Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN CONSUMER LOANS

v3.19.3
INVESTMENTS IN CONSUMER LOANS
9 Months Ended
Sep. 30, 2019
Investments In Consumer Loans Equity Method Investees [Abstract]  
INVESTMENTS IN CONSUMER LOANS
INVESTMENTS IN CONSUMER LOANS

New Residential, through newly formed limited liability companies (together, the “Consumer Loan Companies”), has a co-investment in a portfolio of consumer loans. The portfolio includes personal unsecured loans and personal homeowner loans. OneMain is the servicer of the loans and provides all servicing and advancing functions for the portfolio. As of September 30, 2019, New Residential owns 53.5% of the limited liability company interests in, and consolidates, the Consumer Loan Companies.

On June 4, 2019, the Consumer Loan Companies refinanced the outstanding asset-backed notes with an asset-backed securitization for approximately $938.7 million. The proceeds in excess of the refinanced debt of $13.4 million were distributed to the respective co-investors of which New Residential received approximately $7.8 million.

New Residential also purchased certain newly originated consumer loans from a third party (“Consumer Loan Seller”). These loans are not held in the Consumer Loan Companies and have been designated as performing consumer loans, held-for-investment. In addition, see “Equity Method Investees” below.

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)
September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Consumer Loan Companies
 
 
 
 
 
 
 
 
 
 
 
Performing Loans
$
684,064

 
53.5
%
 
$
722,826

 
18.9
%
 
4.0
 
4.5
%
Purchased Credit Deteriorated Loans(C)
182,171

 
53.5
%
 
147,059

 
15.6
%
 
3.5
 
10.0
%
Other - Performing Loans
12,196

 
100.0
%
 
11,298

 
14.9
%
 
0.8
 
5.5
%
Total Consumer Loans, held-for-investment
$
878,431

 
 
 
$
881,183

 
18.1
%
 
3.9
 
5.6
%
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Consumer Loan Companies
 
 
 
 
 
 
 
 
 
 
 
Performing Loans
$
815,341

 
53.5
%
 
$
856,563

 
18.8
%
 
3.6
 
5.4
%
Purchased Credit Deteriorated Loans(C)
221,910

 
53.5
%
 
182,917

 
16.0
%
 
3.4
 
11.6
%
Other - Performing Loans
35,326

 
100.0
%
 
32,722

 
14.2
%
 
0.8
 
5.6
%
Total Consumer Loans, held-for-investment
$
1,072,577

 
 
 
$
1,072,202

 
18.1
%
 
3.5
 
6.7
%

(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:
September 30, 2019
Days Past Due
 
Delinquency Status(A)
Current
 
95.5
%
30-59
 
1.7
%
60-89
 
1.0
%
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, 2018
 
$
889,285

Purchases
 

Additional fundings(A)
 
42,231

Proceeds from repayments
 
(166,897
)
Accretion of loan discount and premium amortization, net
 
272

Gross charge-offs
 
(30,325
)
Additions to the allowance for loan losses, net
 
(442
)
Balance at September 30, 2019
 
$
734,124


(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, 2018
 
$
2,604

 
$
2,064

 
$
4,668

Provision (reversal) for loan losses
 
23,966

 
442

 
24,408

Net charge-offs(C)
 
(25,672
)
 

 
(25,672
)
Balance at September 30, 2019
 
$
898

 
$
2,506

 
$
3,404


(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 September 30, 2019, there are $17.3 million in UPB and $15.5 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 $6.4 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, 2018
 
$
182,917

(Allowance) reversal for loan losses(A)
 
(40
)
Proceeds from repayments
 
(60,499
)
Accretion of loan discount and other amortization
 
24,681

Balance at September 30, 2019
 
$
147,059


(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 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
September 30, 2019
$
182,171

 
$
147,059

December 31, 2018
221,910

 
182,917



The following is a summary of the changes in accretable yield for these loans:
Balance at December 31, 2018
 
$
126,518

Accretion
 
(24,681
)
Reclassifications from (to) non-accretable difference(A)
 
10,344

Balance at September 30, 2019
 
$
112,181


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

Noncontrolling Interests

Others’ interests in the equity of the Consumer Loan Companies is computed as follows:
 
