Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN MORTGAGE SERVICING RIGHTS AND MORTGAGE SERVICING RIGHTS FINANCING RECEIVABLES

v3.19.2
INVESTMENTS IN MORTGAGE SERVICING RIGHTS AND MORTGAGE SERVICING RIGHTS FINANCING RECEIVABLES
6 Months Ended
Jun. 30, 2019
Equity Method Investments and Joint Ventures [Abstract]  
INVESTMENTS IN MORTGAGE SERVICING RIGHTS AND MORTGAGE SERVICING RIGHTS FINANCING RECEIVABLES INVESTMENTS IN MORTGAGE SERVICING RIGHTS AND MORTGAGE SERVICING RIGHTS FINANCING RECEIVABLES

Mortgage Servicing Rights

In 2016, a subsidiary of New Residential, New Residential Mortgage LLC (“NRM”), became a licensed or otherwise eligible mortgage servicer. NRM is presently licensed or otherwise eligible to hold MSRs in all states within the United States and the District of Columbia. Additionally, NRM has received approval from the Federal Housing Administration (“FHA”) to hold MSRs associated with FHA-insured mortgage loans, from the Federal National Mortgage Association (“Fannie Mae”) to hold MSRs associated with loans owned by Fannie Mae, and from the Federal Home Loan Mortgage Corporation (“Freddie Mac”) to hold MSRs associated with loans owned by Freddie Mac. Fannie Mae and Freddie Mac are collectively referred to as the Government Sponsored Enterprises (“GSEs”). As an approved Fannie Mae Servicer, Freddie Mac Servicer and FHA-approved mortgagee, NRM is required to conduct aspects of its operations in accordance with applicable policies and guidelines published by FHA, Fannie Mae and Freddie Mac in order to maintain those approvals. NRM engages third party licensed mortgage servicers as subservicers to perform the operational servicing duties in connection with the MSRs it acquires, in exchange for a subservicing fee which is recorded as “Subservicing expense” on New Residential’s Condensed Consolidated Statements of Income. As of June 30, 2019, these subservicers include Nationstar, Ocwen, LoanCare, LLC (“LoanCare”), PHH Mortgage Corporation (“PHH”), Ditech Financial LLC (“Ditech”), and Flagstar Bank, FSB (“Flagstar”), which subservice 26.0%, 18.9%, 14.9%, 11.4%, 3.6%, and 0.5% of the underlying UPB of the related mortgages, respectively (includes both Mortgage Servicing Rights and Mortgage Servicing Rights Financing Receivables).

New Residential has entered into recapture agreements with respect to each of its MSR investments subserviced by Ditech, Flagstar and Nationstar. Under the recapture agreements, New Residential is generally entitled to the MSRs on any initial or subsequent refinancing by Ditech, Flagstar or Nationstar of a loan in the original portfolios.

Shellpoint

On November 29, 2017, concurrently with the Shellpoint Purchaser’s entry into the Shellpoint SPA with Shellpoint, NRM entered into (i) a Bulk Agreement for the Purchase and Sale of Mortgage Servicing Rights (the “Shellpoint MSR Purchase Agreement”) with NewRez LLC (“NewRez”, formerly New Penn Financial, LLC), a Delaware limited liability company and a wholly owned subsidiary of Shellpoint, pursuant to which NRM has agreed to purchase from NewRez the mortgage servicing rights relating to a portfolio of Fannie Mae and Freddie Mac mortgage loans having an aggregate UPB of approximately $7.8 billion for a purchase price of approximately $81.0 million (the “Shellpoint MSR Purchase”), which closed on January 16, 2018, and (ii) a Subservicing Agreement (the “Shellpoint Subservicing Agreement”) with NewRez, pursuant to which NewRez has agreed to subservice Fannie Mae and Freddie Mac mortgage loans for which NRM has acquired the right to service such loans.

