Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS EQUITY METHOD INVESTEES

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INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS EQUITY METHOD INVESTEES
3 Months Ended
Mar. 31, 2014
Investments In Excess Mortgage Servicing Rights Equity Method Investees  
INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS EQUITY METHOD INVESTEES
5. INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS EQUITY METHOD INVESTEES

 

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. New Residential elected to record these investments 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 prepayment risk and other market factors.

 

Pool 6. On January 4, 2013, New Residential, through a joint venture, co-invested in Excess MSRs on a portfolio of Government National Mortgage Association (“Ginnie Mae”) residential mortgage loans (“Pool 6”). Nationstar acquired the related servicing rights from Bank of America in November 2012. New Residential contributed approximately $28.9 million for a 50% interest in a joint venture which acquired an approximately 67% interest in the Excess MSRs on this portfolio. The remaining interests in the joint venture are owned by a Fortress-managed fund and the remaining interest of approximately 33% 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 the joint venture and Nationstar, subject to certain limitations.

 

Pools 7, 8, 9, 10. On January 6, 2013, New Residential, through joint ventures, agreed to co-invest in Excess MSRs on a portfolio of four pools of residential mortgage loans Nationstar acquired from Bank of America. At the time of acquisition, approximately 53% of the loans in this portfolio were in private label securitizations (“Pool 10”) and the remainder were owned, insured or guaranteed by Fannie Mae (“Pool 7”), Freddie Mac (“Pool 8”) or Ginnie Mae (“Pool 9”). New Residential committed to invest approximately $340 million for a 50% interest in joint ventures which were expected to acquire an approximately 67% interest in the Excess MSRs on these portfolios. The remaining interests in the joint ventures are owned by Fortress-managed funds and the remaining interest of approximately 33% in the Excess MSRs is owned by Nationstar. In September 2013, New Residential and a Fortress-managed fund each invested an additional $13.9 million into the joint venture invested in Pool 10 to acquire an additional 10% in the Excess MSRs held by the joint venture. 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 the joint ventures 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 Pool 10. See Note 6 for information on New Residential’s investment in servicer advances with respect to Pool 10.

 

Pool 11. On May 20, 2013, New Residential acquired, through a joint venture, an interest in Excess MSRs from Nationstar on a portfolio of Freddie Mac residential mortgage loans (“Pool 11”). New Residential has invested approximately $37.8 million for a 50% interest in a joint venture which acquired an approximately 67% interest in the Excess MSRs on this portfolio. The remaining interests in the joint venture are owned by a Fortress-managed fund and the remaining interest of approximately 33% 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 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 included in the portfolio, subject to certain limitations. See Note 4 for information on New Residential’s other agreements with respect to Pool 11.

 

The following tables summarize the investments in Excess MSR joint ventures, accounted for as equity method investees held by New Residential:

 

    March 31, 2014  
Excess MSR assets   $ 673,718  
Other assets     7,152  
Debt     —  
Other liabilities     (4,256 )
Equity   $ 676,614  
New Residential’s investment   $ 338,307  
New Residential’s ownership     50.0 %

 

    Three Months Ended March 31,  
    2014     2013  
Interest income   $ 18,493     $ 5,616  
Other income (loss)     (5,705 )     (3,154 )
Expenses     (40 )     (524 )
Net income   $ 12,748     $ 1,938  

 

The following is a summary of New Residential’s Excess MSR investments made through equity method investees:

 

    March 31, 2014  
    Unpaid Principal Balance     Investee  Interest in  Excess MSR     New Residential Interest in Investees     Amortized Cost Basis (A)     Carrying Value (B)     Weighted Average Yield     Weighted Average Life (Years) (C)  
MSR Pool 6   $ 9,628,238       66.7 %     50.0 %   $ 37,424     $ 46,261       12.5 %     5.1  
MSR Pool 6 - Recapture Agreement     —       66.7 %     50.0 %     6,922       9,165       12.5 %     12.1  
MSR Pool 7     30,574,186       66.7 %     50.0 %     97,392       99,290       12.5 %     5.2  
MSR Pool 7 - Recapture Agreement     —       66.7 %     50.0 %     14,156       24,498       12.5 %     12.4  
MSR Pool 8     13,547,232       66.7 %     50.0 %     55,107       54,406       12.5 %     5.1  
MSR Pool 8 - Recapture Agreement     —       66.7 %     50.0 %     5,836       13,050       12.5 %     12.1  
MSR Pool 9     29,704,976       66.7 %     50.0 %     100,528       125,876       12.5 %     4.8  
MSR Pool 9 - Recapture Agreement     —       66.7 %     50.0 %     32,271       31,743       12.5 %     12.1  
MSR Pool 10 (D)     66,582,388       66.7-77.0%       50.0 %     196,933       194,571       12.5 %     5.4  
MSR Pool 10 - Recapture Agreement     —       66.7-77.0%       50.0 %     13,658       7,304       12.5 %     13.3  
MSR Pool 11     17,322,366       66.7 %     50.0 %     41,804       51,216       12.5 %     5.7  
MSR Pool 11 - Recapture Agreement     —       66.7 %     50.0 %     22,849       16,338       12.5 %     11.4  
    $ 167,359,386                     $ 624,880     $ 673,718       12.5 %     6.3  

 

(A) 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.
(B) 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 or Recapture Agreements, as applicable.
(C) The weighted average life represents the weighted average expected timing of the receipt of cash flows of each investment.
(D) 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 Excess MSR investments made through equity method investees at March 31, 2014:

 

State Concentration   Percentage of UPB  
California     23.5 %
Florida     9.1 %
New York     5.4 %
Texas     4.9 %
Georgia     4.0 %
New Jersey     3.8 %
Illinois     3.5 %
Virginia     3.2 %
Maryland     3.1 %
Washington     2.8 %
Other U.S.     36.7 %
      100.0 %