Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN RESIDENTIAL MORTGAGE LOANS

v3.19.3
INVESTMENTS IN RESIDENTIAL MORTGAGE LOANS
9 Months Ended
Sep. 30, 2019
Receivables [Abstract]  
INVESTMENTS IN RESIDENTIAL MORTGAGE LOANS
INVESTMENTS IN RESIDENTIAL MORTGAGE LOANS

New Residential accumulated its residential mortgage loan portfolio through various bulk acquisitions and the execution of call rights. As a result of the Shellpoint Acquisition, New Residential, through its wholly owned subsidiary, NewRez, originates
residential mortgage loans for sale and securitization to third parties and generally retains the servicing rights on the underlying loans.

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 accounts for loans based on the following categories:

Loans Held-for-Investment (which may include PCD Loans)
Loans Held-for-Investment, at fair value
Loans Held-for-Sale, at lower of cost or fair value
Loans Held-for-Sale, at fair value
Real Estate Owned (“REO”)

The following table presents certain information regarding New Residential’s residential mortgage loans outstanding by loan type, excluding REO:


September 30, 2019
 
December 31, 2018


Outstanding Face Amount

Carrying
Value

Loan
Count

Weighted Average Yield

Weighted Average Life (Years)(A)

Floating Rate Loans as a % of Face Amount

Loan to Value Ratio (“LTV”)(B)

Weighted Avg. Delinquency(C)

Weighted Average FICO(D)
 
Carrying Value
Loan Type


















 

Performing Loans(G) (J)

$
557,762


$
524,387


7,695


7.8
%

4.6

20.2
%

72.3
%

10.2
%

647

 
$
591,264

Purchased Credit Deteriorated Loans(H)
 
124,238

 
89,270

 
1,106

 
7.9
%
 
3.2
 
19.3
%
 
88.1
%
 
60.7
%
 
590

 
144,065

Total Residential Mortgage Loans, held-for-investment

$
682,000

 
$
613,657

 
8,801


7.8
%

4.4

20.1
%

75.2
%

19.4
%

636

 
$
735,329

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse Mortgage Loans(E) (F)
 
$
13,032

 
$
6,450

 
32

 
7.8
%
 
5.3
 
10.1
%
 
151.6
%
 
65.1
%
 
N/A

 
$
6,557

Performing Loans(G) (I)
 
709,867

 
726,935

 
10,798

 
4.3
%
 
4.0
 
62.4
%
 
54.3
%
 
5.9
%
 
688

 
413,883

Non-Performing Loans(H) (I)
 
726,570

 
616,612

 
5,562

 
5.1
%
 
3.3
 
12.0
%
 
80.7
%
 
68.7
%
 
594

 
512,040

Total Residential Mortgage Loans, held-for-sale
 
$
1,449,469

 
$
1,349,997

 
16,392

 
4.8
%
 
3.6
 
36.7
%
 
68.4
%
 
37.9
%
 
641

 
$
932,480

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired Loans
 
$
4,024,252

 
$
3,916,826

 
26,236

 
4.2
%
 
7.4
 
2.0
%
 
71.1
%
 
15.3
%
 
622

 
$
2,153,269

Originated Loans
 
1,248,711

 
1,289,425

 
4,465

 
4.0
%
 
28.6
 
4.0
%
 
77.6
%
 
29.2
%
 
672

 
655,260

Total Residential Mortgage Loans, held-for-sale, at fair value(K)
 
$
5,272,963

 
$
5,206,251

 
30,701

 
4.1
%
 
12.5
 
2.5
%
 
72.7
%
 
18.6
%
 
634

 
$
2,808,529


(A)
The weighted average life is based on the expected timing of the receipt of cash flows.
(B)
LTV refers to the ratio comparing the loan’s unpaid principal balance to the value of the collateral property.
(C)
Represents the percentage of the total principal balance that is 60+ days delinquent.
(D)
The weighted average FICO score is based on the weighted average of information updated and provided by the loan servicer on a monthly basis.
(E)
Represents a 70% participation interest that New Residential holds in a portfolio of reverse mortgage loans. Nationstar holds the other 30% interest and services the loans. The average loan balance outstanding based on total UPB was $0.6 million. Approximately 51% of these loans have reached a termination event. As a result of the termination event, each such loan has matured and the borrower can no longer make draws on these loans.
(F)
FICO scores are not used in determining how much a borrower can access via a reverse mortgage loan.
(G)
Performing loans are generally placed on nonaccrual status when principal or interest is 120 days or more past due.
(H)
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. As of September 30, 2019, New Residential has placed Non-Performing Loans, held-for-sale on nonaccrual status, except as described in (I) below.
(I)
Includes $37.8 million and $27.7 million UPB of Ginnie Mae EBO performing and non-performing loans, respectively, on accrual status as contractual cash flows are guaranteed by the FHA.
(J)
Includes $112.1 million UPB of non-agency mortgage loans underlying the SAFT 2013-1 securitization, which are carried at fair value based on New Residential’s election of the fair value option. Interest earned on loans measured at fair value are reported in other income.
(K)
New Residential elected the fair value option to measure these loans at fair value on a recurring basis. Interest earned on loans measured at fair value are reported in other income.

