Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN MORTGAGE SERVICING RIGHTS AND MSR FINANCING RECEIVABLES

v3.19.3
INVESTMENTS IN MORTGAGE SERVICING RIGHTS AND MSR FINANCING RECEIVABLES
9 Months Ended
Sep. 30, 2019
Equity Method Investments and Joint Ventures [Abstract]  
INVESTMENTS IN MORTGAGE SERVICING RIGHTS AND MSR FINANCING RECEIVABLES INVESTMENTS IN MORTGAGE SERVICING RIGHTS AND MSR FINANCING RECEIVABLES

A subsidiary of New Residential, New Residential Mortgage LLC (“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 September 30, 2019, these subservicers include PHH Mortgage Corporation (“PHH”), Nationstar, LoanCare, LLC (“LoanCare”), AmeriHome Mortgage Company, LLC (“AmeriHome”), and Flagstar Bank, FSB (“Flagstar”), which subservice 26.9%, 23.1%, 19.2%, 1.8%, and 0.8% of the underlying UPB of the related mortgages, respectively (includes both Mortgage Servicing Rights and MSR Financing Receivables). The remaining 28.2% of the underlying UPB of the related mortgages is subserviced by a subsidiary of New Residential, Shellpoint Mortgage Servicing (Note 1).

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

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 (“MSR Financing Receivables”). Income from these investments (net of subservicing fees) are recorded as interest income, and New Residential has elected to measure the investments at fair value, with changes in fair value flowing through change in fair value of investments in MSR financing receivables in the Condensed Consolidated Statements of Income.

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

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

 
$
1,644,504

 
$
4,528,604

Purchases, net(A)
 
632,144

 
735,152

 
1,367,296

Transfers(B)
 
367,121

 
(367,121
)
 

Other transfers(C)
 
(410
)
 

 
(410
)
Originations(D)
 
190,666

 

 
190,666

Prepayments(E)
 
(11,210
)
 
(52,499
)
 
(63,709
)
Proceeds from sales
 
(1,047
)
 
(15,575
)
 
(16,622
)
Amortization of servicing rights(F)
 
(351,867
)
 
(131,417
)
 
(483,284
)
Change in valuation inputs and assumptions(G)
 
(279,758
)
 
1,437

 
(278,321
)
(Gain)/loss on sales
 
2,229

 
(3,220
)
 
(991
)
Balance as of September 30, 2019
 
$
3,431,968

 
$
1,811,261

 
$
5,243,229


(A)
Net of purchase price adjustments.
(B)
Represents MSRs previously accounted for as MSR Financing Receivables. 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, the purchase agreement was not treated as a sale under GAAP through June 30, 2019.
(C)
Represents Ginnie Mae MSRs repurchased.
(D)
Represents MSRs retained on the sale of originated mortgage loans.
(E)
Represents purchase price fully reimbursable from sellers as a result of prepayment protection.
(F)
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.
(G)
Change in valuation inputs and assumptions includes changes in inputs or assumptions used in the valuation model.

Servicing revenue, net recognized by New Residential related to its investments in MSRs was comprised of the following:
 
Three Months Ended 
 September 30,
 
Nine Months Ended  
 September 30,
 
2019
 
2018
 
2019
 
2018
Servicing fee revenue
$
222,966

 
$
158,458

 
$
602,241

 
$
408,967

Ancillary and other fees
58,489

 
43,638

 
151,039

 
94,699

Servicing fee revenue and fees
281,455

 
202,096

 
753,280

 
503,666

Amortization of servicing rights
(168,776
)
 
(70,933
)
 
(346,772
)
 
(191,499
)
Change in valuation inputs and assumptions(A) (B)
(61,858
)
 
44,192

 
(275,371
)
 
226,617

(Gain)/loss on sales
2,229

 

 
2,229

 

Servicing revenue, net
$
53,050

 
$
175,355

 
$
133,366


$
538,784



(A)
Change in valuation inputs and assumptions includes changes in inputs or assumptions used in the valuation model.
(B)
Includes $3.6 million and $4.4 million of fair value adjustment to Excess spread financing for the three and nine months ended September 30, 2019, respectively.

