Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE OF FINANCIAL INSTRUMENTS

v3.4.0.3
FAIR VALUE OF FINANCIAL INSTRUMENTS
3 Months Ended
Mar. 31, 2016
Fair Value Disclosures [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The carrying values and fair values of New Residential’s financial assets and liabilities recorded at fair value on a recurring basis, as well as other financial instruments for which fair value is disclosed, as of March 31, 2016 were as follows:
 
 
 
 
 
Fair Value
 
Principal Balance or Notional Amount
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Investments in:
 
 
 
 
 
 
 
 
 
 
 
Excess mortgage servicing rights, at fair value(A)
$
317,540,275

 
$
1,547,004

 
$

 
$

 
$
1,547,004

 
$
1,547,004

Excess mortgage servicing rights, equity method investees, at fair value(A)
70,087,028

 
209,901

 

 

 
209,901

 
209,901

Servicer advances
7,203,924

 
7,001,004

 

 

 
7,001,004

 
7,001,004

Real estate securities, available-for-sale
5,766,333

 
3,441,790

 

 
1,523,203

 
1,918,587

 
3,441,790

Residential mortgage loans, held-for-investment
493,166

 
324,734

 

 

 
320,002

 
320,002

Residential mortgage loans, held-for-sale
716,372

 
633,160

 

 

 
641,004

 
641,004

Consumer loans, held-for-investment
1,986,162

 
1,970,565

 

 

 
1,970,565

 
1,970,565

Derivative assets
2,565,000

 
1,720

 

 
1,720

 

 
1,720

Cash and cash equivalents
258,622

 
258,622

 
258,622

 

 

 
258,622

Restricted cash
170,364

 
170,364

 
170,364

 

 

 
170,364

Other Assets
464,348

 
1,479

 

 

 
1,479

 
1,479

 
 
 
$
15,560,343

 
$
428,986

 
$
1,524,923

 
$
13,609,546

 
$
15,563,455

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Repurchase agreements
$
3,974,404

 
$
3,973,512

 
$

 
$
3,974,404

 
$

 
$
3,974,404

Notes and bonds payable
8,888,721

 
8,870,851

 

 

 
8,882,458

 
8,882,458

Derivative liabilities
6,005,000

 
34,942

 

 
34,942

 

 
34,942

 
 
 
$
12,879,305

 
$

 
$
4,009,346

 
$
8,882,458

 
$
12,891,804

 
(A)
The notional amount represents the total unpaid principal balance of the mortgage loans underlying the Excess MSRs. New Residential does not receive an excess mortgage servicing amount on non-performing loans in Agency portfolios.

New Residential’s financial assets measured at fair value on a recurring basis using Level 3 inputs changed as follows:
 
Level 3
 
 
 
Excess MSRs(A)
 
Excess MSRs in Equity Method Investees(A)(B)
 
 
 
 
 
 
 
Agency
 
Non-Agency
 
Agency
 
Servicer Advances
 
Non-Agency RMBS
 
Total
Balance at December 31, 2015
$
437,201

 
$
1,144,316

 
$
217,221

 
$
7,426,794

 
$
1,584,283

 
$
10,809,815

Transfers(C)
 
 
 
 
 
 
 
 
 
 
 
Transfers from Level 3

 

 

 

 

 

Transfers to Level 3

 

 

 

 

 

Gains (losses) included in net income
 
 
 
 
 
 
 
 
 
 
 
Included in other-than-temporary impairment on securities(D)

 

 

 

 
(3,254
)
 
(3,254
)
Included in change in fair value of investments in excess mortgage servicing rights(D)
946

 
6,980

 

 

 

 
7,926

Included in change in fair value of investments in excess mortgage servicing rights, equity method investees(D)

 

 
3,022

 

 

 
3,022

Included in change in fair value of investments in Servicer Advances

 

 

 
(31,224
)
 

 
(31,224
)
Included in gain (loss) on settlement of investments, net

 

 

 

 
(8,490
)
 
(8,490
)
Included in other income (loss), net(D)
656

 
76

 

 

 
268

 
1,000

Gains (losses) included in other comprehensive income(E)

