Annual report pursuant to Section 13 and 15(d)

FAIR VALUE MEASUREMENT

v3.19.3.a.u2
FAIR VALUE MEASUREMENT
12 Months Ended
Dec. 31, 2019
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENT FAIR VALUE MEASUREMENT

U.S. GAAP requires the categorization of fair value measurement into three broad levels which form a hierarchy based on the transparency of inputs to the valuation.

Level 1 - Quoted prices in active markets for identical instruments.
Level 2 - Valuations based principally on other observable market parameters, including:

Quoted prices in active markets for similar instruments,
Quoted prices in less active or inactive markets for identical or similar instruments,
Other observable inputs (such as interest rates, yield curves, volatilities, prepayment rates, loss severities, credit risks and default rates), and
Market corroborated inputs (derived principally from or corroborated by observable market data).

Level 3 - Valuations based significantly on unobservable inputs.

New Residential follows this hierarchy for its fair value measurements. The classifications are based on the lowest level of input that is significant to the fair value measurement.

The carrying values and fair values of New Residential’s assets and liabilities recorded at fair value on a recurring basis, as well as other financial instruments for which fair value is disclosed, as of December 31, 2019 were as follows:
 
 
 
 
 
Fair Value
 
Principal Balance or Notional Amount
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
Investments in:
 
 
 
 
 
 
 
 
 
 
 
Excess mortgage servicing rights, at fair value(A)
$
88,345,237

 
$
379,747

 
$

 
$

 
$
379,747

 
$
379,747

Excess mortgage servicing rights, equity method investees, at fair value(A)
33,592,554

 
125,596

 

 

 
125,596

 
125,596

Mortgage servicing rights, at fair value(A)
373,850,061

 
3,967,960

 

 

 
3,967,960

 
3,967,960

Mortgage servicing rights financing receivables, at fair value(A)
130,984,870

 
1,718,273

 

 

 
1,718,273

 
1,718,273

Servicer advance investments, at fair value
462,843

 
581,777

 

 

 
581,777

 
581,777

Real estate and other securities, available-for-sale
36,159,591

 
19,477,728

 

 
11,519,943

 
7,957,785

 
19,477,728

Residential mortgage loans, held-for-investment
502,352

 
441,263

 

 

 
435,234

 
435,234

Residential mortgage loans, held-for-sale
1,531,505

 
1,429,052

 

 

 
1,438,302

 
1,438,302

Residential mortgage loans, held-for-sale, at fair value(B)
4,675,806

 
4,613,612

 

 
1,099,230

 
3,514,382

 
4,613,612

Residential mortgage loans, held-for-investment, at fair value(C)
452,771

 
484,443

 

 

 
484,443

 
484,443

Residential mortgage loans subject to repurchase
172,336

 
172,336

 

 
172,336

 

 
172,336

Consumer loans, held-for-investment
823,917

 
827,545

 

 

 
849,739

 
849,739

Derivative assets
8,360,894

 
41,501

 

 
155

 
41,346

 
41,501

Cash and cash equivalents
528,737

 
528,737

 
528,737

 

 

 
528,737

Restricted cash
162,197

 
162,197

 
162,197

 

 

 
162,197

Other assets(D)
N/A

 
60,654

 
7,952

 

 
52,703

 
60,655

 
 
 
$
35,012,421

 
$
698,886

 
$
12,791,664

 
$
21,547,287

 
$
35,037,837

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Repurchase agreements
$
27,917,709

 
$
27,916,225

 
$

 
$
27,917,709

 
$

 
$
27,917,709

Notes and bonds payable(E)
7,733,135

 
7,720,148

 

 

 
7,779,060

 
7,779,060

Residential mortgage loan repurchase liability
172,336

 
172,336

 

 
172,336

 

 
172,336

Derivative liabilities
17,379,407

 
6,885

 

 
5,430

 
1,455

 
6,885

Excess spread financing
2,962,629

 
31,777

 

 

 
31,777

 
31,777

Contingent consideration
N/A

 
55,222

 

 

 
55,222

 
55,222

 
 
 
$
35,902,593

 
$

 
$
28,095,475

 
$
7,867,514

 
$
35,962,989


 
(A)
The notional amount represents the total unpaid principal balance of the residential mortgage loans underlying the MSRs, MSR financing receivables, and Excess MSRs. New Residential does not receive an excess mortgage servicing amount on non-performing loans in Agency portfolios.
(B)
Includes $267.7 million in fair value of loans that are 90 days or more past due.
(C)
Includes $21.6 million in fair value of loans that are 90 days or more past due.
(D)
Excludes the indirect equity investment in a commercial redevelopment project that is accounted for at fair value on a recurring basis based on the NAV of New Residential’s investment. The investment had a fair value of $74.0 million as of December 31, 2019.
(E)
Includes the MDST Trusts, SAFT 2013-1 mortgage-backed securities and the 2019-RPL1 asset-backed notes issued for which the fair value option for financial instruments was elected and resulted in a fair value of $659.7 million as of December 31, 2019.

