Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS

v3.7.0.1
INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS
6 Months Ended
Jun. 30, 2017
Transfers and Servicing [Abstract]  
INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS
INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS
 
The following table presents activity related to the carrying value of New Residential’s direct investments in Excess MSRs:
 
 
Servicer
 
 
Nationstar
 
SLS(A)
 
Ocwen(B)
 
Total
Balance as of December 31, 2016
 
$
611,293

 
$
3,935

 
$
784,227

 
$
1,399,455

Purchases
 

 

 

 

Interest income
 
21,263

 
(495
)
 
28,778

 
49,546

Other income
 
1,342

 

 

 
1,342

Proceeds from repayments
 
(62,691
)
 
(1,023
)
 
(63,604
)
 
(127,318
)
Change in fair value
 
215

 
339

 
(18,913
)
 
(18,359
)
Balance as of June 30, 2017
 
$
571,422

 
$
2,756

 
$
730,488

 
$
1,304,666


(A)
Specialized Loan Servicing LLC (“SLS”).
(B)
Ocwen Loan Servicing LLC, a subsidiary of Ocwen Financial Corporation (together with its subsidiaries, including Ocwen Loan Servicing LLC, “Ocwen”), services the loans underlying the Excess MSRs and Servicer Advances acquired from HLSS.

Nationstar, SLS or Ocwen, as applicable, as servicer, performs all of the servicing and advancing functions, and retains the ancillary income, servicing obligations and liabilities as the servicer of the underlying loans in the portfolio.

New Residential has entered into a “recapture agreement” with respect to each of the Excess MSR investments serviced by Nationstar and SLS. Under such arrangements, New Residential is generally entitled to a pro rata interest in the Excess MSRs on any initial or subsequent refinancing by Nationstar of a loan in the original portfolio. New Residential has a similar recapture agreement with Ocwen; however, this agreement allows for Ocwen to retain the Excess MSR on recaptured loans up to a threshold and no payments have been made to New Residential under such arrangement to date. These recapture agreements do not apply to New Residential’s investments in Servicer Advances (Note 6).

New Residential elected to record its investments in Excess MSRs at fair value pursuant to the fair value option for financial instruments in order to provide users of the financial statements with better information regarding the effects of prepayment risk and other market factors on the Excess MSRs.
 
The following is a summary of New Residential’s direct investments in Excess MSRs:
 
June 30, 2017
 
December 31, 2016
 
UPB of Underlying Mortgages
 
Interest in Excess MSR
 
Weighted Average Life Years(A)
 
Amortized Cost Basis(B)
 
Carrying Value(C)
 
Carrying Value(C)
 
 
 
New Residential(D)
 
Fortress-managed funds
 
Nationstar
 
 
 
 
 
 
 
 
Agency
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Original and Recaptured Pools
$
72,609,125

 
32.5% - 66.7% (53.2%)
 
0.0% - 40.0%

 
20.0% - 35.0%

 
5.9
 
$
277,034

 
$
304,980

 
$
330,323

Recapture Agreements

 
32.5% - 66.7% (53.2%)
 
0.0% - 40.0%

 
20.0% - 35.0%

 
12.6
 
21,630

 
48,995

 
51,434

 
72,609,125

 
 
 
 
 
 
 
6.4
 
298,664

 
353,975

 
381,757

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Agency(E)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nationstar and SLS Serviced:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Original and Recaptured Pools
$
70,867,185

 
33.3% - 100.0% (59.4%)
 
0.0% - 50.0%

 
0.0% - 33.3%

 
5.3
 
$
167,751

 
$
199,753

 
$
219,980

Recapture Agreements

 
33.3% - 100.0% (59.4%)
 
0.0% - 50.0%

 
0.0% - 33.3%

 
12.5
 
9,157

 
20,450

 
13,491

Ocwen Serviced Pools
111,983,880

 
100.0%
 
%
 
%
 
6.4
 
706,586

 
730,488

 
784,227

 
182,851,065

 
 
 
 
 
 
 
6.3
 
883,494

 
950,691

 
1,017,698

Total
$
255,460,190

 
 
 
 
 
 
 
6.3
 
$
1,182,158

 
$
1,304,666

 
$
1,399,455

 
(A)
Weighted Average Life represents the weighted average expected timing of the receipt of expected cash flows for this investment.
(B)
The amortized cost basis of the recapture agreements is determined based on the relative fair values of the recapture agreements and related Excess MSRs at the time they were acquired.
(C)
Carrying Value represents the fair value of the pools or recapture agreements, as applicable.
(D)
Amounts in parentheses represent weighted averages.
(E)
New Residential also invested in related Servicer Advances, including the basic fee component of the related MSR as of June 30, 2017 (Note 6) on $169.6 billion UPB underlying these Excess MSRs.

