Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN CONSUMER LOANS

v3.7.0.1
INVESTMENTS IN CONSUMER LOANS
6 Months Ended
Jun. 30, 2017
Investments In Consumer Loans Equity Method Investees [Abstract]  
INVESTMENTS IN CONSUMER LOANS
INVESTMENTS IN CONSUMER LOANS
 
In April 2013, New Residential completed, through newly formed limited liability companies (together, the “Consumer Loan Companies”), a co-investment in a portfolio of consumer loans. The portfolio included personal unsecured loans and personal homeowner loans originated through subsidiaries of HSBC Finance Corporation. New Residential acquired 30% membership interests in each of the Consumer Loan Companies. Of the remaining 70% of the membership interests, OneMain acquired 47% and funds managed by Blackstone Tactical Opportunities Advisors L.L.C. acquired 23%. OneMain acted as the managing member of the Consumer Loan Companies. OneMain is the servicer of the loans and provides all servicing and advancing functions for the portfolio.

In 2014, the Consumer Loan Companies refinanced the portfolio, resulting in proceeds in excess of the refinanced debt which were distributed to the respective co-investors. This reduced New Residential’s basis in the consumer loans investment to $0.0 million and resulted in a gain. Subsequent to this refinancing, New Residential discontinued recording its share of the underlying earnings of the Consumer Loan Companies.

Prior to March 31, 2016, New Residential accounted for its investment in the Consumer Loan Companies pursuant to the equity method of accounting because it could exercise significant influence over the Consumer Loan Companies, but the requirements for consolidation were not met. New Residential’s share of earnings and losses in these equity method investees was included in “Earnings from investments in consumer loans, equity method investees” on the Condensed Consolidated Statements of Income. Equity method investments were included in “Investments in consumer loans, equity method investees” on the Condensed Consolidated Balance Sheets.

On March 31, 2016, certain of New Residential’s indirect wholly owned subsidiaries (collectively, the “NRZ SpringCastle Buyers”) entered into a Purchase Agreement (the “SpringCastle Purchase Agreement”) primarily with (i) certain direct or indirect wholly owned subsidiaries of OneMain (the “SpringCastle Sellers”), (ii) BTO Willow Holdings II, L.P. and Blackstone Family Tactical Opportunities Investment Partnership - NQ - ESC L.P. (together, the “Blackstone SpringCastle Buyers,” and the Blackstone SpringCastle Buyers together with the NRZ SpringCastle Buyers, collectively, the “SpringCastle Buyers”). Pursuant to the SpringCastle Purchase Agreement, the SpringCastle Sellers sold their collective 47% limited liability company interests in the Consumer Loan Companies to the SpringCastle Buyers (the “SpringCastle Transaction”).

Pursuant to the SpringCastle Purchase Agreement, the NRZ SpringCastle Buyers collectively acquired an additional 23.5% limited liability company interest in the Consumer Loan Companies (representing 50% of the limited liability company interests being sold by the SpringCastle Sellers in the SpringCastle Transaction) and the Blackstone SpringCastle Buyers acquired the other 50% of the limited liability company interests being sold in the SpringCastle Transaction.

Following the SpringCastle Transaction, New Residential, through the NRZ SpringCastle Buyers, owns 53.5% of the limited liability company interests in the Consumer Loan Companies and the Blackstone SpringCastle Buyers, collectively with their affiliates, own the remaining 46.5% interests in the Consumer Loan Companies. As a result of the SpringCastle Transaction, New Residential obtained a controlling financial interest in, and consolidates, the Consumer Loan Companies.

In 2016, New Residential agreed to purchase newly originated consumer loans from a third party (“Consumer Loan Seller”). In the aggregate, as of December 31, 2016, New Residential had purchased $177.4 million UPB of loans for an aggregate purchase price of $176.2 million from Consumer Loan Seller. These loans are not held in the Consumer Loan Companies and have been designated as performing consumer loans, held-for-investment.