The carrying values and fair values of New Residential’s assets and liabilities recorded at fair value on a recurring basis, as well as other financial instruments for which fair value is disclosed, as of December 31, 2018 were as follows:
 
 
 
 
 
Fair Value
 
Principal Balance or Notional Amount
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Investments in:
 
 
 
 
 
 
 
 
 
 
 
Excess mortgage servicing rights, at fair value(A)
$
106,426,363

 
$
447,860

 
$

 
$

 
$
447,860

 
$
447,860

Excess mortgage servicing rights, equity method investees, at fair value(A)
41,707,963

 
147,964

 

 

 
147,964

 
147,964

Mortgage servicing rights, at fair value(A)
258,462,703

 
2,884,100

 

 

 
2,884,100

 
2,884,100

Mortgage servicing rights financing receivables, at fair value(A)
130,516,565

 
1,644,504

 

 

 
1,644,504

 
1,644,504

Servicer advance investments, at fair value
620,050

 
735,846

 

 

 
735,846

 
735,846

Real estate and other securities, available-for-sale
22,152,845

 
11,636,581

 

 
2,665,618

 
8,970,963

 
11,636,581

Residential mortgage loans, held-for-investment
706,111

 
614,241

 

 

 
625,321

 
625,321

Residential mortgage loans, held-for-sale
1,043,550

 
932,480

 

 

 
958,970

 
958,970

Residential mortgage loans, held-for-sale, at fair value(B)
2,934,727

 
2,808,529

 

 
213,882

 
2,594,647

 
2,808,529

Residential mortgage loans, held-for-investment, at fair value(C)
122,260

 
121,088

 

 

 
121,088

 
121,088

Residential mortgage loans subject to repurchase
121,602

 
121,602

 

 
121,602

 

 
121,602

Consumer loans, held-for-investment
1,072,577

 
1,072,202

 

 

 
1,054,820

 
1,054,820

Derivative assets
840,179

 
10,893

 

 
42

 
10,851

 
10,893

Cash and cash equivalents
251,058

 
251,058

 
251,058

 

 

 
251,058

Restricted cash
164,020

 
164,020

 
164,020

 

 

 
164,020

Other assets(D)
N/A

 
16,991

 
7,778

 

 
9,213

 
16,991

 
 
 
$
23,609,959

 
$
422,856

 
$
3,001,144

 
$
20,206,147

 
$
23,630,147

Liabilities:
 
 
 
 
 
 
 
 
 
 


Repurchase agreements
$
15,555,156

 
$
15,553,969

 
$

 
$
15,555,156

 
$

 
$
15,555,156

Notes and bonds payable
7,117,909

 
7,102,266

 

 

 
7,076,400

 
7,076,400

Residential mortgage loans repurchase liability
121,602

 
121,602

 

 
121,602

 

 
121,602

Derivative liabilities
15,759,782

 
29,389

 

 
29,166

 
223

 
29,389

Excess spread financing
3,492,587

 
39,304

 

 

 
39,304

 
39,304

Contingent consideration
N/A

 
40,842

 

 

 
40,842

 
40,842

 
 
 
$
22,887,372

 
$

 
$
15,705,924

 
$
7,156,769

 
$
22,862,693

 
(A)
The notional amount represents the total unpaid principal balance of the residential mortgage loans underlying the MSRs, MSR financing receivables, and Excess MSRs. New Residential does not receive an excess mortgage servicing amount on non-performing loans in Agency portfolios.
(B)
Includes $88.7 million in fair value of loans that are 90 days or more past due.
(C)
Includes $0.4 million in fair value of loans that are 90 days or more past due.
(D)
Excludes the indirect equity investment in a commercial redevelopment project that is accounted for at fair value on a recurring basis based on the NAV of New Residential’s investment. The investment had a fair value of $74.3 million as of December 31, 2018.

New Residential has various processes and controls in place to ensure that fair value is reasonably estimated. With respect to the broker and pricing service quotations, to ensure these quotes represent a reasonable estimate of fair value, New Residential’s quarterly procedures include a comparison to quotations from different sources, outputs generated from its internal pricing models and transactions New Residential has completed with respect to these or similar assets or liabilities, as well as on its knowledge
and experience of these markets. With respect to fair value estimates generated based on New Residential’s internal pricing models, New Residential corroborates the inputs and outputs of the internal pricing models by comparing them to available independent third party market parameters, where available, and models for reasonableness. New Residential believes its valuation methods and the assumptions used are appropriate and consistent with other market participants.

Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to determine fair value and such changes could result in a significant increase or decrease in the fair value.

