Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS AT FAIR VALUE

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INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS AT FAIR VALUE
3 Months Ended
Mar. 31, 2014
Investments In Excess Mortgage Servicing Rights At Fair Value  
INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS AT FAIR VALUE
4. INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS AT FAIR VALUE

 

Pool 1. On December 13, 2011, Newcastle announced the completion of the first co-investment between New Residential and Nationstar in Excess MSRs related to mortgage servicing rights acquired by Nationstar. New Residential invested approximately $43.7 million to acquire a 65% interest in the Excess MSRs on a portfolio of government-sponsored enterprise (“GSE”) residential mortgage loans (“Pool 1”). Nationstar has co-invested on a pari passu basis with New Residential in 35% of the Excess MSRs and is the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, the servicing obligations and liabilities associated with this portfolio as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential and Nationstar, subject to certain limitations.

 

Pool 2. On June 5, 2012, Newcastle announced the completion of a co-investment between New Residential and Nationstar in Excess MSRs related to mortgage servicing rights Nationstar acquired from Bank of America. New Residential invested approximately $42.3 million to acquire a 65% interest in the Excess MSRs on a portfolio of residential mortgage loans (“Pool 2”), comprised of loans in GSE pools. Nationstar has co-invested on a pari passu basis with New Residential in 35% of the Excess MSRs and is the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, servicing obligations and liabilities associated with this portfolio as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential and Nationstar, subject to certain limitations.

 

Pools 3, 4 and 5. On June 29, 2012, Newcastle announced the completion of a co-investment between New Residential and Nationstar in Excess MSRs related to mortgage servicing rights Nationstar acquired from Aurora Bank FSB, a subsidiary of Lehman Brothers Bancorp Inc. New Residential invested approximately $176.5 million to acquire a 65% interest in the Excess MSRs on a portfolio of residential mortgage loans, comprised of approximately 25% conforming loans in Fannie Mae (“Pool 3”) and Freddie Mac (“Pool 4”) GSE pools as well as approximately 75% non-conforming loans in private label securitizations (“Pool 5”). Nationstar had co-invested on a pari passu basis with New Residential in 35% of the Excess MSRs and is the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, servicing obligations and liabilities associated with this portfolio as the servicer. In September 2013, New Residential invested an additional $26.6 million to acquire an additional 15% interest in the Excess MSRs related to Pool 5 from Nationstar. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential and Nationstar, subject to certain limitations. In December 2013, New Residential entered into a corporate loan secured by the Excess MSRs related to Pool 5 (Note 11). New Residential, through co-investments made by its subsidiaries, has separately purchased the servicer advances and the basic fee component of the related MSRs associated with Pool 5. See Note 6 for information on New Residential’s investment in servicer advances with respect to Pool 5.

 

Pool 11. On May 20, 2013, New Residential entered into an excess spread agreement with Nationstar to purchase a two-thirds interest in the Excess MSRs on a portion of the loans in the pool which are eligible to be refinanced by a specific third party for a period of time for $2.4 million, with Nationstar retaining the remaining one-third interest in the Excess MSRs and all servicing rights. After this period expired, Nationstar acquired the ability to refinance all of the loans in the pool. See Note 5 for information on New Residential’s other agreements with Nationstar with respect to Excess MSRs on Pool 11.

 

Pool 12. On September 23, 2013, New Residential invested approximately $17.4 million to acquire a 40% interest in the Excess MSRs on a portfolio of residential mortgage loans (“Pool 12”), comprised of loans in private label securitizations. Fortress-managed funds also acquired a 40% interest in the Excess MSRs and the remaining 20% interest in the Excess MSRs is owned by Nationstar. Nationstar performs all servicing and advancing functions, and it retains the ancillary income, servicing obligations and liabilities associated with this portfolio as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential, the Fortress-managed funds and Nationstar, subject to certain limitations. New Residential, through co-investments made by its subsidiaries, has separately purchased the servicer advances and the basic fee component of the related MSRs associated with this portfolio. See Note 6 for information on New Residential’s investment in servicer advances with respect to Pool 12.

 

Pool 17. On January 17, 2014, New Residential completed an additional closing of Excess MSRs that it agreed to acquire as part of a previously committed transaction between Nationstar and First Tennessee Bank (“Pool 17”). New Residential invested approximately $19.1 million in Pool 17 on loans with an aggregate UPB of approximately $8.1 billion.

 

New Residential agreed to acquire a one-third interest in Excess MSRs on the portfolio. Fortress-managed funds and Nationstar each agreed to acquire a one-third interest in the Excess MSRs. Nationstar as servicer will perform all servicing and advancing functions, and retain the ancillary income, servicing obligations and liabilities as the servicer of the underlying loans in the portfolio. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential, the Fortress-managed funds and Nationstar, subject to certain limitations. New Residential, through co-investments made by its subsidiaries, has separately purchased the servicer advances and the basic fee component of the related MSRs associated with this portfolio. See Note 6 for information on New Residential’s investment in servicer advances with respect to Pool 17.