Upon acquisition, consumer loans are accounted for based on New Residential’s strategy for the loan, and on whether the loan was credit impaired at the date of acquisition. New Residential determined that it has the intent and ability to hold the consumer loans for the foreseeable future and accounts for consumer loans based on the following categories:

Loans Held-for-Investment:
Performing Loans
PCD Loans

The following table summarizes the investment in consumer loans, held-for-investment held by New Residential:
 
Unpaid Principal Balance

Interest in Consumer Loans

Carrying Value

Weighted Average Coupon

Weighted Average Expected Life (Years)(A)
 
Weighted Average Delinquency(B)
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Consumer Loan Companies
 
 
 
 
 
 
 
 
 
 
 
Performing Loans
$
1,127,296

 
53.5
%
 
$
1,174,324

 
18.7
%
 
3.9
 
5.4
%
Purchased Credit Deteriorated Loans(C)
322,685

 
53.5
%
 
272,684

 
16.4
%
 
3.4
 
12.2
%
Other - Performing Loans
126,353

 
100.0
%
 
122,380

 
14.2
%
 
1.2
 
2.4
%
Total Consumer Loans, held-for-investment
$
1,576,334

 
 
 
$
1,569,388

 
17.9
%
 
3.6
 
6.6
%
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Consumer Loan Companies
 
 
 
 
 
 
 
 
 
 
 
Performing Loans
$
1,275,121

 
53.5
%
 
$
1,321,825

 
18.7
%
 
4.2
 
6.3
%
Purchased Credit Deteriorated Loans(C)
371,261

 
53.5
%
 
316,532

 
16.6
%
 
3.6
 
14.0
%
Other - Performing Loans
163,570

 
100.0
%
 
161,129

 
14.2
%
 
1.5
 
0.3
%
Total Consumer Loans, held-for-investment
$
1,809,952

 
 
 
$
1,799,486

 
17.9
%
 
3.8
 
7.3
%

(A)
Represents the weighted average expected timing of the receipt of expected cash flows for this investment.
(B)
Represents the percentage of the total unpaid principal balance that is 30+ days delinquent. Delinquency status is the primary credit quality indicator as it provides early warning of borrowers who may be experiencing financial difficulties.
(C)
Includes loans with evidence of credit deterioration since origination where it is probable that New Residential will not collect all contractually required principal and interest payments, which are accounted for as PCD loans.

See Note 11 regarding the financing of consumer loans.

Performing Loans

The following table provides past due information regarding New Residential’s performing consumer loans, held-for-investment, which is an important indicator of credit quality and the establishment of the allowance for loan losses:
June 30, 2017
Days Past Due
 
Delinquency Status(A)
Current
 
94.7
%
30-59
 
2.3
%
60-89
 
1.2
%
90-119(B)
 
0.7
%
120+(B) (C)
 
1.1
%
 
 
100.0
%

(A)
Represents the percentage of the total unpaid principal balance that corresponds to loans that are in each delinquency status.
(B)
Includes loans more than 90 days past due and still accruing interest.
(C)
Interest is accrued up to the date of charge-off at 180 days past due.

Activities related to the carrying value of performing consumer loans, held-for-investment were as follows:
 
 
Performing Loans
Balance at December 31, 2016
 
$
1,482,954

Purchases
 

Additional fundings(A)
 
27,240

Proceeds from repayments
 
(174,319
)
Accretion of loan discount and premium amortization, net
 
2,774

Gross charge-offs
 
(40,139
)
Additions to the allowance for loan losses, net
 
(1,806
)
Balance at June 30, 2017
 
$
1,296,704


(A)
Represents draws on consumer loans with revolving privileges.

Activities related to the allowance for loan losses on performing consumer loans, held-for-investment were as follows:
 
 
Collectively Evaluated(A)
 
Individually Impaired(B)
 
Total
Balance at December 31, 2016
 
$
2,441

 
$
997

 
$
3,438

Provision (reversal) for loan losses
 
36,845

 
275

 
37,120

Net charge-offs(C)
 
(35,314
)
 

 
(35,314
)
Balance at June 30, 2017
 
$
3,972

 
$
1,272

 
$
5,244


(A)
Represents smaller-balance homogeneous loans that are not individually considered impaired and are evaluated based on an analysis of collective borrower performance, key terms of the loans and historical and anticipated trends in defaults and loss severities, and consideration of the unamortized acquisition discount.
(B)
Represents consumer loan modifications considered to be troubled debt restructurings (“TDRs”) as they provide concessions to borrowers, primarily in the form of interest rate reductions, who are experiencing financial difficulty. As of June 30, 2017, there are $8.1 million in UPB and $8.2 million in carrying value of consumer loans classified as TDRs.
(C)
Consumer loans, other than PCD loans, are charged off when available information confirms that loans are uncollectible, which is generally when they become 180 days past due. Charge-offs are presented net of $4.8 million in recoveries of previously charged-off UPB.