New Residential’s assets measured at fair value on a recurring basis using Level 3 inputs changed as follows:
 
Level 3
 
 
 
Excess MSRs(A)
 
Excess MSRs in Equity Method Investees(A)(B)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
Non-Agency
 
 
MSRs(A)
 
Mortgage Servicing Rights Financing Receivables(A)
 
Servicer Advance Investments
 
Non-Agency RMBS
 
Derivatives(C)
 
Residential Mortgage Loans
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
324,636

 
$
849,077

 
$
171,765

 
$
1,735,504

 
$
598,728

 
$
4,027,379

 
$
5,974,789

 
$

 
$

 
$
13,681,878

Transfers(D)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Transfers from Level 3

 

 

 

 

 

 

 

 

 

Transfers to Level 3

 

 

 

 

 

 

 

 

 

Shellpoint Acquisition

 

 

 
275,964

 
(124,652
)
 

 

 
10,604

 
179,644

 
341,560

Gains (losses) included in net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in other-than-temporary impairment on securities(E)

 

 

 

 

 

 
(24,940
)
 

 

 
(24,940
)
Included in change in fair value of investments in excess mortgage servicing rights(E)
(18,099
)
 
(40,557
)
 

 

 

 

 

 

 

 
(58,656
)
Included in change in fair value of investments in excess mortgage servicing rights, equity method investees(E)

 

 
8,357

 

 

 

 

 

 

 
8,357

Included in servicing revenue, net(F)

 

 

 
(199,836
)
 

 

 

 

 

 
(199,836
)
Included in change in fair value of investments in mortgage servicing rights financing receivable(E)

 

 

 

 
31,550

 

 

 

 

 
31,550

Included in change in fair value of servicer advance investments

 

 

 

 

 
(89,332
)
 

 

 

 
(89,332
)
Included in change in fair value of investments in residential mortgage loans

 

 

 

 

 

 

 

 
46,065

 
46,065

Included in gain (loss) on settlement of investments, net

 
40,417

 

 

 

 
72,585

 
(1,288
)
 

 

 
111,714

Included in other income (loss), net(E)
6,137

 
307

 

 

 

 

 
10,283

 
24

 
(175
)
 
16,576

Gains (losses) included in other comprehensive income(G)

 

 

 

 

 

 
31,031

 

 

 
31,031

Interest income
21,936

 
22,504

 

 

 

 
50,218

 
377,018

 

 

 
471,676

Purchases, sales and repayments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Purchases

 

 

 
1,042,933

 
128,357

 
2,332,989

 
3,854,439

 

 
2,107,204

 
9,465,922

Proceeds from sales
(19,084
)
 

 

 
(5,776
)
 
(7,472
)
 

 
(86,448
)
 

 

 
(118,780
)
Proceeds from repayments
(58,139
)
 
(69,654
)
 
(32,158
)
 

 

 
(2,455,155
)
 
(1,163,921
)
 

 
(2,111
)
 
(3,781,138
)
Originations

 

 

 
35,311

 

 

 

 

 

 
35,311

Ocwen Transaction (Note 6)

 
(611,621
)
 

 

 
1,017,993

 
(3,202,838
)
 

 

 

 
(2,796,466
)
Balance at December 31, 2018
$
257,387

 
$
190,473

 
$
147,964

 
$
2,884,100

 
$
1,644,504


$
735,846

 
$
8,970,963

 
$
10,628

 
$
2,330,627

 
$
17,172,492

 
Level 3
 
 
 
Excess MSRs(A)
 
Excess MSRs in Equity Method Investees(A)(B)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
 
Non-Agency
 
 
MSRs(A)
 
Mortgage Servicing Rights Financing Receivables(A)
 
Servicer Advance Investments
 
Non-Agency RMBS
 
Derivatives(C)
 
Residential Mortgage Loans
 
Total
(continued)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Transfers(D)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Transfers from Level 3

 

 

 

 

 

 

 

 
(32,806
)
 
(32,806
)
Transfers to Level 3

 

 

 

 

 

 

 

 
315,577

 
315,577

Ditech Acquisition

 

 

 
387,170

 

 

 
(178,435
)
 

 
381,039

 
589,774

Transfers from investments in mortgage servicing rights financing receivables to investments in mortgage servicing rights

 

 

 
367,121

 
(367,121
)
 

 

 

 

 

Gains (losses) included in net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in other-than-temporary impairment on securities(E)

 

 

 

 

 

 
(25,174
)
 

 

 
(25,174
)
Included in change in fair value of investments in excess mortgage servicing rights(E)
(7,559
)
 
(2,946
)
 

 

 

 

 

 

 

 
(10,505
)
Included in change in fair value of investments in excess mortgage servicing rights, equity method investees(E)

 

 
6,800

 

 

 

 

 

 

 
6,800

Included in servicing revenue, net(F)

 

 

 
(721,356
)
 

 

 

 

 

 
(721,356
)
Included in change in fair value of investments in mortgage servicing rights financing receivable(E)

 

 

 

 
(189,023
)
 

 

 

 

 
(189,023
)
Included in change in fair value of servicer advance investments

 

 

 

 

 
10,288

 

 

 

 
10,288

Included in change in fair value of investments in residential mortgage loans

 

 

 

 

 

 

 

 
(63,347
)
 
(63,347
)
Included in gain (loss) on settlement of investments, net
1,479

 
30

 

 

 

 

 
97,191

 

 

 
98,700

Included in other income (loss), net(E)
1,523

 
819

 

 

 

 


 
2,101

 
29,263

 

 
33,706

Gains (losses) included in other comprehensive income(G)

 

 

 

 

 


 
238,217

 

 

 
238,217

Interest income
14,895

 
17,752

 