 

 

 

 
(15,837
)
 
(15,837
)
Interest income
9,622

 
33,346

 

 
78,637

 
34,109

 
155,714

Purchases, sales and repayments
 
 
 
 
 
 
 
 
 
 
 
Purchases

 

 

 
3,844,638

 
443,139

 
4,287,777

Proceeds from sales

 

 

 

 
(38,168
)
 
(38,168
)
Proceeds from repayments
(22,525
)
 
(63,614
)
 
(10,342
)
 
(4,317,841
)
 
(77,463
)
 
(4,491,785
)
Balance at March 31, 2016
$
425,900

 
$
1,121,104

 
$
209,901

 
$
7,001,004

 
$
1,918,587

 
$
10,676,496

 
(A)
Includes the recapture agreement for each respective pool.
(B)
Amounts represent New Residential’s portion of the Excess MSRs held by the respective joint ventures in which New Residential has a 50% interest.
(C)
Transfers are assumed to occur at the beginning of each respective period.
(D)
The gains (losses) recorded in earnings during the period are attributable to the change in unrealized gains (losses) relating to Level 3 assets still held at the reporting dates and realized gains (losses) recorded during the period.
(E)
These gains (losses) were included in net unrealized gain (loss) on securities in the Condensed Consolidated Statements of Comprehensive Income.

Investments in Excess MSRs and Excess MSRs Equity Method Investees Valuation
 
The following table summarizes certain information regarding the weighted average inputs used in valuing the Excess MSRs owned directly and through equity method investees as of March 31, 2016:
 
 
Significant Inputs(A)
Directly Held (Note 4)
 
Prepayment Speed(B)
 
Delinquency(C)
 
Recapture Rate(D)
 
Excess Mortgage Servicing Amount
(bps)(E)
Agency

 
 
 
 
 
 
 
Original Pools

10.5
%
 
3.5
%
 
31.5
%
 
21

Recaptured Pools
 
7.5
%
 
4.8
%
 
20.0
%
 
20

Recapture Agreement

7.6
%
 
5.0
%
 
20.0
%
 
22



9.8
%
 
3.8
%
 
28.8
%
 
21

Non-Agency(F)

 
 
 
 
 
 
 
Nationstar and SLS Serviced:
 
 
 
 
 
 
 
 
Original Pools

11.8
%
 
N/A

 
10.3
%
 
14

Recaptured Pools
 
7.8
%
 
N/A

 
20.0
%
 
20

Recapture Agreement

7.5
%
 
N/A

 
19.8
%
 
20

Ocwen Serviced Pools
 
9.3
%
 
N/A

 
%
 
14



9.8
%
 
N/A

 
2.6
%
 
14

Total/Weighted Average--Directly Held

9.8
%
 
3.8
%
 
9.8
%
 
16



 
 
 
 
 
 
 
Held through Equity Method Investees (Note 5)

 
 
 
 
 
 
 
Agency

 
 
 
 
 
 
 
Original Pools

12.5
%
 
5.8
%
 
35.1
%
 
19

Recaptured Pools
 
7.6
%
 
5.0
%
 
20.0
%
 
23

Recapture Agreement

7.7
%
 
5.0
%
 
20.0
%
 
23

Total/Weighted Average--Held through Investees

10.6
%
 
5.5
%
 
29.2
%
 
21

 
 
 
 
 
 
 
 
 
Total/Weighted Average--All Pools
 
10.0
%
 
4.1
%
 
13.8
%
 
17


(A)
Weighted by fair value of the portfolio.
(B)
Projected annualized weighted average lifetime voluntary and involuntary prepayment rate using a prepayment vector.
(C)
Projected percentage of mortgage loans in the pool for which the borrower will miss its mortgage payments.
(D)
Percentage of voluntarily prepaid loans that are expected to be refinanced by the related servicer.
(E)
Weighted average total mortgage servicing amount in excess of the basic fee.
(F)
For certain pools, the Excess MSR will be paid on the total UPB of the mortgage portfolio (including both performing and delinquent loans until REO). For these pools, no delinquency assumption is used.

As of March 31, 2016, 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).
 