Purchased Credit Deteriorated Loans

A portion of the consumer loans are considered PCD loans. Activities related to the carrying value of PCD consumer loans, held-for-investment were as follows:
Balance at December 31, 2016
 
$
316,532

(Allowance) reversal for loan losses(A)
 
1,682

Proceeds from repayments
 
(66,826
)
Accretion of loan discount and other amortization
 
21,296

Balance at June 30, 2017
 
$
272,684


(A)
Represents the present value of cash flows expected at acquisition that are no longer expected to be collected.

The following is the unpaid principal balance and carrying value for consumer loans, for which, as of the acquisition date, it was probable that New Residential would be unable to collect all contractually required payments:
 
Unpaid Principal Balance
 
Carrying Value
June 30, 2017
$
322,685

 
$
272,684

December 31, 2016
371,261

 
316,532



The following is a summary of the changes in accretable yield for these loans:
Balance at December 31, 2016
 
$
167,928

Accretion
 
(21,296
)
Reclassifications to non-accretable difference(A)
 
(7,245
)
Balance at June 30, 2017
 
$
139,387


(A)
Represents a probable and significant decrease in cash flows previously expected to be collectible.

Noncontrolling Interests

Others’ interests in the equity of the Consumer Loan Companies is computed as follows:
 
 
June 30, 2017
 
December 31, 2016
Total Consumer Loan Companies equity
 
$
75,132

 
$
75,311

Others’ ownership interest
 
46.5
%
 
46.5
%
Others’ interests in equity of consolidated subsidiary
 
$
34,987

 
$
35,020


Others’ interests in the Consumer Loan Companies’ net income (loss) is computed as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended  
 June 30,
 
2017
 
2016
 
2017
 
2016
Net Consumer Loan Companies income (loss)
$
26,545

 
$
31,464

 
$
47,965

 
$
31,464

Others’ ownership interest as a percent of total
46.5
%
 
46.5
%
 
46.5
%
 
46.5
%
Others’ interest in net income (loss) of consolidated subsidiaries
$
12,343

 
$
14,630

 
$
22,303

 
$
14,630



Variable Interest Entities

The Consumer Loan Companies consolidate certain entities that issued securitized debt collateralized by the consumer loans (the “Consumer Loan SPVs”). The Consumer Loan SPVs are VIEs of which the Consumer Loan Companies are the primary beneficiaries. The following table presents information on the combined assets and liabilities related to these consolidated VIEs.
 
 
As of
 
 
June 30, 2017
Assets
 
 
Consumer loans, held-for-investment
 
$
1,447,008

Restricted cash
 
12,400

Accrued interest receivable
 
21,229

Total assets(A)
 
$
1,480,637

Liabilities
 
 
Notes and bonds payable(B)
 
$
1,450,605

Accounts payable and accrued expenses
 
850

Total liabilities(A)
 
$
1,451,455


(A)
The creditors of the Consumer Loan SPVs do not have recourse to the general credit of New Residential, and the assets of the Consumer Loan SPVs are not directly available to satisfy New Residential’s obligations.
(B)
Includes $121.0 million of bonds retained by New Residential issued by these VIEs.

Equity Method Investees

In February 2017, New Residential completed a co-investment, through a newly formed entity, PF LoanCo Funding LLC (“LoanCo”), to purchase up to $5.0 billion worth of newly originated consumer loans from Consumer Loan Seller over a two year term. New Residential, along with three co-investors, each acquired 25% membership interests in LoanCo. New Residential will account for its investment in LoanCo pursuant to the equity method of accounting because it can exercise significant influence over LoanCo but the requirements for consolidation are not met. New Residential’s investment in LoanCo is recorded as Investment in Consumer Loans, Equity Method Investees. LoanCo has elected to account for its investments in consumer loans at fair value. New Residential has elected to record LoanCo’s activity on a one month lag.