 

 

 
27,666

 
302,705

 

 

 
363,018

Purchases, sales and repayments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases

 

 

 
690,049

 
735,152

 
1,622,808

 
2,058,953

 

 
11,110,245

 
16,217,207

Proceeds from sales
(10,018
)
 
(57
)
 

 
(1,539
)
 
(22,989
)
 

 
(1,949,300
)
 

 
(10,638,483
)
 
(12,622,386
)
Proceeds from repayments
(48,074
)
 
(35,957
)
 
(29,168
)
 
(11,625
)
 
(82,250
)
 
(1,814,831
)
 
(1,559,436
)
 

 
(248,503
)
 
(3,829,844
)
Originations and other

 

 

 
374,040

 

 

 


 

 
844,476

 
1,218,516

Balance at December 31, 2019
$
209,633

 
$
170,114

 
$
125,596

 
$
3,967,960

 
$
1,718,273

 
$
581,777

 
$
7,957,785

 
$
39,891

 
$
3,998,825

 
$
18,769,854

 
(A)
Includes the recapture agreement for each respective pool, as applicable.
(B)
Amounts represent New Residential’s portion of the Excess MSRs held by the respective joint ventures in which New Residential has a 50% interest.
(C)
For the purpose of this table, the IRLC asset and liability positions are shown net.
(D)
Transfers are assumed to occur at the beginning of the respective period.
(E)
The gains (losses) recorded in earnings during the period are attributable to the change in unrealized gains (losses) relating to Level 3 assets still held at the reporting dates and realized gains (losses) recorded during the period.
(F)
The components of Servicing revenue, net are disclosed in Note 6.
(G)
These gains (losses) were included in net unrealized gain (loss) on securities in the Consolidated Statements of Comprehensive Income.

New Residential’s liabilities measured at fair value on a recurring basis using Level 3 inputs changed as follows:
 
 
Level 3
 
 
 
 
Excess Spread Financing
 
Mortgage-Backed Securities Issued
 
Contingent Consideration
 
 
 
 
 
Total
Balance at December 31, 2017
 
$

 
$

 
$

 
$

Transfers(A)
 
 
 
 
 
 
 
 
Transfers from Level 3
 

 

 

 

Transfers to Level 3
 

 

 

 

Shellpoint Acquisition
 
48,262

 
120,702

 
39,262

 
208,226

Gains (losses) included in net income
 
 
 
 
 
 
 
 
Included in other-than-temporary impairment on securities(B)
 

 

 

 

Included in change in fair value of investments in excess mortgage servicing rights
 

 

 

 

Included in change in fair value of investments in excess mortgage servicing rights, equity method investees(B)
 

 

 

 

Included in servicing revenue, net(C)
 
(8,591
)
 

 

 
(8,591
)
Included in change in fair value of investments in notes receivable - rights to MSRs
 

 

 

 

Included in change in fair value of servicer advance investments
 

 

 

 

Included in gain (loss) on settlement of investments, net
 

 

 

 

Included in other income(B)
 

 
684

 
1,580

 
2,264

Gains (losses) included in other comprehensive income, net of tax(D)
 

 

 

 

Interest income
 

 

 

 

Purchases, sales and payments
 
 
 
 
 
 
 
 
Purchases
 

 

 

 

Proceeds from sales
 

 

 

 

Payments
 

 
(4,338
)
 

 
(4,338
)
Other
 
(367
)
 

 

 
(367
)
Balance at December 31, 2018
 
$
39,304

 
$
117,048

 
$
40,842

 
$
197,194

Transfers(A)
 
 
 
 
 
 
 
 
Transfers from Level 3
 

 

 

 

Transfers to Level 3
 

 

 

 

Acquisitions
 

 

 
13,893

 
13,893

Ditech Acquisition(E)
 

 
209,459

 

 
209,459

Gains (losses) included in net income
 
 
 
 
 
 
 
 
Included in other-than-temporary impairment on securities(B)
 

 

 

 

Included in change in fair value of investments in excess mortgage servicing rights
 

 

 

 

Included in change in fair value of investments in excess mortgage servicing rights, equity method investees(B)
 

 

 

 

Included in servicing revenue, net(C)
 
(8,406
)
 

 

 
(8,406
)
Included in change in fair value of investments in notes receivable - rights to MSRs
 

 

 

 

Included in change in fair value of servicer advance investments
 

 

 

 

Included in change in fair value of investments in residential mortgage loans
 

 

 

 

Included in gain (loss) on settlement of investments, net
 

 

 

 

Included in other income(B)
 

 
1,236

 
10,487

 
11,723

Gains (losses) included in other comprehensive income, net of tax(D)
 

 

 

 

Interest income
 

 

 

 

Purchases, sales and payments
 
 
 
 
 
 
 
 
Purchases
 

 
378,569

 

 
378,569

Proceeds from sales
 

 

 

 

Payments
 

 
(46,574
)
 
(10,000
)
 
(56,574
)
Other
 
879

 

 

 
879

Balance at December 31, 2019
 
$
31,777

 
$
659,738

 
$
55,222

 
$
746,737


(A)
Transfers are assumed to occur at the beginning of the respective period.
(B)
The gains (losses) recorded in earnings during the period are attributable to the change in unrealized gains (losses) relating to Level 3 liabilities still held at the reporting dates and realized gains (losses) recorded during the period.
(C)
The components of Servicing revenue, net are disclosed in Note 6.
(D)
These gains (losses) were included in net unrealized gain (loss) on securities in the Consolidated Statements of Comprehensive Income.
(E)
As a result of the Ditech Acquisition, New Residential acquired MSRs and the servicing on certain residual tranches of Non-Agency RMBS it already owned, and now consolidates the respective securities. See Note 12 for the associated liability.

