Annual report pursuant to Section 13 and 15(d)

SERVICER ADVANCE INVESTMENTS

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SERVICER ADVANCE INVESTMENTS
12 Months Ended
Dec. 31, 2019
Investments, All Other Investments [Abstract]  
SERVICER ADVANCE INVESTMENTS SERVICER ADVANCE INVESTMENTS

All of New Residential’s Servicer Advance Investments are comprised of outstanding servicer advances, the requirement to purchase all future servicer advances made with respect to a specified pool of residential mortgage loans, and the basic fee component of the related MSR. New Residential elected to record its Servicer Advance Investments, including the right to the basic fee component of the related MSRs, at fair value pursuant to the fair value option for financial instruments to provide users of the financial statements with better information regarding the effects of market factors.

A taxable wholly-owned subsidiary of New Residential is the managing member of Advance Purchaser LLC (the “Buyer”), a joint venture entity, and owned an approximately 73.2% interest in the Buyer as of December 31, 2019. As of December 31, 2019, third-party co-investors, owning the remaining interest in the Buyer, have funded capital commitments to the Buyer of $389.6 million and New Residential has funded capital commitments to the Buyer of $312.7 million. The Buyer may call capital up to the commitment amount on unfunded commitments and recall capital to the extent the Buyer makes a distribution to the co-investors, including New Residential. As of December 31, 2019, the noncontrolling third-party co-investors and New Residential had previously funded their commitments, however the Buyer may recall $327.8 million and $305.2 million of capital distributed to the third-party co-investors and New Residential, respectively. Neither the third-party co-investors nor New Residential is obligated to fund amounts in excess of their respective capital commitments, regardless of the capital requirements of the Buyer.

The Buyer has purchased servicer advances from Mr. Cooper, is required to purchase all future servicer advances made with respect to this portfolio of loans from Mr. Cooper, and receives cash flows from advance recoveries and the basic fee component of the related MSRs, net of compensation paid back to Mr. Cooper in consideration of Mr. Cooper’s servicing activities. The compensation paid to Mr. Cooper as of December 31, 2019 was approximately 9.2% of the basic fee component of the related MSRs plus a performance fee that represents a portion (up to 100%) of the cash flows in excess of those required for the Buyer to obtain a specified return on its equity.

New Residential has determined that the Buyer is a VIE. See Note 14 for information on the assets and liabilities related to this consolidated VIE.

New Residential also acquired a portion of the call rights related to this portfolio of loans.

In December 2014, New Residential agreed to acquire (the “SLS Transaction”) 50% of the Excess MSRs and all of the servicer advances and related basic fee portion of the MSR, and a portion of the call rights related to a portfolio of residential mortgage loans which is serviced by SLS. Fortress-managed funds acquired the other 50% of the Excess MSRs. SLS services the loans in exchange for a servicing fee of 10.75 basis points (“bps”) and an incentive fee (the “SLS Incentive Fee”) which is based on the ratio of the outstanding servicer advances to the UPB of the underlying loans.

In April 2015, New Residential acquired Servicer Advance Investments and Excess MSRs in connection with the acquisition of HLSS. Through January 1, 2018, Ocwen serviced the underlying loans in exchange for a servicing fee of 12% times the servicing fee collections of the underlying loans, which as of December 31, 2017 and December 31, 2016 was equal to 6.1 bps and 5.9 bps times the UPB of the underlying loans, respectively, and an incentive fee which was reduced by LIBOR plus 2.75% per annum of the amount, if any, of servicer advances outstanding in excess of a defined target. In July 2017, New Residential entered into the Ocwen Transaction as described in Note 6. Subsequent to the Ocwen Transaction, the Servicer Advance Investments (including the related basic fee portion of the MSR) formerly serviced by Ocwen became reclassified, as described in Note 6, as the underlying MSRs are transferred to NRM.

The following is a summary of New Residential’s Servicer Advance Investments, including the right to the basic fee component of the related MSRs:
 
Amortized Cost Basis
 
Carrying Value(A)
 
Weighted Average Discount Rate
 
Weighted Average Yield
 
Weighted Average Life (Years)(B)
 
Change in Fair Value Recorded in Other Income for Year then Ended
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Servicer Advance Investments
$
557,444

 
$
581,777

 
5.3
%
 
5.7
%
 
6.3
 
$
10,288

December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Servicer Advance Investments
$
721,801

 
$
735,846

 
5.9
%
 
5.8
%
 
5.7
 
$
(89,332
)

(A)
Carrying value represents the fair value of the Servicer Advance Investments, including the basic fee component of the related MSRs.
(B)
Weighted Average Life represents the weighted average expected timing of the receipt of expected net cash flows for this investment.

The following is additional information regarding the Servicer Advance Investments and related financing:
 
 
 
 
 
 
 
 
 
Loan-to-Value (“LTV”)(A)
 
Cost of Funds(C)
 
UPB of Underlying Residential Mortgage Loans
 
Outstanding Servicer Advances
 
Servicer Advances to UPB of Underlying Residential Mortgage Loans
 
Face Amount of Notes and Bonds Payable
 
Gross
 
Net(B)
 
Gross
 
Net
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Servicer Advance Investments(D)
$
31,442,267

 
$
462,843

 
1.5
%
 
$
443,248

 
88.3
%
 
87.2
%
 
3.4
%
 
2.8
%
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Servicer Advance Investments(D)
$
40,096,998

 
$
620,050

 
1.5
%
 
$
574,117

 
88.3
%
 
87.2
%
 
3.7
%
 
3.1
%

(A)
Based on outstanding servicer advances, excluding purchased but unsettled servicer advances.
(B)
Ratio of face amount of borrowings to par amount of servicer advance collateral, net of any general reserve.
(C)
Annualized measure of the cost associated with borrowings. Gross Cost of Funds primarily includes interest expense and facility fees. Net Cost of Funds excludes facility fees.
(D)
The following types of advances are included in the Servicer Advance Investments:
    
 
December 31,
 
2019
 
2018
Principal and interest advances
$
71,574

 
$
108,317

Escrow advances (taxes and insurance advances)
180,047

 
238,349

Foreclosure advances
211,222

 
273,384

  Total
$
462,843

 
$
620,050



Interest income recognized by New Residential related to its Servicer Advance Investments was comprised of the following:
 
Year Ended December 31,
 
2019
 
2018
 
2017
Interest income, gross of amounts attributable to servicer compensation
$
51,940

 
$
83,807

 
$
871,506

Amounts attributable to base servicer compensation
(6,209
)
 
(8,491
)
 
(227,585
)
Amounts attributable to incentive servicer compensation
(18,065
)
 
(25,098
)
 
(115,565
)
Interest income from Servicer Advance Investments
$
27,666

 
$
50,218

 
$
528,356



See Note 12 regarding the financing of Servicer Advance Investments.