As a result of the Shellpoint Acquisition completed on July 3, 2018, New Residential, through its wholly owned subsidiary, NewRez, is eligible to hold MSRs associated with loans held in Ginnie Mae MBS.

NewRez, as an approved issuer of Ginnie Mae MBS, originates, sells and securitizes government-insured residential mortgage loans into Ginnie Mae guaranteed securitizations and NewRez retains the right to service the underlying residential mortgage loans. As the servicer, NewRez, holds an option to repurchase delinquent loans from the securitization at its discretion (“Ginnie Mae Buy-Back Option”). In accordance with the accounting guidance in ASC 860, NewRez recognizes any delinquent loans subject to the Ginnie Mae Buy-Back option and an offsetting repurchase liability on its balance sheet regardless of whether NewRez executes its option to repurchase. As of June 30, 2019, New Residential holds approximately $141.6 million in Residential mortgage loans subject to repurchase and Residential mortgage loans repurchase liability on its condensed consolidated balance sheets.

Ditech Transaction

On June 17, 2019, New Residential entered into a “stalking horse” Asset Purchase Agreement (the “APA”) with Ditech Holding Corporation and Ditech Financial LLC to purchase substantially all of the forward assets of Ditech Financial LLC. Concurrently with the execution of the APA, New Residential made a deposit of $70 million to be held in an escrow account until the purchase is settled. The purchase remains subject to approval by the bankruptcy court and various other conditions. The final purchase price will be determined at the closing of the transaction based on the tangible book value of the related assets, subject to certain agreed upon adjustments. New Residential expects to finance the acquisition of these assets with existing financing facilities and cash on hand.

Under the terms of the APA, subject to certain conditions, New Residential has agreed to purchase, among other assets, Ditech Financial’s forward Fannie Mae, Ginnie Mae and non-agency mortgage servicing rights (“MSRs”), with an aggregate unpaid principal balance of approximately $63 billion as of March 31, 2019, the servicer advance receivables relating to such MSRs and other net assets core to the forward origination and servicing businesses. Additionally, New Residential has agreed to assume certain Ditech office spaces and plans to make employment offers to a number of Ditech employees. Under the APA, New Residential will not purchase any of the stock or assets related to Ditech Financial’s reverse mortgage business.

During the six months ended June 30, 2019, New Residential, through its wholly owned subsidiaries, completed the following MSR acquisitions (in millions):
Date of Acquisition
 
Collateral Type(A)
 
UPB
(in billions)
 
Purchase Price
February 28, 2019
 
 Agency
 
$
9.5

 
$
116.7

March 29, 2019
 
 Agency
 
10.0

 
126.9

April 2, 2019
 
 Agency
 
8.2

 
84.4

April 19, 2019
 
 Agency
 
18.5

 
230.5

May 21, 2019
 
 Agency
 
23.7

 
218.0

Various(B)
 
 Agency
 
4.6

 
65.1

Total
 
 
 
$
74.5

 
$
841.6


(A)
“Agency” represents Fannie Mae and Freddie Mac MSRs.
(B)
Represents Flow MSR acquisitions from Ditech and various counterparties for the six months ended June 30, 2019.

New Residential records its investments in MSRs at fair value at acquisition and has elected to subsequently measure at fair value pursuant to the fair value measurement method.

Servicing revenue, net recognized by New Residential related to its investments in MSRs was comprised of the following:
 
Three Months Ended 
 June 30,
 
Six Months Ended  
 June 30,
 
2019
 
2018
 
2019
 
2018
Servicing fee revenue
$
196,249

 
$
131,286

 
$
379,275

 
$
250,509

Ancillary and other fees
52,813

 
27,714

 
92,550

 
51,061

Servicing fee revenue and fees
249,062

 
159,000

 
471,825

 
301,570

Amortization of servicing rights
(105,321
)
 
(65,439
)
 
(177,996
)
 
(120,566
)
Change in valuation inputs and assumptions(A) (B)
(229,278
)
 
52,632

 
(213,513
)
 
182,425

Servicing revenue, net
$
(85,537
)
 
$
146,193

 
$
80,316

 
$
363,429



(A)
Change in valuation inputs and assumptions includes changes in inputs or assumptions used in the valuation model and other changes due to the realization of expected cash flows.
(B)
Includes $8.0 million of fair value adjustment to Excess spread financing for the six months ended June 30, 2019.

