Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN REAL ESTATE SECURITIES

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INVESTMENTS IN REAL ESTATE SECURITIES
 9 Months Ended
Sep. 30, 2013
Investments In Real Estate Securities  
INVESTMENTS IN REAL ESTATE SECURITIES
4.     INVESTMENTS IN REAL ESTATE SECURITIES
 
During 2013, New Residential acquired $661.2 million face amount of Non-Agency RMBS for approximately $450.0 million and $413.2 million face amount of Agency ARM RMBS for approximately $437.3 million. In addition, Newcastle contributed $1.0 billion face amount of Agency ARM RMBS to New Residential during this period. New Residential sold $153.5 million face amount of Non-Agency RMBS for approximately $123.1 million and recorded a gain of $11.3 million.
 
During the third quarter of 2013, Nationstar exercised their cleanup call option related to four Non-Agency RMBS deals, in which Nationstar was the master servicer. New Residential owned $2.6 million face amount of Non-Agency RMBS in these deals. New Residential received par on these securities, which had an amortized cost basis of $2.1 million prior to the repayment, and recorded interest income of $0.6 million related to these securities in the third quarter of 2013.
 
The following is a summary of New Residential’s real estate securities at September 30, 2013, all of which are classified as available-for-sale and are, therefore, reported at fair value with changes in fair value recorded in other comprehensive income.
 
                
Gross Unrealized
              
Weighted Average
  
Asset Type
  
Outstanding Face Amount
    
Amortized Cost Basis
    
Gains
    
Losses
    
Carrying
Value (A)
    
Number of
Securities
  
Rating (B)
  
Coupon
    
Yield
    
Life (Years) (C)
    
Principal Subordination (D)
  
                                                               
Agency ARM RMBS (E) (F)
   $ 1,203,293     $ 1,285,532     $ 1,480     $ (7,562 )   $ 1,279,450       95  
 AAA
     3.15 %     1.30 %     3.0       N/A  
Non-Agency RMBS
     851,504       559,980       28,089       (6,319 )     581,750       95  
 CC
     0.82 %     5.20 %     4.2       9.1 %
Total/Weighted Average (G)
   $ 2,054,797     $ 1,845,512     $ 29,569     $ (13,881 )   $ 1,861,200       190  
 BBB
     2.18 %     2.48 %     3.5          

(A)
Fair value, which is equal to carrying value for all securities. See Note 9 regarding the estimation of fair value.
   
(B)
Represents the weighted average of the ratings of all securities in each asset type, expressed as an S&P equivalent rating. For each security rated by multiple rating agencies, the lowest rating is used. Ratings provided were determined by third party rating agencies, and represent the most recent credit ratings available as of the reporting date and may not be current.
   
(C)
The weighted average life is based on the timing of expected principal reduction on the assets.
   
(D)
Percentage of the outstanding face amount of securities and residual interests that is subordinate to New Residential’s investments.
   
(E)
Includes securities issued or guaranteed by U.S. Government agencies such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”).
   
(F)
Amortized cost basis and carrying value include principal receivable of $10.7 million.
   
(G)
The total outstanding face amount was $16.4 million for fixed rate securities and $2.0 billion for floating rate securities.
 
Unrealized losses that are considered other than temporary are recognized currently in earnings. During the nine months ended September 30, 2013, New Residential recorded other-than-temporary impairment charges (“OTTI”) of $3.8 million with respect to real estate securities held prior to the spin-off on May 15, 2013. Based on Newcastle management’s analysis of these securities, Newcastle determined it did not have the intent to hold the securities past May 15, 2013. Any remaining unrealized losses on New Residential’s securities were primarily the result of changes in market factors, rather than issue-specific credit impairment. New Residential performed analyses in relation to such securities, using management’s best estimate of their cash flows, which support its belief that the carrying values of such securities were fully recoverable over their expected holding period. New Residential has no intent to sell, and is not more likely than not to be required to sell, these securities.
 
The following table summarizes New Residential’s securities in an unrealized loss position as of September 30, 2013.
 
          
Amortized Cost Basis
                      
Weighted Average
  
Securities in an
Unrealized Loss
 Position
  
Outstanding Face Amount
    
Before Impairment
    
Other-Than-Temporary Impairment (A)
    
After Impairment
    
Gross Unrealized Losses
    
Carrying Value
    
Number of Securities
    
Rating
    
Coupon
    
Yield
    
Life
(Years)
  
                                                                   
Less than Twelve Months
   $ 1,015,349     $ 995,953     $ (2,653 )   $ 993,300     $ (13,676 )   $ 979,624       85       A       2.72 %     2.00 %     3.2  
Twelve or More Months
     30,939       33,451       (411 )   $ 33,040       (205 )     32,835       4    
AAA
       3.50 %     1.28 %     2.6  
Total/Weighted Average
   $ 1,046,288     $ 1,029,404     $ (3,064 )   $ 1,026,340     $ (13,881 )   $ 1,012,459       89       A       2.74 %     1.98 %     3.2  
 
(A)
Other than temporary impairment was recorded in connection with unrealized losses at the time of spin-off as Newcastle did not have the intent and ability to hold the securities past May 15, 2013. The losses were not recorded as the result of New Residential’s intent to sell the securities and are not the result of credit impairment.
 
The table below summarizes the geographic distribution of the collateral securing New Residential’s Non-Agency RMBS at September 30, 2013:
 
Geographic Location
  
Outstanding Face Amount
    
Percentage of Total Outstanding
  
Western U.S.
   $ 344,107       40.4 %
Southeastern U.S.
     195,278       22.9 %
Northeastern U.S.
     165,401       19.4 %
Midwestern U.S.
     99,404       11.7 %
Southwestern U.S.
     47,314       5.6 %
    $ 851,504       100.0 %
 
New Residential evaluates the credit quality of its real estate securities, as of the acquisition date, for evidence of credit quality deterioration. As a result, New Residential identified a population of real estate securities for which it was determined that it was probable that New Residential would be unable to collect all contractually required payments. For securities acquired during the nine months ended September 30, 2013, the face amount of these real estate securities was $549.4 million, with total expected cash flows of $442.2 million and a fair value of $354.4 million on the dates that New Residential purchased the respective securities.
 
The following is the outstanding face amount and carrying value for securities, for which, as of the acquisition date, it was probable that New Residential would be unable to collect all contractually required payments, at December 31, 2012 and September 30, 2013:
 
             
             
   
Outstanding Face Amount
    
Carrying Value
  
December 31, 2012
   $ 342,013     $ 212,129  
September 30, 2013
   $ 726,930     $ 476,570  
 
The following is a summary of the changes in accretable yield for these securities:
 
       
   
For the Nine Months
Ended September 30, 2013
  
Balance at December 31, 2012
   $ 90,077  
Additions
     87,756  
Accretion
     (14,797 )
Reclassifications from nonaccretable difference
     38,662  
Disposals     (18,672 ) 
Balance at September 30, 2013
   $ 183,026