Investments in Excess MSRs, Excess MSRs Equity Method Investees, MSRs and MSR Financing Receivables Valuation

Fair value estimates of New Residential’s investments in MSRs and Excess MSRs were based on internal pricing models. The valuation technique is based on discounted cash flows. Significant inputs used in the valuations included expectations of prepayment rates, delinquency rates, recapture rates, the mortgage servicing amount or excess mortgage servicing amount of the underlying residential mortgage loans, as applicable, and discount rates that market participants would use in determining the fair values of mortgage servicing rights on similar pools of residential mortgage loans. In addition, for investments in MSRs, significant inputs included the market-level estimated cost of servicing.

In order to evaluate the reasonableness of its fair value determinations, New Residential engages an independent valuation firm to separately measure the fair value of its investments in MSRs and Excess MSRs. The independent valuation firm determines an estimated fair value range of each pool based on its own models and issues a “fairness opinion” with this range. New Residential compares the range included in the opinion to the value generated by its internal models. To date, New Residential has not made any significant valuation adjustments as a result of these fairness opinions.

Significant increases (decreases) in the discount rates, prepayment or delinquency rates, or costs of servicing, in isolation would result in a significantly lower (higher) fair value measurement, whereas significant increases (decreases) in the recapture rates or mortgage servicing amount or excess mortgage servicing amount, as applicable, in isolation would result in a significantly higher (lower) fair value measurement. Generally, a change in the delinquency rate assumption is accompanied by a directionally similar change in the assumption used for the prepayment rate.

The following tables summarize certain information regarding the weighted average inputs used:
 
December 31, 2019
 
Significant Inputs(A)
 
Prepayment
Rate(B)
 
Delinquency(C)
 
Recapture Rate(D)
 
Mortgage Servicing Amount
or Excess Mortgage Servicing Amount
(bps)
(E)
 
Collateral Weighted Average Maturity Years(F)
Excess MSRs Directly Held (Note 5)
 
 
 
 
 
 
 
 
 
Agency
 
 
 
 
 
 
 
 
 
Original Pools
8.6
%
 
1.1
%
 
20.3
%
 
21

 
20

Recaptured Pools
10.7
%
 
0.5
%
 
27.8
%
 
23

 
23

 
9.2
%
 
0.9
%
 
22.3
%
 
22

 
21

Non-Agency(G)
 
 
 
 
 
 
 
 
 
Mr. Cooper and SLS Serviced:
 
 
 
 
 
 
 
 
 
Original Pools
9.7
%
 
N/A

 
15.5
%
 
15

 
24

Recaptured Pools
7.5
%
 
N/A

 
17.4
%
 
24

 
23

 
9.4
%
 
N/A

 
15.8
%
 
16

 
24

Total/Weighted Average--Excess MSRs Directly Held
9.3
%
 
0.9
%
 
19.4
%
 
19

 
22

 
 
 
 
 
 
 
 
 
 
Excess MSRs Held through Equity Method Investees (Note 5)
 
 
 
 
 
 
 
 
 
Agency
 
 
 
 
 
 
 
 
 
Original Pools
9.3
%
 
1.4
%
 
23.7
%
 
19

 
19

Recaptured Pools
10.3
%
 
0.8
%
 
26.7
%
 
24

 
22

Total/Weighted Average--Excess MSRs Held through Investees
9.8
%
 
1.1
%
 
25.1
%
 
21

 
20

 
 
 
 
 
 
 
 
 
 
Total/Weighted Average--Excess MSRs All Pools
9.5
%
 
1.0
%
 
21.4
%
 
20

 
21

 
 
 
 
 
 
 
 
 
 
MSRs (Note 6)
 
 
 
 
 
 
 
 
 
Agency(H)
 
 
 
 
 
 
 
 
 
Mortgage Servicing Rights(I)
12.5
%
 
1.0
%
 
23.3
%
 
28

 
22

MSR Financing Receivables(I)
15.4
%
 
0.4
%
 
15.8
%
 
27

 
25

Non-Agency
 
 
 
 
 
 
 
 
 
Mortgage Servicing Rights
11.6
%
 
1.2
%
 
22.1
%
 
31

 
16

MSR Financing Receivables(I)
8.3
%
 
14.4
%
 
9.3
%
 
47

 
25

Ginnie Mae
 
 
 
 
 
 
 
 
 
