 2016.
(H)
The total outstanding face amount was $2.4 billion (including $1.8 billion of residual and interest-only notional amount) for fixed rate securities and $1.9 billion (including $229.9 million of residual and interest-only notional amount) for floating rate securities as of March 31, 2016.
(I)
Includes other ABS consisting primarily of (i) interest-only securities which New Residential elected to carry at fair value and record changes to valuation through the income statement and (ii) bonds backed by servicer advances.
    
 
 
 
 
 
 
Gross Unrealized
 
 
 
 
 
Weighted Average
Asset Type
 
Outstanding Face Amount
 
Amortized Cost Basis
 
Gains
 
Losses
 
Carrying Value
 
Number of Securities
 
Rating
 
Coupon
 
Yield
 
Life (Years)
 
Principal Subordination
Other ABS
 
$
1,723,191

 
$
102,192

 
$
6,028

 
$
(4,412
)
 
$
103,808

 
16

 
A+
 
2.21
%
 
6.21
%
 
5.1
 
N/A
Servicer Advance Bonds
 
$
431,000

 
$
430,754

 
$
306

 
$
(103
)
 
$
430,957

 
5

 
AA+
 
2.69
%
 
2.44
%
 
0.8
 
N/A


Unrealized losses that are considered other-than-temporary are recognized currently in earnings. During the three months ended March 31, 2016, New Residential recorded OTTI charges of $3.3 million with respect to real estate securities. Any remaining unrealized losses on New Residential’s securities were primarily the result of changes in market factors, rather than issue-specific credit impairment. New Residential performed analyses in relation to such securities, using its best estimate of their cash flows, which support its belief that the carrying values of such securities were fully recoverable over their expected holding period. New Residential has no intent to sell, and is not more likely than not to be required to sell, these securities.
 
The following table summarizes New Residential’s securities in an unrealized loss position as of March 31, 2016.
 
 
 
 
Amortized Cost Basis
 
 
 
 
 
 
 
Weighted Average
Securities in an Unrealized Loss Position
 
Outstanding Face Amount
 
Before Impairment
 
Other-Than-
Temporary Impairment(A)
 
After Impairment
 
Gross Unrealized Losses
 
Carrying Value
 
Number of Securities
 
Rating(B)
 
Coupon
 
Yield
 
Life
(Years)
Less than 12 Months
 
$
2,296,736

 
$
1,054,378

 
$
(3,070
)
 
$
1,051,308

 
$
(31,030
)
 
$
1,020,278

 
131

 
B+
 
1.35
%
 
5.30
%
 
9.0
12 or More Months
 
202,132

 
166,905

 
(184
)
 
166,721

 
(2,453
)
 
164,268

 
31

 
AA-
 
2.38
%
 
1.87
%
 
6.7
Total/Weighted Average
 
$
2,498,868

 
$
1,221,283

 
$
(3,254
)
 
$
1,218,029

 
$
(33,483
)
 
$
1,184,546

 
162

 
BB-
 
1.50
%
 
4.83
%
 
8.6
 
(A)
This amount represents OTTI recorded on securities that are in an unrealized loss position as of March 31, 2016.
(B)
The weighted average rating of securities in an unrealized loss position for less than 12 months excludes the rating of 24 bonds which either have never been rated or for which rating information is no longer provided. The weighted average rating of securities in an unrealized loss position for 12 or more months excludes the rating of 2 bonds which either have never been rated or for which rating information is no longer provided.

New Residential performed an assessment of all of its debt securities that are in an unrealized loss position (an unrealized loss position exists when a security’s amortized cost basis, excluding the effect of OTTI, exceeds its fair value) and determined the following:
 
March 31, 2016
 
 
 
 
 
Gross Unrealized Losses
 
Fair Value
 
Amortized Cost Basis After Impairment
 
Credit(A)
 
Non-Credit(B)
Securities New Residential intends to sell(C)
$

 
$

 
$

 
$

Securities New Residential is more likely than not to be required to sell(D)

 

 

 
N/A

Securities New Residential has no intent to sell and is not more likely than not to be required to sell:
 
 
 
 
 
 
 
Credit impaired securities
274,970

 
279,440

 
(3,254
)
 
(4,470
)
Non-credit impaired securities
909,576

 
938,589

 

 
(29,013
)
Total debt securities in an unrealized loss position
$
1,184,546

 
$
1,218,029

 
$
(3,254
)
 
