Annual report pursuant to Section 13 and 15(d)

MORTGAGE SERVICING RIGHTS AND MSR FINANCING RECEIVABLES

v3.20.4
MORTGAGE SERVICING RIGHTS AND MSR FINANCING RECEIVABLES
12 Months Ended
Dec. 31, 2020
Transfers and Servicing [Abstract]  
MORTGAGE SERVICING RIGHTS AND MSR FINANCING RECEIVABLES EXCESS MORTGAGE SERVICING RIGHTS
Excess mortgage servicing rights assets include New Residential’s direct investments in Excess MSRs and investments in joint ventures jointly controlled by New Residential and Fortress-managed funds investing in Excess MSRs. The table below summarizes the components of excess mortgage servicing rights assets as presented on the consolidated balance sheets:
Year Ended December 31,
2020 2019
Direct investments in Excess MSRs $ 310,938  $ 379,747 
Excess MSR Joint Ventures 99,917  125,596 
Excess mortgage servicing rights assets, at fair value $ 410,855  $ 505,343 

Direct Investments in Excess MSRs

The following table presents activity related to the carrying value of New Residential’s direct investments in Excess MSRs:
Servicer
Mr. Cooper
SLS(A)
Total
Balance as of December 31, 2018 $ 445,328  $ 2,532  $ 447,860 
Interest income 32,587  60  32,647 
Other income 3,851  —  3,851 
Proceeds from repayments (83,612) (419) (84,031)
Proceeds from sales (10,075) —  (10,075)
Change in fair value (10,387) (118) (10,505)
Balance as of December 31, 2019 377,692  2,055  379,747 
Interest income 28,217  135  28,352 
Other income (12,123) —  (12,123)
Proceeds from repayments (67,340) (405) (67,745)
Proceeds from sales (1,061) —  (1,061)
Change in fair value (16,376) 144  (16,232)
Balance as of December 31, 2020 $ 309,009  $ 1,929  $ 310,938 
(A)Specialized Loan Servicing LLC (“SLS”).

Mr. Cooper or SLS, as applicable, as servicer performs all of the servicing and advancing functions, and retains the ancillary income, servicing obligations and liabilities as the servicer of the underlying loans in the portfolio.

New Residential has entered into a “recapture agreement” with respect to each of the direct Excess MSR investments serviced by Mr. Cooper and SLS. Under such arrangements, New Residential is generally entitled to a pro rata interest in the Excess MSRs on any refinancing by Mr. Cooper of a loan in the original portfolio. These recapture agreements do not apply to New Residential’s Servicer Advance Investments (Note 7).

New Residential elected to record its direct investments in Excess MSRs at fair value pursuant to the fair value option for financial instruments in order to provide users of the financial statements with better information regarding the effects of prepayment risk and other market factors on the Excess MSRs.
The following is a summary of New Residential’s direct investments in Excess MSRs:
December 31, 2020
UPB of Underlying Mortgages Interest in Excess MSR
Weighted Average Life Years(A)
Amortized Cost Basis(B)
Carrying Value(C)
New Residential(D)
Fortress-managed funds Mr. Cooper
Agency
Original and Recaptured Pools $ 34,593,406 
32.5% - 66.7% (53.3%)
—% - 40.0%
20.0% - 35.0%
5.9 $ 141,204  $ 162,645 
Non-Agency(E)
Mr. Cooper and SLS Serviced:
Original and Recaptured Pools 38,095,499 
33.3% - 100.0% (59.4%)
—% - 50.0%
—% - 33.3%
6.5 109,697  148,293 
Total $ 72,688,905  $ 250,901  $ 310,938 
December 31, 2019
UPB of Underlying Mortgages Interest in Excess MSR
Weighted Average Life Years(A)
Amortized Cost Basis(B)
Carrying Value(C)
New Residential(D)
Fortress-managed funds Mr. Cooper
Agency
Original and Recaptured Pools $ 43,310,917 
32.5% - 66.7%
(53.3)%
—% - 40.0%
20.0% - 35.0%
5.5 $ 178,603  $ 209,633 
Non-Agency(E)
Mr. Cooper and SLS Serviced:
Original and Recaptured Pools 45,034,320 
33.3% - 100.0%
(59.4)%
—% - 50.0%
—% - 33.3%
6.5 124,875  170,114 
Total $ 88,345,237  $ 303,478  $ 379,747 
(A)Represents the weighted average expected timing of the receipt of expected cash flows for this investment.
(B)The amortized cost basis of the recapture agreements is determined based on the relative fair values of the recapture agreements and related Excess MSRs at the time they were acquired.
(C)Carrying Value represents the fair value of the pools and recapture agreements, as applicable.
(D)Amounts in parentheses represent weighted averages.
(E)New Residential is also invested in related Servicer Advance Investments, including the basic fee component of the related MSR as of December 31, 2020 and 2019 (Note 7) on $26.1 billion and $31.4 billion UPB, respectively, underlying these Excess MSRs.