The following table presents activity related to the carrying value of New Residential’s investments in MSRs:
Balance as of December 31, 2018
 
$
2,884,100

Purchases, net(A)
 
400,909

Transfer Out(B)
 
(354
)
Originations(C)
 
94,349

Proceeds from sales
 

Amortization of servicing rights(D)
 
(181,515
)
Change in valuation inputs and assumptions(E)
 
(221,481
)
Balance as of June 30, 2019
 
$
2,976,008


(A)
Net of purchase price adjustments.
(B)
Represents Ginnie Mae MSRs repurchased.
(C)
Represents MSRs retained on the sale of originated mortgage loans.
(D)
Based on the ratio of the current UPB of the underlying residential mortgage loans relative to the original UPB of the underlying residential mortgage loans.
(E)
Change in valuation inputs and assumptions includes changes in inputs or assumptions used in the valuation model and other changes due to the realization of expected cash flows.
The following is a summary of New Residential’s investments in MSRs as of June 30, 2019:
 
UPB of Underlying Mortgages
 
Weighted Average Life (Years)(A)
 
Amortized Cost Basis
 
Carrying Value(B)
Agency(C)
$
245,510,334

 
5.2
 
$
2,505,292

 
$
2,621,004

Non-Agency
2,186,456

 
3.7
 
14,679

 
17,791

Ginnie Mae
29,012,692

 
4.6
 
360,112

 
337,213

Total
$
276,709,482

 
5.1
 
$
2,880,083

 
$
2,976,008


(A)
Weighted Average Life represents the weighted average expected timing of the receipt of expected cash flows for this investment.
(B)
Carrying Value represents fair value. As of June 30, 2019, a weighted average discount rate of 8.0% was used to value New Residential’s investments in MSRs.
(C)
Represents Fannie Mae and Freddie Mac MSRs.

Mortgage Servicing Rights Financing Receivable

In certain cases, New Residential has legally purchased MSRs or the right to the economic interest in MSRs, however, New Residential has determined that the purchase agreement would not be treated as a sale under GAAP. Therefore, rather than recording an investment in MSRs, New Residential has recorded an investment in mortgage servicing rights financing receivables. Income from this investment (net of subservicing fees) is recorded as interest income, and New Residential has elected to measure the investment at fair value, with changes in fair value flowing through change in fair value of investments in mortgage servicing rights financing receivables in the Condensed Consolidated Statements of Income.

PHH Transaction

On December 28, 2016, NRM entered into an agreement with PHH to purchase the MSRs, and related servicer advance receivables, with respect to $54.1 billion in total UPB of seasoned Agency residential mortgage loans. Concurrently with the purchase agreement, NRM entered into a subservicing agreement with PHH, pursuant to which PHH Mortgage, a wholly owned subsidiary of PHH, subservices the residential mortgage loans underlying the MSRs acquired by NRM. As a result of the length of the initial term of the related subservicing agreement between NRM and PHH, although the MSRs were legally sold, solely for accounting purposes, New Residential determined that substantially all of the risks and rewards inherent in owning the MSRs had not been transferred to NRM, and that the purchase agreement would not be treated as a sale under GAAP. New Residential has entered into a recapture agreement with respect to each of its MSR investments subserviced by PHH. Under the recapture agreement, New Residential is generally entitled to the MSRs on any initial or subsequent refinancing by PHH of a loan in the original portfolio.