 
September 30, 2019
 
December 31, 2018
Total Consumer Loan Companies equity
 
$
47,314

 
$
66,105

Others’ ownership interest
 
46.5
%
 
46.5
%
Others’ interests in equity of consolidated subsidiary
 
$
22,520

 
$
30,561


Others’ interests in the Consumer Loan Companies’ net income (loss) is computed as follows:
 
Three Months Ended 
 September 30,
 
Nine Months Ended  
 September 30,
 
2019
 
2018
 
2019
 
2018
Net Consumer Loan Companies income (loss)
$
22,790

 
$
21,038

 
$
49,690

 
$
61,359

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
$
10,597

 
$
9,783

 
$
23,106

 
$
28,533



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
 
 
September 30, 2019
 
December 31, 2018
Assets
 
 
 
 
Consumer loans, held-for-investment
 
$
869,885

 
$
1,039,480

Restricted cash
 
9,338

 
10,186

Accrued interest receivable
 
13,148

 
15,627

Total assets(A)
 
$
892,371

 
$
1,065,293

Liabilities
 
 
 
 
Notes and bonds payable(B)
 
$
873,724

 
$
1,030,096

Accounts payable and accrued expenses
 
4,034

 
3,814

Total liabilities(A)
 
$
877,758

 
$
1,033,910


(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 $10.0 million face amount 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 accounts 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 which is included within Other Assets (see Note 2 for details). 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 147.7 million Series F convertible preferred stock in ParentCo as of August 31, 2019, and New Residential and LoanCo co-investors are vested in the warrants to purchase an aggregate of 30.0 million Series F convertible preferred stock in ParentCo as of August 31, 2019. 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 accounts 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 which is included within Other Assets (see Note 2 for details). 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:
 
 
September 30, 2019(A)
 
December 31, 2018(A)
Consumer loans, at fair value
 
$
1,632

 
$
231,560

Warrants, at fair value
 
106,378

 
103,067

Other assets
 
1,685

 
25,971

Warehouse financing
 

 
(182,065
)
Other liabilities
 
(118
)
 
(1,142
)
Equity
 
$
109,577

 
$
177,391

Undistributed retained earnings
 
$

 
$

New Residential’s investment
 
$
25,875

 
$
42,875

New Residential’s ownership
 
23.6
%
 
24.2
%


 
 
Three Months Ended 
 September 30,
 
Nine Months Ended  
 September 30,
 
 
2019(B)
 
2018(B)
 
2019(B)
 
2018(B)
Interest income
 
$
636

 
$
16,513

 
$
20,003

 
$
38,032

Interest expense
 

 
(4,364
)
 
(6,487
)
 
(10,082
)
Change in fair value of consumer loans and warrants
 
(2,933
)
 
5,676

 
(4,390
)
 
24,750

Gain on sale of consumer loans(C)
 
(7,525
)
 
2,379

 
(9,193
)
 
3,512

Other expenses
 
(576
)
 
(1,604
)
 
(3,494
)
 
(6,201
)
Net income
 
$
(10,398
)
 
$
18,600

 
$
(3,561
)
 
$
50,011

New Residential’s equity in net income
 
$
(2,547
)
 
$
4,555

 
$
(890
)
 
$
12,343

New Residential’s ownership
 
24.5
%
 
24.5
%
 
25.0
%
 
24.7
%

(A)
Data as of August 31, 2019 and November 30, 2018, respectively, as a result of the one month reporting lag.
(B)
Data for the periods ended August 31, 2019 and 2018, respectively, as a result of the one month reporting lag.
(C)
During the nine months ended September 30, 2019, LoanCo sold, through securitizations which were treated as sales for accounting purposes, $406.1 million in UPB of consumer loans. LoanCo retained $83.9 million of residual interest in the securitizations and distributed them 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)
September 30, 2019(C)
$
1,226

 
25.0
%
 
$
1,632

 
18.7
%
 
1.0
 
%

(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 August 31, 2019 as a result of the one month reporting lag.

New Residential’s investment in LoanCo and WarrantCo changed as follows:
Balance at December 31, 2018
$
38,294

Contributions to equity method investees
63,969

Distributions of earnings from equity method investees
(1,178
)
Distributions of capital from equity method investees
(77,162
)
Earnings from investments in consumer loans, equity method investees
(890
)
Balance at September 30, 2019
$
23,033