Changes in fair value recorded in other income is composed of the following:
Year Ended December 31,
2020 2019 2018
Original and Recaptured Pools $ (16,232) $ (10,505) $ (58,656)
As of December 31, 2020 and 2019, weighted average discount rates of 7.8% (range 7.5%-8.0%) and 7.8%, respectively, were used to value New Residential’s investments in Excess MSRs (directly and through equity method investees).

Excess MSR Joint Ventures

New Residential entered into investments in joint ventures (“Excess MSR joint ventures”) jointly controlled by New Residential and Fortress-managed funds investing in Excess MSRs.
The following tables summarize the financial results of the Excess MSR joint ventures, accounted for as equity method investees, held by New Residential:
December 31,
2020 2019
Excess MSR assets $ 179,762  $ 226,843 
Other assets 20,759  25,035 
Other liabilities (687) (687)
Equity $ 199,834  $ 251,191 
New Residential’s investment $ 99,917  $ 125,596 
New Residential’s percentage ownership 50.0  % 50.0  %
Year Ended December 31,
2020 2019 2018
Interest income $ 22,507  $ 23,872  $ 26,363 
Other income (loss) (29,461) (10,208) (9,649)
Expenses (24) (64) — 
Net income $ (6,978) $ 13,600  $ 16,714 

The following table summarizes the activity of New Residential’s investments in equity method investees:
December 31,
2020 2019
Balance at beginning of period $ 125,596  $ 147,964 
Contributions to equity method investees —  — 
Distributions of earnings from equity method investees (1,170) (8,999)
Distributions of capital from equity method investees (21,020) (20,169)
Change in fair value of investments in equity method investees (3,489) 6,800 
Balance at end of period $ 99,917  $ 125,596 

The following is a summary of New Residential’s Excess MSR investments made through equity method investees:
December 31, 2020
Unpaid Principal Balance
Investee Interest in Excess MSR(A)
New Residential Interest in Investees
Amortized Cost Basis(B)
Carrying Value(C)
Weighted Average Life (Years)(D)
Agency
Original and Recaptured Pools $ 28,453,512  66.7% 50.0% $ 139,251  $ 179,762  5.8
December 31, 2019
Unpaid Principal Balance
Investee Interest in Excess MSR(A)
New Residential Interest in Investees
Amortized Cost Basis(B)
Carrying Value(C)
Weighted Average Life (Years)(D)
Agency
Original and Recaptured Pools $ 33,592,554  66.7% 50.0% $ 168,807  $ 226,843  5.4
(A)The remaining interests are held by Mr. Cooper.
(B)Represents the amortized cost basis of the equity method investees in which New Residential holds a 50% interest. The amortized cost basis of the recapture agreements is determined based on the relative fair values of the recapture agreements and related Excess MSRs at the time they were acquired.
(C)Represents the carrying value of the Excess MSRs held in equity method investees, in which New Residential holds a 50% interest. Carrying value represents the fair value of the pools and recapture agreements, as applicable.
(D)Represents the weighted average expected timing of the receipt of cash flows of each investment.
MORTGAGE SERVICING RIGHTS AND MSR FINANCING RECEIVABLES
The Company owns and records at fair value the rights to service residential mortgage loans, either as a result of purchase transactions or from the retained mortgage servicing associated with the sales and securitizations of loans originated. MSRs are composed of servicing rights of both agency and non-agency loans. In certain cases where New Residential has legally purchased MSRs or the right to the economic interest in MSRs, 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 MSR Financing Receivables. Income from these investments, net of subservicing fees, are recorded as Interest income with changes in fair value flowing through Change in fair value of investments in the Consolidated Statements of Income.