Investments in Servicer Advances Valuation
 
The following table summarizes certain information regarding the inputs used in valuing the Servicer Advances:
 
Significant Inputs
 
Weighted Average
 
 
 
 
 
Outstanding Servicer Advances to UPB of Underlying Residential Mortgage Loans
 
Prepayment Speed(A)
 
Delinquency
 
Mortgage Servicing Amount(B)
 
Discount Rate
March 31, 2016
2.3
%
 
10.2
%
 
14.6
%
 
9.2

bps
5.5
%


(A)
Projected annual weighted average lifetime voluntary and involuntary prepayment rate using a prepayment vector.
(B)
Mortgage servicing amount excludes the amounts New Residential pays its servicers as a monthly servicing fee.
 
Real Estate Securities Valuation
 
As of March 31, 2016, New Residential’s securities valuation methodology and results are further detailed as follows:
 
 
 
 
 
 
Fair Value
Asset Type
 
Outstanding Face Amount
 
Amortized Cost Basis
 
Multiple Quotes(A)
 
Single Quote(B)
 
Total
 
Level
Agency RMBS
 
$
1,450,299

 
$
1,524,194

 
$
1,523,203

 
$

 
$
1,523,203

 
2

Non-Agency RMBS(C)
 
4,316,034

 
1,928,849

 
1,698,040

 
220,547

 
1,918,587

 
3

Total
 
$
5,766,333

 
$
3,453,043

 
$
3,221,243

 
$
220,547

 
$
3,441,790

 
 
 
(A)
New Residential generally obtained pricing service quotations or broker quotations from two sources, one of which was generally the seller (the party that sold New Residential the security) for Non-Agency RMBS. New Residential selected one of the quotes received as being most representative of the fair value and did not use an average of the quotes. Even if New Residential receives two or more quotes on a particular security that come from non-selling brokers or pricing services, it does not use an average because it believes using an actual quote more closely represents a transactable price for the security than an average level. Furthermore, in some cases there is a wide disparity between the quotes New Residential receives. New Residential believes using an average of the quotes in these cases would not represent the fair value of the asset. Based on New Residential’s own fair value analysis, it selects one of the quotes which is believed to more accurately reflect fair value. New Residential never adjusts quotes received. These quotations are generally received via email and contain disclaimers which state that they are “indicative” and not “actionable” — meaning that the party giving the quotation is not bound to actually purchase the security at the quoted price. New Residential’s investments in Agency RMBS are classified within Level 2 of the fair value hierarchy because the market for these securities is very active and market prices are readily observable.
(B)
New Residential was unable to obtain quotations from more than one source on these securities. For approximately $214.7 million, the one source was the party that sold New Residential the security.
(C)
Includes New Residential’s investments in interest-only notes for which the fair value option for financial instruments was elected.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets are measured at fair value on a nonrecurring basis; that is, they are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances, such as when there is evidence of impairment. For residential mortgage loans held-for-sale and foreclosed real estate accounted for as REO, New Residential applies the lower of cost or fair value accounting and may be required, from time to time, to record a nonrecurring fair value adjustment. The consumer loans, held-for-investment, and related notes and bonds payable were recorded at fair value on the date of the SpringCastle Transaction (Note 1), March 31, 2016.

At March 31, 2016, assets measured at fair value on a nonrecurring basis were $2.4 billion. The $2.4 billion includes approximately $2.0 billion of consumer loans, held-for-investment, $377.4 million of residential mortgage loans held-for-sale and $25.3 million of REO. The fair value of New Residential’s consumer loans, held-for-investment, and mortgage loans, held-for-sale, are estimated based on a discounted cash flow model analysis using internal pricing models and categorized within Level 3 of the fair value hierarchy. The following table summarizes the inputs used in valuing these loans as of March 31, 2016:
March 31, 2016
 
Fair Value and Carrying Value
 
Discount Rate
 
Weighted Average Life (Years)(A)
 
Prepayment Rate
 
CDR(B)
 
Loss Severity(C)
Residential Mortgage Loans
 
 
 
 
 
 
 
 
 
 
 