Ocwen Transaction

On July 23, 2017, Ocwen and New Residential entered into a Master Agreement (the “Ocwen Master Agreement”) and a Transfer Agreement (the “Ocwen Transfer Agreement”) pursuant to which Ocwen and New Residential agreed to undertake certain actions to facilitate the transfer from Ocwen to New Residential of Ocwen’s remaining interests in the mortgage servicing rights relating to loans with an aggregate unpaid principal balance of approximately $110.0 billion that are subject to the Original Ocwen Agreements (the “Ocwen Subject MSRs”) and with respect to which New Residential holds the Rights to MSRs (as defined in the Original Ocwen Agreements). New Residential and Ocwen concurrently entered into a subservicing agreement pursuant to which Ocwen will subservice the mortgage loans related to the Ocwen Subject MSRs that are transferred to New Residential pursuant to the Ocwen Master Agreement and Ocwen Transfer Agreement.

On January 18, 2018, New Residential entered into a new agreement regarding the rights to MSRs (the “New Ocwen RMSR Agreement”) including a servicing addendum thereto (the “Ocwen Servicing Addendum”), Amendment No. 1 to Transfer Agreement (the “New Ocwen Transfer Agreement”) and a Brokerage Services Agreement (the “Ocwen Brokerage Services Agreement” and, collectively, the “New Ocwen Agreements”) with Ocwen. The New Ocwen Agreements amend and supplement the arrangements among the parties set forth in the Original Ocwen Agreements, the Ocwen Master Agreement, the Ocwen Transfer Agreement, and the Ocwen Subservicing Agreement (together with the Original Ocwen Agreements, the Ocwen Master Agreement, and the Ocwen Transfer Agreement, the “Existing Ocwen Agreements”). NRM made a lump-sum “Fee Restructuring Payment” of $279.6 million to Ocwen on January 18, 2018, the date of the New Ocwen RMSR Agreement, with respect to such Existing Ocwen Subject MSRs.

Under the Existing Ocwen Agreements, Ocwen sold and transferred to New Residential certain “Rights to MSRs” and other assets related to mortgage servicing rights for loans with an unpaid principal balance of approximately $86.8 billion as of the opening balances in January 2018 (the “Existing Ocwen Subject MSRs”). The New Ocwen Agreements and NRM’s Fee Restructuring Payment resulted in a new investment structured as a transfer of the full interests and economics of the Ocwen subject MSRs.

Pursuant to the New Ocwen Agreements, Ocwen will continue to service the mortgage loans related to the Existing Ocwen Subject MSRs until the necessary third party consents are obtained in order to transfer the Existing Ocwen Subject MSRs in accordance with the New Ocwen Agreements.

Pursuant to the Ocwen Brokerage Services Agreement, Ocwen will engage NRZ Brokerage to perform brokerage and marketing services for all REO properties serviced by Ocwen pursuant to the Subject Servicing Agreements as defined in the New Ocwen RMSR Agreement. Such REO properties are subject to the Altisource Brokerage Agreement and Altisource Letter Agreement.

As of June 30, 2019, MSRs representing approximately $66.7 billion UPB of underlying loans have been transferred pursuant to the Ocwen Transaction. Economics related to the remaining MSRs subject to the Ocwen Transaction were transferred pursuant to the New Ocwen Agreements. As a result of the length of the initial term of the related subservicing agreement between NRM and Ocwen, although the MSRs transferred pursuant to the Ocwen Transaction were legally sold, solely for accounting purposes, New Residential determined that substantially all of the risks and rewards inherent in owning the MSRs had not been transferred to NRM, and that the purchase agreement would not be treated as a sale under GAAP.

Nationstar Transaction

On February 28, 2019, NRM entered into an agreement with Nationstar to purchase the MSRs, and related servicer advance receivables, with respect to $9.5 billion in total UPB of seasoned Agency residential mortgage loans. The residential mortgage loans underlying the MSRs acquired by NRM are subserviced by Nationstar pursuant to an existing subservicing agreement with NRM. As a result of the length of the initial term of the related subservicing agreement between NRM and Nationstar, although the MSRs were legally sold, solely for accounting purposes, New Residential determined that substantially all of the risks and rewards inherent in owning the MSRs had not been transferred to NRM, and that the purchase agreement would not be treated as a sale under GAAP.