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 in New Residential’s Consolidated Statements of Income. As of December 31, 2020, these subservicers include LoanCare, Nationstar, PHH and Flagstar, which subservice 17.5%, 16.2%, 15.4%, and 0.7% of the underlying UPB of the related mortgages, respectively (includes both MSRs and MSR Financing Receivables). The remaining 50.2% of the underlying UPB of the related mortgages is subserviced by the servicing division of NewRez.

NRM has entered into recapture agreements with respect to each of its MSR investments. Under the recapture agreements, NRM is generally entitled to the MSRs on any initial or subsequent refinancing by an NRM subservicer or by NewRez.

The following table presents activity related to the carrying value of New Residential’s 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)
678,424  652,902  1,331,326 
Transfers(B)
367,121  (367,121) — 
Other transfers(C)
(410) —  (410)
Ditech Acquisition (Note 3) 387,170  —  387,170 
Originations(D)
374,450  —  374,450 
Proceeds from sales (1,539) (22,989) (24,528)
Change in fair value due to:
Realization of cash flows(E)
(537,111) (203,732) (740,843)
Change in valuation inputs and assumptions(F)
(187,530) 21,094  (166,436)
  (Gain) loss realized 3,285  (6,385) (3,100)
Balance as of December 31, 2019 $ 3,967,960  $ 1,718,273  $ 5,686,233 
Purchases, net(A)
449,875  (18,267) 431,608 
Transfers (G)
320,613  (320,613) — 
Originations(D)
666,414  —  666,414 
Proceeds from sales (11,282) (4,059) (15,341)
Change in fair value due to:
Realization of cash flows(E)
(1,369,607) (222,674) (1,592,281)
Change in valuation inputs and assumptions(F)
(536,694) (54,745) (591,439)
  (Gain) loss realized 2,396  (1,749) 647 
Balance as of December 31, 2020 $ 3,489,675  $ 1,096,166  $ 4,585,841 
(A)Net of purchase price adjustments and purchase price fully reimbursable from MSR sellers as a result of prepayment protection.
(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)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.
(F)Includes changes in inputs or assumptions used in the valuation model.
(G)Represents MSRs previously accounted for as MSR Financing Receivables. As a result of the length of prepayment protection between NRM and MSR sellers, although the MSRs were legally sold, solely for accounting purposes, the purchase agreement was not treated as a sale under GAAP through June 30, 2020.

Servicing revenue, net recognized by New Residential related to its MSRs comprises the following:
Year Ended December 31,
2020 2019 2018
Servicing fee revenue $ 1,224,060  $ 899,623  $ 589,546 
Ancillary and other fees 110,640  198,486  130,294 
Servicing fee revenue and fees 1,334,700  1,098,109  719,840 
Change in fair value due to:
Realization of cash flows(A)
(1,360,954) (530,031) (256,915)
Change in valuation inputs and assumptions(B) (C)
(531,183) (186,204) 68,587 
(Gain) loss realized 2,396  3,285  (2,917)
Servicing revenue, net $ (555,041) $ 385,159  $ 528,595 
(A)Includes $8.7 million, $7.1 million and $1.2 million of fair value adjustment due to realization of cash flows to Excess spread financing for the years ended December 31, 2020, 2019, and 2018, respectively.
(B)Includes changes in inputs or assumptions used in the valuation model.
(C)Includes $5.5 million, $1.3 million and $7.4 million of fair value adjustment due to changes in valuation inputs and assumptions to Excess spread financing for the years ended December 31, 2020, 2019, and 2018, respectively.
Interest income from MSR Financing Receivables was composed of the following:
Year Ended December 31,
2020 2019 2018
Servicing fee revenue $ 384,260  $ 513,172  $ 705,812 
Ancillary and other fees 74,421  119,570  146,829 
Less: subservicing expense (151,109) (196,726) (251,184)
Interest income, MSR financing receivables $ 307,572  $ 436,016  $ 601,457 