 
Performing Loans
 
$
151,001

 
3.8
%
 
4.7
 
6.0
%
 
0.9
%
 
37.3
%
Non-performing Loans
 
226,354

 
5.7
%
 
3.4
 
3.0
%
 
N/A

 
22.4
%
Total/Weighted Average
 
$
377,355

 
4.9
%
 
3.9
 
4.2
%
 
 
 
28.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer Loans
 
$
1,970,565

 
9.5
%
 
4.2
 
18.5
%
 
5.6
%
 
87.2
%

(A)
The weighted average life is based on the expected timing of the receipt of cash flows.
(B)
Represents the annualized rate of the involuntary prepayments (defaults) as a percentage of the total principal balance. Not applicable for PCD Loans that are not 100% in default.
(C)
Loss severity is the expected amount of future realized losses resulting from the ultimate liquidation of a particular loan, expressed as the net amount of loss relative to the outstanding loan balance.

The fair value of REO is estimated using a broker’s price opinion discounted based upon New Residential’s experience with actual liquidation values and, therefore, is categorized within Level 3 of the fair value hierarchy. These discounts to the broker price opinion are generally 10%.

The debt assumed in the SpringCastle Transaction (Notes 1 and 11) was recorded at its fair value of $1.8 billion on March 31, 2016. The fair value was estimated based on a discounted cash flow model using both observable and unobservable inputs to estimate the amount and timing of expected cash flows, interest rates and collateral funding spreads and, therefore, is categorized within Level 3 of the fair value hierarchy.

The total change in the recorded value of assets for which a fair value adjustment was included in the Condensed Consolidated Statement of Income for the three months ended March 31, 2016 was a decrease in the net valuation allowance of approximately $3.1 million and $3.6 million for residential mortgage loans held-for-sale and REO, respectively.

Residential Mortgage Loans for Which Fair Value is Only Disclosed

The following table summarizes the inputs used in valuing residential mortgage loans as of March 31, 2016:
 
 
Carrying Value
 
Fair Value
 
Valuation and Loss Provision/ (Reversal) In Current Year
 
Discount Rate
 
Weighted Average Life (Years)(A)
 
Prepayment Rate
 
CDR(B)
 
Loss Severity(C)
Reverse Mortgage Loans(D)
 
$
18,142

 
$
18,142

 
$
12

 
10.0
%
 
4.4
 
N/A

 
N/A

 
8.4
%
Performing Loans
 
19,462

 
20,484

 
4

 
7.9
%
 
5.6
 
5.9
%
 
2.5
%
 
58.3
%
Non-performing Loans
 
542,935

 
545,025

 
N/A

 
5.4
%
 
2.5
 
1.5
%
 
N/A

 
13.2
%
Total/Weighted Average
 
$
580,539

 
$
583,651

 
$
16

 
5.6
%
 
2.6
 
 
 
 
 
14.6
%

(A)
The weighted average life is based on the expected timing of the receipt of cash flows.
(B)
Represents the annualized rate of the involuntary prepayments (defaults) as a percentage of the total principal balance.
(C)
Loss severity is the expected amount of future realized losses resulting from the ultimate liquidation of a particular loan, expressed as the net amount of loss relative to the outstanding loan balance.
(D)
Carrying value and fair value represent a 70% participation interest New Residential holds in the portfolio of reverse mortgage loans.

Derivative Valuation

New Residential enters into economic hedges including interest rate swaps, caps and TBAs, which are categorized as Level 2 in the valuation hierarchy. New Residential generally values such derivatives using quotations, similarly to the method of valuation used for New Residential’s other assets that are categorized as Level 2.

Liabilities for Which Fair Value is Only Disclosed

Repurchase agreements and notes and bonds payable are not measured at fair value. They are generally considered to be Level 2 and Level 3 in the valuation hierarchy, respectively, with significant valuation variables including the amount and timing of expected cash flows, interest rates and collateral funding spreads.

Short-term repurchase agreements and short-term notes and bonds payable have an estimated fair value equal to their carrying value due to their short duration and generally floating interest rates. Longer-term notes and bonds payable are valued based on internal models utilizing both observable and unobservable inputs.