United Shore Transactions

On April 2, 2019 and May 21, 2019, NRM entered into agreements with United Shore to purchase the MSRs, and related servicer advance receivables, with respect to $8.2 billion and $23.7 billion in total UPB of seasoned Agency residential mortgage loans, respectively. The residential mortgage loans underlying the MSRs acquired by NRM will be subserviced by NewRez, Nationstar and LoanCare pursuant to existing subservicing agreements with NRM. As a result of the length of term of prepayment protection provided to NRM, although the MSRs were legally sold, solely for accounting purposes, New Residential determined that the transferor retained more than minor protection provisions, and that the purchase agreement would not be treated as a sale under GAAP.

Interest income from investments in mortgage servicing rights financing receivables was comprised of the following:
 
Three Months Ended 
 June 30,
 
Six Months Ended  
 June 30,
 
2019
 
2018
 
2019
 
2018
Servicing fee revenue
$
130,126

 
$
192,462

 
$
256,370

 
$
394,414

Ancillary and other fees
29,954

 
40,360

 
61,278

 
70,595

Less: subservicing expense
(49,577
)
 
(65,115
)
 
(105,239
)
 
(130,821
)
Interest income, investments in mortgage servicing rights financing receivables
$
110,503

 
$
167,707

 
$
212,409

 
$
334,188


Change in fair value of investments in mortgage servicing rights financing receivables was comprised of the following:
 
Three Months Ended 
 June 30,
 
Six Months Ended  
 June 30,
 
2019
 
2018
 
2019
 
2018
Amortization of servicing rights
$
(40,201
)
 
$
(56,840
)
 
$
(83,077
)
 
$
(105,543
)
Change in valuation inputs and assumptions(A)
(14,850
)
 
(62,263
)
 
(7,912
)
 
257,516

(Gain)/loss on sales(B)
(360
)
 

 
(801
)
 

Change in fair value of investments in mortgage servicing rights financing receivables
$
(55,411
)
 
$
(119,103
)
 
$
(91,790
)
 
$
151,973



(A)
Change in valuation inputs and assumptions includes changes in inputs or assumptions used in the valuation model and other changes due to the realization of expected cash flows.
(B)
Represents the realization of unrealized gain/(loss) as a result of sales.

The following table presents activity related to the carrying value of New Residential’s investments in mortgage servicing rights financing receivables:
Balance as of December 31, 2018
 
$
1,644,504

Purchases, net(A)
 
397,538

Proceeds from sales
 
(9,113
)
Amortization of servicing rights(B)
 
(83,077
)
Change in valuation inputs and assumptions(C)
 
(7,912
)
(Gain)/loss on sales(D)
 
(801
)
Balance as of June 30, 2019
 
$
1,941,139


(A)
Net of purchase price adjustments.
(B)
Based on the ratio of the current UPB of the underlying residential mortgage loans relative to the original UPB of the underlying residential mortgage loans.
(C)
Change in valuation inputs and assumptions includes changes in inputs or assumptions used in the valuation model and other changes due to the realization of expected cash flows.
(D)
Represents the realization of unrealized gain/(loss) as a result of sales.

The following is a summary of New Residential’s investments in mortgage servicing rights financing receivables as of June 30, 2019:
 
UPB of Underlying Mortgages
 
Weighted Average Life (Years)(A)
 
Amortized Cost Basis
 
Carrying Value(B)
Agency
$
78,168,877

 
5.2
 
$
736,708

 
$
745,523

Non-Agency
82,630,548

 
7.9
 
872,378

 
1,195,616

Total
$
160,799,425

 
6.6
 
$
1,609,086

 
$
1,941,139


(A)
Weighted Average Life represents the weighted average expected timing of the receipt of expected cash flows for this investment.
(B)
Carrying Value represents fair value. As of June 30, 2019, a weighted average discount rate of 9.5% was used to value New Residential’s investments in mortgage servicing rights financing receivables.

