Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN SERVICER ADVANCES

v2.4.0.8
INVESTMENTS IN SERVICER ADVANCES
3 Months Ended
Mar. 31, 2014
Investments In Servicer Advances  
INVESTMENTS IN SERVICER ADVANCES
6. INVESTMENTS IN SERVICER ADVANCES

 

On December 17, 2013, New Residential and third-party co-investors, through a joint venture entity (Advance Purchaser LLC, the “Buyer”) consolidated by New Residential, agreed to purchase $3.2 billion of outstanding servicer advances on a portfolio of loans, which is a subset of the same portfolio of loans in which New Residential invests in a portion of the Excess MSR (Pools 10, 17 and 18) (Notes 4 and 5), including the basic fee component of the related MSRs. During the three months ended March 31, 2014, the Buyer also agreed to purchase outstanding servicer advances on a portfolio of loans underlying Pools 5 and 12. As of March 31, 2014, New Residential and third-party co-investors had settled $3.4 billion of servicer advances, net of recoveries, financed with $3.1 billion of notes payables outstanding (Note 11). A taxable wholly owned subsidiary of New Residential is the managing member of the Buyer that holds its investments in servicer advances and owned an approximately 33.5% interest in the Buyer as of March 31, 2014. Noncontrolling third-party investors owning the remaining interest in the Buyer have aggregate capital commitments to the Buyer of $390.3 million, which were fully funded as of March 31, 2014. As of March 31, 2014, New Residential had capital commitments to the Buyer of $197.9 million, which were fully funded. The Buyer may call capital up to the commitment amount on unfunded commitments and recall capital to the extent the Buyer makes distributions to the co-investors, including New Residential. Neither the third-party co-investors nor New Residential is obligated to fund amounts in excess of their respective capital commitments, regardless of the capital requirements of the Buyer that holds its investments in servicer advances.

 

The Buyer has purchased servicer advances from Nationstar, is required to purchase all future servicer advances made with respect to these pools from Nationstar, and receives cash flows from advance recoveries and the basic fee component of the related MSRs, net of compensation paid back to Nationstar in consideration of Nationstar’s servicing activities. The compensation paid to Nationstar is approximately 9.2% of the basic fee component of the related MSRs plus a performance fee that represents a portion (up to 100%) of the cash flows in excess of those required for the Buyer to obtain a specified return on its equity.

 

New Residential elected to record its investments in servicer advances, including the right to the basic fee component of the related MSRs, 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 market factors.

 

The following is a summary of the investments in servicer advances, including the right to the basic fee component of the related MSRs, made by the Buyer, which New Residential consolidates:

 

    March 31, 2014     Three Months Ended March 31, 2014  
    Amortized Cost Basis     Carrying Value (A)     Weighted Average Yield     Weighted Average Life (Years) (B)     Change in Fair Value Recorded in Other Income  
Servicer advances   $ 3,457,385     $ 3,457,385       5.8 %     3.2       —  

  

(A) Carrying value represents the fair value of the investments in servicer advances, including the basic fee component of the related MSRs.
(B) Weighted Average Life represents the weighted average expected timing of the receipt of expected net cash flows for this investment.

 

The following is additional information regarding the servicer advances, and related financing, of the Buyer, which New Residential consolidates as of March 31, 2014:

  

                      Loan-to-Value     Cost of Funds (B)  
    UPB of Underlying Residential Mortgage Loans     Outstanding Servicer Advances     Servicer Advances to UPB of Underlying Residential Mortgage Loans     Carrying Value of Notes Payable     Gross     Net (A)     Gross     Net  
Servicer advances (C)   $ 79,687,268     $ 3,430,473       4.3 %   $ 3,142,292       91.6 %     90.6 %     3.0 %     2.2 %

 

(A) Ratio of face amount of borrowings to par amount of servicer advance collateral, net of an interest reserve maintained by the Buyer.
(B) Annualized measure of the cost associated with borrowings. Gross Cost of Funds primarily includes interest expense and facility fees. Net Cost of Funds excludes facility fees.

(C) The following types of advances comprise the investments in servicer advances:

 

    March 31, 2014  
Principal and interest advances   $ 1,615,067  
Escrow advances (taxes and insurance advances)     1,393,014  
Foreclosure advances     422,392  
Total   $ 3,430,473  

 

Interest income recognized by New Residential related to its investments in servicer advances for the three months ended March 31, 2014 was comprised of the following:

 

Interest income, gross of amounts attributable to servicer compensation   $ 67,138  
Amounts attributable to servicer compensation     (21,422 )
Interest income from investments in servicer advances   $ 45,716