New Residential generally considers the delinquency status, loan-to-value ratios, and geographic area of residential mortgage loans as its credit quality indicators. Delinquency status is a primary credit quality indicator as loans that are more than 60 days past due provide an early warning of borrowers who may be experiencing financial difficulties. Current LTV ratio is an indicator of the potential loss severity in the event of default. Finally, the geographic distribution of the loan collateral also provides insight as to the credit quality of the portfolio, as factors such as the regional economy, home price changes and specific events will affect credit quality.

The table below summarizes the geographic distribution of the underlying residential mortgage loans:
 
 
Percentage of Total Outstanding Unpaid Principal Amount
State Concentration
 
September 30, 2019
 
December 31, 2018
California
 
17.7
%
 
16.7
%
Florida
 
9.0
%
 
8.8
%
New York
 
9.9
%
 
11.7
%
New Jersey
 
4.8
%
 
4.7
%
Texas
 
4.6
%
 
5.3
%
Georgia
 
4.3
%
 
2.7
%
Illinois
 
3.9
%
 
4.0
%
Maryland
 
3.7
%
 
3.1
%
Massachusetts
 
3.3
%
 
3.1
%
Pennsylvania
 
3.3
%
 
3.6
%
Other U.S.
 
35.5
%
 
36.3
%
 
 
100.0
%
 
100.0
%


See Note 11 regarding the financing of residential mortgage loans and related assets.

Call Rights

New Residential has executed calls with respect to Non-Agency RMBS trusts and purchased performing and non-performing residential mortgage loans and REO assets contained in such trusts prior to their termination. In certain cases, New Residential sold portions of the purchased loans through securitizations, and retained bonds issued by such securitizations. In addition, New Residential received par on the securities issued by the called trusts which it owned prior to such trusts’ termination. For the nine months ended September 30, 2019, New Residential executed calls on a total of 97 trusts and recognized $45.3 million of interest income on securities held in the collapsed trusts and $54.2 million of gain on securitizations accounted for as sales.

Performing Loans

The following table provides past due information regarding New Residential’s Performing Loans, which is an important indicator of credit quality and the establishment of the allowance for loan losses:
September 30, 2019
Days Past Due
 
Delinquency Status(A)
Current
 
84.1
%
30-59
 
8.2
%
60-89
 
2.7
%
90-119(B)
 
0.7
%
120+(C)
 
4.3
%
 
 
100.0
%

(A)
Represents the percentage of the total principal balance that corresponds to loans that are in each delinquency status.
(B)
Includes loans 90-119 days past due and still accruing interest because they are generally placed on nonaccrual status at 120 days or more past due.
(C)
Represents nonaccrual loans.

Activities related to the carrying value of residential mortgage loans held-for-investment were as follows:
 
Performing Loans
Balance at December 31, 2018
$
591,253

Purchases/additional fundings

Proceeds from repayments
(73,397
)
Accretion of loan discount (premium) and other amortization(A)
9,998

Provision for loan losses
(800
)
Transfer of loans to other assets(B)

Transfer of loans to real estate owned
(4,739
)
Transfers of loans to held for sale
(168
)
Fair value adjustment
2,240

Balance at September 30, 2019
$
524,387


(A)
Includes accelerated accretion of discount on loans paid in full and on loans transferred to other assets.
(B)
Represents loans for which foreclosure has been completed and for which New Residential has made, or intends to make, a claim with the governmental agency that has guaranteed the loans that are now recognized as claims receivable in Other Assets (Note 2).