Change in fair value of MSR Financing Receivables was composed of the following:
Year Ended December 31,
2020 2019 2018
Realization of cash flows $ (222,674) $ (203,732) $ (197,703)
Change in valuation inputs and assumptions(A)
(54,745) 21,094  230,036 
(Gain) loss realized (1,749) (6,385) (783)
Change in fair value of MSR financing receivables $ (279,168) $ (189,023) $ 31,550 
(A)Includes changes in inputs or assumptions used in the valuation model.
The following is a summary of New Residential’s MSRs and MSR Financing Receivables as of December 31, 2020 and 2019:
UPB of Underlying Mortgages
Weighted Average Life (Years)(A)
Carrying Value(B)
2020
MSRs:
Agency(C)
$ 300,200,826  5.1 $ 2,799,728 
Non-Agency 5,962,225  4.2 17,512 
Ginnie Mae 57,106,825  4.1 672,435 
MSR Financing Receivables:
Agency(C)
5,517,730  5.2 49,275 
Non-Agency 66,648,221  8.0 1,046,891 
Total $ 435,435,827  5.4 $ 4,585,841 
2019
MSRs:
Agency(C)
$ 315,427,933  5.1 $ 3,319,035 
Non-Agency 6,402,833  5.4 20,283 
Ginnie Mae 52,019,295  4.6 628,642 
MSR Financing Receivables:
Agency(C)
54,866,978  4.7 547,351 
Non-Agency 76,117,892  7.6 1,170,922 
Total $ 504,834,931  5.4 $ 5,686,233 
(A)Represents the weighted average expected timing of the receipt of expected cash flows for this investment.
(B)Carrying Value represents fair value. As of December 31, 2020 and 2019, weighted average discount rates of 7.7% (range of 7.3%-13.0%) and 7.8%, respectively, were used to value New Residential’s MSRs, respectively. As of December 31, 2020 and 2019, weighted average discount rates of 9.4% (range of 7.4%-9.5%) and 8.9%, respectively, were used to value New Residential’s MSR Financing Receivables.
(C)Represents Fannie Mae and Freddie Mac MSRs.

Ginnie Mae Loans Subject to Repurchase Right

NewRez, as an approved issuer of Ginnie Mae MBS, originates and securitizes government-insured residential mortgage loans. As the issuer of the Ginnie Mae-guaranteed securitizations, NewRez has the unilateral right to repurchase loans from the securitizations when they are delinquent for more than 90 days. Loans in forbearance that are three or more consecutive payments delinquent are included as delinquent loans permitted to be repurchased. Under GAAP, NewRez is required to recognize the right to loans on its balance sheet and establish a corresponding liability upon the triggering of the repurchase right regardless of whether NewRez intends to repurchase the loans. As of December 31, 2020 and 2019, New Residential holds approximately $1,452.0 million and $172.3 million in residential mortgage loans subject to repurchase and residential mortgage loans repurchase liability on its Consolidated Balance Sheets. New Residential may re-pool reacquired loans into new Ginnie Mae securitizations upon re-performance of the loan or otherwise sell to third-party investors. Upon recognizing loans eligible for repurchase, the Company does not change the accounting for MSRs related to previously sold loans. Upon reacquisition of a loan the MSR is written off. As of December 31, 2020, New Residential holds approximately $810.9 million of reacquired residential mortgage loans and is reflected in Residential mortgage loans, held-for-sale on the Consolidated Balance Sheets.