$
(33,483
)
  
(A)
This amount is required to be recorded as OTTI through earnings. In measuring the portion of credit losses, New Residential estimates the expected cash flow for each of the securities. This evaluation includes a review of the credit status and the performance of the collateral supporting those securities, including the credit of the issuer, key terms of the securities and the effect of local, industry and broader economic trends. Significant inputs in estimating the cash flows include New Residential’s expectations of prepayment speeds, default rates and loss severities. Credit losses are measured as the decline in the present value of the expected future cash flows discounted at the investment’s effective interest rate.
(B)
This amount represents unrealized losses on securities that are due to non-credit factors and recorded through other comprehensive income.
(C)
A portion of securities New Residential intends to sell have a fair value equal to their amortized cost basis after impairment and, therefore, do not have unrealized losses reflected in other comprehensive income as of March 31, 2016.
(D)
New Residential may, at times, be more likely than not to be required to sell certain securities for liquidity purposes. While the amount of the securities to be sold may be an estimate, and the securities to be sold have not yet been identified, New Residential must make its best estimate, which is subject to significant judgment regarding future events, and may differ materially from actual future sales.

The following table summarizes the activity related to credit losses on debt securities:
 
Three Months Ended March 31, 2016
Beginning balance of credit losses on debt securities for which a portion of an OTTI was
    recognized in other comprehensive income
$
6,239

Increases to credit losses on securities for which an OTTI was previously recognized and a portion
    of an OTTI was recognized in other comprehensive income
1,276

Additions for credit losses on securities for which an OTTI was not previously recognized
1,978

Reductions for securities for which the amount previously recognized in other comprehensive
    income was recognized in earnings because the entity intends to sell the security or more likely
    than not will be required to sell the security before recovery of its amortized cost basis

Reduction for credit losses on securities for which no OTTI was recognized in other
    comprehensive income at the current measurement date

Reduction for securities sold during the period
(284
)
Ending balance of credit losses on debt securities for which a portion of an OTTI was recognized
    in other comprehensive income
$
9,209


 
The table below summarizes the geographic distribution of the collateral securing New Residential’s Non-Agency RMBS:
 
 
March 31, 2016
 
December 31, 2015
Geographic Location(A)
 
Outstanding Face Amount

Percentage of Total Outstanding
 
Outstanding Face Amount

Percentage of Total Outstanding
Western U.S.
 
$
1,338,979


34.4
%
 
$
1,097,609

 
35.3
%
Southeastern U.S.
 
946,470


24.3
%
 
758,167

 
24.4
%
Northeastern U.S.
 
757,277


19.5
%
 
583,366

 
18.8
%
Midwestern U.S.
 
452,917


11.7
%
 
335,406

 
10.8
%
Southwestern U.S.
 
382,954


9.9
%
 
309,236

 
10.0
%
Other(B)
 
6,437


0.2
%
 
19,189

 
0.7
%
 
 
$
3,885,034


100.0
%
 
$
3,102,973

 
100.0
%
  
(A)
Excludes $431.0 million face amount of bonds backed by servicer advances.
(B)
Represents collateral for which New Residential was unable to obtain geographic information.

New Residential evaluates the credit quality of its real estate securities, as of the acquisition date, for evidence of credit quality deterioration. As a result, New Residential identified a population of real estate securities for which it was determined that it was probable that New Residential would be unable to collect all contractually required payments. For securities acquired during the three months ended March 31, 2016, excluding residual and interest-only securities, the face amount of these real estate securities was $626.2 million, with total expected cash flows of $425.3 million and a fair value of $341.7 million on the dates that New Residential purchased the respective securities.
 
The following is the outstanding face amount and carrying value for securities, for which, as of the acquisition date, it was probable that New Residential would be unable to collect all contractually required payments, excluding residual and interest-only securities:
 
Outstanding Face Amount
 
Carrying Value
March 31, 2016
$
1,381,005

 
$
758,726

December 31, 2015
873,763

 
504,659


 
The following is a summary of the changes in accretable yield for these securities:
 
Three Months Ended March 31, 2016
Balance at December 31, 2015
$
316,521

Additions
224,428

Accretion
(18,362
)
Reclassifications from (to) non-accretable difference
(13,662
)
Disposals
4,855

Balance at March 31, 2016
$
513,780