Activities related to the valuation and loss provision on reverse mortgage loans and allowance for loan losses on performing loans held-for-investment were as follows:
 
Performing Loans
Balance at December 31, 2018
$

Provision for loan losses(A)
800

Charge-offs(B)
(800
)
Balance at September 30, 2019
$


(A)
Based on an analysis of collective borrower performance, credit ratings of borrowers, loan-to-value ratios, estimated value of the underlying collateral, key terms of the loans and historical and anticipated trends in defaults and loss severities at a pool level.
(B)
Loans, other than PCD loans, are generally charged off or charged down to the net realizable value of the collateral (i.e., fair value less costs to sell), with an offset to the allowance for loan losses, when available information confirms that loans are uncollectible.

Purchased Credit Deteriorated Loans

New Residential determined at acquisition that the PCD loans acquired would be aggregated into pools based on common risk characteristics (FICO score, delinquency status, collateral type, loan-to-value ratio). Loans aggregated into pools are accounted for as if each pool were a single loan with a single composite interest rate and an aggregate expectation of cash flows, including consideration of involuntary prepayments.

Activities related to the carrying value of PCD loans held-for-investment were as follows:
Balance at December 31, 2018
$
144,065

Purchases/additional fundings

Sales

Proceeds from repayments
(13,935
)
Accretion of loan discount and other amortization
12,961

(Allowance) reversal for loan losses(A)
(2,332
)
Transfer of loans to real estate owned
(12,815
)
Transfer of loans to held-for-sale
(38,674
)
Balance at September 30, 2019
$
89,270



(A)
An allowance represents the present value of cash flows expected at acquisition that are no longer expected to be collected. A reversal results from an increase to expected cash flows that reverses a prior allowance.

The following is a summary of the changes in accretable yield for these loans:
Balance at December 31, 2018
$
68,632

Additions

Accretion
(12,961
)
Reclassifications from (to) non-accretable difference(A)
8,188

Disposals(B)
(10,965
)
Transfer of loans to held-for-sale(C)
(8,406
)
Balance at September 30, 2019
$
44,488


(A)
Represents a probable and significant increase (decrease) in cash flows previously expected to be uncollectible.
(B)
Includes sales of loans or foreclosures, which result in removal of the loan from the PCD loan pool at its carrying amount.
(C)
Represents loans not initially acquired with the intent to sell for which New Residential determined that it no longer has the intent to hold for the foreseeable future, or until maturity or payoff.

Loans Held-for-Sale, at Lower of Cost or Fair Value

Activities related to the carrying value of loans held-for-sale, at lower of cost or fair value were as follows:
Balance at December 31, 2018
 
$
932,480

Purchases(A)
 
842,752

Transfer of loans from held-for-investment(B)
 
38,842

Sales
 
(307,004
)
Transfer of loans to other assets(C)
 
(8,564
)
Transfer of loans to real estate owned
 
(35,326
)
Proceeds from repayments
 
(133,279
)
Valuation (provision) reversal on loans(D)
 
20,096

Balance at September 30, 2019
 
$
1,349,997


(A)
Represents loans acquired with the intent to sell.
(B)
Represents loans not initially acquired with the intent to sell for which New Residential determined that it no longer has the intent to hold for the foreseeable future, or until maturity or payoff.
(C)
Represents loans for which foreclosure has been completed and for which New Residential has made, or intends to make, a claim with the governmental agency that has guaranteed the loans that are now recognized as claims receivable in Other Assets (Note 2).
(D)
Represents the fair value adjustments to loans upon transfer to held-for-sale and provision recorded on certain purchased held-for-sale loans, including an aggregate of $4.8 million of provision related to the call transactions executed during the nine months ended September 30, 2019.

Loans Held-for-Sale, at Fair Value

Activities related to the carrying value of originated loans held-for-sale, at fair value were as follows:
Balance at December 31, 2018
 
$
655,260

Originations
 
10,427,690

Sales
 
(9,784,536
)
Proceeds from repayments
 
(24,035
)
Transfer of loans to other assets
 
(412
)
Change in fair value
 
15,458

Balance at September 30, 2019
 
$
1,289,425


Activities related to the carrying value of acquired loans held-for-sale, at fair value were as follows:
Balance at December 31, 2018
 
$
2,153,269

Purchases(A)
 
5,170,388

Sales
 
(3,338,140
)
Proceeds from repayments
 
(141,109
)
Transfer of loans to real estate owned
 
(435
)
Accretion of loan discount and other amortization
 

Change in fair value
 
72,853

Balance at September 30, 2019
 
$
3,916,826


(A)
Includes an acquisition date fair value adjustment increase of $10.2 million on loans acquired through call transactions executed during the nine months ended September 30, 2019.