Interest income from investments in MSR Receivables was comprised of the following:
 
Three Months Ended 
 September 30,
 
Nine Months Ended  
 September 30,
 
2019
 
2018
 
2019
 
2018
Servicing fee revenue
$
128,936

 
$
181,495

 
$
385,306

 
$
575,909

Ancillary and other fees
21,417

 
39,257

 
82,695

 
109,852

Less: subservicing expense
(40,410
)
 
(61,454
)
 
(145,649
)
 
(192,275
)
Interest income, investments in mortgage servicing rights financing receivables
$
109,943

 
$
159,298

 
$
322,352

 
$
493,486


Change in fair value of investments in MSR Financing Receivables was comprised of the following:
 
Three Months Ended 
 September 30,
 
Nine Months Ended  
 September 30,
 
2019
 
2018
 
2019
 
2018
Amortization of servicing rights
$
(48,340
)
 
$
(49,016
)
 
$
(131,417
)
 
$
(154,559
)
Change in valuation inputs and assumptions(A)
9,349

 
(39,329
)
 
1,437

 
218,187

(Gain)/loss on sales(B)
(2,419
)
 

 
(3,220
)
 

Change in fair value of investments in mortgage servicing rights financing receivables
$
(41,410
)
 
$
(88,345
)
 
$
(133,200
)
 
$
63,628


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

The following is a summary of New Residential’s investments in MSRs as of September 30, 2019:
 
UPB of Underlying Mortgages
 
Weighted Average Life (Years)(A)
 
Amortized Cost Basis
 
Carrying Value(B)
MSRs:
 
 
 
 
 
 
 
Agency
$
288,673,487

 
4.9
 
$
2,968,392

 
$
3,038,721

Non-Agency
2,350,471

 
5.6
 
12,294

 
20,321

Ginnie Mae(C)
28,903,327

 
4.0
 
383,454

 
372,926

MSR Financing Receivables:
 
 
 
 
 
 
 
Agency
61,162,569

 
4.3
 
659,950

 
597,990

Non-Agency
79,360,666

 
7.7
 
840,279

 
1,213,271

Total
$
460,450,520

 
5.2
 
$
4,864,369

 
$
5,243,229


(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 September 30, 2019, a weighted average discount rate of 7.5% and 8.8% was used to value New Residential’s investments in MSRs and MSR Financing Receivables, respectively.
(C)
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. As of September 30, 2019, New Residential holds approximately $168.5 million in residential mortgage loans subject to repurchase and residential mortgage loans repurchase liability on its condensed consolidated balance sheets.

Ocwen MSR Financing Receivable Transactions

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 September 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.

As a part of the ongoing integration efforts related to the Ocwen and PHH merger completed on October 4, 2018, Ocwen now conducts its mortgage servicing business under the PHH tradename.

Nationstar MSR Financing Receivable 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 MSR Financing Receivable 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.

Quicken MSR Financing Receivable Transaction

On August 6, 2019, NRM entered into an agreement with Quicken to purchase the MSRs, and related servicer advance receivables, with respect to $29.1 billion in total UPB of seasoned Agency residential mortgage loans. The residential mortgage loans underlying the MSRs acquired by NRM are subserviced by LoanCare pursuant to an existing subservicing agreement 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.

The table below summarizes the geographic distribution of the underlying residential mortgage loans of the investments in MSRs and MSR Financing Receivables:
 
 
Percentage of Total Outstanding Unpaid Principal Amount
State Concentration
 
September 30, 2019
 
December 31, 2018
California
 
23.0
%
 
21.7
%
Florida
 
6.8
%
 
6.9
%
New York
 
6.8
%
 
7.8
%
Texas
 
5.2
%
 
5.3
%
New Jersey
 
5.0
%
 
5.0
%
Illinois
 
3.6
%
 
3.7
%
Washington
 
3.5
%
 
2.3
%
Massachusetts
 
3.3
%
 
3.5
%
Maryland
 
3.1
%
 
3.4
%
Georgia
 
3.0
%
 
3.0
%
Other U.S.
 
36.7
%
 
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 September 30, 2019 was $54.7 billion and subservicing revenue of $99.7 million for the nine months ended September 30, 2019 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:
 
 
September 30, 2019
 
December 31, 2018
Principal and interest advances
 
$
723,155

 
$
793,790

Escrow advances (taxes and insurance advances)
 
1,945,271

 
2,186,831

Foreclosure advances
 
173,032

 
199,203

Total(A) (B) (C)
 
$
2,841,458

 
$
3,179,824


(A)
Includes $243.0 million and $231.2 million of servicer advances receivable related to Agency MSRs, respectively, recoverable from the Agencies.
(B)
Includes $62.7 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 $70.3 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 September 30, 2019 and December 31, 2018, expected full recovery of the Servicer Advance Receivables.

See Note 11 regarding the financing of MSRs.