Ocwen MSR Financing Receivable Transactions

In July 2017, Ocwen Loan Servicing, LLC (collectively with certain affiliates, “Ocwen”) and New Residential entered into an agreement in which both parties 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 and with respect to which New Residential already held certain rights (“Rights to MSRs”). Ocwen
and New Residential concurrently entered into a subservicing agreement pursuant to which Ocwen agreed to subservice the mortgage loans related to the MSRs that were transferred to New Residential.

In January 2018, 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. PHH (as successor by merger to Ocwen) will continue to service the mortgage loans related to the MSRs until any necessary third-party consents to transferring the MSRs are obtained and all other conditions to transferring the MSRs are satisfied, at which time PHH will transfer the MSRs to New Residential.

As of December 31, 2020, MSRs representing approximately $66.7 billion UPB of underlying loans were transferred from PHH to NRM and NewRez. Although the MSRs transferred 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 or NewRez, and that the purchase agreement would not be treated as a sale under GAAP.

Mr. Cooper MSR Financing Receivable Transaction

On February 28, 2019, NRM entered into an agreement with Mr. Cooper 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 Mr. Cooper 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 Mr. Cooper, 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, Mr. Cooper 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. During the year ended December 31, 2020, New Residential reassessed the transaction and concluded that the transferor no longer retained more than minor protection provisions and, as a result, New Residential accounted for this transaction as a true sale.

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. During the year ended December 31, 2020, New Residential reassessed the transaction and concluded that the transferor no longer retained more than minor protection provisions and, as a result, New Residential accounted for this transaction as a true sale.
The table below summarizes the geographic distribution of the underlying residential mortgage loans of the MSRs and MSR Financing Receivables:
Percentage of Total Outstanding Unpaid Principal Amount
State Concentration December 31, 2020 December 31, 2019
California 21.2  % 21.9  %
Florida 7.4  % 6.9  %
New York 7.0  % 6.4  %
Texas 5.6  % 5.5  %
New Jersey 4.8  % 4.9  %
Illinois 3.6  % 3.6  %
Massachusetts 3.4  % 3.4  %
Georgia 3.3  % 3.1  %
Pennsylvania 3.1  % 3.0  %
Maryland 3.1  % 3.0  %
Other U.S. 37.5  % 38.3  %
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 Consolidated Balance Sheets. The UPB of residential mortgage loans subserviced for others as of December 31, 2020 and 2019 was $66.9 billion and $71.3 billion, respectively. Subservicing revenue of $201.6 million and $139.5 million was included within Servicing revenue, net in the Consolidated Statements of Income for the years ended December 31, 2020 and 2019, respectively.

Servicer Advances Receivable

In connection with its 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 16). These servicer advances are recorded when advanced and are included in Servicer Advances Receivable on the Consolidated Balance Sheets.

The following types of advances are included in the Servicer Advances Receivable:
December 31,
2020 2019
Principal and interest advances $ 665,538  $ 823,860 
Escrow advances (taxes and insurance advances) 1,547,796  1,666,792 
Foreclosure advances 816,400  760,593 
Total(A)(B)(C)
$ 3,029,734  $ 3,251,245 
(A)Includes $583.9 million and $562.2 million of servicer advances receivable related to Agency MSRs, respectively, recoverable either from the borrower or the Agencies.
(B)Includes $181.2 million and $166.5 million of servicer advances receivable related to Ginnie Mae MSRs, respectively, recoverable from either the borrower or Ginnie Mae. Expected losses for advances associated with Ginnie Mae loans in the MSR portfolio are considered in the MSR fair valuation through a non reimbursable advance loss assumption.
(C)Net of $27.5 million and $50.1 million, respectively, in unamortized advance discount and reserves, net of accruals for advance recoveries. These reserves relate to inactive loans in the foreclosure or liquidation process.

New Residential’s Servicer advances receivable related to Non-Agency MSRs generally have the highest reimbursement priority pursuant to the underlying servicing agreements (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 December 31, 2019, expected full recovery of the Servicer Advance Receivables. For advances on loans that have been liquidated, sold, paid in full or modified, the Company reserved $22.9 million for expected non-recovery of advances as of December 31, 2020.

See Note 12 regarding the financing of MSRs.