Net Interest Income
 
Three Months Ended 
 September 30,
 
Nine Months Ended  
 September 30,
 
2019
 
2018
 
2019
 
2018
Interest Income:
 
 
 
 
 
 
 
Acquired Residential Mortgage Loans, held-for-investment
$
14,532

 
$
19,466

 
$
47,167

 
$
58,689

Acquired Residential Mortgage Loans, held-for-sale
15,966

 
7,433

 
43,423

 
30,001

Acquired Residential Mortgage Loans, held-for-sale, at fair value
43,288

 
15,453

 
96,393

 
28,344

Originated Residential Mortgage Loans, held-for-sale, at fair value
13,185

 
6,430

 
32,926

 
6,430

Total Interest Income on Residential Mortgage Loans
86,971

 
48,782

 
219,909

 
123,464

 
 
 
 
 
 
 
 
Interest Expense:
 
 
 
 
 
 
 
Acquired Residential Mortgage Loans, held-for-investment
3,953

 
6,537

 
15,717

 
17,447

Acquired Residential Mortgage Loans, held-for-sale
9,357

 
8,306

 
26,873

 
26,264

Acquired Residential Mortgage Loans, held-for-sale, at fair value
30,053

 
7,531

 
77,247

 
13,588

Originated Residential Mortgage Loans, held-for-sale,at fair value
2,344

 
1,288

 
6,451

 
1,288

Total Interest Expense on Residential Mortgage Loans
45,707

 
23,662

 
126,288

 
58,587

 
 
 
 
 
 
 
 
Total Net Interest Income on Residential Mortgage Loans
$
41,264

 
$
25,120

 
$
93,621

 
$
64,877



Gain on Sale of Originated Mortgage Loans, Net

NewRez, a wholly owned subsidiary of New Residential, originates conventional, government-insured and nonconforming residential mortgage loans for sale and securitization. The GSEs or Ginnie Mae guarantee conventional and government insured mortgage securitizations and mortgage investors issue nonconforming private label mortgage securitizations while NewRez generally retains the right to service the underlying residential mortgage loans. In connection with the transfer of loans to the GSEs or mortgage investors, New Residential reports gain on sale of originated mortgage loans, net in the condensed consolidated statements of income.

Gain on sale of originated mortgage loans, net is summarized below:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended  
 September 30,
 
 
2019
 
2018
 
2019
 
2018
Gain on loans originated and sold(A)
 
$
24,312

 
$
24,684

 
$
36,413

 
$
24,684

Gain (loss) on settlement of mortgage loan origination derivative instruments(B)
 
(32,138
)
 
(2,757
)
 
(61,879
)
 
(2,757
)
MSRs retained on transfer of loans(C)
 
96,317

 
17,282

 
190,666

 
17,282

Other(D)
 
12,050

 
6,523

 
28,829

 
6,523

Gain on sale of originated mortgage loans, net
 
$
100,541

 
$
45,732

 
$
194,029

 
$
45,732


(A)
Includes loan origination fees and direct loan origination costs. Other indirect costs related to loan origination are included within general and administrative expenses.
(B)
Represents settlement of forward securities delivery commitments utilized as an economic hedge for mortgage loans not included within forward loan sale commitments.
(C)
Represents the initial fair value of the capitalized mortgage servicing rights upon loan sales with servicing retained.
(D)
Includes fees for services associated with the loan origination process.

Real estate owned (REO)

New Residential recognizes REO assets at the completion of the foreclosure process or upon execution of a deed in lieu of foreclosure with the borrower. REO assets are managed for prompt sale and disposition at the best possible economic value.
 
 
Real Estate Owned
Balance at December 31, 2018
 
$
113,410

Purchases
 
44,539

Transfer of loans to real estate owned
 
61,129

Sales
 
(112,703
)
Valuation (provision) reversal on REO
 
(407
)
Balance at September 30, 2019
 
$
105,968



As of September 30, 2019, New Residential had residential mortgage loans that were in the process of foreclosure with an unpaid principal balance of $393.0 million.

In addition, New Residential has recognized $20.4 million in unpaid claims receivable from FHA on Ginnie Mae EBO loans and reverse mortgage loans for which foreclosure has been completed and for which New Residential has made, or intends to make, a claim.