In addition, New Residential and the LoanCo co-investors agreed to purchase warrants to purchase up to 177.7 million shares of Series F convertible preferred stock in the Consumer Loan Seller’s parent company (ParentCo), which were valued at approximately $75.0 million in the aggregate as of February 2017, through a newly formed entity, PF WarrantCo Holdings, LP (“WarrantCo”). New Residential acquired a 23.57% interest in WarrantCo, the remaining interest being acquired by three co-investors. WarrantCo has agreed to purchase a pro rata portion of the warrants each time LoanCo closes on a portion of its consumer loan purchase agreement from Consumer Loan Seller. The holder of the warrants has the option to purchase an equivalent number of shares of Series F convertible preferred stock in ParentCo at a price of $0.01 per share. Warrantco is vested in the warrants to purchase an aggregate of 27.1 million Series F convertible preferred stock in ParentCo as of May 31, 2017. The Series F convertible preferred stock holders have the right to convert such preferred stock to common stock at any time, are entitled to the number of votes equal to the number of shares of common stock into which such shares of convertible preferred stock could be converted, and will have liquidation rights in the event of liquidation. New Residential will account for its investment in WarrantCo pursuant to the equity method of accounting because it can exercise significant influence over WarrantCo but the requirements for consolidation are not met. New Residential’s investment in WarrantCo is recorded as Investment in Consumer Loans, Equity Method Investees. WarrantCo has elected to account for its investments in warrants at fair value. New Residential has elected to record WarrantCo’s activity on a one month lag.

The following tables summarize the investment in LoanCo and WarrantCo held by New Residential:
 
 
June 30, 2017(A)
Consumer loans, at fair value
 
$
133,951

Warrants
 
13,700

Other assets
 
62,746

Warehouse financing
 
(55,105
)
Other liabilities
 
(10,673
)
Equity
 
$
144,619

New Residential’s investment
 
$
35,959

New Residential’s ownership
 
24.9
%


 
 
Three Months Ended 
 June 30, 2017
(A)
 
Six Months Ended  
 June 30, 2017
(A)
Interest income
 
$
12,829

 
$
12,829

Interest expense
 
(3,133
)
 
(3,133
)
Change in fair value of consumer loans and warrants
 
3,555

 
3,555

Gain on sale of consumer loans(B)
 
11,850

 
11,850

Other expenses
 
(1,580
)
 
(1,580
)
Net income
 
$
23,521

 
$
23,521

New Residential’s equity in net income
 
$
5,880

 
$
5,880

New Residential’s ownership
 
24.9
%
 
24.9
%

(A)
Data as of, and for the periods ended, May 31, 2017, as a result of the one month reporting lag.
(B)
During the six months ended June 30, 2017, LoanCo sold, through a securitization which was treated as a sale for accounting purposes, $550.0 million in UPB of consumer loans.  LoanCo retained $64.2 million of the residual interest of the securitization and distributed it to the LoanCo co-investors, including New Residential.

The following is a summary of LoanCo’s consumer loan investments:
 
Unpaid Principal Balance
 
Interest in Consumer Loans
 
Carrying Value
 
Weighted Average Coupon
 
Weighted Average Expected Life (Years)(A)
 
Weighted Average Delinquency(B)
June 30, 2017(C)
$
133,951

 
25.0
%
 
$
133,951

 
17.4
%
 
1.4
 
1.3
%

(A)
Represents the weighted average expected timing of the receipt of expected cash flows for this investment.
(B)
Represents the percentage of the total unpaid principal balance that is 30+ days delinquent. Delinquency status is the primary credit quality indicator as it provides early warning of borrowers who may be experiencing financial difficulties.
(C)
Data as of May 31, 2017 as a result of the one month reporting lag.

New Residential’s investment in LoanCo and WarrantCo changed as follows:
 
Six Months Ended June 30, 2017
Balance at beginning of period
$

Contributions to equity method investees
192,468

Distributions of earnings from equity method investees
(1,229
)
Distributions of capital from equity method investees
(152,083
)
Earnings from investments in consumer loans, equity method investees
5,880

Balance at end of period
$
45,036