Changes in fair value recorded in other income is comprised of the following:
 
 
Three Months Ended 
 June 30,
 
Six Months Ended  
 June 30,
 
 
2017
 
2016
 
2017
 
2016
Original and Recaptured Pools

$
(21,736
)
 
$
(18,694
)
 
$
(28,984
)
 
$
(12,997
)
Recapture Agreements

2,556

 
3,431

 
10,625

 
5,660

 
 
$
(19,180
)
 
$
(15,263
)
 
$
(18,359
)
 
$
(7,337
)


As of June 30, 2017, a weighted average discount rate of 9.7% was used to value New Residential’s investments in Excess MSRs (directly and through equity method investees).

New Residential entered into investments in joint ventures (“Excess MSR joint ventures”) jointly controlled by New Residential and Fortress-managed funds investing in Excess MSRs. New Residential elected to record these investments 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 prepayment risk and other market factors.

The following tables summarize the financial results of the Excess MSR joint ventures, accounted for as equity method investees, held by New Residential:
 
 
June 30, 2017
 
December 31, 2016
Excess MSR assets
 
$
344,521

 
$
372,391

Other assets
 
18,698

 
17,184

Other liabilities
 

 

Equity
 
$
363,219

 
$
389,575

New Residential’s investment
 
$
181,610

 
$
194,788

 
 
 
 
 
New Residential’s ownership
 
50.0
%
 
50.0
%

 
 
Three Months Ended 
 June 30,
 
Six Months Ended  
 June 30,
 
 
2017
 
2016
 
2017
 
2016
Interest income
 
$
8,931

 
$
4,240

 
$
13,114

 
$
12,321

Other income (loss)
 
(420
)
 
(5,569
)
 
(5,065
)
 
(7,583
)
Expenses
 
(19
)
 
(21
)
 
(45
)
 
(44
)
Net income
 
$
8,492

 
$
(1,350
)
 
$
8,004

 
$
4,694


New Residential’s investments in equity method investees changed during the six months ended June 30, 2017 as follows:
Balance at December 31, 2016
$
194,788

Contributions to equity method investees

Transfers to direct ownership

Distributions of earnings from equity method investees
(7,433
)
Distributions of capital from equity method investees
(9,747
)
Change in fair value of investments in equity method investees
4,002

Balance at June 30, 2017
$
181,610



The following is a summary of New Residential’s Excess MSR investments made through equity method investees:
 
June 30, 2017
 
Unpaid Principal Balance
 
Investee Interest in Excess MSR(A)
 
New Residential Interest in Investees
 
Amortized Cost Basis(B)
 
Carrying Value(C)
 
Weighted Average Life (Years)(D)
Agency
 
 
 
 
 
 
 
 
 
 
 
Original and Recaptured Pools
$
56,215,426

 
66.7
%
 
50.0
%
 
$
230,946

 
$
291,907

 
5.8
Recapture Agreements

 
66.7
%
 
50.0
%
 
26,102

 
52,614

 
12.8
Total
$
56,215,426

 
 
 
 
 
$
257,048

 
$
344,521

 
6.5
 
(A)
The remaining interests are held by Nationstar.
(B)
Represents the amortized cost basis of the equity method investees in which New Residential holds a 50% interest. The amortized cost basis of the recapture agreements is determined based on the relative fair values of the recapture agreements and related Excess MSRs at the time they were acquired.
(C)
Represents the carrying value of the Excess MSRs held in equity method investees, in which New Residential holds a 50% interest. Carrying value represents the fair value of the pools or recapture agreements, as applicable.
(D)
The weighted average life represents the weighted average expected timing of the receipt of cash flows of each investment.

The table below summarizes the geographic distribution of the underlying residential mortgage loans of the Excess MSR investments:
 
 
Aggregate Direct and Equity Method Investees
 
 
Percentage of Total Outstanding Unpaid Principal Amount
State Concentration
 
June 30, 2017
 
December 31, 2016
California
 
24.0
%
 
24.1
%
Florida
 
8.7
%
 
8.6
%
New York
 
8.1
%
 
7.9
%
Texas
 
4.6
%
 
4.6
%
New Jersey
 
4.2
%
 
4.2
%
Maryland
 
3.8
%
 
3.7
%
Illinois
 
3.5
%
 
3.5
%
Virginia
 
3.1
%
 
3.1
%
Georgia
 
3.1
%
 
3.1
%
Massachusetts
 
2.7
%
 
2.7
%
Arizona
 
2.5
%
 
2.5
%
Washington
 
2.5
%
 
2.6
%
Other U.S.
 
29.2
%
 
29.4
%
 
 
100.0
%
 
100.0
%


Geographic concentrations of investments expose New Residential to the risk of economic downturns within the relevant states. Any such downturn in a state where New Residential holds significant investments could affect the underlying borrower’s ability to make mortgage payments and therefore could have a meaningful, negative impact on the Excess MSRs.

See Note 11 regarding the financing of Excess MSRs.