Mortgage Servicing Rights(J)
16.2
%
 
4.4
%
 
28.1
%
 
42

 
27



 
December 31, 2018
 
Significant Inputs(A)
 
Prepayment
Rate(B)
 
Delinquency(C)
 
Recapture Rate(D)
 
Mortgage Servicing Amount
or Excess Mortgage Servicing Amount
(bps)
(E)
 
Collateral Weighted Average Maturity Years(F)
Excess MSRs Directly Held (Note 5)
 
 
 
 
 
 
 
 
 
Agency
 
 
 
 
 
 
 
 
 
Original Pools
9.8
%
 
2.5
%
 
26.3
%
 
21

 
21

Recaptured Pools
8.0
%
 
2.1
%
 
23.6
%
 
22

 
24

Recapture Agreement
7.9
%
 
2.2
%
 
24.8
%
 
22

 

 
9.1
%
 
2.4
%
 
25.4
%
 
21

 
22

Non-Agency(G)
 
 
 
 
 
 
 
 
 
Mr. Cooper and SLS Serviced:
 
 
 
 
 
 
 
 
 
Original Pools
10.4
%
 
N/A

 
15.4
%
 
15

 
24

Recaptured Pools
8.0
%
 
N/A

 
19.9
%
 
23

 
24

Recapture Agreement
7.9
%
 
N/A

 
19.8
%
 
20

 

 
9.9
%
 
N/A

 
16.3
%
 
16

 
24

Total/Weighted Average--Excess MSRs Directly Held
9.4
%
 
2.4
%
 
21.5
%
 
19

 
23

 
 
 
 
 
 
 
 
 
 
Excess MSRs Held through Equity Method Investees (Note 5)
 
 
 
 
 
 
 
 
 
Agency
 
 
 
 
 
 
 
 
 
Original Pools
10.9
%
 
3.9
%
 
29.6
%
 
19

 
20

Recaptured Pools
8.5
%
 
2.6
%
 
28.8
%
 
23

 
23

Recapture Agreement
8.6
%
 
2.7
%
 
30.4
%
 
23

 

Total/Weighted Average--Excess MSRs Held through Investees
9.6
%
 
3.2
%
 
29.4
%
 
21

 
21

 
 
 
 
 
 
 
 
 
 
Total/Weighted Average--Excess MSRs All Pools
9.5
%
 
2.7
%
 
24.5
%
 
20

 
22

 
 
 
 
 
 
 
 
 
 
MSRs (Note 6)
 
 
 
 
 
 
 
 
 
Agency(H)
 
 
 
 
 
 
 
 
 
Mortgage Servicing Rights(I)
9.4
%
 
1.0
%
 
22.2
%
 
26

 
22

MSR Financing Receivables(I)
9.5
%
 
0.9
%
 
14.7
%
 
27

 
20

Non-Agency
 
 
 
 
 
 
 
 
 
Mortgage Servicing Rights(I)
13.2
%
 
0.9
%
 
10.0
%
 
25

 
25

MSR Financing Receivables(I)
8.2
%
 
17.2
%
 
5.0
%
 
45

 
26

Ginnie Mae
 
 
 
 
 
 
 
 
 
Mortgage Servicing Rights(J)
11.2
%
 
3.9
%
 
24.2
%
 
33

 
27


(A)
Weighted by fair value of the portfolio.
(B)
Projected annualized weighted average lifetime voluntary and involuntary prepayment rate using a prepayment vector.
(C)
Projected percentage of residential mortgage loans in the pool for which the borrower will miss its mortgage payments.
(D)
Percentage of voluntarily prepaid loans that are expected to be refinanced by the related servicer or subservicer, as applicable.
(E)
Weighted average total mortgage servicing amount, in excess of the basic fee as applicable, measured in bps. As of December 31, 2019 and 2018, weighted average costs of subservicing of $7.18 and $7.30, respectively, per loan per month was used to value the agency MSRs, including MSR Financing Receivables. Weighted average costs of subservicing of $11.28 and $11.45, respectively, per loan per month was used to value the non-agency MSRs, including MSR Financing Receivables. Weighted average cost of subservicing of $9.20 and $10.06, respectively, per loan per month was used to value the Ginnie Mae MSRs.
(F)
Weighted average maturity of the underlying residential mortgage loans in the pool.
(G)
For certain pools, the Excess MSR will be paid on the total UPB of the mortgage portfolio (including both performing and delinquent loans until REO). For these pools, no delinquency assumption is used.
(H)
Represents Fannie Mae and Freddie Mac MSRs.
(I)
For certain pools, recapture rate represents the expected recapture rate with the successor subservicer appointed by NRM.
(J)
Includes valuation of the related Excess spread financing (Note 6).

With respect to valuing the Ocwen-serviced MSR financing receivables, which include a significant servicer advances receivable component, the cost of financing servicer advances receivable is assumed to be LIBOR plus 1.8%.

As of December 31, 2019 and 2018, weighted average discount rates of 7.8% and 8.8%, respectively, were used to value New Residential’s investments in Excess MSRs (directly and through equity method investees). As of December 31, 2019 and 2018, weighted average discount rates of 7.8% and 8.7% were used to value New Residential’s investments in MSRs, respectively. As of December 31, 2019 and 2018, weighted average discount rates of 8.9% and 10.3%, respectively, were used to value New Residential’s investments in MSR financing receivables.