The table below summarizes the geographic distribution of the underlying residential mortgage loans of the investments in MSRs and mortgage servicing rights financing receivables:
 
 
Percentage of Total Outstanding Unpaid Principal Amount
State Concentration
 
June 30, 2019
 
December 31, 2018
California
 
22.5
%
 
21.7
%
New York
 
6.9
%
 
7.8
%
Florida
 
6.9
%
 
6.9
%
Texas
 
5.2
%
 
5.3
%
New Jersey
 
4.7
%
 
5.0
%
Illinois
 
3.7
%
 
3.7
%
Washington
 
3.4
%
 
2.3
%
Massachusetts
 
3.4
%
 
3.5
%
Maryland
 
3.1
%
 
3.4
%
Georgia
 
3.0
%
 
3.0
%
Other U.S.
 
37.2
%
 
37.4
%
 
 
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 MSRs.

Mortgage Subservicing

NewRez performs servicing of residential mortgage loans for third parties under subservicing agreements. Mortgage subservicing does not meet the criteria to be recognized as a servicing right asset and, therefore, is not recognized on New Residential’s condensed consolidated balance sheets. The UPB of residential mortgage loans subserviced for others as of June 30, 2019 was $51.1 billion and subservicing revenue of $64.7 million is included within servicing revenue, net in the Condensed Consolidated Statements of Income.

Servicer Advances Receivable

In connection with its investments in MSRs and MSR financing receivables, New Residential generally acquires any related outstanding servicer advances (not included in the purchase prices described above), which it records at fair value within servicer advances receivable upon acquisition.

In addition to receiving cash flows from the MSRs, NRM and NewRez, as servicers, have the obligation to fund future servicer advances on the underlying pool of mortgages (Note 14). These servicer advances are recorded when advanced and are included in servicer advances receivable.

The following types of advances are included in the Servicer Advances Receivable:
 
 
June 30, 2019
 
December 31, 2018
Principal and interest advances
 
$
844,704

 
$
793,790

Escrow advances (taxes and insurance advances)
 
1,940,290

 
2,186,831

Foreclosure advances
 
181,871

 
199,203

Total(A) (B) (C)
 
$
2,966,865

 
$
3,179,824


(A)
Includes $266.0 million and $231.2 million of servicer advances receivable related to Agency MSRs, respectively, recoverable from the Agencies.
(B)
Includes $58.4 million and $41.6 million of servicer advances receivable related to Ginnie Mae MSRs, respectively, recoverable from Ginnie Mae. Reserves for advances associated with Ginnie Mae loans in the MSR portfolio are considered in the MSR fair valuation through a nonreimbursable advance loss assumption.
(C)
Net of $80.3 million and $98.0 million, respectively, in accrual for advance recoveries.

New Residential’s Servicer Advances Receivable related to Non-Agency MSRs generally have the highest reimbursement priority (i.e., “top of the waterfall”) and New Residential is generally entitled to repayment from respective loan or REO liquidation proceeds before any interest or principal is paid on the bonds that were issued by the trust. In the majority of cases, advances in excess of respective loan or REO liquidation proceeds may be recovered from pool-level proceeds. Furthermore, to the extent that advances are not recoverable by New Residential as a result of the subservicer’s failure to comply with applicable requirements in the relevant servicing agreements, New Residential has a contractual right to be reimbursed by the subservicer. New Residential assesses the recoverability of Servicer Advance Receivables periodically and as of June 30, 2019 and December 31, 2018, expected full recovery of the Servicer Advance Receivables.

See Note 11 regarding the financing of MSRs.