Variable Interest Entities

During the first quarter of 2019, New Residential formed entities (the “RPL Borrowers”) that issued securitized debt collateralized by reperforming residential mortgage loans. New Residential determined that the RPL Borrowers should be evaluated for consolidation under the VIE model rather than the voting interest entity model as the equity holders as a group lack the characteristics of a controlling financial interest. Under the VIE model, New Residential’s consolidated subsidiaries had both 1) the power to direct the most significant activities of the RPL Borrowers and 2) significant variable interests in each of the RPL Borrowers, through their control of the related optional redemption feature and their ownership of certain notes issued by the RPL Borrowers and, therefore, met the primary beneficiary criterion and consolidated the RPL Borrowers. The following table presents information on the combined assets and liabilities related to these consolidated VIEs.
 
 
Three Months Ended 
 September 30,
 
 
2019
Assets
 
 
Residential mortgage loans
 
$
430,461

Other assets
 

Total assets(A)
 
$
430,461

Liabilities
 
 
Notes and bonds payable
 
$
364,380

Accounts payable and accrued expenses
 
3,562

Total liabilities(A)
 
$
367,942


(A)
The creditors of the RPL Borrowers do not have recourse to the general credit of New Residential, and the assets of the RPL Borrowers are not directly available to satisfy New Residential’s obligations.

A wholly owned subsidiary of NewRez, Shelter Mortgage Company LLC (“Shelter”) is a mortgage originator specializing in retail origination. Shelter operates its business through a series of joint ventures and was deemed to be the primary beneficiary of the joint ventures as a result of its ability to direct activities that most significantly impact the economic performance of the entities and its ownership of a significant equity investment.

The following table presents information on the assets and liabilities of the Shelter JVs.
 
 
September 30, 2019
 
December 31, 2018
Assets
 
 
 
 
Cash and cash equivalents
 
$
21,604

 
$
17,346

Property and equipment, net
 
128

 
137

Intangible assets, net
 
58

 
70

Prepaid expenses and other assets
 
4,903

 
411

Total assets
 
$
26,693

 
$
17,964

 
 
 
 
 
Liabilities
 
 
 
 
Accounts payable and accrued expenses
 
$
3,065

 
$
1,315

Reserve for sales recourse
 
1,192

 
967

Total liabilities
 
$
4,257

 
$
2,282


Noncontrolling Interests
Noncontrolling interests in the equity of the Shelter JVs is computed as follows:
 
 
September 30, 2019
 
December 31, 2018
Total consolidated equity of JVs
 
$
22,436

 
$
15,682

Noncontrolling ownership interest
 
48.2
%
 
51.0
%
Noncontrolling equity interest in consolidated JVs
 
$
10,813

 
$
7,998



 
 
Three Months Ended 
 September 30,
 
Nine Months Ended  
 September 30,
 
 
2019
 
2018
 
2019
 
2018
Total consolidated net income of JVs
 
$
5,098

 
$
2,306

 
$
9,144

 
$
2,306

Noncontrolling ownership interest in net income
 
48.2
%
 
50.6
%
 
48.2
%
 
50.6
%
Noncontrolling interest in net income of consolidated JVs
 
$
2,457

 
$
1,167

 
$
4,407

 
$
1,167



As described in “Call Rights” above, New Residential has issued securitizations which were treated as sales under GAAP. New Residential has no obligation to repurchase any loans from these securitizations and its exposure to loss is limited to the carrying amount of its retained interests in the securitization entities. These securitizations are conducted through variable interest entities, of which New Residential is not the primary beneficiary.

Additionally, New Residential and NewRez, a wholly owned subsidiary of New Residential, were deemed to be the primary beneficiaries of the RPL Borrowers and SAFT 2013-1 securitization entity as a result of their ability to direct activities that most significantly impact the economic performance of the entities and their ownership of significant variable interests in the RPL Borrowers and SAFT 2013-1 securitization, respectively. The following table summarizes certain characteristics of the underlying residential mortgage loans, and related financing, in these securitizations as of September 30, 2019:
Residential mortgage loan UPB
 
$
11,183,024

Weighted average delinquency(A)
 
1.97
%
Net credit losses for the nine months ended September 30, 2019
 
$
5,738

Face amount of debt held by third parties(B)
 
$
10,074,690

 
 
 
Carrying value of bonds retained by New Residential(C) (D)
 
$
1,258,292

Cash flows received by New Residential on these bonds for the nine months ended September 30, 2019
 
$
161,794


(A)
Represents the percentage of the UPB that is 60+ days delinquent.
(B)
Excludes bonds retained by New Residential.
(C)
Includes bonds retained pursuant to required risk retention regulations.
(D)
Classified within Level 3 of the fair value hierarchy as the valuation is based on certain unobservable inputs including discount rate, prepayment rates and loss severity. See Note 12 for details on unobservable inputs.