Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE MEASUREMENT

v3.7.0.1
FAIR VALUE MEASUREMENT
6 Months Ended
Jun. 30, 2017
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENT
FAIR VALUE MEASUREMENT

The carrying values and fair values of New Residential’s 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 June 30, 2017 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)
$
255,460,190

 
$
1,304,666

 
$

 
$

 
$
1,304,666

 
$
1,304,666

Excess mortgage servicing rights, equity method investees, at fair value(A)
56,215,426

 
181,610

 

 

 
181,610

 
181,610

Mortgage servicing rights, at fair value(A)
180,954,998

 
1,749,343

 

 

 
1,749,343

 
1,749,343

Mortgage servicing rights financing receivable, at fair value
13,070,096

 
118,483

 



 
118,483

 
118,483

Servicer advances, at fair value
4,470,640

 
4,836,754

 

 

 
4,836,754

 
4,836,754

Real estate securities, available-for-sale
13,787,789

 
7,423,273

 

 
1,936,193

 
5,487,080

 
7,423,273

Residential mortgage loans, held-for-investment
909,201

 
757,421

 

 

 
753,074

 
753,074

Residential mortgage loans, held-for-sale
1,234,452

 
1,001,472

 

 

 
1,044,901

 
1,044,901

Consumer loans, held-for-investment
1,576,334

 
1,569,388

 

 

 
1,584,236

 
1,584,236

Derivative assets
7,839,500

 
14,177

 

 
14,177

 

 
14,177

Cash and cash equivalents
560,016

 
560,016

 
560,016

 

 

 
560,016

Restricted cash
157,344

 
157,344

 
157,344

 

 

 
157,344

Other Assets
1,417,530

 
9,548

 

 

 
9,548

 
9,548

 
 
 
$
19,683,495

 
$
717,360

 
$
1,950,370

 
$
17,069,695

 
$
19,737,425

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Repurchase agreements
$
8,263,921

 
$
8,261,398

 
$

 
$
8,263,921

 
$

 
$
8,263,921

Notes and bonds payable
7,805,554

 
7,787,782

 

 

 
7,797,806

 
7,797,806

Derivative liabilities
5,025,500

 
55

 

 
55

 

 
55

 
 
 
$
16,049,235

 
$

 
$
8,263,976

 
$
7,797,806

 
$
16,061,782

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

New Residential’s 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)
 
MSRs
 
Mortgage Servicing Rights Financing Receivable
 
Servicer Advances
 
Non-Agency RMBS
 
 
 
Agency
 
Non-Agency
 
 
 
 
 
Total
Balance at December 31, 2016
$
381,757

 
$
1,017,698

 
$
194,788

 
$
659,483

 
$

 
$
5,706,593

 
$
3,543,560

 
$
11,503,879

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)

 

 

 

 

 

 
(7,227
)
 
(7,227
)
Included in change in fair value of investments in excess mortgage servicing rights(D)
(4,415
)
 
(13,944
)
 

 

 

 

 

 
(18,359
)
Included in change in fair value of investments in excess mortgage servicing rights, equity method investees(D)

 

 
4,002

 

 

 

 

 
4,002

Included in servicing revenue, net(E)

 

 

 
(1,618
)
 

 

 

 
(1,618
)
Included in change in fair value of investments in mortgage servicing rights financing receivable

 

 

 

 
5,596

 

 

 
5,596

Included in change in fair value of investments in servicer advances

 

 

 

 

 
59,528

 

 
59,528

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

 

 

 

 

 

 
18,448

 
18,448

Included in other income (loss), net(D)
1,195

 
147

 

 

 

 

 
151

 
1,493

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

 

 

 

 

 

 
190,041

 
190,041

Interest income
12,953

 
36,593

 

 

 

 
316,512

 
155,488

 
521,546

Purchases, sales and repayments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases

 

 

 
1,091,478

 
112,887

 
6,341,861

 
2,138,275

 
9,684,501

Proceeds from sales

 

 

 

 

 

 
(154,429
)
 
(154,429
)
Proceeds from repayments
(37,515
)
 
(89,803
)
 
(17,180
)
 

 

 
(7,587,740
)
 
(397,227
)
 
(8,129,465
)
Balance at June 30, 2017
$
353,975

 
$
950,691

 
$
181,610

 
$
1,749,343

 
$
118,483

 
$
4,836,754

 
$
5,487,080

 
$
13,677,936

 
(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 the 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)
The components of Servicing revenue, net are disclosed in Note 5.
(F)
These gains (losses) were included in net unrealized gain (loss) on securities in the Condensed Consolidated Statements of Comprehensive Income.