 

Pool 18. In the fourth quarter of 2013, New Residential invested approximately $17.0 million to acquire a 40% interest in the Excess MSRs on a portfolio of residential mortgage loans (“Pool 18”) comprised of loans in private label securitizations. Fortress-managed funds also acquired a 40% interest in the Excess MSRs and the remaining 20% interest in the Excess MSR is owned by Nationstar. Nationstar performs all servicing and advancing functions and it retains the ancillary income, servicing obligations and liabilities associated with the portfolio as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential, the Fortress-managed funds and Nationstar, subject to certain limitations. New Residential, through co-investments made by its subsidiaries, has separately purchased the servicer advances and the basic fee component of the related MSRs associated with this portfolio. See Note 6 for information on New Residential’s investment in servicer advances with respect to Pool 18.

 

As described above, New Residential has entered into a “Recapture Agreement” in each of the Excess MSR investments to date, including those Excess MSR investments made through investments in joint ventures (Note 5). Under the Recapture Agreements, New Residential is generally entitled to a pro rata interest in the Excess MSRs on any initial or subsequent refinancing by Nationstar of a loan in the original portfolio. These Recapture Agreements do not apply to New Residential’s investments in servicer advances (Note 6).

 

New Residential elected to record its 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:

 

    March 31, 2014     Three Months Ended March 31, 2014  
    Unpaid Principal Balance (“UPB”) of Underlying Mortgages     Interest in Excess MSR     Amortized Cost Basis
(A)
    Carrying Value
(B)
    Weighted Average Yield     Weighted Average Life (Years)
(C)
    Changes in Fair Value Recorded in Other Income
(D)
 
MSR Pool 1   $ 6,626,389       65.0 %   $ 25,600     $ 35,442       12.5 %     5.3     $ (114 )
MSR Pool 1 - Recapture Agreement     —       65.0 %     517       6,019       12.5 %     12.1       (209 )
MSR Pool 2     7,689,490       65.0 %     29,395       34,389       12.5 %     5.5       (22 )
MSR Pool 2 - Recapture Agreement     —       65.0 %     696       5,969       12.5 %     12.7       (62 )
MSR Pool 3     7,595,633       65.0 %     24,015       31,830       12.5 %     5.2       (449 )
MSR Pool 3 - Recapture Agreement     —       65.0 %     2,237       6,065       12.5 %     12.3       (81 )
MSR Pool 4     4,940,045       65.0 %     9,581       13,605       12.5 %     4.9       77  
MSR Pool 4 - Recapture Agreement     —       65.0 %     2,144       3,897       12.5 %     12.1       (51 )
MSR Pool 5 (E)     35,823,960       80.0 %     115,186       141,967       12.5 %     5.4       3,691  
MSR Pool 5 - Recapture Agreement     —       80.0 %     9,193       5,735       12.5 %     13.2       163  
MSR Pool 11     444,667       66.7 %     2,059       2,369       12.5 %     6.6       321  
MSR Pool 11 - Recapture Agreement     —       66.7 %     254       280       12.5 %     14.0       45  
MSR Pool 12 (E)     4,998,929       40.0 %     15,519       17,180       12.5 %     4.5       1,601  
MSR Pool 12 - Recapture Agreement     —       40.0 %     467       328       12.5 %     13.0       94  
MSR Pool 17 (E)     8,096,439       33.3 %     18,112       18,471       12.5 %     5.2       359  
MSR Pool 17 - Recapture Agreement     —       33.3 %     1,123       598       12.5 %     13.0       (526 )
MSR Pool 18 (E)     8,463,426       40.0 %     15,157       16,785       12.5 %     4.6       1,624  
MSR Pool 18 - Recapture Agreement     —       40.0 %     1,127       775       12.5 %     12.6       141  
    $ 84,678,978             $ 272,382     $ 341,704       12.5 %     5.8     $ 6,602  

 

(A) 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.
(B) Carrying Value represents the fair value of the pools or Recapture Agreements, as applicable.
(C) Weighted Average Life represents the weighted average expected timing of the receipt of expected cash flows for this investment.
(D) The portion of the change in fair value of the Recapture Agreements relating to loans recaptured to date is reflected in the respective pool.
(E) Pool in which New Residential also invested in related servicer advances, including the basic fee component of the related MSR as of March 31, 2014 (Note 6).

   

The table below summarizes the geographic distribution of the underlying residential mortgage loans of the direct investments in Excess MSRs as of March 31, 2014:

 

State Concentration   Percentage of UPB  
California     30.6 %
Florida     9.2 %
New York     4.6 %
Washington     4.1 %
Maryland     4.1 %
Texas     3.9 %
Virginia     3.8 %
Arizona     3.7 %
New Jersey     3.3 %
Colorado     3.0 %
Other U.S.     29.7 %
      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 Excess MSRs.