All of the assumptions listed have some degree of market observability, based on New Residential’s knowledge of the market, relationships with market participants, and use of common market data sources. New Residential uses assumptions that generate its best estimate of future cash flows for each investment in MSRs and Excess MSRs.

When valuing investments in MSRs and Excess MSRs, New Residential uses the following criteria to determine the significant inputs:
 
Prepayment Rate: Prepayment rate projections are in the form of a “vector” that varies over the expected life of the pool. The prepayment vector specifies the percentage of the collateral balance that is expected to prepay voluntarily (i.e., pay off) and involuntarily (i.e., default) at each point in the future. The prepayment vector is based on assumptions that reflect macroeconomic conditions like home price appreciation, current level of interest rates as well as loan level factors such as the borrower’s interest rate, FICO score, loan-to-value ratio, debt-to-income ratio, vintage on a loan level basis. New Residential considers historical prepayment experience associated with the collateral when determining this vector and also reviews industry research on the prepayment experience of similar loan pools. This data is obtained from remittance reports, market data services and other market sources.
Delinquency Rates: For existing mortgage pools, delinquency rates are based on the recent pool-specific experience of loans that missed their latest mortgage payments. Delinquency rate projections are in the form of a “vector” that varies over the expected life of the pool. The delinquency vector specifies the percentage of the unpaid principal balance that is expected to be delinquent each month. The delinquency vector is based on assumptions that reflect macroeconomic conditions, the historical delinquency rates for the pools and the underlying borrower characteristics such as the FICO score and loan-to-value ratio. For the recapture agreements and recaptured loans, delinquency rates are based on the experience of similar loan pools originated by New Residential’s servicers and subservicers, and delinquency experience over the past year. New Residential believes this time period provides a reasonable sample for projecting future delinquency rates while taking into account current market conditions. Additional consideration is given to loans that are expected to become 30 or more days delinquent.
Recapture Rates: Recapture rates are based on actual average recapture rates experienced by New Residential’s servicers and subservicers on similar residential mortgage loan pools. Generally, New Residential looks to three to six months’ worth of actual recapture rates, which it believes provides a reasonable sample for projecting future recapture rates while taking into account current market conditions. Recapture rate projections are in the form of a “vector” that varies over the expected life of the pool. The recapture vector specifies the percentage of the refinanced loans that have been recaptured within the pool by the servicer or subservicer. The recapture vector takes into account the nature and timeline of the relationship between the borrowers in the pool and the servicer or subservicer, the customer retention programs offered by the servicer or subservicer and the historical recapture rates.
Mortgage Servicing Amount or Excess Mortgage Servicing Amount: For existing mortgage pools, mortgage servicing amount and excess mortgage servicing amount projections are based on the actual total mortgage servicing amount, in excess of a base fee as applicable. For loans expected to be refinanced by the related servicer or subservicer and subject to a recapture agreement, New Residential considers the mortgage servicing amount or excess mortgage servicing amount on loans recently originated by the related servicer over the past three months and other general market considerations. New
Residential believes this time period provides a reasonable sample for projecting future mortgage servicing amounts and excess mortgage servicing amounts while taking into account current market conditions.
Discount Rate: The discount rates used by New Residential are derived from market data on pricing of mortgage servicing rights backed by similar collateral.
Cost of subservicing: The costs of subservicing used by New Residential are based on available market data for various loan types and delinquency statuses.

New Residential uses different prepayment and delinquency assumptions in valuing the MSRs and Excess MSRs relating to the original loan pools, the recapture agreements and the MSRs and Excess MSRs relating to recaptured loans. The prepayment rate and delinquency rate assumptions differ because of differences in the collateral characteristics, refinance potential and expected borrower behavior for original loans and loans which have been refinanced. The assumptions for recapture and discount rates when valuing investments in MSRs and Excess MSRs and recapture agreements are based on historical recapture experience and market pricing.

Servicer Advance Investments Valuation

New Residential uses internal pricing models to estimate the future cash flows related to the Servicer Advance Investments that incorporate significant unobservable inputs and include assumptions that are inherently subjective and imprecise. New Residential’s estimations of future cash flows include the combined cash flows of all of the components that comprise the Servicer Advance Investments: existing advances, the requirement to purchase future advances, the recovery of advances and the right to the basic fee component of the related MSR. The factors that most significantly impact the fair value include (i) the rate at which the servicer advance balance changes over the term of the investment, (ii) the UPB of the underlying loans with respect to which New Residential has the obligation to make advances and owns the basic fee component of the related MSR which, in turn, is driven by prepayment rates and (iii) the percentage of delinquent loans with respect to which New Residential owns the basic fee component of the related MSR. The valuation technique is based on discounted cash flows. Significant inputs used in the valuations included the assumptions used to establish the aforementioned cash flows and discount rates that market participants would use in determining the fair values of Servicer Advance Investments.