Investments in Excess MSRs, Excess MSRs Equity Method Investees and MSRs 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 June 30, 2017:
 
 
Significant Inputs(A)
 
 
Prepayment
Rate(B)
 
Delinquency(C)
 
Recapture
Rate(D)
 
Mortgage Servicing Amount or Excess Mortgage Servicing Amount (bps)(E)
 
Collateral Weighted Average Maturity (Years)(F)
Excess MSRs Directly Held (Note 4)
 
 
 
 
 
 
 
 
 
 
Agency

 
 
 
 
 
 
 
 
 
Original Pools

9.2
%
 
3.0
%
 
30.1
%
 
21

 
23
Recaptured Pools
 
7.2
%
 
4.3
%
 
22.9
%
 
22

 
25
Recapture Agreement

7.1
%
 
4.2
%
 
25.6
%
 
21

 


8.6
%
 
3.4
%
 
28.2
%
 
21

 
23
Non-Agency(G)

 
 
 
 
 
 
 
 
 
Nationstar and SLS Serviced:
 
 
 
 
 
 
 
 
 
 
Original Pools

12.2
%
 
N/A

 
15.0
%
 
15

 
24
Recaptured Pools
 
7.1
%
 
N/A

 
19.8
%
 
22

 
24
Recapture Agreement

7.0
%
 
N/A

 
19.7
%
 
20

 
Ocwen Serviced Pools
 
9.1
%
 
N/A

 
%
 
14

 
26


9.6
%
 
N/A

 
3.6
%
 
14

 
26
Total/Weighted Average--Excess MSRs Directly Held

9.3
%
 
3.4
%
 
10.3
%
 
16

 
25


 
 
 
 
 
 
 
 
 
Excess MSRs Held through Equity Method Investees (Note 4)

 
 
 
 
 
 
 
 
 
Agency

 
 
 
 
 
 
 
 
 
Original Pools

10.9
%
 
4.9
%
 
34.8
%
 
19

 
22
Recaptured Pools
 
7.4
%
 
4.5
%
 
24.3
%
 
23

 
24
Recapture Agreement

7.4
%
 
4.5
%
 
24.2
%
 
23

 
Total/Weighted Average--Excess MSRs Held through Investees

9.3
%
 
4.7
%
 
29.9
%
 
21

 
23
 
 
 
 
 
 
 
 
 
 
 
Total/Weighted Average--Excess MSRs All Pools
 
9.3
%
 
3.7
%
 
14.4
%
 
17

 
25
 
 
 
 
 
 
 
 
 
 
 
MSRs
 
 
 
 
 
 
 
 
 
 
Mortgage Servicing Rights(H)
 
9.9
%
 
0.8
%
 
25.2
%
 
27

 
22
Mortgage Servicing Rights Financing Receivable(H)
 
10.2
%
 
0.8
%
 
14.6
%
 
26

 
23

(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 residential 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 or subservicer, as applicable.
(E)
Weighted average total mortgage servicing amount, in excess of the basic fee as applicable, measured in basis points (bps). A weighted average cost of subservicing of $7.35 per loan per month was used to value the MSRs.
(F)
Weighted average maturity of the underlying residential mortgage loans in the pool.
(G)
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.
(H)
For certain pools, recapture rate represents the expected recapture rate with the successor subservicer appointed by NRM.

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). As of June 30, 2017, a weighted average discount rate of 10.5% was used to value New Residential’s investments in MSRs and a weighted average discount rate of 11.0% was used to value New Residential’s investments in mortgage servicing rights financing receivable.

Investments in Servicer Advances Valuation

The following table summarizes certain information regarding the inputs used in valuing the Servicer Advances, including the basic fee component of the related MSRs:
 
Significant Inputs
 
Weighted Average
 
 
 
 
Outstanding Servicer Advances to UPB of Underlying Residential Mortgage Loans
 
Prepayment Rate(A)
 
Delinquency
 
Mortgage Servicing Amount(B)
 
Discount Rate
 
Collateral Weighted Average Maturity (Years)(C)
June 30, 2017
1.8
%
 
10.0
%
 
15.2
%
 
14.2

bps
6.5
%
 
25.0


(A)
Projected annual weighted average lifetime voluntary and involuntary prepayment rate using a prepayment vector.
(B)
Mortgage servicing amount is net of 15.9 bps which represents the amount New Residential pays its servicers as a monthly servicing fee.
(C)
Weighted average maturity of the underlying residential mortgage loans in the pool.
 
Real Estate Securities Valuation
 
As of June 30, 2017, 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
 
$
1,880,434

 
$
1,941,558

 
$
1,936,193

 
$

 
$
1,936,193

 
2

Non-Agency RMBS(C)
 
11,907,355

 
5,169,234

 
5,478,857

 
8,223

 
5,487,080

 
3

Total
 
$
13,787,789

 
$
7,110,792

 
$
7,415,050

 
$
8,223

 
$
7,423,273

 
 
 
(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 evaluates quotes received and determines one as being most representative of fair value, and does 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 has not adjusted any of the quotes received in the periods presented. 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.

The third-party pricing services and brokers engaged by New Residential (collectively, “valuation providers”) use either the income approach or the market approach, or a combination of the two, in arriving at their estimated valuations of RMBS. Valuation providers using the market approach generally look at prices and other relevant information generated by market transactions involving identical or comparable assets. Valuation providers using the income approach create pricing models that generally incorporate such assumptions as discount rates, expected prepayment rates, expected default rates and expected loss severities. New Residential has reviewed the methodologies utilized by its valuation providers and has found them to be consistent with GAAP requirements. In addition to obtaining multiple quotations, when available, and reviewing the valuation methodologies of its valuation providers, New Residential creates its own internal pricing models for Level 3 securities and uses the outputs of these models as part of its process of evaluating the fair value estimates it receives from its valuation providers. These models incorporate the same types of assumptions as the models used by the valuation providers, but the assumptions are developed independently. These assumptions are regularly refined and updated at least quarterly by New Residential, and reviewed by its valuation group, which is separate from its investment acquisition and management group, to reflect market developments and actual performance.

For 81.9% of New Residential’s Non-Agency RMBS, the ranges of assumptions used by New Residential’s valuation providers are summarized in the table below. The assumptions used by New Residential’s valuation providers with respect to the remainder of New Residential’s Non-Agency RMBS were not readily available.
 
 
Fair Value
 
Discount Rate
 
Prepayment Rate(a)
 
CDR(b)
 
Loss Severity(c)
Non-Agency RMBS
 
$
4,496,415

 
2.00 % to 40%
 
0.25% to 20%
 
0% to 10.38%
 
5.0 % to 100%

(a)
Represents the annualized rate of the prepayments as a percentage of the total principal balance of the pool.
(b)
Represents the annualized rate of the involuntary prepayments (defaults) as a percentage of the total principal balance of the pool.
(c)
Represents 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 balance.

(B)
New Residential was unable to obtain quotations from more than one source on these securities. For approximately $7.6 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.

At June 30, 2017, assets measured at fair value on a nonrecurring basis were $0.3 billion. The $0.3 billion of assets include approximately $229.0 million of residential mortgage loans held-for-sale and $65.7 million of REO. The fair value of New Residential’s residential mortgage loans, held-for-sale is estimated based on a discounted cash flow model analysis using internal pricing models and is categorized within Level 3 of the fair value hierarchy. The following table summarizes the inputs used in valuing these residential mortgage loans as of June 30, 2017:
 
 
Fair Value and Carrying Value
 
Discount Rate
 
Weighted Average Life (Years)(A)
 
Prepayment Rate
 
CDR(B)
 
Loss Severity(C)
Residential Mortgage Loans
 
 
 
 
 
 
 
 
 
 
 
 
Performing Loans
 
$
184,148

 
3.8
%
 
5.0
 
10.3
%
 
1.6
%
 
39.0
%
Non-Performing Loans
 
44,866

 
6.6
%
 
3.2
 
3.0
%
 
3.0
%
 
30.0
%
Total/Weighted Average
 
$
229,014

 
4.3
%
 
4.7
 
8.9
%
 
1.9
%
 
37.2
%

(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.
(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 generally range from 10% to 25%, depending on the information available to the broker.

The total change in the recorded value of assets for which a fair value adjustment has been included in the Condensed Consolidated Statement of Income for the six months ended June 30, 2017 was an increase in the net valuation allowance of approximately $4.0 million, consisting of increased valuation allowances of $3.3 million for residential mortgage loans held-for-sale and $0.7 million for REO.

Loans for Which Fair Value is Only Disclosed

The following table summarizes the inputs used in valuing certain loans as of June 30, 2017:
 
 
Carrying Value
 
Fair Value
 
Discount Rate
 
Weighted Average Life (Years)(A)
 
Prepayment Rate
 
CDR(B)
 
Loss Severity(C)
Reverse Mortgage Loans(D)
 
$
10,709

 
$
11,371

 
7.0
%
 
4.6
 
N/A

 
N/A

 
8.2
%
Performing Loans
 
630,037

 
635,456

 
7.7
%
 
5.2
 
8.3
%
 
2.1
%
 
55.1
%
Non-Performing Loans
 
889,133

 
922,134

 
6.0
%
 
3.8
 
2.8
%
 
3.0
%
 
36.0
%
Total/Weighted Average
 
$
1,529,879

 
$
1,568,961

 
6.7
%
 
4.4
 
 
 
 
 
43.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer Loans
 
$
1,569,388

 
$
1,584,236

 
8.9
%
 
3.6
 
22.5
%
 
6.3
%
 
87.8
%

(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.