In order to evaluate the reasonableness of its fair value determinations, New Residential engages an independent valuation firm to separately measure the fair value of its Servicer Advance Investments. The independent valuation firm determines an estimated fair value range based on its own models and issues a “fairness opinion” with this range. New Residential compares the range included in the opinion to the value generated by its internal models. To date, New Residential has not made any significant valuation adjustments as a result of these fairness opinions.

Significant increases (decreases) in the advance balance-to-UPB ratio, prepayment rate, delinquency rate, or discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. Generally, a change in the delinquency rate assumption is accompanied by a directionally similar change in the assumption used for the advance balance-to-UPB ratio.

The following table summarizes certain information regarding the inputs used in valuing the Servicer Advance Investments, including the basic fee component of the related MSRs:
 
Significant Inputs
 
Weighted Average
 
 
 
Outstanding
Servicer Advances
to UPB of Underlying
Residential Mortgage
Loans
 
Prepayment Rate(A)
 
Delinquency
 
Mortgage Servicing Amount(B)
 
Discount
Rate
 
Collateral Weighted Average Maturity (Years)(C)
December 31, 2019
1.4
%
 
10.6
%
 
15.7
%
 
19.6
 bps
 
5.3
%
 
22.9
December 31, 2018
1.4
%
 
10.9
%
 
17.7
%
 
19.6
 bps
 
5.9
%
 
23.4

(A)
Projected annual weighted average lifetime voluntary and involuntary prepayment rate using a prepayment vector.
(B)
Mortgage servicing amount is net of 10.1 bps and 9.6 bps which represent the amounts New Residential paid its servicers as a monthly servicing fee as of December 31, 2019 and 2018, respectively.
(C)
Weighted average maturity of the underlying residential mortgage loans in the pool.

The valuation of the Servicer Advance Investments also takes into account the performance fee paid to the servicer, which in the case of the Buyer is based on its equity returns and therefore is impacted by relevant financing assumptions such as loan-to-value ratio and interest rate as well as advance-to-UPB ratio. All of the assumptions listed have some degree of market observability, based on New Residential’s knowledge of the market, relationships with market participants, and use of common market data sources. The prepayment rate, the delinquency rate and the advance-to-UPB ratio projections are in the form of “curves” or “vectors” that vary over the expected life of the underlying mortgages and related servicer advances. New Residential uses assumptions that generate its best estimate of future cash flows for each Servicer Advance Investment, including the basic fee component of the related MSR.

When valuing Servicer Advance Investments, New Residential uses the following criteria to determine the significant inputs:
 
Servicer advance balance: Servicer advance balance projections are in the form of a “vector” that varies over the expected life of the residential mortgage loan pool. The servicer advance balance projection is based on assumptions that reflect factors such as the borrower’s expected delinquency status, the rate at which delinquent borrowers re-perform or become current again, servicer modification offer and acceptance rates, liquidation timelines and the servicers’ stop advance and clawback policies.
Prepayment Rate: Prepayment rate projections are in the form of a “vector” that varies over the expected life of the pool. The prepayment vector specifies the percentage of the collateral balance that is expected to prepay voluntarily (i.e., pay off) and involuntarily (i.e., default) at each point in the future. The prepayment vector is based on assumptions that reflect macroeconomic conditions and factors such as the borrower’s FICO score, loan-to-value ratio, debt-to-income ratio, and vintage on a loan level basis. New Residential considers collateral-specific prepayment experience when determining this vector.
Delinquency Rates: For existing mortgage pools, delinquency rates are based on the recent pool-specific experience of loans that missed recent mortgage payment(s) as well as loan- and borrower-specific characteristics such as the borrower’s FICO score, the loan-to-value ratio, debt-to-income ratio, occupancy status, loan documentation, payment history and previous loan modifications. New Residential believes the time period utilized provides a reasonable sample for projecting future delinquency rates while taking into account current market conditions.
Mortgage Servicing Amount: Mortgage servicing amounts are contractually determined on a pool-by-pool basis. New Residential projects the weighted average mortgage servicing amount based on its projections for prepayment rates.
LIBOR: The performance-based incentive fees on Mr. Cooper-serviced Servicer Advance Investments portfolios are driven by LIBOR-based factors. The LIBOR curves used are widely used by market participants as reference rates for many financial instruments.
Discount Rate: The discount rates used by New Residential are derived from market data on pricing of mortgage servicing rights backed by similar collateral and the advances made thereon.

Real Estate and Other Securities Valuation

New Residential’s securities valuation methodology and results are further detailed as follows:
 
 
 
 
 
 
Fair Value
Asset Type
 
Outstanding Face Amount
 
Amortized Cost Basis
 
Multiple Quotes(A)
 
Single Quote(B)
 
Total
 
Level
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Agency RMBS
 
$
11,301,603

 
$
11,474,338

 
$
11,519,943

 
$

 
$
11,519,943

 
2

Non-Agency RMBS(C)
 
24,857,988

 
7,307,837

 
7,953,573

 
4,212

 
7,957,785

 
3

Total
 
$
36,159,591

 
$
18,782,175

 
$
19,473,516

 
$
4,212